FEDERAL COURT OF AUSTRALIA Vasiliades v Commissioner of Taxation [2016] FCA 420 File numbers: VID 66 of 2015 VID 67 of 2015 VID 68 of 2015 Judge: DAVIES J Date of judgment: 22 April 2016 Catchwords: PRACTICE AND PROCEDURE – application for dismissal under Federal Court Rules 2011 (Cth) r 5.23(1)(b)(i) PRACTICE AND PROCEDURE – security for costs – where applicant ordinarily resident outside Australia – whether proceedings essentially defensive – where proceedings commenced under Taxation Administration Act 1953 (Cth) Pt IVC Legislation: Federal Court of Australia Act 1976 (Cth) s 56 Federal Court Rules 2011 (Cth) r 19.01 Cases cited: Commissioner of Taxation v Dalco (1990) 168 CLR 614; [1990] HCA 3 Fletcher v Commissioner of Taxation (1992) 37 FCR 288; [1992] FCA 388 Hii v Commissioner of Taxation (No 3) [2016] FCA 58 Knight v Beyond Properties Pty Ltd [2005] FCA 764 Logue v Hansen Technologies Ltd (2003) 125 FCR 590; [2003] FCA 81 Maatschappij Voor Fondsenbezit v Shell Transport and Trading Company [1923] 2 KB 166 Madgwick v Kelly (2013) 212 FCR 1; [2013] FCAFC 61 Mazukov v University of Tasmania [2004] FCAFC 159 Oswal v Commissioner of Taxation (No 2) [2015] FCA 1143 PS Chellaram & Co v China Ocean Shipping Co (1991) 102 ALR 321; [1991] HCA 36 Willey v Synan (1935) 54 CLR 175; [1935] HCA 76 Date of hearing: 24 March 2016 Registry: Victoria Division: General Division National Practice Area: Taxation Category: Catchwords Number of paragraphs: 29 Counsel for the Applicant: H Symon QC with M Bearman Solicitor for the Applicant: HWL Ebsworth Counsel for the Respondent: S Linden Solicitor for the Respondent: Australian Tax Office ORDERS VID 66 of 2015 VID 67 of 2015 VID 68 of 2015 BETWEEN: SOCRATES VASILIADES Applicant AND: COMMISSIONER OF TAXATION Respondent JUDGE: DAVIES J DATE OF ORDER: 22 April 2016 THE COURT ORDERS THAT: 1. The interlocutory application filed by the respondent on 3 February 2016 be dismissed. 2. The orders of Deputy District Registrar Ryan of 21 December 2015 be set aside and in their place, the interlocutory application filed by the respondent on 6 November 2015 be dismissed. 3. In the event that the parties are unable to agree on costs orders, the Court directs each party to file short written submissions in support of the orders sought by the party by 4pm on 6 May 2016. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. REASONS FOR JUDGMENT DAVIES J: 1 The applicant ("the taxpayer") has applied for review of the order of a Registrar of this Court that he provide security for the costs of the respondent ("the Commissioner") of these proceedings. The application for review proceeds as a hearing de novo of the Commissioner's application for security for his costs of these proceedings: Mazukov v University of Tasmania [2004] FCAFC 159, [21]–[24]. The Commissioner, in turn, has applied for an order dismissing the proceedings by reason of the taxpayer's failure to comply with the Registrar's order for the payment of security. For the reasons that follow, there should be no order for security and the Registrar's order requiring the taxpayer to provide security should be set aside. The Commissioner's application for summary dismissal should be dismissed. Background 2 These proceedings were commenced by the taxpayer on 18 February 2015 under Pt IVC of the Taxation Administration Act 1953 (Cth) ("TAA"), exercising his statutory right under s 14ZZ of the TAA to appeal to this Court against the decision of the Commissioner to disallow his objection against amended assessments for the years of income ending 30 June 2007, 2008 and 2009 ("the assessments"). In related recovery proceedings, Pagone J on 5 May 2015 gave judgment for the Deputy Commissioner of Taxation against the taxpayer in the sum of $30,315,876.54 ("judgment debt") for the amounts as assessed plus the general interest charge that had accrued on the amounts due and payable under the assessments. Pagone J also made a declaration that the taxpayer's wife held the amount of $2,701,196.68 in a Macquarie Bank account for or on account of the taxpayer. Pursuant to orders made by the Court on 10 July 2015 and 7 August 2015 Macquarie Bank transferred this amount to the Commissioner and the Commissioner applied that amount in part payment of the judgment debt. The balance of the judgment debt otherwise remains unpaid. 3 The taxpayer is currently resident outside Australia and there is no evidence to show that he has assets within Australia. On 24 April 2015, the Commissioner foreshadowed an application for security for costs against the taxpayer in a directions hearing in these proceedings. The Commissioner did not file his application until 6 November 2015 but put the taxpayer on notice at the directions hearing on 24 July 2015 and again on 25 August 2015 of his intention to seek security for costs. On 8 October 2015, the Commissioner's solicitors wrote to Mr Vasiliades' then-solicitors enclosing a report prepared by a costs consultant, Ms Harris, who assessed the Commissioner's party-party costs, if the proceedings progressed to trial and the Commissioner's costs were ordered to be paid by the taxpayer, in the amount of $436,193. 4 On 21 December 2015, the Registrar ordered the taxpayer to provide security by the provision of one or more bank guarantees or in a form otherwise acceptable to the Deputy Registrar for the costs of the Commissioner of these proceedings in the sum of $228,000 by 4pm on 25 January 2016. That sum represented the Commissioner's costs assessed as from 8 October 2015, being the date when the Commissioner's solicitors formally wrote to Mr Vasiliades' then-solicitors providing a copy of Ms Harris's report and seeking security. The Registrar also gave liberty to the Commissioner to apply on seven days' notice for orders for dismissal of these proceedings in the event that the security was not provided as ordered. 5 On 23 December 2015, the Commissioner sought a variation of the orders pursuant to rr 39.05(e) or 39.05(h) of the Federal Court Rules 2011 (Cth) ("the Rules") by inserting the words "issued by an Australian trading bank" after the word "guarantees". The Registrar refused to vary the order on the basis that the form of the order reflected the intention of the Court and was the form sought by the Commissioner in his application for security for costs. 6 The taxpayer filed an application for review of the Registrar's orders on 20 January 2016 (but not accepted in the electronic court file until 25 January 2016) and did not provide the security as ordered. In consequence of the taxpayer's failure to comply with the security order, the Commissioner has made application that these proceedings be immediately dismissed pursuant to rr 5.22(b) and 5.23(1)(b)(i) of the Rules on the basis that the taxpayer is in default of the security order. 7 The taxpayer has since provided a bank guarantee from a foreign bank for the amount of $228,000. The Commissioner contends that the bank guarantee should not be accepted as sufficient security because it is from a foreign bank and is valid only for one year until 13 March 2017 after which the guarantee will lapse. The Commissioner accordingly presses for the dismissal of the proceedings on the basis that there has been non-compliance with the security order. If the Commissioner is unsuccessful in that application, the Commissioner seeks in the alternative an order for security for costs for the full amount of the costs as assessed by Ms Harris, namely $436,193 and an order requiring payment into Court or the provision of a bank guarantee by an Australian trading bank. the commissioner's application for dismissal 8 I should first deal with the Commissioner's application for summary dismissal. 9 There is an explanation for the failure of the taxpayer to provide security by 25 January 2016. The explanation is contained in an affidavit of Evan Stents, the taxpayer's new solicitor. Mr Stents deposed on information and belief that the taxpayer was orally advised by his former solicitors that if he made an application to review the orders of the Registrar, the application would operate to stay those orders. The application for review was filed on 20 January 2016. On 1 February 2016 the taxpayer was advised by his new lawyers that the application for review did not operate as a stay of the security order whereupon he took steps to procure a bank guarantee from Nordea Bank in Luxembourg. According to Mr Stents, the taxpayer believed on 2 February 2016 that the bank guarantee had been arranged. However, it took longer than anticipated to procure the bank guarantee because of the amount involved, inquiries from the bank's internal lawyers which had to be answered and also the form of the bank guarantee required which was not a form with which the bank was familiar. The bank guarantee was eventually provided on 18 March 2016. 10 The Commissioner submitted that the explanation for the taxpayer's failure to comply with the security order should be rejected. It was submitted that the assertion in Mr Stents's affidavit that the taxpayer's former solicitor had advised the taxpayer that the application for review would operate as a stay was inconsistent with the application itself, which included as part of the orders sought an order staying the security order. Also the Commissioner had written to the taxpayer's former solicitors on 27 January 2016 advising of the Commissioner's intention to seek dismissal of the proceedings for failure to comply with the security order. It was submitted further that there is no basis for the assertion in Mr Stents's affidavit that the taxpayer did believe as at 2 February 2016 that the guarantee was arranged and that statement was not true. It was submitted that the affidavit was "based on second and third hand hearsay" and the explanation should not be accepted. 11 I am not prepared to reject as untrue the explanation furnished by Mr Stents, albeit on a hearsay basis, as there is some corroborating evidence. Critically, in evidence is an email dated 2 February 2016 from the taxpayer to the Commissioner's solicitors advising of the change in solicitors and advising that the security deposit guarantee had been arranged. There is also an affidavit from Scott Cromb, a solicitor in the employ of HWL Ebsworth, the new solicitors for the taxpayer who deposed that on 3 February 2016 he telephoned the Registry of the Federal Court to enquire as to the requirements of the Federal Court with regard to the form of a bank guarantee to be provided for the purpose of satisfying a security for costs order and specifically who should be the beneficiary of the guarantee. I am prepared to accept that the taxpayer acted promptly upon the change of solicitors in taking steps to obtain the guarantee. 12 Moreover, given that security had been provided by the time of the hearing of the taxpayer's application for review of the security order, I would not, in any event, dismiss the proceedings for failure to provide that security by 25 January 2016, albeit that the Commissioner challenges the sufficiency of the form of security because it is from a foreign bank and has an end date. I note that the Commissioner, on 23 December 2015, sought a variation of the security order pursuant to r 39.05(e) and/or r 39.04(h) of the Rules to make it a requirement that the guarantee be provided by an Australian trading bank. The Registrar did not vary the orders, stating that the orders made had reflected the intention of the Court and were in the form sought by the Commissioner in his application. 13 Nor would I dismiss the proceedings on the basis that the security provided is not in a form acceptable to the Registrar. The basis for this contention is that the guarantee contains an end date. The reason for the end date was said to be that the issuing bank does not issue bank guarantees without an end date. To overcome this, the taxpayer has provided an undertaking to renew the guarantee if the proceedings remain on foot on or before the date of expiration of the bank guarantee. If there is an issue about the sufficiency of the guarantee because of the end date, it would not, in any event, warrant the dismissal of the proceedings. should there be an order for security for costs? 14 The power of the Court to make an order for a party to provide security for costs is contained in s 56 of the Federal Court of Australia Act 1976 (Cth) ("FCA Act") and governed by r 19.01 of the Rules. Section 56 of the FCA Act provides: (1) The Court or a Judge may order an applicant in a proceeding in the Court, or an appellant in an appeal under Division 2 of Part III, to give security for the payment of costs that may be awarded against him or her. (2) The security shall be of such amount, and given at such time and in such manner and form, as the Court or Judge directs. (3) The Court or a Judge may reduce or increase the amount of security ordered to be given and may vary the time at which, or manner or form in which, the security is to be given. (4) If security, or further security, is not given in accordance with an order under this section, the Court or a Judge may order that the proceeding or appeal be dismissed. (5) This section does not affect the operation of any provision made by or under any other Act or by the Rules of Court for or in relation to the furnishing of security. Rule 19.01 of the Rules provides: (1) A respondent may apply to the Court for an order: (a) that an applicant give security for costs and for the manner, time and terms for the giving of the security; and (b) that the applicant's proceeding be stayed until security is given; and (c) that if the applicant fails to comply with the order to provide security within the time specified in the order, the proceeding be stayed or dismissed. (2) An application under subrule (1) must be accompanied by an affidavit stating the facts on which the order for security for costs is sought. (3) The respondent's affidavit should state the following: (a) whether there is reason to believe that the applicant will be unable to pay the respondent's costs if so ordered; (b) whether the applicant is ordinarily resident outside Australia; (c) whether the applicant is suing for someone else's benefit; (d) whether the applicant is impecunious; (e) any other relevant matter. 15 Whether security should be ordered is at the discretion of the Court. The only limitation is that the discretion must be exercised judicially: Madgwick v Kelly (2013) 212 FCR 1; [2013] FCAFC 61 at [6]. Notwithstanding, the cases provide useful guidance on the considerations attending the exercise of the discretion to make an order for security for costs. Relevant to the present case is: (a) whether the proceeding is essentially defensive in nature; (b) whether the applicant is a natural person; and (c) whether the applicant is a non-resident with no assets in Australia. 16 It can be relevant to the exercise of discretion that the party against whom the security is sought is a natural person. As Lindgren J observed in Knight v Beyond Properties Pty Ltd [2005] FCA 764 at [32]–[33], many cases can be cited for the proposition that there is a disinclination to order an applicant who is a natural person to provide security, at least in the absence of some factor in addition to impecuniosity. In the cases in which natural persons have been ordered to provide security, some factor in addition to impecuniosity has generally been present, for example residency outside Australia. The fact that a person is a non-resident and has no assets in Australia may be a factor in favour of the grant of security: PS Chellaram & Co v China Ocean Shipping Co (1991) 102 ALR 321 at 323; [1991] HCA 36 at [7]. 17 In the present case, it is clearly a factor to take into account that the taxpayer resides outside of Australia and there is no evidence to show that the applicant has assets in Australia (or elsewhere). In Logue v Hansen Technologies Ltd (2003) 125 FCR 590; [2003] FCA 81 at [18], Weinberg J explained that the purpose of ordering security for costs against an applicant resident outside Australia is to create a fund within Australia against which a successful respondent may enforce a judgment for costs thereby enabling the avoiding of the risks, uncertainties and delays of attempting to enforce such a judgment in the applicant's claimed country of residence. The taxpayer submitted nonetheless that security for costs should not be ordered against him because he is, in substance, in the position of a defendant. 18 There is a strong line of authority that a court should be reluctant to order security where the proceeding is essentially defensive in nature. In Maatschappij Voor Fondsenbezit v Shell Transport and Trading Company [1923] 2 KB 166, Scrutton LJ said at 177: the position, I think, extends to every case where the person against whom security is sought is really defending himself against attack, even if he be nominally a plaintiff, but really defending himself against defendants' previous action against him. To like effect, in Willey v Synan (1935) 54 CLR 175; [1935] HCA 76 Dixon J, with whom Rich J agreed, said at 184 (CLR): The principle is that a party to judicial proceedings, who resides beyond the jurisdiction, should not be required to give security for costs unless, however the parties are arranged upon the record, he is the person invoking or resorting to the jurisdiction for the purpose of establishing rights or obtaining relief. If he does avail himself of the remedies the jurisdiction provides in order to obtain affirmative relief or redress, he may be ordered to give security, although he becomes a defendant in the action. In Willey v Synan, the High Court held that security for costs should not be ordered against the plaintiff by reason that his proceedings were essentially defensive in nature. In that case, the plaintiff was a member of the crew of a ship travelling from New Zealand to Australia. On arrival of the vessel in Australia, a customs official took possession of coins that the plaintiff had alleged he had found on board the ship. The plaintiff made a claim for the coins and the Collector of Customs, while exercising the right conferred by s 207 of the Customs Act 1901-1934 (Cth), sent a notice to the plaintiff requiring the plaintiff to take action against the Collector of Customs for recovery of the coins and stating that in default of bringing such action the coins "would be condemned" without further proceedings. The plaintiff, who was not resident within the Commonwealth, commenced an action against the Collector of Customs for the recovery of the coins. The Collector of Customs applied for security for costs. In the course of reasoning, Dixon J, with whom Rich J agreed, stated at 185–6 that the notice given by the Collector of Customs pursuant to the Customs Act was: …a statutory substitute for judicial proceedings by the Crown against the goods. Its effect is to cast the onus of taking proceedings upon the owner or supposed owner. … The provisions of the Customs Act, in effect, enable the officers of the Crown to take the preliminary steps by simple notices out of Court so that it is the claimant who must issue process. But when he does issue a writ he does so to protect his supposed ownership. In substance he is not the attacker, actor or person seeking redress. For these reasons I think he is not liable to give security for the costs of the action. It was submitted for the taxpayer that the circumstances should be truly extraordinary before the Court departs from that principle which is intended to prevent a defendant being put into a position where that defendant is shut out from justice. 19 It is necessary to consider the statutory scheme for contesting substantive liability for the amounts of tax as assessed before considering the competing factors in relation to ordering security in the present case. 20 By virtue of s 350-10(1) of Sch 1 to the TAA, production of a copy of a Notice of Assessment is conclusive evidence that the assessment was properly made and, except in proceedings under Pt IVC of the TAA on an appeal or review relating to the assessment, that the amount and all the particulars of the assessment are correct. The tax assessed is a debt due to the Commonwealth and is payable to the Commissioner: s 255-5(1) of Sch 1 to the TAA. The avenue for a taxpayer to challenge the substantive liability imposed by the assessment is under the Pt IVC procedure by lodging an objection with the Commissioner against the assessment and, if the objection is wholly or partly disallowed, either seeking review of the Commissioner's objection decision in the Administrative Appeals Tribunal ("AAT") or appealing the objection decision in the Federal Court. In such proceedings the taxpayer bears the burden of proving that the assessment is "excessive": in the AAT by force of s 14ZZK of the TAA and in the Federal Court by force of s 14ZZO of the TAA. The term "excessive" relates to the "amount" of the assessment and in Pt IVC proceedings the taxpayer must prove that the amount of taxable income assessed exceeds the taxpayer's actual taxable income: Commissioner of Taxation v Dalco (1990) 168 CLR 614; [1990] HCA 3 at [12]. Unless the amount is found to be "excessive" in the sense of being greater than the taxable income on which tax ought to have been levied, the taxpayer fails on the review or appeal. Notwithstanding the pendency of a review or appeal, the Deputy Commissioner may sue for and recover any unpaid tax (and any additional tax or other amount) as if no review or appeal were pending: ss 14ZZM and 14ZZR of the TAA. Given the statutory force of the production of a Notice of Assessment and the liability created by force of the operation of the TAA, Pt IVC proceedings are in substance in the nature of defensive proceedings. 21 In Oswal v Commissioner of Taxation (No 2) [2015] FCA 1143, Nicholas J viewed the Pt IVC proceedings as having a significant defensive element. In Hii v Commissioner of Taxation (No 3) [2016] FCA 58, Collier J similarly considered that Pt IVC proceedings have a significant defensive aspect. In both cases, however, security for costs was ordered. 22 In Oswal at [65], Nicholas J considered that it was appropriate to make an order taking into account the following factors: It was conceded by the Commissioner that the Pt IVC proceedings were brought in good faith and based upon reasonably arguable grounds; The taxpayers ordinarily resided outside the jurisdiction in the United Arab Emirates, a country with which Australia does not have any reciprocal arrangements for the enforcement of judgments and the Commissioner could not enforce a Court costs order against the taxpayers in their ordinary place of residence without considerable difficulty; The Commissioner had already obtained a substantial judgment against one of the taxpayers; A litigation funder had a significant financial interest in the outcome of the Pt IVC proceedings; The litigation funding agreements required the litigation funder to indemnify the taxpayers against any order for costs that may be made against them in the Pt IVC proceedings but there was nothing in the agreements that required the litigation funder to itself provide security for the Commissioner's costs. 23 Justice Nicholas concluded: 66. Ultimately, the question is how justice will be best served. On balance, I am satisfied justice will be best served by making an order for security for costs. There is a significant risk that the [Commissioner] will be unable to recover any of his costs (which will be substantial) in the event that Mrs Oswal or Mr Oswal are ordered to pay them. The risk of this occurring can be eliminated, or substantially reduced, by making an order for security in an appropriate amount. Such an order can be made in this case without risk of injustice to Mrs and Mr Oswal because, as I have said, I am satisfied that an order for security for costs in an appropriate amount will not stultify their proceedings. While this is not determinative and, indeed, may be a matter of little weight in some cases (see Green v CGU Insurance Ltd (2008) 67 ACSR 105 at [46] per Hodgson JA), I think it is an important consideration in this case. 24 In Hii at [29], Collier J concluded that an order for security for costs was appropriate in circumstances where the taxpayer was out of the jurisdiction, with apparent access to assets against which the Commissioner could not enforce a costs order and where assets of the taxpayer within Australia did not appear to be of sufficient value to satisfy such an order. Her Honour concluded that as the circumstances then stood, in the absence of such an order, there was a serious risk that the Commissioner would be unable to enforce a costs order in his favour against the taxpayer. In reaching that conclusion her Honour considered that the defensive element of Pt IVC proceedings did not preclude the making of an order for security for costs if the Court considered it appropriate to make such an order. Her Honour also noted that the taxpayer could have brought his substantive claim in the AAT, in which circumstances he would not have been exposed to the possibility of an award of security for costs against him in the Federal Court. 25 The Commissioner urged the Court similarly to hold that security should be required on the basis that the taxpayer is ordinarily resident outside of Australia, has no assets in Australia out of which to meet a costs order against him and has not identified any assets outside of Australia against which a costs order could be enforced. Further, it was submitted, the taxpayer has not made any voluntary payment in respect of the judgment debt which remains substantially outstanding. It was submitted that the Commissioner is exposed to the risk and inconvenience of attempting to enforce an order for costs against the taxpayer who is in a foreign jurisdiction in which it is unknown where his assets are located and this circumstance weighs heavily in favour of an order for security being made. 26 Although in both Oswal and Hii the defensive nature of the Pt IVC proceedings was held not to outweigh other factors bearing upon whether security should be granted, I am of the view it is a significant factor that should, and does, weigh against an order for security in the present case. These proceedings are truly defensive in character and the principle espoused in Willey v Synan applies to the circumstances of this case. The Commissioner's exercise of his assessment power has by force of law crystallised a liability for the taxpayer. The effect of s 350-10(1) of Sch 1 to the TAA is to preclude a challenge to the amount of tax assessed except in Pt IVC proceedings and it is upon the taxpayer to bring such proceedings under Pt IVC. These proceedings are the avenue by which the taxpayer can challenge the Commissioner's assessments and his liability to the tax as assessed and it has not been suggested by the Commissioner that there is not a real issue to be decided between the parties. In the circumstances, I do not consider that the taxpayer should be required to give security for costs. 27 Counsel for the Commissioner argued that it was relevant to take into account that the taxpayer could have commenced Pt IVC proceedings in the AAT which is a no cost jurisdiction. With respect to Collier J in Hii, the taxpayer has a statutory right to commence an appeal in the Federal Court and the fact that the taxpayer chooses to do so in this Court rather than in the AAT is not in my view a factor that carries, or should carry, any weight in determining whether or not to grant security. 28 In view of my conclusion, it is unnecessary to consider the taxpayer's further argument that the Commissioner has had the benefit of $2.7 million which the Commissioner was not bound to apply towards payment of the judgment debt, contrary to the Commissioner's decision to do so. CONCLUSION 29 In Fletcher v Commissioner of Taxation (1992) 37 FCR 288; [1992] FCA 388 at 293 (FCR) Hill J observed that "it would be a rare case where security for costs would be awarded at the instance of the Commissioner of Taxation against a natural person seeking to appeal from a decision of the Administrative Appeals Tribunal reviewing an objection decision where it was conceded that there was a real issue to be decided between the parties". The observation is apt, reflecting as it does the essentially defensive nature of Pt IVC proceedings. The orders of the Registrar should be set aside and the Commissioner's application for summary dismissal dismissed. I certify that the preceding twenty-nine (29) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Davies. Associate: Dated: 22 April 2016