Australian Government Solicitor No. 2

	In this issue
	Commonwealth land acquisition
	Incorporating divestment planning into your lease acquisition strategy
	Water rights as property rights and just term
	Section 172 of the Property Law Act 1958 (Vic) – recent applications by the Australian Taxation Office
	Freezing orders

Commonwealth land acquisition When does the Commonwealth need to acquire interests in land? A Commonwealth entity may wish to acquire interests in land for a variety of reasons. These include: for the purposes of accommodating the personnel of the Commonwealth entity, such as departmental buildings or housing for personnel for the operation of Commonwealth infrastructure, such as meteorology infrastructure, telecommunications infrastructure, electricity infrastructure and water infrastructure for areas for Australian Defence Force training or other defence purposes for an airport site. The particular interests in land that a Commonwealth entity may wish to acquire depend on the specific needs of the Commonwealth entity in the particular circumstances and may include, for example, a freehold interest, a leasehold interest, an easement or a mere personal licence.

 

Alexandra Monk Senior Lawyer AGS Commercial T 08 8205 4210	Greg Prutej Senior General Counsel Office of General Counsel T 02 6253 7481	Leah Lyons Counsel Office of General Counsel T 02 6253 7468

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In what circumstances can the Commonwealth acquire interest in land?

Section 51(xxxi) of the Constitution allows the Parliament to make laws for the acquisition of property on just terms from any State or person for any purpose in respect of which the Parliament has power to make laws.

The Lands Acquisition Act 1989 (LA Act) has been enacted for this purpose and, in general, governs the ability of the Commonwealth or a Commonwealth authority¹ (acquiring authority) to acquire interests in land.

An 'interest' in land is very broadly defined in the LA Act as including:

• any legal or equitable estate or interest in the land
• a restriction on the use of the land
• any other right, charge, power or privilege over or in connection with the land or an interest in the land (s 6 of the LA Act).

It would include interests such as freehold interests, leasehold interests, easements and mere personal licences² and potentially also other more unusual rights in land.

The LA Act requires that an acquisition of an interest in land be in connection with a 'public purpose', being a 'purpose in respect of which the Parliament has power to make laws' (s 6 of the LA Act).

There has been some judicial consideration of the 'public purpose' requirement in the context of Commonwealth acquisitions. The High Court considered the meaning of the term 'for a public purpose' in Clunies-Ross v Commonwealth (1984) 155 CLR 193 and held that the power to acquire land for a public purpose does not allow the Commonwealth to acquire land for whatever purpose it wishes. Rather, the High Court stated that (at 202):

The power compulsorily to acquire land for a public purpose … is limited to a power to acquire land for some purpose related to a need for or proposed use … or application of the land to be acquired. It does not extend to the acquisition of land merely for the purpose of depriving the owner of it and thereby achieving some purpose … in relation to that Territory. (emphasis added)

In addition, the Federal Court in French v Gray [2013] FCA 263 held that the LA Act only allows an acquiring authority to acquire an interest in land for a public purpose if it intends to physically use that interest (at [109]). This is distinct from acquiring the interest to dispose of it to a third party or use the interest at some point in the future.

How can the Commonwealth acquire interests in land?

An acquiring authority can acquire an interest in land by agreement or compulsory process (with the exception of public parks, which can only be acquired by compulsory process with the consent of the government of the State or Territory in which the land is situated).

Acquisition by agreement

Before an acquiring authority enters into an agreement to acquire an interest in land:

– a pre-acquisition declaration (PAD) in relation to the acquisition, being a declaration in writing that the Finance Minister (or delegate) is considering the acquisition of an interest in land for a public purpose, has become absolute and is in force (see below for further discussion on this)

– the interest is available in the market (s 40(2) of the LA Act).

• the Finance Minister (or delegate) is first required to authorise that acquisition under s 40(1) of the LA Act
• in general,³ one of the following must have occurred:

An interest is taken to be available in the market under s 40(5) of the LA Act if:

• it is currently advertised as being available for sale or lease
• it is currently listed with a real estate agent, property manager or other person performing similar services as being available for sale or lease
• the owner of the interest has offered it to the acquiring authority in response to a publicly advertised request by the acquiring authority and that offer has not been withdrawn or
• the Finance Minister (or delegate) has certified that the acquisition of the interest would be a standard commercial transaction, finding that it amounts to a normal commercial transaction between parties dealing with each other on equal terms (s 40(6) of the LA Act).

Only once the requirements outlined above have been met can an acquiring authority enter into an agreement to acquire an interest in land. Accordingly, care needs to be taken by Commonwealth entities to avoid creating a binding agreement, such as through exchange of correspondence or heads of agreement, before this has occurred.

Except where the interest is available in the marketplace, after an agreement has been entered into by an acquiring authority, the Finance Minister is required to put before Parliament a statement describing the nature and purpose of the acquisition (s 40(3) of the LA Act).

Acquisition by compulsory process

In general, before a declaration may be made to acquire an interest in land by compulsory process, a PAD in relation to the acquisition must have become absolute and be in force. A PAD must identify:

• the land, through a complete and accurate legal description
• the interest proposed to be acquired, which could be an interest that is already in existence or the creation of a new interest
• the public purpose of the acquisition.

The PAD must also include a statement setting out the particulars of the use to which the land will be put or for which the land will be developed, and the reasons why the land appears to be suitable for that use or for development for that use (s 22(3)(b) of the LA Act), and may include a statement that the proposed use of the land is connected with the implementation of a policy, particulars of which are set out in the PAD (ss 22(5) and 22(6) of the LA Act).

The PAD is required to be:

• given to persons affected
• published in the Government Notices Gazette
• published, if practicable, in a local newspaper
• lodged with the State Registrar of Titles via a memorandum setting out the relevant particulars (ss 22(7), 23 and 38 of the LA Act).

In most cases, a person affected by a PAD may then exercise the statutory rights conferred by Division 2 of Part V of the LA Act to apply for reconsideration (by the Finance Minister), and may apply for administrative review (by the Administrative Appeals Tribunal (AAT)) of the PAD. In addition, a person affected might seek to challenge a decision to issue a PAD (for example, under the Administrative Decisions (Judicial Review) Act 1977).

If there is no application for reconsideration or review, a PAD becomes absolute 56 days after it has been given to persons affected and published in the Gazette and, if practicable, in a local newspaper (s 43 of the LA Act).

Once a PAD becomes absolute, the Finance Minister may make an acquisition declaration, declaring that the interest identified in the PAD is acquired by compulsory process (s 41(1) of the LA Act). The acquisition declaration must identify the land concerned and specify the public purpose for which the interest is being acquired.

The declaration must be published in the Gazette and, if practicable, in a local newspaper (s 41(3) of the LA Act). Once the declaration is published in the Gazette the interest becomes vested in the acquiring authority (s 41(4) of the LA Act).

A person from whom an interest in land is acquired by compulsory process is entitled to be paid compensation (s 52 of the LA Act). The amount of compensation to which a person is entitled is such amount as, having regard to all relevant matters, will justly compensate the person for the acquisition (s 55(1) of the LA Act). The process for determining the amount of compensation payable is set out in Part VII of the LA Act.

Temporary entry on, and occupation of, land

Short of acquiring an interest in land, the LA Act also provides for the ability of Commonwealth entities to temporarily enter on (s 10 of the LA Act) and temporarily occupy land (s 11 of the LA Act).

Land may be temporarily entered on by persons who have been authorised for the purposes of:

• ascertaining whether the land is suitable for a public purpose or
• obtaining information in relation to the land that, in the opinion of the authorised person, is, or may be, suitable for a public purpose (s 10 of the LA Act).

In addition, neighbouring land to land in which an acquiring authority holds an interest (subject to some exceptions) may be temporarily occupied by authorised persons, with such other persons as are reasonably necessary, for the purposes of carrying out works (as specified in s 11 of the LA Act) connected with the carrying out of a public purpose.

The role of the Department of Finance

The LA Act is administered by the Department of Finance. The Legal Services Directions 2005 require Commonwealth entities to consult Finance for substantive legal advice on the interpretation of the LA Act.

In addition, some LA Act decisions can only be made by the Finance Minister or a Finance delegate, such as acquisitions of freehold interests in land, whether by agreement or under compulsory acquisition process. Some approval powers have been delegated to agencies under the Lands Acquisition Delegation 2016 (available at https://www.finance.gov.au/property/lands-acquisition/delegations.html).

It is important for Commonwealth entities to engage with Finance early if an acquisition will require:

• non-routine advice on the interpretation of the LA Act
• an approval by the Finance Minister or a Finance delegate under the LA Act
• a compulsory process. Note that Finance has requested that it be consulted before any discussions are had with relevant interest-holders regarding an acquisition by compulsory process.

Don't forget other laws, approvals and policies

There may be other relevant laws and approvals that need to be complied with when an acquiring authority acquires an interest in land, in addition to those under the LA Act. Legislation that should be considered in this context includes:

• the Public Governance, Performance and Accountability Act 2013
• the relevant Commonwealth entity's enabling legislation
• the Environment Protection and Biodiversity Conservation Act 1999
• the Native Title Act 1993
• the Public Works Committee Act 1969.

There may also be Commonwealth policies relevant to the acquisition of an interest in land that have not been addressed here that also need to be considered, including those comprised in the Commonwealth Property Management Framework (available at https://www.finance.gov.au/property/property/property-management-framework/), which establishes principles for the efficient, effective, economical and ethical use of property resources and applies to property leased and owned by non-corporate Commonwealth entities.

1. A Commonwealth authority is an authority incorporated by or under a law of the Commonwealth or a Territory that is not exempted under the LA Act or regulations. This covers most Commonwealth statutory authorities but excludes most Commonwealth-owned companies.
2. Licences and permits and so on are usually regarded as providing personal rights rather than real property rights at common law, but the definition of 'interest' in the LA Act is defined broadly such that the provisions of the LA Act are applicable to licences and permits and so on.
3. These requirements do not apply if:

• the Finance Minister (or delegate) has given a certificate in writing that:

  there is an urgent necessity for the acquisition and it would be contrary to the public interest for the acquisition to be delayed by the need for the making, and possible reconsideration and review, of a PAD or

  – to require the making of a PAD for the acquisition would result in a disclosure of information that would be prejudicial to the security, defence or international relations of Australia (s 24 of the LA Act) or

• the interest is owned by the Commonwealth or a Commonwealth authority.

 

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Incorporating divestment planning into your lease acquisition strategy While it may seem counter-intuitive to talk about planning for a lease divestment at the lease acquisition stage, Commonwealth tenants operate in a unique and constantly changing environment. A lease is often a long-term commitment; however, Commonwealth tenants need to be in a position to respond to changes in law and government policy over the life of the lease. Accordingly, it makes sense to invest time at the lease negotiation stage in securing lease terms which provide opportunities for growth and divestment without exposing an agency to undue cost or risk. In the context of this article, the concept of an agency is intended to span both corporate Commonwealth entities and non-corporate Commonwealth entities.

 

Teresa Miraglia Senior Executive Lawyer AGS Commercial T 03 9242 1493	Jane Muir Cottman Senior Lawyer AGS Commercial T 03 9242 1263

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Exploring lease divestment strategies

When leased premises are surplus to an agency's needs, there are various legal avenues by which this can be effected namely:

• surrendering the lease
• assigning the lease
• sub-letting part or all of the leased premises
• granting a licence over part or all of the leased premises.

The choice and availability of lease divestment approach will be influenced by a number of factors, including:

• the operational needs of the agency
• prevailing market conditions
• the terms and conditions of the lease.

Leases will commonly include a regime around the divestment of the lease in future and, typically, property owners will aim to impose a regime of requirements aimed at limiting risk associated with divestment. This is particularly the case for Commonwealth agencies as the Commonwealth is a highly desirable tenant and, therefore, lessors are reluctant to see the replacement of this blue-chip tenant with lower calibre tenants. When negotiating a new lease, agencies will need to be mindful of this commercial context and of various considerations relevant to the different avenues of divestment.

Divestment methods

Surrender

As a lease is a contract for a fixed term, it is not possible for one party to unilaterally bring the lease to an end prior to the end of the term unless early termination rights are expressly provided for under the terms of the lease.

Whilst a right of surrender or early termination is an attractive option for Commonwealth tenants, it is likely to be the least desirable option from a lessor's perspective and may come at a high price. For example, in exchange for agreeing to an early-termination clause in the lease favouring the tenant, a lessor may insist upon a higher rent, or onerous compensation rights, and this will impact upon the value-for-money assessment of the lease arrangement.

Commonwealth entities should also be aware that there is a body of case law around so-called 'termination for convenience' clauses, which may impact upon the manner and circumstances in which such a right may be exercised at the option of the Commonwealth, and may entitle a lessor to claim compensation on the grounds of repudiation of the lease. For example, if a tenant exercising a right of early termination does not do so in accordance with the terms of the lease, or does not act in good faith, a court may find that the attempted termination was ineffective. In that case, the landlord would be entitled to terminate the lease on the grounds that the tenant had repudiated the lease, and claim damages for breach of contract. Accordingly, caution should be exercised in negotiating and executing early-termination clauses.

Assignment

If the whole leased premises are surplus to requirements, an assignment of lease is likely to be an appropriate option.

In the absence of lease terms to the contrary, a tenant is entitled to transfer its interest under a lease to a third party without the consent of the lessor. Nearly all leases, however, modify this common law position, and may prohibit assignment altogether, or permit assignment with the consent of the lessor.

Sub-letting

Sub-letting is an appropriate divestment option where only part of the leased premises are surplus to requirements.

While it is possible to grant a sub-lease of the whole premises, this will be less desirable than assignment in most instances, as there is no scope for the Commonwealth tenant to be released from liability under the lease.

Licensing

As with sub-letting, a licence is less desirable than assignment when disposing of the whole leased premises.

A licence is also less likely to be desirable to the marketplace than a sub-lease, because a licence creates contractual rights only and technically, suggests that the premises will not be exclusively used by the occupant.

Lease negotiation considerations

It is unlikely that a lessor will agree to grant broad rights to deal with the lease without consent. However, there are a number of approaches to negotiating the terms of your lease which can assist Commonwealth tenants to minimise cost and risk in the event of a full or partial lease divestment.

Divestment to other Commonwealth entities

For non-corporate Commonwealth entities (NCCEs), the lease will be entered into in the name of and binding on the Commonwealth of Australia. NCCEs are not legally separate from the Commonwealth and, accordingly, it is possible for another NCCE to take over (or share possession of) the leased premises without the lessor's consent, even though the lease requires that the lessor's consent is required to an assignment, sub-lease or sharing of possession of the premises. This is because the divestment of premises between NCCEs is not as between 2 legal persons but rather within the 'Commonwealth of Australia' – that is within the 1 legal person. As such, it is not technically an assignment, sub-lease or licence from 1 party (the lessee) to a third party.

It is also commonplace for Commonwealth entities to negotiate the right to assign or sub-let leased premises to other Commonwealth corporate entitles (CCEs). This approach is generally well accepted in the market because these tenants are generally seen to be as desirable as NCCEs.

It should be borne in mind that these options may not be available without securing the commercial agreement of the lessor if the permitted use of the leased premises is not sufficiently broad to enable another agency to carry out its operations. For example, if the permitted use is expressed as 'office accommodation', it is unlikely that the premises may be used for, say, a storage facility.

Divestment with lessor consent

In the likely event that a lessor does not agree to grant broad rights to deal with the lease without consent, there remains ample opportunity to build flexibility for the Commonwealth tenant into the relevant provisions of the lease.

Approaches to mitigating the impact of the lessor's discretion around consent to dealings with the lease may include:

• incorporating a requirement for the lessor to act reasonably – namely, that its consent may not be unreasonably withheld
• providing that the lessor may not withhold consent to a dealing upon certain conditions precedent being met – examples may include payment of the lessor's reasonable costs, and proving to the lessor's reasonable satisfaction that the proposed assignee or sub-tenant is solvent and capable of carrying out the permitted use.

Significant costs and time savings can be achieved by working specific and achievable conditions into the lease. This can also be achieved by:

• providing for 'deemed consent' if the lessor does not respond or object to a request for consent to a proposed dealing within a given timeframe
• capping the tenant's contribution to the lessor's costs of considering a request for consent.

Permitted use

Most leases will restrict the manner in which the leased premises may be used. Permitted uses in commercial leases vary from the broad (such as 'any legal use') to the restrictive (such as 'women's clothing retailer trading as "X" '). Lessors are unlikely to agree to permitted uses on the broader end of the scale.

As alluded to above, the scope of the permitted use can have significant consequences for a tenant needing to divest itself of some or all of its interest under a lease in future. If the permitted use is too narrow, it may not accommodate another agency or third party's use, and could increase the likelihood of needing to enter into commercial negotiations with the lessor to achieve the desired divestment outcome.

The permitted use is therefore a significant term which can substantially impact upon the value-for-money assessment of the lease arrangement.

Commonwealth tenants should aim to negotiate a permitted use that strikes an appropriate balance between commerciality and providing the flexibility to allow for later divestment.

Release from liability following assignment

At common law, a tenant will not be automatically released from its obligations upon assignment of a lease. This position may be reversed by legislation (for example, legislation governing leases for retail and residential premises), or by express agreement between the parties.

Ideally, a full release upon assignment should be negotiated into the lease terms to avoid the time and cost associated with conducting commercial negotiations with the lessor later around the scope of the Commonwealth's release when it approaches the lessor for consent to a divestment.

If a full release provision cannot be achieved, compromises may include limiting the scope of the release:

• so that it only applies in certain circumstances – for example, where the assignee is another Commonwealth entity
• to a set time period following assignment, such as 12 months
• to the current term (and not any subsequent option terms).

Ownership of fit-out and lease incentives

Commercial lessors often make contributions to tenants' fit-out or provide rent-abatement periods as an incentive to enter into the lease. It is also commonplace for these arrangements to be documented separately to the lease in a side deed, to protect the confidentiality of the arrangement in the lessor's commercial interest.

Side deeds can impact upon a tenant's divestment strategy in the following ways:

• by providing for the repayment or 'clawback' of the incentive in the event of a surrender or assignment of the lease
• by granting the lessor ownership of any fit-out that it has paid for, or alternatively providing for ownership to revert to the lessor at the end of the lease.

Commonwealth tenants can minimise the potential impacts of incentive clawback provisions by negotiating to confine their applicability to circumstances where the lease is terminated (either because the lessor has accepted a surrender of the lease, or due to the tenant's breach). If the lessor refuses to reduce the scope of the clawback to exclude assignments of the lease, it can be pointed out to the lessor that recent case law suggests that such a provision may be void as a penalty.

If the lease and/or any side deed provides for some or all of the fit-out to be owned by the lessor, the lease will need to provide for any assignee or sub-tenant to have a right to use the fit-out.

Other considerations

Commonwealth entities also need to be mindful of the legislative and policy environment in which they operate when considering lease divestment options. A full discussion of these considerations is beyond the scope of this article; however, we briefly outline them below.

Legislative approvals

An approval is required under the Lands Acquisition Act 1989 (Cth) to dispose of the interest in land by a surrender of lease, grant of a sub-lease or licence or assignment of a lease. Approvals under the Public Governance, Performance and Accountability Act 2013 (PGPA Act) and Public Governance, Performance and Accountability Rule 2014 are also required where the divestment arrangement involves a commitment of Commonwealth money (for example, the payment of a surrender fee).

Policy considerations

Non-corporate Commonwealth entities must also comply with Commonwealth property management and disposal policies, including the Commonwealth Property Disposal Policy, and the Commonwealth Property Management Framework – a series of Resource Management Guides administered by the Department of Finance consistent with PGPA Act requirements for the management of Commonwealth resources.

Concluding comments

It pays to think ahead to potential divestment scenarios during the acquisition of a lease.

The greater the flexibility in the lease around dealings with the lease, permitted use, incentives and ongoing liability for the Commonwealth tenant, the more likely it is that any future divestment will be achievable in an efficient and cost-effective manner.

¹ Traditionally the common law doctrine on penalties has only been applied in the context of damages for breach of contract. However, in Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205, the High Court of Australia accepted that a stipulation for 1 party to pay money to another may amount to a penalty, even if that payment is not triggered by the breach of a contractual obligation. This situation would be analogous with the repayment of an incentive upon an assignment which is not in breach of a lease.

 

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Water rights as property rights and just terms Introduction In the semi-arid continent of Australia, water enjoys an important status which has been recognised for well over a century. Reforms to better manage this limited resource for the benefit of all have included the creation of a framework around water rights, which gives these rights many of the same characteristics that real and personal property also enjoy. But are those rights 'property', and does it actually matter? In this article, we discuss water rights in the Murray–Darling Basin, and some recent cases in which the nature of those rights was in issue. To understand the unique place that water rights occupy, it is helpful to consider the last 100-or-so years of water management in the Murray–Darling Basin.

 

Kathryn Graham Senior General Counsel Office of General Counsel T 02 6253 7167	Robert Cole Senior Lawyer AGS Commercial T 03 9242 1392

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A short chronology is set out below.

• The late 1800s saw each Australian colony conduct public inquiries and conclude that water resources should be brought under statutory control. Each State then went on to enact water management legislation.
• Federation in 1901 preserved water management as a State responsibility. Section 100 of the Constitution prevents the Commonwealth from '[abridging] the right of a State or of the residents therein to the reasonable use of the waters of rivers for conservation or irrigation'.
• In 1915, the River Murray Waters Agreement took effect. This agreement was between the Commonwealth and the States of New South Wales, Victoria and South Australia. The agreement was concerned, among other things, with the management and fair distribution between these States of the water from the River Murray. This agreement also established the River Murray Commission, which would go on to become the Murray–Darling Basin Authority.
• In 1994, the Council of Australian Governments (COAG) endorsed a strategic framework for the reform of the water industry. The strategy covered, among other things, a comprehensive system for water allocation and an improved water trading regime. In terms of water trading, a fundamental component was that water rights were to be separated from the land title. Each relevant State passed legislation to implement the reform framework.
• From 2004 to 2006, all governments signed on to the Intergovernmental Agreement on a National Water Initiative. This agreement built on the measures outlined in the 1994 COAG strategy and emphasised the importance of balancing the needs of water users with the needs of the environment.
• In March 2008, the Water Act 2007 (Cth) took effect. The Water Act's purpose is 'to enable the Commonwealth, in conjunction with the Basin States, to manage the [Murray–Darling] Basin water resources in the national interest'.¹ In 2008 further steps were also taken to enhance the agreements already in place, via a memorandum of understanding in relation to the Murray–Darling Basin signed in March, and the Intergovernmental Agreement on Murray Darling Basin Reform signed in July. The parties to the intergovernmental agreement are the Commonwealth and the 'Basin States' – Queensland, New South Wales, the Australian Capital Territory, Victoria and South Australia.

Key to the reforms was the identified need to develop an effective trading regime for water rights. For this regime to be effective, it was necessary for the water rights that were the subject of the trading regime to have at least some characteristics of a proprietary nature. However, in the context of reforms which also placed significance on the needs of the environment and statutory frameworks which provided for State control of the subject resource, the legal nature of water rights was not clear.² Moreover, although there is a degree of consistency in some areas, the legal regimes in each State governing water rights continue to have significant differences, so it is hard to generalise across the Basin.

A brief history of the law of water

Flowing water at common law is a public right common to all who may access it.³ The right to water is a usufructuary right, meaning that it is a right to enjoy something belonging to another, so far as that enjoyment is compatible with the substance of that thing not being destroyed. The leading case on common law riparian rights, Embery v Owen,⁴ held that the 'riparian' owner had a right to take the water flowing over or adjacent to their land for domestic or ordinary purposes, and for other purposes provided the resource was not diminished. The riparian owner's rights were subject to the right of reasonable use by upstream riparian owners and carried with them corresponding obligations to downstream riparian owners.⁵ This was based on the idea that water, like light and air, is common property. It is possible to have a right to use water but not possible to have property in the water itself.

The position with respect to groundwater was a little different. Landowners had rights to the groundwater beneath their land (also known as 'percolating' water). The common law right of a landowner to extract resources from their land – consistent with the maxim 'dominus soli est dominus ad coelum et usque ad infernos' meaning 'for whoever owns the soil, it is theirs up to heaven and down to hell' – extended to extracting an unlimited quantity of groundwater.⁶

For a dry country like Australia, where water is scarce and which has become deeply dependent on irrigation for agriculture, these common law approaches to the ownership of and right to use water were clearly inappropriate. The source of water rights in Australia is now found in statute – and common law rights have generally been supplanted.⁷ The Crown in the right of each State and Territory has the primary right of access to water and the Crown may grant statutory rights to access and use water. The statutory regime prevails over any pre-existing landholder riparian rights.⁸

Are water rights 'property'?

… few concepts are quite so fragile, so elusive and so frequently misused as the notion of property … ⁹

Property is not itself a physical thing or a resource. Property is a 'legally endorsed concentration of power over things and resources'.¹⁰ A person who holds a water right is essentially able to take and use water, subject to particular conditions or requirements. But is this collection or bundle of rights properly regarded as 'property'?

Whether or not a particular set of rights to water can be truly defined as 'property' is perhaps only of theoretical interest to scholars. To the person who holds a water right, it perhaps does not matter whether the water right is properly characterised as 'property', as long as they know what their rights are and are able to exercise them. However, in one crucial respect it is essential to know whether water rights are 'property': if water rights are property, then a law of the Commonwealth cannot be used to acquire those rights without providing just-terms compensation, because of s 51(xxxi) of the Constitution.

Section 51(xxxi) of the Constitution confers on the Commonwealth Parliament the power to make laws for 'the acquisition of property on just terms from any State or person for any purpose in respect of which the Parliament has power to make laws'.

It is well recognised that, in addition to conferring a power on the Parliament, s 51(xxxi) operates as a constitutional guarantee: the Commonwealth may not make a law which operates to acquire property from a State or person unless the Commonwealth provides just terms for that acquisition.

Obviously a key question confronted by courts and legal advisers applying s 51(xxxi) concerns the meaning of the term 'property' in that section. The High Court has tended to give a liberal construction to the term 'property': as well as traditional notions of property such as legal and equitable interests in land, the Court has said that the notion of property in s 51(xxxi) extends to 'every species of valuable right and interest'¹¹ and to 'innominate and anomalous interests'.¹² Moreover, in some limited circumstances it has been held to extend to rights created by statute if those rights bear the characteristics of property.¹³ For example, copyright, which is a right created by statute, is property which cannot be acquired without the provision of just terms. So the mere fact that water rights are created by statute does not mean that those rights are not property.

In determining whether a right or interest is property, it is necessary to consider a number of issues. These include:

• whether the right or interest is definable and identifiable by third parties
• whether the right or interest is transferable
• whether the right or interest is enforceable against third parties
• whether the right or interest has some degree of permanence or stability.¹⁴

The High Court has also suggested, with rights created by statute, that rights which are inherently susceptible to modification or extinguishment can be acquired without the provision of just terms. So, for example, where a right is created by a statute, but the statute makes clear that the right can be modified or taken away by an amendment, the right will not be one which gives rise to a right to compensation under s 51(xxxi).¹⁵

Are water rights property for the purposes of s 51(xxxi) of the Constitution?

In the last decade there have been a couple of occasions where the courts have had to give consideration to the nature of water rights in the Basin in the context of the Constitution.

In 2009, the High Court decided the case of ICM Agriculture Pty Ltd and Others v Commonwealth and Others.¹⁶ Three landowners in the Lachlan River area in NSW held bore licences under the Water Act 1912 (NSW) which were replaced with aquifer access licences under the Water Management Act 2000 (NSW) with the result that there was a significant reduction in the volume of groundwater they could take. The landowners were provided with 'structural adjustment payments' by the NSW Government, which were partly funded by the Commonwealth under a grant made under s 96 of the Constitution. The landowners argued that s 51(xxxi) was engaged because of this, even though the law depriving them of their bore licences was a NSW law.

There are 2 plurality judgments (French CJ and Gummow and Crennan JJ; and Hayne, Kiefel and Bell JJ) which each take a slightly different approach to the legal issues involved.¹⁷ But the outcome of the case is that the conversion of the licences did not constitute an 'acquisition of property' for the purposes of s 51(xxxi).

The judgment of Hayne, Keifel and Bell JJ is particularly interesting in light of its discussion of the history of the law of water, but also because of the discussion of the difficulty of applying notions of ownership or property to water, whether it be groundwater or flowing water.

What exactly would be the subject of property rights? While still allowed to flow, no part of the water that flows in a stream can be isolated and tagged as the water "owned" by some person. And water in the ground may move more slowly but there is no less difficulty in identifying what would be the subject of the proprietary rights.¹⁸

Citing Getzler,¹⁹ Hayne, Kiefel and Bell JJ noted that the 'quality of instability' in such a flowing and shifting resource makes it difficult to reconcile these rights with ordinary property rights which have physical possession at their foundation.²⁰

However, their Honours also acknowledged that the bore licences which were cancelled in ICM Agriculture were themselves a species of property, which was demonstrated by the ability to trade them or use them as security.²¹ They did not, however, consider that anyone had acquired property by the conversion of the bore licences to access licences.²²

In contrast, French CJ and Gummow and Crennan JJ considered that the licences were not property rights, stating:

… where a licensing system is subject to Ministerial or similar control with powers of forfeiture, the licence, although transferable with Ministerial consent, nevertheless may have an insufficient degree of permanence or stability to merit classification as proprietary in nature.²³

More recently, the issue has been raised again in the Federal Court, in Lee v Commonwealth²⁴ which went on appeal to the Full Federal Court.²⁵ At first instance, North J summarily dismissed a proceeding in which the applicants claimed that parts of the Water Act were invalid and claimed compensation for the acquisition of their property under a provision of the Water Act (s 254) which guaranteed compensation if there had been an acquisition of property other than on just terms (in constitutional terms).

The applicants in Lee were farmers (one from Victoria and one from South Australia) who depended on irrigation water from the Murray River. They claimed to have suffered detriment as a consequence of the so-called 'unbundling reforms' carried out by State governments, which detached water rights from landholdings from 1 July 2007, and the implementation of sustainable diversion limits under the Murray–Darling Basin Plan, which resulted in less water being available for irrigation. One argument run was that the loss of carryover entitlements which resulted from unbundling and the associated reforms amounted to an acquisition of property and compensation was payable under s 254. This argument failed, with North J finding that, while it might be said that the applicants had experienced a deprivation, there was no acquisition for constitutional purposes,²⁶ in reliance on the kind of principles discussed in ICM Agriculture. On appeal, the Full Court agreed with the position taken by the primary judge, stating that the appellants' claims were based on 'a desire to protect the general commercial and economic position' rather than an acquisition of property under the Constitution.²⁷

Conclusion

The significance of water in our dry continent cannot be understated. With a changing climate, disputes over water and its possession, and the increasing importance of balancing the needs of the environment against the demands of irrigation and agriculture, rights of use and ownership may become more significant.

It is foreseeable that the increasing significance of water rights in this context may result in the constitutional guarantee of compensation for acquisition of property being considered in greater depth. It remains to be seen how the law will adapt to such changes and how the constitutional guarantee will be applied to future changes to water rights and water law.

¹Water Act 2007 (Cth) s 3(a), objects clause.

² See for example the comments of Michael McKenzie, 'Water rights in NSW: Properly property?' (2009) 31 Sydney Law Review 443, 463.

³Rugby Joint Water Board v Walters [1966] 3 All ER 497.

⁴ (1851) 6 Ex 353.

⁵Embrey v Owen (1851) 6 Exch 353, 369. See also ICM Agriculture Pty Ltd and Others v Commonwealth and Others (2009) 261 HCA 51, [55], [109].

⁶Acton v Blundell (1843) 12 M & W 324; 152 ER 1223; Bradford Corporation v Pickles [1895] AC 587.

⁷ See Water Resources Act 2007 (ACT); Water Act 1992 (NT); Water Management Act 2000 (NSW); Water Act 2000 (Qld); Natural Resources Management Act 2004 (SA); Water Management Act 1999 (Tas); Water Act 1989 (Vic); Rights in Water and Irrigation Act 1914 (WA).

⁸Thorpes Ltd v Grant Pastoral Company Pty Ltd (1955) 92 CLR 317, 331.

⁹ Kevin Gray and Susan Francis Gray, Elements of land law (2009) 86.

¹⁰Yanner v Eaton (1999) 201 CLR 351, [17].

¹¹Minister for Army v Dalziel (1944) 68 CLR 261, 290 (Starke J).

¹²Bank of NSW v Commonwealth (1948) 76 CLR 1, 349 (Dixon J).

¹³JT International SA v Commonwealth (2012) 250 CLR 1, [29] (French CJ); Cunningham v Commonwealth (2016) 335 ALR 363, [43]–[46] (French CJ, Kiefel and Bell JJ), [65]–[67] (Gageler J), [154]–[155] (Keane J), [229], [232] (Nettle J).

¹⁴ See generally R v Toohey; Ex parte Menneling Station Pty Ltd (1982) 158 CLR 327 (Mason J).

¹⁵Northern Territory v Chaffey; Santos Ltd v Chaffey (2007) 231 CLR 651.

¹⁶ (2009) 240 CLR 140.

¹⁷ Heydon J dissented.

¹⁸ICM Agriculture Pty Ltd and Others v Commonwealth and Others (2009) 240 CLR 140, [112].

¹⁹ Joshua Getzler, A history of water rights at common law (Oxford University Press, 2004).

²⁰ICM Agriculture Pty Ltd and Others v Commonwealth and Others (2009) 261 HCA 51, [112].

²¹ Ibid [147].

²² Ibid [149]–[154].

²³ Ibid [76].

²⁴ (2014) 220 FCR 300; [2014] FCA 432.

²⁵ (2014) 315 ALR 427; [2014] FCAFC 174.

²⁶ Ibid [200].

²⁷ Ibid [172]–[182], and in particular [181].

 

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Section 172 of the Property Law Act 1958 (Vic) – recent applications by the Australian Taxation Office AGS Melbourne recently acted in 2 cases brought by the Deputy Commissioner of Taxation in the Supreme Court of Victoria for declaratory relief, relying on s 172 of the Property Law Act 1958 (Vic). Both cases raised challenging forensic issues, as well as novel questions of standing in cases brought by the Deputy Commissioner for such relief as an unsecured creditor. In this article we discuss, first, the relevant legal principles and, second, their application in the 2 cases litigated in the Supreme Court of Victoria.1

 

Evan Evagorou Senior Executive Lawyer AGS Dispute Resolution T 03 9242 1246	Robyn Curnow Senior Lawyer AGS Dispute Resolution T 03 9242 1208

__________________________

Relevant legal principles – Section 172

Section 172 of the Property Law Act 1958 (Vic) is headed, 'Voluntary conveyances to defraud creditors' and provides as follows:

1. 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.
2. …
3. 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.

Property

Section 172 applies to all forms of property, both legal and equitable.² The provision is 'derived from "the Elizabethan Statute",³ which was intended to prevent debtors alienating property when this would prevent their creditors from recovering the moneys owed to them.'⁴ There are equivalent provisions in other States' legislation,⁵ and, in accordance with the history of the provision, in personal and corporate insolvency legislation.⁶

Intent to 'defraud'

In Marcolongo v Yu Po Chen [2011] HCA 3; (2011) 242 CLR 546 a majority of the High Court held that the concept of 'defraud' within the meaning of s 37A of the Conveyancing Act 1919 (NSW) (and correlative State and federal provisions) should receive a liberal construction consistent with the case law deriving from the Elizabethan Statute. Accordingly, the phrase 'intent to defraud creditors' should be understood as encompassing an intention to 'delay, hinder or [otherwise] defraud' consistently with the application of the phrase used in the Elizabethan Statute.⁷

The majority in Marcolongo held that, whilst the concept of 'defraud' does not extend to encompass equitable or constructive fraud, it does not require a finding of actual dishonesty in the sense of an actual intention or purpose of causing loss. Rather, it is necessary to show 'an intention to hinder, delay or defeat creditors and in that sense to show that accordingly the debtor had acted dishonestly' [emphasis added].⁸

Although intent must be found as a fact, it need not be the sole, nor predominant, intent. It may exist concurrently with a genuine and good faith intention to dispose of property.⁹

The critical period to examine is the period leading up to the date of the transfer and the critical mind is that of the transferor. Where that transferor is a corporate entity, the critical mind is that of the persons controlling the transferor's actions in effecting the transfer.¹⁰

The manner in which intent is to be ascertained was considered in Deputy Commissioner of Taxation v Yeo (2007) 66 ATR 428; [2007] VSC 29, where Harper J said that direct evidence of the necessary intent to defraud creditors is very seldom available.¹¹ His Honour observed:

... the available evidence is almost invariably circumstantial. One ascertains someone else's intention by looking at what that person has done or said as circumstantial evidence from which an inference can be drawn concerning the intention in question.

Harper J's statement reflects what was said in Re PT Garuda Indonesia Limited v Richard John Grellman¹², a case concerning s 121 of the Bankruptcy Act 1966, where Wilcox, Gummow and Von Doussa JJ quoted with approval the statement by Clyne J in Re Trautwein:¹³

With regard to the applicant's claim under s. 37A of the Conveyancing Act, it is, I think, clearly established that in determining whether or not an alienation has been made with intent to defraud creditors, a court must look at all the circumstances surrounding the alienation to ascertain if there were any such intent. It is not necessary to bring actual proof that the alienor had in his mind an intention to defraud creditors: for if it appears from the evidence that the effect might be expected to be and has in fact been to do so, the court will attribute the fraudulent intention to the alienor.

In Cannane v J Cannane Pty Ltd (in liquidation) (1998) 192 CLR 557¹⁴, Brennan CJ and McHugh J stated that the focus must be on whether the impugned disposition results in a 'diminution of the assets available for payment of creditors'.¹⁵ Where a disposition is voluntary, rather than for valuable consideration, and a necessary consequence of the alienation is to defeat or delay creditors, the inference of intent to defraud may be drawn more easily.¹⁶

The nine 'badges' of fraud referred to by Sloss J , by reference to the decision of Lord Hatherley LC in Allen v Bonnett (1870) LR 5 Ch App 577 at 579, are commonly applied as a useful 'check list' for detecting the presence of fraud. Relevantly for present purposes, those 'badges' include:

• secrecy of transfer
• conveyance made pendente lite
• unusual statements of fact in the deed (so a statement that the deed is made without any fraudulent intent is a suspicious circumstance)
• false statements in the deeds
• inadequacy of consideration.

The party seeking to avoid a disposition of property has the onus of proving an actual intent by the disponor at the time of the disposition to defraud creditors.

'Creditors'

The following principles, relevant to the scope of the term 'creditors', are well-established:

• The 'creditors' need not be existing creditors; they may be anticipated future creditors.¹⁹ In such circumstances, however, the applicant must show that the relevant intention existed with the disposition of the property in question, in the sense that it accompanied it.²⁰
• The intention may be inferred if assets are given away at a time when the transferor is aware of an impending liability, even though that impending liability has not yet crystallised into an existing indebtedness.²¹
• Similarly, a person who makes a voluntary settlement immediately before entering into a financially hazardous venture could be said to have intended to defraud his or her creditors notwithstanding that there were no outstanding creditors at the date of the transfer.²²

The defence under s 173(3)

Subsection 172(3) provides that s 172(1) will not apply to an interest in property where the transferee:

gave, either, valuable consideration²³ or good consideration;²⁴ and

in either case, acted in good faith without notice of the intent to defraud.²⁵

The burden of proof for the exclusion in subsection 172(3) lies on the transferee.²⁶

Appropriate order where intention is established

Where, on the application of a prior creditor, an order setting a fraudulent disposition aside is made, the property is made available to the claims of all creditors generally, and subsequent creditors are let in and participate pro rata.²⁷ The Court may make such consequential orders as are necessary (eg amendment to the Land Titles Registry).

During 2013–15, AGS Melbourne acted for the Deputy Commissioner of Taxation in DCOT v Karas & Anor and DCOT v Haritos & Ors, which both involved applications for declaratory relief under s 172 of the Property Law Act: in the case of Karas, the property concerned was a taxpayer's beneficial interest in real property, and in Haritos, the property concerned was beneficial ownership of shares in a company. Both cases arose out of freezing orders obtained following a covert audit.

Application of relevant legal principles

Deputy Commissioner of Taxation v Karas

In Deputy Commissioner of Taxation v Karas the Deputy Commissioner sought declarations that the defendant, Tom Karas (against whom a judgment debt in the sum of $47,147,983 was entered in December 2011) had an equitable interest in a property in Gore Street, Fitzroy. This property was owned by a company Mr Karas was a director of. The company became the registered proprietor of the Gore Street property pursuant to a contract of sale, signed by Mr Karas in August 2007, which named Mr Karas '& or nominee' as purchaser. Mr Karas paid the deposit, then, in January 2008, nominated the company as the purchaser prior to settlement without receiving any consideration from the company. At the time of the nomination, Mr Karas had accrued income tax liabilities for the 2003 to 2007 tax years that were yet to be assessed. The Deputy Commissioner contended that the nomination amounted to a transfer of property, which gave rise to his alternative contention that the nomination was made by Mr Karas with intent to defraud creditors. In February 2013 the company sold the Gore Street property, and the proceeds were applied to loans from the Commonwealth Bank secured against 2 properties in George Street, Fitzroy, which were also owned by the company. Therefore, the Deputy Commissioner also sought a declaration that the George Street properties were charged in favour of Mr Karas.

Deputy Commissioner of Taxation v Karas (2013) 278 FLR 402; [2013] VSC 410

The proceeding in DCOT v Karas was settled pursuant to consent orders filed on the eve of the trial, but interlocutory issues were raised by the defendants about the Deputy Commissioner's standing to make the application and his reliance on s 255–50 of Schedule 1 of the Taxation Administration Act 1953, an averment provision upon which the Deputy Commissioner is able to rely in 'a proceeding to recover an amount of a tax-related liability'. The defendants, Mr Karas and the company (who were jointly represented), applied to the Court to have the Deputy Commissioner's statement of claim struck out on the basis that, first, as an unsecured creditor, the Deputy Commissioner did not have standing to bring the claim as against the property of a third party,²⁸ and, second, the proceeding was not brought 'to recover an amount of a tax-related liability' and therefore the averment provision in s 255–50 was not engaged. Justice Elliot dismissed the defendants' first argument, noting that this case was on all fours with Victorian authority on standing (Sarkis v Deputy Commissioner of Taxation [2005] VSCA 67).²⁹ With regard to the averment provision, Justice Elliot decided that the proceeding could not be characterised as a proceeding to recover an amount, as it was but a step towards recovery which was not necessary for the Deputy Commissioner to take, but one which he chose.³⁰ Therefore, the Deputy Commissioner could not rely on the averment provision. Although the judgment does not refer specifically to s 172 of the Property Law Act, the statement of claim included claims under that provision.

Deputy Commissioner of Taxation v Effie Haritos & Ors [2014] VSC 379

This proceeding, which was heard by Sloss J over 7 days in 2014, involved an application by the Deputy Commissioner for a declaration that the beneficial owner of 4 issued shares in a company called Jinacan was another company called Glen, which owed the Commissioner $514,093 when it ceased trading in 2004.³¹ When Glen went into liquidation, and the shares in Jinacan were brought to the attention of its creditors, the Deputy Commissioner obtained a freezing order directed at a range of individuals and companies associated with Jinacan and Glen, including 2 married couples, George and Effie Haritos and Alex and Betty Kyritsis. Mr Haritos and Mr Kyritsis together operated a company called AES Services Pty Ltd, which was the new corporate vehicle for Glen. Mrs Kyritsis is Mr Haritos's sister.

There were 4 issued shares in Jinacan and Mr Haritos was recorded on the ASIC register as the legal owner of 1 share. Glen was recorded as the beneficial owner of this share, and the legal and beneficial owner of the remaining 3 shares. However, by instruments dated 11 August 2006, Mrs Haritos and Mrs Kyritsis were declared to be the beneficial owners of the Jinacan shares (as to 2 shares each). At trial, the defendants argued that this trust was declared on formation in 1987, reiterated throughout the life of Glen, and finally documented in August 2006. Accordingly, they argued, Glen was not the beneficial owner of the shares in Jinacan, and the ASIC register, as well as all the books and records maintained for Jinacan and Glen by the companies' accountants, were all incorrect.

The Deputy Commissioners claim in Haritos had 2 alternative limbs.

In the first limb, the Deputy Commissioner alleged that at all material times the beneficial owner of the Jinacan shares was Glen and that the purported transfers of the beneficial ownership of the Jinacan shares to the first defendant, Effie Haritos and to the second defendant, Betty Kyritsis, by declarations of trust dated 11 August 2006 were void, invalid and of no effect.

In the second limb [para 214 onwards of the judgment], the Deputy Commissioner alleged that the purported transfers, if valid and effective, are voidable at the instance of the Deputy Commissioner pursuant to s 172 of the Property Law Act.

The Deputy Commissioner's case relied upon the contemporaneous documentary evidence in the proceeding (namely, the companies' books and records and the ASIC records). The defendants contended that those books and records were incorrect, and the companies' accountants, a firm called Gillards, had caused the inaccuracies. As well as Mr and Mrs Haritos and Mrs Kyritsis, the defendants called a director of Gillards, Mr Moscovitch (the firm having ceased providing services to the companies), who had undertaken work for the Haritos and Kyritsis families since 1986, as well as the liquidator of Glen. Overall, the evidence of Mr Haritos was found to be unreliable.³²

On the evidence, Sloss J found that the purported declarations of trust dated 11 August 2006 were not valid and effective and did not operate to alter or affect the manner in which the shares in Jinacan were held.³³ Accordingly, the Deputy Commissioner's argument on the first limb was successful. Section 172 of the Property Law Act was not, strictly speaking, enlivened, but her Honour went on to consider the second limb of the Deputy Commissioner's argument and to make factual findings which she would have made, had s 172 been raised, concerning the declarations of trust made in August 2006, at a time when Glen was indebted to the Commissioner in the amount of $514,032. The defendants argued that the declarations were not intended to, and did not, alienate any interest Glen might have had in the Jinacan shares. Rather, they were intended to document the status quo, and – consequently – there was no intention to alienate property. As to the intention to defraud creditors, the defendants pointed to the fact that Glen had made payments of more than $2 million to creditors in the 18 months after it had ceased trading.

Her Honour concluded that, were it necessary to form a view on these matters, she would conclude, based on the contextual evidence, that if the declarations of trust were found to be valid and effective, they amounted to an alienation of property undertaken with the intention of defrauding the creditors of Glen within the meaning of s 172 of the Property Law Act.³⁴

Prior to closing submissions, her Honour raised with the parties whether the proceeding had been correctly brought in the Deputy Commissioner's name, noting that s 255–5(2) of Schedule 1 only conferred power on him to bring a proceeding to 'recover an amount of a tax-related liability', whereas the only relief sought in the current proceeding was declaratory. The Deputy Commissioner submitted that the wording of s 255–5(2) should be given a liberal construction and that the current proceeding had been brought '"in the course of" recovery proceedings in the relevant sense.' Her Honour considered Justice Elliot's ruling in Karas and determined that the same reasoning applied in the current case; therefore, she was satisfied there was 'a real doubt' about the standing of the Deputy Commissioner to seek only declaratory relief in the proceeding.³⁵ Accordingly, the Commissioner was substituted for the Deputy Commissioner as plaintiff and the following declarations were made:

1. As at 19 May 2008, Glen was the beneficial owner of the 4 Jinacan shares.
2. The purported declarations of trust dated 11 August 2006 were void, invalid and of no effect.

Haritos & Ors v Commissioner of Taxation [2015] VSCA 79

Mr and Mrs Haritos, along with Betty Kyritsis, appealed against the making of the first declaration, contending that Mr Moscovitch had given evidence at the trial that Mr Haritos told him the 4 shares in Jinacan were to be held on trust by each of Mr and Mrs Haritos and Mr and Mrs Kyritsis (as to 1 share each), and that Sloss J had disregarded that evidence. During the trial Sloss J had also refused leave to the appellants to amend their defence to include an alternative scenario, consistent with the evidence of Mr Moscovitch and, when doing so, gave reasons.

The Court of Appeal held that her Honour was correct to refuse leave to amend because the corporate structure applied to Glen and Jinacan in 1987 was inconsistent with the instructions apparently given by Mr Haritos to Mr Moscovitch previously.³⁶ In her reasons, Sloss J also referred to her conclusion that the books and records maintained by Mr Moscovitch for Jinacan and Glen generally reflected Mr Haritos's instructions and noted that the evidence called by the appellants had no coherent theme.³⁷ The Court of Appeal decided that the analysis of the documentary evidence by Sloss J was correct, and expressed agreement with her conclusion that 'sketchy and unsubstantiated assertions' by the appellants did not displace this evidence. Accordingly, and in view of the late stage at which the application for leave to amend was made by the appellants, Sloss J was correct to refuse the application.³⁸

Both of these cases involved large volumes of documentary evidence, as well as viva voce evidence from witnesses, including professionals such as accountants. The very thorough consideration of this evidence in the Haritos matter by Sloss J, as well as her analysis of the law of voidable transfers (which was approved by the Court of Appeal) provides a useful example of the Commissioner's application of this statutory mechanism to obtain remedies directed at the protection of the revenue.

Evan Evagorou was the responsible lawyer acting for the Commissioner in the Haritos proceedings and Robyn Curnow was the responsible lawyer acting for the Commissioner in the Karas proceedings.

¹ See Deputy Commissioner of Taxation v Karas (2013) 278 FLR 402; [2013] VSC 410 and Deputy Commissioner of Taxation v Haritos [2014] 287 FLR 136; [2014] VSC 379 (and on appeal Haritos v Deputy Commissioner of Taxation [2015] VSCA 79).

² Kerr on the law of fraud and mistake, 7th edn. (1952) p 304; May on fraudulent conveyances, 2nd edn. 1887, p 5103 (17).

³ Statute 13 Eliz I c 5 (1571) 'An Act against fraudulent Deeds, Gifts and Alienations, etc'.

⁴Petrovic v Brett Grimley Sales [2014] VSCA 99 [24].

⁵ See equivalent provisions: s 37A of the Conveyancing Act 1919 (NSW); s 228 of the Property Law Act 1974 (Qld); s 86 of the Law of Property Act 1936 (SA); s 40 of the Conveyancing and Law of Property Act 1884 (Tas); s 89 of the Property Law Act 1969 (WA).

⁶ See s 121 of the Bankruptcy Act 1966 and ss 588FE(5) of the Corporations Act 2001.

⁷Marcolongo v Yu Po Chen (2011) 242 CLR 546 at 554 [20] (French CJ, Gummow, Crennan and Bell JJ).

⁸Marcolongo v Yu Po Chen (2011) 242 CLR 546 at 558 [32] (French CJ, Gummow, Crennan and Bell JJ), following Blanchard and Wilson JJ in Regal Castings Ltd v Lightbody [2009] 2 NZLR 433 at 456–457; Barton v Deputy Commissioner of Taxation (1974) 131 CLR 370 at 374 (Stephen J, with whom Menzies and Gibbs JJ agreed); PT Garuda Indonesia Ltd v Grellman (1992) 35 FCR 515.

⁹Marcolongo v Yu Po Chen (2011) 242 CLR 546 at 565 [57] (French CJ, Gummow, Crennan and Bell JJ); Cannane v J Cannane Pty Ltd (in liquidation) (1998) 192 CLR 557 at 579 [58] (Gummow J); 593 [92.5] (Kirby J]).

¹⁰Marcolongo v Chen (2011) 242 CLR 546 (Heydon J) at 566 [64]; Cannane v J Cannane Pty Ltd (in liquidation) (1998) 192 CLR 557 at 566 [10] (Brennan CJ and McHugh J).

¹¹Deputy Commissioner of Taxation v Yeo (2007) 66 ATR 428 at 429 [4] (Harper J).

¹² (1992) 35 FCR 515.

¹³ (1944) 14 ABC 61, 75; Garuda Indonesia Ltd v Grellman (1992) 35 FCR 515, 523.

¹⁴ See also, the observations of Kirby J in Cannane v J Cannane Pty Ltd (in liquidation) (1998) 192 CLR 557 at 591 [92.3]; those observations were cited recently by the Victorian Court of Appeal in Jew v Holloway [2013] VSCA 260 at [15].

¹⁵DM Cannane v J Cannane Pty Ltd (in liquidation) (1998) 192 CLR 557 at 566 [12] (Brennan CJ and McHugh J).

¹⁶Marcolongo v Chen (2011) 242 CLR 546 at 556 [25] (French CJ, Gummow, Crennan and Bell JJ), and see the discussion of this principle in Groeneveld Australia Pty ltd v Nolten Vastgoed BV [2011] VSC 18 at [74] (Vickery J).

¹⁷ See Deputy Commissioner of Taxation v Haritos [2014] VSC 379, [222].

¹⁸ Richards v Dare [2001] VSC 466 at [16] (Harper J) and see also Deputy Commissioner of Taxation v Vereker & Ors (1986) 87 ATC 4,010 at 4,020–1 (Marks J); Marcolongo v Yu Po Chen (2011) 242 CLR 546 at 559 [34]; Cannane v J Cannane Pty Ltd (in liquidation) (1998) 192 CLR 557 at 565–566; Jew v Holloway [2013] VSCA 260 at [4].

¹⁹DM Cannane v J Cannane Pty Ltd (in liquidation) (1998) 192 CLR 557 at [10] per Brennan CJ and McHugh J.

²⁰DM Cannane v J Cannane Pty Ltd (in liquidation) (1998) 192 CLR 557 at [92.5] (Kirby J).

²¹Barton v DCT (1974) 131 CLR 370 at 374 (Stephen J); Prentice v Cummins [2002] FCA 1503; (2002) 124 FCR 67 at 91 [99] (Sackville J).

²²Mackay v Douglas (1872) LR 14 Eq 106 at 118–120; Official Trustee v Alvaro (1996) 138 ALR 341 at 382.

²³ In Barton v Official Receiver (1986) 161 CLR 75 at 86 the High Court held that '… a "purchaser … for valuable consideration" within the meaning of s 120(1) of the [Bankruptcy Act 1966 (Cth)] is one who has given consideration for his purchase "which has a real and substantial value, and not one which is merely nominal or trivial or colourable".'

²⁴ As to the distinction between 'good' and 'adequate' consideration, see Kerr on the law of fraud and mistake, 7th edn. (1952) p. 341.

²⁵ As to the meaning of 'good faith' in this context, see Garuda Indonesia Ltd v Grellman (1992) 35 FCR 515 at 528.

²⁶Deputy Commissioner of Taxation v Vereker & Ors (1986) 87 ATC 4010 at 4,021.

²⁷Agusta Pty Ltd v Provident Capital Ltd [2012] NSWCA 26 at [92] (Barrett JA, with whom Campbell JA agreed); Noakes v J Harvy Holmes & Son (1979) 37 FLR 5.

²⁸Deputy Commissioner of Taxation v Karas [2013] VSC 410, [5].

²⁹Deputy Commissioner of Taxation v Karas [2013] VSC 410, [13].

³⁰Deputy Commissioner of Taxation v Karas [2013] VSC 410, [30].

³¹ Jinacan owned a property in Sydney Road, Brunswick, valued 'conservatively' at $8.5 million.

³²Deputy Commissioner of Taxation v Haritos [2014] VSC 379, [51]–53].

³³Deputy Commissioner of Taxation v Haritos [2014] VSC 379, [206].

³⁴Deputy Commissioner of Taxation v Haritos [2014] VSC 379, [269].

³⁵Deputy Commissioner of Taxation v Haritos [2014] VSC 379, [30]–[32].

³⁶Haritos & Ors v Commissioner of Taxation [2015] VSCA 79, [42].

³⁷Haritos & Ors v Commissioner of Taxation [2015] VSCA 79, [48].

³⁸Haritos & Ors v Commissioner of Taxation [2015] VSCA 79, [67].

 

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Freezing orders A freezing order, or a Mareva Injunction,1 is an equitable remedy that restrains dealings with assets. Commonwealth and State jurisdictions have been largely harmonised by civil procedure rules and practice notes.

 

Suzannah Auld Senior Lawyer AGS Dispute Resolution T 07 3360 5742	Vince Tavolaro Senior Executive Lawyer AGS Dispute Resolution T 03 9242 1359

__________________________

In light of the recently updated Federal Court Practice Note regarding freezing orders (GPN-FRZG), this is a timely opportunity to revisit the obligations on parties seeking freezing orders in the Federal Court.²

Federal Court Rule 7.32 states:

Freezing order

(1) The Court may make an order (a freezing order), with or without notice to a respondent, for the purpose of preventing the frustration or inhibition of the Court's process by seeking to meet a danger that a judgment or prospective judgment of the Court will be wholly or partly unsatisfied.

(2) A freezing order may be an order restraining a respondent from removing any assets located in or outside Australia or from disposing of, dealing with, or diminishing the value of, those assets.

Note: Without notice is defined in the Dictionary.

Freezing orders are sought to preserve assets or to prevent the dissipation of assets. Such an order is a substantial encroachment on a person's basic right and freedom to deal with their property.³

A freezing order may be sought before substantive proceedings have commenced.⁴ However, it must be remembered that a cause of action must exist for a 'right' to whatever asset is sought to be preserved by the applicant. Federal Court Rule 7.35(1)(b) requires the applicant to have a 'good arguable case' on an accrued or prospective cause of action. This has been judicially considered and the following passage from the Curtis v NID Pty Ltd [2010] FCA 1072 at [6] per Edmonds J is often quoted:

… the requirement imposed by r 7.35(1)(b) that an applicant have a "good arguable case" is "one which is more than barely capable of serious argument and yet not necessarily one the judge considers would have better than a 50 per cent chance of success"[.]

Should an applicant be relying on an existing judgment, this concern obviously disappears.

Freezing orders may be sought against a third party – that is, someone who would not necessarily be a party to the proceedings in which the applicant would be seeking substantive relief. The third party may have, in their custody, control or possession, 'assets' which are owned by the respondent to the substantive cause of action or in which the respondent has an equitable interest.⁵

The timing on when to seek a freezing order is crucial. An applicant does not want to act too slowly and have no assets left to preserve. However, acting too quickly may limit the danger that can be shown to the assets.

Federal Court Rules 7.35(4) and (5) refer to the 'danger' that a judgment or prospective judgment will be unsatisfied, either wholly or partially, because the assets will be 'disposed of, dealt with or diminished in value'. Justice Perram has stated that:

This 'does not mean that the court need be satisfied that the risk of dissipation is more probable than not; and there does not necessarily need to be evidence of any intention to dissipate.'⁶

However, it is still necessary for an applicant to justify to a court why a freezing order should be granted.

Courts will require evidence to support allegations of asset dissipation or proposed asset dissipation. For example:

• Has the respondent restructured their affairs such that they have divested or attempted to divest assets?
• Has the respondent moved assets outside of the jurisdiction?
• Has the respondent threatened to dispose of assets?
• Are the assets liquid, eg shares or cash?

Courts have previously accepted the risk of dissipation based on previous 'dishonest conduct' of the respondent.⁷

In practical terms, if there is a real concern about the dissipation of the asset, proceedings seeking freezing orders are usually commenced very quickly and ex parte. However, ex parte proceedings place an additional burden upon applicants to make a full and frank disclosure to the court. This must be remembered and respected. It is important that applicants remember to not only provide evidence to the court that supports their case but also provide anything that may be considered prejudicial.

Freezing orders granted on an ex parte basis are usually listed back before the court very shortly after the orders are made, to allow the respondent to the orders to argue that the orders should either be discharged or varied. If an applicant is unaware of the entire asset position of the respondent, it is also possible to seek additional orders for further information about assets held.

In framing a freezing order, an applicant cannot seek orders to 'freeze' assets for an amount greater than the judgment debt or the prospective judgment debt.

GPN-FRZG includes an example form of a freezing order. The freezing orders included in the example are wide-ranging and seek to restrain assets up to a threshold amount. However, if it is the case that an applicant is aware of specific assets these should be specifically identified.

Freezing orders necessarily contain exceptions to allow respondents to access funds or assets for living and legal expenses. Other exceptions can be negotiated, but it will depend upon the circumstances.

If an applicant deliberately omits prejudicial material when seeking a freezing order on an ex parte basis, the court may discharge the freezing orders when the respondent provides relevant material to the court such that the court would never have granted the freezing orders if they had been apprised of all of the facts.⁸

Freezing orders are inherently a discretion of the court, as Flick J in Deputy Commissioner of Taxation v Greenfield Electrical Services Pty Ltd [2016] FCA 653 set out at [7]:

… the making of an order involves a discretionary exercise of power – even if the requirements imposed by r 7.35 are satisfied, the court nevertheless retains a discretion to refuse relief: Patterson v BTR Engineering (Aust) Ltd (1989) 18 NSWLR 319 at 321–322 per Gleeson CJ.

Should freezing orders be granted on an ex parte basis, you need to act quickly and, depending upon the circumstances:

• serve the respondent/s with copies of the material and orders as made by the court
• serve the orders on any person holding assets, including banks, financial institutions and share registries
• register the orders with any relevant authority, including land titles.

Finally, it will be necessary to prepare the contested hearing. However, this is another paper.

 

¹ So named after the decision of Mareva Compania Naviera SA v International Bulkcarriers SA [1975] 2 Lloyd's Rep 509.

² The Practice Note was updated on 25 October 2016. There are few changes between the previous Practice Note and the updated Practice Note. Therefore, you are encouraged to read both.

³Elderslie Finance Corporation Ltd v Newpage Ltd [2007] FCA 61 at [12].

⁴Patterson v BTR Engineering (Aust) Ltd (1989) 18 NSWLR 319 at 329. Also, Federal Court Rule 7.35.

⁵ For example, this maybe an equitable holding or it could be a bank or financial institution or share-trading house. It will depend upon the situation and assets.

⁶Deputy Commissioner of Taxation v Chemical Trustee Ltd (No 4) [2012] FCA 1064 at [22].

⁷Deputy Commissioner of Taxation v AES Services (Aust) Pty Ltd [2009] VSC 418.

⁸ It is also the case that if the freezing orders are framed too widely they may be discharged.

 

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