The Clarkson Company Limited, the Receiver and Manager of the Property and Undertaking of Rapid Data Systems & Equipment Limited v. Her Majesty the Queen, [1977] CTC 560, 77 DTC 5446

Dube, J:—The issue to be determined in this case is whether the defendant can set off against the plaintiff’s claim for drawbacks the unrelated indebtedness of Rapid Data Systems & Equipment Limited for income tax and excise tax which arose prior to the appointment of plaintiff as receiver.

Both parties have concurred in stating the question in the form of a special case under Rule 475. The relevant facts from the agreed statements of facts are as follows:

“Rapid Data’’, an Ontario corporation manufacturing electronic calculators, pursuant to a debenture dated September 18, 1973, gave a floating charge on all its assets to the Bank of Montreal. Rapid Data having defaulted, “the bank’’ appointed the plaintiff as receiver and manager on March 1, 1974.

As of that date Rapid Data was indebted to the defendant tn the total amount of $231,341.97; of this sum $154,662.28 was for excise tax and penalty and $76,697.69 for income tax. This indebtedness is not related to the money paid for customs duty and excise taxes which is the subject matter of this action.

In September of 1974 the plaintiff submitted 15 drawback claims to the defendant relating to transactions which occurred during the period beginning October 15, 1972 and ending on August 26, 1974. The claims were approved by the defendant in the total net amount of $231,291.90. Of that sum, $139,943.67 was payable as a result of transactions which occurred prior to March 1, 1974. The balance of $91,348.23 after that date.

The defendant has set off the total sum of $231,291.90 against the indebtedness of Rapid Data. Plaintiff claims that the amount of $91,348.23 relating to transactions after March 1, 1974, when it was appointed as a receiver, cannot be set off against the indebtedness of Rapid Data because the claims were submitted by the plaintiff with respect to transactions occurring during the receivership. That is the issue to be solved here.

Plaintiff argues that the appointment of a receiver does not dissolve the company but supersedes it and deprives it of all power to enter into contracts or to dispose of property put into the control of the receiver. Reference is made to a 1911 House of Lords decision, Moss Steamship Co v Whinney (1912), 81 LJKB 674, and more particularly to the Lord Chancellor at page 676:

I agree with Lord Justice Fletcher Moulton that the company was still alive and its business was being still carried on by Mr. Whinney, but he Was not carrying it on as the company’s agent. He superseded the company, and the transactions upon which he entered in carrying on the old business were his transactions, upon which he was personally liable. He was really a trustee, and the shipowners dealt with the trustee. No doubt there may be cases in which a receiver and manager is in all senses the agent of the company, and a question may then arise as to the extent of his authority. But here he was not such agent, and this was sufficiently conveyed to the shipowners by the notice that he was receiver and manager.

Plaintiff alleges that the privately appointed receiver, as the plaintiff was by the Bank of Montreal, while in some respect treated as an agent of Rapid Data, acts for the benefit of the debenture holder (the bank). In Ostrander v Niagara Helicopters Ltd et al, 1 OR (2d) 281, Stark, J Said at page 286:

My decision might well be otherwise if I had come to the conclusion that Bawden as receiver-manager was acting in a fiduciary capacity. I am satisfied that he was not. His roie was that of agent for a mortgagee in possession. The purpose of his employment was to protect the security of the bondholder. . . . A very clear distinction must be drawn between the duties and obligations of a receiver-manager, such as Bawden, appointed by virtue of the contractual clauses of a mortgage deed and the duties and obligations of a receiver-manager who is appointed by the Court and whose sole authority is derived from that Court appointment and from the directions given him by the Court. In the latter case he is an officer of the Court; is very definitely in a fiduciary capacity to all parties involved in the contest.

It is alleged therefore that plaintiff as receiver carried on, not for the benefit of Rapid Data, but for the bank in order to increase the realization of the assets. Plaintiff contends that where a debt arises in respect of dealings with a receiver, the party involved in the transaction is indebted to the receiver and cannot set off a debt owing to him by the company in receivership for an unrelated matter. Plaintiff relies on several authorities to support that proposition.

In Parsons v Sovereign Bank of Canada, [1913] AC 160, Viscount Haldane, LC had this to say at page 166:

The question in this appeal is whether the claim of the appellants to set off the damages they had suffered was a good one. The answer to this question depends upon whether the appellants are able to establish that the goods delivered to them were delivered under the old contracts with the company, and not under the new contracts made with the receivers and managers; for on the latter footing the debt assigned would not be a debt due to the company, and it could be assigned free from any claim for damages for breach by the company of its contracts.

In United Steel Corporation Ltd v Turnbull Elevator of Canada Ltd, 34 DLR (3d) 492 at 493, a special case was stated for the opinion of the Court and the trial judge answered the following question in the negative:

Whether the defendant is entitled to set-off against the sum of $18,397.66 owed by it to the plaintiff the sum of $15,213.98 representing the debt assigned to it by Hamilton Gear and Machine Company?

On appeal the decision was confirmed and Gale, CJO said at page 494:

For a set-off one must find two things: first, two debts; and secondly, mutuality of those debts. Mr. Justice Osler held that there was no mutuality in existence as between the debts respectively owed by United Steel and Turnbull Elevator, at least prior to July 2, 1965. On the basis of the majority decision of the English Court of Appeal in N W Robbie & Co, Ltd v Witney Warehouse Co, Ltd, [1963] 3 All ER 613, which we prefer to the minority judgment, we are of the opinion that the learned Judge was right in holding that there was no mutuality.

Plaintiff argues that upon the appointment of a receiver under a debenture, the floating charge is crystallized and ownership of the goods subject to the charge passes to the debenture holder.

Templeman, J in Business Computers Ltd v Anglo-African Leasing Ltd, [1977] 2 All ER 741, quotes Edmund Davies, LJ as follows at page 145:

A floating charge is ambulatory and hovers over the property until some event occurs which causes it to settle and crystallise into a specific charge . . . One of the events which causes crystallisation is the appointment of a receiver . . . One consequence of the receiver’s appointment by the debenture holders was that the incomplete assignment constituted by the [debenture] became converted into a completed equitable assignment to them of the assets charged . . .

On the other hand, defendant argues that its right of set off against Rapid Data arises out of indebtedness in existence at the time of the appointment of the receiver. At the time the debt arose, the charge of the bank had not crystallized. Pursuant to the terms of the debenture, the plaintiff is the agent of Rapid Data. The last sentence of the first paragraph of article 8 of the debenture reads:

In exercising any powers any such receiver or receivers shall act as agent or agents for the Company and the Bank shall not be responsible for his or their actions.

That was obviously put in for the protection of the bank, but the bank cannot have it both ways.

Defendant states that the claims are for drawbacks and remissions of customs duties and excise taxes payable because of the exportation or destruction by the plaintiff of goods which had been imported by Rapid Data and on which duty had been paid by Rapid Data. The latter’s interest in any drawback or remission of duty and taxes was subject to the defendant’s right of set off. When the plaintiff became receiver and therefore Rapid Data’s agent it acquired a right to make drawback and remission claims to the defendant upon the performance of certain acts. That right was subject to the defencant’s right of set off at the time plaintiff acquired it. In the Business Computers case (supra), Templeman, J said at page 745:

The two debts were mutual debts in respect of which a right of set-off vested in the defendants prior to receiving notice of the assignment to the debenture holders: see Hanak v Green, [1958] 2 All ER 141 at 149; [1958] 2 QB 9 at 23. That right of set off remains exercisable against the debenture holders.

In other words, it is the defendant’s contention that, at the time of the appointment of the receiver, the state of the account between Rapid Data and the defendant was that the former was indebted to the latter. In the course of carrying on the business of Rapid Data, the receiver as agent for Rapid Data submitted drawback and remission claims. Those claims are subject to the pre-existing indebtedness. Defendant relies on George Barker Ltd v Eynon, [1974] 1 WLR 462, wherein Davies, LJ said at page 467:

One consequence of the receiver’s appointment by the debenture holders was that the incomplete assignment constituted by the 1970 deed became converted into a completed equitable assignment to them of the assets charged and of the company’s rights: Biggerstaff v Rowatt’s Wharf Ltd, [1896] 2 Ch 93; N W Robbie & Co Ltd v Witney Warehouse Co Ltd, [1963] 1 WLR 1324. Another was that, both by reason of clause 6 of the deed and under the ordinary law, the receiver became, on August 31, 1971, the agent of the company and not of the debenture holders. The company continued to deal with its assets under the receiver’s direction and control. His duty being to carry on the business so as to preserve the goodwill, he must fulfil company trading contracts entered into before his appointment or render it liable in damages if he unwarrantably declined: see the authorities conveniently collected in Buckley on the Companies Acts, 13th ed (1957), p 244. And, as the assignment of the company’s rights was subject to rights already given by the company to outside parties under ordinary trading contracts, neither the receiver nor the debenture holders were in any way relieved by the former’s appointment from the obligations which by such pre-appointment contracts the company had undertaken.

In Rother Iron Works Ltd v Canterbury Precision Engineers Ltd, [1973] 1 All ER 394, plaintiff company executed a mortgage debenture containing a floating charge in favour of its bank. On October 4, 1971 plaintiff owed defendants £124 for goods sold and delivered. In the ensuing days, plaintiff contracted to sell goods to defendants valued at £159. On October 21, before the contract had been carried out, the bank appointed a receiver whereupon the floating charge crystallized, the goods were delivered to defendants in November. The receiver claimed that defendants were not entitled to set off plaintiff’s debt of £124 since that debt had arisen on delivery of goods, or after crystallization. The Court held that defendants were entitled to set off. Russell, LJ said at page 396:

Now we are not concerned in the present case with a situation in which the cross-claim sought to be set off either arose or first came to the hands of the defendants after the crystallisation of the charge. Nor are we concerned with a claim made by a receiver against the defendants arising out of a contract made by the receiver subsequent to his appointment; for it is clear that the delivery of the goods was pursuant to the contract made by the plaintiff company before the appointment. Nor are there here any special considerations that might arise from a winding-up of the plaintiff company. The facts are simply as stated.

In our judgment the argument for the defendants is to be preferred. It is true that the right of the plaintiff company to sue for the debt due from the defendant company was embraced, when it arose, by the debenture charge. But if this was because the chose in action consisting of the rights under the contract became subject to the charge on the appointment of the receiver, then the debenture holder could not be in a better position to assert those rights than had been the assignor plaintiff company.

And defendant’s final argument is precisely that: the plaintiff cannot be in a better position to assert claims for drawbacks and remissions against the defendant than Rapid Data had been at the time of the appointment.

In N W Robbie & Co, Ltd v Witney Warehouse Co, Ltd, [1963] 3 All ER 613, the Court held that there was no mutuality and therefore no right to set off, but the debt in question had come into existence after the appointment of a receiver. Sellers, LJ said at page 616:

I think that it must be held that the debenture had the effect of making each debt as it arose after the appointment of a receiver a chose in action of the plaintiffs subject to an equitable charge in favour of the bank as debenture-holder. The effect of this was argued before us by the plaintiffs and is dealt with and developed in the judgment of Russell, L J, which I have also had the advantage of reading and with which I agree, and the reasoning of which I gratefully adopt, with the result that I would hold that there is not that mutuality between the two opposing debts to permit of a set-off.

In Biggerstaff v Rowatt’s Wharf, Limited, [1896] 2 Ch 93, an 1896 Chancery case, A agreed to sell H 7,000 barrels and H paid for them. A fell into difficulties and failed to deliver 4,000 barrels. A receiver was appointed at which time H owed A moneys for rent. The Court held that H could set off its claim for undelivered barrels against the rent. Kay, LJ said at page 105:

Then it was urged that this claim could not be asserted against the debenture-holders, who had a charge on all the property of the company, inasmuch as Harvey, Brand & Co knew of the debentures. It is true that as against an assignee there can be no set-off of a debt accrued after the person claiming set-off had notice of the assignment. But does that apply to debentures such as these? Counsel hesitated to go as far as that, but said that there was no right of set-off, as no action had been brought in which it could have been asserted before October 30, 1894. I think that is not so. I think that if at the time of the assignment there was an inchoate right to set off it can be asserted after the assignment, for the assignment is Subject to the rights then in existence.

In the instant case the chain of events commenced with the importation of the goods by Rapid Data. At the time Rapid Data paid duties on these importations, which duties it could recover (up to 99% )'under the Excise Tax Act, RSC 1970, c E-13, the Financial Administration Act, RSC 1970, c F-10, and regulations thereunder.

Section 8 of the General Excise and Sales Tax Regulations, SOR/ 72-61, reads in part:

8. Where goods on which sales tax or excise tax has been paid under the Act are exported without having been used in Canada, a refund of the taxes so paid or a deduction from future taxes payable may be granted,

Section 3 of the Goods Imported and Exported Drawback Regulations, SOR/73-97, reads in part:

3. Subject to these Regulations, the Minister shall authorize the payment to an exporter or importer of goods of a drawback of ninety-nine per cent of the Customs duty and excise taxes paid on imported goods that are exported and that have not

Section 3 of the Obsolete or Surplus Goods Remission Order, SOR/ 74-34, reads in part:

3. (1) Subject to sections 6 and 7, remission is hereby granted of ninety- nine per cent of all customs duty and excise taxes paid or payable at time of entry on goods imported into Canada where the goods

(c) were destroyed under the direction of a customs officer and were not damaged prior to their destruction.

Under section 95 of the Financial Administration Act, where any person is indebted to Her Majesty, the Receiver General may retain by way of set-off any sum payable to such person, where a set-off is possible.

There existed before crystallization of the floating charge a right in Rapid Data to recoup the duties paid, predicated upon the return or destruction of the goods, and in the defendant a rightful claim against Rapid Data for taxes. There were two debts and there was mutuality of those debts. The fact that the right to be reimbursed was only exercised after the appointment of a receiver is not, in my view, a bar to the set-off of the one debt against the other as between the two parties. The situation would have been altogether different, of course, if all the transactions, namely the importation of the goods, the payment of the duties and the return or destruction of the goods, had taken place after crystallization.

The fact that the receiver was appointed out of court is not material (vide N W Robbie v Witney (supra)), nor is the knowledge of the existence of the floating charge (vide Biggerstaff v Rowatt’s Wharf, Limited (supra)). The final argument of plaintiff that the defendant is estopped from alleging that no drawback is payable to the plaintiff has no application in the case at bar.

For all those reasons, the answer to the question stated much therefore be in the affirmative.

Plaintiff’s action is dismissed with costs.