By unanimous decision in Bruton Holdings Pty Limited (in liquidation) v Commissioner of Taxation1, five members of the High Court have reversed a controversial decision of the Full Federal Court to confirm that the Commissioner of Taxation (Commissioner) cannot ‘leap-frog’ other creditors in a liquidation.2
In late 2008, the Full Court delivered judgment permitting the Commissioner to garnishee debts owed by third parties to an insolvent company in order to satisfy outstanding tax-related liabilities of the company after it has entered winding up.3 A Commissioner’s garnishee notice in these circumstances would compel the third party to make payment of a debt owed to the insolvent corporate taxpayer direct to the ATO rather than to the liquidator for distribution between creditors. This would expose liquidators to uncertainty of funds in the winding up and would enable the Commissioner, at his own election, to elevate his claim in a winding up to an effectively secured position.
In August 2009, the High Court allowed the liquidator’s appeal against the Full Court decision. The High Court found that once a liquidator has been appointed, either by court order or voluntarily, the Commissioner’s powers are limited to those set out in a specific statutory regime for recovering tax-related liabilities from liquidators. The Commissioner’s more general power to garnishee funds from third party debtors is not available in a liquidation.
By this decision, the High Court has returned the Commissioner to his previous position among the ranks of unsecured creditors in a winding up and has removed the element of unpredictability introduced into Australian insolvency practice by the Full Court.
In 2004, Bruton Holdings, as the trustee of the Bruton Educational Trust, applied for endorsement as an income tax exempt charity. The Australian Tax Office (ATO) refused that application and Bruton Holdings appealed to the Federal Court. The trial was due to come on in 2007.
In the meantime, the sole director resolved to place Bruton Holdings in administration. On the same day, $450,000 was placed in the trust account of the lawyers prosecuting the appeal against the failed ATO endorsement application. Shortly thereafter, in March 2007, the Commissioner issued Bruton Holdings with a notice of assessment for the 2004 financial year in the amount of $7,715,873.73.
On 30 April 2007, Bruton was placed in a creditors’ voluntary winding up. The following month, the Commissioner served notices under section 260-5 of Schedule 1 to the Taxation Administration Act 1953 (Cth) (Administration Act) on Bruton Holdings’ lawyers to recover funds held in trust in payment of the company’s tax liability.
Bruton Holdings (in liquidation) instituted proceedings to challenge the validity of the Commissioner’s section 260-5 notices.
Validity of section 260-5 notice issued after commencement of winding up
The proceedings before the primary judge and the Full Federal Court focused on Bruton Holdings’ central argument that section 500 Corporations Act 2001 (Cth) (Corporations Act) invalidated the notices issued under section 260-5 of the Administration Act.
Section 500(1) provides:
‘any attachment, sequestration, distress or execution put in force against the property of [a] company after the passing of [a] resolution for voluntary winding up is void’.4
Section 260-5 of the Administration Act empowers the Commissioner to serve notice on a third party who ‘owes or may later owe’ money to a taxpayer requiring direct payment of that debt to the Commissioner up to the amount of the taxpayer’s tax-related liabilities.
Bruton Holdings argued that this process creates an ‘attachment’ against property such that any notice purported to be issued by the Commissioner after the commencement of a winding up is void under section 500(1).
Meaning of ‘attachment’ – limited to court-based process?
The word ‘attachment’ is capable of more than one meaning. ‘Attachment’ may refer generally to a process of freezing or seizing debt authorised by legal authority.5 Alternatively, it may operate in a narrow form limited to court-based methods of appropriating debt.
The primary judge was satisfied that a notice issued under section 260-5 notice creates an ‘attachment’ for the purposes of section 500(1). The Full Court held the reverse. The Full Court emphasised the need for ‘certainty in the law’ and applied the reasoning set out in an earlier decision which had concluded that ‘attachment’ in section 118 Bankruptcy Act 1966 (Cth) (Bankruptcy Act) is limited to curial methods of recovering debt.6
The Full Court’s unease with the inconsistency between this outcome and the winding up provisions of the Corporations Act is evident in a passage of its judgment which suggests that a notice issued under section 260-5 might be over-ridden by section 501 Corporations Act.7 Section 501 mandates that the property of a company being wound up must be applied to its liabilities equally, subject only to the system of preferential payments under the Corporations Act.
High Court - no power to issue section 260-5 notice in a winding up
Whereas the previous two courts examined the validity of the section 260-5 notices by construing the Corporations Act, the High Court focused instead on the anterior question of power: is the Commissioner’s general power to recover tax debts by issuing a garnishee notice to third party debtors available at all in circumstances of a winding up?
The appointment of a liquidator enlivens a specific regime for the collection and recovery of tax debts from liquidators contained in section 260-45 Administration Act. That provision obliges a liquidator to set aside sufficient funds to pay the proportion of a notified tax debt that would be required by the system of proportionate payments under the Corporations Act. In this context, the High Court concluded that the Commissioner’s general power to garnishee third party debt under section 260-5 falls away in the particular circumstances for which section 260-45 makes ‘special provision’.8 Support for this conclusion was found in the:
- emphatic language of section 500(1)
- disruption which would otherwise be caused to the proportionate system established by section 260-45, and
- construction of ‘attachment’ in section 500(1).9
On this last point, contrary to the decision of the Full Court, the High Court considered that a section 260-5 notice does fall within the expression ‘attachment’ as it appears in section 500(1). Authority limiting the scope of the word ‘attachment’ in section 118 Bankruptcy Act does not settle of the meaning of that word as it appears in section 500(1) – although it may be determinative for the purposes of section 569 Corporations Act which has a shared legislative history with section 118.10
The High Court was satisfied that there is nothing in the language or legislative history of section 500(1), nor the subject, scope and purpose of Ch 5 of the Corporations Act, to suggest that ‘attachment’ should have a restricted meaning—limited to curial process—in section 500(1). The specific features of section 118 which led the Full Court in Donnelly to conclude that ‘attachment’ operates in its narrow form are absent from section 500(1). The Full Court’s desire for ‘certainty in the law’—as between the two statutes and between provisions of the Corporations Act—does not displace that conclusion.
Regardless of the differing outcomes, the decisions of each of the primary judge, the Full Federal Court and the High Court in Bruton Holdings disclose unease with the potential to disrupt the system of orderly winding up under the Corporations Act and to reinstate the Crown’s priority for tax debts effectively ‘by the back door’.
The dispute engages competing policy interests in revenue collection and in the orderly winding up of companies. That conflict finds expression in a tension between section 260-5 of the Administration Act and the winding up provisions of the Corporations Act. On the High Court’s analysis, the balance between those competing interests was set by the legislature in enacting section 260-45 and does not fall for resolution by reference to the minutiae of legal argument about the construction of ‘attachment’ in the Corporations Act. Instead of giving rise to ‘the tension which would otherwise exist if a provision of one statute avoided a notice issued under another’, the dispute in Bruton Holdings is said to disclose a situation in which the relevant provisions of the Corporations Act assist in the construction of the Administration Act.11
From a policy perspective, the High Court’s approach has the benefit that the regime in section 260-45 of the Administration Act is saved the ‘adventitious disruption’ which would result from permitting the Commissioner to garnishee tax debts of a company in liquidation.12 The Commissioner’s recovery of tax debt is determined consistently with the Corporations Act according to the proportionate system established by section 260-45 and is not shaped by the happenstance of third party debt, nor the speed with which the liquidator gathers in unrealised debt of the insolvent company.