Tou Pose Ree S Xda. CATCHWORDS Bankruptcy ~ Income Tax - appropriation of payments - applications to set aside bankruptcy notice based on a 'judgment in respect of Commonwealth income tax ~ debtor owed creditor a further debt in respect of Commonwealth income tax not the subject of any judgment - debtor made certain payments to creditor before the issue of the notice which were not credited in the notice - principles governing appropriation - whether debtor appropriated the payments to the judgment debt - whether s. 208B of Income Tax Assessment Act allows Commissioner to ignore appropriation by a taxpayer who owes two or more debts all in respect of Commonwealth income tax - whether debtor could reasonably have been mislead. RE: IIENRY FREDERICK HEATON WALSH EX PARTE: DEPUTY COMMISSIONER OF TAXATION NO. B. 4873 OF 1981 LOCKHART J. FRIDAY 28 MAY 1982 AT SYDNEY Bankruptcy Act 1966 (Cth.) Income Tax Assessment Act 1936 (Cth.) ss. 208,208A,208B IN THE FEDERAL COURT OF AUSTRALIA GENERAL DIVISION BANKRUPTCY DISTRICT OF THE STATI OF NEW SOUTH WALES AND THE AUSTRALIAN CAPITAL TERRITORY RE: EX PARTE: ORDERS JUDGE MAKING ORDERS: WHERE MADE: DATE OF ORDERS: THE COURT ORDERS THAT: 1. Bankruptcy notice No. 4873 of be set aside; NO. B. 4873 OF 1981 HENRY FREDERICK HEATON WALSH DEPUTY COMMISSIONER OF TAXATION LOCKHART J. AT SYDNEY FRIDAY 28 MAY 1982 1981 dated 23 November 1981 The respondent, the Deputy Commissioner of Taxation, pay the costs of the applicant Henry Frederick Heaton Walsh of this application, including reserved costs. IN THE FEDERAL COURT OF AUSTRALIA GENERAL DIVISION BANKRUPTCY DISTRICT OF THE STATE NO. B 4873 OF 1981 OF NEW SOUTH WALES AND THE AUSTRALIAN CAPITAL TERRITORY RE: HENRY FREDERICK HEATON WALSH EX PARTE: DEPUTY COMMISSIONER OF TAXATION REASONS FOR JUDGMENT LOCKHART J: Henry Frederick Heaton Walsh ("the debtor") applies to set aside a bankruptcy notice issued on 23 November 1981 by a Leputy Registrar in Bankruptcy at the request of the Deputy Commissioner cf Taxation ("the creditor"). The notice required payment of the sum of $26,596.34 described as being the sum due under a final judgment obtained by the creditor against the debtor in the Supreme Court of New South Wales on 19 August 1981 ($25,914.75) together with interest thereon ($661.59). The debtor contends that the bankruptcy notice is invalid on the ground that the sum specified in the notice as the amount due to the creditor exceeds the amount in fact due. The debtor made four Payments to the creditor totalling $400.54 befcre the notice was issucda. The notice dces not credit the debtor with any of those payments. The validity of the notice turns primarily on whether the debtor appropriated those payments or any of them to the judgment debt -2- or omitted to do so leaving the creditor at liberty to appropriate them, which he claims he did, to another debt due by the debtor to the creditor arising from the issue of an assessment to income tax for the year of income ended 30 June 1979 which is not the subject of any judgment. It is not disputed by the creditor that, within the time allowed for payment by the notice, the debtor gave notice to the creditor that he disputed the validity of the notice on the ground of the alleged overstatement of the amount due, so that s. 41 (5) of the Bankruptcy Act 1966 ("the Act") covld not save the notice from invalidity. The parties are not in dispute as to the principles governing appropriation of payments. A debtor who owes two debts to a4 crediter is entitled to appropriate a payment which he makes to his creditor to one debt rather than to the other. If he omits to do so, the creditor may make the appropriation. If neither makes any appropriation, the law appropriates the payment to the earlier debt. If there is specific appropriation by the debtor cadit quaestio. In the absence of a specific appropriation it 1s a question of fact whether there was any appropriation by the debtor. To constitute an appropriation there must be more than an intention to appropriate by the cebtor. I respectfully adopt the following passage from the judsment of Greene L.J. in Leeson v. Leeson [1936] 2 K.B. 156 at pp. 162-163:- Cy OR SE HEE TR, gt Keeton mentees Gintey ADU SR SUN PRY Tee eee ae "When, however, he does not notify the creditor of his intention, and when the circumstances are such that the creditor receives the payment merely in satisfaction of the debts and the payment is not more appropriate to the payment of the one debt than to that of the other the creditor is entitled to make the appropriation. When it is said that there need not be an express appropriation of a payment, but that the appropriation can be aunferred, that does not mean that appropriation of a payment can be inferred from some undisclosed intention in the mind of the debtor. It is to be aunferred from the circumstances of the case as known to both parties. Any other view might lead to injustice, as the creditor's right to appropriate a payment would be defeated. When the matter is examined upon principle it will be found that an undisclosed intention in the mind of the debtor is not sufficient to support an appropriation. If authority is needed for that proposition it can be found in the judgment of Lush Jd. an Parker v. Guinness 27 Times L.R. 129,130 where he said: 'What is to be considered is this. Is the true inference to be drawn from all the circumstences of the case that the debtor paid the moneys generally on account, leaving the creditor to apply them as he thought fit, or is the true inference that he paid them on account of special portions of the debt for the purpose and with a view to wipe these out of the account? His undisclosed intention so to do would, of ccurse, not benefit him. lt is what he dad in fact, and not what he meant to do that is to be regarded.' A debtor's undisclosed intention to appropriate a payment to one of two debts owed by him to a creditor cannot benefit him." The question in the present case is not free from difficulty; and necessarily involves an analysis of the relevant circumstances surrounding the payments in question. The creditor issued notices of assessment to the debtor pursuant to the Income Tax Assessment Act 1936 ("the Assessment Act") assessing the debtor to income tax for the years of income ended 30 June 1975, 1976, 1977 and 1978 and additional tax for late payment. -4— The debtor objected in writing against the assessments; the creditor disallowed those objections and sued the debtor in the Supreme Court of New South Wales to recover that tax. The proceedings were defended on various grounds which I need not mention as they are referred to in the reasons for judgment of Waddell J. delivered on 19 August 1981, when his Honour allowed the creditor's application for summary Judgment and directed that judgment be entered for the creditor against the debtor in the sum of $25,914.75. No appeal has been lodged by the debtor from that judgment; nor has the debtor sought any stay of execution thereon. The Board of Review confirmed the assessments and the debtor applied to the Supreme Court of New South Wales for leave to appeal from the Board's decision out of time; but that application was dismisseG on 26 October 1981. On 18 August 1980 thc creditor issued a notice of assessment to the debtor assessing him to income tax for the year of income ended 30 June 1979 in the sum of $23,940.77 due for payment on 22 September 1980. The debtor objected in writing against the assessment; the creditor disallowed the cbjection. On 17 November 1980 the debtor wrote to the creditor requesting him to refer his decision disallowing the debtor's objection to a Board of Review. On 26 October 1981 the creditor wrote to the debtor informing him that the decision of the Deputy Commissioner upon the objection to the assessment had been referred that day to ea Board of Review. The appeal is still pending. In Octoker and November 1981 correspondence passed between the representatives of the debtor and the solicitor for the creditor. ~5- Some of the correspondence on behalf of the debtor was written by his solicitor and other correspondence was written by Mr. Peter Clyne. The question relating to appropriation turns on the proper construction of this correspondence and of four letters each written in similar form by the debtor to the creditor which accompanied the four payments in question. It 1s to that correspondence that I now turn. The first letter was written by the solicitor for the debtor to the solicitor for the creditor on 8 October 1981 referring to the entry of judgment in the Supreme Court of New South Wales on 19 August 1981 and foreshadowing a possible application by the debtor for a stay of execution of the judgment. The solicitor asked the creditor to consent to a stay of execution and suggested that a term of the stay be the payment by the debtor of $500.00 per month in reduction of the judgment. The solicitor also asked, that if the creditor did not agree to a stay, to agree to defer the issue of a bankruptcy notice until the Court Gealt with the application for a stay. On 19 October 1961 the solicitor for the creditor replied stating that the creditor would not agree tc a stay of execution or to the deferment of the issue of a bankruptcy notice. On 19 Octcbher 1981 the debtor wrote a letter to the creditor enclosing for $102.16 "in part payment of the above debt". This reference was to "Re file No. 125 924 599", -6- On 20 October 1981 Mr. Clyne wrote a letter to the solicitor for the creditor saying that he represented the debtor "in his various disputes with the Deputy Commissioner"; confirming that the offer of payment of $500.00 per month "while further litigation is pending" remained open. He then said: "Meanwhile, though a good deal of litigation still remains to be determined, my client 1s anxious to reduce his indebtedness as much as he can, and proposes from time to time to make payments accordingly. You are free to accept these payments without prejudice, and without in any way being bound to accept the offer of repayment that has been made or any other offer." The debtor concluded with the statement that if bankruptcy proceedings were instituted they would be defended. On 26 Octoker 1981, the same day as the Supreme Court dismissed the debtor's application to appeal out of time from the Board of Review's decision in respect of the years of income 1975 tc 1978, Mr. Clyne wrotc a further letter to the solicitor for the creditor referring to a discussion that day between himself and a solicitor in the employ of the creditor's solicitor and stating:- "I...confirm that in accordance with my advice Mr. Walsh has agreed to take no further appellate proceedings, and to pay the amount due to your client as quickly as possible." [le then undertook to send to the creditor's solicitor "a firm proposal for liquidating the debt", a statutory declaration setting out the debtor's financial position and a written authority confirming his (Mr. Clyne's) raght to represent the debtor "in this matter". On 26 October 1981 the debtor wrote a second letter to the creditor in the same terms as the earlier letter of 19 October 1981 and enclosing $73.18. As I said earlier, on 28 October 1981 the creditor wrote to the debtor informing him that the decision upon the objection to the assessment for the 1979 year cf income had been referred that day to a Board of Review. On 30 October 1981 Mr. Clyne wrote to the solicitor for the creditor enclosing a statutory declaration of the debtor together with Mr. Clyne's authority to act "in this matter". The authority was entitled "Supreme Court Action No. 12346 of 1979" which is the number of the Supreme Court file relating to the proceeding in which the judgment was signed on 19 August 1981. I need not refer to the terms of the statutory declaration; it 1s sufficient to say that the debtor there set out details of his financial position and referred to the judgment of the Supreme Court of 19 August 1981 and toe the fact that this proceeding related to the appeal by him to the Board of Review in respect of the years of income 1975 to 1978. In the letter of 30 October 1961 Mr. Clyne set out a proposal for payment of "the aebt" of the debtor. By letter dated 11 November 1981 from the solicitor for the ereditor to Mr. Clyne the offer was said to be "not acceptable". On 12 November 1981 the debtor wrote a third letter to the creditor in the same terms as the earlier two lettersand enclosing $130.18. On 16 November 1981 Mr. Clyne wrote to the solicitor for the creditor saying that the debtor intended tc apply to the Supreme Court for a stay of executicn on the judgment. On 17 November 1981 the debtor wrote a fourth letter to the creditor in the same terms as the earlier three letters and enclosing $125.00. On 23 November 1981 the bankruptcy notice issued. On 9 December 1981 the debtor paid a further $35.00 to the creditor and on 10 December 1981 a further $43.00. Counsel for the debtor submitted that from these circumstances it can be inferred that the debtor appropriated the first four payments to the reduction of the judgment debt. Counsel submitted that the creditor was not entitled to appropriate the payments or any of them to the reducticn of the debt arising from the issue of the assessment for the 1979, year with the consequence that the bankruptcy notice claimed payment of a larger sum than was in fact due and is therefore invalid. It 1s not disputed by the debtor that, 1f it is held that he did not appropriate any of the four payments to the judgment debt, the application for the issue of the bankruptcy notice or the issue thereof constituted an appropriation by the creditor of those payments to the debt arising from the 1979 assessment. Thus it 1s not disputed by the debtor that his right to appropriate payments to the judgment debt rather than to thc debt arising from the assessment for the 1979 year ceased when the bankruptcy notice issued on 23 November 1981: see Friend v. Young [1897] 2 Ch. 421 at p. 437; Seymour v. Pickett [1905] 1 K.B. 715 at p. 722. It is clear that the debtor did not state in express terms that he appropriated the four payments which he made before the issue of the bankruptcy notice, or any of them, to any particular debt. Each of the four letters written by him to the creditor accompanying the payments merely referred to file No. 125 924 599 which identified generally his' inccme tax account and related files. Is the true inference to be drawn from all the circumstances of the case that the debtor paid the moneys generally on account of his indebtedness, leaving the creditor to apply them as thought fit; or is the true inference that he paid them on account of the judgment debt? This 1s not a case of any undisclosed intention of the debtor. He relies only on correspondence and facts known to both -10- parties. Counsel for the creditor submitted that the debtor appropriated none of the four payments to the judgment debt. He relied on the following matters:- 1. The four payments were made by the debtor under cover of letters identifying the payment merely by the debtor's income tax department f1le number and the use of the expression "the above debt" which merely identifies the indebtedness of the debtor to the creditor generally on whatever account. 2. At all times after 5 June 1981 it was apparent that beth the debtor and the creditor had to govern their relationships by reference to the judgment of the High Court in F. J. Bloemen Pty. Limited v. C. of T. (1981) 55 A.L.J.R. 450 which was delivered on 5 dune 1981. It was submitted by counsel for the creditor that in view of Bloemen's Case it is clear that not only is income tax a debt due and payable to the Commonwealth, but there is a real possibility of the Commissioner seeking to recover tax under the 1979 assessment notwithstanding the pendency of the Board of Review proceedings. 3. The correspondence which I have referred to earlier, in particular the letter from Mr. Clyne to the solicitor : -1l- for the creditor of 20 October 1981. It was submitted by counsel for the creditor that the statement in the fourth paragraph of the letter which I set out earlier was intended to apply generally to the indebtedness of the debtor to the creditor and not merely to the indebtedness arising under the judgment. None of the correspondence between the parties and their advisers refers specifically to any particular payment being made by the debtor to the creditor or indeed envisages any payment being made on any particular account; most of the correspondence being with reference to proposals to settle the indebtedness of the debtor to the creditor. At the time of the first payment (19 Octcber 1981) there was on foot litigation between the debtor and the creditor directed to challenging the debtor's liability to tax before the Board or the Supreme Court with reference to the years 1975 to 1978 inclusive and the year 1979. It was not until 26 October 1981 that it was clear that the Supreme Court would not entertain the application of the debtor to appeal out of time from the Board of Review's decision in respect of the liability to tax for the years 1975 to 1978. The amount of the andebtedness of the debtor to the ~12- creditor under the judgment is $25,914.75 plus interest and the amount due by the debtor to the creditor under the 1979 assessment is $23,940.77. The only payments made by the debtor to the creditor in reduction of his tax liability were four small sporadic payments totalling $400.54. None of the four payments when taken an isolation from the others or together bears any necessary relation to the amount due under the judgment debt. In these circumstances the Court would be slow to say that the creditor was deprived of his right of appropriation. Notwithstanding these submissions, in my opinion, the argument of counsel for the debtor is to be preferred. Judgment was entered in the Supreme Court against the debtor on 19 August 19€1 in respect of his liability for tax for the years 1975 to 1978. It 1s true that it was not until 26 October 1981 that the Supreme Court dismissed the debtor's application to appeal out of time from the Board's decision. It is true also that tax became due and payable by the debtor on the date specified in the notice of assessment for the 1979 year (namely 22 September 1980) and that the pendency of the reference to the Board of Review in respect of such tax @id not operate to prevent the creditor recovering 1t (s. 201). Buta fair reading cf the correspondence between the parties and their advisers establishes clearly to my mind that they were all talking -13- about the debtor's liability to the creditor under the judgment entered on 19 August 1981 and the debtor's proposals to satisfy that liability. Their attention was not directed to the debt due by the debtor in respect of the 1979 year. The debtor never admitted the correctness of the 1979 assessment and therefore was not likely to make a payment on that account, especially when judgment had been recently entered against him in respect of the earlier years of income and a bankruptcy notice could be issued against him in respect of that judgment debt. Notwithstanding that the letters from the debtor to the creditor accompanying the four payments in question did not specifically appropriate the payments to the judgment debt, when considered tcegether with all the other documents and the probabilities, the debtor must be regarded as having appropriated all four payments to the judgment debt. I pass to the next submission of counsel for the creditor that s. 208B of the Assessment Act overrode any appropriation by the debtor and entitled the creditor to himself appropriate the payments to the debt due under the 1979 assessment. Section 208B reads as follows :- "206B. (1) In this section, "debt to which this section applies" means a debt owing to the Commonwealth under section 208 or 208A. (2) Where -- (a) 2 or wore debts to which this section applies are owing by a person; (b) an amount is paid to or credited by the Commissioner, or an amount is paid to and an -14- amount is credited by the Commissioner, in respect of all or any of the debts; and (c) the total amout of the debts exceeds the amount so paid or credited or the sum of the amounts so paid and credited, as the case may be, the Commissioner may, notwithstanding any directions given to him by or on behalf of the person by whom the debts are owed, apply the payment or the credit, or the payment and the credit, in partial discharge of the total amount cf the debts and recover the amount by which the total amount of the debts exceeds the amount of the payment or credit, or the sum of the amount of the payment and the amount of the credit, as the case may be, without allocating the payment or the credit, or the payment and the credit, towards the discharge of any particular debt or debts." Counsel for the creditor submitted that s. 208B allows the Cormissioner to ignore any appropriation by a taxpayer who owes 2 or more debts all in respect of Commonwealth income tax due to the Commonwealth and payable pursuant to s. 208; and that the powers conferred by the section are not confined to the situation where a person owes debts in respect of both Commonwealth income tax and State income tax and has made a payment or has a credit that falls short of the total of those debts. The section was inserted in the Assessment Act by the Income Tax (Arrangements With The States) Act 1978, Act No. 87 of 1978. It permits the Commonwealth to assess and collect, on behalf of a State, personal income tax imposed by the State on its residents. It allows the Commissioner of Taxation to administer, on behalf of a State, in conjunction with his administration of Commonwealth income tax law, tax laws imposed by that State. -15- Act No. 87 contains 5 parts. Part 1 contains definitions and formal provisions. Part II sets out the criteria that State tax and rebate laws must meet if they are to be administered by the Commissioner of Taxation. Part III contains amendments to the Assessment Act which provide the machinery to give effect to the purposes of Act No. 87. Part IV contains amendments to other Commonwealth Acts. Part V authorises the Commissioner of Taxation to exercise powers conferred on him by State tax and rebate laws and provides for payment to the States of moneys collected by the Commonwealth on their behalf. Many sections of the Assessment Act were amended by Part III and new sections (ss. 160AP, 203, 204A, 208A, 208B, 221EA, 221EB, 221TA and 221YDBA) were inserted. Section 206A provides that any debt of a person which, by virtue of a State income tax law, is assigned to the Commonwealth for collection, 1S to be a debt due to the Commonwealth and payable to the Commissioner of Taxation in the manner and place prescribed by the Income Tax Regulations. In effect, this section provides for the collection of State income tax as if that tax were Commonwealth income tax. In my opinion when s. 208B is considered in the context of both the Assessment Act as a whole and Act No. 87 of 1978 itself, 1t 15 plain that it applies when a person has debts outstanding in respect of -16- both Commonwealth income tax and State income tax and has made a payment or has a credit falling short of the total of those debts. In effect, the section facilitates recovery by the Commissioner of Taxation of the amounts outstanding by allowing the separate debts to be merged and by allowing the total of any payment received from the person to be applied against that merged sum without distinction between Commonwealth and State components. In the result the Commissioner may proceed to recover a single undifferentiated balance. Under s. 79 of Act No. 87 of 1978 the State concerned 1s paid its share of what 1s collected by the Commissioner. Section 208B is not directed to the situation where two or more debts are owing by a taxpayer to the Commonwealth and payable to the Commissioner all in respect of Commonwealth income tax. If the section is considered in isolation from the context of the Assessment Act as a whole and Act No. 87 of 1978, the submission of counsel for the creditor would have some force because of the definition of "debt to which this Act applies" (s. 208B (1) ) and the opening words of s. 208B (2) (a):- "(2) vhere — (a) 2 or more debts to which this section applies are owlng by a person." However, the submission does not have sufficient force to support the construction of the section contended for by counsel for the creditor. Indeed 1f this construction were correct, s. 208B would have no work to do. If the section applied to 2 or more debts due to the Ccmmonwealth 1 -17- in respect of income tax pursuant to s. 208 there is no point in 4 section of the Assessment Act empowering the Commissioner to merge the separate debts and allowing the total of any payments received from the taxpayer to be applied against that merged sum and to recover a single undifferentiated balance. The Commissioner may recover income tax payable by a taxpayer notwithstanding the pendency of appeals in relation to assessments in question. To treat s. 208B as empowering the Commissioner to aggregate the debts in this way would be to give him a nugatory power. The section should not be so construed. Whether considered 1n isolation from or in the context of the Assessment Act and Act No. 87 of 1978 in my opinion the meaning of the section is clear and is as I mentioned earlier. ' This is not a case of choosing between two possible interpretations of an Act; but it if were such a case:- ++ea construction which will promote the purpose or object underlying the Act is to be preferred (Acts Interpretation Act 1901, sec. 15AA)": per Bowen C. J. and Ellicott J. in F. C. of T. v. Top of the Cross Pty. Limited [1981] 81 A.T.c. 4564 at p. 4571. I turn to the final submission of counsel for the creditor vyhich assumes for the purposes of that submission that there 1s an overstatement in the bankruptcy notice of the amount due by the debtor to the creditor pursuant to the Supreme Court Judgment and that the bankruptcy notice is therefore defective. Counsel submitted that the -~18- Gefect would not invalidate the notice and would be a proper case for the application of s. 306 of the Act on the basis that it 1s "a formal defect or an irregularity". A "formal defect or an irregularity" is one that could not reasonably mislead the debtor: see Pillai v. Comptroller of Income Tax [1970] A.c. 1124 at p. 1135; Re Wimborne; ex parte The Debtor (1979) 24 A.L.R. 494 and Re Florance; ex parte Turimetta Properties Pty. Limited (1979) 28 A.L.R. 403. In my view the overstatement could reasonably mislead the debtor and I reject the submission. In my view, the bankruptcy notice is invalid. The Court orders:- l. That bankruptcy notice No. 4873 of 1981 dated 23 November 1981 be set aside; and 2. That the respondent, the CDeputy Commissicner of Taxation, pay the costs of the applicant Henry Frederick Heaton Walsh of this application, including reserved costs. 1 jorsr' ' > Seventeen C17 prot - ott Sy Peau. 2-07 Po ly Sd oecur i Jost : '