Autorent Pty Ltd v Millar Seymour and Co
[2004] TASSC 2
•5 February 2004
[2004] TASSC 2
CITATION: Autorent Pty Ltd v Millar Seymour & Co [2004] TASSC 2
PARTIES: AUTORENT PTY LIMITED ACN 009 509 988
v
O’BRIEN, Mark Augustine,
CLARK, Warren John,
WILLIAMS, Michael John
SEYMOUR, Anthony Wayne,
MILLAR, Richard Victor
trading as MILLAR SEYMOUR & CO
ALPHA PTY LTD ACN 009 492 682
v
O’BRIEN, Mark Augustine,
CLARK, Warren John,
WILLIAMS, Michael John
SEYMOUR, Anthony Wayne,
MILLAR, Richard Victortrading as MILLAR SEYMOUR & CO
TITLE OF COURT: SUPREME COURT OF TASMANIA
JURISDICTION: ORIGINAL
FILE NO/S: 46/2001 and 47/2001
DELIVERED ON: 5 February 2004
DELIVERED AT: Hobart
HEARING DATES: 30 May, 3 4 & 9 July, 4, 13 & 14 August, 24 September and 17 & 18 December 2003
DECISION OF: Master S J Holt
CATCHWORDS:
Procedure – Tasmania – Practice under Rules of Court – Default of appearance – Setting aside judgment – Defence on the merits – Extent to which credibility may be assessed.
Supreme Court Rules 2000 (Tas), r355.
Evans v Bartlam [1937] AC 473; Shocked v Goldschmidt (1998) 1 All ER 372; Grimshaw v Dunbar (1953) 1 QB 408; Adams v Kennick Trading (International) Ltd (1986) 4 NSWLR 503; Davies v Pagett (1986) 10 FCR 226; Lau v CITIC Australia Commodity Trading Pty Ltd (1999) VSCA 34 (26 March) and West Coast Transport Pty Ltd & Anor v Adams Group Services Pty Ltd & Anor [2001] TASSC 94 followed.
Aust Dig Procedure [269]
REPRESENTATION:
Counsel:
Plaintiffs: D J Gunson SC and M Young
Defendants: W M Griffiths
Solicitors:
Plaintiffs: Gunson Williams
Defendants: Toomey Maning & Co
Judgment Number: [2004] TASSC 2
Number of Paragraphs: 27
Serial No 2/2004
File Nos: 46 & 47/2001
AUTORENT PTY LTD v MILLAR SEYMOUR & CO and
ALPHA PTY LTD v MILLAR SEYMOUR & CO
REASONS FOR DECISION MASTER HOLT
5 February 2004
The application
There are two actions, the first commenced by Autorent Pty Ltd (“Autorent”) and the second by Alpha Pty Ltd (“Alpha”) against the members of an accountancy firm consisting of the five defendants trading under the name Millar Seymour & Co (“Millar Seymour”). Each writ was endorsed with a claim for damages for causes of action including negligence and breach of contract arising out of accountancy services provided to Autorent and Alpha between 1993 and 1997. Between those times the defendants Warren Clark, Michael Williams and Richard Millar were continuously partners in Millar Seymour. The defendant, Mark O’Brien, did not become a partner until 1 July 1996 and the defendant, Anthony Seymour, ceased to be a partner from 1 July 1996. The Autorent writ was also endorsed with a claim pursuant to the Income Tax Assessment Act (Cth) 1936 (“the Act”), s251M for reimbursement of an interest payment imposed by the Australian Taxation Office (“the ATO”). Under that provision if through the negligence of a registered tax agent a taxpayer becomes liable to pay a fine, penalty or interest the registered tax agent is liable to pay to the taxpayer the amount of that fine penalty or interest and the taxpayer may sue for its recovery. None of the members of Millar Seymour entered a timely appearance and on 22 March 2001 a default judgment in each action was entered for damages to be assessed. On 22 April 2002 the defendants filed their applications in each action to set aside the judgments.
The hearing
The applications were returnable on 23 May 2002 at which time counsel for the parties agreed that the hearings should stand adjourned sine die. In late 2002 the plaintiffs, in order to elucidate the claim and facilitate the fair and efficient hearing of the applications, delivered what would have been the statements of claim had default judgments not been entered. A timetable was imposed for the filing and service of affidavits. The applications were ready for hearing by 20 February 2003 and on that day they were adjourned for hearing in Launceston on a date to be obtained by the parties from the listing clerk. The parties estimated the hearing time to be one day. The hearing commenced in Launceston on 30 May 2003, at which time it was ordered that the applications be heard and determined at the same time with evidence in one being evidence in the other. Cross-examination of the deponents of the affidavits filed in support of the application was extensive and conducted without objection as to its length with the result that the hearing time required was significantly more than the original one day estimate. The parties obtained further hearing dates in Hobart from the listing clerk, but the estimates of the further hearing time required continued to be inadequate. The convenience of counsel and the witnesses needed to be accommodated. The result was that the hearing which occupied ten days was punctuated by lengthy breaks so that it was not concluded until 18 December 2003 with counsel for Millar Seymour filing a written reply to the plaintiffs’ final submissions on 20 January 2004.
The considerations
The power to set aside a judgment obtained in default of appearance or defence is contained in the Supreme Court Rules 2000 (Tas), r355, which is as follows:
“Any judgment by default under these rules may be set aside or varied by the Court or a judge either unconditionally or on any terms the Court or a judge considers appropriate.”
The discretion to set aside a judgment obtained by default is not fettered by the terms of the Rule, although in considering the application it is necessary to consider whether any useful purpose would be served by setting aside the judgment and how it came about that the defendants found themselves bound by a judgment regularly obtained to which they could have set up some serious defence: Evans v Bartlam [1937] AC 473 at 482. Where a judgment has been obtained by default without a trial the question of whether there is a defence on the merits is the dominant feature to be weighed against the applicant’s explanation both for the default and for any delay as well as against prejudice to the other party: Shocked v Goldschmidt (1998) 1 All ER 372 at 379. Prima facie, a party to an action is entitled to have it heard in his presence, to dispute his opponent’s case, cross-examine his opponent’s witnesses, call his own witnesses and give his own evidence: Grimshaw v Dunbar (1953) 1 QB 408 at 416. See also West Coast Transport Pty Ltd & Anor v Adams Group Services Pty Ltd & Anor [2001] TASSC 94. It is no part of the Court’s function in determining whether there is an arguable defence to assess the weight of the material put forward by reference to factors going to the credibility of the testimony of the person alleging that he has an arguable defence: Lau v CITIC Australia Commodity Trading Pty Ltd (1999) VSCA 34 (26 March) 1999. If, however, the Court found that an applicant disbelieved the matters put forward in support of a proposed defence and thus was dishonest in raising it the applicant would fail to show a bona fide defence on the merits: Adams v Kennick Trading (International) Ltd (1986) 4 NSWLR 503 at 507. The explanation for the failure to take the procedural step which resulted in the entry of judgment may be important in considering whether there is a bona fide intention of defending the claim, but a mere finding that the explanation is insufficient does not mean that the set aside application should fail: Vann v Awford (1986) 130 SJ 682 and Kostokanellis v Allen [1974] VR 596 at 605. Delay in taking proceedings to set aside the judgment needs to be considered. For example, it may reflect on whether there is a bona fide intention of defending the claim, but delay which in the circumstances does not result in the chances of a fair trial having been rendered unlikely would usually not be important: Grimshaw v Dunbar (supra) at 415 and Davies v Pagett (1986) 10 FCR 226 at 232.
The plaintiffs’ claims
As I have said, in order to elucidate the details of their claims Autorent and Alpha delivered statements of claim. Autorent along with associated companies was involved in the hire car business. In its statement of claim Autorent says that it was part of a group of companies for whom Millar Seymour provided services as accountants, auditors and tax agents. In 1996 Autorent was the subject of a tax audit by the ATO in respect of the financial years ended 1993, 1994 and 1995. Following the audit Autorent, Alpha and the associated companies changed to new accountants who discovered deficiencies in the tax work undertaken by Millar Seymour. Four errors relating to Autorent are asserted. They are as follows:
(1)A mistake in the fringe benefits tax return: By virtue of an amendment to the Fringe Benefits Tax Assessment Act (Cth) 1986 Autorent became exempt from some fringe benefits tax obligations in respect of car parking provided to its employees. Millar Seymour prepared Autorent’s fringe benefits tax return for the year ended 31 March 1996 without noting the exemption or, alternatively, without making enquiries to see whether the exemption applied. The exemption existed where the cheapest commercial car parking station within one kilometre of the employee’s place of work charged more than $5 per day. The consequence of the error was that on 28 May 1996 Autorent paid fringe benefits tax of $13,613.24 in respect of employees’ parking which it was not obliged to pay. It did not recover the money from the ATO until 30 July 1998 after it had engaged new accountants. The claim is for damages for the loss of use of this money.
(2)A lack of tax planning advice: Hire cars which were owned or held on asset purchase or hire purchase agreement could be depreciated for tax purposes at 30% per year and when the vehicles were sold at a profit, after taking into account the depreciation claimed, the profit could be categorised for tax purposes as “recouped depreciation” rather than a capital gain. The recouped depreciation could then be treated as a “balancing charge” which the taxpayer could elect to set-off against the depreciation claimable in the following year on assets acquired in substitution for the assets disposed of. Where a vehicle was leased the vehicle, not being owned by the taxpayer could not be depreciated, but instead the lease payments were the operating expenses to be deducted. There being no recouped depreciation (there not having been depreciation claimed in the first place), where a leased vehicle was acquired by the payment of the balloon payment at the end of the lease and then sold at a profit there was a simple capital gain on which tax was payable without any option to defer payment. Autorent did not receive advice from Millar Seymour about “the significant cash flow tax disadvantages” of financing the hire fleet by lease rather than by hire purchase. It is said that this failure to give advice was in breach of the implied contractual duty of care and negligent. Part of the hire fleet was financed by lease. However, Autorent’s depreciation schedules did not properly distinguish between leased vehicles and non-leased vehicles so that balancing charges were claimed when instead capital gains tax should have been paid. The error was discovered in the ATO audit. The result was that Autorent received an amended tax assessment for tax which could have been deferred had the vehicles been financed other than by lease. The claim is for damages for the loss of use of money used to pay capital gains tax.
(3)A failure to check depreciation schedules: Some of Autorent’s vehicles were financed other than by lease and so depreciation could be claimed as a tax deduction at the rate of 30% per year whilst the cars remained in use as part of the hire fleet. Under the depreciation schedules depreciation was claimed for the whole of the month in which the vehicle was acquired rather than from the actual day of acquisition. This was wrong. In addition, there was the error already referred to in the way the schedules dealt with leased vehicles where the vehicles had subsequently been purchased by Autorent and sold at a profit. The result was that there was a significant underpayment of tax for the 1993, 1994 and 1995 financial years. The 1996 ATO audit picked up these errors and resulted in the ATO reconstructing the schedules and Autorent receiving an amended assessment for back tax and interest. Millar Seymour advised Autorent to accept the amended assessments which it did and it paid the tax and interest. In 1997 Autorent’s new accountants discovered that the ATO’s reconstruction of the depreciation schedules also contained errors and on 9 December 1997 Autorent obtained a refund from the ATO of $138,551.69. Autorent accordingly was kept out of this money between the time of payment of the amended assessment and the refund. It is said that Millar Seymour failed to review or adequately review the ATO’s reconstructed schedules and that this was in breach of the implied contractual duty of care and negligent. Autorent claims damages for the loss of use of this money. In addition, Millar Seymour had not passed on to Autorent’s new accountants the electronic form of the ATO’s audit calculations with the result that the new accountants had to spend considerably more time and effort in discovering and correcting the ATO’s errors than would otherwise have been the case. The new accountant’s fee for the work was $14,150 which Autorent has paid and wants to be reimbursed along with damages for the loss of use of the money paid to the new accountants. Finally, the interest component of the amended assessment issued by the ATO following its 1996 audit of the depreciation schedules was $162,242. This was paid on 31 October 1996 and of this $12,204.77 was refunded by the ATO after Autorent’s new accountants had picked up the errors in the ATO’s recalculation of the depreciation schedules. Pursuant to s251M of the Act, a taxpayer may recover any interest paid to the ATO as a result of the negligence of a registered tax agent. Autorent claims repayment of this interest and damages for the loss of use of the money, on the basis that the depreciation schedule errors should have been detected by Millar Seymour at the time they prepared the 1993, 1994 and 1995 tax returns.
(4)An overstatement of taxable income: Millar Seymour overstated Autorent’s taxable income for the 1996 financial year by $3,327,782 resulting in Autorent making an overpayment of income tax of $1,198,001. Autorent’s new accountants discovered this error and also obtained a further tax saving to Autorent of $50,299. The result was that on 16 December 1997 the ATO refunded to Autorent $1,248,300. Although the ATO paid interest in respect of the overpayment the error was not discovered until after some provisional tax instalments had been paid for the 1997 tax year based on the erroneous 1996 figures. These instalments would have been less and Autorent would have had the use of the difference had the 1996 tax return been correctly calculated by Millar Seymour. It is said that the preparation of the 1996 tax return was undertaken in breach of the implied contractual duty of care and negligently. Autorent claims damages for the loss of use of the money overpaid by it in provisional tax instalments. Autorent also claims reimbursement of, and damages for the loss of use of the money paid to the new accountants for their work in correcting the error. The accountancy fee was $13,375.
The Alpha claim: A failure to ensure that advantage was taken of loss transfers for tax minimisation purposes: Alpha by its statement of claim alleges that it was part of the Autorent group which engaged Millar Seymour as accountants, auditors and tax agents. It says that it was the holding company for each of the other companies in the group and beneficially was entitled to all of the shares in the other companies. Pursuant to the Act, s80G, the losses of companies within a group comprising a holding company beneficially entitled to all the shares in the subsidiary companies could be transferred and set-off against the taxable income of other companies within the group. Some of the shares in the subsidiary companies were in the names of individuals, but held in trust for Alpha. Millar Seymour in completing the annual returns for the subsidiary companies for filing with the Australian Securities Commission completed an item on the standard form enquiring whether listed shareholders held their shares beneficially or in trust on the basis that the individuals held their shares beneficially for themselves. Millar Seymour knew or upon enquiry would have known that in fact this was not the case. The result was that if it was assumed that the information in the annual returns was correct none of the companies within the Autorent group were eligible for s80G loss transfers. A number of the subsidiary companies in the group recorded losses during the 1993, 1994, 1995 and 1996 financial years. These losses were set-off by Millar Seymour against dividends paid by Autorent to Alpha. The set-offs for the 1993, 1994 and 1995 financial years were disallowed in the ATO audit which proceeded on the assumption that the shareholding information contained in the annual returns for the companies was accurate. After the amended tax assessment was issued Alpha dispensed with the services of Millar Seymour and the new accountants corrected the error by lodging with the ATO declarations of trust executed by the individual shareholders with a resultant allowance of all past loss transfers in the 1996 financial year. The need to claim all of the loss transfers in the 1996 year disadvantaged the group because tax rates had changed. As well as this Alpha had less after tax income derived from the group’s operations than would have been the case if a simple adjustment to the commercial arrangements between the group members had been made. Alpha owned premises from which Autorent operated and could have collected rent from Autorent reducing Autorent’s taxable income and causing Alpha instead of having operating losses (excluding dividends received) to make operating profits against which the losses of other companies in the group could be set-off. Millar Seymour failed to advise Alpha to charge Autorent rent. It is said that Millar Seymour breached its implied contractual duty of care and was negligent in the way it completed the annual returns for the group and in failing to advise Alpha to charge rent. The result was that the holding company Alpha had less accumulated funds available for distribution to its shareholders than would have been the case if within the group Autorent had paid rent and loss transfers had been undertaken in earlier financial years.
The proposed defences
Counsel for Millar Seymour, Mr Griffiths, conceded that no arguable defence existed in respect of the completion of the Autorent Fringe Benefits Tax return nor in respect of the overstatement of Autorent’s income in the 1996 tax return. As to the proposed defences to the other claims the evidence is contained in the affidavits of Mr O’Brien and Mr Seymour. Within Millar Seymour, Mr Seymour had charge of the Autorent and Alpha work with the assistance of then employed accountant Mr O’Brien up until Mr Seymour retired as a partner in Millar Seymour in the middle of 1996. After Mr Seymour retired Mr O’Brien became a partner and assumed responsibility for the Autorent and Alpha work. For the whole of the time that Miller Seymour acted they received their instructions from Mr Noel Edwards, the managing director of the companies.
The affidavit evidence as to the defences is as follows. In respect of the claim that Autorent should have been advised about “the significant cash flow tax disadvantages” of financing the hire fleet by lease Mr O’Brien and Mr Seymour say that on several occasions between 1992 and 1996 they advised Mr Edwards of “the significant differences for tax purposes in financing motor vehicles by way of lease agreement as compared with financing by way of hire purchase agreements, including limitations upon claiming depreciation on a leased vehicle and the treatment of balancing charges …”. Mr O’Brien went on to say:
“Whenever the advice referred to in the preceding paragraph was given, Edwards told me that he was fully aware of the tax disadvantages but on various occasions advised that in some instances leasing agreements provided him with flexibility; the opportunity to avail himself of cheap interest rates; and enabled him to enter into lease agreements without recourse, in each case so that the leasing terms available were sufficiently attractive to lead Edwards to forego the tax advantages he knew were otherwise available.”
Mr Seymour said:
“Thereafter there were occasions in 1993 to 1996 inclusive when Edwards advised me, after he had made the relevant arrangements, that he had indeed entered into lease agreements as distinct from hire purchase agreements because of various advantages which he believed would accrue to him sufficient to overcome any taxation disadvantage. My recollection is that on a number if not all of the occasions when he so advised me what he had done it appeared to me from what he told me that the plaintiff or the group might in fact overall receive an advantage greater than the advantage that would have been obtained had it or they entered into standard hire purchase agreements with the taxation results which would follow.”
In respect of the faulty depreciation schedules Mr O’Brien said:
“The internal accounting proceedings and day to day accounting administration was undertaken by the group’s in-house accounting staff … and the work undertaken by the accounting staff resulted in the provision from time to time during the period by the plaintiff to the defendant of depreciation schedules and a computerised accounting ledger from which documents the defendant was required to produce the plaintiff’s tax returns for the years ended 30 June 1993, 1994, 1995 and 1996.”
Mr Seymour’s evidence was to the same effect and in addition he said:
“At a time I do not recall but in or about 1993 or 1994 I had a discussion with Edwards concerning the group’s in-house data systems. Edwards told me that he had a business associate whose ability Edwards greatly respected and who for that reason was consulted by Edwards in relation to the provision to the plaintiff and to the group of software for the purposes amongst other things of maintaining records including depreciation records for tax purposes and other records relating to vehicles used by the plaintiff and the group in the course of its business.
At the time of the discussion referred to in the preceding paragraph, I told Edwards that it was appropriate that he undertake a review of all of the group’s IT systems. I told Edwards that whilst his Accounts Department provided information to us each year for the purpose of completion of taxation returns and whilst we relied upon that information, we had never been requested to undertake a review of the relevant software. Edwards’ response to me was that he had every confidence in the abilities of the person he had used to produce all of his computer software and programs and that such a step was unnecessary.
At no time did Edwards or the plaintiff seek from myself or the defendants the undertaking of an audit of its information technology systems in which was included the program of software used by the plaintiff to maintain its own depreciation schedule. Some of the errors detected by the ATO arose because of errors inherent in the plaintiff’s said software.”
The failure to review the ATO’s reconstructed schedules is explained by Mr O’Brien as follows:
“At or about the end of September 1996 I met with Edwards at Edwards’ office together with Seymour. There was then a discussion with Edwards as to the merits of negotiating an “all in” settlement with the Australian Taxation Office if that was to put an end to all issues raised by the Australian Taxation Office. In addition there was discussion about the prospects of a negotiated settlement avoiding the imposition of a culpability penalty, which penalty I advised Edwards could increase the amount payable by the plaintiff to the Australian Taxation Office by an amount of between 20% and 200% of any additional tax required to be paid. Edwards was told that it was not clear whether the Australian Taxation Office would succeed in relation to any or all of the matters it had detected and which it had claimed were errors, and Edwards was advised that if such an offer was subsequently made by the Australian Taxation Office he should consider whether it should be accepted as a commercial settlement to end the risk of the imposition of penalties and further amended assessments, or whether the matters raised by the Australian Taxation Office should be challenged and if necessary challenged at the Administrative Appeals Tribunal.
The Australian Taxation Office subsequently confirmed that it would accept a settlement and subsequently again I received advice from Edwards that the amount proposed by the Australian Taxation Office was to be accepted on behalf of the plaintiff and that amount paid in full settlement of all matters.”
Along the same lines Mr Seymour said:
“I was present when O’Brien advised Edwards in the course of the discussions referred to in the preceding paragraph that it was not clear whether the Australian Taxation Office would succeed or not in relation to any or all of the matters it had detected during the said audit which it had claimed were errors. He then also advised Edwards that the claimed errors could be contested and pursued to the Administrative Appeals Tribunal. Edwards was then also told by O’Brien in my presence that Edwards could seek a commercial settlement which might obviate the risk of larger claims being made by the Australian Taxation Office along with the possible imposition of penalties which Edwards was then told might increase the additional tax payable by a factor of two or three, and that it was a matter for Edwards to decide what to do.
Edwards said to me in the course of the discussions referred to in paragraph 14 above words to the effect that he would prefer to settle on a commercial basis rather than to spend time and money and accounting costs to go through in detail each of the matters raised by the Australian Taxation Office.”
As to the wrongful inclusion in the annual returns for the companies within the Autorent group of the statement that individual shareholders held their shares beneficially for themselves Mr O’Brien and Mr Seymour said that the returns were sent to Mr Edwards for him to verify the information and then return them for filing with the Australian Securities Commission. On behalf of Autorent and Alpha some copy annual returns for 1997 were tendered. The standard form of declaration apparently signed by Mr Edwards on each of those returns includes the following:
“I declare
(a) that the information given on this Annual Return is complete and correct at the date of signing …
(c) that this declaration is made under a resolution by the company’s board of directors to adopt the contents of this annual return.”
Finally, there is the complaint of the failure to advise Alpha to charge rent to Autorent for the lease of the Alpha premises occupied by Autorent so as to facilitate a reduction in the Autorent taxable income and to give Alpha an operating profit against which the losses of other companies in the group could be set off. The affidavits of Mr O’Brien and Mr Seymour are to the effect that Millar Seymour was instructed to prepare the annual returns and the tax returns, but were not engaged as tax planners and were not consulted about, nor given sufficient information to advise on matters such as whether Alpha, as the holding company, should receive the benefits of the Autorent’s operations by way of dividend or other commercial arrangements such as the collection of rent.
The explanation for the default which led to the entry of the judgments and the delay in applying to set aside
The writs were issued on 22 January 2001. On 8 February 2001 the solicitors for Autorent and Alpha wrote to the firm Millar Seymour advising that writs had issued. The correspondence included the following:
“Would you please advise the professional indemnity insurers of the commencement of these proceedings and request them to appoint solicitors who will accept service of the writs on behalf of the partners of Millar Seymour & Co.
If we have not heard from your professional indemnity insurers or solicitors appointed by them to act on your behalf within ten (10) days of the date of this letter thereafter steps will be taken to effect service of the writ on each of the partners of Millar Seymour & Co.”
The letter was handed by Mr O’Brien to Millar Seymour’s insurance broker, Mr Cluley of McKilllops Insurance Brokers Pty Ltd. Mr Cluley sent a copy of the letter to Millar Seymour’s insurers HIH Insurance. There was no response to the solicitors’ letter however. Each of the defendants was served with the writ in each action in March 2001. Mr O’Brien delivered the writs or copies to Mr Cluley and on 16 March 2001 Mr Cluley forwarded the documents to HIH Insurance in Hobart. On 22 March 2001 the default judgments were entered. Unaware of this, on 27 March 2001 Mr Cluley pursuant to a request from HIH Insurance in Tasmania forwarded the documents to the HIH Liability Claims Unit in Melbourne. Mr Cluley said that forwarding writs to the insurer was his usual practice when a client was served with a writ and that he did not believe that any other steps needed to be taken. He said that although he heard that a liquidator for HIH had been appointed in late March 2001 he did not think that this would have any effect upon claims received prior to the liquidation. Mr O’Brien said that Mr Cluley told him that he would forward the writs to the insurance company and that the insurance company would take whatever steps were necessary to protect Millar Seymour. Mr Clark, Mr Williams, Mr Seymour and Mr Millar all said in their affidavits that they were told by Mr O’Brien that no further steps were required to protect their interests in relation to the writs.
All of the defendants denied receiving notices from the Court in each action dated 26 March 2001 in terms;
“TAKE NOTICE that interlocutory judgment was entered against you on 22 March 2001 for damage (value) to be assessed. The assessment will take place before the Master in Chambers in No 3 Court Supreme Court, Salamanca Place, Hobart at 11 am on Tuesday, 10 April 2001.
*If you do not attend the assessment will proceed in your absence.”
No assessment of damages occurred on 10 April 2001. On 22 March 2002 further notices were issued by the Court advising that the assessment would occur on 29 April 2002. On 22 April 2002 the defendants filed their applications to have the judgments set aside.
The opposition to the applications
On behalf of Autorent and Alpha affidavits of the Supreme Court officer responsible for issuing the March 2001 notices advising of the entry of the judgments and the April 2001 appointment for the assessment of damages were read. The officer said that it was his usual practice to send such notices to each of the defendants named in the writ to the address at which the defendant had been served with the writ. He said that he would prepare the envelopes, put the notices in the envelopes and place the envelopes in the mail tray. He said that he was very methodical and careful in his work and that for this reason he was sure he would have sent the March 2001 notices to each of the defendants. He did not say that he was the person who physically put the envelopes in the post. No postage book was tendered and there was no evidence from anyone saying that the particular envelopes were stamped or franked by them and delivered to the post office or placed in a post box. Senior counsel for Autorent and Alpha Mr Gunson SC submitted that despite all of the defendants saying that they did not get the March 2001 Court notice I should find that Mr Seymour did get the notice and lied when he claimed he had not received it. As to the other partner who had carriage of the Autorent and Alpha work, Mr O’Brien, Mr Gunson SC submitted that he had lied about several matters. Mr Gunson SC incorporated with his submissions a written summary dealing mostly with Mr O’Brien’s evidence entitled “Lies and Inconsistencies”. It was submitted that in the circumstances I should reject all of the evidence from Mr O’Brien (and presumably Mr Seymour) about the proposed defences unless corroborated. Counsel said:
“Now I want to make some general submissions about Mr O’Brien. Mr O’Brien is the lynch pin to the defendants’ defence. If you disbelieve Mr O’Brien with respect to a number of issues, and I will be coming to those, then it is my submission that you should disbelieve him generally. If you find he was untruthful to you, for instance about service of the first notice of the hearing, and I will be submitting that he was untruthful about that, that is the notice of 26 March, then a finding such as that would assist you in determining his veracity overall. In other words you can use his credibility on one issue to judge his credibility on other issues, and I make this submission to you, that in the absence of corroboration of Mr O’Brien from other sources either in the form of oral evidence or in the form of documentary evidence that you should reject Mr O’Brien as a witness of the truth.
…
Let us go back a step and look where the onus of proof lies. It is for the defendants against whom judgment has been entered to satisfy the Court that they have a defence which is capable of being raised, viable, prima facie, these are expressions used and I will come to more of that in a moment. The onus rests on the defendants throughout. If you find that you cannot accept Mr O’Brien as a witness of the truth specifically and generally then you would reject O’Brien’s evidence. If you reach the conclusion that O’Brien has throughout his cross examination been untruthful and been demonstrated to be untruthful and there is no corroborating evidence from other witnesses or in documentary form to support anything he says you reject him, it is as broad as that in my submission.”
In addition, it was submitted that Millar Seymour’s draft defences to the statements of claim and the evidence contained admissions from which it could be concluded that no defence is available. A document headed “Admissions” was handed up. Mr Gunson SC said:
“… it goes on right through dealing with all of the issues that are germane to the totality of the claim and basically, Master, there are two ways we can deal with this, I can sit here and read you the whole of a document, taking you to the transcript in full, which is highly undesirable, or you can accept that as a document that records what we say is relevant evidence concerning admissions which would lead you to a conclusion that there is no arguable defence…”
There was no submission that the explanation for the failure to enter appearances was insufficient. As to the delay I was advised that there was no claim that any prejudice would result from a belated trial should the judgments be set aside. In particular, Mr Gunson SC said:
“Sometimes it is said that if prejudice arises to the defendant that is a matter to be – sorry, to the plaintiff, that is a matter to be taken into account. It is not a matter we are raising so you need not consider it and I am not sure in the line of the more modern authorities whether the question of prejudice in fact is even relevant except in the most extreme cases. It seems a little illogical to say that a person can keep the benefit of a judgment merely by being able to say that there is some prejudice to them if it was to be set aside. Of course, there is always going to be prejudice, but we need not trouble ourselves with it.”
Should the evidence regarding the proposed defences be rejected?
It was not submitted that the evidence as to the proposed defences, if accepted, would be insufficient to show the existence of arguable defences. Accordingly, I confine myself to the submission that I should reject the evidence.
The written summary entitled “Lies and Inconsistencies” invites me to find that Mr Seymour lied as to the period during which he was a partner of Millar Seymour and lied when he asserted that he had not received the March 2001 Court notice. It identifies a number of assertions strongly and unequivocally made under oath by Mr O’Brien which later in the course of intensive cross-examination he had to admit were wrong. The “Lies and Inconsistencies” document, however, contains no reference whatsoever to the evidence referred to earlier in these reasons put forward as the factual basis for the proposed defences. If I were to find that Mr Seymour and Mr O’Brien had lied in the respects asserted in the document the credibility of the rest of their evidence would be in doubt. As to credibility: Winneke P with the agreement of Tadgell and Ormiston JJA said in Lau v Citic Australia Commodity Trading Pty Ltd (supra) at pars 6, 7 and 8:
“6 It seems to me that at least in respect of Lau's proposed defence of ‘unilateral mistake’, if I can call it that, his Honour has embarked upon a trial of the facts, and more particularly the credibility of Lau, in coming to the conclusion that the defence was unarguable. His Honour said:
‘It was submitted on Mr Lau's behalf that his version of events supports the defence of unilateral mistake ... For Citic it was said with considerable force that Mr Lau's account was inconsistent with earlier versions which he had given, not contained in the earlier pleading and was inherently improbable .... The material before me also does not show any basis for the conclusion that Mr Wang was aware that Mr Lau misapprehended the effect of the documents and in particular that when he personally and JBL executed the guarantee, they thought that the document which they executed was the same as the Lau draft which was the document between Ranco and Citic. This conclusion too is fatal to the defence based on unilateral mistake. See Taylor v Johnson. The defences based on Mr Wang's statement about the deed, therefore, are without substance.’
7 Whilst I can understand the argument by Mr Stephen O'Bryan, who appeared in this Court for Citic, that his Honour was bound, in forming his conclusions, to scrutinise material put before him by Lau, it was, in my view, no part of his Honour's function, in determining whether Lau had an arguable defence, to assess the weight of that material by reference to factors which were suggested to go to the credibility of Lau. Yet it seems to me that that is what his Honour has done in assessing its weight by reference to earlier documents and also by reference to what his Honour regarded as the probabilities. It was only by doing so, as I see it, that his Honour was able to determine that the material did not show a basis for the conclusion that Citic, through Wang, was not aware of Lau's misapprehension. In proceeding as he did His Honour was effectively pre-judging a critical issue of fact against the interests of the appellant and thus depriving the appellant of the opportunity of having that issue determined on all the evidence before the ultimate tribunal of fact. It may well be that there is a fine line between a finding that there is no material at all before the Court to support a critical finding of fact and a finding that the material will not support that fact because, in the judge's view, it lacks sufficient weight or credibility.
8 In the vast majority of cases that line, in my view, will have been impermissibly crossed where the judge has come to the latter view because of an assessment that he has made of the credibility of the testimony of the person alleging that he has an arguable defence.
In my view the line has been impermissibly crossed in this case. The judge can only have come to the view that there was no basis at all for a conclusion that Wang was aware of Lau's misapprehension in consequence of his assessment of the weight to be ascribed to the version given by Lau. Short of a finding that that version was, on any reasonable view, a palpable sham (which his Honour did not find), such a conclusion was a misuse, as I see it, of the judge's function in an application of this kind. It may be that the material demonstrated the defence to be a weak one, but that is not to say that, when all the facts are exposed, it will not turn out to be a good one. As Lord Justice Denning, as he then was, said in Hayman v. Rowlands [1957] 1 WLR. 317 at 319:
‘The party asking for a new trial ought to show some defence on the merits, but so long as he does so, the strength or weakness of it does not matter.’”
In West Coast Transport Pty Ltd v Adams Group Services Pty Ltd (supra), Cox CJ cited with approval the following passage from Adams v Kennick Trading (International) Ltd (supra) at 507 where Hope JA said:
“If the judge hearing the application concludes that the applicant has deliberately lied about the alleged defence and is thus dishonest in raising it, the applicant would fail to establish that he had a bona fide defence on the merits. But if in such a case the judge merely concluded that he preferred the evidence of the respondent to that of the applicant, or anything as to credit short of a disbelief by the applicant in the facts he relied on to found the defence, he would not on that account alone be entitled to find that the applicant had failed to establish that he had shown a bona fide defence on the merits. If he did so, he would be trying the issue to be determined at the trial, and this would be an error of law.” [emphasis added]
This is not a case where the proposed defences have been specifically exposed as dishonestly raised. Although some of the evidence might be regarded as containing lies it is not a case where those parts of the evidence directed to the particular defences proposed have been shown to be disbelieved by the defendants, to be a lie or to be a sham. The submission goes to credibility and in the circumstances it is not for the Court on applications of this kind to embark upon a credibility assessment and I decline to do so.
Accordingly, I reject the submission that I should not accept the evidence as to the proposed defences without corroboration.
Have there been admissions rendering the proposed defences unarguable?
As I have said Mr Gunson SC incorporated with his submissions a document entitled “Admissions”. There are three claims which Millar Seymour wish to contest at trial. First, is the Autorent claim of a failure by Millar Seymour to advise Autorent of “the significant cash flow tax disadvantages” of financing the hire care fleet by lease. Millar Seymour’s response is that such advice was given on several occasions between 1992 and 1996 and not acted upon. There is no suggestion in the “Admissions” document that this assertion has been withdrawn and there is nothing in the document showing that concessions made render this defence unarguable.
The second claim which Millar Seymour wishes to defend is the Autorent claim that Millar Seymour in breach of its contractual duty of care and negligently failed to review or adequately review the depreciation schedules provided by Autorent and the reconstructed depreciation schedules provided by the ATO following the tax audit. Millar Seymour assert that they suggested that the software used by Autorent to create the schedules be reviewed and that this suggestion was not acted upon by Autorent. It addition, it is asserted that Autorent instructed Millar Seymour not to spend time, money and accounting costs reviewing the amended assessment issued following the ATO’s reconstruction of the schedules. Instead it is asserted that they were instructed to pursue the alternative that the amended assessment “should be accepted as a commercial settlement to end the risk of the imposition of penalties and further amended assessments …”. Mr O’Brien in his evidence admitted that Millar Seymour did not check or adequately check the Autorent depreciation schedules or the ATO reconstructed schedules; that the computer disk containing the ATO reconstructed schedules was not even opened; that the schedules were wrong and that the errors could and should have been discovered upon a competent review. However, the admissions do not go so far as to leave it unarguable that Millar Seymour in the circumstances had no duty to review the schedules.
The third claim which Millar Seymour wishes to dispute is the claim by Alpha that Millar Seymour in breach of its contractual duty of care and negligently failed to take proper steps to secure good use of the loss transfer provisions available to corporate groups under the Act. The evidence contains admissions that the preparation of the annual returns which said that the individual shareholders in the subsidiary companies held their shares beneficially for themselves was careless; that the information on the annual returns was likely to have been the cause of the ATO in its audit rejecting the previously claimed loss transfers and that the inability to claim loss transfers in the 1993, 1994 and 1995 financial years resulted in loss to Alpha. However, as mentioned earlier in these reasons, there is evidence that the annual returns were signed by a director of the companies submitting them and, pursuant to a resolution of the board of directors of the subsidiary companies, verified to be correct. The admissions do not put it beyond argument that the loss occasioned to Alpha was caused by the negligence of the subsidiary companies in providing the verification. It is admitted that Millar Seymour did not advise Alpha to charge rent for the use of its premises by Autorent so that Autorent’s taxable income might have been reduced and so that Alpha might have obtained an income sufficient to fully take advantage of available loss transfers from other companies within the group to improve its financial position. The admissions, however, do not negate Millar Seymour’s claim that they were not engaged as tax planners and so had no duty to issue advice as to the tax advantages of Alpha collecting rent.
The submission of Mr Gunson SC that there are admissions which lead “to a conclusion that there is no arguable defence” is rejected.
Other considerations
As stated in Evans v Bartlam (supra), consideration must be given as to how it came about that the defendants found themselves bound by a judgment regularly obtained to which they could have set up some serious defence. The writs were handed to Millar Seymour’s insurance broker with the expectation that they would be passed on to the insurer and appropriate steps taken to protect Millar Seymour’s interests. At about the same time the insurer HIH went into liquidation and appearances were not entered. There was no submission that this was an insufficient explanation for the failure to lodge appearances. Perhaps Millar Seymour particularly in light of the HIH liquidation should have followed the matter up to ensure that appearances were entered, but even if it could be said that they should have done that, it would not be appropriate to withhold relief for that reason. The dominant consideration is whether or not there is a defence on the merits. In Vann v Awford (supra), the defendant who did not enter an appearance had lied when he said on oath that he had been in South Africa and had no knowledge of the proceedings. The report of the judgment in the Solicitor’s Journal is as follows:
“Dillon LJ said that the principles on which the court’s discretion to set aside a default judgment under ord 35, r2, were laid down in Evans v Bartlam (1937) AC 473. The judge citing Revici v Prentice Hall Inc(1969) 1 WLR 157, had refused to grant the defendant an extension of time because of his failure to give a reasonable explanation for his delay. The judge had misdirected himself in law. The court’s major consideration was whether the defendant had a defence on the merits and that was to transcend any reason given by the defendant for his delay. The plaintiff has undoubtedly suffered prejudice because of the delay but the defendant’s affidavit showed that there were triable issues. Even for lying to the court, a penalty of 53,783 pounds was excessive. The judgment and the assessment should be set aside on the defendant fulfilling stringent financial conditions to protect the plaintiffs.
Nicholls J delivered a concurring judgment. Appeal allowed on terms.”
As stated earlier in these reasons counsel for Autorent and Alpha pressed upon me to find that the defendants received notices from the court advising of the entry of the default judgments in March 2001 and to reject the evidence that they first became aware of the entry of the judgment shortly after receiving further notices from the Court in March 2002 advising of an appointment for an assessment of damages. It was submitted that the defendants had lied. The applications to set aside the judgments entered on 22 March 2001 were not filed until 22 April 2002. I find it unnecessary to determine whether or not defendants received the March 2001 notices and in those circumstances I consider it undesirable to embark upon an enquiry as to whether or not the defendants lied. If the judgments are set aside the credibility of the defendants may be in issue before the ultimate tribunal of fact and it is best that that tribunal be left to determine the issues absent the distraction of opinions offered without the benefit of all of the evidence on all of the relevant matters. The reason I find it unnecessary to decide whether the defendants could have brought their applications sooner is, firstly, that even if I found that there had been deliberate lengthy delay it would not have led me to conclude that the proposed defences were a sham and, secondly, as earlier stated in these reasons, Autorent and Alpha do not claim that delay has prejudiced them. In Grimshaw v Dunbar (supra) at 415 Jenkins LJ said:
“Secondly, has there been any undue delay by the absent party in launching his proceedings for a new trial? In answering that question I venture to think that delay in itself would not be important, but delay prejudicing the other party, or delay enabling rights of third parties to intervene would be most material.”
In Davies v Pagett (supra) at 232, Morling, Beaumont and Wilcox JJ said:
“It is, however, another question whether concern about the extent of delays, either in a particular case or generally, should, in the absence of prejudice in the particular case, be taken into account in exercising a discretion to set aside a default judgment. The fundamental duty of the Court is to do justice between the parties. It is, in turn, fundamental to that duty that the parties should each be allowed a proper opportunity to put their cases upon the merits of the matter. Any limitation upon that opportunity will generally be justified only by the necessity to avoid prejudice to the interests of some other party, occasioned by misconduct, in the case, of the party upon whom the limitation is sought to be imposed. The temptation to impose a limitation through motives of professional discipline or general deterrence is readily understandable; but, in our opinion it is an erroneous exercise of the relevant discretion to yield to that temptation. The problem of delays in the courts, egregious as it is, must be dealt with in other ways: for example, by disciplinary actions against offending practitioners and by a comprehensive system of directions hearings or other pre-trial procedures which enable the Court to supervise progress - and, more pertinently, non-progress - in all actions. In this respect we note, and respectfully endorse, the remarks made by O'Leary J, as the Chief Justice then was, in Patsalidies v Magoulias (1984) 29 NTR 1 at p7.
In our opinion the discretion exercised by his Honour miscarried. It being established that there was, in each action, a prima facie defence upon the merits and prejudice in none of the particular cases having been shown, the learned Judge should have set aside the judgment in accordance with the approach indicated by the reasoning in Evans v Bartlam, supra.”
Conclusion
Two of the claims have been conceded and I have found that there are arguable defences to the rest. The existence of a defence on the merits is the dominant feature. There is no claim that Autorent and Alpha will be prejudiced by a belated trial. I have not found that the failure to enter timely appearances was the fault of the defendants nor have I found that the defendants lied in explaining why their applications were not brought for more than twelve months after the judgments had been entered. However, even if I had found the defendants were at fault and had lied it would not have been sufficient for me to conclude that their assertions about the existence of arguable defences should be rejected nor would it have changed my view that the justice of the case requires that the defendants should be allowed a proper opportunity to put their cases upon the merits of the matter.
The defendants should have relief from the judgments. In light of the concession that there is no defence to two of the claims I will hear counsel as to the terms of the order which should follow these reasons.
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