FC of T v MACQUARIE HEALTH CORPORATION LIMITED & ORS

Judges:
Emmett J

Court:
Federal Court

Judgment date: 29 October 1998

Emmett J

The proceedings

I have three separate proceedings before me, although the parties to all three are the same. The Commissioner of Taxation (``the Commissioner'') is the applicant. Macquarie Health Corporation Limited (``MHC''), Business and Professional Leasing Pty Ltd (``B&P Leasing''), Ryndale Pty Ltd (``Ryndale'') and Sarzana Holdings (``Sarzana'') are the first four respondents (together ``the Debtors''). Richard Walter Pty Ltd (In Liquidation) (``the Taxpayer'') is the fifth respondent. Morlea Professional Services Pty Ltd (``Morlea'') and AT Holdings Pty Ltd (``AT'') are the sixth and seventh respondents (together ``the Trustees'').

The Commissioner's claim concerns notices (``the Notices'') given by the Commissioner to the Debtors under section 218 of the Income

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Tax Assessment Act 1936 (Cth) (``the Assessment Act'') requiring them to pay to the Commissioner moneys which were or may become due by the Debtors to the Taxpayer. In the events which have happened, there is no significant dispute between the Debtors and the Commissioner. It is common ground that moneys (``the Debts'') were owing by the Debtors to the Taxpayer at the times of service of the Notices although there is a dispute as to the extent to which those moneys were payable at those times. The amounts of the Debts have now been paid into Court in circumstances which I shall describe below.

The real issues in the proceedings arise from cross claims. On 28 February 1997, Hill J ordered that the Taxpayer be wound up and appointed Mr Gregory Hall (``the Liquidator'') as liquidator of the Taxpayer. The Liquidator contended that the Commissioner should be treated in the winding up of the Taxpayer as an unsecured creditor in respect of all tax. He claimed, accordingly, that the moneys in Court should be paid to him, as comprising an asset of the Taxpayer which should be subject to his control as liquidator. The Commissioner, on the other hand, claimed to be a secured creditor in respect of the Debts to the extent of the amounts of tax referred to in the Notices. The Commissioner seeks payment out of Court of sufficient of the moneys to enable the amount of assessments issued under the Assessment Act to the Taxpayer to be paid in full.

The Trustees, however, claim that all of the property of the Taxpayer is held on a constructive trust for the Trustees, to the extent of the amount of payments which were made to the Taxpayer between 24 May 1981 and 30 June 1984 from the funds of a partnership known as the Morlea Partnership, which I shall describe below. That claim is based on the contention that those payments were made in breach of fiduciary duty or in breach of trust and that, as a consequence, a constructive trust was imposed on property of the Taxpayer, which includes the Debts, to the extent of the payments in question and interest thereon.

The Commissioner served Notices on each of the Debtors on 7 July 1992 (``the First Notices''). On 26 September 1995, the Commissioner served additional Notices on MHC, Sarzana and B&P Leasing (``the Second Notices''). On 4 February 1997, the Commissioner served a further Notice on MHC (``the Third Notice''). Each of the Second and Third Notices was said, in a covering letter served with it, to be an amended notice.

The principal proceeding, NG 118 of 1996, was commenced on 16 February 1996 after the service of the First Notices and the Second Notices but before service of the Third Notice of 4 February 1997 on MHC. The second proceeding, NG 445 of 1998, was commenced on 13 May 1998 in response to a contention by the Debtors that any cause of action based on the Third Notice had not arisen when the principal proceeding was commenced.

It is common ground that, when each of the Notices was served, a very substantial part of the Debts was not then payable. The terms of repayment of the Debts were regulated by written loan agreements and other arrangements between the Debtors and the Taxpayer which were in place before the service of any of the Notices. However, on 27 November 1997, the Taxpayer, the Liquidator, the Commissioner, the Debtors and other parties entered into a settlement deed (``the Settlement Deed'') which, inter alia, varied the arrangements between the Debtors and the Taxpayer concerning payment of the Debts.

The Settlement Deed relevantly provided that if a ``Default Event'' as defined in the Settlement Deed occurs, the Debts were to become due and payable immediately. The Settlement Deed provided, in addition, that if there was a Default Event before 1 July 1999 and the principal proceeding had not been finally determined so that an amount was payable but the issue of whether the amount should be paid to the Taxpayer, the Commissioner, or otherwise had not been resolved, then the Debts were to be paid into Court pending the final determination of the principal proceeding. A Default Event as defined occurred on 1 July 1998. Accordingly, on 4 August 1998 the sum of $21,290,886.00 was paid into Court by the Debtors pursuant to orders made by consent.

On 11 August 1998, proceeding NG 812 of 1998 was commenced by the Commissioner. The statement of claim in that proceeding refers to the Settlement Deed and the moneys paid into Court. Those proceedings were commenced by the Commissioner to avoid any contention that no cause of action under section 218 for recovery of any moneys from the Debtors arose in favour of the Commissioner

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until the moneys had actually become payable by the Debtors.

The parties

The Wenkart Group

The proceedings concern the affairs of a group of companies connected with Thomas Richard Wenkart (``Dr Wenkart''). In 1972, pursuant to a scheme of arrangement, Dr Wenkart formed Morlea Pathology Services Pty Ltd to run a pathology laboratory (``the Pathology Business''). From 1 February 1977, Geoffrey Albert Holden (``Mr Holden'') was the financial controller of the Pathology Business. The Pathology Business generated the majority of cash flow for a group of companies known as the Wenkart group of companies (``the Wenkart Group''). All members of the Wenkart Group have some connection with Dr Wenkart. One member of the Wenkart Group was the Taxpayer. The Debtors are also members of the Wenkart Group.

In 1977, the Taxpayer had a small number of investments but its main function, which increasingly became its dominant function, was to act as the financier of the Wenkart Group. For that purpose, the cash position and cash needs of each company in the Wenkart Group were reviewed daily. If any company had a significant credit balance with the Wenkart Group's bankers, that money was taken over into the account of the Taxpayer by way of loan and if any company needed additional funds, that money was lent by the Taxpayer to that company. If the Wenkart Group as a whole had surplus cash funds, that surplus was invested by the Taxpayer, either in fixed term deposits or with other financial institutions, to achieve the best available return in light of the security and terms available.

From time to time, if the Wenkart Group as a whole needed additional funds, then it was the Taxpayer which made the overdraft arrangements or long term accommodation with bankers or other financial institutions to secure the necessary working capital for the Wenkart Group. In some cases, if long term finance was required for a project, then the company concerned would borrow directly from the bankers on security of a first mortgage over its assets and the balance of working capital would be borrowed by the Taxpayer by overdraft or bill facility from bankers and lent to the company requiring funds. To support the overdraft facilities, other companies in the Wenkart Group often made available properties and granted security by way of third party mortgages to bankers or other financial institutions.

In December 1977, the beneficial interest in the assets of the Pathology Business had been transferred to Morlea as trustee of the Morlea Unit Trust. In 1981 the manner in which the Pathology Business was conducted was reorganised. As a result of the transactions constituting the 1981 reorganisation, the beneficial interest in the Pathology Business, which had up to 25 May 1981 been conducted by Morlea as trustee of the Morlea Unit Trust, became vested in the Morlea Partnership and was thereafter conducted by Morlea in its capacity as agent of the Morlea Partnership.

The Liquidator's position

In substance, the first cross-claim could be characterised as an application to the Court by the Liquidator for directions in the winding up of the Taxpayer pursuant to section 479(3) of the Corporations Law. The Liquidator seeks a determination as to the priorities which should be applied in the winding up of the Taxpayer and, in particular, whether the Commissioner is entitled to any priority in respect of the Debts of the Debtors, which are now represented by the money in Court.

The Liquidator is a cross-claimant in the first cross-claim. That appears to me to be an irregularity. A cross-claim ought not be filed in proceedings except by a respondent in the proceedings or a cross-respondent in the proceedings. However, no objection was raised by any of the other parties to the proceedings continuing on the basis that the first cross-claim is properly constituted and that the Liquidator was properly joined as a party.

Neither the Debtors nor the Trustees are parties to the first cross-claim. However, the Debtors apparently have an interest in the outcome of the proceedings as unsecured creditors of the Taxpayer. Notwithstanding that the Debtors probably have no legal standing in relation to the issues raised in the cross-claim, counsel for the Debtors was permitted to address on certain of those issues. I permitted that course on the basis that counsel for the Liquidator would adopt those submissions and did not wish to duplicate them.

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The Trustees' position

The position of the Trustees is not uncomplicated and the position of AT is different from that of Morlea. In essence, the claim made in the second cross-claim is that Morlea, in its capacity as agent for the members of the Morlea Partnership, acted in breach of its fiduciary duty in making the payments in question to the Taxpayer. The members of the Morlea Partnership were Morlea in its capacity as trustee of the Aurelius Unit Trust and Aborda Pty Limited (``Aborda'') in its capacity as trustee of the Aborda Trust. Aborda is no longer trustee of the Aborda Trust. It was removed in May 1997 when AT was appointed as trustee.

Thus, Morlea acted in two capacities. In one capacity, as trustee of the Aurelius Unit Trust, it was a member of the Morlea Partnership with Aborda. However, in another capacity, it was the agent of the partners, who included itself in that first capacity. Accordingly, Morlea owed a fiduciary duty, as agent of the Morlea Partnership, both to itself in its capacity as trustee of the Aurelius Unit Trust and to Aborda. Aborda is not a respondent in any of the proceedings. However, it is a cross- respondent to the second cross-claim. Both Morlea and AT are respondents in the proceedings, having been joined as proper parties, since it is at least arguable that the Commissioner's claim is a claim in rem against the money in Court in respect of which Morlea and AT assert an interest.

In the second cross-claim, the claims of AT and Morlea are made in their capacities as members of the Morlea Partnership. They do so in their respective capacities as trustee of the Aborda Trust and the Aurelius Unit Trust. In so far as their claims are based upon breach of fiduciary duty by Morlea in its capacity as fiduciary agent of the partners, their capacity as such trustees is not relevant.

However, they also make claims in their respective capacities as trustees of those trusts. Such claims may not be open to them in the absence of any order under Order 6 rule 13 of the Federal Court Rules appointing them to represent the beneficiaries of their respective trusts. Under Order 6 rule 14, if the proceedings concern trust property of those trusts, there would be no requirement for the beneficiaries to be joined. Any order made in the proceedings would bind the beneficiaries. However, according to the analysis which I have set out above, the property in question is not trust property of the Aurelius Unit Trust or the Aborda Trust. Rather, it is property held by them in their capacities as members of the Morlea Partnership and in respect of which they assert a right in rem by reason of the alleged breach of fiduciary duty by Morlea in its capacity as a fiduciary agent of the partners.

Accordingly, the Trustees, in the capacity in which they are parties, do not have capacity to make claims on behalf of the beneficiaries of those trusts. It may be that the fruits of any claims upon which they succeed will be held by them on the terms of the Aborda Trust and the Aurelius Unit Trust respectively. Before they are permitted to disperse any such fruits, however, it may be necessary for further judicial intervention to determine who is entitled to the fruits. Those questions may be of significance at this stage because of issues which have been raised concerning the Limitation Act 1969 (NSW) and equitable defences of laches, acquiescence and delay pleaded on behalf of the Taxpayer.

The respondents to the second cross-claim, apart from Aborda, which has not participated in the proceedings, are the Taxpayer, the Debtors and the Commissioner. The Debtors no longer have any direct interest in the outcome of the second cross-claim. That is to say, once any dispute as to the amount of any indebtedness was resolved, the Debtors were virtually in the position of interpleaders and, pursuant to the Settlement Deed, they have paid the subject matter of the competing claims into Court.

The thrust of the second cross-claim was that the Taxpayer received the payments in question with knowledge that they were made in breach of fiduciary duty so as to impose a constructive trust on the Taxpayer. The primary respondent to the second cross-claim is, of course, the Taxpayer. Notwithstanding that the Taxpayer was the primary respondent to the second cross- claim, senior counsel for the Commissioner addressed at length on the issues raised on behalf of the Taxpayer. The Commissioner also has a direct interest in the outcome of the second cross-claim. In so far as he asserts, as against the Liquidator, a priority in respect of the Debts, he has an interest in supporting the Taxpayer's resistance to the claims made in the second cross-claim. If they succeed, they will substantially reduce the assets of the Taxpayer

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in respect of which the Commissioner seeks priority. It was accepted by the Commissioner, however, that his claims in relation to the Debts do not rise any higher than the Taxpayer's and that his claim in respect of the Debts is subject to any claim under the second cross-claim which succeeds.

It was not until the hearing began that the Taxpayer sought to raise by way of defence to the second cross-claim matters which had previously been raised only by the Commissioner. There may be some doubt as to the standing which the Commissioner would have had to raise those matters if they had not been raised by the Taxpayer. I gave leave to the Taxpayer to file an amended defence to the second cross-claim raising the substantive matters which had previously been raised only by the Commissioner. Had these matters not already been raised and put in issue by the Commissioner, it may have been difficult for the Trustees to meet them. However, leave was granted because the Trustees had been put on notice that the issues would be raised by the Commissioner and did not suggest that they were not in a position to meet those matters when also raised directly by the Taxpayer.

The principal claim

One question which remains as between the Debtors and the Commissioner was whether or not any money was actually payable by the Debtors to the Taxpayer at the time when the Notices were served. The issue arose in the context of the submission that section 218 only operates in respect of tax payable at the time when a notice becomes operative, namely, at the time when the money due by the recipient becomes payable. It is only at that time that a recipient would have any obligation to pay to a taxpayer. It was common ground that the Commissioner is not in any better position qua a recipient of a notice under section 218 than a taxpayer would be in relation to the money which is the subject of such a notice. The question remains live in so far as it determines which of the proceedings can be relied on by the Commissioner to obtain a judgment against the Debtors. That may have some consequence in relation to interest and costs.

There are three categories of indebtedness which were affected by the Notices. They were as follows:

(a) The balance of loans payable by the Debtors to the Taxpayer. Loans made by MHC, B&P Leasing and Sarzana to the Taxpayer were each the subject of separate loan agreements dated 30 June 1990, 30 June 1989 and 8 April 1992 respectively. The loan agreements provided for terms expiring on 30 June 1999, 30 June 1998 and 8 April 2002 respectively. All of the Notices were served before those dates. Clearly, the indebtedness in respect of principal was not due and payable at the time of service of any of the Notices. The Settlement Deed varied those dates to provide for repayment on or before 1 July 1999 or on the occurrence of an event of default. The loans made to Ryndale were payable on demand. No demand had been made at the time of service of the First Notices.
(b) Interest payable under each of the loan agreements. Clause 3 of each of the loan agreements provided as follows:

``The Principal amount of the loan will accrue interest on a daily basis at a rate of interest to be determined each year with the right of waiver of interest, determined by the parties to this agreement each year.''
There was no other provision for the payment of interest. Each year interest was in fact capitalised. In relation to interest capitalised prior to the receipt of any of the Notices, it was accepted that the interest was not due and payable at the time of receipt of that Notice. However, in relation to interest which accrued after receipt of a Notice, the question arises as to whether it should be capitalised or remain payable.
A rate was in fact agreed upon as contemplated by clause 3. Thus, interest accrued at that rate. There was no evidence of any time having been agreed for payment. It follows, therefore, that the interest was payable on demand although no demand has been made.
The Commissioner contended that the effect of section 218(6A) is to obviate the need for demand. I do not accept that contention. Section 218(6A) provides that where money is not due or repayable on demand unless a condition is fulfilled, the money is to be taken to be due or repayable on demand notwithstanding that the condition has not been fulfilled. The Commissioner contended that the making of a demand was a condition and that the provision operated to obviate the need for a demand. That provision,

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however, has nothing to do with the need for a demand. When section 218 refers expressly to money being due or repayable on demand, it is clearly concerned with a condition other than the making of a demand.
Nevertheless, where, at the time of service of a notice, amounts are payable on demand, the Commissioner is not required to wait for the relevant taxpayer to make a demand. That is to say, where money is payable on demand, it becomes payable on service of a notice. The service of the notice is in effect a demand by the relevant taxpayer. It follows that interest which had not been capitalised prior to service of one of the Notices was money due at the date of service within the meaning of section 218(1).
(c) Rent payable by MHC to the Taxpayer in respect of its occupation of premises owned by the Taxpayer. In practice, rent was capitalised at the end of each year. Any rent which was capitalised prior to receipt of one of the Notices would not be payable to the Commissioner until it became payable under the arrangements between MHC and the Taxpayer. In so far as it was payable on demand, it is in the same category as interest. Rent which accrued after the service of one of the Notices would, by reason of the Notice, become payable to the Commissioner when it accrued due to the Taxpayer.

After service of the First Notices, entries were made in the books of the Taxpayer debiting and crediting the loan accounts of the Debtors with the Taxpayer. Many of the entries were debits and related to interest which accrued on the balance of the loan accounts. They are amounts which accrued or became due after the service of the First Notices. Those amounts are dealt with above. However, there were also several entries which were credits reflecting a reduction in the loan accounts. The Commissioner contended that in so far as those credits were in substance payments to the Taxpayer by the Debtors, they were ineffective to reduce the indebtedness of the Debtors.

The effect of service of a notice under section 218 is that the recipient is bound by the terms of the notice and may not pay moneys within the scope of the notice -
Clyne & Anor v DFC of T 81 ATC 4429 at 4440; (1981) 150 CLR 1 at 22 and
DFC of T v Donnelly & Ors 89 ATC 5075 at 5087; (1989) 25 FCR 432 at 451. That is to say, the relevant taxpayer can no longer give a good discharge in respect of such moneys. To the extent that there is an amount due by the taxpayer in respect of tax, only the Commissioner can give a good discharge. Accordingly, the purported credits to the loan accounts of the Debtors did not reduce the amount of the loan accounts as against the Commissioner. It follows that the Notices attached the balances of the loan accounts of the Debtors recorded in the books plus the amounts of those credits. Subject to the contentions of the Liquidator and the Trustees, the amounts of the credits should have been paid by the Debtors to the Commissioner.

First cross-claim

The issues

The first cross-claim raises issues concerning the effect of service of notices under section 218 of the Assessment Act in the context of Chapter 5 of the Corporations Law (``the Law'').

Section 218 of the Assessment Act provides as follows:

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

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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) Where:

(a) money has been paid by a person to a building society in respect of the issue of withdrawable shares in the capital of the society; and

(b) the money has not been repaid;

the money shall, for the purposes of this section, be taken:

(c) in a case where the money is repayable on demand - to be due by the building society to the person; or

(d) in any other case - to be money that may become due by the building society to the person.

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) In this section:

`building society' means a society registered or incorporated as a building society, co-operative housing society or other similar society under the law in force in a State or Territory;

`person' includes a company, a partnership, the Commonwealth, a State, a Territory and any public authority (whether incorporated or unincorporated) of the Commonwealth or a State or Territory;

`tax' includes:

(a) additional tax under section 207 or Part VII;

(b) an amount that a person is liable to pay to the Commissioner under Division 1AA, 1A, 1B, 1C, 2, 3, 3A, 3B, 4, 8 or 9;

(ba) an amount of interest that a person is liable to pay to the Commissioner under section 102AAM, 170AA or 207A;

(c) a judgment debt or costs in respect of:

(i) tax;

(ii) additional tax under section 207 or Part VII;

(iii) an amount that a person is liable to pay to the Commissioner under Division 1AA, 1A, 1B, 1C, 2, 3, 3A, 3B, 4, 8 or 9; or

(iv) an amount of interest that a taxpayer is liable to pay to the

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Commissioner under section 102AAM, 170AA or 207A;

(d) any fine or costs imposed by a court in respect of:

(i) an offence against this Act or the regulations; or

(ii) any other taxation offence within the meaning of Part III of the Taxation Administration Act 1953 that relates to this Act or the regulations; or

(e) any amount ordered by a court, upon the conviction of a person for an offence of a kind referred to in paragraph (d), to be paid by the person to the Commissioner;

`taxpayer' includes a person who is liable to pay an amount to the Commissioner under Division 1AA, 1A, 1B, 1C, 2, 3, 3A, 3B, 4, 8 or 9.

218(7) Any notice to be given under this section to the Commonwealth or a State may be served upon such person as is prescribed, and any notice so served shall be deemed to have been served upon the Commonwealth or a State, as the case may be.''

The relevant sequence of events was as follows:

• 7 July 1992 the Commissioner served notices under section 218 on each of the Debtors;
• 29 Sept 1995 the Commissioner served amended notices dated 26 September 1998 on MHC, Sarzana and B&P Leasing;
• 3 July 1996 the Commissioner filed an application for the winding up of the Taxpayer;
• 20 Nov 1996 an administrator was appointed to the Taxpayer;
• 4 Feb 1997 the Commissioner served a further amended notice under section 218 on MHC;
• 28 Feb 1997 Hill J ordered that the Taxpayer be wound up;
• 10 March 1997 the winding up order took effect.

The Liquidator sought a declaration that he is entitled to collect and receive from the Debtors, to the exclusion of the Commissioner, any amounts owing by the Debtors to the Taxpayer as and when those amounts become due and payable. In addition, the Liquidator sought an order restraining the Commissioner from proceeding with all three proceedings to the extent that the Commissioner either seeks payment of the sums referred to in the Notices by means of the proceedings, or seeks to enforce, by means of the proceedings, any process arising from or in relation to the sums referred to in the Notices.

The Commissioner, on the other hand, contended that the Notices created an implied statutory charge in his favour over the Debts. He claimed, therefore, to be entitled to payment out of the moneys in Court of the amount of money owing by the Taxpayer in respect of tax specified in the Notices. The Liquidator disputed that the Notices created an implied statutory charge or any other proprietary right in favour of the Commissioner. They imposed, he contended, no more than a personal obligation upon the recipients which took precedence over the obligation owed to the Taxpayer. The Commissioner's right to receive money from the recipient of any of the Notices was said to be subject to the Liquidator's right under section 474(1) of the Law to take control of the property of the Taxpayer.

Alternatively, the Liquidator contended that any charge created under section 218 attaches only in respect of tax due when the money due by the recipient becomes payable. The effect of a winding up order is that the indebtedness for tax is transformed into a right of proof. Accordingly, since part of the Debts did not become payable until after the winding up order, that part of the Debts was not subject to any attachment under section 218.

Alternatively, the Liquidator contended that if the Notices gave rise to an implied statutory charge, payment to the Commissioner pursuant to the Notices was void under section 468 of the Law. First, it was said that the charge was effective only by reason of the ``deemed authorisation'' by the Taxpayer under section 218(4) such that a payment constitutes a disposition of property by the Taxpayer. Accordingly, where such a payment occurs after the commencement of a winding up, it is void under section 468(1) of the Law unless the Court otherwise orders. Secondly, it was said that compliance with the Notices would constitute attachment or execution being put in force against the property of the Taxpayer after

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the commencement of winding up and would be void by reason of section 468(4) of the Law.

Alternatively, the Liquidator contended that the Third Notice was a disposition of property of the Taxpayer after the deemed commencement of the winding up of the Taxpayer and, accordingly, was void under section 468(1) unless the Court otherwise orders. In that regard, the Liquidator also contended that the effect of any subsequent notice was to supplant any previous notice. The consequence was that, in the case of MHC, the First and Second Notices are inoperative and the Third Notice is void by the operation of section 468.

Finally, the Liquidator contended that each of the Second and Third Notices was an insolvent transaction of the Taxpayer within the meaning of section 588FC of the Law and, accordingly, is avoidable by the operation of section 588FE of the Law.

Effect of section 218 notice

Section 471A(1) of the Law provides that while a company is being wound up in insolvency or by the Court, a person cannot perform or exercise, and must not purport to perform or exercise, a function or power as an officer of the company, except as a liquidator or with the approval of the liquidator or the Court. Further, under section 471B, when a company is being wound up in insolvency or by the Court, a person cannot begin or proceed with a proceeding in a court against the company or in relation to the property of the company or enforcement process in relation to such property except with the leave of the Court. Section 471C, however, provides that nothing in section 471A or 471B affects a secured creditor's right to realise or otherwise deal with the security.

The Liquidator contended that, in seeking recovery of the Debts owing by the Debtors to the Taxpayer, the Commissioner is proceeding with a proceeding in a court in relation to property of the Taxpayer while the Taxpayer is being wound up, contrary to section 471B. The Liquidator further said that the Commissioner is not a secured creditor so as to be able to avail himself of the exception contained in section 471C. Alternatively, the Liquidator contended that, in seeking to recover the Debts owing by the Debtors to the Taxpayer, the Commissioner would be putting in force against the property of the Taxpayer, contrary to section 468(4), ``attachment, sequestration, distress or execution'', the winding up of the Taxpayer by the Court having commenced prior to any such steps being taken. The Commissioner contended that enforcing the provisions of one of the Notices would not be putting in force any attachment or execution because it would be no more than realising the security created, by the operation of section 218, upon the giving of the Notices to the Debtors.

The Commissioner contended that two consequences flowed from the service of the Notices as follows:

• As and from the service of each of the Notices, the Debtors were bound by the terms of such Notice and could not pay moneys within the scope of that Notice to the Taxpayer.
• Neither the Taxpayer nor the Debtors, once one of the Notices had been served, could in any way deal with moneys falling within the scope of that Notice in a manner inconsistent with it.

Thus it was said that the effect of service of the Notices was:

• to charge the Debts owing to the Taxpayer in favour of the Commissioner;
• to prevent the recipient Debtors from paying the Debts to the Taxpayer; and
• to oblige the Debtors to pay the Debts to the Commissioner.

In support of those propositions, the Commissioner relied on Clyne & Anor v DFC of T 81 ATC 4429; (1981) 150 CLR 1 and DFC of T v Donnelly & Ors 89 ATC 5075; (1989) 25 FCR 432.

The Liquidator, on the other hand, contended that service of the Notices did not create an implied statutory charge or any other proprietary right. Rather, it imposed no more than a personal obligation upon the Debtors which took precedence over the obligations owed by the Debtors to the Taxpayer. The Liquidator contended that, notwithstanding Clyne's Case and Donnelly's Case, the Court is not bound in the present case to find that section 218 of the Assessment Act made the Commissioner a secured creditor within the meaning of section 471C of the Law where the winding up of the Taxpayer occurred before the time arrived for compliance with the Notices.

Section 218 does not expressly create a security and the literal language, if anything, suggests the contrary. Thus, the provisions of

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section 218 do not expressly impose an obligation on the recipient of a notice to make a payment. Nor do they confer upon the Commissioner any express right in relation to the recipient or moneys which may be ``due'' to a taxpayer by a recipient. The provisions of section 216 of the Assessment Act may be contrasted with the provisions of section 218.

The provisions of section 216(1) apply where, at the time of a taxpayer's death, tax has not been assessed or paid on the whole of the income and of the profits or gains of a capital nature derived by the taxpayer up to the time of the death of the taxpayer. Under section 216(1)(a), the Commissioner is to have the same powers and remedies for the assessment and recovery of tax from the trustees of the estate of such a taxpayer as he would have against that taxpayer if the taxpayer were still living. Section 216(1)(d) then provides that the amount of any tax payable by the trustees shall be a first charge on all the taxpayer's estate in their hands.

Thus, so the argument ran, the concept of a charge to secure tax was not unknown to the legislature responsible for the Assessment Act. The absence of any reference to a charge in section 218 was said to indicate that the legislature did not intend that the giving of a notice would create a charge. Section 218(1) provides simply that the Commissioner may require a person to pay to the Commissioner certain money. The sanction for failing to comply with a notice under section 218(2) is that the recipient is guilty of an offence. Section 218(3) then provides that where a person is convicted of an offence against section 218(2) the Court may , in addition to imposing a penalty, order the convicted person to pay to the Commissioner an amount not exceeding the amount that the convicted person or the other person, as the case may be, refused or failed to pay.

It would be possible to conclude from those provisions that they constitute the only sanction for non payment and that section 218 creates no independent cause of action in the Commissioner against the recipient of a notice. For example, it would have been a simple matter for the Parliament to provide that upon service of a notice, the money which is the subject of the notice is charged to the Commissioner and the recipient is liable to the Commissioner for the amount which the recipient is obliged to pay to the Commissioner. Rather, the Parliament provided a criminal sanction and no more.

The Commissioner contended, however, that section 218 effects a statutory assignment of money to which a notice relates and that, on ordinary principles relating to assignment of debts, it must follow that the Commissioner can sue for the debt in his own name. It is evident that when section 218 says that the Commissioner may require a person to pay money to him, it is giving statutory backing to that requirement so as to impose an obligation on the recipient to pay money that falls within the statutory description. On the other hand, the section only imposes an obligation to pay in accordance with its terms - see Clyne's Case at ATC 4437; CLR 17.

It is not so clear, however, that a section 218 notice effects a statutory assignment of the debts to which it relates as the Commissioner contended. The Commissioner does not become the absolute owner of the debt. Under section 218(5), if the Commissioner receives any payment in respect of the amount due by a taxpayer before payment is made by the recipient, he must forthwith give notice of the payment to the recipient. The clear intention is that, once the amount due in respect of tax has been paid by a taxpayer, there would no longer be any obligation imposed on the recipient of a notice. Any claim which the Commissioner would have had in respect of the money which is the subject of a notice would thereupon be extinguished. That suggests that the Commissioner's rights are in the nature of security because the Commissioner's right disappears upon discharge by the relevant taxpayer of any indebtedness for tax. The giving of a notice does not extinguish the taxpayer's liability for tax. On the other hand, payment by the recipient of a notice in accordance with the notice effects a pro tanto satisfaction of the taxpayer's liability for tax.

In Clyne's Case, the High Court considered the effect of a section 218 notice as between the Commissioner and the recipient of the notice. The giving of the section 218 notice in that case was held to impose an obligation on the recipient to pay the amount of the debt to the Commissioner at maturity with an implied obligation not to make any inconsistent payment in the meantime (per Mason J in Clyne's Case at ATC 4440; CLR 22). Mason J

ATC 5226

(with whom Aickin and Wilson JJ both agreed) went on to say (at ATC 4440; CLR 23):

``... The section relates to moneys owing to the taxpayer when the notice is given, it imposes an obligation to pay forthwith moneys which are then payable; it imposes an obligation to pay moneys which become payable at a future time when that time arrives. It does not explicitly prescribe as a condition preliminary to the creation of the obligation to pay that the moneys owing to the taxpayer at the date of the notice shall continue to be owing to him when they become payable. It 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 of the suit of the taxpayer the debtor is protected by sec 218(4) which provides that the payment is deemed to be made with the authority of the taxpayer and indemnifies the debtor.''

In Clyne's Case, senior counsel for the Commissioner conceded that section 218 does not purport to create a charge over, or interest in, moneys in favour of the Commissioner although Mason J doubted whether that concession was rightly made (at ATC 4437-4438; CLR 18).

In Donnelly's Case the Full Court of this Court dealt with the effect of a section 218 notice in the context of bankruptcy. The central question there was whether notices issued by the Commissioner created charges over debts due, at the time of service of the notices, by the Health Insurance Commission to a bankrupt medical practitioner or thereafter becoming due (per Lockhart J at ATC 5074; FCR 435). Lockhart J considered that the notices, upon being served upon the Commission, created charges in favour of the Commissioner over debts due by the Commission to the bankrupt at the time of service of the notices and debts which came into existence and became due thereafter but before the making of the sequestration order. His Honour considered that a notice may be given which may operate with respect to debts that are not brought into existence until after the date of service of the notice, although no obligation is imposed upon the recipient until the debt becomes payable by the recipient to the relevant taxpayer (at ATC 5075-5076; FCR 436-437).

Hill J in Donnelly's Case considered that the effect of section 218 is to charge the debt owed to a taxpayer, thereby preventing the debtor from paying it and obliging him to pay it to the Commissioner. His Honour concluded, therefore, that it has the effect of making the Commissioner a secured creditor (at ATC 5091; FCR 457). That conclusion would resolve any question which now arises in relation to section 471C of the Law. While section 471C was not under consideration in Donnelly's Case, the principles with respect to bankruptcy appear to me to be sufficiently indistinguishable from the principles applicable in relation to section 471C. Accordingly, the observations made by Lockhart and Hill JJ concerning the effect of section 218 as creating a security are equally applicable in relation to the insolvency of a company which is being wound up under the Law.

The Liquidator sought to distinguish Donnelly's Case. The Liquidator contended that Hill J's reasoning (which was accepted by Lockhart J) was based on two approaches. The first approach was that section 218 creates an implied statutory charge (at ATC 5091; FCR 456). The second, and alternative, approach was that the words of the section, read literally, create a requirement which obliges the recipient to make payments to the Commissioner notwithstanding that a taxpayer's property had vested in a trustee in bankruptcy (at ATC 5093; FCR 459-460). The Liquidator contended that the first approach was wrong and that the second approach did not lead to the conclusion that the Commissioner is a secured creditor in the present circumstances.

The Liquidator contended, in relation to the first approach, that Hill J derived his conclusion from a consideration of the rights conferred by section 218 upon the Commissioner as follows:

(a) the right to prevent the Taxpayer from accepting payment of the debt;
(b) the right to prevent the Taxpayer from disposing of the debt;

ATC 5227
(c) the right to give a receipt for the money the subject of the Notice;
(d) the right to give a discharge for that money;
(e) the right to apply to the Court in the event of the recipient's failure or refusal to comply with the notice for an order requiring the convicted person to pay the Commissioner the amount which has not been paid (at ATC 5091; FCR 456).

The Liquidator argued that section 218 does not expressly or impliedly confer upon the Commissioner any of the rights so identified and that, if those rights are not conferred, the Commissioner is in a position similar to that of a garnishee. That is to say, while a contingent obligation to pay money, with deemed authority, is cast upon the recipient, the essential characteristics of a charge are lacking because no right over property is conferred upon the Commissioner in respect of the property of a taxpayer.

The Liquidator pointed out that Hill J observed that the same result as an implied statutory charge would be brought about by affording the words of section 218 their ordinary meaning. The Liquidator contended that that is the correct approach to the construction of section 218. The Liquidator also referred to the following comment by Hill J in Donnelly's Case, as repeated by him in
DFC of T v Government Insurance Office of New South Wales & Anor 93 ATC 4901 at 4909; (1993) 45 FCR 284 at 294:

``... The fact that... a sequestration order is made does not alter the character of the moneys as being moneys due or accruing or moneys which may become due... at the time the notice takes effect.''

The Liquidator argued that that statement is not correct because, after sequestration, the moneys in question are in substance and in law payable to the trustee in bankruptcy. The Liquidator contended that the same analysis is applicable in the case of a winding up of a company taxpayer. On that basis, it was said that the character of the debt changes in that the person who has control of the asset is the liquidator.

Under section 474(1) of the Law, if a company is being wound up in insolvency or by the Court, the liquidator is required to take into his or her custody or under his or her control all the property to which the company is or appears to be entitled. Thus, a person who holds or receives property of the company is obliged to deliver it or pay it to the liquidator unless that person is a secured creditor, that is, a person with a proprietary right to property. It was said that a liquidator is in the position of a beneficial owner of the property of a company in liquidation. The argument is that the effect and consequence of section 474(1) is that, on the making up of a winding up order, a company ceases to have the custody and control of its assets which are thereafter administered exclusively for the benefit of those persons who are entitled to share in the proceeds of realisation of the assets (reference was made to
Ayerst v C & K (Construction) Pty Ltd [1975] 2 All ER 537). Thus, it was said, the Debts owing by the Debtors to the Taxpayer ceased, upon the making up of the winding up order, to be payable to the Taxpayer but were ``in substance'' payable to the Liquidator.

I do not consider that the Liquidator's analysis is correct. It is certainly true to say that, by the operation of sections 471(A) and 474 of the Law, the directors of a company may no longer perform or exercise any function or power as an officer of the company without the consent of the liquidator or the Court. Further, control of all of the property of the company is taken from the directors and vested in the liquidator. However, there is no change in the beneficial ownership of the property of the company. The company continues as a legal entity capable of owning property. The property of the company remains beneficially owned by the company.

In the ordinary course, all of the property of a company in liquidation will be realised and the proceeds of realisation will be disbursed in payment of creditors and, as to any surplus, to the contributories. Nevertheless, there is always the possibility that the winding up may be brought to an end otherwise than by dissolution of the company. Under section 482, at any time of the winding up of a company, the Court may make an order staying the winding up either indefinitely or for a limited time. The Court may also make an order terminating the winding up on a day specified in the order. Under section 482(3), where the Court has made an order terminating the winding up, the Court may give such directions as it thinks fit for the resumption of the management and

ATC 5228

control of the company by its officers. The effect of such an order, therefore, is to negate the effect of sections 471A and 474. The fact that such an order is a possibility indicates that sections 471A and 474 are concerned only with the control of the property of the company and not in any way with ownership of it.

I consider that Hill J was correct in saying, in Donnelly's Case, that the making of a sequestration order does not alter the character of moneys owing to a bankrupt as being moneys due or accruing or moneys which may become due to the bankrupt. A fortiori, the making up of a winding up order does not alter the character of moneys owing to a company in liquidation as being moneys due or accruing or moneys which may become due to the company.

It follows, in my view, that the contentions on behalf of the Liquidator directed at distinguishing Donnelly's Case should be rejected. I am inclined to accept Hill J's alternative approach as the correct analysis concerning the effect of section 218. It matters not whether one characterises the effect of section 218 as a statutory charge. The only consideration is whether section 468 of the Law operates to prevent effect been given to the words of section 218 themselves. It follows from Clyne's Case and Donnelly's Case that the winding up of the Taxpayer did not affect any rights which had arisen in favour of the Commissioner by the operation of section 218 upon service of the Notices.

The Liquidator did not, by the making up of a winding up order, acquire any greater right in relation to the Debts due by the Debtors to the Taxpayer than the Taxpayer had. For example, just as the Taxpayer, after the service of a Notice on MHC, could not have validly directed MHC to pay the Debt owing to the Taxpayer to the Taxpayer or a third party, nor can the Liquidator. In other words, the Liquidator does not acquire control over a debt which has been the subject of a valid section 218 notice. A liquidator acquires no greater right in relation to the property of his company than the company had. Once a notice under section 218 has been given, a taxpayer cannot take steps to frustrate or subvert the Commissioner's rights which arise upon service of the notice by, for example, purporting to pay a debt which was not yet payable. By purporting to exercise the powers and rights conferred by section 474 of the Law, a liquidator would frustrate or subvert the Commissioner's rights. Accordingly, sections 471 and 474 of the Law would not prevent the Commissioner from exercising the rights arising under section 218.

Consequences of winding up

The Liquidator contended that if a charge is created by service of a notice under section 218, the charge does not attach to a bare right to payment but only to an identifiable debt ``due'' by a debtor to a taxpayer when the obligation to pay the debt is complete. If there is no money due to a taxpayer at the time of service, there is nothing to which the statutory charge can attach. It was contended that, in the present case, there was no money due to the Taxpayer within the meaning of section 218(1)(a) of the Assessment Act.

The argument was that substantial parts of the Debts owing by the Debtors to the Taxpayer were not actually payable at the time of service of the Notices. For example, a substantial part of the Debts owing by the Debtors was in respect of loans made by the Taxpayer. There was also interest on those loans and, in the case of MHC, rental payable in respect of the occupation of various premises owned by MHC. The loans were regulated, for the most part, by loan agreements under which the loans were not payable as at the time of service of the Notices. Subsidiary questions arose as to whether the other parts of the Debts were payable. I have dealt with those questions above.

However, in relation to the principal amounts of the loans, the argument was that they were not payable at the time of service of the Notices and by the time when the loans did become payable, in accordance with the Settlement Deed, there was no longer any amount due in respect of tax. The Liquidator contended that the charge would only attach when the Debt of the Debtor became payable but, when it did attach, it would only attach in respect of tax which was then payable. However, it was said that once a winding up order is made, tax is no longer payable because the Commissioner is no longer a creditor in respect of income tax since the debt for income tax is converted into a right to prove in the winding up.

A debt due by a bankrupt is no longer a debt ``still owing'' within the meaning of section 52(1)(c) of the Bankruptcy Act so as to found a further sequestration order. The effect of

ATC 5229

bankruptcy is that the debtor is no longer obliged to pay his creditors. Indeed, he is disabled from doing so. If he offered payment, they could not safely accept it. A creditor's right is a right of proof against the estate - see
Clyne v DFC of T (1984) 154 CLR 589 at 594-595.

The Liquidator contended that those principles are equally applicable to a winding up. In consequence, it was argued that, upon the making of a winding up order, there was no longer an amount due by the Taxpayer in respect of tax. Accordingly, when the Debts of the Debtors became payable on 1 July 1998, there was no amount due in respect of tax and the Notices were ineffective.

In
DFC of T v Government Insurance Office of New South Wales & Anor 93 ATC 4901; (1993) 45 FCR 284, Hill J (with whom Beazley J agreed) considered, in a different context, the effect of a section 218 notice. Hill J, after noting that in Donnelly's Case Lockhart J had agreed with him, went on (at ATC 4909; FCR 294) to say:

``It seems to me that the majority view in Donnelly is determinative of the present issue. Section 218 has no operative effect, whether that effect be described as creating a lien or charge, or as working in attachment, or as working an assignment or merely by reference to the words of the section itself unless and until there is actually a debt due from the addressee of the notice to the taxpayer. The analogy raised in Donnelly to a floating charge is apposite. Where at the time of the notice there is no debt due by the addressee to the taxpayer it will only be when there comes into existence a debt which either then is due to the taxpayer or which thereafter becomes due to the taxpayer that the section will operate to work an assignment or create a charge of that debt in the Commissioner.''

In the GIO Case, the recipient of a notice under section 218 was the defendant in proceedings brought by a taxpayer for unliquidated damages for tort. Between the time of service of the notice under section 218 and judgment in the proceedings, the taxpayer was declared bankrupt and subsequently discharged from bankruptcy. The debt owing by the taxpayer to the Commissioner did not survive the bankruptcy. Hill J observed that section 218 is silent as to what is to happen if the tax debt upon which a notice is based is discharged other than by way of payment. His Honour considered that section 218 should be construed as requiring the recipient only to make payment in a case where the tax is in fact properly payable. He considered that the words ``the amount due by the taxpayer in respect of tax'' refers to so much of the tax due and owing by the taxpayer immediately upon the issue of the notice as remained due and owing from time to time. It followed that in that case, upon the discharge of the taxpayer from bankruptcy, no amount of tax was thereafter due. Accordingly, the recipient was under no obligation to make payment to the Commissioner of the amount of the judgment against the recipient in favour of the taxpayer after his discharge from bankruptcy.

However, it is the discharge from bankruptcy which extinguishes the debts of a bankrupt. Whether or not there is an analogy in the context of the winding up of a company, that question does not arise in the present case. Further, the GIO Case can be distinguished on another ground. There is no doubt that in the present case, at the time of service of the Notices on the Debtors, the Debts were owing by the Debtors to the Taxpayer. While it may be that some part of the Debts was then payable, the substantial bulk of the Debts was not payable at the time of service of the Notices. In the GIO Case, however, there was not even a debt due or owing. There was no more than a bare cause of action in tort which the taxpayer had against the recipient of the notice. A fortiori, there was no money payable. Accordingly, while some assistance might be derived from Hill J's general observations, the particular circumstances of that case are of no direct assistance in the resolution of the issues before me.

I consider that the Liquidator's contention confused the right in property with the remedy. A company taxpayer remains liable in respect of the tax which is the subject of a notice of assessment even after a winding up order is made. Income tax is due when it is assessed and a notice of assessment is served. However, the tax does not become payable before the date fixed under section 204 of the Assessment Act, being the date specified in the notice as the date on which the tax is due and payable (per Mason J in Clyne's Case at ATC 4436-4437; CLR 16). In Donnelly's Case, it was conceded that debts

ATC 5230

becoming due to the bankrupt after the making of a sequestration order would not be subject to charges created by section 218 notices because, upon the making of a sequestration order, the Commissioner's rights as a creditor for unpaid income tax were converted into a right of proof in bankruptcy (at ATC 5074; FCR 435). It may be significant that Lockhart J considered that there was some question whether such a concession was correctly made.

It is true that, upon the making of a sequestration order or a winding up order, a creditor's right to enforce payment of its debt ceases to exist and the creditor acquires the right to share in a distribution in the course of administration of the bankrupt's estate or the winding up (
Re Cole; Ex parte Richards (1966) 9 FLR 190 at 191). Upon the making of a sequestration order, the remedies against the person and property of a taxpayer formerly available to the Commissioner are taken away and there is substituted a right to prove against the estate which becomes vested in the trustee in bankruptcy. The Commissioner becomes a creditor whose claim is in proof. His claim is no longer a right of action for a debt since he can no longer maintain an action as for a debt. However, amounts which are owed by a taxpayer at the date of the bankruptcy may, notwithstanding the bankruptcy, still be described as debts. They are ``debts'' from which the bankrupt is not released until he is discharged from bankruptcy.

There is no doubt that the effect of winding up and of sequestration is that there is a restriction imposed on the capacity of a creditor to enforce payment of a debt without the leave of the Court. A creditor will not be entitled to payment from the debtor and if the creditor receives payment, he will be required to repay the amount to the liquidator or trustee in bankruptcy. In that sense, the creditor's remedies are converted into a right to prove in the winding up or in the bankruptcy. However, it does not follow, in my view, that the debt ceases to exist. The right to enforce payment is restricted. Nevertheless, the right to prove in the winding up or bankruptcy is a right to prove in respect of the debt which continues to exist.

Accordingly, when money which was not payable at the time of service of a notice under section 218 subsequently becomes payable, the notice will attach to that money. It follows that as at the time when the Debts became payable to the Taxpayer by the Debtors, there was still money owing in respect of tax even though a winding up order had been made in the interim. The Notices therefore attached the Debts in respect of the amount of tax specified in the Notices.

Commencement of winding up

Section 513A relevantly provides as follows:

``513A If the Court orders under section... 459A... that a company be wound up, the winding up is taken to have begun or commenced:

(a) if, when the order was made, a winding up of the company was already in progress - when the last-mentioned winding up is taken... to have begun or commenced; or

(b) if, immediately before the order was made, the company was under administration - on the section 513C day in relation to the administration; or

(c) if:

(i) when the order was made, a provisional liquidator of the company was acting; and

(ii) immediately before the provisional liquidator was appointed, the company was under administration;

on the section 513C day in relation to the administration; or

(d) if, immediately before the order was made, a deed of company arrangement had been executed by the company and had not yet terminated - on the section 513C day in relation to the administration that ended when the deed was executed; or

(e) otherwise - on the day when the order was made.''

Section 513C provides as follows:

``513C The section 513C day in relation to the administration of a company is:

(a) if, when the administration began, a winding up of the company was in progress - the day on which the winding up is taken because of this Division to have begun; or

(b) otherwise - the day on which the administration began.''

ATC 5231

It is common ground that on 20 November 1996 an administrator was appointed to the Taxpayer. On 28 February 1997, the following orders, inter alia, were made by Hill J:

``2. That, pursuant to section 447A(2) of the Corporations Law, the administration of the [ Taxpayer] end.

3. That the [Taxpayer] be wound up under section 459A of the Corporations Law.

4. That orders 2 and 3 be stayed until 4.00 pm on 10 March 1997.''

The Liquidator contended that, in the light of those circumstances, immediately before the winding up order was made, the Taxpayer was under administration. There was no winding up of the Taxpayer in progress when the administration began and section 513A(b) is applicable. Accordingly, the section 513C day in relation to the Taxpayer is 20 November 1996, being the day on which the administration began. It follows that the winding up of the taxpayer is taken to have begun or commenced on the section 513C day in relation to the Taxpayer, namely 20 November 1996.

The Commissioner, on the other hand, contended that, in the circumstances, section 513A(b) does not apply and, since none of paragraphs (a), (c) and (d) applies, section 513A(e) applies and the winding up is taken to have begun or commenced on the day when the order was made, namely 28 February 1997 or, possibly, the day that order took effect, 10 March 1997. The difference has a bearing on whether section 468 could have any application to any of the Notices, in so far as the Notices could be said to constitute a disposition of property by the Taxpayer or any attachment, sequestration, distress or execution being put in force against the property of the Taxpayer.

The question depends upon the meaning of the expression ``immediately before'' when used in section 513A(b). The construction of that expression must depend upon its context in section 513A. There is a contrast between paragraphs (a) and (c)(i) on the one hand and paragraphs (b), (c)(ii) and (d) on the other hand in the use of the term ``when'' and the expression ``immediately before''. That contrast suggests that the term ``when'' must be taken to mean something different from the expression ``immediately before''.

The contrasting use of the term ``when'' in section 513A(a) and (c)(i) is significant. That term is used in circumstances where the relevant event could continue after a winding up order is made. Thus, if a winding up of a company is already in progress, when a second winding up order is made, the first winding up will not terminate. On the other hand, the appointment of a provisional liquidator will terminate when a winding up order is made, just as an administration will end when a winding up order is made by reason of section 435C(3)(g). The contrast between the terms ``when'' and ``immediately before'' in section 513A(c) confirms that the drafter of the Law was intending to recognise that the term ``immediately before'' could permit an interval between the existence of a state of affairs and the making of a winding up order.

In his reasons for making the orders of 28 February 1997, Hill J said, inter alia:

``Senior counsel for the Commissioner [who was the applicant for winding up] has requested that, before making an order for winding up, I order that the administration terminate. The order sought is an order under s 447A(2) of the Law that the administration end. The basis upon which the application is made is that, unless such an order be made, the period for relation back would commence only at the time the winding up order is made and not at the time the application to wind up Richard Walter occurred.

There is some suggestion in the evidence that there are transactions which have occurred between the two dates which might be set aside for the benefit of creditors, should that course be taken. There has been no opposition to that course nor would I expect there to be, either from the administrators or from the other creditors who would at least share pro rata with the Commissioner subject to any advantage which the Commissioner may obtain by force of the s 218 notices.''

Part 5.3A of the Law, which replaced the official management provisions of the Law, deals with the administration of a company's affairs with a view to executing a deed of company arrangement. Section 436A, which is in Part 5.3A, provides that a company may

ATC 5232

appoint an administrator of the company if the board has resolved to the effect that:

(a) in the opinion of the directors the company is insolvent or is likely to become insolvent at some future time; and
(b) an administrator of the company should be appointed.

Section 435C(1) provides that the administration of a company begins when an administrator is appointed and ends on the happening of whichever event of a kind referred to in sections 435C(2) or 435C(3) happens first after the administration begins. Section 435C(2) deals with the normal outcome of the administration of company. However, under section 435C(3) the administration of a company may also end because:

``(a) the Court orders, under section 447A or otherwise, that the administration is to end, for example, because the Court is satisfied that the company is solvent;

...

(g) the Court appoints a provisional liquidator of the company, or orders that the company be wound up.''

Section 447A also provides as follows:

``(1) The Court may make such order as it thinks appropriate about how this Part is to operate in relation to a particular company.

(2) For example, if the Court is satisfied that the administration of a company should end:

(a) because the company is solvent; or

(b) because provisions of this Part are being abused; or

(c) for some other reason;

the Court may order under subsection (1) that the administration is to end.''

Under section 447A(4) a creditor of the company has standing to apply for an order under section 447A.

The Commissioner's application to wind up the Taxpayer was filed on 3 July 1996. Thus, it was before the Court when administrators were appointed under section 436A on 20 November 1996.

The effect of Hill J's order of 28 February 1997 was that the administration of the Taxpayer would end at 4 p.m. on 10 March 1997 and that the Taxpayer be wound up with effect from that time. While his Honour's orders of 28 February 1997 included the appointment of the Liquidator as liquidator of the Taxpayer and that order was not stayed, the appointment would not take effect until the winding up order became effective. His Honour did not purport to appoint the Liquidator provisionally.

Given the orders of 28 February 1997, it may be correct to conclude that the administration did not end pursuant to section 435C(3)(g) upon the making of the winding up order. Rather the administration ended by the operation of section 435C(3)(a). However, I do not consider that that distinction makes any difference for the purposes of section 513A.

If the Court had made an order under section 447A(1) that the administration end and that order became effective some significant time prior to the making of a winding up order, a question may arise as to whether section 513A(b) would be applicable. In other words, a question may arise as to whether it could be said that the order under section 447A took effect immediately before the winding up order was made. However, where the administration ended at the same moment as the winding up order took effect, it is clear that, immediately before the winding up order was made, the Taxpayer was under administration.

Section 513A(d) indicates that the expression ``immediately before'' entails something more than mere instantaneity. Under section 513A(d), there would ordinarily be a period of time between the execution of a deed of company arrangement, as a result of which the administration would end by the operation of section 435C(2)(a), and the making of a winding up order. It may be that for section 513A(d) to be attracted that interval would need to be very short. Nevertheless, the provision clearly contemplates that there may be such an interval. It follows, therefore, that the same expression when used in section 513A(b) would permit of there being some interval between administration ending and a winding up order being made. How long an interval would be sufficient to preclude the operation of section 513A(b) is not a question which I need to decide. In the present case there was no interval. Orders 2 and 3 made by Hill J on 28 February 1997 took effect at the same moment.

Even if there had been no stay and his Honour pronounced one order after the other, I would still conclude that, immediately before the winding up order was made, the Taxpayer

ATC 5233

was under administration. It follows, therefore, that, by the operation of the provisions which I have set out above, the winding up of the Taxpayer is taken to have begun on 20 November 1996. Accordingly, under section 468, any disposition of property of the Taxpayer made after 20 November 1996 is void unless the Court otherwise orders. No such order was sought. It also follows that any attachment, sequestration, distress or execution put in force against the property of the Taxpayer after 20 November 1996 is also void.

A further consequence is that the ``relation back day'' as defined in section 9 of the Law is also 20 November 1996. Under section 9, ``relation back day'' in relation to a winding up of the company relevantly means the day on which the winding up is taken, because of Division 1A of Part 5.6, to have begun. Section 513A is contained within Division 1A of Part 5.6. The significance of the relation back day is dealt with below in relation to the contention of the Liquidator that certain of the Notices are insolvent transactions of the Taxpayer within section 588FC of the Law.

The result, somewhat anomalously, is that, notwithstanding the submissions which were made to Hill J and which led to the making of the order under section 447A of the Law, the relation back day is in fact later than the day of the filing of the winding up application. That follows from the fact that the administrators were appointed after the winding up application was filed.

Operation of section 468

Section 468 of the Corporations Law relevantly provides as follows:

``468(1) Any disposition of property of the company... made after the commencement of the winding up by the Court is, unless the Court otherwise orders, void.

...

468(4) Any attachment, sequestration, distress or execution put in force against the property of the company after the commencement of the winding up by the Court is void.''

Three questions arise concerning the manner in which section 468 operates in relation to the Notices.

First, the Liquidator contended that if a notice gives rise to a charge, as contended by the Commissioner, the charge arises only upon payment by the recipient because an indispensable component of the charge is the authority deemed by section 218(4) to have been given by a taxpayer. The argument was that the charge created by the Notices was not complete until payment had been made with the deemed authority of the Taxpayer.

However, the effect of giving the Notices was, according to the principles to which I have referred above, that rights analogous to a statutory charge were created by operation of law. Those rights were effective upon the giving of the Notices. Payment in accordance with the Notices is the realisation of those rights. The deemed authority for payment arises under section 218(4) upon the giving of the Notices. Whenever a recipient complies with a notice by making a payment to the Commissioner, the payment will be deemed to have been made in accordance with the authority of the relevant taxpayer. Nothing further comes into existence or arises by the payment. The payment is no more than the giving effect to or realisation of the rights created by the operation of section 218.

Secondly, it was said that section 468(4) applies because compliance with a Notice would constitute an ``attachment'' being ``put in force against the property'' of the Taxpayer within the meaning of that section and would be avoided. In so far as the Liquidator relied on section 468(4) of the Law, the question is resolved by the observations of Hill J in Donnelly's Case. One of the questions raised in Donnelly's Case was whether section 118 of the Bankruptcy Act 1966 (Cth) affected the Commissioner's position. Section 118 relevantly provides that a creditor must pay to the trustee of the estate of a bankrupt moneys received as a result of ``the attachment'' by that recipient of a debt due to the bankrupt.

Hill J adverted to the fact that provisions of sections comparable to section 118 existed at a time when priority for income tax was paramount. He concluded that it could have hardly been intended that a section such as section 118 would operate to require the Commissioner to pay over to the trustee funds taken under a section 218 notice, when the only consequence of that would be that the funds would be held by the trustee to pay to the Commissioner himself in priority. Hill J concluded, therefore, that it seemed highly

ATC 5234

unlikely that section 118 was ever intended to ``encompass a charge of the kind contemplated by section 218'' and that the charge created by the service of a notice under section 218 does not fall to be considered as an ``attachment'' for the purposes of section 118 of the Bankruptcy Act (at ATC 5099; FCR 467).

The analogy between the winding up of a company in insolvency and bankruptcy is sufficiently valid to justify a conclusion that the term ``attachment'' in section 468(4) of the Law should be construed as having the same meaning as in section 118 of the Bankruptcy Act. It would follow, on the authority of Donnelly's Case, that the enforcement by the Commissioner of the obligations and rights created by the service of a notice under section 218 does not entail putting in force attachment against the property of a taxpayer which is a company within the meaning of section 468(4) of the Law.

Thirdly, a question arises as to the effect of the Third Notice, which was given after the deemed commencement of the winding up of the Taxpayer. It is necessary to deal with several additional issues before returning to that question.

The effect of subsequent notices on earlier notices

The Notices given at the same time are relevantly in the same form. It is convenient, therefore, to consider only the three notices addressed to MHC.

The First Notice was relevantly in the following form:

``The Public Officer Macquarie Health Corporation Pty Ltd

...

Income Tax Assessment Act Notice under section 218

Take notice that, in the exercise of the powers conferred on me as Deputy Commissioner of Taxation... I DO BY THIS NOTICE REQUIRE MACQUARIE HEALTH CORPORATION PTY LTD 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

RICHARD WALTER PTY LIMITED (herein after referred to as `the taxpayer')... a taxpayer by whom the amount of $11,826,018.55 is due in respect of tax, TO PAY TO THE COMMISSIONER so much of that money as is sufficient to pay the amount of $11,826,01.855 [sic] or the whole of the money if it is equal to or less than the amount and if the money is now due by the MACQUARIE HEALTH CORPORATION PTY LIMITED to the taxpayer or is now held by MACQUARIE HEALTH CORPORATION on behalf of the taxpayer, the payment to the Commissioner is required to be made forthwith, BUT if the money becomes due by MACQUARIE HEALTH CORPORATION PTY LIMITED to the taxpayer in the future or is held by MACQUARIE HEALTH CORPORATION PTY LIMITED on behalf of the taxpayer in the future, the payment to the Commissioner is required to be made forthwith upon the money becoming due or held by MACQUARIE HEALTH CORPORATION PTY LIMITED.

...

Dated this seventh day of July 1992

[Signed]

DEPUTY COMMISSIONER OF TAXATION''

The First Notice was served under cover of a letter of the same date which simply said as follows:

``Please find enclosed a notice issued pursuant to section 218 of the Income Tax Assessment Act 1936.

Would you please address any payments to the attention of:

Ms Briony Andrew Complex Legal Recovery Unit

...

Yours faithfully

DEPUTY COMMISSIONER OF TAXATION''

ATC 5235

The Second Notice was served under cover of a letter in the following terms from the Deputy Commissioner addressed to the public officer of MHC:

``INCOME TAX - RICHARD WALTER PTY LTD

Please find enclosed a copy of an amended notice which issued this day under section 218 of the Income Tax Assessment 1936 [ sic], as amended, for recovery of tax outstanding on the above named taxpayer's account. Your attention is drawn to the original notice under section 218 of the Income Tax Assessment Act which issued on 7 July 1992. The amended notice issued this day does not operate to revoke the original notice.''

The Second Notice was in similar but not identical terms to the First Notice. The first relevant change was that the figure $15,784,701.26 appeared in lieu of the sum of $11,826,018.55 where that latter sum appeared twice in the First Notice. The other difference between the Second Notice and the First Notice was that the former was headed ``Amended notice under section 218'' whereas, as indicated above, the heading in the First Notice was simply ``Notice under section 218''.

The Third Notice was served under cover of a letter from the Deputy Commissioner also addressed to the public officer of MHC. That letter relevantly provided as follows:

``INCOME TAX: RICHARD WALTER PTY LTD

Please find enclosed a second amended notice which issued this day under Section 218 of the Income Tax Assessment 1936 [ sic], as amended, for recovery of tax outstanding on the above named taxpayer's account. Your attention is drawn to the original notice under section 218 of the Income Tax Assessment Act which issued on 7 July 1992 and of the first amended notice which issued on 26 September 1995. The second amended notice issued this day does not operate to revoke the original notice or the first amended notice.''

The Third Notice was in identical terms to that of the Second Notice except for the substitution of the sum $19,536,409.10 for the sum of $15,784,701.26 where the latter sum appeared twice in the Second Notice.

The Debtors contended, and as I understand it the contention was adopted on behalf of the Taxpayer, that only the Third Notice, to the extent that it is valid and operative, is open to be relied upon. It was pointed out that, while the Second and Third Notices were headed ``AMENDED NOTICE UNDER SECTION 218'', neither makes any reference to any earlier notice nor states the respects in which any earlier notice is to be amended. Further, on its face, each is self-contained and was said to be consistent only with its replacing the notice immediately preceding it.

I consider that the effect of service of the subsequent Notices was not to replace the earlier Notices but to vary the way in which the earlier Notices operated. When an amendment is made to a notice under section 218, the effect of the notice continues as amended and not as previously in effect - see
FC of T v S Hoffnung & Co. Ltd (1928) 1 ATD 310 at 318; (1928) 42 CLR 39 at 54 dealing with amended notices of assessment which both parties accepted as applicable by analogy.

Some point was made on behalf of the Debtors concerning the form of the Second and Third Notices in so far as they were not expressed to amend the earlier Notices. The power given by section 218 is for the Commissioner, by notice in writing, to require a person to pay money to the Commissioner and from time to time to ``amend or revoke any such notice''. The thrust of the contention was that, because the subsequent Notices were not expressed to ``amend'' the earlier Notices, the earlier Notices could not be relied upon in any way although, as I understand the submission, the Debtors ultimately eschewed contending that the subsequent Notices revoked the earlier Notices.

In so far as that contention entailed a conclusion that an earlier Notice, following the issue of an amended Notice, no longer regulated the obligations of the recipient, that may be correct. In so far as the contention was that the earlier Notices are to be treated as though they had not been given, the contention must be rejected.

The First Notice was effective and operative, assuming its validity, according to its terms and the proper construction of section 218. If, as contended for by the Commissioner, the effect of the service of the Notices was to create a statutory charge or rights analogous to a charge,

ATC 5236

that charge or those rights were created by the service of the First Notice. The First Notice remained operative according to its terms until service of the Second Notice. The heading and the covering letter made it abundantly clear that the Second Notice was not intended to revoke the First Notice but was intended to do no more than amend the effect of the First Notice.

While the Second Notice does not draw attention to the amendment, it is a simple matter, by comparing the two documents, to deduce what the amendment was. The amendment was to substitute a higher figure as the amount due by the Taxpayer in respect of tax. Thus, the effect of serving the Second Notice is that the obligations and rights created by the First Notice continued in force and effect and continued to operate except to the extent of that amendment. If, on the true construction of section 218, service of a notice creates a statutory charge to secure an amount stated to be due in respect of tax, that charge, from the time of service of the Second Notice, secured the higher amount specified in the Second Notice. The same analysis would apply in relation to the service of the Third Notice, subject to any relevant effect of the winding up.

Thus, from the time of service of the Second Notice, MHC was under an obligation, arising under section 218, to pay to the Commissioner forthwith the amount of $15,784,701.26 if that amount or more was then ``due'' by MHC to the Taxpayer. Alternatively, if that amount or more was to become ``due'' by MHC to the Taxpayer in the future, MHC was under an obligation to pay that amount to the Commissioner forthwith upon the money so becoming ``due''. In that context it is clear that the term ``due'' is to be construed as meaning ``due and payable''. Similarly, from the time of service of the Third Notice, MHC was under an obligation to pay the amount of $19,536,409.10, subject to the effect of the winding up order.

Disposition of property

Since the winding up of the Taxpayer is to be taken to have commenced on 20 November 1996, a question arises as to the effect of the Third Notice, which was given after that time. The argument was that the giving of a notice under section 218 operates as a disposition of property by the relevant taxpayer in so far as it creates a charge affecting the property of the taxpayer.

It is significant that section 468(1) does not refer to a disposition ``by the company'' but simply to disposition ``of the property of the company''. That is to say, it is not necessary for a disposition to be a ``transaction of the company'' as, for example, under section 588E. I consider that the service of a notice under section 218 constitutes a disposition of the property of the relevant taxpayer to the extent that it creates in favour of the Commissioner a charge or other rights of priority over property of a taxpayer in respect of the amount of tax specified in the notice. Accordingly, a notice given after the commencement of the winding up is void. It follows that the Third Notice which was served on MHC on 4 February 1997 was void.

Voidable transactions

Section 588FE(1) of the Law provides that where a company is being wound up, a transaction of the company may be voidable because of any one or more of the subsequent subsections of section 588FE. The Liquidator relied on subsection 588FE(4) which relevantly provides as follows:

``(4) The transaction is voidable if:

(a) it is an insolvent transaction of the company; and

(b) a related entity of the company is a party to it; and

(c) it was entered into, or an act was done for the purpose of giving effect to it, during the 4 years ending on the relation- back day.''

Under section 588FC:

``A transaction of a company is an insolvent transaction of the company if, and only if, it is an unfair preference given by the company... and:

(a) any of the following happens at a time when the company is insolvent:

(i) the transaction is entered into;

(ii) an act is done, or an omission is made, for the purpose of giving effect to the transaction; or

(b)...''

Under section 588FA(1):

ATC 5237

``A transaction is an unfair preference given by a company to a creditor of the company if, and only if:

(a) the company and the creditor are parties to the transaction (even if someone else is also a party); and

(b) the transaction results in the creditor receiving from the company, in respect of an unsecured debt that the company owes to the creditor, more than the creditor would receive from the company in respect of the debt if the transaction were set aside and the creditor were to prove for the debt in a winding up of the company;

...''

Section 9 of the Law provides that in Part 5.7B in relation to a body corporate, the expression ``transaction'' means a transaction to which the body is a ``party''. The definition then contains several examples, but without limitation, as follows:

``(a) a conveyance, transfer or other disposition by the body of property of the body; and

(b) a charge created by the body on property of the body; and

...

(d) a payment made by the body; and

...

(f) a release or waive by the body; and

...

and includes such a transaction that has been completed or given effect to, or that has terminated;''

Questions arise as to whether the giving of a notice under section 218 is a ``transaction'' within the meaning of section 558FE and, if it is, whether a related entity of the Taxpayer is a ``party'' to that transaction. Dr Wenkart at all relevant times was a director of each of the Debtors and of the Taxpayer and, accordingly, each of the Debtors is a related entity in relation to the Taxpayer by the operation of paragraph (k) of the definition of ``related entity'' in section 9 of the Law.

The Commissioner contended that the relation back day is the day on which the application for winding up of the Taxpayer was filed, namely 3 July 1996. Under the definition of ``relation back day'' in section 9, if, because of Division 1A of Part 5.6, the winding up is taken to have begun on the day when an order that the company be wound up was made, the relation back day is the day on which the application for the order was filed. For the reasons which I have indicated, I consider that the winding up is taken to have commenced on 20 November 1996 and not the day on which the winding up order was made. The First Notices and the Second Notices were given during the four years ended on that date. It is therefore necessary to consider the respective contentions of the Commissioner and the Liquidator as to whether a notice under section 218 can be a ``transaction of the Taxpayer'' for the purposes of section 588FE and whether the recipient of a notice is a ``party to'' the notice.

The term ``transaction'' entails a juridical act to which the relevant company is ``a party''. The definition of ``transaction'' in relation to a body corporate refers to a conveyance, transfer or other disposition by the body or a charge created by the body. Indeed, every example given in the definition of ``transaction'' refers to a juridical act by the body other than paragraph (g) which refers to a loan to the body.

A notice under section 218 is given without reference to the relevant taxpayer and will normally be given without the knowledge of the relevant taxpayer. Further, it will often, although not necessarily, be given against the will or wishes of the relevant taxpayer. In those circumstances, it could not be said that a taxpayer is a participant in any sense in the giving of a notice or in the consequences which follow from the giving of the notice, whatever those consequences in law may be. Accordingly, a taxpayer is not in any sense a party to a section 218 notice or the giving of a section 218 notice.

Under section 218(4) of the Assessment Act, any person making any payment in pursuance of section 218:

``shall be deemed to have been acting under the authority of the taxpayer and all other persons concerned and is hereby indemnified in respect of such payment.''

It is clear that in most circumstances there will be no actual direction or authority given by the relevant taxpayer to the debtor of that taxpayer. Absent such a direction or authority and absent a provision such as section 218(4), a

ATC 5238

recipient of a notice who made a payment in accordance with its terms may well not obtain a discharge of the indebtedness to the relevant taxpayer. The effect of section 218(4), however, is that when the recipient of a notice makes a payment in accordance with its terms, the recipient will be able to obtain a good receipt from the Commissioner in respect of the payment.

The effect of section 218(4) is to deem to have occurred something which did not occur. It has effect on the assumption that the relevant taxpayer has not participated in the arrangement whereby the relevant taxpayer's debtor makes a payment to the Commissioner. Thus, section 218(4) could not have the effect of involving the relevant taxpayer as a participant in the transaction whereby the consequences of giving a notice, whatever those consequences in law may be, arise.

I do not consider that a relevant taxpayer can be said to be a party to the giving of a notice under section 218, notwithstanding that, upon the giving of the notice, the authority of the taxpayer is deemed to be given for a payment to be made by the recipient in accordance with the terms of the notice. Accordingly, since the effect of the giving of a notice under section 218 is to create a charge or other analogous rights in respect of indebtedness of the recipient to the relevant taxpayer, there would not be a transaction of the taxpayer within the meaning section 588FE of the Law.

It is not necessary, therefore, to consider the question of whether or not the recipient of the notice is a party to it. However, for similar reasons, I would conclude that the recipient of a notice is not a party to the notice. The service of a notice may be a transaction of the Commissioner. It is not a transaction of the recipient.

In the course of the hearing, the Liquidator sought leave to amend the first cross-claim to allege that the Taxpayer had at all times since December 1991, or alternatively, since March 1995, been unable to pay its debts as and when they became due and payable and was insolvent within the meaning of Part 5.7B of the Corporations Law. Until leave to make that amendment was sought, the only allegation of insolvency of the Taxpayer made in the first cross-claim was that the Taxpayer was insolvent at all times after 20 November 1996. That allegation was admitted by the Commissioner.

The amendment was opposed by the Commissioner on the ground that the allegation of insolvency prior to 20 November 1996 was completely new and could require considerable additional investigation of the financial affairs of the Taxpayer, which had not up until that time been relevant. I granted leave to the Liquidator to make the amendment but also made an order under Order 29 of the Federal Court Rules that any issue concerning the insolvency of the Taxpayer prior to 20 November 1996 be decided separately from and after the determination of all other questions in the proceedings.

Since the giving of the Notices did not constitute any transaction of the Taxpayer, the giving of the Notices could not constitute an ``insolvent transaction'' of the Taxpayer within the meaning of section 588FC. Accordingly, it is not necessary to consider whether the Taxpayer was insolvent at any time prior to 20 November 1996.

It is interesting, although probably not relevant, to note that the Law Reform Commission Report No. 45 of the General Insolvency Inquiry (``the Harmer Report'') made reference to the position of the Commissioner under section 218 in the context of these provisions. One of the recommendations made in the Harmer Report was that there should be a provision requiring the Commissioner to give up money recovered pursuant to a provision such as section 218 in the event that the Taxpayer to whose debtors notices were directed became subject to formal insolvency proceedings within six months of receipt of the notice by those debtors.

The authors of the Harmer Report observed that the Commissioner may obtain an advantage over other ordinary unsecured creditors through the operation of section 218 because of the contention that the effect of the serving of a valid notice is to create a charge in favour of the Commissioner. That recommendation was not adopted by the Parliament. Further, section 222ARA of the Assessment Act provides that Part XI, within which section 218 is to be found, is not intended to limit or exclude the operation of Chapter 5 of the Law ``in so far as that Chapter can operate concurrently with'' Part XI. Implicit in that provision is the proposition that if Chapter 5 cannot operate

ATC 5239

concurrently with Part XI, then Part XI is paramount.

Conclusion in relation to first cross-claim

It follows, in my opinion, that the Liquidator is not entitled to a declaration that he is entitled to collect and receive from the Debtors, to the exclusion of the Commissioner, any amounts owing by them. Similarly, the Liquidator is not entitled to payment out of Court of the moneys in Court representing the amounts which were owing by the Debtors to the Taxpayer except as to any surplus after the First and Second Notices have been complied with. It also follows that there would be no contravention of section 471B if the Commissioner proceeds against the Debtors for recovery of the amounts which, by the operation of section 218 following the service of the First and Second Notices, became payable to the Commissioner when those amounts became payable to the Taxpayer on 1 July 1998.

As at the date of service of the Second Notice on MHC the balance of the loan account, after reversing the credits referred to above, was $15,105,183.98. Interest continued to accrue or become due after service of the Second Notice. The amount due by the Taxpayer in respect of tax as shown in the Second Notice was $15,784,701.26. It follows that the whole of the loan account was attached by the Second Notice. However, as I have indicated, the Third Notice was void. Accordingly, it did not amend the earlier Notices to increase the amount of money attached. In relation to Ryndale and Sarzana, the same considerations apply. That is to say, the balances of their respective loan accounts were exceeded by the amount due in respect of tax shown in the Notices served on them.

In relation to B&P Leasing, however, the position is different. The balance of the loan account exceeded the amount due in respect of tax shown in both the First Notice and the Second Notice. Accordingly, the balance of the B&P Leasing loan account was attached to the extent of the amount shown in the Second Notice, namely $15,784,701.26.

It may be that the Commissioner would contend that he is entitled to look to each of the Notices separately. For example, after the whole of the debt due by MHC is applied in payment of the tax due by the Taxpayer, there would still be tax owing. A question may arise as to whether the amount shown in the Second Notice addressed to B&P Leasing should be reduced by the amount recovered from MHC or whether it still operates on the B&P Leasing loan account for the full amount of $15,784,701.26. There has been no argument concerning that question. Accordingly, if there is an issue as to the interrelationship between the Notices, that should be the subject of further argument.

The second cross-claim

The issues

In the second cross-claim, the Trustees sought an order that there be paid to AT and Morlea, out of the money in Court, 5% and 95% respectively of an amount which is defined in the second cross-claim as ``the Trust Sum''. That expression is defined as the balance of the amounts paid to the Taxpayer by Morlea as at 30 June 1984, of $7,355,581, together with compound interest on the balance from time to time of the amounts paid by the Taxpayer to Morlea.

The Trustees made the following allegations in the second cross-claim:

1. On 25 May 1981 a partnership agreement was entered into to form the Morlea Partnership. The parties to the partnership agreement were the trustees of the Aborda Trust and the Aurelius Unit Trust in the proportions 5% and 95% respectively. Aborda was the trustee of the Aborda Trust at that time. AT is the present trustee of the Aborda Trust. Morlea was the trustee of the Aurelius Unit Trust at that time. On 28 December 1984, a decision was made to wind up the Aurelius Unit Trust. The Aurelius Unit Trust was subsequently wound up and its then assets were distributed to the unit holders. The Morlea Partnership was dissolved on 30 June 1984.
2. Between 25 July 1981 and 30 June 1984, Morlea conducted the Morlea Partnership in its own name as agent for the partners, namely, Morlea, as trustee of the Aurelius Unit Trust and Aborda as trustee of the Aborda Trust. Between 25 May 1981 and 30 June 1984, Morlea purported to lend certain moneys to the Taxpayer which, by 30 June 1984, amounted to $7,355,581.
3. The Commissioner assessed the Taxpayer to income tax on the basis that the payments made by Morlea to the Taxpayer were income of the Taxpayer. In earlier

ATC 5240
proceedings in this Court, the Taxpayer was unsuccessful in an appeal from decisions of the Commissioner disallowing objections to those assessments. In the earlier proceedings, the Taxpayer contended that the amounts were received as loans from Morlea. The Court did not accept that the payments were made by way of loan and concluded that the Taxpayer had failed to discharge the onus upon it under the Assessment Act to establish that the payments were not income.
4. On the basis of those findings, the Trustees now contend that the payments, if they were not loans, must have been made in breach of fiduciary duty or breach of trust to the knowledge of the Taxpayer such that the Taxpayer received the moneys which were the subject of the payments as constructive trustee or upon a resulting trust.
5. The Taxpayer intermingled those moneys with its own funds and, therefore, the whole of the property of the Taxpayer became subject to a constructive or resulting trust in favour of the Trustees.
6. As a consequence, the Debts are subject to such constructive or resulting trust in favour of the Trustees and that trust interest of the Trustees takes priority over any claim which might arise in favour of the Commissioner by reason of service of the Notices and takes priority over any claim which the Liquidator has to the Debts as property of the Taxpayer.

The principal defence advanced on behalf of the Taxpayer and the Commissioner in answer to the claim by the Trustees was that, if there was a breach of fiduciary duty by reason of the payments made by Morlea to the Taxpayer between 25 May 1981 and 30 June 1984, the effect of that breach was rectified by events which occurred in 1984. That rectification was confirmed in 1989. It was also contended that, even if there had been a constructive or resulting trust, the subject matter of such trust has now been so mixed with the assets of the Taxpayer and dissipated that there are no longer identifiable assets of the Taxpayer to which a trust now attaches. There are also other defences based on the Limitation Act and on laches, acquiescence and delay.

The background to the second cross-claim

The structure of the Wenkart Group up to 25 May 1981 might be represented as follows:

+----------+        +---------------------+
| Patients |--------|  Dr T. R. Wenkart   |
+----------+  Fees  |          &          |
| Medicare |--------|    Other sources    |
+----------+  Fees  +---------------------+
                             |
                             | Service Fees
                             |
                    +---------------------+
                    | Morlea Professional |         +----------------+
                    | Services P/L ATF The|---------| Richard Walter |
                    | Morlea Professional |  Loans  |     Pty Ltd    |
                    | Services Unit Trust |         +----------------+
                    +---------------------+
                             |
                             | 100% Units
                             |
                    +---------------------+
                    |   Ultera P/L ATF    |
                    |    Morlea Trust     |
                    +---------------------+
                             |
                             |
                             |
                    Discretionary Beneficiaries:
                  Wenkart Family Members/Entities
                   (Including Richard Walter P/L)

Following the reorganisation which occurred with effect on 25 May 1981, the
structure might be represented as follows:

+----------+          +---------------------+
| Patients |----------|  Dr T. R. Wenkart   |
+----------+  Fees    |          &          |
| Medicare |----------|    Other sources    |
+----------+  Fees    +---------------------+
                                 |
                                 | Service Fees
                                 |
                    +--------------------------+
                    |    Morlea Professional    |         +----------------+
      +-------------|    (Conducted by Morlea   |---------| Richard Walter |
      |             | Professional Services P/L |  Loans  |     Pty Ltd    |
      |             |   On behalf of partners   |         +----------------+
      |             +---------------------------+                  |
      |                          |                                 | Daily
      |                          |                                 | Cash
      |                          |                                 | Payments
      |                          |                                 |
+--------------+       +--------------------------+  +----------------------+
| Aborda Trust |       |    Aurelius Unit Trust   |  |       Loans and      |
| (Aborda P/L  |       |   (Morlea Professional   |  | Investments to other |
| as Trustee)  |       | Services P/L as Trustee) |  | Members of the Group |
+--------------+       +--------------------------+  +----------------------+
      |                             |
      |                             |
      |                       +-----+------+
      |                  1%   |            |  99%
      |                 Units |            | Units
+----------------+   +------------+  +--------------+
| Discretionary  |   |  Ventura   |  |   Aurelius   |
| Beneficiaries  |   | Securities |  |   Commodus   |
|   Including    |   |    Inc.    |  |  Investment  |
| Richard Walter |   |            |  |      BV      |
|      P/L       |   +------------+  +--------------+
+----------------+

Aurelius Commodus Investment BV (``Aurelius Commodus'') was a company incorporated in the Netherlands. Ventura Securities Inc (``Ventura'') was a limited partnership established in California, USA. The holding company of Aurelius Commodus was Kimberton Investments NV (``Kimberton'') a company incorporated in the Netherlands Antilles. The holding company of Kimberton was Zeeno Investments NV a company incorporated in Jersey (``Zeeno''). The issued capital of Zeeno was owned by the trustee of the Mayfair Trust established in the Channel Islands.

The Taxpayer and the Commissioner contended that the Aurelius Unit Trust was not effectively established because when the instrument constituting it was established, the same entity was trustee and holder of all units. However, within several days, there were transfers such that there was no longer identity between the two. The trust property comprising the interest in the Morlea Partnership was acquired after that time. Accordingly, at least from that time, a trust came into existence.

In the period 25 May 1981 to 30 June 1984, Dr Wenkart, practising under the name of Macquarie Pathology Services, received all the pathology fees from the Pathology Business and those fees, as received, were banked to the credit of the Macquarie Pathology Services account of Dr Wenkart. Each working day, amounts were transferred from that account to the account of Morlea, as agent for the Morlea Partnership.

During that period business outgoings and expenses of the Pathology Business were paid from the account of the Morlea Partnership and the surplus amounts remaining in the account were transferred to the Taxpayer as the finance company of the Wenkart Group. The payments were made on a regular and recurrent basis every two or three days during the period and were shown in the books of the Taxpayer and of the Morlea Partnership as loans. During the period in question, the accounts of the Morlea Partnership showed, as a current asset, loans to the Taxpayer in the amounts of those payments. The accounts of the Taxpayer showed those amounts as a current liability due to the Morlea Partnership.

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The balances of the loan account of the Taxpayer in the books of the Morlea Partnership for that period were as follows:

• Year ended 30 June 1981: $1,707,500;
• Year ended 30 June 1982: $3,376,302;
• Year ended 30 June 1983: $5,428,989;
• Year ended 30 June 1984: $7,355,581.

The books of the Taxpayer showed balances of the loan account of the Taxpayer to Morlea Partnership as follows:

• Year ended 30 June 1981: $1,589,328;
• Year ended 30 June 1982: $3,127,341;
• Year ended 30 June 1983: $5,428,990;
• Year ended 30 June 1984: $7,355,581.

The discrepancies between the 1981 and 1982 figures in the books of the Taxpayer and of the Morlea Partnership arose out of timing differences. The Morlea Partnership's accounts were prepared on a 4 weekly basis and the Taxpayer's accounts on a calendar monthly basis. That resulted in different year end dates.

From 25 May 1981 to 30 June 1984 the income tax returns for the Morlea Partnership stated that the net income of the Morlea Partnership had been distributed as to 95% to Morlea as trustee of the Aurelius Unit Trust and as to 5% to Aborda as trustee of the Aborda Trust as follows:

+-------------------------------------------------------------+
|         |   Share of Net Income   |   Share of Net Income   |
| Year of | of Aborda as trustee of | of Morlea as Trustee of |
| Income  |    the Aborda Trust     | the Aurelius Unit Trust |
|-------------------------------------------------------------|
|  1981   |      $102,955.00        |      $1,956,148.00      |
|  1982   |       $87,852.00        |      $1,669,195.00      |
|  1983   |       $77,135.00        |      $1,465,563.00      |
|  1984   |      $196,889.00        |      $3,740,898.00      |
+-------------------------------------------------------------+

In the income tax returns of the Aurelius Unit Trust for the 1991, 1992, 1993 and 1994 years of income it was stated that the net income of the trust estate included Morlea's share of the net income of the Morlea Partnership and that the net income of the Aurelius Unit Trust was distributed between the two presently entitled unit holders, Aurelius Commodus and Ventura in the proportions of 99% and 1% respectively, as follows:

+-----------------------------------------------------------+
| Year of | Present entitlement of | Present entitlement of |
| Income  |        Ventira         |   Aurelius Commodus    |
|-----------------------------------------------------------|
|  1981   |       $19,561.00       |     $1,936,587.00      |
|  1982   |       $16,691.00       |     $1,652,455.00      |
|  1983   |       $15,119.00       |     $1,496,778.00      |
|  1984   |       $37,409.00       |     $3,703,489.00      |
+-----------------------------------------------------------+

Although Aurelius Commodus and Ventura had a present entitlement to a share in the income of the Aurelius Unit Trust, no significant payment was in fact ever made to Aurelius Commodus or Ventura because they were foreign persons and there were exchange control restrictions in place at that time. Further, although the returns of the Aborda Trust show a distribution to the Taxpayer of the net income of the Aborda Trust as a beneficiary of that Trust, there was never in fact a physical payment of money because there were no moneys in any bank account of the Aborda Trust to do so. There were no moneys in the accounts of the Aurelius Unit Trust or the Aborda Trust to make actual payments to the beneficiaries because Morlea, as agent of the Morlea Partnership, had paid the surplus moneys from the Pathology Business to the Taxpayer as outlined above and the Taxpayer had not repaid any of those moneys to Morlea. It was not possible for the Taxpayer to repay the moneys to Morlea without liquidating the assets of the Taxpayer.

ATC 5243

Morlea made the payments to the Taxpayer in its capacity as agent of the Morlea Partnership. The Taxpayer gave no consideration to Morlea in its capacity as agent of the Morlea Partnership for the transfer by Morlea to the Taxpayer of the moneys in question. The payments which were made during the period in question were made without any writing evidencing an agreement or obligation to repay apart from book entries made by accounts staff of the Wenkart Group. There was no written evidence as to the terms and conditions on which the moneys were lent or repaid other than the year end financial statements which were the product of year end journal entries. No interest was ever charged, payable or paid by the Taxpayer in respect of the moneys in question.

The Taxpayer, through its directors Dr Wenkart and Mr Holden, knew that the moneys were held by Morlea in its capacity as agent of the Morlea Partnership and that the members of the Morlea Partnership held their interest upon trust for the Aborda Trust and the Aurelius Unit Trust respectively. No part of the moneys in question have ever been repaid by the Taxpayer to Morlea as agent for the Morlea Partnership.

The above findings which I make are based on the uncontested evidence of Mr Holden.

The earlier proceedings

I have in evidence before me the reasons for judgment of Tamberlin J of 11 July 1995 in earlier proceedings in the Court between the Taxpayer and the Commissioner (reported at 95 ATC 4440) together with the reasons of the Full Court on appeal of 14 June 1996 (reported at 96 ATC 4550) upholding, by majority, the decision of Tamberlin J. The reasons were admitted into evidence to prove the findings which were made but not the truth of the facts found. The fact that findings were made and the precise terms of the findings are relevant to an issue raised in the proceedings before me. The Trustees contended that it would be an abuse of process for either the Commissioner or the Taxpayer to reagitate precisely the same matters which were in issue before Tamberlin J and decided by him. It is necessary, therefore, to refer in some detail to the earlier proceedings. What follows in this section is taken from the reasons for judgment of Tamberlin J and the reasons for judgment on the appeal.

There were five applications by the Taxpayer before Tamberlin J. The applications were appeals pursuant to section 14ZZ of the Taxation Administration Act 1953 (Cth) from determinations made by the Commissioner under the Assessment Act disallowing the Taxpayer's objections to various assessments. The objections were lodged against amended assessments issued by the Commissioner in respect of the years of income ended 30 June 1981, 1982, 1983 and 1984 and the year of income ended 30 June 1989. The appeal in respect of the 1989 year of income was not pursued at the hearing before Tamberlin J.

The first four appeals sought to vary the determinations of the Commissioner by excluding from the assessable income of the Taxpayer for the four years in question the following four amounts respectively:

30 June 1981    $2,143,148
30 June 1982    $1,869,195
30 June 1983    $1,645,165
30 June 1984    $3,737,581

The appeals in respect of those four years arose out of the restructuring of the Wenkart Group which occurred with effect from 25 May 1981. The obvious purpose of the restructuring which was put in place from 25 May 1981 was to achieve the exemption of the amounts of income referred to above by reason of the provisions and effect of Article 7 of the Australia/Netherlands Double Taxation Agreement. Tamberlin J held that the 1981 arrangements were designed to channel most of the income of the Morlea Partnership to Aurelius Commodus and thereby secure the benefit of an exemption in the Australia/ Netherlands Agreement. The claimed result of the restructuring is reflected in the following note to the income tax return of Aurelius Commodus for the year ended 30 June 1981:

``The company is totally managed and controlled in the Netherlands and does not carry on any business in Australia through a permanent establishment in Australia. Accordingly, the provisions of Article 7 of the Australian/ Netherlands Tax Treaty apply to fully exempt from Australian income tax the profits derived by the company in Australia.''

Article 7 of the Netherlands/Australia Agreement provided that the profits of an enterprise of one of the States was to be taxable only in that State unless the enterprise carried

ATC 5244

on business in the other State through a permanent establishment situated therein. The tax benefit sought to be achieved was that the income of the Morlea Partnership which ultimately flowed through to Aurelius Commodus, as the holder of 99% of the units in the Aurelius Unit Trust and which had a 95% interest in the Morlea Partnership, would, by virtue of the provision of Article 7, not be subject to Australian income tax.

Tamberlin J made findings concerning the steps which were taken to establish the structure which was in place from 25 May 1981. The income tax returns for the Morlea Partnership for the four years in question state that the net income of the Morlea Partnership was distributed as to 95% to Morlea as trustee of the Aurelius Unit Trust and as to 5% to Aborda in its capacity as trustee of the Aborda Trust. In the income tax returns of the Aurelius Unit Trust, it was asserted that the net income of the trust estate included Morlea's purported share of the net income of the Morlea Partnership and that the net income of the Aurelius Unit Trust was distributed between the two presently entitled unit holders, Aurelius Commodus and Ventura in the proportions of 99% and 1% respectively. However, although Aurelius Commodus and Ventura purported to have a present entitlement to a share in the income of the Aurelius Unit Trust, no significant payment was in fact ever made to Aurelius Commodus or Ventura. By ``payment'', Tamberlin J was intending to refer to an actual transfer of funds rather than the making of book entries.

The first contention of the Commissioner before Tamberlin J was that the loan arrangement between the Morlea Partnership and the Taxpayer was a ``sham'' in the sense that the transactions described as ``loans'' purportedly made by Morlea, as agent of the Morlea Partnership, to the Taxpayer were never intended to create legally enforceable debt obligations. His Honour observed that the central feature of a loan transaction is that the parties must intend that the whole of the moneys lent should be repaid. However, his Honour did not consider that there was ever intended to be, nor was there, any such obligation created.

The submission on behalf of the Taxpayer to Tamberlin J was that the ``loans'' were not shams because they were intended by those who entered them to create the very legal rights and obligations which they purported to effect. Reliance was placed by the Taxpayer on the conduct of the parties throughout the period from 25 May 1981 to 30 June 1984 in the way they accounted for and returned their income. The parties acted through their legal and accounting advisers at all relevant times and intended to create precisely those rights and obligations in accordance with the documents which they purported to effect on their face.

Tamberlin J set out the factors which he considered were relevant to be taken into account to decide whether the overall arrangement or any particular part of it was a sham. Tamberlin J said as follows:

``In the present case the relevant factors which must be taken into account to decide whether the overall arrangement or any particular part of it was a sham, in my view, are the following:

1. The moneys were paid without any written evidence of any agreement or obligation to repay apart from book entries made by accounts staff.

2. There was never any written or oral evidence as to the terms and conditions on which the moneys were said to be lent or repaid other than the year end financial statements which were the product of year end journal entries formulated by Holden, the Group Finance Director, to achieve the most desirable tax consequences.

3. It does not appear that any interest was ever charged, payable, or paid by Richard Walter in respect of these loans. There was no group policy that interest should not be charged on intra-group loans according to the evidence of Holden.

4. It is true that, as the applicant points out, there were book entries to indicate some substantial amounts paid by the applicant to MPS Pty Ltd. However, the net movements from MPS Pty Ltd to the applicant were far greater than the converse. For example, to 30 June 1982, the flow of cash from MPS Pty Ltd to the applicant was $2,038,967 and the movement back according to the entries was $500,954. For year ended 30 June 1983, the movement from MPS Pty Ltd to the applicant was $3,168,070.07

ATC 5245
compared with the converse of $866,421.07. In the year ended 30 June 1984, the cash moving from MPS Pty Ltd was $2,159,050.47 as compared with the converse of $232,459.47. These movements back do not show, in my opinion, that there was an intention to repay all the moneys channelled to Richard Walter.

5. It was within Holden's unfettered power and discretion to move money around the group as he determined to be appropriate. MPS Pty Ltd was completely controlled by Wenkart and Holden. Holden agreed that the real money, the cash money, stayed with Richard Walter and did not go to Aurelius Commodus. He could give no explanation as to the way in which Aurelius Commodus was going to use the 95% of income of MPS Pty Ltd, except that it was going to exploit it by increasing its capital account. He could give no explanation as to what it would do with the amassed capital from time to time. He agreed that part of the arrangement or agreement was that the money be lent to Richard Walter and this was acceptable to Holden because the cash money stayed with Richard Walter.

6. It was impossible for Richard Walter to repay the amounts distributed by MPS Pty Ltd without liquidating the assets of Richard Walter and the evidence was that there was never any intention or even contemplation of doing this.

7. In 1982 the nature of the liability of Richard Walter to MPS Pty Ltd was unilaterally reclassified by Holden from current liability to non-current liability without any board resolution by Richard Walter or MPS Pty Ltd. This was clearly to the detriment of Aurelius Commodus. It appears that no consideration was given by Holden to the trust obligations in this respect. In cross-examination in relation to this matter, Holden was prepared to say as an experienced accountant that he did not know whether a dollar today is worth the same or more in a year's time. That reflects adversely on the credibility of Holden. In my view this unilateral reclassification was done without any thought for, and contrary to the interests of, the beneficiaries allegedly owning the debt due from Richard Walter.

8. The evidence makes it clear that when MPS Pty Ltd needed funds of any size, it borrowed from external financiers instead of calling for repayment of the loan due by Richard Walter which was interest free. There was no evidence of any attempt or proposal to call for repayment of the loan to Richard Walter.

9. The debt alleged to be due from Richard Walter to MPS Pty Ltd was never repaid, but it appears to have been assigned by a series of `round robin' artificial paper transactions orchestrated by Richard Walter's legal and accounting tax advisers, none of whom were called in evidence by the applicant. No explanation was proffered for not calling them.''

The only witness called by the Taxpayer in the proceedings before Tamberlin J was Mr Holden. His Honour inferred that any evidence to be given by other witnesses who might have been expected to be called by the Taxpayer would not assist the Taxpayer's case. His Honour identified those witnesses as including Dr Wenkart and the professional advisers to the Wenkart Group. His Honour did not accept Mr Holden as a reliable witness in relation to the matter and concluded that he would accept Mr Holden's evidence only where it was corroborated by credible testimony or evidence or where objective circumstances made his version more likely.

His Honour was satisfied that the cumulative effect of the matters which he outlined was such as to warrant the finding that the so called loans were in truth intended to transfer funds to the Taxpayer without any obligation to repay the funds. His Honour's conclusion was that the purported ``loans'' were simply a false label given in order to mask the real transaction intended by the parties, which was the transfer of the beneficial ownership of the moneys to the Taxpayer free of any obligation to repay. The nomination of the payments as loans was calculated to make the true transaction appear as something it was never in truth intended to be. Accordingly, his Honour found that the loans were shams and that the reality of the situation was that the Taxpayer received the

ATC 5246

beneficial ownership of the moneys without any obligation to repay.

Tamberlin J then went on to consider whether the ``sham loan moneys'' received beneficially by the Taxpayer constituted assessable income of the Taxpayer for the purposes of the Assessment Act. His Honour referred to various circumstances, including the facts that the Taxpayer was engaged in carrying on a business for the purposes of gain or profit and that in the course of carrying on that business it received moneys which were intended to be and were used for the purpose of carrying on its business. His Honour considered that the gain, in the sense of receiving the beneficial ownership of funds, constituted a receipt of income in the Taxpayer's hands. The Taxpayer was carrying on the business of acting as the central banker and financier for the Wenkart Group. The receipt of the moneys on a periodic, regular and recurrent basis over the years in question and the lending or investing of those moneys indicated that the moneys were in the nature of income. His Honour found that the almost daily receipts occurred in the normal course of carrying on the Taxpayer's ordinary business and the payment of the money to the Taxpayer and its use for financing the Wenkart Group were significant elements of what could be described as a profit making scheme. His Honour concluded that the cash received by the Taxpayer, allegedly on the basis of being loans but in fact actually received as payments for its own benefit and which gave it an entitlement to use the funds as it saw fit, constituted assessable income in the hands of the Taxpayer.

On appeal, the majority of the Full Court (Lockhart and Hill JJ) delivered separate reasons for their conclusion that the appeal should be dismissed. Lockhart J considered that, having rejected Mr Holden's evidence that the payments were loans, there was insufficient remaining evidence in the case from which Tamberlin J could have concluded that it was more likely than not that the relevant payments were not income. In that regard, Lockhart J agreed with Hill J. Hill J noted that the finding that there was no intention on the part of Morlea and the Taxpayer that the loans be repaid necessarily involved not accepting the evidence of Mr Holden. Hill J considered that, on appeal, the Court would not come to a different conclusion.

Hill J then considered the question of onus in the context of an appeal under section 14ZZ of the Administration Act. In order to show that the assessment was excessive, the Taxpayer was required to show, on the balance of probabilities, that the payments in question were not income. It sought to do that by making a case that the payments were loans. If that case had been accepted, the Taxpayer would, subject to the possible application of section 260 of the Assessment Act, be entitled to succeed. Tamberlin J did not believe Mr Holden, finding that there was no intention that the loans would be repaid. That being the case, the payments in question were not loans. Hill J concluded that, if they were not loans, it would be for the Taxpayer then to show that they were something else which did not have the character of income. If the Taxpayer did not do that, it would not have satisfied the onus of showing that the assessment was excessive. Hill J considered that the onus could not be on the Commissioner to show what the genuine transaction was which was said to have been obscured by the sham. It was sufficient for Tamberlin J to hold that the payments to the Taxpayer were not loans. Once that finding had been made, the question would then arise whether the Taxpayer had satisfied the onus upon it of showing that the payments were not income.

Outside the evidence of Mr Holden which was rejected, there was no evidence which would enable the Court to conclude what was the character of the payments made to the Taxpayer. All that could be said was that regular payments had been made to it by Morlea. There was no suggestion that the payments were gifts, in the sense that they had been made for some reason personal to the Taxpayer. Conversely, there was no suggestion in the evidence that the payments were made as consideration for services rendered or to be rendered. The mere fact that the payments were periodical would not require the conclusion that they were income. All that was known was that on a regular basis the Taxpayer had profited from the receipt of moneys which it was not obliged to repay.

Hill J considered that if the Taxpayer wished to assert that the amounts in questions should not be treated as profits of the Taxpayer, being a finance company, then the onus lay upon it to show that the payments were not properly to be

ATC 5247

seen as profits made in the course of its business activity or incidental to its business activity. However, once the evidence of Mr Holden had been disbelieved and the accounts could no longer be relied upon, there was no evidence one way or another on the question. In short, Hill J considered that the Taxpayer failed to show, on the balance of probabilities, that the payments to it by Morlea were not assessable income, with the result that it failed to show that the Commissioner's assessment was excessive.

Lehane J dissented and would have allowed the appeal and set aside the Commissioner's objection decision disallowing the Taxpayer's objections to assessments in relation to the four years. Since his Honour was in the minority, his reasons are not strictly relevant. However, it is worth referring briefly to some of his Honour's reasoning because it is probably the genesis of the proceedings before me. Lehane J considered that it was important to note that the money which came to Morlea, out of which it made the payments in question to the Taxpayer, came to it as a fiduciary. Morlea received the money as agent for the Morlea Partnership, one member of which was Morlea itself acting as a trustee and the other member of which was Aborda, also a trustee. His Honour considered that a conclusion that the loans were shams necessarily rested on the proposition that a party which had those fiduciary roles paid money, belonging to its beneficiaries, to a third party gratuitously and on terms which did not require repayment.

Effect of the earlier proceedings

It is clear that the structures which I have described were established at the behest of the advisers to Dr Wenkart. In the earlier proceedings the Taxpayer sought to establish that the payments in question should properly be characterised as loans by the Morlea Partnership to the Taxpayer. It is clear that that is how those responsible for making the payments between May 1981 and June 1984 intended that those payments would be characterised by the Commissioner. However, a finding was made that the so called ``loans'' were intended to transfer funds to the Taxpayer without any obligation to repay the funds. The question arises, therefore, as to whether it is open to the Taxpayer, in the light of the findings made in the earlier proceedings, to resist the contentions of the Trustees by saying that there was no breach of trust or breach of fiduciary duty involved in the making of the payments because, so far as Mr Holden and Dr Wenkart were concerned, it was always intended that there would be an obligation to repay the funds.

The Commissioner did not seek to put in issue in these proceedings the matters which were resolved in the proceedings before Tamberlin J. That is to say, the Commissioner was content for these proceedings to be conducted on the basis of the findings made in the earlier proceedings, namely, that the payments in question made by Morlea to the Taxpayer were intended to transfer funds to the Taxpayer without any obligation to repay those funds. Since those payments were made out of money which came to Morlea as a fiduciary, in its capacity as agent for the partners of the Morlea Partnership, that conclusion rests on the proposition that a party which had that fiduciary role paid money belonging to its beneficiaries to a third party gratuitously and on terms which did not require repayment. That consequence was one of the factors which led Lehane J to his dissenting conclusion in the Full Court in the earlier proceedings.

The majority in the Full Court, having reached the conclusion that they would not interfere with the findings made by Tamberlin J in that regard, did not find it necessary to deal with the issue raised by Lehane J concerning breach of fiduciary duty. However, I agree with the conclusion of Lehane J that it is a corollary of the finding made by Tamberlin J that the payments were made by Morlea in breach of its fiduciary duty to the partners of the Morlea Partnership, being Aborda in its capacity as trustee of the Aborda Trust and Morlea itself in its capacity as trustee of the Aurelius Unit Trust.

The Taxpayer, however, contended that the findings in the earlier proceedings did not bind the Taxpayer. Accordingly, the Taxpayer urged me to come to a different conclusion from that reached in the earlier proceedings and find that the payments in question should be characterised as loans by the Morlea Partnership to the Taxpayer. In that case, any contention that there was a breach of fiduciary duty would fail. The Trustees' response to that contention was that it would be an abuse of the process of the Court for the Taxpayer, as an unsuccessful litigant in former proceedings, to

ATC 5248

seek to reagitate the same issue in subsequent proceedings, albeit against different parties.

In the earlier proceedings, the Taxpayer's contention that the payments were made by way of loan by the Morlea Partnership to the Taxpayer was vigorously advanced on behalf of the Taxpayer and equally vigorously resisted by the Commissioner. I do not have before me evidence as to what constituted the entirety of the evidence which was before Tamberlin J. However, it is apparent to me, from reading his Honour's reasons for judgment, that there is a very substantial overlap, if not identity, between the evidence as to those matters which was before Tamberlin J and the evidence before me.

Thus, the Taxpayer invited me, on the basis of what seems to be very similar evidence, to reach a conclusion inconsistent with that reached by this Court in the earlier proceedings. That would be a most undesirable result and would place the Court in an intolerable position. If there were identity of parties, of course, a defence of res judicata or issue estoppel might be available. No such defence arises in these proceedings because neither of the Trustees was a party to the earlier proceedings. Further, neither of the Trustees is a privy of the Taxpayer; nor is the Taxpayer a privy of either of the Trustees for that purpose. Privity of interest is limited to cases where a person claims a title or right or makes a claim by virtue of a title or right in someone before him (see
Effem Foods Pty Ltd v Trawl Industries of Australia Pty Ltd (1993) 43 FCR 510 at 526). That is not the case here.

Where the principle of abuse of process is invoked in these circumstances, the appropriate remedy would be a stay of the subsequent proceedings. However, the matter was only raised by the Taxpayer at a late stage in the proceedings. The Trustees apparently expected that the Commissioner would, in these proceedings, contend for a conclusion inconsistent with the conclusion secured by the Commissioner in the earlier proceedings. It was not until the trial began that the Taxpayer indicated that it proposed to take the stance of re-agitating the issues which had been resolved against it in the earlier proceedings.

In
Reichel v Mcgrath (1889) 14 App Cas 665, Lord Halsbury LC said (at 668) that it would be:

``... a scandal to the administration of justice if, the same question having been disposed of by one case, the litigant were to be permitted by changing the form of the proceedings to set up the same case again... it surely must be in the jurisdiction of the Court of Justice to prevent the defeated litigant raising the very same question which the Court has decided in a separate action.''

To permit relitigation in subsequent proceedings of an issue which had been resolved on a final basis in earlier proceedings would tend to ``bring the administration of justice into disrepute amongst right thinking people'' (see
Hunter v Chief Constable of the West Midlands Police [1982] AC 529 per Lord Diplock at 536). These questions were canvassed by Hunt CJ CL in
Haines v Australian Broadcasting Corporation (1995) 43 NSWLR 404 at 410ff.

The matter is complicated by the nature of the earlier proceedings as an appeal pursuant to section 14ZZ of the Administration Act. In such a proceeding, the Taxpayer has a special onus. That is to say, the Taxpayer has the onus of establishing that an assessment under the Assessment Act is excessive. The Taxpayer essayed to establish, to that end, that the payments in question should be characterised as loans but failed. In these proceedings the onus is technically reversed. However, the issue is precisely the same. I consider, therefore, that it would tend to bring the administration of justice into disrepute if, notwithstanding the cost and expense incurred in the resolution of the earlier proceedings, I embarked on a reconsideration of what appears to be much the same material as was before Tamberlin J and reached a conclusion as to the character of the payments in question which was inconsistent with that reached in the earlier proceedings.

The Taxpayer did not suggest that the evidence before me as to these matters is different from the evidence before Tamberlin J. Nevertheless, the Taxpayer expressly contended that I should reach a different conclusion from that of Tamberlin J. I do not propose to do so. I do not consider that it is appropriate to embark on an examination of the material in order to determine whether I would come to a different conclusion from that reached by Tamberlin J. It may be, of course, that it will be necessary for me to make additional findings. For example, it was not necessary for Tamberlin J to consider whether, in the light of the determination which he made, there was a breach of fiduciary duty

ATC 5249

which led to a constructive or resulting trust binding on the Taxpayer. However, I begin with the findings of Tamberlin J that the payments in question were made to the Taxpayer with the intention on the part of Morlea that there would be no obligation on the part of the Taxpayer to repay the moneys which were the subject of the payments.

A second possible basis upon which I might decline to reach a different conclusion from Tamberlin J is the doctrine of stare decisis. I am bound by a determination of any question in point by a Full Court. On one view, there is a binding precedent in the earlier decision of the Full Court that the facts before Tamberlin J, as a matter of law, do not constitute the making of loans. However, I do not propose to put my decision on that basis.

Terms of the trust deeds

The Commissioner contended that the trust deed governing the Aborda Trust gave the trustee of the Aborda Trust sufficiently wide powers to direct that money generated from the Pathology Business go to the Taxpayer absolutely. The Taxpayer is an ``eligible beneficiary'' under the terms of the Aborda Trust and the trustee is given express power to dispose of the whole of the income to one beneficiary. The Commissioner contended that I should draw the conclusion that Aborda, in the exercise of that power, determined that during the period 18 May 1981 to 30 June 1984 it was in the best interests of the Aborda Trust for money to go to the Taxpayer. In each of the 1981, 1982, 1983 and 1984 years of income, all of the income received by Aborda in its capacity as trustee of the Aborda Trust from the Morlea Partnership was distributed to the Taxpayer. It was argued, therefore, that, to the extent that any of the moneys paid by Morlea to the Taxpayer represented income of the Aborda Trust, there was no breach of trust by reason of the payments.

Such an argument, however, confuses the notion of the income of the Aborda Trust with the property of the Trust. True it was that the whole of the income of the Aborda Trust was distributed to the Taxpayer during the years in question. However, that is a different matter from the payment of funds which belonged to the Morlea Partnership. The evidence simply does not support a conclusion that any payments were made by Aborda in the exercise of any of its powers as trustee.

The Commissioner also contended that the trust deed of 18 May 1981 governing the Aurelius Unit Trust gave Morlea, in its capacity as trustee of that trust, sufficiently wide powers to permit it to direct that money generated by the Pathology Business go to the Taxpayer absolutely. Clause 10 of that trust deed provided that the trustee of that trust would have and may exercise various powers including power:

``(d) To apply or invest the Fund in its own name or in the name of any corporation approved by it and willing to act as its nominee for the purposes of such application or investment or in partnership or jointly with others... in any authorised investment, as defined in paragraph (b) of clause 1 above or in such other mode as the Trustee may in its absolute discretion think fit.''

In addition, clause 11.1 provided relevantly as follows:

``... the Trustee has as regards all the trusts powers authorities and discretions [sic] vested in it an absolute and uncontrolled discretion as to the exercise thereof whether in relation to the manner or as to the mode of and time for the exercise thereof...''

It was contended on behalf of the Commissioner that those powers authorised distribution of the trust property of the Aborda Trust (``the Fund'') at the discretion of the trustee. However, I consider that submission to be misconceived.

Under clause 3.1 of the trust deed, the beneficial interest in the trust property of the Aurelius Unit Trust was to be divided into units. Under clause 9.2, at the end of each accounting period, the unit holders were to be presently and absolutely entitled to the net income of the Fund derived during such accounting period. Under clause 9.5, the trustee was authorised to distribute any part of the capital of the Fund in excess of the requirements of the Fund among unit holders in proportion to the number of units of which they are respectively registered as holders at the time of distribution. That was the only power vested in Morlea as trustee of the Aurelius Unit Trust to distribute trust property. Clauses 10(d) and 11.1 are concerned with powers of investment, not with power to distribute part of the Fund.

It follows that the payments made by Morlea were not authorised by the terms of the trust

ATC 5250

deeds governing either the Aborda Trust or the Aurelius Unit Trust.

Resulting or constructive trust

Where property is acquired in such circumstances that the holder of the legal title may not in good conscience retain the beneficial interest, equity converts the holder of such legal title into a trustee -
Hospital Products Limited v United States Surgical Corporation (1984) 156 CLR 41 at 108. Where trust property has been improperly disposed of or taken and it is still in existence, or there is some property in the hands of a stranger which represents the trust property, the beneficiary will be entitled to claim it unless the stranger, or a person through whom the stranger claims, was a purchaser of the legal estate for value and without notice. A recipient of trust property is bound by a constructive trust if he or she takes with notice of the trusts affecting the property -
Barnes v Addy (1874) 9 Ch App 244. Where the recipient in respect of funds provided from a trust estate in breach of trust is a volunteer and where the recipient was aware through its directors of the breach of fiduciary duty involved in receipt of the funds, property subsequently acquired by the recipient is fixed with a constructive trust to the extent of the beneficial interest -
Hagan v Waterhouse (1991) 34 NSWLR 308.

The payments in question were made by Morlea from moneys which were held by it in its fiduciary capacity as an agent of the members of the Morlea Partnership. It was a trustee of those moneys. The Taxpayer clearly received the money in question. The moneys came into the hands of the Taxpayer as a volunteer. The directors of the Taxpayer at the time were Dr Wenkart and Mr Holden. They were also directors of Morlea and knew the capacity in which Morlea held the money. Their knowledge must be attributed to the Taxpayer. Accordingly, it follows that the Taxpayer received trust money with knowledge that it was being paid to it in breach of fiduciary duty by Morlea. Having had notice of the trust in respect of the moneys and not having paid any consideration for the transfer of the moneys, the Taxpayer was a constructive trustee and held the moneys on trust for Morlea and Aborda in their capacity as members of the Morlea Partnership.

Where the recipient of trust property mixes the trust property with the recipient's own property, so as to render separate identification possible, the whole of the recipient's property will be treated as trust property, except in so far as the recipient may be able to distinguish what is his or her own -
Brady v Stapleton (1952) 88 CLR 322 at 336 and Hospital Products Ltd v United States Surgical Corporation (at 109). So long as the trust property can be traced and followed into other property into which it has been converted, that other property remains subject to the trust. If a man mixes trust funds with his own, the whole will be treated as the trust property, except so far as he may be able to distinguish what is his own, that is, that the trust property comes first (
In Re Hallett's Estate (1879) 13 Ch D 696 per Jessel MR at 719).

However, while any drawings out by a trustee who has intermingled trust property with his own ought to be attributed to the private moneys and not to the trust moneys, when the drawings out reach such an amount that the whole of the private money part has been exhausted, it necessarily follows that the rest of the drawings must have been against trust moneys. If the balance of the fund is then exhausted, it follows that all of the trust moneys have been dissipated -
James Rosco (Bolton) Ltd v Winder [1915] 1 Ch 62 at 68. If a trustee destroys a trust fund by dissipating it altogether, there remains nothing to be the subject of the trust - In Re Hallett's Estate per Jessel MR at 719.

It is common ground that the Trustees are not able to trace the payments in question specifically through bank accounts or other records of the Taxpayer into advances made to the Debtors. The Taxpayer and the Commissioner contended, therefore, that, while the moneys in question were paid into bank accounts of the Taxpayer and were intermingled with money of the Taxpayer, the intermingled moneys have long since been dissipated. They contended, therefore, that the principle in James Rosco v Winder applies and it is no longer possible to assert that a constructive trust binds any property of the Taxpayer. The appropriate relief, in those circumstances, should be a remedy in personam. In that event, of course, having regard to the winding up of the Taxpayer, the Trustees' remedy would be limited to proving in the winding up.

The Trustees, however, contended that that is too narrow an approach. It was said that the relevant fund is the whole of the property of the

ATC 5251

Taxpayer. There is evidence that the Taxpayer generated substantial income from the time when it first began receiving the payments in question up to the time of the making of the loans to the Debtors. The disbursement of moneys from any bank account of the Taxpayer into which the payments in question were credited was not a dissipation of the property of the Taxpayer held on trust but a further dealing with the property. The onus was on the Taxpayer to demonstrate the extent to which its present property has been acquired independently of the money which were the subject of the payments in question. The Taxpayer has made no attempt to do so. Specifically, it made no attempt, for example, to demonstrate that the premises which generated rental income from the Debtors were acquired independently of such moneys.

Annual accounts of the Taxpayer demonstrate that from 1980 to 1990 the total assets of the Taxpayer increased each year from $6,427,047 as at 30 June 1980 to $38,283,709 as at 30 June 1990. The cash at bank varied throughout the period. However, long term and short term loans shown in the accounts increased overall during that period. A significant part of long term and short term loans in the accounts was represented by the loans made to the Debtors.

I set out below [at page 5252] a table extracted from the accounts:

Those figures indicate that the assets of the Taxpayer have not been dissipated. Rather, while cash at bank, on interest bearing deposit or on hand has fluctuated significantly, it is clear that the money paid by Morlea to the Taxpayer has not been dissipated. That evidence gives no basis for concluding that the principle in James Rosco v Winder has any application. Rather, the evidence indicates that the money received by the Taxpayer, having been intermingled with the funds of the Taxpayer, has contributed to the accretion in assets of the Taxpayer. There is no evidence to indicate that any particular asset of the Taxpayer at the date of the winding up was not acquired, at least in part, with funds intermingled with the moneys in question.

To the extent that a claim against the Taxpayer still exists, a proprietary remedy is appropriate against the property of the Taxpayer. Accordingly, the balance of the loans made by the Taxpayer to the Debtors and other moneys owing by the Debtors to the Taxpayer should be treated as being held on a constructive trust to the extent of any claim which the Trustees are presently able to maintain. However, the quantum of any such claim may not be significant for the reasons which follow.

Limitation Act

The Taxpayer and the Commissioner contended that, in so far as the claim by the Trustees is one made to pursue trust property, it is barred by the operation of section 47 of the Limitation Act. Section 47 relevantly provides as follows:

``47(1) An action on a cause of action:

...

(c) to recover trust property, or property into which trust property can be traced, against a trustee or against any other person; or

...

is not maintainable by a trustee of the trust or by a beneficiary under the trust or by a person claiming through a beneficiary under the trust if brought after the expiration of the only or later to expire of such of the following limitation periods as are applicable:

(e) a limitation period of twelve years running from the date on which the plaintiff or a person through whom he claims first discovers or may with reasonable diligence discover the facts giving rise to the cause of action and that the cause of action has accrued; and

(f) the limitation period for the cause of action fixed by or under any provision of this Act other than this section.''

There are two elements required before section 47 applies. The first is that the claimants be aware of facts giving rise to the cause of action. The second is awareness of the existence of the cause of action. It is put against the Trustees that the directors of both Morlea and Aborda, Dr Wenkart and Mr Holden, were aware of the facts relating to the payments to the Taxpayer and, ex hypothesi, must have been aware of the cause of action since, on the findings made by Tamberlin J, they never had any intention that the moneys would be repayable. On that basis, it was said, both Morlea and Aborda were aware, in the period

            

                 1980      1981       1982       1983       1984       1985
Long Term
  Loans        2,092,385 2,216,571  2,719,817  2,687,979  1,939,214 2,294,157

Shares           445,715   888,826  1,416,340  1,546,040  1,872,896  1,983,377
Short Term
  Loans        2,359,402 3,606,737  4,976,952  6,472,995  8,154,588  8,741,834
Other Debtors     45,560    20,136    124,542     63,090     91,238     58,163
Cash at Bank
  IBD or
  on hand         10,180   600,180        180      1,180    350,200     15,958
Current Assets 2,412,142 4,227,054  5,101,674  6,537,265  8,596,231 10,900,405
Total Assets   6,427,047 9,049,854 11,093,171 12,750,570 14,469,926 17,815,966
Increase in
  Assets            -    2,622,807  4,666,124  6,323,523  8,042,879 11,388,919

                  1986       1987       1988       1989       1990
Long Term
  Loans         3,069,716  3,629,135  5,734,802  4,476,880  20,388,487
Shares          2,026,946  2,268,753    842,205    855,514     854,461
Short Term
  Loans        11,372,169 13,243,256 13,693,217 19,221,759 10,080,567
Other Debtors      92,940    109,150     65,402     45,098    101,810
Cash at Bank
  IBD or
  on hand          93,140     63,769     61,820     36,666    628,684
Current Assets 11,465,309 13,416,175 13,820,439 19,303,523 10,811,061
Total Assets   19,355,312 22,488,674 26,825,589 30,910,622 38,283,709
Increase in
  Assets       12,928,265 16,061,627 20,393,542 24,483,575 31,856,662

ATC 5253

between May 1981 and June 1984, of the breach and of the remedy.

However, it is important to bear in mind the different capacities in which Morlea was acting. Dr Wenkart and Mr Holden engaged in the relevant conduct in their capacities as directors of Morlea. Morlea was acting in its capacity as fiduciary agent of the Morlea Partnership.

It is not appropriate to attribute to the victim of improper conduct the knowledge of the persons who actually perpetrate that conduct. Where a director of a company is acting within the scope of his or her authority, the state of mind of the director will ordinarily be attributed to the company where there is a duty on that director to communicate his or her knowledge to the company. However, where the director is acting in fraud of the company and the director's activities are directed against the interests of that company, and not even in part for the benefit of the company, the position will be different -
Beach Petroleum NL v Johnson (1993) 43 FCR 1 at 31-32. In such a case, the state of mind of the director should not be attributed to his or her company.

The knowledge of Dr Wenkart and Mr Holden must be attributed to the Taxpayer since, in causing the payments to be made to the Taxpayer and to be received by it beneficially, they were acting for the benefit of the Taxpayer. Further, the knowledge of Dr Wenkart and Mr Holden is to be attributed to Morlea in its capacity as fiduciary agent of the Morlea Partnership. However, in relation to Morlea and Aborda as members of the Morlea Partnership, Dr Wenkart and Mr Holden, in causing the payments to be made, were acting wholly against the interests of those companies. Accordingly, their knowledge should not be attributed to Morlea in its capacity as a member of the Morlea Partnership. Nor is it to be attributed to Morlea in its capacity as trustee of the Aurelius Unit Trust. There is some artificiality in Morlea, under the same control, making the present claim. Nevertheless, the claim is now made by Morlea as a member of the Morlea Partnership. On the hypothesis under consideration, it is as a member of the Morlea Partnership that it has been deprived of property, albeit by its own conduct in its capacity as fiduciary agent for the Morlea Partnership.

Nor could the knowledge of Dr Wenkart and Mr Holden be attributed to Aborda. A fortiori the claim by AT, as successor of Aborda, would not be defeated by the operation of section 47 of the Limitation Act. That is to say, there is no basis for attributing to AT the knowledge of Dr Wenkart and Mr Holden in 1981 to 1984. Neither Dr Wenkart nor Mr Holden is or has been a director of AT. AT did not exist at the date of the breaches of fiduciary duty. It was not until determination by Tamberlin J that the breach of fiduciary duty became apparent and the cause of action became known. That did not occur until 11 July 1995.

Accordingly, the Limitation Act is not a bar to the present claims by the Trustees.

Laches, acquiescence and delay

The same questions arise in relation to defences based on laches, acquiescence and delay as arise in relation to the Limitation Act. That is to say, one cannot attribute to Morlea and Aborda, in their capacities as members of the Morlea Partnership, the knowledge of Dr Wenkart and Mr Holden of their conduct in causing the breach by Morlea of its fiduciary duty.

Control by Dr Wenkart and Mr Holden

In the defence of the Commissioner to the second cross-claim, which was adopted by the Taxpayer, the following allegations were made (in paragraph 32):

(1) Each of the Taxpayer, Morlea, Aborda and AT and the beneficiaries of the trusts of which Morlea and Aborda and AT acted or act as trustees, were directed and controlled by Dr Wenkart and Mr Holden for the benefit of members of Dr Wenkart's family.
(2) In accordance with those arrangements each of the payments in question was made to the Taxpayer at the direction or with the knowledge of Dr Wenkart and Mr Holden, and thus at the direction or with the knowledge of each of the Taxpayer, Morlea, Aborda and AT and the beneficiaries of the Aborda Trust and the Aurelius Trust, with the intent that the Taxpayer receive the sums beneficially and, by that means, ultimately for the purpose of advancing the interests of the Wenkart family.
(3) In those circumstances, there was and is such a degree of identification between the Taxpayer, Morlea, Aborda and AT and the beneficiaries of the Aborda Trust and the Aurelius Trust that Morlea, Aborda and AT are estopped and precluded from contending

ATC 5254
that the money transferred under the payments in question were received or held by the Taxpayer for any of Morlea, Aborda and AT.

Towards the end of oral addresses, senior counsel for the Commissioner gave to me a folder said to contain a summary of relevant evidence going to the question of control of various entities by Dr Wenkart and Mr Holden. In the time which was then available for the completion of addresses, it was not practicable for senior counsel for the Trustees to deal with what was, in substance, a very detailed submission on behalf of the Commissioner and the Taxpayer. Since the question of control of the various entities referred to is not critical to the primary defence of the Taxpayer and the Commissioner to the second cross-claim, but only arises in an alternative defence, the parties considered that it was preferable that I defer hearing any further argument in relation to the question of such control. It was agreed that if, having decided all other questions presently before me, the question of control needs to be decided, I will hear further argument on that question. If not, the question would not arise.

The Commissioner contended that all of those who controlled the Aurelius Unit Trust joined in directing Morlea to do what it did and that, accordingly, there was no breach of trust. The Commissioner pointed out that none of the beneficiaries of the Aurelius Unit Trust or their successors had seen fit to assert to the contrary. Accordingly, it was said that an inference should be drawn that the beneficiaries of the Aurelius Unit Trust knew and approved what was done by Morlea and are therefore bound by it.

The Commissioner contended that Dr Wenkart and Mr Holden controlled each of the beneficiaries, neither of whom was before the Court. The beneficiaries are either no longer in existence, having been wound up, or have ceased to trade. One of the beneficiaries, Ventura Securities Inc., was a Californian limited partnership and its partners can no longer be located. The Commissioner contended that an inference should be drawn that there is no evidence which could be placed before the Court that the beneficiaries did not know of and approve of what was done. The Commissioner referred to
Jones v Dunkel (1959) 101 CLR 298 at 304 and 307-308.

In order to resolve this question finally, it would be necessary to examine the folder of material provided by the Commissioner in order to determine whether it supports the contention that the beneficiaries were controlled by Dr Wenkart and Mr Holden. However, I am not satisfied that establishing ``control'' of the relevant entities, whatever that might be, would afford an answer. If it could be shown that the relevant minds of the beneficiaries were those of Dr Wenkart and Mr Holden, that might be one thing. That is to say, it may be possible to show that the beneficiaries did in fact know and approve of what was done.

The Commissioner referred to the decision of the High Court in
Vacuum Oil Co. Pty Ltd v Wiltshire (1945) 72 CLR 319 at 324-325, which was concerned with the position of an executor. An executor who carries on a business otherwise than for the purposes of realisation and without authority given by the will of his or her testator does so at his or her own risk. On the other hand, if a beneficiary actually authorises the executor to carry on the business, the executor would be entitled as against that beneficiary to indemnity out of the estate in respect of the debts which, in the course of carrying on the business, he or she incurs to the trading creditors. The position is the same where a creditor of the testator actively and positively assents to the executor carrying on the business. While the High Court did not made clear what kind of conduct should be held to amount to the necessary active and positive assent, some knowledge on the part of the beneficiary would be required.

However, as I understand the Commissioner's contention, that was not alleged. The contention was that, because the beneficiaries were ``controlled'' by Dr Wenkart, an inference of knowledge and approval on the part of the beneficiaries should be drawn. That raises again the question of whether or not the knowledge of Dr Wenkart and Mr Holden should be attributed to the beneficiaries so as to constitute consent or acquiescence in circumstances where it is their conduct which caused the breach of fiduciary duty by Morlea. For the reasons indicated above, I would be disposed to conclude that merely demonstrating some notion of control would be inadequate, without more, to establish consent or acquiescence by the beneficiaries in that breach of fiduciary duty. Accordingly, it

ATC 5255

would not be necessary to resolve the question of control.

The Trustees' loss

The Taxpayer and the Commissioner contended that even if there was a breach of fiduciary duty involved in the payments made by Morlea to the Taxpayer, the Trustees are not entitled to any relief because the members of the Morlea Partnership have in fact suffered no loss because they have in substance received the benefit of the moneys in question. That contention requires a detailed analysis of transactions which occurred in 1984 and 1989.

(a) The 1984 transactions

On 30 June 1984 a series of meetings was held of directors of a number of companies in the Wenkart Group. In addition, there were meetings of directors of a company then known as Sesole Pty Ltd. Sesole Pty Ltd changed its name on 17 October 1984 to Macquarie Professional Services Pty Ltd and subsequently on 7 December 1990 changed its name to Nika Pty Ltd. I shall refer to that company as ``Nika''.

The first step taken on 30 June 1984 was a meeting of the directors of Nika at 2.50 p.m. A resolution was passed as follows:

``IT WAS RESOLVED THAT the company acquire the business undertakings of the Morlea Partnership this day and that an offer be made to the directors of the manager of that partnership to acquire the business for a total consideration of $27,661,045 comprising:-
Goodwill                                  $16,881,451.75
Insurance settlement assigned              $1,751,209.00
Net assets less liabilities transferred    $9,028,393.25
                                          --------------
                                          $27,661,054.00
              
IT WAS FURTHER RESOLVED THAT the offer be made on the basis that the consideration be left outstanding at an interest rate of 15% pa payable annually in arrears unless deferred to a later date by the payee.''

At 3.00 p.m. a meeting of the directors of Morlea, as manager of the Morlea Partnership, took place. The following was recorded in the minutes:

``IT WAS NOTED THAT the company had been approached by the directors of Sesole Pty Limited to acquire the business of the Morlea Partnership including all plant and equipment, business assets, goodwill and any entitlement to insurance settlement arising from the business undertaken by the partnership to the date of sale. In addition, the offer was made on the basis that all liabilities of the business would be assumed by Sesole Pty Limited. The consideration offered by Sesole Pty Limited for the acquisition of the business totalled $27,661,054 comprising:-
Goodwill                                  $16,881,451.75
Insurance settlement assigned              $1,751,209.00
Net assets less liabilities transferred    $9,028,393.25
                                          --------------
                                          $27,661,054.00
              
IT WAS RESOLVED THAT the company as manager of the partnership accept the offer of Sesole Pty Ltd detailed above and that the business of the partnership be sold for the above consideration today.

IT WAS FURTHER AGREED THAT the consideration payable for the acquisition of the business by Sesole Pty Limited be allowed to remain outstanding as a debt due to the partnership on the basis that interest be paid at the rate of 15% pa annually in arrears unless it is deferred to a later date by the partnership.

IT WAS FURTHER RESOLVED THAT the Chairman of this meeting advise the directors of Sesole Pty Limited of this decision and that the acceptance of the terms of the sale as aforesaid evidenced by the minutes of this meeting shall be sufficient evidence that the sale has been accepted and consummated. IT WAS AGREED THAT no other documentation be prepared relating to the sale or the outstanding debt so created.''

At 3.05 p.m. a further meeting of the directors of Nika was held at which the following resolutions were passed:

``IT WAS NOTED THAT the offer to acquire the business undertakings of the Morlea Partnership had been accepted by the manager of that partnership on the terms offered and that as notified by the Chairman of Directors of that company no other

ATC 5256
evidence is required that the sale has been accepted and consummated.

IT WAS RESOLVED THAT the company record in its books the acquisition of the business previously undertaken by the Morlea Partnership for the consideration agreed and that the outstanding debt due to the partnership be recorded on the terms previously agreed.''

Mr Holden said that the figures set out in the minutes were based on estimates which he made at the time. Subsequently, accounts of the Morlea Partnership were prepared as at 30 June 1984. Those accounts showed that assets of the partnership amounted to $9,052,555. The difference between that figure and the figure shown for net assets in the minutes was explained by Mr Holden as being the result of adjustments which were found to be necessary when final accounts were prepared. The balance sheet showed the following assets:

Petty Cash                                  $2,261.00
Security Deposit                            $9,661.00
Commonwealth Trading Bank
Current Account:                            $1,848.00
Westpac Banking Corporation
Current Account:                          $126,068.00
Trade Debtors:                          $3,091,645.00
Prepayments:                               $92,616.00
Loan account - Richard Walter Pty Ltd:  $7,355,581.00
Loan account - Aurelius Unit Trust:         $6,955.00
Fixed assets:                             $515,133.00
TOTAL                                  $11,201,768.00

Total liabilities were shown as $2,149,213. Accordingly, the amount of net assets was $9,052,555. The amount of net assets was represented by capital accounts as follows:

Morlea Professional Services Pty Ltd
in its capacity as trustee:                  $8,599,928
Aborda Pty Ltd in its capacity as trustee:     $452,627
TOTAL:                                       $9,052,555

Thus, the clear intention of the author of the minutes was to record a transaction whereby all of the assets of the business carried on by the Morlea Partnership, including the indebtedness arising from the purported loans to the Taxpayer, would be transferred on sale to Nika. The consideration payable for those assets was to include assumption of liability for the liabilities of the Morlea Partnership. The balance of the consideration was to remain outstanding and to bear interest. While the parties are recorded as resolving that there be no further documentation of the transaction, several book entries were made in the books of Nika, the Taxpayer and the Morlea Partnership to reflect the transaction.

Two further meetings were held. At 3.10 p.m. a meeting of the directors of Morlea, as manager of the Morlea Partnership, resolved as follows:

`` IT WAS RESOLVED to wind up the Morlea Partnership this day as a result of the sale of the partnership's business and that the debt due by Sesole Pty Limited due to the partnership amounted to $27,661,054 be distributed in specie to the partners of the partnership as at 30 June 1984. IT WAS AGREED THAT Sesole Pty Limited should also be notified orally of this action.

IT WAS NOTED THAT the entitlement to the distribution in specie of the aforementioned debt is as follows:

Morlea Professional Services Pty Ltd
as trustee of the Aurelius Unit Trust:               $26,278,001
Aborda Pty Limited as trustee of the Aborda Trust:    $1,383,053
                                                     -----------
                                                     $27,661,054''

At 3.15 p.m., a further meeting of the directors of Nika resolved as follows:

``IT WAS NOTED THAT after the sale of the business of the Morlea Partnership had occurred, the assets of that partnership remaining comprised the debt due by this company to it.

IT WAS FURTHER NOTED THAT as advised by the manager of the Morlea Partnership orally, the debt was distributed in specie to the partners of the Morlea Partnership in the following proportions:
Aurelius Unit Trust:    $26,278,001
Aborda Trust:            $1,383,053
                        -----------
                        $26,661,054[sic]
              
ATC 5257

IT WAS RESOLVED THAT the company recognise that it owed the aforementioned sums to the entities referred to above on the same basis as it owed such funds to the Morlea Partnership viz, interest shall be paid at a 15% pa annually in arrears unless deferred to a later date by the payee.''

The accounting records of Nika, the Morlea Partnership and the Taxpayer for the period in question no longer exist. However, Mr Holden was able to give evidence, from his knowledge of the practice at the time, of the way in which the above transactions were documented in those accounting records. Mr Holden produced a document which reconstructed the entries which were made at the time. Mr Holden also gave evidence that the companies in the Wenkart Group all had loan accounts with the Taxpayer and that there were no relevant loan accounts between the companies inter se. His reconstruction showed entries reflecting that the balance of the consideration payable to the Morlea Partnership by Nika in respect of the purchase price became a debt due by Nika to Morlea as trustee of the Aurelius Unit Trust and Aborda as trustee of the Aborda Trust in the amounts referred to in the minutes set out above.

The document produced by Mr Holden is not complete as regards all the entries which were made at the time. It was limited to reconstruction of the entries relating to the consideration payable by Nika and the distribution of the share of that consideration to which Aborda, as trustee of the Aborda Trust, was entitled. That share was 5% of the total price since the interest of Aborda in the Morlea Partnership was 5%.

The reconstructed journal entries for Nika were as follows:

``DR Goodwill                              16,881,451.75
  DR Insurance settlement assigned          1,751,209.00
  DR Net assets/liabilities [(Morlea
     Partnership) Assets DR
     Liabilities Net Figure]                9,028,393.25
  CR Loan Aborda                                             1,383,052.70
  CR Loan Aurelius                                          26,278,001.30
                                           -------------    -------------
                                           27,661,054.00    27,661,054.00
  DR Aborda Trust                           1,383,052.70
  CR RW                                                      1,383,052.70''

The reconstructed journal entries for Aborda Trust were as follows:

``DR Nika                                  1,383,052.70
  CR Investments - Morlea                                   459,860.59
     Capital Profits Partnership Reserve                    923,192.11
                                                          1,383,052.70
  DR RW                                    1,383,052.70
  CR Nika                                                 1,383,052.70
  DR Capital Profits Reserve                  16,694.00
  CR Tax Variation Account                    16,694.00

(This transaction occurs because of the difference between the taxable
distribution and the accounting distribution)''

ATC 5258

The entry in the books of Nika, being the debit in respect of debt, assets and liabilities of the Morlea Partnership of $9,028,393.25, reflects the assignment to Nika of all of the assets of the Morlea Partnership, subject to the assumption by Nika of all of the liabilities of the Morlea Partnership. The assets which were taken into account in arriving at the net figure included the balance of the loan account of the Taxpayer in the books of the Morlea Partnership. The accounts of the Taxpayer as at 30 June 1984 record a non-current liability comprising an unsecured long term loan from Morlea in a sum of $7,355,580.95. That corresponds with a current asset shown in the balance sheet of the Morlea Partnership as at 30 June 1984 of a loan account in the name of the Taxpayer in the sum of $7,355,581. The journal entries in relation to the Aborda Trust, being the credit in respect of ``Investments - Morlea'' and ``Capital Profits Partnership Preserve'' totalling $1,383,052.70, represent Aborda's share of the consideration payable to the Morlea Partnership by Nika.

Those entries effectively reflect the transfer by the Morlea Partnership to Nika of all of the partnership assets including the indebtedness of the Taxpayer in respect of the so called ``loans''. More importantly, they reflect the creation of indebtedness to Morlea and Aborda, as members of the Morlea Partnership, of Nika in respect of the balance of the consideration payable for the assets of the Pathology Business. The consideration was not paid, of course. Nevertheless, it is still payable. There is no evidence that Nika has ever declined to pay the consideration. The partners were clearly prepared to sell the Pathology Business for a consideration part of which was to remain outstanding and bear interest. That is to say, they were prepared to accept any risk as to the credit worthiness of Nika in relation to the unpaid balance of the consideration.

On 28 December 1984, a meeting of Morlea as trustee of the Aurelius Unit Trust is recorded as having taken place at 3 p.m. After noting that the Aurelius Unit Trust was entitled to a 95% share of the assets of the Morlea Partnership which, as at 30 June 1984, consisted of a debt due from Nika in the amount of $26,278,001, it was resolved to wind up the Aurelius Unit Trust and that the assets be distributed in specie to the unit holders. The unit holders were Aurelius Commodus as to 99 units and Ventura as to one unit. Accordingly, the debt was distributed as follows:

• Aurelius Commodus: $26,015,221
• Ventura: $262,780

In January 1985 a further meeting of the directors of Nika was held at which it was noted that as of 28 December 1984, the Aurelius Unit Trust was wound up and that the debt of $26,278,001 representing the consideration of the Pathology Business was acknowledged as being due as follows:

• Aurelius Commodus: $26,015,221
• Ventura: $262,780

(b) The 1989 reconstruction

In 1989, a further series of transactions was entered into. On 15 June 1989, the Taxpayer and Nika entered into a deed whereby the Taxpayer acknowledged that it was indebted to Nika for the amount of $16,317,088.90. On 16 June 1989, a deed of assignment was entered into between Nika and April Street Investments BV (``April Street''), a company incorporated in the Netherlands. By the deed it was recited that the Taxpayer was indebted to Nika for the principal amount of $16,317,088.98. The deed relevantly provided as follows:

``1. [Nika] hereby assigns and transfers to [ April Street] the right to receive payment of the Receivable including all interests, rights, liabilities and claims attached to the Receivable.

2. The Receivable is assigned at a consideration of $A16,317,088.98 for which amount [April Street] shall be indebted.

3. Upon execution of this Deed of Assignment, the receivable will be denominated in Dutch Guilders at a conversion rate of 1.688 amounting therefore to NLG 27,543,246.20.''

The sum of $A16,317,088.98 was the balance, after the addition of interest, of the indebtedness of the Taxpayer in respect of the purported loans, which had been transferred pursuant to the sale of the Pathology Business to Nika.

On 16 June 1989, the debt owing by Nika in respect of the purchase consideration was also dealt with. By a deed of assignment of that date, Aurelius Commodus assigned and transferred to April Street, for the principal amount of NLG 66,021,023, the right to receive payment of the indebtedness of Nika in respect of the

ATC 5259

consideration for the Pathology Business. The sum of NLG 66,021,223 was the amount of the indebtedness at that time. The consequence was that April Street became indebted to Aurelius Commodus in respect of that consideration.

It is clear that the author of the various minutes and instruments of June 1989 intended to achieve the result that the indebtedness of the Taxpayer to Nika be assigned to April Street and that the indebtedness of Nika to Aurelius Commodus also be assigned to April Street. Finally, also on 16 June 1989, an agreement was entered into between April Street and Nika whereby amounts owing, as a result of the transactions described above, by Nika to April Street and April Street to Nika, be offset with the effect that Nika was indebted to April Street in the amount NLG 38,477,977. That amount was to bear interest at the rate of 7.5% pa. The principal amount was to be repayable on 16 June 1994.

The Taxpayer and the Commissioner contended that Morlea and Aborda, in their capacities as members of the Morlea Partnership, (and as trustees of the Aurelius Unit Trust and the Aborda Trust), suffered no detriment as a consequence of the payments which had been made by the Morlea Partnership to the Taxpayer. The argument was that, as members of the Morlea Partnership, they received full consideration for the assignment of the indebtedness of the Taxpayer. By reason of the transactions which I have described, the so called ``loans'' by Morlea to the Taxpayer had been transmogrified into indebtedness of the Taxpayer to April Street. That in turn was offset, in part, against the consideration payable for the assignment of that indebtedness. There is no evidence that there is any dispute as to the remaining indebtedness of the Taxpayer to April Street. April Street is in fact shown in a report of the Liquidator as a creditor of the Taxpayer.

For the reasons indicated above, as things presently stand, neither member of the Morlea Partnership suffered any loss. That is to say, on the completion of the sale of the Pathology Business by Morlea as agent of the partners, the partners received consideration in the form of the promise by Nika to pay the balance of the consideration. That consideration was, on the evidence before me, equal to the value of the property sold. That consideration was received by the members of the Morlea Partnership in their respective capacities as trustees of the Aurelius Unit Trust and the Aborda Trust. Those trustees, in turn, distributed to their respective beneficiaries, the consideration consisting of the indebtedness of Nika.

The Trustees contended, however, that there is still a potential claim for restitution of some sort. The argument was that a substantial part of the assets of the Pathology Business which was sold to Nika was the indebtedness of the Taxpayer to Morlea in respect of the so called loans. However, as a result of the determination in the earlier proceedings, those payments are now to be treated, not as loans carrying an obligation to repay, but transfers of beneficial ownership to the Taxpayer. Accordingly, at least in theory, when the Taxpayer is called upon by April Street to repay the loans, the Taxpayer would be entitled to say that it does not owe any money to April Street in respect of loans because no loans were ever made. April Street may then be entitled to say to Nika that there was a total failure of consideration in respect of the assignment by Nika to April Street of the so called indebtedness of the Taxpayer. On that basis, apart from any limitation question, April Street would be entitled to recover from Nika the consideration paid for the loans.

In those circumstances, Nika itself may be entitled to say that there was a substantial failure of consideration in connection with the sale of the assets of the Pathology Business because a substantial part of those assets comprised the so called ``loans'' to the Taxpayer. Therefore, Nika would be entitled to make a claim on Morlea, as seller, for restitution to the extent of the consideration paid for non existent assets. Morlea, therefore, might be compelled to give restitution to Nika.

However, Morlea in its capacity as agent of the Morlea Partnership has, by means of the various book entries referred to above, distributed that consideration to the members of the Morlea Partnership being itself in a trustee of the Aurelius Unit Trust and to Aborda as trustee of the Aborda Trust. Those recipients have, in turn, distributed their respective shares to their beneficiaries. Morlea, therefore, so the argument would run, would be entitled to seek reimbursement from the partners of the Morlea Partnership. To the extent that such a potential claim could be made, that could be said to be loss suffered by reason of Morlea's breach of

ATC 5260

fiduciary duty. Accordingly, assuming that the constructive trust remedy is otherwise available, any constructive trust over the property of the Taxpayer would be for the amount of that claim. The appropriate relief, therefore, might have been a declaration that the property of the Taxpayer is charged with such liability, if any, as the Trustees have to give restitution, along the lines outlined, to Nika.

No claim has yet been made or foreshadowed on behalf of Nika or April Street for restitution in respect of the liability which Nika incurred as consideration for the sale of the assets of the Pathology Business including the so called loans to the Taxpayer. At most, the claims are potential claims. Further, any such claim appears to be dependent upon the Liquidator refusing to acknowledge the indebtedness of the Taxpayer to April Street. The report to creditors of the Liquidator of 5 February 1997 refers to the indebtedness of the Taxpayer to April Street. The report does not suggest that the indebtedness is disputed by the Liquidator. Accordingly, there may be no reason to expect that any such claim will be made against the Trustees by Nika. The existence of any such liability of the Trustees to Nika and the quantum of any such liability has not been litigated in the proceedings before me. Indeed, to determine such questions would require joinder of additional parties such as Nika and April Street.

One possible course, therefore, would be to make a declaration that the property of the Taxpayer, including the Debts, is charged with such liability, if any, as the Trustees have to Nika in consequence of the determination by this Court that there is no indebtedness of the Taxpayer to Morlea by way of loan. That would result in uncertainty until it can be established whether or not there is such a claim capable of being brought against the Trustees for restitution. Another possibility, of course, is that, in the absence of any evidence that such a claim has been or is likely to be made, the Trustees have failed to establish any loss in consequence of Morlea's breach of duty. In that case, the Trustees would not be entitled to any relief and their claims would be dismissed.

Those possibilities have not been fully ventilated before me. Accordingly, I consider that it is appropriate that the Trustees and the Taxpayer, together with the Commissioner, be given a further opportunity to address me on the appropriate relief in the light of the conclusions which I have reached.

Conclusion

It follows from the conclusions which I have reached in relation to the first cross-claim that, as against the Liquidator, the Commissioner is at least entitled to such of the money in Court as is sufficient to pay the amount owing by the Taxpayer in respect of tax shown in the Second Notices. However, the money in Court may yet be subject to a charge in favour of the Trustees to the extent of the liability, if any, of the Trustees to give restitution to Nika. For the reasons indicated above, I do not propose to make orders at this stage but will give the parties the opportunity of further argument. I will then direct the parties to bring in short minutes reflecting the conclusions which I have reached above and any further conclusions which I reach following that further argument.

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FC of T v MACQUARIE HEALTH CORPORATION LIMITED & ORS

The Wenkart Group

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