Federal Commissioner of Taxation v Barnes [1975] HCA 61; (1975) 133 CLR 483 (22 December 1975)

HIGH COURT OF AUSTRALIA

FEDERAL COMMISSIONER OF TAXATION v. BARNES [1975] HCA 61; (1975) 133 CLR 483

Constitutional Law (Cth) - Income Tax (Cth)

High Court of Australia
Barwick C.J.(1), Gibbs(2), Stephen(3), Mason(1) and Jacobs(1) JJ.

CATCHWORDS

Constitutional Law (Cth) - Taxation - Income tax - Deductions by employer from wages of employee - Failure to pay amount of deductions to Commissioner - Trustee in whom employer's property vested liable to pay amount due in priority over all other debts - Validity - Whether law with respect to taxation - The Constitution (63 & 64 Vict. c. 12), s. 51 (ii) - Income Tax Assessment Act 1936-1970 (Cth), ss. 6, 221P.

Income Tax (Cth) - Collection by instalments - Group employer - Deductions by employer from wages of employee - Trustee in whom employer's property vested liable to pay amount due in priority over all other debts - Receiver and manager appointed of employer's undertaking - Whether trustee - Income Tax Assessment Act 1936-1970 (Cth), ss. 6, 221P.

HEARING

Melbourne, 1975, September 30, October 1;
Sydney, 1975, December 22. 22:12:1975
ACTION removed pursuant to s. 40A of the Judiciary Act 1903-1975 (Cth).

DECISION

December 22.
The following written judgments were delivered: -
BARWICK C.J., MASON AND JACOBS JJ. Between September 1972 and February 1973 in the course thereof, employed a number of persons. The company was registered as a group employer under the provisions of s. 221F of the Income Tax Assessment Act 1936-1970 (Cth) ("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 s. 221C of the Act. (at p486)

2. By deed made on 13th December 1972, the company gave to Vanbro Corporation Ltd., Soleng Pty. Ltd. and Solmark Pty. Ltd. ("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. (at p487)

3. 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. (at p487)

4. 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. (at p487)

5. 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 and 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;
(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. (at p488)

6. 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. (at p488)

7. 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 Ltd., 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 Ltd. 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 Ltd. or both. The net amount realized 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 Ltd. jointly and severally to the mortgagee is still $205,650 together with interest and costs. (at p488)

8. There has never been, either at the time of crystallization of the floating charge or at the time the receiver and manager was appointed or at any time thereafter, any prospect that a realization of the whole of the assets of the company and of Cowan Group Securities Ltd. 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 net proceeds of the realization of assets with which he was empowered to deal as receiver and manager of the company. (at p488)

9. The plaintiff Commissioner claims that the defendant is within the meaning of s.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 s. 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 s. 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 s. 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 s. 51(ii.),
s. 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 for 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." (at p489)

10. The plaintiff Commissioner commenced this action in the Supreme Court of Victoria and, by virtue of s. 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. (at p489)

11. It was decided in Federal Commissioner of Taxation v. Card [1963] HCA 52; (1963) 109 CLR 177 that a receiver appointed by a mortgagee of the assets of a company pursuant to a floating charge which had crystallized was not liable to pay a debt of a company owing to the Commissioner of Taxation pursuant to s. 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. (at p490)

12. There are other aspects of the decision of this Court in Federal Commissioner of Taxation v. Card 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 J.J., 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 s.221P must be one to whom control of the property passes for the purpose of some form of general administration of that property. (at p490)

13. In our opinion, the view of the majority was correct and should be followed. "Trustee" is defined in s. 6(1) of the Act to include a receiver unless a contrary intention appears. We can see no contrary intention in s. 221P provided that the words "his property" are recognized 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 s. 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 Federal Commissioner of Taxation v. Card [1963] HCA 52; (1963) 109 CLR 177 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 s. 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 s. 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. (at p491)

14. In the face of these divergent views, Federal Commissioner of Taxation V. Card 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. recognized in Federal Commissioner of Taxation V. Card. (at p491)

15. 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 that 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. (at p492)

16. 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. (at p492)

17. 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 realization 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 s. 221P, the receiver has authority to make the payment which s. 221P requires. In so far as Re Carapark Industries Pty. Ltd. (1967) 1 NSWR 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 s. 221R of the Act. Nevertheless, s. 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-s. (2). (at p492)

18. Much reliance was placed for the defendant on English Scottish and Australian Bank Ltd. V. The Commonwealth [1959] HCA 56; (1959) 102 CLR 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 s. 10(2) of the Estate Duty Assessment Act 1914-1950 (Cth) included by virtue of sub-ss. (3) and (4) of s.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. (at p493)

19. 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 s. 221P result in it being a provision beyond the power of the Commonwealth to enact and therefore void and of no effect. (at p493)

20. It is submitted that the effect of s. 221P(2) is to require that moneys owing to the Crown by A be paid out of property to which B is beneficially entitled. If s. 221P(2) does no more than that then it is not a law with respect to taxation: Waterhouse v. Deputy Federal Commissioner of Land Tax (S.A.) [1914] HCA 16; (1914) 17 CLR 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. (at p493)

21. Secondly, and very importantly, s. 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 s. 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 realize 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 s. 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. (at p494)

22. The overall effect of s. 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. (at p494)

23. It was suggested but faintly argued that even if s. 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 & Offset Printing Co. Pty. Ltd. V. The Commonwealth [1943] HCA 18; (1943) 67 CLR 314 (see per Latham C.J. (1943) 67 CLR, at p 318 and per Starke J. (1943) 67 CLR, at p 325 ) as to the relationship of s. 51(xxxi.) of the Constitution to other lative powers can have no application to such a provision as s. 221P(2); cf. per Dixon C.J. in Attorney-General (Cth) V. Schmidt [1961] HCA 21; (1961) 105 CLR 361, at pp 370-373 . (at p495)

24. We are therefore of the opinion that the defences wholly fail and that the Commissioner is entitled to judgment for the amount claimed. (at p495)

GIBBS J. By a deed dated 13th December 1972, Cowan Securities Ltd. ("the company") charged the whole of its undertaking and assets with the payment to two other companies ("the mortgagees") of, inter alia, $260,000 owing by it to the mortgagees. The charge was to operate as "a first floating charge". Default having been made under the deed, the security became enforceable and on 6th February 1973 the mortgagees appointed the defendant to be receiver and manager of the company. The defendant has realized a net amount of $129,462 and has paid some of that amount to the mortgagees, but at present holds more than $25,000, being the balance of the net proceeds of the realization of assets with which he was empowered to deal as receiver and manager. An amount of more than $205,650 is still owed to the mortgagees and there is not, and never has been, any prospect that a realization of the whole of the assets of the company would enable the mortgagees to be paid in full. (at p495)

2. The company was, as from 22nd September 1972, registered as a group employer under s. 221F of the Income Tax Assessment Act 1936, as amended ("the Act"), and between that date and 6th February 1973 it made deductions totalling $20,593.95 for the purposes of Div. 2 of Pt VI of the Act from the salaries and wages paid to its employees, but failed to pay any of that sum to the Commissioner as required by s. 221F(5). It was not disputed that in these circumstances the company was liable, by reason of the provisions of s. 221P of the Act, to pay that amount to the Commissioner. The Commissioner now claims that it is entitled to be paid that sum by the defendant as receiver in priority to the payment of all other debts of the company, whether secured or unsecured, and has brought the present action to assert that claim. (at p495)

3. The Commissioner's claim is based on the provisions of s. 221P which provide, inter alia, as follows:

"(1) Where an employer makes a deduction for the purposes
of this Division ... 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 ... 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 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."

By s. 6 of the Act, unless the contrary intention appears, "trustee" includes, inter alia:

"(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." (at p496)

4. The provisions of s. 221P, in so far as they refer to trustees, are far from clear. Their effect was considered in Federal Commissioner of Taxation v. Card [1963] HCA 52; (1963) 109 CLR 177 . In that case the Commissioner sought to recover $6,634.60 from the defendant as receiver under the provisions of an equitable mortgage granted to the Commonwealth Bank by a company which had made deductions totalling that amount for the purposes of Div. 2 of Pt VI and had failed to deal with them as required by that division. The defendant died after the institution of the action and proceedings were continued against his executrix. When the receivership was terminated, over $112,000 was still owing by the company to the bank. Unfortunately there is an element of obscurity about the facts relating to what was realized during the receivership. As stated by the Supreme Court, from whose decision the appeal was brought, they were as follows (1963) 80 WN (NSW) 701, at p 702; (1964) NSWR 266, at p 267 :

"During the course of Mr. Card's receivership the company
completed certain outstanding orders and sundry sums
of money were paid to him as receiver, amounting in all to
$2,719.65. The Commonwealth Bank allowed him an
overdraft to carry on as receiver, and he paid out in all the
sum of $8,727. No assets of the company were realized
by Mr. Card as receiver and no moneys were ever held
or received by him as receiver except as aforesaid."

This statement makes it appear that no assets at all were realized and that the receiver suffered a net loss on his receivership. In this Court, Menzies J. said: "... the evidence does not show that the receiver obtained control of any property of the defaulting employer that was of any value. It might be that there were some book debts but, if so, this, as it was conceded in argument, was not sufficiently proved." (1963) 109 CLR, at p 195 Owen J. in the course of his judgment, with which Dixon C.J. concurred, said: "In his capacity as receiver he received payment of certain moneys amounting to $2,719.65. Some of the moneys so received may have been debts due to the company at the time of the deceased's appointment but this does not clearly appear." (1963) 109 CLR, at p 196 However, it seems that Owen J., like Menzies J., proceeded on the footing that it was not established that the receiver had obtained control of any assets of the company, because he went on to say: "None of the assets subject to the charge was realized by the deceased and at all times the company's equity of redemption was valueless." (1963) 109 CLR, at p 196 On the facts as so understood the Commissioner could have succeeded in that case only if s. 221P upon its proper construction imposes upon a "trustee" a personal liability to answer for the employer's debt to the Commissioner, irrespective of whether any property of the employer has come into his hands. The majority of the Court (Dixon C.J., Menzies and Owen JJ.) based their decision on the ground that the section does not impose a personal liability of that kind. The ratio of the decision is in my opinion that "the section is not to be construed as imposing any liability upon a 'trustee' to answer for the employer's debt to the Commissioner except out of property belonging to the employer which has vested in him or passed under his control" (per Owen J. (1963) 109 CLR, at p 197 , and see per Menzies J. (1963) 109 CLR, at pp 194-195 ). Taylor J. took the same view of the effect of the section, although he based his decision on other grounds (1963) 109 CLR, at pp 188-189 . The decision in Federal Commissioner of Taxation v. Card therefore does not govern the present case where the receiver has in his hands, as a result of the realization of the assets of the company, more than enough to pay the company's debt to the Commissioner. (at p497)

5. However, it was submitted on behalf of the defendant that s. 221P does not apply to the case of a receiver under a deed creating a mortgage or charge. That submission is supported by the judgments of McTiernan and Taylor JJ. in Federal Commissioner of Taxation v. Card [1963] HCA 52; (1963) 109 CLR 177 . McTiernan J. was of opinion that s. 221P contemplates a trustee who has the administration of all the estate or assets of an employer to whom s. 221P applies, and that all the property of the employer did not pass to the receiver in that case because the equity of redemption did not fall within the receivership (1963) 109 CLR, at pp 184-185 . Taylor J. considered that the section is designed to operate only in the case of a trustee in whom an employer's property becomes vested or to whom control of that property passes for the purpose of some form of general administration, and further that the "property" of the mortgagor does not pass to the control of the receiver, who has no control of the mortgagor's interest in the assets (1963) 109 CLR, at pp 189-190 . On the other hand, Menzies J. held that the section did apply to the receiver appointed by the bank in that case (1963) 109 CLR, at p 193 . Owen J. left the question open; he said (1963) 109 CLR, at p 197 :

"In the Supreme Court their Honours took the view that a
receiver appointed by a mortgagee was not one of the classes
of 'trustees' to which the section refers and thus disposed of
the case in favour of the respondent. The reasons which led
them to that conclusion have much weight but I prefer to
decide the case on the assumption that a receiver is a 'trustee'
within the meaning of the section."

In my opinion Federal Commissioner of Taxation v. Card does not decide the question whether a receiver is a trustee within s. 221P although the weight of opinion in that case is against the view that a receiver is a trustee. (at p498)

6. Section 221P presents considerable difficulties of construction, but in my opinion it was intended that that section, read with the definition of "trustee" in s. 6, should have the effect that a receiver appointed under a deed which created a floating charge over all the assets of the company giving it is a trustee and liable under s. 221P, although only to the extent of the assets which passed under his control. The definition of "trustee" will, unless the contrary intention appears, apply to s. 221P and if it applies will render that section applicable to the case of a receiver. It does not seem to me that s. 221P reveals an intention to exclude the definition; the fact that sub-s. (3) deals with the costs, charges and expenses of administration or winding up, payable by the trustee of the estate of a bankrupt or the liquidator of a company, but does not similarly deal with the costs of a receivership, does not in my opinion indicate that the section is not intended to have any application to receivers. It may be assumed that s. 221P contemplates a general vesting of property in the trustee, and that the section is therefore not intended to apply to the case where a mortgage under which a receiver is appointed charges part only of the employer's property. However, it is difficult to accept that the section is intended only to apply if literally every item of property belonging to the employer vests in, or passes under the control of, the trustee, because if that were its effect the section would not in every case apply to a trustee in bankruptcy, since in a particular case there may be a residue of the bankrupt's property which will not vest in the trustee: ss.5 ("the property of the bankrupt"), 58, 116 of the Bankruptcy Act 1966 (Cth), and see Stapleton v. Federal Commissioner of Taxation [1955] HCA 58; (1955) 93 CLR 603, at p 619 . However, it is clearly the intention of the Parliament that the section applies to every trustee in bankruptcy: s. 109(1) of the Bankruptcy Act 1966. But even if it be accepted that "his property" in s. 221P means "all his property", it seems to me that in the present case the control of all the property of the company, within the meaning of the section, did pass to the receiver. It is perfectly true that the company had an equitable interest in the property with which the receiver could not deal and which did not pass into his control, so that technically it can be said that the company had an interest in the property which did not pass under the control of the receiver. However, from a practical or commercial point of view it seems to me natural to describe the effect of the deed as being that all of the property of the company passed under the control of the receiver notwithstanding that the company retained an equitable interest in it. The control of all the company's assets passed to the receiver, although if the amounts secured were paid in full any surplus resulting from the realization would belong to the company. In fact of course the equitable interest of the company was valueless, and that is sufficient reason to ignore it. In my opinion the inclusion of "receiver" in the definition of trustee, the fact that s. 221P includes trustees in whom the property is not vested, and the reference to secured debts in sub-s.(2), all indicate that the section was intended to apply to a receiver under a deed of mortgage or charge. Sub-section (2) could not possibly be construed so as to enable a trustee who held property subject to a mortgage in favour of some person other than the employer to pay the Commissioner out of the interest of that third person, and if it does not apply to a case such as the present the reference to secured debts would appear to be meaningless. (at p499)

7. With all respect to what Taylor J. said in Federal Commissioner of Taxation v. Card (1963) 109 CLR, at p 190 , I am unable to draw from the provisions of sub-s. (2) the conclusion that s. 221P necessarily contemplates a form of administration in which debts will be paid in accordance with an established order of priority out of a fund constituted by the employer's property. However, if that were contemplated by the section the receiver is now obliged to pay debts in accordance with an order of priority, limited in scope though it may be: see s. 196 of the Companies Act 1961 (Vict.), as amended. (at p500)

8. Construed in this way s. 221P does not, in my opinion, require A to pay B's debt to the Commissioner, and the section is not invalid. I would, with respect, adopt what Menzies J. said in Federal Commissioner of Taxation V. Card (1963) 109 CLR, at p 195 :

"...it is not beyond the power of the Commonwealth to
require the receiver of a company's property to pay to the
Commissioner moneys deducted by the company from employee's
wages pursuant to Div. 2 of Pt VI of the Act and
wrongly retained by the company and to do so in priority to
other debts, including the debt of the debenture holder
appointing the receiver. It is common practice to postpone
the claims of debenture holders to other liabilities imposed
upon receivers - e.g. Companies Act 1961, s. 196 - and
where amounts deducted from the wages of employees for
tax have gone to swell the company's assets rather than
Commonwealth revenue, I see no reason why Commonwealth
power should not extend to enforcing the payment
of what has been wrongly retained by the company as the
first obligation of a trustee in whom the property of the company
thereafter vests or to whom control of the property of
the company thereafter passes."

Viewed in this way s. 221P in effect requires the company's debt to the Commissioner to be paid out of the company's property, before the security on it becomes effective. The section is clearly a law with respect to taxation and it is not in my opinion a law that provides for the acquisition of property. (at p500)

9. In my opinion the Commissioner is entitled to be paid by the defendant the amount that he claims, and should have judgment in the action. (at p500)

STEPHEN J. The relevant facts have already been stated in some detail. They concern a quite short point. It involves s. 221P of the Income Tax Assessment Act. The defendant is the receiver and manager of a company appointed by a debenture holder and he holds some $25,000 to which his appointor will be entitled unless the Commissioner's claim to priority in respect of some $20,000 is upheld. The company having withheld from employees' wages tax instalments amounting to this sum of $20,000, the Commissioner now asserts his entitlement to payment of it from the receiver of the employer company pursuant to s. 221P in "priority over all other debts, whether preferential, secured or unsecured". (at p501)

2. For s. 221P to operate in these circumstances the property of the employer must have become vested in or control of its property must have passed to "a trustee". The question is, first, whether the receiver is for this purpose a trustee and, secondly, if he is, whether the control of the employer's property has passed to him; it clearly did not vest in him. (at p501)

3. "Trustee" is defined, by s.6 of the Act, to include a receiver but, as the various judgments in Federal Commissioner of Taxation v. Card [1963] HCA 52; (1963) 109 CLR 177 disclose, it is very debatable whether the defined meaning should apply to s. 221P; Owen J., whose reasons were also accepted by Dixon C.J., regarded as of "much weight" the reasons which led the Full Court of the Supreme Court of New South Wales, whose judgment was under appeal, to conclude that it did not apply; however, his Honour preferred to decide the case by assuming the contrary while nevertheless finding in favour of the respondent Card upon another ground (1963) 109 CLR, at p 197 . McTiernan J. expressly held that Card, a receiver appointed by a bank under the provisions of an equitable mortgage by way of floating charge, was not a trustee within s. 221P. So, too, did Taylor J. Menzies J. took the contrary view. Card's Case is the only precedent decision of this Court which is in point. (at p501)

4. I have said that there are two questions for decision; however, they are intimately related the one to the other, the applicability to s. 221P of the defined meaning of "trustee" depending very largely upon the view taken of the section's reference to the employer's property vesting in, or control of it passing to, the trustee. (at p501)

5. I have already said that in Card's Case Owen J., with whom Dixon C.J. agreed, did not need to decide the true meaning of "trustee" in s. 221P; his Honour's decision went upon the ground that a "trustee's" obligation under s. 221P was limited to the extent of the property of the employer which vested in him or passed under his control (1963) 109 CLR, at p 197 and since "the only property of the company which passed to the control of the deceased was valueless" (1963) 109 CLR, at p 198 that was an end of the matter. It may be mentioned in passing that the penultimate paragraph of his Honour's judgment refers to the employer's equity of redemption in terms which might suggest that his Honour regarded it as passing to the control of the receiver. I do not understand that paragraph as in fact saying this; his Honour's reference to a "worthless equity of redemption" was, I think, only by way of illustration of the valueless nature of the employer's assets, having regard to the large outstanding indebtedness to the secured creditor. The other three members of the Court, each of whom did consider the meaning of "trustee" in s. 221P, were influenced in various ways by the section's reference to vesting and to control. (at p502)

6. McTiernan J. regarded that word "trustee" as confined to one who "is concerned with the administration of the estate" of a defaulting employer; he was influenced by the terms of sub-s. (2) of s. 221P and also by his view that in sub-s. (1) the "property" of the employer the subject of vesting or control must be all his property and, since the employer's equity of redemption was no part of the property of which Mr. Card was receiver, this requirement was not satisfied. His Honour gave a meaning to "receiver" in the definition of "trustee" in s. 6 when he instanced (1963) 109 CLR, at p 184 "a receiver in bankruptcy" as a person who would be a "trustee" for the purposes of s. 221P. (at p502)

7. Taylor J., having concluded (1963) 109 CLR, at p 188 that the section in any event only applied to a receiver under a mortgage or debenture by the terms of which the whole, and not some part only, of an employer's property was charged, said (1963) 109 CLR, at pp 189-190 that the section only applied when vesting or control occurred "for the purpose of some form of general administration"; a receiver, unlike a trustee in bankruptcy or liquidator, did not obtain control of the interest of a mortgagor company in mortgaged assets; his physical control of them passed only for a very limited purpose, so as to satisfy the mortgagee's debt, and the mortgagor's interest "somewhat in the nature of an equity in redemption", never passed to a receiver as it did to a liquidator. Hence the section was inapplicable to any receiver appointed under a mortgage or charge, even although what was charged was the whole of the mortgagor's assets. (at p502)

8. These views of McTiernan J. and of Taylor J. are, I think, substantially in accord with the approach adopted by the Full Court of the Supreme Court of New South Wales from which the appeal in Card's Case was brought. However, it was that very approach which Menzies J. rejected; he did not treat "trustee" in s. 221P as limited to persons having control of the distribution of the proceeds of assets amongst creditors generally. It was enough if the trustee had such control as would enable him to resort to the employer's property so as to pay the Commissioner (1963) 109 CLR, at p 191 , and Card, as receiver in fact did obtain "in a very real sense control of the whole of the company's property" (1963) 109 CLR, at p 193 . It was a control of all the property of the company (1963) 109 CLR, at p 193 . His Honour did not refer at all to the question of an outstanding equity to redeem and, despite the different view he took of the operation of the section, he reached the same conclusion as all other members of the Court because he concluded that on the evidence the receiver was not shown to have obtained control of any property of the defaulting employer which was of any value (1963) 109 CLR, at p 195 . (at p503)

9. In the outcome, therefore, Card's Case [1963] HCA 52; (1963) 109 CLR 177 is authority only for the negative proposition that s. 221P does not impose any liability upon a "trustee" beyond the extent of the assets of a defaulting employer which come to his hands. McTiernan and Taylor JJ. would not apply it to a "trustee" unless he obtains control not merely over the employer's mortgaged assets but also over that interest which is variously described as the employer's "equity of redemption" or its "interest somewhat in the nature of an equity in redemption" and unless he obtains that control for the purpose of some general administration of the employer's property for the benefit of creditors. It may be noted that on this view a receiver appointed by a debenture holder will never be a trustee for the purposes of s. 221P since the equity to redeem the very security by virtue of which he is appointed will never pass to him nor will he ever be concerned to undertake any such a general administration. The view of Menzies J. is clearly to the contrary. Of the views of Owen J., and with them those of the Chief Justice, it may be said that his Honour's passing acknowledgement of the weight of the reasoning in the judgment of the Full Court, when read in the light of that judgment (1963) 80 WN (NSW) 701 esp. at p 705; (1964) NSWR 266, at p270 , affords little support for the view of Menzies J., who was therefore, as I would read the judgments, the only member of the Court who can be regarded as deciding that a debenture holder's receiver is a "trustee" within s. 221P. (at p503)

10. So to interpret s. 221P, as the Commissioner urges, is to confer priority upon a debt owed to him and to do so not merely at the expense of a secured creditor but on an occasion which does not necessarily mark the end of the debtor's trading life or the onset of any scheme of general distribution of the debtor's assets to meet his liabilities, as in liquidation or bankruptcy. Indeed the occasion, that of the appointment of a receiver by a secured creditor, need not itself be of great moment; it is no more than the adoption by a secured creditor, in the course of realization of his security, of one of a number of remedies available to him following the debtor's default. In the present debenture trust deed there appears the not uncommon provision that the debenture holder may itself, without any such appointment, exercise all the enumerated powers which the deed confers upon a receiver if he be appointed; thus, although no doubt convenient to act through a receiver, enforcement of this secured creditor's rights did not depend upon his appointment. To be sure, the appointment permitted the secured creditor to avoid the liabilities which might have attached to him as mortgagee in possession but, this apart, the appointment of a receiver is usually only a matter of considerable convenience for secured creditors. It will become a matter of more than passing inconvenience if it results in attracting the terms of s. 221P; no doubt in that event recourse to this convenient aid to the enforcement of security will tend to be studiously avoided. (at p504)

11. If the effect of s. 221P is to treat a debenture holder's receiver and a liquidator or trustee in bankruptcy alike, all being "trustees" to whom control of a defaulting employer's property has passed, the result is curious since they have little in common. The receiver is the instrument of the secured creditor on whose act of appointment his office depends and whose interests he serves, having no special duty to creditors generally. A liquidator or trustee in bankruptcy is, on the contrary, the creature of statute and is concerned with the interests of creditors generally. Their respective relationships to the debtor's property is inherently different. The debenture holder's receiver necessarily finds himself in a situation in which a secured indebtedness encumbers the debtor's assets or some of them; the ambit of his powers is confined to the extent of that encumbrance and his task is to do no more than to realize that security to the best advantage to the secured creditor. Because he is the instrument of the secured creditor he of course acquires no interest in or control over any equity which the debtor may have to redeem; on the contrary it is against his appointor, the secured creditor, that the equity is available. (at p505)

12. The position of the liquidator or trustee in bankruptcy presents in every respect a marked contrast; the assets of his debtor may be subject to no secured indebtedness whatever, but, if they are, then so much the worse for the general body of creditors whose interests he represents. The existence of secured creditors who rely upon their security will fetter the liquidator or trustee in bankruptcy in the exercise of his powers; it will exclude him from control of assets the subject of that security. However, for him, unlike the receiver, the equity to redeem which will pass to him will be a potential asset, the right which it confers being available to him, if circumstances permit, as against the secured creditor. (at p505)

13. An interpretation of s. 221P which results in it being applicable to a receiver appointed by a debenture holder gives to the section an operation which does not accord with the general approach taken by the legislation to the conferring of priority upon the Commissioner in the payment of debts. The general statutory pattern of priorities is one in which the Commissioner obtains no priority so long as the taxpayer does not suffer a termination of his trading activities, followed by some general administration of his assets. It is in such an administration of assets that the Crown's prerogative right to priority of payment has always existed - The Commonwealth V. Cigamatic Pty. Ltd. (In Liq.) [1962] HCA 40; (1962) 108 CLR 372, at p 376 - although at common law it is restricted to priority over debts of equal degree - In re Foreman & Sons Pty. Ltd.; Uther V. Federal Commissioner of Taxation [1947] HCA 45; (1947) 74 CLR 508, at p 514 - an unsecured debt owed to the Crown being of lesser degree than a secured debt owed to a subject; see generally the authorities cited by Bray C.J. in Re John Wiper Ltd. (1972) 22 FLR 206, at p 211 . The Act does not appear to alter this common law position so far as ordinary tax debts are concerned; compare s. 209 and s. 221(b)(ii) and Bankruptcy Act, s. 109(1)(j) and see per Latham C.J. in Federal Commissioner of Taxation V. Official Liquidator of E.O. Farley Ltd. [1940] HCA 13; (1940) 63 CLR 278, at p 290 . Only in respect of deductions from wages by employers (s. 221P) and of withholding tax deductions (s. 221YU) is priority over secured debts expressly conferred, no doubt upon the footing that moneys deducted, by virtue of a statutory authorization from payments due to third parties are, in the hands of the person deducting them, more akin to moneys held by him upon trust for the Commissioner than to mere debts owed by him to the Commissioner; they are expressly declared to be trust moneys by the equivalent New Zealand legislation the terms of which are set out in the report of Re Westmoreland Box Co. Ltd. (1968) 10 AITR 626, at p 628 . However, only if "trustee" in these two sections is taken to include a debenture holder's receiver will this special priority situation, applicable to one or other of the forms of general administration which result from the appointment of the various classes of persons referred to in par. (a) of the definition of "trustee" in s. 6, be extended to the quite different situation of a receivership on behalf of a debenture holder. (at p506)

14. Regarding Card's Case [1963] HCA 52; (1963) 109 CLR 177 , while not decisive on the point, as favouring the view that s. 221P does not apply to a debenture holder's receiver, I give effect to that view the more readily because of the general considerations to which I have referred above. If it be necessary for the word "receiver", in the definition of trustee, to be found work to do in relation to s. 221P I would, with respect, adopt the suggestion of McTiernan J. in Card's Case (1963) 109 CLR, at p 183 that it refers aptly enough to an official receiver in bankruptcy and to no other receiver. (at p506)

15. For these reasons I conclude that the Commissioner cannot rely upon s. 221P so as to establish priority over the claims of the secured creditor. It is accordingly unnecessary for me to consider any question of the constitutional validity of that section. (at p506)

16. In my opinion the plaintiff's action should be dismissed. (at p506)

ORDER

Judgment for plaintiff in the sum of $20,593.95 with costs.