Federal Commissioner of Taxation v. Barnes.

Judges:
Barwick CJ
Mason J
Jacobs J
Gibbs J
Stephen J

Court:
High Court of Australia (Full Court)

Judgment date: Judgment handed down 22 December 1975.

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Barwick C.J.; Mason and Jacobs JJ.: Between September 1972 and February 1973 Cowan Securities Limited (``the Company'') carried on a manufacturing business and, in the course thereof, employed a number of persons. The Company was registered as a group employer under the provisions of sec. 221F of the Income Tax Assessment Act, 1936-1970, (``the Act'') and during the said period an amount of $20,593.95 was deducted by the Company from the salaries and wages of employees pursuant to sec. 221C of the Act.

By deed made on 13th December 1972, the Company gave to Vanbro Corporation Limited, Soleng Pty. Limited and Solmark Pty. Limited (``the mortgagee'') a charge over all and singular the assets and undertaking of the Company whatsoever and wheresoever situate both present and future including uncalled and called, but unpaid, capital for the time being. The charge was to secure the payment of the principal moneys as defined. The deed provided that the charge should operate as a first floating charge as regards all freehold and leasehold property, fixtures, uncalled capital, unpaid calls, plant and machinery, and other chattels (other than stock-in-trade), books of account, vouchers, and other documents relating in any way to the business transactions of the Company, and all securities, negotiable or otherwise, and documents evidencing title to or right to possession of any property at any time deposited with the mortgagee by the Company, and the property mentioned in any such documents, and that the charge should operate as a first floating security as regards all other property and assets of the Company charged by the deed. The amount of money owing by the Company to the mortgagee was $260,000, and the deed acknowledged the agreement between the Company and the mortgagee that, in consideration of the mortgagee's forbearance to petition for the winding up of the Company, it would secure the said sum of $260,000 in the manner and upon the terms appearing in the deed. The term ``principal moneys'' was defined to mean and include this sum and all moneys then or thereafter to become owing to the mortgagee by the Company including, inter alia, further advances.

Clause 3.3(i) of the deed provided that upon the happening of any of a number of events, the floating security should become a fixed charge upon the property of assets previously charged by way of floating security. By cl. 4.1 it was provided that the principal moneys should at the option of the mortgagee immediately become due and payable and also at the like option the right of the Company to deal for any purpose with the mortgaged property should forthwith cease in each or any of a number of events.

Clause 4.3 provided that at any time after the security became enforceable, the mortgagee might exercise any of the powers contained in the deed and might appoint a receiver or receiver and manager of the mortgaged property. It provided that the receiver should be the agent of the Company with the powers set out in the clause, including the power to take possession of, demand, collect, and get in the mortgaged property, to carry on the business of the Company, to sell, exchange or otherwise dispose of, the mortgaged property, and to give receipts for all moneys and other assets which might come into the hands of the receiver in exercise of any power conferred by the deed.

Clause 4.9 provided that all moneys received by a receiver should be applied in the order and manner stated, namely,

``(i) In payment of all costs charges and expenses incurred in or incidental to the exercise or performance of any of the powers or authorities hereby conferred or otherwise in relation to this security;

(ii) In payment of such other outgoings as such Receiver or the Mortgagee shall think fit to pay;

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(iii) In payment to the Receiver of any remuneration whether by way of commission or otherwise;

(iv) In payment to the Mortgagee of the principal moneys.''

The clause then provided that the surplus (if any) should not carry interest and that the receiver should be at liberty to pay the same to the credit of an account in the name of the mortgagor in the books of the mortgagee.

Clause 3.5(viii) provided that the Company would from time to time upon the request of the mortgagee execute in favour of the mortgagee such legal mortgages as the mortgagee should require in respect of the mortgaged property.

On 6th February 1973, a default under the deed having occurred, the defendant was appointed receiver and manager of the Company. The Company continued to trade for some time after the appointment of the defendant as receiver and manager. In November 1973 the assets of the Company were sold in conjunction with the assets of Cowan Group Securities Limited, the joint mortgagor under the deed, as a going concern for $710,890. Of this sum, $585,000 was paid to a mortgagee of a freehold property owned by Cowan Group Securities Limited. A sum of $45,530 was paid to a lessor of plant formerly held on lease, though it does not appear whether the lessee thereof was the Company or Cowan Group Securities Limited or both. The nett amount realised by the defendant, including the collection of book debts, the proceeds of trading, and the balance remaining after the payments to the mortgagee of the freehold property and the lessor of the plant was $129,462. Of this sum, $83,000 has been paid to the mortgagee, but the amount outstanding by the Company and Cowan Group Securities Limited jointly and severally to the mortgagee is still $205,650 together with interest and costs.

There has never been, either at the time of crystallisation of the floating charge or at the time the receiver and manager was appointed or at any time thereafter, any prospect that a realisation of the whole of the assets of the Company and of Cowan Group Securities Limited would suffice to pay the mortgagee in full. The defendant presently holds approximately $25,000 in his capacity as receiver and manager, that being the balance of the nett proceeds of the realisation of assets with which he was empowered to deal as receiver and manager of the Company.

The plaintiff Commissioner claims that the defendant is within the meaning of sec. 221P a trustee to whom control of the property of the Company has passed and that the plaintiff is entitled to payment by the defendant of the sum of $20,593.95 out of the moneys presently held by the defendant in priority to the payment of any debts of the Company secured by the said deed. The defendant denies that he is or was at any material time a trustee within the meaning of sec. 221P or that the property of the Company became vested in him or that the control of the property of the Company passed to him within the meaning of sec. 221P. Alternatively, the defendant claims that the only property of the Company which became vested in, or the control of which passed to, him was the Company's equity of redemption of the charge created by the said deed, which was at all material times worthless. The defendant lastly claims that if sec. 221P would have the effect that the plaintiff was entitled to payment of the said sum of $20,593.95 in priority to all other debts including any debts secured by the said deed, and is therefore entitled to payment by the defendant of the said sum out of the proceeds of the realisation by the defendant of the Company's assets, then the same is beyond the powers of the Parliament of the Commonwealth of Australia and is void and of no effect. Particulars of this claim were given as follows:

``(a) The same is not a law with respect to taxation.

(b) The same is not a law which the Parliament of the Commonwealth is empowered to enact by section 51(ii), section 51(xxxix) or any other provision of the Constitution of the Commonwealth of Australia.

(c) The same is a law with respect to property and the rights of secured creditors.

(d) The same is a law of the acquisition of property otherwise than for any purpose in respect of which the Parliament of the Commonwealth has power to make laws.

(e) The same is a law for the acquisition of property otherwise than on just terms.''

The plaintiff Commissioner commenced this action in the Supreme Court of Victoria and,

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by virtue of sec. 40A of the Judiciary Act, the action was removed into this Court. It has been heard by a Full Court on the facts admitted in the pleadings and on certain further facts, not disputed, appearing in an affidavit of the defendant sworn herein. The facts as they appear in the pleadings and in that affidavit are the basis of the account which we have related.

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. In that case, the Commissioner sued the executrix of a deceased receiver and it was held that he could not recover. In the present case, the Commissioner does not claim that he is entitled to payment of the debt of the Company out of the personal property of the defendant. He claims, however, that there has passed under the control of the defendant property of the Company out of which the debt can be satisfied, and that he is entitled to payment out of that property.

There are other aspects of the decision of this Court in F.C. of T. v. Card (supra) which are pertinent to the resolution of certain of the questions which have been raised in the present case. A majority of the Court in that case, namely Dixon C.J., Menzies and Owen JJ., determined, or at least expressed the opinion, that a receiver in circumstances not relevantly different from those presently existing was a trustee to whom control of the property of a company had passed. McTiernan and Taylor JJ. took the view that a receiver in those circumstances was not a trustee to whom control of a company's property had passed. Taylor J. and we think McTiernan J. were of the opinion that a trustee under sec. 221P must be one to whom control of the property passes for the purpose of some form of general administration of that property.

In our opinion, the view of the majority was correct and should be followed. ``Trustee'' is defined in sec. 6(1) of the Act to include a receiver unless a contrary intention appears. We can see no contrary intention in sec. 221P provided that the words ``his property'' are recognised to refer to the whole of the employer's property. The real question is whether, in the case of the defendant, control of the property of the Company passed to him within the meaning of sec. 221P. But before that question can be answered, it is necessary to determine what is meant by the word ``property'' in the section because, until that is determined, it is not possible to determine what is the relevant control which is claimed to have passed to the defendant. In F.C. of T. v. Card (supra) Owen J., with whom Dixon C.J. agreed, took the view that the relevant property was the interest which the Company had in its assets and undertaking after taking account of the mortgagee's security and that that interest was a worthless equity of redemption. McTiernan J. was of the opinion that the equity of redemption was not a part of the Company's property of which Mr. Card was receiver and manager. Taylor J., as we have said, based his decision on his conclusion that the receiver was not a trustee within the meaning of sec. 221P. On the other hand, Menzies J. took the view that control of all the property of the Company in that case passed to the receiver as a trustee within the meaning of sec. 221P and here he was clearly referring to the assets and the undertaking of the Company as such and not to the Company's interest therein, the equity of redemption.

In the face of these divergent views, F.C. of T. v. Card (supra) cannot be regarded as an authority for the proposition that the relevant property of the Company in the present circumstances is the worthless equity of redemption. Indeed if that equity of redemption were regarded as an item of property separate from the property which was subject to the equitable right to redeem, it never did pass under the control of the defendant, as McTiernan J. recognised in F.C. of T. v. Card (supra).

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. If independently of this security there had been a mortgage or other security over certain assets of the Company, control of those assets could not pass to the receiver. He would have control only of the equitable interest of the Company in those

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

What is true of such an assignment is true also of a floating charge over the assets and undertaking of a company. The charge does not extend beyond the equity of redemption in assets separately mortgaged or charged; but subject to that qualification it extends to the whole of the assets and undertaking and it is with that qualification the control of the whole of the assets and undertaking which passes to a receiver when he is appointed under the charge. That is the purpose of his appointment. 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. But we note again that that control cannot extend to particular assets which are separately secured, but only to the equity of redemption in such assets.

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. In so far as
Re Carapark Industries Pty. Ltd. (1967) 1 N.S.W.R. 337 , decided that the test of control was authority to make payments out, we do not think that it was correctly decided. The facts in the present case show clearly that the defendant has had control of the whole of the Company's assets and undertaking, a control which enabled him to sell the assets. He still has control of that property which now remains, a fund of $25,000. It is true that under the terms of his appointment as receiver by the mortgagee he has an obligation to give priority in payment out of this property to the mortgagee. It may therefore be said that he has no authority under the terms of his appointment to pay the plaintiff Commissioner the debt which the Company owes to the Crown by virtue of sec. 221R of the Act. Nevertheless, sec. 221P creates the obligation and requires that that obligation be carried out even though thereby the Commissioner receives payment in priority over secured creditors, including the mortgagee who appointed the receiver. This is the clear effect of sub-sec. (2).

Much reliance was placed for the defendant on
The English Scottish and Australian Bank Limited v. Commonwealth (1959) 102 C.L.R. 661 , but that case related to a quite different provision. It was there determined that the ``items comprising the estate'' of a deceased person within sec. 10(2) of the Estate Duty Assessment Act, 1914-1950 included by virtue of sub-sec. (3) and (4) of sec. 8 only property which was beneficially owned at death or deemed to be part of the estate and the duty was assessable on the value of that property. From this it was concluded that only the residual redemption value of mortgaged property should be included in the estate. But the inquiry was essentially to ascertain the value of the estate, and it was for that purpose that the items comprising the estate had to be ascertained. The different context makes the decision of little use in the present context.

The defences therefore fail and the plaintiff Commissioner is entitled to judgment in the action for the amount which he claims unless the meaning and effect which we have given to sec. 221P result in it being a provision beyond the power of the Commonwealth to enact and therefore void and of no effect.

It is submitted that the effect of sec. 221P(2) is to require that moneys owing to the Crown by A be paid out of property to which B is

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beneficially entitled. If sec. 221P(2) does no more than that then it is not a law with respect to taxation.
Waterhouse v. D.F.C. of L.T. (S.A.) (1914) 17 C.L.R. 665 . But is that its effect? We do not think so for reasons which appear when the precise operation of the section is examined. First, the section does not provide that the debt due to the Crown shall have priority over all secured debts of a defaulting employer. It provides especially for the case where the whole of the property of a defaulting employer has vested in a trustee. It provides that in that case alone the debt due to the Crown shall have priority over secured debts. In the context the reference to secured debts is only to those secured debts which are payable out of the property which has vested in or control of which has passed to the trustee. In that particular case a security created over the whole of the property, in the sense which we have earlier explained, is to be ignored or postponed. The case is quite different in nature and effect from a case where it is attempted to give the Crown priority in payment to a secured creditor whose security is a particular asset and whose beneficial interest in that asset would thereby be taken from him.

Secondly, and very importantly, sec. 221P is directed to employers who retain tax payable by employees to the Commissioner and then default in passing the moneys on to the Crown. Where the whole of the property of a defaulting employer vests in or passes under the control of a trustee, that property necessarily includes some property in some form which would not exist in the hands of the employer if, having made the deductions under sec. 221C, he had not retained them in his own hands. The amount of the deductions may be identifiable or may be unidentifiable in his hands. It does not matter. In the first case, the identifiable deductions should have been handed over. In the second case, the deductions are represented by property which the employer would have had to realise 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. The divesting or passing of control may be wholly subsequent to the obligation under sec. 221F or pursuant to an agreement in anticipation of such an obligation; but in either case the real effect of such a divesting or passing of control is that in a pool of all the property of an employer including property which would not be so included if the deductions had been paid over, priority in payment thereout is given to a creditor or creditors selected by the employer. A floating charge over the whole of the assets and undertaking of a company anticipates the day when the creditor of the company secured by the floating charge may intervene and claim priority over those creditors who have dealt with the company in the meantime. Creditors who so deal with a company do so at their own risk. But this does not mean that the Crown cannot protect its claim to the employees' tax contributions deducted by a company carrying on business while subject to a floating charge.

The overall effect of sec. 221P(2), therefore, is that when the whole of the property of a defaulting employer vests in or passes under the control of a trustee and when it includes property representing the value of the deductions made and not paid over, the Crown debt is given priority even over a creditor entitled to the whole of the employer's property, as it then exists, as security for his debt. Such a law is a law with respect to taxation.

It was suggested but faintly argued that even if sec. 221P(2) be an otherwise valid law with respect to taxation, it is nevertheless an acquisition of property of a stranger without just terms and therefore is invalid. The principle enunciated in
Johnston Fear & Kingham & The Offset Printing Company Proprietary Limited v. The Commonwealth (1943) 67 C.L.R. 314 , (see per Latham C.J. at p. 318 and per Starke J. at p. 325) as to the relationship of sec. 51(xxxi) of the Constitution to other legislative powers can have no application to such a provision as sec. 221P(2); cf. per Dixon C.J. in
Attorney-General v. Schmidt (1961) 105 C.L.R. 361 , at pp. 370-373 .

We are therefore of the opinion that the defences wholly fail and that the Commissioner is entitled to judgment for the amount claimed.