Industrial Development Bank v. Valley Dairy Ltd., 53 DTC 1027, [1953] CTC 132 (Ont. S.C.)

JUDSON, J.:—The Industrial Development Bank is the holder of a chattel mortgage from the defendant company. The chattel mortgage also contains a floating charge on all the assets and undertaking of the company, both present and future. The floating charge is in such the usual form and contains express power enabling the company, in the ordinary course of business, to deal with its property until the security becomes enforceable.

On December 28 and 30, 1949, certain execution creditors obtained garnishee orders nisi against debtors of the defendant company. On January 7, 1950, the plaintiff issued a writ to enforce its security. The writ was served on January 9th. On January 11th and 12th the execution creditors had their garnishee orders made absolute. On January 14th the sheriff of the County of Carleton was appointed receiver to get in and administer the assets of the defendant company. The sheriff has in his hands three sums of money, (1) $548.19, the proceeds of a seizure made under a writ of execution issued by one James Henry; (2) $1,518.01 as a result of the garnishee orders; (3) $375.70 collected by him in his capacity as receiver. The plaintiff claims the proceeds of these garnishee orders as property to which the floating charge attaches. The two Government Departments claim statutory charges ahead of everybody. The execution creditors resist both these claims.

The claim of the Minister of National Revenue is for withholding tax under Section 112 of the Income Tax Act. By subsection (4) the amounts withheld are in trust for the Crown. By subsection (5) these amounts must be kept separate and apart from the employer’s own moneys and do not form part of his estate in a liquidation, assignment or bankruptcy. Subsection (6) imposes a personal liability upon an employer who fails to remit the withholding tax and also imposes a first charge on his assets in these words :

“(6) Every person who deducts or withholds an amount under this Act is liable to pay His Majesty on the day fixed by or pursuant to this Act an amount equal to the amount so deducted or withheld and this liability constitutes a first charge on his assets and, notwithstanding the Bank Act, the Bankruptcy Act or any other statute or law, ranks for payment in priority to all other claims including claims of His Majesty in right of a province or in any other right of whatsoever kind arising before or after the commencement of this Act, except only the judicial costs, fees and lawful expenses of an assignee or other public officer charged with the administration or distribution of such assets.”

This subsection is not the present subsection (6), but it is the one in force when the Department’s claim arose. The present subsection (6) was enacted by 1949, 2nd Sess., ec. 25, Section 44(1), and did not come into force until July 1, 1950. The old subsection made the withholding tax a first charge on the assets of the person under a duty to remit the withholding tax. The new subsection makes it a first charge on his property.

The old subsection and the phrase ‘first charge on his assets” were considered in Sandberg v. Minister of National Revenue, [1949] 1 W.W.R. 117; [1949] C.T.C. 35. Here the Department sought a charge on moneys which an owner is required to withhold from a contractor for the purpose of discharging mechanics’ liens. These moneys were held not to be assets of the contractor except to the extent of the surplus, if any, after the satisfaction of the mechanics’ liens. The money on which the Department claimed its charge was subject to a prior charge in favour of lienholders. Except to the extent of the surplus it was not an asset of the taxpayer and in my opinion it was not his property.

My decision in this case is the same, whether the subsection reads ‘‘property’’ or ‘‘assets’’. At the time when the statutory lien imposed by subsection (6) attached there was no prior lien, charge or encumbrance on the property of the taxpayer. I am holding that the Department has priority over the Industrial Development Bank because the Bank’s floating charge had not become crystallized at the time when the statutory lien attached. If the floating charge had first become crystallized, I would have held that it had priority on the ground that “property” or “assets” means what is left to the taxpayer after satisfaction of prior charges.

The charge of the Province of Ontario is similar in character to that of the Department of National Revenue. Section 35 of the Corporations Tax Act makes the tax “a first lien and charge upon the property in Ontario of the company liable to pay the tax”. The validity of this charge was established in the Court of Appeal in Jn re General Fireproofing Company of Canada Ltd., [1936] O.R. 510, 520. The point was not argued in the Supreme Court of Canada: [1936] S.C.R. 150, 161.

Subsection (6) of the Income Tax Act gives the charge created by that subsection priority over claims of Her Majesty in right of a Province. This abrogates the principle laid down in ke Silver Brothers, [1932] A.C. 514, where it was held that the charge of the Crown in right of Canada for sales tax under the old Section 17 of the Special War Revenue Act, and the charge of the Crown under the Quebec Corporations Tax Act ranked pari passu. The result is that the Department of National Revenue ranks first and the Treasurer of Ontario ranks second against all three funds in the hands of the sheriff.

The next question that I have to decide is when the floating charge crystallized. There is no doubt that the appointment of a receiver crystallizes a floating charge: Re Florence Land Co., 10 Ch. D. 541; Evans v. Rival Granite Quarries, [1910] 2 K.B. 979, 1001. There is doubt whether the issue of a writ in a debenture-holders’ action will have the same effect. In one case it was held that the issue of a writ did not crystallize the floating charge so as to prevent the company from issuing further debentures of the same series: Re Hubbard & Co. (1898), 68 L.J. Ch. 54. However, Vaughan William, L.J., in Evans v. Rival Granite Quarries, supra, at p. 986, thought that the bringing of an action was sufficient. This is a leading case on the nature of a floating charge. It was followed in Great Lakes Petroleum Co. Ltd. v. The Border Cities Oil Co. Ltd., [1934] O.R. 244. The opinion of Vaughan William, L.J., was part of the ratio decidendi and I follow it and hold that the floating charge in question here crystallized on January 7, 1950, the date of the issue of the writ. Therefore as to the second fund of $1,518.01 held by the sheriff by reason of the garnishee orders, the Bank has priority over the execution creditors, for at the time when the floating charge crystallized the garnishee orders had not been made absolute. An execution creditor who completes his execution by obtaining a garnishee order absolute while a charge remains a floating one, obtains priority over the charge. A garnishee order nisi will not give him this priority: Norton v. Yates, [1906] 1 K.B. 112; Evans v. Rival Granite Quarries, supra. The Bank has no claim against the first fund of $548.19, this execution having been completed before the issue of the writ. This fund is, however, subject to the two statutory charges. They were in existence at the time of the seizure.

This leaves only the Unemployment Insurance Commission and the execution creditors. There is nothing for any of them. The Commission’s claim is under Section 23 of the Unemployment Insurance Act, 1940, c. 44. The section does not give the Commission any statutory charge for deductions made by an employer and not remitted to the Commission. Its position in a bankruptcy has already been considered in Re Rosenberg, [1948] O.W.N. 637.

As to costs, one counsel, appointed by the Court, appeared on behalf of all the execution creditors. He should have his costs out of the funds in the hands of the sheriff. I think that this is a case where I should make the same order for all parties represented on the motion.

Judgment accordingly.