CHANT v DFC of T

Judges:
Priestley JA
Handley JA
Sheller JA

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

Judgment date: Judgment handed down 27 October 1994

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Priestley, Handley and Sheller JA

This appeal concerns a claim by the Deputy Commissioner of Taxation (the DCT) to recover money deducted by RCR Radios Pty Ltd (the company) from the wages of its employees on account of their income tax liabilities (group tax) but not paid to the DCT. The unpaid group tax was $203,650. The DCT claims that Mr Chant holds $125,602 of the company's money which he is bound by s 221P of the Income Tax Assessment Act (the Act) to pay in reduction of the debt for unpaid group tax. This claim was upheld by Brownie J and Mr Chant has appealed.

By a deed bearing date 21 July 1988, the company charged its assets and undertaking to the State Bank of New South Wales as security for advances, to it by the Bank. On 18 December 1990 the security having become enforceable the Bank and the appellant executed a document appointing him-

``the Agent of the... Bank to transact all business and do all acts required to be done under the [charge] which relate to all and any stock-in-trade, plant and equipment, other personal, realty and all other assets and undertaking of the Company... present and future subject to the provisions of the [ charge] with all the powers conferred on and/or which may be conferred on a [sic] Agent by virtue of the [charge] (apart from the power contained in Clause 25(d) thereof which power may be exercised only with the prior written consent of the Bank)...''

Pursuant to this appointment the appellant took possession of and realised the assets of the company. His affidavit simply stated that ``The net proceeds of the realisation... are $125,601.77''. There was no other evidence about this sum, and in particular no evidence that it was held by the appellant or his firm in a trust or other bank account. The business of the company ceased immediately the appellant took possession and all its employees were then dismissed. Section 331(2) of the Companies Code required a debenture holder or person acting on behalf of a debenture holder ``taking possession or assuming control of property of a company'' comprised in a floating charge to

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pay certain debts to employees in priority to any claim for principal or interest in respect of the debenture. Claims by employees for holiday and retrenchment pay totalling $120,335 were later lodged with the appellant, no doubt pursuant to this Section.

The proceedings heard by Brownie J were commenced by a summon filed by the DCT in which the appellant was the sole defendant. The summons claimed a declaration that he was a trustee for the purposes of ss 6(1) and 221P of the Act, and an order that he pay to the DCT ``the funds in his hands... as agent for the bank''.

The definition of ``trustee'' in s 6(1) which has not been amended since 1936 is as follows:-

```trustee' in addition to every person appointed or constituted trustee by act of parties, by order, or declaration of a court, or by operation of law, includes-

• (a) an executor or administrator, guardian, committee, receiver, or liquidator; and
• (b) every person having or taking upon himself the administration or control of income affected by any express or implied trust, or acting in any fiduciary capacity, or having the possession, control or management of the income of a person under any legal or other disability.''

The sections of the Act relating to the deduction of tax from the wages of employees, the duty of employers to pay the tax deducted to the DCT, and consequential provisions, are in Division 2 of Pt VI and in their present form date substantially from 1947. The DCT relied on s 221P(1) which provided:

``Where an employer makes a deduction for the purposes of this Division... 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... 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.''

Brownie J held that the Bank, as mortgagee in possession, was not liable under s 221P(1) but that the appellant as its agent was because he was holding the fund in a fiduciary capacity. This made him a trustee as defined and it did not matter that his fiduciary duties were owed to the Bank. He also held, relying on
James v DFC of T 88 ATC 4812; (1988) 19 ATR 1752 (CA), that control of the company's property had passed to the appellant. Both conclusions were challenged on the appeal.

The first limb of the statutory definition covers trustees under the general law but the expression is also given an extended meaning to include persons within paras (a) and (b) many of whom would not otherwise be trustees. Paragraph (a) includes receivers and liquidators, and para (b) persons ``acting in a fiduciary capacity''. The other limbs of para (b) cover persons who would already be within the definition either as trustees under the general law or as guardians or committees. During the hearing of the appeal the respondent's senior counsel Mr Slater QC sought to file a notice of contention that Mr Chant was a receiver but the Court refused leave to raise this new point.

In
DFC of T v General Credits Ltd & Ors 87 ATC 4918; (1988) VR 571 the Full Court, affirming the decision of Gobbo J,
General Credits Ltd v Chemineer Nominees Pty Ltd & Ors 86 ATC 4315; (1986) ATR 934, held that a mortgagee who went into possession under a floating charge was not a trustee for the purposes of s 221P and was not liable under the section. On the other hand
FC of T v Barnes 75 ATC 4262; (1975) 133 CLR 483 decides that a receiver under a general floating charge who takes possession of the company's property subject to the charge is such a trustee, and is liable.

This decision was based on the express reference to receiver in the definition and the conclusion that there was nothing in s 221P to exclude the application of this part of the definition. The majority, but not Stephen J who dissented, rejected the view of McTiernan and Taylor JJ in
FC of T v Card (1963) 13 ATD 149; (1963) 109 CLR 177 that s 221P did not apply to receivers but only to those other trustees as defined to whom control passed for the purpose of some form of general administration of the debtor's property.

There is no doubt that Mr Chant was acting in a fiduciary capacity when he took possession and realised the assets comprised in the Bank's mortgage. It was not contended that the property had become vested in him, but s 221P

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was said to apply because control of that property had passed to him.

General Credits is authority that a mortgagee in possession is not a trustee for the purposes of s 221P. A mortgagee in possession is subject, in equity, to an onerous obligation to account (see Waldock "The Law of Mortgages" 2nd Ed. 1950 pp 236-241 and
Visbord v FC of T (1943) 7 ATD 213 at 230; (1943) 68 CLR 354 at 331) but is not a fiduciary of the mortgagor. See Finn " Fiduciary Obligations" 1977 p 10 and Waters " The Constructive Trust" 1964 at pp 159, 189-197 where the authorities are collected.

In order to give mortgagees the benefits of entry into possession, without making them liable to account as such, conveyances inserted provisions authorising mortgagees, to intercept the rents and profits from the security by appointing a receiver who would be the agent of the mortgagor. This ``legal device'' as it was described by Williams J in Visbord v FC of T at ATD 230; CLR 381 was later given statutory recognition in England and elsewhere. See Conveyancing Act s 115. A receiver appointed under such powers occupies ``a very special position''. See per Williams J in Visbord at ATD 231; CLR 382 where the authorities are collected. However there was no occasion in Barnes for the High Court to consider this or any other agency relationship because a receiver is expressly included in the statutory definition.

The Bank went into possession through its agent the appellant. In General Credits the mortgagee had also acted through agents. Phillips J, who delivered the principal judgment in the Full Court, noted that the mortgagee had appointed as its agent a firm of chartered accountants who took possession of the borrower's property and realised it for the mortgagee's benefit. At ATC 4921; VR 574 he noted that senior counsel for the Deputy Commissioner had submitted that the agents ``plainly obtained both possession and power to realise which, he contended, are the indicia of `control' '' for the purposes of s 221P. See also at ATC p 4919; VR 572.

A corporation can only act through natural persons.
Tesco Supermarkets Ltd v Nattrass [1972] AC 153 establishes that a single person or a small number of persons may embody the directing mind and will of a corporation so as to be legally identified with it. See also
Hamilton v Whitehead (1988) 166 CLR 121 at 127 and
Nissho Iwai Australia Ltd v Malaysian International Shipping Corporation, Berhad (1989) 167 CLR 219 at 229-230. One would not expect a corporate mortgagee to go into possession through the natural persons who are legally identified with it. In practice it would go into possession through servants or other agents. If Brownie J is correct the DCT could bypass General Credits by suing the servant or agent whose physical possession is in law the possession of the corporation or the director or directors who embodied the corporation, and as such controlled the property in its possession.

The Bank's power to go into possession under the Deed of Charge was conferred by cl 27 which so far as material provided:-

``... the Bank shall have the right at any time after the moneys hereby secured have become payable without any consent on the part of the mortgagor and without the necessity for any demand or notice to exercise all or any of the powers authorities and discretions conferred on a Receiver by these presents...''

The relevant powers of a Receiver under the Charge were ``to take possession... (of) the whole or any part of the mortgaged premises'' (cl 25(ii)(a)) and ``to sell... all or any part of the mortgaged premises by public auction or private treaty...'' (cl 25(ii)(f)). Clause 27 in terms did not confer on the Bank the power to act by an agent but there was no need for such a power. As Griffith CJ said in
JM Christie v Permewan, Wright & Co Ltd (1904) 1 CLR 693 at 700:-

``It is a general rule of law that what a person may do himself, he may do by an agent.''

See also
Jackson v Napper [1886] 35 Ch D 162 at 172,
Ex parte Aston Investments (1959) 60 SR (NSW) 620, Broom's Legal Maxims 10th Edition, 1939 p 558 and foll. and Bowstead on Agency 15th Edition, 1985 p 36.

The appellant as agent for the Bank was at all times subject to its direction. For most purposes the actual possession of an agent is in law that of the principal. See
Williams v Pott [1871] LE 12 Eq 149 at 152,
Lyell v Kennedy [1889] 14 Ap Cas 437 at 456,
Maynegrain Pty Ltd v Compafina Bank (1982) 2 NSWLR 141 especially at 145F-G, and Bowstead (above) at 204-5. Accordingly when the appellant took possession and realised the property of the

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company his acts were in law the acts of the Bank. The Bank thereby became a mortgagee in possession and realised its security. In these circumstances the proper conclusion is that ``control'' of the company's property comprised in the security did not pass to the appellant but passed to the bank as mortgagee in possession. Compare
DFC of T v AGC (Advances) Ltd & Ors 84 ATC 4177 at 4180, 4183, 4185-4186; (1984) 1 NSWLR 29 at 33, 37-38, 40-42 and James v DFC of T 88 ATC 4812 at 4819; (1988) 19 ATR 1752 (CA) at 1760.

In the alternative the DCT argued that the fund was the property of the company which had vested in or passed to the control of the appellant. The evidence does not enable this Court to find that the fund is vested in the appellant but it may be inferred that in some way it is under his control. When a mortgagee exercises the powers of realising the security, including the power of sale, the proceeds of realisation are the property of the mortgagee although received subject to a duty to account. The mortgagee will normally be the vendor under any contract of sale or at least the undisclosed principal and will be entitled as assignee to receive any book debts comprised in its security. As Kay J said in
Banner v Berridge [1881] 18 Ch D 254 at 265:-

``... the moneys which would come to the hands of the mortgagee upon the exercise of the power of sale were not moneys in which he had no interest, they were moneys in which he had a very large interest; moneys which, if the security should happen to be deficient, would entirely belong to him.''

The duty of a mortgagee, who has exercised the statutory power of sale, with respect to the proceeds of sale is defined by s 58(3) of the Real Property Act and s 112(4) of the Conveyancing Act. The position of a mortgagee who exercises powers of realisation conferred by the mortgage instrument is not relevantly different. The mortgagee is not a trustee of the power of sale or of any other powers of realisation. See
Commercial and General Acceptance Ltd v Nixon & Anor (1983) 152 CLR 491 at 494, 502 and 515. A mortgagee is a trustee of the proceeds of sale or other realisation only to the extent of any surplus after payment of the amount due under the mortgage. See
Rajah Kishendatt Ram v Rajah Mumtaz Ali Khan [1879] LR 6 Ind App 145 at 160, Banner v Berridge at 268-269,
Warner v Jacob [1882] 20 Ch D 220 at 221-2,
Charles v Jones [1887] 35 Ch D 544 at 549,
Bank of New South Wales v Adams & Anor (1982) 2 NSWLR 659 at 663-665,
Adams v Bank of New South Wales (1984) 1 NSWLR 285 at 289-290, 295,
Avco Financial Services & Ltd v Commonwealth Bank Australia (1989) 17 NSWLR 679 at 681.

The Bank therefore had a legal entitlement to the proceeds of the realisation of its security and in the first instance received such proceeds directly or through its agent as its own property and for its own benefit. There is no question of there being any surplus. If the appellant has retained control of the fund those moneys were received and held as the property of the bank and not as the property of the company.

In our opinion therefore the appellant's fiduciary capacity, as agent, in relation to the bank does not assist the DCT in this case because s 221P has no application to agents who are trustees as defined only because they are fiduciaries. The section however does apply to fiduciaries who are not agents or otherwise within the definition. See James v DFC of T 88 ATC 4812; (1988) ATR 1752 (CA) and
FC of T v B & G Plant Hire Pty Ltd & Ors 94 ATC 4692.

In our opinion therefore the appeal must be allowed. However we cannot pass from this case without commenting on the form of the proceedings. The appellant's affidavit showed that he had received claims from former employees totalling $120,335. The former employees were necessary parties to the proceedings because they had claims to the fund which would be defeated if the DCT was held to have priority. The DCT should have taken the necessary steps to join a representative employee as a defendant either initially or when the existence of the claims of the former employees came to notice. If he did not the appellant should have done so. See SCR Pt 8 r 8, r 13. Since neither party took the necessary steps voluntarily the Judge should have required them to be taken.

We have held that the DCT is not entitled to the fund. Had we been minded to hold otherwise it would have been necessary to appoint one of the employee claimants to represent the class pursuant to SCR Pt 8 r 13, add that person as an additional respondent, and

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adjourn the appeal to give that party an opportunity to be heard.

This case is yet another example of the failure of legal advisers to ensure that litigation is conducted so that the Court can discharge its statutory duty under s 63 of the Supreme Court Act to determine all matters in controversy between the parties completely and finally so as to avoid a multiplicity of legal proceedings. The section presupposes that all necessary parties will be before the Court. Any dispute between the appellant and the former employees remains outstanding and may have to be determined in further proceedings causing additional expense and delay to the parties.

In our opinion the following orders should be made:-

• 1. Appeal allowed with costs.
• 2. Set aside the orders of Brownie J.
• 3. In lieu thereof order that the respondent's summons be dismissed with costs.