BCI Finances Pty Ltd (in liq) v Binetter
[2018] FCAFC 189
•9 November 2018
FEDERAL COURT OF AUSTRALIA
BCI Finances Pty Limited (in liq) v Binetter [2018] FCAFC 189
Appeal from: BCI Finances Pty Limited (in liq) v Binetter (No 4) [2016] FCA 1351
BCI Finances Pty Limited (in liq) v Binetter (No 5) [2017] FCA 1524
File numbers: NSD 2109 of 2016
NSD 188 of 2018Judges: ALLSOP CJ, MOSHINSKY AND COLVIN JJ Date of judgment: 9 November 2018 Catchwords: CORPORATIONS – directors’ duties – where certain directors involved companies in a scheme for the dishonest evasion of taxation – where, as a result of the scheme, the companies were assessed to taxation, penalties and interest – where the companies went into liquidation and were unable to pay their taxation liabilities – where the primary judge found that certain directors had breached their fiduciary duties to the companies – where the companies had entered into transactions with Israeli banks whereby the banks advanced money secured by offshore deposits – where the existence of the offshore deposits was concealed from the Australian Taxation Office – whether the primary judge erred in finding that the transactions between the companies and the Israeli banks were not loans – whether the primary judge erred in failing to hold that there was no breach of duty because the advances from the Israeli banks were interest-bearing loans – whether the primary judge erred in finding that one of the directors was not liable for breach of the duties he owed to the companies
PRACTICE AND PROCEDURE – costs – deceased person – where a person was appointed to represent the deceased person’s estate for the purpose of a proceeding pursuant to r 9.24 of the Federal Court Rules 2011 – where claims were brought against both the estate and the representative in his own right – where claims against the estate succeeded and claims against the representative in his own right failed – whether costs orders against the estate should be payable by the representative personally or limited to the assets of the estate – whether set-off of costs orders appropriate
Legislation: Corporations Act 2001 (Cth), ss 181, 436A, 439C
Evidence Act 1995 (Cth), s 128
Federal Court of Australia Act 1976 (Cth), s 43
Income Tax Assessment Act 1936 (Cth), ss 51, 264, 264A
Income Tax Assessment Act 1997 (Cth), s 8-1
Taxation Administration Act 1953 (Cth), Pt IVC
Federal Court Rules 2011, rr 9.05, 9.24
Cases cited: Australia and New Zealand Banking Group Ltd v Moszko Mejer Dzienciol by his guardian ad litem Phillip Dzienciol [2001] WASC 305(S)
Australian Growth Resources Corporation Pty Ltd v Van Reesema (1988) 13 ACLR 261
Breen v Williams (1996) 186 CLR 71
Commissioner of Taxation v Radilo Enterprises Pty Ltd (1997) 72 FCR 300
Cuthbertson & Richards Sawmills Pty Ltd v Thomas (No 2) [1999] FCA 1789
Equiticorp Finance Ltd (in liq) v Bank of New Zealand (1993) 32 NSWLR 50
Foots v Southern Cross Mine Management Pty Ltd (2007) 234 CLR 52
Hallstroms Pty Ltd v Commissioner of Taxation (Cth) (1946) 72 CLR 634
Hampton Court Ltd v Crooks (1957) 97 CLR 367
Harlowe’s Nominees Pty Ltd v Woodside (Lakes Entrance) Oil Company NL (1968) 121 CLR 483
House v The King (1936) 55 CLR 499
Howard v Commissioner of Taxation (Cth) (2014) 253 CLR 83
In re Beddoe; Downes v Cottam [1893] 1 Ch 547
In re Smith and Fawcett Ltd [1942] Ch 304
In re Wilson Lovatt & Sons Ltd [1977] 1 All ER 274
Kazar v Kargarian (2011) 197 FCR 113
Mills v Mills (1938) 60 CLR 150
Oshlack v Richmond River Council (1998) 193 CLR 72
Pilmer v Duke Group Ltd (in liq) (2001) 207 CLR 165
Richard Brady Franks Ltd v Price (1937) 58 CLR 112
Richard Walter Pty Ltd v Commissioner of Taxation (1996) 67 FCR 243
Silvia v Brodyn Pty Ltd (2007) 25 ACLC 385; [2007] NSWCA 55
SS Pharmaceutical Co Ltd v Qantas Airways Ltd [1991] 1 Lloyd’s Rep 288
Transport Industries Insurance Co Ltd v Longmuir [1997] 1 VR 125
Westpac Banking Corporation v Bell Group Ltd (in liq) (No 3) (2012) 44 WAR 1
Date of hearing: 6, 7, 8, 9 and 10 August 2018 Registry: New South Wales Division: General Division National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Category: Catchwords Number of paragraphs: 629 Counsel for BCI Finances Pty Limited (in liq) and EGL Development (Canberra) Pty Limited (in liq): Mr JA Arnott with Mr B Mostafa and Ms A Zheng Solicitor for BCI Finances Pty Limited (in liq) and EGL Development (Canberra) Pty Limited (in liq): Clayton Utz Counsel for Gary Binetter: Mr ID Faulkner SC with Mr TL Hollo Solicitor for Gary Binetter: Hoffmann & Koops ORDERS
NSD 2109 of 2016 BETWEEN: BCI FINANCES PTY LIMITED (IN LIQUIDATION)
First Appellant
EGL DEVELOPMENT (CANBERRA) PTY LIMITED (IN LIQUIDATION)
Second Appellant
AND: GARY ROBERT BINETTER
First Respondent
MARGARET BINETTER
Second Respondent
JUDGES:
ALLSOP CJ, MOSHINSKY AND COLVIN JJ
DATE OF ORDER:
9 NOVEMBER 2018
THE COURT ORDERS THAT:
1.The appeal (insofar as it relates to the first respondent) be dismissed.
2.The appellants pay the first respondent’s costs of the appeal, to be taxed if not agreed.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
ORDERS
NSD 188 of 2018 BETWEEN: GARY ROBERT BINETTER
Appellant
AND: BCI FINANCES PTY LIMITED (IN LIQUIDATION)
First Respondent
EGL DEVELOPMENT (CANBERRA) PTY LIMITED (IN LIQUIDATION)
Second Respondent
JUDGES:
ALLSOP CJ, MOSHINSKY AND COLVIN JJ
DATE OF ORDER:
9 NOVEMBER 2018
THE COURT ORDERS THAT:
1.The appeal be allowed.
2.Subject to paragraph 4 below, paragraphs 5, 6 and 10 of the costs orders made by the primary judge on 15 December 2017 be set aside and in lieu thereof it be ordered that:
5.Each of the first, second, fourth, sixth, seventh, eighth, ninth and tenth respondents pay the first applicant’s costs on the ordinary basis, as agreed or taxed, with such liability to be joint and several, and with the liability of the first respondent limited to the assets of the estate of the late Emil Binetter.
6.Each of the first, second, fourth, sixth, seventh, eighth, ninth and tenth respondents pay the second applicant’s costs on the ordinary basis, as agreed or taxed, with such liability to be joint and several, and with the liability of the first respondent limited to the assets of the estate of the late Emil Binetter.
10.The first and second applicants pay the costs of the fifth respondent on the ordinary basis, as agreed or taxed.
3.Subject to paragraph 4 below, the respondents pay the appellant’s costs of the appeal, as agreed or taxed.
4.There be liberty to apply within seven days if any party wishes to raise a matter regarding the form of these orders.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
OVERVIEW
[1]
THE PROCEEDING BELOW AND THE APPEALS
[22]
STATEMENT OF THE FACTS
[41]
Key individuals
[43]
The corporate entities
[51]
BCI
[51]
EGL
[57]
Ligon 268
[63]
Binqld
[68]
Milgerd
[73]
Erma
[75]
Ligon 159
[77]
Ligon 158
[78]
The Nudie Juice business
[80]
The Israeli banks
[87]
Bank Hapoalim
[87]
IDB
[94]
Back-to-back loans
[96]
The period before 1988
[97]
1988
[98]
1988-2000 – advances from IDB to EGL
[104]
1989
[108]
1990
[109]
1991
[114]
1992
[121]
1993
[130]
1994
[179]
1995
[195]
1996
[196]
1997
[203]
1998
[213]
1999
[227]
1999-2006 – advances from IDB to Ligon 268
[235]
2000
[237]
2001
[257]
2002
[264]
2003
[273]
2004
[291]
2005
[336]
January to May 2006
[351]
May 2006 to January 2008 – advances from IDB to Binqld
[370]
May to December 2006
[372]
1992-2008 – BCI and EGL’s tax returns
[391]
BCI
[392]
EGL
[400]
2007
[406]
2008
[445]
2009
[450]
2009-2010 - the revised assessments
[462]
BCI
[463]
EGL
[469]
The revised assessments generally
[475]
2010-2014 – the tax appeals
[476]
2010
[479]
2011
[490]
2012
[500]
2013
[520]
2014
[523]
The conduct of the tax appeals
[528]
The offshore deposits
[530]
THE REASONS OF THE PRIMARY JUDGE
[535]
The scheme
[536]
The nature of the transactions with the Israeli banks
[538]
Fiduciary duties
[543]
Breaches of duty
[544]
Dismissal of the case against Gary
[545]
Costs
[548]
CONSIDERATION OF THE ISSUES
[554]
Issue 1: Whether the primary judge erred in finding that the transactions between BCI and EGL and the Israeli banks were not loans and in failing to hold that there was no breach of Gary’s duties to BCI and EGL because the advances from the Israeli banks were interest-bearing loans
[555]
Issue 2: Whether the primary judge erred in finding that Gary was not liable for breach of the duties he owed to BCI and EGL
[577]
The grounds of appeal
[577]
BCI’s submissions (grounds 1 and 2)
[579]
Consideration of BCI’s submissions
[582]
EGL’s submissions (grounds 3 and 4)
[600]
Consideration of EGL’s submissions
[601]
Issue 3: Whether the primary judge erred in relation to certain costs issues relating to Gary
[604]
CONCLUSION
[628]
THE COURT:
OVERVIEW
These appeals raise questions concerning the liability of directors of companies for their conduct in involving the companies in a scheme for the dishonest evasion of taxation, the result of which was the assessment of taxation imposed on the companies. The scheme has some complexity because of the lack of reliable evidence about its detail. That lack of reliable evidence is a consequence, in part at least, of the people involved being either dead or unwilling to give evidence, the existence of dishonesty and secrecy at various times, the destruction of documents in a fire, and the consequent doubt that reasonably arises as to whether documents that do exist reflect, or fully reflect, underlying transactions, rights and liabilities.
That said, there is some degree of simplicity of narrative and structure, which emerges through the documentary detail. In 1950, the brothers Emil and Erwin Binetter came to Australia as refugees from war-torn Europe. They (or their father) had been born in a town in Slovakia that gave its name to one of the corporate entities involved. From 1950, the brothers worked together, married and raised families. By 1988, Emil and Erwin had removed considerable sums of money from Australia (upon which no income tax had been paid) and deposited such in overseas banks. It is unnecessary to explore whether there was any augmentation of the untaxed funds overseas, other than by the expedients adopted in the scheme with which this case is concerned.
The events over the period from 1988 to 2014 involved Emil and Erwin, until their respective retirements and deaths, Gerda (the wife of Emil), Margaret (the wife of Erwin), Gary (the son of Emil), and Andrew, Michael and Ronald (the sons of Erwin). There were other children of Emil (Debbie and Lisa) and Erwin (Peter). They played no part in the present underlying facts. Some of the various corporate entities that were involved were controlled by the families separately, others were jointly controlled. There was no suggestion in the cases put by the liquidators that Ronald participated in any dishonesty.
In 1971, Erma Nominees Pty Limited (Erma) was incorporated with Erwin and Margaret (and from 1996, Andrew) as directors, and Milgerd Nominees Pty Limited (Milgerd) was incorporated, with Emil and Gerda (and from 1993, Gary) as directors.
In 1973 or 1974, Erwin, Michael (then around 19 years old), and Ronald (then around 16 years old) visited Tel Aviv and attended a bank, probably the Israel Discount Bank (IDB). Ronald, on the instruction of his father, signed a name that was not his name to open an account. It would appear that by 1974 Erwin, at least, had set up offshore accounts.
In 1975, Erwin incorporated EGL Development (Canberra) Pty Limited (EGL) with himself as a director. In 1988, Erwin and Emil incorporated Ligon 158 Pty Limited and Ligon 159 Pty Limited (Ligon 158 and Ligon 159). Andrew, Erwin and Margaret became directors of Ligon 158, and Emil, Gerda and Gary became directors of Ligon 159.
In 1990, Emil became a director of EGL, as did Gary and Michael in 1996 and Andrew in 2001. The shareholders of EGL were Milgerd and Erma. Thus, EGL was at relevant times a company owned and controlled by both branches of the family.
In 1991, Ligon 268 Pty Limited (Ligon 268) was incorporated, of which Erwin and Michael were shareholders and Erwin, Andrew, Michael and Ronald were directors.
In 1992, BCI Finances Pty Limited (BCI) was incorporated. It was a jointly owned and controlled company, with Erwin, Emil, Margaret, Andrew and Gary as directors.
In 2006, Binqld Pty Limited (Binqld) was incorporated with Michael as shareholder and Andrew as director.
Whilst other entities were at times relevant, the above companies reveal the following structure:
(a)Erma and Milgerd were holding companies for the respective families, also being trustees for respective family trusts.
(b)EGL and BCI were jointly owned finance companies for both families. (Binqld was later a finance company for Erwin’s family, controlled by Andrew and Michael). The description “finance companies” should not be misunderstood. The business of these companies and the reason for incorporation of at least BCI and Binqld was the borrowing of money offshore in the manner to which we will come, and the on-lending of these funds to the companies conducting the family businesses and investments.
(c)Ligon 158 and Ligon 159 were shareholding and investing companies: Ligon 158 being a shareholder in companies running a juice business, owning factory premises, and investing otherwise; Ligon 159 owning commercial real estate and otherwise investing.
(d)Ligon 268 was the trustee of Ronald’s medical practice, as well as acting as a finance company.
With this brief corporate background, it is helpful to describe in broad outline the nature of the transactions which are the subject of the case. The precise detail varied over time and for different entities. But there was a broad similarity of events and circumstance that makes such a summary useful. A finance company of the family group (such as EGL or BCI) received funds from an Israeli bank. This is said, by the Binetter interests, to be a commercial loan. The loan was secured by a deposit of cash in equivalent amount held by the Israeli bank. This cash deposit was constituted by moneys upon which no tax had been paid and which had been removed from Australia by members of the family. (We leave aside any augmentation over time by funds paid to the Israeli banks by this scheme.) Guarantees were given to the banks by members of the family and some of the family companies. The money that was brought on-shore, by loan it was said, was on-lent to other companies in the group for use as working capital in the family’s businesses. The on-borrowers paid interest to the finance company, which made payments to the bank which it characterised as deductible interest payments to the bank.
For some years the Commissioner of Taxation (the Commissioner) accepted this structure that formed the basis of the tax returns of BCI and EGL: that there were borrowings from the relevant Israeli banks, on-loans to the relevant group companies, and so BCI and EGL were entitled to deduct interest payments to the Israeli banks against interest income from the on-borrowing companies. At no time was there any disclosure of the deposits of cash that secured the advances from the banks. The loans were always presented as loans secured only by personal or company guarantees.
After revelation of the family name in the records of one Philip Egglishaw that led to the well-known tax investigation called “Operation Wickenby” the Commissioner began a detailed tax audit of the family companies. The Australian Taxation Office (ATO) eventually issued amended assessments to the four companies that acted as finance companies (BCI, EGL, Ligon 268 and Binqld) based on fraudulent evasion of tax. These amended assessments did not recognise the deductibility of interest to the Israeli banks, nor the existence of loans from these banks, treating the inflow of money from Israel via the banks as income.
After some resistance to the amended assessments the four companies went into liquidation, being unable to pay the amended assessments. The Commissioner funded the liquidators of the companies to bring actions in the names of the companies alleging that the directors of the companies (BCI, EGL, Ligon 268 and Binqld) breached their fiduciary duty to the respective company by causing them to participate in the transactions of “loan” and thereby causing loss to the company being the relevant assessment. The claim also sought relief against the companies receiving the on-lent funds on the basis of their knowing participation in a fraudulent breach of director’s duty.
Some preliminary comments should be made about the approach to the facts and the issues. First, there is little doubt that the secrecy (from the ATO, in particular) of the money in offshore accounts was a paramount consideration for members of the family. This can be best illustrated by some matters revealed by the evidence. On one occasion Michael Binetter discussed with an adviser in Israel the willingness of an apparently bribed and suborned bank officer in Israel to tell falsehoods to the Commissioner, if called upon (as he was, and did), to the effect that the only security for the loans was the guarantees. In the same meeting, Michael asked the adviser whether he could assist in locating someone who would help in (unlawfully) destroying the files of the Israeli bank. Both aspects of this conversation (in 2012, while tax appeals commenced by the finance companies were on foot) reveal the danger, fully appreciated by Michael, in the ATO becoming conversant with the details of the back-to-back cash deposits. The unusual clarity of this aspect of the evidence came from a written précis of evidence attested to by Deborah Huber (the wife of Ronald) who was present at the meeting and acting as Hebrew interpreter. The secrecy of the offshore moneys and the desire to utilise them, and if possible augment them, was the driving force, and determining feature, of the structure of the arrangements.
Secondly, much of the focus of debate in argument was whether it could be concluded that the advances from the Israeli banks were loans. As shall be seen, that was a central consideration of the primary judge’s reasoning and conclusions. But there is a subtlety to that question. The advances of funds may have been repayable, and so loans in principle, and as to principal. Nevertheless, their proper characterisation also depends on what can be concluded about the deposits of money as security, and the setting of the interest rates. It is open to conclude from the evidence that the Israeli banks were prepared to lend any sum up to an amount placed on deposit with them for a fee. There is evidence that on occasions the fee was 0.3% of the sum lent. They would agree to lend at an interest rate requested by the borrower, paying an interest rate on the security deposit either slightly less than or the same as the requested borrowing rate. It is not always clear from the evidence how the fee was paid to the bank. Thus, if, as it is open to conclude, the requested interest rate bore a direct relationship, sometimes set by the fee, to the interest rate on the deposit, the payment of interest by the on-borrowing company (say Ligon 158) to the finance company (say EGL) funded the payment of “interest” to the Israeli bank, which was used to pay the interest on the deposit and, sometimes at least, the bank fee. So, if one recognises the conformity of interests of all concerned (the family business entity (Ligon 158), the family finance company (EGL) and the family members owning the offshore deposits), one sees pre-tax revenue of Ligon 158 augmenting the secret cash deposit in Israel, through the medium of a tax deduction in EGL for the payment to the Israeli bank of “interest”. The amount of money thus augmenting the deposit accounts could be adjusted according to domestic profit of the on-borrowing companies, and management of the risk of discovery, by setting the borrowing rate (in arrears) with consequent amendment to the deposit rate. The advances from the Israeli banks and their terms can thus be seen to be driven by the commercial needs and convenience of the on-borrowing companies and the overriding and dishonest intention of the relevant family members involved to use and augment the offshore funds in eliminating taxation as far as possible on the family business and investments. The involvement of the lender was accommodated by its fee, which was either taken from the “interest” payment or collected otherwise in some fashion.
Once one appreciates the reality of the above, the characterisation of the arrangements as commercial loans at interest becomes problematic (to say the least) to any honest person, even if the advance of principal can be viewed as an advance that must be repaid at some time.
At [177] of her reasons, the primary judge recorded her understanding of the liquidators’ case, in particular in its reference to “purported” rates of interest. Her Honour described the case as follows:
… [I]t was that the rates of interest stipulated in the loan documentation were not rates for interest charges that were imposed by the bank as amounts that it would earn on the transactions but, rather, rates that were used to calculate the quantum of payments by the borrower to the bank wholly or partly for the benefit of an entity other than the bank, being an entity associated with one or more of the respondents.
Another way of expressing the matter would be that given the circumstances of the setting up of the loan and the willingness of the bank to enter the arrangement for a fee, passing most or all of the interest through to the deposit account, the interest was not an expenditure of the finance company calculated from a practical and business point of view to effect the borrowing, but rather to augment the deposit. The expenditure, from a practical and business point of view, necessarily incurred to obtain the loan for the purpose of gaining or producing assessable income from the on-borrowing company, was the true negotiated cost of the loan: the fee and the lack of use of the deposit funds (though the interest accrued was free to be used) during the life of the loan.
Such a practical and business view not being one based on “juristic classification of the legal rights, if any, secured, employed or exhausted in the process” (see Hallstroms Pty Ltd v Commissioner of Taxation (Cth) (1946) 72 CLR 634 at 648), was not one that would be the province only of a lawyer or tax practitioner. It is a practical business view plain to an honest person familiar with the details of the arrangement.
THE PROCEEDING BELOW AND THE APPEALS
The applicants in the proceeding below were BCI, EGL, Ligon 268 and Binqld (the finance companies), each of which was in liquidation. The joint and several liquidators of each company were (and are) John Sheahan and Ian Russell Lock (the liquidators).
The respondents to the proceeding below were:
(a)Gary Binetter, as legal personal representative of the late Emil Binetter (Gary’s father);
(b)Margaret Binetter, as legal personal representative of the late Erwin Binetter (her husband);
(c)Margaret Binetter, in her own right;
(d)Andrew Binetter;
(e)Gary Binetter, in his own right;
(f)Michael Binetter;
(g)Milgerd;
(h)Erma;
(i)Ligon 159; and
(j)Ligon 158.
Without intending any disrespect, it will generally be convenient to refer to the individual members of the Binetter families simply by their first names. We will refer to Milgerd, Erma, Ligon 159 and Ligon 158 as the “downstream companies”.
The finance companies’ claims were pleaded in their second further amended statement of claim filed 7 September 2015 (the statement of claim). In summary, the claims were based on allegations of:
(a)breach of fiduciary, common law, equitable or statutory duties owed to the finance companies by the respondents below who were directors of the finance companies at the relevant times; and
(b)knowing participation by the other respondents below in the breaches of duty by the directors.
The finance companies also relied at trial on a document styled “amended narrative”.
The alleged breaches by the directors concerned the finance companies’ dealings with two banks in Israel: Bank Hapoalim, in the case of BCI; and IDB in the case of the other finance companies.
At the behest of the liquidators, the finance companies’ case was based on a complex analysis of the transactions between the finance companies and the two Israeli banks, and on the factual context in which those transactions took place. In summary, the finance companies argued that the respondents below participated in a scheme for the purpose of evading or avoiding liability to pay income tax. The alleged scheme involved, as an important element, using funds in Switzerland or Israel (referred to as “offshore deposits”) as security for advances from the Israeli banks of amounts equivalent to the offshore deposits. The finance companies contended that the respondents’ conduct in participating in the scheme led the finance companies to incur the liabilities which arose when the Commissioner issued notices of assessment, amended assessment and penalty assessment to the finance companies between December 2009 and July 2010 (the revised assessments). Those liabilities comprised income tax, penalties and interest incurred under the Income Tax Assessment Act 1936 (Cth) (the ITAA 1936), the Income Tax Assessment Act 1997 (Cth) (the ITAA 1997) and the Taxation Administration Act 1953 (Cth) (the TAA). In summary, the liabilities arose from the disallowance of deductions for interest expenses claimed to have been paid to the Israeli banks and the inclusion of amounts transferred from the Israeli banks to the finance companies as part of their assessable income.
The finance companies’ claim was quantified principally by reference to the tax liabilities arising from the revised assessments. Claims for relief were also made with respect to the costs of the winding up of the finance companies and there were claims for ancillary relief in the nature of charging orders over various identified assets. The claims totalled over $120 million as at 27 September 2015.
At trial, Ronald gave unchallenged affidavit evidence on behalf of the finance companies. The primary judge accepted his evidence.
Deborah Huber, the wife of Ronald, gave evidence at trial following the grant of a certificate under s 128 of the Evidence Act 1995 (Cth). She was not cross-examined. The primary judge accepted her evidence.
The respondents below adduced no oral evidence, but the evidence tendered by the finance companies included affidavits made by Emil, Margaret, Andrew and Gary in tax appeal proceedings brought by the finance companies.
The primary judge’s principal judgment in relation to liability was delivered on 18 November 2016: BCI Finances Pty Limited (in liq) v Binetter (No 4) [2016] FCA 1351 (the Liability Judgment). The primary judge dismissed the finance companies’ cases against Margaret and Gary. Her Honour upheld the finance companies’ claims against the other respondents below, and listed the matter for hearing on the form of orders to give effect to the reasons and the question of costs.
After a further hearing, on 15 December 2017 the primary judge delivered further reasons for judgment: BCI Finances Pty Limited (in liq) v Binetter (No 5) [2017] FCA 1524 (the Quantum Judgment). In addition to issues concerning the quantum of damages, these reasons dealt with costs. One of the issues concerned the appropriate costs orders in relation to the unsuccessful defence of Emil’s estate and Erwin’s estate (the first and second respondents below). On behalf of Margaret, it was argued that the costs order against her (in her capacity as legal personal representative of the late Erwin Binetter) should be limited to the assets of the estate, and there should be no set-off of the liabilities for costs as between BCI and Margaret. The primary judge rejected these arguments. Her Honour also rejected comparable arguments that were advanced by Gary in relation to Emil’s estate.
On 16 April 2018, the primary judge published further reasons for judgment, dealing with certain outstanding issues: BCI Finances Pty Limited (in liq) v Binetter (No 6) [2018] FCA 500.
Four appeals were instituted against the judgments and orders of the primary judge:
(a)An appeal brought by BCI and EGL against the dismissal of their claims against Gary and Margaret (proceeding No NSD2109/2016) (the Liquidators’ appeal).
(b)An appeal brought by Gary against the costs orders made by the primary judge (proceeding No NSD188/2018) (Gary’s costs appeal).
(c)An appeal brought by Michael against the findings of liability against him (proceeding No NSD189/2018) (Michael’s appeal).
(d)An appeal brought by Margaret (in her capacity as the legal personal representative of the late Erwin Binetter), Margaret in her own right, Andrew, Erma and Ligon 158 (proceeding No NSD195/2018). This appeal was structured in two parts, referred to as Section A and Section B:
(i)Section A involved an appeal by Margaret (in her capacity as the legal personal representative of the late Erwin Binetter), Andrew, Erma and Ligon 158 (the Andrew parties) against the findings of liability against them (the Andrew parties’ appeal).
(ii)Section B involved an appeal by Margaret against the costs orders made by the primary judge (Margaret’s costs appeal).
While judgment was reserved, settlement was reached in respect of the following appeals or parts of the following appeals:
(a)The part of the Liquidators’ appeal concerning Margaret.
(b)The whole of Michael’s appeal.
(c)The whole of the Andrew parties’ appeal.
(d)The whole of Margaret’s costs appeal.
The appeals that remain on foot are therefore as follows:
(a)The Liquidators’ appeal insofar as it relates to Gary.
(b)Gary’s costs appeal.
In the Liquidators’ appeal, the finance companies’ grounds of appeal are set out in a supplementary notice of appeal. Grounds 1-4 relate to Gary, while grounds 5 and 6 relate to Margaret. In light of the settlement, only grounds 1-4 remain relevant.
Further, in the Liquidators’ appeal, Gary relies on an amended notice of contention. This contains a single ground, namely that the primary judge erred in finding that the transactions between BCI and EGL and the Israeli banks were not loans and in failing to hold that there was no breach of Gary’s duties to BCI and EGL because the advances from the Israeli banks were interest-bearing loans. In support of this contention, Gary relies on the submissions made by the Andrew parties, both in writing and at the hearing of the appeals. Accordingly, in order to deal with this contention it will be necessary to consider the submissions made on this issue by the Andrew parties. It is logical to consider this contention before considering the finance companies’ grounds of appeal.
Accordingly, the issues raised by the appeals that remain on foot can be summarised as follows:
(a)whether the primary judge erred in finding that the transactions between BCI and EGL and the Israeli banks were not loans and in failing to hold that there was no breach of Gary’s duties to BCI and EGL because the advances from the Israeli banks were interest-bearing loans;
(b)whether the primary judge erred in finding that Gary was not liable for breach of the duties he owed to BCI and EGL; and
(c)whether the primary judge erred in relation to certain costs issues relating to Gary.
The balance of these reasons will be structured as follows. First, we will set out a statement of the facts. Secondly, we will provide a summary of the reasons of the primary judge. Thirdly, we will consider each of the issues raised by the appeals.
STATEMENT OF THE FACTS
The following statement of the facts is substantially based on the Liability Judgment. In addition, we have drawn on the chronology contained in the Appeal Book and some of the documents in the Appeal Book to which we were taken during the hearing of the appeals. It is necessary to set out the facts in some detail for the purposes of considering the issues raised by the appeals. Among other things, the detailed factual narration is relevant to the question whether the advances by the Israeli banks were loans. It also provides context in which to evaluate the contentions that Gary breached his duties as a director of BCI and EGL and that the primary judge erred in not so concluding.
All references to dollars ($) are to Australian dollars unless otherwise indicated.
Key individuals
Emil and Gerda are the parents of Gary. Emil died on 17 December 2014.
Erwin and Margaret are the parents of Andrew, Michael and Ronald. Erwin died on 25 August 2009.
Erwin and Emil conducted a shoe manufacturing business at Marrickville, Sydney until around 1990. At some time, they commenced investing in property and property development. By the time of BCI’s incorporation in 1992, the brothers had amassed a portfolio of property investments which they valued in the several millions of dollars. Erwin and Emil engaged in numerous joint business ventures.
In about 1997, Emil and Erwin decided to separate their business dealings. However, Emil and Gary continued to be directors of EGL until September 2001 and Erwin and Emil were directors of BCI until Erwin’s death and Emil’s retirement.
By April 2004, Erwin had been diagnosed with dementia. However, the primary judge did not find that he lacked mental capacity to make decisions affecting the finance companies at any point in time prior to his death.
Between 1986 and 2007, Gary was employed as a flight steward with Qantas Airways. Australian Securities and Investments Commission searches showed that he had an address in Double Bay, Sydney, while he was a director of BCI and EGL. In more recent times, Gary has lived in Israel.
Michael is or was a solicitor, specialising in commercial tax law.
Ronald is an ophthalmic surgeon.
The corporate entities
BCI
BCI was incorporated on 1 May 1992. The primary judge inferred that Erwin and Emil caused the incorporation of BCI. The company’s registered office was in Rose Bay, New South Wales (at the home address of Erwin and Margaret) from 17 October 1996. BCI’s principal place of business was at that address from 30 June 1994.
At all material times, BCI carried on business as a financier, on-lending funds it obtained to other entities which used the funds for business purposes.
At all relevant times, the shareholders of BCI were Erwin and Emil.
In relation to the directors of BCI:
(a)Erwin was a director from 4 May 1992 until his death on 25 August 2009;
(b)Emil was a director from 4 May 1992 to 20 June 2013; and
(c)Margaret, Andrew and Gary were directors from 25 January 1994 onwards.
The primary judge observed that, although Margaret and Gary each held the position of director of BCI from January 1994, the evidence did not suggest that either Margaret or Gary played an active role in the management of BCI; on the other hand, her Honour said, Erwin, Emil, Andrew and Michael were actively involved in the management of BCI at various times.
BCI was:
(a)placed in administration under the provisions of Pt 5.3A of the Corporations Act 2001 (Cth) on 5 March 2014;
(b)wound up by resolution of its creditors passed pursuant to s 439C of the Corporations Act on 23 April 2014; and
(c)wound up by order of this Court made on 27 August 2014.
EGL
EGL was incorporated on 20 June 1975. Its registered office was in Rose Bay, New South Wales, from 28 October 1996 to 14 October 2014.
The business of EGL was that of a finance company. The sole activity of EGL, from December 1988, was to operate as an intermediary in relation to transactions with IDB.
The shareholders of EGL were Milgerd and Erma.
In relation to the directors of EGL:
(a)Emil was a director from 31 January 1990 to 28 September 2001;
(b)Erwin was a director from 18 July 1975 until his death on 25 August 2009;
(c)Andrew was a director from 28 September 2001 until at least 20 April 2012;
(d)Gary was a director from 16 October 1996 to 28 September 2001; and
(e)Michael was a director from 16 October 1996 to 28 September 2001.
The primary judge observed that: there was ample evidence that Erwin and Emil were actively involved in the management of EGL; Andrew was actively involved in the management of EGL from around the time of his appointment as a director of EGL (September 2001); and the evidence did not suggest that Gary played an active role in the management of EGL.
EGL was wound up in insolvency by order of the Supreme Court of New South Wales on 2 March 2015 on the application of the Deputy Commissioner of Taxation.
Ligon 268
Ligon 268 was incorporated on 22 April 1991. The company was incorporated, at the suggestion of Erwin, to be the trustee of the Bankstown Eye Trust. This trust was associated with Ronald (who, as noted above, is an ophthalmic surgeon). The paperwork for the incorporation of the company and the establishment of the trust was arranged by Michael and presented to Ronald for signing. In about 1998 or 1999, Ligon 268 expanded its activities to include lending funds to companies associated with Erwin. The registered office of Ligon 268 was in Rose Bay, New South Wales from 16 July 1991 to 14 October 2014.
Ligon 268 conducted the administration of Ronald’s medical practice. Ronald paid the costs incurred by Ligon 268 along with a 15% service fee. Ronald’s income came from his surgical practice and he was not a signatory on Ligon 268’s bank accounts. When his practice became successful, he lent money to Ligon 268 at the request of Erwin.
The shareholders of Ligon 268 were Erwin and Michael, with Michael owning nine of the ten issued shares.
In relation to the directors of Ligon 268:
(a)Erwin became a director on 6 September 1991 and ceased to be a director on his death on 25 August 2009;
(b)Andrew was a director from 30 June 1992;
(c)Michael was a director from 5 July 1991 to 30 June 1992; and
(d)Ronald was appointed as a director on 5 July 1991 and ceased to be a director on 27 March 1992, at his request.
Ligon 268 was wound up in insolvency by order of the Supreme Court of New South Wales on 2 March 2015 on the application of the Deputy Commissioner of Taxation.
Binqld
Binqld was incorporated on 12 April 2006. From incorporation until 12 December 2010, Binqld had its registered office in Rose Bay, New South Wales.
The primary judge found that a substantial purpose for the establishment of Binqld was to obtain funds from IDB to fund and invest in the Nudie juice business.
At all times, Michael was the sole shareholder of Binqld.
Andrew was a director of Binqld from 12 April 2006 onwards. The evidence available at trial showed that Binqld was principally managed by him.
Binqld was wound up in insolvency by order of the Supreme Court of New South Wales on 2 March 2015 on the application of the Deputy Commissioner of Taxation.
Milgerd
Milgerd is a combination of the names Emil and Gerda. Milgerd was incorporated on 4 November 1971. At all relevant times, the shares in Milgerd were held by Emil and Gerda.
Emil was a director of Milgerd from 4 November 1971 until 22 November 2012. Gerda was a director from 4 November 1971 to 19 February 2003. Gary was a director of Milgerd from 18 January 1993. Milgerd appears to have been principally managed by Emil.
Erma
Erma is a combination of the names Erwin and Margaret. Erma was incorporated on 4 November 1971. At all relevant times, the shareholders of Erma were Erwin (or his estate) and Margaret.
Erwin was a director of Erma from 4 November 1971 until his death. Margaret was also a director of Erma from 4 November 1971. Andrew was a director from 17 April 1996.
Ligon 159
Ligon 159 was incorporated on 26 February 1988. Emil was a director of Ligon 159 from 9 May 1988 until 22 November 2012. Gerda and Gary were directors from 9 May 1988. As at January 2015, the shareholders of Ligon 159 were Gary, as well as his sisters, Debbie and Lisa. In the absence of evidence that Gerda or Gary participated actively in the management of Ligon 159, the primary judge found that it was more likely than not that Ligon 159 was principally managed by Emil.
Ligon 158
Ligon 158 was incorporated on 26 February 1988. Erwin was a director of Ligon 158 from 6 July 1991 until his death. Margaret was also a director of Ligon 158 from 9 May 1988 to 9 May 1991, and again from 6 July 1991. Andrew was a director from 9 May 1988.
The shareholders of Ligon 158, as at January 2015, were Erwin, Margaret, Andrew, Michael and Ronald, as well as Peter, the fourth son of Erwin and Margaret.
The Nudie Juice business
In May 1990, Erwin set up a company called Tamarama Fresh Juices Pty Ltd and appointed himself and Andrew as its directors. The company bought a business called Tamarama Fresh Juices, which operated from Marrickville. Erwin arranged the funding to buy this business and, in about 1992, to buy out a competitor to increase the scale of the juice operation.
Between 1990 and 1993, the juice business tripled in size. To accommodate it, Erwin organised the purchase of premises located at Corish Circle, Pagewood (the Pagewood premises). The premises were owned, at least by July 2003, by Ligon 158.
Andrew was appointed a director of Nudie Pty Ltd from about 31 October 2002. Ligon 158 is a shareholder in Nudie Pty Ltd, and also a shareholder in Nudie Foods Pty Ltd.
The Nudie brand was launched in January 2003. From July 2003, the Nudie juice business was carried on from the Pagewood premises.
In May 2004, Andrew was appointed a director of Nudie Foods Pty Ltd.
On 12 July 2004, Andrew was appointed a director of Nudie Foods Australia Pty Ltd. Andrew became the Chief Operating Officer of the Nudie juice business in October 2004, and the Chief Executive Officer in March 2005.
In late December 2014, the Nudie juice business was sold for approximately $80 million.
The Israeli banks
Bank Hapoalim
Bank Hapoalim is a banking corporation organised and existing under the laws of the State of Israel. Bank Hapoalim carried on a business of banking in Israel, which included the provision of loans.
Baruch Etzion is a former officer of Bank Hapoalim.
Mr Etzion first met Erwin and Emil in about 1992. He was introduced to them by Yacov Loew-Beer of IDB. Mr Etzion claimed (in a statutory declaration and an affidavit) to have been in charge of the “credit/loan department for major customers of the Bank” and, in that role, dealt with the “loans” provided by Bank Hapoalim to BCI.
After their first meeting, Mr Etzion met Erwin and Emil occasionally in Israel over several years. The meetings occurred in his office at the bank. In November 1997, Mr Etzion was introduced to Andrew by Erwin – again, in Mr Etzion’s office in Israel.
Mr Etzion made a statutory declaration dated 16 December 2009, in which he described himself as a lawyer admitted in Israel and a former Deputy General Manager of the Central Branch of Bank Hapoalim in the period 1985 to 1999. From 1999 to his retirement on 31 December 2001, Mr Etzion worked in the legal department of Bank Hapoalim. On 4 October 2011, Mr Etzion affirmed an affidavit in a tax appeal brought by BCI in this Court (the BCI tax appeal).
Mr Etzion was not called as a witness in the proceeding below, but the finance companies tendered the statutory declaration and the affidavit. The primary judge stated that the evidence of Deborah Huber, set out below, strongly suggested that Mr Etzion had been corrupted by one or more members of the Binetter family.
The finance companies contended at trial, and the primary judge accepted, that each of Bank Hapoalim (Switzerland) Limited, Bank Hapoalim (Schweiz) and Banque Hapoalim (Suisse) SA was, and together were, banks carrying on the business of banking in Switzerland from an office at 33 Stockerstrasse Zurich, Switzerland (together, Bank Hapoalim Switzerland) as part of, or in conjunction with, the banking business operated by Bank Hapoalim.
IDB
IDB is a banking corporation organised and existing under the laws of the State of Israel. IDB carried on a business of banking in Israel, which included the provision of loans.
Hagai Peled and Fernanda Barisaac were representatives of IDB with whom some of the respondents below had dealings.
Back-to-back loans
At trial, there was expert evidence of Barry Ben Zeev, an Israeli banker and long term employee of Bank Hapoalim, to the effect that in cases where the collateral (or security) for a loan was a deposit of money, the loan would be described as a “back-to-back loan”. In particular, back-to-back loans were where the loan matched the deposit in terms of the maturity date. If the loan term was for five years, then the deposit would also be given a five year term and “applicable” interest rate. The deposit would have to be at least the same size as the loan. The deposit for the back-to-back loan would also be in the same currency as the loan because otherwise the bank would be exposed to foreign exchange risk. The primary judge appears to have accepted this definition of a “back-to-back loan”: see [161], [164] and [167] of the Liability Judgment. The primary judge also referred (at [169]) to the evidence of Mr Ben Zeev in which he stated that “when the loan is fully collateralised by cash the exposure to the Bank is very low. If the borrower defaults then the Bank is able to access the deposit”.
The period before 1988
In 1973 or 1974, Erwin, Michael and Ronald visited Tel Aviv and attended a bank, probably IDB. Erwin instructed Ronald to sign a name, which was not Ronald’s name, for the purpose of opening an account.
1988
On 20-23 December 1988, EGL entered into an arrangement with IDB for the advance of funds.
On 21 December 1988, Erwin and Margaret held a meeting of the directors of Erma. The minutes recorded, relevantly, that IDB had agreed to provide EGL with “certain facilities in an amount not exceeding SFr 17 million on the terms contained in a Facility Letter”, a draft of which was tabled at the meeting.
The evidence below included a handwritten ledger for EGL with entries dating from 30 June 1982. Entries dating from 30 December 1988 referred to IDB. The 30 December 1988 entry referred to a loan of SFr 7,157,033.37 received from IDB and on-lent to Milgerd and Erma. An entry dated 30 June 1989 referred to overseas travelling expenses for a trip by Emil to Israel to arrange working capital loans from IDB. An unsigned letter dated December 1988 from EGL to IDB requested the grant of a loan facility in the amount of SFr 17 million, although the handwritten ledger entry for 30 December 1988 referred to an amount of SFr 9,085,000. The unsigned letter was provided by EGL to the ATO to justify deductions of interest expenses.
EGL’s loan request letter requested that the loan facility be provided on the following terms as to interest:
4.The loan shall bear interest on its outstanding balance at a rate which shall be 9.35% p.a. less withholding tax in Australia resulting in 8.5% payable to you but should we pay such interest no later than twenty one (21) days after the date upon which interest is due then interest on the outstanding balance shall be at the rate of 7.997% p.a. less [withholding] tax in Australia resulting in 7.27% payable to you. Such rate of interest shall be fixed for the first two years of the loan facility and thereafter shall be at such rate to be agreed between us from time to time however, should we not agree upon a new rate from time to time, the rate shall be the last rate agreed and if no such rate exists the rate shall be the aforesaid rate.
Interest shall be paid at the end of each six month period as from the date the loan is drawn, as aforesaid or other period or periods as agreed.
Increased Costs. If due to either (i) the introduction of or any change in the interpretation of any law or regulation or (ii) the compliance by you with any request from any central bank or other governmental authority, there shall be any increase in the cost (including reserve requirements) to you of agreeing to make or making funding or maintaining the loan, then we shall from time to time upon demand by you, pay to you additional amounts sufficient to indemnify you against such increased costs. A certificate as to the amount of such increased costs, submitted to us by you, shall be conclusive.
5.Each and every payment of principal or interest shall be effected on its due date of payment to Israel Discount Bank Ltd., Tel Aviv in your favour.
EGL’s loan request letter stated that the obligation to make the proposed loan was conditional upon the provision of guarantees by Milgerd, Erma, Emil and Erwin, board resolutions approving the loan and the guarantees, and an opinion of Emeric Szanto (an accountant) “reflecting favourably to our power to enter into the transactions contemplated by this letter”. The evidence included guarantees signed by Erwin, Milgerd and Erma dated 23 December 1988 in favour of IDB under an agreement made or intended to be made on 23 December 1988. There was also an unsigned but stamped and initialled guarantee in the name of Emil.
The evidence included a letter dated 22 December 1988 from Mr Szanto to IDB in which Mr Szanto referred to himself as the auditor of the “Binetter Group” and set out a list of assets and liabilities of Erwin. The assets totalled $15,931,000, while the liabilities were nil. The assets included equity in Erma, which had interests in various items of real property in the Sydney area and in Queensland, shareholdings and term deposits.
1988-2000 – advances from IDB to EGL
Between December 1988 and October 2000, EGL received total funds of $27,703,280.38 from IDB.
The funds advanced to EGL up to July 1989 were lent to Milgerd and Erma, and used for the following business purposes:
(a)in December 1988, the sum of $4,777,299 was on-lent to Ligon 159 and Ligon 158 to buy units in the Auburn Investment Trust, which trust purchased the property at 265 Parramatta Road, Auburn;
(b)in 1989, the sum of $2.2 million was on-lent to Ligon 159 to contribute a further sum of $2.2 million in the Auburn Investment Trust;
(c)in 1989, the sum of $2.2 million was on-lent to Ligon 158 to contribute a further sum of $2.2 million in the Auburn Investment Trust;
(d)in 1989, part of the money was used by Milgerd for the following business purposes:
(i)it was on-lent to Ligon 159, which purchased an office block at 12 Cordelia Street, Brisbane on 15 December 1989 for $1,175,000;
(ii)it was on-lent to Ligon 159, which used the money to purchase a shopping strip at 548 Ipswich Road on 22 February 1990 for $1,850,000;
(e)to fund Milgerd’s interest in an investment in Broadbeach, Queensland; and
(f)in 1989, part of the money was used by Erma to fund the interest of Erma in the investment in Broadbeach, Queensland.
Further:
(a)advances in June 1991 were transferred to Erma, which lent the money to Ligon 158, and Milgerd, which lent the money to Ligon 159;
(b)an advance in June 1993 was on-lent to Erma which in turn lent it to Ligon 158; and
(c)an advance in August 1993 was on-lent to Milgerd, which on-lent the funds to Ligon 159, which used the funds to buy a shopping centre in North Richmond.
The evidence below did not reveal how funds advanced to EGL in 2000 were used. However, around that time, correspondence between EGL and IDB referred to Erma in connection with the advances. The primary judge inferred that the funds advanced to EGL in 2000 were on-lent to Erma.
1989
There were no primary records of any payment of interest expenses by or on behalf of EGL to IDB during the year ended 30 June 1989. The handwritten ledgers of EGL were not conclusive evidence, and the primary judge did not accept that they were accurate in the absence of supporting contemporaneous records.
1990
On 15 June 1990, Erwin on behalf of EGL and Erma sent a facsimile to IDB which stated:
According to our agreement of Dec. 1988 we will repay you before the end of June 1990 the sum of Sw.Fr. 1,000,000.00 on the loan granted to Erma Nominees P/L. through E.G.L. Development (Canberra) P/L.
There was no evidence of an agreement to repay SFr 1 million to IDB before the end of June 1990.
There were no primary records evidencing any payment of interest expenses by or on behalf of EGL to IDB during the year ended 30 June 1990.
A facsimile from Erwin on behalf of Erma dated 19 July 1990 to IDB referred to a remittal of SFr 1 million that day. The facsimile stated:
The position after this transfer is:
Loan to E.G.L. Dev. Share of Erma Nominee. Share of Milgerd Nominee. Original loan 19,500,000.00 9,000,000.00 10,500,000.00 Less:
Previous repayment2,000,000.00
1,000,000.00
1,000,000.00
Less:
Repaid NOW1,0000,000.00 1,000,000.00 0.00 Balance Now 16,500,000.00 7,000,000.00 9,500,000.00
(Subtotals omitted.)
The primary judge observed that: there was no apparent reason why Erwin wrote to IDB with this information; and it was not apparent why IDB might have had an interest in the question of the “share” of each of Erma and Milgerd – on their face, the guarantees provided by Erma and Milgerd were each referable to the whole of EGL’s borrowings.
1991
By letter dated 27 May 1991 from Erwin on behalf of EGL to IDB, EGL requested a remittal of SFr 4.8 million. The letter stated, relevantly:
This loan amount will be utilised against the [guarantee] of:-
Erma Nominees Pty. Ltd. Sw. Fr. 2,800,000.00
Milgerd Nominees Pty. Ltd. Sw. Fr. 2,000,000.00
On 11 June 1991, EGL received the following amounts from IDB:
(a)$2,338,006; and
(b)$1,673,640.
The $2,338,006 was transferred to Erma, which lent the money to Ligon 158.
The $1,673,640 was transferred to Milgerd, which lent the money to Ligon 159.
As for previous years, there were no primary records evidencing any payment of interest expenses by or on behalf of EGL to IDB during the year ended 30 June 1991.
By letter dated 26 July 1991 from Mr Szanto on behalf of EGL to IDB entitled “Interest payments on loan account of E.G.L. Development (Canberra) P/L”, Mr Szanto wrote:
Referring to the recent additional borrowing of
Sw. Fr. 4,800,000.--
we advise you of the following interest payments:
a, On 23 July 1991 by MILGERD NOMINEES PTY. LTD.
on Sw. Fr. 2,000,000.--
for 20 days from 11 June, 1991
to 30 June, 1991
in Australian Dollar currency: [$]A 7,932.44
b, On 26 July, 1991 by ERMA NOMINEES PTY. LTD.
on Sw. Fr. 2,800,000.--
for 20 days from 11 June, 1991
to 30 June, 1991
in Swiss Franc currency: [Sw. Fr.] 13,000.--
The above two interest payments payments [sic] satisfies all of our interest obligations to 30 June, 1991.
The primary judge observed that: no explanation was given for why Mr Szanto wrote to the bank to inform it of the payments; and a possible explanation was that the bank was not the recipient of the payments, and the letter was written to create the false impression that the payments were interest payments to IDB.
1992
By facsimile dated 28 February 1992 from Mr Szanto on behalf of Erma to Lloyds International Ltd, Mr Szanto provided “Confirmation of request to transfer by TELEGRAPHIC TRANSFER Sw. Fr. 356,250.00 from our Swiss Franc account”. The request was for a transfer to IDB “whose bank account is with the Union Bank of Switzerland. Bahnhofstrasse 45. Zurich. Switzerland. THEIR ACCOUNT NO. IS: 791-598”. The facsimile requested the following message:
Being interest payment for six months, from 1st. Jan. 92 to 30th. June, 92 on loan granted to EGL Development (Canberra) P/L.
Loan no.: 971014/13692.
Borrowing of Erma Nominees Pty. Ltd.
For the attention of Mr. Loew-Beer.
The primary judge observed that: the evidence did not explain why an interest payment to IDB would be made to an account in Switzerland, rather than to an IDB account with a number corresponding to the loan number; the evidence did not demonstrate that this Swiss account was an account owned by IDB or that an interest payment to IDB could be made to that account; a likely explanation was that this facsimile recorded a payment that was falsely described as a payment of interest on a loan from IDB to EGL but which was, in truth, a payment to a Swiss bank account owned by Erwin and Emil; it was not necessary, however, to make a finding about this matter, or about other similar correspondence which recorded payments to the Union Bank of Switzerland.
In its tax return for the year ended 30 June 1992, EGL disclosed gross interest income of $1,751,410 and claimed deductions for overseas interest expenses of $1,750,410. The primary judge found that the evidence did not justify a conclusion that this amount, or any amount, was paid by way of interest to IDB during the year ended 30 June 1992 by or on behalf of EGL.
In or around November 1992, members of the Binetter family took steps to arrange transactions between Bank Hapoalim and BCI.
In or around 1992, Mr Loew-Beer of IDB introduced Erwin and Emil to Mr Etzion of Bank Hapoalim. They met in Israel.
The evidence below included a letter dated 6 November 1992 from Mr Szanto to Mr Etzion in which Mr Szanto identified himself as the auditor of Milgerd, Erma, Ligon 158, Ligon 159, Emil and Erwin. The letter certified that those six entities had a net value in excess of US$25 million and listed 17 assets said to be their major assets.
A facsimile copy of minutes of a meeting of the directors of BCI dated 10 November 1992 was obtained from the files of Bank Hapoalim. The minutes recorded that Erwin and Emil resolved that:
[F]or the proper handling of the corporation’s funds, it was convenient to open an account with Bank Hapoalim, Central Branch, Tel-Aviv, Israel in addition to the company’s other accounts.
…
Mr Emil Binetter, Mr Erwin Binetter and Mr Michael Binetter each acting individually, be and is hereby authorised, for and on behalf of this corporation, to sign and draw cheques against such account and to manage and transact any other business of whatever nature with such bank with the broadest powers …
The primary judge inferred that, by about late 1992, Emil, Erwin and Michael had agreed to enter into discussions with Bank Hapoalim through, among others, Mr Etzion, and to enter into transactions whereby a substantial amount would be advanced by Bank Hapoalim to BCI on terms that included dealings with Bank Hapoalim Switzerland and the provision of a deposit of offshore funds as security for the advance.
The evidence below included a document dated 10 November 1992 entitled “Deed of continuing guarantee unlimited in amount” signed by Erwin and Emil in favour of Bank Hapoalim in respect of “credit in the form of loans in foreign currency” that BCI had received or might receive from time to time. A similar document was executed on behalf of Erma, Milgerd, Ligon 158 and Ligon 159. The latter document was signed by Erwin and Margaret on behalf of Erma and Ligon 158 and by Emil and Gerda on behalf of Milgerd and Ligon 159. Each document referred to Mr Szanto’s 6 November 1992 letter, and verified its accuracy.
1993
The evidence below included a letter dated 6 January 1993 from Bank Hapoalim Switzerland to a Mr Ben Zeev, a banker at Bank Hapoalim in Israel. (This was a different person to the expert witness of the same name referred to at [96] above.) The letter was copied to Mr Etzion and was entitled “Australian deal”. The letter was produced by Bank Hapoalim from its records relating to BCI. The letter stated:
As I wrote to Mr. M. Reshef we lost contact with the client and we shall review the documentation sent to us when the matter becomes relevant again.
I would like to draw your attention to Mrs. R. Zmiri’s memo in Hebrew to Mr. Reshef, dated October 5, 1992, in which she states in paragraph 3 that both deed of pledge and our confirmation to Central Branch are kept with us and not sent to Tel Aviv as written in your message.
This letter confirmed the existence of a “deed of pledge” and a “confirmation” from Bank Hapoalim Switzerland to Bank Hapoalim prior to the May 1993 advances, referred to below. The primary judge considered it likely that the deed of pledge and confirmation referred to in the January 1993 letter recorded terms on which advances from Bank Hapoalim to BCI would be secured by an offshore deposit.
The letter showed that an apparently significant aspect of the arrangements concerned the location where the “deed of pledge” and the “confirmation” were to be stored. The primary judge considered this to be consistent with an arrangement between BCI and Bank Hapoalim by which the offshore deposit to be provided as security for advances would be concealed.
The letter also showed that, in around January 1993, Mr Etzion was probably aware of the existence of the deed of pledge and the confirmation, and that they were relevant to the advances ultimately made in May 1993.
By letter dated 6 January 1993, Michael wrote to Mr Etzion concerning some amendments apparently proposed by Mr Etzion in relation to a “letter of undertaking”. The letter was addressed “Dear Baruch” and was signed “Michael”. The primary judge inferred that Michael had been introduced to Mr Etzion by this date.
The evidence included a facsimile dated 6 January 1993 from Erwin on behalf of Erma to Lloyds Bank entitled “Confirmation of request to transfer by TELEGRAPHIC TRANSFER Sw. Fr. 206,230.00 from our Swiss Franc account”. The request was for a transfer purportedly to IDB, and it stated the same account details at the Union Bank of Switzerland mentioned in the February 1992 facsimile. The facsimile requested the following message:
This is a partial interest payment. Being the balance of interest due for the period from 1st. July, 92 to 31. Dec. 92. SW. Fr. 150,000.00 was remitted to you on 29th. Dec. 1992.
Reference loan granted to EGL DEVELOPMENT (CANBERRA) P/L. Loan No. 971014/13692. Borrowing of Erma Nominees P/L. Attention: Mrs. Miriam Cohen.
The payment did not appear to be recorded in the EGL handwritten ledgers. The primary judge was not satisfied that this was a payment of interest to IDB, in the absence of other evidence that the Union Bank of Switzerland bank account was owned by IDB.
On 25 April 1993, BCI resolved to enter into an arrangement with Bank Hapoalim for the advance of funds. On that date, Erwin and Emil held a meeting of the directors of BCI. Under the heading “Proposed loan from Bank Hapoalim BM”, the minutes recorded:
PRODUCED to the meeting was a form of letter of undertaking intended to be entered into by this company with Bank Hapoalim B.M. Central Branch, Tel Aviv, Israel.
RESOLVED:
(1)to agree to the terms of the letter of undertaking produced to the meeting, being a letter of undertaking between this Company and Bank Hapoalim B.M. Central Branch, Tel Aviv, Israel;
(2) to date the letter of undertaking this 25th day of April 1993; and
(3)to execute the said letter of undertaking under the common seal of this Company and to authorise Mr Emil Binetter and Erwin Binetter to attest the affixing of the common seal of this Company to the said letter of undertaking and to cause delivery of the said letter of undertaking to Bank Hapoalim B.M. Central Branch, Tel Aviv, Israel.
PRODUCED at the meeting was a form of request for provision of credit.
RESOLVED that this company agree to the terms of the request for provision of credit and authorise each of Mr Emil Binetter, Mr Erwin Binetter and Mr Michael Binetter on their own to negotiate the terms of any provision of credit, to fill in any request for credit, to execute any request for credit, to make any request for credit and to deliver any request for credit, in each case on behalf of this Company to Bank Hapoalim B.M. Central Branch, Tel Aviv, Israel.
The minutes also recorded that the directors had agreed to execute a deed of charge in favour of Bank Hapoalim. The deed of charge, dated 25 April 1993, was in evidence. It referred to the two 10 November 1992 guarantees as “Collateral Securities”.
The evidence below included a document entitled “Letter of undertaking” dated 25 April 1993, executed by BCI and signed by Erwin and Emil (the 1993 letter of undertaking). The document referred to past or future requests to Bank Hapoalim “to provide me, from time to time, with credit by means of loans in freely convertible foreign currencies”. Clause 7(k) recorded that the financial certificate issued by Mr Szanto dated 6 November 1992 was true and correct. Clause 9 provided:
As security for the due and punctual performance of all or any of my undertakings hereunder or pursuant hereto, all securities given or which may be given (if any) by me and/or on my behalf to the Bank and also all bills and other negotiable instruments which I have delivered and/or may deliver (if any) to the Bank from time to time, shall serve as collateral as well as all the additional securities which may be given by me to the Bank after the signing of this Letter of Undertaking.
Neither the 1993 letter of undertaking, nor the deed of charge, referred to any security for loans in the form of a deposit.
The primary judge accepted the finance companies’ submission that the 1993 letter of undertaking and the charge were deliberately drafted without reference to the offshore deposit that had been or would be provided as security for the advances to be made pursuant to these documents, and found that the documents were drafted in this way to permit BCI to provide them to the ATO, if necessary, in support of deductions that BCI intended to claim in its tax returns for overseas interest expenses. Based in particular on Michael’s 6 January 1993 letter, the primary judge found that Michael participated in the creation of the documents in this form and for this purpose.
On 27 April 1993, BCI took further steps to enter into an arrangement with Bank Hapoalim for the advance of funds. By letter of that date, Michael wrote to Bank Hapoalim, purportedly as the Australian solicitor to BCI, in connection with the 1993 letter of undertaking. The letter set out certain opinions concerning BCI and the letter of undertaking under Australian law. Paragraph 9 of the letter stated:
Mr Emil Binetter and Mr Erwin Binetter who attested the affixing of the seal of the Borrower to the Letter of Undertaking had the right[,] power and authority to do so and any one of Mr Emil Binetter, Mr Erwin Binetter and Mr Michael Binetter has the right to sign on any Request for Provision of Credit and/or to give any certificate, notice and other instrument pursuant to the Letter of Undertaking.
By a second letter dated 27 April 1993, Michael wrote to Bank Hapoalim, purportedly as the Australian solicitor to Milgerd, Erma, Ligon 158, Ligon 159, Emil and Erwin, concerning guarantees given in connection with banking facilities granted or to be granted by Bank Hapoalim to BCI.
By another letter dated 27 April 1993, from Emil on behalf of BCI, BCI enclosed 10 documents in relation to a “proposed loan from Bank Hapoalim” to BCI.
The evidence also included a letter dated 27 April 1993 from Bank Hapoalim to Bank Hapoalim Switzerland, copied to Mr Etzion, entitled “Australian transaction” and seeking agreement to the wording of a draft “letter of irrevocable instructions to be issued to you by the pledgor in connection with the a/m transaction”. The letter continued:
Please note that in order to proceed we require your agreement to the wording of the said draft. …
Please note that our customer has agreed to the said wording.
This letter was produced by Bank Hapoalim from its records relating to BCI. It provided confirmation of the existence of the deed of pledge referred to in the 6 January 1993 letter referred to at [130] above, and of Mr Etzion’s probable knowledge of its existence.
The evidence included a letter dated 11 May 1993 from EGL to IDB which foreshadowed a transfer of SFr 6 million to loan account “Code NO. (&971057 A/c. NO. 13692” to “reduce the principal of our loan account. This reduction of the account is to be applied in connection with the borrowing of ERMA NOMINEES PTY LTD.” The loan account details corresponded with the account number on the 28 February 1992 and 6 January 1993 facsimiles identified above.
On 13-14 May 1993, BCI requested 12 advances of funds from Bank Hapoalim totalling SFr 6 million. The evidence included 12 letters dated 13 May 1993 from BCI to Bank Hapoalim, by which BCI purported to request the provision of credit in accordance with the 1993 letter of undertaking. Each letter requested the provision of credit in the amount of SFr 500,000. Each letter provided that interest would be at the rate of 6.2% per annum, less Australian interest withholding tax. The interest rate of 6.2% was completed by hand, apparently on behalf of BCI rather than by the bank. Each letter was signed by Erwin.
On 14 May 1993, there was a meeting of Erwin and Emil as directors of BCI that resolved:
1.To become a party to Bank Hapoalim BM’s arrangement for executing transactions by means of instructions given by telephone and/or fax.
2.To empower each and every one of Mr Emil Binetter, Mr Erwin Binetter and Mr Michael Binetter to give instructions as aforesaid.
The minutes were certified by Michael as BCI’s solicitor.
By letter dated 17 May 1993 from Bank Hapoalim to Michael, the Bank requested that a deed of charge be duly registered in favour of the bank and that confirmation evidencing the registration be provided.
By a further batch of 12 letters, dated 27 May 1993, from BCI to Bank Hapoalim, BCI purported to request the provision of credit in accordance with the 1993 letter of undertaking. Again, each letter requested the provision of credit in the amount of SFr 500,000. Again, each letter provided that interest would be at the rate of 6.2% per annum, less Australian interest withholding tax. Each letter was signed by Emil.
Between 17 and 28 May 1993, Bank Hapoalim advanced SFr 12 million to BCI. That amount was then transferred to other Binetter entities.
By an undated letter from Erwin and Emil on behalf of BCI to the International Services Manager, Australia and New Zealand Banking Group Ltd (ANZ Bank), signed around 17 May 1993, BCI requested that ANZ Bank open a Swiss franc currency account for BCI. The individuals authorised to arrange transfers of funds from the account were Michael, Erwin, Emil, Gary and Andrew. The letter identified Michael’s title as “authorised person”, and Erwin, Emil, Gary and Andrew each as “director”.
The evidence below included a document entitled “Authority for Operations” which identified the signature of persons authorised to operate an ANZ Bank account in the name of BCI. The “Authority for Operations” document identified Erwin, Margaret, Gary and Andrew as holding the office of “director”, while Michael was said to hold the office of “authorised signatory”. Each of Erwin, Emil, Margaret, Andrew, Gary and Michael (amongst others) provided specimen signatures on the “Authority for Operations” document.
According to BCI’s appeal statements in the BCI tax appeal, the funds BCI received from Bank Hapoalim in 1993 were on-lent to EGL to enable EGL to refinance a portion of loans it had received from IDB.
The handwritten ledgers of BCI recorded the amount of SFr 12 million as having been received on 17 May 1993 from Bank Hapoalim and lent first to EGL, and through it then to each of Erma and Milgerd.
Erma advanced the funds received from EGL to Ligon 158. Milgerd advanced the funds received from EGL to Ligon 159.
According to EGL’s statement of facts, issues and contentions (SOFIC) in the tax appeals commenced by the finance companies, in May 1993, EGL repaid to IDB the following amounts:
(a)$5,829,770.60 (described as “repayment by Erwin Binetter”); and
(b)$6,030,150.17 (described as “repayment by Emil Binetter”).
The amounts corresponded with the figures set out in the BCI handwritten accounts as amounts lent to Erma and Milgerd via EGL. The $6,030,150.17 loan was recorded in the EGL ledgers, as “new loan to Milgerd”. The ledger recorded payments made by Milgerd on behalf of EGL to IDB totalling approximately $6,030,150.17. There was no obvious reference to the $5,829,770.60 loan to Erma in the EGL ledger.
A balance sheet attached to EGL’s 1993 income tax return recorded that overseas loans reduced from $17,039,544 to $7,318,767.80 during the year ended 30 June 1993. The difference between those two figures was $9,720,776.
By letter dated 4 June 1993, from Erwin on behalf of EGL to IDB, Erwin wrote:
RE: OUR LOAN ACCOUNT:
CODE NO. 971057
A/c. No. 13692
Around the time you receive this letter, you will have received
Sw.Fr. 100,000.00
(One Hundred Thousand Sw. Fr.)
into the above account to reduce the principal of our loan account.
This reduction of the principal account is to be applied in connection with the borrowing of ERMA NOMINEES PTY. LTD.
The loan is now reduced from Sw.Fr. 3,100,000.00 to the round figure of Sw.Fr. 3,000,000.00
A letter dated 7 June 1993 from Erwin on behalf of EGL to IDB referred to a rate of 5.4% net of withholding tax on “the new SF 2,000,000 facility” and a rate of 7.27% net of withholding tax “on the outstanding SF 3,000,000 existing facility”. An unsigned letter from Erwin on behalf of Erma on behalf of EGL (sic) to IDB, also dated 7 June 1993, requested remittal of SFr 2 million and stated: “When remitting this SF 2,000,000 please state that this loan is based on our new loan agreement.”
According to the EGL SOFIC, on 10 June 1993, EGL received a transfer of $2,010,050 from IDB. This amount was lent by EGL to Erma which in turn lent it to Ligon 158.
By facsimile dated 10 June 1993, Mr Szanto wrote on behalf of EGL to Therese Poulton, International Services Manager, ANZ Bank, as follows:
RE: Sw.Fr. 2,000,000.00
We were advised that the above amount was credited to our Sw.Fr. account no. 527028-001
We are asking you to remit out of these funds ONLY ON THE 11th. JUNE, 1993
BY TELEGRAPHIC TRANSFER
Sw.Fr. 330,785.00
TO:
ISRAEL DISCOUNT BANK LTD.
16 Mapu Street.
Tel Aviv. Israel.
whose bank account is with the Union Bank of Switzerland. 45 Bahnhofstrasse. Zurich. Switzerland, with the following message:
“Being interest payment on Loan No. 971057/13692 of E.G.L. Development (Canberra) Pty. Ltd. for the period from 1 Jan. 93 to 30 June, 93.
Borrowing of Erma Nominees Pty. Ltd.
Attention; Mrs M. Cohen.
The primary judge stated that the effect of this instruction, when read with the 7 June 1993 letters and EGL’s SOFIC, appeared to be that a portion of an amount advanced by IDB would immediately be returned to IDB, albeit into a bank account in Switzerland. The primary judge considered this letter to reinforce the suspicion that IDB was not the owner of a Swiss bank account with the Union Bank of Switzerland and that the payments into that account were not, in truth, payments of interest expenses on a loan from IDB; rather, the primary judge said, they may have been payments that augmented offshore funds that were originally owned by Erwin and Emil and, from some unknown time, also owned by Andrew, Michael and Gary.
In its tax return for the year ended 30 June 1993, EGL disclosed gross interest income of $1,308,480 and claimed deductions for interest expenses within Australia of $1,308,480. However, the profit and loss statement attached to the tax return referred to an expense of $1,308,480 as “Interest paid to Israel Discount Bank Ltd”. There were no primary records to support the payment of interest expenses to IDB on behalf of EGL during the year ended 30 June 1993.
The primary judge inferred that the manner in which the advance of SFr 12 million was documented was agreed between Emil, Erwin and Michael with knowledge of the totality of the arrangements by which the advance was procured; that agreement included creating and executing documents that gave the appearance that there was a transaction comprising loans totalling SFr 12 million secured only by the guarantees set out above and a charge over the assets of BCI; however, as each of Emil, Erwin and Michael knew, the advance was secured by an offshore deposit of SFr 12 million.
Based on later evidence of two deposits, called “fiduciary” deposits, upon which interest was earned, the primary judge inferred that each of Emil, Erwin and Michael knew that the deposited funds would earn interest. Based on the fact that Emil, Erwin and Michael were able to procure the deposits, the primary judge inferred that they each owned the deposits and, therefore, earned any interest income that was earned on the deposits.
The primary judge also concluded that Emil and Erwin as the directors of BCI decided that BCI would:
(a)record advances totalling $11,859,921.30 to EGL in the records of BCI in the manner set out above; and
(b)advance those funds to Erma and Milgerd in the amounts recorded in the records of BCI.
Erma advanced the funds received from EGL to Ligon 158, while Milgerd advanced the funds received from EGL to Ligon 159. The primary judge found that Emil and Erwin as the directors of BCI (but not Michael) agreed for these advances to occur.
According to EGL’s SOFIC, in August 1993, EGL received a transfer of $4,153,685.40 from IDB.
By letter dated 13 August 1993 from Erwin on behalf of BCI to Bank Hapoalim, Erwin requested “a schedule of dates when interest is payable and the amounts of interest payable so that there can be no misunderstanding as to the amounts payable and the dates on which interest is to be paid”. The letter also requested confirmation “that payments are to be received at Central Branch, Tel Aviv”.
A second letter dated 13 August 1993, from Erwin on behalf of BCI to Bank Hapoalim enclosed a deed of charge dated 25 April 1993 and a certificate of entry of a charge.
A letter dated 16 August 1993 from Emil on behalf of EGL to IDB referred to a net interest rate of 7.27% until the end of December 1993 on a “further drawdown of the loan to [EGL] to the extent to which it will be on lent to [Milgerd] namely SFR4,000,000”, reducing to 6% (inclusive of Australian withholding tax) from 1 January 1994. The letter referred to a total loan of SFr 7.5 million.
A letter dated 30 August 1993 from Erwin on behalf of EGL to IDB stated, relevantly:
We confirm your agreement as follows:-
a,From 1 January, 1994 the loan facility of SF 2,000,000 referred to in our letter of 7 June, 1993 and the above referred to amount of SF 3,000,000 will be governed upon the same basis as the proposed SF 4,000,000 loan, referred to in our letter of 16 August, 1993. Accordingly, from 1 January 1994 interest shall be at the rate of 8 per cent (8%) per annum reduced to 6% per annum if paid on time being 30 June and 31 December, though if interest is paid more than two monthsslate [sic] from those dates then additional 1% interest above the 8% interest is payable for each and every additional month of delay. In relation to the payment of interest we will pay Australian interest withholding tax therefore for [example] if interest is paid on time then the rate is 6% with 5.4% to be sent to you and 0.6% payable as withholding tax.
The substance of the 30 August 1993 letter was confirmed by a letter from IDB to EGL dated 1 December 1993, which referred to a “loan facility of SwFr.2,000,000”.
By facsimile dated 5 November 1993, Erma requested Lloyds Bank Ltd to make a telegraphic transfer of SFr 171,120 to Bank Hapoalim (account number 343415-00001) with the following message:
For the attention of Mr Baruch Etzion. Representing interest payment by BCI Finances Pty Ltd, borrowing of Ligon 158 Pty Ltd of Sw Fr 6,000,000 interest due on 14.11.93. Please forward receipt.
1994
On 25 January 1994, Gary became a director of BCI.
By facsimile dated 10 February 1994, Erwin on behalf of Erma wrote to Lloyds Bank Ltd in Sydney. The facsimile stated: “Confirmation of request: Please transfer by TELEGRAPHIC TRANSFER Sw.Fr. 281,750-00”. The request was for a transfer to IDB “whose bank account is with the Union Bank of Switzerland, 45 Bahnhofstrasse, Zurich”. No account number was stated. The facsimile requested the following message to accompany the transfer:
Being interest payment on borrowings of Sw.Fr. 5,000,000 from 1st. July, 93 to 31 December, 1993.
Account of E.G.L. [DEVELOPMENT] (CANBERRA) P/L.
Loan no.: 971057/13692
Borrowing of Erma Nominees P/L.
Attention: Mrs. Miriam Cohen.
It will be convenient to deal separately with grounds 1 and 2 (relating to BCI) and grounds 3 and 4 (relating to EGL).
BCI’s submissions (grounds 1 and 2)
In summary, BCI submits that it should be inferred that Gary, along with others, caused BCI to participate in the scheme on the basis of the following matters:
(a)Gary consented to, and was appointed, as a director of BCI (Liability Judgment, [19]).
(b)There would be no reason for Gary to be appointed as a director of BCI if he were not to be involved in its activities.
(c)BCI had no function other than to participate in the scheme (Liability Judgment, [889]).
(d)The scheme benefited the Emil branch of the family. Gary was the only son in the next generation and his sisters had no involvement. If anyone in that generation (ie, Emil’s children) were to be involved, it had to be Gary. Gary was involved in two other similar schemes involving other companies on the Emil side of the family (Civic and Advance) (Liability Judgment, [697]-[702]).
(e)One of the purposes of the scheme was to facilitate the on-lending of the funds via Milgerd and Ligon 159 and Gary was a director of both (Liability Judgment, [63], [65], [261]).
(f)Gary was a part owner of offshore funds from which the offshore deposit was sourced (Liability Judgment, [231]).
(g)Gary and his father Emil caused a similar scheme to be entered into by Civic using an offshore fund which they controlled to generate the funds so as to bring to an end the Emil tranche of the BCI scheme. That involved providing funds to Bank Hapoalim in Israel that were then remitted to Bank Hapoalim in Switzerland. Once remitted to Bank Hapoalim in Switzerland, the funds would be available to Emil and Gary.
(h)In 2012, Gary was involved in an attempt to cause a destruction of evidence in relation to the BCI scheme. Further, Gary told lies as to his knowledge of the existence of offshore deposits in affidavits made in 2011 and 2012.
(i)Gary’s purpose for seeking to cause destruction of evidence and telling lies at least must have included a desire to protect his father, Emil. Nevertheless, the more serious available inference is that he sought to destroy evidence of his own involvement. That inference is available and should have been acted upon: see SS Pharmaceutical Co Ltd v Qantas Airways Ltd [1991] 1 Lloyd’s Rep 288 (SS Pharmaceutical) at 293.
(j)Gary consented to being joined, and having an indemnity costs order made against him, in the BCI tax appeal.
(k)Gary did not give evidence at the trial.
In its written submissions, BCI made detailed submissions in support of the above propositions, including by reference to the documents at AB Pt C, tabs 50, 166, 268, 269, 273, 274, 275, 282, 283, 284, 293, 294, 295, 296, 523, 524, 525, 758, 761, 832 and 834.
BCI further submits that the primary judge erred in the following respects:
(a)The primary judge treated the Civic dealings with IDB in 2004 as “Emil Binetter’s dealings”, and held that, although Gary was aware that these involved back-to-back arrangements, Gary could only be found to have known about BCI’s back-to-back arrangements by June 2012 (Liability Judgment, [971]). This was an error. Gary’s lies under oath, including in 2011, suggest that he knew the truth before June 2012. The Civic-IDB 2004 dealings were not just “Emil Binetter’s”, as the primary judge found. Gary was a director of Civic, and signed key documentation that showed the true nature of the arrangements. The funds obtained by Civic (and Advance, of which Gary was also a director) were used for BCI to “repay” Bank Hapoalim. Gary was a director of BCI, and Emil was 77 years old at the time. The appropriate finding was that Gary had full knowledge not only of the Civic (and Advance) part of this transaction, but of the BCI part. Once that finding is made, there is no reason to think that Gary’s knowledge of the true nature of BCI’s dealings with Bank Hapoalim did not extend back to the time when he became a director of BCI.
(b)The primary judge held that there was no evidence that Gary took any steps, as a director of BCI, to give effect to the scheme involving BCI or that he took any particular role in the management of BCI (Liability Judgment, [969]). The primary judge found that “even if Gary Binetter agreed to participate in the scheme, there is no evidence that he did participate in the scheme by doing any particular thing or receiving any particular benefit” (Liability Judgment, [971]). This approach should not be accepted for the following reasons.
(c)First, the primary judge held elsewhere that Gary owned “part of the offshore funds from which the offshore deposits were sourced at various times” (Liability Judgment, [231]). That being so, Gary plainly stood to benefit from the scheme.
(d)Secondly, the primary judge did not give sufficient weight to Gary’s failure to give evidence considering the material that was available against him: cf Liability Judgment, [973]. The evidence summarised above provided a firm basis to find that Gary knew all relevant facts regarding BCI’s affairs when he was a director. Only Gary knew the full truth (Emil having passed away). Any doubts about whether it should be inferred that Gary knew of the true state of BCI’s affairs while he was a director of BCI should have been resolved against Gary: see, eg, Transport Industries Insurance Co Ltd v Longmuir [1997] 1 VR 125 at 141-142; Hampton Court Ltd v Crooks (1957) 97 CLR 367 at 371-372; SS Pharmaceutical at 293.
(e)Thirdly, once it is accepted that Gary knew the nature of BCI’s dealings with Bank Hapoalim, given his position as a director of BCI, the appropriate finding was that he agreed, as a director, that BCI should continue its participation in the scheme. That alone is sufficient to show that the primary judge’s dismissal of the case against Gary should be overturned. But if more were required, the fact that Gary was involved in the process by which BCI “repaid” Emil’s family’s half of the BCI-Bank Hapoalim transaction is, contrary to the Liability Judgment at [971], evidence of Gary participating in the scheme by doing a “particular thing”. The Court should hold that Gary breached his director’s duties to BCI by continuing to involve it in the scheme for the period in which he was a director of BCI.
Consideration of BCI’s submissions
In our view, BCI has not established any error in the primary judge’s conclusion that Gary did not breach the duties he owed BCI as a director of that company from January 1994.
As the primary judge noted, Gary was not a director of BCI at the time of the 1993 advances. The primary judge found that Gary did not cause BCI to enter into the 1993 transactions (Liability Judgment, [966]) and there is no challenge to that finding.
The primary judge approached the question whether the directors breached their fiduciary and other duties on the basis that it was necessary to show a particular act or omission on the part of the relevant director (Liability Judgment, [292]). In other words, it was necessary to look at the conduct of the relevant director (see, eg, [298] and [299] of the Liability Judgment). This was consistent with the way the finance companies’ case had been presented at trial (see the Liability Judgment, [286]-[288]). Further, the finance companies’ case at first instance proceeded on the basis that they needed to establish knowledge of the scheme on the part of the relevant director (see the Liability Judgment, [289]).
The primary judge found, at [967], that, to the extent that BCI entered into further transactions with Bank Hapoalim in November 1997, there was no evidence that Gary dealt with Bank Hapoalim or assisted Emil, Erwin, Andrew or Michael to deal with Bank Hapoalim. Further, at [968], the primary judge stated that there was no evidence that Gary caused BCI to enter into any further transactions with Bank Hapoalim after November 1997. The primary judge also stated, at [969], that there was no evidence that Gary took any steps, as a director of BCI, to give effect to the scheme involving BCI, and there was no evidence that he took any particular role in the management of BCI. Considering the extent of the evidence over a long period of time showing the involvement of other family members, this was a significant finding properly reflecting the evidence.
The matters relied on by BCI do not establish any error in the above findings and statements. BCI relies on inferences that may be able to be drawn as to Gary’s knowledge, but does not point to particular acts or omissions on the part of Gary after he became a director of BCI that involved a furtherance of the scheme.
BCI relies heavily on the dealings between Civic and Advance and IDB in 2004. The documents indicate that Gary was involved in these transactions and that the transactions involved back-to-back arrangements. However, even if it be accepted that these documents show knowledge on Gary’s part of back-to-back arrangements between a family company and an Israeli bank, this does not establish any relevant act or omission by Gary in relation to the scheme involving BCI.
BCI relies on the fact that, as found by the primary judge, Gary was one of the owners of the offshore deposits. However, again, this does not establish any relevant act or omission on the part of Gary as a director of BCI.
BCI submits that the primary judge did not place sufficient weight on the fact that Gary did not give evidence. However, in circumstances where the evidence did not establish relevant acts or omissions on the part of Gary as a director of BCI, the failure of Gary to give evidence does not provide a basis upon which to find Gary liable for breach of duty.
BCI submits that it should be inferred that Gary had knowledge of all relevant facts from the time that he became a director of BCI and that it should be found that he agreed, as a director, that BCI should “continue its participation in the scheme”. But this is not the way BCI’s case was put at trial. As indicated above, the finance companies’ case was put on the basis that a breach of duty would arise from “particular acts or omissions on the part of the relevant director” (see the Liability Judgment at [292]). The specific acts and omissions relied on by the finance companies at trial were identified in a document styled “breach note” (see the Liability Judgment at [290]). Although item (1) in the breach note was “involving the relevant [finance company] (in the scheme)” and item (2) was “continuing to involve the relevant [finance company] (in the scheme)”, the primary judge noted at [291] that, as the finance companies put their case, items (1) and (2) were “no more than conclusory descriptions” of the conduct referred to in items (3) to (8). Accordingly, the primary judge focussed on whether each director had been shown to have engaged in conduct as described in items (3) to (8), including drawdowns and rollovers; on-lending; and receiving and making payments.
BCI relies on Gary’s involvement in the process by which BCI “repaid” Emil’s family’s half of the BCI-Bank Hapoalim transaction in May 2004. It appears that the relevant amount ($6,188,757) was paid by Ligon 159, which in turn received funds in two transactions the previous day. However, these transactions involved the discharge of half of the BCI-Bank Hapoalim transaction rather than the entry into a new transaction by BCI and, in any event, Gary’s involvement appears to have been limited. The primary judge referred to the May 2004 repayment at [968], [970](3) and [971] and said that, even if the 2004 dealings supported an inference that Gary knew that the dealings between BCI and Bank Hapoalim involved back-to-back arrangements, she was not satisfied that this knowledge led to the further inference that Gary knew of the key elements of the scheme or that he agreed to participate in it or agreed that BCI should participate in it. We see no error in her Honour’s approach.
BCI relies on Gary’s affidavits dated 21 October 2011 (see [494] above) and 20 December 2012 (see [518] above). The second affidavit was made after the 26 June 2012 meeting with Mr Gicelter during which Gary referred to the offshore deposits (see [516] above). BCI seeks to rely on inferences arising from false or misleading statements in these affidavits. Even if it be accepted that one or both of these affidavits was misleading or false, this is not sufficient, in our view, to overcome the difficulty discussed above, namely that BCI has not identified particular acts or omissions by Gary in connection with the scheme involving BCI.
BCI relies on the fact that the orders that were made disposing of the BCI tax appeal included, by consent, an order joining Gary as a party and ordering him together with the other Binetter parties to pay the costs of the proceeding on an indemnity basis. However, we see no error in the primary judge’s conclusion (at [972]) that no relevant inference could be drawn from this.
For the above reasons, we reject grounds 1 and 2 in the Liquidators’ appeal.
We note that the Andrew parties and Michael challenged the existence of the third fiduciary duty identified by her Honour in [260] of the Liability Judgment (see [543] above), but Gary did not challenge the correctness of her Honour’s statement of the applicable fiduciary duties. In circumstances where the Andrew parties’ appeal and Michael’s appeal have now been settled, and Gary does not challenge her Honour’s statement of the fiduciary duties, it is unnecessary to consider the correctness of her Honour’s statement of the fiduciary duties. Nevertheless, in circumstances where BCI’s grounds of appeal proceed on the basis of her Honour’s statement of the fiduciary duties, we make the following observations.
It has long been accepted that company directors owe a fiduciary duty to exercise their powers bona fide in the interests of the company as a whole. This was accepted by all members of the High Court (Barwick CJ, McTiernan and Kitto JJ) in Harlowe’s Nominees at 490, 492-494. The rule has a long lineage: see, eg, Richard Brady Franks Ltd v Price (1937) 58 CLR 112 at 135 per Latham CJ; In re Smith and Fawcett Ltd [1942] Ch 304 at 306 per Lord Greene MR; Australian Growth Resources Corporation Pty Ltd v Van Reesema (1988) 13 ACLR 261 at 268 per King CJ; Equiticorp Finance Ltd (in liq) v Bank of New Zealand (1993) 32 NSWLR 50 at 147-148 per Clarke and Cripps JJA. In the 1957 edition of The Principles of Modern Company Law (Stevens & Sons, London, 2nd ed, 1957) at p 474, Gower referred to this as the first of four facets of the fiduciary duty owed by company directors:
The general principle upon which these duties are based is clear and simple. Directors are fiduciaries and must therefore display the utmost good faith towards the company in their dealings with it or on its behalf. But the application of this principle has four facets which are probably best treated as distinct, though in practice they tend to overlap. First, the directors must act bona fide, that is in what they believe to be the best interests of the company. Secondly, they must exercise their powers for the particular purpose for which they were conferred and not for some extraneous purpose, even though they honestly believe that to be in the best interests of the company. Thirdly, they must not fetter their discretion to exercise their powers from time to time in accordance with the foregoing rules. And finally, despite compliance with the foregoing rules, they must not, without the consent of the company, place themselves in a position in which there is a conflict between their duties and their personal interests.
The bona fide rule has been described as “central and foundational in the scheme of directors’ fiduciary duties”: Langford RT, Directors’ Duties: Principles and Application (Federation Press, 2014) at p 57. The rule is reflected in s 181(1) of the Corporations Act 2001 (Cth), but the focus for present purposes is on fiduciary rather than statutory duties.
Although the High Court has stated that fiduciary duties are proscriptive rather than prescriptive in nature (see Breen v Williams (1996) 186 CLR 71 at 113 per Gaudron and McHugh JJ; Pilmer v Duke Group Ltd (in liq) (2001) 207 CLR 165 at [74] per McHugh, Gummow, Hayne and Callinan JJ), it has not suggested that the earlier authorities of the High Court referred to above are no longer the law and we do not take the High Court to be suggesting this (a matter discussed in Westpac Banking Corporation v Bell Group Ltd (in liq) (No 3) (2012) 44 WAR 1). We note that, in Howard v Commissioner of Taxation (Cth) (2014) 253 CLR 83, French CJ and Keane J stated (at [37]) that there was no suggestion that the decision of the directors “involved an exercise of their powers as directors other than in the interests of the company”, and Hayne and Crennan JJ (at [58]) stated that no question arose of “the application of the obligation or obligations, often compendiously described as the duty of directors to act in the interests of the company as a whole, examined and applied in Harlowe’s Nominees Pty Ltd v Woodside (Lakes Entrance) Oil Co NL”.
The primary judge did not express what she referred to as the “company interests duty” as it has traditionally been expressed, namely a duty of directors to exercise their powers bona fide in the interests of the company as a whole. This may reflect the way that the case was presented below (see, eg, the Liability Judgment at [252], quoting the fiduciary duties pleaded by BCI). We prefer the traditional formulation, but we do not consider her Honour’s formulation to be substantively different.
EGL’s submissions (grounds 3 and 4)
EGL’s submissions can be summarised as follows:
(a)The case by EGL against Gary is straightforward once BCI’s case is accepted. A little under three years after Gary became a director of BCI, he became a director of EGL. If it is accepted that Gary was cognisant of the nature of BCI’s affairs from the time he became a BCI director, then it would be inferred that he was cognisant of the nature of EGL’s affairs, which similarly involved acting in furtherance of the scheme, when he became an EGL director.
(b)The main difference between EGL’s and BCI’s involvement in the scheme was that EGL dealt with IDB; BCI dealt with Bank Hapoalim. The EGL-IDB arrangement had a framework that the primary judge held had terms to the effect of the March 2004 framework instrument that Gary signed (Liability Judgment, [625]-[627], [697]-[699]). Given Gary’s position as a director of EGL, his involvement in Civic and evident understanding of how back-to-back loans with IDB worked in 2004, his involvement with BCI as outlined above, his position as the only child of Emil to be involved in the scheme, and Emil’s age (69 years) when Gary was appointed as a director of EGL, the appropriate finding was that Gary knew of, and as a director consented to, EGL’s continuing involvement in the scheme while Gary was a director of EGL. The primary judge erred when she held to the contrary, stating that there was “nothing to suggest that Gary Binetter knew of any dealings between EGL and IDB during the period of his directorship” (Liability Judgment, [977]). The primary judge should have treated Gary’s failure to give evidence in the face of the matters outlined above as supporting the finding that EGL sought (cf Liability Judgment, [978]). The Court should hold that Gary breached his duties to EGL by continuing to involve it in the scheme for the period in which he was a director of EGL.
Consideration of EGL’s submissions
In our view, EGL has not established any error in the primary judge’s conclusion that Gary did not breach the duties he owed EGL as a director of that company from October 1996 to September 2001.
The transactions between EGL and IDB were put in place well before Gary became a director of EGL. As discussed above in connection with BCI, the primary judge approached the question whether the directors breached their fiduciary and other duties on the basis that it was necessary to show a particular act or omission on the part of the relevant director. This reflected the way the finance companies put their case at trial. EGL’s submissions do not point to particular conduct on the part of Gary in connection with the scheme involving EGL. We see no error in the conclusions of the primary judge at [975]-[978] of the Liability Judgement, set out above.
Accordingly, we reject grounds 3 and 4 in the Liquidators’ appeal.
Issue 3: Whether the primary judge erred in relation to certain costs issues relating to Gary
This issue is raised by Gary’s costs appeal.
In the proceeding below, BCI and EGL succeeded in their claims against Gary in his capacity as the legal personal representative of Emil (the first respondent) and failed in their claims against Gary in his personal capacity (the fifth respondent). There was no issue that costs should follow the event in respect of each claim. However, Gary contended that the costs payable by him in his representative capacity should be limited to the assets of Emil’s estate, and that there should be no set-off as between the relevant cost orders. The primary judge did not accept these contentions.
The costs orders relevant to Gary’s costs appeal were made on 15 December 2017 and were as follows:
1.The first, second, fourth and sixth respondents pay the costs of winding up [BCI], such costs to be determined by a Registrar of the Federal Court of Australia pursuant to r 30.41 of the Federal Court Rules 2011 (“Rules”) and/or s 23 of the Federal Court of Australia Act 1976 (Cth) (“Federal Court Act”).
2.The first, second, fourth and sixth respondents pay the costs of winding up [EGL], such costs to be determined by a Registrar of the Federal Court of Australia pursuant to r 30.41 of the Rules and/or s 23 of the Federal Court Act.
…
5.Each of the first, second, fourth, sixth, seventh, eighth, ninth and tenth respondents pay [BCI’s] costs on the ordinary basis, as agreed or taxed, with such liability to be joint and several.
6.Each of the first, second, fourth, sixth, seventh, eighth, ninth and tenth respondents pay [EGL’s] costs on the ordinary basis, as agreed or taxed, with such liability to be joint and several.
…
10.[BCI and EGL] pay the costs of the fifth respondent on the ordinary basis, as agreed or taxed, with that amount to be set off against the costs liability arising as against the first respondent by reason of orders 5 and 6 above.
By his amended notice of appeal, Gary challenges these costs orders. Gary contends, in summary, as follows:
(a)Gary was joined as personal representative of the estate of Emil after Emil (a named party) had died. Gary’s joinder was for the purpose of the proceeding only. He was not otherwise the personal representative of the estate. His joinder was a matter of convenience, and this required that no order for costs of BCI and EGL be made against him personally.
(b)Submissions on costs were made on the basis referred to in (a), but the primary judge overlooked them in her reasons for judgment.
(c)By reason of the operation of r 9.05(3) of the Federal Court Rules 2011, Gary could not be made liable for costs before the date of his joinder, but the costs orders against him are not so confined.
(d)BCI and EGL did not seek any orders that the respondents’ liability for costs should be on a joint and several basis. In the circumstances, the primary judge should not have considered or ordered joint and several liability for costs.
(e)The primary judge erred in failing to consider that: BCI and EGL did not succeed against all respondents; BCI and EGL were ordered to pay Margaret’s costs of the failed actions against her as third respondent below and Gary’s costs of the failed actions against him as fifth respondent below; orders 5 and 6 will result in Gary (as the first respondent below) and other Binetter parties paying to BCI and EGL the costs that they incurred in their failed claims against Margaret (as third respondent below) and Gary (as fifth respondent below).
(f)In relation to set-off, the primary judge failed to take into account the matters referred to above. There was an absence of mutuality of costs liabilities such that set-off as ordered was not fair and just.
(g)Gary also challenges the orders that the first respondent below pay the costs of the winding up of BCI and EGL.
BCI and EGL submit, in summary, that the costs orders made by the primary judge were a fair and reasonable exercise of discretion and should not be overturned on appeal. They submit that the submissions filed on Gary’s behalf do not identify any miscarriage in the exercise of the primary judge’s discretion within the principles set out in House v The King (1936) 55 CLR 499; and that his submissions simply reflect a different view as to how the discretion should have been exercised, which is an insufficient basis on which to appeal the exercise of that discretion.
Gary’s challenge to the primary judge’s costs orders raises a number of discrete issues, which we will deal with separately.
The main issue is whether the primary judge erred in not limiting the costs payable by the first respondent below to the assets of Emil’s estate and in providing that the costs payable by the first respondent and the costs payable to the fifth respondent be set off against each other. Her Honour’s reasons for so concluding (expressed in relation to Margaret and then applied to Gary) have been set out above.
An award of costs is discretionary, but must be exercised judicially, that is according to relevant considerations and taking account of the contextual features and facts of the litigation: Kazar v Kargarian (2011) 197 FCR 113 at [4]. Settled principle guides the exercise of the discretion: Oshlack v Richmond River Council (1998) 193 CLR 72 at [65]. Generally, the discretion is exercised in favour of the successful party: Foots v Southern Cross Mine Management Pty Ltd (2007) 234 CLR 52 at [25].
Where an application is made for a costs order that will have the consequence that the order will require a personal representative to bear the costs personally then, as explained below, the Court takes account of that particular circumstance in considering the appropriate costs order to be made.
Rule 9.24 of the Federal Court Rules provides:
9.24 Deceased persons
(1) If:
(a)a deceased person was interested in, or the estate of a deceased person is interested in, any matter or question in a proceeding; and
(b)the deceased person has no personal representative;
a party may apply to the Court for an order:
(c)that the proceeding continue in the absence of a person representing the deceased person; or
(d)that a person who has consented in writing represent the deceased person’s estate for the purpose of the proceeding.
(2)An order under subrule (1) and any subsequent order made in the proceeding binds the estate of the deceased person as the estate would have been bound if the deceased person’s personal representative had been a party to the proceeding.
Note:Before making an order under this rule, the Court may require the application to be served on persons having an interest in the estate, as the Court considers appropriate.
Given the terms of r 9.24(1)(d) and the alternative provided in r 9.24(1)(c), the appointment of a personal representative is made for the purpose of enabling the case to proceed with representation. In considering whether to make an order under r 9.24(1)(c) (as distinct from r 9.24(1)(d)), the Court would need to take into account whether the consequence would be that there would be no substantive defence and the effect upon those with an interest in the deceased estate. It may be that the grant of such an order would be on terms that would address those matters. However, no such order was sought by the finance companies in this case. Instead, they acquiesced in the appointment of Gary as personal representative under r 9.24(1)(d).
A personal representative of a defending party may be in a different position to a personal representative of a party who brings a claim. In the latter instance, the representative may be involved in making the choice to bring and maintain the claim. In the former instance, the personal representative facilitates the fair advancement of the claim. This is a relevant factor in considering whether the personal representative of a defendant should be made personally liable for costs orders: cf Cuthbertson & Richards Sawmills Pty Ltd v Thomas (No 2) [1999] FCA 1789 at [9] (citing In re Wilson Lovatt & Sons Ltd [1977] 1 All ER 274 at 285). The distinction is well recognised in dealing with costs orders in cases involving litigation representatives: Australia and New Zealand Banking Group Ltd v Moszko Mejer Dzienciol by his guardian ad litem Phillip Dzienciol [2001] WASC 305(S) at [15]-[17].
It is also to be noted that liquidators and trustees in bankruptcy who often have the carriage of court proceedings in a representative capacity are not made personally liable for costs in circumstances where they are defending proceedings unless they are shown to have acted unreasonably: see Silvia v Brodyn Pty Ltd (2007) 25 ACLC 385; [2007] NSWCA 55 at [48]-[56]. The Court also recognises that those who assume the office of liquidator or trustee in bankruptcy may be subject to claims concerning the manner in which the duties of their office have been discharged. The fact that they are subject to statutory duties and to the supervision of the Court is also significant. There are aspects of these considerations where a person agrees to act as a personal representative for the purpose of regularising matters procedurally so as to facilitate a claim to relief that would be sought to be enforced against a deceased estate notwithstanding the absence of an executor or administrator of the estate. An order appointing a personal representative has the consequence that the estate of the deceased person is bound by any order made in the proceeding thereafter: r 9.24(2) of the Federal Court Rules. However, the estate is not made a party.
A trustee who defends proceedings may be expected, in the proper discharge of those responsibilities, to seek advice from the court in the exercise of the advisory jurisdiction (in equity or under statute) before continuing with the defence of proceedings: In re Beddoe;Downes v Cottam [1893] 1 Ch 547. Liquidators and bankruptcy trustees may also seek advice from the court. Although there do not appear to be cases where this has occurred, it may be that a personal representative could, in appropriate circumstances, seek judicial advice as to whether to defend the proceeding or that provision could be made in that regard in the order appointing the personal representative.
In the present case, the claims brought by the finance companies in the proceeding below involved an allegation that there was a scheme by which the arrangements made by the directors of the finance companies concerning the advances made and their tax treatment had a common character and origin. Other respondents below were alleged to have been liable on Barnes v Addy principles by reason of their knowledge of and involvement in the scheme. So, the factual foundation for the case brought against each of the respondents was broadly the same.
Gary had not actively sought out the role as personal representative. The issue concerning a personal representative for Emil arose at a case management hearing conducted by Besanko J on 30 January 2015. His Honour pointed out that the proceeding was irregular because it named Emil as first respondent rather than, for example, an executor or administrator of his estate. After that, Gary agreed to be named as the personal representative of Emil’s estate. He was not otherwise involved in the administration of the estate.
The reasons of the primary judge in ordering Gary to personally pay the costs of the claim against Emil’s estate rested upon Gary’s consent to act as personal representative, his access to the evidence against Emil and the absence of any case law to support the contention that, generally speaking, a person who has consented to represent a deceased person’s estate should not bear the costs of an unsuccessful defence.
In seeking to uphold the costs orders made against Gary personally in respect of the unsuccessful defence of claims against Emil, the finance companies did not seek to demonstrate with any particularity how it was said that Gary’s actions had been unreasonable in all the circumstances. Rather, they emphasised the discretionary character of the decision to make a particular costs order. Then they stated in general terms that: (a) Gary actively defended the proceedings against Emil; (b) he gave no evidence as to his motivation in consenting to act as personal representative; and (c) the evidence against Emil was available to Gary. They also said that he could have entered a submitting appearance at any stage of the proceedings.
In our respectful view, her Honour failed to have regard to certain relevant circumstances, in particular that: Gary had agreed to act as the representative of Emil’s estate to overcome a procedural irregularity in the proceeding against the first respondent and thus to assist the orderly conduct of the proceeding; and Gary as representative defended proceedings brought by the finance companies – he was not a plaintiff. Further, it was not suggested that Gary had acted unreasonably in defending the claims against Emil’s estate: cf Cuthbertson at [8]. Once regard is had to these matters, in our view, the appropriate costs order was that the costs payable by the first respondent below be limited to the assets of Emil’s estate. We consider that her Honour erred in not so ordering. For the same reasons, we consider that her Honour erred in ordering set-off as between the relevant costs orders. The costs orders should be adjusted accordingly.
It remains to deal with a number of subsidiary issues raised by Gary’s costs appeal. Gary contends that, by reason of the operation of r 9.05(3) of the Federal Court Rules, Gary could not be made liable for costs before the date of his joinder. In light of the approach we have taken, namely limiting the costs orders against the first respondent to the assets of the estate, this point falls away.
Gary contends that BCI and EGL did not seek any orders that the respondents’ liability for costs should be on a joint and several basis. It may be that in light of the approach we have taken regarding the costs orders against the first respondent, this point largely falls away. In any event, it is not unusual to order that the costs liability of several respondents be joint and several, and we see no error in the primary judge’s decision that this was appropriate in the circumstances of this case.
Gary submits that the primary judge erred in ordering that the first respondent (and certain other respondents) pay BCI’s and EGL’s costs of their failed actions against Margaret (as third respondent) and Gary (as fifth respondent). In response to this contention, counsel for the finance companies submitted that the costs incurred by BCI and EGL in their failed claims against the third respondent and the fifth respondent would not be allowed on a taxation (T374). Thus, there is no substantive issue between the parties that the costs payable to BCI and EGL under paragraphs 5 and 6 of the 15 December 2017 orders are not intended to include the costs incurred by BCI and EGL in their failed claims against the third and fifth respondents below. We do not consider it necessary to vary the orders to state this; we think it sufficient for this concession to be recorded in these reasons.
Gary challenges the orders that the first respondent below pay the costs of the winding up of BCI and EGL (paragraphs 1 and 2 of the 15 December 2017 orders). We accept the submissions of BCI and EGL that these orders are of a similar nature to the money judgments entered against the first respondent below, namely they are in substance another form of loss suffered by BCI and EGL and form part of the equitable compensation awarded against the directors who breached their fiduciary duties. It follows from this that paragraphs 1 and 2 of the orders dated 15 December 2017 are enforceable only against the estate of Emil and not against Gary personally. We do not consider it necessary to adjust the wording of the orders as this is sufficiently clear.
In summary, we conclude that the primary judge erred in not limiting the costs orders against the first respondent below to the assets of Emil’s estate, and in providing for the relevant costs orders to be set off against each other. The costs orders should be adjusted accordingly.
CONCLUSION
For the above reasons, in the Liquidators’ appeal (proceeding No NSD2109/2016), the appeal (insofar as it relates to Gary) is to be dismissed. (The part of the appeal that relates to Margaret has already been dealt with in orders that were made to give effect to the parties’ settlement.) There is no apparent reason why costs should not follow the event. Accordingly, we will also order that the finance companies pay Gary’s costs of the appeal.
In Gary’s costs appeal (proceeding No NSD188/2018), we will make orders as set out below. There is no apparent reason why costs should not follow the event in relation to the appeal. Accordingly, these orders include an order that BCI and EGL pay Gary’s costs of the appeal. In case there are any issues concerning the form of the orders, we will reserve liberty to apply within a short period for any such matter to be raised. The orders we will make are as follows:
1.The appeal be allowed.
2.Subject to paragraph 4 below, paragraphs 5, 6 and 10 of the costs orders made by the primary judge on 15 December 2017 be set aside and in lieu thereof it be ordered that:
5.Each of the first, second, fourth, sixth, seventh, eighth, ninth and tenth respondents pay the first applicant’s costs on the ordinary basis, as agreed or taxed, with such liability to be joint and several, and with the liability of the first respondent limited to the assets of the estate of the late Emil Binetter.
6.Each of the first, second, fourth, sixth, seventh, eighth, ninth and tenth respondents pay the second applicant’s costs on the ordinary basis, as agreed or taxed, with such liability to be joint and several, and with the liability of the first respondent limited to the assets of the estate of the late Emil Binetter.
10.The first and second applicants pay the costs of the fifth respondent on the ordinary basis, as agreed or taxed.
3.Subject to paragraph 4 below, the respondents pay the appellant’s costs of the appeal, as agreed or taxed.
4.There be liberty to apply within seven days if any party wishes to raise a matter regarding the form of these orders.
I certify that the preceding six hundred and twenty-nine (629) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Chief Justice Allsop and Justices Moshinsky and Colvin. Associate:
Dated: 9 November 2018
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