In our e-Update last month I published a short article entitled “Tax Office Claim Beats Registered Mortgages” and posited the question “is this an absurd outcome?” My article has generated quite a bit of interest.
For those who need the relevant citation the case I was referring to was Commissioner of Taxation v Park (2012) FCAFC 122.
In my article I reported:
What happened was that the Tax Office issued a garnishee notice in relation to a taxpayer debtor who was selling real property. The garnishee notice was addressed to the buyer and told him to pay any monies payable to the taxpayer to the Tax Office. Given that the mortgages registered on the title secured debts greater than the sale price, to most of us it would seem clear that on completion nothing would become payable to the vendor. That is all funds would go to satisfy the mortgagees.
But the Court reasoned that, in the seconds between the release of mortgages being handed over and before the settlement cheques were exchanged, there was an instant when the vendor became entitled to the sale proceeds. The dissenting Judge said that he thought that in that instant the mortgagees became entitled to an equitable charge over the funds, so that in fact the taxpayer never had any entitlement.
I understand that the ATO’s position is that the argument is not quite about the seconds between release of the mortgage and the completion of the contract. The strong point which the ATO would make is that the purchaser only ever has a contractual obligation to pay money to the vendor (i.e. the taxpayer). In other words the purchaser is never under any obligation to pay money to the mortgagees. In these circumstances the garnishee does its work on the obligation taken on by the purchaser. Likewise, the mortgage is over the asset which is the subject of the sale, rather than the contractual obligation incurred by the purchaser, or the money in the hands of the purchaser.
As it is stated above the ATO’s argument is clearly correct, and the senior recovery officers at the ATO and their legal team are to be congratulated for their ingenuity in mounting the argument and for their zeal in protecting the public purse.
And yet, even allowing that the ATO’s argument to be correct as far as it goes many lawyers, most insolvency practitioners and I guess almost everyman in the street would find it hard in to identify a time when the purchaser had a clear obligation to pay the vendor without the mortgagors being satisfied. That is where the “seconds between the release of the mortgages being handed over and before the settlement cheques were exchanged” comes in. “Scintilla temporis”1 is the name given by lawyers to that all important moment when money was actually and practically due by the purchaser and the vendor.
Those who are far better informed than I about such things say that the scintilla temporis principle1, as it applies to real property dealings such as happened in this case, was overruled by the House of Lords over twenty years ago and that it has not been followed in Australia for all of that time.
I am very content to leave it to lawyers and the Courts to thrash just what is, or should be, the law relating to these issues.
However, if the decision in Park is correct law I would have to say that the decision is one that will undermine the reliance that men and women of business and finance place on mortgages. The actions of the ATO and the Courts decision in the matter, it seems to me, have robbed the mortgagees of what they would have been forgiven for believing was their entitlement. And that is not good!
1. The information relating to scintilla temporis and the rejection of that principle by the courts is drawn entirely from a recent original and authoritative case note prepared by Dr Garry Hamilton of Minter Ellison.