Ex parte order extending time to pursue preferences set aside
1HIS HONOUR: I am currently trying the issues arising on two interlocutory processes, one an amended process filed on 31 August 2012 by David Mark Anderson and the other filed on 31 August 2012 by Craig White.
2Both Mr Anderson and Mr White were directors of Octaviar Administration Pty Limited (OA) and its associated company Octaviar Limited (OL). Both of those companies are in liquidation, the liquidators being Mr Fletcher and Ms Barnet. They were each appointed on 9 September 2008.
3The liquidators decided that they may well bring proceedings under s 588FF of the Corporations Act 2001 (Cth) in respect of alleged unfair preferences. The section prescribes very strict time limits for the making of such application. However, the Act provides that the court may extend the period.
4It is customary for applications to extent the period to be made ex parte and that is what happened in the instant case. Initially, there was an extension application for OL before Justice Hammerschlag, which was made on 30 May 2011. Because of orders made by McMurdo J in Queensland on 31 July 2009, the relation back date for the purposes of the winding up of OL was 4 June 2008 (being the date of the filing of the initiating process). Justice Hammerschlag extended the time.
5In the case of OA, the relation back date was 3 October 2008; OA having been placed into voluntary administration on that date.
6On 19 September 2011, Ward J extended the time for making the application to 3 April 2012. Her Honour also varied Hammerschlag J's order by extending the time for making applications by OL to the same date. This latter order was challenged before Black J, but upheld by him in re Octaviar Limited [2013] NSWSC 62.
7On 2 April 2012, the liquidator's filed an originating process in this court against the Commissioner of Taxation seeking an order that the commissioner pay to the liquidators of OA $3,942,487.10 as an unfair preference.
8The Commissioner of Taxation by interlocutory process filed on 31 July 2012 in the proceedings commenced against him, applied for indemnity from Messrs Anderson and White under s 588FGA of the Corporations Act 2001 (Cth).
9Messrs Anderson and White seek to set aside Ward J's order on a number of bases, but principally because:
(a) the order made by Ward J was what is termed a "shelf order";
(b) a shelf order should not have been made in the instant circumstances;
(c) as at the date when the liquidator's approached Ward J they had already determined to proceed against the Commissioner of Taxation for an unfair preference. They were under a duty to disclose that fact to Ward J, which they did not do;
(d) Messrs Anderson and White were clearly affected by the order and the liquidators must have known that their determination to sue the Commissioner would almost certainly mean that Messrs Anderson and White would be prejudiced; and
(e) the liquidators failed to discharge their duty of candour to Ward J.
10The interlocutory applications came on before me on 5 March 2013. Mr M Condon SC and Mr P Wallis appeared for Mr Anderson, Ms K Dawson of Counsel appeared for Mr White, Mr BA Coles QC with Mr P Dowdy and Mr A Flecknoe-Brown appeared for the liquidators.
11The Commissioner of Taxation has made no application to set aside Ward J's order, however there is another proceeding in which the Commissioner is interested which was returnable also on 5 March 2013, but, by consent, stood over to the date on which these reasons are delivered.
12Mr Condon SC presented the leading argument. The basal facts seem fairly clear. The application was made to Ward J on an ex parte basis supported principally by an affidavit of Ms Barnett (one of the liquidators), and Ms Merrick (the liquidator's solicitor). No written notice was ever given to the Australian Taxation Office, however one of its employees (a Mr Morelande) was a member of the committee of inspection of OA and had received a letter, which informed the members of the committee of the proposed application.
13It would seem that the basis for the application was the complexity confronting the liquidator's position and their inability to commence proceedings because of that complexity so that an extension of time was justified.
14The order that was made was what is sometimes called a "shelf order" that is an order extending the time generally rather than with respect to an application concerning a particular person.
15Mr Condon submits that her Honour was not entitled to make a shelf order however he accepts that both Ward J and myself are bound by the decision of the Court of Appeal in BP Australia Ltd v Brown [2003] NSWCA 216; (2003) 58 NSWLR 322 at 353, where the proposition was refuted.
16Mr Condon's basic submission on behalf of Mr Anderson is that as at the date when Justice Ward gave her decision, the liquidators either; knew all they needed to know to commence proceedings against the Deputy Commissioner of Taxation, or alternatively, could have put themselves (with appropriate diligence and with due regard for accommodation of care and dispatch) in a position where they would have had this level of knowledge (see the decision of Judge Burley in Matthews v Ipex Pty Ltd [2007] SASC 387 at [23]).
17Mr Condon says that there is no other reason in the circumstances warranting an extension of time. As a result, the application to Ward J insofar as it related to the claim against the Tax Office, had no proper foundation in fact or policy and ought to have been dismissed.
18However, the proceedings went conducted ex parte and this occurred notwithstanding the fact that before 19 September 2011, when Ward J gave her decision, it would appear that the liquidators had already virtually made up their mind to target the tax office. Furthermore, it must have been abundantly clear that if the Tax Office were targeted then the natural and probable reaction of the Tax Office would have been, inter alia, to cross-claim against Messrs Anderson and White.
19As was highlighted in Mr Condon's argument, in the Brown case Spigelman CJ (with whom Mason P and Handley JA agreed) said at page 348 [133]:
"... the power to extend time under s 588FF(1) and s 588FF(3) are conferred on a court. There can be no doubt that such a body must obey the rules of procedural fairness. An order of a superior court is not a nullity even if made in breach of this obligation. Nevertheless, a person effected is entitled as of right to have such an order which affects that person set aside. ... The basic principle has been affirmed many times, including with respect to powers conferred upon the court by corporations legislation. ...
The obligation to comply with procedural fairness imports a higher level of content when imposed on a court that in decision-making processes conducted by administrators or tribunals. It requires, in my opinion, that a person likely to be adversely effected by the order of the court is given an opportunity of making submissions to the court before any such order is made or if exceptionally, an order is made without such an opportunity being given that, upon application, the person must be put in the same position as he or she would have been prior to the order being made. It is the inherent difficulty of achieving the latter that makes an ex parte order a course to be followed only in the case of necessity or other strong reasons."
20Mr Condon puts that Mr Anderson has standing to seek the relief sought because he can invoke any of the defences available to the Tax Office. The Tax Office claim is based on its statutory right of indemnity and by invoking that right Mr Anderson is said to have been entitled to defend the liquidator's claim against the Tax Office because this is a generally accepted incident of third party status. He refers to Hall v The Commissioner of Taxation [2004] NSWSC 985; (2004) 51 ACSR 173 at 178 (a decision of Barrett J), together with the authorities there cited.
21The submission continues and puts that had the directors had the opportunity of putting matters before Ward J not only would they have cross-examined one of the liquidators (as indeed Mr Condon did with respect to the liquidator Ms Barnett in the present motion) and that this would have shown that the alleged ground of delay being caused by a complex litigation was fatuous, but that the judge would also have had submissions made as to the public interest and the prejudice caused to the directors if the order was made.
22It is also put that on an ex parte application of this type, just as applies with an ex parte explanation for an injunction, an applicant owes a duty of candour. In the instant case, at the very least, it is put that this duty required the liquidators to inform Ward J that they had come to the conclusion or at least a tentative conclusion to target the Tax Office. This duty of candour was breached, puts Mr Condon. The ordinary result of a breach of such a duty of candour is that the order that was obtained ex parte is set aside ex debito justitiae.
23As I noted in Streetscape Projects (Australia) Pty Ltd v The City of Sydney [2012] NSWCA 63 at [21], cases such as re Imperial Continental Water Corporation (1886) 33 Ch D 314, 317, show that the duty of candour applies in virtually all ex parte applications. I so held in the Streeetscape case. I continue to hold that view. It follows that a duty of candour was owed to Ward J in this case.
24Again, by reference to Brown, Mr Condon points out that s 588FF(3), when laying down the three year time limit, uses the significant words "may only be made". In Brown, the chief justice stressed the significance to the broader public interest in commercial matters of allowing persons who have had dealings with companies which become insolvent to conduct their business affairs with a degree of certainty about their exposure to having past transactions unravelled so that there is a strong flavour in the legislation of not extending the period except for good reason.
25Thus Mr Condon says that the cases show that applications for extensions have failed where the court has determined that a liquidator either; has sufficient information to determine whether to commence proceedings, or could have obtained such information (see, for example, Scott v Casual Life Furniture Ltd [2005] VSC 463; (2005) 56 ACSR 218; 195 FLR 170 at [21] (per Mandie J) and re Australian Hotels Acquisition (in liq) [2011] NSWSC 1374 (Windeyer AJ). Mr Condon puts the same results should apply in the instant case.
26Mr Condon cross-examined one of the liquidators, Ms Barnet. She did not acquit herself very satisfactorily and her evidence would suggest that she had really very little day to day contact with this matter. That may be unfair to her because it would seem that she did not realise that she was going to be called to give evidence before me and was involved in some other court case or conference immediately before she stepped into the witness box in my court at 10:38am. Her evidence was really so vague as to be of little value, but it does give the impression that by August 2011 the liquidators had all the information about a potential claim against the Tax Office that they were likely to get.
27However, she disagreed with Mr Condon that there was nothing that prevented the liquidators from commencing proceedings against the Tax Office before the end of the three year period.
28Ms Tracey Knight is a director of Bentleys (the chartered accountants with whom the liquidators are either partners or closely associated). Ms Knight swore an affidavit on 18 October 2012, in which she says that she attended a meeting of the committee of inspection for OA and AL around 9 September 2011. Mr Morelande, an officer of the Tax Office, was also present and Ms Knight says she said to him:
"Craig, we are about to send you a letter regarding an extension of time to commence voidable transaction proceedings. The letter is to notify creditors that maybe subject of a claim that an extension application is going to be made. The claim against the ATO predominately relates to PAYG. We will send this letter early next week"
29Mr Morelande replied:
"Sure, that's fine. Send it through."
30No such letter was ever sent.
31Mr Condon however says that that affidavit chose quite clearly that as at the 19 September 2011 the liquidators had decided to target the Tax Office.
32Mr Condon took me to the decision of Ward J in Weston v Publishing and Broadcasting Ltd [2011] NSWSC 433; (2011) 83 ACSR 206. In that case, her Honour held that she should set aside a grant of an extension of time because when the facts were fully examined there was no justification for making them. She also held, at 168, that the court may set aside an ex parte order for a material non-disclosure of a material matter by the party who obtained the order if the court was misled by a misstatement or failure to disclose such a material fact.
33The case went on appeal. The appeal is reported as Weston v Publishing and Broadcasting Ltd [2012] NSWCA 79; (2012) 88 ACSR 80, but there is no further elucidation of the present point.
34Ms Dawson for Mr White makes similar submissions and I mean no discourtesy to her in merely making the summary that I have just made. She does however, emphasise the importance of statutory third parties such as Messrs White and Anderson being notified of applications such as this, because that is consistent with a general principle that such parties must be afforded the right and ability to contest all matters relevant to the question of liability between the liquidator and the Australian Tax Office. She cites the decision of Barrett J in Hall v Commissioner of Taxation [2004] NSWSC 985; (2004) 186 FLR 111 at [22].
35Counsel for the liquidator submits that the interlocutory processes should be dismissed and the orders of Ward J maintained without modification. They give six reasons which I will set out verbatim:
(a) "Neither Anderson nor White have any right of any kind and authorises them to interfere with an order made by the Court affecting the Commissioner of Taxation who does not seek himself to set aside that order;
(b) Anderson and White have no right "ex debito justitiae" to have the orders set aside or varied so as not to apply to them, simply on the basis that they and the Commissioner were not heard before Ward J. They themselves were not persons who were likely to be affected in the relevant sense, so as to warrant being afforded a hearing. In any case, there absence, and the absence of the Commissioner, from the hearing of the extension application does not automatically invalidate Ward J's decision insofar as it affects them or exempt them from liability in the s 588FF(1) proceedings;
(c) There was in any event no "inadequacy" in the notification to the Commissioner of the extension application. Nor did Anderson or White suffer any practical injustice on account of not being personally notified of the extension application in so far as it might have related to prospective proceedings against the Commissioner;
(d) Anderson and White do not have any right to have Ward J's orders set aside on account of a fact that the Commissioner could have been identified specifically as a prospective defendant at the time, or that any other fact essential to bringing the Commissioner proceedings could have been discovered at that time;
(e) there was no failure to disclose any material fact to Ward J;
(f) insofar as these interlocutory applications require a re-hearing of the extension application, Anderson and White have not established any reason why the circumstances which Ward J accepted as warranting the extension order then made were, at least with reference to their particular circumstances, inadequate to justify making that order".
36Although there are a number of important points to be covered when discussing those submissions, probably the key matter is whether it is correct to say that Messrs Anderson and White are persons likely to be relevantly affected.
37The application is made under r 36.16(2)(b) of the Uniform Civil Procedure Rules 2005 (NSW). Although not a party to the proceedings, it is clear that the word "party" in that sub-rule means a person who is relevantly affected by an ex parte order. Such a person has a right to be heard and a right to appear to discharge or vary orders made in his or her absence (see Ritchie's Uniform Procedure Practice, volume 1 at [36.16.5] and cases there cited, and the full discussion of this point by Black J in re Octaviar Ltd (recs and mgrs apptd)(in liq) [2013] NSWSC 62 at [22]).
38Are then Messrs Anderson and White persons who are "likely to be adversely affected by the orders"?
39Mr Coles QC and Messrs Dowdy and Flecknoe-Brown say no. They accept the general proposition that a person likely to be affected should have the opportunity to be heard but they submit this principle is inapplicable to the position of Messrs Anderson and White vis a vis the present company. This is because they say the present company had no intention of making any unfair preference claim against either Mr Anderson or Mr White in connection with money received by the Commissioner of Taxation.
40The mere fact that s 588FGA provides the directors are liable to indemnify the Commissioner does not mean that the directors are relevantly to be regarded as "likely" to be "affected" by the company's claim. The Commissioner's statutory indemnity is completely independent and separate from the rights being enforced against the Commissioner. Moreover, the Commissioner was not actually bound to make a claim for indemnity against Messrs Anderson and White he could have chosen not to exercise that right. Alternatively, the Commissioner could have chosen to sue in an action for debt at any time within six years after he himself had been sued.
41The argument then proceeds that the liquidator had no means of knowing what attitude the Commissioner might take.
42It is then put that the statutory right of indemnity under s 588FGA is analogous to the situation where a person sues the defendant and a defendant sues a guarantor. The famous dictum of Scrutton LJ in Barclay's Bank v Tom [1923] 1 KB 221 at 223 - 224, that states that in such a case the matter between the defendant and the guarantor is something with which the plaintiff has obviously nothing to do, has been quoted.
43Counsel cites page 49 of the Explanatory Memorandum to The Insolvency (Tax Priorities) Legislation Amendment Bill 1993 (Cth), where it is stated that the position of the Commissioner of Taxation was to be "equivalent to a guaranteed creditor". I am not too sure whether it is that helpful to refer to such a comment in an explanatory memorandum, but I have taken it on board.
44Certainly s 588FGA(5) puts the directors in the same position "as if" the payment made to the Commissioner of Taxation has been made under a guarantee.
45I am not at all convinced that this analogy with a contractual guarantee is appropriate. It seems to me that s 588FGA is not the equivalent of a guarantee. For instance, under subs 1, the section only applies if the court makes an order under 588FF against the Commissioner and it is only at that point in time that the statutory indemnity under subs 2 kicks in. However, subs 4 then permits the court in the original proceedings to make an order against the directors even though their liability only arises eo instanter with the order.
46Because of subs 4, presumably the Commissioner can add the directors of the third party even before the order is made against him under 588FF.
47The argument of Mr Coles and his associates seek to read the words "directly" into the standard phrase "likely to be effected". They do this on the basis of the adoption by the full Federal Court in News Ltd v Australian Rugby League [1996] FCA 1256; (1996) 64 FCR 410 at 525, of what Lord Diplock said in the Privy Council in Pegang Mining Co Ltd v Choong Sam (1969) 2 PC 593; [1969] 2 MLJ 52 at 55-56, where his Lordship said:
"Will his rights... be directly effected by any order which may be made in the action".
48However, the full Federal Court said applying Lord Diplock's test: "the test involves matters of degree, and ultimately judgment, having regard to the practical realities of the case..."
49When one looks at the practical realities of the Commissioner of Taxation being sued for a large amount of money and knowing that he has a statutory indemnity, one would apply the principle that it is far more likely that someone will act in his own self interest and otherwise. Thus, whilst I can appreciate that as a matter of theoretical possibilities it may be that the Commissioner would not take up his statutory right of indemnity or may sue later for a debt. The chances of that happening as against an immediate cross-claim are very slim.
50Accordingly, it seems to me that when a liquidator is contemplating taking proceedings against the Commissioner of Taxation the directors are persons who are directly affected by that proposed action.
51Because the question of whether the director should be given notice is a different question of whether the Commissioner of Taxation should have been given notice it is immaterial whether the Commissioner was informally notified or not.
52It should be noted here that the claims by the Commissioner against Messrs White and Anderson are not of the same quantum. In the case of Mr White, payments were made both before and after he resigned as a director. The Commissioner only seeks to recover from him in respect of payments made whilst he was a director (see Delougher v Western [2010] NSWCA 148; (2010) 79 ACSR 180 at 185 [36]).
53The only inference from the evidence of Ms Knight (set out earlier) is that as at that date, there was a strong provisional conclusion by the liquidators that the Commissioner would be targeted under s 588FF. Mr Condon says that this shows that the liquidator's conduct conceded that the Commissioner was a person likely to be affected (or directly affected) by the proposed application and thus should be notified. In view of what I have said earlier, it follows that a person against whom almost certainly a claim will be made for indemnity is in the same plight as the target.
54The authorities show that the target should be given notice of the application (see Brown v DML Resources Pty Ltd (No.2) [2001] NSWSC 590; (2001) NSWLR 685; (2001) 162 FLR 404; 39 ACSR 219 and re Green [2002] NSWSC 135; (2002) 41 ACSR 69).
55Accordingly, in my view the directors should have been given notice of the application for extension in this case. Mr Coles says that no one has ever made such a finding previously. I think that is correct, but I do not consider it that significant because it is only in cases where the Commissioner of Taxation is perceived as the target before the application is made for an extension that the finding would have to be made by a court.
56I will deal shortly with the consequences of not giving the directors notice of the hearing. I will now pass to the second principal limb of the originating process that is that there was a failure of the liquidators to act with due candour before Ward J.
57Ward J's reasons for judgment which were given ex tempore are included in the court book at page 64 and following. Her Honour refers to an affidavit by a solicitor, which Her Honour said: "deposes in general to the notification... to those parties identified as interested parties." The affidavit is in fairly general terms and would not have brought to her Honour's attention the present problem.
58The general thrust of the judgment is that the liquidator had informed the judge that there had been delay broadly arising out of the complexity of the affairs of the Octaviar Group of companies; that independent experts had been retained in Hong Kong for the purpose of preparing an insolvency report; there was complex accountants and inter company loan issues; and there were negotiations with persons affected. There was not one word about recovery of preferences involving PAYG tax from the Commissioner of Taxation.
59The result was a shelf order. That is, an order that actually covers the Commissioner of Taxation, though no one would know it by just looking at the order.
60Mr Coles puts that there was no breach of duty of disclosure before Ward J at all. He says that merely because the liquidator did not in fact deal with a particular circumstance does not mean that there was any lack of candour.
61I find it hard to accept this submission. Looking at the whole of the material before me, including the additional evidence given by Ms Barnett (one of the liquidators), it would seem to me that the application before Ward J was on the basis that this was a very complicated liquidation where the liquidators have been delayed through a number of factors beyond their control and it was necessary for a shelf order to be made in order to enable them to come to grips with everything to make decisions as to whether to proceed to upset any alleged uncommercial transactions. The evidence now shows that 10 days before the hearing before Ward J, the liquidator "reached the strong provisional view that they would be targeting the Australian Tax Office in respect of preferential PAYG tax.
62The order that was obtained was a shelf order, yet it would appear that the principal, if not only, attack that it has been made by the liquidator's within the extended time is against the Australian Tax Office. It seems to me that in these circumstances this information should have been conveyed to Ward J and the liquidators failed in their duties to the court in omitting to do so.
63Mr Coles says that there are a number of reasons why I should not reach this conclusion. First, he puts that the arguments that the liquidator made before Ward J (which form the basis to her Honour's decision) were concerned predominately with the complexity of the liquidation and the delay in appointment of the liquidators after the relation back date. I indeed consider this is a factor which goes against the liquidators rather than for them because it misdirected her Honour away from the true practical effect of what her Honour was being asked to do.
64Secondly, Mr Coles put that a significant number of other persons were in fact notified. My reaction to that is simply "so what". Thirdly, the Commissioner of Taxation had been notified. Again, the same reaction is sparked because the Commissioner knew that he had a statutory indemnity and it was far more likely than not that he would exercise it.
65Accordingly, apart from discretionary considerations, the order made by Ward J should be set aside.
66Mr Coles says that I now need to consider myself what order should have been made. I have a little doubt as to whether I should do this or whether I should ask the Chief Judge to make arrangements with Ward JA to reconsider the matter. Recent authorities seem to suggest that I should hear the matter myself and no one has made any other submission; accordingly, that is how I will act.
67Mr Coles puts that it must be borne in mind that in a complex litigation one cannot just segregate out one particular aspect of the case. For instance general insolvency would have to be demonstrated before the chase against the Australian Tax Office could succeed and the facts show that the liquidators were waiting on a further insolvency report. There is of course some truth in the submission. However the facts of the present case show that Ms Knight was quite prepared to say to Mr Morelande that the Commissioner was being targeted on 9 September despite the fact that she was still waiting on an insolvency report.
68Then the public interest was referred to. This was dangerous ground for the liquidators because the authorities (see, particularly, BP Australia Ltd v Brown [2003] NSWCA 216; (2003) 58 NSWLR 322) show that the weight of public interest in these matters is in favour of members of the commercial community knowing that at the end of the fixed period laid down by the statute that they are free from claim. As I said, earlier considerations in extending limitation periods in other cases are not of much relevance when one is considering extension of the time under s 588FF. One cannot just say, as with respect Mr Coles attempted to say, that the limitation defence is a mere technicality and does not go to the merits of the matter.
69Finally, Mr Coles says that there has been no prejudice ever shown by Messrs Anderson and White apart from their lack of reliance on a limitation defence. Mr Condon accepts this point but says that it is immaterial. The statute sets out a fixed time and makes it clear that unless it is properly shown that the times should be extended the court should not do so. I agree with this submission.
70Accordingly, in my view the applicants are entitled to succeed. I believe that the appropriate order is that the orders made by Ward J on 19 September 2011 be set aside and that the liquidators pay the costs of the present application.
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Decision last updated: 14 June 2013