Case: Surfers Paradise Investments Pty Ltd (in liquidation) v Davoren Nominees Pty Ltd [2004] 1 Qd R 567 
Outcome: applied
As the liquidator notes, the relevant law on this point is helpfully summarized in the reasons of Dutney JA (with whom Williams and Jerrard JJA agreed) in Surfers Paradise Investments Pty Ltd (in liquidation) v Davoren Nominees Pty Ltd [2004] 1 Qd R 567 (" Surfers Paradise" ). First, his Honour noted that the regime now codified in s 554E of the Corporations Act dates back to the judgment of Jessel MR in Moor v Anglo-Italian Bank (1879) 10 Ch D 681: Surfers Paradise at [27]. 37 Essentially, a secured creditor wishing to prove a debt may do one of three things: (1) surrender the security and prove for the full amount; (2) realize the security and prove for the difference; or (3) value the security and prove for the difference: Surfers Paradise at [27]. Furthermore (at [27] quoting Moor ): [i]f without doing either of the latter two things, he proves for the full amount, as he cannot prove for the full amount and receive a dividend except on the theory of giving up the security, he shews by that an intention to give up his security; and, if he so proves and receives a dividend or votes, he shews pretty conclusively that he has finally elected to give up his security and take his dividend; in other words, having two funds to resort to, the bankrupt's general estate, so as to get a dividend on the whole amount of his debt, or his security, he elects to take the bankrupt's estate, and in that way gives up his security. It is not forfeiture, it is election; but, the petitioning creditor gets nothing unless he proves. 38 The question, then, is whether a creditor has elected to surrender the security interest. Whether an election has been made is an objective question of fact; that is, regardless of whether a creditor subjectively intended to give up the interest, the court is required to look at objective evidence including whether the creditor has sought to avail himself of rights and remedies of an unsecured creditor such as the dividend and voting rights mentioned in Moor : Surfers Paradise at [28]-[29]. 39 As noted by Dutney JA, the principles applicable to election were stated by Stephen J in Sargent v ASL Developments Ltd [1974] HCA 40 ; (1974) 131 CLR 634 at 646 (quoted in Surfers Paradise at [31]): The words or conduct ordinarily required to constitute an election must be unequivocal in the sense that it is consistent only with the exercise of one of the two sets of rights and inconsistent with the exercise of the other; thus for a lessor to continue to receive rent under a lease will be consistent only with his rights as lessor and inconsistent with the exercise of a right to determine the lease ... However, less unequivocal conduct, only providing some evidence of an election, may suffice if coupled with actual knowledge of the right of election ... There need be no expressed intention to elect, nor will an express disclaimer of such an intention be of any avail in preserving one right if in fact there be an exercise of another inconsistent right ... For an election there need be no actual, subjective intention to elect ... an election is the effect which the law attributes to conduct justifiable only if such an election had been made ... 40 The unequivocal words or conduct referred to by Stephen J may be of two types. As noted by Mahoney JA in Champtaloup v Thomas [1976] 2 NSWLR 264 at 274-275 (quoted in Surfers Paradise at [32]): First, it may be exercised by a conscious act of election. The party having the right may actually determine on his election and, in so far as communication may be necessary ... communicate it to the other party, and an election is thereby made .... Second, the party may do some act which is of such a nature that, irrespective of his actual intention or determination, the law treats him as having exercised his election. This imputation of an election may occur even though the party does not subjectively know that he has the right to elect, or even where he does not intend to elect. 41 Here, as in Surfers Paradise , there is no question that the Commissioner did not subjectively or consciously intend to give up his security interest. Therefore, only the second type of election is at issue. Such an election "requires unequivocal conduct in the face of a necessary choice. In other words, the circumstances faced by the electing party must require an election to be made between inconsistent positions": Surfers Paradise at [33] (footnotes omitted). 42 Submission of a proof of debt for the full amount, if it is silent on the question of surrender, is some evidence of an election to surrender but not conclusive evidence: Surfers Paradise at [34] but cf Re International Tyre Co Pty Ltd (in liquidation) (1979) 4 ACLR 553 at 554. On the other hand, the receipt and acceptance of a dividend pursuant to a scheme of arrangement (or the exercise of creditor voting rights) based on the full amount of the debt is conclusive evidence of surrender: Surfers Paradise at [34]; Moor at 689-690. In short, "[t]he two questions here are whether the [Commissioner] was required to elect to surrender the security or not and if so, whether [his] conduct was unequivocal": Surfers Paradise at [36]. 43 Addressing those questions in Surfers Paradise , Dutney JA found that there was an election to surrender because the creditor had accepted a dividend based on the full amount of the debt (at [37]): A point at which it became necessary in this case to make an election was, in my view, when the dividend cheque was received. At that point in time the respondent was required to make a choice between accepting the cheque or returning it and notifying the liquidator that a mistake had been made in relation to the proof of debt. Having received the cheque, a payment to which the respondent was entitled in the circumstances of this case only by surrendering the security, the respondent had to decide whether to keep it or return it. The assertion of a right to retain the dividend evidenced by banking the cheque and retaining the proceeds was in my view also sufficient to constitute an affirmative answer to the second question. I regard the assertion of such a right by accepting and retaining the dividend in the context of the earlier communications between the liquidator and the respondent as the unequivocal adoption of one of two inconsistent rights. I do not consider that other conduct unknown to the liquidator but inconsistent with an election to surrender the security can affect the position. In the present case, there is no evidence that the Commissioner has received or accepted a dividend based on the full amount of the tax debt (or indeed any dividend at all). In fact, there is no evidence that the liquidator accepted or even relied upon the proof of debt. Surfers Paradise is thus distinguishable. 44 The issue in this case is whether the lodgement of this proof of debt, without more, constitutes unequivocal conduct demonstrating that the Commissioner elected to surrender his security. It is true that the proof of debt was wholly silent as to the security under the Notice. As noted in [11] above, the proof of debt signed by an employee of the Commissioner stated that " to [her] knowledge or belief the creditor has not, nor has any person by the creditor's order, had or received any satisfaction or security for the sum or any part of it." 45 Lodgement of the proof of debt is thus some evidence that the Commissioner elected to surrender his security under the Notice. However, lodgement of the proof is also consistent with an attempt by the Commissioner to protect his rights in the event he were found not to be a secured creditor (ie, "cover his bases"). Moreover, the express words of the proof quoted above state only that the employee lodging the proof was not aware of a security interest; thus the failure to refer to the Notice is also objectively consistent with the possibility that the person lodging the proof was simply ignorant of the security interest, not that such interest was disclaimed, disavowed or surrendered. Finally, as mentioned before, the lodgement of the proof in this case came at a time when, unlike in Surfer's Paradise , there was no "necessary choice" (ie, exercise of voting or dividend rights) put to the Commissioner. As such, the lodgement of the proof of debt under the facts and circumstances of this case was at most equivocal, and therefore not sufficient or conclusive, evidence of surrender, even if I limit myself to consideration only of the contents of the proof and contemporaneous facts and circumstances: see [41] above. 46 That the 9 November 2006 proof of debt, when objectively viewed in context, did not unequivocally evidence a surrender of the security interest under the Notice is further supported by a review of the subsequent correspondence between the liquidator and Commissioner. As the 11 December 2006 letter from the liquidator shows, he was unclear as to the Commissioner's intentions: see [12] above. Any doubt the liquidator might have had was put to rest on 14 December 2006 when the Commissioner wrote to him in the manner described above: see [12]. Given that the liquidator subjectively did not view the proof of debt as unequivocal evidence that the Commissioner had surrendered his claim under the Notice, it is difficult to see how the court could take that view on an objective basis. The liquidator submits that evidence post-dating the lodgement of the proof of debt is irrelevant because the surrender of the security became complete immediately on the lodging of the proof. While I do not accept this submission, I also note that even if I were to accept it, it would not change the outcome of the analysis for the reasons stated in [45] above. 47 For the foregoing reasons, the Notice was effective and the Commissioner did not surrender the security interest under the Notice by lodging a proof of debt with the liquidator on 9 November 2006. Accordingly, I would grant the application. 48 The orders will be: (1) BJT Legal Pty Ltd pay first from the moneys held in account number 633/000 128949658 in the name of BJT Legal Pty Ltd at Bendigo Bank Limited, 407 Sturt Street, Ballarat, the sum of $244,248.45 in compliance with the Notice to Pay Money to the Commissioner of Taxation under s 260- 5 of Sched 1 of the Taxation Administration Act 1953 (Cth) issued by the Deputy Commissioner of Taxation of the Commonwealth of Australia to BJT Legal on 19 October 2006. (2) The costs of and incidental to this application be costs in the liquidation of A Chaid Pty Ltd (in liquidation) (ACN 109 374 727) (3) The Commissioner serve a copy of this order on BJT Legal Pty Ltd. I certify that the preceding forty-eight (48) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gordon. Associate: Dated: 20 December 2007 Counsel for the Applicant: R Brett QC, C Sievers Solicitor for the Applicant: Australian Taxation Office Counsel for the Third Respondent: A P Young Solicitor for the Third Respondent: DLA Phillips Fox Date of Hearing: 18 December 2007 Date of Judgment: 18 December 2007 AustLII: Copyright Policy | Disclaimers | Privacy Policy | Feedback URL: http://www.austlii.edu.au/au/cases/cth/FCA/2007/2073.html