FC of T v BROOK & ORS

Judges: Sheller JA
Powell JA

Cole JA

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

Judgment date: Judgment handed down 2 February 1995

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Cole JA

This appeal raises the question of the meaning of ``control'' where used in s. 221P(1) Income Tax Assessment Act 1936 which provides:

``Where an employer makes a deduction for the purposes of this Division, or purporting to be for those purposes, from the salary or wages paid to an employee and refuses or fails to deal with the amount so deducted in the manner required by this Division, or to affix tax stamps of a face value equal to the amount of the deduction as required 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, that trustee shall be liable, to pay that amount to the Commissioner.''

Background to this Litigation

The Commissioner of Taxation has appealed against Bryson J's decision dismissing a cross- claim which the Commissioner had brought against Peter Brook, sometime receiver of Hanibridge Pty Limited (In liquidation), (``Hanibridge''), Sonja Catherine Francis Toomey and Gary Edward Toomey, being the first, second, fourth and fifth cross-defendants respectively. The cross-claim initially joined Mr John Moyle as a third cross-defendant but he was dismissed from the proceedings. The fourth and fifth cross-defendants, Mr and Mrs Toomey, took no part in the proceedings before

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Bryson J or this Court although it was established by evidence that they were aware of the proceedings. As did Mr Brook, they submitted to such order as the Court might make except as to costs. The party opposing the Commissioner's appeal was thus Hanibridge.

The cross-claim before Bryson J sought two substantive orders namely:

``1. A declaration that the first cross- defendant (the receiver) is or at relevant times was a trustee for the purposes of s. 6(1) and 221P of the Income Tax Assessment Act 1936.

2. An order that the sum of $86,187.37 paid into Court pursuant to orders of Registrar Berecry made on 23 September 1991 by the first cross-defendant be paid to the first cross-claimant.''

It was not in issue before Bryson J or this Court that Mr Brook, as receiver, was a trustee within the meaning of s. 6(1) or s. 221P of the Income Tax Assessment Act . The question in issue was whether order 2 should be made.

It is necessary to recite the circurmstances leading to this litigation. On 1 June 1989 Hanibridge was registered as a group employer under the Income Tax Assessment Act . It was accordingly permitted and required to make deductions from the salary or wages paid to its employees and thereafter to remit such deductions to the Commissioner in the manner required by Part VI Division 2 of the Act. $86,187.37 was so deducted by Hanibridge but was not remitted to the Commissioner.

On 12 June 1990 Hanibridge executed a charge over all of its assets in favour of Sonja Catherine Francis Toomey. The charge recited that:

``The mortgagor at the request of John Moyle and in support of a loan due and owing from John Moyle to the mortgagee in the sum of $251,855 has requested the mortgagee to extend certain credit advances or accommodation to the mortgagor and the mortgagee may from time to time hereinafter at the request of the mortgagor extend or furnish to the mortgagor credit advances or accommodation.''

By that charge Hanibridge charged ``all and singular its undertaking and all its assets whatsoever and wheresoever both present and future''.

By clause 5 of the deed of charge, the floating charge ``automatically crystallised'' and operated as a fixed charge in respect of ``all such or such part of the mortgaged premises as may be specified by notice in writing given by the mortgagee to the mortgagor''. Pursuant to clause 8(1), upon default the mortgagee was empowered to appoint a receiver upon whom was conferred the powers:

``(a) To take possession of collect and get in the whole or any part of the mortgaged premises;

...

(g) to make any arrangement or compromise in relation to the mortgaged premises which such receiver shall think expedient in the interest of the mortgagee;

...

(n) to do all such other acts and things in relation to the mortgaged premises without limitation as such receiver shall think expedient in the interests of the mortgagee.''

Default occurred. On 27 December 1990 the mortgagee, Mrs Toomey, appointed Mr Brook receiver of part only of the mortgaged property, being moneys in bank or financial accounts, or held in cash and debtors.

On 10 January 1991 Mr Brook ceased to act as such receiver. On the same date he was re-appointed as receiver in respect of the property described as:

``All and singular its undertaking and all its assets whatsoever and wheresoever both present and future including the good will of its business, and its uncalled and called but unpaid capital (including premiums) for the time being on its shares.''

On 17 January 1991 Mr MC Donnelly was appointed provisional liquidator of Hanibridge. On 24 January 1991 Mr Brook ceased to act as receiver. Prior to that time he had received from the company's assets at least $86,187.37, the sum claimed in these proceedings.

On 11 February 1991 Mr Donnelly was appointed official liquidator of Hanibridge.

On 23 September 1991 Registrar Berecry ordered Mr Brook to pay the sum of $86,187.37 into court. The circumstances in which this occurred are not entirely clear. It appears that prior to that time Hanibridge and Mr Moyle had commenced proceedings against Mr and Mrs Toomey and Mr Brook seeking certain orders

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declaring the deed of charge given by Hanibridge on 12 June 1990 in favour of Mrs Toomey void. They also sought orders that the appointment of Mr Brook as receiver was void and declarations that there was no indebtedness by Mr Moyle to Mrs Toomey in the sum of $251,855, as the deed recited. The receiver had, by that time, notice of the claim of the Commissioner for the sum of $86,137.37 for deducted but unremitted income tax payments. He had at least that sum in funds available to him. There apparently was dispute between Hanibridge and the Commissioner regarding that sum and, in consequence, so it seems, the Commissioner was joined as a fourth defendant in the proceedings brought by the company and Mr Moyle. That resulted in a cross-claim by the Commissioner seeking the orders set out above. Having no interest in the matter, the receiver, Mr Brook, in effect inter-pleaded paying the sum into Court.

The claim between the plaintiffs and defendants did not proceed. On the Commissioners cross-claim Mr Brook took no part in the proceedings and Mr Moyle was dismissed from them. Mr and Mrs Toomey also took no part in those proceedings, perhaps because Mrs Toomey had been paid such indebtedness as was due to her. The dispute was thus between the Commissioner and the liquidator of Hanibridge as to whether the Commissioner had an entitlement to the sum paid into Court by the receiver.

Before this Court the question was raised regarding whether, if the Commissioner failed, and the moneys were directed to be paid to the liquidator of Hanibridge, as both parties had assumed, the liquidator would nonetheless be liable to account for those moneys to the Commissioner. Had that been the situation, the appeal would have been pointless. The Court was informed of an agreed position between the liquidator of Hanibridge and the Commissioner that in the event of the Commissioner's appeal failing, it was agreed that the moneys in Court should be paid out to the liquidator to be applied by him pursuant to the provisions of s. 221P of the Act. That arrangement was accepted by both parties to mean that after payment of liquidator's costs and expenses permitted as a priority by s. 221P(3), any sum remaining from the $86,187.37 would be paid to the Commissioner. The Commissioner contended, however, that the appeal should be upheld thus entitling him to that full sum.

The Trial Judge's Decision

Bryson J held that, as the Commissioner was seeking a declaration and order, he bore the onus of proof of establishing satisfaction of the requirements of s. 221P. He was thus required, in accordance with established authority, to show that control of the whole of the company's property had passed to the receiver before s. 221P operated to require the receiver to pay to the Commissioner the amount of the deductions assuming, as was obviously the case, that the receiver had funds sufficient to meet that amount. ^[1] FC of T v Barnes 75 ATC 4262 ; (1975) 133 CLR 483 ; DFC of T v AGC (Advances) Limited & Ors 84 ATC 4177 ; (1984) 1 NSWLR 29 ; DFC of T v Chant & Ors 91 ATC 4734 ; (1991) 103 ALR 387 . Bryson J held that the Commissioner had not discharged [ sic] that onus because the paucity of evidence tendered did not establish whether the company had any property apart from the money paid into court. Absent evidence regarding the totality of property of the company, his Honour was not satisfied that it had been shown that control of all of the company's property had passed to the receiver.

That finding involved a determination by his Honour as to the meaning of the expression ``control of his property'' when used in s. 221P(1). His Honour held, consistent with the view of Marks J in Russell & Anor v AGC (Advances) & Ors ^[2] 87 ATC 4392; (1988) VR 97. that:

``I see these words as not technical but as referring to what is actual, what exists as matter of fact. In my opinion the bare conferral of a right to control property on a receiver pursuant to the Deed of Charge is not necessarily enough; that is say, in the absence of some other facts, it is not enough. It may be that the receiver is entirely unopposed and can do as much or as little with the property as he chooses to exert himself to do; of such a receiver it would be readily found, I would think, that the control of all the property had passed to him. On the other hand it may be that a receiver has good legal rights conferred under the documents but was at all times forcibly resisted in respect of all the property or substantial parts of it by directors, or by other creditors who irrespective of their rights kept the property out of his hands, hidden or locked in a warehouse; whatever his rights were, it would not be a correct finding of fact to say of a receiver in those circumstances that control of the property had passed to him.

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On the evidence before me I cannot know what Mr Brook's situation was in the brief period between his being fully empowered by his second appointment and his resignation late in January. On the facts before me I do not find that control of the company's property passed to Mr Brook. Accordingly, the cross-claim fails.''

The Operation of s. 221P

It is now well established that for the section to apply the property which must be vested in, or the control of which must pass to a trustee must be the whole of the property of the company. ^[3] FC of T v Card (1963) 13 ATD 149 at 151, 153-154, 156; (1963) 109 CLR 177 at 184, 187-188, 192 ; FC of T v Barnes 75 ATC 4262 at 4265; (1975) 133 CLR 483 at 490 . ``His property'' means ``the whole of his property''. However, as is made clear in Barnes and Chant ^[4] DFC of T v Chant & Ors 91 ATC 4734 at 4741; (1991) 103 ALR 387 at 395 . the property being addressed is only that property which ``could'' become vested or in respect of which control could pass. As was said in Barnes : ^[5] FC of T v Barnes 75 ATC 4262 at 4265- 4266; (1955) 133 CLR 483 at 491 Barwick CJ and Mason and Jacobs JJ.

``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 has 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.''

(emphasis added)

Further, it has been established in Card that a trustee has no personal responsibility beyond the extent of assets vested in him or control of which passed to him and to which he may have recourse to meet the obligation imposed by s. 221P. ^[6] 13 ATD at 154; 109 CLR at 189.

The requirements of s. 221P to be satisfied before the Commissioner can recover from a trustee were usefully analysed by Mahoney JA in
James v DFC of T 88 ATC 4812 . His Honour said:

``In order to succeed in this proceeding, it is necessary for the Deputy Commissioner to establish four things:

• (1) that deductions were made by the employer within sec. 221P and that they were not paid to the Deputy Commissioner;
• (2) that the control of the property of the employer, i.e. the company, passed to Mr James as a trustee within sec. 221P(1);
• (3) that as trustee the control of all of the property of the company, passed to him; and
• (4) that Mr James had property to which he might properly have recourse for the purpose of paying the amount of those deductions to the Deputy Commissioner.'' ^[7] 88 ATC at 4818.

Mahoney JA's analysis is useful because it emphasises that whilst control of all property must pass to the trustee, the obligation of the trustee to make payment to the Commissioner is dependent upon accessible assets which may comprise a lesser fund.

The Meaning of ``Control'' in s. 221P

The majority judgment in Barnes , in my opinion, makes clear that ``control'' where used in s. 221P means legal control as distinct from what has been described as ``physical'', ``actual'' or ``de facto'' control. Barwick CJ, Mason and Jacobs JJ said, in addition to the passage quoted above. ^[8] 75 ATC 4266; 133 CLR 491.

``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.'' ^[9] 75 ATC 4266; 133 CLR 492.

(emphasis added)

It seems to me that in each of these passages the majority was addressing legal control.

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This view is also consistent with the decision of Mahoney JA in James with which Kirby P and Hope JA agreed. It is true that Mahoney JA said that it was not there necessary to attempt a formal definition of ``control''. ^[10] 88 ATC at 4819. However, his Honour continued:

``The powers detailed in cl. 3(d) allowed Mr James to do things which together constituted control in the relevant sense. And at that time, there was no one else who, in respect of that property, was able to determine that the property be dealt with in a manner contrary to the manner which Mr James might determine.'' ^[11] 88 ATC at 4819.

His Honour was there addressing lawful dealings with property. That is clear from a later passage where His Honour said:

``If whatever be the rights of others in respect of the company's property, a trustee is given control over all of the interests which the company has in that property, then, it might be thought, the terms of s. 221P(1) have, in this regard, been satisfied.''

The opinion I have expressed is also consistent with the view of Murphy J in Oldfield v Tilley & Anor . ^[12] (1988) VR 77 at 82-83. His Honour there said:

``The use of the words `has passed' in this context, as a correlative of the word `has been vested in' appears to me, as a matter of construction to refer to a legal entitlement to resort to the property, rather than to a de- facto state of things. Certainly, `to vest' may mean to `vest in interest' or `to vest in possession', but in the absence of a context it usually means to vest in interest...

`Vested in', as that term is used in s 221P of the Income Tax Assessment Act 1936 connotes, I believe, a vesting in point of interest, a transfer of the property or the passing of a proprietary interest of some sort to the `trustee'.

The words in s 221P `control of his property has passed to a trustee' must, I should think, convey a not dissimilar meaning. They would (in a wider sense than vesting strictly) connote the right to obtain and deal with the property, even though not perhaps as the legal owner: cf
Re Brown (a Lunatic) [1895] 2 Ch 666 , pp. 670-1 .

I think that it is in this sense that the words are being used in s 221P(1) and, in my opinion, both a liquidator on the making of a winding-up order and a duly appointed receiver on appointment by a debenture holder over all company's assets would have control of the property passed to him although the property does not vest in him.

I do not think that a liquidator, or a receiver appointed over all the property of a company, can, by inactivity apropos specific assets, avoid coming within the terms of s. 221P, and argue that he never had passed to him `control of the property' of the employer. It cannot be left dependent upon the vagaries of a `trustee' to determine whether control has passed, but must, I think, consonant with the purpose of the s., depend upon the legal entitlement of the `trustee' to do what the employer has failed to do.''

I respectfully agree.

It was submitted that there was authority to the contrary. Reference was made to the decision of Hutley JA in DFC of T v AGC (Advances) Limited & Ors ^[13] 84 ATC 4177 at 4178; (1984) 1 NSWLR 29 at 30. where his Honour, after referring to the decision of Brinsden J in Smith and Judge v DFC of T & Anor ^[14] 78 ATC 4561; (1978) 38 FLR 347; (1979) WAR 123. and of Nettlefold J in Re LG Holloway Transport Pty Ltd ^[15] 83 ATC 4164; (1983) 7 ACLR 690. wrote:

``This is not the de-facto control with which the section is concerned.'' ^[16] 84 ATC at 4178; (1984) 1 NSWLR at 31.

In Smith , Brinsden J did not hold that control meant ``de-facto'' control. His Honour was dealing with a circumstance where the assets of a company were the subject of a charge. Before the debenture holder appointed a receiver, a liquidator was appointed. That liquidator, in fact, took possession of and dealt with the assets. The debenture holder did not appoint a receiver. In those circumstances his Honour held that the liquidator had, in fact, taken control of the assets of the company and was liable to pay funds held by him to the Commissioner in priority to the debenture holder. The crystallisation of the debenture holder's charge at the latest at the date of appointment of the liquidator did not mean that the debenture holder had control of the assets absent appointment of a receiver. With due respect, Smith is not authority for the view that control in s. 221P means ``de-facto'' control.

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Nor is the decision in Re LG Holloway Transport Pty Limited . ^[17] 83 ATC 4164; (1983) 7 ACLR 690. Nettlefold J was there concerned with the circumstance of a debenture holder which appointed a receiver in respect of part only of the assets of the company, being book debts. His Honour held, consistently with Barnes , that s. 221P had no operation because control had not been taken by a trustee, being the receiver, of the whole of the assets of the company. As his Honour said:

``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...

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.'' ^[18] 83 ATC 4167; (1983) 7 ACLR 693-694.

The case says nothing about whether ``control'' means legal or de-facto control.

In DFC of T v AGC (Advances) Limited & Ors ^[19] 84 ATC at 4178; (1984) 1 NSWLR 29 at 30. Hutley JA is, perhaps, saying no more than that by collecting book debts after appointment of receiver who claimed entitlement to them pursuant to some arrangement whereby the funds would be separately held pending resolution of legal entitlement, there was no assertion by the liquidator of control of the funds. There is nothing in the reasons of Mahoney JA or Priestley JA in DFC of T v AGC (Advances) Limited to the contrary of the view that ``control'' means ``legal control''. I read the analysis by Priestley JA of Smith v DFC of T as being consistent with the view I have expressed.

In Russell & Anor v AGC (Advances) Limited & Ors . ^[20] 88 ATC 4392 at 4398; (1988) VR 97 at 104. Marks J said:

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

However, his Honour continued:

``While it may well be that a thoroughly definitive meaning of `control' has not yet emerged it is clear that in no sense have the applicants exercised control over the Queensland assets. I find as a fact they have not exercised any. In my view, the presence or otherwise of `control' is ordinarily a question of fact. Its meaning in sec. 221P is not technical but refers to what is actual or `de facto'.'' ^[21] 88 ATC 4398; (1988) VR 104.

His Honour was dealing with a company having property in each of Victoria and Queensland, which property was subject to a charge. The charge was not registered in Queensland and was thus void against the liquidator or any creditor of the company. Thus appointment of a receiver pursuant to the charge would not have entitled the receiver to control of the Queensland assets as against the liquidator or any creditor. As Marks J said:

``Although strictly speaking the charge was not void against the applicants [ receivers] in the sense that legally they could have, if possible, taken the Queensland assets under their control, they did not in fact and it is doubtful whether, if they had, they could have resisted a demand of the liquidator to hand them over to him.'' ^[22] 88 ATC 4394; (1988) VR at 99.

As the receivers had neither legal nor de- facto control of the Queensland assets, any statement by Marks J that ``control'' in s. 221P means actual or de-facto control is obiter. I respectfully disagree with that view.

In my view, ``control'' when used in s. 221P means legal control.

It follows that the appeal must be upheld. The effect of the appointment of the receiver on 10 January 1991 as receiver of the whole of the assets of the company was to pass control of that property to him as receiver, and thus as a trustee within the meaning of the section. The powers conferred upon the receiver by the mortgage deed coupled with the instrument of appointment make clear that he had legal control of all of its assets.

THE COURT ORDERS THAT:

I would propose the following orders:

• 1. Appeal upheld.
• 2. Order 1 and 2 as sought in the cross- claim.

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• 3. The second respondent is to pay the appellant's costs of the appeal but, if qualified, is to have a certificate under the Suitors Fund Act .