Cahill v Garrett

[2015] FCCA 1627

FEDERAL CIRCUIT COURT OF AUSTRALIA

CAHILL & ORS v GARRETT [2015] FCCA 1627

Catchwords:
BANKRUPTCY – Sequestration order – application granted.

Legislation:

Taxation Administration Act 1953 (Cth)
Judiciary Act 1903 (Cth), s.39B
Freedom of Information Act 1989 (Cth)

First Applicant: FRANCIS MICHAEL CAHILL

Second Applicant:

Supporting Creditor:

Respondent:

DEPUTY COMMISSIONER OF TAXATION

AUSTRADE

ANDREW MORTON GARRETT

File Number: MLG 177 of 2015

Judgment of: Judge Riethmuller

Hearing date: 15 May 2015

Date of Last Submission: 15 May 2015

Delivered at: Melbourne

Delivered on: 15 May 2015

REPRESENTATION

Solicitors for the First Applicant: Mr Cahill

Solicitors for the Second Applicant:

Solicitors for the Supporting Creditor:

Counsel for the Respondent:

Mr Tavolaro

Mr Abrams

In Person

ORDERS

1. The Deputy Commissioner of Taxation be added as the Second Applicant to the proceeding.

2. A sequestration order be made against the estate of ANDREW MORTON GARRETT.

3. The applicant creditors’ costs be taxed and paid from the estate of the respondent debtor in accordance with the Bankruptcy Act 1966.

THE COURT NOTES THAT:

A.The date of the act of bankruptcy is 19 January 2015.

B.A declaration of Consent to Act as Trustee has been provided by Mr Timothy Mark Shuttleworth Holden, signed and dated 27 January 2015.

FEDERAL CIRCUIT COURT
OF AUSTRALIA
AT MELBOURNE

MLG 177 of 2015

FRANCIS MICHAEL CAHILL

First Applicant

DEPUTY COMMISSIONER OF TAXATION

Second Applicant

AUSTRADE

Supporting Creditor

And

ANDREW MORTON GARRETT

Respondent

REASONS FOR JUDGMENT

(as revised from transcript)

1. This is an application for a sequestration order.  The creditors that have appeared in the application are three in number. 

2. The first creditor is Mr Cahill, who was formerly a solicitor of the debtor, and has been involved in much litigation with him since that time.  At present, Mr Cahill has costs orders against Mr Garrett, and one in particular for the sum of $8586.50, made on 26 May 2014 in the Supreme Court of Victoria, in proceedings SCI 02968 of 2013.  That costs order founded a bankruptcy notice which was issued on 10 June 2014.  That bankruptcy notice was served upon the respondent debtor, and it was not complied with. 

3. The bankruptcy notice was the subject of proceedings before Judge Burchardt, and then on appeal to the Federal Court of Australia, where the debtor seeking to have the bankruptcy notice set aside.  The bankruptcy notice was not set aside and the appeal was dismissed.  The case is, therefore, one where the debtor has committed an act of bankruptcy in failing to pay the amount set out in the bankruptcy notice.  The creditors put forward evidence, not only of the debt to Mr Cahill, but also of substantial debts to the Australian ATO (‘ATO’).

4. The debts to the ATO are set out in an affidavit of Mr Pownell filed in these proceedings and total $8,288,930.31.  They consist of a variety of forms of debt, ranging from judgments in the courts through to running account balances. 

5. The third creditor that appeared is Austrade, who have a judgment for costs, but have not yet taxed those costs, and therefore that debt is not quantified.  It is reasonable to expect that there would certainly be at least several thousand dollars involved in that debt.  However for these proceedings it is sufficient to note that, without quantification, it is difficult to rely upon that as a basis for bankruptcy, because without quantification it has not yet become due and owing.

6. The case of the debtor is that, as against Mr Cahill, he has a number of claims and actions which could result in damages or other compensation, either as a result of the law of torts, the law of contract, or the law of equity.  It is not necessary for me to set out in detail the various ways in which he has attempted to describe these claims at this stage of the proceedings. It is sufficient to note that these matters were relied upon by him against Mr Cahill as a form of set-off to attempt to set the bankruptcy notice aside.  This claim was rejected by Judge Burchardt and was not successful on appeal.  It is, therefore, a case where, as between he and Mr Cahill, the question that arises is not whether there is a set-off, but whether the nature of his claims against Mr Cahill are such as to provide a proper basis for adjourning the sequestration application until such time as all of those other proceedings are dealt with. 

7. Given the complexity of those matters and the amounts of evidence that would have been involved, I determined in these proceedings to firstly deal with the questions of what case, if any, the debtor had to resist sequestration on the basis of the debts owing to the Commissioner of Taxation, which, if I found was insufficient would only then require me to turn to consider the case as between him and Mr Cahill. 

8. I turn now, to the question of the debts owing to the Commissioner of Taxation.  The debts said to be owing to the Commissioner are particularly large.  A number of them are from running account balances or other assessment documents from the Commissioner through to an evidentiary certificate issued under the Taxation Assessment Act.  The evidentiary certificate which creates prima facie evidence of the debt it refers to is in the sum of $3,758,831.25 as at 4 March 2015, which is due and payable by the applicant personally.

9. A number of the other documents that claim form part of the ATO’s claim of the debtor’s indebtedness are evidence of indebtedness of the trustee of either OenoViva or the Andrew Garrett Family Trust.  The question of the precise role of the applicant as trustee at various times is the subject of some dispute, in that he says he was not the trustee from 8 June 2013 onwards, as a result of a deed that he entered into. 

10. For the purposes of today’s proceedings, it seems to me that it is sufficient for me to consider the taxation debt of $2,021,467.75, together with costs of $7,330.00 that are the subject of a judgment of the Supreme Court of Victoria.  They are set out in paragraphs 4 through 7 of the affidavit of Mr Pownell, and the relevant documents annexed thereto.  The question of whether or not Mr Garrett was a trustee at the relevant times for these debts was addressed by Associate Justice Mukhtar in his reasons, and it is clear that the debts that are the subject of that judgment were within a time frame such that the question of whether or not he continued to be a trustee after 8 June was not relevant, as Associate Justice Mukhtar said at paragraph 3 of his reasons of 7 August 2014.

11. The documentary evidence is that from 1 February 2011 up until 8 June 2013, documents show Mr Garrett to be explicitly a joint trustee of the Family Trust.  Mr Garrett in Court does not dispute this, and it is the plain fact, according to the Commissioner’s evidence, that the relevant period for the purposes of the taxation liability sought to be imposed as against the Trust is the quarter ended December 2012, and the quarter ended March 2013. 

12. The defence that Mr Garrett runs against the Commissioner is to seek to have me look behind this debt that is the subject of a Supreme Court judgment to determine whether it is truly due and owing.  He develops the argument on the basis that he says that the assessments are false, and that they are the result of conduct of the Commissioner of Taxation, through the Commissioner’s various officers, that is a conscious maladministration under the Taxation Administration Act 1953 (Cth) and that, therefore, none of the assessments are valid, and that, as a result, the tax is not due and owing. 

13. The tax matters have been the subject of various proceedings in the Federal Court, seeking declarations under the Judiciary Act 1903 (Cth) under section 39B. Justice Pagone, on 26 February, dismissed proceedings in this regard (VID600 of 2014).

14. The case with respect to there being a claim for conscious maladministration by the ATO is not one that Mr Garrett was able to particularise clearly.  It seems that it is, at best, an inference he argues should be drawn from conduct and events that have happened over the last 10 to 11 years. 

15. The circumstances he relies upon commence when there was a judgment against him in South Australia in 2004 for tax debts.  This led to him being bankrupted.  He was ultimately discharged from his bankruptcy in 2009.

16. Thereafter, he, as part of the self-assessment process, amended his returns, which altered the taxation ledgers to show that he had a $14,000.00, or thereabouts, taxation credit, as opposed to the significant debt that was the subject of the default judgment in favour of the Commissioner in South Australia.  Some time later, these self-assessment amendments were reversed by the Commissioner of Taxation, as is set out in the affidavit of Mr Garrett.  Mr Garrett disputes whether or not that could properly be done.  That would, if it were not able to be properly done, account for $80,000.00 to $90,000.00 of the debts. 

17. As a result of proceedings under the Freedom of Information Act 1989 (Cth), Mr Garrett has obtained various documents from the Commissioner, from which he has extracted small portions. Mr Garrett says that this material indicates that at times the Commissioner’s officers were not prepared to engage with him or interview him despite his offer to do so and that at one point the Commissioner’s officers reflected upon the changed state of the ledgers with respect to the debt that was the subject of the proceedings in South Australia. Mr Garrett says that comments that were made in one document prepared by an officer of the Commissioner, that the effect of the change in his self assessment might be a difficulty for the ATO, in the sense that it may cause some embarrassment to the ATO that a taxpayer who (at one point after his own amendments through the self-assessment process) appeared not to have a taxation debt, but was the subject of a judgment that led to a bankruptcy.

18. Mr Garrett also argues that the ATO mounted a large-scale operation to investigate his affairs, and as a part of that operation seized a large number of documents from Mr Cahill.  From all of this, Mr Garrett says an inference should be drawn that the ATO have consciously maladministered the taxation affairs so as to create large debts, so as to be able to bankrupt him and stop him engaging in any dispute with them. 

19. There are some real difficulties with this process of reasoning.  Firstly, the evidence that Mr Garrett has been able to put forward does not appear to me to show any arguable case that conscious maladministration was engaged in by the ATO.  At best, some parts of the Freedom of Information documents indicates the concerns held by officers of the ATO at a time after Mr Garrett lodged his amended assessments. It seems to me that the concerns of the officers of the ATO were quite reasonable and rational at that point.

20. Ultimately, the ATO did re-adjust the assessments which meant that this was no longer an issue.  However, I can see nothing in that alone to indicate a conscious maladministration.  It is equally consistent with the ATO taking the view that the amendments made by Mr Garrett were simply not appropriate when one inquired into them, and that re-adjusting the assessments back to what they were was the appropriate course.

21. Material has not been put before me to show the detail around these assessments.  However, it is clear that it accounts for only around $80,000.00 worth of taxation which, in the scheme of this case more generally, is a very small proportion of the amounts of money involved.

22. The mounting of a large scale inquiry into Mr Garrett’s taxation affairs appears, on the materials, to have been precipitated by the way in which he structured a large scale business endeavour.  In short form, his entities would sell rights to a third party which would be described as a supply that incurred GST.  The entity purchasing the rights would then utilise the ability to claim an input taxation credit to claim a refund of the GST involved, even though the entity had not, in fact, paid any money or GST to Mr Garrett’s entity at that point in time.

23. Indeed, this seems to have been the nature of the transaction that occurred between an entity controlled by Mr Garrett and the corporate law firm run by Mr Cahill at one point when a transaction of this type with a face value of around $49 million was entered into.  This transaction led to Mr Cahill’s firm claiming an input taxation credit of over $4 million from the ATO. 

24. Mr Garrett was most concerned to stress that the structuring of these transactions was meant to include clauses to ensure that, when the input taxation credit money was refunded by the ATO, that the purchaser of the rights would immediately pay that to Mr Garrett to then pay his GST liability under the transaction.

25. One only has to set out the general nature of the transactions involved to see quite clearly that, on any reasonable view of it, this was almost inevitably going to attract considerable interest from the ATO in that it was a transaction structured around obtaining money from the ATO prior to any money being paid to the ATO for GST and, effectively a round robin of transactions that, at best, would result in the following quarter, after the ATO had refunded money on an input taxation credit basis, receiving that money back as a late GST payment.

26. There is, no doubt, considerably more detail to exactly how these transactions were structured, and it isn’t necessary in these proceedings for me to go through all of those details.  It is sufficient for me to note that on the general theme of the transactions, in my view, this would quite properly have excited considerable interest from the ATO and, to my mind, perfectly explains a large scale inquiry by the ATO, particularly given the size of the transactions, one of which was said to involve over $40 million, even though it was, it seems, a paper transaction that didn’t involve the movement of money prior to the payment of the input taxation credit money from the Commissioner.

27. The situation is, therefore, that on the matters that have been raised it is difficult for me to see how it could be said that there is any arguable case of conscious maladministration by the ATO.  Further, suggestions that perhaps the ATO is in some way in league with Mr Cahill don’t appear to me to have any basis on the material before me, and do not run with common sense. 

28. The further difficulties in this case for Mr Garrett are that he has not, it seems, pursued the processes that are ordinarily available to a taxpayer, after the objection process, to have reviews either in the Administrative Appeals Tribunal or the Federal Court of Australia with respect to assessments until such time as judgments were enter, nor does it seem there was any step taken to obtain any form of private ruling prior to entering into these transactions from the ATO.

29. These matters, as raised by Mr Garrett, were not able to satisfy Associate Justice Mukhtar that it was appropriate to set aside the default judgment in the Supreme Court of Victoria. 

30. In the circumstances, it seems to me that there is a debt due and owing to the ATO on the judgment of around $2 million and that the claims of conscious maladministration, on the material before me are not sufficient to show an arguable case, nor, indeed, even sufficient issues or material to justify a trial on the question of whether or not the debt is just and truly owing.

31. I have turned my mind to the allegations that appear in Mr Garrett’s affidavit about other sums involved in transactions with the ATO.  Importantly, even if he is correct about the Adelaide matters, they could potentially result in a credit of somewhere in the vicinity of $80,000.00 to $90,000.00.  Mr Garrett annexes photocopies of a receipt of a further $81,860.55 said to have been paid to the ATO at paragraph 148 of his affidavit.  He also sets out that between February 2004 and the date of his affidavit a further $406,475.10 has been paid to the ATO, and that a further $11,598.07 was taken from an account.

32. The material before me does not enable me to make clear findings about whether all those payments were, in fact, paid to the Commissioner for taxation liabilities or not.  For the purpose of today, however, it is sufficient to proceed on the argument that they all were payments and, if one totals them up, it comes to something in the vicinity of $600,000.00.  Mr Garrett also raises from the bar table claims of a further $833,000.00 that he says should be accounted for with respect to the ATO.  Even if those bar table claims were taken up, these matters come to $1.233 million: this is far less than the $2 million judgment in the Supreme Court of Victoria.

33. Even on Mr Garrett best case he owes over $700,000 in tax debts.

34. I turn then to consider the question of Mr Garrett’s solvency.  There is no doubt that he has considerable debts.  He says that he is solvent because he claims to have a good cause of action with respect to conduct of Mr Cahill who was involved in one of the transactions that Ms Barlow set out above. Mr Garrett also says that he also has considerable claims against another company, Treasury Wine Estates Vintners Limited, and a number of other claims. 

35. Mr Garrett has had an accountant tally all of his claims in an aide memoire headed ‘Solvency Statement’ which indicates some $20,986.00 million in assets, and some $4.9 million in debts.  It also lists claims against the Commissioner of Taxation in the vicinity of  $38 million to $39 million, and claims against a solicitor’s fidelity fund of more than $100 million.  There are other claims set out that are said to be professional negligence claims.  By listing all of these, Mr Garrett maintains that I should conclude that he is solvent.

36. The question of solvency relates to the ability of one to pay one’s debts as when they fall due, not simply an analysis of an overall asset position.  This is the short answer to the claim that his assets exceed his debts as set out in the aide memoire.  That is, even if the claims in the aide memoire were to be correct, they do not provide an answer to the current inability to pay debts that have clearly fallen due and are the subject of a judgment.  Having said that, I make clear that in no way do I accept that the list in the aide memoire is a realistic list of moneys that may well be recoverable by Mr Garrett.  Most of the figures appear to be significantly inflated, if they were to be recoverable at all.  I also note that some of these claims have already been to various courts and have been dismissed, in any event.  I also note that if a trustee in bankruptcy is appointed the trustee will assess any claims and may pursue claims on behalf of the estate.

37. Mr Garrett develops the argument further though, and says that with respect to Treasury Wine Estates Vintners Limited there are a large number of actions in the Federal Court (VID158 of 2015 through to VID165 of 2015) which involve multiple millions of dollars.  He says that he has issued Notices to Admit in these proceedings, the forms of which would result in him recovering millions of dollars from Treasury Wine Estates Vintners Limited.  According to his aide memoire, he amounts that he would recover exceed the amounts of the debts involved in the case with respect to the Commissioner of Taxation.

38. The date for expiry of response to the Notices to Admit is today.  On the material before me, I am not persuaded that there is any real likelihood that Treasury Wine Estates Vintners Limited would make those admissions and, in these circumstances, I am not persuaded that this is a factual basis upon which to show that there will be solvency in the very near future.

39. The Commissioner of Taxation has filed an affidavit of debt.  The other formalities that are required have been fulfilled and were not the subject of dispute. 

1. In summary, there is a significant outstanding taxation debt as a result of a judgment in the Supreme Court of Victoria.  The debtor has not been able to establish that he has sufficient funds to meet that debt (or even that part that exceeds his claimed payments and credits) in the reasonably foreseeable future.  Rather, I am satisfied that the capacity of the debtor to meet such debt is contingent upon the large number of complex court actions yet to be determined and that in these circumstances he is not solvent.

2. To the extent that Mr Garrett says that he has direct actions against the ATO that would either be a defence on the basis the debt is not truly owing or perhaps more appropriately described as a basis for an adjournment to allow him to proceed with his collateral attack on assessments, these are, according to him, based upon a claim for conscious maladministration against the ATO.  On the material put before me, I am not persuaded that there is sufficient merit in his claim in this regard to justify an adjournment of the sequestration proceedings.

3. Finally, with respect to the various amounts that Mr Garrett alleges may well be due to him from the ATO (or paid by him to the ATO), even taken at its highest on the argument, these claims are not sufficient to come close to discharging the debts involved. 

4. In the circumstances, the appropriate course today is to make a sequestration order against Mr Garrett, and I so do. 

I certify that the preceding forty-three (43) paragraphs are a true copy of the reasons for judgment of Judge Riethmuller

Associate:

Date: 19 June 2015