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[2021] FCA 749
Federal Court of Australia
2021-07-02
Colvin J
Original judgment source is linked above.
Counsel for the Plaintiffs: Mr C Harris SC
Solicitor for the Plaintiffs: Piper Alderman
Counsel for the Defendants: Mr D Krochmalik
Solicitor for the Defendants: Farrar Lawyers
Counsel for the Applicant in the Interlocutory Application: Mr D Krochmalik
Solicitor for the Applicant in the Interlocutory Application: Farrar Lawyers
Counsel for the First and Second Respondents in the Interlocutory Application: Mr C Harris SC
Solicitor for the First and Second Respondents in the Interlocutory Application: Piper Alderman
Counsel for the Third Respondent in the Interlocutory Application: Ms S Foda
Solicitor for the Third Respondent in the Interlocutory Application: ATO Dispute Resolution
ORDERS NSD 1046 of 2019
BETWEEN: TARLETON & PETERS PTY LIMITED (IN LIQ) (ACN 000 385 991) First Plaintiff
GEOFFREY TRENT HANCOCK AS LIQUIDATOR OF TARLETON & PETERS PTY LIMITED (IN LIQ) (ACN 000 385 991) Second Plaintiff
AND: NICHOLAS PETERS First Defendant
SUSAN MARGARET SHARROCK Second Defendant
N & M INVESTMENTS/PROPERTIES PTY LIMITED Third Defendant
IN THE INTERLOCUTORY APPLICATION: BETWEEN: N&M INVESTMENTS/PROPERTIES PTY LIMITED Applicant
and: TARLETON & PETERS PTY LIMITED (IN LIQ) (ACN 000 385 991) First Respondent
GEOFFREY TRENT HANCOCK AS LIQUIDATOR OF TARLETON & PETERS PTY LIMITED (IN LIQ) (ACN 000 385 991) Second Respondent
DEPUTY COMMISSIONER OF TAXATION Third Respondent
order made by: COLVIN J DATE OF ORDER: 2 July 2021
COLVIN J: 1 In February 2016, Mr Geoffrey Hancock was appointed as liquidator of Tarleton & Peters Pty Limited (Tarleton). In June 2019, proceedings were commenced by Tarleton (then in liquidation) and Mr Hancock against Mr Nicholas Peters claiming that he had breached various provisions of Corporations Act 2001 (Cth) and his fiduciary duty to Tarleton by procuring Tarleton to pay a dividend of $7,836,161 (Dividend) to N & M Investments/Properties Pty Limited (N & M) in the year ending 30 June 2014. Mr Peters is alleged to have been a director and shareholder of Tarleton at the time of payment of the Dividend. 2 In March 2020, an amended statement of claim was filed in the proceedings (Amended Claim). The Amended Claim added claims against Ms Susan Sharrock and N & M. Ms Sharrock was also alleged to be a director of Tarleton at the time of payment of the Dividend. Mr Peters is alleged to have been a majority shareholder in N & M at that time. 3 Amongst other things, Tarleton and Mr Hancock allege that the payment of the Dividend was not in the best interests of Tarleton, was not made for a proper purpose, was not made in good faith and was made at a time when Tarleton was insolvent. Claims are also made of breaches of s 588G of the Corporations Act by Mr Peters and Ms Sharrock and of s 256D of the Corporations Act by Tarleton in which they were both involved. 4 It is common ground that a key issue in the proceedings is whether Tarleton had an outstanding tax liability at the time of payment of the Dividend. It is principally the existence of that alleged tax liability that is relied upon by Tarleton and Mr Hancock to establish the alleged insolvency of Tarleton at the time of payment of the Dividend. It appears that the Dividend was paid after a transaction in which there was a sale of the business conducted by Tarleton to third parties. It appears that the sale completed in early 2014. 5 In the liquidation of Tarleton, the Commissioner of Taxation has sought to prove for alleged outstanding superannuation guarantee charges over a number of years (SG Charges). The main creditors in the liquidation are the Commissioner and N & M. 6 In late 2019, lawyers acting for Mr Peters made an application under the Freedom of Information Act 1982 (Cth) (FOI Act) to the Australian Taxation Office (ATO) requesting various documents relating to the SG Charges. It was determined that the ATO could only provide taxpayer information about Tarleton to the liquidator of that company. The liquidator was then asked by lawyers acting for Mr Peters whether he would make a request for the documents so they could be provided to Mr Peters. An application for leave to the Court for Mr Peters to take that action on behalf of the company was foreshadowed if the liquidator refused to do so. 7 Lawyers acting for Mr Hancock as liquidator indicated that he was prepared to submit the request. In doing so, they said: 'Our client has also instructed that he is to inform the ATO of his consent to allow your clients to deal with the ATO directly going forward'. 8 The freedom of information request was sent to the ATO but was refused on the basis that 'in its current form would substantially and unreasonably divert the resources of this agency from its other operations due to its large size, broad scope and complexity'. A revised request was also refused in September 2020. On 16 October 2020, lawyers acting for Mr Peters wrote to lawyers acting for the liquidator concerning a review of the refusal of the freedom of information request. They said: We have received instructions to seek a review by the Australian Information Commissioner regarding the decision. Given Mr Peters' lack of standing to seek the review himself, please let us know whether the Liquidator is prepared to do so on the basis that Mr Peters will prepare all the necessary paperwork. 9 The liquidator refused to do so. 10 In the meantime, the ATO conducted an audit as to the SG Charges. On 29 September 2020, the ATO provided Tarleton with its decision on the outcome of the audit which resulted in new and revised assessments for SG Charges for Tarleton for the period 1 October 2004 to 31 March 2015 and income taxation assessments based upon the disallowance of past deductions for rent for a considerable number of years before the sale of the business of Tarleton in 2014 (Assessments). 11 On 20 October 2020, lawyers acting for the defendants (Mr Peters, Ms Sharrock and N & M) wrote to lawyers acting for the plaintiffs (Tarleton and Mr Hancock) in the following terms: We refer to the affidavit of Mr Hancock sworn 30 September 2020 filed the same day in relation to the issue of superannuation guarantee charge (SGC) [SG Charges]. We observe in paragraph 7 of the affidavit that Mr Hancock does not intend to challenge the assessments that have issued notwithstanding the anomalies we have previously raised with the calculation of the [SG Charges]. The Defendants are presently considering a challenge to the assessments, whether it be with … Mr Hancock's consent and agreement, or alternatively, by seeking leave of the Court to maintain objections in the circumstances. Would you please let us know of Mr Hancock's attitude to this course as a matter of urgency. 12 The reference in the letter to an affidavit of Mr Hancock sworn 30 September 2020 is to an affidavit deposed in support of the substantive claim in the proceedings. By the affidavit, Mr Hancock produced the communication from the ATO concerning the outcome of the audit. The affidavit said: On 29 September 2020, I received a Finalisation Letter and Reasons for Decision Paper from the ATO setting out the basis for the claim asserted in its revised proof of debt dated 5 June 2020 lodged in the liquidation of the Company for the amount of $36,584,625.16 for unpaid superannuation liabilities, which appears at Tab 42 to my affidavit sworn 10 July 2020. Annexed to my affidavit … is a copy of the Finalisation Letter and Reasons for decision Paper received from the ATO. Exhibited to me at the time of swearing this affidavit … is a USB containing the supporting documents provided to me by the ATO on 30 September 2020. On the information available to me, I believe that the Company did not pay all of its superannuation guarantee obligations when due I do not intend to challenge the assessment. 13 The day after the letter requesting assistance from the liquidator in challenging the Assessments, a response was sent stating that 'Mr Hancock does not intend that [Tarleton] challenge the ATO's assessments'. The letter went on: Your clients are entitled to take any action available to them, so long as it does not impose any expense or other burden on the Company, its creditors or our client as liquidator, or prejudice the Company's rights or interest in the litigation, then our client will neither consent nor oppose such action. 14 The defendants complained that the posture of the plaintiffs placed them in a difficult position. The existence of a taxation liability to pay the SG Charges was relied upon by the plaintiffs as the basis for the claims made in the principal proceedings. Reliance was also placed upon the circumstances concerning the deductibility of the rent. The plaintiffs were proceeding to rely upon the Assessments in support of their case. The defendants disputed the claim by the ATO concerning the SG Charges the subject of the Assessments. For the defendants it was suggested that the issues in relation to the SG Charges arose when assessments were raised in the course of the administration of Tarleton based upon a failure to respond to inquiries by the ATO. The defendants maintained that there were matters that could have been advanced to the ATO which were not advanced as part of the audit process and there were proper grounds to object to the Assessments. 15 The lawyers acting for the defendants responded to the position adopted by the plaintiffs by indicating that the defendants would make an application for leave to bring derivative actions on behalf of Tarleton in relation to the decision refusing the freedom of information request (FOI Decision), challenging the Assessments and challenging certain other assessments made (Income Assessments). 16 The lawyers for the plaintiffs responded stating: 'Our client will not consent to leave being granted to your clients to take any derivative action, and seeks directions for them to complete their evidence in the current proceeding'. 17 An interlocutory process seeking leave to bring the derivative actions was filed on 8 December 2020. In an affidavit subsequently filed in support of the application, Mr Peters deposed: I confirm, on behalf of N&M, that N&M will bear the costs of all legal actions and proceeding, as deposed to, and foreshadowed, in this affidavit. I further confirm that N&M will indemnify [Tarleton] with respect to any adverse costs order made in connection with such legal actions and proceedings, as deposed to, and foreshadowed, in this affidavit. 18 On 30 April 2021, a lawyer acting for the plaintiffs provided an affidavit which set out what appeared to be the full course of the correspondence exchanged between the lawyers between 6 April 2020 and 22 March 2021 on issues relating to the freedom of information request and the objections to the Assessments and the Income Assessments. Whilst not wishing to encourage the practice of filing affidavits exhibiting extensive solicitors' correspondence, one matter that the affidavit did demonstrate was a persistent refusal by the plaintiffs to accede to the possibility of leave being given to pursue derivative proceedings and the maintenance up until late February 2021of a position that any application for leave would be opposed. 19 On 3 March 2021, lawyers acting for the plaintiffs wrote in the following terms: We again request that you advise us of the statutory basis upon which Orders are sought as in the Interlocutory Process. None of the defendants are 'officers' of the company, and we do not see how s.198G of the Corporations Act 2001 (Cth) is engaged. By way of further and better particulars of the Interlocutory Process would you please identify the basis upon which your clients assert that they are entitled to relief under s.198G, and those particular parts of that section which are said to apply. Would you also please provide to us the Originating Processes or other documents which would be filed or issued in the name of the company by your clients, were they to be given the leave they seek in the Interlocutory Process. It is our view that the Court will not grant the leave sought in the Interlocutory Process unless the proposed Originating Process or documentation is before it, but in any event our client cannot make a decision as to whether or not to consent to your clients' taking action in the company's name unless they know the specific action which is proposed to be taken. As indicated by Mr Harris SC at the Directions hearing on 26 February, our clients may consent to the proceedings which your clients wish to bring in the company's name, but cannot give proper consideration to this unless they know just exactly what that action would be. 20 There followed further correspondence between the lawyers as to whether it was necessary for drafts to be provided of the applications by which the proposed derivative actions were to be taken. In the result, the lawyers for the defendants provided drafts. 21 The plaintiffs and the defendants have now reached a measure of agreement to the effect that N & M might be granted leave to bring derivative actions on behalf of Tarleton on the basis that N & M is a substantial creditor in the winding up of Tarleton with sufficient standing to seek the orders. 22 It is now common ground that the orders may be made. There is authority to that effect insofar as the application concerns the proposed objections to the Assessments with orders being made in similar circumstances in HFGC Nominees (No 2) Pty Ltd v Hancock as Liquidator of 246 Arabella Investments Pty Ltd (in liq) [2010] FCA 1005 at [7]-[9] (Perram J). At the time of that decision there was a general power for the Court to accede to any question arising in the winding up of a company whether wholly or partly on such terms as the Court thinks fit or make such other order on the application as it thinks just: see former s 511 of the Corporations Act: at [7]. The power that was then expressed in s 511 is now expressed in somewhat different terms in s 90-15 of the Insolvency Practice Schedule (Corporations) being Schedule 2 to the Corporations Act. It provides that the Court may make such orders as it thinks fit in relation to the external administration of a company. Although applications pursuant to these provisions are often referred to as applications for directions, the power conferred by the statutory provisions extends well beyond that which was exercised by the Courts of equity to provide advice by way of direction: Preston, in the matter of Sandalwood Properties Ltd [2018] FCA 547 at [21]-[46]. 23 In addition, at least in those instances where a winding up has been ordered by the Court, there is inherent power in the case of a company in liquidation to give leave to a creditor or contributor to bring a derivative action in the name of the company in liquidation: Ragless v IPA Holding Pty Ltd (in liq) [2008] SASC 90 at [43]-[45] (Debelle J, Sulan and Vanstone JJ agreeing); Chahwan v Euphoric Pty Ltd t/as Clay & Michel [2008] NSWCA 52 at [124]-[125] (Tobias JA, Beazley and Bell JJA); and Re DH International Pty Ltd (in liq) [2017] NSWSC 870 at [5]-[6] (Gleeson JA). 24 There is no longer any issue between the parties as to the utility of the proposed derivative proceedings or as to their arguable merits (at least insofar as they concern the Assessments). The Commissioner has not yet reached a position in relation to the question whether a party bringing an application to review the FOI Decision would have standing to do so. For that reason, the Commissioner sought additional time to consider its position as to that aspect of the application. 25 For the following reasons, the point has been reached where the interlocutory process should be determined. It was brought at the end of last year. The Commissioner filed an affidavit on the application on 15 March 2021. It was listed for hearing on 11 June 2021. At the hearing on that date orders were made to adjourn the hearing of the application in part to allow the Commissioner time to consider the position concerning the application for leave to bring a review of the FOI Decision on a derivative basis. 26 It appears that the review of the FOI Decision is proposed to be brought under s 54L of the Freedom of Information Act 1982 (Cth). It provides that an application for review may be made to the Information Commissioner in respect of certain decisions concerning applications under the statutory regime. Section 54L(3) provides: 'The IC review application may be made by, or on behalf of, the person who made the request to which the decision relates'. The issue being considered by the Commissioner appears to be whether the statutory right of review conferred by s 54L encompasses an instance where a party seeks to exercise that right pursuant to leave given by the Court in the course of a winding up for a party to bring such an action on a derivative basis in the name of the company in liquidation. 27 For the purpose of determining whether leave should be given to bring a claim on a derivative basis the Court considers the merits of the claim and the purpose to be served by bringing the claim. It does not adjudicate upon any aspect of the merits of the claim, including whether the conferral of leave will give the party sufficient standing to advance the claim on a derivative basis. Given the terms of the legislation and the circumstances and context of the application, I am satisfied that there is sufficient merit in the claim for the purposes of the orders sought and that pursuit of the claim on a derivative basis will serve an appropriate purpose. Any issue as to standing may be raised by the Commissioner in response to the claim for review of the FOI Decision if and when it is advanced on a derivative basis. 28 The Commissioner does not otherwise oppose leave. 29 In the above circumstances, I am not persuaded that there is any need for the hearing of the interlocutory process to be further adjourned. 30 The remaining issues as between the plaintiffs and the defendants are these: (1) Should the leave be confined to taking action precisely in the terms of the drafts that have been provided and requiring further applications for leave if required (including as to exercising any available appeal or review rights)? (2) Is the indemnity proposed by N & M sufficient? (3) Is it appropriate for the terms of any indemnity to make clear that it does not extend to the underlying liabilities of Tarleton and is confined to liability for costs and expenses of the derivative proceedings? (4) What order should be made as to the interlocutory process for leave to bring derivative proceedings?
Issue (1): The terms of the order for leave 31 The plaintiffs propose orders that would require the defendants to seek further leave to bring an appeal or review application in respect of a decision on the contemplated objections to the Assessments or the contemplated review of the FOI Decision. They also propose orders that would confine leave to the precise terms of the draft objections and review application that have been provided to the liquidator by N & M. 32 The defendants (and the Commissioner insofar as the orders concern the Assessments) propose orders that would not require further leave to be sought but would require notice to be given to the liquidator before any further review or appeal and liberty to the liquidator to apply to the Court to revoke the leave in the event that the Court is persuaded that it is appropriate to do so. 33 I am not persuaded that it is appropriate to express the leave that is granted in the prescriptive terms contended for by the plaintiffs. In particular, I consider it is not appropriate to confine the leave to the precise terms of the draft objections and review application that have been provided to the lawyers for the plaintiffs. The Court should not invite by the terms in which leave is given future disputation as to whether a particular point or argument or contention that might be advanced in support of an objection or review application is within the precise terms of the drafts that have been provided. Further, the Court should not burden the defendants with the cost and expense of making a further application for leave in circumstances where there is no issue between the parties as to the appropriateness of leave to make the objections to the Assessments and, for reasons that have been given, only a confined issue raised by the Commissioner as to the review of the FOI Decision. 34 N & M and the Commissioner are the creditors with the largest interest in the outcome of the liquidation. It is in the interests of both of them and creditors generally that the position in relation to the character and extent of any taxation liability be determined. If those issues are determined, in effect, as between them in proceedings brought at their cost then that is in the interests of all creditors. 35 The plaintiffs submit that there should not be undue delay of the substantive proceedings while further rights of review or appeal are pursued. The answer to that submission lies in the orders proposed by the defendants which would give the liquidator notice before any such application was brought and an opportunity for the liquidator to raise the issue with the Court. 36 For those reasons, the orders as to the terms in which leave is given should take the form proposed by the defendants.
Issue (2): The indemnity proposed by N & M 37 Where a party seeks an order allowing the party to conduct proceedings in the name of a company in liquidation, it is usual for the Court to require both the company and the liquidator of the company to be properly secured in respect of any adverse costs order and costs, charges and expenses that may be incurred in the winding up consequent upon the conduct of the proceedings in the name of the company. 38 In Cadima Express Pty Ltd (in liq) v Deputy Commissioner of Taxation [1999] NSWSC 1143 at [49], Austin J put the matter in the following way: In addition to inquiring whether there is an arguable case or solid foundation for the proceedings, the court needs to be satisfied that practical considerations support the initiation of the proceedings. The cases to which I have referred indicate that typically the applicant offers to indemnify the company in liquidation and the liquidator in respect of the proceedings, and to conduct the proceedings in such a fashion that liability to pay costs is undertaken by the applicant rather than the company to the extent that it is possible to do so. The court will wish to be satisfied that the assets of the company in liquidation are not put at risk by the proceedings and that the liquidator is not exposed to personal liability without proper protection, and may also properly have regard to the risks which the litigation poses for the other party, given that the plaintiff is a company in liquidation, the assets of which are to be protected. To these ends, the court may require that the person who conducts the litigation gives an indemnity supported by security for the benefit of the company and the liquidator, and perhaps also security for costs to protect the other party to the litigation. 39 In Carpenter v Pioneer Park Pty Ltd [2008] NSWSC 551; (2008) 71 NSWLR 577 at [57], Barrett J said it was 'proper to look to the capacity of an applicant to provide the company with financial protection when considering whether it is in the interests of the company for the applicant to be allowed to bring proceedings on its behalf'. 40 As has been described, the issues in relation to the Assessments and the freedom of information application were matters raised on behalf of Mr Peters and N & M. As was properly accepted by counsel for the defendants, the application for leave will benefit Mr Peters. The applicant for leave bears the burden of demonstrating that the company and the liquidator are appropriately protected. In the present case, no evidence was pointed to concerning the financial circumstances of N & M. 41 It was submitted that the indemnity should be provided by N & M because it was the appropriate party who should have leave given its status as a substantial creditor. It was submitted that Mr Peters did not have obvious status on which he could seek leave. However, the question whether there is sufficient protection for the company (in effect the other creditors) is separate to the identity of the party to whom leave should be granted. The question is about sufficiency of the indemnity. The liquidator has raised an issue as to whether an indemnity for N & M will be sufficient. There is no evidence demonstrating that it is. The liquidator accepts that an indemnity that was also supported by Mr Peters would be appropriate. Mr Peters is also a party who will benefit from the order sought. 42 In those circumstances, the orders should be made on the basis that N & M and Mr Peters will jointly and severally indemnify. There will be liberty to apply within 30 days to vary that order if Mr Peters seeks to demonstrate that an indemnity from N & M is sufficient.
Issue (3): The terms of the indemnity 43 In written submissions for the defendants it was said that it was appropriate for the terms of any indemnity to make clear that it does not extend to the underlying liabilities of Tarleton and is confined to liability for costs and expenses of the derivative proceedings. No submission was advanced as to why the order should not provide that clarification. The order as proposed by the defendants would confine the indemnity to costs of taking the derivative actions. The liquidator has not identified any additional costs that are likely to be incurred by the liquidator by reason of the proceedings. In those circumstances the order as proposed by the defendants should be made.
Issue (4): Costs 44 The defendants and the Commissioner proposed that there be no order as to costs. The plaintiffs proposed an order for costs in their favour. The defendants have been successful on the application. In some respects it might be said that they have provided further information since the filing of the interlocutory application that has assisted in its resolution. However, as the matters addressed earlier in these reasons demonstrate, at the time the application was brought and for a considerable period thereafter the firm position of the plaintiffs was to oppose leave. In all the circumstances, the appropriate order is that there be no order as to costs of the interlocutory process. I certify that the preceding forty-four (44) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Colvin.
Tarleton & Peters Pty Limited (in liq)
Peters
[2008] SASC 90
(2008) 71 NSWLR 577