In re Foreman & Sons Pty Ltd; Uther v Federal Commissioner of Taxation

Arthur Weymouth Uther, the liquidator of Richard Foreman & Sons Pty Ltd, sought directions from the Supreme Court of New South Wales regarding the priority of payment of sales tax and pay-roll tax debts owed to the Federal Commissioner of Taxation in the company's winding up. The Commissioner claimed priority over all other unsecured creditors, while the liquidator sought clarification on whether this claim was valid or if the Commissioner should rank pari passu with other ordinary unsecured creditors. The matter was removed to the High Court of Australia due to its involvement in the interpretation of the Constitution.

The High Court was required to determine two principal legal issues. Firstly, whether the Parliament of New South Wales had the constitutional power to restrict or abolish the prerogative right of the Crown in right of the Commonwealth to priority of payment for debts due to it. Secondly, whether the Commonwealth's Sales Tax Assessment Act and Pay-roll Tax Assessment Act conferred any statutory right of priority for these tax debts, and if so, whether such provisions were inconsistent with the New South Wales Companies Act, thereby attracting the operation of section 109 of the Constitution.

A majority of the Court held that the New South Wales Parliament intended for its Companies Act, including provisions relating to the priority of debts in winding up, to bind the Crown in right of the Commonwealth. Furthermore, the majority found that it was within the constitutional competence of the New South Wales Parliament to restrict or abolish the Commonwealth's prerogative right to priority. Crucially, the Court determined that the relevant Commonwealth tax legislation did not confer any statutory priority for sales tax and pay-roll tax debts. Consequently, there was no inconsistency between the Commonwealth and State legislation, and the State law regarding the distribution of assets in a winding up would apply.

Accordingly, the Court answered the first question in the negative, meaning the Commissioner of Taxation was not entitled to be paid in priority to all ordinary unsecured creditors. The second question was answered in the affirmative, indicating that the Commissioner should be paid pari passu with the ordinary unsecured creditors when the liquidator makes a final distribution.