Kupang Resources Ltd v International Litigation Partners Pte Ltd - [2014] WASC 371

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CIVIL

CITATION: KUPANG RESOURCES LTD -v- INTERNATIONAL LITIGATION PARTNERS PTE LTD [2014] WASC 371

CORAM: ALLANSON J

HEARD: 15 & 16 SEPTEMBER 2014

DELIVERED : 9 OCTOBER 2014

FILE NO/S: COR 148 of 2014

MATTER :Kupang Resources Ltd

BETWEEN: KUPANG RESOURCES LTD
Plaintiff
AND
INTERNATIONAL LITIGATION PARTNERS PTE LTD
First Defendant
QUENTIN JAMES OLDE
NATHAN VANCE LANDREY
Second Defendants
COMMISSIONER OF TAXATION
Third Defendant

Catchwords:

Security for payment of debt - Appointment of receivers - Effect of notice under s 2605, sch 1 Taxation Administration Act on security - Application for declaration that appointment invalid

Legislation:

Australian Consumer Law, s 18
Competition and Consumer Act 2010 (Cth), s 87
Corporations Act 2001 (Cth), s 418A, s 500(1)
Income Tax Assessment Act 1936 (Cth), s 218
Taxation Administration Act 1953 (Cth), sch 1, subdiv 260A, s 2605, s 26015

Result:

Application dismissed

Category: B

Representation:

Counsel:

Plaintiff:     Mr M L Bennett
First Defendant            :     Mr S Penglis
Second Defendants       :     No appearance
Third Defendant           :     Mr N J Williams SC & Ms C H Thompson

Solicitors:

Plaintiff:     Bennett + Co
First Defendant            :     Jackson McDonald
Second Defendants       :     No appearance
Third Defendant           :     Australian Government Solicitor

Case(s) referred to in judgment(s):

Bruton Holdings Pty Ltd (in liq) v Federal Commissioner of Taxation [2009] HCA 32; (2009) 239 CLR 346
Clyne v The Deputy Commissioner of Taxation [1981] HCA 40; (1981) 150 CLR 1
Commissioner of Taxation v Barnes Development Pty Ltd [2009] FCA 830; (2009) 178 FCR 352
Deputy Commissioner of Taxation v Broadbeach Properties Pty Ltd [2008] HCA 41; (2008) 237 CLR 473
Mallinson v Scottish Australian Investment Co Ltd [1920] HCA 51; (1920) 28 CLR 66

ALLANSON J: On 6 August 2014 International Litigation Partners Pte Ltd (ILP) appointed the second defendants as joint and several receivers and managers of Kupang Resources Ltd (Kupang). Kupang applies for an order under s 418A of the Corporations Act 2001 (Cth) declaring that the purported appointment of the receivers was invalid. As an incident of the matters raised in that application, it seeks other relief including relief under s 87 of the Competition and Consumer Act 2010 (Cth).
Under s 418A of the Corporations Act, where there is doubt 'on a specific ground' about whether a purported appointment of a person as a receiver is valid, the corporation (among others) may apply to the court for an order declaring whether or not the purported appointment was valid on the ground specified in the application or on some other ground.
Kupang applies primarily on the ground that by August 2014, ILP no longer had the power to enforce the security deed under which it purported to act. In February 2013, the Deputy Commissioner of Taxation had served two notices on Kupang under s 260‑5 of sch 1 of the Taxation Administration Act 1953 (Cth). Kupang says that by reason of the service of the s 260‑5 notices, ILP was not able to demand payment of the money owed to it by Kupang, or otherwise to specify or deal with the time and manner of payment of that money: statement of claim [32].
On 6 August 2014, on an urgent application by Kupang, I granted interlocutory relief restraining the actions of the receivers pending the resolution of the application under s 418A of the Corporations Act. This application has been brought on as quickly as practicable for final hearing.
The Commissioner of Taxation was, by consent, joined as the third defendant. The issues between Kupang and ILP directly affect the legal interests of the Commissioner.
The receivers were named as second defendants, and advised the court that they abide its decision.

The facts - an overview

There was only limited factual dispute between the parties, at least with regards to the primary facts.
Kupang is an incorporated public company, listed on the Australian Securities Exchange. It has been engaged in the business of acquiring and exploiting mining assets, including the Kupang Project in Indonesia.
ILP is incorporated in accordance with the laws of the Republic of Singapore. Its business includes litigation funding.
On 5 October 2012, the High Court of Australia ordered that judgment in the sum of $8,381,144.30 be entered for ILP against Kupang, together with interest and ILP's costs.

The settlement

Kupang and ILP entered into a Deed of Settlement and Release dated 8 November 2012 (the Deed) under which Kupang was to pay an immediate lump sum, and pay the balance of the amount owing to ILP, together with interest, in monthly instalments to settle all of its obligations to ILP arising from the orders made in the High Court and in earlier proceedings. The debt was to be secured under security documents entered into at about the time of the Deed.
I will refer to the terms of the Deed in greater detail below. One important feature is that it did not specify the amount to be paid each month. On or about 10 October 2013, Kupang and ILP executed an Amending Deed under which the obligation to pay monthly instalments was specified to be 'by monthly instalments of $500,000 or such lower amount notified in writing by ILP to Kupang payable until the principal or an amount of $5,500,000 plus interest is paid in full': statement of claim [23.1]. Kupang seeks relief against the enforcement of the Amending Deed.
In or about November 2012, Kupang entered into a General Security Deed in favour of ILP. By cl 10.1 of the General Security Deed, if the General Security Deed becomes enforceable ILP may at any time appoint a receiver, or receiver and manager of secured property. ILP purported to appoint the second defendants as receivers under that clause.
In or about November 2012, Kupang also entered into a Mining Mortgage in favour of ILP. None of the parties submitted that the terms of the Mining Mortgage are relevant in this application.

The notices under the Taxation Administration Act

The Taxation Administration Act sch 1, pt 4 deals with the methods by which the Commissioner of Taxation may collect and recover amounts of taxes and other liabilities. Division 260 deals with the collection and recovery of money from persons who are not personally liable to pay that amount, including third parties, liquidators, receivers, and the personal representatives of deceased persons.
Where there is an amount payable to the Commonwealth (the debt) by an entity (the debtor), the Commissioner may give a written notice under s 260‑5(2) of sch 1 of the Taxation Administration Act to a third party who owes or may later owe money to the debtor (the available money). The notice must require the third party to pay an amount not exceeding the lesser of the debt or the available money to the Commissioner immediately after, or at or within a specified time after, the amount concerned becomes an amount owing to the debtor: Taxation Administration Act sch 1, s 260‑5(4)‑(5).
On 5 February 2013, the Commissioner (by his delegate, the Deputy Commissioner of Taxation) issued a notice to Kupang under s 260-5 of sch 1 of the Taxation Administration Act in these terms:
KUPANG RESOURCES LTD, YOU are a third party who owes money ('the available money') to INTERNATIONAL LITIGATION PARTNERS PTE LIMITED ('the debtor'), … who, in terms of section 260‑5 of Schedule 1 of the Taxation Administration Act 1953 (TAA) has a debt payable to the Commonwealth of $6,643,966.25.
In exercise of powers conferred on me as Deputy Commissioner of Taxation by delegation from the Commissioner of Taxation under section 8 of the TAA, YOU, KUPANG RESOURCES LTD, ARE REQUIRED TO PAY TO THE COMMISSIONER OF TAXATION the sum of $6,643,966.25 or, if the available money is less than $6,643,966.25, the whole of the available money.
If you now owe the available money to the debtor, the payment to the Commissioner of Taxation is to be made IMMEDIATELY. If you do not owe the available money to the debtor but you will later owe it to the debtor, the payment to the Commissioner of taxation is to be made immediately the money becomes owing to the debtor.
On 11 February 2013, the Commissioner issued a second notice under s 260‑5. In the second notice, the Commissioner claimed the debt owed by ILP in the greater amount of $7,212,852.62. Otherwise the notice was in the same terms.
At the time of service of these notices, the lump sum had been paid but no monthly instalment had been paid by Kupang to ILP under the Deed.

The payment of instalments

Kupang complied with the s 260‑5 notices by paying $500,000 to the Commissioner at the end of each month from February to July 2013 (inclusive) ‑ a total of $3.5 million. Kupang and ILP then agreed to defer the August and September monthly payments (the August 2013 Agreement). The Commissioner was not a party to that agreement.
In November 2013, through its then solicitors, Kupang proposed to the Commissioner that it would make payments of $20,000 in each of November and December 2013, and January 2014. The Commissioner accepted the proposal and Kupang made three payments of $20,000, two in December 2013 and one on 31 January 2014.
On 13 February 2014, Kupang proposed to the Commissioner that it would make payments of $20,000 for the months of February, March and April 2014. Again the Commissioner accepted the proposal. Kupang made a payment of $40,000 on 22 April 2014, and a further payment of $20,000 on 30 April 2014.
Kupang has made no other payments in reduction of the instalment payment obligations. In May 2014, it requested the Commissioner to agree to further payments being deferred. After these proceedings commenced, the Commissioner rejected that proposal.

The agreements between Kupang and ILP

The Deed of Settlement and Release

Judgment in favour of ILP against Kupang was delivered on 5 October 2012. The Deed of Settlement and Release is dated 8 November 2012, and it is not disputed that it was executed around that date. Under cl 2, Kupang was required to pay $5,041,000 to ILP not later than two days after the date of the Deed, and $5,500,000 plus interest in instalments (interest was defined at the rate of 9.5% per annum).
The instalment payment obligation is found in cl 3 in these terms:
(a)The Instalment Payment Obligation is to be paid as follows:
(i)by monthly instalments, payable until the principal amount of $5,500,000 plus interest is paid in full;
(ii)the first instalment payment is to commence on the earlier of:
(A)28 February 2013; or
(B)the last day of the first month in which KPR receives its first payment from production cash flow associated the Kupang project;
(b)Interest on the principal amount of $5,500,000:
(i)is to be calculated at the Interest Rate; and
(ii)will accrue daily from the date falling 30 days from the Date on this Deed, on the balance of any part of the principal amount which remains unpaid.
(c)The total amount outstanding at any point in time pursuant to this clause shall be referred to as the 'Outstanding Amount' as at that date.
By cl 4, ILP was to provide to Kupang copies of all security documents which were necessary to give effect to the 'security obligation', that is, the obligation on Kupang to grant in favour of ILP (or its nominee) a security interest over Kupang and its assets, in a form satisfactory to ILP, to secure all of Kupang's obligations to ILP under the Deed: General Security Deed cl 2(a)(iv).
Clause 7 provides a payment direction, authorising and directing Kupang to make its payments to a bank account in the name of Penz Investments Ltd in Singapore.
By cl 14, the Deed can only be amended or replaced by another deed executed by the parties. A right under the Deed may only be waived in writing.
By cl 22, the Deed and the security documents are stated to contain the entire agreement between the parties about its subject matter.

The General Security Deed

The primary security granted by Kupang, at least for the purposes of these proceedings, is by the General Security Deed. It is undated but accepted to have been executed at about the same time as the Deed, and before the service of the s 260‑5 notice.
The relationship between the Deed and the General Security Deed (and any other agreement) is found in cl 21 of the General Security Deed. The General Security Deed defines the term Transaction Documents in cl 1.1:
'Transaction Document' means:
(a)this document;
(b)the Deed of Settlement and Release;
(c)the Mining Mortgage;
(d)any document or agreement which records or evidences the terms on which any Secured Money is payable to the Secured Party or the terms on which any obligation to the Secured Party is to be performed;
(e)any document or agreement that the parties agree in writing is to be a Transaction Document for the purposes of this document;
(f)any document or agreement that is entered into under any of the above;
(g)any document or agreement that amends, supplements, replaces or novates any of the above; and
(h)any undertaking (whether or not in writing) by or to a party or its lawyers that is given under or relates to any of the above.
The Transaction Documents contain the entire agreement between the parties about their subject matter: cl 21.6. By cl 21.13, if the General Security Deed is inconsistent with any other document or agreement between the parties, it prevails to the extent of the inconsistency.
Under cl 5.1 of the General Security Deed, Kupang's obligation to pay the monthly instalments under the Deed is in these terms:
punctually pay the Secured Money when it becomes payable in accordance with the terms of any written agreement between the Grantor and the Secured Party or, in the absence of any agreement or after default under any agreement, on demand by the Secured Party …
A written agreement under cl 5 would be a Transaction Document. Further, it would have effect by reason of cl 5 and cl 21 of the General Security Deed, despite the provision in cl 14 of the Deed that it may be amended only by deed.
Clause 8.1 of the General Security Deed sets out the circumstances when the document may be enforced. If the General Security Deed has become enforceable, ILP may take various actions, including appointing a receiver, or receiver and manager of Secured Property: cl 10.1(a).
Clause 8.1 provides, in those parts relevant to this action:
The Secured Money will immediately become payable at the Secured Party's option (despite any delay or previous waiver of the right to exercise that option) without the need for any demand or notice under this document or under another Transaction Document, and this document will immediately become enforceable (whether or not the Secured Money has become payable in this manner) if any of the following events occurs:
(a)(non-payment) if the Grantor fails to pay any amount that is due and payable by it under a Transaction Document when it is due;
(b)(other obligations) if the Grantor fails to comply with any of its obligations under a Transaction Document (other than a failure referred to elsewhere in this clause) and:
(i)the Secured Party considers that the failure cannot be remedied; or
(ii)the Secured Party considers that the failure can be remedied, and the failure is not remedied within two Business Days after it occurs;
…
(d)(Insolvency Event) if an Insolvency Event occurs in respect of a Relevant Party;
…
(f)(Material Adverse Effect) if an event or a change occurs (whether or not foreseeable) which could, or could in the opinion of the Secured Party, have a Material Adverse Effect;
…
(n)(provisions void) if all or any material provision of a Transaction Document is or becomes void, voidable, illegal or unenforceable or of limited force (other than because of equitable principles or laws affecting creditors' rights generally), or the Grantor claims this to be the case …
The terms Insolvency Event and Material Adverse Effect are both defined (General Security Deed cl 1.1). Relevantly, Insolvency Event includes:
(g)the person:
(i)suspending payment of its debts, ceasing (or threatening to cease) to carry on all or a material part of its business, stating that it is unable to pay its debts or being or becoming otherwise insolvent; or
(ii)being unable to pay its debts or otherwise insolvent;
(h)the person taking any step toward entering into a compromise or arrangement with, or assignment for the benefit of, any of its members or creditors.
A Material Adverse Effect is defined to include a material adverse effect in the reasonable opinion of the Secured Party on: a relevant party's business, property or financial condition; ability to perform its obligations under the Transaction Documents; or, the validity or enforceability of any Transaction Document or the rights and remedies of the Secured Party under any Transaction Document.

The Amending Deed

By a document titled Amending Deed: Deed of Settlement and Release dated November 2012 between ILP and Kupang the parties agreed to amend the Deed, by deleting subcl 3(a) and replacing it. Materially, the Instalment Payment Obligation was now to be paid 'by monthly instalments of $500,000 or such lower amount notified in writing by ILP to Kupang, payable until the principal amount of $5,500,000 plus interest is paid in full': Amending Deed cl 2.
The Amending Deed also provided for new cl 3(d) and cl 3(e), under which ILP could elect to exercise an existing share option by electing to fund that share purchase by waiving its entitlement to receive part of the Outstanding Amount.
There is some uncertainty on the evidence about when, and in what circumstances, officers of Kupang executed the Amending Deed. It is, however, unnecessary to resolve those matters now.

The enforcement of the security

On 6 August 2014, ILP, by its solicitors, demanded that Kupang pay forthwith the sum of $2,448,620 plus interest. ILP relied upon the Deed, varied by the Amending Deed, as creating an obligation on Kupang to pay monthly instalments of $500,000. ILP asserted that Kupang had committed an event of default by failing to pay amounts due and payable under the Deed. It also asserted that additional events of default had occurred because:
(a)Kupang had stated that it is unable to pay the debt due to ILP under the 'Instalment Agreement' (the term is capitalised, but not defined in the letter);
(b)Kupang had entered into a compromise or arrangement with a creditor (the Commissioner);
(c)Kupang had indicated in a monthly report to ILP under cl 5.2(d) of the General Security Deed that it could not make the required monthly instalments of $500,000 per month;
(d) Kupang's inability and subsequent failure to pay the instalments and its entry into the payment arrangement with the Commissioner was an event which could, and which ILP considered could, have a Material Adverse Effect;
(e)the voluntary entry into bankruptcy of Mr Grimaldi was an event which could, and which ILP considered could, have a Material Adverse Effect.
ILP stated that it relied on any one or more of these events to make the Secured Money immediately due and payable pursuant to cl 1 of the General Security Deed. Later that day, ILP purported to appoint the second defendants as receivers and managers of all the secured property of Kupang, pursuant to the General Security Deed.
In par 37 of its re‑amended defence to this application, ILP pleads that it was entitled to appoint receivers to Kupang as at 6 August 2014 as the General Security Deed had become immediately enforceable because of the following events:
(1) Kupang had failed to pay amounts that were due and payable by it under the Deed as amended by the Amending Deed and/or under the Amended August 2013 Agreement in not paying monthly instalments of $500,000 in each of the months of November 2013 to April 2014; further and alternatively, Kupang did not pay any money whatsoever in the months May, June and July 2014: General Security Deed, cl 8.1(a); re‑amended defence [37.1].
(2)By not paying any money in the months of May, June and July 2014, Kupang had failed to comply with its obligations pursuant to cl 3(a) of the Deed, and pursuant to the Amended August 2013 Agreement. Each was a failure that could be remedied, but which was not remedied within two business days: General Security Deed, cl 8.1(b); re‑amended defence [37.2].
(3)An Insolvency Event had occurred by Kupang stating that it was unable to pay its debts, namely monthly instalments of $500,000, suspending payment of its debts to ILP and/or the Commissioner, and taking steps toward entering into a compromise or arrangement with the Commissioner: General Security Deed, cl 8.1(d); re‑amended defence [37.3].
(4)The bankruptcy of Philip Grimaldi (a debtor of Kupang) was an event which could have a material adverse effect on any of Kupang's business, property, financial condition, or ability to perform its obligations under the Transaction Documents: General Security Deed, cl 8.1(f); re‑amended defence [37.4].
(5)If the August 2013 Agreement is held to be void, voidable or unenforceable or of limited force, then a material provision of a Transaction Document was void, unenforceable or of limited force: General Security Deed, cl 8.1(n); re‑amended defence [37.5].

The issues

The primary issue is whether, on the proper construction of subdiv 260A of sch 1 of the Taxation Administration Act, ILP could no longer demand payment of the secured sum, or enforce its security following service of the notices under that Act. This ultimately is the specific ground on which Kupang relies under s 418A of the Corporations Act, although at times it was submerged.
Kupang also submits that, as a matter of construction the General Security Deed, after the service of the notice by the Commissioner, the balance of the amount payable under the Deed was no longer Secured Money, as defined, because it was a debt to the Commissioner and was not owing or payable to ILP.
These contentions are inconsistent with both the proper construction of the General Security Deed and the Taxation Administration Act.
Dealing first with the construction of the General Security Deed, Secured Money is defined in cl 1.1 to mean:
all amounts (including damages) that are payable, owing but not payable, or that otherwise remain unpaid by the Grantor [Kupang] to the Secured Party [ILP] on any account at any time under or in connection with the Deed of Settlement and Release or any other Transaction Document or any transaction contemplated by them.
Even if the debt is not payable to ILP, but payable only to the Commissioner, it remains an amount that is 'owing but not payable, or that otherwise remain[s] unpaid by the Grantor to the Secured Party … under or in connection with the Deed of Settlement and Release'.
The service of a notice under s 260‑5 of the Taxation Administration Act does not have the effect that Kupang no longer owes the settlement sum to IPL. That would be inconsistent with the terms of s 260‑5(4), s 260‑5(5) and s 260‑15, each of which recognises that the 'third party' as defined continues to owe the money to the 'debtor'. The operation of s 260‑5 depends upon when the amount becomes owing to the debtor. Subsection (5) needs to be read in context.
By s 260‑5(3) and (4):
(3) The third party is taken to owe money (the available money) to the debtor if the third party:
(a) is an entity by whom the money is due or accruing to the debtor; or
(b) holds the money for or on account of the debtor; or
(c) holds the money on account of some other entity for payment to the debtor; or
(d) has authority from some other entity to pay the money to the debtor.
The third party is so taken to owe the money to the debtor even if:
(e) the money is not due, or is not so held, or payable under the authority, unless a condition is fulfilled; and
(f) the condition has not been fulfilled.
(4)A notice under this section must:
(a)require the third party to pay to the Commissioner the lesser of, or a specified amount not exceeding the lesser of:
(i)the debt; or
(ii)the available money; or
(b)if there will be amounts of the available money from time to time--require the third party to pay to the Commissioner a specified amount, or a specified percentage, of each amount of the available money, until the debt is satisfied.
Subsection (5) sets out when an amount must be paid:
(5) The notice must require the third party to pay an amount under paragraph (4)(a), or each amount under paragraph (4)(b):
(a) immediately after; or
(b) at or within a specified time after;
the amount of the available money concerned becomes an amount owing to the debtor. [emphasis added]
Section 260‑15 of sch 1 of the Taxation Administration Act provides that an amount that the third party pays to the Commissioner is taken to have been authorised by the debtor and by any other person who is entitled to all or part of the amount, and the third party 'is indemnified for the payment'. That is, the Commissioner has the right to give to the third party a valid receipt and discharge for money paid in compliance with the notice. That is consistent only with the third party continuing to owe the money to the entity described as the debtor in s 260‑5.
The argument advanced by Kupang is also, in my opinion, inconsistent with the authorities on s 218 of the Income Tax Assessment Act 1936 (Cth), the immediate predecessor of s 260‑5 of the Taxation Administration Act. The authorities have, in the particular factual and legal context in which they arose, spoken of the debt or the money owed by the third party to the debtor as subject to a statutory charge or attachment in favour of the Commissioner. But the authorities do not deny, notwithstanding the charge, that the debt remains. Further, they do not deny the ability of the third party and debtor to deal with the debt, although that dealing may be ineffective against the Commissioner.
In the leading case of Clyne v The Deputy Commissioner of Taxation [1981] HCA 40; (1981) 150 CLR 1, Mr Clyne purported to assign term deposits held by the bank to the second appellant, Ms Peacock, after the service of notices under s 218 of the Income Tax Assessment Act on the bank. Gibbs CJ and Mason J (with whom Aiken and Wilson JJ agreed) did not question that there remained a debt between Mr Clyne and the bank after the Commissioner had served the notices. Gibbs CJ said that the 'validity of the assignment as between the appellants and the Bank is not in question' (7). Later, Gibbs CJ said:
once the notice is given, it operates to prevent any subsequent dealing with the money which will prevent compliance with the notice when the time for compliance arrives. An assignment made by the taxpayer after the date of the notice will be ineffective to relieve the person to whom the notice is given of his statutory obligation to pay the money to the Commissioner. Notwithstanding the assignment, the money will be 'due' at the time when it would have been payable to the taxpayer if it had not been for the subsequent assignment whose effect is to be ignored (11) (emphasis added).
Mason J (with whose reasons Aiken and Wilson JJ agreed) said of the deed of assignment:
The effect of the deed was to give the second appellant the right as against the Bank to the proceeds of the term deposits and to the payment of interest in the meantime. Because the second appellant acquired the right title and interest of the assignor by way of security only, in the event that the loans were repaid she would come under the obligation to refund to the first appellant the proceeds of the term deposits. None the less, within the context of s 12 the assignment was 'absolute' (20).
Mason J reasoned from the doctrine that an assignee of an equitable interest, such as Ms Peacock, takes subject to the equities that the debtor has against the assignor at the time of the notice (19). Specifically, the assignee, by virtue of the assignment, took subject to the right of the bank to set off the monies payable to the Commissioner under s 218 of the Income Tax Assessment Act which accrued due before the notice of the assignment, although they were not payable until the term deposits matured (22). Mason J continued:
The effect of imposing the obligation is to make it unlawful for the recipient to pay the moneys to anyone but the Commissioner after service of the notice. Although this might otherwise expose the debtor to liability of the suit of the taxpayer the debtor is protected by s 218(4) which provides that the payment is deemed to be made with the authority of the taxpayer and indemnifies the debtor (23) (emphasis added).
Although his reasoning was different in other ways, Brennan J also distinguished between the effect of the notice on the third party recipient and the taxpayer, and the relationship between them but for the notice. His Honour said:
The notice precludes the taxpayer from receiving money to the payment of which he would otherwise be entitled or become entitled, and it requires the third person in whose hands the money is or into whose hands it comes to pay it to the Commissioner at some time, but not earlier than when it would otherwise be due and payable. The giving of the notice thus affects the rights of the taxpayer who, once the notice is given, is statutorily divested of his right to payment of the whole or a part of the money specified in the notice. …
The taxpayer is thus unable to effect a disposition of the money so as to defeat the Commissioner's right to payment once the statutory notice is given. Accordingly, a subsequent assignment of the taxpayer's interest in the money does not create in the purported assignee a right to payment superior to the right conferred upon the Commissioner. As between the Commissioner and the assignee, the Commissioner's right to payment prevails (27) (emphasis added).
None of the judgments support the view that, as between the taxpayer and the third party, the debt is no longer owing. The taxpayer retains the ability to deal with the debt, including by assigning it. The effect of a s 260‑5 notice is that such an assignment does not affect the rights of the Commissioner, which arise at the time of the service of the notice, and between the Commissioner and an assignee the Commissioner's right to payment prevails.
It must now be accepted that the Commissioner may sue for non‑payment.
In Commissioner of Taxation v Barnes Development Pty Ltd [2009] FCA 830; (2009) 178 FCR 352 Gilmour J held that the Commissioner may recover the amount by an action in debt under the rule, 'Wherever an Act of Parliament creates a duty or obligation to pay money, an action will lie for its recovery, unless the Act contains some provision to the contrary' [18] (applying Mallinson v Scottish Australian Investment Co Ltd [1920] HCA 51; (1920) 28 CLR 66; Deputy Commissioner of Taxation v Broadbeach Properties Pty Ltd [2008] HCA 41; (2008) 237 CLR 473 [51]). As I understand the decision, Gilmour J found that the right of the Commissioner to recover by civil action was a right to enforce the statutory obligation to pay money. The section creates a new obligation to pay the available money to the Commissioner, and the action is for the amount required to be paid by the third party as a statutory debt pursuant to the s 260‑5 notice: see Barnes Development [28] - [33].
In Bruton Holdings Pty Ltd (in liq) v Federal Commissioner of Taxation [2009] HCA 32; (2009) 239 CLR 346, the High Court held that a notice under s 260‑5 is an attachment in s 500(1) of the Corporations Act. The Court said:
The service of a s 260‑5 notice imposes upon the recipient an obligation to pay the amount specified therein to the Commissioner, renders it unlawful for the recipient to pay the creditor, invalidates any attempted assignment by the creditor after the receipt of the notice, and gives to the Commissioner the sole right to discharge the debtor and to sue the debtor upon non-payment. Section 260-15, as explained above, protects the party paying under the notice. The appellant correctly submits that, as a matter of general understanding, these are indicia of an attachment [28].
The Court cited Clyne for this statement of the effect of the notice. There is nothing in Bruton to suggest the court intended any departure from or qualification of the law stated in Clyne. Accordingly, I read the reference to 'invalidation' of any attempted assignment as referring to the force of that assignment between the taxpayer and the Commissioner.
Counsel for Kupang cited many other authorities on s 218 of the Income Taxation Assessment Act and s 260‑5 of the Taxation Administration Act, applying the section in various factual circumstances. Several cases have considered the position where the taxpayer has given security over its assets, including the debt owed by the third party, and where the taxpayer goes into bankruptcy or liquidation. None dealt with the current situation where the debt owed by the 'third party' to the 'debtor' is secured, and the effect of a notice on that security. There is nothing in subdiv 260A of the Taxation Administration Act that expressly affects the taxpayer's security, subject only to the right of the Commissioner to receive the amount payable to him under s 260-5. I see no reason to read the provisions as destroying or limiting the security.
Kupang also argued that ILP could no longer demand payment of the secured sum as it was not payable to ILP. Even if that is correct, cl 8.1 of the General Security Deed sets out two circumstances in which the document becomes enforceable. Under the second of them, the security immediately becomes enforceable on the happening of an event of default whether or not the Secured Money has become payable at its option.
To summarise my findings: the notices served by the Commissioner did not have the legal effect of making the security held by ILP unenforceable, although the enforcement could not alter the Commissioner's right to payment which prevails over the rights of ILP.

The events of default

Kupang failed to pay amounts that were due and payable

On the agreements as they stood at the time of the service of the first notice by the Commissioner, Kupang was obliged to make its payments by monthly instalments, in accordance with the terms of any written agreement between the parties, and in the absence of any agreement between them on demand by ILP: General Security Deed, cl 5(a). Neither party pleads that there was any written agreement made before the Commissioner served the notices.
On 9 November 2012, however, the board of Kupang announced to the market that it had entered into a settlement with ILP. The terms of the settlement, as set out in the announcement, include 'instalment payments that are to be paid monthly until the principal amount of $5,500,000 (plus interest) (outstanding amount) is paid in full'. The monthly instalment payments 'shall be the greater of AU$500,000 or the KPR cash flow'.
In the financial report for the half year ended 31 December 2012, the directors of Kupang announced the entry into the settlement deed with ILP and the terms of the settlement, in similar terms to the announcement.
The conduct of Kupang following the execution of the Deed and the General Security Deed is also consistent with an instalment payment obligation of $AU500,000.
The Commissioner, in a submission adopted by ILP, argued that each of the statement to the market and the directors' report is a Transaction Document, as defined, in that it records or evidences the terms on which any secured money is payable to ILP. I am not satisfied that is correct. In my opinion, there can only be 'terms' on which the money is payable if there is an agreement to that effect. Neither party to the deeds has pleaded that before August 2013 there was an agreement under which the balance of the amount was to be paid by a monthly payment of $500,000. There is no evidence of any written agreement between Kupang and ILP to that effect. In the absence of a written agreement, the two announcements are inconsistent with cl 5 of the General Security Deed, and do not record or evidence the terms on which the monthly instalment is payable.
The parties did subsequently make two written agreements regarding the payment of instalments. First, on 22 August 2013, Kupang wrote to ILP, referring to recent discussions in relation to the Deed (there is no evidence about those discussions) and requesting ILP 'to agree to accept a delay of one month in respect of the remaining Instalment Payment Obligation (as defined in the Deed)' (the August 2013 Agreement). Having set out its cash position, Kupang continued:
At the date of this letter, the remaining Instalment Payment Obligation owing to ILP is $2,500,000 (principal amount). In accordance with the Deed, the next monthly instalment payment of A$500,000 would fall due on 28 August 2013. Given Kupang's operating cash flow requirements to commission its processing facility this month, Kupang will likely be in a negative cash flow position should it make this month's payment to ILP.
However, further funding of A$1.4 million is expected to be received once Tranche 2 of the Placement is approved by shareholders and subsequently completed. As a result, Kupang hereby requests ILP's written confirmation that:
(a)it accepts a deferral of the Instalment Payment Obligation due on 28 August 2013 and therefore a one month extension to the remaining Instalment Payment Obligation repayment schedule; and
(b)the deferral of the Instalment Payment Obligation due on 28 August 2013 will not constitute a breach of the terms and conditions of the Deed (or associated documents),
(together, the Acceptance).
Subject to ILP's Acceptance of this amendment to the repayment schedule, the next monthly instalment of A$500,000 will be paid on 28 September 2013 and each month thereafter until extinguished. Attached to this letter is the proposed remaining Instalment Payment Obligation repayment schedule assuming ILP's Acceptance (refer Annexure A).
Accordingly, the Company request ILP executes the below confirmation of the acceptance and that it returns a copy to me.
ILP did sign acknowledging its acceptance of the matters set out in the letter and initialled the payment schedule at Annexure A which provided for monthly payments of $500,000 on the 28th of each month commencing September 2013 and ending January 2014.
On 26 September 2013, ILP wrote to Kupang confirming ILP's agreement to defer the monthly $500,000 payment due in September until the next Tuesday. On 1 October 2013, it further agreed to defer the September payment for another month in order to assist with cash flow requirements, with payments to resume on 28 October 2013 (referred to by ILP in its defence as the Amended August 2013 Agreement).
Counsel for Kupang submitted that these documents are not in themselves an agreement, and that in some way the repayment schedule agreed between the parties was merely a proposal and not something which was intended to bind either of them. Counsel further submitted that by cl 14 of the Deed, it could only be varied by deed, and the letter of 22 August 2013 and its acceptance was incapable of varying the obligation under the Deed to make monthly payments of an unspecified amount.
Both of those submissions must in my opinion be rejected. First, the letter of 22 August 2013 on its face is an offer which, on acceptance, would objectively create a legally binding agreement. The terms of the letter are so clear that I do not believe any further comment is needed.
Second, within the terms of the General Security Deed, the letter of 22 August 2013 and its acceptance constitute a Transaction Document. The General Security Deed varies the Deed, and its terms are given primacy.
Third, cl 5.1 of the General Security Deed provides for written agreement between Kupang and ILP regarding when the secured money is to become payable. The August 2013 Agreement is such a written agreement. Accordingly, from 22 August 2013 at the latest, Kupang was liable to make instalment payments of $500,000 per month for the next five months. That was a binding agreement between those parties. It was subsequently modified by further deferral of payments for a stated period. That agreement, as between Kupang and ILP, was a Transaction Document enforceable under the General Security Deed.
Accordingly, I find that the General Security Deed became enforceable by reason of the failure of Kupang to pay the amounts due and payable under the Amended August 2013 Agreement when Kupang failed to pay the amount of $500,000 in each month in accordance with that agreement. It matters not whether that failure is characterised as non-payment under cl 8.1(a), or failure to comply with another obligation under cl 8.1(b).
ILP also relies on the fact that Kupang failed to pay any amount from May 2014. That relies on the obligation under the Deed to pay a monthly instalment, even if the amount is not specified. Because of my other findings, it may be unnecessary to determine this question. It turns, in my opinion, on the proper construction and effect of cl 5 of the General Security Deed - absent a written agreement regarding when the Secured Money becomes payable, it was payable on demand. It would be inconsistent with cl 5 to construe the Deed as providing for a monthly payment, even if nominal, in the absence of an agreement.

The Amending Deed

Sometime after October 2013, Kupang and ILP executed the Amending Deed. Kupang seeks relief, either by an estoppel or by an order under s 87 of the Competition and Consumer Act, refusing to enforce the provisions of the Amending Deed. Kupang pleads (statement of claim [23]) that it executed the Amending Deed in reliance upon certain representations made on behalf of ILP.
For the purposes of these proceedings, ILP admits that through an agent acting on its behalf it made the representations pleaded by Kupang (admission by first defendant, 16 September 2014). These included representations that:
(e)in respect of their fight with the Tax Department, ILP and Mr Lindholm would be significantly assisted if Kupang would enter into an Amending Deed, amending the Deed;
(f)the Amending Deed would never be used against Kupang and ILP would continue to assist Kupang.
Kupang does not plead that the representations were false, or that the conduct of ILP was misleading or deceptive. Its written submissions clearly state its case as a claim for misleading or deceptive conduct. That is how the matter was argued on both sides at trial. Were it necessary, I would proceed on the basis that the elements of a claim under s 18 of the Australian Consumer Law have been pleaded. But it is unnecessary to consider these matters further. ILP and Kupang had made a written agreement (a Transaction Document) relating to the terms of monthly payments in August 2013. Even if the Amended Deed is unenforceable, it does not alter Kupang's position; it was in default of its obligations under a Transaction Document.

Insolvency Events

On 15 November 2013, Kupang (through its then solicitors) wrote to the Commissioner stating, materially, that it was not expecting to receive any significant income from its operations between then and February 2014, and its cash inflow until February 2014 'is close to nil'. Taking into account estimated cash outflow, Kupang estimated its balance as at 31 January 2014 as $298,449. That estimate did not include payments under the Deed. Kupang proposed monthly payments of $20,000 and said that it expected cash inflow from sales revenue in February 2014.
On 13 February 2014, Kupang again wrote to the Commissioner advising that, due to government action in Indonesia, any significant income from the sale of its manganese was not expected before 30 April 2014. It proposed monthly payments of $20,000 in February, March and April 2014.
On 14 May 2014, Kupang provided an update to the Commissioner. Relevantly, it advised that its working capital position was currently less than $200,000, and those funds were required to pay corporate overhead costs in the near term. It requested the Commissioner to agree to a postponement of any further payments until Kupang was able to generate cash inflow.
In each of these letters, Kupang was stating, in effect, that it was unable to pay its debts if it was required to make monthly instalments of $500,000. The claim of this insolvency event adds little, as it depends upon an existing obligation to make monthly payments of $500,000. If there was such an obligation, and in my opinion there was, Kupang did not meet it.

Material Adverse Effect

The relevance of the bankruptcy of Mr Grimaldi requires some brief explanation. Kupang had been successful in Federal Court proceedings against Mr Grimaldi, requiring him to account to the company for profits obtained by him as a result of breaches of fiduciary duty.
Kupang was proceeding against Mr Grimaldi, with an inquiry in the Federal Court (as stated in Kupang's announcement to the ASX) to establish the value of benefits which Mr Grimaldi and his associates or nominees had derived by reason of his breaches of fiduciary duty. Kupang was expecting or hoping to recover many millions of dollars. Kupang had also obtained a certificate of taxation for costs in the Federal Court in March 2014 in the amount of $477,900.
ILP and Kupang agreed that ILP or its nominee may elect to fund the costs of the inquiry regarding Mr Grimaldi, for part of the amount recovered. That election was included in the Deed.
The evidence that ILP formed the opinion required by cl 8.1 of the General Security Deed is the letter of 6 August 2014, in which ILP said that it considered the bankruptcy of Mr Grimaldi could have a Material Adverse Effect. That, in my opinion, is sufficient. It is necessary only that the bankruptcy of Mr Grimaldi could, or could in the opinion of ILP, have a Material Adverse Effect on Kupang's property or financial condition. I accept that such an opinion must be reasonably held. But the amount anticipated to be recovered from Mr Grimaldi was such that his bankruptcy was an event which could reasonably be regarded as material to Kupang's property or financial condition.

Clause 8.1(n) of the General Security Deed

The last alternative on which ILP relies is cl 8.1(n). On the finding I have made, the August 2013 Agreement is not void or unenforceable.
However, Kupang has, in these proceedings, claimed that the Transaction Documents are unenforceable. That is itself a circumstance in which ILP may enforce its security.

Conclusion

To summarise my findings:
(1)The notices served by the Commissioner did not have the legal effect of making the security held by ILP unenforceable, although the enforcement could not alter the Commissioner's rights which prevail over the rights of ILP.
(2)The notices served by the Commissioner did not have the legal effect of preventing ILP and Kupang from making an agreement, within the terms of the existing transaction documents, as to when the amount of the remaining debt was to be repaid. Should such an agreement create rights inconsistent with the rights the Commissioner obtained on service of the notices, the Commissioner's rights would prevail. The August 2013 Agreement is thus valid, and is a Transaction Document as defined.
(3)The failure of Kupang to make payments in accordance with the August 2013 Agreement is a failure to pay an amount due and payable, or alternatively is a failure to comply with its obligations under a Transaction Document. That failure was not remedied.
(4)The bankruptcy of Mr Grimaldi was an event which could have a Material Adverse Effect, as defined, and an event of default for the purposes of cl 8.1 of the General Security Deed.
The appointment of the receiver was, on these findings, valid. The injunction should be discharged and the application for a declaration dismissed.