Tang v BASSILI - [2011] FMCA 544

FEDERAL MAGISTRATES COURT OF AUSTRALIA

TANG & ANOR v BASSILI & ORS

[2011] FMCA 544

BANKRUPTCY – ATO delivery of s.260-5 ITAA notices upon third party – questions of whether money “due” by third party to taxpayer debtor – third party purchaser due to pay money to taxpayer pursuant to contract for sale of land – land subject to registered mortgages securing debt due – money not due to taxpayer – money due to mortgagee – arrangements between parties to secure disputed fund pending trial – such arrangement did not disturb legal rights of parties – arrangement not render disputed fund due by party subject to s.260-5 notice.

Corporations Act 2001 (Cth), s.500(1)
Bankruptcy Act 1966 (Cth), s.50
Land Title Act 1994 (Qld)
Taxation Administration Act 1953 (Cth), s.260-5(1), (2) and (3)
Income Tax Assessment Act 1997 (Cth), s.218

Bank of New South Wales v Barlicks Investments Pty Ltd (1964) 81 WNPt 2 (NSW) 281
Brown v Brown (2007) 69 ATR 533; [2007] FCA 2073
Bruton Holdings Pty Ltd (In Liq) v Commissioner of Taxation [2009] HCA 32
Clyne v Deputy Federal Commissioner of Taxation [1981] HCA 40; (1981) 150 CLR 1
Deputy Commissioner of Taxation (NSW) v Donnelly& Ors (1989) 25 FCR 432
Elric Pty Ltd v Taylor (1988) 92 FLR 222
Elsinora Global Ltd v Healthscope Ltd(No.2) (2006) 227 ALR 570
Federal Commissioner of Taxation v Bruton Holdings Pty Ltd (In Liq) (2008) 173 FCR 472; [2008] FCAFC 184
Norgard v Deputy Federal Commissioner of Taxation (1986) 86 ATC 4947; (1986) 79 ALR 369
Public Trustee of Queensland v Fortress Credit Corporation (Aust) 11 Pty Ltd [2010] HCA 29
Re: Octaviar Ltd (No.8) [2009] QSC 202
Sicree & Anor v Deputy Commissioner of Taxation(Vic) (1980) 32 ALR 307
Tricontinental Corporation Ltd v Federal Commissioner of Taxation [1988] 1 Qd R 474
Wilde v Australian Trade Equipment Co Pty Ltd (1981) 145 CLR 590; (1981) 34 ALR 148

First Applicant:

LLOYD LOK ING TANG

Second Applicant:

JOHN PARK

First Respondent:

MILANKA BASSILI

Second Respondent:

INSTYLE DEVELOPMENTS PTY LTD (AKA IN-STYLE DEVELOPMENTS)

Third Respondent:

COMMISSIONER OF TAXATION

File Number:

BRG 93 of 2010

Judgment of:

Burnett FM

Hearing date:

3 September 2010

Date of Last Submission:

3 September 2010

Delivered at:

Brisbane

Delivered on:

20 July 2011

REPRESENTATION

Counsel for the First Applicant:

Mr L.A Jurth

Solicitors for the First Applicant:

Londy Lawyers

Counsel for the Second Applicant:

Mr L.A Jurth

Solicitors for the Second Applicant:

Londy Lawyers

Counsel for the Third Respondent:

Ms M. Brennan

Solicitors for the Third Respondent:

ATO Legal Services Branch

ORDERS

That the parties submit a minute of order addressing substantive relief arising from the Court’s findings.
Costs reserved.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA
AT BRISBANE

BRG 93 of 2010

LLOYD LOK ING TANG

First Applicant

JOHN PARK

Second Applicant

And

MILANKA BASSILI

First Respondent

INSTYLE DEVELOPMENTS PTY LTD (AKA IN-STYLE DEVELOPMENTS)

Second Respondent

COMMISSIONER OF TAXATION

Third Respondent

REASONS FOR JUDGMENT

Introduction

As at 7 May 2007 Milanka Bassila was the sole registered proprietor of a property at Fig Tree Pocket (the property). On that day she granted a mortgage to Instyle Developments Pty Ltd (Instyle). The mortgage was a second mortgage which secured the sum of $430,200.00 together with any further advances by or payable to that mortgagee. The mortgage was duly registered and upon registration became a second registered mortgage behind the first registered mortgage in favour of the National Australia Bank (NAB).
On 5 February 2010 John Park (the Trustee) was ordered to take control of Ms Bassila’s property pursuant to s.50 of the Bankruptcy Act 1966 (Cth). Subsequently a sequestration order was made against Ms Bassila on 23 April 2010 and she became and remains a bankrupt.
By written standard form REIQ contract dated 19 January 2010 (the contract) the bankrupt had entered into a contract to sell the property to Trevor Boevink as trustee for the Boevink Family Trust and Karen Sullivan (the purchasers).
Pursuant to the contract the purchase price was $1,675,000.00 and settlement was to occur on 18 February 2010.
The Commissioner of Taxation (Commissioner) became aware of the contract and issued notices (the notices) pursuant to s.260-5 of Schedule 1 to the Taxation Administration Act 1953 (Cth) (the Act) in January and February 2010 to the bankrupt’s solicitors acting in the sale; the purchasers’ solicitors acting in the sale and to the purchasers.
It was expected by Instyle, as second mortgagee, that at settlement of the contract there would be insufficient funds from the purchase price to discharge the total amount secured by both the NAB mortgage and its mortgage. Notwithstanding that matter Instyle, as second mortgagee, agreed to provide a release of the second mortgage in exchange for the balance amount remaining after discharge of the NAB mortgage and proper expenses.
Initially the contract did not settle as was agreed because the purchaser was unwilling to pay the remaining amount to Instyle as second mortgagee because of a claim made by the Commissioner and the subject of a s.260-5 notice. The impasse was ultimately resolved between all parties (excluding the Commissioner) on 2 June 2010. As part of the settlement of that impasse a sum of $75,508.64 was paid into court and Instyle assigned its rights and interest to that disputed sum to the Trustee. It otherwise took the remaining funds in exchange for the release of its second registered mortgage. Accordingly the Trustee has effectively stepped into the shoes of the second mortgagee so far as the disputed sum of $75,508.64 is concerned.
The question now arises as to the respective interests of each of the Trustee and the Commissioner in the disputed sum.
Differences arose between the parties because of their respective constructions of s.260-5(1) of the Act which relevantly provides:
“260‑5 Commissioner may collect amounts from third party
Amount recoverable under this Subdivision
(1)     This Subdivision applies if any of the following amounts (the debt) is payable to the Commonwealth by an entity (the debtor) (whether or not the debt has become due and payable):
(a)     an amount of a *tax‑related liability;
…
Commissioner may give notice to an entity
(2)     The Commissioner may give a written notice to an entity (the third party) under this section if the third party owes or may later owe money to the debtor.
Third party regarded as owing money in these circumstances
(3)     The third party is taken to owe money (the available money) to the debtor if the third party:
(a)     is an entity by whom the money is due or accruing to the debtor; or
…
The third party is so taken to owe the money to the debtor even if:
(e)     the money is not due, or is not so held, or payable under the authority, unless a condition is fulfilled; and
(f) the condition has not been fulfilled.
How much is payable under the notice
(4)     A notice under this section must:
(a)     require the third party to pay to the Commissioner the lesser of, or a specified amount not exceeding the lesser of:
(i) the debt; or
(ii)     the available money; or
(b)     if there will be amounts of the available money from time to time—require the third party to pay to the Commissioner a specified amount, or a specified percentage, of each amount of the available money, until the debt is satisfied.
When amount must be paid
(5)     The notice must require the third party to pay an amount under paragraph (4)(a), or each amount under paragraph (4)(b):
(a)     immediately after; or
(b)     at or within a specified time after;
the amount of the available money concerned becomes an amount owing to the debtor.
Debtor must be notified
(6)     The Commissioner must send a copy of the notice to the debtor.
Setting‑off amounts
…”
The subdivision applies if a “debt” is payable to the Commonwealth by a “debtor”, “whether or not the debt has come due and payable”. It is accepted by all that for present purposes the bankrupt is a “debtor”.
Section 260-5(2) of the Act also provides that the Commissioner may give a written notice to a “third party” if the “third party” owes or may later owe money to the “debtor”. In particular it defines, by operation of a deeming provision, when a “third party” owes money.
In this instance the relevant “money” is the purchase price payable by the purchasers under the contract and it follows only subparagraph (a) of s.260-5(3) has application.
In the result the issues for resolution in the application are:
a)Whether the purchaser is an entity by whom the purchase price payable under the contract is “due” to the vendor in circumstances where:
i)The subject property is encumbered by registered mortgage which predates a s.260-5 notice; and
ii)The remaining amount of purchase price after discharge of the mortgage is nil; and
b)What effect, if any, did the second mortgagee’s assignment of its interest to the Trustee prior to settlement of the purchase have upon the rights and obligations under the notice?

Was the purchaser an entity by whom the purchase price was payable?

It is not contested that by force of the Income Tax Assessment Act 1997 (Cth) the tax rated liability is given the character of a “debt” without prior curial determination; Bruton Holdings Pty Ltd (In Liq) v Commissioner of Taxation [2009] HCA 32. Furthermore that the word “due” in the context of the sum due by the third party to the debtor/taxpayer means “due and payable” because a debt “accruing” signifies a debt which is due but not immediately payable; Clyne v Deputy Federal Commissioner of Taxation [1981] HCA 40; (1981) 150 CLR 1 at [15].
However the parties departed from this point. In summary the Commissioner contends the notices serve to:
“work an assignment of the money to be paid to the Commissioner as though the taxpayer had charged the moneys otherwise payable to him with payment of his tax liability”.[1]
such that:
“… the [ Section 260-5] Notice acted like a floating charge so that as and when a debt owing by the [third party] to the [debtor] came into existence and at the very moment of time that it did, the charge created by the [s 260-5] notice crystallised. …”[2]
[1] Clyne v Deputy Commissioner of Taxation per Brennan J at [26].
[2] Commissioner of Taxation v Donnelly (1989) 25 FCR 432 at [458].
If the Commissioner’s contention is correct the purchaser would be taken to owe the money to the taxpayer/debtor.
The Trustee contends to the contrary. He contends the s.260-5 notice “can only operate on the taxpayers beneficial interest in the moneys” and accordingly “once a floating charge has crystallised, moneys the subject of the charge are no longer in reality owing to the taxpayer but to the chargee”.[3]
[3] Tricontinental Corporation Ltd v Federal Commissioner of Taxation [1988] 1 Qd R 474 at [491]
In that event the moneys secured by the mortgage are not moneys the third party is taken to owe to the taxpayer/debtor but rather to another party. Thus a notice delivered upon a debtor after that time fixes on nothing because the fund is no longer the debtors.
At the outset the Commissioner relies particularly upon the observations of Mason J in Clyne v Deputy Federal Commissioner of Taxation (supra) and in particular his observations when discussing s.218 of the Income Tax Assessment Act 1997 (Cth), a section employing similar language and with a similar structure to s.260-5. At page 23 in respect of the analogous section his Honour concluded:
“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 a 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 the relevant fund was held by the taxpayer on a fixed term interest bearing deposits with a bank. Repayment of the interest bearing deposits to the debtor taxpayer were to occur at a defined future date. The debtor sought to avoid the s.218 notice by assigning the benefit of the funds which were then held by him on interest bearing deposits. That assignment was purportedly effected after the delivery of the notice.
It is apparent from the judgments in Clyne that the facts under review were critical to the reasoning of the court leading to the conclusion stated in the decision of Mason J. So much was evident by the discussion of Mason J in his disapproval of the decision of Jenkinson J in Sicree & Anor v Deputy Commissioner of Taxation(Vic) (1980) 32 ALR 307. In that case Jenkinson J determined that service of the notices did not operate to give the Commissioner prior claim to moneys owing to the taxpayer which were the subject of the floating charge which crystallised upon the appointment of receivers. He determined that the appointment of receivers perfected an assignment of the moneys giving them the character of moneys due and payable not to the taxpayer but to the secured creditor of the taxpayer. The charge had been given before the Commissioner served the notices but after the giving of notices the receivers were appointed. His Honour considered the obligation to pay “the money” was to be ascertained at the time of payment.
Mason J distinguished Sicree (supra) on its facts noting:
“There will be cases when a party other than the taxpayer by virtue of an antecedent security asserts in priority to the Commissioner rights to moneys not payable when the notice is served where the security is perfected after service of the notice and before the debt becomes payable.”[4]
[4] (1981) 150 CLR 1 at [23].
His Honour noted Sicree (supra) was such a case (as is this case) but continued:
“Whether the decision (in Sicree) can be supported, as Mr Handley suggests, on grounds other than those stated by Jenkinson J is a question which need not be answered now, although I admit to some difficulty in perceiving how this can be so comfortably with what I have already said.”[5]
[5] Handley QC had submitted Sicree was correctly decided but for the wrong reasons. Beyond the observations contained in the summary of arguments at p 3 of the report there are no details of Mr Handley’s submission on this point.
The principle thrust of his Honour’s basis for questioning Jenkinson J’s approach to the issue was his Honour’s view, expressed at page 18 of the judgment in rejecting Jenkinson J’s view, that there was “no reason to imply, a grant to the Commissioner or to the Crown, of any interest in or right over a debt or a fund (the subject of the notice)”. Further that it was not to be supposed in the absence of express provision “that the section imposes an obligation to make a payment other than one measured by the payer’s obligation to make payment to the taxpayer by the taxpayer’s obligation under the Act, or that section imposes an obligation to make a payment at a time when, in consequence of the occurrence of a supervening event, money is no longer due to the taxpayer.”
Indeed his Honour concluded that the effect of a notice was similar to a garnishee order. In that regard his Honour continued:
“This effect may be seen as the end result of the principle that an assignee of a chose in action takes its subject to all equities that the debtor or fundholder has against the assignor, as at the time of notice of the assignment, and subject also to all the infirmities and defects in title of the assignor.”[6]
[6] (1981) 150 CLR 1 at [19].
Mason J continued to particularly consider that matter observing that “because [the assignee from the taxpayer] acquired the right title and interest of the [assignor/taxpayer] by way of security only, in the event that the loans were repaid, she would come under an obligation to refund to the [assignor/taxpayer] the proceeds of the term deposit”.[7] His Honour noted that the rule that an assignment is subject to equities is a paramount rule and that the effect of the rule was that “an assignee of a non-negotiable chose in action acquires no greater right than was possessed by his assignor and simply stands in the shoes of the latter. The assignee cannot expect to be in a better position than his assignor was prior to notice of the assignment.” That led his Honour to conclude at page [22]:
“The assignee by virtue of the assignment takes subject to the right of the bank to set off the moneys payable to the Commissioner under [s 260-5] which accrued due before the notice of assignment, although they were not payable until the term deposits matured.
Had there been no assignment the bank would have been able to resist a claim for a payment of the term deposits by the [taxpayer] before they became payable on two grounds, (a) that the debts were not then payable; and (b) that the giving of the s 218 notice imposed an obligation on the bank to pay at maturity to the Commissioner with an implied obligation not to make any inconsistent payment in the meantime”.
[7] (1981) 150 CLR 1 at [20].
The factual context of that claim is important, particularly when considered in light of later authority.
Significantly Mason J’s observations that:
a)A third party debtor upon receipt of a notice was subject to an obligation to pay but in respect of money yet payable was subject to “an implied obligation not to make any inconsistent payment in the meantime”;
b)An assignee would take “subject to equities” which impliedly recognises the right of an assignor/debtor to claim the benefit of any equities; and
c)There would be instances of cases involving an antecedent security holders asserting priority to the Commissioner’s right to money not payable when the notice is served but where the security is perfected after service of the notice and before the debt is payable;[8]
left the issue alive for consideration in a case such as the instant case.
[8] Similar observations were also made by Gibbs CJ at [11].
The observations of Brennan J in his decision support that conclusion. At para [27] his Honour stated:
“As the [assignor/debtor] assigned his interest in the moneys on fixed deposit and in the interest thereon to the [assignee] subsequently to the giving of the notices. The [assignee] took the assignment of those moneys subject to the Commissioner’s right to payment of those moneys. The assignment neither destroyed nor impaired the Commissioner’s right to be paid those moneys by the bank.”
For the Trustee considerable reliance was placed upon the decision of Tricontinental Corporation Ltd v Commissioner of Taxation.[9] In Tricontinental (supra) the court was considering the effect of a s.218 notice delivered upon the debtors of the taxpayer who were subject to a fixed and floating charge granted by the taxpayer in favour of Tricontinental. Shortly after delivery of the s.218 notices Tricontinental in enforcing its security appointed receivers over property the subject of the charge. It sought orders that the s.218 notices did not operate to defeat its priority in respect of assets charged including in respect of secured debts due by the debtors who had been served with s.218 notices.
[9] [1998] 1 Qd R 474

In the leading judgment in the case Connolly J explored in detail the history of English authority leading to the conclusion that a debenture constituting a floating security over the undertaking and assets of a company does not specifically affect any particular assets until some event occurs or some other act on the part of the mortgagee is done which causes the security to crystallise into a fixed security.[10] Accepting that position his Honour continued at [481]:
“It is, I think, beyond question that the nature of a floating charge is as described by Lord McNaughton … It is recorded that the charge crystallised when a receiver was appointed; and that it was not contested that, if the charge was valid, the rights of the receiver must prevail over those of an execution creditor.”
[10] At [479].
Significantly his Honour continued:
“Whether in a case in which a charge, which, … has crystallised, that fact would be sufficient to defeat a notice under s.218 of the Income Tax Assessment Act is, I think, not free from difficulty. In form at least, the money is still due or accruing to the taxpayer. The debenture holder enforces his rights by appointing a receiver who would demand and recover the debt in the name of the taxpayer. If the analogy with forms of execution such as garnishment be appropriate, then it might well be right to say that s 218 can only operate on the taxpayer’s beneficial interest in the money. A more direct approach is to say that once a floating charge is crystallised, moneys the subject of the charge are no longer in reality owing to the taxpayer but to the chargee.”
The view that an appropriate analysis would be that the charge can only operate on the taxpayer’s beneficial interest was supported by the West Australian Full Court in Norgard v Deputy Federal Commissioner of Taxation (1986) 86 ATC 4947; (1986) 79 ALR 369. In that case the court was considering notices served upon various trade debtors of the taxpayer requiring them to pay to the Commissioner moneys they owed the taxpayer. One of the parties to action, a bank, had called up security of a debenture over assets of the taxpayer and appointed receivers of property prior to service of some of the Commissioner’s notices. The Commissioner had also served notices on other debtors but not the relevant debtors prior to those debtors by calling up their security and crystallising their debts.
In that case Burt CJ noted:
“I think it should be held that the Commissioner receives the debt subject to all charges which are then, that is to say as to time of the service of the s 38 notice, attached to it. So if at that time the bank’s security was a floating security which had not crystallised there would be no security attaching to the debt. It would, as they say, be “hovering” over it. If, on the other hand, the bank’s security over the book debts was at all times fixed or if it was when created floating but as at the time when the s 38 notice was served it had crystallised and so had become fixed, the Commissioner would take the debt subject to that security. That conclusion is, I think, implicit in the reasons of Mason J in Clyne’s case and can, I think, in reason be sustained either in the way in which I have chosen or by saying that to the extent of the security of the debt although due is not payable to the taxpayer.”
These matters have been more recently reviewed in Re: Octaviar Ltd (No.8) [2009] QSC 202. In Octaviar (supra) the issue concerning s.260-5 notices was ancillary to the principal issue in the application where the applicant sought to set aside a deed of company arrangement. However relevantly for present purposes in that case the Commissioner served his notice at a time when the relevant charge (the Fortress charge) had become a fixed charge because it had automatically crystallised upon the taxpayer becoming insolvent or upon it filing the winding up application. In concluding that the Commissioner’s notice did not defeat the operation of the Fortress charge (if otherwise valid) and ultimately was effected only to the extent that moneys to be paid by the taxpayer’s debtor would not have been paid to be Fortress in payment or part payment of its debt McMurdo J examined the High Court’s decision in Clyne and cases subsequent to it.[11]
[11] [2009] QSC 202 Paragraphs [44] to [49] of the judgment.
At the outset his Honour applied Burt CJ’s reasoning in Norgard (supra) noting that his Honour had concluded that if the charge had crystallised prior to the service of notice it would defeat the notice because:
“The first was that once the charge became fixed, the Commissioner would receive the payment subject to that security, a conclusion which he (Burt CJ) said was implicit in the reasons of Mason J in Clyne v Deputy Commissioner of Taxation. Alternatively, the same result would follow “by saying that to the extent of the security the debt although due is not payable to the taxpayer””.[12]
[12] At paragraph [44].
His Honour also observed that the position of a fixed charge in relation to a notice under the same provision was considered by the Full Court in Tricontinental Corporation Ltd v Federal Commissioner of Taxation (supra) following the remarks of Connolly CJ which I have earlier referred to. In particular his Honour noted:
“Connolly J considered that it was a second approach which was supported by the judgment of Mason J in Clyne, with which I respectfully agree. In Clyne Mason J, in discussing whether “due” of section 218 meant “due and payable” said:
‘[I]f “due” does not mean ‘due and payable’ then the Commissioner by giving a section 218 notice can require payment of a debt owing to the taxpayer which, but for the notice, would not become payable to him by reason of the supervening rights of a secured creditor, eg the crystallisation of a floating charge before the debt becomes payable’.”
His Honour Justice McMurdo also noted that in Tricontinental (supra) although Shepherdson J agreed with Connolly J, Williams J in a separate judgment agreed with the majority conclusion but in doing so accepted the first approach noted by Burt J namely that:
“… The Commissioner is entitled to intercept moneys from persons who were debtors of the taxpayer and who receive notices prior to crystallisation of the charge, but … the Commissioner would take the debts subject to the security if crystallised prior to the time of service of the notices”.
In considering his approach McMurdo J also had regard to the observations of Thomas J in Elric Pty Ltd v Taylor (1988) 92 FLR 222 where the court was considering an application for an injunction in respect of a s.218 notice delivered upon a debtor of a taxpayer directing payment after crystallisation of a charge over all assets (present and future) of the taxpayer. In Elric (supra) Thomas J held that upon appointment of a receiver the floating charge crystallised and thereafter Elric was entitled to be paid all debts that would fall due to the taxpayer and that only Elric could give a good discharge for the debts due to the company. His Honour noted that the primary submission of Elric was that upon crystallisation of the charge the debt ceased to be payable to the creditor and instead became payable only to the equitable chargee and that a notice under s.218 could only operate upon moneys due and payable to the chargor/taxpayer. At [225] the court held:
“… It is not really necessary to go further into the essential nature of the rights created by an equitable charge when it crystallises or the nature of the relationship inter se of creditor, debtor and chargee when this happens. It seems to me that both principal submissions on Elric’s behalf are correct. I would hold that after crystallisation of a charge over all assets (present and future) of a taxpayer, moneys due to the taxpayer by third parties are no longer payable to the taxpayer. They are payable to the chargee, and only it may give a valid discharge. The same may be said with respect to future debts as they fall due. The same again may be said in relation to persons who hold or may hold money for or on account of the taxpayer.
Such discussion as appears in the deciding cases tends to support this view. In Norgard v Deputy Commissioner of Taxation, Burt CJ observed:
‘If … at the time when the sec.38 notice was served it had crystallised and so had become fixed, the Commissioner would take the debt subject to that security.’
And “To the extent of the security the debt although due is not payable to the taxpayer.”
In that case Thomas J considered that both statements were consistent with the reasoning of Mason J in Clyne’s (supra) case and noted the observations made by both Connolly J and Williams J in Tricontinental (supra) supported that conclusion.
Finally McMurdo J noted the findings of the Full Court of the Federal Court in Commissioner of Taxation v Bruton Holdings Pty Ltd (In Liq).[13] At the time of the court’s consideration of Re: Octaviar Ltd (No.8) (supra), Bruton (supra) was subject to a special leave application. In the meantime the matter has been decided by the High Court.[14]
[13] (2008) 173 FCR 472; [2008] FCAFC 184.
[14] (2009) 239 CLR 346.
In Bruton (supra) shortly before creditors of the company resolved that it be wound up the Commissioner issued a notice of assessment of tax liability. After the resolution for winding up the Commissioner lodged a formal proof of debt in the winding up and shortly thereafter issued a notice under s.260-5 to a firm of solicitors requiring them to pay the Commissioner an amount held in their trust account to the credit of the company. The company sought a declaration that the notice was void by virtue of s.500(1) of the Corporations Act2001 (Cth) which provided that any attachment, sequestration, distress or execution put in force against the property of the company after the passing of a resolution for the voluntary winding up was void.
McMurdo J in discussing the special leave application in Federal Commissioner of Taxation v Bruton Holdings Pty Ltd (In Liq) (supra) noted it was not material in the case before him because it considered attachment in circumstances where the s.260-5 notice was served upon the corporation before the winding up application. That was not the situation before him so the question did not arise. However the special leave application was allowed. Observations made by the High Court on appeal only have limited relevance to this case because aside from observations as to the effect of a s.260-5 notice as “operate(ing) in the manner in which, in Hall v Richards Kitto J described a garnishee order was operating to attach a debt”,[15] the question of the impact of antecedent charges upon such a garnishment did not arise for consideration and was not discussed.
[15] At page 352
In considering the approach to be adopted, McMurdo J, somewhat neutrally, concluded (although arguably inclining towards the second approach):
“The second approach put forward by Burt CJ in [Norgard] and adopted by Thomas J in Elric, is supported by subsequent authority; Zuks v Jackson McDonald (a firm) (1996) 132 FLR 317. As was observed in Bruton Holdings, under the first approach the Commissioner would be entitled to payment of the debt but would hold the proceeds subject to the fixed charge, whereas the second approach would deprive the Commissioner of the right to receive payment at all; Federal Commissioner of Taxation v Bruton Holdings Pty Ltd (In Liq) (2008) 173 FCR 472 at 485. If the first approach were applied here, [the third party/debtor] would have to pay to the Commissioner an amount up to the amount of the notice, but (again assuming the validity of the Fortress charge) the Commissioner would then have to pay the Fortress the amount which its charge secured because the beneficial ownership of the funds would be in Fortress. Under the second approach, the notice would not require (the third party/debtor) to pay to the Commissioner whilst Fortress was entitled to the funds for payment of what was secured by its charge. Either way, the result, at least absent the impact of the [deed of company arrangement] for [the taxpayer], would be a payment or payments to Fortress or its receivers.”
Significantly his Honour concluded:
“The notice does not defeat the operation of the Fortress charge (if otherwise valid) and is ultimately effective only to the extent that moneys to be paid by the third party would not have to be paid to Fortress in part payment of its debt.”
Octaviar Ltd No.8 (supra) was subject to appeal. However his Honour’s decision on that point was not challenged in the appeal.
Such an outcome sits comfortably with the established legal orthodoxy. To afford the meaning contended for by the Commissioner to the word “due” in s.260-5 would afford a Commissioner’s s.260-5 notice priority over all registered securities disturbing the recognised statutory protection afforded to such securities by the Land Title Act1994 (Qld) and effecting a re-rating of risks to mortgagees not hitherto required to be accounted for. It could only be with the plainest of expression that the legislature could have intended such an outcome. None is apparent.
In her submission Ms Brennan for the Commissioner submitted some guidance on this particular policy consideration might be gained by reference to the High Court’s determination in Public Trustee of Queensland v Fortress Credit Corporation(Aust) 11 Pty Ltd [2010] HCA 29 (1 September 2010) particularly at paragraph [30].
She particularly conceded the factual context is different. However, and in my view more significantly, the court there was more concerned with the actual terms and effect of the charge itself rather than the effect of a charge to the world at large. So much is apparent from the court’s citation with approval[16] of the majority in Wilde v Australian Trade Equipment Co Pty Ltd (1981) 145 CLR 590 where at [607] they observed:
“…that in order to discover the terms and effect of the charge one must look at the document creating the charge and not the register.”
[16] [2010] HCA 29 at [29].
The question in that case concerned whether or not there had been a variation to the subject charge as variation impacted upon its registration. The decision does not assist in addressing the substantive issue in this case, namely to whom money is due, or the collateral issue of priorities if the money is due by the taxpayer to a secured third party.
The observations of Brennan J in Clyne (supra) I have earlier referred to are consistent with these observations.
Finally it should be noted that the authorities referred to generally relate to company charges (except Clyne). Here the relevant charge is a registered mortgage securing a loan in respect of a crystallised amount. The facts here present a much plainer case than case involving company charges where questions of crystallisation of debt also arise for consideration.
Accepting that reasoning it follows that the money the subject to a valid s.260-5 charge is not “due and payable” to the debtor in these circumstances because such money is “no longer in reality owing to the [debtor] but to the chargee”.
Further the Commissioner contends that the terms of s.260-5 have changed from those of its predecessor, s.218. It contends s.260-5(3) deems the third party to “owe money” (and thence may later owe money) when the money is not due until a condition has been fulfilled and that condition has not yet fulfilled; Brown v Brown (2007) 69 ATR 533; [2007] FCA 2073.
In Brown v Brown (supra) the court was considering the validity of a s.260-5 notice delivered the day after settlement of the sale of a hotel business and approximately a week before the making of a winding up order in respect of the debtor company. Although not expressed in the judgment it is open to be inferred from the facts and timing of events that the Commissioner was aware that upon the sale of the business the taxpayer was to discharge a mortgage debt due by it to a third party. Despite this it did not serve its notice until after the settlement. Although nothing arising from that matter may be imported into and drawn from the court’s decision the fact is the Commissioner by his conduct on that occasion avoided a contest on the question of priority. That is a question which now arises and in that respect the decision in Brown (supra) provides no assistance.
In the Commissioner’s Counsel’s submissions particular reliance was placed upon Gordon J’s observations at paragraph [20] that:
“… the plain language of s.260-5(3)(b) of Schedule 1 to the TAA states that money is deemed to be owed to a debtor, whether or not it is actually due or payable to the debtor, if it is held for or on account of the debtor.
[21] As Edmunds J explained in Elsinora Global Ltd v Healthscope Ltd [2006] 227 ALR 570 at 585:
[63]‘Section 260-5(3) of Sch 1 to the Administration Act is a deeming provision. It provides when a person (the third party) is taken to owe money to another (the debtor). In its form and context it is exhaustive and extends to situations where, but for the deeming, the third party may not, or would not, be regarded as owing money to the debtor. Paragraph (a) is concerned with the standard situation where the third party is indebted to the debtor whether the debt is due or accruing due to the debtor. To attract the deeming operation, para (b) requires the third party to hold money for or on account of the debtor. Unless there is a holding of money by the third party, the deeming cannot operate. Paragraph (c) also requires the third party to hold money, not for or on account of the debtor, but on account of some other entity for payment by the third party, not the other entity, to the debtor. Finally, para (d) operates to deem the third party to owe money to the debtor if the third party has authority from some other entity to pay the money to the debtor.’”
However neither his Honour’s decision nor that of Edmunds J in Elsinora Global Ltd v Healthscope Ltd (No 2)[17] addresses the question identified in earlier cases and expressed most succinctly by Connolly J in Tricontinental (supra) where his Honour said:
“Once a floating charge has crystallised, money the subject of the charge is no longer in reality owing to the taxpayer but to the chargee.”
[17] (2006) 227 ALR 570
In Brown (supra) the Commissioner was the only secured creditor. In that context the court had little difficulty in finding funds held in a solicitor’s trust account for the benefit of unsecured creditors was subject to the deeming provision upon a plain reading of the words of s.260-5; that provision by its operation creating a charge in favour of the Commissioner but not by its terms advancing the priority of that charge over any pre-existing charges.
While it is correct to submit that there is a difference in expression between s.260-5 and s.218 I do not think the change in expression has impacted upon the substance of those provisions in this context because the fact of a secured creditor’s entitlement is not a matter that of itself imparts a conditional entitlement to the taxpayer/debtor of the funds. Authority such as Tricontinental (supra) clearly provides that the funds are not due to the debtor unconditionally or otherwise when a secured creditor’s rights intervene because it either no longer has a beneficial interest in the fund or the funds are no longer in reality owing to the taxpayer but the chargee.
The Commissioner further contended that the money is owed under an executory contract and that the amount owed will become payable to the Commissioner at least by such time as that amount becomes owing in the sense of due and payable to the debtor under the terms of the contract; Bank of New South Wales v Barlicks Investments Pty Ltd (1964) 81 WN Pt 2 (NSW) 281 at 283.
However in that case the matter of any beneficial interest by the debtor and money due was not an issue. There the question turned on “whether the debt was one for which on that day the judgment debtor could have immediately and effectively sued the garnishee.”[18] In that instance a cheque had been deposited in the taxpayer/debtor’s account with the bank but had not cleared until after service of a garnishee which had been made after the deposit of the cheque. The issue for the court was whether the amount of cheque which stood to the credit of the debtor’s account as at the time of making and service of the garnishee order was a debt “due and owing or owing” from the garnishee bank to the debtor. The court there examined the contractual relationship between the banker and customer in resolving the question in favour of the debtor customer that the uncleared funds were not “due and owing” as between the bank as garnishee and customer as debtor.[19] No question of beneficial interest arose and on that point the authority is of no assistance.
[18] At [283].
[19] At [285].

It is no longer in doubt that the effect of a s.260-5 notice is to create a statutory charge. However none of the authorities referred to by Counsel for the Commissioner assist in disposing of the real issue in this case being, what interest, if any, does the debtor have in a fund subject to a crystallised charge which predates a s.260-5 notice. For the reasons addressed I consider authority favours the position that funds which are charged as security prior to the issue of a s.260-5 notice are not funds which are “due or owing to the debtor” for the purposes of that section. Nor does the fact that such charge to funds may be repayable to a secured creditor at some later time mean that they are payable conditionally to a debtor in terms of s.260-5(3)(e).
Finally the Commissioner relying upon Deputy Commissioner of Taxation (NSW) v Donnelly & Ors[20] submitted that the notice acted like a floating charge “so that as and when a debt owing by the [third party] to the [debtor] came into existence at the very moment of time that it did, the charge created by the s.218 notice crystallised.”[21]
[20] (1989) 25 FCR 432
[21] Commissioner of Taxation v Donnelly at 458 per Hill J with whom Lockhart J agreed; Clyne v DCT (1981) 150 CLR 1 per Brennan J at 17-18.
As I have earlier noted the issue of priority between the Commissioner asserting his statutory charge and a pre-existing chargee was not an issue before the court in Clyne v DCT (supra). In FCT v Donnelly (supra) the central question was whether the s.218 notice issued by the Commissioner created charges over debts due by the Health Insurance Commission to Dr G. Edelsten at the time of service of the notices or thereafter becoming due. In that case Dr Edelsten had patients assign to him sums that were otherwise payable by the health Insurance Commission directly to them in respect of medical services provided by him. The effect of the assignment was to direct the Health Insurance Commission to pay Dr Edelsten direct. When Dr Edelsten faced difficulties paying his tax the Commissioner served s.218 notices upon the Health Insurance Commission in order to secure payments due to Dr Edelsten following assignment by his patients. Difficulties arose because Dr Edelsten was subsequently made subject to a sequestration order and his trustee in bankruptcy sought to assert his rights under s.118 of the Bankruptcy Act1966 (Cth) in respect of moneys paid to the Commissioner pursuant to the s.218 notice in the period of six months from the date of presentation of the creditor’s petition together with all moneys which were “due or moneys accruing due” in that period but not at that time paid to the Commissioner. Insofar as that case did involve a contest of priorities the position was best articulated by Hill J commencing at [459] where his Honour noted:
“An alternative and perhaps equally satisfactory way of arriving at the same conclusion is to merely give effect to the words of s.218 themselves. As and from the date of the s.218 notice the Health Commission is bound as and when debts become due and payable to Dr Edelsten to pay those moneys to the Commissioner. That obligation arises by statute. The fact that subsequently a petition is presented and a sequestration order is made does not alter the character of the moneys as being due or accruing or moneys which may become due to Dr Edelsten at the time the notice takes effect. In other words I do not see why the provisions of the Bankruptcy Act should have the consequence of affecting the proper interpretation of s.218. Although the taxpayer becomes a bankrupt, the provisions of s.218 continue to operate between the date of relation back and the date of the sequestration order as the debts are always subject to the charge created over them by force of s.218. In my view s.218 would have priority over the provisions of the Bankruptcy Act is reinforced by s.218(4) which stems the payment to the Commissioner to be made inter alia with the authority of “all other persons concerned”….”
The court’s expressions in Donnelly (supra) are not inconsistent with the views expressed by the court in Tricontinental (supra). On the Donnelly analysis the notice acts like a floating charge. Accordingly when a debt owing by the third party to a debtor comes due; at the very moment in time that it does the charge created by the s.218 notice crystallises[22] and at no time does the debt ever become the debtors/bankrupts. But that fact does not address the present issue which is whether upon the crystallisation of the charge it achieves priority to a pre-existing charge. For reasons addressed earlier I do not think it does and the argument founded upon Hill J’s analysis does not assist the Commissioner in this case.
[22] Deputy Commissioner of Taxation (NSW) v Donnelly & Ors (1989) 25 FCR 432 per Hill J at [457] – [459]

The second applicant’s interests in the moneys paid into court

By agreement between the Trustee and Instyle it was agreed that settlement of the sale of the property would proceed and that Instyle would release its mortgage subject to the difference between the sale price less the amount payable to the first mortgagee and other reasonable deductions and expenses required under the sale contract being assigned to the Trustee subject to the “rights and title to and interest in the mortgage proceeds claimed by the ATO”. In that context mortgage proceeds meant the sale price less the amount payable to the first mortgagee and other deductions and expenses required under the contract of sale. The Commissioner contends that as a question of substance Instyle, by virtue of the registered mortgage had no right title or interest in the disputed balance of the proceeds of sale at the time of settlement.
First in support of that contention the Commissioner relied upon the s.260-5 notice. There was in place an efficacious mortgage securing a debt in respect of the balance of proceeds of sale.
For the reasons I have provided above the sum due under the mortgage was not “due” to the taxpayer notwithstanding form. The notice delivered upon the purchaser could only “garnishee” moneys “due” to the taxpayer. None were due by the purchaser to the taxpayer so the notice did not fix upon money payable through the process of settlement of the sale contract between the taxpayer as vendor and the purchaser. Any arrangement between the taxpayer represented by the Trustee, the purchaser and Instyle did not bear upon the Commissioner’s rights.
The second matter raised by the Commissioner is that the registration of the mortgage conferred on the mortgagee no right title or interest in the moneys held by the purchaser ready for tender at settlement. The Commissioner contended that the covenant to repay the debt secured whilst secured by a charge over the land was a personal covenant enforceable against the mortgagor, that is against the bankrupt. It was contended the notice was delivered to the purchaser and the personal covenant, enforceable by the mortgagee against the taxpayer/mortgagor, confers on the mortgagee no right title or interest in the moneys held by the purchaser ready for tender at settlement.
Whilst I accept the thrust of the Commissioner’s submissions on this point they do not address the elemental question of beneficial interest. Ignoring for the time being the Trustee’s entitlement, his claim was preceded by Instyle’s beneficial interest as a lender of moneys secured by mortgage. The charge predated the Commissioner’s charge and for reasons which I have discussed above is not postponed to the Commissioner’s charge. Instyle subsequently assigned its rights under that charge to the Trustee. That assignment did not purport to disturb the rights inter se between the parties to the transaction although it is later in time than the delivery of the Commissioner’s notice. The effect of the assignment was to transfer the beneficial interest in the disputed funds from Instyle to the Trustee. While the obligation to repay the debt is a personal covenant enforceable against the mortgagor the real point in issue is who has the beneficial interest in funds arising from realisation of the securities. In the context of this argument it is again difficult to find a clearer expression of the issue to be resolved than that of Connolly J in Tricontinental at page [481] which I have earlier recited.
It follows in my view that the Trustee has the greater equity in the disputed funds following an assignment of the beneficial interest in the moneys the subject of the charge and they are in reality owing to him. The charge enlivening the Trustee’s rights predates the s.260-5 notice and in the circumstances ought not be postponed to the Commissioner

Conclusion

The Commissioner seeks to enforce a s.260-5 notice delivered upon a purchaser in respect of moneys due by it to the taxpayer/vendor under a contract for sale of land. The land was subject to a pre-existing registered mortgage securing a debt due by the taxpayer to the mortgagee.
In my view, notwithstanding strict form, the money due to be tendered by the purchaser to the taxpayer at settlement, insofar as they are attributable to the secured debt are not moneys “due” to the taxpayer pursuant to s.260-5 ITAA.
The Commissioner’s notice dated 9 February 2010 directed to the purchaser does not operate to garnishee moneys due by the purchaser in respect of funds applicable to the discharge of the Instyle mortgage.

Orders

I direct that the parties submit a minute of order addressing substantive relief arising from the Court’s findings.
Costs reserved.

I certify that the preceding seventy-six (76) paragraphs are a true copy of the reasons for judgment of Burnett FM

Date: 20 July 2011