Brown v Brown

Federal Court of Australia|2007-12-18|Before: Gordon J

REASONS FOR JUDGMENT 1 The Deputy Commissioner of Taxation of the Commonwealth of Australia ("the Commissioner") has applied for orders permitting the Commissioner to collect a tax debt owed by A Chaid Pty Ltd (in liquidation) (ACN 109 374 727) ("A Chaid"). Specifically, the Commissioner seeks an order that BJT Legal Pty Ltd be directed to pay to the Commissioner $244,248.45 from funds held by BJT Legal in trust prior to distribution of any funds pursuant to pars 3(c) and (d) of the orders made by the Federal Magistrates Court (the "FMC") on 13 September 2006 in ongoing family law proceedings. 2 The basis on which the Commissioner asks to be recognized as a priority claimant to the funds held in trust is a Notice to Pay Money to the Commissioner of Taxation issued by the Commissioner to BJT Legal on 19 October 2006 (the "Notice") pursuant to s 260-5 of Sched 1 to the Taxation Administration Act 1953 (Cth) (the "Act"). 3 The liquidator of A Chaid, Kenneth Stewart Sellers, asks that the Commissioner's application be dismissed on either of two grounds: (1) that the Notice was ineffective because BJT Legal did not owe money to A Chaid as required by s 260-5 of the Act; and (2) even if the Notice was effective, the Commissioner surrendered any security interest created by the Notice when the Commissioner submitted a proof of debt to the liquidator on 9 November 2006. 4 For the reasons set out below, I propose to grant the application and make the orders requested by the Commissioner.

THE NOTICE WAS EFFECTIVE 15 Section 260-5 of the Act, entitled "Commissioner may collect amounts from third party," provides that the Commissioner may give notice to a third party (here, BJT Legal) "if the third party owes or may later owe money" to a debtor (here, A Chaid) who owes a tax-related liability: ss 260-5(1) and 260-5(2). 16 Section 260-5(3) states that a third party is regarded as owing money if, among other things, the third party: (a) is an entity by whom the money is due or accruing to the debtor; or (b) holds the money for or on account of the debtor; or (c) holds the money on account of some other entity for payment to the debtor; or (d) has authority from some other entity to pay the money to the debtor. 17 The parties agree that if the Notice is effective it creates a statutory charge in favour of the Commissioner and thus makes the Commissioner a secured creditor of A Chaid for purposes of the Corporations Act, entitled to priority of payment over unsecured creditors: Clyne v Deputy Commissioner of Taxation (1981) 150 CLR 1 at 17-18 (per Mason J) and 26-27 (per Brennan J); Goodin v Commissioner of Taxation (2002) 169 FLR 282 at 289; Commissioner of Taxation v Donnelly (1989) 25 FCR 432 at 436 (per Lockhart J); Macquarie Health Corp Ltd v Commissioner of Taxation (1999) 96 FCR 238, 255-271; Goodger v Ayre (1988) 88 FLR 188 at 191-192. 18 The liquidator submits, however, that the Notice is ineffective because the funds held by BJT Legal are not owed to A Chaid as a result of the FMC's orders of 13 September 2006, which direct that the proceeds of the hotel sale be paid not to A Chaid but to its unsecured creditors. Therefore, the liquidator submits, it cannot be said that BJT Legal is under any obligation to pay money to A Chaid. Further, the liquidator contends that the moneys held in account number 633/000 128949658 in the name of BJT Legal Pty Ltd at Bendigo Bank Ltd, are not the property of A Chaid or BJT Legal but that of the bank subject to the rights of BJT Legal as a creditor of the bank: see Foley v Hill (1848) 9 ER 1002. 19 The Commissioner submits that the 13 September orders do not affect A Chaid's ownership of the funds; rather, the orders simply impose directions as to how the funds owned are to be applied or distributed. 20 These contentions may be put to one side. It is unnecessary to resolve the debate because the plain language of s 260-5(3)(b) states that money is deemed to be owed to a debtor, whether or not it is actually due or payable to the debtor, if it is held for or on account of the debtor. 21 As Edmonds J explained in Elsinora Global Ltd v Healthscope Ltd (No. 2) (2006) 61 ATR 482 at [63]: Subsection 260-5(3) of Sch 1 to the Administration Act is a deeming provision. It provides when a person (the third party) is taken to owe money to another (the debtor). In its form and context it is exhaustive and extends to situations where, but for the deeming, the third party may not, or would not, be regarded as owing money to the debtor. Paragraph (a) is concerned with the standard situation where the third party is indebted to the debtor whether the debt is due or accruing due to the debtor. To attract the deeming operation, para (b) requires the third party to hold money for or on account of the debtor. Unless there is a holding of money by the third party, the deeming cannot operate. Paragraph (c) also requires the third party to hold money, not for or on account of the debtor, but on account of some other entity for payment by the third party, not the other entity, to the debtor. Finally, para (d) operates to deem the third party to owe money to the debtor if the third party has authority from some other entity to pay the money to the debtor. (Emphasis added.) 22 In this case, it cannot be disputed that BJT Legal is a third party holding money, which money represents proceeds from the sale of A Chaid's business, in trust for and on account of the company pending distribution; indeed BJT Legal itself so stated in its 17 May 2007 facsimile to the Commissioner: see [13] above. 23 Furthermore, nothing in the decision of Bryson J in Deputy Commissioner of Taxation v Westpac Savings Bank Ltd (1987) 87 FLR 130 ("Westpac"), relied on by the liquidator, suggests a contrary approach. In Westpac, the bank Westpac held funds in a savings account jointly owned by three tax debtors. Westpac at 131-132. The Commissioner then issued three separate notices to the bank under s 218 of the Income Tax Assessment Act 1936 (Cth) (the 1936 Act) seeking garnishment of the funds to pay tax liabilities owed severally by the debtors: Westpac at 132. Westpac refused to comply on the grounds that it held the money in a joint account and not in a sole account of any of the tax debtors named in the notices: Westpac at 132. 24 Section 218(1)(b) of the 1936 Act, which was the predecessor to s 260-5(3)(b) of the Act, provided that the Commissioner could require a person (ie, Westpac) to pay the Commissioner money held by the person if (at 133): [the] person … holds or may subsequently hold money for or on account of a taxpayer 25 Based on that language, Bryson J took it to be self-evident that the bank "at the time of delivery of the notices was a person (and I will call such a person the holder) falling within par … (b) of subs (1)": Westpac at 133. The crucial question, in his Honour's view, was not whether the bank could be said to be a holder of money for or on account of a taxpayer, but "whether, when those paragraphs refer to 'a taxpayer' the identification of the holder extends in any circumstances to a holder of moneys due to or on account of a taxpayer as one of several persons for whom the moneys are held jointly": Westpac at 133 (emphasis added). Bryson J resolved this question in the negative, with the effect that the notice was deemed invalid and the Commissioner was unable to enforce the notice: Westpac at 137. 26 Here, the circumstances are similar to those in Westpac to the extent that BJT Legal, like Westpac, is a holder within the meaning of s 260-5(3)(b) (or its substantially identical predecessor s 218(1)(b)). To that extent, then, Westpac supports Commissioner's position, not the liquidator's. However, the facts are different to the extent that the funds are held by BJT Legal for and on account of A Chaid solely, unlike in Westpac, where the bank held money on joint account. To that extent, the Commissioner's position in this case is stronger than it was in Westpac. 27 The liquidator submits that, regardless of the foregoing, the Notice could not take effect in light of the 26 October 2006 winding-up order and s 468(1) of the Corporations Act. That submission is unfounded. 28 First, it conflates the effectiveness of the Notice with the ability of BJT Legal or the company (through its liquidator) to comply with the Notice (ie, pay money to the Commissioner). Section 468(1) provides: Any disposition of property of the company, other than an exempt disposition, and any transfer of shares or alteration in the status of the members of the company made after the commencement of the winding up by the Court is, unless the Court otherwise orders, void. (Emphasis added.) 29 As the plain language of this provision indicates, s 468(1) restricts only the (non-exempt) disposition of company property; it does not address in any way the validity of any creditor attachments to or interests in that property. In that respect, s 468(4) provides: Any attachment, sequestration, distress or execution put in force against the property of the company after the commencement of the winding up by the Court is void. (Emphasis added.) 30 Emmett J agreed that a winding-up order could not defeat a prior notice under s 218 of the 1936 Act in Commissioner of Taxation v Macquarie Health Corp (1998) 88 FCR 451 at 469. His Honour said: The only consideration is whether s 468 of the [Corporations Act] operates to prevent effect being given to the words of s 218 themselves. It follows from Clyne's case and Donnelly's case that the winding up of the Taxpayer did not affect any rights which had arisen in favour of the Commissioner by the operation of s 218 upon service of the notices. 31 In this case, the Notice operated against the property of A Chaid no later than 20 October 2006 (the date of its receipt by BJT Legal), and that, of course, was before the 26 October 2006 winding-up orders. Accordingly, the provisions of s 468 do not operate to void or otherwise vitiate the effectiveness of the previously issued Notice: Commissioner of Taxation v Macquarie Health Corp (1998) 88 FCR 451 at 471. As Emmett J said, "I consider that the Liquidator's contention confused the right in property with the remedy. A company taxpayer remains liable in respect of the tax which is the subject of a notice of assessment even after a winding-up order is made." 32 Secondly, not only does s 468 not affect the efficacy of the Notice, but it also does not bar BJT Legal or the liquidator from complying with the Notice and paying the money. As noted, s 468(1) bars the non-exempt dispositions of company property: Commissioner of Taxation v Macquarie Health Corp (1998) 88 FCR 451 at 472. As Emmett J said, "[t]here is no doubt that the effect of winding up and of sequestration is that there is a restriction imposed on the capacity of a creditor to enforce payment of a debt without the leave of the Court." However, s 468(2)(a) provides that a disposition by the liquidator is exempt if made pursuant to a power conferred on him by the Corporations Act. Section 477 in turn gives the liquidator broad powers to, inter alia: (1) make arrangements with creditors: s 477(1)(c); and (2) "sell or otherwise dispose of, in any manner, all or any part of the property of the company": s 477(2)(c). 33 Moreover, with respect to BJT Legal's position, s 260-15 of the Act provides: An amount that the third party pays to the Commissioner under this Subdivision is taken to have been authorised by: (a) the debtor; and (b) any other person who is entitled to all or a part of the amount; and the third party is indemnified for the payment. 34 In short, the liquidator can point to nothing in the tax legislation or the Corporations Act that makes the Notice ineffective or otherwise prevents compliance with it.

THE COMMISSIONER DID NOT SURRENDER THE SECURITY INTEREST CREATED BY THE NOTICE BY LODGING A PROOF OF DEBT 35 Alternatively, the liquidator submits that even if the notice was effective, the Commissioner surrendered the security interest created by the Notice when he lodged a formal proof of debt with the liquidator on 9 November 2006. I reject that submission. 36 As the liquidator notes, the relevant law on this point is helpfully summarized in the reasons of Dutney JA (with whom Williams and Jerrard JJA agreed) in Surfers Paradise Investments Pty Ltd (in liquidation) v Davoren Nominees Pty Ltd [2004] 1 Qd R 567 ("Surfers Paradise"). First, his Honour noted that the regime now codified in s 554E of the Corporations Act dates back to the judgment of Jessel MR in Moor v Anglo-Italian Bank (1879) 10 Ch D 681: Surfers Paradise at [27]. 37 Essentially, a secured creditor wishing to prove a debt may do one of three things: (1) surrender the security and prove for the full amount; (2) realize the security and prove for the difference; or (3) value the security and prove for the difference: Surfers Paradise at [27]. Furthermore (at [27] quoting Moor): [i]f without doing either of the latter two things, he proves for the full amount, as he cannot prove for the full amount and receive a dividend except on the theory of giving up the security, he shews by that an intention to give up his security; and, if he so proves and receives a dividend or votes, he shews pretty conclusively that he has finally elected to give up his security and take his dividend; in other words, having two funds to resort to, the bankrupt's general estate, so as to get a dividend on the whole amount of his debt, or his security, he elects to take the bankrupt's estate, and in that way gives up his security. It is not forfeiture, it is election; but, the petitioning creditor gets nothing unless he proves. 38 The question, then, is whether a creditor has elected to surrender the security interest. Whether an election has been made is an objective question of fact; that is, regardless of whether a creditor subjectively intended to give up the interest, the court is required to look at objective evidence including whether the creditor has sought to avail himself of rights and remedies of an unsecured creditor such as the dividend and voting rights mentioned in Moor: Surfers Paradise at [28]-[29]. 39 As noted by Dutney JA, the principles applicable to election were stated by Stephen J in Sargent v ASL Developments Ltd (1974) 131 CLR 634 at 646 (quoted in Surfers Paradise at [31]): The words or conduct ordinarily required to constitute an election must be unequivocal in the sense that it is consistent only with the exercise of one of the two sets of rights and inconsistent with the exercise of the other; thus for a lessor to continue to receive rent under a lease will be consistent only with his rights as lessor and inconsistent with the exercise of a right to determine the lease ... However, less unequivocal conduct, only providing some evidence of an election, may suffice if coupled with actual knowledge of the right of election ... There need be no expressed intention to elect, nor will an express disclaimer of such an intention be of any avail in preserving one right if in fact there be an exercise of another inconsistent right ... For an election there need be no actual, subjective intention to elect ... an election is the effect which the law attributes to conduct justifiable only if such an election had been made ... 40 The unequivocal words or conduct referred to by Stephen J may be of two types. As noted by Mahoney JA in Champtaloup v Thomas [1976] 2 NSWLR 264 at 274-275 (quoted in Surfers Paradise at [32]): First, it may be exercised by a conscious act of election. The party having the right may actually determine on his election and, in so far as communication may be necessary ... communicate it to the other party, and an election is thereby made .... Second, the party may do some act which is of such a nature that, irrespective of his actual intention or determination, the law treats him as having exercised his election. This imputation of an election may occur even though the party does not subjectively know that he has the right to elect, or even where he does not intend to elect. 41 Here, as in Surfers Paradise, there is no question that the Commissioner did not subjectively or consciously intend to give up his security interest. Therefore, only the second type of election is at issue. Such an election "requires unequivocal conduct in the face of a necessary choice. In other words, the circumstances faced by the electing party must require an election to be made between inconsistent positions": Surfers Paradise at [33] (footnotes omitted). 42 Submission of a proof of debt for the full amount, if it is silent on the question of surrender, is some evidence of an election to surrender but not conclusive evidence: Surfers Paradise at [34] but cf Re International Tyre Co Pty Ltd (in liquidation) (1979) 4 ACLR 553 at 554. On the other hand, the receipt and acceptance of a dividend pursuant to a scheme of arrangement (or the exercise of creditor voting rights) based on the full amount of the debt is conclusive evidence of surrender: Surfers Paradise at [34]; Moor at 689-690. In short, "[t]he two questions here are whether the [Commissioner] was required to elect to surrender the security or not and if so, whether [his] conduct was unequivocal": Surfers Paradise at [36]. 43 Addressing those questions in Surfers Paradise, Dutney JA found that there was an election to surrender because the creditor had accepted a dividend based on the full amount of the debt (at [37]): A point at which it became necessary in this case to make an election was, in my view, when the dividend cheque was received. At that point in time the respondent was required to make a choice between accepting the cheque or returning it and notifying the liquidator that a mistake had been made in relation to the proof of debt. Having received the cheque, a payment to which the respondent was entitled in the circumstances of this case only by surrendering the security, the respondent had to decide whether to keep it or return it. The assertion of a right to retain the dividend evidenced by banking the cheque and retaining the proceeds was in my view also sufficient to constitute an affirmative answer to the second question. I regard the assertion of such a right by accepting and retaining the dividend in the context of the earlier communications between the liquidator and the respondent as the unequivocal adoption of one of two inconsistent rights. I do not consider that other conduct unknown to the liquidator but inconsistent with an election to surrender the security can affect the position. In the present case, there is no evidence that the Commissioner has received or accepted a dividend based on the full amount of the tax debt (or indeed any dividend at all). In fact, there is no evidence that the liquidator accepted or even relied upon the proof of debt. Surfers Paradise is thus distinguishable. 44 The issue in this case is whether the lodgement of this proof of debt, without more, constitutes unequivocal conduct demonstrating that the Commissioner elected to surrender his security. It is true that the proof of debt was wholly silent as to the security under the Notice. As noted in [11] above, the proof of debt signed by an employee of the Commissioner stated that "to [her] knowledge or belief the creditor has not, nor has any person by the creditor's order, had or received any satisfaction or security for the sum or any part of it." 45 Lodgement of the proof of debt is thus some evidence that the Commissioner elected to surrender his security under the Notice. However, lodgement of the proof is also consistent with an attempt by the Commissioner to protect his rights in the event he were found not to be a secured creditor (ie, "cover his bases"). Moreover, the express words of the proof quoted above state only that the employee lodging the proof was not aware of a security interest; thus the failure to refer to the Notice is also objectively consistent with the possibility that the person lodging the proof was simply ignorant of the security interest, not that such interest was disclaimed, disavowed or surrendered. Finally, as mentioned before, the lodgement of the proof in this case came at a time when, unlike in Surfer's Paradise, there was no "necessary choice" (ie, exercise of voting or dividend rights) put to the Commissioner. As such, the lodgement of the proof of debt under the facts and circumstances of this case was at most equivocal, and therefore not sufficient or conclusive, evidence of surrender, even if I limit myself to consideration only of the contents of the proof and contemporaneous facts and circumstances: see [41] above. 46 That the 9 November 2006 proof of debt, when objectively viewed in context, did not unequivocally evidence a surrender of the security interest under the Notice is further supported by a review of the subsequent correspondence between the liquidator and Commissioner. As the 11 December 2006 letter from the liquidator shows, he was unclear as to the Commissioner's intentions: see [12] above. Any doubt the liquidator might have had was put to rest on 14 December 2006 when the Commissioner wrote to him in the manner described above: see [12]. Given that the liquidator subjectively did not view the proof of debt as unequivocal evidence that the Commissioner had surrendered his claim under the Notice, it is difficult to see how the court could take that view on an objective basis. The liquidator submits that evidence post-dating the lodgement of the proof of debt is irrelevant because the surrender of the security became complete immediately on the lodging of the proof. While I do not accept this submission, I also note that even if I were to accept it, it would not change the outcome of the analysis for the reasons stated in [45] above. 47 For the foregoing reasons, the Notice was effective and the Commissioner did not surrender the security interest under the Notice by lodging a proof of debt with the liquidator on 9 November 2006. Accordingly, I would grant the application.

ORDERS 48 The orders will be: (1) BJT Legal Pty Ltd pay first from the moneys held in account number 633/000 128949658 in the name of BJT Legal Pty Ltd at Bendigo Bank Limited, 407 Sturt Street, Ballarat, the sum of $244,248.45 in compliance with the Notice to Pay Money to the Commissioner of Taxation under s 260-5 of Sched 1 of the Taxation Administration Act 1953 (Cth) issued by the Deputy Commissioner of Taxation of the Commonwealth of Australia to BJT Legal on 19 October 2006. (2) The costs of and incidental to this application be costs in the liquidation of A Chaid Pty Ltd (in liquidation) (ACN 109 374 727) (3) The Commissioner serve a copy of this order on BJT Legal Pty Ltd.

I certify that the preceding forty-eight (48) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gordon.

Counsel for the Applicant: R Brett QC, C Sievers

Solicitor for the Applicant: Australian Taxation Office

Solicitor for the Third Respondent: DLA Phillips Fox

Date of Hearing: 18 December 2007

Date of Judgment: 18 December 2007

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