Graham Lindsay Starkey in his capacity as Liquidator of Allan Fitzgerald Pty Ltd (n Liquidation) v The Deputy Commissioner of Taxation for Queensland

[1993] HCATrans 192

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-...	~·,

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry No B23 of 1993

Brisbane

B e t w e e n -

GRAHAM LINDSAY STARKEY in his

capacity as Liquidator of

Liquidator of ALLAN FITZGERALD

PTY LTD (IN LIQUIDATION)

Applicant

and

THE DEPUTY COMMISSIONER OF

TAXATION FOR QUEENSLAND

Respondent

Application for special leave

to appeal

BRENNAN ACJ
DAWSON J

Starkey 1 2/7/93

McHUGH J

TRANSCRIPT OF-PROCEEDINGS

AT BRISBANE ON FRIDAY, 2 JULY 1993, AT 2.08 PM

Copyright in the High Court of Australia

MR W. SOFRONOFF, QC:  May it please the Court, I appear with

my learned friend, MR R.I.M. LILLEY, for the

applicant.	(instructed by Sly & Weigall Cannan &
Peterson)

MR P.E. HACK:  May it please the Court, I appear for the

respondent. (instructed by the Australian

Government Solicitor)

BRENNAN ACJ: Yes, Mr Sofronoff.

MR SOFRONOFF:  Your Honours, the question of importance in

this case is whether, pursuant to sections 221P and 221YHJ which are in materially identical terms, the

Commissioner of Taxation has a priority over money

recovered by a liquidator, pursuant to what was

section 451 of the Companies Code and is now 565 of

the Corporations Law. We submit that the point is

of general importance because it involves a
competition between a Crown priority and the

general right of creditors to an equitable

distribution of the assets of a company. It

affects every liquidation in which deductions for

group tax have been made and not passed on to the

Commissioner or deductions of prescribed payments that have been made and not passed on. At least it

affects every such liquidation in which those

failures occurred prior to May and June of this

year when there was an amending Act. That means

that in every liquidation in which that has

occurred to date, this question arises, and in many

liquidations which are yet to commence where such

failures have occurred prior to May or June

respectively, that question arises. We submit, for

that reason, the question is one of general public

importance.

We submit that the decision appealed against

is wrong for two reasons: one is, as a matter of

construction of the Act, and the second is, that

construed in the way that the Court of Appeal have

construed the provisions, it involves a consequence

which we do not embrace; a consequence as to the

validity of the Income Tax Assessment Act. Does

the Court wish me to develop those two points?

BRENNAN ACJ: Only if you need to, Mr Sofronoff.

MR SOFRONOFF:  Yes. Your Honours, Justice McPherson

accepted the submission made by the applicant that

moneys recovered by a liquidator under 451 of the

Companies Code, that is, the provision relating to

avoidance of preference payments - that moneys

recovered by a liquidator under that provision do

not, when recovered, constitute property of the

company. Justice Pincus agreed with that

Starkey 2 2/7/93

conclusion. The President did not consider the

point and found that it was unnecessary to consider

that point. We advanced that issue and we embrace

that conclusion that Their Honours made.

Consequently, the section, having been

construed by the Court of Appeal as granting the

Commissioner a priority in respect of such moneys, creates an obligation upon the liquidator to pay

the debt of the company to the Commissioner out of
property which is not, and never has been, the

property of the company; that is, the recovered

moneys~ That, we would submit, is contrary to

established authority, although there is no case

precisely in point. It is contrary though to the

trend of authority which I will identify in a

moment; and secondly, it would have the

consequences for the Income Tax Assessment Act that

I mentioned.

The section has been consistently construed as

not involving any obligation by a trustee, a

liquidator or a receiver or a trustee in

bankruptcy, to pay, other than out of moneys that
belonged to the insolvent person. That was

established in The Commissioner of Taxation of The Commonwealth of Australia v Card. It was followed

with approval and assumed in Barnes and it was also

part of the ratio of The Deputy Commissioner of

Taxation v AGC, a decision of the New South Wales

Court of Appeal.

Could I take Your Honours very quickly to

Card's case - briefly to it - to deal with that-·

issue and to page 188 in Justice Taylor's reasons.

Your Honours, the question for the court in

Card's case was whether a receiver, appointed

pursuant to a debenture, was personally liable to

pay the moneys that section 221P says have to be

paid. The section does not expressly say whether the moneys are to be paid out of company property

or out of the liquidator's personal property.	The
question arose directly for the court in

Card's case, was whether the receiver in that case

was personally liable and the court held that he
was not personally liable; at least three of

Their Honours expressed that opinion.

Could I take Your Honours to page 188, in the

paragraph ending on that page, three lines from the

beginning of that paragraph, His Honours says:

It is, I think, about as clear as it could be

both from the character of the provision and

from the terms of subsection (2) that the

liability which the section purports to impose

upon the trustee to whom the section applies

Starkey	2/7/93 is an obligation to pay out of property of the
employer coming to his hands. If it had been
intended by the section to impose an
independent liability upon the trustee
irrespectively of whether any assets come to his hands it would have been quite inapt to
seek to impose the obligation as one "having priority over all other debts whether
preferential, secured or unsecured".

And then, three lines from the foot of the page:

Further I should have little doubt that if the

section purported to impose upon the trustee

an obligation to discharge the employer's debt

to the Commissioner out of his own moneys and

irrespectively of whether any property came to

his hands, the section would be beyond power.

I see no reason to doubt that the power to

make laws with respect to taxation does not

extend to the enactment of a provision which,
without more, simply requires that A shall

discharge B's debt to the Commissioner.

As I say, Your Honours, the precise point relating

to 451 does not appear in Card's case nor
Barnes' case, nor in any case, but the thrust of

authority - and I will take Your Honours to the other two judgments in the case that touch upon

it. The thrust of this authority and Barnes and

the AGC decision in the Court of Appeal is that the

obligation is to pay only out of property

relevantly of the company.

BRENNAN ACJ:  That does not appear very clearly from the

passage that you just cited, because there was an

incomplete dichotomy, was there not? On the one

hand there was a reference to property of the

employer coming into his hands, as distinct from

property of the trustee, personally.

MR SOFRONOFF: Yes.
BRENNAN ACJ:	So that the question really is, "Was the

relevant dichotomy, for the purposes of this case,

property of the employer or property coming into

his hands?"

MR SOFRONOFF:  Does Your Honour mean, in Card's case?

BRENNAN ACJ:  Yes. To make Card's case have any relevance

to this case, you have to construe it as insisting

on property of the employer as being a

qualification of the principle.

MR SOFRONOFF:  No, Your Honour. We accept that property of

the employer company, coming into his hands upon

Starkey 4 2/7/93

the making of the winding up order, or coming into

his hands later by means of provisions like 368,

which provide that payments after the commencement

of the winding up are void, that those payments are

all caught. So whether it is property that comes

into his hands initially or property that comes

into his hands later.

BRENNAN ACJ:	I appreciate that, but the question is, for the present purposes, whether property which comes
into his hands, whether or not property of the
employer or otherwise, is property out of which he
must be required to pay?

MR SOFRONOFF: Yes, that is the question.

BRENNAN ACJ:  And that is not dealt with in terms by any of

these cases.

MR SOFRONOFF:  Yes, that is correct, Your Honour, it is not.

BRENNAN ACJ: Yes.

MR SOFRONOFF:  Our submission is this, that it is a question

that is important to be raised and answered and

that it has been answered, in our respectful

submission, incorrectly by the Court of Appeal.

Card's case is authority for the proposition that,

at least this, property of the receiver personally
is not included; what is concentrated upon is

property of the company.

Now, could I take Your Honours to two other

passages in Card's case. The first is at page 194.

The passage begins 10 lines from the foot of

page 194, where His Honour said:

It seems unlikely, however, that it was

intended to lay upon a trustee a personal

obligation to pay, whether or not there became

vested in him or subject to his control

property of the defaulting employer from which

to meet the payment of the Commissioner, and

the provisions of subsection (2) of

section 221P which give the amount payable by

a trustee "priority over all other debts,

whether preferential, secured or unsecured" -

that is "other debts" of the defaulting

employer - indicate that the obligation of a

trustee under subsection (1) is to pay by

reference to a fund -

and these are the words we particularly rely upon,

Your Honours -

Starkey 2/7/93

constituted by the property of a defaulting

employer which has become vested in or has

passed under the control of the trustee.

The moneys in question in this case, the

Court of Appeal has held by a majority of 2 to 1,

are not, and never have been, moneys of the
company, although they are moneys in the hands of
the trustee under the control of the trustee, for

the purposes of the winding up and in order to pay

creditors. However, we submit, that the - - -

McHUGH J:	Do you accept that?
MR SOFRONOFF:	Yes.

DAWSON J: But the court here was not directing its

attention to the situation you have in this case.

MR SOFRONOFF: In Card's case, no, they were not,

Your Honours.

DAWSON J: Yes, so those passages really do not take you

anywhere.

MR SOFRONOFF:  No. I am sorry, in our submission, they take

us this far, that we submit Card's case in

exhorting us to concentrate upon the property of

the company, shows that the approach that we

submit, in this case, is consistent with that

approach.

DAWSON J:  It was only doing that in contradistinction to

the personal property of the trustee, and that is,

of course, what the Full Court says.

MR SOFRONOFF: Yes. Could I take Your Honours then to - - -

McHUGH J: But before you do, could I understand what your

proposition is, because I have not heard it yet,

Mr Sofronoff? What is your proposition?

MR SOFRONOFF:	I am sorry, Your Honour. The proposition is that section 221P does not create an obligation
upon a liquidator to pay the sum represented by
unpaid deductions out of moneys coming into his
hands by virtue of section 451 of the
Companies Code.

McHUGH J: And what do you base that proposition on?

MR SOFRONOFF:  We base it upon two things: the first is

that section 221P obliges a liquidator to pay those

sums only out of the property of the company,

whether he originally gets it or later gets it, and

moneys recovered under 451 are not, and never have

been, property of the company.

Starkey 6 2/7/93

McHUGH J:  Do you accept that the Commissioner could claim

with other creditors in relation to these funds

that come into his hands?

MR SOFRONOFF:  Yes.

McHUGH J: You do? Well, it would be surprising, if that

being so, that 221P was not intended to apply to

the situation, would it not?

MR SOFRONOFF: That is a difficulty, Your Honour.

McHUGH J: That is your difficulty?

MR SOFRONOFF:  Yes. However, the difficulty the respondent

faces, we submit, is that one of the consequences
of the construction for which they advance and

which the Court of Appeal accepted, is that there

is a liability imposed upon the liquidator to pay

the tax payable by the company out of moneys that do not belong to the company and never did belong

to the company.

McHUGH J:  I appreciate that, but, I mean, in Card's case

the Court put a gloss on 221P, because if you read

it literally, the trustee would be 1·iable to pay,

provided that condition was fulfilled. But, the

Court having put a gloss on it, the question is, what does the court do in a case such as this?

And, prima facie, there seems to me to be a choice open; a choice for which you contend and a choice

for which your opponent contends in which the Court

of Appeal has basically upheld. It is as simple as

that really, is it not?

MR SOFRONOFF:  Yes. Could we advance this as support for the logic of our argument and it is this: in

Barnes' case - I will take Your Honours to the

passage - one of Their Honours said, it makes sense

for section 221P to oblige the trustee to pay out

of a fund constituted by the assets that have been

mortgaged to the receiver that has been appointed,

as long as the receiver has been appointed to the

whole of the property. And it makes sense to do

that because those assets, in part, represent part

of the deductions that have not been forwarded.

Either the company has been able to buy something,

because it retained the reductions or it has been

at liberty to retain something and not sell it in

order to make good the deductions. Either way,

there is a justice in section 221P's application.

In the case of preference payments, however, one can quite easily imagine the case where the

company has been making payments of the relevant

deductions and honouring its obligations under the

Income Tax Assessment Act. It has made, during

Starkey 2/7/93

that period, payments to creditors. A winding up

ensues. Just before the winding up, when the

company gets into serious difficulties, it ceases

making the payments of the deductions and, as a

consequence, the liquidator is appointed. He

recovers the preference payments that have no link

in reality with the failure to make the payments of

the deductions and the Commissioner says,"Well,

thank you, I will have those" - - -

DAWSON J: What does it matter? It is a debt, is it not,

due to the Commissioner, and all of the moneys

vested in the trustee are available to meet the

debts?

MR SOFRONOFF: Yes, to be, in general, shared equally with

the exception, relevantly, of this priority, which

has its logic, so the Court said in Barnes' case,

because often the deductions are represented by

assets that are held by the trustee.

DAWSON J:  I do not think there is much logic behind

preferences usually.

MR SOFRONOFF:	I am sorry, Your Honour.
DAWSON J:	I do not think there is much logic behind - - -

MR SOFRONOFF: Section 221P?

DAWSON J: The preferential recovery, just because the

government thinks it should be first; that is all.

MR SOFRONOFF:  Yes, but at least one can see the sense of it

in the case of the ordinary case, but when one

comes to 451, because it is the recovery of

payments made up to six months ago, there is no

balancing. If one has regard to the purpose of

section 221P as a legislative enactment of a

tracing exercise - - -

DAWSON J: The purpose of 221P is just to ensure that the

Tax Commissioner gets his money before anyone else.

MR SOFRONOFF:  Yes, but in respect of a special amount of

money, a sum of money collected on his behalf by

the company and not forwarded.

BRENNAN ACJ:  Mr Sofronoff, does not your submission fly in

the face of the express provisions of 221P(2)(a)?

I am looking at the words:

an amount payable to the Commissioner by a

trustee -

and we have that satisfied, in pursuance of this

section -

Starkey 2/7/93

has priority over all other debts -

How do you say that it does not have priority over

all other debts?

MR SOFRONOFF:	Because when one has regard to subsection (1) which creates the obligation, then one asks, out of
what fund or property does the trustee become
liable to pay? Well, we know it is not out of his
own pocket, because of Card's case; it must be prima facie - - -
BRENNAN ACJ:	Is that literally true or is what Card's case

says this, that the extent of the liability imposed

on a trustee by 221P is limited by, as they said in

that case, property of the company that comes into

his hands?

MR SOFRONOFF:  I am not sure that they said that in those

terms.	I understand the point that Your Honour is
making.

BRENNAN ACJ: Well, does 221P(l) create a charge or limit a

personal liability?

MR SOFRONOFF: It limits his liability.

BRENNAN ACJ: Then, in that case, we are firmly within

221P(2)(a), are we not?

MR SOFRONOFF:  But Card's case did not address the issue

that Your Honour put to me in terms.

BRENNAN ACJ:	No.
MR SOFRONOFF:	But one, I would submit, read Card's case as

limiting his liability to the property of the

company, although they did not - I accept they did

not consider this issue, of course. Now, if we are

correct and the liability is limited - the
trustee's personal liability if you like - to the

property of the company, then the point remains

alive.

BRENNAN ACJ: Yes.

MR SOFRONOFF:  Is it limited to property of the company,

strictly so called, or does it include any amounts

coming into his hands for the purpose of the

winding up?

BRENNAN ACJ:  Now, if that be so, then personal liability is

so limited, even though he has fund C in his hands,

so that he never has to pay that money under

221P(l).

MR SOFRONOFF: Yes.

Starkey 9 2/7/93

BRENNAN ACJ:  I thought that was contrary to the answer that

you have given Justice McHugh.

MR SOFRONOFF: Sorry, Your Honour, I had not appreciated

that.

BRENNAN ACJ: Yes.

McHUGH J:  See, it is one thing to draw back the wide words

of 221P and say, "The trustee shall have no

liability in respect of his own property", but it

is another thing to pull them back - that is, pull

the wide words of 221P back - and say that, "The
trustee shall have no liability in respect of

assets which are under the administration and

control of the trustee and available for payment of

the debts, costs and expenses of the winding up."

MR SOFRONOFF:  Yes. Your Honour, we appreciate that in some

respects, the distinction is an artificial one, but

could I address the second point that I

foreshadowed? In Barnes' case there is a reference

at page 493 to the early decision of this Court in

Waterhouse. Waterhouse, Your Honours, has been

considered in the decision of this Court in

McCormick and more recently in the Mutual Pools'

case. Could I summarize what we submit to be the

effect of the relevant parts of those cases, to

this effect.

Section 55 of the Constitution provides that

an Act imposing a law imposing a tax shall deal

with no other subject. The contention articulated

on 493 in the middle of the page, is one that was

raised in Card's case, Barnes' case and Waterhouse,

to this effect: if this provision purports to make

A liable to pay the tax debt of Bout of property that is not the property of B, then it imposes a

tax upon A.

MCHUGH J: Yes, but you really cannot transfer the

Waterhouse proposition to this case there, because

although technically these moneys are not the
property of the bankrupt taxpayer, in substance
they are, they are moneys that have been paid out

in breach of the preference provision and they have

got to come back. Now when they come back~ they

may not be the property of the unsecured creditors

and they may not be the property of the company,

but they are there to discharge the company's debts. It is a different situation, I think.

MR SOFRONOFF:  Your Honour, I accept with respect the

correctness of what Your Honour says is the

substance of it; we advocate the technicality of it

and we do it unashamedly because, in our

submission, it is a technical area, and section 55

Starkey 10 2/7/93

can, from time to time, involve highly technical

considerations. This is a technical area and, in

our submission, this Court in Barnes and in Card and it is reflected in decisions like Waterhouse and Mutual Pools' case, have adopted, correctly

with respect, the technical approach in concluding,

relevantly here, that 221P does not impose a fresh

obligation upon another person because to do so

would offend against section 55. We submit that

section 451 payments are outside, because

otherwise, to construe the section in the way that

the Court of Appeal has done, would be to impose an

obligation upon a trustee, albeit in his capacity

as a trustee, but nevertheless to pay, out of

money, that is not the company's money. Technical

though the argument is, we make it unashamedly, as

I say.

Unless Your Honours wish me to take you to specific passages in Barnes and FCT v AGC, a

decision of the New South Wales Court of Appeal, to

support what I have put to Your Honours - - -

BRENNAN ACJ:  I think we appreciate the force of the

argument you are putting, and most of the passages

on which you would rely are reproduced in the

judgments below in any event, are they not?

MR SOFRONOFF:  Yes, that is so, Your Honour.

BRENNAN ACJ: Yes. Is there anything further that you wish

to add to those?

MR SOFRONOFF:  Your Honours, two things if I may: one is

that Justice McPherson relied upon dicta of

Justice Mahoney of the New South Wales

Court of Appeal, in concluding in the way that he

did. Your Honours will find the passage at

page 60. His Honour referred to that passage as

support for the proposition really that if one

asks, "What is the property of the company?", one

can identify it sufficiently for present purposes

with the fund that is to be administered by the

liquidator. And, the fund that is to be

administered by the liquidator undoubted includes

451 payments, therefore one can, for present
purposes, identify the assets, including that fund,
as the property of the company.

We submit, with respect, that His Honour has it back to front, because what Mr Justice Mahoney

said in that case, was not that the property of the

company is to be identified with that fund, but

when one asks the question, "What is the status,
what is the nature of the relationship between the

company and its property after a winding up order

has been made?", and if one asks, "Well, does it

Starkey 11 2/7/93

remain the owner of that property or does it merely

become the trustee of that property?", he answered

it in the way that His Honour has quoted there.

Upon the liquidation:

the property of the company may, with

sufficient accuracy for present purposes, be

described as a fund to be administered by the

liquidator -

Now, he is not identifying, or rather, fully and

comprehensively describing what is comprised in the

property, as whatever the fund might be that the

liquidator administers from whatever source he

gains it; he is describing the property of the

company as a fund to be administered, in order to identify the relationship between the company and

the liquidator in the property. He is doing it in

an entirely different context and he is doing it,

in our submission, with a consequence different

from that which His Honour used that passage for.

So we submit that the decision, to the extent that

it is to be supported by reference to the property

of the company being in substance, whatever is

collected by the liquidator is incorrect.

The second point that I wanted to mak~ was

that both the president and Justice McPherson each

relied upon subsection (3) to support the

conclusion and what Their Honours said was that

subsection (3) preserves the priority of the

liquidator for his costs and expenses, ordinarily

payable out of the assets of the estate. And

Their Honours concluded that, if that is so, then

it looks like section 221P, the subject-matter of

it, is the assets of the company, to which the

liquidator might resort for his costs and that, of

course, includes 451 recovered funds and,

therefore, so the reasoning goes, those funds are

included.

We would submit that, on the contrary,

subsection (3) reinforces the conclusion that what

is spoken of in subsections (1) and (2) is the

assets or estate of the company, not other funds to

which the liquidator might resort. And the

subsection takes care to identify that the priority

that is preserved is the liquidator's priority in

respect of his costs, payable out of the assets.

And we submit that therefore the subject-matter of

the section as a whole is the property, the assets,

of the company. That is all we wish to say,

Your Honours.

BRENNAN ACJ:  Thank you, Mr Sofronoff. We need not trouble

you, Mr Hack.

Starkey 12 2/7/93

Despite the careful argument by Mr Sofronoff,

in our view the decision of the Court of Appeal was

correct. It would therefore be inappropriate to

grant special leave to appeal. Special leave to

appeal is accordingly refused.

MR HACK:  We ask for costs, Your Honour.

BRENNAN ACJ: With costs, Mr Sofronoff?

MR SOFRONOFF:	I cannot say anything, Your Honour.
BRENNAN ACJ:	It will be refused with costs.

AT 2.38 PM THE MATTER WAS ADJOURNED SINE DIE

Starkey 13 2/7/93