Smits v Shirlaw

HODGSON JA: On 25 October 2010, Sorby DCJ determined proceedings in which the respondent Andrew Shirlaw sued the applicant Mr Smits for a debt of $87,000 plus interest. The primary judge gave judgment for Andrew Shirlaw in the sum of $87,000, gave leave for him "to apply on interest in the judgment sum" [sic], and ordered Mr Smits to pay Andrew Shirlaw's costs.

Mr Smits has applied for leave to appeal from that decision. By the consent of the parties, the application is being dealt with in the absence of the public and without the attendance of the parties.

The Court has not been provided with the transcript of the hearing below or with all of the exhibits.

The basic facts of the case, as alleged by Mr Smits, are set out as follows in his witness statement dated 2 July 2010: 1 I am the defendant. 2 On 11 November 2005 a written declaration of trust was executed by Kevin Richard Shirlaw (" Shirlaw ") personally and as receiver and manager of Ostabridge Pty Ltd under which Shirlaw would acquire and hold first and second mortgages with dealing numbers 702987988 and 704246070 (" the Mortgages ") over Lot 202 on SP 161001 at Yeppoon in Queensland in favour of Shirlaw, Pioneer Investments (Aust) Pty Ltd (" Pioneer ") and myself as beneficiaries (" the Trust "). 3 By transfer dated 14 November 2005 with dealing number 709132801 Shirlaw became the registered owner of the Mortgages as trustee of the Trust, as assignee from Citimark (The Galleries) Pty Ltd. 4 In late 2005 Shirlaw exercised his power of sale under mortgage 702987988 and sold Lot 202 on SP 161001 for consideration of $3,400,000. 5 Such sale settled on 23 December 2005. 6 By transfer dated 31 July 2006, Shirlaw assigned to me all of his legal and beneficial interest in the Mortgages held on Trust. 7 Despite repeated requests, Shirlaw failed to provide me with a tax invoice in relation to my purchase of his interests in the Mortgages. 8 In my September quarter 2007 Business Activity Statement I included my purchase from Shirlaw of his interest in the Mortgages. Since Shirlaw failed to provide me with a tax invoice, I purported to issue a recipient-generated tax invoice. This was disallowed by the Australian Taxation Office on the ground that the invoices were not issued within 28 days after the acquisition. 9 On 25 March 2008 I wrote to Shirlaw demanding issue of tax invoices in relation to me and another company Zonebar Pty Ltd, pursuant to the GST legislation. Shirlaw failed to issue any tax invoices or otherwise comply with my requests. 10 Zonebar Pty Ltd (now called Cyonara Snowfox Pty Ltd) is a company controlled by myself, in which I own 25% of the issued share capital and I am the major secured creditor. 11 Shortly before 21 July 2008, Malcolm Johns & Company, the solicitors for Shirlaw, sent to me tax invoices. In reliance on these tax invoices I lodged Business Activity Statements on 21 July 2008 for Zonebar Pty Ltd and myself and claimed Input Tax Credits in relation to them. 12 Shortly after I lodged my Business Activity Statements, Malcolm Johns & Company wrote to me advising me that the tax invoices provided to me were subject to approval of Shirlaw. Shirlaw has never approved these tax invoices or acknowledged their validity. 13 On 1 October 2008 my solicitors wrote to the solicitors for Shlrlaw demanding that Shirlaw account to me for the proceeds of sale of Lot 202 on SP 161001 and that Shirlaw provide his BAS return disclosing the sale of the Mortgages to me. 14 On 15 October 2008 I entered into the deed of settlement referred to in the statement of claim. On the same day and in consideration for me entering into the deed of settlement, Shirlaw and I entered a collateral agreement which was in writing and executed contemporaneously, which I refer to as "the ATO Agreement " at paragraph 8 of my amended defence. 15 The ATO Agreement was very important to me in securing my rights for Input Tax Credits and in relation to penalties imposed by the ATO. I would not have entered into the deed of settlement unless Shirlaw also executed the ATO Agreement. 16 By the ATO Agreement Shirlaw promised to acknowledge to the ATO the tax invoices issued to me and Zonebar Pty Ltd, and to take all reasonable, relevant and lawful steps in facilitating the recovery of Input Tax Credits by Zonebar Pty Ltd and myself in relation to the tax invoices. 17 Shirlaw failed to provide any acknowledgement whatsoever to the ATO as to the tax invoices issued to Zonebar Pty Ltd or to me. 18 Shirlaw failed to take any steps to facilitate the recovery of Input Tax Credits. 19 Since Shirlaw failed to acknowledge the tax invoices, the ATO has disallowed the Input Tax Credits claimed by me, has imposed General Interest Charges and penalties on me and on Zonebar Pty Ltd. 20 I have incurred substantial legal costs in seeking to challenge the ATO decisions in relation to myself and Zonebar Pty Ltd. 21 These legal costs would have been avoided had Shirlaw provided acknowledgements of the tax invoices to the ATO as required by the ATO Agreement. 22 I have suffered loss and damage both directly and indirectly through the loss and damage suffered by Zonebar, inter alia, as I have funded its legal costs and borrowings in the absence of the receipt of its Input Tax Credits. 23 By deed of assignment dated 13 June 2007 Pioneer assigned to me all of its beneficial interest in relation to the Mortgages held on Trust. 24 Shirlaw has failed to account to me for the proceeds of sale. In particular Shirlaw in breach of trust has failed to pay to me any part of the consideration of $3,400,000 for the sale of Lot 202 on SP 161001.

Submissions to the primary judge on behalf of Mr Smits, recorded by the primary judge, indicate that the transaction of 31 July 2006, referred to in par 6 of the statement, included an undertaking by Mr Smits to indemnify Kevin Shirlaw from debts incurred by him in relation to Ostabridge Pty Ltd; that a dispute arose in relation to the amount by which Mr Smits was required to indemnify Kevin Shirlaw; and that this dispute was resolved by the Deed referred to in par 14 of the statement, for the sum of $87,000 which Mr Smits was to pay to Kevin Shirlaw (and which is the debt claimed by Andrew Shirlaw in the proceedings).

It was admitted by Mr Smits that on 20 April 2009, Kevin Shirlaw assigned this debt of $87,000 to Andrew Shirlaw (his son), and gave notice of this assignment to Mr Smits; and also that Mr Smits has not paid this debt.

Mr Smits raised the defence that he had equitable set-offs against Kevin Shirlaw which, pursuant to s 12 of the Conveyancing Act 1919, can prevail against Andrew Shirlaw as assignee. The claimed set-offs were: (1) Claimed compensation in respect of alleged breaches of trust and failure to account by Kevin Shirlaw, the subject of proceedings No BS 9771 of 2009 in the Supreme Court of Queensland; and (2) Claimed damages in respect of breaches of agreement by Kevin Shirlaw referred to in pars 14 - 16 of the statement.

Apart from the statement of Mr Smits, the only other evidence included in the material provided to this Court is an interim decision summary report of the Deputy Commissioner of Taxation dated 22 June 2010. That report supports the assertion in par 19 of the statement. It also contains the following (White Book 31): Our records show that one of the companies of which you are a director, Zonebar, has previously been involved in commercial property development activities. Previous information supplied by you in relation to this company is that on 16 December 2005, Zonebar entered into a contract to purchase a property at Lammermoor, Yeppoon (Lot 202) for $3.4 million with settlement occurring on 20 January 2006. The events surrounding the acquisition of this property have been the subject of a number of Court cases where it was revealed that only $1.9m was paid by Zonebar.

The primary judge gave the following reasons for rejecting the claim for the first set-off: 6. As counsel submitted, equitable set-offs can apply in respect of both debts and unliquidated claims. A defendant is entitled to raise a defence of equitable set-off where it would be unjust or inequitable for the plaintiff to be permitted to proceed with its claim without making allowance for the cross-demand, having regard to: a. The nature of the claims; and b. The closeness of the connection between the claims. 7. The applicable principle was set out by Giles J in AWA Ltd v Exicom Australia Pty Ltd (1990) 19 NSWLR 705 at 711 as follows: "There must be something additional to the fact of a cross-demand to cause the court, in the exercise of its equitable jurisdiction, to require the plaintiff to set-off against his claim of the defendant. That requirement has often been expressed in language to the effect that the equitable set-off must go to the root of or impeach the title of the plaintiff's claim." 8. The entitlement to equitable set-off turns on the relationship and closeness of connection between the claims. 9. By way of background, the source of the assigned debt was set out in summary form by the Defendant's counsel, Dr Grienke, in his written submissions as follows: "By declaration of trust dated 11 November 2005, Kevin Shirlaw undertook to acquire and hold on trust for himself, the Defendant and Pioneer Investments (Aust) Pty Ltd, various mortgages in relation to a property at Yeppoon, Queensland. By transfer dated 14 November 2005 Kevin Shirlaw became the registered owner of the mortgages as assignee from Citimark (The Galleries) Pty Ltd. Kevin Shirlaw exercised a power of sale under one of the mortgages selling the Yeppoon property for $3,400,000. The sale completed on 23 December 2005. By agreement dated 31 July 2006 the defendant undertook to indemnify Kevin Shirlaw from debts incurred by him in relation to Ostabridge Pty Ltd, in return for the assignment to the Defendant of his interest in: a. The mortgages; b. Kevin Shirlaw's rights in relation to the sale of the property; c. The trust under the declaration of trust dated 11 November 2005. A dispute arose in relation to the amount by which the Defendant was required to indemnify Kevin Shirlaw. That dispute was resolved by the Deed of Settlement dated 15 October 2008 for the sum of $87,000. This debt was later assigned to the Plaintiff, as admitted in the pleadings." 10. ln my view, on the basis of this summary, given the nature of the claims and the connection between them, it would be inequitable for the Plaintiff to enforce obligations owed to it by the Defendant without taking into account the obligations which it owes, those set out in paragraph 4 above. 11. There are concurrent proceedings underway in the Supreme Court of Queensland (Plaintiff's tender bundle, Exhibit 1, Tab 41) concerning the sales of the Yeppoon property. Under the agreement of 31 July 2006, described above, the indemnity was the source of the debt assigned to the Plaintiff which was in exchange for an assignment of Kevin Shirlaw's rights under the sale of the Yeppoon property and declaration from it. Kevin Shirlaw assigned to the Defendant his interest in the mortgages under trust, the Defendant alleges. Further, having assigned his interests, the Defendant alleges Kevin Shirlaw failed to account to the Defendant for any of the proceeds of sale of the Yeppoon property of $3,400,000. His failure to account was a breach of trust by Kevin Shirlaw, the Defendant claims. 12. This part of the Defendant's set-off is the subject of a separate claim in the Supreme Court of Queensland and will be contested in that jurisdiction with detailed evidence, not before me. The Defendant in his witness statement merely claims that Kevin Shirlaw has failed to account to him for the proceeds of sale. There was no evidence before me that there was a trust, no evidence that Kevin Shirlaw received the monies from the sale of the property or that there has been a failure to account. In my view, the matter should be determined in the Supreme Court of Queensland.

The primary judge gave the following reasons for rejecting the claim to the second set-off: 15. The invoices upon which the Defendant relies are, as per the Amended Defence: a. Invoice issued in respect of an alleged supply by Ostabridge Pty Limited to the Defendant in the amount of $703,816.79 in respect of "costs charged to the Supplier by John M O'Connor & Company Solicitors re legal proceedings in the Supreme Court of Queensland concerning Ammbar PI Mortgages over lot 202 on SP 161001, Title Reference 50345052 paid for out of funds of, for and on behalf of the Recipient as beneficial owner of the Mortgages and debts secured thereby" (First Invoice); b. Invoices issued in respect of an alleged supply by Ostabridge Pty Limited to the Defendant in the amount of $3,400,000 in respect of the transfer of "Lot 202 on SP 161001 Title Reference 50345052, being the entire fee simple estate" (Second Invoice); c. Invoice issued in respect of an alleged supply by Kevin Shirlaw as receiver and manager of Ostabridge Pty Limited to the Defendant in the amount of $660,000 in respect of the transfer of "one third beneficial interest in Mortgage Registered Numbers 704246070 and 702987987 over Lot 202 on SP 161001, Title Reference 50345052, being the entire fee simple estate and the debts secured thereby" (Third Invoice). 16. lt was agreed that in addition to the Second Invoice, input tax credits had been allowed in respect of that transaction, in favour of Zonebar Pty Limited, being the recipient of the relevant supply. 17. Tendered by the Plaintiff was an interim determination by the Deputy Commissioner of Taxation (ATO) (Exhibit 1, Pages 148-165) whereby he determined that the Defendant was not "carrying on an enterprise for GST purposes". 18. The ATO in its interim determination examined the possible avenues of business that could enable the ATO to find that Mr Smits was carrying on an enterprise for GST purposes. They are: Mr Smits as a company director, property developer, investor / trader in mortgage securities, provider of financial guarantees and finally, provider of litigation services. Whether or not Mr Smits had failed to substantiate in the invoices relevant in this trial was not a consideration by the ATO in making its determination. There is no "paper chain", to use Dr Greinke's phrase, on the evidence before me to show that the ATO requested copies of the invoices for the purposes relevant to its determination as to whether Mr Smits was carrying on an enterprise for GST purposes. That is that Mr Smits has made a creditable acquisition that founded an entitlement to a GST refund. 19. The Defendant has failed to demonstrate before me that the decision reached by the Deputy Commissioner of Taxation was based in any way on the failure of the Defendant to submit, and rely upon, among other things, the above invoices. 20. lt is apparent from the evidence that the Plaintiff has not "acknowledged" the invoices, meaning "adopted" them, nor has the Plaintiff taken any steps to recover the input tax credits. Damages could result if the Defendant could satisfy me that the invoices and any representations by the Plaintiff would have resulted in a favourable ruling from the ATO. The Defendant has failed to do so and therefore this set-off and the earlier set-off fail.

Mr Smits seeks to rely on the following grounds of appeal: 1 The primary judge erred by failing to determine the question as to whether Kevin Shirlaw had failed to account to the appellant. 2 In doing so the primary judge was in error in finding that there was no evidence in relation to that question, when there was evidence before the Court. 3 The primary judge ought to have found that: a. Kevin Shirlaw had failed to account; b. such failure exceeded the value of the respondent's claim; c. that failure should properly be set off against the respondent's claim. 4 The primary judge erred in considering only the interim decision of the ATO as relevant to the loss and damage suffered by the appellant. 5 The primary judge ought to have taken into consideration the legal costs incurred by the appellant arising from the broader dispute between the appellant and the ATO in relation to the input tax credits relevant to the invoices. 6 The primary judge ought to have found that: a. Kevin Shirlaw caused loss and damage to the appellant in breach of his obligations under the ATO Agreement; b. such loss and damage exceeded the value of the respondent's claim; c. that failure should properly be set off against the respondent's claim. 7 The primary judge ought to have dismissed the respondent's claim accordingly. 8 Alternatively, there has been a miscarriage of justice such that the matter be remitted to the District Court for rehearing.

Relevantly, the applicant relies on the following written submissions: 10 There are principally two questions involved in the appeal. 11 Firstly whether the primary judge was wrong to refuse to determine an issue on the basis that the same issue was before a different Court. 12 Secondly, whether the primary judge was wrong to rely upon the interim determination of the ATO as determinative of the applicant's loss and damage, and should have considered the costs incurred by the applicant. The Applicant's Argument Failure to Determine a Question 13 The primary judge had jurisdiction to deal with the issue before him and ought to have exercised that jurisdiction by determining that issue. 14 That the same question may be before a different Court, while undesirable, does not deprive the Court of its jurisdiction or its obligation to determine the question. 15 The reference at [12] of the Reasons to there being no evidence as to the existence of the trust or receipt of funds from the sale is simply wrong. The declaration of trust and the documents in relation to the settlement of the sale of the property were in evidence and uncontradicted. 16 In any event, whatever the state of the evidence, the Court was required to determine the question as to whether Kevin Shirlaw had failed to account. ATO Agreement 17 The primary judge relied on an interim determination of the ATO which found that the defendant was not carrying on an enterprise for GST purposes (Reasons at [17]) to conclude that the failure of Kevin Shirlaw to comply with his obligations under the ATO Agreement was not relevant to the defendant's loss and damage: Whether or not Mr Smits had failed to substantiate in the invoices relevant in this trial was not a consideration by the ATO in making its determination. (Reasons at [18]) 18 In drawing that conclusion the primary judge asked the wrong question. That determination was not only an interim determination (no final decision was in evidence) but that issue was but one part of a much broader set of dealings between Mr Smits and the ATO. 19 More broadly the primary judge ought to have had regard to the costs incurred by Mr Smits in his broader dispute with the ATO in which he sought to claim input tax credits in relation to the relevant invoices. Although admittedly not a complete "paper chain" of all correspondence, this broader dispute was in evidence. 20 Relevant also was Mr Smit's uncontradicted oral evidence of the legal costs he had incurred in dealing with the ATO in relation to this dispute. 21 The primary judge therefore erred in focussing only on the interim determination as relevant to the defendant's loss and damage. Why Leave Should be Granted ... 25 The first issue, however, raises an important question of principle as to the obligation of the Court to exercise its jurisdiction and to determine questions in dispute, notwithstanding the existence of concurrent proceedings. 26 Such a question is appropriate to be resolved by the Court of Appeal as an important point of practice, such that leave to appeal should be granted.

I accept the submission for the applicant that the primary judge's statement, in the second last sentence of par [12] of his judgment, that there was no evidence of certain matters, was wrong. Mr Smits' statement referred to above was evidence of the existence of the trust, and also provided evidence from which the receipt of monies by Mr Shirlaw and failure to account could be inferred. The submissions for the applicant assert that the declaration of trust and documents in relation to the settlement were in evidence; but those documents are not before this Court, and I do not know what they were or what they could have proved.

The question then is, does this error justify the grant of leave to appeal. In my opinion, it does not.

The question of whether an equitable set-off should be given effect to in circumstances such as these requires the exercise of discretion. In my opinion, one important factor relevant to the exercise of discretion would be the court's assessment as to whether it had been provided with appropriate relevant evidence. In this case, at least so far as the material provided to this Court reveals, the evidence before the primary judge strongly suggested that there was much relevant evidence that was not provided to the primary judge by Mr Smits. In particular, the paragraph quoted from the ATO report suggests that the settlement of the relevant sale took place on 20 January 2006, not 23 December 2005; that the purchaser paid only $1.9 million and not $3.4 million; and that there were a number of court cases concerning those events. In my opinion, it would be a reasonable exercise of discretion not to give effect to the equitable set-off claimed by Mr Smits in the absence of evidence which, at the very least, gave the Court an overview of the issues in and progress of those court proceedings. I am inclined to the view that the primary judge's reference to "no evidence" was an imperfect reference to considerations of this kind.

I accept that there could be powerful reasons to exercise the discretion in favour of giving effect to an equitable set-off as against the assignee of a debt, particularly if there was evidence that the assignor was insolvent. So far as the material provided to this Court shows, there was no evidence in this case that Kevin Shirlaw was insolvent.

In my opinion, having regard to all the considerations I have adverted to, on the material provided to this Court, the chance that the Court of Appeal would exercise a discretion to give effect to the equitable set-off claimed by Mr Smits is insufficient to justify granting leave to appeal.

On the question of the breach of the agreement in relation to tax invoices, it was submitted for the applicant that costs incurred by the applicant in dealing with his dispute with the ATO could be included in damages caused by that breach.

However, neither the evidence included in the material provided to this Court, nor the submissions for Mr Smits, provide a basis for finding that the costs incurred by the applicant in his dealings with the ATO were caused by Kevin Shirlaw's breach of his agreement.

Whether these costs were incurred in connection with the interim ruling included in the material, or incurred in relation to a wider dispute with the ATO, or both, it was not proved that these costs would not have been incurred if the agreement had not been breached, or that in some other way the breach was causative of the incurring of these costs.

For those reasons, in my opinion the application for leave to appeal should be dismissed with costs.

MACFARLAN JA: I agree with Hodgson JA.