Reported Decision : (2004) 22 ACLC 81 New South Wales Supreme Court CITATION : John Raymond Gibbons & Anor as official liquidators of Deemah Marble & Granite Pty Ltd (in liq) v Deputy Commissioner of Taxation [2003] NSWSC 1126 HEARING DATE(S) : 26.11.03 JUDGMENT DATE : 3 December 2003 JURISDICTION: Equity Division JUDGMENT OF : Nicholas J DECISION : See para 39. CATCHWORDS : INSOLVENCY - CORPORATIONS LAW - COSTS - Whether Plaintiffs entitled to indemnity costs - Whether loss or damage suffered includes costs and interest - Whether director liable to indemnify Deputy Commissioner of Taxation in respect of judgment and costs - Corporations Act ss588FF, 588FGA - HELD - Indemnity costs refused - Respondent liable pursuant to s588FGA(2) to indemnify Defendant in respect of the amount payable to the Plaintiffs including interest and costs, and the Defendant's costs incurred in defending the Plaintiff's claim. Corporations Act 2001 (Cth) ss588FF, 588FGA, 588FGA(1), 588FGA(2), 588FGA(4) LEGISLATION CITED : Income Tax Assessment Act 1936 (Cth) Supreme Court Act 1970 (NSW) s94 Supreme Court Rules 1970 (NSW) Pt22 r2, Pt22 r10, Pt 22 Div 1, Pt 22 Div 2, Pt52A r22, Pt52A r22(4), Pt52A r4 Associated Confectionery (Aust) Ltd v Mineral & Chemical Traders Pty Ltd (1991) 25 NSWLR 349 Browne & Ors v Commissioner of Taxation (1998) 153 ALR 10 Burrows v Knightley & Nationwide News Pty Ltd (1987) 10 NSWLR 651 Deputy Commissioner of Taxation v Clark (2003) 45 ACSR 332 CASES CITED : Hillig v Commissioner of Taxation (2000) 35 ASCR 626 Hobartville Stud Pty Ltd v Union Insurance Co Ltd (1991) 25 NSWLR 358 Multicon Engineering Pty Ltd v Federal Airports Corporation (1996) 138 ALR 425 Southern Cross Interiors Pty Ltd (In Liq) v Deputy Commissioner of Taxation (NSWSC, 13 November 2001, Unreported) Tickell v Trifleska Pty Ltd (1990) 25 NSWLR 353 John Raymond Gibbons & Anor as official liquidators of Deemah Marble & Granite Pty Ltd (in liq) - Plaintiffs PARTIES : Deputy Commissioner of Taxation - Defendant Peter John Solomon - Respondent FILE NUMBER(S) : SC 5129/01 C R C Newlinds SC - Plaintiffs COUNSEL : P Rodionoff - Defendant M Cashion SC/C Robinson - Respondent Clayton Utz - Plaintiffs SOLICITORS : Australian Government Solicitor - Defendant Colin Biggers & Paisley - Respondent IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION NICHOLAS J 3 December 2003 5129/01 John Raymond Gibbons & Anor as official liquidator of Deemah Marble and Granite Pty Ltd (in liq) v Deputy Commisioner of Taxation JUDGMENT – Costs 1 His Honour: I gave judgment in this matter on 24 October 2003. I then directed the Plaintiffs to bring in short minutes of orders which give effect to the reasons for decision, and I gave leave to the parties to address me in relation to costs. 2 Subsequently the parties identified a number of questions in dispute which now require determination. 3 The first question is the Plaintiffs' claim that the Defendant be ordered to pay their costs of the proceedings on a party/party basis up to 20 December 2002 and thereafter to pay their costs on an indemnity basis. (The Plaintiffs accept, of course, that their entitlement to costs is subject to the order of 6 September 2002). 4 The second question is the Defendant's claim that, pursuant to s 588FGA(2) Corporations Act 2001 (Cth) (the Act), the loss or damage for which the Respondent is liable includes costs and interest ordered to be paid by the Defendant to the Plaintiffs in the proceedings. The Plaintiffs' claim for indemnity costs 5 The Plaintiffs' claim an order for indemnity costs pursuant to Pt 52A r 22(4). They rely upon the letter from their solicitors to the Defendant's solicitor dated 20 December 2002 as an offer of compromise in accordance with Pt 22 r 2. The rule permits a party to make to the other an offer to compromise any claim in the proceedings on the terms specified in the notice of offer. 6 The relevant part of the letter is the following: "In view of our analysis, and consistent with your client's obligation to act as a model litigant, our clients' require your client to: (a) admit that the payments made to it are voidable transactions; (b) admit that the defences raised by your client to the Liquidators' claim are not sustainable; (c) agree to pay the Liquidators' claim in the sum of $821,590.55. Our clients' claim includes interest and costs. We calculate the interest amount applicable to the unfair preferences at 16 December 2002 to be $208,024.19. Our clients legal costs to date are approximately $90,000. Prolongation of these proceedings exposes your client to judgment for the principle of $821,590.55 plus further costs and interest. Accordingly, in an effort to reduce further burden of these proceedings on your client, we are instructed to invite your client to settle this matter on the basis that he pay our clients claim in full whilst our client agrees to reduce the amount of its claimed costs to $45,000 and interest to $100,000. In the event that your client continues to maintain its defence our client will rely on this letter and will seek to recover the total amount of $821,590.55 plus interest in full and costs on an indemnity basis. Our clients' offer remains open for acceptance until 31 January 2002". 7 The offer conveyed by the letter was not accepted. 8 The Defendant contends that the offer is not an offer of compromise within the meaning of Pt 52A r 22 and therefore no entitlement to an order for indemnity costs has been established. It is put that the offer purportedly made under Pt 22 does not represent any element of compromise so that failure to accept it should not attract the application of Pt 52A r 4. 9 It is well-settled that an offer should reflect a compromise and, ordinarily, a plaintiff will not be entitled to indemnity costs where the purported offer of compromise is, in substance, a demand for payment of the full amount claimed (Tickell v Trifleska Pty Ltd (1990) 25 NSWLR 353; Hobartville Stud Pty Ltd v Union Insurance Co Ltd (1991) 25 NSWLR 358; Multicon Engineering Pty Ltd v Federal Airports Corporation (1996) 138 ALR 425). 10 An offer inclusive of costs is not an offer of compromise in accordance with Pt 22 r 2 to which Pt 52A r 22 applies. This, in my opinion, follows from the decision of Giles J in Associated Confectionery (Aust) Ltd v Mineral and Chemical Traders Pty Ltd (1991) 25 NSWLR 349, in which he said (p 351G): "There is, I think, a readily seen reason why that should be so. If the impact of costs upon an offer had to be borne in mind then whenever a court was required, in order to give effect to Pt 52 r 17(4) or r 17(5), to determine whether the offer was more favourable or less favourable than the result of the proceedings it would be necessary to indulge in a taxation of costs. That is simply not practicable". 11 Consistently, in my opinion, an offer which includes a specified amount for costs should not be considered differently, and is not an offer of compromise under Pt 22 r 2. Furthermore, since that decision the position has been made quite clear. Part 22 has been amended to establish a scheme which distinguishes between an offer to compromise a non-costs claim (Pt 22 Div 1) and an offer to compromise a costs claim (Pt 22 Div 2). The result is stated in Ritchie's Supreme Court Procedure NSW para 52A.22.7, correctly in my view, that where it is desired to achieve a compromise in relation to both the principal claim in the proceedings and costs a separate "costs offer" must be made in accordance with Pt 22 r 10. Such an offer may be made either at the same time as the principal offer or at any time before delivery of the other party's bill of costs. 12 The Plaintiffs' offer in the letter of 20 December 2002 was "… to settle this matter on the basis that he pay our clients claim in full whilst our client agrees to reduce the amount of its claimed costs to $45,000 and interest to $100,000". 13 In my opinion the offer does not attract the application of Pt 52A r 22. Not only does it include a specified amount for costs but it concedes nothing in respect of the claim other than a specified amount for interest. Having regard to the issues in the litigation at the time the offer was made, the offer does not represent any element of genuine compromise. The following passage from Tickell v Trifleska Pty Ltd (supra) p 355 is apt: "What the court is invited to do is to determine whether, in the totality of the circumstances, the offer by the plaintiff represented any element of compromise or whether it was merely, yet another, formally stated demand for payment designed simply to trigger the entitlement to payment of costs on an indemnity basis. It was never in the minds of the draftsmen of the rule, or the members of the Rule Committee responsible for the passing of this rule, that Pt 22 should be utilised simply as a statutory demand which, other circumstances being equal, will automatically entail the payment of costs on an indemnity basis". 14 It was also submitted for the Plaintiffs that a ground for ordering indemnity costs was that the rejection of the offer was unreasonable in the circumstances where, not withstanding the Defendant's stated reason for rejecting the offer, the offer was never communicated to the Respondent by the Defendant. 15 The matter described as the stated reason was the statement in the letter from the Defendant's solicitors to the Plaintiffs' solicitors dated 9 January 2001 as follows: "However, if it is clear that the transaction was voidable, then the Commissioner will not oppose an action by a Liquidator. In other cases, the Commissioner may wish to discuss or defend any action to void the payments". 16 This letter was in response to that from the Plaintiffs' solicitors of 4 December 2000 in which demand was made for the payment of the sum of $821,590.11 within 14 days, failing which proceedings for recovery would be commenced. The payments which made up the amount claimed were alleged to be unfair preferences. 17 It is unnecessary to set out the terms of each letter. It is sufficient to note that by its letter of 9 January 2001 the Defendant's solicitor advised that the Plaintiffs' claims were under investigation, and sought further information or documents to support the contention that the payments might be voidable preferences. 18 The Plaintiffs' submission must be rejected. In my view neither the Defendant's opposition to the claim nor its failure to communicate the offer to the Respondent amounted to conduct which justifies an order for indemnity costs from 20 December 2002, or at all. 19 A further submission was made in these terms: "Finally, in view of the unequivocal findings of the Court in favour of the Plaintiffs, the Defendant's rejection of the Plaintiffs' offer of 20 December 2002 was unreasonable in circumstances where the Defendant's conduct of the litigation occasioned judicial and court resources to be taken up over a period of 5 days notwithstanding the Defendant's obligation to conduct litigation as a model litigant". 20 I also reject this submission. It amounts to no more than an assertion that it was unreasonable for the Defendant, aware of its responsibilities to the Court, to put the Plaintiffs to proof of the several elements necessary to entitle it to the relief they sought. There was nothing unreasonable about the participation in, and conduct of, the Defendant in these proceedings. 21 Accordingly I reject the Plaintiffs' claim for indemnity costs after 20 December 2002. In the circumstances the appropriate order to be made is that the Defendant pay the Plaintiffs' costs of the proceedings on a party and party basis excluding costs the subject of the order of 6 September 2002. The Defendant's claim under s 588FGA(2) 22 The Defendant seeks the following orders against the Respondent: (i) Verdict for the Defendant/Applicant as against the Respondent in the amount of $538,314.39 together with interest calculated pursuant to section 94 of the Supreme Court Act 1970 in the sum of $150,686.12. (ii) The Respondent to pay two thirds of the costs incurred by the Defendant as a consequence of (the order for the Plaintiffs) and two thirds of the Defendant's costs of defending the proceedings. (iii) The Respondent to pay the Defendant/Applicant's costs of its claim against the Respondent. 23 The Respondent does not oppose the last mentioned order. 24 Section 588FGA(1) provides that the section applies if the Court makes an order under s 588FF against the Commissioner of Taxation because of the payment of an amount in respect of a liability under certain provisions of the Income Tax Assessment Act 1936 (Cth). Sub-section (2) is as follows: "Each person who was a director of the company when the payment was made is liable to indemnify the Commissioner in respect of any loss or damage resulting from the order". 25 Section 588FGA(4) provides: "The Court may, in the proceedings in which it made the order against the Commissioner, order a person to pay to the Commissioner an amount payable by the person under sub-section (2)". 26 The Defendant submits that such loss or damage includes the amount it is ordered to repay, interest on that amount, the Plaintiffs' costs ordered to be paid, and its own costs incurred in defending the Plaintiffs' claim. 27 In opposition to the orders sought by the Defendant pursuant to s 588FGA(2), the Respondent submits that no part of the Plaintiffs' interest or of their costs represent loss or damage within the meaning of the sub-section. Accordingly it is put that no amount referable to such interest or costs should be payable by the Respondent to the Defendant. 28 Although research on behalf of the parties has revealed no judicial construction of the phrase " … in respect of any loss or damage resulting from the order" or pronouncement as to the scope of the indemnity under the sub-section, recent decisions make plain the proper approach to be taken in giving effect to it. 29 In Southern Cross Interiors Pty Ltd (In Liq) v Deputy Commissioner of Taxation (unreported 13 November 2001) Palmer, J made orders pursuant to s 588FGA(2) that directors indemnify the Commissioner in terms substantially similar to those sought by the Defendant in this case. He stated (para 6) that in his opinion it was proper to include in the indemnity the costs payable by the Commissioner in respect of the claim instituted by the liquidator, and ordered accordingly. Furthermore, having found that one of the directors was liable to indemnify the Commissioner for the full amount it was liable to pay (which included interest at the prescribed rate), he made a declaration in terms that the director was liable to indemnify the Commissioner in respect of the judgment obtained against it by the Plaintiff. 30 The appeal is reported as Deputy Commissioner of Taxation v Clark (2003) 45 ACSR 332. It seems that the question whether under s 588FGA(2) liability for loss or damage resulting from the Court's order includes the liquidator's interest and costs was neither argued nor referred to in the judgments. However, it is clear from the terms of the orders made by the Court of Appeal at para 170 that Palmer, J interpreted the sub-section correctly, and that the indemnity covers such interest and costs. 31 Another example to similar effect is Hillig v Commissioner of Taxation (2000) 35 ACSR 626 in which, after analysis of the subsection (para 18) White, J made an order, inter alia, in these terms: "(4) The third parties indemnify the defendant against $71,000 of the plaintiff's claim against the defendant together with interest and costs ordered to be paid by the defendant to the plaintiff". 32 On behalf of the Respondent it was submitted that the reasons for judgment in these cases disclose no analysis of the point of construction raised in these proceedings and that I should proceed as though free from binding authority. 33 I disagree. I am bound to adopt the interpretation of the sub-section apparent from the orders made by the Court of Appeal in Deputy Commissioner of Taxation v Clark (supra) and, in any event, with respect, I agree with it. The orders made in those cases give effect to the intention of the legislature outlined in the Explanatory Memorandum to The Insolvency (Tax Priorities) Legislation Amendment Bill 1993 which amended the Corporations Law by the enactment of, inter alia, s 588FGA. Relevantly it states: " … one of the elements of a successful defence to a recovery action by the liquidator in relation to such dispositions requires the disposition to have been made for valuable consideration. The risk remains, however, flowing from the Commissioner's possible possession of financial details of the company's health (through the receipt of tax information etc), that the Commissioner might still be precluded from asserting a defence under the voidable transactions provisions, on the basis that he or she was aware of the insolvency of the person making the disposition. To ameliorate this result the proposed amendment provides that where a court order is made against the Commissioner (under section 588FF of the Corporations Law, introduced by the Corporate Law Reform Bill 1992 ) requiring the return of the money paid by the company to discharge its liability under a remittance provision , (sic) the directors of the company at the time when the payment was made shall indemnify the Commissioner for any loss or damage suffered by the Commissioner as a result [new section 588FGA – inserted by clause 27] . The amount recoverable by the Commissioner is a debt due to the Commonwealth and may be recovered in a court of competent jurisdiction by the Commissioner or Deputy Commissioner [new subsection 588FGA(3)] ". 34 In short, the amendments put the Commissioner in the same position as other creditors under the insolvency provisions of the Corporations Law. It is clear that s 588FGA is intended to provide to the Commissioner, in order to protect the revenue, an indemnity in respect of any loss or damage suffered as a result of being ordered to repay money paid by a company in discharge of its liability under a remittance provision. According to principle, it should be construed to the extent the language will allow so as to give full effect to the intended remedy. So construed, the indemnity covers the full amount which the Commissioner is ordered to pay, and its costs incurred in respect of the claim by a liquidator. Thus, for example, it was held in Browne & Ors v Deputy Commissioner of Taxation (1998) 153 ALR 10 that s 588FGA(2) places the Commissioner in a special position among the other creditors in the winding up of a company. When an order has been made by the Court under s 588FF against the Commissioner, each person who was a director of the company when the payment was made is rendered by s 588FGA(2) liable to indemnify the Commissioner in respect of any loss or damage resulting from the order for repayment. 35 That there may be no authority as to the scope of the indemnity under s 588FGA(2) is, perhaps, not surprising and calls to mind the passage from Burrows v Knightley (1987) 10 NSWLR 651 at p 656D at which Hunt J said: "Very often there is no authority for an obvious proposition because no-one has previously had the hardihood to dispute it: Morgan v Odhams Press Ltd [1971] 1 WLR 1239 at 1246; [1971] 2 All ER 1156 at 1163; Kavanagh v Chief Constable of Devon and Cornwall [1974] QB 624 at 634; or because there has been a general consensus of opinion that the contrary proposition is not tenable: Re KL Tractors Ltd (In Liq) (1961) 106 CLR 318 at 338". 36 In the result, in my opinion, the Respondent is liable under s 588FGA(2) to indemnify the Defendant for the interest and costs referable to those components of the Plaintiffs' claim which were paid at times when the Respondent was a director of the company, and the Defendant is entitled to orders which give effect to that indemnity. 37 In the circumstances of this case, of course, the amount claimed against the Respondent is part only of the amount which the Defendant has been ordered to pay the Plaintiffs, and the amounts for interest and costs payable by the Respondent to the Defendant must be adjusted appropriately. 38 In the circumstances, a broad brush approach to the issue of costs is justified. In my opinion the Defendant's claim for two thirds of its costs is reasonable. Conclusion 39 For the above reasons, I make the following orders: (i) There will be judgment for the Plaintiffs against the Defendant in the amount of $821,590.55 together with interest pursuant to s 94 Supreme Court Act 1970 in the sum of $229,981.39. (ii) The Defendant pay the Plaintiffs' costs of the proceedings excluding costs the subject of the order of 6 September 2002. (iii) There will be a declaration that the Respondent is liable to indemnify the Defendant in respect of the judgment obtained against it by the Plaintiffs. (iv) There will be judgment for the Defendant against the Respondent in the amount of $538,314.39 together with interest calculated pursuant to s 94 Supreme Court Act 1970 in the sum of $150,686.12. (v) The Respondent pay two thirds of the costs referred to in Order (ii) above and two thirds of the Defendant's costs of defending the proceedings. (vi) The Respondent pay the Defendant's costs of its claim against the Respondent. ********** Last Modified: 12/09/2003 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.