FEDERAL COURT OF AUSTRALIA

Deputy Commissioner of Taxation v Cumins [No 4] [2008] FCA 558  

BANKRUPTCY - application under s 31(1)(c) Bankruptcy Act 1966 (Cth) for extension of time to give notice pursuant to s 41(5) - sum specified in Bankruptcy Notice alleged to exceed amount in fact due - consideration of delay - consideration of futility where complaints without merit - refusal to extend time.

Bankruptcy Act 1966 (Cth), ss 33(1)(b), (c), 41(5)

Taxation Administration Act 1953 (Cth), Part IIA, s 8AAGA 

Cumins v Deputy Commissioner of Taxation [2006] FCA 1847

Cumins v Deputy Commissioner of Taxation [2007] FCAFC 207

Emerson v Wreckair Pty Ltd (1992) 33 FCR 581

In Re Bedford; ex parte HC Sleigh (Qld) Pty Ltd (1967) 9 FLR 497

Re Manion; ex parte Custom Credit Corporation Ltd (in Liq) [1996] FCA 343

Seovic Civil Engineering Pty Ltd v Groeneveld (1999) 87 FCR 120

Walsh v Deputy Commissioner of Taxation (1984) 156 CLR 337    

DEPUTY COMMISSIONER OF TAXATION v BRIAN CUMINS

WAD 216 OF 2007

GILMOUR J

24 APRIL 2008

PERTH

THE COURT ORDERS THAT:

1.                  The motion be dismissed.

2.                  The respondent pay the applicant’s costs.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

REASONS FOR JUDGMENT

1                                             The applicant, the Deputy Commissioner of Taxation, has petitioned for a sequestration order in respect to the estate of the respondent, Mr Brian Cumins.  On the third day of the hearing of the petition the respondent filed a motion which came on for hearing on that very day.  The respondent seeks orders that it be granted leave pursuant to s 33(1)(b), alternatively s 33(1)(c) of the Bankruptcy Act 1966 (Cth) (“the Act”) for the Schedule annexed to the motion to stand as notice by the respondent pursuant to s 41(5) of the Act.  During the course of the hearing of the motion, the Schedule was amended.  It also became clear that the entirety of the Schedule was not relied upon by the respondent.  Since the hearing the respondent, by his solicitors, advised the Court that he no longer relies upon certain matters which were the subject of the amendment.  I have set out below only the relevant parts of the Schedule which are relied upon.

SCHEDULE “A”

In Bankruptcy Notice No 122 of 2006 (Bankruptcy Notice)

(a)        the credits allowed in Item 5 of Column 2 of the Schedule to the Bankruptcy Notice (Schedule) are understated so that the sum specified in the Bankruptcy Notice as the amount due exceeded the amount in fact due to the Applicant/Creditor, in that the said sum:

            (i)         failed to include the credits for the remission of the general interest charge as it relates to:

                        A.        the sum of $31,007.72 as set out in paragraphs 4 and 5 of the affidavit of Deborah Jayne Thiele affirmed on 9 April 2008;

                        . . .

            (ii)        failed to include the rounding credit of $0.04 allowed by the Applicant to the Respondent on 19 July 2005 in the Applicant’s account, which credit related to the general interest charge included in the judgment sum of $38,084,522.24;

            . . .

(c)        further, or in the alternative to (a), the Bankruptcy Notice is invalid in that payments received by the Applicant between 1 July 2004 and 30 June 2005 on behalf of the Respondent were not credited to the Applicant’s account at any time before the issue of the Bankruptcy Notice.

2                                             I do not consider that s 33(1)(b) of the Act has any application.  Section 33(1)(b) provides that the Court may at any time allow the amendment of any written process, proceeding or notice under the Act.  It is by no means clear what amendment is sought under this provision.  Schedule A is an extract of information which was introduced, as to part, from the content of the respondent’s Re-amended Notice, dated 26 March 2008, stating grounds of opposition to the amended creditor’s petition and, as to part, from the content of paragraphs 3 and 4 of the affidavit of Ms Thiele affirmed 9 April 2008.  Ms Thiele is a case manager in strategic recovery at the Australian Taxation Office. 

3                                             The way that the matter was argued before me made it plain that what was in fact being sought was an extension of time, under s 33(1)(c), for the giving of a notice for the purposes of s 41(5) of the Act.  I have considered the motion in that light.

Background

4                                             On 15 June 2005 the applicant obtained summary judgment in the Supreme Court of Western Australia against the respondent for the sum of $38,084,522.24 including interest.  The respondent did not consent to the judgment but did not oppose it.  It was in respect of this judgment that a bankruptcy notice was issued on 17 March 2006.  It required the respondent, within 21 days after service, to pay the amount of $38,051,066.24.  The bankruptcy notice was in the form prescribed: Bankruptcy Regulations 1996 (Cth), reg 4.02, Form 1.  The Schedule set out the amount claimed by the applicant to be due as follows:

SCHEDULE

5                                             It transpired that certain credits and payments included in the calculation of the judgment debt entered on 15 June 2005 had not been credited to the respondent’s tax account on the correct dates.  The timing differences involved had an effect on the calculation of general interest charges.  Ms Deborah Thiele, an officer employed by the respondent in her affidavit affirmed on 9 April 2008 said that she had, in effect, recalculated the debt owing by the respondent to the applicant, as at 15 June 2005, employing the correct dates.  Accordingly she assumed, in her recalculation, that:

4.1       credits of $31,258.49 and $147,268.35 had been credited to the respondent’s income tax account on 27 December 2000 instead of 26 March 2001 and 6 December 2001 respectively;

4.2       payment of $50,123.63 had been credited to the respondent’s income tax account on 24 January 2002 instead of 29 January 2002;

4.3       the payment of $1,050.00 for the month of July 2004 had been credited to the respondent’s income tax account on 6 August 2004 instead of 9 August 2004; and

4.4       rounding credits totalling $0.25 had been applied as at 15 June 2005 when none had been taken into account before.

If those credits and payments had been applied at the correct dates and the rounding credits had been taken into account then the debt owing by the respondent to the applicant as at 15 June 2005 would have been reduced by the sum of $31,007.72.  This total figure represents the overstatement of general interest charges included in the judgment debt.  It is the figure referred to in (a)(i)A to Schedule “A” to the motion 

6                                             Between the date of judgment and the date of the issue of the Bankruptcy Notice on 17 March 2006 it is common ground that payments totalling $33,456.00 were received from the respondent by the applicant.  This is the amount set out under Item 5 of the Schedule to the Bankruptcy Notice. 

7                                             According to a document maintained by the applicant in relation to the respondent entitled “Income Tax – Account History” “rounding credits” were credited to the taxation account of the respondent from time to time.  They included a rounding credit of 4 cents applied to the respondent’s taxation account on 19 July 2005.

8                                             The respondent submits that this rounding credit ought to have been disclosed as a credit allowed since the date of the judgment in Item 5 in the Schedule to the Bankruptcy Notice. 

9                                             Part IIA of the Taxation Administration Act 1953 (Cth) concerns the application of general interest charges by the Commissioner of Taxation to the account of a tax payer.  Usually a person is liable to pay a general interest charge if an amount that a person must pay to the Commissioner is not paid on time although there are other circumstances in which a person can be liable for such a charge. 

10                                          Section 8AAGA of the Taxation Administration Act provides that if the amount of the (general interest) charge payable for any period is not a multiple of 5 cents, the Commissioner may round it down to the nearest multiple of 5 cents.  When a rounding credit was applied to the respondent’s taxation account it was always applied on the same date as a general interest charge was debited.  However the rounding credit did not always have the effect contemplated by s 8AAGA.  Sometimes the application of the rounding credit did not have the effect of rounding down the general interest charge to the nearest multiple of 5 cents.  Indeed, on occasions, the rounding credit was applied to a general interest charge which was already a multiple of 5 cents so as to render it an amount which was not such a multiple.  On other occasions the rounding credit had the effect contemplated by s 8AAGA.  On yet other occasions no rounding credit was applied to a general interest charge.

Was Notice given under s 41(5) of the Act?

11                                          The primary submission of the respondent is that notice, for the purposes of s 41(5), has already been given.  The applicant disputes this.  This notice, it contends, was given by the content of part of an affidavit by the respondent sworn on 14 August 2006 in support of a prior application by him to set aside the bankruptcy notice.  The relevant part of the affidavit is set out below:

33.       On 15 June 2005, the Supreme Court of Western Australia awarded judgment by default in favour of the Respondent pursuant to Order 14 Rule 3 of the Supreme Court Rules (the Judgment).

34.       The Judgment was obtained by default and I verily believe that evidence was not produced to show that I was defrauded by the Promoters. My understanding is that the Respondent had previously argued that in order to receive a tax deduction on my investments in the Infomercial Projects, the Infomercial Projects must be a business.  However the Supreme Court of Victoria has confirmed in ASIC v IMG that "the interests involved in the schemes were securities" and the promotion and marketing of the schemes resulted in the Infomercial Projects being a securities business dealing in securities.

35.       The Judgment was given by default therefore I verily believe that the above facts were never considered before the court at trial or were possible of being raised in the court proceedings which resulted in the judgment upon which the Respondent relies upon to issue the Bankruptcy Notice.

36.       The Bankruptcy Notice is for an amount of $38,051,066.24 after a credit for an amount of $33,456. I verily believe that the credited amount may be the result of an amendment to a tax assessment. In addition during the period of May 2005 to 14 March 2006 I have paid to the Respondent an amount of $10,500 which I verily believe may not have been credited against the amount of the Judgment debt.

12                                          The Full Court in Seovic Civil Engineering Pty Ltd v Groeneveld (1999) 87 FCR 120 considered the adequacy of a notice given by the recipient of a bankruptcy notice for the purposes of s 41(5) of the Act.  In that case, the debtor by his solicitors had written a letter to the creditor’s solicitors asserting that the amount claimed in the bankruptcy notice had been overstated by $9,000.  However, that ground of alleged mis-statement was not made out.  The Bankruptcy Notice had contained no such error.  At the trial, and for the first time, the debtor contended that the Bankruptcy Notice was bad because it misstated, by a small amount, the amount of interest stated to be due.  This small overstatement had in fact occurred.  The creditor contended that the letter which identified the alleged $9,000 mis-statement was sufficient notice to embrace the error in the calculation of interest. 

13                                          However, the Full Court concluded that the letter did not constitute a notice, concerning this overstatement, for the purposes of s 41(5).  It said that the notice a debtor is required to give in order to challenge the validity of a bankruptcy notice by reason of an over-statement of the amount due must do two things:

            •     first, it must give notice to the creditor that the debtor disputes the validity of the notice;

            •     secondly, it must give notice to the creditor that the debtor does so on the ground of the “mis-statement”.

14                                          In this respect the Full Court had held that the expression “the mis-statement” in s 41(5) refers to the amount claimed in the Bankruptcy Notice as being incorrect “by reason of it exceeding the amount in fact due by the debtor to the creditor” [32].  The Court observed at [36] that:

The expression “the misstatement” strongly suggests that the debtor must do more than merely assert that there is a misstatement in the bankruptcy notice.  The subsection requires the debtor to provide sufficient information in the notice to enable a creditor to identify what is said to be the alleged misstatement.  Only then does the debtor’s notice displace the general rule established by s 41(5), that the bankruptcy notice is not invalidated only by reason that the sum specified therein as the amount due to the creditor exceeds the amount in fact due.  (emphasis in original)

The Court continued:

The point of the notice is to draw to the creditor’s attention the misstatement, thereby giving the creditor the opportunity to consider, for example, whether the bankruptcy notice should be withdrawn and a fresh notice, correcting the misstatement, issued. If the creditor is given no hint in the notice as to the nature of the misstatement, there is a considerable risk that the debtor will be able to take unmeritorious advantage of minor errors (such as the small mistake in the present case) and that unnecessary and wasteful litigation will eventuate. It is no answer to say that the creditor can ask for particulars, since the debtor would not be obliged to give any until after litigation had been instituted. Indeed, a debtor wishing to take advantage of the technicalities of the law of bankruptcy might be well-advised to say as little as possible for as long as possible about the true nature of the alleged misstatement in the bankruptcy notice.

15                                          The requirement for some specificity did not, the Full Court decided, extend to require the identification of the mis-statement with “complete precision” or that the debtor “specify the exact amount of the alleged excess”.  A debtor’s notice should be given a “benevolent construction”.

16                                          The alleged “mis-statement”, in this case, for the purposes of s 41(5), identified in para [36] of the respondent’s affidavit is the amount of $10,500 which the respondent contended may not have been credited against the amount of the judgment debt prior to the issue of the bankruptcy notice.  The application to set aside the bankruptcy notice on that basis was dismissed by the primary judge: Cumins v Deputy Commissioner of Taxation [2006] FCA 1847 and the appeal from that by the present respondent was also dismissed: Cumins v Deputy Commissioner of Taxation [2007] FCAFC 207.  Applying even the most benevolent construction I do not regard this purported notice as providing sufficient information to enable the applicant to identify what are said to be the mis-statements now relied upon under the present motion, namely the amount of $31,007.72 together with the rounding credits.  Indeed, if that part of the respondent’s affidavit were thought to be a notice, it would have been positively misleading.  The affidavit does not state the mis-statements in these terms nor was it intended to: Seovic Civil Engineering v Groeneveld at [36]-[37].

Extension of time for giving notice

17                                          The respondent submits that there is power under s 33(1)(c) of the Act to extend the time for giving a notice under s 41(5) of the Act: Re Wilhelmsen; Ex parte Gould (1986) 11 FCR 107.  In Re Manion; Ex parte Custom Credit Corporation Ltd (in Liq) [1996] FCA 343Beaumont J, doubted whether time could be so extended but did not decide the question having disposed of the motion before him by reference to discretionary considerations. 

18                                          It is not necessary for me to revisit the question of relevant power.  This is because, assuming the power to exist, I have concluded on discretionary grounds that time should not be extended. 

Discretionary Considerations

19                                          The Schedule to the motion derives its terms in part from the further Re-amended Notice stating grounds of opposition to the amended creditor’s petition dated 26 March 2008 and in part from the content of paras [3]-[5] of the affidavit of Ms Thiele.  The Schedule was introduced during the hearing of the notice of motion on 15 April 2008.  Accordingly the delay in seeking an extension of time for the Schedule to stand as notice under s 41(5) of the Act is in excess of two years.

20                                          The bankruptcy petition was deemed to be served on the respondent on 4 August 2006 pursuant to orders made by Registrar Gilich on 14 July 2006 in the matter of PEG 177 of 2006.  A notice of appearance was filed on 20 February 2007.  The delay is sought to be explained by the respondent on the basis that he was not in a position to identify the mis-statements as to the amount actually due under the Bankruptcy Notice until recently, following inspection of documents discovered by the applicant pursuant to orders made by Registrar Jan on 29 January 2008.  Those documents included the Income Tax – Account History document to which I have referred.  It is this document which discloses the relevant rounding credit.  Furthermore, he contends that the amount of $31,007.72 only became evident to him by virtue of the content of paragraphs [3]-[4] of the affidavit of Ms Deborah Thiele affirmed on 9 April 2008. 

21                                          It may be accepted that questions concerning the amount of $31,007.72 did not, nor could reasonably have, come to the notice of the respondent until these matters were exposed in Ms Thiele’s affidavit. 

22                                          The rounding credit however, in my view, could have been discovered by the respondent had he chosen to ask the applicant for a copy of his taxation account disclosing the application of payments and credits from the time of the judgment debt until the date of the issue of the Bankruptcy Notice.  He did not do so.  Ms Thiele said that had the applicant been asked for that information then it would have been provided and indeed would have been provided in the form of a copy of the respondent’s Income Tax – Taxation Account document.   

23                                          However, the issue of rounding credits including the 4 cent rounding credit was raised for the first time at the first day of the hearing of the bankruptcy petition during cross-examination of  Ms Rice by counsel for the respondent on 18 March 2008.  It was not until 26 March 2008 that the non-application of the rounding credit of 4 cents applicable to 19 July 2005 was formally raised.  It was contained in the Amended Notice of Objection to the petition under Schedule “A”. 

24                                          I agree, respectfully, with the view expressed by Beaumont J in Re Manion; ex parte Custom Credit Corporation Ltd (in Liq) [1996] FCA 343 when he said that it must be a “rare case” where an application to extend time for giving a notice under s 41(5) would be granted after the presentation of a petition.  The application to extend time for giving notice in respect to the overstatement of $31,007.72 might be thought to be such a case because the underlying facts have only recently come to the attention of the respondent.  For reasons I will turn to later, it is not such a case.  The observations of the Full Court in Seovic Civil Engineering v Groeneveld at [37] in relation to the underlying policy considerations are apt to this case.  By the respondent’s delay in relation to the rounding credit the applicant has been denied the timely opportunity of withdrawing the Bankruptcy Notice and issuing a fresh one.  I would for that reason alone refuse to extend time for the giving of notice in respect to the rounding credit.  The Full Court also referred to the “considerable risk that the debtor will be able to take unmeritorious advantage of minor errors … and that unnecessary and wasteful litigation will eventuate”.  Such an observation would be apt in relation to the rounding credit if indeed it were an error.  For reasons which I explain below the omission of the rounding credit of 4 cents in the Bankruptcy Notice was not an error.

25                                          It is relevant also, in my view, to the exercise of discretion, to consider the merits of the grounds sought to be raised in challenging the validity of the Bankruptcy Notice.

26                                          In my opinion, the proposed ground that the amounts totalling $31,007.72 should have been included in Item 5 to the Schedule of the Bankruptcy Notice is without merit.  These were not amounts which had been paid, nor were they credits allowed, since the date of the judgment debt.  The figure of $31,007.72 represents the amount by which general interest charges applied to the respondent’s account prior to the date of the judgment would have been reduced, had the payment and credits identified above, been taken into account.  They are, of course, amounts liable to be taken into account should the Court in due course go behind the judgment debt to consider whether or not there is a genuine debt: Emerson v Wreckair Pty Ltd (1992) 33 FCR 581 at 587-588.  That may or may not have practical consequences so far as the petition is concerned.  The respondent is undoubtedly entitled to a credit for that amount.  It does not, however, have the effect of rendering the amount due under the Bankruptcy Notice incorrect.  The date of the issue of Bankruptcy Notice is the time at which the question of an alleged overstatement of the amount due is to be judged: Walsh v Deputy Commissioner of Taxation (1984) 156 CLR 337.  In their effect the amounts totalling $31,007.72 have the consequence that the judgment debt was for an amount exceeding the amount actually due at the time of the judgment.  That however, does not result in there not being an act of bankruptcy upon which the applicant is entitled to proceed in bankruptcy: In Re Bedford; ex parte HC Sleigh (Qld) Pty Ltd (1967) 9 FLR 497; Re Manion; ex parte Custom Credit Corporation Ltd (in Liq) [1996] FCA 343.  It would, in my opinion, be futile to extend time for giving a notice concerning the credits for the remission of the general interest charges as it relates to the sum of $31,007.72.

27                                          The proposed ground concerning the rounding credit is also, in my opinion, without merit.  The respondent submits that the amount of the rounding credit of 4 cents applied to his account between the dates of the judgment debt and the Bankruptcy Notice should also have been included in Item 5 of the Schedule to the Bankruptcy Notice.  Again, I do not accept this submission.  The rounding credit of 4 cents was applied on 19 July 2005 which was the same date as a general interest charge of $384,756.50 was debited to the taxation account of the respondent.  This general interest charge to which the rounding credit, on its face, applied was not included in the Bankruptcy Notice.  Indeed, no general interest charges which had been applied to the respondent’s taxation account between the dates of the judgment and the Bankruptcy Notice were included in the Bankruptcy Notice under Item 3 of the Schedule or otherwise.  Therefore this rounding credit was not, in my view, a relevant credit required to be included in the Bankruptcy Notice.  If the general interest charge of $384,756.50 had been included in the Schedule to the Bankruptcy Notice then the rounding credit should also have been included.  In that sense it was both or neither. 

28                                          However, the respondent submits that this rounding credit related not to the general interest charge of $384,756.50 applied to the account of the respondent on 19 July 2005 but rather was a delayed credit to the general interest charge of $932,757.54 applied to the respondent’s taxation account on 23 March 2005.  This is said to be the case because the effect of applying the 4 cents rounding credit would have been to reduce that figure to $932,757.00 being the nearest multiple of 5 cents, consistently with s 8AAGA of the Taxation Administration Act.  It follows, the respondent submits, that because the general interest charge of $932,757.54 was included in the amount for which judgment was entered that the credit of 4 cents should have been credited, post-judgment, as applying to it, in Item 3 of the Schedule to the Bankruptcy Notice.  

29                                          Section 8AAGA is, in my view, merely facultative and is entirely discretionary in its application.  I have identified already that the approach of the Commissioner to the application of rounding credits was varied and, arguably, inconsistent in that, on occasions, no rounding credit was applied when it might have been and on other occasions was applied where the result was to produce an amount of a general interest charge which was not a multiple of 5 cents.  I do not, therefore, consider that it follows that the debit of 4 cents should be applied to the general interest charge debited to the respondent’s account some three months earlier.  The way that the other rounding credits were applied does not support any practice of applying a credit to round down an earlier general interest charge to a multiple of 5 cents.  I am reinforced in this view by the fact that on every occasion that a rounding credit was applied, it was done on the same date as a general interest charge had been debited to the taxation account.  I accordingly treat the rounding credit of 4 cents as applicable to the general interest charge debited on 19 July 2005 and not the earlier date.  I also note, that despite what may appear to be the inconsistent approach in the application of rounding credits, that in every case, even if the result upon the general interest charge is not that contemplated by s 8AAGA, nonetheless it does produce an account balance in the last column of the Income Tax Account History document which is a multiple of 5 cents.  The 4 cents rounding credit applied on 19 July 2005 demonstrates this proposition.  The account balance on 15 June 2005 was $38,084,522.24.  On 19 July 2005 a general interest charge of $384,756.50 was applied and but for the rounding credit of 4 cents the account balance following the application of that general interest charge would have been $38,469,278.74.  However, by applying the 4 cents rounding credit the 74 cents in that last figure was reduced to 70 cents which is, of course, a multiple of 5 cents. 

30                                          Ms Nola Rice who is an officer in the Australian Public Service employed as a case manager in strategic recovery at the Australian Taxation Office, gave evidence, consistent with this approach, that the rounding credits had been applied to the taxation account balance from time to time.  She did however concede that, despite this, the application of rounding credits may have the effect of rounding down a general interest charge to a multiple of 5 cents.  However she was not responsible for posting or calculating the rounding credits in the respondent’s taxation account and was unable to say whether they were applied when a figure needed rounding down or whether there might be a delay in posting them.  Ms Thiele stated that the rounding credits were “system generated” meaning generated by computer.  She had not calculated the amount owing for inclusion in the Bankruptcy Notice.  Later, she said that she had been told by the person who had done so that the rounding credits between the dates of the judgment and the Bankruptcy Notice had been applied against the general interest charges.  I do not regard her evidence as having any significant probative value in these respects.

31                                          Again, it would be futile to extend time for the giving of notice under s 41(5) of the Act in respect to the rounding credit of 4 cents which, in my opinion, raises an unmeritorious challenge to the validity of the Bankruptcy Notice.  I have already said, had it been otherwise, that because of the inordinate period of delay I would not, in any event, have extended time in this respect. 

32                                         Finally, the respondent then submits that the applicant had not previously taken the point that no notice for the purposes of s 41(5) of the Act had been given.  That is certainly the position in relation to the first challenge by the respondent to the validity of the Bankruptcy Notice which culminated in the dismissal of the respondent’s appeal to the Full Court: Cumins v Deputy Commissioner of Taxation [2007] FCAFC 207.  That avails the respondent nothing in respect to this motion however.  The particular mis-statements asserted by the respondent in Schedule “A” have only recently been brought to the attention of the applicant.  Were it necessary, and in my opinion, it was not, the applicant put the respondent, by his solicitors, on notice by letter dated 28 March 2008 which was two days after the Amended Notice of Objection was filed by the respondent, that it “maintain(ed) that the respondent (was) not entitled to question the validity of the bankruptcy notice on the basis of an incorrect statement of debt … in view of s 41(5) of the Bankruptcy Act 1966.”

33                                          It is for the respondent to demonstrate that grounds exist to support the grant of an extension of time.  He has not discharged this burden.  I would not extend the time for filing a notice.  It follows by virtue of the provisions of s 41(5) of the Act that the Bankruptcy Notice is not liable to be rendered invalid by reason only that the sum specified in the Notice as the amount due to the applicant exceeds the amount in fact due.  In saying this I do not, for the reasons I have given, intend to imply that there has been an overstatement.  The position is to the contrary.   

34                                          The motion should be dismissed.  The respondent should pay the applicant’s costs of the motion.

Associate:

Dated:         24 April 2008