Tricontinental Corporation Ltd. & Anor v. Federal Commissioner of Taxation & Ors.

Judges:
Carter J

Court:
Supreme Court of Queensland

Judgment date: Judgment handed down 29 July 1986.

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Carter J.

The second plaintiff (``Thoroughbred'') by a deed dated 14 May 1982 (``the debenture'') charged the whole of its undertaking and assets in favour of the first plaintiff (``Tricontinental'') as security for the repayment of moneys advanced by the latter to the former. By cl. 9.1 of the deed the property charged included book debts and by cl. 9.2 the charge was agreed to be a fixed charge in respect of all freehold and leasehold interests in land and all fixed plant and equipment. Subject to certain other provisions in the deed the clause provides that ``until this security becomes enforceable it shall be a floating charge as regards all of the property and assets hereby charged''. By cl. 10 the security was enforceable upon default and, upon the happening of certain events, including the appointment of a receiver, the moneys secured by the debenture ``immediately become due and payable and the security hereby created shall immediately become enforceable''. Clause 11 provides for the appointment of receivers who by cl. 12 ``are empowered to collect and get in the whole or any part of the mortgaged premises''. The latter phrase, by definition (cl. 9.1(a)), includes the whole of the undertaking and assets, the subject of the charge.

Default having been made by Thoroughbred, Tricontinental gave notice of default on 7 March 1985 and receivers were appointed on 6 August 1985.

On 26 February 1985 a notice under sec. 218 of the Income Tax Assessment Act 1936 was given to the second defendant (``Abcos'') and on 27 February 1985 a similar notice was given to the first defendant (``Haymor''). On 26 February 1985 Abcos was indebted to Thoroughbred in the sum of $69,551 and on 27 February 1985 Haymor was indebted to Thoroughbred in the sum of $1.35 million.

On 25 February 1985 a Notice of Assessment in the sum of $2,140,249.82 for income tax was issued by the Commissioner of Taxation to Thoroughbred. This amount was due and payable on 27 March 1985. Only $435 of the assessment has been paid. This action having been commenced, Tricontinental, by a notice of motion, seeks the following orders pursuant to the provisions of O. 57 r. 2:

``(a) a declaration that the first plaintiff is entitled to payment of the moneys due and owing by the second defendant to the second plaintiff;

(b) a declaration that the first plaintiff is entitled to payment of the moneys due and owing by the third defendant to the second plaintiff;

(c) an injunction requiring the first defendant to: -

• (i) withdraw the notice dated 27th February 1985 given by the first defendant to the second defendant pursuant to section 218 of the Income Tax Assessment Act 1936 as amended;
• (ii) withdraw the notice dated 26th February 1985 given by the first defendant to the third defendant pursuant to section 218 of the Income Tax Assessment Act 1936 as amended;
• (iii) refrain from interfering with the rights of the first plaintiff under a mortgage debenture given by the second plaintiff and bearing date 14th May, 1982, whether by the service of notices pursuant to section 218 of the said Act upon the debtors of the second plaintiff or otherwise;''

Both Haymor and Abcos appeared at the hearing and indicated by counsel their intention to abide the order of the Court. The facts which are relevant to the main issue joined between Tricontinental and the Commissioner are agreed. It is the contention of Tricontinental that by reason of its floating charge it acquired

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ATC 4455

rights in respect of debts owing to Thoroughbred from the time of the inception of the charge, and even though its floating security did not become fixed until a date subsequent to the date on which the Commissioner gave notice under sec. 218, the latter was legally ineffective to displace the interest of the chargee. Alternatively, it is submitted that if sec. 218 of the Income Tax Assessment Act requires that income tax payable by a taxpayer be paid out of property to which another is beneficially entitled, that property having been acquired in this case by the chargee as a result of the giving of the security, it is not a law with respect to taxation and is therefore invalid. In the further alternative it is submitted that if sec. 218 be a law with respect to taxation it effects an acquisition by the Commissioner of property and since the acquisition is on other than just terms, it is likewise invalid: sec. 51(XXXI) of the Constitution.

The first submission again raises questions as to the effect of sec. 218 of the Income Tax Assessment Act and of a notice issued pursuant to it. In the context of this case the competition is between such a notice and a floating security given in respect of, inter alia, debts due to the taxpayer and which the Commissioner, by his notice seeks to collect for his own benefit. Here the floating security was given prior to the date of the notice but did not become a fixed security until a date subsequent to it. it is integral to this submission that Tricontinental, from the time of the giving of the security, acquired a present equitable interest in the property, the subject matter of the security, including the debts or funds in question existing at the time of the sec. 218 notice. That being so it is submitted that
Clyne & Anor v. D.F.C. of T. & Anor 81 ATC 4429; (1981-1982) 150 C.L.R. 1 is distinguishable because in the latter case the purported assignment of the deposits in respect of which the Commissioner had given the notice was an attempt to deal with the relevant funds subsequent to the notice whereas in this case, Tricontinental's present equitable interest in the relevant moneys was in force prior to the giving of the notice. In short, the security had already been created and the interest in the property acquired prior to the giving of the notice. The Court in Clyne's case discussed at length the effect of the section.

Mason J. (with whom Aickin and Wilson JJ. agreed) (at ATC p. 4441; C.L.R. p. 23) expressed the view that sec. 218 ``imposes an obligation to pay forthwith moneys which are then payable''. Gibbs C.J. (at ATC p. 4433; C.L.R. p. 11) said that, assuming the giving of a valid notice, the section imposes ``a valid requirement in respect of the moneys to which the notice refers''. In the view of Brennan J. the requirement of the Commissioner expressed in the notice that the moneys be paid to him ``implies an obligation to pay the money and that the persons receiving the notice is not at liberty to disregard it''. His Honour went further and held that the statute ``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'' (ATC p. 4442; C.L.R. p. 26). In
D.F.C. of T. v. Lai Corp. Pty. Ltd. & Ors 86 ATC 4085, Brinsden J., in the Supreme Court of Western Australia (at p. 4095), followed the opinion expressed by Brennan J. that a valid notice, once given and served ``does work an assignment or charge upon the moneys the subject of the notice''. Mason J. (at ATC p. 4438; C.L.R. p. 19) said this:

``... I think that the effect of the service of a sec. 218 notice is to prevent a taxpayer from thereafter assigning a debt, the subject of a notice, so as to defeat the Commissioner's right to payment in accordance with the section.''

Those remarks were particularly relevant to the fact situation in Clyne. So too were the following remarks of Gibbs C.J. (at ATC p. 4434; C.L.R. p. 11):

``However, once the notice is given, it operates to prevent any subsequent dealing with the money which will prevent compliance with the notice when the time for compliance arrives.''

The question is whether the principle so expressed must give way if there has been created, prior to the notice, an equitable interest in respect of the relevant moneys by reason of a floating security, which becomes fixed subsequent to the notice. If it must, then sec. 218 can only be said to operate subject to prior interests and a notice given pursuant to the section, once received, need not be complied with by the person to whom it is given in case any existing floating security which embraces book debts might subsequently become fixed.

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ATC 4456

In my view the question has to be determined at the date of the giving of the notice. There is nothing in the section itself to suggest any possible modification of, or qualification to the statutory requirement that the recipient of the notice act in accordance with its requirements. If it is validly given the Commissioner has a statutory right to payment and that right cannot be defeated by any subsequent dealing with, or action taken in respect of the moneys. The nature of a floating security permits of the property, the subject of the charge, being dealt with in the course of the company's business whilst the security continues to float. However, in my view, the question arising in this case is not to be determined by holding that in some way, the receipt of a sec. 218 notice by a debtor of the company is in the ordinary course of business of the chargor. It is to be determined having regard to the terms of sec. 218 itself and in my view the requirement stated in the notice to make payment operated, in this case, immediately because the debts in question were then presently owing to Thoroughbred. In short they were at the date of the notice ``due and payable''. The subsequent conversion of the floating charge to a fixed one is not therefore to be given as it were a retrospective operation in the sense that the rights acquired by Tricontinental upon default are to be regarded as having become effective in respect of the relevant debts, just as if the security had fixed prior to the notice. That is not to deny the existence in Tricontinental of a present equitable interest in the property, the subject of the charge, from the time of the giving of the security. However, in my view, the question is to be resolved by express reference to the terms of sec. 218 and to the principle expressed in Clyne's case by Gibbs C.J. and Mason J. If, as Brennan J. held, sec. 218 operates as a statutory assignment in favour of the Commissioner, the situation becomes even clearer.

Therefore, in my view, the Commissioner was entitled to payment in accordance with its terms at the date of the giving of the notice in spite of the existence of the prior equitable interest in Tricontinental.

It is next submitted that sec. 218 is not a valid law of the Commonwealth since it is not a law with respect to taxation since its legal effect is to require income tax payable by a taxpayer to be paid out of property to which another is beneficially entitled. Section 218 provides, in my view, a statutory mechanism for more effectively ensuring the collection of income tax. It is therefore a law with respect to taxation. It is a law which permits the Commissioner to have access to a fund of money otherwise payable to the taxpayer in order that he might more effectively enforce payment of the taxpayer's income tax liability. As Mason J. said in Clyne, the effect of giving the notice is ``similar to that of a garnishee order''. In
Melbourne Corporation v. The Commonwealth (1946-1947) 74 C.L.R. 31 at p. 79 Dixon J. said:

``Speaking generally, once it appears that a federal law has an actual and immediate operation within a field assigned to the Commonwealth as a subject of legislative power, that is enough. It will be held to fall within the power unless some further reason appears for excluding it. It will be held to fall within the power unless some further reason appears for excluding it. That it discloses another purpose and that purpose lies outside the area of federal power are considerations which will not in such a case suffice to invalidate the law''

In my view sec. 218 is a valid law of the Commonwealth with respect to taxation.

Finally it is argued that since the effect of sec. 218 is to require income tax owing by the taxpayer to be paid from funds to which in this case Tricontinental is beneficially entitled by reason of its floating charge, the position thereby created is equivalent to an acquisition of property on other than just terms and accordingly the section is invalid (sec. 51(XXXI) of the Constitution).

This submission is valid if, and only if, it can properly be said that the operation of sec. 218 in the circumstances constitutes an acquisition of property by the Commonwealth or its instrumentality. In
Evans v. Rival Granite Quarries Ltd. (1910) 2 K.B. 979 at 999, Buckley L.J., in a passage cited by Dixon J. in
Barcelo v. Electrolytic Zinc Co. of Australasia Ltd. (1932) 48 C.L.R. 391 at p. 420, made it clear that whilst a floating security was a present and not a future security it did not, until it became fixed, specifically affect any item of property the subject of the security. It follows from that, in my view, that whilst it is true that the operation of sec. 218 may, in a case such as this, diminish the efficacy of the security by requiring payment of the money in question to

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ATC 4457

the Commissioner rather than to the chargee, that does not constitute an acquisition of property within the meaning of sec. 51(XXXI) of the Constitution. The section merely imposes a pecuniary liability in persons such as Haymor and Abcos in favour of the Commissioner. It creates a statutory obligation in those persons to pay a sum of money to the Commissioner and that is not an ``acquisition of property''. In my view the submission has no merit.

In the result therefore I refuse the declarations and the injunction sought in the notice of motion. The notice of motion is dismissed with costs.