Waters and Anor. v. Widdows and Anor.

Judges:
Nicholson J

Court:
Supreme Court of Victoria

Judgment date: Judgment handed down 30 September and 18 October 1983.

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Nicholson J.

I have before me a summons issued on behalf of the Receivers and Managers of Quarry and Foundry Engineering Pty. Ltd. (Receivers and Managers appointed) (in liq.) pursuant to sec. 324(4) of the Companies (Victoria) Code seeking directions as to the entitlement of certain creditors to payment out of the proceeds of realisation of certain assets of the company.

The applicant Receivers and Managers were appointed firstly by the Commercial Bank of Australia Ltd. (now Westpac Limited) pursuant

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to the provisions of a Deed of Debenture Charge executed between the bank and the company dated 10 January 1980 (which I shall hereafter refer to as the first deed). That appointment was made on 6 July 1982, and pursuant to it the applicants forthwith entered into possession of the assets and undertaking of the company and proceeded to realise the same. They remain in possession of the company's assets pursuant to that appointment and their receivership is continuing. Subsequent to their appointment by the bank they were also appointed Receivers and Managers of the company pursuant to another Deed of Debenture Charge made between the company and General Credits Limited dated 23 May 1980 (which I shall hereafter refer to as the second deed). This appointment was made on 10 November 1982.

Following the second appointment the company also went into liquidation although the liquidator has to date been unable to exercise any function by reason of the continued receivership.

As at 1 June 1983, the Receivers had realised some $316,245 and had incurred expenses of some $132,463 (which includes their own fees of $46,116). Of the sum so realised, $67,873 represented the proceeds of the sale of plant and equipment, $11,121 represented the sale of stock, $33,890 represented the repayment of a loan made to a company known as Empro Services Pty. Ltd., which loan predated the first deed, and $119,761 represented collections from debtors.

One of the applicants, Mr. Spark, gave evidence to the effect that although the company was owed additional sums amounting to some $98,000, there was little hope of recovery of the same by reason of the insolvency of the debtors in question and he though that the only further sum that was likely to be recovered was $7,058 currently held in the applicants' solicitor's trust account which was held pending the resolution of a dispute with a third party over certain patents.

It appeared from an affidavit sworn by the Deputy Commissioner of Taxation (who was represented before me by Mrs. Moshinsky) that the company was indebted to him in the sum of $90,960 in respect of unpaid group tax and the Deputy Commissioner claims to be entitled to payment of this sum in priority to all other creditors pursuant to the provisions of sec. 221P of the Income Tax Assessment Act 1936.

At the time of the appointment of the Receivers the company was indebted to the bank in the sum of $211,000 which sum the bank claims is secured by the first deed. However, the bank has since received the sum of $170,000 in respect of a sale of certain mortgaged property owned by an associated company which the bank held as additional security for its advances to the company, so that the bank's primary debt has been reduced to some $41,000 together with the cost of the receivership and interest from the date of the Receivers' appointment upon the amount owing to the bank.

The company is indebted to General Credits Ltd. in the sum of $140,000 together with interest dating from the date of the appointment of the Receivers which sums General Credits Ltd. claims are secured by the second deed.

The company is also indebted to former employees in respect of holiday pay entitlements amounting to $47,930.47 and long service leave entitlements amounting to $23,731.12. The interests of the employees were represented before me by the liquidator for whom Mr. Jolson of counsel appeared.

It was claimed on behalf of the employees that they were entitled to priority over all but the Deputy Commissioner of Taxation pursuant to the provisions of the Companies (Victoria) Code, although it was conceded by counsel for the liquidator that the employees were not entitled to payment from the proceeds of realisation of such of the assets of the company that were the subject of a fixed as distinct from a floating charge in favour of the bank. He claimed, however, that their claims took priority over those of General Credits, despite the latter's claim to a fixed charge over all of the assets and undertaking of the company. He said further, on the authority of
Hart & Ors. v. Barnes 83 ATC 4077, that the General Credits Charge should in any event be construed as a floating charge over book debts and stock of the company rather than as a fixed charge despite its terms.

It can be seen that the proceeds of realisation of the company's assets and undertaking are insufficient to pay the Deputy Commissioner of Taxation, the bank and General Credits and the former employees, and the question of priorities between them is thus of considerable importance.

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In order to determine the appropriate order of priority and to give directions as to which portion of the proceeds of the realisation of assets are affected by the respective claims, I turn first to the relevant deeds.

The first deed between the bank and the company purports to create a fixed charge ``on all the undertaking and all the property and assets whatsoever and wheresoever both present and future held by the company as the trustee of the said deed but excluding therefrom all the book debts stock in trade and work in progress of the company''. The latter are subject to a floating charge and the deed provides that ``such floating charge shall not hinder any sale or any dealing by the company in the ordinary course of its business with the property and assets subject thereto but the company shall not be at liberty without the consent of the bank to create any mortgage or charge upon the property and assets comprised in this security to rank either in priority to or in pari passu with the charge hereby created''.

The deed provides for the floating charge to become a fixed charge upon notice in certain events and contains an additional provision that the company will not assign factor charge or otherwise deal with any of the book debts of the company during the currency of the charge. As I have noted it also contains the usual restrictive provision preventing the company from further encumbering the assets and undertaking of the company pursuant to any security ranking in priority to or in pari passu with the charge created without the consent of the bank.

It was conceded by counsel for the applicants that any rights conferred by the second deed were subject to the rights conferred on the bank by the first deed. Although neither the bank nor General Credits were represented before me, I was informed by Mr. Robson, who appeared for the applicants, that their respective solicitors were present in Court. In fact it emerged that the priorities as between the bank and General Credits have been the subject of a written agreement between those parties which was tendered in evidence before me and which was dated 23 May 1980, whereby General Credits conceded priority to the bank to the extent of $230,000 together with interest and the bank's costs and expenses of and the enforcement of the bank's securities. This principal sum was extended by agreement between the parties made on 8 May 1981, to $310,000.

The bank's securities referred to in these agreements were the charge the subject of the first deed and a mortgage over certain real estate owned by an associated company which, as I have mentioned, realised the sum of $170,000.

It is to be noted that the agreement between the bank and General Credits was made on the same day as the second deed and the obvious inference is that General Credits entered into the same with notice of the bank's prior security. In such circumstances the General Credits security obviously ranks in priority after that of the bank save as otherwise varied by agreement between the bank and General Credits: sec
D.F.C. of T. v. Horsburgh and Anor. per Murphy J. (1984) 2 ACLC 73 and the cases cited at ACLC p. 86 of his Honour's judgment.

The second deed purports to create a fixed charge over all of the company's undertaking property and assets including goodwill chattels stock and book debts both present and future and also purports to operate as a conveyance and assignment of the same absolutely subject only to a right of redemption in the company. The deed purports to vest legal title in General Credits in future assets upon the same coming into existence. The deed also purports to create a floating charge in favour of General Credits over all other of the undertaking and property and assets of the company not charged by way of the fixed charge. I regard this as a curious provision having regard to the all embracing nature of the fixed charge and it may well be that it was contemplated that the fixed charge may not necessarily have had this all embracing effect despite its terms and that accordingly the additional clause was added as a matter of caution.

The second deed purports to operate as an assignment of book debts and provides that the company shall act free of charge in the collection of the same and requires the company to pay all moneys collected by it in respect of book debts into a separate trust bank account for General Credits to be nominated by General Credits unless otherwise directed in writing by General Credits.

The evidence of Mr. Spark was to the effect that the company did not, so far as he could determine, open such an account, nor was one nominated nor any direction given by General Credits concerning the matter of book debts. It appears quite clear that what in fact happened

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was that the company continued to trade normally, and I infer that it did so to the knowledge of and with the acquiescence of General Credits. Indeed, it is difficult to imagine how General Credits could have required the company to pay such book debts into a bank account in its name when the same were already subject to the bank's floating charge which General Credits concedes to have had priority. Further, the taking of such a step would have effectively prevented the company from continuing to carry on its business, which, as I hereafter determine, was not the intent of the arrangement between General Credits and the company.

As I understand it, the company continued to trade until the bank acted to appoint the applicants as Receivers and Managers in July 1982. There was no evidence before me as to whether or when any formal notice was given by the bank to the company as required by the terms of its Deed as a precedent to the appointment of its Receivers and Managers, but as no issue was raised as to this matter I assume that such notice was duly given prior to the appointment of the applicants. It follows from this that I treat the bank's charge insofar as it was a floating charge as having crystallised at or about the time of the appointment of the Receiver on 6 July 1982. For some months prior to the appointment of the Receiver the company had failed to account to the Deputy Commissioner of Taxation in respect of group tax, although it had made the relevant deductions from the employees' wages and it is in this way that the Deputy Commissioner of Taxation's claim arises.

It was common ground that the Receivers are still carrying out their functions and are in possession of the company's assets pursuant to the appointment by the bank and that although appointed by General Credits they have not as yet taken possession of any of the undertaking or assets of the company pursuant to that appointment.

The first issue before me relates to the claim by the Deputy Commissioner of Taxation to priority pursuant to sec. 221P of the Income Tax Assessment Act.

That section provides:

``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.''

Subsection (2) provides:

``221P (2) Notwithstanding anything contained in any other Act or State Act, an amount payable to the Commissioner by a trustee in pursuance of this section shall have priority over all other debts, whether preferential, secured or unsecured.''

Subsection (3) is not, I believe, material for present purposes. The Deputy Commissioner claims that control of the company's property for the purposes of the section has passed to the Receivers who are trustees within the meaning of subsec. (1) of sec. 221P and that he is accordingly entitled to priority in relation to payment of the amount owing to him.

The decision of the High Court in
F.C. of T. v. Barnes 75 ATC 4262; (1975) 133 C.L.R. 483 makes it clear that a Receiver of all the company's assets and undertaking is a trustee within the meaning of the section and no argument to the contrary was addressed to me in the present case.

The real issue was as to whether any property of the company had passed into the control of the Receiver within the meaning of the section.

Mr. Robson of counsel for the Receivers contended that the Receivers were only entitled to pay the Deputy Commissioner out of property of the company under his control or vested in him but not out of such property insofar as it was subject to another security and he referred to the passage in the judgment of Gibbs J. (as he then was) at ATC p. 4270; C.L.R. p. 499 of Barnes' case where his Honour said:

``Subsection 2 (of Section 221P) could not possibly be construed so as to enable a trustee who held property subject to a

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mortgage in favour of some person other than the employer to pay the Commissioner out of the interest of that third person...''

Counsel also referred to the passage appearing in the majority judgment of Barwick C.J., and Mason and Jacobs JJ. at ATC p. 4265; C.L.R. p. 491 where their Honours said:

``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.''

Counsel argued that in making these remarks the Court was not limiting itself to prior securities and said that even though the Receivers were empowered to pay the bank out of property of the company under their control in priority to General Credits they were not entitled to pay the Deputy Commissioner out of such moneys.

He also argued that under the second Deed the assets and undertaking of the company were conveyed and assigned to General Credits subject to the bank's fixed and floating charge and that the bank has taken possession of the assets so conveyed and not the property of the company and therefore he said that the section has no application. He said that there were no reported cases where the legal title or an equitable mortgage, which he said had occurred here in relation to future book debts, had been conveyed or granted to a third party and where the Deputy Commissioner had been held entitled to recover pursuant to the section. He accordingly submitted that there could be no obligation upon the Receivers to pay any sum to the Deputy Commissioner in circumstances where the property from which such sum was drawn was not the property of the company.

I think that the key to the present problem lies in the meaning of the words ``his property'' appearing in sec. 221P(1).

In F.C. of T. v. Barnes the majority of the Court said at ATC p. 4265; C.L.R. p. 491:

``In our opinion the property of the company which passed under the control of the defendant upon his appointment by the mortgagee as receiver under the deed was the whole of the assets and undertaking of the company, control of which could pass to him as receiver under the terms of the deed.''

(My own emphasis.)

``It is an important qualification that the `property' is limited to that in respect of which control could pass to the defendant. 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. But it does not follow that because in the case of a security over certain assets only the equitable interest is property within the meaning of the section, therefore in a case where the whole of the property of a company is vested in or passes under the control of a trustee for a secured creditor, the relevant property is likewise no more than the equity of redemption. So to construe the section is self-contradictory. Section 221P deals with cases where the defaulting employer either remains in control of the whole of his property (subject of course to any security given by him over particular assets) and cases where the whole of that property (again subject to the same qualification) has vested in or passed under the control of a trustee. Thus, for example, if a defaulting employer assigns the whole of his property to a trustee as security for all or some of his debts, the property is the whole of his assets subject to any security previously existing over less than the whole. The relevant property is not, and cannot sensibly be regarded, as the interest of the employer remaining after payment of those debts security for payment whereof is the whole purpose of the assignment.''

In my view the reference by the Court to a mortgage or other security must be read as a reference to a mortgage or other security over the assets of the company which either takes priority over or is ranked pari passu with the security pursuant to which the Receiver is appointed. Any mortgage or other security which ranks in priority after that security could not operate to prevent control passing to the Receiver. The Court's reference to a security previously existing tends to support this construction.

Insofar as the applicant Receivers seek to rely upon the passage from the judgment of Gibbs J. (as he then was) where his Honour said that subsec. 2 of sec. 221P could not possibly be construed so as to enable a trustee who held property subject to a mortgage in favour of some

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person other than the employer to pay the Commissioner out of the interest of that person is concerned, I consider that his Honour's remarks should also be interpreted as referring to a mortgage either ranking in priority to or in pari passu with the security under which the Receiver and Manager has been appointed. To hold otherwise would in my view be to defeat the purpose of the section.

This interpretation of the High Court's judgment was adopted by Murphy J. in D.F.C. of T. v. Horsburgh and Anor. (supra) when he said, after quoting portion of the above passage from Barnes' case [at ACLC p. 78]:

``The emphasis in every case must vary, and it is with some trepidation that I suggest that the members of the Court were saying that, in the circumstances posed in Barnes' case, the receivers could only enforce the employer's and the debenture holder's remedies against the separately secured assets subject to the prior rights of the fixed chargee... and that, to the extent of the prior equity, control of the property in those assets did not, for the purposes of sec. 221P(1) of the Act, pass to him on appointment.''

In that case, his Honour was dealing with a similar situation to the present one in that following the grant of a floating charge secured by a debenture a fixed charge over the company's present and future book debts was granted to the same debenture holder. His Honour held that the floating charge had automatically crystallised prior to the grant of a fixed charge and thus took priority over it but also held that even if it had not done so the fact that the fixed charge was entered into with notice of the existence of the floating charge would have been sufficient to give the floating charge priority. The situation in the present case is similar in that it was conceded that the floating charge has priority over what is said to be the fixed charge contained in the second Deed.

At pp. 14-15 of his Honour's judgment in Horsburgh's case he said [at ACLC p. 79]:

``In
Commissioner of Taxation v. Card (1963) 109 C.L.R. Menzies J. expressed the view that control was established for the purposes of sec. 221P(1) `so long as it is sufficient to enable the trustee to resort to the property of the defaulting employer for the purpose of meeting the obligations imposed by the section'.''

His Honour continued:

``Barnes' case would seem to decide that the trustee could not resort to separately secured property, encumbered by a prior equity, to the extent that that property was required to satisfy the prior equity.

The employer had only an equity of redemption in the separately secured property, and the receiver could be in no better position.

But if the debenture holder was entitled to priority over the fixed chargee (as well he might be in the present case) it would be an odd piece of reasoning to look at the separately secured asset, and to say that, because the employer had only an equity of redemption in it, control of it did not pass to the receiver. This would take it out of the fund from which the receiver was required by sec. 221P to pay the amount owing to the Commissioner. But the receiver would then be required in accordance with his general duty as to priorities to collect such moneys and to pay such moneys as were realised on the asset in satisfaction of the debenture holder's advance.''

His Honour went on to find that the debenture holder was in fact entitled to priority over the fixed chargee, as I have mentioned, and found that where the debenture holder has priority ``control of the property'' does pass to the Receiver despite the subsequent fixed charge and that the Receiver should appropriate the amount realised from the book debts in part payment of the Deputy Commissioner's claim.

In the present case, the applicants rely upon what I regard as a similar odd piece of reasoning, but with the added refinement that the security granted to General Credits by the second Deed purported to operate as an assignment of the whole of the company's interests in its undertaking and assets both at law and in equity subject only to its equity of redemption.

If this has the effect that the applicants contend, it means that the bank will be entitled to be paid in full as to the balance of its debt and as to the costs and expenses of the Receivership out of moneys which would otherwise have been payable to the Deputy Commissioner in priority to itself. On the face of it this result

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appears to be a startling one and one which runs contrary to common sense. Accordingly I am not prepared to act upon it. In my view, where the section refers to control of the property it means the undertaking and assets of the company over which control can pass to the receiver under the deed. It matters not that the company has subsequently further encumbered or purported to dispose of its interest in the property provided that control of it can pass to the receiver under the deed. I appreciate that this may give a somewhat strained interpretation to the expression ``his property'' appearing in the section, but I think that it is the only practicable meaning that can be attributed to it.

Counsel for the Receivers also sought to argue, albeit somewhat faintly, that on the evidence the company had not made a deduction for the purposes of the relevant division of the Income Tax Assessment Act as required by sec. 221P from the employees' wages but had simply not paid them the full amount of their wages, and he therefore said that the section did not apply. However, it is quite clear on the evidence that the company did purport to make such a deduction and did fail to deal with the amount so deducted in the manner required by the Act, and I therefore have no hesitation in finding that sec. 221P is applicable to the present case. Accordingly I propose to direct that the Receivers should pay the sum owing to the Deputy Commissioner of Taxation in priority to all other claims, including the Receivers' own costs and expenses.

[His Honour then considered the priorities in relation to the claim made by the liquidator on behalf of the former employees of the company for arrears of holiday pay and long service leave entitlements and continued:]

The position of the Deputy Commissioner of Taxation is different in that he is entitled to payment out of all of the assets of the company under the control of the Receivers regardless of whether they are subject to a fixed or floating charge. Counsel for the liquidator submitted that I should direct that the Deputy Commissioner be paid out of the assets subject to the fixed charge. Counsel for the Receivers, on the other hand, submitted that I have no jurisdiction to give such a direction on a summons for directions under sec. 324(4) of the Companies Code or to give any direction as to the apportionment of payments by the receivers against any particular fund. He further asserted that the Receiver was entitled to pay the Deputy Commissioner of Taxation out of that portion of the funds representing the realisation of assets the subject of the floating charge and thus place the bank in a more advantageous position than it would otherwise have been.

The summons in this case seeks orders and directions as to which of Westpac Banking Corporation and/or General Credits, the liquidator and the Deputy Commissioner is entitled to the proceeds of realisation of the assets of the company set out in the two schedules thereto. The first schedule appears to be intended to relate to assets said to be the subject of a fixed charge in favour of both Westpac and General Credits Limited, and the second schedule appears to be intended to relate to the remainder of the assets said to be subject to a floating charge in favour of the same parties.

As emerged during the course of evidence, the assets in fact listed in each schedule do not accurately reflect the true picture, but I do not regard this as relevant for present purposes to the construction of the summons. I think that the summons is couched in sufficiently broad terms to enable the Court to give directions as to the source from which the Receiver is to make payments and I intend to do so. I consider that the summons being expressed in such terms, sec. 324(4) of the Code enables me to give such directions. I also note that the High Court did in fact give similar directions in
Bank of N.S.W. v. F.C. of T. 79 ATC 4687; (1979) 145 C.L.R. 438.

In my view it would be unconscionable for the Receiver to purport to discharge the company's liability solely from the fund representing the proceeds of realisation of the fixed charge or solely from the fund representing the proceeds of realisation of assets subject to the floating charge. Counsel were unable to direct me to any authority which might assist in relation to this question. I therefore deal with it upon the basis of what appears to me to be one of fairness and justice. On this basis I think that the proper solution is that the debt to the Commissioner be discharged pro rata out of both funds in view of the fact that neither fund has any right of priority in relation to the claim by the Deputy Commissioner. The balance of the proceeds of realisation of assets subject to the bank's fixed charge may be applied in accordance with the provisions of the first deed.

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That brings me to the end of this portion of the judgment. There are certain matters that I want to raise with the parties at this stage, and those matters. I think are three in number.

(Discussion ensued.)

I will adjourn the further hearing of the matter sine die, but with the hope that we might be able to deal with it next week, and by that time you will at least have had the benefit of considering my judgment also.

Nicholson J.: After delivering the first portion of my judgment in this matter on 30 September 1983, I heard further argument concerning two additional matters arising out of it and also heard the parties on the question of costs.

[His Honour discussed these additional matters and concluded:]

ORDER

I will pronounce these orders:

1. I order and direct that as between the parties the Receivers and Managers pay, in accordance with the priorities hereinafter set out, the following debts:

• (a) first: the debt due to the Deputy Commissioner of Taxation for unpaid group tax of $90,960.18;
• (b) that such debt be discharged pro rata out of the funds representing the gross proceeds of realisation of the assets subject to the fixed charge and the floating charge in favour of the bank;
• (c) second: the costs and expenses of the receivership, including the costs of this application as ordered below and of the Applicants, and the remuneration of the Receivers and Managers;
• (d) that such costs, expenses and remuneration be discharged on the basis of the allocation set out by the Receivers and Managers in Exhibit ``BB'' tendered herein out of the funds representing the gross proceeds of realisation of the assets subject to the fixed charge and the floating charge in favour of the bank;
• (e) third: out of the net proceeds of the realisation of the assets subject to the fixed charge the debt due to the bank;
• (f) fourth: out of the net proceeds of the realisation of the assets subject to the floating charge the debt due to the preferred creditors.

2. I order and direct that the debt of $33,829.54 paid by Empro Services Pty. Ltd. to the company be subject to the floating charge in favour of the bank.

3. I order that the Applicants pay the taxed costs of the Respondents, including the costs reserved by order of King J. on 24 February 1983.

I certify.