Re Locktronic Systems Pty Ltd (No 1)
[2008] VSC 626
•11 March 2008
| IN THE SUPREME COURT OF VICTORIA | Not Restricted | |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
CORPORATIONS LIST
No. 10001 of 2005
| RE LOCKTRONIC SYSTEMS PTY LTD (in liquidation) (receivers appointed) (ACN 005 724 149) | |
| GEORGE GEORGES AND JOHN ROSS LINDHOLM (in their capacities as joint and several liquidators of LOCKTRONIC SYSTEMS PTY LTD (in liquidation)(receivers appointed) and LOCKTRONIC SYSTEMS PTY LTD (in liquidation)(receivers appointed) | Plaintiffs |
| v | |
| THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA | Defendant |
| and | |
| PETER KING | First third party |
| MICHAEL DAVID WALSH | Second third party |
| JOHN ANDREAS NISSEN | Third third party |
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JUDGE: | ROBSON J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 11 March 2008 | |
DATE OF RULING: | 11 March 2008 | |
CASE MAY BE CITED AS: | Re Locktronic Systems Pty Ltd (No 1) | |
MEDIUM NEUTRAL CITATION: | [2008] VSC 626 | |
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CORPORATIONS – preferences - claim by plaintiffs against the Commissioner of Taxation under application to recover preferential payments of tax – third party claims by the Commissioner of Taxation against the directors to be indemnified in respect of liability to defendant – defence by third parties filed in response to plaintiffs’ statement of claim against the Commissioner of Taxation under r 11.09(2) – third parties deny insolvency of the company at the time of the alleged preferential payments - whether Commissioner able to consent to judgment in favour of plaintiffs – held Commissioner not entitled to do so while defence of third parties maintained - third party defence withdrawn including denial of insolvency of plaintiff company – consent judgment ordered – whether third party able to deny insolvency in third party proceedings – held that third party bound by admissions to plaintiffs’ claim against the Commissioner of Taxation including insolvency of the company at the time of alleged preferential payments - r 11.09(2) of the Supreme Court (General Civil Procedure) Rules 2005; ss 588FF and 588FGA of the Corporations Act 2001
PRACTICE AND PROCEDURE – defence to plaintiffs’ statement of claim filed by third parties – effect of defence on issues as between the defendant and the third parties – r 11.09(2) of the Supreme Court (General Civil Procedure) Rules 2005
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr P D Crutchfield | Middletons |
| For the Defendants | Mr M Sifris SC with Mr S D Hay | Legal Services Branch, Australian Taxation Office |
| For the Firstnamed & Thirdnamed Third Party | Mr G T Bigmore QC with Mr P Fary | McDonald Partners |
| For the Secondnamed Third Party | In person |
Cases cited
Barclays Bank Ltd v Tom (1923) 1 KB 221; [1922] All ER Rep 279
Crosbie v Commissioner of Taxation [2003] 130 FCR 275
Young v Commissioner of Taxation [2006] 56 ACSR 654
HIS HONOUR:
By an originating process of 19 December 2005, the first and second plaintiffs, the liquidators of Locktronic Systems Pty Ltd (in liquidation)(receivers appointed) and the third plaintiff, Locktronic, applied under s 588FF of the Corporations Act 2001 for orders and declarations that certain alleged preferential payments entered into between Locktronic and the defendant, the Commissioner of Taxation, are insolvent transactions of Locktronic which are voidable by the liquidators pursuant to s 588FF of the Act.
By an amended third party notice of 23 March 2007, the Commissioner claimed to be entitled to be indemnified by the third parties, who had been directors of Locktronic, under s 588FGA of the Act, in the event that the Commissioner was adjudged liable to the plaintiffs to pay an amount equal to the alleged preferential payments.
The proceedings have come on for hearing before me. At the commencement of the hearing, the plaintiffs sought judgment by consent against the Commissioner under s 588FF of the Corporations Act. The order is prefaced by declarations that the payments totalling $341,663.54 made by Locktronic to the Commissioner and referred to in paragraph 5 of the plaintiffs’ statement of claim dated 16 February 2006 were undue preferences within the meaning of s 588FA of the Act and are void against Locktronic pursuant to s 588FE of the Act. The order they seek is that, pursuant to s 588FF of the Act, the Commissioner pay to Locktronic the sum of $341,633.54 together with interest of $117,902.69. Further, they seek an order that the costs of the plaintiffs be reserved until the hearing and determination of the third party claims.
Mr Crutchfield, counsel for the plaintiffs, submits that I am entitled to make the orders on the consent of the Commissioner of Taxation. As indicated above, the Commissioner of Taxation has brought third party proceedings against the three then directors of Locktronic, Mr King, Mr Nissen and Mr Walsh. Under s 588FGA of the Act the Commissioner can obtain orders against the directors.
In particular, sub-paragraph(1) provides:
this section applies if the court makes an order under s 588FF against the Commissioner of Taxation because of the payment of an amount in respect of a liability under any of the following provisions of the Income Tax Assessment Act 1936…
The relevant provision in this case being under sub-division 16(b) in Schedule 1 to the Taxation Administration Act 1953, concerning withholding tax.
Under sub-s (2) it is provided that each person who was a director of the company when the payment was made is liable to indemnify the Commissioner in respect of any loss or damage resulting from the order. Under s 588FGB there are certain defences available to the directors. In particular, under sub-s (3) it is a defence if it is proved that at the payment time the person had reasonable grounds to expect and did expect that the company was solvent at that time and would remain solvent even if it made the payment. Under sub-s (4) it is provided that:
Without limiting the generality of sub-s (3), if it is proved that at the payment time, the person:
(a) had reasonable grounds to believe, and did believe:
(i) that a competent and reliable person (the other person) was responsible for providing to the first mentioned person adequate information about whether the company was solvent; and
(ii) that the other person was fulfilling that responsibility; and
(b) expected, on the basis of the information provided to the first-mentioned person by the other person, that the company was solvent at that time and would remain solvent even if it made the payment.
Under r 11.09(2) of the Supreme Court (General Civil Procedure) Rules 2005 the third parties filed a defence to the plaintiffs' statement of claim which pleaded in paragraph 6:
Save that they admit that the third plaintiff and the defendant were parties to the payments and the payments were made during the six months ending on the relation back day in relation to the company, they deny each and every allegation contained in paragraph 6 of the statement of claim.
Paragraph 6 of the statement of claim alleged:
The payments:
(a) are transactions to which the third plaintiff and the defendant were parties;
(b) resulted in the defendant receiving from the third plaintiff in respect of an unsecured debt that the third plaintiff owed the defendant more than the defendant would have received from the third plaintiff if the payments were set aside and the defendant was to prove the unsecured debt in the winding up of the third plaintiff;
(c) took place at a time when the third plaintiff was insolvent, or the third plaintiff became insolvent because of amongst other things, the Payments; and
(d) took place during the six month period ending on the relation back day.
The plaintiffs informed the court that the first and third third parties, represented by Mr Bigmore QC and Mr Fary, had withdrawn the defence to paragraph 6 of the plaintiffs’ statement of claim plus the denial of paragraphs 7 and 8 of the plaintiffs’ statement of claim. Mr Crutchfield counsel for the plaintiffs sought time to discern the attitude of Mr Walsh, who appeared in person and unrepresented by counsel. After a short adjournment, the court was informed Mr Walsh was also prepared to consent to the withdrawal of his defence to the plaintiffs’ statement of claim against the Commissioner.
Mr Crutchfield then sought orders against the Commissioner including declarations that implicitly find that the company was insolvent at the time of the payments. That raised the issue of whether the Court could or should make a declaration of insolvency without any final determination on the evidence as to the correctness of that determination, where it has not otherwise made any findings on the issue.[1] Mr Crutchfield relied on Young v Commissioner of Taxation,[2] where Tamberlin J stated, after examining the authorities on the issue:
I consider that on a purposive approach having regard to the practical considerations as to expense, time and the importance of considered admissions in the absence of any real contest are powerful considerations sufficient to demonstrate that Crosbie[3] was clearly wrong, with the consequence that I am not obliged to follow the reasoning of that case.[4]
[1]Young v Commissioner of Taxation (2006) 56 ACSR 654 at 656.
[2]Ibid.
[3]Crosbie v Commissioner of Taxation [2003] 130 FCR 275.
[4]Ibid [8].
Tamberlin J declined to follow the decision of Finkelstein J in Crosbie v Commissioner of Taxation[5] after referring to the overwhelming weight of authority against the approach of Finkelstein J.[6]
[5][2003] 130 FCR 275.
[6]Ibid [5]-[9].
Accordingly, he held that there was there was no reason the court should not act on a party’s admissions by making a finding of insolvency without any final determination on the evidence.[7]
[7]Ibid [9].
I reserved my decision on the plaintiff’s application for judgment and directed that Mr Sifris, counsel for the Commissioner should present his case against the third parties. Mr Sifris asserted as part of his opening that the third parties had admitted that the company was insolvent at the time of the payments or at least could not deny that was the case or set up an argument in making out their defences that the company was not insolvent at the time of the payments.
Mr Sifris submitted that this followed from the third parties’ withdrawal of their defence to the plaintiffs’ statement of claim against the Commissioner and, in particular, the defence to paragraph 6 of the plaintiffs’ statement of claim.
He referred to the purpose and effect of r 11.09(2) of the Supreme Court (General Civil Procedure) Rules 2005 which provides:
The third party may serve a defence to the statement of claim of the plaintiff by which the third party disputes the liability to the plaintiff of the defendant by whom the third party was joined on any ground not raised by that defendant in the defendant’s defence.
The notes to that rule in Civil Procedure Victoria provide:
The third party by its defence is entitled to raise any ground of defence which shows that the claim by the defendant against him is not maintainable. Where the defendant seeks contribution or indemnity in respect of the plaintiff’s claim the third party will also be concerned to ensure that the plaintiff fails against the defendant. Under para (2) of this rule the third party is entitled to serve a defence to the statement of claim of the plaintiff by which he disputes the liability of the defendant to the plaintiff on any ground not raised by the defendant in his defence. This provision is new. It gives effect to the practice referred to by Lord Justice Scrutton in Barclays Bank Ltd v Tom (1923) 1 KB 221; [1922] All ER Rep 279. See also Witham v Vine (1880) 49 LJ Ch 242; Barton v London & North Western Railway Co (1888) 38 Ch D 144.[8]
[8]11.09.5.
At this stage of Mr Sifris’ opening, Mr Walsh was given the opportunity to reconsider whether or not he wished to consent to the withdrawal of his defence to the plaintiffs’ statement of claim. I reserved my decision on Mr Sifris’ submission on the effect of the withdrawal of the defence on Mr Walsh’s conduct of his defence to the third party claim. My decision on that issue now follows.
In Barclays Bank Ltd v Tom[9] Scrutton LJ considered the third party procedure as follows:
Now I think it is important to keep clearly in mind what the third party procedure is. The plaintiff has a claim against the defendant. The defendant thinks if he is liable he has a claim over against a third party. With that matter between the defendant and the third party the plaintiff has obviously nothing to do. He is not concerned with the question whether the defendant has a remedy against somebody else. His remedy is against the defendant. But the defendant is much interested in getting the third party bound by the result of the trial between the plaintiff and himself or otherwise he might be at a great disadvantage if having fought the case against the plaintiff and lost he had then to fight the case against a third party possibly on different materials with the risk that a different result might be arrived at. The object of the third party procedure is then in the first place to get the third party bound by the decision between the plaintiff and defendant. In the next place it is directed to getting the question between the defendant and the third party decided as soon as possible after the decision between the plaintiff and the defendant, so that the defendant may not be in a position of having to wait a considerable time before he establishes his right of indemnity against the third party while all the time the plaintiff is enforcing his judgment against the defendant, And thirdly, it is directed to saving the extra expense which would be involved by two independent actions. With these objects in view the third party order usually provides that the third party may appear at the trial between the plaintiff and defendant. When the third party has so appeared as party to proceedings, various questions arise as to what he can do. Can he counterclaim against the plaintiff? The answer is no, for such a counterclaim would have nothing to do with the issue in the action to which he is admitted as a party. Can he interrogate the plaintiff? The answer is yes if the objects of the interrogatories is to show that the plaintiff's claim against the defendant cannot be supported.[10] (citations omitted)
[9](1923) 1 KB 221; [1922] All ER Rep 279.
[10]Ibid 223-224.
The reasoning of Scrutton LJ explains the function of r 11.09(2). It enables, inter alia, the third party to directly raise a defence in the proceedings between the plaintiff and the defendant to the plaintiff succeeding against the defendant which, if successful, would then remove the basis for the claim by the defendant against the third party.
Accordingly, the plea of the third parties puts into issue in the claim as between the plaintiffs and the Commissioner whether or not the company was insolvent at the time of the payments and also puts into issue the alleged preferential result of the payments, even though these defences were not raised by the Commissioner.
In this case the first and third defendants have withdrawn the defence. There is therefore no plea by them to paragraph 6 of the statement of claim. Accordingly in my view, in the circumstances where they have delivered a defence, they must be taken to have admitted the allegations in paragraph 6. Where there is a direct plea between a plaintiff and the defendant a failure to plead a defence to a particular allegation is taken as an admission: see Civil Procedure Victoria 21.04.15. Applying the same principle to where a defence has been delivered by a third party under r 11.09(2) and then withdrawn, the third parties must be taken to admit the allegation.
So what are the consequences then for Mr Walsh? The consequences are that if Mr Walsh does not withdraw his defence to the plaintiffs’ statement of claim, then his defence to paragraphs 6, 7 and 8 remain and the plaintiffs will have to prove their case against the defendant. If follows that I would not be entering judgment against the defendant on the consent of the defendant because, as the authorities establish, that is a matter of in which Mr Walsh has an interest.
If, on the other hand, Mr Walsh consents to the withdrawal of his defence, then I will enter judgment on behalf of the plaintiffs. Of course, the withdrawal of Mr Walsh’s defence will not in any way affect the right of Mr Walsh to rely on the statutory defences to the Commissioner’s claim against him referred to above.
[After this ruling, Mr Walsh confirmed he agreed to withdraw his defence to the plaintiffs’ claim against the Commissioner. The court then gave judgment by consent against the Commissioner in favour of the plaintiffs and the Commissioner’s third party claims against the third parties proceeded on the basis that at the time of the alleged preferential payments, the insolvency of the company was not in issue.]
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