General Credits Limited v. Chemineer Nominees Pty. Ltd. & Ors.

Judges:
Gobbo J

Court:
Supreme Court of Victoria

Judgment date: Judgment handed down 23 April 1986.

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Gobbo J.

This is an Originating Summons issued on the application of the plaintiff, the mortgagee under a mortgage in a Debenture Charge. The mortgage was granted by the first defendant Chemineer Nominees Pty. Ltd., now in liquidation (``Chemineer''). There was a loan agreement which was the subject of guarantees entered into by the directors of Chemineer. There was a default under the agreement. The plaintiff thereupon appointed agents who took possession of Chemineer's property on 23 July 1984. Most of the assets consisted of book debts. In January and March 1985 the plaintiff was paid out the loan and interest on it by the guarantors, who elected not to pursue any right of recovery by way of subrogation. The plaintiff found itself possessed of a fund of some $580,921.01, representing the assets of Chemineer. Once paid out, the plaintiff's only call on the fund was the cost of realising the assets and administering the fund. The net fund amounted to some $469,074.02. By this time Chemineer had gone into liquidation and the official liquidator was claiming the fund.

The plaintiff is concerned as to whether it should properly pay over the fund to the liquidator. It is concerned that it may be under an obligation under sec. 331 of the Companies Code to make preferential payments under the section, in particular in respect of certain Chemineer employees who are represented by the fourth-named defendant. There is also the question of group tax due to the Deputy Commissioner of Taxation by Chemineer. The Deputy Commissioner has declined to release the plaintiff from any liability if it should pay the fund to the liquidator. The plaintiff is concerned by the possible operation of sec. 221P of the Income Tax Assessment Act 1936 and the priority in favour of the Deputy Commissioner of Taxation that the section provides as to recovery of unpaid group tax. There is an outstanding question, which is not before me, as to the amount of the tax due and as to whether the third defendant Chemhire, a company associated with Chemineer, may have to meet some of this liability.

The following questions have been raised by the Originating Summons:

``1. The determination, whether in the events which have happened, the Plaintiff should apply the funds (so far as they extend) which it has realised out of the assets of the firstnamed Defendant, or any and which parts thereof, to the following (or some and which other) persons in the order following, or in some and which other order:

• (i) to the Plaintiff, in respect of its charges and costs of realising the said assets and administering the said funds;
• (ii) to the persons entitled to the moneys referred to in sub.-s. 331(2) Companies (Victoria) Code;
• (iii) the secondnamed Defendant, in respect of unremitted income tax instalment deductions or otherwise;
• (iv) to the liquidator of the firstnamed Defendant.''

In cl. 1 of the Debenture Charge the company gave a charge as a fixed and specific charge in favour of the plaintiff mortgagee over the whole of its assets property and undertaking. Clause 2 charged as a separate and distinct floating charge:

``all other the undertaking property and assets of the company... not charged by way of the fixed and specific charge hereinbefore contained.''

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ATC 4317

There were also provisions relating to the continuing collection of book debts. Condition 12 provided that any moneys received by the plaintiff mortgagee from sale, management of the business or otherwise were to be applied in payment of interest, its expenses and principal moneys unpaid and that subject to this, the moneys were to be held ``in trust for the company''.

It is convenient to consider first the meaning and operation of sec. 221P of the Income Tax Assessment Act 1936, for it was clear that if that section applied, it was to have paramount operation. Section 221P(1) provides as follows:

``Where an employer makes a deduction for the purposes of this Division, for the purposes of the corresponding provisions of a State income tax law or 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.''

Subsection (2) provides for priority in favour of the Commissioner of Taxation in respect of any amount payable to him. Subsection (3) makes specific provision for priority for the expenses of a trustee in bankruptcy or a liquidator.

It was argued on behalf of the Commissioner that once the plaintiff's agent took possession of the company's property pursuant to a Debenture Charge, the requirements of sec. 221P(1) were met. This view was resisted by the plaintiff and the fourth-named defendant on a twofold basis, namely that the plaintiff was not a trustee within the subsection and that even if it were, it was not a trustee at the time it came into control of the company's property. ``Trustee'' is defined in sec. 6(1) of the Income Tax Assessment Act 1936 as follows:

``(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.''

In a well-presented argument, Mrs Moshinsky for the Commissioner urged that the word ``trustee'' should be read very widely on the basis that the deductions from wages made by the employer and not passed on to the Commissioner were in the nature of trust funds. It was said that the word ``trustee'' should be read as though it included any person in control of the property as there would invariably be a control on behalf of others. A mortgagee in possession would have a duty or obligation to have regard to the interests of others. It was further argued that even if a taking of control was not sufficient to make the mortgagee a trustee, he became a trustee by operation of law within the definition of ``trustee'' in sec. 6(1) when he was paid out and held the surplus for the benefit of others.

Reliance was placed on the decision of the High Court in
F.C. of T. v. Barnes 75 ATC 4262; (1975) 133 C.L.R. 483. There it was held that the term ``trustee'' is not limited in sec. 221P to a person who has control of the proceeds of distribution of assets amongst creditors generally and that the receiver and manager was a trustee. Barwick C.J., Mason and Jacobs JJ. after stating that a majority of the Court in
F.C. of T. v. Card (1963) 109 C.L.R. 177 had been of the view that a receiver was a trustee to whom control of the property of a company had passed, went on to say at ATC p. 4265; C.L.R. p. 490:

``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.''

It is, with respect, not entirely clear that Dixon C.J. and Owen J. in Card's case did adopt the view attributed to them for it was perhaps a matter of assumption rather than adoption, much less determination. But whatever the position in Card's case, the High Court has

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ATC 4318

clearly determined in Barnes' case that a receiver is capable of falling within the definition in sec. 6(1). It was argued that if a receiver is a trustee within sec. 221P, there is no reason in principle why, where a mortgagee appoints an agent that takes control - rather than using a receiver - priority should not again be enjoyed by the Commissioner of Taxation.

I have come to the conclusion that the taking of possession of the company's property by the agent of a mortgagee is not a passing of control to a trustee within sec. 221P. In so far as the argument depends on the definition of ``trustee'' in sec. 6(1), I am unable to see how such mortgagee in possession comes within the definition by that mere function or character. The only part of the definition that it was urged could be said to cover this was that referring to a person appointed or constituted trustee by operation of law. The only circumstance pointed to as constituting the plaintiff as a trustee was the taking control of assets that were surplus to the amount necessary to pay out the plaintiff. In my view this bare fact cannot suffice, for it would mean in effect that every time funds were held on behalf of others a trust was thereby created.

It was urged that the notion of trustee in the Income Tax Assessment Act 1936 should be given as wide a reading as possible, especially given the nature of the original sums deducted by the employer for transmission to the Commissioner. In my view there is no warrant for giving the word ``trustee'' in sec. 221P a meaning that is even wider than that provided by the very widely cast definition in sec. 6. As to the original character of the moneys deducted, that at best relates to only part of the assets taken into possession by the plaintiff. Moreover, the crucial question is whether the plaintiff became a trustee rather than whether the employer may have held in that character. I appreciate that this may produce a distinction between a taking of control by a receiver and one taken by the debenture holder's agent, but this flows from the express inclusion of receiver within the definition of ``trustee''.

For these reasons I am of the view that sec. 221P of the Income Tax Assessment Act 1936 does not operate to give the Commissioner the paramount priority claimed as there was not at any time a passing of control to a trustee. This makes it unnecessary to decide as to the second difficulty said to confront the Commissioner, namely, that in any event the plaintiff was not a trustee at the time control passed to it. At that stage, it was said, the plaintiff had not been paid out and it could not then be said to be holding the assets on trust for others. There seems to be considerable force in this argument, but in the event it is unnecessary on the view I take to decide this question.

I turn to the second main issue in this hearing, namely, whether the plaintiff is bound by sec. 331 of the Companies Code to make preferential payments in respect of certain employees of the company.

[CCH Note: The remainder of the judgment is not directly relevant to any taxation issue and has therefore not been reproduced.]