Re L.G. Holloway Transport Pty. Ltd.

Judges:
Nettlefold J

Court:
Supreme Court of Tasmania

Judgment date: Judgment handed down 13 April 1983.

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Nettlefold J.

On 24th April 1979 L.G. Holloway Transport Pty. Ltd. (``the company'') executed a debenture by way of floating charge in favour of Citicorp Australia Ltd. (``the debenture holder''). The provision in that document which creates the charge reads as follows:

``DOES HEREBY as beneficial owner CHARGE in favour of the Mortgagee the whole of the undertaking property and assets of the Company whatsoever and wheresoever both present and future including all its present and future freehold and leasehold property the goodwill of its business and its uncalled and its called but unpaid capital for the time being AND such Charge shall constitute as to the Company's goodwill and uncalled and called but unpaid capital and as to all and singular its present and future freehold and leasehold property plant and equipment book debts and all shares in which the Company has any interest at any time a fixed and specific charge and as to its other assets a floating charge but so that the Company shall not be at liberty to create any mortgage charge or security ranking in priority to or pari passu with this Debenture without the prior written consent of the Mortgagee and the Company.''

At all material times the company was registered with the Commissioner of Taxation pursuant to sec. 221F of the Income Tax Assessment Act as a group employer.

On 13th September 1979 the company was indebted as follows, according to the affidavit of Mr. Tomlinson sworn on 26th October 1981:

• (a) to the debenture holder for not less than $269,279 together with interest and other accruing charges;
• (b) to the Commissioner of Taxation for not less than $140,945 for tax deducted by the company from salaries and wages of employees of the company which sum was due and payable to the Commissioner; and
• (c) to employees of the company for not less than $74,650 for amounts due to them in respect of wages, salaries, annual leave and long service leave.

On 10th September 1979, Mr. J.E. Tomlinson was appointed in writing by the debenture holder as receiver and manager. The notice of appointment reads as follows:

``NOTICE OF APPOINTMENT OF RECEIVER AND MANAGER L.G. HOLLOWAY TRANSPORT PTY. LTD.

TO: THE REGISTRAR OF COMPANIES

CITICORP AUSTRALIA LIMITED of 63 Exhibition Street Melbourne HEREBY GIVES NOTICE that on the 10th day of September, 1979 it appointed JOHN EDWIN TOMLINSON of 86 Collins Street, Hobart Receiver and Manager of all books debts both present and future of L.G. Holloway Transport Pty. Ltd. together with all contracts books of account ledgers vouchers receipts documents and records in whatever form the same may be kept including (without limiting the generality of the foregoing) all computerised data and information of or pertaining to the said book debts under the powers contained in an instrument dated the 24th day of April 1979 Registered No. 7160-13-234.

DATED the 10th day of Sept. 1979.''

It will be noted that the appointment was limited in substance to all book debts both present and future of the company together with all records and other documentary evidence relating to those book debts. It is that limitation upon the appointment which is the critical fact which gives rise to the problem which has arisen.

According to Mr. Tomlinson's affidavit, on 10th September 1979 the company was seised of the following assets:

                                            $
(a) book debts at book value             220,703
(b) cash on hand                           1,259
(c) stock                                 68,750
      

The company held other assets which were subject to mortgages, liens and charges which left the company with no residual interest of any value in those assets. (I note that that statement is probably inaccurate for reasons which will appear.)

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ATC 4166

Acting on his appointment the receiver and manager has realised from the book debts, exclusive of costs and remuneration, $164,737. In his affidavit he estimates that a further $1,000 may be realised.

Mr. Tomlinson deposes that there is no prospect of realising a sufficient sum to make:

• (a) any payment to unsecured creditors of the company; or
• (b) payment in full of the costs and expenses of the receivership, claims of the debenture holder, claim of the Commissioner of Taxation in respect of the tax deductions and the moneys previously mentioned due to employees.

Mr. Tomlinson concedes that the employees stand in priority to the debenture holder in respect of their claims described above. The issue for determination is whether the Commissioner stands in priority to firstly the employees and secondly the debenture holder in relation to the sum of $140,945 for tax deductions or any part of that sum.

By an order of the Court dated 21st April 1980 a winding up order was made against the company on the petition of the Deputy Commissioner of Taxation. Mr. R.J. Dwyer was appointed liquidator.

The parties have agreed on certain facts which, in substance, are:

• (1) cash in the possession and ownership of the company on 10th September 1979 amounted to $1,239 (compare Mr. Tomlinson's affidavit);
• (2) stock owned by the company and in its possession amounted to $68,750 and comprised:

                                      $
        Tyres                       15,000
        Gravel                      40,250
        Fuel                         5,000
        Topsoil (sand)               1,000
        Spare parts for trucks       7,500
                                   -------
                                   $68,750
                                   -------
            

  Those items were transferred by the company to Mr. L.G. Holloway at those figures. The indebtedness so arising was set off against amounts claimed by Mr. Holloway against the company. The liquidator of the company is seeking advice as to whether that transaction is valid as against him. He is also seeking advice as to whether an appropriation by William Adams Finance of approximately $13,000 against an account owed by the company to William Adams Tractors is valid as against him.

Mr. Dwyer, the liquidator, deposes that he has realised from the assets of the company a sum of $46,923 which he is holding as liquidator for the benefit of the creditors of the company. He gave some evidence about the source of this money which was obscure and the matter was not pursued by counsel to any extent.

Mr. Holloway deposes that until the close of business on 13th September 1979 the company was carrying on business principally as a cartage contractor and quarry operator. Since that date he says that he has carried on the same business utilising all the assets of the company other than the book debts. He claims to have ``paid'' the company in all $69,989 for the assets taken over by him ``that indebtedness being satisfied by way of set off against amounts claimed by me from the company''. No submissions were made by counsel on the question whether that transaction was valid as against the liquidator.

On those facts Mr. Liddell Q.C. for the Commissioner of Taxation made, in substance, the following submissions:

• 1. The primary submission involved the proposition that the relevant section does not require the charge to be executed over each and every item of property to enable the section to come into operation. It is sufficient if it has been exercised in respect of ``some substantial asset'' which has come under the control of or been vested in the receiver and manager. To that extent there is a liability to pay out of that fund. In the present case the receiver and manager having obtained $164,000 approximately is trustee pursuant to sec. 221P and is liable to pay out of that fund to the Commissioner in priority over all other debts.
• 2. Alternatively, as a matter of commercial reality in any event the conclusion is that the whole of the property of the company went under the control of the receiver and manager.

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  ATC 4167

• 3. Even if the company can be said, at the relevant date, to have had assets of, say, $70,000 the company then owed the Commissioner $140,000. If you set off its liability, which was a priority liability, that is a priority liability that the employer owed, then all that you have left is the book debts and, on that basis, looking at the matter realistically, the whole of the assets other than those necessary to meet the priority debt pass to the receiver and manager.

I reject those submissions.

The receiver and manager did not become liable to pay to the Commissioner $140,945 or any other sum unless sec. 221P(1) imposed that liability upon him. The critical words in that subsection for the purposes of this case are ``where the control of his property has passed to a trustee, the trustee shall be liable to pay that amount to the Commissioner''. Unless those words, taken in conjunction, of course, with the introductory words of the subsection, have the effect of imposing that liability on the receiver and manager then there is no such liability at all. On the facts of this case, those words do not have that effect. The subsection, in the quoted portion of it, is talking about control which has passed to a trustee. It is not talking about control which might have passed to a trustee had the debenture holder acted differently. Nor is it talking about the right to exercise control which the debenture holder had but did not choose to exercise in relation to the whole of the company's property. The debenture holder might have assumed control, personally or through a receiver, of the whole of the company's property. In fact it did not do so. Why it chose not to do so is not a matter with which I am concerned. The evidence does not enable any conclusion to be drawn as to why it confined the appointment to book debts.

On the facts of this case the receiver did not take control of the company's property. He took control of part only of the company's property leaving a substantial amount of property still in the control of the company. That being so, sec. 221P has no operation at all.

Much has been written, and, I have no doubt, much will be written, about the meaning of the words ``his property'' in that subsection. Having studied closely all the cases cited in argument, I must say that I do not find any difficulty about the general meaning of those words. I can readily understand that particular sets of facts will cause real difficulty. But the facts of this case do not cause any difficulty. For this is not a case where it can be said that the trustee assumed control of the company's property. On the contrary it is a case where the trustee assumed control of part only of the company's property. On the date of the appointment of the receiver the company had a very substantial amount of property which remained in the control of the company after the appointment took effect. That property remained in the control of the company until 13th September 1979 when Mr. Holloway alleges he bought it. On the evidence, as it stands, that property or the value of it may still be within the reach of the liquidator. In addition to that property which Mr. Holloway claims to have purchased, the liquidator swears that he has realised a further sum of $46,923 ``from the assets of the company''. Although the quoted proposition was discussed by counsel it was not refuted and remains part of the evidence.

The statement ``upon his death his property passed to his executor'' is a well known statement, the general meaning of which is not in doubt. It is a statement which does not descend to the particular. It speaks of the deceased person's estate as a whole, a single pool or a single fund. And that is how sec. 221P(1) speaks. It speaks of the employer's property as an undifferentiated whole, a single pool or a single fund. And well it might so speak. For were it to apply whenever any part of the employer's property passed to a trustee, it would produce an injustice in particular cases which, even in this confused age, should be regarded as intolerable. The injustice to which I refer is that the property of A is confiscated to meet the debt of B.

When one comes to apply the section to a given set of facts, one should take a practical approach as a jury of businessmen would. One should look at the commercial realities and sternly subordinate legal technicalities to that. Thus one should ignore the fact that a worthless equity of redemption is not part of the ``pool'' or ``fund''. One should ignore the fact that some particular asset of the employer, even a large asset, is subject to a mortgage or charge as security for a debt

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ATC 4168

which exceeds the value of the asset so that only a worthless equity of redemption in the asset is part of the ``pool'' or ``fund''. One may ignore minor items which, for some reason, have failed to get into the ``pool''. That is so because the tribunal, in its capacity as a tribunal of fact, should content itself with asking whether in substance or to all intents and purposes the employer's property has passed, as far as the law allows, into the control of the trustee and hence out of the control of the employer. For that is the essential situation, and the only situation which will create a liability in the trustee to pay the Commissioner.

On the facts of this case that situation does not exist. I repeat that the facts have not been fully analysed by counsel. Some of them could do with a good deal of further elucidation. But, on the evidence as it stands, the case does not fall within the section.

I find in the joint judgment of Barwick C.J., Mason and Jacobs JJ. in
F.C. of T. v. Barnes 75 ATC 4262; (1975) 133 C.L.R. 483, clear dicta to support the actual decision which I have reached. I content myself with citing the following passages:

• (1) ```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.'' [Emphasis added.] (ATC p. 4265; C.L.R. p. 490.)
• (2) ``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.'' (ATC p. 4266; C.L.R. p. 491.)
• (3) ``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.'' (ATC p. 4267; C.L.R. p. 493.)
• (4) ``The overall effect of section 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.'' (ATC p. 4267; C.L.R. p. 494.)

The originating summons seeks directions as to the order of priority to be observed after meeting the costs and expenses of the receivership. Only the one point was argued, namely, the applicability of sec. 221P. I take it that the parties are in agreement as to the order of priority in all other respects. Consequently, orders will be made in accordance with these reasons after hearing counsel as to the precise wording of the orders.