FEDERAL COURT OF AUSTRALIA Dexcam Australia Pty Ltd (In Liquidation) v Deputy Commissioner of Taxation [2002] FCA 820 INCOME TAX – applicant (Dexcam) in administration – Deed of Company Arrangement (the Deed) executed whereby "Participating Creditors" entitled to payment of debts – Commissioner a Participating Creditor for purposes of Deed – Commissioner submits proof of debt to Administrator for an amount of $715,328 (the pre-Deed debt) – Dexcam lodges income tax returns for 1993 to 1996 financial years – Commissioner makes assessments and Dexcam becomes entitled to prescribed payment system (PPS) credits plus interest credits under Div 3A of Pt VI of Income Tax Assessment Act 1936 (Cth) (the ITA Act) – Commissioner sets-off the PPS credits and interest credits against tax assessed to be payable for 1993 to 1996 financial years and against part of the pre-Deed debt – Commissioner has notice Dexcam insolvent at time of set-off – Dexcam defaults on payments under Deed and Deed terminated – whether there was "tax payable" within meaning of s 221YHG(2) of ITA Act against which Commissioner could set-off tax credits – whether Ch 5 of Corporations Law operated concurrently with Pt VI of ITA Act after enactment of Insolvency (Tax Priorities) Legislation Amendment Act 1993 (Cth) (the Priorities Act) – whether provisions of Pt VI of ITA Act outside general statutory schemes relating to issues of set-off in insolvency WORDS AND PHRASES – "tax payable" Income Tax Assessment Act 1936 (Cth) s 221YHG(2) and s 222ARA Corporations Law s 553C Clyne v Deputy Commissioner of Taxation (1981) 150 CLR 1 at 9 applied Clyne v Deputy Commissioner of Taxation (No 3) (1984) 154 CLR 589 at 594 applied McDermott v Black (1940) 63 CLR 161 at 184-5 referred to Taylor v Commissioner of Taxation (1987) 16 FCR 212 distinguished Ansett Transport Industries (Operations) Pty Ltd v Commonwealth (1977) 139 CLR 54 at 74-5 referred to Commissioner of Taxation v Kavich (1996) 68 FCR 519 at 523-6, 535-7 applied Scott v English [1947] VLR 445 at 453 followed Osborn v McDermott [1998] 3 VR 1 at 9 cited Re Kolb; Ex parte England v Commissioner of Taxation (1994) 51 FCR 31 cited Gye v McIntyre (1991) 171 CLR 609 discussed DEXCAM AUSTRALIA PTY LTD (IN LIQUIDATION) & ORS v DEPUTY COMMISSIONER OF TAXATION VG 3023 of 1999 HEEREY J 27 JUNE 2002 MELBOURNE IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY VG 3023 OF 1999 BETWEEN: DEXCAM AUSTRALIA PTY LTD (IN LIQUIDATION) (ACN 007 056 877) DAVID NEIL LOCKWOOD and KENNETH STEWART SELLERS (as Liquidators) APPLICANTS AND: DEPUTY COMMISSIONER OF TAXATION RESPONDENT JUDGE: HEEREY J DATE OF ORDER: 27 JUNE 2002 WHERE MADE: MELBOURNE THE COURT ORDERS THAT: 1. Declare that the application by the respondent of the prescribed payment system credits and interest credits in the manner described at par 18 of the statement of agreed facts dated 5 June 2002 marked as exhibit "A" is invalid. 2. The respondent pay to the applicants the sum of $400,850.09 together with interest on that sum calculated at the rate of 10.5 per cent from 21 January 1999 to the date of judgment. 3. The respondent pay the applicants' costs of and incidental to this proceeding, including reserved costs. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY VG 3023 OF 1999 BETWEEN: DEXCAM AUSTRALIA PTY LTD (IN LIQUIDATION) (ACN 007 056 877) DAVID NEIL LOCKWOOD and KENNETH STEWART SELLERS (as Liquidators) APPLICANTS AND: DEPUTY COMMISSIONER OF TAXATION RESPONDENT JUDGE: HEEREY J DATE: 27 JUNE 2002 PLACE: MELBOURNE REASONS FOR JUDGMENT 1 Division 3A of Pt VI of the Income Tax Assessment Act 1936 (Cth) (the ITA Act) introduced the prescribed payment system (PPS) for the collection of tax by deduction from payments made for work of a certain kind. It is similar to the system for deduction of tax by employers from wages and salaries under Div 2 of Pt VI. 2 In any tax year tax deducted under Div 3A will almost inevitably not coincide with the tax ultimately payable by the taxpayer. Where the tax deducted exceeds the tax payable an entitlement to a credit will arise: s 221YHF(1). That credit is a debt due and payable to the person by the Commissioner: s 221YHG(1). However that provision is subject to, inter alia, subs (2) which, relevantly for present purposes, is as follows: "Where … a person is entitled to a credit under s 221YHF, the Commissioner shall: (a) if the amount of the credit does not exceed the tax payable by the person under an assessment in relation to the year of income in which the deductions to which the credit relates were made – apply the amount of the credit in payment or part payment of that tax; and (b) if the amount of the credit exceeds the tax payable – apply: (i) so much of the amount of the credit as does not exceed the tax in payment of the tax; and (ii) so much of the excess as does not exceed the amount of any other tax payable by the person in payment or part payment of that other tax." 3 By s 221YHG(7)(a), a reference to "tax payable" is a reference to an amount payable by the person to the Commonwealth under, or by virtue of, the ITA Act. 4 The present proceeding concerns a company which executed a Deed of Company Arrangement pursuant to Div 10 of Pt 5.3A of the Corporations Law (the Law). During the currency of the Deed the company became entitled to PPS credits under the ITA Act. The question arising in the present proceeding is whether the Commissioner can validly set-off those credits against other tax debts owed by the company. 5 Affidavits have been filed but not read. The parties proceeded on the basis of a statement of agreed facts dated 5 June 2002 with an agreed bundle of documents. 6 By virtue of ss 1384 and 1400 of the Corporations Act 2001 (Cth), the provisions of that Act apply to the present proceeding. It will, however, be convenient to speak of the provisions of the Law which were in operation when the relevant events occurred since there is no material difference. Neither party suggested that the change in the regulatory regime affects the present case. The Deed 7 On 11 June 1996 Colin Raymond McDonald was appointed as Administrator of the first applicant Dexcam Australia Pty Ltd (Dexcam) pursuant to s 436A of the Law. On 22 July 1996 the creditors of Dexcam resolved pursuant to s 439C of the Law that Dexcam execute a Deed of Company Arrangement. 8 On 12 August 1996 the Administrator, Dexcam and its two directors executed a Deed of Company Arrangement (the Deed) in accordance with s 444B of the Law. By cl 4 Dexcam covenanted with the Administrator to pay to him a sum of $550,000, called "the Fund", by five instalments, the last of which was due on 30 June 1998. By cl 5 the Administrator was to distribute the Fund amongst "Participating Creditors", ie those whose debt would be admissible to proof as a creditor of the company had the company been wound up on the Commencement Date (11 June 1996). Certain priorities were provided for, namely debts of the Administrator, payment of the Administrator's remuneration and expenses, and priority creditors as specified in s 556 of the Law. Otherwise creditors were to rank equally and the Fund was to be paid by the Administrator to Participating Creditors by five instalments, the last of which was due on 15 July 1998. 9 By cl 12.1, the provisions of Subdivs A and B of Div 6 of Pt 5.6 of the Law and of Regs 5.6.37 – 5.6.57 of the Corporations Regulations were incorporated into the Deed. Clause 13 provided as follows: "13. COMPROMISE OF DEBTS AND RELEASE 13.1 Discharge of Debts The Participating Creditors accept their entitlements under this Deed in full satisfaction and complete discharge of all debts or claim [sic] which they have or claim to have against the Company as at the Commencement Date and each of them will, if called upon to do so, execute and deliver to the Company such forms of release of any such claim as the Administrator requires. 13.2 Claims Extinguished Upon the Administrator paying to the Participating Creditors their entitlement pursuant to this Deed, all debts or claims, demands, proceedings, causes of action, in relation to or in connection with their debts or claims whether present or future, actual or contingent, due or which may become due by the Company as a result of anything done or omitted by or on behalf of the Company before the Commencement Date and each claim against the Company as a result of anything done or omitted by or on behalf of the Company before the Commencement Date are extinguished. 13.3 Bar to Participating Creditor's Claims This Deed may be pleaded by the Company against any Participating Creditor in bar of any debt or claim not admitted or established under this Deed and a participating Creditor (whether the Participating Creditor's debt or claim is or is not admitted or established under this Deed) must not, before the termination of this Deed:- 13.3.1 take or concur in the taking of any step to wind up the Company or; 13.3.2 except for the purpose and to the extent provided in this Deed, institute or prosecute any legal proceedings against the Company in relation to any debt incurred or alleged to have been incurred by the Company before the Commencement Date; or 13.3.3 take any further steps (including any step by way of legal or equitable execution) in any proceedings pending against the Company at the date hereof; or 13.3.4 exercise any right of set-off or cross-action to which the Participating Creditor would not have been entitled had the Company be [sic] wound up at the Commencement Date; or 13.3.5 commence or take any further step in any arbitration against the Company or to which the Company is a party." 10 By cl 15, in the event of the termination of the Deed before payment of the full entitlements of Participating Creditors under the Deed, such creditors would be entitled to enforce payment of the balance of their unpaid claims. 11 The respondent Deputy Commissioner of Taxation (the Commissioner) was a creditor of Dexcam as at 11 June 1996 and thus a Participating Creditor for the purposes of the Deed. Commissioner's proofs of debt 12 On 21 August 1996 the Commissioner submitted a proof of debt to the Administrator for an amount of $715,328.38 in respect of his claims that arose up until 11 June 1996 (the pre-Deed debt). The pre-Deed debt comprised unremitted tax instalment deductions, additional taxes and penalties. This proof of debt was admitted by the Administrator who, pursuant to the Deed, paid interim dividends to the Commissioner on 26 March 1997 and 12 August 1997. 13 In the period April 1997 to October 1997 and during the currency of the Deed: (i) Dexcam lodged with the Commissioner income tax returns for the 1993 to 1996 financial years; (ii) the Commissioner made assessments and Dexcam became entitled to credits for PPS deductions and became entitled to be paid interest by the Commissioner in respect of those financial years; (iii) the Commissioner applied or set-off the PPS credits and interest credits, first, against tax assessed to be payable for the 1993-96 financial years and, secondly, in part reduction of the pre-Deed debt. The tax set-off was evidenced by letters dated 27 June, 19 August and 5 November 1997. The total amount of tax credits so applied by the Commissioner was $400,850.09. 14 At the time the income tax returns were lodged and the Commissioner applied the tax credits, Dexcam was insolvent and the Commissioner had notice of that fact. 15 The Commissioner submitted to the Administrator two further proofs of debt on 3 July 1997 and 9 October 1997 which sought to have the Commissioner's entitlements as a Participating Creditor determined under the Deed after taking into account the tax set-offs. The Administrator did not admit either of those proofs of debt nor did he consent to the withdrawal, reduction or variation of the first proof. Termination of Deed 16 Dexcam defaulted in payment of the instalment due under the Deed on 31 December 1997. After the giving of the required notice, the Deed was terminated on 13 January 1998. On 27 January 1998 the voluntary winding-up of Dexcam commenced. The second applicant, Mr David Neil Lockwood, and the third applicant, Mr Kenneth Stewart Sellers, were appointed liquidators. The relation back day for the purposes of Pt 5.7B of the Law is 27 January 1998. Dexcam's case 17 Dexcam argued that there was, within the meaning of s 221YHG(2), no "tax payable" against which the Commissioner could set-off the tax credits. 18 Tax becomes due under the ITA Act when it is assessed and a notice of assessment issued; the tax is payable on the date specified in the notice: s 204. When the tax becomes due and payable it is a debt due to the Commonwealth and payable to the Commissioner: s 208. 19 It was pointed out that any priority of the Commissioner for the payment of tax debts and the winding-up of companies or in the bankruptcy of individuals was abolished by the Insolvency (Tax Priorities) Legislation Amendment Act 1993 (Cth) (the Priorities Act). About the same time, amendments to the ITA Act introduced s 222ARA which provided: "To avoid doubt, this Part [ie Pt VI] is not intended to limit or exclude the operation of Chapter 5 of the Corporations Law of a State or Territory, insofar as that Chapter can operate concurrently with this Part." Chapter5 of the Law includes Part 5.3A entitled – "Administration of a company's affairs with a view to executing a deed of company arrangement", that being the Part under which the Deed was entered into. 20 It was said that, by virtue of s 444D of the Law and cl 13.1 of the Deed, Dexcam was released from any contingent liability in existence before 11 June 1998, including contingent liabilities to pay tax on income derived by it before that date. Although the release may have lapsed (in part at least) on the termination of the Deed by virtue of cl 15, while the Deed was on foot it was effective to preclude recovery. A debt may have existed, or even be owing or due, but it was not "payable": see Clyne v Deputy Commissioner of Taxation (1981) 150 CLR 1 at 9, 16-17, and Clyne v Deputy Commissioner of Taxation (No 3) (1984) 154 CLR 589 at 594. The Commissioner's case 21 The Commissioner argued that by reason of s 221YHG(2) he was under a statutory duty to apply the amount of the credits due to Dexcam in payment of its tax liabilities. In relation to interest owed to Dexcam, he was entitled under s 13(1) of the Taxation (Interest on Overpayments and Early Payments) Act 1983 (Cth) to apply it in the same way. The application of the credits was effected lawfully, in performance of that duty and power respectively. Nothing in the Law or the Deed affected that conclusion. 22 Although the Deed was binding on the Commissioner, the release contained in cl 13.2 was conditional upon Dexcam paying in full the amounts due under the Deed. There was no discharge of the debt until the promise of payment was performed: McDermott v Black (1940) 63 CLR 161 at 184-5. At the time of the set-offs in 1997 Dexcam had not satisfied that pre-condition; indeed it was never satisfied. Thus at the date of set-off Dexcam's tax debt was "tax payable" within the meaning of s 221YHG(2). 23 The present case, it was said, is governed by the decision of the Full Court of this Court in Taylor v Commissioner of Taxation (1987) 16 FCR 212. 24 Further, it was said that the covenant not to sue in cl 13.3.2 of the Deed should be construed as not applying to the duty imposed on the Commissioner by s 221YHG(2). The Deed was a contract, albeit one given special statutory effect, and the Commissioner had no power to bind himself not to perform a statutory duty in the future: Ansett Transport Industries (Operations) Pty Ltd v Commonwealth (1977) 139 CLR 54 at 74-5. Thus the language of the contract should be construed so as to preserve its validity. "Tax payable" 25 In the first Clyne case, Gibbs CJ drew a distinction between "due" and "payable". His Honour said (at 9): "At the latest when tax is assessed it becomes a debt due to the Crown although it is not payable until the later date specified in the notice of assessment." To the same effect are statements by Lockhart J (with whom Lee J agreed) in Commissioner of Taxation v Kavich (1996) 68 FCR 519 at 523-6 and also by Tamberlin J in that case at 535-7. 26 The term "payable" thus means an immediate, enforceable liability to pay. As at the date of the purported set-offs, the tax debts of Dexcam did not answer that description. They were not then enforceable. Clause 13.3 of the Deed would have been a conclusive answer to any claim. While the Deed was on foot there was in operation a conditional discharge of the debts of the Commissioner (and those of other Participating Creditors) of the kind spoken of by Fullagar J in Scott v English [1947] VLR 445 at 453 in a passage applied in Osborn v McDermott [1998] 3 VR 1 at 9, that is to say one which "effects only a conditional discharge, merely suspending the original cause of action, so that, if it is not performed by the defendant according to its tenor, the plaintiff may still maintain that original cause of action." 27 Moreover, the provisions of cl 13.1 made the position of the Commissioner closely analogous to that which would obtain in a bankruptcy, as to which Gibbs CJ, Murphy, Brennan and Dawson JJ said in Clyne (No 3) (at 594): "But since the debtor was already bankrupt when the petition came to be heard, the remedies against the person and property formerly available to the Deputy Commissioner had been taken away and there was substituted a right to prove against the estate which had become vested in Mr Andrew as trustee." Taylor's Case 28 In Taylor the applicant became a bankrupt on 30 June 1980. On 28 June 1985 the Commissioner issued assessments for the 1982 and 1983 tax years showing credits totalling $2224.39 arising from instalments deducted by the applicant's employer under Div 2 of Pt VI. However, by notice dated the same day, the Commissioner set-off that credit against income tax owed by the applicant in respect of periods prior to the date of bankruptcy. The Full Court held the Commissioner was not bound to pay the applicant the amount of the credits. 29 Woodward and Northrop JJ (at 219) characterised the main issue before the Court as whether s 221H of the ITA Act (the equivalent in Div 2 of s 221YHG) "should be regarded as a complete code paramount to the provisions of the Bankruptcy Act". Their Honours (ibid) reached an affirmative conclusion on this issue, and expressed agreement on this issue with the reasons of Jenkinson J at 222-4. 30 Taylor was considered in Re Kolb; Ex parte England v Commissioner of Taxation (1994) 51 FCR 31. This was a case involving Div 3A. Section 221YHG was apparently argued, but Burchett J decided the case on the basis that s 86 of the Bankruptcy Act 1966 (Cth) (the Bankruptcy Act) gave the Commissioner a right of set-off. His Honour expressed the view (at 37) that Jenkinson J in Taylor "clearly indicated that the figure produced by the operation of Div 2 was not itself immune from the operation of the Bankruptcy Act. Accordingly, s 86 is able to require such a figure to be set off against other obligations." 31 However, Dexcam argues, and I agree, that a fundamental change has been effected by the Priorities Act, which of course came into force after the events with which Taylor and Kolb were concerned. The Explanatory Memorandum accompanying the Bill noted, in the context of the consequential amendments: "Broadly, they seek to put the Commissioner in the same position as other creditors, so that the Commissioner has clear access to all the remedies enjoyed by other creditors. The abolition of the Commissioner's priority is essential for the smooth and efficient operation of the proposed voluntary scheme of administration under the new insolvency provisions of the Corporations Law introduced by the Corporate Law Reform Act 1992. These provisions are due to commence in June this year." 32 Section 222ARA gave effect to that policy. There is no reason why provisions of Chapter 5 of the Law could not operate concurrently with Pt VI of the ITA Act, once it was accepted that the Commissioner was to be treated the same as any other creditor. 33 In particular, issues of set-off in company insolvencies were dealt with by s 553C of the Law which provided: (1) Subject to subsection (2), where there have been mutual credits, mutual debts or other mutual dealings between an insolvent company that is being wound up and a person who wants to have a debt or claim admitted against the company: (a) an account is to be taken of what is due from the one party to the other in respect of those mutual dealings; and (b) the sum due from the one party is to be set off against any sum due from the other party; and (c) only the balance of the account is admissible to proof against the company, or is payable to the company, as the case may be. (2) A person is not entitled under this section to claim the benefit of a set-off if, at the time of giving credit to the company, or at the time of receiving credit from the company, the person had notice of the fact that the company was insolvent." 34 Section 553C was substantially to the same effect as s 86 of the Bankruptcy Act, the only difference of any consequence being that in s 86(2) the notice referred to is notice of an available act of bankruptcy committed by the person in question. The operation of s 86 was the subject of extensive consideration in a joint judgment of all members of the High Court in Gye v McIntyre (1991) 171 CLR 609. The following propositions emerge: · The object of set-off in bankruptcy is to do substantial justice between the parties. It would be unjust if the trustee could insist upon having 100 cents in the dollar upon the whole of the debt owed to the bankrupt but at the same time insist that the bankrupt's creditor must be satisfied with a dividend of a few cents in the dollar on the whole of the debt owed by the bankrupt to him: at 618-9. · But creditors must be protected from being disadvantaged by allowance of set-off where debts, credits or other dealings have not been genuinely mutual as a matter of substance: at 619. · Protection against manipulation of set-off by a debtor to avoid payment to the trustee (for example by buying up debts of the bankrupt) is provided by s 86(2) where the relevant steps have been taken before bankruptcy but after notice of an available act of bankruptcy: at 619. · The section is not confined to persons who lodge a formal proof of debt but extends to a person who seeks to answer a claim brought against him by a trustee: at 621. · The section operates at the time the bankruptcy takes effect and is self-executing, in the sense that its operation is automatic and not dependent upon the option of either party: at 622. · The statutory rule of set-off will prevail over a contrary agreement of the parties: at 622. · The term "other mutual dealings" ensures that the scope of the provision is not frustrated by a narrow or technical approach to what constitutes "credits" or "debts": at 623. · "Mutual" means reciprocity rather than correspondence. It does not mean "identical" or "the same": at 623. · The credits, the debts or the claims need not be vested, liquidated or enforceable at the decisive date; provided they exist as contingent at that date and are of a kind which will ultimately mature into pecuniary demands susceptible of set-off, the section may be satisfied: at 624. · "Dealings" is used in a non-technical sense; it embraces far more than a legally binding contract: at 625. · There can be a set-off within the section even though the claim arises after sequestration, as long as it is in respect of a credit, debt or other dealings which existed or had occurred at that date and such a claim need not be contractual: at 629-634. 35 In Kolb Burchett J (at 36) took the last-mentioned proposition as justifying rejection of an argument "that s 86 does not apply to statutory obligations of the nature of those created by the provisions of the (ITA) Act in question here", that is to say Div 3A of Pt VI. 36 In 1993 there was in existence a detailed framework of principle, recently restated by the highest authority, for working out set-off disputes in an insolvency setting so as to achieve fairness between insolvent debtors, those claiming set-offs, and other creditors. This was part of the law governing priorities between creditors. I cannot see any reason in logic or policy why Parliament should have intended to carve out from a general law removing the Commissioner's priority an enclave as to set-offs. Senior Counsel for the Commissioner in argument was unable to suggest any. 37 I conclude therefore that as a consequence of the changes brought about by the Priorities Act, and in particular s 222ARA, it can no longer be said that the provisions of Div 3A of Pt VI constitute a code standing outside the comprehensive general statutory schemes relating to the insolvency of individuals and companies, including those relating to set-offs. In the present case s 553C was at one stage relied upon by the Commissioner but was, for reasons which were not discussed in argument, abandoned prior to trial. Promise not to perform statutory duty 38 The short answer to this argument is that the Commissioner was not a contracting party to the Deed. He was bound by it by virtue of statute (see Corporations Act s 5A) and not by contractual promise. Orders 39 There will be the following orders: · Declare that the application by the respondent of the prescribed payment system credits and interest credits in the manner described at par 18 of the statement of agreed facts dated 5 June 2002 marked as exhibit "A" is invalid. · Order that the respondent pay to the applicants the sum of $400,850.09 together with interest on that sum calculated at the rate of 10.5 per cent from 21 January 1999 to the date of judgment. · Order that the respondent pay the applicants' costs of and incidental to this proceeding, including reserved costs. I certify that the preceding thirty nine (39) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Court. Associate: Dated: 27 June 2002 Counsel for the Appellant: Mr B J Shaw QC with Mr S Glacken Solicitor for the Appellant: Middletons Counsel for the Respondent: Mr C M Maxwell QC with Mr S P Gardiner Solicitor for the Respondent: Australian Government Solicitor Date of Hearing: 5 June 2002 Date of Judgment: 27 June 2002