Deputy Federal Commissioner of Taxation v. Vereker & Ors.

Judges:
Marks J

Court:
Supreme Court of Victoria

Judgment date: Judgment handed down 18 December 1986.

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Marks J.

On 19 September 1986, the plaintiff ("the Commissioner") obtained judgment for $5,120,075.94 against the first defendant ("Vereker"), the said sum comprising $3,372,911.21 tax on income and the balance for interest.

The Commissioner here seeks declarations and orders in aid of execution. He alleges that Vereker has alienated assets to put them beyond reach but that property in the names of one or more of the defendants belongs to him. There is land ("the Romsey land") in three titles at Romsey in the name of the second defendant ("Verucci"), thoroughbred mares, racing stock, progeny and shares in stallions ("the bloodstock") in the name of the sixth defendant ("Westerley").

The Commissioner also seeks to set aside what it claims to have been a purported third mortgage for $700,000 of the Romsey land in favour of the third defendant ("Belcrest") a Singapore-based company said to be controlled by a man called Patrick Lau.

The fourth ("Adeptgate") and the fifth ("Wilgrow") defendants were joined because the Commissioner seeks that purported sales of the bloodstock to and by them be disregarded.

Mr Hayes and with him Mr Costello of counsel appeared for the Commissioner, Mr Vickery of counsel for Vereker and Verucci, and Mr Murdoch of counsel for Belcrest and Wilgrow. Adeptgate and Westerley, respectively United Kingdom and New Zealand based companies were not represented.

The tax component of the judgment sum was the subject of amended assessments issued 4 January 1983 in respect of the two tax years 1977 to 1978 and 1978 to 1979.

Vereker faces criminal charges allegedly connected with the activity which produced income on which he was assessed. It is undesirable and not necessary that I make more than the barest reference to matters connected with the earnings themselves. Vereker was one of some five principals of a tax advisory service which appears to have generated a remarkably high profit in the order of $19m. in the subject period. The service was managed by Metropolitan Taxation Services (Aust.) Pty. Ltd. ("M.T.S.") in which Vereker himself, then later a corporate vehicle, owned substantial shares. On 18 November 1977 he held four out of ten shares. A man called Manners held the other six. After February 1978 his interests were represented through corporate bodies and other principals through corporate vehicles (perhaps themselves) acquired shares.

It was accepted that the Commissioner must show that the source of funds used to acquire the Romsey land and the bloodstock was income of Vereker derived from his association with M.T.S.

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The Commissioner claims that a number of purported arrangements, transactions and book entries associated with the acquisition of the Romsey land and the bloodstock in the present names should be disregarded as "shams", alternatively, were to defraud him within the meaning of sec. 172 of the Property Law Act 1958, alternatively disclose resulting trusts in favour of Vereker.

Reliance on the Victorian Property Law Act and the tender of certain documents in reliance on the Victorian and Commonwealth Evidence Acts make it desirable that I say something of my understanding as to the jurisdiction here exercised.

Jurisdiction

Section 75(iii) of the Constitution provides that the High Court shall have original jurisdiction in all matters in which the Commonwealth or a person suing or being sued on its behalf is a party.

The expression "on its behalf" has been interpreted to embrace agencies which perform in effect the executive functions of the Commonwealth, for example, the Commonwealth Bank (
Bank of N.S.W. v. The Commonwealth (1948) 76 C.L.R. 1, see Dixon J. at pp. 358, 367) the Commonwealth Trading Bank (
Inglis v. Commonwealth Trading Bank of Australia (1969) 43 A.L.J.R. 330) and the Australian Atomic Energy Commission (
Kathleen Investments (Aust.) Ltd. v. Aust. Atomic Energy Comm. (1978) 52 A.L.J.R. 46).

Section 209(1) of the Income Tax Assessment Act 1936 provides that:

"Any tax unpaid may be sued for and recovered in any Court of competent jurisdiction by the Commissioner or a Deputy Commissioner suing in his official name."

Section 208(1) provides that:

"Income tax when it becomes due and payable shall be a debt due to the Commonwealth, and payable to the Commissioner in the manner and at the place prescribed."

This action which clearly involves collection of the debt due to the Commonwealth, is thus within the original jurisdiction of the High Court, but jurisdiction of this Court to entertain it is conferred by sec. 39(2) of the Judiciary Act 1903.

Application of State laws

The Commissioner seeks to rely on sec. 172 of the Victorian Property Law Act 1958, notwithstanding that I am exercising, for the reasons stated, federal jurisdiction.

Section 172(1) provides:

"Save as provided in this section, every alienation of property made, whether before or after the commencement of this Act, with intent to defraud creditors, shall be voidable, at the instance of any person thereby prejudiced."

Section 64 of the Judiciary Act 1903 provides:

"In any suit to which the Commonwealth or a State is a party, the rights of parties shall as nearly as possible be the same, and judgment may be given and costs awarded on either side, as in a suit between subject and subject."

In Inglis v. Commonwealth Trading Bank of Australia (1969) 119 C.L.R. 334 the High Court held that the bank, which sued in the Supreme Court of New South Wales, was "the Commonwealth" within the meaning of sec. 64 and that the section extended to substantive rights so as to make applicable the New South Wales Limitation Act 1969.

In
Maguire v. Simpson (1978) 52 A.L.J.R. 125 the High Court held that the Commonwealth Trading Bank of Australia, suing in the Supreme Court of New South Wales, was the "the Commonwealth" as party to a suit within sec. 64.

By analogy, the Commissioner suing to recover a debt due to the Commonwealth, is within the description. In
George v. F.C. of T. (1952) 86 C.L.R. 183 at p. 207 Fullagar J. said in effect the Commissioner represented the Crown.

The ambit of sec. 64 has been defined judicially to have, in my opinion, sufficient width to make it clear that sec. 172 of the Property Law Act 1958 is available to the Commissioner in the present action. Recently, in
The Commonwealth of Australia v. Evans Deakin Industries Ltd. and Anor (1986) 60 A.L.J.R. 619, the High Court held that by virtue of sec. 64, the Queensland

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Subcontractors' Charges Act 1974 applied to the Commonwealth. In the joint judgment of five members, it was said (p. 621):

"That case (Maguire v. Simpson) establishes that in every suit to which the Commonwealth is a party s. 64 requires the rights of the parties to be ascertained, as nearly as possible, by the same rules of law, substantive and procedural, statutory and otherwise, as would apply if the Commonwealth were a subject instead of being the Crown."

Procedural Statutes

It follows that sec. 64 of the Judiciary Act 1903 also confers power to apply the Victorian Evidence Act to the admissibility of evidence. Its provisions, particularly of sec. 58A-58J, were relied on to tender documents and records in support of the case for the Commissioner. In my opinion, the power to invoke those provisions is, apart from sec. 64, clearly conferred by sec. 79 and 80. (
The Commissioner of Stamp Duties (N.S.W.) v. Owens (No. 2) (1953) 88 C.L.R. 168.)

The provisions of the Evidence Act 1905 (Cth), particularly sec. 7B, were also relied on. As the jurisdiction being exercised is federal, these provisions, in my opinion, in the absence of clear statutory provision to the contrary, also apply. The opening words of sec. 80 "so far as the laws of the Commonwealth are not applicable or so far as their provisions are insufficient to carry them into effect" make it clear that first resort is to the Commonwealth laws, viz., the Commonwealth Evidence Act. In so far as its provisions do not apply or are insufficient, resort, in my opinion, may be had to the Victorian Evidence Act provided the provisions in question are not in conflict with the Federal Act.

Before departing the Victorian Evidence Act I mention that in receiving many documents over the objections on behalf of Vereker, Verucci, Belcrest and Wilgrow, I followed Tadgell J. in
Re Action Waste Collections Pty. Ltd. (in liq.); Crawford v. O'Brien & Ors (1980-1981) 5 A.C.L.R. 673 at p. 686 and the authorities to which his Honour there referred, in particular
Potts v. Miller (1940) 64 C.L.R. 282 per Dixon J. at pp. 302-305. The observations on Dixon J.'s dicta by Gibbs J. in
Re Montecatini's Patent (1973) 47 A.L.J.R. 161 at p. 169 are especially pertinent in this case where so much of the Commissioner's case depends on the evidence of investigative accountants:

"Two rules seem to be established, first, that books of account kept according to an established system in organized business are receivable in evidence as proof of the financial progress or of the result of business operations conducted on a large scale, and secondly, that when the books are produced, or their production is not insisted on, an accountant who has examined them may state their general effect."

The observations of course concern admissibility apart from statute. But, in my view, they supplement, if necessary, the Evidence Act provisions relied on here and considered by Tadgell J.

"Sham" transactions

The word "sham" is now used in the law to describe a transaction which it will disregard.

It was submitted by Mr Hayes that transfers and recordings of income earned by Vereker and its transformation into capital assets in other names should be disregarded. He submitted the transactions involved were "shams". His alternative submission was that the transactions were for the purpose of defrauding the Commissioner within sec. 172(1) of the Property Law Act. But if the transactions were "shams", there is no need for sec. 172(1). We get to sec. 172 only if not satisfied they were. The distinction, by reference to sec. 260 of the Income Tax Assessment Act 1936, was classically stated by Isaacs J. in
Jaques v. F.C. of T. (1923-1924) 34 C.L.R. 328 at p. 358:

"That the transaction is a reality is no reason for the non-application of the section. On the contrary, if the transactions were not real and effective apart from the section, that section would be unnecessary. A sham transaction is inherently worthless, and needs no enactment to nullify it."

What then does the law mean by "sham"? A definition was supplied by Diplock L.J. in
Snook v. London and West Riding Investments (1967) 2 Q.B. 786 at p. 802:

"I apprehend that, if it has any meaning in law, it means acts done or documents executed by the parties to the `sham' which are intended by them to give to third parties or to the Court the appearance of creating

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between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create."

His Lordship went on to say:

"An essential characteristic of a `sham' is that all the parties to it have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating."

(See also
W.T. Ramsay Ltd. v. I.R. Commrs (1982) A.C. 300 per Lord Fraser at p. 337;
Alloyweld Pty. Ltd. v. F.C. of T. 84 ATC 4328; (1984) 15 A.T.R. 614;
Esanda Ltd. v. Burgess (1984) 2 N.S.W.L.R. 139;
Boydell v. James (1936) 36 S.R. (N.S.W.) 620;
Perpetual Trustee Co. v. Bligh (1940) 41 S.R. (N.S.W.) 33;
Hawke v. Edwards (1947) 48 S.R. (N.S.W.) 21.)

The law has moved away from testing each transaction separately, the "step by step" approach for which it was thought
I.R. Commrs v. Duke of Westminster (1936) A.C. 1 was authority. It is now accepted that the Court may look at the circumstances as a whole, which in this case might usefully involve, comparison between Vereker's enjoyment and control of the subject assets at the beginning and at the end of the activity on which he relies.

In W.T. Ramsay Ltd. v. I.R. Commrs (1982) A.C. 300 Lord Wilberforce at p. 324 said:

"For the Commissioners considering a particular case it is wrong, and an unnecessary self limitation, to regard themselves as precluded by their own finding that documents or transactions are not `shams', from considering what, as evidenced by the documents themselves or by the manifested intentions of the parties, the relevant transaction is. They are not under the Westminster doctrine or any authority bound to consider individually each separate step in a corporate transaction intended to be carried through as a whole."

He also stated at p. 326:

"While the techniques of tax avoidance progress and are technically improved, the Courts are not obliged to stand still... To force the Courts to adopt, in relation to closely integrated situations, a step by step dissecting approach which the parties themselves may have negated, would be a denial rather than an affirmation of the true judicial process. In each case the facts must be established, and a legal analysis made: legislation cannot be required or even be desirable to enable the Courts to arrive at a conclusion which corresponds with the parties' own intentions."

The principles established in Ramsay were applied again by the House of Lords in
I.R. Commrs v. Burmah Oil Co. Ltd. (1982) S.T.C. 30 when Lord Diplock made it clear that the approach of Ramsay may be applied to any preordained series of transactions in which are inserted steps that have no commercial purpose apart from the avoidance of a liability to tax which in the absence of those particular steps would have been payable.

The House of Lords again applied Ramsay in
Furniss v. Dawson (1984) 1 A.C. 474, the above statement of Lord Wilberforce receiving endorsement by Lord Fraser of Tulleybelton who said (p. 512):

"The true principle of the decision in Ramsay was that the fiscal consequences of a preordained series of transactions, intended to operate as such, are generally to be ascertained by considering the result of the series as a whole, and not by dissecting the scheme and considering each individual transaction separately."

Lord Brightman at p. 527 said that the new development involved a finding that there was a preordained series of transactions; i.e. a single composite transaction, and that the transaction contained steps which were inserted without any commercial or business purpose apart from a tax advantage. The modern principles were recently applied by Venelott J. in
Ingram v. I.R. Commrs (1986) 2 W.L.R. 598.

The evidence and inferences

The evidence comprises almost entirely of documents and records of legal entities with which Vereker was associated or alleged to have been, together with the narrative of the investigative accountants who traced a number of entries and gave their opinion of their effect. Apart from what appears therein, enriched to some extent by direct evidence from two former principals of M.T.S., the Commissioner leans heavily on the power to draw inferences from the facts proved. In this regard, it must be

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observed that no witness was called on behalf of any defendant, no challenge made to the credibility of any witness for the Commissioner, and little, if any, challenge in cross-examination of the facts sought by the Commissioner to be established. Further, although some 30,000 documents were seized and examined by officers of the Australian Tax Office, no documents other than those presented on behalf of the Commissioner were called for and sought to be tendered to amplify, explain or contradict the material before the Court.

These circumstances provide the setting for the application of the principles of
Jones v. Dunkel (1958-1959) 101 C.L.R. 298;
Earle v. Castlemaine District Community Hospital (1974) V.R. 722;
O'Donnell v. Reichard (1975) V.R. 916, which permit the absence of evidence which might be expected from a party interested to contradict or explain facts proved by an opposite party to favour the drawing of inferences from those facts unfavourable to the party from whom the contradictions or explanatory evidence might be expected. These principles have particular potency in this case.

Verification of income

The Commissioner must, as he concedes, establish that the subject assets were acquired out of income earned by Vereker.

He sought to do this by reliance on the evidence of the investigating accountants who traced moneys emanating from the Qualdike Trust through the various entities controlled by Vereker or associates to Verucci which made the purchases. No challenge was made to the tracing exercise performed or the conclusions reached. No evidence was offered by way of contradiction or further documents sought to be tendered to show either that the tracing exercise was wrong or that Verucci had some other source of funds. However, it was submitted on behalf of the defendants represented that the source of the funds was not Vereker but the Qualdike Trust. There were in fact two trusts "Qualdike" and "Qualdike No. 2" which were said to have generated the income and therefore the proper targets of tax assessment. Thus it was submitted that I should go behind the admitted notices of assessment which attribute the income not to Qualdike but to Vereker. In the present context, there is no significance in there having been more than one trust said to have generated the income. For convenience I will refer to them compendiously as "Qualdike".

For the Commissioner, it was contended that by virtue of sec. 177 of the Income Tax Assessment Act 1936 the income stated on the notices of assessment to have been derived by Vereker was conclusive evidence that it was and that accordingly it was not open to entertain submissions that Qualdike, not Vereker, earned the income. Section 177(1) provides:

"The production of a notice of assessment, or of a document under the hand of the Commissioner, a Second Commissioner, or a Deputy Commissioner, purporting to be a copy of a notice of assessment, shall be conclusive evidence of the due making of the assessment and (except in proceedings on appeal against the assessment) that the amount and all the particulars of the assessment are correct."

Mr Vickery and Mr Murdoch submitted that this provision did not assist the Commissioner here. It merely prevented, they submitted, any challenge to the existence of the debt. They conceded however, that their submissions if upheld would mean that judgment could not be opposed on the ground that Vereker did not earn the income, but execution on that judgment could be. I do not accept that any such interpretation conforms with legislative intent or for that matter gives effect to what the section says.

In
McAndrew v. F.C. of T. (1956) 98 C.L.R. 263 at pp. 269-270 Dixon C.J., McTiernan and Webb JJ. said of the section:

"Then in our opinion the meaning and effect of s. 177(1) is to give evidentiary effect to such an assessment over the whole ground which by law it is the function of an assessment to cover. Over part of that ground its evidentiary effect is absolutely conclusive, over the rest of the ground it is conclusive except in proceedings on appeal against the assessment. It is given such evidentiary effect by the production of a notice of the assessment or of a copy under the hand of the commissioner, second commissioner or a deputy commissioner. The ground over which s. 177(1) gives conclusiveness to the assessment is described as the due-making of the

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assessment and the correctness of the amount and all the particulars of the assessment. But that appears to us to comprise the whole ground. It is the manifest policy, one may now almost say the historical policy, of the legislation on the one hand to give to the taxpayer full opportunity of objecting to his assessment of contesting his liability in every respect before a court or before a board of review but on the other hand to require that in proceedings for the recovery of the tax the taxpayer will be concluded by the assessment and will not be entitled to go behind it for any purpose."

By sec. 174(2) a notice is required to specify amounts relevant to the assessment, one such amount being necessarily (see definition of "assessment" sec. 6) the taxable income, an assessment of which the Commissioner is empowered to make pursuant to sec. 168 and 169.

In my opinion, the present proceedings are encompassed by the expression "proceedings for the recovery of the tax" mentioned in McAndrew. Undoubtedly, that is precisely what they are, even though subsequent to judgment and merely in aid of execution.

In McAndrew at p. 276 Kitto J. said:

"By the `particulars' of the assessment is meant, presumably, the ingredients or constituent elements (see
Trautwein v. Federal Commissioner of Taxation (1936) 56 C.L.R. 63, at pp. 107, 108) in the ascertainment of the amount of tax to be paid... To say of those ingredients that they are `correct' is to say that they are rightly treated as ingredients as well as that they are right in point of amount."

In sec. 6 of the Act "assessment" is defined to mean "the ascertainment of the amount of taxable income and of the tax payable thereon". Thus, the taxable income stipulated in the assessments which are in evidence by consent is an integral part and must be treated here as conclusive that it was in fact earned by Vereker. (See George v. F.C. of T. (1952) 86 C.L.R. 183 at p. 204;
F.J. Bloemen Pty. Ltd. v. F.C. of T. 81 ATC 4280 at pp. 4284-4285, 4287-4288, 4289; (1981) 55 A.L.J.R. 451 at pp. 454, 456, 457.)

It was next submitted that the evidence does not permit the conclusion that any such income was the source of the funds for the acquisition of the subject assets. I do not agree with this submission. The taxable income attributed by the Commissioner to Vereker emanated from Qualdike. There is no evidence to suggest that Vereker had any other source of income or source of funds which led to the subject acquisitions.

Notwithstanding the conclusiveness of the assessment notices there is little doubt that the venture in which Vereker participated was treated in effect, that is, in substance, by the participants as a partnership whilst for obvious purposes it adopted different legal forms. In judging the legal effect of the activity it is useful to keep in mind that distinction between substance and form to which Lord Bridge so helpfully referred in Furniss at pp. 517-518.

The starting point of the tracing exercise undertaken by the Commissioner's investigators is properly to be regarded as the income of Vereker from the M.T.S. activities and not Qualdike. I do not propose to travel the paths marked out by the witnesses. They were not challenged. The question in essence is whether there should be any recognition of changes of ownership sought to be effected by the purported participation of different legal entities.

I conclude with little hesitation that the various book entries, exchanges of cheques and other activity relied on by Vereker to transform his income into property in other names should be disregarded. The criteria to which I have referred in discussing the law as to "sham" transactions have been amply met. I will state as briefly as I can my reasons.

Most, if not all, the legal entities involved were trustee companies. They were cynically used. Legal form was followed to the extent that deeds existed, settlors and beneficiaries nominated but moneys or cheques passed through them without regard to their import for the so called beneficiaries. Many of the latter were charities unlikely to have had knowledge of the use to which their names were put. The companies and trusts also underwent frequent changes of name, the most feasible explanation for which is the desire of their controllers to put investigation off the scent. These trusts were strategically placed, some in Victoria, at least one in Queensland and a number in Norfolk Island. In the latter they were under the control

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of a solicitor John Brown who was within the network of M.T.S. The cheques relied on to effect the changes of ownership travelled scent destroying paths from Victoria to Norfolk Island and back again. The companies to which I have referred implemented a scheme to avoid liability for tax and make assets controlled by Vereker difficult to locate. The paper movement of assets through the web of companies made the tracing exercise by the taxation investigators long, drawn out and difficult. It was admitted by Vereker that some 36 companies and 20 trusts were the source of relevant documents they examined. But the material was not disgorged voluntarily. Vereker gave no co-operation. He ceased to be a director of M.T.S. on 29 June 1979, Verucci (then called Vereker Pastoral Co. Pty. Ltd.) having in the earlier months of that year purchased some of the bloodstock and the Romsey land. On 2 July 1979 he sold his shares in M.T.S. and severed his association. Thereafter he lived on the Romsey land and conducted a stud there through Verucci. Officers of the Australian Taxation Office first sought information from M.T.S. in August 1979 but without success. On 10 December 1981 Vereker walked out of an interview without any questions being answered or documents produced. Further interviews proved fruitless. Investigations have involved many years full-time work with information extracted largely by use of such statutory provisions as sec. 263 and 264 of the Income Tax Assessment Act.

Exhibit "D" is a working paper in the handwriting of Manners, a principal of M.T.S., as at 28 June 1979 at or about the time of Vereker's retirement. It is headed "Income Distributions". It demonstrates that Qualdike was no more than a legal form. It showed $760,000 as due to Vereker, the "entitlements" of other principals being also set out. The word "partners" and columns headed with their initials show the amounts distributed. Notes on the document show that calculations took into account when persons became partners. The distributions among them were in proportion to the shareholding of each or of his corporate vehicle in M.T.S. The sum allocated to Vereker was part of that which was traced to Verucci for the subject acquisitions. The legal form of Qualdike required this money to be treated as part of the trust the duty of which was to account to the beneficiaries. No regard appears to be had to this obligation. It is a shining example of the form being used but the substance ignored. The latter was the assumption by individuals of the profit, and that, notwithstanding that in its tax returns Qualdike claimed that the same earnings were offset by expenses in the form of "reimbursements" to a Norfolk Island company called Avocado Marketing Pty. Ltd. for losses against which before their incurrence it had executed (without any commercial purpose) a deed of indemnity.

The nature of the journey of the money which started from Qualdike and ended at Verucci demonstrates it was preordained. In addition many transactions having no commercial purpose were interposed. There was none in the journey itself. It involved cheques passing through bank accounts, and, at least on one occasion where there was no bank account a book entry only, of companies in Victoria and Norfolk Island.

Vereker participated in the M.T.S. venture for approximately 2 years only. He was a chartered accountant who had spent his previous years in New Guinea. The first distribution to him of $720,000 was in May 1978. The sum passed through a company the name of which was later changed to Salamaua Pty. Ltd. to his own trust account. After being placed on deposit for a short period, some of it was applied in November 1978 to the purchase of the first parcel of the Romsey land. Book entries later suggested that Salamaua lent a total sum of $2.5m. to Verucci. On 26 June 1981 there was a round robin of cheques which had the purported effect of changing the indebtedness from one of Verucci to Salamaua to one of Verucci to a Brisbane based company called Applevale Pty. Ltd.

Now there can, in my opinion, be no better example of transactions without any commercial purpose than the round robin which occurred on the one day in this case. Its sole purpose was to raise a debt to Applevale Pty. Ltd. to meet a scheme objective of Vereker. Later when Verucci purported to sell the bloodstock this indebtedness was thought to be useful as a source of "consideration" for the "sales".

The round robin, in my view, also demonstrates that the legal entities through

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which the cheques passed were part of the Vereker controlled network and that the only conceivable objective was the distancing of income and assets from the Commissioner.

Having laboured through many documents and considered carefully the evidence and submissions of counsel it is tempting to discuss at length the intricate manipulations which were the targets of the Commissioner's intensive researches. I will not yield to that temptation. There would be no end and perhaps it might merely give credence to the notion that each step must be examined to determine the bona fides of the transaction as a whole. It is sufficient, I think, to emphasise the effect of the manoeuvres in their entirety. Firstly, the nexus between the acquisition of the Romsey land and the income of Vereker has been clearly enough demonstrated. But the appearance of ownership in both cases by Vereker is sufficiently strong to leave inescapable the conclusion that the interposition of transfers of money as "loans", "assignments of debt" or otherwise were without commercial purpose, were in form only, without substance and occurred between entities acting at his behest. They should be disregarded. I do not overlook that the Romsey land is subject to a first and second mortgage (in addition to the Belcrest mortgage) and the destination of the money raised has not been disclosed. All this - despite Verucci purportedly being a trustee company, the beneficiaries of which nominally include the Australian Red Cross Society and the Salvation Army (Victoria) Pty. Ltd.

The Commissioner is entitled to the declarations sought that Vereker is the beneficial owner of the Romsey land.

The acquisition of the bloodstock had a similar background up to the point of purported sale in 1983. Vereker began to move the bloodstock out of Victoria to New Zealand on or about 9 February 1983. On 4 January 1983 the amended assessments for the tax, the subject of the judgment, were issued. At or about the same time there were purported sales from Verucci to a London based company called Adeptgate Pty. Ltd., then from Adeptgate to Wilgrow and from Wilgrow to Westerley. In fact, the horses were sent direct from Victoria to New Zealand. The purpose of the purported sales via London and Singapore is not clear but is likely to involve the retention of capital and income overseas out of reach of the Commissioner.

The purported sales were in my opinion not genuine but in any event for the purpose of fraudulently defeating collection of the income tax due to the Commissioner. My findings which lead me to that conclusion include the following:

• (a) Verucci was a trustee company. The form was used but the substance disregarded, it being used and conducted solely as a vehicle of Vereker. No regard was paid to any interest of beneficiaries;
• (b) considered as a whole the series of transactions left control and enjoyment of the bloodstock in Vereker as the ensuing observations demonstrate;
• (c) Vereker made flights to New Zealand at the same time as the horses. He claimed in correspondence to be the manager of the bloodstock. He has conducted affairs concerning them as though he were in fact owner. He has participated in applications for their registration in New Zealand, assumed supervision of the stud where they now reside in New Zealand and seen to the transfer of the stallion shares into the new names. He lives at Romsey in Victoria, an unlikely place from which to manage valuable bloodstock purporting to be owned by a New Zealand based company which purchased them on a bona fide sale;
• (d) no money changed hands for any purported sale. Consideration was said to result from book entries in compliant companies within the Vereker network;
• (e) in the chain of sales, there was a purported purchase of the bloodstock by Wilgrow which is apparently fully owned by Belcrest. Belcrest is controlled by Vereker's long-time associate Patrick Lau. But the documents filed by Wilgrow with the Registrar of Companies, Singapore show that it has no assets, some small indebtedness and has never commenced operations since its incorporation in 1982. Vereker is shown as a director of Wilgrow as also is Swney, another Vereker associate, and his wife. Mr and Mrs Swney conduct the stud in New Zealand where the bloodstock reside in the name of Westerley. Patrick Lau (whose name is also Low Loke

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  Thim) is also a director of Wilgrow, the total shareholding as at 3 October 1985 being held by him and, I apprehend, his wife, if not an associate;
• (f) the ultimate purchaser of the bloodstock is Westerley which is under the control of the Vereker associate Swney, the stud manager. Swney holds his shares (save one) in Westerley on trust for Wilgrow which as I have said has no assets, except the shares, although the latter are not disclosed in the documents filed with the Singapore Registrar. Swney's co-trustee of the 4,900 shares in Westerley is a man called D.J. Neesham, an Auckland solicitor who acts for Vereker. The remaining issued share (1) is held absolutely by Swney. On 29 April 1983 (a few weeks after the purported sales) Neesham wrote as solicitor for Vereker to the Overseas Investment Commission of the Bank of New Zealand as follows:

• "We act on behalf of Mr J.M. Vereker, an Australian resident who, trading as Vereker Pastoral Company, has recently introduced various high quality Australian brood mares to New Zealand to visit stud to New Zealand sires.
• He has entered into negotiations with New Zealand interests to maintain the mares, future imported stock, and their progeny in New Zealand in coming seasons. It is intended that agistment and management contracts be concluded to have the bloodstock raised and serviced within New Zealand and offered at New Zealand sales."

• The letter went on to state that it was wished to register a company in New Zealand under the name of Vereker Pastoral Co. Ltd. with a share capital of $10,000, all but one share in which were to be held by Vereker "such company to carry on business in New Zealand in accordance with the foregoing";
• (g) thus in April 1983, after the purported sales, Vereker through his solicitor purported to be, as indeed I believe he was, the owner of the bloodstock;
• (h) some of the bloodstock was shipped directly to New Zealand on 9 February 1983, the day prior to one of the sale agreements dated 10 February 1983;
• (i) on 20 March 1983 Vereker wrote to the New Zealand Racing Conference expressing himself "to advise that a client company of this office has recently sent a number of mares, foals and unraced stock into New Zealand";
• (j) correspondence and telephone calls show frequent communication between Vereker and Swney, also between Vereker and Lau;
• (k) on 22 September 1983, Vereker wrote to the Secretary of the New Zealand Racing Conference:

• "May I point out that both ourselves and all the other parties involved in the introduction of the horses into New Zealand are anxious to comply with all rules and regulations outlined by yourself and are working towards achieving this...;"

• (1) In 1985 Belcrest and Vereker were co-plaintiffs in an action in the Supreme Court of New South Wales. It was settled by Vereker without consultation with Belcrest, from whom he claimed to have full authority. In the proceedings he claimed to have had authority to represent Belcrest for four or five years in buying and selling bloodstock and investing funds on its behalf.

The Belcrest mortgage

On or about 28 May 1985, Verucci purported to give a third mortgage over the Romsey land in favour of Belcrest. The consideration was expressed to be for $700,000, the interest rate as "may be agreeable between the mortgagor and mortgagee from time to time". Belcrest did not advance $700,000 and there is no evidence of any agreement for payment of interest or that any interest has been paid. The Commissioner seeks a declaration that the said mortgage is void or should be disregarded as a "sham". As I am clearly of the opinion that the grant of the mortgage was an alienation of property to defraud the Commissioner within the meaning of sec. 172(1), it is unnecessary to consider whether it was also a "sham". The latter consideration is not free from doubt because the mortgage was indeed registered and arguably was therefore a true dealing. There can be little doubt, in my opinion, that the grant of the mortgage was an alienation of property having the effect of depriving the Commissioner

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substantially, if not entirely, of the fruits of execution on the Romsey land which he here seeks.

The circumstances appear to be these. In or about 1980 Vereker deposited in his own name $US300,000 with a company or a firm called Dominican Finance Ltd. ("Dominican") in Hong Kong. Later he withdrew the amount in Japanese yen and redeposited it in 1982. Evidence to this effect was given by Vereker in proceedings in the Supreme Court of New South Wales, the transcript and file of which is in evidence by the consent of Vereker. It was submitted, I think correctly on behalf of Belcrest, that out of Court statements by Vereker could not constitute evidence against Belcrest on whose behalf objection was taken. The evidence nevertheless is admissible against Vereker but I do not rely on any out of Court statement of his as evidence against Belcrest. There is, however, evidence which Mr Murdoch concedes is properly relevant to the case against Belcrest that a deposit of approximately 90 million yen in the name of "Vereker" was made with Dominican in November 1984.

There has been an alleged defalcation by Dominican and the money is said to have been lost. In or about 1984 Vereker declared that the money deposited was in his name only as trustee for Belcrest. The Belcrest company file from Singapore makes it unlikely that Belcrest was ever possessed of sufficient money to make the deposit suggested. For the year 1981 it made a loss of $S58,798 and 1982 a loss of $S31,972. For 1981, it stated accumulated losses brought forward as $S11,940 suggesting it had traded unprofitably since its inception. It was incorporated in 1979 under the name of Prize International Pte. Ltd. but changed its name to Belcrest on 27 December 1979. On 8 January 1986 Patrick Lau filed a statutory declaration with the Registrar of Companies in Singapore stating that Belcrest had a total indebtedness of $S98,044.50 at 10 December 1984. In my opinion, the information filed by Belcrest with the Registrar of Companies in Singapore make it highly improbable it could have had for deposit at the relevant times the amount involved.

On 25 February 1985, Verucci purported to execute a deed of "Guarantee Indemnity and Acknowledgement" which recited that "pursuant to the terms and conditions of trusteeship, Verucci Pastoral Co. Pty. Ltd.... is indebted to Belcrest International Pte. Ltd.... for the amount of 111,320,459 yen". The agreement then purported to indemnify Belcrest against the loss. Verucci did not have such an indebtedness. The deposit was in the name of Vereker who at one stage declared that he, not Verucci, was the trustee. The so-called deed of guarantee was clearly a contrivance to provide a foundation for the execution of the third mortgage in May 1985. It had, in my opinion, no commercial purpose of Verucci (which it must be remembered was a trustee company).

In my opinion, the proper conclusion is that the grant of the third mortgage was pursuant to a preordained plan for depriving the Commissioner of any benefit from the sale of the Romsey land. It goes without saying that Belcrest is within the camp of Vereker and that the third mortgage is likely to have the effect, if it is allowed to stand, that any surplus after the payment out of the first and second mortgagees would go to Singapore in the name of Belcrest but for the benefit of Vereker.

It was accepted that the amount in yen said to be the subject of the guarantee approximated the $700,000 mentioned in the third mortgage.

Mr Murdoch submitted on behalf of Belcrest that the Commissioner had the burden of proving Belcrest had notice of the fraudulent nature of the disposition. He relied on authorities quoted in May on Fraudulent and Voluntary Conveyances 3rd ed. (1908) at p. 314, namely
Re Johnson, Golden v. Gillam 20 Ch. Div. at p. 394 and
Re Carl Hirth (1889) 1 Q.B. per Lindley M.R. at p. 260 and
Re Reis; Ex parte Clough (1904) 2 K.B. at p. 774. These cases concern the equivalent of sec. 172(3) of the Property Law Act which provides:

"This section shall not extend to any estate or interest in property alienated for valuable consideration and in good faith or upon good consideration and in good faith to any person not having, at the time of the alienation, notice of the intent to defraud creditors."

Mr Murdoch submitted that the Commissioner must prove that Belcrest had notice of the fraudulent disposition. If, of course, Belcrest was in reality Vereker himself then this submission has no substance. But in my opinion, the burden of proof is as follows. The party seeking to void the alienation of

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property must prove the fraudulent intent within the meaning of sec. 172(1) but the burden, in my opinion, is on the grantee to show that the alienation to him was for valuable consideration and in good faith or upon good consideration and in good faith. So much is in fact stated by May in the sentence preceding that on which Mr Murdoch relied (see p. 314):

"If the grantee claims the protection of s. 5 of the Statute, as a purchaser, he must prove a bona fide conveyance to him, for valuable consideration;..."

My view of the onus of proof was accepted by Pennycuick V.-C. in
Lloyds Bank Ltd. v. Marcan (1973) 1 W.L.R. 339 in a decision which was affirmed by the Court of Appeal (1973) 1 W.L.R. 1387. Mr Murdoch correctly pointed out that the matter was not argued. However, the decision at first instance contains the following observations (p. 345):

"So, it seems to me, a transferee seeking to take advantage of this sub-section (the equivalent of s. 172(3)) must establish both the requirements of the sub-section i.e., there must be conveyance for valuable or for good consideration in either case in good faith, and the person must not have notice of intent to defraud."

At p. 346 the Vice-Chancellor observed that it was accepted on both sides that the burden of proof under the subsection was on the transferee.

As to the cases relied on by Mr Murdoch and referred to in May the first, in Re Johnson, was a decision of a single Judge concerning a deed which was held to be valid. His observations at p. 394 were obiter and do not concern directly the problem of onus of proof.

In Carl Hirth the observations of Lindley M.R. at p. 620 appear also to have been obiter as the decision eventually turned on the provisions of the Bankruptcy Act. Prima facie, his observations favour the submission of Mr Murdoch but the direct question of onus was not specifically analysed. The observations of Vaughan Williams L.J. in Re Reis did not form part of any judgment in that case but were merely in the course of argument.

In any event, there is in this case in my opinion, sufficient evidence from which the inference can be drawn that Belcrest, by virtue of its association with Vereker and its knowledge that there was no indebtedness to it, had the requisite notice. The inference is strengthened by the absence of evidence from Belcrest on the issue.

For these reasons, the Commissioner is entitled to a declaration that the Belcrest mortgage is void and of no effect.