Paul Anderson | December 2012 | Corporate & Commercial
The recent Federal Court decision of Commissioner of Taxation v Park concerned a contest between a mortgagee and the Commissioner following service by the Commissioner of a section 260-5 notice upon the purchaser of the property subject to the mortgage.
Who does this impact? Mortgagees and trustees in bankruptcy.
What action should be taken? Mortgagees should be aware of the decision and its likely impact upon their security.
Facts
TurkAlert
Mortgagees & Section 260-5 Notices: Erosion of Rights?
Bassili was the registered proprietor of a property at Fig Tree Pocket mortgaged to NAB. On 7 May 2007, Bassili granted a second mortgage over the property for $430,000 to Instyle Developments Pty Ltd (‘Instyle’). On 21 August 2009, the Commissioner of Taxation instituted proceedings in the District Court against Bassili for approximately $69,000 for unpaid tax but interest and penalties increased this amount to $75,508.64. On 16 January 2010, Bassili executed a contract for the sale of the property for $1,675,000. On 9 February 2010, the Commissioner served a notice under section 260-5 of the Taxation Administration Act 1953 upon the purchasers’ solicitors and on 11 February 2010 served a similar notice upon the purchasers themselves. The notices required the purchasers to pay the sum of $75,508.64 to the Commissioner instead of Bassili. The sale settled on 23 February 2010. On any view there were insufficient funds to pay out the Instyle mortgage in full. Instead, the sum of $324,146.12 (being the balance of funds after payment of the NAB mortgage and expenses) was initially paid into the trust account of Instyle’s solicitors. On 23 April 2010, Bassili was declared bankrupt. On 2 June 2010, the sum of $75,508.64 (being the amount claimed by the Commissioner) was paid by agreement into court and the balance of funds in the
1
Mortgagees & Section 260-5 Notices: Erosion of Rights?
solicitor’s trust account was paid to Instyle. Instyle then assigned all of its right title and interest to the monies in court to Bassili’s trustee in bankruptcy so that the proceedings became a dispute only between the Commissioner and the trustee in bankruptcy.
Legislation Section 260-5 permits the Commissioner to serve a notice upon a third party if a third party ‘owes or may later owe money to the debtor’ who in turn owes money to the Commissioner. In such event, the third party is liable to pay the amount of the notice to the Commissioner rather than the debtor.
Lower Court Decision The Federal Magistrate held for the trustee (who was effectively standing in the shoes of Instyle) relying largely upon Tricontinental Corporation Limited v Commissioner of Taxation (1988). In that case, a section 260-5 notice had been served upon a debtor of a company after crystallisation of a floating charge over the debts due to the company. It was held that after crystallisation, the debts were owing to the chargee, or to the receiver where one had been appointed, rather that the taxpayer company with the result that a section 260-5 notice could not operate with respect to those debts.
Arguments on Appeal In addition to the reasoning adopting by the Federal Magistrate, the trustee also raised the following arguments: 1. That a finding for the Commissioner would turn Instyle into an unsecured creditor and such an outcome should be rejected for policy reasons. Such an outcome would be ‘contrary to sound commercial expectations’; and 2. That taking away the existing rights of a secured creditor was an acquisition of property otherwise than on just terms, and as such beyond power for constitutional reasons.
Judgment In a split two to one decision, the full Federal Court found for the Commissioner. The Court rejected the Federal Magistrate’s reasoning. A floating charge relates to sums owing as such and when the charge crystallises it does so with respect to the debtor’s rights of action in respect of those sums. By contrast, a mortgage over land relates not to monies owed by third parties but to the land itself. Monies owed by a third party including a person who has contracted to purchase the land are not the subject of the security. The Court also rejected the trustee’s next argument which was based on timing. It was said that the amount referred to in the notices did not become ‘owing’ to Bassili until settlement of the contract with the purchasers. The vendor has an obligation to deliver title to the purchasers which was only discharged when a cheque was received by Instyle in return for a discharge of its mortgage. Once payment was received by Instyle, Bassili was no longer a party to whom an amount was owed by the purchaser.
TurkAlert
Paul Anderson | December 2012
The Court’s response was that no money was ever owing by the purchasers to Instyle. The money was only ever owed to Bassili. In relation to the policy arguments, the court held that such policy considerations could not stand in the face of the express wording of the statute. The Court implied that Instyle was to blame for its situation and had compromised its position by releasing its mortgage and allowing money to be paid into Court. If it had retained its mortgage, it would have also retained its rights of foreclosure.
Conclusion Although it is hard to fault the strict legal reasoning of the decision, one is still left with a sense of disquiet. The rights as secured creditor of a mortgagee have been eroded and it is hard to see what action the mortgagee could take in the circumstances to protect itself. If the mortgagee had refused to discharge the mortgage without
2
Mortgagees & Section 260-5 Notices: Erosion of Rights?
full payment, then almost certainly at some point a court would have ordered the money in dispute to be paid into court and allowed the settlement of the purchase to proceed. Can any distinction be drawn between a Section 260-5 Notice and a Garnishee Notice Issued by a creditor following the obtaining of judgment? In the case of a Garnishee Notice, an unsecured creditor would then clearly succeed at the expense of a secured creditor. Such a result is contrary to the general understanding of the protection given by a mortgage. It should be added that no complaint can be made in respect of any surplus part of the purchase price being payable to the vendor after discharge of any mortgage on title. It is only that part of the purchase price required to pay out the mortgage that is in issue.
TurkAlert
Paul Anderson | December 2012
It will be interesting to see if an appeal is lodged from the decision. Because of the importance of the case, the Commissioner agreed to pay the costs of the proceedings. Given the relatively small amount of money involved, an appeal may be unlikely unless the Commissioner agrees to pay the costs of an appeal to the High Court. If no appeal is lodged, confirmation of the correctness of the decision will have to await the hearing of another case involving similar facts.
For more information, please contact: Paul Anderson Special Counsel T: 02 8257 5742 M: 0418 491 395 paul.anderson@turkslegal.com.au
www.turkslegal.com.au Syd | Lvl 44, 2 Park St, NSW 2000 T: 02 8257 5700 | F: 02 9264 5600 Melb | Lvl 10 North Tower, 459 Collins St, VIC 3000 T: 03 8600 5000 | F: 03 8600 5099