FEDERAL COURT OF AUSTRALIA

Deputy Commissioner of Taxation v Chemical Trustee Limited (No 4) [2012] FCA 1064

THE COURT ORDERS THAT:

1.    The freezing orders made on 21 September 2012 be extended to 6 pm on 28 September 2012.

2.    The parties bring in short minutes of order giving effect to these reasons by 6 pm Thursday 27 September 2012.

3.    The matter be stood over for further directions on 9 October 2012 at 9.30 am.

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

REASONS FOR JUDGMENT

1    Last Tuesday, 18 September 2012, the Deputy Commissioner of Taxation sued Chemical Trustee Limited for $1,413,219.76 and on Friday increased that claim to $26,927,500.54. Pending the determination of his claim, the Deputy Commissioner sought last Friday, 21 September 2012, a freezing order over any assets of Chemical Trustee located in Australia. The Duty Judge made orders to that effect on the same day which were to expire at 4.15 pm on Tuesday 25 September 2012 and stood the matter over to me as docket judge at 9.30 am on that day. I heard argument for most of that day and reserved my judgment to 2.15 pm today. Late yesterday afternoon, I extended the operation of the freezing order to 4.15 pm today.

2    The principles governing whether a freezing order should be made are not in dispute. The matter is governed by two rules. The first, r 7.32, Federal Court Rules 2011, specifies the purpose of freezing orders and their nature (at least in a usual case). It provides:

7.32 Freezing order

(1)    The Court may make an order (a freezing order), with or without notice to a respondent, for the purpose of preventing the frustration or inhibition of the Court’s process by seeking to meet a danger that a judgment or prospective judgment of the Court will be wholly or partly unsatisfied.

(2)    A freezing order may be an order restraining a respondent from removing any assets located in or outside Australia or from disposing of, dealing with, or diminishing the value of, those assets.

3    The second, r 7.35, sets out the circumstances in which that power, which of its nature is discretionary, is enlivened. Sub-rules (1)(b)(i) and (4) are as follows:

7.35 Order against judgment debtor or prospective judgment debtor or third party

(1)    This rule applies if:

…

(b)     an applicant has a good arguable case on an accrued or prospective cause of action that is justiciable in:

(i)     the Court

…

(4)     The Court may make a freezing order or an ancillary order or both against a judgment debtor or prospective judgment debtor if the Court is satisfied, having regard to all the circumstances, that there is a danger that a judgment or prospective judgment will be wholly or partly unsatisfied because any of the following might occur:

(a)     the judgment debtor, prospective judgment debtor or another person absconds;

(b)     the assets of the judgment debtor, prospective judgment debtor or another person are:

(i)     removed from Australia or from a place inside or outside Australia; or

(ii)     disposed of, dealt with or diminished in value.

4    Since the Deputy Commissioner’s proceedings have not yet proceeded to finality, sub-r 7.35(1)(b) casts upon him the burden of showing that he has a good arguable case that he is entitled to the $26,927,500.54 that he seeks and that this claim is justiciable in the Federal Court. Rule 7.35(4) requires him to demonstrate, and for the Court to be satisfied, that there is a ‘danger’ that the judgment which he seeks will be wholly or partly unsatisfied because the assets of Chemical Trustee might be removed from Australia.

Is the claim justiciable?

5    The Deputy Commissioner submitted that each of those requirements was satisfied. Insofar as the requirements of r 7.35(1)(b) are concerned, his claim for relief is justiciable in this Court. Section 39B(1A) of the Judiciary Act 1903 (Cth) confers original jurisdiction on this Court both in matters in which the Commonwealth is seeking a declaration (which the Deputy Commissioner does claim in his amended originating application) and in which there is a matter arising under a law of the Commonwealth, here plainly the Taxation Administration Act 1953 (Cth) and the Income Tax Assessment Act 1997 (Cth) (‘the 1997 Act’). I did not apprehend this aspect of the matter to be in dispute.

Is there a good arguable case?

6    As to the requirement of r 7.35(1)(b) that he have a good arguable case, the Deputy Commissioner submitted that his claim was based on notices of assessment (or amended notices of assessment) for income tax (or for administrative penalties imposed, or the general interest charge levied upon such tax). He pointed to s 177(1) of the Income Tax Assessment Act 1936 (Cth) (‘the 1936 Act’) which makes such a notice conclusive evidence of the due making of the assessment and that the amount of all particulars of the assessment is correct: see FJ Bloeman Pty Ltd v Commissioner of Taxation (1981) 147 CLR 360 at 376 per Mason and Wilson JJ; Commissioner of Taxation v Futuris Corp Ltd (2008) 237 CLR 146.

7    One might have thought that, where an applicant had the singular advantage of a procedural right to tender a notice which operated as conclusive evidence of that kind, there was present – to use the language of r 7.35(1)(b) – a good arguable case. But this was not so according to Ms Seiden who, with Mr Hyde Page of counsel, appeared for Chemical Trustee. To begin with, it was submitted that the conclusive effect of s 177 was only enlivened where what had been tendered was a valid notice of assessment. There would not be such a notice if the assessment constituted an abuse of process or was not a bona fide exercise of the power of assessment. The Court was invited to draw the conclusion that such was the case because:

(a)    on the day the present proceedings were commenced (18 September 2012) a senior official from the Australian Taxation Office swore that he had made inquiries of the persons responsible for the process of preparing the amended assessments and had been informed that they would not be concluded for a further four weeks following which there would be an internal review. Ultimately, he thought that the new assessments would not appear for eight to twelve weeks;

(b)    despite that, the new assessments were issued three days later on 21 September 2012; and

(c)    it followed that the internal review had not occurred and that, given the haste of what had occurred, an inference should be drawn that the assessments had been issued to further the present application for a freezing order. This was said to be an abuse of process.

8    It seems to me likely that this is why the notices were brought forward. I do not think, however, that this would involve an abuse of process. The point of the freezing order is to protect the subject matter of the assessments. I do not accept that it is an abuse to issue an assessment with a view to procuring a freezing order. The subordinate nature of the freezing order is underscored by the fact that, if the notices are ultimately set aside in proceedings brought under Part IVC of the Taxation Administration Act, the freezing order will be set aside. Indeed, the issue of a notice of assessment will always proceed the application for a freezing order. No doubt the Deputy Commissioner was spurred into action because other freezing orders made in respect of an earlier judgment were about to expire, but I do not see this as a problem.

9    A second reason why the Deputy Commissioner was submitted not to have a good arguable case was because, at least in respect of part of the tax, he had not shown that another taxpayer had not already paid the tax. It was said that Chemical Trustee was the off-shore beneficiary of the Regatta Point Unit Trust; that the Commissioner had assessed the net income of that trust in the hands of the trustee under s 98 of the 1936 Act; and that the trustee had paid that tax. Tendered before me as Exhibit 4 was a trust beneficiary statement of account issued by a Deputy Commissioner which showed that the trustee had a tax debt of $1,135,326,11 on 3 September 2012.

10    It seems to me that I must reject this argument. The evidence does not show that the trustee of the Regatta Point Trust has paid the tax which is now being sought from the beneficiary Chemical Trustee. It shows, to the contrary, that the trustee of the Regatta Point Trust has not paid the tax. Once that is accepted, and the evidence tendered in its support admits, so far as I can see, of no other interpretation, this point collapses. In any event, I would have rejected the argument as advanced. The onus does not lie upon the Deputy Commissioner to prove, in a proceeding based upon a notice of assessment, that the tax has not been paid by someone else. His assessment is conclusive. No doubt the taxpayer in such a case may seek to prove the tax to have been otherwise paid, but negativing such a case in advance is no part of the Deputy Commissioner’s onus of proof.

11    The third argument was that the Deputy Commissioner could not recover the sums in question because his entitlement to do so had merged in an earlier judgment. On 25 November 2010 a Judge of this Court gave judgment in favour of the Deputy Commissioner against Chemical Trustee in the sum of $4,833,259.45: Deputy Commissioner of Taxation v Chemical Trustee Limited [2010] FCA 1297. This was the result of a summary judgment application brought by the Commissioner in which he relied upon notices of assessment issued for the 2001, 2002, 2003, 2004, 2006 and 2007 years on 12 August 2010 together with additional sums for shortfall penalties and the general interest charge. This judgment was subsequently varied on 8 June 2012 by the removal of the general interest charge: Deputy Commissioner of Taxation v Hua Wang Bank Berhad (No. 3) [2012] FCA 594 at [9]-[17]. On 27 August 2012, Chemical Trustee satisfied that judgment by what appears to have been the payment of a final instalment.

12    Before that occurred, the Deputy Commissioner issued further notices of amended assessment in respect of the same years together with a notice of assessment of shortfall penalty. This occurred on 9 July 2012. Thereafter he issued another set of amended notices last Friday (21 September 2012). Some of these related to the same years which had been the subject of the judgment of 25 November 2010. There were, however, notices of assessment also issued in respect of the income years 2000, 2005 and 2008-2011, which were not the subject of the earlier judgment. The tax levied in respect of these years was in itself substantial ($6,264,585.60).

13    In respect of the years of income which had resulted it the original notices of assessment underlying the judgment granted on 25 November 2010, Chemical Trustee submitted that it had paid the judgment sum in full on 27 August 2012 and that all of the Commissioner’s rights to recover in respect of those years had merged in the judgment.

14    There were three steps in this argument. The first was that the liability of a taxpayer to income tax arose from the operation of the 1997 Act and not from the issue of a notice of assessment. The second was that what had, therefore, been in issue when the Deputy Commissioner secured summary judgment based upon notices of assessment for the 2001-2004 and the 2006-2007 years was the liability of Chemical Trustee to income tax in those years. The third step was that whatever rights the Deputy Commissioner had had under the 1997 Act in respect of those years had merged in the judgment. A variant of this step was that issue estoppels arose from the judgment.

15    Each of these steps is plainly arguable. The first finds support in this Court’s decision in Re Mendonca; ex parte Commissioner of Taxation (1969) 15 FLR 256; the second may be the case as a matter of fact; the third receives support from the High Court’s decision in Chamberlain v Deputy Commissioner of Taxation (1988) 164 CLR 502.

16    However, the question is not whether Chemical Trustee’s submission is arguable; rather, it is whether the Deputy Commissioner has a ‘good arguable case’: r 7.35(1)(b). It does not follow that because one side’s case is arguable that the other’s is not.

17    What is required of the taxpayer’s submission is, therefore, that it be sufficiently compelling so as to mean that the Deputy Commissioner’s case is not a good arguable one.

18    I do not think that Chemical Trustee’s argument achieves that threshold. There are a number of potential answers to it which suggest themselves. It may well be true that the 1997 Act creates the liability in a taxpayer to pay tax but it is only when a notice of assessment issues that the obligation becomes payable: s 5-5. Section 255-5(1) of Schedule 1 to the Taxation Administration Act permits recovery as a debt tax liabilities but only those which are both due and payable. One view of what occurred in the earlier summary judgment was that what was determined was the Deputy Commissioner’s entitlements under s 255-5(1) and that this was necessarily circumscribed by the notices of assessment which provided the critical element which made the liabilities under the Act actually payable.

19    Such a view would likewise tend to suggest that Chamberlain is distinguishable because in that case what was involved was a single notice of assessment.

20    In those circumstances, I do not think that this argument means that the Deputy Commissioner does not have a good arguable case. I do, however, accept that the argument put forward by Chemical Trustee is a substantive one requiring resolution.

21    Finally, Chemical Trustee submitted that the combined effect of these three distinct arguments was sufficient to reduce the Deputy Commissioner’s case to below that of a good arguable case. This is a question of assessment. I regard the first two arguments as having little weight. Consequently, this argument rises basically no higher than the third argument which is not, for the reasons I have given, sufficient.

Is there a danger that the prospective judgment will be unsatisfied because Chemical Trustee’s assets are removed from Australia?

22    In litigation involving Chemical Trustee, Kenny J analysed the proper approach to freezing orders in Deputy Commissioner of Taxation v Hua Wang Bank Berhad [2010] FCA 1014 at [5]-[13]. An application for leave to appeal that judgment was dismissed: Hua Wang Bank Berhad v Deputy Commissioner of Taxation [2010] FCAFC 140. Her Honour was dealing with the former O 25A r 2 but this was in substantially the same terms as r 7.32. Paragraphs [8]-[10] are as follows:

8    In substance, O 25A re-states the current judge-made law with respect to freezing orders. A brief reference to the cases is useful to show how, and in what circumstances, the courts have previously thought it appropriate to make such an order. The cases speak of the need for the applicant to establish, first, a prima facie cause of action against the respondent, and, secondly, a “danger” or “real risk” that a judgment debt will go unsatisfied because assets are removed from the jurisdiction or disposed of in some way: see Patterson v BTR Engineering (Aust) Ltd (1989) 18 NSWLR 319 (‘Patterson’) at 321-2 per Gleeson CJ, with whom Meagher JA generally agreed; and Ninemia Maritime Corporation v Trave Schiffahrtsgesellschaft mbH & Co KG (The Niedersachsen) [1983] 1 WLR 1412 (‘Ninemia Maritime’) at 1422-3. In the latter case (at 1422), the Court of Appeal in England described the test as “whether, on the assumption that the plaintiffs have shown at least ‘a good arguable case’, the court concludes, on the whole of the evidence then before it, that the refusal of a Mareva injunction would involve a real risk that a judgement or award in favour of the plaintiffs would remain unsatisfied”.

9    Depending on the circumstances, the interests of justice may support the grant of a freezing order to prevent the dissipation of assets pending the hearing of an action even though the risk of dissipation is less probable than not: Patterson at 325 per Gleeson CJ; Peter Biscoe, Freezing and Search Orders: Mareva and Anton Piller Orders (LexisNexis Butterworths, Australia, 2008) (‘Biscoe’) at p 209 [6.17], citing Patterson, Glenwood Management Group Pty Ltd v Mayo [1991] 2 VR 49 (‘Glenwood’) at 54, and Lifetime Investments Ltd v Commercial (Worldwide) Financial Services Pty Ltd [2005] FCA 226 at [14] per Kiefel J referring to Victoria University of Technology v Wilson [2003] VSC 299 at [36]. As Redlich J noted in the last-mentioned case (at [36]), “[w]hat must be established is a sufficient likelihood of risk which in the circumstances of a particular case justifies an asset preservation order”.

10    A freezing order may be granted even though there is no evidence of the respondent’s positive intention to frustrate a judgment: see National Australia Bank Ltd v Bond Brewing Holdings Ltd (1990) 169 CLR 271 at 277 per Mason CJ, Brennan and Deane JJ; Cardile v LED Builders Pty Ltd (1999) 198 CLR 380 at 394 [26]; Glenwood at 53 per Young CJ; and Riley McKay Pty Ltd v McKay [1982] 1 NSWLR 264 (‘Riley McKay’) at 276. In Riley McKay at 276, the Court of Appeal of the New South Wales Supreme Court said, and I accept, that the jurisdictional basis for relief of this kind “is directed to dispositions … which are intended to frustrate, or have the necessary effect of frustrating, the plaintiff in his attempt to seek through the court a remedy for the obligation to which he claims the defendant is subject” (emphasis added). In this case, there is no direct evidence of positive intention on the respondents’ part to frustrate a judgment. Nonetheless, the Commissioner argues that there is a danger of the removal of assets from the jurisdiction, which would have the effect of frustrating any judgment.

(Emphasis in original.)

23    Important for present purposes is the fact that there must be a ‘danger’; that this does not mean that the Court need be satisfied that the risk of dissipation is more probable than not; and there does not necessarily need to be evidence of any intention to dissipate.

24    In my opinion, in this case there is a danger of dissipation. My reasoning for this conclusion begins with the observation that the amount of tax (and penalties and interest) is very large. Chemical Trustee is, on the taxpayer’s case in the Part IVC proceedings, operated from Neuchatel in Switzerland. The assets it holds in Australia, which are largely securities listed on the Australian Stock Exchange, are in many cases quite liquid (although some of the stocks are also thinly traded). It would not be too difficult for Chemical Trustee to remove a substantial proportion of its assets in this country overseas. I note that between April 2001 to June 2007 AUSTRAC records indicate that $66,397,957 was transferred into Australia by Chemical Trustee and that $61,057,319 transferred out of Australia to Chemical Trustee; also that the ultimate parent of Chemical Trustee is JA Investments Ltd which is incorporated in the Cayman Islands. One has, therefore, the situation where Chemical Trustee both has the means and the motive to remove the assets.

25    Against this it was put the business operations of Chemical Trustee were now well known, having been laid bare in the Part IVC proceedings in which the earlier assessments are under challenge. The evidence in those proceedings does suggest that the affairs of Chemical Trustee are conducted from Neuchatel and that it is involved in trading in Australian securities. Of course, this is disputed by the Deputy Commissioner. But in any event, the knowledge that its affairs are conducted from Switzerland does not lessen the concerns one might otherwise have about a risk of dissipation.

26    It is true that earlier freezing orders which have been in place concerning about $4 million worth of the same shares have been obeyed. It is also true that no attempt has been made to remove the other $21 million or so worth of ASX-listed shares currently held by Chemical Trustee. However, the usefulness of that fact does not go far unless one can know – and I do not – that Chemical Trustee was aware that a tax bill of around $25 million was coming.

27    For those reasons I conclude that a danger of dissipation is shown. I do not find that an intention to dissipate has been shown but, given the means and motive open to Chemical Trustee together with the very large sums involved I am nevertheless satisfied that a danger has been demonstrated.

28    In principle, there should be a freezing order. I see no reason why it should not be on similar terms to the freezing order which has been made in the past.

29    The orders I will make are that:

1.    The freezing orders made on 21 September 2012 be extended to 6 pm on 28 September 2012.

2.    The parties bring in short minutes of order giving effect to these reasons by 6 pm Thursday 27 September 2012.

3.    The matter be stood over for further directions on 9 October 2012 at 9.30 am.

Associate:

Dated:    26 September 2012