Smith and Judge v. Deputy Commissioner of Taxation and National Bank of Australasia.

Judges:
Brinsden J

Court:
Supreme Court of Western Australia

Judgment date: Judgment handed down 17 October 1978.

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Brinsden J.: This matter is the return of a motion by the plaintiffs for directions pursuant to sec. 237(3) of the Companies Act 1961 and also pursuant to sec. 274(1)(a) of the same Act. At the hearing, at the invitation of the parties I made the liquidators plaintiffs, the Deputy Commissioner of Taxation first defendant and the National Bank of Australasia second defendant. The Company was incorporated on 1st July 1971 and on 25th November 1975 it went into liquidation pursuant to the resolutions of a meeting of its creditors and a meeting of its members and the plaintiffs were appointed jointly and severally liquidators. At the date of commencement of the winding up, the Company was indebted to the Commissioner for an amount of $35,555.39, being under remittance of tax instalment deductions made from the wages of the employees of the Company during the years ended 30th June 1975 and 30th June 1976. The Company was registered as a group employer within the meaning of Pt. VI Div. 2 of the Income Tax Assessment Act 1936 and amendments. Under the provisions

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of sec. 221F(5) of the Act the Company made deductions from the wages due to certain of its employees but failed to account to the Commissioner in respect of the sums so deducted totalling in all the amount now claimed by the Commissioner. It is common ground between the parties that the amount claimed by the Commissioner is due and owing by the Company.

At the date of the commencement of the winding up the National Bank, by virtue of a debenture dated 15th April 1974 held a charge over the Company's ``undertaking and all its property, assets and rights whatsoever'' in accordance with the terms and conditions of the debenture. It is again common ground that the company was indebted to the Bank in the sum of $20,626.65 at the time of the commencement of the winding up and that sum is secured by the debenture. The liquidators proceeded with the winding up which has now reached a stage where they are in a position to effect a final distribution to secured and unsecured creditors and to terminate the winding up. Produced at the hearing was a summary of receipts and payments effected during the liquidation showing total funds in the hands of the liquidators as at the 25th May 1978 of $25,200.49. Part of those moneys are invested with the Perth Building Society on an interest bearing deposit so the exact amount in the hands of the liquidators is slightly more than this sum. It is immediately apparent however, that the sum which will remain in the hands of the liquidators is insufficient to meet both the debt due to the Commissioner and the National Bank. If it is payable in priority to the Commissioner, then all available funds will be absorbed, but if the funds are payable in priority to the National Bank, then after discharging the Bank's indebtedness, there may be a small sum available in part discharge of the indebtedness to the Commissioner. The application before me is to determine who is to have priority, that is, whether it be the Commissioner or the Bank and this involves the application of sec. 221P of the Act.

Subsections (1) and (2) of sec. 221P provide as follows:

``(1) [Liability of employer or trustee.] Where an employer makes a deduction for the purposes of this Division, for the purposes of section 78 of the Income Tax (Arrangements with the States) Act 1978, or purporting to be for those purposes, 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, or to affix tax stamps of a face value equal to the amount of the deduction as required by this Division, as the case may be, 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) [Priority over other debts by trustee.] Notwithstanding anything contained in any other Act or State Act, an amount payable to the Commissioner by a trustee in pursuance of this section shall have priority over all other debts, whether preferential, secured or unsecured.''

Notwithstanding the rather harsh words said about this section in
C. of T. v. Card (1963) 109 C.L.R. 177,
C. of T. v. Barnes (1975) 133 C.L.R. 483 and
Carapark Industries Pty. Ltd. (In Liquidation) (1967) 1 N.S.W.R. 337, no attempt has been made to amend the provisions so as to make them more intelligible. Perhaps one is naive in expecting Parliament to have acted upon the complaints of the Judges who have examined this section that, in the words of Menzies J. in Card's case it is an ``incredibly ill-drawn section''. Unfortunately neither Card's case nor Barnes' case directly answers the point I have to decide.

Put in broad terms the contention of the Commissioner is that upon the commencement of the winding up the control of the defaulting employer's property passed to the liquidators within the meaning of subsec. (1), while the Bank argues that by reason of its debenture, which crystallized upon the commencement of the winding up see
Wallace v. Universal Automatic Machines Co. (1894) 2 Ch. 52) and which thereupon became a fixed security in relation to the whole of the assets of the Company, the only property of the Company over which the liquidators assumed control within the meaning of that word in sec. 221P(1) was the equity of redemption which in this case is valueless. There is no doubt that a liquidator of a company can be a trustee within the

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meaning of sec. 221P(1) for the definition of the word ``trustee'' in sec. 6 of the Act is said to include a liquidator wherever the expression is used in the Act unless the contrary intention appears. Far from the contrary intention appearing in sec. 221P, by reason of the provisions of subsec. (3) there is express reference to the liquidator of a company that has been wound-up. Counsel for the Bank did not seek to argue that that section by the use of the word ``trustee'' did not embrace a liquidator.

Card's case has been exhaustively analysed in Barnes' case. It does not appear to be authority for any greater proposition than that a receiver is not personally liable to pay the amount a defaulting company had failed to pay the Commissioner pursuant to Div. 2. It does not otherwise seem to have decided anything else by reason of the divergent paths by which their Honours reached an identical conclusion.

In Barnes' case the position of a receiver was once again in question. In that case the majority (Stephen J. dissenting) held that the term ``trustee'' is not limited in sec. 221P to a person who has control of the distribution of the proceeds of assets amongst creditors generally, and the receiver and manager in that case was a trustee. As here, in Barnes' case the equity of redemption of the Company was worthless. At p. 491 the majority judgment of Barwick C.J., Mason J. and Jacobs J. remarked that in view of the divergent views expressed in Card's case, that case could not be regarded as an authority for the proposition that the relevant property of the company in Barnes' case was the worthless equity of redemption. Their Honours at pp. 491-492 then went on to express why they reached the conclusion that the receiver was a trustee within the meaning of the relevant subsection. I quote in full this passage because I believe it offers the key to the solution of the problem in the case with which I am dealing.

``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 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

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fund out of which a particular debt or in some cases all the debts of the company, secured or 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.''

The essence of the problem seems to me to be to determine what was the property of the defaulting employer which vested in or under the control of the liquidators. The Commissioner contends that this question should be answered to cover not only the equity of redemption of the charge secured by the debenture but also extended to the whole of the assets of the Company which were subject to the debenture. The Commissioner further points out that in fact the liquidators have assumed control over all these assets, have sold some of them, discharged certain liabilities, and now stand possessed of what remains. The sequence of events in the case suggests that by the time the liquidators were appointed the charge created by the debenture, insofar as it was not a fixed charge, had become a fixed charge, having done so at the latest at the time of the resolution to wind up. In Barnes' case as far as I can gather from the judgments, the floating charge had crystallized before the appointment of the receiver - see the majority judgment at p. 488. The equitable interest of the debenture holder as chargee in the assets of the defaulting employer has crystallized before the appointment of the liquidators in this case and before the appointment of the receiver in Barnes' case. There is therefore that measure of similarity. As Sykes points out at p. 786 in his work The Law of Securities 3rd Ed., a floating charge is a security of the hypothecation type and does not involve, even on crystallisation, an assignment or transfer of the company's property, notwithstanding the apparent view of Blackburn J. in
National Mutual Life Nominees Ltd. v. National Capital Development Commission (1975) 6 A.C.T.R. 1 to the contrary. Of course by reason of the crystallized charge the debenture holder has an equitable interest in the assets of the company and the decision in Barnes' case resulted in the Commissioner being paid out of assets over which another held an equitable interest, at least to the extent of the indebtedness, which in that case represented the whole of the value of those assets. But that result the majority held, did not make sec. 221P a law with respect to something other than taxation. In the first place, sec. 221P provides for the Commissioner's priority only in a case where the whole of the property of the defaulting employer should vest in or comes under the control of a trustee. When that happens the debt due to the Commissioner shall have priority over a secured debt which is secured over the whole of the property. Secondly, where the whole of the property 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 the deductions having been made, had not been retained by the employer. At p. 494 occurs this very important passage in the majority judgment:

``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.''

Clearly enough therefore, the policy of the section as enunciated in the above quoted passage, would be wide enough to cover the case of the whole of the assets of a defaulting employer passing under the control of a liquidator, which assets were the subject of a crystallized debenture.

The liquidators in this case have obtained control of the assets of the Company by reason of them being appointed liquidators, and in their capacity as liquidators. There is nothing unusual about this type of situation, that is where a liquidator has been appointed before a debenture holder has appointed a receiver. The debenture holder's right to appoint a receiver is not thereby taken away by the liquidation or the appointment of a liquidator, but often, as in this case, the debenture holder allows the liquidator to realise the assets the subject of his security, with a view to paying him out in priority to

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unsecured creditors, except as provided by sec. 292(4) of the Companies Act 1961. The debenture holder of a debenture drawn in the terms of this particular debenture could of course proceed to appoint a receiver and have him take control of the whole of the assets of the Company, being subject of course by reason of the decision in Barnes' case to the liability under sec. 221P, but he could also use various alternative means to realise upon his security, such as selling the assets or one or more of them (without taking possession), or taking possession of some of the assets and selling those assets, or in short in any way realising on his security as provided for by the deed or allowed by law (for example sec. 57 of the Property Law Act 1969). The doing of any of these things may prevent the liquidator gaining control of the assets or any particular asset of the employer or having gained such control, depriving him of that control. But here in this case where the liquidators have taken control of the whole of the assets of the Company as liquidators as is explained in their affidavit filed in support of these proceedings, it is difficult to see why in the light of the policy of the section as stated in the quoted passage above, it can be said that they have not taken control within the meaning of sec. 221P, even though if the Bank had chosen to act differently, it may have prevented the liquidators from having assumed control of all the assets.

In my view therefore, in this particular case the Commissioner has priority over the Bank and I should make a declaration accordingly. I have reached this decision with some hesitation and I appreciate that the result and the reasons which have led to it, may be considered by some to be extraordinary, for the Bank by taking a certain course of action may have deprived the Commissioner of the priority which I find he is entitled to by reason of what has occurred. The extent of the operation of the section still I think remains a matter of considerable uncertainty and the section clearly calls for amendment.