Federal Court of Australia

Deputy Commissioner of Taxation v State Grid International Australia Development Company Limited [2022] FCA 139

ORDERS

THE COURT ORDERS THAT:

1.    The Applicant have leave to file in Court the Originating Application dated 15 February 2022 and the Affidavit of David Keng Yew Chu executed on 15 February 2022 and the Affidavit of Khaled Metlej sworn 15 February 2022 (together, the Affidavits in Support).

2.    In respect of the application for interlocutory relief, that:

(a)    it be made returnable instanter; and

(b)    service of the Originating Application and the Affidavits on the Respondents prior to hearing the Applicant’s claim for relief be dispensed with.

3.    A freezing order be made against the First Respondent in the terms specified in Annexure A to this Originating Application.

4.    A freezing order be made against the Second Respondent in the terms specified in Annexure B to this Originating Application.

5.    Pursuant to Federal Court Rules 2011 (Cth) r 10.43, an Order that the Applicant have leave to serve the First Respondent with the Originating Application and supporting affidavits outside of Australia.

6.    Pursuant to r 10.24 of the Federal Court Rules 2011 (Cth):

(a)    personal service on the First Respondent and Second Respondent of the Originating Application and the Affidavits in Support be dispensed with;

(b)    the Originating Application, Affidavits and a copy of these Orders (Initiating Documents) be taken to be served on the First Respondent by the following steps occurring on or before 1.00am on 16 February 2022:

(i)    posting a copy of the Initiating Documents to White & Case, Level 32, 525 Collins Street, Melbourne VIC 3000 marked to the attention of Aldrin De Zilva at the said address; and

(ii)    by emailing a copy of the Initiating Documents to aldrin.dezilva@whitecase.com.

(c)    the Initiating Documents be taken to be served on the Second Respondent by the following steps occurring before 1.00am on 16 February 2022:

(i)    posting a copy of the Initiating Documents the Second Respondent’s registered address at Level 31, 2 Southbank Boulevard, Southbank VIC 3006; and

(ii)    by emailing a copy of the Initiating Documents to aldrin.dezilva@whitecase.com; and

(iii)    by emailing the documents to John Nicolopoulos, Head of Tax at AusNet at john.nicolopoulos@ausnetservices.com.au.

7.    The matter be listed for further directions on a date and time to be fixed (Return Date).

8.    Liberty to apply be granted on 24 hours' notice.

THE COURT NOTES THAT:

9.    The Applicant has requested a case management hearing if possible on Monday, 21 February 2022 or as soon as possible thereafter.

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

ANNEXURE A

(STATE GRID INTERNATIONAL AUSTRALIA DEVELOPMENT COMPANY LIMITED)

PENAL NOTICE

TO:     STATE GRID INTERNATIONAL AUSTRALIA DEVELOPMENT COMPANY LIMITED

IF YOU (BEING THE PERSON BOUND BY THIS ORDER):

YOU WILL BE LIABLE TO IMPRISONMENT, SEQUESTRATION OF PROPERTY OR OTHER PUNISHMENT.

ANY OTHER PERSON WHO KNOWS OF THIS ORDER AND DOES ANYTHING WHICH HELPS OR PERMITS YOU TO BREACH THE TERMS OF THIS ORDER MAY BE SIMILARLY PUNISHED.

TO: STATE GRID INTERNATIONAL AUSTRALIA DEVELOPMENT COMPANY LIMITED

This is a 'freezing order' made against you on 15 February 2022 by Justice Perry at a hearing after the Court was given the undertakings set out in Schedule A to this order and after the Court read the affidavits listed in Schedule B to this order.

THE COURT ORDERS:

INTRODUCTION

1.    

2.    Subject to the next paragraph, this order has effect up to and including 11.59PM on the Return Date.

3.    Anyone served with or notified of this order, including you, may apply to the Court at any time to vary or discharge this order or so much of it as affects the person served or notified.

4.    In this order:

5.    

FREEZING OF ASSETS

6.    

7.    For the purposes of this order,

B.    money held on your behalf or for your benefit in the following bank account:

Exceptions to this order

8.    This order does not prohibit you from:

9.    You and the applicant may agree in writing that the exceptions in the preceding paragraph are to be varied. In that case the applicant or you must as soon as practicable file with the Court and serve on the other a minute of a proposed consent order recording the variation signed by or on behalf of the applicant and you, and the Court may order that the exceptions are varied accordingly.

10.    

Costs

11.    The costs of this application are reserved to the Court hearing the application on the Return Date.

Persons other than the applicant and respondent

12.     Set off by banks

This order does not prevent any bank from exercising any right of set off it has in respect of any facility which it gave you before it was notified of this order.

13.    Bank withdrawals by the respondent

No bank need inquire as to the application or proposed application of any money withdrawn by you if the withdrawal appears to be permitted by this order.

14.    Persons outside Australia

SCHEDULE A

UNDERTAKINGS GIVEN TO THE COURT BY THE APPLICANT

1.    The applicant undertakes to submit to such order (if any) as the Court may consider to be just for the payment of compensation (to be assessed by the Court or as it may direct) to any person (whether or not a party) affected by the operation of the order.

2.    As soon as practicable, the applicant will file and serve upon the respondent copies of:

3.    As soon as practicable, the applicant will cause anyone notified of this order to be given a copy of it.

4.    The applicant will pay the reasonable costs of anyone other than the respondent which have been incurred as a result of this order, including the costs of finding out whether that person holds any of the respondent's assets.

5.    If this order ceases to have effect the applicant will promptly take all reasonable steps to inform in writing anyone to who has been notified of this order, or who he has reasonable grounds for supposing may act upon this order, that it has ceased to have effect.

6.    The applicant will not, without leave of the Court, use any information obtained as a result of this order for the purpose of any civil or criminal proceedings, either in or outside Australia, other than this proceeding.

7.    The applicant will not, without leave of the Court, seek to enforce this order in any country outside Australia or seek in any country outside Australia an order of a similar nature or an order conferring a charge or other security against the respondent or the respondent's assets.

SCHEDULE B

Affidavits Relied On

Name and address of applicant's lawyers

The applicant's lawyers are:

        c/- Craddock Murray Neumann Lawyers

        Level 21, 227 Elizabeth Street

        Sydney NSW 2000

        Telephone:    (02) 8268 4000

        Facsimile:    (02) 8268 4001

        Attention:    Khaled Metlej

Email:        kmetlej@craddock.com.au

ANNEXURE B

(AUSNET SERVICES LTD ACN 603 317 559)

PENAL NOTICE

TO:     AUSNET SERVICES LTD ACN 603 317 559

IF YOU (BEING THE PERSON BOUND BY THIS ORDER):

YOU WILL BE LIABLE TO IMPRISONMENT, SEQUESTRATION OF PROPERTY OR OTHER PUNISHMENT.

ANY OTHER PERSON WHO KNOWS OF THIS ORDER AND DOES ANYTHING WHICH HELPS OR PERMITS YOU TO BREACH THE TERMS OF THIS ORDER MAY BE SIMILARLY PUNISHED.

TO:     AUSNET SERVICES LTD ACN 603 317 559

This is a 'freezing order' made against you on 15 February 2022 by Justice Perry at a hearing after the Court was given the undertakings set out in Schedule A to this order and after the Court read the affidavits listed in Schedule B to this order.

THE COURT ORDERS:

INTRODUCTION

1.    

2.    Subject to the next paragraph, this order has effect up to and including 11.59pm on the Return Date..

3.    Anyone served with or notified of this order, including you, may apply to the Court at any time to vary or discharge this order or so much of it as affects the person served or notified.

4.    Nothing in this order prevents you from paying an amount due to the First Respondent into the Sydney Branch of the Industrial and Commercial Bank of China BSB [Redacted], Account Number [Redacted] in the name of State Grid International Australia Development Company Limited, after 11am on 16 February 2022.

5.    In this order:

6.    

Injunction

7.    You are required to ensure that you or Computershare or any other agent acting on your behalf, does not cause to be made any payment to the First Respondent, to any bank other than the Sydney Branch of the Industrial and Commercial Bank of China BSB [Redacted], Account Number [Redacted] provided that the account holder of that account is State Grid International Australia Development Company Limited.

FREEZING OF ASSETS

8.    Nothing in this Order prevents you paying an amount to any third party under the Scheme of Arrangement approved by the Supreme Court of NSW in Proceedings No. 2021/317018 on 3 February 2022 in except in so far as this order relates to the First Respondent.

9.    You must not remove from Australia or in any way dispose of, deal with or diminish the value of any amount that you are required to pay (or caused to be paid) to the First Respondent (whether or not you hold them in your capacity as trustee) up to the unencumbered value of AUD$220,952,895.69 ('the Relevant Amount') except as provided for in Order 4 and Order 7 above.

10.    For the purposes of Order 9, any money payable by you to or at the direction of STATE GRID INTERNATIONAL AUSTRALIA DEVELOPMENT COMPANY LTD ACN 682 531 303 includes any money payable by you to or at the direction of STATE GRID INTERNATIONAL AUSTRALIA DEVELOPMENT COMPANY LTD ACN 682 531 303 from the following bank account

Exceptions to this order

Costs

11.    The costs of this application are reserved to the Court hearing the application on the Return Date.

Persons other than the applicant and respondent

12.     Set off by banks

This order does not prevent any bank from exercising any right of set off it has in respect of any facility which it gave you before it was notified of this order.

13.    Bank withdrawals by the respondent

No bank need inquire as to the application or proposed application of any money withdrawn by you if the withdrawal appears to be permitted by this order.

14.    Persons outside Australia

SCHEDULE A

UNDERTAKINGS GIVEN TO THE COURT BY THE APPLICANT

1.    The applicant undertakes to submit to such order (if any) as the Court may consider to be just for the payment of compensation (to be assessed by the Court or as it may direct) to any person (whether or not a party) affected by the operation of the order.

2.    As soon as practicable, the applicant will file and serve upon the respondent copies of:

3.    As soon as practicable, the applicant will cause anyone notified of this order to be given a copy of it.

4.    The applicant will pay the reasonable costs of anyone other than the respondent which have been incurred as a result of this order, including the costs of finding out whether that person holds any of the respondent's assets.

5.    If this order ceases to have effect the applicant will promptly take all reasonable steps to inform in writing anyone to who has been notified of this order, or who he has reasonable grounds for supposing may act upon this order, that it has ceased to have effect.

6.    The applicant will not, without leave of the Court, use any information obtained as a result of this order for the purpose of any civil or criminal proceedings, either in or outside Australia, other than this proceeding.

7.    The applicant will not, without leave of the Court, seek to enforce this order in any country outside Australia or seek in any country outside Australia an order of a similar nature or an order conferring a charge or other security against the respondent or the respondent's assets.

SCHEDULE B

Affidavits Relied On

Name and address of applicant's lawyers

The applicant's lawyers are:

        c/- Craddock Murray Neumann Lawyers

        Level 21, 227 Elizabeth Street

        Sydney NSW 2000

        Telephone:    (02) 8268 4000

        Facsimile:    (02) 8268 4001

        Attention:    Khaled Metlej

Email:        kmetlej@craddock.com.au

REASONS FOR JUDGMENT

PERRY J:

1.    INTRODUCTION

1    In its originating application filed on 15 February 2022, the applicant, the Deputy Commissioner of Taxation (the Commissioner), applied for interlocutory relief against the first and second respondents, State Grid International Australia Development Company Limited (State Grid) and AusNet Services Ltd ACN 603 317 559 (AusNet) respectively, including:

(1)    freezing orders pursuant to rr 7.32, 7.34 and 7.35 of the Federal Court Rules 2011 (Cth) (FCR) against State Grid to the value of AUD$220,952,895.69 (the relevant amount) and against AusNet with respect to payment of the relevant amount to State Grid pursuant to the Scheme of Arrangement, together with ancillary orders pursuant to FCR r 7.33 for the disclosure of assets by the first respondent;

(2)    an order pursuant to FCR r 10.43 for leave to serve State Grid outside of Australia; and

(3)    orders pursuant to FCR r 10.24 seeking that the time for service of the originating application and supporting affidavits be abridged and seeking leave for short service and substituted service against both respondents.

2    The Commissioner offered the usual undertaking as to damages in accordance with the Usual Undertaking As to Damages Practice Note (GPN-UNDR) and the specific form of undertaking in support of a freezing order prescribed by Schedule A of Annexure A of the Freezing Orders Practice Note (GPN-FRZG).

3    State Grid is a private company limited by shares incorporated in Hong Kong on 6 May 2013, with its registered office in Hong Kong. AusNet was incorporated in Victoria, Australia, and has its registered office in Victoria. It is a public company listed on the Australian Securities Exchange (ASX) with Market Code AST. According to its Annual Report for 2020, it is a diversified Australian energy infrastructure business with over $10.8 billion of electricity and gas network and connection assets operating with around 1.5 million customers across Victoria and having approximately 1700 employees across its regulated networks and commercial energy services business, Mondo. The evidence before the Court on the interlocutory application indicates that State Grid is a subsidiary of the State Grid Corporation of China which is a Chinese–State owned electric utility corporation.

4    The issues giving rise to the proceeding concern an alleged capital gains tax (CGT) event which, at the time of the hearing, was due to take place on the following day, 16 February 2022, pursuant to which State Grid was to dispose of all of its 762,162,932 shares in AusNet (the State Grid Shares) to Brookfield Asset Management Inc (Brookfield) for a total consideration of $1,983,529,032 pursuant to a scheme of arrangement (the Scheme).

5    The interlocutory application was brought on for hearing urgently before me as duty judge at 4.15pm on 15 February 2022, after the application and primary affidavit in support executed by Mr Chu on 15 February 2022 were filed and served approximately half an hour earlier. As such, State Grid had very limited opportunity to read the documents and obtain instructions and no opportunity to brief counsel. That notwithstanding, Mr De Zilva of White & Case LLP acting for the respondents made helpful submissions, cross-examined Mr Chu, and called evidence from Mr Holland, Group Counsel for the AusNet Services Group. I am indebted to the legal representatives and those instructing them for their very great assistance and co-operation at the hearing.

6    After a lengthy hearing concluding at 12.15am on 16 February 2022, I made freezing orders against the respondents with modifications to the draft freezing orders proposed by the Commissioner, as well as orders for service abroad and ancillary orders. I did so on the basis that the matter would return before the duty judge as early as possible the following week, when the orders could be revisited in circumstances where the respondents will have had a proper opportunity to make submissions and present evidence. I did not, however, make orders for the disclosure of assets by State Grid on the basis that the total amount of the alleged CGT liability owed by State Grid was sufficiently protected by the freezing orders which I made, at least at this stage of the proceeding – a position which the Commissioner ultimately appeared to accept (T15/2/22 at p. 101.7-36).

7    These are my reasons for making the orders on 16 February 2022. I note that, while initially these reasons were to be delivered orally on Friday, 18 February 2022, the respondents advised on that day that they were content for the reasons to be delivered the following week in writing. I was content to adopt that course on the basis that I would deliver my written reasons before the next case management hearing before the duty judge on Wednesday, 23 February 2022.

2.    EVIDENCE

8    In support of the interlocutory application, the Commissioner relied on the affidavit of David Keng Yew Chu, who was authorised to speak for and on behalf of the Commissioner. Mr Chu is an Australian public servant employed by the Public Groups and International section of the Australian Taxation Office (ATO) as an Auditor. Mr Chu was cross-examined.

9    In addition, the ATO relied upon the Supplementary Affidavit of Khaled Metlej, solicitor, sworn on 15 February 2022 which annexed correspondence between the solicitors for the Commissioner and State Grid earlier that day. There was no cross-examination of Mr Metlej.

10    Evidence was also called by the respondents during the hearing from Mr Holland, Group Counsel for the AusNet Services Group, as I have earlier mentioned.

3.    BACKGROUND

11    I note that I have made findings of fact in the course of these reasons solely for the purposes of the interlocutory application and bearing in mind the limited capacity for the respondents to make submissions and present evidence.

3.1    The Scheme of Arrangement

12    On 19 December 2021, the Supreme Court of New South Wales in Proceedings No. 2021/317018 (the Supreme Court Proceedings) made orders pursuant to s 411 of the Corporations Act 2001 (Cth) (Corporations Act) for convening a scheme meeting (the Scheme Meeting) and approving a scheme booklet (the Scheme Booklet) to shareholders.

13    In the Scheme Booklet, there is a copy of a letter dated 25 November 2021 to AusNet from White & Case, who has been advising AusNet in relation to the Scheme. In that letter White & Case opined that shares in AusNet “should not give rise to an indirect Australian real property interest”. The Commissioner has taken a contrary view to that reached by White & Case. As I explain below, the Commissioner has determined that Division 855 of the Income Tax Assessment Act 1997 (Cth) (ITAA1997) does not apply to disregard any capital gain made by State Grid from the disposal of the State Grid Shares. Division 855 of the ITAA1997 operates in relation to a capital gain made by a foreign resident. It provides that a capital gain can be disregarded where the asset is not “taxable Australian property” within the meaning of s 855-10 of the ITAA1997.

14    On 28 January 2022, AusNet announced on the ASX that the Scheme Meeting was held on that day and the requisite majorities required by s 411(4)(a)(ii) of the Corporations Act voted in favour of the Scheme. On 3 February 2022, the Supreme Court of New South Wales made orders in the Supreme Court Proceedings approving the Scheme under s 411(4)(b) of the Corporations Act.

15    Under the Scheme, Australian Energy Holdings No 4 Pty Ltd ACN 654 673 793 (AEH4) is to purchase all of the shares in AusNet from existing shareholders. AEH4 is a company incorporated in Victoria, having its registered office in Sydney, New South Wales, and is controlled by Brookfield. Brookfield, in turn, is a global alternative asset manager with more than US$625 billion of assets under management across real estate, infrastructure, and renewable power, and is listed on the New York and Toronto stock exchanges.

16    Pursuant to the Scheme, relevantly:

(1)    each of AusNet’s existing shareholders are to be paid $2.6025 per share in cash consideration for the purchase of their shares;

(2)    no later than 1 business day before the “Implementation Date” as defined in the relevant Scheme Implementation Deed AEH4 will transfer the aggregate amount payable to an Australian bank account operated by AusNet (or Computershare Investor Services Pty Limited (Computershare), the share registry services provider to AusNet), which AusNet will hold as trustee for each registered shareholder of AusNet shares under the Scheme (Scheme Shareholder); and

(3)    on the Implementation Date, AusNet will, without the need for any further act by any Scheme Shareholder, effect a transfer of the shares from the Scheme Shareholders to AEH4 and pay the amounts payable to each Scheme Shareholder in consideration for the sale of their shares from the monies held by AusNet on trust.

3.2    Implementation of the Scheme of Arrangement

17    AusNet notified the ASX on 28 January 2022 that the Implementation Date was expected to be 16 February 2022. It is not in issue that 16 February 2022 was in fact the Implementation Date.

18    On implementation of the Scheme, State Grid, which holds 762,162,932 shares in AusNet, will be entitled to receive $1,983,529,032 in consideration for the sale of the State Grid Shares.

19    As to the mechanics of implementation, Mr Holland explained that, to the best of his knowledge, AusNet has a contractual relationship with Computershare which provides a number of share and registry services. Specifically, in relation to the Scheme, Computershare provided a bank account with the Australian and New Zealand Banking Group Limited (ANZ) for the proceeds of the Scheme to be deposited into and then distributed to the Scheme Shareholders on the Implementation Date. It was Mr Holland’s understanding that ANZ’s role was as an authorised deposit-taking institution providing a bank account.

20    Mr Holland gave evidence of a document before him which he understood to be written instructions from State Grid to Computershare, which had been provided before the record date for the Scheme, to pay the consideration due to State Grid in Australian currency to a specific account with the Sydney branch of the Industrial and Commercial Bank of China Limited (the ICBC). It was his understanding that the ICBC is a registered authorised deposit-taking institution based on the website of the Australian Prudential Regulation Authority and that it has a permanent establishment in the jurisdiction in Sydney.

21    Mr Holland further explained in cross-examination that AusNet itself had not given any direct instruction to Computershare to pay any particular shareholder proceeds to any particular bank account. The relevant bank account into which dividends would be deposited for an individual shareholder was a matter for Computershare to ascertain. Rather AusNet directed Computershare to make the requisite payments via bank transfer to those shareholders with valid (Australian) bank accounts who had provided those details before the record date of the Scheme. In other words, AusNet’s role was to give a general instruction to Computershare to effect payments to shareholders generally in accordance with the Scheme. Further, Mr Holland also deposed that most shareholders would not appreciate receiving payment by cheque, even though that may be the convention where there is no Australian bank account.

22    Mr Holland acknowledged in cross-examination that it was his understanding that it was the obligation of the bidder, AEH4, to place the cleared funds into the trust account one business day before the Implementation Date and that it was AusNet’s obligation to make the necessary payments to the Scheme Shareholders, that is, that AusNet has obligations under the Scheme in relation to the disbursement to Scheme Shareholders of the proceeds provided by the bidder.

3.3    The Commissioner’s determination of a CGT event

23    The Scheme Booklet was published on 16 December 2021 and Mr Chu of the ATO became aware of the Scheme around that time. He also became aware that a tax letter was attached to the Scheme Booklet which (as earlier explained) stated that, in White & Case’s opinion, Division 855 of the ITAA1997 would apply so as to disregard the capital gains made by State Grid. However, Mr Chu gave evidence that, on 19 January 2022 a discussion was held between the ATO and AusNet in which AusNet was advised that the Commissioner’s likely view was that Division 855 would not apply to disregard any capital gain made by State Grid and another shareholder. Mr Chu explained that while the Commissioner’s view had not been definitive in the sense that no assessment or position paper had issued, it was nonetheless the Commissioner’s considered view at the time.

24    The Commissioner has determined that the State Grid Shares constitute an indirect Australian real property interest within the meaning of s 855-25 of the ITAA1997 and thus constitute taxable Australian property. As such, the Commissioner has determined that Division 855 of the ITAA1997 does not apply to disregard any capital gain made by State Grid from the disposal of the State Grid Shares.

25    Specifically, the Commissioner has determined that:

(1)    pursuant to s 108-5 of the ITAA1997, the State Grid Shares are a CGT asset;

(2)    pursuant to s 104-10(2) of the ITAA1997, State Grid will dispose of the State Grid Shares to AEH4, thereby affecting a change in ownership of the State Grid Shares;

(3)    pursuant to s 104-10(3) of the ITAA1997, as State Grid will be disposing of the State Grid Shares under the Scheme and not pursuant to a contract, the time of disposal of the State Grid Shares to AEH4 will be on the implementation of the Scheme, that is, on the Implementation Date; and

(4)    a “CGT Event” within the meaning of s 104-10 of the ITAA1997 will therefore occur in respect of the State Grid Shares on 16 February 2022 at the time that there is a transfer in ownership of the shares from State Grid to AEH4 on the Implementation Date.

26    On the basis of State Grid receiving the proceeds from the disposal of the State Grid Shares, the Commissioner has determined that State Grid will make a capital gain of $736,509,652.00 and will be required to pay income tax at the corporate tax rate of 30%. On this basis the Commissioner has determined that upon the Scheme being implemented, State Grid will have an income tax liability of $220,952,895.69.

27    The Commissioner also determined that on 16 February 2022, she will conduct a special assessment pursuant to s 168 of the Income Tax Assessment Act 1936 (Cth) (ITAA36) and will issue State Grid with a notice of assessment in respect of the CGT liability of $220,952,895.69 (the Special Assessment). However, a notice of assessment with respect to the CGT liability cannot issue until the CGT Event occurs when the State Grid Shares have been transferred to AEH4. Importantly, upon service of the Special Assessment on 16 February 2022, the State Grid CGT liability will become due and payable by State Grid on 1 December 2022. Furthermore, in the event that the State Grid CGT liability is unpaid under the Special Assessment after the due date, the Commissioner intends to commence proceedings in the Federal Court of Australia for recovery of the outstanding income tax.

28    Finally, Mr Chu accepted in cross-examination that State Grid had not been provided with any CGT calculations prior to his affidavit being executed on 15 February 2022. However, in anticipation of the liability crystallising as determined by the Commissioner, Mr Chu and other officers of the ATO had requested that State Grid hold an amount on account of the anticipated CGT liability in a telephone conversation with White & Case. That request was refused. As earlier mentioned, State Grid has also disputed that any CGT liability will arise. Attempts to reach an agreement so as to secure funds on account of State Grid pending CGT liability in advance of the institution of this proceeding were unsuccessful. The correspondence between the Commissioner and State Grid regarding these matters is summarised at [41] to [48] of Mr Chu’s affidavit.

3.4    Evidence with respect to ownership of the ICBC account and payment of the monies owing to State Grid into the ICBC account

29    As referred to above at [5], Mr Holland was called by the respondents to give evidence at the hearing. The evidence given by him at the hearing was particularly helpful. It was on the basis of that evidence that orders were able to be crafted with the assistance of both parties’ submissions, to achieve in particular what was in my view an appropriate balance between: (a) protecting against the danger that the funds required to satisfy the CGT liability which would arise on issue of the Special Assessment would be removed from the jurisdiction on the one hand; and (b) the respondents’ interests and the interests of third parties in the unimpeded implementation of the Scheme on the Implementation Date, on the other hand. It is therefore necessary to consider his evidence in some detail.

30    Evidence in support of the account being in the name of, and held by, State Grid was tendered by State Grid in the form of an email dated 15 February 2022 from Mr Christopher Dedrick, Relationship Manager for Investor Services at Computershare, to Mr Holland, which was forwarded to the Court by Mr De Zilva during the course of the hearing and tendered in evidence. That email set out the relevant account details as follows:

31    Mr Holland gave evidence that “the BSB and account number reconcile with the direct credit form provided to us to provide to Computershare from representatives that we have no reason to believe were not duly authorised by the first respondent to provide that form to Computershare. … all I could say is that that direct – an email – an attachment to an email, that credit form is in my possession.” (T15/2/22 at p. 83.21-26) Mr Holland further confirmed that the funds from Computershare would be paid on 16 February 2022 in respect of State Grid to this BSB and account number. Bearing in mind that he was employed by AusNet and not State Grid, Mr Holland also confirmed to the best of his knowledge that this account number related to State Grid and was an account effectively owned and controlled by State Grid. Nonetheless, based on his role at AusNet, the information he had seen and his interactions with State Grid, he had no reason to believe that this was not an account belonging to State Grid. In this respect, Mr Holland relied heavily on the name of the account provided in the direct credit form that was in his possession, which was “State Grid International Australia Development Company Limited” under the heading “name in which account is held.” The date on the email Mr Holland referred to was 8 February 2022, although the direct credit form was undated to the best of his belief.

32    Mr Holland explained in cross-examination that there was an implementation checklist which was settled with Computershare and, based on that checklist, the processing was scheduled to occur at 8.30am and to be confirmed as having been finalised by 10am the next day on 16 February 2022. He further explained that there was another time which related to a small number of cheques to be despatched in consideration for the transfer of certain shares.

33    In response to the question as to the impact if the process was changed so that all participants received cheques, Mr Holland said:

… [R]eputationally it would be very problematic for AusNet Services and Computershare. … it’s certainly not good practice, given the – just the sheer fact of what a cheque is, it’s – and, to my mind, that really is the more material point. But the second point is – and I must say that this is my opinion, not yet confirmed with Computershare, but … having dealt with the registry in relation to transactions as both a lawyer in equity and capital markets and private practice, and as both a lawyer in-house specialising in similar transactions for some 11 years, I would gravely doubt that there would be any way to pay everybody by cheque tomorrow in a way that preserves the current schedule.

34    Mr Holland also gave evidence that it was his understanding that payment would definitely go through on the following day from the ANZ bank account to the stipulated ICBC account in the name of the first respondent, State Grid International Australia Development Company Limited, in accordance with the Computershare direction.

35    The difficulty was then raised by the Commissioner at the hearing that there was a risk if the electronic transfer of funds to existing shareholders occurred at 8.30am on 16 February 2022, that the monies could be dissipated from Australia before proper notice could be given to the relevant banks of any freezing orders made by the Court the previous night. That difficulty was ultimately able to be accommodated on the basis of further instructions confirming that the commencement time for the transaction could be changed to 11am, which would permit the Commissioner adequate time to serve the relevant institutions.

3.5    Security Bond Demands

36    On 14 February 2022, the Commissioner issued a notice pursuant to s 255-105 of the Taxation Administration Act 1953 (Cth) (TAA) to AusNet, which was subsequently withdrawn. No more need be said with respect to that notice.

37    On 15 February 2022, the Commissioner issued a notice pursuant to s 255-105 of the TAA to State Grid among other entities concerned in the implementation of the Scheme (the Security Bond Demand). Pursuant to the Security Bond Demand, State Grid was required to give security on account of future tax-related liabilities. The amount of security required by the Commissioner is A$110,476,447, being 50% of the estimated future tax liability of State Grid for CGT by way of an unconditional bank guarantee due by 5pm (AEDT) on 7 March 2022 or by depositing that amount with an Australian law firm subject to a deed.

3.6    Risk of dissipation of assets by the first respondent

38    The Commissioner submitted that, on the evidence before the Court on the interlocutory application there is a proper basis on which to infer that there is a real risk that State Grid may transfer the proceeds of the disposal of the State Grid shares abroad and thereupon would have no substantial assets in Australia against which the ATO could satisfy a prospective judgment should the Special Assessment ultimately be unpaid. First, State Grid has made an “Entity Declaration” which represented to AEH4 that it would not have a CGT liability because the State Grid Shares were not an indirect Australian real property interest (Chu affidavit at [57(a)]). Secondly, State Grid has maintained that view notwithstanding the contrary view reached by the Commissioner (Chu affidavit at [57(b)]). Thirdly, State Grid has never lodged an income tax return or Business Activity Statement with the ATO, nor has it been identified in the ATO’s systems as an entity from which tax has been withheld by a financial institution (Chu affidavit at [9(e)]). In the fourth place, State Grid did not have a Tax File Number (TFN) until the Commissioner issued it with a TFN on her own volition on 10 February 2022 (ibid). Finally, in a letter received by the ATO from White & Case on behalf of State Grid on 14 February 2022, White & Case stated that State Grid “does not hold other significant assets in Australia” (although it was part of a group which owned assets in Australia and has a “global reputation to maintain”) (Chu affidavit at [46(k)]). From these matters, the Commissioner submitted that it may be inferred that, following the disposal of its shares in AusNet, State Grid will have no residual business in Australia or substantial assets in Australia.

4.    THE FREEZING ORDERS

4.1    Power to make a freezing order

39    Division 7.4 of the FCR supplements s 23 of the Federal Court Act 1976 (Cth) and the Federal Court’s implied power as a superior court of record: Deputy Commissioner of Taxation v Huang [2021] HCA 43; 96 ALJR 43 (Huang) at [16] (Gageler, Keane, Gordon and Gleeson JJ). Relevantly, r 7.32 in Division 7.4 of the FCR provides:

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

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

Note:     Without notice is defined in the Dictionary.

(Emphasis in italics and bold added.)

40    Thus, in Huang the majority held that:

17. The power conferred by r 7.32(1) is expressly subject to two limitations: first, the purpose of the order must be “the purpose of preventing the frustration or inhibition of the Court’s process”; and secondly, the order must address that purpose “by seeking to meet a danger that a judgment or prospective judgment of the Court will be wholly or partly unsatisfied”. … More broadly, a freezing order is directed to dispositions “which are intended to frustrate, or have the necessary effect of frustrating, the plaintiff in his attempt to seek through the court a remedy for the obligation to which he claims the defendant is subject” [quoting Riley McKay Pty Ltd v McKay [1982] 1 NSWLR 264 at 276].

41    Significantly, it is apparent from the passage from Riley McKay Pty Ltd v McKay [1982] 1 NSWLR 264 quoted with approval that it is not necessary to establish that the person against whom the order is sought intends to frustrate the judgment creditor or prospective judgment creditor in its attempt to seek relief from a court. It is sufficient if the feared disposition would have that necessary effect. However, the majority in Huang also emphasised that “[t]he danger must be sufficiently substantial to warrant the freezing order” (at [18]).

42    Rule 7.35 sets out the circumstances in which the discretionary power to make a freezing order is enlivened, relevantly:

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

(1) This rule applies if:

…

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

(i) the Court; or

(ii) for a cause of action to which subrule (2) applies—another court.

…

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

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

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

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

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

(5) The Court may make a freezing order or an ancillary order or both against a person other than a judgment debtor or prospective judgment debtor (a third party) if the Court is satisfied, having regard to all the circumstances, that:

(a) there is a danger that a judgment or prospective judgment will be wholly or partly unsatisfied because:

(i) the third party holds or is using, or has exercised or is exercising, a power of disposition over assets (including claims and expectancies) of the judgment debtor or prospective judgment debtor; or

(ii) the third party is in possession of, or in a position of control or influence concerning, assets (including claims and expectancies) of the judgment debtor or prospective judgment debtor; or

(b) a process in the Court is or may ultimately be available to the applicant as a result of a judgment or prospective judgment, under which process the third party may be obliged to disgorge assets or contribute toward satisfying the judgment or prospective judgment.

(6) Nothing in this rule affects the power of the Court to make a freezing order or ancillary order if the Court considers it is in the interests of justice to do so.

(Emphasis in bold and italics added.)

43    In Huang, the majority rejected the proposition that r 7.35(4) covers the field of events which might give rise to a danger of the kind necessary to enliven the power in r 7.32, holding that “both r 7.35(6) and r 7.36 explicitly contemplate that a freezing order may be made even though the applicant is unable to satisfy r 7.35(4)” (at [22]).

44    Furthermore and importantly, rule 7.35 expressly provides for the making of an order:

(1)    against a “prospective judgment debtor”, being State Grid; and

(2)    against “a third party”, being AusNet, which at the time of the interlocutory application was in possession of the consideration to be paid to State Grid (and the other Scheme Shareholders) via the ANZ account and had responsibility for the disposition of those funds under the Scheme.

45    The burden lies upon the Commissioner of satisfying the Court that she has a good arguable case, that this claim is justiciable in the Federal Court, and that there is a “danger” that the judgment which she seeks will be wholly or partly unsatisfied because of the removal of State Grid’s assets from Australia.

46    The principles relating to the making of a freezing order were conveniently summarised by Wigney J in Basi v Namitha Nakul Pty Ltd [2019] FCA 743 (recently approved in Deputy Commissioner of Taxation v Wang [2020] FCA 1711 at [8] (Abrahams J)):

7. The purpose of a freezing order is to prevent an abuse or a frustration of the Court’s process by depriving an applicant of the fruits of any judgment obtained in the action: Jackson v Sterling Industries Ltd [1987] HCA 23; (1987) 162 CLR 612 at 625. It is “no light matter” to freeze a party’s assets and there is, accordingly, a need for the Court to exercise caution: Patterson v BTR Engineering (Aust) Ltd (1989) 18 NSWLR 319 at 324F. A freezing order is a “drastic remedy” which should not be lightly granted: Cardile v LED Builders Pty Ltd (1999) 198 CLR 380 at [51] citing Frigo v Culhari (unreported, NSW Court of Appeal 17 July 1998 at 10-11).

8. An applicant has a good arguable case if they have “a reasonably arguable case on legal as well as factual matters”: Cardile at [68]; Insolvency Guardian Melbourne Pty Ltd v Carlei (2016) 111 ACSR 236; [2016] FCA 72 at [18]. It has also been said that a “good arguable case” is one “which is more than barely capable of serious argument, and yet not necessarily one the judge considers would have better than a fifty per cent chance of success”: Curtis v NID Pty Ltd [2010] FCA 1072 at [6] citing Ninemia Maritime Corp v Trave Schiffahrtsgesselschaft mbH & Co KG (The Niedersachsen) [1983] Com LR 234 at 235 (affirmed on appeal: [1983] 1 WLR 1412); Deputy Commissioner of Taxation v Greenfield Electrical Services Pty Ltd (2016) 103 ATR 327; [2016] FCA 653 at [7].

9. Where a freezing order is sought on the basis of a danger of the dissipation of assets, it is not necessary for the Court to be satisfied that the risk of dissipation is more probable than not. Nor is it necessary for the applicant to adduce evidence of an intention on the part of the respondent to dissipate assets: Deputy Commissioner of Taxation v Hua Wang Bank Berhad (2010) 273 ALR 194; [2010] FCA 1014 at [8]-[10]; Deputy Commissioner of Taxation v Chemical Trustee Ltd (No 4) (2012) 90 ATR 711; [2012] FCA 1064 at [23]. The making of a freezing order involves a discretionary exercise of power. The Court retains a discretion to refuse relief even if the requirements in r 7.35 of the Rules are satisfied: Patterson at 321-322.

(Emphasis added.)

See also e.g. Perram J in Deputy Commissioner of Taxation v Chemical Trustee Ltd (No 4) [2012] FCA 1064; (2012) 90 ATR 711 with respect to the relevant “danger” in the context of tax debt recovery proceedings; and Deputy Commissioner of Taxation v Ghaly [2016] FCA 707; (2016) ATR 376 (Perry J).

47    Finally, and in line with the purpose to which a freezing order may be directed, the majority in Huang explained at [29] that:

A freezing order operates to preserve the status quo and not to change it in favour of the party who seeks the orders. ... The status quo to be preserved by the freezing order is the existence of assets which could be realised to pay the prospective judgment debt.

(Emphasis added.)

4.2    Good arguable case

48    I agree for the reasons given by the Commissioner that the Commissioner has established a good arguable case in the form of a prospective cause of action accruing once State Grid has disposed of its shares in AusNet to AEH4 and the notice of the Special Assessment has been issued to State Grid.

49    First, by s 350-10, item 2 of Schedule 1 of the TAA, the production of a notice of assessment is conclusive evidence that the assessment was properly made and, except in proceedings under Part IVC of the TAA on a review or appeal in relation to the assessment, is conclusive evidence that the amounts and particulars in the assessment are correct. The validity of an assessment is not affected by a failure to comply with any provision of the ITAA36 or the TAA or any other taxation law: s 175 of ITAA36, s 155-85 of Sch 1 to the TAA. See also: Federal Commissioner of Taxation v Futuris Corporation Ltd [2008] HCA 32; (2008) 237 CLR 146 at [22]–[25] and [64]–[68] (Gummow, Hayne, Heydon and Crennan JJ).

50    Secondly, the Commissioner may bring proceedings in a court of competent jurisdiction, including the Federal Court, to recover any taxation liability due to the Commonwealth and payable to the Commissioner. In this regard, the taxation assessments obviously owe their existence to federal law and depend on federal law for their enforcement.

51    Thirdly, an officer of the Deputy Commissioner has given evidence that the Deputy Commissioner will conduct and issue the Special Assessment as soon as the transaction is complete on 16 February 2022. There is no reason to doubt that evidence.

4.3    Danger that a prospective judgment will be wholly or partially unsatisfied

52    I accepted the Commissioner’s submission that the evidence established a real danger that the debt which would arise upon service of the Special Assessment on State Grid on 16 February 2022 would be wholly or partially unsatisfied because the proceeds of the sale of the State Grid Shares may be removed from Australia. In particular:

(1)    the CGT liability is a very substantial sum of $220,952,895.69;

(2)    State Grid is a company that is incorporated in Hong Kong, which also has its registered office in Hong Kong;

(3)    the evidence is to the effect that State Grid is a subsidiary of State Grid International Development Limited, which Mr Chu understood to be a Chinese-state owned electric utility corporation;

(4)    State Grid has never lodged an income tax return or Business Activity statement with the ATO and did not have a TFN until the Commissioner issued State Grid with one of her own volition;

(5)    the fact that State Grid did not hold a TFN until the Commissioner of her own volition issued a TFN to it, and that the Commissioner has not received any withholding payments made in respect of bank interest payable to State Grid may be indicative that State Grid has no Australian bank account (save for the account with the ICBC to which the moneys due to State Grid on the Implementation Date were to be paid);

(6)    State Grid is aware that the Commissioner has formed the view that when the shares are disposed of, there will be a CGT event, making CGT payable upon the due date of the Special Assessment that is to be issued by the Commissioner, but State Grid disputes the liability that the Commissioner says will arise;

(7)    the Commissioner’s investigations indicated that State Grid has no assets in Australia and following the share disposal, State Grid will have no residual business in Australia;

(8)    in a letter to the ATO on 14 February 2022, White & Case stated that State Grid had no substantial assets in Australia following the disposal of its shares in AusNet (as earlier explained in section 3.6 above);

(9)    while State Grid has related entities in Australia which may hold assets in Australia (as White & Case stated in their letter of 14 February 2022), the Commissioner was unaware of any legal entitlement to require related entities to pay any outstanding tax debts of State Grid; and

(10)    a prospective judgment in respect of the tax liability is not likely to be enforceable, or may otherwise be difficult, in respect of assets held by State Grid in either the People’s Republic of China or Hong Kong.

53    As to the last of these considerations, Mr Chu explained that:

58. From information available on the Council of Europe’s website … China is a party to the Convention on Mutual Administrative Assistance and Tax Matters.

59. I am also aware that any instrument of ratification deposited with the Secretary General of the OECD, on 18 May 2018, with Respect to Article 30, paragraph 1.b, of the Convention, the People’s Republic of China reserved that it shall not provide assistance in the recovery of tax claims, or in conservancy measures, for all taxes. (The period covered is 01/09/2018 – present). In a letter of reservation registered at the Secretariat General of the OECD on 29 May 2018, the People’s Republic of China advised that its reservations under Article 30, paragraph 1.b, of the Convention shall apply to the Hong Kong Special Administrative Region. …

60. Accordingly, I believe that a prospective judgement obtained against SGIADC may be difficult or is not likely to be enforceable against assets held by SGIADC in the PRC or in the Hong Kong Special Administrative Region.

54    I also note that, while Mr Holland gave evidence at the hearing of the existence of an account with the Sydney branch of the ICBC in State Grid’s name, the facts referred to above at [52(4)] and [52(5)] above are strongly supportive of an inference that that account had no funds of substance prior to the transfer of the moneys on 16 February 2022. The likelihood on the evidence presently before the Court is that that account was created in order to provide a bank account in Australia to which the funds due to State Grid on the Implementation Date could be transferred electronically in Australian dollars. More significantly, and again on the evidence presently before the Court, there would be no apparent benefit to State Grid in the very substantial amount of money to be deposited into that account pursuant to the Scheme, remaining in that account or in Australia.

4.4    Where does the balance of convenience lie with respect to the freezing order against State Grid?

55    The essential considerations which I took into account in determining where the balance of convenience lay with respect to the making of the freezing orders on 16 February 2022 may be summarised as follows.

(1)    On the one hand, the primary factors weighing in favour of making the freezing orders with respect to State Grid, at least for the short term pending the matter returning before the Court, were as follows:

(a)    the Commissioner sought to protect monies in excess of A$220 million which would become owing to the Commissioner upon the transaction proceeding the next day and the issue of the Special Assessment to State Grid;

(b)    the danger that those monies may be transferred out of Australia absent any freezing order being made;

(c)    the absence of any substantial assets held by State Grid in Australia and the fact that after the sale of its shares in AusNet, State Grid would not have any residual business in Australia;

(d)    the difficulties in enforcing a prospective judgment obtained against State Grid in respect of assets held by State Grid in the People’s Republic of China or in the Hong Kong Special Administrative Region;

(e)    the direct correlation between the amount to be the subject of the freezing orders and the debt which would accrue on 16 February 2022 on issue of the Special Assessment; and

(f)    the provision of the usual undertakings to the Court by the Commissioner;

(2)    On the other hand, the following considerations weighed against the orders being made, particularly in the terms originally sought by the Commissioner:

(a)    there was no evidence that State Grid had done anything unlawful or proposed to do anything unlawful or that it would not comply with the Special Assessment (although the evidence suggests that it may seek review of the Special Assessment under Part IVC of the TAA, as it is entitled to do);

(b)    the seriousness of the orders sought, given in particular the substantial amount of money which the Commissioner sought to freeze and the fact that the monies would not fall due under the notice of Special Assessment until 1 December 2022;

(c)    the fact that the Commissioner had sought the freezing orders on the eve of the Implementation Date;

(d)    the fact that, as a consequence of the Commissioner’s late application for interlocutory relief, the implementation of the transaction would be impeded and delayed if orders were made so as to prevent the relevant amount being distributed, as the orders originally proposed by the Commissioner would necessitate the rewriting of payment instructions for distributing the funds electronically from the ANZ account operated by AusNet (the ANZ Account) to all of the shareholders, which was estimated by Mr Holland to require a delay of half a day to a full day;

(e)    the fact that third party interests may be affected in unknown and potentially unknowable ways by a delay of up to a full day in payment of the monies to them if the payment instructions for distribution of the monies had to be rewritten so as to retain the relevant amount in the ANZ Account while distributing the remainder;

(f)    the potentially large number of third parties whose interests may be affected, including individuals, if the funds were not transferred to them on the Implementation Date; and

(g)    if there was a delay of a full day, the consequence would be that the consideration owed to Scheme Shareholders under the Scheme would not have been distributed in full on the Implementation Date, which in turn would potentially raise a question as to whether AusNet was in breach of its obligations under the Scheme.

56    State Grid also submitted in the alternative that any freezing order against it should be limited to 50% of the relevant amount, being the amount of security required by the Commissioner under the Security Bond Demand issued to State Grid.

57    In light of Mr Holland’s evidence, which I have summarised under sections 3.2 and 3.4 above, the Commissioner’s proposed freezing orders were able to be amended so as to avoid the risk that distribution of the monies owed to Scheme Shareholders may be delayed past the Implementation Date with consequential impacts for third party interests, whilst also ensuring that the relevant banking institutions could be properly notified of the orders to be made by the Court, namely:

(1)    by permitting the whole of the consideration owing to State Grid under the Scheme to be transferred to the account in its name with ICBC in accordance with the instructions given to Computershare; and

(2)     by deferring the commencement time for monies to be distributed electronically to Scheme Shareholders to 11am on the Implementation Date (16 February 2022).

58    In those circumstances and given that the matter was to be made returnable next week when State Grid would have had a greater opportunity to consider its position and lead further evidence, I considered that the balance of convenience fell firmly in favour of making a freezing order against State Grid with respect to the whole of the relevant amount, as modified in the manner I have described above.

4.5    Where does the balance of convenience lie with respect to the freezing order sought against AusNet?

59    A question was also raised as to whether, in circumstances where the orders accommodated the transfer of the relevant amount from the ANZ Account to the ICBC account in State Grid’s name, it was still necessary for the freezing order to be made against AusNet. It was also suggested by the respondent that an order other than a freezing order could be made.

60    As I have earlier said, the making of a freezing order is a matter of the utmost seriousness and ought not lightly, and therefore unnecessarily, be made. Ultimately, however, the factors which I have summarised at [55(1)] above together with the following factors weighed in favour of also making freezing orders against AusNet.

(1)    First, while instructions had been obtained by Mr De Zilva that the timing of the transaction could be changed from 8.30am to 11am to allow time for proper notice to be given to the relevant banks, there was no undertaking from either respondent to change the time for the transaction;

(2)    Secondly, in circumstances where the respondents had only received notice of the commencement of proceedings and the relevant court documents approximately half an hour prior to the hearing, State Grid had been unable to obtain “100% … absolute surety” that the account with the ICBC was held by State Grid and that the money would not be transferred to any other account, but remained (only) “99.9% sure”.

(3)    Thirdly, the order against AusNet could be lifted once the transaction had been completed and the monies transferred to State Grid’s ICBC account.

5.    SERVICE

5.1    The issues

61    The Commissioner submitted that the Court should grant leave to serve the documents on State Grid outside Australia. Further, as State Grid’s registered office is located in the Hong Kong SAR, the Commissioner accepted that it would be necessary to serve State Grid in accordance with the requirements of the Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil or Commercial Matters made at The Hague on 15 November 1965 (the Hague Convention), to which both Australia and China are signatories. Substituted service was also sought on the basis that effecting service in compliance with the Hague Convention would cause unnecessary and lengthy delay, whereas State Grid should be given as much notice as possible of the orders sought by the applicant.

62    For the reasons set out below, I was satisfied that leave should be granted for the applicant to serve the first respondent outside the jurisdiction, that the proposed method of service is permitted by the Hague Convention, and that orders should be made for substituted service with respect to both respondents.

5.2    The application for leave to serve originating application outside Australia

5.2.1    The requirements for leave to serve originating application outside Australia (FCR r 10.43)

63    I was satisfied that the application for leave to serve the proceeding outside Australia should be granted for the following reasons.

64    Rule 10.43(1) of the FCR, which deals with applications for leave to serve an originating application outside Australia, provides that:

(1) Service of an originating application on a person in a foreign country is effective for the purpose of a proceeding only if:

(a) the Court has given leave under subrule (2) before the application is served; or

(b) the Court confirms the service under subrule (6); or

(c) the person served waives any objection to the service by filing a notice of address for service without also making an application under rule 13.01.

Note: A respondent may apply to set aside an originating application or service of that application—see rule 13.01.

(2) A party may apply to the Court for leave to serve an originating application on a person in a foreign country in accordance with a convention, the Hague Convention or the law of the foreign country.

65    Rule 10.43(4) provides that the onus lies upon a party applying for leave under r 10.43(2) to satisfy the Court of three matters, namely:

(a) the Court has jurisdiction in the proceeding; and

(b) the proceeding is of a kind mentioned in rule 10.42; and

(c) the party has a prima facie case for all or any of the relief claimed in the proceeding.

66    Rule 10.42 in turn provides that subject to r 10.43, an originating application may be served on a person in a foreign country in a proceeding of a kind mentioned in the table contained within that rule, as discussed below.

67    Furthermore, the application for leave to serve abroad must be accompanied by an affidavit that includes the name of the relevant foreign country where the person to be served is or is likely to be, the proposed method of service and that the proposed method of service is permitted by an applicable convention, the Hague Convention or the law of the foreign country: FCR, r 10.43(3). The evidence adduced by the Commissioner satisfied these requirements.

5.2.2    Does the Court have jurisdiction (FCR r 10.43(4)(a))?

68    As to the first of these matters, I am satisfied that the Court has jurisdiction. By the originating application, the Commissioner seeks a prospective judgment as against State Grid in relation to the Special Assessment, that is the notice of assessment to be issued on 16 February 2022 by way of a special assessment pursuant to s 168 of the ITAA36 and therefore under a federal law. The interlocutory relief sought is in aid of that relief. The matter therefore clearly falls within federal jurisdiction.

5.2.3    Is the proceeding of a kind mentioned in FCR r 10.42 (FCR r 10.43(4)(b))?

69    Secondly, as the Commissioner contends, the proceeding is of a kind mentioned in the table in r 10.42. It is a “[p]roceeding based on a cause of action arising in Australia” as referred to in item 1 of the table, being the Special Assessment to be issued on 16 February 2022 and the debt created by the issue of that assessment, which the Commissioner then intends to enforce.

5.2.4    Have the applicants established a prima facie case (FCR r 10.43(4)(c))?

70    Thirdly, the requirement to establish a prima facie case in r 10.43(4)(c) is not an onerous one. As the Full Court observed in Ho v Akai Pty Ltd (in liq) [2006] FCAFC 159; (2006) 247 FCR 205:

10.    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 (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.

(Emphasis added.)

71    Thus, Yates J explained in Vringo Infrastructure Inc v ZTE (Australia) Pty Ltd (No 4) [2015] FCA 177; (2015) 323 ALR 138 at [41] that “… it is not the task of the Court to reach a definitive conclusion as to the accuracy of the facts advanced by the parties or to express any preference for competing accounts.”

72    It follows from these principles that it is not relevant for this issue to consider whether or not the Commissioner is correct in her view that Division 855 of the ITAA1997 does not apply to disregard any capital gain made by State Grid from the disposal of the State Grid Shares and that upon the disposal of those shares, State Grid will incur a CGT liability of $220,952,895.69. Rather, it suffices to establish a prima facie case that:

(1)    the CGT liability will arise upon the issue of the Special Assessment;

(2)    the production of the Special Assessment is conclusive evidence that the assessment was properly made; and,

(3)    save in proceedings under Part IVC of the TAA on a review or appeal relating to the assessment, the notice of assessment issued in respect of the Special Assessment is conclusive evidence that the amounts and particulars in that assessment are correct.

5.2.5    Should the Court decline to grant leave to serve outside the jurisdiction in the exercise of discretion?

73    Fourthly, a Court may, in the exercise of its discretion, decline to grant leave to serve a proceeding out of the jurisdiction if the Court is of the view that the proceeding is liable to be stayed: Jasmin Solar Pty Ltd v Trina Solar Australia Pty Ltd [2015] FCA 1453; (2015) 331 ALR 108 (Jasmin Solar) at [66]–[67] (Edelman J) and the authorities there cited. As Edelman J explained in Jasmin Solar at [66], this residual discretion exists “because rule 10.43(2) speaks of a party who ‘may apply to the Court for leave to serve an originating application on a person in a foreign country …’” (emphasis in original). As I recently explained in Tweedale v Carnival PLC trading as P&O Cruises [2021] FCA 1633 at [73]:

A proceeding may be stayed on one of several grounds. In Voth v Manildra Flour Mills Pty Ltd (1990) 171 CLR 538 (Voth), Mason CJ, Deane, Dawson and Gaudron JJ observed (at 564) that where an application is brought to set aside orders granting leave to serve a proceeding outside the jurisdiction, the onus remains on the plaintiff to satisfy the court that the case is one which falls within the relevant category and “that the proceedings would not be subsequently stayed as an abuse of process on forum non conveniens grounds or for some other reason”. …

74    Justice Rares in Suzlon Energy Ltd v Bangad (No 3) [2012] FCA 123 at [52] summarised the relevant principles that emerge from the majority’s reasons in Voth v Manildra Flour Mills Pty Ltd [1990] HCA 55; (1990) 171 CLR 538 (Voth) (with which Brennan J agreed at 572), as follows:

1.    An Australian court must exercise jurisdiction that is conferred on it, except where it is established to be a clearly inappropriate forum ([Voth] 171 CLR at 559).

2.    In cases where the Court has a discretion to grant leave to serve outside the jurisdiction, it is relevant to consider the appropriateness of the forum in exercising that discretion ([Voth] 171 CLR at 560).

3.    The applicant for either that leave, or confirmation of service effected … must satisfy the Court positively that the proceedings would not, or ought not, be stayed as having been brought in a clearly inappropriate forum or as being an abuse of process ([Voth] 171 CLR at 564).

4.    The power to stay (or refuse leave to serve outside the jurisdiction), based on the Court being a clearly inappropriate forum is discretionary, and involves a subjective balancing process, in which various factors and matters of impression, in all the circumstances, are weighed as had been explained by Deane J in Oceanic Sun Line Special Shipping Co Inc v Fay (1988) 165 CLR 197 at 247-248 (whose judgment was substantially approved in Voth 171 CLR at 564).

5.    Ordinarily, the local court will not be a clearly inappropriate forum if there is no foreign tribunal that has jurisdiction over the respondent (here the banks) and would entertain the particular proceedings that the applicant wishes to bring (Oceanic 165 CLR at 248). However, where there is no real connection between the subject matter of, or parties to, the litigation, the local court may be clearly inappropriate if the law of the place where the alleged wrong occurred did not allow proceedings to be brought for its redress (e.g. in a jurisdiction where a traffic accident occurred and that had an exclusive statutory compensation scheme, a suit brought in this jurisdiction would be in a clearly inappropriate forum) (Voth 171 CLR 558-559).

6.    The rationale for the exercise of the power to stay is the avoidance of injustice between parties in the particular case (Voth 171 CLR at 554).

75    His Honour further explained at [53] that “a court is not an inappropriate forum merely because another is more appropriate” (citing Regie Nationale des Usines Renault SA v Zhang [2002] HCA 10; (2002) 210 CLR 491 at [24] (Gleeson CJ, Gaudron, McHugh, Gummow and Hayne JJ)).

76    I am satisfied that Australia is “not an inappropriate forum” given that the Commissioner is present in Australia, the prospective debt will arise in Australia under Australian federal law, and the transaction said to give rise to the prospective debt occurred in Australia and is governed by Australian law. The second respondent is also incorporated in Australia although following the implementation of the Scheme, it seems likely that the second respondent should be disjoined.

5.3    The proposed method of service is permitted by the Hague Convention

77    It is necessary before turning to the question of substituted service to address the question of whether the proposed method of service was permitted by the Hague Convention to which, as I have earlier mentioned, Australia and China are signatories: Deputy Commissioner of Taxation v Huang [2019] FCA 1537; (2019) 110 ATR 673 at [85] (Katzmann J). (I note that the High Court’s decision in Huang did not address this aspect of her Honour’s judgment.) In the present case the proposed method of service was to send by post the requisite documents to the registered office of State Grid (T15/2/22 at p. 24.32–34).

78    The Hague Conference on Private International Law (HCCH) maintains on its website a list of “Competent Authorities” for the purposes of effecting service in countries which are signatories to the Hague Convention. A copy of that list was reproduced at Exhibit the DC-1 to Mr Chu’s affidavit at pp. 597–600. The list identifies the relevant authority in Hong Kong as the Chief Secretary for Administration, Hong Kong Special Administrative Region Government, and permits service by post to the registered office address of a limited company or corporation. As such, I am satisfied that the proposed method of service is permitted by the Hague Convention.

5.4    Substituted service

79    The HCCH’s list of Competent Authorities also states that the time for execution of a request for service is “generally around 4 months”. As a result, Mr Chu deposed to the Commissioner’s view that:

In the interests of fairness, the Commissioner holds concerns about utilising a method of service which would potentially see [State Grid] unaware of the proceedings for that length of time, especially where, if the order sought by the Commissioner are granted, [State Grid] may act in a manner inconsistent with the freezing orders where it does not know of their existence.

80    As a result, the Commissioner did not propose to effect service personally on State Grid but instead, in the interests of bringing the matter to State Grid’s attention as soon as possible, sought orders for substituted service on State Grid by:

(1)    emailing the documents to Mr De Zilva of White & Case on the basis that he was the nominated legal representative for State Grid identified on the Nomination of Legal Representative Form on 9 February 2022, which was provided by White & Case to the Commissioner; and

(2)    posting the documents to Mr De Zilva at the office of White & Case in Victoria, Australia.

81    Given the urgency of the matter, the Commissioner also proposed to effect service on AusNet by emailing the documents to Mr De Zilva, who is also the legal representative for AusNet according to the letter dated 25 November 2021 from White & Case to AusNet, by posting the documents to the registered office of AusNet, and by emailing the documents to the Head of Tax at AusNet.

82    I agreed that it was critically important for service to be effected as swiftly as possible on both respondents and that it was therefore appropriate to make orders for substituted service via the means proposed by the Commissioner.

6.    CONCLUSION

83    For the reasons set out above, I considered that it was appropriate to maintain the status quo by making freezing orders against both respondents at the conclusion of the urgent interlocutory hearing on 16 February 2022 limited to the relevant amount, at least until the matter was returnable the following week before the duty judge. I also considered that it was appropriate to make orders for leave to serve the proceeding outside Australia on State Grid and for substituted service on both respondents.

Associate:

Dated:    22 February 2022