The Federal Court has held that a garnishee notice under s 260-5 of the TAA served on a debtor (“G8”) of one of the applicants (“Local Kids”) was subject to an earlier fixed charge over the debt given to the other applicant, a related party (“Market Nominees”), and that therefore the fixed charge took priority over the s 260-5 notice.
As a result, the Commissioner was required to pay back $1.9m to the liquidators of Market Nominees that had been previously paid to the Commissioner by the G8 pursuant to the notice.
Local Kids Pty Ltd operated a child-care businesses, which it sold to G8 under an earn-out arrangement, whereby the proceeds were to be paid some 7 months later by reference to the earning of the businesses. Market Nominees entered into a charge deed over the debt due to Local Kids (as security for acting on its behalf in litigation). The Commissioner later determined that Local Kids had a tax liability of $3.7m and issued a s 260-5 notice to G8 in respect of the moneys it owed Local Kids (which G8 paid). Several months earlier, Local Kids and Market Nominees had been put into liquidation. The liquidators claimed that Market Nominees had priority over the money paid to the Commissioner by G8 by virtue of its earlier charge over the debt.
In finding for the liquidators, the Court held that the deed created a fixed charge in favour of Market Nominees over the debt due to Local Kids that took priority over the Commissioner’s later s 260-5 notice. In doing so, the Court found that the deed created a prior fixed and specific charge over all of Local Kids’ property, which covered all of its rights under the contract of sale, including the right to receive the proceeds of the sale – even though the debt was unascertainable at the time.
(Market Nominees Pty Ltd v FCT [2012] FCA 262, Federal Court, Tracey J, 27 March 2012.)
[LTN 61, 29/3]