Commissioner of State Revenue v Aidlaw Pty Ltd (No. 5)

[2013] VSC 32

IN THE SUPREME COURT OF VICTORIA Not Restricted

AT MELBOURNE

COMMERCIAL AND EQUITY DIVISION
COMMERCIAL COURT
TAXATION LIST

No. 8583 of 2005

COMMISSIONER OF STATE REVENUE (in his capacity as the Comptroller of Stamps)	Plaintiff
v
AIDLAW PTY LTD (ACN 055 407 899) (RECEIVERS AND MANAGERS APPOINTED) (formerly known as AID & ABET PTY LTD) & ORS (according to the schedule attached)	Defendants

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JUDGE:	Davies J
WHERE HELD:	Melbourne
DATE OF HEARING:	19-22 and 26-30 November, 3-5 and 12-13 December 2012
DATE OF JUDGMENT:	12 February 2013
CASE MAY BE CITED AS:	Commissioner of State Revenue v Aidlaw Pty Ltd (No. 5)
MEDIUM NEUTRAL CITATION:	[2013] VSC 032

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TAXES AND DUTIES – Debt recovery action under s 40(1) of the Stamps Act 1958 (Vic) – Whether monies were received by the defendants as or for duty upon or in respect of any instrument - Whether defendants neglected or omitted to remit monies received as or for duty – Whether defendants improperly withheld or detained duty – Stamps Act 1958 (Vic)
s 40(1), s 40A

STATUTES – CONSTRUCTION – Stamps Act 1958 (Vic) – Where monies received were for duty endorsed by an “authorised person” within the meaning of s 40A – Whether s 40A is an exclusive code governing Commissioner’s rights – Whether Commissioner’s remedy under s 40A is confined to prosecution - s 40A not an exclusive code – s 40A does not prevent Commissioner from making debt claim under s 40(1) in lieu of prosecution under s 40A(4A) – Whether monies were “received” for the purposes of s 40(1) – National Commercial Banking Corporation of Australia Ltd v Batty (1986) 160 CLR 251 discussed – Whether monies received were ”as or for the duty” within the meaning of s 40(1) – Whether the defendants neglected or omitted to appropriate the monies to the due payment of duty – Whether monies “improperly withheld or detained” by the defendants

WORDS AND PHRASES – ‘received’, ‘omits’, ‘neglects’, ‘as or for the duty’, ‘improperly withholds or detains’, ‘in respect of’

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	N Lucarelli QC with JC Paterson	Solicitor for the Commissioner of State Revenue
For the First Defendant	No appearance
For the Second Defendant	S Begg (19 November, 12-13 December 2012) Second defendant, in person (20-22, 26-30 November, 3-5 December 2012)
For the Third Defendant	S Begg (19 November, 12-13 December 2012) Third defendant, in person (20-22, 26-28 November 2012)
For the Fourth Defendant	PH Solomon SC with M Norton	Christopher Bunnett Lawyers
For the Fifth, Sixth and Seventh Defendants	No appearance

HER HONOUR:

1. The plaintiff (“the Commissioner”) has sued the defendants for recovery of unpaid duty totalling $3,514,751 (“the recovery action”). The Commissioner contended that the defendants are liable to pay the amount of the duty under s 40(1) of the Stamps Act 1958 (Vic) (“the Stamps Act”) which, before its repeal,[1] made a person who “received… money as or for the duty upon or in respect of any instrument” personally liable for the amount of the duty if the person “neglect[ed] or omit[ted] to appropriate such money to the due payment of such duty or otherwise improperly with[held] or detain[ed] the same”. The amount is recoverable by the Commissioner as a debt due to the State. For the reasons that follow, the Commissioner is entitled under s 40(1) to recover the amount claimed from the first, second and third defendants (“Aid & Abet”, “Mr Kalotihos” and “Mrs Kalotihos” respectively) but not from the remaining defendants, whose liability under s 40(1) was not established.

   [1]Duties Act 2000 (Vic) s 284 repealed the Stamps Act 1958 (Vic) with effect from 1 July 2001.

Procedural history

1. The Commissioner commenced the recovery action in 2005 by filing an application:

· for an order under s 40(2) of the Stamps Act requiring the defendants to show cause why they should not give an account on oath to the Commissioner of the “duties and sums of money received” by them and why “the same should not be forthwith paid to [the Commissioner]”; and

· for an order under s 40(3) of the Stamps Act requiring the defendants to pay “such duties or sums of money” that appeared to the Court to be due.

1. In Commissioner of State Revenue v MMK Cameroon Pty Ltd[2] Gillard J observed that that an order under s 40(2) to show cause was the “first stage” of a three stage process in establishing liability under s 40(1) of the Stamps Act. The evident policy and design of the three stage process was to enable the Commissioner to sue for recovery of duty in circumstances where the Commissioner did not know how much duty was unpaid.[3] The second stage was an order requiring the person to give the Commissioner an account upon oath of all duties and sums of money received. The third stage was an order under s 40(3) for the payment of the duty or sums of money, which the Court may enforce “by attachment or otherwise”.

   [2][2001] VSC 239.

   [3]Ibid [15]-[17]; Commissioner of State Revenue v Bulzomi (2009) 24 VR 643.

1. The Commissioner sought an order under s 40(2) initially only against the fourth defendant (“Mr Bulzomi”). That application was refused, although the Court was satisfied that the Commissioner had made out a prima facie case for a show cause order against Mr Bulzomi. The reason for the refusal was the Court’s acceptance of the submission on behalf of Mr Bulzomi that the s 40(2) show cause process was not available to the Commissioner because the section had been repealed before the recovery action was commenced.[4] The Commissioner appealed that decision but, in the meantime, also filed a statement of claim in the proceeding to preserve the debt claim in the event that the appeal was unsuccessful. The statement of claim pleaded claims for debts due by the defendants to the Commissioner pursuant to s 40(1) of the Stamps Act, breach of contract, knowing receipt of trust monies or knowing participation in a breach of trust and aiding and abetting a breach of the Trade Practices Act 1974 (Cth) (“the pleaded claims”). The defendants were not required to file defences to the pleaded claims pending the determination of the appeal, as the Commissioner indicated his preference to use the s 40(2) show cause process if the appeal was successful.

   [4]Commissioner of State Revenue v Aidlaw Pty Ltd [2007] VSC 475.

1. The appeal was allowed.[5] On 5 August 2010 an order requiring Mr Bulzomi to show cause was made against him and on 8 December 2010, orders requiring the remaining defendants to show cause were made against them.[6] In the event, the show cause hearing proceeded as a straight debt claim under s 40(1). The Commissioner did not need an accounting from the defendants to quantify how much to sue for as the recovery action was based on the results of an audit by the State Revenue Office (“SRO”) of the activities of Aid & Abet as an “authorised person” under s 40A of the Stamps Act. The audit conclusion was that $3,784,590[7] in duty on instruments endorsed by Aid & Abet had not been paid to the SRO. The Commissioner had wanted to utilise the show cause process to ascertain whether any additional amount was owed but, at the urging of the Court, the Commissioner agreed to by-pass the show cause hearing in the interests of better efficiencies in an already unduly protracted and expensive proceeding and to proceed straight to a hearing and determination of the substantive question in dispute: viz, whether the defendants are liable to the Commissioner under s 40(1) for unpaid duty totalling $3,514,751.

   [5]Commissioner of State Revenue v Bulzomi (2009) 24 VR 643.

   [6]Commissioner of State Revenue v Aidlaw Pty Ltd (No 4) [2010] VSC 555.

   [7]The Commissioner reduced this figure to $3,514,751 as the result of certain payments later received from Aid & Abet and some other adjustments.

1. The trial on the substantive question was conducted in accordance with “A Memorandum as to the Protocol for the Further Hearing and Determination of the Proceeding” (“the protocol”) agreed to by the Commissioner and by Mr and Mrs Kalotihos and Mr Bulzomi. There was no appearance at the trial by or on behalf of Aid & Abet or the fifth, sixth or seventh defendants (“Monocote”, KC Management” and “Clubhouse Restaurant” respectively). Paragraph 2 of the protocol set out the controversy for determination, namely whether any of the defendants have a liability in debt to the Commissioner under s 40(1). Paragraph 13 of the protocol preserved the Commissioner’s right to apply to the Court at the conclusion of the trial for an order under s 40(2)(a) requiring any defendant whose liability under s 40(1) was established to provide an account on oath of all duty or sums of money received. In the event, senior counsel for the Commissioner advised the Court at the conclusion of the trial that the Commissioner did not seek an order under s 40(2). Paragraph 15 of the protocol recorded the Commissioner’s agreement that he will not pursue the pleaded claims and that on determination of the substantive question, the pleaded claims will merge into the judgment of the Court and will be res judicata.

1. The trial on the substantive question occupied twelve full sitting days. The Court Book contained nearly 6000 pages, the transcript ran to almost 1500 pages and the parties filed detailed written closing submissions on fact and law. The reasons that follow do not make reference to all the evidence before the Court nor are findings made on all disputed facts. Facts and evidence are addressed only in so far as those matters bear upon, and are material to, the determination of the substantive question. By and large, many of the material facts were not actually in dispute.

Background to the audit of Aid & Abet

1. Aid & Abet was authorised by the Commissioner pursuant to s 40A(1) of the Stamps Act to endorse instruments for duty, and instruments endorsed by Aid & Abet were deemed by s 40A(3)(a) to be stamped under the Stamps Act to the amount of stamp duty shown on the endorsement or to be exempt from duty as the case may be. As an “authorised person”, Aid & Abet was required to lodge regular statements in the prescribed form with the Commissioner verifying the total of all amounts endorsed by it and to pay the Commissioner a sum equal to the total of those amounts.[8] Aid & Abet was also required to make, and to keep, records of the endorsements that it made.[9] 

   [8]Stamps Act 1958 (Vic) s 40A(3)(b).

   [9]Stamps Act 1958 (Vic) s 40A(3)(c).

1. The SRO from time to time conducted random audits of the activities of “authorised persons” to ensure compliance with their statutory obligations.  A random audit of Aid & Abet in August 2001 revealed some irregularities and in November 2001, the SRO commenced a full audit of Aid & Abet’s endorsement activities.  The auditors concluded that Aid & Abet had complied with its reporting and payment obligations up until October 1999, but not as from then. Non-compliance coincided with Aid & Abet’s introduction of “the Goldstein System”. 

The Goldstein System

1. Aid & Abet’s practice was not to endorse instruments until it had received a cheque from the client payable to the SRO for the amount of duty. Usually the clients would send instruments for endorsement together with a cheque payable to the SRO for the payment of the duty. Aid & Abet would separately calculate the duty payable using a software program supplied by the SRO that was also used to record the details of the instruments and the duty chargeable for reporting purposes to the SRO. If the amount for which the client cheque was made out corresponded with the correct amount of duty payable, Aid & Abet would endorse the instrument or instruments referable to that cheque by stamping the instruments with a rubber stamp and completing the details on the stamp, including the duty chargeable. If the client cheque was for an amount that was different to the amount of duty calculated by Aid & Abet, Aid & Abet would wait until it received a replacement cheque for the correct amount of duty from the client or the mismatch was otherwise resolved before it would endorse the instruments to which the cheque related.

1. Aid & Abet’s principal client was Goldstein Partners (“Goldstein”). As Goldstein usually sent instruments for endorsement in bundles of ten to twenty files together with one cheque payable to the SRO for the estimated total duty, there were often delays in processing its instruments whilst discrepancies were sorted out, which eventually caused Goldstein, in mid-1999, to threaten to take its work away from Aid & Abet. Aid & Abet came up with the Goldstein System as the solution to the processing delays in endorsements of Goldstein instruments.

1. Under the Goldstein System, Aid & Abet endorsed Goldstein instruments without requiring Goldstein to provide an accompanying cheque for the duty payable. Aid & Abet only sought payment for the duty from Goldstein after endorsement, when the actual amount of duty payable had been ascertained. Each week, Aid & Abet faxed to Goldstein a list of the instruments it had endorsed during the week, together with a request for payment of the aggregate amount of the duty endorsed by direct deposit into Aid & Abet’s nominated bank account and, as from June 2001, by cheque payable to Aid & Abet. 

Accounting to the SRO for duty endorsed on instruments

1. Up until September 2000, Aid & Abet accounted to the SRO on a weekly basis for the duty that it endorsed on instruments. From September 2000, this changed to a monthly basis.  The reporting was done by lodgement of a transaction report with the SRO containing details of the instruments endorsed that month and the duty chargeable, together with payment of the duty. Up to October 1999, Aid & Abet paid the duty by remitting the client cheques payable to the SRO that corresponded with the endorsements entered in the transaction report for the particular period.  With the introduction of the Goldstein System, Aid &  Abet paid the duty on the instruments reported by remitting with the client cheques for the duty on non-Goldstein instruments, a balancing cheque or “cheque for difference” drawn on its own account for the difference between the total of the client cheques accompanying the transaction report and the total duty chargeable on the instruments reported.

The cheques for difference

1. Goldstein was invoiced and paid Aid & Abet the total amount of $9,912,943.44 between October 1999 and June 2001 (“the relevant period”), corresponding with the amount of duty that Aid & Abet endorsed on Goldstein instruments over that period and reported to the SRO.  Yet the cheques for difference that accompanied the transaction reports for the relevant period totalled only $6,128,353.14. The balance of $3,514,751 (after other reconciliations) was not accounted for in the payments of duty that Aid & Abet made to the SRO. The defendants’ evidence did not explain why the cheques for difference did not match the duty payable on the Goldstein instruments nor why the cheques for difference were, for the most part, for amounts that were substantially less than the duty payable on the Goldstein instruments.

Under-reporting of endorsements

1. The Commissioner adduced evidence to show that Aid & Abet had not reported all endorsements on non-Goldstein instruments from October 1999 onwards. The Commissioner also adduced evidence to show that Aid & Abet applied client cheques referable to the payment of duty on non-Goldstein instruments to the payment of duty on the Goldstein instruments. That evidence was not challenged or contradicted by the defendants[10] and the evidence provided a cogent explanation as to why the cheques for difference were for amounts that were substantially less than the duty payable on the Goldstein instruments. The inference to be drawn is that Aid & Abet did not report, or attend to the due payment of, all the duty that it endorsed on non-Goldstein instruments and it is open to find on that evidence that Aid & Abet underpaid duty by at least the amount of $3,514,751 referrable to those endorsements on non-Goldstein instruments that were not reported.

   [10]Mr Bulzomi sought to make the case that within the Goldstein System itself there were embedded real and important safeguards against under-reporting of Goldstein instruments. Whether that was so was not to the point as the under-reporting claim related to non-Goldstein instruments.

1. Mr Kalotihos denied that there was any shortfall in the payment of duty and asserted that Aid & Abet had overpaid duty to the SRO, potentially “as high as hundreds of thousands of dollars”,[11] but he did not back up the assertion with evidence. Instead, he sought to cast doubt on the reliability of the audit conclusions by asserting deficiencies in the SRO’s audit, including a lack of proper forensic investigation by the SRO auditors. Whether or not the criticisms of the audit process were justified (about which I express no view), the Court cannot make a finding of fact of overpayment based merely on assertion, having regard to the evidence adduced by the Commissioner, nor could the Court infer from the available material that Aid & Abet had overpaid duty so that no amount could be said to be owing. Indeed, the evidence was to the contrary.

   [11]Second and Third Defendants’ Outline of Closing Submissions, [21].

1. In the circumstances, I find that Aid & Abet underpaid duty by the amount of $3,514,751.

Recovery from the defendants                  

1. The Commissioner contended that each of the defendants received money “as or for the duty” referable to the duty on instruments endorsed by Aid & Abet in circumstances where the requirements of s 40(1) are satisfied.

1. The Commissioner’s claim against Aid & Abet was based on that company’s position and activities as an authorised person.

1. The Commissioner’s claim against Mr and Mrs Kalotihos was based on the contention that they were the effective owners and controllers of Aid & Abet during the relevant period with knowledge of the activities of Aid & Abet as an authorised person. 

1. The Commissioner’s claim against Mr Bulzomi was based on his role as office manager of Aid & Abet during the relevant period with responsibility for the endorsement activities of the company and, later, as a director of the company.

1. The Commissioner claimed that the first to fourth defendants are jointly and severally liable for the amount of $3,514,751 in unpaid duty.

1. The basis of the debt recovery against Monocote, KC Management and Clubhouse Restaurant was that these defendants were companies associated with Mr and Mrs Kalotihos and also with Mr Bulzomi, and that Aid & Abet had used monies paid to it by Goldstein on account of the duty chargeable on instruments that Aid & Abet endorsed for Goldstein to make payments to, or for, the benefit of those companies.  The Commissioner sought as against Monocote an order for the payment of $738,948.60, as against KC Management an order for the payment of $429,285.64 and as against Clubhouse Restaurant an order for the payment of $205,000.

Must the debt recovery action lie under s 40A of the Stamps Act and not s 40 of the Stamps Act?

1. It was contended for Mr and Mrs Kalotihos that the Commissioner had no right of recovery against them under s 40(1) of the Stamps Act as s 40A of the Stamps Act governed the Commissioner’s rights in the event of non-payment of duty by an authorised person. The argument was that s 40A constituted a code concerning the endorsement of dutiable instruments by authorised persons, and that this code exclusively prescribed the Commissioner’s rights in respect of the duty endorsed. It was further contended that the Commissioner’s only remedy under s 40A was to prosecute Aid & Abet for non-compliance with s 40A(3)(b), which is now time-barred.

1. The scheme of s 40A effective as at October 1999[12] was as follows. The Commissioner was empowered by s 40A(1) to declare a person to be an “‘authorised person’… in relation to any class of instruments chargeable or that, but for an exemption, would be chargeable, with duty” under the Stamps Act. Section 40A(3)(a) provided that authorised persons were entitled to endorse specified instruments as stamped under the Stamps Act. Instruments so endorsed were “deemed to be stamped” under the Stamps Act to the amount of stamp duty shown on the endorsement or to be exempt from duty (as the case may be).[13] Section 40A(3)(b) imposed the obligation on authorised persons to lodge periodic statements with the Commissioner verifying the total of all amounts endorsed during the relevant period and to pay the Commissioner “a sum equal to the total of such amounts”. The failure to pay attracted a penalty under s 40A(4A) of twenty penalty units plus an amount equal to double the amount that would have been payable had there been compliance with s 40A(3)(b) and s 40A(6) fixed a time limit within which to bring a prosecution. The failure to pay did not mean, however, that the instrument could not be taken to be endorsed. By s 40A(7), where an instrument appeared to have been endorsed under s 40A, “any person may receive register enrol enter record accept endorse transfer negotiate or otherwise deal with (as the case may be) the instrument as if it was actually stamped” under the Stamps Act. Section 40A(7A) then provided that nothing in s 40A(7) prevented the Commissioner “from recovering any duty chargeable on an instrument” under the Stamps Act.

   [12]Stamps Act 1958 (Vic) s 40A was amended from time to time.

   [13]Stamps Act 1958 (Vic) s 40A(3)(a).

1. The arguments cannot be accepted for two reasons. First, the terms of
   s 40A did not prevent the Commissioner from making a debt claim in lieu of prosecution. Whilst s 40A did not contain an express provision authorising the Commissioner to sue an authorised person for an amount that the authorised person is required to pay by s 40A(3)(b), the section plainly imposed the obligation to pay on the authorised person. It is implicit that the Commissioner must also have a claim in debt against an authorised person for failure to pay as required by s 40A(3)(b), and the legal right to sue for recovery to enforce payment.[14] Secondly, whilst s 40A plainly imposed personal liability on authorised persons for the amount of duty endorsed on instruments by them in that capacity, it does not follow that s 40A constituted the only provision imposing liability for duty chargeable on an instrument endorsed by an authorised person. To put it another way, s 40A dealt with the special case where an instrument was endorsed by an authorised person, but that did not mean that s 40A must constitute an exclusive code governing the Commissioner’s rights where an authorised person has failed to comply with its payment obligations under s 40A(3)(b). Section 40A neither expressly, nor by implication, precluded the operation of s 40(1), which effected debt obligations and recovery rights independent of the debt obligations and recovery rights under s 40A.

[14]Deputy Commissioner of Taxation v Lanstel Pty Ltd (1996) 22 ACSR 314, 316.

Were the amounts paid by Goldstein to Aid & Abet sums of money “as or for … duty”  ?

1. It was contended for Mr and Mrs Kalotihos and for Mr Bulzomi that the monies that Goldstein paid to Aid & Abet were not monies that Aid & Abet received “as or for the duty upon or in respect of any instrument”. The contentions relied on the effect and operation of s 40A(3). It was argued, consistently with the Commissioner’s published view,[15] that endorsement of an instrument by an authorised person, by force of s 40A(3)(a), extinguished the liability for duty of the person on whose behalf the instrument was endorsed to the extent of the amount endorsed and, by force of s 40A(3)(b), that the authorised person instead became liable to pay the amount of the duty endorsed. As the uncontroversial fact was that during the relevant period, Aid & Abet endorsed Goldstein instruments before requesting payment of the amounts referable to the duty endorsed, it was put that endorsement before receipt of payment thus extinguished Goldstein’s liability for the duty on the instruments endorsed so that the payments that Aid & Abet received from Goldstein were not “as or for the duty”. It was further put that the monies that Goldstein paid to Aid & Abet were not, as a matter of contract, “as or for the duty” but to enable Aid & Abet to discharge the liability that attached to Aid & Abet under s 40A(3)(b) - namely, to pay a sum equal to the total of all amounts endorsed as duty - which, it was contended, was not a liability to pay “duty”.

   [15]State Revenue Office, “SRO Guidelines issued to Authorised Persons” (September 1998).

1. The flaw in the argument is that s 40A(3) does not control the meaning and application of s 40(1). The starting point must be the terms of s 40(1) itself.[16] The enquiry that is directed by s 40(1) is whether monies were received “as or for the duty upon or in respect of any instrument”. The phrase “as or for the duty” looks at the nexus between the monies received with the duty that is levied on an instrument. It is that nexus with which s 40(1) is concerned, not with the effect of endorsement on a person’s liability to pay the duty. Where there is that nexus, the omission or neglect “to appropriate” such monies to “the due payment of such duty” created a liability for the amount of the duty. As the legislative history of s 40(1) bears out, the evident purpose of the section was to make persons who received duty on instruments accountable for the payment of the duty.[17] Section 40A(3)(a) did not operate to remove the imposition of the duty charged on the Goldstein instruments. Reliance on s 40A(3)(a) does not thus answer the question of whether any payments that Aid & Abet received from Goldstein bore the character of monies that it received “as or for the duty” on the Goldstein instruments.

   [16]Commissioner of Taxation v Consolidated Media Holdings Ltd (ACN 009 071 167) (2012) 293 ALR 257, 268 (Full Court); Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (2009) 239 CLR 27, 31 (French CJ) and 46-47 (Hayne, Heydon, Crennan and Kiefel JJ); Certain Lloyd’s Underwriters Subscribing to Contract No IH00AAQS v Cross (2012) 293 ALR 412.

   [17]It appears that s 40(1) can be traced back to an 1870 UK provision which was intended to apply to court officers and stewards of manors, who were authorised by the Stamps Act 1870 (UK) to receive payments of duty.

1. In evidence were the weekly payment requests from Aid & Abet to Goldstein for remittance of amounts equal to the aggregate duty chargeable on the Goldstein instruments that Aid & Abet endorsed for Goldstein in those weekly periods.  In my view, the nexus between duty chargeable on the Goldstein instruments and the payments received by Aid & Abet was clearly made out by that evidence.  The amounts that Goldstein remitted to Aid & Abet (“the Goldstein monies”) were intended to be, and were received by Aid & Abet, for the duty that Aid & Abet had endorsed on the Goldstein instruments. 

“Received” for the purposes of s 40(1)

1. Section 40(1) operates on the combined effect of the phrase “having received any sum of money as or for the duty”. The ordinary meaning of “received” is “to be given, presented with, or paid something”.[18] “Receipt” is ordinarily established by showing actual payment to a person, as “payment” and “receipt”, as a matter of ordinary meaning, are correlative terms.[19] Actual payment of the Goldstein monies to Aid  & Abet and Aid  & Abet’s receipt of those monies was not in issue.  

   [18]Oxford Dictionary of English (Oxford University Press, 2^nd ed revised, 2005).

   [19]Jazazievska v Secretary, Department of Family and Community Services [2000] FCA 1484, [39] (Cooper J).

1. The Commissioner contended further that the Goldstein monies were also “received” by Mr and Mrs Kalotihos and by Mr Bulzomi because they were in de facto control of Aid & Abet’s funds and knew about the payments (“the constructive receipt argument”). The Commissioner referred to the High Court decision in National Commercial Banking Corporation of Australia Ltd v Batty[20] (“Batty”) in support of his argument. The facts in Batty were that one of two partners misappropriated cheques payable to a third party, deposited the cheques into the firm’s bank account, withdrew the proceeds and applied them to his own use. The third party successfully sued the bank for damages for conversion of the cheques. The bank then brought an action for monies had and received against the innocent partner (“Mr Batty”). It was held by Gibbs CJ (with whom Wilson and Dawson JJ agreed) that Mr Batty had not received the monies.[21] Part of the reasoning of Gibbs CJ was as follows:

   [20](1986) 160 CLR 251.

   [21]Brennan J found for Mr Batty on the basis that the money credited to the firm’s account was the firm’s and not the bank’s money. Deane J dissented.

Where, because of the action of a servant or agent acting outside the scope of his authority, or for that matter because of the action of a complete stranger, money has been paid into the account of the defendant, who has technically received it, although he is quite unaware of that fact, and the money is then misappropriated, still without the knowledge or intervention of the defendant, there seems to be no reason in justice or equity why the defendant should be answerable for the money simply because theoretically he had the means of knowing that the money was in the account. In principle, in those circumstances, the defendant ought not to be liable unless, before the money was misappropriated, he knew or ought to have known that he had possession or control of it. In other words, where the defendant has not had the benefit of the money, has not played any part in disposing of it and was ignorant of the fact that it was theoretically under his control, he should not be liable in the absence of fault on his part.[22]

In reaching that conclusion, Gibbs CJ relied on what was said by Dixon J in James v Oxley[23]:

The explanation of the introduction into the question of the element of ‘means of knowledge’ may lie in the peculiarity of the position of partners in relation to a partnership bank account upon which each partner may be empowered to draw by himself. In substance, money, though temporarily there, may never be in the actual de-facto control of any member of the firm except the fraudulent partner. He may pay a cheque to the credit of the account and immediately draw against it. In such circumstances the technical ‘receipt’ by the firm may be considered as insufficient to make payment into the account a receipt to the use of the plaintiff unless the other partners knew or ought to have known of the credit and of its nature. In the same way, if an agent who operates on his principal’s account free of his actual control or supervision pays in money fraudulently obtained from a stranger and forthwith draws it out again, the principal may be regarded as never having really received it to the use of the stranger unless he knew or ought to have known of its presence before it was withdrawn.[24]

The Commissioner submitted that the “findings” of Gibbs J were:

… consistent with the principle that a person with knowledge that money was being received and who was in control of the flow of funds will be taken to have received those monies. The High Court referred to this as being “in de facto control of the money”.[25]

[22]National Commercial Banking Corporation of Australia Ltd v Batty (1986) 160 CLR 251, 268-269.

[23](1939) 61 CLR 433.

[24]Ibid 456, cited by Gibbs CJ in National Commercial Banking Corporation of Australia Ltd v Batty (1986) 160 CLR 251, 268.

[25]Plaintiff’s Outline of Closing Submissions, [1.21].

1. The Commissioner contended in reliance on Batty that Mr and Mrs Kalotihos and Mr Bulzomi “received” monies as and for the duty through their control of, and knowledge about, the Goldstein funds.  The Commissioner said that they were in “constructive receipt” of those monies.

1. Batty was not a case though about de facto control constituting receipt. The issue was whether Mr Batty should be held liable to the bank for monies that Mr Batty had “technically received” in the circumstance where he neither knew nor ought to have known that he technically had possession or control of the monies in the firm’s account.[26] The case is authority for the proposition that an account holder who has no effective means of controlling the money in the account “may be regarded as never having really received it”.[27] That said, the case is illustrative that due regard should be paid in the present case to what actually occurred in evaluating whether monies “as or for the duty” were “received” by the second to seventh defendants, within the meaning of that word as it appears in s 40(1). There is clear support in other authorities for this approach.[28] The fact that the Goldstein monies were actually paid to, and received by, Aid & Abet is thus not determinative against the application of s 40(1) to the remaining defendants.

   [26]National Commercial Banking Corporation of Australia Ltd v Batty (1986) 160 CLR 251, 269.

   [27]James v Oxley (1939) 61 CLR 433, 456 (Dixon J).

   [28]National Banking Corporation Australia Limited of Australia v Batty (1986) 160 CLR 251; Australia & New Zealand Banking Group Limited v Westpac Banking Corporation (1988) 164 CLR 662, 673-674 (Mason CJ, Wilson, Deane, Toohey and Gaudron JJ); Ford by his tutor Beatrice Ann Watkinson v Perpetual Trustees Victoria Limited [2009] NSWCA 186, [123] (Allsop P and Young JA, Sackville AJA agreeing); Heperu Pty Ltd v Belle (2009) 76 NSWLR 230.

Did Mr or Mrs Kalotihos “receive” monies “as or for the duty”?

1. The Commissioner put his case in two ways. First he argued the notion of “constructive receipt”. Secondly he argued actual receipt (“actual receipt argument”).

Constructive receipt argument

1. There was considerable evidence about the roles and involvement of Mr and Mrs Kalotihos in Aid & Abet during the relevant period.

1. The corporate history of Aid & Abet up to June 2001 was as follows. Mr Kalotihos founded a paralegal business in 1984. Mrs Kalotihos and a Dominic Crupi (“Mr Crupi”) were involved in the business from the outset. In 1992, the decision was made to incorporate Aid & Abet to conduct the paralegal business, which until then had been carried on under a business name. The ASIC records show that the original directors and shareholders (in equal shares) were Mrs Kalotihos and Mr Crupi’s wife (“Mrs Crupi”) who, according to Mr and Mrs Kalotihos, was there to secure Mr Crupi’s interest in the company and was “a director in name only”. Apparently, Mr Crupi had not wanted his interest in the company recorded in his name for tax reasons. According to the ASIC records, Mrs Crupi resigned as a director of Aid & Abet in March 2000, leaving Mrs Kalotihos as the sole director. In June 2001, Mrs Kalotihos resigned as director. She was replaced by Mr Bulzomi.[29] The ASIC records also show that Mr Crupi at some stage became the holder of the fifty per cent shareholding interest previously held by his wife.

   [29]Mr Bulzomi was the company’s sole director until September 2000, when he also resigned.

1. Mr Kalotihos’ evidence was that he “elected” not to hold a position as a director or shareholder of the company. Despite the fact that he was not a director[30] or shareholder and, according to him, only worked as a consultant to Aid & Abet, he was, in his words, “the guy at the top of the tree” at Aid & Abet and “chairman of everything”. Mr Kalotihos agreed in cross-examination that he described himself variously as the “chairman”, “chief executive officer” and “managing director” of Aid & Abet. Mr Bulzomi recollected that Mr Kalotihos had also described himself on numerous occasions as “the general” and the staff at Aid & Abet as his “foot soldiers”. Mr Kalotihos could not specifically recall this, but agreed that it was possible that he may have used that terminology. Mr Kalotihos also agreed in cross-examination that he constantly reminded staff at Aid & Abet that he answered to nobody and that he insisted on obedience from them in carrying out his instructions, including from Mr Bulzomi. He also agreed with the proposition put to him in cross-examination that he was the one in charge at Aid & Abet. In his words, “in the end it all fell on [him]”, “[he] ended up being responsible for everything”, “[Mrs Kalotihos] and I, we were at the top of the tree” and in answer to the question “you [were] the one that was really in charge of everybody, including staff, consultants, [Mrs Kalotihos] and [Mr Crupi]” Mr Kalotihos replied, “if by ‘in charge’ you mean the guy at the top of the tree, that was me”.[31]

   [30]Save that Mr Kalotihos was appointed as director on 5 September 2002 upon Mr Bulzomi’s resignation and held that office only until 18 October 2002. His evidence was that he was appointed because there was no other person available on short notice to be appointed as director.

   [31]T148/26-31.

1. Mrs Kalotihos described herself as the managing director of the company, a position that she said she held until she resigned her directorship in June 2001. Her evidence was consistent with that of Mr Kalotihos that any significant decisions in the running of the business were made by herself or by her husband. She also agreed in cross examination that she had described herself and Mr Kalotihos to Mr Bulzomi as the owners of Aid & Abet. However she also gave evidence to the effect that she had limited involvement in the actual day-to-day operations of the company from 1999 onwards, the responsibility for which she said she had mostly delegated and left to Mr Bulzomi. This was disputed by the Commissioner but whether she actually had a “hands-on” role in the day-to-day operations during the relevant period was not really to the point. The relevant significant evidence was her own evidence that she controlled the affairs of the company over that period, including the endorsement activities of Aid & Abet, in her capacity as managing director.

1. There was little evidence about the role and involvement of Mr and Mrs Crupi in the activities of Aid & Abet during the relevant period but the one thing that is clear is that they did not control the company’s finances, unlike Mr and Mrs Kalotihos.  Relevantly, Mr and Mrs Crupi did not hold authority to operate Aid & Abet’s bank accounts whereas Mr and Mrs Kalotihos, on the other hand, had that authority. Both Mr and Mrs Kalotihos were authorised to sign company cheques and to make withdrawals from the company’s accounts. Mr Bulzomi was also authorised to sign company cheques, though his evidence was that he could only sign on instructions from Mr or Mrs Kalotihos. There was some controversy in the evidence as to whether Mr Bulzomi was required to seek permission from Mr or Mrs Kalotihos before signing a cheque, but there was no controversy in the evidence that Mr Bulzomi required their authority. He was a signatory to the accounts subject to the direction and authority of Mr and Mrs Kalotihos.

1. The significance is that the persons who controlled the affairs of the company were also the persons who had dispositive power over Aid & Abet’s funds. The evidence showed that Mr and Mrs Kalotihos routinely exercised that dispositive power by drawing cheques on the company’s account to their own use. They sought to make the case that they were entitled to withdraw and apply company monies to their own use on the basis that they had claims against the company for fees that were owed to them, for reimbursement of expenses that they had incurred on behalf of Aid & Abet, and for repayment of funds that they had expended on behalf of Aid & Abet from time to time. But whether the payments to themselves were business related was not to the point. The critical point was that the evidence confirmed their authority, right and ability to withdraw company funds, as the controllers of the affairs of Aid & Abet.

1. I find as a fact that Mr and Mrs Kalotihos were the controlling minds and will of Aid & Abet and in that capacity had, and exercised, dispositive power over the funds in the Aid & Abet accounts. As the controlling minds and will of Aid & Abet with, and exercising, the dispositive power over Aid & Abet’s funds, they were the persons in actual de facto control of Aid & Abet’s funds and knew, or ought to have known, about the Goldstein monies paid into Aid & Abet’s accounts, given that the monies were received by Aid & Abet as part of, and in the course of, Aid & Abet’s ordinary business activities. “Receipt” by the company of the Goldstein monies “as or for the duty” was, in the circumstances, also “receipt” by Mr and Mrs Kalotihos for the purposes of s 40(1). They cannot avoid the application of s 40(1) merely by the circumstance that the Goldstein monies were paid to the corporate entity, Aid & Abet. That is not to lift the corporate veil or to disregard the separate corporate existence of Aid & Abet but to give effect to the ordinary meaning of “received” as it appears in s 40(1), with due regard to the position of Mr and Mrs Kalotihos as the persons in actual de facto control of Aid & Abet’s funds and due regard to the fact of the receipt by Aid & Abet of the Goldstein monies as part of, and in the ordinary course of, Aid & Abet’s ordinary business activities.

Actual receipt argument

1. The Commissioner also contended that Mrs and Mrs Kalotihos were in actual receipt of the Goldstein monies because they had appropriated those monies for their own benefit or for the benefit of companies associated with them. However, s 40(1) is not satisfied merely because a tracing exercise is capable of being performed. The inquiry must be whether the Aid & Abet monies that they paid to themselves were received by them “as or for the duty” on instruments. To put it another way, the issue is whether the payment of duty on instruments was the occasion for the receipt of monies in their hands. That question is not answered by a tracing exercise. It is the nature of the receipt in the hands of the recipient that is the relevant inquiry as it is the nature of the receipt that triggers the obligation on the part of that person to attend to the due payment of the duty, failing which liability is imposed under
   s 40(1). That there must be some obligation to attend to the due payment of the duty is evident in the terms of s 40(1) itself, as liability does not attach under s 40(1) unless the person “neglects or omits” to appropriate monies to the due payment of duty or “improperly withholds or detains” that money. Each of those terms connotes some element of obligation to attend to the due payment of the duty. The obligation arises because a person has received monies “as or for the duty”. Thus, merely demonstrating that Mr and Mrs Kalotihos appropriated for their own benefit, or for the benefit of companies associated with them, monies that Aid & Abet received “as or for the duty” does not satisfy the analysis called for by s 40(1).

Did Mr Bulzomi “receive” monies “as or for the duty”?

1. The Commissioner again put his case in two ways, arguing “constructive receipt” and actual receipt.

Constructive receipt argument

1. The constructive receipt argument was based on Mr Bulzomi’s involvement in the management and day-to-day operations of Aid & Abet as its office manager and later as its sole director. As the office manager Mr Bulzomi was head of the paralegal area, which included stamping and lodging. Mr Bulzomi attended management meetings, made managerial decisions and monitored Aid & Abet’s staff and supervised their work. Mr Kalotihos described him as “his right hand man”. Mr Bulzomi was authorised to sign cheques drawn on Aid & Abet’s account and the evidence showed that Mr Bulzomi regularly wrote out the “cheques for difference” for payment of the duty on Goldstein instruments to the SRO, which cheques he would either sign himself or give to Mr Kalotihos to sign.  He was also involved in the endorsement activities of Aid & Abet, which included responsibility for ensuring that the correct amount of duty was collected from clients and paid to the Commissioner. From 2001, Mr Bulzomi additionally had responsibility for the accounts department and, with effect from 8 June 2001, was the company’s sole director replacing Mrs Kalotihos (although Mr Bulzomi claimed that he was actually appointed in July 2001).

1. I do not accept that Mr Bulzomi is in the same position as Mr and Mrs Kalotihos on the issue of “constructive receipt”. Unlike Mr and Mrs Kalotihos, Mr Bulzomi did not control the affairs of the company. The circumstance that he had a managerial position and could exercise, and exercised, rights and powers in that capacity did not give him control of the affairs of the company. That control was in the hands of Mr and Mrs Kalotihos to whom he was accountable and answerable. Much was made by the Commissioner of the extent of his role and involvement in the endorsement activities at Aid & Abet without supervision but this did not negate the fact that he was an employee and remained subject to the direction of Mr and Mrs Kalotihos as the persons actually in charge at Aid & Abet. Additionally, unlike Mr and Mrs Kalotihos, Mr Bulzomi did not have dispositive power over Aid & Abet’s funds. Although he was an authorised signatory on company cheques, it was subject to the authority of Mr and Mrs Kalotihos. The evidence did not suggest that this changed when he was appointed director.

1. The constructive receipt argument has not been made out against Mr Bulzomi.

Actual receipt argument

1. The Commissioner went on to argue that Mr Bulzomi was in actual receipt of the Goldstein monies, first because Mr Bulzomi had appropriated the monies to the payment of cash cheques signed by him and drawn on Aid & Abet’s accounts, and secondly because Mr Bulzomi, through his shareholding in Clubhouse Restaurant, had received the benefit of monies that Aid & Abet paid to Clubhouse Restaurant using Goldstein monies.

1. Both claims suffer the same defect in analysis as the claim of actual receipt against Mr and Mrs Kalotihos and must be rejected. The issue is not the application of the Goldstein monies but whether the Mr Bulzomi received any monies “as or for the duty”. The mere fact that he or Clubhouse Restaurant received monies paid or appropriated out of Goldstein monies in Aid & Abet’s account does not characterise the monies received by them as monies received “as or for the duty” for the purposes of s 40(1).

1. Furthermore, the factual basis for the contentions was not established. The contention that Mr Bulzomi was in actual receipt of the Goldstein monies was put on the basis of evidence “that the system for cash cheques at Aid & Abet was that the person who had written and signed those cheques was later provided with the proceeds”.[32] The Commissioner submitted that the Court should find “on that basis”[33] that Mr Bulzomi received the proceeds of the cash cheques that he signed. But such a finding would be insufficient to support the contention that Mr Bulzomi “received” the Goldstein monies and, by itself, was not to the point. Nor to the point was the contention for the Commissioner that Mr Bulzomi “should be found to have been in receipt” of the Goldstein monies because he was a signatory to the accounts and through his control of Aid & Abet’s activities with Mr and Mrs Kalotihos “condoned” the cash cheque system.[34]  The finding that the Commissioner required to support his contention was a finding that Mr Bulzomi had appropriated the Goldstein monies for his own benefit. It was not put to Mr Bulzomi that he kept the cash for himself or used it for his own private purposes[35] and that was not the evidence. Likewise, the Commissioner did not establish on the evidence that Mr Bulzomi personally received, let alone took the benefit of, the monies that Aid & Abet paid to Clubhouse Restaurant, whether as shareholder or otherwise.

   [32]Plaintiff’s Outline of Closing Submissions, [1.28].

   [33]Ibid.

   [34]Ibid [1.29].

   [35]The Commissioner’s case had initially been that Mr Bulzomi received the cash proceeds for his personal benefit. Mr Bulzomi always denied this, maintaining that he wrote cash cheques at the direction of Mr and Mrs Kalotihos. The Commissioner did not pursue that allegation against Mr Bulzomi at trial and no submission was made in final address that the Court should find that he wrote cash cheques to benefit himself.

Did Monocote, KC Management and Clubhouse Restaurant “receive” monies “as or for the duty”?

1. The Commissioner also contended that these companies had constructive receipt of the Goldstein monies as the companies “were imparted with the knowledge and state of mind of the second, third and fourth defendants”[36] by reason of the common directorship, ownership and control of these companies by Mr and Mrs Kalotihos and Mr Bulzomi. The argument was put without any attempt at rigour of analysis to support it, has no legal basis and totally lacks merit.

   [36]Plaintiff’s Outline of Closing Submissions, [1.24].

1. The claim that these companies were in actual receipt of Goldstein funds because Aid & Abet made payments to them using Goldstein monies is rejected on the same basis that merely tracing the application of the funds to these companies did not bring these companies within the terms of s 40(1).

The requirements of “neglects or omits” and “improperly withholds or detains”

1. These requirements can be considered together.

1. The word “omit” has at least two possible meanings. It can mean simply the omission to do a thing in question that the person is required or expected to do, irrespective of any reason; or an omission by reason of some carelessness or delinquency.[37] I am inclined to the view that the word “omit” in the context of s 40(1) imports the connotation of “not doing something”, whatever the reason – that is, not “appropriating” monies that a person has received as or for the duty “to the due payment” of that duty.[38] The expression “neglects or omits” indicates that the legislature did not intend the words to be interchangeable so as to ascribe to the word “omits” the same connotation as the word “neglects”. Thus, the mere fact that not all duty was paid which should have been paid is sufficient to attach liability to Aid & Abet and to Mr and Mrs Kalotihos as “the persons…having received monies as for or the duty upon or in respect of instruments”.

   [37]CBS Productions v O’Neill (1985) 1 NSWLR 601; L & D Audio Acoustics Pty Ltd v Pioneer Electronics Australia Pty Ltd (1982) 7 ACLR 180; Hill v Holmes (1999) 164 ALR 1; Elliot v Australian Securities and Investments Commission (2004) 10 VR 369; Gankev Deputy Commissioner of Taxation (1975) 1 NSWLR 252.

   [38]Stamps Act 1958 (Vic) s 40(1).

1. If I am wrong about the meaning of “omit”, I am of the opinion that the facts disclose at least “neglect” on their part, if not “improper withholding or detention” of the Goldstein monies. The “neglect” or “improper withholding or detention” of the monies was established by the lack of any explanation as to why client cheques referable to non-Goldstein instruments were used to pay the duty on Goldstein instruments, why the cheques for difference did not match the duty payable on the Goldstein instruments, or why Aid & Abet had not remitted the equivalent of $3,514,751 referable to the Goldstein monies to the SRO. The Goldstein monies, or their equivalent, ought to have been paid to the SRO. The fact that the monies were not, considered with the fact that Aid & Abet under-reported the instruments that it had endorsed, indicates at least a lack of attention and care to the proper discharge of the endorsement activities of Aid & Abet, if not revealing some irregularity about the discharge of those endorsement activities, which was not “proper”. The word “improperly” does not require a finding that the Goldstein monies were dishonestly withheld or detained.[39]

   [39]Lord Advocate v Gordon (1901) Sc LT 439, 439 (Lord Stormouth Darling) cited with approval in Commissioner of State Revenue v MMK Cameroon Pty Ltd [2001] VSC 239, [57] (Gillard J); Australian Concise Oxford Dictionary (Oxford University Press, 5^th ed, 2009) ‘improper’ adj. 1b. not in accordance with accepted rules of behaviour, 2. inaccurate, wrong; ‘improperly’ adv.

1. The Commissioner’s case went further though. The Commissioner’s case was that the under-reporting of non-Goldstein instruments was deliberate and the Court was asked to find that Mr and Mrs Kalotihos and Mr Bulzomi misappropriated the Goldstein monies that were not remitted to the SRO. It was further put that the Court should conclude on the evidence that Mr Kalotihos and Mr Bulzomi took a number of steps to prevent detection of the misappropriation and to hinder the subsequent SRO investigations of Aid & Abet’s activities. These are very serious allegations on which I make no findings. It is both unnecessary that I consider the allegations, as liability under s 40(1) does not depend on establishing misappropriation and, because of the seriousness of the allegations, undesirable that I make any findings or express any view on this part of the Commissioner’s case.

“Upon or in respect of any instrument”

1. Finally, Mr and Mrs Kalotihos argued that it was incumbent upon the Commissioner to identify the particular instruments “upon or in respect of” which they received money “as or for the duty” which was not paid to the SRO.  I reject that submission.  The words “in respect of” require a material and discernible link to be shown between the sums of money received and duty chargeable on instruments, which was unpaid.[40] That link was sufficiently established here by evidence of the receipt by Aid & Abet of the Goldstein monies referrable to the duty on the Goldstein instruments, which Aid & Abet did not apply to payment of the duty on those instruments.

   [40]J & G Knowles and Associates Pty Ltd v Commissioner of Taxation (2000) 96 FCR 402.

Orders

1. I will order the first, second and third defendants to pay the plaintiff the sum of $3,514,751. The proceeding against the fourth to seventh defendants will be dismissed. 

SCHEDULE OF PARTIES

No. 8583 of 2005

BETWEEN:
THE COMMISSIONER OF STATE REVENUE (IN HIS CAPACITY AS THE COMPTROLLER OF STAMPS)	Plaintiff
and
AIDLAW PTY LTD (ACN 055 407 899) (RECEIVERS AND MANAGERS APPOINTED (formerly known as AID & ABET PTY LTD)	First Defendant
and
SPIROS KALOTIHOS	Second Defendant
and
ANNE MAREE KALOTIHOS	Third Defendant
and
ANTONIO BULZOMI	Fourth Defendant
and
MONOCOTE PTY LTD (ACN 094 166 024)	Fifth Defendant
and
KC MANAGEMENT SERVICES PTY LTD (ACN 006 185 888)	Sixth Defendant
and
AID & ABET CLUBHOUSE RESTAURANT PTY LTD (ACN 094 945 945) (formerly MI’MUM’S BAR & GRILL PTY LTD)	Seventh Defendant