Commissioner of Taxation v Fitzroy All Pty Ltd as trustee for the FA Trust
[2013] WASC 427
•29 NOVEMBER 2013
COMMISSIONER OF TAXATION -v- FITZROY ALL PTY LTD AS TRUSTEE FOR THE FA TRUST [2013] WASC 427
| SUPREME COURT OF WESTERN AUSTRALIA | Citation No: | [2013] WASC 427 | |
| 29/11/2013 | |||
| Case No: | CIV:3073/2012 | 7 NOVEMBER 2013 | |
| Coram: | KENNETH MARTIN J | 7/11/13 | |
| 14 | Judgment Part: | 1 of 1 | |
| Result: | Leave granted Declaratory relief granted | ||
| B | |||
| PDF Version |
| Parties: | COMMISSIONER OF TAXATION FITZROY ALL PTY LTD AS TRUSTEE FOR THE FA TRUST |
Catchwords: | Equity Creditors' subrogation rights against trustees' rights of indemnity Trust assets Practice and procedure Leave to proceed application Corporations Act Equity Declaratory relief |
Legislation: | Corporations Act 2001 (Cth), s 440D Federal Court Act 2011, s 57A |
Case References: | Agusta Pty Ltd v Provident Capital [2012] NSWCA 26 Commissioner of Taxation v Barnes Development Pty Ltd [2009] FCA 830 Custom Credit Corporation v Ravi Nominees Pty Ltd (1992) 8 WAR 42 Octavo Investments v Knight [1979] HCA 61; (1979) 144 CLR 360 Yara Australia Pty Ltd v Oswal [No 2] [2013] WASCA 187 |
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
- IN CHAMBERS
- Plaintiff
AND
FITZROY ALL PTY LTD AS TRUSTEE FOR THE FA TRUST
Defendant
Catchwords:
Equity - Creditors' subrogation rights against trustees' rights of indemnity - Trust assets - Practice and procedure - Leave to proceed application - Corporations Act - Equity - Declaratory relief
Legislation:
Corporations Act 2001 (Cth), s 440D
Federal Court Act 2011, s 57A
Result:
Leave granted
Declaratory relief granted
Category: B
Representation:
Counsel:
Plaintiff : Mr I D Martindale SC & Ms C H Thompson
Defendant : No appearance
By Leave : Mr J C Vaughan for the Administrator of Defendant
Solicitors:
Plaintiff : Australian Government Solicitor
Defendant : Gadens Lawyers
By Leave : Gadens Lawyers
Case(s) referred to in judgment(s):
Agusta Pty Ltd v Provident Capital [2012] NSWCA 26
Commissioner of Taxation v Barnes Development Pty Ltd [2009] FCA 830
Custom Credit Corporation v Ravi Nominees Pty Ltd (1992) 8 WAR 42
Octavo Investments v Knight [1979] HCA 61; (1979) 144 CLR 360
Yara Australia Pty Ltd v Oswal [No 2] [2013] WASCA 187
- KENNETH MARTIN J:
Application by plaintiff for leave to proceed with action under s 440D(1)(b) Corporations Act 2001 (Cth)
1 At the outset I am dealing with an application for leave to proceed made by the plaintiff ('the Commissioner') pursuant to s 440D(1)(b) of the Corporations Act 2001 (Cth). The application is necessarily made by reason of the recent appointment of Mr G Carello as a voluntary administrator to the defendant corporation, Fitzroy All Pty Ltd ('Fitzroy'). Fitzroy is the trustee of the FA Trust and was sued in that capacity by the Commissioner in these proceedings by originating summons of 21 December 2012. The matter was subsequently managed in my CMC list from 7 February 2013.
2 The sole director of Fitzroy (Mrs Anastasiou) appointed Mr Carello as administrator on 9 October 2013. At that time, the matter had already been set down for a substantive hearing and determination before me under directions (direction 5) first made provisionally on 28 May 2013 at a strategic conference. These trial dates were then confirmed at the further strategic conference on 24 September 2013, although I was given a strong indication by counsel for both parties at that time that their ongoing negotiations could see the litigation resolved. Contrary to expectations, a voluntary appointment of Mr Carello as administrator of Fitzroy occurred on 9 October 2013.
3 I should also observe that until 6 November 2013 Fitzroy, as the defendant, had been represented by solicitors of record, namely Jackson McDonald. However, on 6 November 2013 Gadens Lawyers filed a notice of change of solicitor pursuant to Rules of the Supreme Court O 8 r 2 notifying that they now acted in lieu of Jackson McDonald for Fitzroy as the defendant.
4 The appointment of an administrator on 9 October 2013 effectively delivered a statutory stay of the action, pursuant to s 440D(1) of the Corporations Act, notwithstanding looming trial dates set for the substantive determination of the proceedings on Thursday, 7 and Friday, 8 November 2013.
5 For the Commissioner to proceed further would now require either the administrator's written consent or the grant of leave by this Court – neither of which has yet been obtained.
6 After his appointment on 9 October 2013 there was correspondence between the Commissioner and the administrator. The Commissioner was effectively seeking the administrator's written consent to this action proceeding to substantive determination on the basis that the action was fully prepared on each side and ready for trial.
7 However, the administrator's consent was not forthcoming. Consequently, on 31 October 2013 the Commissioner filed an interlocutory process seeking leave to proceed to a substantive determination of the action.
8 From a pragmatic perspective, the application for leave to proceed was listed for hearing at 10.30 am on Thursday, 7 November 2013, being the time and date at which a trial would otherwise have proceeded but for the statutory stay delivered under s 440D.
9 It is convenient to mention at this point the precise terms of s 440D of the Corporations Act, which reads:
During the administration of a company, a proceeding in a court against the company in relation to any of its property cannot be begun or proceeded with, except:
(a) with the administrator's written consent; or
(b) with the leave of the Court in accordance with such terms (if any) as the Court imposes.
10 For the purpose of my determination of the Commissioner's application for leave to proceed, I have had the benefit of written submissions filed by the Commissioner in support of that interlocutory process. His application is supported by the affidavit of Ms Carla Kovacevic, sworn 30 October 2013.
11 The administrator has appeared by solicitors and counsel this morning. I have also had the earlier benefit of written submissions from the administrator, effectively opposing the litigation proceeding further, at this time. Those submissions emphasise particularly the recent appointment of the administrator and the limited opportunity for him to be prepared for a substantive hearing. Conceptually, the administrator by counsel also drew my attention to the fact that the action in this court, properly understood, essentially bore the character of an enforcement process against Fitzroy. In that context, albeit accepting that this was an application properly brought under s 440D for leave to proceed, the special circumstances applicable to allowing an enforcement process in relation to the property of a company under s 440F were emphasised from a policy perspective particularly the high degree of restraint a court ought to exhibit as regards a grant of leave in an enforcement situation. Section 440F relevantly provides:
During the administration of a company, no enforcement process in relation to the property of the company can be begun or proceeded with except:
(a) with the leave of the court; and
(b) in accordance with such terms (if any) as the court imposes.
12 Evaluating the Commissioner's application for leave it is necessary, in the unique presenting circumstances of the present application, to descend more deeply than usual into the substantive potential merits of the underlying action. The action is founded upon a judgment obtained on 10 September 2012 in the Federal Court (West Australian District Registry) proceedings WAD 140 of 2012 by the Commissioner against Fitzroy. On the materials before me, that judgment has not been appealed. Nor has it been satisfied.
13 Background to this unsatisfied judgment favouring the Commissioner in the amount of $1,803,000 (plus interest and costs), is ascertainable from the affidavit materials before me on this application. The Federal Court proceedings were commenced in reference to an asserted tax liability of a Mr John Kizon. In seeking to recover the amount of an asserted tax debt due by Mr Kizon, the Commissioner had sought to attach and thereby take the benefit of an asset of Mr Kizon. The asset in question was a loan recorded in the financial records of the FA Trust as being due Mr Kizon. The Commissioner sought, in effect, to exercise a statutory power to obtain the benefit of that debt owed to Mr Kizon by the FA Trust under statutory garnishee proceedings. The Commissioner's garnishee notice had been directed to Fitzroy as trustee of the FA Trust.
14 Fitzroy failed to respond to the Commissioner's garnishee notice in relation to the FA Trust debt due to Mr Kizon.
15 Consequently, the Commissioner commenced proceedings against Fitzroy in the Federal Court to compel compliance with his garnishee notice in relation to the debt shown as being due to Mr Kizon by the FA Trust.
16 On the materials before me it would appear that there was a failure to file any defence in the Commissioner's Federal Court action brought against Fitzroy.
17 On 10 December 2012 default judgment was obtained by the Commissioner in accordance with principles as explained in Commissioner of Taxation v Barnes Development Pty Ltd [2009] FCA 830. In accord with principles underlying that decision, Gilmour J ordered default judgment against Fitzroy in respect of the amount of the debt recorded as due by the FA Trust to Mr Kizon, together with interest and costs.
18 Notwithstanding even that default judgment, Fitzroy still took no steps to satisfy or meet what was now its direct obligation via the default Federal Court judgment in respect of the Commissioner. Nor was there any appeal against the default judgment, which stands unmet.
19 This action (CIV 3073 of 2012) was commenced by the Commissioner in this Court on 21 December 2012. It has at all times been directed towards realising the satisfaction of the (default) judgment obtained against Fitzroy by the Commissioner on 10 December 2012 in the Federal Court.
20 The nature of the proceedings in this court are, therefore, of a somewhat limited unique character. I agree that it is not inappropriate, as counsel for the administrator contended, to recognise an underlying enforcement character of the present proceedings.
21 On his application for leave to proceed as sought by the Commissioner, I heard this morning the submissions of senior counsel for the plaintiff and as well counsel for the administrator opposing the grant of leave to proceed at this time.
22 On behalf of the Commissioner, Mr Martindale SC essentially contends that a last minute voluntary appointment of an administrator (in circumstances of asserted insolvency by Fitzroy) must not be allowed to frustrate the Commissioner's endeavours to conclude a long saga by trial which has been set for hearing in this court for some time.
23 The Commissioner then contends that the declaratory relief which is sought as regards the Commissioner as a creditor being subrogated to the trustee's (Fitzroy's) right of indemnity against trust assets of the FA Trust, is entirely orthodox.
24 Whilst it may not have been directly apparent from the written materials received to date, Mr Martindale SC by his address made it plain that the Commissioner, in seeking to be subrogated to the trustee's rights of indemnity, did not seek an elevated recognition as a judgment creditor - in terms of his seeking a priority over Fitzroy's other legitimate unsecured creditors.
25 In that respect, some issues of disputed fact do arise in terms of the asserted creditor status accorded towards other entities, and particularly to a corporate entity which appears to be associated with Mr Kizon, namely All Mediation Pty Ltd (in the amount of $3,394,620). (The position of that asserted creditor may, however, for the moment be put to one side.)
26 The key point then is that the Commissioner made it plain, at least this morning, he does not seek a position of priority as against other legitimate unsecured creditors of the FA Trust.
27 Otherwise, the subrogation to the rights of the trustee declaration which the Commissioner has sought does not, as I ultimately understood the expressed position of the administrator through counsel, present as controversial.
28 There is a significant body of case authority supporting a creditor's right of subrogation to the position of the trustee - commencing with observations in Octavo Investments v Knight [1979] HCA 61; (1979) 144 CLR 360, 367 in the High Court of Australia, observations of Owen J (as he then was) as a member of the Full Court in Custom Credit Corporation v Ravi Nominees Pty Ltd (1992) 8 WAR 42, 53 and more recently observations by McLure P in Yara Australia Pty Ltd v Oswal[No 2] [2013] WASCA 187 [60] where, having referred to Octavo v Knight at (367) her Honour expressly acknowledged the principle that creditors of a trustee are entitled to be subrogated to the trustee's right of indemnity against trust assets.
29 The Commissioner's submissions also referred me to a recent decision of the New South Wales Court of Appeal in Agusta Pty Ltd v Provident Capital [2012] NSWCA 26, by reference to the observations of Barrett JA, particularly as regards subrogation rights of creditors against a trustee's right of indemnity at [70]. Those observations culminated at [75] where his Honour detailed circumstances where a judgment creditor is a sole creditor seeking this type of subrogation relief.
30 As I indicated, consideration of the Commissioner's application for leave to proceed has uniquely required a greater than usual canvassing of the underlying merits of the creditor subrogation relief as sought by the Commissioner against the trustee's right of indemnity. In the process, Mr Martindale SC indicated to me that the Commissioner would now be content to obtain leave to proceed to obtain merely declaratory relief as to the Commissioner's position as a general unsecured creditor. The Commissioner was then content to otherwise stand over any issues arising concerning enforcement repercussions arising out of the declaration. That stance as articulated appeared to provide some measure of forensic comfort to counsel for the administrator.
31 A second point of clarification provided by the Commissioner during argument was that as against legitimate unsecured creditors the Commissioner sought no priority or advantage for himself in respect of the judgment debt against Fitzroy in seeking declaratory relief confirming its entitlement (along with other legitimate creditors) to subrogation against the trustee's rights of indemnity against trust assets.
32 In the aftermath of those clarifications from the Commissioner, counsel for the administrator indicated that it was possible the administrator, subject to instructions and subject to discussion between counsel concerning the precise terms of declaratory relief sought, may now be amenable to relaxing his prior opposition to a grant of leave to proceed on this basis.
33 The ensuing luncheon interval culminated in the formulation as between counsel of the terms of the proposed declaration to be sought by the Commissioner - which counsel for the administrator said he was content with, save for a minor clarification over one word (which was later uncontroversially replaced). In the end then, as regards terms of an essentially agreed form of words concerning a declaration as is now sought by the Commissioner, the administrator by counsel, did not maintain any further opposition to leave being sought - insofar as the Commissioner pressed today to proceed to obtain that declaratory relief.
34 Presently, I am only concerned with whether there should be a grant of leave pursuant to s 440D favouring the Commissioner to seek what is now the uncontroversially formulated declaratory relief (in principle) as regards the Commissioner's entitlement (along with other legitimate unsecured creditors), to be subrogated to the right of indemnity of Fitzroy against the assets of the FA Trust. Counsel for the administrator effectively described the proposal as a 'win-win' situation.
35 In the end then, it falls to me to evaluate as a matter of discretion whether it is appropriate to grant leave in order for the Commissioner to pursue the declaratory relief as is now indicated and pressed for.
36 In the circumstances of somewhat unique events and facts, my view is that a grant of leave to the Commissioner to pursue the foreshadowed declaration is sensible, cost effective, and appropriate.
37 That outcome will also cater for a looming contingency of a second meeting of creditors of Fitzroy which is currently convened to occur on Wednesday, 13 November 2013. One of the matters to be discussed at that second creditors' meeting concerns a potential for a deed of company arrangement (DOCA) to be considered by all creditors, including by the Commissioner.
38 The circumstances present what I assess as a somewhat unusual case. First, I have necessarily had to evaluate the underlying merits of the facts and legal principles in a substantive trial, in order to reach my evaluation about the appropriateness of granting leave to proceed. The exercise has effectively persuaded me, at the end of the day, there is minimal factual disputation between the parties. Likewise, there appears to be minimal contention over what look to be well settled legal principles concerning the position of an unsecured creditor of a trustee as regards the creditor being subrogated to the trustee's right of indemnity against trust assets. The underlying principles of law seem to be well established and largely uncontroversial.
39 A potential area of disputation as between the Commissioner and the administrator may arise, it would mainly seem, in the arena of possible pragmatic concerns relating to implementing any access to the subrogated right of indemnity by the Commissioner directly, or via some other entity such as a receiver and manager appointed by the Court, at a later time.
40 A looming second meeting of creditors raises a prospect of a deed of company arrangement under which the Commissioner may potentially receive a return of 100 cents in the dollar. This contingency has a capacity to proceed and work itself out under the proposal for leave now under discussion.
41 In unique circumstances, I am persuaded it is appropriate to grant leave to the Commissioner to pursue his revised and now essentially uncontroversial declaratory relief. I assess that course to fall within the parameters of the Commissioner's originating summons in terms of the relief sought from this court.
42 I am also satisfied, from a pragmatic perspective, that granting of liberty to apply to the Commissioner and to the administrator within my CMC list in the aftermath of any declaration, caters for any subsequently arising possible dispute over enforcement or implementation of the terms of a declaration as now sought by the Commissioner if that declaration is made, or if its implementation becomes controversial.
43 There is always potential for indeterminate factors to emerge, including perhaps the identification of other creditors and the extent of their rights. Such contingencies would also be catered for under a general liberty to apply, if necessary, to address such matters. On the other hand, such matters may not arise, in which case declaratory relief, if obtained, may be enough without need to incur further expense.
44 Accordingly, I do grant leave to the Commissioner to proceed today with the proposed trial for the Commissioner to seek by way of revised declaratory relief in terms which have been handed to me today and which now loom at least from the perspective of the administrator as uncontroversial. This is in a context of the Commissioner and the administrator also being granted liberty to apply, if necessary, regarding matters arising in the future concerning the implementation of such declaratory relief if issued.
Commissioner's substantive application for declaratory relief
45 In light of the grant of leave to proceed now obtained by the Commissioner, he has moved by senior counsel to tender a series of affidavit materials to support the declaratory relief as foreshadowed and which, from the administrator's perspective, now emerges as uncontroversial. The declaration as sought by the Commissioner is in the terms the Court declare:
All persons who are creditors of the defendant, as trustee of the FA Trust, including the plaintiff [ie, the Commissioner] in respect of his judgment debt of $1,800,300 plus interest and costs are entitled to be subrogated to the defendant's right of indemnity from the assets of the FA Trust.
46 The Commissioner has now proceeded with his substantive action, effectively ex parte. Courts are always cautious about granting declaratory relief, particularly in circumstances where there is no effective contradictor. In recognition of that caution the Commissioner has now tendered substantial affidavit evidence to prove the case in support of the relief sought. I have earlier and today undertaken a thorough scrutiny of the underlying affidavit materials relied upon.
47 From an evidentiary perspective, the Commissioner tendered a number of affidavits. In particular, he relies upon the comprehensive affidavit of Aris Zafiriou sworn 2 May 2013, which is exhibit 1. Mr Zafiriou's affidavit contained tax return information in respect of the FA Trust of which Fitzroy, the defendant, is trustee. The trust deed indicating the basis upon which Fitzroy acts as trustee is appended to Mr Zafiriou's affidavit: see attachment AZ32, being a deed of settlement for the trust dated 1 July 2000.
48 Mr Zafiriou's affidavit contains his explanation of the underlying background which led to the Federal Court action. The underlying garnishee action concerning a debt recorded as owed to Mr John Kizon by the FA Trust, is also explained. Financial statements for the FA Trust are contained within Mr Zafiriou's affidavit and are conveniently summarised by a table A to the Commissioner's statement of facts, issues and contentions. Table A has been prepared by reference to the tax returns submitted from time to time on behalf of the FA Trust. There is some distinction between the financial information found within financial statements for the trust within Mr Zafiriou's affidavit and in the tax returns.
49 More significant now than the garnishee proceedings against Mr Kizon first advanced by the Commissioner is the unsatisfied default judgment obtained in the Federal Court action against Fitzroy, on 10 December 2012 under the orders of Gilmour J. I refer in that respect to AZ10, page 74 of Mr Zafiriou's affidavit.
50 It appears that there was failure to comply with an order of the Federal Court of 29 August 2012, in that Fitzroy did not file a defence in that action by 26 September 2012. Default judgment was entered for the Commissioner against Fitzroy as trustee of the FA Trust. There appears to be a typographical error in the judgment document, the obviously intended reference being to $1,803,000, rather than to how that amount currently presents numerically. The Commissioner under his judgment is also entitled to interest under the Federal Court Act (s 51A) and to his costs of that application.
51 The Commissioner's judgment obtained in the Federal Court on 10 December 2012 against Fitzroy has not been met. Fitzroy, as trustee, would, in the ordinary course, hold a right of indemnity against trust assets of the FA Trust in respect of the judgment obtained against it in the Federal Court. Notwithstanding that right, Fitzroy does not appear to have taken any steps as trustee to call upon or utilise its right of indemnity against the assets of the FA Trust - either by way of seeking reimbursement or by exoneration - in order to meet its otherwise now exposed direct liability to the Commissioner.
52 The evidence before me is that the Commissioner's judgment against Fitzroy remains intact, unsatisfied and, more significantly even, wholly unchallenged by any appeal lodged in the Federal Court against that judgment.
53 As explained, this has all led to the commencement in this court of what are effectively enforcement proceedings seeking to have the Commissioner as a judgment creditor but otherwise as an unsecured creditor of Fitzroy, become subrogated to the rights of Fitzroy as trustee against the assets of the FA Trust.
54 There is nothing particularly novel about an unsecured creditor seeking to become subrogated to the position of a trustee's right of indemnity against trust assets. Earlier in these reasons I identified some case authority supporting that uncontentious proposition: see the observations of Barrett JA in Agusta Pty Ltd v Provident Capital [2012] NSWCA 26 [70] – [75]. I note Barrett JA's reasons were concurred in by Campbell JA, who also agreed with the supplementary reasons of Sackville AJA at [95].
55 Materials before me included not only Mr Zafiriou's affidavit but also a deed of variation to the FA Trust of the 29th day of June 2012, which became exhibit 2. The Commissioner also relied upon an affidavit filed on behalf of the defendant at an earlier time when represented by its prior solicitors. The affidavit in question was that of Mr Joseph Michael Rapattoni, an accountant who had prepared the financial statements and tax returns for Fitzroy over many years. His affidavit became exhibit 3. Effectively, it attaches financial statements for the trust for the financial year ending 30 June 2012. Attachment JMR5 is a general ledger report for the six months ended 31 December 2012. Mr Martindale SC took me through the recent financial information contained in Mr Zafiriou's affidavit primarily for 2012. This is all helpfully summarised, as I indicated, in table A to the statement of facts, issues and contentions filed by the Commissioner.
56 I need not descend into a numerical analysis of what presents as a somewhat interesting picture in terms of the income earned by the trust in the period 2001 to 2012 measured against its various assets and liabilities – which have fluctuated over time. It is only necessary to canvass the in principle relief now sought under the terms of the declaration by the Commissioner at present. Undoubtedly, the Commissioner is an unsatisfied judgment creditor of Fitzroy, albeit unsecured. The declaration that is now sought as regards an entitlement as a creditor to be subrogated to the trustee's right of indemnity against trust assets in respect of the Commissioner's unmet judgment debt, is essentially orthodox.
57 In my view, a proper basis for grant of the declaration as currently formulated is now proved. That course is also appropriate. Manifestly, the Commissioner is beneficiary of a judgment in its favour obtained in the Federal Court on 10 December 2012, which remains unsatisfied. Moreover, Fitzroy, as the judgment debtor, has, on the evidence, taken no step, it would appear, towards either meeting its judgment obligations to the Commissioner directly, or by seeking for itself to exercise its rights of subrogation against trust assets through the offering or charging of trust assets for sale, or anything of the like.
58 The stance of the Commissioner in seeking a declaration for him to advance to proceed if necessary against trust assets of the FA Trust presents to me as understandable and orthodox, in the prevailing circumstances.
59 One slight wrinkle that arose conceptually to this course involved a future concern over the possible positions of other asserted creditors of the trust. However, it has been made clear today that in seeking the revised declaratory relief as now framed, that the Commissioner does not seek any position of advancement or priority over any other legitimate creditors of the FA Trust.
60 Therefore, orthodox equitable principles under which creditors may be subrogated to a trustee's right of indemnity against trust assets have been, in my view, properly and appropriately invoked by the Commissioner in this action.
61 Accordingly, on the basis of the evidence, albeit effectively ex parte, I have now been satisfied to the requisite degree that it is appropriate the declaratory relief in the terms referred to issue in those terms.
62 I grant liberty to all parties, including the administrator, to approach the court regarding any issues of controversy concerning future steps necessary or desired to be implemented towards a practical enforcement of this declaration in the future.
63 I have noted a pending second meeting of creditors fixed for Wednesday, 13 November 2013. That meeting has been convened by the administrator in accordance with his statutory obligations. I also note a DOCA proposal foreshadowed to be considered at that second creditors' meeting. Where those matters go are essentially for another day.
64 There will be liberty to apply to all parties and to the administrator to approach the Court as regards future enforcement issues, if any, surrounding or concerning a declaration which will now issue.
65 As against Fitzroy, the Commissioner should have his total costs of both his successful application for leave and his ensuing obtaining of declaratory relief.
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