Halgido Pty Ltd v DG Capital Company Ltd
[1996] FCA 1123
•20 DECEMBER 1996
CATCHWORDS
TAXATION - application to recover from lender moneys paid to Commissioner for Taxation in relation to withholding tax on interest paid under a loan agreement - Income Tax Assessment Act (1936) 1936 (Cth) s 221YQ(2) - loan agreement provided that liability for withholding tax be borne by borrower - whether various securities provided by borrower fall within meaning of "mortgages" within meaning of s 261(5) - lender liable to pay withholding tax under s 128B(5) - whether s 261 renders clause directing borrower to be liable for withholding tax void - meaning of "collateral" or "supplementary agreement" within s 261 - primacy not necessary - whether money recoverable under s 221YQ(2) - borrower entitled to recover amount equal to amount paid as withholding tax under s 221YQ(2).
MISTAKE - whether there was a mistake of law - notice of possible invalidity - no mistaken belief on facts.
RESTITUTION - whether borrower entitled to recoupment under principles of restitution - recoupment made out.
CONFLICT OF LAW - controlling law clause - intention of parties to exclude Australian income tax law - not effective to make Australian income tax legislation inapplicable - public policy.
Income Tax Assessment Act 1936 (Cth) ss 221YQ, 261(5), 128B(5), 221YL, 261
Income Tax (Dividends, Interest and Royalties Withholding Tax) Act 1974 (Cth) s 7
Torrens Aloha Pty Limited v Citibank NA (1996) 32 ATR 450, applied
David Securities Pty Limited v Commonwealth Bank of Australia (1992) 175 CLR 353, applied
Moule v Garrett (1872) LR 7 Ex 101, cited
Brook's Wharf & Bull Wharf Ltd v Goodman Bros [1937] 1 KB 534, cited
Commissioner of State Revenue (Victoria) v Royal Insurance Australia Ltd (1994) 182 CLR 51, considered
Bilbie v Lumley (1802) 2 East 469, cited
Wanganui-Rangitikei Electric Power Board v Australian Mutual Provident Society (1934) 50 CLR 581, considered
Kay's Leasing Corporation Pty Ltd v Fletcher (1964)
116 CLR 124, considered
BHP Petroleum Pty Ltd v Oil Basins Ltd [1985] VR 725, cited
Golden Acres Ltd v Queensland Estates Pty Ltd [1969] QdR 378, cited
HALGIDO PTY LIMITED v DG CAPITAL COMPANY LIMITED
No NG 441 OF 1995
Tamberlin J
Sydney
20 December 1996
IN THE FEDERAL COURT OF AUSTRALIA )
NEW SOUTH WALES DISTRICT REGISTRY ) No. NG 441 of 1995
GENERAL DIVISION )
BETWEEN: HALGIDO PTY LIMITED
(ACN 101 095 459)
Applicant
AND: DG CAPITAL COMPANY LIMITED
Respondent
CORAM: TAMBERLIN J
PLACE: SYDNEY
DATED: 20 DECEMBER 1996
REASONS FOR JUDGMENT
TAMBERLIN J:
The Application
In this matter the applicant, Halgido Pty Limited ("Halgido"), seeks to recover from the respondent, DG Capital Company Limited ("the bank"), moneys paid by it to the Commissioner for Taxation ("the Commissioner") in relation to withholding tax on interest paid under a loan agreement ("the credit agreement"), whereby Halgido borrowed an amount of 29 million Swiss francs (CHFS29M). The liability to pay withholding tax arose under the Income Tax Assessment Act 1936 (Cth) ("the Act").
The credit agreement provided in cl8(2) that all interest payments required to be made by Halgido were to be made to the bank without set-off, counterclaim, or deduction. The clause
provided that withholding tax was to be borne and paid by Halgido and it was to indemnify the bank in respect of withholding tax referable to the loan.
The amended statement of claim alleges that as security for the credit agreement, Halgido executed in favour of the bank various securities that were "mortgages" within the meaning of that term as defined in s261(5) of the Act. Halgido contends that the effect of s261(1) was to render cl8(2) void.
The loan was drawn down by Halgido on 24 January 1989 and thereafter it made a number of payments of interest to the bank in accordance with cl8(2).
The bank was liable to pay Australian tax on the interest pursuant to s128B(5) of the Act. The Act required Halgido to deduct withholding tax of ten percent from each payment of interest made by it and to forward such deductions to the Commissioner and to provide the Commissioner with a statement as to the payments.
In fact, Halgido did not make deductions from interest payments as required by s221YL of the Act, and thereby became liable to pay the Commissioner an amount equal to the withholding tax which ought to have been paid. See s221YQ(1)(a).
Halgido on about 7 August 1990 paid to the Australian Taxation Office amounts totalling about AUD317,756 in respect of interest withholding tax arising from the loan. As a result of these payments of interest withholding tax Halgido contends that it discharged the liability of the bank to the Australian Taxation Office and that it is entitled under s221YQ(2) to recover the amount of AUD317.756 plus interest from the date of payment.
Halgido has demanded payment of the sum of AUD317,756 from the bank. The bank refused to pay.
Alternatively, Halgido says that it made the payment of interest as a result of its mistaken belief that interest withholding tax was its liability under the credit agreement and not that of the bank. The true position was that it had no such liability because cl8(2) was absolutely void. Therefore, it is said, the bank has been unjustly enriched at the Halgido's expense and is liable to make restitution.
As a further alternative, Halgido argues that in making the interest payments it discharged the indebtedness of the bank to the Commissioner in satisfaction of the bank's tax liability and therefore is entitled to recoup those payments from the bank.
In addition to denials and non-admissions of the allegations against it, the bank relies on submissions based on waiver, indemnity, estoppel and the choice of law clause (cl22) in the credit agreement.
Facts and Statutory Provisions
The credit agreement, under which the loan was made, is dated 19 January 1989. Halgido is incorporated in Australia and is a resident for the purposes of the Act. The bank is incorporated in Hong Kong and is a non-resident for the purpose of the Act.
The bank, being a non-resident, became liable to pay withholding tax on the interest to be paid to it by Halgido under the credit agreement.
Section 128B(5) of the Act provides:
"A person who derives income to which this section applies that consists of interest is, ... liable to pay income tax upon that income at the rate declared by the Parliament..."
Other relevant provisions of the Act are set out below:
"128C(1)Withholding tax is due and payable by the person liable to pay the tax at the expiration of 21 days after the end of the month in which the income .. was derived ...."
The person liable to pay the tax is the bank.
Part VI of the Act which relates to the Collection and Recovery of Tax contains the following provisions relating to withholding tax:
"221YL(2A)Where interest is payable by a person, ... 'the borrower' ... to another person, ..... and -
(a) ...
(b) the borrower is authorized to pay the interest, ... to the person ... to whom it is payable ... at a place outside Australia,
the borrower shall, ... at the time when the interest is paid by the borrower, make a deduction from the interest of an amount determined in accordance with the regulations.
221YN(1)Where a person has made a deduction ... from interest .. and that deduction was made, ... under section s221YL -
(a) that person shall, within 21 days after the end of the month in which the deduction was made, pay to the Commissioner an amount equal to the deduction;
221YQ(1)Where a person has ... failed to make a deduction ... from interest ... in accordance with section 221YL or has that section in full or has contravened subsection 221YP(1), (2) or (3A) in relation to ... interest, that person is liable, in addition to any other penalty ... to pay to the Commissioner -
(a) an amount equal to any unpaid withholding tax payable in respect of that dividend, interest or royalty; ...
(b) ...
(2)Where a person has paid to the Commissioner an amount payable by virtue of paragraph 1(a), that person may recover an amount equal to that amount from the person liable to pay the withholding tax to which that first-mentioned amount relates.
(3)Where an amount payable under subsection (1) has been paid to the Commissioner, the person liable to pay the withholding tax to which the amount relates is entitled to a credit equal to that amount." (Emphasis added)
Section 261 of the Act relevantly reads:
"261(1)A ... stipulation in a mortgage which has or purports to have the purpose or effect of imposing on the mortgagor the obligation of paying income tax on the interest to be paid under the mortgage:
(a) ...
(b) if the mortgage was entered into after that date
[13 September 1915] - shall be absolutely void.
....
(5)For the purposes of this section "mortgage" includes any charge, lien or encumbrance to secure the repayment of money, and any collateral or supplementary agreement, whether or not in writing or otherwise, and whether it be one whereby the terms of any mortgage are varied or supplemented, or the due date for the payment of money secured by mortgage is altered, or an extension of time for payment as granted." (Emphasis added)
The language of s261(1) is far reaching. It contemplates a provision which "purports" to have the "purpose" or the
"effect" specified and this "purpose" or "effect", consistently with the language can be direct or indirect.
By the Income Tax (Dividends, Interest and Royalties Withholding Tax) Act 1974 (Cth), the rate of income tax imposed is ten percent (10%) in respect of income to which s128B(5) applies (see s7).
During the term of the credit agreement Halgido paid to the bank interest amounting to $3,177,558.70 but did not make any deductions for withholding tax as required under s221YL of the Act, nor did it remit to the Commissioner any withholding tax.
On 7 August 1990 Halgido paid to the Commissioner three amounts totalling $317,756.36 in satisfaction of its obligations under s221YQ(1) in respect of interest withholding tax on interest payments by Halgido to the bank under the credit agreement. These payments, it was submitted, discharged the bank's liability to the Commissioner in accordance with s221YQ(3) of the Act, because it gave rise to a credit entitlement in the bank equal to the amount of withholding tax.
The credit agreement obligations of Halgido were secured by a letter of credit, dated 20 January 1989, issued by the Sanwa Bank Limited (Hong Kong), ("Sanwa Hong Kong") in favour of the bank in the sum of AUD20 million, together with a guarantee and indemnity from Mr Balog of the director of Halgido. The evidence of the bank was that it regarded Sanwa's irrevocable letter of credit as being the principal security for the loan. There was also an irrevocable letter of credit provided by National Mutual Royal Bank Limited but the details of this security are not important for present purposes.
The letter of credit provided by Sanwa Hong Kong was issued at the request of its Australian subsidiary, Sanwa Australia Limited, ("Sanwa Australia"), which had agreed to provide this assistance to Halgido pursuant to a Combined Loan and Support Guarantee Facility Agreement ("the facility agreement"), also dated 19 January 1989. The obligations of Halgido to Sanwa Australia under this facility agreement in turn were to be secured by real property mortgages given to Sanwa Australia by Progress and Securities Pty Limited ("Securities") and Progress and Securities Investments Pty Limited ("Investments"), which were companies connected with Mr Balog, a director of Halgido.
In addition to the Sanwa letter of credit and the guarantee, the obligations of Halgido to the bank were also secured, during part of the term of the credit agreement, by a Mortgage of Credit Account dated 21 May 1990, granted by Halgido to the bank. This mortgage was subsequently released by the bank on 16 July 1990.
The principal parties to the credit agreement were Halgido, the bank, and Mr Balog as guarantor. The repayment date was stated to be a date two years and eleven months after the date of the credit agreement.
Clause 8 of the credit agreement is a provision of central importance, entitled "Payments". It provides:
"(2)All payments to be made by the Borrower hereunder shall be made without set-off or counterclaim and free and clear of and without deduction for or on account of any present or future Australian Taxes unless the Borrower is compelled by law to make payment subject to any such Australian Tax. All such Australian Taxes shall be paid by the Borrower for its own account prior to the date on which penalties attach hereto. The Borrower will indemnify the Bank in respect of all such Australian Taxes. Should any such payment be subject to any Australian Tax and the above provisions either cannot be effected or do not result in the Bank actually receiving an amount equal to the full amount provided for hereunder the Borrower shall pay to the Bank such additional amounts as may be necessary to ensure that the Bank receives a net amount in the relevant currency equal to the full amount which it would have received had payment not been made subject ti such Australian Tax. The Borrower shall deliver to the Bank within thirty days of each such payment by the Borrower of such Australian Tax, evidence satisfactory to the Bank (including all relevant tax receipts) that such Australian Tax has been duly remitted to the appropriate authority.
(2) The Borrower hereby waives any right it may have against the Bank to recover amounts paid by the Borrower in respect of unpaid withholding tax.
(3)....
(4) ...
(5)If at any time the Borrower fails to comply with the provisions of sub-clause 8(2) then notwithstanding anything to the contrary including, without limitation :
(a)that such failure does not constitute a breach of this Agreement; or
(b)that such failure does not constitute an Event of Default under Clause 13,
the Bank shall be entitled by notice given to the Borrower to declare its obligations under this Agreement to be terminated whereupon the Borrower shall forthwith repay the Loan to the Bank together with interest accrued to the date of repayment and all other amounts payable under this Agreement."
It was a condition precedent to the operation of the credit agreement that the Sanwa letter of credit duly completed and signed should be provided prior to the making of the loan, together with evidence as to due execution, validity and enforceability (see cl10(1)(a)).
An agreed form of letter was required by the credit agreement to be provided by the solicitors for the parties prior to drawing down the loan. This form included the following qualification with respect to cl8(2):
"3(i)By reason of section 261 of the Income Tax Assessment Act 1936 of the Commonwealth of Australia if at any time the Borrower executes a pledge or other security in favour of the Bank, the undertaking by the Borrower in Clause 8(2) of the Credit Agreement to pay any amount of withholding tax or income tax imposed on or to pay any additional amount in respect of such withholding tax or income tax (and to the extent that it covers the moneys to be paid under such undertaking) the Credit Agreement may be void."
The provision of this letter by the solicitor for each of the parties was a further condition precedent to the obligations of the bank under the credit agreement. (cl10(1)(i) and (j)).
The facility agreement made between Halgido, Sanwa Australia, Investments, Securities, and Mr Balog provided in cl2.2 and 2.3 as follows:
"2.2Support Guarantee
The Financier may satisfy its obligations in respect of the Support Guarantee Facility by causing or occasioning the issue of guarantees, bonds, indemnities or letters of credit by a related or associated company of the Financier on the security of a guarantee or indemnity of the Financier which bonds, indemnities or letters of credit shall themselves secure the obligations of the Customer under any other financial accommodation to be furnished by a Creditor and approved by the Financier.
2.3Purpose
The Customer will use the Facility for the purpose of securing the liabilities of the Customer in respect of a foreign currency facility to be granted to the Customer by the D.G. Bank of Frankfurt or such other purpose as the Financier may from time to time approve."
On 20 January 1989 Sanwa Hong Kong furnished particulars of an irrevocable letter of credit issued in favour of the bank in an amount of AUD20,000,000 with an expiry date of 30 November 1991. By amendment number 1 to this letter of credit made on 24 January 1989, the expiry date of the letter of credit was extended to 24 January 1992.
The facility agreement defined the term "securities" when referred to in that agreement to include; a first registered mortgage from Securities over 19 Stanley Street, Woollahra, and a first registered mortgage from Investments over property 402-420 Pacific Highway, Crows Nest together with a guarantee from Mr Balog.
By cl5 of the facility agreement, it was a condition precedent to the making of the loan that Sanwa Australia should have the securities executed, stamped and in registrable form.
In evidence are three mortgages under the Real Property Act 1900 (NSW) from Security and Investments to Sanwa Australia, dated 29 December 1988.
As a result of cl2.3 of the facility agreement there was a clear link between the real property mortgages and the loan which was the subject of the credit agreement.
On 21 May 1990 by way of further security, Halgido mortgaged a credit bank account which it held in Hong Kong with D G Bank Deutsche Genossenschaftsbank. The bank released this mortgage on 16 July 1990.
The Applicant's Submissions:
Halgido makes the following submissions:
•Section 261 of the Act renders void cl8(2) of the credit agreement ("the s261 submission"). The term "mortgage" is given an extended meaning by subs(5) of that section so as to include "any collateral or supplementary agreement" having the specified "purpose or effect". The words "collateral" or "supplementary" do not denote primacy, but are rather to be understood as "related to" or "in addition to". It is not necessary for a "mortgage" within the meaning of s261 to be a direct security for the repayment of the amounts borrowed by Halgido. See Torrens Aloha Pty Limited v Citibank NA (1996) 32 ATR 450 at 458.
•The credit agreement is a "mortgage" within the extended meaning of that term because it is an agreement collateral or supplementary to the "mortgages", namely the two real property mortgages from Securities and Investments and the mortgage of the credit account from Halgido.
•The moneys claimed are recoverable under s221YQ(2) of the Act ("the statutory claim") because Halgido has paid to the Commissioner an amount, in respect of tax on interest payments without deduction and may therefore recover an amount equal to that amount from the bank. In the present case, it is said, that the bank was liable to pay withholding tax on amounts of interest received from Halgido and that Halgido "failed" to deduct the amounts from the three interest payments as required by s221YL(2A) and subsequently paid an amount equal to the interest withholding tax to the Commissioner.
•Halgido made the payment to the Commissioner as the result of a mistake of law ("the mistake claim"). The mistake was that it understood it was legally obliged to pay the full amount to the bank and that the bank had the legal right to receive the full amount of interest during the term of the credit agreement. In reality, because of s261, cl8(2) of the credit agreement was void and the bank was not entitled to receive the full amount of interest, rather only ninety percent thereof.
•Alternatively, it is said the bank has been unjustly enriched by reason of the discharge by Halgido of its legal liability to pay withholding tax to the Commissioner ("the recoupment claim"). The bank had the legal liability to pay withholding tax to the Commissioner under s128B(5). It failed to do so and Halgido then incurred a liability to deduct and remit the withholding tax to the Commissioner under ss221YL(2A) and 221YN. There was a legal liability to the Commissioner to pay that tax. The bank obtained a credit for the amount paid to the Commissioner by Halgido. The payment was made under legal compulsion and Halgido is entitled to recoupment under the principles relating to restitution.
Section 261 - Applicability and Consequences
Whether s261 of the Act is attracted depends on whether the credit agreement can be properly described as a collateral or supplementary agreement in relation to the real property mortgages and the mortgage of credit account.
In one sense, the description of an agreement as collateral or supplementary might be thought to signify primacy, in the sense that one agreement could be described as the primary or principal agreement and another might be described as collateral or supplementary to that main agreement. In the present case, on a first impression, it might be thought, for example, that the real property and the credit account mortgages were collateral to the credit agreement in the sense that the credit agreement was the primary or principal agreement, but that the credit agreement, being the document which effected the loan, was not "collateral" to the mortgages. However, the High Court, in David Securities Pty Limited v Commonwealth Bank of Australia (1992) 175 CLR 353 at 364-365, made it clear that the notion of primacy is not essential and that the prefix "co-" imports a sense of "with" or "in addition to " without any necessary concept of primacy or subordination. At 365 their Honours said:
"Collateral contracts are so called not because they are subordinate or of lesser importance (although they may well be, depending on the facts of the case), but because they impinge upon and are related to another contract. ... Once the notion of primacy is jettisoned 'collateral' must be understood in the sense of 'related to' or even 'in addition to'."
In David Securities, the clause under consideration was substantially similar in effect to cl8(2) of the credit agreement in the present case, except that it did not include the final paragraph relating to waiver by the borrower of any right to recover. The Court held that the whole of the clause was caught by s261.
The above approach was applied by Hill J in Torrens Aloha Pty Limited v Citibank NA (1996) 32 ATR 450.
In that case clause 1.08(b) of the Multi-Currency Credit Agreement provided:
"Any ... payments made by the Borrower ... shall be made free and clear of and without deduction for any ... taxes or withholdings ... If the Borrower shall be required by law to make any such deduction ...,
(i) the sum payable shall be increased as may be necessary so that after making all required deductions ... the Bank receives an amount equal to the sum it would have received had no such deductions been made."
His Honour concluded that this clause was void.
Paragraph (d) of the same clause contained an indemnity by the borrower in respect of any taxes imposed by any jurisdiction on amounts payable by way of interest.
Repayment of amounts owing under the credit agreement in that case was guaranteed by Citicorp Australia Limited. By an indemnity agreement the borrower and various other companies and individuals in turn indemnified Citicorp Australia against all liabilities it might incur under the guarantee given by it. As security for this indemnity, the borrower executed a bill of encumbrance over various parcels of real estate to secure money payable under the indemnity agreement and all moneys which "the Citicorp Group" might advance, or in respect of which the borrower might become liable to pay to either Citibank Australia Limited or the Citicorp Group. The Citicorp Group specifically included Citibank NA.
At 458, after referring to David Securities, Hill J said:
"I think ... the credit agreement is a collateral contract to the mortgage in the sense that it is 'related to' the mortgage. The case is one removed from that in David Securities because the encumbrance does not directly secure to the respondent (who is not a party to it) payment of the amounts payable under the credit agreement, but rather secures the indemnity given to Citibank Australia Limited for that company guaranteeing the obligation of the applicant to the respondent. However, I think that notwithstanding the less direct relationship it is still correct to say that the credit agreement is related to the encumbrance." (Emphasis added)
In the present case, it was an express condition precedent to the credit agreement that the bank should be provided with a letter of credit duly completed and signed on behalf of Sanwa Hong Kong.
Under the facility agreement, dated the same day as the credit agreement, it was agreed that Sanwa Australia would provide a letter in favour of a creditor for, or on behalf of, Halgido and that this obligation could be satisfied by causing the issue of a letter of credit by a related or associated company of Sanwa Australia (clause 2.2 of the facility agreement). The letter of credit was required to be used for the purposes of securing the liabilities of Halgido in respect of a foreign currency facility to be granted to it by DG Bank (clause 2.3 of the facility agreement). This in fact occurred.
By the deeds of guarantee and indemnity of 29 December 1988 made between Sanwa Australia, Securities and Investments (the guarantors), it was agreed that the guarantors would irrevocably and unconditionally guarantee to Sanwa Australia the performance by Halgido of all its obligations.
It is true, as the bank points out, that the relationship between the mortgages and the credit agreement is indirect, but in my opinion, the relationship is, in a practical and commercial sense, a real and substantial one and is not merely tenuous or insignificant.
The commercial reality is that Sanwa Hong Kong would not have issued the irrevocable letter of credit required by the credit agreement, at the request of Sanwa Australia, without the security of the real property mortgages made in favour of Sanwa Australia.
Determination of the sufficiency of the relationship between the mortgages and the credit agreement depends on the level of generality at which the transaction is considered. If one looks simply at direct legal relationships, then the required nexus is not made out. However, on a broader approach to the transactions, as indicated by the High Court, it is appropriate to look at the dealings between the parties on a comprehensive basis, having regard to practical commercial considerations to determine whether the agreements are collateral. On this approach, the relationship although indirect, is in my view, sufficient to bring the credit agreement within the description of a "collateral" or "supplementary" agreement to the mortgages.
Accordingly, I have reached the conclusion that s261 applies in relation to cl8.(2) of the credit agreement in this case.
The effect of the application of s261, is that cl8(2) of the credit agreement is absolutely void. This conclusion in my view, extends to the final paragraph, the waiver provision, in that sub-clause which reads:
"The Borrower hereby waives any right it may have against the Bank to recover amounts paid by the Borrower in respect of unpaid withholding tax."
This paragraph is clearly in aid of and related to the proceeding provisions of cl8(2).
Notwithstanding the arguments advanced by the bank, the waiver clause cannot stand on its own because it is an integral and inseverable part of cl8(2) when read as a whole and is part of the mechanism designed to carry out the purpose and effect of the earlier parts of the sub-clause.
To treat the waiver clause as independently operative after avoidance of the earlier provisions of paragraph 8(2) would, in my view, be contrary to the evident purpose of s261. The waiver is calculated to prevent the mortgagor exercising its legal entitlement, which would result from the avoidance of the rest of that clause. This means that the non-resident lender would have received the interest inclusive of an amount equal to the tax. Such a result would be direct conflict with the express provisions and the manifest purpose of s261. As was pointed out in David Securities (supra) at 367, the legislative intention which underlies s261, is to provide protection for mortgagors.
The conclusion that the section has such a wide and destructive effect gains support from the comprehensive language in which the section is cast. It refers not only to "purpose" but also "effect" and it speaks not of "void" or "voidable" but in terms of "absolutely void". Moreover, a purpose or effect may be direct or indirect. This language does not call for a restrictive interpretation, but rather a wide and comprehensive one. In interpreting the words "allocated" and "supplementary" as being equivalent to "related" and not requiring primary primacy, the High Court has favoured a wider approach. Such an approach is reinforced by the "protective" nature of the provision.
Accordingly, in my view, the result of the operation of s261 is that cl8(2) as a whole is absolutely void.
The Statutory Claim - Section 221YQ
The bank submits that Halgido cannot succeed on its statutory claim for payment under s221YQ(2) because this is not a case where Halgido has "failed" to make a deduction from interest in accordance with s221YL. The correct approach to these circumstances, it is said, is to characterise the payments of interest as giving rise to a situation where Halgido should be taken to have made deductions from the interest payments and then grossed up these reduced interest payments to an amount equal to one hundred percent of the interest due. It subsequently used the amount deducted to discharge its liability under s221YN(1).
I do not agree that this is an appropriate characterisation of the events which transpired.
In my view, the facts show that the present case is one where Halgido made payments of interest without any deductions in respect of withholding tax and later made a payment to discharge its liability under s221YQ(1).
The characterisation suggested by the bank is artificial and unduly strains the clear language of the section.
It is necessary to look at the substance of the matter. What the borrower in fact did was to pay the interest without set-off, counter-claim, or deduction for Australian tax. To the extent that the bank relies on the provision of cl8(2) to characterise the payments of interest and tax as a deduction and grossing-up, the submission runs counter, in my view, to the clear language of cl8(2) which expressly calls for interest payment without deduction on account of Australian taxes.
The payment of tax by Halgido is within s221YQ and accordingly Halgido is entitled to recover as provided for by that section.
It was also submitted that Halgido was contractually prevented from enforcing the cause of action by the waiver provisions set out in the last paragraph of cl8(2). In my view, for the reasons given earlier, this submission cannot be accepted because s261 avoids the waiver. Further, I do not accept the alternative estoppel argument which achieves the same result. If the waiver paragraph is void it cannot give rise to a misrepresentation of the true position. Such a contention is contrary to s261.
Accordingly, Halgido in my view, has made out its case for recovery under s221YQ(2).
As I have concluded that Halgido is entitled to succeed on the s221YQ(2) basis, it is not necessary to decide the other questions raised, but I will state my conclusions with brief reasons on these arguments.
Unjust Enrichment- Mistake
Halgido submits that it paid the interest without deduction in the mistaken belief that it was obliged to pay the full amount to the bank and that the bank was entitled to receive the full amount of interest without deduction during the term of the credit agreement. Therefore, so the argument runs, because cl8(2) was void under s261 the bank was only entitled to receive ninety percent of the interest payments and Halgido is entitled to recover the tax which it has paid.
Alternatively, Halgido says that the bank has been unjustly enriched because Halgido, under compulsion, discharged the bank's liability to pay the withholding tax. Halgido refers to Moule v Garrett (1872) LR 7 Ex 101, Brook's Wharf & Bull Wharf Ltd v Goodman Brothers [1937] 1 KB 534.
The bank responds with the submission that for a payment to be recoverable on the ground of mistake of law it must be shown that the mistake caused the payment to be paid. In David Securities at 376, the majority said:
"Having rejected the so-called traditional rule denying recovery in cases of payments made under mistake of law, it is necessary to consider what principle should be put in its place. It would be logical to treat mistakes of law in the same way as mistakes of fact, so that there would be a prima facie entitlement to recover moneys paid when a mistake of law or fact has caused the payment...."
and at 379:
" ... The fact that the payment has been caused by a mistake is sufficient to give rise to a prima facie obligation on the part of the respondent to make restitution. Before that prima facie liability is displaced, the respondent must point to circumstances which the law recognises would make an order for restitution unjust." (Emphases added)
In Commissioner of State Revenue (Victoria) v Royal Insurance Australia Ltd (1994) 182 CLR 51 at 67, Mason CJ said:
"The belated recognition in David Securities that moneys paid away as a result of a causative mistake of law are recoverable enables us to discard some of the complications associated with the old law governing the recovery of moneys paid as and for taxes which were not due and payable because causative mistake of law was not thought to be a sufficient basis of recovery." (Emphasis added)
In the present case, the language of cl8(2) itself exposed the possibility that payments made in accordance with that clause might be void. This exposure of potential invalidity was reinforced by the solicitors' letters required under the credit agreement, which were conditions precedent to the operation of the credit agreement. Both these letters were to the effect under s261 of the Act, the undertaking by the borrower in cl8 of the credit agreement to pay withholding tax, may be void.
In David Securities, the majority considered the "traditional rule" that a payment made voluntarily was not recoverable. Their Honours considered that the leading authority of Bilbie v Lumley (1802) 2 East 469 (102 ER 448) was probably correct on its facts, because the payment appeared to have been made voluntarily and not under any mistake. After reviewing some of the authorities, the Court said at 373:
"An important feature of the relevant judgments in these three cases is the emphasis placed on voluntariness or election by the plaintiff. The payment is voluntary or there is an election if the plaintiff chooses to make the payment even though he or she believes a particular law or contractual provision requiring the payment is, or may be, invalid, or is not concerned to query whether payment is legally required; he or she is prepared to assume the validity of the obligation, or is prepared to make the payment irrespective of the validity or invalidity of the obligation, rather than contest the claim for payment. We use the term 'voluntary' ... to refer to a payment made in satisfaction of an honest claim, rather than a payment not made under any form of compulsion or undue influence." (Emphasis added)
In the present case, the language of cl8(2), coupled with the solicitors' letter, support the inference that Halgido made the payment even though it knew that cl8(2) may be invalid and that it was prepared to assume the validity of the obligation and make the payment irrespective of its validity.
Mr T Balog, a director of Halgido and the only witness who gave oral testimony for the applicant, gave the following evidence:
"Q.I suggest to you, Mr Balog, that even if you had been aware ... directly aware yourself, of the possibility of clause 8... being void, you would nevertheless have paid interest to the lender without deduction of withholding tax because you would have anticipated that if you did otherwise they might be reluctant to continue the funding facility?
A. I agree with that assumption.
Q.So the payment would have been made regardless of the state of your knowledge about whether the precise obligation under clause 8(ii) was void?
A.Yes I think so.
.....
Q.... I put to you that even if you had been aware of the possibility that part of clause 8(ii) was void, you would nevertheless have paid interest to the lender without deduction of withholding tax because you would not want to run the risk of otherwise the facility being brought to an end; that is so, is it not?
A.Yes, it is a risk and I still stand by that but ...
... if I'd known that we don't have to pay the withholding tax we would have made some approaches to the lender to incorporate that into the interest and not have it paid ourselves."
The evidence does not satisfy me that Halgido made any of the payments under the operative effect of any mistake of law. Mr Balog was the only relevant witness called. He said that he did not read the credit agreement prior to execution. The two persons who might have been expected to have been familiar with the details of the loan, Mr Hippmann and the Company Secretary, Mr Rowles, did not give any evidence as to their state of mind in relation to this matter. This assists to reinforce the inference that the payments were not made as a result of mistake as explained in David Securities.
The parties must be taken to have entered the transaction embodied in the credit agreement with their eyes open, knowing of the possible invalidity. Therefore, they should not be permitted to allege injustice if it subsequently transpires that part of the agreement (namely cl8(2)), is found to be invalid.
I am satisfied that Halgido on the balance of probability was on notice of the possible invalidity of cl8(2) and notwithstanding that awareness, entered into the agreement.
Furthermore it is significant that after Mr Balog first became aware of the "mistake" as to the validity of cl8(2) in December 1994, as a result of advice from the company solicitors, a letter was written to the bank demanding repayment. This letter made no reference to cl8, nor did it contain any suggestion that any part of that agreement might be void or that Halgido was affected by any mistake of law. The demand then made was based on the statutory claim under s221YQ of the Act.
Accordingly, I find that none of the payments of moneys in respect of the withholding tax were made under a mistake of law.
Recoupment
In further argument the bank submitted that the payments by Halgido were made to discharge its own legal liability under the Act and not any liability of the bank, although the effect
of the payment was to credit the bank with the amount of the payment.
The bank says that because the liability of Halgido and the liability of the bank in respect of the withholding tax are independent liabilities under the Act, then s221YQ(2) cannot apply. In Torrens Aloha (supra) at 461, Hill J, in referring to a submission based on subrogation, observed:
"While it is true that under the Act the Commissioner of Taxation can recover from the payer of interest if that withholding tax is not deducted and paid to the Commissioner, and while payment of the amount to the Commissioner extinguished the obligation of the payer to pay interest to that extent, it is hard to see how a claim to contribution can be made out. The respondent has a liability to tax. The applicant had a liability to withhold and pay withholding tax to the Commissioner. That payment operated as a credit against the tax payable by the respondent. Each of the applicant and respondent had separate liabilities which could be enforced by the Commissioner, subject to the extinguishment of the respondent's liability by the credit which the Act confers. The case was not one of joint liability for the same amount..."
It is pointed out that s128B(5) provides that the non-resident recipient of interest is liable to pay income tax whereas the provisions dealing with collection and payment require payment of withholding tax to be made by Halgido. (ss221YL and 221YQ(1)). It is said that s221YQ(3) reinforces the existence of separate liability because where an amount equal to unpaid withholding tax on the interest is paid to the Commissioner, the lender liable to pay the withholding tax, is entitled to a credit equal to that amount.
The claim in recoupment is that Halgido has paid the Commissioner an amount equal to the withholding tax which had the effect of extinguishing the liability of the bank to the Commissioner by conferring on the bank a credit equal to the amount of tax due. This results from the operation of s221ZQ.
While it is true that Halgido had a liability distinct from that of the bank to pay an amount equal to the amount of the withholding tax, this is of no consequence, in my view, because the practical commercial result of the payment by Halgido is that Halgido paid an amount which effectively discharged the bank's debt to the Commissioner by providing a credit in favour of the bank. It would be unjust for the bank to retain this benefit, to which it had no entitlement under the credit agreement by reason of s261 rendering cl8(2) absolutely void. The bank has not persuaded me that it would not be unjust for the bank to retain the benefit of the payments by Halgido. Nor has the bank made good any defence based on change of position.
This is not a case where it can be said that in making the payment Halgido somehow acted in an officious manner. The payment was clearly made under compulsion arising under the Act.
Accordingly, I am of the view that in addition to its statutory entitlement to recover under s221YQ(2), Halgido was also entitled to recover on the basis of its recoupment claim. See Restitution Law in Australia, Mason and Carter, 1995 at par631 and following.
Mortgage of Credit Account - May to July 1990
As a further alternative, Halgido submits that the mortgage of the Hong Kong credit account, which subsisted during the period 19 May 1990 to 16 July 1990 was a mortgage to which the credit agreement was collateral and that therefore the credit agreement became a mortgage.
My conclusion on this point, is that the mortgage of credit account was a "mortgage" and that the credit agreement was collateral to it so that it was affected by s261 of the Act. However, because the mortgage of credit account only had limited temporal operation, the only interest obligations affected were those which accrued during the term of the mortgage of credit account. Accordingly, the obligation to pay interest which accrued during the term of that agreement was invalid. However, in view of my conclusions in relation to the other submissions in this matter, it is not necessary or appropriate to further examine the effect of this conclusion or to quantify the amount of interest which so accrued.
Controlling Law - clause 22
Finally, the bank contends that because English law was selected as the governing law by cl22 of the credit agreement then s261 of the Act, being Australian law, cannot operate to render void the obligations under cl8(2) and in addition the statutory right of recovery provided for under s221YQ cannot apply.
The bank contends that notwithstanding that there was a valid imposition on it of a liability to pay withholding tax as between it and the Commissioner, English law controlled the rights and obligations subsisting between the parties. The consequence is therefore that remedies based on Australian statutes are not available to Halgido.
No satisfactory basis in principle or authority has been advanced for this proposition.
It would be an odd result if the Act was effective to impose tax liabilities on interest payable under the agreement yet did not govern the rights as between the parties resulting from the operation of those provisions of the Act. Such an intention would need to be clearly spelt out. In my view, the agreement does not bear such a construction.
The wording of cl8(2) itself assumes that Australian tax law might apply to render the clause ineffective. For example, there are references to phrases such as "unless the Borrower is compelled by law to make payment subject to any such Australian Tax"; "All such Australian taxes shall be paid by the Borrower for its own account ..."; "the Borrower will indemnify the Bank in respect of all such Australian Taxes"; and "the Borrower shall deliver to the Bank within thirty days of each such payment by the Borrower of such Australian Tax evidence satisfactory to the Bank...".
The bank refers to the comments of Dixon J in Wanganui-Rangitikei Electric Power Board v Australian Mutual Provident Society (1934) 50 CLR 581 at 601:
"The rule is that an enactment describing acts, matters or things in general words, so that, if restrained by no consideration lying outside its expressed meaning, its intended application would be universal, is to be read as confined to what, according to the rules of international law administered or recognized in our Courts, it is within the province of our law to affect or control. The rule is one of construction only, and it may have little or no place where some other restriction is supplied by context or subject matter."
This is simply a statement of well-settled general principle.
Kitto J referred to this principle in Kay's Leasing Corporation Pty Ltd v Fletcher (1964) 116 CLR 124 at 143, and said:
"In the Vita Food Case[[1939] AC 277] the proposition was laid down that the parties to a contract may conclusively determine for themselves what the proper law of the contract shall be, provided that their expressed intention is "bona fide or legal", and provided there is no reason for avoiding their choice on the ground of public policy." (Emphasis added)
In Kay's Leasing, the Court was concerned with the effect of the proper law of the contract is determining whether agreements were covered by certain provisions of the New South Wales Hire Purchase Agreements Act 1941-1957.
In the present case, the Court is concerned with legislative provisions which impose liabilities and requirements on local and overseas residents as part of a scheme for the imposition and payment of tax on interest as income sourced from within Australia. It would be contrary to public policy to interpret cl22 of the credit agreement as effectively overriding the operation of the Act in relation to payments to non-residents.
The relevant principle is that where parties have in terms agreed which law is to govern an agreement, the Courts will prima facie apply that law. However, the Courts have refused to allow a choice of law made by the parties to operate where the result would be to avoid the operation of "fiscal or policy provisions" which would otherwise apply to the contract or arrangement. See BHP Petroleum Pty Ltd v Oil Basins Ltd [1985] VR 725 at 747-748; Golden Acres Ltd v Queensland Estates Pty Ltd [1969] QdR 378.
Here, the parties have not expressed any intention to exclude the operation of the Act. On the contrary the agreement specifically envisages that Australian tax laws may apply and provides for the consequences. Parties cannot exclude consequences of the Australian tax laws simply by providing that an agreement is governed by the law of another country. Clause 22 must be read down. If cl22 is not read down then it is inoperative to the extent that it purports to exclude the operation of the Act, as being contrary to Australian fiscal policy.
To attempt to draw a distinction between the operation of the Act as between the Commissioner and the resident on the one hand and the rights and obligations of the parties between themselves on the other is to suggest a distinction without any difference or basis.
There is no force in the submission that cl22 is effective to prevent the operation of the Act in relation to the rights and obligations of the parties which flow from s261 and 221YQ.
Conclusion
In my view, the application should be granted with costs. I direct the parties to bring in Short Minutes of Order to give effect to these reasons at an appropriate time to be arranged.
I certify that this and,
the preceding thirty-five (35)
pages are a true copy of the
Reasons for Judgment herein of
his Honour Justice Tamberlin.
Associate:
Date: 20 December 1996
Counsel for Applicant: Mr F Gleeson
Solicitor for Applicant: Verekers
Counsel for Respondent: Mr B J Sullivan SC
Solicitor for Respondent: Allen Allen & Hemsley
Date of Hearing: 20, 23 August 1996
Date Judgment Delivered: 20 December 1996