Commissioner of Taxation v Moodie

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

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• The impact of this case on ATO policy is discussed in Decision Impact Statement: Commissioner of Taxation v Moodie (Published 7 August 2014).

(Judgment by: McColl J)

Commissioner of Taxation
v Moodie

Court:

Judges:
McColl JMeagher J
Barrett J

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

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

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

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Judgment by:
McColl J

[1] Mr Robert Moodie, the first respondent, as liquidator of Rivercorp Pty Ltd (Receivers and Managers appointed) (in liq) and the second respondent, Rivercorp Pty Ltd (Receivers and Managers appointed) (in liq) ("Rivercorp") (both, where context permits, hereafter referred to as the "liquidator"), brought proceedings against the applicant, the Commissioner of Taxation, seeking to recover payments alleged to be unfair preferences, being payments by Rivercorp of amounts, inter alia, in respect of its liability under a provision of Subdiv 16-B in Sch 1 to the Taxation Administration Act 1953 (Cth). The liquidator sought an order pursuant to s 588FF of the Corporations Act 2001 (Cth) (the "Act") that the Commissioner pay Rivercorp $1,139, 039 plus interest and costs.

[2] The Commissioner by interlocutory process pursuant to s 588FGA(4) sought an indemnity under s 588FGA(2) from Mr Anthony Rowe, a director of Rivercorp. Mr Rowe sought to defend the Commissioner's proceedings on grounds which, the Commissioner contended, put the issue of Rivercorp's insolvency at the time of the payments in issue.

[3] The Commissioner defended the liquidator's proceedings on bases no longer relevant. Relevantly, in December 2011 he withdrew his defence to the liquidator's claim. In March 2012 Mr Rowe withdrew his defence to the Commissioner's claim. In April 2012 Brereton J entered judgment in the liquidator's favour against the Commissioner and in the Commissioner's favour against Mr Rowe.

[4] On 7 May 2012, in an ex tempore judgment, Brereton J ordered the Commissioner to pay the liquidator and Rivercorp's costs on the ordinary basis until and including 20 September 2011 and thereafter on an indemnity basis: Re Rivercorp Pty Ltd [2012] NSWSC 576.

[5] This is the concurrent hearing of the Commissioner's application for leave to appeal and, if leave be granted, the hearing of the Commissioner's appeal against the primary judge's costs decision. Leave to appeal is required because the Commissioner seeks to challenge an order as to costs: s 101(2)(c), Supreme Court Act 1970 (NSW).

[6] The Commissioner identifies the matter at issue as the proper exercise of the court's discretion as to costs where the Commissioner concedes a liquidator's claim, but the principal proceedings remain "alive" while a third party contests the claim. The Commissioner submits that, as a general proposition, he should not be liable to pay the liquidator's costs after he withdraws his defence because, from that point, he takes no active part in the proceedings. Rather, the real and only dispute is between the liquidator and the third party.

[7] I would grant leave to appeal as the proposition the Commissioner seeks to advance has general significance in cases in which the Commissioner, as defendant in s 588FF proceedings, pursues a s 588FGA indemnity. However, for the reasons which follow, I would dismiss the appeal.

Statement of the case

[8] On 20 September 2011, the liquidator made an offer of compromise to the Commissioner in accordance with Uniform Civil Procedure Rules 2005 (NSW) ("UCPR") 20.26 for a sum of $1,139,039 exclusive of costs. The Commissioner did not accept the offer.

[9] On 7 October 2011, the Commissioner filed Points of Defence to the liquidator's claim which did not admit the allegation Rivercorp was insolvent at the time each alleged payment to the Commissioner was made. On 15 December 2011 the Commissioner wrote an open letter to the liquidator's solicitor, confirming a without prejudice communication of the previous day, that his defence to the proceedings was withdrawn. On 30 March 2012, Mr Rowe withdrew his defence to the Commissioner's claim.

[10] On 2 April 2012, Brereton J gave judgment by consent in favour of the liquidator and Rivercorp against the Commissioner for $1,298,356. He gave judgment for the Commissioner against Mr Rowe pursuant to s 588FGA(2) in the amount of $842,587.69. He adjourned the proceedings to 7 May 2012 to argue the liquidator's claim to recover costs, including on an indemnity basis from the Commissioner. Neither the liquidator or the Commissioner sought to recover costs from Mr Rowe. He did not appear on 7 May nor was he joined as a party to the appeal.

[11] In support of his claim for costs against the Commissioner, the liquidator relied on a chain of correspondence that passed between the parties on a "without prejudice save as to costs" basis. That correspondence relevantly reveals the following course of events.

[12] In his letter of 20 September 2011 to the Commissioner serving the offer of compromise, the liquidator's solicitor pointed out that at a meeting on 26 July 2011 the liquidator had offered to settle the proceedings for the sum of $1,139,039 and waive its claim to costs and interest in the hope of obviating incurring the costs of preparing an expert report as to insolvency. In light of the fact that the Commissioner did not concede the issue of insolvency, the liquidator engaged experts to prepare a report in relation to that issue. Having regard to the Commissioner's intransigence on the insolvency issue, the liquidator, according to the letter, was no longer prepared to waive his entitlement to costs. The letter also pointed out that the author assumed that by 20 September the Commissioner had satisfied itself that Mr Rowe "has no substantial assets and there would no longer be a commercial reason for the ATO to not satisfy our client's claim without the need for incurring further unnecessary costs".

[13] On 14 December 2011 the Commissioner wrote to the liquidator's solicitor asserting that the insolvency report was "not without blemish and can be challenged" but, nevertheless, in the light of potential litigation risks and associated legal costs if the matter was to go to trial, conveyed the Commissioner's instructions to withdraw the 7 October 2011 defence. The letter pointed out that notwithstanding the Commissioner's concession, while his interlocutory process remained on foot it was still open to Mr Rowe to pursue the issue, presumably of insolvency, pursuant to his points of defence. Nevertheless the Commissioner offered to compromise the matter on the basis that he pay the liquidator $1,139,039 (inclusive of interest), dismiss the interlocutory process and that each party bear its own costs. The letter also advised that in the event the offer was not accepted, the Commissioner was instructed to proceed on the interlocutory process and put the liquidator's solicitors on notice, referring to Noxequin Pty Ltd v DCT [2007] NSWSC 87 (Noxequin) that any further costs incurred by the liquidator from 14 December would be borne by Mr Rowe should the liquidator succeed at the hearing.

[14] On 16 December 2011 the liquidator's solicitors responded to the Commissioner's 14 December letter rejecting the settlement proposal. The letter pointed out that at a without prejudice meeting in July 2011 those present had discussed the fact that Mr Rowe "was a man without any significant assets" and that if he lodged all outstanding tax returns and satisfied the ATO as to that matter, the latter would not proceed against him as there would be little commercial merit in doing so. The letter advised that the author understood from discussions with Mr Rowe's lawyers that he had provided the information foreshadowed and was prepared to resolve the proceedings on the basis that the ATO dismiss the interlocutory process with no order as to costs. The author assumed that the ATO was satisfied that Mr Rowe did not have significant assets, as otherwise it would not be prepared to consent to the dismissal of the interlocutory process.

[15] The Commissioner responded on 21 December disputing that he was satisfied that Mr Rowe did not have significant assets, but acknowledging that Mr Rowe had asserted that fact, and confirmed that Mr Rowe had all his taxation affairs up to date as discussed at the July 2011 meeting. The letter did not concede and expressly stated it should not be construed to infer, that the Commissioner would not recover monies from Mr Rowe if a judgment was obtained against him in respect of the indemnity claim.

[16] On 21 December 2011 the Commissioner wrote an open letter to Mr Rowe's solicitors confirming that he had withdrawn his points of defence to the liquidator's claim and, accordingly, was in a position to consent to an order under s 588FF(1) of the Act in favour of the liquidator, but observing that while Mr Rowe's points of defence remained on foot, and insofar as the defence related to the liquidator's claim, the Commissioner was unable to consent to any such orders. Referring to Noxequin, the letter put Mr Rowe's solicitors on notice that Mr Rowe would bear any further costs incurred by the liquidator in proving his claim from 15 December 2011 to the date of judgment. The letter also referred to Mr Rowe's statutory declaration of 8 December 2011 and advised that the Commissioner was instructed to continue to seek indemnity from Mr Rowe pursuant to s 588FGA of the Act.

[17] On 30 January 2012 the court made directions about the filing of evidence which contemplated that each of Mr Rowe, the Commissioner and the liquidator would file evidence.

[18] The liquidator's solicitors wrote to the Commissioner on 29 February 2012 stating the firm had a copy of Mr Rowe's statutory declaration of 8 December 2011, conveying the understanding that that information was provided to the Commissioner's office on that date and asserting that based on the information contained in it, it was clear Mr Rowe had insufficient assets and no capacity to satisfy any potential judgment against him which the Commissioner might obtain pursuant to the s 588FGA indemnity. The letter also asserted that it was clear from Mr Rowe's discovery that he had no documents to support the proposition that Rivercorp was solvent. The letter invited the Commissioner to reconsider his position. It proposed a further settlement for the principal sum set out in the 20 September 2011 offer of compromise, interest to run on that sum from 20 August 2010, the Commissioner to pay the liquidator's costs on a party-party basis to be agreed or assessed and that there be judgment for the Commissioner against Mr Rowe for an amount of $765,602.69 plus interest and costs but that the Commissioner agree not to enforce that judgment unless satisfied Mr Rowe's statutory declaration was incorrect.

[19] As I have said, Mr Rowe withdrew his defence to the indemnity claim on 30 March 2012 and judgment was entered on 2 April 2012. According to a letter the Commissioner wrote to the liquidator's solicitors on 19 April 2012, the judgement against Mr Rowe included interest. The letter also foreshadowed an application for costs against Mr Rowe but, according to the papers before this court, that did not eventuate.

Statutory Framework

[20] Pursuant to s 588FE(2A)(a)(ii) of the Act, a transaction is voidable if it is an unfair preference (a concept defined in s 588FA) given by the company to a creditor of the company. On the application of a company's liquidator, a court has the power under s 588FF to make an order directing a person to pay to the company an amount that has been paid under a voidable transaction.

[21] At the material time, s 588FGA relevantly provided:

588FGA Directors to indemnify Commissioner of Taxation if certain payments set aside

(1)

This section applies if the Court makes an order under section 588FF against the Commissioner of Taxation because of the payment of an amount in respect of a liability ... under a provision of Subdivision 16-B in Schedule 1 to the Taxation Administration Act 1953.

(2)

Each person who was a director of the company when the payment was made is liable to indemnify the Commissioner in respect of any loss or damage resulting from the order.

(3)

An amount payable to the Commissioner under subsection (2):

(a)

is a debt due to the Commonwealth and payable to the Commissioner; and

(b)

may be recovered in a court of competent jurisdiction by the Commissioner, or a Deputy Commissioner of Taxation, suing in his or her official name.

(4)

The Court may, in the proceedings in which it made the order against the Commissioner, order a person to pay to the Commissioner an amount payable by the person under subsection (2).

(5)

A person who pays an amount under subsection (2) has the same rights:

(a)

whether by way of indemnity, subrogation, contribution or otherwise; and

(b)

against the company or anyone else;

 

as if the payment had been made under a guarantee:

(c)

of the liability referred to in subsection (1); and

(d)

under which the person and every other person who was a director of the company as mentioned in subsection (2) were jointly and severally liable as guarantors.

[22] Section 588FGA was amended after 7 May 2012 but not in a manner relevant, or in any event applicable, to the proceedings.

[23] It is common ground that the judgment the primary judge entered against the Commissioner on 2 April 2012 was in respect of a liability under "a provision of [s]ubdivision 16-B in Schedule 1 to the Taxation Administration Act 1953" as required by s 588FGA(1).

[24] A director from whom the Commissioner seeks s 588FGA recovery can defend the proceedings on the bases appearing in s 588FGB. In his points of defence in response to the Commissioner's points of claim pursuing s 588FGA(4) recovery, Mr Rowe sought to invoke the defences available pursuant to s 588FGB(3) and 588FGB(4). The points of defence also alleged that the Commissioner had failed to mitigate his loss because he had not put in issue in response to the liquidator's claim receipt of the payment in good faith and that he had "reasonable grounds to believe that the Company was solvent". It is unnecessary to set out the details of these defences as nothing at issue on appeal turns on either aspect of Mr Rowe's defence.

[25] At a directions hearing before White J on 18 July 2011, his Honour sought to ascertain from counsel for Mr Rowe whether his points of defence put insolvency in issue. Although counsel's response was not entirely clear, he did say Mr Rowe "would have an argument about solvency" which appears to have been understood to mean Mr Rowe put insolvency in issue. The appeal proceeded on that premise.

Primary judgment

[26] It was common ground that the plaintiffs had been substantially successful in the proceedings: primary judgment (at [2]). They were prima facie entitled pursuant to UCPR 42.14 to a special costs order from the day after the offer of compromise was made as "the plaintiffs bettered [the offer of compromise] in the settlement that was ultimately encapsulated in the consent judgment, even allowing for the interest that accrued after the date of offer": primary judgment (at [3]). (His Honour's references to UCPR 42.15 should have been to UCPR 42.14 and I shall refer to that rule hereafter.)

[27] Brereton J identified (at [2]) two issues for determination:

(1)

Should the Commissioner's liability for the plaintiffs' costs extend beyond 14 December 2011, on which date the Commissioner indicated that his defence to the plaintiffs' claim would be withdrawn?

(2)

Should the plaintiffs' costs be payable on an indemnity basis after 21 September 2011, on which date the offer of compromise was made?

[28] His Honour noted (at [4]) that it "was not suggested that the offer did not amount to a genuine compromise or that the objective reasonableness of defending the claim if established amounted to an exceptional circumstance within" UCPR 42.14.

[29] His Honour first rejected (at [6]) the Commissioner's argument relying on Re Minister for Immigration and Ethnic Affairs; Ex parte Lai Qin [1997] HCA 6 ; (1997) 186 CLR 622 (McHugh J) (Lai Qin) that, in circumstances where proceedings are settled without a determination on the merits, the usual position that there will be no order as to costs, leaving each party to bear their own costs, should apply. His Honour concluded that, on the facts, the case fell within an exception identified in Lai Qin, because the Commissioner had "effectively capitulated, or ... it was plain without further investigation that one party had achieved substantial success". Secondly, his Honour rejected (at [7]) the Commissioner's argument that UCPR 42.14 was intended to apply to circumstances of determination after a contested hearing rather than to a settlement on the basis that "such a construction of the rule would run entirely counter to its purpose of promoting early settlement". Thirdly, his Honour rejected (at [8]-[9]) arguments the Commissioner sought to advance on the basis of his policies and practice concerning settling a voidable transaction claim.

[30] Accordingly, Brereton J held (at [10]) that the plaintiffs were, prima facie, entitled to a special costs order under UCPR r 42.14(2).

[31] The Commissioner submitted that as the costs incurred after 14 December were attributable to the necessity to prove the case against Mr Rowe, Mr Rowe and not the Commissioner should be responsible for the plaintiffs' costs after that date. He relied in this respect, on a statement by Barrett J (as his Honour then was) in Noxequin which the primary judge extracted (at [13]):

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

[32] The primary judge accepted (at [11]) that the time which intervened between the Commissioner withdrawing his defence on 14 December 2011 and entry of judgment on 2 April 2012 was attributable to what his Honour described as the "cross-claim" the Commissioner brought for indemnity pursuant to s 588FGA against Mr Rowe which the latter had defended on the basis that he disputed insolvency.

[33] Referring to Barrett J's statement in Noxequin (at [40]), the primary judge said (at [14]):

It is difficult to suppose that in that passage, exercising a costs discretion in the particular circumstances of the case, his Honour was seeking to lay down a rule of law. Any such rule would have the unusual consequence of making the primary recourse of the plaintiff for costs a party with whom the plaintiff was not in suit, namely the cross-defendant, while exonerating the party who was in suit with both the cross-defendant and the plaintiff and who had chosen to involve the cross-defendant in the proceedings and who was responsible for the prosecution of the case against the cross-defendant.

[34] The primary judge addressed (at [15]) the issue of insolvency in the following terms:

It was argued that the Commissioner's position was hamstrung because he was not in charge, so to speak, of proving the case on insolvency. But if recognising that he cannot or is unlikely to succeed in resisting the plaintiffs' claim the Commissioner needs to prove insolvency against the cross-defendant, then the position is quite clear and orthodox: the Commissioner must find and adduce such evidence as is necessary which may include evidence already served by the plaintiff or could be obtained on subpoena to prove that case against the cross-defendant. It seems to me that the need to prove the case against the cross-defendant is not a sufficient reason to keep the plaintiffs' proceedings on foot and require the plaintiff to incur further costs which may well be irrecoverable for impecuniosity on the part of the cross-defendant.

[35] His Honour concluded (at [16]):

In my view, there is no rule that in cases such as the present the Commissioner should be liable for a plaintiffs' costs only until he indicates that he will not maintain the defence any further, and, thereafter, that the cross-defendant should be liable for those costs. On ordinary principles, the unsuccessful defendant Commissioner should be responsible for the successful plaintiffs' costs, including those incidental to the Commissioner's cross-claim for indemnity.

[36] His Honour (at [17]) awarded the plaintiffs their costs against the Commissioner on the ordinary basis until and including 20 September 2011 and thereafter on an indemnity basis. The award of indemnity costs from 21 September 2011 until 14 December 2011 is not challenged on appeal.

[37] Thus, the primary judge effectively determined that the Commissioner should bear the liquidator's costs pursuant to UCPR 42.1 and that there were no circumstances which would warrant him departing from the ordinary rule in UCPR 42.14(2) to order that those costs be paid on an indemnity basis from 20 September 2011.

Issues on appeal

[38] The Commissioner relies on the following grounds of appeal:

1.

His Honour, Brereton J, erred in not taking into account in the exercise of the discretion to award costs:

(a)

the fact that the Commissioner had brought the s 588FGA(4) claim in the proceedings;

(b)

the rights to be afforded to Mr Rowe as a statutory third party, to defend the Respondents' claim against the Commissioner, even where the Commissioner had conceded the Respondents' claim on 15 December 2011; and

(c)

the fact that the Court did not enter judgment against the Commissioner (whether by consent or otherwise) without affording Mr Rowe a hearing on the merits in relation to the s 588FGA(4) claim, until such time as Mr Rowe subsequently conceded the issue of insolvency on 30 March 2012.

2.

His Honour misconstrued section 588FGA of the Corporations Act 2001 as including a requirement that the Commissioner needed to prove insolvency as against Mr Rowe, the respondent to the Commissioner's s 588FGA(4) claim.

3.

His Honour erred in not following the approach of Barrett J in Noxequin Pty Ltd v DCT [2007] NSWSC 87, in respect of the date on which the Commissioner's liability for costs should cease where the Commissioner conceded the Respondents' claim, but Mr Rowe continued to defend the Respondents' claim against the Commissioner on the issue of insolvency.

4.

His Honour should have exercised his discretion when awarding costs against the Appellant, to order that the Appellant pay the Respondents costs of the proceedings on the ordinary basis up to 20 September 2011, and on an indemnity basis for the period between 21 September and 15 December 2011.

Appellant's submissions

[39] Ms J S Gleeson of Senior Counsel, who appeared with Mr P Cutler for the Commissioner on the application but not below, made the following submissions.

[40] First, Ms Gleeson submitted from the time the Commissioner withdrew his defence the real and only dispute was between the liquidator and Mr Rowe, a dispute in which the Commissioner had no active role. She argued that the primary judge failed to take into consideration that where the Commissioner makes a s 588FGA claim, the directors have a right to be fully heard in the proceedings, including a right to contest the liquidator's claims against the Commissioner. That was reflected in this case where, she contended, Mr Rowe contested the issue of insolvency up until 30 March 2012, notwithstanding the Commissioner's earlier concession of the liquidator's claim on 14 December 2011.

[41] Secondly, Ms Gleeson contended that it was not the intention of s 588FGA that the Commissioner should effectively give security for costs on behalf of directors. She submitted that the legislation did not support a construction which would make the price of enforcing the Commissioner's statutory indemnity the liquidator's costs of litigating any issue which directors are entitled to raise against the liquidator.

[42] Thirdly, Ms Gleeson submitted that the primary judge erred in not adopting Barrett J's approach in Noxequin. She characterised the following passage at [49] of his Honour's judgment as the principle on which he based his resolution of the costs dispute at [40] (see [31] above):

... the fact that the third party actually becomes a party to the proceedings brought initially by the liquidator against the Commissioner ... means that that person also faces the full exposure to costs that is the lot of any party to proceedings in the ordinary course.

[43] Fourthly, Ms Gleeson contended that his Honour's exercise of the costs discretion miscarried because he failed to have regard to the fact that directors responding to a s 588 FGA(4) claim are afforded the position of third parties in proceedings brought by the liquidator against the Commissioner and, too, in describing (at [11]) the indemnity proceedings brought by the Commissioner as a "cross-claim", failed to recognise that the proceedings are constituted as Barrett J (as his Honour then was) explained in Hall (as liquidators of Reynolds Wines Ltd) v Cmr of Taxation [2004] NSWSC 985 ; (2004) 186 FLR 111 (Hall) (at [15]).

[44] Fifthly, Ms Gleeson submitted that the primary judge erred in suggesting (see [34] above) that the Commissioner must prove insolvency against the director. She submitted that the s 588FGA indemnity is only conditioned on the making of an order under s 588FF and that, contrary to his Honour's observation (at [15]), the proceedings were not kept on foot because the Commissioner had to prove insolvency against Mr Rowe but rather because Mr Rowe wished to agitate the question of insolvency in the proceedings between the Commissioner and liquidator.

[45] Finally, Ms Gleeson submitted that the position of Mr Rowe as a statutory third party contesting solvency, and effectively the real party to the dispute (in the sense of the people who were in active dispute with each other serving evidence, making forensic decisions, running arguments and doing the kinds of things that cause people to incur costs), was a sufficient circumstance to justify a departure from the special costs rules in UCPR 42.14(2) after the date of the Commissioner's concession.

Respondents' submissions

[46] Mr D Cook who appeared for the liquidator below and on the application made the following submissions.

[47] First, he submitted that the liquidator's loss was caused by the Commissioner's decision to seek an indemnity in the proceedings with the liquidator, rather than claim the indemnity as a debt in separate proceedings. He contended that the Commissioner should be accountable for the consequences that flowed from this decision, including that Mr Rowe was given the opportunity to contest all issues in the proceedings between the liquidator and the Commissioner and that the liquidator was put to further and additional costs, particularly in light of evidence before the primary judge that the Commissioner was aware that his costs would be irrecoverable because of Mr Rowe's financial position.

[48] Secondly, Mr Cook contended that the appellant had failed to establish that the primary judge mischaracterised the nature of the proceedings. He submitted that the primary judge's reference to the Commissioner's need to prove insolvency was merely "dealing with an argument raised by the Commissioner that he would be hamstrung if he had to prove insolvency without the benefit of the liquidator's evidence", noting that his Honour prefaced his observations regarding this issue by stating that "if" insolvency needed to be proved by the Commissioner he must find sufficient evidence to do so. Furthermore, he contended that the primary judge did not err in his description of the director as "not in suit" with the liquidator, as they were parties to the same proceeding but not the same suit.

[49] Thirdly, Mr Cook submitted that Noxequin did not support the Commissioner. He sought to distinguish Noxequin on the basis that Barrett J was not asked to decide whether the director or Commissioner should be ordered to pay the liquidator's costs. Rather, the liquidator was seeking costs from a director, Mr Soong, rather than the Commissioner, as Mr Soong's failure to admit insolvency in response to a letter sent by the liquidator was grounds for an award of costs on an indemnity basis.

[50] Finally, Mr Cook contended that leave to appeal should not be granted. He submitted that the amount of costs in issue was not shown to be significant and that there was no error of principle or substantial injustice in the primary judge's exercise of his discretion on the specific facts of this case. Furthermore, he contended that the effect of leave being granted, in light of the Commissioner's election not to join Mr Rowe to these proceedings, is that if the appeal is successful, the liquidator will not recover any costs for the period after the Commissioner's concession until judgment, notwithstanding the Commissioner's submission at the hearing that these costs should be paid by Mr Rowe.

The nature of s 588FGA proceedings

[51] The s 588FGA indemnity compensates the Commissioner from the risk that he or she is inhibited from asserting a defence pursuant to s 588FG of the Act (which provides that a transaction is not voidable as against certain persons in certain circumstances, including that the person had no reasonable grounds for suspecting that the company was insolvent at that time or would become insolvent at the relevant time) on the basis that he or she received tax information placing him on notice of the company's poor financial health: Sims v DCT [2006] NSWSC 305 ; (2006) 57 ACSR 249 (at [35]) per Campbell J (as his Honour then was).

[52] A s 588FF order, such as that the liquidator sought against the Commissioner in these proceedings, can be made by consent if there are no other parties to the action, however a court considering doing so must be mindful of the rights of third parties: Dean-Willcocks v Cmr of Taxation (No 2) [2004] NSWSC 286 ; (2004) 49 ACSR 325 (Dean-Willcocks); (at [27]-[28]) per Austin J; Cooper (as liquidator of Wanted World Wide (Australia) Ltd (in liq)) v Cmr of Taxation [2004] FCA 1063 ; (2004) 139 FCR 205 (at [44]-[53]) per Lander J; Young v Cmr of Taxation [2006] FCA 90 ; (2006) 56 ACSR 654 (at [8]-[9]) per Tamberlin J; Noxequin ([at 6]). A consent order made without notice to directors from whom the Commissioner proposes to enforce the statutory indemnity may be set aside as an irregularity: UCPR 36.15(1); Harris v Cmr of Taxation [2006] QSC 108 ; [2006] 2 Qd R 445, Mackenzie J. Once directors have been joined by the Commissioner seeking a s 588FGA(4) indemnity, a s 588FF order cannot be made by consent: see Re Locktronic Systems Pty Ltd (No 1) [2008] VSC 626 (Locktronic (No 1)) (infra (at [86]).

[53] When the Commissioner claims indemnity pursuant to s 588FGA(4) in the same proceedings in which the liquidator seeks a s 588FF order, the claim is made by interlocutory process pursuant to r 2.2(1)(b) of the Supreme Court (Corporations) Rules 1999 (NSW) rather than by cross-claim as defined in r 1.8 of the Supreme Court Rules 1970 (NSW): Condon v Cmr of Taxation [2004] NSWSC 481 ; (2004) 207 ALR 676 (at [7]-[8], [20]-[21]) (Condon) per Barrett J. However, the "procedural gap so far as the applicability of cross-claim rules is concerned" can be met by making directions pursuant to r 1.8 "import[ing], with appropriate modifications, provisions of Pt 6 of the Supreme Court Rules dealing with cross-claims": Hall (at [23], [25]).

[54] It does not appear from the papers whether directions of the nature Barrett J contemplated were made in this matter. However it was common ground that Mr Rowe was effectively a third party to the proceedings. By analogy with, if not by direct application of, s 22(3)(b)(i) of the he was to be treated as a party to the liquidator's proceedings.

[55] In Hall (at [16]) (see also Noxequin (at [31])), Barrett J (as his Honour then was) explained that "[a] decision by the Commissioner to pursue the s 588FGA(4) route (as distinct from any other) in seeking to enforce the s 588FGA(2) indemnity carries within it a decision that the relevant directors should be afforded the position of third parties in the proceedings brought by the liquidator against the Commissioner [and] [a]s a corollary ... should be able to defend the liquidator's claim against the Commissioner, that being a generally accepted incident of third party status".

[56] Third party status is afforded to the directors on the basis that they would be prejudiced if denied the opportunity to contest the liquidator's claim, as the making of an order against the Commissioner under s 588FF imposes an obligation on them to indemnify him pursuant to s 588FGA: Dean-Willcocks (at [40]) per Austin J; Crosbie v Cmr of Taxation [2003] FCA 922 ; (2003) 130 FCR 275 (at [4]-[6]) (Crosbie) per Finkelstein J; Noxequin (at [34]).

[57] As is apparent from s 588FGA(3) (see Barrett J's parenthetical observation in Hall (at [16]) and Condon (at [18])), the Commissioner does not have to pursue the statutory indemnity in the liquidator's proceedings. However, where the Commissioner does take the course s 588FGA(4) envisages, the consequence of the decision to do so insofar as the liquidator is concerned was explained by Barrett J in Hall (at [21]-[22]) as follows:

[21] The case before me is one in which the directors seek to be assured of their right to participate fully in the proceedings brought be [sic] the liquidators against the Commissioner. By conscious choice, the Commissioner has sought relief against the directors in the proceedings in which the claim by the liquidators is pursued against the Commissioner. The Commissioner has deliberately declined to follow any alternative course that would have seen those proceedings confined to the controversy between the liquidators and the Commissioner, with the question of recourse by the Commissioner against the directors under s 588FGA left to be pursued in some separate proceeding. The particular course the Commissioner has chosen is one expressly made available by the statute. The liquidators, by whom the proceedings were commenced, are therefore bound to deal with those proceedings in the modified form into which they have been put by the Commissioner ...

[22] Consistently with this, the directors, as statutory third parties to the proceedings, must be afforded the right and ability to contest all matters relevant to the question of liability between the liquidators and the Commissioner, including the matter of insolvency. ... A likely consequence is that the liquidators will be put to proof of the matters in para 9 of the statement of claim despite the Commissioner's admission [of insolvency]. But it is to be borne firmly in mind that the Commissioner, as well as making the admission, has taken the particular opportunity made available by s 588FGA(4) to recast the liquidators' proceedings by inserting as parties the persons who not only have a real interest in contesting the insolvency question but also are likely to have the factual wherewithal to do so. That those persons should be able to participate fully in that contest is, to me, obvious. (Emphasis added)

[58] Barrett J's emphasis on the fact that it is the Commissioner who has recast the proceedings by pursuing the s 588FGA indemnity assists in highlighting the respective parties' role in such proceedings. The tripartite position was also explained in an illuminating manner by Scrutton LJ in Barclays Bank v Tom [1923] 1 KB 221 (at 223-224) as follows:

[I]t is important to keep clearly in mind what the third party procedure is. A plaintiff has a claim against a defendant. The defendant thinks if he is liable he has a claim over against a third party. With that matter between the defendant and the third party the plaintiff has obviously nothing to do. He is not concerned with the question whether the defendant has a remedy against somebody else. His remedy is against the defendant. But the defendant is much interested in getting the third party bound by the result of the trial between the plaintiff and himself, for otherwise he might be at a great disadvantage if, having fought the case against the plaintiff and lost, he had then to fight the case against the third party possibly on different materials, with the risk that a different result might be arrived at. The object of the third party procedure is then in the first place to get the third party bound by the decision between the plaintiff and the defendant. In the next place it is directed to getting the question between the defendant and the third party decided as soon as possible after the decision between the plaintiff and the defendant, so that the defendant may not be in the position of having to wait a considerable time before he establishes his right of indemnity against the third party while all the time the plaintiff is enforcing his judgment against the defendant. And thirdly, it is directed to saving the extra expense which would be involved by two independent actions.

[59] Scrutton LJ's statement has been followed in this court in Sandtara Pty Ltd v Abigroup Ltd (1997) 42 NSWLR 5 (at 8) and Insurance Exchange of Australasia Group v Dooley [2000] NSWCA 159 ; (2000) 50 NSWLR 222 (at [12], [16]) per Handley JA (Giles JA agreeing); see also Fitzgerald JA (at [85]-[86]; see also Financial Wisdom Ltd v Newman [2005] VSCA 110 ; (2005) 12 VR 79 (at [28]).

The costs jurisdiction

[60] Subject to any limitations contained in statute or the rules of the court, costs are in the discretion of the court, which has full power to determine by whom, to whom and to what extent costs are to be paid: s 98(1), Civil Procedure Act 2005 (NSW). The power conferred by s 98 must "be exercised judicially, that is to say not arbitrarily, capriciously or so as to frustrate the legislative intent ... [and] subject to such considerations, the discretion conferred is ... unconfined except in so far as 'the subject matter and the scope and purpose" of the legislation may enable an appellate court to pronounce the reasons given by the primary judge to be "definitely extraneous to any objects the legislature could have had in view": Oshlack v Richmond River Council [1998] HCA 11 ; (1998) 193 CLR 72 (Oshlack) (at [22]) per Gaudron and Gummow JJ.

[61] The general rule as to costs is that costs follow the event: UCPR 42.1, which reflects the principle that, subject to certain limited exceptions, a successful party in litigation is entitled to an award of costs in its favour to indemnify the successful party from having to bring (or defend) the proceedings. As between the parties, fairness dictates that the unsuccessful party typically bears the liability for the costs of the unsuccessful litigation: Oshlack (at [67]) per McHugh J.

[62] The concept of fairness takes into account the contextual circumstances of the litigation and the conduct of the parties, including their responsibility in incurring the costs: Commonwealth v Gretton [2008] NSWCA 117 (at [85]) per Beazley JA, (at [121]) per Hodgson JA (Mason P agreeing with both); Kazar (Liquidator) v Kargarian; Re Frontier Architects Pty Ltd (in liq) [2011] FCAFC 136 ; (2011) 197 FCR 113 (at [9]) per Greenwood and Rares JJ; see also Peters v Peters (1907) 7 SR (NSW) 398 (at 399) per Street J.

[63] In this case, in addition to relying on the general rule to recover his costs of the proceedings, the liquidator's offer of compromise triggered his claim pursuant to UCPR 42.14 to recover indemnity costs against the Commissioner. UCPR 42.14(1) effectively provides that in circumstances where the liquidator obtained judgment on the claim no less favourable than the terms of the offer of compromise of 20 September 2011, then, in accordance with UCPR 42.14(2), unless the court ordered otherwise, the liquidator was entitled to an order against the Commissioner for costs in respect of the claim assessed on the ordinary basis up to the end of the day on which the offer was made (20 September 2011) and assessed on an indemnity basis from the beginning of the day following the day on which the offer was made.

[64] There is a conflict in decisions of this court as to whether exceptional circumstances are required before the court may exercise the UCPR 42.12(2) discretion to "otherwise order" (see Barakat v Bazdarova [2012] NSWCA 140 (Barakat) (at [42]-[49]) per Tobias AJA (Bathurst CJ and Whealy JA agreeing)) or whether that discretion has to be exercised having regard to all the circumstances of the case: Regency Media Pty Ltd v AAV Australia Pty Ltd [2009] NSWCA 368 (at [15]).

[65] Tobias AJA concluded in Barakat (at [50]) that it was unnecessary to determine which line of authority to follow because he was of the view that none of the circumstances of that case would justify depriving the respondent of indemnity costs.

[66] The Commissioner did not seek to enter the debate before this court, submitting, in effect, that on either line of authority, Mr Rowe's position as a statutory third party was an "exceptional" or otherwise "sufficient circumstance justifying departure from UCPR 42.14(2) in respect of the period of time after [the Commissioner's] concession on 15 December 2011".

A "special" costs rule in s 588FGA proceedings?

[67] Ground three of the notice of appeal raises the question whether the primary judge should have followed Barrett J's approach in Noxequin as to when the Commissioner's liability for the liquidator's costs should cease. The Commissioner emphasised that he was not arguing that Noxequin established an inflexible rule, but was contending that, all things being equal, when there was a simple case of a withdrawal of a defence and then a later withdrawal on the part of the director, the liquidator's costs should be borne by the director.

[68] While Noxequin concerned a dispute as to which of the Commissioner or the director should bear the liquidator's costs, there was no question before the primary judge as to whether a costs order should be made against Mr Rowe. Neither party sought such an order. The only issue before his Honour was when the Commissioner's liability for costs, he being the unsuccessful party, should cease. Nevertheless it is necessary to examine the Commissioner's submission that Noxequin should have been followed so that his costs liability ceased on 14 December 2011.

[69] In Noxequin, the liquidator of Noxequin Pty Ltd sought an order for the payment of money against the Commissioner pursuant to s 588FF(1) of the Act. The Commissioner conceded a s 588FF order could be made: Noxequin (at [6]). The Commissioner joined Mr Soong, who was at all material times the sole director of Noxequin, seeking a s 588FGA(2) indemnity "in respect of any loss or damage resulting from the order": Noxequin (at [7]-[8]). Mr Soong put the liquidator to proof on the question of insolvency: Noxequin (at [10]).

[70] After a trial confined to the insolvency issue, Barrett J found (at 26]) that the company was insolvent at each of four critical dates. Accordingly, the liquidator was entitled, as against the Commissioner, relevantly, to an order pursuant to s 588FF that the Commissioner pay money to Noxequin and the Commissioner was entitled to a declaration that Mr Soong was liable to indemnify him pursuant to s 588FGA(2) and to an order that Mr Soong pay money to the Commissioner.

[71] In determining an issue concerning the date from which interest should run on the s 588FF order, Barrett J considered, but ultimately rejected (at [38]) the Commissioner's submission that interest should be computed from 17 January 2005 (the date the liquidator served demand on the Commissioner) to 4 July 2006, the date on which the Commissioner advised the other parties that the Commissioner would not be defending the liquidator's claim or leading evidence. His Honour's consideration of the submission recognised that Mr Soong, as a statutory third party, was entitled to contest the liquidator's entitlement to s 588FF relief against the Commissioner with the result that "the Commissioner was, as it were, compelled to remain the non-consenting defendant in the present proceedings beyond the point at which the Commissioner effectively consented to the grant of the relief sought by the liquidator for the benefit of the insolvent estate of the company": Noxequin (at [30]-[32]).

[72] Barrett J also observed (at [33]-[34]) that it was arguable that, as a matter of fairness, Mr Soong and not the Commissioner should bear the burden of the whole of the interest. However, he was not satisfied that he could make such an order in circumstances where, by virtue of the operation of s 588FGA(4), "the court plays no direct or immediate part in determining the liability of Mr Soong".

[73] When his Honour turned to costs (at [40]) he determined that, recognising "that the Commissioner would have brought the proceedings to an end on 4 July 2006 had it not been for the continuing opposition of Mr Soong", the Commissioner should be ordered to pay the costs of the liquidator up to and including 4 July 2006 and that Mr Soong should be ordered to pay the costs of the plaintiffs after that date. His Honour ordered that the latter costs be paid on an indemnity basis because Mr Soong had disputed insolvency in response to a letter from the liquidator's.

[74] His Honour considered (at [49]) the question whether a third party in Mr Soong's position could be "subjected to any liability for costs not forming part of the 'loss or damage'" referred to in s 588FGA(2) and concluded that costs orders such as those made against the Commissioner in respect of recovery of the kind with which s 588FGA is concerned formed part of the "loss or damage" referred to in that section (see also now Commissioner of Taxation v Sims [2008] NSWCA 298 ; (2008) 72 NSWLR 716 (Sims (CA)). His Honour then made (at [49]) the observation on which the Commissioner relies:

But the fact that the third party actually becomes a party to the proceedings brought initially by the liquidator against the Commissioner (see paragraphs [9] and [31] above) means that that person also faces the full exposure to costs that is the lot of any party to proceedings in the ordinary course.

[75] This observation was made to dispel a suggestion his Honour perceived in Woodgate (as liquidator of Fairlight ESP Pty Ltd) v Cmr of Taxation [2006] NSWSC 778 (at [83] and [84]) "that a third party in the position occupied here by Mr Soong cannot ... be subjected to any liability for costs not forming part of the 'loss or damage' referred to in s 588FGA(2)". Thus his Honour's statement made it clear that third parties from whom s 588FGA indemnity was sought were subject to the court's ordinary costs jurisdiction in relation to parties and that two of the costs orders made against Mr Soong in favour of the liquidator were made on that basis.

[76] In my view, Noxequin does not establish a principle of general application as to when the Commissioner's liability for costs in a case such as the present should cease. Barrett J's order turned on the facts of that case in which the director's stance on the insolvency issue had meant there was a trial of that issue in which the Commissioner took no part. His Honour's decision was an orthodox exercise of his s 98 discretion having regard to the parties' responsibility for the costs being incurred. Insofar as principle can be extracted from it, it is authority for the proposition that persons in Mr Rowe's position are exposed to the court's general costs jurisdiction and thus can be ordered to pay the liquidator's costs, even though he was joined at the behest of the Commissioner.

[77] Reference should also be made to other cases concerning costs orders in like proceedings: Sims (CA), Duncan v Cmr of Taxation; Re Trader Systems International Pty Ltd (in liq) [2006] FCA 885 ; (2006) 58 ACSR 555 ("Duncan") and Re Locktronic Systems Pty Ltd (No 2) [2009] VSC 523 (Locktronic (No 2)).

[78] Sims (CA) also involved a liquidator and company's (the "liquidator") preference claim against the Commissioner and the Commissioner's claim for s 588FGA indemnity against two directors. At trial before Hammerschlag J, the Commissioner admitted the insolvency of the company at all material times, but the directors put it in issue. Both the liquidator and the Commissioner took upon themselves the burden of proving insolvency: Sims v Cmr of Taxation [2007] NSWSC 1359 ; (2007) 25 ACLC 1,829 (Sims 3) (at [6], [8]). Following a trial, Hammerschlag J gave judgment for the liquidator against the Commissioner and made orders in favour of the Commissioner under s 588FGA(2) of the Act against the directors (albeit that one of the directors was partially successful in advancing a s 588FGB(4)(b) defence against the Commissioner's claim): Sims v DCT [2007] NSWSC 998 ; (2007) 69 ATR 186 (Sims 2).

[79] When considering the appropriate costs orders, Hammerschlag J expressed the view (Sims 3 (at [9])) that the "insolvency issue was only in play because of the [Commissioner's] joinder of the directors". Despite this, his Honour ordered the Commissioner to pay the liquidator's costs and the director who had been wholly unsuccessful to pay the costs of the Commissioner. He held that the s 588FGA(2) indemnity did not cover the legal costs the Commissioner had been ordered to pay the liquidator: Sims 3 (at [25], [37]).

[80] On appeal, the court (Ipp JA, Beazley and Macfarlan JJA agreeing) held (at [35]) that the words "loss or damage" in s 588FGA(2) were intended to apply to the costs and interest that the Commissioner might be ordered to pay the liquidator in consequence of reasonably, but unsuccessfully, defending a claim made against the Commissioner under s 588FF.

[81] Ipp JA did not accept Hammerschlag J's view (Sims 3 at [9]) concerning the reason the insolvency issue ... was "in play". In his Honour's view (at [44]), in circumstances where only the directors disputed insolvency, the Commissioner was effectively interpleading. Thus, in his Honour's view, "[i]n reality, the contest as to the solvency or otherwise of [the company] was between the liquidators and [the directors]".

[82] In Duncan, the liquidator of two companies sought to avoid payments made by the companies to the Commissioner as unfair preferences pursuant to s 588FA and uncommercial transactions pursuant to s 588FB of the Act. He sought a s 588FF order. The Commissioner claimed a s 588FGA indemnity from the directors of the companies for payment of so much of the money received by the Commissioner as represented income tax withholding liabilities (a compendious expression used to describe the payments listed in s 588FGA(1): see Duncan (at [16]). The liquidator and the Commissioner settled the claims as between themselves on 14 November 2005 and agreed upon orders for the money to be repaid to the liquidator, a settlement communicated to the court at the outset of the hearing on 26 April 2006 (the "settlement agreement"). Two of the directors resisted the indemnity claim on the basis, among others, that the companies were not insolvent at the relevant time. Following a trial, Young J rejected that defence and held (at [110]) that it was appropriate to make orders under s 588FF in each proceeding in the terms sought by the liquidator.

[83] The liquidator (supported by the Commissioner) sought orders that the directors pay the liquidator's costs and interest on the moneys recovered by the liquidator from 14 November 2005, the date of the settlement agreement. They argued that "the settlement was reached at a mediation in which [the directors] participated and, but for the unsuccessful arguments raised by [the directors] ... final orders could have been made disposing of the whole proceeding on 14 November 2005." Young J concluded (at [131]) without discussion of principle, that the liquidator was entitled to recover costs from the directors, but that the more appropriate date from which those costs should run was when directions were made for the contested hearing of the proceedings.

[84] The liquidator also sought an order that the directors pay the liquidator interest on the sum of $38,319.55, being monies the Commissioner was liable to pay the liquidator (see [5], [128]) for the period from 14 November 2005 to the date of judgment. Young J declined to make that order, observing (at [131]) that the liquidator had not advanced any cause of action against the directors that would entitle him to recover interest directly from them, nor made such a claim against the Commissioner save to the extent that the settlement between them included an undifferentiated amount for interest and costs.

[85] In Locktronic (No 2), the liquidator of Locktronic sought orders and declarations pursuant to s 588FF of the Act in respect of alleged preferential payments entered into between Locktronic and the Commissioner. The Commissioner filed a third party notice seeking s 588FGA indemnity from the directors of Locktronic in the event the Commissioner was found to be liable to the liquidator. The liquidator and the Commissioner settled and on the first day of trial, 11 March 2008, Robson J by consent ordered that, pursuant to s 588FF of the Act, the Commissioner pay Locktronic the sum of $341,633.54 together with interest of $177,902.69.

[86] It should be noted, however, that his Honour only made the consent order after the directors had withdrawn their defences to the third party notices insofar as they had put insolvency in issue. Until that occurred, his Honour was of the view that he could not enter judgment against the Commissioner pursuant to s 588FF, while a third party had raised a defence in the proceedings between the plaintiff and the defendant to the plaintiff succeeding against the defendant which, if successful, would remove the basis for the claim by the defendant against the third party: Locktronic (No 1) (at [17], [20]).

[87] Robson J reserved the question of costs until the hearing of the third party claims. Those claims were settled on 21 August 2008: Locktronic (No 2) (at [3]). The liquidator then sought an order that the Commissioner pay the liquidator's costs of the proceedings, including reserved costs until the first directions date after the Commissioner admitted the plaintiffs' claim in full. His Honour held that the Commissioner should only pay the liquidator's costs until 11 December 2006 (the date the Commissioner filed and served its amended defence in which it admitted the liquidator's claim in full) and that thereafter the directors ought to pay the liquidator's costs until 11 March 2008. His Honour reached this conclusion on the basis that the directors were responsible for the liquidator's costs incurred in proving the company was insolvent, applying Ipp JA's observations in Sims (CA) (at [44]).

[88] As will be apparent, in each of the cases discussed, the liquidator recovered a costs order against the director after the Commissioner conceded insolvency, but the director put the liquidator to proof on the issue of insolvency. The orders in each case appear to reflect the parties' respective responsibility for the costs incurred.

Conclusion

[89] In my view the Commissioner's submissions misapprehend the role of the parties in the proceedings.

[90] The proceedings are, prima facie, a claim made by the liquidator against the Commissioner. In the event he or she is found liable to the liquidator, the Commissioner relies on s 588FGA to recover from the director. The director is treated as a third party and, accordingly, is entitled to defend the liquidator's claim against the Commissioner as if joined by cross-claim: Hall, Dean-Willcocks, Crosbie, Noxequin, Barclays Bank v Tom.

[91] The liquidator has no interest in the controversy between the Commissioner and the director: Hall, Duncan, Barclays Bank v Tom. The liquidator's only remedy is against the Commissioner. I would reject the Commissioner's submission the primary judge erred (at 14]) in saying that the liquidator was not "in suit" with Mr Rowe.

[92] It is the Commissioner who recast the liquidator's proceedings by pursuing the s 588FGA indemnity: Hall (at [22]). Once the director, but not the Commissioner, puts insolvency in issue the liquidator is compelled to fight the insolvency issue because a s 588FF order will not be made until that issue is resolved: Locktronic (No 2). The outcome of the dispute is critical to the liquidator's ability to obtain a s 588FF order against the Commissioner and, in turn, to the Commissioner's ability (subject to s 588FGB defences) to be indemnified by the director in respect of that order.

[93] The liquidator's only interest is obtaining a s 588FF order against the Commissioner. However, the Commissioner has dual interests: to resist the claim as against the liquidator and, in the event that is unsuccessful to recover from the director using the s 588FGA(4) route. Even where, as in this case, the Commissioner does not advance a positive defence, he stands to benefit from the director's involvement if the latter succeeds on the insolvency issue. In such circumstances, subject to the terms of the pleadings or any agreement as between the Commissioner and the liquidator, it could be expected that the Commissioner would seek to piggyback on the finding that the company was not relevantly insolvent to resist the liquidator's claim.

[94] Indeed, the Commissioner took precisely that position in Sims 2. Notwithstanding her admission of insolvency, the Commissioner took the stance at trial that, should the court find that the company was solvent at the material times, the Commissioner would seek judgment against the liquidator on the basis of that finding and, if necessary would seek to withdraw her admission of insolvency. Ipp JA expressed the view that this forensic stance was reasonable and must have contributed to the liquidators' decision to lead evidence to prove that the company was insolvent: see Sims (CA) (at [45]).

[95] However, if the director is unsuccessful in disputing insolvency (where that is the only matter in issue), the Commissioner fails as against the liquidator, but (subject to any s 588FGB defences) recovers against the director pursuant to s 588FGA(2).

[96] It may be technically correct to say, as the Commissioner submitted, that once the Commissioner's defence is withdrawn, he or she has no active role in the proceedings. However, it cannot be said that "the real and only fight" (Edginton v Clark [1964] 1 QB 367 (at 384) is between the liquidator and the director. That submission fails to take into account that that fight was being fought to help the director resist the Commissioner's claim, and as I have said, was a fight in which the Commissioner had a real interest whichever way it was resolved. True, the liquidator and the director also stood to gain if the issue was resolved in either's favour. However, the Commissioner, the party with whom the liquidator was in suit in the sense that he was the only party against whom the liquidator sought an order, had conceded the issue and was, prima facie, exposed to liability for the costs of the proceedings: UCPR 42.1.

[97] It will be apparent from what has been said that I cannot, with respect, accept the characterisation in Sims (CA) (at [44]) of the Commissioner's role in s 588FGA proceedings as that of an interpleader where the only issue is insolvency as between the director from whom indemnity is sought and the liquidator. That observation was not necessary to the disposition of the proceedings, however it is important to address it because it finds reflection in aspects of the Commissioner's submissions.

[98] Interpleader is "[a] civil action instituted by a person in possession of property to compel rival claimants to the ownership of that property to satisfy a court as to which of them has the legitimate claim": Australian Law Dictionary Online (Oxford). The interpleader process in general treats the debt as itself the property to the ownership of which there are adverse claims; thus, a debtor, who acknowledges indebtedness and claims no interest in the money the debtor is prepared to pay into court, may be allowed to interplead: Olsson v Dyson [1969] HCA 3 ; (1969) 120 CLR 365 (at 369-370) per Barwick CJ. The requirement that the interpleader have no interest in the subject-matter in dispute is an express requirement of an application to interplead: UCPR 43.2(3)(a). Historically, it has not been the practice of the court in interpleader proceedings to treat the exact form of the issue as material, as the issue was only a proceeding directed for the purpose of informing the conscience of the court as to whom the money in court should be paid: Olsson v Dyson (at 370), referring to Peake v Carter [1916] 1 KB 652 (at 656) per Swinfen Eady LJ

[99] As will be manifest, proceedings in which a liquidator seeks to recover monies said to constitute voidable preferences from the Commissioner, to which the latter joins the directors pursuant to s 588FGA(4), cannot be characterised as in the nature of an interpleader action. There are no rival claimants to the ownership of property seeking to satisfy a court as to which of them has the legitimate claim. The Commissioner cannot be said to be in the position of a stakeholder claiming no interest in the outcome of the dispute.

[100] The primary judge's consideration (at [14]) of the parties' respective roles did manifest to some extent a failure to appreciate the role of the parties once Mr Rowe was joined. His Honour's remarks (at [15]) envisaging that the Commissioner could have consented to judgment in favour of the liquidator then pursued the claim against Mr Rowe, with respect, do not indicate an appreciation of the fact that the liquidator could not obtain a s 588FF order against the Commissioner until the insolvency aspect of the indemnity claim was resolved. However, his Honour's error in this respect does not detract, in my view, from his analysis of the responsibility as between the liquidator and the Commissioner for the costs the liquidator incurred.

[101] Finally, a decision that the Commissioner must bear the liquidator's costs of the proceedings subsequent to the date he withdrew his defence does not, as the Commissioner submitted, have the effect of the Commissioner giving security for costs on behalf of the director. Pursuant to s 588FGA(2), the Commissioner can recover from the director any costs of the proceedings he or she is required to pay the liquidator insofar as they were incurred in reasonably, albeit unsuccessfully, defending the claim: Sims (CA).

[102] The Commissioner has not demonstrated any material error or unreasonable exercise of the primary judge's costs discretion such as might warrant appellate intervention: House v R [1936] HCA 40 ; (1936) 55 CLR 499 (at 505) per Dixon, Evatt and McTiernan JJ; Rasch Nominees Pty Ltd v Bartholomaeus [2013] SASCFC 105 (at [52]) per Stanley J (Gray and Sulan JJ agreeing).

Orders

[103] The Commissioner informed the court that he had agreed to provide the taxpayer with funding under the ATO Test Case Litigation Program to assist the taxpayer to meet its costs in these proceedings. Nevertheless it is appropriate that the court make express provision for costs.

[104] I propose the following orders.

(1)

Grant leave to appeal.

(2)

Appellant to file the Notice of Appeal in the form appearing as a draft in the White Book within 14 days.

(3)

Appeal dismissed.

(4)

Appellant to pay the respondents' costs.