Israel Discount Bank Limited v ACN 078 272 867 Pty Ltd (in liq) (formerly Advance Finances Pty Ltd) [2019] FCAFC 90
ORDERS
DATE OF ORDER: |
THE COURT ORDERS THAT:
1. The application for leave to appeal be dismissed.
2. The applicants pay the respondents’ costs of the application, to be taxed if not agreed.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
THE COURT:
Introduction
1 This application for leave to appeal concerns the requirement, for the purposes of service out of the jurisdiction, that the party seeking to serve out of the jurisdiction has a prima facie case for all or any of the relief claimed in the proceeding. The applicants for leave to appeal, Israel Discount Bank Limited (IDB) and Mercantile Discount Bank Limited (MDB) (together, the Banks), are the fourth and fifth defendants to this proceeding. On 30 March 2017, a judge of this Court granted the plaintiffs (the respondents to the present application) leave to serve the originating process and associated documents on the Banks in Israel. By interlocutory application dated 16 October 2017, the Banks applied to have those orders discharged or service of the documents set aside. The primary judge dismissed that application, and the Banks seek leave to appeal from that judgment.
2 In order to sustain service out of the jurisdiction on the Banks, it was necessary for the plaintiffs to have a prima facie case for all or any of the relief claimed. The plaintiffs relied on the following two claims for the purposes of the hearing before the primary judge:
(a) first, a claim that amounts, said to represent payments of principal and interest, paid by the plaintiffs to IDB and MDB, are voidable transactions under s 37A of the Conveyancing Act 1919 (NSW);
(b) secondly, a claim that IDB and MDB were “involved” (for the purposes of s 79 of the Corporations Act 2001 (Cth)) in alleged breaches of statutory duties by the directors of the plaintiffs, and that IDB and MDB thereby contravened s 181(2) and s 182(2) of the Corporations Act.
3 The primary judge held, in summary, that the plaintiffs had established a prima facie case for relief against the Banks in respect of each of these claims. Further, his Honour was not persuaded that there were discretionary reasons for discharging the order for service out of the jurisdiction or setting aside service.
4 The Banks’ application for leave to appeal was heard together with argument on the appeal, should leave be granted. In summary, the Banks challenge the primary judge’s conclusion that the plaintiffs had established a prima facie case in respect of each of the statutory claims. The Banks accept that they need to establish error by the primary judge in respect of both statutory claims in order to succeed on any appeal.
5 For the reasons set out below, no error is shown in the primary judge’s conclusion that the plaintiffs had established a prima facie case for relief against the Banks in respect of the Corporations Act claim. It is therefore unnecessary to consider the challenge to the primary judge’s conclusion in relation to the Conveyancing Act claim. In any event, we note the following matters. The main argument raised by the Banks in relation to the Conveyancing Act claim (a standing argument) was not raised before the primary judge. To the extent that the argument has merit, it can be addressed by the joinder of an additional plaintiff (and likely would have been addressed in this way had the point been taken below). Accordingly, we do not consider that the new argument provides a sufficient basis to grant leave to appeal. We reject the other arguments raised by the Banks in relation to the Conveyancing Act claim.
6 Accordingly, the application for leave to appeal is to be dismissed.
Background
7 The following outline of the background facts and matters is drawn substantially from the reasons for judgment of the primary judge (the Reasons).
8 The plaintiffs are two companies (Advance and Civic) formerly associated with the late Emil Binetter. Emil Binetter and his son Gary Binetter were directors of Advance from its incorporation in 1997 until its reinstatement and liquidation in March 2011 and directors of Civic from its incorporation in 1999 until its reinstatement and liquidation, again in March 2011.
9 The activities of the companies apparently centred on borrowing money from banks in Israel and on-lending it to other entities. It is alleged that from about December 1988, Emil Binetter and his brother Erwin Binetter were involved in a scheme that was said to have the following components:
(a) funds under the control of Emil Binetter and Erwin Binetter, deposited outside of Australia (offshore deposits), were used as security for the advance of funds by the Israeli banks to various applicants (back-to-back arrangement);
(b) funds obtained pursuant to the back-to-back arrangement were provided by the Israeli banks to various members of the Binetter companies by way of purported loans to assist in their business activities in Australia;
(c) the arrangements between those companies and the Israeli banks were documented in such a fashion as to permit the Binetter companies to produce documents purportedly evidencing the purported loans but failing to disclose the existence of the offshore deposits or the back-to-back arrangement;
(d) the Binetter companies then lodged income tax returns in Australia declaring no taxable income (in the case of Advance and Civic), or little or significantly reduced taxable income in respect of other entities, because any income disclosed was to be offset by substantially equivalent amounts claimed to be deductible expenses for overseas interest referable to payments to the Israeli banks;
(e) at the conclusion of the operation of the scheme, the funds invested in Australia by the Binetter companies were returned to the Israeli banks in purported repayment of the purported loans, leaving those companies in Australia with no moneys with which to pay their creditors, in particular the taxation liabilities that were assessed once, it is further alleged, the true nature of the scheme was revealed (which was not until 2009).
10 In about 1997, Emil Binetter and Erwin Binetter apparently decided to separate their respective interests. It is asserted by the plaintiffs that Advance (from 1997) and Civic (from 1999) were the vehicles utilised by Emil Binetter and Gary Binetter to continue to utilise the alleged scheme.
11 The income tax returns for Advance and Civic in the years from incorporation until 2006 showed ‘nil’ taxable income. Those returns were said to be self-assessments prepared by accountants without source documents and in reliance on information provided by Emil Binetter. In July and September 2006, the Australian Taxation Office (ATO) wrote to the then solicitors for Advance and Civic and stated that the ATO intended to audit a number of entities associated with Emil Binetter. Five days after the second letter, Advance and Civic each lodged an application with the Australian Securities and Investments Commission (ASIC) to be deregistered. ASIC was given no notice of the impending audits, nor was the ATO given notice of the deregistration applications.
12 In December 2010, Jagot J ordered that the registrations of each of Advance and Civic be reinstated, that each be wound up and that Mr Max Donnelly be appointed as liquidator of each company: see Deputy Commissioner of Taxation v Australian Securities and Investments Commission (2010) 81 ATR 456.
13 ASIC effected the reinstatement of each company in March 2011. After each of Advance and Civic had been reinstated, amended assessments were served by the Deputy Commissioner of Taxation (DCT) on Advance totalling $3,955,101.15 (in respect of the tax years 1998 to 2004), and on Civic totalling $862,179.63 (in respect of the tax years 1999 to 2004).
14 In February 2014, Mr Donnelly, as liquidator, conducted an examination of Gary Binetter pursuant to s 596A of the Corporations Act. Mr Donnelly had previously applied to this Court for the issue of a Letter of Request addressed to the District Court in Tel Aviv-Jaffa, requesting the Court’s assistance in relation to the winding up of Advance and Civic, and in particular the production of relevant documents by the Banks. That application was granted by Farrell J on 28 May 2013: see Donnelly (as liquidator), in the matter of Advance Finances Pty Limited (in liq) [2013] FCA 514. As a consequence, a number of records were produced by the Banks.
15 This proceeding was commenced by originating application filed on 16 December 2016, within the period of six years after the reinstatement of each of Advance and Civic. The originating application was supported by an affidavit of Mr Donnelly sworn 15 December 2016. A statement of claim was filed in March 2017.
16 In summary, the claims made by Advance in the statement of claim are:
(a) relief against the estate of Emil Binetter and against Gary Binetter for breach of duty, breach of fiduciary duty, breach of statutory duty and negligence in connection with their involvement in, and implementation of, the alleged scheme (statement of claim at [37]-[51]) for:
(i) the amounts of the amended assessments issued by the DCT to Advance totalling $3,955,101.15; and
(ii) the amounts remitted by Advance to MDB totalling $7,290,767;
(b) against MDB for:
(i) involvement in breach of statutory duty and knowing receipt of $7,290,767, whereby that amount is held on constructive trust for Advance (statement of claim at [52]-[57]);
(ii) damages or equitable compensation for involvement in breach of statutory duty in the amounts of $3,955,101.15 and $7,290,767, or alternatively a compensation order under s 1317H of the Corporations Act, or an account of profits (statement of claim at [52]-[57]);
(iii) receipt of payments voidable under s 37A of the Conveyancing Act totalling $7,290,767, or alternatively $3,500,000 (statement of claim at [58]-[65]).
17 In summary, the claims made by Civic in the statement of claim are:
(a) relief against the estate of Emil Binetter and against Gary Binetter for breach of duty, breach of fiduciary duty, breach of statutory duty and negligence in connection with their involvement in, and implementation of, the alleged scheme involving the Israeli banks (statement of claim at [66]-[80]) for:
(i) the amounts of the amended assessments issued by the DCT to Civic totalling $862,179.63; and
(ii) the amounts remitted by Civic to IDB totalling $9,246,305;
(b) against IDB for:
(i) involvement in breach of statutory duty and knowing receipt of $9,246,305, whereby that amount is held on constructive trust for Civic (statement of claim [81]-[86]);
(ii) damages or equitable compensation for assistance in breach of fiduciary duty of $862,179.63 and $9,246,305, or alternatively a compensation order under s 1317H of the Corporations Act, or an account of profits (statement of claim at [81]-[86]);
(iii) receipt of payments voidable under s 37A of the Conveyancing Act totalling $9,246,305, or alternatively $4,690,000 (statement of claim at [87]-[94]).
18 On 30 March 2017, Foster J made orders granting leave to the plaintiffs to serve on the Banks in Israel the further amended originating application and statement of claim, together with affidavits of Mr Donnelly and Peter Joseph Duggan (the Originating Documents).
The interlocutory application before the primary judge
19 By interlocutory application dated 16 October 2017, the Banks applied for: an order under r 13.01(1)(d) of the Federal Court Rules 2011 discharging the orders of Foster J; or an order under r 13.01(1)(b) setting aside service of the Originating Documents.
20 As noted in [3] of the Reasons, during the hearing of the interlocutory application, the Banks conceded that the Court had jurisdiction in the proceeding (see r 10.43(4)(a) of the Federal Court Rules) and that, in the event the primary judge concluded that the plaintiffs had a prima facie case, the proceeding would be of a kind mentioned in r 10.42 (see r 10.43(4)(b)). Accordingly, the primary issue on the interlocutory application was whether the plaintiffs had established a prima facie case for relief against the Banks (see r 10.43(4)(c)). It was common ground at the hearing before the primary judge that it was unnecessary to distinguish between the individual positions of each of IDB and MDB; if a prima facie case was established against one of the Banks, then it was expressly agreed that such a result would also apply to the other bank.
21 Further, although the plaintiffs had pleaded claims said to give rise to equitable relief, the plaintiffs did not ask the primary judge to conclude that they had established a prima facie case as to these equitable claims: see the Reasons at [4]. The plaintiffs accepted that the Banks’ application for an order under r 13.01(1) stood or fell on whether or not a prima facie case had been established by the plaintiffs for one of the statutory claims advanced.
The Reasons of the primary judge
22 The primary judge set out the applicable principles regarding the prima facie case requirement in r 10.43(4)(c) of the Federal Court Rules at [8]-[12] of the Reasons, referring to cases including Morris v McConaghy Australia Pty Ltd [2018] FCA 435 at [29]-[30] per Rares J; Australian Competition and Consumer Commission v Yellow Page Marketing BV [2010] FCA 1218 at [25] per Gordon J; and Australian Competition and Consumer Commission v April International Marketing Services Australia Pty Ltd (No 6) (2010) 270 ALR 504 at [8] per Bennett J. In Morris, Rares J quoted from the judgment of the Full Court of this Court in Ho v Akai Pty Ltd (in liq) (2006) 247 FCR 205 (Ho v Akai) at [10], where the Full Court said that “a prima facie case for relief is made out if, on the material before the court, inferences are open which, if translated into findings of fact, would support the relief claimed”. It was sufficient for the plaintiffs to establish a prima facie case in relation to either the Conveyancing Act claim or the Corporations Act claim: Reasons at [12], citing Bell Group Ltd (in liq) v Westpac Banking Corporation (1996) 20 ACSR 760; Cell Tech Communications Pty Ltd v Nokia Mobile Phones (UK) Ltd (1995) 58 FCR 365 (Cell Tech) at 373.
23 After describing the background to the interlocutory application, the primary judge discussed the inferences available from the relevant material at [26]-[38] of the Reasons. As the primary judge explained at [26], for the purposes of the interlocutory application, the following matters were in contest: the proper characterisation of the conduct of Emil Binetter and Gary Binetter; the precise arrangements and characterisation of the arrangements the plaintiffs put in place with the Banks; and the conduct and knowledge of the Banks. The Banks contended before the primary judge that the plaintiffs’ material fell short of establishing the plaintiffs’ contentions as to these matters on a prima facie basis. It followed, the primary judge said, that the Court needed to engage initially in a process of determining what relevant inferences were available from the material in evidence on the interlocutory application.
24 The primary judge explained at [27] that the proposed documentary tender by the plaintiffs had been refined, and that the refined documentary tender became Exhibit A. The primary judge then dealt with the available inferences. The primary judge stated at [28]-[29]:
28 In accordance with the authorities identified at [9] and [10] above, I have broadly examined and reviewed the material in Exhibit A, and for reasons I will explain, I am satisfied that inferences are available to be drawn from that material that:
(a) arrangements were implemented, which involved Emil Binetter and Gary Binetter putting in place ‘back-to-back’ agreements by which funds, under their control, were deposited in Israel, with those funds being used as security for advances of funds by the Banks to the plaintiffs;
(b) more specifically, the Banks created a deposit account and one or more borrowing accounts; funds were placed in the deposit account, and then the Banks permitted advances to be drawn on the borrowing account, which were styled as loans, provided that the total outstanding advances did not exceed the total amount in the deposit account: that is, the deposit account was back-to-back with the borrowing account and the Banks paid interest on the positive difference between the balances of each account and charged a margin on any funds received into the borrowing accounts;
(c) the purpose of the structure was that it created a patina of a regular loan, unconnected to any deposit account whereas, in reality, all the transactions depended on there being a surplus in the deposit account;
(d) these back-to-back arrangements allowed the plaintiffs to have the benefit, in Australia, of funds transferred to each of the plaintiffs by each of the Banks and allowed each of the plaintiffs to treat the transfers of funds from each of the Banks as loan funds;
(e) it also allowed income tax returns to be lodged on behalf of the plaintiffs which declared no taxable income, because any income disclosed would be offset by deductible interest expense amounts said to be liabilities to the Banks.
29 These inferences are to be drawn in circumstances where it is difficult to conceive readily of another commercial purpose for the unusual arrangements disclosed by the evidence. In the absence of other evidence or explanation, the inference is available that the arrangements evinced an intention by those then controlling Advance and Civic to conceal or dissemble the existence of the deposits for the purposes of evading tax. This concealment by those controlling Advance and Civic took place, in effect, by creating the false impression that the terms of the relevant transactions were not affected by the deposits. In this regard, it is also open to infer that the arrangements between the plaintiffs and the Banks were documented in such a way so as to permit the plaintiffs, if necessary or expedient, to produce misleading documents purportedly evidencing the arrangements, but which did not disclose them sufficiently completely so as to reveal the existence of the deposits.
25 After referring to some of the evidence, the primary judge stated at [32] that, in the absence of any explanation by further evidence, it was open to infer that the omission by Advance and Civic in disclosing the true nature of the whole of the arrangements between the plaintiffs and the Banks was no accident and that “the Banks were willing to assist in arming Advance and Civic with documents which allowed those controlling Advance and Civic to create, by omission, a false impression”.
26 The primary judge also stated at [38]:
In the absence of evidence on behalf of the Banks, and in the absence of any other evidence, it would be unsafe in the circumstances revealed by Exhibit A to treat any particular terms upon which any of the advances were made by the Banks at face value. Given the nature of the arrangements revealed in the evidence, and the apparent concerted efforts taken to conceal their true nature, I am not satisfied that I can, without evidence from the Banks or others, safely rely on any documents suggesting that the loans were for a proper purpose. It is notable a similar conclusion was drawn in not substantially dissimilar circumstances, albeit on the basis of different evidence and in the absence of evidence from the respondents by Gleeson J in BCI Finances at 257 [157].
27 The reference to the judgment of Gleeson J is to BCI Finances Pty Ltd (in liq) v Binetter (No 4) (2016) 348 ALR 227. That judgment was subsequently substantially affirmed on appeal: BCI Finances Pty Ltd (in liq) v Binetter (2018) 362 ALR 597. That case involved different corporate entities associated with the Binetter family. Of course, as the primary judge clearly understood, the interlocutory application had to be determined on the basis of the evidence before the primary judge for the purposes of the interlocutory application.
28 The primary judge dealt with the Conveyancing Act claim at [40]-[65]. In relation to this claim, the case made by the plaintiffs is that by paying principal and interest to the Banks with the alleged purpose of avoiding tax, the main purpose of each of Emil Binetter and Gary Binetter was to prevent the amounts paid from becoming divisible among the plaintiffs’ creditors or to hinder or delay the process of making those amounts available for division among the plaintiffs’ creditors: see the statement of claim at [44.5](b) and [73.5](b). It is further asserted that each of Emil Binetter and Gary Binetter knew, and it was their intention, that by making the relevant payments, the plaintiffs would be unable to pay all of their creditors and meet existing and future likely taxation liabilities: see the statement of claim at [60] and [89]; and at the time of making the above payments, the plaintiffs were, or were about to become, insolvent: see the statement of claim at [61] and [90].
29 As put in their submissions below, the plaintiffs assert that the application of s 37A of the Conveyancing Act in the present circumstances follows by reference to the following logical sequence:
(a) in 2005 there was a prospective creditor, namely the DCT, for taxation liabilities that would ultimately become due and payable in March 2011 (when Advance and Civic were reinstated);
(b) payments by Advance to MDB and by Civic to IDB, in June 2005, removed all funds (effectively all assets) available to Advance and Civic from the jurisdiction;
(c) after these payments in June 2005, neither Advance nor Civic was left with any funds at all with which to pay their prospective taxation liabilities to the DCT;
(d) the effect of these June 2005 payments was to delay or hinder a creditor (it is said it will be a question of fact at any hearing to ascertain whether earlier payments in the period 2000 to 2004 had the same effect);
(e) it can be inferred from the above that the payments made in June 2005 by Advance and Civic were made with intent to defraud creditors; and
(f) (although, it is said not to be relevant to prove in the plaintiffs’ case in chief), the Banks are not purchasers in good faith without notice of intent to defraud within the meaning of s 37A(3) of the Conveyancing Act.
30 The Banks’ submissions before the primary judge were, in summary, that: s 37A does not apply to the repayments of principal and interest on a loan and that the plaintiffs had not established, on a prima facie basis, that there were alienations of property with intent to defraud; and the plaintiffs had failed to demonstrate, on a prima facie basis, that the Banks were not acting in good faith as they had, at the time of the alienation, no notice of the intent to defraud creditors. The primary judge set out the applicable law in relation to s 37A of the Conveyancing Act and then considered each of these submissions in turn.
31 In relation to the first submission (concerning alienations of property with intent to defraud), the primary judge reasoned as follows:
56 As I have already explained, there is ample material in Exhibit A, and inferences are open from that material which, if translated into findings of fact, would support the plaintiffs’ contentions that payments by Advance to MDB and by Civic to IDB in June 2005 removed all funds from Australia and after the payments, neither Advance nor Civic had funds to pay any prospective tax liabilities, with the effect that those payments delayed or hindered the DCT (a prospective creditor) and hence, it can be inferred, the payments made were made with intent to defraud a prospective creditor.
57 The Banks’ contentions in their supplementary written submissions that the evidence is only capable of supporting an inference that IDB and MDB are banks which loaned funds to the plaintiffs and that “on the available evidence”, the purpose of the loans was “for business purpose” and there is “no evidence” the loans were other than “on commercial terms” are put much too highly and (in the absence of any further evidence) defy a commonsense review of the available material in evidence and should be rejected.
58 In particular, the submission that the evidence is only capable of supporting an inference that the Banks loaned funds to the plaintiffs and any transfers were in discharge of an obligation to repay principal and interest on a loan entered into (and used) for business purposes is one I cannot embrace in the light of the inferences available as to the existence of the back-to-back arrangements, the apparent concealment of those arrangements, and their apparent purpose. The further notion that in the absence of further evidence shedding light of what actually occurred, I should conclude that no prima facie case has been established because of the existence of the loan documentation and payments pursuant to a loan obligation, carries with it the unstated premise that I can safely treat at face value one aspect of the contractual documentation between the Banks and the plaintiffs and Ligon (a company related to Advance and Civic). For reasons I have already explained, I simply cannot.
59 There is sufficient material from which it may be inferred that the aim of the actions of Emil Binetter and Gary Binetter was to denude Advance and Civic of moneys in June 2005 by remitting them to the Banks in purported repayment of loans. This necessarily had the intended consequence that Advance and Civic would not have those funds with which to meet an obligation to a prospective creditor, the DCT, to meet their taxation liabilities.
32 In relation to the second submission (concerning lack of evidence as to mala fides), the primary judge first addressed the question of where the onus of proof lies in connection with s 37A(3) of the Conveyancing Act. The primary judge set out a passage from the reasons of Hodgson JA in Wentworth v Rogers [2004] NSWCA 430, and then noted that Davies J in Royal v El Ali (2016) 14 ABC(NS) 108; [2016] FCA 782 at [217] cited the passage as authority for the proposition that the party relying on the defence under s 37A(3) bears the onus of proving that the subsection applies. The primary judge noted that Gilmour J in Commissioner of Taxation v Oswal (No 6) (2016) 229 ALR 560 at [115] approached the matter in the same way. The primary judge stated, at [64], that the approach to s 37A(3) in those cases could not be said to be wrong, let alone plainly wrong, and that nothing in PT Garuda Indonesia Ltd v Grellman (1992) 35 FCR 515 or the analysis of a different statutory regime in Lewski v Australian Securities and Investments Commission (2016) 246 FCR 200 compelled a different approach. Accordingly, the primary judge proceeded on the basis that it was unnecessary for the plaintiffs to plead that s 37A(3) had not been satisfied or to seek to negative the statutory ingredients of the subsection in their case in chief. However, the primary judge also stated that, even if he was wrong about this point, he would have concluded, subject to the provision of further evidence, that a prima facie case had been established as to a want of the good faith by the Banks.
33 Accordingly, the primary judge concluded that a prima facie case had been established for the Conveyancing Act claim. Subject to any discretionary argument, this was sufficient to determine the interlocutory application. However, the primary judge proceeded to deal also with the Corporations Act claim.
34 The primary judge dealt with the Corporations Act claim at [66]-[84] of the Reasons. The plaintiffs allege that, as directors, Emil Binetter and Gary Binetter each breached their respective statutory duties to Advance and Civic by involving, and continuing to involve, the companies in a scheme or schemes implemented to evade Australian tax. It is asserted that involving Advance and Civic in such a scheme provided no benefit to those companies, while exposing them to the risk of unfavourable tax assessments and penalties. Put more specifically, it is contended that if Emil Binetter and Gary Binetter had complied with their duties, the plaintiffs would not have been used as the conduit for the funds provided by MDB and IDB, they would not have submitted tax returns claiming those funds were loans, would not have been placed in the position where they did not have documents or information to justify the tax returns and would not have been exposed to the risk, and actuality, of unfavourable tax assessments, including substantial assessments for interest and penalties. Further, if Emil Binetter and Gary Binetter had not denuded Advance and Civic of all moneys in June 2005 by remitting them to the Banks in purported repayment of loans, then Advance and Civic would have had those funds with which to meet their taxation liabilities and pay their creditors, at least to the extent of those moneys.
35 The plaintiffs also allege that each of IDB and MDB was involved (within the meaning of s 79 of the Corporations Act) in breaches of the duties under ss 181(1) and 182(1) of the Corporations Act that Emil Binetter and Gary Binetter owed to the plaintiffs, so as to amount to contravening conduct on the part of the Banks under ss 181(2) and 182(2). The remedy sought is statutory compensation under s 1317H for losses, being the amounts paid out of Australia by Advance to MDB and by Civic to IDB in 2005 and the amounts of the amended assessments and penalty assessments issued by the DCT. These losses are said to have arisen when the risk, to which the plaintiffs were exposed by the wrongful conduct of their directors, materialised.
36 The primary judge stated, at [74], that “inferences can be drawn which, if translated into findings, would be sufficient to prove that Emil Binetter and Gary Binetter were acting in such a way as to put in place a scheme to evade the payment of tax and acted contrary to their statutory obligations as directors in doing so”. The primary judge stated at [75] that “[t]he real question therefore is, does a prima facie case exist that the Banks were involved in the contravening conduct engaged in by the directors?”
37 The primary judge referred to cases concerning s 79 of the Corporations Act and stated at [80] that “[i]t is trite, as the Banks emphasise, that s 79 requires actual knowledge of the essential facts constituting the contravention”. The primary judge reasoned as follows at [82]-[83]:
82 In the absence of further material, such a review reveals that inferences are open that an ordinary, decent person in the position of the Banks with knowledge of all the circumstances would have concluded at material times that:
(a) the purpose of Emil Binetter and Gary Binetter in implementing the arrangements was to assist the plaintiffs evading Australian tax; and that it was the intention of each of Emil Binetter and Gary Binetter to conceal the deposit accounts for this purpose;
(b) the banking arrangements were designed in such a way as to assist in dissembling the true position and hence evade tax, which could not conceivably be in the best interests of the plaintiffs (because it exposed the plaintiffs to risks of investigation and remedial responses by the ATO) and which amounted to Emil Binetter and Gary Binetter preferring their own interests over the interests of the plaintiffs (in having them act properly as directors of the plaintiffs); additionally, if the risk of not successfully concealing the scheme from the tax authorities came to pass, then deleterious consequences would result, exposing the plaintiffs to the risk of loss.
83 One would further infer that it was because the Banks had this knowledge, that they were prepared (as I have explained in Section D above at [30]-[36]) to assist those controlling the plaintiffs in preventing revelation of the true nature of the overall commercial relationship between the plaintiffs and the Banks. Given that what is being dealt with is inferences open on a prima facie basis, it is notable that despite my invitation to do so, Counsel for the Banks could not point to a benign commonsense explanation for the unusual arrangements disclosed by the evidence. Although, as a matter of logic, the absence of a contrary benign explanation does not of itself make out, even on a prima facie basis, the malign inference contended for by the plaintiffs, I reject the notion that an inference is unavailable that the arrangements were documented in such a way so as to permit the plaintiffs to produce misleading documents purportedly evidencing the arrangements, but which did not disclose them sufficiently completely so as to reveal the existence of the deposits. Indeed, as I have explained, it is presently open to infer that the Banks, by putting in place these arrangements and providing letters and statutory declarations on request, assisted the directors in this endeavour.
38 The primary judge concluded, at [84], that “inferences are available, on the present state of the evidence, of the necessary knowledge of the essential facts constituting contraventions by Emil Binetter and Gary Binetter”. Thus, subject to a further issue concerning the power of the Court to grant relief, the primary judge stated that, had it been necessary to do so, he would have determined that a prima facie case of s 79 involvement by the Banks was made out. The further issue concerned s 1317K of the Corporations Act, which provides that a proceeding for a declaration of contravention, or for a compensation order, may be started no later than six years after the contravention.
39 The primary judge considered discretionary matters at [85]-[94] of the Reasons. In relation to s 1317K of the Corporations Act, the primary judge considered that it was not appropriate to deal with that issue on the application, particularly in the absence of any assistance on this point. After indicating his approach in relation to s 1317K, the primary judge noted that no limitation point was raised or developed in relation to the Conveyancing Act claim and that the finding as to a prima facie case in relation to that claim was dispositive of the interlocutory application. His Honour also stated that the Conveyancing Act claim did not suffer from a want of prospects of success such as to mean that overseas defendants should not be put to the time, expense and trouble of defending the claim, referring to Agar v Hyde (2000) 201 CLR 552.
40 The primary judge made orders on 22 June 2018 that: the interlocutory application of the fourth and fifth defendants dated 16 October 2017 be dismissed; and the fourth and fifth defendants pay the plaintiffs’ costs of and incidental to the interlocutory application.
The application for leave to appeal
41 The Banks apply for leave to appeal from the judgment of the primary judge. In their application for leave to appeal, the Banks set out a number of grounds, including that the decision of the primary judge is attended by sufficient doubt to warrant it being reconsidered by the Full Court, and that substantial injustice will result if leave is refused supposing the decision to be wrong (see Decor Corporation Pty Ltd v Dart Industries Inc. (1991) 33 FCR 397 at 398-399).
42 The Banks’ proposed grounds of appeal are set out in an amended draft notice of appeal dated 8 February 2019. However, the Banks do not press paragraphs 7(a) and (d) of the amended draft notice of appeal. Further, during the course of the hearing, and in light of discussion and an indication from the plaintiffs, the Banks indicated that they did not press paragraph 8 of the amended draft. In light of this, a notice of contention filed by the plaintiffs falls away.
43 The proposed grounds of appeal may be summarised as follows:
(a) In relation to the Conveyancing Act claim, the Banks contend that the primary judge erred in concluding that a prima facie case had been established. In particular, the Banks challenge the primary judge’s conclusions that certain inferences were open (grounds 1 and 2).
(b) Also, in relation to the Conveyancing Act claim, the Banks challenge the primary judge’s conclusions regarding s 37A(3) of the Conveyancing Act (grounds 3 and 4).
(c) In relation to the Corporations Act claim, the Banks contend that the primary judge erred in concluding that a prima facie case had been established. In particular, the Banks challenge the primary judge’s conclusions that certain inferences were open, and contend that the primary judge erred in failing to find that there was no evidence, or no sufficient evidence, that the Banks had knowledge of any fraudulent design at the time that the alleged breaches were alleged to have occurred (grounds 6 and 7(b) and (c)).
44 In the course of submissions, the Banks advanced a new argument in relation to the Conveyancing Act claim, which had not been raised before the primary judge and is not explicitly stated in the amended draft notice of appeal. That argument concerns the plaintiffs’ standing to bring a claim under s 37A of the Conveyancing Act.
Applicable principles
45 There is no dispute between the parties as to the principles relating to r 10.43 and r 13.01 of the Federal Court Rules, and no issue is taken with the primary judge’s statement of those principles.
46 An application under r 13.01 of the Federal Court Rules for an order discharging an earlier order granting leave to serve out of the jurisdiction, or for an order setting aside such service, is in the nature of a review by way of rehearing of the original decision to grant leave to serve out of the jurisdiction: Ho v Akai at [9] (in relation to the predecessor provision, but equally applicable to the current provision). Accordingly, it is open to the party who sought and obtained an order for service out of the jurisdiction to adduce additional evidence to that put before the Court for the purposes of obtaining the original order: WSGAL Pty Ltd v Trade Practices Commission (1992) 39 FCR 472.
47 In the present case, the only issue before the primary judge was whether the party who had sought and obtained the original order (the plaintiffs) had “a prima facie case for all or any of the relief claimed in the proceeding”: r 10.43(4)(c). The principles applicable to the predecessor provision to r 10.43(4)(c) (O 8, r 2(2)(c) of the Federal Court Rules 1979) were considered by the Full Court of this Court (Finn, Weinberg and Rares JJ) in Ho v Akai. The Full Court said at [10]:
As has been observed on many occasions, the prima facie case requirement has to be met at the outset, usually on an ex parte basis, and without the advantage of discovery and other procedural aids to the making out of a case: see eg Merpro Montassa Ltd v Conoco Specialty Products Inc (1991) 28 FCR 387 at 390. It “should not call for a substantial inquiry”: WSGAL Pty Ltd v Trade Practices Commission (1992) 39 FCR 472 at 476; see also Sydbank Soenderjylland A/S v Bannerton Holdings Pty Ltd (1996) 68 FCR 539 at 549. For present purposes it is sufficient to say that a prima facie case for relief is made out if, on the material before the court, inferences are open which, if translated into findings of fact, would support the relief claimed: Western Australia v Vetter Trittler Pty Ltd (in liq) (1991) 30 FCR 102 at 110. Or, to put the matter more prosaically as Lee J did in Century Insurance Ltd (in prov liq) v New Zealand Guardian Trust Ltd [1996] FCA 376:
What the Court must determine is whether the case made out on the material presented shows that a controversy exists between the parties that warrants the use of the Court’s processes to resolve it and whether causing a proposed respondent to be involved in litigation in the Court in Australia is justified.
These principles are equally applicable to the current provision.
48 In relation to the predecessor provision, it was held that the requirement that there be a “prima facie case for the relief sought” only required that there be such a case in relation to one of the causes of action relied upon for the relief sought: Bray v F Hoffman-La Roche Ltd (2003) 130 FCR 317 at [47]-[55], [176]-[191]; Ho v Akai at [45]-[47]. This is equally true of the current provision, which requires a prima facie case for “all or any of the relief claimed in the proceeding”.
49 Further, as Lindgren J said in Cell Tech at 373-374, where a statement of claim has been filed “an applicant who establishes a prima facie case for the relief sought in the application should not fail merely because the cause of action on which that case for relief is established does not conform precisely to the words of the statement of claim”.
Consideration
50 It is convenient to consider, first, the proposed appeal grounds relating to the Corporations Act claim, and then to consider the proposed appeal grounds relating to the Conveyancing Act claim.
Proposed appeal grounds 6, 7(b) and (c)
51 The Banks challenge the primary judge’s conclusion that the plaintiffs had a prima facie case for the relief sought in relation to the Corporations Act claim. The Banks’ submissions can be summarised as follows:
(a) In determining that a prima facie case existed, his Honour applied the wrong test. He stated at [82] of the Reasons that certain inferences were open based on what “an ordinary, decent person in the position of the Banks with knowledge of all the circumstances” would have concluded. As is evident from [80], this formulation is derived from the fourth level of knowledge referred to in Baden v Societe Generale pour Favoriser le Developpement du Commerce et de l’Industrie en France SA [1993] 1 WLR 509 at 575-576 applied in the context of knowing assistance claims in equity. It is not relevant to s 79 of the Corporations Act, which, as his Honour noted at [80], requires actual knowledge of the essential facts constituting the contravention.
(b) There was no basis for the finding in [82](a) (impliedly relied on in [82](b)) that the purpose of the plaintiffs’ directors, Emil and Gary Binetter, in implementing the arrangements was to assist the plaintiffs to evade Australian tax. This was not the claim the plaintiffs made.
(c) The material before the primary judge did not justify drawing an inference, even at the prima facie level, that the Banks had actual knowledge of Emil and Gary Binetter implementing arrangements to evade Australian tax by concealing overseas deposits.
(d) The material on which the primary judge appears to have relied is set out at [28]-[38] of the Reasons. So far as concerns the Banks, that material might support an inference that certain officers of the Banks were prepared to provide the plaintiffs with letters describing the nature of the loan arrangements, which letters did not identify that the loans were secured by back-to-back deposits. But the material does not support any inference that:
(i) the Banks knew the letters were to be provided to the revenue authorities; indeed, the primary judge found that a solicitor’s letter that referred to the Banks’ letters being provided to the ATO was not seen by the Banks – Reasons, [34]; or
(ii) the reason for not disclosing the existence of the back-to-back deposits was to conceal from the revenue authorities the offshore interest earned on the deposits in Israel.
(e) An inference the Banks knew both these matters would be essential in order to be able to infer that they knew the essential elements of the contravention.
(f) Of course, it was logically possible that the plaintiffs did not want the offshore deposits disclosed for some nefarious purpose, such as evading tax. But there must be positive facts from which it may be inferred that some officer, whose knowledge can relevantly be imputed to the Banks, must have appreciated that the plaintiffs were evading tax; mere speculation or conjecture is not sufficient: Seltsam Pty Ltd v McGuinness (2000) 49 NSWLR 262 at [84]-[88] per Spigelman CJ. Here, there is nothing more than the apparent fact that the Banks were prepared to provide confirmation of the nature of the loan arrangements in terms that did not disclose the deposits. That cannot support the inference the plaintiffs need to establish.
52 Insofar as the Banks contend that the primary judge adopted the wrong test in relation to s 79 of the Corporations Act, we do not accept this submission. In [80] of the Reasons, the primary judge stated, correctly, that “[i]t is trite, as the Banks emphasise, that s 79 requires actual knowledge of the essential facts constituting the contravention”. The primary judge referred to the discussion in Lifeplan Australia Friendly Society Ltd v Ancient Order of Foresters in Victoria Friendly Society Ltd (2017) 250 FCR 1 of the level of knowledge required for the purposes of s 79. Although a cross-appeal from that judgment was allowed, the High Court did not address the question of knowledge in relation to s 79: Ancient Order of Foresters in Victoria Friendly Society Ltd v Lifeplan Australia Friendly Society Ltd (2018) 360 ALR 1. The approach taken by the primary judge was consistent with the judgment of the Full Court of this Court in Lifeplan. In Lifeplan, the Full Court stated at [106]:
Whether actual knowledge exists for the purposes of s 79 will be a question of proof and evidence. If circumstances are such as to indicate to an ordinary, decent person that the relevant facts exist, that may be open as an evidential conclusion.
To similar effect, albeit in a different context, in Pereira v Director of Public Prosecutions (1988) 82 ALR 217, the High Court stated at 220:
All that having been said, the fact remains that a combination of suspicious circumstances and failure to make inquiry may sustain an inference of knowledge of the actual or likely existence of the relevant matter.
The primary judge’s approach was consistent with these principles.
53 We were taken during the course of the hearing to many of the documents in the Appeal Book, being documents relied on by the plaintiffs before the primary judge. Based on the documents to which we were taken, no error is shown in the primary judge’s conclusions as to the inferences that were open on the material (whether in the early part of the Reasons, at [26]-[38], or in the section dealing specifically with the Corporations Act claim, at [82]-[83]). Indeed, we consider that his Honour was correct to conclude that such inferences were open. It is not appropriate, on an application for leave to appeal such as this, to provide an extensive analysis of the documents. It is sufficient for present purposes to note the following features of some of the documents. It should be noted that many of the documents relied on by the plaintiffs were produced by the Banks in 2015 as a result of the Letter of Request discussed in [14] above.
54 The materials include a letter from Emil Binetter on behalf of Advance to MDB dated 24 June 1997 (under a tab in the Appeal Book labelled “CRI 21”). The letter referred to a loan application that had been signed by Advance and then set out “additional details as agreed”. The letter stated that: the first draw down under the loan would be in the amount of $4 million; the interest payable on the loan would be 8.298% per annum (after Australian withholding tax, which would be the responsibility of Advance); and interest was payable no later than 31 December and 30 June in each year. The loan application itself (CRI 24) did not specify the interest rate, but rather provided that it would be the rate of LIBOR plus an “agreed” percentage. The plaintiffs submit that the letter indicates that Advance, the borrower, was setting the interest rate on the loan. It may be that, together with other material, such an inference is open. In particular, as discussed below, there is other material to suggest that the back-to-back arrangements were structured in such a way that the Banks charged a ‘margin’, being the difference between the interest paid by Advance or Civic to the Banks, and the interest paid by the Banks on the offshore deposit.
55 Another document included in the materials is a “Framework Instrument” between Civic and IDB (CRI 28). This document referred to a “deposit” of $5 million. It may be inferred that this referred to an offshore deposit as part of a back-to-back arrangement. The document then provided for two interest rates, one for the deposit and one for a loan. The loan would seem to refer to the advance of funds from IDB to Civic. The interest rate for the deposit was 6.6% per annum, while the interest for the loan was 7.2% per annum. As foreshadowed above, it is open to infer that the difference between these two interest rates represented a margin charged by IDB to Advance for the provision of the back-to-back arrangement. If this is correct, then it supports the plaintiffs’ case that, although Civic claimed tax deductions for interest payments to IDB reflecting an interest rate of 7.2%, these payments may not have been properly deductible: cf BCI Finances Pty Limited (in liq) v Binetter (2018) 362 ALR 597 at [563]-[568].
56 We were also taken to a letter from IDB to Civic dated 3 July 2001 (CRI 33). This sets out interest calculations on a loan provided by IDB to Civic. The interest amounts ($11,000, $34,400 and $36,400) total $81,800. Against this, an amount of $72,000 was credited, such that only the difference ($9,800) was payable by Civic to IDB. The netting off of $72,000 against $81,800 supports an inference that, in substance, the bank was charging a margin for the back-to-back arrangement, being the difference between the so-called interest payments and the amount credited.
57 The materials include another “Framework Instrument” with IDB (CRI 35). In this Framework Instrument, which related to a deposit of $3.69 million, the interest rate on the deposit was 5.40%, while the interest rate on the loan was 6%. Thus, the difference between the two interest rates was again 0.6%, supporting an inference that this was a margin charged by IDB for providing the back-to-back arrangement.
58 The materials include a draft typed letter from MDB to Emil Binetter in his capacity as director of Advance dated 23 March 2004. The draft letter has a hand-written annotation in English instructing the bank to re-type the letter on bank letterhead and provide it to Advance (CRI 37). The draft letter is set out in [30] of the Reasons. The draft letter also has hand-written annotations in Hebrew. These annotations indicate that, upon receipt of the draft letter, a query was raised by one bank employee to another, to which a response was given. The response, when translated from Hebrew, was: “this is a back to back credit with a margin of 0.6 between the deposit and the loan. We are supposed to receive additional AUD 2.4 Mil. in return for increasing the loan” (CRI 38). These documents provide further support for an inference that the bank charged a margin for the provision of the back-to-back arrangements.
59 The materials include a draft letter dated 22 February 2009 from IDB to Civic (CRI 59) and a letter dated 2 March 2009 from IDB to Civic (CRI 60) purporting to set out details of the loans. It may be inferred from the material generally that the letter dated 2 March 2009 was provided to assist Civic in its dealings with the ATO. The letter did not disclose the existence of the offshore deposit or the back-to-back arrangement, but stated that loans had been granted by IDB “upon commercial terms” and that the loans “had been supported by the personal guarantee obtained by IDB from Mr. Emil Binetter and the guarantee from Milgerd Nominees Pty Limited”. Statements to similar effect appear in the draft dated 22 February 2009. This was a less than frank description of the true position. The fact is that the offshore deposit was the real security. Although the letter and draft letter are dated 2009, some years after the relevant time for the causes of action, later behaviour can be used to infer a prior state of mind, namely a consciousness of concealing the true position.
60 A statutory declaration made by Gary Binetter on 17 December 2009 (CRI 68) is also included in the material. In that declaration, Mr Binetter referred to telephone discussions with Israel Zamir of MDB during a visit to Israel in 2009 and during previous visits. Mr Binetter described a conversation in which he asked Mr Zamir for “help in getting bank documents to show to the Australian tax office to provide that Advance had loans with the bank, and that they were legitimate”. According to the declaration, Mr Zamir responded: “We have given you letters previously that prove this. What was wrong with them?” Mr Binetter responded: “The tax office didn’t accept them. They said anyone could run them off a computer”. This evidence supports an inference that MDB provided letters to Advance at its request to assist Advance in its dealings with the ATO. Further, it supports an inference that MDB did so, not only in 2009, but also at earlier points in time.
61 Having regard to the material to which we were taken, including the documents described above, in our view the primary judge was correct to conclude that inferences are open which, if translated into findings of fact, would support the relief claimed. In particular, as the primary judge found at [82], it is open to infer that the Banks knew that the banking arrangements were designed in such a way as to assist in dissembling the true position and, hence, to evade tax. This could not conceivably be in the best interests of the plaintiffs (because it exposed the plaintiffs to risks of investigation and remedial responses by the ATO) and amounted to Emil Binetter and Gary Binetter preferring their own interests over the interests of the plaintiffs.
62 The Banks also challenge the finding of the primary judge, at [82] of the Reasons, that it was open to infer that the purpose of Emil and Gary Binetter in implementing the arrangements was to assist the plaintiffs to evade Australian tax. The Banks submit that the case against them is that the arrangements were designed to avoid tax in relation to the offshore deposits rather than to avoid tax payable by the plaintiffs. However, the Banks’ submission takes too narrow a view of the plaintiffs’ case. While it is true that the statement of claim alleges that the arrangements were designed to avoid tax in relation to the offshore deposits, there are also allegations to the effect that the arrangements were designed to enable the plaintiffs to claim deductions for interest paid to the Banks: see, eg, the statement of claim at [28.9], [29.4], [30.4], [31.2], [34.3](c), [44.3](b) and [45.3](d).
63 For these reasons, the primary judge’s conclusions in relation to the Corporations Act claim are not attended by sufficient doubt to warrant reconsideration by the Full Court. This is a sufficient basis upon which to conclude that the application for leave to appeal should be dismissed. However, we will also consider the proposed appeal grounds in relation to the Conveyancing Act claim.
Proposed appeal grounds 1 and 2
64 The Banks contend that the primary judge wrongly concluded that the plaintiffs had established a prima facie case for relief under s 37A of the Conveyancing Act.
65 Section 37A of the Conveyancing Act provides:
(1) Save as provided in this section, every alienation of property, made whether before or after the commencement of the Conveyancing (Amendment) Act 1930, with intent to defraud creditors, shall be voidable at the instance of any person thereby prejudiced.
(2) This section does not affect the law of bankruptcy for the time being in force.
(3) This section does not extend to any estate or interest in property alienated to a purchaser in good faith not having, at the time of the alienation, notice of the intent to defraud creditors.
66 The Banks’ first submission is that the plaintiffs, as the alleged disponers of the funds the subject of the s 37A applications, do not have standing to seek relief under s 37A because they were not “person[s] thereby prejudiced” within the meaning of s 37A(1). The Banks submit that a person prejudiced within the meaning of the section is a person who is owed a debt at the time of the hearing or the filing of the proceedings: Chen v Marcolongo (2009) 260 ALR 353 at [193]-[207]; HP Mercantile Pty Ltd v Dierickx [2012] NSWSC 1005 at [86]-[87]; Sutherland v Jot Property Solutions Pty Ltd [2016] 1 Qd R 353 at [31]. The Banks submit that the plaintiffs are not in this category. The Banks acknowledge that this point was not argued at first instance, but submit that it is a pure question of law, and they ought to be permitted to argue it on appeal in accordance with Suttor v Gundowda Pty Ltd (1950) 81 CLR 418 at 438 and Coulton v Holcombe (1986) 162 CLR 1 at 7-8.
67 In response, the plaintiffs submit that there is authority for the proposition that a disponer company in liquidation, via its liquidator, is a party prejudiced by the alienation, because its assets have been disposed of to the detriment of its creditors. The plaintiffs rely, in particular, on Williams v Lloyd (1934) 50 CLR 341, which concerned claims by the Official Receiver that certain dispositions were void against him under both s 37A of the Conveyancing Act and s 94 of the Bankruptcy Act 1924 (Cth). In that case, Starke J (at 362) rejected the suggestion that the Official Receiver could not avail himself of s 37A of the Conveyancing Act, stating that the “official receiver represents the creditors, and dispositions void against creditors are void against trustees or receivers lawfully appointed”. The plaintiffs also rely on Cannane v J Cannane Pty Ltd (in liq) (1998) 192 CLR 557 at [11], where Brennan CJ and McHugh J referred to the avoidance of transactions by the official receiver or a liquidator. The plaintiffs also rely on a number of cases that have applied or followed Williams v Lloyd. Although the liquidator of the plaintiffs is not a party to the present proceeding, the plaintiffs indicated that they would be willing to add the liquidator as a plaintiff.
68 In our view, there is merit in the Banks’ submission regarding standing. As presently constituted, the plaintiffs to the proceeding are the disponer companies and not the liquidator of those companies. On no view is the disponer company in the present circumstances a “person thereby prejudiced” by the disposition. It is the grantor of the transaction to be set aside. For this reason, the Banks’ submission regarding standing is correct.
69 The question then is whether, if the liquidator of the plaintiff companies were added as a plaintiff, this would overcome the problem. This is a difficult question. We incline to the view that the answer is “No”. A liquidator is not directly to be aligned with a trustee in bankruptcy, unless a statutory provision so provides: cf s 565 of the former Corporations Law. Of course, a liquidator can be given standing to pursue statutory Corporations Act claims, but we are not dealing with such provisions. But the matter is arguable and the plaintiffs only have to establish a prima facie case on standing (among other things) as part of establishing a prima facie case on relief. Thus, it would be sufficient for present purposes for the plaintiffs to join the liquidator as a plaintiff. In circumstances where the point was not taken at first instance, and is capable of being addressed in the manner indicated, it would not be appropriate to grant leave to appeal on the basis of the Banks’ submissions regarding standing.
70 Further, and in any event, the matter can be put beyond doubt by the plaintiffs joining a creditor (eg, the DCT) as a plaintiff. As we understood the plaintiffs’ position, they are willing to do what is necessary to cure the standing question. Again, as the standing point was not taken at first instance, and is capable of being addressed by joining a creditor as plaintiff, it would not be appropriate to grant leave to appeal on the basis of the Banks’ standing submissions.
71 The Banks’ second submission in relation to these proposed appeal grounds may be summarised as follows:
(a) There was no basis for inferring that any property of the plaintiffs was alienated. The transactions which the primary judge found gave rise to a prima facie case for relief under s 37A comprised two payments made in “purported repayment” of the “purported loans” from the Banks, namely:
(i) a transfer of $3.5 million to MDB on behalf of Advance on or about 6 June 2005; and
(ii) a transfer of $4.69 million to IDB on behalf of Civic on or about 23 June 2005.
(b) Both transfers are alleged to have been made by Ligon 159 Pty Limited (Ligon 159). This is consistent with the documentary evidence showing the funds came from a Ligon 159 account. Ligon 159 is an entity to which each of the plaintiffs had allegedly on-loaned the moneys they had borrowed from the Banks.
(c) For there to be an alienation within the meaning of s 37A there must be a “parting with property” or “some interest in the property” (Cardile v LED Builders Pty Ltd (1999) 198 CLR 380 at [65]). In the absence of any reason to believe that the plaintiffs transferred any of their own funds to the Banks in June 2005, there can be no prima facie case that there was an alienation in relation to the plaintiffs’ property and thus no claim under s 37A. True it is that the transfer by Ligon 159 (assuming that, as alleged, it was made “on behalf of” the plaintiffs) will have discharged any repayment obligations the plaintiffs owed to the Banks; but that is a discharge of a debt and not an alienation of property.
(d) The primary judge addressed this issue by saying that he could not conclude that no prima facie case has been established because of the existence of the loan documentation and payments pursuant to a loan obligation, because he could not safely treat at face value one aspect of the contractual documentation between the Banks, the plaintiffs and Ligon 159. This reasoning does not engage with the argument the Banks made in respect of the repayments. That argument turned not on the existence of contractual documentation, but on the simple fact that the plaintiffs never pointed to any evidence that might support an inference they made the repayments with their own funds.
72 For the reasons that follow, we do not accept these submissions.
73 In Hall v Poolman (2007) 215 FLR 243, Palmer J said at [550]:
The purpose of s 37A is to defeat fraud no matter by what device it is implemented. The reach of the section is not foreshortened by technical obstructions placed in the way of recovery proceedings in furtherance of the original fraudulent intent. The words of the section are of the widest possible application; they focus on the effect of what is done, not on the means by which it is done. The word “alienation” encompasses every conceivable means whereby property might be removed from the reach of a person’s creditors. The section does not say that the alienation must be by the act of the fraudulent debtor.
74 These observations were adopted by Davies J in Royal v El Ali at [202].
75 Consistently with the purpose of s 37A, a broad approach is to be adopted as to what constitutes an alienation of property. It is common ground that the payments made in June 2005 were made by Ligon 159 at the direction of Advance and Civic respectively, and that they were made “out of” moneys due to each of Advance and Civic from Ligon 159. In these circumstances, it is at least reasonably arguable that the payments constituted an alienation of property by the plaintiffs for the purposes of the provision. The effect of the payments made by Ligon 159 to the Banks was to dispose of or, indeed, extinguish Advance’s and Civic’s assets being their choses in action against Ligon 159.
76 The Banks’ third submission may be summarised as follows:
(a) It is a premise of the plaintiffs’ case in this proceeding and of the judgment of the primary judge, that the Banks made advances or loans to the plaintiffs. That is consistent with the evidence before the primary judge. Indeed, the primary judge found that the plaintiffs had the benefit of the loans made by the Banks. Although portions of the pleading and the judgment refer to “purported loans”, there is no allegation, or finding at the level of a prima facie case, that the loans were a sham or were never made; the furthest the primary judge goes is to imply they were not for a proper purpose. This is unsurprising. The gravamen of the wrongdoing alleged in the pleading is the concealment of the existence of the offshore deposits. That is, loans, which appeared to have been made by the Banks on the strength of a guarantee alone, were in fact backed by deposits, which meant the Banks were not risking their own capital and the primary customer had the opportunity to earn interest on the deposits, which was not disclosed to the revenue authorities in the primary customer’s home jurisdiction.
(b) The matter is significant because the primary judge’s finding that there was an intent to defraud creditors rested on a rejection of the proposition that the Banks made loans to the plaintiffs: Reasons, [56]-[58]. The matters the primary judge relied upon at [58] – the nature of the back-to-back arrangements, their apparent concealment, and their apparent purpose (i.e. to evade tax) – do not provide a basis for that inference, in circumstances where there was no allegation, or finding at the level of a prima facie case, that the loans were a sham or were not made.
77 We do not accept these submissions. Central to these submissions is the proposition that a premise of the plaintiffs’ case in the proceeding (and the judgment of the primary judge) is that the Banks made loans to the plaintiffs. However, this is not an accurate description of the way that the plaintiffs’ case is put. Rather, as is apparent from the statement of claim generally, the plaintiffs put in issue whether transactions were in fact loans: see, eg, the statement of claim at [28.2], [28.3], [28.4] and [28.5]. Accordingly, the statements of the primary judge at [56]-[58] of the Reasons were consistent with the way in which the plaintiffs’ case is put. Further, no error is shown in the primary judge’s conclusion, at [59], that there is sufficient material from which it may be inferred that the aim of the actions of Emil Binetter and Gary Binetter “was to denude Advance and Civic of moneys in June 2005 by remitting them to the Banks in purported repayment of loans”. As the primary judge said, this “necessarily had the intended consequence that Advance and Civic would not have those funds with which to meet an obligation to a prospective creditor, the DCT, to meet their taxation liabilities”. Given the existence of the offshore deposits and the back-to-back arrangements, it is open to infer that the payments in June 2005 were not simply repayments of loans.
78 The Banks’ fourth submission is as follows:
(a) There is no basis, at the level of a prima facie case, for inferring that there was any intention on the part of the plaintiffs to defraud the only creditor of theirs to which the primary judge referred – the DCT (said to have been a prospective creditor). The plaintiffs did not allege that the loans were part of any scheme to avoid or evade tax otherwise payable by the plaintiffs. Nor is it obvious that such an allegation could be made. An advance of money between two separate entities (even if backed by a security), would ordinarily give rise to allowable deductions on payments of interest on that advance – at least where the advance is not a gift or a contribution of capital. At any rate the matter need not be explored because the allegation was never made. The allegation in the present case is that the purpose of the alleged schemes was to enable the primary customer (i.e. the person making the offshore deposit) to evade or avoid paying tax on the offshore income. Indeed, it is expressly alleged that the purpose of the schemes was to assist persons other than the plaintiffs to evade Australian tax.
(b) In these circumstances, there is no apparent basis why, when the loans were repaid in 2005, the plaintiffs’ guiding minds should have supposed that the plaintiffs had any liability to the DCT, or would have such a liability in the future. No such basis appears to be advanced in the pleading. The closest the pleading comes is to observe that involving the plaintiffs in such a scheme exposed them to a risk that the ATO would audit them and issue an assessment which disallowed the overseas interest expense; but no hint is given as to why the plaintiffs’ guiding minds should have believed the ATO was entitled to do this.
79 We do not accept these submissions. In our view no error is shown in the primary judge’s conclusions as to the inferences that were open on the material. We refer, in particular, to the documents discussed above in the context of the Corporations Act claim.
80 For these reasons, proposed appeal grounds 1 and 2 do not provide a sufficient basis upon which to grant leave to appeal.
Proposed appeal grounds 3 and 4
81 The Banks challenge the primary judge’s conclusions in relation to s 37A(3) of the Conveyancing Act. The Banks’ submissions can be summarised as follows:
(a) Properly construed, subsection (3) limits the scope of s 37A, rather than offering an available defence to the consequences that would otherwise flow if subsection (1) applies: cf Vines v Djordjevitch (1955) 91 CLR 512 at 519. As such, it was necessary for the plaintiffs to demonstrate a prima facie case that the Banks lacked good faith.
(b) The issue was considered in Wentworth v Rogers at [64]-[68], with the Court indicating that the onus would lie on the person asserting that s 37A(3) applies. That indication was strictly obiter, because the Court of Appeal found that the trial judge was justified in declining to find that the transaction was entered into by the transferor with intent to defraud creditors, so the consideration of the operation of s 37A(3) was unnecessary.
(c) There are conflicting first instance authorities. The following cases support the view that the onus is on the party bringing the claim under s 37A: Huynh v Helleh Holdings Pty Ltd (2001) 10 BPR 19,333; [2001] NSWSC 1162 at [18] and [28]; Lym International Pty Ltd v Chen [2009] NSWSC 98 at [156] (which was overturned by the Court of Appeal, but restored by the High Court without any negative comment in this regard); and Kang v Kwan (2002) 11 BPR 20,623; [2002] NSWSC 1187 at [192]. A contrary approach has been taken in other first instance decisions: B v U [2012] NSWSC 1416 at [11]-[12]; Bechara v Haratsaris [2013] NSWSC 577 at [32]; Royal v El Ali at [217]; and Commissioner of Taxation v Oswal (No 6) at [115]. The High Court did not resolve the issue in Marcolongo v Chen (2011) 242 CLR 546: see [24]-[25]; cf [12].
(d) The approach applied in Huynh and Lym was correct and the primary judge erred in not so holding. First, this construction is consistent with the approach taken to the application of the Elizabethan Statute (effectively the predecessor to s 37A) by the Full Court of the Supreme Court of Victoria in Michael v Thompson (1894) 20 VLR 548 at 552-553. Secondly, the language utilised in s 37A(3) is consistent with that approach. Indeed, a similarly worded subsection was recently interpreted by the High Court as providing a condition to the operation of the section (which must be proven by the plaintiff), rather than an exception to it (which must be proven by the person relying upon it): see Australian Securities and Investments Commission v Lewski (2018) 362 ALR 286 at [86]-[87], in relation to s 208(3) of the Corporations Act.
(e) Although the primary judge did not find that a prima facie case had been established that the Banks lacked good faith for the purpose of s 37A(3), his Honour indicated that he would have so concluded if it was necessary to do so (Reasons, [64]). The primary judge’s reasoning in this respect was by reference to his reasons concerning the allegations that the Banks were involved in breaches of directors’ duties (at [82]-[83]), but those paragraphs are devoid of any reasoning as to how the Banks were on notice, on a prima facie basis, of the relevant fraudulent intention for the purpose of s 37A – in particular, the possibility that the payments were made to enable the plaintiffs to delay, hinder or otherwise defraud the DCT.
82 It is unnecessary to resolve the issue of where the onus lies for the purposes of s 37A(3) of the Conveyancing Act. As acknowledged in the Banks’ submissions, the primary judge indicated that, if it were necessary to do so, he would have concluded that a prima facie case was established as to a want of good faith by the Banks for the purposes of s 37A(3) (Reasons, [64]). The primary judge referred in support of this conclusion to [82] and [83] of the Reasons, which relate to the Corporations Act claim. For the reasons we have given above, we consider that the primary judge’s conclusions in those paragraphs were correct. Further, on the basis of the material to which we were taken during the appeal hearing, it is open to infer that the Banks were on notice of the relevant fraudulent intent for the purposes of s 37A. We refer, in particular, to the documents discussed above in the context of the Corporations Act claim. Among other documents, the statutory declaration of Gary Binetter (CRI 68) may support an inference that the Banks were on notice at the relevant times of the relevant fraudulent intent for the purposes of s 37A.
83 For these reasons, proposed appeal grounds 3 and 4 do not provide a sufficient basis upon which to grant leave to appeal.
Conclusion
84 The application for leave to appeal is to be dismissed. There is no apparent reason why costs should not follow the event. Accordingly, there will also be an order that the Banks pay the plaintiffs’ costs.
I certify that the preceding eighty-four (84) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Yates, Beach and Moshinsky. |
Associate:
