SPLs justified by conflict perception: judge

The latest judgment to surface from the stew of litigation between the Deputy Commissioner of Taxation (DCoT) and those behind gold refiner Pallion Group reveals that a lone liquidator has been adroitly walking the perception-of-conflict tightrope since 2017.

“It was not necessary for the Court to form a view that the liquidator is, or will likely be, in a position of conflict. Rather, it was sufficient that an appearance of conflict exists sufficient to compromise confidence in the position of the liquidator, whether on the part of the Commissioner or on the part of the officers of the Company.” Justice Scott Goodman.

The reasons why the tightrope’s been trod and why the balancing act’s been ended with the appointment of Special Purpose Liquidators(SPLs) are to be found in Deputy Commissioner of Taxation v ACN 607 537 548 Pty Ltd, in the matter of ACN 607 537 548 Pty Ltd (in liq) [2023] FCA 933, which was made public on Wednesday, though the orders sought by the DCoT were made on July 31.

The proceedings were commenced in circumstances where Sydney liquidator Adam Shepard of Clarence street firm Setter Shepard was being funded by Pallion Group to challenge notices of assessments issued to ACN 607 537 548 Pty Ltd (The Company) by the Commissioner Taxation (CoT) early in July 2017.

The Company responded by lodging objections to the assessments on July 27, 2017. But as Justice Goodman has explained, it didn’t stop there.

“On 16 August 2017, a new company titled ABCRA Pty Ltd (ACN 621 121 079) was incorporated,” the judge explained.

“Its directors were and remain Andrew Cochineas, Philip Cochineas, Francis Gregg and Jane Simpson (that is, all directors of the new company were directors of the Company). Its sole shareholder is Pallion. Its principal place of business from 17 August 2017 was also the Marrickville address (of Pallion),” the judge said.

“On 1 September 2017: (1) the Company changed its name from ABC Refinery (Australia) Pty Ltd to ACN 607 537 548 Pty Ltd; (2) ABCRA Pty Ltd changed its name to ABC Refinery (Australia) Pty Ltd (ABCRA2); and (3) the Company and ABCRA2 entered into agreements pursuant to which it appears, amongst other things, that the Company transferred all of its business, goodwill and assets to ACBRA2 (September 2017 transaction). All of the directors of the Company ceased to hold that office, with the exception of Mr Andrew Cochineas.

“On 27 October 2017, the Company lodged further objections against notices of assessment.

“On or about 13 November 2017, Pallion transferred its shares in the Company to a company titled ACN 133 769 187 Pty Ltd (ACN 133). ACN 133 is a company of which Mr Andrew Cochineas has been at all material times the sole shareholder and director,” the judge said.

Then on November 15, 2017 Shepard was appointed liquidator at the instigation of Cochineas.

According to this DIRRI, the appointment was referred to Shepard on November 1, 2017 by The Company’s solicitor, Andrew Robinson. Justice Goodman’s judgment indicates that at the time Robinson was also a director of Pallion Group though a search of ASIC records by iNO indicates he has since resigned.

Shepard also declared that he was provided with $20,000 upfront for his fees and costs and that Cochineas indicated further funding was likely in respect of the assessment objections.

That same month Shepard took his first step on the tightrope, instructing his solicitors to write to the Australian Taxation Office (ATO) asking whether the ATO would discuss the possibility of funding an investigation into the September 2017 transaction, by which the Company’s assets were transferred to ABCRA2. Shepard’s lawyers told the ATO that he didn’t have funds to engage a valuer.

By February 2018 Shepard had advanced further, issuing more objections to the notices of assessment and distributing his second report to creditors.

In that report he noted that the September 2017 transaction might be voidable, that there might have been director misconduct, that examinations of the director and others could take place if creditors were prepared to fund them and that “related entities” were encouraging him to enter into a funding agreement with Pallion to cover the costs of investigating whether the tax office assessments could be overturned.

Accepting funding from Pallion when it was a party to the September 2017 transaction he was proposing to investigate with the help of ATO funding didn’t bother Shepard.

In April 2018 he produced a third report in which he advised of the receipt of a funding proposal from Pallion and Andrew Cochineas. Creditors learned that Cochineas was in possession of advice suggesting that the ATO assessments were vulnerable to challenge.

News of the proposed funding agreement must have sent tremors through the ATO, which weren’t subdued by assurances contained in Shepard’s April 24, 2018 letter to the ATO.

In the correspondence he noted that it was not unusual for there to be a tension between the position of different creditors; that he was conscious of the need to be, and to be seen to be, independent; and was of the view that subject to the provision of adequate funding it was in the interests of all creditors for investigations into the September 2017 transaction to occur and the challenge to the notices of assessment to be determined.

A week later the ATO responded indicating that Shepard would be in a position of conflict if he accepted funding from Pallion in circumstances in which, the ATO asserted, Pallion had been involved in the September 2017 transaction. The letter impeded Shepard’s waltz along the tight rope not at all.

On 16 May, a resolution was put to a meeting of the Company’s creditors to approve the funding proposal. The ATO voted against the proposal. Shepard used his casting vote to ensure the resolution passed and over the next six months more correspondence was exchanged.

Shepard insisted he needed funding to investigate the September 2017 transaction. The ATO continued to refuse to provide any on the basis it believed he was in conflict. In December 2018 the ATO flagged its intention to apply for the appointment of SPLs.

Simultaneously, notices of assessment issued to a related entity of the Company were also being contested.

Shepard told the ATO that while he would neither consent to or oppose an application to appoint SPLs it was premature given that if the assessment proceedings were resolved in favour of the related entity, the ATO’s right to prove as a creditor of the Company might well be extinguished.

Unsurprisingly, while its status as a creditor remained in doubt and time was on its side in respect of the pursuit of any claims, the ATO held fire on the SPL appointment.

Almost four years passed before the Commissioner in April 2022 determined that The Company’s notices of objection should be disallowed, despite a full bench of the Federal Court of Appeal blowing up the Commissioner’s essentially identical case against the related entity in 2020. No question of conflict there of course.

Following the failure of the challenges Shepard caused the Company to appeal to the Federal Court and that appeal is yet to be heard.

Then in April this year Shepard approached the ATO again, noting that limitation periods on the commencement of claims in respect of the September 2017 transaction would soon expire. He proposed that the tax office indemnify him for $150,000 to undertake investigations.

No dice. The DCoT refused and finally commenced the threatened proceedings to appoint KordaMentha’s Rahul Goyal and Jennifer Nettleton as SPLs, articulating its belief in court documents that Shepard is “talking instructions” from and “reporting” to Cochineas. iNO does not suggest that the liquidator is knowingly acting in a position of conflict.

In summing up why he approved the appointment Justice Goodman said that it was clear that the September 2017 transactions should be investigated and that there was no prejudice to creditors given the SPLs would be funded by the CoT. Then he turned to the elephant in the room.

“I was satisfied that there was an available perception that the liquidator, if funded to undertake the investigation, might be in a position of conflict in circumstances where: the liquidator had been funded by interests associated with Mr Andrew Cochineas to challenge the objection decisions; and part of the investigation will be, as the liquidator has identified, an investigation into the conduct of Mr Andrew Cochineas and interests associated with him.

“It was not necessary for the Court to form a view that the liquidator is, or will likely be, in a position of conflict. Rather, it was sufficient that an appearance of conflict exist sufficient to compromise confidence in the position of the liquidator, whether on the part of the Commissioner or on the part of the officers of the Company.”