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AUSTRALIAN SECURITIES COMMISSION v MACLEOD & ORS

Judges:
Drummond J

Court:
Federal Court

Judgment date: Judgment delivered 8 February 1994

Drummond J

This application turns on the question of the true construction of s. 221P of the Income Tax Assessment Act 1936 (``the Act''), which applies only to deductions of group tax made by an employer prior to 1 July, 1993.

By notice of motion dated 14 September, 1992, the applicants, who are the receivers of the property of the five respondents, sought orders and directions in relation to their liability pursuant to that section. Although all of the parties to the principal application were served with copies of the notice of motion, the contest was essentially between the applicants and the Deputy Commissioner of Taxation (``the DCT'').

It is necessary to follow the history of the applicants' appointments as receivers. By order of this Court made on 29 June, 1992 the applicants were, on the ex parte application of the Australian Securities Commission (``the ASC''), appointed receivers of the property of

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the five respondents, one natural person and four corporations, pursuant to s. 573 of the Companies (Queensland) Code and s. 1323 of the Corporations Law. This order expressly conferred on the applicants, as receivers, the powers set out in schedule 3 to the application, namely, power:
  • ``(a) to enter into possession and take control of the property of the corporation in respect of which he is appointed; [this comprised the whole of the property in question]
  • (b) to convert property of the corporation into money;
  • (c) to execute any document, bring or defend any proceedings or do any other act or thing in the name of and on behalf of the corporation;
  • (d) to draw, accept, make and endorse a bill of exchange or promissory note;
  • (e) to use a seal of the corporation;
  • (f) to appoint a solicitor, accountant or other professionally qualified person to assist the receiver;
  • (g) to appoint an agent to do any business that the receiver is unable to do, or that it is unreasonable to expect the receiver to do in person;
  • (h) where a debt or liability is owed to the corporation - to prove the debt or liability in a bankruptcy, insolvency or winding up and in connection therewith, to receive dividends and to assent to a proposal for a composition or a scheme of arrangement;
  • (i) to make or defend an application for the winding up of the corporation; and
  • (j) to refer to arbitration any question affecting the corporation''

but subject to deletion of the word ``corporation'' where it appears in the schedule (save in paragraph (e) and (i)) and insertion in lieu the word ``respondents'', to make it clear which of the powers the receivers were to have in relation to all of the respondents and which of those powers they were to have only in relation to the corporate respondents. The schedule appears to be a pro forma list of powers commonly sought by the ASC in cases such as the present.

The Court also then made an order, pursuant to s. 574 of the Companies (Queensland) Code and s. 1324 of the Corporations Law, restraining the respondents from:

  • (a) disposing of, encumbering, taking any steps to dispose of or encumber, or dealing in any manner whatsoever with, any and all property of the respondents;
  • (b) except as was expressly permitted by the order, dealing with funds held in a number of identified bank accounts in the names of the first, second and third respondents.

The matter came back before the Court on 3 July, 1992, when the respondents were represented; the Court vacated the orders I have referred to and, instead, appointed the applicants receivers of the property of the respondents with the powers set forth in schedule 3 of the initial application, as amended, other than the powers in subparagraphs (b), (c), (h), (i) and (j). The order of 3 July thus substituted for the wide powers conferred on the receivers by the first order, which included the power to convert property of each of the respondents into money, significantly narrower powers which did not include this particular power. The same restraints were imposed on the respondents on 3 July, as those imposed by the order of 29 June, save that the first respondent was then given access to a residence, a motor vehicle and his personal effects and clothing.

I was referred to the transcript of the proceedings before the Court on both 29 June and 3 July. On the first occasion nothing was said about the power referred to in the list of powers in schedule 3, which the ASC was seeking to have conferred on the receivers, to convert the property of the respondents into money, apart from a general comment by its counsel to the effect that schedule 3 sets out the usual powers of a receiver (a submission that cannot be accepted as correct, at least in relation to an ex parte appointment). It also appears from comments made by the judge on that occasion that his Honour was alert to the need to confer on the receivers by his ex parte order only such powers as were essential to protect threatened interests. In the discussion that took place in court on 3 July, counsel for the ASC, in consenting to the removal of the receivers' power of realisation, acknowledged that that particular power was sought by inadvertence and without sufficient thought having been given to the lack of justification for its inclusion in the schedule.

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Further orders in the proceeding were made on 21 July, 1992, when it was ordered that the receivers be appointed jointly and severally, and on 23 July, 1992 when the order of 3 July, 1992, which appointed the applicants to be receivers of the respondents' property, was varied by adding the words ``for the purposes of preserving that property''.

The statement of agreed facts prepared by the applicants and the DCT established that:

  • (a) the third respondent was at all material times an employer and group employer within the meaning of those terms in s. 221A of the Act and accordingly was subject to the liabilities imposed by Division 2 of Part VI of that Act; and
  • (b) in the period from November 1991 to June 1992 inclusive, it deducted from its employees' salaries and wages sums totalling $21,021.85, but has not paid any part of that sum to the DCT.

It was common ground that the applicants were ``trustees'' for the purposes of s. 221P. The sole issues for my determination are, firstly, whether the control of the property of the third respondent passed to the applicants as such trustees so as to make them liable under s. 221P to pay the amount of group tax deducted by the third respondent from its employees' salaries and wages to the DCT; secondly, if the decision on this point is adverse to the applicants, whether the Court has power and, if so, whether it should exercise that power to vary the order of 29 June retrospectively by deleting from it the power then conferred on the receivers to convert the property of the respondents into money.

In
FC of T v Barnes 75 ATC 4262; (1975) 133 C.L.R. 483, Barwick CJ, Mason and Jacobs JJ said, at ATC 4265-4266; CLR 491, that s. 221P operates only in cases in which the whole of the defaulting employer's property (save for specific property that is vested beneficially in another under a security) either remains in the employer's control or is vested in or has passed under the control of a trustee. The reason for the requirement that the whole of the employer's property must pass under the control of the trustee before the trustee will be subject to s. 221P is explained in this joint judgment, from which (as was said in
DFC of T v AGC (Advances) Ltd & Ors [Re Obie Pty. Ltd.] 84 ATC 4776 at 4778-4779; [1985] 1 Qd R 464 at 468) it emerges that the fundamental conception underlying s. 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 realize 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'': Barnes at ATC 4267; CLR 494. The same passage in the joint judgment shows, however, that liability under s. 221P is not dependent upon ability to trace or follow the relevant deductions.

A trustee to whom control of all of an employer's property passes (including a receiver appointed under a crystallised floating charge over the entirety of the employer's property) is necessarily in control of that part of the employer's property which represents the value of the unremitted group tax deductions (``the representative property''). A trustee who is in control of part only of an employer's property cannot be certain that he exercises dominion over the representative property: that is why he is not a trustee to whom the section applies. If s. 221P operated to require moneys owing to the Crown by A to be paid out of property to which B was beneficially entitled, it would be beyond the power of the Federal Parliament, since it would not be a law with respect to taxation: Barnes at ATC 4267; CLR 493. The reason why s. 221P, as explained by the joint judgment in Barnes, is constitutionally valid as a law with respect to taxation is that it only operates in a case in which the whole of an employer's property has passed into the control of a trustee, i.e., where the pool of property that has so passed necessarily includes either the unremitted deductions as an identifiable fund or property which the employer could not have accumulated if he had remitted tax in accordance with the requirements of the Act. Thus Barnes, at ATC 4265-4266; CLR 491-492, recognises that s. 221P has no application to specific items of the property of the defaulting employer which are the subject of a fixed security (provided those items do not comprise the whole of the employer's property). If the section purported to give the Commissioner priority over specific items of property of the employer subject to such a

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security, it would be constitutionally invalid as a law permitting or allowing moneys owing to the Crown by the employer to be paid out of property that could not be said with certainty to include the unremitted tax and which belonged beneficially to the secured creditor. As the joint judgment in Barnes recognises, the Commissioner's priority depends upon the trustee's ability to resort to that entire pool of property (which necessarily includes the representative property and which does not include specific items of property separately charged) for the purpose of meeting the statutory liability. Where these conditions are met, the effect of the trustee's payment to the Commissioner of the debt due him will be to reduce the value of that pool of property only to the level it would have been at had the employer remitted the deduction in accordance with his statutory obligation; the creditors continue to have available to them, for the satisfaction of their debts, property of the same value as that to which they would have had resort, had the deducted amounts been remitted as required by the Act. The creditors are therefore not prejudiced by the Commissioner's priority.

In Re Obie Pty. Ltd., supra, McPherson J said at ATC 4782; Qd R 473 that the reason for the requirement of s. 221P that the whole of the employer's property must pass to the trustee ``is to ensure that there be a single process of administration under which all creditors are treated and suffer rateably''. (His Honour must of course mean all creditors other than the Commissioner, who has the statutory priority.) I think that the reason for this requirement of the section is really to ensure its constitutional validity. But given the application of the section, the inevitable result, so far as creditors other than the Commissioner are concerned, is as his Honour said.

The question of critical importance for this case is: what kind of dominion over the whole of the employer's property must the trustee have before he can be said to have control of that property sufficient for the purposes of s. 221P?

Barnes establishes that s. 221P operates only in cases in which the value of the unremitted group tax deductions is represented either by a fund the employer would have had to pay over or by property which the employer would have had to realise in order to meet his liability under the section. This suggests that the trustee must, at the very least, have power to realise, by converting into money, all the property in his hands before he can have control of it sufficient for the purposes of s. 221P. That the trustee must have this general power of realisation if he is to have the kind of control of the employer's property required by s. 221P is confirmed by what was said in Barnes at ATC 4266; CLR 492:

``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...

Control does not necessarily signify authority in the receiver to pay all debts out of the funds in his hands. Control is directed to possession and realisation of the Company's property and, in determining whether control of the property of the Company passed to the receiver, it is not relevant to enquire whether independently of sec. 221P, the receiver has authority to make the payment which sec. 221P requires.''

(emphasis added)

The power to realise the whole of the employer's property is necessary, but not, without more, sufficient to constitute control for the purposes of s. 221P. The words emphasised in the passage from Barnes identify a further requirement which must be satisfied before the trustee will have sufficient dominion over all of the employer's property to amount to such control: as well as having power to realise the whole of the employer's property in his hands, the trustee must also have an authority to deal with the proceeds of such a realisation that permits him to disburse all of those proceeds (if that be necessary) to pay at least one of the debts of the employer. It is authority in the trustee to pay at least one of the employer's debts from the proceeds of realisation of the entirety of the employer's property (if it should in the circumstances of the particular case, be necessary to turn the whole of the employer's property into cash to do that) that turns actual control by the trustee of the entirety of the employer's property, in the sense of power to prevent others dealing with that property, into ``control'' within s. 221P. Provided the trustee has this sort of dominion over the whole of the

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employer's property it does not matter, as this passage in Barnes recognises, that the trustee does not have authority independent of s. 221P to pay the amount of the group tax deductions to the Commissioner: if the trustee otherwise lacks that specific authority, s. 221P itself invests the trustee with it. See also Re Obie Pty. Ltd., supra, at ATC 4782; Qd R 472. The disapproval in Barnes at ATC 4266; CLR 492 of what was said in
Re Carapark Industries Pty. Ltd. (in liq.) (1967) 14 ATD 492; [1967] 1 N.S.W.R. 337 about authority to make payments not being essential before a person could, as trustee, have control sufficient for the purposes of s. 221P(1) is I think a rejection only of the notion that there must be a general power to pay all the employer's debts before there will be control sufficient for s. 221P(1): a power to disburse must be vested in the trustee, but a more limited power of disbursement than a general one will suffice.

In
FC of T v Card (1963) 13 ATD 149; (1963) 109 C.L.R. 177, Menzies J, at ATD 155-156; CLR 191-192, in the course of rejecting an argument accepted below that the control necessary for the purposes of s. 221P was that exercised by a trustee having a power of general administration, said:

``It seems to me that when in 1951 s. 221P was amended to extend its application to include trustees to whom control of the property of what I shall call a defaulting employer passes as well as trustees in whom property of a defaulting employer vests, the section then applied whenever there is a trustee as defined - including a receiver - to whom control of the property of a defaulting employer has passed, whatever, be the nature of that control, 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... Similarly it seems to me that if a receiver of the undertaking and assets of the company appointed by the holder of a charge does obtain such control of the property of a defaulting employer as enables him to dispose of it, there is no reason why the obligations imposed by s. 221P upon trustees should not rest upon him merely because his duties and responsibilities are different from those of a trustee in bankruptcy...

[T]he general enquiry I find myself obliged to make is whether there passes to a receiver appointed by the holder of a charge over the whole of the undertaking and assets of a company any control of the company's property that would enable him to resort to that property for the purpose of meeting the payment which the section, where it applies, requires.''

His Honour was of the opinion that some power in the trustee to resort to the employer's property for the purpose of meeting his liability under the section was an essential ingredient of control for the purposes of s. 221P. Such a position is consistent with the theory underlying the section, as explained in the joint judgment in Barnes. The section can only apply where the unremitted tax exists in the employer's hands as a separately identifiable fund or where the value of the unremitted group tax deductions is represented by property in the hands of the trustee. In the latter situation, there must necessarily be a power in the trustee to resort to that property before he will be able to meet his liability under the section. Mahoney JA (Kirby P and Hope JA agreeing) in the New South Wales Court of Appeal in
James v DFC of T 88 ATC 4812 at 4819 so understood Barnes and Menzies J's decision in Card, saying:

``It is, in accordance with the decisions in Card's case (supra) and Barnes' case (supra) necessary to show that the trustee is to be seen as having the right of recourse to property from which he may pay to the Deputy Commissioner what the section prescribes...''

It is I think essential that both the powers of realisation and the power of disbursement to pay a particular debt (or debts) or all the debts of the employer both exist and extend to the whole of the employer's property before there will be control sufficient for the purposes of s. 221P. If the power of realisation is exercisable for a limited purpose only, being one inconsistent with payment out to the Commissioner, i.e., if it is exercisable for a purpose other than that of paying a debt or debts of the employer, there will be no control sufficient to attract the operation of s. 221P. If the trustee is entitled to recourse to the whole of the fund created by the exercise of his power of realisation, but only for a limited purpose which is also inconsistent with payment out to the

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Commissioner, there can be no control of the kind required by s. 221P.

By the initial order of 29 June, the receivers were given power to convert property of the various respondents into money and it is the existence of this power of realisation in this order upon which the Commissioner bases his claim here. But that order gave the applicants no power to make any disbursements from any funds of any of the respondents and in particular the third respondent (the defaulting employer) that they might hold in the course of their receivership. The order of 3 July gave the applicants certain limited express powers of disbursement: it empowered the receivers to pay the sum of $20,000.00 to the respondents' solicitors to meet the respondents' costs of defending the ASC's claim. But that order of 3 July expressly deprived the applicants of the power of realisation conferred on them on 29 June. I should also note that the order of 23 July, 1992 directed the receivers to pay this sum of $20,000.00 out of a particular account which the receivers control, upon certain conditions in substitution for the conditions imposed by the order of 3 July, 1992 and the order of 3 August, 1992 empowered the receivers to pay out of this same account body corporate levies, rates and insurance premiums in respect of certain identified property of the various respondents. The applicants relied upon their lack of power to make disbursements of any kind from funds held by them without the express authorisation of the Court in support of their submission that they lacked control of the property of the third respondent of which they had custody as receivers.

In my opinion, the applicants never were in a position to exercise control sufficient for the purposes of s. 221P.

Even under the order of 29 June, 1992 and prior to its being varied on 3 July, 1992, they never had power to realise the whole of the property of the third respondent. It was submitted for the DCT that the power conferred on the receivers by the order of 29 June, 1992 to convert the property of the respondents into money was an unlimited power of realisation and that accordingly the applicants possessed the requisite control. I cannot accept that. The order conferring this power was expressed to be made pursuant to s. 573 of the Companies (Queensland) Code and s. 1323 of the Corporations Law. These provisions in terms confer on the Court power to appoint a receiver where an investigation, a prosecution or a civil proceeding is under way in relation to a person who has contravened the Code or the Law and the Court considers it necessary or desirable to do so for the purpose of protecting the interests of a person to whom the suspected person may become liable by way of damages or otherwise. The order is necessarily interlocutory - see s. 1323(5) - and is intended to safeguard the assets of a company until the claims of creditors or potential creditors can be determined in other proceedings: O'Donovan, Company Receivers and Managers, 2nd Ed., para 29.20.

As a matter of construction of the order, I think the power conferred on 29 June on the receivers to convert the respondents' property into money must be read as a power to convert that property into money only insofar as that is necessary to better preserve the property of the respondent in question, pending termination of the receivership. Moreover, apart from the express power conferred by the orders of 3 July and 23 July to make a limited disbursement in respect of the respondents' defence costs, the applicants had no power to disburse any of the respondents' funds or other property, save that given by the order of 3 August, which also was for the exceptional purpose of preserving certain of the respondents' assets.

A provisional liquidator ``whose primary function is to `preserve an existing status quo with the least possible harm to all concerned'...'': Re Obie Pty. Ltd., supra, at ATC 4782; Qd R 472 does not, in the absence of an express authorisation in his appointment, have power either to realise any of the assets of the company or to pay any of its debts or to disburse any of its assets (save in the exceptional case in which that may be necessary to preserve the company's property). A provisional liquidator's lack of a general power of realisation of the property for which he has responsibility was one of the reasons why it was held in Re Obie Pty. Ltd., supra, that the provisional liquidator did not have control of the defaulting employer's property sufficient for the purposes of s. 221P: see ATC p. 4782; Qd R p. 472. The Court there recognised that even though a provisional liquidator has no express power of sale, unusual circumstances may arise in which he has that power, it being a power that can only be exercised for the purpose of preserving the company's business.

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Yet notwithstanding the existence of such a limited power of sale, which could in theory apply to any of the company's assets, the Court was not prepared to accept that it amounted to a sufficient power of realisation to constitute the provisional liquidator a trustee in control of the company's assets.

In
Re Rothercroft Pty. Ltd. 86 ATC 4339; (1986) 4 N.S.W.L.R. 673, the provisional liquidator, under the terms of his appointment, had an express power to sell all or any of the property of the company. It was on this basis that the DCT sought to distinguish Re Obie Pty. Ltd. and to show that the provisional liquidator there was subject to s. 221P. Kearney J held that the provisional liquidator was not a trustee for the purposes of s. 221P. In explaining why the existence of this power of sale in the provisional liquidator did not affect his view that that official was not a trustee for the purposes of s. 221P, he said at ATC 4343-4344; N.S.W.L.R. 679:

``I do not consider that the presence of such power of sale amongst the powers vested in the provisional liquidator has the effect which is suggested. Reference was made to this power by Bowen C.J. in Eq. in
Re Codisco Pty. Ltd. [(1974) A.C.L.C. 27,897 (at 27,906)], where his Honour points to the difference in purpose and nature of the appointment of a provisional liquidator on the one hand and the liquidator on the other as quoted above, and also concludes that the role of a provisional liquidator requires him to exercise the powers conferred upon him for the limited purpose for which he is appointed and for no other purpose. His Honour further makes the point at p. 27,906 as follows:

`However, cases arise where the only way to preserve the assets and undertaking of a company, or at least their value for creditors and contributories, may be to sell them quickly...'

The limited use which can be made by a provisional liquidator of his power of sale is further emphasised by the reference in
In re Drydock Corporation of London (1888) 39 Ch.D. 306 at 314 to the nature of a provisional liquidation as being `contingent'.

With these qualifications upon the provisional liquidator's capacity to exercise the power of sale vested in him, I do not consider that the fact that he has such a power of sale affects the conclusion that he is not a trustee for the purposes of sec. 221P.''

His Honour, having held that the provisional liquidator was not a trustee, also said at ATC 4344; NSWLR 679:

``It is not therefore necessary to consider the question of `control', but I record that it was submitted that the existence of the power of sale in the provisional liquidator clearly distinguishes the finding on control in A.G.C. (Advances) Ltd. 84 ATC 4776 [Re Obie Pty. Ltd. (No. 5)] from the present case. That such a power exists is, of course, a point of distinction, but it is arguable that the limitations upon the exercise of such power to which Bowen C.J. in Eq. referred so qualify it as to prevent it giving to the provisional liquidator that measure of control which is requisite for the purposes of sec. 221P.''

This decision was affirmed on appeal sub nom
DFC of T v Access Finance Corporation Pty. Ltd. (1987) 8 N.S.W.L.R. 557 in which the Court of Appeal shortly disposed of the matter by following Re Obie Pty. Ltd.

The limitations imposed on the applicants' power of sale in this case under the order of 29 June prevented them, in the period it remained in force, from realising the respondents' property, except to the extent that was necessary to protect the interests of the persons for whose benefit they were appointed to be receivers. Even if the power of realisation in the order of 29 June extended to the whole of the respondents' property, the fund created by the exercise of such a power would not be one to which the applicants could legitimately have recourse for the purpose of satisfying any potential liability under s. 221P. That fund would necessarily be one which the applicants would be required to keep intact for the protection of the interests of the persons for whose benefit they were appointed. That was also the only purpose for which assets could be realised and the proceeds of any such realisation disbursed. The express power to pay corporate levies etc. conferred on the applicants by the order of 3 August, even if it was to be exercised with respect to property of the third

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respondent, was a power conferred for the purpose of preserving the property in question, not a power of disbursement to meet a debt or debts of any respondent. Upon the making of the order of 3 July, the applicants ceased to have any express power of realisation. They were never in a position of control of that property within s. 221P because the powers of realisation and disbursement which they had were conferred for limited purposes which were inconsistent with them having power to make any payment to the Commissioner.

It is therefore unnecessary to reach a conclusion on the second point raised by the applicants as to the retrospective alteration of the order of 29 June. But, assuming the power exists, I would not have exercised it here where it is possible that the rights of third parties may be involved. Neither the ASC nor the various respondents, who did not participate in the hearing, were given any notice of this particular application.

The applicants are entitled to a declaration that they have never been trustees in control of the property of any of the respondents, and, in particular, the third respondent, within the meaning of s. 221P of the Act.

THE COURT DECLARES THAT:

1. The applicants have never been trustees in control of the property of any of the respondents within the meaning of s. 221P of the Income Tax Assessment Act 1936.

THE COURT ORDERS THAT:

1. The respondent/Deputy Commissioner of Taxation pay the applicant/Receiver's costs of and incidental to the application to be taxed.


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