Rhodium Australia Pty Ltd v Deputy Commissioner of Taxation

Federal Court of Australia (Full Court)|2012-02-17|Before: Mr P, As Black CJ, French J, Greenwood JJ

REASONS FOR JUDGMENT 1 This appeal raises a very narrow point. It concerns a challenge to the exercise of the primary judge's discretion to make the particular costs order he considered appropriate in the circumstances before him.

Background 2 The proceeding before the primary judge concerned an application by the current respondent ("the Deputy Commissioner") to wind up the current appellant ("Rhodium") on the ground that Rhodium was insolvent. Not long before the matter before the primary judge was due to be heard, Rhodium filed affidavits which led the Deputy Commissioner to discontinue the winding up proceeding. 3 The primary judge viewed the Deputy Commissioner's conduct of the proceeding up to the time of the discontinuance as reasonable. He ordered that Rhodium pay part of the Deputy Commissioner's costs, being the costs incurred up to and including 8 August 2011 together with any costs later incurred in considering certain affidavits made on 5 August 2011.

Facts 8 The primary judge took into account the following important facts: the Deputy Commissioner was justifiably cautious in dealing with Rhodium having regard to its irregular financial affairs. Difficulties with the financial management of Rhodium heightened the Deputy Commissioner's reasonable suspicions about Rhodium; the irregular financial affairs included failure to account for PAYG income tax in respect of two employees, including Ms Margaret McCall, Rhodium's sole director; the Deputy Commissioner served a Notice of Estimate ("the Estimate") on Rhodium pursuant to s 268-10 of Sch 1 to the Taxation Administration Act 1953 (Cth) ("the Act"). Rhodium did not seek to dispute the Estimate by statutory declaration; and the Deputy Commissioner served a statutory demand on Rhodium in respect of the sum of $724,111.35 owing as a consequence of Rhodium's failure to challenge the Estimate, together with interest and superannuation guarantee charges. 9 Rhodium took no action to set aside the statutory demand. As a consequence the Deputy Commissioner commenced the winding up proceeding on 22 February 2011. 10 On 30 May 2011, Rhodium filed an affidavit of Ms McCall. It claimed that Rhodium was solvent and did not owe tax, but it did not directly address the Estimate or provide details of its assertion that it owed no tax. 11 On 20 June 2011, a Registrar of the Court made orders for the filing and serving of further affidavits by Rhodium by 1 July 2011. Rhodium did not comply with that order. 12 On 1 August 2011, the winding up proceeding was listed for hearing before the primary judge on 15 and 16 August 2011. On 5 August 2011 Rhodium filed two affidavits from Ms McCall in support of an application for leave to oppose the winding up on the grounds referred to in s 459S of the Corporations Act 2001 (Cth). 13 One of the 5 August 2011 affidavits challenged the accuracy of the Estimate. The affidavits were not received by the Deputy Commissioner until 8 August 2011. At [19], the primary judge said: The [Deputy Commissioner] took the view that the affidavits of 5 August 2011 purported to be affidavits made to revoke an estimate pursuant to s 268-40 of Schedule 1 of [the Act]. On the basis of those affidavits, the [Deputy Commissioner] made a decision to revoke the liability in [the Estimate]. For that reason, the [Deputy Commissioner] sought leave to discontinue the winding up application.

Primary Judge's Exercise of Discretion 14 His Honour considered in all the circumstances that the Deputy Commissioner was justified in applying to wind up Rhodium and pursuing that application. Rhodium did not assert that the application was unreasonably commenced. It contends that the Deputy Commissioner should have been satisfied by 30 May 2011 that Rhodium was solvent, based on the affidavit of Ms McCall filed on that day. Alternatively, it contends that it should have been apparent to the Deputy Commissioner that Rhodium was solvent when it lodged Business Activity Statements on 30 June 2011. 15 The primary judge accepted the submission of the Deputy Commissioner that it was reasonable for the application to be maintained until Rhodium's basis for disputing the taxation debt was verified by affidavit filed in the proceeding. 16 At [23] the primary judge said: It was not unreasonable for the [Deputy Commissioner] to not recognise Rhodium to be solvent on the provision of Rhodium's financial statements. I have already observed that the [Deputy Commissioner] had good grounds to be cautious. Additionally, the financial statements were unaudited. Nearly 95% of the total assets shown in the most current balance sheet provided related to the item "proprietary IP/R&D". The worth of that apparently intangible asset was not supported by any valuation. Despite the item being queried at the direction hearing held on 20 June 2011 and an opportunity given for that query to be answered on affidavit, no answering affidavit was provided. In those circumstances, the [Deputy Commissioner] was entitled to think that on the hearing of the winding up application, a judge would require better evidence from Rhodium than that which was provided on 30 May 2011, for Rhodium to rebut the presumption of insolvency: Deputy Commissioner of Taxation v De Simone Consulting Pty Ltd [2007] FCA 548 at [14] (Finkelstein J). 17 The primary judge at [24] also rejected a submission that it was unreasonable for the Deputy Commissioner to await sworn verification that no PAYG income tax had been withheld by Rhodium. His Honour said: …the [Deputy Commissioner] was entitled to be cautious and it was also entitled to expect that the process provided by [the Act] for reducing or revoking an estimate be followed. As I have explained, the process required verification on oath of facts sufficient to prove that the underlying liability never existed. In that respect, it is to be recalled that the debt the statutory demand claimed was (for the most part) the "separate and distinct" debt created by [the Estimate] and not the underlying liability which the lodgement of the Business Activity Statements addressed: See s 268-20(2) of [the Act]. 18 His Honour rejected a submission by the Deputy Commissioner that a costs order should be made against Rhodium in respect of the entire proceeding. He considered that it should not have its costs incurred after 8 August 2011, the date on which it received the 5 August 2011 affidavits.

Consideration 19 Counsel for Rhodium submits that the primary judge's discretion miscarried. He refers to Rhodium as being entirely successful because of the withdrawal of the winding up application. He asserts that Rhodium was given insufficient time to prepare its financial statements. That is not a finding which the primary judge made. Based on the material before him the primary judge was justified in referring to the laxity of Rhodium in paying due regard to its financial affairs and accounting. Counsel referred also to Rhodium's contention that it was not insolvent. However, he failed to acknowledge that that position was not subject to sworn verification until 5 August 2011. 20 The attack on the primary judge's exercise of discretion is entirely misplaced. It has not been shown that his Honour acted on any wrong principle, took into account extraneous matters or failed to take into account relevant matters; see House v R (1936) 55 CLR 499 at 505. 21 Although Rhodium may be considered the "successful party" given the withdrawal of the winding up application, it is entirely consistent with relevant principle to order costs against a successful party "for some reason connected with the case"; see Ruddock at [9]. Such would occur where there are special circumstances justifying an order other than that the successful party have its costs; see Ruddock at [11]. 22 The current matter subject to appeal was one of those rare cases where the ultimate merits were not determined and the event upon which costs are ordinarily assessed, after a final hearing, did not arise. Notwithstanding that fact, as McHugh J said in Re Minister for Immigration and Ethnic Affairs of the Commonwealth of Australia: Ex parte Lai Qin (1997) 186 CLR 622 at 624: …the Court may be able to conclude that one of the parties has acted so unreasonably that the other party should obtain the costs of the action… See also Consolidated Byrnes Holdings Ltd v Hardel Investments Pty Ltd (2009) 176 FCR 348 at [359] and [360]; Kardas v Kalliakoudis [2008] FCA 1913 at [9]; Akiba & Anor v Queensland (2010) 184 FCR 406 at [83] to [98]; Australian Securities Commission v Aust-Home Investments Ltd (1993) 44 FCR 194 at 201; Aussie Red Equipment Pty Ltd v Antsent Pty Ltd [2001] FCA 1641; ONE.TEL Ltd v Commissioner of Taxation (2000) 101 FCR 548 at [5] per Burchett J and ACCC v Contact Plus Group Pty Ltd (in liq) [2006] FCA 396. 23 The Deputy Commissioner's conduct of the litigation up to 8 August 2011 was appropriately considered by the primary judge to have been reasonable; see Ruddock at [13]. Rhodium was appropriately denied its costs because of its conduct during the application; see Ruddock at [15]. 24 The primary judge's exercise of his discretion was exemplary. Even though we consider that it was the correct approach, it is sufficient for our purposes in dismissing the appeal to record that no basis has been identified to interfere with the primary judge's exercise of discretion.

COSTS 25 At the conclusion of giving reasons for judgment the Deputy Commissioner made an application for the award of costs on an indemnity basis. The application was based on a settlement offer contained in a letter dated 27 September 2011 which the Australian Taxation Office sent to the appellant's solicitors. The letter set out the costs incurred by the Deputy Commissioner in the original proceeding. It offered to settle the matter if the appellants paid the sum of $7830.55. Counsel for the Deputy Commissioner indicated that this amount was confined to disbursements and did not include solicitor costs that were incurred in the course of that proceeding. That offer was not accepted. Indeed, what transpired was the present appeal to this Court. 26 The award of costs is a matter which is in the total discretion of the Court. In all the circumstances, the conduct of the appellant in rejecting the offer in the letter of 27 September 2011 and bringing this appeal does not warrant an order for indemnity costs. The application is therefore declined.

ORders 1. The appeal is dismissed. 2. The appellant pay the respondent's costs of the appeal to be taxed in default of agreement. I certify that the preceding twenty-six (26) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Marshall, Edmonds and Greenwood.

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