Fortuna Holdings Pty. Limited & Ors. v. Deputy Federal Commissioner of Taxation.
Judges:McGarvie J
Court:
Supreme Court of Victoria
McGarvie J.:
Background This is an application upon summons by the eight companies who are plaintiffs in this action, for an interlocutory injunction against the defendant, the Deputy Commissioner of Taxation. They seek an injunction to restrain the Deputy Commissioner until the trial of the action or further order from presenting to this Court a petition for the winding up of any of the plaintiff companies based on demands to pay debts which have been served on them.
According to the evidence before me, each of the plaintiffs is incorporated in Victoria and is a member of a group of companies controlled by Mr. Emmanuel Margolin and his family. As there are common features of the disputes between the respective plaintiffs and the Deputy Commissioner, it is convenient at this stage to deal with them together.
ATC 4314
On various dates during the period from 19th September, 1975, to 12th February, 1976, the Deputy Commissioner issued to each of the companies a notice or notices of assessment of income tax. The notices were of assessments of income tax for various financial years ranging from the year ended on 30th June, 1970, to the year ended on 30th June, 1974. Some were notices of original assessment, others were notices of amended assessment.
Notice of objection to each of the assessments was given by the company assessed. Each objection was ultimately disallowed by the Deputy Commissioner.
Under sec. 187 of the Income Tax Assessment Act 1936 each company requested the Deputy Commissioner to refer to a Board of Review for review, the decision or decisions disallowing that company's objections. Some of the requests to refer decisions to a Board of Review were made on or about 5th February, 1976, and the remainder on or about 29th March, 1976.
The sum of the amounts assessed for the eight companies is $276,779.99. The latest date specified in any of the notices of assessment as the date on which the tax is due and payable is 16th March, 1976.
The Commonwealth Crown Solicitor on behalf of the Deputy Commissioner served on each of the companies a written demand requiring payment of the total amount of income tax due and payable by it pursuant to the relevant notice or notices of assessment.
Each of these demands also required payment of a specified amount of additional tax due under sec. 207 of the Assessment Act as a result of the assessed tax remaining unpaid. The sum of the additional amounts required by the notices to be paid by the eight companies is $3,704.40.
Thus the total amount required by the demands to be paid by the eight companies as assessed tax and additional tax is $280,484.39.
The demands bore various dates from 12th November, 1975, to 26th April, 1976, and were served on or about the dates which they bore. Each demand indicated that, if it were not complied with, the Deputy Commissioner would present a petition for the winding up of the company to the Supreme Court of Victoria.
The demands were served on five of the plaintiffs before disallowance of their objections and on the other three after disallowance.
None of the companies has paid the Deputy Commissioner the amounts or any part of the amounts which the demand served on the company required to be paid by it.
The demands requiring payment were given by the Deputy Commissioner so as to bring into operation sec. 222(2)(a) of the Companies Act 1961 of Victoria. That provides that a company shall be deemed to be unable to pay its debts if a creditor to whom the company is indebted in a sum exceeding $100 then due, has served on the company a demand requiring it to pay the sum so due, and the company has for three weeks thereafter neglected to pay the sum or to secure or compound for it to the reasonable satisfaction of the creditor. Subsection (1) of the section provides that the Court may order the winding up of a company if it is unable to pay its debts.
In the case of each company, following the service of the demand, the accountants of the company sent to the Crown Solicitor a letter in a common form. As an example I set out the letter dated 2nd March, 1976, which was sent on behalf of Fortuna Holdings Pty. Limited:
``Dear Sir,
Re Fortuna Holdings Pty. Limited RF/VC28232
We are the accountants for Fortuna Holdings Pty. Limited and refer to sec. 222 Notice served on our client company on approximately 17th. instant claiming $43,856.33 as being due to the Deputy Commissioner of Taxation.
We are advised that our client company disputes the amount due and this is a matter which will probably proceed by way of Statement of Claim.
Our Client company regards the threatened use of a winding up proceeding under the Companies Act, as an abuse of the process of the Court and unless we receive an assurance in writing that the threatened winding up proceedings will not be instituted, our instructions are that the company solicitor is to approach the Supreme Court without further notice and apply for an injunction unless we hear from you by Friday 5th. March 1976. An order for costs will also be sought.
Yours faithfully,
Grinwald & Greenberg.''
ATC 4315
The reference in the letter to ``17th. instant'' was intended as a reference to 17th February.
At some time after 3rd May, 1976, agreement was reached between the Crown Solicitor acting for the Deputy Commissioner and the solicitors for the plaintiffs, that the Crown Solicitor would not proceed with any action based on the service of the demands for payment without first giving notice to the plaintiffs' solicitors.
The Crown Solicitor on or about 16th June, 1976, informed the plaintiffs' solicitors by letter that winding up petitions would be presented to this Court on 30th June, 1976, for the winding up of the first to the sixth-named plaintiff companies.
The plaintiffs have placed before me evidence in an affidavit sworn on 29th June, 1976, by Mr. Grinwald, the secretary of each of the plaintiff companies, that he believed that petitions would also be presented on 30th June, 1976, for the winding up of the seventh and eighth-named plaintiff companies.
On 29th June, 1976, the plaintiffs issued the writ in this action, claiming by general indorsement that the Deputy Commissioner be restrained from presenting a petition to this Court for the winding up of any of the plaintiffs in reliance upon the demands for payment which have been served.
By summons issued in the action on 29th June, 1976, the plaintiffs seek an interlocutory injunction restraining the Deputy Commissioner from presenting such a petition until the completion of the trial of the action or further order.
An injunction was granted and extended which at present restrains the presentation of such a petition until the hearing of this application or further order.
During the hearing I was told that the Deputy Commissioner had not at that stage referred the decisions to a Board of Review as requested, but that this would be done by 22nd July, 1976. I was also informed that the reviews by a Board of Review could not take place before November, 1976, but that a Board would be able to hear the matters during that month.
Issues.
Mr. Merkel, who appeared for the plaintiffs, based the application on two broad submissions. Each of these submissions depends on the proposition that the mere presentation of winding up petitions might be productive of irreparable damage to the plaintiff companies. First he submitted that the injunction should be granted because the Deputy Commissioner is not, in the circumstances, entitled to commence winding up proceedings against any of the plaintiffs. Second he submitted that the injunction should be granted because, even if the Deputy Commissioner is entitled to commence winding up proceedings, by deciding to do so he has chosen to assert a disputed claim by a procedure productive of damage to the companies rather than by a suitable alternative procedure.
There was no suggestion by Mr. Merkel that the Deputy Commissioner was not entitled to act on behalf of the Commissioner in all matters relevant to this application.
Mr. Michael Adams, who appeared for the Deputy Commissioner, challenged the proposition that there is any real risk that the mere presentation of petitions would produce irreparable damage to any of the plaintiffs. In reply to the plaintiffs' first broad submission he contended that the Deputy Commissioner is entitled in the circumstances to commence winding up proceedings. To the plaintiffs' second broad submission, he argued that where the Deputy Commissioner is entitled to commence winding up proceedings, he can be restrained by injunction only in exceptional circumstances which he illustrated with an example, or where it is shown that the proceedings have no chance of success. He submitted that in this case there are no such exceptional circumstances and that the proposed petitions do have a chance of success.
Principle
The submissions of the parties make it necessary for me to consider whether in this application the basis exists which would enable me to exercise a discretion to grant or refuse an interlocutory injunction, and if so, to consider the exercise of that discretion.
When a court restrains the presentation of a winding up petition to that court it exercises part of its inherent jurisdiction to prevent abuse of its process.
Mann v. Goldstein (1968) 1 W.L.R. 1091 at 1093-4. Usually a court acts against abuse of its process after proceedings
ATC 4316
have been commenced. Thus, existing proceedings may be stayed or dismissed, or documents delivered as a step in the proceedings may be struck out. This is done to relieve a party to the proceedings from an oppressive and damaging situation in which he has been placed through abuse of court process. The law has long recognized that with proceedings to wind up a company, intervention after the commencement of proceedings would often be too late to relieve the company of oppression and damage. The courts have recognized that irreparable damage may be done to a company merely through public knowledge of the presentation of a petition. Usually the damage flows from the loss of commercial reputation which results. The courts have also been conscious of the pressure which may be put on a company, by a person with a disputed claim against it, threatening to present a winding up petition unless the company meets his claim. While that threat exists, the company, in order to avoid the damage involved in the presentation of a petition, is pressed to meet the claim although it may have substantial and genuine grounds for regarding itself as not required to do so.The decisions of the courts have established the principle that the presentation of a winding up petition may be restrained by injunction where its presentation would amount to an abuse of the process of the court. The courts apply this principle similarly to restrain the advertisement of a petition already presented. The principle enables companies to be protected from threatened or apprehended oppression and damage from abuse of court process.
The basis on which the courts have intervened in the cases cited by counsel, has been that presentation of a winding up petition might of itself cause irreparable damage to the company. Given that basis, the application of the principle which entitles the courts to intervene to prevent abuse of process, depends on the existence of different elements in two distinct situations considered in the authorities. For convenience I will refer to the applications of the principle in the two situations as the first and second branches of the principle.
First Branch of Principle
The first branch applies in cases where the presentation of the petition might produce irreparable damage to the company and where the proposed petition has no chance of success. The decision by Vaughan Williams J. to restrain the advertisement of a petition in In re a Company (1894) 1 Ch. 349 is an example of a case within this branch of the principle. There, the petitioner had not held shares in the company for long enough to be entitled to petition for winding up as a contributory. The petition therefore had no chance of success. Later decisions have treated the case as decided on that ground.
Tench v. Tench Bros. Ltd. (1930) N.Z.L.R. 403;
Bryanston Finance Ltd. v. De Vries (No. 2) (1976) 2 W.L.R. 41 at 51: Cases where the first branch of the principle has been applied, have been cases where the petition was incapable of success as a matter of law, or as a matter of fact through lack of supporting evidence. The petition in In re a Company (above) was, as a matter of law, incapable of success. In
Charles Forte Investments Ltd. v. Amanda (1964) 1 Ch. 240 which is discussed below, the first branch of the principle was held to apply, because the petition was incapable of success as a matter of law (Danckwerts L.J.) or through lack of supporting evidence (Willmer L.J.). Bryanston Finance Ltd. v. De Vries (No. 2) (1976) 2 W.L.R. 41, which also is discussed below, was a case where the first branch did not apply because the petition was capable of succeeding.
The plaintiffs' first broad submission was based on the first branch of the principle. It was submitted that the proposed petitions by the Deputy Commissioner were incapable of success in the circumstances. This submission was supported by one argument depending primarily on the interpretation of the Assessment Act and another depending primarily on the application of the Companies Act.
Interpretation of Assessment Act
To consider the argument founded on the interpretation of the Assessment Act it is necessary to refer to some provisions of that Act.
Under the Assessment Act the Commissioner may make an assessment of the amount of tax which a person is liable to pay (sec. 169) and is then required to serve notice of the assessment on the person liable to pay the tax (sec. 174). The legal consequences of this are stated in the following sections:
ATC 4317
``204. Subject to the provisions of this Part, any income tax assessed shall be due and payable by the person liable to pay the tax on the date specified in the notice as the date upon which tax is due and payable, not being less than thirty days after the service of the notice, or, if no date is so specified, on the thirtieth day after the service of the notice.''
``208. Income tax when it becomes due and payable shall be a debt due to the King on behalf of the Commonwealth, and payable to the Commissioner in the manner and at the place prescribed.''
``209. Any tax unpaid may be sued for and recovered in any Court of competent jurisdiction by the Commissioner or a Deputy Commissioner suing in his official name.''
Provision is made for objections and appeals. A taxpayer dissatisfied with any assessment may within 60 days of service of the notice of assessment lodge with the Commissioner a written objection (sec. 185). The Commissioner is to consider the objection and to give the taxpayer written notice of his decision (sec. 186). Within 60 days of receiving notice of the Commissioner's decision a taxpayer dissatisfied with the decision may in writing request the Commissioner either to refer the decision to a Board of Review for review or to treat his objection as an appeal and forward it to the Supreme Court of a State (sec. 187).
Where a request to refer the decision to a Board of Review is accompanied by a fee of $2, the Commissioner is to refer the decision to a Board (sec. 188). Assessments, determinations or decisions of a Board of Review made upon review are deemed to be those of the Commissioner (sec. 193). The Assessment Act further provides:
``201. The fact that an appeal or reference is pending shall not in the meantime interfere with or affect the assessment the subject of the appeal or reference; and income tax may be recovered on the assessment as if no appeal or reference were pending.''
``202. If the assessment is altered on the appeal or reference a due adjustment shall be made, for which purpose amounts paid in excess shall be refunded, and amounts short paid shall be recoverable as arrears.''
Mr. Merkel relied on the use of the word ``recovered'' in both sec. 201 and sec. 209 and submitted that it had the same meaning in both sections. He argued that the only right to recover allowed by sec. 201 while a reference is pending, is the right to recover by suing in a court of competent jurisdiction. This is the right referred to in sec. 209. The argument was put at two levels. At its highest it was put that the Deputy Commissioner is never entitled to present a petition based on an assessment while an appeal or reference is pending. Alternatively it was put that the proper interpretation of sec. 201, 204 and 209 is that while an appeal or reference is pending, the assessed tax is not due until it has become recoverable pursuant to the judgment of a court of competent jurisdiction. It was argued that it does not become recoverable pursuant to the judgment of a court of competent jurisdiction until judgment has been obtained and is free of any stay of execution. It was submitted that it followed, that while an appeal or reference is pending, a demand for payment does not bring into operation the provisions of sec. 222(2)(a) of the Companies Act unless there is in existence a judgment of a competent court upon the debt which is free of stay of execution. This was submitted to be the result, on the basis that, until then, the debt is not due, and the section of the Companies Act operates only when the debt demanded is due.
Mr. Adams submitted that the meaning of the word ``recovered'' in sec. 201 is not to be applied to sec. 209. He suggested that the purpose of sec. 209 is to make it clear that unpaid tax can be recovered by action in any competent court without the necessity of conferring Federal jurisdiction on the court; and that the section has no restrictive effect on sec. 201 or other sections.
In my opinion neither of the interpretations put on behalf of the plaintiffs is a natural interpretation or one which the context requires to be adopted. I consider that the purpose of sec. 201 is to make it clear that the institution of an appeal or reference does not of itself affect the rights which the Commissioner otherwise possesses of obtaining payment of the assessed income tax.
For these reasons I hold that the Assessment Act upon its proper interpretation does not in
ATC 4318
this case operate to deprive the Deputy Commissioner of the right to present a winding up petition.Application of Companies Act
It was argued for the plaintiffs that the Deputy Commissioner does not have a factual basis to show that a ground for a petition arose through the operation of sec. 222(2)(a) of the Companies Act. It was argued that, in the circumstances, there had been no neglect, by any of the plaintiffs, within the meaning of that provision, to pay the sum demanded by the Deputy Commissioner. For reasons which, for convenience, I set out below in the context of related issues, I do not accept this argument.
I conclude that the plaintiffs have not established that the first branch of the principle entitles me in this case to exercise a discretion upon the grant of an injunction.
Second Branch of Principle
There was a fundamental conflict between the parties upon the second broad submission made on behalf of the plaintiffs.
For the plaintiffs it was put, in effect, that there is a second branch of the principle and that the criteria for its application are different from those for the application of the first branch. For the Deputy Commissioner it was put, in essence, that there is not a second branch of the principle such as that on which the plaintiffs base their second broad submission, or if there is, its application ultimately depends on the same criteria as the first branch.
For the plaintiffs it was submitted that I should proceed on the basis that the presentation of the petitions would cause irreparable harm to the plaintiffs. It was put that the material before me shows that the disputes, the subject of the references to a Board of Review, are genuine disputes based on substantial grounds. It was argued that, by proceeding for the amounts due, by the presentation of petitions for winding up, the Deputy Commissioner is depriving the plaintiffs of the right, which they would have had if sued to judgment in a court, of applying for a stay of execution pending the determination of the references by a Board of Review. It was submitted that in the circumstances the presentation of petitions would be a misuse of the process of the Court.
The plaintiffs relied on principles in authorities which included Charles Forte Investments Ltd. v. Amanda (1964) 1 Ch. 240;
Metal Protectives Company Pty. Ltd. v. Site Welders Pty. Ltd. (1968) 1 N.S.W.R. 160 and
Clem Jones Pty. Ltd. v. International Resources Planning and Development Pty. Ltd. (1970) Qd. R. 37, as entitling me to exercise a discretion to grant an injunction.
It was contended that the delay of the presentation of petitions until after decision upon the references by a Board of Review would cause no disadvantage to the Deputy Commissioner. Reliance was placed on the fact that the Deputy Commissioner does not claim that delay in winding up would make any difference to the position of such debts as might be due to him after the Board of Review decisions. It was submitted that the Deputy Commissioner is acting in a way which would enable him to eliminate his opponents in the Board of Review proceedings. I was told that the plaintiffs and the three trading companies in the group which are mentioned later, were prepared to give appropriate undertakings not to dispose of their assets. The plaintiffs are prepared to undertake to expedite the Board of Review proceedings and submitted that the delay would not be long. It was put that the balance of convenience is substantially in favour of granting the interlocutory injunction.
On behalf of the Deputy Commissioner it was put that the discretion which I have in this application is a very restricted one. It was submitted that only in an exceptional case would a court be entitled to restrain presentation of a winding up petition by the Deputy Commissioner based on non-compliance with a demand for payment of assessed tax which was due and payable. It makes no difference that a reference to a Board of Review is pending or that it may have substantial prospects of success. Mr. Adams gave a hypothetical example of an exceptional case which would justify a court in restraining presentation of such a petition. He said that if a Deputy Commissioner were in contempt of court through refusal to comply with an order of the court to deliver to the company, documents needed for a Board of Review hearing, presentation of a petition against the company could be restrained.
It was submitted that, in the absence of positive misconduct of the type mentioned, the
ATC 4319
presentation of the petition in this case could not be restrained even if I were satisfied that the plaintiffs are likely to succeed in the proceedings before a Board of Review, that they are solvent and that the presentation of the petitions would commercially be highly damaging to them. This result was submitted to follow from the provisions of the Assessment Act, especially sec. 201, 204 and 209, and the decisions in Bryanston Finance Ltd. v. De Vries (No. 2) (1976) 2 W.L.R. 41;Re Roma Industries Pty. Ltd. 76 ATC 4113 and other cases.
It was argued that there could here be no genuine dispute on substantial grounds as to the existence of the debt which could be relied on as a basis for restraining presentation of the petition. The provisions of the Assessment Act place the existence of the debt beyond doubt or dispute. It was also submitted that the Bryanston Finance case establishes that presentation of a petition can only be restrained as an abuse of the process of the Court if it has no chance of success.
It was acknowledged that, at the hearing of a petition for winding up, the court would take into account considerations relevant to the exercise of its discretion, which would include whether the petitioner is making an oppressive use of the proceedings and whether the company is solvent. However, these considerations are not of any relevance in the present application, it was argued. As the fate of the petition depends on the exercise of the discretion of the court hearing the petition, it cannot at this stage be said that the petition has no chance of success.
It was put that the only procedure available to the plaintiff companies is to wait until the petitions have been presented and then seek to have the Court exercise its discretion to dismiss them.
Submissions were put on behalf of the Deputy Commissioner which challenged the factual basis on which the plaintiffs' second broad submission relied.
Consistently with his submission that as a matter of law it is not open to me to exercise a discretion upon the grant of an injunction, Mr. Adams indicated that he was making no submissions upon the way in which I should exercise my discretion if I held that a discretion exists. He did however offer some criticism of submissions which Mr. Merkel had made upon issues which go to the balance of convenience.
I consider that there is a second branch of the principle which may apply in situations where the first branch does not.
The second branch applies in cases where a petitioner proposing to present a petition has chosen to assert a disputed claim, by a procedure which might produce irreparable damage to the company, rather than by a suitable alternative procedure. It may apply in cases where the petition, if presented, has a chance of success. In some cases both the first and the second branches of the principle apply.
The application of the second branch is illustrated by the decision of the Court of Appeal in
Charles Forte Investments Ltd. v. Amanda (1964) 1 Ch. 240. There, the directors of a holding company who were entitled under the articles to refuse to transfer shares, had declined to register the transfer of certain shares submitted for transfer by a minority shareholder. The shareholder informed the company that unless the directors gave an undertaking to register the shares he would present a winding up petition against the company. The proposed petition and draft affidavit in support had already been prepared. The directors did not give the undertaking and the company issued a writ claiming an injunction to restrain the presentation of the petition. It applied on motion for an interlocutory injunction, which was refused. The company appealed. The Court of Appeal decided that an interlocutory injunction should be granted. Before the Court of Appeal, the shareholder argued that presentation of the petition could be restrained only if it were shown that the petition would not be presented in good faith for the purpose of winding up the company or that it was bound to fail regardless of the evidence to support it. The company argued that this petition was bound to fail. Another of the arguments of the company was that even if there were material on which it could succeed, a winding up petition was not the appropriate remedy. It submitted that if the petitioner had evidence to support his allegations his proper remedy would be to bring an action for rectification of the register. Willmer L.J. first considered whether, on the material before the Court, the petitioner had a chance of establishing the allegations in the proposed petition. He decided that he did not. This was an application of the first branch of
ATC 4320
the principle. Willmer L.J. then said that if he were wrong about that, there was another ground on which the shareholder was bound to fail, because a winding up petition was not a proper remedy. He said:``... the winding up petition is misconceived even if the allegations contained in it could be substantiated, having regard to the existence of an alternative and more suitable remedy. It is to be observed that by bringing an action the defendant, if he has a good case, would not only more easily obtain what he is really after, but he could do so without incurring the risk of inflicting damage, possibly irreparable damage, on the company, and possibly also on other innocent shareholders''
(pp. 257-8)
Danckwerts L.J. found that the allegations in the petition were insufficient to entitle the shareholder to a winding up order and that the case could not be established that it was just and equitable to wind up the company. This also was an application of the first branch of the principle. He added that there was also the point that alternative and more appropriate remedies were available in the form of proceedings to rectify the register, which would provide the petitioner with more efficient methods of proving his allegations, if well founded. He said that he had concluded that the defendant proposed to adopt the method of a petition rather than the other and more appropriate remedies because he hoped to bring pressure on the directors to alter their attitude. This was an improper use of the process, and the company should be freed from the improper pressure being used by the defendant, and an injunction should be granted. Cross J., the other member of the Court of Appeal, agreed with the other two judgments and added that, if the shareholder wished to make out a case for his entitlement to transfer the shares he should bring an action for rectification of the register. He said that a winding up petition was not a form of relief which the defendant could properly invoke. He added:
``I do not say that there could never be a case in which the facts were such that it would be proper to launch a winding-up petition in respect of a refusal to register a transfer, but for the reasons which have been given by my Lords, I am satisfied that this petition is bound to fail, and I have, for my part, no doubt that the reason why the defendant chose to proceed by way of petition rather than by way of action was because he thought that more effective pressure would be brought to bear on the company in that way than if he sought his proper remedy.''
(p. 263.)
Both Willmer L.J. (at p. 250) and Danckwerts L.J. (at p. 261) stressed that the jurisdiction to restrain the presentation of a petition was to be exercised with care and only in a clear case.
The authorities which have been discussed illustrate the distinction between the application of the first and second branches of the principle.
The first branch applies to cases where the petitioner is incapable of success as a matter of law or through absence of supporting evidence. Where the petitioner is not entitled to present a petition or where the ground alleged is not a ground which can found a winding up order, the petition is incapable of success as a matter of law. If there is no sufficient evidence to establish an otherwise sufficient ground, the petition is incapable of success for that reason. Thus the first branch applies where the proposed petition cannot succeed.
The second branch applies to cases where there is a more suitable alternative means of resolving the dispute involved in a disputed claim against the company. They are not necessarily cases in which, as a matter of law or through absence of evidence, there is an inherent incapacity of success. They may be cases where the petitioner is entitled to present the petition, the gound is sufficient in law and there is evidence to support the ground. They are cases, though, where, due to the availability of the more suitable alternative remedy, the Court hearing the petition would in the circumstances, in the exercise of its discretion, decline to make a winding up order, at least while the circumstances remain as they are at the time of the application for an injunction. Thus the second branch applies where, because of the availability of a suitable alternative procedure, the petition is unlikely to succeed in the circumstances existing at the time.
The case of Charles Forte Investments Ltd., v. Amanda (above) was a case in which both the first and the second branches applied. First it was held that as a matter of law or through absence of supporting evidence the proposed
ATC 4321
petition was inherently incapable of success. This is the approach under the first branch. The members of the Court of Appeal then approached the case by assuming that the proposed petition was otherwise capable of success and considering the effect of the availability of the other more suitable remedy. They held that because of the existence of that remedy the petition would fail. This is the approach under the second branch.The distinction between the two approaches is demonstrated by the decision of the Court of Appeal in Bryanston Finance Ltd., v. De Vries (No. 2) (1976) 2 W.L.R. 41. The appellant in that case was holder of sixty-two shares in a holding company whose issued capital was more than seven million shares. The chairman and managing director of the company was a Mr. Smith who was the major shareholder. At the annual general meeting in 1974 and later, the appellant had raised questions about entries in the 1973 accounts relating to Mr. Smith and his companies but had received no satisfactory answers.
On the application of the appellant and other shareholders, the Department of Trade and Industry had appointed inspectors to investigate the affairs of the company under sec. 164 of the Companies Act 1948 and that investigation was proceeding. The appellant indicated an intention of presenting a petition for the winding up of the company on a number of grounds. The company issued a writ against the appellant claiming an injunction to restrain him from presenting a petition on any of those grounds or any ground connected with those grounds. On application by motion for an interlocutory injunction, the judge restrained the presentation of such a petition until judgment or further order. The shareholder appealed. It was apparently argued by the company that there were available to the appellant more satisfactory remedies of achieving his objective and that one of these remedies was the investigation by inspectors which was already proceeding. The Court of Appeal held that neither that nor any other available remedy would afford the appellant a satisfactory form of proceeding. It is to be noted that the objective of the appellant in that case was to have the company wound up. It was not a case where the real objective of the prospective petitioner was to obtain payment of a debt or registration of shares. There being no available alternative remedy, the case did not fall within the second branch of the principle which I have discussed and the application for an interlocutory injunction had to be considered under the first branch. This involved asking whether the petition had no chance of success. The Court of Appeal was of the view that at least some of the proposed grounds could lead to a winding up order. Further, counsel for the company had conceded that the appellant might succeed in establishing that the presentation of a petition on the proposed grounds would not be an abuse of the process of the Court. It followed that the appeal was allowed and the injunction discharged. There is in my opinion no inconsistency between the decision in the Charles Forte case and the decision in the Bryanston Finance case.
In
Re Surrey Garden Village Trust Ltd. (1965) 1 W.L.R. 975 at 981-2, the situation in which the second branch of the principle applies is included among a number of examples of situations where winding up proceedings are misconceived.
A policy similar to the policy underlying the second branch of the principle, appears in sec. 225(3) of the Companies Act.
As a matter of convenience in discussing the issues before me, I have discussed and distinguished the application of two branches of the general principle under which courts may restrain the presentation of winding up petitions. The two branches cover the cases which have been cited to me. I notice that the hypothetical example given by Mr. Adams of the type of case in which an injunction could be granted against the Deputy Commissioner, does not appear to fall within either of the branches which I have discussed. It is not necessary to consider whether there are other applications of the principle.
Creditor's Petitions
The second branch of the principle has often been applied to creditor's petitions. Usually in a creditor's petition, the only interest and legitimate object of the creditor is to get paid: In
re St. Thomas' Dock Coy. (1876) 2 Ch. 117 at 118;
Re First Western Corporation Ltd. (1970) W.A.R. 136 at 137. A petitioning creditor who establishes a ground is entitled to have the court exercise its discretion whether to make a winding up order or not. A person clearly entitled to present a petition as a creditor, who makes out a ground and has no
ATC 4322
other way of obtaining the amount of his debt, is, as between himself and the company, entitled to an exercise of discretion in favour of winding up, if nothing more appears: Inre Concrete Pipes and Cement Products Ltd. (1926) V.L.R. 34;
Re L.H.P. Wools Ltd. (1970) Ch. 27;
I.O.C. Australia Pty. Ltd. v. Mohil Oil Australia Ltd. (1975) 49 A.L.J.R. 176 at 182. As there is in these circumstances no basis for exercising the discretion against a winding up order, the petitioning creditor may be said to be entitled, in effect, to an order as of legal right. If other considerations appear before the court, it must exercise its discretion in the light of all relevant considerations. If only the interests of the petitioner and the company are involved, a court normally dismisses a petition if the petitioning creditor is paid before the final hearing of the petition: In re Concrete Pipes and Cement Products Ltd. (1926) V.L.R. 34; Re Q.B.S. Pty. Ltd. (1967) Qd. R. 218. This is consistent with the limited interest and objective of a petitioning creditor.
Creditor's Debt Disputed
A person is not entitled to present a petition as a creditor unless he actually is a creditor. In ordinary circumstances the procedures of a winding up petition are not to be used to determine whether the petitioner is a creditor if the existence of his debt is genuinely disputed on substantial grounds. If a creditor's petition is based on a debt which is genuinely disputed on substantial grounds, usually courts in the proper exercise of their discretion decline to a winding up order: In
re K.L. Tractors Ltd. (1954) V.L.R. 505 at 512. The Court then either dismisses the petition or stands it over to enable the debt to be established in other appropriate proceedings: Mann v. Goldstein (1968) W.L.R. 1091. There may be special circumstances which would justify the court in the exercise of its discretion, determining the existence of a disputed debt in winding up proceedings:
Re Q.B.S. Pty. Ltd. (1967) Qd. R. 218 at 225;
Bateman Television Ltd. v. Coleridge Finance Co. Ltd. (1969) N.Z.L.R. 794 (C.A.): (1971) N.Z.L.R. 929 at 932 (P.C.).
If a person intends to present a petition based on a debt which is genuinely disputed on substantial grounds, a court may restrain the presentation of the petition.
Cadiz Waterworks Co. v. Barnett (1874) L.R. 19 Eq. 182; Metal Protectives Co. Pty. Ltd. v. Site Welders Pty. Ltd. (1968) 1 N.S.W.R. 106. If the petition has been presented the court may restrain its advertisement: Mann v. Goldstein (1968) 1 W.L.R. 1091.
Creditor's Debt Subject to Disputed Cross-Claim
The courts have considered the position where the existence of the petitioning creditor's debt is not itself disputed but the company genuinely claims on substantial grounds to have a cross-claim equal to or exceeding the petitioner's debt. In winding up proceedings the existence of such a cross-claim is a matter which is proper for consideration in the exercise of the discretion to order winding up:
Re Convere Pty. Ltd. (1976) V.R. 345 at 350. In
Re Madison Avenue Carpets Pty. Ltd. (1974) CCH Company Law Cases \sp\40-125 at p. 27,895 Bowen C.J. in Equity, on the hearing of a creditor's petition for winding up, was satisfied by the company that it had cross-claims against the petitioner which appeared to have substance. His Honour said:
``... the petitioner on any view of the facts has sought to use the procedure of a sec. 222 demand where the state of account between the parties is complex and uncertain and has for some time been the subject of dispute. I am of the opinion that in all the circumstances and as a matter of discretion, I should dismiss the petition. (see Mann v. Goldstein (1968) 1 W.L.R. 1091; cf. In re K.L. Tractors Ltd. (1954) V.L.R. 505;
Thiess Peabody Mitsui Coal Pty. Ltd. (1966) Qd R.I.)(p. 27,897).''
In dealing with the considerations relevant to their exercise of discretion on a winding up petition, the courts have looked at the substance not the form of the cross-claim. Usually the court has not been concerned to distinguish whether the cross-claim was a set-off or a counter-claim or some other form of cross-claim. In
Re Convere Pty. Ltd. (1976) V.R. 345 Kaye J. investigated a claim for damages being pursued in the Supreme Court of South Australia by the company against the petitioning creditor, in order to see whether it was genuinely based on substantial grounds. In that case his Honour was not satisfied that there were substantial grounds to support it. In Re L.H.F. Wools Ltd. (1970) Ch. 27 the Court of Appeal, in exercising its discretion to stand a petition over, gave substantial weight to the existence of a cross-claim of a type not known to English law but existing under Belgian law
ATC 4323
and being pursued against the petitioner in proceedings in Belgium.Where the petition is based on a clearly existing debt but the company has a genuine cross-claim based on substantial grounds, it is open to the court to exercise its discretion one way or the other in accordance with usual rules which govern the exercise of discretions. In taking account of the various considerations relevant to the exercise of this discretion, a court should regard other decisions upon the exercise of this discretion as signposts or indicators and not as laying down rules which the court is to follow: Re L.H.F. Wools Ltd. (1970) Ch. 27. An example of a case where a winding up order was made despite the existence of a cross-claim is
Re Douglas (Griggs) Engineering Ltd. (1963) Ch. 19. The position is stated in the following passage in Palmer's Company Law (21st ed):
``Where the debt is undisputed, but the company has a genuine cross-claim against the petitioning creditor, it is a matter for the discretion of the court whether a winding-up order should be made, although the normal practice would be to dismiss the petition or to stand it over until the cross-claim has been heard: Re L.H.F. Wools Ltd. (1970) Ch. 27 (C.A.) cf.
Re Portman Provincial Cinemas Ltd. (1964) 108 S.J. 581 (C.A.)''(Sixth Cumulative Supplement, 1974, notes to p. 738.)
Where a creditor intends to present or to advertise a petition and the company has a genuine cross-claim based on substantial grounds, which equals or exceeds the creditor's debt, a court may grant an injunction restraining the presentation or advertisement of the petition.
In
Cercle Restaurant Castiglione Company v. Lavery (1881) 18 Ch. D. 555 by a contract with the defendant, the company agreed to pay him £2,000 by two instalments of £1,000 for certain furniture and effects and the defendant agreed in certain events to pay the company up to £2,000 for paid up shares. These events occurred but the defendant refused to pay the company £1,000 which it requested. He demanded payment of the second instalment of £1,000 which was due to him and threatened to present a petition to wind up the company unless it was paid. The company issued a writ and moved for an injunction to restrain the defendant from presenting a winding up petition. Jessel M.R. granted the injunction. He said that:
``... the conduct of the defendant Lavery was wholly unjustifiable, and that he had no right to present a winding up petition. The company having called upon him to take up and pay for shares to the amount of £1,000 under his agreement... by which he was clearly bound, he was not entitled, after refusing to do so, to say that the company ought to be wound up for non-payment of their instalment of £1,000. He could not take advantage of his own wrong.''
(pp. 558-9.)
In Clem Jones Pty. Ltd. v. International Resources Planning and Development Pty. Ltd. (1970) Qd. R. 37 the plaintiff company applied for an injunction to restrain advertisement of a petition which had been presented against it. There was an objection that the proper procedure had not been followed in making the application. This question is not of importance in this case because it is clear that in one way or another the application could have been brought before the Judge. Wanstall J. found that the company and the petitioner had for some time mutually set-off their respective accounts one against the other. There was a firm and substantially based dispute as to whether the amount which the plaintiff company was entitled to set-off equalled or exceeded the amount of the petitioning creditor's debt. His Honour held that in that situation there had not been, within the meaning of sec. 222(2)(a) of the Companies Act of Queensland, a neglect to comply with the demand for payment, so the statutory ground had not been made out. He then referred to the fact that if there had been a neglect to pay and the statutory ground had been established there would be a discretion in the court whether or not to make a winding up order. Earlier he had referred extensively to the decision in Charles Forte Investments Ltd. v. Amanda (1964) I Ch. 240. He referred to the relevance of the dispute as to the existence of the debt and continued:
``Placed in this context, that would raise a relevant consideration, for I am left in this position, that holding as I do that there exists a bona fide dispute based upon a substantial ground, as to whether or not there is a debt having regard to the right of
ATC 4324
set off, I conclude that it is unlikely that a winding up order would be made by any judge in the exercise of his discretion. This seems to me to be a very good ground upon which I should exercise a discretion to enjoin the advertising of the petition at this stage.''(pp. 44-5.)
His Honour took the view that the dispute needed to be determined in a common law action. He restrained the petitioner until further order from advertising the petition. See also: Thiess Peabody Mitsui Coal Pty. Ltd. v. A.E. Goodwin Ltd. (1966) Qd. R. 1.
In
Tranquility Holdings Pty. Ltd. v. Glass Pools Pty. Ltd. (1974) CCH Company Law Cases \sp\40-133 a company applied for an injunction to restrain the presentation of a petition. It claimed that the debt to be relied on in the petition was disputed on several grounds. One ground was the existence of cross-claims exceeding the amount of the debt. Bowen C.J. in Equity said:
``... where cross-claims exist, and are greater in total than the sum the subject of a sec. 222 demand, the Court may decide in its discretion to prevent the presentation or continuance of a winding up petition based on the demand.''
(p. 27,963.)
Upon examination of the material before him, his Honour held that the plaintiff had not satisfied him that the cross-claims existed and for that and other reasons refused the injunction. See also
Pizzy Ltd. v. Classic Toys Pty. Ltd. (1975) CCH Company Law Cases 40-139 at pp. 28,013-4 per Bray C.J.
Sections 201 and 202 of Assessment Act
I turn to consider whether, if the second branch of the principle discussed above is otherwise applicable, sec. 201, 202 and related sections of the Assessment Act would affect or prevent its application in this case.
Section 201 and 202 have been considered on the background of the wide discretion which courts have to grant a stay of proceedings or execution. Two views of the meaning of sec. 201 were possible. One was that in all proceedings for recovery of income tax both the fact of an appeal or reference and the taxpayer's prospect of success in an appeal or reference are for all purposes to be disregarded. The other was that the existence of a pending appeal or reference does not of itself affect the rights which the Commissioner otherwise possess of obtaining payment of the assessed tax.
The effect of the section was considered by the High Court in
D.C. of T. (W.A.) v. Australian Machinery and Investment Co. Pty. Ltd. (1945) 8 A.T.D. 133; 47 W.A.L.R. 9.. An appeal to the High Court in relation to assessment of income tax of a company in respect of four years had established by an interim judgment of the High Court that the assessments were excessive because the income was earned partly in Australia and partly in England. The interm judgment did not detemine the amount of the excess included in the assessments. The Commissioner assessed the company for undistributed profits tax in respect of the same four years. Before the objections to the assessments of undistributed profits tax were determined, the Deputy Commissioner, relying on sec. 201 of the Assessment Act, sued the company in the Supreme Court of Western Australia for £463,864. 10s. 1d., the amount of the assessments.
The company applied to the Supreme Court for a stay of proceedings.
It was common ground that the final decision of the High Court in the uncompleted appeal in relation to income tax would necessarily establish that the assessments for undistributed profits tax were also excessive.
Dwyer J. who heard the application refused the stay. He took the view that the action could not have been stayed if an appeal had been pending against the assessments the subject of the action and therefore could not be stayed because of a pending appeal upon other assessments. He regarded the Act as having said that the amount assessed was recoverable if the Commissioner took action to recover it, and that the Court had no right to stop him.
The company appealed from that decision to the High Court. The judgment of the majority upholding the appeal was delivered by Latham C.J. He said:
``My brothers, Rich, Dixon and Williams and myself are of opinion that the contention that there is no jurisdiction to grant a stay in these proceedings by reason of the provisions of the Income Tax Assessment Act, sec. 201 and the associated sections should not be accepted.
ATC 4325
We are of opinion that there is jurisdiction to grant a stay in such proceedings, but that in considering any application for a stay the policy of the Act as stated in sec. 201 is a matter to which great weight should be attached.''
A.T.D. p.135; W.A.L.R. pp. 16-17.)
Later he said:
``We are, however, of opinion that, having regard to all the circumstances of the case which have been fully stated by counsel on both sides it is not just that there should be immediate judgment for £463,000, the amount sued for. But we do not agree that the matter should be held up for a further period until a decision is obtained in another jurisdiction. We are therefore of opinion, having regard to the fact that sec. 202 of the Act provides that if any overpayment is made an appropriate adjustment may be made, the following order should be made.''
(A.T.D. p. 135; W.A.L.R. p. 17.)
An order was then made which set aside the order of the Supreme Court and stayed further proceedings in the action until further order of the Supreme Court or a judge on condition of the defendant within 28 days paying to the plaintiff the sum of £75,000, the defendant undertaking not to dispose of any of its assets other than in the ordinary course of business. Starke J. who dissented, agreed that there was power in the Supreme Court and the High Court to stay proceedings. He considered that the special leave to appeal which had earlier been granted should be rescinded. One of his reasons for this was ``that the Act itself has enacted that proceedings to recover tax shall not be stayed pending appeal and has given the Commissioner power to grant extension of time for payment of tax and for refund if overpaid''. (A.T.D. p. 136; W.A.L.R. p. 18.)
In that case the High Court did not disregard the fact that an appeal or reference would result in the amount of the assessment of tax sued on, being held to be excessive. That fact appears to have been central to its granting a stay. The decision in that case supports the interpretation that the words of sec. 201 mean that a pending appeal or reference does not of that a pending appeal or reference does not of itself affect the rights which the Commissioner would otherwise have to obtain payment of the assessed tax. It follows that when a court is asked to exercise a discretion to delay recovery by the Commissioner of assessed tax, it would not be a proper exercise of the discretion, to delay the recovery solely because an appeal or reference is pending, but, while the policy stated in sec. 201 is a consideration to which great weight should be attached, other considerations, including the extent of the taxpayer's prospect of success in an appeal or reference, can justify the exercise of discretion in a way which delays the Commissioner's recovery.
The article by Mr. A.R. Castan, ``Enforcement of Payment in Contested Tax Cases'' (1976) 5 Australian Tax Review 4, to which I was referred, discusses a number of cases in which, in actions to recover assessed tax, courts have exercised their discretion by granting a stay and a number where a stay has been refused.
In
Marina Estates Pty. Ltd. v. F.C. of T. 74 ATC 4166 at 4169, Barwick C.J., in delivering the judgment with which the other members of the High Court agreed, in an appeal against a judge's refusal to stay an action to recover assessed tax, pending an appeal against the assessment, said that the question of the grant of a stay was a matter peculiarly within the discretion of the primary judge. The appeal against the judge's exercise of discretion was dismissed.
In Re Roma Industries Pty. Ltd. 76 ATC 4113, on the hearing of a petition by the Deputy Commissioner for the winding up of a taxpayer company, Bowen C.J. in Equity considered the relevance of the existence of pending references to a Board of Review. The references had not been heard and it seemed likely that some substantial time would elapse before they were. It appears from his Honour's judgment that the company had merely proved that in respect of each relevant assessment an objection had been lodged and had been disallowed and that a request had been made to refer the decision of disallowance to a Board of Review for review. The company seems to have done no more than rely on the existence of the references to a Board of Review as sufficient to show that the Commissioner's debt was disputed. The Commissioner had submitted that it was not a disputed debt and argued that the fact that an appeal is pending is not in itself a ground for a stay of execution and is not to be
ATC 4326
taken as a ground for refusing to make an order for winding up. Bowen C.J. said:``The next question which arises is whether the amount claimed by the Commissioner should be treated as a disputed claim, and an order be refused on this ground. In one sense, of course, the Commissioner's claim is disputed, because appeals to the Board of Review have been lodged. However the provisions of sec. 201 of the Income Tax Assessment Act require me to treat the debt as in effect undisputed.''
(p. 4116)
He referred to D.C. of T. (W.A.) v. Australian Machinery Investment Co. Pty. Ltd. (1945) 8 A.T.D. 133 and Marina Estates Pty. Ltd. v. F.C. of T. 74 ATC 4166 as authorities for the proposition that sec. 201 will generally lead the court to refuse a stay.
Later he said:
``I have come to the conclusion that the existence of the appeals to the Board of Review should not persuade me to refuse a winding up order.''
(p. 4116)
It seems clear that the case of the company on this aspect was that the mere existence of the references to a Board of Review converted the debt into a disputed one.
The company also argued that by the Deputy Commissioner presenting a petition instead of suing for the tax due, the company had been deprived of the right which it would then have had of applying for time to pay, which may or may not have been granted. Bowen C.J. pointed out that the right to apply for a stay arose only if the company were sued; as it had not been sued the right did not arise; and the Commissioner was not obliged to sue. He also said that even if the company were sued it was the general attitude of the courts to refuse a stay by reason of the provisions of the Assessment Act and referred to the authorities which he had mentioned earlier.
In deciding to make a winding up order, Bowen C.J. gave weight to a number of considerations, including the uncertainty, on the evidence, whether the unsecured assets of the company were at that stage sufficient to cover the Commissioner's debt.
It is to be noted that there is a basic difference between the case of that company and the case of the plaintiffs in this application. The company in that case relied on the mere existence of pending references as converting the debts into doubtful debts. It apparently provided no evidence to show that the claim which it was to assert before a Board of Review was genuinely based on substantial grounds. In both winding-up proceedings (Re Convere Pty. Ltd. (1976) V.R. 345) and proceedings to restrain the presentation of a petition (Tranquility Holdings Pty. Ltd. v. Glass Pools Pty. Ltd. (1974) CCH Company Law Cases \sp\40-133) the onus is on the company which relies on a cross-claim to show that it is genuinely based on substantial grounds.
I have earlier expressed the view that the meaning of sec. 201 is that a pending appeal or reference does not of itself affect the rights which the Commissioner would otherwise have to obtain payment of the assessed tax. The company's argument in the Roma Industries case was that the pending reference, of itself, did affect the Commissioner's rights by converting the debt into a doubtful debt. Bowen C.J. decided that it did not.
By contrast there is in this case a substantial amount of material from both sides on the issue of whether the cases on which the plaintiffs are to rely before a Board of Review are genuinely based on substantial grounds.
What his Honour did in the Roma Industries case was to give great weight to the policy stated in sec. 201, but to consider that along with other considerations in deciding how to exercise his discretion.
On one aspect I am not sure that I would reach the same conclusion as Bowen C.J. The decisions cited to me and those referred to in the article by Mr. Castan, suggest to me that the particular circumstances of cases involving sec. 201 lead courts sometimes to grant and sometimes to refuse a stay, rather than that the section generally leads a court to refuse a stay.
Neglect Within sec. 222(2)(a), Companies Act
In dealing with the first branch of the general principle I said that I did not accept the argument for the plaintiffs that within the meaning of sec. 222(2)(a) of the Companies Act there had been no neglect by any of the plaintiffs to pay the sum demanded by the Deputy Commissioner. I now set out the reasons for that conclusion.
It is established that non-compliance with a demand for payment does not amount to
ATC 4327
neglect within sec. 222(2)(a) of the Companies Act where the existence of the debt is genuinely disputed by the company on substantial grounds: Re K.L. Tractors Ltd. (1954) V.L.R. 505;Re Lympne Investments Ltd. (1972) 1 W.L.R. 523. Apart from the case of a set-off arising between accounts customarily mutually set off (Clem Jones Pty. Ltd. v. International Resources Planning and Development Pty. Ltd. (1970) Qd. R. 37) it has not finally been determined whether the existence of a set-off, counter-claim or cross-claim genuinely based on substantial grounds prevents non-compliance with a demand for payment from amounting to ``neglect'' within sec. 222(2)(a). Re K.L. Tractors Ltd. (above); Re Madison Avenue Carpets Pty. Ltd. (1974) CCH Company Law Cases \sp\40-125. Whatever may be the position regarding set-offs, counter-claims and other cross-claims it is my opinion that the operation and policy of sec. 201 and sec. 202 of the Assessment Act lead to the conclusion that the non-payment of the demands made upon the plaintiffs on behalf of the Deputy Commissioner, amounted to a neglect to comply within sec. 222(2)(a) of the Companies Act. In my view it is still a neglect to comply, even though the plaintiff in question had genuine and substantial grounds for the objections now referred to a Board of Review. This is so, whether the demand for payment was made before or after disallowance of the plaintiff company's objections.
Applicability of Second Branch of Principle
I now consider whether the second branch of the principle is capable of application in this case.
The debts relied on by the Deputy Commissioner are not in themselves disputed debts in the sense that there is a genuine dispute on substantial grounds as to their existence. The provisions of the Assessment Act put the existence of those debts beyond doubt or dispute. Accordingly the Deputy Commissioner is, beyond dispute, a creditor entitled to present a petition against any of the plaintiffs.
However, the authorities which have been considered, show that, in the exercise of discretion on a winding up petition, the courts have treated the case of a clearly existing debt which is subject to a genuine cross-claim based on substantial ground, in a way which is analogous to their treatment of a disputed debt. Although the debt itself is not doubtful, it is doubtful whether, when the claims between them are settled, the petitioner will be entitled to receive payment from the company of the amount of the debt. It would normally involve some incongruity to liquidate a company at the instance of a petitioner who may, when all outstanding claims are settled, be entitled to receive nothing from the company or be required to make it a payment. In the light of the broad and practical approach which the courts have taken in the great variety of situations in which a company has been treated as having a cross-claim against a petitioner, I consider that the plaintiffs should here be regarded as having cross-claims against the Deputy Commissioner. If the claims which they intend to assert before a Board of Review succeed, the practical result will be the diminution or extinction of the existing assessments of tax on which the proposed petitions are to be based. It is true that as a matter of strict law the debts are payable immediately to the Commissioner. But that is also the position of the plaintiff's debt in the common case where the plaintiff recovers judgment but execution is stayed pending the determination of a genuine counter-claim by the defendant based on substantial grounds. In the exercise of a discretion to delay the plaintiff's recovery in those cases the courts recognize the practical fact that the determination of a disputed cross-claim takes time. In a practical sense the claims of the plaintiffs in this case are analogous to claims treated as cross-claims in other cases such as Re L.H.F. Wools Ltd. (1970) Ch. 27. In this context the courts are more concerned with the practical result of the cross-claim than with its legal nature.
In deciding to present petitions against the plaintiffs the Deputy Commissioner has chosen a procedure which is capable of producing damage to a company through loss of commercial reputation following the presentation of a petition.
Further, it is my opinion that the Deputy Commissioner has, within the meaning of the authorities, a suitable alternative procedure to establish whether his debt is or is not subject to a cross-claim. This is the procedure of the references now pending before a Board of Review. It will of course involve some delay but so did the alternative available to
ATC 4328
determine disputed claims in other cases. E.g. Clem Jones Pty. Ltd. v. International Resources Planning and Development Pty. Ltd. (1970) Qd. R. 37. Indeed the practice of standing over petitions until the cross-claim has been determined, recognizes the delay usually involved in the alternative procedure.Mr. Adams was not prepared to concede that the only legitimate interest and objective of the Deputy Commissioner in this case is to obtain payment of the tax and contended that he may have other objectives. I consider that in this case the Deputy Commissioner's only legitimate interest and objective is to obtain payment of tax. Accordingly it is only necessary to consider a procedure which is a suitable alternative for the ultimate achievement of that objective.
A decision of a Board of Review which was favourable to the Deputy Commissioner would place him in a position to present a petition for the winding up of the company concerned. There would then be no basis for restraining the presentation of a petition: Mann v. Goldstein (1968) 1 W.L.R. 1091 at 1096.
I regard the relevant alternative procedure as being the proceedings before a Board of Review. I do not think that the Deputy Commissioner is to be criticised for not commencing actions. I regard as very remote the complaint that this deprived the plaintiffs of a contingent right to a stay of execution upon judgment. A judgment obtained by the Deputy Commissioner in an action against one of the companies, whether subject to a stay of execution or not, would in no way establish the validity of the claim by the company to have its debt to the Deputy Commissioner reduced or extinguished. This can now be established only in proceedings before a Board of Review.
I consider that before restraining the presentation of a petition against a plaintiff company I would need to be satisfied on the material before me, that it is unlikely that a winding up order would be made by any judge in the exercise of his discretion. This is the test applied by Wanstall J. in Clem Jones Pty. Ltd. v. International Resources Planning and Development Pty. Ltd. (1970) Qd. R. 37 at 44-5 in the light of the decision in Charles Forte Investments Ltd. v. Amanda (1964) 1 Ch. 240.
I do not accept the submission that before granting an injunction I would need to be satisfied that the Deputy Commissioner had no chance of success in obtaining a winding up order. The present case is to be determined upon the second branch of the general principle, where the presentation of a petition may be restrained despite the fact that there is a chance that a winding up order may be made. This chance may exist in at least two ways. First, the test that it is unlikely that a winding up order would be made by any judge in the exercise of his discretion, does not exclude all possibility of such an order being made. Second, if the test is stated in different words, the position is that an injunction may be granted where it is likely that if a petition were presented, any judge would either dismiss it or stand it over. The purpose of standing over a petition is to enable the disputed claim to be determined in other proceedings. If the other proceedings result in favour of the petitioning creditor, the court may then make a winding up order.
The test applied by Wanstall J. in the Clem Jones case corresponds with the approach which has been adopted in most of the cases where the second branch of the principle has been applied and presentation of a petition restrained. Although members of the Court of Appeal in the Charles Forte case, in considering the application of the second branch to that case, said that the proposed petition was bound to fail, they were, I think, accepting the contention advanced by the company in that case, but contested by the shareholder, that the proposed petition was bound to fail. They were not, in my opinion, laying down any new rule which departed from established principle.
Nature of Decision
Although this is an interlocutory application, the decision upon it, rather than any decision at a trial of the action, is likely in practice, and will, it seems, in law, determine the rights of the parties upon the issues raised in the writ. If an injunction is refused and the petitions are presented, a trial of the action becomes irrelevant to the issues now raised. If an injunction is granted, the determination by a Board of Review is likely to occur before any trial of the action. This situation is common in actions which are themselves in the nature of an interlocutory proceeding: Bryanston Finance Ltd. v. De Vries (No. 2) (1976) 2 W.L.R. 41 at 51-3 per Buckley L.J. In that case
ATC 4329
Stephenson L.J. (p.55) and Sir John Pennycuick (pp.55-6) expressed the opinion that the issue between the parties in an action of this kind is finally decided on the interlocutory application and that the order on the application is the end of the action. Because of these features of the case I have given the application more consideration than is usual on an application for an interlocutory injunction.Evidence
I now consider whether a case has been made out for restraining the presentation of petitions against the respective plaintiffs. From this stage it is necessary to consider the position of each of the plaintiffs separately.
I first look at the evidence before me to see whether it shows that the objections of the companies referred to a Board of Review are genuine objections based on substantial grounds.
The plaintiffs rely on two affidavits sworn on 29th June and 30th June, 1976, by Paul Grinwald who is secretary and principal accounting officer of each of the plaintiffs and on an affidavit of Emmanuel Margolin sworn on 13th July, 1976. The defendant relies on an affidavit of Michael Augustine Frewen sworn on 15th July, 1976. Objection was taken on behalf of the plaintiffs to Mr. Frewen's affidavit on the ground of relevance. In my opinion it is relevant to the issue of whether the plaintiffs have genuine and substantial grounds for claiming that proceedings before a Board of Review will result in their favour. The statements in the affidavit that the Deputy Commissioner does not accept various contentions made in the plaintiffs' affidavits indicate the area of dispute between the parties. Statements of facts on which the Deputy Commissioner relies as grounds for refusing to accept those contentions are statements which detract from the strength of the claim that all plaintiffs have genuine and substantial grounds upon which-they will rely in Board of Review proceedings. I admit Mr. Frewen's affidavit.
No application was made for the cross-examination of any deponent.
Genuineness and Substance of Objections
Before me, neither counsel submitted to any detailed examination the evidence on which the plaintiffs rely to establish the genuineness and substance of their objections or the evidence on which the defendant relies to show that the objections lack genuineness and substance.
Age Acceptance: The Deputy Commissioner demanded from Age Acceptance Corporation Pty. Ltd. (``Age Acceptance'') $7,312.90 consisting of $7,277.10 assessed tax and $35.80 additional tax. The assessment was an amended assessment. The amendment was the result of the inclusion in the taxable income of the company of $19,248.00 which was the profit received on the sale of a property in Stubbs Street, Kensington. The notice of objection claimed that this was a capital profit.
The issue before a Board of Review would be whether the profit fell within sec. 26(a) of the Assessment Act which provides:
- 26. The assessable income of a taxpayer shall include -
- (a) profit arising from the sale by the taxpayer of any property acquired by him for the purpose of profit making by sale, or from the carrying on or carrying out of any profit making undertaking or scheme;
In his affidavit Mr. Margolin swore that the land had not been acquired for any of the purposes mentioned in sec. 26(a). His evidence was to the effect that it was purchased in about February, 1967, for the purpose of a panel-beating and spray-painting shop and for the storage of repossessed vehicles; it was used by Emmanuel Car Sales Pty. Limited until about November, 1967, and then leased to Cold Storage Pty. Ltd., for part of the year 1967-1968, all of the year 1968-1969 and part of the year 1969-1970; and that it was sold in September, 1970, after Cold Storage Pty. Ltd. got into financial difficulty and was unable to pay its rent. Mr. Margolin's answers to questions in respect of this property, contained in a record of interview signed by him on 19th June, 1975, and exhibited to Mr. Frewen's affidavit, are consistent with the evidence in his affidavit.
Mr. Frewen in his affidavit gave evidence from information and belief that tended to show that Cold Storage Pty. Ltd. had never been in financial difficulties or unable to pay its rent under the lease and had always paid up its rent under the lease.
ATC 4330
There is evidence in Mr. Frewen's affidavit and in the extract from the transcript of the evidence of Mr. Margolin before a Board of Review on 28th March, 1968, exhibited to that affidavit, which does cast some doubt on the evidence which supports the claim that Age Acceptance has genuine objections based on substantial grounds. In these proceedings it is not for me to decide whether the objections will succeed. I have only to decide whether they are genuine objections based on substantial grounds. This is to be decided on the affidavit evidence before me. In deciding this I have borne in mind the difficulties of law, fact and inference which may be involved in determining the application of sec. 26(a) of the Assessment Act.
For the purpose of this application, I am satisfied that the objection of Age Acceptance is genuine and based on substantial grounds. If the objection succeeded before a Board of Review the assessment would, in effect, be extinguished.
Emmanuel Car Sales: The Deputy Commissioner demanded from Emmanuel Car Sales Pty. Limited (``Emmanuel Car Sales'') $15,876.50 consisting of $15,798.60 assessed tax and $77.90 additional tax. The assessment was an amended assessment which had been amended as a result of including in the taxable income of the company $41,911.00, the profit received on the sale of a property in Tahara Road, Toorak. The notice of objection claimed that this was a capital profit. This raised an issue of the application of sec. 26(a) of the Assessment Act.
In his affidavit Mr. Margolin swore that the land had not been acquired for any of the purposes mentioned in that section. His evidence was to the effect that the property was a block of flats purchased by the company in April, 1967, for the purpose of providing an income; it proved an unattractive investment and did not provide the income which had been anticipated and in consequence was sold in August, 1968. He swore that he believed that the assessment which is stated to be based on income of the year ended on 30th June, 1974, relates to the income year ended on 30th June, 1969. His answers in the record of interview which relate to that property are consistent with his affidavit.
I am satisfied for present purposes that the objection of Emmanuel Car Sales is genuine and based on substantial ground and that if the objection were upheld by a Board of Review the assessment would, in effect, be extinguished.
Emmanuel Wholesale: The Deputy Commissioner demanded from Emmanuel Car Sales (Wholesale) Pty. Limited (``Emmanuel Wholesale'') $25,621.85 consisting of $25,461.45 assessed tax and $160.40 additional tax. The objection is that the assessment should be reduced to nil by excluding from the assessable income the sum of $57,280.00, the profit on a sale of property in Parramatta Road, Petersham, New South Wales, which was a profit of a capital nature. There is nothing to suggest that the assessment is based on the inclusion in the assessable income of any amount other than that profit.
Mr. Margolin swore, in effect, that this property was purchased for two purposes. The first purpose was that of an investment to provide an income. The second purpose was that it should be available to him to use as a yard for the sale of cars should it ever have become necessary for him to return to dealing in motor cars as a business. He said that it was purchased in December, 1970, and that it was let as a car yard at a rental of $1,300 per month and was sold in December, 1972. He swore that the property was not purchased for any of the purposes mentioned in sec. 26(a). His answers regarding this property which appear in the record of interview are consistent with what he has sworn in his affidavit.
I am satisfied for present purposes that the objection of Emmanuel Wholesale is genuine and based on substantial ground and that if it were upheld by a Board of Review the assessment would, in effect, be extinguished.
Tragerbie: The Deputy Commissioner demanded from Tragerbie Pastoral Co., Pty. Limited (``Tragerbie'') $80,313.02 consisting of $79,810.12 assessed tax and $502.90 additional tax. The company objects in its notice of objection that the assessment should be reduced to nil by excluding from its assessable income, profit of $189,004.00 on the sale of a property at Tarneit which, it claims, was a capital profit, and by allowing as a deduction the amount of $17,500.00 paid as interest by the company.
ATC 4331
Mr. Margolin in his affidavit swears that the property at Tarneit was not purchased for any of the purposes mentioned in sec. 26(a). He says that it was purchased on 25th August, 1969, and gives details of the circumstances which led to its sale. However there is no sworn evidence as to what was the purpose for which the property was purchased.
The only sworn evidence before me as to the sum of $17,500.00 paid as interest by the company is a statement in Mr. Margolin's affidavit that ``the said interest was necessarily incurred in carrying on business for the purpose of gaining or producing assessable income and is therefore an allowable deduction to which the Company is entitled''.
I do not find these bald and formal statements on oath sufficient to satisfy me that either of the objections taken by Tragerbie is genuine and based on substantial grounds. If facts exist which would justify the statements in the affidavit I would expect some detailed statement of them to appear on oath as has been done with the three companies whose objections I have considered above. In
Re Great Britain Mutual Life Assurance Society (1880) 16 Ch. 246 an insurance society claimed that the petitioning creditor's debt was disputed as the society had repudiated liability under its policy. There was no evidence of the facts produced by the society on which it relied to justify its repudiation, except evidence of the belief of some of the officers of the society. Jessel M.R. said:
``... it is not sufficient for the Respondents upon a petition of this kind to say, `We dispute the claim.' They must bring forward a prima facie case which satisfies the Court that there is something to be tried...''
(p. 253.)
See also In re K.L. Tractors Ltd. (1954) V.L.R. 505;
Re Q.B.S. Pty. Ltd. (1967) Qd. R. 218 at 225.
The later cases show that judges, in deciding whether a claim is genuinely disputed on substantial grounds, have, in practice, applied a standard of the kind mentioned by Jessel M.R. I do not find the evidence relied on to prove that Tragerbie has genuine and substantial grounds for its objections to be persuasive.
There is in the first affidavit of Mr. Grinwald a statement that, in relation to each of the assessments which are relevant in this case, the amounts claimed by the Commissioner are subject to a bona fide dispute. I have found this statement of little assistance in considering whether I am satisfied that the respective plaintiffs have objections based on substantial grounds though it does carry some weight as to the genuineness of the objections.
I am not satisfied that the objections of Tragerbie are genuine objections based on substantial grounds.
Little River: The Deputy Commissioner demanded from Little River Pastoral Co., Pty. Limited (``Little River'') $21,047.14 consisting of $20,915.34 assessed tax under two notices of assessment and $131.80 additional tax. The notices of objection claim that each of the assessments should be reduced to nil by excluding from the assessable income of the company profit on the sale of a property at Little River which was a profit of a capital nature, and by allowing as a deduction the full amount of $1,500.00 claimed as interest.
There is no sworn evidence at all to support any part of the objections in the notice of objection by Little River.
I am not satisfied that the objections by Little River are genuine objections based on substantial grounds.
Lara Pastoral: The Deputy Commissioner demanded from Lara Pastoral Co., Pty. Ltd. (``Lara Pastoral'') $54,799.20 consisting of $54,278.70 assessed tax and $520.50 additional tax. That assessed tax consists of the sum of $40,252.65 in an amended notice of assessment for the year ended 30th June, 1971, and $14,026.05 in an assessment for the year ended 30th June, 1974. The only notice of objection before me relates to the assessment for the year ended 30th June, 1971, and claims that it should be reduced by the allowance as a deduction of $95,500.00 in respect of the following items incurred by the company in that income year:
1. Management fees paid to
Fortuna Holdings Pty. Limited ......................... $10,000.00
2. Interest paid to Fortuna
Holdings Pty. Limited ................................. $11,000.00
3. Loss on share trading ................................. $74,500.00
ATC 4332
The only sworn evidence in support of this objection is the statement in Mr. Margolin's affidavit to the effect that the management fees, which were a loss or outgoing, and the interest were both necessarily incurred by Lara Pastoral in carrying on its business for the purpose of gaining or producing assessable income. He also says that the company did trade in shares during the year of income and that the results of its trading produced the loss stated in the notice of objection and that it is entitled to have the loss taken into account in the calculation of its assessable income in that year.
I do not find these bald statements without details of the facts on which they are based, to be convincing.
There is no evidence before me as to the objection to the assessment of $14,026.05 for the year ended 30th June, 1974, or as to any grounds on which that assessment could be challenged.
I am not satisfied that any objections of Lara Pastoral are genuine objections based on substantial grounds.
Tragaville: The Deputy Commissioner demanded from Tragaville Pastoral Co., Pty. Limited (``Tragaville'') $31,657.45 consisting of $29,656.95 assessed tax and $2,000.50 additional tax.
The material relating to this company does not deal with the whole of the debt demanded by the Deputy Commissioner. The demand served on behalf of the Deputy Commissioner requires payment of $31,657.35 made up as follows:
Assessment for year ended 30th June, 1971, notice of which
issued on 1st October, 1974 .............................. $19,965.45
Amended assessment for year ended 30th June, 1971, notice
of which issued on 12th February, 1976 ................... 17,625.60
Assessment for year ended 30th June, 1974, notice of which
issued on 12th February, 1976 ............................ 2,324.25
----------
$39,915.30
Deduct credit by miscellaneous cash payment made on 19th
March, 1975 .......... 10,258.35
----------
$29,656.95
----------
Additional Tax .......... 2,000.50
----------
$31,657.45
----------
The assessments, objections and affidavit material before me do not refer to or cover in any way the assessment relating to the year ended 30th June, 1971, of which notice issued on 1st October, 1974, for $19,965.45.
There is a notice of objection dated 2nd March, 1976, which objects to the amended assessment relating to the year ended 30th June, 1971, of which notice issued on 12th February, 1976, for $17,625.60. This notice of objection claims that the assessment should be reduced by the allowance of the whole or part of $31,472.00, the loss incurred on share trading during the income year and by the allowance of the whole or part of management fees of $10,000.00 paid to Fortuna Holdings Pty. Limited. In his affidavit Mr. Margolin says of the objections in this notice of objection, that the company traded in shares during the year of income and this produced the loss stated in the notice of objection and that the management fees were necessarily incurred by the company in carrying on its business for the purpose of gaining or producing assessable income. These bald statements do not satisfy me that there are genuine and substantial grounds to support the objections to which the statements relate.
There is no affidavit material to support the objection to the assessment for $2,324.25 for
ATC 4333
the year ended 30th June, 1974, which issued on 12th February, 1976.The result is that I am not satisfied that Tragaville has genuine objections based on substantial grounds to any part of the amount which the Deputy Commissioner has demanded from it.
Fortuna: The Deputy Commissioner demanded from Fortuna Holdings Pty. Limited (``Fortuna'') $43,856.33 consisting of $43,581.73 assessed tax and $274.60 additional tax.
The notice of assessment, the notice of objection and the other evidence relating to this company do not make clear to me the way in which the facts placed before me to show that the objection is based on substantial grounds would affect the assessment if they were accepted by a Board of Review. At least part of my difficulty arises from the fact that the notice of objection refers in several places to adjustment sheets which are not before me
The result is that I am not satisfied that Fortuna would not have a substantial amount still due and payable to the Commissioner even if all its objections were upheld.
If the outcome of the review by a Board of Review were that, while the Deputy Commissioner's debt was in effect reduced, it still remained substantial the likelihood would be that a court would make a winding up order. Compare: Re Convere Pty. Ltd. (1976) V.R. 345 at 349-50; Mann v. Goldstein (1968) 1 W.L.R. 1091 at 1096.
Winding Up Order
The position is that, for present purposes, I am satisfied from the material before me that Age Acceptance, Emmanuel Car Sales and Emmanuel Wholesale have genuine objections based on substantial grounds which they desire to assert before a Board of Review. I am not satisfied that Tragerbie, Lara Pastoral, Tragaville, or Little River have genuine objections based on substantial grounds. I am not satisfied that if Fortuna's objections were upheld, this would not leave it with a substantial tax liability to the Deputy Commissioner. On the material before me each of the three companies with genuine and substantial grounds of objection, has a prospect of persuading a judge hearing a winding up petition presented by the Deputy Commissioner, that the petition should be dismissed or that the hearing should be adjourned until after the relevant Board of Review decision. In this case the latter result would be more likely than the former. Before taking the latter course the judge, giving the proper weight to the policy of sec. 201 of the Assessment Act would consider the effect of adjournment upon the Commissioner's eventual recovery of amounts due to him. This would involve some assessment of the financial position of the company, which would in turn lead to an examination of the reliability for this purpose of the company's accounts and the extent to which its assets are assets of substance. The delay likely to be involved in waiting for a decision from a Board of Review would be taken into account, and there would be other considerations as well.
Because I consider that the case for the plaintiffs has not been sustained on the issue which I next mention, I do not pursue to conclusion, the question whether the material before me satisfies me that no judge would be likely to order the winding up of the three companies without adjourning the hearing to await decision upon the references by a Board of Review.
Damage
The basis of the exercise of the power to restrain the presentation or advertisement of a petition is the irreparable damage to the company which might be done to it by the mere presentation or advertisement of the petition. If there is a real risk of damage being done by the mere presentation or advertisement of the petition and the court presented with the petition would not, or would not until after clarification of a disputed claim, make a winding up order, the risk of damage may be avoided by restraining the presentation or advertisement of the petition. Usually the damage to be avoided is the damage to the company through the diminution or loss of its commercial creditworthiness resulting from public knowledge of the commencement of winding up proceedings. If there is no real risk that public knowledge of the presentation of a winding up petition would cause damage to a company the basis for restraining presentation of a petition is absent. There would usually be no real risk of damage to a company which has no commercial creditworthiness or to a company of a type, or with commercial
ATC 4334
activities of a type, unlikely to be affected by loss of public confidence in the company. The principle is usually stated as applying in cases where the presentation of a petition might produce irreparable damage to the company. In the passage in his judgment in Charles Forte Investments Ltd. v. Amanda (1964) 1 Ch. 240 at 257-8 Willmer L.J. seems to have contemplated that something less than irreparable damage would suffice. In other cases the principle has been stated and applied without insistence that the damage be irreparable. If it is not essential that the damage be irreparable I consider that it would, at least, need to be damage which is significant and substantial.It is primarily for the purpose of assessing the reality of the risk of damage through the mere presentation of a petition, that courts take into account the solvency of the company in considering whether to restrain presentation of a petition.
It was on this basis that Lucas J. in
Community Development Pty. Ltd. v. Engwinda Construction Company (1963) Qd. R. 541 refused to restrain the advertisement of a petition against an insolvent company. He said:
``What irreparable injury can then be done to an insolvent company by the advertisement of a petition for a winding up order? It must be borne in mind that I am not investigating these matters for the purpose of deciding whether or not a winding up order should be made; I am investigating them for the purpose of ascertaining whether or not a person who asserts that he is a creditor or contingent or prospective creditor, should be allowed to prosecute his right to have the company wound up if it is insolvent.''
I consider that even if Fortuna had shown that it has genuine substantial objections which, if upheld, would eliminate its tax liability, it could not fairly be said that mere presentation of a petition against it and public knowledge of the fact, might cause it damage. The balance sheet of Fortuna shows it to have had net assets of $730,009 at 30th June, 1975. Included amongst its assets are $2,000,006 for shares in subsidiary companies not listed on a stock exchange and $231 for goodwill at the cost of preliminary expenses. A part from those two items the balance sheet would show liabilities exceeding assets by $1,270,228. Mr. Grinwald who is the secretary and principal accounting officer of each of the plaintiffs, expressly excludes Fortuna from the other plaintiff companies which he swears are able to pay their debts in the ordinary course of business. He says that the unlisted subsidiary companies whose shares are shown in the balance sheet at $2,000,006 are incorporated overseas and have suffered substantial losses since 30th June, 1975. He is unable to say what amount they would realise. Upon that material I cannot be satisfied that Fortuna is solvent even if the amount due to the Deputy Commissioner is left out of account. Fortuna owes $2,338 on bank overdraft and $93,797 on bank loans. Mr. Grinwald says that the loan by the bank is secured by a guarantee by another Margolin company supported by a mortgage of land held by that company. Fortuna owes $24,810 to related companies and $1,894.526 to other lenders.
The plaintiffs carry the onus of establishing by evidence, facts which are sufficient to persuade me to grant the relief which is sought: Tranquility Holdings Pty. Ltd. v. Glass Pools Pty. Ltd. (1974) CCH Company Law Cases \sp\40-133. Proceeding on the basis that Forutna has a large excess of liabilities over assets and owes substantial debts to a bank and to lenders outside the Margolin group, I am not satisfied that there is any real risk that mere presentation of a petition against it would cause it damage.
I have not been satisfied that there are genuine and substantial grounds to support the objections of Tragerbie, Lara Pastoral, Tragaville or Little River. It follows that a case has not been made out for restraining the presentation of a petition against them. For the reasons which I have set out I am not satisfied that a case has been made for restraining the presentation of a petition against Fortuna.
What is the effect on the three plaintiff companies with objections based on genuine substantial grounds, of the fact that a case has not been made out for restraining the presentation of petitions against the other five?
There is not much evidence before me about the activities of the three companies. The balance sheet of Age Acceptance shows it to have current assets of $38,112 consisting of advances to related companies and to have current liabilities of $19,661 consisting of loans
ATC 4335
from shareholders ($1,796) and related companies ($17,865), leaving net current assets of $18,451. The tax due to the Commissioner is $7,312.90.The balance sheet of Emmanuel Car Sales shows it to have current assets of $321,193 consisting of cash at bank ($220) and advances to related companies ($320,973) and to have current liabilities of $245,691 consisting of loans from related companies ($187,464), shareholders ($35,589) and others ($22,638), leaving net current assets of $75,502. The tax due to the Commissioner is $15,876.50.
The balance sheet of Emmanuel Wholesale shows it to have current assets of $121,805 consisting of advances to related companies and to have current liabilities of $64,676 consisting of an amount due to a bank ($5) and loans from shareholders ($5,445) and related companies ($59,226), leaving net current assets of $57,129. The tax due to the Commissioner is $25,621.85.
Each of the balance sheets shows the position as at 30th June, 1975, but Mr. Grinwald in his affidavit of 29th June, 1976, swore that to the best of his knowledge and belief no material changes have taken place in the assets or liabilities of any of the plaintiff companies since 30th June, 1975, and that the balance sheets as at that date (subject to two qualifications immaterial to the present question) accurately reflect the position of the companies as at the date of his affidavit.
In that affidavit Mr. Grinwald said that the assets and liabilities of each of Age Acceptance, Emmanuel Car Sales and Emmanuel Wholesale consist substantially of loans by and to the company payable on demand. However, somewhat surprisingly, in view of that statement by the secretary and chief accounting officer of each plaintiff, Mr. Margolin in his affidavit of 13th July, 1976, after stating that he is a director of each of the plaintiffs and well acquainted with its affairs, referred to what Mr. Grinwald had said about the nature of the assets and liabilities of the companies and swore that insofar as they are loans to and by other companies in the Margolin group they are not loans repayable on demand but are loans repayable on a date 10 years from approximately 7th February, 1975, and bearing interest at 7 per cent per annum from that time.
There is no evidence before me that any of the three companies is engaged in any business activity apart from advancing and borrowing money on a long term basis. In the paragraph of his first affidavit which is quoted below, Mr. Grinwald appears to draw a distinction between the plaintiffs and trading members of the group.
I infer from the evidence that each of the three companies has not for the last year been engaged in any substantial business or commercial transactions.
It does not seem to me that there is any evidence before me to indicate or to give rise to an inference that presentation of a petition against any one of the three companies might cause damage to that company.
The plaintiffs' case was primarily based on damage arising in another way. It was founded on the following evidence in the last paragraph of Mr. Grinwald's affidavit of 29th June, 1976:
``If the petitions to wind up the companies are presented, I believe that irreparable harm will be done to the plaintiffs. All of the plaintiffs are members of a group of companies controlled by the family of one Emmanuel Margolin. The loans in which the major part of the assets of the plaintiffs are invested are with other trading members of the group, in particular Warbler Pty. Limited and Gadabout Pty. Limited both of which are primary producers and Rostowrack Pty. Limited, a property company. The public knowledge that petitions have been presented to wind up eight of the Margolin Family Companies will result in a collapse of the credit available to the borrowing companies and I believe that the realizable value of the assets of the plaintiffs may thereby be reduced.''
It was argued for the Deputy Commissioner that I could not take into account any damage which occurred in the manner outlined in that paragraph of Mr. Grinwald's affidavit. The consequences on associated persons and companies other than the company against which the petition is to be presented have been considered in other cases, e.g. Charles Forte Investments Ltd. v. Amanda (1964) 1 Ch. 240 at 252, 261. I am inclined to the view that, if all plaintiffs had shown genuine substantial grounds for their objections, they would be entitled to rely on damage which might be
ATC 4336
caused to them in the manner outlined in Mr. Grinwald's affidavit but I do not need to decide that point. I will assume that they could rely on damage caused in this manner.I need to consider the question of damage on the background of my decision that five of the plaintiffs are not entitled to protection by injunction from the presentation of a petition. The evidence satisfies me that the Deputy Commissioner has an intention to present petitions against all plaintiffs unless restrained. I infer that if he is restrained from presenting a petition against three of the plaintiffs he will still present petitions against the remaining five. I do not consider that any damage to Age Acceptance, Emmanuel Car Sales or Emmanuel Wholesale of the type outlined in Mr. Grinwald's affidavit, resulting from the mere presentation of petitions, would be significantly different whether petitions were presented against only the other five of the plaintiffs or against all eight. The jurisdiction which I am asked to exercise is one to be exercised on practical and substantial considerations. In the circumstances I am not satisfied that, in the likely context of a presentation of petitions against all eight plaintiffs there would exist a real risk that the presentation of petitions against the three with genuine substantial grounds of objection would of itself cause irreparable damage to any of those three. I think that in that situation the presentation of petitions against the three is unlikely to cause any significant damage to any of those three, beyond any damage which might be caused by the presentation of petitions against the other five plaintiffs.
Bearing in mind that the jurisdiction which I am asked to exercise, is to be exercised with care and only in a clear case, I am not satisfied that the necessary element of a real risk of damage to the three plaintiffs with genuine substantial grounds of objection has been established.
Conclusion
Mr. Merkel ultimately submitted that the principles which I should apply in determining the application for the interlocutory injunction are those of
Beecham Group Limited v. Bristol Laboratories Pty. Limited (1968) 118 C.L.R. 618 rather than any different principles which may flow from
American Cyanamid Co. v. Ethicon Ltd. (1975) A.C. 396. I consider this to be the correct approach:
Firth Industries Ltd. v. Polyglas Engineering Pty. Ltd. (1975) 49 A.L.J.R. 263. However, in an application for an interlocutory injunction in a case of this type, there seems, since the decision in Bryanston Finance Ltd. v. De Vries (No. 2) (1976) 2 W.L.R. 41, to be little if any difference between the approach in Australia and the approach in England.
I have approached the question by first inquiring whether the plaintiffs have made out a prima facie case, in the sense that if the evidence remains as it is, there is a fair probability that they would succeed if this action came for trial. I have decided that the plaintiffs have not made out this prima facie case.
If the position is as indicated by Stephenson L.J. and Sir John Pennycuick in the Bryanston Finance case, and the decision on this application disposes of the issues in the action, the case to be made out by a plaintiff before becoming entitled to a consideration of the balance of convenience would not be less than the prima facie case of the standard to which I have had regard.
In view of my decision that the plaintiffs have not made out a prima facie case, there is no occasion in this case to enter upon considerations of the balance of convenience or of terms or conditions which may be appropriate to the grant of an injunction.
The application for an interlocutory injunction is dismissed.
This information is provided by CCH Australia Limited Link opens in new window. View the disclaimer and notice of copyright.