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Federal Court of Australia |
COURT
IN THE FEDERAL COURT OF AUSTRALIACATCHWORDS
Income Tax - Bankruptcy - Whether moneys paid pursuant to notices issued under s. 218 of the Income Tax Assessment Act 1936 are recoverable by a trustee in bankruptcy - Whether such notices created charges over debts which came into existence after the service of the notices and became due before the making of a sequestration order against the debtor or thereafter - Whether moneys paid pursuant to s. 218 notice were received by Commissioner as a result of an attachment by him of a debt due to the debtor within the meaning of s. 118 of the Bankruptcy Act 1966 - meaning of "attachment".Bankruptcy Act 1966: ss. 115, 118 and 131
Income Tax Assessment Act 1936: s. 218
HEARING
SYDNEY Counsel and Solicitors G Downes QC and D McGovern
for Applicant: instructed by Australian
Government SolicitorCounsel and Solicitors S G Finch instructed by
for First Respondent: Isenberg Spedding & Player
ORDER
The appellant be directed to bring in short minutes of order to give effect to the reasons of the Court on a date to be fixed.NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
DECISION
I have read the reasons for judgment of Von Doussa J. and Hill J. in draft form where the relevant facts and statutory provisions appear, so they need not be restated.2. I agree with the reasons of Hill J. I agree also with the reasons of Von Doussa J. except on the question whether the notices issued by the Deputy Commissioner in this case under s. 218 of the Income Tax Assessment Act 1936 ("the Act") created a charge over the debts due by the Health Commission with which this case is concerned. I should add some observations of my own.
3. The central question in this appeal is whether the s.218 notices issued by the Deputy Commissioner on 23 December 1986 created charges over debts due by the Health Insurance Commission to Dr. G.W. Edelsten at the time of service of the notices or thereafter becoming due. It was common ground between the parties that debts becoming due to Dr. Edelsten after the making of the sequestration order would not be subject to the charges because, upon the making of the sequestration order, against the estate of Dr. Edelsten the Deputy Commissioner's rights as a creditor for unpaid income tax were converted into a right of proof in the bankruptcy. It is perhaps open to some question whether this concession was correctly made.
4. In Clyne v Deputy Commissioner of Taxation [1981] HCA 40; (1981) 150 CLR 1 Brennan J.
said at 26, with reference to a notice served by the Commissioner under para.
218(1)(a)(i) of the Act (the section was
then in substantially similar terms
to its present terms) that:
"The statute thus works an assignment of the moneys5. Counsel for the Commissioner in Clyne's Case made a concession that s. 218 did not purport to create a charge over, or interest in the moneys in favour of the Commissioner, Mason J. said at pp 18-19 with reference to that concession that it was doubtful whether it was rightly made.
to be paid to the Commissioner as though the
taxpayer had charged the moneys otherwise payable
to him with payment of his tax liability.
Statutory charges are no novelty, although a
statute which creates a charge usually describes
it as such and defines the chargee's remedies. An
example of a statutory charge which created a
security in favour of a chargee over moneys due by
a third party to the chargee's debtor was to be
found in the Contractors' and Workmen's Lien Acts
1906-1921 (Q), considered by this Court in
Stapleton v F.T.S. O'Donnell Griffin & Co. (Q)
Pty. Limited [1961] HCA 70; (1961) 108 CLR 106."
6. The question whether a s. 218 notice creates a charge over the moneys in favour of the Commissioner or gives rise to an assignment of the debts described in the notice has been considered in cases subsequent to Clyne's Case: see Deputy Federal Commissioner of Taxation v Lai Corporation (1986) 86 ATC 4085 per Brinsden J. of the Supreme Court of Western Australia; Tricontinental Corporation Limited v Federal Commissioner of Taxation (1986) 86 ATC 4453 per Carter J. of the Supreme Court of Queensland; Deputy Federal Commissioner of Taxation v Steele (1987) 87 ATC 5050 per McInerney J. of the Supreme Court of New South Wales. In Kerrison v Acting Deputy Federal Commissioner of Taxation (1988) 88 ATC 4476 Fisher J. of this Court expressed the view at 4481 that a valid section 218 notice "probably" or "prima facie" creates a charge over the relevant moneys in favour of the Commissioner.
7. A charge was succinctly described by Lord Esher M.R. in In Re Potts; Ex
parte Taylor (1893) 1 QB 648 at 658 in these terms:
"A charge is a well-known thing. If one man owes a8. See also Stapleton v F.T.S. O'Donnell Griffin & Co. (Q'land) Pty. Limited [1961] HCA 70; (1961) 108 CLR 106 per Dixon C.J., Kitto, Taylor and Windeyer JJ. at 112-115 and the cases there cited.
debt to another, a creditor of the latter can, by
bringing in the debtor, charge the debt in his
hands so as to prevent him from paying it to his
own creditor, and oblige him to pay it to the
creditor who obtains the charge. Why is that a
charge? Because it charges the debt in the hands
of the man who has to pay it."
9. A notice under section 218 cannot be given before the taxpayer has been assessed to tax as it is not until then that, to use the words of the section, "the amount due by the taxpayer" can be ascertained; but it is incorrect to say that tax becomes due only when it is payable. When the word "due" is used in s. 218 with reference to "the amount due by the taxpayer in respect of tax" it means "due" in the sense of owing and not necessarily payable at that time. A notice under the section can therefore be given in respect of a taxpayer whose tax is due but not payable: Clyne's Case.
10. Money becomes "due" by the recipient of a s. 218 notice to the taxpayer for the purposes of the notice when it is due and payable. "Due" in that context means payable: Clyne's Case.
11. Section 218 does not in terms require the recipient of the notice to comply with the requirements of the notice, but a duty to comply arises by implication: see sub-section 218(2) which makes it an offence to fail to comply with a notice under the section.
12. The effect of a s. 218 notice was described by Gibbs C.J. in Clyne's Case
at 11-12 as operating:
"to prevent any subsequent dealing with the moneySection 218 empowers the Commissioner, by giving the notice in writing under the section, to require the recipient to pay to the Commissioner moneys when they become payable to the taxpayer by the recipient. The section confers on the Commissioner the right to prevent the taxpayer from subsequently dealing with the moneys so as to prevent compliance with the notice by the recipient when the time for payment of the moneys by the recipient to the taxpayer arrives; the section also creates an offence for a recipient to refuse or fail to comply with the notice (sub-s. 218(2)). Upon payment by the recipient to the Commissioner a valid discharge of the recipient's obligation to the taxpayer is given pro tanto with the amount of the payment (sub-s.218(4)). The section operates as a statutory assignment of the moneys payable by the recipient to the taxpayer in favour of the Commissioner in the nature of a charge over those moneys.
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"
13. In my opinion the notices in this case, upon being served upon the Health Commission, created charges in favour of the Commissioner over debts due by the Health Commission to Dr. Edelsten at the time of service of the notices and debts that came into existence and became due thereafter before the making of the sequestration order against Dr. Edelsten.
14. I agree with the conclusion of Von Doussa J. that a notice may be given under s. 218 which is prospective in the sense in which his Honour used that expression, namely, that it may operate with respect to debts that are not brought into existence until after the date of service of the notice, although of course no obligation is imposed on the recipient until the debt becomes payable by him to the taxpayer. This question was not argued before us but it seems to me that the conclusion must be correct and is supported by the language of the section, in particular, the words "or may become due" (para. 218(1)(a)) and "or may subsequently hold" (para. 218(1)(b) and (c)) and the evident purpose of the section.
15. I would allow the appeal. The orders which should be made by this Court consequent upon allowing the appeal should, in light of the particular orders made by the learned trial Judge on 2 December 1988, be considered by the parties and short minutes of order brought in.
The appellant, the Deputy Commissioner of Taxation, has been an active party in litigation surrounding the bankruptcy of Geoffrey Walter Edelsten. The reasons for decision in Edelsten's Trustee & Anor v. Commissioner of Taxation & Anor (1987) 16 FCR 386, Edelsten v. Wilcox & Anor 88 ATC 4484 and Deputy Commissioner of Taxation v. Edelsten & Ors (unreported judgment of Burchett J., 10 March 1988, matter no. SQ1135 of 1987) set out the earlier history. The facts relevant to the present appeal may be shortly stated. On 10 March 1988, immediately following the annulment of the bankruptcy made pursuant to s.55 of the Bankruptcy Act 1966 on Dr Edelsten's debtor's petition filed on 21 September 1987, a sequestration order was made on a creditor's petition presented on 29 July 1987. The act of bankruptcy relied upon was the failure on or before 22 May 1987 to comply with a bankruptcy notice. For present purposes the date of the commencement of the bankruptcy is 22 May 1987.
2. At all material times Dr Edelsten carried on the practice of a medical practitioner. It was his habit, after rendering professional services, to enter into an agreement with his patient in an approved form under the Health Insurance Act 1973 under which the patient assigned his right to the payment of medicare benefit to Dr Edelsten who agreed to accept the assignment in full payment of the appropriate fee for the medical service rendered. Dr Edelsten would periodically submit forms to the Health Insurance Commission and claim medicare benefits. In other words, he would "bulk bill" the Health Insurance Commission.
3. For relevant purposes, on 23 December 1986 the Deputy Commissioner of Taxation served on the Health Insurance Commission four notices pursuant respectively to paras. (a), (b), (c) and (d) of s.218(1) of the Income Tax Assessment Act 1936 requiring payment of 45 cents in every dollar of each payment due by the Health Insurance Commission to Dr Edelsten until the amount of his tax liability, which was stated in the notices, was satisfied. (These notices were later revoked and fresh notices given under s.218 claiming 100 cents in every dollar due to Dr Edelsten, but on the decision to issue the fresh notices being set aside in Edelsten v. Wilcox, the earlier notices became reinstated.)
4. The present appeal arises out of an application which was made by the first respondent, the trustee of Dr Edelsten's bankrupt estate, seeking declarations and orders that the s.218 notices issued on 23 December 1986 were ineffective in respect of moneys otherwise payable to the trustee, by virtue of the relation back period, between the commencement of the bankruptcy and the making of the sequestration order; declarations and orders in respect of moneys received by the Deputy Commissioner of Taxation, pursuant to the notices, on or after 8 January 1987, claimed by the trustee to be recoverable pursuant to s.118 or s.122 of the Bankruptcy Act; and further declarations and orders pursuant to s.113 of the Bankruptcy Act, and otherwise, so as to make available to the trustee moneys payable by the Health Insurance Commission in respect of medical fees earned by Dr Edelsten.
5. The learned trial judge, Burchett J., had earlier held in Edelsten's Trustee v. Commissioner of Taxation at p 391 that medicare benefits claimed by Dr Edelsten from the Health Insurance Commission did not become due under the Health Insurance Act until after a claim for payment had been lodged. In the instant case no distinction in time seems to have been drawn between when claims were lodged by Dr Edelsten for benefits, and when the claims were assessed and accepted for payment. Upon the premise that no debt was owed by the Health Insurance Commission on claims by Dr Edelsten until they were accepted for payment, the learned judge held that the relation back period operated, in accordance with ss.58(1), 115 and 116 of the Bankruptcy Act, so that when debts came into existence on the acceptance of claims in the period between 22 May 1987 and the sequestration order, those debts were owed to the trustee, not to Dr Edelsten. Accordingly, during this period, there was no money which could "become due to (the) taxpayer" so as to answer the description in s.218 and impose an obligation on the Health Insurance Commission to make payment to the appellant. In his reasoning leading to this conclusion Burchett J. held that s.131 of the Bankruptcy Act was concerned only with income received by the bankrupt after the making of the sequestration order. An argument that the medicare benefits payable on claims assessed and accepted for payment during the relation back period represented income which Dr Edelsten was entitled to retain for his own benefit was therefore rejected, and the grounds of appeal do not challenge this aspect of the decision.
6. Burchett J. also held that s.118 of the Bankruptcy Act enabled the trustee to extend his reach to moneys paid under the s.218 notices beyond the period of the relation back, and for a full six months prior to the presentation of the petition, as moneys received by the Deputy Commissioner during this period were received as a result of the attachment by him or on his behalf of a debt due to the debtor within the meaning of sub.s.118(1). A declaration and orders were therefore made requiring the Deputy Commissioner of Taxation to forthwith pay to the trustee all moneys received or receivable by him pursuant to the s.218 notices within six months before 29 July 1987 and thereafter.
7. The Deputy Commissioner of Taxation now appeals against the declaration and orders. Central to the submissions advanced in support of the appeal is a contention that the s.218 notices from the time they were given, had the effect of assigning or charging all moneys then due and thereafter becoming due to Dr Edelsten so that the appellant was, from that time, a "secured creditor" within the meaning of the Bankruptcy Act. As a secured creditor it is submitted that the appellant is entitled under sub.s.58(5) of the Bankruptcy Act to realise his security by requiring payment from the Health Insurance Commission notwithstanding the sequestration order. Unless this submission is made good it is not disputed that by reason of the relation back period the trustee would be entitled to receive medicare benefits that first became due by the Health Insurance Commission between 22 May 1987 and the sequestration order on claims lodged by Dr Edelsten. The appellant however now seeks to advance a supplementary argument, which was not agitated at trial, that on the proper construction of the Health Insurance Act at least some of the moneys payable on claims assessed and accepted for payment during the relation back period first became due to Dr Edelsten prior to that period. The argument is advanced that medicare benefits became due to Dr Edelsten when his patients assigned their rights to benefits to him at or about the time when professional services were rendered.
8. It is convenient to deal with the central contention first, and to do so initially on the premise accepted by the trial judge, namely that moneys would only become owing by the Health Insurance Commission when claims lodged by Dr Edelsten were assessed and accepted for payment.
9. In so far as is material s.218 reads:
"218(1) The Commissioner may at any time, or fromThe section was in closely similar, though not identical, terms when it received the consideration of the High Court in Clyne & Anor v. Deputy Commissioner of Taxation & Anor [1981] HCA 40; (1981) 150 CLR 1. All members of the Court were agreed that under para.218(1)(a) money is or becomes "due" when it is due and payable, but in the then equivalent provision to para.218(1)(e) the amount of tax "due" by the taxpayer is the amount of tax owing even though that amount may not be presently payable. The s.218 notices under consideration were held to bind the respondent bank, from the time the notices were given, to pay moneys then on deposit with the bank to the Commissioner on their maturity dates, unless the tax was paid in the meantime. The section prevented any dealing with deposits subsequent to the giving of the notice which would prevent compliance with the terms of the notice. In particular the section prevented the assignment of the deposits to another party by the taxpayer after the notices were given and before the deposits matured. The appellant relies in particular on the following passage in the judgment of Brennan J. (at p 26):
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 respect of
tax or, if the amount of the money is equal to
or less than the amount due by the taxpayer in
respect of tax, the amount of the money; or
(f) such amount as is specified in the notice out
of each payment that the person so notified
becomes liable from time to time to make to
the taxpayer until the amount due by the
taxpayer in respect of tax is satisfied,
and may at any time, or from time to time, amend
or revoke any such notice, or extend the time for
making any payment in pursuance of the notice.
(2) Any person who refuses or fails to comply with
any notice under this section is guilty of an offence.
Penalty: $1,000
(3) Where a person (in this sub-section referred
to as the 'convicted person') is convicted before
a court of an offence against sub-section (2) in
relation to the refusal or failure of the
convicted person or another person to comply with
a notice under this section, the court may, in
addition to imposing a penalty on the convicted
person, order the convicted person to pay to the
Commissioner an amount not exceeding the amount or
the aggregate of the amounts, as the case requires,
that the convicted person or the other person,
as the case may be, refused or failed to pay to
the Commissioner in accordance with 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
indemnified in respect of such payment.
(5) If the Commissioner receives any payment in
respect of the amount due by the taxpayer before
payment is made by the person so notified he shall
forthwith give notice thereof to that person."
"The statute thus works an assignment of the moneysThe other members of the Court found it unnecessary to decide whether the notices conferred a true proprietary interest in the debts owing to the taxpayer. Mason J. (with whom Aickin and Wilson JJ agreed) left the question open (at pp 17-18), although he described the effect of such a notice "as similar to that of a garnishee order" (at p 19). Gibbs C.J. considered it unnecessary, to dispose of the argument advanced by the taxpayer, to have recourse to the doctrine that an assignee of an equitable interest takes subject to the equities and infirmities of the assignor's title (at p 11).
to be paid to the Commissioner as though the
taxpayer had charged the moneys otherwise payable
to him with payment of his tax liability."
10. Burchett J. rejected the appellant's argument saying that even if s.218 could work an assignment of the debts due to Dr Edelsten by the Health Insurance Commission, though prior to the commencement of the bankruptcy those debts were mere expectancies, the assignment could not be effective until the rights to the choses in action came into existence. When those rights came into existence they did so as rights which belonged to the trustee in bankruptcy by virtue of the doctrine of the relation back period. His Honour drew an analogy with the well established principle that an assignment of future property for valuable consideration operates in equity to effect a transfer as and when the property comes into existence: see Performing Right Society v. London Theatre of Varieties (1922) 2 KB 433 at 454, Palette Shoes Pty Ltd (In Liquidation) v. Krohn & Anor [1937] HCA 37; (1937) 58 CLR 1 at 27 and Booth v. The Commissioner of Taxation of the Commonwealth of Australia [1987] HCA 61; (1987) 164 CLR 159 at 165. Section 218 must however operate according to its terms. It is in the power of the legislature to arm the Commissioner of Taxation with a means of recovering tax which imposes obligations on third parties, and varies the rights of the taxpayer and third parties, in a way which cuts across traditional notions of the common law and equity. Whether s.218 does so depends on the proper construction of the language it employs. Whilst established principles regarding the assignment of proprietary interests by way of security, liens, and garnishee proceedings, provide a useful background against which to construe the section, it cannot be assumed that the section is to be equated with some presently recognised kind of security, or is to be constrained in its operation by rules which apply to some other more or less analogous procedure.
11. In Clyne, the Court had no need to consider whether and in what manner a
notice under s.218 given to a third party would impose
obligations on the
third party in respect of a debt coming into existence subsequently where at
the time of giving the notice there
was, at best, only an expectancy that a
debt might come into existence. It was the view of each member of the High
Court that the
notices in question imposed an obligation on the respondent
bank immediately they were given (Gibbs C.J. at p 11, Mason J. at pp
22-23,
and Brennan J. at p 26). That conclusion must be understood against the facts
of the case. The bank was indebted to the taxpayer
for the moneys in question
when the notices were given. Where at the time a notice is given there is an
identifiable debt owing to
the taxpayer by the third party, it is readily
understandable that an immediate obligation is imposed on it by s.218. On the
other
hand, it is difficult to understand how an immediate obligation could be
imposed on the third party where no identifiable debt owing
to the taxpayer
exists when the notice is given. I agree with Burchett J. that the words "any
money . . . may become due" in para.218(1)(a)
are apt in context to refer to
an identifiable sum payable upon a contingency. If, when the notice is given,
there is an identifiable
debt owing to the taxpayer by the third party,
whether payable forthwith, or on a fixed date, or on a contingency, the
obligation
imposed by s.218 immediately attaches as the conditions of the
section are then fulfilled. In my opinion the following passage from
the
judgment of Mason J. in Clyne at p 23 is to be understood as referring to
cases where those conditions exist when the notice
is given:
"The section relates to moneys owing to theThe similarity between the effect of a notice under s.218 and the provisions for garnishee orders in Rules of Court lends further support to the view that s.218 has in contemplation an identifiable sum of money which "is due or accruing or may become due to the taxpayer" as a precondition to imposing obligations on the third party.
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 the 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."
12. In my opinion the judgments in Clyne do not deny the possibility that a
notice may be given prospectively to a third party. The
view that this is
possible was expressed by Fox J. in Huston v. Deputy Commissioner of Taxation
(Cth) (1983) 49 ALR 566 at p 574. He said:
"A notice can be issued under s.218 which may haveWhen Gibbs C.J. in Clyne said (at p 11) that:
only a prospective application. I do not mean,
in putting the matter that way, to suggest that
the Commissioner, if challenged, must establish
that at some time one of the paragraphs will
apply, but rather that he is by the section
enabled to issue a notice even if it may apply
only to circumstances arising in the future, as
between garnishee and taxpayer."
"The conditions for the giving of a valid noticeI do not think he meant that if the conditions of s.218(1) do not exist when a notice is given, that the notice is then and forever null and incapable of taking effect in the future should the conditions of s.218(1) later come into existence. The notice simply would not be legally binding at the time when it was given. It is necessary to refer to the decision in Deputy Federal Commissioner of Taxation v. Steele & Anor (1987) 87 ATC 5050. The effect of two s.218 notices were under consideration. The first notice was given after judgment in the taxpayer's favour to the judgment debtor, but possibly at a time when the verdict was under appeal and an unconditional stay had been ordered. McInerney J. is reported as saying at p 5052 :
are laid down in s.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, . . ."
"It is therefore not open to me at the time toAs I understand the reasons for judgment, his Honour considered that if the judgment were under appeal and subject to a stay order it was not then owing, so it was not established that the conditions of s.218 existed when the notice was given. As the second notice was given after the disposal of the appeal it bound the judgment in the hands of the judgment debtor, and it was unnecessary to consider whether the first notice could operate prospectively. The Court did not do so, and the decision is not an authority to the contrary.
determine if the money was due and payable at the
time and I am of the opinion that the first
sec.218 notice was not a valid one."
13. In my opinion a notice may be given prospectively under s.218. When this is done, no obligation is imposed on the third party unless or until circumstances arise between the third party and the taxpayer which bring into existence an identifiable debt owing to the taxpayer, whether payable forthwith, or on a fixed date, or on a contingency. The principles which apply to the assignment of future property do provide a helpful guide. Equity fastens upon the future property to make the assignor a trustee of the legal right of ownership for the assignee when the property comes into existence and when it is identifiable as property meeting the description of the assignment: see Tailby v. The Official Receiver (1888) 13 App Cas 523 at pp 528-530, 533, 543. Until identifiable property comes into existence there is no subject matter in respect of which the assignment can operate. Likewise, in the case of a prospective notice given under s.218, until there is an identifiable sum of money owing to the taxpayer by the third party the conditions of the section are not met. It is the coming into existence of the identifiable debt which crystalises the obligation on the third party to pay to the Commissioner the "money" referred to in sub.s.218(1) and provides the measure of the obligation which is imposed by the notice. If for any reason circumstances do not arise after the giving of the notice where "money" answering the description in sub.s.218(1) comes into existence, no obligation is ever imposed on the third party to make any payment to the Commissioner. Where "money" does come into existence later, only at the point in time when it does so is an obligation imposed on the third party. Therefore if medicare benefits became due as an identifiable debt owed by the Health Insurance Commission only after a claim for payment was made by Dr Edelsten, no obligation to pay the "money" which those medicare benefits represented was imposed on the Health Insurance Commission before the claim was made.
14. It is convenient now to deal with the submissions which have been made regarding the construction of the Health Insurance Act. The first respondent objected at the outset that this issue between the parties was raised and determined by Burchett J. in Edelsten's Trustee v. Commissioner of Taxation (at 391). There has been no appeal from that decision. The first respondent submits that the appellant is estopped from contesting the construction which the trial judge adopted. It is not clear from the reasons for judgment in Edelsten's Trustee v. Commissioner of Taxation, or from other information placed before this Court, that the point of construction was a live issue in the earlier proceedings, but even if the issue were clearly raised for determination, those earlier proceedings were between the Commissioner of Taxation and, at least until a late stage in the proceedings, a different trustee. Mr Donnelly, the present trustee, was substituted as a new trustee by resolution of a meeting of creditors when the trial was under way. Counsel for Mr Donnelly made some submissions during the trial, but he was not formally substituted as a party to the proceedings. More importantly however, those proceedings concerned a different bankruptcy which has since been annulled. There is therefore no common identity of the parties and the capacities in which they sue: see Ramsay v. Pigram [1968] HCA 34; (1968) 118 CLR 271 at 276. In these circumstances I do not consider the appellant is estopped from contending for a different construction of the section. The issue is an important one to the parties.
15. The scheme for the payment of medicare benefits is established by Part II
of the Health Insurance Act 1973. Sub-section 10(1) reads :
"10.(1) Where, on or after 1 February 1984, medicalSub-section 10(2) provides generally a formula for the calculation of medicare benefits by reference to the fees for medical services set out in the table to the Act (see also s.9). Sub-section 10(3) makes detailed provision for additional benefits where a patient in a particular year incurs medical expenses for which the aggregate patient contributions exceed a prescribed amount. The operation of the section is premised at several points upon claims "being accepted for payment" by the Commission: see paras.(a), (b), (c)(ii), (e)(i), and (f)(i) of sub.s.10(3). In succeeding sections there are provisions for specific circumstances where the calculation or entitlement to benefit is to be different from the general entitlement established by sub-ss.10(1) and (2). Sub-section 20(1) provides that, subject to Part II, medicare benefit is payable by the Health Insurance Commission on behalf of the Commonwealth to the person who incurs the medical expenses in respect of a professional service, and sub.s.20(1A) provides that the benefit will be paid in such manner as the General Manager of the Commission determines. Sub-section 20A(1) is important. It reads:
expenses are incurred in respect of a professional
service rendered in Australia to an eligible
person, medicare benefit calculated in accordance
with sub-section (2) is payable, subject to and in
accordance with this Act, in respect of that
professional service."
"20A.(1) Where a medicare benefit is payable to anThis provision, along with sub.ss.20B(2) and (3), establishes the scheme for "bulk billing" by a medical practitioner. Section 20B provides for a claim for medical benefit to be made in accordance with an approved form to be lodged with the Commission within a time fixed by reference to the rendering of the professional service to which the benefit relates. Sub-section 20B(3) reads :
eligible person in respect of a professional
service rendered to the eligible person or to
another eligible person, the first-mentioned
eligible person and the person by whom, or on
whose behalf, the professional service is rendered
(in this sub-section referred to as 'the
practitioner') may enter into an agreement, in
accordance with the approved form, under which -
(a) the first-mentioned eligible person assigns
his right to the payment of the medicare
benefit to the practitioner; and
(b) the practitioner accepts the assignment in
full payment of the medical expenses incurred
in respect of the professional service by the
first-mentioned eligible person."
"(3) A claim referred to in sub-section (2) shall16. It will be seen from the foregoing provisions that the entitlement to medical benefit is, by sub.s.10(1), dependent upon the incurring of medical expenses by an eligible person (i.e. the patient). Then "medicare benefit calculated in accordance with sub.section 2 (of s.10) is payable, subject to and in accordance with the Act". The point in time when that entitlement leads to the creation of an identifiable debt due by the Health Insurance Commission depends not on sub.s.10(1) but on the other provisions of the Act. The entitlement established by s.10 is in the nature of a right to put in train the processes of the Act which have the potential to lead to payment. The entitlement, although capable of assignment to the provider of the medical service under s.20A, is not "payable" until a claim is made within a specified time (s.20(B)) and is accepted. The condition of acceptance is to be implied from the language of sub.s.10(3), from the implicit requirement that the complex process of calculation laid down in the Act is to be undertaken by the Health Insurance Commission to assess the proper medical benefit, and from sub.s.20B(3). It is clear enough from the scheme of the Act that medicare benefit does not become presently payable until the process of calculation or assessment and the act of acceptance makes a certain sum actually payable. The more difficult question is whether medicare benefit becomes owing, and owing as an identifiable sum though not presently payable, at some earlier point in time so that a s.218 notice can operate to impose an obligation on the Health Insurance Commission to pay that sum to the Commissioner of Taxation when it has "become due".
not be paid unless the claimant satisfies the
Commission that -
(c) in the case of an agreement under sub-section
20A(1) that was signed by each party in the
presence of the other - the assignor retained
in his possession after the agreement was so
signed a copy of the agreement; or
(d) in the case of an agreement under sub-section
20A(1) that was signed by the assignor in
circumstances other than those referred to in
paragraph (c) - the assignor retained in his
possession after so signing a copy of the
document so signed."
17. Sub-section 20A(1) by its terms would suggest that a right to payment of medicare benefit arises in the patient when the professional service is rendered which is thereupon capable of assignment under the general law. However the terms of the sub-section are part of a tightly drawn scheme and the apparently general words used must be construed in context. In particular, by sub.s.20A(3), medicare benefit, under an assignment under that section "is, subject to s.20B, payable in accordance with the assignment." Section 20B imposes not only a time limit within which claims must be made, but by sub.s.20B(3), makes payment dependent upon the Commission being satisfied as to one of the states of fact required by paras.(c) or (d). Until the Commission is so satisfied an assignee under s.20A has a right to claim benefits, but no right to payment, let alone payment of a particular sum of money that is identifiable in the hands of the Health Insurance Commission. Until a claim is made the Health Insurance Commission would have no knowledge that the relevant professional services had been rendered, and no knowledge about particular facts which could entitle the eligible person to whom the service was rendered to a greater or lesser payment of benefit than would arise under the general formula for calculating benefit in sub.ss.10(1) and (2). Until a claim is made, and assessed and accepted for payment, there is no identifiable sum of money owing, and an essential condition on which the imposition of an obligation by notice given under s.218 depends does not exist.
18. The right to claim medical benefits assigned to Dr Edelsten by an eligible person under s.20A is however "property" within the meaning of s.5 of the Bankruptcy Act, and from the commencement of the bankruptcy must be treated under the relation back doctrine as passing to Dr Edelsten's trustee: In re Pollitt Ex parte Minor (1893) 1 QB 455 at 457-458. So in respect of claims made by Dr Edelsten between 22 May 1987 and the date of the sequestration order, when the benefits were assessed and accepted for payment, they belonged to the trustee. The indebtedness that arose in the Health Insurance Commission on a claim lodged after 22 May 1987 being accepted for payment was not one which then or at any time answered the terms of sub.s.218(1) or the notices. There was not then or at any time any identifiable sum of money due to the taxpayer. For these reasons I agree with the conclusion reached by Burchett J. that the notices upon which the appellant relies did not have the effect contended for. The Commissioner of Taxation was not at any stage a secured creditor in respect of moneys which became payable by the Health Insurance Commission in respect of claims lodged by Dr Edelsten after 22 May 1987.
19. The next submission of the appellant is that moneys paid to the
Commissioner pursuant to a notice given under s.218 are not "received . . . as
a result of the attachment by him . . . of a debt due to the debtor" within
the meaning of s.118(1) of the Bankruptcy Act. It is submitted that "an
attachment" within the meaning of s.118 must be a process of a Court for the
enforcement of a judgment or order. It is said that this follows from the
reference to taxed
costs in the concluding words of sub.s.118(1) which read:
" . . . the creditor shall pay to the trustee of theBurchett J. rejected this argument. He considered the significance which the appellant sought to place on the reference to taxed costs was not borne out by the history of the section. His Honour undertook an extensive review of that history, and of the meaning of the word "attach" in the law, particularly before the word came to be associated with the statutory power given to courts to make garnishee orders. He concluded that generally attachments are by Court order, but the legal authority by which an attachment may be given may take more than one form. He applied an observation in the decision of Upjohn J. (as he then was) in In re Lupkovics Ex parte the Trustee v. Freville (1954) 1 WLR 1234 at 1241 that the word "attachment", although undefined in the bankruptcy legislation, was not used as a term of art and was to be given a wide meaning.
estate of the bankrupt the amount by which the
amount of those moneys exceeds the taxed costs of
the execution or attachment, as the case may be."
20. It may be accepted that historically, and in present usage, the meaning of "attachment" may extend to means other than a process of the Court by which a debt is frozen or seized; the meaning may extend to similar procedures otherwise authorised by legal authority. But the question which falls for decision is whether that extended meaning is the meaning intended by the legislature in the Bankruptcy Act 1966, or whether the context in which the word is used indicates that it has a more restricted meaning.
21. In the Bankruptcy Act 1924, s.92 placed a restriction on the rights of
creditors under execution or attachment to retain the
benefit of the execution
or attachment against the trustee in bankruptcy. That section was closely
similar to s.40 of the Bankruptcy
Act 1914 (U.K.) which was considered in In
re Lupkovics. The question in that case was whether an attachment within the
meaning of
the section included a proceeding taken under s.27(1) of the Crown
Proceedings Act 1947 which made special provision for an order
of the High
Court directing payment of money payable by the Crown in a case where, if the
money had been payable by a subject, a
garnishee order could have been
obtained. Upjohn J. at p 1241 said:
"Apparently, before 1947, there was no means ofI do not understand his Lordship to be attributing to the word "attachment" a meaning in the legislation any wider than that which would encompass the usual features of garnishee proceedings, that is a process of a court in aid of the enforcement of a judgment or order. In the Bankruptcy Act 1966, the former s.90 in the repealed legislation was replaced by s.118. In the terms first enacted sub.s.118(1) read:
attaching a debt due from the Crown: see
Robertson's Civil Procedure by and against the
Crown, at p 611. In my judgment, however,
proceedings under section 27(1) are proceedings by
way of attachment for the purposes of section 40.
Attachment is nowhere defined in the Bankruptcy
Act, 1914, but it is not, in my judgment, a term
of art confined to attachments arising under Order
45. It is equally appropriate to include
proceedings under section 27(1) of the Crown
Proceedings Act, 1947 - a section clearly intended
to put the judgment creditor in the same position
vis-a-vis the Crown as any other debtor of the
bankrupt, i.e., to prevent the judgment debtor
from obtaining payment of the debt and to secure
payment to himself, the difference in the form of
order obtained being due to the privileges and
immunities of the Crown."
"118(1) Where -The reference to a creditor who has "instituted proceedings to attach a debt" indicates, in my view, a clear intention that the section was concerned only with a process of a court undertaken to enforce a judgment or order. That construction gains further support from the coupling in the section of proceedings to attach a debt with execution against property of a debtor and proceedings to enforce a charge or a charging order against property of a debtor - all court procedures to enforce judgments - and from the reference to "taxed costs of the execution, attachment or enforcement . . .".
(a) a creditor has issued execution against
property of a debtor or instituted proceedings
to attach a debt due to a debtor or to enforce
a charge, or a charging order, against
property of a debtor -
(i) within six months before the
presentation of a petition against the
debtor; or
(ii) after the presentation of a petition
against the debtor; and
(b) the debtor subsequently becomes a bankrupt on,
or by virtue of the presentation of, the petition
the creditor shall pay to the trustee in the
bankruptcy an amount equal to the amount, if any,
received by the creditor as a result of the
execution, attachment or enforcement of the charge
or the charging order, less the taxed costs of the
execution, attachment or enforcement of the charge
or the charging order."
22. Section 118 was repealed and an amended section substituted by s.55 of
the Bankruptcy Amendment Act 1980 (No.12 of 1980). Sub-section 118(1) now
reads :
"118(1) Subject to sub-section (2), where -From the amended sub-section, it is perhaps not as clear as it was in the repealed sub-section that an attachment means a process of a court to enforce a judgment or order. However I am satisfied that this remains the meaning. The continuing reference to taxed costs is, I think, an important indication. Another indication is that the section still couples the notion of attachment with that of execution against property of a debtor, and includes as part of its subject matter in sub.ss.118(9), (10), (11), and (12), the enforcement of judgments by charge or charging order. There is now a further indication in support of the construction I favour to be found in sub.s.118(2) which exempts from the operation of sub.s.118(1) a creditor who has received moneys as a result of execution or attachment "in respect of any liability of the debtor under a maintenance agreement or maintenance order . . . ". A "maintenance agreement" and a "maintenance order" are defined in s.5. A maintenance agreement is one, within the meaning of the Family Law Act 1975 that has been registered or approved by a court. On registration or approval a maintenance agreement has the force of an order of the court: see the Family Law Act ss.85, 87 and 88. Attachment as a means of enforcing a maintenance agreement is achieved by garnishee proceedings supervised by a court: see Family Law Act s.105(1) and the Family Law Rules 0.33, rs.2(5), and 4. An attachment to enforce a maintenance order would also be a process of the court in aid of the enforcement of a judgment or order of a court.
(a) a creditor has, within 6 months before the
presentation of a petition, or after the
presentation of a petition, against a debtor -
(i) received moneys as a result of execution
having been issued by him, or on his
behalf, against property of the debtor,
being moneys that are the proceeds of the
sale of property of the debtor that has
been sold in pursuance of the process or
that were seized, or paid to avoid
seizure or sale of property of the
debtor, in pursuance of the process; or
(ii) received moneys as a result of the
attachment by him, or on his behalf, of a
debt due to the debtor; and
(b) the debtor subsequently becomes a bankrupt on,
or by virtue of the presentation of, the petition,
the creditor shall pay to the trustee of the
estate of the bankrupt the amount by which the
amount of those moneys exceeds the taxed costs of
the execution or attachment, as the case may be."
23. I think further support for the construction I favour may also be found in ss.119, 119A, 205 and 205A of the Bankruptcy Act. Those sections are drafted on the assumption that officers of the court will be charged with the execution of the process of attachment and the recovery of money. More recently the amendments made by the Bankruptcy Amendment Act 1987 (No. 119 of 1987), which introduced Division 2A of Part IV making provision for the declaration of intention to present a debtor's petition, and the associated definitions in s.5 of "enforcement process" and "proceeds" are also drafted on the assumption that "attachment" within the meaning of the Act is a process of a court to enforce a judgment or order.
24. I am of the opinion that moneys paid to the Commissioner under a s.218 notice within six months before the presentation of the petition or after presentation of the petition are not payments caught by s.118 of the Bankruptcy Act.
25. This conclusion means that it now becomes necessary to determine the claim by the trustee under s.122 of the Bankruptcy Act. This aspect of the proceedings was not determined by Burchett J. and has not been fully argued before this Court. In my view the proceedings should be remitted to the trial judge to determine that question.
26. I would therefore dismiss the appeal against that part of the decision which held that the s.218 notices were ineffective in respect of medicare benefits which became owing by the Health Insurance Commission on claims submitted by Dr Edelsten in the period between 22 May 1987 and the sequestration order. I would however allow the appeal in so far as the Court ordered that moneys received or receivable in the period from 29 January 1987 to 22 May 1987 by the Deputy Commissioner of Taxation from the Health Insurance Commission as a result of the notices under s.218 are payable to the trustee. The fate of those payments must await the determination of the trustee's claim under s.122 of the Bankruptcy Act, and I would remit that aspect of the proceedings to the trail judge for determination.
The judgment under appeal is but one of a series involving the appellant and the respondents. For present purposes it is unnecessary to chronicle the litigation between the parties. Suffice it to say that Dr Edelsten first became bankrupt on 21 September 1987 pursuant to the presentation of his own petition. That bankruptcy was in due course annulled and a sequestration order was made on 10 March 1988 upon a creditor's petition which had been presented on 29 July 1987. The parties are agreed that the consequence of this sequestration order was that the commencement of Dr Edelsten bankruptcy for the purposes of relation back was 22 May 1987.
2. On 23 December 1986 four notices were issued by the Deputy Commissioner of Taxation pursuant respectively to paragraphs (a), (b), (c) and (d) of s.218(1) of the Income Tax Assessment Act 1936 requiring the Health Insurance Commission to pay to the Commissioner of Taxation 45 cents in every dollar of each payment due by the Commission to Dr Edelsten until the tax debt, the subject of assessments issued and served before the notices, was satisfied. Subsequent notices were issued by the Commissioner of Taxation and served upon the Health Commission but were set aside by this Court in Edelsten v. Wilcox (1988) 88 ATC 4484. The parties are agreed that the effect of the second series of notices being set aside was to reinstate the original notices in full force and effect. It is accordingly unnecessary to trace further that part of the litigation.
3. It was Dr Edelsten's practice to obtain from patients, pursuant to s.20A of the Health Insurance Act 1973, assignments of their Medicare entitlements, those entitlements arising under s.10(1) of that Act and thereafter to claim from the Health Commission in accordance with s.20A(3) of the Health Insurance Act the Medicare benefit which, but for the assignment, would have been payable to the patient. Assignments were apparently executed immediately at the end of a consultation so that at any particular point of time Dr Edelsten might have moneys payable to him in respect of work done for which assignments had been taken and in respect of which he had made a claim which had been accepted by the Health Commission for payment, those in respect of which he had made a claim but where that claim had not been accepted for payment and those in respect of which no claim had been made at all. For ease of convenience I shall refer to the first of these categories as "money due" and to the second and third of these categories as "money accruing due" although no technical significance is intended by these labels.
4. The trustee claimed under s.118 of the Bankruptcy Act to be entitled for
the benefit of the bankrupt estate to:
(a) All moneys paid to the Commissioner of Taxation pursuant to the s.218
notices in the period of six months from the date of presentation of the
creditors' petition on 29 July 1987.
(b) All moneys falling into the category of moneys due or moneys accruing due
in that period of six months not in fact paid to the
Commissioner of Taxation.
5. Alternatively, the trustee claimed under s.115(1) of the Bankruptcy Act to
be entitled to:
(a) All moneys paid to the Commissioner of Taxation pursuant to s.218 notices
in the period from the commencement of the bankruptcy on 22 May 1987 until the
date of making of the sequestration order.
(b) All moneys falling into the category of money due or moneys accruing due
between 22 May 1987 and the date of making of the sequestration
order not in
fact paid to the Commissioner of Taxation.
6. Burchett J found in favour of the trustee under s.118 of the Act. In his Honour's view the notices under s.218 of the Income Tax Assessment Act effected an "attachment" within the meaning of s.118 of the Bankruptcy Act and accordingly all moneys received or to be received under the notices were required to be refunded by the Commissioner to the Trustee. His Honour therefore made a declaration in favour of the trustee accordingly.
7. Section 218 of the Income Tax Assessment Act 1936 provides relevantly as
follows:
"(1) The Commissioner may at any time, or from8. Section 218 has a long history in the income tax law of this country. The 1936 Commonwealth Income Tax Assessment Act took over in almost identical form the section which prior to that date was s.65 of the Income Tax Assessment Act 1922-1934. The only substantial difference was that s.65 of the 1922 Act made no provision for a mode of service of notices to the Commonwealth or a State such as is presently contained in s.218(7) of the present Act.
time to 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, or at or
within a time specified in the notice (not being a
time before the money becomes due or is held) -
(e) so much of the money as is sufficient to pay
the amount due by the taxpayer in respect of
tax or, if the amount of the money is equal
to or less than the amount due by the taxpayer
in respect of tax, the amount of the money; or
(f) such amount as is specified in the notice out
of each payment that the person so notified
becomes liable from time to time to make to
the taxpayer until the amount due by the
taxpayer in respect of tax is satisfied,
and may at any time, or from time to time, amend or
revoke any such notice, or extend the time for
making any payment in pursuance of the notice.
(2) Any person who refuses or fails to comply with
any notice under this section is guilty of an offence.
Penalty: $1,000
(3) Where a person (in this sub-section referred
to as the "convicted person") is convicted before a
court of an offence against sub-section (2) in
relation to the refusal or failure of the convicted
person or another person to comply with a notice
under this section, the court may, in addition to
imposing a penalty on the convicted person, order
the convicted person to pay to the Commissioner an
amount not exceeding the amount or the aggregate of
the amounts, as the case requires, that the
convicted person or the other person, as the case
may be, refused or failed to pay to the
Commissioner in accordance with 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 indemnified
in respect of such payment."
9. Save for immaterial amendments made in 1936 and 1965 s.218 remained in its original form until 1984 when the present sub-paragraphs (e) and (f) of s.218(1) were substituted for sub-paragraphs (d)(i) and (ii) of s.218(1). These amendments are of no significance to the resolution of the present dispute between the parties.
10. Section 218 is expressed in wide terms and is intended to have a wide application. But for the intervention of the bankruptcy it is clear that in the present case the service of the notices had the consequence of requiring the Health Commission as and when moneys became due and payable to Dr Edelsten under the assignments to pay those moneys or more accurately 45 cents in every $1 of those moneys to the Commissioner of Taxation. Failure so to do would have given rise to an offence under the Act. Two further consequences flowed from the due service of the notices upon the Commission. The first is that as and from the giving of the notice the Health Commission was bound by the terms of the notice and in particular could neither pay moneys otherwise within the scope of the notice to Dr Edelsten nor to such person as Dr Edelsten might direct: Clyne v. Deputy Commissioner of Taxation [1981] HCA 40; (1981) 150 CLR 1. The second consequence which flowed directly from Clyne's case was that Dr Edelsten could not, once the s.218 notices had been served upon the Health Commission, in any way deal himself with moneys falling within the scope of the notices in a manner inconsistent with them. It will be necessary to consider Clyne's case in greater detail presently.
11. The Commissioner submitted before us:
1. That he was relevantly, in respect of all debts payable by the Health
Commission as and from the time those debts came into existence
but only to
the extent of 45 cents in each dollar thereof, a secured creditor so that by
virtue of s.58(5) of the Bankruptcy Act the Commissioner was empowered to deal
with them notwithstanding the making of a sequestration order against Dr
Edelsten.
2. That the doctrine of relation back had no application because at the very
moment of time that a debt due to Dr Edelsten from the
Health Commission came
into being that debt was to the relevant extent bound by the terms of the
s.218 notice and was required to be paid to that extent to the Commissioner.
3. That the provisions of s.118 of the Bankruptcy Act had no application to an
amount payable to the Commissioner under a s.218 notice and in particular that
such notices did not relevantly constitute "attachments" for the purposes of
that section.
12. There were a number of subsidiary arguments advanced on behalf of both
the Commissioner and the trustee but I will defer dealing
with them until I
have considered the principal submissions as in my view the subsidiary
submissions made by both parties were of
little assistance in the resolution
of the issues between them.
1. Did the S.218 Notices Constitute the Commissioner a Secured Creditor
13. Critical to the Commissioner's case was a submission that the s.218 notices had the effect of bringing into existence a charge upon any debts due by the Health Commission to Dr Edelsten at the time the notices were served and any debts that thereafter came into existence until the making of the sequestration order. The parties were not in dispute that debts becoming due to Dr Edelsten after the making of the sequestration order would not fall within the terms of the notice because once the sequestration order was made the Commissioner of Taxation was no longer a creditor for the income tax theretofore payable but the tax debt was converted into a right of proof in the bankruptcy: Edelsten's Trustee v. Commissioner of Taxation (1987) 16 FCR 386.
14. The Commissioner relies heavily upon what was said by Brennan J and to some extent upon what was said by Mason J at 18 in Clyne v. Deputy Commissioner of Taxation [1981] HCA 40; (1981) 150 CLR 1, 27. In that case Mr Clyne had, after the service of a s.218 notice upon his banker assigned to a Miss Peacock by way of mortgage the money owing to him by the bank. The question relevant for present purposes was whether that assignment operated to defeat the notice. All members of the High Court were unanimous that it did not, although there are differences in emphasis in each of the judgments as to the precise effect of a notice under the section.
15. The principal judgment was given by Mason J with whom Aickin and Wilson
JJ agreed. In his Honour's view the effect of the service
a of s.218 notice
was to prevent a taxpayer from thereafter assigning the debt the subject of
the notice so as to defeat the Commissioner's
right to payment in accordance
with the section. This effect came about, in his Honour's view, from the
principle:
"that an assignee of a chose in action takes subject16. The consequence was that Miss Peacock acquired no greater right to the moneys than Mr Clyne had.
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 also to all the
infirmities and defects in title of the assignor." (p 19)
17. His Honour defined the word "equities" in the following passage:
"The word "equities" is not used in its technical18. It appears that in the High Court counsel for the Commissioner had conceded that s.218 did not purport to create a charge over or interest in the moneys in favour of the Commissioner, a concession not made in the present appeal. Mason J in referring to that concession said at p 18:
sense as meaning an equitable interest or something
in the nature of an equitable interest. It is a
general expression calculated to comprehend defences
which would have been available to the debtor in an
action brought against him by the assignor as well
as set-off and counter claims. The assignee takes
subject to any defence or set-off available to the
debtor at the time when notice of assignment is
given, unless the right of set-off is excluded by
the contract between the assignor and the debtor
. . ." (at pp 20-21)
"It may be doubted whether this concession is19. Later in the judgment his Honour expressed the view that the effect of a s.218 notice was similar to that of a garnishee order under the Rules of Court. He described that similarity as "quite striking" (at p 19).
rightly made. On this question - see for example
Stapleton v. F T S O'Donnell, Griffin & Co (O) Pty
Ltd." [1961] HCA 70; (1961) 108 CLR 106.
20. Gibbs CJ reached his conclusion from the language of s.218 itself and
found it unnecessary to consider whether the doctrine that an assignee of an
equitable interest takes subject to the equities
and to the infirmities of the
assignor's title was relevant to a question arising under s.218. His Honour
described the effect of a s.218 notice at pp 11-12 as follows:
"However, once the notice is given, it operates to21. Brennan J went further than Mason J and expressed clearly the view that the concession made by the Commissioner that a s.218 notice did not constitute a charge over the debts the subject of it was wrongly made. His Honour said at p 26:
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) recognizes
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.""
"The statute thus works an assignment of the moneys22. In his Honour's view once the notice was given, the taxpayer's right to payment of the debt was statutorily divested and thereafter the third party recipient of the notice was obliged to hold and dispose of the money in accordance with the notice. A subsequent direction by the taxpayer in an assignment could not prevail over the Commissioner's right to payment. His Honour then added the following comment at p 27:
to be paid to the Commissioner as though the
taxpayer had charged the moneys otherwise payable to
him with payment of his tax liability. Statutory
charges are no novelty, although a statute which
creates a charge usually describes it as such and
defines the chargee's remedies. An example of a
statutory charge which created a security in favour
of a chargee over moneys due by a third party to the
chargee's debtor was to be found in The Contractor's
& Workmen's Lien Acts 1906-1921 (Q), considered by
this Court in Stapleton v. F T S O'Donnell, Griffin
& Co (Q) Pty Ltd [1961] HCA 70; (1961) 108 CLR 106."
"The Commissioner's right to payment out of the23. Subsequent cases have discussed the question of whether or not s.218 created a charge or worked an assignment of the debts referred to in the notice but the matter cannot be said to have been authoritatively determined. Thus in Deputy Federal Commissioner of Taxation v. Lai Corporation (1986) 86 ATC 4085 Brinsden J of the Supreme Court of Western Australia held that where a s.218 notice was served after the charge under a floating charge had crystallized the rights of the Commissioner under a s.218 notice were defeated but not before. After considering the judgments in Stapleton v. F.T.S. O'Donnell Griffin & Co (O) Pty Ltd his Honour said at p 4093:
money in the hands of the third person distinguishes
him from a garnishor of a debt who obtains no
proprietary interest in the debt owing to the
judgment debtor, though he may obtain execution
against the garnishee (Hall v. Richards [1961] HCA 34; (1961) 108
CLR 84, at p 92, per Kitto J). But even a garnishor
is not defeated by the judgment debtor's assignment
of the debt after service of the garnishee order
nisi, for a judgment debtor loses the right to
assign his debt free of the garnishee order once the
order nisi is served, Galbraith v. Grimshaw (1910)
AC 508 at p 511 per Lord Loreburn LC). The taxpayer's
right to assign free of the requirement in the
notice is likewise lost when the notice is given."
"In my respectful view these passages support the24. Later in his Honour's judgment at p 4095 his Honour said:
doubt expressed by Mason J as to the correctness of
the concessions. The distinction to be drawn as
between a case where a statute or order charges the
person in whose hands the money is not to deal with
it except to pay it to or hold it for, some other
person, with cases where the effect of the statute
or order is that the fund is to be held at the
disposal of the Court or some neutral party. All
the judges of the Court in Stapleton, upon an
examination of the Acts, and not solely or I believe
significantly because the Acts purported to create
"liens" and "charges", concluded that they created a
charge in favour of the subcontractor."
"In my view I should hold the section, when a valid25. Subsequently in Tricontinental Corporation Ltd v. Federal Commissioner of Taxation (1986) 86 ATC 4453 Carter J of the Supreme Court of Queensland also held that the Commissioner's rights were not defeated by the crystallization after the service of a s.218 notice of a floating charge over debts payable to the taxpayer. This result flowed in his Honour's view however from the express terms of s.218. His Honour referred at p 4456 to a s.218 notice as giving the Commissioner a "statutory right to payment". That decision was upheld on appeal in (1987) 73 ALR 433 without any comment as to the juridical nature of the right created in favour of the Commissioner of Taxation by the section.
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"".
26. In Deputy Federal Commissioner of Taxation v. Steele (1987) 87 ATC 5050 McInerney J of the Supreme Court of New South Wales held that a s.218 notice could validly be issued to an insurance company requiring payment of a verdict for personal injuries for damages to the taxpayer. In the course of his Honour's judgment, his Honour expressed the view that s.218 created a charge with the consequence that the Commissioner would be a secured creditor in the bankruptcy of the taxpayer. Finally, in Kerrison v. Acting Deputy Commissioner of Taxation (1988) 88 ATC 4476 Fisher J in holding that the Commissioner could validly give a s.218 notice in respect of a damages claim arising out of an accident giving rise to personal injuries expressed the view that s.218 "prima facie at least" creates a charge.
27. The requirements of a lien or charge sufficient to be a security for bankruptcy purposes were considered by the full High Court in Hall v. Richards [1961] HCA 34; (1961) 108 CLR 84. The issue in that case was whether a judgment creditor who had entered a caveat against the land of a judgment debtor under a section of the Real Property Act 1886 (Tasmania) was a "secured creditor" within the meaning of the then s.4 of the Bankruptcy Act 1926-58 corresponding to the present definition in s.5 of the 1966 Act. That question in turn depended upon whether a judgment creditor who had lodged a caveat which effectively prevented any disposition by the debtor of the land and so could be said to "bind" the land to answer a future execution had a charge or lien over the land as those words are used in the Bankruptcy Act. It was held that he did not.
28. As Hall v. Richards points out it was held in Holmes v. Tutton [1855] EngR 45; (1855) 5
El & Bl 65 (119 ER 405) that while the service of an order of attachment on a
garnishee under the Common Law Procedure Act 1854 bound debts due to the
judgment
debtor having the effect that the garnishee could not pay his
original creditor or anyone claiming under him, that did not give the
judgment
creditor a "lien" so that the judgment creditor had under the English
Bankruptcy Act of 1849 to share pro rata with other creditors. The present
definition of "secured" creditor derives from the later English Bankruptcy
Act
1869 and under that definition the case of Emanuel v. Bridger (1874) LR 9 QB
286 was decided. The facts in that case were the same as those in Holmes v.
Tutton and it was held that the judgment creditor holding
the garnishee order
was a secured creditor. Quain J delivering the judgment of the Court said at p
291:
"We think that the word "charge" has a wider meaning29. In Hall v. Richards, Kitto J referring to a garnishee order made the following observation at p 92:
than the words "mortgage" or "lien", and we cannot
doubt but that an execution creditor who has
obtained, served, and made absolute his garnishee
order before the bankruptcy, is a creditor holding a
charge on a part of the bankrupt's estate as a
security for a debt due to him within s.16, sub-s.5,
and is therefore a creditor holding a security on
the property of the bankrupt under s.12."
"Such an order, though not working an assignment or30. The case of In re Combined Weighing & Advertising Machine Co to which Kitto J referred made it clear that the service of a garnishee order did not create as between the garnishor and garnishee any debt either at law or in equity entitling that person to petition for the winding up of the company against which the garnishee order was obtained. The nature of the rights obtained under a garnishee order were however discussed by Cotton LJ at p 104:
giving the judgment creditor any proprietary
interest in the debt, yet gives him positive rights
with respect to it which a creditor having no more
than a judgment does not possess; not merely a
negative right to prevent the judgment debtor from
accepting payment of the debt or disposing of it but
positive rights for the recovery of what is owing on
the judgment, namely a right to give a valid receipt
and discharge for the money, and a right in case of
non-payment to obtain execution against the
garnishee: In re Combined Weighing & Advertising
Machine Co (1889) 43 Ch D 99 at pp 105, 106."
"Now, what does the garnishee order do? It is no31. Further in his Lordship's view a mere garnishee order attaching a debt and enabling the person who has obtained the order to give a good discharge did not work an equitable assignment. Bowen LJ described the effect of a garnishee order at p 105 in the following terms:
assignment to any extent of the debt due by the
garnishee to the debtor of the garnishor; it merely
gives the garnishor a lien upon that debt."
"There is no assignment in equity, and I cannot see32. A notice under s.218 is not itself a garnishee order although as Mason J in Clyne's case remarked it is certainly very similar to such an order. Particularly, in my view it confers upon the Commissioner not merely the negative right to prevent the taxpayer from accepting payment of the debt or disposing of it, but positive rights, namely a right to give a valid receipt and discharge for the money (s.218(4)): the payment being deemed by that section to have been made under the authority of the taxpayer and there is conferred upon the Commissioner the further right in the event of default or failure to comply with a s.218 notice to apply to the court for an order requiring the convicted person to pay to the Commissioner an amount which the convicted person has refused or failed to pay. Thus the similarity between the s.218 notice and a garnishee order is indeed most striking and in my opinion it follows that for the purposes of the Bankruptcy Act there is created in the Commissioner by virtue of the service of the s.218 notice a charge so that the Commissioner becomes for the purposes of bankruptcy law a secured creditor.
that there is any legal debt. There is an order of
a Court of Common Law that a sum equal to the
original debt shall be paid by the garnishee to the
judgment creditor, or as an alternative that
execution may issue; but I think that the relation
which is created by that section and the orders made
under it does not create a debt at all; it creates
an attachment of a portion of the debt, and in case
of non-payment confers the right of issuing
execution and nothing more."
33. I am confirmed in this view by the decision of the Full High Court in
Stapleton v. F T S O'Donnell Griffin & Co (Q) Pty Ltd to
which both Mason and
Brennan JJ referred in Clyne's case. That case decided that the statutory
charge over moneys payable by an employer
to a contractor given by the
Contractors' and Workmen's Lien Acts 1906-1921 (Q) to a subcontractor who had
given notice of a claim
to the employer under s.10 of the Acts constituted the
subcontractor a secured creditor for the purposes of the Bankruptcy Act
1924-1958.
It was argued in that case that no attention should be given as
such to the word "charge" used in the Queensland Acts but rather
attention
should be focused upon the substance of the legislation from which it was said
to follow that the statutory provisions
in no way invested a subcontractor
with any proprietary interest in the chose in action constituted by the
contractor's outstanding
debt but conferred upon him merely a right to proceed
personally against the employer in the event of the debt being discharged by
payment either to the contractor or to his trustee or assignee. In rejecting
the argument Dixon CJ, Kitto, Taylor and Windeyer JJ
said at p 114:
". . . every indication to be found in the Acts34. In the course of judgment reference was made to the case of In re Potts; Ex parte Taylor (1893) 1 QB 648 where Lord Esher had said:
supports the conclusion for which the defendant
contends. First of all, the provisions of the Acts
purport to create "liens" and "charges" and it is
not unreasonable to suppose that they were intended
to create liens and charges in the true sense.
Consistently with this notion it is clear that, at
the latest, upon notice pursuant to either s.9 or
s.10, or both, the property charged is bound in the
hands of the owner or employer and, in the case of a
debt, the latter section makes it clear that the
contractor, as the creditor, becomes disentitled,
pro tanto, to receive it. With respect to a lien
upon the land of an owner it is provided that the
lien shall not attach if the notice, as prescribed,
is not given. The form of notice prescribed with
respect to both liens on land and charges on moneys
payable by an employer provide some further support
for the defendant's argument."
"A charge is a well known thing. If one man owes a35. In my view the effect of a s.218 notice is to charge the debt owed to the taxpayer preventing the debtor from paying it and obliging him to pay it to the Commissioner. To adopt the words of Lord Esher, it charges the debt in the hands of the debtor (here the Health Commission) who has to pay it. It has, therefore the effect of making the Commissioner a secured creditor.
debt to another, a creditor of the latter can, by
bringing in the debtor, charge the debt in his hands
so as to prevent him from paying it to his own
creditor, and oblige him to pay it to the creditor
who obtains the charge. Why is that a charge?
Because it charges the debt in the hand of the man
who has to pay it."
36. It is clear enough from what I have so far said that if the Health Commission owed moneys to Dr Edelsten at the time of receiving the s.218 notice those moneys would be the subject of a charge in favour of the Commissioner. Further, but for the intervention of the bankruptcy, as new debts became due and owing to Dr Edelsten by the Health Commission those debts would be subject to a charge in favour of the Commissioner.
37. For the trustee it was argued that the doctrine of relation back had the consequence that as and from the "commencement of the bankruptcy" (i.e. 22 May 1987) the right to receive debts owing by the Health Commission passed to the trustee and that as and when debts arose and became owing thereafter those debts were owed to the trustee and not to the bankrupt and accordingly fell outside the scope of the notice authorised by s.218.
38. It is beyond dispute that where a debtor becomes a bankrupt, (i.e. a
person against whom a sequestration order is made) "the
property of the
bankrupt" vests "forthwith"in, for present purposes, the trustee. However, by
force of s.115(1) the bankruptcy is
deemed "to have relation back and to have
commenced at" the time of the commission of the earliest act of bankruptcy
committed by
that person within a period of six months immediately preceding
the date on which the creditors' petition was presented. In the bankruptcy
there is distributable for the benefit of creditors that property which falls
within this description "property of the bankrupt".
The expression "property
of the bankrupt" is defined by s.5 for present purposes as meaning the
property divisible among the bankrupt's
creditors which property is defined in
s.116 of the Bankruptcy Act as meaning, inter alia:
"all property that belonged to, or was vested in, a39. For the Commissioner it was said that the s.218 notice acted like a floating charge so that as and when a debt owing by the Health Commission to Dr Edelsten came into existence and at the very moment of time that it did, the charge created by the s.218 notice crystallized so that the doctrine of relation back had no application. Reference was made to the well known case of Tailby v. The Official Receiver (1888) 13 App Cas 523 where it was held that a bill of sale given for consideration purporting to assign all the book debts which might during the continuance of the security become due and owing operated to pass the equitable interest in book debts that came into existence after the assignment, the applicable principle being that stated by Lord Watson at p 533:
bankrupt at the commencement of the bankruptcy, or
has been acquired or is acquired by him, or has
devolved or devolves on him, after the commencement
of the bankruptcy and before his discharge."
"The rule of equity which applies to the assignment40. Lord Macnaghten in the same case expressed the principle in the following terms (at pp 542-3)
of future choses in action is, as I understand it, a
very simple one. Choses in action do not come
within the scope of the Bills of Sale Acts, and
though yet not existing, may nevertheless be the
subject of present assignment. As soon as they come
into existence, assignees who have given valuable
consideration will, if the new chose in action is in
the disposal of their assignor, take precisely the
same right and interest as if it had actually
belonged to him, or had been within his disposition
and control at the time when the assignment was
made. There is but one condition which must be
fulfilled in order to make the assignee's right
attach to a future chose in action, which is, that,
on its coming into existence, it shall answer the
description in the assignment, or, in other words,
that it shall be capable of being identified as the
thing, or as one of the very things assigned. When
there is no uncertainty as to its identification, the
beneficial interest will immediately vest in the assignee."
"The claim of the purchaser was rested on well-known41. That principle, it was said, and there can scarcely be any doubt about the proposition, was as much applicable to assignments of choses in action as it was to agreements to charge choses in action: Re Row Dal Constructions Pty Ltd (in liq) (1966) VR 249 at 254.
principles. It has long been settled that future
property, possibilities and expectancies are
assignable in equity for value. The mode or form of
assignment is absolutely immaterial provided the
intention of the parties is clear. To effectuate
the intention an assignment for value, in terms
present and immediate, has always been regarded in
equity as a contract binding on the conscience of
the assignor and so binding the subject-matter of
the contract when it comes into existence, if it is
of such a nature and so described as to be capable
of being ascertained and identified."
42. Implicit in the argument for the Commissioner is the fact that equity
does not recognise any gap in time between the coming into
existence of the
chose in action and the charge attaching to it. The point was well expressed
in the judgment of Deane J, given while
his Honour was sitting in this Court,
in Federal Commissioner of Taxation v. Everett [1980] HCA 6; (1978) 78 ATC 4595 at p 4609:
"The nature of the intended assignee's interest43. Although his Honour dissented in the result in Everett's case and the majority judgment was affirmed on appeal nothing that was said in the High Court, or for that matter by the majority in this Court, in any way casts doubt upon the principle enunciated by his Honour. Although the principle is expressed by reference to charges or assignments for consideration I can see no reason why the principle should not be equally applicable to a statutory charge which carries with it legislative sanctions.
pending acquisition by the intending assignor of
future property the subject of a purported immediate
assignment for valuable consideration which has been
fully satisfied is of some importance in the present
matter. Even pending acquisition by the intending
assignor, the intended assignee enjoys more than the
traditional concept of an equitable right in per
sonam against the assignor. The relevant equitable
principle does not depend upon the possibility of a
court of equity decreeing specific performance with
the consequence that the assignee's beneficial
interest could not arise until after acquistion by
the assignor. The relevant principle is that equity
considers it as done that which ought to be done.
The consequence is that the beneficial interest in
the property the subject of the assignment never
vests in the assignor when the property is acquired
by him. He holds it immediately in trust for the
assignee (see generally Collyer v. Isaacs (1881) 19
Ch D 342 at p 351; In Re Lind, Industrials Finance
Syndicate Ltd v. Lind (1915) 2 Ch 345 at p 360;
Pallett Shoes Pty Ltd v. Krohn [1937] HCA 37; (1937) 58 CLR 1 at
pp 16-17, 27; Bakewell v. Deputy Federal
Commissioner of Taxation [1937] HCA 11; (1937) 58 CLR 743 at
pp 760-761, 768 and Visbord v. Federal Commissioner
of Taxation [1943] HCA 4; (1943) 68 CLR 354 at p 383."
44. In my view the argument for the Commissioner is to be preferred. For the trustee's argument to be correct it must be possible to say for the purposes of the doctrine of relation back that there was a moment of time where the debt in question was property of Dr Edelsten, that is to say a debt payable by the Health Commission to him. If the Commissioner's charge operates, as I believe it does, immediately upon the debt coming into existence so that there is no gap of time, then it must follow that at no time will the debts owed by the Health Commission fall within the description of debts owed to Dr Edelsten. Rather the debts will (to the relevant extent) be debts payable to the Commissioner of Taxation by force of s.218. Thus the doctrine of relation back will have no application to them.
45. 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 by it 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 moneys 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. My view that s.218 would have priority over the provisions of the Bankruptcy Act is reinforced by s.218(4) which deems the payment to the Commissioner to be made inter alia with the authority of "all other persons concerned" there is also an indemnification from such other persons. I see no reason why the trustee in bankruptcy might not for the purpose of s.218(4) be "an other person".
46. Burchett J appears to have been of the view that while s.218 might constitute a charge over the debts due from the Health Commission that charge arose only after the choses in action, i.e. the debts themselves, came into existence. In his Honour's view once the debts came into existence by virtue of the doctrine of relation back they did so as rights which belonged to the trustee in bankruptcy and not to Dr Edelsten. With respect to his Honour this suggests that the charge imposed by s.218 can only come into existence at the moment after a debt arises, whereas in my view, there will never be any point of time at which a debt will arise without the charge being attached to it.
47. It follows therefore that, in my view, but for the application of s.118
of the Bankruptcy Act the Commissioner would be entitled
to succeed.
3. Section 118 - Is a S.218 Notice an Attachment?
48. Section 118 of the Bankruptcy Act provides:
"1. Subject to sub-s.2, where -49. There are references in the section to "charges and charging orders" which are defined in sub-s.12 as follows:
(a) a creditor has, within six months before
the presentation of a petition, or after the
presentation of a petition, against a debtor -
(i) received moneys as a result of
execution having been issued by
him, or on his behalf, against
property of the debtor, being
moneys that are the proceeds of
the sale of property of the debtor
that has been sold in pursuance of
the process or that were seized or
paid to avoid seizure or sale of
property of the debtor, in
pursuance of the process; or
(ii) received moneys as a result of the
attachment by him or on his behalf, of
a debt due to the debtor; and
(b) the debtor subsequently becomes a
bankrupt on, or by virtue of the
presentation of, the petition,
the creditor shall pay to the trustee of the
estate of the bankrupt the amount by which the
amount of those moneys exceeds the taxed costs of
the execution or attachment, as the case may be."
""charge" means a charge created by a law of the50. If s.118 applies in the present circumstances the consequence will be that the Commissioner must refund to the trustees all moneys to which he became entitled under the s.218 notice in the six months before the presentation of the petition and between the time the petition was presented and the time the sequestration order was made.
Commonwealth or of a State or Territory of the
Commonwealth upon registration of a judgment in any
registry;
"charging order" means a charging order made by a
court in respect of a judgment."
51. Section 118 of the present Act was derived from s.92 of the Bankruptcy Act 1924 (Cth) which in turn was derived from s.40 of the Bankruptcy Act 1914 (Eng), which section was in substantially similar terms to s.92.
52. Section 92(1) of the 1924 Act provided relevantly:
"Where a creditor has issued execution against the53. As the Committee appointed by the Attorney General of the Commonwealth to review the Bankruptcy Law of the Commonwealth (Clyne Committee) pointed out in its report published in 1962, s.92(1) had been the subject of much litigation particularly as to the meaning of the words "the benefit of the execution or attachment". The problems which these words produced were described by Dixon CJ in McQuarrie v. Jaques [1954] HCA 76; (1954) 92 CLR 262 as requiring one to enter "one of the darker recesses of the bankruptcy law."
goods or lands of a debtor, or has attached any debt
due to him, he shall not be entitled to retain the
benefit of the execution or attachment against the
trustee in bankruptcy unless he has completed the
execution or attachment before sequestration and
before notice of the presentation of any petition by
or against the debtor or before notice of the commission
of any available act of bankruptcy by the debtor."
54. The form of the section in the 1966 Act was designed to ensure that where a creditor issued execution or attached a debt within six months before the presentation of a petition against the debtor or after the presentation of such a petition and the debtor subsequently became bankrupt on the petition the creditor should be required to pay to the trustee an amount equal to that obtained by him as a result of the execution or attachment less the taxed costs. Thereafter the creditor would be entitled to prove in the bankruptcy as if the execution or attachment had not taken place.
55. There was nothing in s.92(1) of the 1924 Act or s.40 of the Bankruptcy Act 1914 of England which indicated the meaning of the word "attachment" and in particular which assisted in the resolution of the question whether the attachment referred to in the section was limited to attachment arising by or as a result of court order or whether it extended to an attachment operating by force of statute in favour of the Crown.
56. As pointed out by Burchett J, the only case in which the meaning of the
word "attachment" was considered in the context of s.40(1)
of the Bankruptcy
Act 1914 was In re Lupkovics; Ex parte The Trustee v. Freville (1954) 1 WLR
1234 where Upjohn J, as his Lordship then was, had to decide whether an
application to the court under the Crown Proceedings Act 1947,
s.27(1) that an
amount of money owing by the Ministry of Health to her husband should be paid
to her. In holding that the proceedings
under s.27(1) were proceedings by way
of attachment for the purposes of s.40 of the Bankruptcy Act 1914 Upjohn J
said at p 1241:
"Apparently, before 1947, there was no means of57. Burchett J concluded that if the word "attachment" was not a term of art then there was no reason to confine its meaning as an English word with a long history in the law. His Honour referred to the Shorter Oxford English Dictionary 1980 and the Macquarie Dictionary (revised edition 1985) where the relevant meanings are given respectively as:
attaching a debt due from the Crown: see Robertson
Civil Proceedings by and against the Crown, at
p 611. In my judgment, however, proceedings under
section 27(1) are proceedings by way of attachment
for the purposes of section 40. Attachment is
nowhere defined in the Bankruptcy Act, 1914, but it
is not, in my judgment, a term of art confined to
attachments arising under R.S.C. Order 45. It is
equally appropriate to include proceedings under
section 27(1) of the Crown Proceedings Act, 1947 - a
section clearly intended to put the judgment
creditor in the same position vis-a-vis the Crown as
any other debtor of the bankrupt, i.e., to prevent
the judgment debtor obtaining payment of the debt
and to secure payment to himself, the difference in
the form of order obtained being due to the
privileges and immunities of the Crown."
"to place or take under the control of a court; to58. It will be noted that the former definition in its first meaning confines the word to curial acts but the latter does not necessarily do so.
arrest or seize by authority of a writ of
attachment: (a) a person; (b) property, goods."
(emphasis added; and
to arrest (a person) or distrain (property) in
payment of a debt by legal authority."
59. Words and Phrases Legally Defined (2nd ed) (John B Saunders(Ed))
(Butterworths London 1969) defines "attachment of debts" as:
"a process by means of which a judgment creditor is60. Jowitt's Dictionary of English Law (2nd ed 1977) defines "attachment of debts" as:
enabled to reach money due to the judgment debtor
which is in the hands of a third person. For this
purpose the ordinary methods of execution are
inapplicable; but there is power to order the third
person to pay to the judgment creditor the debt due
from him to the judgment debtor, or as much of it as
may be sufficient to satisfy the judgment creditor's
claim. In this connexion, the third person in whose
hands is the money which is sought to be attached is
called the garnishee, the requisite proceeds are
known as garnishee proceedings, and the necessary
order is called a garnishee order."
"a proceeding employed in actions in the High Court61. The Encyclopaedia of the Laws of England (Morrison & Gibb 1897) edited by A W Renton defines "attachment of debts" to mean:
where a judgment for the payment of money has been
obtained against a person to whom money is owing by
another person; in such a case the judgment
creditor, on application ex parte at chambers, may
obtain an order nisi (Norton v. Yates (1906) 1 KB
112) that all debts owing or accruing from that
person (who is called the garnishee) to the judgment
debtor shall be attached to answer the judgment debt."
"Proceedings by which, after any person has obtained62. Also referred to by his Honour was the discussion of "attachment" in the judgment of Lord Denning MR in Choice Investments Ltd v. Jeromnimon Midland Bank Ltd (1981) QB 149 where his Lordship refers to attachment as "a mode of execution which was introduced by section 61 of the Common Law Procedure Act 1854" (where of course it required a court order). However under the heading "Garnishee" his Lordship discusses the process of garnishee and the derivation of the words "garnishee" and "attach" as both coming from Norman French. His Lordship says at p 155:
a judgment or order for the recovery or payment of
money in any Court having jurisdiction in equity, or
in law and equity, he may, . . . procure an order for
the payment to him of all debts owing or accruing
due, to his judgment debtor from third persons, in
satisfaction, or part satisfaction, of his judgment
or order."
"As soon as the garnishee order nisi is served on63. It is true that in this passage his Lordship refers to the attachment as being the freezing of the debt rather than as being the order of the court but, with respect to Burchett J, that does not seem to me determinative of the meaning of the word "attachment" in s.118 of the Act. Given that "attachment" is the freezing of some relevant fund or debt, the question is whether in the context of s.118, the relevant attachment must be one which arises by order of a court; that is to say, whether the relevant attachment involves a process akin to execution of goods.
the bank, it operates as an injunction. It prevents
the bank from paying the money to its customer until
the garnishee order is made absolute, or is
discharged, as the case may be. It "binds the debt
in the hands of the garnishee - that is, creates a
charge in favour of the judgment creditor" . . . .
The money at the bank is then said to be "attached"
- again derived from Norman-French. But the
"attachment" is not an order to pay. It only freezes
the sum in the hands of the bank until the order is
made absolute or is discharged. It is only when the
order is made absolute that the bank is liable to pay."
64. Holdsworth in his History of English Law Vol VIII, p 229ff traces as part of the history of bankruptcy law the history of execution. Originally a judgment creditor at common law could realise his claim by a writ of fieri facias (execution against goods) or by a writ of levari facias (execution out of goods and the profits of the land). However execution could be obtained against the person of the debtor (capias ad respondendum) in which case no other mode of execution was open.
65. By the reign of Henry VIII Holdsworth notes, the machinery of the common law lagged behind the laws of other countries. Henry Brinklow in 1542 complained that attachment ("tachement") operated to give the person first in (usually the richest) an advantage over other creditors. He recommended that the law be adopted in England as it was in other countries that "every man may have pound and pound alyke, as farre as his goodys will goo, leavyng him somewhat as the lawe shall thynck good."
66. The law of bankruptcy in the United Kingdom originated in Acts passed
between 1542 (34 & 35 Henry VIII C4) and 1623 (21 James
1 C19) and provided
inter alia for the distribution of the assets of a bankrupt among his
creditors. It was provided that the estate
was to be ratably divided among
creditors notwithstanding a creditor has inter alia a judgment, attachment or
other security (21 James 1 C19 S.9). That section provided:
"And for the better Divifion and Diftribution of the67. That section remained in the law, with insignificant amendments for present purposes, until its repeal in 1869 by the Bankruptcy Repeal Act 32 and 33 Vic. C83 (cf. e.g. 6 Geo IV, C16 s.CVIII).
Lands, Tenements, Hereditaments, Goods, Chattels and
other Eftate of fuch Bankrupt to and amongft his or
her Creditors; (2) Be it enacted, That the
Commiffioners, or the greateft Part of them, fhall
and may examine upon Oath or by any other Ways or
Means as to them fhall feem meet, any Perfon or
Perfons, for the finding out and Difcovery of the
Truth and Certainty of the feveral Debts due and
owing to all fuch Creditor and Creditors as fhall
feek Relief by fuch Courfe of Commiffion to be fued
forth as aforefaid: (3) And that all and every
Creditor and Creditors having Security for his or
their feveral Debts, by Judgment, Statute,
Recognizance, specialty with Penalty or without
Penalty, or other Security, or having no Security,
or having made Attachments in London or any other
Place, by Virtue of any Cuftom there ufed, of the
Goods and Chattels of any fuch Bankrupt, whereof
there is no Execution or Extent ferved and executed
upon any the Lands, Tenements, Hereditaments, Goods,
Chattels and other Eftate of fuch Bankrupts, before
fuch Time as he or fhe fhall not be relieved upon
any fuch Judgment, Statute, Recognizance, Specialty,
Attachments or other Security for any more than a
ratable Part of their juft and due Debts, with the
other Creditors of the faid Bankrupt, without
Refpect to any fuch Penalty or greater Sum contained
in any fuch Judgment, Statute, Recognizance,
Specialty with Penalty, Attachment or other Security."
68. The Common Law Procedure Act 1854, (17 and 18 Vic C125 s.LXI) provided
for the first time for an order for the attachment of
debts by way of a
garnishee order. The section read:
"It shall be lawful for a Judge, upon the ex-parte69. Subsequently in 1883 in the Bankruptcy Act of that year (46 & 47 Vic C52) s.45(1) of that Act was enacted in terms similar to s.40 of the Bankruptcy Act 1914 and s.92(1) of the Australian 1924 Act.
Application of such Judgment Creditor, either before
or after such oral Examination, and upon Affidavit
by himself or his Attorney stating that Judgment has
been recovered, and that it is still unsatisfied,
and to what Amount, and that any other Person is
indebted to the Judgment Debtor, and is within the
Jurisdiction, to order that all Debts owing or
accruing from such Third Person (herein-after called
the Garnishee) to the Judgment Debtor shall be
attached to answer the Judgment Debt; and by the
same or any subsequent Order it may be ordered that
the Garnishee shall appear before the Judge or a
Master of the Court, as such Judge shall appoint, to
show Cause why he should not pay the Judgment
Creditor the Debt due from him to the Judgment
Debtor, or so much thereof as may be sufficient to
satisfy the Judgment Debt."
70. Although the legislative history is not conclusive the early references
to attachment in London by virtue of custom there prevailing
appears to be a
reference to a form of curial procedure whereby if an action of debt was
brought in the Mayor's Court, and the defendant
defaulted in certain
circumstances the Court might attach property in the possession of someone
else in the city to compel the defendant
to appear. According to Jowitt's
Dictionary of English Law (2nd ed) Vol 1 p 810-811:
"The attachment was effected by warning the person71. That execution operated as a satisfaction in whole or in part of the debt. Similar custom existed in Bristol, Exeter and Lancaster.
in whose possession the property was not to part
with it without the further order of the court.
This person was then called the garnishee. If the
defendant still made default in appearing, the
garnishee was required to show cause why the
plaintiff should not have execution of the property
attached, and in default of cause being shown, the
plaintiff obtained execution"
72. It is not insignificant that the present law has its origin in the 1883 legislation enacted after the Common Law Procedure Act 1854 which introduced the garnishee procedure presently known as attachment, which like the attachment of customary law was a curial procedure available as an execution remedy to a judgment creditor.
73. Under the present law a garnishee order when served works an attachment, but such an order is properly described as being in the nature of "execution of a judgment" cf. Rainbow v. Moorgate Properties Ltd (1975) 1 WLR 788, per Buckley L.J. The making of a garnishee order is a discretionary matter and the court will not make an order where to do so would be to confer a preference on a creditor, as for example, where a winding up order had been commenced or a petition presented. The court would not allow one creditor, however diligent he may be, to get an advantage over the others by getting in first with a garnishee order: Prichard v. Westminster Bank Ltd (1969) 1 WLR 547 at p 549.
74. Where a judgment creditor sought execution against the goods of a judgment debtor and notice was, before the execution was completed, served on the officer of the court that a sequestration order was made, s.93 of the 1924 Act (s.41 of the 1914 Act) provided that the goods should be delivered up to the trustee. There was no comparable provision relating to garnishee orders probably because until the debt was paid the court retained control of the matter.
75. Indeed, it was only in the 1980 amending legislation to the Australian Bankruptcy Act that s.119 of the Act (the equivalent of s.93 of the 1924 Act) was substituted so as to cover not only the execution of goods but also attachments. Section 119 now requires the sheriff with notice of the presentation of a creditor's petition to refrain from taking any action on behalf of a creditor to attach a debt due to the debtor or to pay to the creditor moneys received as a result of the attachment of the debt until the petition has been dealt with or lapsed.
76. Although, perhaps, not a matter in respect of which great weight can be given it is interesting to note that in the explanatory memorandum which accompanied the bill which ultimately became the Bankruptcy Amendment Act 1980, reference is made in the notes to the amendment then made to s.118 to "all execution moneys received by a creditor as the result of an execution or attachment" (emphasis added). The implication to be drawn from the explanatory memorandum is that the kind of attachment to which s.118 refers is that which is akin to execution of goods, that is to say, attachment by curial order.
77. Although it would not be permissible to construe the 1966 Act by reference to an amendment made to it in 1980, nevertheless the 1980 amendments do provide some support for a meaning of the word "attachment" limited to curial attachments. In particular, if attachments worked by a section such as s.218 of the Income Tax Assessment Act had been intended to come within s.118, then it might have been expected that some procedure could have been devised by the legislation whereby notice would be given to stay the effect of the s.218 notice upon presentation of a petition. Such an amendment was not however made.
78. Further support for the confining of the meaning of "attachment" in s.118 may be found from the use of the word in ss.205 and 205A the Act where the word is clearly restricted to attachments worked by curial order and to the references in s.118 itself to "taxed costs" which references were, however, not to be found in s.92 of the 1924 Act or s.40 of the 1914 Act (UK). While it is possible to dismiss the references to "taxed costs" in the present legislation as referring only to one of the possible classes of attachment which falls within s.118 i.e. as meaning "taxed costs if any are appropriate and ordered", I think that the words do, when read together with s.119, give quite strong support for the view that attachments, worked by a section such as s.218, were not contemplated by the legislature when s.118 was enacted in 1966 or when it was amended in 1980.
79. Resort to cases in other jurisdictions and contexts does not greatly
assist. Thus in Re D S Patterson & Co Ltd (1931) Or 777 a question arose as to
whether goods seized by a landlord by way of distress were goods under seizure
or attachment for the purposes
of a section of a statute which provided as
follows:
Where personal property liable to seizure for taxes80. It was held in that context that the words "seizure" and "attachment" were intended to cover an exercise of judicial power, Sedgewick J saying:
as hereinbefore provided is under seizure or
attachment or has been seized by the sheriff or by a
bailiff of any court or is claimed by or in
possession of any assignee for the benefit of
creditors or liquidator or of any trustee or
authorised trustee in bankruptcy . . . it shall be
sufficient for the tax collector to give to the
sheriff, bailiff, assignee or liquidator or trustee
or authorised trustee in bankruptcy, notice of the
amount due for taxes, and in such case the sheriff,
bailiff, assignee or liquidator or trustee or
authorised trustee in bankruptcy shall pay the
amount of the same to the collector in preference
and priority to any other and all other fees,
charges, liens or claims whatsoever."
"I think "seizure" and "attachment" are intended to81. While the case does give some support to the view that attachment should be confined to such an attachment as is worked by curial process, the context in which the issue arose does differ from s.218 and the context is ultimately controlling of the meaning of an expression.
cover exercise of judicial power. "Seize" in
Murray's New English Dictionary is "to take
possession of (goods) in pursuance of a judicial
order." "Attachment", according to the same
authority, is "the taking of property into the
actual or constructive possession of the judicial
power." These words, so defined, do not ordinarily
include distress, which, according to Stroud, "is
the taking without legal process cattle or goods as
a pledge to compel the satisfaction of a demand."
Again if the words are to include distress, I must
read the word "bailiff" in the eighth line of the
sub-section to include a landlord's bailiff. It
seems to me to mean only the bailiff referred to in
the third line, that is "a bailiff of any court"."
82. I should say that I do not find it surprising that the legislature had no regard to attachments worked by statute, for such attachments obviously rare as they are, would, in my view, generally, if not invariably, be as is the case with s.218 of the Income Tax Assessment Act in favour of the Crown and indeed, until quite recently, the debts protected by the attachment would have been entitled to Crown priority. In the case of income tax, priority of sorts existed until 1980 when it was removed.
83. Apart from statutory provision, debts due to the Crown were entitled to payment in priority to those of the subject in the administration of a bankrupt's estate: Commissioners of Taxation (NSW) v. Palmer (1907) AC 179. Section 84 of the Bankruptcy Act 1924-1960, providing for the order of priority in bankruptcy, gave a sixth priority to all assessed income tax assessed under the Commonwealth Act or any State Act prior to the date of the order of sequestration but not exceeding in the whole one year's assessment. Thus by virtue of this section the common law right of the Crown to priority was displaced by the statutory order: Deputy Federal Commissioner of Taxation v. Stranger [1934] HCA 6; (1934) 50 CLR 468, 472, 473.
84. As a temporary measure in 1942 s.221 of the Income Tax Assessment Act 1936 was inserted purporting to give priority to Commonwealth income tax over State taxes and giving the Commonwealth priority in payment of income tax in bankruptcy. It was held in South Australia v. The Commonwealth [1942] HCA 14; (1942) 65 CLR 373 that the section in its original temporary form was valid although subsequently in Victoria v. The Commonwealth; New South Wales v. The Commonwealth [1957] HCA 54; (1957) 99 CLR 575 it was held that s.221(1)(a) was not a valid exercise of the taxation power (the defence power no longer being able to be relied upon) and was ultra vires and void but sub-s.1(b) of the section was valid as a law made under the bankruptcy power. The priority granted by s.221(b)(1) gave to the Commissioner a higher priority over other debts than that conferred under s.84(1)(h) of the Bankruptcy Act 1924.
85. The 1966 Bankruptcy Act, s.109(1)(j) conferred upon income tax, tenth priority but only in respect of an amount not exceeding in the whole one year's assessment.
86. At the same time s.221(b) of the Income Tax Assessment Act was repealed so that there was no inconsistency between the priority granted by the Income Tax Assessment Act and that granted by the Bankruptcy Act but that the sole priority was that granted by the Bankruptcy Act.
87. When it is appreciated that the provisions of the comparable sections to s.118 of the present Bankruptcy Act existed at a time when Crown priority for income tax was paramount it can hardly have been intended that a section such as s.118 would operate to require the Commissioner to pay over to the trustee funds taken under a s.218 notice when the only consequence of that would be that the funds would be held by the trustee to pay to the Commissioner himself in priority. Thus it seems highly unlikely in my view that s.118 was ever intended to encompass a charge of the kind contemplated by s.218 of the Income Tax Assessment Act.
88. Crown priority was dispensed with altogether in 1980 by a series of Acts including the Bankruptcy Amendment Act No.12 of 1980 and the Taxation Debts (Abolition of Crown Priority) Act 1980 No. 134 of 1980 which made amendments to the Income Tax Assessment Act.
89. It is interesting to note that prior to the 1980 amendments s.123(6) of
the Bankruptcy Act 1966 provided:
"Nothing in this Act invalidates -90. There was no corresponding provision protecting the Commissioner or otherwise dealing with the situation where the taxpayer became bankrupt after a payment was received from the recipient of a s.218 notice. I am, however, unable to draw any inference from these provisions in favour of either party.
(b) a payment by a person who becomes a bankrupt,
being a payment made on or before the date on
which he became a bankrupt, under s.218 of the
Income Tax Assessment Act 1936-1965 or under
any similar provision of a law of the Commonwealth
or of a State or Territory of the Commonwealth."
91. Although the question can certainly not be said to be unarguable I am of the view that when the context of s.118 in the bankruptcy legislation is examined the charge created by the service of a notice under s.218 of the Income Tax Assessment Act does not fall to be considered as an attachment for the purposes of s.118 of the Bankruptcy Act.
92. It follows in my view that the Commissioner of Taxation would be entitled to retain moneys coming to him under the s.218 notice and would not be obliged to pay these out to the trustee for distribution among the creditors.
93. A number of other matters were argued. In particular leave was given to the Commissioner to argue that from the moment of assignment there was a debt due and owing (although not payable) by the Health Commission to Dr Edelsten, this being a relevant matter in the event that the appeal was not allowed. Leave was granted by the Court to the Commissioner to argue this matter. As in my opinion the question does not arise I express no opinion upon it. I should however mention one matter.
94. Counsel for the trustee argued that this issue had already been decided in litigation between the parties (see Knight v. Deputy Federal Commissioner of Taxation (1987) 87 ATC 4970). While it is not, in my view, relevant to determine when the debts from the Health Commission became due to Dr Edelsten, there seem to me to be great difficulties in making out the essential ingredient for an issue estoppel, one of which would require that the matter be decided between the same parties acting in the same interests.
95. There remains to be noted a number of other arguments put by both parties.
96. For the Commissioner it was argued that the debts due to Dr Edelsten from
the Health Commission were "income" and obtained the
protection of s.131 of
the Bankruptcy Act notwithstanding that the amounts arose prior to the making
of a sequestration order. In my view this argument is misconceived. Section
131 reads relevantly:
"(1) Subject to this section, a bankrupt who is in97. Burchett J was of the view that s.131 had no operation prior to the date of the sequestration order and I am, with respect, in agreement with his Honour who in the judgment below sets out the history of the section and concludes the section is concerned only with income of which a bankrupt is in receipt following the making of a sequestration order. Income of which a bankrupt was in receipt prior to the making of the order but during the period of relation back, in my view, does not fall within the section. It is in my view, telling in favour of this construction of the section that sub-s.(1) refers to a "bankrupt" being in receipt of income and being entitled to retain it for his own benefit. By virtue of the definition provisions in s.5 a bankrupt is defined as a person "against whose estate a sequestration order has been made". Pending that time a person who is in receipt of income is not at all protected by the section. After the sequestration order is made it is only those receipts after the sequestration order is made to which the section makes reference.
receipt of income is entitled to retain it for
his own benefit.
(2) The court may, upon the application of the
trustee, order that all, or such part as the
court thinks fit, of the income of the
bankrupt shall be paid to the trustee for the
benefit of the bankrupt's creditors."
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