FEDERAL COURT OF AUSTRALIA

Kassem and Secatore v Commissioner of Taxation (No 2) [2012] FCA 293

THE COURT ORDERS THAT:

1.    The respondent is to pay $70,000 together with interest in the sum of $9,808.63 being a total of $79,808.63 to the second applicant.

2.    The respondent is to pay the applicants’ costs of this proceeding on a party/party basis up to 11.00am on 25 February 2011 and thereafter on an indemnity basis.

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

THE COURT ORDERS THAT:

1.    The defendant is to pay $56,000 together with interest in the sum of $20,059.12 being a total of $76,059.12 to the third plaintiff.

2.    Each party is to pay its own costs of and incidental to the hearing on 2 November 2011.

3.    The defendant is otherwise to pay the plaintiffs’ costs of this proceeding.

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

REASONS FOR JUDGMENT

1    My principal judgment in these proceedings was delivered on 29 February 2012; see Kassem and Secatore v Commissioner of Taxation [2012] FCA 152.

2    The parties are agreed as to the form of orders that should be made except in relation to costs. The background to the costs debate is as follows.

3    Proceeding 1085 of 2010 was commenced by the first applicant (the liquidators) and the second applicant (Mortlake) for the recovery of what I have held to be a preferential payment of $70,000 made to the respondent (the Commissioner). In proceeding 1099 of 2010 the liquidators (the first and second plaintiffs) and Mortlake (the third plaintiff) sought to recover $56,000 from the defendant (Allianz) in respect of what I have since held to be a preferential payment. Both proceedings were commenced in August 2010.

4    The two proceedings were heard together. That the two proceedings should be heard together was a matter first raised at the commencement of the hearing of the proceeding against Allianz before Edmonds J on 2 November 2011. That hearing did not proceed for reasons which I will later explain.

5    Both proceedings were listed before me on 8 November 2011 for directions. Up until that time different solicitors and counsel were appearing for the liquidators and Mortlake in the two proceedings.

6    On 18 November 2011 directions were made fixing both matters for hearing. At that time the liquidators and Mortlake were still being represented by different solicitors and counsel in the two proceedings. That position changed on 10 January 2012 when a notice was filed in accordance with the rules indicating that the liquidators and Mortlake would from that point forward be represented by the same solicitors.

7    On 23 February 2011, the liquidators delivered an offer of compromise to the Commissioner in accordance with O 23, r 3 of the Federal Court Rules 1979. By that offer of compromise the liquidators offered to compromise their claim for $59,500 plus costs. The Commissioner declined to accept the offer of compromise. Instead he offered to consent to the proceeding against him being dismissed with no order as to costs.

8    The liquidators have succeeded against the Commissioner. They have recovered significantly more from the Commissioner than they would have received had the offer of compromise been accepted.

9    Speaking of O 23, r 11(4) of the Federal Court Rules 1979, Hely J in Port Kembla Coal Terminal Ltd v Braverus Maritime Inc (No 2) (2004) 212 ALR 281 at para [17] said:

Once an offer is made, and a judgment no less favourable obtained, a rebuttable presumption in favour of indemnity costs is created. It then becomes incumbent on the defendant to show reason why the presumption should not crystallise.

10    His Honour’s observations were expressly approved by a Full Court in Futuretronic.com.au Pty Ltd v Graphix Labels Pty Ltd [2009] FCAFC 40 (Tamberlin, Finn and Sundberg JJ) at para [10].

11    Rule 25.14(3) of the Federal Court Rules 2011 is in a slightly different form to O 23, r 11(4) but for relevant purposes they are to the same effect. As the notes to r 25.14 make clear, the Court may make an order under r 1.35 that would result in costs being awarded otherwise than as provided for by r 25.14(3). However, it is for the party who is prima facie required to pay costs in accordance with the requirements of the rule to persuade the Court that some other order should be made.

12    The Commissioner made submissions suggesting that he is in a different position to other litigants because he is bound by s 44 of the Financial Management and Accountability Act 1997 (Cth) to promote the proper use of Commonwealth resources. I do not think there is any substance to this argument. The Commissioner may be bound by s 44 but it does not follow that he should be treated differently to other litigants in circumstances where r 25.14 applies. Indeed, s 44 itself may require the Commissioner to give prompt and serious consideration to an offer of compromise that is made in litigation to which he is a party. In saying this I do not intend to suggest that the Commissioner did not do so in this case.

13    In the present case the Commissioner seems to have taken the view that the liquidators were likely to fail because the payments received by the Commissioner were ultimately applied to superannuation guarantee charge amounts owed by Mortlake.

14    It is not necessary for me to determine whether the Commissioner’s defence of the proceeding on that basis was reasonable because I am quite willing to assume that it was. Nevertheless, I am not persuaded that this provides a sufficient reason to make an order under r 1.35 relieving the Commissioner of the consequences that usually follow where an offer of compromise is not accepted by a respondent who is later ordered to pay an amount of money greater than that which was the subject of the offer.

15    The Commissioner also relied upon the following matters in support of his submission that r 25.14(3) should not be applied against him in the circumstances of this case:

    It was clear after a without prejudice meeting on 23 May 2011, that the books and records of Mortlake were incomplete and accounts would need to be reconstructed. The Commissioner submits that he could not be satisfied of insolvency as at that date.

    Reconstructed accounts for Mortlake were provided by the liquidators on 15 June 2011, but the Commissioner was still not satisfied of insolvency.

    An insolvency report was filed and served by the liquidators on 22 September 2011. The Commissioner submits that this was the first time that sufficient information was provided to him with which to form a view about insolvency.

    Whether or not Antqip Pty Ltd’s (Antqip) payment to the Commissioner was a transaction to which Mortlake was a party was hotly contested at trial. Until the filing of Mr Russell’s affidavit sworn 17 November 2011 (which was filed in the proceedings against the Commissioner on 2 February 2012) there was no evidence of the relationship between Antqip and Mortlake and no evidence that the payment had been authorised by the latter.

    The superannuation guarantee charge issue was also the subject of contest at the trial. The Commissioner says that he was never satisfied that there was at least one other creditor of equal or higher priority at the time he received the relevant payments.

16    I am not satisfied that these matters justify the making of an order under r 1.35 that would result in costs being awarded otherwise than as provided for by r 25.14(3).

17    It was open to the Commissioner to put the liquidators to proof of the various matters they needed to prove in order to make good their claim against him. But the liquidators were at all times entitled to prepare their case in the knowledge that if they were to obtain a judgment for an amount greater than the amount they had offered to settle the proceeding in its early days then they would be entitled (subject to the Court being persuaded that some different order should be made) to an indemnity costs order against the Commissioner as provided for by r 25.14(3).

18    The Commissioner also argued that the liquidators’ costs should be reduced in accordance with r 40.08. It provides:

A party other than in a proceeding under the Admiralty Act 1988 may apply to the Court for an order that any costs and disbursements payable to another party in the proceeding be reduced by an amount to be specified by the Court if:

(a)    the applicant has claimed a money sum or damages and has been awarded a sum of less than $100 000; or

(b)    the proceeding (including a cross-claim) could more suitably have been brought in another court or tribunal.

19    The liquidators have succeeded in obtaining an order for payment of $79,808.63 against the Commissioner. Accordingly, the operation of the rule is enlivened. For the purpose of his application the Commissioner relies upon both paras (a) and (b) of the rule.

20    In support of his application under r 40.08, the Commissioner pointed to evidence that showed that even after full recovery in both proceedings, there will not be any dividend payable to creditors of Mortlake. This is because the amounts recovered will not satisfy the costs and expenses of the administrators of Mortlake and those of the liquidators such that the general body of creditors will obtain nothing from the winding up. However, counsel for the Commissioner made it clear that he did not suggest that the liquidators had acted improperly by commencing these proceedings. In the circumstances, I do not think the point made by the Commissioner leads anywhere.

21    While the amount payable by the Commissioner in accordance with the order of the Court is less than $100,000, it does not follow that an order should be made under the rule. The point raised by the Commissioner based upon the priority given to amounts received in payment of superannuation guarantee charge debts had not, so far as I am aware, been specifically considered in any reported case. The point having been raised by the Commissioner, I think it was appropriate that it be considered by this Court. In the result, I do not consider it appropriate to make an order under r 40.08.

22    The position of Allianz is different to that of the Commissioner in a number of respects.

23    First, no offer of compromise made under O 23 of the Federal Court Rules 1979 was served on Allianz. Instead, the solicitors for the liquidators (who were not the same solicitors as those acting for the liquidators in the case against the Commissioner) sent a letter written in the form of a “Calderbank letter”. Allianz did not accept the offer made in the Calderbank letter.

24    The Calderbank letter sent to Allianz’s solicitors on 11 January 2011, offered to settle the proceeding against Allianz for $57,350 inclusive of interest and costs. That figure was only $1,350 more than the amount of the payment received by Allianz on 21 August 2007. Of course, the order for payment to be made against Allianz is for a larger sum, namely, $76,059.12 which is inclusive of interest but exclusive of any amount for costs.

25    In cases involving the rejection of an offer contained in a Calderbank letter it must generally be shown that the rejection of the offer was imprudent or unreasonable before it may be made the basis of an award of indemnity costs: see Dukemaster Pty Ltd v Bluehive Pty Ltd [2003] FCAFC 1 (Sundberg, Emmett and Conti JJ) at paras [7]-[9] and the cases there cited.

26    There are two matters that might suggest Allianz acted unreasonably in refusing the liquidators’ offer.

27    First, Allianz received the bank cheques used to pay the debt from Mr Russell who personally delivered them to Allianz. Even allowing for the wisdom of hindsight, it seems to me that the indications that the payment made to Allianz was one made by or on behalf of Mortlake were quite strong.

28    Secondly, Allianz was well placed to know that at the time it received the bank cheques from Mr Russell, Mortlake was likely to be insolvent. I say this because Allianz had issued a statutory demand which it served upon Mortlake that was not complied with and which was later relied upon by Allianz in the winding up proceeding commenced by Allianz against Mortlake. Allianz consented to the dismissal of the winding up proceedings after the bank cheques were received.

29    However, the Calderbank letter stipulated that the offer would remain open until 24 January 2011. Affidavit evidence central to the liquidators’ case was not served until after that date. This includes Mr Russell’s affidavit of 2 June 2011 (filed in the proceedings against Allianz on 16 June 2011) which was relied upon by the liquidators to show that the payment to Allianz was made by or on behalf of Mortlake.

30    I am not persuaded that it was unreasonable for Allianz not to accept the offer contained in the Calderbank letter within the time allowed. Accordingly, I am not satisfied that there should be an award of indemnity costs made in favour of the liquidators against Allianz.

31    Another matter raised by Allianz concerns its costs of the appearance before Edmonds J on 2 November 2011. As I have mentioned, the hearing of the proceeding against Allianz was listed for that date, but was adjourned. His Honour reserved the question of costs.

32    I have read the transcript for the 2 November 2011 hearing. It is clear that one matter that led to the hearing being adjourned was the unavailability of Mr Russell who Allianz required to attend for cross-examination. The other matter that led to the hearing being adjourned was the obvious desirability that the proceeding against Allianz should be heard with the proceeding against the Commissioner.

33    Counsel for the liquidators pointed to the lateness of the notice requiring Mr Russell to be available for cross-examination. His affidavit was served some months prior to 2 November 2011 but notice was not given until a week or so prior to that date. By that time Mr Russell had apparently booked himself an overseas holiday. By 2 November 2011 he was overseas.

34    I think there is likely to have been some fault on both sides. The proceeding should not have been fixed at a time when Mr Russell was likely to be unavailable. Nor should Mr Russell have been permitted by the liquidators’ solicitors to leave the country until Allianz’s requirements in relation to attendance for cross-examination had been made known. It was open to the liquidators’ solicitors to inquire of Allianz before Mr Russell booked his holiday as to whether or not he would be required for cross-examination. There is no suggestion that they made any such inquiry.

35    In the circumstances I think it is appropriate that each party pay its own costs of and incidental to their appearance before Edmonds J on 2 November 2011.

36    There will be orders accordingly.

Associate:

Dated:    14 March 2012