FEDERAL COURT OF AUSTRALIA

Denlay v Commissioner of Taxation (No 2) [2013] FCA 358

THE COURT ORDERS THAT:

1.    The quashing of the decision of 30 September 2011 to issue a notice under s 260-5 of Schedule 1 of the Taxation Administration Act 1953 (Cth) to BT Funds Management Ltd is to take effect on 30 September 2011.

2.    The respondent is forthwith to refund to BT Funds Management Ltd monies paid to him, by reason of that notice, by BT Funds Management Ltd.

3.    The respondent is to pay the applicant’s costs of and incidental to the application, to be taxed 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 quashing of the decision of 30 September 2011 to issue a notice under s 260-5 of Schedule 1 of the Taxation Administration Act 1953 (Cth) to BT Funds Management Ltd is to take effect on 30 September 2011.

2.    The respondent is forthwith to refund to BT Funds Management Ltd monies paid to him, by reason of that notice, by BT Funds Management Ltd.

3.    The respondent is to pay the applicant’s costs of and incidental to the application, to be taxed on an indemnity basis.

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

REASONS FOR JUDGMENT

1    On 5 April 2013, for reasons which I then published, I decided that each of the decisions of the Commissioner of 30 September 2011 to issue notices under s 260-5 of Sch 1 to the Taxation Administration Act 1953 (Cth) (Taxation Administration Act) to BT Funds Management Limited should be quashed: see Denlay v Commissioner of Taxation [2013] FCA 307 (the principal judgment). At that time I reserved to Mr and Mrs Denlay liberty to apply for ancillary or consequential orders as to the date of effect of the quashing order, repayment of moneys garnered in pursuant to the two section 260-5 notices, and, at the same time, orders in respect of costs. I further directed that the District Registrar forthwith give notice to Mr and Mrs Denlay as trustees in bankruptcy in respect of the orders made and the reasons for judgment. These reasons for judgment must be read in conjunction with the principal judgment.

2    The trustees in bankruptcy have responded to the receipt by them of the Court’s orders and reasons for judgment. I record my appreciation for the diligence of their response, which is entirely in keeping with the responsibilities to the Court in respect of the administration of bankrupt estates by trustees in bankruptcy. The trustees have advised that they do not intend to appear before the Court. They have further advised that, having considered their responsibilities in relation to the bankrupt estates of Mr and Mrs Denlay, they have formed the view that the moneys which were garnered in are superannuation funds and do not form part of property which would otherwise vest in them pursuant to the Bankruptcy Act 1966 (Cth).

3    I anticipated that so much might be the case in the principal judgment. It was though necessary to permit the trustees an occasion to make their own decision on that subject. The order which the trustees in bankruptcy suggest in their correspondence, responsive to the notification of the Court’s quashing order and reasons for judgment, is that subject to any consideration as to a lien as to legal costs of Mr and Mrs Denlay, the order that would be made is one foreshadowed in the principal judgment, which is the refunding of the moneys to BT Funds Management Limited.

4    Mr and Mrs Denlay raised three issues for consideration in relation to consequential orders. The first was that the quashing should take effect on 30 September 2011, ie the date of the decisions in question. The Commissioner did not dispute that this should be the date of effect. Secondly, they submitted that the order should be that the moneys should be repaid to BT Funds Management to the end that those moneys be held then on the same terms as they were held at the time when the notices were issued to BT Funds Management. Here again, the Commissioner did not dispute that such a repayment order should be made.

5    It was a necessary part of the submission on behalf of Mr and Mrs Denlay as to the making of a repayment order in those terms that whatever question there may be as to a lien in respect of legal costs was regarded as a matter as between them and their solicitors, not one which required any particular order from the Court. The end then to which each of these particular orders proposed on behalf of Mr and Mrs Denlay was directed was to a restoration of the status quo which had prevailed in respect of those moneys prior to the decisions to issue the section 260-5 notices. It seems to me entirely appropriate to make consequential orders in those terms.

6    It should also be recorded, lest be thought the subject had escaped the attention of those representing Mr and Mrs Denlay or the Court that consideration was given as to whether or not there ought additionally to be an order in respect of the payment of interest on the moneys concerned. A request that the interest be awarded was not made. That followed an exchange in Court prior to today which raised as between me and counsel for Mr and Mrs Denlay, considerations for and against that subject. These included that one might have apprehended, but for the section 260-5 notice decisions, that moneys would have been diminished, in any event. In other words, one can see that this was not necessarily a case where there had been a loss in the ability to earn interest on the moneys concerned. It was not necessary for counsel for Mr and Mrs Denlay to do anything other than signify that an application for interest was not made, but I should record that that particular value judgment is one which strikes me as entirely reasonable in the circumstances.

7    That then leaves for consideration the question not as to whether there should be an order for costs against the Commissioner, but whether there should be a special order as to costs? That was a subject which I deliberately left open at the conclusion of the principal judgment.

8    The Commissioner, unsurprisingly, conceded that costs should follow the event. Where there was controversy was on the subject of whether the costs should not be ordered to be taxed on the usual party and party basis, but whether, as Mr and Mrs Denlay sought, the order should be that costs be taxed on an indemnity basis.

9    Section 43 of the Federal Court of Australia Act 1976 (Cth) confers upon the Court a power to award costs. In cases of the present kind, as opposed to some of the Court’s particular, specialist jurisdictions, such as native title and industrial law, the power to award costs involves the exercise of an unfettered discretion. It is though a discretion which must be exercised judicially, not capriciously or arbitrarily or, for that matter, swayed by matters of emotion.

10    There are against the background of a discretion which is not fettered categories of case where in the past courts have been disposed to order indemnity costs. These categories of case were notably canvassed by Sheppard J in Colgate Palmolive Company & Anor v Cussons Pty Ltd (1993) 46 FCR 225. Sheppard J examined not just the categories of case but also the differences between party and party and indemnity costs. His Honour was astute to highlight that the categories which he identified were not closed and that the discretion truly was an open ended one which must be exercised in the circumstances of each individual case.

11    That is a point which has been made repeatedly, and by no means just in modern times, in respect of the discretion as to costs. For example, in Hypec Electronics Pty Ltd (in liquidation) v Mead & Ors [2004] 61 NSWLR 169 at 179 (Hypec), Campbell J at [42] referred to a judgment of Bray CJ with whom the other members of the Full Court agreed in Cretazzo v Lombardi [1975] 13 SASR 4 at 11, where the Chief Justice, referring to Donald Campbell & Co v Pollak [1927] AC 732 said:

Time and again attempts have been made to fetter that general discretion by the imposition of judge-made rules. Time and again those fetters have been released by appellate courts. I think the guiding principle still stands as it left the House of Lords in the famous case of Donald Campbell & Co v Pollak, that the general discretion is absolute and unfettered, except that it must be exercised judicially, not arbitrarily or capriciously, and that it cannot be exercised on grounds unconnected with the litigation.

To this Campbell J added in Hypec, “If that is true of the general discretion as to costs, it must also be true of the discretion to order indemnity costs”. I, respectfully, agree with that observation.

12    For all that, it is apparent when one goes to authorities that there are particular features of the making of a costs order which must firmly be taken into account in deciding whether or not to make a special order as to costs. A useful reminder of these was offered by Preston J in Great Lakes Council v Lani [2007] 158 LGERA 1 at [31] (Great Lakes v Lani) where his Honour stated:

I do not consider that there is any special or unusual feature in the circumstances of this particular case justifying a departure from the usual basis for an order of costs; that is on a party and party basis. First, the nature of each of the breaches of the statutes in question is not a special or unusual feature by itself. Costs are not to be used for punitive purposes. There is no rule that as between the differing bases for ordering costs - party and party, solicitor and client and indemnity the selection of the basis depends upon the seriousness of the breach of statute the subject of a civil enforcement proceedings.

[emphasis added]

13    The seriousness of the breach of a statute cannot, in itself, be used as an aggravating circumstance warranting departure from ordering costs on the usual basis, namely, party and party basis, to another basis such as indemnity costs, as will be apparent from the passage quoted from Great Lakes v Lani. That was a civil enforcement proceeding arising against the background of the clearing of native vegetation on a private reserve. The breaches to which his Honour referred were breaches of legislation which regulated that clearance. Here, in a sense, and by reference to the principal judgment, it can be seen that the Commissioner breached s 260-5 of Sch 1 to the Taxation Administration Act in that he failed to take into account a relevant consideration.

14    That analogy might suggest that this is not a case for the awarding of indemnity costs. As it happens, there is authority which would support that proposition, derived by analogy from Great Lakes v Lani in the context of a judicial review proceeding. In Australian Electoral Commission v Towney (No 2) & Ors [1994] 54 FCR 383 at 388 – 389, Foster J had occasion to reflect upon whether a special order as to costs should be made against the Australian Electoral Commission. Under the heading “The Process of Public Administration”, his Honour stated:

The applicants sought to distinguish these proceedings from the ordinary inter parties proceedings by emphasising the involvement of councillors and electors in their public capacity.

Then a little later:

The consequences of the petitioner availing himself of the opportunity to bring proceedings included the investment by the elected office bearers of considerable time and expense in participating in the proceedings. There is no dispute about that. Nor is there any dispute that error occurred in the balloting and recording of votes in the elections. It is submitted that elected officials, not responsible for the commission of the error, should not incur liability for the mistakes made by polling officials. At the same time, the applicants point to what they characterise as the AEC’s [that is, the Australian Electoral Commission’s] central role in the circumstances leading to the dispute and consequent responsibility for the involvement of the other parties. The fact that the councillors were involved in the proceedings concerning the process of public administration is not, in my view, in itself a sufficient basis to award costs upon the basis desired by the applicants. The appropriateness of the AEC paying the costs of the applicants is not in dispute …. The AEC correctly points out, in my opinion that in judicial review proceedings, or cases concerning constitutional principles, costs are awarded on the usual basis even though the public acts of administration officials are called in question. The fact that these proceedings involve errors made by officials in the process of public administration does not, in my view, afford ‘special circumstances’ sufficient to justify departure from the party and party basis.

[emphasis added]

15    Yet even in relation to judicial review proceedings, there is no hard and fast rule that an award of indemnity costs is not possible. To hold that would run quite contrary to the observation made by Bray CJ by reference to earlier authority. In Sky Channel Pty Limited v Minister for Transport and Communications & Ors (G 319 of 1992, 19 February 1993), Einfeld J made an order that costs be paid by a Minister and a public official on an indemnity basis. When one reads his Honour’s judgment, the basis for that order lay in the conduct of the litigation by the Minister. That conduct had occasioned, for entirely futile reasons, expense to the other parties. His Honour regarded that as, “the stuff of indemnity costs.”

16    A submission was made that, when one examined particular correspondence directed on behalf of Mr and Mrs Denlay by their legal advisers to the Commissioner’s legal advisers, after the making of the decisions concerned and prior to the furnishing of reasons for those decisions, occasion was to be found in the continued adherence to the decisions and in the defence of those decisions, for an order on a special basis. In particular, attention was drawn to an email of 22 December 2011 from the Denlays’ lawyers to an officer in the Australian Government Solicitor’s office, in which the following was highlighted as a sequel to the bringing up of the taxation appeals in this Court for mention:

The position taken by your client in court last Friday was somewhat surprising, given that your client:

1    issued the garnishee notices to my clients’ superannuation funds;

2    had previously received correspondence from my office concerning the garnishee notices;

3    was well and truly aware that my clients’ source of funding the tax appeals was the superannuation moneys (this having been directly expressed to numerous representatives of your client over the past 12 to 24 months);

4    was well and truly aware of the consent orders which are in place in the Queensland Supreme Court (most recently, the orders made by her Honour Philippides J on 29 April 2011) regarding a stay of the execution of the two Supreme Court judgments against my clients (this issue being of quite some industry and public discussion including your client having challenged the original stay (unsuccessfully) in the Queensland Court of Appeal); and

5    had, prior to the court hearing last week, received approximately $80,000 from my clients’ superannuation funds in purported compliance with the garnishee notices.

[emphasis in original]

17    The author of the email extended an invitation to the Commissioner to respond to these issues and also referred to the fact that he was presently seeking instructions from Mr and Mrs Denlay regarding the garnishee notices and any appropriate court proceedings which might be taken. There was a follow up to this particular communication on behalf of Mr and Mrs Denlay in early January 2012, no response having by then been received. On 11 January, the response on behalf of the Commissioner was that reasons were in the course of preparation. Such reasons were furnished later that month. The following month, the judicial review proceedings were initiated.

18    It is fair to say that, prior to furnishing reasons, the Commissioner’s attention was specifically directed not just to the consensual basis of stay orders made most recently in the Queensland Supreme Court but to the history behind those particular orders in terms of the contest which had ensued in that court. It is, in those circumstances, somewhat surprising that, in the course of embarking on the process of giving reasons after the event of the making of the decisions, the decision-maker did not better avail himself of the opportunity for mature reflection presented by that correspondence. This was not a case where the reasons concerned accompanied the decisions. There was occasion for reflection. That occasion necessarily included an ability on the part of the decision-maker to vacate the decisions concerned, having regard to the points that were made in the Denlays’ solicitor’s email of 22 December 2011.

19    Of course, it might be said, as indeed it was submitted on behalf of the Commissioner, that compensatory aspects of the challenge to the decision to issue the section 260-5 notices are addressed by the making of the consequential order for repayment. It is certainly salutary to recall that, in Harrison v Schipp Cameron & Anor v Schipp [2001] NSWCA 13 (Harrison v Schipp), the Court of Appeal in New South Wales overturned a trial judge’s decision which had granted indemnity costs because, in essence, the defendants concerned had engaged in unconscionable conduct and breaches of fiduciary duty. In particular, in Harrison v Schipp, the court, at [136], observed:

the unconscionable conduct or breach of fiduciary duty leads to compensatory or other relief and costs on the normal basis and more must be established for a special order as to costs.

20    It was on that basis, that the trial judge’s ordering of indemnity costs was regarded by the Court of Appeal as wrong in principle.

21    Also to be noted is Lindgren J’s reasoning under the heading “Ethical or Moral Delinquency, failure to train and supervise agents and contravention of the Companies Code, the SIC and the law”, in NMFM Property Pty Ltd (formerly National Mutual Property Services (Australia) Pty Ltd) & Ors v Citibank Ltd (formerly Citibank Savings Ltd) (No 11) (2001) 187 ALR 654. His Honour stated at [56]:

The ordinary rule is that an award of cost is on the party and party basis, and that it is only the special case that the discretion to depart from that rule will be properly exercised: Venture Industries at FCR 153 per Black CJ, FCR 158 per Cooper and Merkel JJ. In my opinion, there is no counterpart ordinary rule that in the absence of special circumstances indemnity costs will be awarded where the losing party was guilty of ethical or moral delinquency in the antecedent facts which have given rise to the litigation. Even in a proved case of fraud, for example, in my opinion the presumption is that a costs order against the fraudulent party will be on a party and party basis. The conduct of a party that is relevant to the issue of indemnity costs is the party’s conduct as litigant. But, as noted below, the knowledge that a party has, including knowledge of his or her past conduct, may be relevant to an assessment of his or her conduct as litigant.

[emphasis in original]

22    As to the latter part of the passage quoted, the authorities to which his Honour then referred include Australian Guarantee Corp Ltd v De Jager [1984] VR 483 (Tadgell J). As summarised by Lindgren J at [57], that was a case where a mortgagee finance company, AGC, was ordered to pay the costs of a wife mortgagor, Mrs De Jager, of successfully defending AGCs action for possession. AGC had forwarded the mortgage for registration knowing that what it assumed to be Mrs De Jager’s signature had not been attested. Although it purported on the face on the document to have been, it transpired that her signature had in fact been forged, although this was not named to AGC. Tadgell J held that AGC was guilty of fraud for the purpose of s 42 of the Transfer of Land Act 1958 (Vic), therefore, did not enjoy the benefit of the indefeasibility of title provided in section 41 of that Act. The fraud consisted of forwarding the instrument for registration with knowledge that it would falsely appear to the Registrar of Titles to satisfy the legislative requirement of attestation instrument. In relation to costs, Tadgell J stated [1984] VR at 502:

Upon the facts as I have found them the pursuit of the action was in my opinion a high-handed presumption. In the end, it was conceded for AGC that Mrs De Jager’s signature was a forgery. Having pursued the action with the knowledge … that it had, and failed, AGC allowed itself a luxury. The Court ought to do what it can to ensure that Mrs De Jager is not out of pocket over it.

[emphasis added]

23    I have taken Tadgell J’s observation in the last sentence in the passage quoted very much to heart, in reflecting upon, whether, truly, having any regard to the matters of principle to which I have adverted, and acknowledging that the discretion is an open-ended one, this is a case where the Court ought to do what it can to ensure that Mr and Mrs Denlay are not out of pocket over it. I have not found that by any means an easy question to resolve.

24    It is necessary, firmly to bear in mind, that there was, appropriately, on the facts, no pleading of bad faith on the part of the Commissioner. Indeed, in the principal judgment, I observe that, while the Commissioner’s ignorance was abject, there was no malice present. I point, as one indicator of that, to the fact that even though, given when the request was made, he was not under the Administrative Decisions (Judicial Review) Act 1977 (Cth), obliged to furnish reasons, he nonetheless voluntarily did that. As was observed on his behalf, in so doing the Commissioner, as it transpired, exposed the administrative law error concerned. That, of course, is one of the benefits that the furnishing of reasons can confer. It enables, for better or for worse, the recipient of a decision to understand why it was made. It also provides a necessary discipline for a decision-maker to set out exactly why a decision has been made. Here, as I have observed already, there was an interval between when the decision was made and when the reasons were furnished and an interval where there was, prompted by the Denlays’ solicitor’s communication, occasion for reflection.

25    In a case where bad faith was present, it might, more readily be able to be concluded that a special order for costs should be made. Even then, one would have to bear in mind that in fraud or in unconscionable conduct cases, the compensation for that conduct lies in the awarded damages, not in the ordering of costs at a special rate.

26    It was also put on behalf of the Commissioner that in the actual conduct of the litigation, the Commissioner had behaved fairly. I respectfully agree with that. The concession to which I refer in the principal judgment is eloquent in that regard. Further, it was obvious to me as the trial judge that the Commissioner’s conduct of the case was fair.

27    The question which might be asked though is whether the case should have been conducted at all given the pause for thought that was offered by the solicitor’s communication? In the end, whilst there was reference in submissions to offers for compromise, it was not pressed strongly on behalf of Mr and Mrs Denlay that this is how that communication ought to be characterised. Rather, it was put that it was more in the nature of a submission that there was a particular fatal flaw about the decision, or, at least, an exposing of the same such that the defence of the decision was unreasonable.

28    In that regard, reference was made to my judgment is Tesoro MB Pty Ltd v Total Building Group Pty Ltd [2009] FCA 802, where I was disposed to order costs on an indemnity basis against a company which had persisted in the defence of an application for the setting aside of a statutory demand in circumstances where its attention had very specifically been drawn to authority which highlighted that there was a readily apparent basis upon which it was very likely that the demand would be set aside.

29    The email of 22 December 2011 did not have that quality of detail about it, but it was written against a very particular background indeed and included reference to the controversy resolved in the Supreme Court in relation to the granting of a stay.

30    The long and the short of it in this case, then, is that a decision to issue the section 260-5 notices was made by the Commissioner in ignorance which I have described in the principal judgment as abject. The ignorance was of a relevant consideration. The considerable history concerned was highlighted in the email of 22 December 2011, albeit not in detail. The author of that email was entitled to assume, (as it turned out mistakenly), that the Commissioner would take heed of considered judgments of courts exercising judicial power under Ch III of the Constitution. He did not do this and did not in circumstances which, although not intentionally on his part, nonetheless led to exactly what had been sought not to happen by the Supreme Court judges, which was a truncation of the exercise by Mr and Mrs Denlay of a right, the presence of which is necessary for the constitutional validity of laws with respect to taxation.

31    It was a highly exceptional course for the Commissioner to take, in circumstances where tax appeals were part-heard, to issue these notices. The result is that Mr and Mrs Denlay did become bankrupt. The further result is that their trustees decided that the appeals should not be pursued. In order to have the benefit of moneys which would never pass to a trustee in bankruptcy, two persons whose experience of the judicial system was frustrated by the issuing of the notices and who had become bankrupt had to seek judicial review in order to have at least the hope of the return of their superannuation moneys.

32    It has been put that circumstances of impecuniosity on the part of one litigant and wealth or power on the part of another are not in themselves reasons to give an order for indemnity costs against a wealthy or powerful party which has not succeeded in litigation. I accept that, but I also find particular force in the sentiment voiced by Tadgell J in the circumstances of this case.

33    Taking all of the factors to which I have adverted into account, it does seem to me that there is a very particular and intimate connection, and not just an intimacy derived from a temporal connection, between the decision by the Commissioner to defend this particular challenge and the occasion offered by the solicitor’s correspondence of 22 December 2011 to reflect upon whether, having regard to the provenance of the stay orders, this was a case where the Commissioner should either concede the quashing or even earlier decide to vacate the decisions concerned. In other words, whilst the actual conduct of the litigation was fair, that it was conducted at all in the circumstances strikes me as a continuation of a decision which was unreasonable in the sense described in the principal judgment. That to me is a basis upon which an order for indemnity costs can and ought to be ordered.

Associate:

Dated:    18 April 2013