Post by Banjo on Nov 17, 2015 7:54:59 GMT 7
Carapeta and Secretary, Department of Social Services (Social services second review) [2015] AATA 863 (11 November 2015)
Decision under review affirmed.
REASONS FOR DECISION
Ms A F Cunningham, Senior Member
The decision under review is that made by an Authorised Review Officer (ARO) on 23 January 2012 and affirmed by the Social Security Appeals Tribunal (SSAT) on 10 July 2012 to pay age pension at a reduced rate having regard to the assets test. The Applicant’s assets include a loan made to a business company, Teles Martins & Carapeta LDA (the Company) of which they are the sole shareholders. The ARO decided that Mr and Mrs Carapeta (the Carapetas) were not entitled to the age pension at the full rate because their assets exceeded the relevant allowable limit.
BACKGROUND
On 10 May 2013 the Administrative Appeals Tribunal (the Tribunal) set aside the SSAT’s decision and remitted the matter to the Secretary to recalculate the Applicant’s assets in accordance with the Tribunal’s findings. The decision of the Tribunal was appealed to the Federal Court which on 17 December 2013 set aside the Tribunal’s decision and remitted the matter back to the Tribunal to be heard in accordance with law. The Federal Court found that there was no evidence before the Tribunal that a charge or encumbrance existed over the subject assets.
The Applicants reside in Portugal and are in receipt of the age pension by virtue of an agreement between Australia and Portugal. There is no issue that the Applicants are entitled to the age pension. The matter in dispute is the rate at which the pension should be paid having regard to the asset test provisions of the Social Security Act 1991 (Cth) (the Act). The Tribunal refers to the Background Facts and Legislation as set out in the Tribunal’s Reasons for Decision dated 10 May 2013.
The Tribunal had decided that although the loan to the Company was correctly “attributed” to the Applicants in accordance with the provisions of section 1122 of the Act, on the basis of further evidence provided by the Applicants, the amounts advanced to the Company were never “an asset in their hands” but “comprised monies borrowed by them from the banks and other sources and loaned to the company”. The Tribunal considered that the financing obtained by the Company in the sum of 436,220.70 Euro was subject to “charges” in the hands of the Applicants. The Federal Court however considered that:
“There was no evidence before the AAT which showed that the sum loaned to the company was obtained by the Carapetas via secured loans advanced to them from creditors of the Carapetas.” (at para 17).
Accordingly it found that there was no basis for the application of section 1121 of the Act as there was no evidence that a charge or encumbrance existed over the particular asset.
The Federal Court invited the parties “to provide the AAT with as much information as possible for it to deal as comprehensively as it can with the specific circumstances of the Carapetas and their loan to their company.”
The Federal Court directed that the application for review be determined by the same AAT Member who constituted the Tribunal at first instance. The parties to the appeal have consented to the application being heard on the basis of the written material before the Tribunal. A statement of facts, issues and contentions and further translated documentary evidence together with written submissions have been received from the Applicant’s legal representative, Pier Paolo Parisi. A statement of facts and contentions with attachments and written submissions were submitted on behalf of the Secretary. The attachments included most of the documentary evidence relied upon by the Applicants in the previous proceedings.
ISSUE
The sole issue for consideration by the Tribunal is the application of section 1121 of the Act and whether there is any evidence of a “charge” or “encumbrance” over the subject assets.
CONSIDERATION
The Federal Court did not dispute the Tribunal‘s finding that the Applicants had borrowed 436,225.70 Euro from a bank and loaned that amount to the Company. The Federal Court found however, that the loan was not subject to a “charge” or “encumbrance” within the meaning of section 1121 of the Act. It is contended on behalf of the Secretary that none of the material submitted by the Applicants with respect to the Tribunal’s first hearing and in the present appeal, evidences that any of the loans were subject to a “charge” or an “encumbrance.”
Mr Sparkes on behalf of the Secretary referred to the Federal Court decision in Unicomb v the Secretary, Department of Social Security (1988) 50 ALD 405 the facts of which he submitted, are largely identical to those of the Applicants. After concluding that the Applicants had lent the amount of $647,000 to the Company, applying the provisions of section 1122 of the Act, the Federal Court found that the value of the Applicant’s assets included so much of the amount that remained unpaid. The Court stated that there was no evidence upon which it could determine the nature and extent (if any) of the obligation which the Company assumed as “the incoming guarantor” under the deed, accordingly there was no evidence of a charge or encumbrance.
In his submissions in reply, Mr Parisi referred the Tribunal to the decision of the Full Court of the Federal Court in Repatriation Commission v Tsourounakis [2007] FCAFC 29; (2007) 158 FCR 214. The Full Court was there considering the value of the respondent’s interest in a property and whether any equity vested in the respondent’s son could be regarded as a “charge” or “encumbrance”. The Full Court referred to a decision of the High Court in Davies v Littlejohn [1923] HCA 64; (1923) 34 CLR 174 which discussed the meaning of these terms and referenced excerpts from the case of Wallace v Love [1922] HCA 42; (1922) 31 CLR 156. In that case the High Court referred to the Oxford Dictionary which defines the word “encumbrance” as a burden on property, a claim, lien or liability attached to the property such as a mortgage, a registered judgment etc. The word “charge” is defined as “a liability to pay money laid upon a person or estate”. Their Honours in Tsourounakis concluded at page 240 that:
“Both cases demonstrate that a “claim”, a “burden” or a “responsibility” may be an encumbrance. There is no suggestion that it must relate to the payment of money. We see no reason to exclude a claim in equity from that list of “encumbrances”. However the claim must “rest as a charge upon land, lessening its value to the owner...”or be a “burden” upon it. To say that a property is burdened with an obligation or responsibility generally means that a particular person’s interest in that property is so burdened...”
The evidence submitted on behalf of the Applicants confirms that various loans were extended by the bank to the Company mainly in the form of lines of credit which were subject to interest charges. None of the documentation refers to any forms of security over property or other assets belonging to the Applicants or other persons or companies.
Mr Parisi summarises the Applicant’s contentions as:
(a) the Applicants, in dealing with third party financiers, mainly acted as guarantors for loans made to the Company, not as borrowers;
(b) to the extent, if any, to which the Applicants borrowed monies from third parties, and on-lent to the Company, they borrowed, and on- lent, while subject to fiduciary obligations by virtue of their office as directors; and
(c) any rights of repayment of loans owned by the Company to the Applicants were subject to “a charge or encumbrance over” those rights for the purpose of section 1121(1) of the Act, because of:
(i) the fiduciary obligation in equity to apply monies repaid by the Company to them for the purposes of servicing the loans from third parties and preventing the collapse of the Company; and/or
(ii) the mere fact that any repayments by the Company were earmarked for repayment to third party financiers, from whom the loan funds came, consistently with the Guide (at 4.6.6.30).
Section 1121 provides:
Effect of charge or encumbrance on value of assets
(1) If there is a charge or encumbrance over a particular asset of the person, the value of the asset, for the purposes of calculating the value of the person's assets for the purposes of this Act (other than Division 1B of Part 3.10), is to be reduced by the value of that charge or encumbrance.
The Applicant’s first contention is that the Applicants mainly acted as guarantors for loans made by the Company and not as borrowers. Mr Parasi however, did not identify the documentary evidence which supports this contention. Some of the documentation submitted by the Applicants confirms that the Company borrowed money from the bank in its own name. The Applicants may very well have guaranteed some of the Company bank loans. The Tribunal is however not able to identify from the documentation submitted, whether any of the subject 436,225.70 Euro was subject to guarantees by the Applicants. The evidence relied upon by the Tribunal at its first hearing was sourced from the Company’s own financial statements which shows that the 436,225.70 Euro constituted monies borrowed by the Company from the Applicants.
Mr Parasi submits that it makes no difference whether the Applicants guaranteed the Company’s loans or alternatively borrowed the money in a fiduciary capacity with a right to be reimbursed by the Company for either way, they are liable to the lenders. This submission ignores however the terminology used in section 1121 of the Act which specifically refers to “a charge or encumbrance over a particular asset of the person”. The Tribunal has previously held that a personal guarantee does not constitute a “charge” or “encumbrance” over an asset (Re Smith and SDFaCS (1999) AATA267). In the words of Senior Member Handley at paragraph 30;
“The words “charge or encumbrance’” are not defined in the Act. In the Tribunal’s view, however, it is clear from cases such as Re Fawthrop and Repatriation Commission (1993) AATA 359; (1994) 19 AAR 290 (1993) 36 ALD 140, that the words “charge” and “encumbrance” refer to a form of security which specifically attaches to an asset. By contrast, guarantee or indemnity is a promise or undertaking to honour the performance of an obligation, a form of security which does not specifically attach to an asset. Ultimately, a guarantee or indemnity can only be enforced by judgment of the courts.”
In the appealed decision the Federal Court held that the evidence submitted by the Applicants does not constitute either a “charge” or an “encumbrance” within the meaning of this section.
In addition to his lengthy written submissions, translated bank documents and case reports, Mr Parisi submitted two articles regarding director’s duties and liabilities, one of which was entitled “Director’s Duties and Liability in Portugal”. None of the submitted material however, demonstrates how a director’s fiduciary duties would constitute either a “charge” or “encumbrance” over an asset within the meaning of section 1121. Nor do Mr Parisi’s written submissions satisfactorily address this issue.
FINDINGS
This Tribunal therefore rejects Mr Parisi’s submission that the Applicants’ fiduciary obligations as directors of the Company constitute a “charge” or “encumbrance” within the meaning of section 1121. Mr Parasi has not addressed the requirement that the charge or encumbrance attach to a particular asset of the person and has not produced any evidence that the loan was in any way secured. He has also failed to address how the fiduciary obligation attaches to the subject loan.
Because the Applicants have failed to satisfy the Tribunal that their loan to the Company in the sum of 436,225.70 Euro was secured in the form of a “charge” or “encumbrance” over a particular asset as required by section 1121 of the Act, the Tribunal must accordingly conclude that the Applicant’s assets exceeded the allowable assets limit at the relevant time. For this reason, the decision under review to pay aged pension at a reduced rate must be affirmed.
The Tribunal understands that this will be a disappointing outcome for the Applicants who may perceive the decision as unfair and unjust. The Tribunal must however determine the application for review in accordance with the relevant case law and the findings and directions of the Federal Court.
Decision under review affirmed.
REASONS FOR DECISION
Ms A F Cunningham, Senior Member
The decision under review is that made by an Authorised Review Officer (ARO) on 23 January 2012 and affirmed by the Social Security Appeals Tribunal (SSAT) on 10 July 2012 to pay age pension at a reduced rate having regard to the assets test. The Applicant’s assets include a loan made to a business company, Teles Martins & Carapeta LDA (the Company) of which they are the sole shareholders. The ARO decided that Mr and Mrs Carapeta (the Carapetas) were not entitled to the age pension at the full rate because their assets exceeded the relevant allowable limit.
BACKGROUND
On 10 May 2013 the Administrative Appeals Tribunal (the Tribunal) set aside the SSAT’s decision and remitted the matter to the Secretary to recalculate the Applicant’s assets in accordance with the Tribunal’s findings. The decision of the Tribunal was appealed to the Federal Court which on 17 December 2013 set aside the Tribunal’s decision and remitted the matter back to the Tribunal to be heard in accordance with law. The Federal Court found that there was no evidence before the Tribunal that a charge or encumbrance existed over the subject assets.
The Applicants reside in Portugal and are in receipt of the age pension by virtue of an agreement between Australia and Portugal. There is no issue that the Applicants are entitled to the age pension. The matter in dispute is the rate at which the pension should be paid having regard to the asset test provisions of the Social Security Act 1991 (Cth) (the Act). The Tribunal refers to the Background Facts and Legislation as set out in the Tribunal’s Reasons for Decision dated 10 May 2013.
The Tribunal had decided that although the loan to the Company was correctly “attributed” to the Applicants in accordance with the provisions of section 1122 of the Act, on the basis of further evidence provided by the Applicants, the amounts advanced to the Company were never “an asset in their hands” but “comprised monies borrowed by them from the banks and other sources and loaned to the company”. The Tribunal considered that the financing obtained by the Company in the sum of 436,220.70 Euro was subject to “charges” in the hands of the Applicants. The Federal Court however considered that:
“There was no evidence before the AAT which showed that the sum loaned to the company was obtained by the Carapetas via secured loans advanced to them from creditors of the Carapetas.” (at para 17).
Accordingly it found that there was no basis for the application of section 1121 of the Act as there was no evidence that a charge or encumbrance existed over the particular asset.
The Federal Court invited the parties “to provide the AAT with as much information as possible for it to deal as comprehensively as it can with the specific circumstances of the Carapetas and their loan to their company.”
The Federal Court directed that the application for review be determined by the same AAT Member who constituted the Tribunal at first instance. The parties to the appeal have consented to the application being heard on the basis of the written material before the Tribunal. A statement of facts, issues and contentions and further translated documentary evidence together with written submissions have been received from the Applicant’s legal representative, Pier Paolo Parisi. A statement of facts and contentions with attachments and written submissions were submitted on behalf of the Secretary. The attachments included most of the documentary evidence relied upon by the Applicants in the previous proceedings.
ISSUE
The sole issue for consideration by the Tribunal is the application of section 1121 of the Act and whether there is any evidence of a “charge” or “encumbrance” over the subject assets.
CONSIDERATION
The Federal Court did not dispute the Tribunal‘s finding that the Applicants had borrowed 436,225.70 Euro from a bank and loaned that amount to the Company. The Federal Court found however, that the loan was not subject to a “charge” or “encumbrance” within the meaning of section 1121 of the Act. It is contended on behalf of the Secretary that none of the material submitted by the Applicants with respect to the Tribunal’s first hearing and in the present appeal, evidences that any of the loans were subject to a “charge” or an “encumbrance.”
Mr Sparkes on behalf of the Secretary referred to the Federal Court decision in Unicomb v the Secretary, Department of Social Security (1988) 50 ALD 405 the facts of which he submitted, are largely identical to those of the Applicants. After concluding that the Applicants had lent the amount of $647,000 to the Company, applying the provisions of section 1122 of the Act, the Federal Court found that the value of the Applicant’s assets included so much of the amount that remained unpaid. The Court stated that there was no evidence upon which it could determine the nature and extent (if any) of the obligation which the Company assumed as “the incoming guarantor” under the deed, accordingly there was no evidence of a charge or encumbrance.
In his submissions in reply, Mr Parisi referred the Tribunal to the decision of the Full Court of the Federal Court in Repatriation Commission v Tsourounakis [2007] FCAFC 29; (2007) 158 FCR 214. The Full Court was there considering the value of the respondent’s interest in a property and whether any equity vested in the respondent’s son could be regarded as a “charge” or “encumbrance”. The Full Court referred to a decision of the High Court in Davies v Littlejohn [1923] HCA 64; (1923) 34 CLR 174 which discussed the meaning of these terms and referenced excerpts from the case of Wallace v Love [1922] HCA 42; (1922) 31 CLR 156. In that case the High Court referred to the Oxford Dictionary which defines the word “encumbrance” as a burden on property, a claim, lien or liability attached to the property such as a mortgage, a registered judgment etc. The word “charge” is defined as “a liability to pay money laid upon a person or estate”. Their Honours in Tsourounakis concluded at page 240 that:
“Both cases demonstrate that a “claim”, a “burden” or a “responsibility” may be an encumbrance. There is no suggestion that it must relate to the payment of money. We see no reason to exclude a claim in equity from that list of “encumbrances”. However the claim must “rest as a charge upon land, lessening its value to the owner...”or be a “burden” upon it. To say that a property is burdened with an obligation or responsibility generally means that a particular person’s interest in that property is so burdened...”
The evidence submitted on behalf of the Applicants confirms that various loans were extended by the bank to the Company mainly in the form of lines of credit which were subject to interest charges. None of the documentation refers to any forms of security over property or other assets belonging to the Applicants or other persons or companies.
Mr Parisi summarises the Applicant’s contentions as:
(a) the Applicants, in dealing with third party financiers, mainly acted as guarantors for loans made to the Company, not as borrowers;
(b) to the extent, if any, to which the Applicants borrowed monies from third parties, and on-lent to the Company, they borrowed, and on- lent, while subject to fiduciary obligations by virtue of their office as directors; and
(c) any rights of repayment of loans owned by the Company to the Applicants were subject to “a charge or encumbrance over” those rights for the purpose of section 1121(1) of the Act, because of:
(i) the fiduciary obligation in equity to apply monies repaid by the Company to them for the purposes of servicing the loans from third parties and preventing the collapse of the Company; and/or
(ii) the mere fact that any repayments by the Company were earmarked for repayment to third party financiers, from whom the loan funds came, consistently with the Guide (at 4.6.6.30).
Section 1121 provides:
Effect of charge or encumbrance on value of assets
(1) If there is a charge or encumbrance over a particular asset of the person, the value of the asset, for the purposes of calculating the value of the person's assets for the purposes of this Act (other than Division 1B of Part 3.10), is to be reduced by the value of that charge or encumbrance.
The Applicant’s first contention is that the Applicants mainly acted as guarantors for loans made by the Company and not as borrowers. Mr Parasi however, did not identify the documentary evidence which supports this contention. Some of the documentation submitted by the Applicants confirms that the Company borrowed money from the bank in its own name. The Applicants may very well have guaranteed some of the Company bank loans. The Tribunal is however not able to identify from the documentation submitted, whether any of the subject 436,225.70 Euro was subject to guarantees by the Applicants. The evidence relied upon by the Tribunal at its first hearing was sourced from the Company’s own financial statements which shows that the 436,225.70 Euro constituted monies borrowed by the Company from the Applicants.
Mr Parasi submits that it makes no difference whether the Applicants guaranteed the Company’s loans or alternatively borrowed the money in a fiduciary capacity with a right to be reimbursed by the Company for either way, they are liable to the lenders. This submission ignores however the terminology used in section 1121 of the Act which specifically refers to “a charge or encumbrance over a particular asset of the person”. The Tribunal has previously held that a personal guarantee does not constitute a “charge” or “encumbrance” over an asset (Re Smith and SDFaCS (1999) AATA267). In the words of Senior Member Handley at paragraph 30;
“The words “charge or encumbrance’” are not defined in the Act. In the Tribunal’s view, however, it is clear from cases such as Re Fawthrop and Repatriation Commission (1993) AATA 359; (1994) 19 AAR 290 (1993) 36 ALD 140, that the words “charge” and “encumbrance” refer to a form of security which specifically attaches to an asset. By contrast, guarantee or indemnity is a promise or undertaking to honour the performance of an obligation, a form of security which does not specifically attach to an asset. Ultimately, a guarantee or indemnity can only be enforced by judgment of the courts.”
In the appealed decision the Federal Court held that the evidence submitted by the Applicants does not constitute either a “charge” or an “encumbrance” within the meaning of this section.
In addition to his lengthy written submissions, translated bank documents and case reports, Mr Parisi submitted two articles regarding director’s duties and liabilities, one of which was entitled “Director’s Duties and Liability in Portugal”. None of the submitted material however, demonstrates how a director’s fiduciary duties would constitute either a “charge” or “encumbrance” over an asset within the meaning of section 1121. Nor do Mr Parisi’s written submissions satisfactorily address this issue.
FINDINGS
This Tribunal therefore rejects Mr Parisi’s submission that the Applicants’ fiduciary obligations as directors of the Company constitute a “charge” or “encumbrance” within the meaning of section 1121. Mr Parasi has not addressed the requirement that the charge or encumbrance attach to a particular asset of the person and has not produced any evidence that the loan was in any way secured. He has also failed to address how the fiduciary obligation attaches to the subject loan.
Because the Applicants have failed to satisfy the Tribunal that their loan to the Company in the sum of 436,225.70 Euro was secured in the form of a “charge” or “encumbrance” over a particular asset as required by section 1121 of the Act, the Tribunal must accordingly conclude that the Applicant’s assets exceeded the allowable assets limit at the relevant time. For this reason, the decision under review to pay aged pension at a reduced rate must be affirmed.
The Tribunal understands that this will be a disappointing outcome for the Applicants who may perceive the decision as unfair and unjust. The Tribunal must however determine the application for review in accordance with the relevant case law and the findings and directions of the Federal Court.