FEDERAL COURT OF AUSTRALIA BANKRUPTCY – default assessments to tax – appeal to AAT dismissed, subject to further appeal and to application for reinstatement of appeal – circumstances in which, despite the general rule in Ahern v Deputy Commissioner, a sequestration order was made. Ahern v Deputy Commissioner of Taxation (Qld) (1987) 76 ALR 137 Adamopoulos v Olympic Airways SA (1990) 95 ALR 525 IN THE MATTER OF: GEORGE STEPHEN GREER (ALSO KNOWN AS JOHN DUFFY); DEPUTY COMMISSIONER OF TAXATION v GEORGE STEPHEN GREER (ALSO KNOWN AS JOHN DUFFY) NP 818 of 1996 Burchett J Sydney 25 June 1998 IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NP 818 of 1996 In the matter of: george stephen greer (ALSO KNOWN AS john duffy) BETWEEN: deputy commissioner of taxation Applicant AND: george stephen greer (ALSO KNOWN AS john duffy) Respondent JUDGE: BURCHETT J DATE: 25 JUNE 1998 PLACE: SYDNEY THE COURT ORDERS THAT: 1. A sequestration order be made against the estate of George Stephen Greer; 2. The applicant creditor's costs, including reserved costs, if any, be taxed and paid from the estate of the bankrupt in accordance with the Bankruptcy Act 1966. AND IT IS NOTED that the date of the act of bankruptcy is 11 June 1996. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NP 818 of 1996 In the matter of: george stephen greer (ALSO KNOWN AS john duffy) BETWEEN: deputy commissioner of taxation Applicant AND: george stephen greer (ALSO KNOWN AS john duffy) Respondent JUDGE: BURCHETT J DATE: 25 JUNE 1998 PLACE: SYDNEY EX TEMPORE REASONS FOR JUDGMENT In this matter, the issue that has been raised in defence of the petition brought by the Deputy Commissioner of Taxation, seeking a sequestration order against the debtor, is that the validity of the assessments to tax constituting the debt, which were default assessments covering a number of years, has not yet been determined by the Administrative Appeals Tribunal. It is also claimed that the debtor is not insolvent. Apart from these matters, it is accepted that the proofs of the various matters required to be proved under the provisions of the Bankruptcy Act 1966 and the Rules are established, and accordingly, subject to the two specific matters I have mentioned and the exercise of such discretion as I have, the case is made out. The general principle which must be applied in respect of the primary defence, that the validity of the assessments has not yet been examined and ruled upon in the Administrative Appeals Tribunal, was laid down by a Full Court in Ahern v Deputy Commissioner of Taxation (Qld) (1987) 76 ALR 137 at 148 and was reaffirmed by a Full Court in the judgment of Gummow J and myself in Adamopoulos v Olympic Airways SA (1990) 95 ALR 525 at 531-532. In the former case, the joint judgment of Davies, Lockhart and Neaves JJ states at 148: "It is also well established that in general a court exercising jurisdiction in bankruptcy should not proceed to sequestrate the estate of a debtor where an appeal is pending against the judgment relied on as the foundation of the bankruptcy proceedings provided that the appeal is based on genuine and arguable grounds: Re Rhodes; Ex parte Heyworth (1884) 14 QBD 49; Bayne v Baillieu (1907) 5 CLR 64 and Re Verma; Ex parte DCT (1985) 4 FCR 181. These cases rest on the broad principle that before a person an be made bankrupt the court must be satisfied that the debt on which the petitioning creditor relies is due by the debtor and that if any genuine dispute exists as to the liability of the debtor to the petitioning creditor it ought to be investigated before he is made bankrupt. Bankruptcy is not mere inter partes litigation. It involves change of status and has quasi-penal consequences. In income tax cases an additional consideration to be taken into account is the policy expressed in s 201(1) of the Income Tax Assessment Act 1936 whereby the fact that an appeal is pending shall not in the meantime interfere with or affect the assessment the subject of the appeal or reference; and income tax may be recovered on the assessment as if no appeal were pending. This section is called in aid by the respondent. In one sense proceedings in bankruptcy are proceedings to recover an assessment within the meaning of s 201, but that provision must operate within the general framework of the law of bankruptcy including the provisions of s 52 of the Bankruptcy Act. Section 201 is a relevant matter for the court to consider when exercising its powers on the adjournment of the bankruptcy petition or on considering whether to make a sequestration order, but it is not itself dispositive of the matter. The court's powers and discretions remain." In Adamopoulos at the pages cited, much of this quotation was set out again, and Gummow J and I went on to comment (at 532): "It will, of course, be observed that the principle is stated in terms which acknowledge the existence of exceptions; it operates 'in general'. For situations which were held to raise considerations making them fall outside the general rule, see Re Verma; Ex parte Deputy Commissioner of Taxation (1985) 4 FCR 181; Re Lewin and Glasson; Ex parte Milner (1986) 67 ALR 591." So the principle relied on by the debtor, in the present case, is one which acknowledges that the rule in question is applicable only in general, and that there will be cases not conforming to the general position. In the present case, the position is certainly far from what might be commonly encountered. As I have indicated, the assessments were default assessments covering a number of years. In December of 1994, the Commissioner of Taxation referred the debtor's application for review to the Administrative Appeals Tribunal pursuant to s 187 of the Income Tax Assessment Act 1936. There followed delays on the ground that the debtor was seeking legal representation, and little seems to have happened beyond a series of vacated conferences, vacated at the debtor's request, between 3 March 1995, when the first such conference called by the Administrative Appeals Tribunal was vacated, and 24 November 1995, when representatives of the parties signed a form of agreement to the discontinuance of the proceeding. The Tribunal, pursuant to s 42A(1) of the Administrative Appeals Tribunal Act 1975, ordered that by consent the application be dismissed. Then, on 8 December 1995, the debtor wrote to the Tribunal requesting a reinstatement. It may be noted that s 42A provides for reinstatement, but, in the context of the section, it is more than a little doubtful whether that provision was not intended, at least primarily, for cases where proceedings had been summarily dismissed under other subsections than sub-s(1). Generally speaking, if a proceeding is dismissed by consent, there will not be occasion to reinstate it. On 11 January 1996, the Tribunal in fact refused to reinstate the proceeding here in question. Its ground appears to have been the statement of the debtor's own barrister that the agreement to discontinue the application, made on 24 November 1995, was made after extensive legal advice. It was following these events that a default judgment was entered against the debtor in the Supreme Court in the sum of $2,035,563.37. That is the judgment which, in due course, founded the bankruptcy notice upon which the Deputy Commissioner now seeks a sequestration order. Not until many months later was the next step taken by the debtor. On 25 November 1996, he lodged with the Administrative Appeals Tribunal a further application for reinstatement of the proceedings which had, by then, been dismissed for just over a year. That application for reinstatement suffered the same fate as the previous one. It was dismissed on 27 November 1996. Then, on 5 December 1996, the debtor lodged with the Tribunal a fresh application, in which he sought an extension of time to enable him to maintain a second application for review of the decisions of the Commissioner to disallow his objections to the assessments in question. The application for an extension of time was heard on 17 March 1997, when Deputy President McMahon granted it. There followed telephone conferences in June and August 1997, when directions were given in respect of the filing of evidence on behalf of the debtor. On 18 September 1997, the Commissioner of Taxation sought a further directions hearing for the purpose of having the proceedings dismissed for failure by the debtor to meet timetables. On 16 October 1997, that application was refused, and it was ordered that the matter be set down, for hearing, for an estimated three days. The hearing came on on 2 March 1998, but when the matter was to commence the transcript shows that the debtor was not ready to proceed. He was represented by a solicitor who said he had only recently been instructed, and would need time to prepare. The result was a lengthy argument about what ought to be done, in the course of which the debtor gave evidence, and it transpired that he had made entries in his diary containing the private addresses of the member of the Administrative Appeals Tribunal hearing the matter and of counsel for the Commissioner of Taxation. He gave the explanation that he might need to subpoena them, but it is clear that the Tribunal was at least doubtful of the truth of this explanation. It was, of course, apparent that, in a Tribunal which could not award costs, the granting of the application for an adjournment, if it were to be granted, would be certain to cause prejudice to the Commissioner, who had come prepared to fight the case over three days. The member, during the argument, pointed out to the debtor's solicitor this feature of the position. He said: "I, as you know, have no power in this Tribunal to make an order as to costs, but I have in previous proceedings heard of argument and suggestions that on occasion offers to pay the costs thrown away are made. Is your client proposing such an offer?" The solicitor said he would seek instructions, to which the member responded: "Would you like an adjournment? What I am trying to put to you is this, Mr Pigott. Firstly, are you going to offer to pay the costs thrown away? I emphasise that I am not urging you to do so and I certainly have no power to insist that you do so, but undoubtedly an offer to that effect would have a bearing on my view." After a short adjournment, Mr Pigott made it clear that his client would offer to pay costs thrown away, if the matter were adjourned. After further discussion, the member decided upon an adjournment on a particular basis involving the offer which had been made, and he said: "Moreover, this application will, by agreement between you, correct me if I am wrong, be dismissed if the costs thrown away which are agreed at $10,000 are not paid within" - and he specified 28 days at the express invitation of the debtor's solicitor. Counsel for the Commissioner shortly afterwards put the following comment on the transcript: "Yes, well it would be on the transcript that the understanding between the parties and the agreement between the parties is that if the $10,000 amount is not paid within 28 days, Mr Pigott has instructions from his client to consent to the proceedings being dismissed." The member made a comment about crossing the t's and dotting the i's, after which the solicitor for the debtor added: "Yes, I am just thinking the same, Senior Member. I have obtained some written instructions about that matter, if you will just excuse me one moment." After further discussion the Senior Member said: "So the relevant periods are 28 days for the payment of the costs thrown away. It is agreed that if that amount is not paid the matter must be dismissed." The matter was then adjourned, dates being fixed for it to be heard on and following 7 April. When 7 April arrived, the sum of $10,000 had not been paid. Accordingly, there was further discussion, and the Senior Member noted: "With the consent of both parties I gave directions on that day" - that is a reference back to 2 March - "postponing the matter until today but on the express basis - and I emphasise that it was an agreed basis - that if the applicant did not pay the respondent's costs thrown away agreed at $10,000 within 28 days - and that was a period suggested by Mr Pigott - the application would, in accordance with that agreement, be dismissed." Accordingly, the Senior Member did dismiss the application saying: "In the circumstances, the order of this Tribunal is that the application is in accordance with the agreement between the parties, dismissed pursuant to section 42A(1) of the Administrative Appeals Tribunal Act." An appeal under s 44 of the Administrative Appeals Tribunal Act has been lodged with this court, and is due, I understand, to come before the court for directions very shortly. I also understand that a further application has been made to the Administrative Appeals Tribunal. But the fact is that, at the present time, there is no extant appeal to the Administrative Appeals Tribunal under the provisions of the Income Tax Assessment Act challenging the assessments which grounded the Bankruptcy Notice, and now ground the petition. The argument for the debtor requires me to pile possibility on possibility. If, as is possible, the appeal to this court, or the application to reinstate the matter in the Administrative Appeals Tribunal, should succeed, so that there would again be a viable application to that Tribunal to review the disallowance of the debtor's objections, there would then be a further possibility that such a proceeding in the Administrative Appeals Tribunal could succeed; although, accepting that there are genuine grounds to challenge the quantum of the assessments, there are not genuine grounds, it seems clear, to challenge the full liability. It is a case in which repeated delays, and almost constant irresolution as to the pursuit of attempts to appeal against the assessments, have continued over a lengthy period. These matters must either undermine the genuineness of any appeal or, at the least, provide strong reasons in themselves why the court should not now, at the eleventh hour, withhold its hand, when the Deputy Commissioner seeks the remedies provided under the Bankruptcy Act. In my opinion, if there is ever a case in which the general rule laid down in Ahern and in Adamopoulos should not be applied, as both of those Full Court decisions assert there is, then this matter must be an example of such a case. It was suggested, as a further argument, that the Senior Member should have disqualified himself, once his concern about the diary entry recording his private address became manifest. I do not think there is any substance in this point. Appropriate concern at such an entry in a litigant's diary could not, in my opinion, give rise to a relevant apprehension of bias, but in any event, the order actually made was a consent order. The other matter raised was the question of solvency. The debtor provided some vague evidence as to his assets. I can deal with this very briefly, because that evidence went nowhere near demonstrating the possession of assets sufficient to enable him to pay a debt in excess of $2 million. He acknowledged that something like $160,000 worth of tax is owed, and presumably there would be penalties on top of that. If his evidence had gone anywhere near establishing solvency, when viewed apart from the context of this case and the failure to comply with the Bankruptcy Notice, I would have considered it handsomely rebutted by what occurred in relation to the sum of $10,000. It is simply not believable that, if the debtor were truly solvent, he would have permitted a genuine claim to review the relevant decisions of the Commissioner of Taxation to be dismissed for failure to pay so relatively paltry a sum. Even if it be assumed that his passions may have become engaged, and that he may have had a strong view about whether he ought to pay $10,000 to the Commissioner, he could have paid it under protest. However one looks at it, it seems to me that the story of what occurred in relation to that sum is strongly corroborative of the Deputy Commissioner's case on insolvency, if not as to the genuineness of the grounds of appeal. As I have indicated, I am satisfied of the proof of the other matters required to be proved. I will direct that the proceedings be amended to show the name of the debtor as George Stephen Greer, and I make a sequestration order against the estate of George Stephen Greer, the debtor. I order that the applicant creditor's costs, including reserved costs, if any, be taxed and paid from the estate of the bankrupt in accordance with the Bankruptcy Act 1966. I note that the date of the act of bankruptcy is 11 June 1996. I certify that this and the preceding six (6) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Burchett Associate: Dated: 6 July 1998 Counsel for the Applicant: Mr M Aldridge Solicitor for the Applicant: Australian Government Solicitor Counsel for the Respondent: Mr B Glennon Solicitor for the Respondent: Stephen Doyle & Associates Date of Hearing: 25 June 1998 Date of Judgment: 25 June 1998