DMG Industries Pty Ltd v KPMG
[2007] VSC 358
•19 September 2007
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
No. 9458 of 2006
| DMG INDUSTRIES PTY LTD | Plaintiff |
| v | |
| KPMG (ABN 51 194 183) | Defendant |
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JUDGE: | ROBSON J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 19 September 2007 | |
DATE OF JUDGMENT: | 19 September 2007 | |
CASE MAY BE CITED AS: | DMG Industries Pty Ltd v KPMG | |
MEDIUM NEUTRAL CITATION: | [2007] VSC 358 | |
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CATCHWORDS: Appeal from Order of Master - Statutory demand - Setting aside - Whether affidavit in support of application to set aside statutory demand made in accordance with s 459G – Whether genuine dispute or offsetting claim established – Corporations Act 2001 ss 459E, 459G and 459H.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | M.R. Scott | Gadens Lawyers |
| For the Defendant | G.T. Bigmore QC | Collins & Stephens |
HIS HONOUR:
I have before me an appeal from the order of Master Efthim setting aside a statutory demand made under s 459E of the Corporations Act 2001 (“the Act”). Mr Scott of counsel appears for the plaintiff, DMG Industries Pty Ltd (“DMG”), and Mr Bigmore, one of Her Majesty's counsel, appears for the defendant, KPMG.
On 12 October 2006, KPMG served a statutory demand against the DMG under s 459E of the Act. On 27 October 2006 DMG applied by an originating process to set aside the statutory demand under s 459G of the Act. Section 459G provides:
"(1)a company may apply to the Court for an order setting aside a statutory demand served on the company;
(2)an application may only be made within 21 days after the demand is so served;
(3)an application is to be made in accordance with this section only if, within those 21 days:
(a)an affidavit supporting the application is filed with the Court; and
(b)a copy of the application, and a copy of the supporting affidavit, is served on the person who served the demand on the company."
Whether or not the affidavit filed and served by DMG in support of the application is in accordance with section 459G(3) is one of the matters in issue before me.
The application to set aside the statutory demand was supported by the affidavit of Michael Joseph Cain who is a director of DMG. DMG manufactures components for the car industry. Mr Cain became a director in about June of 2006 when DMG was taken over by new owners. The events giving rise to the claim by KPMG arose prior to June 2006 under the previous owners.
In addition to Mr Cain's initial affidavit in support of the application but outside the 21 day application period, DMG relies upon further affidavits of Mr Cain of 20 February 2007 and 9 August 2007. In addition DMG relies on the affidavit of Antony John Baxter of PricewaterhouseCoopers sworn 22 February 2007.
KPMG relies on affidavits of Edmond Tern, the former chief financial officer of DMG, dated 16 November 2006 and the affidavit of Mark Steven Prentice, a director of KPMG, dated 14 February 2007. The initial affidavit of Michael Joseph Cain was subject to considerable objection by Mr Bigmore. Each of his objections was ruled upon by me and I will not repeat my rulings here.
Mr Bigmore also objected to the affidavit of Anthony John Baxter an expert in research and development (“R&D”) taxation and other government support schemes such as the Automotive Competitiveness and Investment Scheme (“ACIS”). I permitted the affidavit to be relied upon on the normal basis for an expert witness. I treated Mr Baxter’s assertion of facts concerning DMG as being the factual matters he was instructed to assume for the purposes of giving his opinion about the operation of the R&D tax scheme and ACIS.
Essentially two issues arise for my consideration. First, does the affidavit of Michael Joseph Cain satisfy the requirements of s 459G(3), so that I have before me a valid application to set aside the statutory demand? Secondly, if the affidavit does satisfy the requirements of s 459G(3), does it, and the other evidence relied upon by DMG, satisfy the court that there is a genuine dispute between DMG and KPMG about the existence of a debt to which the demand relates, and/or that DMG has an offsetting claim?
I have read the reasons for decision of the learned Master Efthim in his matter, delivered on 1 June 2007. I have found the reasons for decision of considerable assistance. His reasons contain a very helpful review of the authorities. The Master came to a similar conclusion that I have come to.
I propose to dismiss the appeal and do so for the following reasons.
KPMG’s Engagement
In 2003, KPMG was engaged to provide accounting services to DMG in relation to claiming R&D tax concessions, and to provide accounting services in relation to ACIS. A letter of engagement was sent by KPMG to DMG, which provided for DMG to sign.
The letter detailed the activities to be conducted with respect R&D and ACIS. With respect to R&D, KPMG was to:
· “Undertake a review in relation to identifying eligible R&D activities;
· Undertake a review in relation to identifying and quantifying eligible R&D expenditure;
· Undertake an analysis of R&D expenditure in relation to determining if DMG is entitled to an extra 50 per cent premium deduction, and if so, the amount of the premium deduction;
· Review other aspects of the R&D claim as appropriate;
· Prepare and lodge the Aus Industry Registration;
· Prepare the R&D tax schedule.”
As to ACIS, the letter provided:
"Further, the engagement provides for KPMG to assist DMG, where required, with issues arising from its participation in the Automotive Competitiveness Investment Scheme (ACIS)".
Further, under the heading of "Scope of the work in relation to ACIS", it provided:
“KPMG will provide assistance to DMG in respect of ACIS issues as they may arise from time to time.
In the first instance, KPMG will assist DMG to:
· Prepare timesheets (for a 12 week period) for staff for whom ACIS credits are claimed, in preparation for DMG's ACIS audit with AusIndustry in early 2004;
· Prepare other material, as required, for DMG's ACIS audit with AusIndustry in early 2004;
· With its presentations to AusIndustry; and
· Prepare any follow up responses to AusIndustry as a result of the audit in early 2004."
KPMG has invoiced DMG for fees in respect of R&D tax concessions obtained by DMG with the assistance of KPMG. KPMG was entitled to the invoice fees calculated on the basis of 30 per cent of the permanent tax saving (including increased carried forward tax losses) for each income year. There is no dispute that the unpaid invoices the subject of the statutory demand have been properly calculated according to that formula.
The first affidavit of Mr Cain relies on two grounds to resist payment of the statutory demand. The first ground is that there has been no permanent tax saving to DMG. Insofar as this is meant to suggest that the contract entitlement to fees has not arisen under the contract or not been properly calculated, I find that there is no genuine basis for so asserting and there is no genuine dispute arising out of any such allegation.
Insofar as that allegation complains that DMG has not as a matter of fact received any material financial advantage as a result of KPMG's services that issue is more properly dealt with under the second ground that Mr Cain raises in his initial affidavit.
R&D and ACIS
Before elaborating on the second ground, it is necessary to briefly explain the nature of R&D tax concessions and the ACIS scheme. I intend to speak very broadly about these issues as there does not appear to be any dispute between the parties about the nature of the schemes.
Essentially, under the R&D scheme taxpayers who incur certain research and development expenditure attract concessional additional allowable deductions over and above the deductions which would otherwise be claimable, which has the effect of reducing the tax they would otherwise pay or increasing losses to be carried forward to be set against future liabilities to pay tax.
The ACIS scheme, on the other hand, involves statutory grants by the Federal Government to the car and car component manufacturing industries of amounts of money or credits which can be converted into cash as part of the government's policy to foster and promote car and car component manufacturing in Australia. The cash payments, or credits which can be converted into cash, are calculated in accordance with expenditure which may fall within R&D and other expenditure which may not.
It is not necessary for me to go into the application of both schemes. So far as is relevant to this case, DMG alleges that it would have been to its financial advantage to pursue the ACIS scheme to its fullest extent, which would have involved giving up some of the R&D benefits. DMG claims such an approach would have generated more money for DMG. In particular, DMG suggests that by not pursuing the ACIS scheme to the extent that it may have been able to and instead pursuing the R&D scheme, DMG has lost between $2.3 million and $4 million depending on its future tax position.
The ACIS Ground
It is now convenient to turn to Mr Cain's second ground to establish a genuine dispute or offsetting claim. In doing so I will quote from Paragraphs 23-30 of his first affidavit, where he says:
“(23)In or about early June 2006, I had a meeting with Mark Prentice of the defendant at Keysborough.
(24)The meeting was held in order to ascertain the claims being made by the defendant and what outstanding moneys it alleged the plaintiff owed. At this meeting I discussed with Mark Prentice the nature of the services and advice provided by the defendant in respect of the plaintiff.
(25)Mark Prentice proposed an arrangement whereby the plaintiff would pay the defendant if and when the tax benefit was received. I refused this proposal on the basis that the proposal was uncertain as the concessions were of no benefit to the plaintiff, specifically:
(a)there have been no permanent tax savings to the plaintiff in respect of the R&D concessions, and;
(b)currently, or in the foreseeable, it is unlikely that the plaintiff will have the ability to realise a permanent tax saving.
(26)Further, the services were not warranted in circumstances where the defendant should have been advising the plaintiff in relation to ACIS.
(27)At the conclusion of the meeting with the defendant I requested the defendant provide full particulars of the details of the claimed amounts, which information was never received save for Exhibit MJC2 of my affidavit."
Under the heading of "Offsetting Claim":
(28)I believe that the defendant did not properly contemplate the financial position of the plaintiff and provided inappropriate advice to the plaintiff in relation to R&D concessions and ACIS.
(29)In the plaintiff's financial circumstances, whereas the defendant advised that the plaintiff follow its advice to pursue R&D concessions, the plaintiff ought to have been advised to seek an amount by way of ACIS. I believe the plaintiff is now prevented from accessing any grant by way of ACIS in relation to the relevant periods.
(30)As a result of the conduct of the defendant the plaintiff has suffered loss and damage."
I should add that Mr Baxter, in his affidavit, has fleshed out the nature of the advantages to be gained by pursuing ACIS as opposed to R&D, and has explained how it is that the plaintiff is now no longer able to obtain grants from ACIS in relation to the relevant periods.
Has DMG Satisfied S 459G (3)?
Mr Bigmore in a very able argument argues that Mr Cain's affidavit laid no foundation to establish that KPMG had other than functionary duties set out in their letter of engagement - in other words, that the affidavit does not establish any basis for the allegation that KPMG should have been advising DMG in relation to ACIS, which is the allegation made in Paragraph 26 of Mr Cain's first affidavit, or to quote from Paragraph 29, "The plaintiff ought to have been advised to seek an amount by way of ACIS".
Mr Bigmore submits that without such foundation DMG has not filed the required affidavit under s 459G(3) of the Corporations Act. For the reasons set out below, in my view, DMG has sufficiently identified the foundation of the claim.
DMG refers to the terms of engagement, which on one construction provide for KPMG to advise DMG about ACIS, and establish that:
25 KPMG acted as the accountant for DMG in the area of R&D and ACIS claims;
26 DMG was making losses and was not receiving any material benefit through the R&D tax concessions;
27 ACIS claims provided a more advantageous approach for DMG;
28 KPMG did not advise DMG of this fact, and
29 losses were incurred by DMG because of KPMG's failure to so advise.
Mr Bigmore concedes that it is not necessary for DMG to expressly identify the legal causes of action which it seeks to rely upon to satisfy s 459G but he submits that DMG should identify the factual circumstances which give rise to the legal obligation. He submits that Mr Cain's affidavit has not sufficiently identified the factual circumstances which give rise to the obligations alleged.
In my opinion the plaintiff has done so and I repeat again the list of matters that I refer to above.
In Graywinter v Gas and Fuel[1] Sundberg J was called upon to determine the extent to which the qualifying affidavit supporting the application to set aside the statutory demand, must make out the extent and nature of the dispute or the extent and nature of the basis for the counterclaim to satisfy s 459G(3).
[1](1996) 21 ACSR 581.
Sundberg J drew a distinction between what the qualifying affidavit filed with the application must contain in order for there to be a valid application on foot under s 459G, and the evidence the applicant must adduce to satisfy the court that there is a genuine dispute to the claimed debt or a genuine offsetting claim under s 459H.
As to the former, his Honour said referring to the qualifying affidavit:
"In a section 459H(1)(a) case, the affidavit must in my view disclose facts showing there is a genuine dispute between the parties. A mere assertion that there is a genuine dispute is not enough, nor is a bare claim that the debt is disputed sufficient. It follows from the fact that the affidavit need not go into evidence, which is the customary function of an affidavit that it may read like a pleading.
An affidavit which exhibits an exchange of correspondence between the parties or between their solicitors, from which it appears that a claim is made and rejected for reasons given, can qualify as a supporting affidavit and an affidavit therefore in the pleadings in an action may qualify.
I am thus unable to accept the respondent's submission that the affidavit must contain sufficient material to make out a case under s 459H".[2]
[2](1996) 21 ACSR 581, 587, line 40.
For the reason expressed above I conclude that Mr Cain's affidavit satisfies s 459G(3).
Has DMG satisfied the requirements of s 459H?
I turn to the second argument of Mr Bigmore, that DMG does not establish that there is a genuine dispute or that DMG has an offsetting claim within the meaning of s 459H.
In John Holland Construction and Engineering Pty Ltd v Kilpatrick Green Pty Ltd [3] Young J considered whether the evidence established a genuine dispute under s 459H. Young J said:
"There may be cases and indeed it may be the majority of cases where the court will look not only to an assertion of a dispute, but some sort of material short of proof which backs up the claim that is made that the amount is disputed. It is clear that what is required in all cases is something between mere assertion, and the proof that would be necessary in a court of law. Something more than mere assertion is required, because if it were not so then anyone could say merely it did not owe a debt.
On the other hand if proof of a claim was required then one would be doing the very thing that one is not to do, and that is to try this sort of dispute in the Companies Court. What more than assertion is required is something that may differ from case to case. In Jesseron Holdings Pty Ltd v. Middle East Trading Consultants Pty Ltd (No.2) (1994)[4], I indicated that so long as the claim is not fictitious or merely colourable and is genuinely believed to exist one can ordinarily take that as sufficient. That is something more than mere assertion. Even if the proposition in Jesseron (No.2) goes too far, as Mr Hutley submits, it would seem to me that in a sizeable construction case where the contemporaneous correspondence between the parties shows that there is a disputing of the figures, then one can say without looking at the figures, or without looking at the evidence that backs up the figures, that there is a genuine dispute between the company and the respondent about the amount of the debt.”[5]
[3](1994)] 14 ACSR 250.
[4]13 ACSR 787 and 12 ACLC 490.
[5](1994)] 14 ACSR 250, 253
Young J referred to “genuine” in the context of a genuine belief. He also held that a claim which is fictitious or merely colourable would not be genuine.
In Mibor Investments Pty Ltd v Commonwealth Bank of Australia[6] Hayne J of the Supreme Court of Victoria (as he then was) said:
“These matters, taken in combination, suggest that at least in most cases, it is not expected that the court will embark upon any extended inquiry in order to determine whether there is a genuine dispute between the parties and certainly will not attempt to weigh the merits of that dispute. All that the legislation requires is that the court concludes that there is a dispute and that it is a genuine dispute."[7]
[6](1994) 2 VR 290.
[7](1994) 2 VR 290, 295.
The affidavit of Mr Cain goes beyond mere assertion and satisfies me that DMG’s claim is not fictitious or merely colourable. The facts he relies on have some substance. KPMG is a major accounting firm. It was advising and assisting DMG in a very complicated area of taxation and government regulation law. In my opinion, it is not a fictitious or colourable claim to say in those circumstances, and in the context of the written agreement that was entered into, that KPMG may have been duty bound to exercise reasonable care and skill to ensure that its client was being best served by the use DMG was making of the government's tax laws and schemes to foster the car component industry upon the advice of KPMG.
Mr Bigmore submitted that the engagement letter establishes that KPMG's duties did not require it to act other than as a functionary. I am not sure whether functionary is a term which is used to describe tradesmen and the like who merely do what they are told, but I understood what Mr Bigmore means. He means, as I take it, that beyond carrying out the specified tasks, KPMG owed no further duty or obligation to look out for the welfare of its client or to advise its client about possible other steps which could be taken to improve its position. He may be right about that assertion, and that may be what is held by the court at the end of the day. For my purposes, however, there is nothing in the letter in my view which establishes beyond reasonable argument that KPMG was merely acting as a functionary and that it was excused from acting as other professionals are required to, with all the attendant duties and responsibilities flowing there from. In other words, there is nothing in the letter which denies and prevents DMG from genuinely disputing that the retainer was so limited and/or raising on offsetting claim.
In those circumstances and for those reasons I reject the arguments of Mr Bigmore. I am satisfied that there is a genuine dispute between DMG and KPMG about the existence of the debt to which KPMG’s demand relates and/or that DMG has an offsetting claim within the meaning of s 459H(1).
Accordingly, I dismiss the appeal with costs.
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