• Legal database
Legal database

Commissioner of Taxation v Moodie

[2014] NSWCA 59
(2014) 308 ALR 571
(2014) 282 ALR 453

(Judgment by: Meagher J)

Commissioner of Taxation
v Moodie

Court:
Supreme Court of NSW - Court of Appeal

Judges: McColl J

Meagher JBarrett J

Legislative References:
Corporations Act 2001 - s 588FF; s 588FGA
Supreme court Act 1970 (NSW) - The Act
Tax Administration Act 1953 - Schedule-1 16-B
Civil Procedure Act 2005 - The Act

Case References:
Sims v DCT - [2006] NSWSC 305; (2006) 57 ACSR 249
Dean-Willcocks v Cmr of Taxation (No 2) - [2004] NSWSC 286; (2004) 49 ACSR 325
Cooper (as liquidator of Wanted World Wide (Australia) Ltd (in liq)) v Cmr of Taxation - [2004] FCA 1063; (2004) 139 FCR 205
Young v Cmr of Taxation - [2006] FCA 90; (2006) 56 ACSR 654
Harris v Cmr of Taxation - [2006] QSC 108
Condon v Cmr of Taxation - [2004] NSWSC 481; (2004) 207 ALR 676
Crosbie v Cmr of Taxation - [2003] FCA 922; (2003) 130 FCR 275
Barclays Bank v Tom - [1923] 1 KB 221
Sandtara Pty Ltd v Abigroup Ltd - (1997) 42 NSWLR 5
Insurance Exchange of Australasia Group v Dooley - [2000] NSWCA 159; (2000) 50 NSWLR
Financial Wisdom Ltd v Newman - [2005] VSCA 110; (2005) 12 VR 79
Oshlack v Richmond River Council - [1998] HCA 11; (1998) 193 CLR 72
Commonwealth v Gretton - [2008] NSWCA 117
Kazar (Liquidator) v Kargarian Re Frontier Architects Pty Ltd (in liq) - [2011] FCAFC 136; (2011) 197 FCR 113
Barakat v Bazdarova - [2012] NSWCA 140
Regency Media Pty Ltd v AAV Australia Pty Ltd - [2009] NSWCA 368
Commissioner of Taxation v Sims - [2008] NSWCA 298; (2008) 72 NSWLR 716
Woodgate (as liquidator of Fairlight ESP Pty Ltd) v Cmr of Taxation - [2006] NSWSC 778
Sims v Cmr of Taxation - [2007] NSWSC 1359; (2007) 25 ACLC 1
Edginton v Clark - [1964] 1 QB 367
Duncan v Cmr of Taxation Re Trader Systems International Pty Ltd (in liq) - [2006] FCA 885; (2006) 58 ACSR 555
Olsson v Dyson - [1969] HCA 3; (1969) 120 CLR 365
Peake v Carter - [1916] 1 KB 652
Hall (as liquidators of Reynolds Wines Ltd) v Cmr of Taxation - [2004] NSWSC 985; 186 FLR 111
Noxequin Pty Ltd v DCT - [2007] NSWSC 87
House v R - [1936] HCA 40; (1936) 55 CLR 499
Rasch Nominees Pty Ltd v Bartholomaeus - [2013] SASCFC 105
Noxequin, Duncan v Commissioner of Taxation, Hall v Poolman (No 2) - [2007] NSWSC 1494
Georges v Locktronic Systems Pty Ltd - [2009] VSC 523
New South Wales Insurance Ministerial Corporation v Edkins - (1998) 45 NSWLR 8

Hearing date: 15 April 2013
Judgment date: 14 March 2014

Judgment by:
Meagher J

[105] The applicant Commissioner seeks leave to appeal from a costs order made by the primary judge (Brereton J) on 7 May 2012. That order was made in proceedings in which the first respondent liquidator sought and obtained judgment against the Commissioner for recovery under s 588FF(1)(a) of the Corporations Act of payments made by the second respondent company on the ground that they were insolvent transactions and unfair preferences.

[106] The circumstances leading to the making of that order are set out in the reasons for judgment of McColl JA. The following dates and events are of particular significance. The proceedings were commenced in 2010. In addition to defending the liquidator's claim, the Commissioner made a claim against a director of the second respondent, Mr Rowe, for an indemnity under s 588FGA(2). That claim was made by interlocutory process filed in the existing proceedings, as contemplated by s 588FGA(4). That was not, however, the only course available to the Commissioner, who could have pursued the indemnity in a separate proceeding and after the order under s 588FF had been made: Condon v Cmr of Taxation [2004] NSWSC 481 ; 207 ALR 676 at [4], [18], [31]; and Hall (as liquidators of Reynolds Wines Ltd) v Cmr of Taxation [2004] NSWSC 985 ; 186 FLR 111 at [9], [15], [21].

[107] The consequence of the Commissioner making that claim was that the director was a third party in the liquidator's proceeding and afforded the opportunity of defending the liquidator's claim, including by putting insolvency in issue: Crosbie v Cmr of Taxation [2003] FCA 922 ; 130 FCR 275 at [4]-[7] (where the claim against the directors was made by a cross-claim); Hall v Cmr of Taxation at [16], [21]; and Duncan v Cmr of Taxation [2006] FCA 885 ; 58 ACSR 555 at [23].

[108] The Commissioner's defence to the liquidator's claim did not admit that the company was insolvent at the time each of the alleged preference payments was made. Mr Rowe denied the Commissioner's claim for an indemnity and at a directions hearing on 18 July 2011 confirmed to the court that insolvency was in issue. In answer to the Commissioner's claim, Mr Rowe also relied upon the defence in s 588FGB(3) that he had reasonable grounds to expect, and did expect, that the company was and would remain solvent when and after the alleged payments were made.

[109] On 20 September 2011, the liquidator made an offer of compromise to the Commissioner in accordance with UCPR r 20.26. The Commissioner did not accept that offer. By letter dated 14 December 2011, the Commissioner made a settlement offer to the liquidator which was expressed to be "without prejudice save to costs". That offer was to settle his claim for the amount offered by the liquidator in September 2011 but on the basis that there be no order as to costs, that there be no interest payable for the period from September 2011 and that the interlocutory process be dismissed. That letter also advised that the Commissioner withdrew his defence and noted that while the interlocutory process remained on foot it was "still open to Mr Rowe" to press the insolvency issue. The letter continued that in the event that the offer was not accepted, the Commissioner would proceed on the interlocutory process and argue that if the liquidator succeeded at the hearing, any further costs incurred should be borne by Mr Rowe. In support of that argument reference was made to the judgment of Barrett J in Noxequin Pty Ltd v DCT [2007] NSWSC 87. On the following day the Commissioner advised in an open communication that he did not contest the issue of insolvency.

[110] At the time this offer was made, as was known to both parties, Mr Rowe had sworn a statutory declaration disclosing that he had liabilities exceeding $4.3 million and no assets. In that context the Commissioner's position was to be understood as being that if his counteroffer was not accepted, he would maintain the interlocutory process and argue that the further costs incurred by the liquidator proving insolvency should be borne by the impecunious Mr Rowe. On 30 March 2012 Mr Rowe withdrew his defence to the Commissioner's claim and on 2 April 2012 consent judgment was entered in favour of the liquidator against the Commissioner and in favour of the Commissioner against Mr Rowe. The judgment for the liquidator exceeded the amount of the liquidator's September 2011 offer and did not include costs.

[111] The question of costs was dealt with on 7 May 2012. On that occasion there was no appearance on behalf of Mr Rowe and no costs order was sought against him by the liquidator or the Commissioner. That position is to be contrasted with the circumstances in Noxequin, Duncan v Commissioner of Taxation, Hall v Poolman (No 2) [2007] NSWSC 1494; and Georges v Locktronic Systems Pty Ltd [2009] VSC 523 where costs orders were sought, contested and made as between the liquidator, Commissioner and third party director or directors.

[112] The only order sought by the liquidator before the primary judge was that the Commissioner pay his costs, assessed on the ordinary basis until 20 September 2011 and thereafter on an indemnity basis. As a consequence, the two matters in issue were whether the liquidator's costs should be payable on an indemnity basis after 20 September 2011 and whether the Commissioner's liability for costs on an indemnity basis should extend beyond 14 December 2011, when the Commissioner had indicated that his defence was withdrawn and that he would not contest the issue of insolvency.

[113] The primary judge decided each of these issues in favour of the respondents and ordered the Commissioner to pay their costs assessed on the ordinary basis until 20 September 2011 and thereafter on an indemnity basis: Re Rivercorp Pty Ltd [2012] NSWSC 576.

[114] The Commissioner requires leave to appeal from that order: Supreme Court Act 1970, s 101(2)(c). As Barrett JA observes, ordinarily this court would not grant leave to appeal from a costs decision unless there was shown to be a "clear error of principle or manifest injustice": New South Wales Insurance Ministerial Corp v Edkins (1998) 45 NSWLR 8 at 12. The error of principle must be one of the kind described in House v R [1936] HCA 40 ; 55 CLR 499 at 505.

[115] The costs order made by the primary judge was made in exercise of the broad discretion given by s 98 of the Civil Procedure Act 2005. That power is expressed to be "subject to the rules". The particularly relevant rules in this case were UCPR r 42.1, which gives effect to the established principle that subject to limited exceptions "costs follow the event" and UCPR r 42.14(2) which applied in this case because the liquidator obtained judgment for an amount which exceeded the amount of his offer of compromise.

[116] UCPR r 42.14(2) provides:

Unless the court orders otherwise, the plaintiff is entitled to an order against the defendant for the plaintiff's costs in respect of a claim:

(a)
assessed on the ordinary basis up to the time from which those costs are to be assessed on an indemnity basis under paragraph (b), and
(b)
assessed on an indemnity basis:

(i)
if the offer was made before the first day of the trial, as from the beginning of the day following the day on which the offer was made, and
(ii)
if the offer was made on or after the first day of the trial, as from 11 am on the day following the day on which the offer was made.

[117] This rule states that two things follow unless "the court orders otherwise". The first is that the successful plaintiff is entitled to an order for payment of its "costs in respect of the claim". The second is that those costs are to be assessed during particular periods either upon the ordinary or an indemnity basis. The provision that a plaintiff is entitled to payment of its "costs in respect of a claim" gives effect to the general rule in r 42.1 that costs follow the event. The Commissioner's appeal is directed to the application of that general rule in the circumstances of this case. It is not contended that if the primary judge did not err in ordering that the Commissioner's liability for costs should extend beyond 14 December 2011, that his exercise of discretion otherwise miscarried in his requiring that those costs be assessed on an indemnity basis.

[118] The Commissioner argues that he should not be liable to pay the liquidator's costs on any basis after the defence was withdrawn on 14 December 2011 because it is said that from that time he had "no active role in the ongoing dispute between the liquidator and the director" and that thereafter the "real and only dispute [was] between the liquidator and the director" (Tcpt 15/04/13, p 2).

[119] Before the primary judge, and in support of that argument, the Commissioner relied upon the following passage from the judgment of Barrett J (as his Honour then was) in Noxequin at [40]:

40
The final matter to be addressed is costs. On the basis that costs follow the event, the plaintiffs should have a costs order against the Commissioner and Mr Soong. As between the Commissioner and Mr Soong, however, it should be recognised that the Commissioner would have brought the proceedings to an end on 4 July 2006 had it not been for the continuing opposition of Mr Soong. I accept the submission made on behalf of the Commissioner that the Commissioner should be ordered to pay the costs of the plaintiff up to and including 4 July 2006 and that Mr Soong should be ordered to pay the costs of the plaintiffs after 4 July 2006.

[120] The circumstances in which the costs discretion came to be exercised in the present case were quite different from those addressed in Noxequin. In that case the costs order was made after a contested hearing in which the liquidator, the Commissioner and the director, Mr Soong, had participated and were represented. The liquidator sought an order that his costs incurred after the Commissioner had admitted insolvency should be awarded against Mr Soong and on an indemnity basis because of Mr Soong's failure to respond favourably to a letter requesting that insolvency be admitted. Unlike the position in the present case, the liquidator did not seek an order against the Commissioner for costs incurred after the point in time at which the Commissioner "would have brought the proceedings to an end". Significantly, there is no suggestion in the reasons in Noxequin that Mr Soong's financial position was, or was believed to be, that he could not satisfy any order for costs made against him or that the Commissioner maintained the claim to an indemnity notwithstanding that that was believed to be the position. Finally, there had been no offer of compromise made by the liquidator to the Commissioner which attracted the application of UCPR r 42.14(2).

[121] In response to the Commissioner's argument that the liquidator's costs incurred after 14 December 2011 were attributable to the necessity to prove the case against the director and the Commissioner's reliance upon the observation in Noxequin at [40], the primary judge said:

14.
It is difficult to suppose that in that passage, exercising a costs discretion in the particular circumstances of the case, his Honour was seeking to lay down a rule of law. Any such rule would have the unusual consequence of making the primary recourse of the plaintiff for costs a party with whom the plaintiff was not in suit, namely the cross-defendant, while exonerating the party who was in suit with both the cross-defendant and the plaintiff and who had chosen to involve the cross-defendant in the proceedings and who was responsible for the prosecution of the case against the cross-defendant.
15.
It was argued that the Commissioner's position was hamstrung because he was not in charge, so to speak, of proving the case on insolvency. But if -- recognising that he cannot or is unlikely to succeed in resisting the plaintiffs' claim -- the Commissioner needs to prove insolvency against the cross-defendant, then the position is quite clear and orthodox: the Commissioner must find and adduce such evidence as is necessary -- which may include evidence already served by the plaintiff or could be obtained on subpoena -- to prove that case against the cross-defendant. It seems to me that the need to prove the case against the cross-defendant is not a sufficient reason to keep the plaintiff's proceedings on foot and require the plaintiff to incur further costs which may well be recoverable for impecuniosity on the part of the cross-defendant.

[122] His Honour concluded (at [16]) that on "ordinary principles, the unsuccessful defendant Commissioner should be responsible for the successful plaintiff's costs, including those incidental to the Commissioner's cross-claim for indemnity".

[123] In support of his argument that after he withdrew his defence he had no active role in the ongoing dispute between the liquidator and the director, the Commissioner submitted that the primary judge erred in treating Mr Rowe as a "party with whom [the liquidator] was not in suit". In my view the primary judge's observation was correct. There was no claim made against the director by the liquidator and no issue arising directly between them. That conclusion does not deny that Mr Rowe was nevertheless "interested" in the suit between the liquidator and the Commissioner because of the latter's claim to an indemnity under s 588FGA(2); and for that reason entitled to contest the basis of the Commissioner's alleged liability to the liquidator.

[124] However, the significant matter in the present case, to which the primary judge adverts in [14], was the Commissioner's conduct in maintaining the presence of the director as a party to the liquidator's proceedings. In that respect, notwithstanding that the Commissioner had withdrawn his defence to the liquidator's claim, he continued to have an "active role" in relation to the defence of the liquidator's claim because Mr Rowe was likely to continue his opposition to the orders sought by the liquidator whilst the Commissioner pressed his claim to an indemnity. The Commissioner could have brought the dispute between him and the liquidator to an end by abandoning that claim in circumstances where it was believed to be of little or no value. (That was apparent from the terms of the Commissioner's offer of 14 December 2011 which included that the interlocutory process be dismissed). Instead, and for some time, the Commissioner maintained that claim and also asserted, relying on the decision in Noxequin, that he should not be liable for the ongoing costs being incurred by the liquidator. In doing so, as the primary judge observed at [15], the Commissioner kept the proceedings on foot and required the liquidator to incur further costs which were likely to be irrecoverable from Mr Rowe because of his impecuniosity.

[125] The primary judge was right to reject the Commissioner's suggestion that the statement in Noxequin was intended to state a general rule with respect to the liability for costs as between a liquidator, the Commissioner and a third party director in a claim to which s 588FGA applies. The circumstances which attracted the exercise of the discretion in that case were quite different from those which faced the primary judge. Most significantly, the costs question before the primary judge was whether, in a case to which UCPR r 42.14(2) applied, the successful party should be denied his costs after a particular date and in a context where the Commissioner had maintained the claim to an indemnity in circumstances where it was believed to be of little or no value.

[126] The Commissioner's remaining arguments focus upon the primary judge's observation in [15] as to there being a need for the Commissioner to prove insolvency against the director and as to that not being a sufficient reason to justify the Commissioner keeping the liquidator's proceedings on foot. It is undoubtedly correct that the Commissioner does not need to prove insolvency as against a director from whom an indemnity is sought and that it was unnecessary for the Commissioner to keep the liquidator's proceedings on foot in order to prove any element of his claim against the director. To the extent that the primary judge's observation is to be understood otherwise, it would misstate the effect of s 588FGA(2). Nevertheless, the position remains that, as the primary judge considered, the Commissioner was ultimately responsible for the prosecution of the case against the director and by maintaining that case required the liquidator to incur further costs in circumstances where they were likely to be irrecoverable from Mr Rowe.

[127] In these circumstances, whilst the primary judge may have misstated the position in relation to what is necessary to establish the entitlement to the indemnity, his doing so did not detract from his reasons justifying the order for costs. That being the position, there is no material error of principle established or any manifest injustice in the outcome of the exercise of the discretion. In the result, I agree with McColl JA that the Commissioner has not demonstrated any error or unreasonable exercise of the discretion which warrants the intervention of this court. The orders proposed by McColl JA should be made.


Back to top