Deputy Commissioner of Taxation v Trapp
[2008] FMCA 704
•29 May 2008
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| DEPUTY COMMISSIONER OF TAXATION v TRAPP | [2008] FMCA 704 |
| BANKRUPTCY – Review of a decision of a registrar – sequestration order – act of bankruptcy – failure to comply with a bankruptcy notice – whether bankruptcy notice invalid for claiming interest on interest considered – whether the certificate of judgment annexed to the bankruptcy notice created confusion considered – whether the claim for interest was an overstatement considered. |
| Bankruptcy Act 1966 (Cth), ss.33, 41, 52 Civil Procedure Act 2005 (NSW), ss.100, 101 Federal Magistrates Court (Bankruptcy) Rules 2006 (Cth) Income Tax Assessment Act 1936 (Cth) Taxation Administration Act 1953 (Cth), ss.8AAD, 8AAE, 250-10, 255-1 |
| Hexiva Pty Ltd v Lederer (No 2) [2007] NSWSC 49 James v Abrahams (1981) 34 ALR 657 Re Wilhelmsen; Ex parte Gould (1986) 66 ALR 189 Totev v Sfar [2008] FCAFC 35 |
| Applicant: | DEPUTY COMMISSIONER OF TAXATION |
| Respondent: | JOHN TRAPP |
| File Number: | SYG 2940 of 2007 |
| Judgment of: | Driver FM |
| Hearing date: | 29 May 2008 |
| Delivered at: | Sydney |
| Delivered on: | 29 May 2008 |
REPRESENTATION
| Counsel for the Applicant: | Mr D Jay |
| Solicitors for the Applicant: | ATO Legal Services Branch |
| Solicitors for the Respondent: | Mr R Mitchell Eggleston Mitchell Lawyers |
ORDERS
The time for the filing of the review application is extended until 18 April 2008.
Orders 1 and 2 made by Registrar Hedge on 18 March 2008 are affirmed.
The application for review is dismissed with costs.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT SYDNEY |
SYG 2940 of 2007
| DEPUTY COMMISSIONER OF TAXATION |
Applicant
And
| JOHN TRAPP |
Respondent
REASONS FOR JUDGMENT
(revised from transcript)
I have before me an application filed on 18 April 2008 to review a sequestration and other orders made by Registrar Hedge on 18 March 2008. An application for review of a power exercised by a Registrar must be made within 21 days on which the power was exercised: Federal Magistrates Court (Bankruptcy) Rules 2006 (Cth), rule 2.03. The review application was made out of time. The reason given as to why the application was not made in time is that Mr Trapp did not have sufficient funds to pay the application fee and that when the application was made and the fee paid by his solicitor he had used the incorrect form and amount of money: affidavit of Russell Mitchell filed 18 April 2008 [2(b) and (c)]. The review application was filed only a week out of time, and I ordered that time be extended until 18 April 2008.
The review application is based upon a notice stating grounds of opposition to the creditor's petition, the notice being filed on 13 February 2008. The grounds of opposition to the creditor's petition were considered by the Registrar prior to making her orders but the present application must be dealt with as a complete rehearing of the creditor's petition[1].
[1] Totev v Sfar [2008] FCAFC 35
The application for review is also supported by two affidavits by Mr Mitchell, the solicitor for the debtor. I received those affidavits as evidence to the extent that they contained assertions of fact, and as submissions to the extent that they contain legal opinions. I accepted paragraph 18 of the affidavit of Mr Mitchell made on 8 April 2008 and filed on 18 April 2008 as a statement of Mr Mitchell's recollection of the reasons given by Registrar Hedge. The notice of opposition to the creditor’s petition is exhibited as RGM2 to the affidavit of Mr Mitchell.
The creditor's petition filed on 24 September 2007 is supported by two affidavits of Tuan Van Le made on 12 February and 14 March 2008, the affidavit of Bradley Pearson Liddle made on 25 July 2007, and updated affidavits of search and debt, the former made by Tuan Van Le on 29 May 2008, and filed in Court by leave today, and the second made by Francis Fabian on 28 May 2008 and also filed in Court by leave today.
I had the benefit of written submissions on behalf of both parties which I incorporate, with any necessary amendments, in this judgment. In particular, the background circumstances are dealt with in the Deputy Commissioner's submissions in paragraphs 4 to 12, and I incorporate those paragraphs with amendments as additional background.
The orders sought in the review application are:
1. The Sequestration Order be set aside
2. The Bankruptcy Notice be dismissed.
The outline of submissions filed in support of the application for review repeat earlier submissions filed in support of the notice of opposition with some short further submissions regarding whether the certified copy of the judgment supporting the bankruptcy notice is misleading. The affidavit Mr Mitchell filed on 18 April 2008 states at [19] that:
Trapp wishes to review the decision of Registrar Hedge made on the 18 March 2008 on the following grounds:
(a)The Bankruptcy Notice was misleading in that it claimed interest on interest (Ground 1).
(b)The general interest charge is in fact an interest charge (Ground 2).
(c)The Certified Extract of Judgment attached the Bankruptcy Notice was misleading in that it included a reference to “including interest” (Ground 3).
(d)The amount claimed in the Bankruptcy Notice NN4177/06 is overstated due to pre-judgment interest being calculated on post-judgment interest and the Registrar should have refused to make the Sequestration Order (Ground 4).
(e)Such further or other orders as the Court sees fit.
History
The Deputy Commissioner of Taxation commenced proceedings against Mr Trapp in the Newcastle Registry of the District Court of New South Wales on 23 August 2005. The liquidated sum sought at the commencement of the proceedings was $112,812.11 which comprised unpaid income tax liabilities, running balance account debts, administrative penalties and a general interest charge.
Mr Trapp did not file a defence and default judgment was entered on 20 February 2006 in the sum of $118,474.10 plus costs in the sum of $500. The basis for the calculation of the liquidated sum is set out in the affidavit in support of the notice of motion for default judgment sworn by Bradley Liddle and which is page 16 of annexure A to the affidavit of Tuan Van Le sworn 14 March 2008.
The Deputy Commissioner obtained judgment on 20 February 2006. There are two sealed judgments dated 20 February 2006. The first is annexed to the bankruptcy notice and styled “Certified Copy of Judgment” the second is styled “Judgment” and is attached to the affidavit of Tuan Van Le sworn 14 March 2008 as annexure B.
On 13 June 2007 this Court made orders for substituted service of the bankruptcy notice. The bankruptcy notice was deemed to be served on 6 July 2007.
No steps were taken to set aside the bankruptcy notice within the allowed time limit.
On 24 September 2007 the Deputy Commissioner filed a creditor’s petition. Orders for substituted service were granted on 16 January 2008 and the petition was deemed to be served on Mr Trapp.
On 13 February 2008 Mr Trapp’s solicitor filed the notice of opposition to the creditor’s petition.
That notice of opposition was dismissed and a sequestration order against Mr Trapp’s estate was made on 18 March 2008 by Registrar Hedge.
The review application was filed on 18 April 2008.
The review application
Calculation of the Judgment Debt - The basis upon which the quantum of the liability is calculated is set out in paragraphs 2 – 8 of the affidavit of Bradley Pearson Liddle sworn 17 February 2006 which stated:
2.The amount owing to the plaintiff at the commencement of the proceedings in respect to the cause of action was $112,812.11.
3.The amount claimed for issue and service costs is $500.00.
4.The amount of interest claimed under s 100 of the Civil Procedure Act 2005 as at the date of affirming this affidavit is $0.00.
5.The amount of further general interest charge as at the date of affirming this affidavit is $7,161.96.
6.The amount of legal costs claimed (not exceeding the amount calculated in accordance with the Legal Profession Regulation 2002) is $0.00.
7.Since the commencement of the proceedings, payments have been made or credits have accrued to the amount of $1500.05, which have reduced the amount of the claim to $118,474.05.
The Deputy Commissioner made no claim for interest up to judgment pursuant to s.100 the Civil Procedure Act2005 (NSW) (“the Civil Procedure Act”). The claim of $7,161.96 is a claim in respect of the general interest charge.
The general interest charge is claimed pursuant to paragraph 93 of the Commissioner’s Receivables Policy. Paragraphs 93.6.15 to 93.6.18 of the Receivable Policy provide as follows:
(1)… the Commissioner will claim GIC for the period from the due date to the date of issuing the proceeding.
(2)… the Commissioner will claim GIC for the period from the date of issue of a proceeding to the date of judgment or earlier payment.
(3)The Commissioner will claim judgment interest for the period from the date of judgment to the date of bankruptcy or liquidation, or earlier payment. The Commissioner will also in most circumstances claim the so-called “top-up amount” of GIC, ie the difference between the amount of GIC and judgment interest.
The amount of general interest charge is greater than the allowable interest rate if pre-judgment interest is claimed pursuant to the Civil Procedure Act. Section 8AAD(1) of the Taxation Administration Act1953 (Cth) (“the Taxation Administration Act”) prescribes the general interest charge rate by adding 7 percentage points to the base interest rate for that day and dividing it by the total number of days in the calendar year.
The debtor’s original outline of submissions proceeded on the assumption that the $7,161.96 is a claim for interest under the Civil Procedure Act. That was corrected in oral submissions. Both parties now agree that it is a general interest charge pursuant to the Taxation Administration Act.
Some confusion in the debtor’s outline of submissions about the “principal sum” was also corrected. The principal sum includes all tax related liabilities – being the unpaid income tax and related liabilities referred to in paragraph 2 of the extract from Mr Liddle’s affidavit above, with the exception of the general interest charge which continued to accrue after the commencement of the proceeding in the District Court.
Debtor’s submissions:
Mr Trapp relevantly submits as follows:
·The certified copy of judgment attached to bankruptcy notice NN4177/06 and dated 20 February 2006 specifies that the applicant pay the respondent $111,312.06 on the claim and $500.00 for costs and that the applicant pay $118,974.02 forthwith including interest.
·Thus the interest pursuant to the certified copy of judgment is $7,161.96.
·The interest calculations annexed to Bankruptcy Notice NN4177/06 stipulate that interest is being calculated on the total judgment sum minus costs of $500.00.
·Accordingly the Deputy Commissioner is calculating post-judgment interest on pre-judgment interest in direct conflict with s.101(6) of the Civil Procedure Act.
·The Deputy Commissioner’s interest calculations annexed to bankruptcy notice NN4177/06 specifically state that they are calculated pursuant to s.101 of the Civil Procedure Act. Section 101(6) of the Civil Procedure Act states that “this section does not authorise the giving of interest on any interest payable under this section”.
·Interest in this case should be:
- 21/02/2006 to 10/05/2006 @ 9% on the principal sum of $111,312.06 = $2,168.30
- 11/05/2006 to 23/08/2006 @ 9% on the principal sum of $111,312.04 = $2,881.91
- 24/08/2006 to 15/10/2006 @ 9% on the principal sum of $111,312.01 = $1,454.68
TOTAL $6,504.89
·Thus as bankruptcy notice NN4177/06 claims $6,923.41 in interest where an entitlement only exists to claim $6,504.89 in interest. Bankruptcy notice NN4177/06 should be dismissed.
·The amount claimed in bankruptcy notice NN4177/06 is overstated due to pre-judgment interest being calculated on post-judgment interest and has misled and confused the debtor as to the true debt owing. Thus bankruptcy notice NN4177/06 should be dismissed.
·The certified copy of judgment states that “the defendant pay $118,974.02 forthwith including interest”. The certificate of judgment is misleading in that it claims interest and it is not clear whether interest is being claimed pursuant to the Civil Procedure Act or whether or not the interest is the general interest charge.
Deputy Commissioner’s submissions
The Deputy Commissioner relevantly makes the following submissions:
·The Deputy Commissioner submits that there is no claim for “interest on interest” in the judgment sum. There was no claim for interest prior to judgment pursuant to s.100 of the Civil Procedure Act.
·Section 100 of the Civil Procedure Act does not authorise the award of interest on interest, it does authorise the award of interest on damages (including where those damages are calculated as interest): Hexiva Pty Ltd v Lederer (No 2) [2007] NSWSC 49.
·The Deputy Commissioner’s entitlement to recover the general interest charge accrues pursuant to item 70 of s.250-10(2) of the Taxation Administration Act.
·The provisions relating to the payment of the general interest charge are set out in Part IIA of the Taxation Administration Act. The general interest charge is charged to a taxpayer where there is a default in payment of, inter alia, income tax, fringe benefits tax and goods and services tax. The general interest charge is fixed by s.8AAD of the Taxation Administration Act and is due and payable to the Commissioner at the end of each day that a liability remains outstanding: s 8AAE.
·The general interest charge is in the nature of a charge or penalty for default in payment of income tax. It is not a claim for interest and is not analogous to pre-judgment interest. It is properly categorised as a “tax-related liability”: Taxation Administration Act, s.250-10.
·There is nothing in the debtor’s outline of written submissions to support the contention that the “general interest charge is in fact an interest charge”. It is a bald statement unsupported by reference to the Taxation Administration Act, the Income Tax Assessment Act1936 (Cth) (“the Income Tax Assessment Act”) or other authority and should be rejected.
·The contention is that the judgment is “misleading” because it does not identify whether the interest is claimed pursuant to the Civil Procedure Act or a taxation enactment. It is submitted that the debtor could only have been misled if the amount of the debt was wrong. The method of calculation of the debt is correct. To the extent that the judgment includes the words “including interest” where no interest was claimed it is merely a procedural oversight by the District Court Registrar which did not lead to an error in the amount of the debt owing.
·There is no requirement in the Bankruptcy Act or Rules to specify the basis upon which interest is charged in a certified copy of a judgment. There is no requirement in the Deputy Commissioner to do so and in any event he has no power to direct the Registrar as to how to prepare the judgment.
·The applicant’s submissions refer to the interest calculations relied on in the bankruptcy notice. It is submitted that they proceed on a fundamental misapprehension of the application of ss.100 and 101 of the Civil Procedure Act. Section 100 allows interest up to judgment and s.101 allows interest after judgment. They are not mutually exclusive. Both, however, prohibit a claim for interest on interest under each respective section.
·The Deputy Commissioner made no claim for interest before judgment.
·The Deputy Commissioner did claim interest after judgment. Section 101 specifically provides for interest payable after judgment. Section 101(6) is not relevant to this claim because there is no claim for interest on “any interest payable under this section”. That is, s.101(6) prohibits a claim of interest on interest under the section. There is only one claim for interest under s.101 in the Deputy Commissioner’s bankruptcy notice.
·The Deputy Commissioner claimed post-judgment interest in the sum of $6,923.41 in the bankruptcy notice. That was done by correctly calculating post-judgment interest in accordance with s.101 of the Civil Procedure Act and the method of calculation is set out in the schedule to the bankruptcy notice.
·Without accepting that there is on an over calculation of interest, nevertheless, s.41(5) of the Bankruptcy Act 1966 (Cth) (“the Bankruptcy Act”) would apply. Section 41(5) provides that a bankruptcy notice is not invalidated by reason of claiming a sum more than is in fact due unless an application is made to set aside the bankruptcy notice within time. No application was made to set aside the bankruptcy notice or to extend time for compliance with it. Although the time prescribed by s.41(5) to file a notice of overstatement of debt may be extended by the Court under s.33(1)(c): Re Wilhelmsen; Ex parte Gould (1986) 66 ALR 189, the time for compliance with a bankruptcy notice is expressly excluded by s.33(1)(c).
·Section 33(1)(c) expressly excludes the power to extend the time for compliance with the bankruptcy notice and express power is granted so to do by s.41(6A). The effect of these two provisions is to preclude the implication of a general inherent power in the court to extend time for compliance with the requirements of a bankruptcy notice: James v Abrahams (1981) 34 ALR 657.
·The evidence filed by the debtor’s solicitor supports the view that Mr Trapp is hopelessly insolvent. He was unable to pay the filing fee and has paid no amount of the judgment debt in over 2.5 years. He has not offered to pay that amount of the debt (ie the unpaid income tax) that is not in dispute.
Consideration
There are essentially two issues raised by the debtor on the review, which are the same issues that were raised in opposition to the creditor's petition. The first is that the bankruptcy notice improperly claimed interest on interest contrary to s.101(6) of the Civil Procedure Act. The second is that the bankruptcy notice was misleading and confusing.
The first objection fails by reference to the terms of s.101 of the Civil Procedure Act. That section relevantly states that the section does not authorise the giving of interest on any interest payable under that section. The debtor's contention is that the amount claimed as post‑judgment interest pursuant to s.101 of the Civil Procedure Act improperly claimed interest on a pre-judgment interest component of the judgment debt.
There was a somewhat elaborate argument on behalf of the Deputy Commissioner as to whether the interest component of the judgment debt was indeed interest or not, which I shall deal with later. However, whether or not there was any claim for pre-judgment interest, it is clear, first that there was no claim for pre-judgment interest pursuant to s.100 of the Civil Procedure Act, and secondly, that even if there had been, s.101 of the Civil Procedure Act does not prevent a claim for interest on a judgment which includes a sum of pre-judgement interest. Subsection 101(6) simply prevents a claim of compound interest on a judgement. There is a similar prohibition in s.100 on a claim for compound interest up to judgment. The sections operate independently. On that basis I reject the first ground of opposition to the petition.
The second ground asserts confusion. There was no confusion on the face of the bankruptcy notice itself, which accurately stated the amount due pursuant to the judgment, and accurately stated the calculation of post-judgment interest pursuant to s.101 of the Civil Procedure Act. The question of confusion only arises in relation to the certificate of judgment annexed to the bankruptcy notice.
The certificate of judgment issued by the District Court states, relevantly:
IT is this day adjudged that the plaintiff recover against the defendant $111,312.06
on his claim and $500 for costs and that
the defendant pay $118,974.02 forthwith including interest.
The debtor's contention centres on the third amount and the words "forthwith including interest". The debtor contends that the certificate of judgment is confusing in asserting that the judgment included a claim for pre-judgment interest if it did not and in failing to identify the source of the obligation to pay interest.
In simple terms, the source of the obligation to pay interest was the judgment itself. It is apparent from the affidavit of Tuan Van Le made on 14 March 2008 and filed on 18 March that the statement of liquidated claim in the District Court was for a base amount as an income tax liability and, in addition, an amount pursuant to the general interest charge applicable under the Taxation Administration Act. That amount continued to accrue during the District Court proceedings.
There is not real doubt, in my view, that the reference in the certificate of judgment to interest was a reference to the general interest charge component of the judgment debt. In my view, there was no error in the certificate of judgment.
The Deputy Commissioner contended that the general interest charge is not strictly an interest provision, but rather it is a charge and a “tax related liability” under s.250-10 of the Taxation Administration Act as defined in s.255-1 of the Taxation Administration Act.
I accept that the general interest charge is a tax related liability, but it is also clear that it accrues daily, and continues to accrue after the commencement of recovery proceedings. That is why it was claimed separately in the statement of liquidated claim in the District Court. The charge continued to accrue during the course of those proceedings. In my view, it is tolerably clear from the manner in which the charge was claimed, and the terms of ss.8AAD and 8AAE of the Taxation Administration Act that the general interest charge is in the nature of interest. Accordingly there was no error in the certificate of judgment in describing it as an interest component of the judgment.
In my view, there was no confusion in the certificate of judgment resulting from the failure to identify the interest component as based upon the Taxation Administration Act rather than the Civil Procedure Act. The judgment made clear what amount was payable. The bankruptcy notice also made clear what was payable, why it was payable, and how the liability might be discharged.
I reject the contention that the bankruptcy notice was invalid by reason of confusion.
Further, there was no overstatement of interest in the bankruptcy notice. Even if there had been an overstatement, s.41(5) of the Bankruptcy Act would have supplied an answer to that attack upon the bankruptcy notice.
There is no other basis upon which the creditor's petition is, or can be, opposed. I am satisfied that Mr Trapp committed the act of bankruptcy alleged in the petition and I am satisfied with the proof of the other matters of which subsection 52(1) of the Bankruptcy Act requires proof.
I therefore affirm orders 1 and 2 made by Registrar Hedge on 18 March 2008 and I dismiss the application for review, with costs.
I certify that the preceding thirty-nine (39) paragraphs are a true copy of the reasons for judgment of Driver FM
Associate:
Date: 4 June 2008
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