Deputy Federal Commissioner of Taxation v. James.

Judges:
Enderby J

Court:
Supreme Court of New South Wales

Judgment date: Judgment handed down 11 April 1986.

Enderby J.

In this matter the plaintiff, the Deputy Commissioner, originally claimed by summons:

``1. A declaration that from and upon his appointment as Scheme Manager pursuant to a Scheme of Arrangement in relation to Cloughs Spares Pty. Limited the defendant was a `trustee' within and for the purposes of Section 221P(1) of the Income Tax Assessment Act 1936. I will hereafter refer to it as the Act.

2. A declaration that the defendant is liable pursuant to Section 221P aforesaid to pay to the plaintiff the amount of $5,969.35 being the total of deductions theretofore made by the Company for the purposes of Division 2 of Part VI of the Act.

3. A declaration that the defendant is further liable pursuant to Section 221P aforesaid to pay to the plaintiff the amount of $36,063.33 being the total of such deductions made by the Company during the period 26 June 1978 to 26 June 1980 namely $59,009.64, less the total of amounts actually remitted by the defendant to the plaintiff namely, $22,946.31.

4. A declaration that the defendant is liable to pay to the plaintiff the additional amount in respect of each of the amounts of $5,969.35 and $36,063.33 computed pursuant to Section 221F(10) of the Act.

5. Costs.''

Subsequently, the claim sought in para. 4 was abandoned.

The basic facts that give rise to the claim are as follows:

A company, Cloughs Spares Pty. Limited, had become incorporated on 28 February 1963. On 9 April 1963 it became registered as a group employer and carried on the business of a new motor vehicle dealer selling Volkswagen and Subaru motor vehicles and spare parts for those vehicles, and second-hand motor vehicles of all types. On 23 May 1975 it entered into distribution agreements with Volkswagen (Distribution) Pty. Limited and Subaru (Distribution) Pty. Limited. Those agreements remained in force during all relevant times. It carried out its business in association with its holding company Clough Holdings Pty. Limited, and another subsidiary Cloughs Service Centre Pty. Limited. I will henceforth refer to Cloughs Spares Pty. Ltd. as the company.

The agreements referred to provided that the title to all... products shall remain in the distributor (i.e. Volkswagen and Subaru) until paid for in full in cash. All negotiable instruments received by the distributor were deemed to be conditional until met.

On 31 March 1976, the company entered into a loan and guarantee agreement with

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A.G.C. (Advances) Limited. There were other ancillary agreements entered into called ``Used Goods Wholesale Plan and A.G.C. Sub-Bailment Plan and A.G.C. (Wholesale) Demonstrator Plan''. These were with A.G.C. (Wholesale) Ltd. and Australian Guarantee Corporation Ltd.

They were designed to facilitate the provision of finance and still give effect to the proper conduct of the business.

The essence of the bailment plans was that the company would acquire goods for sale as bailee for A.G.C., with the title to the goods remaining with A.G.C.

The loan and guarantee agreement defined the security in the following terms:

``(iv) `The Initial Securities' - Deed of Equitable Charge made between the Borrower as Mortgagor of the one part and the Lender as Mortgagee of the other part, a Deed of Equitable Charge made between Clough Holdings Pty. Limited as Mortgagor of the one part and the Lender as Mortgagee of the other part, a Deed of Equitable Charge made between Cloughs Service Centre Pty. Limited as Mortgagor of the one part and the Lender as Mortgagee of the other part, a First registered Mortgage over the whole of the land contained in Certificate of Title Volume 11221 Folio 244 and a First registered Mortgage over the whole of the land contained in Certificate of Title Volume 6738 Folio 123.

(v) `The Additional Security' - a First registered Mortgage over the whole of the land contained in Certificate of Title Volume 11221 Folio 243 being Lot 1 in Deposited Plan 538193.

(vi) `The Securities' - the Initial Securities, the Additional Security and any other real or personal securities now or at any future time held by the Lender from the Borrower or the Guarantor or any other person or corporation as security for the performance of `the Obligations' (as hereinafter defined) or any part thereof.''

The deed of equitable charge referred to, charged all and singular (the company's) undertaking and all its assets whatsoever and wheresoever both present and future including its uncalled capital for the time being with the due and punctual performance by the (company) of all of its obligations under the loan agreement. It purported to operate as a fixed charge over all real and leasehold property but has been accepted by the parties in argument as being a floating charge.

In addition to the floating charge there were fixed specific mortgages registered under the Real Property Act, given over real estate property of the company and the directors.

In about May, 1978, the company was in financial difficulties. Its directors approached the defendant, Mr James, and asked him to investigate the company's affairs and report back. Mr James reported to the directors on 23 May 1978.

He reported that the company's affairs were perilous and that if the company relied on its current trading trend to finance a positive cash flow, then the results would be disastrous.

He expressed his opinion that it was essential that a period of moratorium be granted with regard to the repayment of the principal for the time being.

He also noted:

``A claim of the Deputy Commissioner of Taxation for group tax estimated at $3,500 is payable in priority to the claim of all other creditors, be they preferential, secured or unsecured. Furthermore the Deputy Commissioner claims common law priority in respect of sales tax estimated at $8,112 for the purpose of the attached statement. In addition, the claims of employees for wages, salary, commission, annual leave and long service leave are payable in priority to the holder of any debenture secured by floating charge and although the preferential entitlement to annual leave is limited to claims not in excess of thirty days, I have for the purpose of the attached statement assumed that all such claims are wholly admissible.''

And he recommended that immediate steps be taken to invite A.G.C. (Advances) Limited to appoint a receiver and manager of the company. This would have crystallised the floating charge.

A.G.C. (Advances) Limited declined the request.

Faced with this refusal, Mr James formed the opinion, that it might be possible for the

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company to trade profitably, notwithstanding its perilous financial position and that the implementation of a Scheme of Arrangement, with the co-operation and approval of A.G.C. (Advances) Limited, might be a viable proposition and that a profit might still be made if more effective control was exercised over the company's operations. This advice was tendered to the company and accepted. A scheme of management, adequately called a moratorium-type scheme, was prepared and given the approval of the Supreme Court on 26 June 1978. It did not appoint or name Mr James as manager. That was done by deed on 12 June 1978.

Pursuant to the scheme he had the following powers:

``3(a)... (to) appoint any other person or persons to act for him during his absence from the State of New South Wales.

(b)... (to) be entitled to remuneration at a rate normally charged by him for work of a like nature but not to exceed that from time to time recommended by the Bankruptcy Trustees and Liquidators' Association of Australia, if any, for work of a like nature to that carried out by the Scheme Manager.

(c)... a general power of delegation and entitled to appoint Accountants, Solicitors, Barristers and other experts in relation to or incidental to the affairs of the Company and/or the administration of the Scheme.

(d)... (to) have and... be entitled to exercise all powers necessary for the collection and realisation of the assets of the company and the carrying on of the Company's business and... specifically... those powers granted to a Liquidator and set forth in Section 236(1)(d) and Section 236(2)(a) to (j) inclusive of the (Companies) Act.

(e) to compromise the claims of creditors against the company...''

He was not deemed to be a director of the company and was not to have the powers and duties of the directors of the company in respect of the statutory obligations in relation to the convening and holding of annual general meetings of the company and the preparation and filing of an annual return of the company and the other duties and obligations imposed upon directors by the provisions of the Act.

The powers given liquidators as set out in sec. 236(1)(d) of the 1961 Companies Act are as follows:

``to compromise any calls and liabilities to calls, debts and liabilities capable of resulting in debts and any claims present or future certain or contingent ascertained or sounding only in damages subsisting or supposed to subsist between the company and a contributory or other debtor or person apprehending liability to the company, and all questions in any way relating to or affecting the assets or the winding up of the company, on such terms as are agreed, and take any security for the discharge of any such call, debt, liability or claim, and give a complete discharge in respect thereof.''

Those in sec. 236(2)(a) to (j) are:

``(a) bring or defend any action or other legal proceeding in the name and on behalf of the company;

(b) appoint a solicitor to assist him in his duties;

(c) sell the real and personal property and things in action of the company by public auction, public tender or private contract with power to transfer the whole thereof to any person or company or to sell the same in parcels;

(d) do all acts and execute in the name and on behalf of the company all deeds receipts and other documents and for that purpose use when necessary the company's seal;

(e) prove rank and claim in the bankruptcy of any contributory or debtor for any balance against his estate, and receive dividends in the bankruptcy in respect of that balance as a separate debt due from the bankrupt and ratably with the other separate creditors;

(f) draw, accept, make and endorse any bill of exchange or promissory note in the name and on behalf of the company with the same effect with respect to the liability of the company as if the bill or note had been drawn, accepted, made or endorsed by or on behalf of the company in the course of its business;

(g) raise on the security of the assets of the company any money requisite;

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(h) take out letters of administration of the estate of any deceased contributory or debtor, and do any other act necessary for obtaining payment of any money due from a contributory or debtor or his estate which cannot be conveniently done in the name of the company, and in all such cases the money due shall for the purposes of enabling the liquidator to take out the letters of administration or recover the money be deemed due to the liquidator himself;

(i) compromise any debt due to the company other than calls and liabilities for calls and other than a debt where the amount claimed by the company to be due to it exceeds three hundred pounds;

(j) appoint an agent to do any business which the liquidator is unable to do himself;.''

The deed of 12 June 1978 appointed Mr James sole manager. It referred to the indebtedness of the company to A.G.C. and to the fact that it had granted to A.G.C. the Deed of Equitable Charge to secure that indebtedness. It should be noted that A.G.C. was not a party to the deed. It recited in that:

``Each of the Clough Companies is desirous of appointing James as Manager of the whole of the business undertaking of each of the Clough Companies and to advise the Board of Directors of each of the Clough Companies as to the sale of the assets of each of the Clough Companies for the purpose of repaying the indebtedness of each of the Clough Companies as to both principal and interest to A.G.C. (Advances) Limited.''

It empowered Mr James to:

``(i) take possession or collect and get in the whole or any part of the Clough Companies' premises.

(ii) lease in the name of all or any of the Clough Companies or otherwise the whole or any part of the Clough Companies' premises from year to year or for any term of years or for any term less than a year at such rent and upon such terms and conditions as shall seem expedient to James.

(iii) carry on or concur in carrying on in the name of all or any of the Clough Companies the business of all or any of the Clough Companies and to make and effect all repairs, purchases and insurances and to erect or to make any new building or improvement upon any land forming part of the Clough Companies premises and to pull down alter rebuild and/or add to any then existing building thereon and to cause all or any of the Clough Companies to do all acts which might protect or improve the Clough Companies' premises or any of them or might cause the return of income therefrom.

(iv) cause all or any of the Clough Companies to borrow from any Bank or from A.G.C. (Advances) Limited or from any other person firm or corporation any money which may be required for any of the purposes mentioned in this Deed or generally and to secure such moneys so borrowed by mortgage or charge over the Clough Companies' premises or any part thereof but only so that such mortgage or charge may rank after the Deed of Equitable Charge in favour of A.G.C. (Advances) Limited.

(v) sell or concur in selling all or any of the Clough Companies' premises either by Public Auction or Private Treaty or by tender for cash or on credit and either in one lot or in parcels and either with or without special conditions or stipulations as to title or time or mode of payment or purchase money or otherwise and with power to allow the whole or any part of the purchase money to remain on mortgage of the properties sold or on any other security or without any security and upon such other terms and conditions as James may consider expedient and with full power to buy in and rescind or vary any contract for sale and to resell without being responsible for loss and to compel the specific performance of any contract by suit in equity or otherwise and to execute assurances of all or all of the mortgaged premises in the name and on behalf of all or any of the Clough Companies or otherwise and to do all other acts and things for completing any such sale which James may deem necessary.

(vi) sever fixtures belonging to all or any of the Clough Companies and sell them apart from any other part of the mortgaged premises.

(vii) employ Managers Solicitors Officers Agents Auctioneers Workmen Servants for

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all or any of the purposes aforesaid at such salaries or remuneration as James shall think fit.

(viii) make any arrangement or compromise which James shall think expedient in interest of all or any of the Clough Companies.

(ix) give effectual receipts for all moneys and other assets which may come to the hands of James in exercise of any power hereby conferred which receipt shall exonerate any person paying or handing over such moneys or other assets from all liability to enquire whether the principal moneys have become payable or otherwise as to the propriety or regularity of the appointment of James.

(x) carry out and enforce specific performance of or otherwise obtain the benefit of all contracts entered into or held by all or any of the Clough Companies or entered into in exercise of the powers or authorities hereby conferred.

(xi) make debtors bankrupt and to wind up Companies and do all things in connection with bankruptcy or winding up which James shall think necessary for the recovery or protection of the Clough Companies' premises or any part thereof.

(xii) take proceedings at law or in equity or in bankruptcy in the name of all or any of the Clough Companies or otherwise for all or any of the purposes aforesaid.

(xiii) do all the things necessary to perform or observe any of the convenants on the part of all or any of the Clough Companies herein contained.

(xiv) do all such other acts and things without limitation as James shall think expedient in the interest of all or any of the Clough Companies.

(xv) insure such part of the Clough Companies' premises as is of an insurable nature against loss or damage by fire or other risks in such sums as James thinks fit and to effect such other insurance relating to the business of the Clough Companies as James thinks fit.''

He was not to be a principal and in the execution of all his duties and obligations he was to act only as an agent of all or any of the Clough Companies respectively and to be entitled to be indemnified out of the assets of the Clough Companies against all claims made against him at any time with respect to or arising out of the exercise by him of any of his duties or obligations. In this respect the Clough Companies and the directors covenanted with him to enter into mortgages in favour of him securing the indemnity granted over the realty referred to in the mortgage.

He was to be entitled to be paid remuneration for carrying out of his duties and obligations at such rate or rates usually charged by him in respect of work of a like nature and he was to be entitled to render accounts and invoices for such remuneration to any of the Clough Companies.

The directors covenanted with him to do all things and hold all meetings and pass all resolutions as shall be required of them from time to time by him for the purpose of having him carry out his duties and meet his obligations and the directors further covenanted with him not to hinder or impede the exercise by him of all or any of his duties or obligations and undertook to approve all proper and reasonable actions he might take and to adopt all proper and reasonable recommendations he might make from time to time.

This agreement set out in the deed was to terminate forthwith upon the happening of any one of the following events:

The term ``the Clough Companies' premises'' wherever it appeared was said to be

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a reference to all and singular the undertakings of each of the Clough Companies and all the assets both present and future including uncalled capital for the time being of each of the companies.

I pause to say that, on the evidence led in the case, it is inconceivable that these agreements were not being entered into by the company and its directors and the associated companies and all these steps taken, without the full knowledge and concurrence of A.G.C.

Mr James then took over. He operated a bank account with the A.N.Z. bank styled ``Clough Spare Parts Pty. Limited Scheme Manager's Account'' in the name of the company as envisaged in cl. 10 of the Scheme of Arrangement and utilised that account for the payment of the current liabilities of the company. He was the sole person to operate on the account which was at all times in the name of the company. He paid the salaries of the employees and continued to deduct the tax deductions from the salaries paid. He paid the other running expenses of the company. He engaged in correspondence on behalf of the company. He accepted that it was his responsibility to account to the Deputy Commissioner of Taxation for the tax instalment deductions because in a letter to the Deputy Commissioner dated 15 September 1978 he said:

``Dear Sir,

Re: Cloughs Spares Pty. Limited (Under a Scheme of Arrangement) Group Remittance, May, 1978: Group No. 15091463

I wish to acknowledge receipt of your letter of August 23, 1978, reference 10/A/150 91463, and advise that the tax instalment deductions for Clough Spares Pty. Limited for the month of May has not been remitted.

At a meeting of creditors of Cloughs Spares Pty. Limited, held on Wednesday, June 21, 1978 approved the appointment of myself as Scheme Manager. The Scheme of Arrangement was subsequently approved by the Supreme Court of New South Wales, Equity Division on June 26, 1978.

I elected to pay the tax instalment deductions for the month of June, however, the May deductions have been frozen and will rank as a preferential creditor of the Scheme.

Please find enclosed the remittance advice for the Group deduction for May, totalling $5,969.35.

Yours faithfully,

G.R. JAMES (SGD)

SCHEME MANAGER.''

Some uncertainty arose during argument before me as to whether the $5,969.35 referred to had been paid or not. This was subsequently cleared up and I was informed that it was accepted that the money had not in fact been paid and was still due.

Mr James supervised and controlled the running of the business for some twenty months. In my opinion, in any real or practical sense of the word, he had overall control of the operation and work of the company.

The financial troubles continued however, and there were further negotiations and discussions with A.G.C.

On about 19 July 1979 Mr James advised A.G.C. that he had no option but to close the business down.

A.G.C. were then advised that the stock on site should be sold by auction. All moneys from the auction went to the finance company.

On 25 July 1979 the spare parts which had been supplied to the company by Volkswagen and Subaru were seized and taken away by Volkswagen Australia Limited.

Mr James, accepting that A.G.C. had its security, came to the opinion that there was some equity left in the properties concerned and attempted to take some security for himself by way of additional mortgage. This proved valueless however and it turned out there was no equity in substance left in any of the properties when they came to be sold.

It is not in dispute that over the period there was a sum of $42,032.68 deducted as income tax instalments that was not paid over to the Commissioner.

As I have stated, the plaintiff, the Deputy Commissioner, bases his claim against the defendant on sec. 221P of the Income Tax Act.

Section 221P is in the following terms:

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

221P(2) Notwithstanding anything contained in any other law of the Commonwealth, or in any law of a State or of the Northern Territory -

  • (a) an amount payable to the Commissioner by a trustee in pursuance of this section has priority over all other debts (other than amounts payable under sub-section 221YHJ(3)), whether preferential, secured or unsecured; and
  • (b) where an amount is payable by a trustee to the Commissioner under sub-section 221YHJ(3), an amount payable by the trustee in pursuance of this section ranks equally with the amount payable under sub-section 221YHJ(3) in priority to all other debts, whether preferential, secured or unsecured.

221P(3) Where a trustee, being the trustee of the estate of a bankrupt or the liquidator of a company that is being wound up, is liable to pay an amount to the Commissioner in pursuance of this section, sub-section (2) does not operate so as to make that amount payable in priority to any costs, charges or expenses of the administration of the estate or of the winding-up of the company (including costs of a creditor or other person upon whose petition the sequestration order or the winding-up order, if any, was made and remuneration of the trustee) that are lawfully payable out of the assets of the estate or of the company except where, in the case of the winding-up of a company, the Crown in right of a State or any other creditor is entitled to payment of a debt by the liquidator in priority to all or any of those costs, charges and expenses and has not waived that priority.''

``Trustee'' is defined in sec. 6 of the Act as follows:

```trustee' in addition to every person appointed or constituted trustee by act of parties, by order, or declaration of a court, or by operation of law, includes -

  • (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 plaintiff's first submission is that the company, as an employer, became liable and that Mr James then as ``scheme manager'' became liable as a ``trustee'' within the meaning of sec. 221P(1) and 6. The Deputy Commissioner argued that the control of the property passed to Mr James, making him liable.

The first question I am asked to decide is whether on the facts in this case the defendant became a trustee. Unless that question is answered in the plaintiff's favour, the claim fails at the outset.

The plaintiff relies mainly on the words in sec. 6 ``... or acting in any fiduciary capacity...''. He submits that Mr James was acting in a fiduciary capacity.

I am informed by counsel that as far as their researches go, there is no direct authority on either of these questions.

Mr Bainton, for Mr James, has argued strongly that there cannot be a trustee-beneficiary relationship when there is no property to which it could attach. He submitted that nothing in the nature of trust had been created.

In some ways, this is correct. The precise conceptual nature of a trust is uncertain. The

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problems of definition are well known (see Jacobs on Trusts in New South Wales 2nd ed. p. 107) but the term in this instance has been given an extended statutory meaning.

Mr Bennett has argued that the expression should not be read down and I agree.

In my opinion the draftsman of sec. 221P has used the word most closely aligned with his intent and in sec. 6 has taken the common examples of trustees and the operation of the law and has added to them a general description of anyone acting in a fiduciary capacity.

Notwithstanding Mr Bainton's vigorous and sustained effort, I am persuaded that Mr James was a trustee within the meaning of the Act. I am satisfied that at all relevant times he was acting in a fiduciary capacity. Fiduciary means the relationship of one person to another where the former is bound to exercise rights and powers in good faith and for the benefit of the latter. It is a broad term although there are well recognised relationships such as trustee and beneficiary and solicitor and client and others but the term is not restricted to such relationships.

In my opinion, Mr James was acting in a fiduciary capacity in his relationships with the company and, I would add, the Commissioner. The tax deducted was not the company's money or Mr James's money. It was the money of the Commissioner.

I proceed to consider the second question argued which was whether, being a trustee, the control of the property of the company had passed to him as required by sec. 221P.

This was the more substantive question argued before me.

As with the question of whether or not Mr James was a trustee, the question of whether or not the control of the employer's property passed to Mr James is free of directing binding authority. To a large extent it is a question of fact.

However, notwithstanding this, the question can only be answered after a consideration of certain judgments that have been given in other sec. 221P cases. I have been referred to a number. The first three are relied on by Mr James.

The first is
F.C. of T. v. Barnes 75 ATC 4262; (1975) 133 C.L.R. 483.

In Barnes' case the facts briefly were that the Commissioner sought to recover tax, deducted and not paid, from a receiver and manager. There was a floating charge which had crystallised leaving the company only with its equity of redemption and the mortgagee had installed a receiver and manager and the High Court held that he was a trustee for the purposes of sec. 221P. At the time of appointment, the company owed the Commissioner amounts deducted as tax from its employees. The Court also held that it was a prerequisite that the whole of the property of the employer pass to the control of the trustee, and that on the facts in that case, it had so passed. The Commissioner succeeded against the receiver.

At ATC p. 4265; C.L.R. p. 490 et seq., Barwick C.J. and Mason and Jacobs JJ. said:

``... The real question is whether, in the case of the defendant, control of the property of the company passed to him within the meaning of sec. 221P. But before that question can be answered, it is necessary to determine what is meant by the word `property' in the section because, until that is determined, it is not possible to determine what is the relevant control which is claimed to have passed to the defendant. In
F.C. of T. v. Card [(1963) 109 C.L.R. 177] Owen J., with whom Dixon C.J. agreed, took the view that the relevant property was the interest which the company had in its assets and undertaking after taking account of the mortgagee's security and that that interest was a worthless equity of redemption. McTiernan J. was of the opinion that the equity of redemption was not a part of the company's property of which Mr Card was receiver and manager. Taylor J., as we have said, based his decision on his conclusion that the receiver was not a trustee within the meaning of sec. 221P. On the other hand, Menzies J. took the view that control of all the property of the company in that case passed to the receiver as a trustee within the meaning of sec. 221P and here he was clearly referring to the assets and the undertaking of the company as such and not to the company's interest therein, the equity of redemption.

In the face of these divergent views, F.C. of T. v. Card (supra) cannot be regarded as an authority for the proposition that the

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relevant property of the company in the present circumstances is the worthless equity of redemption. Indeed if that equity of redemption were regarded as an item of property separate from the property which was subject to the equitable right to redeem, it never did pass under the control of the defendant, as McTiernan J. recognised in F.C. of T. v. Card (supra).

In our opinion, the property of the company which passed under the control of the defendant upon his appointment by the mortgagee as receiver under the deed was the whole of the assets and undertaking of the company, control of which could pass to him as receiver under the terms of the deed. It is an important qualification that the `property' is limited to that in respect of which control could pass to the defendant. If independently of this security there had been a mortgage or other security over certain assets of the company, control of those assets could not pass to the receiver. He would have control only of the equitable interest of the company in those assets. But it does not follow that, because in the case of a security over certain assets only the equitable interest is property within the meaning of the section, therefore in a case where the whole of the property of a company is vested in or passes under the control of a trustee for a secured creditor, the relevant property is likewise no more than the equity of redemption. So to construe the section is self-contradictory. Section 221P deals with cases where the defaulting employer either remains in control of the whole of his property (subject of course to any security given by him over particular assets) and cases where the whole of that property (again subject to the same qualification) has vested in or passed under the control of a trustee. Thus, for example, if a defaulting employer assigns the whole of his property to a trustee as security for all or some of his debts, the property is the whole of his assets subject to any security previously existing over less than the whole. The relevant property is not, and cannot sensibly be regarded as, the interest of the employer remaining after payment of those debts security for payment whereof is the whole purpose of the assignment.

What is true of such an assignment is true also of a floating charge over the assets and undertaking of a company. 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 whole of the assets and undertaking which passes to a receiver when he is appointed under the charge. That is the purpose of his appointment. 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.

Control does not necessarily signify authority in the receiver to pay all debts out of the funds in his hands. Control is directed to possession and realisation of the company's property and, in determining whether control of the property of the company passed to the receiver, it is not relevant to enquire whether, independently of sec. 221P, the receiver has authority to make the payment which sec. 221P requires. In so far as
Re Carapark Industries Pty. Ltd. [(1967) 1 N.S.W.R. 337] decided that the test of control was authority to make payments out, we do not think that it was correctly decided. The facts in the present case show clearly that the defendant has had control of the whole of the company's assets and undertaking, a control which enabled him to sell the assets.''

At ATC pp. 4269-4270; C.L.R. p. 498 Gibbs J., as he then was, said:

``Section 221P presents considerable difficulties of construction, but in my opinion it was intended that that section, read with the definition of `trustee' in sec. 6, should have the effect that a receiver appointed under a deed which created a floating charge over all the assets of the company giving it is a trustee and liable under sec. 221P, although only to the extent of the assets which passed under his control. The definition of `trustee' will, unless the

ATC 4235

contrary intention appears, apply to sec. 221P and if it applies will render that section applicable to the case of a receiver. It does not seem to me that sec. 221P reveals an intention to exclude the definition; the fact that subsec. (3) deals with the costs, charges and expenses of administration or winding-up, payable by the trustee of the estate of a bankrupt or the liquidator of a company, but does not similarly deal with the costs of a receivership, does not in my opinion indicate that the section is not intended to have any application to receivers. It may be assumed that sec. 221P contemplates a general vesting of property in the trustee, and that the section is therefore not intended to apply to the case where a mortgage under which a receiver is appointed charges part only of the employer's property. However, it is difficult to accept that the section is intended only to apply if literally every item of property belonging to the employer vests in, or passes under the control of, the trustee, because if that were its effect the section would not in every case apply to a trustee in bankruptcy, since in a particular case there may be a residue of the bankrupt's property which will not vest in the trustee... However, it is clearly the intention of the Parliament that the section applies to every trustee in bankruptcy: sec. 109(1) of the Bankruptcy Act 1966. But even if it be accepted that `his property' in sec. 221P means `all his property', it seems to me that in the present case the control of all the property of the company, within the meaning of the section, did pass to the receiver.

It is perfectly true that the company had an equitable interest in the property with which the receiver could not deal and which did not pass into his control, so that technically it can be said that the company had an interest in the property which did not pass under the control of the receiver. However, from a practical or commercial point of view it seems to me natural to describe the effect of the deed as being that all of the property of the company passed under the control of the receiver notwithstanding that the company retained an equitable interest in it. The control of all the company's assets passed to the receiver, although if the amounts secured were paid in full any surplus resulting from the realisation would belong to the company.''

In Barnes' case the control of all the employer's property, save for the valueless equity of redemption, passed to the receiver per the mortgagee once the charge crystallised. In the case I am considering, the charge did not crystallise at any relevant time.

Barnes' case is helpful for the assistance it gives in the interpretation and meaning of property in such a situation, and in the reminder it gives that such a charge cannot extend beyond the residual equity of redemption of assets separately mortgaged as is the situation in the case I am considering. It has not been argued before me whether the expression ``equity of redemption'' when used in that context is applicable to the property of a registered proprietor in land under the provisions of the Real Property Act who has given registered first mortgages over the land by way of extra security. I note the dates of the floating charge and the dates of the specific mortgages are the same.

In the case I am considering A.G.C. took a general floating charge over ``the employers' undertaking and all its assets'' and took, for abundance of caution no doubt, registered mortgages and guarantees by the companies and the directors.

The next case cited was
D.F.C. of T. v. A.G.C. (Advances) Ltd. & Ors 84 ATC 4177, a decision of the New South Wales Court of Appeal. In that A.G.C. case, there was a floating charge over book debts which became crystallised and fixed after a winding-up order and the appointment of a liquidator and when A.G.C. appointed receivers to collect the book debts. The liquidator had collected some of the debts before crystallisation and by agreement had de facto control. The question was whether the Commissioner could claim against the liquidator by virtue of sec. 221P. The Commissioner failed.

In that A.G.C. case, Hutley J.A. said at p. 4178:

``What is in issue in this case is the nature of the control which the liquidator, who collected all the debts, had over those debts. The liquidator is a trustee (Income Tax Assessment Act 1936, sec. 6). In
Smith and Judge v. D.F.C. of T. 78 ATC 4561; (1979) W.A.R. 123,

ATC 4236

Brinsden J. appears to have held that control is de facto control, in that if the holder of a crystallised charge, which was originally a floating charge over the whole of the assets of a company, takes no action and permits the liquidator to collect the assets, the control of the assets has passed to him, he is liable to account to the Taxation Commissioner.

A similar view as to the nature of control was taken by Nettlefold J. in the Supreme Court of Tasmania in
Re L.G. Holloway Transport Pty. Ltd. 83 ATC 4164. No serious attack on this approach was advanced in argument and I, therefore, accept it for the purpose of this judgment. The argument for the Commissioner was that as the liquidator was permitted to collect the book debts, which were the subject of the charge, he was in control of the assets of the company and, therefore, the conditions for liability were fulfilled.

The facts in this case are not consistent with the liquidator having control after 12 August 1982. 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. He was not being allowed to collect the debts as the debts of the company for its benefit, he was collecting the debts for the benefit of whomsoever was entitled. As the charge over the book debts was crystallised on 12 August 1982, he was collecting them for the chargee, and was not in de facto control in the relevant sense.''

Mahoney J.A. said at pp. 4178-4181:

``It is agreed between the parties that the charge upon the company's books was, until it crystallised by the appointment of the receivers, a floating charge. His Honour was of the same view. I shall approach the matter on that assumption...

In considering the effect of sec. 221P and the decisions which have been given in relation to it, it is, in my opinion, of assistance to see the section as directed to two things: the specification of the circumstances in which it is to operate; and (if it operates) the specification of what it does.

If the section is to operate two things must appear: that the employer's property has become vested in or passed to some person; and that that person is `a trustee' within the meaning of that term in the section.

The meaning of `trustee' within the section was the subject of a difference of opinion in earlier times. However this is not now of significance. The term `trustee' as defined in sec. 6 of the Act includes both a receiver and a liquidator and there is nothing in sec. 221P to exclude the application of that definition.

But the section applies only if `his' (the employer's) `property has become vested in or where the control of his property has passed to, a trustee...'. There was and, perhaps, still is doubt as to what is `his property'. In F.C. of T. v. Card (1963) 13 A.T.D. 149; (1963) 109 C.L.R. 177, the views of the members of the Court differed on this point. However, as the result of the decision in F.C. of T. v. Barnes 75 ATC 4262; (1975) 133 C.L.R. 483, it is now established that `his property' means, in effect, `all of the property' of the employer: it is not sufficient that the property which vests or passes constitutes part only of his property: see ATC at pp. 4265-4267; 133 C.L.R. at pp. 491-493. As, I think, appears from the judgment of Gibbs J. (as he was) in that case, it may be necessary to qualify `all', at least to the extent to which his Honour referred: at ATC p. 4270; C.L.R. p. 499.

In considering what is `all of the property' of an employer, the Court has examined the case where the employer's property consists only of a limited interest, e.g. an equity of redemption, an interest subject to a charge, or the like, in assets which he has mortgaged or charged. In a case concerning a receiver appointed under a general charge over the employer company's assets, the Court held that `his property' for this purpose did not mean the beneficial interest which the employer company had in the charged, assets; it referred to all of the property the subject of the general charge. To this I shall return subsequently...

ATC 4237

In my opinion, as the result of the appointment of the liquidator, control of all of the employer company's property passed to the liquidator. Section 233(1) deals with `all the property and things in action to which the company is or appears to be entitled'. It is not necessary, for the purposes of this case, to consider whether, in strictness, the liquidator's control extends only to e.g., beneficial or limited interests which the company has as chargor under a charge, or whether the liquidator's power extends more broadly to the property so charged. In the present case, the only encumbrance upon the employer company's property was the charge over its book debts. If that which, as the result of sec. 233, passed to the control of the liquidator was the only interest which the employer company had in those book debts under the charge, that would not prevent what passed to the liquidator being `all' of the employer company's property for the purposes of sec. 221P. This was, in my opinion, made clear in Barnes' case: see at ATC pp. 4265-4266 and 4269-4270; C.L.R. pp. 491-492 and 498-499.

Both sec. 233(1) and sec. 221P(1) use the term `control'. That term may mean, e.g., the right to control or the actual physical control, depending on the context in which it is used. It is not necessary for present purposes to determine whether the term is used in the same sense in the two sections. In the present case, at the time when the liquidator was appointed, he clearly had the power to reduce the book debts to his actual or physical control and the mortgagee had not, by the appointment of a receiver or otherwise, then sought to interfere with that power. In fact, the debts here in question were reduced into the liquidator's physical control. He acted to do this in reliance upon sec. 233(1), notwithstanding that the receivers who had been subsequently appointed might have intervened. The control of the employer company's property within sec. 221P passed to the liquidator, in my opinion, either at the date of his appointment or subsequently upon his reducing the debts into his physical control.

I come now to consider the effect of the operation of sec. 221P in the present case. Three things may be said as to the general effect of the operation of the section. First, by its express terms, the section makes the trustee liable to pay the relevant amount to the Commissioner. Second, again by its express terms, the section gives the Commissioner's claim for such payment a priority which it otherwise would not have: sec. 221P(2). And third, as the result of the construction of the section by the High Court, the trustee's liability to pay is limited to the property which vests or passes, in the manner explained in Barnes' case: at ATC pp. 4264-4265; C.L.R. pp. 489-490. But, the Commissioner's submission suggests, there is as yet no determination by the High Court of the precise property to which the trustee may and should resort for the purpose of meeting the Commissioner's claim. And it is to this that the Commissioner's submissions are directed.

Prima facie, it might be thought that the trustee may have resort only to the property the vesting or passing of which brings the section into operation. Thus, sec. 221P(1) provides that the trustee shall be liable to pay the relevant amount to the Commissioner `where his' (the employer's) `property has become vested in or where the control of his property has passed to, a trustee...'. It is now established that, though the trustee is personally liable to the Commissioner, his liability to pay is limited to `property of the company which had vested in him or passed under his control': see Barnes' case at ATC pp. 4264-4265; C.L.R. pp. 489-490. Gibbs J. saw the ratio of the Card decision to be that the liability is limited to `property belonging to the employer which is vested in him or passed under his control': at ATC p. 4268; C.L.R. p. 497. His Honour was, I think, not intending to indicate his view that the relevant property must be property `belonging to the employer', in the sense of being beneficially owned by the employer: his Honour was referring to the view adopted in the Card case.

On this view, and having regard to what was said, e.g., in the majority judgment in the Barnes' case: at ATC pp. 4265-4266; C.L.R. pp. 491-492; the property so vesting or passing will not include the interest of the chargee of a specific asset, such as the

ATC 4238

interest of the mortgagee in the debts here relevant.

This is in fact, I think, the basis on which, in the Barnes' case, the issues there raised were determined. In that case the trustee was a receiver under a floating charge over the whole of the assets of the employer company: at ATC p. 4263; C.L.R. pp. 486-487. All of the assets of that company were realised. The amount held by the receiver was about $25,000; the Commissioner claimed $20,593.95. The chargee claimed $205,650. There were no relevant specific securities, i.e., securities over specific parts of the employer company's property: there had been rights existing in relation to leased plant but nothing was seen in the judgments to turn upon those rights. The Court held that the receiver should pay to the Commissioner the amount claimed out of the $25,000. It held, in effect, that though the $25,000 held by the receiver was property in which the chargee had a beneficial interest, the receiver could and should have recourse to it to pay the Commissioner's claim.

The receiver had made, inter alia, two submissions: that the section did not operate because the employer company's `property' did not vest or pass within the section; and that (if it did) the only property which so passed was the employer company's worthless equity of redemption, that the $25,000 was not part of this but part of (as I shall describe it) the chargee's interest in the company's property, and that therefore the receiver could not have recourse to that sum for the purpose of paying the Commissioner's claim: at ATC pp. 4264-4265; C.L.R. pp. 488-489.

In dealing with the first submission, the Court explained what was the meaning, in sec. 221P(1), of the employer company's property, i.e., `his property' in the subsection. The argument was, presumably, that the use of `his' indicated that the property could be only that which the employer company owned beneficially...''

Referring to Barnes' case, he said at pp. 4181-4183:

``In the majority judgment, Barwick C.J. and Mason and Jacobs JJ., at ATC pp. 4265-4266; C.L.R. pp. 491-492 said:

  • `In our opinion, the property of the company which passed under the control of the defendant upon his appointment by the mortgagee as receiver under the deed was the whole of the assets and undertaking of the company, control of which could pass to him as receiver under the terms of the deed. It is an important qualification that the `property' is limited to that in respect of which control could pass to the defendant. If independently of this security there had been a mortgage or other security over certain assets of the company, control of those assets could not pass to the receiver. He would have control only of the equitable interest of the company in those assets. But it does not follow that, because in the case of a security over certain assets only the equitable interest is property within the meaning of the section, therefore in a case where the whole of the property of a company is vested in or passes under the control of a trustee for a secured creditor, the relevant property is likewise no more than the equity of redemption. So to construe the section is self-contradictory...
  • What is true of such an assignment is true also of a floating charge over the assets and undertaking of a company. 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 whole of the assets and undertaking which passes to a receiver when he is appointed under the charge. That is the purpose of his appointment. 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.'

    ATC 4239

Gibbs J. expressed, I think, a relevantly similar view: at ATC pp. 4269-4270; C.L.R. pp. 498-499.

The Court recognised that, the trustee being a receiver, the equitable interest of the employer company under the general charge did not pass: at ATC pp. 4265-4266; C.L.R. pp. 491-499; but, upon the basis that there passed to the trustee-receiver the control of the chargee's interest and so the general control of the employer company's assets and that company's interest under specific charges (if any), there was a passing of `his property' so as to bring the section into operation. If, therefore, that to which the trustee may and should have recourse to satisfy the Commissioner's claim is congruent with that which so passed, prima facie there is no right of recourse to the interest of a chargee under a specific charge.

In dealing with the second submission made in the Barnes' case, the Court expressed views as to what it was to which the trustee could have recourse in this sense. As I have said, the Court did not accept that the trustee could and should have recourse only to that which represented the employer company's beneficial interest in the general property...

It is, in my opinion, to be taken from this that, in so far as the property to which a chargee is entitled under a charge on a particular asset only would be applied to meet the Commissioner's claim, that application would be outside the valid operation of the section.

The effect of Barnes' case is, in my opinion, therefore prima facie that, for the section to operate, there must be a vesting or passing of all the employer company's property; that such will take place even though that which vests in or passes to the trustee does not include the beneficial interest of a chargee under a specific charge; and that that to which the trustee may have recourse for payment of the Commissioner's claim is that which vests or passes and does not include the interest of a chargee under such a specific charge...

Upon the appointment of the liquidator in the present case, he became subject to the duty, imposed by sec. 233(1) of the Companies Act 1961 (as amended) to take into his custody or under his control all of the property and things in action to which the company was or appeared to be entitled. This duty arose immediately upon liquidation. The effect of the last-mentioned section was, as I have said, sufficient to bring sec. 221P into operation. The Commissioner accepts that the passing of the beneficial interest in the specifically charged debt, i.e., the passing of the control of it to the trustee, was not necessary for the section to operate. But, his submission suggests, in fact the control of the relevant debt did pass to the liquidator. This happened immediately upon the liquidation and, the suggestion is, the fact that subsequently receivers were appointed did not affect this. The Commissioner concedes that the receivers, when subsequently they were appointed, could have taken control of the book debts under the specific charge: whether the consent of the Court would have been necessary for this purpose it is not necessary to determine. But, the submission suggests, if they did do so, they could take the book debts only subject to the liquidator's right to have recourse to them to meet the Commissioner's claim; and, in any event, they did not do so and the book debts remained under the control of the liquidator. And, upon this basis, it is suggested that book debts fall within the description of `property of the company which had vested in him or had passed under his control': Barnes' case 75 ATC pp. 4264-4265; (1975) C.L.R. pp. 489-490; or `property belonging to the employer which has vested in him or passed under his control': at ATC p. 4269; C.L.R. p. 497, so as to enable the liquidator to have recourse to the book debt to meet the Commissioner's claim...

The fact that there is a specific charge does not, I think, prevent the liquidator taking the relevant property under his control: at least it does not do so where the chargee has not, by the exercise of the powers under the charge, already taken control of it. But, if there be a difference in this regard between the relationship of a receiver under a general charge and a liquidator to specifically charged property, I do not think it is such as to require a different result for present purposes. The principle adopted in Barnes' case was that the interest of a chargee under

ATC 4240

a specific charge was outside the effects of the operation of the section and I do not think that in adopting that principle the Court based itself upon any matter in which the position of a receiver under a general charge would be different from that of a liquidator. In the result, therefore, the interest of the mortgagee under the specific charge here in question is not property to which the liquidator may have recourse for payment of the Commissioner's claim.''

At pp. 4184-4186 Priestley J.A. said:

``... It was claimed on the Deputy Commissioner's behalf that control of the company's property had passed to the trustee, namely the liquidator, and that the liquidator was thus liable to pay the amount of the untransmitted deductions from the employees' wages to the Deputy Commissioner. The receivers relied on A.G.C. (Advances) Ltd.'s security over the book debts and contended that the property, the control of which had passed to the liquidator, did not include A.G.C. (Advances) Ltd.'s security interest in the book debts.

The leading case on the interpretation of sec. 221P is F.C. of T. v. Barnes 75 ATC 4262; (1975) 133 C.L.R. 483. From Barnes' case and sec. 221P itself the following propositions emerge:

  • 1. A liquidator is a trustee within the meaning of the section.
  • 2. The section only operates when the whole of the employer's property has become vested in the trustee whether he be liquidator, receiver or some other trustee. Thus, in the present case the receivers are not trustees within the meaning of the section.
  • 3. When the trustee is a receiver appointed under a charge over the whole of the assets and undertaking of a company:
    • (a) The property the control of which has passed to the (trustee) receiver is that which could pass to him.
    • (b) Control of specific assets subject to mortgage or other security could not pass to the (trustee) receiver.
    • (c) In respect of specific assets subject to mortgage or other security the only control the (trustee) receiver could have is of the company's equitable interest in such assets. (Barnes' case, especially at ATC p. 4265; C.L.R. p. 491.)
  • 4. It follows from 3 that when a liquidator is required by the Companies legislation upon a winding-up order being made (sec. 233 of the Companies Act 1961 in the present case) to `take into his custody or under his control all the property and things in action to which the company is or appears to be entitled', and some specific assets are mortgaged or charged as security, he only obtains `control' in the sense in which that word is used in sec. 221P, of the company's equitable interest in those items of the company's property and things in action.

The foregoing propositions appear to require an answer in the present case in favour of the receivers and adverse to the Deputy Commissioner. This was the conclusion arrived at by Wootten J. He found that the 1979 deed had so operated as to crystallise a charge in favour of A.G.C. (Advances) Ltd. over the company's book debts prior to 12 August 1982. In reaching this conclusion, he observed that although the charge described itself as a fixed charge until certain events occurred, it was in substance a floating charge which, however, had become a fixed charge by reason of its terms before 12 August 1982. No issue was raised concerning the correctness of his Honour's analysis on this point and it is unnecessary to examine it further as on any view the charge had become a fixed one at the relevant date.

On behalf of the Deputy Commissioner, both before Wootten J. and on appeal to this Court, it was contended that the `control' spoken of in sec. 221P(1) included the control which the liquidator in fact exercised in the present case 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. It was said that this view of the meaning of `control' in the circumstances of the present case was supported by a passage in the joint judgment in Barnes' case of Barwick C.J., Mason J. and Jacobs J. at ATC p. 4266; C.L.R. p. 492 and a passage

ATC 4241

in the judgment of Gibbs J. commencing at ATC p. 4269 and at the bottom of C.L.R. p. 498 and ending at ATC p. 4270 and at the foot of C.L.R. p. 499. It was submitted that these passages supported the view that when book debts are collected by a trustee who is appointed and under a duty to get in the assets of a company such as the liquidator here, the liquidator can quite lawfully and properly and in accordance with his duty as liquidator, realise that property and get it in in the exercise of `control' of that property within the meaning of that term in sec. 221P(1). It was further contended that the submission was supported by the view taken of the meaning of `control' in sec. 221P(1) by Brinsden J. in Smith and Judge v. D.F.C. of T. 78 ATC 4561; (1979) W.A.R. 123.

I do not think that the passages from Barnes' case relied upon by the Deputy Commissioner support the submission he makes. The passage from the joint judgment was dealing with a view expressed in Re Carapark Industries Pty. Ltd. (1967) 1 N.S.W.R. 337 that the test of control was authority to make payments out. This view was relied upon in Barnes' case for a submission that the receiver did not have the necessary control because his only authority under the terms of his appointment was to give priority in payment out of the company's property to the mortgagee and that he had no authority to pay the Commissioner in priority to the mortgagee. The passage at ATC p. 4266; C.L.R. p. 492 in Barnes' case rejected the test relied upon in Re Carapark Industries Pty. Ltd. saying that the receiver's obligation to make the payment to the Commissioner came directly from sec. 221P notwithstanding that otherwise he lacked authority to make it. In making this point the passage also mentioned that on the facts in Barnes' case the receiver had control of the whole of the company's assets and undertakings and of the fund derived from those assets. This was the observation on which the Deputy Commissioner based his submission. That observation was not, however, made generally but in relation to the specific facts of Barnes' case where, as appears elsewhere in the report, no other person had any mortgage or other security interest in specific assets of the company. Thus the fact that the Court thought the receiver had the requisite control in Barnes' case is no indication of what the Court's view would be of the facts such as those in the present case where the trustee has control of the property of the company and specific items of that property are subject to the security interest of A.G.C. (Advances) Ltd. The passage in the judgment of Gibbs J. is directed to the same situation as that dealt with in the joint judgment. The remarks he made concerning the control of the receiver in that case were not directed more widely than to the situation where a receiver had control of the whole of the company's assets, none of which was individually subject to any security interest.

The facts in Smith and Judge v. D.F.C. of T. were that a company which went into liquidation and to which liquidators were appointed in 1975 had, in 1974, given a charge over the whole of its undertaking property assets and rights to a bank. The charge crystallised at least at the time of the winding-up order. Also, at that time there were amounts unpaid by the company in respect of tax instalment deductions made from the wages of its employees falling within sec. 221P. Had the bank appointed receivers they would have fallen directly within the ambit of Barnes' case and would have had to pay the Commissioner from the property of the company under their control as trustees within the meaning of sec. 221P the amount owing in respect of unremitted deductions in priority to any payment to the bank. The bank did not appoint receivers and permitted the liquidators to realise the assets of the company. The bank then 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. The passage in his judgment upon which the Deputy Commissioner relies in Smith and Judge v. D.F.C. of T., commences at ATC p. 4564; W.A.R. p. 128. It is contended for the Deputy Commissioner here that the passage shows Brinsden J. was relying on the fact that the bank stood by and let the

ATC 4242

liquidators obtain control of the assets of the company when the bank could have prevented that as the basis for his holding that `control' of the company's property, in the sense in which the word is used in sec. 221P(1), had passed to the liquidators. 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. It follows that sec. 221P(1) does not apply to the security interest of A.G.C. (Advances) Ltd. in the book debts and that Wootten J.'s conclusions were correct.''

It will be noted that, notwithstanding the concepts of the Real Property Act, Mahoney, J.A. equated ``equity of redemption'' with ``an interest subject to a charge or the like'' (see p. 4179).

The next case cited for Mr James was D.F.C. of T. v. A.G.C. (Advances) Ltd. & Ors 84 ATC 4777, a unanimous decision of the Full Court of the Supreme Court of Queensland. This can be called ``the second A.G.C. case''. Because the facts are important, I include the findings as to facts in the quoted parts of the judgment.

It was a claim against a provisional liquidator. The Commissioner failed. At pp. 4777-4782 McPherson J., giving the judgment of the Court, said:

``This is yet another case involving the interpretation of sec. 221P of the Income Tax Assessment Act 1936 (`the Act'). The material facts are these. On 6 May 1983, Obie Pty. Ltd. (`the company') executed a mortgage debenture in favour of A.G.C. (Advances) Ltd. (`A.G.C.') to secure payment of moneys payable or to become payable. By cl. 7 the company charged its undertaking property and assets, therein described as `the mortgaged premises'. By cl. 8 the charge was declared to be a first charge on the mortgaged premises to operate as a fixed and specific charge as regards assets enumerated in Sch. 7 (which comprised land of any tenure), and as a floating charge as regards all other property and assets. Clause 9 conferred on A.G.C. the power by notice in writing to convert the floating charge into a fixed and specific charge as regards any assets specified in the notice. Other provisions of the mortgage debenture rendered the moneys thereby secured payable to A.G.C. at its option in certain specific events including winding-up or presentation of a petition therefor: cl. 41; and enabled A.G.C. to appoint a receiver in the event of those moneys becoming payable: cl. 18.

On 4 October 1983 a winding-up petition was presented against the company and on the same day Mr D.R. O'Brien, who is one of the applicants and a respondent to this appeal, was appointed provisional liquidator of the company until the making of the winding-up order. The order making that appointment was in the common form, and it is necessary to set out here only the following specifications of the duties that the provisional liquidator was required to perform. These were:

  • `1. To take possession of and protect the assets of the... company;
  • 2. To carry on the business of the... company... but so far only as it may be necessary for the purpose of preserving the business... as a going concern...
  • 3. To receive and collect the debts due to the... company, but only so far as may be necessary for the purpose of preserving the business as a going concern;'.

    ATC 4243

There followed a description of the property of which the provisional liquidator was to take possession, which included `all real and personal estate whatsoever owned by the company'.

Shortly after his appointment Mr O'Brien, on 13 October 1983, paid into his provisional liquidator's account no. 70-0098 funds totalling $83,319.26 the property of the company.

The company was ordered to be wound up on 3 November 1983, Mr O'Brien and his partner Mr Lawson being then appointed liquidators of the company. Mr Lawson deposes that investigations have revealed that various `priority' debts are owing by the company. These include sums due for pay-roll tax and on account of wages and holiday pay, as well as $85,928.40 due to the Commissioner of Taxation on account of unremitted group tax, and $104,432.09 due to A.G.C. as secured creditor. The liquidators continued the account opened by Mr O'Brien, which by mid-November 1983 was in credit to the extent of $76,292.

By notice dated 31 October 1983 (which was after appointment of the provisional liquidator but before the winding-up order was made on 3 November 1983), A.G.C. gave notice pursuant to cl. 9 of the mortgage debenture converting part of its floating charge into a fixed and specific charge as regards certain specified assets. Those assets included three special leases of parcels of Crown lands and a perpetual suburban lease of another parcel of Crown land; all book debts due or to become due; deposits, bank accounts, investment funds `or any moneys held on any account whatsoever including funds of [the company] held by the provisional liquidator for or on behalf of [the company] or its creditors; and plant and equipment, stock in trade, and office furniture, fixtures and fittings'. The effect was to render the charge conferred by cl. 8 of the debenture specific as regards the funds standing to the credit of the provisional liquidator's account no. 70-0098. The assets of the company at the time also included some 10 motor vehicles valued at varying amounts, as well as the goodwill and business name, books of account, and contracts. According to Mr Lawson, A.G.C. did not fix its charge on these assets, and that view has not been contested before us.

In proceedings commenced by the liquidators [reported at 84 ATC 4067], to which A.G.C. and the Deputy Commissioner of Taxation are parties, Thomas J. on 20 December 1983 declared that Mr O'Brien as provisional liquidator of the company had no obligation to pay the balance in the liquidator's account no. 70-0098 to the Deputy Commissioner of Taxation; and that Messrs O'Brien and Lawson as liquidators of the company likewise had no obligation to pay that balance or to cause it to be paid to the Deputy Commissioner; that the liquidators were bound to recognise the title of A.G.C. to the said balance in priority to all other debts of the company; and that it was proper that they perform such acts as would facilitate payment of that balance or part thereof to A.G.C. His Honour directed that the liquidators' costs in the proceedings be costs in the winding-up ranking in priority over A.G.C.'s costs, and that of A.G.C.'s costs rank in priority to the costs of the Deputy Commissioner. He also directed that, subject to there being sufficient assets for the purpose, the liquidators pay A.G.C.'s costs of the proceedings and those of the Deputy Commissioner.

In the form in which the matter was argued before us the only question for determination on appeal is whether the provisional liquidator was required by sec. 221P of the Act to pay the balance in the liquidators account no. 70-0098 to the Deputy Commissioner for Taxation...''

I agree with much of what fell from McPherson J. in that A.G.C. case and the relevance of the passages he quoted from Barnes' case at p. 4781. I cite the passage ``prima facie, therefore, control of an asset cannot be said to have passed if there is in the trustee no power to realise that asset in order to pay the amount of the liability under sec. 221P''.

It is convenient at this stage to epitomise briefly some of the facts as I have found them to be in the case I am considering.

It is against that summary of the facts that the questions posed by the cases have to be answered with the reminder that property is only a collection of rights and powers over tangible and intangible things. It is as trite to say that, as it is to say that often those rights and powers are subject to the rights and powers of others whether they be creditors or strangers.

I agree with the significance and importance that has to be given to the concept of ``property'', as stressed in Barnes' case, but in my opinion the High Court was not intending to blur the distinction between a vesting of property and control of property. That distinction cannot be overlooked.

I turn to the other cases cited to me which were relied on by the plaintiff. Some have been referred to by McPherson J. in the second A.G.C. case.

The first is Smith and Judge v. D.F.C. of T. & Anor, a decision of Brinsden J. of the Supreme Court of Western Australia, 78 ATC 4561. It was decided after Barnes' case but before the two A.G.C. cases.

The facts were as follows:

Under the terms of a debenture dated April 1974, a bank held a charge over a company's ``undertaking and all its property, assets and rights whatsoever''. The company was wound up in 1975 pursuant to the resolutions of a meeting of its creditors and a meeting of its members. At the date of commencement of the winding-up, the company was indebted to the Commissioner of Taxation in the sum of $35,555 for tax deductions made from the wages of its employees, which it had failed to

ATC 4248

remit to the Commissioner. The company was also indebted to the bank in the sum of $20,626 and that sum was secured by the debenture. The liquidators assumed control of all of the assets of the company, sold some of them and discharged some liabilities. They held funds of $25,000. The Commissioner claimed that by virtue of sec. 221P of the Assessment Act, he had priority as against the bank to payment of the debt due to him out of the funds.

Brinsden J. said at p. 4562:

``Notwithstanding the rather harsh words said about this section in... Card... Barnes... and Carapark Industries Pty. Ltd. no attempt has been made to amend the provisions so as to make them more intelligible... neither Card's case nor Barnes' case directly answers the point I have to decide.''

This comment of Brinsden J. is equally applicable in the case I have to decide.

He went on at pp. 4562-4565:

``Put in broad terms the contention of the Commissioner is that upon the commencement of the winding-up the control of the defaulting employer's property passed to the liquidators within the meaning of subsec. (1), while the Bank argues that by reason of its debenture, which crystallised upon the commencement of the winding-up... and which thereupon became a fixed security in relation to the whole of the assets of the company, the only property of the company over which the liquidators assumed control within the meaning of that word in sec. 221P(1) was the equity of redemption which... is valueless...

In Barnes' case... As here... the equity of redemption of the company was worthless. At p. 491 the majority judgment of Barwick C.J., Mason J. and Jacobs J. remarked that in view of the divergent views expressed in Card's case, that case could not be regarded as an authority for the proposition that the relevant property of the company in Barnes' case was the worthless equity of redemption

...

The essence of the problem seems to me to be to determine what was the property of the defaulting employer which vested in or under the control of the liquidators. The Commissioner contends that this question should be answered to cover not only the equity of redemption of the charge secured by the debenture but also extended to the whole of the assets of the company which were subject to the debenture. The Commissioner further points out that in fact the liquidators have assumed control over all these assets, have sold some of them, discharged certain liabilities and now stand possessed of what remains. The sequence of events in the case suggests that by the time the liquidators were appointed the charge created by the debenture, in so far as it was not a fixed charge, had become a fixed charge, having done so at the latest at the time of the resolution to wind up. In Barnes' case as far as I can gather from the judgments, the floating charge had crystallised before the appointment of the receiver... The equitable interest of the debenture holder as chargee in the assets of the defaulting employer has crystallised before the appointment of the liquidators in this case and before the appointment of the receiver in Barnes' case. There is therefore that measure of similarity. As Sykes points out at p. 786 in his work The Law of Securities 3rd ed., a floating charge is a security of the hypothecation type and does not involve, even on crystallisation, an assignment or transfer of the company's property, notwithstanding the apparent view of Blackburn J. in
National Mutual Life Nominees Ltd. v. National Capital Development Commission (1975) 6 A.C.T.R. 1 to the contrary. Of course by reason of the crystallised charge the debenture holder has an equitable interest in the assets of the company and the decision in Barnes' case resulted in the Commissioner being paid out of assets over which another held an equitable interest, at least to the extent of the indebtedness, which in that case represented the whole of the value of those assets... sec. 221P provides for the Commissioner's priority only in a case where the whole of the property of the defaulting employer should vest in or comes under the control of a trustee. When that happens the debt due to the Commissioner shall have priority over a secured debt which is secured over the whole of the property... where the whole of the property vests in or passes under the

ATC 4249

control of a trustee, that property necessarily includes some property in some form which would not exist in the hands of the employer, if the deductions having been made had not been retained by the employer. At p. 494 occurs this very important passage in the majority judgment:
  • `The overall effect of sec. 221P(2), therefore, is that when the whole of the property of a defaulting employer vests in or passes under the control of a trustee and when it includes property representing the value of the deductions made and not paid over, the Crown debt is given priority even over a creditor entitled to the whole of the employer's property, as it then exists, as security for his debt.'

Clearly enough therefore, the policy of the section is enunciated in the above quoted passage, would be wide enough to cover the case of the whole of the assets of a defaulting employer passing under the control of a liquidator, which assets were the subject of a crystallised debenture.

The liquidators in this case have obtained control of the assets of the company by reason of them being appointed liquidators, and in their capacity as liquidators. There is nothing unusual about this type of situation, that is where a liquidator has been appointed before a debenture holder has appointed a receiver. The debenture holder's right to appoint a receiver is not thereby taken away by the liquidation or the appointment of a liquidator, but often, as in this case, the debenture holder allows the liquidator to realise the assets the subject of his security, with a view to paying him out in priority to unsecured creditors... The debenture holder of a debenture drawn in the terms of this particular debenture could of course proceed to appoint a receiver and have him take control of the whole of the assets of the company, being subject of course by reason of the decision in Barnes' case to the liability under sec. 221P... where the liquidators have taken control of the whole of the assets of the company as liquidators... it is difficult to see why in the light of the policy of the section as stated in the quoted passage above, it can be said that they have not taken control within the meaning of sec. 221P even though if the Bank had chosen to act differently, it may have prevented the liquidators from having assumed control of all the assets.''

I agree completely with the opinions expressed by Brinsden J. in this latter part of the quotation.

The next case cited is a decision of Nettlefold J. of the Supreme Court of Tasmania in Re L.G. Holloway Transport Pty. Ltd. 83 ATC 4164.

There the facts were as follows:

``[A company] executed a debenture charge over the whole of its assets... A receiver and manager was subsequently appointed by the debenture holder to realise all present and future book debts of [the company]. At that time the company had a substantial number of assets in its control. These assets were transferred by the company to one of its creditors several days after the appointment of the receiver. Some seven months later a winding-up order was made against the company on the Commissioner's petition. The Commissioner claimed that by virtue of sec. 221P he was entitled to be paid in priority to all other creditors for group tax instalments deducted by [the company] but unremitted at the relevant time.''

At p. 4165 Nettlefold J. having recited the facts said:

``It will be noted that the appointment was limited in substance to all book debts both present and future of the company together with all records and other documentary evidence relating to those book debts. It is that limitation upon the appointment which is the critical fact which gives rise to the problem which has arisen.''

At p. 4166 he said:

``... the Commissioner... made... the following submissions:

  • 1. The primary submission involved the proposition that the relevant section does not require the charge to be executed over each and every item of property to enable the section to come into operation. It is sufficient if it has been exercised in respect of `some substantial asset' which has come under the control of or been vested in the receiver and

    ATC 4250

    manager. To that extent there is a liability to pay out of that fund. In the present case the receiver and manager having obtained $164,000 approximately is trustee pursuant to sec. 221P and is liable to pay out of that fund to the Commissioner in priority over all other debts.
  • 2.... as a matter of commercial reality... the whole of the property of the company went under the control of the receiver and manager...

I reject those submissions.

The receiver and manager did not become liable to pay to the Commissioner $140,945 or any other sum unless sec. 221P(1) imposed that liability upon him. The critical words in that subsection for the purposes of this case are `where the control of his property has passed to a trustee, the trustee shall be liable to pay that amount to the Commissioner'. Unless those words, taken in conjunction, of course, with the introductory words of the subsection, have the effect of imposing that liability on the receiver and manager then there is no such liability at all. On the facts of this case, those words do not have that effect. The subsection, in the quoted portion of it, is talking about control which has passed to a trustee. It is not talking about control which might have passed to a trustee had the debenture holder acted differently. Nor is it talking about the right to exercise control which the debenture holder had but did not choose to exercise in relation to the whole of the company's property. The debenture holder might have assumed control, personally or through a receiver, of the whole of the company's property. In fact it did not do so. Why it chose not to do so is not a matter with which I am concerned. The evidence does not enable any conclusion to be drawn as to why it confined the appointment to book debts.

On the facts of this case the receiver did not take control of the company's property. He took control of part only of the company's property leaving a substantial amount of property still in the control of the company. That being so, sec. 221P has no operation at all.

Much has been written, and, I have no doubt, much will be written, about the meaning of the words `his property' in that subsection. Having studied closely all the cases cited in argument, I must say that I do not find any difficulty about the general meaning of those words. I can readily understand that particular sets of facts will cause real difficulty. But the facts of this case do not cause any difficulty. For this is not a case where it can be said that the trustee assumed control of the company's property. On the contrary it is a case where the trustee assumed control of part only of the company's property. On the date of the appointment of the receiver the company had a very substantial amount of property which remained in the control of the company after the appointment took effect. That property remained in the control of the company...

The statement `upon his death his property passed to his executor' is a well known statement, the general meaning of which is not in doubt. It is a statement which does not descend to the particular. It speaks of the deceased person's estate as a whole, a single pool or a single fund. And that is how sec. 221P(1) speaks. It speaks of the employer's property as an undifferentiated whole, a single pool or a single fund. And well it might so speak. For were it to apply whenever any part of the employer's property passed to a trustee, it would produce an injustice in particular cases which, even in this confused age, should be regarded as intolerable. The injustice to which I refer is that the property of A is confiscated to meet the debt of B.

When one comes to apply the section to a given set of facts, one should take a practical approach as a jury of businessmen would. One should look at the commercial realities and sternly subordinate legal technicalities to that. Thus one should ignore the fact that a worthless equity of redemption is not part of the `pool' or `fund'. One should ignore the fact that some particular asset of the employer, even a large asset, is subject to a mortgage or charge as security for a debt which exceeds the value of the asset so that only a worthless equity of redemption in the asset is part of the `pool' or `fund'. One may

ATC 4251

ignore minor items which, for some reason, have failed to get into the `pool'. That is so because the tribunal, in its capacity as a tribunal of fact, should content itself with asking whether in substance or to all intents and purposes the employer's property has passed, as far as the law allows, into the control of the trustee and hence out of the control of the employer. For that is the essential situation, and the only situation which will create a liability in the trustee to pay the Commissioner.

On the facts of this case that situation does not exist...

  • `... The overall effect of section 221P(2), therefore, is that when the whole of the property of a defaulting employer vests in or passes under the control of a trustee and when it includes property representing the value of the deductions made and not paid over, the Crown debt is given priority even over a creditor entitled to the whole of the employer's property, as it then exists, as security for his debt'.''

The next case for consideration is the decision of the Full Court of the Supreme Court of Victoria in
Horsburgh & Anor v. D.F.C. of T. 84 ATC 4501. There the appellants were receivers and managers of a company which had deducted group tax from the salaries of its workers but which had failed to pay the amounts deducted to the Commissioner. They were appointed by a debenture holder having a floating charge over the company's assets.

The appellants realised the assets of the company, deducted their costs and expenses, and paid the net proceeds to the debenture holder. They paid nothing to the Commissioner.

The Deputy Commissioner sued to recover the group tax, claiming priority under sec. 221P(2).

Prior to the appointment of the appellants, but after defaulting on its obligations to the debenture holder, the company granted a fixed charge over certain book debts. The fixed charge was granted to the debenture holder to secure further advances.

The amount received by the debenture holder from the realisation of the company's assets was roughly equal to the amount realised on the book debts, and was less than the amount secured by the fixed charge.

The appellants argued that the fixed charge had priority over the floating charge given under the debenture which did not crystallise until their appointment as receivers. Accordingly, the amount received by the debenture holder came from property (the book debts) which had not passed into their control within sec. 221P.

Anderson J. said at p. 4502:

``... It was not disputed that the amount of tax which [the company] had deducted from the salaries and wages of its employees and in respect of which it had not accounted by the Commissioner was $43,646.67. The amount claimed in the writ by the Commissioner was $33,084, being $13,212, which the Commissioner claimed the appellants had wrongly paid to themselves as remuneration and expenses deducted by them from the proceeds on realisation of the assets of [the company], and $19,872, wrongly paid to the debenture holder, Griffiths. (The judgment, as already mentioned, was for $28,084, the amount originally claimed being reduced by agreement by $5,000.)...

In December 1976, [the company] required money to pay wages, salary, long service leave, recreation and sick leave of its employees, and Griffiths agreed to advance it money for that purpose. The amount so required for that purpose was $22,280.77, though more than that sum appears to have been advanced. However, it was the sum of $22,280.77 which was secured by an instrument, described as a deed, dated 23 December 1976,...''

(This was the fixed charge over the book debts.)

``On 6 January 1977, Griffiths appointed the appellants as joint receivers and managers of [the company] pursuant to the debenture of 6 January 1975, [the company] still being in default which had continued since 7 February 1975.

The appellants entered into possession of [the company's] assets on 6 January 1977, and managed its affairs until 24 January 1978, when they terminated their activities. At that stage they had in their possession $33,082 which they claimed they were entitled to dispose of...

ATC 4252

The submissions on behalf of the Commissioner were designed to rebut the appellants' argument to the effect that the deed of 23 December 1976 was a fixed charge operating instantly, and enforceable upon default by [the company] on 24 December 1976, and that the deed did not require any action by Griffiths to make its provisions operative.

... A receiver, entering into possession of a debtor's goods pursuant to a debenture of the nature here under consideration, takes possession with limited rights; he does not become the owner, no title is vested in him, but he has the right to dispose of the debtor's assets to the extent necessary to reimburse the creditor and, if the debenture provides for it, to reimburse himself out of the proceeds of the sale of assets; the balance of assets, if any, and any surplus over and above the amount of the debt and interest and the costs of administration, being returned to the debtor. Such a receiver very evidently has control of the debtor's assets... It is at the very least a case where the control of his property has passed to, a trustee, to quote the words of sec. 221P(1), and he thereby becomes a trustee liable to pay to the Commissioner the amount which the debtor has already deducted as tax from its employees...

... sec. 221P(1) was intended to require an employer to account to the Commissioner for moneys which he had deducted as tax from the salaries and wages of its employees, thereby releasing them pro tanto from the obligation to pay any amount of tax which otherwise they would be required to pay; and similarly to require a person, by whatever name he chooses to use, into whose hands control of the employer's assets may fall, to pay to the Commissioner that amount of tax which the employer (and subsequently the receiver) in effect held in trust. Where such moneys are in the control of the receiver as in the present case, sec. 221P(2) seeks to ensure that moneys virtually held in trust by the receiver are to be paid to the Commissioner...

I think therefore that, in relation to sec. 221P(1), considerations of whether the charge crystallised on 6 February 1975, or on 6 January 1977, or, whether by recital of the deed it crystallised on 24 December 1976, are irrelevant to the claim by the Commissioner for priority in payment. The obligation of the employer to pay the Commissioner occurred upon the deduction of tax from the salary and wages of its employees. The obligation on the receiver could not arise until there was a crystallisation of the floating charge, at which time the receiver became entitled to conduct the affairs of the debtor and to discharge its debts. Problems might arise as to priorities between other parties claiming entitlement to assets or the proceeds of assets in the hands of a receiver, but it is evident to me that the claim of the Commissioner by reason of sec. 221P(2) had priority over all of them, so far as such assets were the subject of the instrument by virtue of which the receiver held such assets as receiver. I think so much is clear from the decision of the High Court in F.C. of T. v. Barnes 75 ATC 4262; (1975) 133 C.L.R. 483, where it was held that a receiver and manager appointed pursuant to a floating charge over a company's assets (which necessarily would have crystallised into a fixed charge by reason of default of the debtor and the appointment of a receiver and manager) was a trustee within the meaning of sec. 221P and that the Commissioner was accordingly entitled, in priority to other debts of the company whether secured or unsecured, to an amount of tax deducted by the company from wages of its employees. I say `necessarily would have crystallised', because until that happened it could not be determined what assets, the content of which was changing from day to day, were subject to the ignominy of being seized and realised upon for the benefit of the debenture holder...

To my mind, it is clear that when a receiver acts, property of a debtor the subject of a charge comes under the control of the receiver. The property of a debtor which so passes under his control is not property of the debtor over which has been given, independently of the charge, a mortgage or other security, control of which could not, of course, pass to the receiver. Any right which the receiver may have in respect of such property otherwise mortgaged or secured would be no more than over an equity of redemption which possibly might

ATC 4253

remain in the debtor after realisation of such assets by the mortgagee or other security holder...

In the context, the reference to secured debts is only to those secured debts which are payable out of the property which has vested in, or control of which has passed to, the trustee...

From the foregoing it will be evident that I am of the opinion that the appellants were not entitled to dispose of the sum of $28,084 which was in their hands by distributing it between the debenture holder, Griffiths, and themselves. On the contrary, I am satisfied that the appellants' obligation was to pay that sum to the Commissioner pursuant to the priority given him under sec. 221P(2).

It was a coincidence that on the day on which this case commenced to be argued before this Court, the New South Wales Court of Appeal delivered its judgment in the case of D.F.C. of T. v. A.G.C. (Advances) Ltd. 84 ATC 4177. Not unreasonably the judgment of the New South Wales Court of Appeal was not referred to in argument before this Court, but I have had the opportunity of perusing the reasons for judgment in the Court of Appeal, and also in two other cases, namely, Smith and Judge v. D.F.C. of T. 78 ATC 4561; (1979) W.A.R. 123 (which was distinguished by the Court of Appeal in A.G.C. (Advances) case) and
Re Obie Pty. Ltd. 84 ATC 4067. These cases dealt with priorities under sec. 221P of the Income Tax Assessment Act, but in each of those cases the circumstances were, in my opinion, quite different from those in the case now before this Court. In the A.G.C. (Advances) case, a company over which already there was a deed of charge went into liquidation, and the question arose whether sec. 221P operated to require the liquidator, who had proceeded to realise the assets of the company, to pay the Deputy Commissioner in priority to the claim of the receiver who was appointed pursuant to the deed of charge. It was, in effect, a contest between the liquidator and the receiver, for the liquidator was holding in a suspense account the proceeds of his labours, while the Deputy Commissioner was claiming that the liquidator was required to pay out of the proceeds of the assets so far realised the amount which the insolvent company had withheld from its employees for their tax. The view of the Court of Appeal being that the charge over the company's assets having crystallised prior to the appointment of the liquidator, the liquidator's claim was subject to that of the receiver. The effect of that finding was that the Commissioner's claim against the liquidator failed.

The facts in the A.G.C. (Advances) case were thus quite different from and more complicated than the facts in the case before this Court. There is no liquidator in this case to add to its complexities, and the Commissioner's claim in this case is directly upon the receivers, who, so far as it appears from the evidence, are in control of the whole of the property of Intercab in the sense required by sec. 221P...''

The last case cited is Waters & Anor v. Widdows & Anor, a decision of Nicholas J. in the Supreme Court of Victoria 84 ATC 4921:

``Quarry & Foundry Engineering Pty. Ltd. (`the company') entered into a deed (`the first deed') with a bank, by which the company purported to create a fixed charge over all its assets excluding book debts, stock in trade and work in progress, which were expressed to be subject to a floating charge.

The company later entered into another deed (`the second deed') with General Credits Limited (`General Credits') to create a fixed charge over the company's assets including book debts both present and future. The second deed purported to operate as a conveyance and assignment of those assets, and purported to vest in General Credits the legal title in future assets upon their coming into existence. The rights conferred by the second deed were subject to the rights conferred on the bank by the first deed.

The bank appointed receivers and managers pursuant to the first deed. The bank's charge, so far as it was a floating charge, crystallised at or about the time of the appointment of the receivers. After their appointment by the bank, the appointees were also appointed by General Credits as receivers and managers of the company pursuant to the second deed. The receivers entered into possession of the company's

ATC 4254

assets and proceeded to realise them. Although also appointed by General Credits, the receivers had not taken possession of assets of the company pursuant to that appointment.

The amount realised by the receivers included a sum which represented the repayment of a loan made by the company to another company (`Empro') which was entered into before the first deed. The loan was an inter-company loan made as part of the general business of both companies and was payable at call. The company then went into liquidation.

The company was indebted to the bank, General Credits, the Deputy Commissioner of Taxation and former employees of the company. A summons was issued on behalf of the receivers seeking directions as to the entitlement of the creditors to payment out of the proceeds of realisation of the assets of the company.

The Deputy Commissioner claimed that control of the company's property for the purposes of sec. 221P had passed to the receivers, and that he was therefore entitled to priority in relation to the amount owing to him for unpaid group tax. Counsel for the receivers argued that, under the second deed, the assets of the company were conveyed to General Credits subject to the bank's fixed and floating charge and that the bank had taken possession of the assets so conveyed, and that sec. 221P therefore had no application.''

Nicholas J. said at p. 4923:

``It can be seen that the proceeds of realisation of the company's assets and undertaking are insufficient to pay the Deputy Commissioner of Taxation, the bank and General Credits and the former employees, and the question of priorities between them is thus of considerable importance.

In order to determine the appropriate order of priority and to give directions as to which portion of the proceeds of the realisation of assets are affected by the respective claims, I turn first to the relevant deeds.

... It appears quite clear that what in fact happened was that the company continued to trade normally, and I infer that it did so to the knowledge of and with the acquiescence of General Credits. Indeed, it is difficult to imagine how General Credits could have required the company to pay such book debts into a bank account in its name when the same were already subject to the bank's floating charge which General Credits concedes to have had priority. Further, the taking of such a step would have effectively prevented the company from continuing to carry on its business, which, as I hereafter determine, was not the intent of the arrangement between General Credits and the company.

As I understand it, the company continued to trade until the bank acted to appoint the applicants as Receivers and Managers in July 1982...

The decision of the High Court in F.C. of T. v. Barnes 75 ATC 4262; (1975) 133 C.L.R. 483 makes it clear that a Receiver of all the company's assets and undertaking is a trustee within the meaning of the section and no argument to the contrary was addressed to me in the present case.

The real issue was as to whether any property of the company had passed into the control of the Receiver within the meaning of the section.

Mr Robson of counsel for the Receivers contended that the Receivers were only entitled to pay the Deputy Commissioner out of property of the company under his control or vested in him but not out of such property in so far as it was subject to another security and he referred to the passage in the judgment of Gibbs J. (as he then was) at ATC p. 4270; C.L.R. p. 499 of Barnes' case...

Counsel also referred to the passage appearing in the majority judgment of Barwick C.J., and Mason and Jacobs JJ. at ATC p. 4265; C.L.R. p. 491.

... the key to the present problem lies in the meaning of the words `his property' appearing in sec. 221P(1)...

In my view the reference by the Court to a mortgage or other security must be read as a reference to a mortgage or other security over the assets of the company which either takes priority over or is ranked pari passu with the security pursuant to which the

ATC 4255

Receiver is appointed. Any mortgage or other security which ranks in priority after that security could not operate to prevent control passing to the Receiver. The Court's reference to a security previously existing tends to support this construction.

In so far as the applicant Receivers seek to rely upon the passage from the judgment of Gibbs J. (as he then was) where his Honour said that subsec. (2) of sec. 221P could not possibly be construed so as to enable a trustee who held property subject to a mortgage in favour of some person other than the employer to pay the Commissioner out of the interest of that person is concerned, I consider that his Honour's remarks should also be interpreted as referring to a mortgage either ranking in priority to or in pari passu with the security under which the Receiver and Manager has been appointed. To hold otherwise would in my view be to defeat the purpose of the section... In my view, where the section refers to control of the property it means the undertaking and assets of the company over which control can pass to the receiver under the deed. It matters not that the company has subsequently further encumbered or purported to dispose of its interest in the property provided that control of it can pass to the receiver under the deed. I appreciate that this may give a somewhat strained interpretation to the expression `his property' appearing in the section, but I think that it is the only practicable meaning that can be attributed to it...

The position of the Deputy Commissioner of Taxation is... entitled to payment out of all of the assets of the company under the control of the Receivers regardless of whether they are subject to a fixed or floating charge...''

What emerges from a consideration of all these cases is, as Nettlefold J. said in Holloway's case, that it is the particular facts that cause the difficulties with the application of sec. 221P. That gives emphasis to the fact that a practical approach is required.

I also agree with Brinsden J. when he said at p. 4564 that the passage in Barnes' case at p. 494 was important. It is the key to the policy that lies behind sec. 221P.

In my opinion on the facts in this case, and on a proper construction of the relevant documents tendered in evidence, control of the property of the company passed to Mr James within the meaning of the section. It remained with him for some twenty months. Even if control of the ``property'' in the specific mortgages did not pass to him, it would not matter. The question was not argued before me and does not arise for decision although, without deciding the question, I would lean to the view that he had control of that ``property'' as well.

He received funds during the relevant period that were sufficient to remit the tax deductions to the Commissioner. He elected to use the moneys for other purposes.

Those findings alone would, in my opinion, be enough for the plaintiff to succeed but I would add that, even if they were not, the acquiescence and concurrence of A.G.C. provides an additional factor. It gave additional control.

I make the declarations sought in para. 1, 2 and 3 of the summons. I order the defendant to pay the plaintiff's costs.

 

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