Sheahan v Carrier Air Conditioning Pty Ltd & Ors A30/1995 [1995] HCATrans 400 (23 November 1995)

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Adelaide No A30 of 1995

B e t w e e n -

JOHN SHEAHAN

Applicant

and

CARRIER AIR CONDITIONING PTY LTD

First Respondent

and

ANDREW RYRIE CAMPBELL and ROBERT E. SCHROEDER

Second Respondents

Office of the Registry

Adelaide No A31 of 1995

B e t w e e n -

JOHN SHEAHAN

Applicant

and

AIR CON SERVE PTY LTD

First Respondent

and

ANDREW RYRIE CAMPBELL and ROBERT E. SCHROEDER

Second Respondents

Applications for special leave to appeal

BRENNAN CJ

GAUDRON J

GUMMOW J

TRANSCRIPT OF PROCEEDINGS

FROM ADELAIDE BY VIDEO LINK TO CANBERRA

ON THURSDAY, 23 NOVEMBER 1995, AT 11.45 AM

Copyright in the High Court of Australia

MR D.M.J. BENNETT, QC: In each of these matters, if your Honour pleases, I appear with my learned friend, MR D.W. PILKINGTON, for the applicant. (instructed by Minter Ellison Baker O'Loughlin)

MR D.E. CLAYTON, QC: In each matter, may it please the Court, I appear for the first respondent. I appear with my learned friend, MR N.G.C. KANDELAARS, in the first matter. (instructed by Knox & Hargrave) and I appear with my learned friend, MR T.N. COGAN, in the second matter. (instructed by T.N. Cogan & Co)

MR A.J. BESANKO, QC: May it please the Court, in each of those matters I appear for the second and third respondents, with my learned friend, MR A.S. VIDEON. (instructed by Finlaysons)

BRENNAN CJ: Thank you, Mr Bennett. Mr Bennett, it seems that the time allocated to you in this case should be only one bite at the cherry, I think.

MR BENNETT: Yes, if your Honours please. I do not think I will need even that. Your Honours, the point in this case is very short. First of all, it is a daily matter that creditors approach debtors shortly prior to their bankruptcy, or debtor companies shortly prior to winding-up, offering reasons why they should be paid, notwithstanding the general difficulty in which the debtor or debtor company is in. That frequently occurs and it is frequently responded to, and frequently responded to for good commercial reasons. Indeed, that is why in Australia, unlike England, we describe preferences as preferences rather than fraudulent preferences.

Where there is a receivership prior to a liquidation, as also occurs very commonly, a receiver will often be placed by a creditor under the very same sort of pressure. The creditor says, for example, "I am a builder who has a right to terminate the contract because of your defaults. I will do so unless you pay all the past indebtedness." Or the creditor says, "I am Telstra, and I will cut off your phone unless you pay all the past debts and your business won't be able to carry on."

In cases such as that, receivers, like debtors and debtor companies, frequently, for good commercial reasons, respond to the pressure and pay the amounts. Those amounts, of course, are then preferences. What has been said in this case is that where a receiver agrees to make such a payment and then does so, although that is a payment out of the company's funds, the fact that the receiver has made that promise affects the characterisation to the extent that it is not a preference because it is not a preference by the company.

The decision below has this rather surprising result: that if a creditor comes to a receiver and says, "For these good reasons pay my debt," and the receiver says, "Yes, I see the force of that. Here is a cheque." Leave aside for the moment whether it is the company's cheque or that aspect because that is found in our favour and probably makes no difference whose cheque it is, but the debt is then paid by the company. There is, on the findings below, no preference. But if, in that precise fact situation, the receiver says, "Yes, you're right, I promised to pay you" and he says that in a binding way, and then writes the cheque the next day, there is no preference, and that is the effect of the finding below, because what is said is because the receiver made his promise the payment then ceases to be a payment - - -

BRENNAN CJ: Supported by consideration though, Mr Bennett?

MR BENNETT: Yes, your Honour. Supported by consideration does not - the consideration is merely the continuance of performance of an existing contract in a situation where there might be a right not to continue to perform it.

BRENNAN CJ: Yes.

MR BENNETT: It is consideration in that sense. But the characterisation of the payment is not affected by the fact that it is a payment by the receiver nor, we would submit, by the fact that it is a payment pursuant to the receiver's promise. There are many situations.

GAUDRON J: Or the fact that it is payment out of moneys that would otherwise go to a secured creditor?

MR BENNETT: Only in the ultimate, your Honour, because whether they would then go to unsecured creditors or not might depend whether there is a surplus or not.

GAUDRON J: In this case there was not?

MR BENNETT: But it is the company's money, your Honour. It is the company's money whether it is going to be used to pay a secured creditor or pay unsecured creditors, and it is capable of being preferential so long as it is the company's money, and that was found in our favour. The only issue found against us was the effect of the receiver's promise.

GUMMOW J: But why was it the company's money?

MR BENNETT: That was found in our favour, your Honour, by all four judges below.

GUMMOW J: I know, yes, but why was it the company's money?

MR BENNETT: Because it was the company's money at law subject to an equitable charge.

GUMMOW J: Which it fixed and which secured a debt vastly in excess of all the assets, subject to the charge.

MR BENNETT: Yes, your Honour, but the receiver is trading and the receiver, in the course of trading, is acting as agent for the company and in his capacity as agent for the company he deals with the company's assets. It is the company making the payment.

GUMMOW J: That would be different if all this happened a day after the commencement of the liquidation?

MR BENNETT: Then we would be in a different area of discourse because then one would be looking at the provisions relating to payments after liquidation and probably the situation would be quite different. There would be other considerations.

GUMMOW J: Well, the fiction as it is, in a sense, of agency of the company would cease?

MR BENNETT: Yes, but there would be other factors though.

GUMMOW J: Yes.

MR BENNETT: The reasoning of the Full Court against me is basically this; because the payment is made pursuant to the receiver's promise, it is not a payment by the company of its debt. Our answer to that is that there is no inconsistency at all. If I make a promise to someone for consideration to pay my tax debt to the Commissioner of Taxation, one does not say because it is pursuant to the promise it is not pursuant to the Income Tax Assessment Act, nor vice a versa. The payment fulfils the dual function. It satisfies both obligations. There are many situations where a person may have more than one obligation which can be satisfied by the same payment or the same act and the mere fact that it is pursuant to one does not stop it being pursuant to the other. That was the reasoning.

Your Honours, this is regular problem in liquidations where there is a receivership before. The only direct authority is a decision of Mr Justice O'Bryan which goes the other way so, in a sense, there are conflicting authorities between two States on this issue, although this one is a Full Court and the other one is a single judge. But, we would submit it is an important issue and it is one which the Court has simply decided wrongly.

BRENNAN CJ: When you say it is decided wrongly, Mr Bennett, what you must be saying is this: that the receiver who, for good commercial reasons, seeks to continue trading and to have, in this case, the building contract completed, is unable to secure the services of the builder in order to complete the contract and garner the proceeds?

MR BENNETT: No, your Honour. If he were simply to say to the builder, "I will pay you a premium for not rescinding the contract" and that is characterised as a legitimate expense of the receivership, it might be different. But this is a case where the creditor comes to the receiver and says, "I won't go on unless you pay the past indebtedness" or, in the other case, "half the past indebtedness," and, as a matter of characterisation, that is not in the same category.

BRENNAN CJ: That is a question of fact, is it not? I mean, if the question is, "You must pay what the company owes me or I won't go on" and the payment is made then, clearly, a preference. But if it is a question of saying, "If I am to go on I insist upon a payment for the future work and for the past" then, under those circumstances, there is a fresh consideration for the payment of that which is already a past debt.

MR BENNETT: Yes, your Honour, but here it is found that this is a payment by the company. It is found that it is a discharge of past indebtedness. In your Honour's second example the past indebtedness might not be discharged. If the creditor says, "Pay me a premium not to rescind the contract and we'll go on as before," then the past indebtedness remains, so one can readily say that is not a payment to the creditor in its capacity as a creditor and, therefore, it is not a preference. But if - - -

BRENNAN CJ: What if he says, "Pay me a premium equal to the past indebtedness and I promise you that if you do I won't claim the past indebtedness in the future"? If we are getting into - - -

MR BENNETT: Then we are, your Honour. That is the borderline case which would have to be a question of fact, but this is not a borderline case. This case is the simple case where the creditor comes to the receiver, says, "Pay the past debt if you want me to continue to perform"; the receiver says, "Yes, I promise to do that," and the court's decision is not that we lose because of the argument your Honour puts to me. It is not that we lose because this is really a premium in relation to a failure to rescind. The way the court puts it is because the receiver has made a promise, the payment is the payment of the promise, not the payment of the company's debt.

It is put in the abstract and it is a general proposition and it has this peculiar consequence, that, as the Full Court has found the first question in my favour, on which there would no doubt be a contention judging by my learned friend's submissions, the law is as laid down by the Full Court in this case that, as I said at the beginning, if the receiver simply writes a cheque in response to that pressure, it is a preference, but if he says, "I agree to pay you," and then pays tomorrow, it is not a preference. And that distinction, which is the distinction laid down here, in my respectful submission, cannot be right. It may be that my learned friend would persuade the Court on the contention that the first proposition is wrong and he so argues.

While we do not concede the correctness of his contention, we do concede that it is an important issue, but it is the combination of the two issues which gives this case the great importance. The issue I raise on its own is important because it is going to arise so frequently and the logic in saying because it is X, it is not Y, is, in my respectful submission, simply erroneous logic. For those reasons we would submit, your Honour, the question is important. It arises with some frequency. The only direct authority is the other way and we would submit that it is an appropriate case for a grant of special leave. May it please the Court.

BRENNAN CJ: That is in both cases, Mr Bennett?

MR BENNETT: Yes, your Honour. The only difference between the cases is that one was the whole of the past debt and one was about half the past debt. That is the only difference.

BRENNAN CJ: Then do we need to choose between them on your argument?

MR BENNETT: It is the same representation, your Honour. It is conceivable, although highly unlikely, that there could be a distinction drawn. We would submit the convenient course is to grant special leave in both, but if your Honours were to grant special leave in one and stand the other over to a bad result of the appeal, we would not oppose that course.

BRENNAN CJ: Mr Clayton, what do you have to say?

MR CLAYTON: May it please the Court. The requirement for the payments to constitute a preference is that the payment should be made by a person unable to pay his debts. In this case that is the company TOC. My submission is that there was a fresh contract but there was fresh consideration and that the Full Court correctly determined that the payments which were made were payments made by the receiver pursuant to the receiver's personal obligation and as such, those payments were not payments by the company itself.

BRENNAN CJ: Why do you say "as such"? Why do they not bear a dual characteristic?

MR CLAYTON: Because the receiver entered into the fresh contract. The respondents were under no obligation to carry out the further work. It was only because of the fact that the receiver undertook the fresh obligation that the respondents were prepared to return to the site and complete the building work and that building work was completed pursuant to the fresh contract. If I could give an analogy: if one assumes the same receiver, the same work, the same consideration but the work done by an outside party, somebody other than the respondents, in that situation the receiver could, in my submission, pay the outside party. The receiver would be entitled to be indemnified for his payment as against the fund held by him and, in my submission, it should not matter if he decides to contract with the respondents rather than a fresh party.

BRENNAN CJ: Does it matter if the consideration instead of being a fresh contract to do the work is an agreement not to exercise the right to rescind the contract, so that the original contract continues?

MR CLAYTON: In my submission, no, your Honour, but the important thing, in my submission, is that there was a fresh contract in this case. The Full Court found correctly, I submit, that it was very much in the interests of the company to have the work completed. The court found that if the work was performed, that could give rise to a substantial payment to the company or to the receiver from Jennings, the head contractor under the work, and the Full Court accepted that the performance of the work by Air Con Serve and Carrier would assure the receiver of the receipt of substantial moneys. It was, therefore, in the interests of the company as a whole, in the interests of all the creditors, that the work should be done so that that additional money could be received from Jennings Industries.

The fact that the work was done by Air Con Serve and Carrier because the receiver decided that it was appropriate to use those two persons rather than outsiders is, in my submission, incidental. What Carrier and Air Con Serve sought in this case was a personal undertaking from the receiver that they would be paid. The receiver for his own reasons required them to return to the site. It was only on the basis of that assurance that Air Con Serve and Carrier did return to the site. Had there not been an undertaking by the receiver, Air Con Serve and Carrier simply would not have returned and the work would not have been performed and the receiver would not have received the benefit of the payment from Jennings.

In my submission the fact that the receiver had personally undertaken a fresh obligation means that the payment which was made was a payment by the receiver pursuant to his obligation. It was not a payment by the company and accordingly, the requirement of section 122 was not met.

BRENNAN CJ: Do you accept that it was the company's money that was used to make the payment?

MR CLAYTON: Well, the Full Court has found against us on that matter, your Honour, but if special leave was granted it would be the intention of the clients whom I represent to file a notice of alternative contention and argue that the moneys were the moneys of a secured lender. In our submission the Full Court correctly found that the payment was in discharge of the personal obligation of the receiver and it was not a payment by the company. The fact that the consideration paid by the receiver was inflated by the inclusion of an amount which was part or all of the pre-receivership debt is, in my submission, incidental.

The receiver chose to pay the additional amounts because it suited his interests. It was his obligation, not the company's obligations, that was met. Whatever rights of indemnity the receiver may have under the debenture is, I submit, irrelevant both between the receiver and my clients. The fact is the receiver had a personal obligation to meet the debts due to my client. Whether the receiver had undertaken a personal liability or not was a question of fact. The Full Court found that fact in favour of my clients and in my submission that finding of fact is not something which would give rise to the grant of special leave. They are my submissions, if the Court pleases.

BRENNAN CJ: Yes, thank you, Mr Clayton. Mr Besanko?

MR BESANKO: If the Court pleases, I adopt the submissions of Mr Clayton. Could I add two or three brief points. First of all, counsel for the applicant suggested that in a sense there was conflicting authority between the decision of the Full Court and a decision in Victoria, Russell Kumar and Sons, which is referred to in the applicant's summary of argument. Your Honours, the propositions that were accepted by the Full Court in this case were not considered by Justice O'Bryan in the Russell Kumar Case and we say that there is no inconsistency between the two authorities.

The second point, your Honours, is my learned friend referred to fine distinctions that arise in this area and he gave your Honours the example of a receiver who writes out a cheque one day where it would be a preference and the distinction between that situation and where the receiver promises to make a payment and on the Full Court's reasoning that would not be a preference but, your Honours, inevitably there will be fine distinctions in this area because, in our submission, it could not be said that there would be a preference in this situation if the receiver had made a personal promise to make a payment and he had obtained the funds from the secured creditor and paid those funds over to the creditors with whom he was dealing and immediately thereafter asserted his right of indemnity over the company's assets, a right which is supported by a lien, he could recoup the moneys that had been provided to him by the secured lender out of the funds and used those moneys to discharge his liability to the secured creditor.

Your Honours, in that circumstance, I do not think it is suggested that that would be a preference and that situation on my learned friend's argument would be distinguished from the situation where the receiver takes the money directly out of his account. So we say, your Honours, first of all inevitably there will be fine distinctions in this area and, secondly, the issue does not have the great practical importance my learned friend refers to because if my learned friend is right it would be open to the receiver to ask his chargee to provide the funds and then to immediately recoup those funds out of the company's assets and to repay the secured lender and there would be no question of a preference in that situation.

BRENNAN CJ: But that rather indicates the significance, does it not, of approaching it in that way because in that situation the secured creditor takes the burden of the payment as distinct from the company's funds?

MR BESANKO: He does initially, your Honour. The submission we make though is that in this case where the receiver and manager's bank account under the corporations law was held at the bank which was the chargee, the bank could, for a split second, provide the funds to the receiver. The receiver could pay it over to the creditors and the receiver could immediately then take out the equivalent amount of funds from the receiver and manager's bank account and pay it back to the secured chargee.

GUMMOW J: Well, that may well be so but I doubt if that is, in fact, what is happening around the country and if it is not happening and that is what should be happening the position should be made clear so that people can regulate their affairs to avoid these hazards.

MR BESANKO: Yes, we put it forward, your Honour, to show that it is inevitable that there will be fine distinctions in this area.

GUMMOW J: Of course there are but they have got to be observed. That is the whole peril in this area, really.

MR BESANKO: Yes, and we put it forward also, your Honour, to support the submission that the issue is not of the great practical importance that the applicant's counsel refers to. If the Court pleases, those are our submissions.

BRENNAN CJ: Yes, thank you, Mr Besanko. We need not trouble you in reply, Mr Bennett.

There will be a grant of special leave in both applications.

AT 12.11 PM THE MATTER WAS CONCLUDED