GE Crane Pty Ltd v Federal Commissioner of Taxation [1971] HCA 75; (1971) 126 CLR 177 (17 December 1971)

HIGH COURT OF AUSTRALIA

G.E. CRANE PTY. LTD. v. FEDERAL COMMISSIONER OF TAXATION [1971] HCA 75; (1971) 126 CLR 177

Income Tax (Cth)

High Court of Australia
Barwick C.J.(1), McTiernan(2), Menzies(3), Walsh(4) and Gibbs(5) JJ.

CATCHWORDS

Income Tax (Cth) - Allowable deductions - Bad debts - Taxpayer entitled in equity to debts - Assignments of some debts - Discharge of others upon part payment - Scheme of arrangement - Subsequent purported writing-off of debts - Whether deduction allowable - "Debts" - Income Tax Assessment Act 1936-1967 (Cth), s. 63.

HEARING

Sydney, 1971, August 12, 16, 17, December 17. 17:12:1971
CASE STATED under s. 18 of the Judiciary Act 1903-1969 (Cth).

DECISION

December 17.
The following written judgments were delivered : -
BARWICK C.J. The facts as stated by my brother Owen for the opinion of the by my brother Menzies which I have had the advantage of reading. I have no need to repeat any of those facts or to add to the recital of them. (at p180)

2. It is clear that there was no legal assignment to the taxpayer of any debts due to its customers mentioned in the case stated. I entertain some doubt myself as to whether there was any equitable assignment of any such debts to the taxpayer. To be an effective equitable assignment the circumstances must be such that a court of equity would lend its aid to the person claiming to be the assignee of the debts to recover them from the debtor to the assignor. I am far from convinced that in the circumstances of this case equity would have lent its aid to the taxpayer to effect such recovery. However I have no need in order to answer the question asked by the case stated to reach any final conclusion on that matter. It suffices that I am in agreement with my brother Menzies in his conslusion that s. 63 of the Income Tax Assessment Act can only apply if what is said to be written off as a bad debt answered the description of a debt due either at law or in equity at the time that it is claimed to have been written off. I agree with the reasons which my brother Menzies assigns for that conclusion. (at p181)

3. I am also of opinion that on any view the appellant had no right to receive any moneys in respect of the so-called debts which were written off by it as bad debts in the year 1967. Consequently, in my opinion, the question asked in the case stated ought to be answered in the negative. (at p181)

McTIERNAN J. I have had the advantage of reading the judgment of Menzies J. I agree in the judgment and have nothing to add for myself. (at p181)

MENZIES J. The appellant has appealed against the refusal of the Commissioner to allow as a deduction, pursuant to s. 63 of the Income Tax Assessment Act 1936-1967 (Cth) $46,331 written off as bad debts during the year ended 30th June 1967. The matter comes to the Full Court upon a case stated by Owen J. (at p181)

2. The so-called debts became owing to the taxpayer years ago when its name was Australian Factors Ltd., and, except for the sum of $1,763, had their origin in the appellant's factoring business. The sum of $1,763 was a debt in respect of the refund of premiums due upon a cancelled insurance policy with the Traders Prudent Insurance Co. Ltd. and had been included in the appellant's assessable income for the year ended 30th June 1964. (at p181)

3. The factoring business of the company consisted of the discounting for cash amounts due to traders for goods or service. The method adopted was deceptive. The trader was accepted as a client and the course of dealing was then as set out in the case stated as follows :

"Upon acceptance of a person as a client, that person was
required to sign a letter addressed to the Registrar-General
giving the appellant permission to register a business name
similar to but not identical with the name of the client which
registration was then effected by the appellant, and
subsequently
to render his invoices showing that business name,
and an address which was in fact the address of the appellant
as the person to whom and the place at which payment was to
be made. This device was adopted for the purpose of not
revealing to a client's customers that the client was factoring
his invoices. At a time prior to March 1964, the
Registrar-General
declined to register the appellant as proprietor of such
business names, but invoices continued to be made out in such
names and address whether or not registered.
The client desiring to factor transactions other than the
initial factoring of his then book debts was required to render
his invoices in the business name which the appellant had
registered, to submit to the appellant a form of master invoice
accompanied by copies of the invoices to his customers which
he desired to factor and to make a declaration of the
correctness
of the same. Upon presentation to the appellant of such
a master invoice and the documents, and upon a clerical
checking of the same, the appellant, if it accepted the offer to
factor constituted by the presentation of those documents,
made out its cheque to the client for the amount shown on the
master invoice less the factoring fee (and less any other
adjustments
to the account between them necessary at the time of
that transaction).
The terms of the contract between the appellant and its
client required the client to send to the appellant each cheque
it received from a customer in respect of any invoice factored
to the appellant but that term was not always observed, the
client sometimes banking its customer's cheque and accounting
to the appellant with a cheque drawn on its own account
or in a number of instances not accounting at all to the appellant
in respect of such receipts. The appellant had no recourse
against a client in respect of any amounts not paid by that
client's customers." (at p182)

4. The taxpayer paid its clients the face value of their monthly invoices less a percentage of the total by way of a charge. It relied for the recoupment of the moneys paid upon recoveries to be made from its clients' customers. The so-called bad debts are amounts not recovered from such customers. (at p182)

5. In its trading and profit and loss account for the year ended 30th June 1962, which formed part of the appellant's income tax return for that year, the following items appear :

"TRADING AND PROFIT AND LOSS ACCOUNT
FOR THE YEAR ENDED 30th JUNE, 1962.
SALES 3,554,987 16s 9d.
Deduct : Purchases 3,310,642 19s 4d.
GROSS PROFIT 244,344 Pounds 17s 5d."

The so-called sales were the amounts claimed to be payable to the appellant from customers of traders who were its clients and whose credits had been factored. The so-called purchases were the moneys paid by the appellant to its trader clients for the debts owing to them by their customers for goods or services. To the sum of 244,344 Pounds 17s. 5d. shown as gross profit there were added some other items of income to bring the gross income to 251,449 Pounds 17s. 8d. From this was deducted 125,637 Pounds 7s. 11d. for expenses, leaving a net profit for the year of 125,812 Pounds 9s. 9d., which was incorrectly shown in the account as 125,762 Pounds 9s. 9d. Part of the case made for the appellant was that, included in the item "Sales 3,554,987 Pounds 16s. 9d." were the debts which were subsequently written off, and, by virtue of what it had done as aforesaid, the appellant had brought these debts to account as assessable income of the year ended 30th June 1962. Consideration of this contention can be postponed. (at p183)

6. The initial question for determination is whether the sums owing by the customers of the appellant's clients for goods and services rendered to those customers ever became the debts of the taxpayer. (at p183)

7. It is, of course, clear that such sums did not become payable by the customers to the appellant in the sense that the appellant could have successfully sued for them as moneys owing to it. It is common ground that notices of assignment were not given to customers ; indeed, it was part of the factoring plan that customers should be kept in the dark about the appellant's arrangements with those to whom money was owing. There was certainly no legal assignment of the appellant's clients' debts. (at p183)

8. The appellant's claim, however, is that, by virtue of the factoring arrangement already stated, it did become the assignee in equity of the debts owing to its clients by their customers. This the Commissioner contests on the basis that the appellant never became the creditor its clients' customers and that any client could at all times have effectively discharged the debts owing to it, notwithstanding its arrangements with the appellant. I accept the Commissioner's contention to the extent that I agree that payment by a customer to a client would always have discharged the liability of the customer, but it is, I think, beyond question that any amount which a client received from one of its customers in discharge of, or on account of, debts owing for goods or services in respect of which it had received payment from the appellant, would have been held in trust for the appellant because, by virtue of the factoring arrangements, the clients had constituted themselves trustees for the appellant of the debts owing to them. For a creditor to constitute himself trustee of his debts for another, and to do so for consideration, does, in my opinion, amount to an assignment in equity of those debts. That is what I think happened under the factoring arrangement under consideration, notwithstanding the deception practised upon the customers of clients whose debts were factored by the appellant. The essence of an equitable assignment is simply that the assignment "in form or in effect, amounted to a declaration of trust, with authority for the assignee to make use of the name of the assignor to obtain the benefit of the assignment" : Halsbury's Laws of England, 3rd ed., vol, 14, at p. 467, par. 884. (at p184)

9. For the reasons stated I consider that the appellant has established that it became the owner in equity of the factored debts owing by their customers to its clients. (at p184)

10. The next matter for consideration is whether, by virtue of the equitable assignment made to it, the factored debts became the appellant's debts for the purpose of s. 63 of the Act. (at p184)

11. The purpose of s. 63 is generally to provide relief by way of deduction for those who have brought to account as assessable income debts which have not been paid or otherwise discharged and are written off as bad debts. In construing this section, I am not disposed to interpret the word "debts" narrowly. A debt due only in equity (1) can be garnisheed : Webb v. Stenton (1883) 11 QBD 518 ; (2) will found a bankruptcy petition : McIntosh v. Shashoua [1931] HCA 56; (1931) 46 CLR 494 ; (3) will found a winding up petition : In re Steel Wing Co. Ltd. (1921) 1 Ch 349 . I think it is sound in principle and in keeping with these authorities to hold, as I do, that a debt due only in equity is a debt to which s. 63 can apply. (at p184)

12. My consideration of the case to this point has brought me to the conclusion that the factored debts were debts to which s. 63 can apply. At this point it is, however, necessary to bring into consideration events intervening between the dates of the equitable assignments of the factored debts to the appellant and the purported writing off of those debts as bad debts in 1967. (at p184)

13. On 13th March 1964, the appellant, being in default under the debenture trust deed executed on 20th December 1961 to secure moneys to be borrowed from the public, the trustee thereunder appointed a receiver. The trustee also presented a petition for the winding up of the appellant. On 10th December 1965 a provisional liquidator was appointed by the Supreme Court of the Australian Capital Territory. In June 1966 a scheme of arrangement proposed between the appellant, its shareholders and its creditors was approved by the Supreme Court of the Australian Capital Territory and the Supreme Court of New South Wales. After these approvals the petition for the winding up of the appellant was withdrawn, and the charge given in December 1961 was discharged. The receiver under the debenture trust deed, R. F. J. Bragg, became receiver and manager under the scheme of arrangement. It appears from the case stated that :

"Debts owing to the appellant at 21 June 1966 from persons
residing in New South Wales from its previous factoring
transactions that were paid after that date were received by
Ross Frederick Joseph Bragg, banked by him to an account
under his control styled 'G. E. Crane Sales Pty. Ltd. Scheme
of Arrangement Account' and distributed by him to the
appellant's former debenture stock holders in the performance
of his duty as Receiver and Manager under the Scheme of
Arrangement to persons other than the appellant. As from
21 June 1966 the appellant was not entitled to receive or to
retain amounts paid in respect of such debts and the control and
possession of the property constituted by the debts was vested
in Ross Frederick Joseph Bragg as Scheme Receiver and
Manager." (at p185)

14. Furthermore, by virtue of the scheme of arrangement, and as part of the consideration for the appellant giving up its beneficial interest in debts owing to it, its creditors released it from all debts and liabilities. The appellant thereupon became an empty shell. It was after 21st June 1966 that the shares in the appellant were transferred to G. E. Crane and Sons Ltd. and its nominees, and the appellant's name was changed. This, of course, was a tax dodge. (at p185)

15. Before determining how the events which I have stated affected the application of s. 63 to the factored debts, it is convenient to record that the writing off of the factored debts as bad debts, upon which the appellant relies for the deduction claimed, was, as the case stated states, effected as follows :

"During the year of income ended 30th June 1967, the
appellant instructed Ross Frederick Joseph Bragg to write off
debts due to it which he considered bad. The said Ross
Frederick Joseph Bragg caused a list of debtors to be prepared
by his employee, which said list comprised amounts unpaid
as a result of the factoring transactions into which Australian
Factors Limited had entered and in respect of which in his
opinion no further recovery action was possible. On the
instructions of the appellant the said Ross Frederick Joseph
Bragg during the year of income wrote the said amounts off as
bad debts by making the entries appropriate for that purpose in
the books of the appellant then in the custody of the said
Ross Frederick Joseph Bragg. Schedule 2/6 to the appellant's
return of income for the year ended 30th June, 1967, sets
out the amounts so written off and includes also one other
amount, that due from Traders Prudent Insurance Company
Limited, similarly written off, which did not arise out of a
factoring transaction.
Certain of the debts shown in the said Schedule 2/6 as bad
debts were the balances of the debts previously due to the
appellant after it had accepted a lesser sum in settlement of
its claim for such a debt. The appellant concedes that by such
settlement its right to recover the balance claimed by it was
extinguished. The total of such balances written off as bad
debts during the said year of income and listed as such in
the said Schedule 2/6 is $4,126.33 and the final item on such
schedule is comprised in this category." (at p186)

16. I am now in a position to consider how what happened as aforesaid affects the appellant's claim that the factored debts were effectively written off as bad debts in the year 1967. (at p186)

17. When the so-called debts were written off as aforesaid, the appellant had no right to receive any moneys in respect thereof. Some of the debts had been extinguished and in cases where the debts had not been extinguished the person entitled to receive any moneys which had become owing to the appellant by virtue of equitable assignments to it was not the appellant ; it was the receiver and manager under the scheme of arrangement ; moreover any moneys which he received in respect thereof were to be paid not to the appellant but to its fromer debenture holders. In no sense was the appellant a creditor of the customers of its former clients when the so-called debts were written off. In so far as the debts had not been extinguished, they remained owing, but they were owing in law to the clients with whom they had been contracted by the customers, and those clients held the debts owing to them in trust, not for the appellant, but for the receiver and manager under the scheme of arrangement. (at p186)

18. Now it is necessary to consider again the meaning of the word "debts" in s. 63. In my opinion a taxpayer cannot write off as a bad debt an amount which is no longer a debt. "Debts", in my opinion, mean moneys which the taxpayer is presently entitled to receive, except in cases for which s. 63 (2) may make special provision. It was at one time argued for the appellant that the word "debts" in s. 63 (1) means moneys which the taxpayer is entitled to receive. This submission I have accepted to the extent already stated. Later, however, to accommodate s. 63 (1) to the facts which I have stated, it was submitted more broadly that a sum of money could be written off as a bad debt if the taxpayer had been entitled to receive it at the time when it was brought to account as assessable income regardless of the fact that nothing was payable to the taxpayer in respect thereof at the time it purported to write the amount off as a bad debt. This submission I feel obliged to reject. (at p186)

19. It seems to me that, without reference to sub-ss. (2) and (3) of s. 63, sub-s. (1) is clearly enough referring to what may conveniently enough be called existing debts. The sub-section speaks in the present when it refers to "debts which are bad debts and are written off". The word "are" is used in s. 63 (1) (b) in the same way as it is used in the opening words of s. 63 (1). What has ceased to be a debt does not fall within the description of "debts which are bad debts". Counsel for the appellant, however, in the course of a thought-provoking argument, challenged the correctness of this simplicity and pointed out that sub-s. (2) of s. 63 provides that certain debts shall be deemed to be bad debts when they have ceased to exist as debts of the taxpayer, e.g. if a debtor of the taxpayer has become bankrupt and been discharged so that the former debt no longer exists. Counsel also drew attention to the limited character of s. 63 (2) and suggested that the reason why there is not to be found therein any reference to compositions or liquidations is because such provision was not necessary because of the broad construction to be given to s. 63 (1). I may say that, after having listened and considered the argument, I find s. 63 (2) a puzzling provision that may be in need of some clarification, but I have finally come to the conclusion that it does not provide any sound basis for extending s. 63 (1) beyond what its words, without unwarranted extension or implication, plainly mean. I may say that I was ready enough to be convinced that Owen J. in Point v. Federal Commissioner of Taxation [1970] HCA 7; (1970) 119 CLR 453 and myself in Kratzmann v. Federal Commissioner of Taxation (1970) 44 ALJR 293 and Franklin's Selfserve Pty. Ltd. v. Federal Commissioner of Taxation [1970] HCA 33; (1970) 125 CLR 52 had taken the words of s. 63 (1) too literally, but reconsideration has eventually confirmed me in the view that the subsection cannot be extended to cover the writing off as a bad debt of something that is no longer payable to the taxpayer in law or in equity. (at p187)

20. I have therefore come to the conclusion, both as to the factored debts which were extinguished and those in which the appellant gave up any beneficial interest which it had to the receiver and manager under the scheme of arrangement, that s. 63 does not apply because at the time the writing off occurred there did not exist, in any sense, debts owing to the appellant. To write off as bad debts amounts which are owing but which cannot be recovered is a sensible commercial exercise and one to which taxation significance is naturally enough given, but to write off a non-existent ddebt as a bad debt is hardly sensible commercially and, in my opinion, to do so has no significance for the purposes of s. 63, except to the extent to which s. 63 (2) may, by express and particular enactment, give it some such significance. (at p187)

21. The conclusion which I have now expressed about the factored debts makes it unnecessary for me to determine whether or not they were brought to account as assessable income in the year 1962. Accordingly, I leave this question open. Nor is it necessary for me to reach a conclusion upon the submission made by counsel for the Commissioner that, even if the debts were so brought to account, the account as a whole was in error and should be disregarded because the acquisition by the appellant of any interest in the debts owing to its clients by their customers was on capital account. (at p188)

22. There remains for consideration the debt which had been owing to the appellant by Traders Prudent Insurance Co. Ltd. In my opinion this amount could not be written off because earlier it had been settled by a payment in full satisfaction and the right to recover any balance was extinguished. (at p188)

23. Accordingly, I would answer the question "No". (at p188)

WALSH J. I agree with the conclusions of Menzies J. that upon the facts set out in the case stated the appellant became the owner in equity of the factored debts which are therein described and that a debt to which a taxpayer is entitled only in equity and not at law is a debt to which s. 63 (1) of the Income Tax Assessment Act (the Act) can apply. I agree with his Honour's reasons for those conclusions. (at p188)

2. The sums in dispute between the parties are set out in schedule 2/6 to the appellant's return of income for the year which ended on 30th June 1967. The appellant claims that these were, by virtue of s. 63 of the Act allowable deductions. In considering whether or not the requirements of that section were satisfied, I shall assume that the sums in dispute have been brought to account by the appellant as assessable income of earlier years. The way in which the appellant recorded the factoring transactions, as a result of which it became in equity entitled to the benefit of the factored debts, leaves room for debate as to whether that requirement of s. 63 was satisfied. For the respondent it has been contended that it was not and, also, that the sums in dispute could not properly be brought to account as assessable income. I am disposed to resolve those questions in favour of the appellant but, for reasons which will appear, I need not express a concluded view upon them. (at p188)

3. I proceed to refer to a submission on behalf of the respondent which, in my opinion, should be accepted. It was put forward as a sufficient reason for rejecting the appellant's claim for deductions in relation to all the sums in dispute. But I shall consider it in the first instance in relation to those sums which represent the factored debts, other than those which were the balances of debts previously due to the appellant, remaining after it had accepted lesser sums in settlement of its claims, whereby its right to recover the balances was extinguished. The submission was to the following effect. At the time when the writing off of the debts took place the appellant had no relevant interest in them. It had never had any legal interest. All that it ever had was an equitable interest. In consequence of the scheme of arrangement it lost any beneficial interest which it had had. It was not merely that the control and possession of the property of the appellant, including the debts, were vested in the scheme receiver and manager or in the scheme administrator. But, as the case stated asserts, as from 21st June 1966 the appellant "was not entitled to receive or to retain amounts paid in respect of such debts". In a separate but related submission, it was argued for the respondent that as a result of the scheme of arrangement, for the approval of which the appellant presented petitions to the courts, the appellant gave up all its beneficial interests in the debts as well as in any other property in return for being released from its own debts and liabilities. This latter submission is relevant when considering the argument that s. 63 could not apply because at the relevant time the appellant had no interest, in so far as it draws attention to the facts that there was consideration for a surrender of the appellant's rights and that these were lost by its surrender of them and not by a statutory divesting of them taking place independently of any act of the appellant. But whether or not it would be proper to regard what took place as amounting to an assignment for consideration by the appellant of its interest in the debts, with the result that thereafter they could not be said either to be debts of the appellant or to be from its point of view "bad", I am of opinion that the respondent is entitled to succeed, upon the submission already outlined, if the following two conclusions are reached, (1) that as a matter of construction s. 63 (1) cannot operate to allow a deduction to a taxpayer of a sum of money representing a debt to which he was formerly beneficially entitled if his interest in it has passed by his act from him to another before the debt is written off and (2) that in the present case the interest of the appellant did pass from it by its own act in consequence of the scheme of arrangement. (at p189)

4. I deal first with the second of those propositions. The case stated contains the express statement that the appellant was not entitled to receive or to retain amounts paid in respect of the debts. In face of that statement it would be difficult to maintain, in my opinion, that the appellant retained any interest in the debts. But the effect of the provisions of the scheme of arrangement must be considered. It was argued for the appellant that, for purposes here relevant, it should not be held that the debts were no longer the debts of the appellant. It was submitted that the company still owned all the assets which it had owned before the scheme came into operation, although it had become bound to deal with them for the benefit of its creditors in the manner set out in the scheme. In reality, so the argument ran, the scheme receiver and manager and the scheme administrator exercised the powers given to them by the scheme as agents of the appellant. The situation was similar to the ordinary case of a receiver appointed by a mortgagee who exercises powers over the assets of a company. But having considered the terms of the scheme, I cannot agree with those submissions. Subject to one matter, shortly to be mentioned, it seems to me that the appellant lost its interest in the debts which formerly belonged to it. It is, of course, true that the parties intended that tax deductions would be obtained by the appellant in respect of bad debts subsequently written off. As was put in argument that was in a large measure the object of the exercise. But the operation of s. 63 (1) must be determined in accordance with what the parties did and not in accordance with their intentions or expectations. (at p190)

5. To the argument that the appellant lost its interest in the debts, an answer was given that in certain events it would receive, with respect to the debts, some benefits for itself. Reference was made to cl. 21A of the scheme which provided in effect that if a debt should be written off as bad and allowed as a deduction and afterwards "the company recovers all or any part of that debt", then the receiver and manager or the administrator, as the circumstances might require, should pay to the company or permit the company to retain one-sixth of the amount so recovered. But in my opinion this does not assist a conclusion that at the time of the writing off of the debts the appellant had an interest in them. This special provision operates only at a point of time subsequent to that at which a debt is written off. Even then, it does not entitle the appellant to receive whatever is paid by the debtor on account of the debt. It is a promise by the scheme receiver and manager or the scheme administrator to pay or to allow the retention of a portion of a sum so paid. Thus the provision appears to assume that the appellant would not be, by virtue of any interest in the debt still retained by it, entitled to receive any such payment. (at p190)

6. I return to the first of the two propositions which I set out above. I think there is force in the arguments for the appellant that the purpose of s. 63 was to provide relief to a taxpayer whenever he has paid tax upon a sum of money which he expected to receive but in the end does not receive and that to effect that purpose, a liberal construction should be placed upon the section. It was submitted that it should be held to operate in all cases in which a taxpayer has been entitled to receive a debt at the time when it was brought to account as assessable income and in which he is afterwards unable for any cause (except, perhaps, an act of his own which is simply an act of generosity without any valid business reason) to recover payment in full. But I have come to the conclusion that the language of s. 63 (1) does not permit a construction by which a deduction may be allowed in respect of a debt in which the taxpayer had previously had an interest with which he has parted before the debt is written off. In my opinion, debts of that character could not be described as being, so far as such a taxpayer is concerned, debts "which are bad debts and are written off as such". The result of that conclusion is that in relation to the debts now being considered, the appellant cannot succeed. In my opinion, it is not correct to say that those debts remained the debts of the appellant or to say that they were merely being dealt with on its behalf by persons who were for that purpose to be regarded as its agents. In my opinion the situation resulting from the scheme of arrangement was essentially different from that which is created by the appointment by a mortgagee of a receiver of the mortgaged property. I think it was different also from the situation which is created in relation to the assets of a company when it goes into liquidation and I do not find it necessary to consider the question discussed by Menzies J. in Franklin's Self-serve Pty. Ltd. v. Federal Commissioner of Taxation [1970] HCA 33; (1970) 125 CLR 52 , and in the cases which his Honour there cited, namely, the question whether such assets cease to be beneficially the property of the company. (at p191)

7. There was one debt to which the appellant was entitled at law. That was a debt in respect of a refund of the premium paid upon a cancelled policy. A settlement of the claim was effected by which part of the amount claimed was accepted. The balance which was written off is included in the class of bad debts in respect of which it is conceded that the right to recover the balance was extinguished. It is proper therefore to consider that item along with the other items which are included in that class. (at p191)

8. It was submitted for the respondent that if his argument prevailed that as a result of the scheme of arrangement the appellant ceased to have any relevant interest in the debts and that the consequence was that it had no debts which it could write off, then that would decide the whole case and it would not be necessary to deal separately with the class of debts consisting of the balances as to which the appellant's rights to recovery had been extinguished by reason of settlements of its claims. I would accept that if it appeared clearly from the stated case that in relation to all the debts of that class the settlements of the claims had occurred after the scheme of arrangement came into operation. But although it does appear from the schedule 2/6, which forms part of the stated case, that many of the settlements were made in the year of income which ended on 30th June 1967 and although it is probable that all of them were made after the scheme of arrangement began to operate, it is not made certain by the stated case that that was so. If any of them had already been made when the scheme of arrangement took effect it would be difficult to regard the appellant as having divested itself of an interest which then passed to other persons. In any such case, I do not think that it would be correct to say that the balance of the debt could not be written off as a bad debt for the reason that the appellant had parted with its interest in the debt. It appears to me, therefore, that if any of the sums in dispute was the balance of a debt the right to recover which had already been extinguished before the commencement of the scheme of arrangement, it would be necessary to decide in relation to any such sum whether or not the view stated by Owen J. in Point v. Federal Commissioner of Taxation [1970] HCA 7; (1970) 119 CLR 453, at p 456 , should be accepted. Upon this question I have been impressed by the argument that the provision has an odd operation if a taxpayer may get relief under it if he writes off a debt or a part of it just before he settles a dispute about its amount, but can get no relief if he writes a balance off just after he has made a settlement. But after consideration of the matter I do not dissent from the conclusion which other members of the Court have reached that in s. 63 (1) the word "debts" refers to what may be called existing debts and cannot therefore apply to a sum the right to recover which has been extinguished. (at p192)

9. The conclusion just mentioned applies to the balance of the debt which arose from a claim for a refund of the premium paid on a cancelled insurance policy, as well as to the other debts consisting of the balances remaining after the settlement of claims. (at p192)

10. I am of opinion that Question (i) (a) and Question (i) (b) should be answered "No". (at p192)

GIBBS J. I have had the advantage of reading the judgment prepared by my brother Menzies and may state briefly my reasons for agreeing that the appellant taxpayer is not entitled to a deduction under s. 63 of the Income Tax Assessment Act 1936-1967 (Cth) in respect of any of the amounts which it purported to write off as bad debts during the year of income ended 30th June 1967. (at p193)

2. During that year of income the appellant purported to write off, as bad debts, a sum of $46,331.53, which represented the total amount of debts which had been owing to the appellant in respect of factoring transactions and also included an amount of $1,763.08, which had been due as a refund of premiums paid on policies of insurance that had been cancelled. None of these alleged debts had been paid and all were regarded as irrecoverable. I agree with my brother Menzies that, for the reasons he has given, the appellant became the owner in equity of the factored debts owing to its clients by their customers and that a debt due only in equity is a debt to which s. 63 may apply. I am inclined to think, and shall assume, although I need not decide, that the factored debts had been brought to account by the appellant as assessable income of the years ended 30th June 1962, 1963 and 1964 and that the debt of $1,763.08 was brought to account by the appellant as assessable income of the year ended 30th June 1964. The question that then falls for decision is whether the amounts in respect of which the deductions are claimed were, when the appellant purported to write them off, "debts which are bad debts" within s. 63. (at p193)

3. The total sum of $46,331.53 included the balances, amounting in all to $4,126.33, of debts previously due to the appellant after it had accepted a lesser sum in settlement of its claim for such debts, in circumstances in which its right to recover the balances claimed by it was extinguished. I may for a moment put aside the balances of former debts which had been extinguished by settlements made before the scheme of arrangement took effect on 20th or 21st June 1966, and consider the debts that remained owing to the appellant until that date. The effect of the scheme of arrangement was as follows. The scheme receiver and manager was authorized (by cl. 2 (a)) to take possession of the property of the appellant which constituted the mortgaged property within the meaning of the debenture trust deed executed by the appellant on 20th December 1961. This property included the factored debts owing to the appellant by persons residing in New South Wales and it was conceded that as from 21st June 1966 the appellant was not entitled to receive or to retain amounts paid in respect of such debts and that the control and possession of the property constituted by such debts was vested in the scheme receiver and manager. The property received by the scheme receiver and manager was to be applied in payment of certain claims which were afforded priority and then in payment to the secured stockholders of principal and interest owing in respect of issued stock under the debenture trust deed ; any surplus then remaining was to be paid to the scheme administrator(cl.3). The scheme administrator was given power to take possession of all property of the appellant which was not subject to the deed and to apply it, after payment of priority claims, in payment of unsecured creditors (cl. 12). All debts owing by and claims against the appellant were extinguished and discharged (cll. 17-18). It is apparent that at the time when the scheme took effect the appellant ceased to have any beneficial interest in any of the debts which had been owing to it immediately before that time. Counsel for the appellant placed some reliance on two provisions of the scheme, cl. 2 (d) which empowers the scheme receiver and manager "to bring and prosecute in the name and on behalf of the company" (the appellant) "an action to recover debts of the company forming part of the mortgaged property" and cl. 21A which provides in effect that if, after a debt has been written off by the appellant and allowed as a deduction, the appellant recovers all or part of that debt, the scheme receiver and manager, or the scheme administrator, as the case may be, shall pay to the appellant or permit the appellant to retain one-sixth part of the amount so recovered. Neither of these provisions affects the conclusion that when the scheme took effect the appellant had no longer any beneficial interest in the debts formerly owed to it. The words "debts of the company" in cl. 2 (d), like the words "the property of the company" in cll. 2 and 11, refer to debts which apart from the scheme would be beneficially owned by the appellant rather than to debts which the appellant continues to own beneficially. The provisions of cl. 21A give the appellant a right to a proportion of the amount recovered in respect of certain debts in the circumstances mentioned, but if a debt were recovered before the appellant had written it off, or after the appellant had written it off without it having been allowed as a tax deduction, the appellant would not be entitled to any payment in respect of it. Accordingly, although the appellant was given a contractual right of the kind described in cl. 21A, it could not be said to have retained its beneficial interest in the debts formerly owing to it. (at p194)

4. In my opinion the words "debts which are bad debts" in s. 63 must refer to debts owed to the taxpayer. A sum of money comes within the ordinary meaning of those words if it is owed to the taxpayer by some other person but is reasonably regarded as irrecoverable. The factored debts to which the appellant remained equitably entitled at the time immediately before the scheme took effect could not after that time be described as debts owed to the appellant. In law they had always been owed to the clients of the appellant, and the appellant had never been the legal owner of the debts. After the scheme took effect the appellant neither owned the debts in law nor was beneficially entitled to them. In these circumstances it was not entitled to treat them as "debts which are bad debts" within s. 63. I should add however that it does not seem to me important whether or not the appellant was the legal owner of the debts ; the crucial matter is that it has voluntarily and for value parted with all beneficial interest in them, and therefore can no longer claim to regard them as debts which it is owed. It is unnecessary to express any opinion as to whether there might be circumstances in which a creditor who had parted with the beneficial interest in a debt might still treat it as a bad debt within s. 63, but in my judgment a creditor who has voluntarily assigned for value his entire beneficial interest in a debt cannot thereafter claim that he is owed a debt which he can write off as bad so as to entitle himself to an allowable deduction within the section. Similarly the appellant in the present case cannot write off former debts to which it had lost its entitlement by reason of a scheme of arrangement into which it had entered voluntarily and for valuable consideration. (at p195)

5. I now must deal with the balances, which total $4,126.33, which remained after lesser sums had been accepted in full settlement of claims to certain debts. Particulars of all the amounts alleged to constitute the bad debts are shown in schedule 2/6 which formed part of the appellant's return of income for the year ended 30th June 1967. From this schedule it appears that a number of the settlements, under which a sum was accepted in full satisfaction of a claim in respect of a factored debt, were effected during the year ended 30th June 1967 and the balances left unpaid as a result of settlements shown to have been effected during that period total $1,151.92. The schedule does not disclose the date of the settlements of other claims in respect of factored debts as a result of which further balances totalling $1,211.33 remained unpaid. The final component of the total of $4,126.33 is the sum of $1,763.08, the balance of the claim to a refund of premiums on the cancelled policies and the date of the settlement which had the effect of extinguishing the appellant's right to receive that balance also does not appear. If the settlement of a claim to a factored debt was made after the date on which the scheme of arrangement had taken effect, the appellant had, before the settlement was made, and as a result of the scheme of arrangement, ceased to have any interest in that debt, and it follows from what I have already said that as from the date on which the scheme took effect the debts then existing could not be treated by the appellant as "debts which are bad debts". The appellant has failed to prove that any of the settlements took place before the scheme took effect, and that is enough, on the reasoning which I have already accepted, to dispose of its claim to a deduction under s. 63, not only in respect of the factored debts, but also in respect of the amount of $1,763.08, although the appellant had been the legal owner of the debt represented by the last-mentioned amount. The appellant bears the onus of proof that the assessment is excessive, and since it has not shown that any of the former debts in question was released before the scheme took effect, it has failed to establish that the scheme did not extinguish its beneficial interest in all the debts. (at p196)

6. It was submitted on behalf of the Commissioner, in relation to any debts which were released before the date of the scheme, that once the appellant settled a claim to a debt on terms which disentitled it to receive any further amount, the balance of the debt was extinguished and it was then impossible to describe the balance of the former debt as a bad debt. The decisions in Point v. Federal Commissioner of Taxation (1970) 119 CLR, at p 456 and Franklin's Selfserve Pty. Ltd. v. Federal Commissioner of Taxation [1970] HCA 33; (1970) 125 CLR 52, at p 68 , support this submission, and accord with what I have said about the effect of s. 63. However to construe s. 63 in this way would lead to an unsatisfactory result in a case in which a taxpayer has paid tax on the amount of a debt brought to account in a previous year but has been forced to agree to a compromise whereunder he receives part only of the debt and forgoes the balance. In such a case, if the irrecoverable balance of the debt were written off immediately before the compromise was made the amount would be deductible, whereas once the compromise had taken effect the debt would be extinguished and could no longer be written off. It was submitted by the appellant that since the apparent purpose of s. 63 is to give relief to a taxpayer who has paid tax in respect of a debt which in the events which have happened has proved to be irrecoverable, the section should be given a liberal construction so that its beneficial purpose will not be frustrated. It may be that the words of s. 63 compel the result at which my brethren arrived in Point v. Federal Commissioner of Taxation [1970] HCA 7; (1970) 119 CLR 453 and in Franklin's Selfserve Pty. Ltd. v. Federal Commissioner of Taxation [1970] HCA 33; (1970) 125 CLR 52 , but since for the reasons I have given I consider that the appellant cannot on any view successfully claim any of the amounts in question as a deduction under s. 63, I find it preferable not to decide in the present case whether a taxpayer may write off the balance of a debt remaining after he has compromised a claim for its recovery. (at p197)

7. I would answer the questions referred by the special case in the negative. (at p197)

ORDER

Question asked in the stated case answered "No".