Deputy Federal Commissioner of Taxation v. Horsburgh & Anor.

Judges:
Murphy J

Court:
Supreme Court of Victoria

Judgment date: Judgment handed down 10 June 1983.

Murphy J.

The plaintiff, the Deputy Commissioner of Taxation, sues the defendants, Alan Murray Horsburgh and Roland Petrie Newman as receivers and managers of Intercab Pty. Ltd. (in liquidation) for moneys owing by Intercab to the Commissioner by way of group tax deducted from the salaries of its employees pursuant to sec. 221C of the Income Tax Assessment Act 1936 (hereinafter termed ``the Act'').

It is common ground that Intercab made deductions totalling $43,464.67 as a group employer from the salaries of its workers, and that it did not, as it was legally obliged to do, pay any part of this sum to the Commissioner before the appointment of receivers and managers.

It is also common ground that pursuant to Registered Debenture No. 25711 dated 6 January 1975 the defendants were appointed receivers and managers to Intercab on 6 January 1977, and that they then proceeded to collect and realise all the assets of that company.

From the amount so realised they retained costs, charges and out-of-pocket expenses including remuneration and paid the net balance to the debenture holder which appointed them. They paid nothing to the Deputy Commissioner.

The Deputy Commissioner bases his present claim on sec. 221P of the Act claiming that the defendants were liable to pay the amount of group tax owing out of the amount realised by them from the assets of Intercab which came under their control, in priority to all other debts, whether preferential, secured or unsecured (see sec. 221P(2) of the Act).

He further submits that the defendants were bound to pay such group tax owing before paying their own costs, charges, out-of-pocket expenses and remuneration. He points to sec. 221P(3) of the Act, relying on the principle of interpretation, expressio unius exclusio alterius.

The defendants submit that certain book debts of Intercab, namely those owed to Intercab by Sanyo-Guthrie Australia Ltd. were at the time of their appointment already the subject of a fixed charge. Accordingly they submit that as they were appointed by Griffiths Bros. Ltd. (hereinafter termed Griffiths) pursuant to the terms of a floating charge which crystallized (on their submission) only on their appointment, the property of Intercab which passed into or under their control did not include so much of the sum realised on the said book debts as was necessary to satisfy the earlier fixed charge. In other words, only what turned out to be a worthless equity of redemption in the said book debts passed to their control.
F.C. of T. v. Barnes 75 ATC 4262; (1975) 133 C.L.R. 483.

The Deputy Commissioner submitted, among other things, that the floating charge, pursuant to which the defendants were appointed, crystallized automatically on default by Intercab, long before the fixed charge over the Sanyo-Guthrie book debts was granted and, at the latest, when Griffiths put pen to paper to execute the fixed charge before the fixed charge was granted and before receivers were appointed.

This oft recurring question whether automatic crystallization of a floating charge can occur had in the present case some unusual features in that Griffiths, the debenture holder in whose favour the floating charge was granted by Intercab, was also the chargee in whose favour Intercab


ATC 4825

purported later to grant the fixed charge over the Sanyo-Guthrie book debts.

At all material times Griffiths owned a substantial equity in the share capital of Intercab.

Dr. Pannam Q.C. and Mr. A. Myers appeared for the defendants and Mr. Goldberg Q.C. and Mrs. Moshinsky appeared for the Deputy Commissioner.

On the issue whether the receivers and managers were entitled to recoup their out-of-pocket expenses and to pay their own remuneration before paying to the Deputy Commissioner the amount of group tax owing, Dr. Pannam submitted that pursuant to sec. 221P the receivers and managers were liable to pay the group tax owing, but only out of the net fund in their control on realisation of assets. In his submission, the net fund was arrived at after the receiver's out-of-pocket expenses and remuneration had been deducted.

Intercab was a company carrying on the business of manufacturing fibreboard with a vinyl covering. In 1974 Griffiths was an investment company and financier, having ceased to market tea and coffee in or about 1972. In 1974 Griffiths took up shares in Intercab and also agreed to advance money to it.

Between 1 July 1975 and 31 December 1976 group tax deductions totalling $43,464.67 were made by Intercab from salaries of its employees. At all material times that sum remained owing to the plaintiff (see Exhibit A).

On 6 January 1975 Intercab granted a debenture and floating charge (Exhibit B) to Griffiths to secure the repayment of moneys to be advanced to it by Griffiths up to a maximum of $47,500 in January 1975. The total advance was $39,000 of which only $10,000 was repaid. All of this advance together with interest was due to be repaid on 31 January 1975. It was not repaid, and Intercab was in default thereafter. Because of default in repayment it is contended that the floating charge by its terms automatically became fixed on 8 February 1975. Intercab continued to trade.

On 23 December 1976 Intercab purported to give to Griffiths a specific fixed charge (Exhibit 1) over book debts then or in the future owed to it by Sanyo-Guthrie Australia Pty. Ltd. The charge was to secure repayment of a further sum of $22,280.77 then and there advanced to Intercab by Griffiths. On 6 January 1977 Griffiths appointed receivers and managers (the defendants) to Intercab (Exhibit D). It did so pursuant to the terms of the Original Debenture (Exhibit B Registered Debenture number 26711 dated 6 January 1975). The appointment of the receivers and managers simply recites as the justification for such appointment that ``the security constituted by the Debenture has become enforceable''.

The floating charge of 6 January 1975 stated that it should be a floating charge on all the property and assets of the borrower present and future including book debts, but should become fixed ``if the security becomes enforceable'' in any one of the ways set out in Condition 3. These included default in repayment by the borrower of the moneys advanced and default in the performance or observation of any provisions binding on the borrower. One important provision was that the borrower should not create or suffer to be created any other charge upon its property ``to rank equally with or in priority to the charge hereby created''.

This floating charge was said by the plaintiff to have become fixed when Intercab failed to pay its debt on the date stipulated, or alternatively when it put pen to paper to execute the subsequent fixed charge on 23 December 1976 (
Re Manurewa Transport Limited (1971) N.Z.L.R. 909). In any event it was clear that it had crystallized upon the appointment of the receivers by Griffiths and it was submitted that, even then the priorities were such that the interest of the subsequent fixed chargee executed by the chargee with actual notice of the prior floating charge and actual notice of its restrictive clause, should be postponed to the interest of the debenture holder under the floating charge.

It is common ground that the joint receivers and managers took possession of the property and assets of Intercab on 6 January 1977 and between then and 24 January 1978 realized $94,829. After paying the running expenses of Intercab for that period they retained $13,212 for their own remuneration and out-of-pocket expenses,


ATC 4826

and paid the balance of the net sum, namely $14,872, to Griffiths, this being some $90 more than the amount realized on the Sanyo-Guthrie book debts (which stood in the books of Intercab at $27,904).

The receivers' statement of final receipts and disbursements states ``Repayment to Debenture Holder of advance and proceeds of assigned debt $19,872''. This sum of $19,872 also includes a sum of $5,000 specially advanced by Griffiths to the receivers, after their appointment, to enable them to commence the conduct of their receivership. The validity of the repayment of this sum of $5,000 to Griffiths was (at one stage during the hearing before me) in issue but at the conclusion of evidence Mr. Goldberg for the Commissioner did not persist in claiming this sum, on the assumption that Mr. Horsburgh's evidence concerning the nature of the advance would be accepted by me. I do accept his evidence on the matter, and accordingly, this is a matter to which my judgment does not go.

The issues which were debated before me involve the interpretation of sec. 221P of the Act, which relates to the situation where an employer makes deductions for the purposes of Div. 2 of Pt. VI of the Act (or for other specified purposes) and does not account for those deductions to the Commissioner. In the present case the deductions were made by Intercab from the salaries of its employees pursuant to sec. 221C of the Act, and have been referred to as group tax.

Section 221P has three subsections, each of which is material to the matters which I have to decide. Since its insertion in the Act in 1947 the section has been criticized by Courts at all levels. That it is difficult to construe may be confirmed by a reading of the decisions of the High Court in
F.C. of T. v. Card (1963) 109 C.L.R. 177 and F.C. of T. v. Barnes 75 ATC 4262; (1975) 133 C.L.R. 483 to which I shall have to refer.

In 1951 by amendment the priority given by the section operated not only where property of an employer became vested in a trustee but also where the control of an employer's property has passed to a trustee. In 1959, subsec. (3) was added exempting from the priority provisions of subsec. (2) costs, charges and expenses of the administration of the estate of an employer or of the winding-up of the company, save in specified circumstances.

The section now reads:

``221P(1) Where an employer makes a deduction for the purposes of this Division, for the purposes of the corresponding provisions of a State income tax law or for the purposes of section 78 of the Income Tax (Arrangements with the States) Act 1978, or purporting to be for those purposes, from the salary or wages paid to an employee and fails to deal with the amount so deducted in the manner required by this Division, or to affix tax stamps of a face value equal to the amount of the deduction as required by this Division, as the case may be, he shall be liable, and where his property has become vested in, or where the control of his property has passed to, a trustee, the trustee shall be liable, to pay that amount to the Commissioner.

(2) Notwithstanding anything contained in any other Act or State Act, an amount payable to the Commissioner by a trustee in pursuance of this section shall have priority over all other debts, whether preferential, secured or unsecured.

(3) Where a trustee, being the trustee of the estate of a bankrupt or the liquidator of a company that is being would up, is liable to pay an amount to the Commissioner in pursuance of this section, sub-section (2) does not operate so as to make that amount payable in priority to any costs, charges or expenses of the administration of the estate or of the winding-up of the company (including costs of a creditor or other person upon whose petition the sequestration order or the winding-up order, if any, was made and remuneration of the trustee) that are lawfully payable out of the assets of the estate or of the company except where, in the case of the winding-up of a company, the Crown in right of a State or any other creditor is entitled to payment of a debt by the liquidator in priority to all or any of those costs, charges and expenses and has not waived that priority.''

There is no debate but that the receivers and managers of Intercab were at all material


ATC 4827

times a trustee and liable to pay the Commissioner the amount of tax owing. But this liability was not a personal liability (see Card's case above). It was a liability to pay the amount owing out of the fund realized on sale and collection of the property of Intercab, control of which passed to the receivers on their appointment (see Barnes' case above).

An issue in the present case arose as to what property passed to the control of the receivers on their appointment, having regard especially to the floating charge and its terms and to the subsequent fixed charge granted before the appointment of the receivers.

If the floating charge had not crystallized and if Intercab had granted a fixed charge over the Sanyo-Guthrie book debts to a third party who took without notice of the floating charge or of its terms then, upon the appointment of receivers and managers, the property of the company (Intercab), control of which passed to them (within the meaning of sec. 221P(1)), would (on the authority of the majority judgment in Barnes' case) be limited to all of the unencumbered property and undertaking of the company and to the ``equity of redemption in assets separately mortgaged or charged'' (at ATC p. 4266; C.L.R. p. 492).

The ``control'' to which sec. 221P refers is:

``... that control which enables the receiver to reduce the assets and undertaking of a company into a fund out of which a particular debt or in some cases all the debts of the company, secured and unsecured, are able to be paid if the fund so far extends. But we note again that that control cannot extend to particular assets which are separately secured, but only to the equity of redemption in such assets.''

(F.C. of T. v. Barnes at ATC p. 4266; C.L.R. p. 492.)

The last sentence of this passage was relied upon by the defendants, and it is necessary, in the circumstances of the present case, to examine its meaning.

A little earlier in their joint judgment, their Honours had said:

``In our opinion, the property of the company which passed under the control of the defendant upon his appointment by the mortgagee as receiver under the deed was the whole of the assets and undertaking of the company, control of which could pass to him as receiver under the terms of the deed. It is an important qualification that the `property' is limited to that in respect of which control could pass to the defendant. If independently of this security there had been a mortgage or other security over certain assets of the company, control of those assets could not pass to the receiver. He would have control only of the equitable interest of the company in those assets.''

(At ATC pp. 4265-4266; C.L.R. p. 491.) (My emphasis.)

The emphasis in every case must vary, and it is with some trepidation that I suggest that the members of the Court were saying that, in the circumstances posed in Barnes' case, the receivers could only enforce the employer's and the debenture holder's remedies against the separately secured assets subject to the prior rights of the fixed chargee (
Manser v. Dix (1857) 8 De G.M. & G. 703) and that, to the extent of the prior equity, control of the property in those assets did not, for the purposes of sec. 221P(1) of the Act, pass to him on appointment.

In the present case the subsequent fixed charge was a charge over Sanyo-Guthrie book debts present and future. This agreement of 23 December 1976 created ``a valid equitable charge upon such fund; in other words, [it] will operate as an equitable assignment of the debts or fund to which the order refers''. (Per Lord Truro L.C. in
Rodick v. Gandell (1852) De G.M. & G. 763 at pp. 777-778 approved in
Palmer v. Carey (1926) A.C. 703 (P.C.). See also
R. v. Greig (1931) V.L.R. 413 at p. 435 per Cussen A.C.J.)

The equitable proprietary interest assigned in the existing debts as identified in Exhibit 1 arose in the assignee as soon as the agreement was made. See
Holroyd v. Marshall (1862) 10 H.L. Cas. 191;
Tailby v. Official Receiver (1888) 13 App. Cas. 523. And insofar as the agreement related to future Sanyo-Guthrie debts, it arose as soon as they came into existence and were identified. See
Re Yorkshire Woolcombers Association Ltd. (1903) 3 Ch. 284 at pp. 293-294.


ATC 4828

It seems clear that such a subsequent specific charge without more takes priority over an earlier floating charge which has not crystallized. See
Re Hamilton's Windsor Ironworks; Ex parte Pitman & Edwards (1879) 12 Ch.D. 707; and
Wheatley v. Silkstone & Haigh, Moor Coal Co. (1885) 29 Ch.D. 715 at p. 719 (North J.).

However, there was in the present case a restrictive clause in the floating charge, allied with a provision that the parties agreed that the floating charge ``shall become fixed'' in the event that the borrower attempted to grant another charge to rank pari passu or in priority to the floating charge. Accordingly issues as to priorities between successive assignments arise, once the borrower granted such a subsequent fixed charge.

The position of the debenture holder was made the stronger, for the subsequent fixed charge was executed by and in favour of a person who had actual knowledge of the prior floating charge and of its restrictive clauses. In my opinion, until this issue of priorities is first decided, it cannot be said that ``control'' of the book debts ``could not pass'' to the receivers and managers appointed under the terms of the floating charge.

I think that the last sentence in the passage quoted above from Barnes' case (at ATC p. 4266; C.L.R. p. 492) must be understood to apply in a context where there is an asset separately secured and there is no prior equity relating to the asset able to be established by the person appointing the receiver. If there are competing successive proprietary interests in the asset, and one of them is entitled to priority over that claimed by the person appointing the receiver, it would seem that Barnes' case is authority for the proposition that control of the property in that asset (insofar as is necessary to satisfy the prior interest) does not, for the purposes of sec. 221P, pass to the receiver. Otherwise, in my opinion, control of the property in that asset does pass, for as their Honours say, to construe the section as if ``property'' referred only to the company's equity of redemption in any property ``is self-contradictory''. (See ATC p. 4266; C.L.R. p. 491.)

Receivers and managers appointed out of Court have the duty to realise assets and collect receipts coming to the company and to make payment from such receipts to creditors of the company according to their respective priorities. If they enter into contracts they generally do so as agents of the company (see
Owen v. Cronk (1895) 1 Q.B. 265), but in some respects they may be agents of the person appointing them (see also Exhibit B Condition 5).

In F.C. of T. v. Card (1963) 109 C.L.R. 177 at p. 191, Menzies J. expressed the view that control was established for the purposes of sec. 221P(1):

``... so long as it is sufficient to enable the trustee to resort to the property of the defaulting employer for the purpose of meeting the obligations imposed by the section.''

Barnes' case would seem to decide that the trustee could not resort to separately secured property, encumbered by a prior equity, to the extent that that property was required to satisfy the prior equity.

The employer had only an equity of redemption in the separately secured property, and the receiver could be in no better position.

But, if the debenture holder was entitled to priority over the fixed chargee (as well he might be in the present case) it would be an odd piece of reasoning to look at the separately secured asset, and to say that, because the employer had only an equity of redemption in it, control of it did not pass to the receiver. This would take it out of the fund from which the receiver was required by sec. 221P to pay the amount owing to the Commissioner. But the receiver would then be required in accordance with his general duty as to priorities to collect such moneys and to pay such moneys as were realised on the asset in satisfaction of the debenture holder's advance.

Mr. Goldberg for the Commissioner submitted that control of property passed within the meaning of sec. 221P(1) as soon as the receiver obtained possession of moneys on realization. He pointed in the majority judgment in Barnes' case to a passage in support, which reads:

``Control does not necessarily signify authority in the receiver to pay all debts


ATC 4829

out of the funds in his hands. Control is directed to possession and realisation of the company's property and, in determining whether control of the property passed to the receiver, it is not relevant to enquire whether, independently of sec. 221P, the receiver has authority to make the payment which sec. 221P requires.''

(At ATC p. 4266; C.L.R. p. 492.)

Further he submitted that control of property may pass to the receiver even though, in the absence of sec. 221P, part of the property controlled may have to be paid to specific secured creditors. Control of property is not commensurate with ``beneficial interest in'' property. I would have found this argument persuasive had it not been for the clear and repeated statements in Barnes' case relating to ``particular assets which are separately secured'', and to the effect that control cannot extend to them.

In summary Mr. Goldberg submitted that if control in fact can be demonstrated (as I find that it can be here, for the receivers negotiated the amount payable by Sanyo-Guthrie on the book debts, and received payment of the negotiated amount) then sec. 221P(2) imposes a priority in favour of the Commissioner, and moneys in the hands of the receivers must be paid to the Commissioner in satisfaction of the amount owing for group tax.

He argued by analogy with the decision in
F.C. of T. & Ors. v. Smorgon & Ors. 76 ATC 4364; (1976) 143 C.L.R. 499 that ``control'' of the moneys realised on the book debts had passed to the receivers. But as Dixon J. said in
Bank of New South Wales v. Commonwealth (1948) 76 C.L.R. 1, control is ``an unfortunate word of - wide and ambiguous import'' and it must be construed according to its context in the particular statute in which it is found.

Normally, the proceeds on realisation of the book debts, being encumbered property, would be bound by the same equities as those which bound the property itself. Fisher and Lightwood's Law of Mortgage 9th ed. (1977) p. 448.

In the present case, if the holder of the fixed charge over Sanyo-Guthric book debts had been a third party, in my opinion it would have been necessary (in the absence of sec. 221P) for the receivers and managers to have determined the issue of priorities as between the debenture holder and the third party fixed chargee. If the circumstances were found to be such that the fixed chargee did not have priority to the debenture holder, then in my opinion it would have been the duty of the receiver to pay the proceeds of the book debts to the debenture holder in priority to the fixed chargee.

If this same situation is then considered in the context of sec. 221P of the Act, it would, I believe, be consistent with Card's case and Barnes' case (above) to conclude that control of the property in the book debts passed to the receivers. The receivers would then be liable to pay the proceeds of such book debts to the Commissioner in priority both to the debenture holder and the fixed chargee (see sec. 221P(2)).

If the holder of the fixed charge did not have priority over the debenture holder, the mere fact of the existence of the fixed charge at the time of appointment of receivers would not in my opinion prevent control of the property to which the fixed charge attached from passing to the receivers within the meaning of sec. 221P.

It may therefore be important to determine whether in the present case the floating charge had crystallized to a fixed charge before the subsequent fixed charge over the Sanyo-Guthrie book debts was granted by Intercab.

It may also be important (even if the question whether the floating charge had crystallized earlier is answered in the negative) to determine whether the fixed charge over the Sanyo-Guthrie book debts had priority to the floating charge, so that, on appointment of the receivers pursuant to the floating charge, control only of Intercab's ``equity of redemption'' in those book debts, after satisfying the interest of the fixed chargee, passed to the receivers.

The unusual circumstances in the present case to which I have referred are that the company in whose favour the subsequent fixed charge over the Sanyo-Guthrie book debts was granted was the original debenture holder in whose favour the floating charge


ATC 4830

over all the company's property present and future including book debts had been granted. Furthermore the subsequent fixed chargee had knowledge of the existence and terms of the earlier floating charge, which included a restrictive clause against granting any charge to rank pari passu or in priority to the floating charge itself (see Condition 1 proviso 1). The situation is somewhat artificial, but it must be remembered that different advances were being secured.

Next, the floating charge itself contained terms which purported, at the very least, to convert the charge from a floating charge to a fixed charge on the happening of specified events, one of which had occurred long before the subsequent fixed charge was granted (i.e. default by Intercab in repayment) and one of which occurred on the granting of the fixed charge.

Dr. Pannam's first submission was that at the time of the appointment of the receivers, Intercab did not, because of the fixed charge, control the book debts of Sanyo-Guthrie and that, consequently, the receivers, standing in Intercab's shoes, could not be said to do so. He relied upon Barnes' case at ATC pp. 4264, 4265-4266, 4269-4270; C.L.R. pp. 488, 491-492, 498-499.

Dr. Pannam argued against the concept of automatic crystallization of the floating charge. he used the words ``catastrophic'' and ``unworkable'' as also did, I think, Lord Halsbury in
Government Stocks and Securities Investment Co. Ltd. v. Manila Railway Co. (1897) A.C. 81 at pp. 84-85.

He stressed that the Courts were reluctant to accept that a floating charge could automatically crystallize, so paralysing the company's business.

I have read the authorities on this matter, and it is my opinion that, as a matter of law, there is nothing to prevent an agreement being made whereby a floating charge crystallizes on the happening of specified events. The Manila Railway Co. case (above) itself may be cited in support of this concept. See also
Evans v. Rival Granite Quarries Ltd. (1910) 2 K.B. 979 at p. 1000;
Davey & Co. v. Williamson & Sons Ltd. (1898) 2 Q.B. 194. It was clearly accepted that this could be so in
Stein v. Saywell (1969) A.L.R. 481 and in Barnes' case at ATC p. 4264; C.L.R. p. 488 and in
Smith & Judge v. D.F.C. of T. & Anor. 78 ATC 4561.

It is the intention of the parties as contractually expressed, which must be ascertained. Since it is possible to have a specific security by way of charge over all the present and future property of the company, I am not able to accept that as a matter of legal theory, a contract which is made on the basis that the floating charge created by it will become fixed on the happening of certain events is ineffectual to achieve that purpose. Holroyd v. Marshall (1862) 10 H.L. Cas. 191;
Roscoe v. Whitmore (1893) 33 L.J. Ch. 63.

In the particular floating charge with which we are here concerned the words to be construed were:

``Provided that the floating charge hereby created shall become a fixed charge if the security hereby created becomes enforceable as hereinafter mentioned...''

(See Condition 1 Exhibit B.)

It is common ground that the amounts secured by the floating charge were not repaid by Intercab to Griffiths on the due date, and that the security therefore became enforceable as defined in the deed of charge (Condition 3). Furthermore, Condition 1 stipulated that the:

``... Borrower shall not create or suffer to be created any other mortgage charge or lien upon the mortgaged property to rank equally with or in priority to the charge hereby created save and except that any existing mortgage over the land of the Borrower shall rank undisturbed in the priority that it at present enjoys.''

A further proviso relating to specially defined after acquired land and assets stipulated that with the consent of the lender the borrower should be at liberty to charge them so that the mortgagee should rank in priority to the floating charge. It is not suggested that this further proviso is applicable to the present case, and it may be disregarded, save of course that it evidences the fact that the parties to the floating charge deliberately turned their minds to a consideration of the circumstance in which another charge might thereafter be created to rank in priority to the floating charge. Those circumstances did not apply here.


ATC 4831

It was because of the ``conceptual disadvantages'' of automatically crystallizing floating charges that Dr. Pannam submitted that this debenture does not mean what it says. I do not accept this submission.

Alternatively Dr. Pannam submitted that Griffiths, by doing nothing when default occurred, waived their right to assert that on default the floating charge in question became fixed automatically. I do not accept this submission. It seems to me that it begs the question. It is persuasive only if it was necessary to perform some overt act in order to cause the floating charge to crystallize. This is the very matter in question.

In any event, he submitted that the evidence clearly shows that in December 1976, there was an agreement between the two parties to the floating charge to take out of its operation the Sanyo-Guthrie book debts.

I find that the intention of the parties to the original floating charge as expressed in the deed was that it would convert from a floating charge to a fixed charge on the happening of certain events. It may be accepted that the essential feature of a floating charge is that the company granting the same may continue to trade in the ordinary way uninhibited save by the terms of the floating charge. But such a charge is only worth having if it does provide security for the lender in the event that his money is not repaid. In the early days of the development of the floating charge, many cases decided that subsequent fixed charges ranked in priority to such a floating charge. In order to avoid this consequence, debenture holders secured by a floating charge introduced the restrictive clause found in the present case, whereby the borrower agreed not to issue a subsequent charge ranking pari passu or in priority and the floating charge was to become fixed if the borrower attempted to do so.

The apparent reluctance of the Court (referred to by Dr. Pannam as ``the pedantic approach'') towards the end of the 19th century and early into the 20th century, to conclude that the parties to such a floating charge intended that the charge should automatically crystallize on the happening of certain events and without any overt act being performed (such as entry into possession or the appointment of a receiver) stemmed from what were then seen to be the disastrous consequences of such a conclusion. It was said that the company would be paralysed for, on crystallization, all of its assets would be impressed with the charge and, moreover, third parties dealing with the company would be unaware that its assets were so charged, and this could work an injustice against them. It seems to me that the injustice referred to could work either way.

Today the requirement that a floating charge must be registered does to a degree alleviate the risk that third parties may be taken by surprise. The suggested paralysis simply does not occur. The priorities which attach to subsequent chargees who take without notice of the existence of a prior floating charge or of its terms operate against the efficiency of automatic crystallization clauses - but not against their legality.

In any event, in the present case I am of the opinion that the intention of the parties is quite clearly expressed and that the floating charge crystallized when Intercab was in default in repaying the moneys borrowed. If not then, then when Intercab commenced to enter upon the subsequent charge, and finally, even the defendant concedes that it crystallized on appointment of the receivers.

Dr. Pannam was prepared to concede in argument that as between contracting parties automatic crystallization can occur, although his junior Mr. A. Myers in reply was prepared only to say that the matter has not yet been decided in Australia. Cf. Ford Principles of Company Law (1982) 3rd ed. p. 268.

In my opinion, the fact that the borrowing company may be inconvenienced or that third parties may not receive notice has no bearing on the interpretation of the contract as expressing the intention of the parties. They are simply considerations to be borne in mind as possible consequences of automatic crystallization, if the parties have not clearly spelt out what their intention is, and the Court is asked to construe an ambiguous or silent document.

The parties to a floating charge can express clearly their intention that the charge shall


ATC 4832

become fixed immediately on the happening of specified events. They have in my opinion done so here. They may express their intention to be that it shall crystallize only on appointment of a receiver. They may remain silent as to the matter of crystallization, simply empowering the debenture holder to appoint a receiver or to go into possession on default by the borrower. In this latter case, the Courts will conclude that the floating charge does not crystallize until the appointment of receivers or entry into possession. Or the parties may expressly provide that the charge shall become fixed on the happening of specified events. All of these propositions are, in my opinion, consistent with Lord Macnaghten's opinion as expressed in
Illingworth v. Houldsworth (1904) A.C. 355 at p. 358 where he said:

``A floating charge - is ambulatory and shifting in its nature, hovering over and so to speak floating with the property which it is intended to affect until some event occurs or some act is done which causes it to settle and fasten on the subject of the charge within its reach and grasp.''

(My emphasis.)

I find that the floating charge in this case became fixed when the debtor, Intercab, did not on or before 8 February 1978, repay the amounts lent as it had contracted to do.

Many of the cases deal with floating charges pursuant to the terms of which the debenture holder is empowered on the happening of certain specified events to take steps to determine the right of the company to carry on business. But the mere right to intervene does not change the floating charge into a fixed charge. See In
re Standard Manufacturing Co. (1891) 1 Ch. 627; In
re Opera Ltd. (1891) 3 Ch. 260; Evans v. Rival Granite Quarries Ltd. (1910) 2 K.B. 979 at pp. 983, 1000 per Fletcher Moulton L.J., per Buckley L.J.; Davey & Co. v. Williamson & Sons (1898) 1 Q.B. 194.

The present case is quite distinct from these cases. I have already referred to the terms of the floating charge itself. In my view the debenture does not allow of any construction that the floating charge would not become fixed until appointment of receivers and managers or entry into possession which is, as I understand it, the only alternative construction that is put forward.

Conditions 1 and 3 specify precisely the circumstances in which the charge is to become fixed. Then Condition 4 empowers the lender after the security becomes enforceable at his discretion to take possession and Condition 5 states:

``The Lender at any time after the security hereby constituted becomes enforceable may by writing appoint a Receiver of the mortgaged property or any of it...''

The exercise of neither of these discretionary powers could be seen, as a matter of construction, to effect or affect the fixed nature of the security, which in my opinion had already occurred as agreed upon by the parties.

The lender was not required by the agreement to do anything at the time that the security became enforceable and so fixed. Nor is there anything which the law requires the lender to do. Accordingly, its failure in this case to do anything, accepting Dr. Pannam's argument that it did nothing, cannot, in my view, be construed as a waiver. No other facts are relied upon as constituting a waiver.

The appointment of receivers and managers by Griffiths was made on 6 January 1977 pursuant to its powers under Condition 5 of the original debenture. The default relied upon had occurred at a much earlier date.

On 23 December 1976 by deed bearing that date, the debtor Intercab gave Griffiths ``a specific fixed charge on all the book debts present and future of the debtor from Sanyo-Guthrie Australia Pty. Ltd. including those debts listed in the schedule hereto'' (Exhibit 1).

What then was the effect of this charge? Did it prevent control of the property in the said book debts from passing to the receivers, save as to any equity of redemption in Intercab?

In my opinion the answer is in the negative irrespective of the precise time at which the floating charge became fixed.

Here Griffiths took the subsequent fixed charge on the Sanyo-Guthrie book debts with


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actual notice of the prior charge and with actual notice of the restrictive clauses in such prior charge. See Gough Company Charges (1978) pp. 149, 155-158.

Even on the hypothesis most unfavourable to the Commissioner that the prior floating charge had not crystallized at the time when Intercab granted the fixed charge over the said book debts, it is reasonably clear that in equity if the chargee entitled to the benefit of the fixed charge was a third party, who took the charge with actual knowledge of the prior floating charge and actual knowledge of its restrictive clauses (against granting subsequent charges to rank pari passu or in priority to it) he would not take in priority to the floating charge. See
English and Scottish Mercantile Investment Co. Ltd. v. Brunton (1892) 2 Q.B. 700 at p. 707 per Lord Esher M.R.; and Re Hamilton's Windsor Ironworks; Ex parte Pitman & Edwards (1879) 12 Ch.D. 707 at pp. 711-712 per Malins V.C. (The facts of this latter case bear a remarkable similarity to many of the facts of the present case save that in that case, there was no restrictive clause in the earlier debenture.) See
Wilson v. Kelland (1910) 2 Ch. 306;
Cox v. Dublin City Colliery (1906) I.R. 1940;
C. & T. Earle Ltd. v. Hemsworth R.D.C. (1928) 44 T.L.R. 605; and
Dempsey & Anor. v. Traders Finance (1933) N.Z.L.R. 1287.

It is said that it would be unconscionable in such circumstances for the subsequent fixed charge to rank prior to the earlier floating charge.

Even though the fixed chargee is first with his proprietary interest, the maxim qui prior est tempore potior est jure, does not apply because the merits are not equal. Compare Latec
Investments Ltd. v. Hotel Terrigal Pty. Ltd. (1964-1966) 113 C.L.R. 265 at p. 276 per Kitto J.

These decisions relate to cases where the subsequent fixed charge was granted to a person other than the person to whom the original debenture and floating charge was granted. But I doubt whether in the present case there is any distinction to be drawn.

There is nothing in the evidence to suggest that Griffiths gave up any of the benefits flowing to it under the floating charge (whether fixed or still floating) to secure the initial advances made by it in January 1975.

There is nothing to support the conclusion that Griffiths and Intercab agreed to exclude the Sanyo-Guthrie book debts from the property impressed with liability under the floating charge to repay the advances of January 1975 with interest.

The Sanyo-Guthrie book debts exceeded in value the amount of the advance made by Griffiths to Intercab on 23 December 1976 (Exhibit 1) and it seems extremely unlikely that Griffiths would have been willing to remove the said book debts from the property available to secure also the advances made under and secured by the floating charge.

The floating charge had secured only the Griffiths advances made in January 1975. It did not purport to secure any subsequent advances. Griffiths was anxious to secure also its advance of December 1976 and so the fixed charge was drawn. Without it there would have been no security in favour of Griffiths relating to the new advance.

The oral evidence and the silent testimony of the memorandum of the company secretary (Exhibit 6) and the fixed charge itself (Exhibit 1) do not support the contention that the parties to the original floating charge agreed to vary, amend or alter its terms or effect in any way. I find that they did not so agree. It might also be said that, if the parties entered upon the fixed charge with an eye on Barnes' case and to defeat sec. 221P, to give priority to the subsequent charge would be unconscionable; but I do not decide the case on this basis.

The Sanyo-Guthrie book debts referred to in the fixed charge of 23 December 1976 were in my opinion at all material times impressed with the charge dated 6 January 1975. See
Palette Shoes Pty. Ltd. v. Krohn (1937) 58 C.L.R. 1 at pp. 26-27 per Dixon J.;
Ferrier v. Bottomer (1971-1972) 126 C.L.R. 597 at p. 607 per Menzies J. Acquired assets, that is to say assets acquired after the floating charge became fixed, are subject to the charge and liable to be used to repay the advance owing. Furthermore any dealing with Intercab by a person who had actual notice of the earlier charge and actual notice of its terms was subject to that earlier charge.

Exhibit 6 states:

``We advise having drawn cheque No.


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079119 for an amount of $22,280.77 being Holiday Pay for Intercab.

We also enclose for your information and records a copy of the appointment of receiver which the writer has signed and sealed but which at this stage, has not been countersigned or dated.

Kind regards,

Jack.''

Mr. John Frederick Smith, the resident secretary in Victoria of Griffiths, gave evidence that on 23 December 1976 he wrote this memorandum to his counterpart in Sydney where Griffiths was administered. He said:

``I knew that Intercab were very very short of money and that Griffiths Bros. were going to advance them the money for the reasons already - with the debenture or whatever as security for that advancement.''

(See pp. 32-33 of the transcript.)

It was no doubt hoped that despite sec. 221P the new fixed charge would secure this further advance. But there is, in my opinion, nothing in the material to suggest that it was intended that the terms or the legal effect of the original debenture and floating charge of 6 January 1975 would be varied, amended or altered in any way.

I repeat what I have already stated, namely that it is only proprietary rights ranking in priority to the right of the debenture holder which on my understanding of the ratio of Barnes' case would lead to the result that the property in question, to the extent of the prior charge, ``could not pass'' to the receiver.

In the circumstances in which the debenture holder has priority, ``control of - property'' does pass to the receiver despite the subsequent legal charge and any sum realised on the asset would in my opinion be property passing to the control of the receiver, and therefore liable to pay the amount due to the Commissioner pursuant to the Act.

Accordingly, in the present case, in my opinion the receivers and managers are liable to pay the amount realised on the Sanyo-Guthrie book debts to the Commissioner in part payment of the amount of group tax owing to him by Intercab.

I now turn to the issue whether the receivers and managers were entitled to retain their out-of-pocket expenses and remuneration out of the sums realised before paying to the Commissioner the amount owing for group tax deductions. The total of these sums was $13,212.25 made up of $563.52 out-of-pocket expenses and $12,648.73 remuneration (see Exhibit 2).

Dr. Pannam submitted that sec. 221P(3) is inserted in the Act ex majore cautela to make clear the interlocking between sec. 221P(2) of the Act and sec. 109 of the Bankruptcy Act 1966 (Cth.) and sec. 292 of the Companies Act 1961 (Vic.). He referred to Barnes' case (ATC at pp. 4266 and 4270; C.L.R. at pp. 448, 492 and 499) where references to ``net proceeds'', to ``a fund'' and to the ``surplus resulting from realisation'' suggest that sec. 221P(1) is only concerned with payment to the Commissioner after deductions of the usual outgoings.

He also referred to two Canadian cases,
Re Toronto Metal and Waste Company (1921) 67 D.L.R. 111 at pp. 111-112 and
Lamarre v. R. (1948) Can. L.R. (Ex. C.R.) 115 at p. 128. These were both cases in bankruptcy, and it was held that the Crown's prerogative right to be paid taxes upon distribution in bankruptcy is subject to the trustee's right to be paid his fees and expenses. Orde J. said in the first mentioned case in a passage approved by Angers J. in the second:

``... As the collection of the taxes of which the Crown reaps the benefit must under the circumstances be made through the medium of the bankruptcy, it would seem to be wholly unreasonable and unfair that the Crown should be entitled to take advantage of the administration of the estate by the trustee without being subject to the expense incidental to such administration.''

((1948) Ex. C.R. at pp. 128-129.)

It was said in those cases that the Crown's prerogative was, in the statutory circumstances, ``merely a right of preference in the administration of the estate''.

The law in the absence of statute is that ``receivers and managers are entitled to their just charges and expenses incurred in the


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management of the estate in which they may have been appointed receivers and managers, and they are entitled to those charges in priority to the debenture holders and other persons holding charges on the property''.
Batten v. Wedgwood Coal and Iron Co. (1884) 28 Ch.D. 317;
Ex parte Izard; Re Bushell (No. 1) (1883) 23 Ch.D. 75;
Strapp v. Bull, Sons & Co. (1895) 2 Ch. 1 at p. 9.

Dr. Pannam submitted that the receivers and managers are in the same position as the supplier of the electricity necessary to assist in performing the bookwork of realisation.

On the other hand Mr. Goldberg for the Commissioner submitted that the cornerstone of sec. 221P is that the receiver (trustee) is liable to pay the amount of group tax not paid by the employer to the extent that it can be paid out of all property that comes within his physical control. He pointed out that subsec. (3) of sec. 221P was only added by Act No. 85 of 1959 (sec. 24), and that its deliberate discrimination against receivers cannot be ignored.

He relied upon the fact that sec. 221P(3) specifically exempted the trustee of the estate of a bankrupt and the liquidator of a company that is being wound up, and provided that in those instances subsec. (2):

``... does not operate so as to make that amount payable in priority to any costs, charges or expenses of the administration except where, in the case of the winding up of a company, the Crown in right of a State or any other creditor is entitled to payment of a debt by the liquidator in priority to all or any of those costs, charges and expenses and has not waived that priority.''

(See sec. 221P(3).) (My emphasis.)

It appears to me that subsec. (3) clearly proceeds on the assumption that without it the deduction by a trustee in bankruptcy of his costs, charges and expenses and the deduction by a liquidator of his costs, charges and expenses would be postponed by subsec. (2) to the payment of the amount of group tax owing to the Commissioner.

This view is confirmed by the exception contained at the conclusion of subsec. (3). The exception itself does not confer any entitlement upon the Commissioner. It simply proceeds on that basis and provides that the exempting provisions of subsec. (3) will not operate where someone else has a debt owing with priority over the trustee's or liquidator's costs, charges and expenses and would benefit, at the Commissioner's expense, if sec. 221P(2) did not operate. In such a case the statute assumes that the Commissioner's right of priority given by subsec. (2) shall continue to operate, and that as a consequence he shall be paid prior to the trustee's or the liquidator's costs, charges and expenses and prior to the debt of the Crown in right of a State or any other creditor.

Receivers appointed out of Court are normally paid in accordance with the terms of their contract of appointment. Here the original debenture and floating charge empowered the lender to fix the receiver's remuneration and to direct payment thereof out of the mortgaged property (see Exhibit B Condition 5(e)). The same document provided for the application of all moneys received by the receivers and Condition 6(b)(i) specifically related to the payment of the receiver's costs, charges and expenses, including commission not exceeding 5 per cent on the gross amount of all moneys received prior to satisfaction of the ``principal sum accruing due under this Deed''.

The notice of appointment of receivers states that the ``Company shall be solely responsible for your acts and defaults and for your remuneration'' (see Clause 2 Exhibit D). In the present case the debenture provided that the receiver should be the agent of the company.

The law is that the bargain between the debenture holder and the lender regulates both the ability of the receiver to charge remuneration and its rate (subject to any private bargain that the receiver may make with the debenture holder). Accordingly, it would be understandable if his entitlement to such remuneration was postponed to the Commissioner's priority for payment of earlier outstanding group tax. The amount of such tax is represented somewhere in the assets of the company employer. Cf. Card's case per Menzies J. (1963) 109 C.L.R. 177 at p. 195.

It has been held that the receiver's expenses and liabilities rank ahead of his


ATC 4836

remuneration for payment out of the company's assets. See
Re Beni Felkai Mining Co. Ltd. (1934) Ch. 406.

In
Bank of N.S.W. v. F.C. of T. 79 ATC 4687; (1979) 145 C.L.R. 438; (1979) 28 A.L.R. 43 it appears to have been assumed, on the facts of that case, that the costs, charges, expenses and outgoings of the receivers would be paid before arriving at the net fund available for distribution in accordance with sec. 196 of the Companies Act and to the debenture holder (see ATC at p. 4692; C.L.R. at pp. 449-450). But in that case no statutory provisions relating to the Commonwealth's right to be paid income tax were applicable. Gibbs J. said (at ATC p. 4693; C.L.R. p. 451):

``Sections 221P(2) and 221YU(2) of that Act give priority to the Commissioner in certain cases over all other debts, whether preferential, secured, or unsecured; those sections have no application to this case, and their strong and clear language has no counterpart in any provision relevant to the present circumstances.''

(My emphasis.)

In the present case the ``strong and clear language'' of sec. 221P(1) and (2) establishes the Commissioner's right and his priority. As a matter of construction it appears to me simply to be a question of whether the receiver's costs, expenses and charges or any of them are ``debts'' within the meaning of sec. 221P(2). In my opinion they are debts of the company which, under the terms of the debenture, it is liable to pay. They are not saved from the operation of sec. 221P(2) by sec. 221P(3), although comparable costs, charges and expenses of trustees in bankruptcy and liquidators are so saved, except in certain circumstances.

In my opinion the statute is clear and the Commissioner is entitled to be paid the amount owing to him by the company for group tax earlier deducted in priority to any costs, charges or expenses of the receiver.


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