FC of T v BROOK & ORS

Judges:
Sheller JA
Powell JA
Cole JA

Court:
Supreme Court of New South Wales - Court of Appeal

Judgment date: Judgment handed down 2 February 1995

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Sheller JA

Introduction

I have had the benefit of reading in draft the judgment of Cole JA. His Honour has set out the facts and the terms of s 221P(1) of the Income Tax Assessment Act 1936 . The amendments to the section by the Insolvency (Tax Priorities) Legislation Amendment Act 1993 do not apply in this case.

On 10 January 1991, pursuant to a deed of charge dated 12 June 1990, the respondent, Mr Brook, was re-appointed receiver of all of the undertaking and assets of Hanibridge Pty Limited with all the powers which might be

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conferred upon a receiver appointed under the charge. These included power to take possession of, collect and get in the whole or any part of the mortgaged premises, to sell all or any part of the mortgaged premises and to apply all moneys received under or by virtue of the deed of charge:

``(a) in payment of all costs charges and expenses incurred in or incidental to the exercise or performance or attempted exercise or performance of any of the powers or authorities hereby conferred or otherwise in relation to these presents;

(b) in payment of such other properly incurred outgoings in connection with the receivership or the enforcement of the security as such receiver or the mortgagee shall think fit to pay;

(c) in payment to the receiver of his fixed remuneration (not exceeding any amount or commission of five per cent of the gross amount of all moneys received by him); and

(d) in payment to the mortgagee of the moneys hereby secured and the surplus (if any) shall belong to the mortgagor but such surplus shall not carry interest and the receiver or the mortgagee shall be at liberty to pay the same to the credit of an account in the name of the mortgagor concerned in the books of any bank carrying on business within the Commonwealth of Australia and shall thereupon be under no further liability in respect thereof.''

On 27 December 1990 Mr Brook had been appointed receiver of part of the mortgaged property but had ceased to act as such receiver on 10 January 1991. On 17 January 1991 a provisional liquidator of the company was appointed. On 29 January 1991 Mr Brook resigned as receiver and on 11 February 1991 the company was wound up.

Hanibridge was indebted to the Commonwealth in the sum of $86,187.37 for tax instalment deductions not remitted for the months of June 1990 to January 1991 both inclusive. Mr Brook had paid into Court this sum which apparently was proceeds of his realisation as receiver of the company's assets. In reliance upon s 221P(1) the appellant sought an order by cross claim in proceedings commenced by the company and a director that the sum paid into Court be paid out to him. In dismissing the cross claim Bryson J held that ``control'' in s 221P(1) referred to control which was actually exercised in fact over the relevant property and that the bare conferral of a right to control property on a receiver pursuant to the deed of charge was not, in the absence of some other facts, enough. On the facts his Honour did not find that control of the company's property passed to Mr Brook.

``Control''

``Control'' may indicate an act of domination in the sense that a person driving a car has control of it or the power of domination in the sense that a person who possesses property has control of its disposition. Control may be combined with a legal right to control or may be no more than physical control. The expression ``control of his property'' as used in s 221P(1) seems to me to be directed to the power of domination by legal right. The extent and degree of control of the employer's property may vary. It may extend to all or some of the employer's assets. It may be limited in degree, for example, to realising those assets and retaining the proceeds.

During the course of argument we were referred to a number of cases. In
FC of T v Barnes 75 ATC 4262 at 4265-4266; (1975) 133 CLR 483 at 490-492 the majority of the High Court considered first what the word ``property'' in s 221P(1) denoted, a question left open by the diversity of opinions expressed in
FC of T v Card (1963) 13 ATD 149 ; (1963) 109 CLR 177 . Was the employer company's ``property'' limited to its interest therein, the equity of redemption, or did it extend to the whole of the assets and undertaking of the company? At ATC 4265-4266; CLR 491 their Honours held that the company's property which passed under the control of the defendant upon his appointment by the mortgagee as receiver under the deed comprised ``the whole of the assets and undertaking of the company, control of which could pass to [ the defendant] as receiver under the terms of the deed.'' Their Honours went on to say:

``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.''

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In referring to the property of the company as that ``which passed under the control of the defendant upon his appointment by the mortgagee as receiver under the deed'' their Honours used ``control'' in the sense of the power of domination by legal right. At ATC 4266; CLR 492, in considering the case of a floating charge over the assets and undertaking of a company, their Honours said:

``The charge does not extend beyond the equity of redemption in assets separately mortgaged or charged; but subject to that qualification, it extends to the whole of the assets and undertaking and it is with that qualification the control of the assets and undertaking which passes to a receiver when he is appointed under the charge.''

Of the meaning of control in the section, their Honours said:

``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. 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.''

In order to explain the degree of the control necessary to satisfy the requirements of s 221P(1), Drummond J, in
Australian Securities Commission v Macleod & Ors 94 ATC 4061 at 4064; (1994) 120 ALR 351 at 356 , emphasised the words ``out of which a particular debt or in some cases all the debts of the company secured and unsecured, are able to be paid'' in the passage in the majority judgment and said:

``The power to realise the whole of the employer's property is necessary, but not without more, sufficient to constitute control for the purposes of s. 221P. The words emphasised in the passage from Barnes identify a further requirement which must be satisfied before the trustee will have sufficient dominion over all of the employer's property to amount to such control: as well as having power to realise the whole of the employer's property in his hands, the trustee must also have an authority to deal with the proceeds of such a realisation that permits him to disburse all of those proceeds (if that be necessary) to pay at least one of the debts of the employer. It is authority in the trustee to pay at least one of the employer's debts from the proceeds of realisation of the entirety of the employer's property (if it should in the circumstances of the particular case, be necessary to turn the whole of the employer's property into cash to do that) that turns actual control by the trustee of the entirety of the employer's property, in the sense of power to prevent others dealing with that property, into `control' within s. 221P.''

See also
FC of T v Prescribing Biochemists Pty Limited (Controller Appointed) (Receivers and Managers Appointed) (Subject to Deed of Company Arrangement) & Anor 94 ATC 4702 , Sackville J at 4708-4709 and 4710 .

In my opinion the suggestion that control of the company's property had not passed to Mr Brook upon his appointment as receiver is inconsistent with the majority judgment in Barnes . In the words of Mahoney JA in
James v DFC of T 88 ATC 4812 at 4819 the powers detailed in the deed of charge allowed the receiver to do things which together constituted control in the relevant sense. His Honour said: ``And at that time, there was no one else who, in respect of that property, was able to determine that the property be dealt with in a manner contrary to the manner which Mr James might determine''. There was no evidence in the present case that any other person controlled any part of the company's property.

A number of other cases were cited in argument. In
DFC of T v AGC (Advances) Limited & Ors 84 ATC 4177 ; (1984) 1 NSWLR 29 a company had charged its book debts with the payment of moneys owing by it to AGC. The company was wound up and a liquidator appointed. A fortnight later AGC appointed receivers under the deed of charge. Before the appointment of the receivers the liquidator had collected some book debts. The Deputy Commissioner claimed that control of the company's property had passed to the liquidator. The Deputy Commissioner failed at first instance and his appeal was dismissed. Hutley JA referred to
Smith and Judge v DFC of T & Anor 78 ATC 4561 ; (1978) 38 FLR 347 ; (1979) WAR 123 , a decision of Brinsden J who, his Honour said, appeared to have held that control within the meaning of the section was de facto control and that a similar view as to the nature of control was taken by Nettlefold J in

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Re LG Holloway Transport Pty Limited 83 ATC 4164 ; (1983) 7 ACLR 690 . Hutley JA said that the facts in the case were not consistent with the liquidator having control after 12 August 1982, the date upon which the receivers were appointed. ``He had the book debts, which he had collected after 12 August 1982, under his control, but only pending the decision of the Court as to their proper destination. This is not the de facto control with which the section is concerned.'' By this his Honour meant, I think, that, assuming that the criterion was ``de facto control'', the liquidator did not have such control. Mahoney JA was of opinion that the control of the employer company's property within s 221P passed to the liquidator either at the date of his appointment or subsequently upon his reducing the debts into his physical control (ATC 4180; NSWLR 33). His Honour did not regard it as necessary to consider whether control was used to mean ``right to control or the actual physical control''. However at ATC 4183; NSWLR 38 his Honour concluded that the interest of the mortgagee under the specific charge was not property to which the liquidator might have recourse for payment of the Commissioner's claim and hence on the principle established by Card's case the liquidator was not liable. At ATC 4185; NSWLR 40 Priestley JA dealt with the submission on behalf of the Deputy Commissioner that the ``control'' spoken of in s 221P(1) included the control which the liquidator in fact exercised over the book debts by himself collecting and receiving them from the company's debtors and then placing them to the credit of an account in his own name. Reliance was placed upon what had been said in Barnes' case and the judgment of Brinsden J in Smith's case. Priestley JA concluded that the passages from Barnes' case relied upon did not support the submission. At ATC 4186; NSWLR 41-42 his Honour analysed the decision in Smith's case. In that case a bank had taken a charge over the company's undertakings and all its property, assets and rights. The company went into liquidation and the charge crystallized no later than the time of the winding up order. The company was indebted to the Commonwealth for an amount representing under remittance of tax instalment deductions. The bank did not appoint receivers and permitted the liquidators to realise the assets of the company. The liquidators applied to the Court for a determination of the priority of the Commissioner and the bank to the funds in the liquidators' hands. The bank contended that the only property, control of which passed to the liquidators, was the company's equity of redemption in the assets charged to the bank. Brinsden J held that the liquidators had obtained control of the whole of the assets of the company and found against the bank on that basis. In DFC of T v AGC (Advances) Limited the Deputy Commissioner contended that Brinsden J held that ``control'' of the company's property had passed to the liquidators on the basis that the bank stood by and let the liquidators obtain control of the company's assets when the bank could have prevented this. At ATC 4186; NSWLR 41-42 Priestley JA said:

``In my opinion that was not the way in which Brinsden J. reached his conclusion. The passage in question begins with his saying that the liquidators had obtained control of the assets of the company by reason of their being appointed liquidators. Later in the passage he discusses other courses that may have been open to the bank but I do not think that he at any stage indicates that, in his view, the liquidators obtained control of the assets of the company otherwise than as the immediate legal consequence of their appointment. If I am correct in my understanding of his Honour's course of reasoning, it is of no assistance to the Deputy Commissioner's argument in the present case and there is no need to enter into the question, touched upon in the course of submissions before this Court, whether the whole of Brinsden J.'s reasoning should be accepted as correct.

My conclusion therefore is that the Deputy Commissioner's submission that in the present case the liquidator obtained `control' in the relevant sense of the complete legal and equitable interest in the company's book debts cannot be sustained.''

I respectfully agree with Priestley JA's analysis of the reasoning of Brinsden J.

Neither Smith's case nor DFC of T v AGC (Advances) Limited is authority for the proposition that the word ``control'' in s 221P(1) means de facto control.

Re LG Holloway Transport Pty Limited concerned the appointment of a receiver and manager of the company's book debts. In an

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attempt to hold the receiver liable under s 221P(1), in a case where it might have been said that control of the whole of the company's property had been demonstrably shown not to have passed to the receiver, the Commissioner argued that the section did not require that the charge be executed over each and every item of property to enable it to come into operation or alternatively that as a matter of commercial reality the whole of the property passed under the control of the receiver and manager. Nettlefold J concluded, it seems to me entirely correctly, that the receiver took control of part only of the company's property. In accordance with authority, s 221P(1) did not apply.

Russell & Anor v AGC (Advances) Limited & Ors 87 ATC 4392 ; (1988) VR 97 concerned a debenture charge over the assets of a company which, at the time receivers and managers were appointed and the company was wound up, had assets both in Queensland and Victoria. The charge was registered only in Victoria. As Marks J said at 103 it was clear that since their appointment the Victorian assets had come under the control of the receivers and managers. On the other hand the contention that the Queensland assets had come under their control was untenable. His Honour rejected a contention that the control of the Queensland assets passed to the receivers and managers because they ``could have controlled them'' and therefore should be regarded as having done so. In this context his Honour said at ATC 4398; VR 104:

``In any event, I am persuaded that `control' within sec. 221P means de facto control or at least control to a greater extent than any achieved by the applicants....

While it may well be that a thoroughly definitive meaning of `control' has not yet emerged it is clear that in no sense have the applicants exercised control over the Queensland assets. I find as a fact they have not exercised any. In my view, the presence or otherwise of `control' is ordinarily a question of fact. Its meaning in sec 221P is not technical but refers to what is actual or `de facto'.''

His Honour referred to
DFC of T v AGC (Advances) Limited and DFC of T v Horsburgh 83 ATC 4823 at 4827; (1983) 2 VR 591 at 596 ;
Horsburgh & Anor v DFC of T 84 ATC 4501 at 4508; (1984) VR 773 at 783 . I do not think his Honour was meaning to say any more than that s 221P speaks of the control of property which ``has passed'' to a trustee rather than the control of property which might have passed to a trustee. In that case the power of domination had not passed to the receivers and managers.

By contrast Murphy J in
Oldfield v Tilley & Anor (1988) VR 77 at 82 treated the words ``control of his property has passed to a trustee'' as connoting the right to obtain and deal with the property ``even though not perhaps as the legal owner.'' His Honour did not think that a liquidator or receiver appointed over all the property of a company could by inactivity apropos specific assets avoid coming within the terms of s 221P and argue that he never had passed to him ``control of the property'' of the employer.

As I have said I regard Barnes' case as authority for the view that control of the employer's property passes to the trustee within the meaning of s 221P(1) when the trustee acquires, on appointment under a deed of charge, power of domination over the employer's property, enabling the trustee to reduce the assets and undertaking of the employer into a fund out of which a particular debt or in some cases all the debts of the employer, secured and unsecured, are able to be paid if the fund so far extends.

The remaining point goes to Bryson J's conclusion that on the evidence before him he could not know what the receiver's situation was in the brief period between 10 January 1991 when he was re-appointed as receiver of all the undertaking and assets of the company and 24 January 1991 when he ceased to act as receiver. Accordingly his Honour said he could not find that control of the company's property had passed to Mr Brook. However his Honour had held that control meant control ``which is actually exercised in fact over the relevant property, being the whole of the employer's property.'' In my opinion, with respect, this is not what must be demonstrated. The appointment of the receiver and the powers conferred upon him by the deed indicate that control of the company's property within the meaning of s 221P(1) had passed to him. There is nothing to suggest that this was less than what appears on the face of the documents namely control over the whole of the undertaking and assets of the company.

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Conclusion

I agree with the orders proposed by Cole JA.