Richard Foreman & , Re; Sons Pty Ltd; Uther v Federal Commissioner of Taxation
(1947) 74 CLR 50821 ALJ 360
8 ATD 348
[1947] ALR 589
(Judgment by: Dixon J)
In the Matter of: Richard Foreman
&
Sons Pty Ltd
Between: Uther
And: Federal Commissioner of Taxation
Judges:
Latham CJ
Rich J
Starke J
Dixon JMcTiernan J
Williams J
Subject References:
Constitutional law (Cth)
Judgment date: 2 December 1947
Judgment by:
Dixon J
The question for decision is whether the Commonwealth in a winding up of an insolvent company is entitled to any priority in respect of amounts owing by the company for sales tax and pay-roll tax. (at p527)
The winding up is voluntary and commenced on 31st March 1942. The sales tax became payable in December 1941 and January and February 1942, the pay-roll tax in January and February 1942. The relevant legislation is Part X of the Companies Act 1936 (N.S.W.) and Part VI. of the Sales Tax Assessment (No. 1) Act 1930-1942 and Part V. of the Pay-roll Tax Assessment Act 1941-1942. (at p527)
Section 297(1) and (4) of the Companies Act 1936 provide, in effect, that, after payment of the costs and expenses of the winding up certain preferred debts - employees' wages up to 50 pounds, workers' compensation up to 200 pounds, one year's land tax and income tax, Commonwealth and State, due within twelve months, and three months' rent - shall be paid next, abating, should the fund be insufficient, ratably among themselves. Subject to such provisions, s. 282 directs that the property of the company shall be applied in satisfaction of its liabilities pari passu. (at p527)
The reference to Commonwealth land tax and income tax, which occurs in par. (d) of s. 297(1), makes it clear that the State Act intends to comprehend debts owing to the Crown in right of the Commonwealth within the order of priority it prescribes. There is, therefore, no point in the question whether the express statement, contained in s. 199(3), that the provisions relating to priorities of debts shall bind the Crown refers to the Crown in right of the Commonwealth as well as to the Crown in right of the State of New South Wales. But, in my opinion, the expression "the Crown" in this State provision ought not to be understood as referring to the Crown in right of the Commonwealth. Upon this I shall not repeat what I so recently said in Essendon Corporation v. Criterion Theatres Ltd. (1947) 74 CLR 1 , at p 26. (at p527)
The Federal legislation makes both the sales tax and the pay-roll tax debts due to the King on behalf of the Commonwealth and payable to the Commissioner (Sales Tax Assessment Act (No. 1) 1930-1942, s. 30, and Pay-roll Tax Assessment Act 1941-1942, s. 28(1)). (at p527)
The consequence at common law of giving the taxes this character of Crown debts is to entitle the Commonwealth to priority over other creditors of equal degree. Such a result was described by Lord Watson as "in strict accordance with constitutional law." He spoke with reference to a Canadian decision but, paraphrasing his language so as to apply to Australia, what he said would amount to this - that the property and revenues of the Commonwealth are vested in the Sovereign, subject to the disposal and appropriation of the legislature of the Commonwealth, and that the prerogative of the Crown when it has not been expressly limited by local law or statute is as extensive in the Dominions as in Great Britain (Liquidators of the Maritime Bank of Canada v. Receiver-General of New Brunswick [1892] AC 437 , at p 441 ). (at p528)
Can s. 282 of the Companies Act 1936 of New South Wales operate as a local statute to limit or destroy this priority of the Commonwealth? This is perhaps the chief question in the case and my answer to it is a very definite denial of the constitutional competence of the State to prescribe for the Commonwealth the relative rights of the subjects of the Crown and the Crown in right of the Commonwealth in a competition between them. (at p528)
We are here concerned with nothing but the relation between the Crown in right of the Commonwealth as a creditor for public moneys and the subjects of the Crown as creditors for private moneys. There are no conflicting claims between State and Commonwealth. The conflict is between the Commonwealth and its own subjects. What title can the State have to legislate as to the rights which the Commonwealth shall have as against its own subjects? (at p528)
The fact that the priority claimed by the Commonwealth springs from one of the prerogatives of the Crown is an added reason, a reason perhaps conclusive in itself, for saying that it is a matter lying completely outside State power. But there is the antecedent consideration that to define or regulate the rights or privileges, duties or disabilities, of the Commonwealth in relation to the subjects of the Crown is not a matter for the States. General laws made by a State may affix legal consequences to given descriptions of transaction and the Commonwealth, if it enters into such a transaction, may be bound by the rule laid down. For instance, if the Commonwealth contracts with a company the form of the contract will be governed by s. 348 of the Companies Act. Further, State law is made applicable to matters in which the Commonwealth is a party by s. 79 of the Judiciary Act. But these applications of State law, though they may perhaps be a source of confusion, stand altogether apart from the regulation of the legal situation which the Commonwealth, as a Government, shall occupy with reference to private rights. Take two examples. At common law the King in virtue of his prerogative might effectually assign, or take an assignment of, a legal chose in action, at all events if it were for a debt or thing certain. No law of the State could deprive the Crown in right of the Commonwealth of this special capacity or impose, for instance, the necessity of notice in writing. Again, in the interval before the Claims against the Commonwealth Act 1902 made the Commonwealth liable for tort no State law could have done so.
Indeed it is interesting to notice that the Supreme Court of New South Wales has adopted the view that the substantive law of tort governing the Commonwealth is the State law in force when s. 56 of the Judiciary Act 1903 came into operation, treating the State as incompetent to affect the Commonwealth by any subsequent changes it might make in the law of tort and ascribing to s. 56 and s. 79 of the Judiciary Act no ambulatory operation or effect (Washington v. The Commonwealth (1939) 39 SR (NSW) 133; 56 WN 60 ). In dealing with a claim by the government of the United States to recover for the loss of services of a soldier whom the defendant had negligently run down and injured, that is, a claim in tort, the Supreme Court of the United States held "that the creation or negation of such a liability is not a matter to be determined by State law" (United States v. Standard Oil Co. (1947) 91 Law Ed (adv op) 1507, at p 1510 ). Indeed, the principle has been held to extend to "the rights and duties of the United States on commercial paper which it issues." These rights and duties are governed by Federal and not State law, because in disbursing its funds or paying its debts the United States is exercising a constitutional function or power. "The authority to issue the check had its origin in the Constitution and the statutes of the United States and was in no way dependent on the laws of Pennsylvania or of any other state.... The duties imposed upon the United States and the rights acquired by it as a result of the issuance find their roots in the same federal sources" (Clearfield Trust Co. v. United States (1943) 318 US 363, at p 366 (87 Law Ed 838)). (at p529)
A federal system is necessarily a dual system. In a dual political system you do not expect to find either government legislating for the other. But supremacy, where it exists, belongs to the Commonwealth, not to the States. The affirmative grant of legislative power to the Parliament over the subjects of bankruptcy and insolvency may authorize the enactment of laws excluding or reducing the priority of the Crown in right of the States in bankruptcy and it has been held that the taxation power extends to giving the Commonwealth a right to be paid taxes before the States are paid (South Australia v. The Commonwealth (1942) 65 CLR 373 ). But these are the results of express grants of specific powers, plenary within their ambit, to the Federal legislature, whose laws, if within power, are made paramount. Because of their content or nature, the express powers in question are considered to extend to defining the priority of debts owing to the States or postponing State claims to taxes. The legislative power of the States is in every material respect of an opposite description. It is not paramount but, in case of a conflict with a valid Federal law, subordinate. It is not granted by the Constitution. It is not specific, but consists in the undefined residue of legislative power which remains after full effect is given to the provisions of the Constitution establishing the Commonwealth and arming it with the authority of a central government of enumerated powers. That means, after giving full effect not only to the grants of specific legislative powers but to all other provisions of the Constitution and the necessary consequences which flow from them. (at p530)
It is a fundamental constitutional error to regard the question of the efficacy of s. 282 of the Companies Act 1936 of New South Wales as if it were an exercise of an express grant, contained in the Constitution, to the States of a power to make laws with respect to the specific subject of the winding up of insolvent companies. It is a provision enacted in intended pursuance of a general legislative power to make laws for the peace, welfare, and good government of New South Wales in all cases whatsoever. The content and strength of this power are diminished and controlled by the Commonwealth Constitution. It is of course a fallacy, in considering what a State may or may not do under this undefined residuary power, to reason from some general conception of the subjects which fall within it as if they were granted or reserved to the States as specific heads of power. But no fallacy in constitutional reasoning is so persistent or recurs in so many and such varied applications. In the present case the fallacious process of reasoning could not begin from s. 107 as the error has so commonly done in the past. For it is not a question whether the power of the Parliament of a Colony becoming a State continues as at the establishment of the Commonwealth. The Colony of New South Wales could not be said at the establishment of the Commonwealth to have any power at all with reference to the Commonwealth. Like the goddess of wisdom the Commonwealth uno ictu sprang from the brain of its begetters armed and of full stature. At the same instant the Colonies became States; but whence did the States obtain the power to regulate the legal relations of this new polity with its subjects?
It formed no part of the old colonial power. The Federal constitution does not give it. Surely it is for the peace, order and good government of the Commonwealth, not for the peace, welfare and good government of New South Wales, to say what shall be the relative situation of private rights and of the public rights of the Crown representing the Commonwealth, where they come into conflict. It is a question of the fiscal and governmental rights of the Commonwealth and, as such, is one over which the State has no power. (at p531)
But the priority which the State Act, by s. 282, is supposed to have destroyed and, by s. 297(1)(d) in the case of land and income tax, to have reduced, is a consequence of the King's prerogative. It is an adjunct of the "Executive power of the Commonwealth" that is vested by s. 61 of the Constitution in the Sovereign. The prerogative of the Crown representing the Commonwealth, being as extensive as in Great Britain, is part of the constitutional law of the Commonwealth: cp. Liquidators of the Maritime Bank of Canada v. Receiver-General of New Brunswick [1892] AC 437 at p 441. The rule that when the title of the Crown and the title of a subject concur, that of the Crown is to be preferred, is a general rule of the common law of the Constitution. "It is founded not so much upon any personal advantage to the sovereign as upon motives of public policy, in order to secure an adequate revenue to sustain the public burdens and discharge the public debts" (Per Story J., United States v. State Bank of North Carolina (1832) 31 US 29, at p 35 (8 Law Ed 308 at p 310) ). "From Lord Coke's time to the present day it has never been questioned as a rule of law" (Per Lord Macnaghten, Commissioner of Taxation for New South Wales v. Palmer [1907] AC 179 at p 182 ). "It only means that the interests of the individuals are to be postponed to the interests of the community" [1907] AC 179 at p 182 (at p531)
Such a prerogative right of the Crown is exercisable by the Executive Government of the Commonwealth. It may be relinquished or modified by and with the consent of the Parliament of the Commonwealth. But from its very nature it must be outside the power of a State to detract from it. (at p531)
Here the Commonwealth Parliament has, I think, confirmed the prerogative right to preferential payment. For can it seriously be doubted that a purpose of the express provisions that the taxes should be deemed debts due to the King in right of the Commonwealth (though at the same time made recoverable at the suit of the Commissioner) was to ensure that unpaid taxes owing should stand in the superior position which the law gives to claims by the Crown and should rank accordingly? (at p531)
How far s. 109 of the Constitution may protect from the operation of State laws the consequences which are affixed by law to what Federal legislation enacts is perhaps a question; but I suppose that, if it sufficiently appears that the purpose of the Federal law is to bring about the consequences, a State law which defeats them must be regarded as inconsistent. However, as I am of opinion that the State law cannot affect the prerogative rights of the Crown in right of the Commonwealth and the consequential right of the Federal treasury in an administration of assets to be preferred in respect of the payment of taxes over debts of equal degree due to the subject, it is unnecessary to pursue the question what is the operation of s. 109 with reference to s. 28(1) of the Pay-roll Tax Assessment Act and s. 30 of the Sales Tax Assessment Act (No. 1) by which the taxes are deemed to be debts due to the King. (at p532)
But upon the question whether State law can affect the remedial rights of the Commonwealth for the collection of taxes, there is one matter that has been raised in the United States to which it is perhaps desirable to advert. It is stated in the following passage from the opinion of the Supreme Court in United States v. Synder (1893) 149 US 208, at p 214 (37 Law Ed 705, at p 707). "The provision" (of the Constitution) "exacting uniformity throughout the United States itself imports a system of assessment and collection under the exclusive control of the general government. And both the grant of the power and its limitation are wholly inconsistent with the proposition that the states can by legislation interfere with the assessment of Federal taxes or set up a limitation of time within which they must be collected." The case adopts the view that the Federal tax system is regulated by Federal law and is not controlled by State enactments, but I refer to the passage because it directs attention to the anomaly which must arise if one State may exclude and another may allow the Commonwealth's claim to preferential payment of its taxes in a liquidation, notwithstanding that the Commonwealth itself could not make or authorize a similar discrimination. (at p532)
In my opinion. s. 297(1)(d) of the Companies Act 1936 of New South Wales is void in so far as it relates to Commonwealth land and income taxes and s. 282 cannot and does not operate to exclude the preferential claim of the Commonwealth in respect of sales tax and pay-roll tax or other Crown debts due to the Commonwealth. (at p532)
This opinion disposes of the question raised by the case upon the ground which was argued before us. But I think that it is necessary to refer to a further matter. Both the Sales Tax Assessment Act (No. 1) and the Pay-roll Tax Assessment Act contain special sections laying upon a liquidator a particular duty to make provision for taxes and, although at the Bar it was considered that, by reason of a construction which this Court had placed upon the sections in the first of these Acts and a like section of the Income Tax Assessment Act as they stood in an earlier form, they could not be understood as giving the Commonwealth a further or other right to be preferred in the payment of the taxes due to it, my own examination of the sections in their present form has led me to doubt the correctness of this view. (at p533)
In Federal Commissioner of Taxation v. Official Liquidators of E. O. Farley Ltd. (1940) 63 CLR 278 the Court construed s. 32 of the Sales Tax Assessment Act (No. 1) 1930-1935 and s. 59 of the Income Tax Assessment Act 1922-1934 as doing no more than requiring the liquidator to hold a sufficient part of the fund for the protection of the revenue so that by parting with it the legitimate claims of the Commissioner for Taxes might not be defeated and as establishing no preferential or other right or claim of the Commissioner in or in respect of the fund. The provisions had, however, undergone very substantial changes after the facts of that case had occurred and before the decision. This present case is governed by the revised form of s. 32 of the Sales Tax Assessment Act (No. 1) 1930-1942 and by s. 30 of the Pay-roll Tax Assessment Act 1941-1942 which follows the new form. (at p533)
In the view I take it is unnecessary for me to decide what is the operation of these provisions and I shall do no more than call attention to certain considerations affecting the question. The first is that now the liquidator, to the extent of the value of the assets which he is required to set aside, is liable as trustee to pay the tax. The liability, no doubt, is regulated by s. 69 of the Sales Tax Assessment Act (No. 1) and s. 66 of the Pay-roll Tax Assessment Act. But it is a question whether "trustee" is not used in its ordinary sense to fix upon the liquidator fiduciary liabilities to the Commissioner in respect of the fund he must set apart. In E.O. Farley's Case (1939) 40 SR (NSW) 240; 56 WN 203 both in the Supreme Court and in this Court (1) great importance was attached to the question whether the provisions conferred upon the Commissioner or the Crown any rights in the fund. Indeed Starke J. made this the critical consideration. His Honour said:-
"The solution of the problem presented for our consideration, namely, the overriding priority of the Commonwealth hinges, I think, upon whether the Acts appropriate and charge the moneys set aside with payment of the taxation for which they are set aside or whether they are merely administrative provisions directing the retention of funds to meet taxation before any distribution of assets is made but in no wise affecting substantive rights whether of priority or otherwise" (1940) 63 CLR, at p 296. (at p534)
Jordan C.J. (1939) 40 SR (NSW) at p 251; 56 WN, at p 206 said that he was unable to discover in the former language of the section any sufficient indication of intention to create a charge such as would vest in the Crown rights in rem to the assets or some part of them. He added that, under the form of section that has been substituted, it is provided that the liquidator shall, to the extent of the value of the assets which he is required to set aside be liable as trustee to pay the tax. His Honour continued: "Since, however, a liquidator is not in law a trustee of the assets of the company... it may well be that the word 'trustee' is not here used in any technical sense, and that the change in language is not material in relation to such cases as the present. This question does not, however, arise in the present case" (1939) 56 WN at pp 206, 207. It does, of course, arise in the proceedings now before us and the operation of the provisions depends upon it. These citations appear to me enough to show that the interpretation of s. 32 of the Sales Tax Assessment Act (No. 1) and s. 30 of the Pay-roll Tax Assessment Act cannot be governed by Federal Commissioner of Taxation v. Official Liquidators of E.O. Farley Ltd. (1939) 40 SR (NSW) 240; 56 WN 203; (1940) 63 CLR 278 . Apart from the suggestion by Jordan C.J. of a possible secondary meaning of the word "trustee," the question upon which the operation of the sections now appears to depend is the meaning of the expression, in par. (b) of the sub-section numbered (2A) in s. 32 and (3) in s. 30, "out of the assets available for the payment of the tax." If these words throw you back on the application of assets directed by State law, the provision does not, of course, advance the matter. But, having regard to the express reservation of the deduction of costs, charges and expenses, it may be said that the provision is not concerned with applicability of assets under State law, but simply the existence of an available surplus. (at p534)
However, I am content to rest my judgment on the single ground that it is not competent for the State legislature to destroy or reduce the priority to which the prerogative of the Crown in right of the Commonwealth entitles it. (at p534)
In my opinion the first question in the liquidator's summons should be answered: Yes. (at p534)