Re Starkey

[1993] QCA 195

IN THE COURT OF APPEAL

[1993] QCA 195

SUPREME COURT OF QUEENSLAND

Appeal No. 3 of 1993

Brisbane

[Starkey v. Deputy Commissioner of Taxation]

BETWEEN:

GRAHAM LINDSAY STARKEY in his capacity as Liquidator of ALLAN FITZGERALD PTY. LTD.

(In Liquidation)

Appellant

- and -

DEPUTY COMMISSIONER OF TAXATION

Respondent

The President
Mr Justice Pincus

Mr Justice McPherson

Judgment delivered 31/05/93

SEPARATE REASONS FOR JUDGMENT PREPARED BY THE PRESIDENT AND McPHERSON JA. PINCUS JA. AGREEING WITH BOTH SETS OF REASONS. ALL CONCURRING AS TO THE ORDER.

APPEAL DISMISSED WITH COSTS

CATCHWORDS:	INCOME TAX - priority - group tax not remitted by company to respondent - whether respondent has statutory priority to payment from funds recovered by liquidator as voidable preferences Income Tax Assessment Act ss.221P, 221YHJ
Counsel:	Mr W. Sofronoff Q.C., with him Mr Lilley for the appellant Mrs A. Moshinsky Q.C., with her Mr Hack for the respondent
Solicitors:	Messrs. Sly & Weigal Cannan & Peterson for the appellant Australian Government Solicitor for the respondent
Hearing Date(s):	06/05/93

THE COURT OF APPEAL

SUPREME COURT OF QUEENSLAND

Appeal No. 3 of 1993

Brisbane

Before The President
Mr Justice Pincus
Mr Justice McPherson

[Starkey v. Deputy Commissioner of Taxation)]

BETWEEN:

GRAHAM LINDSAY STARKEY in his capacity as Liquidator of ALLAN FITZGERALD PTY. LTD.

(In Liquidation)

Appellant

- and -

DEPUTY COMMISSIONER OF TAXATION

Respondent

REASONS FOR JUDGMENT - THE PRESIDENT

Judgment delivered 31/05/93

The appellant, the liquidator of Allan Fitzgerald Pty. Ltd. (in liquidation), has appealed against the dismissal of an application which he made for declarations concerning the meaning and effect of sections 221P and 221YHJ of the Income Tax Assessment Act 1936 as amended (Commonwealth). The dispute between the parties concerns the claim of the respondent, the Deputy Commissioner of Taxation, to payment in priority over other debts (except as provided by subsections 221P(3) and 221YHJ(5)) out of money obtained by the appellant, in his capacity as liquidator of the company, from the avoidance of preference payments pursuant to section 451 of the Companies (Queensland) Code. It was accepted that there is no presently material difference between sections 221P and 221YHJ of the Income Tax Assessment Act, and for convenience the appeal was argued by reference to the former section upon the common assumption that the outcome with respect to that provision would also determine the result of the dispute concerning section 221YHJ.

So far as presently material, section 221P provides: "221P(1) Where an employer makes a deduction for the purposes of this Division, or purporting to be for those purposes, from the salary or wages paid to an employee and refuses or fails to deal with the amount so deducted in the manner required by this Division, or to affix tax stamps of a face value equal to the amount of deduction as required by this Division, as the case may be, he shall be liable, and where his property has become vested in, or where the control of his property has passed to, a trustee, the trustee shall be liable, to pay that amount to the Commissioner.

221P(2) Notwithstanding anything contained in any other law of the Commonwealth, or in any law of a State or of the Northern Territory -

(a)  an amount payable to the Commissioner by a trustee in pursuance of this section has priority over all other debts ...

(The remainder of section 221P(2) is not presently
directly relevant)

221P(3) Where a trustee, being the trustee of the estate of a bankrupt or the liquidator of a company that is being wound up, is liable to pay an amount to the Commissioner in pursuance of this section, subsection (2) does not operate so as to make that amount payable in priority to any costs, charges or expenses of the administration of the estate or of the winding-up of the company (including costs of a creditor or other person upon whose petition the sequestration order or the winding-up order, if any, was made and remuneration of the trustee) that are lawfully payable out of the assets of the estate or of the company except where, in the case of the winding-up of a company, the Crown in right of a State or any other creditor is entitled to payment of a debt by the liquidator in priority to all or any of those costs, charges and expenses and has not waived that priority."

It is agreed that the respondent is a trustee for the purposes of the Income Tax Assessment Act (subsection 6(1)). Shortly stated, the argument for the appellant is that (i) the respondent is only entitled to payment out of the property of the company in liquidation which "has become vested in or the control of [which] has passed to" the appellant as trustee, and (ii) that money obtained by the appellant by the avoidance of preferences, while "vested in" or under "the control of" the appellant, neither is nor was the property of the company in liquidation.

I have not found it necessary to consider the second limb of this argument because, in my opinion, the first limb cannot be sustained. It is not disputed that the property of the company in liquidation has vested in, or passed into the control of, the appellant. Further, the section does not expressly state that the respondent's right to payment (or payment in priority to other debts) is limited to property (or the proceeds of property) of the company in liquidation which has so vested or passed into control. The appellant's submission is that, nonetheless, that is the effect of decisions of the High Court which are binding on this Court although, as is acknowledged, the actual point has not been decided.
In Commissioner of Taxation v. Card (1963) 109 CLR 177, the Commissioner sought pursuant to section 221P of the Income Tax Assessment Act to impose personal liability upon a trustee (a receiver appointed by a secured creditor).

Owen J., with whom Dixon CJ. agreed, said at pp.197:
"The real question seems to me to be whether the section
imposes upon a receiver ... a personal obligation to make
good to the Commissioner a debt due to him by the
mortgagor arising from the fact that the latter has failed
to account for wage tax deductions from the wages of its
employees ... . ... I prefer to decide the case on the
assumption that a receiver is a `trustee' within the
meaning of the section. In my opinion, however, the
section is not be construed as imposing any liability upon
a `trustee' to answer for the employer's debt except out
of property belonging to the employer which has vested in
him or passed under his control. The true obligation
which it imposes is one which does no more than require
the `trustee' to discharge the liability out of the
property of the employer which vests in him or passes
under his control and, it may be, discharge, that
liability in priority to all other liabilities. That this
is the proper construction of the provision seems to me to
find support in sub-s(2) which proceeds upon the basis
that there is property of the employer which has vested
in or passed under the control of the `trustee' and which
is available to discharge, wholly or in part, the
employer's liabilities ...

Turning then to the facts of the present case, the only property of the company which passed to the control of the [receiver] was valueless ... . There was therefore never any property of the company out of which its obligations, secured or otherwise, could be met."

The appellant relied on the passage which I have underlined (and the following sentence which is substantially to similar effect) and, taken literally, the statements made support his case. However, that the issue for present determination is remote from what was under consideration in Card's case and what was said there, read in context, as it must be, does not decide the present matter. The point at issue in Card was whether a "trustee" is made personally liable by section 221P of the Income Tax Assessment Act or whether a trustee's liability is limited to the property coming into the trustee's hands in that capacity. It was held, in the passage quoted, that the latter was the correct interpretation.

Neither the words underlined, the following sentence nor the sentence related to subsection (2) at the end of the same paragraph was intended to differentiate between the part of the estate of an employer which is available for distribution to creditors which was formerly the employer's property and any part of the estate available for distribution which does not meet that description. The point made was that section 221P does not impose a personal liability upon a "trustee" but provide an entitlement in favour of the respondent which is limited to the estate which is vested in or comes under the control of the trustee which is available for distribution.

Nor do the judgments of the other members of the High Court assist the appellant when what was said is taken in context. McTeirnan and Taylor JJ. decided the case on another basis. However, there are statements by both Taylor and Menzies JJ., who agreed with the decision arrived at by Owen J., which, taken out of the context of the dispute there under consideration, may be suggested to give literal support to the appellants.

Taylor J. said at p.188:
"It is, I think, about as clear as it could be both from
the character of the provision and from the terms of sub-
s.(2) that the liability which the section purports to
impose upon the trustee to whom the section applies 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". Obviously,
what the section contemplates and intends is a liability
on the part of the trustee to pay the amount in question

out of a fund."

and at p.189:

"The second contention on this aspect of the case was, in part, the production of the appellant's argument and, in part, that of the argument presented by the respondent and, in effect, it asserts that the liability of the receiver will be limited to the extent of the assets coming to his hands or under his control at the time of his appointment. But I can see no reason for supposing that it was intended that in case of bankruptcy or a winding-up administration the liability of the trustee should be so limited. The trustee in bankruptcy and liquidators may, and frequently do, continue to carry on business for the purposes of winding up and it was no doubt with this in mind that the special provisions of sub-s.(3) of s.221P were enacted.

For my part I am of the opinion that the liability of a trustee to whom the substantive provisions of the section apply is to be measured, subject only to the provisions of sub-s.(3), by the extent of the assets coming to his hands during the course of the relevant administration."

and at p.189-190:
"That section, in my opinion, 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. So
much is, I think, clear from the fact that it 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."
Menzies J. said at p.194-195:
"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 to the Commissioner, and the provisions of sub-
s.(2) of s.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 sub-s.(1) is to pay by
reference to a fund constituted by the property of a
defaulting employer which has become vested in or has
passed under the control of the trustee."
and at p.195:
"In this case, therefore, the obligation which s.221P
imposed upon the receiver was to pay to the Commissioner
£3,317 6s. 0d., the amount which the defaulting employer
had deducted but had failed to pay over, but only out of
the property of the defaulting employer which passed under
the receiver's control or perhaps only to the extent of
the value of that property. In this case it does not
matter which of these constructions is adopted because the
evidence does not show that the receiver obtained control
of any property of the defaulting employer that was of any
value."
While perhaps superficially assisting the appellant, these

passages demonstrate that Card proceeded on the assumption, which was adequate for the purpose of that decision, that the estate available for distribution by a trustee would be derived from the employer's property. The only distinction relevant in that case was between the personal liability of the trustee and the liability of the trustee in a representative capacity.

Card was discussed in F.C.T. v. Barnes (1975) 133 CLR 483. In Barnes, it was held by a majority of the High Court (Barwick CJ, Gibbs, Mason and Jacobs JJ., Stephen J. dissenting), that the Commissioner was entitled to priority in respect of the assets of a company which had been placed in receivership. Once again the issues were far removed from the present subject of dispute. Barwick CJ, Mason and Jacobs JJ. said in their joint judgment at p.491:

"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."

And, at p.494, they said:
"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. ...."
As in Card's case, there was no occasion for the Court to

differentiate between property vested in or under the control of the trustee which had been the company's property and property so vested or controlled which had not or might not have been the company's property. Accordingly, it is again possible to point to statements which, divorced from their context, seem to support the appellant's argument. Thus, for example, in their joint judgment, Barwick CJ., Mason and Jacobs JJ. said (the underlining has been added) at pp.489-490:

"It was decided in Federal Commissioner of Taxation v. Card (1963) 109 CLR 177, that a receiver appointed by a mortgagee of the assets of a company pursuant to a floating charge which had crystalized 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."
and at p.492:
"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.
... 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 at p.493:
"In the context [subsection 2] 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."
and at p.494:
"... 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."
Speaking of Card, Gibbs J. at p.497 said:
"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. and see per Menzies J.). Taylor J.
took the same view of the effect of the section, although
he based his decision on other grounds. 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."
Other passages of potential relevance also appear in his

Honour's judgment; for example at p.498:

"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 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."
and at p.498-499:
"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."
Stephen J., who dissented, said at p.501-502:
"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 and since
`the only property of the company which passed to the
control of the deceased was valueless' that was an end of
the matter."
and at p.503:
"In the outcome, therefore, Card's Case 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."
and at p.504-505:
"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 t no special duty to creditors generally. A
liquidator or trustee in bankruptcy is, on the contrary,
the creature of statue 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
tasks 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; or on the contrary it is
against his appointee, the secured creditor, that the
equity is available.

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 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.

Barnes, like Card, involved the position of a receiver, not a liquidator, and there was no occasion to seek to divide the fund available for distribution into property (or proceeds) which had belonged to the employer and property (or proceeds) derived otherwise through the exercise of the trustee's powers.

In neither decision was the possibility even adverted to that there might be property vested in or controlled by a trustee which had not been the property of the employer which was indebted to the respondent.
If, as I think, there is no decision of the High Court
which determines, or even provides guidance as to the answer to
the present question, this Court must construe it for itself.
Once that point is reached, the appellant's argument, which
rests solely on dicta in Card and Barnes, is seen to lack any
substantial foundation. Section 221P requires that the
property of the employer "has become vested in", or that
"control of [the employer's] properly has passed to" a trustee,
but does not expressly state that the trustee must make payment
to the respondent only from such property.

On the contrary, the implication on which the section proceeds is that the trustee is required to make payment from all the property (or proceeds) he holds in his representative capacity. Emphasis is given to this by subsections (2) and (3), which clearly envisage, and proceed to resolve, priority issues between the respondent's debt and other claims on the trustee in his representative capacity. These provisions are only fully explicable if effect is given on the assumption on which they proceed, namely, that the Commissioner's debt and other claims are payable from the same fund. This fund is described by subsection (3) as "the assets ... of the company", although, according to the appellant, such a description is technically incorrect.

However that may be, the legislative intention sufficiently emerges that the fund which is available to creditors of the company (subsection (2)) and to which resort may be had for the costs and expenses of the winding-up (subsection (3)) is the fund from which the Commissioner is entitled to payment pursuant to section 221P of the Income Tax Assessment Act.

In my opinion therefore, the appeal should be dismissed

with costs.
THE COURT OF APPEAL

SUPREME COURT OF QUEENSLAND

Appeal No. 3 of 1993

Brisbane

Before The President
Mr Justice Pincus
Mr Justice McPherson

[Starkey v D.C.T. (Qld]

BETWEEN

GRAHAM LINDSAY STARKEY in his capacity as
Liquidator of ALLAN FITZGERALD PTY LTD

(IN LIQUIDATION) Appellant

AND

THE DEPUTY COMMISSIONER OF TAXATION

FOR QUEENSLAND Respondent

REASONS FOR JUDGMENT - McPHERSON J.A.

Judgment delivered 31/05/1993

The question for decision on this appeal is whether the liquidator of a company in winding up is required to apply proceeds of preference payments recovered in winding up in order to pay to the Commissioner for Taxation amounts of group tax deducted by the company as employer acting under s.221C of the Income Tax Assessment Act 1936 but not remitted to the Commissioner as directed by s.221F(5) of the Act. It calls for a consideration of the effect and interaction of two statutory provisions, as interpreted in judicial decisions, that are applicable to the winding up of insolvent companies. One is s.221P of the Assessment Act. The other is s.451 of the Companies (Queensland) Code, read with s.122 of the Bankruptcy Act 1966.

Section 221P is directed to a case where, after an employer has failed to deal with amounts of group tax deducted but not remitted to the Commissioner as required by the Act, "his property has become vested in, or ... the control of his property has passed to, a trustee ...". In that event, s.221P(1) provides that the trustee (who by s.6(1) is defined to include a liquidator) "shall be liable to pay that amount to the Commissioner". By s.221P(2)(a) the amount so payable is expressed to have "priority over all other debts ... whether preferential, secured or unsecured"; but the priority so conferred is qualified in s.221P(3) by providing that it does not operate to make the amount payable to the Commissioner in priority "to any costs, charges or expenses ... of the winding up of the company ... that are lawfully payable out of the assets ... of the company".

Under s.221P(1) liability to pay the amount not paid by the employer is imposed on the trustee. However, the section operates, only where "his property" - that is, the property of the employer - has vested in, or control of it has passed to, the trustee. Because of this, it was held in Commissioner of Taxation v. Card (1963) 109 C.L.R. 177 that the liability to pay is limited by the extent of the assets so passing or coming under control; and, in Federal Commissioner of Taxation v. Barnes (1975) 133 C.L.R. 483, that liability under the section arises only where the whole of the employer's property passes to the trustee.

In the present case the agreed facts are that in the course of winding up the liquidator has, by realising property of the company and recovering debts due to it, received a sum (net of the costs and expenses of realisation) of $744,163.81.

This is designated Fund A. The liquidator has also recovered an amount of $1,067,224, with interest of $133,250, representing payments avoided under s.368 of the Companies Code (Fund B). A further amount (Fund C) of $476,921, together with interest of $140,953, representing proceeds of preference payments avoided pursuant to s.461 of the Code has also been recovered by the liquidator. The Commissioner has claims for unremitted tax deductions amounting to $1,508,582.53 and $178,210.39. The first sum comprises amounts subject to s.221P; the second consists of amounts that are the subject not of s.221P but of s.221YHJ (which is concerned with deductions from payments due to subcontractors). It is nevertheless accepted that the provisions of the two sections are materially indistinguishable in their effect, and it is convenient here to speak as if all deductions had been made under s.221P. The practical result is that, taken in conjunction with the likely amount of liquidator's costs, charges and expenses accorded priority under s.221P(3), it is at present doubtful if the aggregate of Funds A and B will suffice to meet the Commissioner's claims without recourse to the amount forming Fund C.

Before the primary judge the liquidator failed in his submission that neither Fund B nor Fund C was available to satisfy the claims of the Commissioner under s.221P. On appeal against that decision, the liquidator's submission has been confined to Fund C. The essence of the argument on his behalf is that the money comprised in that Fund, constituted as it is of proceeds of preference payments recovered by the liquidator pursuant to s.451, is not, in terms of s.221P as interpreted in the decisions mentioned, property or assets of the company within the meaning of that section; but rather property or assets held by the liquidator on trust for distribution among the unsecured creditors of the company.

To pass upon the correctness of this argument calls for analysis of the character of a voidable preference in insolvency, as well as of the consequences of setting aside a payment that is preferential in its effect. Section 451(1) of the Companies Code provides that a payment made by a company that, if it had been made by a natural person, would in the event of his becoming bankrupt be void as against the trustee in bankruptcy is, in the event of the company being wound up, void as against the liquidator. The effect of a provision in that form is to incorporate into the winding up of insolvent companies provisions like those in s.122 of the Bankruptcy Act 1966 (Cth) avoiding payments, transfers, etc. having in the case of an individual the effect of preferring a creditor or creditors in the administration of the assets in insolvency.

In both s.451 and s.122, and in comparable earlier legislation, the word "void" is used to describe the effect on the payment or transfer impugned. It is nevertheless settled that such a payment or transfer is not void by force of the insolvency itself, but only void or voidable at the election of the trustee in bankruptcy or, in the case of a company, of the liquidator : see Marks v. Feldman (1870) L.R. 5 Q.B. 275; Re W.R. Waters, ex parte Hodgens (1887) 5 N.Z.L.R. 431, 433; N.A. Kratzmann Pty Ltd v. Tucker (No. 1) (1966) 123 C.L.R. 257, 277.

A similar interpretation has been applied to provisions rendering settlements "void" in bankruptcy : see Sanguinetti v. Stuckey's Banking Co. [1895] 1 Ch. 176, 180-181. On behalf of the Exchequer Chamber in Stevenson v. Newnham (1853) 13 C.B. 285, 302; 138 E.R. 1208, 1215, Parke B. compared the effect of avoidance of a preference in insolvency to rescission of a transaction on the ground of fraud, saying that the property in the subject-matter "vests until avoided". Referring to s.95 of the earlier Australian Bankruptcy Act, the High Court in Federal Commissioner of Taxation v. Jaques (1956) 95 C.L.R. 223, 229, described its operation as follows:

"It simply renders certain transactions void as against the trustee, leaving the general law or other statutory provisions to supply appropriate remedies for the situations thus created. Its operation in respect of a payment to a creditor (and for present purposes the other kinds of transactions to which it applies may be ignored) is to make the payment, as against the trustee, void as a payment, so that, in favour of the trustee, the creditor must be considered to have received money which belongs to the bankrupt's estate, and his debt must be considered not to have been paid. The trustee's remedies are to sue for the recovery of the money as money had and received to his use, which is a remedy provided by the common law ...".

We are here concerned specifically with the effect of an avoidance operating on a preference constituted by a money payment. In N.A. Kratzmann Pty. Ltd v. Tucker (No. 2) (1968) 123 C.L.R. 295, the liquidator of an insolvent company, in seeking to recover as preferences payments made to another company that, in the event, also became insolvent, argued that upon avoidance by the liquidator the payee was bound to restore the amount of those payments in specie or, at any rate, in full. In rejecting that argument, the High Court distinguished a preference constituted by payment of money from one arising out of a transfer of some specific and identifiable subject like a chattel. In reliance partly upon the form of s.122(5) of the Bankruptcy Act, their Honours acknowledged that, while the effect of avoiding a transfer of specific property would be to vest title to it in the trustee or liquidator, the same consequence did not follow where a money payment was avoided as a preference. Preference moneys recovered by the trustee are, their Honours said (123 C.L.R. 295, 301):

"not the same moneys and ... do not, by virtue of payment to the trustee, become moneys of the bankrupt or in any way subject to the charge; when recovered they become the moneys of the trustee and his title to them does not depend upon his succession to any title the bankrupt had".

In the course of the reasons for judgment in that case, their Honours approved as correct the decision in Re Yagerphone Ltd [1935] 1 Ch.392, where Bennett J. held that money recovered as a preference did not, upon being received by the liquidator, fall within the ambit of a crystallised floating charge given by the company as security before the winding up. The basis of his Lordship's reasoning ([1935] 1 Ch. 392, 396) was that the right to recover money from a creditor who had been preferred was vested in liquidators for the purpose of benefiting the general body of creditors, so that money recovered did not become part of the general assets of the company, but was:

"... a sum of money received by the liquidators impressed in their hands with a trust for those creditors amongst whom they had to distribute the assets of the company."

These observations formed the foundation of the appellant liquidator's submission before this Court. If money representing proceeds of preference payments that have been avoided are, in the hands of the liquidator, to be considered not as part of the general assets of the company but as being impressed with a trust for the unsecured creditors among whom they are to be distributed, then for the purposes of s.221P they must, it was contended, be regarded as property belonging to the creditors. As such they are, it was submitted, outside the scope of the provisions of that section which, on the authority of C.T. v. Card and F.C.T. v. Barnes, requires payment to the Commissioner only from property of the company and not property belonging to someone else.

The argument suffers from several difficulties. In the first place, although in Kratzmann (No. 2) the High Court accepted the correctness of the decision in Re Yagerphone Ltd, it is by no means clear that their Honours adopted everything that was said by Bennett J. in support of his decision in that case. A close reading of the reasons of their Honours leaves some doubt whether they approved the proposition that the preference money received by the liquidators was impressed in their hands with a "trust" for the unsecured creditors. What their Honours plainly did accept was a line of authority holding that a secured creditor cannot himself assert a claim to set aside a dealing as a preference, with the consequence that "a trustee ought not to assert such a claim where the resultant benefit would accrue only to a secured creditor".

See Albert Gregory Ltd v. C. Niccol Ltd (1916) 16 S.R. (N.S.W.) 214, and the other decisions to which the High Court referred at 123 C.L.R. 295, 299-300, and 301-302).

If a secured creditor may not set in motion for his own benefit a procedure for avoiding preferences that exists for the benefit of the unsecured creditors, it is a logical consequence that he should not be able to claim the proceeds of avoiding such a preference when recovered. But it is another matter to say that the liquidator holds those proceeds in trust for the unsecured creditors if what is meant by that is a "trust" in the full sense of the word, under which the unsecured creditors are equitable owners of the assets in winding up. There is little in recent decisions to support that view of the rights of creditors. See, for example, Ayerst v. C. & K. (Construction) Ltd [1976] A.C. 167, 177-178, where the comparison drawn by Lord Diplock was with the position of a residuary beneficiary in respect of assets of an unadministered estate.

It is secured creditors who, under the decision in Re Yagerphone Ltd, are denied a share in the proceeds of avoiding preferences in winding up. Unlike the claimant in that case the Commissioner here is not a secured creditor with rights that are enforceable against identified property independently of winding up. Section 221P does, it is true, confer on the Commissioner's claim a priority that elevates it above all other debts, whether preferential, secured or unsecured; but it stops short of making him a secured creditor.

The result is that, like any other ordinary unsecured creditor, he has no more than a claim to be paid in winding up, and then only if the assets are sufficient to meet in full the costs, charges and expenses of winding up : see s.221P(3). Exceptionally under s.221P(3) the Commissioner may even claim priority over those costs and expenses if the case is one in which the Crown in right of the State is entitled to be paid in priority to such costs and expenses, and title to that priority has not been waived.

Proceeds of preferences recovered by the liquidator may
be, and in practice often are, a constituent of the fund of
assets out of which costs and expenses of winding up are paid.
Section 221P evidently has in view a single fund from which
costs and expenses are payable before the balance, if any, is
applied in meeting the Commissioner's claim accorded priority
by s.221P(2). Section 221P(3) speaks of those costs and
expenses as being "payable out of the assets ... of the company
...". A fund of assets that may be composed, wholly or in
part, of proceeds of preference payments avoided and recovered
is thus treated in s.221P(3) as "assets of the company", and is
made available for payment of the Commissioner's priority claim

after the costs and expenses have been met, or, exceptionally,

even before they are met.

The result is, we think, that, while proceeds of payments recovered as preferences in winding up do not become the property of the company, nor the property of the unsecured creditors, they do form part of the general assets under the administration and control of the liquidator that are available for payment of the costs and expenses of winding up and the claims of unsecured creditors, including that of the Commissioner under s.221P. It is true that in C.T. v. Card and F.C.T. v. Barnes there are passages in some of the judgments to the effect that, for the application of s.221P, there must be "property of the employer"; but that is simply a reflection of the words "his property" in s.221P(1). In neither of those cases was the Court concerned, as we are here, with a process of administration of assets undertaken for the benefit of the general creditors of the company. The true position is, we consider, accurately stated by Mahoney J.A. in D.C.T. v. AGC (Advances) Ltd [1984] 1 N.S.W.L.R. 29, 37, where his Honour said:

"... the property of the company may, with sufficient accuracy for present purposes, be described as a fund to be administered by the liquidator in accordance with the company law and to be distributed in accordance with the priorities there established. It is against this background that the effect of the section in the case of liquidation is to be considered".

Section 221P was the section to which his Honour was referring there.

Finally, there are some other considerations of a general kind. Section 122 of the Bankruptcy Act is not the only provision relating to personal insolvency that is incorporated into the winding up of companies; nor is s.451 the only provision of the Companies Code that uses the expression "void against the liquidator". If the submission of the appellant liquidator is correct, assets becoming available from any of these sources will not be applicable to pay the Commissioner's claim under s.221P. In practice this would tend to complicate the process of administration in winding up. It would be necessary not only for liquidators to segregate proceeds received from those sources from other funds received from realising general assets of the company; but also to distinguish between proceeds that result from avoiding preferences constituted by money payments and from preferences constituted by transfers of specific and identifiable property.

It would mean reserving particular assets in winding up for payment of particular creditors, which is something that, unless compelled to it by statute, courts have in the past generally been unwilling to sanction.

For all of these reasons, we consider that s.221P does not exclude from its scope assets that, like those comprised in Fund C in this case, are the result of the liquidator's action pursuant to s.451 of the Companies Code of avoiding payments by the company that constituted preferences in terms of s.122 of the Bankruptcy Act. In reaching this conclusion we ought perhaps to add that we have not found it necessary to rely on the penultimate paragraph of the joint reasons in Octavo Investments Pty Ltd v. Knight (1979) 144 C.L.R. 360, 372. In dismissing the appeal against an order for payment of preference moneys to the liquidator in that case, the High Court of its own motion substituted an order for payment to the company. To that extent the order on appeal in Octavo tends to support the argument for the Commissioner in the present appeal; but the order that was substituted in that case was, we understand, introduced by the High Court after the hearing without calling on counsel for submissions on the question.

In our opinion this appeal should be dismissed with costs.

IN THE COURT OF APPEAL

SUPREME COURT OF QUEENSLAND

Appeal No. 3 of 1993

Brisbane
[Starkey v. D.C.T. (Qld)]

BETWEEN

GRAHAM LINDSAY STARKEY in his capacity as
Liquidator of ALLAN FITZGERALD PTY LTD

(IN LIQUIDATION) Appellant

AND

THE DEPUTY COMMISSIONER OF TAXATION

FOR QUEENSLAND Respondent

The President
Mr Justice Pincus

Mr Justice McPherson

Judgment delivered 31/05/93

Separate Reasons by the President and McPherson J.A. Pincus
J.A. agreeing with both.
Hearing Date: 6 May 1993

APPEAL DISMISSED WITH COSTS

CATCHWORDSCOMPANY LAW - Winding up - Whether Commissioner of
Taxation has priority in regard to proceeds of
preference payments - Sections 221C, 221P Income
Tax Assessment Act 1986 (Cth), ss.451, 461.
Companies (Queensland) Code, s.122 Bankruptcy

Act 1966 (Cth).

Counsel:	W. Sofronoff Q.C., with him R.M. Lillay, for the appellant
A. Moshinsky Q.C., with him P.E. Hack, for the respondent

Solicitors: Sly & Weigall Cannan & Peterson for the

appellant

Australian Government Solicitor for the
respondent