Effect of the Notices
62 The written submissions filed on behalf of the Liquidator in relation to his appeal were directed primarily to the question of whether service of the Notices on the Debtors created a statutory charge over the Debts in favour of the Commissioner. Mr Conti QC, who appeared with Mr Dodson for the Liquidator, submitted that, on analysis, the alternative approach put forward in Donnelly was not a true alternative because it rested on the unexpressed assumption that the Notices created interests in the nature of statutory charges. Mr Conti sought to argue that Donnelly was wrongly decided.
63 In the course of oral argument, it was put to Mr Conti that it might not be appropriate for a Liquidator to adopt a vigorous stance which appeared to favour one set of substantial creditors (companies associated with the Taxpayer) over another substantial creditor (the Commissioner). In this respect, the general principle is that a liquidator, as an officer of the Court, is bound to maintain an even and impartial hand between all individuals whose interests are involved in the winding-up: In re Contract Corporation (Gooch's Case) (1871) LR 7 Ch App 207, at 211. For this reason, the liquidator must both be and appear to be independent and impartial: Re Intercontinental Properties Pty Ltd (in liq) (1977) 2 ACLR 488 (Needham J), at 491-492; McPherson, The Law of Company Liquidation (4th ed 1999), at 287, 290, 294.
64 Mr Conti thereafter approached the question on the basis that the Liquidator merely wished to bring issues to the attention of the Court rather than to argue for a particular result. No party with an interest in the outcome of the appeals or cross-appeal, other than the Liquidator, suggested that Donnelly should not be followed.
65 The starting point for a consideration of the effect of a notice under s 218 of the ITAA is Clyne v Deputy Commissioner of Taxation (1981) 150 CLR 1. The issue arose in that case because the taxpayer purported to assign his interest in interest-bearing deposits held with a bank. The purported assignment took place after a s 218 notice had been served on the bank but before the deposits had matured. The Court held that the service of the notice imposed an obligation on the bank to pay the deposits at maturity to the Commissioner. In the meantime, the bank was obliged not to make any payment inconsistent with the rights of the Commissioner.
66 Clyne establishes several propositions:
(i) The word "due" in s 218(1)(a) of the ITAA means "due and payable", while "accruing" means a debt due but not immediately payable: at 15, per Mason J (with whom Aickin and Wilson JJ agreed). Thus a notice can be given in respect of a debt due to the Taxpayer but not immediately payable.
(ii) By contrast, the word "due" in sub-par (e) applies to tax which is the subject of an assessment albeit not yet payable: at 16-17, per Mason J.
(iii) Where the debtor owes money to the taxpayer at the time the notice is given, it imposes an obligation on the debtor to pay forthwith to the Commissioner the moneys which are then payable. The notice imposes an obligation to pay moneys which become payable at a future time when that time arrives: at 23, per Mason J; at 27, per Brennan J. It is unlawful for the recipient to pay moneys to anyone but the Commissioner after receipt of the notice: at 23, per Mason J.
(iv) A debtor who acts in accordance with a s 218 notice is protected by s 218(4) (which deems the payment to be made with the authority of the taxpayer): at 23, per Mason J.
(v) The effect of service of s 218 notice is to prevent the taxpayer from thereafter assigning the debt the subject of the notice so as to defeat the Commissioner's right to payment. Nor can the taxpayer's purported assignment affect the debtor's obligation to pay the money to the Commissioner when the debt becomes due and payable: at 11-12, per Gibbs CJ; at 19, per Mason J; at 27, per Brennan J.
67 In Clyne, counsel for the Commissioner conceded that s 218 did not purport to create a charge over, or interest in, the moneys in favour of the Commissioner. Doubtless this concession was influenced by the absence of any express statement in s 218 that the Commissioner is to have the benefit of a charge over the debt which is the subject of a notice. Nonetheless, Mason J (at 18) doubted that the concession had been rightly made. Brennan J went considerably further (at 26):
"The statute thus works an assignment of the moneys to be paid to the Commissioner as though the taxpayer had charged the moneys otherwise payable to him with payment of his tax liability. Statutory charges are no novelty, although a statute which creates a charge usually describes it as such and defines the chargee's remedies."
Gibbs CJ did not address the issue.
68 It was not necessary in Clyne to decide whether the effect of a s 218 notice is to create a charge in favour of the Commissioner. The question was, however, squarely raised in Donnelly. There, a s 218 notice was served on the Health Insurance Commission which was indebted to the taxpayer, a medical practitioner. The indebtedness arose because the taxpayer procured assignments from his patients of their Medicare entitlements (in accordance with "bulk billing" arrangements). A sequestration order was made against the medical practitioner. The trustee in bankruptcy sought to recover all moneys paid to the Commissioner pursuant to the notices between the date the bankruptcy commenced and the date the sequestration order was made. The Full Court, by majority (Lockhart and Hill JJ; von Doussa J dissenting), held that the trustee was not entitled to recover those moneys.
69 As Hill J noted, s 218 has had a long history in Australian income tax law (at 451). A provision authorising the Commission to require a debtor of the taxpayer to pay the amount of the debt directly to the Commissioner was first enacted in 1918: Income Tax Assessment Act 1915 (Cth), s 50A, inserted by the Income Tax Assessment Act 1918 (Cth), s 32. The 1915 Act was repealed by the Income Tax Assessment Act 1922 (Cth), s 65 of which was in substantially the same form as the present s 218. In 1922, Crown debts, including debts due in respect of income tax, enjoyed priority over debts of equal degree: Commissioner of Taxation for New South Wales v Palmer [1907] AC 179. The principle applied in bankruptcy (Palmer, at 183, 185-186) and on a winding-up: Palmer, at 184; In re Henley & Co (1878) 9 Ch D 469. The Bankruptcy Act 1924 (Cth), s 84, displaced the Crown's priority under the general law by providing for a statutory order of priority, initially giving eighth place to income tax assessed under Commonwealth or State law: see Deputy Federal Commissioner of Taxation v Stranger (1934) 50 CLR 468. In New South Wales, for example, the general law priority for Crown debts was not displaced in a winding-up until the enactment of the Companies Act 1936 (NSW). Section 297(1) provided for statutory order of priority on a winding-up, with income tax assessed under a New South Wales or Commonwealth statute ranking fourth; and see s 199(3). The High Court upheld the New South Wales legislation in its application to Commonwealth income tax in In re Richard Foreman & Sons Pty Ltd; Uther v Federal Commissioner of Taxation (1947) 74 CLR 508, but that decision was overruled in Commonwealth v Cigamatic Pty Ltd (in liq) (1962) 108 CLR 372. See now Crown Debts (Priority) Act 1981 (Cth).
70 Hill J addressed in detail whether service of a s 218 notice constitutes the Commissioner a secured creditor in relation to the debt which is subject to the notice. For this purpose, his Honour examined the reasoning in Clyne and, in particular, the analogy drawn by Mason J between a s 218 notice and a garnishee order. Hill J concluded that the effect of service of a s 218 notice on the debtor was to create a charge over the debt due to the taxpayer (at 456-457):
"A notice under s 218 is not itself a garnishee order although as Mason J in Clyne's case remarked it is certainly very similar to such an order. Particularly, in my view it confers upon the Commissioner not merely the negative right to prevent the taxpayer from accepting payment of the debt or disposing of it, but positive rights, namely a right to give a valid receipt and discharge for the money (s 218(4)): the payment being deemed by that section to have been made under the authority of the taxpayer and there is conferred upon the Commissioner the further right in the event of default or failure to comply with a s 218 notice to apply to the court for an order requiring the convicted person to pay to the Commissioner an amount which the convicted person has refused or failed to pay. Thus the similarity between the s 218 notice and garnishee order is indeed most striking and in my opinion it follows that for the purposes of the Bankruptcy Act there is created in the Commissioner by virtue of the service of the s 218 notice a charge so that the Commissioner becomes for the purposes of bankruptcy law a secured creditor.
…
In my view the effect of a s 218 notice is to charge the debt owed to the taxpayer preventing the debtor from paying it and obliging him to pay it to the Commissioner… [I]t charges the debt in the hands of the debtor (here the Health Commission) who has to pay it. It has, therefore, the effect of making the Commissioner a secured creditor."
71 Hill J also expressed the view that the charge in favour of the Commissioner operates immediately upon the debt coming into existence in a manner similar to that of a floating charge (at 458-459). It followed that, where a s 218 notice is served prior to a sequestration order being made against the taxpayer and the recipient of the notice subsequently becomes indebted to the taxpayer, the charge crystallises immediately the debt comes into existence. The doctrine of relation-back has no application to the notice, since there is no moment of time prior to the crystallisation of the charge during which the debt is payable to the taxpayer.
72 Hill J gave an alternative reason for his conclusion (at 459-460):
"An alternative and perhaps equally satisfactory way of arriving at the same conclusion is to merely give effect to the words of s 218 themselves. As and from the date of the s 218 notice the Health Commission is bound as and when debts become due and payable by it to Dr Edelsten to pay those moneys to the Commissioner. That obligation arises by statute. The fact that subsequently a petition is presented and a sequestration order is made does not alter the character of the moneys as being moneys due or accruing or moneys which may become due to Dr Edelsten at the time the notice takes effect. In other words I do not see why the provisions of the Bankruptcy Act should have the consequence of affecting the proper interpretation of s 218. Although the taxpayer becomes a bankrupt, the provisions of s 218 continue to operate between the date of relation back and the date of the sequestration order as the debts are always subject to the charge created over them by force of s 218. My view that s 218 would have priority over the provisions of the Bankruptcy Act is reinforced by s 218(4) which deems the payment to the Commissioner to be made inter alia with the authority of 'all other persons concerned' there is also an indemnification from such other persons. I see no reason why the trustee in bankruptcy might not for the purpose of s 218(4) be 'an other person'."
It was this alternative which the primary Judge considered to be the preferable approach.
73 Lockhart J agreed with Hill J, but added some observations on the effect of a s 218 notice. His Honour referred to the judgments in Clyne and to a number of subsequent first instance decisions which favoured the view that a s 218 notice creates a charge over the moneys due to the taxpayer in favour of the Commissioner. Lockhart J (at 436) considered that this view was correct:
"Section 218 empowers the Commissioner, by giving the notice in writing under the section, to require the recipient to pay to the Commissioner moneys when they become payable to the taxpayer by the recipient. The section confers on the Commissioner the right to prevent the taxpayer from subsequently dealing with the moneys so as to prevent compliance with the notice by the recipient when the time for payment of the moneys by the recipient to the taxpayer arrives; the section also creates an offence for a recipient to refuse or fail to comply with the notice: s 218(2). Upon payment by the recipient to the Commissioner a valid discharge of the recipient's obligation to the taxpayer is given pro tanto with the amount of the payment: s 218(4). The section operates as a statutory assignment of the moneys payable by the recipient to the taxpayer in favour of the Commissioner in the nature of a charge over those moneys.
In my opinion the notices in this case, upon being served upon the Health Commission, created charges in favour of the Commissioner over debts due by the Health Commission to Dr Edelsten at the time of service of the notices and debts that came into existence and became due thereafter before the making of the sequestration order against Dr Edelsten."
74 von Doussa J dissented, but on grounds that did not require him to address whether service of a s 218 notice has the effect of creating a charge in favour of the Commissioner.
75 In the GIO Case, a majority of the Court (Hill and Beazley JJ; Jenkinson J dissenting) applied the principles laid down in Donnelly. In that case, a s 218 notice was served on an insurer (the GIO) against which the taxpayer had made a personal injuries claim. The notice was served before a sequestration order was made against the taxpayer. However, no debt due to the taxpayer came into existence until after the taxpayer was discharged from bankruptcy. (The debt due by the GIO to the taxpayer was created by a judgment founded on the personal injuries claim.) Hill J, with whom Beazley J agreed, held that if at the time a s 218 notice is served there is no debt due by the addressee to the taxpayer, it is only when a debt due to the taxpayer comes into existence that s 218 operates to work on assignment or create a charge (at 294). Thus the Commissioner was not a secured creditor at the time of the taxpayer's discharge from bankruptcy because no debt to the taxpayer had yet come into existence in respect of which the Commissioner's charge under s 218 could operate. Although he dissented, Jenkinson J (at 286) accepted Hill J's analysis of what had been decided by the majority in Donnelly.
76 Hill J went on to hold that the consequence of the bankrupt being released from all unsecured debts was to exonerate the GIO from any obligation to make payments under the notice. In his view, the words "the amount due by the taxpayer in respect of tax" in s 218(1)(e) mean the amount, if any, actually due by the taxpayer at the time the notice becomes operative to require the person to whom it is given to pay moneys to the Commissioner. Since on discharge from bankruptcy, the taxpayer owed no tax to the Commissioner, the s 218 notice did not oblige the GIO to pay any moneys it owed to the taxpayer to the Commissioner.
77 Subsequent authorities have treated Donnelly and GIO as establishing that the effect of service of a s 218 notice is to create a charge over the debt owing by the recipient to the taxpayer: Smith v Deputy Commissioner of Taxation (No 2) (1997) 15 ACLC 687 (FCA/Mansfield J), at 708; Zuks v Jackson McDonald (1996) 96 ATC 4588 (S Ct WA/Steytler J), at 4598.
78 The Liquidator's submissions suggest that it is by no means inevitable that s 218 should be construed as creating a statutory charge over a debt due by the recipient of the notice to a taxpayer. As Mr Conti pointed out, the language of s 218 does not expressly create a charge over the debt. In this respect, it stands in contrast to s 216(1)(d) of the ITAA which expressly creates a first charge over the estate of a deceased taxpayer in respect of certain tax unpaid at his or her death. Mr Conti also pointed out that the analogy between a s 218 notice and a garnishee order does not necessarily suggest that s 218 creates a charge, since a garnishee order does not effect an assignment of the property of the garnishee: Hall v Richards (1961) 108 CLR 84, at 92, per Kitto J; Blacktown Concrete Services Pty Ltd v Ultra Refurbishing & Construction Pty Ltd (in liq) (1998) 43 NSWLR 484 (Santow J), at 496. It is also correct to say, as Mr Conti did, that the observations of the High Court in Clyne, although carrying persuasive weight, did not authoritatively decide the question.
79 These and other contentions raised by the Liquidator indicate that a plausible argument can be made against the conclusion that service of a s 218 notice creates a statutory charge over debts due to a taxpayer in favour of the Commissioner. But the arguments fall short of demonstrating that the careful analysis of the majority in Donnelly is "plainly wrong" and therefore should not be followed by a later Full Court: Qantas Airways Ltd v Cornwell (1998) 84 FCR 483 (FC), at 489-490; Nguyen v Nguyen (1990) 169 CLR 245, at 268-269, per Dawson, Toohey and McHugh JJ. This conclusion is reinforced by the fact that the predecessor to s 218 was introduced at a time when Crown debts enjoyed priority over other debts of equal degree in bankruptcy and on a winding-up of a company. It is hardly surprising that the language has been seen as calculated to reinforce the priority then (although not now) enjoyed by Crown debts, including income tax. If this result is anomalous, in that it allows the Commissioner by his or her own enforcement actions, to acquire the preferential status of a secured creditor, the anomaly should be corrected by Parliament, or by the High Court should it choose to revisit the question.
80 Once it is accepted that Donnelly should be followed, subject to further arguments as to the effect of the Taxpayer's winding-up, certain conclusions follow:
(i) The service of the s 218 Notices on the Debtors created an interest in the nature of a statutory charge over any debts then due by the Debtors to the Taxpayer. The charge was created notwithstanding that the amounts due to the Taxpayer were not payable until a future date.
(ii) The Notices were also effective to create a statutory charge over any debts coming into existence (whether or not payable immediately) after the date of service, but before commencement of the winding-up.
(iii) To the extent the Commissioner was entitled to a statutory charge over debts due by the Debtors to the Taxpayer, s 471C of the Corporations Law preserves the Commissioner's right to realise or enforce the charge notwithstanding the winding-up of the Taxpayer.
(iv) The Liquidator cannot invoke s 474(1) of the Corporations Law to take control of debts subject to the statutory charge in favour of the Commissioner.
Can the Notices Operate After the Winding-Up Has Commenced?
81 The Debtors, supported by the Liquidator, put forward what Mr Hammerschlag described as a beguilingly simple argument. The steps in the argument are these:
(i) By reason of s 218(1)(e) of the ITAA, a s 218 notice is effective to require the recipient to pay moneys to the Commissioner if, and only if, at the time the notice becomes operative, there is tax due and owing by the taxpayer to the Commissioner;
(ii) The notice becomes operative in the relevant sense only when the recipient has or acquires moneys that are due and payable to the taxpayer;
(iii) In this case, the bulk of the Debts due by the Debtors to the Taxpayer did not become due and payable until 1 July 1998, after the winding-up order had been made;
(iv) The effect of the winding-up order was that no tax was thereafter due and payable by the Taxpayer to the Commissioner, since the Commissioner's debt was converted into a right to prove in the winding-up;
(v) On 1 July 1998, the date the Notices became effective, there was no tax due and payable by the Taxpayer to the Commissioner and thus the Notices did not oblige the Debtors to pay any moneys to the Commissioner.
82 It must be said immediately that this argument, which ultimately depends on the construction of s 218 of the ITAA, produces curious results if correct. On the one hand, s 218(1) (so it has been held) is intended, upon service of a notice, to create in the Commissioner an interest in the nature of a charge over debts due to the taxpayer. One consequence is that the Commissioner becomes a "secured creditor" for the purposes of s 471C of the Corporations Law, whose right to realise or otherwise deal with the security is not affected by the limitations specified in ss 471A and 471B of the Corporations Law. Yet on the Debtors' argument, s 218(1)(e) has the effect of preventing the Commissioner from realising his security after a winding-up order has been made. This must be since, on the Debtors' argument, once a winding-up order has been made against a taxpayer, there can never be a debt due and payable by the taxpayer to the Commissioner.
83 The short answer to the submission would seem to be that, once it is accepted that service of a s 218 notice constitutes the Commissioner a secured creditor, step (iv) in the Debtors' argument is not made out. Unlike an unsecured creditor, a secured creditor of a company in liquidation is entitled to take proceedings against the company or in relation to property of the company. Thus a secured creditor's debt is not merely converted into a right to prove in the winding-up.
84 An implicit assumption in the argument may have been that the alternative view of the operation of s 218 is to be preferred, namely that s 218 does not create a statutory charge but simply operates according to its terms so as to bind the addressee even after the bankruptcy or winding-up of the taxpayer.
85 In this form, the argument relied heavily on the GIO Case, the facts of which have been referred to earlier. Hill J in that case addressed the significance of the fact that the taxpayer, by reason of his discharge from bankruptcy, had been released from the debt due to the Commissioner. His Honour identified the question of construction as follows (at 298):
"[W]hether the words 'the amount due by the taxpayer in respect of tax' in s 218(1)(e) of the ITA Act refer to the amount actually due by the taxpayer for tax at the moment the notice was given, unaffected by subsequent events, or whether they mean the amount, if any, of tax due by the taxpayer at the time the notice becomes operative to require the person to whom it is given to pay moneys to the Commissioner." (Emphasis in original.)
86 His Honour opted for the second of the alternatives because he thought it "hardly conceivable" that the Commissioner could require the addressee of a notice to pay over moneys when the tax debt due by the taxpayer to the Commissioner had been satisfied by payment. The same problem would arise if the tax debt were discharged for other reasons, such as a successful objection or appeal, or the release of the debt upon the taxpayer's discharge from bankruptcy. His Honour thought that the short question was
"whether s 218, in any of these circumstances, contemplates that the recipient of a notice must nevertheless make payment to the Commissioner of tax no longer payable, or whether it is to be construed as requiring the recipient only to make payment in a case where the tax is in fact properly payable."
He answered this question in a passage on which the Debtors relied (at 298-299):
"In my view the latter construction should be adopted. It is unlikely that the parliamentary intention was that the recipient of a notice should make payment to the Commissioner where tax is no longer payable in cases where it would then be incumbent upon the taxpayer to seek to recover from the Commissioner the amount wrongly paid. In my view the proper construction of s 218 is that the words 'the amount due by the taxpayer in respect of tax' refers to so much of the tax due and owing by the taxpayer immediately upon the issue of the s 218 notice as remains due and owing from time to time. So construed the section can be given a sensible operation."
87 It is clear from the context that Hill J was not considering the effect of a s 218 notice which becomes "operative" after a sequestration or winding-up order has been made against a taxpayer. He was directing his remarks to the case where, at the time the s 218 notice becomes operative, the taxpayer's indebtedness to the Commissioner has been discharged whether by payment, judicial or administrative decision or release of the debt. The reference in the passage quoted to "so much of the tax… as remains due and owing from time to time" must be understood within this context.
88 A winding-up order against a taxpayer company does not discharge the tax debt owed by the taxpayer to the Commissioner. It is true that an unsecured creditor is precluded from taking proceedings to recover the debt (s 471C of the Corporations Law) or putting in force any attachment or execution (s 468(4)). Such a creditor instead is entitled to lodge a proof of debt: s 553(1). But this does not mean that the debt is discharged or released.
89 In Clyne v Deputy Commissioner of Taxation (1984) 154 CLR 589, it was held that, where a debtor had already become bankrupt on his own petition, the petitioning creditor could not establish that "the debt or debts on which the petitioning creditor relies is or are still owing" within the meaning of s 52(1)(c) of the Bankruptcy Act. The joint judgment (Gibbs CJ, Murphy, Brennan and Dawson JJ) reasoned as follows (at 594):
"But since the debtor was already bankrupt when the petition came to be heard, the remedies against the person and property formerly available to the Deputy Commissioner had been taken away and there was substituted a right to prove against the estate which had become vested in [the] trustee."
Nonetheless, the judgment specifically acknowledged that
"[a]mounts which were owed by a debtor at the date of the bankruptcy may, notwithstanding his bankruptcy, still be described as debts… They are 'debts' from which the bankrupt is not released until he is discharged from bankruptcy… However,… they are no longer debts 'still owing' within the meaning of s 52(1)(c)… [t]he word ['owing'] connotes a sense of obligation to make the payment. The effect of the bankruptcy… is that the debtor is no longer obliged to pay his creditors…; their right is a right of proof against the estate." (Emphasis added.)
90 The position described by the High Court applies on the winding-up of a taxpayer. The curtailment of the Commissioner's remedies does not discharge or release the debt due by the taxpayer to the Commissioner. The principle applied in the GIO Case does not require or justify a holding that s 218 notice ceases to be operative. Accordingly, the Debtors' argument should be rejected.