Sydney Subdivision Pty Ltd (in liq) v Chow

• Jurisdiction: Australia Federal only
• Judgment Date: 13 January 2023
• Neutral Citation: [2023] FCA 8
• Date: 13 January 2023
• Court: Federal Court

FEDERAL COURT OF AUSTRALIA

Sydney Subdivision Pty Ltd (in liq) v Chow [2023] FCA 8

ORDERS

NSD 309 of 2020
BETWEEN:	SYDNEY SUBDIVISION PTY LTD (IN LIQ) (ACN 001 997 208) First Applicant MICHAEL SLAVEN AS LIQUIDATOR OF SYDNEY SUDIVISION PTY LTD (IN LIQ) (ACN 001 997 208) Second Applicant
AND:	BENJAMIN MING TUNG CHOW First Respondent ROBERTA CHOW Second Respondent

order made by:	COLVIN J
DATE OF ORDER:	13 january 2023

THE COURT ORDERS THAT:

1. The interlocutory application dated 7 October 2022 for leave to amend the statement of claim is dismissed.

2. There be leave to the applicants to make a further application to amend the originating process and statement of claim.

3. There be liberty to apply for any order as to costs of the interlocutory application.

4. Within 10 days, any party seeking an order as to costs shall file and serve an outline of submissions of no more than three pages setting out the costs order sought and the basis for the order together with any necessary affidavit confined to matters of fact.

5. Within 10 days of any party seeking an order as to costs, the opposing party shall file and serve an outline of submissions in reply of no more than three pages.

6. The question of any order as to costs of the interlocutory application be determined on the papers.

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

REASONS FOR JUDGMENT

COLVIN J:

1 Sydney Subdivision Pty Ltd (in liq) (SSPL) was formerly the trustee of the Benjamin M J Chow Family Trust (Trust). Until July 2015, its directors were Mr Benjamin Chow and Ms Roberta Chow. In its capacity as trustee, SSPL carried on business. Mr Vanda Gould provided accounting, tax, financial and investment advice to SSPL and to each of Mr and Ms Chow.

2 In 2015, the Commissioner of Taxation commenced an audit of the taxation affairs of SSPL. The Commissioner had conducted two earlier audits of its affairs each of which resulted in disallowance of certain deductions. The third audit resulted in adjustments to the income taxation returns of SSPL in each of the financial years 2000 to 2009. Amended assessments and assessments for penalties and interest were issued for each of the financial years 2003 to 2009 (2015 Assessments). The total amount of the 2015 Assessments was $2,602,191.05. In consequence, SSPL was voluntarily wound up on 13 July 2015.

Proceedings against Mr and Ms Chow

3 After an investigation by the liquidator of SSPL which included compulsory examinations and production of documents, proceedings were commenced in this Court by SSPL and the liquidator against Mr and Ms Chow on 11 March 2020. The form of application used to commence the proceedings was an application under the Federal Court (Corporations) Rules 2000 (Cth). It described the claims in the following terms:

On the facts stated in the supporting Statement of Claim, the plaintiff claims:

a. a declaration that each of Benjamin Chow and Roberta Chow has and have acted in breach of the fiduciary duties which they owed to Sydney Subdivision as directors of Sydney Subdivision;

b. a declaration that each of Benjamin Chow and Roberta Chow have acted in breach of sections 180,181,182, and 184 of the Corporations Act;

c. The sum of $2,602,191.05 for unpaid tax, penalties and interest;

d. The sum of $2,551,330.00 in unpaid director's loans.

e. Alternatively, damages against each of Benjamin Chow and Roberta Chow.

4 The statement of claim (Claim) filed with the application set out the basis for the claims and concluded with a restatement of the claims to relief in the same terms as the application (together with claims to interest, costs and such other orders as the Court deems fit).

5 In broad terms, the allegations in the Claim were to the following effect:

(1) At all material times, Mr Gould provided accounting, tax, financial and investment advice to SSPL and Mr and Ms Chow.

(2) Mr Gould had central management and control of Hua Wang Bank Berhad (HWBB), a company registered in Samoa.

(3) In 1994, SSPL was approved as an employer member of a superannuation fund (Fund).

(4) The trustee of the Fund was also a company controlled by Mr Gould.

(5) In 1994, SSPL transferred an amount of $400,000 styled as superannuation contributions to the Fund and those funds were then transferred to HWBB.

(6) HWBB entered into a purported loan agreement with SSPL to provide a $1 million loan facility with interest payable on drawdowns by 30 June each year.

(7) The above arrangements were part of a scheme to allow the Trust to have the benefit in Australia of the superannuation contributions and for SSBL as trustee to claim a tax deduction in Australia for purported interest payments to HWBB, thereby reducing the personal income tax liability of Mr and Ms Chow as the recipients of distributions from the Trust.

(8) The arrangements were made to conceal the superannuation funds from the Commissioner and to evade, alternatively avoid, income tax liability.

(9) The scheme was implemented thereby exposing SSBL to a risk of audit and a risk of assessments that disallowed the purported deductions.

(10) The scheme involved Mr and Ms Chow acting as directors of SSBL to benefit themselves to the detriment of SSPL.

(11) In or about 2000, there was an audit of the taxation affairs of SSPL which determined that purported interest payments as part of the scheme were not allowable as deductions.

(12) In the period 2000 to 2006, SSPL continued to claim such purported interest payments as deductions.

(13) In 2007, there was a second audit which again determined that such purported interest payments were not allowable as deductions.

(14) After the conclusion of the second audit, a further deduction of $75,216 was claimed for the 2006 tax year on the same basis as the earlier purported interest payments.

(15) There was a third audit after which the 2015 Assessments were issued.

(16) Mr and Ms Chow owed common law fiduciary and statutory duties to SSBL as directors.

(17) Mr and Ms Chow had breached those duties because they had caused SSPL to enter into the scheme and give effect to each of its constituent parts when they knew, amongst other things (a) it was a device to reduce their personal taxable income; (b) the documentation was intended to create a false appearance that there was a genuine commercial loan transaction between HWBB and SSPL; (c) in fact the scheme involved back to back arrangements whereby offshore funds under the control of SSPL were disguised; (d) the scheme was a sham arrangement; and (e) the scheme operated to the personal benefit of Mr and Ms Chow; yet they continued to cause SSPL to file income tax returns claiming purported interest expenses as deductions after the first audit and the second audit.

6 It may be noted that the alleged breach of duty was entering into the scheme concerning the HWBB loan with the knowledge as alleged.

7 The plea as to loss and damage in respect of the alleged breaches of duty was a claim that 'by reason of the audits conducted by the Commissioner and by reason of the Liquidation of [SSPL], [SSPL] has suffered and incurred loss and damages and costs and expenses'. The particulars given listed claims to the total amount of the 2015 Assessments and the costs of winding up.

8 Therefore, it appears that the event alleged to give rise to the loss claimed is the third audit which was said to have commenced in or about 2015 and to have culminated in the issue of the 2015 Assessments between 2 and 4 June 2015.

9 There was a separate claim that an amount of $2,551,330 had been advanced by SSPL to Mr and Ms Chow as unsecured loans and that despite demand the loans had not been repaid to the liquidator of SSPL.

An earlier draft claim included allegations concerning a separate loan scheme

10 Before filing the originating process and the Claim, the solicitors acting for SSPL and the liquidator had considered including a separate claim in relation to a loan provided by Normandy Finance and Investments Limited (Normandy) to SSPL. Normandy was a company incorporated in the United Kingdom. It too was alleged to be controlled by Mr Gould. Information available to the liquidator of SSPL at the time of preparing a draft of the Claim showed that between August 2000 and April 2009, SSPL had claimed interest deductions in respect of a loan from Normandy. Indeed, it appeared that interest deductions had been claimed for the Normandy loan by SSPL for many years before 2000 (as far back as 1996).

11 A copy of the draft Claim was provided to the solicitors acting for Mr and Ms Chow. It included allegations concerning the HWBB loan (of the kind that came to be included in the Claim) as well as a separate claim based upon a scheme concerning the Normandy loan. Relevantly for present purposes, the draft Claim set out a table which identified the interest expenses (and facility fees) that had been claimed by SSPL which were the subject of the claim, being those that related to the period 2000 to 2009. It identified the parts of the 2015 Assessments that related to deductions for the Normandy loan and the parts that related to the HWBB loan. Of the total amount, only $75,216 was shown to be interest relating to the HWBB loan. As has been noted, this amount is separately identified in the Claim as a deduction relating to the HWBB loan.

12 Therefore, it was very clear from the terms of the draft Claim that most of the 2015 Assessments related to deductions that had been claimed for interest expenses (and facility fees) in respect of the Normandy loan. However, there was no evidence available to the liquidator to indicate that in the case of the Normandy loan there was a back to back arrangement of the kind alleged in respect of the dealings involving HWBB. Further, neither the first nor the second audits resulted in the disallowance of the interest deductions that had been claimed by SSPL in respect of the Normandy loan.

13 In those circumstances, a decision was made by those acting for SSPL and the liquidator to...