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DFC of T v GOVERNMENT INSURANCE OFFICE OF NEW SOUTH WALES & ANOR

Judges:
Wilcox J

Court:
Federal Court

Judgment date: Judgment handed down 19 June 1992

Wilcox J

This proceeding raises questions concerning a notice given by the applicant, the Deputy Commissioner of Taxation, pursuant to s. 218 of the Income Tax Assessment Act 1936. The applicant's case is that the notice operated against monies payable by the first respondent, Government Insurance Office of New South Wales (``the GIO''), to the second respondent, Hussein Daoui, pursuant to a judgment recovered by Mr Daoui in connection with a District Court personal injuries claim. Fearing that the damages monies were about to be paid by the GIO to Mr Daoui, the Deputy Commissioner made an ex parte application on 12 December 1991 for an order restraining the payment pending further order of the Court. The usual undertaking as to damages was given. I granted this application and directed that an Application seeking permanent relief be made returnable on 18 December. On that day all three parties were represented. At their joint request, I made a series of orders, including an order that the damages payable to Mr Daoui be paid into this Court and directions for preparatory steps. These steps included the giving of notices under s. 78B of the Judiciary Act 1903 to the Commonwealth and State Attorney-Generals, the second respondent wishing to raise the question whether s. 218 of the Income Tax Assessment Act fell within Commonwealth legislative power. No Attorney General appeared.

There is no dispute about the facts of this case; indeed most of them were the subject of an agreed statement of facts. But, before stating them, it may be useful to set out the relevant portions of s. 218:

``218(1) The Commissioner may at any time, or from time to time, by notice in writing (a copy of which shall be forwarded

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to the taxpayer at his last place of address known to the Commissioner), require-
  • (a) any person by whom any money is due or accruing or may become due to a taxpayer;
  • (b) any person who holds or may subsequently hold money for or on account of a taxpayer;
  • (c) any person who holds or may subsequently hold money on account of some other person for payment to a taxpayer; or
  • (d) any person having authority from some other person to pay money to a taxpayer,

to pay to the Commissioner, either forthwith upon the money becoming due or being held, or at or within a time specified in the notice (not being a time before the money becomes due or is held)-

  • (e) so much of the money as is sufficient to pay the amount due by the taxpayer in respect of tax or, if the amount of the money is equal to or less than the amount due by the taxpayer in respect of tax, the amount of the money; or
  • (f) such amount as is specified in the notice out of each payment that the person so notified becomes liable from time to time to make to the taxpayer until the amount due by the taxpayer in respect of tax is satisfied,

and may at any time, or from time to time, amend or revoke any such notice, or extend the time for making any payment in pursuance of the notice.

218(2) Any person who refuses or fails to comply with any notice under this section is guilty of an offence.

Penalty: $1,000.

218(3) Where a person (in this subsection referred to as the `convicted person') is convicted before a court of an offence against subsection (2) in relation to the refusal or failure of the convicted person or another person to comply with a notice under this section, the court may, in addition to imposing a penalty on the convicted person, order the convicted person to pay to the Commissioner an amount not exceeding the amount or the aggregate of the amounts, as the case requires, that the convicted person or the other person, as the case may be, refused or failed to pay to the Commissioner in accordance with the notice.

218(4) Any person making any payment in pursuance of this section shall be deemed to have been acting under the authority of the taxpayer and of all other persons concerned and is hereby indemnified in respect of such payment.

218(5) If the Commissioner receives any payment in respect of the amount due by the taxpayer before payment is made by the person so notified he shall forthwith give notice thereof to that person.

218(6)...

218(6A) Where, but for this subsection, money is not due, or repayable on demand, to a person unless a condition is fulfilled, the money shall be taken, for the purposes of this section, to be due, or repayable on demand, as the case may be, to the person notwithstanding that the condition has not been fulfilled.

218(6B)...

218(7)...''

I now turn to the facts. On 3 April 1986 the Deputy Commissioner issued to Mr Daoui, pursuant to the Income Tax Assessment Act, notices of assessment of income tax in respect of each of the income years ending on 30 June 1980, 1981, 1982 and 1983. The total amount payable under those assessments was $48,742.13. No part of that sum has yet been received by the Deputy Commissioner.

On 1 July 1986, Mr Daoui commenced an action for damages in the District Court of New South Wales against the GIO. The action arose out of a motor accident on 4 December 1985 wherein Mr Daoui had been injured. Apparently the Deputy Commissioner became aware of the claim. On 3 October 1986 he forwarded to the GIO a document which purported to be a notice under s. 218 of the Income Tax Assessment Act. This is the document relied upon by the Deputy Commissioner in claiming the monies now in Court. Omitting formal parts, the document read:

``TAKE NOTICE that in the exercise of the powers conferred upon me as Deputy Commissioner of Taxation by delegation from the Commissioner of Taxation

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pursuant to section 8 of the Taxation Administration Act 1953, I DO BY THIS NOTICE REQUIRE the Government Insurance Office being a person:
  • (a) by whom any money is due or accruing or may become due to;
  • (b) who holds or may subsequently hold money for or on account of;
  • (c) who holds or may subsequently hold money for or on account of some other person for payment to; or
  • (d) having authority from some other person to pay money to;

Mr Hussein Daoui (hereinafter referred to as the taxpayer) now or previously of 5/31 Hill Street, Marrickville 2204, a taxpayer by whom the amount of $52,499.82 is due in respect of tax TO PAY TO THE COMMISSIONER so much of that money as is sufficient to pay the amount of $52,499.82 or the whole of the money if it is equal to or less than that amount AND if the money is now due by the Government Insurance Office to the taxpayer or is now held by the Government Insurance Office on behalf of the taxpayer, the payment to the Commissioner is required to be made forthwith, BUT if the money becomes due by the Government Insurance Office to the taxpayer in the future or is held by the Government Insurance Office on behalf of the taxpayer in the future, the payment to the Commissioner is required to be made forthwith upon the money so becoming due or held by the Government Insurance Office. 

  Your reference : SCON 37 Ext 3674
  Claim Number   : MVC 83 642103
  Policy Number  : PD JP 23 50216

AND TAKE FURTHER NOTICE that where a person refuses or fails to comply with this notice that person will be guilty of an offence against section 218 (a copy of which is attached) and be liable to a penalty not exceeding $1,000.

AND TAKE FURTHER NOTICE that where a person is convicted before a Court of an offence in relation to the refusal or failure of the convicted person or another person to comply with this notice, the Court may, in addition to imposing a penalty on the convicted person, order the convicted person to pay to the Commissioner an amount not exceeding the amount or aggregate of the amounts that the convicted person or the other person refused or failed to pay to the Commissioner in accordance with this notice.

If the said tax or any portion thereof is paid before any payment is made by the Prudential Assurance Co Ltd to the Commissioner under this notice, I shall forthwith give notice to the Prudential Assurance Co Ltd of such payment and, in that event, the Prudential Assurance Co Ltd will not be required to pay to the Commissioner, in pursuance of this notice, the tax or portion thereof, so paid.''

Two comments should be made about this document. First, although nobody suggests that this matters, the parties agree that the policy number quoted in the particulars at the end of the opening paragraph is not meaningful to any of them. The second matter is more important. It will be noted that the final paragraph of this document refers, on three occasions, to Prudential Assurance Co Ltd. This was an error. Apparently, two notices were simultaneously issued by the Deputy Commissioner in relation to Mr Daoui, one making demand on the GIO and the other on Prudential Assurance. Their second pages became transposed, with the result that each insurance company received a document containing a correct first page but incorrect second page. The document sent to the GIO should, of course, have referred, in each of these three locations, to the GIO. The copies of the notices sent to Mr Daoui at that time, as required by the parenthetical words in the opening clause of s. 218(1), were not infected by the same error. The copy GIO notice named that company in the final paragraph as well as in the opening paragraph.

On 14 July 1987 Mr Daoui became bankrupt. On or about 23 July 1987 the Official Receiver, on behalf of the Official Trustee in Bankruptcy, forwarded to the Deputy Commissioner a notice to creditors. The notice included a summary of the bankrupt's statement of affairs. This revealed liabilities of $68,000 and current assets of $10. The bankrupt's claim against the GIO was disclosed as a contingent asset. The Deputy Commissioner responded by lodging a proof of debt for $56,945.93 (the amount of the 1980-1983 assessments with accrued interest). This proof has neither been admitted nor rejected. No dividend has been paid.

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On 13 August 1991 Mr Daoui recovered judgment against the GIO in the District Court. The amount of the judgment was $10,793 together with costs to be agreed or taxed. The amount of the costs has not yet been determined. In the meantime the GIO has paid the verdict monies into this Court.

The final factual material to which reference should be made is not disputed as a matter of fact; but the Deputy Commissioner disputes its relevance and the material was admitted subject to his objection on that ground. The material shows that Mr Daoui owes Mr BV Dennis, the solicitor who acted on his behalf in the District Court proceeding, the sum of $14,365.56. This sum comprises $5,000 solicitor's profit costs, and $5,450 disbursements, in connection with the District Court proceeding; plus $7,106.06 due to the National Australia Bank pursuant to a litigation lending scheme loan made by the bank and guaranteed by Mr Dennis; less the sum of $3,190.50 paid by the bank to Mr Dennis when the loan was negotiated.

The Application filed on behalf of the Deputy Commissioner seeks declarations that:

  • ``(a) As at 3 October 1986, the First Respondent was a person by whom money was due or accruing or might become due to the Second Respondent or a person who held or might subsequently hold money for or on account of the Second Respondent, or a person who held or might subsequently hold money for or on account of some other person for payment to the Second Respondent, or a person having authority from some other person to pay money to the Second Respondent.
  • (b) As at 12 August 1991, the said money became due or was being held for or on account of the Second Respondent: and
  • (c) The whole of the said money is subject to a change in favour of the Applicant, in accordance with the notice in writing dated 3 October 1986 from the Applicant to the First Respondent.''

The Application also seeks an order restraining the GIO from paying any money to Mr Daoui otherwise than in accordance with the s. 218 notice and an order that the GIO pay to the Deputy Commissioner the whole of the judgment monies. It may be that these proposed orders would have continuing relevance in relation to costs, but they are no longer appropriate (if they ever were) to the verdict monies. In relation to those monies, and although he has not formally amended the Application, the Deputy Commissioner seeks an order for payment to him of the amount now in Court.

Since it paid the money into Court, the GIO has taken no active part in the case. But Mr Daoui has contested the Deputy Commissioner's claim, arguing not only that the Application should be dismissed but that relief ought to be granted to him on a Cross- claim. The relief sought in the Cross-claim is:

  • ``1. A declaration that the Second Respondent is not indebted to the Applicant for income tax in the years ending 30th June 1980, 30th June 1981, 30th June 1982 and 30th June 1983.
  • 2. That a Notice pursuant to Section 218 of the Income Tax Assessment Act 1936 (Comm) issued by the Applicant on 3rd October 1986 is void and of no effect.
  • 3. Further, in the alternative to 2 above, that the said Notice be set aside.
  • 4. Damages.
  • 5. Costs on an indemnity basis.
  • 6. Such further or other orders thinks fit.''

Counsel for Mr Daoui challenges the validity of the Commissioner's notice upon several grounds. First, there is an argument about form. Counsel says that the notice must be strictly construed since any failure to comply with it constitutes an offence: see s. 218(2). He says that the present notice has two defects: it misrepresents to the GIO its rights under s. 218(5) and it fails to identify any fund or property over which it may operate. The first of these defects is said to arise out of the error in the last paragraph of the notice; counsel concedes that this point would be unavailable to him if the notice had referred to the GIO rather than to Prudential Assurance.

In support of his argument in relation to the first suggested defect, counsel referred to
Perpetual Trustee Co (Ltd) v Holdsworth [1966] 2 NSWR 755. That decision was actually given in 1953. It concerned two notices given to a trustee of a settlement, one under s. 218 of the Income Tax Assessment Act and the other under s. 274 of the Income Tax Management Act 1941 (NSW). In his s. 218 notice, the Commissioner of Taxation added

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after the requirement of payment the words ``in conjunction with State''. The notice under the State Act followed the requirements of s. 274 except that there were added the words: ``in conjunction with Federal''. At 757 Myers AJ adverted to the penal consequences of non- compliance with s. 274 and said ``that any notice issued under the section must therefore be explicit and be strictly within the terms of the Statute. If words are added to it that the section does not authorise, it is not sufficient in my opinion to say that the words have no meaning. They at least must place the person to whom the notice is given in some doubt as to what his duty is, and the addition of them, in my opinion, makes the notice invalid''. He said that similar considerations applied to the notice under the federal Act. It also was invalid.

I accept counsel's submission that, to be valid, a s. 218 notice must follow the terms of the section and leave no ambiguity as to the nature of the recipient's obligation. But I do not think that this acceptance affects the validity of the present notice. The operative words of the notice, contained in its opening paragraph, followed the terms of s. 218. They were unambiguous. The GIO was required to pay so much of the money due by it to Mr Daoui, or as might thereafter become due, as was sufficient to discharge Mr Daoui's tax liability of $52,499.82. The only confusion in the notice pertained to its last paragraph, in which the Deputy Commissioner sought to state the effect of s. 218(5) - namely his obligation to inform the GIO if he received payment from another source. He did not succeed in accurately stating that obligation; he spoke of informing Prudential Assurance whereas his obligation under s. 218(5) was to inform the GIO. But there is nothing in s. 218 which requires a notice to contain a reference to subs. (5) or to the obligation thereunder. And, unlike the situation in Holdsworth, the error was not one which would cause a recipient doubt as to his duty. In contrast to the situation in Holdsworth, the operative words were clear.

As a variant on this first argument, counsel says that the Deputy Commissioner was obliged by the parenthetical words in subs. (1) to serve on Mr Daoui a ``copy'' of the notice served on the GIO. The Deputy Commissioner failed to comply with this obligation because the notice served on the GIO referred in its last paragraph to Prudential Assurance whereas the document served on Mr Daoui spoke of the GIO. Accordingly, counsel argues that the notice (or its service) is invalid.

I accept that the Deputy Commissioner failed to serve on Mr Daoui a ``copy'' of the notice he sent to the GIO. The two documents differed. But I do not think that this failure invalidates either the notice itself or its service upon the GIO. The section does not expressly provide that service of a copy is a pre-requisite to the existence of a valid notice or valid service. There is good reason to refrain from implying that intention: the possibility of prejudice to a recipient of a notice. Ordinarily, the recipient would have no information about the document (if any) served upon the taxpayer. Yet, if counsel is right, in such a case the recipient would act at its peril in making a payment to the Commissioner under the notice. If no document was served upon the taxpayer, or if the served document was not a true copy of the original notice, or was sent to the taxpayer otherwise than at his or her last place of address known to the Commissioner, the notice, or its service, would be invalid and the indemnity provided by s. 218(4) inapplicable. Notwithstanding the service upon it of a proper notice, and payment thereunder to the Commissioner, the recipient would remain liable to the taxpayer for the original debt.

In the absence of express words compelling such a construction of the section, the Court should not impute to the Parliament an intention to create such an unfair possibility. The very circumstance relied upon by counsel in his first submission, that the recipient of a notice is placed under an obligation enforceable by criminal process, is a telling reason for rejecting a construction of the section making the recipient concerned with the Commissioner's compliance with his obligation to provide a copy of the notice to the taxpayer.

The second submission on form is that the notice failed to identify a fund or property over which it was to operate. Factually, perhaps, the submission is not entirely correct - the notice did include a claim number whose accuracy is not challenged. But the short answer to the submission is that the section does not require a notice to make such an identification. The entitlement of the Commissioner under s. 218(1) is to issue a notice requiring the recipient ``to pay to the Commissioner, either forthwith upon the money becoming due or

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being held, or at or within a time specified in the notice (not being a time before the money becomes due or is held)'' so much of ``the money'' as is sufficient to pay the tax. The words ``the money'' refer to any money falling within para. (a) to (d) inclusive of subs. (1). A recipient complies with a notice by paying to the Commissioner any money, falling within para. (a) to (d) inclusive, which is then, or subsequently falls, due by the recipient to the taxpayer. It is for the recipient, not the Commissioner, to identify the re!evant money. This result is not surprising. The Commissioner may not be in a position to identify the precise fund or account out of which money is due, or may become payable, to the taxpayer. To require him to do so, would be to limit significantly the utility of the section for tax- collection.

This understanding of s. 218 is consistent with the past practice of the Commissioner, insofar as that practice is revealed in the reported cases. I am unaware of any case in which the Commissioner specified the particular fund or property out of which payment was to be made. Even in cases where the validity of s. 218 notices has been contested on other grounds, this point has not been taken: see, for example,
Clyne & Anor v DFC of T & Anor 81 ATC 4429; (1981) 150 CLR 1 and
DFC of T v Donnelly & Ors 89 ATC 5071; (1989) 25 FCR 432. In the latter case at ATC 5080; FCR 442-443 von Doussa J used language inconsistent with the submission of counsel for Mr Daoui:

``In my opinion a notice may be given prospectively under sec. 218. When this is done, no obligation is imposed on the third party unless or until circumstances arise between the third party and the taxpayer which bring into existence an identifiable debt owing to the taxpayer, whether payable forthwith, or on a fixed date, or on a contingency. The principles which apply to the assignment of future property do provide a helpful guide. Equity fastens upon the future property to make the assignor a trustee of the legal right of ownership for the assignee when the property comes into existence and when it is identifiable as property meeting the description of the assignment: see
Tailby v. Official Receiver (1888) 13 App. Cas. 523 at pp. 528-530, 533, 543. Until identifiable property comes into existence there is no subject matter in respect of which the assignment can operate. Likewise, in the case of a prospective notice given under sec. 218, until there is an identifiable sum of money owing to the taxpayer by the third party the conditions of the section are not met. It is the coming into existence of the identifiable debt which crystallises the obligation on the third party to pay to the Commissioner the `money' referred to in sec. 218(1) and provides the measure of the obligation which is imposed by the notice.''

Next, counsel for Mr Daoui puts some submissions concerning the effect of a s. 218 notice. He argues that it does not operate either as an assignment of future property or a charge. But, at least for a single Judge of this Court, that question is settled by Donnelly. In that case the Full Court held that the effect of service of a s. 218 notice is to charge the debts owed, or which thereafter become owing, by the recipient to the taxpayer: see per Lockhart J at ATC 5075; FCR 435-436 and per Hill J at ATC 5087-5088; FCR 452-459.

Counsel for Mr Daoui sought to distinguish Donnelly on the basis that it was founded on Clyne, a decision given in 1981 but relating to a s. 218 notice served in 1979, prior to the repeal of s. 221 of the Income Tax Assessment Act in 1980. Section 221 provided a Commonwealth priority on the winding up of a company. It seems to me that the existence of this section in 1979 had nothing to do with the High Court's decision in Clyne, which dealt with an individual taxpayer, not a company, and in which s. 221 was not even mentioned. In any event I would not be justified in refusing to follow a directly-applicable decision of the Full Court, made after the repeal of s. 221, simply because of a view that the decision failed to take account of that repeal.

Counsel's next proposition is that, if the notice created a charge, it imposed a tax contrary to s. 55 of the Constitution. Section 55 requires that laws imposing taxation deal only with the imposition of taxation, any other provision being of no effect. The argument is that monies may become payable under a s. 218 notice before the tax is payable - see Clyne - and, in any event, the effect of a notice creating a charge is that the Commissioner changes from an unsecured to a secured creditor.

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Both the propositions just set out are correct. It does not follow that s. 218 offends s. 55 of the Constitution. As Gibbs CJ pointed out in Clyne at ATC 4432; CLR 9, tax is imposed by the relevant Income Tax Act, not by the Income Tax Assessment Act. Section 218 does not impose any additional obligation upon a taxpayer; it merely provides an additional mechanism whereby the Commissioner may recover tax which is already due to him, whether or not yet payable. The provisions of the Income Tax Assessment Act relating to recovery of tax are not provisions dealing with the imposition of taxation: see
Re Dymond (1958-1959) 101 CLR 11 per Fullagar J (with whom Dixon CJ, McTiernan, Kitto, Taylor and Windeyer JJ all agreed on this point) at 19-21. Dymond was applied by Gibbs CJ, Wilson, Deane and Dawson JJ in
MacCormick v FC of T 84 ATC 4230 at 4239; (1983-1984) 158 CLR 622 at 644.

Counsel's next submissions arise out of his client's bankruptcy. Counsel says that, upon the making of the sequestration order, there was no longer an amount due by the taxpayer to the Commissioner, the debt was converted into a right to prove against Mr Daoui's bankrupt estate. It follows, says counsel, that there was nothing upon which the s. 218 notice could take effect; alternatively, if money remained owing after the sequestration order, Mr Daoui's debt to the Commissioner did not survive his discharge from bankruptcy.

Both these propositions misconceive the effect of a s. 218 notice. For there to be a valid s. 218 notice, tax must be due to the Commissioner. But once the notice is served, it takes effect as a charge over any monies then payable by the recipient to the taxpayer or which thereafter become payable, until such time (if ever) as notice of payment is given by the Commissioner to the recipient under s. 218(5). The continuing efficacy of the notice is not dependent upon the tax remaining recoverable from the taxpayer. I apprehend, for example, that if the outstanding tax was paid to the Commissioner by the taxpayer, or by someone else other than the recipient, and, being unaware of this, the recipient made a payment to the Commissioner pursuant to the notice, the recipient would still be entitled to an indemnity under s. 218(4).

Once a charge comes into existence, it continues to bind the charged monies until payment, notwithstanding the supervening bankruptcy of the debtor. The position is similar to that discussed in a recent Full Court decision, Puntoriero v Nickpack Pty Limited (Beaumont, Wilcox and O'Loughlin JJ, 3 June 1992); except that the Court was there concerned with an equitable assignment rather than a charge. Nor does it matter that the debtor, the person over whose property the charge arises, has been discharged from bankruptcy: see
In re Lind. Industrials Finance Syndicate, Lind v Lind [1915] 2 Ch 345.

Counsel puts a further submission related to Mr Daoui's bankruptcy. He says that the Deputy Commissioner is estopped from realising his security because he failed to include details of it in his proof of debt. Section 90 of the Bankruptcy Act governs proofs of debts by secured creditors. A secured creditor who surrenders his security for the benefit of creditors generally is entitled to prove for the whole of his debt (s. 90(2)). A secured creditor who has realised his debt may prove for any outstanding balance (s. 90(3)). A secured creditor who has neither realised nor surrendered his security may estimate its value and prove for any balance (s. 90(4)). Such a secured creditor is obliged to give particulars of his security and its estimated value in his proof of debt (s. 90(5)).

In the subject proof of debt the statement was made that security is not held by the Deputy Commissioner, or any person on his behalf, for the whole or any part of the monies owing. The security (the charge effected by the s. 218 notice) had not been realised. It was not surrendered in the proof of debt. Consequently, s. 90(4) applied. The proof of debt should have contained an estimate of the value of the charge. It did not. But this does not matter. A non-compliance with s. 90(4) may lead a trustee to reject a proof of debt; it does not affect the continuing operation of the relevant security. In the present case, the proof of debt has not been accepted. No estoppel arises.

Counsel referred to
Taylor v Secretary to the Department of Social Security (1988) 18 FCR 322, a decision concerning the entitlement of the Secretary to deduct earlier overpayments from a pension paid to a bankrupt. If this decision has any present relevance, it is by way of assistance to the Deputy Commissioner. Taylor illustrates the proposition that the operation of a statutory regime established to

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ensure payment of monies due to government is not ordinarily affected by a bankruptcy.

Counsel submits that Mr Daoui's verdict monies could no longer be subject to the s. 218 notice because they have been paid into court; a s. 218 notice may not be issued against a court. This submission is scarcely worth comment. The notice was issued before the monies were paid into court. Upon issue it charged such monies as might become payable in the future by the GIO to Mr Daoui. Monies having become payable, and a dispute having arisen, by consent they were paid into court to await a determination as to who was entitled to them, the Deputy Commissioner or Mr Daoui. The payment into court neither created new rights nor derogated from existing rights.

Counsel's final submission has more substance. He submits that there is a general principle that a person who does work on behalf of another has an equitable lien over the property in relation to which the work was performed. Counsel cited
Hewett & Ors v Court & Anor (1982-1983) 149 CLR 639, a case where the High Court, by majority, held that the purchasers of a prefabricated house, who had paid in advance the full cost of its construction, had an equitable lien over the house; so that they received no preference when the building company, which later went into liquidation, completed the construction during the period of relation back. That case was very different from the present; it concerned a purchaser's lien, not a lien for work done. Nonetheless, the decision is helpful in indicating the width of the concept of equitable lien. The utility of the case is illustrated by its citation in
Shirlaw v Taylor (1991) 102 ALR 551, a case where a Full Court held a provisional liquidator entitled to an equitable lien over funds under his control, notwithstanding the termination of the provisional liquidation and the appointment of another person as liquidator. The Full Court referred particularly to the judgment of Deane J (one of the majority) in Hewett v Court. That judgment contains an extensive account of the concept of equitable lien. It is sufficient to quote its opening paragraph, at 663:

``An equitable lien is a right against property which arises automatically by implication of equity to secure the discharge of an actual or potential indebtedness... Though called a lien, it is, in truth, a form of equitable charge over the subject property... in that it does not depend upon possession and may, in general, be enforced in the same way as any other equitable charge, namely, by sale in pursuance of court order or, where the lien is over a fund, by an order for payment thereout... Equitable lien differs from traditional mortgage in that it does not transfer any title to the property and therefore cannot be enforced by foreclosure. While it arises by implication of some equitable doctrine applicable to the circumstances, its implication can be precluded or qualified by express or implied agreement of the parties... It can exist over land or personalty or both.''

At 668 Deane J cited, as an example of an equitable lien, ``the solicitor's lien over the proceeds of an action''. He went on to consider ``the circumstances which are sufficient for the implication, independently of agreement, of an equitable lien between parties in a contractual relationship''. That was, of course, the situation in the present case. Mr Daoui and his solicitor, Mr Dennis, were in a contractual relationship; but, so far as the evidence indicates, there was no express agreement between them for a lien. The relevant circumstances, according to Deane J are:

  • ``(i) that there be an actual or potential indebtedness on the part of the party who is the owner of the property to the other party arising from a payment or promise of payment either of consideration in relation to the acquisition of the property or of an expense incurred in relation to it...;
  • (ii) that the property (or arguably property including that property:...) be specifically identified and appropriated to the performance of the contract...;
  • (iii) that the relationship between the actual or potential indebtedness and the identified and appropriated property be such that the owner would be acting unconscientiously or unfairly if he were to dispose of the property (or, if it be appropriate, more than a particular portion thereof) to a stranger without the consent of the other party or without the actual or potential liability having been discharged. It may be that the above circumstances or tests, particularly (i), would be unduly restrictive if propounded as a statement of exclusion. As has been said however, they are formulated as a statement of what is sufficient rather than of what is

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    essential. Whether or not they exist or are satisfied in a particular case should, like most questions involved in the application of equitable doctrines, be determined by reference to the substance of the transaction rather than its form:...''

In Shirlaw v Taylor the Full Court said at 558:

``... where a party has by his efforts brought into court a fund in the administration of which various parties are interested, his costs and expenses should be a first claim upon the fund.''

Two authorities were cited:
Batten v Wedgwood Coal and Iron Company (1884) 28 Ch.D 317, a case where a receiver and manager was held entitled to be paid his fees in priority to debenture-holders, and
In re Universal Distributing Company Limited (In Liquidation) (1933) 48 CLR 171. In the latter case Dixon J, sitting at first instance, dealt with a claim for fees by an official liquidator. The company had given a debenture creating a floating charge over the whole of its assets. The liquidator had expended time and effort in the realisation of the company's assets and he contended that he was entitled to be paid his fees out of the proceeds of realisation, in priority to the debenture-holders. At 174 Dixon J set out the relevant principle:

``If a creditor whose debt is secured over the assets of the company come in and have his rights decided in the winding up, he is entitled to be paid principal and interest out of the fund produced by the assets encumbered by his debt after the deduction of the costs, charges and expenses incidental to the realization of such assets... The security is paramount to the general costs and expenses of the liquidation, but the expenses attendant upon the realization of the fund affected by the security must be borne by it... The debenture-holders are creditors who have a specific right to the property for the purpose of paying their debts. But if it is realized in the winding up, a proceeding to which they are thus parties, the proceeds must bear the cost of the realization just as if they had begun a suit for its realization or had themselves realized it without suit.''

Dixon J went on to note that the expenses thrown against the fund belonging to the debenture-holders had all ``been reasonably incurred in the care, preservation and realisation of the property''. It is, of course, fundamental to the entitlement to indemnity that a person in the position of a trustee has acted reasonably in the interests of the trust estate: see
Mayne v Jaques (1960) 101 CLR 169 at 183 and
In re Beddoe; Downes v Cottam [1893] 1 Ch 547 at 558 and 562. A trustee has a lien over trust property to secure payment of monies properly due to him in relation to the trust estate. If the extent of that lien is governed by the rule that the trustee is entitled to recover only properly incurred expenses, principle requires the same limitation to apply to other equitable liens.

In the present case, it seems that Mr Dennis' retainer predated the s. 218 notice. The evidence does not disclose the proportion of the total work performed by Mr Dennis in relation to the District Court action which was done in the three months between the commencement of the action and the giving of the s. 218 notice; presumably it was comparatively small. But it seems to me that the proportion does not matter. By the service of the s. 218 notice, the Deputy Commissioner became a secured creditor in relation to the proceeds of the action for damages. But proceeds would become available only if the action was prosecuted. The action has been prosecuted and its proceeds have now become available; but only through the work of Mr Dennis. It would be inequitable to allow the Deputy Commissioner to take the benefit of the judgment monies without making any deduction from those monies of the costs reasonably and actually incurred in obtaining judgment. Although the facts of the two cases are very different, it seems to me that this case falls within the principles expressed in Hewett v Court. In particular, the Deputy Commissioner would be acting ``unconscientiously or unfairly'' to Mr Dennis if he were to appropriate the benefit of the charge obtained over Mr Daoui's cause of action without deducting therefrom the reasonable cost of realising that asset. This applies to the verdict monies, the sum of $10,793 which has been paid into Court. A fortiori it applies to the party/ party costs, which have not yet been quantified and relate directly to the work done, or disbursements made, by Mr Dennis; but which the Deputy Commissioner claims in priority to him. As I see the situation, it is very similar to that which occurs when a receiver or liquidator

ATC 4305

realises assets over which a creditor has a security, as in Shirlaw v Taylor and Re Universal Distributing Co Ltd.

The basis upon which counsel for the Deputy Commissioner resists Mr Daoui's argument of equitable lien is that the proceeds of the judgment never came into Mr Dennis' possession. Counsel referred to
Stewart v Strevens [1976] 2 NSWLR 321. In that case, Helsham J discussed the entitlement of a solicitor to deal with monies held by him on behalf of a client. At 327-328 he referred to the possibility of a solicitor having a lien over monies recovered by the solicitor on behalf of the client. But that passage cannot be read as a statement that possession is essential to the existence of a lien; his Honour was not concerned with the situation where the solicitor did not have control of the money. More importantly, a requirement of possession is incompatible with both the wide terms of the principles enunciated in Hewett v Court and some of the examples there given by Deane J. I refer in particular to his Honour's references to vendors' liens and purchasers' liens, at 663-664; the whole point of those liens being to protect the party who is not in possession of the property.

The submission made on behalf of the Deputy Commissioner on this aspect of the case reflects confusion between a legal lien and an equitable lien. Possession is an ingredient of a legal lien, but not of an equitable lien; see ``Halsbury's Laws of England'', 4th edition, vol. 28 paras. 501-505, 551. In the last-cited paragraph the learned authors say: ``An equitable lien differs from a common law lien in that a common law lien is founded on possession and, except as modified by statute, merely confers a right to detain the property until payment, whereas an equitable lien, which exists quite irrespective of possession, confers on the holder the right to a judicial sale''. If I am right in thinking that the circumstances of the present case gave rise to an equitable lien, it does not matter that the judgment monies never came into Mr Dennis' possession.

I previously mentioned the rider of reasonableness. Mr Dennis is entitled to assert a lien over the judgment monies only to the extent of the amount reasonably due to him for his work, as Mr Daoui's solicitor, in the prosecution of the District Court action. That amount is not restricted to items recoverable, on a party/party basis, by Mr Daoui against the GIO; it extends to all items of work reasonably undertaken, and all disbursements reasonably incurred, in connection with the prosecution of the claim. Unless agreement can be reached, the amount will have to be determined by taxation of a bill of costs, compiled on a solicitor/client basis but having regard to the fact that the relevant work was done in connection with a District Court claim. I mean that, although any taxation of a solicitor/client bill will be effected by an officer of this Court, the taxation should have regard to the scale of costs governing proceedings in the District Court at the relevant time. In determining the total amount due to Mr Dennis, account must be taken of the monies recoverable from the GIO, on a party/party basis, pursuant to the costs order in the District Court. The amount of those costs has not yet been calculated. That is a task for Mr Dennis; but the Deputy Commissioner has an interest in maximising the recovered party/party costs, since the difference between the total party/ party costs and the total solicitor/client costs will come out of the monies now in Court. Accordingly, it seems to me that any assessment of party/party costs, as between Mr Daoui and the GIO, should be dependent upon the Deputy Commissioner's prior assent. If agreement cannot be reached, the costs should be taxed by the proper officer of the District Court. When quantified, the amount of those costs ought to be paid to Mr Dennis in reduction of the amount payable to him pursuant to his equitable lien. Credit for that amount should be given on any solicitor/client bill which he might then prepare. Unless the amount of that bill is agreed, the amount payable under the solicitor/client bill should be determined by a taxing officer of this Court. The monies held in Court should then be applied: first, in payment to Mr Dennis of the balance due under the solicitor/client bill; and, second, in payment to the Deputy Commissioner of whatever monies remain available.

Although the quantum of the solicitor/client costs is a matter for the taxing officer, there is one matter of principle to which I should make reference. It concerns the expenditure incurred by Mr Daoui in respect of the loan made to him by the National Australia Bank. I appreciate that this loan was arranged in order to finance the District Court action and that Mr Dennis

ATC 4306

guaranteed its repayment. But I do not think that it follows that Mr Dennis is entitled to recover the balance owing to the bank, or any payments which he might have made, or may hereafter make, pursuant to his guarantee, in priority to the Deputy Commissioner. The evidence about the loan is extremely sparse. I have set out above the relevant portion of Mr Dennis' affidavit. The only additional evidence is the bank statement which is annexure ``BVD 3'' to the affidavit. The opening item on this statement shows a debit balance of $7,000.99 brought forward on 28 June 1991. Apparently, the loan account was opened earlier; on what date, in what amount and under what circumstances the evidence does not reveal. What does appear from the statement is that, between 28 June 1991 and 31 December 1991, interest was being debited at various rates (15% from 23 September, 14.5% from 18 November and 14% from 16 December) along with a monthly account-keeping fee. There is no suggestion that the Deputy Commissioner was apprised of the fact that this expenditure was being incurred or that he acquiesced in it. Unlike legal costs, expenditure for bank interest and bank fees is not a usual incident of the prosecution of a claim for damages. The visitation of that expenditure upon the Deputy Commissioner is, in my opinion, a course requiring justification by evidence. No such evidence has been tendered. It is not shown that this was expenditure reasonably and necessarily incurred in the prosecution of the District Court action. Accordingly, it should be disregarded in determining the amount properly payable to Mr Dennis pursuant to his lien. But, of course, Mr Dennis is entitled to claim actual disbursements incurred in connection with the District Court action (filing fees, witnesses expenses, counsel's fees and the like) notwithstanding that these expenses may have been paid out of the loan account.

Each of the parties seeks declaratory relief. But it seems to me that neither of their suggested formulations is apt. These formulations would either give the whole of the judgment monies to the Deputy Commissioner, without any allowance for Mr Dennis' lien, or deny the Deputy Commissioner's rights entirely. The appropriate declaration, as it seems to me, is one that follows para. (a) of the form suggested by the Deputy Commissioner but modifies para. (b) to take into account the lien. With the above matters in mind I propose to make the following declarations and orders:

1. Declare that-

  • (a) As at 3 October 1986, the first respondent was a person by whom money was due or accruing or might become due to the second respondent or a person who held or might subsequently hold money for or on account of the second respondent, or a person who held or might subsequently hold money for or on account of some other person for payment to the second respondent, or a person having authority from some other person to pay money to the second respondent.
  • (b) As at 12 August 1991, the said money became due or was being held for or on account of the second respondent subject to the equitable lien of Bruce Vernon Dennis over the said money for any balance payable to him for his reasonable costs, necessarily incurred, in acting as solicitor for the second respondent in an action for damages against the first respondent commenced on 1 July 1986; the amount of which is to be calculated on a solicitor/client basis, but after deducting the amount payable to the second respondent by the first respondent for party/party costs of the said action pursuant to the judgment entered therein on 13 August 1991, as agreed by all three parties to this proceeding or taxed by the proper officer of the District Court.

2. Order that-

  • (a) after ascertainment of the amount of the party/party costs referred to in paragraph 1(b), and unless the amount thereof be agreed between the applicant and the said Bruce Vernon Dennis, the Registrar determine by taxation the balance of costs payable to the said Bruce Vernon Dennis pursuant to his said equitable lien;
  • (b) upon the making of any agreement or determination concerning the balance of costs payable to the said Bruce Vernon Dennis pursuant to his equitable lien, the Registrar pay the amount thereof to the said Bruce Vernon Dennis out of the monies held in Court pursuant to the order made herein on 18 December 1991 and pay the balance of such monies to the applicant.

As to costs, neither party has succeeded in establishing his principal position. For each

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party, the result represents a partial win and a partial loss. To order payment of the costs out of the monies in Court, would be to order them to be borne by the Deputy Commissioner, a result which would be incompatible with his success in establishing a residual entitlement to the proceeds of the judgment. Under the whole of the circumstances, it seems to me that the appropriate course is to make no order as to costs.


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