FEDERAL COURT OF AUSTRALIA
Deputy Commissioner of Taxation; in the matter of James Hardie Australia Finance Pty Ltd (Deregistered) [2008] FCA 1181
Corporations Act 2001 (Cth) ss 509, 601AD(1), 601AH
Taxation Administration Act 1953 (Cth) Sch 1 s 260-45
Australian Competition and Consumer Commission v Australian Securities and Investments Commission [2000] NSWSC 316;(2000) 174 ALR 688 referred to
JP Morgan Portfolio Services Ltd v Deloitte Touche Tohmatsu [2008] FCA 433; (2008) 167 FCR 212 approved
Pacanowski v Australian Securities Commission (1995) 57 FCR 173 referred to
Re Proserpine Pty Ltd and the Companies Act [1980] 1 NSWLR 745 referred to
Re Steelmaster Pty Ltd (in liq) (1992) 6 ACSR 494 referred to
DEPUTY COMMISSIONER OF TAXATION v
JAMES HARDIE AUSTRALIA FINANCE PTY LTD (DEREGISTERED)
NSD 901 of 2008
LINDGREN J
8 august 2008
SYDNEY
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IN THE FEDERAL COURT OF AUSTRALIA |
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NEW SOUTH WALES DISTRICT REGISTRY |
NSD 901 of 2008 |
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DEPUTY COMMISSIONER OF TAXATION Plaintiff
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LINDGREN J |
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DATE OF ORDER: |
8 AUGUST 2008 |
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WHERE MADE: |
SYDNEY |
THE COURT ORDERS THAT:
1. The title of the proceeding be amended by omitting the name of James Hardie Australia Finance Pty Ltd (ACN 089 600 760) (Deregistered) as defendant.
2. The Australian Securities and Investments Commission reinstate the registration of James Hardie Australia Finance Pty Ltd (ACN 089 600 760) (Deregistered).
3. Max Christopher Donnelly of Ferrier Hodgson be liquidator of James Hardie Australia Finance Pty Ltd (ACN 089 600 760).
4. The plaintiff have liberty to apply at any time within two months from today’s date for an order that James Hardie Australia Finance Pty Ltd (ACN 089 600 760) pay the costs of this proceeding.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
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IN THE FEDERAL COURT OF AUSTRALIA |
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NEW SOUTH WALES DISTRICT REGISTRY |
NSD 901 of 2008 |
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DEPUTY COMMISSIONER OF TAXATION Plaintiff
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JUDGE: |
LINDGREN J |
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DATE: |
8 AUGUST 2008 |
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PLACE: |
SYDNEY |
REASONS FOR JUDGMENT
Introduction
1 The plaintiff (I will use the term "Commissioner" to refer generically to the Commissioner and to the Deputy Commissioner of Taxation, but will also sometimes refer to the “ATO” (Australian Taxation Office)) applies under s 601AH of the Corporations Act 2001 (Cth) (Corporations Act) for an order reinstating the registration of James Hardie Australia Finance Pty Ltd (ACN 089 600 760) (Deregistered) (JHAF), and for an order that Max Christopher Donnelly of Ferrier Hodgson replace the former liquidator, John Duncan Green, as liquidator of JHAF. The originating process was filed on 18 June 2008.
2 The Commissioner's application was supported by an affidavit of Kevin William O'Farrell, made on 23 April 2008, and other affidavits. Mr O'Farrell is employed by the ATO as a Tax Technical Leader, National Client Group, in the Large Business & International Business Line. In his affidavit, Mr O'Farrell makes reference to various records and documents obtained by the Commissioner.
3 The originating process named JHAF as a defendant. In my opinion, it should not have done so because upon deregistration JHAF ceased to exist: see s 601AD(1) of the Corporations Act. I have ordered that the title of the proceeding be amended by deleting the name of JHAF as defendant. The former shareholders, directors, secretary and liquidator of a deregistered company are a different matter, and their position is considered below.
4 The Australian Securities and Investments Commission (ASIC) has been served and has indicated that subject to certain conditions it does not wish to be heard in opposition to the application. In so far as those conditions could be satisfied by now, they have been satisfied.
5 JHAF was the subject of a members’ voluntary winding up pursuant to a special resolution passed on 16 September 2003. Mr Green was appointed liquidator on that date and he remained liquidator until 17 May 2005, which was the date of the final meeting of members convened by Mr Green pursuant to s 509 of the Corporations Act.
6 Section 509(5) of the Corporations Act provided that ASIC must deregister a company at the end of a period three months after the liquidator lodges with ASIC a return of the holding of the final meeting. Mr Green filed that return on 23 May 2005. ASIC deregistered JHAF on 23 August 2005. As noted earlier, upon deregistration JHAF ceased to exist. Clearly, Mr Green is no longer in office as its liquidator. It is therefore not quite appropriate to speak of his being “replaced”. Although I reached this view before becoming aware of Stone J’s decision in JP Morgan Portfolio Services Ltd v Deloitte Touche Tohmatsu [2008] FCA 433; (2008) 167 FCR 212, I note that it is totally in conformity with her Honour’s.
7 Section 601AH(5) provides expressly that upon a reinstatement, a person who was a director immediately before the reinstatement “becomes a director again as from the time when ASIC or the Court reinstates the company”. The existence of this provision suggests, first, that in the absence of such a provision persons in office at the time of deregistration are not automatically reinstated, and, second, that all that is at issue is whether a person should be appointed to an office as from the time of the reinstatement.
8 Mr Green, who has been served, consents to such orders as the Court may make save as to costs, and does not wish to be heard on the application.
9 At the time of the deregistration, the directors of JHAF were Phillip Graham Morley and Alan Thornton Kneeshaw. Mr Kneeshaw subsequently died on 10 January 2008. Henry Davis York (HDY) accepted service on behalf of Mr Morley, and advised that their client’s intention was not to appear or to seek to be heard on the present application.
10 At the time of the deregistration, the secretaries of JHAF were Mr Kneeshaw and Joanne Marchione. Mallesons Stephen Jaques (Mallesons) accepted service on behalf of Ms Marchione. At the time of the deregistration, the immediate holding company of JHAF was James Hardie International Finance BV (JHIFBV) and the ultimate holding company of JHAF and JHIFBV was James Hardie Industries NV (JHINV). JHIFBV and JHINV were both incorporated in the Netherlands. As will be seen later, JHIFBV became the sole shareholder in JHAF in place of another Netherlands company and JHINV subsidiary, James Hardie Finance BV (JHFBV), as a result of one of the events which the Commissioner wishes to have investigated by a liquidator.
11 Mallesons acts for JHIFBV. By letter dated 16 July 2008, Mallesons advised the ATO that JHIFBV did not consent to the Commissioner’s application, and asked that their letter be drawn to the Court’s attention. In that letter they asserted, with detailed particulars: (1) that the Commissioner had known of the deregistration at an earlier time than that referred to in the affidavits served on them; and (2) that if JHAF’s registration were to be reinstated there would be substantial prejudice to JHAF and, potentially, to others. I will refer to these two matters further below.
12 No person sought to be joined as a defendant and upon the proceeding being called on for hearing, no person apart from the Commissioner appeared.
Consideration
1. Section 601AH: is the Commissioner a person aggrieved by the deregistration of JHAF?
13 An application under s 601AH for reinstatement of the registration of a company may be made by “a person aggrieved by the deregistration”. According to s 601AH(2)(b), it is a condition of the enlivening of the Court’s power to order reinstatement that the Court be “satisfied that it is just that the company’s registration be reinstated”. The Court has a residual discretion whether to make an order. These three matters will need to be considered.
14 It has been said that the expression “a person aggrieved by the deregistration” should not be narrowly construed: see Re Proserpine Pty Ltd and the Companies Act [1980] 1 NSWLR 745 at 749 [15]; Pacanowski v Australian Securities Commission (1995) 57 FCR 173 at 175. It does not matter that the person’s interest in the decision to deregister arose after the deregistration: Proserpine at 749 [15].
15 The Commissioner is charged with the responsibility of administering, relevantly, the Income Tax Assessment Act 1936 (Cth) (ITAA 1936). The Commissioner wishes to make a determination under s 177F of the ITAA 1936, and, consequentially, to make an amended assessment of the amount of JHAF’s taxable income and of the tax payable on it under ss 166 and 170 of that Act in respect of the year ended 31 March 2002. The Commissioner wishes to do so as a result of his investigation consequent upon his receipt of information from an overseas regulatory authority. The Commissioner considers that he may not be in a position to act as proposed while JHAF is deregistered. I agree that he cannot do so because, as noted earlier, upon deregistration of a company it ceases to exist.
16 In my view, the facts recounted above show that the Commissioner is a person aggrieved by the deregistration of JHAF and has standing to apply for reinstatement of its registration. The public responsibilities of the Commissioner can be compared with those of the Australian Competition and Consumer Commission, which was acknowledged to have standing to apply for a reinstatement under s 601AH in Australian Competition and Consumer Commission v Australian Securities and Investments Commission [2000] NSWSC 316;(2000) 174 ALR 688.
2. Section 601AH: is it “just” that the registration of JHAF be reinstated?
The history of JHAF and the three transactions into which it entered
17 JHAF reduced its capital and paid a dividend in late 2001 and made a second reduction of its capital in 2003. These three transactions, most significantly the first two in 2001, involved a denuding of the company of its assets. The Commissioner wishes to have all three investigated by a liquidator with a view to the possible replenishment of JHAF’s coffers to enable it to pay tax.
18 JHAF was incorporated by registration on 17 September 1999. One share in its capital was issued to its parent company upon incorporation and a further 742,611 shares were issued to its parent on 23 February 2000. All 742,612 shares were of $1,000 each and were issued as having been fully paid in cash. The immediate parent company which held all of the shares was JHFBV, to which I referred at [10] above.
19 As at 31 March 2000 (JHAF’s financial year ended on 31 March), JHAF had a total shareholders’ equity of $743,682,000 and as at 31 March 2001, a total shareholders’ equity of $740,709,000.
20 On 1 and 2 November 2001, a related series of steps were taken.
21 The first of the three transactions of particular present interest was a reduction of share capital. The resolution was that the issued capital of JHAF be reduced without the cancellation of any shares by the payment of $735,000,227 (or $989.75 per share) to its shareholder, JHFBV, on the date of the passing of the resolution. The directors resolved upon the reduction on 1 November 2001 and shareholder approval was given by resolution passed by JHFBV on 2 November 2001. After the reduction, JHAF was left with a paid up share capital of $7,609,773.
22 At the directors’ meeting on 1 November 2001, it was also resolved that JHAF pay an unfranked dividend of $316,500,000 on 2 November 2001, and that payment be effected by the issue of a promissory note.
23 Financial records of JHAF confirm that a dividend of $316,500,000 was paid at some time in the year ended 31 March 2002. Those records also show that JHAF received a dividend of $346,269,149 at some time in that year.
24 A file memorandum made by Stephen Harman of James Hardie Inc (of the USA) dated 7 November 2001 asserts that on 2 November 2001, JHAF paid a dividend and made a capital return to its then parent, JHFBV. The memorandum states that on 2 November 2001, JHAF paid a dividend of $316,500,000 and reduced its share capital without cancellation of shares by a payment of $735,000,227 or $989.75 per share, to JHFBV. In other words, on 2 November 2001 JHAF paid a total of $1,051,500,227 to JHFBV.
25 According to the same memorandum, on 2 November 2001 JHFBV “contribute[d]” all of its assets and liabilities to JHIFBV. Shares which JHFBV already held in JHIFBV were excepted. The consideration was stated by Mr Harman in his file memorandum to have been “US $632,710,000, as described in description of contribution in kind attached to share deed”.
26 As a result of the transfer, JHIFBV became the sole shareholder in JHAF, in place of JHFBV. So it was that JHIFBV was the sole shareholder at the time of the deregistration of JHAF on 23 August 2005.
27 The financial statements of JHIFBV for the year ended 31 March 2002 show that JHIFBV was a wholly owned subsidiary of JHFBV, and that the ultimate parent company of both was JHINV. The statements claim that on 1 November 2001, JHAF “transferred all its assets and liabilities" to JHIFBV, and that “[c]onsequently on 02 November, 2001 [JHFBV] contributed all its assets and liabilities to [JHIFBV], the consideration being the issue of 10,000 shares”.
28 The statement that on November 1 JHAF transferred its assets to JHIFBV is difficult to reconcile with other evidence. The evidence to which I referred at [24] above, was that the return of capital and payment of the unfranked dividend totalling $1,051,500,227 were in favour of JHAF’s then sole shareholder, JHFBV, not JHIFBV.
29 According to the same financial statements, in November 2001 due to the transfer of assets and liabilities from JHFBV, JHIFBV acquired 100% of the shares in JHAF “which was equal to USD 5,000 at historical costs”. The statements indicate that “the net asset value as per March 31, 2002 is USD 4,359, therefore a provision of USD 641 occurred”.
30 Mr O’Farrell’s affidavit shows that the Commissioner conducts comprehensive reviews of corporate groups in order to develop an understanding of a taxpayer’s business operations, and to identify and assess potential taxation risks. This process is known as a “Client Risk Review” (CRR). By a letter dated 19 May 2002, the Commissioner advised the James Hardie Group that he was commencing a CRR in relation to it for the income year ended 31 March 2002.
31 On 1 April 2003, the ATO wrote to the James Hardie Industries Group requesting information on certain transactions, including some involving JHAF. There followed correspondence between the ATO and the James Hardie Industries Group. By letter dated 28 August 2003, the ATO advised that the CRR process had been completed and that certain taxation risks had been identified which might be the subject of further action.
32 In September 2003, the third transaction (and the second reduction of capital) to which I referred took place. On 15 September 2003, the members of JHAF resolved that its issued share capital be reduced without the cancellation of shares by the payment of $7,608,773 or $10.24596 per share. It willbe recalled that by now the sole shareholder of JHAF was JHIFBV. The result of the reduction was that the share capital of JHAF was reduced to $1,000.
33 The financial statements of JHIFBV for the year ended 31 March 2004 stated that “[a]t 15 September 2003”, JHAF had been put into voluntary liquidation. As noted at [35] below, that date seems to be wrong. The further statement was made that the “liquidation proceeds” totalled USD 5,514,742, of which USD 4,901,612 had been applied as a capital return to the shareholder, and USD 552,397 had been paid out as an unfranked interim dividend. It was also stated that USD 33,000 was outstanding on loans and USD 28,650 was outstanding on current accounts between JHAF and JHIFBV.
34 A “Notification of Resolution” filed by JHAF with ASIC on 16 September 2003 shows that on 16 September 2003, the members of JHAF (no doubt a reference to JHIFBV) resolved by special resolution that JHAF be wound up voluntarily and by ordinary resolution that Mr Green, having consented to act as liquidator, be appointed liquidator.
35 The sequence seems to be, therefore, that the special resolution for the second reduction of share capital was passed on 15 September 2003, and the resolution for the winding up was passed on the following day, 16 September 2003.
36 On 11 November 2003, the Commissioner wrote a letter to Don Salter of James Hardie Industries Ltd in Sydney advising that an audit would be conducted in relation to the particular risks that had been identified in the ATO’s letter of 28 August 2003. The James Hardie Industries Group responded on 27 February 2004.
37 According to Mr O’Farrell’s affidavit, on the basis of information provided by the James Hardie Industries Group:
· the Commissioner was unable to identify any basis on which JHAF might have an undisclosed tax liability for the year ended 31 March 2002; and
· the audit team concentrated on investigating other issues from the 2002 audit and issues in relation to another ongoing audit of the James Hardie Industries Group for the income years ended 31 March 1999 to 31 March 2001.
38 On 23 May 2005, Mr Green filed with ASIC a notice that he had convened the final meeting of members and creditors of JHAF on 17 May 2005 and that no quorum had been present. According to his account of the winding up dated 12 April 2005, Mr Green had received no creditors’ claims against JHAF, and JHAF’s assets had been distributed to its shareholders “in accordance with the resolution passed at the meeting on 19 September 2003”. This is a further error. The special resolution for winding up of 16 September 2003 had referred to the division of JHAF’s assets among its members, but the evidence does not disclose any resolution passed on 19 September 2003. Indeed, by that date the company was in liquidation. Mr Green’s report also stated that the declaration of solvency had disclosed assets with an estimated realisable value of $1,000.
39 On 3 June 2005, by way of what Mr O’Farrell describes as a “spontaneous exchange of information" from the United States Internal Revenue Service (IRS) to the ATO, the audit team was made aware of the existence of certain documents that pertained to a cross-border master repurchase agreement or “REPO arrangement” involving James Hardie entities in the United States, Holland and Australia, including JHAF. The audit team in the ATO sought particular documents from the IRS and on 8 February 2006 received further information from the IRS in relation to the REPO arrangement.
40 Mr O’Farrell states that following the receipt of the information from the United States and the analysis of it by the audit team, the ATO formed the view that the transactions being investigated occurred as a result of the REPO arrangement. Mr O’Farrell states that the James Hardie Industries Group had not advised the ATO of this fact. On 25 August 2006, the ATO sent the first of several letters to the James Hardie Industries Group requesting further information about the REPO arrangement.
41 There was a course of correspondence and meetings between the ATO and the James Hardie Industries Group extending to September 2007.
42 According to Mr O’Farrell’s affidavit, by September 2007 the ATO formed the view that Part IVA of the ITAA 1936 might apply to the REPO arrangement, and that accordingly JHAF had a potential liability for income tax for the year ended 31 March 2002.
43 On 12 September 2007 the ATO wrote to Sarah Carter of the James Hardie Industries Group enclosing a summary statement of its understanding of factual matters touching the REPO arrangement in order to facilitate discussion with James Hardie officers at a meeting that was scheduled to occur on 25 September 2007. The letter asked that Ms Carter advise the ATO of any errors in the summary.
44 On 21 September 2007, Ms Carter replied, noting that the ATO had previously been requested to provide details of any tax benefits the ATO believed may have arisen in relation to the transactions comprising the REPO arrangement, but the details had never been provided. Ms Carter requested that the meeting scheduled for 25 September 2007 be postponed until the ATO identified “the potentially liable entity” and, if that was one of the deregistered entities, until the implications of the deregistration were considered.
45 A company search conducted by the Commissioner in relation to JHFBV reveals that JHFBV was deregistered on 31 October 2004 and, prior to going into liquidation, James Hardie NV was its sole shareholder. A company search in relation to JHIFBV reveals that JHIFBV is a wholly owned subsidiary of James Hardie International Holdings BV, and the sole shareholder of James Hardie International Holdings BV is JHINV.
The proposed amended assessment
46 Mr O’Farrell’s affidavit provides evidence that the auditors have completed their investigations into the REPO arrangement and that an assessment is expected to be made and a notice issued to JHAF that will include:
· JHAF's taxable income for the income year ended 31 March 2002 in the sum of $338,382,221;
· the amount of tax payable (the tax shortfall) on that taxable income in the sum of $101,514,666;
· an estimate of the “General Interest Charge/Shortfall Interest Charge” on the tax shortfall (calculated from 1 September 2002 to 30 June 2008) in the sum of $87,726,176; and
· penalty tax of $50,757,333 being 50% of the tax shortfall in accordance with s 226 of the ITAA 1936.
Mark Warren Beacom, who is employed by the ATO as a Tax Technical Leader, National Client Group, in the Large Business & International Business Line, estimates that the tax and shortfall penalties (but excluding shortfall interest) would exceed $150,000,000.
47 According to Mr O’Farrell’s affidavit, the Deputy Chief Tax Counsel examining the REPO arrangement has advised the audit team that Part IVA applies. Mr O’Farrell states that the Commissioner has completed his internal processes relating to the application of Part IVA. Mr O'Farrell states that it is believed that a determination should be made on the basis that a “tax benefit” has been obtained pursuant to a “scheme” within the meaning of Part IVA, and that an assessment should be issued to JHAF once the Part IVA determination is made.
48 The evidentiary position is clarified by an affidavit of Mr Beacom, who has the authority to make determinations under Part IVA and to cause assessments to issue. Mr Beacom states that he has decided to make the determination and issue the amended assessment to JHAF.
49 There is in evidence a draft of the proposed determination. It refers to a “tax benefit” of $346,271,148. Mr Beacom states that the only reason he has deferred acting is uncertainty on his part as to whether he can make a determination while JHAF is deregistered. As I indicated earlier, his uncertainty is well founded – in my view the Commissioner cannot determine that an amount be included in the assessable income of a taxpayer that has gone out of existence under s 177F of the ITAA 1936.
50 Mr Beacom states that in accordance with the usual business practice of the ATO, a notice of assessment would issue to JHAF within about three weeks of the making of the determination.
Matters the FCT wishes a liquidator to investigate
51 Mr O’Farrell’s affidavit shows that the Commissioner wishes a liquidator to investigate the circumstances in which each of the capital reductions referred to above took place in order to ascertain whether there is a liability on the part of JHAF’s shareholder or directors at the time that would lead to an amount being recovered for the benefit of creditors. Mr O’Farrell has spoken to an officer in the Strategic Recovery Advice section of the ATO in relation to the possible funding of a liquidator and has been advised that the Commissioner is prepared to consider favourably the funding of a liquidator, subject to the liquidator’s views and “the amounts involved”.
The first matter that Mallesons desires to have drawn to the Court’s attention
52 It will be recalled that Mallesons acts for JHIFBV, the parent company of JHAF (and for Ms Marchione, the secretary of JHAF). Although JHIFBV did not apply to become a party to the present application, on 16 July 2008 Mallesons wrote to the Australian Government Solicitor on behalf of JHIFBV, requesting that the Commissioner draw the following two matters to the Court's attention: (1) that (according to Mallesons’ letter) the ATO knew of the deregistration of JHAF much earlier than appeared from the affidavit evidence served; and (2) that there would be substantial prejudice to JHAF and, potentially, to others, arising from a reinstatement of its registration.
53 Regarding the ATO's knowledge of the deregistration, Mallesons' letter makes several observations. Mallesons states that the ATO "appears to assert" that it first learned of the deregistration on 21 September 2007 from Ms Carter. Mallesons states, however, that "this is clearly not correct". Mallesons draws attention to a form that was submitted to the ATO as early as 17 January 2006 signed by Mr Kneeshaw, advising that JHAF should be removed from the tax consolidated group as of 23 August 2005, on the basis that JHAF had been deregistered. By a letter dated 30 January 2006, the ATO acknowledged receipt of that notification and confirmed the change to the tax consolidated group without raising any concern over the deregistration. Mallesons points out that documents in the exhibit to Mr O’Farrell’s affidavit show that an ATO officer created a diary note even earlier on 27 June 2005, recording that the liquidation of JHAF was finalised on 17 May 2005.
54 Mallesons concludes that the ATO knew at least from January 2006 (20 months earlier than alleged), if not earlier, that JHAF had been deregistered on 23 August 2005, and did not, so far as Mallesons is aware, object. According to Mallesons’ letter, the ATO also knew of the finalisation of the liquidation as early as 27 June 2005 – three years ago – and must have known that ASIC would automatically deregister the company.
55 Mallesons refers to other circumstances which they say support their contention of delay on the part of the Commissioner. For example, Mr Green as liquidator of JHAF called for proofs of debt from creditors on 24 January 2004, yet the Commissioner did not lodge any proof of debt.
56 Mallesons asserts that the Commissioner failed in his obligation under s 260-45(3) in Schedule 1 of the Taxation Administration Act 1953 (Cth) (TA Act) to notify Mr Green of the amount that he considered enough to discharge any outstanding tax liability “as soon as practicable”. Mallesons states that "[t]here is no explanation offered for this delay of almost 5 years".
57 Mallesons points out that Mr Green as liquidator gave notice of the final meeting of JHAF pursuant to s 509 of the Corporations Act, and no explanation has been given for the ATO’s failure to respond.
58 There are other circumstances mentioned in Mallesons’ letter which I need not recount in detail.
59 The answer made on behalf of the Commissioner is that it was not until he received information from the IRS in 2005 and 2006 that he became aware of the possibility of making a determination under Part IVA of the ITAA 1936. Moreover, he submits, the Commissioner has not yet become a creditor and will not do so until the Part IVA determination is made and the amended assessment is issued.
60 Ultimately, I am not persuaded by Mallesons’ delay argument. It is difficult to conclude that there has been undue delay, in view of the complexity of JHAF’s affairs. In arriving at the decision to make a s 177F determination, the Commissioner must take care to make a thorough investigation. The evidence does not reveal the detail of the investigations conducted by the ATO in relation to the REPO arrangement, and the deliberations that have taken place from early 2006 to July 2008, but I infer from the complexity involved that they have been extensive.
61 The evidence does establish that as late as September 2007, the Commissioner was corresponding with Ms Carter of the James Hardie Industries Group. It seems that communication between the ATO and the James Hardie Industries Group in relation to the REPO arrangement then came to a halt.
62 After making all due allowances, I infer that there has been some delay in the sense that the present proceeding could, and perhaps should, have been brought earlier, but I cannot, with confidence, quantify that delay. I am certainly not persuaded to think that it is necessarily to be equated with the entire period from early 2006 to June 2008. It may be that the present application should have been brought in late 2007 or early 2008, when communications with the James Hardie Group appear to have come to an end, but I do not see why a delay from then to 18 June 2008, when the originating process was filed, should deprive the Commissioner of the remedy he seeks.
63 In the circumstances referred to above, I am not persuaded to conclude that there has been disqualifying delay.
The second matter that Mallesons desires to have drawn to the Court’s attention
64 The second contention made by Mallesons in its letter is related to the first. It is that if JHAF’s registration is reinstated, the delay referred to above will cause JHAF substantial prejudice and will, potentially, cause others substantial prejudice too. Mallesons argues that the course which the Commissioner proposes to follow would "result in unfairness to JHAF and a serious failure of due process". Mallesons contends that on the evidence, the Commissioner proposes, immediately and without giving JHAF an opportunity to be heard, to make a determination under Part IVA and to issue an amended assessment. Mallesons correctly points out that a notice of the amended assessment will be conclusive evidence of the due making of the assessment, subject to any review or appeal under Part IVC of the TA Act: see s 177 of the ITAA 1936.
65 Mallesons also complains that any disadvantage to JHAF is compounded because the ATO does not propose to provide funding to the liquidator to enable him to consider the question of whether a determination under s 177F of the ITAA 1936 has any foundation. Mallesons also refers to the 60 day time limit for the lodging of an objection by JHAF to an assessment: see s 14ZW of the TA Act.
66 Mallesons asserts that the ATO usually follows a different procedure to that proposed in the present case. I do not know if this is true.
67 Mallesons does not submit that the Commissioner is obliged to accord a reregistered JHAF an opportunity to be heard before making a determination under Pt IVA. Mallesons’ argument is that the absence of a further opportunity to be heard emphasises the harm with which JHAF is now threatened.
68 It is not clear on the evidence that the ATO will not allow a reregistered JHAF an opportunity to be heard. But even if it does not propose to do so, it will be possible for JHAF to challenge the amended assessment in review or appeal proceedings. Moreover, there is the possibility of an extension of the 60 day time limit: see s 14ZX(4) of the TA Act.
69 I am not persuaded by this ground either to decline to reinstate registration.
The question of the clearance certificate
70 The evidence related to this question is extensive.
71 Mr Green, as liquidator, was subject to an obligation imposed by s 260-45 in Schedule 1 to the TA Act. The effect of that section is that a liquidator must not, without the Commissioner's permission, part with any of the company's assets before receiving a “tax clearance certificate” from the Commissioner. The facts in relation to the liquidator's failure to obtain a tax clearance certificate are established by the affidavit of Mr O'Farrell. He deposes to the following facts as revealed by ATO records which he identifies.
· On 26 September 2001, an operator in the “Debt Collections” area of the ATO noted that the LB&I (Large Business & International) area in the ATO had contacted “Debt Collections” to ask if any request had been received from JHAF or its parent company for a tax clearance. The note concluded, “[i]t is very important that no insolvency tax clearance be granted … without prior contact with LBI”.
· On 8 January 2004, an operator in the “Insolvencies” area noted correspondence dated 2 December 2003, advising that Mr Green had been appointed liquidator of JHAF on 22 May 2003 (the date was wrong), and that he was seeking a s 260 clearance.
· On 12 January 2004, an operator in Insolvencies noted that Greg Dick (Gregory Craig Dickson, of LB&I, who made an affidavit in the proceeding) had telephoned advising that no clearance was to be issued, and that LB&I needed to be contacted if there were any further requests from the liquidator.
· On 2 February 2004, an operator in Insolvencies recorded that Mr Dick had advised that no clearance was to issue “as the James Hardie Group [is] currently undertaking a large business audit and significant revenue risks are perceived”. The operator recorded that the liquidator had asked for a clearance.
· On 2 February 2004, an operator in Insolvencies noted that a second request for a tax clearance had been received from Mr Green dated 20 January 2004, the request had been referred to Mr Dick, and Insolvencies was awaiting a response from Mr Dick.
· On 20 July 2005, an operator in the “Audit” area noted that the James Hardie Group was being audited and that JHAF "has particular interest for the audit". The operator noted that if there was a request for a clearance, it should not be given until the audit was completed
· On 2 December 2003, Mr Green wrote to the ATO advising, relevantly, that JHAF had been placed into members’ voluntary liquidation at an extraordinary general meeting held on 22 May 2003, and that he (Mr Green) was appointed liquidator. Mr Green asserted that JHAF’s income tax return for the year ended 30 September 2002 had been recently lodged and that no tax was payable. He therefore sought a clearance pursuant to s 260-45(4) of the TA Act to enable the winding up and distribution of the property of JHAF to be completed.
· Not having received a response, Mr Green again wrote to the ATO on 20 January 2004 seeking a clearance certificate.
· On 2 February 2004, the ATO wrote to Mr Green advising that a proof of debt might be lodged when the Business Activity Statement (BAS) for the October to December 2003 period was lodged. The letter added that a tax clearance pursuant to s 260-45(4) of the TA Act could not be issued until the BAS was lodged.
· On 19 March 2004, the ATO wrote to Mr Green in relation to his request for a tax clearance in respect of, inter alia, “James Hardie Australia Pty Ltd”, advising that the ATO could not provide the tax clearance at that time. It seems clear that this was a misnomer for JHAF, since
o James Hardie Australia Pty Ltd was not in liquidation;
o the other three companies mentioned in the ATO’s letter were all companies of which Mr Green had been appointed liquidator; and
o Mr Green had specifically requested a tax clearance in respect of JHAF (including by a later letter dated 6 May 2004).
· On 5 April 2004 and again on 28 September 2004, Mr Green lodged a “Presentation of Accounts and Statement by Liquidator” with ASIC, which indicated that the only cause that might delay termination of the winding up was “tax clearance”.
· On 15 April 2005, Mr Green lodged a “Presentation of Accounts and Statement by Liquidator” with ASIC, indicating that the only cause that might delay the termination of the winding up was a “final meeting”.
· On 2 February 2004, Mr Dick advised the Insolvency section within the ATO that there was to be no tax clearance granted for, relevantly, JHAF. Mr O’Farrell states in his affidavit that given that there is no record of Mr Dick’s having authorised a tax clearance for JHAF, he believes that Mr Dick did not subsequently authorise one. Mr Dick’s own affidavit confirms that Mr Dick gave instructions that no tax clearance was to be given for JHAF.
· On 29 November 2007, the ATO wrote to Mr Green enclosing a notice under para 264(1)(b) of the ITAA 1936 requiring production of documents relating to any application for a tax clearance certificate under s 260-45 of the TA Act in relation to JHAF and any document relating to a grant or refusal of such a certificate. Mr O’Farrell states that no such document has been produced.
72 I accept that on the evidence summarised above, in December 2003 and January 2004 Mr Green applied for a tax clearance certificate which would permit him to part with JHAF’s assets, and that none was ever issued to him.
73 The Commissioner makes this submission:
The evidence of Mr Green not having obtained a tax clearance is relevant to two points:
a. The company should never have been deregistered. If it had not been deregistered, this application for reinstatement would not have been necessary; and
b. It is appropriate to replace Mr Green with another liquidator.
74 I do not accept the Commissioner’s submission.
75 Section 509 of the Corporations Act obliged Mr Green to make up an account, convene a meeting of the company and lodge a return with ASIC. Once Mr Green performed those statutory obligations, s 509(5) obliged ASIC to deregister JHAF after the passing of a certain period of time. Section 601AD(2) of the Corporations Act had the effect that upon deregistration, JHAF’s property vested in ASIC. On the evidence, at the time of deregistration, and indeed throughout the winding up, JHAF had no property except some $1,000 or $2,000 (both figures occur in the evidence) that covered Mr Green’s fees as liquidator.
76 It is true, as the Commissioner submits, that if JHAF had not been deregistered, the present application would not have been necessary. But it was ASIC that deregistered JHAF, and ASIC did so as s 509(5) of the Corporations Act required it to do. Similarly, when Mr Green lodged his return with ASIC on 23 May 2003, he was doing what s 509 of the Corporations Act required him to do. The Commissioner does not submit that Mr Green should not have accepted appointment as liquidator in the first place, or should not have obeyed the Corporations Act.
77 In sum, the evidence and the submissions relating to tax clearance are beside the point. One can only speculate as to the reason why Mr Green sought the tax clearance certificate.
78 On the evidence before the Court, I am not persuaded that Mr Green has contravened s 260-45 in Schedule 1 to the TA Act. Nor do I think, on the evidence before the Court, that Mr Green's failure to obtain the tax clearance certificate is any reason why he should not be reappointed as liquidator.
79 This does not, however, have a material effect on the Commissioner’s case. As I see it, he wishes to make a determination and an amended assessment in an amount exceeding $150,000,000, and has set out in some detail his reasons for wishing to do so. Subject to what follows, I think that he should have the opportunity of doing so. The Commissioner wishes to have a liquidator carry out investigations in relation to potential recoveries. Mr Green does not oppose the appointment of Mr Donnelly as liquidator, and, subject to what follows, it is appropriate that he be appointed (see [89]-[92] below).
Utility or futility of any orders made by the Court
80 In Australian Competition and Consumer Commission v Australian Securities and Investments Commission [2000] NSWSC 316; (2000) 174 ALR 688, Austin J addressed the question “When should the Court be satisfied that it is just that the company’s registration be reinstated?”. His Honour said (at [27]), with reference to authorities:
The wording of the section is very broad, and the cases confirm that it gives the Court a wide discretion. The Court takes into account the circumstances in which the company came to be dissolved; whether, if the order were made, good use could be made of it; and whether any person is likely to be prejudiced by the reinstatement…
81 At [54], his Honour observed that the reported cases establish that the Court will not make an order which is futile, as where the reinstated company would be left without the funding necessary to permit the liquidator to do any work. His Honour noted that in Re Steelmaster Pty Ltd (in liq) (1992) 6 ACSR 494,the Court made an order, albeit by consent, for the applicant for reinstatement to pay the costs and disbursements of the liquidator incurred as a result of the reinstatement, including the costs of any further proceedings under s 509 of the Corporations Law.
82 The payments by way of return of capital and interim dividend of November 2001 were made to JHFBV, a corporation that no longer exists. The second return of capital, that of September 2003, was to JHIFBV, a company which, so far as the evidence shows, still exists. The second return of capital, however, was in a sum of only $7,608,773 – a small fraction of the amount exceeding $150,000,000 which is expected to be the amount of the tax and shortfall penalties (see [46] above).
83 The Commissioner refers to the fact that the two capital reductions divested JHAF of all of its assets, and that the second of them took place in contemplation of the winding up which was resolved upon the following day. He submits that these steps were taken in the knowledge of the Commissioner’s interest in the transactions in which JHAF had previously participated, and that “[t]here is ample room to investigate the validity of those transactions”.
84 It may be that in respect of the substantial payments by JHAF of November 2001, a liquidator of JHAF will have a right of recovery against persons or entities other than the then parent and payee, JHFBV.
85 The making of the proposed determination and amended assessment may prove fruitless. The liquidator to be appointed may advise against any attempt to recover the money that JHAF paid away. The Commissioner may decide not to fund the liquidator to that end.
86 The Commissioner should, however, have the opportunity of moving to the next stage of making the determination and amended assessment, and entering into discussions with the liquidator to be appointed.
87 In my opinion, it is appropriate to reinstate the registration of JHAF in order to allow the Commissioner to make a determination under s 177F and to make an amended assessment. Of course, it will be necessary for the Commissioner to put the liquidator in funds to consider the means of recovery. The Commissioner has indicated that he is prepared to consider funding the liquidator to that end, and submits that the appropriate course is for the level of funding to be determined between the Commissioner and the liquidator. I agree.
3. Section 601AH: how should the residual discretion of the Court be exercised?
88 There are no special considerations militating against the making of an order in addition to the matters already addressed.
Who should be appointed as liquidator?
89 The Commissioner seeks the appointment of Mr Donnelly as liquidator. Mr Donnelly has signed the required Consent of Liquidator. It should be noted that Mr Green’s task was simple and straightforward (his fees amounted to only $2,000). It is not as if Mr Green had conducted extensive investigations into the affairs of JHAF, in which case it would have to be considered whether there would be a saving in costs in appointing him. He has not been undertaking any activity as liquidator for three years.
90 Mr Green has indicated that he consents to an order appointing Mr Donnelly as liquidator, and has not himself signed a Consent of Liquidator or otherwise put himself forward for appointment.
91 On the basis referred to in the preceding two paragraphs, Mr Donnelly should be appointed.
Conclusion
92 For the reasons given above, there should be an order that ASIC reinstate the registration of JHAF and that Mr Donnelly be appointed liquidator.
93 Being non-existent, JHAF has not been heard on the question of costs. There will be an order giving the Commissioner leave to apply within two months for an order that the reinstated JHAF pay the costs of this proceeding.
94 There will be orders accordingly.
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I certify that the preceding ninety-four (94) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Lindgren. |
Associate:
Dated: 8 August 2008
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Counsel for the Plaintiff: |
Mr M Aldridge SC and Mr P Rodionoff |
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Solicitor for the Plaintiff: |
Australian Government Solicitor |
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Date of Hearing: |
22 July 2008 |
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Date of Judgment: |
8 August 2008 |
