Deputy Commissioner of Taxation v Kelly [2008] FCA 7 (15 January 2008)

DEPUTY COMMISSIONER OF TAXATION v GRAHAM EDMUND KELLY, SILVERCOURT PROPERTIES PTY LIMITED AND PALL MALL FINANCE COMPANY LIMITED
NSD 1291 OF 2007

ALLSOP J
15 JANUARY 2008
SYDNEY

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NSD 1291 OF 2007

BETWEEN:	DEPUTY COMMISSIONER OF TAXATION Applicant
AND:	GRAHAM EDMUND KELLY First Respondent SILVERCOURT PROPERTIES PTY LIMITED Second Respondent PALL MALL FINANCE COMPANY LIMITED Third Respondent

JUDGE:	ALLSOP J
DATE OF ORDER:	15 JANUARY 2008
WHERE MADE:	SYDNEY

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NSD 1291 OF 2007

BETWEEN:	DEPUTY COMMISSIONER OF TAXATION Applicant
AND:	GRAHAM EDMUND KELLY First Respondent SILVERCOURT PROPERTIES PTY LIMITED Second Respondent PALL MALL FINANCE COMPANY LIMITED Third Respondent

JUDGE:	ALLSOP J
DATE:	15 JANUARY 2008
PLACE:	SYDNEY

1 This is an application under Order 11 rule 16 of the Federal Court Rules, brought by the third respondent, to strike out certain paragraphs of the applicant’s statement of claim as frivolous or vexatious, or likely to cause prejudice, embarrassment or delay to the fair trial of the proceedings and as not disclosing a reasonable cause of action against the third respondent or otherwise as an abuse of process.

2 To explain why the motion should be dismissed, it is necessary to examine the pleading and the arguments of the parties.

3 The proceeding was commenced by application filed on 6 July 2007. In the application, the applicant, the Deputy Commissioner of Taxation, sought judgment against the first respondent, Mr Kelly, in respect of liability for income tax in years of income ending 30 June 1999 to 30 June 2005 inclusive, in accordance with notices of amended assessments dated 3 July 2007. Together with interest and penalties, the applicant claimed judgment in sums of over $10 million. The applicant also sought declarations that a property at 17 Peel Street, Kirribilli in the name of the second respondent, Silvercourt Properties Pty Limited ("Silvercourt"), was held on trust for Mr Kelly, and that the proceeds of any sale of the said property were held on trust by Silvercourt for Mr Kelly, and if held by the third respondent, Pall Mall Finance Company Limited ("Pall Mall"), it also held the funds on trust for Mr Kelly. Pall Mall held a mortgage over the property.

4 The matter was initially urgent in relation to the proposed sale of the property to a third party. That sale has proceeded and the proceeds of sale have been held pending resolution of the issues in this case.

5 During the case management of the proceeding, the applicant was ordered to file a statement of claim. This was done on 28 September 2007.

6 The essence of the argument in support of the motion put forward by the third respondent was that the claim was necessarily one based on fraud and there has been, so it was said, no proper particularisation of the fraud case. That is somewhat more limited than the arguments possibly available, given the terms of the rule in question and of the motion. Nevertheless, that was the gravamen of the argument.

7 The argument before me was not limited, however, to the terms of the statement of claim. Pall Mall relied on certain material, including a request for assistance in a criminal matter made by the Australian Government to the Competent Authority of Switzerland about certain firms and individuals. It also relied upon certain parts of an affidavit (and exhibits thereto) of an officer of the Australian Tax Office, Mr Prashant Singh, that had been filed in support of the earlier application for interlocutory orders in the proceeding. The applicant also relied on Mr Singh’s affidavit.

8 The statement of claim should be viewed (as both sides approached the matter) in the context of Mr Singh’s evidence. The existence of that affidavit may not excuse some defects in pleading; but to the extent that an evidentiary basis is laid out in that affidavit, the statement of claim should be understood in that context. Thus, some deficiency in particularisation may require elaboration by way of case management, but the existence of a detailed affidavit may make striking out a deficiently particularised claim unnecessary.

9 I will return to parts of the evidence in due course. I will start with the pleading. The first section of the statement of claim (paragraphs 1 - 14) pleads the amended assessments and the liability of Mr Kelly for over $10 million thereby. (It can be noted at this point that, at the hearing of the motion, I was informed by the legal representatives of Mr Kelly and Silvercourt that they intend to take no further part in defending the proceeding.) It was submitted by Pall Mall that the penalties pleaded reveal an assertion (not expressly made) of "deliberate false and misleading conduct vis a vis the tax department" and that the unparticularised fraud allegations begin here. I disagree. These paragraphs plead a debt; no more, no less. They do not insinuate fraud.

10 The second part of the pleading deals with the property. Mr Kelly was the owner of certain intellectual property, being novel veterinary medicines particularised under paragraph 15. On 19 August 1988, it is alleged that Mr Kelly assigned the intellectual property to a company called Bende Pty Limited ("Bende") which was, it was asserted, at all times controlled by Mr Kelly by his ownership of a majority of the shares in it.

11 The pleader then asserted that about four years later (in the financial year ending 30 June 1993), Bende assigned the intellectual property to a company which came to be called Novogen Research Pty Limited ("Novogen Research"), the consideration for which assignment was equity in Novogen Research. The pleader asserted that as at 30 June 1994, the value of the intellectual property that had been assigned was at least $7.5 million.

12 The pleader then asserted that on 14 July 1994, Novogen Research (in which Bende had an equity interest, Bende being controlled by Mr Kelly) entered a share transfer agreement with a company that came to be called Novogen Pty Limited ("Novogen"), under which shareholders of Novogen Research (including Bende) were granted shares and options in Novogen (presumably in exchange for their shares in Novogen Research being transferred to Novogen). Thus one infers from the pleading that this step interposed a holding company (Novogen) between Novogen Research and its erstwhile shareholders, who came to hold their shares in that holding company (Novogen). The pleader asserted that pursuant to the agreement of 14 July 1994, Bende acquired 7,980,000 fully paid ordinary shares in Novogen, the same number of options to purchase shares and 2,850,000 "performance options". (There was no pleading as to the particular nature of these rights.)

13 The next step in the history asserted was on 12 June 1997, on which date Bende, it was said, granted to Postland Limited ("Postland"), a Hong Kong company said to be administered by a firm called Moore Stephens Hong Kong and to be "related" to associates of Mr Kelly, an option to acquire 7 million options to purchase shares in Novogen.

14 Then, on 14 August 1997, it was said that Leominister Co Limited ("Leominister") was incorporated in the British Virgin Islands (BVI), with its registered office at a company called Moore Stephens International Services (BVI) Limited at Tortola, BVI. It was alleged that on or before 25 August 1998, Postland transferred to Leominister its option to acquire 7 million options to purchase shares in Novogen (that had been granted to Postland by Bende) for $0.50 per option.

15 It was alleged that on or before 30 November 1998, Leominister exercised its option to acquire 7 million options to purchase shares in Novogen, and then exercised those options and received 7 million Novogen shares. It was alleged that this was funded by Leominister forward selling 1.5 million Novogen shares on or before 27 November 1998 for $3,680,917.50. It was also alleged that Leominister did not hold the Novogen shares beneficially. No particulars of that assertion were given at this point. The following paragraphs, however, lead one to conclude that it is asserted that Leominister held the shares for Mr Kelly. Paragraphs 30 - 32 plead that from 1998 to 2004, Mr Kelly gave instructions to Australian stockbrokers and Moore Stephens Hong Kong to sell the shares in Novogen held by Leominister. The shares in Novogen were, it was alleged, sold. Mr Kelly, it was alleged (though without any particularisation) dealt with Leominister’s assets, and in particular the proceeds of the sale of the Novogen shares, "as his own". It was not explained how this was any different, or to be distinguished, from exercising rights of ownership and control through shareholdings of entities concerned.

16 Meanwhile, in two earlier paragraphs (28 and 29), the pleader had begun to set out the relationship between Mr Kelly and Strachans, a firm of financial advisers that is said to control the third respondent, Pall Mall. Whilst these paragraphs alleged that Pall Mall commenced in 1997 or 1998 providing (unspecified) financial services to Mr Kelly such as creation of offshore trusts, offshore companies and management thereof, no specific allegation was made of Pall Mall’s involvement with the grant by Bende to Postland of the option, or with the incorporation of Leominister, or with the transfer of the option from Postland to Leominister or with the exercise by Leominister of the option, or with the activities of Moore Stephens Hong Kong or Moore Stephens International Services (BVI) Limited.

17 The pleader then dealt with the proceeds of sale by Leominister of the Novogen shares. It was alleged that Mr Kelly caused the proceeds of the sale of the Novogen shares to be transferred to Strachans, without consideration, "to be made available, by various means, for his purposes." This allegation was in the context of the previous paragraph that Mr Kelly dealt with Leominister’s assets as his own. It might be inferred from these paragraphs that Strachans held the funds on trust for either Mr Kelly or Leominister. Alternatively, the relationship may have been one of debtor and creditor. The pleading does not clarify this aspect of the matter.

18 The pleader then, in a long paragraph broken into sub-paragraphs, sets out how Strachans dealt with the funds for Mr Kelly’s purposes. First, it was alleged that on 8 October 2002, Pall Mall (said to be controlled by Strachans) entered into a written loan agreement with Bende, by which Bende borrowed $2 million from Pall Mall. The pleading did not insinuate that the agreement was a sham.

19 Secondly, it was alleged that on the same day, 8 October 2002, Pall Mall and Bende entered into a mortgage under which Bende provided Pall Mall with a mortgage over 2 million Novogen shares (presumably being shares held by Bende) and a second mortgage over a property at 1/47 Coolawin Road, Northbridge. (The pleading does not make clear who owned this property.)

20 Thirdly, it was alleged that in October and November 2002, Bende drew down $2 million under the loan agreement, and later, in May 2003, the loan was extended by a further draw down of $750,000. It was alleged that Bende made interest payments from January 2003 to April 2007.

21 Thus, at this point, Strachans, it was alleged, had provided funds that they held for Mr Kelly (either as trustee or debtor) to Pall Mall, which lent them to Bende. The pleading does not clarify whether the transfer of funds from Strachans to Pall Mall was a loan or whether Pall Mall was acting as trustee for Strachans (and, perhaps, through them, for Mr Kelly).

22 Fourthly, it was alleged that on 12 July 2003, an entity known as "Silvercord Properties Pty Limited" entered into and exchanged a contract for the property at 17 Peel Street, Kirribilli. The second respondent, Silvercourt, was registered two days later, on 14 July 2003. Bende paid the deposit of $152,500. Prior to 22 August 2003, the contract was amended to clarify Silvercourt as purchaser.

23 Fifthly, it was alleged that Mr Kelly was the sole shareholder in, and director of, Silvercourt.

24 Sixthly, it was alleged that on 9 August 2003, Pall Mall transferred $1,600,000 to Silvercourt and 9 days later (on 18 August 2003) Pall Mall transferred another $100,000 to Silvercourt. Silvercourt, it was said, then used these funds to complete the purchase, and to repay Bende for the deposit.

25 Thus, at this point, it was alleged that Strachans had provided funds that they held for Mr Kelly (either as trustee or debtor) to Pall Mall, which provided the funds to Silvercourt. The pleading does not clarify whether this transfer of funds from Strachans to Pall Mall was a loan or whether Pall Mall was acting as trustee for Strachans (and perhaps, through them, Mr Kelly).

26 Seventhly, it was alleged that on the date of the completion of the purchase (22 August 2003) Silvercourt, Mr Kelly and Pall Mall entered into a loan agreement and guarantee which included the provision to Pall Mall of a registered mortgage over the Kirribilli property. The loan agreement provided for quarterly interest, which, if not paid, would be capitalised.

27 Eighthly, it was alleged that Silvercourt had no business and no source of funds to repay the loan from Pall Mall, other than through the sale of the property.

28 It is to be noted that there is no specific allegation that the loan agreement between Pall Mall, Mr Kelly and Silvercourt, which characterised the "transfer" of the funds from Pall Mall to Silvercourt as a loan, was a sham.

29 A number of paragraphs conclude the pleading, the essence of which was that the funds provided to Silvercourt from Pall Mall were the funds of Mr Kelly. The pleader drew a number of conclusions, as follows in paragraphs 38-41:

30 The only basis upon which Pall Mall seeks to strike out paragraphs 28 - 41 is that the pleading must involve an inadequately articulated and particularised claim of fraud. With one qualification (as to paragraph 40.2 to which I will come), I disagree. No allegation of fraud is made. The pleader asserts that the various events took place (none of them, subject to paragraph 40.2, is said to be a sham) which lead to the conclusion that the money received by Silvercourt or by Pall Mall were funds of Mr Kelly. Whether this can be made out in the face of the legal forms and transactions pleaded (without their being shams) may be open to doubt. But any embarrassment in the pleading in this respect was not the subject of argument.

31 I turn to paragraph 40.2. In submissions on behalf of the applicant, it was stated that it was a paragraph based on the "extremely well particularised matters that appear before it". An "illegal, dishonest or improper scheme" was specifically eschewed. Left at that, it is difficult to see how paragraph 40.2 adds anything to the pleading other than a cloud or odour of ambiguity from the connotations arising from the word "scheme".

32 Reliance, however, is further placed on evidence adduced through Mr Singh’s affidavit. First, reliance was placed on three pages of an exhibit to Mr Singh’s affidavit, in which a principal of Strachans and Pall Mall described the activities of Strachans and Pall Mall. It was said that this was material that was "entirely consistent with matters pleaded in clause 40.2". That may be, but it is equally unenlightening and takes the matter no further than the establishment of legal forms and entering transactions as earlier pleaded, not said to be shams.

33 Secondly, reliance was placed on promotional material, published by Strachans, called "Trusts A Simple Concept". The applicant submitted that this document:

34 It is unnecessary to dwell on the terms of the document (the confidentiality of which, though claimed by the applicant, is highly doubtful). It is sufficient to say that a structure is set out by which it is asserted that clients could retain effective control over assets through vehicles (companies and trusts) separate from them. The pleading makes no attempt elsewhere to identify the deployment of such structures in the events pleaded.

35 Support was also drawn from the fact that an assertion in identical terms to paragraph 40.2 was made in written contentions and filed in July 2007. No support is gained from this.

36 The third respondent cannot demand that the applicant plead fraud. The applicant has not done so. In her submissions, the applicant has made clear (as is otherwise clear from the pleading) that there is no pleading of illegality by any party, of impropriety of any party, of dishonesty of any party, or of the fraud of any party. The applicant nevertheless asserts that the funds provided to Pall Mall or to Silvercourt were Mr Kelly’s funds, such as to support a conclusion that the mortgage (held by Pall Mall) or the property (held by Silvercourt) was held on trust for Mr Kelly.

37 Subject to the content of paragraph 40.2, there is no pleading of sham. There is certainly no pleading that any loan agreement did not reflect the true legal relations of the respective parties.

38 It is also to be noted that paragraph 40.2 is in the alternative. That is, there is a case pleaded without it as an operative element.

39 I am not prepared to strike out the statement of claim on the basis argued. However, as a matter of case management, I am not prepared to allow paragraph 40.2 to remain unless it is properly particularised. Its content should be illuminated, in particular if there is no illegality, impropriety, dishonesty or fraud alleged, as is the case. How can, I ask rhetorically, a legal, proper and honest creation of a (real) legal form intended to govern and control the legal relations of honest parties (on this hypothesis) be ignored or set to one side, or be less than determinative in the analysis of ownership rights of parties? At the moment, paragraph 40.2 is pregnant with unarticulated propositions as to the proper characterisation of legal relations otherwise benignly pleaded earlier in the document. It calls into doubt in a manner that is unarticulated what appears from the balance of the pleading: that no transaction or structure is said to be a sham.

40 Thus, on the basis clearly stated by and on behalf of the applicant that her case makes no allegation of any form of impropriety, illegality, dishonesty or fraud by any party at all, I will not strike out paragraphs 28 - 41, but the case management and hearing of the proceeding will take place on that basis, and no other, unless an application to amend is made. Secondly, I will give the applicant 28 days to particularise paragraph 40.2 adequately, failing which I will hear the parties on why I should not strike out that paragraph.

41 I will defer making any order as to the applicant’s costs of the motion until particulars of paragraph 40.2 are given.

I certify that the preceding forty-two (42) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Allsop.

Counsel for the Applicant:	Mr M Aldridge SC with Ms R Henderson

Solicitor for the Applicant:	Australian Government Solicitor

Counsel for the Third Respondent:	Mr M Abbott QC with Mr A Thomas

Solicitor for the Third Respondent:	Browne & Co

Date of Hearing:	9 November 2007

Date of Judgment:	15 January 2008

Federal Court of Australia

Deputy Commissioner of Taxation v Kelly [2008] FCA 7 (15 January 2008)