Reported Decision : 57 ACSR 249 (2006) 24 ACLC 465 New South Wales Supreme Court CITATION : Sims v Deputy Commissioner of Taxation [2006] NSWSC 305 HEARING DATE(S) : 3 April 2006 JUDGMENT DATE : 3 April 2006 JURISDICTION : Equity JUDGMENT OF : Campbell J EX TEMPORE JUDGMENT DATE : 04/03/2006 DECISION : Director to indemnify Commissioner for PAYG component of preference, with that amount to bear interest. No decision about whether Director liable to indemnify Commissioner for Commissioner's own costs concerning preference proceedings. CATCHWORDS : CORPORATIONS - winding up - preference recovered from Commissioner of Taxation - Commissioner of Taxation seeks indemnity from Director - consideration of whether Commissioner entitled to indemnity for Commissioner's own costs of defending preference recovery action Civil Procedure Act 2005 Corporations Act 2001 LEGISLATION CITED : Corporations Law Taxation Administration Act 1953 Uniform Civil Procedure Rules 2005 Browne & Ors v Deputy Commissioner of Taxation (1998) 82 FCR 1; (1998) 153 ALR 10; (1998) 26 ACSR 750; (1998) 16 ACLC 559; (1998) 98 ATC 4721; (1998) 38 ATR 331 Deputy Commissioner of Taxation v Clark [2003] NSWCA 91; (2003) 57 NSWLR 113; (2003) 176 FLR 235; (2003) 45 ACSR 332; (2003) 21 ACLC 1063; (2003) 52 ATR 526 CASES CITED : Gibbons (as official liquidators of Deemah Marble & Granite Pty Ltd (in liq) v DCT [2003] NSWSC 1126; (2004) 22 ACLC 81 Hillig v Commissioner of Taxation [2000] QSC 403; (2000) 35 ACSR 626 Southern Cross Interiors Pty Ltd (In Liq) v Deputy Commissioner of Taxation [2001] NSWSC 621; (2001) 164 FLR 430; (2001) 53 NSWLR 213; (2001) 188 ALR 114; (2001) 39 ACSR 305; (2001) 19 ACLC 1513 Southern Cross Interiors Pty Ltd (In Liq) v Deputy Commissioner of Taxation (Palmer J, Supreme Court of New South Wales, unreported, 13 November 2001) PARTIES : Deputy Commissioner of Taxation - Defendant/Applicant Christopher Allan Trudgett - Respondent FILE NUMBER(S) : SC 4349/05 COUNSEL : A Iuliano - Applicant No Appearance - Respondent ATO Legal Services Branch - Applicant SOLICITORS : No Appearance - Respondent LOWER COURT DATE OF DECISION : 04/03/2006 IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST CAMPBELL J MONDAY 3 APRIL 2006 4349/05 ANTHONY MILTON SIMS IN HIS CAPACITY AS LIQUIDATOR OF CLASSIC CEDAR VENETIANS PTY LIMITED (IN LIQUIDATION) v DEPUTY COMMISSIONER OF TAXATION JUDGMENT – Ex Tempore, (with postscript 18 April 2006) 1 HIS HONOUR: This is an application by the Commissioner of Taxation under Section 588FGA Corporations Act 2001. The Respondent was a director of Classic Cedar Venetians Pty Limited (in liquidation). 2 The liquidator of that company brought proceedings against the Commissioner, seeking to recover an amount of $33,000.00, plus interest and costs, as a preference. The $33,000.00 was the total of amounts which had been paid to the Commissioner, between 30 July 2003 and 17 March 2004, both dates inclusive, in connection with taxation liabilities of the company. 3 Those proceedings have now been settled and orders were made on 28 March 2006 to give effect to that settlement. Under those orders, the Commissioner is liable to refund the amount of $33,000.00 to the liquidator. The settlement was arrived at fairly soon after the proceedings were begun. 4 By an interlocutory process filed 5 August 2005, the Commissioner sought from the respondent the sum of $23,124.00, together with such further or other sum, including interest and costs, as the applicant is found liable to pay to the plaintiffs. After some vicissitudes in effecting service of that interlocutory process, an order for substituted service was made. It is established it has been served in accordance with those orders. 5 The respondent has been notified of the date of today's application but has not appeared. 6 I am satisfied that the amount of $33,000.00, which was the principal amount of the taxes and tax related amounts paid by the company between 3 July 2003 and 17 March 2004 included the amount of $23,124.00 for PAYG tax. 7 Section 588FGA provides: (1) This section applies if the Court makes an order under section 588FF against the Commissioner of Taxation because of the payment of an amount in respect of a liability under any of the following provisions of the Income Tax Assessment Act 1936 : (aa) section 220AAE, 220AAM or 220AAR; (a) section 221F (except subsection 221F(12)), section 221G (except subsection 221G(4A)) or section 221P; (b) subsection 221YHDC(2); (c) subsection 221YHZD(1) or (1A); (d) subsection 221YN(1); (e) section 222AHA; or under a provision of Subdivision 16-B in Schedule 1 to the Taxation Administration Act 1953 . (2) 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. (3) An amount payable to the Commissioner under subsection (2): (a) is a debt due to the Commonwealth and payable to the Commissioner; and (b) may be recovered in a court of competent jurisdiction by the Commissioner, or a Deputy Commissioner of Taxation, suing in his or her official name." 8 The PAYG tax has fallen due under Subdivision 16-B of Schedule One of the Taxation Administration Act 1953. 9 Even though the liquidator had claimed against the Commissioner the amount of $33,000.00 plus interest and costs, and the claim was compromised for $33,000.00, without any allocation of the $33,000.00 to any particular head of claim, it can still properly be said that the court judgment for $33,000.00 is "an order under section 588FF against the Commissioner of Taxation because of the payment of an amount in respect of ..." the PAYG tax. That is because the judgment is unlikely to be for as much as $33,000 if at least some PAYG tax had not been included in the calculation of the settlement sum. 10 I am satisfied that the respondent was a director at the relevant time. Thus his liability to indemnify the Commissioner is established by Section 588FGA(2). 11 The Commissioner also seeks an order that the respondent pay the Commissioner's costs of defending the claim brought against the Commissioner by the liquidator. 12 In circumstances where there was no costs order made against the Commissioner in those proceedings, the only costs of the Commissioner concerning the proceedings would be his own legal costs. 13 Mr Iuliano, for the Commissioner, submits that the Commissioner's own costs count as part of the "loss or damage resulting from the order" referred to in section 588FGA(2). I raised with him in argument a possible difficulty with that construction, namely that the order was made on 28 March 2006 but in the ordinary course of things the vast bulk of the Commissioner's own costs connected with the proceedings brought by the liquidator would have been incurred prior to that date. At first blush it seems an unusual use of language to say that costs incurred before the order was made were "loss or damage resulting from the order". 14 Mr Iuliano requested the opportunity to put further submissions in writing concerning that point. In light of the fact that it may be of some general importance and because Sections 588FGA and 588FGB have been considered by courts on previous occasions, it seems appropriate to give him that opportunity. 15 Thus, the only order I shall make today concerning the claim that the respondent pay the Commissioner's costs of defending the claim brought against him by the liquidator is to direct that any further written submissions on that point by the Commissioner be made available to me no later than 5.00 pm Monday, 10 April 2006. 16 One other order which the Commissioner seeks is that the respondent pay to the Commissioner interest under Section 101 Civil Procedure Act 2005, at the rates prescribed in the Uniform Civil Procedure Rules 2005 from time to time on the sum of $23,124.00 such interest to commence accruing 21 days from the date the sealed order made by this court on 28 March 2006 is served by the plaintiff on the defendant. It is 21 days from the date the sealed order made by the court on 28 March 2006 is served by the plaintiff on the defendant that marks the date when the Commissioner will become liable to start paying interest to the liquidator on the judgment of $33,000.00. 17 In my view, it would be appropriate for interest to accrue on the amount of the judgment for $23,124.00 from that same date. 18 Finally, Mr Iuliano seeks an order that the respondent pay the defendant's costs of the interlocutory process. It is appropriate, in accordance with the principle that costs follow the event, for that order to be made. 19 I will make the orders in the terms of the reasons I have given so far. * * * * * * * * * * 18 April 2006: 20 On Monday 10 April 2006 my staff were informed (as I understood it) that the Commissioner did not wish to make any additional submissions. A note from Mr Iuliano later in the day stated that he had been instructed not to seek the proposed order for the director to pay the Commissioner's own costs concerning the preference recovery action. 21 I have, however, given additional consideration to whether it is appropriate to make an order that the respondent pay the Commissioner's cost of defending the claim brought against the Commissioner by the liquidator. As the Commissioner no longer seeks the order, I do not intend to express any final views about what entitlement he would have had, had he continued to seek it. However, there are some remarks that I think it is appropriate to make. I do so because I have some unease about the Commissioner putting an argument to the Court, then abandoning it when a possible difficulty with it was raised, in circumstances where there is a Court decision in favour of the argument which the Commissioner has abandoned. 22 The decision to which I refer is the judgment of Nicholas J in Gibbons (as official liquidators of Deemah Marble & Granite Pty Ltd (in liq) v DCT [2003] NSWSC 1126; (2004) 22 ACLC 81. Gibbons involved a claim by the Commissioner under section 588FGA(2) against a director, arising from the Commissioner having been ordered to repay a preference he had received from a company of which the director was director. It appears from [22] of the judgment that the orders the Commissioner sought included an order that the director pay not only two thirds of the costs incurred by the Commissioner as a consequence of the order for the Commissioner to repay, but also two thirds of the Commissioner's costs of defending the preference proceedings. At [39] Nicholas J made that order. 23 With the greatest respect, it seems to me that either there may be some room for argument about the correctness of the making of that order, or else there was some factual circumstance not apparent from the reasons which influenced the making of the order. 24 The particular consideration which led me to the initial view of the application of section 588FGA(2) which I have expressed at Para [13] above – namely, a consideration concerning the causal relationship between the order and the incurring of the Commissioner's own costs – was not put to Nicholas J. Rather, the argument which the director put to His Honour was (at [27]): "… that no part of the Plaintiffs' … costs represent loss or damage within the meaning of the subsection." 25 I turn to the matters mentioned in Gibbons as relevant to the making of the order. At [29] of Gibbons Nicholas J referred to the decision in Southern Cross Interiors Pty Ltd (In Liq) v Deputy Commissioner of Taxation (Palmer J, Supreme Court of New South Wales, unreported, 13 November 2001) ("the November 2001 Southern Cross decision"). That decision of Palmer J was a brief decision about the orders that should be made to give effect to the decision which Palmer J had given on 31 August 2001 in Southern Cross Interiors Pty Ltd (In Liq) v Deputy Commissioner of Taxation [2001] NSWSC 621; (2001) 164 FLR 430; (2001) 53 NSWLR 213; (2001) 188 ALR 114; (2001) 39 ACSR 305; (2001) 19 ACLC 1513 ("the August 2001 Southern Cross decision"). In the August 2001 Southern Cross decision, Palmer J held that the company in question was insolvent, and that a deed of release did not prevent the Commissioner from making his claim against the directors of the company, but that a female director who had taken no part in the affairs of the company and had left it all to her husband to run had made out a defence under section 588H(4), namely that "for some other good reason" she had not taken part at the relevant time in the management of the company. 26 The November 2001 Southern Cross decision was one given in a context where Palmer J was considering two rival sets of short minutes of order. In the course of the November 2001 Southern Cross decision at [6] Palmer J said: "Under s 588FGA the Defendant is entitled to indemnity from the Respondent in respect of any loss or damage resulting from the order under s 588FF made against the Defendant in favour of the Plaintiff. In my opinion it is proper to include in this indemnity the costs payable by the Commissioner in respect of the claim instituted by the liquidator." Nicholas J referred at [29] of Gibbons to that passage in the November 2001 Southern Cross decision. 27 The actual orders made by Palmer J (as appearing in the entered order contained in the court file) were, as far as is presently relevant, as follows: 1. There will be judgment for the Plaintiff against the Defendant in the sum of $208,737.44 together with interest at the rate prescribed in the Rules; 2. There will be a declaration that the First Respondent is liable to indemnify the Defendant in respect of the judgment obtained against it by the Plaintiff; 3. There will be judgment for the Second Respondent on the Defendant's claim against her; 4. The First and Second Respondents pay the Plaintiff's costs in relation to the issue of whether the liquidator could bring these proceedings given the Deed of Release dated 11th September 1998; 5. The Defendant pay the Plaintiff's costs of the originating process other than the costs referred to in order 4 above; 6. the First Respondent indemnify the Defendant in relation to the costs referred to in order 5 above. 28 Those orders do not require the director to pay the Commissioner's own costs of the preference proceedings. 29 The appeal to the Court of Appeal, Deputy Commissioner of Taxation v Clark [2003] NSWCA 91; (2003) 57 NSWLR 113; (2003) 176 FLR 235; (2003) 45 ACSR 332; (2003) 21 ACLC 1063; (2003) 52 ATR 526 was concerned only with the aspect of the August 2001 Southern Cross decision which exonerated the female director. The Court of Appeal reversed that aspect of the August 2001 Southern Cross decision. Insofar as the orders of the Court of Appeal related to the costs orders that had been made below, they were (at [170], 57 NSWLR 150): "(4) Order 6 in the Equity Division vacated and in lieu thereof substitute an order that the first and second respondents indemnify the defendant in relation to the costs referred to in order 5 in the Equity Division." 30 In Gibbons at [30] Nicholas J expressed the view that "it is clear from the terms of the orders made by the Court of Appeal at para 170 that Palmer J interpreted the subsection correctly, and that the indemnity covers such interest and costs." 31 It seems to me that an argument is fairly open that those orders of the Court of Appeal say nothing about whether the Commissioner received, or should have received, an indemnity concerning his own costs of the preference claim. 32 At [31] of Gibbons Nicholas J referred to the decision of White J in Hillig v Commissioner of Taxation [2000] QSC 403; (2000) 35 ACSR 626, the order in which included: "(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." 33 The order in Hillig thus did not involve any obligation on the director to pay the Commissioner's own costs of the preference proceedings, as the Commissioner's own costs of the preference proceedings did not fall within "interest and costs ordered to be paid by the defendant to the plaintiff.". 34 At [33] of Gibbons, Nicholas J quoted from the Explanatory Memorandum which introduced the legislation whereby section 588FGA Corporations Law (which corresponds exactly with the same numbered provision in the Corporations Act 2001) had been introduced. The passage his Honour quoted was: "… 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)]." 35 His Honour drew from the quoted passage a legislative intention for the amendments to put the Commissioner in the same position as other creditors under the insolvency provisions of the Corporations Law. An argument seems to me to be fairly open about whether the quoted portion of the Explanatory Memorandum gives rise to that conclusion about the intention with which the legislation was passed. Instead, it might be argued that it leads simply to a conclusion that the intention was that the disadvantage which the Commissioner was at, by comparison with practically every other creditor, of having intimate knowledge or means of knowledge of the state of the company's financial health, and so being inhibited in making out a defence under section 588FG(2) of being a bona fide recipient of a payment which was in fact preferential, should be made up for by giving the Commissioner a different right altogether, namely a right to be indemnified by a director. 36 At [34] of Gibbons, reference was made to the decision of the Full Federal Court in Browne & Ors v Deputy Commissioner of Taxation (1998) 82 FCR 1; (1998) 153 ALR 10; (1998) 26 ACSR 750; (1998) 16 ACLC 559; (1998) 98 ATC 4721; (1998) 38 ATR 331. At 26 ACSR 757, the Court (Lockhart, O'Loughlin and Kiefel JJ) said: "In our opinion once the commissioner pays an amount to the company or liquidator in accordance with a court order under s 588FF, directors of the company at that time become liable to indemnify the commissioner in respect of the amount of payment; it is that payment that constitutes "the loss or damage resulting from the order" of the court." (Emphasis added) 37 That account of this section might be argued not to support the notion that the Commissioner has a right to be indemnified concerning his own costs of the preference action. 38 Notwithstanding those additional remarks I have made, as the Commissioner no longer seeks the order for indemnification in relation to his own costs of the preference proceedings, I shall make no orders additional to those which I made on 3 April 2006. ********** 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.