ACN 078 272 867 Pty Ltd (in liq) (formerly Advance Finances Pty Ltd) v Binetter, in the matter of ACN 078 272 867 Pty Ltd (in liq) (formerly Advance Finances Pty Ltd) [2018] FCA 952
ORDERS
DATE OF ORDER: |
THE COURT ORDERS THAT:
1. The interlocutory application of the fourth and fifth defendants dated 16 October 2017 be dismissed.
2. The fourth and fifth defendants pay the plaintiffs’ costs of and incidental to the interlocutory application.
3. By 12 pm on 28 June 2018, the parties provide to the Associate to Justice Lee their joint or, failing agreement, competing short minutes of order containing the parties’ proposal for the progress of the substantive matter.
4. The matter be listed for a case management hearing at 9.30 am on 29 June 2018.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
LEE J:
A Introduction
1 By interlocutory application dated 16 October 2017, the fourth defendant, Israel Discount Bank Limited (IDB) and the fifth defendant, Mercantile Discount Bank Limited (MDB) (collectively, the Banks), seek an order under r 13.01(1)(d) of the Federal Court Rules 2011 (FCR) discharging the orders of Foster J made on 30 March 2017 granting leave to both plaintiffs to serve on the Banks in Israel the further amended originating application and statement of claim in this proceeding, together with affidavits of Max Christopher Donnelly and Peter Joseph Duggan (including exhibits) (together, Originating Documents). Further or alternatively, an order under FCR 13.01(1)(b) is sought to set aside service of the Originating Documents.
2 Originally, the Banks submitted that relief ought to be granted because the plaintiffs have not satisfied, and are unable to satisfy, any or all of the constituent and separate requirements of FCR 10.43(4), specifically that: (a) they have a prima facie case for the relief claimed against IDB and MDB (FCR 10.43(4)(c)); (b) the proceeding is of a kind mentioned in FCR 10.42 (FCR 10.43(4)(b)); and (c) the Court has jurisdiction in the proceeding (FCR 10.43(4)(a)). Further or alternatively, it was contended that the proper exercise of the Court’s discretion warrants setting aside the order granting leave to serve the Originating Documents and the consequential service of those documents.
3 During the oral hearing of the application, the Banks conceded that the Court has jurisdiction in the proceeding (indeed, irrespective of the ultimate merits of the claim made under the Corporations Act 2001 (Cth), it is difficult to see how the contrary could ever have been seriously maintained). It was also accepted that in the event that I concluded that the plaintiffs had a prima facie case, then the proceeding would be of a kind mentioned in FCR 10.42. Accordingly, it emerged as common ground that the primary issue on the application was whether the plaintiffs had established a prima facie case for relief against the Banks. I use the collective term, “the Banks” advisedly, as it was also common ground that it was unnecessary to distinguish between the individual positions of each of IDB and MDB; if a prima facie case was established against one of the Banks, then it was expressly agreed that such a result would also apply to the other bank. Although it did not receive prominence in the oral submissions for reasons that will become evident, the assertion that the order granting leave to serve the Originating Documents and the consequential service of those documents should be set aside on discretionary grounds was not abandoned, and will also be addressed below.
4 The Bank’s concessions were not the end of the attenuation of the dispute during the course of oral submissions. Notwithstanding pleading claims said to give rise to equitable relief, the plaintiffs did not ask the Court to conclude that they had established a prima facie case as to these equitable claims. Senior Counsel for the plaintiffs accepted that the Banks’ application for order under FCR 13.01(1)(d) stood or fell on whether or not a prima facie case had been established by the plaintiffs for one of the statutory claims advanced. Nor was reliance placed on the equitable claims to contest the Bank’s assertion that the proper exercise of the Court’s discretion warrants setting aside the order granting leave.
5 This concession narrowed the ambit of dispute on the application considerably. Very detailed submissions had been put in writing as to whether or not a prima facie case had been made out in respect of the equitable relief claimed. Additionally, expert evidence was received on Israeli domestic law relating to knowing assistance in circumstances where it was contended by the Banks that the claim made by the plaintiffs was governed by, and was to be determined pursuant to, the lex loci delicti, being the law of Israel. Both parties are to be commended in narrowing issues in this way in accordance with the case management imperatives contained in Part VB of the Federal Court of Australia Act 1976 (Cth).
6 The relevant statutory claims fall into two categories:
(a) first, the plaintiffs claim that amounts, said to represent payments of principal and interest, paid by the plaintiffs to IDB and MDB, are voidable transactions under s 37A of the Conveyancing Act 1919 (NSW) (Conveyancing Act Claim);
(b) secondly, the plaintiffs allege that the directors relevantly breached statutory duties owed to the plaintiffs under ss 180(1), 181(1) and 182(1) of the Corporations Act. The plaintiffs additionally allege that IDB and MDB were ‘involved’ (for the purposes of s 79 of the Corporations Act) in those alleged breaches, thereby themselves contravening s 181(2) and s 182(2) of the Corporations Act (Corporations Act Claim).
7 The balance of these reasons will be structured as follows:
Section B – Prima Facie Case – The Applicable Principles
Section C – Relevant Background
Section D – The Inferences Available from Relevant Material
Section E – The Conveyancing Act Claim
Section F – The Corporations Act Claim
Section G – The Discretionary Ground for Relief
Section H – Conclusion and Orders
B Prima Facie Case – The Applicable Principles
8 The principles are well established and have been very recently summarised by Rares J in Morris v McConaghy Australia Pty Ltd [2018] FCA 435 at [29]-[30] as follows:
In Ho v Akai Pty Ltd (In Liq) (2006) 247 FCR 205 at 208 [10], Finn, Weinberg and Rares JJ said:
As has been observed on many occasions, the prima facie case requirement has to be met at the outset, usually on an ex parte basis, and without the advantage of discovery and other procedural aids to the making out of a case: see eg Merpro Montassa Ltd v Conoco Specialty Products Inc (1991) 28 FCR 387 at 390. It “should not call for a substantial inquiry”: WSGAL Pty Ltd v Trade Practices Commission (1992) 39 FCR 472 at 476; see also Sydbank Soenderjylland A/S v Bannerton Holdings Pty Ltd (1996) 68 FCR 539 at 549. For present purposes it is sufficient to say that a prima facie case for relief is made out if, on the material before the court, inferences are open which, if translated into findings of fact, would support the relief claimed: Western Australia v Vetter Trittler Pty Ltd (in liq) (1991) 30 FCR 102 at 110. Or, to put the matter more prosaically as Lee J did in Century Insurance Ltd (in prov liq) v New Zealand Guardian Trust Ltd [1996] FCA 376:
What the Court must determine is whether the case made out on the material presented shows that a controversy exists between the parties that warrants the use of the Court's processes to resolve it and whether causing a proposed respondent to be involved in litigation in the Court in Australia is justified.
The requirement of r 10.43(4)(c), that there be a prima facie case for all or any of the relief sought, will be satisfied if the applicant makes out a prima facie case, to the standard referred to above, in respect of any one of the causes of action for which relief is sought: Ho 247 FCR at 215 to 216 [45] applying Bray v F Hoffman-La Roche Ltd (2003) 130 FCR 317 in respect of an analogue of r 10.43(4)(c).
9 The requirement has been described as “not particularly onerous”: see Australian Competition and Consumer Commission v Yellow Page Marketing BV [2010] FCA 1218 at [25] per Gordon J. It was observed of a predecessor provision by Bennett J in Australian Competition and Consumer Commission v April International Marketing Services Australia Pty Ltd (No 6) [2010] FCA 704; (2010) 270 ALR 504 at 507 [8]:
Establishing a prima facie case for the relief claimed…should not call for a substantial inquiry. A prima facie case is made out where, upon a broad examination rather than an intense scrutiny of the material before the court, inferences are shown to be open which, if translated into findings of fact, would support the relief claimed: Western Australia v Vetter Trittler Pty Ltd (in liq) (rec and mgr apptd) (1991) 30 FCR 102 at 110; 4 ACSR 795 at 802–3 per French J; Sydbank Soenderjylland (A/S) v Bannerton Holdings Pty Ltd (1996) 68 FCR 539 at 549; 149 ALR 134 at 142–3; the Full Court in F Hoffman-La Roche at [17] and [96]–[97] per Carr J.
10 Like the former rule (O 9, r 7), it was common ground that FCR 13.01 requires the conduct of a rehearing of the original decision to grant leave, taking into account any additional material put to the Court on the later application: Tycoon Holdings Ltd v Trencor Jetco Inc (1992) 34 FCR 31 at 33; Bray v F Hoffman-La Roche Ltd [2003] FCAFC 153; (2003) 130 FCR 317 at 332 [53]; Australian Competition and Consumer Commission v Prysmian Cavi E Sistemi Energia SRL (formerly Pirelli Cavi E Sistemi Energia SPA) (No 4) [2012] FCA 1323; (2012) 298 ALR 251 at 258 [40]. In this regard, it was uncontroversial that it was open to the plaintiffs, on the hearing of the Bank’s inter partes application to set aside service, to adduce additional evidence to that put before Foster J on the ex parte application: WSGAL Pty Limited v Trade Practices Commission (1992) 39 FCR 472; Costa Vraca Pty Ltd v Bell Regal Pty Ltd [2003] FCAFC 305.
11 Further, in the context of applications under FCR 13.01, where a prima facie case for relief is established, it was accepted that the Court would not set aside service merely because the case for relief did not conform precisely to the words of the statement of claim. This makes sense, because in this way, applications such as the present do not provide a mechanism for some form of collateral attack on the pleadings: Cell Tech Communications Pty Ltd v Nokia Mobile Phones (UK) Ltd (1995) 58 FCR 365 at 373-374.
12 It follows in the present circumstances that a sufficient prima facie case will be established if such a case is made out in relation to either the Conveyancing Act Claim or the Corporations Act Claim: see Bell Group Ltd (in liq) v Westpac Banking Corporation (1996) 20 ACSR 760; Cell Tech at 373.
13 With these principles in mind, I will examine these two statutory claims. Before doing so, it is convenient to set out some background matters (Section C) and then identify (upon a broad examination, rather than an intense scrutiny of the material before the Court), what inferences have been shown to be open (Section D).
C Relevant Background
C.1 Events Leading Up to the Proceedings
14 The plaintiffs are two companies (Advance and Civic) formerly associated with the late Emil Binetter. Emil Binetter and his son Gary Binetter were directors of Advance from its incorporation in 1997 until its reinstatement and liquidation in March 2011 and directors of Civic from its incorporation in 1999 until its reinstatement and liquidation, again in March 2011.
15 The activities of the companies apparently centred on borrowing money from banks in Israel and on-lending it to other entities. It is alleged that from about December 1988, Emil Binetter and his brother Erwin Binetter were involved in a scheme which was said to have the following components:
(a) funds under the control of Emil Binetter and Erwin Binetter, deposited outside of Australia (offshore deposits), were used as security for the advance of funds by the Israeli banks to various applicants (back-to-back arrangement);
(b) funds obtained pursuant to the back-to-back arrangement were provided by the Israeli banks to various members of the Binetter companies by way of purported loans to assist in their business activities in Australia;
(c) the arrangements between those companies and the Israeli banks were documented in such a fashion as to permit the Binetter companies to produce documents purportedly evidencing the purported loans but failing to disclose the existence of the offshore deposits or the back-to-back arrangement;
(d) the Binetter companies then lodged income tax returns in Australia declaring no taxable income (in the case of Advance and Civic), or little or significantly reduced, taxable income in respect of other entities, because any income disclosed was to be offset by substantially equivalent amounts claimed to be deductible expenses for overseas interest referable to payments to the Israeli banks;
(e) at the conclusion of the operation of the scheme, the funds invested in Australia by the Binetter companies were returned to the Israeli banks in purported repayment of the purported loans, leaving those companies in Australia with no monies with which to pay their creditors, in particular the taxation liabilities which were assessed once, it is further alleged, the true nature of the scheme was revealed (which was not until 2009).
16 In BCI Finances Pty Ltd (in liq) v Binetter (No 4) [2016] FCA 1351; (2016) 348 ALR 227, Gleeson J, at 252-256 [139]-[153] (in proceedings commenced by BCI Finances Pty Ltd (in liquidation) and three other Binetter companies) set out the allegations of the liquidators of those companies of the scheme said to have been employed. Her Honour found, on the evidence adduced in that case, that the scheme involved the establishment of sham ‘back-to-back’ loan arrangements with foreign banks that enabled offshore deposits to be hidden. Her Honour described the documents putting in place the arrangements as “shams”: see 261-262 [183]-[185].
17 In any event, in about 1997, Emil Binetter and Erwin Binetter apparently decided to separate their respective interests. It is asserted before me that Advance (from 1997) and Civic (from 1999) were the vehicles utilised by Emil Binetter and Gary Binetter to continue to utilise the alleged scheme.
18 As Heydon J explained in ACN 078 272 867 Pty Ltd (In liq) v Deputy Commissioner of Taxation [2011] HCA 46; (2011) 86 ALJR 4 at 6-7 [7]-[8], “the income tax returns for the two companies in the years from incorporation until 2006 showed ‘nil’ taxable income. Those returns were said to be self-assessments prepared by accountants without source documents and in reliance on information provided by Mr Emil Binetter”. In July and September 2006, “the Australian Taxation Office (ATO) wrote to the then solicitors for Advance and Civic and stated that the ATO intended to audit a number of entities associated with Emil Binetter”. It was five days after the last letter that Advance and Civic each lodged an application with the Australian Securities and Investments Commission (ASIC) to be deregistered. “ASIC was given no notice of the impending audits”, nor was the ATO given notice of the deregistration applications.
19 In December 2010, Jagot J ordered that the registrations of each of Advance and Civic be reinstated, that each be wound up and that Mr Max Donnelly be appointed as liquidator of each company: see Deputy Commissioner of Taxation v Australian Securities and Investments Commission [2010] FCA 1411; (2010) 81 ATR 456 (it was these orders, among others, that were the subject of an application for certiorari, dismissed by Heydon J).
20 Following this, reinstatement of registration was effected by ASIC in March 2011. After each of Advance and Civic had been reinstated, amended assessments were served by the Deputy Commissioner of Taxation (DCT) on Advance totalling $3,955,101.15 (in respect of the tax years 1998 to 2004), and on Civic totalling $862,179.63 (in respect of the tax years 1999 to 2004).
21 In February 2014, Mr Donnelly, as liquidator, conducted an examination of Gary Binetter pursuant to s 596A of the Corporations Act in Israel by audio-visual link. Mr Donnelly had previously applied for the issue of a Letter of Request, requesting the assistance in relation to the winding up of Advance and Civic, and in particular the production of relevant documents by certain of the Israeli banks (including the Banks) in connexion with Gary Binetter’s examination. That application was granted by Farrell J on 28 May 2013 (Donnelly (as liquidator), in the matter of Advance Finances Pty Limited (in liq) [2013] FCA 514). As a consequence, a number of records were produced pursuant to the Letter of Request by, relevantly, the Banks.
C.2 The Proceedings
22 As explained above, for the purposes of this application, it is only necessary to focus on the two statutory claims but before coming to them in detail, it is worth summarising the broader claim made by the plaintiffs.
23 This proceeding was commenced by originating application filed on 16 December 2016, within the period of six years after the reinstatement of each of Advance and Civic. The originating application was supported by an affidavit of Mr Donnelly sworn 15 December 2016. A statement of claim (SOC) was eventually filed in March 2017.
24 In summary, the claims made by Advance in the SOC are:
(a) relief against the estate of Emil Binetter and against Gary Binetter for breach of duty, breach of fiduciary duty, breach of statutory duty and negligence in connexion with their involvement in, and implementation of, the alleged scheme (SOC at [37]-[51]) for:
(i) the amounts of the amended assessments issued by the DCT to Advance totalling $3,955,101.15; and
(ii) the amounts remitted by Advance to MDB totalling $7,290,767;
(b) against MDB for:
(i) involvement in breach of statutory duty and knowing receipt of $7,290,767, whereby, it is said, that amount is held on constructive trust for Advance (SOC at [52]-[57]);
(ii) damages or equitable compensation for involvement in breach of statutory duty in the amounts of $3,955,101.15 and $7,290,767, or alternatively a compensation order under s 1317H of the Corporations Act, or an account of profits (SOC at [52]-[57]);
(iii) receipt of payments voidable under s 37A of the Conveyancing Act totalling $7,290,767, or alternatively $3,500,000 (SOC at [58]-[65]).
25 In summary, the claims made by Civic in the SOC are:
(a) relief against the estate of Emil Binetter and against Gary Binetter for breach of duty, breach of fiduciary duty, breach of statutory duty and negligence in connexion with their involvement in, and implementation of, the scheme involving the Israeli banks (SOC at [66]-[80]) for:
(i) the amounts of the amended assessments issued by the DCT to Civic totalling $862,179.63; and
(ii) the amounts remitted by Civic to IDB totalling $9,246,305;
(b) against IDB for:
(i) involvement in breach of statutory duty and knowing receipt of $9,246,305, whereby that amount is held on constructive trust for Civic (SOC [81]-[86]);
(ii) damages or equitable compensation for assistance in breach of fiduciary duty of $862,179.63 and $9,246,305, or alternatively a compensation order under s 1317H of the Corporations Act, or an account of profits (SOC at [81]-[86]);
(iii) receipt of payments voidable under s 37A of the Conveyancing Act totalling $9,246,305, or alternatively $4,690,000 (SOC at [87]-[94]).
D The Inferences Available from Relevant Material
26 I have set out in Section C.1 some relevant background. Much of that background is uncontroversial (such as the relationship between Emil Binetter, Gary Binetter and the plaintiffs, the chronology of what occurred in relation to deregistration of the plaintiffs, the actions of the DCT, and the course of proceedings in this Court and the High Court relating to the plaintiffs and related companies). For the purposes of this application, however, the proper characterisation of the conduct of Emil Binetter and Gary Binetter, the precise arrangements and characterisation of the arrangements the plaintiffs put in place with the Banks, and the conduct and knowledge of the Banks, is in contest. The nature of the contest is that the Banks say that the plaintiffs’ material falls short of establishing the plaintiffs’ contentions as to these matters on a prima facie basis. It follows that the Court, in accordance with the authorities explained above, needs to engage initially in a process of determining what relevant inferences are available from the material in evidence on this application.
27 Leaving aside the affidavit of Professor Israel Gilead (which was expert evidence directed to questions of Israeli law) and evidence from the Banks’ solicitor proving service of the Originating Documents, the evidence consisted of an affidavit of Peter Joseph Duggan sworn 28 March 2017, an affidavit of Max Christopher Donnelly sworn 15 December 2016 and a documentary tender. As to the tender, a vast, oppressive and unwieldy amount of documentation had been referred to in (and exhibited to) the affidavit of Mr Donnelly. I indicated to the parties, before and during the hearing, that such a large and indiscriminate volume of material should not be placed into evidence, and documents would not be received unless it was proposed that I was to be taken to the document. The plaintiffs cooperated in reducing the scope of the documentation, and the refined documentary tender pressed became Exhibit A.
28 In accordance with the authorities identified at [9] and [10] above, I have broadly examined and reviewed the material in Exhibit A, and for reasons I will explain, I am satisfied that inferences are available to be drawn from that material that:
(a) arrangements were implemented, which involved Emil Binetter and Gary Binetter putting in place ‘back-to-back’ agreements by which funds, under their control, were deposited in Israel, with those funds being used as security for advances of funds by the Banks to the plaintiffs;
(b) more specifically, the Banks created a deposit account and one or more borrowing accounts; funds were placed in the deposit account, and then the Banks permitted advances to be drawn on the borrowing account, which were styled as loans, provided that the total outstanding advances did not exceed the total amount in the deposit account: that is, the deposit account was back-to-back with the borrowing account and the Banks paid interest on the positive difference between the balances of each account and charged a margin on any funds received into the borrowing accounts;
(c) the purpose of the structure was that it created a patina of a regular loan, unconnected to any deposit account whereas, in reality, all the transactions depended on there being a surplus in the deposit account;
(d) these back-to-back arrangements allowed the plaintiffs to have the benefit, in Australia, of funds transferred to each of the plaintiffs by each of the Banks and allowed each of the plaintiffs to treat the transfers of funds from each of the Banks as loan funds;
(e) it also allowed income tax returns to be lodged on behalf of the plaintiffs which declared no taxable income, because any income disclosed would be offset by deductible interest expense amounts said to be liabilities to the Banks.
29 These inferences are to be drawn in circumstances where it is difficult to conceive readily of another commercial purpose for the unusual arrangements disclosed by the evidence. In the absence of other evidence or explanation, the inference is available that the arrangements evinced an intention by those then controlling Advance and Civic to conceal or dissemble the existence of the deposits for the purposes of evading tax. This concealment by those controlling Advance and Civic took place, in effect, by creating the false impression that the terms of the relevant transactions were not affected by the deposits. In this regard, it is also open to infer that the arrangements between the plaintiffs and the Banks were documented in such a way so as to permit the plaintiffs, if necessary or expedient, to produce misleading documents purportedly evidencing the arrangements, but which did not disclose them sufficiently completely so as to reveal the existence of the deposits.
30 Additionally, it can be inferred that the relationship between the plaintiffs and the Banks was such that each of MDB and IDB was apparently prepared to create documents at the request of Emil Binetter which did not identify, on their face, the true complexion of the whole of the dealings between the plaintiffs and the Banks: see, for example, Exhibit A at 30 and 67. This point is well illustrated by a communication, apparently in March 2004, between Emil Binetter and MDB. Under cover of a handwritten note addressed to persons apparently employed by MDB, Emil Binetter requested those employees to “(k)indly have this re-typed on MDB letterhead (as it is, including the date) and post it to us at the address below. Thank you!” The letter was as follows:
ADVANCE FINANCES PTY LIMITED
2/63 BAY STREET
DOUBLE BAY NSW 2028
AUSTRALIA
23 March 2004
Attention: Mr Emil Binetter, Director
Dear Mr Binetter,
This letter is to confirm the agreement between the Mercantile Discount Bank Ltd and your company.
Advance Finances Pty Limited agreed that from 27 May 2004 the existing loan of AUD1,000,000 (one million Australian Dollars) will be amalgamated with a an additional loan of AUD2,500,000 (two million, five hundred thousand Australian dollars) at an interest rate of 6% p.a. (including Australian Withholding Tax) provided that the interest on these amounts is paid on or before the due date (that is to say, 30 June and 31 December each year). That is to say, Advance Finances Pty Ltd will pay Israel Discount Bank Ltd 5.4% interest and Withholding Tax in Australia, when interest is paid on time.
We note that the above facility relates to the loan by your company to Ligon 159 Pty Ltd.
All the aforesaid is in accordance with the abovementioned loan documents signed by you and in any instance the loan documents will prevail.
Yours faithfully,
31 Upon receipt of this request, a query was raised by one bank employee to another to which a response was given, which when translated from Hebrew, was as follows: “this is a back to back credit with a margin of 0.6 between the deposit and the loan. We are supposed to receive additional AUD 2.4 Mil. in return for increasing the loan”.
32 Of course, consistently with the arrangements I have described, the draft letters (including that to Advance I have reproduced above) did not record or disclose the security held by way of back-to-back deposits by each of MDB and IDB. This was not a unique event. Further documents (Exhibit A at 43-56), again apparently reveal the willingness of MDB and IDB to write letters, at the request of the plaintiffs, which may be literally correct so far as they go but are misleading in the sense they fail to disclose the full security held for the loans, namely the back-to-back deposits. Again, in the absence of any explanation by further evidence, it is open to infer that this omission by Advance and Civic in disclosing the true nature of the whole of the arrangements between the plaintiffs and the Banks was no accident and that the Banks were willing to assist in arming Advance and Civic with documents which allowed those controlling Advance and Civic to create, by omission, a false impression.
33 That such letters were apparently relevant to advancing the interests of the plaintiffs in creating a partial or misleading impression of the reality of the arrangements can not only be inferred by the requests themselves, but also appears from a letter from a solicitor to Andrew Binetter dated 20 December 2007 (Exhibit A at 43). It reads as follows:
Dear Andrew,
RE: BINETTER FAMILY + RELATED ENTITIES
We refer to our previous communications.
Please find enclosed for your attention, the following documents for your review and approval:-
1. Draft letter on the letterhead of Mercantile Discount Bank which relates to Advance Finance Pty Limited;
2. Draft letter on the letterhead of Israel Discount Bank which relates to Civic Finance Pty Limited and EGL Development (Canberra) Pty Limited;
3. Draft letter on the letterhead of Israel Discount Bank which relates to BINQLD Finances Pty Limited;
4. Schedule of Tables to be inserted into draft letters on the letterhead(s) of Israel Discount Bank, Hapoalim Bank and Mercantile Discount Bank which relate to Erwin Binetter entities;
5. Copy of Schedules provided to the Australian Taxation Office (“ATO”) on 27 October 2006;
6. Copy of revised Schedule provided to the ATO on 30 October 2006; and
7. Copy of Schedule provided to the ATO during the course of a Section 264 Examination conducted on 9 August 2007 which relates to BINQLD Finances Pty Limited;
8. Schedule entitled “Israel Discount Bank - BINQLD Finances Pty Limited”; and
9. Austrac Report Details Output.
Please note that the above draft letters should be considered to be a “first-cut” working draft of our suggested inclusions for your consideration and by no means is settled.
We note that we are very concerned that if identical letters are sent to the ATO from the respective banks that this will serve to heighten rather than allay the suspicions of the ATO. It may therefore be prudent to amend the letters so that they are structurally and linguistically different to ensure that suspicions of this nature do not arise.
Would you please review the enclosed documents and provide us with your further instructions.
Yours faithfully,
(emphasis added)
34 At least insofar as Civic and IDB were concerned, a letter was ultimately provided in terms very similar to that proposed by the solicitor (compare the draft at Exhibit A at 49-51, with the final letter at Exhibit A at 54-56). The evidence did not establish that the solicitor’s letter (in contradistinction to some of the enclosures) was provided to the Banks, but this is not the point. An inference is open that assistance was provided by arming Civic with a letter which those controlling the company wanted, but which did not reveal all of what, in truth, was going on.
35 Consistently with what one can infer in the absence of further evidence, was a general approach of the Banks providing assistance to those controlling Advance and Civic in apparently being economical in revealing the true nature of the overall commercial relationship, are two statutory declarations, one of which was provided by Mr Israel Zamir from MDB dated 10 December 2009 (Exhibit A at 82-125) and the other by Mr Yacov Loewbeer from IDB dated 3 December 2009 (Exhibit A at 126-128). Both of these statutory declarations were referred to in Gary Binetter’s affidavit affirmed on 24 May 2010 (Exhibit A at 73-81), which, I am informed, was used in opposing the DCT’s application for reinstatement of Advance and Civic heard before Jagot J.
36 These statutory declarations are of some importance. They were obviously carefully drawn and although literally true, do not make any reference whatsoever to the existence of back-to-back deposits as security for the loans to Advance and Civic. In the absence of further evidence, an available inference is that these documents were prepared at the request of those controlling Advance and Civic in an artful way, consistent with the past practice of the Banks to provide documentation at request and, on this occasion, to assist Gary Binetter in his apparent endeavours to conceal the true nature of the commercial arrangements at the time of the opposition to the application for reinstatement of Advance and Civic.
37 Ultimately, it was not until July 2015 that the complete ‘framework’ documentation revealing the true terms of the arrangements was revealed to the liquidator of Advance and Civic for the first time, and then only under compulsion after the Letter of Request had been obtained and executed in Israel requiring production of the documents. This framework documentation set out the true nature of the commercial relationship and the role of the deposits (see, for example, Exhibit A at 1-2).
38 In the absence of evidence on behalf of the Banks, and in the absence of any other evidence, it would be unsafe in the circumstances revealed by Exhibit A to treat any particular terms upon which any of the advances were made by the Banks at face value. Given the nature of the arrangements revealed in the evidence, and the apparent concerted efforts taken to conceal their true nature, I am not satisfied that I can, without evidence from the Banks or others, safely rely on any documents suggesting that the loans were for a proper purpose. It is notable a similar conclusion was drawn in not substantially dissimilar circumstances, albeit on the basis of different evidence and in the absence of evidence from the respondents by Gleeson J in BCI Finances at 257 [157].
39 I will return to these available inferences that can be drawn from the material adduced below.
E The Conveyancing Act Claim
E.1 An Overview of the Contentions of the Plaintiffs
40 The case made by the plaintiffs is that by paying principal and interest to the Banks with the alleged purpose of avoiding tax, the main purpose of each of Emil Binetter and Gary Binetter was to prevent the amounts paid from becoming divisible among the plaintiffs’ creditors or to hinder or delay the process of making those amounts available for division among the plaintiffs’ creditors: see SOC at [44.5(b)] and [73.5(b)]. It is further asserted that each of Emil Binetter and Gary Binetter knew, and it was their intention, that by making the relevant payments, the plaintiffs would be unable to pay all of their creditors and meet existing and future likely taxation liabilities: see SOC at [60] and [89]; and at the time of making the above payments, the plaintiffs were, or were about to become, insolvent: see SOC at [61] and [90].
41 As put in submissions, the plaintiffs assert that the application of s 37A of the Conveyancing Act in the present circumstances follows by reference to the following logical sequence:
(a) in 2005 there was a prospective creditor, namely the DCT, for taxation liabilities that would ultimately become due and payable in March 2011 (when Advance and Civic were reinstated);
(b) payments by Advance to MDB and by Civic to IDB, in June 2005, removed all funds (effectively all assets) available to Advance and Civic from the jurisdiction;
(c) after these payments in June 2005, neither Advance nor Civic was left with any funds at all with which to pay their prospective taxation liabilities to the DCT;
(d) the effect of these June 2005 payments was to delay or hinder a creditor (it is said it will be a question of fact at any hearing to ascertain whether earlier payments in the period 2000 to 2004 had the same effect);
(e) it can be inferred from the above that the payments made in June 2005 by Advance and Civic were made with intent to defraud creditors; and
(f) (although it is said not to be relevant to prove in the plaintiffs’ case in chief), the Banks are not purchasers in good faith without notice of intent to defraud within the meaning of s 37A(3) of the Conveyancing Act.
E.2 An Overview of the Submissions of the Banks
42 The Bank’s submissions were that the plaintiffs have failed to identify how s 37A applies to the circumstances of the Banks in two respects: first, that s 37A does not apply to the repayments of principal and interest on a loan and that the plaintiffs have not established, on a prima facie basis, that there were alienations of property with intent to defraud; and secondly, the plaintiffs have failed to demonstrate, on a prima facie basis, that the Banks were not acting in good faith having, at the time of the alienation, no notice of the intent to defraud creditors. It is convenient in summarising the submissions of the Banks and later considering them, to deal with each of these arguments in turn.
E.2.1 No Intent to Defraud or Relevant Alienation of Property
43 As noted above, the Banks contend that as a matter of statutory construction, s 37A does not apply to repayments of loans to lenders, suggesting that at its highest the evidence is only capable of supporting an inference that the Banks loaned funds to the plaintiffs (noting that the plaintiffs plead that the funds advanced did not belong to them: see SOC at [38.1] and [67.2]).
44 It is said to be a logical fallacy that a transfer of funds in discharge of an obligation to repay principal and interest on a loan entered into a number of years earlier and the purpose of which, on the available evidence, was entered into (and used) for business purposes (see SOC at [28.8], [30.2] and [38.5]) can be an “alienation of property…with intent to defraud creditors”. Hence the plaintiffs have not established that s 37A applies to the payments by the plaintiffs to IDB and MDB.
45 The Banks point to the pleadings and submit that notwithstanding the onus to prove that an intent to defraud existed, no evidence or particulars have been pleaded or identified to support the allegations. In this regard, it is noted that the plaintiffs’ evidence shows that payments were made from Ligon 159 Pty Ltd (Ligon) to IDB and MDB and the plaintiffs have not identified with any precision the evidence tendered on the application which establishes, even to a prima facie level, that the plaintiffs were ever beneficially entitled to the funds owned (and paid) by Ligon such that those funds would have been available (on a winding up of the plaintiffs) to the creditors of the plaintiffs. By the plaintiffs’ own pleadings, it is said the funds advanced to the plaintiffs belonged to third parties, not the plaintiffs: see SOC at [38.1] and [67.2].
46 The plaintiffs’ case is insufficient because, as Vaughan Williams LJ explained in Glegg v Bromley [1912] 3 KB 474 at 484, where a person has genuine creditors, to give a preference to one at the expense of the others “does not bring the case within the statute … even though the parties may have been minded to defeat a particular creditor”.
E.2.2 Lack of Evidence as to Mala Fides
47 It is common ground that s 37A will not apply if it can be shown that IDB and MDB were acting in good faith having, at the time of the alienation, no notice of the intent to defraud creditors: see s 37A(3) of the Conveyancing Act. What separates the parties is whether the evidentiary and persuasive burden of proving this aspect of the case rests upon the plaintiffs in chief (thus forming part of the prima facie proof analysis) or upon the Banks as the parties seeking to make out the defence.
48 The Banks contend that no evidence has been adduced which is capable of establishing, to a prima facie level, that the Banks had notice of any intent to defraud creditors. Indeed, consistently with the approach the plaintiffs take as to the proper construction of s 37A, no such allegation is even made. If the Banks’ construction is correct, a critical element in the attribution of liability to IDB and MDB remains missing.
49 The Banks point to recent authority (Lewski v Australian Securities and Investments Commission [2016] FCAFC 96; (2016) 246 FCR 200) which is said to be instructive on the approach to be taken to the construction of s 37A(3) and, it is said, requires the conclusion that the onus of proof rests with the plaintiffs. In Lewski, the Full Court considered a similar question in the context of s 208(3) of the Corporations Act. Section 208(1) imposed certain requirements on persons involved in making related party transactions on behalf of registered schemes and s 208(3) provided that those requirements did not prevent the entity responsible for the registered scheme from making certain transactions where those transactions were provided for by the scheme’s constitution. The Full Court noted (at [321]) that the language of the provision disclosed an intention that s 208(3) did not create an exception to s 208(1), but rather acted as a threshold or gateway to its operation and held (at [321]-[322]) that s 208(3) was an essential element of a contravention of s 208(1) and therefore the onus of proof fell upon ASIC, as the applicant. In doing so, reference was made to Vines v Djordjevitch (1955) 91 CLR 512 in which Dixon CJ, McTiernan, Webb, Fullagar and Kitto JJ said (at 519):
When an enactment is stating the grounds of some liability that it is imposing or the conditions giving rise to some right that it is creating, it is possible that in defining the elements forming the title to the right or the basis of the liability the provision may rely upon qualifications exceptions or provisos and it may employ negative as well as positive expressions. Yet it may be sufficiently clear that the whole amounts to a statement of the complete factual situation which must be found to exist before anybody obtains a right or incurs a liability under the provision.
(Emphasis added)
50 Consistently with this approach, the Banks contend that the principled approach is to view s 37A(3) as identifying the factual situation which must be found to exist before a right under the section is complete, hence it is an essential element of the cause of action and the burden of proof lies with the plaintiffs. Textually, this is said to be consistent with the opening words of pre-condition in s 37A(1), “[s]ave as provided in this section”. I will come back to this submission in Section E.3.3 below.
E.3 Consideration
E.3.1 The Applicable Law
51 It is convenient to commence a consideration of the Banks’ arguments, by setting out the principled approach to the application of s 37A of the Conveyancing Act. The section relevantly provides that:
1. Save as provided in this section, every alienation of property, made whether before or after the commencement of the Conveyancing (Amendment) Act 1930, with intent to defraud creditors, shall be voidable at the instance of any person thereby prejudiced.
2. This section does not affect the law of bankruptcy for the time being in force.
3. This section does not extend to any estate or interest in property alienated to a purchaser in good faith not having, at the time of the alienation, notice of the intent to defraud creditors.
52 As is well known, the origins of s 37A date back to the Fraudulent Conveyances Act 1571 (13 Elizabeth I, c 4 & 5), and, as Palmer J observed in Hall v Poolman [2007] NSWSC 1330; (2007) 215 FLR 243 at 361 [550]:
The purpose of s 37A is to defeat fraud no matter by what device it is implemented. The reach of the section is not foreshortened by technical obstructions placed in the way of recovery proceedings in furtherance of the original fraudulent intent. The words of the section are of the widest possible application; they focus on the effect of what is done, not on the means by which it is done.
53 In Chan v Acres [2013] NSWSC 1597; (2013) 51 Fam LR 90, Kunc J, at 100 [72]-[73], helpfully set out a series of principles concerning the application of the section drawn from the authorities, which relevantly included:
(1) “Creditors” includes present or future, contingent or prospective creditors.
(2) The existence of the requisite intent is a question of fact to be determined objectively from all the circumstances, irrespective of whether or not the person concerned appreciated the quality of their act.
(3) It is easier to infer intent to defraud where the alienation is voluntary rather than for consideration.
(4) An inference of intent to defraud creditors may be made in the case of subtraction of assets which, but for the alienation in question, would be available to meet the claims of present and future creditors.
(5) The phrase "intent to defraud" includes an intent to delay or hinder.
(6) It is sufficient to show an intent to hinder, delay or defeat creditors without also showing that the debtor wanted creditors to suffer loss or had the purpose of causing loss.
(7) The intent to defraud does not have to be the sole or even predominant intent of the debtor.
(8) The seriousness of the allegation of fraud is a matter which may be taken into account in determining whether the necessary intention has been proven on the balance of probabilities.
…
The propositions in the preceding paragraph are derived from: Marcolongo v Chen [2011] HCA 3; (2011) 242 CLR 546 at [19], [20], [25]. [32], [34] and [57]; Cannane v J Cannane Pty Ltd (in liq) [1998] HCA 26; (1998) 192 CLR 557 at [12] and [92]; Kang v Kwan [2002] NSWSC 1187; (2002) 11 BPR 20,623 at [187]; s 140 Evidence Act 1995 (NSW); Green v Schneller [2002] NSWSC 671; (2002) 29 FamLR 346; (2002) 11 BPR 20,935.
54 Despite the width of the section, as is evident from the above propositions, a textual analysis of the section reveals that in order for it to be invoked, four elements need to be present, being: (a) an alienation; (b) of property; (c) the alienation must have been made with the intention to defraud creditors; and (d) the application must be made by a person thereby prejudiced. Additionally, s 37A(3) affords a defence protecting bona fide transactions for value.
55 As was explained in Marcolongo v Chen [2011] HCA 3; (2011) 242 CLR 546 at 554 [19]-[20] the term “defraud” as used in the section reproduced the meaning in the expression “delay, hinder or defraud” of the Elizabethan Statute which was understood as if it read “delay, hinder or [otherwise] defraud”, and the section should be given a liberal construction in effecting the purpose of suppressing fraud. The essential element of the fraud being aimed at is the diminution of the fund available for the satisfaction of creditors being future, contingent or prospective: Huynh v Helleh Holdings Pty Limited [2001] NSWSC 1162; (2001) 10 BPR 19,333 at [17]. Consistently with this liberal, purposive construction, “alienation” has also been interpreted broadly as meaning a parting with property.
E.3.2 Intent to Defraud and Relevant Alienation of Property to Defraud
56 As I have already explained, there is ample material in Exhibit A, and inferences are open from that material which, if translated into findings of fact, would support the plaintiffs’ contentions that payments by Advance to MDB and by Civic to IDB in June 2005 removed all funds from Australia and after the payments, neither Advance nor Civic had funds to pay any prospective tax liabilities, with the effect that those payments delayed or hindered the DCT (a prospective creditor) and hence, it can be inferred, the payments made were made with intent to defraud a prospective creditor.
57 The Banks’ contentions in their supplementary written submissions that the evidence is only capable of supporting an inference that IDB and MDB are banks which loaned funds to the plaintiffs and that “on the available evidence”, the purpose of the loans was “for business purpose” and there is “no evidence” the loans were other than “on commercial terms” are put much too highly and (in the absence of any further evidence) defy a commonsense review of the available material in evidence and should be rejected.
58 In particular, the submission that the evidence is only capable of supporting an inference that the Banks loaned funds to the plaintiffs and any transfers were in discharge of an obligation to repay principal and interest on a loan entered into (and used) for business purposes is one I cannot embrace in the light of the inferences available as to the existence of the back-to-back arrangements, the apparent concealment of those arrangements, and their apparent purpose. The further notion that in the absence of further evidence shedding light of what actually occurred, I should conclude that no prima facie case has been established because of the existence of the loan documentation and payments pursuant to a loan obligation, carries with it the unstated premise that I can safely treat at face value one aspect of the contractual documentation between the Banks and the plaintiffs and Ligon (a company related to Advance and Civic). For reasons I have already explained, I simply cannot.
59 There is sufficient material from which it may be inferred that the aim of the actions of Emil Binetter and Gary Binetter was to denude Advance and Civic of moneys in June 2005 by remitting them to the Banks in purported repayment of loans. This necessarily had the intended consequence that Advance and Civic would not have those funds with which to meet an obligation to a prospective creditor, the DCT, to meet their taxation liabilities.
60 But this is not the end of the analysis, because of the s 37A(3) good faith issue that has been raised.
E.3.3 Lack of Evidence as to Mala Fides
61 In B v U [2012] NSWSC 1416 at [11], Pembroke J remarked that where the onus of proof lies in connexion with the defence under s 37A(3) is sometimes contentious. His Honour went on at [11]-[12]:
No assistance is obtained from the language of Section 37A(3) itself, which is silent as to the party who must prove, or disprove, its ingredients. And appellate courts appear to have expressed different views. Compare P T Garuda Indonesia Limited v Grellman (1992) 35 FCR 515 at 527-528 and Wentworth v Rogers [2004] NSWCA 430 at [62]-[68]. But I am of course bound by the Court of Appeal of this court, whose clear view of the law is set out in Wentworth v Rogers…
The party seeking to have the benefit of Section 37A(3) must positively prove the necessary statutory ingredients. It is not necessary for the plaintiff to plead that the section has not been satisfied or to seek to negative the statutory ingredients of the section in its case in chief. Of course, once the defendant embarks on a course of attempting to prove that he or she was a purchaser in good faith with no notice of the intent to defraud creditors, the plaintiff may respond with whatever forensic resources are available to it to rebut the allegation.
62 Notwithstanding these comments, it is not apparent to me that in Wentworth v Rogers [2004] NSWCA 430, Hodgson JA (with whom Santow and Hislop JJA agreed), considered the approach taken in that case to be inconsistent with the Full Court’s decision in P T Garuda. This can be seen by a review of Hodgson JA’s reasons at [64]-[68]:
In Huynh v. Helleh Holdings Pty. Limited [2001] NSWSC 1162, Hamilton J held that the onus was on the person seeking relief to prove lack of good faith, or notice of the intent to defraud, relying particularly on P T Garuda…
However, that case concerned s.121 of the Bankruptcy Act, which at the relevant time was in the following terms:
121(1) Subject to this section, a disposition of property, whether made before or after the commencement of this Act, with intent to defraud creditors, not being a disposition for valuable consideration in favour of a person who acted in good faith, is, if the person making the disposition subsequently becomes a bankrupt, void as against the trustee in the bankruptcy.
(2) Nothing in this section shall be taken to affect or prejudice the title or interest of a person who has, in good faith and for valuable consideration, purchased or acquired the property the subject of the disposition or any interest in that property.
(3) In this section, “disposition of property” includes a mortgage of property or a charge on or in respect of property.
It is clear that the Court in that case was considering the onus of proof as to good faith of the disponee (35 FCR at 527), which is dealt with in s.121(1), and not the good faith of any person who may for the time being hold the property, referred to in s 121(2). Under s.121(1), the onus is on the party seeking to avoid the transaction to show, inter alia, the element required by the phrase commencing “not being”. However, if that onus is discharged, I think the onus under s.121(2) would lie on the person asserting its protection; and I think the same is true of s.37A(3)…
The case of Michael v. Thompson [1894] VicLawRp 107; (1894) 20 VLR 548, referred to in Garuda, suggests the contrary; although there is no reference in that case to the statutory provision there under consideration. Authority in favour of the view that the onus under s 37A(3) lies on the person seeking its protection is the following dictum by Parker J in Glegg at 492:
The only remaining point is, I think, that which was argued under the statute of 13 Eliz. c. 5. Now the scheme of that statute is this: By it all conveyances and assignments made with intent to hinder and delay creditors are rendered void against all creditors hindered or delayed by their operation. There is, however, a proviso for the protection of a purchaser for good consideration without notice of the illegal intention. In the authorities which deal with the statute it is not always clear whether the judges are dealing with the operative part of the Act or with the proviso. The illegal intent under the operative part is a question of fact for the jury or the judge sitting as a jury. On the one hand the want of consideration for the conveyance or assignment is a material fact in considering whether there was any illegal intent, but it is not conclusive that there existed any such intent. In the same way consideration was by no means conclusive that there was no illegal intent. When, however, one comes to deal with the proviso, it is quite clear that any person relying on the proviso must prove both good consideration and the fact that he had no notice of the illegal intent.
This was quoted in approval in Marcan at 345.
This view was also consistent with the view favoured by the weight of authority that, in the application of the doctrine of bona fide purchase of a value, the onus of proof lies on the purchaser: Meagher Gummow & Lehane Equity (4th Ed) [8-300].
63 Recently, in Royal v El Ali [2016] FCA 782; (2016) 14 ABC(NS) 108 at 166 [217], Davies J cited these paragraphs in Wentworth v Rogers as authority for the proposition that the party relying on the defence under s 37A(3) bears the onus of proving that the subsection applies. Gilmour J in Commissioner of Taxation v Oswal (No 6) [2016] FCA 762; (2016) 339 ALR 560 at 576 [115], approached the matter the same way.
64 The approach to s 37A(3) in these cases cannot be said to be wrong, let alone plainly wrong. Indeed, the approach of Hodgson JA in Wentworth v Rogers seems to me, with respect, to be clearly correct. Nothing in P T Garuda or the analysis of a different statutory regime in Lewski compels some different approach. Contrary to the Banks’ submissions, I propose to proceed on the basis that it is unnecessary for the plaintiffs to plead that the subsection has not been satisfied or to seek to negative the statutory ingredients of the subsection in their case in chief. Having said this, even if I was wrong about this point, for reasons I will explain in the context of the involvement of the Banks in the statutory contraventions of Emil Binetter and Gary Binetter at [82] and [83] below, if it was necessary to do so, I would have concluded, subject to the provision of further evidence, a prima facie case established as to a want of the good faith by the Banks as required by s 37A(3).
65 It follows from the above analysis that a prima facie case has been established for the Conveyancing Act Claim. Subject to any discretionary argument, this is sufficient to determine the application but I will proceed to deal also with the Corporations Act Claim.
F The Corporations Act Claim
F.1 The Case Advanced
66 The plaintiffs allege that as directors, Emil Binetter and Gary Binetter each breached their respective statutory duties to Advance and Civic by involving, and continuing to involve, the companies in a scheme or schemes implemented to evade Australian tax. It is asserted that involving Advance and Civic in such a scheme provided no benefit to those companies, while exposing them to the risk of unfavourable tax assessments and penalties. Put more specifically, it is contended that if Emil Binetter and Gary Binetter had complied with their duties, the plaintiffs would not have been used as the conduit for the funds provided by MDB and IDB, they would not have submitted tax returns claiming those funds were loans, would not have been placed in the position where they did not have documents or information to justify the tax returns and would not have been exposed to the risk, and actuality, of unfavourable tax assessments, including substantial assessments for interest and penalties. Further, as noted above, if Emil Binetter and Gary Binetter had not denuded Advance and Civic of all moneys in June 2005 by remitting them to the Banks in purported repayment of loans, then Advance and Civic would have had those funds with which to meet their taxation liabilities and pay their creditors, at least to the extent of those moneys.
67 As by now would be obvious, the plaintiffs also contend that sufficient inferences arise from a review of the materials in Exhibit A which, if translated into findings, would allow a conclusion to be reached as to a scheme involving the plaintiffs which is similar to the broader tax evasion scheme found to exist on different evidence by Gleeson J in BCI Finances (proceedings to which Gary Binetter was a party) at 254-256 [146]-[153], 257-259 [158]-[169], 259-262 [170]-[187], 262-264 [188]-[197], 337-338 [684]-[689], 339-340 [697]-[702], 341-344 [706]-[730], 361-364 [870]-[882] and 365-366 [889]-[892].
68 The more particular allegation of present relevance is that each of IDB and MDB was involved (within the meaning of s 79 of the Corporations Act) in breaches of the duties under ss 181(1) and 182(1) of the Corporations Act that Emil Binetter and Gary Binetter owed to the plaintiffs, so as to amount to contravening conduct on the part of the Banks under ss 181(2) and 182(2). The remedy sought is statutory compensation under s 1317H for losses, being the amounts paid out of Australia by Advance to MDB and by Civic to IDB in 2005 and the amounts of the amended assessments and penalty assessments issued by the DCT. These losses are said to have arisen when the risk, to which the plaintiffs were exposed by the wrongful conduct of their directors, came to pass. A question arises as to whether power exists to make the orders sought by the plaintiffs on the case outlined in submissions because the present proceedings were not commenced within six years of these alleged contraventions (see s 1317K of the Corporations Act) and although I will return to this issue below, I will put it to one side for present purposes.
69 The central factual allegation against IDB and MDB is that they offered the banking service which had the features I have already described and were involved in assisting the directors to conceal the true nature of the arrangements.
F.2 The Submissions of the Bank
70 After making the point that there is insufficient evidence that the directors breached statutory duties owed, the primary submission made on behalf of the Banks was that the requirements of s 79 of the Corporations Act as to knowing involvement have not been satisfied. After referring to Yorke v Lucas (1985) 158 CLR 661, the Banks submitted that no prima facie case existed of “knowledge” of all the “essential elements” or “essential facts” of the alleged contraventions.
71 To succeed in the claim, the plaintiffs would be required to satisfy the Court that IDB and MDB had “actual knowledge of each essential matter going to make up the contraventions as at the time of the contraventions”: see Prestige Lifting Services v Williams [2015] FCA 1063; (2015) 333 ALR 674 at 704-705 [233]; Digital Cinema Network Pty Ltd v Omnilab Media Pty Ltd (No 2) [2011] FCA 509 at [171].
72 This was said to require the plaintiffs to prove that IDB and MDB had actual knowledge of the following matters, as pleaded by the plaintiffs:
(a) the purpose of Emil Binetter and Gary Binetter in implementing the arrangements (described as the “Civic Scheme” and the “Advance Scheme”) was to assist what was described as the “Binetter Entities” in evading Australian tax (see SOC at [42] and [71]);
(b) it was the intention of each of Emil Binetter and Gary Binetter that:
(i) the deposit account would be concealed from the DCT; and
(ii) the offshore income earned on and in the deposit account would be concealed from the DCT (see SOC at [43] and [72]);
(c) the banking arrangements:
(i) were to assist each of Emil Binetter and Gary Binetter and/or the Binetter Entities to evade Australian tax (see SOC at [44.1] and [73.1]);
(ii) were pursued for reasons extraneous to the interests of the plaintiffs and in order to further the interests of Emil Binetter and Gary Binetter and/or the Binetter Entities to evade Australian tax (see SOC at [44.2] and [73.2]);
(iii) were not in the best interests of the plaintiffs because it exposed the plaintiffs to:
(1) a risk that the DCT would commence a tax audit of the affairs of the plaintiffs (see SOC at [44.3(a)] and [73.3(a)]);
(2) a risk that the DCT, acting rationally, would issue the plaintiffs an assessment or amended assessment which disallowed any overseas interest expense claimed as a deductible expense (see SOC at [44.3(b)] and [73.3(b)]);
(3) a risk that the DCT, acting rationally, would issue the plaintiffs an assessment or amended assessment which treated the amounts they had received from IDB and MDB as income (see SOC at [44.3(c)] and [73.3(c)]); and
(4) the likelihood that if any of the risks in (1) to (3) arose, that the plaintiffs’ directors would act in their own self-interest or in the interests of themselves and/or the Binetter entities, and not the interests of the plaintiffs, by:
(A) continuing to conceal the existence of the deposit account from the DCT (see SOC at [44.3(d)(i)] and [73.3(d)(i)]);
(B) continuing to conceal the offshore income earned on and in the deposit account from the DCT (see SOC at [44.3(d)(ii)] and [73.3(d)(ii)]); and
(C) failing to provide the necessary documents or disclosures to avoid or minimise the risks manifesting to the plaintiffs (see SOC at [44.3(d)(iii)] and [73.3(d)(iii)]);
(iv) was pursued by Emil Binetter and/or Gary Binetter to benefit each of them and/or the Binetter Entities by evading the Australian tax payable by those persons or entities through the concealment pleaded in paragraphs [43] and [72] of the SOC (see SOC at [44.4] and [73.4]);
(v) gave rise to a conflict of interest between the interests of the plaintiffs and the interests of Emil Binetter and Gary Binetter in that:
(1) the Civic Scheme and the Advance Scheme were entered and continued in order to assist persons other than the plaintiffs to evade Australian tax (namely Emil Binetter and/or Gary Binetter and/or the Binetter Entities) (see SOC at [44.5(a)] and [73.5(a)]);
(2) the Civic Scheme and the Advance Scheme was to the detriment of the plaintiffs because it exposed the plaintiffs to the risks identified in subparagraph (c)(iii) above and did not provide any benefit to the plaintiffs at all (see SOC at [44.5(b)] and [73.5(b)]); and
(3) the implementation of the Civic Scheme and the Advance Scheme negligently exposed the plaintiffs to the risk of loss and damage (see SOC at [44.5(c)] and [73.5(c)]);
and
(vi) alternatively, negligently exposed the plaintiffs to the risk of loss (see SOC at [45.5] and [74.5]).
73 Explained this way, it is said the claims for knowing assistance and knowing receipt, the evidence relied on, and the pleadings set out in the SOC, do not permit the inference that IDB or MDB had actual knowledge of the essential matters making up the relevant contraventions by the plaintiffs’ directors.
F.3 Consideration
74 I have already set out in Section D at [26]-[38] above, the inferences I consider are available relating to the back-to-back arrangements put in place by the directors of Advance and Civic and the apparent reasons for those arrangements being put in place. In the light of those inferences it seems to me clear that a prima facie case exists that if Emil Binetter and Gary Binetter had complied with their duties, the plaintiffs would not have received the funds pursuant to those arrangements from the Banks and would not have submitted tax returns claiming those funds were loans, thus exposing the plaintiffs to the risk of unfavourable tax assessments, including interest and penalties. On a prima facie basis, had the directors complied with their duties, the plaintiffs would have had sufficient funds to meet their taxation liabilities. Hence, inferences can be drawn which, if translated into findings, would be sufficient to prove that Emil Binetter and Gary Binetter were acting in such a way as to put in place a scheme to evade the payment of tax and acted contrary to their statutory obligations as directors in doing so.
75 The real question therefore is, does a prima facie case exist that the Banks were involved in the contravening conduct engaged in by the directors? Before coming to s 79, it is convenient at the outset to deal with the preliminary issue of the extra-territorial operation of the Corporations Act.
76 Section 5(4) of the Corporations Act provides:
Subject to subsection (8), each provision of this Act also applies, according to its tenor, in relation to acts and omissions outside this jurisdiction.
77 The question of extra-territoriality was not the focus of debate during submissions. This is perhaps unsurprising as in Waller v Freehills [2009] FCAFC 89; (2009) 177 FCR 507 at 520 [53] the Full Court (Finn, Dowsett and Siopis JJ) said of s 5(4), that the provision:
comprises a clear expression of Parliament’s intention that the provisions of the Corporations Act are, according to their tenor, to operate extraterritorially. This expression of Parliamentary intention operates to displace the presumption that the Corporations Act is to operate only territorially.
78 Additionally, in PCH Offshore Pty Ltd v Dunn [2009] FCA 553; (2009) 72 ACSR 99, Siopis J observed at 101 [11]:
In my view, the tenor of the sections in question does not contain any limitations such as would cause me not to give effect to the clear words of s 5 of the Act. The language is plainly capable of applying to acts and omissions which have occurred outside of Australia. Further, that these sections of the Act are to be construed as operating outside of Australia, is consistent with the position which has been taken in the United States of America, where the extraterritorial operation of similar provisions in the securities legislation of the United States is justified on the grounds that breaches of duty overseas by officers of an United States corporation may have an adverse effect within the United States. In my view, similar policy considerations apply to Australian corporations and the duties owed by their officers.
79 The real issue is how s 79 works in the circumstances of this case. It provides:
A person is involved in a contravention if, and only if, the person:
(a) has aided, abetted, counselled or procured the contravention; or
…
(c) has been in any way, by act or omission, directly or indirectly, knowingly concerned in, or party to the contravention; or
(d) has conspired with others to effect the contravention.
80 It is unnecessary for the purposes of an application such as the present to enter into yet another detailed consideration of the principled approach to s 79. Recently, the Full Court in Lifeplan Australia Friendly Society Ltd v Ancient Order of Foresters in Victoria Friendly Society Ltd [2017] FCAFC 74; (2017) 250 FCR 1 at 27 [94] explained the similarity between accessorial liability in equity and statutory accessorial liability. It is trite, as the Banks emphasise, that s 79 requires actual knowledge of the essential facts constituting the contravention. What is also clear is that whether actual knowledge exists for the purposes of s 79 is a question of proof and evidence. In this regard, as the Full Court observed, “[i]f circumstances are such as to indicate to an ordinary, decent person that the relevant facts exist, that may be open as an evidential conclusion”: Lifeplan at 28 [106]; see also Challis v Hoffmann [2017] NSWSC 870; (2017) 121 ACSR 585 at 603 [102]. This, of course, was connected to a detailed discussion in Lifeplan at 27-28 [95]-[102] where reference was made to the five categories of knowledge referred to in Baden v Societe Generale pour Favoriser le Developpement du Commerce et de l’Industrie en France SA [1993] 1 WLR 509 at 575-576, the fourth category being “knowledge of circumstances which would indicate the facts to an honest and reasonable man”.
81 The submissions of the Banks were characterised by an intense focus, as if in final submissions, on the facts as pleaded in the SOC. As I have explained above, it is inappropriate for this application to transmogrify into a dispute about particularisation or pleading of the claim. It merits repeating that this application should not require the intense scrutiny of substantial inquiry, or a fine parsing of the pleadings, but a broad examination of the material.
82 In the absence of further material, such a review reveals that inferences are open that an ordinary, decent person in the position of the Banks with knowledge of all the circumstances would have concluded at material times that:
(a) the purpose of Emil Binetter and Gary Binetter in implementing the arrangements was to assist the plaintiffs evading Australian tax; and that it was the intention of each of Emil Binetter and Gary Binetter to conceal the deposit accounts for this purpose;
(b) the banking arrangements were designed in such a way as to assist in dissembling the true position and hence evade tax, which could not conceivably be in the best interests of the plaintiffs (because it exposed the plaintiffs to risks of investigation and remedial responses by the ATO) and which amounted to Emil Binetter and Gary Binetter preferring their own interests over the interests of the plaintiffs (in having them act properly as directors of the plaintiffs); additionally, if the risk of not successfully concealing the scheme from the tax authorities came to pass, then deleterious consequences would result, exposing the plaintiffs to the risk of loss.
83 One would further infer that it was because the Banks had this knowledge, that they were prepared (as I have explained in Section D above at [30]-[36]) to assist those controlling the plaintiffs in preventing revelation of the true nature of the overall commercial relationship between the plaintiffs and the Banks. Given that what is being dealt with is inferences open on a prima facie basis, it is notable that despite my invitation to do so, Counsel for the Banks could not point to a benign commonsense explanation for the unusual arrangements disclosed by the evidence. Although, as a matter of logic, the absence of a contrary benign explanation does not of itself make out, even on a prima facie basis, the malign inference contended for by the plaintiffs, I reject the notion that an inference is unavailable that the arrangements were documented in such a way so as to permit the plaintiffs to produce misleading documents purportedly evidencing the arrangements, but which did not disclose them sufficiently completely so as to reveal the existence of the deposits. Indeed, as I have explained, it is presently open to infer that the Banks, by putting in place these arrangements and providing letters and statutory declarations on request, assisted the directors in this endeavour.
84 In the way explained, inferences are available, on the present state of the evidence, of the necessary knowledge of the essential facts constituting contraventions by Emil Binetter and Gary Binetter. Subject to an important issue as to power of the Court to grant relief which I deal below at [91]-[93] as to the operation of s 1317K, if it had been necessary to do so, I would have determined that a prima facie case of s 79 involvement by the Banks is made out.
G The Discretionary Ground for Relief
85 FCR 10.43(4) prescribes three conditions that must be satisfied in order for there to be service outside the jurisdiction. Even if those preconditions are satisfied, the Banks correctly submit that the Court has a residual discretion to set aside the order for service: see Jasmin Solar Pty Limited v Trina Solar Australia Pty Limited [2015] FCA 1453; (2015) 331 ALR 108 at 119 [66].
86 The Banks’ submissions as to why this discretion should be exercise were focussed on two matters.
87 The first was the contention that the governing law for the alleged assistance provided, and the knowing receipt, by IDB and MDB, was Israeli law. It was pointed out that the place of the assistance and receipt as pleaded by the plaintiffs is Israel, and that this is an important consideration in determining whether or not the forum was appropriate: see PCH Offshore Pty Limited v Dunn (No 2) [2010] FCA 897; (2010) 273 ALR 167. It was said that an order to allow the claim to proceed in these circumstances would be likely to produce injustice, oppression and prejudice to the Banks.
88 These submissions as to discretion on this basis, although not abandoned, were not developed in relation to the Conveyancing Act Claim and the Corporations Act Claim. There does not seem to me to be any discretionary argument, at least as developed by the Banks in their written submissions, as to why the Court should decline to exercise jurisdiction notwithstanding that the statutory preconditions as to service have been satisfied, save as to the second matter to which I now turn.
89 As Kiefel CJ, Bell, Keane, Nettle and Gordon JJ noted last week in Trkulja v Google LLC [2018] HCA 25 at [21]:
In Agar v Hyde, this Court essayed the test for determination of an application to set aside service of a proceeding out of Australia, pursuant to Pt 10 r 6A of the Supreme Court Rules 1970 (NSW), on the ground that the claims made in the proceeding had insufficient prospects of success to warrant putting an overseas defendant to the time, expense and trouble of defending them. The plurality concluded that the test should be the same as the test for summary judgment propounded in Dey v Victorian Railways Commissioners and General Steel Industries Inc v Commissioner for Railways (NSW): a party should not be denied the opportunity of placing his or her case before the court in the ordinary way, with the advantage of the usual interlocutory processes, unless there is a high degree of certainty about what would be the ultimate outcome of the proceeding if allowed to go to trial in the ordinary way.
(citations omitted)
90 The Banks made reference to the principle that where a proceeding had insufficient prospects of success, an overseas defendant should not be put to the trouble of defending it (although no reference was made that this should be judged by reference to the summary judgment standard).
91 By the Corporations Act Claim, the plaintiffs seek a compensation order pursuant to s 1317H of the Corporations Act. Section 1317K provides that a proceeding for a declaration of contravention or for a compensation order may be started no later than six years after the contravention. Other than stating the proposition that a limitation defence may be available to the Corporations Act Claim (and, by analogy, the equitable claim), the submission as to limitations was again undeveloped. I did not receive any assistance from the plaintiffs in relation to this argument other than the mere assertion that the proceeding was commenced within six years of the re-registration of Advance and Civic (a factor which may be relevant to the equitable claims, but does not seem self-evidently relevant to the Corporations Act Claim).
92 Without expressing any views as to the merits or otherwise of any limitation defence that may be pleaded, questions arise as to the Corporations Act Claim in circumstances where the proceeding was not filed timeously. The question, properly understood, is not so much a limitation defence in the usual sense, but a question of whether the Court has power to grant to the statutory relief sought in the present circumstances. Subject to any further argument, it appears that s 1317K would not prevent reliance on conduct occurring prior to the six year period, either to put in context a later contravention or to make out a continuing course of conduct which continued within the period of six years prior to the commencement of the proceedings for a declaration of contravention or for statutory compensation: see Lewski at 236 [111].
93 It does not seem to me to be appropriate to deal with this issue on this application, particularly in the absence of any assistance on the point. I may be doing them a disservice, but seems to have been overlooked by the plaintiffs because the focus of written submissions was on the equitable claims (in respect of which, I assume, the plaintiffs will contend that it would not be consistent with good conscience to permit the Banks to rely upon the statute: see Gerace v Auzhair Supplies Pty Ltd [2014] NSWCA 181; (2014) 87 NSWLR 435; BCI Finances at 302-303 [335]). In any event, this issue in relation to the Corporations Act Claim may be apt to be dealt with in advance of a hearing on a strike-out application, consistent with the case management imperatives of Part VB of the Federal Court of Australia Act 1976 (Cth).
94 No limitation issue was raised or developed in relation to the Conveyancing Act Claim, and the finding as to a prima facie case as to that claim is dispositive of the present application. It is sufficient to note that the Conveyancing Act Claim does not suffer from a want of sufficient prospects of success such as to mean that overseas defendants should not be put to the time, expense and trouble of defending the claim (cf Agar v Hyde [2000] HCA 41; (2000) 201 CLR 552).
H. Conclusion and Orders
95 As noted above, the approach of the Banks on this application involved a close and minute examination of the pleadings and repeated complaints about a lack of particularisation. Some submissions were advanced that resembled those one might expect at the conclusion of a trial. The point of this application, however, was not to provide a dress rehearsal for a pleading dispute or, less still, a preview of arguments that can be deployed at a final hearing, but to ensure a gateway is passed through to ensure that proceedings are not served outside of Australia in circumstances where the claims made have no merit.
96 Although the SOC may be liable to attack on the basis of its drafting and particularisation and there may be an unresolved issue arising by reason of the timing of the filing of the Corporations Act Claim, on a broad examination of the materials, inferences are available which, if translated into findings of fact, would be sufficient to ground some of the relief sought in the originating application against the Banks, being the Conveyancing Act Claim. There is no basis for an order under FCR 13.01(1)(d) or FCR 13.01(1)(b) and, in these circumstances, the interlocutory application filed by the Banks must be dismissed with costs.
I certify that the preceding ninety-six (96) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Lee. |
Associate:
NSD 2171 of 2016 | |
ISRAEL DISCOUNT BANK LIMITED | |
Fifth Defendant: | MERCANTILE DISCOUNT BANK LTD |
