September 2013

Is there another way to skin a cat (or collect a judgment debt)? - A garnishee order

You are a judgment creditor with a charge over the judgment debtor’s assets and have lodged a caveat over a property owned by judgment debtor. You finally receive word from the judgment debtor that the property has been sold and you are asked to provide a withdrawal of caveat. You agree, subject to being paid the judgment debt at settlement in exchange for the withdrawal. Your request is followed by silence, and then a lapsing notice is served upon you. Your caveat will lapse unless you go to the expense of Supreme Court proceedings to extend the life of your caveat.

But is there another means to get paid the judgment debt at settlement?

The effect of a garnishee order

The Commissioner of Taxation (“the Commissioner”) may have paved the way for a judgment creditor to be paid at settlement (whether or not a caveat has been recorded against the title).  The key is a garnishee order.

A garnishee order issued pursuant to rule 39.36 of the Uniform Civil Procedure Rules 2005 (NSW) requires a third party (the garnishee) to pay the judgment creditor debts owed by the garnishee to the judgment debtor.

In the matter of Commissioner of Taxation v Park, the Full Court of the Federal Court held that settlement funds ought to be released to the Commissioner in satisfaction of the Commissioner’s version of a garnishee order (a notice under s260-5 of Schedule 1 of the Taxation Administration Act 1953 (Cth)) served on the purchaser for money owed by the taxpayer vendor (Ms Bassili) to the Commissioner. Jessup and Katzmann JJ held that “..the instant moneys became owing by the purchaser to Ms Bassili, the former fell under the statutory obligation to pay those moneys to the Commissioner…..At that point, the purchasers’ obligation to pay the Commissioner under s260-5 became absolute.”

It is (quite mistakenly) a commonly held view that some or all of the money payable by a purchaser at settlement is payable by the purchaser to the mortgagee (if there is one) before payment is made to the vendor.  However, as is made clear by Jessup and Katzmann JJ, money payable by the purchaser on settlement is money owing by the purchaser to the vendor, and not any other party.  Therefore, if the vendor is the judgment debtor, that is the party to whom the purchaser owes the purchase price, not a mortgagee to whom the judgment debtor might direct payment.  It follows that the service of a garnishee order upon the purchaser should mean that the purchaser must pay the purchase price (up to the amount owing to the judgment creditor) to the judgment creditor on settlement, in priority to any mortgagee.

Some words of caution

Firstly, although the Full Court upheld the Commissioner’s entitlement to be paid in Park on service of a s260-5 notice, a court has not yet been asked to determine whether a judgment creditor has the same rights pursuant to a garnishee order.  

Secondly, the principle does not apply where the sale is by a mortgagee exercising a power of sale under its mortgage.

Also, the purchaser will only be required to pay you at the time the purchaser becomes indebted to the judgment debtor, which is at settlement. If the sale of the property does not settle, the purchaser does not owe any money to the judgment debtor and therefore is not required to pay you in accordance with the garnishee order. And worse still, as you have not extended the life of your caveat, it will have lapsed and you will have lost your right to record a further caveat against the property without an order of the Supreme Court. 

So there may be another way to skin a cat, but take care not to get scratched.

 

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