Dean-Willcocks re Venwood Trading Pty Ltd v Commissioner of Taxation

[2006] NSWSC 676

CITATION:	Dean-Willcocks re Venwood Trading Pty Ltd v Commissioner of Taxation [2006] NSWSC 676
HEARING DATE(S):	20/06/06
JUDGMENT DATE :	4 July 2006
JURISDICTION:	Equity Division Corporations List
JUDGMENT OF:	Barrett J
DECISION:	Extension of time to file reply
CATCHWORDS:	CORPORATIONS - winding up - alleged insolvent transactions - recovery proceedings - pleading in response to defence of lack of reasonable grounds to suspect insolvency - whether knowledge of circumstances of associated company may be pleaded - whether estoppel may arise in relation to result of proceedings involving associated company
LEGISLATION CITED:	Civil Procedure Act 2005, s.14 Corporations Act 2001 (Cth), ss.588FC, 588FE(2), 588FF, 588FG(2), Part 5.7B, Div 2 Income Tax Assessment Act 1936 (Cth), s.16(3) Uniform Civil Procedure Rules 2005, rules 1.12, 14.4(1), 21.214.4(3),
CASES CITED:	Cussen v Commissioner of Taxation (2003) 47 ACSR 107 Cussen v Commissioner of Taxation (2004) 51 ACSR 530 Dean-Willcocks v Commissioner of Taxation (2004) 51 ACSR 353 General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125 Javorsky (as liquidator of PLM Formwork Pty Ltd) v Commissioner of Taxation (2005) 216 ALR 619 Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589 Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266 Smith v Deputy Commissioner of Taxation (1997) 75 FCR 339 Sutherland v Eurolinx Pty Ltd (2001) 37 ACSR 477 Tolcher v National Australia Bank Ltd (2003) 174 FLR 251
PARTIES:	Ronald John Dean-Willcocks, Nicholas Craig Malanos and Ian James Purchas (in their capacity as liquidators of Venwood Trading Pty Limited) - First Plaintiffs Venwood Trading Pty Limited - Second Plaintiff Commissioner of Taxation - Defendant
FILE NUMBER(S):	SC 6513/04
COUNSEL:	Mr J.M. White - Plaintiffs Ms S.M. Foda - Defendant
SOLICITORS:	Kemp Strang - Plaintiffs The ATO General Counsel - Defendant

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
CORPORATIONS LIST

BARRETT J

TUESDAY, 4 JULY 2006

6513/04 RONALD JOHN DEAN-WILLCOCKS & ANOR (AS LIQUIDATORS OF VENWOOD TRADING PTY LTD) v COMMISSIONER OF TAXATION

JUDGMENT

1 I have before me what is, in an immediate sense, a procedural application for extension of time. But it also raises questions about matters that may be pleaded and pursued in cases in which liquidators seek recoveries under Division 2 of Part 5.7B of the Corporations Act 2001 (Cth). Before describing the application, I should refer to the background.

2 Mr Dean-Willcocks and Mr Malanos (“the liquidators”) are the liquidators of Venwood Trading Pty limited (“Venwood”). They were appointed administrators on 10 March 2004 and became liquidators on 6 April 2004. They claim, as against the Deputy Commissioner of Taxation (“Commissioner”), an order that the Commissioner pay to them a sum of $173,788.00, together with interest and costs. Their case is, in essence, that payments in that aggregate amount made by Venwood to the Commissioner within the relevant relation back period (commencing 10 March 2004) were unfair preferences made at a time when Venwood was insolvent and hence were “insolvent transactions” (s.588FC). Furthermore, it is said, they were “voidable transactions” under s.588FE(2), with the result that the court may (and should make, under s.588FF, an order which is essentially an order directing the Commissioner to pay the relevant sum, with interest, to Venwood.

3 On 30 March 2005, the Commissioner filed a defence. It is relevant to quote paragraphs 8 to 13 of the defence:

“8. At the time the Defendant became a party to the transaction, it had no reasonable grounds for suspecting that Venwood was insolvent.
9. At the time the Defendant became a party to the transaction, it had no reasonable grounds for suspecting that Venwood would become insolvent because of, or because of matters including entering into the transaction.
10. At the time the Defendant became a party to the transaction, it had no reasonable grounds for suspecting that Venwood would become insolvent because of, or because of matters including the Defendant doing an act, or making an omission, for the purpose of giving effect to the transaction.
11. At the time the Defendant became a party to the transaction, a reasonable person in the Defendant’s circumstances would have had no such grounds for suspecting that Venwood was insolvent.
12. At the time the Defendant became such a party to the transaction, a reasonable person in the Defendant’s circumstances would have had no such grounds for suspecting that Venwood would become insolvent because of, or because of matters including entering into the transaction.
13. At the time the Defendant became such a party to the transaction, a reasonable person in the Defendant’s circumstances would have had no such grounds for suspecting that Venwood would become insolvent because of, or because of matters including the Defendant doing an act, or making an omission, for the purpose of giving effect to the transaction.”

4 The Commissioner does not seek to raise by way of defence the question of solvency at the relevant times. What the Commissioner does seek to do is to rely on the grounds of defence provided by both subparagraph (i) and subparagraph (ii) of s.588FG(2)(b). Section 588FG(2) is in these terms:

“(2) A court is not to make under section 588FF an order materially prejudicing a right or interest of a person if the transaction is not an unfair loan to the company, or an unreasonable director-related transaction of the company, and it is proved that:
(a) the person became a party to the transaction in good faith; and
(b) at the time when the person became such a party:
(i) the person had no reasonable grounds for suspecting that the company was insolvent at that time or would become insolvent as mentioned in paragraph 588FC(b); and
(ii) a reasonable person in the person’s circumstances would have had no such grounds for so suspecting; and
(c) the person has provided valuable consideration under the transaction or has changed his, her or its position in reliance on the transaction.”

5 The liquidators now wish to file a reply. By that reply, they seek to take issue with the propositions in the quoted paragraphs of the defence by saying, in effect, that, at the material time, the Commissioner had reasonable grounds for suspecting that Venwood was insolvent or likely to become insolvent (s.588FG(2)(b)(i)) or that a reasonable person in the Commissioner’s circumstances would have had grounds for so suspecting (s.588FG(2)(b)(ii)). The proposed reply pleads, in essence, that

(a) Mrs Power was at material times the sole director of Venwood;
(b) her husband, Mr Power, was at material times the sole director of a different company, Melwood Trading Pty Limited (“Melwood”);

(c) the two companies had the same registered office;

(d) the administration of both companies was conducted from the same address;

(e) the two companies are “related entities” for the purposes of the Corporations Act;

(f) Melwood was the trustee of the Melwood Trading Trust;

(g) the Commissioner was a creditor of each of Melwood and Venwood;
(h) the Commissioner knew or ought to have known the matters in (a) to (g) above;
(i) the present plaintiffs (liquidators of Venwood) were appointed administrators of Melwood on 10 March 2004 and became liquidators on 6 April 2004) (in other words, precisely the same timing sequence as for Venwood);
(j) in the period 10 September 2003 to 10 March 2004, Melwood made specified payments to the Commissioner;
(k) the liquidators, as liquidators of Melwood, sought recovery of the Melwood payments in other proceedings (which I shall call “the Melwood proceedings”);
(l) in the Melwood proceedings, judgment was, by consent and without admissions, entered in favour of the liquidators of Melwood on 10 February 2005;
(m) Venwood owed Melwood some $544,000 at 10 March 2004.

6 The contention the liquidators would wish to advance on the basis of this pleading is threefold: first, that, given the alleged connections between Venwood and Melwood, one should infer that the circumstances pertaining to Venwood were the same as or similar to those pertaining to Melwood; second, that, by consenting to judgment in the Melwood proceedings, the Commissioner must be regarded as bound to the conclusion that Melwood was insolvent during the period 10 September 2003 to 10 March 2004; and, third, that these matters are properly put in opposition to the Commissioner’s contentions in the present proceedings advanced by means of paragraphs 8 to 13 of the defence (set out at paragraph [3] above), in that those matters are capable of having a bearing on the question whether, as the Commissioner alleges, he had no reasonable grounds for suspecting any of the relevant things concerning the state of Venwood’s solvency and a reasonable person in his circumstances would not have had any such grounds.

7 At a technical level, the application before me is an application for an extension of time under rule 1.12 of the Uniform Civil Procedure Rules 2005. Rule 14.4(1) of the rules permits a plaintiff in proceedings in this court to file a reply to a defence. Under rule 14.4(3), however, the time for filing a reply expires 14 days after service of the defence on the plaintiff, which deadline is, in this case, long past. Under rule 1.12, the court may extend any time fixed by the rules, even if it has already expired.

8 The liquidators approached the application on the footing that the question of appropriateness of an extension of time for filing a reply should, in this particular context, be approached by applying the principle generally applied in considering strike-out motions and applications for leave to amend, expressed as follows by Barwick CJ in General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125 at p.129:

“[T]he plaintiff ought not to be denied access to the customary tribunal which deals with actions of the kind he brings, unless his lack of a cause of action--if that be the ground on which the court is invited, as in this case, to exercise its powers of summary dismissal--is clearly demonstrated. The test to be applied has been variously expressed; ‘so obviously untenable that it cannot possibly succeed’; ‘manifestly groundless’; ‘so manifestly faulty that it does not admit of argument’; ‘discloses a case which the Court is satisfied cannot succeed’; ‘under no possibility can there be a good cause of action’; ‘be manifest that to allow them’ (the pleadings) ‘to stand would involve useless expense’.”

9 The Commissioner did not argue that such an approach to the application for an extension of time was unreasonable or inappropriate; or that the Commissioner would suffer any prejudice if the application were approached on that footing. I proceed accordingly.

10 The liquidators say that the propositions they seek to advance (to the general effect that the state of the Commissioner’s suspicion about Venwood and the state of the suspicion of a hypothetical person in the Commissioner’s position should have been conditioned by matters of which the Commissioner was aware in relation to Melwood and matters which the Commissioner acknowledged and accepted in relation to Melwood) are plain and clearly arguable. Mr White of counsel emphasised, on the liquidators’ behalf, that the defence of lack of reasonable grounds for suspicion, whether under subparagraph (i) or subparagraph (ii) of s.588FG(2)(b), requires consideration of the whole of the factual context as it existed at the relevant time. He pointed to observations to that effect by Santow J in Sutherland v Eurolinx Pty Ltd (2001) 37 ACSR 477 and Mansfield J in Smith v Deputy Commissioner of Taxation (1997) 75 FCR 339. And given the nature of “suspicion” as explained in, for example, Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266, as a “positive feeling of apprehension or mistrust”, a wide-ranging inquiry may be called for.

11 The way in which the total context is to be examined is prescribed by the section. As the Court of Appeal confirmed in Cussen v Commissioner of Taxation (2004) 51 ACSR 530, subparagraph (i) of s.588FG(2)(b) looks to the actual content of the particular defendant’s mind and involves a subjective inquiry, while subparagraph (ii) imports a “reasonable business man” test as described by Palmer J in that case at first instance (Cussen v Commissioner of Taxation (2003) 47 ACSR 107 at [64]):

“Mr Cotman's submission is that, because of its internal policy on collection of tax debts, the ATO is in a special position which sets it apart from other creditors for the purpose of a defence under s 588FG(2)(b)(ii). I do not think that this submission is supported by the authorities. As has been emphasised by Austin J in Dean-Willcocks v Commonwealth Bank of Australia , (2003) 45 ACSR 564 at 572, [33]–[35], the objective test imposed by s 588FG(2)(b)(ii) does not require an examination whether the particular creditor, acting reasonably, would have had reasonable grounds for suspecting insolvency, with the consequence that if the creditor happens to be a bank (or a tax collecting authority) one asks whether a reasonable bank (or a reasonable tax collecting authority) would reasonably have had such a suspicion. Rather, whether or not the creditor would have reasonably had a suspicion is determined according to the presumed perception of ‘the ordinary person on the Bondi bus’: per Young J in Harkness v Commonwealth Bank of Australia Ltd (1993) 32 NSWLR 545 at 545-6; 12 ACSR 165 at 167-9. That pithy phrase simply denotes that an objective test is to be applied and the standard of measurement is that of a hypothetical person who is assumed to have the knowledge and experience of the ‘average business person’, but certainly not the skills and experience of an expert financial analyst or someone with legal training or any other kind of tertiary education: ibid.”

12 With the provisions understood in that way, the liquidators refer to the decision of Young CJ in Eq in Dean-Willcocks v Commissioner of Taxation (2004) 51 ACSR 353. In that case, it was emphasised that it is for the defendant (here, the Commissioner) to establish the negative proposition that he had no reasonable ground to suspect a relevant matter concerning insolvency and that the hypothetical person in his circumstances likewise would have had no reasonable ground to suspect. The defendant will fail in that task if, on the evidence, there is what his Honour called “objective material which a person would find raised a suspicion of insolvency”. That case concerned a so-called “phoenix company” situation – that is, broadly speaking, a situation where the persons controlling a particular company had caused it to dispose of its assets and business to another company also controlled by them in such a way as to make it appear that the business continued uninterruptedly.

13 Young CJ in Eq referred to a number of factors relevant to the “reasonable grounds” inquiry that emerged from the evidence and then said:

“[35] To this Mr Newlinds says one must add the factor that the company was known by the Commissioner’s officers to be a Phoenix Company whose previous incarnation had died owing the ATO about $2.5m.
[36] A Phoenix Company is a term used to describe a company which has a similar name to a failed company trading in the same line of business and with much the same directorate.
[37] Mr McGovern says that whether or not the company was a Phoenix Company is immaterial. I beg to differ: the matter would be of some significance to a business person. However, I would not give the factor as much weight as Mr Newlinds gives it.”

14 It is submitted by the liquidators in the present case that the circumstances of Melwood would likewise be “of some significance to a business person” considering the circumstances of Venwood. I accept that submission. Factual coincidences as between the circumstances and affairs of the two companies may well be of probative value when it comes to the questions of grounds for suspicion now in issue.

15 I should add that counsel devoted some time to the question whether the proposed reply could properly extend to matters concerning the Melwood Trading Trust, it being acknowledged that Melwood was the trustee of that trust. Some of the submissions seemed to proceed on the footing that there is some relevant separateness between Melwood and the Melwood Trading Trust – a view that, in the present context, is no doubt conditioned by the legal fiction under the taxation legislation that a trust is an entity. It is sufficient to say that matters pertaining to Melwood that the liquidators seek to bring forward in the reply cannot be said to be ruled out just because Melwood was acting, in relation to those matters, as a trustee.

16 There was much debate before me as to whether, in the present case, the Commissioner would be estopped from disputing matters going to suspicion of the insolvency of Melwood and, therefore, suspicion of the insolvency of Venwood; and as to the effect, in that respect, of the judgment entered by consent and without admissions in the Melwood proceedings. It was contended on behalf of the Commissioner that, even though the judgment was by consent and without admissions, the liquidators could not re-litigate here anything that had been litigated there. Submissions were made based on res judicata, issue estoppel and Anshun estoppel (Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589).

17 It seems to me that these matters do not raise the kind of clear-cut obstacle to the liquidators that it would be necessary to find in order to justify the course of not allowing them to raise the matters they wish to raise by way of reply. There is no real doubt, I think, that a judgment entered by consent may produce a res judicata or estoppel or render it an abuse of process for the settled controversy to be re-litigated. Whether the circumstance that the judgment was not only by consent but also “without admissions” makes any difference is not something I need decide. I merely observe that it may make some difference.

18 The real point here, it seems to me, is that the kinds of barriers under discussion can operate only between the same parties or their privies. In other words, where there is judgment in proceedings between A and B, only A and B and their respective privies are precluded from re-litigating any aspect of the relevant subject matter.

19 The Commissioner’s submissions on this facet proceed on the footing that, in both the present proceedings and the Melwood proceedings determined by the judgment entered by consent and without admissions, the parties are Mr Dean-Willcocks and Mr Malanos as plaintiffs and the Commissioner as defendant. I do not consider that to be necessarily a correct view of matters. Each of the proceedings – that is, the present proceedings and the now concluded Melwood proceedings – was initiated under s.588FF(1). That section allows an application to be made by “a company’s liquidator”. The effect of s.588FF, viewed in its context, is to permit “a company’s liquidator” to pursue claims which, if successful, yield what Palmer J described in Tolcher v National Australia Bank Ltd (2003) 174 FLR 251 as moneys “recovered in exercise of rights available only to the liquidators”. It may well follow that, in neither the present proceedings nor in the concluded Melwood proceedings, should the plaintiffs properly be seen as Mr Dean-Willcocks and Mr Malanos. In these proceedings, the plaintiffs are the liquidators for the time being of Venwood. In the Melwood proceedings, the plaintiffs were the liquidators for the time being of Melwood. It is by no means clear that, in the respects under consideration, the complexion and incidents of the present proceedings take one form while Mr Dean-Willcocks and Mr Malanos are the liquidators of Venwood but would take a quite different form if they tomorrow retired as the liquidators of Venwood and were replaced by two other persons. In other words, I am by no means satisfied that the coincidence in identity, as individuals, between the liquidators of Venwood and the liquidators of Melwood cause to be erected the barriers upon which the Commissioner seeks to rely.

20 In the present context, it is not necessary for me to come to any finally concluded view on these matters. It is sufficient that I record my conclusion that the supposed barriers to which the Commissioner points are not such as to make untenable, in the General Steel sense, the position the liquidators seek to advance by means of their proposed reply.

21 The plaintiffs will be granted the extension of time necessary to enable them to file that proposed reply.

22 It remains to consider, upon the present motion, certain questions concerning discovery. The plaintiffs’ acceptance that the proposed categories of documents should be amended (paragraph 43 of Mr White’s written submissions in reply), coupled with my decision to allow the plaintiffs to file their reply, may well mean that the parties are now able to agree descriptions of categories. They should attempt to do with a view to producing an agreed form of order, subject, however, to the remaining matter to which I now turn.

23 The Commissioner draws attention to s.16(3) of the Income Tax Assessment Act 1936 (Cth):

“An officer shall not be required to produce in Court any return, assessment or notice of assessment, or to divulge or communicate to any Court any matter or thing coming under his notice in the performance of his duties as an officer, except when it is necessary to do so for the purpose of carrying into effect the provisions of this Act or of any previous law of the Commonwealth relating to Income Tax.”

24 This provision was the subject of detailed consideration by White J in Javorsky (as liquidator of PLM Formwork Pty Ltd) v Commissioner of Taxation (2005) 216 ALR 619. As his Honour observed, s.16(3) has two “limbs”. Both relate to an “officer”. The first is concerned with production to a court by an “officer” of “any return, assessment or notice of assessment”. The second is concerned with communication to a court by an “officer” of “any matter or thing coming under his notice in the performance of his duties as an officer”. The section aims to shield an “officer” from a court-imposed requirement as to production of documents within the first limb and communication of matters and things within the second limb.

25 White J held that production of documents is not dealt with by the first limb alone and that production of a document not within the first limb may be covered by the second limb. His Honour said at [41]:

“A document and the information contained in it are clearly capable of falling within the expression ‘any matter or thing’ in s 16(3). The fact that a narrow class of documents is expressly dealt with does not, in my view, mean that all other classes of documents are impliedly excluded from the wider notion of divulging or communicating any matter or thing.”

26 White J then dealt with the scope of the second limb (at [43] to [45]):

“[43] Unless the contrary intention appears, the word ‘officer’ is used in its defined sense. The contrary intention does not appear in s 16(3). The freedom from being required to disclose matters coming under an officer’s notice in the performance of his duties as an officer is confined by the definition of ‘officer’. Not everything coming to the notice of an employee in the taxation department in the performance of his duties, is exempt from compulsory disclosure. ‘Officer’ in s 16 does not mean a person employed in the taxation department. It refers only to a person who, by reason of his employment or in the course of his employment, may acquire, or has acquired, information respecting the affairs of another person, which was disclosed or obtained under the provisions of the Income Tax Assessment Act . (I leave aside any previous Commonwealth law relating to income tax).

[44] When the definition of ‘officer’ is read into s 16(3), the subsection provides in substance:

A person who, by reason of his employment, or in the course thereof, may acquire or has acquired information respecting the affairs of any person, disclosed or obtained under the provisions of this Act, shall not be required to divulge or communicate to any Court any matter or thing coming under his notice in the performance of his duties as a person who by reason of his employment, or in the course thereof, may acquire or has acquired information respecting the affairs of any person, disclosed or obtained under the provisions of this Act.
[45] By reading the definition of ‘officer’ into s 16(3), it can readily be seen that the freedom from compulsory disclosure is in respect of information that the person has acquired, or may acquire, which has been, or may be, disclosed or obtained under the provisions of the Act. It is not a freedom from disclosure of any information that a taxation officer, using the word in a general rather than the defined sense, may have obtained in the course of his duties, or for the purposes of the Act. Information must have been disclosed or obtained ‘under the provisions of this Act’. That directs attention to the provision of the Income Tax Assessment Act which expressly or impliedly required or authorised the disclosure or the obtaining of the information. ( Glasson v Parkes Rural Distributors Pty Ltd (1984) 155 CLR 234 at 241; Minister for Immigration and Ethnic Affairs v Mayer (1985) 157 CLR 290 at 295-296, 301-302, 307; NEAT Domestic Trading Pty Ltd v AWB Ltd (2003) 77 ALJR 1263; 198 ALR 179 at [54], [55]; Griffith University v Tang [2005] HCA 7 at [78], [89]).”

27 At paragraph [49] of the judgment, White J said that production of a document could be resisted on the basis of the second limb of s.16(3) only if it were shown that discovery of the document would entail disclosure of “information which has been obtained by the Commissioner pursuant to the exercise of authority conferred by any provision of the Act, or disclosed by a taxpayer pursuant to any requirement of the Act”.

28 White J’s analysis is, in my respectful opinion, correct. It would be applied in determining whether any particular document that the liquidators sought to have the Commissioner produce to the court in these proceedings was within the scope of the s.16(3) exclusion.

29 White J also considered, in Javorsky, whether s.16(3) applies in a case of discovery between parties, that is, discovery pursuant to an order made under what is now rule 21.2 of the Uniform Civil Procedure Rules 2005. That question need not be addressed at this stage of the present case, where no such order is yet in place. The policy behind s.16(3) and the clear legislative intention that an officer “shall not be required” to produce to the court documents covered by either limb of the section would obviously be taken into account in framing any order for discovery between parties.

30 The desirable course, at this point, is that the parties have liberty to apply on matters of discovery if discussion between them in the light of these reasons leaves any matter requiring the attention of the court.

31 The orders of the court, at this point, are as follows:

1. Pursuant to rule 1.12 of the Uniform Civil Procedure Rules 2005, extend until 11 July 2006 the time for filing a reply in the form of Exhibit E.
2. Grant liberty for any party to apply on seven days notice on any matter relating to discovery arising in consequence of Order 1.

32 I shall make directions for the filing of written submissions regarding the costs of the motion, should either party wish to seek a costs order.

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