Deputy Commissioner of Taxation v Chant

[1991] HCATrans 332

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Sydney No Sl24 of 1991

B e t w e e n -

THE DEPUTY COMMISSIONER OF

TAXATION

Applicant

and

ERROL GEORGE CHANT AND ALFARM

(AUSTRALIA) LTD. (RECEIVERS AND

MANAGERS APPOINTED)

First and Second

Respondents

and

CHRISTOPHER JOHN BEALE

Third Respondent

Application for special

leave to appeal

Chant 1 15/11/91

DEANE J
TOOHEY J

GAUDRON J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 15 NOVEMBER 1991, AT 11.35 AM

Copyright in the High Court of Australia

MS A. MOSHINSKY, QC: If it please the Court, I appear with

my learned friend, MR T.P. MURPHY, on behalf of the

applicant, the Commissioner of Taxation.

(instructed by the Australian Government Solicitor)

MR R.J. BAINTON, QC: If the Court pleases, I appear with my

learned friend, MR B.J. SULLIVAN, for the

respondent receiver who is Mr Chant, and his

appointer, the first and second respondents.

(instructed by Allen, Allen & Hemsley)

MR M.J. WILLIAMS, QC: If the Court pleases, I appear with

my lear~ed friend, MR C. EGAN, for the third

respondent, who is a representative of a group of

employees. (instructed by Adams Leyland)

DEANE J:  Ms Moshinsky?

MS MOSHINSKY:  If the Court pleases. By way of background,

this case arises in the context of section 221P.

Your Honours would be familiar, most probably, with

the section, that is the section which gives

priority to the Commissioner in respect of income

tax instalment deductions which an employer has

failed to remit to the Commissioner. The issue

directly is the proper meaning or construction of

the section in the light of the policy and purpose

behind the enactment of that section.

Now, the last time the High Court had to

consider section 221P was in 1975 in the case of

Barnes v The Commissioner of Taxation. In that

case, the specific issue was whether a receiver

appointed under a floating charge was a trustee.

Now, 16 years later and approximately 20 cases

later, we seek leave and say that it is time for

the High Court to again consider the proper
construction of this section but this time, more

specifically, in the context of what the meaning of

"his property".

TOOHEY J:  But why should we? Why is it appropriate now

after that length of time during which the section

has been acted upon, presumably in the light of the

decision in Barnes, should the Court now review

that decision?

MS MOSHINSKY:  Your Honour, I next go to my reasons but if I

could respond specifically before I do so is to

correct one thing, with respect, and that is it

cannot be said, in the context of this section, the

parties have acted upon that decision because the

section only arises when a company or an individual

becomes insolvent or a receiver or liquidator or

trustee, ordinarily speaking, takes control of the

property. It is not a section where parties

Chant 2 15/11/91

anticipate the insolvency or arrange their affairs

in relation to that future insolvency.

DEANE J: But if you were drafting a security document, you

always assume that the person giving the security

is going to become insolvent. That is what the

security is about.

MS MOSHINSKY:	I accept that, Your Honour.
DEANE J:	And would not a wise drafter of a deed of

debenture exclude something these days just in case

this very situation arose?

MS MOSHINSKY:  Your Honour, with respect, this case arises

not because of an exclusion in a deed but because

of an exclusion of property passing to the control

of.

DEANE J: But in answer to Justice Toohey you said people

would not have acted on the decision. I would have

thought anybody drafting a debenture deed would be

very silly if he did not take account of the

decision.

MS MOSHINSKY: Well, Your Honour, in that finer point, in a

broad sense, one could say, yes, that we take into

account everything that stands but, on the other

hand, any party taking security would have to take

into account the commercial interest and would be

unlikely to exclude any property from the charge he

would otherwise take security over.

DEANE J:  What about excluding the first $100?

MS MOSHINSKY: That is from the security?

DEANE J: Yes, to exclude the situation arising when the

Commissioner comes along and makes a claim for half

a million under 221P?

MS MOSHINSKY: Well, again, I have to respect the cogency of

that argument but, in fact, in none of these cases

has that arises nor am I aware of that having been

done although it is certainly open, as Your Honour

puts, but then, of course, when one says "reliance

on the decision in Barnes", again, Barnes case

primarily was concerned as to whether a receiver

was a trustee and the question of what "his

property" means has, in fact, been couched in

uncertain terms and it is in fact the very

uncertainty in the decision of Barnes that may have

given rise to the problems. Now, it is that very

uncertainty which is seen in the 20 or so cases and

more specifically as seen in the case below is one

of the most important reasons why leave should be

given.

Chant 3 15/11/91

Now, the reasons why we submit leave ought to

be given are set out at page 52 of the application

book and in substance, in subparagraph (a)(i) it is

put to you that what has occurred is in fact a

divergence of approach between the different

courts; the divergence of approach being as to

whether His Honour Justice Gibbs, as he then was,

in Barnes qualified what Their Honours in the joint

judgment said as to whether "all of the property"

meant literally all of the property.

Now, the courts in Victoria have approached

the construction of this section on the basis that

the majority decision did not mean literally all.

Now, if I could just stop at this moment: in

addition to the three grounds or bases for which

special leave should be granted at pages 52 and 53,

and why I stop at that because I want to develop

this very argument is that we sought - I believed

we had filed but it comes to my attention that the

Court, although the other members at the bar table have got a copy, that a further affidavit has not

been filed. So, perhaps if I could hand copies of

that up now. There are additional copies for the

Court as well.

In the further affidavit, if I could take

Your Honours to the second paragraph which purports

to develop the grounds why leave would be justified

- perhaps it would be more helpful if I took

Your Honours to the specific parts which develop on

that first point and that is the divergence of the

courts. If Your Honours look at subparagraph (f)

on page 3, what is submitted there is that not only

is there a divergence in the courts of the

different States but also that very divergence can

be seen in the judgment of this Court of Appeal

below.

Would Your Honours like me to wait?

DEANE J: Well, whatever you would like us to do.

MS MOSHINSKY: Well, perhaps it would be of assistance if

Your Honours read the material first.

GAUDRON J: That divergence though, of course, really, that

you refer to, does that do any more than say

"Unless the approach that has stood since Barnes'

case be adopted", the majority approach, "somebody

has go to rewrite it"?

MS MOSHINSKY:  No, Your Honour, with respect. That

divergence is, "What is the approach in Barnes'
case?". The divergence is not as to why it should

be changed. It is, "What did the Court in Barnes'

case say?" Now, most members of the bench have

Chant 4 15/11/91

said that the majority decision in Barnes does not

require literally all the property to pass and, in

fact, His Honour Justice Mahoney, in the court

below, accepted that qualification.	I direct the
Court to that part.	He took the view that property

could be excluded from the control of the trustee

and the section could nevertheless apply. So, we

have a qualification on the requirement of what

property had to pass. But the dichotomy is

whether, literally, all of the property has to pass

or whether the exclusion of some property will

defeat the application of the section.

Now, the divergence is whether Barnes is

authority for one proposition or the other and,

with respect, it is submitted that even in the

court below, the Court of Appeal, Their Honours

President Kirby and Justice Mahoney took a

divergent view, and that is reflected in the other

decisions. We have the problem as to whether we

accept that Justice Gibbs, as he then was,

qualified the joint judgment in Barnes.

Now, what is being put and strongly by

President Kirby is that if the approach of

Justice Gibbs is not taken, well then, clearly, it

is an absurd result and President Kirby has said

that his view is that he is bound by the decision

in Barnes, as he construes it or as was construed
in AGC(Advances) and James but that if not for that

decision he would not find that way.

Now, His Honour Justice Mahoney says the Court

in Barnes did not say "literally all", they

accepted the exclusion of property of the third

party, accepted the exclusion of the valuer's

equity of redemption and they accepted, as

Justice Gibbs said, that it was a general vesting

of property. They are clear meaning of the words.

"What does 'his property' mean?" "His property

passes" does not necessarily, as His Honour

Justice Gibbs said, mean literally every item of

property. So, what we say is that this confusion -

this difference of interpretation of Barnes must be

clarified and we also say that because, strongly,

we are supported by what President Kirby said, is

that the result is absurd otherwise.

Now, as I was putting to Your Honours, that

was the first reason. The first reason is that in

the administration of justice the Court must

clarify the issue of what is meant by "his

property" because of the divergence of opinion.

Now, on page 53 - - -

DEANE J:  Ms Moshinsky, there obviously is some variation in

approach but do not the differences in the various

Chant 15/11/91

State court cases flow essentially from differences in the facts of the particular insolvency?

MS MOSHINSKY:  No, Your Honour, with respect. If there was

ever a case where the Commissioner would have won

on the approach taken in the other courts, that

would be this case because the approach taken in

the other courts was that not literally every item of property had to pass and that the only property that was excluded, the only relevant property that

was excluded here, was the company's residual

interest in the land and it was submitted and

accepted by President Kirby but rejected by

Justice Mahoney that the residual interest in the

land had no value and it is submitted that monetary value or value is the relevant test because it is a

question of recourse to moneys to pay the

Commissioner and it is the test which was accepted

implicitly in Card's case and in Barnes' case.

Now, if we go back to Card's case and limit

the liability to the property that passes, now,
clearly, it must be you limit the liability to the

property from which funds can be realized to meet

the debt. But in this case, and for the first

time, Justice Young rejected that as an approach

and Justice Mahoney appears not to expressly say so

but to implicitly reject that, although that, in

itself, seems in conflict with some of the views he

has expressed in earlier decisions.

But, no, in this very case, you have a case

where with the other alternative approach it would

have been found to the contrary and, in fact, that

is what President Kirby says. It is only his view

that he cannot accept Justice Gibbs' approach -
that he is constrained from accepting

Justice Gibbs' approach - that he comes to his

conclusion.

GAUDRON J: But is there not a time difficulty in what you

are saying, Ms Moshinsky? The question has got to

be, "When does it lack value?"

MS MOSHINSKY: There is no difficulty there, Your Honour.

The time is, as in all insolvency, the relevant

date and that is the date of possession or date of

when the receiver is appointed. If one looks at

the corporation law and liquidations and receivers

and priorities given under that legislation, in the

same way here, the relevant time is when control is

taken. Now, at that point in time you cannot, as

Justice Young suggested, look into the future and

say, "Well, what if Westpac does not exercise its

rights under the mortgage?" The fact is if we went

to a businessman and said, "Value this piece of

land at the time of the appointment", that land -

Chant 6 15/11/91

the company's interest in that land was of no value

because that land was subject to two mortgages in

exceeding the value of that land. As long as both

mortgages were registered on the title, they had to

be taken into account.

So, with respect, that is the relevant time

and we cannot speculate as to whether or not in the

future, for some reason - which, in the context of this case, is highly unlikely - a secured creditor

would abandon its security over that land. So,

therefore, the relevant time, we submit, is the

time of the appointment and at that point of time
the residual interest in that land, in theory and in fact, was nil, if the Court accepts, as I say,

as consistent with all other authorities, that

value must be what it would produce on realization.

But if I could take the Court to the second

reason and that is that this is important in the

administration of the Act and the orderly conduct

of insolvent employers. As the position stands,

prior to President Kirby's decision, there may have
been room for argument one way or the other and

there may have been room to say that "all" does not

mean literally all and, in fact, in my opinion, it

was a persuasive argument that the joint judgment

and the judgment of Justice Gibbs were consistent

with each other and that therefore the view of

Justice Gibbs, which was not intended to be

contrary to the joint judgment, was that literally

all did not pass was consistent with the joint

judgment.

Chief Justice Barwick, Mason and Jacobs, it is

submitted, never intended to say that every item of
property had to pass. In fact, if anything, they

were at pains to describe what property could not

pass or what property could be ignored such as, in

that case, the valueless equity of redemption.

Now, it is important for this, therefore, to

be resolved. But the main reason, possibly,
depending on the weight the Court gives to the
reasons, would be, as President Kirby said, this is
contrary, this decision of his, in particular, to

the intention of the legislation; it is contrary to

common sense; it ends in an unjust result. We have

a situation where creditors can virtually, at their

option, decide whether the section should apply.

As Your Honour Justice Deane said, one could

redraft, theoretically, the debenture and exclude

$100 or, as in this case, the bank took the

proceeds of the sale of the land and yet denied the charge by merely excluding that property which got the benefit which they got the benefit anyway.

Chant 7 15/11/91

DEANE J: That is an attack on Barnes, not an attack on

Justice Kirby's decision.

MS MOSHINSKY: Well, I put it in two ways because I would

submit that -

DEANE J:  I mean, when you come to the decision in this

case, it is simply a matter of degree whether

Barnes goes all the way or only 99 per cent of the

way.

MS MOSHINSKY: 

Yes, but it is, in a sense, an attack on the

decision of President Kirby because his
interpretation of Barnes, it is submitted, is
contrary to the interpretation by Mahoney and by
the other courts and therefore his conclusion based

on that interpretation is tainted by that error

because he says, "This is what Barnes means and I

am bound by it."

Now, we challenge that finding. He then says,

"Well then, Barnes is wrong". But there are two

potential errors there: one is that Barnes is

wrong or, two, that President Kirby is wrong in

his construction or interpretation of what Barnes

said. Now, Justice Ormiston in Judson's case,

which is an excellent example, where two receivers

were appointed - one receiver was appointed over

book debts; the other receiver was appointed over

the balance of the assets - had no problem in

saying that, "The receiver over the book debts is
not a trustee and the section does not apply to him

but, clearly, the receiver over the balance of the

property is a trustee."

Now, Justice Marks in Russell, although we do

not agree with his conclusion, again followed that

approach and what I am putting to Your Honours is

that Justice Mahoney also followed that approach.

But coming back to the policy of this Act and

why this decision cannot be allowed to stand as it

is, is that this decision virtually, as we put in

the affidavit, is tantamount to a judicial repeal. Now, the legislature has not repealed the section.

In fact, it has recently endorsed it by the very

fact that it has amended the Crown (Priority) Act

and preserved the Commissioner's priority.

The application of the section has been

extended in the sense of its relevance to

prescribed payments. The same scheme applies in

respect of prescribed payments where deductions are
made. So, any decision of this Court or the
decision, if it is allowed to stand, will affect
the prescribed payment deductions; it will affect

deductions in respect of royalties to overseas

Chant 15/11/91

residents; it will affect withholding tax. Now,

all of those sections work on - we say the policy

behind them is that the funds deducted can be
perceived as quasi or in the nature of trust funds.

The funds are deducted from an employee. These

funds are held by the employer and they are not

remitted to the Commissioner. In the same case,
say, of a builder, the prescribed payment obliges

the builder to collect the tax on behalf of the

Commissioner.

Now, this Court has been amenable to

in equity, the Commissioner could come to court and say, "This is my money. This money is held by the employer on condition to pay the tax."

submissions as to constructive trusts, the alone

GAUDRON J: Well, that involves a different time period from

the one that you say is involved in this section,

does it not?

MS MOSHINSKY:  No, I am not talking about the liability of

the trustee now, I am talking about the liability

of the employer, Your Honour.

GAUDRON J: Yes, and you would have to trace through, if you

wanted to bring that approach to bear on this

section, would you not?

MS MOSHINSKY:  Yes. Now, this section alleviates the need

to tracing but the time, Your Honour, at the

moment, I am referring to is the employers.	The
liability on the employer arises at the date	of the
deduction or so many days later. If I could

separate the liability of the employer: I am only

referring to that in the context of policy.

Now, what the legislation has then said,

rather than, as Your Honour says correctly, require
the Commissioner to trace, where the employer's

property passes to a third person, that person, if

I remain with trust law, arguably would be a

constructive trustee, taking notice of the

Commissioner's entitlement to that property and

that is the trust property. What the section is
doing is giving legislative recognition to that

sort of concept.

Now, if that is accepted - and, again, I

should mention the employees get a credit for the

tax deducted - then that money forms part of the

employer's property and we have an unjust
enrichment type of position where the creditor

steps in and takes the benefit of that property;

that property, which we put, is property or

intended by legislature to be property of the

Chant 9 15/11/91

Commissioner. Now, that is not a new submission.

I mean, that was recognized in Barnes case.

Their Honours recognized that the property deducted

augmented the property of the employer.

Their Honours - I think only Justice Stephen described it as "trust funds" but the majority of

the Court clearly recognized this whole concept of

augmentation.

That was, as I put it, the purpose or

justification of the section why, when the employer

can no longer pay the Commissioner because somebody has stepped in, because control of the property has

passed, the person who takes control should

discharge that debt. Now, President Kirby has

clearly put it that this not only is the purpose

but the intention of the legislature. The

legislature intended that in such circumstances the

Commissioner be given priority.

Now, if you look at the section, the words

"his property" do not, it is submitted, require any

qualification and that, again, is what

President Kirby says:  "There is no necessity for

the qualification 'all of the property' and 'whole

of the property'". But that is slightly different

to the submission I was making and that is even if

it was so qualified, can it really mean literally

all? Can we have an absurd result, as in this

case, which would open the way for all of these
sections to be defeated and that is by the
exclusion of some small item of property or any

property, that is, to defeat the section?

So, if I could just restate that: we say that

the courts - there has been a divergence of view:
the diversion of approach as to what the relevance

of Justice Gibbs' qualification as to what was

intended in Barnes' case; as to whether that even

should be taken into account. Fundamentally, the question ought to come back to what is the proper

meaning of "his property", and the affect of that	decision, if it stands. I have not taken you to
the figures, but you will note in that affidavit
that in the last three years the Commissioner lost
$75 million in relation to - - -

DEANE J: Where is that, Ms Moshinsky?

MS MOSHINSKY: That is at page 2 of the further affidavit.

The points made in the further affidavit,

Your Honours will note, is the breadth of the

application to the other section; the fact that the

decision below, we say, amounts to a judicial

repeal and, indeed, the $75 million is estimated

was lost over the last three years. And, of

course, it would be common knowledge that that is

Chant 10 15/11/91

most likely to increase in the present state of the

economy, insolvencies and so on, and in fact you

could not recover anything because certainly

everybody would take advantage of that decision.

Only one other further matter is that if we

were granted leave, I am instructed that there
would be an arrangement that the costs of all

parties would be paid by the Commissioner. I do

not think, unless there is any further questions, I

can take that any further.	We would submit that
leave should be granted.

DEANE J:  Thank you, Ms Moshinsky. The Court need not

trouble you, Mr Bainton, and Mr Williams.

Apart from the question of the correctness of the majority judgment of Barwick CJ and Mason and

Jacobs JJ in Federal Commissioner of Taxation v

Barnes, the Court considers that none of the matters which the applicant Commissioner of

Taxation desires to raise on an appeal to this

Court involves any question of general principle or is for any other reason such as to warrant a grant

of special leave to appeal. The question whether

special leave to appeal should be granted to allow

the Commissioner to challenge the effect of the

decision in Barnes must, in our view, be answered

in the negative.

For relevant purposes, the decision in Barnes

turned upon the construction of a particular

statutory provision, namely, section 221P of the

Commonwealth Income Tax Assessment Act 1936. It

involved no real question of general principle.

The decision has now stood for more than 15 years. It has, in the meantime, been followed and applied

in a number of other cases. It could well have

been relied upon in the framing of security

documents and in the resolution of competing claims

to the assets of insolvent estates.

In these circumstances, it would not be

appropriate for this Court to grant leave to appeal

for the purpose of enabling the Commissioner to

challenge the correctness of the construction given

by the majority of the Court in Barnes to

section 221P. Accordingly, and notwithstanding the

submissions advanced by Ms Moshinsky on behalf of

the Commissioner, we consider that special leave to

appeal should be refused.

Accordingly, the order of the Court is that special leave to appeal is refused.

MR BAINTON:  In that case, would Your Honours make an order for costs of the application?

Chant 11 15/11/91

MR WILLIAMS:	And, likewise, Your Honour?
DEANE J:	Ms Moshinsky, can you think of anything to say?
MS MOSHINSKY:	I do not have to, fortunately; I am not

instructed to oppose that.

DEANE J:  Thank you. The application is refused with costs.

MR BAINTON: If the Court pleases.

AT 12.07 PM THE MATTER WAS ADJOURNED SINE DIE

Chant 12 15/11/91