FEDERAL COURT OF AUSTRALIA GH1 Pty Ltd (in liquidation) v Commissioner of Taxation [2017] FCA 652 File number: NSD 1791 of 2016 Judge: ROBERTSON J Date of judgment: 9 June 2017 Catchwords: COSTS – where proceedings dismissed by consent prior to trial by reason of insolvency of first applicant Legislation: Federal Court Rules 2011 (Cth) r 26.12 Cases cited: Australian Securities Commission v Aust-Home Investments Ltd [1993] FCA 401; 44 FCR 194 MNWA Pty Ltd v Deputy Commissioner of Taxation (No 2); Gucce Holdings Pty Ltd v Deputy Commissioner of Taxation [2015] FCA 1128;109 ACSR 265 MNWA Pty Ltd v Deputy Commissioner of Taxation [2016] FCAFC 154; 117 ACSR 446 Re Minister for Immigration and Ethnic Affairs; Ex parte Lai Qin [1997] HCA 6; 186 CLR 622 Travaglini v Raccuia [2012] FCA 620 Date of hearing: Determined on the papers Date of last submissions: 7 June 2017 Registry: New South Wales Division: General Division National Practice Area: Taxation Category: Catchwords Number of paragraphs: 32 Solicitor for the First Applicant: HWL Ebsworth Solicitor for the Second to Fourth Applicants: Zafra Legal Counsel for the Respondent: Mr S White SC with Mr P Afshar Solicitor for the Respondent: Australian Government Solicitor ORDERS NSD 1791 of 2016 BETWEEN: GH1 PTY LTD (IN LIQUIDATION) First Applicant TINA MICHELLE BAZZO AS BARE TRUSTEE FOR GUCCE HOLDINGS PTY LTD (ACN 099 191 714) Second Applicant MORTIMER LAND COMPANY PTY LTD (ACN 113 807 140) AS TRUSTEE FOR THE MORTIMER LAND TRUST (and another named in the Schedule) Third Applicant AND: COMMISSIONER OF TAXATION Respondent JUDGE: ROBERTSON J DATE OF ORDER: 9 June 2017 THE COURT ORDERS THAT: 1. Without prejudice to the costs order made on 29 November 2016, there be no order as to costs, such that each party bears their own costs of the proceedings. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. REASONS FOR JUDGMENT ROBERTSON J: Introduction 1 These proceedings were commenced on 14 October 2016 by originating application for relief under s 39B of the Judiciary Act 1903 (Cth). A statement of claim was filed on 8 November 2016. An amended statement of claim was filed and served on 13 January 2017, with leave to file being granted on 9 March 2017. 2 The dispute concerned the rights and obligations of the parties under a Deed of Agreement between the applicants and the respondent Commissioner of Taxation dated 16 May 2014 (the Deed). That deed was in respect of a taxation debt, defined to mean the tax-related liabilities and applicable GIC due and payable by the taxpayer, the first applicant, as at 6 May 2014. This was in the amount of $10,795,673.13, subject to a certain reduction, and the amount of any additional GIC which accrued on or after 6 May 2014 on those tax-related liabilities. 3 Under the Deed, as I have said, the first applicant was described as the taxpayer. The entity named as the taxpayer in the Deed, Gucce Holdings Pty Ltd, subsequently changed its name to GH1 Pty Limited. The second to fourth applicants were guarantors of the first applicant's obligations under the Deed. 4 The respondent Commissioner proposed to take recovery action against the applicants on the basis that there was an existing event of default under the Deed. The applicants sought a declaration that the first applicant had complied with its obligations pursuant to cl 3.2 of the Deed and that the respondent did not have the right under cl 10.2 the Deed to exercise his recovery rights. 5 On 24 May 2017, orders were made by consent dismissing this proceeding. The parties did not however agree on the appropriate order as to costs. These reasons deal with that issue. 6 The first applicant entered into administration on 5 April 2017. A second creditors meeting was held on 22 May 2017 and as a result the first applicant was placed into liquidation. 7 The position of the liquidators of the first applicant was that there be no order as to costs. The same position was adopted by the other applicants. The respondent Commissioner submitted that the applicants should pay the respondent's costs. The parties' submissions 8 The respondent Commissioner submitted that the relief the applicants sought was based on the allegation that the Commissioner had agreed to certain terms in relation to debts the applicants owed the Commonwealth. The applicants' amended statement of claim, which was filed and served on 13 January 2017, substantially expanded the factual matters in dispute. The respondent Commissioner submitted that the additional factual matters put in dispute by the amended statement of claim had been heard and determined, albeit in an interlocutory application, in MNWA Pty Ltd v Deputy Commissioner of Taxation (No 2); Gucce Holdings Pty Ltd v Deputy Commissioner of Taxation [2015] FCA 1128; 109 ACSR 265. In that case the judge rejected contentions that were essentially similar to those made in the amended statement of claim after receiving substantial and detailed affidavit evidence and after two days of cross-examination. In short, the respondent Commissioner submitted, prior to filing the amended statement of claim, the applicants' additional factual contentions had been tested and rejected. 9 The respondent Commissioner's submissions then referred to r 26.12(7) of the Federal Court Rules 2011 (Cth) relating to discontinuance and submitted that the rules envisaged a prima facie entitlement to costs on the part of the party not discontinuing: Travaglini v Raccuia [2012] FCA 620. 10 The respondent Commissioner submitted that while costs are nevertheless discretionary, they usually follow the event and here there could be no suggestion that the respondent had engaged in some disentitling conduct. The applicants obtained none of the relief they sought and the ultimate result was consistent with the Commissioner's denial of any entitlement of the applicants to any relief. 11 This was not a case where a party had achieved the relief sought through other means and then decided to abandon the proceedings: Re Minister for Immigration and Ethnic Affairs; Ex parte Lai Qin [1997] HCA 6; 186 CLR 622. It was also not a case where the applicants had at all times acted reasonably: Australian Securities Commission v Aust-Home Investments Ltd [1993] FCA 401; 44 FCR 194 at [31]. Even if the Court were to apply those decisions, the Court would find that the commencement and maintenance of the additional claims in the amended statement of claim were unreasonable. The applicants were, in effect, seeking to rerun a trial on the same facts. In the course of doing so, they put the respondent to substantial costs not only of responding to lengthy and detailed pleadings but also of responding to the applicants' evidence. 12 The respondent Commissioner submitted that the position here was pedestrian: the applicants had decided not to proceed with their claims. The terms of the agreement alleged by the applicants, as set out in paragraphs [34] and following of their amended statement of claim, were broad and would have affected not only the first applicant but also other entities. Given the ambit of the relief claimed, especially as it affected entities other than the first applicant, there was no reasonable basis for any argument based on alleged irrelevance of the relief or futility. If insolvency (triggered by the voluntary placement of the company into administration) were considered a supervening event in itself, then parties in litigation would be regularly deprived of costs orders in each case where a claimant became insolvent during the course of a proceeding. The respondent Commissioner submitted that position was not supported by law or principle. 13 The respondent Commissioner also submitted that the costs of the applicants' interlocutory application for discovery were reserved by order 4 made on 9 March 2017 and the applicants should be ordered to pay the respondent's costs of that application, given that it had now been abandoned. Further, any order made concerning the costs of the proceedings generally should not affect the costs order made against the applicants in December 2016. 14 The liquidators did not file written submissions on behalf of the first applicant but relied, so far as relevant, on the written submissions filed on behalf of the second to fourth applicants. 15 Those applicants submitted that the appropriate order was that there ought to be no order made as to costs; and, in any event, no order for costs should be made against them, the guarantors. 16 They referred to the proposition in Ex parte Lai Qin, that the proper exercise of the cost discretion will usually mean that the court will make no order as to the cost of the proceedings where both parties had acted reasonably in commencing and defending the proceedings and the conduct of the parties continued to be reasonable until the litigation was settled or its further prosecution became futile, applied generally to all cases that have become futile, whether a party has obtained the relief sought by other means or not. 17 Those applicants submitted that the first applicant sought declarations that, amongst other things, it had not committed an event of default within the meaning of the Deed. The effect of the declarations sought would have been that the Deed would continue in its operation. 18 They referred to a letter dated 7 April 2017 to the first applicant by which the respondent Commissioner stated that cl 10.1 of the Deed provided that the occurrence of an insolvency event constituted an event of default. By cl 10.2 of the Deed, upon the occurrence of an event of default, the Commissioner may immediately enforce the securities and/or exercise his rights under a taxation law, at law or otherwise, and all amounts payable by the first applicant under the Deed would, upon demand by the Commissioner, become immediately due and payable. The Commissioner demanded by this letter the immediate payment of all amounts payable by the first applicant under the Deed. 19 They submitted that the first applicant had irrefutably committed an insolvency event upon its entry into liquidation (if not earlier) and, upon the proper notice period lapsing, the Deed was at an end. The relief sought in the amended originating application became futile. The Deed was at an end for reasons outside the present proceedings. 20 They submitted that the proceedings were commenced and advanced reasonably by all parties. It was by no means certain that the respondent would have succeeded at trial. Orders for discovery had been made and the matter had been listed for a three-day hearing in which at least four witnesses were likely to be subject to cross-examination. 21 They submitted that MNWA Pty Ltd v Deputy Commissioner of Taxation (No 2) at first instance was conducted under s 459G of the Corporations Act 2001 (Cth) and the proceedings were determined under a quite different legal test and subject to a different standard of proof than the present proceedings. They referred to the appeal, MNWA Pty Ltd v Deputy Commissioner of Taxation [2016] FCAFC 154; 117 ACSR 446, where the Full Court found that the matter was interlocutory and a full trial of the issues did not occur. 22 In any event, they submitted, the matters raised in the respondent's submissions were not raised prior to the filing of those submissions and could only deal with the second element of the applicants' case which was the subject of the amendments made in the amended statement of claim. The matters raised by the respondent in relation to MNWA Pty Ltd v Deputy Commissioner of Taxation (No 2) did not feature in the amended defence filed by the respondent on 24 January 2017 and did not form the basis of any strikeout application brought by the respondent. Those matters were not raised in opposition to the application for discovery made by the applicants on 22 February 2017. 23 The second to fourth applicants submitted that a costs order should not be made against them, the guarantors, as they did not take any active part in the proceeding. They were joined as necessary parties. Their rights and obligations may have been affected by these proceedings but it was the first applicant alone that sought the substantive declarations that were the subject of the proceedings. Any costs orders made should be made against first applicant alone. They submitted that these submissions were equally applicable to the reserved costs of the interlocutory application dated 22 February 2017. Consideration 24 In my opinion, applying the propositions in Aust-Home Investments Ltd at page 201 of the report, it is clear that there should be no order for costs, that is, each side should bear their costs of the proceeding up to and including 12 January 2017. At least up to that date, the relevant propositions are that: It will rarely, if ever, be appropriate, where there has been no trial on the merits, for a Court determining how the costs of the proceeding should be borne to endeavour to determine for itself the case on the merits or, as it might be put, to determine the outcome of a hypothetical trial… This will particularly be the case where a trial on the merits would involve complex factual matters where credit could be an issue. In determining the question of costs it would be appropriate, however, for the Court to determine whether the applicant acted reasonably in commencing the proceedings and whether the respondent acted reasonably in defending them… 25 I find that at least up to 12 January 2017, it was reasonable both for the applicants to commence the proceedings and for the respondent to defend them. There has been no determination of the merits and there is nothing in the behaviour of any party which should affect the exercise of discretion. See also Ex parte Lai Qin, at page 625 of the report. 26 On and from 13 January 2017, should there be a different exercise of discretion, particularly in light of the judgment in MNWA Pty Ltd v Deputy Commissioner of Taxation (No 2) given on 23 October 2015 and the subsequent dismissal of the appeal on 16 November 2016? 27 I do not conclude that the conduct of the applicants in that respect was other than reasonable. No special order as to costs was sought or made at the time the parties were formally granted leave to rely on the amended pleadings. There is force in the applicants' submission that the matters now relied on were not raised in the defence to the amended statement of claim or in any other formal way before the proceedings were dismissed. 28 In my opinion, there has been no effective surrender by the applicants in this case but some supervening event, the appointment of liquidators of the first applicant, has removed or modified the subject of the dispute. There was no evidence that there was anything out of the ordinary in relation to the appointment of liquidators to the first applicant. In these circumstances, I see no clear reason why one party rather than the other should bear the costs. 29 I do not accept the respondent Commissioner's submission with reference to discontinuance and Travaglini v Raccuia. In the present case the proceedings were dismissed, by consent. 30 The respondent Commissioner sought a specific order in relation to order 4 made on 9 March 2017 that the costs of the applicants' interlocutory application dated 22 February 2017 be reserved. That interlocutory application was for discovery. It was disposed of by consent orders for discovery made on 9 March 2017. Those consent orders gave effect to the terms of three specific subparagraphs in the applicants' application for discovery and did not give effect to a further two of those subparagraphs. In the circumstances I do not consider that any specific order should be made in respect of the applicants' interlocutory application for discovery. 31 The costs order made against the applicants, that they pay the costs of the respondent occasioned by the vacation of the hearing on 6 December 2016, being an order made on 29 November 2016, is unaffected. That is the only order which answers the description in the respondent's submissions "costs orders made against the applicants in December 2016." Conclusion and orders 32 For these reasons, the order I make is that there be no order as to costs, noting that the costs order made on 29 November 2016 is unaffected. I certify that the preceding thirty-two (32) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Robertson. Associate: Dated: 9 June 2017 SCHEDULE OF PARTIES NSD 1791 of 2016 Applicants Fourth Applicant: GHT(WA) PTY LTD (ACN 099 191 714) AS TRUSTEE FOR THE GUCCE HOLDINGS TRUST