Richard Foreman & , Re; Sons Pty Ltd; Uther v Federal Commissioner of Taxation

(1947) 74 CLR 508
21 ALJ 360
8 ATD 348
[1947] ALR 589

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(Judgment by: Latham CJ)

In the Matter of: Richard Foreman & Sons Pty Ltd
Between: Uther
And: Federal Commissioner of Taxation

Court:

Judges:
Latham CJRich J
Starke J
Dixon J
McTiernan J
Williams J

Subject References:
Constitutional law (Cth)

Judgment date: 2 December 1947

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Judgment by:
Latham CJ

Richard Foreman & Sons Pty. Ltd. is a company which is in voluntary liquidation under the Companies Act 1936 (N.S.W.). Debts of unsecured creditors amounting to more than 29,000 pounds have been proved, a dividend of 4s. in the pound has been paid and a sum of 1,459 pounds 13s. 7d. is in the hands of the liquidator. A claim has been received from the Commissioner of Taxation for 594 pounds 8s. 10d. sales tax and 172 pounds 9s. 3d. pay-roll tax. Sales tax and pay-roll tax are debts due to the King on behalf of the Commonwealth (Sales Tax Assessment Act 1930-1942, s. 30; Pay-Roll Tax Assessment Act 1941-1942, s. 28). The Acting Deputy Commissioner has informed the liquidator that he claims priority over all unsecured creditors for the payment of sales tax and pay-roll tax as debts due to the Crown. The liquidator applied to the Supreme Court of New South Wales under s. 286 of the Companies Act to determine the question whether the Commissioner was entitled to be paid in priority to all ordinary unsecured creditors, and, if not, whether he should be paid pari passu with such creditors. Roper J. was of opinion that a question as to the limits inter se of the constitutional powers of the Commonwealth and those of the State of New South Wales arose and proceeded no further with the matter (Judiciary Act 1903-1946, s. 40A.) This Court was of opinion that the matter involved the interpretation of the Constitution and made an order removing the cause into this Court (Judiciary Act, s. 40). (at p513)

The Companies Act 1936, s. 282, provides that, subject to the provisions of the Act as to preferential payments, the property of a company shall, on its winding up, be applied in satisfaction of its liabilities pari passu. Section 199(3) provides, inter alia, that the winding-up provisions of the Act relating to the priorities of debts shall bind the Crown. Section 297 deals with preferential payments or priorities. It provides that, subject to the provisions of the Act, in a winding up there shall be paid in priority to all other debts

(a)

the costs and expenses of winding up, including the remuneration of the liquidator and certain audit costs;

(b)

certain wages and salaries;

(c)

in certain cases amounts due in respect of compensation under the Workers' Compensation Act 1926-1929;

"(d)

all land tax and income tax assessed or to be assessed under any Act or Commonwealth Act due from the company at the relevant date,"

and having become due within a specified period or to become due and payable thereafter, with a limit of one year's assessment;

(e)

certain rent.

Section 297(4) provides that, after provision is made for the costs and expenses of winding up referred to in par. (a) of sub-s. (1), the debts referred to in the following paragraphs shall rank equally among themselves and be paid in full unless the assets are insufficient to meet them, in which case they shall abate in equal proportion. (at p514)

The effect of these provisions, therefore, is to give the costs and expenses of winding up a first priority, to place claims for State and Commonwealth land tax and income tax in the same class as the debts mentioned in pars. (b), (c) and (e) of sub-s. (1), and to leave claims for Commonwealth sales tax and Commonwealth pay-roll tax in the class of unsecured debts which can be satisfied only after effect has been given to the provisions for preferential payment contained in s. 297(1). The question which arises is whether the liquidator is bound to conform to s. 297 according to its terms, or whether, on the other hand, the Commonwealth has a priority in respect of debts due to it for sales tax and income tax over all the unsecured creditors. In the present case no question arises as to any debts due to a State. (at p514)

Where a claim of the Crown and a claim of a subject come into competition the Crown has priority. In relation to Crown debts the law, if not varied by statute, is that Crown debts are paid in priority to all other debts of equal degree. This is a prerogative existing at common law which the Commonwealth upon its creation carried with it into the Federal system established by the Commonwealth Constitution (Federal Commissioner of Taxation v. Official Liquidator of E.O. Farley Ltd. (1940) 63 CLR 278 ) - and see R. v. Kidman (1915) 20 CLR 425 , at pp 435-436; Liquidators of Maritime Bank of Canada v. Receiver-General of New Brunswick [1892] AC 437 . (at p514)

The prerogative can be limited by a statute passed by a competent Parliament, and a statutory provision can be made in such terms that a statutory right is substituted for a prerogative right existing at common law (Attorney-General v. De Keyser's Royal Hotel Ltd. [1920] AC 508 ). (at p 514)

The intent of the Parliament of New South Wales to bind "the Crown" is explicitly stated in s. 199(3). Prima facie the words "the Crown" in a State statute should be understood as applying only to the Crown in right of the State (Essendon Corporation v. Criterion Theatres Ltd. (1947) 74 CLR 1 and the cases there cited). But s. 297 of the Companies Act, with its express reference to taxes payable under Commonwealth Acts as well as to taxes payable under State Acts, shows an intention to bind the Commonwealth. It was argued for the Commissioner that s. 297 did not purport to determine priorities in respect of any debts due to the Commonwealth - that it merely prescribed a rule of administration for the liquidator which was subject to any claim which the Commonwealth might make by virtue of a prerogative right. But the effect of the directions given to a liquidator by s. 297 is that Commonwealth debts for land tax and income tax are not to be given a first priority, but are to be paid upon the same footing as certain other classes of debts, and that other debts due to the Commonwealth are left, if unsecured, in the same class as other unsecured debts, i.e., without any priority. Before considering whether it is within the power of the State Parliament to enact such legislation, mention should be made of two matters which were raised in argument. (at p515)

In the first place, it was contended that if the Commonwealth made a claim in the liquidation of a company under State law, the Commonwealth must accept all the provisions of that law, whatever they may be, and that the Commonwealth could not claim the benefit of the State law and at the same time refuse to submit to some of its provisions. This argument was supported by reference to what was said in The Commonwealth v. New South Wales (Royal Metals Case) (1923) 33 CLR 1 , at pp 26-28. But in the present case the Crown is not seeking to come into the general scheme provided by the Companies Act for the distribution of the assets of a company which is being wound up. On the contrary, the Commonwealth has distinctly claimed a first priority in respect of the taxes in question, notwithstanding the provisions of the Act. The property of the company is held by the liquidator on behalf of the company and the Commonwealth makes its claim, insisting upon the prerogative right. Further, it has been expressly held that where a company is being wound up and a claim is made in the liquidation for priority in respect of a Crown debt, the making of such a claim against the liquidator does not involve any abandonment of the prerogative. In In re Oriental Bank Corporation; Ex parte The Crown (1884) 28 Ch D 643, at p 648 Chitty J. said that, where the Crown came in under a liquidation and sought to prove, the Crown could still retain its right of priority as against the other creditors. The Crown might, however, stand out and insist on its prerogative and then "the assets to be administered would be the assets of the company, less that portion of the assets which the Crown had taken away." In Commissioner of Taxation for New South Wales v. Palmer [1907] AC 179 , at p 185, Lord Macnaghten said:-

"It is difficult to understand the suggestion made in the Court below that, because the Crown puts forward its claim to priority in the case of the administration of a bankrupt's estate, it must therefore be held to have abandoned an undoubted prerogative on which it is actually at the time insisting, and to have elected to come in with the ordinary creditors."

Thus it cannot be said that the Crown, by making a claim in a liquidation for priority, has impliedly agreed to accept the provisions of the State Companies Act which deprive it of priority. (at p516)

In the second place, the power conferred upon the Commonwealth Parliament by s. 51 (ii.) of the Constitution to make laws with respect to taxation enables the Commonwealth Parliament to provide that Commonwealth taxes shall be paid by taxpayers in priority to other debts, including debts for taxes owing under State Acts (South Australia v. The Commonwealth (1942) 65 CLR 373 ). The Commonwealth Parliament might therefore have provided that sales tax and pay-roll tax should be paid by taxpayers or by the liquidators of taxpayer companies in priority to other debts, or that debts in respect of such taxes, though not having first priority, should have a certain defined preference. If the Commonwealth Parliament had made any such provision, then s. 297 of the State Act, so far as inconsistent with the Commonwealth Act, would, to the extent of the inconsistency, be invalid and the law of the Commonwealth would prevail (Constitution, s. 109). (at p516)

The Commonwealth Parliament, however, has not enacted any such legislation with respect to sales tax and pay-roll tax. It is true that in s. 32 of the Sales Tax Assessment Act and in s. 30 of the Pay-Roll Tax Assessment Act the Commonwealth Parliament has made specific provisions referring to the liquidation of a company. By sub-s. (1) of these sections the liquidator of a company is required, within a specified time, to give notice in writing to the Commissioner of his appointment as a liquidator. Sub-section (2) provides that the Commissioner shall notify to the liquidator the amount which appears to the Commissioner to be sufficient to provide for tax which then is or will thereafter become payable by the company, and sub-s. (3) of the Pay-Roll Tax Assessment Act (sub-s. (2A) of the Sales Tax Assessment Act) prevents the liquidator parting with assets of the company until he has been so notified, and requires him to set aside out of the assets "available for the payment of the tax" assets to the value of the amount notified or the whole of the assets, if necessary. It is further provided that the liquidator shall, to the extent of the value of the assets which he is so required to set aside, be liable as trustee to pay the tax. Sub-section (6) of the Pay-Roll Tax Assessment Act (sub-s. (4) of Sales Tax Assessment Act) provides as follows:

"Notwithstanding anything contained in this section, all costs, charges and expenses which, in the opinion of the Commissioner, have been properly incurred by the liquidator in the winding-up of a company, including the remuneration of the liquidator, may be paid out of the assets of the company in priority to any tax payable in respect of the company." (at p517)

This provision relates only to costs & c. of winding up which in the opinion of the Commissioner have been properly incurred. The Companies Act, s. 297 (1)(a), gives a first priority to all such costs without any reference to the opinion of the Commissioner. (at p517)

In Farley's Case (1940) 63 CLR 278 s. 32 of the Sales Tax Assessment Act was considered by the Court, and it was held that the section did not deal with priorities. It required the liquidator to make provision towards securing the payment of tax by setting aside assets, but the section did not create any charge on the assets, and the liquidator was to set aside a sum only out of "assets available for the payment of the tax."

The provision in sub-s. (4) of the Sales Tax Assessment Act (sub-s. (6) of the Pay-Roll Tax Assessment Act) has no further effect than that of entitling the liquidator to meet the costs, charges and expenses which, in the opinion of the Commissioner, have been properly incurred in the winding up before setting aside a sum under sub-s. (2A) of the Sales Tax Assesment Act (sub-s. (3) of the Pay-Roll Tax Assessment Act) to meet actual or future tax liabilities. A liquidator will comply with these sections of the two Acts if he pays costs, charges and expenses of winding up to the extent mentioned in sub-s. (4) of the Sales Tax Assessment Act (sub-s. (6) of the Pay-Roll Tax Assessment Act) - an amount which depends upon the opinion of the Commissioner. He must then set aside and retain in his hands the assets to the extent required by sub-s. (2A) of the Sales Tax Assessment Act (sub-s. (3) of the Pay-Roll Tax Assessment Act). The assets must then be applied by the liquidator according to law - i.e., according to common law or any valid statute law. There is nothing in the Commonwealth Acts to prevent him from then applying the provisions contained in s. 297 of the Companies Act of New South Wales. Accordingly, there is no inconsistency in this case between Commonwealth and State legislation. The question, therefore, is whether, there being no abandonment by the Commonwealth of its prerogative, and there being no Commonwealth legislation inconsistent with any relevant State Act, a State Parliament has power to determine where debts due to the Commonwealth shall rank in the winding up of a company. (at p518)

The State Parliament has full power to legislate with respect to the winding up of companies. Such power as the Commonwealth Parliament may have with respect to this subject is limited to foreign corporations and trading and financial corporations formed within the limits of the Commonwealth (Commonwealth Constitution, s. 51(xx.); Huddart Parker & Co. Pty. Ltd. v. Moorehead (1908) 8 CLR 330 ). But there is no doubt as to the complete power of the State Parliament to legislate on the subject. (at p518)

In the well-known case of R. v. Burah (1878) 3 App Cas 889, at p 904 , Lord Selborne, referring to the Indian Legislature, said that it "has powers expressly limited by the Act of the Imperial Parliament which created it, and it can, of course, do nothing beyond the limits which circumscribe these powers. But, when acting within those limits, it is not in any sense an agent or delegate of the Imperial Parliament, but has, and was intended to have, plenary powers of legislation, as large, and of the same nature, as those of Parliament itself" - see also Croft v. Dunphy [1933] AC 156 , at p 163. I proceed to examine, in the light of this general principle, the powers of the Parliament of New South Wales with respect to Crown debts of varying descriptions.

(1)

Crown debts in right of the State of New South Wales. There can be no doubt as to the full power of the Parliament of New South Wales to legislate with respect to the priority to be accorded to these debts in the liquidation of a company under the Companies Act of New South Wales. It can reduce or abolish such priority.

(2)

Crown debts in right of another State of the Commonwealth, e.g., Victoria. I can see no reason why the Parliament of New South Wales should not be regarded as having full power to legislate with respect to the priority to be accorded to such debts. The Parliament of Victoria could not enact a statute which would operate as law in New South Wales with respect to this (or any other) matter. There is, however, no reason whatever for denying to the Parliament of New South Wales the right to determine the rules to be applied in the forum of New South Wales in relation to debts owed to the Crown in right of Victoria and other Australian States. The power of that Parliament in relation to this matter is as plenary as that of the Parliament of the United Kingdom.

(3)

Crown debts in right of other parts of the British Commonwealth e.g., Canada, Newfoundland, Jamaica. The same considerations apply as in the case of class No. 2. The Parliament of New South Wales has full power to determine how such Crown debts shall rank in a liquidation.

(4)

Crown debts in right of the United Kingdom. The plenary power of the New South Wales Parliament to deal with the liquidation of companies within New South Wales enables that Parliament to determine the priority, if any, to be accorded to Crown debts in right of the United Kingdom. Otherwise the power of the Parliament of New South Wales would not be plenary with respect to this subject. The Parliament of the United Kingdom has power, as a matter of law, to legislate for New South Wales and, accordingly, has itself power to make laws relating to the priority to be accorded in New South Wales to Crown debts arising in any right or, indeed, in relation to any debts at all. But the existence of this overriding power of the Imperial Parliament does not affect the scope and extent of the power of the Parliament of New South Wales, which remains plenary, though subject to the possible operation of paramount legislation, if any, passed by the Parliament of the United Kingdom.

(5)

Crown debts in right of the Commonwealth of Australia. It is argued that, even though the State Parliament may have the powers stated in respect to Crown debts in right of the various parts of the British Commonwealth mentioned, the position is different in the case of debts owed to the Crown in right of the Commonwealth. It is contended that the prerogative right of the Commonwealth to priority in payment of debts due to the Commonwealth is a governmental right with respect to which a State Parliament has no power to make laws. In the recent case of Melbourne Corporation v. The Commonwealth (1947) 74 CLR 31 it was held by this Court that the Commonwealth Parliament had no power to make laws which were directed against and impaired the exercise of an essential governmental function of the State. It is argued that the considerations which led to this conclusion apply equally to protect Commonwealth governmental functions against destruction or impairment by State laws. It is contended that the prerogative priority of Commonwealth debts is a governmental right of the Commonwealth, with which a State Parliament has no power to interfere. In Federal Commissioner of Taxation v. Official Liquidator of E.O. Farley Ltd. (1940) 63 CLR 278 , at p 308 , Dixon J. referred to this matter. He pointed out that the priority belonging to Crown debts was a priority of the Executive Government founded upon public policy in order to protect the public revenue. His Honour was of opinion that though, in many respects, the Executive Government of the Commonwealth may be incidentally affected by the content or condition of the general law, "governmental rights and powers belonging to the Federal Executive as such" were matters which were beyond the legislative powers of the State Parliament. His Honour held that the prerogative right of priority in payment of debts due to the Commonwealth was such a governmental right or power. (at p520)

The principle enunciated and applied in the Banking Case (1947) 74 CLR 31 cannot, in my opinion, be applied in favour of the Commonwealth in the same way as it may properly be applied in favour of a State. A State has no means of protecting itself against Commonwealth legislation if that legislation is valid. The position in the case of the Commonwealth, however, is very different. The Commonwealth Constitution, s. 109, provides that when a law of a State is inconsistent with a law of the Commonwealth the latter shall prevail and the former shall, to the extent of the inconsistency, be invalid. This provision, as has often been pointed out, relates only to State laws which, apart from s. 109, would be valid. A valid Commonwealth law prevails over an otherwise valid State law where the latter is inconsistent with the former. Accordingly, the Commonwealth Parliament is in a position to protect the Commonwealth against State legislation which, in the opinion of the Parliament, impairs or interferes with the performance of Commonwealth functions or the exercise of Commonwealth rights. It has been recognized that the Commonwealth Parliament has this power in the case of laws relating to Commonwealth elections: R. v. Brisbane Licensing Court; Ex parte Daniell (1920) 28 CLR 23 - Federal legislation excluding the operation of State legislation as to elections; and to Commonwealth borrowing: The Commonwealth v. Queensland (1920) 29 CLR 1 - Commonwealth legislation preventing the application of State income tax law to interest on certain Commonwealth stock or Treasury bonds; and to the Commonwealth Public Service: West v. Commissioner of Taxation (N.S.W.) (1937) 56 CLR 657 - where the power of the Commonwealth Parliament to enact legislation inconsistent with State legislation for the purpose of protecting rights conferred by Commonwealth legislation is fully discussed. (at p520)

The present case relates to the Commonwealth prerogative in respect of debts due to the Commonwealth for Commonwealth taxes. It was held in South Australia v. The Commonwealth (Uniform Tax Case) (1942) 65 CLR 373 , that the power of the Commonwealth to legislate with respect to taxation enabled the Commonwealth Parliament to legislate so as to give priority to Commonwealth taxes over all State taxes. It is an a-fortiori proposition that the Commonwealth Parliament can, if it thinks proper, provide for priority to be given to debts for Commonwealth taxes over debts due to creditors other than State Governments. (at p521)

Accordingly, there is no need to invoke any principle of non-interference with governmental functions for the purpose of protecting the prerogative right of the Commonwealth to priority in payment of debts due to the Commonwealth. The Commonwealth Parliament has the means of protection in its own hands, and by suitable legislation can prevent the application of inconsistent State legislation. I do not suggest, however, that, because the Commonwealth has an extensive power of protecting itself in relation to its governmental functions against State legislation, the result is that any State legislation with respect to the Commonwealth should be held to be valid unless the Commonwealth Parliament produces counter-legislation. There are some subjects which are completely beyond State legislative power; for example, the functions of the Governor-General in relation to the summoning and the dissolution of the Commonwealth Parliament are matters with respect to which State legislatures have no power whatever. The Parliament of New South Wales has power to make laws "for the peace, welfare and good government of New South Wales in all cases whatsoever" - Constitution Act 1902 (N.S.W.) s. 5. Laws upon the subjects mentioned would not be laws for the peace, & c., of New South Wales. Any State legislation relating to such matters would be invalid and the Commonwealth Parliament would not be put to the necessity of passing a statute inconsistent with a State statute which attempted to regulate such matters. (at p521)

Thus some matters of Commonwealth concern are entirely beyond State legislative power. Is the Commonwealth prerogative right of priority in respect of debts owed to the Commonwealth one of these matters? (at p521)

The Commonwealth of Australia was not born into a vacuum. It came into existence within a system of law already established. To much of that law the Commonwealth is necessarily subject; for example, the Commonwealth has no general power to legislate with respect to the law of property, the law of contract, the law of tort. In relation to those subjects, speaking generally, it lives and moves and has its being within a system of law which consists of the common law (in the widest sense) and the statute law of the various States. The question of the application of general law to the Commonwealth came before this Court in Pirrie v. McFarlane (1925) 36 CLR 170 . It was there held that general provisions in a Traffic Act relating to motor cars applied to the Commonwealth when there was no Commonwealth law with which the State law was inconsistent: see the report (1925) 36 CLR, at pp 182-183, 213-214, 228-229. Provision for the ranking of debts inter se in the liquidation of companies in the forum of a State is a common feature of ordinary company law. It is as much a part of the general law of the community as a traffic law. It usually involves distinction between classes of creditors. It is a general law which can be applied to the Commonwealth where the Commonwealth is a creditor in the same way as to other creditors. If the State legislation abolishes or reduces the priority in payment to which the Commonwealth is entitled at common law the Commonwealth may, by Commonwealth legislation, prevent that State law from operating. But, in my opinion, until the Commonwealth Parliament passes such legislation, the State law is applicable according to its terms. (at p522)

The questions submitted by the liquidator for the determination of the Court are as follows:

"1.

Is the Commissioner of Taxation entitled to be paid in priority to all ordinary unsecured creditors amounts owing to him by the liquidator in respect of (a) sales tax and (b) pay-roll tax respectively?

2.

If the answer to Question 1 is no, then should the Commissioner of Taxation be paid pari passu with the said ordinary creditors when the liquidator is making a final distribution to creditors?" (at p522)

In my opinion the first question should be answered: No, and the second question should be answered: Yes. (at p522)