T-340-76
The Clarkson Company Limited, the Receiver and
Manager of the property and undertaking of
Rapid Data Systems and Equipment Limited
(Plaintiff)
v.
The Queen (Defendant)
Trial Division, Dubé J. Toronto, October 18;
Ottawa, October 31, 1977.
Crown — Tax — Defendant set off indebtedness for taxes
owing against plaintiff's drawback claims for duty and excise
paid — Drawback relating to transactions occurring before
and after appointment of receiver — Whether or not drawback
claims related to transactions occurring after receiver's
appointment can be subject to set-off — Financial Adminis
tration Act, R.S.C. 1970, c. F-10, s. 95 — General Excise and
Sales Tax Regulations, SOR/72-61, s. 8 — Goods Imported
and Exported Drawback Regulations, SOR/73-97, s. 3 —
Obsolete or Surplus Goods Remission Order, SI/74-34, s. 3.
Plaintiff, privately appointed receiver of a company after a
debenture default crystallized a floating charge, submitted
drawback claims of $231,291.90 for customs duties and excise
taxes paid on transactions that occurred before and after its
appointment. The defendant set off this sum against the com-
pany's indebtedness. Plaintiff claims that $91,348.23 of the
total drawback related to transactions after its appointment as
receiver cannot be set off against the company's indebtedness.
The issue is whether or not defendant can set off against
drawback credits that accrued after the creation of the
receivership.
Held, the action is dismissed. Before the floating charge was
crystallized and plaintiff appointed, a right existed in the
company to recoup the duties paid, predicated upon the return
or destruction of the goods, and in the defendant a rightful
claim existed for taxes. There were two debts and a mutuality
of those debts. That the right to be reimbursed was only
exercised after the receiver's appointment is not a bar to the
set-off of the debt against the other as between the two parties.
The situation would have been different, however, if all the
transactions—the importing of the goods, the payment of duty,
and the return or destruction of goods—had taken place after
crystallization. That the receiver was appointed out of court is
not material, nor is the knowledge of the existence of a floating
charge.
ACTION.
COUNSEL:
Terence M. Dolan for plaintiff.
Mrs. Katharine F. Braid for defendant.
SOLICITORS:
Harries, Houser, Toronto, for plaintiff.
Deputy Attorney General of Canada for
defendant.
The following are the reasons for judgment
rendered in English by
Dust 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 ques
tion 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 manufac
turing electronic calculators, pursuant to a deben
ture dated September 18, 1973, gave a floating
charge on all its assets to the Bank of Montreal.
Rapid Data having defaulted, the "Bank" appoint
ed the plaintiff as receiver and manager on March
1, 1974.
As of that date Rapid Data was indebted to the
defendant in the total amount of $231,341.97; of
this sum $154,662.28 was for excise tax and penal
ty and $76,679.69 for income tax. This indebted
ness is not related to the money paid for customs
duties 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 defend
ant in the total net amount of $231,291.90. Of that
sum, $139,943.67 was payable as a result of trans-
actions 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 super
sedes 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', and more particularly to the
Lord Chancellor at page 259:
I agree with Fletcher Moulton L.J. 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 Mont-
real, 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 Heli
copters Ltd. 2 , 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 role 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
' [1912] A.C. 254.
2 (1973) 1 O.R. (2d) 281.
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 3 , Vis
count Haldane L.C. had this to say at page 166:
The question in this appeal is whether the claim of the appel
lants to set off the damages they had suffered was a good one.
The answer to this question depends upon whether the appel
lants are able to establish that the goods delivered to them were
delivered under the old contracts with the company, and not
under 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. 4 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
C.J.O. 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 E.R. 613, which we
3 [1913] A.C. 160.
4 (1973) 34 D.L.R. (3d) 492 at p. 493.
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.', quotes Edmund
Davies L.J. [in George Barker (Transport) Ltd. v.
Eynon, infra] as follows at page 745:
A floating charge is ambulatory and hovers over the prop
erty 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 plain
tiff 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 draw
backs 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
5 [1977] 2 All E.R. 741.
was subject to the defendant'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 Q.B. 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 receiv
er, the state of the account between Rapid Data
and the defendant was that the former was indebt
ed 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
(Transport) Ltd. v. Eynon 6 , wherein Edmund
Davies L.J. said at pages 467-468:
One consequence of the receiver's appointment by the deben
ture 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
W.L.R. 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 hold
ers 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 Preci
sion Engineers Ltd.', 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 deliv-
6 [1974] 1 W.L.R. 462.
7 [1973] 1 All E.R. 394.
ered. In the ensuing days, plaintiff contracted to
sell goods to defendants valued at £159. On Octo-
ber 21, before the contract had been carried out,
the bank appointed a receiver whereupon the float
ing charge crystallized, the goods were delivered to
defendants in November. The receiver claimed
that defendants were not entitled to set off plain
tiff'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 L.J. 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 appoint
ment. 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 Ware
house Co., Ltd. 8 , 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 L.J. said at page
616:
8 [1963] 3 All E.R. 613.
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 9 , 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 L.J. 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 has 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 assign
ment is subject to the rights then in existence.
In the instant case the chain of events com
menced with the importation of the goods by
Rapid Data. At the time Rapid Data paid duties
on these importations, which duties it could recov
er (up to 99%) under the Excise Tax Act'°, the
Financial Administration Act" and Regulations
thereunder.
Section 8 of the General Excise and Sales Tax
Regulations 12 reads in part:
9 [ 1896] 2 Ch. 93.
10 R.S.C. 1970, c. E-13.
" R.S.C. 1970, c. F-10.
12 SOR/72-61.
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 13 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 14 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 Administra
tion 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 float
ing charge a right in Rapid Data to recoup the
duties paid, predicated upon the return or destruc
tion 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 importa
tion 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.
13 SOR/73-97.
14 SI/74-34.
Witney, supra), nor is the knowledge of the exist
ence of the floating charge (vide Biggerstaff v.
Rowatt's Wharf, Limited, supra). The final argu
ment 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 must therefore be in the affirmative.
Plaintiff's action is dismissed with costs.
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