Deputy Federal Commissioner of Taxation v. Lai Corporation Pty. Ltd. and Ors.

Judges:
Brinsden J

Court:
Supreme Court of Western Australia

Judgment date: Judgment handed down 7 February 1986.

Brinsden J.

These reasons concern a trial of preliminary issues in action 1817 of 1983. By an order made 19 December 1985 it was ordered that the action 1914 of 1985 be heard by the same Judge and immediately following the trial of the issues in 1817 of 1983. The reason for that order is that substantially the issues raised in action 1914 of 1985 are similar to the preliminary issues in the other action. As a matter of convenience both matters were heard together. Throughout these reasons the plaintiff in action 1817 of 1983 and the defendant in 1914 of 1985, who of course is the same person, will be referred to as ``the Commissioner''. The first defendant in action 1817 of 1983 was not represented, but throughout these reasons I will refer to it as ``the company''. The second defendants in action 1817 of 1983 are the joint and several receivers of the property of the company charged by debenture bearing date 12 May 1980 given by the company to the Commissioners of the Rural and Industries Bank of Western Australia (hereinafter called ``the bank''). The receivers were appointed by the bank on or about 1 June 1983. The plaintiffs in action 1914 of 1985 are also the receivers and managers of the property of the company appointed by Steinberg Holdings Pty. Ltd. (``Steinberg'') on 1 June 1984 pursuant to a debenture granted by the company on 1 June 1980 to Steinberg. Throughout these reasons, unless it otherwise appears, whenever I refer to the receivers I should be taken as intending all the receivers, that is to say, the defendants in action 1817 of 1983 and the plaintiffs in action 1914 of 1985 but otherwise I will call them the bank's receivers or Steinberg's receivers. The debenture granted to the bank will be called ``the bank's debenture'' and the debenture granted to Steinberg will be called ``Steinberg's debenture''.

The amended statement of claim in the first action contains a claim by the Commissioner against the company for the sum of $17,401,566.70 being as to the sum of $8,590,170.18 sales tax due on returns of sales and of sales tax pursuant to the Sales Tax Procedure Act 1934 as amended and the Sales Tax Assessment Acts 1930 as amended, and as to a like amount being additional tax pursuant to sec. 10(2B) of the Sales Tax Assessment Acts (Nos. 2, 3, 6, and 7) 1930 as amended. There is also a claim for an additional sum of $221,226.34 being additional tax calculated at the rate of 10 per cent per annum pursuant to sec. 29 of the Sales Tax Assessment Act (No. 1) 1930 as amended. Apparently the company contests its liability but that issue is not before me though, in order to deal sensibly with the issues in respect of which this trial took place, I am to assume there is such a liability.

By notices given on 30 May 1983 pursuant to the provisions of sec. 38(1) of the Sales Tax Assessment Act (No. 1) 1930 (the ``Act'') to various persons being persons to whom the provisions of the said sec. 38(1) applied, the Commissioner required such persons to pay to him money specified in the said notices. On the same date a copy of each such notice was delivered to the company. As previously mentioned, on or about 1 June 1983, the Commissioners of the Rural and Industries Bank purporting to act pursuant to the powers given to them by the terms of the bank's debenture, made the appointment of the bank's receivers. Purporting to act pursuant to such appointment it is alleged the bank's receivers made demand upon the persons or some of the persons to whom the said notices had previously been given in respect of the same moneys the subject of such notices and claiming to be entitled to the same in priority to the Commissioner. These receivers have received and accepted payment of such moneys from such persons. The Commissioner seeks a declaration that by virtue of the notices he is entitled to receive the moneys the subject thereof to the exclusion of the bank's receivers unless and until such sum of $17,401,566.70 and the additional tax is paid and/or otherwise satisfied. A further declaration is sought that any moneys the subject of such of notices received or hereafter received by the company or the bank's receivers until such time as the aforesaid sum is paid or satisfied is payable forthwith to the Commissioner. Orders are consequentially sought. The persons to whom the Commissioner sent notices pursuant to sec. 38(1) were persons who were debtors to the company in its ordinary course of trading and therefore these debts were book debts of the company. The bank's receivers defend the action by saying that the bank's mortgage constituted or created a fixed charge in respect of the book debts and that therefore at all material times these book debts were assigned to the bank. It is then said that neither the

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provisions of sec. 38 nor the giving of the notices pursuant thereto created any estate or interest in or any charge over the book debts in favour of the Commissioner. If, which is denied, any such estate or interest therein or charge over the book debts is so created it is subject to and ranks subsequent in priority to the interest of the bank therein as assignee of such debts pursuant to the debenture. By virtue of the provisions of the debenture the bank's receivers became entitled and obliged upon their appointment to collect the book debts and to deal with the same in accordance with the terms of the debenture without hindrance from the Commissioner or any other third party. They admit they have received and accepted payment of some book debts. They deny the Commissioner is entitled to any relief and they counter-claim for a declaration that they are entitled to collect and recover the book debts and apply the same in accordance with the provisions of the debenture to the exclusion of the Commissioner and for an order that the Commissioner pay to them the sum of the book debts received or hereafter received by him. In his reply the Commissioner joins issue with the defence and alleges, inter alia, that the bank's debenture was at all material times a floating charge with respect to the book debts by reason of (1) the proper construction of the debenture, and (2) that further and alternatively it was at all material times the intention of the parties to the debenture that the company would be at liberty to collect book debts and apply the proceeds in the ordinary course of business.

Turning now to the pleadings in action 1914 of 1985 the statement of claim sets out material facts which appear in the pleadings in the other action. It then goes on to plead the facts relevant to the creation of the Steinberg debenture and the appointment by Steinberg of Steinberg's receivers. It is agreed that that debenture created a floating charge. The same points are taken against the Commissioner's contentions as in the other action. Steinberg's receivers claim a declaration that the bank's receivers were at all material times entitled to collect and recover the book debts and apply the same in accordance with the provisions of the bank's debenture to the exclusion of the Commissioner and to pay the surplus to them or alternatively Steinberg to the exclusion of the Commissioner and a further declaration that Steinberg's receivers are entitled to collect and recover the book debts and apply the same in accordance with the provisions of the Steinberg debenture to the exclusion of the Commissioner. Consequential orders are also sought. The Commissioner in his defence alleges the Steinberg debenture crystallised over the book debts on 7 June 1984. The defence further alleges that by reason of the receipts of the notices by the addressees there was created the charge over the debts owing by the addressees to the company in favour of the Commissioner which ranks in priority to the charge over those debts created by the Steinberg debenture and the bank's debenture.

Before me the receivers were represented by senior counsel. Counsel for all the parties agreed that these were the issues before me:

Those are the issues it is agreed arise in action 1817 of 1983. The additional issues that arise under action 1914 of 1985 are as follows:

Fortunately the parties have agreed on a number of facts and issues and exhibits and these are all contained in ex. 1. A summary of what has been agreed is as follows. The company is and was at all material times registered as a wholesale merchant for the purposes of the Act. On 31 March 1983 the Commissioner issued notices of assessment pursuant to the Sales Tax Assessment Acts (Nos. 2, 3, 6 and 7) 1930 to the company of sales tax due and payable by it to the Commissioner in the sum of $17,180,340.36 (the sales tax). Copies of the notices were annexed to ex. 1. On 9 May 1983 the company gave notice to the Commissioner of its objection to the assessments. On 30 May 1983 the Commissioner disallowed in full the objections. A written notice of that decision was given to the company by hand at 3.40 p.m. on 30 May 1983. On that date the Commissioner issued the notices which purported to be pursuant to sec. 38 of the Act to various persons who were, as at the date of service of the notices, persons by whom money was due or accruing or may become due to the company (the debtors). The formal requirements for the issue of the notices were complied with by the Commissioner. A copy of one of the notices was annexed to the exhibit. Some of the notices were served by being delivered by hand to the recipients and those persons are detailed, while the remainder were served by the posting on 30 May 1983 at 3.21 p.m. of prepaid letters to the addressees listed in Pt (i) of the Schedule annexed to the exhibit and marked with the letter ``E'' (Sch. E) and are deemed by reg. 68 of the Sales Tax Assessment Regulations and sec. 29 of the Acts Interpretation Act 1901 (Cth) to have been served on the debtors at the time and date specified in Pt (ii) of Sch. E. The company was unable to meet the sales tax assessments. Copies of the notices were served on the company by hand on 30 May 1983. Reference is then made in the exhibit to the bank's debenture which is annexed to the exhibit. It was duly registered.

On 31 May 1983 the bank was told of the assessments and that the notices had been issued and gave verbal notice to the Commissioner on the morning of 31 May that it would immediately call up the money secured by the debenture. At approximately 2.30 p.m. on 31 May 1983 the bank by written notice served on the company demanded payment from it of the money secured by the debenture. A copy of the notice is annexed to the exhibit. At approximately 11.30 a.m. on 1 June 1983 the bank by written notice again demanded payment from the company of the money secured by the debenture. A copy of that notice is also exhibited. At approximately 11.31 a.m. on 1 June 1983 the company failed to meet the demand of the bank, such failure being communicated or occasioned by the two directors of the company informing the bank that it could not meet the demand. At 11.35 a.m. on the same date the bank appointed the bank's receivers as receivers and managers of the property of the company pursuant to cl. 19. Annexed to the exhibit is the instrument of appointment. At 4.45 p.m. on the same date the bank's receivers posted by mail letters to the debtors listed in Pt (i) of Sch. E requiring the addressees thereof to pay all moneys due and payable to the company to them. A copy of one of such letters is annexed. The letters were received by the addressees thereof after they had received the notices. Immediately on their appointment as receivers, the bank's receivers in their capacity as receivers and managers took control of the company's assets and exercised the powers of managers and directors to the exclusion of those persons who had been the company's managers and directors immediately prior to their appointment. The bank's receivers carried on the company's business until after they and the Commissioner had received the moneys referred in Sch. E.

At all material times prior to the appointment of the bank's receivers the company received and collected its book debts (the moneys). The moneys were eventually paid into cheque accounts with the bank. The accounts had also paid into them various other moneys such as collections from amusement machines and the proceeds from cash sales of the property of the company. The company drew on accounts from day to day and applied those drawings for the

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various business purposes. The bank took no objection to the company dealing with the book debts in the ordinary course of business. The bank's receivers carried on the business of the company on and from 1 June 1983 but they did not pay unsecured creditors of the company whose debts accrued prior to their appointment save for such accounts as telephone, electricity and like accounts and with the exception of those accounts the unsecured pre-receivership debts remain unpaid. The dates upon which the Commissioner received payment of debts due by the debtors to the company and the amounts received by him from those debtors are set out in Pt (iii) of Sch. E identified with the letters ``ATO'' typed thereunder. The dates upon which the bank's receivers received payments of the debts due by the debtors and the amounts received by them from those debtors are set out in the same Part but have no letters typed thereunder.

It is not necessary to set out in detail what is contained in Sch. E. It is sufficient to say that the date of receipt of the notices in some cases preceded the time of appointment of the bank's receivers and in other cases was after that time. Of the moneys collected by the Commissioner on the one hand and the bank's receivers on the other, the Commissioner only collected a very small sum of money which, from the bar table, I was informed he had applied towards payment of the outstanding sales tax. The bank's receivers collected quite a considerable sum of money in excess of $300,000 which by mutual agreement is now held to the joint account of the solicitors for the parties.

Section 38 of the Act is in these terms:

``38(1) The Commissioner may, by notice in writing (a copy of which shall be forwarded to the taxpayer to the last place of address known to the Commissioner), require -

  • (a) any person by whom any money is due or accruing or may become due to a taxpayer;
  • (b) any person who holds or may subsequently hold money for or on account of a taxpayer;
  • (c) any person who holds or may subsequently hold money on account of some other person for payment to a taxpayer; or
  • (d) any person having authority from some other person to pay money to a taxpayer,

to pay to him, forthwith, upon the money becoming due or being held, or within such further time as the Commissioner, a Second Commissioner or a Deputy Commissioner allows, the money or so much thereof as is sufficient to pay the tax due by the taxpayer or the fines and costs (if any) imposed by a Court on him in respect of an offence against this Act.

(2) Any person who fails to comply with any notice under this section shall be guilty of an offence.

Penalty: $100.

(3) Where the amount payable by the person to the taxpayer is less than the amount of tax due by the taxpayer, the person shall pay to the Commissioner in reduction of the amount of tax due the amount payable by that person to the taxpayer.

(4) Any person making any payment in pursuance of this section shall be deemed to have been acting under the authority of the taxpayer and of all other persons concerned and is hereby indemnified in respect of such payment.

(5) If the tax due by the taxpayer, or the fine and costs (if any) imposed by a court on him, are paid before any payment is made under a notice given in pursuance of this section, the Commissioner shall forthwith give notice to the person of the payment.

(6) In this section -

  • `Tax' means sales tax and includes additional tax chargeable under this Act, and any judgment debt and costs in respect of tax;
  • `Person' includes company, partnership, Commonwealth or State Officer, and any public authority (corporate or unincorporate) of the Commonwealth or a State.''

A taxpayer by sec. 3 is defined as a person chargeable with sales tax under the Act. Each of the other Sales Tax Assessment Acts includes a provision that sec. 38 and the other provisions of the Act ``shall mutatis mutandis apply in relation to the imposition, assessment and

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collection of the tax chargeable under this Act in like manner as they apply in relation to the imposition, assessment and collection of the tax chargeable under that Act''.

The only decided case on sec. 38 is
Sicree and Watt v. D.F.C. of T. 80 ATC 4302; (1981) V.R. 527 a decision of Jenkinson J. In that case his Honour held that service of a sec. 38 notice did not operate to give the Commissioner a prior claim to money owing to the taxpayer company which was the subject of a floating charge which crystallised on the appointment of receivers. It was decided that the appointment of the receivers perfected an assignment of the moneys giving them the character of moneys due and payable not to the taxpayer but to the secured creditor of the taxpayer. The charge was given before the Commissioner served his sec. 38 notices and the receivers were appointed before payment was made by the taxpayer's creditors to the Commissioner. Counsel for the receivers relied on the case especially those passages in the reasons where his Honour expressed the view that he saw ``no reason to imply, a grant to the Commissioner or to the Crown'' of ``any interest in, or right over a debt or a fund'' by reason of sec. 38(1) (at ATC p. 4307; V.R. p. 534) and that it was not to be supposed in the absence of express provision ``that the section imposes an obligation to make a payment other than one measured by the payer's obligation to make payment to the taxpayer and by the taxpayer's obligation under the Act, or that the section imposes an obligation to make a payment at a time when, in consequence of the occurrence of a supervening event, money is no longer due to the taxpayer'' (ATC p. 4308; V.R. p. 534). Jenkinson J.'s conclusion was that the obligation to pay ``the money'' is to be ascertained at the time of payment and that is achieved by construing the expression where it last occurs in subsec. (1) ``as meaning an amount equal to the amount then due and payable by the person served with notice to the taxpayer'' (ATC p. 4308; V.R. p. 535).

Sicree's case came under consideration in
Clyne & Anor v. D.F.C. of T. & Anor 81 ATC 4429; (1981) 150 C.L.R. 1. The headnote [in C.L.R.] states that Sicree was disapproved. This is certainly true of the judgment of Mason J. with whom Aickin and Wilson JJ. agreed. The reasoning of Brennan J., which will shortly appear, however is inconsistent with not only the reasoning behind Sicree but the actual result. Gibbs C.J., the other member of the Court, preferred not to consider Sicree. The facts of Clyne's case were these. On 9 July 1979 the Commissioner served notice of assessment for a sum including $118,436.31 being income tax for the year ended 30 June 1979 due and payable on 8 August 1979. On 10 July he served upon a bank two notices, identical in substance, requiring it to pay to him any money due or accruing which might become due by the bank to Clyne up to $118,436.31. The notices were served pursuant to sec. 218 of the Income Tax Assessment Act as amended. That section is in identical form with sec. 38. On 10 July Clyne had three interest bearing deposits with the bank totalling $70,000 which were repayable to him on 21 September 1979, 9 April 1980, and 20 April 1980. On 4 September 1979 Clyne by deed assigned those deposits to a third party as security for future advances to be made by the assignee to him. He gave notice of the assignment to the bank. It was held that the notices bound the bank to pay the amounts of the deposits and interest thereon (not exceeding $118,486.31) to the Commissioner on their respective maturity dates unless the tax had been paid in the meantime. Naturally Clyne placed reliance on Sicree for if the reasoning of Jenkinson J. had been applied, by the time the deposits became due and payable they were no longer payable to Clyne but to his assignee by reason of the assignment for the obligation under sec. 38(1) to pay ``the money'' was to be ascertained at the time of payment and not at the time of service of the notice. It is necessary to examine the various judgments of the Court.

Gibbs C.J. after referring to Clyne's argument that when the moneys became payable by the bank they were, because of the assignment, due to the assignee, and not to him and in those circumstances the notices did not effectively require payment to the Commissioner. His Honour said at ATC p. 4433; C.L.R. p. 11:

``In disposing of this argument, it is not, in my respectful opinion, necessary to have recourse to the doctrine that an assignee of an equitable interest takes subject to the equities and to the infirmities of the assignor's title. The section itself answers the appellants' contentions. The conditions for the giving of a valid notice are laid down

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in sec. 218(1). If those conditions exist at the time when the notice is given there is a valid requirement in respect of the money to which the notice refers, which, in a case under para. (a), will be money which is due or accruing or may become due by the person to whom the notice is given to the taxpayer. The words by which the Parliament grants the power to make the requirement necessarily imply that the person to whom the requirement is given will obey it. Subsequent actions by the taxpayer cannot render the requirement nugatory or ineffective.''

In that passage there are three matters which should be highlighted. Firstly, the notice must be valid, i.e., comply with the requirements of sec. 38(1). As previously stated it is agreed the formal requirements for the issue with the notices were complied with by the Commissioner. It is also agreed that the notices were served at the respective times of service. One matter of substance which is in issue however is, that at the time of the notice there must be ``moneys which are, will be or may be payable'' (per Gibbs C.J. at ATC p. 4433; C.L.R. p. 10), that is due and payable (see also Mason J. at ATC p. 4436; C.L.R. p. 15). Secondly, the moneys must be payable to the taxpayer at the time of the notice. In this case the receivers contended that at the time of the notice, by reason of the debentures, there was no money payable to the taxpayer for the book debts had been assigned. I will deal with this submission in depth later. Thirdly, subsequent actions by the taxpayer cannot render the requirement of the notice nugatory. Clyne's case was, of course, a case of a subsequent act by the taxpayer. In this case there has been no subsequent act by the taxpayer company. In so far as there has been subsequent action that has been taken by the debenture holders - the bank and Steinberg - respectively purporting to act under the debentures granted by the company before the service of the notices. In a later passage at ATC p. 4434; C.L.R. pp. 11-12 Gibbs C.J. said:

``However, once the notice is given, it operates to prevent any subsequent dealing with the money which will prevent compliance with the notice when the time for compliance arrives. An assignment made by the taxpayer after the date of the notice will be ineffective to relieve the person to whom the notice is given of his statutory obligation to pay the money to the Commissioner. Notwithstanding the assignment, the money will be `due' at the time when it would have become payable to the taxpayer if it had not been for the subsequent assignment whose effect is to be ignored. Section 218(4) recognises that if it had not been for the notice other persons than the taxpayer might have acquired rights to the money, for any payment made in pursuance of the section is deemed to have been made `under the authority of the taxpayer and of all other persons concerned'.''

However, the same comment must be made as previously, namely, that the reference is again to a subsequent dealing by the taxpayer.

Mason J. at ATC p. 4437; C.L.R. p. 17 was of the opinion that sec. 218(1) when it says that the Commissioner may require a person to pay money to him is giving statutory backing to the requirement ``so as to impose an obligation on the recipient to pay money that falls within the statutory description'' (emphasis supplied). He then goes on to say at ATC p. 4437; C.L.R. pp. 17-18:

``Mr Handley Q.C. for the Commissioner concedes that it does not purport to create a charge over, or interest in, the moneys in favour of the Commissioner. It may be doubted whether this concession is rightly made. On this question see for example
Stapleton v. F.T.S. O'Donnell Griffin & Co. (Q.) Pty. Ltd. (1961) 108 C.L.R. 106 at pp. 113, 117.''

Counsel for the receivers, with deference to his Honour, suggested that Stapleton hardly supported his Honour's doubt. That case dealt with the Contractors' and Workmen's Liens Acts 1906-1921 (Qld) which purported to give a statutory charge in favour of a subcontractor over moneys payable by an employee to a contractor. The question before the court was whether the charge constituted the subcontractor a secured creditor within the meaning of the Bankruptcy Act 1924 and amendments in the bankruptcy of the contractor. Stapleton, the trustee of the bankrupt's estate, contended that though the subcontractor became entitled to what the Acts called ``a charge'' on the moneys owing by the employer to the contractor that was a mere

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matter of words for when the Acts were examined closely it would be seen that, despite the use of the expression, the statutory provisions in no way invested a subcontractor with any proprietary interest in the chose in action constituted by the contractor's outstanding debt, but conferred upon him a right to proceed personally against the employer in the event of the debt being discharged by payment either to the contractor or his trustee or assignee. In other words the statutory provisions, construed as a whole, merely provided the method of administration whereby a subcontractor might obtain an order for payment for work directly from an employer. The first passage in the judgment of the majority, Dixon C.J., Kitto, Taylor and Windeyer JJ. to which Mason J. refers is at p. 113. There their Honours refer to two cases: In
Re Dickinson; Ex parte Charrington & Co. (1888) 22 Q.B.D. 187 and In
Re Potts; Ex parte Taylor (1893) 1 Q.B. 648. Those two cases were concerned with the effect of an order appointing a receiver. It was held the effect of the orders was not to create charges because they did not charge the debt ``in the hands of the man who has to pay it'' per Lord Esher in In Re Potts at p. 658. At the other page, 117, referred to by Mason J., McTiernan J. also refers to In Re Potts but does so by reference to what Swinfen Eady M.R. said in In
Re Pearce; Ex parte The Official Receiver (1919) 1 K.B. 354 at p. 363:

``Counsel for the plaintiffs said that he had to satisfy this Court that the order, if it was to amount to a charge, must come within Lord Esher's expression in In Re Potts. `An order appointing a receiver can only amount to a charge if it charges the person in whose hands the money is not to deal with it except in one way'. That must mean `except to pay it to, or hold it for, the execution creditor'.''

In my respectful view these passages support the doubt expressed by Mason J. as to the correctness of the concession. The distinction to be drawn as between a case where a statute or order charges the person in whose hands the money is not to deal with it except to pay it to or hold it for, some other person, with cases where the effect of the statute or order is that the fund is to be held at the disposal of the Court or some neutral party. All the Judges of the Court in Stapleton, upon an examination of the Acts, and not solely or I believe significantly because the Acts purported to create ``liens'' and ``charges'', concluded that they created a charge in favour of the subcontractor.

It may be remembered at this stage the words of Mason J. in Clyne that sec. 218(1) (hence sec. 38(1)) imposes an obligation on the recipient of the notice to pay money that falls within the statutory description and that money, or so much thereof, is to be paid which is ``sufficient to pay the tax due by the taxpayer'': sec. 38(1). It is difficult to see why the section does not create a charge upon the money in the hands of the debtor since he is obliged by the section not to deal with it in any way other than to pay it to the Commissioner. That was the view of Brennan J. as will shortly be seen.

Continuing with the discussion of the reasons of Mason J. in Clyne at ATC p. 4438; C.L.R. p. 19 he says:

``I think that the effect of the service of a sec. 218 notice is to prevent a taxpayer from thereafter assigning a debt, the subject of the notice, so as to defeat the Commissioner's right to payment in accordance with the section. In this respect I do not agree with the comments made by Jenkinson J. and I regard the effect of the notice as similar to that of a garnishee order. Indeed, the similarity between sec. 218 and the provisions for garnishee orders in Rules of Court is quite striking.''

Counsel for the receivers made much of the reference to the similarity between sec. 218 and a garnishee order for it has been held that neither an order nisi attaching a debt owed to a judgment debtor nor an order absolute that the garnishee pay the amount of such debt to the judgment creditor works an assignment to the debt to the judgment creditor. Counsel referred to a passage in Sicree at ATC p. 4307; V.R. p. 533:

``It is well established that neither an order nisi attaching a debt owed to a judgment debtor nor an order absolute that the garnishee pay the amount of such a debt to the judgment creditor works assignment of the debt to the judgment creditor and that such an order creates no debt in favour of the judgment creditor; that the debt which upon service of the order nisi is thereby bound in the garnishee's hands remains the property of the judgment debtor and remains

ATC 4094

subject to any floating charge previously given over the debt; and that if the charge crystallises after the making of the garnishee order and before payment into court or to the garnisher, the right of a receiver appointed to receive the debt for the debenture holder (which right derives, in my opinion, from the completion on the receiver's appointment of the equitable assignment of the debt) prevails over those rights which have been conferred on the garnisher by the order attaching the debt; see
Norton v. Yates (1906) 1 K.B. 112; In
Re Combined Weighing and Advertising Machinery Co. (1889) 43 Ch.D. 99;
Cairney v. Black (1906) 2 K.B. 746;
M.G. Charley Pty. Ltd. v. F.W. Wells Pty. Ltd. (1963) N.S.W.R. 22.''

While all the above is undoubtedly correct I do not believe that the reference by Mason J. to a garnishee order was with these features in mind, but rather that after the service of a garnishee upon a creditor of the judgment debtor the latter loses the right to assign his debt free of the garnishee order: per Brennan J. in Clyne at ATC pp. 4442-4443; C.L.R. p. 27 and per Lord Loreburn L.C. in
Galbraith v. Grimshaw (1910) A.C. 508 at p. 511.

In a later passage in his judgment Mason J. decided the case upon the principle that an assignee of a chose in action takes its subject to all the equities that the debtor or fund holder has against the assignor, as at the time of the notice of assignment, and subject also to all the infirmities and defects in title of the assignor (ATC p. 4438; C.L.R. p. 19). At ATC p. 4439; C.L.R. pp. 20-21 his Honour said:

``The word `equities' is not used in its technical sense as meaning an equitable interest or something in the nature of an equitable interest. It is a general expression calculated to comprehend defences which would have been available to the debtor in an action brought against him by the assignor as well as set-off and counter-claims. The assignee takes subject to any defence or set-off available to the debtor at the time when notice of assignment is given, unless the right of set-off is excluded by the contract between the assignor and the debtor - see
Phoenix Assurance Co. (Ltd.) v. Earl's Court (Ltd.) (1913) 30 T.L.R. 50 at p. 51; Halsbury, 4th ed., vol. 6, para. 64.''

At ATC p. 4440; C.L.R. p. 22 his Honour goes on to say:

``It is of no consequence whether one regards the Bank's obligation to pay under sec. 218 as creating a defence or a right of set-off by reason of the deemed authority of the taxpayer for which sec. 218(4) makes provision. The assignee by virtue of the assignment takes subject to the right of the Bank to set off the moneys payable to the Commissioner under sec. 218 which accrued due before the notice of assignment, although they were not payable until the term deposits matured.''

And finally, at ATC pp. 4440-4441; C.L.R. p. 23:

``The section relates to moneys owing to the taxpayer when the notice is given, it imposes an obligation to pay forthwith moneys which are then payable; it imposes an obligation to pay moneys which become payable at a future time when that time arrives. It does not explicitly prescribe as a condition preliminary to the creation of the obligation to pay that the moneys owing to the taxpayer at the date of the notice shall continue to be owing to him when they become payable. It merely requires the recipient to pay to the Commissioner when they become payable moneys owing to the taxpayer at the date of the notice. The obligation attaches to the recipient on service of the notice, though it cannot be performed until a future date. The effect of imposing the obligation is to make it unlawful for the recipient to pay the moneys to anyone but the Commissioner after service of the notice. Although this might otherwise expose the debtor to liability of the suit of the taxpayer the debtor is protected by sec. 218(4) which provides that the payment is deemed to be made with the authority of the taxpayer and indemnifies the debtor.

There will be cases when a party other than the taxpayer by virtue of an antecedent security asserts in priority to the Commissioner rights to moneys not payable when the notice is served where the security is perfected after service of the notice and before the debt becomes payable. Sicree was such a case. Whether the decision can be supported, as Mr Handley Q.C. suggests,

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on grounds other than those stated by Jenkinson J. is a question which need not be answered now, though I admit to some difficulty in perceiving how this can be so conformably with what I have already said.''

In summary Brennan J. thought the duty to comply arises by implication. The debtor upon receipt of the notice is obliged to comply with it and the Commissioner is entitled to insist upon compliance and that there is no reason why the Commissioner's right reciprocal to the debtor's obligation, should not be enforced by proceedings other than prosecution under subsec. (2). The obligation on the debtor is to make, with the deemed authority of the taxpayer, a payment to the Commissioner in satisfaction of the taxpayer's liability for tax assessed of money which would, but for the operation of the section, be due to the taxpayer. At ATC p. 4442; C.L.R. p. 26 he states:

``The statute thus works an assignment of the moneys to be paid to the Commissioner as though the taxpayer had charged the moneys otherwise payable to him with payment of his tax liability. Statutory charges are no novelty, although a statute which creates a charge usually describes it as such and defines the chargee's remedies. An example of a statutory charge which created a security in favour of a chargee over moneys due by a third party to the chargee's debtor was to be found in The Contractors' and Workmen's Lien Acts 1906 to 1921 (Qld), considered by this Court in Stapleton v. F.T.S. O'Donnell Griffin & Co. (Qld) Pty. Ltd. (1961) 108 C.L.R. 106.''

Later in his judgment his Honour goes on to say that when a notice is given and served the debtor is immediately bound to comply with it though his obligation is not to be discharged until some time later. ``Between the time when the notice is given and the time when the obligation is to be discharged, the third person is not at liberty to pay to the taxpayer the money falling within the terms of the notice; the third party is obliged to retain it in order to discharge the obligation to pay the money to the Commissioner in compliance with the requirement expressed in the notice.'' (ATC p. 4442; C.L.R. p. 26). Thus the notice affects the right of the taxpayer who when the notice is given and served is statutory divested of his right to payment and if he has assigned the money after the notice, the obligation of the third party to pay the assignor's direction cannot prevail over an earlier statutory requirement to pay the money to the Commissioner. Finally, his Honour distinguished the Commissioner's right to payment of the moneys from the third party from a garnisher of a debt who obtains no proprietary interest in the debt owing to the judgment debtor.

As can be seen therefore one Judge, Brennan J., held that the effect of sec. 218(1) and hence sec. 38(1), was to work an assignment of the moneys to the Commissioner as though the taxpayer had charged the moneys otherwise payable to him with payment of his tax liability. Three Judges doubted the section did not constitute a charge. In my view I should hold the section, when a valid notice is given and served, does work an assignment or charge upon the moneys the subject of the notice which ``are or will be or may be payable''. I must also hold that any subsequent assignment by the company after the service of the notices gives way to the command in the notices.

Counsel referred to sec. 32 as amended by which no priority is given to the Commissioner for tax due by a company in liquidation. The denial of priority was achieved by the amending Act 134/1980. It was said that the policy contained in the amending Act should be regarded in the construction of sec. 38 bearing in mind that the section does not expressly state that it operates by way of charge or assignment. Counsel pointed out that the Acts under consideration in Stapleton and all the statutes the subject of the cases referred to by their Honours at p. 114 of that report, expressly make provision for their operation to be by way of charge or lien or assignment. I was invited to read the second reading speech of the Minister in introducing the Bill for what later became the Act 134/1980. In my view I should decline for much the same reasons as expressed by Williams J. in
F.C. of T. v. Bill Wissler (Agencies) Pty. Ltd. 85 ATC 4626 at p. 4631, though with respect, not perhaps in such absolute terms. In my view sec. 32 deals with a special case - bankruptcy - but sec. 38 operates in different circumstances. Further-more if there is a legislative policy behind 134/1980 to forego Crown priority that policy did not extend to sec. 34 for it was left unamended.

ATC 4096

It now becomes necessary to consider both debentures and whether in the case of the bank's debenture it was a fixed security as regards the book debts and when, in respect of both debentures, they crystallised, if in the case of the bank's debenture, notwithstanding its express terms it should not be regarded as a fixed security. Even if it be the correct conclusion that the bank's debenture was a fixed security it will be necessary to consider whether upon the facts the bank and the company so conducted their joint affairs that the bank consented to the company dealing with its book debts as if they had not been assigned to it by way of a fixed security. In turn it will be necessary to consider whether this conduct was such that at the time of the service of the notices moneys from the debtors were, would be, or could be payable by them to the company.

As to the facts it will be remembered that it is agreed that at all material times prior to the appointment of the bank's receivers the company received and collected its book debts the proceeds of which were paid into cheque accounts with the bank and also paid into those accounts were various other moneys from sources I have already particularised. The company drew on the accounts from day to day and applied those drawings for its business purposes. The only witness called, and he was called by the Commissioner, was the bank manager who said that at all relevant times the company's accounts were usually in overdraft though at times the company might have had a credit. Evidence was also led from the manager (under objection) as to the practice of the bank in respect of the use and collection of a customer's book debts where the bank had taken a debenture over those debts to secure advances. I am entitled to take into account evidence of the factual background known to the parties at or before the date of the contract including evidence of the genesis and, objectively, the aim of the agreement:
Prenn v. Simmonds (1971) 3 All E.R. 237 per Lord Wilberforce at p. 241. Evidence of subsequent acts of the parties showing how they have acted upon an instrument in a particular way is generally inadmissible. Chitty on Contracts 25th ed., para. 85. The evidence led does not appear to me to meet these requirements, though in so far as it deals with what the parties did after the granting of the debenture relating to the book debts is material as to whether the bank consented to the company receiving the book debts. I have no doubt that based on what was agreed in ex. 1 and the evidence of the manager, accepted in the limited way I have mentioned, the bank allowed the company to collect and receive the book debts to be applied to the company's accounts and utilised at its will towards the expenses of carrying on its business.

The terms of the bank's debenture are as follows. In consideration of any advances, credits or bank accommodation given to it by the bank, the company:

``Hereby charges with the payment of the moneys hereby secured... the Mortgagor's undertaking and assets whatsoever and wheresoever both present and future including... the Mortgagor's freehold and leasehold land goodwill... book debts... to be a specific charge and as regard the Mortgagor's other assets is to be a floating security.''

Clause 12, which I set out in full:

``12. THAT the Mortgagor will whenever required by the Bank deliver to the Bank full and accurate accounts for all the mortgaged property including the said book debts and that the Mortgagor will not receive compound or release any of the said book debts nor do anything whereby the recovery of the same may be impeded delayed or prevented without the consent of the Bank and will keep proper books of the said business and will at any time when

ATC 4097

required produce such books for the inspection of any of the officers of the Bank or their agents and allow them or any of them access thereto and to make copies of or any extracts from the same and that the Mortgagor will on request communicate to any of the officers of the Bank or their agents all the information touching the financial position of the said business which they or any of them may require AND that the Mortgagor will once at least in every year or oftener if so required by the Bank cause the books and accounts of the Mortgagor to be duly audited by an Auditor to be approved of by the Bank and will immediately thereafter furnish to the Bank a copy of the Balance Sheet and Trading and Profit and Loss Account of the Mortgagor duly certified by such Auditor.''

The Commissioner argues that this debenture in respect of the book debts is a floating security despite the express provision that in relation to the book debts it is to be a specific charge. The receivers contend that it should be construed as it states, namely, as a specific charge over the book debts and that in turn means that by the debenture the company assigned to the bank in equity the book debts both then existing and as and when they became due in the future. The company relies principally on
Hart & Ors v. Barnes 83 ATC 4077; (1983) 2 V.R. 517 Anderson J. at ATC pp. 4079-4082; V.R. pp. 520-522 refers to a number of cases where despite the wording of the document that in relation to the book debts it was to be regarded as a specific charge it has been held that the charge was nevertheless a floating charge as in example,
Re Yorkshire Wool Combers Association Ltd. (1903) 2 Ch. 284. The essence of that decision is the view of Farwell J. at p. 289:

``A charge on all book debts which may now be, or at any time hereafter become charged or assigned, leaving the mortgagor or assignee free to deal with them as he pleases until the mortgagee or assignee intervenes, is not a specific charge, and cannot be. The very essence of a specific charge is that the assignee takes possession, and is the person entitled to receive the book debts at once. So long as he licenses the mortgagor to go on receiving the book debts and carry on the business, it is within the exact definition of a floating security.''

And at p. 295 Romer L.J. said that along with two other factors (both of which are present in this case), ``if you find that by the charge it is contemplated that, until some future step is taken by or on behalf of those interested in the charge, the company may carry on its business in the ordinary way as far as concerns the particular class of assets I am dealing with'', then the charge is a floating charge. The Yorkshire Wool Combers' case was affirmed under another name:
Illingworth v. Houldsworth (1904) A.C. 355. It is clear enough that the bank's debenture contemplated that the business of the company would be carried on in the ordinary way. As recited above there was an express covenant that the business would be carried on in a proper and efficient manner. To carry on a business of a company in the future in the ordinary way where the company in the ordinary course of business contracts book debts envisages that the book debts will change from time to time as they are paid and fresh ones incurred. In Hart the terms of the debenture were not unlike the bank's debenture. Clause 2 provided that the charge should constitute the company's book debts a fixed and specific charge. Clause 3 provided that until the security became enforceable the mortgagee permitted the company to hold and enjoy all the mortgaged property and to carry on therein and therewith its business. A supplementary agreement which formed part of the debenture provided that so long as the amount owing shall not have become payable pursuant to the debenture, the mortgagor might collect the book debts and might employ the proceeds of such collection in its business as it saw fit. Even without the provisions of the supplementary agreement Anderson J. thought it could not sensibly be said that while the company was not in default

ATC 4098

and was allowed to carry on its business, it could not nevertheless make use of the funds received by way of payment of the book debts. In his Honour's view the provision that each and all future book debts be specifically charged and that the legal title vest in the debenture holder could not be given effect to, for that intention was repugnant to the nature of a charge over a future asset the disposition of which was still in the will of the company. He therefore held that all that the debenture created was a floating charge. To the same effect is the decision of Wootten J. in
Re Wallyn Industries Pty. Ltd. and the Companies Act 1961 83 ATC 4109 at p. 4111 though there the terms of the debenture lent more readily to the inference that it created a floating charge.

The receivers press upon me three cases:
Siebe Gorman & Co. Ltd. v. Barclays Bank Ltd. (1979) 2 L1.L.R. 142 at pp. 158, 159;
Evans, Coleman & Evans Ltd. v. R.A. Nelson Construction Ltd. (1958) 16 D.L.R. (2d) 123 at pp. 127, 128 and
Re Manurewa Transport Ltd. (1971) N.Z.L.R. 909 at p. 915 and pp. 916-917. I must say I find some difficulty in discovering a satisfactory distinction between this group of cases and those cited by the Commissioner, but distinctions can be made. In Siebe Gorman the debenture charged the book debts with a fixed charge pursuant to cl. 3(d). By cl. 5(c) it was provided that during the continuance of the security the company would pay into its account with the bank all moneys which it might receive as book debts and should not without prior consent of the bank in writing purport to charge or assign the same in favour of any other person and should, if called upon to do so, execute a legal assignment of such book debts to the bank. Slade J. accepted the premise that if the mortgagor had unrestricted right to deal with the proceeds of any relevant book debt paid into its account, so long as that account remained in credit, he would have been inclined to accept the view that the charge was no more than a floating charge (p. 158). In his judgment, however, his Honour said at p. 159:

``In my judgment, however, it is perfectly possible in law for a mortgagor, by way of continuing security for future advances, to grant to a mortgagee a charge on future book debts in a form which creates in equity a specific charge on the proceeds of such debts as soon as they are received and consequently prevents the mortgagor from disposing of an unencumbered title to the subject matter of such charge without the mortgagee's consent, even before the mortgagee has taken steps to enforce its security: (compare Evans, Coleman & Evans Ltd. v. R.A. Nelson Construction Ltd.).''

His Honour seems to have reached this conclusion from the terms of cl. 3(d) read along with the debenture as a whole, cl. 5(c) reinforcing the specific charge given by cl. 3. In Evans, Coleman & Evans Ltd., a decision of the British Columbia Court of Appeal, the assignment, in the opinion of DesBrisay C.J.B.C. with whom O'Halloran J.A. agreed, purported to pass the entire interest to the assignor in the book debts and was absolute. The respondent had argued that the absolute nature of the assignment was qualified because (a) it was expressed to be by way of security, (b) that no notice was given to the debtors and that, (c) the assignor continued to collect the debts, and that therefore it constituted the floating charge. His Honour held the assignment which was an equitable one, was absolute and complete without notice and the fact that the mortgagee permitted the assignor to collect the assigned debts did not alter the fact that they were the property of the mortgagee. There is of course a distinction to be drawn between the assignment in this case and the bank's debenture and the debenture in Hart. This assignment was not open to the construction that the parties contemplated the company would continue to carry on its business in the ordinary way involving the collection and incurring of book debts from time to time. It was a naked assignment. As Davey J.A. pointed out at pp. 127-128 in order to infer the parties contemplated the business to be carried on in the ordinary way the intention has to be collected from the instrument itself and not from conduct inadmissible as an aid to construction. No such intention could be inferred from the terms of that assignment. I do not find this latter case helpful and with respect I am unable to see that it was much assistance in construing the debenture in Siebe Gorman. As to Re Manurewa, in that case the company's right to deal with its property ``in the ordinary course of business'' was subject to certain restrictions, one of which was the condition of non-charging without written consent. An asset was charged without written consent. It was

ATC 4099

held that although a floating charge as was the case, did not attach specifically, it covered assets but with power of automatic relinquishment provided those assets were dealt with in a way authorised by the debenture, i.e. in the ordinary course of business.

The bank's debenture is not on all fours with any of the documents considered in the reported cases to which I have been referred, though it is closer to the terms of the debenture considered in Hart. It clearly contemplates the carrying on of the business of the company in the ordinary way. There is a covenant the company will not create or give any mortgage or encumbrance ranking in priority to or pari passu with the bank's debenture. Clause 12 precludes the company from receiving the book debts. But what book debts? As a matter of grammar those book debts are ones which are the subject of ``full and accurate accounts for all the mortgaged property including the said book debts'' when such accounts have been called for by the bank. Thus interpreted the only book debts which the company may not receive without the consent of the bank are those which have been the subject of a full and accurate account called for by the bank. Clause 12 seems primarily to be directed to providing accurate information to the bank so it may well be a sensible construction of its terms, that the company should do nothing which might invalidate the information so given such as by receiving, compounding or releasing a book debt. If that is not so it is difficult to reconcile the coupling of the verb ``receive'' with the verbs ``compound'' and ``release'' and what immediately follows. Without ``receive'' the passage makes sense since it is directed at the reduction of the size of a book debt on the one hand and against the impeding, delaying or preventing of a book debts recovery. The introduction of the word ``receive'' upsets that harmony since the receipt by the mortgagor of a book debt does not necessarily mean it has been reduced in size or lost. The idea behind the embargo on the receipt by the mortgagor of a book debt without the bank's consent seems foreign to the balance of the clause. Notwithstanding the provisions of cl. 12 I decline to read them in such a way as to contradict the right of the company to deal with its book debts in the ordinary course of business so long as the debenture has not crystallised in respect of them. In short I construe the debenture in respect of the book debts as creating a floating charge. In any event if cl. 12 is to be construed so as to provide a general embargo on the receipt by the company of its book debts without the consent of the bank in reinforcement of the creation of a specific charge, in fact the bank did consent. The cause contemplates that possibility and in that regard it is clearly distinguishable from the assignment dealt with in Evans, Coleman & Evans Ltd. As previously mentioned the bank permitted the company to deal with its book debts at its will so long as that conduct was in the ordinary cause of business. I am also unimpressed by the fact that the company's accounts with the bank were mainly in debit. I do not see that fact leads to the result that the collection by the company of its book debts by payment into its accounts of the proceeds of them was other than dealing with them in its ordinary course of business at its will. The bank manager did not say that there was any specific arrangement requiring the company so to deal with its book debts though, obviously, they would have contemplated that the book debts might have been paid into the company's accounts.

The company did not breach cl. 7 because it did not create or give a charge. That came about because of the actions of the Commissioner pursuant to sec. 38. It is not suggested that any of the debts owed by the recipients of the notices were not incurred other than in the ordinary course of business and if sales tax was owing that seems to have been incurred also in the ordinary course of business. There would have been no reason then why the company could not have collected the book debts, the subject of the notices, and used the proceeds to pay the sales tax or directed the debtors to pay the Commissioner. That would have been in the ordinary course of business. Because the Commissioner has intervened between the debtors and the company I do not see as causing the book debts to be dealt with in such a way as to lead to the result that they were not dealt with in the ordinary course of business: cf. Re Manurewa.

My conclusions thus far are these. The sec. 38 notices being duly given and served upon the debtors there arose a charge upon such debts upon receipt of the notices in favour of the Commissioner. The extent of such charge embraced the whole of each debt since in no

ATC 4100

case was a debt more than sufficient to pay the tax due by the company. The bank's debenture created a floating charge over these book debts, such charge being created prior in time to the notices. The authorities support the view that prior to the crystallisation of the security the mortgagee holding a floating charge obtains an interest in the res, but is liable to be deprived of its value as a security by the extinguishment of the subject matter, as for example, when prior to crystallisation the company, in the ordinary course of its business, alienates its legal or equitable right in the subject matter to a third party. The relevant cases are reviewed by Lavan S.P.J. at pp. 102-103 and Wickham J. at pp. 107-109 in
Landall Holdings Ltd. v. Caratti (1979) W.A.R. 97. As Wickham J. put it at pp. 108-109:

``if a third party acquires the equity in the asset before the chargee gathers in his equity, then when the chargee comes to gather it in he finds that it has gone - in the language of the metaphor it has floated away - or, if it is a matter of priorities, it has submerged.''

I have already held that the incurring of the sales tax (if indeed it was incurred but that issue is not before me to decide) was in the ordinary course of business and that the acquisition by the Commissioner of his charge on the book debts by invoking sec. 38 did not amount to a breach of the terms of the debenture by the company so as to constitute the creation of the charges other than in the ordinary course of business. Hence if at the time of the receipt of the notices the bank's debenture was still a floating charge over the book debts, by the time it sought to gather in its equity by crystallising the charge its equity in the debts had floated away (to adopt the words of Wickham J.). That leads me on to consider the time at which the bank's debenture crystallised.

The Commissioner asserts, however, that I need not trouble myself with any question of priorities or indeed crystallisation, because he says that by the application of the literal meaning of the words of sec. 38, if the bank had no better claim than as an equitable assignee, there still remained the legal estate in the company in respect of the debts and hence the debtors of the company were persons by whom money is due or accruing or may become due to the company. If in the circumstances there are such persons then the command of the section must be obeyed, claims to the money in priority notwithstanding, and the money must be paid in accordance with the command in the notice. Two points arise out of this for discussion. Even if it be correct that the command must be met does it follow that the money in the hands of the Commissioner might not be subject to a prior claim? Is sec. 38 to be construed so as to deny a claim arising prior in time to that of the charge of the Commissioner?

I come back to consider the construction of the Act and in particular Pt VI. It would, I think, be taking a big step to conclude Parliament intended the Commissioner should be paid his tax out of a debt which in equity had ceased to belong to the taxpayer at the time of receipt of a sec. 38 notice. There is no compelling reason to be derived from the Act why this should be so. Section 34 seems to deny such a result. That section attempts to make an estate, and the executors and the administrators of it, responsible for the payment of tax where, whether intentional or not, a taxpayer escapes full taxation in his lifetime by reason of not having duly made full, complete, and accurate returns. By subsec. (d) the Commissioner may exercise all such powers and remedies for the purpose of giving effect to the section as in the case of ordinary assessments and taxation. Presumably therefore he could give a notice under sec. 38 to a debtor of the estate and achieve a charge on that debt. By subsec. (c) the amount of the tax shall, wherever the taxpayer's default was intentional be double the amount of the sales tax so assessed less the amount actually paid by the taxpayer ``and shall be a first charge on all the taxpayer's estate''. But if the default was unintentional the tax is not a first or any charge upon the estate, but would rank pari passu with the creditors of the estate. It would be a strange result that though the Commissioner has no priority against the assets of the estate, by giving a sec. 38 notice he not only achieves a charge upon the debt the subject of the notice, but does so where the debt in equity no longer belongs to the taxpayer or his estate. In my view I should not construe sec. 38 in such wide terms as the Commissioner seeks. I accept that it can create a charge, but when it does, that charge will be subject to ordinary rules of equity so that he whose charge is first in time

ATC 4101

would have priority even if a subsequent chargee be the Commissioner.

The bank's debenture provides by cl. 18 when the moneys secured are to become immediately repayable and to be so due and recoverable without it being necessary to make formal demand. Clause 19 provides that upon the happening of any of the events referred to in cl. 18 the bank may appoint a receiver. It did so at 11.35 a.m. on 1 June 1983. Following Sykes 3rd Edition: The Law of Securities at p. 785, the bank's debenture crystallised at that time because the company had made default and the bank had taken some step to realise its security by appointment of receivers. From that time onwards the bank would have had priority over any other chargee whose charge came into being later in time. Therefore in respect of the debt of every debtor who received a notice prior to 11.35 a.m. on 1 June 1983 the Commissioner obtained a charge in priority to the bank. But in respect of the debt of every debtor who received a notice after that time the bank's security prevails. I am not called upon to deal specifically with the facts set out in the Schedule but it can be seen that some of the notices were served or are deemed by law to have been so served prior to 11.35 a.m. on 1 June 1983 and others were served after this time, while in respect of still others it is not possible, on the information supplied, to say whether they were received prior or subsequent to the relevant time, though, they seem to have been received on 1 June 1983. I heard no argument from the parties on whether in these circumstances the bank's security would prevail and I think I should say nothing about this issue for the resolution of it may well depend where the burden of proof or disproof lay.

The next question is, when did the Steinberg debenture crystallise? It was in its terms in respect of the book debts a floating charge. Some of the relevant clauses are as follows. By the proviso to cl. 1 it was stated that ``so far as this security constitutes a floating security it shall not (until the same shall become enforceable) prevent or restrict any sales or other dealings by the company in the ordinary course of business with the property charged by way of a floating security''. Clause 7 stated:

``7. THE Company will so long as any of the principal sum interest or any other moneys secured by these presents remains unpaid and the Lender has not appointed a Receiver or Receiver and Manager of the Company's business carry on and conduct in a proper and efficient manner the business of the Company.''

Clause 10 provided the principal sum should ipso facto become immediately payable on the happening of certain events and relevantly by:

``(d) If the Company shall cease to carry on business or shall fail to carry on business in a proper and efficient manner.

...

(f) If an Official Manager or a Receiver of the Company's undertaking or any part thereof shall be appointed or any Creditor shall take possession of the undertaking or any of the property or assets of the Company or if the Company shall dispose of its undertaking or a substantial part of any of the undertaking of the Company without the consent in writing of the Lender first had and obtained.''

Clause 11 stated that any time after all the principal moneys had become payable the mortgagee, after giving notice to the company requiring payment of the moneys, might appoint a receiver.

The dispute between the parties centred on whether a floating charge can self crystallise, that is, without action on the part of the mortgagee or whether, in certain circumstances, it may do so. The authorities seem to be divided on this point as well as the text book writers. In an article by Robert L. Dean in the Law Institute Journal (Victoria) 1984 at p. 843 the author states what writers are for and against automatic crystallisation. The author points out that the difficulty with cases relied on by those who reject automatic crystallisation is to determine to what extent particular decisions rely on the inherent nature of a floating charge, as distinct from the implied intention of the contracting parties. But even Sykes at p. 786 in the work cited, who is for the negative side of the argument, would allow it to be a condition precedent to the continuance of the floating character of the security that the company continues to carry on business, and commencement of liquidation proceedings would therefore cause a security to become fixed, even though there has been no actual default under the terms of the debenture citing
Wallace v. Universal Automatic Machines

ATC 4102

(1884) 2 Ch. 547. The appointment of a receiver by a prior debenture holder has been held to have caused without more the crystallisation of a subject floating charge:
Stein v. Saywell (1968-1969) 121 C.L.R. 529,
Re Otway Coal Co. Ltd. (1953) V.R. 557. The same difficulty applies to those cases as does with those that deny automatic crystallisation. The Steinberg debenture contemplated, and indeed the company covenanted, that the business would be carried on and conducted in a proper and efficient manner but only so long as Steinberg had not appointed a receiver. By cl. 10(f) the principal moneys became immediately payable as soon as the bank appointed its receivers. The debenture had become enforceable on that event and thereafter the company was precluded from making sales of or entering into other dealings with its property in the ordinary course of business. It seems to me that to hold that the Steinberg debenture crystallised upon the bank appointing its receivers is consistent with the inherent nature of a floating charge and I so hold. It is not in dispute that the bank's debenture takes priority over the Steinberg debenture but the charge created by the latter, in my view, takes priority over the charges in favour of the Commissioner in respect of notices served after 11.35 a.m. on 1 June 1983.

I return to the issues which counsel agreed were before me and I endeavour to answer them as follows.

It has been agreed by counsel that I should hand these reasons down so that they may consider them before moving for appropriate relief if any.

 

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