Re Kerrisk, P.W. Ex parte Duus, R.A. (As Trustee for Patrick William Kerrisk)

[1993] FCA 145

Re: PATRICK WILLIAM KERRISK
Ex Parte: ROSS ANDREW DUUS (AS TRUSTEE FOR PATRICK WILLIAM KERRISK)
No. Q X102 of 1992
FED NO. 145
Number of pages - 10
Bankruptcy
(1993) 93 ATC 4190
(1993) 25 ATR 216
(1993) 41 FCR 276

COURT

IN THE FEDERAL COURT OF AUSTRALIA

BANKRUPTCY DISTRICT OF THE STATE OF QUEENSLAND
Cooper J.(1)

CATCHWORDS

Bankruptcy - notice under section 218 Income Tax Assessment Act - debtor a shareholder - deed of arrangement under Part X - trustee appointed - transfer of shareholdings to trustee - whether the trustee or the Commissioner of Taxation entitled to any dividends declared after the transfer of the shares to the name of the trustee.

Income Tax Assessment Act 1936 (as amended) section 218

Part X Bankruptcy Act 1966

Commissioner of Taxation v. Donnelly (1989) 25 FCR 432

Clyne v. Deputy Commissioner of Taxation (1981) 150 CLR 1

Stapleton v. F.T.S. O'Donnell Griffin and Co. (Q.) Pty. Ltd. (1961) 108 CLR 160

Re Potts Ex parte Taylor (1893) 1 QB 648

Bond v. Barrow Haematite Steel Company (1902) 1 Ch 353

Godfrey Phillips Ltd. v. The Investment Trust Corporation Ltd. (1953) 1 Ch 449

In Re Severn and Wye and Severn Bridge Railway Co. (1896) 1 Ch 559

In Re Kidner, Kidner v. Kidner (1929) 2 Ch 121

Re Winbush, Richards v. Winbush (1940) 1 Ch 92

HEARING

BRISBANE, 8 March 1993

#DATE 19:3:1993

Counsel for the Applicant: P. Dutney QC

Solicitor for the Applicant: Boulton Cleary and Kern

Counsel for the Respondent: J.A. Logan

Solicitor for the Respondent: Australian Government Solicitor

ORDER

The Court orders:

1. The Court declares that for as long as the Deed of Arrangement between Ross Andrew Duus and Patrick William Kerrisk dated 23 September, 1992 is operative -

(i) any dividends payable by P.W. Kerrisk (Townsville) Pty. Ltd. in respect of the shares formerly held by Patrick William Kerrisk should be paid to Ross Andrew Duus as trustee of the Deed of Arrangement and not to the Commissioner of Taxation; and

(ii) any dividends payable by Ross River Road Services Pty. Ltd. in respect of the shares formerly held by Patrick William Kerrisk should be paid to Ross Andrew Duus as trustee of the Deed of Arrangement and not to the Commissioner of Taxation.

2. That the Commissioner of Taxation pay the Trustee's costs of and incidental to this application.

Note: Settlement and entry of orders is dealt with in Rule 124 of the Bankruptcy Rules.

JUDGE1

COOPER J. On 26 June, 1991 the Commissioner of Taxation, the respondent to the application, served a notice under section 218 of the Income Tax Assessment Act 1936 (as amended) upon each of the companies P.W. Kerrisk (Townsville) Pty. Ltd. and Ross River Road Services Pty. Ltd. Each notice relevantly provided:-

"TAKE NOTICE that, in the exercise of the powers conferred on me as Deputy Commissioner of Taxation by delegation from the Commissioner of Taxation pursuant to section 8 of the Taxation Administration Act 1953, I DO BY THIS NOTICE REQUIRE (the named company), being a person:

(a) by whom any money is due or accruing or may become due to;

(b) who holds or may subsequently hold money for or on account of;

(c) who holds or may subsequently hold money for or on account of some other person for payment to;

(d) having authority from some other person to pay money to; money (sic) for or on account of PATRICK WILLIAM KERRISK (hereinafter referred to as "the taxpayer") now or previously of 301 ROSS RIVER ROAD, a taxpayer by whom the amount of $324,163.99 is due in respect of tax, TO PAY THE COMMISSIONER:

(e) where the amount of the money held or which may subsequently be held is greater than the amount of $324,163.99 due by the taxpayer - so much of the money as is sufficient to pay the amount of $324,163.99 due by the taxpayer;

(f) where the amount of the money held or which may subsequently be held is equal to or less than the amount of $324,163.99 due by the taxpayer - the amount of the money; or

(g) where (the named company) become liable from time to time to make payments of money to the taxpayer - an amount of one hundred (100) cents in every dollar of each payment until the amount of $324,163.99 due by the taxpayer is satisfied.

1. At the relevant time Patrick William Kerrisk ("the debtor") was a shareholder in each of the companies.

2. On 23 September, 1992 the debtor executed a deed of arrangement under Part X of the Bankruptcy Act 1966. The applicant Ross Andrew Duus is the trustee under that deed. Under the deed the debtor transferred his shareholding in each of the companies to the trustee. This deed superceded an earlier deed executed on 19 December, 1991.

3. At the date of execution of the second deed no dividends had been declared and remained unpaid by either company and there were at that time no monies to which the notices could attach.

4. The issue between the parties is whether the trustee or the Commissioner is entitled to any dividend declared after the shares have been transferred into the name of the trustee in terms of the deed.

5. The principal submission of the respondent was that the service of the notice under section 218 of the Income Tax Assessment Act created a statutory charge over the shares in favour of the respondent and that the trustee took the shares subject to the statutory charge. Thus it was submitted that it was irrelevant that no dividends had been declared at the time the section 218 notice issued because the notice had a prospective operation in relation to any dividends later declared. In support of these submissions the respondent relied upon certain observations of members of the Full Court in Commissioner of Taxation v. Donnelly (1989) 25 FCR 432.

6. The applicant's principal contention is that when the shares were transferred to the trustee the right to receive dividends, if any, passed to the trustee. Thereafter it was submitted there was nothing to which the statutory charge could attach as money due to the debtor because there was no identifiable sum which ever became due to the debtor. The notices, it was submitted, only became effective if there was at some point in time an amount of money due by either company to the debtor. The statutory charge cannot attach to any dividend which has not been declared.

7. Section 218(1) of the Income Tax Assessment Act provides:-
   

"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 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 to the notice."

1. For present purposes the relevant paragraph in section 218(1) is (a) and the notice operates on "Money...due or accruing or which may become due to the taxpayer".

2. In Commissioner of Taxation v. Donnelly, the operation of section 218 was described by Lockhart J. His Honour said (at 426):-
   

"Section 218 empowers the Commissioner, by giving the notice in writing under the section, to require the recipient to pay to the Commissioner moneys when they become payable to the taxpayer by the recipient. The section confers on the Commissioner the right to prevent the taxpayer from subsequently dealing with the moneys so as to prevent compliance with the notice by the recipient when the time for payment of the moneys by the recipient to the taxpayer arrives; the section also creates an offence for a recipient to refuse or fail to comply with the notice: s 218(2). Upon payment by the recipient to the Commissioner a valid discharge of the recipient's obligation to the taxpayer is given pro tanto with the amount of the payment: s 218(4). The section operates as a statutory assignment of the moneys payable by the recipient to the taxpayer in favour of the Commissioner in the nature of a charge over those moneys."

von Doussa J. said (at 442-443):-

"In my opinion a notice may be given prospectively under s 218. When this is done, no obligation is imposed on the third party unless or until circumstances arise between the third party and the taxpayer which bring into existence an identifiable debt owing to the taxpayer, whether payable forthwith, or on a fixed date, or on a contingency. The principles which apply to the assignment of future property do provide a helpful guide. Equity fastens upon the future property to make the assignor a trustee of the legal right of ownership for the assignee when the property comes into existence and when it is identifiable as property meeting the description of the assignment: see Tailby v. Official Receiver (1888) 13 App Cas 523 at 528-530, 533, 543. Until identifiable property comes into existence there is no subject matter in respect of which the assignment can operate. Likewise, in the case of a prospective notice given under s 218, until there is an identifiable sum of money owing to the taxpayer by the third party the conditions of the section are not met. It is the coming into existence of the identifiable debt which crystallises the obligation on the third party to pay to the Commissioner the "money" referred to in s 218(1) and provides the measure of the obligation which is imposed by the notice. If for any reason circumstances do not arise after the giving of the notice where "money" answering the description in s 218(1) comes into existence, no obligation is ever imposed on the third party to make any payment to the Commissioner. Where "money" does come into existence later, only at the point in time when it does so is an obligation imposed on the third party. Therefore if Medicare benefits became due as an identifiable debt owed by the Health Insurance Commission only after a claim for payment was made by Dr Edelsten, no obligation to pay the "money" which those Medicare benefits represented was imposed on the Health Insurance Commission before the claim was made".

1. What is clear to my mind is that the statutory charge (Clyne v. Deputy Commissioner of Taxation (1981) 150 CLR 1 at 26; Commissioner of Taxation v. Donnelly at 435, 456) attaches to the "money" at the time that it comes into existence as a due and identifiable debt payable to the taxpayer. If the money does not exist or come into existence in this sense then there is nothing to which the charge attaches. Thus, as von Doussa J. explains, if something has to be done to convert a bare right to receive money into an identifiable debt due to the taxpayer, until that act is done, there is no "money...due to the taxpayer" within the meaning of section 218(1)(a) to which the statutory charge can attach. Importantly, the charge does not attach to the bare right to payment which, in Donnelly's Case was represented by the Medicare benefit assigned by the patient to the doctor. It attached to the identifiable debt due by the third party to the taxpayer when the obligation to pay was complete.

2. Counsel for the respondent submitted that the effect of section 218 was to assign to the Commissioner "whatever is productive of the amount owing" and that it operated as "an assignment of the right to receive payment and the right is an incident of the share". Thus, it was submitted, the trustee obtained the beneficial interest in the shares with the right to receive a dividend charged in favour of the Commissioner to the extent of the unpaid tax. It was submitted that this followed from the observation of Brennan J. in Clyne (at 26):-
   

"The statute thus works an assignment of the moneys to be paid to the Commissioner as though the taxpayer had charged the moneys otherwise payable to him with payment of his tax liability. Statutory charges are no novelty, although a statute which creates a charge usually describes it as such and defines the chargee's remedies. An example of a statutory charge which created a security in favour of a charge over moneys due by a third party to the chargee's debtor was to be found in The Contractors' and Workmen's Lien Acts 1906 to 1921 (Q.), considered by this Court in Stapleton v. F.T.S. O'Donnell Griffin and Co. (Q.) Pty. Ltd.

(1961) 108 CLR 160".

1. The reference to Stapleton v. F.T.S. O'Donnell Griffin and Co. (Q.) Pty. Ltd. makes clear that the assignment referred to by Brennan J. is the assignment of a proprietary interest in the chose in action constituted by the debt due by the third party to the taxpayer (see 108 CLR at 112-115; Donnelly at 435-436). That is, it is a right to enforce payment because it charges the debt in the hands of the person who is obliged to pay it (Re Potts Ex parte Taylor (1893) 1 QB 648 at 658). What must be identified is a debt due and payable, or payable on some future date or contingency, by the third party to which the charge can attach (Donnelly at 442-443). It is the amount owing which is assigned to the Commissioner by the operation of section 218, not whatever is productive of that amount.

2. The submission of the Commissioner that the right to receive a dividend is an incident of a share is, in my view, too broad a statement to be of any use in deciding the present issue.

3. A shareholder does not have a right to a dividend until one is declared: "A shareholder has no right to any payment (of a dividend) until the body corporate has determined that the money can properly be paid away" (per Farwell J. in Bond v. Barrow Haematite Steel Company (1902) 1 Ch 353 at 362); "in respect of a right to a dividend on a share no debt is created until a dividend is declared" (per Wynn-Parry J. in Godfrey Phillips Ltd. v. The Investment Trust Corporation Ltd. (1953) 1 Ch 449 at 454). Once a dividend is declared the declaration creates a debt due by the company to the shareholder (In Re Severn and Wye and Severn Bridge Railway Co. (1896) 1 Ch 559 at 564; In Re Kidner, Kidner v. Kidner (1929) 2 Ch 121 at 126). The debt is immediately enforceable by action at law.

4. In the instant case, because no dividend was declared prior to the transfer of the shares to the trustee, there was no debt which was identifiable or enforceable by the debtor. The debtor had no right to payment because neither of the companies had by declaration determined that money of the company could properly be paid away as a dividend. When the trustee became the holder of the shares, the debtor ceased to hold any interest in the shares. A dividend is declared in relation to shares in the capital of a company and is payable to the registered holder of the shares. As the debtor is no longer the holder of any shares, should a dividend be declared in the future, no debt would arise as between the company and the debtor. Rather, the debt would arise between the company and the trustee. The simile used by Morton J. in Re Winbush, Richards v. Winbush (1940) 1 Ch 92 at 99 in describing the position of the sale of shares where a dividend is subsequently declared is apposite:-
   

"The purchaser has bought the tree, and with it the fruits that are ripening on the tree".

1. When the trustee obtained title to and property in the shares he obtained the benefit of any "fruit" which may be harvested in the way of dividends declared from past or future trading of the companies.

2. In terms of the section 218 notices served by the respondent on the companies, the transfer of the shares to the trustee had the result that thereafter there would not be any moneys within the meaning of the section to which the statutory charge could attach for so long as the shares remained in the ownership of the trustee, because the declaration of any future dividend would not create an identifiable debt due by the company to the debtor.

3. Additional arguments were addressed by the parties as to the effect of the execution of the deed of arrangement under the Bankruptcy Act on the debt due at that time from the debtor to the respondent. In the view which I take as to the operation of section 218 and the facts which have occurred it is unnecessary to determine that issue.

4. The applicant is entitled to the declaration sought in his application for directions.

5. The respondent must pay the costs of the application.

6. The Court orders:
   

1. The Court declares that for as long as the Deed of Arrangement between Ross Andrew Duus and Patrick William Kerrisk dated 23 September, 1992 is operative -

(i) any dividends payable by P.W. Kerrisk (Townsville) Pty. Ltd. in respect of the shares formerly held by Patrick William Kerrisk should be paid to Ross Andrew Duus as trustee of the Deed of Arrangement and not to the Commissioner of Taxation; and

(ii) any dividends payable by Ross River Road Services Pty. Ltd. in respect of the shares formerly held by Patrick William Kerrisk should be paid to Ross Andrew Duus as trustee of the Deed of Arrangement and not to the Commissioner of Taxation.

2. That the Commissioner of Taxation pay the Trustee's costs of and incidental to this application.