Re Rothercroft Pty. Ltd.

Judges:
Kearney J

Court:
Supreme Court of New South Wales

Judgment date: Judgment handed down 9 May 1986.

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Kearney J.

Rothercroft Pty. Limited (``the company'') is insolvent. Its assets are in the custody of a provisional liquidator. Access Finance Corporation Pty. Ltd. (``Access''), being a secured creditor of the company, seeks in the motion before the Court a declaration that it is entitled to possession of such assets. The provisional liquidator and the Deputy Commissioner of Taxation as respondents to the motion contend that the Commissioner is entitled to priority under sec. 221P of the Income Tax Assessment Act 1936 to the proceeds of realisation of such assets to meet unremitted group tax instalments deducted by the company. The Commissioner also submits that it is inappropriate to determine this contest at this interim stage of the winding-up proceedings, and contends that such a question is proper to be determined only after the anticipated winding-up order has been made.

From its incorporation on 3 November 1983 the company carried on business as a general carrier by road of freight. On 5 March 1984 the company executed a deed of loan and a mortgage debenture whereby it charged its assets and undertakings as security for repayment of a loan to it of $130,000. A fixed charge was created over certain assets, including specified motor vehicles, the balance of the company's assets and undertaking being subjected to a floating charge. The company defaulted in failing to make a payment due under the deed of loan on 5 October 1985 and such default continues.

The mortgage debenture provided by cl. 5(g) that upon default in making any payment the lender should be entitled to appoint a receiver with extensive powers, including the power to take possession of the property the subject of the charge. By cl. 6, the lender was empowered upon default to exercise any of the powers conferred on a receiver by the mortgage debenture.

On 18 October 1985 the company filed a summons for its winding-up and obtained an order appointing a provisional liquidator in the company.

According to the provisional liquidator's preliminary report, the estimated realisable value of the assets of the company approximates $129,000. The amount due to Access under its deed of loan exceeded $150,000, while the amount owing to the Deputy Commissioner of Taxation for group tax exceeds $88,000.

Access did not exercise its right to appoint a receiver under the mortgage debenture, but itself sought possession from the provisional liquidator of the assets of the company the subject of this charge. Such possession was denied save as to the vehicles which had been specified in the mortgage debenture. This led to the present application by motion in which Access seeks a declaration of its entitlement to possession of the disputed assets of the company, and a declaration that the provisional liquidator is not precluded by sec. 221P of the Income Tax Assessment Act from delivering such assets to Access.

Subsections (1) and (2) of sec. 221P of the Income Tax Assessment Act provide as follows:

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``(1) 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 refuses or 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) Notwithstanding anything contained in any other law of the Commonwealth, or in any law of a State or of the Northern Territory -

• (a) an amount payable to the Commissioner by a trustee in pursuance of this section has priority over all other debts (other than amounts payable under sub-section 221YHJ(3)), whether preferential, secured or unsecured; and
• (b) where an amount is payable by a trustee to the Commissioner under sub-section 221YHJ(3), an amount payable by the trustee in pursuance of this section ranks equally with the amount payable under sub-section 221YHJ(3) in priority to all other debts, whether preferential, secured or unsecured.''

The critical question which Access and the provisional liquidator seek to have determined on the motion is whether the provisional liquidator is a ``trustee'' having ``control'' of the property of the company within the meaning of sec. 221P. However, the Deputy Commissioner's objection stands in the way.

The objection is based on several grounds:

First, it is submitted, the company being clearly insolvent, the creditors are prima facie entitled to have it wound-up and therefore, whether or not the provisional liquidator is a ``trustee'', the winding-up order should be made without delay.

Secondly, it is submitted that the principal function of a provisional liquidator is to get in assets and preserve the status quo pending ultimate determination of the winding-up proceedings and therefore where the question of priorities may be affected by the fact of whether the company is in liquidation or provisional liquidation, the Court should not determine such question at this interim stage so as to alter or affect the rights of the parties.

Thirdly, it is submitted that the secured creditor has an alternative remedy available, namely to appoint a receiver, and that if this alternative would result in payment being required under sec. 221P the Court should not lend its aid to circumvent that legislative provision.

The objection relies principally upon maintaining the status quo. However, the reference to the status quo begs the question as to what is in truth the status quo in the circumstances of this case.

From the Deputy Commissioner's point of view the situation is that the company is on the verge of liquidation, whereupon the official liquidator would take control of the property of the company and will be accountable to the Commissioner under sec. 221P. However, from the point of view of Access it is a secured creditor under a security entitling it to possession of the property charged, and it is only the reluctance of the provisional liquidator to agree with Access's claim which has necessitated these proceedings. Accordingly, it is not, in my view, a matter of exercising some discretion in favour of or against the secured creditor. Rather, the Court is called upon to adjudicate upon the respective entitlements of Access and the Commissioner with respect to property which happens to be in the hands of the provisional liquidator. Whether Access has some other less palatable remedy is not to the point. Indeed, the Commissioner's suggestion of legislation being circumvented is countered by the fact that the Commissioner has no special status except that conferred by sec. 221P and yet he seeks to have matters so directed that he can rely in due course upon that section.

Moreover it cannot be predicated that the immediate appointment of an official liquidator would necessarily favour the Commissioner as against the secured creditor. Thus, while the

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decision in
Smith & Judge v. D.F.C. of T. & National Bank 78 ATC 4561; (1979) W.A.R. 123 points one way, factual differences in
D.F.C. of T. v. A.G.C. (Advances) Ltd. & Ors 84 ATC 4177; (1984) 1 N.S.W.L.R. 29; and
Re Obie Pty. Ltd. 84 ATC 4067; (1984) 1 Qd.R. 371 led to an opposite result.

It is pointed out on behalf of Access that dicta in
F.C. of T. v. Barnes 75 ATC 4262; (1975) 133 C.L.R. 483 which may be said to favour the Commissioner upon liquidation relate to significantly different circumstances from those of the present case. Thus, it is put that Barnes' case concerns the position where the trustee obtains that status pursuant to the instrument said to confer the specific charge and that in such case the trustee cannot stand outside the security pursuant to which he is appointed and rely upon the charge for it is the same security; whereas the present case would attract the reasoning of Thomas J. in Re Obie so as to prefer the secured creditor as against the Commissioner.

Apart from mentioning this point it is neither necessary nor prudent for me to examine the various propositions which may affect the position after a winding-up order is made.

Two incidental aspects may be mentioned. First, if a winding-up order were made immediately and before the notice of motion is disposed of, and it were later held that Access was entitled to possession of the subject property during the provisional liquidation but not after a winding-up order had been made, the provisional liquidator might well be exposed to a claim by Access for conversion of the property the subject of Access's charge. Secondly, for Access to establish the entitlement claimed by it after the making of a winding-up order would appear to involve the necessity for some further proceedings to be instituted.

Access in conjunction with the provisional liquidator is entitled to raise in its notice of motion the question of the competing rights for determination.

I do not consider that any valid ground exists for refusing to adjudicate upon the dispute which is thus properly before the Court. Accordingly, I overrule the Commissioner's objection, and propose to determine now the matters raised for determination in the notice of motion.

I would observe in passing that in so far as this situation may seem to involve an anomaly, it has not been caused by the parties, but is the consequence of the confusion created by the terms of sec. 221P. That section is notoriously difficult to construe. Judicial pleas for its amendment have been largely ignored. Despite judicial attempts to clarify it, its operation remains in the words of Wootten J.,
Re Wallyn Industries Pty. Ltd. (1983) 1 ACLC 712 at p. 714, ``in many circumstances either obscure or anomalous''. The result has been a series of decisions by various courts which are difficult to reconcile except, as indicated above, on fine factual distinctions. (See F.C. of T. v. Barnes; Smith & Judge v. D.F.C. of T. & National Bank;
D.F.C. of T. v. Horsburgh & Anor 83 ATC 4823; (1983) 2 V.R. 591; D.F.C. of T. v. A.G.C. (Advances) Ltd. & Ors 84 ATC 4776; (1985) 1 Qd.R. 464.)

Turning to the critical question two elements are involved, namely that of ``trustee'' and that of ``control''.

First, as to ``trustee'', sec. 6 of the Income Tax Assessment Act defines ``trustee'' as (unless a contrary intention appears) including a receiver or liquidator. ``Liquidator'' is defined in sec. 6 as:

• ...

``the person who, whether or not appointed as liquidator, is the person required by law to carry out the winding-up of a company.''

By sec. 372(2) of the Companies (New South Wales) Code a liquidator appointed provisionally has such functions, powers and duties ``as are conferred on him by this Code or prescribed by the rules or as the Court specifies in the order appointing him''. The order appointing the provisional liquidator in this instance did not relevantly specify. Section 377(2) of the Code grants various powers to a liquidator as set forth in para. (a) to (l). The power provided in para. (1) is to:

``do all such other things as are necessary for winding up the affairs of the company and distributing its property.''

The Rules of the Supreme Court of New South Wales provide in Pt. 80 of the Companies (New South Wales) Code r. 29 for a liquidator appointed provisionally under the Code to have power to carry on the business of the company

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and the powers specified in para. (a) to (k) of sec. 377(2) of the Code. Accordingly, it is these powers which apply in the present case.

While it has been said that the expression ``provisional'' as applied to a liquidator refers only to some limitation on the tenure of office (
Re A.B.C. Coupler Engineering Co. Ltd. (1970) 1 W.L.R. 702), this is only one aspect of the appointment of a provisional liquidator for present purposes.

First of all, there is in the terms of the above definition of ``liquidator'' a restriction of that expression to the person having the duty to carry out the winding-up of the company.

Secondly, a provisional liquidatorship is in its nature different from that of a liquidation following the making of an order for the winding-up of a company.

In
Re Codisco Pty. Ltd. (1974) CLC ¶40-126 Bowen C.J. in Eq. said at p. 27,906:

``The difference between the exercise of powers by a liquidator and a provisional liquidator seems to lie rather in the difference between the purpose and nature of their respective appointments than in any fluctuating interpretation of sec. 236(2)(c).''

There is also the further reference by his Honour to the provisional liquidator's task being generally ``to preserve the existing position, to maintain the status quo''.

The question of whether a provisional liquidator is a ``trustee'' within the meaning of sec. 221P was examined by the Full Court of the Supreme Court of Queensland in D.F.C. of T. v. A.G.C. (Advances) Ltd. & Ors 84 ATC 4776 where it was held that a provisional liquidator did not fall within the terms of the definition of a trustee.

It is urged on behalf of Access that I should follow this decision. However, it is pointed out on behalf of the provisional liquidator and the Commissioner that differences existing in the present case distinguish it from the facts upon which the decision in A.G.C. (Advances) Ltd. 84 ATC 4776 was faced.

Reference is made to the terms of the definition which contain the qualification ``Unless the contrary intention appears'', and reference is also made to the second limb of the definition of ``trustee'' which is contained in para. (b) of sec. 61 of the Act which constitutes as a trustee for purposes of the Act a person ``acting in any fiduciary capacity''. In A.G.C. (Advances) Ltd. 84 ATC 4776 contentions based upon each of these provisions were rejected for the reasons appearing in the judgment of the Court. However, reference is made in the present case to the terminology of sec. 47 of the Income Tax Assessment Act which, as stressed, is a provision which was in the Act as originally framed. This section refers to distributions by a liquidator and commences in subsec. (1) with the following phraseology:

``Distributions to shareholders of a company by a liquidator in the course of winding up the company...''

It is suggested that by reason of the unqualified reference to liquidator for the purposes of sec. 221P there is shown a contrary intention so as to bring within the scope of a trustee for the purposes of sec. 221P a provisional liquidator. I do not consider that sufficient weight can be derived from the terminology of sec. 47 to produce this result in sec. 221P. The matter dealt with in sec. 47 involves a quite different context and necessitates the adjectival reference to a liquidator as one acting in the course of winding-up in order to clarify and complete the operation of sec. 47 in relation to distributions within the company in the course of winding-up.

There is simply not enough relevance, in my view, to enable the use to be made of sec. 47 so as to constitute an indication of contrary intention in sec. 221P.

It is further pointed out that in A.G.C. (Advances) Ltd. 84 ATC 4776 the absence of a power in the provisional liquidator to realise assets was emphasised, particularly as a ground for the Court's decision in relation to the element of ``control'' of the property in the company by a provisional liquidator. It is submitted that in New South Wales under the rules and by virtue of the form of order made in the present case, the provisional liquidator is invested with a power to sell all or any of the property of the company. Hence, it is submitted that this vital difference has the effect of rendering a provisional liquidator a trustee for the purposes of sec. 221P.

I do not consider that the presence of such power of sale amongst the powers vested in the provisional liquidator has the effect which is

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suggested. Reference was made to this power by Bowen C.J. in Eq. in Re Codisco Pty. Ltd. where his Honour points to the difference in purpose and nature of the appointment of a provisional liquidator on the one hand and the liquidator on the other as quoted above, and also concludes that the role of a provisional liquidator requires him to exercise the powers conferred upon him for the limited purpose for which he is appointed and for no other purpose. His Honour further makes the point at p. 27,906 as follows:

``However, cases arise where the only way to preserve the assets and undertaking of a company, or at least their value for creditors and contributories, may be to sell them quickly...''

The limited use which can be made by a provisional liquidator of his power of sale is further emphasised by the reference in In
re Drydock Corporation of London (1888) 39 Ch. D. 316 at p. 314 to the nature of a provisional liquidation as being ``contingent''.

With these qualifications upon the provisional liquidator's capacity to exercise the power of sale vested in him, I do not consider that the fact that he has such a power of sale affects the conclusion that he is not a trustee for purposes of sec. 221P.

It is further submitted that the provisional liquidator acts in a fiduciary capacity and that I should decline to follow the conclusion expressed in A.G.C. (Advances) Ltd. 84 ATC 4776 as being incorrect. However, I consider that the reasoning of the Court in that case is correct, and I do not consider that ground has been established to justify my reaching a contrary conclusion.

My own views of the question as to whether the provisional liquidator is a ``trustee'' for purposes of sec. 221P coincide with those expressed in A.G.C. (Advances) Ltd. 84 ATC 4776. In any event, I would have considered it proper to follow the decision of the Full Court of the Supreme Court of another State, bearing in mind what was said by Rogers J. in
Hamilton Island Enterprises Pty. Ltd. v. F.C. of T. 82 ATC 4088 at pp. 4092-4093; (1982) 1 N.S.W.L.R. 113 at p. 119 where his Honour emphasises the importance of uniformity in the interpretation of Commonwealth legislation by the courts of the various States.

Closer to the present case are the remarks of McLelland J. in
Grime Carter & Co. v. Whytes Furniture (Dubbo) Pty. Ltd. (1983) 1 ACLC 739 at p. 741; (1983) 1 N.S.W.L.R. 158 at p. 161 where his Honour refers to powerful reasons (also present in this case) why the decision of an ultimate State appellate Court involving Commonwealth wide legislation should be followed by a single judge in another State.

I therefore express my conclusion that the provisional liquidator is not a trustee within the meaning of sec. 221P of the Income Tax Assessment Act.

It is not therefore necessary to consider the question of ``control'', but I record that it was submitted that the existence of the power of sale in the provisional liquidator clearly distinguishes the finding on control in A.G.C. (Advances) Ltd. 84 ATC 4776 from the present case. That such a power exists is, of course, a point of distinction, but it is arguable that the limitations upon the exercise of such power to which Bowen C.J. in Eq. referred so qualify it as to prevent it giving to the provisional liquidator that measure of control which is requisite for the purposes of sec. 221P.

I do not consider that in a case of this nature I should embark upon a consideration of matters unnecessary to determine the question before the Court. Accordingly, I make no finding as to whether the element of ``control'' in the provisional liquidator would have been established in this instance.

Therefore, I make declarations in terms of para. 1 and 2 of the notice of motion and an order in terms of para. 4 adding at the end ``or the proceeds of sale thereof''.

The balance of the notice of motion is stood over to 14 May 1986. The winding-up summons is likewise stood over to 14 May 1986. I anticipate that by that day the way will be clear to make the winding-up order and any orders for costs or other outstanding aspects of the motion.