GAGIE v DFC of T
Members:Young J
Tribunal:
Supreme Court of New South Wales - Equity Division
Young J
This is a dispute between the Deputy Commissioner of Taxation and a secured creditor of Haleglen Pty Ltd as to which of the is entitled to moneys that are currently held by Messrs Gagie and Singleton.
However, formally the plaintiffs are the liquidator and the company. The Taxation Commissioner is the first defendant and the Commonwealth Bank, the secured creditor, the second defendant. The first defendant submitted as the liquidator, whom I will call ``plaintiff'' is putting forward the submissions he would otherwise make.
Mr Gagie is the official liquidator of the company. He was appointed to that position by this court on 9 June 1992. Mr Singleton was appointed by the secured creditor, the Commonwealth Bank of Australia, as its agent to collect book debts. The bank had an equitable mortgage of 9 January 1989, which gave it a floating charge over all the assets of the company, including book debts, and the bank took action which caused that charge to crystallise on 16 June 1992.
The company was one of a group of companies which was involved in the construction and property development industry. It would seem that its then controllers had structured their group in a way that was most favourable to them. The company in question here was a company that was a trustee of a family trust, and it would seem that it was utilised by other members of the group to perform construction work on development properties owned by other members of the group. However, it also had other customers as well.
When the company went into liquidation the liquidator had reason to suspect that it had two assets, first, work in progress and, secondly, book debts. The liquidator made enquiries as to the work in progress. His enquiries led him to the belief that the work in progress was worth virtually nothing.
For reasons which I hope will become clear later, it is important to know whether moneys that have been collected are the whole of the property of the company or not. Mr Forster, for the secured creditor, correctly submits that the onus of establishing that his client's agent became in control of all the property of the company rests on the plaintiff, and that if there is insufficient evidence for the court to come to that conclusion then the claim must fail; see
Hanibridge Pty Ltd (in liq) v Toomey 92 ATC 4109 at 4111; (1992) 7 ACSR 450 at 453.
A third item of property was in fact discovered by Mr Singleton during the course of his administration. The Workcover legislation of the State of Victoria is, as this legislation tends to be, rather complex. The company had assumed facts which made it make a sizeable contribution to the Victorian Workcover fund. Mr Singleton worked out that the company had made the wrong assumption and had overpaid $34,423.19. He convinced the Victorian Workcover Authority that a refund was due. The money was paid by the Victorian Workcover Authority, but was paid to the liquidator.
Nothing has been recovered by either Mr Gagie or Mr Singleton in respect of work in progress. Of the book debts Mr Singleton's affidavit (DA7) shows that of $174,742.46, alleged to be owing, the liquidator has collected
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$10,151.06 and Mr Singleton has collected $23,691. The outstanding amount of $140,900.40 seems to reflect a large number of intercompany debts and the possibility or recovery may not be great. What happened, that operated to collect those debts, is that very shortly after he was appointed Mr Gagie wrote to the debtors and asked for payment, and shortly after his appointment as agent Mr Singleton wrote a similar letter to debtors. The way in which the debts flowed in seemed to depend on the way in which the debtors reacted to the two letters, rather than any other factor.Accordingly, this was not a case, as has been the situation in a number of cases of the present type that have come before the court, where the secured creditor has stood back and let the liquidator collect the book debts (see for instance
Smith and Judge v DFC of T and National Bank of Australasia 78 ATC 4561 and
Re Mzimba Pty Ltd 89 ATC 4229; (1989) 7 ACLC 464).
The plaintiff in the winding-up proceedings was the Commissioner of Taxation and he alleged, as appears to be the fact, that a substantial amount is due to him for unpaid group tax. The bank has a secured debt of some $2 million, presumably a debt that is owing by a number of companies in the group of which the subject company was a member. Because the Commissioner's debt includes a substantial amount of unpaid group tax, section 221P of the Income Tax Assessment Act 1936, in the form that that section was in as at the date of the commencement of the winding up, comes into play. Section 221P(1), so far as is relevant, provides as follows:
``Where an employer makes a deduction for the purposes of this Division, or purporting to be for those purposes, 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, or to affix tax stamps of a face value equal to the amount of the deduction as required... 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.''
The ``trustee'' is defined by section 6(1) of that Act to include:
- ``(a) an executor or administrator, guardian, committee, receiver, or liquidator; and
- (b) every person having or taking upon himself the administration or control of income affected by any express or implied trust, or acting in any fiduciary capacity, or having the possession, control or management of the income of a person under any legal or other disability;''
The submissions of the liquidator, which are advanced on behalf of the Commissioner of Taxation, who did not independently argue the case, are put in two alternative ways.
A. The assets of the company are under the control of the liquidator and, accordingly,
- (1) The liquidator is a trustee within the meaning of section 6(1) (see
Russell & Anor v AGC (Advances) Ltd & Ors 87 ATC 4392; [1988] VR 97). - (2) The liquidator is in control because-
- (a) under section 474(1) of the Corporations Law he is given the warrant to take into his custody or control the company's property;
- (b) he wrote letters of demand to the debtors to bring about that control; and
- (c) $10,000 of debts flowed into his control pursuant to that demand.
B. Mr Singleton is himself a trustee within the meaning of section 221P.
As to A, the argument is that the bank, as at the date of the liquidation, had not performed an act which would amount to the charge crystallising, and did not do so until 16 June. Accordingly, so the submissions run, the bank was not entitled, at the time when the liquidator became entitled to control and made the demands, to be paid the moneys. The liquidator, once having gained control by that process and having the power to call in the moneys, the moneys, despite the security, were held by the liquidator to be applied in accordance with section 221P, i.e. to be paid to the Commission. The decision of Cohen J in
Re Alspar Pty Ltd 90 ATC 4945; (1990) 2 ACSR 702, was cited as supporting that proposition.
Mr Fordyce, the solicitor for the liquidator, put that for the purposes of the analysis of Cohen J in the Alspar case, the liquidator had done all he possibly could to get control of all
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the assets of the company before the charge crystallised.The word ``control'' in section 221P has been considered by the court on many occasions. In
DFC of T v AGC (Advances) Ltd & Ors 84 ATC 4177 at 4178 and 4180; [1984] 1 NSWLR 29 at 31 and 33, Russell's case (supra) at ATC page 4398; VR page 104 and the Hanibridge case (supra) the courts in this State and Victoria have held that ``control'' means de facto actual control and it is a question of fact in each case as to whether there has been control obtained.
I find it rather difficult to see how one can have control of a book debt until the point is reached where the debt is actually paid, or at least the time when the debtor irrevocably commits itself to pay the debt only to the person who has demanded it. There was discussion during argument in this case as to whether the same problem might be raised with all intangible property. How, for instance, does one control a copyright? Certainly a copyright would be controlled at the time when on actually obtained an injunction to prevent infringement of the copyright, but query whether it could be controlled at an anterior point in time. That matter can be left to another day. It seem to me, however, that one does not get control of property, being book debts, merely by making a demand on the debtor to pay their debt to you.
Accordingly, it does not seem to me that apart from the debts which were actually paid to the liquidator, the liquidator got control of the property.
In my view, the first limb of the liquidator's argument does not succeed.
B. The second limb of the argument is that Mr Singleton is the controller, with fiduciary duties, of the property of the company and section 221P applies to him.
The first question is whether Mr Singleton is a fiduciary within the meaning of section 6 of the Income Tax Assessment Act. Uninstructed by authority, I would have found great difficulty in finding that he was, but there are authorities that need to be followed.
It has been put in this case and in other cases on section 22lP that particular constructions of the section could bring about strange results and, accordingly, those constructions were to be avoided; see for instance the result of and comments made in
Chant & Anor v DFC of T & Anor 91 ATC 4435; (1991) 22 ATR 79, and on appeal
DFC of T v Chant & Ors 91 ATC 4734; 22 ATR 449, and a completely different case called
DFC of T v Chant before Brownie J reported 92 ATC 4096; (1992) 23 ATR 97. The plain fact about the matter is that this is a very complex area of the law, the legislature has drawn its boundary line in a particular way and odd results in particular cases are bound to flow, and the mere fact that they do flow does not mean that one should pervert the language of the section. In
DFC of T v James 86 ATC 4225; (1986) 17 ATR 500 (Enderby J) and
James v DFC of T 88 ATC 4812; (1988) 19 ATR 1752 (Court of Appeal) the question was whether a scheme manager under a scheme of arrangement was a fiduciary. Both Enderby J and the Court of Appeal held that he was. The words of Enderby J, employed at ATC page 4233; VR page 509, and Mahoney JA, employed at ATC page 4818; VR page 1759, are that the scheme manager was obliged to act on behalf of others and thus he was acting in a fiduciary capacity. This definition of ``fiduciary'' flows, of course, from
Hospital Products Ltd v United States Surgical Corp & Ors (1984) 156 CLR 41, 67-75. However, in the Supreme Court of Victoria a different view was apparently reached. The case is reported at first instance as
General Credits Ltd v Chemineer Nominees Pty Ltd & Ors 86 ATC 4315; (1986) 17 ATR 934, and on appeal as
DFC of T v General Credits Ltd & Ors 87 ATC 4918; [1988] VR 571. That case involves whether a mortgagee in possession was a trustee. Gobbo J at page 4318 held that he was not and this was affirmed by the Full Court. JD Phillips QC, as his Honour then was, was counsel for the first respondent. The leading judgment was given by JH Phillips J, currently the Chief Justice of Victoria. At ATC page 4921; VR page 574 JH Phillips J referred to the words of Enderby J in James' case, but at ATC page 4922; VR page 575 said:
``As to D.F.C. of T. v. James it does not appear that the cogent arguments advanced by Mr Phillips of Queen's Counsel for the firstnamed respondent to this Court were ever put to Enderby J., and, with respect, I consider that that case was wrongly decided.''
Unfortunately the reporter did not include the arguments of JD Phillips QC so we do not
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know what so impressed JH Phillips J. In any event, with one comment, it would not seem to me that the two decisions were incompatible because it has often been said that a mortgagee in possession can do what he likes for himself and does not owe fiduciary duties to the mortgagor, at least until a particular point is reached. The one comment is the one made by Brownie J in Chant's case 92 ATC 4096; (1992) 23 ATR 97, that it is rather peculiar that one gets a different result where a mortgagee in possession acts personally and where it appoints an agent. I have already, however, dealt with that sort of comment.For some reason that completely escapes me, although the most eminent members of the Bar appeared before the Court of Appeal in James' case, and the case was heard by a strong Court of Appeal, there was no reference at all made in the Court of Appeal to the General Credits case, even though James' case was argued in March 1988 and the Victorian decision was handed down in October 1987. It may well have been that although the decision had been handed down it was not reported and so was not known, or it may be that the judges and barristers involved thought that a decision on a mortgagee in possession was of no assistance. After the decision in James' case was handed down in October 1988, Mr James sought special leave to appeal from the High Court on the basis of a difference of decision. Special leave was refused, the High Court's decision being reported in [1989] 8 Leg Rep SL 3. In dismissing the application for special leave Mason CJ said that two questions arose, (a) whether the scheme manager was a fiduciary; and (b) whether control of the employer's property had passed to the scheme manager, and then said:
``With respect to the first of those questions, we consider that the decision of the court below is not attended with sufficient doubt to justify the grant of special leave to appeal.''
The court then said that the second question depended on the facts. It would appear to me that the High Court considered that James' case was a good guide and there was no public interest in reviewing it. Since the High Court refused special leave James' case has been reaffirmed by a differently constituted Court of Appeal in one of the Chant's cases 91 ATC 4734; (1991) 22 ATR 449, and has also been followed, as we are bound to do, by various single judges of this Division. It seems to me that I should follow the James' case and not take the comment made by JH Phillips J as affecting its authority in any way.
Another matter that must now be mentioned is the submission that the obligations laid on people like Mr Singleton in the instant case towards payment of employees and a controller's duty to various other people add to the factors which would make a court consider that such persons were fiduciaries. Probably they do, but again this is not a matter that need trouble me at the present time.
In my view, the authorities are sufficient to show that Mr Singleton should be considered a fiduciary within the meaning of section 6. However, section 221P(1) as truly interpreted by the courts, including
FC of T v Barnes 75 ATC 4262; (1975) 133 CLR 483, James' case and the Chant case in 91 ATC; 22 ATR is that the fiduciary must be in control of the whole of the property of the debtor. Whilst it is clear from the authorities, such as Chant in 91 ATC; 22 ATR and
Re Obie Pty Ltd (No 5) 84 ATC 4776; (1984) 9 ACLR 151 that one can ignore apparently worthless assets, unless a person is a fiduciary in control of the whole of the assets the section does not apply. The authorities are collected and examined by Gummow J in
FC of T v B & G Plant Hire Pty Ltd 94 ATC 4692; (1994) 14 ACSR 283. That case shows it is insufficient that one has two separate and discrete fiduciaries who between them have control of the whole of the assets.
In the instant case, if, as I consider, the control of the debts only was taken when the debts came in, we have the situation where Mr Singleton only has control of about two-thirds of the debts that are recovered, and that is insufficient. It follows that the section does not apply so as to catch the debts, and it does not make them held for the Commissioner. I think it flows from that that the property is the property of the secured creditor.
Two matters need to be considered which I have not yet touched upon. The first is Mr Forster's submission that there is insufficient factual material to enable me to conclude that the work in progress was valueless. The significance of this is that Mr Singleton was only appointed over the book debts. If the company had other work in progress it would have other assets and Mr Singleton would not
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be a fiduciary in respect of the whole of the property of the company. Because of the determinations I have already made, this question does not apply. However, a judge when finding facts in a case can only act on the evidence before him. It would have been useful had there been evidence from the directors as to what was the true situation, but it is understandable in this sort of case that there is no such evidence because relationships between liquidators and former directors are often not particularly close and directors tend to comply with their statutory duties, if that, and certainly not go the further mile. However, what evidence there is before the court suggests to me as a tribunal of fact that the liquidator has done all that he could be expected to do to get in all the rest of the property of the company, and has only been able to get in he book debts plus the amount that has flowed from the Victorian Workcover. I would find as a fact that on the evidence before me anything else can be disregarded as worthless. Accordingly, if it be relevant for another place, my finding of fact would be that the assets of the company are the book debts and the refund from Victorian Workcover, and none other.The second matter that must be dealt with is the refund from the Victorian Workcover Authority. The question arises as to whether that is a book debt or not. If it is not a book debt then again force is given to the proposition that Mr Singleton was not a fiduciary in respect of the whole of the property of the company. Because of my earlier determinations it does not really matter, but in deference to the arguments of counsel and solicitor for the parties, and in case it goes further, I should say something about it.
The term ``book debt'' is one that has been used in finance and corporation law for a long period of time. Even last century in
Shipley v Marshall (1863) 14 CB(NS) 566, 571; 143 ER 567 at 569 Erle CJ said that such a debt meant a trade debt not necessarily one that was entered in any particular book. The other members of the Court of the Common Pleas agreed. In
Official Receiver v Tailby (1887) 18 QBD 25 at 29 Lord Esher said that book debts were debts arising in a business in which it is the proper and usual course to keep books and a book debt is something which ought to be entered in such books. These views were approved of in this court in
Motor Credits Ltd v WF Wollaston Ltd (1929) 29 SR(NSW) 227, 244.
In the instant case I find as a fact that it was not until Mr Singleton did his investigative work, and probably because of the expertise Mr Singleton had, that anyone connected with the company realised that there was a possibility of the refund from the Victorian statutory authority. Thus, as at the date of the commencement of the winding up, there does not seem to me to have been any debt in any sense of the word at all which anyone in connection with the company ought to have recorded in any of the company's books. Nor was the debt one that could be considered to be an ordinary trading debt, rather it was something connected with the administrative functions of the company. I do not consider that a refund by a statutory authority, at least at the time when the controllers of the company did not realise that they were due for a refund, is to be considered as a book debt within the meaning of that term used in commerce. This finding again reinforces the view that I take that the secured creditor is not affected by section 221P.
Turning to the relief sought. Before the hearing the plaintiff indicated that it was not pressing paragraphs 3, 4, 5A and 5B of its amended summons. It is entitled to declarations 1 and 2, which the evidence is there to support, but they are really not the subject of contention. The main point in the amended summons, as far as I am concerned, is paragraph 5, but for the reasons which I have given the liquidator is not entitled to that order. Accordingly, on the summons, I make only declarations 1 and 2.
The cross-claim in its amended form as filed today seeks orders which must flow as a matter of course from the reasons that I have already given. The cross-claim seeks interest, but so far as interest is concerned it was made clear by Mr Forster that he only seeks interest that has actually accrued on moneys which are held by the liquidator, and not for the court rate of interest or interest payable by a trustee.
Accordingly, I make declaration 1 and order 2 in the amended cross-claim and note that those orders are to include any accrued interest which may be held by the liquidator on the relevant funds.
So far as costs are concerned, having looked at the cases, it would seem that the view that courts have taken is that the loser should pay, so
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that the proper order is that the plaintiffs should pay the cross-claimant's costs. However, the plaintiffs are representative parties and their action was brought because the statute, which was passed to protect the Deputy Commissioner of Taxation, who was named as the first defendant, did file a submitting appearance, and was also brought, as the Commissioner acknowledged in a letter to the Commonwealth Bank, to protect the Commissioner's position. Indeed, the Commissioner took no part in the action because he felt the liquidator was sufficiently covering his interests.The liquidator has some money in this liquidation from preference recoveries and at least some of those funds might be able to be used to pay costs. It may well be that the Commissioner has expressly or impliedly agreed to indemnify the liquidator. It would seem to me that unless the Commissioner does take this position liquidators will in future not mount this type of action but merely pay moneys into court or inter-plead, and it is probably a more efficient way of conducting these sort of cases, to do what has happened in the instant case, that is the liquidator make the claim and the Commissioner submit. If the end result of cases such as this is that the liquidator ends up paying costs out of his own pocket then doubtless a different process will be entered into by liquidators.
I think I should make an order for costs against the liquidator but reserve further consideration, and the liquidator is entitled to come back to the court if the funds he holds in this liquidation are insufficient to pay the plaintiffs' costs and if there is a problem with indemnification by the Commissioner. Further consideration should also cover the situation where the Commonwealth Bank wishes to seek an order against the Deputy Commissioner of Taxation for any shortfall.
The formal orders I make are declarations 1 and 2 in the amended summons; declaration 1 and order 2 in the amended cross-claim, with the note that the moneys referred to include accrued interest, and I order that the plaintiffs pay the costs of the second defendant/cross- claimant, with further consideration as to costs generally reserved.
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