A secret political deal between the Federal and State governments to let WA claw back $1 billion from Alan Bond’s collapsed Bell Group was torpedoed by submissions made by Solicitor-General Justin Gleeson on behalf of the Australian Tax Office.

It is understood Mr Gleeson’s submissions were critical in events that led to his resignation last month.

A senior Federal source toldThe West Australian that Attorney-General George Brandis verbally instructed Mr Gleeson earlier this year, as counsel for the A-G, not to run a particular argument in the High Court when a Bell creditor and its liquidator challenged the constitutionality of WA’s attempt to take control of the group’s $1.8 billion.

The West Australian understands Senator Brandis told Mr Gleeson an understanding had been reached between the Federal and WA governments to finally end more than two decades of litigation stemming from the group’s collapse.

The ATO, which at nearly $300 million was one of Bell’s four main creditors, separately approached the Solicitor-General to also act as its counsel and to run the argument for it.

Despite Senator Brandis’ instruction, the ATO’s written submission to the High Court — authored by Mr Gleeson — used the precise legal argument that the Attorney-General had assured his State counterpart Michael Mischin would be avoided by the Commonwealth.

“Mr Gleeson advanced an argument that caused the WA Government to think the Commonwealth had acted in bad faith,” the senior Federal source said.

Mr Mischin was infuriated by the ATO’s move, not only because its argument in the High Court was on a basis the Commonwealth had promised not to advance, but because he thought the tone of the agency’s submission professed WA’s ignorance of the Constitution.

In fact, the Commonwealth was kept well abreast of the State’s intentions, with WA openly discussing the constitutional issues concerning its legislation and even sharing early drafts.

WA Treasurer Mike Nahan had received personal and written assurances early last year from then Federal counterpart Joe Hockey that the Commonwealth would not oppose the State Governments move.

On the weekend of April 2-3, just two days before the High Court hearing, Mr Mischin repeatedly called Senator Brandis and Assistant Treasurer Kelly O’Dwyer to seek an agreement that would avert Commonwealth involvement in the case — but to no avail.

The ATO was heard in the High Court case with its arguments — that the WA laws were inconsistent with Federal tax law — used to effectively “kill” the State’s legislation.

On April 12, five days after the High Court had heard the case, Mr Mischin and Senator Brandis had what witnesses say was a “blazing row” when the two attorneys-general met in Perth. Mr Mischin told Senator Brandis he was unhappy that the Commonwealth intervened in the case on the grounds pursued in court.

On May 16, the High Court ruled 7-0 that the legislation, which sought to elevate the Insurance Commission of WA to the front of the queue of creditors, was “invalid in its entirety”.

It led to Senator Brandis believing Mr Gleeson, as the second law officer, had disobeyed instructions from him, the first law officer, the Federal source said.

On May 4, Senator Brandis issued a directive that any department or agency seeking legal opinion from the Solicitor-General must first get Attorney-General approval.

A Federal Government source said the WA Government thought it had “comfort” before introducing legislation that would have proposed giving ICWA $930 million of the $1.8 billion assets, despite being an unsecured subordinated creditor, thereby leapfrogging the ATO and two other creditors. WA believed it had an agreement with the Commonwealth on how to carve up Bell Group assets because of meetings Dr Nahan had with Mr Hockey.

It culminated in a meeting in Canberra on April 9 last year, witnessed by two advisers, when Mr Hockey agreed that the Commonwealth would not intervene if WA pushed ahead with its legislation.

At the time, WA’s GST share was scheduled to fall from 37¢ in the dollar to less to 30¢, which Mr Hockey acknowledged was “an issue for the Federation”.

A letter sent by Mr Hockey a few days later confirmed the agreement, with the overriding caveat that it not pose a sovereign risk. “Given the significant nature of the proposed course of action, I urge the Western Australian Government to ensure that the utmost probity is evidenced throughout the process so as to ensure that Australia remains and continues to be seen as an attractive destination for foreign investment,” Mr Hockey wrote.

At the heart of the Brandis-Gleeson dispute would appear to be differing views as to the role of the Solicitor-General.

Whereas Senator Brandis believed Mr Gleeson should have acted as the Government’s barrister, acting within the confines of the Attorney-General’s instructions, Mr Gleeson appears to have seen his role differently.

During a recent parliamentary inquiry, Mr Gleeson said the Solicitor-General was both independent and a key element of the government.

“The Solicitor-General is independent. The independence is protected by the statute,” Mr Gleeson said.

“The Solicitor-General has an important role in assisting ... the Government to uphold the rule of law for the benefit of the whole community.”

In his written submission to the inquiry, Mr Gleeson said it was “critically important” that those seeking advice from the Solicitor-General do so in an “uninhibited fashion and in respect of questions framed by them and not by others”.

Mr Gleeson’s view was supported by previous solicitors-general Dr Gavan Griffith QC and Sir Anthony Mason, a former High Court chief justice, and upheld by the majority report of the parliamentary inquiry. At a Senate estimates hearing in October, the tax office second commissioner Andrew Mills said it would have been strange if the ATO had failed to be part of the High Court action.

“In fact, the basis on which the litigation was being undertaken by that creditor relied on parts of the Tax Act, so it would seem strange for us not to be involved,” he said.

Mr Mills said that when the ATO became aware of the details of the legislation, it believed it had a responsibility to see if the laws were constitutional and to “protect the position of the Commonwealth”.

Mr Gleeson was approached for comment but was prevented from talking by his obligations of legal professional privilege owed to the Government.