CONSIDERATION
47 It is convenient to deal first with the question of whether Markets Nominees, as the applicants contended, had a fixed charge over the debt owing by Local Kids to G8 when the Commissioner gave his notice on 23 December 2010.
48 There was substantial agreement between the parties as to the meaning of the terms "fixed charge" and "floating charge" and the means by which they are to be distinguished.
49 There was agreement that a "fixed charge" is a charge that "without more fastens on ascertained and definite property or property capable of being ascertained and defined": see United Builders Pty Ltd v Mutual Acceptance Ltd (1980) 144 CLR 673 at 686. The assets which are subject to a fixed charge are "permanently appropriated to the payment of the sum charged, in such a way as to give the chargee a proprietary interest in the assets. So long as the charge remains unredeemed, the assets can be released from the charge only with the active concurrence of the chargee": see Re Spectrum Plus (in liq) [2005] 2 AC 680 at 729.
50 A "floating charge", on the other hand, does not specifically affect any of the charged assets unless and until it crystallises into a fixed charge: Luckins v Highway Motel (Carnarvon) Pty Ltd (1975) 133 CLR 164 at 173. Such a charge is "not to be put into immediate operation, but [is] such that the company is to be allowed to carry on its business": Illingworth v Houldsworth [1904] AC 355 at 357. A charge will be a floating charge if the intention of the parties is that the chargor "should be free to deal with the charged assets and withdraw them from the security without the consent of the holder of the charge": Agnew v Commissioner of Inland Revenue [2001] 2 AC 710 at 725.
51 In determining whether a charge is fixed or floating, regard must be had to the terms of the charge deed and the effect of the rights and obligations created by that deed. If the rights and obligations so created are inconsistent with a fixed charge, the charge will be a floating charge, notwithstanding that it might be described otherwise in the deed: Agnew at 725.
52 The fixed charges to which the deed applied are identified in cl 2.2. Although paragraphs (b), (d) and (o) were each referred to in argument as being of potential relevance, the applicants placed primary reliance on paragraph (o). That paragraph created a fixed charge over all of Local Kids' property specified in item 2 of the Schedule. That item covered all of Local Kids' rights "under the Contract of Sale" including the right to receive the proceeds of the sale of the child care centres upon completion of the contract.
53 The Commissioner put in issue the question of whether the "Contract of Sale" referred to in item 2 was the business acquisition contract.
54 The term "Contract of Sale" is defined in cl 13.1 of the deed. Its full terms are set out above at [17]. That contract was defined as "an executed contract of sale to sell the child care centres operated by [Local Kids]" at five of the six premises, identified by their addresses, referred to in the definition.
55 The Commissioner's point was that the business acquisition contract provided for the sale of six businesses not five. The definition included five of the six but omitted the business conducted at 73 Suttontown Road, Mt Gambier.
56 The definition could, undoubtedly, have been framed with greater precision. Nonetheless, the business acquisition contract answers the description of an executed contract of sale to sell the five identified centres. This remains so notwithstanding the fact that the contract also provided for the sale of an additional business. Unsurprisingly, there was no evidence to suggest that any other contract or contracts had been entered into to procure the sale of any of the six businesses.
57 Evidence was called from Mr Lomas and Mr Catalano which was directed to establishing that it had been the intention of the parties to the charge deed to include all six businesses within the definition of "contract of sale" in cl 13.1 of the deed. I do not consider it necessary to have regard to this evidence for present purposes.
58 The Commissioner also drew attention to the words appearing in parenthesis ("if any") in paragraph (o) with a view to submitting that the parties to the deed had contemplated the possibility that item 2 might not contain a reference to any relevant property. Be that as it may, property, including rights under the Contract of Sale were, in the event, specified in item 2.
59 In my opinion, the "Contract of Sale" referred to in item 2 is the business acquisition contract.
60 The next issue is whether cl 2.2(o) created a fixed charge and, if so, over what property.
61 When read together cl 2.2(o) and item 2 created a fixed charge over the business acquisition contract. This included a charge over Local Kids' right to receive the proceeds of the sale of the businesses.
62 Under the contract property in the assets which formed part of each of the child care businesses passed to G8 on 31 May 2010. G8 thereupon became indebted to Local Kids for the sale price. At the time at which the charge was granted and at the time when the Commissioner gave his notice under s 260-5 of the Act, the sale price under the contract was (prospectively) ascertainable but unknown. The calculation could not be made earlier than 1 January 2011 or later than 28 February 2011.
63 It is in these circumstances that the nature of Local Kids' property interests under the contract fall to be determined. It is on that interest that any charge (be it fixed or floating) fastened.
64 The Commissioner framed the relevant question as being whether Markets Nominees could assert a fixed charge over the proceeds of sale as distinct from the right to receive those proceeds. He contended that the answer to the question was: No. This was so for a number of reasons. The first was that the proceeds did not become available until they were paid and this had not occurred by the time the Commissioner's notice was given. Implicit in this submission was the assertion that no legal interest on which any charge could fix arose prior to the proceeds becoming available. Alternatively, the Commissioner argued that any charge that might have been created upon the execution of the charge deed could only have been a floating charge unless and until an event of default occurred and Markets Nominees chose to exercise its rights in respect of that default. The charge continued to be a floating charge until Markets Nominees appointed receivers on 22 February 2011. Any such charge was a floating charge because Local Kids remained free, under the charge deed, until 22 February 2011, to use the proceeds, when they were received, in the ordinary course of its business. It followed that, even if the deed created a charge over the right to receive the proceeds that charge was only a floating charge and so too would be the charge over the right to receive the proceeds.
65 The applicants, on the other hand, submitted that the correct characterisation of the property interest charge was an interest in the debt created by the contract which included the right to receive the purchase price when it was ascertained. Clause 2.2(o) granted a fixed charge over this composite interest.
66 This dispute is to be resolved by reference to the terms of the charge deed with a view to determining "the nature of the rights and obligations which the parties intended to grant each other in respect of the charged assets": Agnew at 725.
67 Once the contract was executed G8 became indebted to Local Kids. That indebtedness was to remain until the sale price was calculated and paid. The debt and the right to the receipt of the sale proceeds upon realisation were distinct assets but they were inextricably linked. As the Privy Council explained in Agnew at 729:
"While a debt and its proceeds are two separate assets, however, the latter are merely the traceable proceeds of the former and represent its entire value. A debt is a receivable; it is merely a right to receive payment from the debtor. Such a right cannot be enjoyed in specie; its value can be exploited only by exercising the right or by assigning it for value to a third party. An assignment or charge of a receivable which does not carry with it the right to the receipt has no value. It is worthless as a security. Any attempt in the present context to separate the ownership of the debts from the ownership of their proceeds (even if conceptually possible) makes no commercial sense."
68 Under item 2 of the charge deed all Local Kids' rights under the contract formed part of the property which was charged pursuant to cl 2.2(o). Those rights included a chose in action (the debt) and the right to receive the proceeds of the sale of the six child care centres. The charge was created on 28 May 2010. It was expressed to be a fixed and specific charge over those assets.
69 The Commissioner sought to maintain a distinction between the proceeds of a debt and the debt itself by reference to cases which had considered the legal effect of notices issued under s 260-5 of the Act and its precursors. He submitted that the effect of service of a notice under s 260-5 was that he obtained the right to receive the proceeds of any sale of property which might subsequently become payable to the debtor. If the Commissioner could only obtain an interest in proceeds once they were realised a charge could, likewise, only fasten on proceeds once realised: prior to that event, the chargee was unable to assert a property interest under the charge which might have priority over the Commissioner's claims.
70 The authorities relied on by the Commissioner do not support the Commissioner's contentions. They recognise that both charges and s 260-5 notices can attach to both an existing debt and its proceeds even if those proceeds are not realisable until some later time. If the chargee has been given security over the debt prior to the giving of a notice by the Commissioner, that right can be asserted and enforced in priority to any rights which the Commissioner may acquire in relation to the debt upon the issue of a notice under s 260-5.
71 In Clyne v Deputy Commissioner of Taxation (1981) 150 CLR 1 at 23 Mason J (with whom Aickin and Wilson JJ agreed) considered the operation of s 218(1)(a)(i) of the Income Tax Assessment Act 1936 (Cth) which was a forerunner of s 260-5. His Honour said that:
"The section relates to moneys owing to the taxpayer when the notice is given, it imposes an obligation to pay forthwith moneys which are then payable; it imposes an obligation to pay moneys which become payable at a future time when that time arrives. It does not explicitly prescribe as a condition preliminary to the creation of the obligation to pay that the moneys owing to the taxpayer at the date of the notice shall continue to be owing to him when they become payable. It merely requires the recipient to pay to the Commissioner when they become payable moneys owing to the taxpayer at the date of the notice …
There will be cases when a party other than the taxpayer by virtue of an antecedent security asserts in priority to the Commissioner rights to moneys not payable when the notice is served where the security is perfected after service of the notice and before the debt becomes payable."
His Honour had earlier (at 19) noted that "the effect of the service of a s 218 notice is to prevent a taxpayer from thereafter assigning a debt, the subject of the notice, so as to defeat the Commissioner's right to payment in accordance with that section." (Emphasis added).
72 These principles have been applied in subsequent cases.
73 In Deputy Commissioner of Taxation v LAI Corporation Pty Ltd [1987] WAR 15 the Full Court of the Supreme Court of Western Australian considered the meaning and effect of s 38 of the Sales Tax Assessment Act (No 1) 1930 (Cth). Section 38 was, as Burt CJ observed (at 21) "for all practical purposes in the same terms as s 218(1)." Having referred to Mason J's reasons in Clyne, his Honour said, at 22, that:
"I think it should be held that the Commissioner receives the debt subject to all charges which are then, that is to say at the time of the service of the s 38 notice, attached to it. So if at that time the Bank's security was a floating security which had not crystallized there would be no security attaching to the debt. It would, as they say, be 'hovering' over it. If, on the other hand, the Bank's security over the book debts was at all times fixed or if it was when created floating but as at the time when the s 38 notice was served it had crystallized and so had become fixed, the Commissioner would take the debt subject to that security."
74 A similar approach is evident in the decision of the Full Court of this Court in Macquarie Health Corporation Limited v Federal Commissioner of Taxation (1999) 96 FCR 238. In this case the Court considered the legal effect of the issuing of a notice under s 218. Having referred to a number of authorities including Clyne and Commissioner of Taxation v Donnelly (1989) 25 FCR 432 their Honours (at 258-9) expressed certain conclusions. They were that:
"(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) …"
75 As these decisions make clear charges and notices under s 260-5 can both fix on debts and the proceeds of the debts which do not become payable until some later time. I, therefore, accept the applicants' submission that Markets Nominees, upon the execution of the charge deed, held a charge over the debt owed by G8 to Local Kids. That charge was in force at the time at which the notice under s 260-5 was given.
76 The Commissioner further contended that, notwithstanding the express terms of cl 2.2(o) and Item 2, the charge thereby granted was not a fixed charge. He submitted that there were other provisions of the charge deed which were inconsistent with the charge being treated as fixed. He directed attention to cl 3(b) and, in particular, to the second sentence. The clause was headed "Dealings with Secured Assets". It required that Local Kids:
"Not sell, assign, let, part with possession, mortgage, charge, encumber, or otherwise dispose of or deal with the Secured Assets despite any power implied by statute or otherwise without [Markets Nominees] prior written consent. Unless an Event of Default occurs, [Local Kids] may retain possession of the Secured Assets and may use, operate, maintain and control the Secured Assets in the ordinary course of its business."
77 The Commissioner submitted that, in the absence of an event of default, Local Kids was free to use and control the proceeds of the sales in the ordinary course of its business. So construed cl 3(b) was inconsistent with the charge granted by cl 2.2(o) being a fixed charge.
78 The first sentence of cl 3(b) imposed stringent obligations on Local Kids. Local Kids could not dispose of or deal with any secured assets without Markets Nominees' consent in writing. The second sentence operated as a qualification on the restriction contained in the first. It is necessary to pay careful attention to the language of the second sentence.
79 It permitted Local Kids to "retain possession" of any of the secured assets, including those charged by cl 2.2(o). It did not contemplate Local Kids disposing of any such assets. What it does qualify is the restriction on dealing with secured assets. Local Kids could, therefore, inter alia, use or control secured assets in the ordinary course of its business.
80 Each of the parties relied on a variety of dictionary definitions of the words "control" and "use" with a view to supporting their positions. It may be accepted that a range of nuanced meanings are conveyed by each of the words. It may also be accepted that some of those meanings are broad enough to permit the disposal of or dealing with secured assets. Clause 3(b) must, however, in my opinion, be read as a whole. There are ordinary and natural usages of both the words "control" and "use" which allow the clause to be read coherently.
81 It is to be borne in mind that cl 2.2 of the charge deed in terms created a fixed charge over a range of assets apart from the property rights identified in paragraph (o). Those assets included real estate, plant equipment and machinery and computer software and computer records. Assets such as these can clearly be controlled or used without being disposed of or otherwise dealt with in a manner inconsistent with the restrictions imposed by the first sentence. To the extent that the proceeds of the sales themselves constituted a secured asset those proceeds could be controlled or used by Local Kids without being disposed of. They could, for example, have been placed in an interest bearing account and been available at call.
82 In seeking to ascertain the intentions of the parties it is also necessary to notice the provisions of cl 3(c)(i) of the deed. Relevantly, it required that Local Kids maintain Markets Nominees' rights to the secured assets and not cause or permit anything to be done by which any part of those assets might be rendered of limited or reduced value to Markets Nominees. The broad reading of the second sentence of cl 3(b), for which the Commissioner contends, would render Markets Nominees' rights under cl 3(c) of little or no utility.
83 There are parts of the irrevocable authority which also have a bearing on the construction of cl 3(b). The irrevocable authority was executed on the same day as the charge deed by Markets Nominees and Local Kids. By cl 6.2 (see above at [28]) it was provided that the charge over the contract of sale was a fixed charge, that the charge was created by the charge deed and that, to the extent of any inconsistency, the terms of the irrevocable authority were to prevail over those of the charge deed.
84 By cl 7 of the irrevocable authority (see above at [29]) Local Kids was prevented from disposing of or dealing with the contract of sale or the sale assets without Markets Nominees' consent and was required to maintain Markets Nominees' rights to and under the contract.
85 If the Commissioner's broad construction of the second sentence of cl 3(b) of the charge deed were to be accepted, it would give rise to an inconsistency with cl 7 of the irrevocable authority which contains no provision equivalent to the second sentence. That inconsistency would, under cl 6.2 of the irrevocable authority, be resolved by the upholding of Markets Nominees' rights under cl 7.
86 It follows, in my opinion, that there was nothing in cl 3(b) of the charge deed which suggested that the charge created by cl 2.2(o) of the deed was not a fixed charge.
87 For these reasons I have concluded that the charge deed granted a fixed charge over the debt and the proceeds of the sale of the six businesses which were formerly owned and operated by Local Kids. I further find that that fixed charge was in existence at the time at which the Commissioner gave his notice under s 260-5 of the Act and that the Commissioner, upon the giving of the notice, secured a charge over the same property but did so subject to Markets Nominees' charge.
88 These findings make it unnecessary for me to examine the alternative bases of the applicants' claims. I would, nonetheless, indicate that I found force in the last of the applicants' series of cascading contentions.
89 That last contention was that, even if Markets Nominees held only a floating charge prior to 23 December 2010, that charge crystallized on that day as a fixed charge to which the Commissioner's interest was subject.
90 The starting point in considering this contention is cl 2.5(d) of the charge deed. It provided for any floating charge granted to Markets Nominees automatically and immediately converting to a fixed charge if "any notice is issued under which any Government Agency … may rank ahead of the Chargee."
91 It was common ground that, if Markets Nominees did not have a fixed charge over the debt and/or the proceeds of sale, it at least held a floating charge over that property. Both parties also accepted that the Commissioner was a "Government Agency" for the purposes of cl 2.5(d).
92 Under s 260-5 of the Act the Commissioner secures an interest over a debt or the proceeds thereof upon the giving of a written notice to a person who is indebted to the taxpayer: see s 260-5(2). It is implicit in the section that the obligation to comply with the notice only arises when it is given to the person who owes money to the taxpayer: see ss 260-5(2); 260-20. The Commissioner is also under an obligation to send a copy of the notice to the taxpayer: see s 260-5(6).
93 Before any notice can be given to the indebted person or sent to the taxpayer it must be prepared, considered and then signed by the Commissioner or one of his delegates. Further steps will then be necessary in order that the signed notice be given to the indebted person.
94 Clause 2.5(d) operates to convert a floating charge to a fixed charge at the time at which the s 260-5 notice is "issued". The word "issue" bears many meanings. Among those meanings, according to the Macquarie Dictionary, are "the act of sending, or promulgation", "to put out" and "to be sent or put forth authoritatively or publicly, as a writ, money, etc." According to the New Shorter Oxford English Dictionary, the word can mean "proceed as from a source; take ones or its origin, be derived, spring"; and "give or send out authoritatively or officially; publish …". When used in these ways, a notice under s 260-5 can be said to have "issued" at the time it was authenticated or published or was despatched from the Commissioner's office prior to the notice being given to the indebted person. If, therefore, the word "issued" bears one of these meanings, cl 2.5 of the deed would have operated to create a fixed charge in favour of Markets Nominees before the Commissioner's notice was "given" to G8. Upon the notice being given to G8 the Commissioner would also have had a charge but it would have been subject to the one already held (albeit for perhaps a very short time) by Markets Nominees.
95 It must be acknowledged that both dictionaries also attribute other meanings to the word "issue" which are synonymous or closely synonymous with "give to". The Macquarie Dictionary, includes "the act of … delivery", "to … deliver for use" and the Oxford Dictionary includes amongst relevant meanings "give (something) out officially (to) a person; supply (a person) officially with."
96 It is unlikely that these alternative meanings were intended by the parties to the deed. Clause 2.5(d) is plainly intended to be pre-emptive; that is to say it is meant to ensure that Markets Nominees' rights are to be protected against the possibility that they might be displaced and subordinated to claims made by a public agency such as the Commissioner. Such an intention would be frustrated if Markets Nominees' charge only became fixed at the same moment that the Commissioner acquired an equivalent interest. It is, therefore, far more likely that the parties to the deed intended that "issued" bore one of the former groups of meanings.
97 For these reasons, I would, had it been necessary, have determined that Markets Nominees obtained a fixed charge over the relevant debt and proceeds thereof, by operation of cl 2.5, which ranked in priority over the interests obtained by the Commissioner upon the giving of the notice to G8.
98 It was common ground that, if the charge was a fixed charge and, as I have held, it was created upon the execution of the deed, any charge which was created in favour of the Commissioner over the debt upon the giving of the notice under s 260-5 of the Act, was subject to the existing fixed charge in favour of Markets Nominees. This agreed position is consistent with authority: see LAI Corporation; Tricontinental Corporation Limited v Commissioner of Taxation (Cth) [1988] 1 Qd R 474.
99 The applicants have made demands of the Commissioner for the return of the full amount of the purchase monies. The Commissioner has failed to comply with those demands.