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Deputy Federal Commissioner of Taxation v. A.G.C. (Advances) Limited & Ors.

Judges: Campbell CJ
Sheahan J

McPherson J

Court:
Supreme Court of Queensland (Full Court)

Judgment date: Judgment handed down 10 October 1984.

McPherson J. (Campbell C.J. and Sheahan J. concurring)

This is yet another case involving the interpretation of sec. 221P of the Income Tax Assessment Act 1936 (``the Act''). The material facts are these. On 6 May 1983, Obie Pty. Ltd. (``the company'') executed a mortgage debenture in favour of A.G.C. (Advances) Ltd. (``A.G.C.'') to secure payment of moneys payable or to become payable. By cl. 7 the company charged its undertaking property and assets, therein described as ``the mortgaged premises''. By cl. 8 the charge was declared to be a first charge on the mortgaged premises to operate as a fixed and specific charge as regards assets enumerated in Sch. 7 (which comprised land of any tenure), and as a floating charge as regards all other property and assets. Clause 9 conferred on A.G.C. the power by notice in writing to convert the floating charge into a fixed and specific charge as regards any assets specified in the notice. Other provisions of the mortgage debenture rendered the moneys thereby secured payable to A.G.C. at its option in certain specific events including winding up or presentation of a petition therefor: cl. 41; and enabled A.G.C. to appoint a receiver in the event of those moneys becoming payable: cl. 18.

On 4 October 1983 a winding up petition was presented against the company and on the same day Mr. D.R. O'Brien, who is one of the applicants and a respondent to this appeal, was appointed provisional liquidator of the company until the making of the winding up order. The order making that appointment was in the common form, and it is necessary to set out here only the following specifications of the duties that the provisional liquidator was required to perform. These were:

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

2. To carry on the business of the... company... but so far only as it may be necessary for the purpose of preserving the business... 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;''

There followed a description of the property of which the provisional liquidator was to take possession, which included ``all real and personal estate whatsoever owned by the company''.

Shortly after his appointment Mr. O'Brien, on 13 October 1983, paid into his provisional liquidator's account no. 70-0098 funds totalling $83,319.26 the property of the company.

The company was ordered to be wound up on 3 November 1983, Mr. O'Brien and his partner Mr. Lawson being then appointed liquidators of the company. Mr. Lawson deposes that investigations have revealed that various ``priority'' debts are owing by the company. These include sums due for pay-roll tax and on account of wages and holiday pay, as well as $85,928.40 due to the Commissioner of Taxation on account of unremitted group tax, and $104,432.09 due to A.G.C. as secured creditor. The liquidators continued the account opened by Mr. O'Brien, which by mid-November 1983 was in credit to the extent of $76,292.

By notice dated 31 October 1983 (which was after appointment of the provisional liquidator but before the winding up order was made on 3 November 1983), A.G.C. gave notice pursuant to cl. 9 of the mortgage debenture converting part of its floating charge into a fixed and specific charge as regards certain specified assets. Those assets included three special leases of parcels of Crown lands and a perpetual suburban lease of another parcel of Crown land; all book debts due or to become due; deposits, bank accounts, investment funds ``or any moneys held on any account whatsoever including funds of [the company] held by the

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provisional liquidators for or on behalf of [the company] or its creditors; and plant and equipment, stock in trade, and office furniture, fixtures and fittings''. The effect was to render the charge conferred by cl. 8 of the debenture specific as regards the funds standing to the credit of the provisional liquidator's account no. 70-0098. The assets of the company at the time also included some 10 motor vehicles valued at varying amounts, as well as the goodwill and business name, books of account, and contracts. According to Mr. Lawson, A.G.C. did not fix its charge on these assets, and that view has not been contested before us.

In proceedings commenced by the liquidators [reported at 84 ATC 4067], to which A.G.C. and the Deputy Commissioner of Taxation are parties, Thomas J. on 20 December 1983 declared that Mr. O'Brien as provisional liquidator of the company had no obligation to pay the balance in the liquidator's account no. 70-0098 to the Deputy Commissioner of Taxation; and that Messrs. O'Brien and Lawson as liquidators of the company likewise had no obligation to pay that balance or to cause it to be paid to the Deputy Commissioner; that the liquidators were bound to recognise the title of A.G.C. to the said balance in priority to all other debts of the company; and that it was proper that they perform such acts as would facilitate payment of that balance or part thereof to A.G.C. His Honour directed that the liquidators' costs in the proceedings be costs in the winding up ranking in priority over A.G.C.'s costs, and that of A.G.C.'s costs rank in priority to the costs of the Deputy Commissioner. He also directed that, subject to there being sufficient assets for the purpose, the liquidators pay A.G.C.'s costs of the proceedings and those of the Deputy Commissioner.

In the form in which the matter was argued before us the only question for determination on appeal is whether the provisional liquidator was required by sec. 221P of the Act to pay the balance in the liquidator's account no. 70-0098 to the Deputy Commissioner for Taxation.

Section 221P is as follows:

``221P(1) Where an employer makes a deduction for the purposes of this Division, for the purposes of the corresponding provisions of a State income tax law or for the purposes of section 78 of the Income Tax (Arrangements with the States) Act 1978, or purporting to be for those purposes, 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 law of the Commonwealth, or in any law of a State or of the Northern Territory -

  • (a) an amount payable to the Commissioner by a trustee in pursuance of this section has priority over all other debts (other than amounts payable under sub-section 221YHJ(3)), whether preferential, secured or unsecured; and
  • (b) where an amount is payable by a trustee to the Commissioner under sub-section 221YHJ(3), an amount payable by the trustee in pursuance of this section ranks equally with the amount payable under sub-section 221YHJ(3) in priority to all other debts, whether preferential, secured or unsecured.

(3) Where a trustee, being the trustee of the estate of a bankrupt or the liquidator of a company that is being wound up, is liable to pay an amount to the Commissioner in pursuance of this section, sub-section (2) does not operate so as to make that amount payable in priority to any costs, charges or expenses of the administration of the estate or of the winding-up of the company (including costs of a creditor or other person upon whose petition the sequestration order or the winding-up order, if any, was made and remuneration of the trustee) that are lawfully payable out of the assets of the estate or of the company except where, in the case of the winding-up of a company, the Crown in right of a State or any other creditor is entitled to payment of a debt by the liquidator in priority to all or any of those costs, charges and expenses and has not waived that priority.''

The section was the subject of extensive consideration by the High Court in
F.C. of T. v. Barnes 75 ATC 4262; (1975) 133 C.L.R. 483.

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From the joint judgment of Barwick C.J., Mason, Jacobs JJ. in that case, it emerges that the fundamental conception underlying sec. 221P is that, the group tax deductions having been made by the employer but not accounted for to the Commissioner, they are regarded as having remained under the control of the employer as an identifiable fund; or, if not identifiable as a fund, they are represented in the form of other property ``which the employer would have had to realise in order to pay over the deductions to the Commissioner of Taxation or would not have been able to purchase if he had paid the deductions over'': F.C. of T. v. Barnes at ATC p. 4267; C.L.R. p. 494. The same passage in the joint judgment shows, however, that liability under sec. 221P is not dependent upon ability to trace or follow the relevant deductions. Liability for the amount payable under the section gives rise to a debt due to the Commonwealth recoverable in a Court of competent jurisdiction: see sec. 221R(1). The liability is therefore personal but it is a representative liability; that is to say, the trustee is liable only to the extent of the property that passes into his control: see F.C. of T. v. Barnes at ATC p. 4269; C.L.R. p. 497, per Gibbs J. citing
F.C. of T. v. Card (1963) 109 C.L.R. 177 at pp. 194-195, 197.

The section therefore operates to impose liability only where and to the extent that ``property'' passes into the control of a person who answers the description of ``trustee'' within the meaning of the Act. The expression used in sec. 221P is ``his property''. That has led to two further conclusions about the meaning and effect of the section. The first is that it is only where all of the property of the employer passes into control of the trustee that the section can operate: see F.C. of T. v. Barnes at ATC pp. 4265-4266; C.L.R. pp. 491-492; cf. per Gibbs J. at ATC p. 4269; C.L.R. p. 499 of that report;
D.F.C. of T. v. A.G.C. (Advances) Ltd. 84 ATC 4177 at p. 4179, per Mahoney J.A. The second is that it excludes particular items of property that are separately mortgaged or charged: F.C. of T. v. Barnes (supra) at ATC p. 4265; C.L.R. p. 491:

``If independently of this security 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.''

See also
Re Wallyn Industries Pty. Ltd. 83 ATC 4109; affirmed sub. nom. D.F.C. of T. v. A.G.C. (Advances) Ltd. (supra).

The scope of the exclusion in favour of a distinct item of property separately mortgaged or charged has given rise to some difficulty and possible conflict of authorities in decisions subsequent to F.C. of T. v. Barnes (supra). It is clear from the decision in that case itself that all the property of the company may be said to pass into the control of a receiver for the holder of a crystallised floating charge over the assets of the employer company notwithstanding that the company itself retains the bare equity of redemption which, in consequence, cannot be said to pass to the control of the receiver as ``trustee'' under the section. That remains so even if there is a subsequent fixed charge over specific assets ranking only after the floating charge, provided at least that the receiver appointed pursuant to the crystallised floating charge takes and exercises control over the specific assets subject to that subsequent fixed charge:
D.F.C. of T. v. Horsburgh & Anor. 83 ATC 4823; (1983) 2 V.R. 591; and that is so whether or not the beneficiary of the later fixed charge is one and the same as, or different from, the beneficiary of the erstwhile floating charge:
Waters v. Widdows 84 ATC 4921; (1984) V.R. 503. In either case the receiver as trustee obtains control of all of the corporate employer's assets.

What is perhaps not yet quite so certain is whether control of all the property can be said to pass in the case where there is a crystallised floating charge but the assets are realised not by a receiver appointed on behalf of the beneficiary of that charge but by the liquidator in the ordinary course of the winding up. In Smith v. D.F.C. of T.
[Re W.T. & N.M. Jones Pty. Ltd. (W.A.)] (1977-1978) CLC ¶40-449, Brinsden J. held that such a case was within the section, and a similar conclusion was reached by Nettlefold J. in
Re L.G. Holloway Transport Pty. Ltd. 83 ATC 4164. In both cases the whole of the assets appear to have been subject to a floating charge, so that in each instance it could be said that all the property, whether secured or unsecured, passed to the control of the trustee, who in each instance was the liquidator or liquidators.

That may be said to distinguish those cases from one where some only of the assets are the subject of a mortgage or charge, whether or not there is in addition a subsequent floating charge over all the assets in favour of some person

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other than the beneficiary of the separate mortgage or charge. The exclusion from the operation of sec. 221P recognised in F.C. of T. v. Barnes (supra) in favour of distinct property the subject of such a mortgage or charge does not mean that a receiver or liquidator, who otherwise controls all the other assets, fails to attain control of all the property of the company simply because the particular assets so mortgaged or charged are not within his control. If that were so the existence of a mortgage over a single asset would preclude the operation of the section. The opposite conclusion seems clearly enough to be required by what was said in the joint judgment in F.C. of T. v. Barnes at ATC p. 4265; C.L.R. p. 491. What it does mean, however, is that in such a case sec. 221P does not extend to authorise the trustee to apply the particular assets specifically mortgaged or charged in satisfaction of the liability under that section unless those assets also pass to the control of a receiver or liquidator who controls all the other assets: F.C. of T. v. Barnes (supra) at ATC p. 4265; C.L.R. p. 491.

The result is that the section does not operate to impose a liability upon a receiver or liquidator unless he acquires control of all the property of the company. The explanation for that requirement must, I think, be to ensure that all creditors bear a rateable proportion of the liability imposed by the section. That object can be accomplished only if all the property of the employer is brought under a single process of administration or ``control''.

Nevertheless, some surprising consequences may follow, or are capable of being contrived. Of these the present case is an illustration. A.G.C. was and is entitled to a charge, whether fixed or originally floating, over all the assets of the company. Had it appointed a receiver to all those assets, the liability under sec. 221P would have fallen to be discharged by the receiver as the trustee having control of all the property of the company: F.C. of T. v. Barnes (supra). Had A.G.C. stood by and allowed all the assets, or at any rate all those that were subject to the erstwhile floating charge, to be realised by the liquidators, then on the authority of Smith v. D.F.C. of T. (supra), the liquidators would have been entitled and bound to resort to those assets in order to discharge the liability imposed on them by sec. 221P. In fact A.G.C. took neither of those courses. It did not appoint a receiver to take control of all the assets, whether specifically charged or not; and it did not in fact cause the floating charge to fix and become specific over all the assets the subject of that charge. Its notice dated 30 October 1984 excluded from the charge as fixed certain specified assets of which the most notable are the vehicles. The others referred to in the notice had, according to the evidence, little or no value at all. The leasehold interests in land are no doubt valuable. They were expressly included by that notice; but that was unnecessary because those interests were in any event among the assets enumerated in Sch. 7 to the mortgage debenture and so were by virtue of cl. 8 the subject of a fixed charge ab initio.

From that point the submissions on behalf of A.G.C. in this case proceed as follows. The liquidators, and a fortiori the provisional liquidator, did not acquire control of all property of the company. Control of some property remained outside their reach. That was so of the leasehold interests in the land, which at all times after the mortgage debenture was executed were the subject of a specific fixed charge. Because control of all property did not pass, the section did not apply at all. Accordingly, the provisional liquidator, even if a trustee, was not under sec. 221P liable to pay the Commissioner by resorting to the money standing to the credit of the liquidator's bank account no. 70-0098.

I am not at all persuaded that the decision in F.C. of T. v. Barnes (supra) requires acceptance of the foregoing submission on behalf of A.G.C. The fact that some distinct item of property is separately mortgaged does not have the result that sec. 221P cannot apply. Otherwise, as I have said, the operation of the section would be precluded by the existence of a single item of specifically mortgaged property. It may mean, however, that the property to which the trustee may resort for the purpose of satisfying sec. 221P excludes in this case the company's interests in land. Whether it also excludes the money in the bank account is another matter.

Whether in this case the provisional liquidator is subjected to liability under sec. 221P depends upon answers to the questions, first, whether, together with other assets, he gained ``control'' of the money in the bank account and, second, whether he is a ``trustee'' within the meaning of that section. I have so far treated the first question as distinct from the second, but they are in my opinion to some extent related. What

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is meant by control in sec. 221P(1) is by no means clear from the section or from the decided cases. In order to enjoy control it is not necessary that a trustee should have an independent authority to make payments out of funds in his possession. That is shown by the specific disapproval on this point of the decision in
Re Carapark Industries Pty. Ltd. (1967) 86 W.M. (Pt. 1) (N.S.W.) 165; (1967) 1 N.S.W.R. 337: see the joint judgment in F.C. of T. v. Barnes at ATC p. 4266; C.L.R. p. 492. What is made clear by the joint judgment in that case is that:

``The control which is referred to is that control which enables the receiver to reduce the assets and undertaking of a company into a fund out of which a particular debt or in some cases all the debts of the company, secured and unsecured, are able to be paid if the fund so far extends.''

See 75 ATC at p. 4266; 133 C.L.R. at p. 492. At the same page of the report the joint judgment proceeds:

``Control is directed to possession and realisation of the company's property...''

Section 221P does, as the judgments in F.C. of T. v. Barnes recognise, invest the trustee with the requisite authority, even if it is otherwise lacking, to make the payment to the Commissioner required by that section. It says nothing, however, about a power to realise assets in order to make that payment. Prima facie, therefore, control of an asset cannot be said to have passed if there is in the trustee no power to realise that asset in order to pay the amount of the liability under sec. 221P.

Realisation of assets, at any rate in the course of an administration, is ordinarily achieved by sale. Receivers appointed by debenture holders almost invariably have such a power, and so have ``control'' of assets they can sell. Liquidators appointed on winding up likewise have that power. Indeed, realisation of the company's assets in winding up is the primary function of a liquidator: cf.
Re Wreck Recovery & Salvage Co. (1880) 15 Ch. D. 353. Not so in the case of a provisional liquidator. His primary function is to ``preserve an existing status quo with the least possible harm to all concerned'': Re Carapark Industries Pty. Ltd. (1966) 86 W.N. (Pt. 1) (N.S.W.) 165 at p. 171, per Street J. Within the limits of the order appointing him, that function of the provisional liquidator is discharged by his collecting and taking care of the assets of the company pending disposal of the proceedings for winding up. Except in unusual circumstances or where he is expressly authorised to do so, it is no part of his function to realise by selling or otherwise disposing of assets of the company.

On that footing, Mr. O'Brien in his capacity of provisional liquidator acquired no ``control'', in the sense in which that word is used in sec. 221P(1), over the assets of the company in the present case. His primary powers were limited to taking possession of and protecting the assets of the company and (but only for the purpose of preserving the business as a going concern) receiving and collecting debts. However, to say that the provisional liquidator had no ``control'' over the money in the bank may seem, in the light of the facts of this case, to be an absurd conclusion. He received the money in question and he paid it into an account which he was required by law to open: see Companies (Queensland) Regulations, reg. 77 to 81. It is true that, except for the purpose of preserving the company's assets or business, a provisional liquidator is not ordinarily permitted to pay debts, which, in any event if incurred prior to liquidation are required to be the subject of proof in winding up and payment only of a dividend if the assets do not further extend. The rules of State law cannot, however, impede the duty of a trustee to comply with the provisions of sec. 221P of the Commonwealth Act. That provision bound him to pay if he had control. He had in a general or legal sense a control of the money even if such control may be said to have come to an end on 30 October 1983 when A.G.C. fixed its floating charge and so rendered it specific over or in respect of the money in the account. Thereafter the right to ultimate control of that fund passed from the provisional liquidator to A.G.C. Apart from sec. 221P, if applicable, for him then to have applied it for any purpose other than one authorised expressly or impliedly by A.G.C. would have involved him in a liability to A.G.C. for breach of trust.

Until 30 October 1983, however, the provisional liquidator certainly had a general control of the money in the bank. If the power to realise is essential to the concept of control under sec. 221P, then he did not have control over other assets of the company in his possession or custody. He could not, except in unusual circumstances, have sold or disposed of

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other assets such as company vehicles. Does it follow then that he did not have control of the property of the company within the meaning of sec. 221P? In my opinion it does. If, as I consider to be the case, the reason for the requirement of sec. 221P that all the property pass to the trustee is to ensure that there be a single process of administration under which all creditors are treated and suffer rateably, then that purpose would or might be defeated if payment under sec. 221P were made from a single asset or fund. It would, in the present case, mean that the liability under that section would be met solely from property in which only one creditor, namely A.G.C., was interested; and to that extent it would operate to exonerate other creditors from bearing their rateable share of the statutory burden.

For that reason I do not think that control in the special sense required by sec. 221P can be said to have passed to the provisional liquidator at any time. But even if this view is wrong, I am satisfied that a provisional liquidator is not a trustee within the meaning of that section. The expression ``trustee'' is defined in sec. 6(1) of the Act to mean:

``... in addition to every person 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;''

Paragraph (a) of the definition expressly includes a ``liquidator''. It is relevant, though not decisive, to know that a provisional liquidator is simply a liquidator who is appointed provisionally: cf. sec. 372(2) of the Companies (Queensland) Code. Accordingly, it may be right to say that the expression ``provisional'' implies a qualification only upon the liquidator's tenure of office:
Re ABC Coupler & Engineering Co. Ltd. (No. 3) (1970) 1 W.L.R. 702, 715;
Re Codisco Pty. Ltd. (1971-1973) CLC ¶40-126;
Newmont Pty. Ltd. v. Laverton Nickel N.L. (1977-1978) CLC ¶40-454. The definition of trustee does not, however, stand alone. Section 6 also defines the word ``liquidator'' to mean:

``... the person who, whether or not appointed as liquidator, is the person required by law to carry out the winding-up of a company.''

That definition obviously embraces a liquidator as such. It is also apt to include the Corporate Affairs Commission acting under sec. 462 of the Code: cf.
Re Producers' Oilwell Supplies Ltd. (1943) V.L.R. 141. It does not however include a provisional liquidator, since he is not a person required by law to carry out the winding up of a company.

Prima facie therefore a provisional liquidator is not a ``trustee'' within the meaning of para. (a) of the definition of that expression in sec. 6(1), and is therefore not bound by sec. 221P. It is true that the definitions of ``trustee'' and ``liquidator'' are introduced by the words in sec. 6(1) ``unless the contrary intention appears''. But I am unable to see any context that suggests that a contrary or other meaning is intended, whether in sec. 221P or in the application to the word ``liquidator'', where it appears in the definition of ``trustee'', of the further definition in sec. 6(1) of the word ``liquidator'' itself. It is true that in sec. 221P(3) there is a reference to ``the liquidator of a company that is being wound up''; but that particular provision does not in my view imply that a provisional liquidator must be intended to be included elsewhere in the section. A company may have a liquidator without necessarily being in the process of being wound up, e.g. where the company is, after winding up has begun, placed under a scheme of arrangement; or where it is in the process of reconstruction under sec. 409 of the Code. The form of expression used in sec. 221P(3) may well have been employed in order to exclude instances of that kind, and, if so, it affords no indication of intention that a provisional liquidator is to be included in sec. 221P.

Finally, it was submitted that, even if not within para. (a) of the definition of ``trustee'' in sec. 6(1) of the Act, a liquidator is certainly within para. (b) of the definition. Of the collocation of individuals referred to in that paragraph, a person ``acting in any fiduciary capacity'' presents the instance most favourable

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to the appellant in this case. Without doubt a liquidator comes under fiduciary duties in certain respects: see
Thomas Franklin & Co. v. Cameron (1935) 36 S.R. (N.S.W.) 286 at p. 296; and a provisional liquidator may be said at times to share that character or condition. However, even if in para. (b) those words are to be regarded as literally including a provisional liquidator, I do not think that the intention is that they should. Having gone to the pains of expressly including ``liquidator'' in para. (a), and then of defining ``liquidator'' elsewhere in sec. 6(1) in such a way as to exclude a provisional liquidator, it would be surprising if the legislature had intended to achieve a different result by means of para. (b) of the definition. If the general definition in para. (b) was intended to embrace provisional liquidators, there would have been no need to include a liquidator in para. (a) of the definition. The definition in para. (b) would have served to include both a provisional liquidator as well as a liquidator as such.

In my view, Mr. O'Brien in his capacity of provisional liquidator was not at any relevant time a ``trustee'' within the meaning of sec. 221P(1) of the Act.

I would dismiss the appeal with costs.


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