CATCHWORDS Bankruptcy ~ exercise of Court's discretion to dismiss or adjourn petition - default judgment obtained in Supreme Court against debtor for unpaid income tax and additional taxes - debtor earned ancome aS commissions for promoting tax avoidance schemes - stay of execution in Supreme Court upon terms that sum of $780,000.00 be applied in satisfaction of debts - properties of a company controlled by the debtor mortgaged to petitioning creditor - debtor defaulted on terms - stay partially lifted by Supreme Court - whether s.41(3)(b) prevented issue of bankruptcy notice - whether Supreme Court judgment obtained by false pretences - debtor being prosecuted under Crimes Act (Cth) - effect of close relationship between tax office and D.P.P. ~ whether amount of tax debt overstated - effect of onus on debtor imposed by s.190(b) Income Tax Assessment Act - effect of payment of commissions into trust account - effect of mortgages by debtor's company to petitioning creditor - whether petition should be stood over until determination of criminal proceedings. Bankruptcy Act 1966 ss.41(3)(b), 44(1). Income Tax Assessment Act 1936 ss.19, 51, 167(b), 190(b). L.0.C. Australia Pty. Ltd. v. Mobil Oil] Australia Ltd. (1975) 49 A.L.J.R. 176. Trautwein v. Federal Commissioner of Taxation (1936) 56 C.L.R. 63. Re Lewin; Ex parte Milner, Pincus J., unreported, 24 April, 1986. Re Velis; Ex parte Seymour (1983) 48 A.L.R. 420. Re Verma; Ex parte Deputy Commissioner of Taxation (1984) 4 F.C.R. 181, Full Court, unreported 22 February 1985. McMahon v. Gould (1982) 7 A.C.L.R. 202. Ahern v. The Commissioner of Taxation, Ryan J., Supreme Court of Queensland, 17 April 1986. Re O'Leary; Ex parte Bayne (1985) 61 A.L.R. 674. RE: RICHARD LINDSAY GOLDSPINK; EX PARTE DEPUTY COMMISSIONER OF TAXATION No. P1987 of 1985 Beaumont, J. Sydney 11 June 1986 I] THE FEDEPAL COURT OF AUSTRALIA GENERAL DIVISTON BANKRUPTCY DISTRICT OF NEW SOUTH WALES No. P1987 of 1985 AND THE AUSTRALIAN CAPITAL TERRITORY RE: RICHARD LINDSAY GOLDSPINK Debtor EX PARTE: DEPUTY COMMISSIONER OF TAXATION Petitioning Creditor MINUTES OF ORDER Judge making order: Beaumont, J. Date order made: 11 June 1986 Where made: Sydney THE COURT ORDERS THAT: 1. I make a sequestration order against the estate of the debtor. Ze I order that the costs of the petitioning creditor, including reserved costs, he taxed and paid according to the Act. 3. I order that the operation of orders 1 and « be suspended up to and including 2 July 1386. ' 4. I reserve liberty to the debtor to apply, on two days' notice, for the rescission of orders 1 and 2. Note: Settlement and entry of orders is dealt with in Bankruptcy Pule 124. LN_THE FEDERAL COURT OF AUSTRALIA GENERAL DIVISION BANKRUPTCY DISTRICT OF NEW SOUTH WALES No. P1987 of 1985 er oe a eee AND THE AUSTRALIAN CAPITAL TERRITORY RE: RICHARD LINDSAY GOLDSPINK Debtor EX PARTE: DEPUTY COMMISSTIONEP OF TAXATION Petitioning Creditor CORAM: Beaumont, J. DATED: 11 June 1986 REASONS FOR JUDGMENT By his petition dated 23 December 1985, the petitioning creditor seeks a sequestration order against the estate of the debtor. He claims that the debtor is indebted to him in the sum of $3,155,939.16 and $150.00 for costs under a default judgmence obtained 1n the Supreme Court of New South Wales on 17 January 1984, The petition 1s opposed by the debtor, who appeared in person, on various discretionary grounds. A stay of execution on the judgment was granted by consent by the Supreme Court on 27 February 1984 upon terms but was removed in part by Lee J. on 30 October 1985, in circumstances to be mentioned later, s0 as to permit execution up to an amount of $625,000.00. The act of bankruptcy relied on is the debtor's failure to comply with a 14 day bankruptcy notice served on him oon 21 November 1985. Although s.41(3)(b) of the Bankruptcy Act 1966 prohibits the issue of a bankruptcy notice where execution on a judgment has been stayed, in the case of a partial stay, the prohibition in s.41(3)(b) should, in "my opinion, be read down so as to permit the issue of a notice in respect of that part of the judgment on which execution is not stayed. It follows, 1n my view, that the bankruptcy notice is not invalidated by s.41(3)(b). The complicated history of the matter commences with the issue, on 16 September 1983, of notices of assessment for 1ncome tax and additional tax for late payment in the total sum of $3,024,098.35 ain respect of assessable income claimed to have been derived by the debtor in the years ending 30 June 1979, 30 June 19380 and 30 June 1981 ("the subject assessments"). The basis of assessment was that the debtor had earned commissions as the promoter of certain tax avoidance schemes but had failed to disclose the receipt of the commissions in his return of income. The Commissioner therefore sought to invoke his power to make a default assessment pursuant to s.167(b) of the Income Tax Assessment Act 1936. On 28 October 1983, the petitioning creditor filed a statement of claim in the Supreme Court claiming payment of the sum of $3,024,098.35 together with additional tax. On 17 November 1983, the debtor lodged objections in respect of the subject assessments. On 15 December 1983, the petitioning 3. creditor notified the debtor that he had disallowed his objections. As has been said. on 17 January 1984, default judgment was entered inthe sum of $3,155,939.16 together with costs of $150.00. On 31 January 1984, the debtor appealed to the Supreme Court to challenge the assessments. On 27 February 1984, a stay of execution, upon terms, was agreed upon by the' parties. Pursuant to that agreement, on 27 February 1984, the debtor gave undertakings to the Court as follows: (a) that he would supply to the petitioning creditor details of assets owned by him or by his family or by companies with which he or his family was associated; (b) that he would ensure that Lamore Pty. Ltd., a company controlled by him, would grant to the petitioning creditor a first mortgage over certain properties to secure payment of the sum of $780,000.00 on certain terms; (c) that he would within 150 days, in discharge of the security, pay to the petitioning creditor the sum of $780,000.00; (d) that he would diligently prosecute his appeals in the Supreme Court in respect of a number of assessments for income tax, including the subject assessments; (e) that he would produce to the petitioning - creditor records under his control relating to the conduct of a tax minimisation business; (f) that he would co-operate in the investigation by the petitioning creditor of the affairs of the debtor and his family; (g) that, until further order, he would not dispose of the assets of himself. his 4. family or associated companies except, inter alia, with the consent of the petitioning creditor or in the discharge of debts in the ordinary course of business. For his part, the petitioning creditor then agreed with the debtor to apply the sum of $780,000.00: (1) first, towards satisfaction of the liability, if any, of Thalia Goldspink, the wife of the debtor, under the Taxation (Unpaid Company Tax) Assessment Act 1982 in respect of the sale of shares in Baker Drafting Services Pty. Ltd., Alpha Bootes Pty. Ltd. and Barstool Bandit Pty. Ltd., which were companies apparently controlled by the debtor; (11) secondly, towards the satisfaction of the liability, aif any, of the trustees of certain trusts, presumably under the Taxation (Unpaid Company Tax) Assessment Act; (ii1) as to the balance, towards satisfaction of the liability of the debtor to income tax or vendor's recoupment tax under the aforesaid assessments. The petitioning creditor further agreed that. upon payment to him within 150 days of part of the said sum of $780,000.00, he would by way of partial discharge, release his security. For this purpose, the parties attributed to the several properties then secured by Lamore the following values: (1) A property at Ultimo - $450,000.00. (il) A property at Kingsford - $55,000.00. (iil) A property at Roseville - $100,000.00. (iv) A property at Pacific Highway, Karuah, N.S.W. - $250,000.00. Upon noting these undertakings and agreements, Lee J., on 27 February 1984, ordered that execution of the Supreme Court judgment he stayed until final determination of the aforesaid appeals. Liberty to apply was reserved. On 28 March 1984, a deed was entered into between Lamore and the petitioning creditor. It recited the terms of the stay of execution. Under the deed. Lamore, as surety for the debtor, agreed to mortgage the aforesaid properties upon the footing that it had no personal liability except as mortgagor. On 18 December 1984, apparently by consent, Maxwell J. extended the period of 150 days mentioned in the order made on 27 February 1984, to 31 January 1985. On 15 August 1984 and 1i5 January 1985 respectively, completion of the sale of the Roseville and Kingsford properties took place. On settlement the petitioning creditor received the sums of $100,000.00 and $55,000.01 respectively in partial satisfaction of the debtor's liability of $780,000.00. The other properties secured by Lamore have not yet been sold. Recent valuations suggest that the present value of the Ultimo site, assuming its present zoning continues, is in the order of $360,000.00, although this figure includes in the land valued one lot which was not mortgaged by Lamore. The Karuah site appears to be now worth about $250,000.00 if sold in three separate lots as a motel site, a Caravan park site and a cabin site respectively. 6. On 30 October 1985, the debtor having defaulted under the conditions of the existing stay of execution, Lee J. ordered that the stay "be removed in part to permit the Cpetitioning creditord to execute the judgment up to an amount of $625,000.00." In November 1985, the petitioning creditor applied to the Supreme Court for "mareva" unjunctions against the debtor, Lamore, Thalia Goldspink and the debtor's solicitors. On 19 December 1985, for the reasons he then gave, Lusher J. granted the injunctions sought. On 17 December 1985, the petitioning creditor issued amended assessments 1n respect of the taxable income of the debtor for the 1979, 1980 and 1981 years of income in the total sum of $2,990,677.65. It appears that these assessments, which were for less than the assessments issued in September 1983, accepted that the debtor was to be allowed a deduction under s.51 of the Income Tax Assessment Act in respect of outqoings paid to third parties who had acted as sub-agents in the transactions in which the debtor had earned commissions. On 17 February 1986, the debtor objected to these amended assessments. On 2 April 1986, the petitioning creditor disallowed the debtor's objections. In May 1986, the appeals previously lodged by the debtor were listed in the Supreme Court for the purpose of fixing a hearing date. In response to the debtor's request, no hearing date was fixed. The debtor gave as the reason for his request the pendency of certain criminal charges against him dealing, to some extent at least, with matters the subject of the assessments under appeal. In urging the Court to exercise its discretion to adjourn or dismiss the petition, the debtor challenged the subject assessments as "arbitrary". He also contended that the Supreme Court judgment was obtained by "false pretences", although no clear statement of this argument was ever made by the debtor. It will suffice to say that nothing emerged at the hearing to suggest that the judgment now sought to be enforced was liable to be set aside on the ground that it was obtained by fraud (see Halsbury's Laws of England 4th ed., Vol.26 at p.285). He further claimed that the present proceedings were, in some way, tainted by reason of the proximity of the relationship between the office of the petitioning creditor, the office of the Spectal Prosecutor (appointed under the Special Prosecutors Act 1982) and the office of the Director of Public Prosecutions. He also submitted that these proceedings should, in any event, be stood over pending the hearing of criminal charges brought against him by the Director of Public Prosecutions. In his case, the debtor called a number of officers of the petitioning creditor and of the Director of Public Prosecutions who had dealt with the affairs of the debtor. Some ef these officers had been transferred from the Taxation Department to the office of the Special Prosecutor and then to 8. the office of the Director of Public Prosecutions. Some of these officers, whilst in the office of the Special Prosecutor, had been concerned with civil recovery proceedings against the debtor as well as with the initiation of criminal prosecutions against him. Reference was made by the debtor, in this connection, to the scope of the statutory functions of the Special Prosecutors with respect to both the institution of criminal prosecutions and the taking of civil remedies on behalf of the Commonwealth (see Special Prosecutors Act, s.6(1)(a) and (b)). In this context, the debtor relied on the fact that. on 8 July 1985, on the anformation of the Director of Public Prosecutions, the debtor was charged with two offences of conspiracy under s.86 of the Crimes Act 1914. The offences alleged were, first, conspiracy to prevent or defeat the execution or enforcement of a law of the Commonwealth (s.86(1)(b)); and, secondly, conspiracy to defraud the Commonwealth (s.986(1)(e)). According to particulars of the charges furnished in a letter written by the Director of Public Prosecutions on 11 July 1985, the gist of each charge is that the debtor. ain concert with the other defendants and others, knowingly participated ain schemes of "pre-tax profit-stripping"" whereby large numbers of companies were stripped of all their net tangible assets as a result of which the Commissioner of Taxation was hindered. obstructed, delayed or defeated ain collecting income tax payable by such companies on profits made by them. The particulars further allege that the debtor was aware that assets of the stripped companies were used to pay commissions to, inter alios, the debtor. The committal proceedings in respect of these charges are fixed for a hearing to commence on 16 June 1986 before Mr. Butler S.M. The hearing 1s estimated to continue for some months. The evidence established that, in the course of their respective duties, officers of the Department of Taxation communicated with officers of the Special Prosecutor and with officers of the Director of Public Prosecutions about the debtor, and, in particular, . about the criminal and civil proceedings now pending against him. There is also evidence that, although no personal impropriety could be suggested, those officers felt no particular goodwill towards the debtor. It appears that those officers formed the view that because the debtor was, in their belief. anvolved in the "tax avoidance industry" ona large scale, they, on behalf of the Commonwealth, should not shirk from what they perceived to be their responsibility to institute any proceeding, civil or criminal, properly available to be brought against the debtor by reason of his activities. But it does not follow that the petition should be dismissed because of such attitudes. To borrow the language of Gibbs J. in [.0.C. Australia Pty. Ltd. v. Mobil Oi] Australia Ltd. (1975) 49 A.L.J.R. 176 at p.182, "it 1s not the law that only a creditor who feels goodwill towards his debtor 1s entitled to a a Csequestration] order." 10. The debtor did not give evidence in these proceedings because he said that he wished to maintain his "right of silence" zn view of the criminal proceedings pending against him. The debtor said that he had no unencumbered assets, explaining that the home in which he and his wife lived was owmed by her. He also tendered, without objection, a list of creditors. The list omitted the petitioning creditor. It indicated that the debtor owed $3,761.00 to unsecured creditors. Westpac Banking Corporation is owed a total of $2,912.00 on several accounts. The balance 1s owed to tradesmen and a medical practitioner. The debtor also said that he owed $15,200.00 by way of a loan froma relative, Mr. T.A. Wynyard. The loan 1s said to be secured by a bill of sale over furniture and a car owned by the debtor. The car was said by the debtor to have a value of only $5,000.00. The events leading up to the making of the assessments in September 1983 commenced with a memorandum dated 13 September 1983 written by Mr. T. Malone, an officer of the Taxation Department as follows: "RICHARD LINDSAY GOLDSPINK Information has been received that as a result of destruction, by fire, of buridings owned by an entity of Richard Lindsay Goldspink, this entity is to receive an insurance pay out of $800,000. An investigation of the affairs of Richard Lindsay Goldspink has not, as yet, been carried out and consequently it 1s not known what assets are avallable to meet any amended assessments. As the Department 1S now aware of the pending payment of $800,000 to one of Goldspink's ran) ill. entities, it is considered that amended assessments should be issued in order to lay claim to this amount. Information obtained from deal sheets siezed from the office of John Walker Wynyard shows that Goldspink derived commission, from the sale of tax-avoidance schemes, which have not been returned as income. These commissions are as follows:- 1979 $ 28,062 1980 $1,607,927 1981 $ 48,088 As these commissions represent the total received in respect of 1366 companies and in fact some 2020 companies were involved, it 15 submitted that the above commissions be proportionately increased. It is therefore submitted that the taxpayer's 1979, 1980, and 1981 assessments be amended to include the following commissions:- 1379 $ 41,497 1980 $2,377,754 1981 $ 71,111" Another officer, Mr. W. Bourke, a supervisor, responded by a memorandum dated 14 September 1983 as follows: "INCOME TAX : RICHARD L. GOLDSPINK The taxpayer was not involved in all the 2020 "Wynyard" stripped companies but he received fees/commissions from 182 of the 1366 strips identified from the dial (sic) sheets inspected. The method of calculation of the estimated total commissions received by the taxpayer is supported. Submission re Penalty The taxpayer s additional income was net fees/commissions from the promotion of income tax avoidance schemes. A penalty of 100% of the 12. tax avoided, in terms of 3.226(2), is recommended and that 100% has been calculated in accordance with the quidelines set out in Taxation Ruling No. I.T. 2012 as follows:- 40% culpability component of the Basic Penalty, 20% a interest component of the Basic Penalty. The total interest at 10% p.a. from 8 April 1982 to 13 February 1983 and at 20% p.a. from 14 February 1983 to 16 September 1983 computes to 20.3% flat, 40% in view of the fact the taxpayer was a tax adviser/scheme promotor - see attached." Only one of the "deal" sheets mentioned by Mr. Malone was tendered in evidence. It showed that, in respect of a transaction in June 1980 involving the stripping of the assets of Hesleyside Pty. Limited (the "target company"), an ""agent's commission" of $4,820.00 was paid to "R.L. Goldspink and Co. Trust Account". The debtor said that, in the course of his practice aS an accountant. he maintained a trust account. He also claimed that amounts were paid out of the trust account to third parties who acted as sub-agents in the transaction. For instance, the debtor adduced documentary evidence showing that in January, February and March 1980, amounts totalling $8,181.00 were paid to Mr. G. Ditfort. The debtor claimed that, pursuant to s.51 of the Income Tax Assessment Act, he should be allowed a deduction in respect of such outgoings. The response of the petitioning creditor was to accept such an allowance in principle but to dispute the amount claimed. The petitioning creditor says that the amount of any such deductions has already been reflected 13. in the amended assessments issued in December 1985. From such general assertions on both sides, it 1s only possible to conclude that. 1n the absence of any detailed documentation, the debtor has failed to discharge the onus imposed upon him by s.190(b) of the Income Tax Assessment Act to establish that he should be allowed any deduction beyond those accepted by the petitioning creditor in the assessments made in December 1985. The debtor also arqued that he did not earn the commissions personally. He sought to obtain comfort from the circumstance that the commissions were paid into his trust account. But the mere nomination by the debtor of a trust account as the recipient of income earned by him would not lead to the result that, for taxation purposes, the debtor did not derive that income isee Income Tax Assessment Act, s.19). The debtor aiso attacked the assessments by reference to the approach taken by Mr. Malone and by Mr. Bourke. He argued that thelr memoranda indicated that the assessments were quite arbitrary. He singled out for special criticism the attempt to increase the debtor's income by the assumption that he had been involved in stripping the assets of 2020 "target" companies rather than 1366 of such companies. There is force in the debtor's submission that the several assessments issued by the petitioning creditor have at least overstated the amount of his income in the form of l4. commissions derived by him. But the debtor has not been able, on the material in evidence, and in discharge of the onus cast upon by s.190(b) of the Income Tax Assessment Act, to establish that no such income was earned by him (see Trautwein v. Federal Commissioner of Taxation (1936) 56 C.L.R. 63 at p.lll; Re Lewin; Ex parte Milner, Pincus J., unreported, 24 April 1986). On the contrary, the evidence, sketchy as it is, indicates that it 1s probable that, in the years in question, the debtor earned substantial commissions. It 1s true that itis difficult to quantify the amounts involved and that, in the end, the amount found to be due to the petitioning creditor by way of income tax, as distinct from additional tax, may even be less than the value of the securities offered by Lamore. Yet, as has been said, the debtor has no assets. The evidence suggests that he is indebted to the petitioning creditor for an amount well in excess of the amount which must be owed before a creditor mav present a petition (see Bankruptcy Act, s.44(1)). He has already committed an act of bankruptcy; and even 1f his appeals to the Supreme Court were allowed and the assessments were set aside, the act uot bankruptcy would remain (see Re Vella; Ex parte Seymour (1983) 498 A.L.R. 420). It follows that. technically at least, the debtor is ansolvent. Further, in my view, the debtor has failed to make out a case that the Court, in the exercise of its discretion, should decline to proceed to sequestration (see Re Verma; Ex parte Deputy Commissioner of Taxation (1984) 4 F.C.R. 181; 15. affirmed on appeal by Full Federal Court, Fox, McGregor and Wilcox JJ., 22 February 1985, unreported). On the other hand, 1t 18 possible that, with the aid of professional advice, the debtor may be able to discover the existence of documentary evidence which may establish that the assessments issued should be wholly set aside. It appears unlikely that such evidence does exist but the debtor should be given a last opportunity to seek advice on these matters, as well as on the question of the beneficial ownership of the assets held by Lamore. It 1s possible that, contrary to the debtor s assertions, the beneficial ownership of that company's assets may belong to the debtor. If that were so, 1t may be necessary to review the question of the debtor's insolvency in the light of the disclosure of fresh assets which, 1t appears, are of substantial value. It was implicit, 1f not explicit in the several arguments advanced by the debtor, that the petition should be adjourned until the determination of the criminal proceedings. In a proper case, the Court, in 1ts discretion, may stand over the petition in order that the debtor can maintain his "right of silence" (see McMahon v. Gould (1982) 7 A.C.L.R. 202; Ahern v. The Commissioner of Taxation - Ryan J., Supreme Court of Queensland, 17 April 1986, unreported). But, in the present case, 1t 1s not clear how the debtor's oral testimony could improve his position. From the little material tendered, it seems that the ""deal" sheets mentioned by Mr. Malone are the relevant source documents. However, neither party sought to 16. tender these crucial documents other than the one already mentioned. In other words, on the material available, 1t appears that the fate of the appeals in the Supreme Court will depend upon the documentation in the form of the "deal" sheets rather than upon oral evidence of the debtor. In these rather special circumstances, the debtor has failed to demonstrate that the Court should, in its discretion, defer the hearing of the petition until after the criminal proceedings have been concluded. Finally, it should be noted that in the petition, reference was made to the security granted by Lamore in these terms: "2. The debtor is justly and truly indebted to me under a final judgment obtained on 17 January 1984 against the debtor in the Supreme Court of New South Wales in the sum of $3,155,939.16 and $150.00 costs, being a judgment upon which a stay of execution granted on 27 February 1984 was on 30 October 1985 removed in part pursuant to an order made by his Honour Mr. Justice Lee tO permit me to execute the judgment up to an amount of $625,000.00 only. 3. I do not, nor does any person on my behalf, hold any security over the property of the debtor or any part of iat for the payment of the amount specified in the last preceding paragraph. Alternatively I hold security over the property of the debtor inthe form of mortgages over the property of Lamore Pty. Limited. a company duly incorporated in New South Wales, but the present value of the security 15 less than the amount specified in the last preceding paragraph." The fact that Lamore granted security to the petitioning 17. creditor is not, of itself, a reason for declining to make a sequestration order. The assets charged were not, of course, liquid and, on the debtor's case, were not assets in which he could claim any interest. On the other hand, the grant of security could properly be taken into account in the debtor's favour as a circumstance pointing against the exercise of the Court's discretion to make a sequestration order. Its weight, however, must be minimal (see Re O'Leary; Ex parte Bayne (1985) 61 A.L.R. 674). For these reasons, I propose to make a sequestration order, but to suspend the operation of such order for a period of 21 days, reserving liberty to the debtor to apply in that period for the rescission of the sequestration order. It follows from what has previously been said that an application for rescission would only be entertained on the grounds, first, that fresh evidence, which presumably would be 1n documentary form, established that the assessments should be wholly set aside; or, secondly, that the debtor is, in truth, the beneficial owner of the assets held by Lamore, in which event those assets would be taken into account in assessing the debtor's solvency. I make the following orders: 1. I make a sequestration order against the estate of the debtor. ae I order that the 18. costs of the petitioning creditor, including reserved costs, be taxed and paid according to the Act. 3. I order that the operation of orders 1 and 2 he suspended up to and including 2 July 1986. 4. I reserve liberty to the debtor to apply, on two days' notice, for the rescission of orders 1 and 2. Counsel and Solicitors for Petitioning Creditor: _, Dates of hearing: Date Judgment Delivered: Debtor appeared in person Mr. C. Darvall, Q.C. wath Mr. P. Urquhart, instructed by the Australian Government Solicitor. 4, 5 and 6 June 1986 11 June 1986.