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Clyne v. Deputy Federal Commissioner of Taxation.

Judges:
Bowen CJ
McGregor J
Fisher J

Court:
Federal Court of Australia

Judgment date: Judgment handed down 17 December 1982.

Bowen C.J. McGregor and Fisher JJ.

This is an appeal from a decision of a Judge of this Court (Lockhart J.) sitting in Bankruptcy given on 11 October 1982 (82 ATC 4484). His Honour dismissed an application by Peter Leopold Clyne, the appellant, in which he sought certain orders in relation to a bankruptcy notice issued by the Deputy Commissioner of Taxation, the respondent, on 13 August 1982. He ordered Mr. Clyne to pay the Commissioner his costs of the application. Further, he extended the time for compliance with the bankruptcy notice up to and including 25 October 1982. The time for compliance was later further extended up to and including 3 December 1982 pending the hearing of this appeal. When we reserved judgment on 3 December 1982, time for compliance was extended until further order.

ATC 4691

It is not necessary for the purpose of dealing with the issues before us to set out in any great detail the circumstances in which this appeal falls for consideration. They arise out of the issue by the Commissioner of notices of assessment to income tax for the years of income ending respectively on 30 June 1977, 1978, 1979 and 1980. Mr. Clyne lodged an objection against each of the notices of assessment and each objection was disallowed by the respondent.

At the request of Mr. Clyne the objection in respect of the assessment of income for the year ending 30 June 1977 was treated as an appeal and referred to the Supreme Court of New South Wales. That appeal was dismissed for want of prosecution by the Supreme Court on 1 March 1982. Mr. Clyne appealed against that judgment to this Court, a Full Court of which dismissed the appeal on 20 August 1982 (82 ATC 4397).

In respect of the notices of assessment for the years ending 30 June 1978, 1979 and 1980 the disallowance of Mr. Clyne's notices of objection was referred for hearing to Taxation Board of Review No. 1. This hearing extended over the period from 13 to 23 September 1982. On 26 November 1982 the Board of Review unanimously confirmed the assessments (Cases P100 - P103,
82 ATC 489, 520 and 540). Mr. Clyne has appealed to the Supreme Court of New South Wales against the Board's decision.

Pursuant to his right under sec. 201 of the Income Tax Assessment Act 1936 (``the Assessment Act'') the Commissioner took steps to recover from Mr. Clyne the income tax assessed on the four notices of assessment. That section confers exceptional powers on the Commissioner to recover assessed income tax notwithstanding the fact that appeals or references in relation to the assessments are pending. It provides:

``201. The fact that an appeal or reference is pending shall not in the meantime interfere with or affect the assessment the subject of the appeal or reference; and income tax may be recovered on the assessment as if no appeal or reference were pending.''

As a result of the exercise of his powers under this section the Commissioner obtained judgment in the Supreme Court of New South Wales against Mr. Clyne for the sum of $334,826.25 (``the judgment debt''). This amount was the aggregate of income tax assessed by the notices of assessment to which Mr. Clyne objected in respect of the years of income ending respectively on 30 June 1977, 1978 and 1979. It included certain amounts of additional tax for late payment and also provisional tax for the year ending 30 June 1980. It should be noted that Mr. Clyne was entitled to two credits:

  • (a) a credit of $108,829.07 being the sum recovered by the Commissioner pursuant to notices under sec. 218 of the Assessment Act in respect of the assessment for the year ending 30 June 1979 from a Bank and Building Society being moneys deposited by Mr. Clyne; and
  • (b) a credit of the sum of 58 cents paid by Mr. Clyne to the Commissioner.

Mr. Clyne appealed from this judgment to the Court of Appeal of the Supreme Court of New South Wales, which appeal was pending at the time the learned trial Judge dismissed the present application. Subsequently, the Court of Appeal on 5 October 1982 dismissed the appeal. From that dismissal Mr. Clyne has appealed to the High Court. The Commissioner, who is the respondent to that appeal, successfully obtained from Mason A.C.J. on 14 October 1982 an order that the stay which arose under O. 70 r. 12(2) of the High Court Rules on the lodging of security by Mr. Clyne be removed.

On 13 August 1982 a bankruptcy notice was issued at the request of the Commissioner in respect of the judgment debt. An earlier notice issued on 4 May 1982 had on that date been set aside. On 14 August 1982 Mr. Clyne made application to this Court for an order to set the notice of 13 August aside and for other relief. In his judgment of 11 October 1982, Lockhart J. summarised what was sought by Mr. Clyne, in substance, as follows:

  • (a) an order setting aside the bankruptcy notice issued on 13 August 1982;
  • (b) an adjournment of the proceedings commenced by the application of 11 October 1982 until all relevant litigation between the parties had been determined before Courts and Boards of Review, and

    ATC 4692

    an extension of time for compliance with the requirements of the bankruptcy notice in the meantime; or
  • (c) that the Court determine, for the purposes of sec. 41(7) of the Act that it was satisfied that Mr. Clyne had a counter-claim, set-off or cross demand of the kind referred to in sec. 40(1)(g) of the Act...

In respect of the application to set aside the bankruptcy notice Mr. Clyne submitted to Lockhart J. that the evidence in the proceedings before the Board of Review disclosed that there was a dispute genuinely based on substantial grounds as to the judgment debt. Because the Board of Review had completed its hearing and reserved its decision the trial Judge considered it was inappropriate for him to form a judgment as to Mr. Clyne's prospects of success in setting aside or reducing the amounts of income assessed by the respondent. He therefore determined this application in the exercise of his discretion and, upon a review of a substantial volume of evidence, dismissed the application. In reliance upon this evidence he also exercised his discretion to dismiss Mr. Clyne's application for an extension of time to comply with the bankruptcy notice. He also refused to set aside the bankruptcy notice on a number of other grounds which Mr. Clyne supported by technical arguments relating both to the form and the substance of the bankruptcy notice.

A further issue arose in that Mr. Clyne filed an affidavit pursuant to sec. 41(7) of the Bankruptcy Act alleging that he had a counter-claim, set-off or cross demand of the kind referred to in sec. 40(1)(g) of that Act. In his affidavit he claimed that the pendency of the tax appeals, his claim for a refund of moneys collected under the sec. 218 notices and his claim for costs under the order of Lockhart J. made on 13 August 1982 together constituted the counter-claim, set-off or cross demand. Lockhart J. was required to rule on this affidavit for the purpose of determining whether by virtue thereof time for compliance with the bankruptcy notice had been extended. His Honour held that a counter-claim, set-off or cross demand under sec. 40(1)(g) and 41(7) must be one capable of being enforced by action or capable of quantification at the relevant time. He considered that Mr. Clyne's alleged counter-claim based on the pendency of the tax appeals did not answer this description. He distinguished
Fortuna Holdings Pty. Ltd. v. F.C. of T. 76 ATC 4312.

By his notice of appeal to this Court Mr. Clyne raised three issues. He challenged the trial Judge's finding that the amount of his counter-claim could not equal or exceed the judgment debt, contending that the trial judge had omitted to take into account the credit of $108,829.07 earlier referred to in these reasons. He also challenged the trial Judge's refusal to set aside the bankruptcy notice on the ground that it was not founded on a final judgment or alternatively that the amount claimed therein was not a true debt.

The balance of the notice of appeal, which was lengthy and detailed, specified a number of errors which Mr. Clyne contended the trial Judge had made in exercising his discretion to refuse to set aside the bankruptcy notice or extend the time for compliance.

Mr. Clyne also raised two issues which necessitated notices to the Attorneys-General of the Commonwealth and the State. He contended that, if sec. 201 entitled the Commissioner to institute proceedings in bankruptcy to recover income tax, the section constituted acquisition of property on other than just terms, was not a bona fide exercise of the power of the Commonwealth to impose taxes and thus was contrary to the provisions of the Constitution of the Commonwealth of Australia. He also contended that the Act, in so far as it vested in the Registrar by sec. 40(1)(g) the power to fix a time for compliance with a bankruptcy notice, attempted to vest judicial power in an administrative officer of the Commonwealth and in consequence was beyond the power of the Commonwealth under the Constitution.

Before this Court Mr. Clyne abandoned reliance upon those of his grounds of appeal which were based upon the provisions of sec. 41(7) of the Act and his contention that the amount claimed in the bankruptcy notice was not a true debt payable by him to the respondent.

The arguments advanced by Mr. Clyne on this appeal may conveniently be dealt with under the following heads:

ATC 4693

  • 1. whether sec. 201 of the Assessment Act applies to bankruptcy proceedings;
  • 2. whether the judgment of the Supreme Court for $334,826.25 was a final judgment;
  • 3. whether the discretion to set aside the bankruptcy notice should be exercised in his favour;
  • 4. whether the Registrar's fixing of time for compliance with the bankruptcy notice was an exercise of judicial power.

We will deal with these questions in turn.

As to 1, Mr. Clyne argued that sec. 201 in empowering the Commissioner to ``recover'' tax did not authorize him to commence bankruptcy proceedings. He acknowledged that the section contemplated Court proceedings for the recovery of tax and eventual entry of judgment for the amount of it. He recognised that such a judgment could be enforced by execution. Nevertheless, he contended that sec. 201 was not available to assist or enable the Commissioner to bring bankruptcy proceedings.

In our opinion Mr. Clyne's contention is untenable. We leave on one side the question whether a bankruptcy notice, viewed from one aspect as a statutory notice to pay carrying statutory consequences if not complied with, is not in that particular aspect a method of recovery and thus covered by sec. 201. The Commissioner is empowered by sec. 201 to sue and obtain judgment for unpaid tax notwithstanding the fact that it is the subject of dispute. The provisions of sec. 201 are available in this regard, enabling the Commissioner to do what otherwise would be denied him. But having obtained his judgment the Commissioner has no need of the assistance of sec. 201 to enforce it. He is then in a position of a judgment creditor and as such can execute by a writ of fieri facias or otherwise. He has the right which all judgment creditors have of proceeding in accordance with the Bankruptcy Act to force a non-paying judgment debtor to commit an act of bankruptcy. He can achieve this by levying execution under the process of the relevant Court. Upon any of the property of the taxpayer being sold or held for twenty one days of the execution being returned unsatisfied (sec. 40(1)(d)(i) and (ii) of the Bankruptcy Act) the taxpayer will without any intervention or assistance of a Court exercising jurisdiction in bankruptcy have committed an act of bankruptcy. Similarly, the Commissioner can, as can any judgment creditor, make application to the bankruptcy registrar for the issue of a bankruptcy notice and the taxpayer will commit an act of bankruptcy if within the time specified in the notice he fails to comply with its requirements.

In our view the Commissioner is entitled to avail himself of the provisions of the Bankruptcy Act in his capacity of a judgment creditor. In the same capacity he is entitled to levy execution. He does not use the special position conferred upon him by sec. 201 in doing so nor does he need any assistance from that section. It is true that sec. 201 entitles him to obtain the judgment for disputed tax. If the Commissioner takes this course and obtains a judgment he has thereafter the rights of a judgment creditor. Mr. Clyne's contention that sec. 201 does not apply to bankruptcy proceedings and that the bankruptcy notice should therefore be set aside is misconceived. That is not to say that if a petition is subsequently presented, the fact that the amount payable by the taxpayer is still genuinely in dispute or that the taxpayer may have a counter-claim against the Commissioner are not relevant considerations for a Court to take into account in the exercise of its discretion under sec. 52(2) of the Bankruptcy Act.

As to 2, Mr. Clyne argued that the judgment of the Supreme Court of New South Wales for $334,826.25 was not a final judgment within the meaning of sec. 40(1)(g) of the Bankruptcy Act. He contended that reading sec. 193(1) and 201 of the Assessment Act and sec. 40(1)(g) of the Bankruptcy Act together the proper conclusion was that the judgment of the Supreme Court was a defeasible one and would not become final until the taxpayer's appeal had been finally determined. He did not argue that the pendency of the appeals to the High Court against the Court of Appeal's judgment upholding the judgment of the Supreme Court affected this finality. His contention was that when the bankruptcy notice was issued on 13 August and when his application to set it aside was dealt with by Lockhart J. on 11 October 1982, his

ATC 4694

reference to the Board of Review in respect of the assessments was still pending and he argued that the judgment would be defeasible until the decision of the Board was given and any appeals from the Board's decision were disposed of.

In our opinion the judgment of the Supreme Court for $334,826.25 was a final judgment (see
Opie v. Opie (1951) 84 C.L.R. 362). It is true that a final judgment may in certain circumstances be set aside or become inoperative but this does not mean that it is not final in the meantime unless and until it is set aside or becomes inoperative (
Re Hanby; Ex parte Flemington Central Spares Pty. Ltd. (1966) 10 F.L.R. 378). It is also to be noted that the appeal procedures had been exhausted so far as tax for the year ended 30 June 1977 was concerned. The judgment was not defeasible to this extent even in the sense contended for by Mr. Clyne.

As to 3, it was common ground that the learned trial Judge had a discretion to set aside the bankruptcy notice (
Re Sterling; Ex parte Esanda Ltd. (1980) 30 A.L.R. 77). Leaving on one side the questions dealt with above, Mr. Clyne argued that the learned trial Judge wrongly exercised his discretion in refusing to set aside the bankruptcy notice. His contention in effect was that the bankruptcy notice had been issued prematurely by the Commissioner who should have waited for the decision of the Board of Review on the references which have been mentioned and the result of any ensuing appeals before applying for the issue of the bankruptcy notice. This last proposition is completely untenable. Whatever the effect on the individual taxpayer it is clear that by sec. 201 of the Assessment Act the legislature authorizes the Commissioner, no doubt in the interests of the revenue, to recover income tax notwithstanding that a reference or appeal is pending in respect of the assessments. This does not mean that where the Commissioner has become a judgment creditor and has issued a bankruptcy notice based on the judgment the Court has no discretion to set the notice aside. However, it is clear that the mere pendency of a reference or an appeal in respect of the assessment will not of itself, in the absence of special circumstances, require the exercise of discretion to set aside (
Re Roma Industries Pty. Ltd. 76 ATC 4113; Fortuna Holdings Pty. Ltd. v. D.F.C. of T. 76 ATC 4312), although circumstances may be such that the exercise of the discretion to set aside a bankruptcy notice, a bankruptcy petition or a winding up petition is called for (cf.
Re Norper Investments Pty. Ltd. & Companies Act 77 ATC 4212.

In the present case the question remains whether the circumstances of the present case were such that the trial Judge was in error in not setting the notice aside. This Court does not interfere with the exercise of discretion by a Judge sitting at first instance unless he is shown to have committed an error of fact or of law or unless the result is so unreasonable that some hidden error must have been present. Mr. Clyne at the outset conceded that the burden of establishing the exercise of discretion by the learned trial Judge was in error in this sense was too heavy to be undertaken by him on this appeal. Instead he argued that in the interests of maintaining consistency in decisions in this field of the law the Full Court should exercise the discretion itself de novo. However, we find ourselves in agreement with the exercise of discretion by his Honour in the present case and would arrive at the same conclusion. The only subsequent occurrence of significance appears to be the decisions of the Board of Review given on 26 November 1982 which unanimously rejected Mr. Clyne's references. Mr. Clyne has since lodged an appeal to the Supreme Court of New South Wales against the Board's decisions. We do not consider that these events in any way can be seen as improving Mr. Clyne's position. We would, if it were proper to undertake the task of exercising the discretion, arrive at a similar decision in the circumstances existing at the time of the hearing of this appeal.

As to 4, it was argued by Mr. Clyne that the fixing by the bankruptcy registrar under sec. 40(1)(g) of the Bankruptcy Act of the time for compliance with the bankruptcy notice was an exercise of judicial power and that sec. 40(1)(g) was unconstitutional and invalid. Notice in accordance with sec. 78B of the Judiciary Act was given to the Commonwealth and State Attorneys-General of the constitutional question thus raised but neither wished to intervene.

In
Re Moss; Ex parte Tour Finance Limited (1968) 13 F.L.R. 101, Gibbs J., as he then was, at p. 106 said:

ATC 4695

``In issuing a bankruptcy notice, and in fixing the time for compliance with its requirements, the Registrar does not decide any controversy between parties; he does not determine any issue of fact or law or ascertain any existing rights or liabilities; and his decision (if it can be called that) cannot itself be enforced by execution or in any other way. The function which he exercises seems to me to exhibit none of those features which, generally speaking, belong to judicial power (see
R. v. Davison (1954) 90 C.L.R. at pp. 367-368).''

He concluded that the fixing of time for compliance was not a step in a judicial process nor in itself an act of a judicial character and was not an act which had traditionally been regarded as necessary to be performed by a Court. It was not an exercise of judicial power and the enactment was not unconstitutional. In
Re Maddox; Ex parte The Debtor (1979) 36 F.L.R. 393, Lockhart J. held that the issue of a bankruptcy notice by the bankruptcy registrar was a ministerial or administrative act and he relied on some passages from Re Moss; Ex parte Tour Finance Limited.

We were invited by Mr. Clyne to say that these two cases were wrongly decided. However, in our opinion they were correctly decided. We find ourselves in agreement with the approach which was adopted in these two cases and we reject Mr. Clyne's argument.

In the result we would dismiss the appeal with costs and order that the time for compliance with the bankruptcy notice of 13 August 1982 be on or before 24 December 1982.


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