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Re Obie Pty. Ltd.

Judges:
Thomas J

Court:
Supreme Court of Queensland

Judgment date: Judgment handed down 20 December 1983.

Thomas J.

This is a liquidator's application under sec. 379(3) of the Companies Act 1981. Directions are sought as to priority between a secured creditor (``A.G.C.'') and the Commissioner of Taxation. Questions arise as to whether the provisional liquidator was a ``trustee'' within the meaning of sec. 221P of the Income Tax Assessment Act; and whether that section obliges the eventual liquidators to cause a certain fund (raised by the provisional liquidator) to be paid to the Commissioner.

The practical object of the exercise is to ascertain who has the prior rights to a credit balance of $76,615.27 held in Account No. 70-0098 at the Westpac Banking Corporation, Queen Street, Brisbane. The claims of A.G.C. and the Commissioner each exceed that amount, A.G.C.'s total claim being slightly over

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$104,000, and the Commissioner's claim being slightly over $86,000.

Although all interested parties were represented during the proceedings I indicated that I had reservations as to the appropriateness of the advice and direction procedure as a means of resolving the present problem, mainly because of the absence of issue estoppel binding the parties (
Re Blackbird Pies (Management) Pty. Ltd. No. 2 (1970) Q.W.N. 14). In the result, the parties have issued a writ and notice of motion whereunder the liquidators are plaintiffs and the other parties are defendants, seeking in effect a declaration that will answer the following question - ``Whether DENIS RONALD O'BRIEN formerly Provisional Liquidator of Obie Pty. Ltd. and now Liquidator of the company and GORDON ERIC LAWSON Liquidator of the company or either of them are liable to pay the balance in Account No. 70/0098 at the Westpac Banking Corporation, 239 Queen Street, Brisbane, to the Deputy Commissioner of Taxation or to A.G.C. Advances Ltd., in priority to all other debts of the Company save the costs of the winding-up of the company and the costs of this Application''. A similar procedure was followed in
Smith & Judge v. D.F.C. of T. and National Bank of Australasia 78 ATC 4561.

The company granted a mortgage debenture to A.G.C. on 6 May 1983, and the same was duly registered. On 4 October 1983 a petition was presented to wind up the company, and on the following day Mr. D.R. O'Brien was appointed provisional liquidator. Prior to that time, the company (a group employer) had deducted group tax from wages and salaries of employees but had failed to remit it to the Commissioner. The amount of unremitted group tax was $86,268.35. Mr. O'Brien received various payments as provisional liquidator and on 12 October opened an account at Westpac, styled Obie Pty. Ltd. (in provisional liquidation). On the following day he deposited cheques totalling $83,319.26. Some payments were made out of that account in the course of Mr. O'Brien's duties as provisional liquidator in the ensuing weeks. On 31 October, the credit stood at $76,615.27. On that day A.G.C. crystallized its floating charge with respect to certain specified assets of the company, including the abovementioned bank account. It gave notice to that effect both to the company and the bank. A.G.C. thereupon demanded that the liquidator pay or effect the transfer of those credits to it.

On 3 November a winding up order was made, and Mr. O'Brien and Mr. G.E. Lawson were appointed liquidators. The moneys in the account opened by the provisional liquidator remain in that account, operable only upon Mr. O'Brien's signature. Neither he nor Mr. Lawson intend to do anything with respect to those moneys until the present matter has been decided.

Section 221P(1) of the Income Tax Assessment Act (where relevant) provides:

``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,... 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.''

1. The position of the provisional liquidator.

The first question that arises is whether the provisional liquidator was a ``trustee'' for the purposes of that section. If he was, Mr. O'Brien was obliged to pay the credits he received prior to the fixation of A.G.C.'s charge.

In
Re Carapark Industries Pty. Ltd. (1967) 14 A.T.D. 492; (1967) 86 W.N. (Pt. 1) N.S.W. 165, Street J. held that sec. 221P has no application to a provisional liquidator. However, the authority which this decision would otherwise bear is diminished by the disapproval of Barwick C.J., Mason and Jacobs JJ. of some of the reasoning upon which that decision was based (
F.C. of T. v. Barnes 75 ATC 4262 at p. 4266; (1975) 133 C.L.R. 483 at p. 492). Their Honours said:

``In so far as Re Carapark Industries Pty. Ltd. [1967] 1 N.S.W.R. 337, decided that the test of control was authority to make payments out, we do not think that it was correctly decided.''

At the same time it may be noted that no dissent was expressed from his Honour's actual conclusion that a provisional liquidator is not a trustee under the section. However, I think that I must approach this question on the footing that there is no clear authority on the point.

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``Trustee'' is defined (unless the contrary intention appears) as follows, for the purpose of the Income Tax Assessment Act:

```Trustee' in addition to every person appointed or constituted trustee by act of parties, by order, or declaration of a court, or by operation of law, includes -

  • (a) an executor or administrator, guardian, committee, receiver, or liquidator; and
  • (b) every person having or taking upon himself the administration or control of income affected by any express or implied trust, or acting in any fiduciary capacity, or having the possession, control or management of the income of a person under any legal or other disability.''

It will be noted that a liquidator is expressly included in the definition, but there is no mention of a provisional liquidator as such. ``Liquidator'' is itself defined in sec. 6 as ``the person who, whether or not appointed as liquidator is the person required by law to carry out the winding up of the company''. That definition does not, in my opinion, include a provisional liquidator, whose primary function is to maintain the status quo pending determination of the winding up proceedings. He may be something of a hybrid, but conceptually it would be wrong to speak of him as performing winding up functions. The powers, functions and duties of a provisional liquidator are limited and must be specified in the order appointing him (
Re Mainline Constructions (Qld.) Pty. Limited (1975) Qd.R. 123; r. 51(2) of the Companies Rules 1963, as applied by the Companies Rules Amendment Rules 1982; sec. 372(2) of the Companies Code; McPherson - The Law of Company Liquidation 2nd ed. pp 84-85). The powers and duties prescribed in the present order appointing the provisional liquidator are those commonly found in such an order. It is unnecessary to set them out in full, but it may be noted that they are framed to protect the assets of the company. The principal duties are:

``1. To take possession of and protect the assets of the abovenamed company;

2. To carry on the business of the abovenamed company or any portion of the business of the company or until further ordered but so far only as it may be necessary for the purpose of preserving the business or a portion thereof as a going concern...

3. To receive and collect the debts due to the... company, but only so far as may be necessary for the purpose of preserving the business as a going concern.''

In this respect, namely the preservation of the business as a going concern, the functions of a provisional liquidator are virtually the antithesis of those of the eventual liquidator who must wind up the company.

I am satisfied that provisional liquidators are not encompassed by the definition of liquidator in the Income Tax Assessment Act or by the express reference to ``liquidator'' in the definition of ``trustee''.

It was further submitted that a provisional liquidator is a ``trustee'' according to the general meaning of that word, and that he is a trustee ``by operation of law'' within those words contained in the definition. However, to describe a liquidator as a trustee in the general sense would lead to great confusion. He is certainly the company's agent, and he owes certain fiduciary duties to the company including a duty to be careful, and a duty not to profit or contract personally with the company. But he is not generally a trustee. Indeed, he never obtains title to the company's assets. In a number of important respects he is positively denied the character of a trustee. The matter is discussed in McPherson (supra) at pp. 142 and 188, concluding with the following passage:

``The true position is that, like a director, the liquidator is at most a quasi-trustee: he has some of the rights, duties and liabilities of a trustee, but he is principally and really an agent for the company who occupies a position which is fiduciary in some respects and who is bound by the statutory duties imposed by the Act.''

I do not think that the case for calling a provisional liquidator a trustee is any stronger than that respecting a liquidator.

I therefore conclude that the provisional liquidator was not a ``trustee'' under sec. 221P of the Income Tax Assessment Act.

2. The position of the liquidators

It is now necessary to consider the position of the liquidators, who took office upon the

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making of a winding up order on 31 October. They are expressly defined to be trustees. They are therefore subject to that section provided of course that the company's property ``has become vested in, or... the control of his (the company's) property has passed to'' the trustees (sec. 221P(1)). Of course, no property whatever became vested in the liquidators, because the scheme of liquidation under the Companies Act vests control of property in a liquidator rather than the property itself. I am therefore concerned with the question of what property passed to the control of the liquidators. I do not think that a fund, the subject of a charge which has crystallized, is a fund the control of which passes to the liquidators. If I am correct in this view, then the liquidators do not become liable to pay this account or its realised proceeds to the Commissioner, and the Commissioner's claim must fail.

The property of a company which passes into the custody and control of a liquidator upon a winding up, is commonly referred to as the ``available assets'' of the company. These comprise the items of property (including choses in action) which the liquidator must get in and, in due course, apply as directed by the Companies Act or by any other relevant statute. However, the available assets do not include property which the company holds on trust (
Quistclose Investments Ltd. v. Rolls Razor Ltd. (1970) A.C. 567 at p. 580) or property which has been mortgaged or charged (
Re United Pacific Transport Pty. Ltd. (1968) Qd.R. 517 at p. 521; McPherson - The Law of Company Liquidation (2nd ed.) at p. 279).

The present litigation is directly concerned with the credit balance in the bank account opened by the provisional liquidator. It is not directly concerned with the disposition of other moneys or other assets in the control of the company. Leaving aside the question whether all the company's property has passed to the liquidators (which will be mentioned later), the liquidators became liable, on the plain words of sec. 221P(1), to pay unremitted group tax to the Commissioner. But they are liable to do so only to the extent that the assets of the company permit them to make such a payment. The moneys which the Commissioner asks them to obtain and then pay to the Commissioner are, in truth, the property of a third party, A.G.C. It may be possible that they could obtain some measure of control of the moneys in that bank account which stand in the name of the company (in provisional liquidation) (compare
Re Crest Realty Pty. Ltd. (No. 2) (1977-1978) CLC ¶40-349; (1977) 2 A.C.L.R. 502), but this would not alter their character or make such moneys available assets of the company.

This point was recognized with respect to a chose in action in Re United Pacific Transport Pty. Ltd. (1968) Qd.R. 517. In that case, the company gave the applicant a fixed debenture charge over all its assets. Those assets included a right of action against the third party. Such action was later brought but before it was determined a winding up order was made. The action was then compromised by the provisional liquidator for a sum of $12,000. The Deputy Commissioner of Taxation asserted Crown priority and sought payment of those moneys from the provisional liquidator. The matter came before W.B. Campbell J. who said:

``In my opinion questions of the priority of the Crown do not arise in this case because the assets of the company being subject to a charge are regarded in equity as the property of the applicant and are beyond the reach of the prerogative right of the Crown: in
Re H.J. Webb and Company (Smithfield London) Limited (1922) 2 Ch. 369 per Younger L.J. at p. 404. They are not assets available to the liquidator in the administration and distribution of the estate''

(p. 521).

I do not think that the subsequent expression of the Commissioner's priority in the form of sec. 221P makes any difference to this fundamental point. The charge had crystallized before the liquidators became trustees for the purposes of this section.

The same result follows if regard is had to sec. 221P(2). The priority given to the Commissioner by the section is a priority ``over all other debts''. But there is no true priority contest in the present circumstances between the Commissioner and A.G.C. In so far as A.G.C. has crystallized its charge over this particular banking account, it does not comprise an ``other debt'' of the company. Whilst a debt may still subsist in favour of A.G.C. no question arises of the liquidators paying it or discharging it, let alone their paying it in priority to the Commissioner.

Thus far, the position might seem to be relatively straightforward. A fund subject to a

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charge which has crystallized is not a fund that passes into the control of the liquidators. The chargee can stand outside the liquidation. The liquidators' liability to pay the Commissioner is limited to the scanty assets outside this particular fund, and this particular claim of the Commissioner would fail. But it is unhappily complicated by the provisions of sec. 365(2) of the Companies Code. The winding up is deemed to have commenced on the filing of the petition, which preceded the crystallization of the charge. Apart from cases covered by specific provisions in the Act such as sec. 228, 263, 293, 294 of the 1961 Act, or sec. 368, 401, 451 and 452 of the Uniform Code, difficulty is frequently met in determining whether rights or obligations are to be determined at the date when the winding up order was made or at the date of commencement of the winding up (Compare McPherson (supra) at p. 139.) In
Motor Terms Co. Pty. Ltd. v. Liberty Insurance Ltd. (1967) 116 C.L.R. 177, the earlier date was preferred for purposes of determining whether a creditor's claim was extinguished by the Statute of Limitations. Barwick C.J. (at p. 179) referred to the date of presentation of the petition as ``the date of the commencement of the process of administering the assets of the company with a view to their proper distribution according to the statute amongst the creditors''. His Honour regarded that date as the time ``at which to determine who are the creditors and as at which to adjust their rights''. Taylor J. (at p. 190) referred to English provisions comparable with sec. 365, 367 and 368 of the Companies Code and said: ``These provisions seem to me to make it reasonably clear that the so called statutory trust is to take effect retroactively to the commencement of the winding up and that the rights of the creditors are to be regarded as subject to the rights created by the statute as from the commencement of the winding up''.

It is also well recognised that the earlier date is the one as at which priority contests under sec. 441 to 450 of the Companies Code (previously covered in part by sec. 292 of the 1961 Act) are determined. It is to be noted that such contests are between creditors of the company who are making claims in the liquidation. Similarly, the principle recognised in the Motor Terms Co. case (supra) relates to the adjustment of rights between creditors. In the present case the Commissioner may rightly be recognised as a creditor and claimant, although his claim is not the subject of priority recognition in the Companies Code itself. However, A.G.C. is not a claimant in the liquidation, and is not to my mind a proving creditor for any purpose in the liquidation. It is a secured creditor which can stand outside the liquidation. It is well recognised that a receiver who stands outside the liquidation can act effectively in relation to charged assets even after the liquidation (O'Donovan - ``The Interaction of Winding Up and Receivership'' 53 A.L.J. 264; McPherson (supra) p. 175.)

I can find no authority in relation to the crystallization of a charge occurring independently of the appointment of the receiver. No doubt this is because, in the normal case, a receiver is appointed as the most effective means of realising the particular security. The reason why the receiver was not appointed in the present case may be obvious, in that a receiver is expressly included in the definition of ``Trustee'' in the Income Tax Assessment Act. His receipt of funds (as agent for the company) may have made him liable to account to the Commissioner. At all events it seems to me that a secured creditor can exercise whatever remedies he has outside the liquidation whether by appointment of a receiver or by mere crystallization of a charge with respect to particular assets without appointment of a receiver. I agree with the remarks of Goulding J. in
Sowman v. David Samuel Trust Limited (1978) 1 All E.R. 616 at p. 623, that winding up does not in the least affect a receiver's powers to hold and dispose of the company's property comprised in the debenture, including his power to use the company's name for that purpose, ``for such powers are given by the disposition of the company's property which it made (in equity) by the debenture itself. That disposition is binding on the company and those claiming through it, as well in liquidation as before liquidation.''

I therefore conclude that sec. 365(2) does not alter the prima facie rights of the secured creditor in the present case.

There is a further problem confronting the Commissioner. It is conceded that the ``property'' referred to in sec. 221P(1) means the property of the company as a whole (F.C. of T. v. Barnes 75 ATC 4262 at pp. 4265-4267; (1975) 133 C.L.R. 483 at pp. 490-491 and 493). Mr. Davies Q.C. (for A.G.C.) submitted that the debt represented by the banking account did not pass to the control of the liquidators because the charge had crystallized. In such

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circumstances only an equity of redemption passed into their control. It follows, he submitted, that the company's property as a whole had not passed into the control of the liquidators, and that they were therefore not liable to pay under sec. 221P. In addition to Barnes' case (supra), he cited
Re Wallyn Industries Pty. Ltd. 83 ATC 4109; Smith and Judge v. D.F.C. of T. and National Bank of Australasia 78 ATC 4561; and
Re L.G. Holloway Transport 83 ATC 4164, recognising some difficulties in the path of his submission from Smith and Judge (supra). Counsel for the Commissioner bypassed this problem by submitting that the charge over the whole of the company's assets had necessarily crystallized upon the appointment of the provisional liquidator on 5 October. Consequently he submitted that the purported crystallization of the charge with respect to some only of the company's property (including the relevant bank account) was ineffective. He conceded that before sec. 221P can operate the whole of the property must vest or pass into the control of the liquidator, and that unless the charge had crystallized on 5 October with respect to all the company's property (including that which A.G.C. later purported to convert into a specific charge), the Commissioner could not succeed.

I have considerable difficulties with this submission. In the first place, I am not sure that the concession is appropriate. In the second place, the argument that the crystallization occurred on 5 October is no answer to the main point that the fund is not an asset available to the liquidator. However, I shall consider the submission at face value - as the Commissioner's answer to the submission that not all of the company's property passed to the liquidators. The question then is whether the appointment of the provisional liquidator automatically crystallized the floating charge.

A good deal has been written on the subject of ``automatic crystallization'' of charges (vide Gough; Company Charges 1978 at pp. 96-107; Australian supplement thereto pp. 3-6). Conflicting dicta make the point difficult to resolve although it would seem that if the parties word the debenture appropriately, an automatic crystallization could occur upon a given event. It is less certain whether the given events could be anything less than cessation of business on the part of the company. Gore-Browne on Companies (43rd ed.) concludes:

``Thus there is no clear authority in favour of the concept of automatic crystallization in English law. It would clearly make the floating charge a more effective security from the point of view of the lender, but at the price of undercutting the judicially created rules of priority as between fixed and floating charges.''

Whatever the correct academic solution may be, I can find no warrant in the present mortgage debenture for an automatic crystallization upon provisional liquidation. Reliance was placed upon cl. 7 (which merely demonstrates the breadth of the property to which the charge can relate) and cl. 41 (which sets up a series of constructive defaults and mechanisms for fixation of the charge, but which falls short of effecting any automatic crystallization). Indeed cl. 41 in my view runs counter to the suggestion of automatic consequences, as it requires specific exercise of option by the mortgagee to make the moneys payable and recoverable. Clause 9 provides the machinery for converting the floating charge into a fixed and specific charge through the giving of notice in writing at any time to the mortgagor ``as regards any assets specified in the notice''. Mr. Drummond relied upon the general proposition that a floating charge remains floating only whilst the company is a going concern, citing
Hodson v. Tea Co. (1880) 14 Ch.D. 859;
Wallace v. Universal Automatic Machines Co. (1894) 2 Ch. 547; and
Re Crompton & Co. Limited (1914) 1 Ch. 954. There is also authority that upon a winding up, a charge automatically crystallizes because the chargee's license for the company to deal with the property is subject to the implied condition that the company carries on business (Wallace v. Universal Automatic Machines (supra);
Re Asiatic Electric Co. Pty. Ltd. and Companies Act (1970) 2 N.S.W.R. 612 at p. 613). This appears to be correct in the case of an actual winding up, as the business of the company must cease. But the appointment of a provisional liquidator is an entirely different matter. Such an appointment seeks to secure preservation of the status quo and the express continuation of the company business at least to a limited extent. I am therefore unable to conclude that the appointment of a provisional liquidator produces any crystallization of a charge such as the present one.

The Commissioner's argument on this further ground therefore fails. In the circumstances it is

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not necessary to embark upon the further task of endeavouring to reconcile Re Wallyn Industries Pty. Ltd. 83 ATC 4109; Smith and Judge v. D.F.C. of T. and National Bank of Australasia 78 ATC 4561; and F.C. of T. v. Barnes 75 ATC 4262; (1975) 133 C.L.R. 483, or to examine further the nature and extent of the property the control of which passed to the liquidators on 3 November 1983.

In the circumstances of this particular case, the Commission cannot establish the benefit of the priority which sec. 221P gives. This result follows whichever approach is made to the section. I would add that it is difficult to see how the present case is any different from that of the secured creditor who can look to his security without proving in the liquidation.

I am therefore prepared to direct the liquidators, and the provisional liquidator, in accordance with the above views. I advise direct and declare -

  • (a) that Denis Ronald O'Brien as provisional liquidator of the company has no obligation to pay the balance in the said account to the Deputy Commissioner of Taxation;
  • (b) that Denis Ronald O'Brien and Gordon Eric Lawson as liquidators of the said company have no obligation to pay or cause the said balance to be paid to the said Deputy Commissioner;
  • (c) that the said Denis Ronald O'Brien and Gordon Eric Lawson both as provisional liquidator and liquidators respectively are bound to recognize the title of A.G.C. Advances Ltd. to the said balance in priority to all other debts of the company save the costs of the winding up and the costs of this application and action, and to that end it is proper that they perform such acts as will facilitate the payment of that balance or part thereof to the said A.G.C. Advances Ltd.


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