RE ALLAN FITZGERALD PTY LTD (IN LIQ)

Judges:
Ryan J

Court:
Supreme Court of Queensland

Judgment date: Judgment handed down 18 December 1992

---

Ryan J

An application has been made by the liquidator of Allan Fitzgerald Pty. Ltd. (In Liquidation) (``the company'') for certain declarations. These involve the construction of

---

ATC 4019

ss. 221P and 221YHJ of the Income Tax Assessment Act 1936 (as amended) (``the Act'').

The declarations sought are:-

• (i) a declaration that upon the true construction of sections 221P and 221YHJ of The Income Tax Assessment Act 1936 (as amended) (``the ITAA'') claims by the Deputy Commissioner of Taxation (``the DCT'') in respect of monies recovered by the applicant in the winding up of the company, pursuant to the provisions of section 368 of The Companies (Queensland) Code (the Code), rank equally with the claims of the other unsecured creditors of the company; alternatively
• (ii) a declaration that upon their true construction sections 221P and 221YHJ of the ITAA do not afford the DCT priority over the other unsecured creditors of the company in respect of monies recovered, pursuant to the provisions of section 368 of the Code, by the applicant in the winding up of the company; and
• (iii) a declaration that upon the true construction of sections 221P and 221YHJ of the ITAA claims by the DCT in respect of monies recovered by the applicant in the winding up of the company, pursuant to the provisions of section 451 of the Code, rank equally with the claims of the other unsecured creditors of the company; alternatively
• (iv) a declaration that upon their true construction sections 221P and 221YHJ of the ITAA do not afford the DCT priority over the other unsecured creditors of the company in respect of monies recovered, pursuant to the provisions of section 451 of the Code, by the applicant in the winding up of the company; and
• (v) a declaration that the costs, charges or expenses referred to in section 221P(3) and 221YHJ(5) of the ITAA are the costs, charges and expenses incurred by the applicant in realising and/or recovering the company's debtors, plant, equipment and other assets, in the winding up of the company.

For the purposes of the application, the parties put before me a statement of agreed facts.

On 13 April 1987 a creditor's application was filed for the winding-up of the company. On 16 June 1987 the applicant was appointed provisional liquidator of the company. On 23 June, 1987, an order was made that the company be wound up and that the applicant in these proceedings be appointed liquidator for the purpose of the winding up.

It is agreed between the parties that the applicant is a trustee within the meaning of that term in s. 6 of the Act. At all material times prior to 23 June 1987, the company was ``an employer'' and ``a group employer'' within the meaning of those terms in s. 221A of the Act and was subject to the liabilities imposed by Division 2 of Part VI of the Act.

In the period from September 1986 to March 1987 inclusive, the company, as an employer and a group employer, deducted from employees' salaries and wages sums totalling $1,508,582.53 (``the group deductions'') but did not, and has not since, paid that sum to the respondent. The provisions of the Act required the company, and the company was obliged to pay the amounts so deducted to the respondent no later than the seventh day of the month next succeeding the month in which the deductions were made.

At all material times prior to 23 June 1987, the company was ``an eligible paying authority'' within the meaning of that term in s. 221YHA of the Act and was subject to the liabilities imposed by Division 3A of Part VI of the Act. In the month of February 1986, and in the period from September 1986 to June 1987 inclusive, the company, as an eligible paying authority, deducted from payments made to sub-contractors sums totalling $178,210.39 (``the prescribed payment deductions'') but did not, and has not since, paid that sum to the respondent. The provisions of the Act required the company, and the company was obliged, to pay the amounts so deducted to the respondent no later than the fourteenth day of the month next succeeding the month in which the deductions were made.

The applicant has collected the company's debts and has sold plant, equipment and other property of the company and, in so doing, has realised the total amount of $794,985.76. The applicant has paid out the sum of $50,821.95 as the costs of collecting the company's debts and selling plant, equipment and other property of

---

ATC 4020

the company, leaving him with a net fund of $744,163.81 (``Fund A'').

The applicant has taken action to recover from the creditors of the company:

• (a) payments made by the company after the commencement of the winding up, which payments are void by operation of s. 368 of the Companies (Queensland) Code (``Section 368 payments'');
• (b) payments made by the company in the period six months prior to the commencement of the winding up, which payments are voidable by operation of s. 451 of the Companies (Queensland) Code (``Section 451 payments'').

As at 30 October 1992 the applicant has recovered:-

• (a) the amount of $1,067,224 as s. 368 payments and a further sum of $133,250 as interest thereon (``Fund B'');
• (b) the amount of $476,921 as s. 451 payments and a further sum of $140,953 as interest thereon (``Fund C'').

The applicant contends that the respondent has priority over other unsecured creditors of the company pursuant to s. 221P and s. 221YHJ of the Act to the extent of Fund A only, subject to the exceptions created by s. 221P(3) and s. 221YHJ(5) in respect of the costs of the applicant in recovering Fund A.

The respondent contends that Funds A, B and C constitute one fund out of which the applicant is obliged to pay to the respondent the unremitted tax instalment deductions and the unremitted progress payments in priority to any preferred secured or unsecured creditors, subject only to the exceptions created by s. 221P(3) and s. 221YHJ(5).

The respondent contends alternatively that Funds A and B constitute one fund out of which the applicant is obliged to pay to the respondent the unremitted tax instalment deductions and the unremitted progress payments in priority to any preferred secured or unsecured creditors, subject only to the exceptions created by s. 221P(3) and s. 221YHJ(5).

In the further alternative, the respondent contends that Funds A and C constitute one fund out of which the applicant is obliged to pay to the respondent the unremitted tax instalment deduction and the unremitted progress payments in priority to any preferred secured or unsecured creditors, subject only to the exceptions created by s. 221P(3) and s. 221YHJ(5).

Section 221P provides:

• (1) Where an employer makes a deduction for the purposes of this Division, or purporting to be for those purposes, 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, 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 s. 221YHJ(3) or 221YHZD(3) of this Act or under Part 5 of the Life Insurance Policy Holders' Protection Services Collection Act (1991)) whether preferential, secured or unsecured.

Section 221YHJ(3) provides:

``Where-

• (a) an amount deducted from a prescribed payment is payable to the Commissioner under this Division by a person; and
• (b) the property of that person has become vested in, or the control of the property of that person has passed to, a trustee,

the trustee is liable to pay the amount to the Commissioner.''

It was submitted for the applicant that while ss. 221P(1) and 221YHJ(3) create a liability in a liquidator to pay, they do not provide any guidance as to the funds from which payment is to be made.

It was said that it is clear that the trustee is not liable to pay from his own funds. That this is so, appears from
FC of T v. Card (1963) 13 ATD 149; (1963) 109 CLR 177. The question in that case, according to the judgment of Owen J. with which Dixon C.J. agreed, was whether s. 221P imposed upon a receiver appointed by a mortgagee holding a security over the whole of an employer-mortgagor's assets a personal

---

ATC 4021

obligation to make good to the Commissioner a debt due to him by the mortgagor arising from the fact that the mortgagor had failed to account for wage tax deductions made from the wages of its employees. His Honour decided the case on the assumption that a receiver is a trustee within the meaning of s. 221P, and held that the ``startling preparation'' for which the Commissioner contended was wrong. Likewise Taylor J. summarily rejected a contention that the section operated to impose an independent liability on the receiver irrespective of whether any assets came under his control.

It was then submitted that statements in FC of T v. Card suggested that the amount is payable out of the property of the company which comes under the control of the liquidator. There are indeed statements to that effect. Taylor J. said (at ATD p. 154; CLR p. 189) that the liability of a trustee was to be measured by the extent of the assets coming under his control during the course of the relevant administration. Menzies J. considered (at ATD p. 158; CLR p. 195) that the obligation which s. 221P imposed upon the receiver was to pay only out of the property of the defaulting employer which passed under the receiver's control or perhaps only to the extent of the value of that property. Owen J. said (at ATD p. 159; CLR p. 197) that the section was not to be construed as imposing any liability upon a trustee to answer for the employer's debt to the Commissioner except out of property belonging to the employer which has vested in him or passed under his control.

In
FC of T v. Barnes 75 ATC 4262; (1975) 133 C.L.R. 483, it was said in the joint judgment of Barwick CJ, Mason and Jacobs JJ [at ATC p. 4265; CLR p. 489-490]:

``It was decided in F.C. of T. v. Card (1963), 109 C.L.R. 177, that a receiver appointed by a mortgagee of the assets of a company pursuant to a floating charge which had crystallised was not liable to pay a debt of a company owing to the Commissioner of Taxation pursuant to sec. 221P except out of property of the company which had vested in him or passed under his control.''

They then observed that in the instant case the claim of the Commissioner was that there had passed under the control of the receiver and manager property of the company out of which the debt could be satisfied, and that he was entitled to payment out of the property. The real question, they said, was whether, in the case of the receiver and manager, control of the property of the company passed to him within the meaning of s. 221P. In relation to that, they said (at ATC p. 4265; CLR 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. It is an important qualification that the `property' is limited to that in respect of which control could pass to the defendant.''

In
DFC of T v. A.G.C. (Advances) Ltd. & Ors. 84 ATC 4177; (1984) 1 NSWLR 29 the decision in Barnes' case was closely analysed in the judgment of Mahoney J.A. He summarised his views as follows (at ATC p. 4182; CLR p. 36):-

``The effect of Barnes' case is, in my opinion, therefore prima facie that, for the section to operate, there must be a vesting or passing of all the employer company's property; that such will take place even though that which vests in or passes to the trustee does not include the beneficial interest of a chargee under a specific charge; and that that to which the trustee may have recourse for payment of the Commissioner's claim is that which vests or passes and does not include the interest of a chargee under such a specific charge.''

I adopt with respect this summary as accurately stating the effect of Barnes' case.

For the purposes of the present application, both parties accepted that control of all of the property of the company had passed to the applicant and that the applicant was a trustee within the meaning of s. 221P and accordingly under a statutory duty to pay to the respondent the unremitted tax instalment deductions. The applicant accepted that it was under that statutory duty in respect of Fund A, but contended that Funds B and C are not available to meet the statutory priority imposed by s. 221P. The respondent on the other hand contended that Funds A, B and C constitute a single fund held by the applicant for the benefit of creditors to be distributed by him in accordance with the statutory scheme imposed by s. 441 of the Companies (Queensland) Code and s. 221P.

---

ATC 4022

The submissions for the respondent may be summarised as follows:

• (a) The effect of the appointment of a liquidator is that control of all the company's property passes to the liquidator, but there is no change in ownership of company property upon a winding up; title to property does not pass but remains vested in the company.

In
Octavo Investments Pty. Ltd. v. Knight & Anor (1979) 144 CLR 360 at p. 371, it was said in the joint judgment of Stephen, Mason, Aitkin and Wilson JJ:

``In the case of the winding up of a company the legal title to all company property, including trust property, remains in the company. The liquidator of a company takes the position of the directors and, in the absence of a court order under s. 233(2) of the Companies Act, acquires no title to company property...''

I consider that this submission must be accepted as correct.

• (b) The liquidator does not become the beneficial owner of the assets of the company but is simply an officer of the company charged with the duty of dealing with the company's assets in accordance with the statutory scheme.

That proposition is taken from the headnote of the report of
United Tool & Die Makers Pty. Ltd. (In liquidation) v. J.V. Marine Motors Pty. Ltd. [1992] 1 VR 266. It is based upon statements in a number of English decisions, including
Ayerst v. C. & K. (Construction) Ltd. (1976) AC 167. In
FC of T v. St. Hubert's Island Pty. Ltd. 78 ATC 4104; (1977-1978) 138 CLR 210, Mason J. and Aitkin J. pointed to an apparent conflict in the view expressed by Lord Diplock in Ayerst v. C. & K. Construction, namely that when a company was wound up, the effect was to divest it of the beneficial ownership of its assets within the meaning of a provision of the Finance Act 1954 (U.K.), since it could not use them for its own benefit, and that expressed by Menzies J. in
Franklin's Selfserve Pty. Ltd. v. FC of T 70 ATC 4079 at pp. 4089-4090; (1970) 125 CLR 52 at pp. 70-71, namely that liquidation did not deprive a company of the beneficial ownership of the shares for the purpose of required continuity of shareholders under s. 80 of the Income Tax Assessment Act. Their Honours did not find it necessary to resolve that apparent conflict in that case and I do not find it necessary to attempt to do so in this case. I accept the proposition I have stated as correct. I consider that while the legal and perhaps also the beneficial ownership of the assets of the company remains in the company, the assets must be held for the purpose of realisation by the liquidator and distribution among the company's creditors in accordance with the statutory provisions.

• (c) Upon liquidation any property control of which passes to the liquidator is subject to a single scheme of administration and all of the property can be described as a fund to be applied by the liquidator in accordance with the priorities imposed by the Code and subject to s. 221P.

This proposition is a transcription of a statement by Mahoney J.A. in DFC of T v. A.G.C. (Advances) Ltd. & Ors. 84 ATC 4177 at p. 4183; (1984) 1 NSWLR 29 at p. 37, with the addition of the concluding words ``and subject to s. 221P''. I accept as correct the statement by Mahoney J.A. and the addition of the concluding words having regard to s. 4 of the Crown Debts (Priority) Act 1981, which provides that nothing in the Companies Act 1981 affects the operation of s. 221P.

• (d) On the proper construction of s. 221P there is no basis to confine liability to property of the company either in a temporal or absolute sense.

Two authorities were relied on for that proposition. One was
Oldfield v. Tilley & Anor [1988] VR 77. In that case, Murphy J. said in relation to s. 221P (at p. 81):

``The section has been interpreted in Card's Case to limit the trustee's liability to pay the Commissioner the sum of the unremitted tax to the amount of the defaulting company's property control of which passes to him. This follows from the conclusion that he is not made personally liable by the section, despite its wording.

But this does not mean, as I construe the section, that the unremitted tax can only be paid out of any moneys which happen, at any particular time being looked at, to be in the hands of the `trustee'. It must, I think, be that if at any time there are or have been moneys or property in the control of the trustee, and those moneys or property are or

---

ATC 4023

were property of the employer company, then they are property from which the `trustee' to the extent of the unremitted sum is liable to pay to the Commissioner the amount due.''

That statement involves a conception of the meaning of ``control'' of property which passes to the liquidator which is challenged on behalf of the liquidator. For reasons set out later in this judgment, I find it unnecessary to comment upon it.

The other case is
Re Neander Constructions Pty. Ltd. 88 ATC 4113; (1988) 6 ACLC 865; (1988) 19 AJR 848, in which McPherson J. rejected a contention that s. 221P was limited to assets owned beneficially by the employer company as being untenable in the light of what was said in FC of T v. Barnes. I have difficulty in seeing how this case supports the respondent's submission which I have set out.

I turn now to consider the submissions in relation to the effect of s. 451 and s. 368.

Section 451(1) provides that a settlement, a conveyance or transfer of property, a charge on property, a payment made, or an obligation incurred, by a company that, if it had been made or incurred by a natural person, would, in the event of his becoming a bankrupt, be void as against the trustee in the bankruptcy, is, in the event of the company being wound up, void as against the liquidator.

It was submitted for the applicant that the moneys received as preferences are not property of the company in the sense of s. 221P(1). Reference was made to passages in the judgment of
N.A. Kratzmann Pty. Ltd. (In Liq) v. Tucker [No 2] (1968) 123 CLR 295 and in
Bibra Lake Holdinqs Pty. Ltd. (in liq) v. Firmadoor Australia Pty. Ltd. (1992) 10 ACLC 726; (1992) ACSR 380. In the latter case, the headnote states accurately that it was decided that the liquidator is a necessary plaintiff in an action to recover money or other property paid by way of undue preferences rendered void, as against the liquidator, by s. 451 of the Companies Code, because the transaction is avoided only against the liquidator, and the proceeds of recovery do not necessarily form part of the general assets of the company.

In the course of his judgment, Rowland J. referred at ACLC p. 729; ASCR p. 383 to N.A. Kratzmann v. Tucker at pp. 299-301, where, as he said, "their Honours gave approval to their understanding of what Bennett J had said in an ex tempore judgment in
In Re Yagerphone Ltd [1935] 1 Ch. 392:

`... that, applying the bankruptcy rules in a winding up,

"... the sum of money, when recovered by the liquidators by virtue of s. 265 of the Companies Act, 1929, and s. 44 of the Bankruptcy Act, 1914, did not become part of the general assets of Yagerphone, Ltd., but was a sum of money received by the liquidators impressed in their hands with a trust for those creditors amongst whom they had to distribute the assets of the company"'."

Ipp J. in the same case referred also to the same passage in N.A. Kratzmann v. Tucker. He added (at ACLC p. 731; ASCR p. 386):-

``It is because of the trust in favour of the creditors with which the liquidator is impressed that `the proceeds of recovery (obtained by virtue of s 451) do not necessarily form part of the general assets of the company...'

Monies paid in circumstances which create an undue preference, and which are recoverable under s 451(1), are monies which are recoverable for the benefit of the creditors and contributories. Such monies cannot be said to have been the property of the company and nor are they owed by the recipients thereof as a debt to the company.''

He concluded by saying:-

``Undue preferences are void as against liquidators, not as against companies. Section 451 confers upon liquidators the sole right to bring proceedings for the recovery of undue preferences.''

If a liquidator is to be liable to pay an amount to the Commissioner pursuant to s. 221P(1) of the Act in respect of the amounts recovered pursuant to s. 451, it must appear that those amounts are ``property'' in the sense of s. 221P(1). The effect of the cases to which I have referred is that such moneys are not the property of the company, and hence it might be supposed that s. 221P(1) is inapplicable to them. But this ignores the consequence of making the dispositions void as against the liquidator. In
Re Farnham (A Lunatic) (1895) 2 Ch. 799, an argument was addressed to the court based on a provision of the Bankruptcy

---

ATC 4024

Act 1883 under which a settlement of property was void if it was made within two years of the bankruptcy. Lindley L.J. said (at p. 808):-

``If the settlement is void as against the trustee, it is void altogether. The section does not mean that the property, the subject of the settlement, vests in the trustee by a title which overrides both that of the donor and the donee. The settlement being void, the property reverts to the donor, and it is as the donor's property that it vests in the trustee and must be distributed correctly.''

That case, and a decision to the same effect in
Sanguinetti v. Stuckey's Banking Co. [1895] 1 Ch. 176, were referred to in N.A. Kratzmann v. Tucker at p. 302. It was there stated that if specific property to which a charge, validly created by a bankrupt prior to his bankruptcy has attached prior to the time of its disposition is subsequently recovered as a preference the trustee's title will be no higher or better than that of the bankrupt to which he has succeeded. The two cases were cited as ``strong authority for the proposition that in such as case the result of the avoidance of the disposition is to revest the property in the trustee subject to the charge which the bankrupt had validly created prior to the bankruptcy''.

In my opinion, the effect of avoidance of preferences by a liquidator is to revest the property in the company, and that property, when recovered, is subject to the same liabilities and encumbrances as originally existed. Control of that property passes as a consequence of liquidation to the liquidator, and it is property in respect to which the liquidator is liable to pay unremitted tax instalment deductions.

Section 368(1) of the Companies Code provides that any disposition of property of the company, other than an exempt disposition, and any transfer of shares or alteration in the status of the members of the company made after the commencement of the winding up by the court is, unless the Court otherwise orders, void.

In
National Acceptance Corporation Pty. Ltd. v. Benson & Ors (1988) 6 ACLC 685; (1988) 12 NSWLR 213 it was said by Kirby P. that the word ``void'' as used in s. 368(1) means at least void for all purposes related or incidental to the administration of the winding up of the company and as between the company and a person dealing with the company. Priestley J.A., with whom Clarke J.A. agreed, said that the word ``void when used in s. 368(1) means at least void for all purposes vested or incidental to the administration of the winding up of the company concerned''. At ACLC p. 698; NSWLR p. 229 he said:-

``In my opinion the legal position that came about when the winding up order was made was that the payment by the company to the plaintiff was thereby avoided, as at the date of payment, with the result that the law requires that it be treated as not having happened...''

If a disposition of the company's property is treated as not having happened, then the property remained throughout the property of the company, and the liquidator would be liable under s. 221P(1) to pay unremitted tax instalment deductions to the Commissioner if control of the property passed to him. It is however submitted on behalf of the applicant that it is irrelevant that the right to obtain control of the property passed to the liquidator; it must appear that he had control in fact of the property.

There are a number of passages in the cases to which I have already referred where the question whether the term ``control'' meant the right to control or actual physical control was left undecided. In
Hanibridge Pty. Ltd. (In Liquidation) v. Toomey & Ors 92 ATC 4109, Bryson J. held that ``control'' within s. 221P means actual or de facto control. The same view was expressed by Marks J. in
Russell & Anor v. AGC (Advances) Ltd & Ors 87 ATC 4392. It is unnecessary for me to consider this issue, since in the statement of agreed facts it is recited that upon the making of the order for the winding up of the company, the control of all of the property of the company passed to the applicant, and the amount recovered by the applicant, including s. 368 and s. 451 payments are stated. Those amounts, in my opinion, are property in the actual control of the liquidator.

In the result, I refuse to make the declarations sought in the summons. I dismiss the application, and order the applicant to pay the respondent's costs of and incidental to the application to be taxed.