ZUKS v JACKSON MCDONALD & ANORJudges:
Supreme Court of Western Australia
This is an interpleader application by the plaintiff Mr Nicholias Zuks, brought against each of the first defendant, the members of a law firm, Messrs Jackson McDonald, and the second defendant, the Western Australian Deputy Commissioner of Taxation.
Each of the first and second defendants claims to be entitled to receive from the plaintiff two sums of $700,000. The first of those sums has aleady been paid into court to abide the outcome of the application and the second of those sums is, by order made in these
ATC 4589proceedings on 29 May 1996, to be paid into court on or before 1 July 1996.
The matter arose in the following way.
On 4 January 1990 Mr Lawrence Robert Connell and Mrs Elizabeth Joan Connell obtained a judgment against the plaintiff for payment of the sum of $1,320,067.50 and $670,287.30 by way of interest and costs to be taxed.
Then, in about February 1994, Mr and Mrs Connell issued a bankruptcy notice against the plaintiff in respect of the judgment debt.
Next, on about 15 September 1994 (but no later than that date) Mr and Mrs Connell and the first defendant executed a Deed of Assignment (``the Deed''). The first defendant was described, in the Deed, as the ``Mortgagee''. The ``Mortgagor'' under the terms of the Deed was defined as being Mr and Mrs Connell and also L R Connell and Partners, a partnership between Mr and Mrs Connell.
The assignment provided for in the Deed was expressed to be one by way of security. The Deed provided, in that respect, as follows:
``ASSIGNMENT BY WAY OF SECURITY
The Mortgagor HEREBY GRANTS AND ASSIGNS with the Mortgagee all and singular the Mortgagor's right title and interest in and to the Mortgaged Premises and each of them including, without limitation, all rights, both contingent and actual which the Mortgagor may now or at any time hereafter have in relation thereto and to all moneys which may now or at any time hereafter become payable to the Mortgagor in full or part satisfaction of each of the Debts [a reference, inter alia, to a sum of $1,320,067.50 and interest then still payable by the plaintiff to Mr and Mrs Connell under the terms of the abovementioned judgment] TO HOLD the same unto the Mortgagee absolutely, but subject, nevertheless, to the following proviso for redemption: PROVIDED ALWAYS that, if the Mortgagor shall pay to the Mortgagee all the Moneys Hereby Secured, then the Mortgagee will, at the request and cost of the Mortgagor, re-assign the same to the Mortgagee and execute, at the like request and cost, such memorandum of satisfaction of this security as shall be reasonably required.''
It was common cause between the parties that the assignment effected by the Deed was, notwithstanding the proviso for redemption therein referred to, absolute. (See, in this respect,
Durham Brothers v Robertson  1 QB 765 at 772;
Tancred v Delagoa Bay and East Africa Rail Co  23 QBD 239 and
Hughes v Pump House Hotel Co  2 KB 190).
The plaintiff applied to set aside the bankruptcy notice which had been issued by Mr and Mrs Connell in respect of the judgment debt. The second defendant became aware of that application when one of its officers read newspaper reports thereof on 21 September 1994, 20 October 1994, 24 October 1994 and 25 October 1994. Those newspaper reports contained no reference to the fact that the Judgment debt had been assigned to the first defendant.
On 28 October 1994 the second defendant, as a consequence of the reading of the newspaper reports to which I have referred, served notices on the plaintiff pursuant to s 218 of the Income Tax Assessment Act 1936 (``the Act'').
Subsections 218(1) and (4) of the Act read as follows:
``(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 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
ATC 4590respect 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 of the notice.
(4) Any person making any payment in pursuance of this section shall be deemed to have been acting under the authority of the taxpayer and of all other persons concerned and is hereby indemnifed in respect of such payment.''
As at the date of the notices the amount of tax due by each of Mr and Mrs Connell to the second defendant in respect of assessments previously issued to them exceeded $103M. Each notice required the plaintiff to pay to the second defendant, in effect, the whole of the money due by him to Mr and Mrs Connell.
On 31 October 1994 the first defendant wrote to the solicitor for the plaintiff drawing to his attention the fact of the Deed and enclosing a copy of that document. The first defendant contended that, having regard for the terms of the Deed, it had ``priority to the Deputy Commissioner of Taxation under the s. 218 notice''.
Next, on 3 November 1994, the second defendant served on the plaintiff an amended notice under s 218 of the Act. That notice was expressed to replace the previous notice which had been issued in respect of money owing by the plaintiff to Mrs Connell. The only alteration to the terms of the original notice was that the amount said to be due by her in respect of tax was reduced by $80,948.39 to an amount of $103,284,127.54.
Then, on 5 December 1994, the first defendant posted to the plaintiff a notice, dated 2 December 1994, of the fact of the assignment effected by the Deed.
On 21 December 1995 the plaintiff was served with the petition of the first defendant to the Federal Court for a sequestration order against his estate. That petition relied upon the plaintiff's non-payment of the balance due under the judgment debt, which, as I have said, fell within the compass of the Deed.
The petition was due to be heard on 20 May 1996. On that day, shortly prior to the hearing of the petition, the plaintiff entered into an agreement with the first defendant in terms whereof he agreed, inter alia, to settle ``the debt to... [the first defendant] the subject of bankruptcy proceedings issued against... [him]'' by payment to the first defendant of the ``further sum'' of $1.5M payable as follows:
- (a) $100,000 on or before 24 May 1996;
- (b) $700,000 on or before 7 June 1996; and
- (c) $700,000 on or before 1 July 1996.
The sum of $100,000 was paid by the plaintiff to the first defendant on or before the due date in the apparent belief, formed pursuant to legal advice obtained by him, that the first defendant was entitled to receive payment of that sum in priority to the second defendant.
Against this background the first defendant contends, and the second defendant disputes, that, as a consequence of the assignment effected by the Deed, it has priority over the second defendant in respect of its entitlement to receive payment of the two sums of $700,000.
Before considering the rival contentions of the parties I should mention, also, that the first defendant has brought a separate application by way of originating summons for a declaration that the Deed entitles it to receive such sums as are due by the plaintiff to Mr and Mrs Connell, pursuant to the judgment obtained by them, in priority to the entitlement of the second defendant to payment of such sums pursuant to the s 218 notices.
The contentions of the second defendant, in support of his claim of priority, centred around the propositions that s 218 operates as a statutory assignment of a debt, payable by the recipient of the notice to the taxpayer, in favour of the Commissioner in the nature of a charge over that debt, that at the date of the relevant notices the plaintiff had not been given notice of the assignment effected by the Deed with the consequence that the first defendant had only an equitable interest in the debt owing by the plaintiff to Mr and Mrs Connell, and that the right, title or interest of the Commissioner in that debt, once the notices had been served, was
ATC 4591``a statutory... and... legal right'' taking priority over the equitable interest of the first defendant.
These propositions assume that s 218, on its proper construction, entitles the Commissioner to require the recipient of a notice under that section to pay to the Commissioner the amount of a debt in which the taxpayer to whom it is owed no longer has any beneficial interest and, once received by the Commissioner, to retain that amount notwithstanding any claim thereto by the holder of the beneficial interest. That being so it is, I think, first necessary for me to consider whether the section should be construed in that way.
Section 218 of the Act (then in terms not materially different from those set out above) was considered in
Clyne & Anor v DFC of T & Anor 81 ATC 4429; (1981) 150 CLR 1. There are two aspects of the judgments in that case which warrant attention in the circumstances of this case.
The first of these is that all members of the court considered that, under s 218(a), money is or becomes ``due'' when it is due and payable.
Gibbs CJ (at ATC p 4433; CLR p 10) considered that this becomes clear when the word ``due'', where it appears in s 218(a), is looked at in its context. However his Honour went on to say (ibid) that:
``... Moreover it would be drastic, and generally speaking unconscionable, to require a third party to pay to the Commissioner money which was owed to the taxpayer but which was not yet payable to him, and doubts might be raised as to the constitutional validity of such a provision. In the event of any ambiguity, sec. 218 should be construed to avoid the unjust result that a third party should be required to pay to the Commissioner moneys that were not yet payable to the taxpayer.''
Mason J (with whom Aickin and Wilson JJ were in agreement) was likewise influenced by the context in which that word is used. However his Honour added that ``it cannot be that the Commissioner can by notice require a debtor of a taxpayer to pay the money which he owes to the taxpayer before the debt, as between the debtor and the taxpayer, has become payable''.
Brennan J (at ATC p 4442; CLR p 25) appears to have followed a similar process of reasoning.
The second aspect warranting attention, for present purposes, is the consideration which each of the judgments in Clyne gave to the effect of service of a notice under s 218.
The taxpayer in that case had been served with a notice of assessment which stated that the amount assessed ($236,922.31, which included $118,436.31 income tax for the year ended 30 June 1979 and a $50 health insurance levy) was due and payable on 8 August 1979. The taxpayer had three interest-bearing deposits with a bank, totalling $70,000, which were respectively repayable to the taxpayer on 21 September 1979, 9 April 1980 and 20 April 1980. On 10 July 1979 the Commissioner served on the bank notices under s 218 of the Act requiring it to pay to the Commissioner any money due or accruing or which might become due by the bank to the taxpayer up to $118,436.31. On 4 September 1979 the taxpayer, by deed, assigned those deposits to a third party as security for future advances to be made by the assignee to the taxpayer. He gave notice of the assignment to the bank.
The appellants (the taxpayer and his assignee) contended that, when the moneys became payable by the bank (once the deposits had matured), they were payable, by virtue of the assignment, to the assignee and not to the taxpayer with the consequence that the s 218 notices did not effectively require payment to the Commissioner.
Mason J (and Aickin and Wilson JJ) thought (ATC p 4438; CLR p 19) that the effect of service of the notices was ``to prevent a taxpayer from thereafter assigning a debt, the subject of the notices, so as to defeat the Commissioner's right to payment in accordance with the section''. His Honour went on to say (ibid):
``This effect may be seen as the end result of the principle that an assignee of a chose in action takes it subject to all the equities that the debtor or fund-holder has against the assignor, as at the time of the notice of the assignment, and subject to all infirmities and defects in title of the assignor.''
Mason J doubted (at ATC p 4437; CLR pp 17-18) the correctness of a concession, made on behalf of the Commissioner, that s 218 did not
ATC 4592purport to create a charge over, or interest in, the moneys in favour of the Commissioner.
However his Honour later added (at ATC pp 4440-4441; CLR p 23) that 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''.
Gibbs CJ, in disposing of the appellants' abovementioned contention, found it unnecessary (at ATC pp 4433-4434; CLR p 11) to have recourse to the doctrine that an assignee of an equitable interest takes subject to the equities and to the infirmities of the assignor's title. His Honour considered that the section itself answered the appellant's contentions, saying (ibid) that:
``... The conditions for the giving of a valid notice are laid down in sec. 218(1). If those conditions exist at the time when the notice is given there is a valid requirement in respect of the money to which the notice refers, which, in a case under para. (a), will be money which is due or accruing or may become due by the person to whom the notice is given to the taxpayer. The words by which the Parliament grants the power to make the requirement necessarily imply that the person to whom the requirement is given will obey it. Subsequent actions by the taxpayer cannot render the requirement nugatory or ineffective. If that were not so it would be possible for a taxpayer, in a case such as the present in which the notice required payment within seven days of the money becoming due, himself to obtain payment of the money immediately it became due, with the result that when the time came for compliance with the notice there would be no money to which the notice related. It would indeed be possible, in every case in which the money was not payable to the taxpayer at the time when the notice was given, entirely to defeat the purposes of the section. 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. An assignment made by the taxpayer after the date of the notice will be ineffective to relieve the person to whom the notice is given of his statutory obligation to pay the money to the Commissioner. Notwithstanding the assignment, the money will be `due' at the time when it would have become payable to the taxpayer if it had not been for the subsequent assignment whose effect is to be ignored. Section 218(4) recognises that if it had not been for the notice other persons than the taxpayer might have acquired rights to the money, for any payment made in pursuance of the section is deemed to have been made `under the authority of the taxpayer and of all other persons concerned'.''
Brennan J considered (ATC p 4442; CLR p 26) that the Act ``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''. His Honour went on to say (at ATC pp 4442-4443; CLR p 27) that:
``The notice precludes the taxpayer from receiving money to the payment of which he would otherwise be entitled or become entitled, and it requires the third person in whose hands the money is or into whose hands it comes to pay it to the Commissioner at some time, but not earlier than when it would otherwise be due and payable. The giving of the notice thus affects the rights of the taxpayer who, once the notice is given, is statutorily divested of his right to payment of the whole or a part of the money specified in the notice. Whether the money is property in existence when the notice is given or whether it is property which comes into existence thereafter, the third party is obliged to hold and dispose of it in accordance with the notice. A notice of assignment would ordinarily bind the third party to pay money in his hands or coming into his hands to an assignee (see
Tooth v. Brisbane City Council (1928) 41 CLR 212, at p. 222) but an obligation to obey the assignor's direction cannot prevail over an earlier statutory requirement to pay the money to the Commissioner.
The taxpayer is thus unable to effect a disposition of the money so as to defeat the Commissioner's right to payment once the statutory notice is given. Accordingly, a subsequent assignment of the taxpayer's interest in the money does not create in the purported assignee a right to payment
ATC 4593superior to the right conferred upon the Commissioner. As between the Commissioner and the assignee, the Commissioner's right to payment prevails.''
DFC of T v Lai Corporation Pty Ltd 86 ATC 4085; (1986) 17 ATR 256 this Court, in the form, initially, of Brinsden J, had to consider the effect of s 38(1) of the Sales Tax Assessment Act (No 1) 1930, the provisions of which are, for all practical purposes, to the same effect as those of s 218(1) of the Act.
In that case the taxpayer company had by debentures created charges over its undertaking, assets and book debts in favour of a bank and another company. On 30 May 1983, some three years after the creation of the debentures, the Commissioner issued notices, pursuant to s 38, to various debtors of the taxpayer company requiring those debtors to pay to him the amount of the debts in circumstances in which the taxpayer company had been assessed to sales tax, which it was unable to pay, in an amount of approximately $17M. On the following day the bank appointed receivers and managers to the charged property. On 7 June 1983 the second chargee did likewise. So far as the bank's security was concerned the date of receipt, by the taxpayer's debtors, of the Commissioner's notices in some cases preceded the time of appointment of the bank's receivers and in other cases was after that time. So far as the second chargee was concerned, the appointment of its receivers was subsequent to receipt by the taxpayer's debtors of all of the notices sent by the Commissioner.
The Deputy Commissioner contended that each debenture was a floating charge with respect to the book debts, that in each case it crystallised over the book debts at the date upon which the receivers and managers were, respectively, appointed and that receipt of the s 38 notices by the various debtors created, in each case, a charge over the debt owing to the taxpayer in favour of the Commissioner which ranked in priority to the charge over those debts created by each debenture.
Brinsden J formed the opinion (ATC p 4095; ATR p 268) that s 38(1), when a valid notice is given and served, ``does work an assignment or charge upon the moneys the subject of the notice which `are or will be or may be payable''' and that any subsequent assignment by the taxpayer company after the service of the notices gave way to the command in the notices.
The Deputy Commissioner had submitted that it was unnecessary for his Honour to trouble himself with any question of priorities or indeed crystallisation because, by the application of the literal meaning of the words of s 38, if the debenture-holder had no better claim than as an equitable assignee, there still remained the legal estate in the taxpayer company in respect of the debts and hence the debtors of the taxpayer company were persons by whom money is due or accruing or may become due to that company. In those circumstances, he asserted, the command of the section must be obeyed, notwithstanding the claims of the debenture-holder, and the moneys must be paid in accordance with the command in the notice. Brinsden J said (at ATC p 4100; ATR p 274), in respect of these contentions, the following:
``I come back to consider the construction of the Act and in particular Pt VI. It would, I think, be taking a big step to conclude Parliament intended the Commissioner should be paid his tax out of a debt which in equity had ceased to belong to the taxpayer at the time of receipt of a sec 38 notice. There is no compelling reason to be derived from the Act why this should be so. [His Honour then considered the provisions of s 34 of the Sales Tax Assessment Act (No 1) 1930 which seemed to him to deny such a result]''
His Honour went on to say (at ATC 4100-4101; ATR p 274) that he accepted that s 38 ``can create a charge, but when it does, that charge will be subject to ordinary rules of equity so that he whose charge is first in tirne would have priority even if a subsequent chargee be the Commissioner''.
The case went on appeal to the Full Court of the Western Australian Supreme Court. (See
DFC of T v LAI Corporation Pty Ltd  WAR 15).
Burt CJ, in considering the obligation placed by the statute upon the debtor, concluded that it did not matter whether the charge be fixed or floating. He said that, in either case, it was an equitable security as the debt had not been assigned at law and, as the debts were presently payable when the notices were served, they were at that time, and within the meaning of s 38, money due and payable to the taxpayer.
ATC 4594That being so, he considered, in either case the debts, once the notices were properly given, were payable to the Commissioner (see pp 21 and 22).
His Honour had regard, in this respect, to the provisions of subs 38(4) which were in identical terms to those of s 218(4) of the Act. He said (at p 22), in that respect:
``In my opinion `all other persons concerned' within the meaning of the subsection would include a person who by reason of some arrangement made by him with the taxpayer has acquired some equitable interest short of a legal interest and whether fixed or floating in the debt. I am unable to see how a person could be `concerned' in any other way. Hence, although the paying of the debt the subject of an equitable charge given by the taxpayer to a third party by the debtor to the Commissioner may - although in passing I cannot see how - expose the debtor to liability at the suit of the equitable chargee, the payment is nevertheless deemed to have been made under the authority of the equitable chargee and the debtor is indemnifed in respect of such payment. It is for this reason that so far as the obligation cast upon the debtor to pay the Commissioner is concerned, I do not think that it matters whether the equitable charge created by the debenture was floating or fixed. In either case the debt, once the notice was properly given, is payable to the Commissioner.''
That said, his Honour went on to say, it did not follow that the Commissioner was entitled to retain the proceeds of the book debts to the exclusion of the bank. He said (at pp 22 and 23):
``I think it should be held that the Commissioner receives the debt subject to all charges which are then, that is to say as at the 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 then 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 (see at 16 and 23) and can, I think, in reason be sustained either in the way which I have chosen or by saying that to extent of the security the debt although due is not payable to the taxpayer.''
Wallace J (at p 37) rejected an argument that the word ``due'' in s 218(1)(a) should be construed as meaning ``due legally and equitably''. His Honour said (``ibid'') that as soon as the notices were given there arose an obligation on their recipients, as debtors to the taxpayer company, to pay the Commissioner. That, he said, was so because of the punishment provision of the section with the consequence that ``the pre-existence of a floating charge over book debts cannot prevail''. His Honour added that he was not of the opinion ``that the service of the s 38 notice upon the company's debtors was an event giving rise to crystallisation of the bank's floating charge so as to defeat the effect of the notice''.
Kennedy J, the third member of the court, considered (at p 44) that the reasoning of the judgments in Clyne's case required the conclusion that the Commissioner's claim pursuant to a s 38 notice must prevail against a floating charge over book debts which had not crystallised at the time of receipt of the notice. His Honour went on to say (pp 44 and 45):
``It does not seem to me to be necessary to characterise the effect of service of a s 38 notice as being equivalent to an assignment or a charge. The essential question is simply as to the operation of the statutory obligation, and that is a matter of construction, which appears to me to have been resolved by Mason J in Clyne's case (with the assent of Aickin and Wilson JJ). Just as the subsequent assignment in Clyne's case could not defeat the Commissioner's claim, the taxpayer's subsequent conversion of an existing floating charge into a fixed charge cannot, in my view, do so.''
Then, at p 45, his Honour said:
``At the opening of the case for the Commissioner... [counsel for the Commissioner] indicated that he would not be contending that the s 38 notice, when served, was effective against an existing fixed charge. It is not necessary, I believe, in this case to doubt that concession, which
ATC 4595relieves us of having to consider the question of whether a s 38 notice can require the payment of moneys which, although payable to the taxpayer, are not moneys to which he is beneficially entitled. If the language of the section, notwithstanding the terms of s 38(4), permits a negative answer, it might be thought that such a construction should be adopted - cf The English, Scottish and Australian Bank Ltd v The Commonwealth (1959) 102 CLR 661 at 668.''
Section 218 has more recently been considered by the Full Court of the Supreme Court of Queensland in
Tricontinental Corporation Limited & Anor v FC of T & Ors 87 ATC 4454;  1 Qd R 474.
It was there held that, prior to crystallisation of a floating charge, the holder of the mortgage debenture has the right to obtain an injunction against the company subject to the charge in order to prevent it from dealing with its assets otherwise than in the ordinary course of its business, but that it had no proprietary interest even in equity in the assets subject to the charge. As a consequence, the court held, the Commissioner is entitled to intercept money from debtors of the taxpayer who received notices prior to the crystallisation of the charge but the Commissioner took debts subject to the security if the charge crystallised prior to the time of service of the notices.
Connolly J (with whom Shepherdson J agreed) considered (at ATC p 4457; Qd R p 477) that, should a transfer of moneys on deposit occur before the giving of a notice under s 218, there would be much to be said for the view that, at the date of the notice under that section, the debtor held no money due or accruing or which might become due to the taxpayer or for or on account of the taxpayer, the moneys in question being due to or held on account of the assignee. However, his Honour went on to say (at ATC p 4460; Qd R pp 481 and 482):
``Whether in a case in which a charge, which, as in this case, is expressed to be a floating charge, has crystallized, the fact would be sufficient to defeat a notice under sec 218 of the Income Tax Assessment Act is, I think, not free from difficulty. In forrn 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 sec 218 can only operate on the taxpayer's beneficial interest in the moneys. A more direct approach is to say that once a floating charge has crystallized, moneys the subject of the charge are no longer in reality owing to the taxpayer but to the chargee.
The former view would seem to have found favour with Burt CJ in
Norgard v DFC of T (1986) 86 A.T.C 4947 [now reported in the Western Australian Reports as Deputy Commissioner of Taxation v LAI Corporation Pty Ltd, (supra)]...
It was, in fact, the latter view which is to be found in the judgment of Mason J in Clyne's case 81 ATC at pp 4436-4437; 150 CLR at p 16 for his Honour there speaks of the effect of the crystallization of a floating charge as having the effect that the moneys owed by the debtor would not be payable to the taxpayer.
In this case, however, it is unnecessary to take this question any further. Plainly, the floating charge had not crystallised before the sec 218 notice was given and it follows in my judgment that there is nothing to defeat or intercept the operation of that notice according to its tenor.''
Williams J, too, concluded that, prior to crystallisation, the holder of a mortgage debenture has no proprietary interest even in equity in the property subject to the charge which could defeat a s 218 notice. His Honour went on to say (at ATC 4463; Qd R p 485):
``Once that position is reached one cannot challenge, in my view, the reasoning of the learned trial Judge and of Connolly J in this Court. Though it is not necessary to decide the point I should indicate that I agree with the approach taken by the Full Court of Western Australia in Norgard v DFC of T (1986) 86 A.T.C 4947 that the Commissioner is entitled to intercept moneys from persons who were debtors of the taxpayer and who received notices prior to crystallization of the charge, but that the Commissioner would take debts subject to the security if it crystallized prior to the time of service of the notices.''
Section 218 has also been considered by Thomas J in the Supreme Court of Queensland in
Elric Pty Ltd v Taylor & Ors 88 ATC 4578; (1988) 19 ATR 1551.
The plaintiff, a mortgagee under an equitable mortgage, had submitted, in that case, that, upon crystallisation of a charge, the debt the subject of the charge ceased to be payable to the creditor and instead became payable only to the equitable chargee with the consequence that a notice under s 218 could not operate upon that debt. By way of an alternative formulation it submitted that statutory assignment of a debt to the Commissioner remains, under s 218, subject to prior equities existing at the date of assignment and that the Commissioner merely steps into the shoes of the taxpayer. At ATC p 4581; ATR pp 1554-5 of the report Thomas J considered that both of these submissions were correct. He said:
``... 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 decided cases tends to support this view. In Norgard & Ors v DFC of T & Anor 86 ATC 4947 at 4952; (1986) 18 ATR 270 at 276, 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.'
`... to the extent of the security the debt although due is not payable to the taxpayer.'
Both statements are consistent with the reasoning of Mason J in Clyne's case (above) at ATC 4436-4437 and 4438-4439; CLR 15-16 and 19-20. Similar views are also contained in dicta of Connolly and Williams JJ in Tricontinental Corporation Ltd v FC of T... [supra].''
It will be apparent from the aforegoing review of the case law that there is now a substantial body of authority to support the proposition that, upon the proper construction of s 218, service of a notice under that section will not defeat a prior equitable charge. That appears to have been the view of Brinsden J in LAI, supra, in respect of the equivalent provisions of the Sales Tax legislation and it was certainly the view of Burt CJ on the appeal from his Honour's decision. It was also that of each of Williams J in Tricontinental Corporation and Thomas J in Elric. The proposition is also consistent with each of the judgments in Clyne and is, I think, at least left open by what was said by Kennedy J in LAI and by Connolly and Shepherdson JJ in Tricontinental Corporation.
In this case the first defendant relies upon an absolute assignment of a debt which, because of the absence of notice to the debtor, was effective only in equity. However that assignment created, as between the assignor and assignee, a valid and effective title in the assignee; (See
Gorringe v Irwell India Rubber Works  34 Ch D 128 and
Comptroller of Stamps (Vic) v Howard-Smith (1936) 54 CLR 614 at 622).
It seems to me that in such a case, on the proper construction of s 218 and having regard for the authorities to which I have referred, the Commissioner's entitlement to receive payment of the debts referred to in the notices should be found to be subject to the interest of the prior equitable assignee.
Like Brinsden J in Lai, supra, at ATC 4100-4101; ATR 274, I consider that it would be a big step to conclude that Parliament intended that the Commissioner should be paid his tax out of a debt which in equity had ceased to belong to the taxpayer at the time of receipt of the relevant notice. It is difficult to conceive that this could ever have been its intention. The purpose behind s 218 seems to me to be that of rendering more effective the Commissioner's powers to recover property of a taxpayer in payment of his or her unpaid tax rather than that of, in effect, picking the pocket of a third party (who might have acted entirely in good faith) in order to satisfy the obligation of a defaulting taxpayer. (See, in this respect, s 15AA of the Acts Interpretation Act 1901 (Cth)).
Kennedy J, in LAI, supra at 45, referred, as I have mentioned, to the case of
ATC 4597Scottish and Australian Federal Bank Ltd v The Commonwealth of Australia (1959) 12 ATD 123 at 124; (1959) 102 CLR 661 at 668 in support of the proposition that, if the language of s 38 of the Sales Tax Assessment Act (No 1) 1930 permitted this, that section should be construed in such a way as not to require the payment of moneys which, although payable to the taxpayer, are not moneys to which he is beneficially entitled. There the High Court had to consider s 34 of the Estate Duty Assessment Act 1914-1950 which provided:
``(1) The duty assessed under this Act shall be a first charge upon the estate in priority over all other encumbrances whatever, and there shall not be any disposition of the estate or any part of it until the duty thereon has been paid or the Commissioner... certifies that he holds security for payment of the duty sufficient to permit any specified part of the estate to be disposed of.''
A question arose whether s 34 should be construed so as to give the charge for duty thereby created priority over a pre-existing equitable charge held by the plaintiff over property comprising part of the estate. The court (comprising Dixon CJ and Fullager, Kitto, Taylor and Windeyer JJ) considered that there were two considerations which suggested themselves as tending strongly against a construction of s 34 which would give the charge for duty priority over the security held by the plaintiff. The second of these was expressed (at ATD p 124; CLR p 668) as follows:
``...the result of the construction is that duty required by the Act to be levied and paid upon an estate of which the plaintiff's interest in the shares and the land forms no part would be recoverable nevertheless out of that interest. In short, the Commonwealth would be enabled to resort to A's property for payment of B's estate duty, A having acquired his property from B, not under any transaction which is disregarded for estate duty purposes, but for full value and by an ordinary business transaction. An intention to produce a result so plainly unjust, so inconsonant with the general scheme of the Act, should not be attributed to the Legislature if the language of the section is fairly open to another construction.''
Similarly, the result here contended for by the Deputy Commissioner is, I think, one which, for like reasons, is plainly unjust and inconsonant with the general scheme of the Act. The language of the section is fairly open, in my opinion, to another, and preferable, construction. That being so, I am not, as I have foreshadowed, prepared to accept the construction advanced on behalf of the Deputy Commissioner.
I should also mention the prospect, not argued before me (no notice having been given pursuant to s 78B of the Judiciary Act 1903), that the construction contended for by the Deputy Commissioner might be one which would render s 218 unconstitutional. (See, in this respect, the provisions of s 15A of the Acts Interpretation Act, supra).
It will be apparent from the first of the extracts which I have quoted from the reasons for decision of Gibbs CJ in Clyne's case, supra at ATC p 4433; CLR p 10, that his Honour there suggested that doubts might be raised as to the constitutional validity of a provision (described by his Honour as ``unconscionable'' which required a third party to pay to the Commissioner money which was owed to the taxpayer but which was not yet payable to him. If doubts might be raised about the constitutionality of such a provision then, it seems to me, they might also be raised in respect of a provision which requires an assignee under the terms of a valid and effective equitable assignment preceding the issue of the s 218 notices, in effect, to give up the property the subject of the assignment in payment of the assignor's unpaid tax liability. (See also the comments of Connolly and Williams JJ in Tricontinental Corporation, supra, at ATC 4461 and 4463; Qd R 483 and 485 respectively).
However, because I have reached the conclusion at which I have arrived independently of any such consideration, and because the point has not been argued before me, it is both unnecessary and inappropriate for me further to comment upon it.
I should, before leaving the matter, mention two other points which have been raised in argument before me.
The first of these relates to the effect of s 218(4) of the Act, the provisions of which were relied upon by the Deputy Commissioner in support of the construction contended for by him.
I do not consider that the words of that subsection can be taken to reflect an intention, merely because equitable assignees fall within the category of ``all other persons concerned'', that the pre-existing interest of such a person in a debt the subject of a notice under s 218(1) should be extinguished upon the service of that notice. It may, for example, be the case that the subsection is designed (perhaps unnecessarily), by its reference to ``other persons concerned'', inter alia, to protect the debtor from claims which might otherwise be advanced against him or her by such other persons who would, were it not for the operation of s 218(1), subsequently have acquired rights to the money the subject of the debt (cf the comments of Gibbs CJ in Clyne, supra, at ATC 4434; CLR 12).
Also, it is, I think, plain that s 218(4) could not have the consequence that the obligation of the debtor to make payment to the Commissioner prevails over any other right, at all, of any third party to receive payment of the debt even if otherwise in priority to that of the Commissioner. If the section did have that consequence then much of the discussion of the High Court in Clyne would have been unnecessary. (Cf, in this respect, the comment of Hill J in
DFC of T v Government Insurance Office of NSW & Anor 93 ATC 4901 at 4913; (1993) 117 ALR 61 at 76).
Finally, I should mention that I was referred to a number of statements in the case law to the effect that the issue of a valid s 218 notice creates a charge, or something in the nature of a charge, over the debt owing by the recipient to the taxpayer, in favour of the Commissioner. (See, in this respect, the comments of Mason J in Clyne, supra, at ATC 4437; CLR 18-19, those of Brennan J in that case, at ATC 4442; CLR 26;
DFC of T v Donnelly & Ors 89 ATC 5071 at 5075; (1989) 89 ALR 232 at 234-5 per Lockhart J, ATC 5079; ALR 239, per von Doussa J, and ATC 5087-5092; ALR 250-5, per Hill J, and DFC of T v Government Insurance Office of NSW & Anor, supra at ATC 4905; ALR 66, per Jenkinson J, and ATC 4907-4909; ALR 69-71, per Hill J, with whom Beazley J agreed.) However it seems to me that, once it is accepted that the intention of the Parliament, as reflected in s 218, is that of facilitating the taking, by the Commissioner, only of property which, at the time of service of a notice, is beneficially that of the taxpayer in payment of the latter's tax, then nothing turns, for present purposes, upon the nature of any charge which might be created in favour of the Commissioner by the issue of such a notice.
It follows, from these conclusions, that the rights of the first defendant, as equitable assignee, were not defeated by the issue of the s 218 notices and that it is entitled, in priority to the second defendant, to receive payment of the two sums of $700,000 to which I have referred.
It is unnecessary, in the light of my conclusions, for me to consider other arguments which were advanced before me with respect to the application of equitable principles for determining priority.
I will hear further from the parties as to the precise form of relief which should be ordered in the light of these reasons.