Reported Decision : (2007) 25 ACLC 1,829 New South Wales Supreme Court CITATION : Sims v Commissioner of Taxation [2007] NSWSC 1359 This decision has been amended. Please see the end of the judgment for a list of the amendments. HEARING DATE(S) : 8 & 16 November 2007 JUDGMENT OF : Hammerschlag J EX TEMPORE JUDGMENT DATE : 16 November 2007 DECISION : Defendant to pay plaintiffs' costs. First respondent to pay defendant's costs. Second respondent to pay 25 per cent of defendant's costs and be jointly and severally liable with first respondent to that extent. CATCHWORDS : CORPORATIONS – COSTS – Liquidators of company successful in obtaining order against Commissioner of Taxation under s 588FF of the Corporations Act 2001 (Cth) ("the Act") – Admissions by Commissioner of insolvency of the company and on other issues but no consent to judgment – Commissioner successful against one director and partially successful against another director under s 588FGA(2) of the Act – Order for costs against the Commissioner in favour of liquidators and against directors in favour of the Commissioner – Whether Commissioner's liability under that costs order is "loss or damage resulting from the order" within the meaning of s 588FGA(2) in respect of which directors are liable to indemnify Commissioner – Costs payable by Commissioner because of costs order in proceedings not loss or damage resulting from the order referred to in s 588FGA(2) of the Act LEGISLATION CITED : Corporations Act 2001 (Cth) Dean-Willcocks Pty Ltd v Commissioner of Taxation (No 2) (2004) 49 ACSR 325 CASES CITED : Cooper v Commissioner of Taxation (2004) 139 FCR 205 Gibbons v Deputy Commissioner of Taxation [2003] NSWSC 1126 Anthony Milton Sims and Neil Geoffrey Singleton as Joint and Several Liquidators of ACN 087 202 980 Pty Ltd (In Liquidation) (formerly NewsNet.Com Pty Limited) ACN 087 202 980 (formerly NewsNet.Com Pty Limited) PARTIES : Anthony Leonard Maine Judith Merryn Maine Commissioner of Taxation FILE NUMBER(S) : SC 2717/2004 P. Braham (First and Second Plaintiffs) COUNSEL : P. Rodionoff (Defendant) S.B. Paterson (Solicitor) (First Respondent) J.R. Clarke (Second Respondent) Purcell Insolvency Lawyers (First and Second Plaintiffs) SOLICITORS : ATO Legal Practice (Defendant) Home Wilkinson Lowry (First Respondent) Esplins Solicitors (Second Respondent) - 11 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST HAMMERSCHLAG J 16 NOVEMBER 2007 02717/2004 ANTHONY MILTON SIMS AND NEIL GEOFFREY SINGLETON AS JOINT AND SEVERAL LIQUIDATORS OF ACN 087 202 980 PTY LTD (IN LIQUIDATION) (FORMERLY NEWSNET.COM PTY LIMITED) -V - COMMISSIONER OF TAXATION EX TEMPORE JUDGMENT 8 NOVEMBER 2007 1 HIS HONOUR: On 25 September 2007 I gave judgment for the plaintiff against the defendant Commissioner of Taxation ("the Commissioner"). In the same proceedings, as is envisaged by s 588FGA(4) of the Corporations Act 2001 (Cth) ("the Act"), I made orders in favour of the Commissioner against the first and second respondents, Mr Maine and Mrs Maine, on their statutory indemnities under s 588FGA(2) of the Act. 2 Mrs Maine raised the statutory defence given by s 588FGB(4). She was partially successful. 3 Exclusive of interest, the total amount in respect of which judgment is to be entered against the Commissioner is $285,209. It represents the total of 14 separate payments which the plaintiffs successfully impeached. 4 Mrs Maine's statutory defence succeeded on 10 out of the 14 claims. The four on which she lost amount to $80,000 and I gave judgment for the Commissioner against her for that amount. 5 The parties have been unable to agree on the costs orders to be made. 6 At an early stage of the proceedings the Commissioner admitted the plaintiffs' case on the pleadings, including the insolvency of the company at the material times. However, the Commissioner then sought orders in the proceedings against Mr Maine and Mrs Maine on their statutory indemnities. Mr Maine and Mrs Maine put insolvency of the company in issue. Directions were made to enable them directly to contest that issue in the plaintiffs' case. 7 There has been consideration in the authorities of the status of, and the approach which the Court should take with respect to, an admission by the Commissioner of insolvency of the company in proceedings of this type when, in the same proceedings, the Commissioner sues the directors on their statutory indemnity and they then put that insolvency in issue: see, for example, Dean-Willcocks Pty Ltd v Commissioner of Taxation (No 2) (2004) 49 ACSR 325 at [18] and following; Cooper v Commissioner of Taxation (2004) 139 FCR 205. 8 Whatever the status of the Commissioner's admissions, she did not consent to judgment, and both the plaintiffs and the Commissioner took upon themselves the burden of proving insolvency before me. 9 Had the Commissioner consented to judgment, or not claimed against Mr Maine and Mrs Maine in the same proceedings, there would have been no issue as to insolvency in the proceedings (or, given the Commissioner's admissions, any issues between the plaintiffs and the Commissioner). The insolvency issue was only in play because of the joinder of the directors. 10 The outcome was that the plaintiffs succeeded entirely against the Commissioner and the Commissioner in turn succeeded entirely against Mr Maine. 11 There is in those circumstances no reason in my view why Mr Maine should be ordered to pay anything more than the costs of the Commissioner in prosecuting the claim against him and no reason why costs should not otherwise follow the event in the ordinary way. 12 The order of the Court will be that the Commissioner is to pay the costs of the plaintiffs, and Mr Maine is to pay the costs of the Commissioner. 13 The position of Mrs Maine is somewhat different. Her statutory defence succeeded in respect of 10 out of 14 claims against her. 14 Mr Clarke for Mrs Maine put that an appropriate view of what occurred was that Mrs Maine succeeded in respect of more claims than she lost, and accordingly she should be favoured with an order for costs. 15 There is, however, the countervailing consideration that on each of the four claims she lost she put insolvency of the company in issue. That was a substantial issue which straddled the proceedings as a whole and which cannot, on any realistic basis, be dealt with piecemeal as to any one or more of the 14 claims. 16 On all of the claims against her Mrs Maine's defence was the same. It would have been raised in the same way even if only the four claims on which she lost had been prosecuted. 17 There are thus considerations going both ways. 18 Ultimately, however, the Commissioner was successful and obtained judgment. 19 I have formed the view that an appropriate exercise of my discretion is to order Mrs Maine to pay 25 percent of the costs of the Commissioner. To the extent that Mrs Maine and Mr Maine are both liable to the Commissioner, she will, with him, be jointly and severally liable for 25 percent of the Commissioner's costs. 20 There remains an issue as to whether or not the Commissioner should be ordered to pay costs of the plaintiffs on an indemnity basis because of non-acceptance of a Calderbank offer made on 20 March 2006. I propose to reserve my judgment on that issue until 2 pm today. 8 NOVEMBER 2007 - 2PM 21 When the matter returned, Mr Rodionoff of counsel for the Commissioner informed me that there had been some debate between him and representatives for Mr Maine and Mrs Maine as to whether I had disposed of a contention put on behalf of the Commissioner that in addition to orders for costs in the proceedings, the Commissioner was, under the statutory indemnity given by s 588FGA(2) of the Act, entitled to an order that Mr Maine and Mrs Maine pay the Commissioner such costs as the Commissioner was ordered to pay the plaintiffs. Because counsel for Mr Maine and Mrs Maine were not then present, I stood the matter over to 16 November 2007. 16 NOVEMBER 2007 22 On 16 November 2007 I informed counsel for the plaintiffs and the Commissioner that I did not propose ordering the Commissioner to pay the plaintiffs' costs on an indemnity basis. Mr Braham, counsel for the plaintiffs, informed me that reasons were not required. 23 I also informed counsel that I did not propose to make any further orders against Mr Maine or Mrs Maine with respect to costs payable by the Commissioner to the plaintiffs. I enquired of Mr Rodionoff whether he required reasons, which he did. EX TEMPORE JUDGMENT - 16 NOVEMBER 2007 24 His Honour: I consider that the orders which I made with respect to the costs payable by the first and second respondents, Mr Maine and Mrs Maine, to the Commissioner represent, in the circumstances of this case, the reasonable costs recoverable by the Commissioner. 25 In my view, on the plain language of the section, the indemnity given to the Commissioner by s 588FGA(2) of the Corporations Act 2001 (Cth) ("the Act") does not cover the legal costs which the Commissioner has been ordered to pay the successful plaintiffs. 26 Sections 588FF(1) and (2) of the Act are as follows: 588FF Courts may make orders about voidable transactions (1) Where, on the application of a company's liquidator, a court is satisfied that a transaction of the company is voidable because of section 588FE, the court may make one or more of the following orders: (a) an order directing a person to pay to the company an amount equal to some or all of the money that the company has paid under the transaction; (b) an order directing a person to transfer to the company property that the company has transferred under the transaction; (c) an order requiring a person to pay to the company an amount that, in the court's opinion, fairly represents some or all of the benefits that the person has received because of the transaction; (d) an order requiring a person to transfer to the company property that, in the court's opinion, fairly represents the application of either or both of the following: (i) money that the company has paid under the transaction; (ii) proceeds of property that the company has transferred under the transaction; (e) an order releasing or discharging, wholly or partly, a debt incurred, or a security or guarantee given, by the company under or in connection with the transaction; (f) if the transaction is an unfair loan and such a debt, security or guarantee has been assigned—an order directing a person to indemnify the company in respect of some or all of its liability to the assignee; (g) an order providing for the extent to which, and the terms on which, a debt that arose under, or was released or discharged to any extent by or under, the transaction may be proved in a winding up of the company; (h) an order declaring an agreement constituting, forming part of, or relating to, the transaction, or specified provisions of such an agreement, to have been void at and after the time when the agreement was made, or at and after a specified later time; (i) an order varying such an agreement as specified in the order and, if the Court thinks fit, declaring the agreement to have had effect, as so varied, at and after the time when the agreement was made, or at and after a specified later time; (j) an order declaring such an agreement, or specified provisions of such an agreement, to be unenforceable. (emphasis added) (2) Nothing in subsection (1) limits the generality of anything else in it. 27 Section 588FGA(1) provides as follows: 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 the following provisions of the Income Tax Assessment Act 1936: … [the section then enumerates sections of the Income Tax Assessment Act under one or more of which the payments recovered by the liquidators had been made by the company to the Commissioner] 28 Section 588FGA(2) provides 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 . (emphasis added) 29 "The order" referred to in s 588FGA(2) is an order referred to in s 588FGA(1), which in turn is an order made under s 588FF(1). 30 The order in this case was one made under s 588FF(1)(a) which directed the Commissioner to pay an amount equal to all of the money that the company had paid to the Commissioner under the relevant transactions. 31 The damage or loss to the Commissioner which results from that order can only be the amount of money which the Commissioner must pay under it. That damage or loss cannot extend to costs which the Commissioner must, because of a further order (the costs order), pay to the plaintiffs. 32 Section 588FF(1) says nothing about orders as to costs. 33 The costs liability of the Commissioner to the plaintiffs is not damage or loss resulting from the order under s 588FF(1) for the further reason that it resulted rather from the Commissioner having defended the claim. 34 The question whether the scope of the s 588FGA(2) indemnity extends to cover the costs referable to a plaintiff's claim was considered by Nicholas J in Gibbons v Deputy Commissioner of Taxation [2003] NSWSC 1126. His Honour said: [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 subsection 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 subsection apparent from the orders made by the Court of Appeal in Deputy Commissioner of Taxation v Clark (above) 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. 35 The question of interest does not arise here. 36 In my respectful view, it is not possible to accommodate both the plain meaning and operation of the words in s 588FGA(2) of the Act and the conclusion to which His Honour came. 37 In so far as His Honour held that the indemnity under s 588FGA(2) extends to the Commissioner's liability to meet a costs order in favour of a plaintiff who has succeeded in obtaining an order under s 588FF in respect of payments under remittance provisions referred to in s 588FGA(1), for the reasons I have set out above, I respectfully take a different view. ********** 03/12/2007 - Insertion of words "between the plaintiffs and the Commissioner" in paragraph 9Correction of typographical errors in paragraphs 15, 21 and 23 - Paragraph(s) 9, 15, 21 and 23 03/12/2007 - Correction of typographical error on coversheet - Paragraph(s) Coversheet DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. 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