JUDGMENT No. wuLL& dol 5.2. FEDERAL COURT OF AUSTRALIA ) VICTORIAN REGISTRY ) No VG 546 of 1996 GENERAL DIVISION ) BETWEEN: THE SOLICITORS' LIABILITY COMMITTEE Applicant AND: GARRICK LEWIS GRAY and MICHAEL FREDERICK WINTER (trading as GRAY & WINTER) Respondent COURT: FINN J PLACE: MELBOURNE DATE: 9 DECEMBER 1996 EX TEMPORE REASONS FOR JUDGMENT NOT FOR DISTRIBUTION NO POINT OF PRINCIPLE FEDERAL COURT OF AUSTRALIA ) VICTORIAN REGISTRY ) No VG 546 of 1996 GENERAL DIVISION ) BETWEEN: THE SOLICITORS' LIABILITY COMMITTEE Applicant AND: GARRICK LEWIS GRAY and MICHAEL FREDERICK WINTER (trading as GRAY & WINTER) Respondent COURT: FINN J PLACE: MELBOURNE DATE: 9 DECEMBER 1996 EX TEMPORE REASONS FOR JUDGMENT This application is to vary an order of Jenkinson J made on 21 October 1990, staying execution of a judgment of Olney J, of 9 August 1996, in which it was ordered that the present appellant - the Solicitors' Liability Committee - pay the respondents Garrick Lewis Gray and Michael Frederick Winter, trading as Gray & Winter - $500,000 plus the costs incurred in defending other proceedings. I am informed that the aggregate value of that judgment is now in excess of $1.3 million. The appellant carries on the business (inter alia) of providing professional indemnity insurance for solicitors. The judgment I have mentioned was in respect of a claim made under an indemnity contract had by the respondents with the appellant. The principal ground of appeal relied upon against the judgment, I am informed, is that the trial judge erred in finding that the activity of the respondents which gave rise to the indemnity claim on the appellant was one which fell within the scope of the insurance contract itself. Because of its bearing on this matter I should note that the respondents were directors, and Mr Gray remains a director, of a group of companies of which two, Graywinter Properties Pty Ltd ("Properties" ) and Graywinter Management Pty Ltd ("Management") are of present relevance. It is agreed that these companies are liable respectively to the Deputy Commissioner of Taxation in the sums of $261,829.11 and $106,949.91 in respect of unpaid group tax deductions from employee salaries and wages. These liabilities are the subject of statutory demands against the companies in other proceedings which I heard immediately following this proceeding. Paralleling the group tax liabilities of the two companies is the personal liability (joint and _ several) of the respondents, as directors, for that tax. For reasons which I need not enter upon here, that liability in aggregate is in the order of $346,000, a sum differing somewhat from the aggregate of the liabilities subject to the statutory demands. This parallel liability arises under the provisions (inter alia) of $222a0C of the Income Tax Assessment Act. I would note that payment of the companies' indebtedness to the Deputy Commissioner would have the effect under s222AOH of the same Act, of discharging the personal liability of the directors. I am informed that the Deputy Commissioner has takén proceedings in the County Court against Mr Gray in respect of the personal liability. Those proceedings are being defended. I should also note by way of introduction that Mr Winter was declared bankrupt on the petition of the Commission. This eccurred shortly after the stay was granted by Jenkinson J. Mr Winter's trustee in bankruptcy has, I am informed, elected to play no active part in these proceedings. The present application The application is to vary the Order of Jenkinson J so as to require the Appellant to pay the Deputy Commissioner of Taxation on behalf of the respondents, the two sums I earlier mentioned, being the now substantiated amounts claimed in the statutory demands served on Management and Properties respectively. That payment is sought on or before 13 December 1996, the date fixed for compliance with the statutory demands by Jenkinson J under the Corporations Law, s459F(2) (a) (i), in the separate proceedings involving the demands to which I have referred. It is agreed between the parties that the present is not in the nature of a fresh application for a stay. Neither is it, in effect, an appeal from the order of Jenkinson J, nor could it be. All I am concerned with is whether circumstances exist which could make it appropriate to vary the order in the manner sought , there being no question but that that order was properly made. Though Jenkinson J did not give separate reasons for his @ecision, it is clear from the Transcript of his Honour's observations at the hearing at which the stay was granted that he was aware that circumstances could arise that could require a variation to be made. His Honour instanced the situations of the impending expiry of the period for compliance with a statutory demand or a bankruptcy notice. Needless to say it is on this observation that the respondents place great weight and this because the time for compliance with the statutory demands served on the companies expires, as I have noted, on 13 December. Given that the burden of the variation application is, at one level, to protect the two companies from the presumption of insolvency arising from non-compliance with a statutory demand, it is necessary to outline in a little detail the relationship of the respondents to the companies to explain why they seek me to take the apparently benevolent course to the companies that they advocate. Though there is some alleged inconsistency between Mr Gray's affidavits on the matter, he has sworn for the purposes of this application that Properties funded the respondent firm's Federal Court action which resulted in the indemnity claim being made against the appellant. In those proceedings Properties made payment, in aggregate of $798,687.27, $200,000 of which was provided to Properties by Management . The firm, it is said, has not repaid the money expended by Properties. I am prepared, for present purposes, to accept that the alleged payments were in fact made and that a corresponding liability in the firm was incurred. On 21 November 1996, Mr Gray, on behalf of the respondents, executed two Irrevocable Authorities under which he directed the appellant to pay to the Deputy Commissioner of Taxation the sums I previously mentioned, owed by Properties and Management respectively. Mr Gray has sworn that this step was taken in consideration of Properties not issuing proceedings to recover the nearly $800,000 debt owing by the firm to it. He also has sworn that, in the event of the appellant's "appeal being successful, he would be able personally to pay the amount of group tax to the Commissioner. He was also prepared to undertake to the Court to repay that amount if the stay was varied but the appeal was successful. I have, of course, been provided with no evidence of Mr Gray's capacity to make such payments. What he relies upon to demonstrate his earnest in the matter is the consequence flowing from a solicitor failing to meet an undertaking to the Court. Before turning to the merits of the application it is appropriate to make reference to several other matters. First, the evidence as to the financial position of the companies is sparse, and in the case of Properties, contested. On 1 May 1996, the Controlling Trustee of Mr Winter's estate made his report pursuant to s189A of the Bankruptcy Act 1966. In it he noted that he was advised by Mr Winter that Properties had no assets and debts of about $12 million. For his part Mr Gray in his affidavit of 5 December 1996 asserts that this is false and that in any event Properties repaid debts of $5,311,000 between April 1996 and December 1996 by way of cash, transfer of real property and/or provision of security from directors. Assuming such to have occurred, I note specifically that Properties debt to the Deputy Commissioner for Taxation which went back in part to 1991 was not one so favoured by the company. I have no significant evidence before me of the financial affairs of Management other than the assertions that it derives all of its income from managing commercial real estate, that it is able to meet its debts as they fall due (other than the group tax), but that it will lose its income under two management agreements in the event of liquidation. Those agreements were put in evidence. Finally, I would note that quite apart from the group tax liability the appellant is now being sought to pay, the appellant has, since the date of Olney J's judgment, paid out or had notice of, claims amounting to $362,519 on the judgment debt itself. Conclusion As I have indicated, this proceeding is to vary an existing order the propriety of which has not. been called. into question. This said the respondents' written submissions come close to seeking to reagitate generally the application to the circumstances of this appeal of the principles governing the grant of a stay, albeit the respondents' purpose is to secure merely the variation applied for. The purpose of the award of the stay in this proceeding can only have been to avoid the appeal being rendered nugatory if the appellant was successful in it - the matter of apprehension being the irrecoverability of the moneys that would otherwise be paid over to the respondents. For my own part, I do not see that the respondents in the present application have advanced any consideration which would make that apprehension any the less. They have an understandable concern about the fate of Properties and Management and about the effect on them of non compliance with the statutory demand. They assert that but for having to have funded the firm's litigation, {where this should have been done by the appellant) they would have been able to pay the group tax, so that it can be said that the appellant is responsible for the financial circumstances of the respondents insofar as the group tax has not been paid. I would note in passing no mention was made in this of the over $5 million in debts said to have been paid by Properties between April and December of this year. They further question the prospects of the appeal and urge that, on the balance of convenience, the irreparable damage that will be caused to the companies (hence to the respondents) if the variation is not made, outweighs any hardship that might be suffered by the appellant in being required to meet about 27 per cent of the judgment awarded against it. For its part, the appellant opposed the application on the grounds that: (1) I should be unconcerned with the fate of the companies - the more so because I have no satisfactory evidence as to their financial position; "S Me (2) the group tax problems of the companies and _ the respondents are unrelated to non-payment of moneys by the appellant - indeed the group tax problem has an older provenance; (3) the variation sought is premature and that Mr Gray should first seek to have the time for compliance under the statutory demands extended or under a bankruptcy notice that may have been served on him (there is no evidence that such has}; and (4) no sufficient cause for the variation has been shown. Given the course that I intend to take in the related proceedings concerned with the statutory demands, I need not deal at any length with the contending submissions. Here I need merely say that I have not had put before me any evidence which would satisfy me that the position of the appellant would be any less at risk if moneys were now to be paid out under the variation than was the case when Jenkinson J ordered the stay and refused to make by way of exception an order allowing for (inter alia) $346,000 to be paid to the Deputy Commissioner of Taxation in respect of the parallel personal liability of the respondents. Such an order was sought at the time. In saying this I have taken into account the undertaking Mr Gray has said he is prepared to give the Court. I would say, furthermore, that I find little that is heipful at all in the evidence put before me by the respondents. In particular I find the evidence as to the financial affairs of the two companies to be wholly inadequate despite the opportunities the respondents have had to remedy this. I have been left to speculate as to how and why Properties paid, so it is said, over $5 million of debts without apparently bothering to consider payment of its group tax liability. And I find that omission the more inexplicable given that the Deputy Commissioner of Taxation served its statutory demand on 29 December 1995. Equally I am unsatisfied on the sparse evidence put before me as to the actual prejudice likely to be suffered (a) by the respondents, or (b) by the two companies, if the variation is not made. No sufficient reason has been given, no circumstances made out, to justify varying the order of Jenkinson J. Accordingly, I dismiss the application. ad I certify that this and the preceding 11 pages are a true copy of the Reasons for Judgment herein gf the Hqngurable Justice Finn. 22 January 1997 Counsel for the appellant : M Clarke Solicitors for the appellant : Deacons Graham & James Counsel for the respondent : P K Searle Solicitors for the respondent : Gray & Winter Date of hearing 9 December 1996 Date of judgment : 9 December 1996