Federal Court holds liquidators personally liable for costs

The Federal Court in Commissioner of Taxation v Warner (No 2) [2015] FCA 1281 held the liquidators of a group of companies to be personally liable for the Commissioner of Taxation’s costs.

The case concerned section 264 of the Income Tax Assessment Act 1936 (ITAA) and section 353-10 of Schedule 1 of the Taxation Administration Act 1953 (TAA) and how these provisions interact with section 486 of the Corporations Act 2001 (Corporations Act).

Section 264 of the ITAA and section 353-10 of the TAA provide the Commissioner with broad powers to require a person to furnish the Commissioner with information, to attend and give evidence before the Commissioner and to produce documents to the Commissioner.

Section 486 of the Corporations Act provides that:

“The Court may make such order for inspection of the books of the company by creditors and contributories as the Court thinks just, and any books in the possession of the company may be inspected by creditors or contributories accordingly, but not further or otherwise."

Anthony Warner and Steven Kugel were appointed liquidators of a group of companies (the “TJT” companies) as a result of creditors’ voluntary liquidations.

Prior to the liquidators’ appointment, the ATO had commenced a review of the TJT companies and identified various tax debts owing to the ATO. Notices were issued to the liquidators under section 264 of the ITAA and section 353-10 of the TAA to provide information and to produce documents. Although the liquidators complied with the notices to produce information, they refused to comply with the notices to produce documents. There were numerous letters exchanged between the solicitors for the liquidators and the ATO in which the liquidators’ solicitors advised the ATO of their clients’ position. Their position was that the Deputy Commissioner was a creditor of the TJT companies and that section 486 of the Corporations Act requires a creditor to obtain an order from the Court if it wishes to inspect the companies’ records held by the liquidator. The liquidators’ solicitors stated that the liquidators would only comply with the ATO notices if ordered to do so by a Court. They suggested that the Commissioner apply for such an order.

The Commissioner’s solicitors refuted the arguments and stated that the notices remained effective and had to be complied with.

A number of letters were exchanged with each party reiterating its respective position.

The Commissioner instituted proceedings on 6 June 2014 seeking declaratory relief and an order for costs against the liquidators. Subsequently, the solicitors for the liquidators wrote to the Commissioner reiterating their earlier position but stating that they objected to a costs order being made against them. The letter went on to state that, if the Commissioner did not seek a costs order, the liquidators would file a submitting appearance only and would take no active role in the proceedings.

On 19 June 2014, the Commissioner responded reiterating his position on the substantive issue. The Commissioner also indicated that the Court would be assisted by the appearance of a contradictor in the proceedings and that if the liquidators merely filed a submitting appearance, there was a risk that the court may decide there was no justiciable controversy. The letter concluded by stating that the Commissioner would agree to orders that each party pay their own costs on the condition that the liquidators take an active role in the proceedings.

No response was provided by the liquidators. Subsequently, the liquidators filed a submitting appearance.

A directions hearing was held at which the Court indicated that it would be assisted by having a contradictor appear. The Commissioner wrote to the liquidators reiterating his earlier offer as to costs in exchange for the liquidator’s active participation in the hearing. No response was provided by the liquidators.

The Commissioner then arranged for amicus curiae to make submissions as a contradictor in the proceedings.

On 1 July 2015, Perry J of the Federal Court delivered judgment holding that the notices issued under section 264 of the ITAA and section 353-10 of the TAA were not subject to, or affected by, section 486 of the Corporations Act. Her Honour held that:

• The fact that the Commissioner is as far as possible placed on a par with other creditors with respect to the ultimate distribution of the company’s assets, does not mean that he should be on a par with other creditors insofar as access to the company books is concerned.
• Section 486 of the Corporations Act recognises that a creditor has no right to inspect the books of a company but may have a legitimate interest in doing so when a company is being wound up. By contrast, the Commissioner has a legitimate interest (irrespective of the winding up) to access the company’s books to discharge his statutory duty to ascertain the tax liability. The Commissioner’s interest in access to the company books does not arise only on a winding up and is broader than that of an ordinary creditor.

On 20 November 2015, Perry J delivered judgment on the matter of costs. Her Honour found in favour of the Commissioner and made an award of costs against the liquidators personally. Her Honour was influenced by the following matters:

• The litigation was occasioned by the liquidators’ conduct in refusing to comply with the notices on the basis that section 486 of the Corporations Act applied. This was a position that, to the knowledge of the Commissioner, had never been taken by any other liquidator.
• The liquidators’ position in the proceedings was considered to be effectively adversarial such that the proceedings could not be properly characterised as public interest litigation or as a “test case”.
• A party cannot avoid costs because he or she has acted on a mistaken view of the law. Once the Commissioner’s position was explained to the liquidators, it was open to them to accept that view and avoid litigation.
• The court had indicated that it would be of assistance if a contradictor were to appear. The costs of arranging for amicus curiae to appear were of a kind the liquidators would have incurred had they participated in the proceedings and defended their position.

Importantly, Perry J made the award of costs against the liquidators personally, finding that:

• It was difficult to see how the liquidators’ stance furthered the interests of creditors.
• It was open to the liquidators to discuss their position with the creditors before refusing to comply with the Commissioner’s notice. The liquidators did not do this. In the circumstances, it would be unfair on the creditors for the costs to be payable as an expense of the liquidation.
• Although the Commissioner instituted the proceedings, his hand was forced by the conduct of the liquidators in refusing to comply with the notices. The liquidators indicated in correspondence that they would institute proceedings if the Commissioner did not. Therefore, their position was akin to a liquidator who had instituted proceedings. In such circumstances, the liquidators ought to be taken to have assumed the risk that their construction of the provisions was wrong. This reasoning reconciles Perry J’s conclusion to the usual position that a liquidator will be personally liable for costs if they are an unsuccessful plaintiff in a proceeding, but if acting as defendant they will only be personally liable for costs if they act unreasonably (for example, see Silvia v Brodyn Pty Ltd [2007] NSWCA 55).
• In the unusual circumstances of this case, an award of costs against the liquidators personally best served the interest of justice, bearing in mind the interests of the creditors.
• It would then be for the liquidators to establish the reasonableness of their conduct in due course should they seek indemnity for the costs out of the company’s assets.

The case is a reminder of the breadth of the Commissioner’s powers and the fact that the Commissioner enjoys a more privileged status to other creditors when it comes to access to information.