MacMAHON and COMMISSIONER OF TAXATION

[2010] AATA 594

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION [2010] AATA 594

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          Nos 2008/2925-2927

TAXATION APPEALS DIVISION		)                2009/6129-6131
Re		GREGORY MacMAHON

Applicant

And COMMISSIONER OF TAXATION

Respondent

Nos. 2008/2929-2931
  2009/6132-6134

Re PETER MacMAHON

Applicant

And COMMISSIONER OF TAXATION

Respondent

INTERLOCUTORY DECISION

Tribunal Mr J Block, Deputy President
Mr S E Frost, Senior Member

Date10 August 2010

PlaceSydney

Decision The application for a postponement of the hearing in applications 2008/2925-2927 and 2009/6129-6131 is refused.

.......................[sgd].......................

J Block
  Deputy President

CATCHWORDS – Taxation – procedure of the Tribunal – adjournment request – bankruptcy petition entered into by an applicant – stay of proceedings – applications heard together are not consolidated – discretion of the tribunal

Administrative Appeals Tribunal Act 1975 (Cth)

Bankruptcy Act 1966 (Cth)

McCallum v Commissioner of Taxation (1997) 75 FCR 458

Re Lofthouse (2001) 107 FCR 151

John and Another v Neiman Holdings Pty Ltd (1986) 84 FLR 84

REASONS FOR DECISION

10 August 2010 Mr J Block, Deputy President
Mr S E Frost, Senior Member       

1.      In our view, there are two issues for us to decide:

(a)does it follow as a matter of law that s 60(2) of the Bankruptcy Act 1966 has the effect of staying the applications by Mr Gregory MacMahon; we consider that it does not;

(b)whether, as a matter of discretion, we should in any event postpone the hearing of the applications by Mr Gregory MacMahon; the history of these matters is such that we believe that we should not do so.

2.      The tribunal is concerned with applications for review in respect of three tax years (collectively the “relevant years”) by Mr Gregory MacMahon (case numbers 2008/2925-2927 and 2009/6129-6131) and by Mr Peter MacMahon also in respect of the relevant years and where the relevant case numbers are 2008/2929-2931 and 2009/6132-6134.  We propose to refer to the applications by Mr Gregory MacMahon as the “Gregory applications” and to the applications by Mr Peter MacMahon as the “Peter applications”.

3.      It is important to make it clear that although the factual matrix in respect of the Gregory applications is much the same as the factual matrix in respect of the Peter applications, the Gregory applications and the Peter applications constitute two separate sets of applications.  The Gregory applications and the Peter applications arise from a series of transactions involving an acquisition by a purchaser of all of the issued shares in a company named Mactek Pty Ltd and in which each of the applicants held one half of the issued shares.

4.      It was in these circumstances that as a matter of convenience the tribunal directed that the Gregory applications and the Peter applications be heard together and that the evidence in respect of each set of applications would be evidence in the other set of applications.  We do not accept that the two sets of applications have, as Mr Young contended, been consolidated, and whether in substance or otherwise.

5.      There have been significant delays culminating in directions given some months ago and in terms of which inter alia the two sets of applications were scheduled for hearing on four days commencing today.

6.      

On 3 August 2010 the applicants applied for a postponement of the hearings on the basis that the question of penalty was not properly before the tribunal.  This arose because the assessment in respect of primary tax was not the assessment in respect of penalty and so that (so the applicants contended) the penalty assessment could not be dealt with (although referred to by both parties in documents before the tribunal) because there was no reviewable objection decision before the tribunal in respect of penalty.  It is unnecessary to recite the directions given by consent on

3 August 2010; suffice it to say that they were designed to ensure that penalty could and would be dealt with at the hearing of the applications.

7.      

When the hearing commenced this morning, Mr Solomons, who is a certified practising accountant, advised the tribunal that a bankruptcy petition was on

9 August 2010 presented in respect of Mr Peter MacMahon and that he, Mr Solomons, and a colleague have agreed to be the trustees of Mr Peter MacMahon's bankrupt estate.  The tribunal has no reason to doubt that a bankruptcy order will be duly granted.  Mr Solomons sought in respect of the Peter applications an adjournment of three months to enable the trustees to decide whether to prosecute or discontinue the Peter applications.

8. It was in these circumstances that Mr Young, on behalf of Mr Gregory MacMahon, sought a postponement in respect of the Gregory applications. Section 60(2) of the Bankruptcy Act 1966 provides for a stay of any action (defined in subsection (5) as “any civil proceedings, whether at law or in equity”) pending the decision of the trustees either to prosecute or discontinue the action. As to whether the Peter applications are readily capable of characterisation within s 60(2) of the Bankruptcy Act 1966 is not altogether clear but it is unnecessary for us to deal with the issue in detail because we incline, having regard to the decision in McCallum v Commissioner of Taxation (1997) 75 FCR 458, that the Peter applications do fall within s 60(2). In McCallum's case a majority of the full Federal Court held (Hill J dissenting) that a proceeding in this tribunal is a legal proceeding within s 134(1)(j) of the Bankruptcy Act 1966.

9.      Mr Young referred the tribunal to the judgement of Gray J in Re Lofthouse (2001) 107 FCR 151; clause 20 of the judgement reads as follows:

In my view, s 60 has been enacted deliberately as a broad provision, so as to encompass any proceeding brought by a bankrupt before bankruptcy. The exceptions have been expressed quite narrowly. The intention is that, once a bankruptcy occurs, no further costs should be incurred in a proceeding unless the trustee in bankruptcy makes an election to continue the proceeding. If such an election is made, the trustee in bankruptcy will ordinarily become substituted as plaintiff in the pending proceeding, in the capacity of trustee in bankruptcy for the former plaintiff. The trustee in bankruptcy will thereby become liable for the costs of the proceeding in the event that it is unsuccessful and a costs order is made in favour of the defendant in the proceeding or some other party to it. The trustee in bankruptcy may be entitled to an indemnity in respect of those costs out of the bankrupt estate, as expenses of the administration of the estate, to the extent to which the estate has assets. The trustee in bankruptcy will obviously consider whether continuing to prosecute the proceeding will be likely to have any benefit to the estate of the bankrupt, and therefore to the bankrupt's creditors. One of the elements that the trustee in bankruptcy will take into account is whether the bankrupt is suing in a personal capacity or some other capacity, particularly that of trustee for someone else. If the bankrupt has sued as trustee for another person, and the estate will not benefit, the trustee in bankruptcy would no doubt usually elect not to continue to prosecute the proceeding. This would protect any defendant, and perhaps other parties to the proceeding, with respect to costs. Of course, it may impact on the beneficiary of the trust of which the bankrupt claims to be trustee. The beneficiary may be forced to institute proceedings in his or her own right to enforce the trustee's legal right, as can be done where there are "exceptional circumstances". See Lamru Pty Ltd v Kation Pty Ltd (1998) 44 NSWLR 432.

10.     The judgement of Young J in John and Another v Neiman Holdings Pty Ltd (1986) 84 FLR 84 was also cited by Mr Young. In that case the second plaintiff sought an adjournment because he desired to know what the attitude of the first plaintiff's trustee in bankruptcy was in respect of proceedings in which they were co-plaintiffs. That application for an adjournment was granted; we refer to a passage from page 86 of the judgement as follows:

However, in my view, apart from these two exceptions, viz: (1) where the bankrupt's property is not affected because he is merely added to the litigation as a party for more abundant caution; or (2) where the litigation has progressed beyond the stage where the trustee's decision as to what he will do about it is still material, the effect of s 60(2) is to prevent any activity in litigation in which the bankrupt is a plaintiff or one of the plaintiffs until the election has been made. This will doubtless cause hardship in many cases: the instant is one of them, but the Commonwealth Government must be taken to have formed the policy that it is better for some hardship to be caused to some litigants in the public interest of the trustee in bankruptcy making an informed decision as to whether in the interest of creditors he will pursue the action in which the bankrupt is involved or not.

I say this because it seems to me inescapable, in view of the presence of subs (5), to read down the words "civil proceedings" as meaning a claim in a civil proceeding or part of a civil proceeding and thus confining it to the claims which the bankrupt makes, as opposed to the claims that other people may make in the litigation. Indeed, subs (1)(b) where it speaks of orders being made in civil proceedings, seems to me to reinforce this view and, of course, there is a contrast in subs (1) with legal process and civil or criminal proceedings.

In so far as the authorities touch on the point they again seem to support this view. Under the old New South Wales legislation cases such as Cohen v Moss (1887) 8 LR (NSW) 156 and Kerle v Smith (1897) 18 LR (NSW) 211 were both cases where the statutory stay was held to apply even though only one of two plaintiffs had become bankrupt. True it is that those cases may have involved actions where there was a joint cause of action, but my view is that in view of subs (5) this is not a material distinction.

Cases which lean the other way can be found in Victoria, such as King v Commercial Bank of Australia Ltd [1921] VLR 48 and Millane v Shire of Heidelberg [1936] VLR 8, but it may be that these go off on the point that there is a statutory splitting of a cause of action in s 60 between that part of a bankrupt's sole cause of action which vests in the official receiver and that which remains is pursuant to subs (4). For completeness it should be noted that even at common law if the bankrupt brought a representative action that the action would be stayed: Wolff v Van Boolen (1906) 94 LT 502.

11.     There is an important distinction between the two sets of applications before us and the judgement in John's case.  In John’s case there were two co-plaintiffs and one of them was made bankrupt.  We have, by contrast, two separate applicants who are not on any basis co-applicants and so that in our view the judgement in John's case is distinguishable.

12. The opening words of s 60(2) of the Bankruptcy Act 1966 refer to “an action commenced by a person who subsequently becomes a bankrupt".  Those words are apt to describe the position in respect of Mr Peter MacMahon but they do not also encompass the position in respect of Mr Gregory MacMahon who brought completely separate applications.  The fact that the factual matrix in respect of each of the two sets of applications is much the same is not to the point.

13.     On the basis that we accepted that Mr Peter MacMahon is or shortly will be bankrupt, a postponement was granted in respect of the Peter applications and so that the trustees must make their decision whether or not to proceed with the applications by 10 November 2010.

14.     Mr Young contended that for the tribunal to reverse, at this late stage, the earlier directions made (which are referred to below) would be improper.  We do not agree; the timing of the bankruptcy petition in respect of Mr Peter MacMahon launched one day before the commencement of the hearing it is in our view significant.

15. Mr Young asked in the alternative that we exercise their discretion under s 33 of the Administrative Appeals Tribunal Act 1975 on the basis that it would be unfair for Mr Gregory MacMahon to have to proceed alone and while the trustees make up their mind as to the future of the Peter applications.  There is no substance in this application; each of Mr Gregory MacMahon and Mr Peter MacMahon brought their respective applications and they brought them separately.  Had the tribunal not directed that they be heard together, they would have been heard separately.  The only reason why the direction as to their being heard together was issued was because of the convenience thereby involved; that reason is at this late stage no longer relevant.

16.     There is in our view no reason why the Gregory applications, already so long delayed, should not proceed and we direct that:

(a)the direction pursuant to which the Gregory applications and the Peter applications were to be heard together is set aside;

(b)the direction pursuant to which evidence in respect of either set of applications would be evidence in the other is also set aside;

(c)the Gregory applications must proceed forthwith, subject only to the fact that we will adjourn the hearing, if so desired by Mr Young, until 2 p.m. on Wednesday 11 August 2010 to enable Mr Young to make application to the Federal Court.

I certify that the 16 preceding paragraphs are a true copy of the reasons for the decision herein of Mr J Block, Deputy President, and Mr S E Frost, Senior Member

Signed: ......................[sgd].................................................
  Associate: Lloyd Doherty

Date of Hearing  10 August 2010
Date of Interlocutory Decision   10 August 2010
Counsel for the Applicant         I S Young
Solicitor for the Applicant          Jade Lawyers
Counsel for the Respondent     T Thawley
Solicitor for the Respondent     ATO Legal Services