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SUPREME COURT OF NEW SOUTH WALES - EQUITY DIVISION

NODNARA PTY LTD v DEPUTY COMMISSIONER OF TAXATION

Young J

19, 21 August 1997 - Sydney

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Young J    The plaintiff company seeks to set aside statutory demands served on it by the defendant.

   The defendant resists this application basically for the reason that he says that in view of the provisions of ss 175and 177 of the Income Tax Assessment Act 1936 (Cth) (the ITAA 1936) as amended, this court cannot go behind an assessment for the purpose of considering a statutory demand based on such an assessment.

   The plaintiff says that it has an objection to the assessments listed for a three-week hearing before the Administrative Appeals Tribunal of the Commonwealth, commencing on 9 October 1997. It says that it has a strongly arguable case before that tribunal that the assessments are mala fide or just wrong and should be varied. It says that if it is wound up before it has a chance to win its appeal before the tribunal, it will not have a chance to litigate the matter. This is for two reasons, one practical and the other legal. The practical reason is that a liquidator may not become involved in the costs of a three-week hearing without the support of the creditors and the defendant, who appears to be the major creditor, will obviously not support the liquidator's appeal against him. The legal reason is that if the statutory demand is not set aside, the plaintiff will not be able to contest the matter of insolvency before the court hearing the winding up order and, if, as appears likely in such a scenario, a winding up order is made, it and its liquidator will be estopped from challenging the petitioning creditor's debt: see Direct Acceptance Investments Pty Ltd v Blackwell (1995) 17 ACSR 89.

   Mr McMillan, for the defendant, in supplementary written submissions, put that Blackwell's case did not have this effect, or at least did not have this effect on the hearing of a summons to set aside a statutory demand. This last point may be completely correct, though completely irrelevant. In any event, it is not necessary to consider whether Mr McMillan's supplementary written submissions have validity for the purpose of the present rulings.

   The summons to set aside the statutory demand is listed before me on 5 September 1997. The matter before me at present is whether certain evidence given by Mr Constantine Karageorge, who appears to be the controlling director of the plaintiff, is admissible. The management of the case makes it desirable that this question be dealt with before the hearing commences. These matters were argued before me on 19 August 1997.

   The evidence under consideration is two affidavits of Mr Karageorge sworn respectively 29 August 1996 (Affidavit A) and 6 May 1997 (Affidavit B). I directed that objections to these affidavits be put in writing. The written objections to the evidence threw up three principal grounds of objection: (1) objections as to relevance; (2) an objection to para 19 of Affidavit B on the ground of privilege; and (3) various particular objections. Apart from an objection to para 7 of Affidavit B, I ruled on the third set of objections at the oral hearing on 19 August. I also ruled that para 25 of Affidavit B was irrelevant. I reserved my decision on the objections in categories (1) and (2) and the objection to para 7. Rulings on these and the reasons therefor are now furnished.

   Section 56 of the Evidence Act 1995 (NSW) provides that evidence that is relevant in a proceeding is admissible and conversely, evidence that is not relevant is not admissible. Section 55 defines what is relevant as "evidence that … could rationally affect (directly or indirectly) the assessment of the probability of the existence of a fact in issue …".

   "Facts in issue" is a technical term denoting those facts "necessary by law to establish the claim, liability, or defence, forming the subject-matter of the proceedings" (Phipson on Evidence, 12th ed, Sweet & Maxwell, London, 1976, para 151). Section 55 makes it clear that "facts in issue" include facts relating to the credibility of a witness, the admissibility of other evidence or failure to adduce evidence.

   Section 57 makes it clear that, in the first instance a court may rule that a matter is provisionally relevant and provisionally admit the evidence, subject to it making a final ruling before the end of the trial. This process is similar to the former practice of admitting material subject to relevance, as to which see Dubbo Base Hospital v Jones [1979] 1 NSWLR 225.

What are the facts in issue in the instant case?

   The plaintiff's application is under s 459G of the Corporations Law (the Law) to set aside a statutory demand. Because of s 459J of the Law, the court may set aside the demand where "(a) because of a defect in the demand, substantial injustice will be caused unless the demand is set aside; or (b) there is some other reason why the demand should be set aside". Unless a court is satisfied as to (a) or (b), it must not set aside a demand merely because of a defect.

   The plaintiff says that the demand should be set aside because:

 (i)  the demand was not signed by the Commonwealth, but by a Deputy Commissioner of Taxation and so is invalid; and

 (ii)  the court in its discretion should set aside the demand because the assessments will more likely than not be affected by the decision of the Administrative Appeals Tribunal.

   The first point is not addressed by the evidence under review and I will say no more about it in these reasons.

   As to the second point, the defendant says that that matter, even if it be correct (which he disputes) is not a reason for setting aside the demand. The defendant relies on the decision of the Full Federal Court in Hoare Bros Pty Ltd v DCT (1996) 62 FCR 302; 32 ATR 148; 96 ATC 4163. At first sight, that case seems to tell strongly against the plaintiff. However (a) the case was really one involving the proper construction of s 459H of the Law; and (b) the case actually supports the plaintiff as to s 459J.

   At FCR 317; ATR 161; ATC 4174, the Full Court said:

   

It would be unwise to attempt to mark out the limits of the discretion conferred by s 459J(1)(b) … In the present case, Olney J implied that he would have been prepared to exercise the discretion in the Company's favour, had it been shown that the Commissioner's conduct was unconscionable, was an abuse of process, or had given rise to substantial injustice.

   The Full Court implied that a consideration of those factors would have been a proper consideration of the discretion under the section. However, the Full Court did not limit the discretion to those factors. It said that a case where the creditor unreasonably refuses the Company's offer to meet the debt would be another relevant factor as would the situation that occurred in Re Norper Investments Pty Ltd (1977) 7 ATR 488; 77 ATC 4212. It then went on to say that Olney J's decision could be construed to mean that the mere fact that the company was genuinely pursuing an appeal to the Administrative Appeals Tribunal was not sufficient for him to exercise his discretion in the Company's favour. If that were so, that decision was a proper exercise of the discretion.

   The Norper case was one where the Commissioner had apparently irregularly declined to send the taxpayer's appeal to a Board of Review and his assessment seemed contrary to the current state of the law as laid down by the Board. There was thus a significant chance that the assessment was misconceived. This made it appropriate not to wind the company up until at least the time when those matters had been sorted out.

   It also must be remembered that the Supreme Court of New South Wales has a general jurisdiction to prevent the subject matter of proceedings before it or any other court or tribunal from being dissipated. Thus this court may issue an injunction to preserve the subject matter of a dispute before the State Industrial Relations Court: see Richardson & Wrench Ltd v Harfeld Pty Ltd (unreported, SC(NSW), Young J, 15 July, 1991) and cases there cited and Star League Pty Ltd v Pay (unreported, SC(NSW), Santow J, 9 June, 1995). The High Court has a similar power: see eg Tait v The Queen (1962) 108 CLR 620; Simsek v Macphee (1982) 148 CLR 636. Although the power will only be exercised in special circumstances (Smith Kline & French Laboratories (Australia) Ltd v Secretary, Department of Community Services and Health (1991) 65 ALJR 360), the presence of such jurisdiction is to my mind a relevant matter when considering how to exercise the discretion given under s 459J(1)(b) of the Corporations Law.

   Mr McMillan addressed me on the broad policy behind ss 175and 177 of the ITAA 1936 and took me to F J Bloemen Pty Ltd v FCT (1981) 147 CLR 360; 11 ATR 914; 81 ATC 4280 and DCT v Richard Walter Pty Ltd (1995) 183 CLR 168; 29 ATR 644; 95 ATC 4067 especially at CLR 186-8; ATR 653-4; ATC 4075-6. He strongly submitted that even if there was an attack on the Commissioner's assessment on the ground of mala fides, that would be an irrelevant matter in this court. He says that I should assume (which I do) that the Commissioner's counsel will tender the assessments at the hearing on September 5 and that that will then invoke the conclusive evidentiary provisions of s 177. Thus, the argument goes, everything except the assessment will be irrelevant to determine whether there is a debt which was properly made the subject of the statutory demand. Mala fides and any other potentially destructive matter is only relevant before the Administrative Appeals Tribunal.

   This argument overlooks the wide provision of s 459J(1)(b) of the Law. As the Hoare case demonstrates, the court is not curtailed from considering a wide number of matters in deciding whether to exercise that discretion. Furthermore, some of the relevant matters are whether the Commissioner has acted conscionably or whether injustice would be caused by not setting aside the statutory notice. As Mr Thorley, for the plaintiff put it, "the conduct of the creditor is most relevant to the question of the exercise of the discretion".

   Reverting to the text of the Evidence Act 1995, it is unfortunate that the statute does not explicitly state whether the court is to admit all evidence which is actually, on an objective test, relevant or whether it may admit evidence if it seems to it at the time to be relevant. Section 57 only partly covers the problem by permitting a court to say evidence is provisionally relevant where the relevance of any particular piece in the jigsaw cannot be determined conclusively until the court has completed the jigsaw. In my view, the Evidence Act 1995 should be approached in a purposive manner to aid the court process and not to delay it. The only construction which fulfils this purpose is to hold that evidence is relevant if it appears to the court to be relevant at the time it is tendered. If it were necessary to have a voir dire examination to examine the objective facts underlying relevance each time an objection arose, trials would never finish.

   I now turn to the specific objections to relevance in Affidavits A and B. Mr McMillan objects to paras 3-10 of Affidavit A. To a great extent these paragraphs only deal with background facts and annex correspondence. By themselves, they would not encourage the exercise of a discretion in the plaintiff's favour. However, they might with other facts do so. Initially these paragraphs are provisionally relevant.

   Affidavit B is more explicit. I have disallowed some particular matters. However, as to the objection on the grounds of relevance, most of the material goes to the conduct of officers of the Commissioner. This is relevant to the exercise of the discretion and thus is admissible. Mr Thorley argued that some of the material went to show an estoppel by conduct. I doubt whether this is so. Indeed, it would seem that the principle that there cannot be any operative estoppel in the face of a statute (see Barilla v James (1964) 81 WN (Pt 1) (NSW) 457 at 461-2) would tell against such an estoppel. However, whether this be so or not, the material is relevant to conduct.

   Of the paragraphs objected to on the ground of relevance, the only one that does not directly deal with conduct of the defendant or with background material is para 19. This refers to the failure of an officer of the defendant to respond to a statement made by Mr Karageorge at a "settlement conference" before the Administrative Appeals Tribunal. It seems to me that no basis has been shown for expecting a response on such an occasion, so that the reaction is irrelevant. I will thus reject para 19.

   When one reads Affidavit B, the matters of provisional relevance in Affidavit A become relevant to the facts in issue.

   Accordingly I would admit the material objected to on the grounds of relevance in both affidavits other than para 19 of Affidavit B.

   As I have rejected para 19 of Affidavit B on the grounds of relevance, it is really unnecessary to consider the further objection to it on the grounds of privilege. However, in deference to counsels' submissions I will deal with it briefly.

   Section 131 of the Evidence Act 1995 provided that evidence is not to be adduced of communications made in an attempt to settle a dispute. Mr McMillan says that the purpose of a settlement conference before the Administrative Appeals Tribunal is to settle the dispute or at least a portion of it, ergo, anything that is said at such conference is privileged.

   With respect, I do not consider the matter can be dealt with quite so simply. I understand that settlement conferences are held by the Administrative Appeals Tribunal in almost every apparently contested case. It is thus not the situation that the parties necessarily go to such conferences with the intention of settling their disputes or even in the hope of doing so. One or both of them may approach the conference as merely something that has to be attended before the tribunal will grant them a hearing. Unless there is evidence that at least one party was attempting to settle the dispute at such conference, it does not seem to me that the ground for a s 131 privilege is established. The only relevant decision that I have found, Trade Practices Commission v Arnotts Ltd (1989) 21 FCR 306, is consistent with this approach. In that case, Beaumont J considered that what was said by a defendant at a settlement conference called by the plaintiff, a person who was both a regulatory authority and a litigant, was privileged because it should be inferred that the defendant attended the conference with a view to settlement. See also McNicol, Law of Privilege, Law Book Co, Sydney, 1992, pp 441-2. Such an inference is not really open on the material filed in the instant case.

   The objection to para 7 of Affidavit B is to the penultimate sentence in that it states a legal conclusion and indeed, one which is not supported by facts. This objection must be upheld, but the plaintiff may file supplementary material in proper form if it is so advised to cure this defect no later than 1 September 1997.

   Accordingly, I make the rulings set out in these reasons. The costs of the argument on 19 August are to be costs in the cause.