Barden-Steeldeck Industries Pty Ltd v Walsh M121/1999 [2000] HCATrans 525 (8 September 2000)

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Melbourne No M118 of 1999

B e t w e e n -

G & M ALDRIDGE PTY LTD

Applicant

and

JOHN MARTIN WALSH (as Liquidator of Thompson Land Limited)(Receiver and Manager Appointed)(In Liquidation))

Respondent

Office of the Registry

Melbourne No M119 of 1999

B e t w e e n -

ELECRAFT (AUST.) PTY LTD

Applicant

and

JOHN MARTIN WALSH (as Liquidator of Thompson Land Limited)(Receiver and Manager Appointed)(In Liquidation))

Respondent

Office of the Registry

Melbourne No M120 of 1999

B e t w e e n -

K & V PLUMBERS PTY LTD

Applicant

and

JOHN MARTIN WALSH (as Liquidator of Thompson Land Limited)(Receiver and Manager Appointed)(In Liquidation))

Respondent

Office of the Registry

Melbourne No M121 of 1999

B e t w e e n -

BARDEN-STEELDECK INDUSTRIES PTY LTD

Applicant

and

JOHN MARTIN WALSH (as Liquidator of Thompson Land Limited)(Receiver and Manager Appointed)(In Liquidation))

Respondent

Applications for special leave to appeal

McHUGH J

GUMMOW J

TRANSCRIPT OF PROCEEDINGS

AT MELBOURNE ON FRIDAY, 8 SEPTEMBER 2000, AT 11.00 AM

Copyright in the High Court of Australia

_________________

MR M.L. SIFRIS: May it please the Court, I appear for the applicants in each of those matters. (instructed by instructed by Rockman & Rockman)

MR I.J. HARDINGHAM, QC: If the Court pleases, I appear with my learned friend, MR A.P. RODBARD-BEAN, for the respondent. (instructed by Abbott Stillman & Wilson)

McHUGH J: Yes, Mr Sifris.

MR SIFRIS: If the Court pleases, the special leave point in this case, in my respectful submission, is a short one and it is this. In the case of Wily there was not a preference because there was a crystallised charge. So the payment in Wily was not a preference because there was a crystallised charge and, similarly, in the judgment of the Chief Justice, Chief Justice Brennan, in Sheahan's Case his Honour held that a payment to an unsecured creditor - - -

GUMMOW J: No, his Honour did not hold. Sheahan is quite a different case, is it not?

MR SIFRIS: Sheahan is different - - -

GUMMOW J: In Sheahan the receiver had gone in, sold some assets, realised money and then used the money to pay creditors to keep the business going.

MR SIFRIS: Yes, that is correct.

GUMMOW J: So the Chief Justice did not decide anything in the nature you are putting. These were additional observations.

MR SIFRIS: With respect, what the Chief Justice - - -

GUMMOW J: What I am putting to you is Sheahan stands for what the joint judgment says.

MR SIFRIS: Yes, that is correct.

GUMMOW J: And it does not deal with anything outside that particular area.

MR SIFRIS: Yes, I agree, your Honour, but there is an observation by the Chief Justice that where there was a payment to an unsecured creditor after crystallisation of a charge, because it was with the consent of the chargee, consent of the bank, it was held in that case not to be a preference. The case of Wily and the observation of his Honour the Chief Justice made be contrasted with the position in this case, Aldridge's Case, for example, and the decision of Justice Kirby in Sheahan's Case, where it was held - - -

GUMMOW J: Again, that is not a holding either.

McHUGH J: Yes. Decisions are decisions of the Court.

MR SIFRIS: I withdraw that. Yes, I withdraw that. The observation of Justice Kirby was that notwithstanding the crystallisation of a charge, there could still be a preference in respect of a payment and, in our respectful submission, the key issue here is this. If a case were to arise today where there was a crystallised charge and after crystallisation of a charge which the assets subject to the charge were vest in equity in the chargee, if after crystallisation there was a disposition to a creditor, the existing case, according to Justice Phillips would say that there can still be a preference because if a chargee decides to do nothing or there is inaction on the part of the chargee. Our point really is this, that why should the inaction on the part of the chargee affect the position in any way?

If there is a crystallised charge, our submission is there can never be a preference because there is no property available for payment to any unsecured creditors because everything vests in equity in the chargee.

GUMMOW J: It depends. There may be some equity of redemption, I suppose.

MR SIFRIS: There may be some equity of redemption, yes.

GUMMOW J: Is that clear on the facts in this case, that there was no equity of redemption in effect because the debt was so great?

MR SIFRIS: The debt was so great and, in fact, the secured creditor still has not paid. That is what is shown. The critical issue, with respect, in this case is the following, that Justice Finkelstein held in Wily's Case that the existence of a crystallised charge meant that there could not be a preference because upon crystallisation all of the assets vest in, or in equity, are assigned to the chargee so that any payment does not constitute a preference because the unsecured creditors are not entitled to anything. It all vests in the chargee.

GUMMOW J: Your point really is that there is a difference of opinion between the Full Federal Court and the Victorian Court of Appeal.

MR SIFRIS: Yes, precisely, and there is one further matter, if I may say, is this, that Justice Phillips, with respect, his main point was that the bank did nothing and by doing nothing the bank allowed third party interests to intrude because it was possible for the debtor or chargor to dispose of assets despite crystallisation. All that that means is there would be a claim in breach of contract. Now, that may be the case, that the bank was inactive and did nothing, whereas in Sheahan, according to the observation of the Chief Justice, the bank consented to the payment.

Why should that be a difference and what about the intermediate situation where a bank has knowledge, does not consent to the payment, but knows of the payment? So you have gradations of situations. The bank could say, "Well, we are aware of this payment" and there is evidence here that the bank was monitoring this account all the time.

So the real question is, in our submission, that there is a conflict on the authorities between the Full Federal Court, where the other two judges agreed with Justice Finkelstein, and the Court of Appeal in this case and that should be sorted out, the matter of principle being, when there is the automatic crystallisation of a charge, can there ever be a preference where all the assets the subject of the charge are assigned in equity to the chargee and does the answer depend on the knowledge of the chargee where you have today automatic crystallisations all the time?

There must be a delay in the time period between automatic crystallisation and action and in this case it was a matter of weeks, six or seven weeks. So the bank did nothing for six or seven weeks, but why should other unsecured creditors complain where to start all the assets vested in the chargee? That is the critical point that we say requires determination by this Court, with respect. If the Court pleases.

McHUGH J: Yes, Mr Sifris. Yes, Mr Hardingham.

MR HARDINGHAM: If the Court pleases, may I first address the Wily decision? My learned friend has said that the charge in that case crystallised and that there was payment thereafter and the Full Federal Court held that the payment was not preferential. What happened in that case was that payment had been made to a chargee whose charge was still floating. This is the third payment in Wily. That is certainly not the case here. The charge was definitely fixed, but the Full Court or Mr Justice Finkelstein specifically, in Wily, treated the floating charge as crystallised and reached the inevitable conclusion that if payment is made to the chargee following crystallisation of the chargee's charge, there is no preference involved there.

McHUGH J: Yes, I know.

GUMMOW J: Payment there was made to the chargee.

McHUGH J: Yes, yes.

MR HARDINGHAM: The payment was made to the chargee. Now, your Honours, special leave to appeal ought to be refused in this case on the ground that the decision of the Court of Appeal is not attended by sufficient doubt. The basic misconception or fallacy in the applicant's reasoning is that the money paid to the applicants was not available for distribution among unsecured creditors generally but was only available for distribution to the bank, but that is wrong, in our submission, your Honours. The money was available for distribution to any or all unsecured creditors.

McHUGH J: Are you talking in a physical or practical sense or in a legal sense?

MR HARDINGHAM: In a legal sense, your Honour, and as purchasers the unsecured creditors would have received those moneys subject to any claim by the bank as against them subject to working out priorities in accordance with usual equitable principle, but nevertheless they would have received the moneys and they would have been entitled to keep them subject to the bona fide purchaser rules which applies as between the equitable interest holder, namely, the bank, and the recipients of the moneys.

GUMMOW J: Did the Victorian Court of Appeal advocate the bona fide purchaser rule as the means by which you resolve the ultimate question?

MR HARDINGHAM: It does. If I can take your Honours to page 94 of the application book and the short judgment of Mr Justice Buchanan. At line 41, his Honour said:

The question whether a payment made by the debtor is a preference is not answered simply by determining whether the payment was made from the property of the debtor or another. The basic question remains whether in practical terms - - -

McHUGH J: Well, that is the point, is it not?

MR HARDINGHAM: That is so. That is the point and you will see, your Honours, that Mr Justice Buchanan makes the point that the payment could only be made:

subject to the Bank's charge, but whether that factor diminished the value of the property alienated depended upon whether the bank took steps to enforce its charge.

As well, Mr Justice Phillips at page - - -

McHUGH J: But that is the point - the point that is exercising my mind is whether or not his Honour is right when he looks at it in practical terms as opposed to legal terms. Does that not raise a question of principle requiring the grant of special leave to appeal?

MR HARDINGHAM: I would suggest not, your Honour. In this case - - -

McHUGH J: I mean, it was not legally available because the bank was entitled to enforce its charge which it crystallised, but, as you say and his Honour Justice Buchanan said, in a practical sense it was funds that was available for the general body of creditors.

MR HARDINGHAM: Your Honour, there are two concepts competing here. There is the concept of entitlement to payment and I would not contend that the unsecured creditors could have gone to the company after the charge had fixed and said, "We are entitled to be paid out of the moneys the subject of the now fixed charge." The other concept is whether those moneys were available to be paid to the unsecured creditors. Though the company had the legal title to them, it could dispose of those moneys. It was legally entitled to dispose of those moneys and the value of what was received by the recipients depended upon whether they constituted bona fide purchases for value without notice and, indeed, whether the chargee was willing to raise the issue - - -

McHUGH J: In this particular case the judge found that the applicants acted in good faith but not in the ordinary course of business.

MR HARDINGHAM: That is so.

McHUGH J: Yes.

GUMMOW J: You do not usually have bona fide purchases of value on a sum of money, do you?

MR HARDINGHAM: I would respectfully submit you do, your Honour. Your Honour will be familiar with the House of Lords decision in Thomson v Clydesdale Bank where moneys were paid into an account in overdraft and - - -

GUMMOW J: Yes.

MR HARDINGHAM: - - - it was held that there could be no tracing there because the bank was a bona fide purchaser of the value of those moneys, but, your Honours - - -

McHUGH J: The old bankruptcy preferences applied.

MR HARDINGHAM: I am sorry, your Honour?

McHUGH J: The bankruptcy preference provisions applied to payments of money, did they?

MR HARDINGHAM: Yes, they do.

McHUGH J: And the defence raised these issues.

MR HARDINGHAM: But, your Honours, the curious position arises here if it is held that these payments were not preferential, rather the vociferous unsecured creditors, the 12 unsecured creditors who were represented by Mr Rockman and who got payment up front, can retain their moneys, subject to any claim that the bank may have against them, but the other creditors miss out altogether. Now, there is absolutely no reason why the moneys that were paid to the 12 vociferous creditors could not have been paid to any or all of the creditors. My learned friend has never put forward any reason as to why, if the moneys could have been paid in the first place to the applicants, they could not have been paid to any and all of the unsecured creditors.

Finally, your Honours, we would submit that the question raised by my learned friend will be of historical interest only because of the new provisions contained in the Corporations Law. Section 588FA of the Corporations Law - I think the relevant provisions are under tab 1 of the respondent's authorities - would suggest that prima facie on the facts of the present case there would be recovery. The sort of issue - - -

GUMMOW J: When did 588FA come into force? We referred to it in Sheahan.

MR HARDINGHAM: I think it was 1992, your Honour.

GUMMOW J: Yes, effective 1993.

MR HARDINGHAM: Yes, but the Court will see from a reading of that that the emphasis is placed on looking at the position before and after and there is no doubt here that had the applicants simply proved in the winding-up they would have received less than they have now received. Those are the submissions for the respondent, your Honours.

McHUGH J: Yes. Yes, Mr Sifris.

MR SIFRIS: Your Honour, very briefly, on the last matter there is a Court of Appeal decision in Victoria, the matter of Dye v Peninsular Hotels where Justice Tadgell and Justice Orminston held that the new provisions do not affect the position and that the old law is still good law and that - - -

GUMMOW J: What is the citation of that case?

MR SIFRIS: It is [1999] VSCA 60; (1999) 3 VR 201 and - - -

McHUGH J: Yes, I was just looking at the section. It did not really jump out that there has been a change.

MR SIFRIS: No. The leading authority, the leading textbook, Macpherson, says that it is not intended to effect a change. The memorandum introducing the Bill said it is not intended to effect a change and the idea that there must be a preference prior to your advantage is implied in the legislation according to the text and, with respect, there is an important issue of automatic crystallisation and what flows from it in relation to preferences and the fact that the other unsecured creditors did not get anything begs the question. They were entitled to anything as a matter of law. That is the issue, with respect.

McHUGH J: Yes, there will be a grant of leave in this case.

MR SIFRIS: If the Court pleases.

AT 11.17 AM THE MATTER WAS CONCLUDED