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: Williams 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 J
McTiernan J
Williams J
Subject References:
Constitutional law (Cth)
Judgment date: 2 December 1947
Judgment by:
Williams J
The origin of this matter was an application to the Supreme Court of New South Wales in its Equitable Jurisdiction under s. 286 of the Companies Act 1936 (N.S.W.) by the liquidator of Richard Foreman and Sons Pty. Ltd., which is in voluntary liquidation, for the determination of the questions: (1) Whether the Commissioner of Taxation is 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 ordinary creditors when the liquidator is making a final distribution to creditors. When the application came on for hearing before the Supreme Court, Roper J. was of opinion that it raised an inter-se question within the meaning of s. 40A of the Judiciary Act 1903-1946, and therefore proceeded no further with the cause. Without deciding whether his Honour was right in holding that an inter-se question had arisen, this Court made an order under s. 40 of the same Act removing the cause into this Court on the ground that it involved the interpretation of the Constitution. (at p537)
The relevant provisions of the Sales Tax Assessment Act (No. 1) 1930-1942 are ss. 30 and 32. Section 30(1) provides that the tax shall be deemed when due and payable to be a debt due to the King on behalf of the Commonwealth. Section 32, as amended by s. 5 of the Act No. 29 of 1934, requires the liquidator of a company to give notice to the Commissioner of the winding up, and to set aside such sum out of the assets of the company as appears to the Commissioner to be sufficient to provide for any tax that is then or will thereafter become payable. It also provides that all costs, charges and expenses which, in the opinion of the Commissioner, have been properly incurred by the liquidator in the winding up of the company including the remuneration of the liquidator may be paid out of the assets of the company. Sections 28 and 30 of the Pay-roll Tax Assessment Act 1941-1942 correspond to ss. 30 and 32 of the Sales Tax Assessment Act (No. 1). The debts referred to in the application are therefore debts due to the Crown on behalf of the Commonwealth. (at p537)
The effect of the decision in Federal Commissioner of Taxation v. Official Liquidator of E.O. Farley Ltd. (1940) 63 CLR 278 is that these sections do not operate to give priority in the winding up of a company under State law to debts owing to the Crown in right of the Commonwealth for taxes over debts owing to the Crown in right of a State. Farley's Case (1) related to the winding up of an insolvent company under the Companies Act 1899 (N.S.W.), which did not bind the Crown either expressly or by necessary implication. The present company is being wound up under the provisions of the Companies Act 1936 (N.S.W.), which provides by s. 199 that in a winding up the provisions of Part X. of the Act relating to the remedies against the property of a company, the priorities of debts and the effect of an arrangement with creditors shall bind the Crown. (at p537)
I adhere to the opinion already expressed in Minister of Works (W.A.) v. Gulson (1944) 69 CLR 338 that the Crown, whether in right of the Commonwealth or of a State, is not bound by an Act of the Parliament of the Commonwealth or of a State unless it is expressly mentioned or there is a necessary implication to that effect. Here the Crown is expressly mentioned, and it is a question of construction whether the intention is to bind the Crown only in right of the State of New South Wales or in every other right including the right of the Commonwealth. (at p538)
Section 282 of the Companies Act 1936 provides that, subject to the provisions of this Act as to preferential payments, the property of a company shall, on its winding up, be applied in satisfaction of its liabilities pari passu. The provisions of the Act relating to preferential payments are contained in s. 297(1) of the Act. The costs and expenses of the winding up, including the remuneration of the liquidator, are payable out of the assets of the company in priority to all other claims. Then follow four categories of debts which are to be paid pari passu inter se and in priority to all other debts. Category (d) comprises all land tax and income tax assessed or to be assessed under any New South Wales Act or Commonwealth Act due from the company at the relevant date and having become due or to become due and payable within twelve months next preceding that date or to become due and payable thereafter and not exceeding in the whole one year's assessment. (at p538)
Many companies incorporated under the Companies Act 1936 would normally trade at least throughout Australia, and in many cases in other parts of the British Commonwealth and Empire, and could in the course of such trade incur debts to the Crown in right of the other States of Australia and of other parts of the British Commonwealth and Empire as well as in right of the Commonwealth. In Farley's Case (1940) 63 CLR, at p 286 Latham C.J. cited the authorities and pointed out that "no distinction in respect of the prerogative is drawn in relation to Crown debts owing to the government of the United Kingdom, the government of a dominion, or the government of a colony. All such debts are treated upon the same footing, so that in the case of a deficiency of assets to meet the claims" (of creditors) "all Crown debts are paid pari passu." Unless s. 199 binds the Crown in every right, the whole scheme for the distribution of the assets of an insolvent company under the Companies Act 1936 would be liable to be destroyed. In Food Controller v. Cork [1923] AC 647 , at p 657 the Earl of Birkenhead said in reference to the corresponding English legislation that: "It would have been plainly impossible to adopt this form of legislation if it had been intended that other Crown debts should retain a priority inconsistent alike with the general language of s. 186" (s. 282 in the New South Wales Act)" and with the motive which led to the specification of admitted exceptions contained in s. 209" (s. 297 of the New South Wales Act). (at p539)
In my opinion it is manifest that the Parliament of New South Wales did intend in s. 199 to bind the Crown in every right. In particular the provisions of category (d) in favour of the Commonwealth are quite inconsistent with any other intention than that the Crown should be bound in right of the Commonwealth, so that if the Parliament of New South Wales can bind the prerogative rights of the Crown in right of the Commonwealth the debts for sales tax and pay-roll tax in question are debts which only rank for dividend pari passu with the ordinary unsecured debts. (at p539)
But Mr. Kitto contended (1) that it is beyond the constitutional power of the Parliament of New South Wales to deprive the Crown in right of the Commonwealth of its prerogative to have debts due to the Crown in such right paid in priority to the debts of the ordinary unsecured creditors; (2) that the relevant sections of the Sales Tax Assessment Act (No. 1) and the Pay-roll Tax Assessment Act provide that these debts shall be paid in priority to ordinary unsecured debts except the costs charges and expenses of the winding up including the remuneration of the liquidator to the extent to which the Commissioner is satisfied that they are reasonable, and that there is an inconsistency between these provisions and the provisions of s. 297 (1) within the meaning of s. 109 of the Constitution. (at p539)
In my opinion both these contentions fail. Full effect must be given to the established principle recently applied by this Court in City of Melbourne v. The Commonwealth (1947) 74 CLR 31 that there is a necessary implication arising from the nature of the Federal compact that neither the Commonwealth or the States may exercise their respective constitutional powers for the purpose of affecting the capacity of the other to perform its essential governmental functions. The imposition and collection of taxation falls within this principle. But the application of the principle varies with the circumstances. It is usual for legislation relating to bankruptcy or the winding up of insolvent companies to provide that the Crown shall be bound in the manner provided by s. 199 of the Companies Act. Section 5 (3) of the Commonwealth Bankruptcy Act 1924-1945 makes that Act binding upon the Crown as representing the Commonwealth or any State to a similar extent. Section 84 of that Act only places Crown debts for land tax and income tax assessed under any Commonwealth Act or State Act prior to the date of sequestration and not exceeding in the whole one year's assessment sixth in the order of priority. Debts to the Crown in right of the Commonwealth for income tax and land tax are therefore placed in a higher order of priority under the Companies Act than are the corresponding State debts under the Bankruptcy Act. (at p540)
The right to legislate for the winding up of companies incorporated under the Companies Act 1936 and for that purpose to determine in what order of priority the unsecured debts of an insolvent company shall be paid is clearly within the constitutional powers of the Parliament of New South Wales, and the provisions of s. 297(1) are so much in accord with the usual provisions of an Act of that nature as to be really a law for the peace order and good government of New South Wales with respect to the winding up of insolvent companies incorporated there and not a law which, under colour of such a purpose, is really a law intended to interfere with the essential governmental functions of the Commonwealth.
(2) In South Australia v. The Commonwealth (1942) 65 CLR 373 it was held that the Parliament of the Commonwealth under its power to make laws with respect to taxation can, by aptly framed legislation, give priority to its taxes over those of a State. It would appear therefore that the Parliament of the Commonwealth could provide that debts to the Crown in right of the Commonwealth for taxes should have such priority as the Parliament thought fit to provide over the other debts of an insolvent company which was being wound up under governmental functions of the Commonwealth.
inconsistent with the Commonwealth laws would then be void under s. 109 of the Constitution. But it follows from Farley's Case (1940) 63 CLR 278 that the relevant sections of the Sales Tax Assessment Act (No. 1) and of the Pay-roll Tax Assessment Act do not give any such priority. They are not therefore inconsistent with the provisions of ss. 282 and 297 (1) of the Companies Act. (at p540)
For these reasons I would answer the first question: No; and the second question: Yes. (at p540)