Deputy Federal Commissioner of Taxation v. Zarzycki

Judges:
O'Bryan J

Court:
Supreme Court of Victoria

Judgment date: Judgment handed down 12 July 1990.

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O'Bryan J.

This proceeding arises from a notice of objection by a judgment creditor to an order made by the Senior Master on 20 February 1990 on the application of the abovenamed judgment debtor pursuant to the Judgment Debt Recovery Act 1984 (the Act). The hearing is a hearing de novo (
Cahill v. Howe (1986) V.R. 630).

The Act is concerned with the payment of judgment debts and provides for the recovery of judgment debts by instalments.

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ATC 4708

The scheme of the Act enables a judgment debtor at any time after judgment is given to apply to the proper officer of the Court (a Master) for an order that the judgment debt or the balance thereof be paid by instalments (sec. 6(1)). Upon an application being made in the prescribed form the proper officer of the Court may without notice to the judgment creditor order that the judgment debt be paid by instalments and at times specified in the application or refuse to make an order (sec. 6(3)). Following the making of an order the judgment creditor is notified by the proper officer and may file notice of objection, whereupon the matter is set down for hearing by the Court (sec. 6(5)). The Court may confirm, vary or cancel the order of the proper officer (sec. 6(7)).

The judgment debt was incurred in a proceeding in which the Deputy Commissioner of Taxation claimed that the judgment debtor owed tax, penalty tax and additional tax in respect of six tax years. On 15 January 1988 the judgment creditor entered judgment against the judgment debtor in the sum of $93,998.40 including costs of $655.

On 17 June 1989 a bankruptcy notice was served on the judgment debtor. On 11 August the judgment creditor presented a creditor's petition to the Federal Court of Australia seeking to rely upon the judgment debt. On 13 October, three days before the petition was first listed for hearing, the judgment debtor filed and served an application pursuant to the Act, supported by an affidavit of financial situation.

By sec. 6(8)(b) of the Act, where an application under subsec. (1) is made, from the time of service the application shall operate as a stay of enforcement or execution of the judgment in respect of which the application is made.

From time to time the petition was adjourned. On 19 February 1990 the judgment creditor and the judgment debtor entered into terms of settlement whereby the judgment debtor agreed to pay the judgment together with interest to date of $12,437.38 by repayments, as follows:

         On            $
      23/2/90       25,000
      10/3/90       20,000
      20/3/90       10,000
      20/4/90       10,000
      20/5/90       10,000
      20/6/90       10,000
      20/7/90       10,000
      20/8/90       10,000
      20/9/90       any balance,
                    including interest.
      

The Act provides that a judgment creditor or a judgment debtor may file with the proper officer of the Court an ``instalment agreement'' (sec. 7). An agreement ``shall be in or to the effect of the prescribed form'' (sec. 7(2)). When the proper officer of the Court receives an ``instalment agreement'' an order is made that the balance of the judgment debt shall be paid by the instalments and at the times specified in the agreement (sec. 7(3)).

The ``terms of settlement'' are not in the prescribed form (Form 61J - Civil Procedure - Victoria) or ``to the effect of the prescribed form''. Most importantly, the terms of settlement do not include the words in para. 4 of Form 61J:

``The [judgment debtor] acknowledges that he is aware that upon filing of this agreement an order will be made in the terms of this agreement and that for a breach thereof he may be required to attend before the Court.''

Further, the document was not signed personally by the judgment debtor and witnessed as required by Form 61J.

Nevertheless, the terms of settlement negotiated between the legal advisers to the parties is a relevant matter in the hearing before me. The existence of the terms of settlement was not drawn to the attention of the Senior Master before the order was made on 20 February. However, I am satisfied that neither the judgment debtor nor her legal advisers knew that an order was imminent on 19 February. It was purely fortuitous that the application was dealt with by the Senior Master on the following day.

The application for an instalment order was not determined for four months due, no doubt, to the volume of business before the Master's Court. Perhaps higher priority should be given to an application of this nature which may be dealt with whether or not the judgment debtor

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ATC 4709

is before the proper officer. Whenever undue delay occurs it might also be desirable as a matter of practice for the proper officer to enquire whether the financial situation of the judgment debtor has changed since the application was filed. No doubt the Senior Master would have regarded the terms of settlement as relevant had the document been disclosed before he determined the application.

The Senior Master made an instalment order whereby the judgment debtor was required to pay the judgment debt by 21 monthly instalments of $5,000 each, the first on 19 March and the last on 19 January 1992.

Such an order was proper to make on the material because the amount owing under the judgment together with interest accruing from time to time would result in the debt being extinguished by 19 January 1992.

The judgment debtor paid $25,000 to the judgment creditor on 23 February pursuant to the terms of settlement but otherwise has not complied with the terms of settlement. Since the making of the instalment order, the judgment debtor has paid monthly instalments of $5,000 pursuant to the order.

I turn now to a threshold point going to jurisdiction.

Mr Fajgenbaum submitted that as the Act does not expressly bind the Crown in the right of the Commonwealth, only sec. 64 of the Judiciary Act can require the Act to bind the Crown. It cannot be doubted, I consider, that the Act binds the Crown in the right of the State of Victoria by virtue of the Crown Proceedings Act 1958, sec. 22. However, the Crown in right of the Commonwealth cannot be bound by the test of ``necessary implication''. The rule is explained in Province of
Bombay v. Municipal Corporation of Bombay (1947) A.C. 58 at p. 61. Cf.
Bropho v. State of Western Australia (unreported 20/6/1990 - Full High Court).

Section 64 of the Judiciary Act provides:

``In any suit to which the Commonwealth or a State is a party, the rights of parties shall as nearly as possible be the same, and judgment may be given and costs awarded on either side, as in a suit between subject and subject.''

The proceeding by the Commonwealth Deputy Commissioner of Taxation in this case is a ``suit to which the Commonwealth... is a party'' and sec. 64 requires that ``the rights of parties shall as nearly as possible be the same... as in a suit between subject and subject''. The Act is binding on the Commonwealth Deputy Commissioner by virtue of sec. 64 unless the Act is inconsistent with Commonwealth legislation. In
Dao v. Australian Postal Commission (1987) 162 C.L.R. 317 the High Court held that the provisions of sec. 64 cannot properly be construed as intended indirectly to apply the provisions of a State law to circumstances where the direct application of a State law would be invalidated by operation of sec. 109 of the Constitution by reason of inconsistency with applicable provisions of a law of the Commonwealth.

In
D.F.C. of T. v. Moorebank Pty. Ltd. 88 ATC 4443; (1987-1988) 165 C.L.R. 55 the High Court held that the general scheme of the Income Tax Assessment Act 1936 (Cth) providing for collection and recovery of tax covered the field and left no room for the importation of State limitation provisions.

Mr Fajgenbaum submitted that the Income Tax Assessment Act, in particular Pt VI, left no room for the importation of State moratorium provisions found in the Act. The Act, in providing for the recovery of judgment debts by instalments is moratorium legislation in that a debt recovery procedure is prescribed. The Act provides a legal authorisation to pay a judgment debt by instalments over a period of time. Accordingly, from the time of service of an application for an instalment order, the application operates as a stay of enforcement or execution of the judgment in respect of which the application is made. While an instalment order made by the proper officer of the Court is in force and is being complied with, the instalment order shall operate as a stay of enforcement or execution of the judgment in respect of which the instalment order is made (sec. 9).

Before the application was filed pursuant to the Act on 13 October the Deputy Commissioner of Taxation could recover this judgment debt by execution or by sequestration or by agreement, as he saw fit. The Income Tax Assessment Act confers upon the Deputy Commissioner wide discretions in relation to the recovery of tax (e.g. sec. 206, 207 and 209).

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ATC 4710

In Re Michael Francis Faulkner; Ex parte D.F.C. of T., Ryan J., in the Federal Court of Australia, held in an unreported decision delivered on 1 February 1989, that the Deputy Commissioner, as petitioning creditor for a sequestration order pursuant to the Bankruptcy Act in respect of a judgment for a tax debt, was precluded from proceeding with the hearing of the petition until an application by the judgment debtor pursuant to the Act was determined.

The reasoning behind the decision was that the petitioning creditor was unable to prove that a debt was owing at the date of the hearing of the petition because by operation of sec. 6(8) of the Act the debt was not then ``payable immediately or at a certain future time'' for the purposes of sec. 52 of the Bankruptcy Act 1966.

When the instalment order was made by the Senior Master in the present case the judgment debt was converted from a debt immediately payable into a debt payable in future by monthly instalments. Cf.
Re Agrillo; Ex parte The Bankrupt (1977) 29 F.L.R. 484 at p. 487 and the cases cited,
Re Padagas; Ex parte Carrier Air Conditioning Pty. Ltd. (1977) 30 F.L.R. 170 at p. 172.

When the judgment debtor made an application pursuant to the Act the sequestration proceeding in the Federal Court could not proceed further until the proper officer of this Court or the Court determined not to make an instalment order.

The question arises whether Pt VI of the Income Tax Assessment Act and, in particular, sec. 206, 207 and 209 has effectively covered the field and left no room for the intrusion of State moratorium legislation to delay the recovery of tax. Unlike State limitation legislation, the subject matter of the Moorebank decision, the Act does not extinguish the right of the Deputy Commissioner to sue for and recover any unpaid tax, including penalty tax.

The essential provisions of the Income Tax Assessment Act for the purposes of this submission are set out in the joint judgment of Mason C.J., Brennan, Deane, Dawson and Gaudron JJ. in Moorebank at ATC p. 4447; C.L.R. p. 65. It is unnecessary to repeat them.

The question raised here is whether the scheme for collection and recovery of tax contained in Pt VI of the Income Tax Assessment Act is significantly undermined by the Act. In the joint judgment in Moorebank is the following passage (at ATC pp. 4447-4448; C.L.R. pp. 66-67):

``Thus, for example, sec. 206 of the Assessment Act authorises the Commissioner `in any case [to] grant such extension of time for payment... as he considers the circumstances warrant' and provides that `in such case the tax shall be due and payable accordingly'. That power to grant an extension of time `in any case' plainly extends to the case where tax has already become due and payable with the result that the right of action to recover the tax has already arisen or accrued. The intrusion of a State Limitation Act provision which, according to its terms, barred recovery after the expiry of a specified time from the date on which the cause of action `arose' or `accrued' (see, e.g. the Queensland Act, sec. 10(1)(d) and (5)) or `first accrues' (see, e.g. Limitation Act 1969 (N.S.W.), sec. 14(1) and 18) would be incompatible with the existence of such a broad discretionary power. If, in such a case, the Commissioner granted an extension of time until after the expiry of the relevant limitation period from the date on which the right of action for recovery of the tax `arose' or `accrued' or `first accrues', the application of a State Limitation Act provision to bar recovery in accordance with the extension of time would be inconsistent with the provisions of the Assessment Act to the effect that the tax should be then due and payable (sec. 206) and that any tax unpaid may be sued for and recovered in any court of competent jurisdiction (sec. 209). If the application of the State limitation provision was not excluded, the result would be that the general discretion conferred upon the Commissioner was effectively confined to preclude the grant of any extension of time beyond the limitation of action period since, if an extension of time beyond that period were granted, the tax would be irrecoverable at the time when it became due and payable in accordance with the extension.''

This passage is equally applicable, I consider, to the Act. Discretionary powers conferred upon the Deputy Commissioner and exercisable pursuant to sec. 206 and possibly sec. 209 are diminished or curtailed by the

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ATC 4711

operation of the Act where tax has become due and payable pursuant to judgment in a court of competent jurisdiction. The intrusion of a State moratorium legislation is incompatible with the discretionary powers of the Income Tax Assessment Act to which reference has been made. The Act, when invoked by a judgment debtor, effectively precludes the Deputy Commissioner, as judgment creditor, from proceeding to execution or sequestration after judgment for the time limited by an instalment order. An instalment order in favour of a judgment debtor extending the time of recovery of tax diminishes and curtails the discretionary powers of the Deputy Commissioner.

I have reached the conclusion that the Act cannot operate consistently with Pt VI of the Income Tax Assessment Act. The consequence is that the Act is not applicable to the judgment debt by virtue of the operation of sec. 64 of the Judiciary Act. This Court is precluded from making an ``instalment order'' in favour of the judgment debtor and the order of the Senior Master will be cancelled.

Should this view of the law later be held erroneous I propose to embark upon the merits of the application.

In an affidavit made on 23 April the judgment debtor deposed that she entered into the terms of settlement because she was fearful that if she did not do so a sequestration order would be made against her with the consequence that a family business Odra Travel Service which is supported by guarantees would collapse. The fact is that the judgment debtor had legal advisers when the terms of settlement were negotiated and signed. Whatever reasons motivated the judgment debtor to authorise her legal advisers to enter into the terms of settlement on her behalf, the agreement constituted by the document is binding and enforceable on its face, subject only to the order made subsequently by Senior Master Mahony. The terms of settlement demonstrate an ability to satisfy the judgment debt within a period of eight months, a significantly shorter period than the period of 21 months fixed by the order.

The material now before the Court suggests strongly that the judgment debtor understated her financial situation in October last year. In particular, material relied upon by the judgment creditor shows that the judgment debtor is the registered proprietor of unencumbered land at Jan Juc in the State of Victoria (Certificate of Title Vol. 8411 Fol. 448), which was not disclosed by the judgment debtor in her affidavit of financial situation. Her explanation for this omission is not credible. In March 1987, when the judgment debtor, together with her son and daughter, applied to Geelong Building Society for finance to purchase four residential blocks of land, the land at Jan Juc was valued at $36,000. The judgment debtor represented to the building society that she had a surplus of assets over liabilities of $983,000.

In my opinion, the judgment debtor has not demonstrated on the material that an instalment order should be made. I take into account the nature of the debt, the terms of settlement and lack of frankness on the part of the judgment debtor in disclosing her financial situation. These matters outweigh the matters relied upon by the judgment debtor in her affidavits.

A further relevant consideration is the lateness of the application. At the last moment, no doubt to forestall an imminent sequestration order in the Federal Court, an application was made pursuant to the Act. Delay in making an application may go to the bona fides of the judgment debtor. All the matters to which I have referred, require me to refuse the application.

The parties voluntarily entered into terms of settlement in February and the judgment creditor is still prepared to abide the agreement, provided the judgment debtor brings her payments up to date. This is not a matter about which I am required to comment. It is a matter for the parties to abide the terms of settlement or to proceed to the Federal Court.

In my opinion, the order of the Senior Master should be cancelled.

I shall give the parties an opportunity to speak as to the contents of the order and whether any and what order should be made as to costs.