Re Mzimba Pty. Limited

Judges:
McLelland J

Court:
Supreme Court of New South Wales

Judgment date: Judgment handed down 17 March 1989.

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McLelland J.

On 26 May 1986 an order was made for the winding up of Mzimba Pty. Limited (``Mzimba'') and the applicant, Mr M.W. Prentice (``the liquidator''), was appointed as its liquidator. Prior thereto the company, being registered as a ``group employer'', had made deductions from the salary or wages of employees for the purposes of Div. 2 of Pt VI of the Income Tax Assessment Act 1936, which it had failed to deal with in the manner required by that Division. The amount involved was substantially in excess of $100,000.

By deed dated 21 June 1985 Mzimba had charged the whole of its undertaking and assets to Oscleg Pty. Limited (``Oscleg'') to secure payment to Oscleg of certain money. The charge was a fixed charge over certain assets and a floating charge over certain other assets. The floating charge crystallised upon the making of the order for the winding up of Mzimba.

Upon his appointment the liquidator (who had previously been the provisional liquidator of Mzimba) made arrangements for the sale of its principal asset, a takeaway business at Gosford. There was correspondence between the respective solicitors for the liquidator and Oscleg in relation to such a sale. Oscleg, through its solicitors, indicated that it had no objection to a sale by the liquidator proceeding, and on completion would provide a release of its charge, subject to the liquidator's retaining out of the proceeds of sale an amount equal to the secured debt owing to Oscleg plus anticipated costs ``until such time as the court determines the parties' entitlement thereto''. The business was sold by the liquidator for $115,000 by contract dated 21 July 1986. The sale was completed on 18 August 1986, immediately prior to which the liquidator's solicitors delivered to Oscleg's solicitors a letter in the following terms:

``In consideration of you handing to us on settlement a release of charge duly executed by Oscleg Pty. Limited we undertake to retain in our trust account the amount of $38,697.44 pending agreement as to disposal of that amount between Oscleg Pty.

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ATC 4231

Limited and the liquidator of Mzimba Pty. Limited (in liquidation), Mr. M.W. Prentice. We will not disburse any part of this amount except upon the written direction of both Oscleg Pty. Limited and the liquidator of Mzimba Pty. Limited (in liquidation), Mr. M.W. Prentice, or by order of a Court.''

The liquidator now seeks directions from the Court as to whether he would be justified in paying the retained funds to the Commissioner of Taxation or alternatively to Oscleg.

The question turns on the effect in the circumstances of sec. 221P of the Income Tax Assessment Act, which provides, so far as presently relevant:

``221P(1) Where an employer makes a deduction for the purposes of this Division... from the salary or wages paid to an employee and refuses or fails to deal with the amount so deducted in the manner required by this Division... 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 law of the Commonwealth or in any law of a State...

• (a) an amount payable to the Commissioner by a trustee in pursuance of this section has priority over all other debts... whether preferential, secured or unsecured...''

It is clear that where a company is ordered to be wound up and a liquidator appointed, the liquidator is a ``trustee'' to whom control of the company's property has passed within the meaning of the section.

In
F.C. of T. v. Card (1963) 109 C.L.R. 177 it was held that the section should be construed so as to limit the liability of a ``trustee'' under subsec. (1) to payment out of ``property of a defaulting employer which has become vested in, or has passed under the control of, the trustee'' (see pp. 194-195 and 197).

In
F.C. of T. v. Barnes 75 ATC 4262; (1975) 133 C.L.R. 483 it was said in the joint majority judgment that:

``the section does not provide that the debt due to the Crown shall have priority over all secured debts of a defaulting employer... In the context the reference to secured debts is only to those secured debts which are payable out of the property which has vested in or control of which has passed to the trustee. In that particular case a security created over the whole of the property, in the sense which we have earlier explained, is to be ignored or postponed. The case is quite different in nature and effect from a case where it is attempted to give the Crown priority in payment to a secured creditor whose security is a particular asset and whose beneficial interest in that asset would thereby be taken from him.''

(See at ATC p. 4267; C.L.R. p. 493.)

This limitation of the meaning of the expression ``debts... secured'' in subsec. (2) to debts secured over the whole of the property the control of which passes to the trustee, excluding debts secured only over part of that property, provides the explanation for the otherwise puzzling distinction which earlier in the judgment (at ATC pp. 4265-4266; C.L.R. pp. 491-492) their Honours draw between the effect under the section of a prior security interest over the whole of the property on the one hand and a prior security interest over particular assets (being less than the whole property) on the other.

In the present case, Oscleg's charge was over the whole of the property of Mzimba. Accordingly the amount owing to Oscleg is a secured debt within the meaning of subsec. (2), which by force of that section must yield priority to the Commissioner's claim under the section. It was argued by counsel for Oscleg that by virtue of the existence of the charge, the liquidator lacked any power to realise any assets and in particular the business, except subject to the charge, and therefore although until such time as Oscleg intervened by going into possession itself or appointing a receiver the liquidator had power to take possession of, inter alia, the business, he could only realise it (free of the charge) by discharging the debt secured by the charge. Reference was made in this connection to the discussion of sec. 221P in the judgment of McPherson J. in
D.F.C. of T. v. A.G.C. (Advances) Limited & Ors 84 ATC 4776];
Re Obie Pty. Ltd. 84 ATC 4776; (1985) 1 Qd.R. 464. At [ATC p. 4781]; Qd.R. p. 472 his Honour said:

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ATC 4232

``Section 221P does, as the judgments in F.C. of T. v. Barnes recognise, invest the trustee with the requisite authority, even if it is otherwise lacking, to make the payment to the Commissioner required by that section. It says nothing, however, about a power to realise assets in order to make that payment. Prima facie, therefore, control of an asset cannot be said to have passed if there is in the trustee no power to realise that asset in order to pay the amount of the liability under sec. 221P.''

This was said in the context of his Honour's considering whether a provisional liquidator of a company, who had no power to realise any of its assets, was a ``trustee'' within the meaning of sec. 221P. It was held that he was not, as no ``control'' of the assets of the company passed to him in the sense in which the expression ``control'' is used in the section. In reaching this conclusion his Honour referred to the following passages from the joint majority judgment in Barnes at ATC p. 4266; C.L.R. p. 492:

``The control which is referred to 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.

...

Control is directed to possession and realisation of the company's property...''

There is no doubt however that a liquidator has power to realise the assets of a company and is thus a ``trustee'' to whom control of those assets passes within the meaning of subsec. (1). Once that position has been reached (and it never was reached in [D.F.C. of T. v. A.G.C. Advances]; Re Obie) it is necessary to give effect to the provision in subsec. (2) giving priority to the Crown's claim over debts secured over the whole of the property of the company. According to what was said in Barnes, that subsection requires the security to be ``ignored or postponed''. If in accordance with Card and Barnes the Commissioner's claim against the liquidator is to be satisfied out of the property control of which passes to the liquidator, and if Oscleg's security is to be ``ignored or postponed'', there must necessarily be implied a power in the liquidator to realise that property free of Oscleg's charge.

The operation of sec. 221P has been considered by the Court of Appeal in different factual circumstances in D.F.C. of T. v. A.G.C. (Advances) Ltd. & Ors 84 ATC 4177; (1984) 1 N.S.W.L.R. 29 and in
James v. D.F.C. of T. 88 ATC 4812. I do not think that anything I have said is inconsistent with what was said in either of those cases. I was referred to a number of other decisions. The closest to the facts of the present case is that of Brinsden J. in
Smith and Judge v. D.F.C. of T. 78 ATC 4561; (1978) 38 F.L.R. 347, where a result was reached similar to my own conclusion in the present case, although perhaps not by identical reasoning. None of the other cases to which I was referred is directly in point and it is unnecessary to discuss them.

I make the following orders:

(1) Direct that Maxwell William Prentice as liquidator of Mzimba Pty. Limited would be justified in paying to the Commissioner of Taxation the funds held by his solicitors from the sale of the company's business.

(2) Order that the respondent Oscleg Pty. Limited pay the costs of this application of the applicant and of the respondent the Commissioner of Taxation.