CHANT & ANOR v DFC of T & ANOR

Judges:
Young J

Court:
Supreme Court of New South Wales

Judgment date: Judgment handed down 14 May 1991

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Young J

The first plaintiff is a receiver of the property of the second plaintiff (other than certain land) appointed by deed bearing date 5 June 1990.

On 10 February 1987 the second plaintiff executed three mortgages or charges: viz (a) a mortgage over its Torrens system land at Albury to the Albury City Council; (b) a mortgage over the same property to Westpac Banking Corporation; and (c) a mortgage debenture to Westpac Banking Corporation. It would appear from the statement of affairs that was filed that the mortgage to the Albury City Council was a first mortgage, and the Torrens system mortgage to Westpac a second mortgage. However, a literal reading of charge (c) was one whereby the second plaintiff charged all and singular its undertaking and all its assets whatsoever and wheresoever both present and future to Westpac Banking Corporation.

In due course the second plaintiff made default and on 5 June the bank appointed the first plaintiff and another gentleman receivers. The deed appointing the receivers contained the following recital:

``C. Westpac intends, pursuant to this Deed, to appoint the Receivers, jointly and severally, as receivers to all of the Mortgaged Property other than the land contained in certificate of title vol 13786 folio 158 located at Albury, New South Wales (the `Land').''

The undisputed facts show that the assets of the second plaintiff, other than the land, have produced approximately $697,000 into the hands of the receivers. It would seem that the land itself has a value of about $800,000 or more and that the mortgage to the Albury City Council could be paid out for about $83,000. There is owing to the Westpac Bank approximately $3.4 million. There is owing to former employees approximately $541,000. The second plaintiff owes to the first defendant, the Deputy Commissioner of Taxation, approximately $652,300 and of this amount $514,126.01 is unpaid group tax, which gains certain priority in the administration pursuant to the provisions of s 221P of the Income Tax Assessment Act 1936. The debate in this case has been whether the first plaintiff, as receiver, is obliged to pay this $514,126.01 in preference to the claim of the employees or in satisfaction of the Westpac debt.

Section 221P(1) of the Income Tax Assessment Act is in the following terms:

``221P(1) Where an employer makes a deduction for the purposes of this Division,

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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.''

The section has been the subject of judicial consideration on many occasions though, with respect to some of the discussions in the judgments, they are not all easy to follow. However, the present case raises relatively narrow issues.

The seminal discussion of the ambit of s 221P occurs in
FC of T v Barnes 75 ATC 4262; (1975) 133 CLR 483. The effect of Barnes' case has been considered by the Court of Appeal on at least two occasions since 1975, namely, in
DFC of T v AGC (Advances) Ltd & Ors 84 ATC 4177; (1984) 1 NSWLR 29, and in
James v DFC of T 88 ATC 4812. Essentially a receiver will be held to be a trustee within the meaning of s 221P if all the property of the employer passes into the control of the receiver. I have deliberately put that simplistically because as soon as one goes to a deeper level one gets into not only semantic problems, but other problems as well.

The basal argument in the instant case is on the plaintiffs' side, that this is not a case where the control of all the property of the employer passed to the receivers. Although the charge (c) covered all the property of the company, including any interest that the company may have in what is described in recital C as ``the Land'', the deed of appointment of receiver did not appoint the the receivers as receivers of ``the Land''. Thus it is said that whilst control of most of the company's property passed to the receivers, they were not the controllers of all the company's property and, accordingly, s 221P did not compel them to pay moneys to the Deputy Commissioner of Taxation. The counter argument is that ``all'' in the expression ``all property'' does not literally mean ``all''. The mere exclusion of a worthless asset does not affect the situation. One must adopt a practical approach to the whole matter and ignore property such as worthless equities of redemption: cf Barnes' case per Gibbs J at ATC 4270; CLR 499,
Re LG Holloway Transport Pty Ltd 83 ATC 4164, 4167-4168; (1983) 14 ATR 44, 48 and
Judson & Ors v DFC of T 87 ATC 4489, 4494; [1988] VR 308, 313.

The cases have sometimes referred to ``worthless equities of redemption'', though it may be debated in what sense these words have been used. I would agree, with respect, with Mr Bainton QC when he says that the passage of Gibbs J's judgment at ATC 4270; CLR 499 of Barnes' case really says no more than the mere fact that there are certain pieces of property which do not pass to the control of a trustee in bankruptcy or a liquidator, such as, for instance, in a personal bankruptcy tools of trade of a debtor, and does not affect the situation that generally speaking the trustee has control of all the property of the debtor/employer. It is not really an exercise of working out what is the value of the interest in land which the debtor/employer has at the relevant date (whatever the relevant date may be). However, even if this were not so, it seems to me in the instant case one cannot say that the property which was excluded from the receivers' control was something worthless which could be disregarded.

It is really a loose way of talking in Australia in 1991 with respect to Torrens system mortgages to speak in terms of an equity of redemption at all. Certainly it is quite wrong, in my view, to speak of it as if when a company mortgages property, interests are carved out of the ``pie'', constituting the whole fee simple, so that if various slices are removed little or nothing in money terms may be left. A fee simple is a congeries of rights. When under the Torrens system the registered proprietor mortgages the land, the registered proprietor retains the fee simple and thus the whole congeries of rights, subject only to the charge or hypothecation constituted by the mortgages. At all material times the registered proprietor retains the fee simple. It may be that the value of the fee simple as a commercial piece of property has been reduced, but the property remains the same.

Indeed, even in an old system mortgage of realty the same can, to a lesser degree, be said. It must always be remembered that the doctrine of equity of redemption was one which was

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more or less introduced into the law by Lord Hardwicke. The writings on the subject, for which I confess I am greatly indebted to Dr Clyde Croft of the Victoria Bar's thesis on the subject where the authorities are collected, show that Lord Hardwicke always thought of an equity of redemption as meaning that beneficially the mortgagor still had a fee simple and that the rights which he had granted (which at law took the form of an outright conveyance) were merely by way of pledge or security; see eg Lord Hardwicke's utterance ``Ye ownership of ye land does in equity remain in ye mortgagor'' (this comes from Dr Croft's research on additional Hardwicke manuscripts in the British library: cf
Casburne v Inglis (1737) 25 ER 905). However, over time the expression ``equity of redemption'' came to refer to two distinct rights. The first was the right of a mortgagor to redeem the land even after the contractual period for redemption had passed. It was fashionable in England to make mortgages repayable at an artificially short period of time, so that after that short period of time had passed the mortgagor had no right at law to get back his land. This was the scenario made popular in American movies where the widow was racing against the clock to get her land back before the time came when the rascally mortgagee foreclosed. To outflank such rascally mortgagees equity allowed a further period up to the time of a decree absolute of foreclosure, in which the mortgagor could redeem. That was an equitable right and was truly called an equity of redemption. However, the term is also loosely employed for the contractual right that there is in the mortgagor, which is a legal right to pay off the debt and have the charge written off the title. It should be emphasised that in no analysis does one merely regard the mortgagor as owning X dollars'-worth of property after both the first mortgage and the second mortgage has been paid out. At all stages, even under common law title, the mortgagor has an equitable beneficial estate in the fee simple and may also have a contractual right to rid himself of the charge.

Accordingly, when one is considering what property the receivers had control of in the instant case, one looks to see what was covered by their appointment. The appointment clearly says that it covers all the property other than ``the Land''. That land was the fee simple. True it was that the fee simple was charged with a debt to the Albury City Council, and true it is that the land was also charged with a debt to Westpac, which Westpac may or may not choose to enforce, but that fee simple was, to my mind, substantial property. The mere fact that on realisation the property may be found to have a nil value, to my mind, is not a relative factor.

Accordingly, even applying the practical commercial approach taken in Holloway's case and Judson's case, it does not seem to me that I can ignore the substantial fee simple interest that did not pass under the control of the receivers. Accordingly, in my view, the receivers did not become persons who controlled all the property of the debtor in the relevant sense and, accordingly, s 221P does not give the Commissioner any comfort.

Accordingly, I make declaration 2 in the summons and order that the first defendant pay the plaintiffs' costs of the proceedings. In addition I order that the first plaintiff pay out of the assets of the company in his control the costs of the second defendant. I will note that the first plaintiff does not intend to pay any of the employees any moneys within the next period of 28 days. The exhibits may remain.