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Merchant v Ernst & Young (a firm) QSC 259
SUPREME COURT OF QUEENSLAND
Merchant & Ors v Ernst & Young (a firm) & Anor  QSC 259
GORDON STANLEY MERCHANT
GORDON MERCHANT NO 2 PTY LTD AS TRUSTEE FOR MERCHANT FAMILY TRUST
ACN 085 677 229
GSM SUPERANNUATION PTY LTD AS TRUSTEE FOR GORDON MERCHANT SUPERANNUATION FUND
ACN 120 470 813
GSM PTY LTD
ACN 074 508 124
ERNST & YOUNG (A FIRM)
IAN MICHAEL BURGESS
BS No 9080 of 2020
Application for a stay
Supreme Court at Brisbane
15 November 2023
13 November 2023
PROCEDURE – STATE AND TERRITORY COURTS: JURISDICTION, POWERS AND GENERALLY – INHERENT AND GENERAL STATUTORY POWERS – TO STAY OF DISMISS ORDERS OR PROCEEDINGS GENERALLY – where the defendants seek a temporary stay of the proceeding pending the final determination or resolution of three proceedings commenced in the Federal Court and three proceedings commenced in the Administrative Appeals Tribunal – where the temporary stay is sought on the basis that it is desirable that the Tax Appeals should first proceed to their conclusion – where the plaintiffs resist the stay, contending that it is unnecessary because there is no risk that the proceeding would be ready for trial before the final determination of the Tax Appeals and any stay would cause intolerable delay in the resolution of the proceeding – where the plaintiffs submitted that the refusal of a stay would be consistent with r 5 of the Uniform Civil Procedure Rules 1999 (Qld) – whether a temporary stay of the proceedings ought be granted
Income Tax Assessment Act 1936 (Cth), s 177D, s 177E
Superannuation Industry (Supervision) Act 1993 (Cth)
Superannuation Industry (Supervision) Regulations 1994 (Cth)
Uniform Civil Procedure Rules 1999 (Qld), r 5
Michael Wilson & Partners Ltd v Emmott (2021) 396 ALR 497
NRNQ (alimited partnership) v MEQ Nickel Pty Ltd  2 Qd R 592
Shaw v Official Trustee in Bankruptcy of the Australian
Financial Security Authority  FCA 775
Sterling Pharmaceuticals Pty Ltd v Boots Co (Australia) Pty Ltd (1992) 34 FCR 287
D Clothier KC, with S Eggins, for the defendants
B O'Donnell KC, with M May, for the plaintiffs
Jones Day for the defendants
Cooper Grace Ward for the plaintiffs
An application for a temporary stay
- The defendants apply for a temporary stay of this proceeding pending the final determination or resolution of three proceedings commenced in the Federal Court and three proceedings commenced in the Administrative Appeals Tribunal (collectively those six proceedings will be referred to as “the Tax Appeals”). The temporary stay was sought on the basis that it was desirable that the Tax Appeals should first proceed to their conclusion. The plaintiffs resisted the stay, contending that it was unnecessary because there was no risk that this proceeding would be ready for trial before the final determination of the Tax Appeals and any stay would cause intolerable delay in the resolution of this proceeding. The plaintiffs submitted that the refusal of a stay would be consistent with r 5 of the Uniform Civil Procedure Rules 1999 (Qld) (“UCPR”).
Matters of principle relevant to the discretionary judgment
- Whether a temporary stay should be granted is fundamentally a question of case management. In Michael Wilson & Partners Ltd v Emmott, Brereton JA relevantly described such a stay as a technique for the management of proceedings “where proceedings are pending in another court and it is desirable that those proceedings should proceed to their conclusion first”. His Honour observed that the discretionary decision as to whether to temporarily stay a proceeding is informed by “…practical considerations based on common-sense and fairness.”
- In the earlier case of Sterling Pharmaceuticals Pty Ltd v Boots Co (Australia) Pty Ltd, Lockhart J provided this classical statement of applicable principles:
“The court has a general power to control its own proceedings, and that power extends to enable it to order a temporary stay of proceedings in various circumstances including the case where proceedings are pending in another court and it is desirable that those proceedings should proceed to their conclusion first …
In my opinion relevant considerations to be taken into account in the present case include the following:
- Which proceeding was commenced first.
- Whether the termination of one proceeding is likely to have a material effect on the other.
- The public interest.
- The undesirability of two courts competing to see which of them determines common facts first
- Whether work done on pleadings, particulars, discovery, interrogatories and preparation might be wasted
- How far advanced the proceedings are in each court.
- The law should strive against permitting multiplicity of proceedings in relation to similar issues.
- Generally balancing the advantages and disadvantages to each party.”
- Where there are two proceedings, it is not a requirement for a stay of one proceeding, that the two proceedings involve identical parties or issues. The authorities countenance a practical and common-sense approach to the exercise of the discretion, informed by the objects of r 5 of the UCPR.
Background to, and issues in, this proceeding and the Tax Appeals
- The first plaintiff (“Mr Merchant”) is a director and sole shareholder of the second to fourth plaintiffs. The second plaintiff (“GM2”) is the trustee of the Merchant Family Trust (“the MFT”), a discretionary trust of which Mr Merchant is a member of the class of potential beneficiaries. The third plaintiff (“GSM Super”) is the trustee of a self-managed superfund known as the Gordon Merchant Superannuation Fund (“the Super Fund”). Mr Merchant is the sole member of the Super Fund. The fourth plaintiff (“GSM”), Tironui Pty Ltd (“Tironui”) and Kahuna No. 1 Pty Ltd as trustee for the Angourie Trust (“Angourie”) are companies within what might be called the Merchant Group of companies. GM2, as trustee of the MFT, owned all of the shares in Plantic Technologies Limited (“Plantic”), a company which carried on a business of researching, developing and manufacturing technologies to use recyclable and reusable material in plastic packaging.
- In this proceeding, the plaintiffs make allegations to the following effect:
- (a)Mr Merchant had arranged for companies within the Merchant Group to fund Plantic’s expenses and, as a result, Plantic owed substantial sums to GSM, Tironui and Angourie (“the Related Party Debts”).
- (b)From May 2014, Mr Merchant, GM2 and Plantic were contemplating the sale of Plantic’s business to a third party either by GM2 (as trustee of the MFT) selling its shares in Plantic or by Plantic selling its business.
- (c)The first defendant (“Ernst & Young”) was engaged to provide advice in respect of the proposed transaction. The second defendant (“Mr Burgess”) was a partner of Ernst & Young involved in the provision of the advice.
- (d)The plaintiffs were given advice styled as “the Earlier Advice” and “the Later Advice” about the proposed structure.
- (e)The Earlier Advice is alleged to have been partly written and partly oral and provided between 21 August 2014 and 2 September 2014. The Later Advice is alleged to have been partly written and partly oral and provided between 2 September 2014 and 31 March 2015.
- (f)The substance of the Earlier Advice and the Later Advice was to the effect that:
- (i)The better way to structure the sale of Plantic was by way of a sale by GM2 (as trustee of the MFT) of its shares in Plantic rather than by a sale by Plantic of its business;
- (ii)A sale by GM2 was identified as the better structure on the assumption that the MFT would sell approximately $10.3 million of shares it held in Billabong International Limited (“Billabong”) to GSM Super as trustee for the Super Fund;
- (iii)The transaction would involve the forgiveness of the Related Party Debts;
- (iv)The identified structure was the preferable option because:
- (A)the forgiveness of the Related Party Debts reduced top up tax payable by Mr Merchant on dividends paid by GSM and increased the capital gain to the MFT by the same amount of the Related Party Debts;
- (B)the increased capital gain to the MFT was a deferred tax cost, rather than a current tax cost, because of capital losses MFT had in respect of the Billabong shares;
- (C)there were “some slightly increased risks” associated with this structure in relation to commercial debt forgiveness rules, deemed dividend rules, direct and indirect value shifting rules and ‘wash’ sale issues;
- (D)on balance those risks were “manageable” particularly given that a forgiveness or related party debt is a common aspect of a share sale transaction and there were real commercial consequences of the super fund acquiring the shares.
- (g)The plaintiffs relied upon the Earlier Advice and the Later Advice in entering into three transactions, namely:
- (i)A sale by GM2, as trustee of the MFT of $10,344,828 shares held in Billabong to GSM Super as trustee of the Super Fund for $5,844,827.82 which was effected on 2 September 2014. It has been convenient to refer to this sale as “the Billabong Share Sale”.
- (ii)A sale by GM2, again as trustee for the MFT, of its shares in Plantic to a third-party Kuraray Co Ltd (“Kuraray”). That share sale agreement was entered into on 31 March 2015 and the sale settled on 2 April 2015.
- (iii)A deed of forgiveness whereby GSM, Tironui and Angourie released Plantic from all liability in relation to debts owed by Plantic to GSM, Tironui and Angourie. This deed was entered into on 2 April 2015 and took effect prior to the Plantic Share Sale. It has been convenient to refer to this deed as “the Deed of Forgiveness”.
- In 2016, the plaintiffs lodged income tax returns for the 2015 income year which were audited by the Commissioner of Taxation (“the Commissioner”). The Commissioner decided that Pt IVA of the Income Tax Assessment Act 1936 (Cth) (“the Income Tax Act”) applied to the transactions in the following two respects:
- (a)First, s 177D applied to the Billabong Share Sale as a scheme that was entered into for the purpose of enabling the taxpayer to obtain a tax benefit;
- (b)Second, s 177E of the Income Tax Act applied to the Deed of Forgiveness.
- The Commissioner cancelled the tax benefits that were otherwise afforded to the plaintiffs as a result of the transactions and imposed income tax liabilities, penalties and interest. The Commissioner also concluded that there had been various breaches of the Superannuation Industry (Supervision) Act 1993 (Cth) (“the SIS Act”) and the Superannuation Industry (Supervision) Regulations 1994 (Cth) (“the SIS Regulations”). That conclusion led to an administrative penalty and the disqualification of Mr Merchant from acting as trustee or the responsible officer of a corporate trustee of a regulated superannuation fund.
- In this proceeding, the plaintiffs sue Ernst & Young and Mr Burgess for breach of contract and in negligence. The plaintiffs allege that they should have been given different or further advice to the Initial Advice and the Later Advice. In particular, the plaintiffs allege that:
- (a)A reasonable person in the position of Ernst & Young, complying with its contractual and common law duties:
- (i)Would not have advised to the effect of the Earlier Advice;
- (ii)Would not have provided the Earlier Advice without also providing “advice to the effect pleaded in paragraph 67”;
- (iii)Would not have advised to the effect of the Later Advice; and
- (iv)Would not have provided the Later Advice without also providing “advice to the effect pleaded in paragraph 68”.
- (b)Ernst & Young did not prior to 2 September 2014 provide the plaintiffs with “the advice that a reasonable person complying with” its contractual and common law duties would have provided in respect of the contemplated Plantic sale;
- (c)Ernst & Young failed to provide adequate advice about the extent to which risks associated with the proposed structure could be mitigated.
- (d)Ernst & Young failed to recommend that the contemplated Plantic sale be affected by transactions involving an alternative structure.
- The “advice to the effect pleaded in paragraph 67”, the “advice to the effect pleaded in paragraph 68”, the “advice that a reasonable person complying with the contractual and common law duties would have provided” and the alternative structure are presently undefined as the current version of the statement of claim makes clear that particulars defining the issues to be tried in respect of these matters are yet to be provided, and cannot be provided until after disclosure and the delivery of expert evidence.
- In respect of the “advice to the effect pleaded in paragraph 67” and the “advice to the effect pleaded in paragraph 68”, the best particulars which the plaintiffs presently provide are by reference to Ernst & Young’s alleged failures. In particular, it is alleged that Ernst &Young failed to:
- (a)advise of the risk that the recommended structure “was or gave rise to a scheme in the nature of a dividend stripping to which s 177E … applied (or that the Commissioner might conclude that it was or did);
- (b)provide adequate advice as to the risk that the recommended structure “was or gave rise to a scheme for the purpose of obtaining a tax benefit to which s 177D … applied (or that the Commissioner might conclude that it was or did)”;
- (c)advise in relation to alleged risks that the proposed structure might breach the SIS Act or the SIS Regulations or that the Commissioner might conclude that it did.
- In this proceeding, the primary damages case advanced by the plaintiffs is to the effect that, if Ernst & Young had complied with its obligations, the three transactions would not have occurred and the contemplated Plantic sale would have been affected by a transaction adopting an alternative structure. It is ultimately alleged that, in that counter-factual scenario, the overall financial position of the plaintiffs would have been better than it is as a result of the three transactions having occurred. The loss and damage is presently particularised substantively by reference to the amended assessment and penalties. Further particulars are foreshadowed after the delivery of expert evidence.
- The Commissioner’s various decisions are the subject of the Tax Appeals. The defendants are not parties to the Tax Appeals. The Tax Appeals may be described as follows:
- (a)In Gordon Stanley Merchant v Commissioner of Taxation (Federal Court of Australia Proceeding No. NSD 907/2021), Mr Merchant appeals the Commissioner’s determination of the s 177E issue, and the consequences that followed including the increased assessments of income tax plus interest (the “177E Proceeding”);
- (b)In GSM Pty Ltd v Commissioner of Taxation (Federal Court of Australia Proceeding No. NSD 908/2021), GSM appeals the Commissioner’s determination of the s 177D issue, and the consequences that followed, including the increased assessments of income tax plus interest (the “177D Proceeding”);
- (c)In Gordon Stanley Merchant v Commissioner of Taxation (Federal Court of Australia Proceeding No. NSD 1161/2021), Mr Merchant disputes assessments made in respect of the 2017 and 2018 income years and those disputes are unrelated to this proceeding;
- (d)In Gordon Merchant v Commissioner of Taxation (Administrative Appeals Tribunal Case No. 2021/6294), Mr Merchant applies to review the decision to impose an administrative penalty on him under s 177E (the “177E Penalty Review”);
- (e)In Gordon Merchant No. 2 Pty Ltd as trustee for Merchant Family Trust v Commissioner of Taxation (Administrative Appeals Tribunal Case No. 2021/6296), Mr Merchant applies to review the decision to impose a penalty on GM2 under s 177D (the “177D Penalty Review”);
- (f)In Gordon Merchant v Commissioner of Taxation (Administrative Appeals Tribunal Case No. 2020/6932), Mr Merchant challenges the Commissioner’s decisions in respect of the Super Fund (the “Disqualification Decision Review”).
- The Tax Appeals are set down for hearing together before his Honour Justice Thawley in March 2024.
- Broadly stated, some of the key issues in the Tax Appeals are whether:
- (a)the sole or dominant purpose of the Deed of Forgiveness was to avoid tax on a distribution of profits from GSM;
- (b)the Deed of Forgiveness had the substantial effect of a scheme by way of or in the nature of dividend stripping;
- (c)the sole or dominant purpose of the Billabong share sale was to obtain a tax benefit; and
- (d)in the superannuation context, whether a share sale said to give effect to an investment strategy was for an improper collateral purpose and amounted to using a superfund’s resources to provide financial assistance.
- The defendants’ submissions emphasised that the various challenges to the Commissioner’s decisions, at least in some respects, contend that there have been “critical errors” in the application of the law and “a fundamental misunderstanding of the evidence and the legal tests”. Those challenges also variously contend that, in the 2015 income year, the tax-related liability of Mr Merchant, GM2 or GSM “is not, and could not reasonably be expected to be, less than it would be apart from the scheme”.
Conduct and progress of this proceeding and the Tax Appeals
- On 20 August 2020, the claim and statement of claim were filed in this proceeding. That step was taken to protect the plaintiff’s claims from a limitations defence. The Tax Appeals were commenced before this proceeding was served. As a result of there being some hope within the plaintiffs’ camp that the Tax Appeals might be resolved quickly, this proceeding was not served promptly. On 16 August 2021, this proceeding was served on the defendants. By that time, a material witness for the plaintiff, Ms Paul, had died.
- The Tax Appeals are set down for hearing in March 2024. The evidence in the Tax Appeals has been prepared and filed.
- Between 6 April 2022 and 11 August 2022, the parties to this proceeding exchanged correspondence which discussed, among other issues, a potential stay of this proceeding. On 16 May 2022, the plaintiffs’ solicitors wrote to the defendant’s solicitors advising that, as at that time, the plaintiffs were “content to seek a stay of [this proceeding]…”. On 3 May 2023, an Amended Claim and Amended Statement of Claim were filed. On 28 June 2023, a Notice of Intention to Defend and Defence was filed. On 28 August 2023, the parties attended a conference with the Resolution Registrar about an initial document plan. In that context the question of a stay again emerged. On 30 August 2023, a Reply was filed. On 28 September 2023, the Commercial List Principal Judge, his Honour Justice Applegarth, placed this proceeding on the Commercial List. This proceeding was then allocated to me.
- The plaintiffs made appropriate and significant concessions. Relevantly, the plaintiffs accepted that:
- (a)there was some overlap between the issues in this proceeding and the issues in the Tax Appeals.
- (b)it was preferable that the Tax Appeals be finally determined before the final determination of this proceeding.
- (c)the progress of this proceeding to date has been slow.
- (d)there had been “limited progress” of this proceeding.
- (e)the current statement of claim in this proceeding needs “review”.
- (f)the current statement of claim in this proceeding does not plead:
- (i)the counterfactual advice, that is, the advice, different from the advice given by Ernst & Young, which a reasonably competent tax professional would have given to the plaintiffs in their situation;
- (ii)what different decisions the plaintiff might have made, what different structure might have been adopted and what different net financial result might have been obtained;
- (g)the advice which ought to have been given will be “the key issue” in this proceeding.
- (h)presently, disclosure would be an “extensive” and “very large exercise”.
- In my consideration, it is desirable and consistent with the objects of r 5 of the UCPR for this Court to grant a temporary or case management stay of this proceeding until such time as the Tax Appeals have been heard and determined by his Honour Justice Thawley. My reasoning may be set out as follows.
- First, there is a substantial or significant overlap between the proceedings. The outcome of the Tax Appeals may well have a material effect on this proceeding. There is an obvious potential impact in relation to the quantum of loss and damage. If the plaintiffs in this proceeding are successful in the Tax Appeals, there will be a radical and significant diminution in the quantum of the damages sought in this proceeding. However, the Tax Appeals have potential impact in relation to the elucidation of liability issues in this proceeding. There was consensus between counsel that, fundamentally, this proceeding is concerned with the assessment of risks inherent in the structure pursued and the structure available, but not pursued. That assessment will be better informed by the outcome of the Tax Appeals, at least to the extent that, as between the plaintiffs in this proceeding and the Commissioner, there are determinations regarding whether the decisions made about the character of the transactions were affected by “critical errors” and “a fundamental misunderstanding of the evidence and the legal tests”. Ultimately, the plaintiffs wish to call expert evidence in relation to what they style as the key issue in this proceeding, namely the advice that should have been given. Expert evidence about that key issue will necessarily involve opinion evidence and be offered for the benefit of, and under duties owed to, the Court. The opinion evidence on this key issue is likely to be better informed and less speculative if the Tax Appeals have been determined.
- Secondly, that the Tax Appeals may have a significant impact on the quantum of the loss and damage claimed in this proceeding is a significant consideration of itself. Any significant impact on quantum would likely influence the prospects of settlement of this proceeding. To now require the parties to incur the prohibitive costs of “extensive” disclosure, which is said to comprise a “very large exercise”, could be expected to adversely impact the prospects of a commercial settlement in the event that the Tax Appeals significantly impact the quantum of loss and damage.
- Thirdly, the plaintiffs sought to progress this proceeding for the immediate purpose of obtaining disclosure so that they could then obtain expert evidence which would enable them to plead and particularise the counterfactual advice and the financial outcomes which would have been obtained had an alternative structure been pursued. As I have indicated, the disclosure in contemplation was accepted as being extensive. In advancing that position, the plaintiffs presumed that they would, as a matter of course, be entitled to extensive disclosure to enable them to identify fundamental, important issues. That presumption is not necessarily consistent with the traditional view that discovery is only directed to “the issues as they are refined by particulars”. The efficient management of documents at all stages of litigation is a fundamental requirement of the just and expeditious resolution of the real issues in dispute at a minimum of expense. The parties are yet to agree a document plan. There may well be significant disputes, yet to be determined, about the extent of the disclosure required by the current pleadings. I am not prepared to decide this application on an assumption that the plaintiffs are presently entitled to extensive disclosure to enable them to define the real issues in dispute.
- Fourthly, having had the benefit of the parties’ submissions, and in particular the candour of the plaintiffs’ submissions, I have no real confidence that the real issues in dispute in this proceeding have been identified with any precision. The plaintiffs’ suggested course would involve significant disclosure and then a round of significant amendments to the pleadings. There is then the real prospect that, following the determination of the Tax Appeals, a further round of amendments to the pleadings may be required. I am not prepared to adopt an approach to case management which contemplates or countenances the prospect of multiple stages of further amendments to the pleadings.
- Fifthly, I accept that any temporary stay means that the progress of this proceeding will be delayed, and delay has an inevitable deleterious impact on the quality of justice. That is a consideration which I have considered and balanced against the other circumstances I have outlined. In this proceeding, the quality of justice has already been impacted because the proceeding started on the eve of the expiry of the limitation period and was not then served for a significant period. The issue is how to minimise further prejudice caused by the inevitable further deterioration of memories and evidence whilst at the same time ensuring that the proceeding is managed efficiently with a view to minimising costs and ensuring that interlocutory steps are directed to identifying and resolving real issues. Case management is a flexible tool and this Court, through its Commercial List, is able to manage this proceeding in a way which ensures that, from an appropriate point in time, the interlocutory steps are completed with expedition and a trial date is set from an early stage. That is my intended approach to the case management of this proceeding on the Commercial List.
- In my consideration it is appropriate to grant a temporary stay until such time as the Tax Appeals have been heard and determined. I intend to impose a temporary stay and to review this proceeding at a point in time after the expiry of the appeal period from the decisions of his Honour Justice Thawley in the Tax Appeals. At that time, the future conduct of this proceeding can be addressed by reference to the circumstances which then exist.
- 1.This proceeding is stayed until 40 days after his Honour Justice Thawley delivers his judgments in the proceedings identified in Schedule 1 to the application filed 5 October 2023.
- 2.The parties have liberty to apply on 7 days’ notice.
- 3.Once judgment has been delivered by his Honour Justice Thawley, the plaintiff must, within 2 business days, notify the Associate to Kelly J and the solicitors for the defendants of delivery of judgment and provide his Honour Justice Thawley’s reasons to the solicitors for the defendants.
- 4.Following the delivery of the judgments referred to in , the parties are to contact the Associate to Kelly J to arrange a review at the conclusion of the 40-day period.
- 5.The costs of and incidental to the application filed 5 October 2023 be costs in the proceeding.
 (2021) 396 ALR 497, .
 with whom Leeming JA and Emmett AJA agreed.
 (2021) 396 ALR 497, .
 (1992) 34 FCR 287, 290, 291 and 294.
 Sterling Pharmaceuticals Pty Ltd v Boots Co (Australia) Pty Ltd (1992) 34 FCR 287, 292; Shaw v Official Trustee in Bankruptcy of the Australian Financial Security Authority  FCA 775,  and .
 Section 177E is directed to preventing tax benefits arising as a result of dividend stripping schemes or schemes having substantially the same effect.
 Affidavit of Rocco Russo filed 19 October 2023 .
 Ibid .
 NRNQ (alimited partnership) v MEQ Nickel Pty Ltd  2 Qd R 592, 595.
 Practice Direction Number 18 of 2018.
- Published Case Name:
Merchant & Ors v Ernst & Young (a firm) & Anor
- Shortened Case Name:
Merchant v Ernst & Young (a firm)
 QSC 259
15 Nov 2023