Elric Pty. Ltd. v. Taylor & Ors

Judges:
Thomas J

Court:
Supreme Court of Queensland

Judgment date: Judgment handed down 29 July 1988.

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Thomas J.

This motion is another litigious incident in the resolution of problems created by Co-ownership Land Development Pty. Ltd. (C.O.L.D.). The present contest is between the Commissioner for Taxation (who recently issued an assessment against C.O.L.D.) and Elric Pty. Ltd. (``Elric'') which is the equitable mortgagee of C.O.L.D.'s property. Elric appointed a receiver, thereby crystallising its floating charge, on 1 October 1983.

The respective rights of these parties will depend upon the effect of the equitable mortgage and of the scheme of arrangement which was sanctioned by the Supreme Court on 1 April 1982. After a lengthy history of litigation, the scheme's trustees finally sold the land the subject of the scheme earlier this year (1988) for $4.4 million, realising sufficient money to repay the co-owners in full, including the interest contemplated by the scheme. The trustees proceeded to repay the co-owners and by 31 May 1988 concluded that there would be approximately $100,000 remaining to the credit of C.O.L.D. which should be paid to Elric after full payment of the co-owners. Shortly before that date the Deputy Commissioner of Taxation issued a default assessment upon C.O.L.D. in the sum of $137,673.31, and on 19 May 1988 served the trustees with a notice under sec. 218 of the Income Tax Assessment Act requiring them to pay that sum to him from moneys due or accruing due by them to C.O.L.D.

Shortly stated Elric's submission is that moneys are not due and payable and will never become payable from the trustees to C.O.L.D. because Elric's entitlement under the crystallised charge makes such moneys payable to Elric (whose secured debt would not be fully satisfied by such a sum). The determination of this point will depend upon the effect of the equitable mortgage, the scheme of arrangement and the provisions of sec. 218 of the Act.

C.O.L.D. granted an equitable mortgage to Elric on 1 July 1983 to secure substantial advances made to it by Elric. Under that document C.O.L.D. granted a ``charge in favour of the mortgagee the whole of its undertaking and all of its assets whatsoever and wheresoever both present and future...''. There was a proviso in the following terms:

``Provided however that until the payment by the trustees of the scheme of arrangement... to the co-owners pursuant to the said scheme... or other satisfaction of the co-owners `the company land' and `the contract land' as defined in cl. 1 of the said scheme of arrangement shall not be included in the security or charge hereby created...''

It should be noted that the definitions of ``the company land'' and ``the contract land'' in the scheme referred to particular parcels or portions of land. The scheme provided in cl 1:

```the company land' means the land more particularly described as follows -

• (i)... (particular descriptions ensued).
• ...''

Similarly:

```the contract land' means all or part of those pieces or parcels of land on South Stradbroke Island described in the agreements entered into by the company with the scheme creditors as -

• (i)... (particular descriptions ensued)
• ...''

The definitions are not merely inclusive, and I do not think that the proviso in the equitable charge is capable of excluding anything more than those particular assets. Counsel for the

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Commissioner submitted that ``the contract land'' should be read so as to include proceeds of sale of the land, but I find no merit in that submission.

I do not propose to express a lengthy analysis of the scheme in these reasons. The clauses referred to by counsel as being of principal relevance were 4, 12, 13, 14, and 16. Clause 13 provides authority to the trustees (in certain events which happened) to sell the company lands in their own name. It then provides:

``insofar as the sale proceeds are concerned the trustees shall make payment in the following order.

• Firstly - by way of remuneration of the trustees pursuant to Clause 6(c)(vi) hereof;
• Secondly - in payment of the remaining costs set out in Clause 6(c) hereof;
• Thirdly - in payment to the scheme creditors on a pro rata basis; and
• Fourthly - to the company.''

Counsel for Elric submitted that the floating charge crystallised on appointment of the receiver, and I do not understand this to have been challenged. Notice was given to all relevant parties. Thereafter Elric was entitled to be paid all debts that fell due or would fall due to C.O.L.D., and only Elric could give a good discharge for debts due to the company. This is, I think, supported by dicta in cases mentioned in argument, including
Re Bismark Australia (1981) V.R. 527 at p. 535;
M.G. Charley Pty. Ltd. v. F.H. Wells Pty. Ltd. (1963) N.S.W.R. 22 at p. 26;
Norgard & Ors v. D.F.C. of T. & Anor 86 ATC 4947 at p. 4964;
National Mutual Life Nominees v. National Capital Development Commission (1975) 6 A.C.T.R. 1 at pp. 4-7; and cf. Gough on Company Charges pp. 87 and 170.

The effect of a sec. 218 notice (under the Income Tax Assessment Act) has sometimes been likened to that of a statutory garnishee (cf.
Clyne & Anor v. D.F.C. of T. & Anor 81 ATC 4429 at p. 4438; (1981) 150 C.L.R. 1 at p. 19). With or without resort to that analogy it is clear enough that it operates upon the money in the hands of a third party before payment is made to the debtor. The primary submission of Elric is 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 sec. 218 can only operate upon moneys due and payable to C.O.L.D. An alternative formulation submitted on behalf of Elric is that the statutory assignment of the debt to the Commissioner remains subject to prior equities existing at that date of assignment, and that the Commissioner merely steps into the shoes of the taxpayer.

Section 218(1) of the Income Tax Assessment Act provides (where relevant):

``218(1) The Commissioner may at any time... by notice in writing... 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...

• (e) so much of the money as is sufficient to pay the amount due by the taxpayer in respect of tax...''

It should be immediately noted that the word ``due'' in para. (a) of that section has been authoritatively construed as requiring the meaning ``due and payable''. This is because:

``... 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.''

(Per Mason J. (with whose reasons Aickin J. and Wilson J. agreed) in Clyne & Anor v. D.F.C. of T. & Anor 81 ATC 4429 at p. 4436; (1981) 150 C.L.R. 1 at p. 15; cf. Gibbs C.J. at ATC p. 4433, C.L.R. p. 10.)

Counsel for the Commissioner expressly disavowed that any moneys had yet become due and payable by the trustee to Elric and based his submission upon the anticipated event

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that money will become due and payable to C.O.L.D. The requirements of the notice are to pay to the Commissioner ``forthwith upon the money becoming due or being held'' (sec. 218(1)). The notice actually served contains the following alternative demand:

``But if the money becomes due by the trustees to the taxpayer in the future or is held by the trustees on behalf of the taxpayer in the future, the payment to the Commissioner is required to be made forthwith upon the money so becoming due or held by the trustees.''

I do not think that any different result will follow according to whether one focuses attention upon the event (in sec. 218(1)(a)) that money will become due and payable to the taxpayer or the event (in sec. 218(1)(b)) that the trustees will subsequently hold money for or on account of the taxpayer. In the latter event for similar reasons to those of Mason J. at ATC p. 4436; C.L.R. p. 15 of Clyne's case (above) the reference to moneys held ``for or on behalf of a taxpayer'' must refer to moneys that are or will be payable to the taxpayer (and not to some other party) before the trustee can be obliged to pay the money to the Commissioner. It is desirable therefore to focus attention in the first instance on the question whether the trustee is a ``person by whom any money may become due to a taxpayer'' (C.O.L.D.) under sec. 218(1)(a). for this purpose it may be assumed that the trustees are holding more money than they are required to distribute to the co-owners under the scheme, and that the surplus moneys will (apart from the existence of Elric's charge) become due and payable to C.O.L.D. It is common ground that Elric's charge has crystallised.

The question therefore is whether those moneys will be due and payable by the trustee to the taxpayer (i.e. C.O.L.D.). In the present circumstances there is no prospect whatever that those moneys will be payable to C.O.L.D. There is no question here of the moneys being sufficient to exceed Elric's secured debt so as to leave a surplus payable to the taxpayer. 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 relationships 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 decided cases tends to support this view. In Norgard & Ors v. D.F.C. of T. & Anor 86 ATC 4947 at p. 4952. Burt C.J. 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.''

Both statements are consistent with the reasoning of Mason J. in Clyne's case (above) at ATC pp. 4436-4437 and 4438-4439; C.L.R. pp. 15-16 and 19-20. Similar views are also contained in dicta of Connolly J. and Williams J. in
Tricontinental Corporation Ltd. & Anor v. F.C. of T. 87 ATC 4454 at pp. 4460-4461 and 4463; (1988) 1 Qd.R. 474 at pp. 481-482 and 485.

Counsel for the Deputy Commissioner submitted that there is no property of the company to which the charge will attach. It may be accepted for present purposes that his primary submission that the trustees do not yet hold any moneys for the benefit of Elric and that they will do so only when all co-owners have been paid, is correct. Letters written by the trustees indicate that this event is imminent and they have already expressed their intention of paying a substantial sum to Elric, and it seems that the only inhibition upon their doing so is the sec. 218 notice. It is true that under the first proviso in the equitable mortgage ``the contract land'' is not covered until payment by the trustees to the co-owners, and of course that land has now been sold. However I am unable to accede to counsel's submission that ``the contract land'' also includes the proceeds of sale of the contract land. Counsel referred to the provisions of the scheme of arrangement including cl. 4, 12, 13 and 14 thereof to

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support his submission that C.O.L.D.'s interest in any surplus funds is as residual beneficiary under a trust. The submission then proceeded that it was ``only an equitable interest'' and that the equitable mortgage did not attach to equitable interests. Counsel also described it as a future contingent interest dependent upon the successful completion of the scheme, and that ``it only comes into existence upon those things happening''. I am not to be taken as accepting that the equitable mortgage, particularly after crystallisation, does not attach to equitable interests, but in any event it is inescapable that upon payment being made to the last co-owner, immediately upon the emergence of C.O.L.D.'s rights they are subject to Elric's charge. In short, upon their creation Elric has priority over both the taxpayer and the Deputy Commissioner. However one construes the scheme of arrangement, the moneys which the trustees hold after payment of the co-owners will be payable to the equitable chargee in priority to the taxpayer. The Deputy Commissioner will always be unable to satisfy the requirements of sec. 218(1)(a), (b), (c) or (d) of the Act with respect to the moneys in question.

An injunction should therefore be granted restraining the trustees from paying to the Deputy Commissioner the moneys claimed in the notice which purported to be given under sec. 218. I further declare that the claim of the plaintiff pursuant to its equitable mortgage dated 1 July 1983 to moneys due by the trustees to C.O.L.D. has priority to the claim of the Deputy Commissioner pursuant to the said notice.

The trustees appeared only to abide the order of the Court and the true contest was between Elric and the Deputy Commissioner. I therefore propose to order the Deputy Commissioner to pay the costs of Elric and of the trustees of and incidental to the notice of motion to be taxed.