The use of the Mareva injunction is currently in vogue with Australia’s Commissioner of Taxation as a measure to target foreign residents who the commissioner believes will not comply with their Australian tax obligations that result from the divestment of Australian assets, such as ASX-listed shares. The commissioner has most recently obtained a Mareva injunction in Federal Commissioner of Taxation v Regent Pacific Group (2013).
In the context of tax debt
The equitable remedy of a Mareva injunction (named after Mareva Compania Naviera SA v International Bulkcarriers SA ) is incorporated into both federal and state court rules, and is referred to in the court rules as a “freezing order”. Broadly, the purpose of a Mareva injunction is to “prevent 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”.
The commissioner will generally apply to the Federal Court for a Mareva injunction where the commissioner believes that a foreign resident may dispose of or deal with assets, which could culminate in the foreign resident not fulfilling payment of the tax liability or the enforcement of a judgment the commissioner may obtain if successful in subsequent litigation regarding the tax liability.
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Broadly, rule 7.35(4) of the Federal Court Rules 2011 provides that if there is a danger that the prospective judgment will be wholly or partially unsatisfied, having regard to all the circumstances, the Federal Court can issue a freezing order to prevent the disposal of assets held by the foreign resident.
The case law indicates that a freezing order can be granted even though there is no evidence that there is a positive intention to frustrate a judgment (see Deputy Commissioner of Taxation v Hua Wang Bank Berhad ).
Obtaining a Mareva injunction
The commissioner argued in Federal Commissioner of Taxation v Regent Pacific Group that the following facts and circumstances were relevant to the court imposing a Mareva injunction on other Australian assets held by Regent and associated third parties:
- Regent and associated third parties held shares in ASX-listed companies that were liquid and could be sold easily into the market, thereby allowing for the proceeds to be efficiently transmitted offshore;
- Regent did not have a tax file number and had not filed a tax return in Australia in the past;
- Regent was registered in the Cayman Islands and had a business office in Hong Kong, and neither the Cayman Islands nor the PRC had a bilateral collection policy or process with Australia (further, both jurisdictions did not recognise foreign revenue debts).
- The quantum of the tax debt was sizeable – A$12.7 million (US$11.7 million) – and the fact that payment of the tax debt was not due for 11 months.
The court was satisfied that the facts and circumstances supported an inference that if freezing orders on the other Australian assets were not made, then the commissioner would not be able to recover the tax debt from Regent (assuming there was a subsequent successful judgment for the tax debt resolved by a court in the commissioner’s favour).
Foreign resident investors be aware
After the commissioner’s reactive response to TPG’s disposal of Myer in 2009 and the negative publicity that ensued, the commissioner has gone out of his way to take more immediate action against foreign resident investors by issuing special assessments in conjunction with Mareva injunctions (see also Commissioner of Taxation v Resource Capital Fund III LP  and now the Regent case).
The commissioner has also become much more media savvy, making views felt in the media where highly publicised deals are involved, both at the acquisition stage and at the divestment stage.
If you are a foreign resident investor and are contemplating the divestment of your Australian assets you should:
- Take a proactive approach towards your Australian tax obligations to ensure that they have been satisfied;
- Liaise with your advisers to ensure that the structures that have been used to undertake the divestment are able to withstand the scrutiny of the commissioner;
- Give due consideration to strategies that can adeptly deal with any potential negative consequences, such as the negative impact a Mareva injunction may have on the quantum of proceeds received;
- Be prepared to engage with the commissioner, but ensure that safeguards are in place to protect your position given the possibility that a dispute with the commissioner can lead to protracted litigation (see also Resource Capital Fund III LP v Commissioner of Taxation , which took over two years to resolve but was resolved in favour of the taxpayer at first instance).
Should the court impose a Mareva injunction on your other assets, it will be necessary to negotiate with the commissioner to have the Mareva injunction lifted by the court as soon as possible, given the negative impact on your business.
You may have to enter into a 50/50 payment arrangement with the commissioner until the dispute is resolved by the court; this will have a number of implications, including the need for provision disclosures in your accounts.
Range of powers
When combined with the power to issue a statutory garnishee notice under section 260-5 of Schedule 1 to the Taxation Administration Act 1953, and also with the power under section 255 of the Income Tax Assessment Act 1936, Australia’s Commissioner of Taxation has a considerable range of powers to target foreign investors who may not be complying with their Australian tax obligations.
Michael Sheng is a partner at Ashurst in Shanghai; Craig Saunders is a partner at Ashurst in Sydney. Tim Loh, a senior associate at Ashurst in Sydney, co-authored this article
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