Re Wallyn Industries Pty. Ltd. and the Companies Act 1961.

Judges:
Wootten J

Court:
Supreme Court of New South Wales

Judgment date: Judgment handed down 2 March 1983.

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Wootten J.

In this matter the liquidator of Wallyn Industries Pty. Limited (``the company'') seeks directions arising out of competing claims to the proceeds of the collection of book debts of the company, the claims being those of A.G.C. (Advances) Limited (``A.G.C.'') and the Deputy Commissioner of Taxation.

On 23rd March 1979 the company executed a Deed of Charge in favour of A.G.C. It was given for the purpose of

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securing advances by A.G.C. and charged ``the present and future book debts'' of the company. In cl. 3(ii) the deed declared that the charge should ``operate as a fixed charge'' and that the moneys secured should not only be payable on demand but also at the option of the mortgagee immediately in any of certain events, which events included the lodging of a petition or the making of an order or the passing of a resolution for the winding up of the company. Clause 3(iii) provided that at any time after the moneys became payable the mortgagee might appoint a person to be receiver of the book debts, who should be the agent of the mortgagor and have power to collect and get in the book debts. Clause 3(iv) provided in addition that at any time after an order had been made or a resolution passed for the winding up of the company A.G.C. might appoint in writing a person to be receiver of the book debts, who should be the agent of the mortgagee and have the same powers as the receiver appointed under the preceding subclause. Clause 3(v) provided that, notwithstanding that a receiver might or might not have been appointed, it should be lawful for the mortgagee at any time after the moneys had become payable to exercise the powers of a receiver itself.

Clause 3(vi) went on to provide:

``That provided that the mortgagor shall not commit any breach of any of the covenants on its part herein contained and none of the events mentioned in para. (ii) of this clause shall occur, the mortgagee shall not take any steps for enforcing this security by collecting the book debts or any of them or giving notice of this security to any debtors of the mortgagor or by preventing the mortgagor from collecting the same for its own benefit or by exercising its statutory powers.''

On 26th July 1982 the company was wound up and a liquidator appointed by order of this Court. On 12th August 1982 A.G.C. appointed receivers of the book debts, the instrument of appointment saying that the receivers should be the agent of the mortgagor and not personally liable for the mortgagor's acts.

The liquidator then found himself placed with conflicting claims from, on the one hand, the receivers appointed by A.G.C., who claimed to be entitled to the book debts, and on the other hand, the Deputy Commissioner, claiming payment by the liquidator of outstanding tax instalment deductions made by the company in priority to all other debts secured or unsecured, pursuant to sec. 221P of the Income Tax Assessment Act 1936.

As a result of negotiations between the receivers and the liquidator, in which the receivers offered to refrain from contacting debtors if the liquidator held any book debts collected pending resolution of the dispute, the liquidator announced his intention of seeking directions from the Court and, in the meantime, of holding proceeds of all debt collections from 12th August 1982 in a special interest bearing trust account. All debts collected since 12th August 1982, the date of appointment of the receivers, have been dealt with in this way. A substantial amount is in this account. There are also further debts outstanding.

A.G.C. does not claim any priority in relation to debts collected prior to 12th August 1982, the proceeds of which have not been held in a separate account. The Deputy Commissioner on his part does not dispute the right of the receivers to collect on behalf of A.G.C. any debts which have not been collected by the liquidator. I am therefore concerned only with the disposition of debts received by the liquidator since 12th August 1982.

Subsections 1 and 2 of sec. 221P of the Income Tax Assessment Act 1936 provide as follows:

``(1) Where an employer makes a deduction for the purposes of this Division... from the salary or wages paid to an employee and 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.

(2) Notwithstanding anything contained in any other Act or State Act, an amount

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payable to the Commissioner by a trustee in pursuance of this section shall have priority over all other debts, whether preferential, secured or unsecured.''

By sec. 6 of the Act ``trustee'' is defined to include a liquidator.

In
Smith & Judge v. D.F.C. of T. & National Bank 78 ATC 4561 at p. 4562; (1978) W.A.R. 123 at p. 125, Brinsden J. said of sec. 221P:

``Notwithstanding the rather harsh words said about this section in
F.C. of T. v. Card (1963) 109 C.L.R. 177,
F.C. of T. v. Barnes [75 ATC 4262]; (1975) 133 C.L.R. 483 and
Carapark Industries Pty. Ltd. (In Liquidation) (1967) 1 N.S.W.R. 337, no attempt has been made to amend the provisions so as to make them more intelligible. Perhaps one is naive in expecting Parliament to have acted upon the complaints of the Judges who have examined this section that, in the words of Menzies J. in Card's case it is an `incredibly ill-drawn section'.''

Despite a number of judicial attempts to grapple with the section, its operation still remains in many circumstances either obscure or anomalous and, as Brinsden J. said at ATC p. 4565; W.A.R. p. 129, it clearly calls for amendment.

Notwithstanding the attempt in cl. 3(ii) to label the charge in this case a fixed charge, it was in my view in its nature a floating charge (
Governments Stock and other Securities Investment Co. v. Manila Railway Co. (1897) A.C. 81 at p. 86;
Re Yorkshire Woolcombers' Association Ltd. (1903) 2 Ch. 284;
Illingworth v. Houldsworth (1904) A.C. 355;
Hart & D.F.C. of T. v. Barnes 83 ATC 4077). However, it crystallised as a fixed charge over the book debts on the making of the winding-up order on 26th July 1982 (
Wallace v. Universal Automatic Machines Co. (1894) 2 Ch. 547). Although A.G.C. had, under cl. 3(ii), an ``option'' to convert it to a fixed charge at an earlier date, viz. on the lodging of the petition, there was no evidence that it had exercised that option.

Therefore on 12th August 1982, the first date with which I am concerned, the liquidator was liquidating the assets of the company. Over certain assets only, the book debts and not the other assets, there existed (and had existed at all times since his appointment) a crystallised charge in favour of A.G.C. to the extent of the company's indebtedness to it. The property of the company which passed to the control of the liquidator within the meaning of sec. 221P was subject to this security. The only beneficial interest in the debts which passed to the control of the liquidator was the equity of redemption. The liquidator therefore is not required by sec. 221P, and is not entitled, to use A.G.C.'s beneficial interest in the book debts to pay the Commissioner's claim. This much seems to me to flow from the majority decision of the High Court in
F.C. of T. v. Barnes, especially at ATC pp. 4265-4270; C.L.R. pp. 491-499, nonetheless so because the ``trustee'' in that case was not a liquidator as in this case, but a receiver of the whole of the company's assets. The position may well have been otherwise if the security taken by A.G.C. had been over the whole of the company's assets and not over certain assets only (cf. Smith & Judge v. D.F.C. of T.).

In the present case the Commissioner argued that as the receivers appointed by A.G.C. had not proceeded to collect the book debts but had allowed the liquidator to collect them, they had in fact passed to the control of the liquidator within the meaning of sec. 221P. This seems to me to be inconsistent with the decision in Barnes' case. At ATC pp. 4265-4266; C.L.R. p. 491, Barwick C.J., Mason and Jacobs JJ. said:

``If independently of this security [i.e. the debenture over the whole assets pursuant to which the receiver had been appointed] there had 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.''

In the present case the company had a legal title to the debts which enabled the liquidator to collect them. But having collected them he held them subject to the security over them. The reference to secured debts in subsec. (2) of sec. 221P does not enable the ``trustee'' to pay the Commissioner out of the interest of a mortgagee of certain assets (per Gibbs J. in Barnes' case at ATC p. 4270; C.L.R. p. 499).

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I do not read the remarks of Brinsden J. at ATC p. 4565; W.A.R. p. 128 of Smith & Judge's case as suggesting the contrary. I read that decision as based on the ground that the debenture was over the whole of the assets and not (even as an alternative ground) on the fact that the debenture holder allowed the liquidator to realise the assets. In the last two paragraphs his Honour was suggesting only that the result for the Commissioner may have been different if the debenture holder had exercised some limited remedy.

In any event I think that the true construction of the events of this case is that the liquidator agreed to collect the debts and hold the proceeds as a stakeholder (to use his counsel's term) for whoever was found by the Court to be entitled. This did not cause the beneficial interest in the debts to pass to his control as trustee even in a de facto sense, to any greater extent than flowed as a matter of law from his appointment.

ORDERS

I will note that A.G.C. (Advances) Ltd. (``the chargee'') does not claim to participate as a secured creditor in respect of the proceeds of payment of any book debts of Wallyn Industries Pty. Limited (``the chargor'') received by the liquidator prior to 12th August 1982. I direct that upon the true construction of the deed of charge dated 3rd March 1979 and in the events that have happened the chargee is entitled to participate as a secured creditor in respect of the proceeds of payment of any book debts of the chargor received since 12th August 1982, or hereafter received, in priority to the claim of the Deputy Commissioner of Taxation for unremitted group tax deductions.

It does not appear to me that any further directions or orders are necessary. However, I will reserve liberty to apply.

The question of costs was not argued before me. I am disposed to make no order as to costs. The liquidator will be entitled to his costs as part of the costs of the liquidation. The summons sought directions in respect of book debts received since 26th July 1982, and it was only at the hearing that A.G.C. indicated that it did not make any claims in respect of book debts received prior to 12th August 1982. The result of the hearing has been that the Deputy Commissioner has succeeded by concession in respect of the debts received prior to 12th August 1982 and A.G.C. has succeeded by reason of my decision in respect of debts received after that date. However, I will reserve liberty to apply in case any party should wish to present argument in favour of the making of an order as to costs.