NSW Court of Appeal upholds rejection of proof of debt claim
The recent decision of Alora Property Group Pty Ltd as trustee for Alora Property Group Trust v Henry McKenna (as Liquidator of Alora Davies Development 104 Pty Ltd) [2022] NSWCA 197 has upheld a primary judge’s finding that a proof of debt claim should be rejected. This decision dealt with some interesting considerations for insolvency practitioners and creditors when seeking to challenge a liquidator’s proof of debt.
Background
The company, Alora Davies Development 104 Pty Ltd, was wound up in insolvency on 6 May 2020. It had been a joint venture between its two shareholders “Alora” and “Davies” to develop real property. The arrangements were contained in a shareholder’s agreement, which relevantly provided by clause 16:
The parties agree that Alora (or its nominee) shall be entitled to be paid fees for project managing the Company’s property development(s) including but not limited to managing the development application process. The fees payable shall be calculated at $8,000 plus GST per lot, to be paid as an expense by the Company to Alora (or its nominee), prior to the disbursement of funds via dividends or profit share between the Shareholders.
After the company was wound up in insolvency, APG (Alora’s nominee and related entity) on 5 June 2020 lodged a formal proof of debt with the liquidator, in the sum of $1,084,983.82. On 22 February 2021, the Liquidator admitted APG’s proof to the extent of $166,599.62. The liquidator rejected any claims for project management fees essentially on the basis that as the development had not been completed and there were no proceeds available for distribution, no entitlement to any fees had accrued. The primary judge found in the liquidator’s favour and APG appealed this decision.
In arriving at its decision at first instance, the Court noted that a person appealing against the liquidator’s decision to reject the proof of debt has the onus of showing that decision was wrong, and that question is determined by reference to the evidence before the Court when it considers whether or not to affirm the liquidator’s decision. Further, the decision in Tanning Research Laboratories Inc v O’Brien (1990) 169 CLR 332 remains good law in respect of an appeal against a liquidator’s decision in relation to a proof of debt under s90-15 of the Insolvency Practice Schedule in Schedule 2 to the Corporations Act 2001. These principles were not disturbed on appeal.
On appeal, APG submitted that the terms of clause 16 were clear and unambiguous, to the effect that APG (as Alora’s nominee) was entitled to fees for its project management services and that it did not stipulate that those fees were contingent on any event such as completion of all of the services.
However, the Court of Appeal (Ward P, Macfarlan JA & Brereton JA) disagreed with APG’s interpretation. They held that the proper construction of clause 16 was that the project management fees became payable only upon completion of the project by realisation of the development.
It was concluded that project management was expressly not limited to the managing of the development application process, and so contrary to the appellant’s contention, that alone could not be enough to earn the fee. All of the project management work required to bring the project to completion needed to be performed. The purpose of the provision that the fees would be paid “prior to the disbursement of funds via dividends or profit share” was to ensure the fees would be paid in priority to distribution of any surplus, once funds were available – a situation which would only arise upon completion of the project by realisation.
The presumption of advancement survives a High Court challenge, but its influence has been weakened
The High Court decision of Bosanac v Commissioner of Taxation [2022] HCA 34 has confirmed that the presumption of advancement is an entrenched part of Australian law despite the Commissioner of Taxation’s (Commissioner) submission to abolish the principle on the basis of that it has no acceptable rationale, and is anomalous, anachronistic and discriminatory.
Background facts
Mr and Mrs Bosanac had purchased a house for use as their matrimonial home in Dalkeith, WA. The deposit funds came from their joint bank account, the mortgage was in both their names, however the property was registered solely in the wife’s name.
Following an audit by the ATO, it was determined that Mr Bosanac had a substantial tax debt. As a result, the Commissioner sought a declaration that Mr Bosanac had a 50% beneficial interest in the Dalkeith property, despite it being registered only in his wife’s name.
The issue was - what did Mr and Ms Bosanac intend as to the beneficial ownership of the property at the time of purchase? This is generally determined by reference to the following presumptions in equity:
- Resulting trust – this presumption arises when two parties contribute to the purchase price, but legal title is only recorded in the name of one. In those circumstances, equity presumes that the person holding legal title does so for both contributors; and
- Presumption of advancement – this presumption operates to prevent a resulting trust from arising where the relationship between the parties provides a reason for concluding that a gift was intended.
A presumption of trust is a useful tool for creditors and bankruptcy trustees to attack assets not held in the name of the debtor, especially in circumstances where evidence of the actual intention of the parties may be difficult to ascertain.
In the first instance decision in the Federal Court of Australia, the trial judge found that the presumption of advancement arose and had not been rebutted, and therefore the property was not held beneficially for the husband. This was despite Mr Bosanac contributing to the deposit and assuming a considerable personal liability under the mortgage. Weight was placed on the fact that Mr Bosanac and Mrs Bosanac had owned other assets separately, and that Mr Bosanac was a sophisticated person of business so would have understood the consequences of not having an asset in his name.
This decision was reversed on appeal before the Full Federal Court, which held that it was the intention of the parties that 50% of the property was held beneficially for Mr Bosanac. The Court emphasised the fact that the deposit was taken from a joint loan account, and Mr Bosanac had accepted substantial personal liability for the mortgage and effectively each contributed half of the purchase price.
This was a significant decision as it reversed the presumption of advancement and showed that where a husband contributed to the purchase of an asset, it may not be sufficient to protect that asset from creditors merely by the asset being held in the wife’s name.
High Court appeal
The Commissioner’s key submissions on appeal called for abolishing the presumption of advancement altogether. The Commissioner submitted that the doctrine was outdated and had not kept pace with societal values where the presumption of advancement applies from husband to wife, but not from wife to husband. Ms Bosanac’s submissions in reply rejected the abolition of the doctrine noting that the underlying rationale for a number of equitable doctrines have evolved over time and remain unsettled, which should not mean that they should be abolished because they sit uneasily with modern principles.
The High Court delivered three separate judgments (Kiefel CJ and Gleeson J, Gageler J & Gordon J and Edelman J). All were in agreement that the appeal should be allowed, and the decision of the Full Federal Court set aside, with the result that the original judgment of the Federal Court stood, namely that the property was not held beneficially for the husband. In the end, the Commissioner’s claims failed. It was held that the presumption of advancement remains an entrenched part of Australian law, and although the criticisms about the presumption not reflecting contemporary standards of relationships were recognised, they were too enshrined in Australian law to be simply abolished.
However, all three judgments clearly emphasised that the presumptions played a more limited role in the ultimate determinations and that while the presumption remains intact, it will not overcome the objective intention of the parties.
Gageler J described the presumption of resulting trust and the presumption of advancement as being of practical significance only in rare cases where the totality of the evidence is incapable of supporting the drawing of an inference about what the parties intended when purchasing the property (at [67]). The question of intention as to whether a trust arises is entirely one of fact.
When applying this reasoning to the Bosanac’s, it was held that the clear inference was that the parties' objective intention was that Mr Bosanac was doing no more than facilitating Ms Bosanac's acquisition of the Dalkeith property. He did so by assisting in paying the deposit and entering into the joint loans for the purpose of funding the purchase, as his wife did not have the personal finances to do it on her own. Therefore, the appeal was allowed.
The key takeaway from this case is clear: the influence of the presumption of advancement is arguably weakening in Australia and cannot be simply relied upon without considering the surrounding circumstances. Instead, the Court will look to the objective intention of the parties at the time of the acquisition to determine whether any presumption applies.
Corporate Law and COVID-19
Treasurer Josh Frydenburg has announced a series of potential temporary economic measures in response to the fluid COVID-19 situation. This temporary package has implications for bankruptcy, insolvency and corporate law.
We have summarised the proposed measures below.
Bankruptcy changes
- Increase in the minimum debt threshold for a creditor-initiated bankruptcy procedure from $5000 - $20,000;
- The time to respond to a bankruptcy notice increased from 21 days to 6 months;
- An extension of the protection period for individual’s declaring an intention to present a debtor’s petition extended from 21 days to 6 months.
Insolvency Changes
- Increase in minimum amount for a statutory demand from $2000 - $20,000;
- Increase in time to respond to a statutory demand from 21 days to 6 months;
- Temporary suspension of directors’ personal liability for insolvent trading for six months (egregious cases of dishonesty will still attract criminal liability);
- Insertion of s 588GAAA which provides an additional temporary safe harbour provision during the six-month period.
According to the Bill, the amendments to times for compliance will only apply to procedures commenced on or after the commencement of the amending Schedule. The temporary increase in the monetary threshold will be repealed at the end of the six-month period which starts on the date of commencement.
In addition to the above relief, the Australian Investment and Securities Commission has announced it has adopted a ‘no-action’ position in regard to company AGM’s including:
- a two-month ‘no-action’ position in regard to entities with a financial year end of 31 December that have not held an AGM by 31 March 2020;
- the holding of virtual AGM’s;
- sending supplementary notices of AGM electronically;
- non-compliance with section 249J of the Corporations Act.
ASIC encourages the use of technology to facilitate virtual AGMs and electronic communication, however the company constitution will determine whether or not this is possible. ASIC cannot amend the constitution to allow this, however irregularities may be addressed via other methods.
No changes to financial reporting obligations have been announced yet, however ASIC is monitoring the situation.
While ASIC is entitled to indicate that it will not exercise its regulatory powers in a certain way, this does not prevent third parties from taking action against a company or a Court ruling that conduct has breached legislation. It is highly advisable to seek legal advice prior to undertaking a course of action.
Fugitive sentenced to 3 years jail for $200k tax fraud
A 56-year-old man has been sentenced to three years and three months in jail and ordered to pay over $150k in reparations after he fraudulently obtained and attempted to obtain more than $200,000 from the ATO.
Peter Garven appeared before the Sydney District Court on 30 May 2019, which heard that between October 2002 and July 2004, Mr Garven lodged three income tax returns in which he fraudulently obtained $102,504 in refunds and attempted to obtain a further $41,758. In doing so, Mr Garven claimed to have received more than $150,000 in salary and wages from the University of New South Wales, despite the university having no record of such payments.
The court also heard that between August 2002 and July 2004, Mr Garven fraudulently obtained $51,684 in GST refunds in his capacity as the sole director of Peter Garven Consulting and Garven Resources.
The hearing follows a tumultuous series of events which ensued after Mr Garven admitted his claims were false and vowed to lodge amendments in 2004. Namely, the ATO commenced an audit after the amended returns were never received. Mr Garven then failed to appear for his trial in March 2009, with a warrant later issued for his arrest. Mr Garven subsequently went into hiding and was registered on the missing persons list, before being arrested in 2017 in the Watagan Mountains.
Ultimately, the decision serves as an important reminder of the implications of failing to comply with tax obligations.
Close but no cigar: taxpayer jailed after creating fake business to obtain $1.5M tax refund
A 39-year-old South Australian man has been sentenced to 2 years and 4 months imprisonment after he attempted to obtain almost $1.5 million in tax refunds.
On 31 July 2019, Adam Hamshere appeared before the Adelaide District Court which heard that in January 2016, Mr Hamshere registered a fake business which purported to sell cigars. In doing so, Mr Hamshere obtained an ABN and later registered for GST and Wine Equalisation Tax (WET), backdating the GST registration to commence in January 2015.
In March 2016, Mr Hamshere lodged five business activity statements (BAS) in which he claimed an entitlement to $1,444,069 in GST and WET refunds.
After becoming the subject of an ATO audit, Mr Hamshere frequently phoned the ATO demanding immediate payment of the refund and claiming that his paper and electronic records had been stolen. However, despite thorough investigations into Mr Hamshere’s affairs, the ATO found no evidence to substantiate his business activity or his claims that his records had been stolen.
Ultimately, Judge Muscat found that Mr Hamshere had attempted to dishonestly obtain a financial advantage from the Commonwealth, pursuant to sections 11.1 and 134.2(1) of the Criminal Code 1995.
Acting ATO Assistant Commissioner David Mendoza asserted that the strong sentence is a timely reminder of penalties facing those who attempt to cheat the tax system. In doing so, he asserted that “those people who try to evade or cheat the tax and super system will get caught and we will take firm action. We will not tolerate this type of behaviour.”
Director reprimanded for failing to comply with PAYGW obligations
In the matter of Deputy Commission of Taxation v Thomas Wilson [2018] NSWDC 302, the New South Wales District Court found against a company director for failing to comply with his duties. In doing so, Mahoney SC DCJ refused to mitigate on the basis of the director’s ‘difficult’ co-directors, asserting that there is no reprieve available to directors who fail to uphold their obligations.
In April 2015, Global Piling Contractors Pty Ltd was incorporated, with Mr Wilson, Mr Wheatley and Mrs Wheatley appointed as directors. Mr Wilson and Mr Wheatley each owned a 50% share in the company.
According to Mr Wilson, it was agreed at the time of incorporation that the directors were not employees of the company and thus would not receive salaries. Rather, they would draw money by way of dividends. In fact, the company was to have no employees, but would instead engage the services of contractors as required.
However, in 2015 the company withheld monies due to the Deputy Commissioner of Taxation on two occasions, before lodging Business Activity Statements which identified two amounts withheld for PAYG tax on employee salaries. The PAYG tax was never paid. Accordingly, in February 2016, Mr Wilson was issued with a Director Penalty Notice (DPN) for failing to remit PAYGW to the value of $111,798 to the ATO.
At trial, Mr Wilson submitted that from the time of incorporation until he received the DPN, he believed the company had systems in place to ensure it complied with its taxation obligations and remitted all amounts due to the ATO. He asserted that he thought those sums would be limited to GST and upon receiving the DPN, he did not understand that the amounts claimed were on account of taxes withheld by the company for wages paid to employees.
Moreover, Mr Wilson submitted that upon receiving the DPN, he phoned Mrs Wheatley who informed him that the amounts claimed in the DPN were on account of taxes withheld from wages paid to workers and not remitted to the ATO. Mr Wilson was also informed that Mr Wheatley had been hiring employees, rather than engaging contractors - a decision which he submitted he had not previously been made aware of. Further, Mr Wilson was informed that both Mr and Mrs Wheatley had also received a DPN and that ATB Partners would be engaged to formulate a payment plan with the ATO.
On 22 February 2016, at Mr Wilson’s request, a meeting of the company was held to discuss the outstanding taxation liability and the company’s ability to pay it. With no involvement in the day-to-day running of the company, and concerned that the company was insolvent, Mr Wilson was apprehensive about his exposure as a Director under the DPN. He subsequently moved a resolution that the company enter into voluntary administration. However, Mr and Mrs Wheatley contended that the company was simply experiencing a ‘temporary lack of liquidity’, and consequently dismissed the motion. They also rejected a secondary resolution by Mr Wilson that the directors convene a general meeting of the members of the company for the purpose of appointing a liquidator.
Mr Wilson subsequently sought legal advice on how to put the company into administration or cause the company to be wound up to avoid liability under the DPN. Mr Wilson was informed that he alone could not put the company into the administration, and that in order to avoid liability under the DPN, the company would need to pay its outstanding taxation liabilities. Mr Wilson was also advised that he could apply to the court for a winding up order but that it would be a difficult process and that by the time an application was heard in court, the time for compliance with the DPN would likely have expired.
In August 2016, Mr and Mrs Wheatley agreed to appoint an administrator, who the court subsequently appointed as a liquidator.
In September 2018, the matter was brought before Mahoney DCJ, with the Deputy Commissioner of Taxation alleging that pursuant to section 255-45 of the Taxation Administration Act, it had a prima facie entitlement to the debt due by virtue of an evidentiary certificate. However, Mr Wilson relied on the statutory defence under s 269-35. Accordingly, the court was required to determine whether Mr Wilson had taken “all steps which were reasonable, having regard to the circumstances of which the defendant, acting reasonably, knew or ought to have known, to ensure that the directors complied with the section.”
Having considered the test in Saunig, the court held that the Mr Wilson had failed to take all reasonable steps, concluding that he “failed to inform himself of the way in which the company was being managed and operated.” In doing so, Mahoney DCJ held that Mr Wilson ought to have known that the company was incurring a tax liability by way of PAYGW. His Honour also concluded that there were further steps available to Mr Wilson, including calling another meeting to persuade his co-directors to appoint an administrator or to have brought an application for leave to wind up the company. Mr Wilson was therefore ordered to pay the debt in the amount of $111,798 plus interest, pursuant to section 100 of the Civil Procedure Act 2005.
Ultimately, this case serves as a warning to other directors that they cannot claim ignorance to satisfy the objective test and absolve their duties as a director.
Federal Court sets aside statutory demand in respect of unpaid legal costs issued during the period in which costs may be assessed
The recent Federal Court of Australia decision of Rusca Bros Services Pty Ltd v Dlaw Pty Ltd, in the matter of Rusca Bros Services Pty Ltd (No 2) [2019] FCA 1865 serves as a timely reminder that a statutory demand may be at risk of being set aside when issued in circumstances where a statutory period for assessment of costs comprising the debt claimed has not yet expired.
Background
Rucsa Bros Services Pty Ltd (Rusca) engaged Dlaw Pty Ltd trading as Doyles Construction Lawyers (Doyles) to act on their behalf in a dispute with Lendlease Building Pty Ltd (Lendlease) connected with construction works at RAAF Tindal in the Northern Territory in about September or October 2017.
Throughout the course of the retainer, Doyles rendered invoices to Rusca totalling $500,529.79. Rusca paid a total of approximately $300,000 to Doyles between about October 2017 and about March 2018.
In April 2018 a director of Rusca sent an email to Mr Doyle of Doyles expressing surprise at the size of the recent invoice given the significant fees already paid to that point and stating that Rusca would need to go through each of the bills to ensure that they were reasonable.
On 8 May 2018, Rusca requested that Doyles provide it with an itemised invoice for all of the bills rendered by Doyles to Rusca. By section 187(3) of the Legal Profession Uniform Law (NSW) (LPUL) Doyles were required to provide the itemised bill within 21 days of the request. The equivalent provision in Queensland, secion 332 of the Legal Profession Act 2007, provides that a firm must provide an itemised bill within 30 days of such a request.
Also on 8 May 2018, Rusca received a statutory demand from Doyles dated 7 May 2018 seeking payment of a total sum of $191,022.15 being the unpaid balances of 3 invoices issued in February, March and April 2018 less funds held in trust.
On 25 May 2018, Rusca filed an application to assess the costs charged to it by Doyles over the course of the retainer.
As at the date of the hearing, whilst the costs assessor had completed his assessment of the costs, his fees had not been paid and neither Rusca nor Doyles had taken steps to obtain the costs assessor’s Costs Determination (the equivalent of a certificate of assessment in Queensland).
Statutory Demand
Rusca applied under sections 459H and 459J of the Corporations Act 2001 (the CA) to set the statutory demand aside.
The grounds relied upon included, relevantly:
- as the legal costs comprising the debt the subject of the Demand were the subject of an assessment application, there was a statutory prohibition on proceedings to recover the costs and the debt the subject of the Demand was not presently due and payable; and
- Doyles had failed to give an adequate estimate of total legal costs at the commencement of the retainer and as a result, was not permitted to commence or maintain proceedings for recovery of its costs until the costs had first been assessed. This also constituted a statutory prohibition on proceedings to recover the costs and for this reason as well, the debt the subject of the Demand was not presently due and payable
In ordering that the Demand be dismissed, Markovic J referred to section 198(7) of the LPUL. That section provides that once an application for costs assessment has been made:
the law practice must not commence any proceedings to recover legal costs until the costs assessment has been completed.
There are similar provisions in other jurisdictions in Australia. The Queensland equivalent is section 338 of the Legal Profession Act 2007 (LPA), which is identical to section 198(7) of the LPUL save that a law practice may commence proceedings with the leave of the court.
Her Honour cited authority to the effect that:
if a statute prohibits commencement of proceedings to recover a debt, then so long as the statutory prohibition remains in place the debt is not “due and payable” and consequently cannot found a statutory demand.[8]
Her Honour held that:
the statutory prohibition in s 198(7) means that the debt the subject of the Demand can no longer be said to be immediately “due and payable” as required by s 459E of the Act. This is because the debt the subject of the Demand cannot presently be enforced by action by the commencement of any proceeding for recovery. That is so even if the Demand was served prior to the commencement of the Assessment Application. While the debt might have been due and payable at the time of service of the Demand because there was no prohibition on the commencement of a proceeding for recovery at that time, that status changed as soon as the Assessment Application was filed.[9]
After determining that the costs assessment application was not complete because the Costs Determination had not been obtained, in the result her Honour held that:
the Assessment Application is not complete. As that is the case, it follows that Doyles is precluded by s 198 of the LPUL from taking steps to recover its costs and, in those circumstances, the debt the subject of the Demand is not due and payable and the Demand should be set aside pursuant to s 459J(1)(b) of the Act.
Other grounds relied upon
Her Honour also dealt briefly with other grounds relied upon by Rusca in order to set aside the Demand, including, relevantly, the contention that Doyles had failed to provide a proper estimate of legal costs at the commencement of the retainer.
Her Honour held that Doyles had failed to give sufficient costs disclosure (noting that the estimate given at the outset ultimately comprised 2% of the total costs billed) and that by operation of section 178 of the LPUL, Doyles could not commence or maintain proceedings to recover the legal costs until they had been assessed, with the result that the costs the subject of the Demand would not be payable until they had been assessed.
There are also equivalents to section 178 of the LPUL in other Australian jurisdictions. The equivalent provision in Queensland is section 316 of the LPA, which provides that a client “need not pay the legal costs unless they have been assessed” in circumstances where adequate disclosure has not been made.
Conclusion
The key takeaways for practitioners from the decision are:
- If a client files a competent application for costs assessment after a statutory demand has been issued in respect of unpaid legal costs, the statutory demand is liable to be set aside pursuant to section 459J(1)(a) of the CA on the basis that the costs the subject of the statutory demand are not “due and payable” until the costs assessment process is complete.In Queensland, a client may apply for assessment of costs without leave within 12 months of receiving the final bill or request for payment, so the period of risk extends for at least that length of time; and
- A court may be prepared to in effect ‘look behind’ a statutory demand issued in respect of unpaid legal costs to determine whether adequate disclosure has been made for the purposes of the applicable statutory regime and if it determines that it has not, the statutory demand may be set aside as a result.
High Court of Australia abolishes ‘Chorley Exception’
In 2018 we provided an update in respect of the matter of Pentelow v Bell Lawyers Pty Ltd [2018] NSWCA 150.
In that decision, the New South Wales Court of Appeal held that the ‘Chorley exception’ applied to barristers as well as to solicitors.
The Chorley exception is an exception to the well-established rule that a self-represented litigant is not entitled to professional costs for acting for him or herself in legal proceedings and provides that self-represented litigants who are solicitors are entitled to recover professional costs for work they have undertaken in legal proceedings.
In December 2018, the High Court of Australia granted special leave to appeal that decision and on 4 September 2019, allowed the appeal and overturned the decision of the New South Wales Court of Appeal.
Significantly, in doing so the High Court effectively abolished the Chorley exception in Australia.
Background and proceedings below
The case involved Janet Pentelow, a barrister who brought proceedings in both the Local Court and Supreme Court of New South Wales, seeking to recover unpaid fees following a dispute with her client (who had been her instructing solicitors). Although the Supreme Court awarded costs in Ms Pentelow’s favour in respect of both proceedings, the costs assessor later rejected in its entirety that part of the costs claimed by Ms Pentelow for preliminary work that she had undertaken herself prior to engaging legal representation, such as drafting the originating process and her affidavit of evidence.
During a subsequent review by the Costs Review Panel, Ms Pentelow’s claim for costs relating to work that she had undertaken was again disallowed on the on the basis that, relevantly, the Chorley exception did not extend to barristers. Ms Pentelow subsequently appealed to the District Court of New South Wales, however was unsuccessful on the same basis and thus sought judicial review of the decision pursuant to s69 of the Supreme Court Act 1970 (NSW).
In the New South Wales Court of Appeal, Beazley ACJ (with whom Macfarlan JA agreed) held that the Chorley exception extended to the work undertaken by a self-represented barrister, so long as that work was not expressly proscribed by the Bar Rules. Significant in Beazley ACJ’s reasoning was the fact that there was now significant overlap in the work undertaken by both solicitors and barristers and the costs of each may be assessed under the same costs assessment processes.
The decision in the High Court of Australia
On appeal, Keifel CJ, Bell, Keane and Gordon JJ commenced their analysis by noting that:
the Chorley exception is not only anomalous, it is an affront to the fundamental value of equality of all persons before the law. It cannot be justified by the considerations of policy said to support it.
Their Honours considered the rationale expressed to underlie the Chorley exception, which is that the professional skill and labour exercised by a solicitor litigant may be measured by the law, whereas the “private expenditure of labour and trouble by a layman cannot be measured”.
After noting that there was no reason in principle why the reasonable value of the time of any litigant could not be measured (citing the example of valuing the provision of labour in a quantum meruit claim), their Honours went on to note that:
there is an air of unreality in the view that the Chorley exception does not confer a privilege on solicitors in relation to the conduct of litigation… A privilege of that kind is inconsistent with the equality of all persons before the law.
There were only two previous decisions of the High Court of Australia in which the Chorley exception is referred to: Guss v Veenhuizen [No 2] and Cachia v Hanes (Cachia Decision).
The majority noted that because the existence of the Chorley exception in Australian common law was not in question in either decision, those decisions did not bind a later court to accept the application of the Chorley exception.
Furthermore, the majority in the Cachia Decision was critical of the decision in Chorley, describing it as “somewhat anomalous” and stating that the justification for the exception was “somewhat dubious”.The majority in Bell Lawyers noted that those criticisms “substantially undermine[d] the authority of the decision in Chorley” and that the possibility of a solicitor profiting from their participation as a litigant “is unacceptable in point of principle.”
Their Honours also cited the following statement of the majority in the Cachia Decision:
If the explanation for allowing the costs of a solicitor acting for himself are unconvincing, the logical answer may be to abandon the exception in favour of the general principle rather than the other way round.
Their Honours concluded that:
There is no compelling reason for this Court to refrain from taking the “logical step” identified in Cachia. The Chorley exception is not part of the common law of Australia.
The remaining judges agreed that the appeal should be dismissed. Both Gageler J and Edelman J agreed with the majority that the Chorley exception did not form a part of the common law of Australia. Nettle J, however, found only that the Chorley exception did not extend beyond solicitors to barristers.
Practical consequences
It is unclear how common it is for legal practitioners to undertake legal work in litigation on their own behalf.
The most likely example may be circumstances in which a sole practitioner or firm undertakes debt recovery proceedings on its own behalf. The apparent consequence of the decision is that a sole practitioner cannot recover legal costs from its opponent for work of this type. Whilst that may lead to an increase in firms outsourcing their own debt recovery, that outcome is consistent with the majority’s view that as a matter of policy, it is better that legal work be undertaken with sufficient professional detachment.
Where an incorporated legal practice (ILP) undertakes legal work such as debt recovery proceedings on its own behalf, it appears that the firm remains capable of recovering legal costs from its opponent, due to the legal detachment between the litigant (the ILP) and the practitioner undertaking the work (an employee of the ILP). Comments made by the majority, however, suggest that this position may be subject to review in future, in particular in respect of ILPs with a sole shareholder and director.
Brisbane man cops jail time for $1.2M tax fraud
A 51-year-old Brisbane man has been sentenced to 7 years in prison and ordered to pay $1.2 million in reparations after he was convicted of fraudulently obtaining and attempting to obtain more than $1.2 million from the ATO.
On 22 March 2019, Stephen Mungomery appeared in the Brisbane District Court which heard that between March 2009 and October 2012, he lodged 46 Business Activity Statements (BAS) on behalf of his wife’s business, Gourmet Providores. In doing so, Mr Mungomery included expenses incurred by his sole trader entity Epicure Consulting and Training Solutions.
In attempting to substantiate his claims, Mr Montgomery produced 24 invoices issued by Epicure Consulting. The invoices accounted for 92% of all expenditure and totalled $13,767,466 in sales - including $5 million for website development and $2.6 million for franchise development.
However, those invoices bore no commercial reality and were never actually paid. In fact, the court heard that the initial Gourmet Providores website was actually created by another company for $7,885. The franchise development claims were also held to be fraudulent.
Mr Mungomery was subsequently jailed for 7 years and ordered to repay the money to the ATO.
ATO Assistant Commissioner Peter Vujanic asserted that this case signals a warning to all Australian’s that those caught breaking the law will be held accountable, even if it means pursuing an action in the criminal justice system.
Failure to Disclose Debt May Jeopardise Consent Order
A recent finding of the Full Court of the Family Court of Australia serves as a timely reminder that a failure to disclose an asset or debt in a consent order may result in orders being set aside, regardless of whether that asset or debt is in the name of an individual, or the name of an ex-partner.
In the matter of Trustee of the Bankrupt Estate of Hicks & Hicks and Anor [2018] FamCAFC 37, the court was required to determine whether an appeal should be allowed on the basis that the primary judge erred in dismissing an application to set aside consent orders.
Specifically, the case involved Mr and Mrs Hicks, a husband and wife who, during their marriage, had acquired a number of properties between them. Mr Hicks also engaged in a number of business ventures, including a commercial deal to secure a $560,000 investment by Mr S in an enterprise known as U Pty Ltd.
Following their divorce, the couple filed an Application for Consent Orders for property settlement, in which neither party disclosed any liability to Mr S or identified him as a person who may be entitled to become a party to the case - something the application required.
Consequently, the Trustee of the Bankrupt Estate sought to have the final consent orders set aside.
At first instance, Mrs Hicks asserted that although there was a miscarriage of justice, the consent orders should not be set aside. The primary judge found in favour of Mrs Hicks, concluding that the debt was not incurred for a matrimonial objective and thus ruling that she had no involvement in Mr Hicks debt to Mr S. His Honour also contended that the trustee of bankruptcy would find itself in no better position if the order were set aside.
At trial, the Trustee subsequently argued that the consent orders should be set aside. In doing so, the Trustee asserted that the parties to the consent orders had sought to defeat a creditor by not disclosing that Mr S was suing Mr Hicks for $606,000 or notifying Mr S of the orders they proposed.
Thus, the court concluded that the Trial Judge had not taken into account the likely outcome of the property settlement proceedings in the event that the orders were set aside. Ultimately, the court held that the debt of $606,000 was incurred during the marriage and the projects which were linked to the loan were intended to benefit the marriage. On these grounds, the court allowed the appeal, ordering the proceeding be partially remitted for rehearing on the basis that there was a miscarriage of justice pursuant to s79A(1)(a) of the Family Law Act 1975 (Cth).
