BCI Finances Pty Limited (in liq) v Binetter (No 4) – Wickenby: Major victory for Commissioner: recovery of over $120m via liquidator of 4 Binetter family companies

In a long-running Wickenby related matter involving offshore tax evasion, the liquidator of 4 companies (the applicants) – acting on behalf of the Commissioner as the only creditor of the companies – has been successful in the Federal Court in arguing that certain directors of the companies (the respondents) breached their fiduciary duty in engaging in a scheme to avoid or evade tax, thereby resulting in the liquidators incurring losses in winding up the companies. These losses were in the form of the tax liabilities arising from the scheme of over $120m.

The scheme involved advances to the companies from various banks in Israel under “back to back loans” in relation to which the companies claimed deductions for interest on the advances.  The Commissioner claimed the advances were not loans but payments from the bank, which were secured by moneys deposited in other offshore deposits of the companies. Following audits in 2006, the Commissioner issued assessments disallowing the interest claims and included the advances in the assessable income of the taxpayers for the years in question (which for one company went back to 1992).

The liquidators claimed that their loss arose from having to meet the tax liability on the winding up of the companies (resulting from revised assessments issued to the companies) and that the cause of this loss was the directors’ breach of duty in their dealings with the Israeli banks, which gave rise to these schemes to evade or avoid tax. The liquidators also claimed that the Israeli head office (and its Swiss arm) knew that the purpose of the directors in implementing the scheme was to assist persons or the company entities in evading Australian tax.

In allowing the liquidator’s application, the Federal Court found that 4 of the 6 directors (2 of whom were now deceased) had breached their fiduciary duties in this way (albeit, finding the widow of one of the directors and a son had not breached their duties). In particular, the Court found that “the scheme (and the individual transactions undertaken in pursuance of the scheme) operated to the benefit of various of the respondents but, if revealed, would operate to the detriment of the applicant companies. Such detriments would include liabilities to pay income tax for which the relevant applicant company would not otherwise have been liable, liabilities to pay penalties on assessments issued by the Commissioner and liabilities to pay interest including shortfall interest charges and general interest charges”.

Note that in Rawson Finances Pty Ltd v FCT [2013] FCAFC 26, the Full Federal Court confirmed that amounts of over $4.75m deposited in the taxpayer’s bank account in the 1997 and 1998 years were not income but were loans, and that payments made in respect of the loans were deductible interest. However, the Commissioner had previously issued “revised” assessments to the companies in 2010 in relation to the scheme, and the liquidators took their action in the current matter on the basis that the revised assessments were “conclusive evidence of their due making and that the amounts and particulars in the notices of assessment are relevantly correct”.

(BCI Finances Pty Limited (in liq) v Binetter (No 4) [2016] FCA 1351, Federal Court, Gleeson J, 18 November 2016.)

[Related TT Article] [LTN 226, 22/11/16]

Reasons of Federal Court (Liquidation case) – relating to Michael Binetter’s role

GLEESON J:

1. The applicants are four companies formerly associated with the families of Erwin and Emil Binetter, two brothers who came to Australia from Eastern Europe as refugees in 1950. Erwin and Emil Binetter are now both deceased.
2. After an extensive audit by the Australian Taxation Office (“ATO”) which commenced in about July 2006 (“tax audit”), the Commissioner of Taxation (“Commissioner”) issued notices of assessment, amended assessment and penalty assessment to the various applicants between December 2009 and July 2010 (“revised assessments”). In the case of the second applicant (“EGL” or “EGL Development”), the revised assessments go back as far as the year ended 30 June 1992. In order to issue revised assessments going back so far in time, the Commissioner was required to form the opinion that there had been fraud or evasion.
3. After several years disputing the revised assessments, the applicants went into liquidation. The joint and several liquidators of each of the applicants are John Sheahan and Ian Russell Lock (“liquidators”).
4. The liquidators claim that the applicants are entitled to the monetary relief from the respondents, quantified principally by reference to the tax liabilities arising from the revised assessments. Claims for relief are also made with respect to the costs of the winding up of the applicants and there are claims for ancillary relief in the nature of charging orders over various identified assets. The claims totalled over $120 million as at 27 September 2015.
5. In their opening submissions, the liquidators stated that the claims are primarily made on the basis of rights to equitable compensation.
6. The claims are pleaded in a second further amended statement of claim filed 7 September 2015 (“statement of claim”). In summary, claims are based on allegations of:

(a)      breach of fiduciary, common law, equitable and or statutory duties owed to the various applicants by various respondents who were directors of the applicants at various times; and

(b)      knowing participation by other respondents in the breaches of duty by the director respondents.

7. The alleged breaches by the director respondents concern the applicants’ dealings with two banks in Israel: the Bank Hapoalim in the case of the first applicant (“BCI” or “BCI Finances”) and the Israel Discount Bank (“IDB”) in the case of the other applicants.
8. The liquidators’ case is based on a complex analysis of the transactions between the applicants and the two Israeli banks, and on the factual context in which those transactions took place from 1988. In summary, the liquidators argue that the respondents participated in a scheme for the purpose of evading or avoiding liability to pay income tax. The alleged scheme involved, as an important element, using funds in Switzerland or Israel (sometimes referred to as “offshore deposits”) as security for advances from the Israeli banks of amounts equivalent to the offshore deposits. The liquidators contend that the respondents’ conduct in participating in the scheme led the applicants to incur the liabilities which arose when the revised assessments were issued. Those liabilities comprise income tax, penalties and interest incurred under the Income Tax Assessment Act 1936 (Cth) (“ITAA 1936”), the Income Tax Assessment Act 1997 (Cth) (“ITAA 1997”) and the Taxation Administration Act 1953 (Cth) (“TAA”). In summary, the liabilities arose from the disallowance of deductions for interest expenses claimed to have been paid to the Israeli banks and the inclusion of amounts transferred from the Israeli banks to the applicants as part of the applicants’ assessable income.

The Commissioner’s proceedings?

9. Mr Williams SC, who appeared as senior counsel for the fourth, eighth and tenth respondents (“Andrew Binetter parties”) submitted that the proceedings should be characterised as the Commissioner’s proceeding. He noted that the common denominator in respect of the applicants is that all of them have outstanding tax assessments following the tax audit. Mr Williams SC also noted that the revised assessments had led to extensive litigation between the applicants and the Commissioner before both this Court and the Administrative Appeals Tribunal (“AAT”).
10. Mr Williams SC argued that the liquidators were appointed by or at the insistence of the Commissioner; the only creditor of the applicants (apart from related parties) is the Commissioner; the applicants are funded in this proceeding by the Commissioner; the applicants have been indemnified in respect of their costs (or a substantial part) in this proceeding by the Commissioner; the Commissioner has given an undertaking to the Court (by way of security for costs in respect of any adverse costs order); and the Commissioner has given security for the undertaking as to damages in relation to freezing orders made in the proceeding.
11. Mr Williams SC submitted that the Court should not be “distracted” by the “interposition” of the applicants or the liquidators between the Commissioner and these claims.
12. For their part, the liquidators emphasised that it was not necessary for them to show that the revised assessments by which the applicants incurred liabilities are correct. Their case was that the revised assessments are conclusive evidence of the due making of the assessments and that the amounts and particulars in the notices of assessment are relevantly correct: see s175 and s177 ITAA 1936.

Michael Binetter – not a defacto director of the liquidated companies until after the commencement of the ATO audit

Many Australian readers will know Michael Binetter as a Sydney based tax lawyer. Michael is part of the extended ‘Binetter’ family mentioned in this case and you may be interested in the parts of the reasons that relate to him.

Michael Binetter’s “de facto” or “shadow” directorships

239. In summary, the liquidators contended that Michael Binetter was a de facto or shadow director of each of the applicants, except to the extent that he held a valid appointment as a director.
240. By s 9(b) of the Corporations Act, a director means relevantly, a person who is not validly appointed as a director if:

(i)      they act in the position of a director [a de facto director]; or

(ii)     the directors of the company are accustomed to act in accordance with the person’s instructions or wishes [a shadow director].

241. The court applies an objective test in determining whether a person is a de facto director: Smithton Ltd v Naggar [2014] EWCA Civ 939; [2015] 1 W.L.R. 189 at [39]. A person may still be a de facto director even if the company concerned has a properly constituted and functioning board: Grimaldi v Chameleon Mining NL [2012] FCAFC 6; (2012) 200 FCR 296 (“Grimaldi”) at [74] and [132] to [134]. Whether a company has held out a person as a director is a relevant consideration: Grimaldi at [75].
242. The liquidators submitted that it is necessary to consider the functions that would be expected to be performed by a director of the relevant company in the circumstances, the functions carried out by the alleged “de facto” director and whether the person was held out as a director by the company. The role and functions performed by a director will vary with the commercial context, operations and governance structure of the relevant company. The functions assumed need not relate to all facets of the management of the company’s business: Grimaldi at [65] to [69].
243. A person may alternatively, or also, be a “shadow” director. Generally, being “accustomed to act” in accordance with the wishes of a person involves “habitual compliance over a period of time”: Buzzle Operations Pty Ltd (In Liq) v Apple Computer Australia Pty Ltd [2010] NSWSC 233; (2010) 77 ACSR 410 (“Buzzle”) at [248]. Although the directors collectively must be accustomed to act on the person’s instructions or wishes, it is sufficient if a governing majority is so accustomed: Buzzle at [250]. The instructions of the shadow director need not be given in relation to the whole of the corporation’s activities for which directors are responsible: Buzzle at [241].
244. Ford’s Principles of Corporations Law summarises the following factors which are considered by courts in deciding whether a person is a de facto director:

(1)      the duties that would be expected to be performed by a director in the relevant company – noting that this will vary according to matters such as the size of the company and the allocation of the responsibilities within the company. This is subject to the requirement that the person performs what the court in Deputy Commissioner of Taxation v Austin [1998] FCA 1034; (1998) 28 ACSR 565 referred to as “top-level management functions”;

(2)      the duties actually performed by the person;

(3)      whether others in the company considered the person a director;

(4)      whether the company held out the person as a director;

(5)      whether the person held themselves out as a director; and

(6)      whether those outside the company considered the person to be a director.

245. The businesses of the applicants are identified earlier in these reasons. Except for Ligon 268 (which was also trustee of the Bankstown Eye Trust), the businesses comprised procuring and on-lending funds to related companies. In that context, the role of the directors was primarily concerned with procuring funds from the Israeli banks to support the business activities of associated entities in Australia, in a way that involved minimal tax liabilities. For those directors who had agreed to participate in or facilitate the scheme, their roles included:

(1)      procuring the “back-to-back” arrangements by which offshore funds were used as security for advances of funds by the Israeli banks to the various applicants;

(2)      documenting the arrangements so as to permit the applicants to produce documents purportedly evidencing the arrangements but which did not disclose the offshore deposits;

(3)      causing or procuring the lodgement of income tax returns on behalf of the relevant applicant which would declare no or no significant taxable income referable to the transactions that occurred as a consequence of the “back-to-back” arrangements.

246. After the revised assessments were issued, the role of the directors of each of the applicants included managing the subsequent tax disputes.

Summary of conclusions

247. I do not find that Michael Binetter was a shadow director of any of the applicants. The evidence does not support a conclusion that, at any particular time, or during any particular period, any applicant or any director of any applicant was accustomed to act in accordance with his wishes.
248. The evidence does not support a conclusion, for any of the applicants or Erma or Ligon 158, that at any time:

(1)      others in the relevant applicant company considered Michael Binetter a director;

(2)      the relevant applicant held out Michael Binetter as a director;

(3)      Michael Binetter held himself out as a director; or

(4)      those outside the relevant applicant considered Michael Binetter to be a director.

249. Based on the evidence of his participation in the tax disputes between the applicants and the ATO, identified below, I infer that Michael Binetter was a de facto director of each of the applicant companies after the commencement of the ATO tax audit. In that role, he caused or procured the lodgement of several income tax returns by the applicants pursuant to the scheme. I reject the contention that I should find Michael Binetter was acting as company solicitor for the various applicant companies after the commencement of the audit, particularly in the absence of any evidence from Michael Binetter himself to support that finding. Particularly in the light of the misconduct revealed by Ms Huber’s evidence, in my view, if Michael Binetter was to have the benefit of a finding to the effect contended for, it was necessary for him to step into the witness box to explain the facts by which he should be understood to have acted as a solicitor for the applicant companies following the commencement of the ATO tax audit rather than as a de facto director.
250. On the evidence set out below, I find that Michael Binetter was a de facto director of BCI when he took steps to procure the arrangements between BCI and Bank Hapoalim, and to procure the documentation of the arrangements so as to permit BCI to retain documents purportedly evidencing the arrangements but which did not disclose the offshore deposits.
251. Otherwise, I do not find that Michael Binetter was a de facto director of the applicant companies or of Erma or Ligon 158.

Reasons from Liquidation case – effects of breaches of directors’ duties

KNOWING PARTICIPATION IN BREACHES OF DUTY

Erma, Milgerd, Ligon 158 and Ligon 159

252. Erma, Milgerd, Ligon 158 and Ligon 159 undertook various acts which furthered the scheme as implemented by the various applicants, including the provision of guarantees and the making of payments to the Israeli banks. Some of those payments were treated by the applicants as deductible interest expenses. Other payments were repayments of funds advanced by the Israeli banks on behalf of the various applicants.
253. It was a matter of importance to Erma, Milgerd, Ligon 158 and Ligon 159 whether their respective acts were facilitating or furthering the scheme because the scheme was implemented for purposes including the evasion of income tax.
254. Accordingly, the knowledge of Erwin, Emil and Andrew Binetter about the scheme, to the extent that they were directors of Erma, Milgerd, Ligon 158 and Ligon 159, must be imputed to those companies.
255. I am satisfied that this conduct amounts to participation in the various directors’ breaches of fiduciary duty in procuring drawdowns and in procuring payments to the Israeli banks in furtherance of the scheme because it was conduct which enabled those breaches to be committed.
256. I am not satisfied that Erma, Milgerd, Ligon 158 and Ligon 159 participated in the breaches of fiduciary duty involving the lodgement of the applicants’ income tax returns or in concealing the offshore deposits from the ATO.

Michael Binetter

BCI

257. Michael Binetter participated in the breaches of duty by Erwin, Emil and Andrew Binetter by the conduct described above which assisted those directors to procure the advances from Bank Hapoalim. I have previously found that he had knowledge at all relevant times of the terms of the transactions between Bank Hapoalim and BCI and of the purposes for which BCI engaged in the transactions.

EGL

258. Within the period of his directorship of EGL, between October 1996 and September 2001, I infer that Michael Binetter made a deliberate decision to accept the role of director for the purpose of participating in the management of EGL including its dealings with IDB. That inference is based on the fact that Michael Binetter was a commercial lawyer who made a deliberate choice to accept the role of “authorised person” in connection with BCI.
259. There is no direct evidence that Michael Binetter otherwise participated in breaches of duty by the directors of EGL. I do not infer from his role as director of EGL that he participated in the breaches of duty by the directors of EGL that did not occur within the period of his directorship.

Ligon 268

260. There is no direct evidence that Michael Binetter participated in the breaches of duty by the directors of Ligon 268. I am not satisfied that there is evidence to support an inference that he participated in those breaches of duty.

Binqld

989. Michael Binetter assisted in the completion of the documentation which was said by Andrew Binetter to have documented its “loans” from IDB.

Benefits arising from participation in breaches of duty

990. Each of Erma, Milgerd, Ligon 158 and Ligon 159 benefited from their participation in the breaches of duty in that, by their participation, they obtained the use of the funds advanced to various of the applicant companies and, consequently, they claimed tax deductions for interest paid to the applicant companies thereby reducing their assessable income.
991. Michael Binetter benefited from his participation in the breaches of duty to the extent that they led to interest being earned on the offshore deposits in which he had an ownership interest.

CONSEQUENCES OF THE BREACHES OF DUTY

BCI losses

Conduct which enabled BCI to earn assessable income

992. The primary tax liabilities levied against BCI, by the revised assessments, arose primarily from the fact that the ATO disallowed interest expense deductions claimed by BCI, thereby increasing its assessable income.
993. Those interest expense deductions were disallowed because they were not substantiated to the satisfaction of the ATO.
994. In the case of BCI, the interest expense deductions were largely (but not entirely) claimed by reference to payments made to Bank Hapoalim. Those payments were made pursuant to transactions between BCI and Bank Hapoalim that resulted from the breaches of duty of BCI’s directors in causing BCI to obtain advances from Bank Hapoalim.
995. For the 1997 income year, the primary assessment of $14,455.04 arose from disallowed interest expense deductions of about $21,000 being the difference between payments made to Israeli and the amount of the claimed deduction. BCI’s assessable income arose from its receipt of interest income on its borrowing of funds procured from Bank Hapoalim to BCI in May 1993, which funds were procured by the breaches of duty of Erwin, Emil and Michael Binetter. That assessable income would not have been earned if the breaches of duty had not been committed.
996. Accordingly, the 1997 assessment is a loss that would not have suffered by BCI if there had not been those breaches of duty.
997. For the 1998 income year, BCI’s assessable income arose from its receipt of interest income on its borrowing of funds procured from Bank Hapoalim to BCI in May 1993, in respect of which there was an alteration to the currency of the facility and an extension to the duration of the facility in late 1997. Those changes were procured by Erwin, Emil, Andrew and Michael Binetter. BCI’s assessable income arose from its receipt of interest income on its borrowing of funds procured from Bank Hapoalim to BCI in May 1993, which funds were procured by the breaches of duty of Erwin, Emil and Michael Binetter and which continued to be available to BCI by reason of the breaches of Erwin, Emil and Michael Binetter. Accordingly, the 1998 assessment is a loss that would not have been suffered by BCI apart from those individuals’ breaches of duty, including Andrew Binetter to the extent that income was earned after the late 1997 changes.
998. For the 1999 income year, BCI’s assessable income arose from its receipt of interest income on its borrowing of funds procured from Bank Hapoalim to BCI in May 1993, in respect of which there was, at least on the face of the available documents, an extension to the duration of the facility. That change was procured by Erwin, Emil, Andrew and Michael Binetter in breach of their respective duties as directors of BCI. Applying the reasoning for the 1997 and 1998 income years, BCI’s assessable income was earned by reason of the breaches of duty of each of Erwin, Emil, Andrew and Michael Binetter. Accordingly, the 1999 assessment is a loss that would not have been suffered by BCI apart from those individuals’ breaches of duty.
999. For the 2000, 2001 and 2002 income years, there were no material changes to the arrangements between Bank Hapoalim and BCI. Accordingly, the 2000, 2001 and 2002 assessments are losses that would not have been suffered by BCI apart from the same breaches of duty of Erwin, Emil, Andrew and Michael Binetter.
1000. There were also penalty assessments for the 2001 and 2002 income year. Those assessments arose because BCI earned the assessable income, which it did not disclose. It follows that these assessments are losses that would not have been suffered by BCI apart from those breaches of duty of Erwin, Emil, Andrew and Michael Binetter.
1001. During the 2003 income year, the arrangements between Bank Hapoalim and BCI were apparently extended to May 2004, in about November 2002. That change was procured by Erwin, Emil and Michael Binetter in breach of their respective duties as directors of BCI. Accordingly, the 2003 assessment is a loss that would not have been suffered by BCI apart from those breaches of duty of Erwin, Emil and Michael Binetter. As to Andrew Binetter, it is a loss that would not have been suffered by BCI apart from his breach to duty to the extent that the 2003 assessment includes income earned prior to the November 2002 extension of the facility.
1002. There is also a penalty assessment for the 2003 income year. As for the 2001 and 2002 penalty assessments, this assessment arose because BCI earned assessable income in the 2003 income year which it did not disclose. Accordingly, this is a loss that would not have been suffered by BCI apart from the breaches of duty of Erwin, Emil and Michael Binetter. It is also a loss that would not have been suffered by BCI apart from Andrew Binetter’s breach of duty to the extent that it is referrable to assessable income earned prior to the November 2002 extension of the facility.
1003. During the 2004 income year, the arrangements between Bank Hapoalim and BCI were probably extended to 30 November 2004. That change was procured by Erwin and Andrew Binetter in breach of their respective duties as directors of BCI. Accordingly, the 2004 assessment is a loss that would not have been suffered by BCI apart from the breaches of duty of Erwin, Emil and Michael Binetter, and the breaches of duty of Erwin and Andrew Binetter.
1004. There is also a penalty assessment for the 2004 income year. This is a loss that would not have been suffered by BCI apart from the same breaches of duty as caused the loss arising from the 2004 assessment.
1005. During the 2005 income year, there were further extensions of the arrangements between Bank Hapoalim and BCI, procured by Andrew and Michael Binetter. Accordingly, the 2005 amended assessment and the 2005 penalty assessment are losses that would not have been suffered by BCI apart from the breaches of Andrew and Erwin Binetter and the breaches of duty of Andrew and Michael Binetter.
1006. During the 2006 income year, the arrangements between Bank Hapoalim and BCI were managed by Andrew Binetter. This included procuring the advance of A$3,850,000 in April 2006. It follows that the assessable income earned by BCI in that year was earned by reason of Andrew Binetter’s breaches of duty to BCI. Accordingly, both the 2006 amended assessment and the 2006 penalty assessment are loss that would not have been suffered by BCI apart from Andrew Binetter’s breaches of duty to BCI.
1007. For the 2007 and 2008 income years, there were no material changes to the arrangements between Bank Hapoalim and BCI. Accordingly, the 2007 and 2008 amended assessments and the 2007 and 2008 penalty assessments are losses that would not have been suffered by BCI apart from the same breaches of duty of Andrew Binetter.

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