Federal Commissioner of Taxation v Official Liquidator of E O Farley Limited (in Liquidation) [1940] HCA 13

Federal Commissioner of Taxation v Official Liquidator of E O Farley Limited (in Liquidation) [1940] HCA 13 - HCA 1940 case summary — Zoe

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(N.S.W.) for the years 1928-1930 inclusive, for which it had obtaii judgment in 1932; and (b) unemployment relief tax in the sum of £199 4s. 6d. for the year 1930, payable under the Unemployment Relief Tax (Amendment) Act 1930 (N.S.W.). All these debts were debts due to the Crown. * The company's total assets were approximately of the value of £2,700. An order for the compulsory winding up of the company under - the provisions of the Companies Act 1899 (N.S.W.) was made on 18th December 1935. The official liquidator of the company appointed by the order duly gave notice to the Federal Commis-_ sioner of Taxation and to the Commissioner of Taxation for the - State of New South Wales. The Federal commissioner replied by requiring that a sum of £200 be set aside for sales tax. The State commissioner, while stating that £3,000 or more was owing for income tax, required only £1,500 to be set aside. At a later date the Federal commissioner required that "a sufficient sum of money - should be set aside to meet Commonwealth income tax." A further' notice specifying a sum of £3,116 4s. 10d. in respect of income tax - was given by the Federal commissioner on 9th October 1939, shortly _ before judgment on the summons was given by the Supreme Court, _ but the notice was not part of the material upon which the adjudica- tion of that court proceeded. The summons was heard before the Chief Judge in Equity with - the assistance of two other justices by virtue of sec. 6 of the Hquity Act 1901 (N.S.W.). The Supreme Court, by majority, decided that all claims in the - winding up of the company in respect of moneys due to the Crown - in right of the Commonwealth and of the State of New South Wales should be paid pari passu: In re BE. O. Farley Ltd. (1). ; From that decision the Federal Commissioner of Taxation appealed - to the High Court. Upon the hearing of the appeal the Postmaster- General, by consent, was added as a respondent to the summons and as an appellant in the appeal. The relevant statutory provisions are sufficiently set forth in the

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of the common law such a right belonged to the State as sovereig that is, sovereign before. the Union: See Central Trust Oo. v. New York City & Co., Railway N.R. (1), Re Carnegie Trust Co. (2) a per Brandeis J., Marshall v. New York (3). In the self-governing dominions and colonies of the Crown prerogative right of priority operates to entitle the treasury of the dominion or colony to payment of debts due to the government in priority to debts due to its subjects. In other words, the claims of the government of the country are preferred to those of its subjects _ in accordance with the modern understanding of the principle. Bi the claims of other parts of the Empire have been thought entit to a like preference over the claims of the citizens of the part whose laws the assets of the debtor are administered. Thus in a winding up in England payment has been ordered of a debt due to the Crown in right of the Colony of Victoria in priority to debts due to English creditors (In re Oriental Bank Corporation ; Ex parte The ; Crown (4) ). The indivisibility of the Crown is said to be the justifi-- cation for this conclusion : See a number of judicial dicta supporting _ this position collected by Murray C.J. in In re Commonwealth Agricul tural Service Engineers Ltd. (5). But the unity of the Crown does not mean that distinctions do not exist between the parts of the King's dominion for and in respect of which the rights of the Crown are exercised. A right or prerogative of the Crown in right of New Zealand, to take an example, and conferred by, or subsisting under, the law of New Zealand, by which debts due to the Crown in that right are to be preferred to debts due to subjects of the Crown, forms part of the governmental and fiscal system of New Zealand. If the Government of New Zealand, to pursue the example, proves its debt in a winding up in Newfoundland, why should the New- Zealand treasury be preferred to ordinary creditors in Newfoundland ? It is not in accordance with the division of the Empire into separate polities that a prerogative of government affecting the treasury of one part of the Empire should be exercisable in another part and, moreover, exercisable to the prejudice of the citizens of that other (1) (1888) 110 N.Y. 250, at p. 259. (4) (1885) 52 L.T. 170; 28 Ch. D. (2) (1912) 206 N.Y. 390. 643.

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work on Companies said (10th ed. (1924), p. 484), "the section introduced into winding up the bankruptcy rules 'as to debts and liabilities provable' which must be construed (at all events for winding-up purposes) to include all rules as to priorities expressly - enacted by any statute and made applicable in the event of bank- ruptcy." The decisions which produce this result relate to the administration of the estates of deceased persons, but they fix the - meaning of the words. They are In re Leng; Tarn v. Emmerson (1), In re Heywood ; Parkington v. Heywood (2), and In re Whitaker ; Whitaker v. Palmer (3). It was never decided that sec. 10 of the Judicature Act did not bind the Crown, though in the course of distinguishing In re Henley & Co. (4) Lord Wrenbury in Food Controller v. Cork (5) explained it on that ground, mistakenly, as - Ithink. In re Churchill (Lord) ; Manisty v. Churchill (6) did not so decide ; it depends on the view that sec. 10 did not import the bank- ruptcy law of priorities: See the argument (7) and In re Williams ; Jones v. Williams (8) there cited. On the contrary, in In re Oriental Bank Corporation; Ex parte The Crown (9), Chitty J. says: " It is not necessary to decide, but it may be that so much of the Bankruptey Act of 1883 as relates to the Crown's priority is imported into winding-up proceedings by the 10th section of the Judicature Act 1875." This suggestion appears to me to be correct. What is incorporated in the law of winding up is a coherent and systematic body of rules - the rules with regard to the proof and allowance of debts and claims, including, by construction, priorities. Such a body of rules does not easily admit exceptions. To treat the Crown as impliedly excepted and therefore as not bound by the procedural requirements of proof, by the principles affecting secured debts and by the order of priorities is to throw disorder into the system and ~ impair its coherence. Adopting the view suggested by Chitty J. ' the result would be that the Crown might pursue its ordinary remedies against the assets of the company, ignoring the winding up, and the liquidator might as a short cut be permitted to pay the

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It appears to me that the substantial nature and purpose of priority belonging to the debts due to the Commonwealth is deci against the power of the State to impair or destroy it by legislation The priority is a right of the executive government, founded, as Story J. said in United States v. State Bank of North Carolina (1 upon motives of public policy, in order to secure an adequat revenue to sustain the public burdens and discharge the public debts. The administration of assets and the winding up of com- panies are matters over which the State legislative power extends But it does not follow that, as an incident of providing a complete set of rules for the application of assets in an administration or winding up, the State legislature may detract from or adversel; affect governmental rights of the Commonwealth. In many respects the executive government of the Commonwealth is affected by the condition of the general law. For instance, the general law of contract may regulate the formation, performance and discharge of the contracts which the Commonwealth finds it necessary to make in the course of the ordinary administration of government. : there is no Federal statute affecting the matter, an exercise of the legislative power of the State over the general law of contrac' might incidentally apply in the case of the Commonwealth alike with the citizen. In the practical administration of the law, the decision of questions of that sort depends less upon constitutional analysis than on sec. 80 and perhaps sec. 79 of the Judiciary Act 1903-1939. There is, however, a clear distinction between the general law, the content or condition of which, though a matter for the legislatures of the States, may incidentally affect Common- wealth administrative action, and, on the other hand, governmenta tights and powers belonging to the Federal executive as such. priority of debts due to the Crown has always been treated as a matter of prerogative and falls under the latter head. I am, there- fore, of the opinion that the New-South-Wales Companies Act 1899 could not operate to introduce into the winding up of companies an order of priority which postponed a debt due to the Common- wealth and, accordingly, that it does not draw in so much of sec. 84 (1) of the Bankruptcy Act 1924-1933 as places assessed Federal

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The right of the State to rank equally with the Commonwealth is not a thing that falls exactly under sec. 106 of the Constitution. ' Even if it be treated as forming part of the "constitution" of the State, it is not easy to regard it as existing as at the establishment of the Commonwealth. But to destroy the equality does spell an interference with an existing governmental right of the State flowing from the constitutional relations of the two polities. The Engineers' Case (1) shows that this consideration may not be enough to protect the right of the State from the exercise of a specific legislative power of the Commonwealth. The claim that debts of equal degree due to the Crown in right of the State and in tight of the Commonwealth tank equally in a distribution of assets, unlike the claim that the Crown is to be preferred to the subject, does not depend upon the prerogative and is therefore not within the reservation made in the Engineers' Case (2) in favour of the " prerogative in the broader sense," whatever that reservation may mean. On two previous occasions I have attempted to reduce to a brief legal statement the doctrine which I understand that case to establish: See Aus- tralian Railways Union v. Victorian Railways Commissioners (3) and West v. Commissioner of Taxation (N.S.W.) (4). It is a rule of construction of the legislative powers expressly conferred by the Constitution upon the Parliament of the Commonwealth. For present purposes it is enough to repeat the general proposition. "The principle is that whenever the Constitution confers a power to make laws in respect of a specific subject matter, prima facie it is to be understood as enabling the parliament to make laws affecting the operations of the States and their agencies. The prima-facie meaning may be displaced by considerations based on the nature or the subject matter of the power or the language in which it is conferred or on some other provision in the Constitution. But, unless the contrary thus appears, then, subject to " certain " reserva- _ tions, the power must be construed as extending to the States" (5). The power given by sec. 51 (xvii.) to make laws with respect to bankruptcy and insolvency is an example of a legislative power which, as a result of this principle, might be interpreted as enabling

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imposed by the Parliament fall under the legislative power with respect to taxation. In the exercise of that power the Parliament may impose the tax either on property or on the person, may make it a charge on specific real or personal property or a personal liability of the taxpayer, or may impose a personal liability and secure it over property. Having made the tax a personal liability, that is, a debt, as in the present case, the Parliament may make particular provisions to facilitate the enforcement of the liability and to ensure the actual recovery of the debt. Measures of this sort are incidental to the main purpose of the power and, independently altogether of sec. 51 (xxxix.), fall under the power. To require a liquidator to set aside assets to answer a debt due to the Commonwealth for tax so that the claim of the Treasury will not be defeated is doubtless within the ambit of the legislative power with respect to taxation. But another question arises when the debt due to the Common- wealth for tax is brought into competition with a like debt due to the State, and an attempt is made under the power with respect: to taxation to defeat the claim of the State to stand on an equality. That question is whether it is fairly incidental to the taxation power to subordinate the State's claim to that of the Commonwealth, when both claims depend on debt and come into competition in an administration of the assets of the debtor. In considering this question it is important to notice its limited character. It is con- cerned only with the existence under the taxation power of an authority to exclude an equal claim of the State of exactly the same nature. It is concerned 'only with an authority to do so when both claims are in debt, that is to say, when the Commonwealth law has chosen to create a personal obligation and the State law has done the same. It is concerned only with an authority to exclude a right of the State of a governmental and fiscal nature, a right arising from the co-ordinate position under the Constitution of the State and Commonwealth, a right to stand on an equality in the satisfaction of personal obligations due to each of them, a right confined to the relations inter se of the two governments in case of competition. Unless it can be clearly affirmed that the Commonwealth Parlia- ment has such an authority under the taxation power, then, I think,

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sec. 59 of the Income Tax Assessment Act and sec. 32 of the Sales Tax Assessment Act (No. 1) should not be construed as attempting - to affect the equality upon which State and Commonwealth debts of the same degree rank. No doubt is cast on the general validity of these sections. All that is in question is whether they can and do operate to postpone the State to the Commonwealth. I have described the inquiry as depending upon what is incidental to the taxing power because it appears to me that no legislative authority to produce the precise consequence ascribed to sec. 59 can be found unless it is considered to be incidental or ancillary to that power. Everything which is incidental to the main purpose of a legislative power is contained within the grant of the power. It carries authority to make all laws which are " necessary or proper" to effectuate the power. But, in determining whether to produce some specific consequence is ancillary or incidental to an acknowledged power, the nature of the thing it is sought to do is all important. The exact nature of the thing now in question I have already endeavoured to describe. But the special character of the main power itself must also be kept in view. For it is the natural relation between the power and the thing done that determines whether the doing of the thing is a proper incident of the power, and the existence of such a relation or connection depends on the limits and the purpose of the power on the one side and, on the other side, on the nature of what it is sought to do. Neither in the nature nor in the form of the taxation power is there anything to suggest that the relations of the two governments inter se or any rights of the States are involved. Indeed, in the Engineers' Case (1) the taxation power was singled out as an instance of a legislative power the extent of which in relation to the States might in the future come up for special consideration. It is not like powers over specific fields of law or of activity or conduct, such as bankruptcy and insolvency, bills of exchange and promissory notes, copyright, patents and trade marks, currency, coinage and legal tender, weights and measures, &c. The specific subject matter in powers of that character could not be effectually regulated if, when the State in the course of its operations entered on the field, it was immune

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Before

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Judgment (315 paragraphs)

epERaL counterpart in the Sales Tax Assessment Act perhaps departs from