DFC of T v CHANT & ORS

Judges: Kirby P

Mahoney JA
Hope AJA

Court:
Supreme Court of New South Wales - Court of Appeal

Judgment date: Judgment handed down 5 September 1991

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Mahoney JA

Where an employer makes deductions of instalments of income tax from the salary or wages of employees pursuant to Div 2 of Pt VI of the Income Tax Assessment Act 1936, he is liable to pay that amount to the Commissioner of Taxation: s 221F. Where the control of ``his property'' is passed to a trustee, within the meaning of that Act, the trustee is liable to pay that amount to the Commissioner: s 221P. Mr Chant was appointed receiver of some but not all of the property of Alfarm (Australia) Limited. The question at issue in this appeal is whether Mr Chant, as such receiver, is liable to the Commissioner under s 221P.

Mr Chant applied to the Supreme Court of New South Wales for declarations as to his liability in this regard. The defendants in this proceedings were the Deputy Commissioner of Taxation and Christopher John Beale, representing employees of the company claiming preferential rights in respect of its assets. On 14 May 1991 Young J held that Mr Chant was not so liable, essentially because the property which had passed to his control comprised some but not all of the property of the company. The Commissioner has appealed to this Court against his Honour's judgment.

The relevant facts are not significantly in dispute. It will be sufficient for present purposes to refer only to such of them as are relevant for the decision of the issue before this Court.

In 1987 the company carried on a business under the name EMT Investments Pty Limited: it subsequently changed its name to Alfarm (Australia) Limited. Its assets included land described as ``factory premises at 202 North Street Albury''. It had other assets of substantial value. On 10 February 1987 the company executed three securities: a first mortgage to the Albury City Council to secure an amount of the order of $80,000: it has been said in argument that the amount owing at the relevant time was $83,007. It executed what is accepted to be a second mortgage, subject to the council's mortgage, to Westpac Banking Corporation to secure amounts then owing or subsequently to become owing by the company to that bank. And it executed a mortgage debenture to that bank by which it charged ``all and singular its undertaking and all of its assets whatsoever and wheresoever both present and future including...'' to secure, inter alia, the same liabilities as were secured by (as I shall describe it) the second mortgage.

It is agreed by counsel that there is no evidence to establish the order in which the three security documents were executed. However, it has been accepted that the mortgage to the council was the first mortgage and that the mortgage to the bank was subject to that mortgage. There is, it is agreed, no evidence to establish whether the mortgage debenture was executed before or after the second mortgage or whether it was intended by the company and the bank that the mortgage debenture should have operation prior to the second mortgage. However, it is accepted that both mortgages were registered under the Real Property Act 1900 and at all relevant times remained registered under that Act.

As far as appears, the company carried on business or was entitled so to do until or about 5 June 1990. On that date, the bank appointed the defendant Mr Chant and a Mr Skinner ``to be the joint and several receiver and manager'' (sic). The deed of appointment recited the mortgage debenture of 10 February 1987 as having ``charged all its undertaking and all its assets whatsoever and wheresoever both present and future including the goodwill of its business and its uncalled and unpaid capital (including premiums) for the time being on its shares (the `Mortgaged Property')...'', that Westpac ``is now entitled to appoint a receiver to the Mortgaged Property'' and that the bank ``intends, pursuant to this Deed, to appoint the Receiver (sic), jointly and severally, as

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receivers to all of the Mortgaged Property (other than the land contained in Certificate of Title Volume 13786 Folio 158 located at Albury, New South Wales (the `Land'))''.

The deed then witnessed:

``1. Westpac, being entitled under the powers conferred by the Debenture, in exercise of such powers and all other powers it has, appoints the Receiver to be the joint and several receiver and manager of all of the Mortgaged Property other than the Land under the Mortgage with all powers conferred by the Debenture on a receiver and manager of the Mortgaged Property other than the Land so appointed or which may under the Debenture be conferred on or exercised by such receiver and manager.''

The argument has proceeded on the basis that the gentlemen in question were not appointed as receivers or managers of the relevant land. Mr Chant is, apparently, now the sole receiver and manager.

In December 1990 the Deputy Commissioner of Taxation claimed income tax of the order of $652,295.97, and claimed entitlement to payment under s 221P of some $514,126.01.

Preferential claims have been made against the company by certain employees. It is not necessary to detail the basis of that claim but the amount of it is of the order of $500,000 or more.

In or about February 1991 an auction sale was held of plant, equipment, office furniture and stock of the company and as at 3 April 1991 the assets of the company under Mr Chant's control were said to be ``a fund of approximately $697,000''. At that date, the land owned by the company had not been sold but the value of it, on a mortgagee sale with vacant possession, was assessed to be $800,000. The evidence discloses that the amount owing to the bank as at 10 February 1987 was $3,408,835. The amount presently owing has been accepted for the purposes of argument as being generally of the order of $3,000,000, more or less. The argument has proceeded upon the basis that, for the purpose of the declarations now sought, it is not necessary that the court quantify precisely the various amounts to which I have referred. It is sufficient to note that if, in the ordinary priorities which would be applicable apart from s 221P, the assets now in the control of Mr Chant were applied first towards the discharge of relevant preferential claims and the claims of Westpac Banking Corporation as the secured creditor of the company, no sum would be available for payment to the Commissioner in respect of the relevant income tax instalments.

The Commissioner's claim is that, by virtue of s 221P, the amount claimed in respect of those instalments is to be paid in priority to all other relevant debts.

Section 221P, as far as is here relevant, provides:

``221P(1) Where an employer makes a deduction for the purposes of this Division... from the salary or wages paid to an employee and refuses or 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.

(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...), whether preferential, secured or unsecured; and
• (b)...

(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,...''

It is not in question in this proceeding but that Mr Chant is, within s 221P, a trustee: he falls literally within the definition of that term in s 6. As I have indicated, the essential issue is whether, by virtue of his appointment (I put aside the position of the other receiver who is not now involved), what has happened in relation to the company's property falls within the phrase ``the control of his property has passed to a trustee''.

The construction of s 221P gives rise to significant difficulty: in
FC of T v Card (1963) 13 ATD 149 at 157; (1963) 109 CLR 177 at 194 ,

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Menzies J described it as ``an incredibly ill drawn section''. However, the construction of the section and the concepts upon which that construction proceeds have been authoritatively established for this Court by the High Court in Card's case and in
FC of T v Barnes 75 ATC 4262 ; (1975) 133 CLR 483 . The understanding of this Court of what was there laid down has been established in
DFC of T v AGC (Advances) Ltd & Ors 84 ATC 4177 ; (1984) 1 NSWLR 29 and in
James v DFC of T (1988) 88 ATC 4812 . I shall not repeat in this judgment all of the observations which the members of the court there made.

In the AGC case, all members of the court concluded that, in s 221P(1), the phrase ``his property'' means ``all of the property of the employer'': see at ATC 4177-4178; NSWLR 30E, per Hutley JA; at ATC 4185; NSWLR 39F, per Priestley JA; and my own opinion at ATC 4179; NSWLR 32B. The phrase ``all of his property'' was used by the members of the court in the sense in which the phrase or its equivalent was used by the members of the High Court in Barnes' case: see, eg, at ATC 4265-4266; CLR 491-493.

The members of the High Court did not mean by what there was said that literally every proprietary right of the taxpayer must pass to the control of the trustee if the section is to operate. For present purposes, three things may be said in this regard.

First, as was pointed out in the joint judgment of Barwick CJ, Mason and Jacobs JJ: at ATC 4265; CLR 491; the court in the Barnes case was concerned with and what was there said was ``limited to that in respect of which control could pass to the'' trustee. In that case and in the Card case, the court considered the position of, as I shall describe them, a company's residual rights under a document which conferred an equitable charge over the whole of the company's assets. In the case of a common law mortgage, a mortgagor would retain, in the proper sense, the rights comprehended by the term ``equity of redemption''. In the case of a charge, the chargor company would retain in respect of the property charged such residual rights as would remain after grant of such a charge. A receiver appointed under a charge over all of the company's assets would take control of the whole of the company's assets except that he would not, of course, take control, at least in the same sense, of such rights as the company would have residual upon that charge. He would not, for example, take control of the company's right to have the charge discharged on satisfaction of it. Accordingly, the argument had been, in both the Card and the Barnes cases, that because of that, the phrase in s 221P(1), ``his property'', could not mean ``all of his property''. Barwick CJ, Mason and Jacobs JJ accepted that such residual rights were, in such a case, to be excluded from what if the section was to operate the term ``his property'' required to be passed to the receiver's control. This does not mean that, whenever a company owns residual rights of this kind consequent upon the grant of an equitable charge or an equity of redemption consequent upon the grant of a charge or a common law mortgage, those residual rights may be put aside. As the present case shows, the company's ``property'' may include residual rights, in the nature of equity of redemption or otherwise, arising under documents other than the document under which the receiver is appointed. And ordinarily where these arise prior to the grant of the charge under which the receiver is appointed, they must pass to the control of the receiver if the section is to operate.

In the present case, upon the registration of two Real Property Act mortgages, charges were created by the statute respectively in favour of the council and the bank: the effect of the registration of such a mortgage is, under that Act, to create a statutory charge: see Real Property Act, s 3, ``mortgage''. Therefore there remained with the company the kinds of residual rights in respect of the land to which I have referred. In the present case, those residual rights were, of course, substantial: the company remained the registered proprietor of the land and, as far as the evidence presently establishes, it remained in possession and control of the land at that time.

Therefore, if it be assumed that the mortgage debenture was executed last, then when the mortgage debenture operated to create a charge over all of the company's assets, the charge created would attach to the residual rights which the company had in respect of the land following the grant and registration of the two mortgages. And therefore, if the receiver were

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given control over all of the assets the subject of the charge, he would take control of, inter alia, those residual rights in respect of the land. The position would therefore differ from that considered in the Card and the Barnes cases.

(I shall not pursue the position obtaining if the mortgage debenture was executed before the second mortgage. In such a case, a similar result would be reached, though for somewhat different reasons.)

This is, I think, of significance for the operation of the section in the present case. The land itself was one of the substantial assets of the company. The utility of the residual rights in respect of it to the company at any particular time and its money value would be affected by, eg, whether the company remained in possession of the land and was able to use it for its own purposes and the money value of the obligations secured upon it by the two charges. But the asset in respect of which the residual rights existed was a substantial asset. It was necessary that that asset pass to the receiver's control if the section was to operate.

Second, at least Gibbs J (as he then was) saw a further qualification to the generality of the phrase ``his property''. His Honour accepted that the section contemplated for its operation ``a general vesting of property in the trustee and that the section is therefore not intended to apply to the case where a mortgage under which a receiver is appointed charges part only of the employer's property'': at 499. But, as his Honour indicated, it was obviously intended that the section should operate where, in the case of an individual, a trustee in bankruptcy was appointed in respect of his estate. However, as his Honour pointed out: at 499; in a bankruptcy ordinarily there are assets, such as personal clothing and the like, the control of which does not pass to the trustee: his Honour referred to ss 5, 58 and 116 of the Bankruptcy Act 1966 and to
Stapleton v FC of T (1955) 93 CLR 603 at 619 . But, as his Honour held, that did not prevent there being, in the sense to which he referred, ``a general vesting of property in the trustee''.

His Honour therefore, I think, concluded that for the section to apply it was not necessary that ``literally every item of property belonging to the employer'' had to pass to the control of the receiver. His Honour accepted that the residual rights of the company under the charge there in question did not pass to the receiver. He saw this as not warranting the rejection of the requirement of a ``general vesting of property'' because, as he said: at ATC 4270; CLR 499:

``... from a practical or commercial point of view it seems to me natural to describe the effect of the deed as being that all of the property of the company passed under the control of the receiver notwithstanding that the company retained an equitable interest in it. The control of all of the company's assets passed to the receiver, although if the amounts secured were paid in full any surplus resulting from the realization would belong to the company. In fact of course the equitable interest of the company was valueless and that is sufficient reason to ignore it.''

What Gibbs J there said was not, at least in terms, discussed by Barwick CJ, Mason and Jacobs JJ. It is not necessary for present purposes to consider whether the thrust of the majority judgment was to the same effect as that of Gibbs J. It is sufficient that it is plain that what the members of the court in Barnes case saw as required for the operation of the section, namely, ``the whole of the property of a defaulting employer'' passing under the control of a trustee: at 494; would accommodate special cases of the kind to which reference has been made.

Third, that which, in the end, is required by the section is, according to its terms, that ``the control of his property has passed to'' the receiver. In the present context, the section looks, not to what is charged by the charge, but what passes under it to the receiver's control. In Card and Barnes and in some at least of the decisions which have been given subsequently to them, the courts have been concerned with cases in which, in the sense to which I have referred, ``all of the property'' of the taxpayer has been the subject of the relevant charge and has been put under the control of a trustee or, if part only of the property was the subject of the charge, all that was charged passed to the receiver's control upon his appointment. What was said was, no doubt, framed in terms appropriate to those situations. But, in the present case, the mortgage charge was, in terms, a charge over all of the company's assets but the receiver was given control of some only of the assets so charged. He was not given

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control of the asset which consisted of the company's residual rights in the land then subject to the two prior mortgages.

I do not think that this difference means that the principles and concepts adopted in Card and Barnes are inapplicable in the present case. As I have said, in the end the question is whether it is ``the control of his property'' which has passed to the trustee. If it has not, then, in my opinion, it does not matter whether that has not passed because the charge given by the security document did not extend to all of the property or because the instrument passing control passed control in respect of some only of the property over which control could under it have been given.

Therefore, in my opinion, the fact that in this case some only of the property owned by the company passed to the receiver's control meant that the section did not operate.

Mrs Moshinsky QC, for the Deputy Commissioner of Taxation, reserved the right to contend that the principles established in the Card and Barnes cases were wrong or should be qualified by the High Court. But she accepted that the ``construction of the statutory provisions and the concepts upon which that construction must proceed'' which have been authoritatively established by the High Court in those two cases must be applied in this Court: James v DFC of T at 4817.

Mrs Moshinsky QC then sought to distinguish or qualify those decisions. She submitted that what was said in the majority judgment in Barnes in respect of the residual rights under the charge then in question meant that the residual rights of the company in respect of the land consequent upon the two registered mortgages should, for relevant purposes, be put aside. As I have indicated, I do not think that that submission should be accepted. The residual rights here in question are different from those referred to in the Barnes case. If, for example, there had been in existence only the registered mortgage to the council, it would have been clear that a passing of the company's property other than its residual rights consequent upon that mortgage would not have satisfied s 221P. The fact that the second registered mortgage was a mortgage to the bank does not, in my opinion, alter the position.

Mrs Moshinsky QC then submitted that the residual rights consequent upon those two mortgages could be put aside because they were, in the sense referred to by Gibbs J, worthless. In substance, the second mortgage and the mortgage debenture secured the same indebtedness of the company: no distinction between the two was suggested. The total indebtedness was far in excess of the value of the land. In that sense, the company's residual rights after the execution of the second mortgage and before the execution of the mortgage debenture may conceivably have been of little financial value. But I do not think that the references in the judgments in Barnes to the financial value of the residual rights under the instant charge indicates that their Honours saw the question whether control of all of the property of the taxpayer had passed to a trustee was to be determined by the value for the time being of the right which remained to the taxpayer. When Gibbs J said, in the passage to which I referred, that the residual rights of the company under that charge were ``valueless and that is sufficient reason to ignore it'', he did not, I think, indicate a view contrary to what I have said.

Mrs Moshinsky pointed out also that, if the construction adopted by Young J be correct, then the application of s 221P may be avoided by the simple expedient of appointing a receiver of the great bulk of a taxpayer's assets but omitting an asset or assets sufficient to produce the result that not all of the property is in the receiver's control. That, of course, is an anomalous result of what was said in Barnes. But, as Mr Bainton QC asserted, that has been known to and used by taxpayers since the time of the Barnes decision and, no doubt, has been known to the Commonwealth. No amendment has been made to the section to remove that or any other relevant anomaly.

During argument the question was raised why, in the construction of s 221P, the court in Barnes' case should have adopted the view that ``his property'' meant, in the sense to which I have referred, ``all of his property''. It may be that, with no less anomalies, the section could have been seen as operating, where a trustee was involved, to the extent that property did pass under the control of the trustee and in respect of the property which so passed. Thus, in respect of the property which did pass, the liability to pay to the Commissioner the unpaid

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tax instalments would be placed upon the trustee; to the extent that the property remained with the taxpayer, the obligation would be upon him or it. There is, of course, a distinction between those cases in that the grant of ``priority over all other debts... whether preferential, secured or unsecured'' operates only in respect of an amount payable ``by a trustee in pursuance of the section'': s 221P(2). But, the suggestion was, I think, that there was no sufficient reason to read ``his property'' as meaning ``all of his property'' in this sense.

Mr Bainton QC, whose argument was adopted by Mr Williams QC, submitted that the court in Barnes had adopted the approach it had because the alternative approach might mean that, in effect, the moneys paid to the Commissioner would be paid out of part only of the assets of the taxpayer and that there would result an unjustified discrimination between taxpayers. Reference had been made, in some of the judgments in Card's case, to the view that it was only a ``general administration'' of the property of the taxpayer which appeared to attract the operation of the section: see, eg, per Taylor J at ATD 154-155; CLR 189-190; and this, the argument suggested, derived from such an approach.

I do not think that these matters warrant a different construction being given to the section: at least, I do not think that they warrant this Court adopting an approach different to that to which I have referred. As I have indicated, the section is ill drawn. It may be that, without unacceptable elaboration, a different provision could not be formulated. But the construction adopted in Barnes' case has stood since 1975. Attention has been given to the amendment of the Income Tax Assessment Act on many occasions since that time and, though in respect of matters not now relevant, the legislature has considered the present section. Considerations such as these are of relevance in considering whether qualifications or distinctions of the kind here suggested should be adopted: see, eg,
Melbourne Corporation v Barry (1922) 31 CLR 174 ;
Platz v Osborne (1943) 68 CLR 133 at 146-7 ; see also. I do not think that such distinctions or qualifications as has been suggested by counsel can be adopted by this Court.

In my opinion, therefore, the appeal should be dismissed with costs.

There was discussion at the conclusion of argument of whether the Deputy Commissioner of Taxation should be ordered to pay the costs of Mr Beale in respect of the appeal. It may be that the interests of the employees represented by Mr Beale would, in the circumstances of the present appeal, have been effectively protected by the arguments advanced by Mr Bainton QC for the receiver. It may be that, by a modern adaptation of the old ``two guinea rule'': see Parker's Practice In Equity (NSW), 2nd ed, p 367-8; the necessity of Mr Beale's full representation could have been avoided. But Mr Beale has been a party to the proceeding, at the trial and before this Court. I see no reason why, as far as concerns the costs on appeal, any special order should be made.

In my opinion, therefore, the appeal should be dismissed with costs.