Deputy Commissioner of Taxation v Advanced Holdings Pty Ltd [2018] FCA 1263 (21 August 2018)

Last Updated: 15 August 2019

FEDERAL COURT OF AUSTRALIA

Deputy Commissioner of Taxation v Advanced Holdings Pty Ltd

[2018] FCA 1263

File number:	NSD 1496 of 2018
Judge:	KATZMANN J
Date of judgment:	21 August 2018
Catchwords:	PRACTICE AND PROCEDURE — ex parte application for freezing orders under rr 7.32 and 7.35 — where application made for judgment on certain taxation liabilities — good arguable case — evidence of recent history of dishonest conduct — danger that assets might otherwise be dissipated
Legislation:	Income Tax Assessment Act 1936 (Cth) ss 175, 264 Judiciary Act 1903 (Cth) s 39B(1A)(c) Taxation Administration Act 1953 (Cth) Sch 1 ss 255-5, 255-45, 350-10, 353-10 Federal Court Rules 2011 (Cth) rr 7.32, 7.35, 39.05
Cases cited:	Batagol v Federal Commissioner of Taxation [1963] HCA 51; (1963) 109 CLR 243 Cardile v LED Builders Pty Ltd (1999) 198 CLR 380 Deputy Commissioner of Taxation v Hua Wang Bank Berhad (2010) 273 ALR 194; 80 ATR 449; [2010] FCA 1014 Deputy Commissioner of Taxation v Chemical Trustee Ltd (No 4) (2012) 19 ATR 711; [2012] FCA 1064 Deputy Commissioner of Taxation v Ma (2017) 106 ATR 773;  [2017] FCA 1317  Deputy Commissioner of Taxation v Vasiliades (2014) 323 ALR 59; 99 ATR 799; [2014] FCA 1250 Federal Commissioner of Taxation v Naidoo (1981) 55 FLR 245 Frigo v Culhaci (unreported; NSW Court of Appeal, 17 July 1998) Insolvency Guardian Melbourne Pty Ltd v Carlei (2016) 111 ACSR 236; [2016] FCA 72 Jackson v Sterling Industries Ltd [1987] HCA 23; (1987) 162 CLR 612 Ninemia Maritime Corporation v Trave Schiffahrtsgesellschaft and Co KG (The Niedersachsen) [1983] 1 WLR 1412; [1984] 1 All ER 413 Patterson v BTR Engineering (Aust) Ltd (1989) 18 NSWLR 319
Date of hearing:	17 August 2018
Registry:	New South Wales
Division:	General Division
National Practice Area:	Taxation
Category:	Catchwords
Number of paragraphs:	71
Counsel for the Applicant:	Mr R Scruby SC with Mr R A Jedrzejczyk
Solicitor for the Applicant:	Australian Government Solicitor
Counsel for the Respondents:	The Respondents did not appear

ORDERS

		NSD 1496 of 2018
BETWEEN:	DEPUTY COMMISSIONER OF TAXATION Applicant
AND:	ADVANCED HOLDINGS PTY LTD First Respondent SUMMER HILL BUSINESS ESTATE PTY LTD (ACN 123 332 730) AS TRUSTEE FOR THE CAMELLIA ESTATE TRUST Second Respondent RIVERLAND ESTATE PTY LTD (ACN 103 833 825) AS TRUSTEE FOR THE RIVERLANDS ESTATE TRUST Third Respondent

JUDGE:	KATZMANN J
DATE OF ORDER:	17 AUGUST 2018

THE COURT ORDERS THAT:

1. The time for service of the originating application be abridged to 5 pm on 20 August 2018.
2. The originating application, the affidavit of Craig Morelande affirmed 17 August 2018 and the affidavit of Maggie Ng affirmed 17 August 2018 be served on the respondents by 5 pm on 20 August 2018, in the first instance by:

(a) courier delivery to Lionheart Lawyers, at Level 2, 64 Clarence Street Sydney NSW 2000 marked for the attention of Charbel Azzi; and
(b) email to [e-mail] marked for the attention of Charbel Azzi.

3. Pursuant to rules 7.32 and 7.35 of the Federal Court Rules 2011 (Cth) (FCR) orders be made against the first respondent in the terms set out in annexure A to these orders.
4. Pursuant to FCR 7.33 the first respondent, by itself, its employees or agents, be restrained until further order from taking any step:

(a) to exercise any power as a unit holder under the Camellia Estate Trust and/or the Riverlands Estate Trust; or
(b) to cause any asset owned by the Camellia Estate Trust and/or the Riverlands Estate Trust to be sold, transferred, disposed of or otherwise diminished in value.

5. Pursuant to FCR 7.32 and 7.34 orders be made against the second respondent in the terms set out in annexure B to these orders.
6. Pursuant to FCR 7.33 and 7.34 the second respondent, by itself, its employees or agents, be restrained until further order from:

(a) creating or issuing any new units, or approving the transfer of any units, in the Camellia Estate Trust, or
(b) amending the trust deed of the Camellia Estate Trust; or
(c) without giving 14 days’ written notice to the applicant, retiring as trustee of the Camellia Estate Trust.

7. Pursuant to FCR 7.32 and 7.34 orders be made against the third respondent in the terms set out in annexure C to these orders.
8. Pursuant to FCR 7.33 and 7.34 the third respondent, by itself, its employees or agents, be restrained until further order from:

(a) creating or issuing any new units, or approving the transfer of any units, in the Camellia Estate Trust, or
(b) amending the trust deed of the Camellia Estate Trust; or
(c) without giving 14 days’ written notice to the applicant, retiring as trustee of the Camellia Estate Trust.

9. The originating application be stood over for hearing or directions before the duty judge at 10.15am on Wednesday 22 August 2018.
10. The parties have liberty to apply to the duty judge on 24 hours’ notice.
11. These orders be entered forthwith.

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

ORDERS

		NSD 1496 of 2018
BETWEEN:	DEPUTY COMMISSIONER OF TAXATION Applicant
AND:	ADVANCED HOLDINGS PTY LTD First Respondent SUMMER HILL BUSINESS ESTATE PTY LTD (ACN 123 332 730) AS TRUSTEE FOR THE CAMELLIA ESTATE TRUST Second Respondent RIVERLAND ESTATE PTY LTD (ACN 103 833 825) AS TRUSTEE FOR THE RIVERLANDS ESTATE TRUST Third Respondent

JUDGE:	KATZMANN J
DATE OF ORDER:	21 AUGUST 2018

THE COURT ORDERS THAT:

1. The applicant be granted leave to file an amended originating application in the form annexed to these orders and marked “A”.
2. Pursuant to rule 39.05 of the Federal Court Rules 2011, the orders made on 17 August 2018 be varied as follows:

2.1 order 8(a) be varied by replacing the words “Camellia Estate Trust” with “Riverlands Estate Trust”;
2.2 order 8(b) be varied by replacing the words “Camellia Estate Trust” with “Riverlands Estate Trust”;
2.3 order 8(c) be varied by replacing the words “Camellia Estate Trust” with “Riverlands Estate Trust”;
2.4 the name of the second respondent in the schedule on page 3 of the orders be changed to: ‘Summer Hill Business Estate Pty Ltd ACN 123 332 730 as trustee for the Camellia Estate Trust’;
2.5 the name of the third respondent in the schedule on page 3 of the orders be changed to: ‘Riverland Estate Pty Ltd ACN 103 833 825 as trustee for the Riverlands Estate Trust’;
2.6 the name of the addressee in annexure C to the orders be changed to “Riverland Estate Pty Ltd atf the Riverlands Estate Trust”.

3. Order 2 of these orders has effect nunc pro tunc from the making of the orders on 17 August 2018.
4. The applicant serve a copy of the amended originating application and these orders on the respondents by 5 pm on 21 August 2018.

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
Annexure A

REASONS FOR JUDGMENT

1. Charbel Demian is a property developer. He is also a director of a number of companies within a group of companies that bears his name (the Demian Group). He is the sole director and shareholder of several of those companies, including Advanced Holdings Pty Ltd (Advanced Holdings), Summer Hill Business Estate Pty Ltd, and Riverland Estate Pty Ltd.
2. Following an audit into the taxation affairs of Mr Demian and the Demian Group and in reliance on information contained in documents provided to the Australian Taxation Office (ATO) by the accountants for the Demian Group during the course of the audit, the Commissioner of Taxation assessed the tax liabilities of the members of the Demian Group and issued notices of assessment. Objections were lodged by several of the companies in the group including Advanced Holdings (purportedly in its capacity as the trustee of The Demian Trust). Certain objections were allowed, others disallowed and, earlier this year, notices of appeal were filed against the Commissioner’s objection decisions under Pt IVC of the Taxation Administration Act 1953 (Cth) (TAA). Those proceedings are pending in the Court.
3. On 17 August 2018 the Commissioner issued notices of amended assessment on Advanced Holdings for the 2013 and 2014 financial years (Amended Assessments), together with a notice of shortfall penalty (Penalty Notice). The total amount due is over $34.3 million.
4. The same day the Deputy Commissioner filed an originating application in this Court seeking judgment in the amounts due under the Amended Assessments and the Penalty Notice.
5. Included in the originating application were various claims for interlocutory relief. In short, the interlocutory relief the Deputy Commissioner sought consisted of freezing orders against Advanced Holdings, Summer Hill Business Estate Pty Ltd as trustee for the Camellia Estate Trust (Summer Hill) and Riverland Estate Pty Ltd as trustee for the Riverlands Estate Trust (Riverland) and orders restraining Summer Hill and Riverland from creating or issuing any new units or approving the transfer of any units in their respective trusts, amending the trust deeds, or retiring as trustees of their respective trusts without giving 14 days’ written notice to the Deputy Commissioner.
6. The originating application was supported by two affidavits. The first was affirmed by Craig Morelande, who is employed by the ATO as a Senior Technical Leader, Significant Debt Management. Exhibited to that affidavit were two lever arch files of documents. The second was affirmed by Maggie Ng, a computer forensics officer employed in the Forensics and Investigations team of the ATO. Exhibited to that affidavit was one lever arch file of documents.
7. I heard the application for interlocutory relief late in the afternoon of the day the originating application was filed. The application was made without notice to the respondents. On the basis of the material to which I was taken by senior counsel for the Deputy Commissioner and brief oral evidence adduced at the hearing, and with the considerable assistance of both written and oral submissions, I was satisfied that I had the power to make the orders and that the interests of justice and the balance of convenience favoured that course. Accordingly, I made orders in the terms the Deputy Commissioner sought. Given the lateness of the hour, however, I indicated I would give my reasons later. These are those reasons.

The power to make the orders sought

8. The Deputy Commissioner relied on the powers conferred on the Court by rr 7.32 and 7.35 of the Federal Court Rules 2011 (Cth) (FCR or Rules), which appear in Div 7.4 of the Rules, although r 7.36 makes it clear that nothing in Div 7.4 “diminishes the inherent, implied or statutory jurisdiction of the Court” to make a freezing or ancillary order.
9. Rule 7.32 provides as follows:

7.32 Freezing order
(1) The Court may make an order (a freezing order), with or without notice to a respondent, for the purpose of preventing the frustration or inhibition of the Court’s process by seeking to meet a danger that a judgment or prospective judgment of the Court will be wholly or partly unsatisfied.
(2) A freezing order may be an order restraining a respondent from removing any assets located in or outside Australia or from disposing of, dealing with, or diminishing the value of, those assets.

10. Rule 7.35 concerns judgment debtors, prospective judgment debtors, and certain third parties. Since no judgment has been entered against Advanced Holdings, it is not a judgment debtor but a prospective judgment debtor. No judgment is sought against either of the other respondents but r 7.34 enables the Court to make a freezing order or an ancillary order against a person even if that person is not a party in a proceeding in which substantive relief is sought against one who is.

11. Rule 7.35 relevantly provides that:

7.35 Order against judgment debtor or prospective judgment debtor or third party
(1) This rule applies if:
...

(b) an applicant has a good arguable case on an accrued or prospective cause of action that is justiciable in:

(i) the Court; ...
...

(2) This subrule applies to a judgment if there is a sufficient prospect that the judgment will be registered in or enforced by the Court.
(3) ...
(4) The Court may make a freezing order or ancillary order or both against a ... prospective judgment debtor if the Court is satisfied, having regard to all the circumstances, that there is a danger that a ... prospective judgment will be wholly or partly unsatisfied because any of the following might occur:
...

(b) the assets of the... prospective judgment debtor or another person are:

(i) removed from Australia or from a place inside or outside Australia; or
(ii) disposed of, dealt with or diminished in value.

(5) The Court may make a freezing order or an ancillary order or both against a person other than a... prospective judgment debtor (a third party) if the Court is satisfied, having regard to all the circumstances, that:

(a) there is a danger that a... prospective judgment will be wholly or partly unsatisfied because:

(i) the third party holds or is using, or has exercised or is exercising, a power of disposition over assets (including claims and expectancies) of the... prospective judgment debtor; or
(ii) the third party is in possession of, or in a position of control or influence concerning, assets (including claims and expectancies) of the... prospective judgment debtor; or

(b) a process in the Court is or may ultimately be available to the applicant as a result of a judgment or prospective judgment, under which process the third party may be obliged to disgorge assets or contribute toward satisfying the judgment or prospective judgment.

(6) Nothing in this rule affects the power of the Court to make a freezing order or ancillary order if the Court considers it is in the interests of justice to do so.

The applicant has a good arguable case on an accrued or prospective cause of action justiciable in this Court

12. I was satisfied that the Deputy Commissioner has a good arguable case for the final relief he seeks for the following reasons.
13. First, an applicant has “a good arguable case” if he has “a reasonably arguable case on legal and factual matters”: Insolvency Guardian Melbourne Pty Ltd v Carlei [2016] FCA 72; (2016) 111 ACSR 236; [2016] FCA 72 at [18] (Edelman J); Cardile v LED Builders Pty Ltd (1999) 198 CLR 380 at [68] (Gaudron, McHugh, Gummow and Callinan JJ).
14. It is beyond doubt that the Deputy Commissioner has a good arguable case on both legal and factual matters.
15. Copies of the Amended Assessments and Shortfall Penalty are in evidence.
16. The particulars of assessment were summarised in a table in Mr Morelande’s affidavit:

Year ending	Type	Amount	Date issued	Date payable
30 June 2013	Amended Assessment	$10,208,174.81	17 August 2018	7 September 2018
30 June 2013	Shortfall penalty	$7,209,552.15	17 August 2018	7 September 2018
30 June 2014	Amended Assessment	$9,596,200.32	17 August 2018	7 September 2018
30 June 2014	Shortfall penalty	$7,353,480.20	17 August 2018	7 September 2018
Total		$34,367,407.48

17. Production of a notice of assessment under a taxation law is conclusive proof that the assessment was properly made and, except in proceedings under Pt IVC of the TAA, that the amounts and particulars of the assessment are correct: TAA Sch 1 s 350-10 item 2.
18. Second, a certificate under s 255-45 of Sch 1 of the TAA dated 17 August 2018 bearing the stamped signature of the Deputy Commissioner was included in the exhibit to Mr Morelande’s affidavit. It certified, amongst other things, that the Amended Assessments and the Penalty Notice were issued and served on Advanced Holdings. Section 255-45 provides that such a certificate, bearing the signature of the Deputy Commissioner, is prima facie evidence of such matters. Further, Mr Morelande stated that the Amended Assessments and Penalty Notice were served by hand at the offices of LCI Partners Pty Ltd, Level 3/239 Church Street Parramatta which is the registered office of all the respondents as disclosed by the records of the Australian Securities and Investment Commission exhibited to Mr Morelande’s affidavit. I interpolate that LCI Partners is a firm of “accountants, advisors, and consultants” apparently retained for some years by Mr Demian and the companies he controls. Mr Vuong testified that he had instructed a paralegal to serve the documents on Advanced Holdings at the above address and that she had confirmed by text message received at 1.03 pm that she had carried out his instructions.
19. On the assumption that service of the Amended Assessments and Penalty Notice is valid, the case the Deputy Commissioner brings arises on an accrued cause of action because a cause of action in debt accrues to the Commissioner against a taxpayer upon service of the notice of assessment: Batagol v Federal Commissioner of Taxation [1963] HCA 51; (1963) 109 CLR 243 at 251–2 (Kitto J). Due service of a notice of assessment is “a condition precedent” to the creation of a liability to pay the tax assessed: Federal Commissioner of Taxation v Naidoo (1981) 55 FLR 245 at 256 (Everett J). If service of the Amended Assessments was not valid, however, the issuing of the Amended Assessments gives the Deputy Commissioner a prospective cause of action in debt against Advanced Holdings (the prospective judgment debtor): Deputy Commissioner of Taxation v Hua Wang Bank Berhad (2010) 273 ALR 194; 80 ATR 449; [2010] FCA 1014 at [18] (Kenny J).
20. Third, non-compliance, if any, with the provisions of the Income Tax Assessment Act 1936 (Cth) (ITAA) does not affect the validity of the assessments: ITAA, s 175.
21. Fourth, the Commissioner or the Deputy Commissioner may sue in a court of competent jurisdiction to recover any tax liability that is due to the Commonwealth and payable to the Commissioner: TAA, Sch 1, s 255-5. This Court is such a court; it has original jurisdiction, amongst other things, in a matter arising under a law of the Parliament: Judiciary Act 1903 (Cth), s 39B(1A)(c). As Gordon J put it in Deputy Commissioner of Taxation v Vasiliades (2014) 323 ALR 59; (2014) 99 ATR 799; [2014] FCA 1250 at [42], taxation “[a]ssessments owe their existence to federal law and depend upon federal law for their enforcement”. It follows that the cause of action is justiciable in this Court.

Sufficient prospect that the judgment will be registered in or enforced by the Federal Court of Australia

22. There is sufficient prospect that the judgment will be registered in or enforced by the Court.

Danger that a prospective judgment will be wholly or partly unsatisfied

23. The purpose of an order of this kind is to prevent an abuse or frustration of the court process by depriving the applicant of the fruits of the action: Jackson v Sterling Industries Ltd [1987] HCA 23; (1987) 162 CLR 612 at 625 (Deane J). Something more than a bare assertion is required: Ninemia Maritime Corporation v Trave Schiffahrtsgesellschaft and Co KG (The Niedersachsen) [1983] 1 WLR 1412 at 1419; [1984] 1 All ER 413 at 417 (Kerr LJ). It is “no light matter” to impose a freeze on the assets of a person so courts must be sensitive to the need for caution: Patterson v BTR Engineering (Aust) Ltd (1989) 18 NSWLR 319 at 324F (Gleeson CJ). Indeed, a freezing order has been aptly described as “a drastic remedy” which should not lightly be granted: Frigo v Culhaci (unreported; NSW Court of Appeal, 17 July 1998) at 10–11 (Mason P, Sheller JA and Sheppard AJA), cited with approval by the plurality in Cardile at [51].
24. But the danger that a prospective judgment will be wholly or partially unsatisfied because the assets of the prospective judgment debtor or those of another person are removed from Australia or from a place inside or outside Australia or that the prospective judgment debtor would more probably than not dispose of, deal with or diminish the value of its assets need not be established on the balance of probabilities. Nor is it necessary that there be evidence that it had any such intention. See, for example, Hua Wang at [8]–[10]; Deputy Commissioner of Taxation v Chemical Trustee Ltd (No 4) (2012) 19 ATR 711; [2012] FCA 1064 at [23]–[24] (Perram J); and Patterson at 325C–D (Gleeson CJ).
25. In the present case I was satisfied that there was such a danger because the evidence before the Court established that Advanced Holdings had the ability to divest itself of its assets and the incentive to do so and that there is reason to believe that in the recent past, in his dealings with the Commissioner and for the purpose of defeating the Commissioner’s interests, the sole director of Advanced Holdings dishonestly engaged in conduct of this very kind.
26. First, the assets in this case consist of units in the trusts. The trust deeds for both the Camellia Estate Trust and the Riverlands Estate Trust exhibited to Mr Morelande’s affidavit show that Advanced Holdings owns 100% of the units in each trust. As the Deputy Commissioner argued, this gives the company effective ownership of the underlying assets of the trusts. Under the terms of both deeds, Advanced Holdings may require the trustee to terminate the trust merely by notifying the trustee that it is to terminate on a specified date (cl 95), in which case the trustee is obliged to realise the assets of the trust (cl 96). As a unit holder, it may apply to the trustee to redeem one or more units (cl 31). If it does so, within 90 days of the redemption the trustee is required to pay it the redemption price (cl 35) which may be effected through a transfer to it of the assets of the trust (cl 36). Although the trustee has an absolute discretion whether or not to accept an application for redemption (cl 32), as the owner of 100% of the units Advanced Holdings may remove a trustee any time “in accordance with law or by passing a special resolution” (cl 88).
27. The powers vested in Advanced Holdings provide the means by which the company could dispose of, deal with, or diminish the value of its assets. As the Deputy Commissioner submitted, Advanced Holdings may dispose of its units in the trusts or take steps to result in a reduction in their value by borrowing against their security, by causing the trustees to issue new units to other entities, thereby diluting the value of the existing units, or by exercising its power as 100% unit holder to cause the trustees to dispose of the trusts’ assets.
28. Mr Moreland’s affidavit contains an illustration of conduct of this nature only last year by another entity controlled by Mr Demian, Mt Lewis Estate Pty Ltd, after it was served with a statutory demand for the payment of a tax debt of $627,441.78. Mt Lewis was the registered proprietor of a property in Punchbowl, NSW. Seventeen days after Mt Lewis had been served with the statutory demand, the Punchbowl property was sold to the brother of a principal in the firm of lawyers that has represented the Demian Group in various proceedings against the Deputy Commissioner.
29. Second, the amount of the liability to the Commissioner is a considerable one. That would give the respondents an incentive or motive to act as the Deputy Commissioner fears.
30. Third, it appears from the evidence that Mr Demian, Advanced Holdings, and other entities Mr Demian controls have engaged in dishonest conduct intended to defeat the interests of the Commissioner. Evidence of dishonest behaviour or avoidance of liability on the part of a prospective judgment debtor may give rise to an inference that there is “a real and not fanciful risk” that it may try to dissipate or dispose of assets unless freezing orders are made: Deputy Commissioner of Taxation v Ma (2017) 106 ATR 773;  [2017] FCA 1317  at  [18]  (Mortimer J).
31. That conduct is set out at length in Mr Morelande’s affidavit and supplemented by the evidence of Ms Ng. For the purpose of the present application, and although his written submissions went further, at the hearing the Deputy Commissioner was content to rely on one instance of this kind of behaviour which came to light after the seizure of documents during the audit. It is reasonable to infer from this evidence that, unless restrained, Advanced Holdings would not be likely to preserve the assets of the company intact so that they might be available to its prospective judgment creditor: Patterson at 325–6 (Gleeson CJ).