Re Norper Investments Pty. Limited & the Companies Act.

Judges:
Needham J

Court:
Supreme Court of New South Wales

Judgment date: Judgment handed down 3 June 1977.

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Needham J.: Norper Investments Pty. Limited (hereinafter called the company) was at all relevant times a private company for the purposes of the Income Tax Assessment Act 1936. In respect of the year ended 30th June 1972, it was necessary for the company to distribute not less than $993,755 in order to avoid what is commonly known as ``Division 7 tax'', tax arising because of a failure to distribute the necessary proportion of its taxable income in the tax year. Division 7 tax was at the rate of 50% of the amount under-distributed.

On 30th April 1973 the company, having amended its articles so as to permit it to do so, issued 500,000 preference shares of $2 each at par to a listed public company Jensen Mining and Investments Ltd. The rights attached to these shares were, after the distribution of the dividend about to be mentioned, extremely limited. On the same day the company declared and paid a dividend on those shares at the rate of $2.04 per share, amounting to $1,020,000.

On 2nd October 1975 the defendant Commissioner issued an assessment of tax for the year ended 30th June 1972 claiming that the ``undistributed amount'' was $993,755 and, accordingly, the additional tax payable under Division 7 was $496,877.50. Payment was sought by 3rd November 1975. The company duly lodged an objection to this assessment on 28th November 1975, which was rejected on 30th January 1976. As it was entitled to do (sec. 187 of the Act) the company requested the Commissioner to treat the objection as an appeal and to forward it to this Court.

The assessment of the Commissioner was accompanied by an adjustment sheet which contained the following statement: -

``Section 260 requires the Commissioner to ignore the dividend paid on the shares issued to Jensen Mining and Investments Ltd. As a consequence the company has been assessed for Division 7 tax in respect of the undistributed amount of $993,755...''

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The adjustment sheet then set out the calculation.

The evidence satisfies me that the Commissioner had a number of cases in his office in which Division 7 tax had been assessed by him in somewhat similar circumstances. The Commissioner had advised at least one taxpayer (and I infer that he had advised more than one) that he had not referred that taxpayer's objection to this Court because he had a test case on the question before No. 2 Board of Review in Melbourne.

On 9th July 1976, the Commissioner served upon the company (incorporated in the A.C.T. but registered in New South Wales as a foreign company) a notice of demand under sec. 315 (2) of the Companies Act, 1961. On 9th September 1976, the High Court delivered judgment in
Mullens v. F.C. of T. 76 ATC 4288.

On 1st December 1976, No. 2 Board of Review delivered judgment in an appeal referred to as ``Case H53'' - see 76 ATC 451. The facts in that case relevant to the objection of the company against the assessment are practically identical. The Board of Review, applying the decision of the High Court in Mullens v. F.C. of T. 76 ATC 4288, upheld the taxpayer's objection, denying the applicability of sec. 260 of the Act to the declaration of dividend. The Commissioner has lodged an appeal to the High Court from the Board's decision. I infer from the evidence that ``Case H53'' was the ``test case'' the Commissioner had referred to. The case is plainly, as a matter of legal principle, on all fours with the present.

On 19th January 1977 the Commissioner, despite the fact that he had not yet complied with his statutory duty to refer the company's objection to this Court, issued a petition out of this Court for the winding up of the company. It alleged that the company was indebted to the Commissioner in the sum of $542,925.86, being the total of the disputed assessment and additional tax imposed for late payment. The petition was returnable before the Master on 28th February 1977. Some arrangement for its adjournment must have been reached, as the petition was not heard on that day. On 4th March 1977, on the application of the company, I restrained the advertising of the petition until 8th March 1977, when, by consent, the injunction was continued until 22nd March 1977. On that day the petition came on for hearing before me.

The company submitted that the petition should be dismissed or adjourned until the Commissioner had referred the appeal and the fate of that appeal was known.

Section 187 of the Income Tax Assessment Act 1936 gives a taxpayer, dissatisfied with a decision of the Commissioner on an objection, the right to request the Commissioner either to refer the decision to a Board of Review or to treat the objection as an appeal and to forward it to the Supreme Court of a specified State. Section 188 provides, by subsec. (1), that, if the request is accompanied by a fee of two dollars, ``the Commissioner shall refer the decision or forward the objection to a Board or Court in accordance with the request''. Under sec. 189 the taxpayer has a right to give a further notice if the Commissioner does not refer the decision or forward the objection within sixty days. There is no evidence that the company did give such a notice in the present case.

Section 201 provides as follows: -

``The fact that an appeal or reference is pending shall not in the meantime interfere with or affect the assessment the subject of the appeal or reference; and income tax may be recovered on the assessment as if no appeal or reference were pending.''

Section 202 provides: -

``If the assessment is altered on the appeal or reference a due adjustment shall be made, for which purpose amounts paid in excess shall be refunded, and amounts short paid shall be recoverable as arrears.''

The company has no assets from which the amount of the assessment could be paid. The company claims that, if a winding up order were to be made against it, defaults would be committed under mortgages of which it was a guarantor, and that tax losses available over the next four years to the group of which the company was a member amounting to approximately $10,000,000, would be in danger (the Commissioner, despite the argument's rejection by Menzies J. in
Franklin's Selfserve Pty. Ltd. v. F.C. of T. 70 ATC 4079 at 4089, still contending that a company in liquidation cannot be the beneficial owner of shares for the purposes of sec. 80A of the Income Tax Assessment Act - cf. Ayerst v. C. & K. Construction Ltd. (1976)

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A.C. 167). Upon each of these situations arguments were based that no winding up order should be made. In the view I take of the case I need not consider them further.

The Commissioner submitted that the company could show no irreparable harm coming to it from a winding up order and that such a result was necessary not only in proceedings for an injunction against presentation or advertisement of a petition, but also in a successful defence of a petition itself. In respect of an insolvent company, the claim was unable to be made in either case.

Much consideration was given during the argument to two decisions - one by Bowen C.J. in Eq. (
Re Roma Industries Pty. Ltd. 76 ATC 4113; CCH Company Law Cases (1975-76) ¶ 40-247), the other by McGarvie J. of the Supreme Court of Victoria (
Fortuna Holdings Pty. Ltd. v. D.F.C. of T. 76 ATC 4312; CCH Company Law Cases (1975-76) ¶ 40-265). In the first of these it was held that, because of the existence of sec. 201 of the Income Tax Assessment Act, 1936, the claim for tax cannot be said to be disputed merely because an appeal from the Commissioner's rejection of an objection to the assessment is pending. It was also held that the Commissioner was entitled to issue a winding up petition even if he has not exhausted all other legal means for obtaining payment. His Honour, in reaching the conclusion that he should make a winding up order, said (p. 4116) that the section ``will generally lead the Court to refuse a stay''. For this proposition he cited two cases, including
Marina Estates Pty. Ltd. v. F.C. of T. 74 ATC 4166, 48 A.L.J.R. 219. The company submits that his Honour misapplied that decision, as Barwick C.J. (74 ATC at p. 4169; 48 A.L.J.R. at p. 220) in a judgment agreed with by the other four judges said: -

``A stay of proceedings was sought pending certain appeal proceedings against the assessment. This was a matter peculiarly within the discretion of the primary judge.''

The company submits (and I think with some force) that the High Court has recognized that a discretion exists in the trial judge to grant or refuse a stay applied for on the ground that appeal proceedings were pending. It may be, as Bowen C.J. in Eq. said, that, generally, such an application would be rejected, but the power remains.

McGarvie J., in a long and careful judgment, saw what he described as two ``branches'' of the principle that a winding up petition, if its presentation amounts to an abuse of the process of the court, will be restrained by injunction. The first branch was said to be applicable to cases where the presentation of the petition might produce irreparable damage to the company and where the proposed petition had no chance of success (76 ATC at p. 4316). The second branch was said to be applicable to cases where the petitioner had chosen to assert a disputed claim, by a procedure which might produce irreparable damage to the company, rather than by a suitable alternative procedure (76 ATC at p. 4319). Support was found for the proposition so far as it related to a ``suitable alternative procedure'' in the decision of the Court of Appeal in
Charles Forte Investments Ltd. v. Amanda (1964) 1 Ch. 240.

The company submitted that I should not follow Re Roma Industries Pty. Ltd. and should follow the reasoning of McGarvie J. in Fortuna Holdings Pty. Ltd. v. D.F.C. of T. The Commissioner submitted that I should follow the decision of Bowen C.J. in Eq. not only because it was correct but also because, as a matter of comity, I should not depart from a judgment of a judge of this Court unless convinced of its incorrectness. The Commissioner further submitted that the ``second branch'' espied by McGarvie J. in the authorities did not exist, the decision in Charles Forte Investments Ltd. v. Amanda being given in an entirely different and irrelevant context.

It seems to me that I need to determine the following matters: whether I have power to dismiss or stay a petition for winding up when (a) it is vexatious, oppressive or an abuse of process; (b) when, in the case of taxation assessments, an appeal is pending which has a substantial chance of success.

I shall deal with the second matter first. I have no doubt that, despite the provisions of sec. 201, the Court has a general discretion to grant a stay of proceedings. I have already referred to Marina Estates Pty. Ltd. v. F.C. of T. (above) and now refer to another decision of the High Court relied upon by Bowen C.J. in Eq. in Re Roma Industries Pty. Ltd. for the proposition I have already set out. It is
D.F.C. of T. v. Australian Machinery & Investment Co. Pty. Ltd. (1945) 8 A.T.D. 133. Other cases where a stay has been granted or refused are

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referred to at 5 Australian Tax Review p. 4 et seq. Undoubtedly, the principle set out in sec. 201 must be taken into account in considering whether a stay should be granted. But, as it seems to me, if the Court is satisfied that the company has a substantial argument that the assessment should be set aside entirely, a stay could properly be granted, even without condition of payment of portion of the sum assessed. If the argument of the company is that the assessment is excessive, and the argument is one of substance, terms could well be imposed on any stay that payment of the undisputed portion be made - cf. the case last mentioned, at pp. 135-6.

In the present case, if an appeal were properly on foot, I have no doubt that I would have granted an application for a stay of these proceedings. That the company's case is substantial is conceded by the Deputy Commissioner himself, who gave evidence. The company has the support of a considered unanimous decision of a Board of Review on a matter on all fours with the present. Counsel for the Commissioner did not suggest that that decision was wrong - all he submitted was that, as an appeal to the High Court had been lodged, I could not take it as certain that the law was as stated by the Board. It is not necessary for me to express any view on the likelihood of success of the Commissioner's appeal; the decision of the Board is there and is not manifestly wrong.

But, of course, no appeal is pending. The Commissioner has omitted to obey the clear direction of the Statute which he administers - he has not forwarded the objection to the Court, as sec. 188 says he shall. It may be convenient for the Commissioner (and perhaps for a number of taxpayers) to select one of a number of objections to similar assessments as a case for litigation to determine the fate of all. If that were done with the full approval of all the objectors I suppose it would be for this Court to act as if all of the objections had been referred or forwarded. But there is no evidence of the consent of this company to this procedure. What is proved is that the Commissioner has failed, since 26th February 1976, that is, for some 15 months, to comply with his duty under the Statute to forward the objection to this Court. Even during the hearing of this petition he made no offer to do so and I must, I think, assume that he will continue to act in breach of the command of the legislature. What is further proved is that, after the ``test case'' had foundered before the Board of Review, the Commissioner lodged a winding up petition against this company and sought to convince the Court that he was entitled to a winding up order because of other provisions of the Statute he was studiously breaching. The present state of the law (i.e. the decision of the Board of Review) is and the state of the law at the date the petition was lodged was that the assessment in this case is misconceived and that this company is not taxable under Division 7. To make a winding up order in such circumstances would, in my opinion, be ``not just'' - see per Latham C.J., Rich, Dixon and Willams JJ. in
D.F.C. of T. v. Australian Machinery & Investment Co. Pty. Ltd. 8 A.T.D. 133 at p. 135.

In my opinion this petition is oppressive and the proceedings, therefore, are an abuse of process. I think the proper order in the case of proceedings which are so commenced is to dismiss them with costs. That is the order I make.