FC of T v BRUTON HOLDINGS PTY LTD (IN LIQ) & ANOR

Judges:
Ryan J
Mansfield J
Dowsett J

Court:
Full Federal Court, Brisbane

MEDIA NEUTRAL CITATION: [2008] FCAFC 184

Judgment date: 1 December 2008

Ryan, Mansfield and Dowsett JJ

Background

1. The first respondent ("Bruton") was incorporated on 27 May 1997. On 8 July 1997 Mr Michael Aitken settled an amount of money on Bruton as trustee of the Bruton Educational Trust (the "Trust"), the terms of which were set out in a deed dated 8 July 1997. Both Mr Aitken and Bruton were parties to the deed. The deed recited that the settlor wished to establish a trust "for the purpose of enabling and facilitating the promotion, advancement and encouragement of purposes which are charitable as that term is understood at law at or on behalf of any public benevolent organization or institution in Australia in general and for such other public charitable purposes in Australia as shall hereinafter appear." Clauses 2 and 3 suggested that a primary purpose was the provision of educational scholarships. Clause 3 provided that the income and capital of the fund were to be applied having regard to the views of a management committee appointed by the trustee. The trustee had wide powers of investment and associated powers. Clause 10.2 provided:

"The office of a Trustee is immediately terminated and vacated if:

(a) where the Trustee is an individual, he dies or is either found to be a lunatic or of unsound mind or becomes subject to any bankruptcy law; or

(b) where the Trustee is a corporation it enters into administration, receivership or liquidation (whether compulsorily or voluntarily, not being merely a voluntary liquidation for the purposes of amalgamation or reconstruction)."

2. Clause 10.3 provided:

"In relation to any change in Trustee:

(a) acts and deeds done or executed for the proper vesting of the Trust Fund in a replacement Trustee or in the continuing Trustee jointly with any additional Trustee are to be done and executed by the continuing or retiring Trustee at the expense of the Trust Fund except that an outgoing Trustee who is or may be liable as a Trustee for taxes will not be bound to transfer the Trust Fund unless the ongoing or new Trustee indemnifies from the Trust Fund the outgoing Trustee against any present or future liability incurred by the outgoing Trustee as a direct or indirect consequence of its acting as trustee of the Trust; and

(b) a memorandum must be endorsed or annexed to this deed stating the name of the Trustee for the time being and must be signed by the Trustee so named and:

(i) any person dealing with the Trust will be entitled to rely on the memorandum as sufficient evidence that the named Trustee is the duly constituted Trustee for the time being; and

(ii) any or all Trustees (as the case may be) so named are taken to have consented to act as Trustee of the Trust subject to the terms of this deed."

3. Clause 13 provided:

"The Trustee shall be entitled to be reimbursed out of the Trust Fund for all liabilities costs and expenses properly incurred by them in the administration of the Trust Fund or otherwise under the provisions of this Deed and shall have a lien on the Trust Fund therefore (sic) but shall not be entitled to charge any remuneration."

4. Mr Neil Scott was the sole director of Bruton. As the result of an arrangement made with one of Mr Scott's colleagues, Bruton, as trustee, derived substantial income from three business ventures in which it took no active part. In 1998 and 1999 some of that income was applied in providing scholarships tenable at the University of Sydney.

5. Charitable trusts have long enjoyed favourable tax treatment. From 1 July 2000 a charity could only qualify for such favourable treatment if it had been endorsed by the appellant (the "Commissioner") as an income tax exempt charity. Prior to that legislation Bruton had asked the Commissioner to confirm its charitable position for tax purposes but had been told that this was not possible. In 2004, during a tax audit, Mr Scott became aware of the need for endorsement and lodged an appropriate application. The application was unsuccessful. Bruton appealed to this Court against that decision (the "Endorsement Appeal"). In November 2006, orders were made for the filing of evidence so that the matter might be heard in 2007. On 28 February 2007 the Bruton Board (ie Mr Scott) appointed Mr Richard Albarran and Mr Geoffrey McDonald to be administrators of Bruton pursuant to the Corporations Act 2001(Cth) (the "Corporations Act"). It is common ground that upon such appointment Bruton ceased to be trustee of the Trust. No other trustee has been appointed. On 30 April 2007 the creditors of Bruton resolved that the administration end and that it be wound up. It was placed in liquidation on that date, the two administrators being appointed joint liquidators.

6. In a report to creditors dated 19 March 2007, the administrators indicated that their appointment was as a result of Mr Scott's concern that the costs of conducting the Endorsement Appeal might absorb all of Bruton's funds. The debts owed to creditors at that time were said to be disbursements incurred by Mr Scott as a director, legal fees and accounting fees estimated at $10,000. The Commissioner was identified as a contingent creditor in respect of costs in the Endorsement Appeal and otherwise. The administrators identified themselves as priority creditors for fees and disbursements estimated at $257,000 in connection with the administration and pending liquidation.

7. On 26 March 2007 the Commissioner issued a Notice of Assessment for the year ended 30 June 2004. It was issued to "The Trustee for Bruton Educational Trust" and was in the amount of $7,715,873.73 (the "tax debt"). Although the liquidators have not yet called for proofs of debt, the Commissioner has lodged a proof as follows:

"This is to state that the company was on 28 February 2007, and still is, justly and truly indebted to the Deputy Commissioner of Taxation for Income Tax. Particulars of the debt are:

Consideration Amount $

Income Tax

Income tax for the year ended 30 June 2004 $7,715,873.73

Additional Tax for Late Payment Nil

Interest Payable Nil

General Interest Charged Nil

Grand Total $7,715,873.73"

8. The second respondent ("Piper Alderman") has also lodged a proof in the amount of $2579.80. Mr Scott has lodged a proof in the amount of $183.14. The liquidators have suggested that if they have adequate funds, they might seek to prosecute the Endorsement Appeal in order to reduce the tax debt. They have also suggested that they might seek to recover certain Trust moneys which were paid to the University of Sydney.

9. Prior to 28 February 2007 Bruton had retained Piper Alderman to act in connection with the Endorsement Appeal. It paid substantial amounts to that firm, commencing on 26 October 2005 (about eight months prior to the commencement of the Endorsement Appeal on 23 June 2006). The first amount of $20,000 was paid by cheque which was received on that day but deposited into a Piper Alderman account on 29 June 2006. On 28 February 2007 (the day of the appointment of the administrators) Bruton paid Piper Alderman (by telegraphic transfer) the sum of $450,000 on account of costs and disbursements. On 30 April 2007 (the date of the winding up resolution) $2,597.80 was deducted from the sum of $450,000 as payment to Piper Alderman of an account "re ATO audit.

10. Section 260-5 of Schedule 1 to the Taxation Administration Act 1953(Cth) (the "Administration Act") provides as follows:

"Amount recoverable under this Subdivision

(1) This Subdivision applies if any of the following amounts (the debt ) is payable to the Commonwealth by an entity (the debtor ) (whether or not the debt has become due and payable):

(a) an amount of a tax-related liability;

(b) a judgment debt for a tax-related liability;

(c) costs for such a judgment debt;

(d) an amount that a court has ordered the debtor to pay to the Commissioner following the debtor's conviction for an offence against a taxation law.

Commissioner may give notice to an entity

(2) The Commissioner may give a written notice to an entity (the third party ) under this section if the third party owes or may later owe money to the debtor.

Third party regarded as owing money in these circumstances

(3) The third party is taken to owe money (the available money ) to the debtor if the third party:

(a) is an entity by whom the money is due or accruing to the debtor; or

(b) holds the money for or on account of the debtor; or

(c) holds the money on account of some other entity for payment to the debtor; or

(d) has authority from some other entity to pay the money to the debtor.

The third party is so taken to owe the money to the debtor even if:

(e) the money is not due, or is not so held, or payable under the authority, unless a condition is fulfilled; and

(f) the condition has not been fulfilled.

How much is payable under the notice

(4) A notice under this section must:

(a) require the third party to pay to the Commissioner the lesser of, or a specified amount not exceeding the lesser of:

(i) the debt; or

(ii) the available money; or

(b) if there will be amounts of the available money from time to time - require the third party to pay to the Commissioner a specified amount, or a specified percentage, of each amount of the available money, until the debt is satisfied.

When amount must be paid

(5) The notice must require the third party to pay an amount under paragraph (4)(a), or each amount under paragraph (4)(b):

(a) immediately after; or

(b) at or within a specified time after;

the amount of the available money concerned becomes an amount owing to the debtor.

Debtor must be notified

(6) The Commissioner must send a copy of the notice to the debtor.

Setting-off amounts

(7) If an entity other than the third party has paid an amount to the Commissioner that satisfies all or part of the debt:

(a) the Commissioner must notify the third party of that fact; and

(b) any amount that the third party is required to pay under the notice is reduced by the amount so paid."

11. On 9 May 2007 the Commissioner served three notices on Piper Alderman, purportedly pursuant to s 260-5. Each was addressed to "Piper Alderman Lawyers". Each described the relevant "debtor" in a different way. The notices were in the following form:

"Notice

PIPER ALDERMAN LAWYERS, YOU are a third party who owes, or may later owe, money ('the available money') to [name - see below] ('the debtor'), of (or previously of) Unit 2/600 Darling Street, Rozelle NSW 2039, who, in terms of section 260-5 of Schedule 1 of the Taxation Administration Act 1953 has a debt payable to the Commonwealth of $7,715,873.73.

In exercise of powers conferred on me as Deputy Commissioner of Taxation by delegation from the Commissioner of Taxation under section 8 of the Taxation Administration Act, YOU, PIPER ALDERMAN LAWYERS, ARE REQUIRED TO PAY TO THE COMMISSIONER OF TAXATION the sum of $447,420.20. If you now owe the available money to the debtor, the payment to the Commissioner of Taxation is to be made IMMEDIATELY. If you do not owe the available money to the debtor but you will later owe it to the debtor, the payment to the Commissioner of Taxation is to be made immediately the money becomes owing to the debtor.

For the purpose of section 260-5 of Schedule 1 to the Taxation Administration Act, a third party is taken to owe money (the available money) to the debtor if the third party:

(a) is an entity by whom the money is due or accruing to the debtor; or

(b) holds the money for or on account of the debtor; or

(c) holds the money on account of some other entity for payment to the debtor; or

(d) has authority from some other entity to pay the money to the debtor.

The third party is so taken to owe the money to the debtor even if:

(e) the money is not due, or is not so held, or payable under the authority, unless a condition is fulfilled; and

(f) the condition has not been fulfilled.

If the debt (or any part of the debt) is paid by the debtor or another entity before a payment is made by you under this notice, I will notify you of that fact and any amount that you are required to pay under this notice will be reduced by the amount so paid.

WARNING

You are legally required to comply with this notice. Should you receive instructions from the debtor or any other party regarding payment which are in contravention of this notice, please notify this office immediately.

The Legislation imposes severe penalties upon those who do not comply with its requirements. A penalty of 20 penalty units is prescribed for a failure to comply with the notice. Under section 4AA of the Crimes Act 1914 the current value of a penalty unit is $110.

In addition to imposing a penalty on a person convicted of an offence in relation to failing to pay an amount under the notice, the court may order the person to pay to the Commissioner an amount not exceeding that amount."

12. Where we have inserted the words "[name - see below]" one notice referred to "Bruton Holdings Pty Limited (in liquidation)" as the debtor; one referred to "The Trustee for Bruton Educational Trust"; and the third referred to "Bruton Holdings Pty Ltd (in liquidation) as trustee for the Bruton Educational Trust". The primary Judge considered that the first-mentioned notice was "correct". It was the primary subject of his Honour's reasoning. We will refer to it as the "Notice" to distinguish it from the other two notices.

13. Piper Alderman claims a lien over the funds which it holds in respect of:

(a) costs and disbursements incurred in the Endorsement Appeal up to 28 February 2007;
(b) costs and disbursements incurred in the Endorsement Appeal after 28 February 2007 but prior to the "originating process" filed by Bruton on 30 May 2007, seeking declaratory and other relief, orders made in those proceedings being the subject of this appeal;
(c) costs of participating in those proceedings to assert its lien; and
(d) costs of continuing to prosecute the Endorsement Appeal on behalf of the liquidators should that occur, the Commissioner having applied to have that appeal dismissed.

14 The Commissioner and Piper Alderman have compromised any dispute between them as to the claimed lien. We need not consider it further. Apart from the tax debt, other creditors are owed relatively small amounts.

Bruton's originating process

15. In its "originating process", Bruton sought the following relief:

"1. A declaration that the notice dated 8 May 2007 issued by the First Defendant pursuant to section 260-5 of the Taxation Administration Act 1953 on the Second Defendant, in relation to Bruton Holdings Pty Ltd (In Liquidation) as Trustee for Bruton Educational Trust, is void and unenforceable.

2. A declaration that the notice dated 8 May 2007 issued by the First Defendant pursuant to section 260-5 of the Taxation Administration Act 1953 on the Second Defendant, in relation to The Trustee for Bruton Educational Trust, is void and unenforceable.

3. A declaration that the notice dated 8 May 2007 issued by the First Defendant pursuant to section 260-5 of the Taxation Administration Act 1953 on the Second Defendant, in relation to Bruton Holdings Pty Ltd (In Liquidation), is void and unenforceable.

4. An Order pursuant to section 500(3) of the Corporations Act 2001 (Cth) that the Second Defendant pay to the Plaintiff forthwith or within such time as the Court directs, all of the moneys held by the Second Defendant as follows:

(a) $447,402.20 held in Piper Alderman General Trust Funds Trust Account for Bruton Holdings Pty Limited (Administrators Appointed) on account of costs and disbursements; and

(b) $20,467.34 held in Piper Alderman - Bruton Holdings Pty Ltd Trust Account for Bruton Holdings Pty Limited (Administrators Appointed) on account of costs and disbursements.

5. Such further or other orders and declarations as the Court thinks fit.

6. Costs."

16. On 2 November 2007 the primary Judge made the following orders:

"THE COURT DECLARES THAT:

1. The notice dated 8 May 2007 issued by the Commissioner of Taxation pursuant to s 260-5 of the Taxation Administration Act 1953 to Piper Alderman, the second defendant, in relation to Bruton Holdings Pty Ltd (in liquidation) is void.

THE COURT ORDERS THAT:

2. The first defendant, Commissioner of Taxation, take no step to rely upon notices dated 8 May 2007 issued by him pursuant to s 260-5 of the Taxation Administration Act 1953 to the second defendant, Piper Alderman, in relation to Bruton Holdings Pty Ltd (in liquidation) as Trustee for Bruton Educational Trust and in relation to the Trustee for Bruton Educational Trust.

3. The first defendant pay the costs of the plaintiff and the second defendant to date.

4. The first defendant notify the Attorney-General for the State of New South Wales of proceeding NSD 1222/2006 by providing him with a copy of these reasons.

5. Stand the proceeding NSD 1222/2006 and this proceeding over to 2.15 pm on 23 November 2007 for the making of further orders and for directions."

17. The primary Judge's reasons for holding the Notice to be void focused on s 500 of the Corporations Act. That section provides:

"(1) Any attachment, sequestration, distress or execution put in force against the property of the company after the passing of the resolution for voluntary winding up is void.

(2) After the passing of the resolution for voluntary winding up no action or other civil proceeding is to be proceeded with or commenced against the company except by leave of the Court and subject to such terms as the Court imposes.

(3) The Court may require any contributory, trustee, receiver, banker, agent, officer or employee of the company to pay, deliver, convey, surrender or transfer forthwith or within such time as the Court directs to the liquidator any money, property or books in his, her or its hands to which the company is prima facie entitled."

18. His Honour considered that Bruton continued to be entitled to call for the funds held by Piper Alderman, notwithstanding the fact that it had ceased to be trustee, simply because, as between it and Piper Alderman, it was the party who had deposited them. His Honour considered that such entitlement was also established by s 255 of the Legal Profession Act 2004(NSW) (the "Legal Profession Act"). Further, Bruton had a "right of exoneration" out of Trust assets. The primary Judge presumably had in mind payment or re-imbursement of any moneys owed by Bruton to Piper Alderman in connection with the Endorsement Appeal, to the Commissioner by way of tax liability or liability for costs incurred in the Endorsement Appeal or to the other creditors. His Honour held that the claim to exoneration was "property" as defined in s 9 of the Corporations Act, and that the Notice was a form of attachment upon such property and therefore avoided by s 500. The primary Judge seems also to have considered that the s 260-5 notice was an attachment upon Bruton's legal right to receive the moneys as depositor thereof.

The appeal and notice of contention

19. The Commissioner appeals on the following grounds:

1. His Honour erred in holding that [Piper Alderman] was obliged to pay moneys to or at the direction of [Bruton] for its own benefit and not as trustee.
2. His Honour ought to have held that the obligation of [Piper Alderman] was to account to [Bruton] for the benefit only of the trust fund.
3. His Honour erred in holding that the only Notice that identified correctly the debtor to whom [Piper Alderman] owed or may later owe money was the one identifying "Bruton Holdings Pty Ltd (In Liquidation)".
4. His Honour ought to have held that the debtor to whom [Piper Alderman] owed or may later owe money was the trustee from time to time of the Bruton Educational Trust and that each of the Notices identified the party to whom [Piper Alderman] owed or may owe its obligation to account.
5. His Honour erred in holding that [Bruton's] claim to exoneration out of trust funds held for the benefit of the Bruton Educational Trust entitled it to possession of the funds the subject of the Notice pursuant to s 260-5 of the Taxation Administration Act 1953 such as to make those funds "property" of [Bruton] for the purpose of section 500 of the Corporations Act.
6. His Honour ought to have held that the Notices issued by the [Commissioner] pursuant to s 260-5 of the Taxation Administration Act 1953 applied only to the obligation of [Piper Alderman] to account for the moneys held in their trust account and did not extend to or effect an attachment of any right of [Bruton] to exoneration.
7. His Honour erred in holding that a Notice pursuant to s 260-5 of the TAA is an "attachment" for the purposes of s 500 of the Corporations Act.
8. His Honour ought to have held that a Notice pursuant to s 260-5 of the TAA is not an "attachment" for the purposes of s 500 of the Corporations Act.
9. His Honour erred in holding that the funds held in [Piper Alderman's] trust account were subject to a solicitor's lien in favour of [Piper Alderman] in respect of work done after 28 February 2007.
10. His Honour ought to have held that the costs associated with steps taken by [Piper Alderman] from the date that [Bruton] was placed into voluntary administration and in any event from 8 May 2007 were not protected by a solicitor's lien.

20. Bruton, by notice of contention, seeks to uphold the decision at first instance upon the alternative ground that:

"His Honour should have found that, as a matter of form, the Notices issued by the [Commissioner] to [Piper Alderman] pursuant to section 260-5 of the Taxation Administration Act were void and unenforceable."

Winding up an insolvent corporate trustee with tax debts

21. We begin by identifying a number of relevant propositions and statutory provisions.

Legal Profession Act - s 255

22. As we have said, the primary Judge placed substantial reliance upon s 255 of the Legal Profession Act. That section relevantly provides:

"(1) A law practice must:

(a) hold trust money deposited in a general trust account of the practice exclusively for the person on whose behalf it is received; and

(b) disburse the trust money only in accordance with a direction given by the person.

Maximum penalty: 50 penalty units.

(2) Subsection (1) applies subject to an order of a court of competent jurisdiction or as authorised by law."

23. No doubt the section regulates the relationship between solicitor and client. However we doubt whether it is of any real significance for present purposes. The extent of the mandate contained in s 255(1) must, after all, be greatly reduced by the operation of s 255(2).

Income Tax Assessment Act 1936 (Cth) (the "1936 Act")

Income Tax Assessment Act 1997 (Cth) (the "1997 Act")

24. By force of s 9-1 of the 1997 Act, trustees are taxed pursuant to ss 98, 99, 99A and 102 of the 1936 Act. For present purposes it may be accepted that, for the year ended 30 June 2004, Bruton was the effective taxpayer in connection with the Trust. As the primary Judge pointed out, s 254 of the 1936 Act imposed certain tax obligations upon Bruton as trustee. Section 254(1) relevantly provides:

"With respect to every agent and with respect also to every trustee, the following provisions shall apply:

(a) He shall be answerable as taxpayer for the doing of all such things as are required to be done by virtue of this Act in respect of the income, or any profits or gains of a capital nature, derived by him in his representative capacity, or derived by the principal by virtue of his agency, and for the payment of tax thereon.

(b) He shall in respect of that income, or those profits or gains, make the returns and be assessed thereon, but in his representative capacity only, and each return and assessment shall, except as otherwise provided by this Act, be separate and distinct from any other.

(c) …

(d) He is hereby authorized and required to retain from time to time out of any money which comes to him in his representative capacity so much as is sufficient to pay tax which is or will become due in respect of the income, profits or gains.

(e) He is hereby made personally liable for the tax payable in respect of the income, profits or gains to the extent of any amount that he has retained, or should have retained, under paragraph (d); but he shall not be otherwise personally liable for the tax.

(f) He is hereby indemnified for all payments which he makes in pursuance of this Act or of any requirement of the Commissioner.

(g) ..

(h) For the purpose of insuring the payment of tax a Commissioner shall have the same remedies against attachable property of any kind vested in or under the control or management or in the possession of any agent or trustee, as he would have against the property of any other taxpayer in respect of tax."

25. We infer from the above provisions that in the relevant year, Bruton:

• was personally liable to submit appropriate tax returns in respect of trust income, profits and gains;
• was liable to be assessed thereon in its representative capacity;
• was obliged to retain from any moneys coming to its hands as trustee, so much as would be required to pay tax which was, or would become, due in respect of Trust income, profits and gains;
• was personally liable for such payment up to the amount which it had retained or should have retained; and
• was entitled to indemnity out of the Trust assets for all payments made to the Commissioner in pursuance of the Act.

26. It seems that a trustee has an absolute liability to retain so much as will be sufficient to pay whatever amount of tax is, or becomes, due. However Taxation Ruling IT 254/4, dated 29 June 1989, suggests that the Commissioner takes a less draconian view in practice. The matter is of no present relevance.

The Administration Act

27. We have previously set out the terms of s 260-5 of the Administration Act. We will later say something about the way in which the predecessor of that section has been interpreted. Section 260-5 appears in Div 260 entitled "Special Rules About Collection and Recovery". Section 260-1 provides:

"This Division deals with the collection and recovery of an amount from a person who is not personally liable to pay that amount. Apart from Subdivision 260-A, which covers a wider range of amounts, this Division primarily deals with amounts of tax-related liabilities."

28. Subdivision 260-A contains s 260-5 and other sections relevant to notices given pursuant thereto. Section 260-15 provides that a payment by a third party to the Commissioner pursuant to a s 260-5 notice is to be taken to have been authorized by the relevant tax debtor and any other person who is entitled to all or part of the relevant amount. The section indemnifies the third party accordingly. Section 260-20 makes it an offence to fail to comply with a notice. A court may, in imposing a penalty, order that the relevant person pay the amount in question.

29. Subdivision 260-B may be of some present relevance. It deals with the recovery of tax debts from company liquidators. A person who becomes a liquidator of a company is obliged to notify the Commissioner within 14 days. The Commissioner must, as soon as is practicable thereafter, notify the liquidator of the amount which the Commissioner considers is sufficient to discharge any outstanding tax-related liability of the company. With certain exceptions, the liquidator must not, without the Commissioner's permission, part with any of the assets before receiving such notice. After receipt of the Commissioner's notice, the liquidator must, out of the available assets for payment of debts, set aside assets with a value calculated in accordance with a prescribed formula. In effect, the liquidator must retain the same proportion of the assets (by value) as the Commissioner's notified amount bears to the total of that amount and the amount of all other ordinary debts. Broadly speaking, the section contemplates the Commissioner participating in the winding up upon the same basis as other unsecured creditors.

30. The 1936 Act previously contained s 218 which was similar in effect to s 260-5. That section was considered by the High Court in
Clyne v Deputy Commissioner of Taxation 81 ATC 4429; (1981) 150 CLR 1. Mason J (Aickin and Wilson JJ concurring) considered (at 23) that the section:

"… 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 at 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 a taxpayer and indemnifies the debtor."

31. Gibbs CJ and Brennan J took slightly different views. In particular, Brennan J considered that the section created a statutory charge in favour of the Commissioner. It seems that counsel for the Commissioner had expressly conceded that there was no such charge. At 17-18, Mason J doubted the correctness of the concession. In any event, in
Commissioner of Taxation v Donnelly 89 ATC 5071; (1989) 25 FCR 432, this Court held that the service of a s 218 notice created a charge, rendering the Commissioner a secured creditor (per Lockhart J at 436 and Hill J at 457). The charge arises upon the notice being given. This raises a question as to its effect upon rights vested in third parties at that time. In
Norgard v Deputy Commissioner of Taxation 86 ATC 4947; (1986) 18 ATR 270, the Full Court of the Supreme Court of Western Australia considered that question in connection with s 38 of the Sales Tax Assessment Act (No 1) 1930 (Cth) which was in similar terms to s 218. The relevant taxpayer's debt was subject to a floating charge which crystallized after s 38 notices had been given. The case proceeded upon the basis that, as the charge had not crystallized at the time of the notices, the relevant debt was then due and payable to the taxpayer. Concerning the rights of third parties, Burt CJ said at 275-276:

"It may be that the debtor does not by paying the debt to the Commissioner pay his debt to the taxpayer and hence as is observed by Mason J in Clyne's case …

'Although this might otherwise expose the debtor to liability at the suit of the taxpayer the debtor is protected by s.38(4) which provides that the payment is deemed to be made with the authority of the taxpayer and indemnifies the debtor ….'

Sub-section (4), however, does not only deem the payment to have been made under the authority of the taxpayer. It also deems it to have been made 'under the authority of … all other persons concerned and (the debtor) hereby indemnified in respect of such payment'. I would have thought that a person holding an equitable charge over the debt, be it fixed or floating, would be a person concerned. In my opinion 'all other persons concerned' within the meaning of the sub-section would include a person who by reason of some arrangement made by him with the taxpayer has acquired some equitable interest short of a legal interest and whether fixed or floating in the debt. I am unable to see how a person could be 'concerned' in any other way.

Hence, although the paying of the debt the subject of an equitable charge given by the taxpayer to a third party by the debtor to the Commissioner may, although in passing I cannot see how, expose the debtor to liability at the suit of the equitable chargee, the payment is nevertheless deemed to have been made under the authority of the equitable chargee and the debtor is indemnified in respect of such payment. It is for this reason that so far as the obligation cast upon the debtor to pay the Commissioner is concerned [sic], I do not think that it matters whether the equitable charge created by the debenture was floating or fixed. In either case the debt, once the notice was properly given, is payable to the Commissioner.

It follows from that, that in the terms of the contentions to which I have referred as formulated in the statement of agreed facts, as the debtor is by the statute required to pay the debt to the Commissioner, the Commissioner is 'entitled to collect and to receive it'. But it does not I think follow from that that the Commissioner is entitled 'to retain proceeds of the book debts to the exclusion of' the bank. I think it should be held that the Commissioner receives the debt subject to all charges which are then, that is to say as at the time of the service of the s. 38 notice, attached to it.

So if at that time the bank's security was a floating security which had not crystallised there would be no security attaching to the debt. It would, as they say, be 'hovering' over it. If, on the other hand, the bank's security over the book debts was at all times fixed or if it was when created floating but as at the time when the s. 38 notice was served it had crystallised and so had become fixed, the Commissioner would take the debt subject to that security. That conclusion is I think implicit in the reasons of Mason J. in Clyne's case … and can, I think, in reason be sustained either in the way which I have chosen or by saying that to the extent of the security the debt although due is not payable to the taxpayer.

32. At 289, Wallace J accepted that had the floating charge crystallized prior to the notices, the Commissioner's interest would have been deferred to that of the charge holder. See also remarks by Kennedy J at 295-296.

33. In
Tricontinental Corporation Ltd v Commissioner of Taxation [1988] 1 QdR 474, the Full Court of the Supreme Court of Queensland considered a s 218 notice given prior to the crystallization of a floating charge, reaching the same conclusion as was reached in Norgard. At 481, Connolly J said:

"Whether in a case in which a charge, which, as in this case, is expressed to be a floating charge, has crystallised, that fact would be sufficient to defeat a notice under s.218 of the Income Tax Assessment Act is, I think, not free from difficulty. In form at least, the money is still due or accruing to the taxpayer. The debenture holder enforces his rights by appointing a receiver who would demand and recover the debt in the name of the taxpayer. If the analogy with forms of execution such as garnishment be appropriate, then it might well be right to say that s.218 can only operate on the taxpayer's beneficial interest in the moneys. A more direct approach is to say that once a floating charge has crystallised, moneys the subject of the charge are no longer in reality owing to the taxpayer but to the chargee."

34. His Honour considered that the two "approaches" were the alternative bases relied upon by Burt CJ in Norgard. They appear in the last paragraph from his Honour's reasons reproduced above. The first approach may mean that when the Commissioner gives a s 218 notice, he becomes entitled to payment of the debt but holds the proceeds subject to any charge attaching to the debt prior to the notice being given. The second approach would deprive the Commissioner of the right to receive payment at all. Connolly J considered that in Clyne at 16, Mason J had taken the second approach. In
Elric Pty Ltd v Taylor (1988) 19 ATR 1551, Thomas J referred to both approaches. His Honour appears to have decided the case on the basis that after crystallization of the charge the relevant debt ceased to be payable to the taxpayer.

Trusts and trustees

35. At first instance the case was conducted upon the basis that the duties, powers and rights of Bruton as trustee of a trust for a charitable purpose were effectively the same as those established by courts of equity in connection with trusts for identified beneficiaries. As much appears from Warburton J, Tudor on Charities (9th ed, Sweet & Maxwell, 2003) at paras 6-020 and 10-048. The case also appears to have proceeded upon the basis that with one possible exception, no relevant statutory provision and no term of the trust deed materially affected such duties, powers and rights. The exception is the Commissioner's submission that s 254 of the 1936 Act has some effect upon a trustee's right to indemnity for tax debts, a subject to which we now turn.

36. A trustee is generally entitled to indemnity out of the assets of the trust for debts incurred in the course of performing its duties as trustee. The primary Judge referred to this entitlement as the "right of exoneration". A trustee has a lien over trust assets securing such right of indemnity. The High Court considered the nature of a trustee's rights in
Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360. At 367, the majority (Stephen, Mason, Aickin and Wilson JJ) said:

"We do not understand the general principles concerning the bankruptcy of a trading trustee to be in dispute. It is common ground that a trustee who in discharge of his trust enters into business transactions is personally liable for any debts that are incurred in the course of those transactions … . However, he is entitled to be indemnified against those liabilities from the trust assets held by him and for the purpose of enforcing the indemnity the trustee possesses a charge or right of lien over those assets … . The charge is not capable of differential application to certain only of such assets. It applies to the whole range of trust assets in the trustee's possession except for those assets, if any, which under the terms of the trust deed the trustee is not authorized to use for the purposes of carrying on the business … .

In such a case there are then two classes of persons having a beneficial interest in the trust assets: first, the cestuis que trust, those for whose benefit the business was carried on; and secondly, the trustee in respect of his right to be indemnified out of the trust assets against personal liabilities incurred in the performance of the trust. The latter interest will be preferred to the former, so that the cestuis que trust are not entitled to call for a distribution of trust assets which are subject to a charge in favour of the trust deed until the charge has been satisfied … .

The creditors of the trustee have limited rights with respect to the trust assets. The assets may not be taken in execution … but in the event of a trustee's bankruptcy the creditors will be subrogated to the beneficial interest enjoyed by the trustee … .

These principles lead naturally to the conclusion that the beneficial interests which, by subrogation, the creditors whose claims arise from the carrying on of the business have in the assets held by a bankrupt trustee form part of the property of the bankrupt divisible among his creditors … . The definitions of both 'property' and 'property of the bankrupt' in s 5 of the Bankruptcy Act are apt to include such a beneficial interest."

37. In
Chief Commissioner of Stamp Duties for New South Wales v Buckle 98 ATC 4097; (1998) 192 CLR 226 at [47]-[51] the High Court observed:

"47. In
Worrall v Harford, Lord Eldon LC said:

'It is in the nature of the office of a trustee, whether expressed in the instrument, or not, that the trust property shall reimburse him all the charges and expences [sic] incurred in the execution of the trust.'

The entitlement of a trustee who has borrowed moneys for application to trust purposes has been described as follows:

'Where the trustee acting within his powers makes a contract with a third person in the course of the administration of the trust, although the trustee is ordinarily personally liable to the third person on the contract, he is entitled to indemnity out of the trust estate. If he has discharged the liability out of his individual property, he is entitled to reimbursement; if he has not discharged it, he is entitled to apply the trust property in discharging it, that is, he is entitled to exoneration.'

In aid of that right to reimbursement or exoneration for liabilities properly incurred in the administration of the trust, the trustee cannot be compelled to surrender the trust property to the beneficiaries until the claim has been satisfied. In that sense, the entitlement to reimbursement or exoneration confers a priority in the further administration of the trust. Accordingly, in an administration action, if it appears probable that the trust fund will be insufficient for the full recoupment of the trustee, the trustee is entitled to the insertion in the order for administration of a direction that there be payment in the appropriate order of priority.

48. Until the right to reimbursement or exoneration has been satisfied, 'it is impossible to say what the trust fund is'. The entitlement of the beneficiaries in respect of the assets held by the trustee which constitutes the 'property' to which the beneficiaries are entitled in equity is to be distinguished from the assets themselves. The entitlement of the beneficiaries is confined to so much of those assets as is available after the liabilities in question have been discharged or provision has been made for them. To the extent that the assets held by the trustee are subject to their application to reimburse or exonerate the trustee, they are not 'trust assets' or 'trust property' in the sense that they are held solely upon trusts imposing fiduciary duties which bind the trustee in favour of the beneficiaries.

49. The entitlement to reimbursement and exoneration was identified by Lindley LJ as 'the price paid by cestuis que trust for the gratuitous and onerous services of trustee'. The right of the trustee has been described as a first charge upon the assets vested in the trustee, as one upon the 'trust assets', and as conferring upon the trustee an 'interest in the trust property [which] amounts to a proprietary interest'.

50. However, the starting point in the class of case under consideration is that the assets held by the trustee are 'no longer property held solely in the interests of the beneficiaries of the trust'. The term 'trust assets' may be used to identify those held by the trustee upon the terms of the trust, but, in respect of such assets, there exist the respective proprietary rights, in order of priority, of the trustee and the beneficiaries. The interests of the beneficiaries are not 'encumbered' by the trustee's right of exoneration or reimbursement. Rather, the trustee's right to exoneration or recoupment 'takes priority over the rights in or in reference to the assets of beneficiaries or others who stand in that situation'. A court of equity may authorise the sale of assets held by the trustee so as to satisfy the right to reimbursement or exoneration. In that sense, there is an equitable charge over the 'trust assets' which may be enforced in the same way as any other equitable charge. However, the enforcement of the charge is an exercise of the prior rights conferred upon the trustee as a necessary incident of the office of trustee. It is not a security interest or right which has been created, whether consensually or by operation of law, over the interests of the beneficiaries so as to encumber them in the sense required by s 66(1) of the Act. In valuing the interests of beneficiaries which are conveyed by an instrument, there is no encumbrance which the Act requires to be disregarded.

51. Accordingly, we agree with the following treatment of the matter by Sheller JA:

'If it be right, as in my opinion it is, that the trustee has a beneficial interest in the trust assets to the extent of its right to be indemnified out of those assets against personal liabilities incurred in the performance of the trust and that interest will be preferred to the beneficial interests of the cestuis que trust, the consequence is that the interest conveyed has no value. This does not depend in any way upon treating the interest as encumbered. It flows from the fact that the trustee has a preferred beneficial interest in the trust fund.' "

38. The Commissioner submits that in the case of a tax liability, a trustee's rights and obligations as set out in s 254 displace the general rules concerning the right to indemnity. Section 254 makes it clear that the trustee has a personal liability to pay tax on trust income to the extent that it has, at some time, held trust funds which it should have retained for that purpose. It also makes it clear that the trustee is entitled to an indemnity for payments actually made. Section 254(1)(h) may operate to give the Commissioner direct access to trust assets. However the Commissioner seems not to have relied upon it for present purposes. The breadth of s 260-5 probably makes such reliance unnecessary. The reference in s 254(1)(h) to "attachable property" suggests the tantalizing possibility that the section may throw light on the question of whether the s 260-5 process is an attachment for the purposes of s 500 of the Corporations Act, the primary question in this appeal. No such argument was advanced. No doubt it was accepted that although the s 260-5 process may apply to attachable property, it does not follow that such process is, itself, a form of attachment.

39. In the end we doubt whether s 254 adds anything to the Commissioner's case. Excluding s 254(1)(h), the section does no more than authorize retention of moneys against tax liability, create personal liability in the trustee and authorize indemnity to the trustee from trust assets. It does not purport to charge moneys in the trustee's hands with payment of its tax liability.

Winding up under the Corporations Act

40. Chapter 5 of the Corporations Act deals with "external administration" of companies. Part 5.3A deals with companies in administration with which we are only marginally concerned. Part 5.4 deals with winding up in insolvency by the Court. Part 5.4A deals with winding up by the Court on other grounds. Part 5.4B deals with both types of winding up by the Court. Part 5.5 deals with voluntary winding up, including members' voluntary winding up and creditors' voluntary winding up. Whether or not a voluntary winding up is a members' voluntary winding up or a creditors' voluntary winding up depends upon whether directors have made the declaration of solvency contemplated by s 494. Voluntary windings up are generally commenced by resolution of the company. In some circumstances a company in administration may be put into voluntary winding up by a resolution of creditors. See s 439C. We are presently concerned with a creditors' voluntary winding up. Part 5.6 applies to windings up generally, whether by the Court or voluntary. Pursuant to s 513B, where a company is being wound up voluntarily and was, immediately before the resolution for winding up, under administration, the winding up is deemed to have commenced on the "s 513C day in relation to the administration". For present purposes that date is the date on which the administration began, namely 28 February 2007.

41. Section 501 provides that, in the case of a voluntary winding up:

"Subject to the provisions of this Act as to preferential payments, the property of a company must, on its winding up, be applied in satisfaction of its liabilities equally and, subject to that application, must, unless the company's constitution otherwise provides, be distributed among the members according to their rights and interests in the company."

42. Pursuant to s 506, the liquidator has the same powers as a liquidator in a winding up by the Court. The liquidator's powers are specified in s 477. They include doing all such things as are necessary for winding up the affairs of the company and distributing its property. Pursuant to s 474 a liquidator in a winding up by the Court must take the property of a company into custody. There is no such provision applicable to voluntary windings up, but the liquidator must necessarily have the power to take possession of the company's property. Such property does not vest in the liquidator unless, in the case of a winding up by the Court, the Court so orders pursuant to s 474(2).

43. We have previously set out the terms of s 500 which applies to voluntary windings up. That section should be compared with s 468 which applies to windings up by the Court. Subsection 468(1) provides:

"Any disposition of property of the company, other than an exempt disposition, made after the commencement of the winding up by the Court is, unless the Court otherwise orders, void."

44. Section 468(2) exempts limited categories of transaction. Section 468(3) provides for validation by the Court of a disposition made between the presentation of an application for winding up and the making of a winding up order. Section 468(4) is in identical terms to s 500, save that it refers to winding up by the Court rather than to a resolution for voluntary winding up. Sections 468 and 500 should be read in conjunction with s 569(1) which provides:

"Where:

(a) a creditor has issued execution against property of a company, or instituted proceedings to attach a debt due to a company or to enforce a charge or a charging order against property of a company within six months immediately before the commencement of the winding up; and

(b) the company commences to be wound up;

the creditor must pay to the liquidator 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 an amount in respect of the cost of the execution, attachment or enforcement of a charge of a charging order, being an amount agreed between the creditor and the liquidator or, if no agreement is reached, an amount equal to the tax cost of that execution, attachment or enforcement."

45. Other sub-sections permit such a creditor to prove in the winding up. Section 569(7) provides that the word "charge" means "a charge created by law upon registration of a judgment in a registry". The words "charging order" mean "a charging order made by a court in respect of a judgment".

46. Part 5.7B deals with voidable transactions and compensation for the benefit of creditors. Clearly, this Part was intended to have at least some operation upon tax debts. See particularly ss 588F and 588FG(2). We should add that there is no suggestion that s 588D has any relevant operation for present purposes.

Trust assets in a winding up

47. In the end, this case primarily concerns the respective rights of the Commissioner and the liquidators to apply trust assets, namely the moneys held by Piper Alderman, in paying, in the one case, Bruton's tax liability, and, in the other, the liquidators' expenses, costs and remuneration. The extent to which trust assets may be applied in payment of the debts of an insolvent corporate trustee has been a matter of some dispute. In the course of argument considerable attention was given to the apparently conflicting decisions in, on the one hand, Re Byrne Australia Pty Ltd[1981] 1 NSWLR 394, Re Byrne Australia Pty Ltd (No 2)[1981] 2 NSWLR 364 and Re Suco Gold Pty Ltd(1983) 33 SASR 99 and, on the other, Re Enhill Pty Ltd[1983] 1 VR 561. Re Byrne involved the winding up of a company which had carried on business as a trustee and no other business. Concerning the decision of the High Court in Octavo Needham J said at 398:

"There is no suggestion in the case that there were any creditors other than creditors of the trust business and there was certainly no suggestion that the 'proprietary interest' which the trustee had in the trust fund was property divisible among the creditors other than those who were subrogated to the trustee's right of indemnity. In other words, the case is not authority for the proposition that, where a trustee company carries on business with a trust fund that incurs liabilities and then is wound-up, the whole of the trust fund is property divisible amongst all the company's creditors, whether trust creditors or not. The right of indemnity arises only because the trustee is liable to creditors whose debts arose because of its activities as trustee of the fund. If there is no right of indemnity, there is no 'proprietary interest'. For example, if a company, having various powers including a power to act as trustee, carries on business on its own account as well as in its capacity as a trustee, it would have no right of indemnity out of the assets of the trust for liabilities it incurred in the business it carried on on its own account, and the creditors of that business would have no right to look to the trust assets for payment of their debts by subrogation to the company's rights."

48. Re Byrne was primarily concerned with whether or not the costs and expenses of the liquidator of the trustee company could be paid out of trust assets. Of this matter Needham J said at 399:

"For the above reasons, I am of the opinion that the assets of the company should be utilized in the payment of those creditors who can properly be called trust creditors. If the liquidator wishes to submit that he is one of such creditors, then evidence should be filed to support such a claim and further argument can be had."

49. The next case in temporal sequence was the decision of the Full Court of the Supreme Court of Victoria in Re Enhill. The Court was again concerned with the winding up of a company which had not carried on business other than as trustee and had no assets other than trust assets. The case concerned the entitlement of the liquidator to recoup from trust assets his expenses, costs and remuneration and the costs of the petitioning creditor. Young CJ referred to Octavo and to the proposition that a trustee's right of indemnity is an asset of the trustee company in its winding up. His Honour observed:

"No limitation was expressed upon the purposes for which the trustee in bankruptcy or the liquidator might apply the proceeds of the right. Moreover, the reasoning of the majority of the High Court and the authorities upon which their Honours rely suggest that no limitation was intended. In
Jennings v Mather … which was one of those authorities, it was held that a trustee's right of indemnity or his lien over the assets of the trust passed to his trustee in bankruptcy … . In these circumstances to hold that a trustee in bankruptcy could only apply the proceeds of the right of indemnity towards some only of the bankrupt's creditors, viz creditors of the trust business, would deny the very purpose of the right to indemnity which is to exonerate the trustee's personal estate. In a case like the present therefore the proceeds of the trustee's lien are available for division among the bankrupt's creditors generally, not only among creditors of the trust business, and in the case of a company in liquidation are subject to the control of the liquidator … ."

50. The decision in
Jennings v Mather [1901] 1 QB 108 seems not to support that proposition. The case concerned an insolvent trustee, but all creditors appear to have been trust creditors. Young CJ's observation that to limit availability of the indemnity to trust creditors would deny the purpose of the right to indemnity might well be correct if the trustee has paid the relevant debt. In that case, any amount recovered by way of an indemnity would be an asset of the trustee in its own right and have nothing to do with the trust. However the position is not so clear where the trustee has not paid the debt. His Honour went on to observe that where the trustee's indemnity is derived from a party "who is concerned with the application of the money which he pays" the situation may be otherwise. His Honour then referred to
In re Law Guarantee Trust and Accident Society Ltd: Liverpool Mortgage Insurance Company's Case [1914] 2 Ch 617 per Buckley LJ at 633. His Lordship there said:

"The equitable doctrine is that the party to be indemnified can call upon the party bound to indemnify him specifically to perform his obligation, and to pay him the full amount which the creditor is entitled to receive, and that whether having received it he applies it in payment of that creditor or not is a matter with which the party giving the indemnity is not concerned. In such a case the party indemnified is entitled to receive 20s. in the pound, and, having got it, to deal with as he thinks proper. The case is otherwise where the party giving the indemnity is concerned with the application of the money which he pays. This was the case in
In re Richardson. The wife who was bound to indemnify was there concerned in seeing that the money which she paid went to the lessor so as to relieve the property of which she was beneficial owner from the consequences of non-payment of rent and damages for breach of covenant."

His Lordship also referred to
Cruse v Paine (1868) 6 Eq 641 and
In re Perkins[1898] 2 Ch 182. We do not understand the reasoning in any of those cases to support the proposition advanced by Buckley LJ. His Lordship seems only to have been suggesting a basis for explaining their apparent inconsistency with that proposition. The proposition is superficially surprising but flows from the fact that the trust assets will not otherwise be liable for the debt, it being the debt of the trustee.

51. We turn to the decision of the Full Court of the Supreme Court of South Australia in Re Suco Gold Pty. Once again the case concerned an insolvent corporate trustee, its debts being solely trust debts. The question was again the entitlement of the liquidator to recover his expenses, costs and remuneration from trust assets. King CJ summarized the decision in Re Enhill and observed that there was a conflict of judicial opinion evidenced by the decisions in
In Re Richardson [1911] 2 KB 705 and Liverpool Mortgage Insurance Company's Case. His Honour understood the conflict to concern the entitlement of a trustee to appropriate trust funds in exercise of its claim to indemnity out of trust debts, without first paying such debts. King CJ referred to the basis adopted by Buckley LJ for distinguishing the former case, namely the beneficiary's interest in protecting a trust asset. His Honour pointed out that the relevant lease had, in fact, expired, so that it could not be said that the beneficiary had any interest in protecting it. King CJ continued at 105:

"I cannot escape the conviction that if a trustee, or his trustee in bankruptcy, or liquidator in the case of a trustee company, is permitted to use trust property, not for the discharge exclusively of liabilities incurred in the performance of the trust, but in the discharge of other liabilities as well, the money is being used for an unauthorized purpose and is being used, moreover, for the benefit of the trustee, and of third parties, namely the non-trust creditors."

52. At 107-108 his Honour said:

"The right of indemnity, it is true, exists for the trustee's own benefit and it passes to the trustee in bankruptcy or the liquidator. The proceeds of that right of indemnity are therefore part of the estate divisible among the creditors. It seems to me, however, that the right of indemnity can only produce proceeds for division among the creditors generally if the trustee has discharged the liabilities incurred in the performance of the trust and is therefore entitled to recoup himself out of the trust property. If he has not discharged the liabilities, the right of indemnity entitles him to resort to the trust property only for the purpose of discharging those liabilities. He may apply the trust moneys directly to the payment of the trust creditors or he may take it into his own possession for that purpose. If he takes trust property into his possession to satisfy his right to be indemnified in respect of unpaid trust liabilities, it seems to me that that property retains its character as trust property and may be used only for the purpose of discharging the liabilities incurred in the performance of the trust. The exercise of the right of indemnity is for the benefit of the trustee in that it relieves him of liability for the trust debts. If the trustee is bankrupt, or being a company is in liquidation, the trustee in bankruptcy or liquidator can exercise the right of indemnity which vests in him as part of the property of the bankrupt or insolvent company. If the trust liabilities have been discharged, the trustee in bankruptcy or liquidator is entitled to recoup the bankrupt estate out of the trust property and the proceeds of the right of indemnity become part of the property divisible among the creditors. If the liabilities have not been discharged, the trustee in bankruptcy or liquidator may, by reason of the right of indemnity which vests in him, apply the trust property to the payment of the trust liabilities, thereby exonerating the bankrupt estate to the extent of the value of the available trust assets. In the latter circumstances there cannot be proceeds of the right of indemnity which are available for distribution among the general body of creditors."

53. Notwithstanding this rejection of the reasoning in Re Enhill, King CJ concluded that the liquidator could recover the costs and expenses of the liquidation. After referring to the fact that in Re Enhill the Court had ordered that the liquidator's costs, expenses and remuneration be paid out of trust property, his Honour continued at 110:

"There are clearly strong practical considerations in favour of such a course. Unless that course can be followed, the liquidation of a trustee company without assets of its own cannot proceed. It seems to me that that course can be justified by reference to the obligations of the trustee company arising out of the carrying on of the business authorized by the trusts. It is part of the duty of the trustee company to incur debts for the purpose of the trust businesses and, of course, to pay those debts. Upon winding up those debts can only be paid in accordance with the provisions of the Companies Act. This requires necessarily that there be a liquidator and that he incur costs and expenses and be paid remuneration. Section 292 provides that there be paid the costs and expenses of winding up, the taxed costs of the petitioner and the remuneration of the liquidator 'in priority to other unsecured debts' (emphasis mine). The expression 'other unsecured debts' appears to imply that the costs and expenses of winding up, the petitioner's costs and the liquidator's remuneration are regarded by the statute as debts of the company. As the company's obligation as trustee to pay the debts incurred in carrying out the trust cannot be performed unless the liquidation proceeds, it seems to me to be reasonable to regard the expenses mentioned above as debts of the company incurred in discharging the duties imposed by the trust and as covered by the trustee's right of indemnity. If that reasoning is wrong, I would, like Lush J in
Re Enhill Pty Ltd, be prepared to rely on the principle enunciated by Dixon J in
In Re Universal Distributing Co Ltd (1933) 48 CLR 171 at 174-175.

[original emphasis]

54. The "principle" enunciated by Dixon J seems to have been that if a liquidator has gone to the trouble and expense of getting in assets, those who benefit from such conduct should pay for it as they would have done had they, themselves, performed it.

55. In
Ramsay v National Australia Bank Ltd [1989] VR 59 the Full Court noted that the decision in Enhill had been criticized but found it unnecessary to consider its correctness. See also
Nolan v Collie (2003) 7 VR 287 at 313. Enhill was followed by McLelland J in
Grime Carter & Co Pty Ltd v Whytes Furniture (Dubbo) Pty Ltd [1983] 1 NSWLR 158 but not followed by his Honour in the subsequent decision of Re ADM Franchise Pty Ltd(1983) 7 ACLR 987. In that case his Honour followed Suco. In Re Matheson(1994) 49 FCR 454 a single Judge of this Court applied Suco. The Honourable BH McPherson, speaking extra-curially, favoured the approach in Suco to that in Enhill. See Finn (ed), Essays in Equity(1985), p 153, 154. In the same volume (at 249-50) Sir Anthony Mason observed that the decision in Enhill looked "distinctly fragile". In his essay Unsecured Borrowings by Trustees of Commercial Trusts (10 Australian Bar Review 248 at 249-50), JD Merralls QC observed, concerning the question presently under review "Upon this point Re Enhill Pty Ltd has few supporters: The present Chief Justice of the High Court has written extra-judicially that its reasons 'look distinctly fragile'."

56. The text book writers have taken similar views. See Gronow MGR, McPherson's Law of Company Liquidation at [11.120]. See also Heydon JD and Leeming MJ, Jacobs' Law of Trusts in Australia(7th ed) at [2114]. The learned author of McPherson submits that:

"Assets held by the company on trust, although not available for the purposes of winding up, are nevertheless subject to the control of the liquidator acting through the company in the place of the directors. Moreover, the creditors of a trustee company the debts of which were incurred in the administration of the trust are entitled to be subrogated to the trustee company's claim to an indemnity out of the assets of the trust. The assets that are available in this way to the creditors by subrogation are not assets available for distribution among the general creditors of the company.

In the absence of any statutory provision regulating the administration of trusts of which the company is the trustee, the liquidator is expected to act in a responsible way in the administration of the trust in the name of the company. This duty does not necessarily require the liquidator in all cases to apply to the court for the appointment of a new trustee. Indeed, it is this involvement in the administration of the trust and the winding up of the trustee company that forms the basis of the liquidator's claim to be subrogated to the trustee company's right of indemnity from the trust assets in respect of remuneration, costs and expenses. Only where the liquidator's costs and expenses are necessarily incurred in performing the company's duties as trustee will it be possible for the liquidator's costs and expenses to be recouped from the trust assets."

57. The learned authors of Jacobs submit that Byrne and Suco are correct and that Enhill is incorrect. However, as to the liquidator's costs, expenses and remuneration, they say, relying on Suco and other cases:

"Where the trustee of a trading trust is in liquidation, the liquidator's costs, expenses and remuneration may be paid out of trust assets, because the trustee's obligation to pay debts can only be performed, after the liquidation has commenced, through the liquidator, whose right of remuneration is to be regarded as a debt incurred in performing the duties of the trustee."

58. This view differs from that expressed in McPherson. Note also the treatment of the matter in the 6th edition of Jacobs (RP Meagher and WMC Gummow), at [2114].

Section 260-5 of the Administration Act and section 500 of the Corporations Act

59. At first instance Bruton's primary assertion was that the Notice was void by virtue of the operation of s 500 of the Corporations Act. The primary Judge accepted that service of the Notice constituted attachment put in force against Bruton's property. "Property" is defined in s 9 of the Corporations Act as:

"… any legal or equitable estate or interest (whether present or future and whether vested or contingent) in real or personal property of any description and includes a thing in action."

60. Section 500 applies to any attachment of Bruton's legal and equitable property, but it cannot apply to equitable property or interests not vested in Bruton. Bruton had the legal title to the debt owed to it by Piper Alderman (ie the right to be paid) and its right to an indemnity against debts incurred as trustee, with an associated lien over Trust assets. It did not hold any other equitable interest in that property.

61. The Commissioner necessarily accepts that money was due from Piper Alderman to Bruton for the purposes of s 260-5(3) but submits that, for the purposes of s 500, no property belonging to Bruton was affected by the s 260-5 notice. This submission is based upon the assertion that Bruton had a power to indemnify itself from Trust assets, which power did not amount to property. That approach is inconsistent with the decision in Octavo which expressly describes the trustee's interest as being "property" (at 367-368). See also Buckle at [49]. It also neglects Bruton's legal right to receive payment. This right had value. The trustee's lien seems to be in the nature of a possessory security. The trustee is entitled to retain possession of the trust property as against the beneficiaries. See Octavo at 369-370. It is at least arguable that Bruton's lien depended upon its right to receive the money.

62. The extent of Bruton's right to indemnity depended upon the extent of Trust debts. Setting aside the amount claimed by Piper Alderman and other small amounts, the debts are the tax debt and the liquidators' costs, expenses and remuneration. The liquidators contemplate the possibility of further prosecuting the Endorsement Appeal with a view to reducing or extinguishing the tax debt. The liquidators' right to recoup their costs, expenses and remuneration from Trust assets is also in dispute. There may be a liability for the Commissioner's costs in the Endorsement Appeal. Thus the total amount of the Trust debts is uncertain, as is the extent of Bruton's interest in the Trust assets. However Octavo establishes that the lien applies to all such assets.

63. The primary Judge concluded that the s 260-5 notice was an attachment, advancing three reasons for this view, namely:

• the reasoning in
Macquarie Health Corporation Ltd v Commissioner of Taxation (1999) 96 FCR 238;
• the structure of the Corporations Act, Ch 5 Pt 5.6 Div G Subdiv 10, dealing with priorities; and
• "the ending of Crown priority for debts for many years".

64. His Honour considered that these factors led to the conclusion that it was "contrary to the scheme of orderly winding up that the right to prove in the Commissioner can be elevated at will by him to the status of a form of secured creditor after the winding up has commenced by the service of a s 160-5 notice on a debtor of the company". We observe that it is not beyond the power of Parliament to bring about such an effect. After all, such a notice, given before winding up, may well affect priorities in a winding up, particularly as a s 260-5 notice is not a "transaction" for the purposes of part 5.7B of the Corporations Act. See Macquarie Health at [133].

Macquarie Health

65. In order to understand the decision in Macquarie Health it is necessary further to consider the decision in Donnelly. It was there submitted by the trustee in bankruptcy that, pursuant to s 118 of the Bankruptcy Act, all moneys payable pursuant to a notice under s 218 of the 1936 Act were payable to the trustee. Section 118(1) provides:

"Subject to subsection (2), where:

(a) a creditor has, within 6 months before the presentation of a petition, or after the presentation of a petition, against a debtor:

(i) …

(ii) received moneys as a result of the attachment by him or her, or on his or her 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

…"

66. The trustee alleged that the effect of the s 218 notice was to attach a debt due to the bankrupt. The relevant s 218 notices was given on 23 December 1986; the petition was presented on 29 July 1987; and the sequestration order was made on 10 March 1988. As we have previously observed, the majority (Lockhart and Hill JJ) found that the effect of the notice was to create a charge with effect from the date upon which it was given. All three members of the Court concluded that the s 218 process was not an attachment of a debt due to the bankrupt. The question depended upon whether the word "attachment" included only methods of recovery involving court process or whether it included other, non-curial processes. Their Honours accepted that the term "attachment" might be used in either sense. However the authorities cited by their Honours suggested (at least in our view) that the narrower usage (limited to curial process) was more common than the wider. Their Honours concluded that, in the context of the Bankruptcy Act, the term should be given the narrower meaning. That decision was, at least in part, based upon the reference in s 118(1)(b) to the "taxed costs of the … attachment", suggesting a curial context.

67. To construe a statute by reference to a word used in another statute is potentially problematic, particularly when the meaning of that word can, itself, only be determined by a relatively arbitrary or subjective choice. As von Doussa J said in Donnelly at 441:

"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."

68. In Macquarie Health, the Court considered the application of s 468 of the Corporations Law (now the Corporations Act) to the s 218 process. Section 218 notices were served in September 1995 in connection with assessments previously issued. In July 1996 the Commissioner applied to wind-up the taxpayer. On 20 November 1996 administrators were appointed. A further notice under s 218 was served on 4 February 1997. On 28 February 1997 a winding up order was made. The liquidator asserted that s 468(4) invalidated the s 218 notices. In construing s 468(4) the primary Judge applied the reasoning in Donnelly by analogy, concluding that the s 218 process did not result in attachment of property. On appeal the Full Court observed that, unlike s 118 of the Bankruptcy Act, s 468(4) contained no reference to taxed costs. However at [111] it noted that s 569(1) contained such a reference in connection with attachment. The Full Court considered the meaning of the word "attachment" but eventually concluded that the notices given prior to the commencement of the winding up could not, in any event, be invalidated by s 468(4) which applied only to attachment put in force after such commencement. It was therefore unnecessary to decide whether the s 218 procedure constituted an attachment for the purposes of s 468. It is true that at [110] the Court observed that the liquidator's contentions as to meaning of "attachment" had "considerable force". On the other hand, at [115], their Honours seem carefully to have avoided coming to any conclusion as to whether the decision in Donnelly should be applied to s 468(4).

69. We do not propose to re-visit the detailed and helpful discussions of the use of the word "attachment" which are found in Donnelly and Macquarie Health. In Macquarie Health the primary Judge considered that the reasoning in Donnelly should be applied by analogy in construing s 468 of the Corporations Law. There may well be benefit in that approach which fosters uniformity between the position in bankruptcy and that in corporate insolvency. However the provisions operate in slightly different statutory contexts. We also share the concern expressed by von Doussa J as to the appropriateness of limiting the operation of a section such as a s 260-5 by reference to the protean meaning of the word "attachment". Further, we cannot overlook the presence in the Corporations Act of s 569. Sections 500 and 569 reflect different aspects of the operation of s 118 of the Bankruptcy Act. Adopting the reasoning in Donnelly, the reference in s 569 to "taxed costs" implies that the word "attachment", as used in that section, refers to curial process. If it has that meaning in s 569, there is much to be said for attributing the same meaning to it in s 500 (and s 468).

Structure of the Corporations Act

70. We turn to the structure of the Corporations Act. The primary Judge effectively concluded that the operation of s 260-5 was inconsistent with the system of priorities prescribed by the relevant provisions of the Corporations Act. His Honour did not demonstrate any basis for this conclusion. We are not persuaded that there is any such inconsistency. The cases demonstrate that a s 260-5 notice takes effect from the time at which it is given and not earlier. Pursuant to s 501, upon winding up, the property of a company is to be applied in accordance with that section and not otherwise. In our view, the relevant question is whether a notice given pursuant to s 260-5, after the commencement of the winding up, affects the operation of s 501. That question has not been argued, and so we refrain from expressing a concluded view. However it is at least arguable that the statutory mandate imposed by s 501 overrides any later charge created by a s 260-5 notice. If so, then s 260-5 is not inconsistent with the structure of the Corporations Act.

Crown priority for tax debts

71. Finally, the primary Judge was influenced in reaching his conclusion as to the proper construction of s 500 by "the ending of Crown priority for tax debts for many years". We accept that such priority has been largely abrogated. However, in
Deputy Commissioner of Taxation v Dexcam Australia Pty Ltd 2003 ATC 4598; (2003) 129 FCR 582, the Full Court held that such abrogation did not necessarily revoke all provisions which confer an advantage upon the Commissioner. The decision of the High Court in
Deputy Commissioner of Taxation v Broadbeach Properties Pty Ltd 2008 ATC ¶20-045; (2008) 248 ALR 693 at [61] demonstrates that any conflict between the operation of two statutes cannot usually be resolved by reference to policy considerations underlying one without reference to policy considerations underlying the other.

Was there an attachment?

72. Donnelly was decided in 1989 and has not prompted any amendment to the Bankruptcy Act or change of language in the corporations legislation. It is reasonable to infer that the decision has not caused problems in practice. Proper regard for earlier decisions and the need for certainty in the law can best be recognized by applying the decision in Donnelly to s 500. The terms of s 569 are also of some importance. We hold that the process prescribed by s 260-5 is not an attachment for the purposes of s 500.

Notice of contention

73. Bruton submits that a notice pursuant to s 260-5 must clearly identify the person to whom it is addressed and must also clearly identify the action to be performed by the recipient. The first proposition is supported by the decision of Pagone J in
Goodin v Federal Commissioner of Taxation (2002) 50 ATR 220. The second is supported by the decision of Davies J in
Conley v Commissioner of Taxation (1997) 152 ALR 467.

74. Bruton submits that the Notice ought not to have been sent to Piper Alderman but rather to the individual partners of that firm, by name. We see no merit in this argument. A firm may sue or be sued in its firm name. See O 42 r 2. Whilst the Rules of Court are not in any sense conclusive of the matter, we think that the rule is evidence of a well-established and community-wide practice. We see no basis for thinking that the Notice could have caused any uncertainty or confusion.

75. Bruton also submits that, in giving three notices, each referring to the tax debtor by a different name, the Commissioner somehow created confusion. The three notices clearly addressed the same tax liability. They were based upon a notice of assessment for the year ended 30 June 2004 when Bruton was the trustee. It was addressed to "The Trustee for the Bruton Educational Trust". In each of the s 260-5 notices the amount claimed to be owing to the tax debtor was identified as $447,420.20. The terms upon which the money was held, and for whom it was held, were matters better known to Piper Alderman and to Bruton than they were to the Commissioner. There is no evidence of any confusion. Whilst questions may remain as to the effect of the notices, we cannot see that any uncertainty affected the object of their operation. There were either funds upon which each notice could operate or there were not. On its face the Notice is in valid form. We cannot see that its validity could be affected by the existence of the other notices. Each of the other notices also seems to be, in itself, sufficient in form. Piper Alderman would have well understood that the Commissioner was trying to avoid disputes as to the proper identity of the tax debtor. There could have been no confusion.

76. We doubt whether Bruton (as opposed to Piper Alderman) may complain about matters of form. They concern only the Commissioner and Piper Alderman. The notices were identifiable as having been given pursuant to s 260-5, there was a tax debt and there were funds upon which one or other of the notices could operate. In those circumstances it is unlikely that the validity of a notice, as against Bruton, would depend upon its form. See
Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355 at 388-391.

77. Finally, the injunctive relief contained in para 2 of the orders at first instance seems to be unjustified. Each notice either operated upon a debt or it did not. If a notice did so operate, then Bruton has not yet demonstrated any justification for restraining the Commissioner from acting on it. If a notice did not operate upon a debt, then it is spent.

Other matters

78. There are numerous outstanding matters. Clearly, the Commissioner wishes to dispute the liquidators' claim to costs, expenses and remuneration, at least to the extent that they are to come out of the Trust moneys. It will also be necessary to deal with the few small creditors. We have pointed out that there may be a question as to the extent to which the Commissioner's claim under the Notice (or either of the other notices) can affect the distribution of assets in the winding-up. We have not had the benefit of submissions on this point. Of course it will only be of substantial significance if the liquidators are entitled to payment of their costs, expenses and remuneration from Trust assets. That question, in turn, will depend upon resolution of the conflicting views in the cases to which we have referred. We are unsure whether the parties wish us to decide that matter, but there is good reason for not doing so.

79. As the primary Judge pointed out, the liquidators are winding up a former trustee, not a "serving" trustee. In the cases to which we have referred, as far as we can see, the position was otherwise. In the present case the liquidators cannot claim to have been performing Bruton's duties as trustee. It no longer holds that position. It may still hold Trust property, but as a bare trustee. Its duties, powers and rights are limited to protecting the Trust assets. The liquidators' duties, powers and rights cannot be any greater than Bruton's. The liquidators are also entitled to protect and enforce Bruton's indemnity. However entitlement to the indemnity is intimately connected to payment of the relevant debts particularly, for present purposes, the tax debt. In fact, the liquidators have resisted paying that debt, apparently because of their own claims against the trust assets. Given the limited role of Bruton as a trustee, it is unlikely that the liquidator' costs, expenses and remuneration as claimed are all attributable only to performance of the bare trustee's duties. It is difficult to see how the liquidators could be justified in incurring costs and expenses in prosecuting the present proceedings in which they have resisted taking the step which is a necessary pre-requisite to Bruton's entitlement to indemnity. It is similarly difficult to see how they could be justified in seeking to recover moneys paid to the University of Sydney. Those would be matters for consideration by a new trustee. Bruton's (and therefore the liquidators') right to prosecute the Endorsement Appeal also seems doubtful, although the matter is not entirely clear given that Bruton has received the 2004 notice of assessment.

80. His Honour identified the difficulties associated with the absence of a trustee who is able to make decisions as to the Trust assets. If there is to be litigation to resolve conflicting claims to trust assets, some step should be taken to ensure "representation" of the Trust. It may be that the Attorney General of New South Wales should be joined. An alternative procedure may be to seek the appointment of a new trustee. We are not familiar with the relevant New South Wales law. In the first instance, it is for the parties to ensure that all necessary parties are joined.

81. Subject to that question we are inclined to think that the matter should continue on pleadings, with the liquidators having the carriage of it. The ultimate issue is the way in which Trust funds should be applied. The Commissioner, the liquidators and the Attorney General (or a new trustee) are relevant parties. It may be necessary to join the small creditors. We assume that Piper Alderman has no further interest in the matter. We infer that the Trust funds remain with that firm. If so, it may be better that it be relieved of any further obligation in that regard. There is also the question of costs.

Orders

82. The Court orders that:

1. The appeal be allowed.
2. The orders of 2 November 2007 be set aside.
3. The parties within 14 days of this day bring in agreed minutes of any further orders considered necessary to reflect the reasons for judgment published this day and to provide for the future conduct of the proceedings herein.
4. In default of agreement as to the orders contemplated by paragraph 3 of this Order;
- (a) the appellant file and serve by 22 December 2008 written submissions as to the orders, including orders as to costs, which he contends should be made in light of the reasons published this day;
- (b) the first and second respondents file and serve by 30 December 2008 any written submissions which they desire to make in respect of the further orders which should be made in light of the reasons published this day;
- (c) The appellant file and serve by 6 January 2009 any written submissions which he desires to make in response to the written submissions referred to in sub-paragraph 4(b) of this Order.
5. The appeal be adjourned to a date to be fixed for the making of further orders.

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FC of T v BRUTON HOLDINGS PTY LTD (IN LIQ) & ANOR

"Notice