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High Court of Australia Transcripts |
Melbourne No M104 of 2000
B e t w e e n -
G & M ALDRIDGE PTY LTD
Appellant
and
JOHN MARTIN WALSH (as Liquidator of Thompson Land Limited (Receiver and Manager Appointed) (In Liquidation)
Respondent
Office of the Registry
Melbourne No M105 of 2000
B e t w e e n -
ELECRAFT (AUST) PTY LTD
Appellant
and
JOHN MARTIN WALSH (as Liquidator of Thompson Land Limited (Receiver and Manager Appointed) (In Liquidation)
Respondent
Office of the Registry
Melbourne No M106 of 2000
B e t w e e n -
K & V PLUMBERS PTY LTD
Appellant
and
JOHN MARTIN WALSH (as Liquidator of Thompson Land Limited (Receiver and Manager Appointed) (In Liquidation)
Respondent
Office of the Registry
Melbourne No M107 of 2000
B e t w e e n -
BARDEN-STEELDECK INDUSTRIES PTY LTD
Appellant
and
JOHN MARTIN WALSH (as Liquidator of Thompson Land Limited (Receiver and Manager Appointed) (In Liquidation)
Respondent
GLEESON CJ
GAUDRON J
GUMMOW J
HAYNE J
CALLINAN J
TRANSCRIPT OF PROCEEDINGS
AT HOBART ON WEDNESDAY, 4 APRIL 2001, AT 11.45 AM
Copyright in the High Court of Australia
MR M.L. SIFRIS: May it please the Court, I appear for each appellant. (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 in each appeal. (instructed by Abbott Stillman & Wilson)
GLEESON CJ: Yes, Mr Sifris.
MR SIFRIS: If the Court pleases. Your Honours, this appeal raises a point of some importance, given the increasing occurrence of the automatic crystallisation of charges. The appellants contend that after crystallisation of the charge over all of the assets of undertaking of a company a payment thereafter in breach of the charge cannot be a preference.
GUMMOW J: Now, are we to assume in this case that the indebtedness was so serious that there was no equity of redemption left?
MR SIFRIS: Yes. The debate in this Court stems from the ability of a company after crystallisation to in fact make payments, even in breach of the charge, and that is conceded that after crystallisation the funds remain in the company's bank account, for example, the company has the power and can make payments to third
parties. If it does so, after crystallisation of the charge and an unsecured creditor is paid, on one view expressed by Justice Kirby in Sheahan's Case to be the broader view, there is a preference because despite the crystallisation of the charge there is a payment to one unsecured creditor and not others, so, there is a preference. You got paid, you did not - there is the preference.
GUMMOW J: Yes, but got paid with whose money?
MR SIFRIS: Assuming it is the money of the company.
HAYNE J: Well, is that assumption right, relevantly, and does it matter whether it is the company's money?
MR SIFRIS: Yes. Our submission is that without going into a jurisprudential characterisation of whose money, we would submit the money is not available for the payment of unsecured creditors so that if the chargee has an equitable proprietary interest in the funds, after crystallisation, and the ability to appoint a receiver and take control of the funds, we would submit that the funds, nonetheless, are not available for the payment to unsecured creditors.
GLEESON CJ: These funds of which you speak are credit balances in a bank account, are they?
MR SIFRIS: In this particular case, the funds comprised a sum of a little under $400,000.
GLEESON CJ: Yes, but they were not in a bag?
MR SIFRIS: No, they were not in a bag.
GLEESON CJ: So, presumably, it was a debt owed to the company by a bank, was it?
MR SIFRIS: No, it was a debt owed to a company by its project manager.
GUMMOW J: No.
GLEESON CJ: I want to get behind this word "funds" that you keep using. We are not dealing with gold coins.
MR SIFRIS: No, we are not dealing with - we are dealing with - - -
GLEESON CJ: What was the nature - what do you mean by the expression "funds"?
MR SIFRIS: In this particular case, Thompson Land Limited was the company that executed a charge in favour of the ANZ Bank. There was an amount owing to Thompson Land Limited by its project manager, Construction Engineering. Those amounts comprised overpayments made during the course of the project by the company to the project manager. So, the project manager, Construction Engineering, had in its bank account, not separately set aside, but had in its bank account the sum of about $399,000.
GLEESON CJ: That was a debt owed by its banker to it?
MR SIFRIS: Yes, and it used those funds, as directed by Thompson Land, to pay the appellants.
GUMMOW J: But that debt owed to it by its bank was something upon an asset of it upon which the charge had crystallised?
MR SIFRIS: Yes, clearly, and that - - -
HAYNE J: Well, is that right, that the debt owed by the banker of Construction Engineering to Construction Engineering? No. The crystallisation was over the debt owed by Construction Engineering to Thompson Land.
MR SIFRIS: Yes.
HAYNE J: Yes.
MR SIFRIS: Yes, we would submit that the debt owed to Thompson Land by Construction Engineering was subject to the fixed charge. What then happened is that due to some pressure from the appellants that money in Construction Engineering's bank account was used to pay the appellants and some others - used to pay 12 unsecured creditors but not all unsecured creditors, and, that is the basis of the case. The liquidator says, "Those moneys held in Construction Engineering's account that were used to pay 12 unsecured creditors should have been used to pay all".
Our submission, with respect, is that once the charge crystallised and became a fixed charge over the debt owing from Construction Engineering to Thompson Land, once that happened, no unsecured creditor is entitled to anything, given the consequence that flows from crystallisation, and we would submit that in such a case there is no disadvantage to unsecured creditors. The only disadvantage is to the secured creditor.
GLEESON CJ: Just remind us of the circumstances in which this agreement between Mr Rockman and his clients, on the one hand, and the construction levy was worked out. You say there is a debt owed by the construction manager to the owner of the building to Thompson?
MR SIFRIS: Yes.
GLEESON CJ: Was the agreement by Mr Rockman made with Thompson or with the construction manager?
MR SIFRIS: It was made with the construction manager as agent for Thompson Land.
GLEESON CJ: So, perhaps, it was made with both of them?
MR SIFRIS: Maybe both of them.
GLEESON CJ: As between the construction manager and Thompson, the payment to Mr Rockman's 12 clients was treated as a discharge of the obligation by the construction manager to Thompson. Is that right?
MR SIFRIS: Yes.
GLEESON CJ: So, the construction manager discharged its liability to Thompson by, at the direction of Thompson, paying money to certain creditors of Thompson?
MR SIFRIS: Yes, precisely.
HAYNE J: In accordance with a direction given by Thompson at a time when the debt, the subject of direction, was the subject of a fixed charge in favour of Thompson's banker?
MR SIFRIS: Yes, correct.
HAYNE J: Thompson thereby directing disposition of property in which the bank had the interests it had as holder of a then fixed charge?
MR SIFRIS: Precisely, your Honour. That is the point. The point of this appeal is that given those facts there can never be a preference because there were no funds available to anyone, other than the bank, and nobody was entitled to anything, other than the bank, and the only party that suffered a disadvantage is the bank and on another test that is being propounded in the cases, related to what we are talking about, there was no decrease in the assets available for distribution to unsecured creditors.
GLEESON CJ: I know that floating charges were invented by the law so that people could write about their juridical nature but I would just like to think a little further about the nature of a fixed charge over a debt in circumstances where what is proposed is not an assignment of the debt but an action which, as between debtor and creditor, will discharge the liability, Thompson being owed money by the construction company and that debt becoming the subject of a fixed charge in favour of the bank - Thompson, without the knowledge or agreement of the bank, I gather.
MR SIFRIS: Without the agreement of the bank - on the evidence, without the agreement and on its use.
GLEESON CJ: All right. Thompson, without the agreement of the bank makes a further agreement with the debtor.
MR SIFRIS: Yes.
HAYNE J: By what right? To what effect? We know what happens in fact but by what authority did it say you discharge my debts to others by recourse to money which, putting it unduly crudely, is the money of another, my banker.
MR SIFRIS: That is our proposition, with respect, your Honour.
GLEESON CJ: I suppose it would not make any difference to the analysis, would it, if instead of Thompson agreeing with the construction company that the construction company's debt to Thompson would be discharged by the making of payments to certain creditors of Thompson, Thompson had transferred personal property which was the subject of the fixed charge.
HAYNE J: Or what title could it give? Let it be assumed it had the bag of gold coin, subject to fixed charge, or ingots of gold - let us avoid legal tender intruding. Could it have validly given title to the gold ingot by directing Construction Engineering to hand it to Thompson Land's creditor?
MR SIFRIS: Thompson Land's unsecured creditor.
HAYNE J: It would help if I understand which side of the ledge is which, Mr Sifris.
MR SIFRIS: Yes, unsecured creditor. There are cases where property disposed of in breach of a charge can create in favour of recipients rights, and even successful rights, in the case of a bona fide third party for value without notice. So, I would have to say that it is possible to create an interest in favour of a third party recipient - - -
GLEESON CJ: Yes. That would typically happen with a car dealer.
MR SIFRIS: Yes, precisely. In fact, your Honour Justice Gleeson referred to that in the Fire Nymph Case about priorities between chargor companies disposing of property.
GLEESON CJ: Yes, but finance companies frequently take floating charges over the assets of a car dealer and those charges sometimes crystallise and the car dealer goes on trading.
MR SIFRIS: The difficulty in this case is that the primary judge in the Court of Appeal really based his reasoning on the inaction of the bank. What they said was that the bank took too long and thereby allowed a payment to be made out of the funds, subject to the fixed charge. I use that loosely and qualified in the way that we have discussed. But, the inaction of the bank in doing nothing permitted those payments to be made and for that inaction the bank must suffer because third party rights can validly be created. They were created in favour of my clients. Why not others?
GUMMOW J: It is the last step that is perhaps the problem - "and why not others".
MR SIFRIS: Yes. That is central to the reasoning of the Court of Appeal, the bank who waited too long. Even assuming the funds were disposed of in breach of the charge that does not mean that third party recipients cannot get some benefit and if they can, like our clients did, others could, and our submission - - -
GUMMOW J: And, therefore, the preference provisions are said to be activated somewhat.
MR SIFRIS: Yes, and our submission is that there cannot be a preference because, for there to be a preference, parties must be entitled to something. If you are not entitled to anything, on the basis that the bank has an equitable proprietary interest in everything, what is it to the point if a bank decides not to do anything? There is always a delay between automatic crystallisation, let us assume, and the time that the bank appoints a receiver and manager.
GLEESON CJ: But the bank may not appoint a receiver or manager. The whole idea of a floating charge is to allow a trader to trade and a trader might often persuade the bank not to appoint a receiver and give him an opportunity to trade out of his financial difficulties, even though a charge has crystallised.
MR SIFRIS: Yes. In our submission, there are cases where the inaction of the bank is fatal and therefore you have decrystallisation of charges, if a bank sits by and allows the company to trade and it is clear from the circumstances that the bank has waived its right to rely on automatic crystallisation by its conduct.
GUMMOW J: Or some charges may have an express provision for the bank to decrystallise, a sort of pro tanto sort of thing.
MR SIFRIS: Yes, precisely, but that is not this case. That argument was not run in the Court of Appeal and we need not deal with it. So, really, our submission is that on the authorities, and, in particular the opinion of the Chief Justice in Sheahan's Case, Justice Brennan - if I could read a passage of that case.
GUMMOW J: Just before you get to that could you just remind me what is different between this case and Sheahan's Case?
MR SIFRIS: In Sheahan's Case there was a crystallisation of a charge and the payment to an unsecured creditor from secured funds, if you like. I use the "funds" loosely, but there was a payment to an unsecured creditor from the assets, subject to the fixed charge.
GAUDRON J: And it was a payment by the administrator or receiver?
MR SIFRIS: It was a payment by the receiver. The question, though, is, was it a preference. Chief Justice Brennan said no, it is not a preference because the bank was entitled - the bank had an equitable proprietary interest in all of the assets and it directed, as it was entitled, to make a payment to an unsecured creditor for good reason because they wanted the unsecured creditor to complete the project or carry on working. He and Justice Kirby were the only two judges dealing with the preference aspect. The other three judges, including Justice Gaudron and Justice Gummow, dealt with it on the basis that it was not funds paid by the company but by the receiver in a separately allocated account, as required, but Justice Kirby said some got paid, others did not, therefore it is a preference on a very broad view of the preference provisions.
GAUDRON J: But, in a sense, does it not come down to the same thing on your argument that you are really saying the bank was really impliedly authorising the payment out of its funds by sitting on its hands?
HAYNE J: If you have to go down that path it seems to me to raise some real evidentiary questions of some complexity. Does your argument depend upon some implied authority element?
MR SIFRIS: No. No, our argument does not. We say it depends purely on legal principle and what follows from the automatic crystallisation of a charged knowledge or not.
HAYNE J: At some point I would like you to relate this to the specific terms of the sections because - - -
GLEESON CJ: Your argument turns on "available" does it not?
MR SIFRIS: Yes.
GAUDRON J: Or other creditors?
MR SIFRIS: There was nothing available to other creditors, and, on one view, including my clients. This seems to have disturbed everybody, that my clients received an advantage in that they got some money and others did not, and that is true, but the question is that nobody was entitled to receive any payment after crystallisation of the charge. They were not entitled to any payment. No money was available, but if for some reason they got paid - for whatever reason - our submission is that payment is not a preference - call it a windfall, call it whatever - it is not a preference over other unsecured creditors because that assumes and presupposes that they were entitled to something and they are not.
GLEESON CJ: Does it come down to a question of whether "available" is to be considered in terms of strict legal entitlement or whether it is to be considered, at least partly, in terms of practical conduct?
MR SIFRIS: Our submission is that "available" means "legally available" but the other view is that - and the view expressed by Justice Buchanan in the Court of Appeal in this case was that if funds are practically available, well, if some got and others did not they can complain. Our submission is, "No, the question is are the funds legally available" and in this case, we would say, they were not legally available and therefore nobody has the right to complain. There is no prejudice, relevantly and there is no diminution in the assets available for distribution to unsecured creditors.
HAYNE J: That may be so. It may be laborious, but could you please take me at some point in your argument through the section because at least from my point of view the use of shorthand expression may be obscuring problems that I find at the moment quite difficult. It was a Code winding-up, was it?
MR SIFRIS: Yes, it was a Code winding-up.
HAYNE J: It is as old as the Code.
MR SIFRIS: The relevant provisions which are attached to the appellants' submissions is section 451 of the Companies (Victoria) Code which was in existence as at March 1990, the date of the payment. That section is the first attachment to the appellant's submissions and it says as follows:
A settlement, a conveyance or transfer of property, a charge on property, a payment made, or an obligation incurred, by a company that, if it had been made or incurred by a natural person, would, in the event of his becoming a bankrupt, be void as against the trustee in the bankruptcy, is, in the event of the company being wound up, void as against the liquidator.
HAYNE J: So, it is payment made. It would be void. Payment made by the company.
MR SIFRIS: Yes.
GAUDRON J: And you do not dispute that it was a payment made by the company?
MR SIFRIS: No.
HAYNE J: We then go, do we not, to 122 of the Bankruptcy Act 1990 .
MR SIFRIS: Yes, and that is the next page.
HAYNE J: And which parts of that provision are engaged in this case?
MR SIFRIS: The second line, "a payment made". So, it picks up the wording:
A conveyance or transfer of property, a charge on property, or a payment made, or an obligation incurred, by a person who is unable to pay his debts as they come due from his own money . . . in favour of a creditor -
and these are the relevant words:
having the effect of giving that creditor a preference, priority or advantage over other creditors -
and those are the relevant words. The rest of the section:
within 6 months before the presentation -
we agree that it was within six months before, and, (b) is not presently relevant. So, the relevant provisions are whether the payment made had the effect of giving the appellants:
a preference, priority or advantage over other creditors -
Now, on our submission - - -
HAYNE J: Now, at one level that question is perhaps encapsulated by what Justice Buchanan said at page 132 of the appeal book at paragraph 41, line23:
The basic question remains whether in practical terms the creditor who has been paid gained an advantage at the expense of his fellow creditors.
Now, your contention, as I understand it, is that consideration must be given to whether there was an advantage at the expense of other creditors.
MR SIFRIS: Precisely, yes.
HAYNE J: The competing contention might be thought to be that attention is directed not to expense of fellow creditors, that is disadvantage to fellow creditors so much as advantage to preferred creditor compared with others. That is, if one creditor gets something and other gets nothing, that is a preference, rather than if one gets something that the other might have had. Are those the competing views?
MR SIFRIS: Yes, precisely.
HAYNE J: Where in the statutory framework do you say we find one view - I was about to say "one view preferred over the other" - one view reflected?
MR SIFRIS: It is not in the statute and in fact if one reads the statute it does appear to be very wide. Having the effect of giving that creditor, "preference, priority or advantage" one has to have recourse to the authorities that deal with the particular wording because it is not clear from the wording and therefore one has what Justice Kirby called in Sheahan's Case "a broader and a narrower view" and there is support for the narrower view, namely, that one reads in - I withdraw that and say this: on these words, if there was a payment made to the secured creditor directly they would also come within these words.
GUMMOW J: Yes. Well, the cases say they do not.
MR SIFRIS: Yes, precisely. But, the wording is wide enough - - -
GUMMOW J: The cases suggest you cannot give literal effect to 122(1). You cannot give literal effect to the word "creditor" et cetera.
MR SIFRIS: Yes.
GUMMOW J: Now, what is the reasoning by which the case has put payments to secured creditors on a different level?
MR SIFRIS: Because they were entitled to be advantages because - - -
GLEESON CJ: Well, it is not the payment that gives them the advantage, it is the charge that gives them the advantage.
MR SIFRIS: Yes, precisely. It is their security that gives them the advantage and it is registered and everybody knows or ought to know of it and it is their security that gives them the advantage and the cases say that, therefore, after crystallisation of that charge that gives them the advantage,''' any payment does not decrease the amount of assets available for unsecured creditors because there are not any if the debt to the secured creditor is far greater than the value of the assets.
HAYNE J: Though the position of the encumbrancer might be thought to be dealt with explicitly in 122(2)(a):
Nothing in this section affects:
(a) the rights of a purchaser, payee or encumbrancer - - -
GLEESON CJ: Does not that refer to a encumbrancer during the period of relation back, that is a charge that is created within the period of relation back?
MR SIFRIS: Yes.
GLEESON CJ: A common form of giving a preference is to turn an unsecured creditor into a secured creditor.
MR SIFRIS: Yes. How does one resolve the competing views, as Justice Hayne has articulated them? In our submission, they are to be resolved by looking at it this way, if I may, by way of an example. Before I get to the example I should say that on the authorities - - -
GUMMOW J: Well, can we just look at Justice Buchanan's sentence, again. "The basic question" because that, itself, has some ellipsis in it, I think, at paragraph 41 at (1993) 3 VR. What does "practical terms" mean? Certainly the practical terms might be thought at one level to encompass a secured situation. And, what is "at the expense of", and what does "advantage" mean?
MR SIFRIS: I think what Justice Buchanan, with respect, was saying is that despite the fact that payments were made in breach of the charge, they were made to some and not all, and because they were made to some and not all, practically, hypothetically - - -
GUMMOW J: What is the hypothesis? That is what I do not understand.
MR SIFRIS: They could have been made to all. If Thompson Land or its agent Construction Engineering is sitting with some funds in a bank account in credit and Thompson Land says, "We will pay - - -
GUMMOW J: Had set about comprehensively in breaching the bank's position by itself making some uniform distribution arrange that would have been all right?
MR SIFRIS: Yes, because practically that could have been done. If you paid the 12 creditors that were agitating you could have said, "Well, who else of our creditors - - -
GUMMOW J: But would there have been enough to pay all of them?
MR SIFRIS: No.
GUMMOW J: So, there would have had to have been some distribution structure?
MR SIFRIS: Yes, precisely. We do not have the figures but the creditors are - of tens of millions of dollars, and what - - -
GUMMOW J: Yes, so they would get some dividend.
MR SIFRIS: Because that would practically mean the 399 - we did run an argument that 399 was the appellants' money that was retention moneys but we lot that argument on appeal, so that is not relevant, but then the $399,000 to be available practically for all would have involved an immense project of taking all the figures into account and giving everyone a point 01 distribution or whatever it might work out at.
GUMMOW J: That it is said against you, well, therefore, nothing should be done.
MR SIFRIS: We would characterise the payment that has been made to us definitely an advantage to us. We cannot get away from that. We have been paid, others have not, but it does beg the question as to whether it is a preference over and above or at the expense of the others and we come back to the original formulation, "No, because nobody was entitled to anything because nothing was available and it matters not whether the bank took action or not". To say against us that it must follow, logically, axiomatically, "If AB and C got paid A to Z could have been paid" of course, but that is not the point.
The point is whether they were entitled to be paid and whether there was any unfairness on them, looking at the matter globally, in the context of the fixed charge.
GLEESON CJ: What is the statutory objective? Is it to secure a rateable distribution of assets amongst creditors?
MR SIFRIS: Available assets amongst creditors, yes. There must be available assets. The Bankruptcy Act, section 116, when it refers to what is divisible assets, "excludes assets the subject of any security".
So, it does try and achieve, rateably, unsecured creditors being entitled to participate equally in those assets that are available to them, and by definition that must exclude assets that are the subject of a fixed charge. The relevant time to look at it is the time of the payments. On 15 March 1990 when those payments were made to the unsecured creditors, to the appellants, what was the position on 15 March 1990?
GLEESON CJ: Could you just remind us why the bank was not entitled to get these moneys back from your clients?
MR SIFRIS: They probably were but they did not. The bank has taken no action against the appellants to recover moneys received in breach of the charge. There is no explanation offered. We do not why and they have not done so.
CALLINAN J: It was the same bank, was it?
MR SIFRIS: Yes, your Honour.
GLEESON CJ: You have said this raises a question of general importance but if people had exercised their rights it might not have raised a question at all. What is the bank?
MR SIFRIS: The ANZ Bank. When I say the "ANZ Bank" they did, on 20 April, appoint a receiver and manager, and the evidence is that between the time of crystallisation and appointment that there were discussions being held and there was some endeavour on the part of the company to re-capitalise and - - -
GLEESON CJ: There are often very good reasons why people do not appoint a receiver to a company if they hope that the company can trade out of its difficulties. It might be in the bank's interests as much as anybody else's interests that the company goes on paying some creditors, particularly threatening creditors.
GUMMOW J: At least over this 10 days, or whatever it was, before they did decide to put in a receiver, the bank may have been not unhappy that these particular people who are shouting loudest were getting paid.
MR SIFRIS: And the evidence was that they continued to do some work on the centre as well.
GUMMOW J: Exactly.
MR SIFRIS: Yes. Not unlike Sheahan's Case.
CALLINAN J: To keep things alive, at least, until the bank decided not to appoint a receiver or to take some other course.
MR SIFRIS: Yes. May I say this that on 15 March if one had in a room together the bank and two unsecured creditors and the bank said, "Well, you realise" - I am sorry, the bank, the company, Thompson Land and two unsecured creditors and the bank said, "You realise that our charge has crystallised and we are entitled to put in receivers and we could take everything". Thompson Land says, "Oh, well, yes, we realise that but we have got some money in an account, $399,000". The bank says, "Well, that is subject to our fixed charge, we want you to know that". "Yes." Then Thompson Land says, "Do you mind if we pay unsecured creditor A? We want to give him some money because" for whatever reason. Unsecured creditor B says, "That is unfair. Why should he get money and not us?" The bank says, "Well, look, technically, it is all our money anyway but we were happy for A to get it and not you because" whatever reason. Why is that unfair?
GLEESON CJ: The money was not in an account with the ANZ Bank, was it?
CALLINAN J: And, indeed, Mr Rockman was careful to negotiate an arrangement whereby the project manager paid the money directly to the contractors, the appellants, so the bank would not have been aware of it until after it had happened, is that not right? I mean, that is the way in which it was obviously negotiated.
MR SIFRIS: Yes, that is correct. I think that is correct.
CALLINAN J: It never got into the bank's account and the bank would only have found out about it later, if at all.
MR SIFRIS: Yes, that is correct.
CALLINAN J: Is there any evidence that the bank did every find out about it?
MR SIFRIS: I think there is some evidence that they found out at some stage.
GUMMOW J: But after the appointment?
MR SIFRIS: After the appointment. Getting back to the timing, when the unsecured creditor who has not been paid is sitting in the room, we, with respect, see no difference between the fortunate unsecured creditor being paid by a stranger and that way receiving an advantage. Of course he was paid and it is a little unfair in a general sense, but it is not unfair when one realises that the bank at all times could direct things and in fact had a fixed charge over all the assets. Where is the disadvantage to anyone but the bank?
GLEESON CJ: You say these creditors, if I can find a neutral word, got their comparative advantage over other creditors not at the expense of the company but at the expense of the bank?
MR SIFRIS: Yes, precisely.
GLEESON CJ: So you say it is relevantly no different from what the case would have been if a volunteer had for some reason chosen to pay the volunteer's funds to your clients?
MR SIFRIS: That is what we say, yes, your Honour.
HAYNE J: The bank either had a good claim to recover the moneys from your clients or it did not. Whatever the circumstance, it did not pursue it.
CALLINAN J: Could you tell me a little more about the units, please. They were units owned by the company, were they?
MR SIFRIS: Yes.
CALLINAN J: And they were units in some sort of a property trust?
MR SIFRIS: In a property trust, yes.
CALLINAN J: Was it a property trust in respect of the building?
MR SIFRIS: Not that particular building, no.
CALLINAN J: Some other building?
MR SIFRIS: Some other building. Those units were used as security.
CALLINAN J: What was the origin of those units? Were they units that the company acquired perhaps in part payment of construction work or something of that kind?
MR SIFRIS: I am not sure, your Honour.
CALLINAN J: In any event, the units, or any documents evidencing title to them, were never deposited with or held by the bank?
MR SIFRIS: That is correct. They were not held by the bank.
CALLINAN J: Did the bank hold other securities, titles or anything?
MR SIFRIS: Yes.
CALLINAN J: Is there any evidence of that?
MR SIFRIS: There were other securities.
CALLINAN J: Why did not the bank hold the units, do you know?
MR SIFRIS: I do not know that, your Honour. I do not know whether there was much evidence given on the units at all other than their existence and their use as security for the obligation to pay by a particular date. When the payment was not made, then they were sold. I must say the units have been treated on the same basis as the payments.
CALLINAN J: They yielded very little money, is that right?
MR SIFRIS: Very little comparatively, yes. On one view they may be different to the payments, given that it is specific property, being units in a - - -
GUMMOW J: But they were assets of the chargor company?
MR SIFRIS: Yes.
GUMMOW J: Bank security must have extended to them.
MR SIFRIS: Yes, the bank security did but they specified an identifiable as against arguably the money in an account or the debt.
GLEESON CJ: What happened to the units?
MR SIFRIS: They were sold by each appellant for comparatively small amounts and they retained the amounts.
GLEESON CJ: So what we have been referring to as the payments were partly in cash and partly in kind?
MR SIFRIS: Yes, mostly in cash. I think the proportion of the units is very, very minor. For example, the first appellant received $4,000 by way of sale of the units and $77,000 by way of a payment. So that the units were really a very minor component.
GLEESON CJ: What was the date of the payments?
MR SIFRIS: Payment was on 15 March.
GLEESON CJ: What year?
MR SIFRIS:.
GLEESON CJ: More than six years ago.
MR SIFRIS: The liquidator started the case, I think, five years and 364 days - - -
GLEESON CJ: Yes, it was the bank I was thinking of. It would make your point more emphatically, I suppose, if the bank were a party to these proceedings and were claiming successfully to be entitled to these moneys back from your client.
MR SIFRIS: Yes, it would and, for whatever reason, the bank has declined to intervene.
GLEESON CJ: Do you have a submission to make one way or the other on whether or not the bank would have been entitled to recover these moneys from your clients?
MR SIFRIS: I do not have a submission to make on that because my primary submission does not depend on that point, in other words, whether the bank succeeds. Even if the bank lost, my point would still be as good. We submit that it would be as good, given the nature of the charge and all the other arguments that we have advised.
GLEESON CJ: Just because it may affect something that one of us feels inclined to say in a judgment, does the law of Victoria in relation to limitations produce a six-year limitation period in respect of a claim by the bank of a kind that we have been talking about?
MR SIFRIS: It is a difficult question to answer because if they are - - -
GUMMOW J: There may be a tracing remedy as well, which would be a longer period.
MR SIFRIS: Tracing and trust remedies which may be a longer period.
CALLINAN J: And also, if the bank did not know about the units, for example, as it might well not have done, I do not know whether there is an extension of time provision in the Victorian Limitations Act.
HAYNE J: There is the usual concealment extension.
MR SIFRIS: Yes, but we do not want to advance too much about the facts.
CALLINAN J: But in any event, if the claim had been brought within time, would not the bank have had an unanswerable claim to set aside the transactions or to recover the money and the proceeds of the units from your clients? There is just no defence, is there?
MR SIFRIS: I would think so. The money is disposed of. These unsecured creditors, by the very fact of negotiations, et cetera, it may be said that they cannot be bona fide third parties for value without notice.
CALLINAN J: And the money that was held by the project manager was either being held possibly on trust for the company, but in any event at least it was an item of property, a chose in action available to the company and no different in that sense from the units.
MR SIFRIS: Yes. To emphasise the point I have made about disadvantage to the bank, if I could read from a decision of Chief Justice Brennan in Sheahan's Case 189 CLR 407 at 424, the second-last main paragraph:
The Bank's secured debt exceeded the moneys in the hands of the receiver. There were no funds available to satisfy, even in part, the debts of the unsecured creditors. The question arises: is it sufficient to constitute a preference that an unsecured creditor is paid part of his debt and other unsecured creditors receive none when the other unsecured creditors' position is not adversely affected by the payment? The purpose of s 122(1) is to recoup the moneys of a bankrupt that have been paid preferentially in order to replenish the pool of assets which the creditors - that is, the general creditors - are entitled to share rateably. The language of s 122(1) - "preference, priority or advantage" - shows that the section is concerned with the effect of payments made to a creditor payee who is in competition with other creditors for a share in the bankrupt's estate. The only preference with which s 122(1) is concerned is a preference as between the payee and other general creditors who would otherwise be entitled to share in the money paid.
We emphasise that and repeat that they were not entitled to share in the money paid.
If a fund in the hands of a debtor or a debtor's agent is charged with the payment of a secured debt that would exhaust the fund, so that no part of the fund is available for distribution among the general creditors, and a payment to a general creditor is made out of the fund with the consent of the chargee, that creditor gains no preference at the expense of other general creditors. The effect of such a payment is not to prefer the payee among the general creditors but to prefer the payee to the secured creditor who would otherwise have been entitled to the money paid.
The only relevant distinction between this case and the case under appeal is that the bank agreed. In Sheahan's Case it was with the consent of the chargee. Our submission is what if it is not with the consent but with the knowledge? Does that matter when the fundamental - - -
GLEESON CJ: But you have just told us that is not this case.
MR SIFRIS: Yes, that is not this case.
GLEESON CJ: This was not paid with either the knowledge or the agreement of the bank.
MR SIFRIS: That is correct and, in my submission, it should not make a difference. So, although there is a factual distinction between Sheahan's Case and this case, we say that the legal reasoning is equally applicable, namely that nobody else is entitled to anything and the only party that is disadvantaged is the secured creditor. Why should it matter if the bank is agreeing to the payment or not? It does not fundamentally affect the proprietary rights and the consequence of crystallisation of the charge.
GUMMOW J: Is there anything in the judgment in Fire Nymph, for example, on this point?
MR SIFRIS: Not precisely on this point, no. Then carrying on:
And, as the secured creditor has consented to the payment, no recoupment of the money paid is possible.
Then the Chief Justice goes on to cite from Justice Young in James's Case which is authority for the proposition that you look to see whether the general creditors have been disadvantaged. That refers to if they were any the worse off after the transaction. The words that have been emphasised in the second paragraph on page 425, citing from Justice Young:
To my mind, cases such as Richardson v Commercial Banking Company of Sydney Ltd do focus consideration on the ultimate effect of the transaction with respect to the general creditors over and against the relevant creditor. Accordingly, in my view, if one can see that the position of the general creditors after the transaction was no worse than it was before the transaction then the transaction does not have the effect of giving a preference to one creditor over the others."
GUMMOW J: I have in the back of my mind that there has been some discussion about James v Commonwealth Bank. Do you know of any?
MR SIFRIS: No, your Honour. Justice Kirby does - - -
GUMMOW J: No, but apart from that. After Sheahan there was some discussion about that case. I may be quite wrong.
MR SIFRIS: I have done a reasonably thorough search. I do not recall any case critical of that. Certainly Justice Finkelstein in Wily accepts that entirely in an unqualified way and says, "Yes, that's the test. Look to see whether there's been any reduction in the assets available to unsecured creditors". In this case there has not. In Wily's Case there was not either because of the crystallisation of the fixed charge and the effect that that has.
CALLINAN J: Do you think during the adjournment you would be able to check so that you could tell me after lunch precisely what the situation was or is with respect to the bank's knowledge so far as the evidence discloses?
MR SIFRIS: Before turning to Wily's Case I should say that Justice Kirby in Sheahan took the broader view and said one should not read down the words "preference, priority or advantage", that they mean what they say; they are broad and do not read them down. In my respectful submission - - -
GLEESON CJ: Where is that passage?
MR SIFRIS: The judgment starts at page 441 and the passage is at 458 to 460. Justice Kirby refers to those fortunate creditors that have been paid as quasi-secured and in his opinion it does fall squarely within the intent of the legislation and, in our respectful submission, secured creditors equally fall within that. It could not possibly be given, with great respect, a literal meaning.
GUMMOW J: Is there anything else in the authorities?
MR SIFRIS: Only in Wily's Case [1999] FCA 33; (1998) 84 FCR 423, which is a decision of the Full Federal Court. In that case Justice Finkelstein gave the leading judgment. I apologise for citing from the Australian Law Reports. We do have the Federal Court Reports in the Court. The relevant passage is to be found starting at page 434 and then 435.
GLEESON CJ: There is nothing in Palmer's "Company Precedents" that deals with this issue - a precedent for a floating charge?
MR SIFRIS: I should say I have not looked at Palmer's.
GLEESON CJ: I recommend you look at that over the luncheon adjournment.
MR SIFRIS: On the floating charges?
GLEESON CJ: Yes. You will find a commentary on floating charges not in Palmer's "Company Law" but in Palmer's "Company Forms and Precedents" in which they have a precedent for a floating charge.
HAYNE J: In the third volume of the 16th edition, is it? If you can find that and find a spare copy, just let me know.
GUMMOW J: You will strike gold if you find one in the library here.
HAYNE J: I have been searching for one for about 20 years, Mr Sifris.
MR SIFRIS: If I could take the Court to paragraph 52 on page 435, once again Justice Finkelstein says:
Accordingly, the position of the Bank must be determined as if Space Made was wound up when the three payments were made.
The Court of Appeal in Victoria in this case agreed with that and so did this Court in Airservices v Ferrier at page 502 that the relevant date that one looks at whether there has been a preference is the date of the payment. His Honour goes on:
On that assumption the floating charge would have crystallised, that is become a fixed charge . . . with the consequence that the property the subject of the charge would not be available for the general body of unsecured creditors. In that event the three payments to the Bank could not be regarded as preferential.
GLEESON CJ: In our case we do not need that process of reasoning to get to the crystallisation of a charge, do we?
MR SIFRIS: Yes, precisely. There is no dispute it was crystallised at the time of the payments.
Even if, contrary to the view that I have expressed, the payments to the Bank would appear to be preferential in a hypothetical winding up, if that is not their true effect they will not be caught by s 122. By this I mean that a payment will not be preferential unless it results in a decrease in the assets that are in fact available to meet the claims of the unsecured creditors in the actual winding up of a company.
A reference is made to Airservices and to Re Discovery and a citation from Re Discovery.
"[T]he effect of a payment is to be judged - - -
GUMMOW J: "Available" means legally available, as it were.
MR SIFRIS: Yes, that is precisely the point. On the next page, paragraph 58, Justice Finkelstein poses the question:
If one asks whether there is less money available for the general body of creditors by reason of the three payments to the Bank the answer must be a clear: "No."
That is precisely what we say, that if one asks that question, clearly there is no more money available for creditors because of the crystallisation of the charge.
GLEESON CJ: After the adjournment, Mr Sifris, you had better show us how the Court of Appeal dealt with this issue.
MR SIFRIS: If your Honour pleases.
GLEESON CJ: We will adjourn until 2.15.
AT 12.43 PM LUNCHEON ADJOURNMENT
UPON RESUMING AT 2.16 PM:
GLEESON CJ: Yes, Mr Sifris.
MR SIFRIS: If your Honour pleases, I note that your Honour Justice Gleeson referred to Palmer's Company Precedents in the Fire Nymph Case - - -
GLEESON CJ: I must have the only copy.
MR SIFRIS: Yes. The 16th edition part III. There is no part III available in any addition in the library in Tasmania, in the Law Society Library. The other volumes, 1 and 2, dealing with - edition 17 do not contain anything that would assist the Court, with respect. I am indebted to my learned friend's junior for assisting me in that task. Justice Callinan raised a point of the bank's knowledge. As at the date of the payments, 15 March, the bank had no knowledge, on the evidence. There was no knowledge and obviously no consent by the bank to the payments. The bank did find out later, some time later - the precise date is unclear - but certainly at the time of the payments no knowledge.
GUMMOW J: Is there findings about that?
MR SIFRIS: Not directly, no.
CALLINAN J: It is common ground though?
MR SIFRIS: Yes. So far as the Court of Appeal decision is concerned, before I take the Court to the relevant passages, if I may summarise and say this, that the basis of the decision, the principle decision of Justice Phillips, is that the inaction of the bank permitted a situation to be brought about where some creditors were paid and others were not and the inaction led to this taking place. They could have all been paid practically but because of the inaction they were not. The difficulty that we submit that there is with this judgment is the following.
Firstly, with respect, the charge crystallised on 9 March and the payments were made not even a week later on 15 March, and any relevant inaction of the bank should be examined at the time of the payments, namely 15 March, and why should any inaction as at 15 March, a few days later, be held against the bank when the debenture led to the bank to take a number of courses, one of which was the appointment of a receiver and manager, which it did some time later.
GLEESON CJ: Do we have the debenture?
MR SIFRIS: Yes. The debenture is in the appeal book at page 30.
GLEESON CJ: What page do we see the provision for automatic crystallisation?
MR SIFRIS: It starts at page 28 and the relevant clause dealing with automatic crystallisation is to be found at clause 17 on page 30 of the appeal book.
GLEESON CJ: What about the right to appoint a receiver?
MR SIFRIS: That right appears in the debenture, clause 19, at page 31, "At any time after the moneys . . . become payable the Bank" may appoint a person to act as receiver and manager and, indeed, there are other rights that the bank may have short of the appointment of receiver, for example, clause 21 at page 32:
Notwithstanding a Receiver may or may not have been appointed as aforesaid it shall be lawful for the Bank -
et cetera. So the bank, after crystallisation, had a variety of things it could do and as the 15th, which was only a few days after crystallisation, it is not clear when the bank even knew at what stage after the 15th of the payments. But certainly at the 15th, our submission is, how can any inaction after 6 days affect the consequences of automatic crystallisation?
So that the finding by the court that the inaction permitted the situation to be brought about, in our respectful submission, is erroneous because as at the 15th, being the relevant date and not a later date as suggested by his Honour Justice Phillips, the bank was fully entitled at that stage - - -
GLEESON CJ: Well, you said the charge crystallised - - -
MR SIFRIS: On the 9th.
GLEESON CJ: On the 9th. What brought about the crystallisation of the charge?
MR SIFRIS: The demand.
GUMMOW J: Do we see the demand anywhere?
MR SIFRIS: No. I am not really sure the demand is in evidence. It might have been originally but it was accepted in all courts that - and the finding of the judge at first instance and the Court of Appeal was that there was automatic crystallisation after 9 March. That was common ground.
GLEESON CJ: I notice that clause 17 prohibits an assignment of book debts without "the consent in writing of the Bank", you see halfway through the clause.
MR SIFRIS: Clause 19, your Honour?
GLEESON CJ: Clause 17 prohibits an assignment by the debtor of its book debts except with the consent of the bank. That is what happened here, was it not, in effect? It was owed debts.
MR SIFRIS: It was owed a debt by Construction Engineering.
GLEESON CJ: Was that a book debt?
MR SIFRIS: No, it was not a book debt. It was an overpayment made in the first instance by Thompson Land to Construction Engineering for project management fees.
GLEESON CJ: There is a bit of learning about what this expression "book debt" means.
MR SIFRIS: Yes. It probably does not answer that description as ordinarily understood, "a book debt". If an overpayment is a book debt, then, yes. The Court of Appeal decision, if I could take the Court, firstly, to page 121 of the appeal book, at the bottom of that page, line 28, Justice Phillips says this:
It suffices for present purposes to note - - -
GUMMOW J: Paragraph?
MR SIFRIS: Page 121, line 28.
GUMMOW J: Is there a paragraph in the judgment?
MR SIFRIS: Paragraph 24, and his Honour says this:
It suffices for present purposes to note the bank's inaction both before and after 15 March -
we, with respect, say that the period after is not relevant unless one deals with decrystallisation which is not in issue -
in respect of events on that day; for it is that inaction which, in my opinion, now admits of the conclusion that the making of the payments to the appellants on 15 March, and the giving of the security over the units, amounted to a preference which the liquidator properly claimed was void as against him in the winding up of Thompson and in respect of which he properly recovered judgment against the appellants in the County Court.
If one then goes to page 128, one picks up this thread of inaction, paragraph 34, line 10:
In this instance Thompson, having been left in possession, as it were, notwithstanding the crystallisation occasioned by the demand on 9 March, entered into the agreement with Mr Rockman, direction the payments by Construction and giving the units as security. The payments were made and the security was given "by" the debtor company, as required by s.122, and, were it not for the existence of the charge, there seems no reason to doubt that those who were thereby favoured obtained a preference, priority or advantage over other unsecured creditors -
there was no question about that -
which was void as against the subsequently appointed liquidator by virtue of s.122, as applied by s.451 in the winding up of Thompson. That being so, why should it be different when, though the bank had a charge, the bank made no claim to enforce it?
Now, that, with respect, we say, it is different, fundamentally different, because the charge had crystallised. Whether or not the bank chose in those six days, or as at the 15th, to do something about it, does not alter the fundamental effect that flows from crystallisation. So it is important and it is different when, despite crystallisation, the bank, for a short period, decides not to do anything:
Why should it be supposed that, if the appellants had not received the money they did, the money would not have been available in the winding up for unsecured creditors generally?
GUMMOW J: That is the problem, is it not?
MR SIFRIS: Yes. We say it would not have been available, legally available. We, for the reasons that we have previously advanced, say that that is the question. So:
Why should it be supposed that, if the appellants had not received the money they did, the money would not have been available in the winding up for unsecured creditors generally? What evidence is there of that? There is none. The only evidence . . . is to the contrary.
Now, I am not sure what his Honour means by the evidence "to the contrary", but to suggest that the money that is sitting in the project manager's account, Construction Engineering, would have been available to unsecured creditors begs the question that has been debated. In our respectful submission, it would not have been available, legally available anyway, for the reasons advanced and therein lies, with respect, an error in the decision.
It is different when the charge is crystallised and it is intended to be different because that is the nature and consequences that flow from automatic crystallisation. The only thing, if the bank knew about it and took possession of the fund by either appointing a receiver or acting on its own, there would not be a problem, and Justice Phillips would not have a problem, if the bank had taken some steps. So why should not taking any steps make any difference whatsoever and why should knowledge or taking steps make any difference to what has, as a matter of law, happened by virtue of the automatic crystallisation in the context of a preference case?
If I may say this, that central to the Court of Appeal's reasoning is that because of the delay and because the funds were able to be accessed by Thompson Land, and because, on the authorities, third party rights can be created, even in breach of a charge, there was a situation that could have come about where all the unsecured creditors were paid, practically. In our respectful submission, that ignores the fundamental legal consequence that flows from the automatic crystallisation of a charge. I have repeated myself many times, but that is our submission, that following automatic crystallisation, nothing is available for unsecured creditors and that is a principle of importance, not only in this case.
If the amount in Construction Engineering's account had not been used, it would not have been available for unsecured creditors, why should it now? Why should it, at any stage, be available for them if it was subject to the specific charge?
GLEESON CJ: What is the origin of this word "available" in this context?
MR SIFRIS: It seems to have been used in the authorities - - -
GLEESON CJ: Yes, I was wondering what its root of title?
MR SIFRIS: It is not referred to in the section. It is a rather loose word and I think I was criticised for using it - "available". I am not sure of the origin in the context of preference cases. But it does seem an appropriate word - is the money available or is it not? If it is not available in the sense that they have no claim to it, then they cannot complain. Unless there is anything further from any member of the Court, I refer to the written submissions that have been filed and those are our submissions.
GLEESON CJ: Yes, thank you very much, Mr Sifris. Yes, Mr Hardingham.
MR HARDINGHAM: If the Court pleases. Perhaps before I turn to the submissions on behalf of the respondent, I can address one issue that your Honour the Chief Justice raised, and that concerns what we mean when we say that payment was made in this particular case. It is clear that there was a chose in action, a debt owed by Construction Engineering to Thompson Land, and it is clear that, at the time of "payment", that chose in action was subject to a fixed charge. We say the payment was effected by Thompson Land for the reasons that are set out so clearly in Sheahan's Case at page 436. The majority, consisting of Justices Dawson, Gaudron and Gummow, in that case, said about halfway down the page in the paragraph beginning "No doubt":
No doubt, as the authorities indicate, there may be a payment made by the debtor within the meaning of s 122(1) where the debtor directs a third party who holds funds at the direction of the debtor or is otherwise obliged to the debtor to account to the debtor not by payment to the debtor but to a creditor of the debtor. Thus, in Re Stevens, it was said that the debtor "parted with his assets, and the payment which he himself should have received he has authorised to be made to the creditor, and it is just the same as if he had received payment himself and had himself handed such payment to [the creditor]. The result in that case was that the third party was to be treated as having acted on behalf of the debtor.
So that particular passage is of assistance, we would respectfully submit, in the analysis of what occurred in the present case.
CALLINAN J: Mr Sifris accepted all of that though, I thought. There was no argument about that, that it was not a payment, in effect, by the company.
MR HARDINGHAM: That is so, your Honour. I was just drawing the Court's attention to that passage because it is a helpful passage in the context - - -
CALLINAN J: How does it help your argument?
MR HARDINGHAM: It helps our argument because we have to establish that there was a disposition under section 122 of a preferential kind.
CALLINAN J: Well, Mr Sifris accepted that there was a disposition. Whether it was of a preferential kind or not is the issue.
MR HARDINGHAM: The next preliminary point I wish to make, or point arising out of Mr Sifris's submission, concerns the rights of recovery of the bank. The rights of recovery of the bank are referred to by Mr Justice Phillips in the Court of Appeal at pages 124 and 127 of the appeal book, and in paragraph 28 at page 124, his Honour said - this is line 18:
At the end of the day, the bank was surely left to take action or not, as advised, to enforce its proprietary claim to the property or to seek compensation for any wrongdoing. The latter would presumably be of little significance if pursued against an insolvent company already in liquidation, while the former could succeed only subject to the usual limitations on any claim to an equitable interest in property already in the hands of some third party.
His Honour, at page 127 in paragraph 32, made a similar point about the proprietary nature of the claim so the bank would be seeking to trace, as his Honour Justice Gummow mentioned this morning, into the fund in the hands of the appellants, asserting that that fund was held by the appellants subject to the equitable interest of the bank. Presumably, the appellants would then turn around and say, by way of defence, that "We acted in good faith and for value and without notice of your equitable interest and, therefore, we take free of it." But that, for reasons which nobody really knows, was something that never arose because the bank never asserted such a claim.
Now, your Honours, turning to the submissions for the respondent, we say that the payment, if I can use that word, your Honour, did have the effect of giving the appellants a preference priority or advantage over other unsecured creditors within section 122 of the Bankruptcy Act. First, we say that the payment had a preferential effect. The appellants were placed in a position of advantage with respect to the general body of creditors.
CALLINAN J: But that is only so if the bank were prepared to adopt the same benevolent attitude to all of the creditors. In practice, that is so. There would not have been any money available unless the bank abstained from taking any steps in relation to all of the creditors.
MR HARDINGHAM: Yes. Well, coming to that word "available", and I intend to come back to it, your Honour, it is an ambiguous word because it can mean "available to the company for payment of creditors", and in that sense, the money was available to the company because it could pass good title to that money to a bona fide purchaser for value without notice of the bank's equitable interest. So it was available to the company in that sense. It was not available to the creditors in the sense that the creditors could demand that it be paid to them or that they could prove for what was due to them by reference to the charged property.
GLEESON CJ: But what actually went on, as I understand it, was that before Mr Rockman's clients made their agreement with Thompson and Construction, there was a chose in action belong to Thompson in the form of a debt owed to it by Construction.
MR HARDINGHAM: That is so, your Honour.
GLEESON CJ: There was then an agreement to which Thompson and Construction were both parties, although not necessarily the only parties, pursuant to which Construction's payment of moneys to 12 creditors was treated by Thompson as a discharge of Construction's liability to Thompson. Is that what happened?
MR HARDINGHAM: That is so, your Honour, and of its liability to the 12 payees pro tanto.
GLEESON CJ: Now, when you say there was a payment, what actually happened was that Thompson agreed to treat a payment by Construction of a certain amount as an act that would discharge Construction's indebtedness to Thompson.
MR HARDINGHAM: Yes, "Do not pay me, pay them".
GLEESON CJ: That is right.
MR HARDINGHAM: As that passage from Sheahan to which I took the Court, shows, it is legitimate to treat that as a payment within section 122(1).
HAYNE J: A payment by the company.
MR HARDINGHAM: A payment by the company.
HAYNE J: Which if, whatever may be the circumstances that must be demonstrated, in those circumstances the bank could recover from the creditor receiving it would lead to what consequence?
MR HARDINGHAM: If the bank could recover those moneys from the appellants, say, in this case, then there would be no discharge of the company's indebtedness to the appellants and there would be no preferential payment.
HAYNE J: And you accept, do you, that if the appellants received with notice of the prior equitable interest of the bank, the bank could recover?
MR HARDINGHAM: Provided that the bank could trace at the time it sought to assert its right of recovery. It is a proprietary remedy, your Honour. The law about knowing receipt is in a difficult state at the present moment.
GLEESON CJ: What would have been the remedy that the bank would have had if it had moved immediately? Suppose the bank had found out about this payment and moved immediately after it was made, what would have been the bank's remedy?
MR HARDINGHAM: Your Honour, it would seek a declaration that the appellants held the moneys subject to its equitable interest and it would have sought injunctive relief at the same time, restraining the appellants from dealing with the money.
HAYNE J: Remedies which may have been affected, may they, by whether there had been some intermingling of funds and the like?
MR HARDINGHAM: Yes, it could have, your Honour. As I say, there is law, and it is a developing area of the law, concerning what is referred to as "knowing a receipt", and that is that the circumstances in which personal liability will be attached to a recipient in the position of the appellants as constructive trustees who have misapplied property which they should have held subject to the bank's equitable rights. Now, that area of the law is unclear at the present moment, as to whether some form of dishonesty is required, as in the knowing assistance cases, exemplified by Royal Brunei Airlines v Tan.
But it would seem that in this case the bank would have been hard put to establish any personal liability on the part of the bank because, after all, Judge Ostrowski did find, at first instance, that the appellants could not reasonably have been expected to know that Thompson Land was insolvent. He held that they acted in good faith within the terms of the legislation and, therefore, it would be problematic whether any personal remedy would ever have existed against them at the suit of the bank.
GLEESON CJ: Mr Hardingham, just remind us if you would not mind, how Construction came to owe this money to Thompson?
MR HARDINGHAM: As I understand it, your Honour, Thompson would pay moneys to Construction, which was the site manager, and Construction would pay the contractors out of the moneys, and it happened that Thompson Land paid Construction too much. So, as my learned friend said this morning, there was an overpayment and that overpayment was owed back to Thompson Land by Construction Engineering.
GLEESON CJ: Well, it was an advanced payment, a payment too soon.
MR HARDINGHAM: Yes.
GLEESON CJ: Was there ever any suggestion at any stage of this litigation that that money was held by Construction on trust for Thompson?
MR HARDINGHAM: Certainly not in the Court of Appeal, your Honour. My learned friend, Mr Sifris, argued in the Court of Appeal that it was held by Construction on trust for the contractors, including his clients, but that was rejected by the Court of Appeal and it is not in issue in this Court.
GLEESON CJ: The building work was ongoing at the time of the arrangements made by Mr Rockman and the payments.
MR HARDINGHAM: The building works or the project had reached practical conclusion on about - I have the date here, your Honour; let me give it to you - 22 December 1989. So practical completion had occurred at that time. My impression is that these were final payments due to contractors who worked on the site project, which had in the meantime been sold, had been realised.
GLEESON CJ: Now, the money was the proceeds of these overpayments that had been made by Thompson to Construction. What about the units? Were the units owned by Thompson or by Construction?
MR HARDINGHAM: By Thompson.
GLEESON CJ: So the units were assigned by Thompson to the 12 creditors.
MR HARDINGHAM: By way of security, yes.
GLEESON CJ: But there is no interposition of Construction in that aspect of the transaction?
MR HARDINGHAM: My understanding is that that is so, your Honour. There was no interposition of Construction in that.
GLEESON CJ: So in so far as we are applying the statute to the transfer of the units - - -
MR HARDINGHAM: It would be a transfer of property.
GLEESON CJ: It is a transfer of property. Now, that was property that was subject to a fixed charge.
MR HARDINGHAM: It was, your Honour.
GLEESON CJ: Just concentrating on that for a moment, suppose an item of property is subject to a fixed charge in circumstances where the owner of the property does not have sufficient funds to pay out the secured creditor, so that on the face of it there is going to be no surplus available for unsecured creditors, and because of inaction for whatever reason, the property, the subject of the charge, is transferred to an unsecured creditor and the secured creditor does nothing to set aside that transaction. That is this case, is it not?
MR HARDINGHAM: Yes, it is.
GLEESON CJ: As I understand it, the units were, in fact, sold.
MR HARDINGHAM: Yes, they were.
GLEESON CJ: And the proceeds of sale applied in partial discharge of the debts of the unsecured creditors.
MR HARDINGHAM: That is so, your Honour.
GLEESON CJ: Well, now, by the time the units get into the hands of the purchaser from the creditors presumably the equities of the purchaser would prevail over the bank; is that right?
MR HARDINGHAM: Absolutely, your Honour. One would not have thought that it would be hard for the purchasers to say they were bona fide purchasers for value without notice of the bank's original equitable entitlement.
GLEESON CJ: The case has been conducted all along on the basis there is no material difference between the position in relation to the units and the position in relation to the money.
MR HARDINGHAM: Yes.
HAYNE J: You said there were some findings by the primary judge about the knowledge and good faith of the appellants receiving the money in units. Where were they?
CALLINAN J: There was an issue, was there not; there was an attempt to prove some sort of complicity almost?
MR HARDINGHAM: No, your Honour. There are certain defences to a claim to recapture a preferential payment, and they are referred to in - let me find it - 122(2)(b).
Noting in this section affects:
(a) the rights of a purchaser, payee or encumbrancer in good faith and for valuable consideration and in the ordinary course of business.
Section 122(3) says:
The burden of proving the matters referred to in subsection (2) lies upon the person claiming to have the benefit of the subsection.
Section 122(4)(c):
a creditor shall be deemed not to be a purchaser, payee or encumbrancer in good faith if the conveyance, transfer, charge, payment or obligation was executed, made or incurred under such circumstances as to lead to the inference that the creditor knew, or had reason to suspect:
(i) that the debtor was unable to pay his debts as they became due from his own money; and
(ii) that the effect of the conveyance, transfer, charge, payment or obligation would be to give him a preference, priority or advantage over other creditors.
Now, Judge Ostrowski at appeal book 72 concluded that the appellants had acted in good faith. In the pages prior to that he found that they had no reason to suspect at the time of payment that the debtor was unable to pay or that the company was unable to pay its debts as they became due from its own money. So it was in that context, your Honour, that Judge Ostrowski made that finding.
GUMMOW J: Well, you have to read that beginning at 67, do you not?
MR HARDINGHAM: Yes, you do. You do, your Honour.
GUMMOW J: The Judge said:
The plaintiff Liquidator has established all the elements of his cause of action.
Which is what this dispute is against you, I guess, here today. Then he came on to the question was there a 122(3) defence and then carried on.
MR HARDINGHAM: That is so. Your Honours, I was saying that our first submission was that the payment had a preferential effect in that the appellants were placed in a position of advantage with respect to the general body of creditors. That broad test was mentioned by Justice Kirby in Sheahan's Case at page 459, and you will see that Justice Kirby cites a passage from the judgment of Chief Justice King in Matthews v Geraghty, (1986) 43 SASR 576 where Chief Justice King said:
To say that a disposition of property confers a preference upon a creditor in a liquidation conveys no more than that the disposition of property has placed the creditor in a position of advantage with respect to the general body of creditors.
There is little doubt that the payments in the present case placed the appellants in a position of advantage with respect to the general body of creditors. Why? Because the appellants received something; the general body of creditors were left to prove in the winding up and they stood to make or receive no cents in the dollar.
GUMMOW J: Is there anything predating that dictum of Chief Justice King that says what is said there?
MR HARDINGHAM: Not that I have come across, your Honour.
GLEESON CJ: Is there no English authority on this point?
MR HARDINGHAM: It is remarkable, your Honour, that there is very, very little authority on the meaning of these words "preference, priority or advantage." I have not been able to find more authority than was cited by Justice Kirby and Chief Justice Brennan in Sheahan's Case.
GLEESON CJ: What is the origin of this word "available" in this context?
MR HARDINGHAM: I am not sure which court originally started referring to availability. We say any reference to availability, such as the reference made by his Honour Mr Justice Young in James v Commonwealth Bank of Australia, any such reference is a reference calculated to put an unwarranted gloss on the section.
GUMMOW J: It comes out of the heading of the part, does it not, "Property available"?
HAYNE J: I thought there was something in the Companies Code, which I cannot find, about available assets. The liquidator had some duties in respect to available assets, I thought, and I cannot find it.
GUMMOW J: All these provisions which 122 is one are in that part, are they not?
GLEESON CJ: A lot of this language has picked up is language of previous authorities. You might have to go back to Lord Mansfield.
MR HARDINGHAM: Well, that learned judge is mentioned from time to time in the cases. Your Honours, in Matthews v Geraghty - and, I believe, your Honours have been provided with a copy of that - I have referred to Chief Justice King. Mr Justice Bollen at pages 585 to 586, says down at the bottom of page 585:
Does the word "preference" in s122 of the Bankruptcy Act and the word "preference" in s453(5) of the Code mean the same or not? I think that they must mean the same or connote the same idea - a creditor's being made better off than other creditors.
In this case the payment - - -
GUMMOW J: Well, that cannot be an exhaustive statement because it does not deal with the security situation.
MR HARDINGHAM: What we are dealing with here, your Honour - - -
GUMMOW J: No, I mean that general statement has to require some qualifications.
MR HARDINGHAM: Yes. Well, certainly, what his Honour is talking about are preferential payments, and preferential payments are payments made to unsecured creditors, your Honour.
GUMMOW J: The section does not say that.
MR HARDINGHAM: No, the section does not say that, but the section must be referring when it refers to "other creditors" to other unsecured creditors, your Honour, because talking about the situation which will ultimately obtain in the winding up of the company and the secured creditors will not be proving, except to the extent that there is a short form.
GLEESON CJ: But the fact that present problem resulted from a crystallisation of a floating charge is almost accidental, is it not? This issue would arise in any case in which an unsecured creditor, by reason of inaction on the part of a secured creditor, however that may come about, has managed to get his hands on a payment or a transfer of property in circumstances where, if things had taken their ordinary course, the asset or the monies would have gone to the secured creditor.
MR HARDINGHAM: That is so, your Honour.
GLEESON CJ: That could happen for any one of a number of reasons, and it could happen in bankruptcy as well as in the winding up of a company. In that sense, the fact that we are dealing with an automatic crystallisation of a floating charge just happens to be what brings us to court, it is not a solution to the problem.
MR HARDINGHAM: Yes.
GLEESON CJ: Is McDonald, Henry and Meek still the current textbook on bankruptcy law and practice?
MR HARDINGHAM: It is a loose-leaf service and it is a very prestigious one.
GLEESON CJ: Have you had a look at that?
MR HARDINGHAM: I have had a look at that.
GLEESON CJ: That has nothing - - -
MR HARDINGHAM: Does not help. Does not help.
HAYNE J: I suspect we ought to be going back into Seton's Judgments and Orders and the Coventry on Mortgages. Seton or one of those maybe the - - -
MR HARDINGHAM: Your Honour, what you seem to be suggesting to me is that there is something of a windfall element about the payment received by the appellants. There is, certainly, that, and the question arises, to the extent that there is a windfall element or there is a windfall, who should have the benefit of the windfall given the wording of section 122? Should it be the appellants who pressured the company into making these payments, or should the payments in question come back or be restored, recaptured and go into the pool for unsecured creditors; be a windfall for the unsecured creditors as a whole, so that there is no inequality of treatment as between the unsecured creditors during the six month time zone prior to the relevant date.
GLEESON CJ: Chief Justice Brennan would have answered that question, as I understand it, by saying, "This is a question of statutory construction. You have look at the meaning of the expression preference, priority, or advantage, so what is the purpose of the statutory provision?" And then he explained the purpose of the statutory provision in such a way that appears to lead to the result to which your opponent contends. What is your answer to that?
MR HARDINGHAM: My answer to that, your Honour, is that the statutory purpose of the provision is one of - or the statutory policy, the policy behind the statutory provision, is one of equality of treatment of unsecured creditors during the six month period prior to petition, as far as section 122 goes. That policy rationale is reflected in the judgment of Justice Kirby in Sheahan where, at page 463, his Honour said in the paragraph beginning halfway down the page:
It was accepted by the Full Court that the language of s122(1) of the Bankruptcy Act was not intended to be interpreted narrowly. There is a long line of authority to the same effect relating to similar provisions. This approach recognises the important social and commercial purposes of the sections, being designed to protect creditors against any attempt to favour one creditor or group of creditors over others during the time immediately before winding up. It would be completely inequitable, and destructive of the effectiveness of the legislation, to allow a receiver -
and then he goes on.
GLEESON CJ: That seems to treat the legislative policy as directed at motivation. Companies can go into liquidation or people can become insolvent quite suddenly, and the purpose of having a period of relation back is to produce an equitable distribution amongst creditors regardless of what people attempted to do or set out to do.
MR HARDINGHAM: That is so, your Honour. With respect, I do not read that passage as going to motivation, intention or - - -
GLEESON CJ: Well, it talks about an attempt to favour one group of creditors. The operation of this section is not confined, is it, to deliberately seeking to favour one group of people?
MR HARDINGHAM: Having regard to what Justice Kirby said about the objective meaning of the word "effect" in an earlier part of his judgment, I respectfully submit what his Honour was saying there is that one looks at the action taken and one asks whether it has the effect of favouring one creditor over others, or one group of creditors over others. You will recall, your Honour, that in that passage Justice Kirby referred to prior authority.
Can I take the Court to Ferrier And Knight v CAA [1994] FCA 1571; (1994) 55 FCR 28. This is the decision of the Full Court of the Federal Court. I think we have had photocopied the headnote and the pages to which I wish to take the Court. They are pages 42 and 43 of the joint judgment.
GUMMOW J: It was reversed.
MR HARDINGHAM: I am sorry?
GUMMOW J: It was reversed, was it not? Was not this judgment reversed?
MR HARDINGHAM: It was, your Honour, but the passage I wish to take the Court to - - -
GUMMOW J: Survived.
MR HARDINGHAM: - - -survived.
CALLINAN J: Was this the case in which the liquidators were ordered to pay some costs personally?
MR HARDINGHAM: I cannot recollect that, your Honour. At the bottom of page 42, paragraph G, the Court will see there is a heading "The rationale of preference recapture," and the court talks about that rationale and the importance of identifying it, and on page 43 in paragraph B the court says:
It has been said in the United States that there are two predominant objectives of preference law: (i) equality between creditors; and (ii) deterrence.
Reference is made to Union Bank v Wolas. In that case:
the Supreme Court considered s 547, the preference provision of The Bankruptcy Reform Act of 1978. Justice Stevens giving the judgment of the Court, cited the following passage from the House Committee Report -
and I refer the Court to that particular passage.
CALLINAN J: How is deterrence relevant if there is a finding of good faith?
MR HARDINGHAM: It is deterrence in the sense, as I understand it, your Honour, of trying to head off an unholy stampede by unsecured creditors.
CALLINAN J: What, an unholy stampede to act in good faith?
MR HARDINGHAM: Well, they would be acting - - -
HAYNE J: Well, that would be an unusual event in a winding up.
MR HARDINGHAM: Then Justice Stevens goes on to say - and I will come back to your Honour's observation in a moment:
As this comment demonstrates, the two policies are not entirely independent. On the one hand, any exception for a payment on account of an antecedent debt tends to favour the payee over other creditors and therefore may conflict with a policy of equal treatment. On the other hand, the ordinary course of business exception may benefit all creditors by deterring the `race to the courthouse' and enabling the struggling debtor to continue operating its business.
The Court goes on to say:
What one might call the `deterrence' rationale has been questioned.
Just as is being questioned by your Honour.
CALLINAN J: Mr. Hardingham, may I ask you this. If, in fact, we were talking about property in specie as opposed to money, even though the bank has not asserted any claim, and even though limitation periods may have expired - I do not know about that - why would not the liquidators simply be obliged to hand the property over to the mortgagee, to the bank?
MR HARDINGHAM: There is a decision of this Court on that very point, your Honour. The decision which we have referred to - and I should interpose here, this is the full extent to which I intend to refer to this decision - is N A Kratzmann Pty Ltd v Tucker [No 2] [1968] HCA 44; (1968) 123 CLR 295. In that case it was accepted that when a preferential payment is recaptured, it is recaptured by the liquidator for the unsecured creditors, and even although there may be a charge over the assets of the company, a crystallised charge over the assets - - -
CALLINAN J: My question, Mr Hardingham, in the first instance was - I would have asked you a question in relation to the money. In the first instance my question was directed to a situation in which what was recovered was property in specie. Does this decision deal with that, or does this just deal with a money payment?
MR HARDINGHAM: There is a reference in it to money, indeed, your Honour. Let me see if I can find the case.
GUMMOW J: But is not the effect of Kratzmann to say once the claw back has taken place, as it were, the charge does not reach out to grab that. So that assumes that the charge had not grabbed it in the first place, which is this case.
MR HARDINGHAM: Yes.
GUMMOW J: So Kratzmann does not really solve the problem, does it?
MR HARDINGHAM: I was just using Kratzmann to try answer Justice Callinan's point.
GUMMOW J: Kratzmann say it is no after-acquired property to which the charge fixes.
GLEESON CJ: But in any insolvency argument the last card in the pack always used to be the rule in Ex parte James. Do you know that one? It says liquidators have to behave in an honourable fashion. I understood that to be behind the question that you were asked by Justice Callinan.
CALLINAN J: Yes, exactly. If it were property in specie, it seems to me that, perhaps, voluntarily the liquidators might be obliged - perhaps voluntarily is not right. Perhaps the liquidators would be obliged to surrender to the - - -
MR HARDINGHAM: With respect, your Honour is quite right, and down at the bottom of page 300 of Kratzmann the Court is talking about the Yagerphone Case, and the Court says:
Now in bankruptcy the property of a bankrupt vests in his trustee upon the making of the sequestration order. The property which so vests is, of course, subject, in the hands of the trustee, to any charges validly created in relation to it by the bankrupt prior to the bankruptcy. The position of a secured creditor who has a charge on specific property is, of course, not in question; such property in the hands of the trustee will still remain subject to the charge.
The Court goes on to say:
But where security has been given by a bankrupt over all of his assets and a payment to a creditor is made by him out of moneys subject to the charge and the payment is, as against the trustee, subsequently declared void as a preference the moneys paid, when recovered will not be subject to the charge.
There is reference to - I have not answered your question properly, your Honour. There is a reference to "goods" in a decision of the New South Wales Supreme Court. I will get my junior to find that.
CALLINAN J: Well, in any event, it does seem that may be the position, that the liquidator would be bound to hand over property in specie. This case does not deal with the situation here for the reason that Justice Gummow pointed out. Why should there be a difference if the proceeds are recovered?
MR HARDINGHAM: Your Honour, I am not sure that there is a difference. I would just like my junior to find this - - -
CALLINAN J: Is not that against you, then. If there is no difference between the proceeds and property in specie, then the proceeds here would never be available to the general body of creditors because the liquidators would be obliged, if that were so, to hand the money over to the bank.
MR HARDINGHAM: Kratzmann is clear authority, in our submission, your Honour, that when money is recovered - - -
CALLINAN J: No, no, but Justice Gummow drew attention to the fact the factual situation there was different from here.
MR HARDINGHAM: Yes. The factual situation is not that different.
GUMMOW J: We dealt with Kratzmann and those cases in Sheahan at 428 but I think it is a different situation to this.
GAUDRON J: Now, money seemed to be dealt with at pages 300 and 301. Really, in that same sentence there is a statement there, but I do not understand it, for my part. It says:
where security has been given by a bankrupt over all of his assets and a payment to a creditor is made by him out of moneys subject to the charge and the payment is, as against the trustee, subsequently declared void as a preference the moneys paid, when recovered, will not be subject to the charge.
But why? That would seem to be in your favour, at least so far as the money is concerned.
MR HARDINGHAM: Yes. As I understand it, your Honour, the - - -
CALLINAN J: Can I just interpose. I am sorry to interrupt you, but that may be different because here it was a separate identifiable fund in somebody else's hands. Really, the property in question was really a chose in action in relation to a separate identifiable fund. I do not know, but in Kratzmann it may have been that the payment was made out of mixed funds in a general bank account, and that might make a difference.
MR HARDINGHAM: But if moneys were recovered in this case, as Justice Ostrowski and the Court of Appeal say that they ought to be, it does not follow that those moneys can be identified with the chose in action.
CALLINAN J: I do not know, you see. On one view of it, perhaps the appellants here got the proceeds of a chose in action rather than simply a sum of money. On one analysis, that may be a possible view.
MR HARDINGHAM: The appellants may have got the proceeds of the chose in action but the moneys recaptured by the liquidator in the preference recovery proceeding would not necessarily be the same moneys or the same subject matter, your Honour. It is not as though you could say there was a car that was given, there was a car that was recovered. The car would remain subject to the charge. The charge would never go away, it would remain subject to the charge in the hands of the liquidator. This is a different res, as it were.
CALLINAN J: Like Justice Gaudron, I do have a little bit of trouble with that sentence, I must say, at page 301.
GAUDRON J: It would make sense if the secured debt were less than the assets secured and there was a surplus, but it is not spelt out in those terms.
MR HARDINGHAM: It is not spelt out in those terms and, indeed - - -
GAUDRON J: And I do not think there was a surplus in Kratzmann.
MR HARDINGHAM: No, I do not think there was either, your Honour.
HAYNE J: Whatever else there was in Reid Murray, there was no surplus.
MR HARDINGHAM: Further down the page, just to compound the difficulty, your Honour, you will see that reference is made to N.W. Robbie v Witney Warehouse Co Ltd where Lord Justice Russell is quoted as saying:
" . . . that a claim by the liquidator for repayment to him of a fraudulent preference was not subject to the debenture-holder's charge; a statutory right in and only in the liquidator to make such a claim could never have been property of the company subject to the charge.
The Court goes on to say:
It is of significance that his Lordship did not think that the decision in any such case could depend upon whether or not the charge had crystallized at the time when the payment to the creditor was made.
HAYNE J: That may be explicable in this way, that you begin to use Code sections, you begin with section 374 of the Code, which is the obligation on the liquidator to get in the property of the company, and property of the company includes what is and appears to be property of the company. But to that you then add things like the preference claw-back. So that you are doing more than getting in the property of the company; you are getting in something additional.
GUMMOW J: You are under a statutory right which is of a limited nature and for a particular purpose.
HAYNE J: But if we are to search for policy and the like we, I suspect, at least perhaps have to begin from the proposition that step 1 is: liquidator gets in the property of the company; step 2: what the liquidator is doing in a preference claim is something more than getting in the property of the company.
CALLINAN J: Except that at page 302 of Kratzmann, property recovered pursuant to a liquidator's claim is treated differently and is treated as the property of the mortgagee. That seems to be apparent from about point 2 on page 302:
the very existence of the rule plainly acknowledges that if specific property, to which a charge, validly created . . . has attached prior to the time of its disposition, is subsequently recovered as a preference -
so it is still the statutory claim, but it is to be treated differently according to Kratzmann.
GUMMOW J: It really goes back to Yagerphone, does it not?
MR HARDINGHAM: Yes, it does. All I can say in response to that, your Honour, is that that would depend upon it being shown that the moneys recaptured by the liquidator were the same moneys, in effect, as the moneys which were paid to the payees.
CALLINAN J: In principle I do not know why that should be so. I mean, it may in fact be so, but the principle at the moment - - -
GLEESON CJ: They are never going to be the same moneys. We are not dealing with banknotes.
MR HARDINGHAM: No, that is right, your Honour.
GLEESON CJ: This is where we came in. We are dealing with a chose in action and some units and we are dealing with the proceeds of a series of dispositions of that property, but we are not dealing with money in the sense of banknotes. I am not saying this is right, but I am inviting your comment on why the amounts that you recover, if you succeed in this appeal, would not be amounts which for the purposes of the winding up you would be obliged to treat as subject to the charge.
MR HARDINGHAM: Well, I suppose the liquidator would take some comfort in Kratzmann v Tucker [No. 2], your Honour, the case that we have just been discussing, where the High Court said that such moneys are not subject to the charge. They are not company moneys, they are moneys recovered by the liquidator for the benefit of unsecured creditors pursuant to section 122.
HAYNE J: That is, you get a judgment in debt, do you? You get a judgment in debt against the appellants, and on satisfaction of that judgment, that what, simply falls into general pot for distribution?
MR HARDINGHAM: It is a judgment pursuant to section 122, the money - - -
GUMMOW J: It is an odd sort of order that is made, actually, when one looks at it.
GLEESON CJ: But is not the corollary of that proposition that you should not be entitled to the judgment unless they are funds that are not affected by the charge?
GUMMOW J: All of this is really against you, I think, because it helps explain why the appellant is right in the first place.
GLEESON CJ: From the liquidator's point of view, what is going on in this case is like that story they tell about the solicitor who was handed two $50 notes by the elderly lady, stuck together, and he had an ethical problem as to whether he would disclose it to his partner. From the bank's point of view, what is going on here is a question of whether an amount of money that should have gone to the bank should be divided between some or all of the unsecured creditors.
MR HARDINGHAM: Well, your Honour, we simply come back to the words of the section and we say that the payment was made by the company, the payment was made to some unsecured creditors. The payment had the effect of conferring a preference, priority or advantage on those creditors over the other creditors. We say that the policy behind the section is one of equality of treatment. There was no equality of treatment by the company of creditors during the relevant six-month period in this case. We say that on its face, the section applies.
Your Honours, the appellants put the matter in several ways, or it can be put in several ways. They say that the section requires that other unsecured creditors be disadvantaged in the sense of being worse off on a winding up as a consequence of the relevant payment. They put it another way. They say that the subject of the payment must have constituted an asset of the debtor company, out of which unsecured creditors were entitled to be paid. So that on payment, the pool available for payment of creditors on the winding up of the debtor company was reduced, the pool reduction scenario.
It can be put a different way. It can be said that the status quo should be restored so that creditors receive in the bankruptcy administration that which they would have received without the preference. Now, if any of those tests, which all amount to much the same thing, namely that what was legally available to unsecured creditors was reduced by the payment, if those are applied in the present case, it is quite clear that there has been no preferential payment because the unsecured creditors stood to make nothing in the winding up; the pool was nothing. But if these moneys are recaptured, then there will be something, albeit a small amount, for unsecured creditors. They will be better off than were there to be no recapture. We say that the section does not - - -
GUMMOW J: They are probably better off because they will be like the partners in the Chief Justice's example. That is why they will be better off.
MR HARDINGHAM: They will be better off because there will be something in the pool as a consequence of the - - -
GUMMOW J: The bank has inaptly a simulated position to the old lady.
MR HARDINGHAM: Well, perhaps I can take your Honours to the decision of this Court in Richardson's Case.
CALLINAN J: Just before we do that, Mr Hardingham, the way in which the appellants got the benefit of the overpayments, was that as a result of the assignment of the chose in action? Was there an assignment prepared? There is reference to an agreement, but it is not reproduced, in the index, "Copy of Agreement dated March 1990", is that - - -
MR HARDINGHAM: My understanding is that there was no formal assignment of the chose in action. There was simply a direction by Thompson Land to Construction Engineering, "Don't pay us, pay them".
CALLINAN J: Why would that not be an assignment of a chose in action?
MR HARDINGHAM: Well, a chose in action in Victoria would be assigned in accordance with section 134 of the Property Law Act.
GLEESON CJ: If after it happened Thompson had sued Construction, then the defence to be pleaded would have been accord and satisfaction.
MR HARDINGHAM: That is so, your Honour, that is so.
If the Court pleases, we submit that none of the limitations, the availability, the pool reduction, status quo limitation, no matter how it is put by my learned friend, none of these limitations appears expressly in or is expressly incorporated in the section.
GAUDRON J: Well, I am wondering that, Mr Hardingham. I am wondering if it is not necessarily in the notion void as against the trustee in the bankruptcy. I have just had a quick look at Sanguinetti which was referred to in Kratzmann which seems to support this. It is not void against anyone else, so the trustee takes, it seems to me, subject to prior interests because it is only void as against the trustee.
MR HARDINGHAM: But if the payment, your Honour, is void as against the trustee or the transfer is void as against the trustee - - -
GAUDRON J: Well, it may simply mean that you have to give it back - - -
MR HARDINGHAM: That means that the trustee, here the liquidator, can say "That is void, I want it" and claim it for unsecured creditors.
GAUDRON J: No, no, it cannot. You may say "It does not bind me", but you may take no benefit from it. I mean, there would be no doubt in a case where the equity of redemption is worth something. You could posit a case where there is one asset outstanding - let us say it is worth $5. The secured creditor has not been met to the extent of $2.5. The trustee is going to still take subject to the secured creditor. So, to that extent, the whole transaction is not void, all that is void is the $2.5 because that is all that can benefit you.
MR HARDINGHAM: Yes, I am not sure where that takes one, your Honour. We would submit, as I said before, that when the section says "void as against the trustee" or "against the liquidator", it means that the whole transaction, not the transaction subject, but leaving aside the bank's charge, the whole transaction is void as against the liquidator. Of course, that is subject to a qualification - and this comes back to the point Justice Callinan was making before - if there is specific property like a car in which you can see the charge inhering, if that is recovered, well, the chargee may very well be able to assert its charge over the res in the hands of the liquidator.
GAUDRON J: Let us take this car worth X on which half X of the charge is unsatisfied, and the transaction is void against the trustee, but it certainly would not be void against - we will complicate it a bit further - one can trace it but one can still see a beneficial interest in it that belongs to someone other than the trustee, you cannot get that, can you, because it is only void as against the trustee?
MR HARDINGHAM: Yes, I follow what your Honour is saying.
GAUDRON J: What is the remedy then? The situation in Sanguinetti, I think, briefly, was that it was declared that a trust was void as against the trustee, but some people had encumbranced their shares in the trust. It was not void as against the encumbrances as against those who, yes. What is the remedy, I want to know, in that situation under 122? You do not have the transactions set aside, I do not think.
MR HARDINGHAM: Well, you would have the transactions set aside to this extent, that the car would come back to the liquidator from - - -
GAUDRON J: I do not know.
GUMMOW J: It might have to be sold, you see.
GAUDRON J: Yes.
GUMMOW J: You might have to have some sale order with a division of the proceeds. But it could happen with land too, and does happen with land, I think.
MR HARDINGHAM: Yes. Can I take the Court to Richardson's Case.
GUMMOW J: Is that not about running accounts?
MR HARDINGHAM: Not entirely, your Honour, no.
GUMMOW J: It is a case of despair, really, to be avoided if at all possible.
MR HARDINGHAM: Well, it is certainly not cited as a case of despair from this side of the Bar table, your Honour. Richardson v The Commercial Banking Co (1952) 85 CLR 111, and the particular part of this case that we want to draw the Court's attention to is that part between pages 135 and 137. Here there was a solicitor who went bankrupt and prior to his bankruptcy, he made a payment out of a trust account to his creditor, the bank. The payment, one will see on page 135, was a payment of [sterling]390. Now, that payment was made at the expense of the beneficiary of that trust account, who was a Mrs Turner, and the Court said on page 135 of the report, halfway down the page:
The respondent bank contended that no deposit to the credit of the office account out of trust moneys could be considered a preference because they were not moneys which would have been available to creditors and the respondent bank could obtain no preference over other creditors by receiving them in purported reduction of the overdraft. This argument must be dealt with in relation to the item of [sterling]390, the last paid to the credit of the office account and the subject of the cross appeal.
Over the page in the first full paragraph on page 136, the Court said:
If it had been Price's -
that is the solicitor -
own money, the effect would have been to give a preference to the respondent bank over other creditors. The question whether such a use of other people's money is within s.95 is not easy. In Price's hands the cheque and its proceeds were subject to a trust and Commins -
that is the bank manager -
knew this. It is correct that if the cheque or its proceeds had been preserved and had remained identifiable they never would have been assets available to Price's creditors. The Official Receiver as trustee of his bankrupt estate could have made no title to them. Again, if in an identifiable form the money represented by Mrs. Turner's cheque had come to the latter's hands, it would have been subject to her right to follow it specifically.
On the other hand, Price having converted it, for we may take it that there was a conversion of the cheque for which he was at least vicariously responsible, Mrs. Turner, if she were unwilling to undertake the burden of proof involved in fixing the bank with accountability to her, could claim upon Price and after his bankruptcy prove in his estate and so add to the claims upon the assets. Again, unless the respondent bank be accountable to her for the proceeds of the cheque, and no attempt was made to show that a claim upon the bank has been made or admitted, then Price's debt to the bank has been reduced pro tanto; and to that extent the bank has an advantage over other creditors.
Further down the page in the final paragraph the Court concluded:
On the whole it appears to us that the payment of a cheque representing trust funds into the office account, were it otherwise to operate to give a preference to the bank, would be within s.95. It is within s.95 because, although the same moneys could never but for the misappropriation have been available to the bankrupt's creditors, there would be a preference, priority or advantage effected in favour of the bank as a creditor, in making a payment to it, when other creditors must prove and other creditors suffer the disadvantage of being exposed to the competition upon the assets of the proof of the defrauded owner of the funds. If the payment to the bank is undone at the suit of that owner, that would be another matter. If it is undone at the suit of the Official Receiver, then the owner may or may not be able to follow the moneys into his hands. That is a question involving matters of law and a of fact and we are not now called upon to decide it in either branch. But for the reasons we have given we do not think that there was a preference as to any deposit but that of Mrs. Turner's cheque.
GLEESON CJ: And it was because of the running account aspect of the case that there was no preference, except for that, as I recollect it.
MR HARDINGHAM: That is exactly so, your Honour.
GLEESON CJ: How did - - -
MR HARDINGHAM: If I can just finish that bit:
Thus upon the view we take of the case, the question of the consequence of the payment coming from trust funds arises for decision only in relation to that item.
In our opinion it does not prevent its being a preference.
GLEESON CJ: That is a - - -
GAUDRON J: The question then by reference to that, I would have thought, is: is the bank able to prove in the winding up for the difference between the funds realised and the debt?
MR HARDINGHAM: It is certainly able to do that, your Honour.
GAUDRON J: Yes, and that may not simply provide the answer. Do we know the extent to which the bank can prove in the winding up? Let us say it is one half of the amount that was paid out. There may only be a preference as to one half, if you take the meaning I take of "void as against the trustee".
MR HARDINGHAM: Your Honour, no matter how much the bank can prove for in the winding up, the other unsecured creditors are going to be better off than they would otherwise have been because, if there is no recapture of this preferential payment, they stand to make absolutely nothing. But even if they make one cent in the dollar, they will be better off than they would have been otherwise.
GAUDRON J: The question may be: are they worse off than they would have been, which is the question Mr Sifris says is the one you have to ask. Are they worse off than they would have been? You see, what there appears at page 137 suggests that the other creditors are worse off than they would have been because the client can prove in the bankruptcy.
MR HARDINGHAM: Yes, can I say this, your Honour: in the present case it could not be said that the other unsecured creditors would be worse off, and in this particular case, Richardson's Case, the High Court says, at the top of 137:
and other creditors suffer the disadvantage of being exposed to the competition upon the assets of the proof of the defrauded owner of the funds.
That has to be looked at carefully, that particular part of the sentence. Certainly there would be a disadvantage in having Mrs Turner come in and claim for a 390, but the status quo was basically maintained because the bank had received the 390, so that would be 390 less that the bank would be proving for in Mr Price's bankruptcy. In other words, Mrs Turner's claim really replaced the claim by the bank as an unsecured creditor in the bankruptcy of Mr Price to the extent of [sterling]390.
GUMMOW J: Now, is there any reference to Richardson in the Court of Appeal?
MR HARDINGHAM: Yes, there is, your Honour.
GUMMOW J: It is referred to by Chief Justice Brennan in Sheahan by reference to what Justice Young said about it.
MR HARDINGHAM: Yes. At pages 130 to 132 of the appeal book Mr Justice Phillips deals with Richardson's Case and he cites it in support of the view taken in the Court of Appeal. We say that two things are clear from Richardson's Case. The first is that in Richardson the relevant moneys, that is the [sterling]390, would never, but for the payment, have been available to the bankrupt's creditors. The Court acknowledges this. They were trust moneys. They would not have been available to the bankrupt's creditors in bankruptcy and it follows that creditors were never entitled to seek payment out of the moneys in question.
There was never availability of those trust funds in the sense that the creditors were entitled to seek payment out of them. They were trust moneys. We submit that Richardson's Case supports recovery in the present case. Mention was made by my learned friend, of course, as one would expect, of - - -
GUMMOW J: Just a minute. At paragraph 39 of his judgment, Justice Phillips refers to Richardson. He also refers to it back on paragraph 19.
MR HARDINGHAM: He refers to Richardson in paragraphs 36 and following, your Honour.
GUMMOW J: Yes, but also in paragraph 19.
MR HARDINGHAM: Yes, your Honour. Richardson's Case has two aspects. It has the running accounts aspect and it has the bit at the end which people seem to have overlooked. It certainly was not referred to Chief Justice Brennan in Sheahan nor to Mr Justice Young in CBA v James.
GUMMOW J: That is not right, is it? Justice Young did refer to it, did he not?
MR HARDINGHAM: I do not think he referred to that aspect.
GUMMOW J: Not to your passage?
MR HARDINGHAM: Not to the passage. Not to part of Richardson's Case upon which we are relying.
GLEESON CJ: Well, everybody, as I recollect it, usually treats Richardson as a case about running accounts.
MR HARDINGHAM: Any way, it was not referred to. The relevant passage was not referred to the Chief Justice in Sheahan or to Mr Justice Young in CBA v James. My learned friend relies heavily on what Mr Justice Finkelstein had to say in Wiley's Case. What Mr Justice Finkelstein had to say in Wiley's Case was, strictly speaking, obiter because the charges in that case were treated by his Honour as fixed and the payments made in that case were to the chargee itself. It was not necessary for his Honour to consider what the position would have been if the payments had been made to unsecured creditors following the crystallisation of the charges.
GUMMOW J: Now, he referred to Richardson, did he not?
MR HARDINGHAM: He did not refer to the part of Richardson upon which we rely, your Honour.
GUMMOW J: No, he referred to page 129 which is your 136.
MR HARDINGHAM: Yes, and he did not refer to the judgments or the comments of Chief Justice Brennan in Sheahan or the comments of Justice Kirby in Sheahan and it seems fair to infer that the matter obviously was not canvassed before the Full Court.
CALLINAN J: Mr Hardingham, I just want to make sure I understand something you said before. Is this your submission that even if the property were, or the money were to be treated or indeed the property that existed before it was converted into money were to be regarded as the mortgagee's property, the bank's property, and if the ultimate result even were that the bank got the money, that would still be of benefit to the general body of creditors because it would reduce the amount that the bank to recover and had the capacity to enlarge the fund that might be available to the unsecured creditors? Is that part - - -
MR HARDINGHAM: I will try and answer your Honour's question this way. I am not sure that I have followed it clearly but what I was trying to say is this that if there is nothing in the pool - putting aside this preferential payment, there is nothing in the pool for unsecured creditors. Everything there belongs to the bank in the sense that it is subject to the bank's fixed charge. So, there is nothing in the pool for the other unsecured creditors. If these payments which were made to the appellants are recovered there will be something in the pool.
GAUDRON J: Unless the bank can get it back.
MR HARDINGHAM: Your Honour, the bank will only be able to prove as an unsecured creditor for that money in the pool.
GAUDRON J: Yes, because it cannot trace.
MR HARDINGHAM: That is right, and it will not be able to get all of the money in the pool because there will be a pro rata distribution. The bank will probably get the lion's share of it but other unsecured creditors will get something. That was the point I was trying to make, your Honour.
CALLINAN J: Yes. Well, in this case, however, we know that there is no money over at all, in effect.
MR HARDINGHAM: No money - - -?
CALLINAN J: No money over for the unsecured creditors if the ordinary position obtained. But, even if the bank did get the money and had an entitlement to the money there would still be the potential, in most cases, for the bank's claim then, generally, to be reduced to the extent of the money that it has received or it gets, with the potential, therefore, for the pool available to the unsecured creditors to be enlarged to that extent because a secured creditor is not looking for as much money as it would otherwise be.
MR HARDINGHAM: Yes, but that presupposes that there will be something in the pool.
CALLINAN J: But often you will not know. I am talking in terms of general principle, now. I mean, cases may very well come to court when it is not know whether there is going to be any surplus over and above the secured debt or not. Is that not right?
MR HARDINGHAM: I am sorry, your Honour. Pardon me.
CALLINAN J: Indeed, an application is often made in the course of the liquidation or the bankruptcy for declarations and one does not know how it is going to end up, whether there is going to be any surplus or not.
MR HARDINGHAM: I am sorry, I cannot assist more with that.
CALLINAN J: I think it is in your favour what I am putting to you.
MR HARDINGHAM: Yes, but if the chargee recovers the money which is recaptured by way of preference then we would say that the unsecured creditors are not going to be better off, there will be nothing in the pool for them. What we are dealing with here, your Honour, is a case where the charge exhausts the assets which are subject to - - -
CALLINAN J: I understand that. I am talking in terms of general principle, that is all, that it may be - certainly in some cases, the fact that the secured creditor may get the money, or the proceeds, does not mean that the general body of creditors is disadvantaged. Indeed, they are advantaged to the extent that the secured creditor has to look for less in order to satisfy its debt.
MR HARDINGHAM: We would say that if money comes into the pool where otherwise there is no money or money comes into the pool thereby increasing it, that will automatically be for the benefit of other unsecured creditors.
CALLINAN J: Or if the claims of unsecured creditors are reduced. That also is to the benefit of unsecured creditors.
MR HARDINGHAM: It is not clear how those claims could be reduced, your Honour.
CALLINAN J: Well, say the secured creditor is owed $1,000 and it recovers $150,then it is only looking - it is only entitled to $850 from its security.
MR HARDINGHAM: Yes.
CALLINAN J: So that there is the potential for a benefit to the extent of $150 to the unsecured creditors.
MR HARDINGHAM: One would have to do the sums, your Honour.
GUMMOW J: Mr Hardingham, would you just take me through the passage at the bottom of page 136 of Richardson again and explain to me how it would work here? The sentence beginning, "It is within s 95".
MR HARDINGHAM:
It is within s 95 because, although the same moneys could never but for the misappropriation have been available to the bankrupt's creditors -
can I stop there? They would not have been available to the bankrupt's creditors because they were trust moneys, your Honour - 116(2)(a):
there would be a preference, priority or advantage effected in favour of the bank as a creditor, in making a payment to it, when other creditors must prove - - -
GUMMOW J: "When" means "because".
MR HARDINGHAM: Yes:
in making a payment to it -
because -
other creditors must prove and other creditors - - -
GLEESON CJ: "When" means "whereas".
MR HARDINGHAM: Yes. I am sorry, may I just look at that again:
there would be a preference, priority or advantage . . . making a payment to it, when other creditors must prove and other creditors - - -
GLEESON CJ: You have paid the bank and you have forced other creditors to prove.
MR HARDINGHAM: Yes.
GAUDRON J: So that it seems to be looking not to the situation that would have been if the transaction had not occurred but the situation that will be because of the bankruptcy. That, in a sense, makes - - -
GLEESON CJ: Well, he says, other creditors suffer the disadvantage of being exposed to the competition upon the assets of the proof - - -
CALLINAN J: Competition for the assets, is that how it should be read?
HAYNE J: Because all of the creditors concerned, including the defrauded creditor, are unsecureds?
MR HARDINGHAM: Yes.
HAYNE J: We are talking about competition between creditors, all of a single class, namely unsecureds.
MR HARDINGHAM: Yes, that is so.
GUMMOW J: Yes, I think that is right.
HAYNE J: Is that not an important difference, indeed distinction, between your case and Richardson where, because here we are concerned with consequences as between differing classes of creditors, there may not be the immediate translation of what is said in Richardson to these circumstances? Can I exemplify this or illustrate it this way: if you take the last line on 136:
in making a payment to it, when other creditors -
here the bank must, or other creditors, namely the other unsecureds:
must prove and other creditors suffer the disadvantage of being exposed to the competition upon the assets of the proof of the defrauded owner -
No, not here, they are not exposed to the competition upon the assets of proof by the secured, are they?
MR HARDINGHAM: Yes, they are, your Honour.
HAYNE J: In respect of the surplus, are they, or the deficiency between security and debt?
MR HARDINGHAM: Yes.
GLEESON CJ: Is one of your arguments that the present case is stronger than Richardson because in that case Mrs Turner was not merely a secured creditor of the solicitor, she was in fact the beneficial owner of the moneys the solicitor paid to the bank.
MR HARDINGHAM: Yes. Well, it is certainly no weaker case from the present case, your Honour.
GUMMOW J: What follows from the succeeding sentences:
If the payment to the bank is undone at the suit of -
Mrs Turner -
that would be another matter.
MR HARDINGHAM: That is right, yes.
GUMMOW J: What is the other matter, that is what I do not understand.
MR HARDINGHAM: There would be no preference.
GUMMOW J: Why?
MR HARDINGHAM: Because the debt to the bank would not have been discharged because Mrs Turner would have recovered the payment made by Mr Price to the bank in discharging his indebtedness to the bank from the bank.
HAYNE J: So if the bank in this case recovered money from the appellants, traced it, got it back, no question of preference arises because the bank never got anything.
MR HARDINGHAM: That is right.
GLEESON CJ: And Mr Sifris' clients would just prove in the winding-up?
MR HARDINGHAM: Yes.
GUMMOW J: That all seems to assume that they could and would prove in the winding-up, that the bank could and prove in this winding-up.
MR HARDINGHAM: Yes.
GUMMOW J: There is a question of fact in there we do not know the answer to, given their acquiescence of - so it is said - delay.
MR HARDINGHAM: But one looks at the possibilities here, your Honour.
GUMMOW J: Yes. Then, what is the meaning of the next sentence:
If it is undone at the suit of the Official Receiver, then the owner may or may not be able to follow the moneys into his hands.
MR HARDINGHAM: I can only assume that what they are talking about there is the situation where it can be seen to be an in specie recovery by the official receiver, so that one can say that precisely what was paid and was subject to Mrs Turner's equitable entitlement was recovered, so - - -
GUMMOW J: He is recovering a piece of trust property.
GLEESON CJ: Yes.
MR HARDINGHAM: Yes, that is exactly right.
GLEESON CJ: But they were there leaving open the question that you say was decided in Kratzmann, were they not? They say you may or may not be able to follow. That is a question involving matters of law or fact that we are not called on to decide.
MR HARDINGHAM: Yes. I would have to look at Kratzmann again, your Honour, just to see what the Court said about that.
CALLINAN J: The Court of Appeal drew the inference that the bank would not now, even if it could, assert any claim to this money against the appellants. Is that not right?
MR HARDINGHAM: Yes, that is right.
CALLINAN J: But you are asking us to assume that the bank would claim, as an unsecured creditor, to the extent that its security did not satisfy the debt.
MR HARDINGHAM: I do not think it is an integral part of our argument, your Honour, as an evidentiary matter, to establish that on the balance of probabilities, the bank in this case will put its hand up as an unsecured creditor. What we are looking at are the legal possibilities and the rights that arise.
CALLINAN J: You have really asked us to look at what the situation is, but there does not seem to be any finding anywhere, and perhaps there is no evidence as to what the state of the liquidation is; how much the security realised; how much the debt was; what the total of the unsecured debts was. There is no evidence of any of that? Why should we assume that this is a case of a deficit or a surfeit or a surplus?
MR HARDINGHAM: Well, I am sorry, your Honour, in the appeal book - - -
CALLINAN J: There is, yes.
MR HARDINGHAM: The best I can do for the Court is to refer it to page 114 of the appeal book where, in paragraph 12, at line 10, Mr Justice Phillips said:
The property over which the security extends is not then available for distribution among unsecured creditors unless of course there is a surplus over and above the needs of the secured creditor (and it was not suggested that there would, or even might, be any surplus here).
There will be no surplus, as I understand it. It is common ground that there will be no surplus for unsecured creditors. The charge will gobble up all assets of the company. The only thing that will be available for unsecured creditors is moneys that are recaptured pursuant to the claw-back provisions of the Bankruptcy Act.
Can I finally say, your Honours, just in relation to the chargee's inactivity, we would submit that all that Mr Justice Phillips was saying about the chargee's inactivity was that, but for that inactivity, the question of principle with which we are concerned today would never have arisen. Mr Justice Phillips, in our submission, was not saying that in some way the inactivity of the bank impacts upon the resolution of the question of principle with which we are dealing. The fact is that had the bank appointed a receiver and manager contemporaneously with the crystallisation of the charge, these payments may never have been made. Had the bank sought to recover the moneys early, then a question of preference may never have arisen. But for some reason, and we do not represent the bank, the bank did not appoint a receiver and manager - it may have been good or bad reasons - until 27 April 1990, and the bank has never, it appears, asserted a proprietary claim to the moneys received by the appellants.
Finally, your Honours, we would submit that in the present case pressure was brought to bear upon the debtor company by the appellants. Payment was made in response to that pressure. It would not be consistent with the policy of the section of equality of treatment as between unsecured creditors during the six-month period if, following crystallisation of the charge and for so long as the company retains control of its assets, it can, in effect, play favourites, for whatever reason, between unsecured creditors. The protection afforded unsecured creditors by the section should apply in these circumstances. Therefore, we would respectfully request that the appeal be dismissed.
GUMMOW J: Just before you go away, Mr Hardingham, and leave us with this terrible problem of Richardson's Case, can I take you to the argument in Sheahan 189 CLR 407 at 417 and 413. I remember now we were invited, to some extent, to get entangled with the passage at 136 to 137 of Richardson. You see footnote (16) at 413. You go up into Mr Finkelstein's argument. You were getting asked to get entangled in this passage in Richardson, 136 and 137. What he was saying about it was that in Richardson the client:
the beneficial owner of the money . . . was regarded as an unsecured creditor in competition with the other creditors.
That seems to be so. Why? That is what I still do not - how could she be regarded as an unsecured creditor in competition with the others when she was secured, because she had a proprietary claim, she was a beneficiary.
MR HARDINGHAM: Because if her equitable interest is defeated by the payment, she will seek to recover from Mr Price personally. She will seek to recover the 390 - - -
GUMMOW J: On a common law claim.
MR HARDINGHAM: Yes.
GUMMOW J: Of money had and received, or whatever.
MR HARDINGHAM: No, she would say that - yes, that is right. In those circumstances she would have to prove for that money in his bankruptcy along with other unsecured creditors.
GLEESON CJ: Just as the bank in the present case would have to prove for the difference between what it gets back under its charge and the amount of the debt owed to it.
MR HARDINGHAM: Just so, your Honour, yes.
GLEESON CJ: Thank you, Mr Hardingham. Yes, Mr Sifris. How long do you expect to be in reply?
MR SIFRIS: A few minutes, your Honour.
GLEESON CJ: All right.
HAYNE J: Just before you begin, Mr Sifris, on this search for the origin of available assets and so on, reference can be made to section 446 of the Code about priority of employees' claims over floating charges, which uses the expression:
So far as the property of a company available for payment of creditors other than secured creditors is insufficient -
That, I suspect, is a fairly recent section and I doubt very much is its first use, but it is a use.
MR SIFRIS: Thank you, your Honour. We respectfully submit that Richardson's Case is distinguishable. The beneficial owner of the money, Mrs Turner, was, in that case, regarded as an unsecured creditor, and as I read the passage at 136 starting at line 8:
It is correct that if the cheque or its proceeds had been preserved and had remained identifiable they never would have been assets available to Price's creditors.
But the beginning of the next paragraph, "Price having converted it", so the money was paid into the account and Mrs Turner did not assert, as against the bank, when he won a trust. Nothing was asserted. She proved, and that is a different - - -
GUMMOW J: So how do you get that out of the passage? You start at 136 - - -
MR SIFRIS: Firstly, if the cheque had remained preserved, it would have been identified - there would never have been assets available to Price's creditors. Once it was put into the account, it was available to Price's creditors and including Mrs Turner, who was regarded as an unsecured creditor, in the absence of taking a step against the bank fixing it with knowledge and seeking a payment or a declaration that it was trust property, as the next passage goes on to say.
GUMMOW J: How does that relevantly distinguish this case?
MR SIFRIS: Because, we say - - -
GUMMOW J: The position of a bank, in this case, I suppose, one should say.
MR SIFRIS: We say, as appellants, we are entitled to assert that all the funds were available and the bank was entitled to it. But in Richardson's Case there was no other party that was entitled to anything unless you asserted it and raised it as a trust. Here we have a fixed charge standing in the way; there, there was nothing unless she asserted it. She did not.
GLEESON CJ: I am afraid I have not followed that.
MR SIFRIS: The difference, we say, is this, that in the case before the Court now, the appellants' submission is that the trade creditors are in no worse position because of the crystallised charge. Because of the crystallised charge, there are no available assets - - -
GAUDRON J: But we have to say no worse position when?
MR SIFRIS: At the time of the payment.
GAUDRON J: Well, I think that ultimately is the question. Do you look to what would have been the case if no payment had been made or do you look to what is the case having regard to the fact that the payment was made? It seems to me that is the crucial difference in this case.
MR SIFRIS: You look at the position at the time of payment.
GAUDRON J: But why? What is there about the section that drives you to "at the time of payment", rather than "at the present time, having regard to the fact that a payment was made"?
MR SIFRIS: Firstly, on authority. The authorities seem to have canvassed the issue and decided, including Airservices at 501, that the relevant time is the time of the payment to - - -
GLEESON CJ: You mean immediately before?
MR SIFRIS: Immediately before, yes.
GLEESON CJ: Right. If that was the relevant time in Richardson's Case, why would you not say, "Immediately before the solicitor did what he did, that [sterling]390 was not available, or potentially available, to the unsecured creditors"? It belonged to Mrs Turner beneficially.
MR SIFRIS: Yes, that is true so far as it remained identifiable but, once it lost its identity by being put into the account, then it lost its identity and she was regarded as an unsecured creditor and - - -
GLEESON CJ: I understand that, but is not the decision in Richardson's Case about the [sterling]390 inconsistent with your proposition, in answer to Justice Gaudron, that you look at the situation immediately before the time of payment rather than looking at what occurred having regard to the payment?
MR SIFRIS: I might have to withdraw my answer, your Honour. I cannot answer that at the moment, namely, which one of those is applicable.
GLEESON CJ: Unless counsel want to urge a different course on us, as far as we are concerned, we would prefer your assistance rather than expedition in answer to this question because I have to say, speaking for myself, personally I find it a difficult case. Why do we not adjourn now until 10.15 tomorrow morning and you can think about this overnight?
MR SIFRIS: Your Honour, that may cause some difficulty, I am embarrassed to say.
GLEESON CJ: You are jammed.
MR SIFRIS: Your Honour, may I respectfully suggest - - -
GUMMOW J: It will not be assisted by getting it on paper, I am afraid.
MR SIFRIS: Yes, that limited submissions on this point - - -
GUMMOW J: This is a case which demonstrates the need for oral discussion.
GLEESON CJ: We will sit on until you finish your argument, Mr Sifris, but you can see the point that is concerning us.
MR SIFRIS: Yes, your Honour. The relevant time according to Airservices at page 501:
So the principal question in the appeal is whether any of the payments . . . had the effect of giving Airservices a preference, priority or advantage over other creditors of Compass at the time that it was made.
That is said to be the relevant time, and reference is made to other authorities. So one looks at the effect of the payment in order to determine whether it is a preference at the time that it is made. On 15 March one examines the payments made to the creditors, one takes them into account and says, "Well, these payments that are made to these creditors, did they have the effect at that stage of giving a preference, priority or advantage?".
GAUDRON J: They cannot have had that effect immediately. You can ask: will they have that effect if the person goes bankrupt or the company goes into liquidation within the next six months?
HAYNE J: There has to be some element of hindsight in it, has there not? We know there is a liquidation, we know there is an insolvent liquidation. You have to at least have those facts swirling around in the system somewhere, have you not?
MR SIFRIS: Your Honour, on this authority - - -
GAUDRON J: What is it that you were reading from? I missed that, Mr Sifris.
MR SIFRIS: This is the case of Airservices v Ferrier at page 501.
GUMMOW J: Of 185 CLR?
MR SIFRIS: Yes. It is referred to by Justice Finkelstein as well as being the relevant time. Footnote (51) of the joint decision of Justice Dawson, your Honour Justice Gaudron and Justice McHugh:
The relevant time is the time of payment and not the date of liquidation.
There has been some debate in cases about whether you should have regard to the subsequent liquidation and what happened.
GLEESON CJ: But that is addressing a different problem, I think, from the one we are looking at.
MR SIFRIS: Yes. In the context of a preference, priority and advantage, you freeze the situation as at the date of payment and say, "If we allow this payment to go through, is this a preference, priority or advantage? How do we characterise it?". We would say that so far as unsecured creditors are concerned, it is not because of the prior crystallisation of the charge.
GAUDRON J: Perhaps I put that question too precisely. Perhaps that is not really even the question either. But let us freeze it at the time. Why would you not say once this ceases to be in specie, then you are within what is said in Richardson's Case?
MR SIFRIS: The difference with Richardson is Richardson - - -
GAUDRON J: And you were paid in specie, were you not, at least for what I will call the retention money?
MR SIFRIS: We were paid in money and security constituted by the units. But the distinction with Richardson, we say with respect, is that, unlike the case of a fixed charge over assets, there was in the case of Richardson nothing because, although at a prior stage when the cheque itself - had that remained identifiable, certainly it would not have been assets available but, once the cheque got paid into an account, it was left to Mrs Turner to decide what to do.
GUMMOW J: Why could she not trace it?
MR SIFRIS: She could trace it and have a claim against the bank.
GUMMOW J: She had two sorts of remedies. That is part of the problem in all of this.
MR SIFRIS: Yes. If she sought to trace it - in fact, that is what the next paragraph on 136 says:
Mrs Turner, if she were unwilling to undertake the burden of proof involved in fixing the bank with accountability to her -
so that was one avenue available to her - - -
GUMMOW J: That means if she is not going to trace, does it not?
MR SIFRIS: Yes.
GUMMOW J: Or try to trace.
MR SIFRIS: That is right, and she did not. Then she "could claim upon Price and . . . prove in his estate", and that is what she did do.
GUMMOW J: Then they say, "We don't know the facts". The opening words at the bottom of 136 say "would be within s.95". Is that some hypothesis which is then worked out over the next succeeding lines and left as a hypothesis because there are not facts?
MR SIFRIS: I am not sure, your Honour.
GUMMOW J: I do not know either.
MR SIFRIS: I must confess I find this passage at the end very cryptic and I must say that I have read it to be that she did not assert any tracing rights, although they were available to her and therefore, unlike our case where there is a fixed charge over property, here there was nothing. There may have been if she asserted something. That is why her inaction may be critical, but there was not a pre-existing trust fund as a separate asset because it was converted and mixed into the account.
GUMMOW J: Which then picks up the running account situation.
MR SIFRIS: Yes.
GAUDRON J: Is it not the fact that there was in essence a running account in Airservices that explains that footnote (51)? The question was whether you look to see how much ahead, as it were, Airservices was at the date of liquidation or how much ahead it was as at the date of each payment on the running account.
MR SIFRIS: It certainly was in that context but, with respect, Justice Finkelstein decided a case not involving a running account and concluded that that was the relevant time and referred to some other authorities as well, including those authorities referred to at (51). Footnote (51) did not deal with running accounts.
GLEESON CJ: Are you referring to Justice Finkelstein's judgment in Wily?
MR SIFRIS: Yes, correct, your Honour.
GLEESON CJ: He was really dealing with a different problem there though, was he not? He was dealing with the case of a payment made to the secured creditor.
MR SIFRIS: Before crystallisation, yes.
CALLINAN J: Why is that not simply an advantage to your client not to have to prove in the liquidation for the whole of their debt, whereas the other unsecured creditors do have to prove for the whole of their debt? Why is that not simply an advantage that your clients get over the other creditors?
MR SIFRIS: Yes, it is an advantage.
CALLINAN J: Why is that not within the section?
MR SIFRIS: It is an advantage that we get but the only disadvantage is to the bank.
CALLINAN J: I am not satisfied about that. It may be a disadvantage to the other creditors in the sense that whether the bank gets it - let us assume the bank does not get it. Then it is a disadvantage in the sense that we have just discussed. If the bank does get it, it then reduces the extent to which the bank has to claim as an unsecured creditor for the difference between the amount realised and its debt.
MR SIFRIS: Yes.
CALLINAN J: So if the bank's claim is reduced in any way at all, that is to the advantage of the general body of unsecured creditors.
MR SIFRIS: Yes, that is.
CALLINAN J: Does that not mean that the section is satisfied? There is an advantage to your clients and there is a disadvantage to the unsecured creditors.
MR SIFRIS: But if the money that the appellants received was to be returned to the bank - - -
CALLINAN J: Then to the extent that the bank gets that money, its claim as an unsecured creditor to the extent of the shortfall is reduced.
MR SIFRIS: Yes, that is correct, it would reduce.
CALLINAN J: Then the general body of unsecured creditors is better off. It is as simple as that, is it not?
MR SIFRIS: With respect, not. One still looks at the question of preference, priority and advantage at the relevant time if that is the test. At the relevant time, in our respectful submission, we go back to the original argument as to what was available or what parties were entitled to. We submit one has to go back to the - - -
CALLINAN J: Go back to that date. At that date the bank was entitled because there had been a demand by then, had there not?
MR SIFRIS: Yes.
CALLINAN J: The bank was entitled to all of the assets.
MR SIFRIS: Yes.
HAYNE J: The argument that underpins your proposition is, is it not, pretty close to the argument advanced by Mr Taylor in Richardson at the foot of 123 to the top of 124 in Richardson where Mr Taylor is recorded as submitting that:
No payment-out by a bank of trust moneys to a creditor can constitute a preference under s.95 because such moneys are not available for payment to creditors - - -
GLEESON CJ: It is repeated against letter (D) on page 125 at the conclusion of his submissions.
HAYNE J: Yes. It is that argument that provokes what the Court says and it seems, Mr Sifris, to be at the core of your argument: there could be no preference because it was secured, it came out of secured property, secured property could never be available therefore. Do I mischaracterise your argument or mischaracterise the way in which it was dealt with in Richardson?
MR SIFRIS: Your Honour has not mischaracterised my argument. My argument is correct, but so far as Richardson is concerned, we say if one looks at the judgment at the relevant pages, 136 and 137, dealing with it, it is not entirely clear but it does seem to suggest that the beneficial owner there, Mrs Turner, was regarded as an unsecured creditor in competition with other creditors.
HAYNE J: Yes.
GLEESON CJ: Your argument comes to this, does it not, that the other unsecured creditors never had any, if I could borrow a phrase from another context, legitimate expectation of getting their hands on any of this money in the first place and therefore they cannot complain about the fact that they have missed out on it?
MR SIFRIS: Yes, that is so.
GLEESON CJ: They were not disadvantaged.
MR SIFRIS: That is so, yes.
GLEESON CJ: The question we have to decide is whether your clients were advantaged.
CALLINAN J: But the general body of unsecured creditors was disadvantaged. It would have been disadvantaged no matter whether the bank got the money or not.
HAYNE J: You say, as I understand it, the disadvantage is wholly theoretical because true it is the bank's claim moves according to what is happening but the bank's claim is against a nil or an empty pot and therefore the disadvantage is theoretical, not real. Is that the answer?
MR SIFRIS: I can only come back to the fact that one looks at the position at the date of 15 March and not any subsequent - - -
HAYNE J: I will take that as a "no", Mr Sifris.
CALLINAN J: At that date you have no idea what the liquidation is going to yield.
MR SIFRIS: That is correct, yes.
GAUDRON J: In fairness to you, I should take you to this at page 502 of Airservices which may, I think, undermine some of your reliance on footnote (51). In the last sentence in the paragraph that continues on to that page:
Whether the payment is or is not a preference has to be "decided not by considering its immediate effect -
in this case you say no effect as far as the other unsecured creditors are concerned -
but by considering what effect it ultimately produced in fact".
Then it is footnoted to Rees v Bank of New South Wales.
GUMMOW J: When is this ultimate production going to appear in fact? It is the last moment of the distribution.
GAUDRON J: You would have to at least wait to see if there was a bankruptcy.
HAYNE J: "In the fullness of time, Minister, in the fullness of time".
CALLINAN J: Most of these proceedings are conducted before there is any distribution or, indeed, whether there is any - - -
GLEESON CJ: You could have an action like this early on in the liquidation of an insurance company that wrote long-tail insurance.
MR SIFRIS: Yes, that is correct. Thank you for the indulgence.
GLEESON CJ: Thank you, Mr Sifris. We will reserve our decision in this matter.
AT 4.34 PM THE MATTER WAS ADJOURNED
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