D.C.T. v Lowry
[2006] FMCA 913
•29 June 2006
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| D.C.T. v LOWRY | [2006] FMCA 913 |
| BANKRUPTCY – Creditors petition – whether appropriate to ‘go behind judgment’ – challenge to taxation assessment – no appeal properly filed – withdrawal of application to Administrative Appeals Tribunal – whether assessment of a company relevant – sequestration order. |
| Bankruptcy Act 1966, s.52(2) Income Tax Assessment Act 1936, ss. 169, 169A Taxation Administration Act 1953, ss.14ZZM, 14ZZR |
| Wren v Mahony (1972) 126 CLR 212 Cain v Whyte (1933) 48 CLR 639 Ahern v Deputy Commissioner of Taxation (1987) 76 ALR 137 Adamopoulos v Olympic Airways SA (1990) 95 ALR 525 Re Verna; Ex parte Deputy Commissioner of Taxation(NSW) (1984) 4 FCR 181 Clyne v Deputy Commissioner of Taxation (No.3) (1982) 45 ALR 323 |
| Applicant Creditor: | DEPUTY COMMISSIONER OF TAXATION |
| Respondent Debtor: | MARTIN BERNARD LOWRY |
| File number: | PEG 10 of 2006 |
| Judgment of: | McInnis FM |
| Hearing date: | 15 May 2006 |
| Delivered at: | Melbourne (by video link to Perth) |
| Delivered on: | 29 June 2006 |
REPRESENTATION
| Counsel for the Applicant Creditor: | Mr. K. Tavener |
| Solicitors for the Applicant Creditor: | Australian Taxation Office Legal Services Branch |
| Respondent Debtor: | In person |
ORDERS
A Sequestration Order be made against the estate of Martin Bernard Lowry.
The Applicant Creditor’s costs be taxed in accordance with the Federal Court Rules and paid from the estate of the Respondent Debtor in accordance with the Bankruptcy Act 1966.
The Court notes that the date of the act of Bankruptcy is 20 December 2005.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT PERTH |
PEG 10 of 2006
| DEPUTY COMMISSIONER OF TAXATION |
Applicant Creditor
And
| MARTIN BERNARD LOWRY |
Respondent Debtor
REASONS FOR JUDGMENT
The Deputy Commissioner of Taxation (“the Applicant Creditor”) by a Creditor's Petition filed 11 January 2006 seeks a Sequestration Order against the estate of Martin Bernard Lowry (“the Respondent Debtor”).
The Petitioning Creditor has relied upon the usual Affidavits of Service and Searches together with Proof of Debt, claiming that the Respondent Debtor owes the Applicant Creditor an amount of $87,319.69. The total amount owing arises from a final judgment obtained in the District Court of Western Australia in favour of the Applicant Creditor against the Respondent Debtor on 24 October 2005. The judgment in that Court followed the entry of an appearance and is properly described as a summary judgment for the sum of $89,752.88 together with costs of $734.70. The amount now owing of $87,319.69 is arrived at after deducting credits of $3,167.89.
No issue is taken in the present case concerning the Bankruptcy Notice or Service.
The Petitioning Creditor has relied upon an Outline of Submissions together with Affidavits sworn by Francis James Maloney on 28 February 2006 and 21 March 2006 in addition to the usual Affidavits, Proof of Debt and Searches. Updated Affidavits of Search and Proof of Debt were filed on the day of the hearing with the leave of the Court.
The Respondent Debtor is self-represented and has sought to rely upon Affidavits sworn by him on 16 February 2006 and 2 March 2006. In addition, the self-represented Respondent Debtor filed and served Written Submissions dated 28 March 2006 together with corrections to those Submissions dated 29 March 2006. It is evident from the material relied upon by the Respondent Debtor that he seeks to refer in significant detail to documents relating to Taxation Assessments, both of himself and of a Company of which he was formerly a Director; namely, Vitalia Pty Ltd (“Vitalia”) now in liquidation.
As a preliminary issue, it is noted that the Respondent Debtor had sought to issue a number of Subpoenas in the Court and the Registry had declined to issue those Subpoenas. When the matter came before the Court, I was prepared to further consider the issue of Subpoenas and ruled that the Respondent Debtor should not be granted leave to issue the Subpoenas.
The Subpoenas were addressed to a number of witnesses and it is not necessary to recite the details of each Subpoena, save to note that the Subpoenas appeared to be misconceived. In most instances the Subpoena sought explanations from the person to whom the Subpoena was addressed and required sworn Affidavits to be prepared by the potential witnesses rather than simply require the personal attendance of the witnesses before the Court and/or the production of documents relevant to the dispute.
In one instance, a Subpoena addressed to a Mr. Oren Zohar, a liquidator of Vitalia, sought the production of what is described as an Independent Reconciliation Report for Vitalia and other correspondence or documentation received by the liquidator. I ruled that those documents were not relevant to this Application.
The other Subpoenas and/or parts of the Subpoena addressed to Mr. Oren Zohar, in my view, ought not be issued as they were misconceived and impermissibly required the recipients of those Subpoenas to provide sworn Affidavits and/or explanations in relation to certain issues agitated by the Respondent Debtor. I am satisfied that the Affidavit material otherwise relied upon by the Respondent Debtor, combined with his Written Submissions and Oral Submissions, would provide the Respondent Debtor with an adequate opportunity to raise issues in support of his opposition to the Creditor’s Petition.
The Respondent Debtor relied upon a document entitled "Notice Stating Grounds of Opposition to Application, Interim Application or Petition" filed 17 February 2006. Other similar documents were filed by the Respondent Debtor, though he identified this document as the one to be relied upon in this Application. In that document the following grounds are set out:
“1. The original Income Tax returns for the years ended 30 June 1999, 30 June 2000 and 30 June 2001 inadvertently reported an operating profit from ordinary activities before income tax that was not correct, and The Notice of Assessment used by the Applicant to obtain a Judgment against the Respondent is erroneous and based on a superseded return. The amended returns and amended Notice of Assessment have been deliberately held back within the Applicant's system to obtain an unfair Judgment against the Respondent.
2.The original Income tax returns for the years ended 30 June 1999, 30 June 2000 and 30 June 2001 inadvertently assessed the Respondent for an amount of income tax that was not correct, and The Notice of Assessment used by the Applicant to obtain a Judgment against the Respondent is erroneous and based on a superseded return. The amended returns and amended Notice of Assessment have been deliberately held back within the Applicant's system to obtain an unfair Judgment against the Respondent.
3.The original Income tax returns for the years ended 30 June 1999, 30 June 2000 and 30 June 2001 reported dividends paid to the Respondent as unfranked that was not correct, and The Notice of Assessment used by the Applicant to obtain a Judgment against the Respondent is erroneous and based on a superseded return. The amended returns and amended Notice of Assessment have been deliberately held back within the Applicant's system to obtain an unfair Judgment against the Respondent.”
It was clear during the course of Submissions that essentially the Respondent Debtor sought to go behind the judgment which was the subject of the Bankruptcy Notice and the Petition. It was equally clear that the Respondent Debtor was concerned to challenge the Taxation Assessments which formed the basis of the judgment, not only in relation to his own income but also in relation to the taxable income of Vitalia now in liquidation.
To understand the grounds relied upon by the Respondent Debtor, it is useful to recite the background facts which I accept have been accurately set out in the Submissions relied upon by the Applicant Creditor and may be summarised as follows:
·On 24 October 2005, summary judgment of $90,487.58 (“the judgment”) was obtained against the Respondent Debtor by the Applicant Creditor in the District Court.
·The judgment was based on Notices of Assessment in respect of Income Tax for the financial years 1999, 2000 and 2001 together with general interest charges and costs.
·The Assessment as to the Taxation was made by the Commissioner of Taxation who determined that the Respondent Debtor was liable to pay tax based on returns and statements from the Respondent Debtor pursuant to ss.169 and 169A of the Income Tax Assessment Act 1936 (“the ITAA 1936”).
·The Notices of Assessment were based on the Income Tax Returns lodged by or on behalf of the Respondent Debtor.
·On 10 November 2005, a Bankruptcy Notice was issued against the Respondent Debtor based on the judgment which then remained unsatisfied.
·The Bankruptcy Notice was served on the Respondent Debtor on 29 November 2005. The Respondent Debtor did not comply with the Bankruptcy Notice within 21 days, and accordingly an act of bankruptcy was committed on 20 December 2005.
·The Respondent Debtor's Tax Accountant requested that Assessments of the Respondent Debtor for the years ending 30 June 1999 to 2001 be amended, and did so by letter dated 17 June 2005 addressed to the Applicant Creditor.
·The requests for amendment to the Assessments were disallowed on or about 12 October 2005.
·Objections to the Notices of Assessment of the Respondent Debtor for the years 30 June 1999 to 2001 have not been lodged. No further requests have been submitted for any other amendments of the assessment of the Respondent Debtor's tax.
Based on the Notices of Assessment for the years ending 30 June 1999 to 30 June 2001 a summary judgment was obtained on 24 October 2005.
It is noted that as at the date of the hearing, no valid appeal has been lodged against the summary judgment obtained by the Applicant Creditor on 24 October 2005. It is further noted, however, that the Respondent Debtor had endeavoured to lodge what he describes in his Affidavit as a "letter of appeal with the district court" on "6 December 2005 along with the required fee of $54.50". The Respondent Debtor further states that:
“…this application was returned along with a covering extract from the Government Gazette outlining the formal procedure for such an appeal and returning the cheque.’
In his Affidavit material and in Submissions before this Court, the Respondent Debtor made it clear that he had formed the view that the Notices of Assessment used by the Applicant Creditor for the relevant financial years to obtain judgment against the Respondent Debtor were "excessive and based on corrupt and erroneous information".
Of significant concern to the Respondent Debtor was the Assessment of Tax made in relation to Vitalia. Essentially, the concern arose in relation to payments previously treated as unfranked dividends to the Respondent Debtor that should have been referred to as payments for services rendered, entitling Vitalia to a tax deduction, and further more properly characterising the income of the Respondent Debtor which would have been considerably reduced, though not eliminated.
The Chronology of Events concerning the Income Tax Assessments of Vitalia has been set out in the Affidavit of Francis James Maloney sworn 28 February 2006 where the deponent relevantly states, when referring to Vitalia as "the Company" and the Respondent Debtor as "the Respondent" the following:
“5.From reviewing the Records and from carrying out my duties, I am aware and verily believe that the following events took place in regard to the Company to which the Respondent was a director and shareholder:
(a)the Company or its representative lodged the Company's 1999 and 2000 income tax returns on 16 January 2002 and lodged its 2001 income tax return on 19 June 2003. All of these returns showed payments to the Respondent as 'unfranked dividends'.
(b)on 4 June 2004, the Company then lodged objections to these assessments on the grounds that the payments previously treated as unfranked dividends should have been payments for services rendered and therefore the Company would be entitled to tax deduction.
(c)on 9 November 2004, the Commissioner disallowed the objections by giving notice to the Company’s solicitors in a letter dated 9 November 2004.
(d)on 7 January 2005, Wilson and Atkinson, the Company’s solicitors, lodged an application for review with the AAT in respect of the objection decisions for the Company for the years ended 30 June 1999 to 30 June 2001.
(e)the proceedings in the AAT concerned the taxation liabilities of the Company, and not of the Respondent;
(f)on 14 April 2005, the Company abandoned its ground of objection and sough to lodge amendments.
(g)by letter dated 16 June 2005, the Company’s new tax agent lodged amendment requests in respect of years ended 30 June 1999 to 30 June 2001 for the Company. These amendment requests did not affect the income tax liabilities claimed against the Respondent.
(h)on 1 November 2005, the Commissioner amended the assessments for the years ended 30 June 1999 to 30 June 2001 for the Company in accordance with its requests.
(i)on 18 November 2005, the Company’s solicitors advised the Tribunal that the application for review was withdrawn.
(j)by letter dated 1 December 2005, the Respondent wrote to Deputy President Hotop of the AAT requesting that the matter be “re-activated” as he alleged that the matter had been withdrawn contrary to his instructions.
(k)on 6 December 2005 the Tribunal listed the matter for a Hearing of Reinstatement Application on
12 December 2005.
(l)at the hearing, Vitalia was represented by a solicitor acting on behalf of its liquidator. The Respondent attended the hearing but he was advised by the Tribunal that he could no longer represent Vitalia since it was in liquidation.
(m)the Tribunal adjourned the matter to give the solicitors time to consider the circumstances of the case. A Directions hearing was listed for 20 January 2006.
(n)on 19 January 2006 the solicitor representing the liquidator advised the Tribunal that the client withdraws its application to have the applications reinstated.”
Whilst the Court may readily appreciate the Respondent Debtor's concern in relation to the Tax Assessment of Vitalia and the withdrawal of an Application made by that Company to the Administrative Appeals Tribunal (“the AAT”), it is my view that that concern should not form any or any proper basis upon which this Court should go behind the judgment relied upon by the Applicant Creditor in the Petition. Whilst it may arguably have an impact on the Assessment of Income made of the Respondent Debtor, it does not of itself provide the Court with grounds upon which the debt should not be regarded as prima facie proof of the debt and/or that the judgment should stand.
It does not in my view provide grounds upon which this Court may conclude that there is "other sufficient cause" to convince the Court that a Sequestration Order ought not to be made (see s.52(2) of the Bankruptcy Act 1966 (“the Act”)).
The Applicant Creditor referred the Court to relevant law which provides that pursuant to s.52(2) of the Act, the Respondent Debtor bears the onus of showing that there is "sufficient cause" why a Sequestration Order should not be made (see Wren v Mahony (1972) 126 CLR 212). I further accept that the Petitioning Creditor has a prima facie right, as submitted by the Applicant Creditor, to a Sequestration Order unless the Respondent Debtor establishes special circumstances which would justify the Court departing from its usual practice (see Cain v Whyte (1933) 48 CLR 639).
Reliance was also placed upon the decision in Ahern v Deputy Commissioner of Taxation (1987) 76 ALR 137 (‘Ahern’) where in that case the Court stated as follows at pp. 147-148:
“It is well established that a court exercising bankruptcy jurisdiction has undoubted discretion to go behind a judgment, particularly one obtained by default or compromise or where fraud or collusion is involved and inquire whether the judgment is founded on a real debt: Corney v Brien (1951) 84 CLR 343. Where the judgment is by default the court will go behind the judgment if there is a bona fide allegation that no real debt underlies the judgment: Corney v Brien. Even where the judgment was obtained following a hearing on the merits where both parties appeared, if there are substantial reasons for questioning whether behind the judgment there is in truth and reality a debt due to the petitioning creditor, the court will go behind the judgment and inquire into the consideration for it: Wren v Mahony (1972) 126 CLR 212 per Barwick CJ, with whose reasons Windeyer and Owen JJ agreed; Menzies and Walsh JJ dissenting. Barwick CJ said (at 224):
The judgment is never conclusive in bankruptcy. It does not always represent itself as the relevant debt of the petitioning creditor, even though under the general law, the prior existing debt has merged in a judgment. But the bankruptcy court may accept the judgment as satisfactory proof of the petitioning creditor’s debt. In that sense the court has a discretion. It may or may not so accept the judgment. But it has been made quite clear by the decisions of the past that where reason is shown for questioning whether behind the judgment or as it is said, as the consideration for it, there was in truth and reality a debt due to the petitioning creditor, the court of bankruptcy can no longer accept the judgment as such satisfactory proof. It must then exercise its power, or if you will, its discretion to look at what is behind the judgment: to what is its consideration.
It is also well established that in general a court exercising jurisdiction in bankruptcy should not proceed to sequestrate the estate of a debtor where an appeal is pending against the judgment relied on as the foundation of the bankruptcy proceedings provided that the appeal is based on genuine and arguable grounds: Re Rhodes; Ex parte Heyworth (1884) 14 QBD 49 Bayne v Baillieu (1907) 5 CLR 64 and Re Verma; Ex parte DCT (1985) 4 FCR 181.
These cases rest on the broad principle that before a person can be made bankrupt the court must be satisfied that the debt on which the petitioning creditor relies is due by the debtor and that if any genuine dispute exists as to the liability of the debtor to the petitioning creditor it ought to be investigated before he is made bankrupt. Bankruptcy is not mere inter partes litigation. It involves change of status and has quasi-penal consequences.
In income tax cases an additional consideration to be taken into account is the policy expressed in s 201(1) of the Income Tax Assessment Act 1936 whereby the fact that an appeal is pending shall not in the meantime interfere with or affect the assessment the subject of the appeal or reference; and income tax may be recovered on the assessment as if no appeal were pending. This section is called in aid by the respondent. In one sense proceedings in bankruptcy are proceedings to recover an assessment within the meaning of s 201, but that provision must operate within the general framework of the law of bankruptcy including the provisions of s 52 of the Bankruptcy Act. Section 201 is a relevant matter for the court to consider when exercising its powers on the adjournment of the bankruptcy petition or on considering whether to make a sequestration order, but it is not itself dispositive of the matter. The court’s powers and discretions remain.”
Further reliance was placed upon the Full Court of the Federal Court decision in Adamopoulos v Olympic Airways SA (1990) 95 ALR 525 where the Court after referring to ‘Ahern’ relevantly states as follows at p. 532
“It will, of course, be observed that the principle is stated in terms which acknowledge the existence of exceptions; it operates “in general”. For situations which were held to raise considerations making them fall outside the general rule, see Re Verma; Re Lewin and Glasson; Ex parte Milner (1986) 67 ALR 591.”
It was acknowledged by the Applicant Creditor that if there was an appeal pending in the District Court, then this Court may use its discretion to adjourn proceedings until that appeal had been heard
(see Re Verna; Ex parte Deputy Commissioner of Taxation(NSW) (1984) 4 FCR 181). It was submitted, however, in this case that as there is no appeal pending, any question of an appeal is "hypothetical and does not constitute sufficient reason".
The Applicant Creditor also relied upon ss.14ZZM and 14ZZR of the Taxation Administration Act 1953 (“the TAA 1953”) which it was submitted provide that the fact that a review is pending in relation to a taxation decision (other than a registration‑type sales tax decision) does not in the meantime interfere with, or affect, the decision and any tax, additional tax or other amount may be recovered as if no review were pending.
It is a relevant consideration for the Court to take into account in the exercise of its discretion under s.52(2) of the Act (see Clyne v Deputy Commissioner of Taxation (No.3) (1982) 45 ALR 323).
The Respondent Debtor in this instance, whilst focusing on what I would accept is a genuine concern in relation to the Tax Assessment of Vitalia, which in turn had an adverse impact upon the Respondent Debtor's own Tax Assessment, cannot rely upon that concern to persuade this Court to exercise any discretion it may have to dismiss the Petition pursuant to s.52 of the Act.
It is significant in this case that there is no appeal pending from the District Court judgment, and accordingly the Applicant Creditor is entitled to rely upon that judgment and obtain the benefit of what is described as a "prima facie right to a Sequestration Order". I am not satisfied there is sufficient cause as to why a Sequestration Order should not be made in this instance. There are no objections currently lodged in relation to the Tax Assessments of the Respondent Debtor, and even if objections were lodged, I accept that those objections, if leading to a review of a taxation decision, would not by operation of ss.14ZZM and 14ZZR of the TAA 1953 prevent recovery of the tax pursuant to the decision sought to be challenged.
In any event, there is no current challenge to the assessment. An amendment was sought and refused in relation to the assessments and no further objections lodged. Significantly, as I have indicated, although the Respondent Debtor may have forwarded to the District Court a letter with an appropriate fee, that material was returned to the Respondent Debtor and as at the date of hearing, no appeal has been filed and nor is there any appeal pending.
In those circumstances, applying the relevant authorities to which reference was made by the Applicant Creditor, I can see no basis upon which the Court can exercise its discretion to dismiss the Petition or indeed adjourn the Petition. There are simply no pending proceedings which would justify adjournment and as I have indicated, no other sufficient cause which would lead the Court to refuse to make a Sequestration Order.
I am otherwise satisfied that the requirements of s.52 of the Act have been complied with by the Applicant Creditor and there is no other grounds advanced for and on behalf of the Respondent Debtor which would justify refusal to make a Sequestration Order.
Accordingly, it follows that a Sequestration Order should be made in the usual form against the Respondent Debtor, and the Court notes that the date of the act of bankruptcy is 20 December 2005.
I certify that the preceding thirty-one (31) paragraphs are a true copy of the reasons for judgment of McInnis FM
Deputy Associate:
Date: 29 June 2006
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