Deputy Commissioner of Taxation v Haritos
[2013] VSC 12
•5 February 2013
| Do Not Send for Reporting | ||
| IN THE SUPREME COURT OF VICTORIA | Not Restricted | |
AT MELBOURNE
COMMERCIAL & EQUITY DIVISION
PRACTICE COURT
No. 7062 of 2009
| DEPUTY COMMISSIONER OF TAXATION | Plaintiff |
| v | |
| GEORGE HARITOS & ORS | Defendants |
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JUDGE: | FERGUSON J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 15 January 2013 | |
DATE OF JUDGMENT: | 5 February 2013 | |
CASE MAY BE CITED AS: | Deputy Commissioner of Taxation v Haritos & Ors | |
MEDIUM NEUTRAL CITATION: | [2013] VSC 12 | |
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PRACTICE AND PROCEDURE – Freezing order – Variation of freezing order to extend to all assets of third party where existing orders relate to specific property – Risk of dissipation of assets – Ancillary orders.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Ms M. Schilling | Australian Government Solicitor |
| For the Defendants | Dr B. Orow | Stephen Peter Byrne |
HER HONOUR:
Introduction
On 10 June 2009, Mandie J made a number of freezing orders on application by the Deputy Commissioner of Taxation (“DCT”) against AES Services (Aust) Pty Ltd and its two directors, George Haritos and Alex Kyritsis, and third parties who were companies and individuals associated with AES and the directors. Two of those third parties were Jinacan Pty Ltd and Bega Nominees Pty Ltd and properties registered in their names were subject to the freezing orders. The freezing orders were subsequently extended and varied on a number of occasions by other judges of this Court. The DCT seeks to have the orders further varied so that the freezing orders would extend to all of Bega and Jinacan’s assets. In addition, the DCT seeks ancillary orders relating to the filing of affidavits concerning the relevant assets, liability position and other financial information concerning Jinacan and Bega against whom the freezing orders were made. Finally, the DCT seeks an order requiring Mr Haritos and Mr Kyritsis to make affidavits regarding their compliance with undertakings that they gave to the Court.
For the reasons which follow, I have determined that orders should be made prohibiting Jinacan and Bega from dealing with all their assets except in relation to dealings related to normal expenses associated with their operations where the dealing is with an arms length third party. In my opinion it is also appropriate for ancillary orders to be made in relation to affidavits concerning the financial position of Jinacan and Bega. However, as will be seen from what follows, I am not persuaded that orders should be made for the filing of affidavits by Mr Haritos and Mr Kyritsis concerning their compliance with their undertakings.
Background
Much of the background to the current application is set out in the reasons for judgment of J. Forrest J in Deputy Commissioner of Taxation v AES Services (Aust) Pty Ltd.[1] His Honour determined that, subject to some variations, the freezing orders made by Mandie J should be continued until further order. His Honour’s reasons conveniently set out the factual background[2] and I adopt his Honour’s description. In summary, at the time that the original freezing orders were made, the DCT claimed that AES and its directors had failed to disclose over $30 million in assessable income in the financial years ending June 2005 to 2008. The DCT contended that AES and the directors had alienated funds or assets to third parties and that, absent a freezing order, there was a real likelihood that the DCT would be unable to recover outstanding amounts of income tax owed by AES and the directors, as well as GST owed by AES.
[1](2009) 77 ATR 414.
[2]Ibid [6]-[19].
As I have said, the freezing orders were originally made against AES, the directors and third parties. The proceeding has been discontinued against AES as a result of the company entering into a deed of company arrangement. Some of the other freezing orders against third parties are no longer in force.
Relevant to this application, the freezing orders which remain in operation include orders against Jinacan in respect of a property at 624 Sydney Road, Brunswick, and Bega in respect of properties located at 1122 High Street, Armadale[3] and 49 Claremont Street, South Yarra. The orders provide that Jinacan and Bega must not “transfer, deal with, charge, diminish, mortgage, dissipate, assign or dispose of” the properties. “Diminish” is defined in the orders:
‘diminish’ includes:
(i)increasing or causing to be increased the amount of, or any indebtedness under, any loan or finance facility secured by any mortgage or charge over the land referred to in any of the following orders; and/or
(ii)amending the terms of any charge or mortgage over the land referred to in any of the following orders; and/or
(iii)doing or permitting to be done anything which may reduce the unencumbered value of the land referred to in any of the following orders.[4]
[3]Specifically, 4, 5, 6, 10 and 12/1122 High Street, Armadale.
[4]This definition was included as a result of consent orders made 3 March 2010 varying the original orders of Mandie J of 10 June 2009.
Jinacan and Bega are not prohibited from dealing with any assets other than the properties. Further, Jinacan and Bega are permitted to enter into bona fide commercial transactions with unrelated parties for full market value in respect of the properties conditional upon seven days notice of such transactions being provided to the DCT.
The other freezing orders that remain operative are against Mr Haritos and Mr Kyritsis in respect of all of their assets, and against Ms Betty Kyritsis (who is the wife of Mr Kyritsis and the sister of Mr Haritos) in respect of a property at 4 Grattan Street, Prahran. The DCT contends that the value of the real property which is subject to the freezing orders which remain operative is approximately $16.5 million. In addition, it appears that Mr Haritos and Mr Kyritsis have personal assets in the region of $500,000.[5]
[5]In September 2009, Mr Haritos deposed that he had three cars registered in his name with a total value of $130,000 (although he stated that two of the cars worth about $30,000, are owned by his wife and daughter respectively) and cash of $50,000, which is held by the Australian Federal Police. At the same time, Mr Kyritsis deposed that he had two motor vehicles valued at $385,000 with a very small amount of cash in bank accounts.
The DCT has obtained judgment against Mr Haritos and Mr Kyritsis for recovery of tax liabilities. Interest has accrued and will continue to accrue on the judgment debts pursuant to s 101(1) of the Supreme Court Act 1986 (Vic).[6] When the present application was filed in mid December 2012, the total amount owed by Mr Haritos and Mr Kyritsis relating to the judgments was approximately $15 million.[7] Both Mr Haritos and Mr Kyritsis have made application to the Administrative Appeals Tribunal for a review of the assessments upon which the judgment debts are based. The applications have been heard and judgment is reserved. Consequently, the present position is that the judgments obtained by the DCT against Mr Haritos and Mr Kyritsis in this Court remain outstanding and enforceable.
[6]The section provides:
Every judgment debt carries interest at the rate for the time being fixed under section 2 of the Penalty Interest Rates Act 1983 from the time the judgment was given or, in the case of costs which are assessable by the Costs Court, from the date of the order of the Costs Court stating the result of the assessment or such other date as the Court orders.
The current penalty interest rate is 10.5 per cent.
[7]The exact figure is $15,344,765.55.
The DCT has commenced a separate proceeding in this Court in respect of the Sydney Road property held by Jinacan. In that proceeding, the DCT seeks declaratory relief that the shares in Jinacan are beneficially owned by Glen Geriatric Services Pty Ltd or, alternatively, Glen and Mr Haritos. In May 2008, Glen was dissolved. Prior to its deregistration, the shares in it were held equally by Mr Haritos and Mr Kyritsis. Glen’s registration has been reinstated and it is a party to the declaratory proceeding. The DCT contends that if it is successful in the declaratory proceeding, the effect will be that both Jinacan and Glen will be wound up, their assets realised and distributed to the relevant shareholders, ultimately Mr Haritos and Mr Kyritsis, such that the assets would be available to the DCT in satisfaction of the tax debts owed by Mr Haritos and Mr Kyritsis.
The DCT seeks orders varying the freezing orders to prohibit Jinacan and Bega from dealing with their assets generally.
Legal principles
In Zhen v Mo & Ors,[8] J. Forrest J set out the principles relevant to the making of freezing orders as follows:
[8][2008] VSC 300.
First, that a freezing order, by its very nature, is a drastic remedy and a court must exercise a high degree of caution before taking a step which will interfere with a party’s capacity to deal with his or her assets.
Second, the order is not designed to provide security for the applicant’s claim. It is solely directed to preserving assets from being dissipated, thereby frustrating the court process.
Third, the applicant bears the onus both in satisfying the Court that the order should be continued and in satisfying the Court as to the amount which is to be the subject of the order.
Fourth, that an order can only be made on the basis of admissible evidence which supports the contentions made by the party seeking the order. Speculation and guesswork is no substitute for either the facts or inferences properly drawn from proved facts.
Fifth, that before such an order can be made it is necessary that the applicant establish –
(a) an arguable case against the defendant; and
(b)that there is a danger that the prospective judgment will be wholly or partly unsatisfied as a result of the defendant’s actions in either removing the assets or disposing or dealing with them so as to diminish their value.
Sixth, the balance of convenience must favour the granting of the freezing order.
Seventh, that there is no set process determining the exact nature of an order. The order will be framed according to the circumstances of the case.
Eighth, the applicant must establish with some precision the value of prospective judgment. The order should not unnecessarily tie up a party’s assets and property.
Finally, there may be discretionary considerations which militate against the granting of a freezing order, such as delay in bringing the application on before the court or a lack of candour in the materials placed before the court.[9]
[9]Ibid [22]-[30].
In Deputy Commissioner of Taxation v AES (Aust) Pty Ltd[10] his Honour observed that when freezing orders are sought against a third party, regard must be had to what the High Court said in Cardile v LED Builders Pty Ltd.[11]In that case, Gaudron, McHugh, Gummow and Callinan JJ quoted the following passage from CSR Ltd v Cigma Insurance Australia Ltd:[12]
The counterpart of a court’s power to prevent its processes being abused is its power to protect the integrity of those processes once set in motion.[13]
[10](2009) 77 ATR 414.
[11](1999) 198 CLR 380.
[12](1997) 189 CLR 345.
[13]Ibid 391.
Their Honours continued in Cardile:
The integrity of those processes extends to preserving the efficacy of the execution which would lie against the actual or prospective judgment debtor. The protection of the administration of justice which this involves may, in a proper case, extend to asset preservation orders against third parties to the principal litigation. This appeal concerns the identification of such proper cases.[14]
[14]Cardile v LED Builders Pty Ltd (1999) 198 CLR 380, [25].
Later in their reasons, their Honours set out the relevant principles for making freezing orders against third parties:
What then is the principle to guide the courts in determining whether to grant Mareva relief in a case such as the present where the activities of third parties are the object sought to be restrained? In our opinion such an order may, and we emphasise the word "may", be appropriate, assuming the existence of other relevant criteria and discretionary factors, in circumstances in which:
(i)the third party holds, is using, or has exercised or is exercising a power of disposition over, or is otherwise in possession of, assets, including “claims and expectancies”, of the judgment debtor or potential judgment debtor; or
(ii)some process, ultimately enforceable by the courts, is or may be available to the judgment creditor as a consequence of a judgment against that actual or potential judgment debtor, pursuant to which, whether by appointment of a liquidator, trustee in bankruptcy, receiver or otherwise, the third party may be obliged to disgorge property or otherwise contribute to the funds or property of the judgment debtor to help satisfy the judgment against the judgment debtor.[15]
[15]Ibid [57].
J. Forrest J noted that r 37A.05(5) of the Supreme Court (General Civil Procedure) Rules 2005 (Vic) reflects those principles.[16]
[16]Deputy Commissioner of Taxation v AES Services (Aust) Pty Ltd (2009) 77 ATR 414, [22].
Where a freezing order has been made and the applicant seeks a variation that would have the effect of freezing assets not previously the subject of the order, then the same matters as those identified by his Honour are relevant to determination of the application.
Is there a risk of dissipation of assets such that there is a danger that the judgments of the Court will be unsatisfied?
As I have noted previously, the DCT holds a judgment against each of Mr Haritos and Mr Kyritsis and it also has on foot the declaratory proceeding. The parties agreed that in considering whether the existing freezing orders ought be varied, the relevant consideration in this case was whether the DCT had established that there is a risk of dissipation of assets. In addition, the Haritos’ interests[17] submitted that, in any event, the value of the assets that are subject to the existing freezing orders is about $17 million and that is sufficient to meet the judgments. Consequently they submitted that there is no need to extend the existing orders beyond the properties owned by Jinacan and Bega to cover their additional assets.[18] The DCT submitted that the variation orders sought do not have the effect of extending the scope of the original freezing orders but rather serve to protect intact the properties that are the subject of those orders. In the case of Jinacan, the Sydney Road property is its only significant asset. The DCT says that consequently, if Jinacan incurs liabilities, then the property asset is in effect diminished because that is the only asset that is available to its creditors. The DCT made a similar submission in relation to Bega.
[17]By which I mean Mr Haritos, Mr Kyritsis, Jinacan and Bega.
[18]Jinacan and Bega did not argue that their assets were not susceptible to being the subject of a freezing order if the DCT established that there was a risk of dissipation of assets and that the value of the assets already subject to freezing orders was insufficient.
As to the risk of dissipation of assets, the DCT contends that since the date of the freezing orders, Jinacan and Glen have made payments and entered into loan arrangements with related entities that have the potential to diminish the assets available to Jinacan to distribute to shareholders in the event that Jinacan’s and Glen’s assets are realised as a consequence of the declaratory proceeding. The DCT relied on five matters to establish that there is a risk of dissipation by Jinacan and Glen of their assets:
(1)that Jinacan, Bega and Mr Haritos entered into loan arrangements with related parties and that both they and Mr Kyritsis have given guarantees since the freezing orders were made against them;
(2)what the DCT contends is inconsistent information previously provided by Mr Haritos and Mr Kyritsis regarding Jinacan’s asset and liability position;
(3)what the DCT contends is inconsistent information previously relied upon by Mr Haritos and Mr Kyritsis in seeking variations to the freezing orders as to the value of the Sydney Road property;
(4)what the DCT contends is inconsistent information provided by the defendants in relation to the ownership of the Jinacan shares; and
(5)the matters which are outlined in the reasons of J. Forrest J as to the conduct of AES, Mr Haritos and Mr Kyritsis and upon which the DCT relied to obtain the freezing orders.
I will set out what the parties say in respect of each of these matters in turn and will then consider whether there is a risk of dissipation of assets such that there is a danger that the judgments in favour of the DCT will be wholly or partly unsatisfied.[19]
[19]Supreme Court (General Civil Procedure) Rules 2005 (Vic), r 37A.05(5).
Transactions involving Jinacan and Bega and guarantees given by Mr Haritos and Mr Kyritsis
To recap, the original freezing orders were made on 10 June 2009. The DCT points to a number of transactions after that date involving one or more of Mr Haritos, Mr Kyritsis, Jinacan and Bega and contends that the inference to be drawn is that there is a continuing risk of dissipation of assets. The information about the various transactions came to the attention of the DCT in September 2012 when Jinacan’s accountant produced documents in response to a subpoena. Those documents included Jinacan’s financial statements for the years ended 30 June 2010 and 2011. The 2010 balance sheet includes as a liability a loan by Mr Haritos in the amount of approximately $133,000[20] and shows that that liability did not exist in the preceding year. The 2011 accounts show that the loan liability had increased to approximately $295,000.[21] The DCT contends that these loans are a dealing by Mr Haritos with his assets in breach of the freezing orders.
[20]The exact amount is $132,813.58.
[21]The exact figure is $295,377.14.
The accounts show that Jinacan’s income is derived primarily from rental and that in the years ending 30 June 2010 and 2011, the company had no operating profit after payment of expenses, including directors’ fees to Mr Haritos. In each of those years, the shareholders passed a resolution that Mr Haritos receive fees as a director equivalent to the taxable profit to Jinacan.
The accounts also disclose that Jinacan’s primary and most valuable asset is the Sydney Road property and the accounts record a value of approximately $1.6 million for the property.[22] Jinacan’s other assets (with a total value of approximately $400,000 as at 30 June 2011) are described in the accounts as being comprised of cash, intercompany loans, building improvements, fixtures and fittings, plant and equipment.
[22]This is to be compared with a valuation for the property of $8.5 million by the Australian Valuation Office which the DCT obtained in 2009.
From other documents produced in response to the subpoena, it seems that in July 2009, Jinacan entered into a loan agreement with Bega. Also in July 2009, Jinacan’s directors approved a $250,000 loan to related entities (including Bega). The 2010 accounts show as an asset intercompany loans of approximately $97,000.[23] There were no intercompany loans shown for the preceding year. The figure in the accounts for 30 June 2011 for intercompany loans is approximately $92,000.[24]
[23]The exact figure is $97,544.13.
[24]The exact figure is $92,194.48 and the loans are to the same entities as in the 30 June 2010 year accounts.
In November 2010, Jinacan’s shareholders resolved to approve a loan for $250,000 to Transclean Facilities Pty Ltd. Transclean operates the business formerly conducted by AES. Mr Haritos and Mr Kyritsis are the directors of Transclean. The 2011 accounts do not show that the loan had been drawn down.
In July 2011, Jinacan approved payment of a management fee of $230,000 to Kyritsis Nominees Pty Ltd and Diamond Sun Pty Ltd. Those companies are controlled respectively by Ms Betty Kyritsis and Ms Haritos. They were originally parties to the proceeding and freezing orders (which are no longer operative) were made against them.
In January 2011, Jinacan, Bega and other companies[25] entered into an unlimited guarantee in favour of Australia and New Zealand Banking Group Limited (“ANZ”) in respect of money owed by them to the bank.
[25]The other companies are Transclean Facilities Pty Ltd, AES Services (Aust) Pty Ltd and Grattan Heights Pty Ltd.
Similarly, Bega has entered into a loan agreement with Transclean Facilities Pty Ltd; in July 2009 Bega’s shareholders approved a loan of $250,000 to Jinacan and in November 2010 Bega’s shareholders approved a loan of $250,000 to AES. Also in July 2009, Bega approved directors’ fees to Mr Haritos equivalent to the taxable profit to Bega.
In January 2011, Mr Haritos and Mr Kyritsis each entered into a guarantee limited to $3.195 million in favour of ANZ in respect of money owed to the bank by a number of companies including Jinacan and Bega.[26]
[26]The other companies are Transclean Facilities Pty Ltd, AES Services (Aust) Pty Ltd and Grattan Heights Pty Ltd.
The DCT relies on the making of the loans, the giving of the guarantees and the payment of management fees to related entities as evidence which goes to establish that there is a risk of dissipation of assets.
Counsel for the Haritos’ interests submitted that each of these matters is explicable and does not support the proposition that there is a risk of dissipation of assets. In respect of the loans by Mr Haritos, he gave evidence that fees Jinacan paid to directors were retained in the company and treated as loans. This evidence is supported by the financial statements for Jinacan for 2010 and 2011 which include as expenses directors’ fees for the same amount as the loans by Mr Haritos to Jinacan; that is, the amount of directors’ fees to which Mr Haritos says he is entitled has been lent by him to the company. Counsel submitted that there is no dissipation of assets in those circumstances as the assets have remained within the control of persons subject to the existing freezing orders. In effect, Mr Haritos has substituted one asset (his right to those directors’ fees) with another asset (the right to claim repayment of the loans in the same amount).[27] Counsel also submitted that there was no evidence that the $250,000 loans had been drawn upon and given that they were approved some time ago, he contended that the approval of the loans did not support the DCT’s submission that there is a risk of dissipation.
[27]I note that there is no evidence as to the terms of the loan including as to the date for repayment and whether any interest is payable.
As to the guarantees given by Mr Haritos and Mr Kyritsis, counsel for the Haritos’ interests submitted that they were permitted to be given by reason of consent orders that were made in September and October 2010 varying the original freezing orders that were made. The variation made by order of 30 September 2010, permitted Bega to grant a mortgage over two of the properties at 1122 High Street, Armadale[28] in favour of ANZ to secure the provision of an unconditional irrevocable undertaking by the bank to the maximum amount of $955,000 (“the September variation”). A variation made by order of 8 October 2010, permitted Bega to grant a mortgage over an additional three properties at 1122 High Street, Armadale[29] for the same purpose. A further variation made by the order of 8 October 2010 permitted Jinacan to mortgage the Sydney Road property in favour of ANZ to secure an overdraft facility with a limit of $1 million. The variation orders did not alter the freezing orders against Mr Haritos and Mr Kyritsis. Consequently, it seems to me that the variation orders are irrelevant and I do not accept the submission that they provide any basis for the giving of the guarantees.
[28]Units 4 and 10.
[29]Units 5, 6 and 12.
Counsel for the Haritos’ interests submitted that the giving of the guarantees was a requirement of ANZ. Even if that were so,[30] it does not provide a foundation for the giving of the guarantees if to do so was in breach of the orders made against Mr Haritos and Mr Kyritsis.
[30]As the submission was not based on any evidence, I cannot be satisfied as to its factual basis.
Finally, counsel for the Haritos’ interests submitted that the guarantees only created a contingent liability. Counsel contended that there was no certainty that the irrevocable undertaking had been given by the ANZ, nor that the overdraft had been established and drawn upon. Consequently counsel contended that there was no evidence as to the likelihood that the guarantees would be called upon.
Information about Jinacan’s asset and liability position
In a letter of October 2010, the former solicitor for the Haritos’ interests (Mr Grundy) stated that Jinacan had no liabilities. In mid November 2010, the DCT’s solicitor sent a letter to Mr Grundy noting that Jinacan’s financial statements for the year ending 30 June 2008 identified liabilities in the form of shareholder loans of approximately $3 million and for the year ended 30 June 2009, approximately $2.86 million. Mr Grundy responded:
As I understand the position, the financial statements which have been provided to you were only prepared this year as a consequence of your request for information. In that regard, they are not audited.
The first observation that needs to be made is in relation to the financial statements of Jinacan Pty Ltd (“Jinacan”). In that statement, the shareholders are described as Haritos and Kyritsis. You will of course be aware from our previous correspondence that the beneficial shareholders are Mrs Haritos and Mrs Kyritsis. It is also my understanding that the shareholders’ loans attach to the shares, and that the loans are assets of Mrs Haritos and Mrs Kyritsis as beneficial shareholders of Jinacan.
In Jinacan’s financial statements for the year ending 30 June 2010, long term liabilities for shareholder loans from Mr and Ms Haritos and Ms Betty Kyritsis totalled approximately $2.87 million.[31] Those accounts also show that for the preceding year, the liability for shareholder loans was approximately $2.86 million.[32] The financial statements for the year ended 30 June 2011 show the liability for shareholder loans was approximately $2.89 million.[33]
[31]The exact figure is $2,877,698.96.
[32]The exact figure is $2,865,560 for loans by Ms Haritos and Ms Betty Kyritsis.
[33]The exact figure is $2,895,176.22 for loans by Mr Haritos, Ms Haritos and Ms Betty Kyritsis
The balance sheets for Jinacan for the financial years ending June 2009 to 2011 show that Jinacan had a deficiency in assets over liabilities. In June 2009, the deficiency was approximately $709,000[34] and had grown to approximately $747,000[35] by June 2011.
[34]The exact figure is $709,723.
[35]The exact figure is $747,683.01.
Counsel for the Haritos’ interests submitted that the loans and other transactions occurred in the ordinary course of business to enable the business to be carried on. Counsel contended that the entities were all within a family group and naturally there would be monies provided by one to the other to enable them to deal with short term financial needs. Counsel submitted that there is no net diminution of the assets that would be available to the DCT in circumstances where the two entities involved in the transaction (such as where one makes a loan to the other) are caught by the existing freezing orders.
Counsel also observed that the shareholder loans pre-dated the making of the original freezing orders.
Value of the Sydney Road property
Before making the application for freezing orders, the DCT obtained from the Australian Valuation Office (“AVO”) a valuation of all the properties in respect of which the orders were to be sought. The Sydney Road property was valued by the AVO at approximately $8.5 million. In affidavits made 29 and 30 September 2010, a solicitor acting for the Haritos’ interests, relied on that valuation in support of an application by Mr Haritos and Mr Kyritsis for variation of the freezing orders. However, a week or so earlier, the tax agent for Mr Kyritsis lodged an objection in respect of his tax assessments in which he endeavoured to establish that Mr Kyritsis was suffering financial hardship. He stated:
[T]he ATO obtained valuations on the real estate components of the various assets owned by AES and its related entities, including Mr Kyritsis.
The Property at Sydney Road, Brunswick was valued at $8,500,000…and, this is probably true. However, it should be noted that in their valuation, it included a car park which, in fact, belongs to the Brunswick City Council rather than AES or its related entities. The actual value of the real estate asset as valued by Charter Keck Cramer (Sworn Valuation) is $3,000,000.
In the present application, the Haritos’ interests relied on the AVO’s valuation of $8.5 million for the Sydney Road property to support their contention that the property subject to the freezing orders is sufficient so that the scope of the orders need not be broadened.
Counsel for the Haritos’ interests submitted that any inconsistency in the value attributed by them to the Sydney Road property arose because of the view that Mr Kyritsis took as to the lease of the property.
The Jinacan shares
The beneficial ownership of the Jinacan shares is the subject of the declaratory proceedings. Although in 2010 the ASIC register recorded Mr Haritos and Glen as the shareholders, the solicitor for the Haritos’ interests deposed that based on information provided by the company’s accountant, he believed that the register was incorrect and the shares in Jinacan were beneficially held by Mr Haritos, Ms Haritos, Mr Kyritsis and Ms Betty Kyritsis. Subsequently the accountant located additional documents on his file and the solicitor for the Haritos’ interests informed the solicitor for the DCT that those documents disclosed that the beneficial shareholders were in fact Ms Haritos and Ms Betty Kyritsis.
Counsel for the Haritos’ interests submitted that his clients dispute the DCT’s contention that the shares in Jinacan are beneficially owned by Glen and that as the dispute is the subject of the declaratory proceeding which has not been determined, there is nothing in relation to the ownership of the shares that supports the DCT’s view that there is a risk of dissipation of assets.
Matters that supported the granting of the freezing orders
As I have said, subject to some variations, J. Forrest J continued the freezing orders that were originally made. In his reasons, his Honour stated:
In cases in which freezing orders are sought there will rarely be direct evidence of conduct deliberately designed to frustrate the processes of the Court. DCT has established, at least, a prima facie case from which to draw an inference as to the risk of dissipation of assets by AES or the directors based upon:
•non-disclosure by AES and the directors of vast amounts of assessable income and taxable supplies;
•the apparent diversion of AES funds into personal bank accounts or accounts of related parties;
•the purchase of properties in the names of persons other than AES or the directors with the use of AES funds.
The inference to be drawn from this conduct is that the directors are prepared to, when it suits their needs, appropriate AES funds for their own purposes and to purchase properties in the names of close family members or associated companies with their consent. Such an inference is available against the directors and AES itself. I think it is also available, contrary to Mr Ribbands’ submission, against the third parties. Each has participated in the arrangements which, on their face, have facilitated the diversion of funds from AES and in which each of the third parties, arguably, holds the properties for the benefit of the directors or AES.
Contrary to Mr Ribbands’ submission that the Commissioner’s application is simply to obtain security for its claims, I am satisfied that it is proper to infer that, absent the order, there is a risk of the dissipation of assets by both the directors and the third parties. Arguably, the third parties have acted hand in glove with the directors. I reject Mr Ribbands’ suggestion that the connection is tenuous. If the Commissioner has an arguable case against AES and the directors based upon a failure to declare over $30 million in assessable income, then that, combined with the purchase of the various properties, leads one to infer, not speculate, that, faced with potential tax liabilities of $28 million, AES and the directors may choose to direct that the assets held by the third parties be placed beyond the reach of the processes of the Court.
I am satisfied that there is a real danger of an unsatisfied judgment on the part of AES and the directors and also that there is a real risk that the assets arguably purchased with AES funds and held in the names of the third parties will be dissipated if not frozen.[36]
[36]Deputy Commissioner of Taxation v AES Services (Aust) Pty Ltd (2009) 77 ATR 414, [35]-[38].
The Haritos’ interests submitted that the matters relevant to the making of the freezing orders and their continuation by J. Forrest J are now of historical interest only. They noted that AES is no longer a party and submitted that their affairs are now closely monitored because of the freezing orders that are in place.
Conclusion as to risk of dissipation of assets
Taking into account that the properties are the only substantial assets of Jinacan and Bega, it seems to me that if those companies incur liabilities that exceed the income derived from the properties, the effect is to diminish the value of the properties. This is because the companies’ liabilities will increase but the assets available to meet those liabilities (that is, principally the properties) will remain the same. This would erode the protection that the original freezing orders seek to give in guarding against the diminution of assets to thwart the Court’s processes and leave an unsatisfied judgment in favour of the DCT. That very scenario was seemingly contemplated because variation orders were made by consent in March 2010 to the original orders when an inclusive definition of ‘diminish’ was added.[37] On one view, no additional orders are needed because the potential vice has been addressed by the existing orders - if those orders are breached, contempt proceedings may be brought. Nevertheless, to make it clear beyond doubt that the value of the properties is not to be diminished, freezing orders affecting assets in addition to the properties may be appropriate. In particular, such orders may be appropriate if the Court is satisfied that there is an ongoing risk of dissipation despite the current orders.
[37]See [5] above.
In my view, the DCT has established such a risk. First, as noted above,[38] Jinacan’s balance sheet shows an increase in liabilities over assets from June 2009 to June 2011. Whilst that increase is not enormous, it is not insignificant either. Second, the risk of dissipation is to be inferred from the conduct referred to by J. Forrest J and which I have set out in [44] above. I do not accept counsel’s submission that those matters are of historical interest only. Rather, they support the inference that his Honour made that there was risk of dissipation of assets not only by the directors but also by the third parties, including Jinacan and Bega. There is nothing to suggest that absent the freezing orders, the same conduct would not occur. This is particularly so in light of the conduct of the companies and Mr Haritos and Mr Kyritsis since the orders were made, including the giving of the guarantees by them.[39] Third, I accept the submission by the Haritos’ interests that where a loan is made by one person to another and all the assets of that other person are within the scope of the existing freezing orders, there is no diminution of assets and no inference of risk can be drawn from that conduct. However, not all of the transactions fall into that category. An inference may be drawn from Jinacan and Bega’s conduct in making:
(a)the loans to related entities which are not subject to freezing orders;[40] and
(b)the payment of management fees to related entities which are not subject to freezing orders.[41]
[38]See [36] above.
[39]See [28], [31]-[32].
[40]See [23]-[24] above.
[41]See [25] above.
The inference that I draw from the making of the loans and the payment of the management fees is that Jinacan and Bega are prepared to increase their liability to related entities who, in the event of a winding up of Jinacan and Bega, would be paid out of the assets before a distribution is made to shareholders. As I have noted previously, the DCT contends that ultimately, Mr Haritos and Mr Kyritsis would be entitled to any such distribution to shareholders and the funds received would be available to meet the judgments in favour of the DCT against them.[42] Whilst it would seem that as at 30 June 2011 the $250,000 loans had not been drawn down in full, the accounts evidence that at least some intercompany loans were provided by Jinacan to related entities which are not subject to the existing freezing orders. [43]
[42]See [9] above.
[43]See [23]-[24] above.
Further, the making of the loans and payment of the management fees took place after the original freezing orders were made and must be viewed against the backdrop of the conduct which led to the making of those orders, the inconsistent figures put forward by the Haritos’ interests as to the value of the Sydney Road property[44] and the statement by Jinacan’s solicitor that the company had no liabilities at a time when it clearly did. In relation to this last matter, Mr Grundy’s response which I have set out in [34] above, did not address why he had stated that Jinacan had no liabilities. On the current application, neither Mr Haritos in the affidavit that he swore in opposition nor counsel in submissions, made any attempt to give an explanation. In relation to the value of the Sydney Road property, there was no evidence to support the submission made by counsel that the inconsistency as to value arose because of a view that Mr Kyritsis took as to the lease of the property. In any event, it discloses that the Haritos’ interests are prepared to put forward differing figures to suit their purposes.
[44]The AVO valuation of $8.5 million relied on by the Haritos’ interests in the September 2010 affidavits supporting an application for variation of the freezing orders and on this application (see [39]-[40] above); the figure of $3 million relied on by Mr Kyritsis in an endeavour to establish that he was suffering financial hardship (see [39] above) and the figure of $1.6 million included in the financial statements (see [22] above).
As to the contention that the property already subject to the freezing orders is sufficient to meet the judgments, it seems to me that the purpose of the orders sought is to preserve the value of those properties not to extend to other significant assets not already caught by the order. As I have noted above, Jinacan’s assets (other than the Sydney Road property) comprise cash, intercompany loans, building improvements, fixtures and fittings, plant and equipment ascribed a value of $400,000 in total. I am also mindful that the estimated value of the Sydney Road property ranges from $1.6 million (in the company’s financial statements) to $8.5 million (the estimated value in the AVO valuation). Finally, whilst the debt was approximately $15 million in December 2012, counsel informed the Court that when interest which has accrued is added, the correct figure is approximately $17 million and it will continue to increase with the passage of time.
Subject to one matter, in my opinion, it is appropriate for the freezing orders to be varied so that they extend to all of the assets of Bega and Jinacan. The companies should, however, be permitted to use their assets to meet normal expenses associated with operating the company where the liability is to arms length third parties. For example, they should be permitted to use their assets to meet agent’s fees incurred in relation to management of the properties, accounting fees, fees payable to ASIC and rate and tax liabilities.
Ancillary orders
The DCT also seeks ancillary orders for the provision of information relevant to Jinacan and Bega’s financial position. Rule 37A.03 of the Supreme Court (General Civil Procedure) Rules 2005 provides for the making of such orders. In late November 2012, the DCT sought information from the Haritos’ interests in relation to the transactions to which I have referred above. Mr Haritos deposed that Jinacan is unable to respond to that letter in any other way than its accountant responded to the subpoena served on him and Mr Haritos says that the accountant provided all the information requested of Jinacan. In my opinion it is an appropriate case in which to make ancillary orders requiring the directors to go on oath as to the asset and liability position of each company. Whilst the accountant has produced information that goes to some of these matters, that information is not complete. For example, no financial statements for Bega for the years ending June 2010 to 2012 were produced. The directors must be able to provide information about the companies’ assets and liabilities for those years. Further, not only is the information that has been provided incomplete, it is not on oath. Given the nature of the transactions into which the companies appear to have entered with related entities, the differing information given as to Jinacan’s liability position and the various valuation figures for the Sydney Road property, it seems to me that affidavits by the directors as to the financial position of the companies will aid in the prevention of the dissipation of assets which would thwart the Court’s judgments.
In addition, the DCT seeks orders that Mr Haritos and Mr Kyritsis make affidavits regarding their compliance with undertakings given by them to the Court in relation to the overdraft facility provided by ANZ to which I have referred in [11] above. The overdraft was to be used for payment of AES employees and subcontractors and the undertakings were directed towards this. In late November 2012, the DCT sought confirmation that Mr Haritos and Mr Kyritsis had complied with the undertakings but no response has been received. It seems from that correspondence that the DCT’s concerns about compliance arise from the conduct relied on by the DCT in respect to variation of the Jinacan and Bega freezing orders. Mr Haritos has deposed that the relevant employees are paid more than $1 million each month and each month the ANZ overdraft is repaid from contract receipts. Mr Haritos exhibited to his affidavit a copy of the ANZ bank statements for the overdraft for the months from August to November 2012. Without further explanation, the statements do not assist. However, on the material as a whole, the DCT has not satisfied me that it is appropriate to make orders for affidavits as to compliance to be filed.
I will hear the parties as to the precise form of orders to be made.