Liquidators: 5 Defeat ATO: 260 - High Court finds against the ATO over validity of a garnishee notice

On 26 August 2009 five judges of the High Court delivered a unanimous verdict against the validity of an ATO garnishee notice issued under s260-5 of the Taxation Administration Act 1953 (Cth) (\"the TAA\").  The High Court held that upon a company entering liquidation, the power of the Commissioner to issue such a garnishee notice in respect of a debt owed to the company ceases.  The decision is a welcome relief to liquidators and creditors who no longer face the uncertain prospect of a liquidation dividend disappearing should the ATO issue a notice after the liquidator's appointment.  The decision also clarifies the interaction between the TAA and the Corporations Act in this area.

The facts ? Bruton Holdings Pty Ltd v Commissioner of Taxation & Anor [ 2009] HCA 32

Bruton was a trustee company operating for charitable purposes.  The Commissioner denied Bruton's claims for endorsement as a tax exempt entity.  The solicitors acting for Bruton were provided with funds totalling $470,000 to be held in trust for the costs of conducting an appeal from the Commissioner's decision.  On 28 February 2007 Bruton appointed voluntary administrators.  On 26 March 2007 the ATO issued an assessment to Bruton for $7.7 million in respect of the 2003-2004 tax year.  On 30 April 2007 Bruton was placed into liquidation by creditors at the s439A meeting.  On 9 May 2007 the ATO issued a notice under s260-5 of the TAA to the solicitors in respect of the funds in their trust account.

The issue

Ordinarily a s260-5 notice imposes a statutory charge on the relevant debt in favour of the Commissioner.  The notice operates to compel a third party to pay to the ATO money which the third party holds for an entity with outstanding tax obligations.  Failure to pay the money to the ATO in accordance with the notice is a criminal offence.  Not surprisingly, the solicitors in Bruton wished to avoid prosecution and insisted that the liquidators obtain restraining orders preventing them from dealing with the funds.  Otherwise they would have had no alternative but to pay the money to the ATO.

The trial judge held the s260-5 notice was void against the liquidators as an \"attachment\" pursuant to s500(1) of the Corporations Act - s500(1) renders void any enforcement process undertaken by creditors after a company has been wound up by creditors.

On appeal the Full Federal Court considered whether a s260-5 notice constituted an \"attachment\" so as to be void under s500(1) of the Corporations Act.  The Full Court considered the earlier Full Federal Court decision in Commissioner of Taxation v Donnelly [1989] FCA 399.  In Donnelly the Full Court had held that the word \"attachment\" in the context of the Bankruptcy Act was limited to the narrower sense of methods of enforcement involving court processes (for example by a writ of execution or garnishee order).  In Donnelly, therefore, the Court held that because the ATO notice was not a court process, it was not void as an attachment under s118(1) of the Bankruptcy Act. 

Following this reasoning, the Full Federal Court in Bruton (at [69]) applied the same approach to the Corporations Act, finding that s569 (broadly similar to s118 of the Bankruptcy Act) contains an implied reference to court processes in its use of the word \"attachments\".  The Court then held that if it had that meaning in s569, it should be given the same meaning in s500.  Therefore a s260-5 notice would not be void because it did not involve a court process.

The High Court decision

The High Court rejected the Full Federal Court's logic.  The Court focused on the operation of the TAA itself, noting that s260-5 was part of Div 260 of the TAA dealing with \"special rules about collection and recovery\".  It is in the same division of schedule 1 to the TAA as s260-45, which deals \"specifically with collection and recovery of tax liabilities of companies from liquidators\" (at [16]).  The latter section provides for the lodgment with the liquidator of details of the ATO debt, and distribution of the company's assets to the ATO alongside ordinary unsecured creditors.  According to the High Court, s260-5 represents:

\"a specific regime which in cases where it applies, excludes more general provisions which otherwise might be engaged\" (at [17]).

The High Court therefore found that the Commissioner's general powers under s260-5 are not available once a liquidator has been appointed by creditors or the courts (at [19]).

The High Court found support for its conclusion from:

• The \"emphatic language\" of s500(1) (\"Any attachment ... put in force against the property of the company ... is void\")
• The abolition of the historical priority for tax debts in 1980
• The disruption to the regime provided for in s260-45 that would eventuate if the ATO could intervene by threatening to issue s260-5 notices to the debtors of the company, until collected.

The High Court went on to add that in relying upon Donnelly and s118 of the Bankruptcy Act the Full Federal Court had not given sufficient weight to important differences between s118 of the Bankruptcy Act and s500 of the Corporations Act, including their history and wording.  The use of \"attachment\" in s569 of the Corporations Act is not indicative of the meaning of \"any attachment\" s500(1) (at [37]) and there was no reason to limit the ordinary meaning of the words \"any attachment\" in s500(1).

Accordingly the decision of the trial judge was reinstated such that the s260-5 notice issued by the Commissioner was held to be void against the liquidators.

Conclusions and warning

The Bruton decision will ease the concerns of liquidators and secured creditors that, at least from the time of appointment of a liquidator, the ATO will be precluded from issuing a s260-5 notice diverting assets that would otherwise flow to the liquidator or secured creditor.

However given that the s260-5 notices in Bruton were issued despite the stipulations of the ATO's receivables policy against taking such action, in the absence of binding authority or legislation the operation of s260-5 notices in the lead up to other forms of insolvency administration (and beyond) remains less certain.

The ATO's receivables policy, at Chapter 12, sets out a number of self-imposed limitations on the use by the ATO of garnishee notices.  It states that the ATO will not ordinarily use a s260.5 notice following the appointment of a controlling trustee under the Bankruptcy Act, or administrators under the Corporations Act (at 12.14), and in certain circumstances where the interests of secured creditors may be affected (at 12.15).

There is no discussion in any of the Bruton decisions as to how the s260-5 notices in Bruton came to be issued.  The ATO's receivables policy in place at the time was even clearer:

\"for insolvency law purposes, a 'garnishee' notice will only be effective if it is served before the date of commencement of bankruptcy or winding up\" (at 12.3.5 of the 2006 version of Chapter 12 - emphasis in original)

and

\"a 'garnishee' notice should not be served ... when the company is wound up.\"  (at 12.3.9(vii) of the 2006 version)

The receivables policy was amended prior to the decision of the Full Federal Court in Bruton that upheld the s260-5 notice.  Prior to the outcome of the High Court appeal the ATO indicated to the Insolvency Practitioners Association of Australia that it did not intend to use s260-5 after winding up. The ATO has since informed the IPAA that it intends to amend the receivables policy further to clearly state its approach. 

Bruton represents welcome clarification in relation to liquidators.  However in Bruton the receivables policy does not appear to have been followed, and the ATO retains considerable discretion to issue s260-5 notices in the lead up to an insolvency appointment where \"the need to protect revenue justifies the expected impact that the garnishee will have on the debtor's unrelated, arms-length creditors ...\" (at 12.19 of the 2008 version of Chapter 12). How the ATO applies the policy outside a liquidation is yet to be seen.

This publication is intended as a source of information only. No reader should act on any matter without first obtaining professional advice.

Stephen Mullette