Commissioner of Taxation v Macquarie Health Ltd
[1998] FCA 1365
•29 OCTOBER 1998
FEDERAL COURT OF AUSTRALIA
TAXATION – where notices under s 218 of the Income Tax Assessment Act issued to debtors of taxpayer – whether s 218 operates only in respect of tax payable at the time when the money due by the recipient becomes payable – effect of s 218(6A) where money payable on demand but where no demand has been made – where entries in taxpayer’s books purported to reduce the indebtedness of the debtors.
INSOLVENCY – effect of s 474 on custody, control and beneficial ownership of a company’s assets – effect of winding up on creditor’s remedies – whether debt ceases to exist upon winding up – whether the expression “immediately before” in s 513A(b) has meaning different from the expression “when” in s 513A(a) – whether taxpayer in administration “immediately before” the making of winding up order – whether, where taxpayer in liquidation, Commissioner should be treated as secured or unsecured creditor in respect of amounts referred to in notices issued under s 218 – whether s 468 Corporations Law operates to prevent effect being given to the words of s 218 – whether compliance with a s 218 notice constitutes an “attachment” within the meaning of s 468(4) of the Corporations Law –effect of subsequent s 218 notice on an earlier notice – whether s 218 notice given after the commencement of the winding up is void as being a disposition of property by a taxpayer – whether giving of a s 218 notice is a “transaction” within the meaning of s 588FE of the Corporations Law – whether taxpayer is a “party” to the notice – whether a recipient of a notice is a “party” to the notice.
TRUSTS – whether payments made by agent of a partnership to a taxpayer were made in breach of fiduciary duty – whether taxpayer received payments with knowledge of breach of fiduciary duty such that those moneys were held on constructive trust by the taxpayer for the partners – whether, when trust moneys have been intermingled with the taxpayer’s own assets and the taxpayer’s assets are subject of constructive trust, are no longer identifiable – effect of s 47 of Limitation Act1969 on recovery of trust property – whether, where trustees and beneficiaries subject to “control” of same persons, inference should be drawn of knowledge and approval on the part of beneficiaries of the conduct of the trustees – whether any loss suffered by partners as result of payments made to taxpayer.
PRACTICE AND PROCEDURE – whether parties should be permitted to relitigate matters dealt with on a final basis in earlier proceedings – where evidence in the two proceedings is substantially similar – where there is not identity of parties between present and earlier proceedings.
Income Tax Assessment Act 1936 (Cth), ss 204, 216, 218, 222ARA
Corporations Law, ss 435C, 436A, 447A, 468, 471A(1), 471B, 471C, 474(1), 482, 513A, 513C, 588FA, 588FC, 588FE
Limitation Act 1969 (NSW), s 47
Commissioner of Taxation v Donelly (1989) 25 FCR 432, followed
Clyne v Deputy Commissioner of Taxation (1981) 150 CLR 1, followed
Ayerst v C&K (Construction) Pty Ltd [1975] 2 All ER 537, cited
Commissioner of Taxation v Government Insurance Office of New South Wales (1993) 45 FCR 284, distinguished
Re Cole; Ex parte Richards (1966) 9 FLR 190, cited
Federal Commissioner of Taxation v S Hoffnung & Co Ltd (1928) 42 CLR 39, cited
Effem Foods Pty Ltd v Trawl Industries of Australia Pty Ltd (1993) 43 FCR 510, cited
Reichel v Mcgrath (1889) 14 App Cas 665, cited
Hunter v Chief Constable of the West Midlands Police [1982] AC 529, cited
Haines v Australian Broadcasting Corporation (1995) 43 NSWLR 404, cited
Hospital Products Limited v United States Surgical Corporation (1984) 156 CLR 41, cited
Barnes v Addy (1874) 9 Ch App 244, followed
Hagan v Waterhouse (1991) 34 NSWLR 308, followed
Brady v Stapleton (1952) 88 CLR 322, followed
In Re Hallett’s Estate (1879) 13 Ch D 696, followed
James Rosco (Bolton) Ltd v Winder [1915] 1 Ch 62, distinguished
Beach Petroleum NL v Johnson (1993) 43 FCR 1, followed
Vacuum Oil Co Pty Ltd v Wiltshire (1945) 72 CLR 319, cited
COMMISSIONER OF TAXATION V MACQUARIE HEALTH CORPORATION LIMITED & ORS
NG 118 of 1996, NG 445 of 1998 and NG 812 of 1998
EMMETT J
SYDNEY
29 OCTOBER 1998
IN THE FEDERAL COURT OF AUSTRALIA
NG 812 OF 1998 NG 118 of 1996
NEW SOUTH WALES DISTRICT REGISTRY
NG 445 of 1995
BETWEEN:
COMMISSIONER OF TAXATION
ApplicantAND:
MACQUARIE HEALTH CORPORATION LIMITED
First RespondentBUSINESS AND PROFESSIONAL LEASING PTY LTD
Second RespondentRYNDALE PTY LTD
Third RespondentSARZANA HOLDINGS PTY LTD
Fourth RespondentRICHARD WALTER PTY LIMITED (IN LIQUIDATION)
Fifth RespondentAT HOLDINGS PTY LTD
Sixth RespondentMORLEA PROFESSIONAL SERVICES PTY LTD
Seventh Respondent
JUDGE:
EMMETT J
DATE:
29 OCTOBER 1998
PLACE:
SYDNEY
REASONS FOR JUDGMENT
HIS HONOUR:
THE PROCEEDINGS
I have three separate proceedings before me, although the parties to all three are the same. The Commissioner of Taxation (“the Commissioner”) is the applicant. Macquarie Health Corporation Limited (“MHC”), Business and Professional Leasing Pty Ltd (“B&P Leasing”), Ryndale Pty Ltd (“Ryndale”) and Sarzana Holdings (“Sarzana”) are the first four respondents (together “the Debtors”). Richard Walter Pty Ltd (In Liquidation) (“the Taxpayer”) is the fifth respondent. Morlea Professional Services Pty Ltd (“Morlea”) and AT Holdings Pty Ltd (“AT”) are the sixth and seventh respondents (together “the Trustees”).
The Commissioner’s claim concerns notices (“the Notices”) given by the Commissioner to the Debtors under section 218 of the Income Tax Assessment Act 1936 (Cth) (“the Assessment Act”) requiring them to pay to the Commissioner moneys which were or may become due by the Debtors to the Taxpayer. In the events which have happened, there is no significant dispute between the Debtors and the Commissioner. It is common ground that moneys (“the Debts”) were owing by the Debtors to the Taxpayer at the times of service of the Notices although there is a dispute as to the extent to which those moneys were payable at those times. The amounts of the Debts have now been paid into Court in circumstances which I shall describe below.
The real issues in the proceedings arise from cross claims. On 28 February 1997, Hill J ordered that the Taxpayer be wound up and appointed Mr Gregory Hall (“the Liquidator”) as liquidator of the Taxpayer. The Liquidator contended that the Commissioner should be treated in the winding up of the Taxpayer as an unsecured creditor in respect of all tax. He claimed, accordingly, that the moneys in Court should be paid to him, as comprising an asset of the Taxpayer which should be subject to his control as liquidator. The Commissioner, on the other hand, claimed to be a secured creditor in respect of the Debts to the extent of the amounts of tax referred to in the Notices. The Commissioner seeks payment out of Court of sufficient of the moneys to enable the amount of assessments issued under the Assessment Act to the Taxpayer to be paid in full.
The Trustees, however, claim that all of the property of the Taxpayer is held on a constructive trust for the Trustees, to the extent of the amount of payments which were made to the Taxpayer between 24 May 1981 and 30 June 1984 from the funds of a partnership known as the Morlea Partnership, which I shall describe below. That claim is based on the contention that those payments were made in breach of fiduciary duty or in breach of trust and that, as a consequence, a constructive trust was imposed on property of the Taxpayer, which includes the Debts, to the extent of the payments in question and interest thereon.
The Commissioner served Notices on each of the Debtors on 7 July 1992 (“the First Notices”). On 26 September 1995, the Commissioner served additional Notices on MHC, Sarzana and B&P Leasing (“the Second Notices”). On 4 February 1997, the Commissioner served a further Notice on MHC (“the Third Notice”). Each of the Second and Third Notices was said, in a covering letter served with it, to be an amended notice.
The principal proceeding, NG 118 of 1996, was commenced on 16 February 1996 after the service of the First Notices and the Second Notices but before service of the Third Notice of 4 February 1997 on MHC. The second proceeding, NG 445 of 1998, was commenced on 13 May 1998 in response to a contention by the Debtors that any cause of action based on the Third Notice had not arisen when the principal proceeding was commenced.
It is common ground that, when each of the Notices was served, a very substantial part of the Debts was not then payable. The terms of repayment of the Debts were regulated by written loan agreements and other arrangements between the Debtors and the Taxpayer which were in place before the service of any of the Notices. However, on 27 November 1997, the Taxpayer, the Liquidator, the Commissioner, the Debtors and other parties entered into a settlement deed (“the Settlement Deed”) which, inter alia, varied the arrangements between the Debtors and the Taxpayer concerning payment of the Debts.
The Settlement Deed relevantly provided that if a “Default Event” as defined in the Settlement Deed occurs, the Debts were to become due and payable immediately. The Settlement Deed provided, in addition, that if there was a Default Event before 1 July 1999 and the principal proceeding had not been finally determined so that an amount was payable but the issue of whether the amount should be paid to the Taxpayer, the Commissioner, or otherwise had not been resolved, then the Debts were to be paid into Court pending the final determination of the principal proceeding. A Default Event as defined occurred on 1 July 1998. Accordingly, on 4 August 1998 the sum of $21,290,886.00 was paid into Court by the Debtors pursuant to orders made by consent.
On 11 August 1998, proceeding NG 812 of 1998 was commenced by the Commissioner. The statement of claim in that proceeding refers to the Settlement Deed and the moneys paid into Court. Those proceedings were commenced by the Commissioner to avoid any contention that no cause of action under section 218 for recovery of any moneys from the Debtors arose in favour of the Commissioner until the moneys had actually become payable by the Debtors.
THE PARTIES
The Wenkart Group
The proceedings concern the affairs of a group of companies connected with Thomas Richard Wenkart (“Dr Wenkart”). In 1972, pursuant to a scheme of arrangement, Dr Wenkart formed Morlea Pathology Services Pty Ltd to run a pathology laboratory (“the Pathology Business”). From 1 February 1977, Geoffrey Albert Holden (“Mr Holden”) was the financial controller of the Pathology Business. The Pathology Business generated the majority of cash flow for a group of companies known as the Wenkart group of companies (“the Wenkart Group”). All members of the Wenkart Group have some connection with Dr Wenkart. One member of the Wenkart Group was the Taxpayer. The Debtors are also members of the Wenkart Group.
In 1977, the Taxpayer had a small number of investments but its main function, which increasingly became its dominant function, was to act as the financier of the Wenkart Group. For that purpose, the cash position and cash needs of each company in the Wenkart Group were reviewed daily. If any company had a significant credit balance with the Wenkart Group’s bankers, that money was taken over into the account of the Taxpayer by way of loan and if any company needed additional funds, that money was lent by the Taxpayer to that company. If the Wenkart Group as a whole had surplus cash funds, that surplus was invested by the Taxpayer, either in fixed term deposits or with other financial institutions, to achieve the best available return in light of the security and terms available.
From time to time, if the Wenkart Group as a whole needed additional funds, then it was the Taxpayer which made the overdraft arrangements or long term accommodation with bankers or other financial institutions to secure the necessary working capital for the Wenkart Group. In some cases, if long term finance was required for a project, then the company concerned would borrow directly from the bankers on security of a first mortgage over its assets and the balance of working capital would be borrowed by the Taxpayer by overdraft or bill facility from bankers and lent to the company requiring funds. To support the overdraft facilities, other companies in the Wenkart Group often made available properties and granted security by way of third party mortgages to bankers or other financial institutions.
In December 1977, the beneficial interest in the assets of the Pathology Business had been transferred to Morlea as trustee of the Morlea Unit Trust. In 1981 the manner in which the Pathology Business was conducted was reorganised. As a result of the transactions constituting the 1981 reorganisation, the beneficial interest in the Pathology Business, which had up to 25 May 1981 been conducted by Morlea as trustee of the Morlea Unit Trust, became vested in the Morlea Partnership and was thereafter conducted by Morlea in its capacity as agent of the Morlea Partnership.
The Liquidator’s Position
In substance, the first cross-claim could be characterised as an application to the Court by the Liquidator for directions in the winding up of the Taxpayer pursuant to section 479(3) of the Corporations Law. The Liquidator seeks a determination as to the priorities which should be applied in the winding up of the Taxpayer and, in particular, whether the Commissioner is entitled to any priority in respect of the Debts of the Debtors, which are now represented by the money in Court.
The Liquidator is a cross-claimant in the first cross-claim. That appears to me to be an irregularity. A cross-claim ought not be filed in proceedings except by a respondent in the proceedings or a cross-respondent in the proceedings. However, no objection was raised by any of the other parties to the proceedings continuing on the basis that the first cross-claim is properly constituted and that the Liquidator was properly joined as a party.
Neither the Debtors nor the Trustees are parties to the first cross-claim. However, the Debtors apparently have an interest in the outcome of the proceedings as unsecured creditors of the Taxpayer. Notwithstanding that the Debtors probably have no legal standing in relation to the issues raised in the cross-claim, counsel for the Debtors was permitted to address on certain of those issues. I permitted that course on the basis that counsel for the Liquidator would adopt those submissions and did not wish to duplicate them.
The Trustees’ Position
The position of the Trustees is not uncomplicated and the position of AT is different from that of Morlea. In essence, the claim made in the second cross-claim is that Morlea, in its capacity as agent for the members of the Morlea Partnership, acted in breach of its fiduciary duty in making the payments in question to the Taxpayer. The members of the Morlea Partnership were Morlea in its capacity as trustee of the Aurelius Unit Trust and Aborda Pty Limited (“Aborda”) in its capacity as trustee of the Aborda Trust. Aborda is no longer trustee of the Aborda Trust. It was removed in May 1997 when AT was appointed as trustee.
Thus, Morlea acted in two capacities. In one capacity, as trustee of the Aurelius Unit Trust, it was a member of the Morlea Partnership with Aborda. However, in another capacity, it was the agent of the partners, who included itself in that first capacity. Accordingly, Morlea owed a fiduciary duty, as agent of the Morlea Partnership, both to itself in its capacity as trustee of the Aurelius Unit Trust and to Aborda. Aborda is not a respondent in any of the proceedings. However, it is a cross-respondent to the second cross-claim. Both Morlea and AT are respondents in the proceedings, having been joined as proper parties, since it is at least arguable that the Commissioner’s claim is a claim in rem against the money in Court in respect of which Morlea and AT assert an interest.
In the second cross-claim, the claims of AT and Morlea are made in their capacities as members of the Morlea Partnership. They do so in their respective capacities as trustee of the Aborda Trust and the Aurelius Unit Trust. In so far as their claims are based upon breach of fiduciary duty by Morlea in its capacity as fiduciary agent of the partners, their capacity as such trustees is not relevant.
However, they also make claims in their respective capacities as trustees of those trusts. Such claims may not be open to them in the absence of any order under Order 6 rule 13 of the Federal Court Rules appointing them to represent the beneficiaries of their respective trusts. Under Order 6 rule 14, if the proceedings concern trust property of those trusts, there would be no requirement for the beneficiaries to be joined. Any order made in the proceedings would bind the beneficiaries. However, according to the analysis which I have set out above, the property in question is not trust property of the Aurelius Unit Trust or the Aborda Trust. Rather, it is property held by them in their capacities as members of the Morlea Partnership and in respect of which they assert a right in rem by reason of the alleged breach of fiduciary duty by Morlea in its capacity as a fiduciary agent of the partners.
Accordingly, the Trustees, in the capacity in which they are parties, do not have capacity to make claims on behalf of the beneficiaries of those trusts. It may be that the fruits of any claims upon which they succeed will be held by them on the terms of the Aborda Trust and the Aurelius Unit Trust respectively. Before they are permitted to disperse any such fruits, however, it may be necessary for further judicial intervention to determine who is entitled to the fruits. Those questions may be of significance at this stage because of issues which have been raised concerning the Limitation Act 1969 (NSW) and equitable defences of laches, acquiescence and delay pleaded on behalf of the Taxpayer.
The respondents to the second cross-claim, apart from Aborda, which has not participated in the proceedings, are the Taxpayer, the Debtors and the Commissioner. The Debtors no longer have any direct interest in the outcome of the second cross-claim. That is to say, once any dispute as to the amount of any indebtedness was resolved, the Debtors were virtually in the position of interpleaders and, pursuant to the Settlement Deed, they have paid the subject matter of the competing claims into Court.
The thrust of the second cross-claim was that the Taxpayer received the payments in question with knowledge that they were made in breach of fiduciary duty so as to impose a constructive trust on the Taxpayer. The primary respondent to the second cross-claim is, of course, the Taxpayer. Notwithstanding that the Taxpayer was the primary respondent to the second cross-claim, senior counsel for the Commissioner addressed at length on the issues raised on behalf of the Taxpayer. The Commissioner also has a direct interest in the outcome of the second cross-claim. In so far as he asserts, as against the Liquidator, a priority in respect of the Debts, he has an interest in supporting the Taxpayer’s resistance to the claims made in the second cross-claim. If they succeed, they will substantially reduce the assets of the Taxpayer in respect of which the Commissioner seeks priority. It was accepted by the Commissioner, however, that his claims in relation to the Debts do not rise any higher than the Taxpayer’s and that his claim in respect of the Debts is subject to any claim under the second cross-claim which succeeds.
It was not until the hearing began that the Taxpayer sought to raise by way of defence to the second cross-claim matters which had previously been raised only by the Commissioner. There may be some doubt as to the standing which the Commissioner would have had to raise those matters if they had not been raised by the Taxpayer. I gave leave to the Taxpayer to file an amended defence to the second cross-claim raising the substantive matters which had previously been raised only by the Commissioner. Had these matters not already been raised and put in issue by the Commissioner, it may have been difficult for the Trustees to meet them. However, leave was granted because the Trustees had been put on notice that the issues would be raised by the Commissioner and did not suggest that they were not in a position to meet those matters when also raised directly by the Taxpayer.
THE PRINCIPAL CLAIM
One question which remains as between the Debtors and the Commissioner was whether or not any money was actually payable by the Debtors to the Taxpayer at the time when the Notices were served. The issue arose in the context of the submission that section 218 only operates in respect of tax payable at the time when a notice becomes operative, namely, at the time when the money due by the recipient becomes payable. It is only at that time that a recipient would have any obligation to pay to a taxpayer. It was common ground that the Commissioner is not in any better position qua a recipient of a notice under section 218 than a taxpayer would be in relation to the money which is the subject of such a notice. The question remains live in so far as it determines which of the proceedings can be relied on by the Commissioner to obtain a judgment against the Debtors. That may have some consequence in relation to interest and costs.
There are three categories of indebtedness which were affected by the Notices. They were as follows:
(a)The balance of loans payable by the Debtors to the Taxpayer. Loans made by MHC, B&P Leasing and Sarzana to the Taxpayer were each the subject of separate loan agreements dated 30 June 1990, 30 June 1989 and 8 April 1992 respectively. The loan agreements provided for terms expiring on 30 June 1999, 30 June 1998 and 8 April 2002 respectively. All of the Notices were served before those dates. Clearly, the indebtedness in respect of principal was not due and payable at the time of service of any of the Notices. The Settlement Deed varied those dates to provide for repayment on or before 1 July 1999 or on the occurrence of an event of default. The loans made to Ryndale were payable on demand. No demand had been made at the time of service of the First Notices.
(b)Interest payable under each of the loan agreements. Clause 3 of each of the loan agreements provided as follows:
The Principal amount of the loan will accrue interest on a daily basis at a rate of interest to be determined each year with the right of waiver of interest, determined by the parties to this agreement each year.
There was no other provision for the payment of interest. Each year interest was in fact capitalised. In relation to interest capitalised prior to the receipt of any of the Notices, it was accepted that the interest was not due and payable at the time of receipt of that Notice. However, in relation to interest which accrued after receipt of a Notice, the question arises as to whether it should be capitalised or remain payable.
A rate was in fact agreed upon as contemplated by clause 3. Thus, interest accrued at that rate. There was no evidence of any time having been agreed for payment. It follows, therefore, that the interest was payable on demand although no demand has been made.
The Commissioner contended that the effect of section 218(6A) is to obviate the need for demand. I do not accept that contention. Section 218(6A) provides that where money is not due or repayable on demand unless a condition is fulfilled, the money is to be taken to be due or repayable on demand notwithstanding that the condition has not been fulfilled. The Commissioner contended that the making of a demand was a condition and that the provision operated to obviate the need for a demand. That provision, however, has nothing to do with the need for a demand. When section 218 refers expressly to money being due or repayable on demand, it is clearly concerned with a condition other than the making of a demand.
Nevertheless, where, at the time of service of a notice, amounts are payable on demand, the Commissioner is not required to wait for the relevant taxpayer to make a demand. That is to say, where money is payable on demand, it becomes payable on service of a notice. The service of the notice is in effect a demand by the relevant taxpayer. It follows that interest which had not been capitalised prior to service of one of the Notices was money due at the date of service within the meaning of section 218(1).
(c)Rent payable by MHC to the Taxpayer in respect of its occupation of premises owned by the Taxpayer. In practice, rent was capitalised at the end of each year. Any rent which was capitalised prior to receipt of one of the Notices would not be payable to the Commissioner until it became payable under the arrangements between MHC and the Taxpayer. In so far as it was payable on demand, it is in the same category as interest. Rent which accrued after the service of one of the Notices would, by reason of the Notice, become payable to the Commissioner when it accrued due to the Taxpayer.
After service of the First Notices, entries were made in the books of the Taxpayer debiting and crediting the loan accounts of the Debtors with the Taxpayer. Many of the entries were debits and related to interest which accrued on the balance of the loan accounts. They are amounts which accrued or became due after the service of the First Notices. Those amounts are dealt with above. However, there were also several entries which were credits reflecting a reduction in the loan accounts. The Commissioner contended that in so far as those credits were in substance payments to the Taxpayer by the Debtors, they were ineffective to reduce the indebtedness of the Debtors.
The effect of service of a notice under section 218 is that the recipient is bound by the terms of the notice and may not pay moneys within the scope of the notice – Clyne v Deputy Commissioners of Taxation (1981) 150 CLR 1 at 22 and Commissioner of Taxation v Donnelly (1989) 25 FCR 432 at 451. That is to say, the relevant taxpayer can no longer give a good discharge in respect of such moneys. To the extent that there is an amount due by the taxpayer in respect of tax, only the Commissioner can give a good discharge. Accordingly, the purported credits to the loan accounts of the Debtors did not reduce the amount of the loan accounts as against the Commissioner. It follows that the Notices attached the balances of the loan accounts of the Debtors recorded in the books plus the amounts of those credits. Subject to the contentions of the Liquidator and the Trustees, the amounts of the credits should have been paid by the Debtors to the Commissioner.
FIRST CROSS CLAIM
The Issues
The first cross-claim raises issues concerning the effect of service of notices under section 218 of the Assessment Act in the context of Chapter 5 of the Corporations Law (“the Law”).
Section 218 of the Assessment Act provides as follows:
218(1) The Commissioner may at any time, or from time to time, by notice in writing (a copy of which shall be forwarded to the taxpayer at his last place of address known to the Commissioner), require:
(a)any person by whom any money is due or accruing or may become due to a taxpayer;
(b)any person who holds or may subsequently hold money for or on account of a taxpayer;
(c)any person who holds or may subsequently hold money on account of some other person for payment to a taxpayer; or
(d)any person having authority from some other person to pay money to a taxpayer;
to pay to the Commissioner, either forthwith upon the money becoming due or being held, or at or within a time specified in the notice (not being a time before the money becomes due or is held):
(e)so much of the money as is sufficient to pay the amount due by the taxpayer in respect of tax or, if the amount of the money is equal to or less than the amount due by the taxpayer in respect of tax, the amount of the money; or
(f)such amount as is specified in the notice out of each payment that the person so notified becomes liable from time to time to make to the taxpayer until the amount due by the taxpayer in respect of tax is satisfied;
and may at any time, or from time to time, amend or revoke any such notice, or extend the time for making any payment in pursuance of the notice.
218(2) Any person who refuses or fails to comply with any notice under this section is guilty of an offence.
Penalty:$1,000.
218(3) Where a person (in this subsection referred to as the “convicted person”) is convicted before a court of an offence against subsection (2) in relation to the refusal or failure of the convicted person or another person to comply with a notice under this section, the court may, in addition to imposing a penalty on the convicted person, order the convicted person to pay to the Commissioner an amount not exceeding the amount or the aggregate of the amounts, as the case requires, that the convicted person or the other person, as the case may be, refused or failed to pay to the Commissioner in accordance with the notice.
218(4) Any person making any payment in pursuance of this section shall be deemed to have been acting under the authority of the taxpayer and of all other persons concerned and is hereby indemnified in respect of such payment.
218(5) If the Commissioner receives any payment in respect of the amount due by the taxpayer before payment is made by the person so notified he shall forthwith give notice thereof to that person.
218(6) Where:
(a)money has been paid by a person to a building society in respect of the issue of withdrawable shares in the capital of the society; and
(b) the money has not been repaid;
the money shall, for the purposes of this section, be taken:
(c)in a case where the money is repayable on demand – to be due by the building society to the person; or
(d)in any other case – to be money that may become due by the building society to the person.
218(6A) Where, but for this subsection, money is not due, or repayable on demand, to a person unless a condition is fulfilled, the money shall be taken, for the purposes of this section, to be due, or repayable on demand, as the case may be, to the person notwithstanding that the condition has not been fulfilled.
218(6B) In this section:
“building society” means a society registered or incorporated as a building society, co-operative housing society or other similar society under the law in force in a State or Territory;
“person” includes a company, a partnership, the Commonwealth, a State, a Territory and any public authority (whether incorporated or unincorporated) of the Commonwealth or a State or Territory;
“tax” includes:
(a) additional tax under section 207 or Part VII;(b)an amount that a person is liable to pay to the Commissioner under Division 1AA, 1A, 1B, 1C, 2, 3, 3A, 3B, 4, 8 or 9;
(ba)an amount of interest that a person is liable to pay to the Commissioner under section 102AAM, 170AA or 207A;
(c)a judgment debt or costs in respect of:
(i)tax;
(ii)additional tax under section 207 or Part VII;
(iii)an amount that a person is liable to pay to the Commissioner under Division 1AA, 1A, 1B, 1C, 2, 3, 3A, 3B, 4, 8 or 9; or
(iv)an amount of interest that a taxpayer is liable to pay to the Commissioner under section 102AAM, 170AA or 207A;
(d)any fine or costs imposed by a court in respect of:
(i)an offence against this Act or the regulations; or
(ii)any other taxation offence within the meaning of Part III of the Taxation Administration Act 1953 that relates to this Act or the regulations; or
(e)any amount ordered by a court, upon the conviction of a person for an offence of a kind referred to in paragraph (d), to be paid by the person to the Commissioner;
“taxpayer” includes a person who is liable to pay an amount to the Commissioner under Division 1AA, 1A, 1B, 1C, 2, 3, 3A, 3B, 4, 8 or 9.
218(7) Any notice to be given under this section to the Commonwealth or a State may be served upon such person as is prescribed, and any notice so served shall be deemed to have been served upon the Commonwealth or a State, as the case may be.
The relevant sequence of events was as follows:
7 July 1992 the Commissioner served notices under section 218 on each of the Debtors;
29 Sept 1995 the Commissioner served amended notices dated 26 September 1998 on MHC, Sarzana and B&P Leasing;
3 July 1996 the Commissioner filed an application for the winding up of the Taxpayer;
20 Nov 1996 an administrator was appointed to the Taxpayer;
4 Feb 1997 the Commissioner served a further amended notice under section 218 on MHC;
28 Feb 1997 Hill J ordered that the Taxpayer be wound up;
10 March 1997 the winding up order took effect.
The Liquidator sought a declaration that he is entitled to collect and receive from the Debtors, to the exclusion of the Commissioner, any amounts owing by the Debtors to the Taxpayer as and when those amounts become due and payable. In addition, the Liquidator sought an order restraining the Commissioner from proceeding with all three proceedings to the extent that the Commissioner either seeks payment of the sums referred to in the Notices by means of the proceedings, or seeks to enforce, by means of the proceedings, any process arising from or in relation to the sums referred to in the Notices.
The Commissioner, on the other hand, contended that the Notices created an implied statutory charge in his favour over the Debts. He claimed, therefore, to be entitled to payment out of the moneys in Court of the amount of money owing by the Taxpayer in respect of tax specified in the Notices. The Liquidator disputed that the Notices created an implied statutory charge or any other proprietary right in favour of the Commissioner. They imposed, he contended, no more than a personal obligation upon the recipients which took precedence over the obligation owed to the Taxpayer. The Commissioner’s right to receive money from the recipient of any of the Notices was said to be subject to the Liquidator’s right under section 474(1) of the Law to take control of the property of the Taxpayer.
Alternatively, the Liquidator contended that any charge created under section 218 attaches only in respect of tax due when the money due by the recipient becomes payable. The effect of a winding up order is that the indebtedness for tax is transformed into a right of proof. Accordingly, since part of the Debts did not become payable until after the winding up order, that part of the Debts was not subject to any attachment under section 218.
Alternatively, the Liquidator contended that if the Notices gave rise to an implied statutory charge, payment to the Commissioner pursuant to the Notices was void under section 468 of the Law. First, it was said that the charge was effective only by reason of the “deemed authorisation” by the Taxpayer under section 218(4) such that a payment constitutes a disposition of property by the Taxpayer. Accordingly, where such a payment occurs after the commencement of a winding up, it is void under section 468(1) of the Law unless the Court otherwise orders. Secondly, it was said that compliance with the Notices would constitute attachment or execution being put in force against the property of the Taxpayer after the commencement of winding up and would be void by reason of section 468(4) of the Law.
Alternatively, the Liquidator contended that the Third Notice was a disposition of property of the Taxpayer after the deemed commencement of the winding up of the Taxpayer and, accordingly, was void under section 468(1) unless the Court otherwise orders. In that regard, the Liquidator also contended that the effect of any subsequent notice was to supplant any previous notice. The consequence was that, in the case of MHC, the First and Second Notices are inoperative and the Third Notice is void by the operation of section 468.
Finally, the Liquidator contended that each of the Second and Third Notices was an insolvent transaction of the Taxpayer within the meaning of section 588FC of the Law and, accordingly, is avoidable by the operation of section 588FE of the Law.
Effect of Section 218 Notice
Section 471A(1) of the Law provides that while a company is being wound up in insolvency or by the Court, a person cannot perform or exercise, and must not purport to perform or exercise, a function or power as an officer of the company, except as a liquidator or with the approval of the liquidator or the Court. Further, under section 471B, when a company is being wound up in insolvency or by the Court, a person cannot begin or proceed with a proceeding in a court against the company or in relation to the property of the company or enforcement process in relation to such property except with the leave of the Court. Section 471C, however, provides that nothing in section 471A or 471B affects a secured creditor’s right to realise or otherwise deal with the security.
The Liquidator contended that, in seeking recovery of the Debts owing by the Debtors to the Taxpayer, the Commissioner is proceeding with a proceeding in a court in relation to property of the Taxpayer while the Taxpayer is being wound up, contrary to section 471B. The Liquidator further said that the Commissioner is not a secured creditor so as to be able to avail himself of the exception contained in section 471C. Alternatively, the Liquidator contended that, in seeking to recover the Debts owing by the Debtors to the Taxpayer, the Commissioner would be putting in force against the property of the Taxpayer, contrary to section 468(4), “attachment, sequestration, distress or execution”, the winding up of the Taxpayer by the Court having commenced prior to any such steps being taken. The Commissioner contended that enforcing the provisions of one of the Notices would not be putting in force any attachment or execution because it would be no more than realising the security created, by the operation of section 218, upon the giving of the Notices to the Debtors.
The Commissioner contended that two consequences flowed from the service of the Notices as follows:
As and from the service of each of the Notices, the Debtors were bound by the terms of such Notice and could not pay moneys within the scope of that Notice to the Taxpayer.
Neither the Taxpayer nor the Debtors, once one of the Notices had been served, could in any way deal with moneys falling within the scope of that Notice in a manner inconsistent with it.
Thus it was said that the effect of service of the Notices was:
to charge the Debts owing to the Taxpayer in favour of the Commissioner;
to prevent the recipient Debtors from paying the Debts to the Taxpayer; and
to oblige the Debtors to pay the Debts to the Commissioner.
In support of those propositions, the Commissioner relied on Clyne v Deputy Commissioner of Taxation (1981) 150 CLR 1 and Deputy Commissioner of Taxation v Donnelly (1989) 25 FCR 432.
The Liquidator, on the other hand, contended that service of the Notices did not create an implied statutory charge or any other proprietary right. Rather, it imposed no more than a personal obligation upon the Debtors which took precedence over the obligations owed by the Debtors to the Taxpayer. The Liquidator contended that, notwithstanding Clyne's Case and Donnelly's Case, the Court is not bound in the present case to find that section 218 of the Assessment Act made the Commissioner a secured creditor within the meaning of section 471C of the Law where the winding up of the Taxpayer occurred before the time arrived for compliance with the Notices.
Section 218 does not expressly create a security and the literal language, if anything, suggests the contrary. Thus, the provisions of section 218 do not expressly impose an obligation on the recipient of a notice to make a payment. Nor do they confer upon the Commissioner any express right in relation to the recipient or moneys which may be “due” to a taxpayer by a recipient. The provisions of section 216 of the Assessment Act may be contrasted with the provisions of section 218.
The provisions of section 216(1) apply where, at the time of a taxpayer’s death, tax has not been assessed or paid on the whole of the income and of the profits or gains of a capital nature derived by the taxpayer up to the time of the death of the taxpayer. Under section 216(1)(a), the Commissioner is to have the same powers and remedies for the assessment and recovery of tax from the trustees of the estate of such a taxpayer as he would have against that taxpayer if the taxpayer were still living. Section 216(1)(d) then provides that the amount of any tax payable by the trustees shall be a first charge on all the taxpayer’s estate in their hands.
Thus, so the argument ran, the concept of a charge to secure tax was not unknown to the legislature responsible for the Assessment Act. The absence of any reference to a charge in section 218 was said to indicate that the legislature did not intend that the giving of a notice would create a charge. Section 218(1) provides simply that the Commissioner may require a person to pay to the Commissioner certain money. The sanction for failing to comply with a notice under section 218(2) is that the recipient is guilty of an offence. Section 218(3) then provides that where a person is convicted of an offence against section 218(2) the Court may, in addition to imposing a penalty, order the convicted person to pay to the Commissioner an amount not exceeding the amount that the convicted person or the other person, as the case may be, refused or failed to pay.
It would be possible to conclude from those provisions that they constitute the only sanction for non payment and that section 218 creates no independent cause of action in the Commissioner against the recipient of a notice. For example, it would have been a simple matter for the Parliament to provide that upon service of a notice, the money which is the subject of the notice is charged to the Commissioner and the recipient is liable to the Commissioner for the amount which the recipient is obliged to pay to the Commissioner. Rather, the Parliament provided a criminal sanction and no more.
The Commissioner contended, however, that section 218 effects a statutory assignment of money to which a notice relates and that, on ordinary principles relating to assignment of debts, it must follow that the Commissioner can sue for the debt in his own name. It is evident that when section 218 says that the Commissioner may require a person to pay money to him, it is giving statutory backing to that requirement so as to impose an obligation on the recipient to pay money that falls within the statutory description. On the other hand, the section only imposes an obligation to pay in accordance with its terms – see Clyne’s Case at 17.
It is not so clear, however, that a section 218 notice effects a statutory assignment of the debts to which it relates as the Commissioner contended. The Commissioner does not become the absolute owner of the debt. Under section 218(5), if the Commissioner receives any payment in respect of the amount due by a taxpayer before payment is made by the recipient, he must forthwith give notice of the payment to the recipient. The clear intention is that, once the amount due in respect of tax has been paid by a taxpayer, there would no longer be any obligation imposed on the recipient of a notice. Any claim which the Commissioner would have had in respect of the money which is the subject of a notice would thereupon be extinguished. That suggests that the Commissioner’s rights are in the nature of security because the Commissioner’s right disappears upon discharge by the relevant taxpayer of any indebtedness for tax. The giving of a notice does not extinguish the taxpayer’s liability for tax. On the other hand, payment by the recipient of a notice in accordance with the notice effects a pro tanto satisfaction of the taxpayer’s liability for tax.
In Clyne’s Case, the High Court considered the effect of a section 218 notice as between the Commissioner and the recipient of the notice. The giving of the section 218 notice in that case was held to impose an obligation on the recipient to pay the amount of the debt to the Commissioner at maturity with an implied obligation not to make any inconsistent payment in the meantime (per Mason J in Clyne’s Case at 22). Mason J (with whom Aichin and Wilson JJ both agreed) went on to say (at 23):
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. The obligation attaches to the recipient on service of the notice, though it cannot be performed until a future date. The effect of imposing the obligation is to make it unlawful for the recipient to pay the moneys to anyone but the Commissioner after service of the Notice. Although this might otherwise expose the debtor to liability of the suit of the taxpayer the debtor is protected by s. 218(4) which provides that the payment is deemed to be made with the authority of the taxpayer and indemnifies the debtor.
In Clyne’s Case, senior counsel for the Commissioner conceded that section 218 does not purport to create a charge over, or interest in, moneys in favour of the Commissioner although Mason J doubted whether that concession was rightly made (at 18).
In Donnelly’s Case the Full Court of this Court dealt with the effect of a section 218 notice in the context of bankruptcy. The central question there was whether notices issued by the Commissioner created charges over debts due, at the time of service of the notices, by the Health Insurance Commission to a bankrupt medical practitioner or thereafter becoming due (per Lockhart J at 435). Lockhart J considered that the notices, upon being served upon the Commission, created charges in favour of the Commissioner over debts due by the Commission to the bankrupt at the time of service of the notices and debts which came into existence and became due thereafter but before the making of the sequestration order. His Honour considered that a notice may be given which may operate with respect to debts that are not brought into existence until after the date of service of the notice, although no obligation is imposed upon the recipient until the debt becomes payable by the recipient to the relevant taxpayer (at 436-7).
Hill J in Donnelly’s Case considered that the effect of section 218 is to charge the debt owed to a taxpayer, thereby preventing the debtor from paying it and obliging him to pay it to the Commissioner. His Honour concluded, therefore, that it has the effect of making the Commissioner a secured creditor (at 457). That conclusion would resolve any question which now arises in relation to section 471C of the Law. While section 471C was not under consideration in Donnelly’s Case, the principles with respect to bankruptcy appear to me to be sufficiently indistinguishable from the principles applicable in relation to section 471C. Accordingly, the observations made by Lockhart and Hill JJ concerning the effect of section 218 as creating a security are equally applicable in relation to the insolvency of a company which is being wound up under the Law.
The Liquidator sought to distinguish Donnelly’s Case. The Liquidator contended that Hill J’s reasoning (which was accepted by Lockhart J) was based on two approaches. The first approach was that section 218 creates an implied statutory charge (at 456). The second, and alternative, approach was that the words of the section, read literally, create a requirement which obliges the recipient to make payments to the Commissioner notwithstanding that a taxpayer’s property had vested in a trustee in bankruptcy (at 459-60). The Liquidator contended that the first approach was wrong and that the second approach did not lead to the conclusion that the Commissioner is a secured creditor in the present circumstances.
The Liquidator contended, in relation to the first approach, that Hill J derived his conclusion from a consideration of the rights conferred by section 218 upon the Commissioner as follows:
(a) the right to prevent the Taxpayer from accepting payment of the debt;
(b) the right to prevent the Taxpayer from disposing of the debt;
(c) the right to give a receipt for the money the subject of the Notice;
(d) the right to give a discharge for that money;
(e)the right to apply to the Court in the event of the recipient’s failure or refusal to comply with the notice for an order requiring the convicted person to pay the Commissioner the amount which has not been paid (at page 456).
The Liquidator argued that section 218 does not expressly or impliedly confer upon the Commissioner any of the rights so identified and that, if those rights are not conferred, the Commissioner is in a position similar to that of a garnishee. That is to say, while a contingent obligation to pay money, with deemed authority, is cast upon the recipient, the essential characteristics of a charge are lacking because no right over property is conferred upon the Commissioner in respect of the property of a taxpayer.
The Liquidator pointed out that Hill J observed that the same result as an implied statutory charge would be brought about by affording the words of section 218 their ordinary meaning. The Liquidator contended that that is the correct approach to the construction of section 218. The Liquidator also referred to the following comment by Hill J in Donnelly’s Case, as repeated by him in Commissioner of Taxation v Government Insurance Office of New South Wales (1993) 45 FCR 284 at 294:
The fact that… 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… at the time the notice takes effect.
The Liquidator argued that that statement is not correct because, after sequestration, the moneys in question are in substance and in law payable to the trustee in bankruptcy. The Liquidator contended that the same analysis is applicable in the case of a winding up of a company taxpayer. On that basis, it was said that the character of the debt changes in that the person who has control of the asset is the liquidator.
Under section 474(1) of the Law, if a company is being wound up in insolvency or by the Court, the liquidator is required to take into his or her custody or under his or her control all the property to which the company is or appears to be entitled. Thus, a person who holds or receives property of the company is obliged to deliver it or pay it to the liquidator unless that person is a secured creditor, that is, a person with a proprietary right to property. It was said that a liquidator is in the position of a beneficial owner of the property of a company in liquidation. The argument is that the effect and consequence of section 474(1) is that, on the making up of a winding up order, a company ceases to have the custody and control of its assets which are thereafter administered exclusively for the benefit of those persons who are entitled to share in the proceeds of realisation of the assets (reference was made to Ayerst v C & K (Construction) Pty Ltd [1975] 2 All ER 537). Thus, it was said, the Debts owing by the Debtors to the Taxpayer ceased, upon the making up of the winding up order, to be payable to the Taxpayer but were “in substance” payable to the Liquidator.
I do not consider that the Liquidator’s analysis is correct. It is certainly true to say that, by the operation of sections 471(A) and 474 of the Law, the directors of a company may no longer perform or exercise any function or power as an officer of the company without the consent of the liquidator or the Court. Further, control of all of the property of the company is taken from the directors and vested in the liquidator. However, there is no change in the beneficial ownership of the property of the company. The company continues as a legal entity capable of owning property. The property of the company remains beneficially owned by the company.
In the ordinary course, all of the property of a company in liquidation will be realised and the proceeds of realisation will be disbursed in payment of creditors and, as to any surplus, to the contributories. Nevertheless, there is always the possibility that the winding up may be brought to an end otherwise than by dissolution of the company. Under section 482, at any time of the winding up of a company, the Court may make an order staying the winding up either indefinitely or for a limited time. The Court may also make an order terminating the winding up on a day specified in the order. Under section 482(3), where the Court has made an order terminating the winding up, the Court may give such directions as it thinks fit for the resumption of the management and control of the company by its officers. The effect of such an order, therefore, is to negate the effect of sections 471A and 474. The fact that such an order is a possibility indicates that sections 471A and 474 are concerned only with the control of the property of the company and not in any way with ownership of it.
I consider that Hill J was correct in saying, in Donnelly’s Case, that the making of a sequestration order does not alter the character of moneys owing to a bankrupt as being moneys due or accruing or moneys which may become due to the bankrupt. A fortiori, the making up of a winding up order does not alter the character of moneys owing to a company in liquidation as being moneys due or accruing or moneys which may become due to the company.
It follows, in my view, that the contentions on behalf of the Liquidator directed at distinguishing Donnelly’s Case should be rejected. I am inclined to accept Hill J’s alternative approach as the correct analysis concerning the effect of section 218. It matters not whether one characterises the effect of section 218 as a statutory charge. The only consideration is whether section 468 of the Law operates to prevent effect been given to the words of section 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 section 218 upon service of the Notices.
The Liquidator did not, by the making up of a winding up order, acquire any greater right in relation to the Debts due by the Debtors to the Taxpayer than the Taxpayer had. For example, just as the Taxpayer, after the service of a Notice on MHC, could not have validly directed MHC to pay the Debt owing to the Taxpayer to the Taxpayer or a third party, nor can the Liquidator. In other words, the Liquidator does not acquire control over a debt which has been the subject of a valid section 218 notice. A liquidator acquires no greater right in relation to the property of his company than the company had. Once a notice under section 218 has been given, a taxpayer cannot take steps to frustrate or subvert the Commissioner’s rights which arise upon service of the notice by, for example, purporting to pay a debt which was not yet payable. By purporting to exercise the powers and rights conferred by section 474 of the Law, a liquidator would frustrate or subvert the Commissioner’s rights. Accordingly, sections 471 and 474 of the Law would not prevent the Commissioner from exercising the rights arising under section 218.
Consequences of Winding Up
The Liquidator contended that if a charge is created by service of a notice under section 218, the charge does not attach to a bare right to payment but only to an identifiable debt “due” by a debtor to a taxpayer when the obligation to pay the debt is complete. If there is no money due to a taxpayer at the time of service, there is nothing to which the statutory charge can attach. It was contended that, in the present case, there was no money due to the Taxpayer within the meaning of section 218(1)(a) of the Assessment Act.
The argument was that substantial parts of the Debts owing by the Debtors to the Taxpayer were not actually payable at the time of service of the Notices. For example, a substantial part of the Debts owing by the Debtors was in respect of loans made by the Taxpayer. There was also interest on those loans and, in the case of MHC, rental payable in respect of the occupation of various premises owned by MHC. The loans were regulated, for the most part, by loan agreements under which the loans were not payable as at the time of service of the Notices. Subsidiary questions arose as to whether the other parts of the Debts were payable. I have dealt with those questions above.
However, in relation to the principal amounts of the loans, the argument was that they were not payable at the time of service of the Notices and by the time when the loans did become payable, in accordance with the Settlement Deed, there was no longer any amount due in respect of tax. The Liquidator contended that the charge would only attach when the Debt of the Debtor became payable but, when it did attach, it would only attach in respect of tax which was then payable. However, it was said that once a winding up order is made, tax is no longer payable because the Commissioner is no longer a creditor in respect of income tax since the debt for income tax is converted into a right to prove in the winding up.
A debt due by a bankrupt is no longer a debt “still owing” within the meaning of section 52(1)(c) of the Bankruptcy Act so as to found a further sequestration order. The effect of bankruptcy is that the debtor is no longer obliged to pay his creditors. Indeed, he is disabled from doing so. If he offered payment, they could not safely accept it. A creditor’s right is a right of proof against the estate – see Clyne v Deputy Commissioner of Taxation (1984) 154 CLR 589 at 594-5.
The Liquidator contended that those principles are equally applicable to a winding up. In consequence, it was argued that, upon the making of a winding up order, there was no longer an amount due by the Taxpayer in respect of tax. Accordingly, when the Debts of the Debtors became payable on 1 July 1998, there was no amount due in respect of tax and the Notices were ineffective.
In Commissioner of Taxation v Government Insurance Office of New South Wales (1993) 45 FCR 284, Hill J (with whom Beazley J agreed) considered, in a different context, the effect of a section 218 notice. Hill J, after noting that in Donnelly’s Case Lockhart J had agreed with him, went on (at page 294) to say:
It seems to me that the majority view in Donnelly is determinative of the present issue. Section 218 has no operative effect, whether that effect be described as creating a lien or charge, or as working in attachment, or as working an assignment or merely by reference to the words of the section itself unless and until there is actually a debt due from the addressee of the notice to the taxpayer. The analogy raised in Donnelly to a floating charge is apposite. Where at the time of the notice there is no debt due by the addressee to the taxpayer it will only be when there comes into existence a debt which either then is due to the taxpayer or which thereafter becomes due to the taxpayer that the section will operate to work an assignment or create a charge of that debt in the Commissioner.
In the GIO Case, the recipient of a notice under section 218 was the defendant in proceedings brought by a taxpayer for unliquidated damages for tort. Between the time of service of the notice under section 218 and judgment in the proceedings, the taxpayer was declared bankrupt and subsequently discharged from bankruptcy. The debt owing by the taxpayer to the Commissioner did not survive the bankruptcy. Hill J observed that section 218 is silent as to what is to happen if the tax debt upon which a notice is based is discharged other than by way of payment. His Honour considered that section 218 should be construed as requiring the recipient only to make payment in a case where the tax is in fact properly payable. He considered 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 notice as remained due and owing from time to time. It followed that in that case, upon the discharge of the taxpayer from bankruptcy, no amount of tax was thereafter due. Accordingly, the recipient was under no obligation to make payment to the Commissioner of the amount of the judgment against the recipient in favour of the taxpayer after his discharge from bankruptcy.
However, it is the discharge from bankruptcy which extinguishes the debts of a bankrupt. Whether or not there is an analogy in the context of the winding up of a company, that question does not arise in the present case. Further, the GIO Case can be distinguished on another ground. There is no doubt that in the present case, at the time of service of the Notices on the Debtors, the Debts were owing by the Debtors to the Taxpayer. While it may be that some part of the Debts was then payable, the substantial bulk of the Debts was not payable at the time of service of the Notices. In the GIO Case, however, there was not even a debt due or owing. There was no more than a bare cause of action in tort which the taxpayer had against the recipient of the notice. A fortiori, there was no money payable. Accordingly, while some assistance might be derived from Hill J’s general observations, the particular circumstances of that case are of no direct assistance in the resolution of the issues before me.
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. Income tax is due when it is assessed and a notice of assessment is served. However, the tax does not become payable before the date fixed under section 204 of the Assessment Act, being the date specified in the notice as the date on which the tax is due and payable (per Mason J in Clyne’s Case at 16). In Donnelly’s Case, it was conceded that debts becoming due to the bankrupt after the making of a sequestration order would not be subject to charges created by section 218 notices because, upon the making of a sequestration order, the Commissioner’s rights as a creditor for unpaid income tax were converted into a right of proof in bankruptcy (at 435). It may be significant that Lockhart J considered that there was some question whether such a concession was correctly made.
It is true that, upon the making of a sequestration order or a winding up order, a creditor’s right to enforce payment of its debt ceases to exist and the creditor acquires the right to share in a distribution in the course of administration of the bankrupt’s estate or the winding up (Re Cole; Ex parte Richards (1966) 9 FLR 190 at 191). Upon the making of a sequestration order, the remedies against the person and property of a taxpayer formerly available to the Commissioner are taken away and there is substituted a right to prove against the estate which becomes vested in the trustee in bankruptcy. The Commissioner becomes a creditor whose claim is in proof. His claim is no longer a right of action for a debt since he can no longer maintain an action as for a debt. However, amounts which are owed by a taxpayer at the date of the bankruptcy may, notwithstanding the bankruptcy, still be described as debts. They are “debts” from which the bankrupt is not released until he is discharged from bankruptcy.
There 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. A creditor will not be entitled to payment from the debtor and if the creditor receives payment, he will be required to repay the amount to the liquidator or trustee in bankruptcy. In that sense, the creditor’s remedies are converted into a right to prove in the winding up or in the bankruptcy. However, it does not follow, in my view, that the debt ceases to exist. The right to enforce payment is restricted. Nevertheless, the right to prove in the winding up or bankruptcy is a right to prove in respect of the debt which continues to exist.
Accordingly, when money which was not payable at the time of service of a notice under section 218 subsequently becomes payable, the notice will attach to that money. It follows that as at the time when the Debts became payable to the Taxpayer by the Debtors, there was still money owing in respect of tax even though a winding up order had been made in the interim. The Notices therefore attached the Debts in respect of the amount of tax specified in the Notices.
Commencement of Winding Up
Section 513A relevantly provides as follows:
513A If the Court orders under section… 459A … that a company be wound up, the winding up is taken to have begun or commenced:
(a)if, when the order was made, a winding up of the company was already in progress – when the last-mentioned winding up is taken… to have begun or commenced; or
(b)if, immediately before the order was made, the company was under administration – on the section 513C day in relation to the administration; or
(c)if:
(i)when the order was made, a provisional liquidator of the company was acting; and
(ii)immediately before the provisional liquidator was appointed, the company was under administration;
on the section 513C day in relation to the administration; or
(d)if, immediately before the order was made, a deed of company arrangement had been executed by the company and had not yet terminated – on the section 513C day in relation to the administration that ended when the deed was executed; or
(e)otherwise – on the day when the order was made.
Section 513C provides as follows:
513C The section 513C day in relation to the administration of a company is:
(a)if, when the administration began, a winding up of the company was in progress – the day on which the winding up is taken because of this Division to have begun; or
(b) otherwise – the day on which the administration began.
It is common ground that on 20 November 1996 an administrator was appointed to the Taxpayer. On 28 February 1997, the following orders, inter alia, were made by Hill J:
2.That, pursuant to section 447A(2) of the Corporations Law, the administration of the [Taxpayer] end.
3.That the [Taxpayer] be wound up under section 459A of the Corporations Law.
4.That orders 2 and 3 be stayed until 4.00 pm on 10 March 1997.
The Liquidator contended that, in the light of those circumstances, immediately before the winding up order was made, the Taxpayer was under administration. There was no winding up of the Taxpayer in progress when the administration began and section 513A(b) is applicable. Accordingly, the section 513C day in relation to the Taxpayer is 20 November 1996, being the day on which the administration began. It follows that the winding up of the taxpayer is taken to have begun or commenced on the section 513C day in relation to the Taxpayer, namely 20 November 1996.
The Commissioner, on the other hand, contended that, in the circumstances, section 513A(b) does not apply and, since none of paragraphs (a), (c) and (d) applies, section 513A(e) applies and the winding up is taken to have begun or commenced on the day when the order was made, namely 28 February 1997 or, possibly, the day that order took effect, 10 March 1997. The difference has a bearing on whether section 468 could have any application to any of the Notices, in so far as the Notices could be said to constitute a disposition of property by the Taxpayer or any attachment, sequestration, distress or execution being put in force against the property of the Taxpayer.
The question depends upon the meaning of the expression “immediately before” when used in section 513A(b). The construction of that expression must depend upon its context in section 513A. There is a contrast between paragraphs (a) and (c)(i) on the one hand and paragraphs (b), (c)(ii) and (d) on the other hand in the use of the term “when” and the expression “immediately before”. That contrast suggests that the term “when” must be taken to mean something different from the expression “immediately before”.
The contrasting use of the term “when” in section 513A(a) and (c)(i) is significant. That term is used in circumstances where the relevant event could continue after a winding up order is made. Thus, if a winding up of a company is already in progress, when a second winding up order is made, the first winding up will not terminate. On the other hand, the appointment of a provisional liquidator will terminate when a winding up order is made, just as an administration will end when a winding up order is made by reason of section 435C(3)(g). The contrast between the terms “when” and “immediately before” in section 513A(c) confirms that the drafter of the Law was intending to recognise that the term “immediately before” could permit an interval between the existence of a state of affairs and the making of a winding up order.
In his reasons for making the orders of 28 February 1997, Hill J said, inter alia:
Senior counsel for the Commissioner [who was the applicant for winding up] has requested that, before making an order for winding up, I order that the administration terminate. The order sought is an order under s 447A(2) of the Law that the administration end. The basis upon which the application is made is that, unless such an order be made, the period for relation back would commence only at the time the winding up order is made and not at the time the application to wind up Richard Walter occurred.
There is some suggestion in the evidence that there are transactions which have occurred between the two dates which might be set aside for the benefit of creditors, should that course be taken. There has been no opposition to that course nor would I expect there to be, either from the administrators or from the other creditors who would at least share pro rata with the Commissioner subject to any advantage which the Commissioner may obtain by force of the s 218 notices.
Part 5.3A of the Law, which replaced the official management provisions of the Law, deals with the administration of a company’s affairs with a view to executing a deed of company arrangement. Section 436A, which is in Part 5.3A, provides that a company may appoint an administrator of the company if the board has resolved to the effect that:
(a)in the opinion of the directors the company is insolvent or is likely to become insolvent at some future time; and
(b)an administrator of the company should be appointed.
Section 435C(1) provides that the administration of a company begins when an administrator is appointed and ends on the happening of whichever event of a kind referred to in sections 435C(2) or 435C(3) happens first after the administration begins. Section 435C(2) deals with the normal outcome of the administration of company. However, under section 435C(3) the administration of a company may also end because:
(a)the Court orders, under section 447A or otherwise, that the administration is to end, for example, because the Court is satisfied that the company is solvent;
………………………………
(g)the Court appoints a provisional liquidator of the company, or orders that the company be wound up.
Section 447A also provides as follows:
(1)The Court may make such order as it thinks appropriate about how this Part is to operate in relation to a particular company.
(2)For example, if the Court is satisfied that the administration of a company should end:
(a)because the company is solvent; or
(b)because provisions of this Part are being abused; or
(c)for some other reason;
the Court may order under subsection (1) that the administration is to end.
Under section 447A(4) a creditor of the company has standing to apply for an order under section 447A.
The Commissioner’s application to wind up the Taxpayer was filed on 3 July 1996. Thus, it was before the Court when administrators were appointed under section 436A on 20 November 1996.
The effect of Hill J’s order of 28 February 1997 was that the administration of the Taxpayer would end at 4 p.m. on 10 March 1997 and that the Taxpayer be wound up with effect from that time. While his Honour’s orders of 28 February 1997 included the appointment of the Liquidator as liquidator of the Taxpayer and that order was not stayed, the appointment would not take effect until the winding up order became effective. His Honour did not purport to appoint the Liquidator provisionally.
Given the orders of 28 February 1997, it may be correct to conclude that the administration did not end pursuant to section 435C(3)(g) upon the making of the winding up order. Rather the administration ended by the operation of section 435C(3)(a). However, I do not consider that that distinction makes any difference for the purposes of section 513A.
If the Court had made an order under section 447A(1) that the administration end and that order became effective some significant time prior to the making of a winding up order, a question may arise as to whether section 513A(b) would be applicable. In other words, a question may arise as to whether it could be said that the order under section 447A took effect immediately before the winding up order was made. However, where the administration ended at the same moment as the winding up order took effect, it is clear that, immediately before the winding up order was made, the Taxpayer was under administration.
Section 513A(d) indicates that the expression “immediately before” entails something more than mere instantaneity. Under section 513A(d), there would ordinarily be a period of time between the execution of a deed of company arrangement, as a result of which the administration would end by the operation of section 435C(2)(a), and the making of a winding up order. It may be that for section 513A(d) to be attracted that interval would need to be very short. Nevertheless, the provision clearly contemplates that there may be such an interval. It follows, therefore, that the same expression when used in section 513A(b) would permit of there being some interval between administration ending and a winding up order being made. How long an interval would be sufficient to preclude the operation of section 513A(b) is not a question which I need to decide. In the present case there was no interval. Orders 2 and 3 made by Hill J on 28 February 1997 took effect at the same moment.
Even if there had been no stay and his Honour pronounced one order after the other, I would still conclude that, immediately before the winding up order was made, the Taxpayer was under administration. It follows, therefore, that, by the operation of the provisions which I have set out above, the winding up of the Taxpayer is taken to have begun on 20 November 1996. Accordingly, under section 468, any disposition of property of the Taxpayer made after 20 November 1996 is void unless the Court otherwise orders. No such order was sought. It also follows that any attachment, sequestration, distress or execution put in force against the property of the Taxpayer after 20 November 1996 is also void.
A further consequence is that the “relation back day” as defined in section 9 of the Law is also 20 November 1996. Under section 9, “relation back day” in relation to a winding up of the company relevantly means the day on which the winding up is taken, because of Division 1A of Part 5.6, to have begun. Section 513A is contained within Division 1A of Part 5.6. The significance of the relation back day is dealt with below in relation to the contention of the Liquidator that certain of the Notices are insolvent transactions of the Taxpayer within section 588FC of the Law.
The result, somewhat anomalously, is that, notwithstanding the submissions which were made to Hill J and which led to the making of the order under section 447A of the Law, the relation back day is in fact later than the day of the filing of the winding up application. That follows from the fact that the administrators were appointed after the winding up application was filed.
Operation of Section 468
Section 468 of the Corporations Law relevantly provides as follows:
468 (1) Any disposition of property of the company… made after the commencement of the winding up by the Court is, unless the Court otherwise orders, void.
………………………………
(4) 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.
Three questions arise concerning the manner in which section 468 operates in relation to the Notices.
First, the Liquidator contended that if a notice gives rise to a charge, as contended by the Commissioner, the charge arises only upon payment by the recipient because an indispensable component of the charge is the authority deemed by section 218(4) to have been given by a taxpayer. The argument was that the charge created by the Notices was not complete until payment had been made with the deemed authority of the Taxpayer.
However, the effect of giving the Notices was, according to the principles to which I have referred above, that rights analogous to a statutory charge were created by operation of law. Those rights were effective upon the giving of the Notices. Payment in accordance with the Notices is the realisation of those rights. The deemed authority for payment arises under section 218(4) upon the giving of the Notices. Whenever a recipient complies with a notice by making a payment to the Commissioner, the payment will be deemed to have been made in accordance with the authority of the relevant taxpayer. Nothing further comes into existence or arises by the payment. The payment is no more than the giving effect to or realisation of the rights created by the operation of section 218.
Secondly, it was said that section 468(4) applies because compliance with a Notice would constitute an “attachment” being “put in force against the property” of the Taxpayer within the meaning of that section and would be avoided. In so far as the Liquidator relied on section 468(4) of the Law, the question is resolved by the observations of Hill J in Donnelly’s Case. One of the questions raised in Donnelly’s Case was whether section 118 of the Bankruptcy Act 1966 (Cth) affected the Commissioner’s position. Section 118 relevantly provides that a creditor must pay to the trustee of the estate of a bankrupt moneys received as a result of “the attachment” by that recipient of a debt due to the bankrupt.
Hill J adverted to the fact that provisions of sections comparable to section 118 existed at a time when priority for income tax was paramount. He concluded that it could have hardly been intended that a section such as section 118 would operate to require the Commissioner to pay over to the trustee funds taken under a section 218 notice, when the only consequence of that would be that the funds would be held by the trustee to pay to the Commissioner himself in priority. Hill J concluded, therefore, that it seemed highly unlikely that section 118 was ever intended to “encompass a charge of the kind contemplated by section 218” and that the charge created by the service of a notice under section 218 does not fall to be considered as an “attachment” for the purposes of section 118 of the Bankruptcy Act (at 467).
The analogy between the winding up of a company in insolvency and bankruptcy is sufficiently valid to justify a conclusion that the term “attachment” in section 468(4) of the Law should be construed as having the same meaning as in section 118 of the Bankruptcy Act. It would follow, on the authority of Donnelly’s Case, that the enforcement by the Commissioner of the obligations and rights created by the service of a notice under section 218 does not entail putting in force attachment against the property of a taxpayer which is a company within the meaning of section 468(4) of the Law.
Thirdly, a question arises as to the effect of the Third Notice, which was given after the deemed commencement of the winding up of the Taxpayer. It is necessary to deal with several additional issues before returning to that question.
In order to resolve this question finally, it would be necessary to examine the folder of material provided by the Commissioner in order to determine whether it supports the contention that the beneficiaries were controlled by Dr Wenkart and Mr Holden. However, I am not satisfied that establishing “control” of the relevant entities, whatever that might be, would afford an answer. If it could be shown that the relevant minds of the beneficiaries were those of Dr Wenkart and Mr Holden, that might be one thing. That is to say, it may be possible to show that the beneficiaries did in fact know and approve of what was done.
The Commissioner referred to the decision of the High Court in Vacuum Oil Co. Pty Ltd v Wiltshire (1945) 72 CLR 319 at 324-5, which was concerned with the position of an executor. An executor who carries on a business otherwise than for the purposes of realisation and without authority given by the will of his or her testator does so at his or her own risk. On the other hand, if a beneficiary actually authorises the executor to carry on the business, the executor would be entitled as against that beneficiary to indemnity out of the estate in respect of the debts which, in the course of carrying on the business, he or she incurs to the trading creditors. The position is the same where a creditor of the testator actively and positively assents to the executor carrying on the business. While the High Court did not made clear what kind of conduct should be held to amount to the necessary active and positive assent, some knowledge on the part of the beneficiary would be required.
However, as I understand the Commissioner’s contention, that was not alleged. The contention was that, because the beneficiaries were “controlled” by Dr Wenkart, an inference of knowledge and approval on the part of the beneficiaries should be drawn. That raises again the question of whether or not the knowledge of Dr Wenkart and Mr Holden should be attributed to the beneficiaries so as to constitute consent or acquiescence in circumstances where it is their conduct which caused the breach of fiduciary duty by Morlea. For the reasons indicated above, I would be disposed to conclude that merely demonstrating some notion of control would be inadequate, without more, to establish consent or acquiescence by the beneficiaries in that breach of fiduciary duty. Accordingly, it would not be necessary to resolve the question of control.
The Trustees’ Loss
The Taxpayer and the Commissioner contended that even if there was a breach of fiduciary duty involved in the payments made by Morlea to the Taxpayer, the Trustees are not entitled to any relief because the members of the Morlea Partnership have in fact suffered no loss because they have in substance received the benefit of the moneys in question. That contention requires a detailed analysis of transactions which occurred in 1984 and 1989.
(a) The 1984 Transactions
On 30 June 1984 a series of meetings was held of directors of a number of companies in the Wenkart Group. In addition, there were meetings of directors of a company then known as Sesole Pty Ltd. Sesole Pty Ltd changed its name on 17 October 1984 to Macquarie Professional Services Pty Ltd and subsequently on 7 December 1990 changed its name to Nika Pty Ltd. I shall refer to that company as “Nika”.
The first step taken on 30 June 1984 was a meeting of the directors of Nika at 2.50 p.m. A resolution was passed as follows:
IT WAS RESOLVED THAT the company acquire the business undertakings of the Morlea Partnership this day and that an offer be made to the directors of the manager of that partnership to acquire the business for a total consideration of $27,661,045 comprising:-
Goodwill $16,881,451.75
Insurance settlement assigned $1,751,209.00
Net assets less liabilities transferred $9,028,393.25
$27,661,054.00IT WAS FURTHER RESOLVED THAT the offer be made on the basis that the consideration be left outstanding at an interest rate of 15% pa payable annually in arrears unless deferred to a later date by the payee.
At 3.00 p.m. a meeting of the directors of Morlea, as manager of the Morlea Partnership, took place. The following was recorded in the minutes:
IT WAS NOTED THAT the company had been approached by the directors of Sesole Pty Limited to acquire the business of the Morlea Partnership including all plant and equipment, business assets, goodwill and any entitlement to insurance settlement arising from the business undertaken by the partnership to the date of sale. In addition, the offer was made on the basis that all liabilities of the business would be assumed by Sesole Pty Limited. The consideration offered by Sesole Pty Limited for the acquisition of the business totalled $27,661,054 comprising:-
Goodwill $16,881,451.75
Insurance settlement assigned $1,751,209.00
Net assets less liabilities transferred $9,028,393.25
$27,661,054.00IT WAS RESOLVED THAT the company as manager of the partnership accept the offer of Sesole Pty Ltd detailed above and that the business of the partnership be sold for the above consideration today.
IT WAS FURTHER AGREED THAT the consideration payable for the acquisition of the business by Sesole Pty Limited be allowed to remain outstanding as a debt due to the partnership on the basis that interest be paid at the rate of 15% pa annually in arrears unless it is deferred to a later date by the partnership.
IT WAS FURTHER RESOLVED THAT the Chairman of this meeting advise the directors of Sesole Pty Limited of this decision and that the acceptance of the terms of the sale as aforesaid evidenced by the minutes of this meeting shall be sufficient evidence that the sale has been accepted and consummated. IT WAS AGREED THAT no other documentation be prepared relating to the sale or the outstanding debt so created.
At 3.05 p.m. a further meeting of the directors of Nika was held at which the following resolutions were passed:
IT WAS NOTED THAT the offer to acquire the business undertakings of the Morlea Partnership had been accepted by the manager of that partnership on the terms offered and that as notified by the Chairman of Directors of that company no other evidence is required that the sale has been accepted and consummated.
IT WAS RESOLVED THAT the company record in its books the acquisition of the business previously undertaken by the Morlea Partnership for the consideration agreed and that the outstanding debt due to the partnership be recorded on the terms previously agreed.
Mr Holden said that the figures set out in the minutes were based on estimates which he made at the time. Subsequently, accounts of the Morlea Partnership were prepared as at 30 June 1984. Those accounts showed that assets of the partnership amounted to $9,052,555. The difference between that figure and the figure shown for net assets in the minutes was explained by Mr Holden as being the result of adjustments which were found to be necessary when final accounts were prepared. The balance sheet showed the following assets:
Petty Cash $2,261.00 Security Deposit $9,661.00 Commonwealth Trading Bank
Current Account:$1,848.00
Westpac Banking Corporation
Current Account:
$126,068.00 Trade Debtors: $3,091,645.00 Prepayments: $92,616.00 Loan account - Richard Walter Pty Ltd:
$7,355,581.00 Loan account – Aurelius Unit Trust: $6,955.00 Fixed assets: $515,133.00 TOTAL $11,201,768.00
Total liabilities were shown as $2,149,213. Accordingly, the amount of net assets was $9,052,555. The amount of net assets was represented by capital accounts as follows:
Morlea Professional Services Pty Ltd
in its capacity as trustee:$8,599,928 Aborda Pty Ltd in its capacity as trustee: $452,627 TOTAL:
$9,052,555
Thus, the clear intention of the author of the minutes was to record a transaction whereby all of the assets of the business carried on by the Morlea Partnership, including the indebtedness arising from the purported loans to the Taxpayer, would be transferred on sale to Nika. The consideration payable for those assets was to include assumption of liability for the liabilities of the Morlea Partnership. The balance of the consideration was to remain outstanding and to bear interest. While the parties are recorded as resolving that there be no further documentation of the transaction, several book entries were made in the books of Nika, the Taxpayer and the Morlea Partnership to reflect the transaction.
Two further meetings were held. At 3.10 p.m. a meeting of the directors of Morlea, as manager of the Morlea Partnership, resolved as follows:
IT WAS RESOLVED to wind up the Morlea Partnership this day as a result of the sale of the partnership’s business and that the debt due by Sesole Pty Limited due to the partnership amounted to $27,661,054 be distributed in specie to the partners of the partnership as at 30 June 1984. IT WAS AGREED THAT Sesole Pty Limited should also be notified orally of this action.
IT WAS NOTED THAT the entitlement to the distribution in specie of the aforementioned debt is as follows:
Morlea Professional Services Pty Ltd
as trustee of the Aurelius Unit Trust: $26,278,001Aborda Pty Limited as trustee of the Aborda Trust: $1,383,053
$27,661,054
At 3.15 p.m., a further meeting of the directors of Nika resolved as follows:
IT WAS NOTED THAT after the sale of the business of the Morlea Partnership had occurred, the assets of that partnership remaining comprised the debt due by this company to it.
IT WAS FURTHER NOTED THAT as advised by the manager of the Morlea Partnership orally, the debt was distributed in specie to the partners of the Morlea Partnership in the following proportions:
Aurelius Unit Trust: $26,278,001
Aborda Trust: $1,383,053
$26,661,054 [sic]
IT WAS RESOLVED THAT the company recognise that it owed the aforementioned sums to the entities referred to above on the same basis as it owed such funds to the Morlea Partnership viz, interest shall be paid at a 15% pa annually in arrears unless deferred to a later date by the payee.
The accounting records of Nika, the Morlea Partnership and the Taxpayer for the period in question no longer exist. However, Mr Holden was able to give evidence, from his knowledge of the practice at the time, of the way in which the above transactions were documented in those accounting records. Mr Holden produced a document which reconstructed the entries which were made at the time. Mr Holden also gave evidence that the companies in the Wenkart Group all had loan accounts with the Taxpayer and that there were no relevant loan accounts between the companies inter se. His reconstruction showed entries reflecting that the balance of the consideration payable to the Morlea Partnership by Nika in respect of the purchase price became a debt due by Nika to Morlea as trustee of the Aurelius Unit Trust and Aborda as trustee of the Aborda Trust in the amounts referred to in the minutes set out above.
The document produced by Mr Holden is not complete as regards all the entries which were made at the time. It was limited to reconstruction of the entries relating to the consideration payable by Nika and the distribution of the share of that consideration to which Aborda, as trustee of the Aborda Trust, was entitled. That share was 5% of the total price since the interest of Aborda in the Morlea Partnership was 5%.
The reconstructed journal entries for Nika were as follows:
DR Goodwill 16,881,451.75 DR Insurance settlement assigned 1,751,209.00 DR Net assets/liabilities [(Morlea Partnership) Assets DR Liabilities Net Figure] 9,028,393.25 CR Loan Aborda 1,383,052.70 CR Loan Aurelius 26,278,001.30 27,661,054.00 27,661,054.00 DR Aborda Trust 1,383,052.70 CR RW 1,383,052.70
The reconstructed journal entries for Aborda Trust were as follows:
DR
Nika 1,383,052.70 CR Investments – Morlea 459,860.59 Capital Profits Partnership Reserve 923,192.11 1,383,052.70 DR RW 1,383,052.70 CR Nika 1,383,052.70 DR Capital Profits Reserve 16,694.00 CR Tax Variation Account 16,694.00
(This transaction occurs because of the difference between the taxable
distribution and the accounting distribution)
The entry in the books of Nika, being the debit in respect of debt, assets and liabilities of the Morlea Partnership of $9,028,393.25, reflects the assignment to Nika of all of the assets of the Morlea Partnership, subject to the assumption by Nika of all of the liabilities of the Morlea Partnership. The assets which were taken into account in arriving at the net figure included the balance of the loan account of the Taxpayer in the books of the Morlea Partnership. The accounts of the Taxpayer as at 30 June 1984 record a non-current liability comprising an unsecured long term loan from Morlea in a sum of $7,355,580.95. That corresponds with a current asset shown in the balance sheet of the Morlea Partnership as at 30 June 1984 of a loan account in the name of the Taxpayer in the sum of $7,355,581. The journal entries in relation to the Aborda Trust, being the credit in respect of “Investments – Morlea” and “Capital Profits Partnership Preserve” totalling $1,383,052.70, represent Aborda’s share of the consideration payable to the Morlea Partnership by Nika.
Those entries effectively reflect the transfer by the Morlea Partnership to Nika of all of the partnership assets including the indebtedness of the Taxpayer in respect of the so called “loans”. More importantly, they reflect the creation of indebtedness to Morlea and Aborda, as members of the Morlea Partnership, of Nika in respect of the balance of the consideration payable for the assets of the Pathology Business. The consideration was not paid, of course. Nevertheless, it is still payable. There is no evidence that Nika has ever declined to pay the consideration. The partners were clearly prepared to sell the Pathology Business for a consideration part of which was to remain outstanding and bear interest. That is to say, they were prepared to accept any risk as to the credit worthiness of Nika in relation to the unpaid balance of the consideration.
On 28 December 1984, a meeting of Morlea as trustee of the Aurelius Unit Trust is recorded as having taken place at 3 p.m. After noting that the Aurelius Unit Trust was entitled to a 95% share of the assets of the Morlea Partnership which, as at 30 June 1984, consisted of a debt due from Nika in the amount of $26,278,001, it was resolved to wind up the Aurelius Unit Trust and that the assets be distributed in specie to the unit holders. The unit holders were Aurelius Commodus as to 99 units and Ventura as to one unit. Accordingly, the debt was distributed as follows:
Aurelius Commodus: $26,015,221
Ventura: $262,780
In January 1985 a further meeting of the directors of Nika was held at which it was noted that as of 28 December 1984, the Aurelius Unit Trust was wound up and that the debt of $26,278,001 representing the consideration of the Pathology Business was acknowledged as being due as follows:
Aurelius Commodus: $26,015,221
Ventura: $262,780
(b) The 1989 Reconstruction
In 1989, a further series of transactions was entered into. On 15 June 1989, the Taxpayer and Nika entered into a deed whereby the Taxpayer acknowledged that it was indebted to Nika for the amount of $16,317,088.90. On 16 June 1989, a deed of assignment was entered into between Nika and April Street Investments BV (“April Street”), a company incorporated in the Netherlands. By the deed it was recited that the Taxpayer was indebted to Nika for the principal amount of $16,317,088.98. The deed relevantly provided as follows:
1.[Nika] hereby assigns and transfers to [April Street] the right to receive payment of the Receivable including all interests, rights, liabilities and claims attached to the Receivable.
2.The Receivable is assigned at a consideration of $A16,317,088.98 for which amount [April Street] shall be indebted.
3.Upon execution of this Deed of Assignment, the receivable will be denominated in Dutch Guilders at a conversion rate of 1.688 amounting therefore to NLG 27,543,246.20.
The sum of $A16,317,088.98 was the balance, after the addition of interest, of the indebtedness of the Taxpayer in respect of the purported loans, which had been transferred pursuant to the sale of the Pathology Business to Nika.
On 16 June 1989, the debt owing by Nika in respect of the purchase consideration was also dealt with. By a deed of assignment of that date, Aurelius Commodus assigned and transferred to April Street, for the principal amount of NLG 66,021,023, the right to receive payment of the indebtedness of Nika in respect of the consideration for the Pathology Business. The sum of NLG 66,021,223 was the amount of the indebtedness at that time. The consequence was that April Street became indebted to Aurelius Commodus in respect of that consideration.
It is clear that the author of the various minutes and instruments of June 1989 intended to achieve the result that the indebtedness of the Taxpayer to Nika be assigned to April Street and that the indebtedness of Nika to Aurelius Commodus also be assigned to April Street. Finally, also on 16 June 1989, an agreement was entered into between April Street and Nika whereby amounts owing, as a result of the transactions described above, by Nika to April Street and April Street to Nika, be offset with the effect that Nika was indebted to April Street in the amount NLG 38,477,977. That amount was to bear interest at the rate of 7.5% pa. The principal amount was to be repayable on 16 June 1994.
The Taxpayer and the Commissioner contended that Morlea and Aborda, in their capacities as members of the Morlea Partnership, (and as trustees of the Aurelius Unit Trust and the Aborda Trust), suffered no detriment as a consequence of the payments which had been made by the Morlea Partnership to the Taxpayer. The argument was that, as members of the Morlea Partnership, they received full consideration for the assignment of the indebtedness of the Taxpayer. By reason of the transactions which I have described, the so called “loans” by Morlea to the Taxpayer had been transmogrified into indebtedness of the Taxpayer to April Street. That in turn was offset, in part, against the consideration payable for the assignment of that indebtedness. There is no evidence that there is any dispute as to the remaining indebtedness of the Taxpayer to April Street. April Street is in fact shown in a report of the Liquidator as a creditor of the Taxpayer.
For the reasons indicated above, as things presently stand, neither member of the Morlea Partnership suffered any loss. That is to say, on the completion of the sale of the Pathology Business by Morlea as agent of the partners, the partners received consideration in the form of the promise by Nika to pay the balance of the consideration. That consideration was, on the evidence before me, equal to the value of the property sold. That consideration was received by the members of the Morlea Partnership in their respective capacities as trustees of the Aurelius Unit Trust and the Aborda Trust. Those trustees, in turn, distributed to their respective beneficiaries, the consideration consisting of the indebtedness of Nika.
The Trustees contended, however, that there is still a potential claim for restitution of some sort. The argument was that a substantial part of the assets of the Pathology Business which was sold to Nika was the indebtedness of the Taxpayer to Morlea in respect of the so called loans. However, as a result of the determination in the earlier proceedings, those payments are now to be treated, not as loans carrying an obligation to repay, but transfers of beneficial ownership to the Taxpayer. Accordingly, at least in theory, when the Taxpayer is called upon by April Street to repay the loans, the Taxpayer would be entitled to say that it does not owe any money to April Street in respect of loans because no loans were ever made. April Street may then be entitled to say to Nika that there was a total failure of consideration in respect of the assignment by Nika to April Street of the so called indebtedness of the Taxpayer. On that basis, apart from any limitation question, April Street would be entitled to recover from Nika the consideration paid for the loans.
In those circumstances, Nika itself may be entitled to say that there was a substantial failure of consideration in connection with the sale of the assets of the Pathology Business because a substantial part of those assets comprised the so called “loans” to the Taxpayer. Therefore, Nika would be entitled to make a claim on Morlea, as seller, for restitution to the extent of the consideration paid for non existent assets. Morlea, therefore, might be compelled to give restitution to Nika.
However, Morlea in its capacity as agent of the Morlea Partnership has, by means of the various book entries referred to above, distributed that consideration to the members of the Morlea Partnership being itself in a trustee of the Aurelius Unit Trust and to Aborda as trustee of the Aborda Trust. Those recipients have, in turn, distributed their respective shares to their beneficiaries. Morlea, therefore, so the argument would run, would be entitled to seek reimbursement from the partners of the Morlea Partnership. To the extent that such a potential claim could be made, that could be said to be loss suffered by reason of Morlea’s breach of fiduciary duty. Accordingly, assuming that the constructive trust remedy is otherwise available, any constructive trust over the property of the Taxpayer would be for the amount of that claim. The appropriate relief, therefore, might have been a declaration that the property of the Taxpayer is charged with such liability, if any, as the Trustees have to give restitution, along the lines outlined, to Nika.
No claim has yet been made or foreshadowed on behalf of Nika or April Street for restitution in respect of the liability which Nika incurred as consideration for the sale of the assets of the Pathology Business including the so called loans to the Taxpayer. At most, the claims are potential claims. Further, any such claim appears to be dependent upon the Liquidator refusing to acknowledge the indebtedness of the Taxpayer to April Street. The report to creditors of the Liquidator of 5 February 1997 refers to the indebtedness of the Taxpayer to April Street. The report does not suggest that the indebtedness is disputed by the Liquidator. Accordingly, there may be no reason to expect that any such claim will be made against the Trustees by Nika. The existence of any such liability of the Trustees to Nika and the quantum of any such liability has not been litigated in the proceedings before me. Indeed, to determine such questions would require joinder of additional parties such as Nika and April Street.
One possible course, therefore, would be to make a declaration that the property of the Taxpayer, including the Debts, is charged with such liability, if any, as the Trustees have to Nika in consequence of the determination by this Court that there is no indebtedness of the Taxpayer to Morlea by way of loan. That would result in uncertainty until it can be established whether or not there is such a claim capable of being brought against the Trustees for restitution. Another possibility, of course, is that, in the absence of any evidence that such a claim has been or is likely to be made, the Trustees have failed to establish any loss in consequence of Morlea’s breach of duty. In that case, the Trustees would not be entitled to any relief and their claims would be dismissed.
Those possibilities have not been fully ventilated before me. Accordingly, I consider that it is appropriate that the Trustees and the Taxpayer, together with the Commissioner, be given a further opportunity to address me on the appropriate relief in the light of the conclusions which I have reached.
CONCLUSION
It follows from the conclusions which I have reached in relation to the first cross-claim that, as against the Liquidator, the Commissioner is at least entitled to such of the money in Court as is sufficient to pay the amount owing by the Taxpayer in respect of tax shown in the Second Notices. However, the money in Court may yet be subject to a charge in favour of the Trustees to the extent of the liability, if any, of the Trustees to give restitution to Nika. For the reasons indicated above, I do not propose to make orders at this stage but will give the parties the opportunity of further argument. I will then direct the parties to bring in short minutes reflecting the conclusions which I have reached above and any further conclusions which I reach following that further argument.
I certify that this and the preceding seventy-nine (79) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett
Associate:
Dated: 29 October 1998
Counsel for the Applicant: G.A.A. Nettle QC with M. Gordon Solicitor for the Applicant: Australian Government Solicitor Counsel for the Respondents: D.J. Hammerschlag with M. Green Solicitor for the First to Fourth Respondents: Teece Hodson & Ward Counsel for the Fifth Respondent: P.L. Dodson Solicitor for the Fifth Respondent: Blake Dawson Waldron Counsel for the Seventh Respondent: R.B.S. Macfarlan QC with D.L. Williams Solicitor for the Seventh Respondent: Alan Jessup Date of Hearing: 10-13, 17-21 August 1998 Date of Judgment: 29 October 1998
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