I. INTRODUCTION

1.1 This is the Seventh Report in the Community Law Reform Program. The Program was established on 24 May 1982 by the Attorney General at that time, the Hon F J Walker QC. by letter addressed to the Chairman of the Commission The letter included the following statement:

This letter may therefore be taken as an authority to the Commission in its discretion to give preliminary consideration to proposals for law reform made to it by members of the legal profession and the community at large. The purpose of preliminary consideration will be to bring to my attention matters that warrant my making a reference to the Commission under s.10 of the Law reform Commission Act, 1967.

The background of the Community Law Reform Program is described in greater detail in the Commission’s Annual Report of 1982.

1.2 Between March and August 1983 the Commission gave preliminary consideration to the subject matter of this Report at the request of the then Attorney General, the late Hon D P Landa QC. This request followed receipt of complaints by the Courts and by the Department of the Attorney General and Justice (now the Department of the Attorney General) that a judgment creditor is not able, in order to satisfy the judgment debt to attach moneys deposited by the judgment debtor with a building society or credit union By contrast a judgment creditor is able to attach moneys standing to the credit of the judgment debtor in a bank account. The Commission was asked to give preliminary consideration to the desirability and feasibility of legislative reform to remove the immunity which a judgment creditor enjoys where his or her savings are deposited with a building society or credit union rather than with a bank.

1.3 Discussions were held with Mr R Baker, the then Acting Registrar of Permanent Building Societies and the Registrar of Credit Unions. Mr H H Binns. Secretary of the United Permanent Building Society Ltd and Mr J Reid. Secretary of the Permanent Building Societies Association (NSW) Ltd. After due consideration a reference was sought by letter of 30 August 1983. The terms of the reference received are set out on page xii.

II. THE GARNISHMENT PROCESS

1.4 Civil litigation most commonly results in a judgment or order of the court that the unsuccessful litigant (the judgment debtor) shall pay a sum of money (the judgment debt) to the successful litigant (the judgment creditor). Garnishment is one of several procedures which may be available to the judgment creditor to enforce payment by the judgment debtor. Other enforcement procedures include a writ of execution¹ against real or personal property of the judgment debtor² and a charging order over any asset of the judgment debtor which is amenable to a charging order, such as shares or an equitable interest in property³ or an interest in a partnership.⁴ In appropriate cases the judgment creditor may resort to bankruptcy or winding up proceedings.

1.5 The garnishment procedure enables a judgment creditor to obtain a court order under which any debt due or accruing⁵ to the judgment debtor from a third party (the attached debt) becomes payable to the judgment creditor to the extent necessary to satisfy the judgment debt Garnishment is an unusual procedure in so far as the third party (the garnishee) is involuntarily, and usually unwillingly, involved in a matter of concern only to the judgment creditor and the judgment debtor. The adoption of a procedure involving a disinterested third party reflects the policy that such involvement is justified in order to facilitate the recovery of judgment debts. However, the interests of the garnishee must be taken into account and are of particular importance because the garnishee is an involuntary participant in the legal process.

1.6 The law relating to garnishee orders is considered in more detail in Chapter2 (paras 2.14-2.24). Since the practical effect of a garnishee order is to place the judgment creditor in the shoes of the judgment debtor in relation to the attached debt, the legal relationship between the judgment debtor and any potential garnishee determines whether there is any debt due or accruing to the judgment debtor from that person which may be attached. As a general proposition, if there is some precondition to the payment of a debt, there is no debt due or accruing at common law until the precondition is satisfied. Consequently moneys held by banks and other financial institutions to the credit of judgment debtors, although frequently readily available to the judgment debtors themselves, generally are not attachable. This is because the withdrawal of moneys deposited with financial institutions is usually subject to some precondition to payment to the depositor, such as the presentation of a passbook or receipt or the giving of notice of withdrawal.

III. BACKGROUND TO THE REFERENCE

1.7 Historically banks have been the principal institutions with which the majority of the community has deposited money and the desirability of legislative reform of the common law limits on the attachment of moneys on deposit first became apparent in relation to moneys deposited with banks. In 1970 provisions were included in the Supreme Court Rules to enable the attachment of moneys standing to the credit of a judgment debtor in a bank account notwithstanding that conditions of certain kinds often imposed on the withdrawal of moneys from bank accounts had not been satisfied.⁶ Similar provisions subsequently were incorporated in the District Court Act, 1973⁷ and the Courts of Petty Session s(Civil Claims) Act, 1970(now renamed the Local Courts (Civil Claims) Act, 1970).⁸ Additional provisions were later included in order to protect savings banks against the possibility that a bank might comply with a garnishee order and also pay the judgment debtor “over-the-counter” on presentation of his or her passbook.⁹ The garnishment provisions applying to banks are considered in Chapter 2 (paras 2.22-2.24.)

1.8 The principal question raised by this reference is whether the bank account provisions should be extended to enable judgment creditors to attach moneys standing to the credit of a judgment debtor in a deposit account with a building society or credit union Building societies and credit unions are now used extensively as alternatives to banks for the purpose of placing money on deposit. As at 30 June 1984 building societies held deposits totalling $438,208,000 (paras 5.6, 5.8 and 5.25) and credit unions held deposits totalling $1,479,281,567 (para 5.34). Moreover deposits with building societies seem likely to comprise an increasing proportion of the funds invested with these organisations (para 5.26). It is very difficult to justify the continued immunity of such funds from attachment.

1.9 The terms of reference also refer to “withdrawable share capital” and “withdrawable share accounts” in building societies and credit unions. A member of a building society or credit union may subscribe for withdrawable shares in the organisation and such subscriptions become part of the organisation’s withdrawable share capital. Usually subscriptions for shares remain the property of the body in which the shares are held and the shareholder realises his or her investment by selling the shares to someone else. However members of a building society or credit union who hold withdrawable shares may recover their subscriptions in accordance with the rules of the organisation and thereby “withdraw” their shares. At present building societies hold the bulk of the funds lodged by their members as withdrawable share capital rather than as deposits. To take permanent building societies alone, as at 30 June 1984 the ratio of the aggregate membership of these societies (4,076,014) to the aggregate share capital ($6,302,990,000) gave an average shareholding of $1,546.36 (para 5.25).¹⁰ By contrast, credit unions hold the bulk of the funds lodged by their members as deposits. The shareholding of a member usually will be the minimum number of shares required for membership of the credit union and will be of little value. As at 30 June 1984 the ratio of the aggregate membership of active credit unions (801,090) to their aggregate share capital ($6,054,598) gave an average shareholding of only $7.55 (para 5.34). Consequently withdrawable share accounts in building societies are of greater practical significance to judgment creditors than comparable accounts in credit unions.

1.10 Usually an amount in a withdrawable share account cannot be attached by a garnishee order. The difficulty the judgment creditor faces is that there is no debt due or accruing to the judgment debtor capable of being attached until the judgment debtor is entitled to withdraw his or her shares and applies to do so in accordance with the rules governing withdrawal from the account The legal nature of a withdrawable share account is different to that of a deposit account. However, for the account- holder, there is little practical difference between putting money in a deposit account and putting money in a withdrawable share account. In both cases funds are more or less readily available once all preconditions to withdrawal from the account have been satisfied. Moreover the difficulty a judgment creditor faces in attaching a withdrawable share account is essentially the same difficulty he or she faces in attaching a deposit account in a building society or credit union. In both cases there is no debt due or accruing to the judgment debtor until all preconditions to withdrawal from the account have been satisfied. The question to be considered is whether, given the similarities between deposit accounts and withdrawable share accounts, the law should be reformed to permit a judgment creditor to attach an amount standing to the credit of a judgment debtor in a withdrawable share account.

IV. THIS REFERENCE AND THE ENFORCEMENT OF JUDGMENT DEBTS IN GENERAL

1.11 On 22 March 1973 the Commission received a reference from the then Attorney General which required the Commission:

to review the procedures used and remedies available in the civil and criminal courts, including the enforcement of judgments and orders: in doing so, to have regard for the functions of the Rule Committee of the Supreme Court, other rule making authorities, and of the Criminal Law Committee: and to consider what reforms should be made for the more convenient and efficient disposal of legal matters which now come or might be brought before the courts.

Under this reference, which will be referred to in this Report as the Procedure reference, a Working Paper entitled “Draft Proposal Relating to the Enforcement of Money Judgments” was prepared and circulated for comment in 1975. The Working Paper incorporated a proposed Act, the Money Judgments Enforcement Act. The object of the proposals was to ensure efficient and effective enforcement of judgment debts after a full examination of the means and overall financial position of each individual judgment debtor. The methods of enforcement covered in the legislation proposed in the Working Paper included garnishment.

1.12 In May 1976 the Australian Law Reform Commission received a reference on reform of debt recovery procedures. The federal reference overlaps with our Procedure reference so far as it relates to the enforcement of judgment debts. The two Commissions have co-operated on research in this area and it was decided by this Commission that further work by it on this aspect of the Procedure reference should await the Australian Law Reform Commission’s report on a model judgment debt recovery system under its Debt Recovery reference, as the Australian Commission has suggested that its proposals might either be the basis for the adoption of uniform State laws or the subject of federal legislation under the Federal Government’s legislative power with respect to insolvency.

1.13 The reasons for non-payment of a judgment debt include both unwillingness and genuine inability to pay on the part of the judgment debtor. As to the latter, overzealous efforts to enforce the judgment may not only amount to harassment of the judgment debtor but may also be counterproductive for the judgment creditor. There are already laws and procedures in place which allow the judgment debtor to alleviate his or her immediate difficulties and provide the judgment creditor with improved prospects of recovery in the long term. The judgment debtor who cannot pay a judgment debt immediately may apply to pay it by instalments or, where the general state of his or her financial affairs warrant it, may even apply to be made bankrupt.

1.14 The law relating to the enforcement of judgment debts requires a compromise between the right of a judgment creditor to recover moneys which have been judged owing to him or her and the need to take a realistic and humane view of the capacity of the judgment debtor to pay. Such a compromise also raises questions of the interests of creditors of the same debtor as between each other, since the successful enforcement of one creditor’s rights may exclude any recovery by other creditors if the capacity of the debtor to pay is limited. How such difficult and important questions are resolved is entirely outside the scope of this reference, limited as it is to the removal of anomalies which have emerged in one particular form of judgment enforcement.

1.15 This reference has been undertaken within the Community Law Reform Program because of its discrete nature and because the elimination of anomalies of the kind at which the reference is directed (paras 1.7-1.10) will do nothing to pre-empt reform on the broader issues which are the subject of our Procedure reference and the Australian Law Reform Commission’s Debt Recovery reference (paras 1.11-1.12). We would hope that the improvements in the law, which would result from the adoption of the recommendations in this Report would be a positive contribution to the larger task involved in the Procedure and Debt Recovery references. The rapid growth of building societies and credit unions as deposit-taking institutions has created a problem in the law of garnishment which requires urgent attention and which justifies an immediate solution independently of the broader and necessarily more time-consuming review of the whole relationship of debtor and creditor which is currently underway.

1.16 There is one important policy issue which, although outside the scope of this reference, warrants special mention The extension of the garnishment procedure to include attachment of moneys in deposit and withdrawable share accounts with building societies and credit unions raises a particular problem in relation to judgment debtors who are financially dependent on social security payments. The Commonwealth Department of Social Security has recently altered its payment system so that social security entitlements are now directly credited to an account with a bank, building society or credit union in all but exceptional cases. Under the Social Security Act 1947 (Cth), entitlements under that Act are inalienable by way of execution.¹¹ However it is doubtful that the relevant provision protects a social security payment from garnishment when it has been directly credited to the recipients account Since the inalienability of social security payments and other income benefits is essentially a matter of Commonwealth policy, we have drawn the matter to the attention of the Commonwealth Government and understand that income security payments by direct credit will be safeguarded in a manner consistent with the inalienability principles in the Social Security Act

V. OUTLINE OF THIS REPORT

1.17 Under our terms of reference, we are required to consider the following matters:

• Whether the present law of garnishment permits the attachment of moneys standing to the credit of a judgment debtor in a deposit account or withdrawable share account with a building society or credit union.
• Whether the law of garnishment in particular the provisions relating to accounts in banks, should be reformed to make moneys in deposit and withdrawable share accounts in building societies and credit unions liable to attachment.
• Any incidental matters.

1.18 The present law of garnishment both procedural and substantive, and the extent of its application to moneys lodged with building societies and credit unions are considered in Chapter 2. We have concluded that moneys in deposit and withdrawable share accounts with building societies and credit unions are not liable to attachment by garnishment in other than exceptional situations.

1.19 The question whether the law should be reformed calls for consideration of relevant reforms in other jurisdictions and these are discussed in Chapter 3. We have concluded that any reform should be effected within the general framework of the existing bank account provisions. The bank account provisions are discussed in Chapter 4 where we identify several deficiencies which should be remedied in order to improve their operation, irrespective of whether they are extended to accounts with building societies and credit unions. Our recommendations for reform of the bank account provisions are contained in Chapter 4.

1.20 Whether the law should be reformed to permit the attachment of moneys in accounts with building societies and credit unions is the subject of Chapters. In that Chapter we review the general nature of building societies and credit unions, the types of accounts which these organisations offer to their members and the contractual relations which can exist between a building society or credit union and a judgment debtor/member under the legislation and rules which regulate the activities of these organisations. We recommend that deposit and withdrawable share accounts in building societies (other than co- operative housing societies) and credit unions should be made liable to attachment by extension of the bank account provisions.

1.21 Some characteristics of building societies and credit unions and of their relationship with depositors/shareholders require more than an extension of the bank account provisions to these organisations, even if the existing bank account provisions are improved in the manner recommended in Chapter 4. In Chapter 6 we therefore make a number of consequential recommendations designed to ensure the effective operation of the garnishment procedure in relation to accounts with building societies and credit unions (and with banks) and to achieve an appropriate compromise between the interests of the judgment creditor and the garnishee.

1.22 There are a number of substantive differences between the garnishment provisions in the Supreme Court Rules, the District Court Act 1973 and the Local Courts (Civil Claims) Act 1970. Consequently in some respects the law operates differently in the different jurisdictions. These anomalies in the substantive law are incidentally significant to this reference because they would affect building societies and credit unions as particular classes of garnishee and would, if ignored, undermine the effectiveness of our principal recommendations. They are discussed in Chapter 7, where we recommend that the substantive law of garnishment should be uniform for all jurisdictions. In Chapter 7 we also consider the remedy of a charging order to enforce a judgment debt where the judgment debtor holds withdrawable shares in a building society or credit union.

1.23 The recommendations made throughout the Report are restated in the List of Recommendations which follows Chapter 7 and are embodied in the draft legislation in the Appendices to the Report The draft legislation would amend the District Court Act 1973 (Appendix A) and the Local Courts (Civil Claims) Act 1970 (Appendix B). The provisions to attach debts to satisfy a judgment debt in the Supreme Court are included in the Supreme Court Rules (Part 46) and not in the Supreme Court Act, 1970. Under the Act the Supreme Court Rule Committee is empowered to alter, add to or rescind the Rules for the time being in force, and to make additional rules, for the purpose of carrying the Act into effect.¹² If the legislation, as recommended, is implemented for the District Court and Local Courts, we recommend that appropriate amendments be made to the Supreme Court Rules consistent with Parliament’s endorsement of the proposed reforms and the different procedure in the Supreme Court Because some of the reforms we propose arguably are of a substantive nature, we recognise that there may be some question as to the adequacy of the present rule- making power for this purpose. It may therefore be desirable to make an appropriate amendment to the Supreme Court Act to put the matter beyond doubt.

VI. OTHER FINANCIAL INSTITUTIONS

1.24 This reference is limited to considering reform of the law of garnishment in relation to building societies and credit unions. However the common law principles which prevent the attachment of moneys held by these organisations to the credit of members and other depositors apply equally to other forms of investment such as debentures, and to deposits with other types of organisations, eg insurance companies, rural trading and other co-operative societies and friendly societies. Also, from the point of view of the investor, investments in cash management trusts are analagous to withdrawable shares in a building society or credit union in that the investor may, in accordance with the terms of the particular trust deed, readily recover moneys invested by surrendering units held in the trust.

1.25 In the course of our discussions with various building societies and credit unions and their industry associations, some concern was expressed at the possible implications which selective reform of the law of garnishment might have for their competitive position in relation to other financial institutions. Since it seems improbable that any significant proportion of the investing public is likely to take the possibility of garnishment into account, let alone as a decisive factor, when deciding with whom and in what manner to invest funds, we doubt that reform of the law of garnishment as it applies to building societies and credit unions is likely to disadvantage these organisations in the marketplace. Nevertheless, as a general principle, the law ought to apply uniformly unless there are sound legal or practical reasons for making distinctions.

1.26 This wider issue, while clearly outside the scope of this reference, warrants consideration However in raising the matter we must also stress that, in our view, any reform of the law of garnishment to include moneys lodged with other types of financial institution should not proceed without thorough consideration of the legal nature of the transactions involved, the specific problems they may raise for effective attachment and the practical consequences of subjecting the type of financial institution in question to garnishee orders in view of its particular operations. We believe that the need for an inquiry of this type before implementing any such further reform will be apparent from a reading of this Report.

VII. CONSULTATIONS

1.27 In the course of preparing the draft report we had further discussions with Mr Baker and this officers and Mr Binns (para 1.3) and discussions with Ms Mary Donnelly of the Permanent Building Societies Association (NSW) Ltd. Mr Russell Dobson, General Manager of the Association of Central Credit Unions Limited and Mr R Elliott of the Association of NSW Credit Unions. In addition written submissions were sought from the three Associations. We also had discussions with officers of several building societies and credit unions regarding their particular operations and with officers of the Supreme Court, the District Court and Local Courts regarding garnishment procedures. Mr John Brownie QC advised the Commission on certain preliminary matters and acted as a consultant in the preparatory work on the reference. Mr G R Herron, Senior Manager of Westpac Banking Corporation’s Legal Administration Section, NSW Division, assisted the Commission on aspects of banking practice and the garnishment procedure as it affects banks. To all of these we wish to express our appreciation for the valuable contribution they have made to the preparation of the Report.

1.28 It was not feasible to make the draft report available to all the organisations likely to be affected if our proposed reforms are adopted. However it was circulated for comment to the following people and organisations:

Mr R Baker, Director of the Department of Co-operative Societies and the Registrar of Permanent Building Societies and of Credit Unions

Permanent Building Societies Association (NSW) Ltd

Association of Central Credit Unions Ltd

Association of New South Wales Credit Unions Limited

The North Sydney Starr- Bowkett Building Co-operative Societies

The Newtown and Enmore Starr- Bowkett Building Co-operative Societies

Australia and New Zealand Banking Group Limited

Commonwealth Bank of Australia

National Australia Bank Limited

State Bank of New South Wales

Westpac Banking Corporation

1.29 Those organisations which commented on the draft report were also invited to comment on the draft legislation where they had expressed a wish to do so. In addition a meeting was held to discuss the final draft of the Report and the draft legislation, which were also circulated for comment to the Secretary of the Supreme Court Rule Committee, the Registrar of the District Court and the Director of Local Courts Administration. The contribution of the above organisations and individuals has been most helpful especially in matters touching on the day-to-day business of particular financial institutions.

VIII. PARLIAMENTARY COUNSEL

1.30 We also wish to record our thanks to Mr D R Murphy QC, Parliamentary Counsel, and in particular to Mr D Colaguiri, Assistant Parliamentary Counsel for the preparation of the draft legislation appended to this Report and for their advice and assistance.

1. In the case of the Supreme Court the correct term is a “writ for levy of property” rather than a “writ of execution” - Supreme Court Rules, Pt44 r1 and Pt45.

2. Supreme Court Rules, Pt42 r2(1)(a) and Pt45: District Court Act. 1973 ss107-110; Local Courts (Civil Claims) Act. 1970 ss58 and 59; Judgment Creditors’ Remedies Act, 1901 ss4,10 and 13.

3. Judgment Creditors’ Remedies Act, 1901 s27.

4. Partnership Act. 1892 s23(I1). There are additional means of enforcing a judgment debt in the Supreme Court - Supreme Court Rules, Pt42 r2(1)(d) (appointment of a receiver) and (e) (committal and sequestration). On the appointment of a receiver see R P Meagher. W M C Gummow and J R F Lehane. Equity: Doctrine and Remedies (Butterworths 2nd ed 1984) at 660-661 (paras 281 9-2822). On the remedies of judgment creditors. see J Farmer, Creditor and Debtor Law in Australia and New Zealand (CCH 1980) ch9.

5. The phrase “debt due or accruing” is that used in the relevant Rules of the Supreme Court (Supreme Court Rules. Pt46). The phrase” debt due, owing or accruing” is used in the District Court Act. 1973 (eg s97(2)) and the Local Courts (Civil Claims) Act. 1970 (eg s47). The difference in terminology appears to have no legal significance.

6. Supreme Court Act. 1970 s122 and Fourth Schedule. Pt46 r2.

7. Section 103(1) and (2).

8. Section 52A(1) and (2).

9. Supreme Court Rules. Pt46 r10A: District Court Act. 1973 s103(4),(5) and (6): Local Courts (Civil Claims) Act. 1970 s52A(4),(5) and (6).

10. This average figure is slightly inaccurate in that an insignificant portion of the aggregate share capital of permanent building societies is non-withdrawable capital.

11. Subsection (1) of s144 of the Act states:

Subject to this Act, a pension, allowance or benefit under this Act shall be absolutely inalienable, whether by way of, or in consequence of sale, assignment, charge, execution, bankruptcy or otherwise.

12. Section 124(1).