FEDERAL COURT OF AUSTRALIA

Higgins v Hancock as Liquidator of 246 Arabella Investments Pty Ltd (in liq) [2011] FCA 1492

THE COURT ORDERS THAT:

1.    The Application be dismissed.

2.    The Applicant pay the Respondents’ costs of the Application as agreed or assessed.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

Introduction

1    The Applicant, Mr Christopher Lyndon Higgins, is a director of 246 Arabella Investments Pty Limited (In Liquidation) (“Arabella”). He seeks leave under s 511 of the Corporations Act 2001 (Cth) (“Corporations Act”) to bring an application in the name of Arabella for preliminary discovery against the Commissioner of Taxation.

2    Before I can make such an order, I need to be satisfied, inter alia, that Mr Higgins reasonably believes that Arabella may have the right to obtain relief in this Court from the Commissioner.

3    The relief which is said to form the subject matter of Mr Higgins’ belief arises out of conduct said to have been engaged in by the Commissioner. In summary, the conduct is said to be the unlawful use of documents obtained by the Australian Crime Commission and disseminated to the Commissioner who is said to have used those documents improperly to raise tax assessments against Arabella.

4    The income tax assessments increased the taxable income of Arabella in the relevant period by approximately $6 million. Arabella objected to the assessments but the Commissioner disallowed the objections. Arabella then commenced proceedings in the Administrative Appeals Tribunal (the “AAT”) for review of the Commissioner’s decision. The review proceeding in the AAT was brought by Mr Higgins in Arabella’s name pursuant to leave granted by Perram J: see HFGC Nominees (No 2) Pty Ltd v Hancock as Liquidator of 246 Arabella Investments Pty Ltd (in Liquidation) [2010] FCA 1005.

5    The conduct of the Commissioner which gave rise to Mr Higgins’ claimed belief came to light in the course of the AAT hearing. What was revealed in the hearing was that the officer of the Australian Tax Office (“ATO”) responsible for raising the assessments against Arabella had “available” to him certain documents obtained by the Australian Crime Commission pursuant to a search warrant issued in connection with an investigation now well-known as Operation Wickenby.

6    The documents in question were disseminated by the Australian Crime Commission to an officer of the ATO pursuant to s 59(7) of the Australian Crime Commission Act 2002 (Cth) (“Australian Crime Commission Act”). That sub-section permits the Australian Crime Commission to disseminate documents to the ATO in certain circumstances but the effect of s 59(7)(a) is to limit the use which the ATO may make of such documents to the criminal functions of that agency. In particular, it would seem that the ATO cannot use documents disclosed to it by the Australian Crime Commission under s 59(7) in order to make a tax assessment, or to disallow an objection made by the taxpayer.

7    The documents obtained by the Australian Crime Commission under Operation Wickenby, and which were disseminated to the ATO, were described in this application as the “s 59 documents” because they were disseminated under s 59(7)(c) of the Australian Crime Commission Act.

8    The effect of Mr Higgins’ contention is that if the ATO officer used the s 59 documents to issue the tax assessments to Arabella, he did so in breach of the requirements of s 59 which provide for a strict quarantining of such documents to the carrying out of the ATO’s criminal enforcement powers.

9    This is then said to give rise to a belief that it is likely that the assessments were affected by conscious maladministration as explained by the High Court in Federal Commissioner of Taxation v Futuris Corporation Ltd (2008) 237 CLR 146 at [25] (“Futuris”).

10    If that is so, the right to obtain relief in the Court from the Commissioner which would enliven the discretion to order preliminary discovery is said to be an entitlement to set aside the assessments by reason of jurisdictional error pursuant to s 39B of the Judiciary Act 1903 (Cth) (“Judiciary Act”).

11    Mr Higgins’ Originating Application for Leave and his Application as a Prospective Applicant for an Order for Discovery sought orders against the Commissioner and the Australian Crime Commission. However, Mr Higgins did not pursue his claims against the Australian Crime Commission and I granted leave to discontinue the proceeding against that agency on 18 November 2011.

The relevant legislation and Rules

12    Section 511(1) of the Corporations Act provides, relevantly, that a contributory may apply to the Court to exercise all or any of the powers that the Court might exercise if the company were being wound up by the Court.

13    Section 511(2) empowers the Court, if it is satisfied that the exercise of that power will be “just and beneficial”, to accede to the application on such terms and conditions as it thinks fit.

14    The power of the Court to order preliminary discovery is contained in Rule 7.23 of the Federal Court Rules 2011 (Cth). That Rule is as follows:

7.23 Discovery from prospective respondent

(1)    A prospective applicant may apply to the Court for an order under subrule (2) if the prospective applicant:

(a)    reasonably believes that he or she may have the right to obtain relief in the Court from a prospective respondent whose description has been ascertained; and

(b)    after making reasonable inquiries, does not have sufficient information to decide whether to start a proceeding in the Court to obtain that relief; and

(c)    reasonably believes that:

(i)     the prospective respondent has or is likely to have or has had or is likely to have had in the prospective respondent’s control documents directly relevant to the question whether the prospective applicant has a right to obtain the relief; and

(ii)    inspection of the documents by the prospective applicant would assist in making the decision.

(2)    If the Court is satisfied about matters mentioned in subrule (1), the Court may order the prospective respondent to give discovery to the prospective applicant of the documents of the kind mentioned in subparagraph (1) (c) (i).

15    The power of the Australian Crime Commission to disseminate documents to other Commonwealth agencies, subject to the quarantining effect on the recipient as referred to above, is found in s 59(7) of the Australian Crime Commission Act. That sub-section provides, as follows:

(7)    The CEO may give to:

(a)    any law enforcement agency; or

(b)    any foreign law enforcement agency; or

(c)    any other agency or body of the Commonwealth, a State or a Territory prescribed by the regulations;

any information that is in the ACC's possession and that is relevant to the activities of that agency or body if:

(d)    it appears to the CEO to be appropriate to do so; and

(e)    to do so would not be contrary to a law of the Commonwealth, a State or a Territory that would otherwise apply.

The facts

16    The circumstances in which the Australian Crime Commission obtained documents from Mr Philip Egglishaw in the course of Project Wickenby have been referred to in a number of proceedings in this Court: see, for example, Egglishaw v Australian Crime Commission (No 3) (2009) 259 ALR 458 which was upheld on appeal in Egglishaw v Australian Crime Commission (2010) 186 FCR 393; Egglishaw v Australian Crime Commission (No 2) (2009) 253 ALR 354; Egglishaw v Australian Crime Commission (2006) 230 ALR 254.

17    The evidence in the present case is that the two CDs which were obtained by the Australian Crime Commission from Mr Egglishaw through the execution of a search warrant in February 2004 contained documents including correspondence with Mr Higgins. Copies of those documents, that is to say, the s 59 documents, were disseminated to the ATO on 21 October 2004.

18    Mr Higgins did not become aware of the existence of the s 59 documents until he was cross-examined upon them in the AAT.

19    The assessments which were the subject of Mr Higgins’ application in the AAT were issued on 3 November 2008 and 4 November 2008 for the years ending 30 June 1993 to 30 June 2003. Although the assessments were issued many years after the tax years in question, they were not described as amended assessments but rather as original notices of assessment.

20    The reason why the assessments were original, rather than amended, is that Arabella’s tax returns for the years in question disclosed “nil” income. This, and the matters which apparently gave rise to the assessments, are explained in the Reasons for Decision issued by the ATO following upon certain events which culminated in the assessments.

21    Those events commenced in June and July 2007 when the Commissioner issued notices to Arabella (then known as Wanaka Developments Pty Ltd) seeking production of certain documents pursuant to s 264 of the Income Tax Assessment Act 1936 (Cth) (the “1936 Tax Act”).

22    The documents which the Commissioner sought under the s 264 notices included comprehensive accounting records but they also include correspondence and other documents relating to Mr Egglishaw and Strachans SA. Strachans is known to be associated with Mr Egglishaw. Documents were also sought in respect of Arabella’s dealings with a “Strachans intermediary”, Mr John Bush.

23    At around the same time, that is to say during the second half of 2007, the ATO conducted an audit of Arabella for the income years ending 30 June 1993 to 30 June 2003. The principal auditor engaged in this process was Mr David Shepherdson.

24    The principal issue raised in the audit was whether Arabella was entitled to interest deductions on loans. Those interest deductions had been claimed, for each of the tax years in question, as interest incurred by Arabella in connection with a loan said to have been made to it by a related entity (“Kristin”).

25    The total amount of interest deductions claimed by Arabella during the 11 years that were the subject of the tax audit was $5,983,653.

26    Apart from the issue of whether Arabella was entitled to claim those deductions, the tax audit also raised the issue of whether there had been avoidance of income tax due to fraud so as to enable the Commissioner to amend his assessments for the 11 tax years in question.

27    Mr Higgins was interviewed by the ATO in connection with the audit on 20 September 2007 and in February 2008.

28    On 26 October 2007 the members of Arabella passed a resolution for the voluntary winding up of that company. Mr Higgins was appointed liquidator.

29    As I said earlier, the Commissioner issued notices of assessment for each of the tax years in question on 3 November 2008 and 4 November 2008. The total amount assessed by the Commissioner was $10,395,717 which was comprised of the interest deductions of $5,983,653 that were disallowed by the Commissioner, plus penalties and interest.

30    Arabella lodged notices of objection to the assessments on 9 December 2008 but on 15 December 2008 Mr Higgins resigned as liquidator of Arabella. Mr Trent Hancock was then appointed as a liquidator, Arabella having been rendered insolvent by reason of the assessments.

The Commissioner’s reasons for disallowing the objections

31    On 5 November 2009 the Commissioner disallowed Arabella’s objections to the tax assessments. At about the same time, the Commissioner issued his reasons for doing so. The reasons for decision are extensive. They set out the facts which the Commissioner considered to be relevant, the facts relied upon in coming to the views reached, and the Commissioner’s reasons for his decision.

32    The essential reason why the Commissioner disallowed the interest deductions was that he was not satisfied that the available documentary evidence demonstrated a borrowing of funds from Kristin as contended by Mr Higgins.

33    The Reasons for Decision state that bank records for available accounts of Arabella do not show evidence of funds transferred from Kristin during the relevant period and

Further, Mr Higgins could not explain when the subject funds were purportedly borrowed, the purpose of the borrowing, or the actual use of the funds.

34    Since there was no explanation of the commercial purpose of the loan, the Commissioner was not satisfied that any borrowing (if indeed obtained) was for the purpose of gaining or producing assessable income within the meaning of s 51(1) of the 1936 Tax Act and s 8-1 of the Income Tax Assessment Act 1997 (Cth).

35    The Reasons for Decision went on to state that one of the purposes of the subject transaction was the achievement of nil tax payable for the years in question and a further advantage was:

the achievement of fund movements to offshore entities through an associated corporate entity, Kristin, under the guise of principal and interest payments … with the benefit of free use and payment of the subject funds from the offshore location or locations.

36    The Commissioner considered, in the alternative, that the arrangements under which the interest expenses were claimed was a sham.

37    He considered that Arabella had avoided the payment of tax as a result of fraud or evasion having regard to the fact that Arabella was not able to substantiate the loan or how the funds purportedly borrowed, were used by Arabella for the purpose necessary to satisfy the requirements for deductibility.

The review in the AAT

38    Arabella’s application for review of the Commissioner’s disallowance of its objections was heard by Senior Member Frost during the period from 22 August 2011 to 30 August 2011.

39    On 24 August 2011 the Commissioner sought to cross-examine Mr Higgins on a bundle of documents that had not previously been provided to Mr Higgins. The documents were originally part of a larger bundle that was marked MFI-3 in the AAT proceedings but they were then taken out of that bundle and marked as MFI-4. Those documents are the s 59 documents.

40    Counsel for Arabella in the AAT objected to the cross-examination of Mr Higgins on the s 59 documents and Senior Member Frost requested an explanation for why the documents were not included in the “T-Documents” to be considered in the course of the review. On the following day, 25 August 2011, Senior Counsel for the Commissioner indicated that the s 59 documents had originated from Mr Egglishaw’s computer and that they had been disseminated to the Commissioner by the Australian Crime Commission.

41    On 26 August 2011 counsel for Arabella requested proof that the s 59 documents could be deployed in civil proceedings.

42    On 30 August 2011, the Commissioner filed and served an affidavit of Ms Barbara Zakos, a principal litigator employed by the Australian Tax Office, explaining how the s 59 documents were disseminated from the Australian Crime Commission to the ATO. Ms Zakos’ affidavit was not formally read in the AAT but it was in evidence before me.

43    Following the completion of the oral hearing before Senior Member Frost, there was correspondence between the solicitors for Arabella and the ATO about the s 59 documents, and an application was made by Arabella for the issue of a summons to the Australian Crime Commission.

44    Ultimately, Senior Member Frost ruled that he would not give any consideration to Mr Higgins’ answers to questions concerning the s 59 documents. He also rejected the tender of the s 59 documents so that those documents, and Mr Higgins’ answers to questions concerning them, have been effectively quarantined from consideration by the AAT in coming to its decision on the review application.

Cross-examination of decision-maker in the AAT

45    On 30 August 2011 Mr Shepherdson gave evidence in the AAT. He was cross-examined by counsel for Arabella as to his knowledge of the existence of the s 59 documents.

46    A reading of the transcript of the cross-examination of Mr Shepherdson discloses that the thrust of the cross-examination was as to the failure of the Commissioner to include the s 59 documents in the T-Documents. However, he was also asked whether he had the s 59 documents “available” at a s 264 interview with Mr Higgins. Mr Shepherdson conceded that the documents were available and that he asked Mr Higgins about Strachans at the interview. He conceded that the s 59 documents were available to him from the time when the proceedings were commenced by Arabella in the AAT and that he was able to get them within less than day of wanting those documents.

47    Counsel for Arabella asked Mr Shepherdson about the statement in the Reasons for Decision which refers to the issue of the s 264 notices seeking documents in respect of dealings with the “Strachans intermediary”, Mr Bush. However, Mr Shepherdson explained that this was merely part of the chronology and that he did not make reference to this fact because he had not considered “the impact” of the s 59 documents to be relevant to the reasons for his decision.

48    Mr Shepherdson was asked on a number of occasions abut whether he used the s 59 documents in writing the Reasons for Decision and about his knowledge of the relevance of the s 59 documents to the issues raised in the review proceeding in the AAT. He answered on each occasion that he did not believe that the s 59 documents were relevant to “the substantive issue”. That answer appears to be shorthand for the issue of whether the loan was made by Kristin to Arabella and whether the relevant commercial purpose existed for Arabella to claim the interest deductions.

49    In addition, Mr Shepherdson refused to change the evidence contained in his affidavit to the effect that he had not used the s 59 documents in the course of the audit of Arabella.

Conscious Maladministration

50    The concept of conscious maladministration and the ability of a taxpayer to rely on it in order to challenge the validity of an assessment were explained by the High Court in Futuris. Their Honours (Gummow, Hayne, Heydon & Crennan JJ) explained it by reference to the scope of the critical provisions of ss 175 and 177(1) of the 1936 Tax Act.

51    Section 175 provides that the validity of any assessment shall not be affected by reason that any of the provisions of the 1936 Tax Act have not been complied with. Section 177(1) provides that a notice of assessment shall be conclusive evidence of the due making of the assessment and, except in review proceedings, or an appeal relating to the assessment, that the amount of the assessment is correct.

52    Their Honours explained in Futuris that where s 175 applies, errors in the process of assessment do not go to jurisdiction and therefore do not attract the remedy of constitutional writs or review under s 39B of the Judiciary Act. Their Honours said, however, at [25] that s 175 operates only where there has been something that answers the statutory description of an “assessment” and:

[f]urther, conscious maladministration of the assessment process may be said also not to produce an “assessment” to which s 175 applies.

53    Gummow, Hayne, Heydon and Crennan JJ went on at [60] to express an important warning about the seriousness of allegations of conscious maladministration. They said that allegations that statutory powers have been exercised corruptly or with deliberate disregard to the scope of those powers are not lightly to be made or upheld. They quoted with approval remarks to similar effect made by Hill, Dowsett and Hely JJ in Kordan Pty Ltd v Federal Commissioner of Taxation (2000) 46 ATR 191 at 193.

54    Futuris was discussed (and distinguished) by a Full Court in Denlay v Federal Commissioner of Taxation (2011) 193 FCR 412 (“Denlay”). In that case, Keane CJ, Dowsett and Reeves JJ observed at [76] that in Futuris, the High Court was concerned with actual bad faith in the exercise of the decision making power. The Full Court went on to say at [79] that conscious maladministration as explained in Futuris relates to the integrity of the assessment. Even if the Commissioner of Taxation’s officers obtain information unlawfully, that will not necessarily deny the integrity of the assessment. Their Honours said that:

What matters for that purpose is the accuracy of the information and the competence and honesty of those officers involved in making the assessment.

See also Higgins v Hancock as Liquidator of 246 Arabella Investments Pty Limited (in liq) [2011] FCA 1119 at [65] per Edmonds J.

Preliminary Discovery

55    Although there are some differences in the language of Rule 7.23, it incorporates much of the language of the preliminary discovery rules formerly to be found in O 15A r 6. The same principles therefore apply: Ebos Group Pty Ltd v Team Medical Supplies Pty Ltd [2011] FCA 862 at [19] per Flick J.

56    It follows that the test applicable to the first requirement of Rule 7.23, namely that the person “reasonably believes that he or she may have the right to obtain relief” is much the same as the former test which was whether there is “reasonable cause to believe that the applicant ... may have the right to obtain relief”.

57    In St George Bank Ltd v Rabo Aust Ltd (2004) 211 ALR 147 (“Rabo”), Hely J set out at [26] the propositions which emerge from the authorities on the proper application of the former rule.

58    His Honour’s succinct but comprehensive summary of the principles has been applied on numerous occasions by judges sitting at first instance and has been endorsed by Full Courts: Apache Northwest Pty Limited v Newcrest Mining Ltd (2009) 182 FCR 124 at [2] (Moore and Gilmore JJ), [26] (Flick J).

59    The fourth proposition stated by Hely J in Rabo is central to the present application:

(d)    belief requires more than mere assertion and more than suspicion or conjecture. Belief is an inclination of the mind towards assenting to, rather than rejecting a proposition. Thus it is not sufficient to point to a mere possibility. The evidence must incline the mind towards the matter or fact in question. If there is no reasonable cause to believe that one of the necessary elements of a potential cause of action exists, that would dispose of the application insofar as it is based on that cause of action: John Holland Services Pty Ltd v Terranora Group Management Pty Ltd [2004] FCA 679 at [13], [14], [17] and [73].

Discussion

60    The essential question which arises is whether the first of the requirements as stated in Rule 7.23(1)(a) has been satisfied. That is to say, has Mr Higgins satisfied the Court that he reasonably believes that he may have the right to obtain relief from the Court?

61    What is required in the present case is that Mr Higgins must have an objectively reasonable belief that he may have a right to obtain an order against the Commissioner under s 39B of the Judiciary Act setting aside the assessments by reason of conscious maladministration by officers of the ATO using the s 59 documents to raise the assessments.

62    Thus, the cause of action which underlies the necessary belief is one which has, as an essential element, actual bad faith by officers of the Commonwealth in raising the assessments. There must be a belief that the relevant officers deliberately engaged in conduct that affected the integrity of the assessment process: Futuris at [25], [60]; Denlay at [76], [79].

63    The evidence on which Mr Higgins relied to satisfy the requirement of an objectively reasonable belief that he may have such a cause of action was drawn largely from the transcript of the cross-examination of Mr Shepherdson.

64    The relevant matters are set out in some detail in the written submissions of counsel for Mr Higgins and in particular, in their written submissions in reply. I do not propose to repeat them.

65    In my opinion, the highest that the evidence rises is to establish that Mr Shepherdson had the s 59 documents available before he interviewed Mr Higgins in relation to the s 264 notices in September 2007 and February 2008 and that he had read the documents by that time. He acknowledged that he had the documents available before the second interview on 20 February 2008 and he asked Mr Higgins about Strachans during that interview.

66    Mr Shepherdson had sought from Mr Higgins in the s 264 notices in June 2007 documents concerning Mr Egglishaw and Strachans. This also supports the inference that Mr Shepherdson had read the s 59 documents before the interviews took place in September 2007 and February 2008.

67    But a further step is needed to give rise to the necessary objective belief that the s 59 documents were deliberately used in a way which destroyed the integrity of the assessments.

68    Something more than suspicion or conjecture is required. What is required is some fact or matter that inclines the mind toward assenting to, rather than rejecting the proposition that the s 59 documents were misused in that way, even though the circumstances may leave something to surmise or conjecture: Rabo at [26(d)]; John Holland Services Pty Ltd v Terranora Group Management Pty Ltd [2004] FCA 679 at [14], [16]–[17] (Emmett J).

69    In my opinion, the seriousness of the underlying allegation, namely that statutory powers have been deliberately misused, must be borne in mind when determining whether Mr Higgins has established that he holds the necessary objectively reasonable belief.

70    The effect of the submission put by counsel for Mr Higgins was that it is sufficient that Mr Shepherdson knew the content of the s 59 documents when he caused the ATO to issue the assessments to Arabella. In my opinion, there is sufficient evidence at this stage to establish that Mr Shepherdson had that knowledge.

71    Counsel for Mr Higgins then submitted that it is not possible to isolate hermetically the “substantive issue” from the pejorative effect of the s 59 documents as Mr Shepherdson sought to do when he was cross-examined in the AAT.

72    Counsel went on to submit that even if it were possible to do so, it is implausible that the s 59 documents did not have an effect on the substantive issue, namely whether the inter-company loan was made and the purpose of that loan. They pointed to the remarks of Brennan J in Kioa v West (1985) 159 CLR 550 at 629 (“Kioa”) to the effect that it is impossible for the repository of a power to shut information “of that kind” out of his or her mind so as to reach a decision without reference to it.

73    But the remarks of Brennan J were made in discussing the obligation of a decision-maker to give an opportunity to a person likely to be affected by an exercise of power to address relevant matters adverse to his or her interests which the repository of the power proposes to take into account: see Kioa at 628–629.

74    I accept that the possession of adverse information creates a risk that the decision-maker will advert to it, whether subconsciously or perhaps otherwise. However, in the present case I do not consider that Mr Shepherdson’s knowledge of the content of the s 59 documents provides a tangible basis for establishing the necessary objective belief.

75    The Reasons for Decision, which were apparently prepared by Mr Shepherdson, show that the critical factors which resulted in the issue of the tax assessments to Arabella were the absence of any documentary records to support the existence of the loan and the absence of any explanation of the commercial purpose for which the alleged loan was made.

76    I was not taken to anything in the s 59 documents to suggest that the content of those documents could have had any bearing on the decision to raise the assessments. In my opinion, it was necessary, at very least, for Mr Higgins to be able to point to the possibility of some causal nexus between the content of the s 59 documents and the process by which the assessments were produced in order to have a starting point for the serious allegation that would constitute the subject matter of the alleged cause of action.

77    No such causal nexus was revealed. All that is left in my view is assertion or suspicion. That is not sufficient to provide a basis for an order for preliminary discovery.

78    Indeed, this is borne out by the submissions made on behalf of Mr Higgins in support of the order. They submitted that if the assessments issued to Arabella were based on the s 59 documents obtained as a result of a breach of the strict quarantining provisions of the Australian Crime Commission Act, then it is likely that the assessments were affected by conscious maladministration. They went on to submit that the documents sought by way of preliminary discovery may, if they exist, establish the chain of custody of the documents which, if not properly adhered to, is likely to establish conscious maladministration.

79    These submissions were properly made and I do not criticise counsel for doing so. But they show the absence of any suggestion of a causal nexus between the s 59 documents and the assessments. They also reveal that Mr Higgins has no reasonable cause to believe that one of the necessary elements of the suggested cause of action, namely bad faith and deliberate misuse of the s 59 documents to subvert the assessments, exists.

Conclusion

80    It follows from what I have said that Mr Higgins has not established that the application for preliminary discovery should succeed. It also follows that leave under s 511 of the Act to pursue the application should be refused on the basis that it is not sufficiently arguable: Commissioner of Revenue (ACT) v Slaven (2009) 178 FCR 334 at [46]; HFGC Nominees (No 2) Pty Ltd v Hancock as Liquidator of 246 Arabella Investments Pty Ltd (in Liquidation) [2010] FCA 1005 at [10].

Orders

81    The orders I will make are that the application be dismissed with costs.

Associate:

Dated:    21 December 2011