Greenbow Pty Ltd v Rossi Recycling Pty Ltd
[2022] VCC 1298
•16 August 2022
| IN THE COUNTY COURT OF VICTORIA AT Melbourne COMMERCIAL DIVISION | Revised Not Restricted Suitable for Publication |
GENerAL List
Case No. CI-19-05953
| Greenbow Pty Ltd | Plaintiff |
| v | |
| Rossi Recycling Pty Ltd | Defendant |
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JUDGE: | His Honour Judge Woodward | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 12-15 April 2021; final reply submissions dated 21 May 2021 | |
DATE OF JUDGMENT: | 16 August 2022 | |
CASE MAY BE CITED AS: | Greenbow Pty Ltd v Rossi Recycling Pty Ltd | |
MEDIUM NEUTRAL CITATION: | [2022] VCC 1298 | |
REASONS FOR JUDGMENT
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Subject: EQUITY AND TRUSTS
Catchwords: Whether plaintiff released or assigned present equitable right to “unpaid present entitlement” – intention to release – effecting release by accounting entries – whether unpaid present entitlement was written down as unrecoverable – alternative claim under doctrine of money had and received
Legislation Cited: Income Tax Assessment Act 1936 (Cth), Division 7A, s109F; Income Tax Assessment Act 1997 (Cth), s25-35; Corporations Act 2001 (Cth), s1305; Evidence Act 2008 (Vic), s69
Cases Cited:FCT v Whiting (1943) 68 CLR 199; Fischer v Nemeske Pty Ltd (2016) 257 CLR 615; MSP Nominees Pty Ltd v Commissioner of Stamps (SA) (1999) 198 CLR 494; Tosich Construction v Tosich (1999) 198 CLR 494; Taylor v Smith (1926) 38 CLR 48; Powell v Smith (1872) LR 14 Eq 85; White v Timbercorp Finance Pty Ltd (2017) 123 ACSR 284; Michell v Onroad Offroad Pty Ltd [2018] VSC 648; Shot One Pty Ltd (in liq) v Day [2017] VSC 741; Norman v Federal Commissioner of Taxation (1963) 109 CLR 9
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | D Farrands QC with K Jones | Aptum Legal |
| For the Defendant | Dr M Barrett | Dunemann Sutherland |
HIS HONOUR:
Summary and outcome
1The remaining plaintiff in this proceeding (originally the second plaintiff) (“Greenbow”) claims the sum of $729,825 from the defendant (“Rossi Recycling”) pursuant to an alleged unpaid present entitlement (“Greenbow UPE”), together with interest and costs. Greenbow claims the Greenbow UPE in equity (a present equitable right to the sum) and at law (a debt owing as money had and received). It is not in dispute that the Greenbow UPE was validly created and subsisting under a sub-trust as at the end of the financial year ending (“FYE”) 30 June 2013. The issue is whether it was either permanently released or assigned and then written off, as a result of decisions made in December 2014 in the course of preparing the financial statements and tax returns for Greenbow for FYE 30 June 2013.
2In my judgment, the UPE was permanently released by Greenbow in about December 2014 and it has not been validly restored or otherwise validly acknowledged by Rossi Recycling as owing to Greenbow since that time. The evidence establishes that the release occurred because of a misunderstanding of the tax effect of the UPE by Greenbow’s external accountant Nicole May. But I am nevertheless satisfied that she determined that it should be permanently released, and took steps to effect that release. I am further satisfied that Paul Rossignoli (“Paul”) in his capacity as the sole director of both Greenbow and Rossi Recycling effectively authorised that release.
3There will therefore be judgment for the defendant in the proceeding and I will order that Greenbow’s claim is dismissed. I will also order that the Greenbow pay the defendant’s costs of and incidental to the proceeding on the standard basis, in default of agreement, unless either party can establish a basis for seeking a different order on costs. I will invite the parties to prepare draft orders to give effect to these reasons, and any further issue as to costs will be determined on the papers.
Factual background
Companies and trusts
4Paul was born in 1946. He was married to Patricia until their divorce in 2012. Their son Glen Rossignoli (“Glen”) was born in 1974. At all relevant times until September 2019, Paul controlled all of the entities and trusts comprising the Rossignoli group of companies (“Rossi Group”). More particularly, he controlled Greenbow, Rossi Recycling, Able Demolitions Pty Ltd (“Able”), and Buckland Valley Pty Ltd (“Buckland”), and the three associated discretionary family trusts described below.
5One of the businesses originally controlled by Paul is the waste transfer station and skip bin hire business, Eastern Recycling. Eastern Recycling is operated by Rossi Recycling in its capacity as trustee of the Rossignoli Property Trust (“RP Trust”). The business operates from a property at the corner of Heatherdale Road and Palmerston Road, Ringwood. The property is owned by Buckland as trustee for the Rossignoli Trust No. 3 and the Heatherdale Road Property Trust.
6The deed dated 3 June 1992 establishing the RP Trust (“RP Trust Deed”) includes terms to the effect as follows:
(a) the trustee may pay, apply, or set aside before the expiration of any Accounting Period all or any part of the net income for a relevant accounting period of the trust to “General Beneficiaries” (clause 3.1(a));
(b) amounts paid, or to be applied, or set aside for beneficiaries, may be allocated or dealt with for the benefit of the beneficiary or by placing such amount to the credit of such beneficiary in the books of account of the trust fund (clause 3.2(c)); and
(c) once net income has been set aside for the benefit of a beneficiary in the books of account, it ceases to be part of the trust fund and is held by the trustee on a separate trust for the beneficiary absolutely with power to the trustee pending payment thereof to the beneficiary to invest or apply or deal with such fund or any resulting income therefrom or any part thereof in the manner provided for in clause 7 of the RP Trust Deed (clause 3.5).
7Greenbow was established in 1992 and is a “General Beneficiary” within the meaning of the RP Trust Deed. Bernadette Crennan, the Rossi Group external accountant between 2009 and 2014, gave evidence that Greenbow was set up as a “bucket company”, to be the repository for the distribution of the profits of the trusts, as this was more tax effective than distributing to individual beneficiaries.
The dispute between Paul and Glen
8Glen has worked in the Eastern Recycling business for his whole working life. In 2012 he was appointed General Manager of the business. However, within a few years, Paul and Glen’s relationship soured, primarily in relation to the management and conduct of the Eastern Recycling business. Glen’s complaints about Paul’s conduct of the business were detailed in proceedings brought by Glen in the Supreme Court of Victoria against Paul, Buckland and Rossi Recycling (“Trustee Proceeding”), alleging (among other things) breach of trust.[1] It does not appear to be in dispute that the Trustee Proceeding was commenced in February 2018, although the pleadings from the Trustee Proceeding in evidence in this proceeding comprise an Amended Statement of Claim filed by leave granted on 30 November 2018.
[1] Supreme Court of Victoria Proceeding S CI 2018 00737
9On 29 November 2018, Paul commenced proceedings in the Supreme Court of Victoria seeking orders (among others) that a receiver be appointed to Rossi Recycling (“Receivership Proceeding”).
10On 6 September 2019, the parties to the Trustee Proceeding and the Receivership Proceeding executed a deed of settlement of both proceedings (“Settlement Deed”), including provisions to the effect that:
(a) Paul would forthwith resign as director and secretary and forthwith transfer his shareholding in Rossi Recycling to Glen, and irrevocably and permanently resign his position as appointor and guardian of Rossi Recycling and appoint Glen in his place (clause 1);
(b) a new lease would be entered into on the terms identified at a market rental which would be determined by an independent valuer, such lease at such current market rental to commence by 1 October 2019 (clause 2);
(c) the loan recorded in the books of account of Rossi Recycling showing that Rossi Recycling was indebted to Paul in the amount of $353,281 as at 30 June 2018, together with any further loan amounts, will be discharged upon the payments by Rossi Recycling to Paul of $114,427 payable 1 July 2021 and $114,427 payable by 1 July 2022 (clause 6); and
(d) the parties released each other from all claims and demands related to or arising out of the subject matter of both the Trustee Proceeding and the Receivership Proceeding (clause 13).
11A company search for Rossi Recycling shows that on 13 September 2019 Paul ceased as sole director and secretary and Glen was appointed to both those roles in his place. The company search also shows that later in September 2019, forms were lodged indicating that Paul had ceased as the holder of all 12 shares in Rossi Recycling, with the shares thereafter held by Glen (8 shares), his brother Matthew Rossignoli (2 shares) and his sister Catherine Rossignoli (2 shares).
Adjustments to the Rossi Group financial records
Rossi Group accountants
12The financial statements, tax returns and other financial records of the Rossi Group and the circumstances of the adjustments to those records in late 2014, are central to the resolution of the issues in this proceeding. There were three accountants primarily involved in the preparation of these financial statements and tax returns during the relevant period, namely, Ms Crennan and Ms May (both of whom were external accountants initially engaged by Paul) and Mr Hoffman, the Rossi Group’s internal accountant and bookkeeper. Mr Hoffman maintained the Rossi Group’s MYOB general ledger and related records.
13Ms Crennan began acting as the Rossi Group’s external accountant as early as 1983. She undertook accounting work for the group for a time, but ceased once she moved to Arthur Andersen, because Mr Hoffman was not happy with that firm. Ms Crennan recommenced the external accounting work in 2008 when she was with the firm Nugents, and stayed in that role (despite further changes in her employment) until November 2014, when Ms Crennan “decided she could no longer work for Paul”.
14Ms Crennan’s evidence was that her departure from her role as the Rossi Group’s external accountant was acrimonious and she did not talk to Paul thereafter. However, Glen approached her in 2019 and asked her to assist with the accounting work for Rossi Recycling for FYE 30 June 2019, which she agreed to do.
15Ms May took over as the Rossi Group’s external accountant in late 2014. Ms May’s aunt is Jane Fulton, Paul’s domestic partner. Ms May said in evidence that she was initially approached by Ms Fulton and told that Paul needed some assistance and that he was very frustrated with his external accountant at the time (Ms Crennan). Paul then asked Ms May to “complete the annual taxation compliance work, so the preparation of financial reports and tax returns, and also generally advise with regard to tax compliance work”. Counsel for Greenbow submitted that her retainer was thus limited to accounting and tax compliance work. As discussed further below, I do not accept that her role was so limited.
Nicole May’s evidence
16Ms May explained in her evidence that between 2012 and 2019, Mr Hoffman prepared the MYOB accounts, and these were the main source of the final accounting information. Ms May confirmed that Ms Crennan prepared the Rossi Group’s external accounts for FYE 30 June 2012 and in 2013, Ms Crennan prepared documentation for the accounts. Ms May received Ms Crennan’s working papers and trial balances in and from about September 2014 and Ms May prepared the Rossi Group’s accounts for FYE 30 June 2013 based on that information.
17Ms May’s evidence was that she also prepared the accounts for FYE 30 June 2014. For reasons that are not clear, the financial statements and tax returns for Rossi Recycling for FYE 30 June 2015 were prepared by Mr Hoffman, but Ms May then took that work back until the accounts for FYE 30 June 2019. Ms May described her practice when preparing the financial statements for obtaining Paul’s approval as follows:
“I would let him know that I required the information, I would then contact David Hoffman, and request the information, and then any information that wasn’t supplied I would ask Paul to ask David Hoffman for the information…And I prepared the financial statements and tax returns and then forward[ed] them to Paul for review.”
18In relation to the accounts and tax returns for Greenbow and the RP Trust (Rossi Recycling) for FYE 30 June 2013, Ms May’s evidence in chief was to the effect as follows:
(a) she prepared these accounts and tax returns in about November 2014;
(b) the balance sheet for Greenbow she prepared included entries as follows:
2013 2012 CURRENT ASSETS Rossignoli Trust No.3 $534,584 Rossignoli Property Trust $730,606 Heatherdale Property Trust $223,453 $223,453 CURRENT LIABILITIES Loans $190,377
(c) there is an entry for the RP Trust for 2012 of $730,606, but no entry for 2013 (Mr Farrands, senior counsel for Greenbow, indicated that he would be asking questions later about how that entry changed between 2012 and 2013);
(d) the “Loans” entry under Current Liabilities is a loan from Able which was “consolidated and removed to tidy up the loans in the accounts”;
(e) in the balance sheet of the RP Trust, there is an entry under Current Liabilities showing a liability to Able in for FYE 30 June 2012 for $730,824, but the entry for FYE 30 June 2013 is zero. This was a typing error, where the UPE to Greenbow was mis-labelled as owing to Able;
(f) in seeking to explain this mistake, Ms May said that she had two years’ worth of financial reports to do for numerous entities and that she was overwhelmed by the volume of information she had to process in trying to get it completed in a timely manner to satisfy the Australian Taxation Office (“ATO”), and support her application to get $126,000 in penalties remitted;
(g) the entry in the profit and loss statement for Greenbow described as “Capital Profit (Loss) on Sale of Non-Current Assets” in the sum of ($1,105,956), was to “write out of the accounts” the loans to various entities, being the loans to Rossignoli Trust No.3 and the RP Trust;
(h) there was no corresponding entry for this item in the profit and loss statement for the RP Trust and no income or other gain is shown as part of the revenue of the RP Trust arising from the write-off of the UPE in Greenbow’s accounts;
(i) the $1,106,183 shown in the tax return for Greenbow as a loss, broadly corresponds to the figure of the capital loss referred to in (g) above, was a capital loss that was used to remove the loan total from the accounts – it was expensed as a capital loss;
(j) the tax return for Greenbow was not intended as the final tax return;
(k) there was no future income in Greenbow available to be offset against the capital loss; and
(l) the RP Trust financial statements and tax return for the FYE 30 June 2013 had no record of this transaction as a capital gain or otherwise.
19After asking about Greenbow’s financial statements and tax return, Mr Farrands then took Ms May to a single page spreadsheet headed “The Rossignoli Group Loan Account Matrix As at 30th June 2011”. Ms May’s evidence was that this was prepared by Ms Crennan and it was given to Ms May with the documents sent to her by Ms Crennan by email in late 2014, in relation to the preparation of the 2013 and 2014 financial statements and tax returns for the Rossi Group.
20This shows a total of six entries under the heading “Unpaid Beneficiary Entitlements/Distributions” (noting that each entry is represented by a credit amount against each beneficiary and a matching debit amount against each of the three trusts). These entries represent sums owing by each of the three trusts to both Able and Greenbow. The sums owing to Greenbow are $730,823.88 owed by the RP Trust (representing the sum claimed in this proceeding), $253,453.03 owing by Heatherdale Property Trust and $543,593.63 owing by Rossignoli Trust No.3. The sums owing to Able are $594,522.96 (RP Trust), $90,363.87 (Heatherdale Property Trust) and $197,727.95 (Rossignoli Trust No. 3).
21I mention the sums apparently owing to Able, because it seems that most or all of these were released as part of the “tidy[ing] up of loan accounts” in the following year or so, apparently in the same way as the sum claimed in this proceeding. There is no suggestion (as I understand it) that any of these sums are sought to be reinstated into the accounts or otherwise now treated as still owing to Able. This may be because the amounts no longer claimed were post-16 December 2009 UPEs which counsel for Greenbow indicated in opening were sums that “the parties did contemplate writing…off so as to avoid Division 7A tax”.
22Mr Farrands next asked Ms May to compare this with a similar spreadsheet for the period “As at 30th June 2012”. This used different wording for the sections dealing with UPEs, with the heading for the first section being “Unpaid Beneficiary Entitlements/Distributions (PRE 16TH DECEMBER 2009)”, and then a second section headed “Unpaid Beneficiary Entitlements/Distributions (POST 16TH DECEMBER 2009)”. The first section had the entry for Greenbow owing by the RP Trust at a slightly lower sum than the 2012 spreadsheet ($730,606), as well the virtually same entries for the sums owing to Greenbow by each of the Heatherdale Property Trust and the Rossignoli Trust No.3 referred to in the earlier document.
23Notably, however, the sums that had been shown as owing to Able in the 2011 spreadsheet are either written off entirely (in the case of the $594,522.96 earlier shown as owing to Able by the RP Trust) or significantly reduced (in the case of the sums earlier shown as owing by the other trusts).
24After some initial confusion, Ms May’s evidence was that she did not have this document in late 2014 when she prepared the Rossi Group financial statements and tax returns. Nor, she said, did she have the equivalent spreadsheet for the FYE 30 June 2013, which was in similar terms to the 2012 spreadsheet discussed above.
25Her evidence was that, having only the 2011 spreadsheet caused her to make decisions concerning the treatment of Greenbow’s UPEs in the FYE 30 June 2013 tax returns for Greenbow that she would not otherwise have made. In particular, she gave evidence that she wrote off Greenbow’s UPEs for FYE 30 June 2013 Greenbow, “because you cannot leave a… post 2009 unpaid present entitlement sitting there in the… consecutive year [because] it gives rise to a Div 7A loan…so this being a [20]11 [spreadsheet], if it wasn’t paid out by the end of [20]12…it becomes a Div 7A loan and there’s a tax implication to that”.
26By this evidence, Ms May was asserting in effect that she would have approached the accounts for FYE 30 June 2013 differently if she had been provided with the 2012 or 2013 spreadsheets differentiating between UPEs pre and post-16 December 2009, instead of (or in addition to) just the 2011 spreadsheet, which did not differentiate so. She was saying that if she had known in late 2014 when preparing the financial statements that the $730,823.88 loan to Greenbow was a pre-16 December 2009 UPE, she would not have written it off as an asset in Greenbow’s accounts.
27There is a difficulty with this evidence, which is appropriate to identify at this point. It does not sit well with Ms May’s later evidence (discussed below) that she realised her mistake in her 2014 treatment of the $730,823.88 Greenbow UPE only after undertaking some training in 2018. If that were true, having spreadsheets in late 2014 showing a distinction between pre and post-16 December 2009 UPEs would not have made any difference to her approach to the UPEs in late 2014. I sought to clarify this aspect of Ms May’s evidence when the issue of her training was raised, but (as discussed further below) her answers were unconvincing.
28Ms May was next taken to a document headed “Rossignoli Property Trust Loans reconciliation”. Mr Farrands put to Ms May that the meta data for this document showed that Ms May created this document in around October 2014. He then sought to adduce evidence from Ms May about the purpose and effect of the document, to make good his submission in opening to the effect that none of Ms May’s contemplated write-offs shown in the document extended to the Greenbow beneficiary account.
29However, Ms May was unable to provide any meaningful explanation of the intent of the document or otherwise illuminate what it said about her thinking at the time she prepared the document. Even when she was taken back to it a second time at the conclusion of her evidence-in-chief, she could do no more than make the bald assertion that “there was never an intention to write off or remove that loan”. This assertion did not advance Ms May’s explanation of the document. Further, it was inconsistent with the general thrust of her evidence that she did intend to remove the loan constituted by the UPE, albeit based on what was a misunderstanding of the tax implications of leaving the loan on the balance sheet as at 30 June 2013.
30Despite Ms May’s lack of recollection of the meaning or effect of the document, Greenbow’s counsel sought to rely on it as showing that the Greenbow UPE was excluded from Greenbow’s write-off calculations. I deal below with Greenbow’s counsels’ submissions generally about the treatment of the UPE in its financial statements and conclude that, given Ms May’s inability to provide any meaningful explanation for the entries in the document, I am not persuaded that any conclusions can be drawn from it about Ms May’s (or Greenbow’s) intentions concerning the Greenbow UPE.
31In contrast, the next document to which Ms May was taken by Mr Farrands provides important insights into Ms May and Paul’s plans for the finances of the Rossi Group in late 2014. The first page of the document is an email from Ms Fulton to Mr Hoffman dated 19 December 2014 stating: “Attached is a Preliminary Summary of Accounting Status from Nicole [May]. Could you pass on a copy to Glen please”. Paul’s evidence was that this was an email from him – he did not have his own email address so all of his emails were coming from his partner Ms Fulton. The email attached a three page table with various entries about each of the companies in the Rossi Group under column headings including “Jobs Completed”, “Actions Required”, “Resulting Refunds” and “Processed”.
32Ms May described the table as “a list for myself of items that I needed to complete, and a list of things to be discussed with Paul”. Ms May sought to explain the entries in the table in both her evidence-in-chief and in cross-examination. I set out in my analysis section below my significant reservations about the reliability of this evidence. In the meantime, her evidence about the table can be summarised as follows:
(a) Item 7 for each company stated “Allocate loans as per Bernadette’s notes”. Ms May did not have a copy of Bernadette’s notes, but recalled that they were her adjustments and other preparations for the 2013 returns, which was the basis on which Ms May prepared the returns and the financial reports.
(b) The loans referred to in that note were the $1 million that was written off, because there was a note there about that from Bernadette. Ms May said that was the only reason the writing off was done – “That would not be something I would do off my own back [sic]”.
(c) Entries 8 to 10 for Greenbow say (respectively): “Prepare summary of loans between entities 2012”, “Enter 2013 totals” and “Reconcile loans and other balance sheet account to close company”.
(d) When asked why that entry was there, Ms May said: “That’s in there because at the time I hadn’t seen anything to do with Greenbow…And I needed to know exactly what the purpose of Greenbow was, what the trading history of it was…so I needed to know whether or not it could be wound up…[This] was simply a note to follow up whether or not we could wind up that entity once we had some information with regards to it”.
(e) In respect of two of the entities (notably including Greenbow), Ms May had included as the last item (emphasis added) “Prepare Financial Reports and Final Taxation”. In contrast, all other entities had the entry “Prepare Financial Reports and Taxation Return”. Her explanation of this in cross-examination was as follows:
“If I'd written final accounts there, the reference was simply to the fact that we'd had a discussion with Paul, he said he had a lot of companies, and a lot of entities, he didn't quite understand why there was so many, and…we had a discussion that if there were any entities that were no longer required or were able to be wound up, that it may be an idea to do so, but we needed further information. It was certainly not saying that we were going to wind anything up, it was to look at the history and what was actually going on and try and get some information… as to whether or not there were any entities that no longer were required.”
(f) Later in cross-examination Ms May said that the document had been prepared after preliminary discussion with Paul, but that:
“We hadn't discussed any detail because I was trying to find out the background information and I had no financial reports at this point in time for most of the entities. Most of the entities, it was only that I had an ACN for them that I was actually able to get access to their corporate information, particularly Greenbow, and Whelan the Wrecker…”
(g) Ms May denied that it was possible that Paul directed her before her preparation of these notes that Greenbow be closed. And she repeatedly asserted that the notes were a checklist and were prepared “pending… information” because she “had no financials” at that time. She also asserted that they could not deal with the UPEs “because they were crystallised UPEs” and that: “I didn’t write them off, I wrote them out of the accounts”.
33On 23 December 2014, Ms May sent an email to Ms Fulton’s email address. It commences “Hi Jane”, but I infer, consistently with the Paul’s evidence referred to above about using Ms Fulton’s email address, that this was intended for Paul. The email states: “Attached are [sic] the entity list with the assets for each entity for 2013 and the loan summary which should now be correct”. Ms May’s evidence about this document (which Greenbow’s submissions seek to emphasise) was that the main purpose of preparing this report was to deal with the inter-entity loans between the RP Trust, the two property trusts and Able, but that it was “an incomplete worksheet”. Ms May continued:
“Well, had it been complete it would have had those UPEs, but in December 14 I was still trying to get all the information together to try and work out exactly what their entitlement was. As I said, I still - I didn't have financial reports for all the entities, I didn't have all the information, I purely had the bit of information that was supplied by Bernadette. I tried to ask for additional information from David Hoffman, the in-house accountant, and I was provided with very little.”
34This evidence is directly at odds with the covering email and is unconvincing. As Greenbow’s submissions recognise, it was sent after the financial statements had been prepared and signed off (this occurred on and before 21 December 2014) and expressly states that it includes the “assets for each entity for 2013” (emphasis added) and “the loan summary which should now be correct”. There is nothing in the covering email to suggest that the list should be read as dealing only with RP Trust, the two property trusts and Able, that it is incomplete or that Ms May was waiting for additional information. On the contrary, the email it expressly states that “the loan summary should now be correct”.
35On my reading, Ms May is plainly stating to the recipient of the document (Paul), that the loan summary (which I infer includes the loans constituted by the UPEs) were at zero. In particular, there is no entry showing a UPE (or other loan) outstanding as at 30 June 2013 from the RP Trust to Greenbow. There are no documents or other evidence to suggest that Paul was taken by surprise by this or misunderstood what the spreadsheet was showing. He was not asked about it in examination-in-chief or in cross-examination.
36Ms May’s evidence about her “training for taxation purposes” referred to above was that this occurred in 2018 when she was an employee at Chambers & Partners, where she dealt with a lot of clients that had Division 7A loans and UPEs both pre and post-1997. She went on to explain that in September of 2018 documents were prepared to reinstate all the assets and liabilities as they should have been recorded as required by the relevant ATO tax ruling. She also referred to being asked by Paul where the Greenbow UPE had gone, and her explaining to him that they needed to be reinstated “because they were never treated as being forgiven”.
37Ms May’s answers on why and in what circumstances she came to reinstate the UPEs were long, convoluted and dissembling. Greenbow’s submission about the effect of her evidence was as follows (citations omitted):
“Some years later, in 2018, [Paul] became aware, when dealing with his ex-wife’s application in the Family Court to re-open his property settlement with her from 2007, that Greenbow’s UPE was not in the financial statements he was looking at. He raised this with Ms May and instructed her to ‘write it back’ into Greenbow’s financials. She told him it was left out by mistake. She had become aware of that from a training course she attended in May 2018.”
38Returning to the events of late 2014 in cross-examination, Ms May’s evidence initially did not improve and ended up being only slightly less opaque. I sought to clarify with Ms May what she understood about the UPEs in 2014, compared to her understanding after the training in 2018, but she seemed incapable of giving a straightforward answer. Her evidence in response to my question on this concluded as follows:
“I was unclear, I was unclear on it, because I was confused about the way in which the information was, and look, I - I treated it the wrong way, and I looked at the total as one thing, and look, in - I did the wrong thing, okay, I was unclear, I did write that down, I never forgave anything or wrote anything off, I simply omitted it because we were trying to - we were trying to, um, consolidate loans and tidy the accounts up, to make it easier for Paul to understand and to report going forward. This is why there were never financial, there wasn't financial information put in tax returns where it wasn't required, because it wasn't required in the companies.”
39The following morning Dr Barrett, counsel for Rossi Recycling returned to the question of what Ms May had intended when she wrote off the Greenbow UPE in the accounts of Greenbow in late 2014. She first said that she was not completely aware of the implications at that time and agreed that an entry in the accounts having tax implications does not mean that it cannot be done. She also agreed that she treated the UPE as an expense in the Greenbow tax return, because of a concern that if something was not done about it, that it would be treated as a Division 7A loan and there would be a tax implication to that.
40She then gave the following evidence:
“I moved it from the financial reports, yes, and it was put in the tax return and that was an incredibly huge error, and that's why I got so upset yesterday, because I'm realising, once I realised the impact of the - of preparing that return and what could be conceived or interpreted as my - well, as the intention was totally incorrect, it was purely for the purpose of removing it from the accounts to simplify the accounts and also because it was just believed that the debt would probably never be paid back, because Green - sorry, Rossi Property Trust had already had significant losses in the prior couple of years, and we just assumed that it would never be repaid.”
41After Dr Barrett pressed the issue and despite further answers that seemed to conflate what Ms May was intending at the time with what she later understood to be implications of her actions, I find that the effect of her evidence was that:
(a) at the time (that is, in late 2014), she believed that her treatment of the UPE in the Greenbow tax return for FYE 30 June 2013 “was the correct way of doing it”;
(b) she made the assumption that the purpose of the treatment in the Greenbow tax return was to convey to the Tax Commissioner that there was no UPE so no Division 7A liability would arise, but she later discovered this was incorrect;
(c) she thought there might be a Division 7A liability and that is why she treated it the way she did in the Greenbow tax return;
(d) we (presumably referring to herself and Paul) believed that the UPE may not be recoverable, particularly at that point in time;
(e) another reason it did not matter too much at that stage was that Paul essentially controlled and owned all the companies and all of the assets;
(f) at the time “we” were also trying to tidy up the accounts because there were so many different loans; and
(g) in re-examination Ms May was asked, if the UPE was permanently removed, what she understood about whether there would be a detriment to the RP Trust if that were the case in terms of deemed dividends. She answered: “At the time I did not. I actually can’t recollect”.
Bernadette Crennan’s evidence
42Ms Crennan also confirmed that Paul would review and comment on draft accounts before they were finalised. When asked to respond to Paul’s criticism of her that she was lazy and incompetent, she responded: “Paul would paint a picture that suited him. I would work till 3 or 4 in the morning to get things done for Paul. I did those [2013/2014] accounts [in draft form] three times, and each time he changed his mind about something I had to alter 33 sets of accounts”.
43When asked about the table of action items prepared by Ms May and emailed on 19 December 2014, Ms Crennan confirmed that she had not seen that table. In relation to the item referring to “Bernadette’s notes” her evidence was that she could not say what notes the item was referring to, but “the only thing they would have been was if Paul and I had discussed what he wanted, they would have been the notes based on those discussions, but no, I don't remember them”. She added that what Paul wanted was “to consolidate the loan accounts in a way that made it easier for him to keep his assets”. Ms Crennan did not recall discussing Greenbow.
Paul Rossignoli’s evidence
44Asked in evidence in chief about his own assessment of his ability to read financial statements, Paul responded:
“I can read a financial statement, if I sit down for three or four hours and just slowly go through it, right, but at the end of it I will always have a lot of questions, and I've always asked the accountant, 'This is right? Everything's okay?' And you'll get the answer it's never wrong.”
45He clarified that by “the accountant” he was referring to Ms Crennan first, “but then I’d also do the same thing with Nicole”. And he agreed that this was his “regular practice”.
46When Paul was taken in examination-in-chief to the table attached to the 19 December 2014 email he had sent using Ms Fulton’s email address, and asked about entry item 7 for Greenbow reading “Allocate loans as per Bernadette’s notes”, he remarked: “I presume there was something said to David [Hoffman] to do about allocating loans. I don't know…I never knew where she allocated them, I knew she was allocating moneys through the companies for tax reasons, right”.
47Then when asked about why item 9 would refer to “closing the company” (Greenbow), his evidence was: “I don't understand why I'd want to close the company, it had money that - owed to it that it had already paid tax on, why would I want to close it?” His evidence was that he did not give any instructions to close Greenbow.
48Paul was next asked in examination-in-chief about claims for legal fees by Barry Kenna & Co solicitors (“Kenna”) against Able. He seemed to have a good recollection of inter-company liabilities in relation to this issue. When asked whether Greenbow owed any money to Able in 2013, he said it owned about $190,000 or thereabouts. He was not sure how the loan came about, but he could recall that it was dealt with in the end by being forgiven. He said:
“[I]n the end it was forgiven, or written off, or something…partly because the Barry Kenna case happening, and partly because Greenbow didn't have the money to pay it, because their people that owed [Greenbow] money weren't paying any money and it didn't look like they were going to get any money from them at that time”.
49He explained that “their people” was a reference to Rossi Recycling, Heatherdale Property Trust and the RP Trust, as they were Greenbow’s three biggest creditors.
50In relation to the role of Ms May, Paul was asked if she explained anything to him about the preparation of the 2013 financial statements. He said that she sounded very competent, and:
“[S]he was adjusting what she was allowed to adjust in the books for tax reasons, right, and that's what she did, but I didn't get at that stage any specific notes to what she was actually doing, right, I, you know, I always thought she was doing a good job, and I still think she does today, right….I didn't give her any instructions, I didn't even find out that things that happened there like they'd happened, until I had to go through the books in 2018 [in relation to the Family Court dispute with his ex-wife]”.
51The effect of Paul’s evidence concerning his enquiries purportedly prompted by the Family Court proceedings and what followed, is conveniently summarised in Greenbow’s submissions as follows (citations omitted):
“Some years later, in 2018, [Paul] became aware, when dealing with his ex-wife’s application in the Family Court to re-open his property settlement with her from 2007, that Greenbow’s UPE was not in the financial statements he was looking at. He raised this with Ms May and instructed her to ‘write it back’ into Greenbow’s financials. She told him it was left out by mistake. She had become aware of that from a training course she attended in May 2018… As instructed, in September 2018, Ms May wrote back the UPE into Greenbow’s financial statements for 2013-2018. She did not write it back into [Rossi Recycling]’s financial statements in 2018 because she wanted to avoid further disputes between [Paul] and [Glen] which had been running for many years and which had caused her distress.”
52In cross-examination, Paul accepted that he disagreed with Glen about the management of Eastern Recycling probably from shortly after 2013 right up to 2019. He accepted that he felt a degree of hostility and bitterness about the allegations made against him by Glen in the Trustee Proceeding. He asserted that he commenced the Receivership Proceeding to “get some money that was owed to me from Rossi Recycling, and [because Rossi Recycling] wasn’t viable”. Before entering into the Settlement Deed, he considered all of the assets held by all of the companies and trusts in the Rossi Group “were mine to do with what I wanted as being the controller”. But he denied that he sought the reintroduction of the Greenbow UPE into the books of Greenbow for the Receivership Proceeding and not for the Family Court proceeding.
53Paul’s evidence was that he relied on accountants to do the things that need to be done by the accountants, including determining which amounts are to be transferred where and what documents have to be lodged. He did not understand the finer points. However, he asserted that he “always knew what happened at the end of the year, because I would look and see if we've made a profit, we've got that much tax coming out, right, you could see briefly if you'd had a big loss, where it was”. He said he would do that every year, including in 2014 and 2015. He agreed that on each occasion he was satisfied that the accounts reflected what he understood the transactions to have been.
54In the context of questions about the reference in the spreadsheet prepared by Ms May and emailed to Ms Fulton on behalf of Paul to “closing down Greenbow”, it was put to Paul that it was possible for him to allocate loans between companies within the Rossi Group”. His initial response was “I don’t know…the accountants have done what they thought was appropriate, right, to look after my interests”. He later accepted that transfers between companies in the Rossi Group could be done:
“That was a reason of having a group of companies, because you can move funds around. How it happens and why it happens and what the result are, and what the responsibilities are, that's the accountant's work, not mine”.
55On the specific question of the reference to closing down Greenbow, he insisted that he would not have agreed to this. He said that if the accountant had said to him that Greenbow had funds that had been allocated to it, there was no way he would have would have let it be closed down. However, he had no recollection of discussing closing Greenbow down.
MYOB general ledgers
56The general ledgers maintained by Mr Hoffman for the Rossi Group during this period have the following relevant entries:
(a) The general ledger of Rossi Recycling for FYE 30 June 2013 records a debit to Greenbow in the sum of $730,309.38, described as “Unpaid Benefichiary [sic] Entitlement – Pre Dec 2009”; and again as “2-1910 Greenbow Pty Ltd”.
(b) The general ledger of Rossi Recycling for FY 2014 records a debit to Greenbow in the sum of $730,309.38, described as “2-1910 Greenbow Pty Ltd”.
(c) The Greenbow UPE did not appear in the general ledger of Rossi Recycling for FY 2015, 2016, 2018, or 2019.
(d) The general ledger of Rossi Recycling for FY 2017 records a debit to Greenbow in the sum of $730,309.38, described as “2-1910 Greenbow Pty Ltd”.
(e) The general ledger of Rossi Recycling for FY 2020 records a debit to Greenbow in the sum of $730,309.38, described as “2-1910 Greenbow Pty Ltd”.
ATO Rulings
57As Greenbow submitted in its written opening submissions, there are three ATO tax rulings that are relevant to the issues in the proceeding. First, on 2 June 2010, the Commissioner issued ruling TR 2010/3,[2] the effect of which was that a UPE arising before 16 December 2009 (the date of release of a draft ruling on the same subject matter) was not taken to give rise to a loan from the beneficiary to the trustee pursuant to Division 7A of the Income Tax Assessment Act 1936 (Cth). UPEs created after that date and not treated in certain ways as set out in the ruling, would be a Division 7A loan and thus a dividend in the hands of the beneficiary, and incur tax accordingly.
[2]I note that this ruling was withdrawn with effect from 1 July 2022 (TD2022/11), but the withdrawal does not affect the findings in these reasons, which concern decisions about the tax affairs of the Rossi Group in the period 2013 to 2019, when the ruling remained in force.
58On 25 November 2015, the ATO issued ruling TD 2015/20 which applied to UPEs arising before and after its issue (and therefore applies to the Greenbow UPE). This ruling provided that a release by the corporate beneficiary of its UPE, in full or in part, is a crediting of an amount and is taken to be a payment for Division 7A purposes, to the extent that the release represents a financial benefit to an entity. The deemed payment is therefore taxable in the hands of the recipient. Thus any release by Greenbow of the Greenbow UPE would be a financial benefit to Rossi Recycling and taxable in its hands.
59Ruling TD 2015/20 does not apply to an amount already included in assessable income because of another application of Division 7A. Nor does it apply to the extent the UPE is converted into a debt to which s109F of the Income Tax Assessment Act 1936 (Cth) may apply.
60On 14 December 2016, the Commissioner issued ruling TD 2016/19, which concerned whether a beneficiary is entitled to a deduction under s25-35 of the Income Tax Assessment Act 1997 (Cth) for the amount of a UPE the beneficiary has purported to write-off as a bad debt. The Commissioner stated that a deduction is not available to the beneficiary. According to Greenbow, this determination indicates that the Commissioner’s view on this issue is applicable to past as well as current and future income years.
Analysis
The issues
61A UPE arises where a trustee declares a distribution of income to a beneficiary, but fails to pay it out. The beneficiary then acquires a present equitable entitlement to payment.[3] That entitlement entails a right to demand immediate payment, or to request the trustee properly re-invest, accumulate, or capitalise the distribution.[4] As Lathan CJ and Williams J held in FCT vWhiting:[5]
“The words ‘presently entitled to a share of the net income’ refer to a right to income ‘presently’ existing – i.e., a right of such a kind that a beneficiary may demand payment of the income from the trustee, or that, within the meaning of s. 19 of the Act, the trustee may properly reinvest, accumulate, capitalize, carry to any reserve sinking fund or assurance fund however designated or otherwise deal with it or as he directs on his behalf.”
[3]Fischer v Nemeske Pty Ltd (2016) 257 CLR 615 (“Fischer v Nemeske”) at 650 [97] (Gageler J), citing Commissioner of Inland Revenue (NZ) v Ward [1970] NZLR 1 at 30
[4] FCT v Whiting (1943) 68 CLR 199 at 216-7
[5] (1943) 68 CLR 199 at 216-7
62It is not in dispute that a pre-16 December 2009 UPE in the sum of around $730,000 validly arose and was owing by Rossi Recycling to Greenbow in the period leading up to FYE 30 June 2013. The precise figure varies slightly between different versions of the financial statements and company records, but nothing of substance turns on this. It appears that the minor discrepancies are probably the result of the treatment of annual ASIC fees owing by Greenbow, but paid by Rossi Recycling on Greenbow’s behalf – Greenbow did not have its own bank account from which to make the payments. Payments made by Rossi Recycling on behalf of Greenbow were deducted from the Greenbow UPE balance.
63I accept and adopt Greenbow’s counsels’ summary of the circumstances in which the UPE arose (citations omitted):
“Greenbow had been established in 1992 as a tax effective vehicle to which earnings could be distributed from the RP Trust (and the other trusts); Greenbow’s rate of tax was the corporate rate, whereas a distribution to, say, [Paul], would be at his marginal rate. Further, the distribution to Greenbow could be ‘unpaid’ in that although the distribution had been made, the money to pay the UPE could be left in the RP Trust, as working capital or for other purposes. In short, a UPE represents distributed income, on which tax has been paid, but with the UPE not being paid to the beneficiary, and therefore represents that beneficiary’s asset (post tax) to be called on whenever considered appropriate”.
64It is also not in dispute that the amount of the UPE (while it existed) was held by Rossi Recycling for Greenbow under a sub-trust, separate from the RP Trust established by the RP Trust Deed. As Greenbow’s counsel submitted, under the RP Trust Deed, Greenbow and other beneficiaries were mere discretionary beneficiaries, but under the sub-trust, Greenbow was absolutely entitled to the UPE. That is, it could call on it at any time for payment, without any discretion on the part of Rossi Recycling as trustee to refuse payment. The following submissions by Greenbow’s counsel are similarly uncontroversial:
(a) It is conventional to record a UPE in the balance sheet of the beneficiary as an “asset”, and for the obligation to pay a UPE as a liability in the balance sheet of the trustee in question.
(b) Rossi Recycling recorded the Greenbow UPE in the conventional manner, namely, as a liability in the RP Trust’s financial statements for the year ended 30 June 2012.
(c) Greenbow recorded the Greenbow UPE as an asset in its balance sheet for FYE 30 June 2012.
(d) Recovery of a UPE by a beneficiary if not paid on demand may be brought by way of an action to enforce the demand, in equity.[6]
(e) The entitlement to be paid is absolute, and therefore the demand in equity that the trustee pay it over can be made at any time into the future irrespective of when the UPE was created.
(f) The claim for money had and received overlays the equitable relationship of the trustee and the beneficiary with the legal relationship of debtor and creditor, a principle which is well settled.[7] Time runs from when the debt is demanded.
[6] Tindon Pty Ltd v Adams [2006] VSC 172 at [49] per Hargrave J
[7] Fischer v Nemeske at 653 [105] per Gageler J
65What is in dispute is the legal consequence of Ms May’s conduct in late 2014 to remove the Greenbow UPE from the financial statements for Greenbow and the RP Trust. It is again convenient to set out the summary of those actions from Greenbow’s counsels’ submissions, noting that these analyse the relevant evidence from an accounting perspective, in part informed by the evidence of Greenbow’s accounting expert Mr Fitzgerald. I discuss below the extent to which these matters impact the legal characterisation of the conduct.
“Ms May’s accounting work and treatment in December 2014 of Greenbow’s UPE was handled very badly on a number of significant accounting fronts. It was treated inconsistently and asymmetrically across the [Rossi Group]; it was said to be a disposal (as part of other asset disposals) of the UPE in Greenbow’s 2013 financial statements, but ‘expensed’ (rather than shown as a capital loss) in its 2013 tax return. Greenbow’s UPE had come over to the [RP] Trust balance sheet in 2012 and then…removed in 2013, and…consistent with the ‘expensing’ of the UPE by Greenbow (but referable to Able) [it] did not appear in the 2013 RP Trust tax return as a ‘capital gain’ or otherwise. As Ms May told the Court, it was part of the removal of items from the financial statements.
Further, the UPE was recorded in the RP Trust’s 2013 financial statements as one owed and then written-off as regards to Able (another entity within the RGC), not Greenbow. This was another mistake by Ms May. There were in fact two mistakes: the first was to mislabel the UPE as Able’s when it was Greenbow’s; the second was to remove it because it [was] labelled as Able’s and Ms May therefore considered it did not belong there. It was an error not only as to description but also as to amount. Further, while the UPE was kept in the general ledger of the RP Trust, at least until March 2015, it then inexplicably disappeared (no witness at trial could say why). Further, Able did not show the UPE as a gain in its financial statements for 2013 or 2014.
In short, in December 2014, Ms May had caused Greenbow’s UPE to be ‘written out of’ the financial statements of the [Rossi Group], but not in any coherent manner. Ms May gave evidence that when she started working for the [Rossi Group] in late 2014 she was under considerable pressure and there was a short timeframe in which to get things done for the various entities within the [Rossi Group]. This may somewhat explain the anomalies.
By mid-December 2014, the financial statements for Greenbow for 2013 had been prepared and finalised by Ms May. [Paul’s] name appeared on the financial statements as the relevant director, however, inexplicably David Hoffman, the internal accountant, is recorded as having chaired the directors meeting and the AGM at which those accounts were approved. [Paul] was the public officer of Greenbow for tax purposes. But in the tax return the UPE was “expensed” within the overall expenses of Greenbow – it was not shown separately or as a capital loss. Further, there was no ‘capital gain’ shown in the RP Trust’s tax return for 2013, so [Paul] could not have seen it. No ‘capital gain’ relating to Greenbow’s UPE appeared in the Able tax return for 2013.
On or about 19 December 2014, Ms May prepared the Able 2013 financial statements. Those statements did not show any UPE being owed to Greenbow. However, there was a release of about $190,000 said to be owed by Greenbow to Able. Ms May’s evidence was that this loan was consolidated and removed to tidy up the loan accounts.”
66Greenbow’s counsels’ submission include a helpful summary of the various ways in which an equitable interest (including a UPE) can be dealt with by a beneficiary and trustee. Of these, only two are relevant. Namely, “Release/Surrender” and “Assignment”. The other possibilities are not supported by the facts for the reasons stated in Greenbow’s counsel’s submissions, and are not relied on by Rossi Recycling. It is therefore unnecessary to consider them.
67Greenbow’s expert Mr Fitzgerald similarly expresses the opinion that there are “two options” to explain the reduction to the UPEs due from the three Rossi Group trusts to Greenbow. Namely, that the “assets were written down as not recoverable” or that “the assets were written down as having been released”.
68Incidentally, Mr Fitzgerald also confirms that a set of FYE 30 June 2013 financial statements had apparently been prepared by Southerton’s Melbourne which did show the Greenbow UPE. However, the circumstances of the preparation of these financial statements is obscure and it is clear that they were never approved. Mr Fitzgerald accepted that Ms May’s financial statements were the final FYE 30 June 2013 year end accounts.
69Thus the issues in this proceeding are:
(a) Was the Greenbow UPE permanently released by Greenbow?
(b) Was the Greenbow UPE assigned by Greenbow to Able?
Was the Greenbow UPE permanently released by Greenbow?
70Greenbow’s counsel submit that a beneficiary may release its equitable interest, and that the word “surrender” may be used to identify such release, citing the decision of the High Court in MSP Nominees Pty Ltd v Commissioner of Stamps (SA).[8] However, they argue, “the evidence indicates overwhelmingly that [Paul] did not intend that Greenbow would release its UPE”, and then set out at length the evidence on which they rely to support that submission.
[8] (1999) 198 CLR 494 at [32], [35]
71Greenbow’s counsel correctly identify that the answer to this question of release or surrender turns on evidence as to Greenbow’s intention. And for practical purposes, that means Paul’s intention, as well as that of any authorised agent being, relevantly, Ms May. As Rossi Recycling submits, in Tosich Construction v Tosich,[9] Lehane J observed: “The character of the underlying transaction depends, principally at least, on the intention of those who entered into it”.
[9] (1997) 23 ACSR 466 at 472, affirmed on appeal in Tosich Construction v Tosich (1997) 78 FCR 363
72In my view, and contrary to Greenbow’s submission, the evidence indicates that Greenbow did intend to release its interest in the UPE. Its reasons for doing so were based on a flawed understanding of the law, and I agree with Greenbow that its intention was poorly executed. But I am satisfied that neither of those matters undermines the validity of the release, effected in furtherance of that intention. It is convenient to structure my reasons for this conclusion by reference to each of Greenbow’s contrary arguments.
Did the release make commercial sense?
73Greenbow’s first and second arguments essentially focus on the original rationale for establishing Greenbow, and the lack of any commercial justification for the release. I accept that Greenbow was created to act a tax effective repository (or, as Ms Crennan described it, “bucket”) for the allocation of profits from the various Rossi Group businesses. It seems that Able also served this purpose, given that it too was the beneficiary of accumulated UPE’s from each of the three Rossi Group trusts, at least as at 30 June 2011. I also accept that a commercial justification for the release is not obvious, particularly given that the Greenbow UPE was a “post tax” asset.
74However, it is not correct to assert that Rossi Recycling has not identified any reason for moving the Greenbow UPE out of Greenbow. Although the primary reason offered by Rossi Recycling was Greenbow’s intention to assign the UPE to Able (discussed further below), it also embraced the alternative explanation provided by Greenbow itself, particularly in Dr Barrett’s reply submissions. Namely, that it was done to avoid a perceived Division 7A tax liability. I am satisfied that this was the reason, and that it is a reason that also supplies the commercial justification, albeit one that was at least in part based on Ms May’s misunderstanding of the law.
75I say “in part”, because both Paul and Ms May’s evidence suggests there were a number of factors that informed the perceived commercial justification. As I have said, foremost among these was Ms May’s belief that releasing the UPE would avoid a tax liability in Greenbow. Although this was a misconceived belief, it seems there were other factors in play that diminished the potential impact of the release.
76For example, Paul’s evidence was that, at the time of the permanent writing off of the $190,000 loan from Able to Greenbow (that is, in late 2014 when Ms May was making the various account adjustments), Greenbow did not have the money to pay Able, because the three Rossi Group trusts including the RP Trust, did not have the money to pay Greenbow. It follows that at the time of the release Paul believed it was a release of a liability that was probably never going to be paid in any event.
77Similarly, it was clear that Paul considered that all of the companies and trusts in the Rossi Group were his to do with as he wanted, at least until he signed the Settlement Deed in 2019. Thus, he is unlikely to have been overly concerned about releasing internal liabilities between his companies (including a “tax paid” liability), if it avoided an exposure to an external liability to the ATO.
78Ms May gave similar evidence as summarised above. She said in effect that “we” (presumably referring to herself and Paul) believed that the UPE may not be recoverable, particularly at that point in time and that another reason the writing off of the Greenbow UPE did not matter too much at that stage, was that Paul essentially controlled and owned all the companies and all of the assets. She added that, at the time, “we” were also trying to tidy up the accounts because there were so many different loans.
79Taking all those factors into account, I do not agree that it would be non-sensical (at least in the eyes of Ms May and Paul in late 2014) to release the Greenbow UPE.
Greenbow’s intent and issues of credit
80The third and most forceful argument on Greenbow’s behalf on this release issue is that Paul “gave unequivocal evidence that he did not intend that the UPE should be released – he positively considered that it continued to exist and raised with Ms May in 2018 why he could not find it in the financial statements of Greenbow”. Counsel for Greenbow explain in their submissions that the context for this was that Paul had started looking at Greenbow’s financial statements because of his ex-wife’s Family Court application.
81It is convenient to deal with this submission in conjunction with counsels’ fourth, fifth, seventh and eleventh arguments, which respond to Dr Barrett’s submissions about Paul’s tactics in his dispute with Glen, his credit more generally and doubts about the reliability of Ms May’s evidence.
82I agree with Dr Barrett that Paul’s evidence of his intentions and conduct at various relevant times was both contrived and unconvincing. As to Paul’s intentions in around late 2014, I discuss this below in reference to counsel for Greenbow’s seventh argument and the issue of Ms May’s authority. In relation to Paul’s evidence about how he discovered that the UPE had been removed from Rossi Recycling’s and Greenbow’s financial statements, Greenbow’s counsel submit the effect of this evidence was as follows:
“Some years later, in 2018, [Paul] became aware, when dealing with his ex-wife’s application in the Family Court to re-open his property settlement with her from 2007, that Greenbow’s UPE was not in the financial statements he was looking at. He raised this with Ms May and instructed her to ‘write it back’ into Greenbow’s financials. She told him it was left out by mistake. She had become aware of that from a training course she attended in May 2018.”
83Greenbow’s counsel argue that the circumstances of Paul’s discovery of the missing Greenbow UPE evidences that Paul never intended to release it. They argue that, contrary to Dr Barrett’s submissions, Paul did not look into the existence of the UPE so as to “increase the size of the asset pool against which his ex-wife could claim in contested family law proceedings”. They say that there was no such evidence given. They assert that Paul’s evidence was that he “had to go through the books thoroughly to find out exactly where [he] stood” and “[he] had to know exactly where [he] stood when [his ex-wife] was claiming more money”. Greenbow’s counsel criticise Dr Barrett’s attack on this evidence on the basis that none of Paul’s evidence about him wanting to know his financial exposure to his ex-wife’s Family Court application was challenged in cross-examination.
84I reject the submission that Paul wasn’t challenged about his evidence concerning his Family Court dispute. It misses the point. Dr Barrett directly challenged Paul on his true motivation for his investigation of the Rossi Group accounts and insistence that the UPE be reinstated. There can be no suggestion that Greenbow was in any way surprised about Rossi Recycling’s case on this issue. The effect of Dr Barrett’s submission in relation to the Family Court dispute was that it was not credible for Paul to suggest that he insisted the UPE being reinstated because of that dispute. I agree. It makes no sense for Paul to dramatically enlarge Greenbow’s asset pool in circumstances where his ex-wife is apparently seeking to claim a greater share of his assets.
85Put another way, Paul may well have been interested in investigating the Rossi Group accounts in relation to the family law dispute. But I do not accept that this was either the explanation or the motivation for his request to reinstate the Greenbow UPE. I agree with Dr Barrett that Paul’s evidence to this effect was not credible and undermines his general credibility on matters of importance. Rather, it is likely (and I accept) that he did so for reasons akin to those suggested by Dr Barrett.
86As noted above, Glen commenced the Trustee Proceeding in February 2018. It seems this occurred at a time when Paul’s dissatisfaction with Glen’s management of the Eastern Recycling business had been escalating over several years. He said that he disagreed with Glen about the management of the business probably from shortly after 2013. Further, the allegations made in that proceeding (particularly as they related to Paul’s alleged misuse of company funds and more personal matters) were self-evidently serious and confronting. Paul accepted in cross-examination that he felt resentment and bitterness about the allegations.
87Against that background, and despite Paul’s denials, I am satisfied that Dr Barrett’s suggested explanation for Paul’s direction to Ms May to reintroduce the Greenbow UPE, is the most plausible. By September 2018, the Trustee Proceeding had been on foot for several months. It is not surprising that Paul would be looking for ways to improve his strategic advantages in the increasingly bitter dispute with Glen. In particular, seeking to revive a substantial debt previously owing by the RP Trust to Greenbow is an obvious way to provide Paul with leverage in resisting any attempt to remove him from control of the RP Trust’s Eastern Recycling business.
88Paul’s decision to commence the Receivership Proceeding was probably also intended to raise the stakes in the broader dispute with Glen. This proceeding was issued in late November 2018, but it is safe to assume that it was in contemplation and being prepared for some weeks or months before November. And it is unlikely to be a coincidence that Paul commenced the Receivership Proceeding three days after a Greenbow director’s meeting resolving to adopt Ms May’s revised Greenbow accounts for FYE 30 June 2013 to FYE 30 June 2018 purporting to restore the Greenbow UPE.
89In summary, I am not satisfied that Paul’s direction to reinstate the Greenbow UPE to Greenbow’s financial statements backdated to 2013, was motivated by a desire to ensure everything was in order in relation to his Family Court dispute. In my judgment, based on contemporaneous documents and Paul’s demeanour in the witness box, his evidence about this was contrived and unconvincing. Rather, it is likely that he gave the direction to provide him with additional leverage in his dispute with Glen. Thus, I reject the submission by Greenbow’s counsel that Paul’s version of what happened in 2018 supports the contention that he did not intend that the UPE be released.
90Turning briefly to Ms May’s evidence (and Greenbow’s counsels’ seventh and eleventh argument), I have noted above my concerns about aspects of that evidence. In particular, I observed that Ms May’s answers on why and in what circumstances she came to reinstate the UPEs were long, convoluted and dissembling. I agree with Dr Barrett’s submission that Ms May cannot be regarded as an independent witness both because of her family connections to Paul and her hostility towards Glen.
91Based on my assessment of Ms May’s evidence and the contemporaneous documents, I make the following findings in relation to Ms May’s role in 2018:
(a) I accept that Ms May received the training in around May 2018 to which she referred in her evidence;
(b) I also find that it was not until Ms May received this training that she appreciated that the effect of the relevant ATO rulings was that pre-16 December 2009 UPEs were not subject to Division 7A tax liability;
(c) it is likely that Paul spoke to her later in 2018 about the status of the inter-company indebtedness;
(d) Paul may have referred to his Family Court dispute in his discussions with Ms May but, for the reasons above, I do not accept that this was ultimately his reason for wanting the Greenbow UPE restored;
(e) at some point in this process Ms May identified that her treatment of the Greenbow UPE in the FYE 30 June 2013 financial statements and tax returns was based on a misunderstanding of the relevant ATO rulings, and she probably communicated this to Paul; and
(f) Paul then directed Ms May to reinstate the Greenbow UPE, which she did by revising all of the Greenbow financial statements back to and including 2013.
92I note in passing that Greenbow’s own expert expressed the view that Ms May was in error in reinstating the Greenbow UPE for each year back to and including FYE 30 June 2103. In his view, Ms May should have recorded the write-back of the Greenbow UPE “at the time it was determined that such assets may be recoverable”. He said that: “The financial accounts for the [FY] 2013 to 2018, being prior to the reinstatement of the UPEs should not have been adjusted”. Ms May was not asked to comment on this, so I can only speculate as to why she considered it appropriate to back-date the adjustments to FYE 30 June 2013.
93Finally, Dr Barrett criticised Ms May’s evidence purporting to explain why she did not reinstate the Greenbow UPE into the Rossi Recycling accounts at the same time as her adjustment to the Greenbow accounts. Greenbow’s counsels’ response to this criticism was as follows:
“But the evidence was clear: [Paul] told Ms May to do this in 2018, and the only reason it went into Greenbow’s 2018 financials and not [Rossi Recycling’s] financial statements for 2018 was that, as the defendant’s submissions identify, Ms May did not want to cause any further problems between [Glen] and [Paul]. Ms May’s evidence was that ‘the situation was incredibly acrimonious, and I did not make any changes, which should have been made’.”
94In my judgment, Ms May’s evidence as summarised in this passage is also contrived and unconvincing. Given the state of the litigation between Paul and Glen at that time, it is difficult to imagine how the situation could have been made more acrimonious by an additional account adjustment to another company in the Rossi Group that Paul then effectively controlled. I also agree with Dr Barrett that the evidence is inconsistent with Ms May’s own admitted hostility towards Glen.
95I would add that it makes little sense that she would be uncomfortable about adjusting the accounts of Rossi Recycling when Paul controlled that entity, and yet apparently willing to purport to do so in October 2019 after Glen had taken control of Rossi Recycling and terminated her retainer by that company. To my mind, it is much more likely that she refrained from adjusting RP Trust financial statements at the same time as adjusting the financial statements for Greenbow, to avoid giving Glen further ammunition to deploy in support of his claims in the Trustee Proceeding. But this was not put to Ms May. It is sufficient that I find that Ms May’s evidence generally did nothing to remedy the deficiencies in Paul’s evidence on the matter of his intention.
Accounting treatment and Ms May’s intention
96Greenbow’s counsels’ sixth argument essentially relies on aspects of Ms May’s accounting treatment in respect of the UPE as inconsistent with a release. These arguments are unpersuasive. As stated above, Greenbow’s counsel themselves acknowledge that:
“Ms May’s accounting work and treatment in December 2014 of Greenbow’s UPE was handled very badly on a number of significant accounting fronts. It was treated inconsistently and asymmetrically across the [Rossi Group].”
97I agree. It is not in dispute that whether or not the Greenbow UPE was released by Greenbow turns on its intent. Given the deficiencies and inconsistencies in Ms May’s accounting treatments as admitted by Greenbow, it would be very dangerous to draw any conclusions about that intent from what treatments were or were not chosen by her. In my view, her contemporaneous emails and other documents say more about her thinking at the time than her choices about how to account for the release of the Greenbow UPE.
98In any event, I agree with Dr Barrett’s submissions that:
(a) Greenbow’s suggestion that the UPE was merely “expensed” and therefore could be written back into the accounts several years later, is inconsistent with the treatment in Greenbow’s tax return where the writing off of the UPE was not treated as a “bad debt” under item E;
(b) as to the accounts generally, Ms May’s own evidence was that she wrote off the UPE because she considered that otherwise there would be a Division 7A tax liability and that it was written off as a “capital loss”; and
(c) that evidence is only consistent with the permanent release of a UPE. The alternative would appear to be that Ms May intended to defraud the revenue.
99Further, there was no evidence that Ms May played any part in managing the Greenbow general ledger – merely that she used this to inform her preparation of financial statements in late 2014 and in subsequent years. The evidence was that the Rossi Group MYOB general ledgers were managed by Mr Hoffman and there is no suggestion that he took any part in decisions about the Greenbow UPE. He was not called to give evidence at the trial.
100In my view, the evidence summarised above establishes the following about Ms May’s thinking and intentions concerning the Greenbow UPE:
(a) Ms May had no difficulty in removing Rossi Group inter-company liabilities for the purposes of “tidy[ing] up loans in the accounts” through various forms of accounting adjustments and without supporting documents, such as deeds of release – a good example of this is the “consolidation and removal” of Greenbow’s $190,337 loan from Able;
(b) although the circumstances of this are less clear, it appears that Ms May also arranged to release or substantially reduce UPEs owing to Able by the three Rossi Group trusts, at the same time as releasing the Greenbow UPE (and UPEs owing by the Heatherdale Property Trust and Rossignoli Trust No. 3 to Greenbow), and there is no suggestion that the releases by Able were not intended to be permanent;
(c) as noted above, the email dated 19 December 2014 and the attached table are particularly revealing. In my view, they establish that:
(i)Ms May considered that the “allocating” over $1 million in loans was something Ms Crennan had intended, as reflected in “Bernadette’s notes” and this vindicated her decision to remove the loans, because she would not have done this “off my own back”;
(ii)Ms May was proposing to prepare a summary of loans as at 2012, enter 2013 totals and “reconcile loans and other balance sheet accounts to close company” and prepare “final taxation”;
(iii)the idea of closing Greenbow and preparing final taxation can only have been in contemplation if the release of the Greenbow UPE was intended to be permanent;
(iv)the reference to “final taxation” is entirely consistent with Ms May’s belief at the time that she had found a permanent solution to what she believed to be Greenbow’s potential tax liability;
(v)Ms May’s explanation of these entries was contrived and false – the suggestion that she “had not seen anything to do with Greenbow” as late as 19 December 2014 and “needed to know it’s trading history” is irreconcilable with the fact that the final accounts for all Rossi Group companies including Greenbow were finalised by this date; and
(vi)it is possible that the notes did not reflect a concluded position and the steps referred to were subject to further consideration and revision, but they are the best and most reliable indication of Ms May’s intention when the financial statements and tax returns effecting the release of the Greenbow UPE were signed by Paul in late December; and
(d) the email of 23 December 2014 and attached spreadsheet strongly reinforces what can be gleaned from the 19 December 2014 email and table set out above. Indeed, this could well be the summary of loans that was contemplated by that earlier document, although I accept this was not expressly confirmed by the evidence. I have set out above my concerns about Ms May’s evidence apparently seeking to downplay the importance of this document. I am satisfied that it is again consistent with her intention to effect a permanent release of the Greenbow UPE (among numerous other inter-company liabilities).
101In the circumstances I do not accept Ms May’s repeated refrain in evidence that “there was never an intention to write off or remove [the Greenbow UPE]”, or words to that effect. This may have been the view she formed after the events of 2018 described above, including the discovery of her mistake, but I am satisfied that it did not reflect her thinking at the time of the release in late 2014. In my judgment, her clear intention at this time continuing at least until mid-2018, was that the Greenbow UPE be forever released. This was her simplistic and ill-informed solution to a perceived tax problem. Had her intention been otherwise, she would not have solved that problem.
102My findings above also largely deal with Greenbow’s counsel’s eighth and ninth arguments, except the submission that: “But as Ms May told the Court, and as the defendant’s closing submissions concede, she omitted the UPE from that allocation”. I have reviewed the paragraph of Dr Barrett’s submissions and the transcript pages referenced in that sentence, but am unable to identify or understand how these references support the contention that “she omitted the UPE from that allocation”. If the point being made here is that the treatment of the UPE involved a removal, not an allocation, and thus is not consistent with the words used in the table, I reject that argument.
103As I have already found, very little reliance can be placed on Ms May’s selection of accounting treatments, and I would say the same about her choice of words in the accounting records (and in her evidence) to describe the effect of those treatments. In particular, it is clear that the term “allocation” has been used to cover moving loans between companies, as well as writing-off or otherwise removing them. Greenbow’s loan from Able again provides an example of this. The table under the heading Able also states: “Allocate loans as per Bernadette’s notes”, and it is not in dispute that the $190,377 loan was intended to be permanently removed from the Greenbow and Able accounts.
104If instead this submission purports to rely on the document headed “Rossignoli Property Trust Loans Reconciliation”, which the meta data apparently reveals was prepared by Ms May in October 2014, that reliance is misplaced. In particular, in my view, this document does not support an argument that the Greenbow UPE “was never to be part of any write off of loans”, for two reasons. First, this was prepared comparatively early in Ms May’s involvement with the Rossi Group financial statements. Thus, any decisions or intentions this document might reflect were preliminary at best. Further, they were superseded both by the December documents discussed above, and the unequivocal decision by Ms May in fact to write-off the Greenbow UPE to avoid a perceived tax problem. Second, and in any event, Ms May was unable to provide any meaningful information about what this document meant or otherwise illuminate what it said about her thinking at the time she prepared the document, as noted above.
Paul’s knowledge and Ms May’s authority
105This leaves Greenbow’s counsels’ seventh argument, concerning the level of Paul’s knowledge of what Ms May did with the Greenbow UPE. It is convenient to deal with this in conjunction with the wider question of Ms May’s authority, which Greenbow’s counsel address under the heading: “If a purported write-off (release) occurred, it was not authorised”.
106For the reasons that follow:
(a) it can be comfortably inferred on the evidence that Paul was at least aware that the Greenbow UPE had been removed from the accounts as at the end of 2014 and raised no objection;
(b) Paul may have not fully understood why Ms May thought the removal was necessary, but he was willing to rely on her advice about that;
(c) in my view, the effectiveness of the release is not undermined by the fact that Ms May’s advice (and thus Greenbow’s intention) was based on a misunderstanding of the law relating to the tax treatment of UPEs; and
(d) the submission that Ms May’s retainer was limited to “accounting and tax compliance work” and that she lacked the necessary authority to release the Greenbow UPE on behalf of Greenbow, cannot be sustained.
107The evidence relevant to these findings is set out in my discussion of the background above, and can be summarised as follows:
(a) Paul’s evidence of Ms May’s role was that he asked her to “complete the annual taxation compliance work, so the preparation of financial reports and tax returns” and “generally advise with regard to tax compliance work”, essentially echoing Ms May’s evidence;
(b) it is not in dispute that it was Paul’s practice to review the financial statements and tax returns before they were signed and routinely ask questions and request changes – this was the effect of the evidence of each of Ms Crennan, Ms May and Paul himself;
(c) in particular, in his evidence-in-chief Paul confirmed that he could read a financial statement “if I sit down for three or four hours and just slowly go through it” – there was no suggestion that he did not do this in relation to the financial statements for the Rossi Group prepared by Ms May in late 2014;
(d) Paul’s active involvement in finalising the financial statements and tax returns and the true nature and extent of Ms May’s authority is reinforced by the 19 December 2014 email and attached table – this was sent by Paul to Mr Hoffman to pass on to Glen, and comprises a detailed “to do” list for all the companies in the Rossi Group;
(e) the document shows that Ms May was engaged in a wholesale review of steps required to be completed or considered for each entity and actively engaging with and informing Paul of the issues she was addressing, a mere two days before Paul formally approved the Greenbow financial statements;
(f) similarly, the 23 December 2014 email and attached spreadsheet sent by Ms May to Paul is a succinct and uncluttered summary of the current status of inter-company indebtedness;
(g) even if Paul’s understanding of detailed financial statements was in some way compromised by his lack of education and training (which is doubtful), it is hard to imagine a simpler way to convey that all UPEs (including Greenbow’s) had been reduced to zero;
(h) Paul agreed that he knew Ms May was “allocating money through the companies for tax reasons” and apparently had no difficulty with the fact that this was being done or that Ms May was doing it;
(i) Paul gave unequivocal evidence that Ms May was “allowed to adjust… the books for tax reasons” and that he “always thought she was doing a good job”;
(j) both the oral evidence and contemporaneous documents were replete with references to Ms May (and Ms Crennan before her) routinely shifting debt between companies in the group and “tidy[ing] up loan accounts”, and Paul being aware of and condoning this practice; and
(k) with the exception of the three UPEs owing to Greenbow written out of the FYE 30 June 2013 financial statements by Ms May, there is no evidence that any of those involved treated these adjustments as anything other effective and permanent, despite the absence of any underlying or other supporting documents.
108Turning to Greenbow’s counsels’ submissions on this question, I accept their analysis of the applicable legal principles, up to a point. In particular, I agree that book entries in accounts must reflect the transactions in fact made by relevant parties and that if parties have no knowledge of them and do not agree to them, they are just book entries. I also agree that the actions of an agent are only authorised either prospectively or retrospectively (by ratification) if the principal consciously and with full knowledge of the facts so authorises those actions.[10]
[10] Taylor v Smith (1926) 38 CLR 48 at 59 per Higgins J
109However, I reject their assertion that Paul did not realise what Ms May had done with the Greenbow UPE. Based on Paul’s usual practice and the evidence summarised above, I am satisfied that:
(a) Paul received and reviewed the financial statements in the methodical way that he described in his evidence;
(b) those financial statements, by also including the 2012 comparatives, clearly disclosed the removal of the UPE’s previously owing to Greenbow, including the Greenbow UPE;
(c) I therefore infer that he noted the adjustments to the inter-company loan accounts as disclosed in those financial statements and raised no questions or objections to those adjustments;
(d) his denial of knowledge of these matters is contrived and unconvincing, particularly given his clear recollection of the removal of the $190,377 loan from Able to Greenbow; and
(e) it is likely that he and Ms May had at least a high level discussion about the reduction in UPEs between FYE 30 June 2012 and FYE 30 June 2013 by $1,105,956, and he accepted her advice that this was done to avoid a tax liability.
110Even if Paul’s knowledge of the relevant facts was less comprehensive than I have found, the principles stated in the authorities relied on by Greenbow’s counsel are not absolute. As the learned author of Law of Agency stated (citations omitted):[11]
“A principal cannot deny knowledge to which he or she would have been privy had the principal not closed his or her eyes to the obvious. Phillimore LJ emphasised this point colourfully in observing that ‘it is unnecessary to decide what inference should be drawn when a principal knows so much that it is a policy of an ostrich to know no more’. In circumstances where the principal has signed a document that reveals the true state of affairs, for instance, it stands to reason that the law should not countenance a claim of lack of knowledge, at least in the absence of grounds to vitiate consent. Moreover, the bulk of authority dictates that there is no need to establish that the principal knew the legal effect of the act ratified.”
[11] G Dal Pont, Law of Agency (LexisNexis, 4th ed, 2020) at [5.19]
111The matter raised in the last sentence of the passage above was not the subject of submissions by either party, but it seems to me to be uncontroversial. Certainly, Greenbow’s counsel did not seek to argue that Ms May’s misunderstanding of the application of the relevant ATO rulings operated to vitiate any authority or acquiescence that Paul may have otherwise given to her to release the Greenbow UPE. The authorities they rely on discuss the importance of the principal having knowledge of all the relevant facts, not of the law.
112I draw a distinction here with Taylor v Smith,[12] because in that case the principal wrongly believed that the payee had a legal entitlement to the payment. As Knox CJ explained, this amounted to a mistake of fact as to the binding nature of the underlying obligation (a mistake induced by the agent’s conduct).[13] In contrast, in Powell v Smith,[14] Lord Romilly MR was satisfied there was a binding agreement and the words of the agreement were quite certain. He held that “the only thing that was not understood was the legal effect of certain words which it contained”.[15] Similarly, here, the mistake arose from a misunderstanding of the legal effect of the ATO rulings.
[12] (1926) 38 CLR 48
[13] Ibid at 55 per Knox CJ
[14] (1872) LR 14 Eq 85
[15] Powell v Smith (1872) LR 14 Eq 85 at 90 per Lord Romilly MR
113In any event, I reject Greenbow’s counsels’ submissions that Ms May’s actions in effecting a release of the Greenbow UPE was outside the scope of her authority. Although I have found that Paul did routinely review the work of his external accountants Ms Crennan and Ms May, I accept that he was lacking formal education as both parties have accepted, and relied first on Ms Crennan and then on Ms May in relation to tax matters. I also accept Dr Barrett’s submission that Greenbow has not suggested that Ms May did not have authority to release any UPE if such a release was necessary to avoid a Division 7A liability. Nor did Ms May or Paul say in evidence that such a transaction would not fall within the ambit of Ms May’s authority.
114In my view, the evidence summarised above shows that Paul’s reliance led to him effectively giving Ms May authority to (in his words) “allocat[e] moneys through the companies” for tax reasons. He said in terms that she was “allowed to adjust in the books for tax reasons, right, and that’s what she did, but I didn’t get at that stage any specific notes as to what she was doing”. Of course, that fact that Ms May did not give Paul “specific notes” does not detract from her authority to make the adjustments in the first place. And while it is not clear what Paul meant by “specific notes”, Ms May did provide him with the information attached to the emails of 19 and 23 December 2014, as well as the financial statements themselves.
115It appears to be common ground that a release in this case (if made with the requisite intent and authority, as discussed above) can be effected by accounting entries. However, for completeness, I note that I accept Dr Barrett’s submissions on this, citing the Court of Appeal in White v Timbercorp Finance Pty Ltd.[16] In a convenient summary of the Court of Appeal’s findings in that case, Digby J observed:[17]
“The Court held that there was an agreement between entities that intercompany transactions could be evidenced by journal entry. In that matter, the facts founding the inference included that the group had a single operating bank account, the relevant companies had the same directors and were both wholly-owned subsidiaries of the same parent, the companies were the subject of directors’ declarations that the financial accounts gave a true and fair view of the financial position, and the companies were the subject of an audit report to the same effect.”
[16] (2017) 123 ACSR 284 at [147]-[148] per Ferguson CJ, Santamaria and McLeish JJA
[17]Michell v Onroad Offroad Pty Ltd [2018] VSC 648 at [70], see also De Vries v Timbercorp Finance Pty Ltd (in liq) [2021] VSCA 265 at [23] per Kyrou and McLeish JJA and Lyons AJA
116Each of the elements above were present here, except for the audit report. However, it is clear that the courts in these cases only identified these as indicia of an agreement between related entities that inter-company transactions can be effected by book entry, not essential pre-requisites to such an agreement. Here, additional indicia are the long history of similar transactions (including, for example, the permanent writing-off of Greebow’s $190,377 loan to Able) and the involvement of the companies’ external accountants in effecting these transactions (first Ms Crennan, and then Ms May).
What was the effect of the writing back of the Greenbow UPE in 2018?
117Greenbow’s counsel conclude their submissions on the issue of release by arguing that accounting for the Greenbow UPE was appropriate when it was written back in 2018. They assert that: “The write-back was not a ‘re-instatement’ (re-creation) of the UPE in Greenbow’s hands. The UPE had never been released.”
118However, given my findings above on the facts relied on by Greenbow’s counsel to support this contention, and my conclusion that the UPE was released, it is unnecessary for me to consider these matters further. As I understand it, Greenbow’s counsel are not submitting that the write back into the Greenbow financial statements by Ms May in 2018 had the effect of reviving the liability that had otherwise been duly released. I agree with Dr Barrett that a decision by a putative beneficiary to write a liability into its financial statements cannot create that liability, without some assent from the trustee.
119Similarly, in my view, neither party can rely on the financial statements alone to prove either the existence or non-existence of the Greenbow UPE. In this regard, I agree with Greenbow’s counsels’ submissions concerning the application of s1305 of the Corporations Act 2001 (Cth) to the facts of this case. Although that section provides that the books of the Rossi Group entities are prima facie evidence of any matter stated or recorded in the books, the section cannot cause there to exist transactions merely by reason of matters so stated or recorded.
120In Shot One Pty Ltd (in liq) v Day,[18] Sloss J considered and extracted the leading authorities dealing with the application of the section. Greenbow’s counsel have summarised her Honour’s reasons,[19] which I adopt (in part):
“The books are prima facie evidence of the matters stated in them, but the weight of that evidence is to be measured in accordance with the common sense of the tribunal of fact; it is open to the tribunal of fact to find that the prima facie evidence constituted by the company's books is outweighed by other evidence; or by some quality or characteristic of the books themselves, even if there is no other evidence. If the books contain inconsistencies or ambiguities or the matter otherwise demands explanation (emphasis added); the section does not elevate the matters contained in the books to a plane of probative value that requires the court to disregard the context in which the matters relied on appear in the tendered document.”
[18] [2017] VSC 741
[19] Ibid at [237]-[242]
121It is common ground that the financial statements of the Rossi Group (including the entries made by Ms May in December 2014) were unreliable, including by containing inconsistencies and errors. It is this fact that has necessitated the search for supporting evidence of intention discussed in my analysis above. That is not to say that the entries in the accounts should be entirely disregarded, merely that they demand testing and explanation, through consideration of contemporaneous documents and oral evidence. I also agree with Greenbow’s counsel that s69 of the Evidence Act 2008 (Vic) does not advance the evidentiary value of the financial statements beyond that established by s1305 of the Corporations Act 2001 (Cth).
122Clearly the considerations above apply with even greater force to any attempt to rely on Ms May’s purported write-back of the Greenbow UPE into the Rossi Recycling accounts after her retainer by that company was terminated in 2019. I am satisfied that there is no basis for asserting that the entry is prima facie evidence of Rossi Recycling’s acceptance of any liability to Greenbow.
Was the UPE assigned by Greenbow to Able?
123Rossi Recycling’s primary argument in relation to the Greenbow UPE is that it was assigned to Able. Dr Barrett argues that this was part of a plan by Paul to avoid paying any legal fees to Kenna who had been engaged by Able and who was seeking payment of legal fees. There is no doubt that Paul did take steps to strip Able of assets to avoid liability to Kenna. The fact that he did this reinforces his willingness to move funds between companies to suit his commercial objectives, consistently with my analysis of the release issue above.
124Ms Crennan gave evidence that before the completion of the FYE 30 June 2013 accounts, Able had incurred a liability for legal fees for services provided by Kenna. Ms Crennan said that Paul asked her to move equity out of Able so Kenna could not get anything. Ms Crennan said she felt very uncomfortable about Paul doing that because she considered it unethical, and that she left before the completion of the FYE 30 June 2013 accounts. Paul also gave evidence to the effect that in FYE 30 June 2013, he wrote off a debt owed by Greenbow to Able of about $190,000 “partly because [of] the Barry Kenna case happening”.
125Dr Barrett submits that it is apparent from this evidence that there was a process of consolidation of loans in FYE 30 June 2013 within the Rossi Group which effected a reduction in Able’s assets. He argues that Ms May’s evidence about the table she prepared that was attached to the 19 December 2014 email is consistent with the general approach that loans were to be consolidated within the group of companies. He said the reason most consistent with the evidence is that the UPE was assigned to Able to avoid liability to Kenna.
126Dr Barrett also references in aid of his submissions the expert opinion of Mr Ferrier. He submits that Mr Ferrier considered Rossi Group accounts in detail and concluded that the Greenbow UPE was assigned to Able and thereafter allocated and set off with other group loans in subsequent years resulting in a loan recorded in Rossi Recycling’s accounts in 2019 as owing to Paul in the amount of $353,281. He notes that is the sum compromised in the Settlement Deed dated 6 September 2021.
127Greenbow’s counsel make a number of submissions in reply, some of which repeat submissions advanced in relation to the release issue, which I have rejected for the reasons above. However, their other submissions have more force. First, they argue that the books of Able do not show Able taking up the Greenbow UPE as an asset. A “transaction”, such as an assignment, must have at least two parties involved. There is no evidence that Able was involved in any assignment of the UPE.
128Second, they accept that the financial statements of the RP Trust for FYE 30 June 2013 prima facie show that Able took Greenbow’s UPE. But as Ms May told the Court, this was a typographical error by her and should never have been made; a mislabelling. The financial statements for FYE 30 June 2013 for the RP Trust are in any event wholly unreliable because the “other side of any such assignment” (ie, the credit entry against the debt to the UPE liability) cannot be and was not identified at trial.
129Third, they note that as Dr Barrett’s closing submissions indicate, it was Rossi Recycling’s case at trial that there was an assignment of the UPE to Able as part of Paul’s plan to avoid paying any legal fees to Kenna. They argue that this case is a non sequitur – if Paul wanted to move equity out of Able, he would not have procured that Greenbow assign its UPE to Able – that would increase Able’s assets, not reduce its equity.
130Fourth, they argue that it was essentially only Mr Ferrier who raised the possibility of an assignment, proffering an opinion based on assumptions without evidence that there had been in fact been an assignment of the UPE. They say that no agreement to assign could be inferred from the evidence and Mr Ferrier’s opinion is at best an inference but more so, as he expressly states, an assumption on his part. They raise a number of other grounds for rejecting Mr Ferrier’s evidence some of which have substance, but it is sufficient to note their submission that Mr Ferrier’s conclusion cannot be sustained because of his opening assumption that Able was owed the UPE of $730,824, is false.
131I agree. The rule concerning assignments in equity was stated in Norman v Federal Commissioner of Taxation[20] by Windeyer J, who held that to effect an assignment of present equitable property, there must be a manifest intention to immediately assign:[21]
“If the interest to be assigned is a creature of equity, such as the beneficial interest of a cestui que trust, then, apart from any statutory provisions, an assignment of it can, of course, only be effected in equity; for the common law does not know it. Any present assignment of such an interest, that is to say of a chose in equity, is therefore necessarily an equitable assignment. Such an assignment can be by way of gift; and, except that writing is required by s. 9 of the Statute of Frauds, no formality is necessary beyond a clear expression of an intention to make an immediate disposition.”
[20] (1963) 109 CLR 9
[21] Ibid at 30
132Here, there is no evidence of clear expression of an intention to assign. Unlike the position in respect of the release (which arguably has a lower evidence threshold in any case), the entry in the accounts is the only evidence of intention. There are no contemporaneous documents supporting the entry and no oral evidence of an intention or sustainable justification for the assignment. Again this is to be contrasted with the release, where it was not in dispute that the explanation was the perceived exposure to a Division 7A tax liability.
133Most importantly, Dr Barrett’s posited explanation is illogical. In the same way that it made no sense for Paul to have reinstated the Greenbow UPE to his private company Greenbow in response to his ex-wife’s Family Court application for a greater share of his assets, it makes no sense for him to assign a substantial debt to Able as part of a plan to avoid a claim for legal fees against that company. In this instance, Ms May’s evidence that the entry was a simple typographical or entry error is therefore both plausible and likely, and is consistent with other examples of errors and inconsistencies in her work.
134Accordingly, I am not satisfied that there was a manifest intention to immediately assign the Greenbow UPE to Able. I also accept that there is no evidence that Able was involved in the assignment – its books do not show the Greenbow UPE as an asset. As Greenbow’s counsel submitted, “if it did happen, Able was completely blind to it”. Thus the flipside of the assignment is missing and the UPE was not assigned in equity.
Was the UPE written off because it was unrecoverable?
135In their submissions, Greenbow’s counsel state (and I agree) that it is possible that a beneficiary might decide to merely write-down in its books of account or financial statements a UPE as a bad debt because it is considered “doubtful” as to recoverability, or even irrecoverable. This does not affect the beneficiary’s right to demand the trustee pay the UPE. It merely means that within the books of account of the beneficiary, the beneficiary records that it does not consider the UPE to be recoverable.
136Greenbow’s counsel submit that this is in substance what happened to the Greenbow UPE in December 2014. The matters they rely on in support of this submission can be summarised as follows:
(a) there was evidence from Ms May that when the Greenbow UPE was removed from Greenbow’s 2013 financial statements, that may have been because the UPE was doubtful;
(b) underlying journal entries for the Greenbow UPE for FYE 30 June 2013, and following (at least until March 2015, when the UPE “disappeared”) suggest it was intended that the UPE continued to exist, consistent with it being written-down as “bad”;
(c) Mr Fitzgerald opined that the entries in the Greenbow financial statements for FYE 30 June 2013 were at least consistent with a write-off of the UPE as a bad debt; and
(d) Paul’s evidence that in 2013, Eastern Recycling was worth $7m should be discounted – there was no expert evidence at trial as to Rossi Recycling’s solvency.
137Dr Barrett also relies on the absence of evidence on this question, but as a basis for rejecting the suggestion that the UPE was written off because it was not recoverable. He too points to the fact that there was no expert evidence as to solvency in 2013 and submits that, such evidence as there was (being Paul’s evidence that Eastern Recycling was worth $7million in 2013), points the other way.
138Dr Barrett next refers to Mr Fitzgerald’s evidence that the UPE could properly be written out of the accounts (in FYE 30 June 2013) if it was considered to be not recoverable and then written back into the accounts (in FYE 30 June 2019) if it was determined that it was recoverable. Dr Barrett says that Mr Fitzgerald essentially then proceeds on the assumption that is what occurred, but argues that this is not a credible explanation.
139Dr Barrett then argues that Mr Fitzgerald had a number of conferences with Paul’s lawyers in which the “mistake” of Ms May was discussed, and yet he denied ever having been told the nature of this mistake. He adds that there was no clear evidence of when Mr Fitzgerald first was instructed, if he was, that the UPE was written off because it was not recoverable and written back in because it was recoverable. Dr Barrett submits that it is incredible to think that Mr Fitzgerald did not ask, or was not told, details concerning Rossi Recycling’s financial state and the recoverability of the UPE at relevant times, when that forms such a pivotal part of his report, and the opined justification for writing off the Greenbow UPE.
140I agree with both parties that there is insufficient evidence to form a concluded view about the recoverability of the Greenbow UPE in either 2013 or 2019. In particular, neither expert who gave evidence at trial were either asked for, or proffered, an opinion on that question. Further, I agree with Dr Barrett that it is clear from Mr Fitzgerald’s reports and evidence that his conclusions about the writing down or writing off of the Greenbow UPE were wholly based on assumption, and not on analysis or verifiable contemporaneous evidence or documents. This is exemplified by the following passage from Mr Fitzgerald’s report (emphasis added):
“The UPEs…were in FY2013 written off or written down for accounting purposes. The UPEs were subsequently revised and included in the FY2019 accounts which suggests they were not released or forgiven in FY2013.”
141Thus Mr Fitzgerald’s suggestion that the Greenbow UPE was not released or forgiven in 2013, is based solely on the fact that it was put back into the FYE 30 June 2019 accounts. He made no independent assessment of Ms May’s purported justification for revising the accounts in 2018 and 2019, nor (more importantly) for her original decision in late 2014 to remove the Greenbow UPE. At most Mr Fitzgerald notes (in effect) that Ms May’s accounting entries in late 2014 were not inconsistent with a decision to write off the Greenbow UPE as irrecoverable. Likewise, Mr Fitzgerald’s supplementary letter report of 7 August 2020 purports to conclude that the Greenbow UPE was not released based on confirmation by Ms May that this was not the case.
142In any event, I have found above that it is dangerous to put any store in Ms May’s accounting entries and that I am satisfied on the facts that the Greenbow UPE was released as a result of Ms May’s actions in late 2014. And it is not in dispute that her explanation for those actions was in truth her concern about a potential Division 7A liability. Her half-hearted attempt to suggest that recoverability was a factor in her decision in December 2014 from the accounts was unconvincing and inconsistent with her professed intention to avoid that perceived tax liability. I therefore reject the submission that the Greenbow UPE was written down in late 2014 as a bad debt.
Does Greenbow have a claim based on an action for money had and received?
143It is not entirely clear to me from the parties’ submissions whether Greenbow is submitting that its pleaded claim based on an action for money had and received, can survive my finding above that the Greenbow UPE was permanently released in late 2014. Greenbow’s counsels’ only substantive submission on this is as follows:
“In the case of Greenbow’s UPE, an express sub-trust was created in favour of Greenbow when [Rossi Recycling] as trustee of the RP Trust ‘credited’ in the books of account income of the RP Trust in favour of Greenbow. Once credited, that created an unconditional obligation to pay on demand both in equity and at common law. The action for money had and received arises even without the sub-trust if there is a crediting/acknowledgement in the books of account.” [citing, among others, Fischer v Nemeske Pty Ltd (2016) 257 CLR 615]
144Greenbow’s counsel next refers to entries for the Greenbow UPE in various financial statements in 2012 and 2013 including, most relevantly, the financial statements for the RP Trust for FYE 30 June 2012. I note that (unsurprisingly) they do not purport to rely in this context on Ms May’s unauthorised RP Trust financial statements for FYE 30 June 2019. They then state that:
“The defendant’s suggestion therefore in its closing submissions that it cannot be sufficient to establish a UPE that it is included in a beneficiary’s (i.e., Greenbow’s) books of account carries no weight. The real issue for trial is as stated above namely as to how if any the UPE was dealt with in 2014 and or in 2018 and whether its treatment caused the underlying beneficial interest to be lost for some reason.”
145The submissions then proceed to set out the various ways in which a UPE can be dealt with by a beneficiary or trustee referred to above, including by release or assignment. As I understand it, the effect of the last sentence in the passage above is that if (as I have found) the Greenbow UPE was permanently released by Greenbow, it has been “lost” and thus the action for money had and received falls away. Regardless, in my view, that is the effect of the release.
146Further, with two immaterial exceptions, there has been no manifestation of the Greenbow UPE in the financial statements of Rossi Recycling since that release that might arguably revive a claim based on an action for money had and received. Those exceptions are the unadopted Southertons financial statements for FYE 30 June 2013 and the unauthorised financial statements prepared by Ms May for FYE 30 June 2019. Being unauthorised and unadopted by the relevant entities, these can be disregarded. That only leaves what appear to be errant references to the Greenbow UPE in the Rossi Recycling general ledgers, as follows:
(a) the general ledger of Rossi Recycling for FYE 30 June 2013 records a debit to Greenbow in the sum of $730,309.38, described as “Unpaid Benefichiary [sic] Entitlement – Pre Dec 2009”; and again as “2-1910 Greenbow Pty Ltd”;
(b) the general ledger of Rossi Recycling for FYE 30 June 2014 records a debit to Greenbow in the sum of $730,079.38, described as “2-1910 Greenbow Pty Ltd”;
(c) the general ledger of Rossi Recycling for FY 2017 records a debit to Greenbow in the sum of $730,309.38, described as “2-1910 Greenbow Pty Ltd”; and
(d) the general ledger of Rossi Recycling for FY 2020 records a debit to Greenbow in the sum of $730,309.38, described as “2-1910 Greenbow Pty Ltd”.
147I accept that where a trustee acknowledges a UPE in its books, this can be an admission that the trustee is indebted to the beneficiary.[22] In Pardoe v Price,[23] Baron Rolfe explained that:[24]
“When, indeed, there is no trust to execute, except that of paying over money to the cestui que trust, the trustee, by his conduct, as for instance, by admission that he has money to be paid over, or by settling accounts on that footing, may, and often does, make himself liable to an action at law at the suit of the cestui que trust, for money had and received, or for money due on account stated.”
[22]Fischer v Nemeske Pty at 646-647 [80]-[84] per Kiefel J; 653 [105] per Gageler J; Seoud v Fortythird Garland Pty Ltd [2019] VSC 192 at [62] per McMillan J, citing Chianti Pty Ltd v Leume Pty Ltd (2007) 35 WAR 488 at 511 [70] per Buss JA, with whom Martin CJ and Pullin JA agreed; 514-515 [77].
[23] (1847) 16 M & W 451
[24]Ibid at 458-459, quoted in Fischer v Nemeske Pty Ltd at [81] per Kiefel J
148In those circumstances, the trustee can be personally liable for the debt under the doctrine of money had and received. However, for reasons adverted to above, the entries in the Rossi Recycling general ledger cannot be relied on as such an acknowledgement, and Greenbow’s counsel do not appear to contend otherwise. Briefly, those reasons are:
(a) there was no evidence from Mr Hoffman to explain how or why these entries in the general ledgers appeared, and there is evidence that account keeping by the internal and external accountants during the relevant period was, at best, unreliable;
(b) importantly, there is no evidence to suggest that the entries represented an authorised reinstatement of the Greenbow UPE on behalf of Rossi Recycling that superseded what I have found to be Greenbow’s intention in late 2014 to permanently release the Greenbow UPE;
(c) the general ledgers are at odds with the authorised financial statements of Rossi Recycling for FYE 30 June 2013 to 30 June 2019 (and, incidentally, for Greenbow for FYE 30 June 2013 to 30 June 2018); and
(d) in those circumstances, the evidence against accepting the general ledgers as an acknowledgment summarised above operates to counter the effect of s1305 of the Corporations Act 2001 (Cth).
Subsidiary questions
149In view of my findings above, it is unnecessary for me to determine the questions raised in Dr Barrett’s submissions of whether Greenbow’s claims were statute barred or defeated by its alleged unconscientious conduct. If it were necessary for me to do so, I am inclined to the view that:
(a) Greenbow’s equitable claims were not statute barred essentially for the reasons advanced by Greenbow’s counsel;
(b) the question whether Greenbow’s claim for money had and received is statute barred is less straight-forward, and would probably depend on which (if any) of the general ledger entries were held to be the basis for that claim; and
(c) Rossi Recycling’s defence based on Greenbow’s alleged unconscientious conduct would probably fail, again for the reasons advance by Greenbow’s counsel.
150Further to sub-paragraph (c) above, I have found that Paul’s pursuit of a strategic advantage in his dispute with Glen is a more plausible explanation for his instruction to Ms May in 2018 to reinstate the Greenbow UPE than his Family Court dispute. While this conduct might be fairly described as sharp practice or involving an ulterior purpose, I am not persuaded that it reaches the level of moral or legal depravity necessary[25] to support the findings urged by Dr Barrett.
[25]Bullhead Pty Ltd v Brickmakers Place Pty Ltd (in liq) [2018] VSCA 316 at [118] per Kyrou, McLeish and Hargrave JJA, referring to Dering v Early of Winchelsea (1787) 1 Cox 318 at 319 per Eyre CB.
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Certificate
I certify that these 57 pages are a true copy of the judgment of his Honour Judge Woodward delivered on 16 August 2022.
Dated: 16 August 2022
Claire Findlay
Associate to His Honour Judge Woodward
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