Capital Finance Australia Limited & Anor v Tolcher & Anor [2008] HCATrans 281 (5 August 2008)

Last Updated: 5 August 2008

[2008] HCATrans 281

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
Sydney No S220 of 2008

B e t w e e n -

CAPITAL FINANCE AUSTRALIA LIMITED

First Appellant

CAPITAL CORPORATE FINANCE LIMITED

Second Appellant

and

RAYMOND GEORGE TOLCHER (AS LIQUIDATOR OF LLOYD SCOTT ENTERPRISES PTY LIMITED) (IN LIQUIDATION)

First Respondent

LLOYD SCOTT ENTERPRISES PTY LIMITED (IN LIQUIDATION)

Second Respondent

GUMMOW J
KIRBY J
HEYDON J
CRENNAN J
KIEFEL J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON TUESDAY, 5 AUGUST 2008, AT 10.16 AM

Copyright in the High Court of Australia

__________________

MR B.A.J. COLES, QC: If your Honours please, I appear with my learned friends, MR M.A. ASHHURST, SC and MR S.B. DOCKER, for the appellants. (instructed by Kemp Strang Lawyers)

MR R.R.I. HARPER, SC: May it please the Court, I appear with my learned friend, MR S.W. BALAFOUTIS, for the respondents, proposed cross-appellants. (instructed by Addisons)

GUMMOW J: Yes, Mr Coles.

MR COLES: May it please the Court.

GUMMOW J: Now, this is quite a complicated matter. It has been set down for one day. We need to take some time in understanding it though and we have looked at the situation in tomorrow’s case. If this case does not finish before 11.00 or 11.30 tomorrow, so be it. But it is more important that we get a full grasp of the facts in this case, not to mention the law.

MR COLES: I think we are encouraged by that observation, your Honour, and had assumed the possibility ourselves, subject to the Court’s convenience.

GUMMOW J: All right.

MR COLES: If your Honours please. The appeal, as your Honours will have noted, concerns a series of transactions under which the respondent, or the company now in liquidation, Lloyd Scott Enterprises, became the lessee of certain items of photocopying equipment from a bank, the National Australia Bank, those items of equipment having been purchased for that purpose from the owner of the equipment, the appellants. The Full Court found that the circumstances surrounding the sale by the appellants of their equipment to the bank constituted an uncommercial transaction of the company in liquidation, Lloyd Scott Enterprises, within the meaning of that expression described in section 588FB of the Corporations Act and the relief - - -

HEYDON J: How could they have done that in view of the way that paragraph 30 of the further amended statement of claim pleaded the facts? That seems to have fastened entirely upon the second 12 January deed and no other point of fact.

MR COLES: Yes, that is right.

GUMMOW J: Was it widened at any stage?

MR COLES: I am sorry, was it widened?

GUMMOW J: Was the pleading widened in the way the case was conducted?

MR COLES: No. What your Honours see in volume 1 of the appeal book is, I think, the further amended final emanation of a document - - -

GUMMOW J: Yes, but in the conduct of the litigation, was it in fact widened? I do not know, I am just asking?

MR COLES: I do not really think so, your Honour. I do not think there was any consensual departure from the four walls of the pleading, If the pleading, on the other hand – and this may be something claimed for them – had a certain ambulatory quality, I suppose one might say – but the focus of the pleader, centring as he or she did on the document I will take your Honours to in a moment, what is called the second deed of 12 January 2001, was a focus which found resonance with the primary judge and the judges in the Full Court. Indeed, when I come to take your Honour to the precise terms of the declaration numbered 3 which the Full Court made, your Honours will see the centrality of that instrument as, I suppose, an inspiration or indeed as a decisive feature in the conclusion reached.

The relief granted by the Court – by both Courts at first instance and on appeal – was that the – indeed, in fairness the only relief claimed by the liquidator was that the appellants should pay to the company in liquidation or its liquidator, more accurately, the whole of the amount of some $3.7 million which comprised the totality of the purchase moneys which the appellants received from the National Australia Bank upon the sale of the equipment.

Later in the appeal, your Honour, I will develop one of our complaints, namely, that whatever be the correctness or otherwise of what we may have say about the fact or otherwise of a transaction of the company and whether or not it was uncommercial relevantly, there was absolutely no basis whatsoever for wholly divesting the appellants of the entirety of the proceeds of sale of what was in fact and in law absolutely their own property.

CRENNAN J: Justice Lindgren in paragraph 15 of his judgment identified that possibly the uncommercial transaction was the transaction between LSE and NAB.

MR COLES: The NAB, yes, that is right.

CRENNAN J: And what should be disgorged was part of the moneys paid which would represent NAB’s profit.

MR COLES: Yes.

CRENNAN J: Two questions. One, would that kind of conclusion have been available on the matter as pleaded and is it part of your case that some amount, such as the NAB profit amount, could be the subject of an order under section 588FF?

MR COLES: Can I answer both of those questions, if your Honour pleases, fairly shortly at the moment because, as your Honour will apprehend, the development of the features which inform the two answers I am about to give your Honour is quite important in other aspects of the appeal.

CRENNAN J: Certainly. Do that at your convenience.

MR COLES: But to deal shortly now with your Honour’s two questions, the first one was whether it would have been open to the liquidator, in effect, as an alternative on the case as pleaded and presented, to have obtained some such compensation as that, in effect, described by Justice Lindgren in paragraph 15 of his dissenting judgment. The answer to that, in our respectful submission, is no, because your Honours will see from the further amended statement of claim that the liquidator made but one claim and one claim only, namely, he claimed the payment of the whole of the amount of the sale proceeds received from the National Australia Bank.

He did not seek any declaration as to the profits. He did not ask for an account of what they might be and fundamentally, of course, in the course of answering that question, I should add, as your Honours will have observed from the constitution of the proceedings, that if there was – or was according to the putting together of the proceedings – an attack by the liquidator on the alleged uncommerciality of the leasing arrangements, that is to say, the lease arrangements between the National Australia Bank and Lloyd Scott Enterprises, or LSE as we have abbreviated it to, then, of course, it would be our respectful observation that the Court could hardly make a finding about the contravening or uncommercial quality of that transaction when the National Australia Bank was not itself a party and when the pleadings between the immediate parties did not raise that issue.

Your Honours will not, I think, find any component of the liquidator’s attack as containing in terms broadly and with the appropriate particularisation a proper allegation that the National Australia Bank leasing transaction was itself uncommercial. It is a curiosity that the Full Court’s conclusions which tended – treating them at large – towards the view that there were disbenefits, I suppose; whether they amounted to uncommerciality is another matter, but the Full Court’s conclusion that there were non-benefits or disadvantages in the NAB leasing transaction might have suggested, on one view, if the facts measured up, a case could have been made that the leasing transaction was uncommercial in which case the liquidator may have had, indeed, for all we know, he may still have a case against the National Australia Bank for the recoupment of the respects in which there was disadvantage to the company in liquidation.

At least so far as the proceedings which are before your Honours are concerned, and as Justice Lindgren pointed out very near the paragraph to which your Honour Justice Crennan has made reference, there was no attempt by the liquidator to examine numerically or arithmetically what the outcome of the supposed benefits and disbenefits of the leasing transaction were.

GUMMOW J: I was wondering about that. We just do not know, do we?

MR COLES: We just do not know. This comes back to the first part, returning, I suppose, to part of question 1 of your Honour Justice Crennan, the case just was not formulated that way. It will be that various speculation that there were any disbenefits at all. When I come to draw your Honours’ attention particularly to what fell from Justice Gordon, I think, respectively at paragraphs 134 and 135 of her Honour’s reasons, your Honour will see that they are to the extent that they tend along the lines of what Justice Lindgren said at paragraph 15 of his judgment, they are flawed, in our respectful submission, by errors of facts and it will be but a brief reference to some pages in the appeal book which will indicate to your Honour the absence of any basis for any conclusion, were it relevant to come to one, and it is our primary submission that one cannot. The proceedings were simply not constituted for the purpose of reaching a proper conclusion as to the 588FB uncommercial nature of the leasing transaction in the absence of an attack on it and, of course, in the absence of any joinder of the National Australia –

KIRBY J: Mr Coles, that leads me to my question. One thing I liked about Mr Harper’s submission was that he endeavoured to explain what he detected as a difference in approach or principle or, if you like, legal policy between the view of the majority and the minority in the Court of Appeal and Justice Tamberlin. If all that is indifference is essentially a misunderstanding of the facts by Justice Gordon, then that is one thing, but if there is a significant difference in approach or an understanding of the principles of the statute, I would like you to identify that because that is a matter worthy of the attention of the High Court of Australia, otherwise, what are we doing? We are just sitting here in a matter which has divided the learned judges of the Federal Court applying the words of the statute to a particular complex fact situation.

MR COLES: The significant legal questions which we think require attention involve – when I shortly come to introduce your Honours, doubtless not for the first time, to the text of the statutory provisions, this will become plainer, but there are important differences – well, simply to confine the matter to the majority judges and Justice Lindgren in the Full Court there are important differences of approach to the concept of a transaction and that is important as a matter in itself. But of real particular importance is the identification, with some clarity and, indeed, some rigor of definition, of a transaction of a company, because as will be seen on their proper interpretation, the relevant provisions of the Corporations Act proceed with a degree of constraint and caution as to the types of transactions which they wish to fall under the operation of Part 5.7B.

One of the criticisms that will emerge, we trust, is the – and I say this, of course, with the utmost respect – absence of rigor on the part of the majority of the Full Court in what really was the transaction and the less attention paid once the view of the transaction as such had been reached as to the separate but important question as to whether it was truly and indeed a transaction of the company.

GUMMOW J: We have to know what lay behind the introduction of this new scheme.

MR COLES: Yes. I think both of us on each side of the Bar table have endeavoured to employ, with the economy that the Court encourages, some reference to the history and origin of the provisions. That is perhaps something I will come to briefly enough when I come to that part of the submissions. In our respectful submission, it is of cardinal importance to identify that the questions I have already briefly drawn attention to, that is to say the question of what in essence really is meant by “transaction” in the context of non-exclusive or exemplary type of definition the legislature has supplied - - -

GUMMOW J: The old section 120, is it, of the Bankruptcy Act is not carried over any more, is it?

MR COLES: No, indeed. They jettisoned the concept in a number of ways. Your Honour having raised it, let me shortly mention how one can detect the metamorphosis, I suppose. It was not a progression although they jettisoned, in effect, the section 120 approach and adopted a really new approach. The section 120 approach – your Honours will have in our little folder, in the bundle of statutory materials - there is a white folder of statutory materials which seeks to trace the origins and evolution of the relevant provisions and gives your Honours, for example, the dates of when they came in and the Acts which import them into the statute book.

Just to deal very briefly with the scheme before the 1992 Act which, as your Honours know, came into operation on 15 June 1993 in consequence of the Law Reform Commission’s report or its adoption by legislature, “settlements”, as they were then called under the Bankruptcy Act, were void against the trustee in bankruptcy. “Settlement” was defined as any disposition of property, so fairly widely, but the settlement was, with certain exceptions, being certain marriage-related transactions and the like, but any disposition of property was void against the liquidator within two years – settlement being, of course, a voluntary disposition. I am sorry - the trustee within two years, or within four years if the company was unable to pay its debts in that earlier or extended period.

The difficulties of course – whilst that provision – I am sorry, I should have mentioned that the Corporations Law picked up in very general terms the Bankruptcy Act provisions simply by saying prior to 1992 that when a liquidator is winding up a company he shall, in effect, do the same and apply the same principles of bankruptcy law as a trustee in bankruptcy would apply in the administration of a bankrupt estate with certain qualifications and modifications. The result of that, however, was – although it was easier for a trustee in bankruptcy because he did not have to prove the bankrupt was insolvent in the relevant relation at that time, whereas a liquidator, of course, must show to avoid the essentially voluntary disposition under 588FB that the company was insolvent.

On the other hand, one of the difficulties, of course, with the notion of a settlement being void against the trustee in bankruptcy was that although the legislature defined settlement as any disposition of property, the court has very properly held that that took its meaning from the context. So that a settlement to ground a claim for recovery by an insolvency practitioner needed to constitute the disposition of property in a way that it could be traced or located or found, either in specie or in a recognisable or traced form. So that if, for example, the settlement or disposition of property was simply a sum of money which was dissipated by the donee and found itself in no manifestation by way of the acquisition of property, or it could not be followed into a particular fund, then there was nothing to recover because, after all, it was the settlement that was void, not simply the economic consequence or the abstraction from the debtor’s estate.

That was plainly unsatisfactory and, indeed, our written submissions record a couple of the older cases where there was plainly difficulty experienced by liquidators, at least for a time, in recovering moneys at all from disponees of a company which had gone into liquidation pursuant to the incorporation of section 120 of the Bankruptcy Act. Indeed, until the late 1980s – and your Honours will see the reference to these in the footnotes in our submissions – it was doubted by judges as eminent as Sir Nigel Bowen whether the settlement provisions in the Bankruptcy Act had any application at all to corporations because - - -

GUMMOW J: That was the Maranatha Ski Club Case (1977-78) CLC.

MR COLES: Yes, the Maranatha Ski Club. Because a company, after all, is not the sort of thing you make the kind of settlement which it was thought at section 120 of the Bankruptcy Act was concerned with. That being thought and on a respectable - - -

GUMMOW J: You might both let us know tomorrow whether you disagree with the discussion of all this in two articles by Professor Keay written in 1996. They may be a bit out of date. The first one is in (1996) 70 ALJ 390; the second is in [1996] SydLawRw 3; (1996) 18 Syd LR 55. The first one is called Liquidators Avoidance Among Commercial Transactions; the second one is called In Pursuit of a Rationale Behind the Avoidance of Pre-Liquidation Transactions.

KIRBY J: Those articles are referred to in the written submissions.

MR COLES: They are and I think in general we have no quarrel with anything Professor Keay said in the first of the two articles and we may have one or two small observations about the second, but I will take that up with your Honours later on. Indeed, I think Professor Keay explains in those articles some of the features that I have just been shortly describing.

GUMMOW J: We need to know the outline. What triggered all of this? Was it some activity on the part of Mr Scott which your client was not attracted to?

MR COLES: In very short terms, Mr Scott’s activities – or one needs to be cautious about Mr Scott’s activities. They were, after all, LSE’s activities. Mr Scott was, in effect, the directing mind and will, so it is not open to the liquidator to, in effect, disavow Mr Scott as if he was some sort of interloper into the corporation’s affairs. If there were frauds and the case really was not apt to identify them or describe their consequences, but if there were unsatisfactory behaviour, as various file notes recorded, then that was of the company, not of Mr Scott.

But, what happened briefly, as recounted particularly I think in the judgment of Justice Lindgren most helpfully, Leasetec – in effect, another financial institution which was doing much the same sort of work as the appellants, was leasing photocopying equipment by arrangement with Lloyd Scott Enterprises – uncovered a situation where it found that there was, in the first instance, apparently a duplication, that is to say, the same equipment had been discovered, to some extent, as leased both to the Leasetec company and to others, including the appellants, and that caused the Leasetec company to bring proceedings against Mr Scott and the respondent company obtaining asset preservation orders and various other relief.

That produced, as we follow, an outcome whereby Mr Scott decided generally, or in principle that he might take his financing business elsewhere. He had since 1999 at the latest, existing facilities with the National Australia Bank and the Leasetec detection of his company’s irregularities prompted him to pursue avenues there and as we follow, this is no doubt amenable to closer detailed attention, but in general terms as we follow it, Mr Scott - - -

GUMMOW J: The asset preservations orders were 21 December 2000.

MR COLES: Yes.

GUMMOW J: At that stage his commercial connection of his companies with the NAB were in existence?

MR COLES: Yes, and had been for some years, or a couple of years anyway.

CRENNAN J: Since 9 April 1999. One looks at paragraphs 19 and then 32 of Justice Lindgren’s decision.

MR COLES: Yes, and I will show your Honour the National Australia Bank master leasing agreement, under the provisions of which I should say Lloyd Scott Enterprises was able to say to the National Australia Bank “I want you to buy identified equipment and lease it to us”.

CRENNAN J: Was not the position then that there was a master lease agreement with NAB and also one with Capital Finance? So that was operative as between LSE and NAB from April 1999?

MR COLES: Yes.

CRENNAN J: Was it the position then that the equipment which had been purchased through the financing arrangements with Capital then just became subsumed under that master lease with NAB?

MR COLES: Well, not all of it, but the items of equipment which generated the purchase moneys, which are the subject of these proceedings - - -

CRENNAN J: Sorry, the ones that were subject of payouts, then just moved from being under the Capital umbrella to being under the umbrella of the master lease with NAB.

MR COLES: Yes, that is right, and physically, of course, in the various offices and universities and public authorities’ premises where this equipment was installed and used, nothing was to change, business as usual. The equivalent of an NAB master lease that LSE had, so far as Capital was concerned -I think they did not call it a master lease they call it a P and A or principal and agency agreement, but its broad general commercial effect can be seen as providing that type of mechanism for the arrangements that ensued and I will shortly take your Honours to look at those documents because they are of particular importance in eventually understanding what the true transaction was.

Now, I should, if it is convenient, invite your Honours’ attention to the particular provisions of the legislation because it is upon their application as properly construed that the outcome of the appeal depends. Bearing in mind that at the end of the exercise one is asking one’s self, effectively, if you can see a circumstance whereby particular facts do or do not fall within particular legislative provisions and there is a conclusion to be drawn about that outcome, then one may recognise that on one view falling, perhaps literally within a particular statutory outcome, while that may produce the possibility of the courts making an order adverse to the disponee, nevertheless everyone looks at the transaction in its true colours. One may see that one needs to just look at it a little more carefully and see how it advances the purposes of the legislation and whether accordingly, such an order is appropriate.

The first statutory provision or first element of the statutory provision to which one needs to have attention, in our respectful submission, is in section 9 of the Act where the definition of “transaction” occurs. It is a curious place to put it because the definition in section 9, which is the definition provisions of the Corporations Act, is, generally speaking, definitions for corporations legislation of the whole Act.

In reality the expression “transaction” is not defined at all for the purposes of the Corporations Act at large; it is defined for the rather limited purpose of, as its opening words indicate, 5.7B. So that one sees, in effect, perhaps unusually the legislature has incorporated into a definition something one might in other circumstances perhaps be inclined to disregard, apart from perhaps providing extrinsic material, namely what is the heading in a statute.

The definition of “transaction” in section 9, however, tells us that in Part 5.7B, it means a transaction to which the body is a party, and it gives some examples. The reference, or the, in effect, incorporation of 5.7B draws attention to the fact that 5.7B is itself, as its heading indicates, a part for recovering property or compensation for the benefit of creditors of an insolvent company. So, in effect, the meaning of “transaction” for the purposes of so much of the Act as is concerned with the topic of the recovery of property or for the compensation for the benefit of creditors of the insolvent company is the subject matter of the definition. That, in turn, in our respectful submission, is capable of colouring or informing one’s approach to the concept of what is a transaction, albeit that its definitional elements are defined exemplarily or by exemplification rather than exhaustively or exclusively.

GUMMOW J: Section 588FB itself is a definition.

MR COLES: Yes, your Honour. I am coming to that very shortly. Can I just say very shortly about these matters we would urge upon your Honours in relation to the proper approach to the application of the definition of “transactions”, firstly, as your Honours can see by the respective examples – there are seven given – three of them at least involve some active movement of property or assets of the company moving away, it would seem, from the company; that is to say (a) a conveyance; (d) a payment and (f) a release, in each case involves some outgoing or some disposition or even dissipation in a given case of property or valuable thing which readily one could understand could inform the 5.7B concept to which the definition is linked, that is to say something that needs to be recovered or something that needs to be made available in order to compensate creditors of the insolvent company for the loss that they have sustained.

The other elements of the “transaction” definition, including “a charge”, “guarantee”:

(e) an obligation incurred by the body; and

(f) a loan to the body –

those items may be, although themselves, in terms of their immediate operation, can be seen as, in effect, neutral, nevertheless are present occurrences which have the potential to affect the property of the company or to cause a disbenefit to the company’s creditors in the event of the company’s liquidation. So it can be said accurately, as the Full Court of the Federal Court has said in a case to which I will take your Honour shortly, Re Emanuel (No. 14), that all of these seven illustrative matters refer to changes in the body’s property, its property, its rights or its liabilities. We would be inclined by way of – I have permissible gloss on what the Full Court there said to say that the illustrations all contemplate, in effect, an adverse change in the rights or adverse change to the body’s property, rights or liabilities because, after all, the context is the recovery or compensation for creditors.

One matter of significance we would point out even at this stage – perhaps I will come to it when I take your Honour briefly to some authorities – there is a decision, or a number of decisions, but one decision of the Court of Appeal in the Supreme Court of New South Wales is a case called Kalls Enterprises v Baloglow [2007] NSWCA 191; (2007) 63 ACSR 557. An observation of importance is to be found both in the judgments of Justice Giles and I think also of Justice Ipp. The observation of Justice Giles will suffice by way of illustration. He points out, I think, at paragraph [97], the fundamental importance of identifying the transaction question, the fundamental importance, particularly when one is looking at 588FB in the context of it being a transaction of the company. I will just tell your Honours the passages. It may suffice to give your Honours reference to the passages we had in mind. In the judgment of Justice Giles at paragraph [97], which is on page 575 of the report, his Honour observes at the foot of the right-hand page:

For an order pursuant to s 588FF there must be a “transaction of the company” of a particular kind. The identification of the transaction governs whether it was an uncommercial transaction, since entry into “the transaction” (s 588FB(1)) must be considered. It may govern whether it was an insolvent transaction, for example through consideration of whether the company became insolvent because of entering into “the transaction”: s 588FC(b)(i). And it is material to the orders which may be made under s 588FF, not only because orders about payment of money are tied to what was paid under or received because of “the transaction” (s 588F(1)(a), (b)) but also because, for example, an agreement constituting, forming part of or relating to “the transaction” can be declared void: s 588FF(1)(b). The limitations in s 588FG –

which is the defence of relevant lack of knowledge and good faith and the like –

are also tied in various ways to “the transaction”.

Then he refers to the importance which other judges, including Justice Bryson in Mann v Sangria, have attached to, in effect, precision in the identification of the transaction. His Honour records in paragraph [101]:

For a transaction to be a transaction “of the company”, at the least the company must be a party to the transaction: see the definition of “transaction”. Being a party to a transaction will often by plain, but it is not a precise concept. The bank which provided finance to DT could be said to have been a party to the transaction, in that providing finance was necessary for the transaction to occur, but I do not think it would be a party for the purposes of Pt 5.7B. Being a party to a transaction requires a nature and extent of involvement, for which there is no simple test. Whether the involvement is sufficient may in some circumstances call for consideration.

Then, importantly, he says at paragraph [102]:

In Pt. 5.7B the words “of the company” add something. As well as being a transaction to which the company is party, which comes from there being a transaction, the transaction must warrant the description of a transaction of the company. Unless being a party to a transaction requires such involvement that the description applies without more, which does not seem to me a correct understanding, being a transaction to which the company is a party and being a transaction of the company are not co-extensive. In this I do not accept the appellants’ submission that all that was required for there to be a transaction of a company was that the transaction be one to which the company was as party –

He refers in paragraph [103] on the same page to the possibility to which I will return:

a composite transaction may include events or actors which are not dealings by the company or actors acting on behalf of the company, and the collection of dealings may not warrant the description of a transaction of the company.

I will return to that. Briefly, to just draw your Honours’ attention to what Justice Ipp said at page 600 of the report, I draw your Honours’ attention to what Justice Ipp said in paragraphs [236] and [237]. In particular, he agrees that a transaction of the - - -

HEYDON J: Justice Ipp or Justice Basten?

MR COLES: I am terribly sorry, it is Justice Basten, I do apologise. Justice Basten records at [236] his agreement:

that being a transaction “of” a particular company can be said to involve something more than the concept of a company being “party to” a transaction. It involves a different perspective. A sale may involve three companies, a vendor, a purchaser and a financier. Each is “party to” the transaction, but in order to characterise the transaction for the purposes of Pt 5.7B, one needs to identify “of” which company it is a transaction, so as to assess benefits for, detriments to, insolvency of and winding up –

Then in the next paragraph his Honour records his further agreement:

that it is critical to identify the transaction with precision; that is at least in part because it is necessary to answer the tests posed by ss 588FB . . . but also to tailor appropriate relief under s 588FF.

I will return to both of those matters. May I interpolate, your Honours, that when I in due course come to the final conclusion in the majority judgment and to the form of declaration that was made, we will be focusing our criticism of that declaration in terms which include observations of the kind to which I am now drawing attention. In the final or concluding sentence at paragraph [237] Justice Basten observed:

The sale of the business was an essential step in the plan to obtain funds to settle an obligation of Messrs Kalls and Kaliaropoulos to Mr Baloglow, but it was not correct to see it as part of the transaction, in relation to which relief was sought in the court.

Counselling, in our respectful submission, a caution before one too readily embraces antecedent procedural steps or administrative activities, motivations, aspirations, purposes and the like and lumping them in with the transaction when they are not part of the transaction but merely serve to explain or identify the reason for the transaction, not the transaction itself - - -

KIRBY J: Now, can I repeat my question? Is the problem that the majority did not focus their mind with accuracy upon the transaction within the meaning of the statute, or is there something more fundamental that they misunderstood what the transaction within the statute is and that for the reason that the principle and policy of the language of the statute to attain the purposes of Parliament is frustrated by the view that they have taken?

MR COLES: I think to answer your Honour’s question, the answer is both.

KIRBY J: That is a factual foundation for the mistake - - -

MR COLES: The part of the reason for the affirmative answer to question one is because of the affirmative answer to question two, if I can put it that way.

KIRBY J: If you lost on the assertion of a factual mistake, do you still have an argument that the mischaracterisation is inconsistent with the purpose of Parliament in the provision that it has made?

MR COLES: That is right and I will illustrate that type of outcome when I come to cases like this Court’s decision, for example, in Airservices which is a little bit of a pointer in a way to how long to go. Then I will lastly give your Honour a reference to - - -

GUMMOW J: Just before we leave this Court of Appeal case, I see at paragraph [105] there is a citation of Justice Ormiston said about commercial realities.

MR COLES: Yes.

GUMMOW J: What does that mean? It said:

There must be a practical and realistic –

whatever “realistic” means –

appraisal of the constituent dealings and the overall transaction.

These are just exhortations, are they not?

MR COLES: Yes, with respect. It has it origin, I think – and this is not a criticism because the earlier law required it and, hence, the reference to Airservices, particularly in the paragraph on page 502 to which I will take your Honours later. One was accustomed to looking very much – as indeed, and properly so, I am not saying it is a criticism of the way the old law arose. It was very necessary to take a very broad – I mean, the word “transaction” was not the focus in the former legislation and, hence, reference to expressions like “transaction” in the context of the former legislation lead to a rather broad based and necessarily not required to be particularly focused overview of the commercial substance and purpose against which the transaction had to be evaluated.

GUMMOW J: Look at the first paragraph at [106]. It says:

In the present case the transaction was a succession of events which . . . were directed to satisfaction of the initial liability –

et cetera. Why is not the present case a series of events unleashed by the realisation of what Mr Scott was up to, or his company was up to?

MR COLES: In a practical sense, it is a series of events, but that is an issue - - -

KIRBY J: The sting in the question by Justice Gummow is in the last words. That it is a series of events arising out of Mr Scott’s misbehaviour.

MR COLES: Yes, that is right. As a matter of factual description, it undoubtedly is a series of events in the sense that each event can be explained in the context of the other events which precede or follow it.

GUMMOW J: But you say that has to be a transaction of the company?

MR COLES: At the end of the day it has to be a transaction of the company, that is right.

GUMMOW J: Of your client.

MR COLES: No, of his client.

GUMMOW J: I am sorry, of Mr Harper’s, yes.

MR COLES: That is right.

CRENNAN J: We are focusing on the effect partly.

MR COLES: Section 588FB itself focuses on effect.

CRENNAN J: Does direct you in that direction?

MR COLES: It does.

CRENNAN J: Away from the old law in relation to settlements.

MR COLES: Exactly.

KIRBY J: But does that not undermine the achievement of what seems to be the obvious purpose of Parliament in this case?

MR COLES: No, I do not think so, with respect, your Honour.

KIRBY J: I realise that the purpose has to be understood in light of the language that Parliament has used, but it does produce, arguably, an unusual outcome in this case, your theory of the Act.

MR COLES: With respect, your Honour, I think my view of the Act is simply at the moment, so far as I have developed it, just drawn from the legislation, but I will come to more - - -

KIRBY J: I realise you latch on, but we have come a bit down the track in the last 20 years. We now read statutes, text, context, purpose.

MR COLES: Absolutely, that really is our ultimate point.

KIRBY J: It is just not going to be enough for you as far as I am concerned, nor I think the doctrine of the Court is concerned, just to focus only on the text.

MR COLES: I hope I have sought when I open the observations about transaction, your Honour, to emphasise a matter of real importance, namely that this is a transaction in the context of recovering property or compensation for creditors and one needs to steadily bear in mind the significance of that because one of the deficiencies in the old law was that if a company simply gave away assets to somebody who spent them then they were, in effect, irrecoverable unless you could find a fund or a pool or an asset which represented their proceeds.

Now, the mere fact of handing over the property, paying the money, entering into an improvident guarantee which is called upon making some other form of dissipation of an uncommercial kind will enable recovery from the disponee, which in other words breathes life back into what had become largely extinct when the matter reposed in the realm of merely the incorporation of section 120 of the Bankruptcy Act.

GUMMOW J: Now have you taken us as far as you want to to Kalls’ Case?

MR COLES: Yes I have, your Honour, yes.

GUMMOW J: Are you going to take us to Emanuel?

MR COLES: In due course, your Honour, yes.

GUMMOW J: In due course? All right.

MR COLES: If that is convenient?

GUMMOW J: Where do we go now?

MR COLES: Could I mention just in passing, because it is the subject of, in effect, the cross-appeal, section 588FA and your Honours will see that:

A transaction is an unfair preference given by a company to a creditor of the company if, and only if:

(a) the company and the creditor are parties to the transaction . . .

(b) the transaction results in the creditor receiving from the company, in respect of an unsecured debt . . . more than the creditor would receive from the company in respect of the debt if the transaction were set aside and the creditor were to prove –

as will become apparent. Of very considerable importance in the context of the present matter is the requirement implicit as a matter of construction in the old law, now rendered express in the more recent clause since 1993, that one must look at whether the payment which the creditor has received from the company – the transaction which would typically be a payment – is in respect of an unsecured debt that the company owes to the creditor. That is quite an important matter and I will return to that later.

Of more immediate importance for the purposes of the present appeal is 588FB which has important statutory indicators as to how to go forward:

A transaction of a company is an uncommercial transaction of the company if, and only if, it may be expected that a reasonable person in the company’s circumstances would not have entered into the transaction, having regard to –

the four matters identified and they are the respective benefits and detriments to the parties – the company and the other party – and any other parties and any other relevant matters, so appropriately broad in aid of what your Honour Justice Kirby and I agree are the relevant legislative purposes.

Some points to note about that, in our respectful submission. I have already taken your Honours to what was said in Kalls in connection with the importance of identifying the transaction of the party and that more is required than that the transaction should be one to which the company is a party, that being built into the matter. Another matter of importance the authorities have noted along the way is the requirement apparently built into the opening lines of 588FB, that is to say, that it must positively appear, it is said, that the reasonable person would not have entered into the transaction. I will not trouble your Honours to turn up the report, but that I think, your Honour, emerges from the decision of the Full Court of the Federal Court in Tosich Constructions v Tosich (1997) 78 FCR 363. There must be, in effect, an affirmative basis that the person would not have – must positively appear, I think is the expression, that the transaction would not have been entered into.

Can I respectfully suggest, your Honours, that 588FB in a number of ways emphasises, as indeed it has been to a degree interpreted, that one is concerned, unlike the preference section, 588FA, which of course concerns payments or dispositions or transactions necessarily for valuable consideration – and I interpolate, that must follow because, after all, at least in bankruptcy law, the payment of a debt and the consequent discharge of the obligation - - -

GUMMOW J: The object of the preference provision is to stop one creditor jumping the queue. We are not in jumping the queue territory with this section, are we?

MR COLES: No. The object of the uncommercial transactions provisions is really to stop somebody who is not even a creditor becoming, in effect, the beneficiary of the director’s largesse in the same way as might have been the case when one dealt with the matter as a settlement, but without the necessity to identify the property or to trace it through. Some reference is made to subsection (2) in the judgment of, I think, Justice Gordon referring to the fact that a transaction may be an uncommercial transaction because of subsection (1) whether or not a creditor of the company is a party to the transaction.

That rather, in our respectful submission, serves, if anything, to emphasise that one of the concerns – perhaps the essential concern of the whole provision – is the typically voluntary nature that such a transaction is likely to exhibit. There will not be any consideration, even by discharging a debt. There will simply be a payment with no corresponding appropriate valuable return. The benefit to the company entering into the transaction will be, in effect, significantly outweighed by the detriment.

We have referred your Honours to one judicial observation in connection with the purpose and effect of the provision in the observation of the court in – I will give your Honours the reference to the case. The Full Court of the Federal Court in the decision Demondrille Nominees v Shirlaw [1997] FCA 1220; (1997) 25 ACSR 535. The relevant passage is at page 548. There the Full Court said:

The purpose or object of the provisions with which we are concerned is to prevent a depletion of the assets of a company which is being wound up by, relevantly, “transactions at an under-value” entered into within a specified unlimited time prior to the commencement of the winding up.

The concept of “undervalue” is not, I suppose, wholly uncontroversial, but it has been fairly often noted and simply stems from the statutory language, we would think, that one is looking at, and therefore necessarily comparing, the benefits, if any, to the company of entering into the transaction and, on the other hand, the detriment, and the others matters to which the section draws attention.

GUMMOW J: Is that meant to be something that flows from the use of the word “uncommercial”? What is the content of that word?

MR COLES: Our preferred submission would be that one has to take some - even if it is only colouring and flavouring, as it were – content in the construction of the provision to the use of the expression “uncommercial” rather than treat the provision as purely definitional. They could have said a transaction of a company is a voidable transaction, (a), (b), (c), (d), (e), but the legislature has, in effect, affirmatively chosen the adjective “uncommercial”. That suggests to us that it is focusing or inviting focus on a transaction which is not such a transaction as in the ordinary course of business.

GUMMOW J: Well, 238 of the British Insolvency Act of 1986 talks about entering into a transaction at an undervalue, does it not? We did not follow that.

MR COLES: One of our, I suppose, Professor Keay, in I think the first of the articles your Honour Justice Gummow mentioned, is inclined to proffer the view that there is an inspirational kind of feature in the English Insolvency Act which may have been informative of 5.7B and, in particular, 588FB.

CRENNAN J: But then I think he suggests, does he not, that this is not confined to undervalued transactions, even though thematically one can detect strong, as you say, inspiration from the UK provisions.

MR COLES: Indeed. We, perhaps, would not feel as strongly as Professor Keay about the inspiration afforded by the British legislation. It is really quite a stand alone or it is sui generis kind of provision, just the product of no doubt many inspirations on the part of the Law Reform Commission. At the risk of mentioning, for the moment, the text, we would invite a view sympathetic to the notion of there being an undervalue flavour just from the comparison of benefit and detriment which the legislation seems to require or require regard to be paid to.

After all, it is as a result, I suppose, of having regard to the benefit and detriment respectively in the other matters which one would then ask the question, well – here, perhaps, it is important I should emphasise that the words are “having regard to”, that the transaction is an uncommercial transaction if, and only if, a reasonable person would not have entered into it. Why would not the reasonable person have entered into it? Because it was uncommercial, in our respectful submission, having regard to. So we do commend to your Honours a view of the section that ascribes to the expression “uncommercial transaction”, more than just a definitional expression that is neutral in content or quality.

The next provision, your Honour, FC, picks up what the part really avoids, that is to say, insolvent transactions, and tells us what an insolvent transaction is, and importantly, again calls attention to the necessity to identify the transaction that is entered into and broadens, importantly and consistently, with the expanded legislative purpose, the notion to include an act done or an omission made for the purpose of giving effect to the transaction.

So one can see – it is probably correct to say that a transaction can happen when the company is itself insolvent, but after it becomes insolvent the transaction may then be put into effect. So that, for example, if a solvent company gives a wholly improvident guarantee at the time it is solvent, which has no useful purpose, and no reasonable person would have given that guarantee, the fact that the company is solvent at the time may not matter, if later when the company becomes insolvent, one can suppose the guarantee is called up.

We embrace that such as to indicate to your Honours, particularly Justice Kirby, that we are strongly in favour of a broad, expansive and purposive reading of the provisions themselves, and it is not our contention in this appeal that they must be applied in a narrow, constrained and constricted way. What we are contending is they must be applied in a way which the sections themselves requires, having regard to the importance of the identification of the transaction and the identification by the legislature that one must not be too blunt or undiscriminating.

One of the problems with the earlier legislation, of course, is that once you identify the relevant transaction, then it will simply void against the liquidator, as your Honours will see in a moment when I take your Honours to 588FF. The court is given much more latitude to select within the outcomes of the transaction what relief it ought to grant. So we have moved away from a dull sort of “one size fits all” outcome to a more analytical requirement in terms of the relief that is to be given. I will say something about that in a moment.

Section 588FE describes the transactions which may be voidable. Those transactions are voidable if they are insolvent transactions and they occurred within the particular period. So that, for example, by subsection (2) there is no doubt about the application of this provision if otherwise applicable in the present case. The relevant act was done. The act was done or the transaction happened:

or an act was done for the purpose of giving effect to it within . . . 6 months ending on the relation-back day -

and I need not say more about that, perhaps only to make this observation. The endeavour to cast the provisions expansively has brought about this outcome that we are not only concerned just with the transaction itself but with an act being done to give effect to the transaction. Parenthetically, one would observe that the legislature has been very conscious of a distinction between the transaction itself and those acts which are done to give effect to it.

In other words, they are not or not necessarily the same, and one would not without caution proceed to regard an occurrence or a particular activity as necessarily part of the transaction merely because it was done to give effect to the transaction, there being a legislative recognition that the two concepts are not or are not necessarily synonymous benefit.

Your Honours will see there is a time scheme then for the various sorts of transactions including the ultimate limit of 10 years if the transaction was such a transaction as was done:

for the purpose, or for purposes including the purpose, of defeating, delaying, or interfering with, the rights of any or all of its creditors –

which corresponds, of course, with section 121 of the Bankruptcy Act and previously 37A of the Conveyancing Act or its equivalence. I am taking a little time with your Honours’ indulgence over the legislative provisions because this is a case about their application necessary in the particular facts, but their discriminating application is at the heart of the appeal. Section 588FF envisages that:

a court is satisfied that a transaction of the company is voidable because of –

the elements I have just referred to.

HEYDON J: Here it must be section 588FE(3) that leads us into 588FF.

MR COLES: This is very correct, if I may say so, your Honour. Then the court can make a series of orders. In aid of encouraging the observation I earlier made that - - -

GUMMOW J: It is awkward to talk about a transaction so widely defined as being voidable, is it not?

MR COLES: Yes, it is.

GUMMOW J: In the older law you would have a specific legal dealing, as it were, a payment, a settlement.

MR COLES: Perhaps the focus on a transaction being void really concentrates the mind on finding out what it is that is really important.

GUMMOW J: I think you have to say to the extent it is voidable insofar as it produces this remedy.

MR COLES: Yes. That is one of the points. There are a number of general points - - -

GUMMOW J: That is what “voidable” is trying to say.

MR COLES: Yes, that is right. There are a couple of observations I can make in general terms which would encourage your Honours to take into account in looking at 588FF are these. One thing of note, for the importance it may bear, which might require evaluation is that the set of orders seems to be, in effect, exclusive or cover the field, although within the various orders there are alternatives and the like, unlike, for example, some of the other provisions in the Corporations Act. I think 1324, 1325, around that area, the court can make such order as it thinks appropriate. In 233 the oppression provisions, the court can make any order it thinks appropriate and the like. The usual mechanism in Corporations Law remedy provisions that the court can make any order it thinks appropriate is, in effect, not picked up for the purposes of these provisions, rather, the legislature has foreseen the sorts of orders that the court can make.

The relevance of that, in our respectful submission, as a matter of contextual construction, is this; that when one really is looking at whether something, for example, is an uncommercial transaction, one would not look at it, we would respectfully submit, in the abstract and say this is a pretty poor old deal. One would say, is the sort of deal – to use it colloquially – which would ground relief from a court under one or more of these provisions?.

CRENNAN J: So you define it by reference to the available remedies?

MR COLES: “Define” might be perhaps a stronger word that I would have used, but you evaluate the content of the impugned transaction in the context of the available remedies which can be deployed to redress the wrong which the relevant activity is seen as producing.

CRENNAN J: But (a) and (c) in particular, I think, emphasise the fact that you can have something like an uncommercial transaction without the result that the complete amounts of money, if you like, are to be transferred back. You can have some moneys transferred back and you can have - - -

MR COLES: Yes. Some money and some payment, yes.

CRENNAN J: And some payment, but you can have direction of attention always to what fairly represents some or all of the benefits that have been received. So that brings it back to the way in which one decides whether a transaction is an uncommercial transaction.

MR COLES: In our respectful submission, it does. On a more, I suppose, pedestrian level, our final sort of safety net position in the appeal is that there is absolutely no conceivable basis upon which an order should have been made equal to the whole of the amount paid to the appellants as the consideration for the sale of its property to the bank. That bears, as a matter of fact, no correspondence whatsoever. As seemingly the trial judge regarded it, there is a problem with how the Full Court saw it, but the trial judge regarded the payment made to the appellants by the National Australia Bank as simply a payment made by the company in liquidation, a rolled up arrangement whereby what was really paid to the - - -

GUMMOW J: He thought it was a preference too.

MR COLES: Yes, as a result he therefore came to the conclusion it was a preference because he said, well, in effect there is a payment by the company in liquidation to us, to the appellants. Once you come to that conclusion, then normally, I suppose you would say, well, if it is a preference, the usual remedy is to make the recipient pay it all back, but for reasons we address in detail in the written submissions, of course the underlying error which the trial judge made was not simply to fail to recognise, but to deny that there was a sale or transaction at all. The Full Court on the other hand redressed that conclusion but, as our written submissions point out, having identified the trial judge as fairly central, we would say, fairly transforming error, failed to do anything about building it into the concept of the transaction which the Full Court itself in due course identified and clarified by reference to the trial judge’s earlier description of what the transaction was.

HEYDON J: Can I raise a problem. I cannot see that the declaration made by the Full Court fits into 588FF, but they left standing order number 4 made by Justice Tamberlin which is on 1315, the Full Court’s order being on 1377 of volume 5. How did Justice Tamberlin or, rather, how did the Full Court come to leave Justice Tamberlin’s order of $5,584,009.50 standing? I thought the sum of money involved was less than that? I thought it was 3.7 million. Is that interest?

MR COLES: The sum of money was in round terms 3.7. The difference between the 3.7 and the 5 point whatever was statutory interest under - - -

HEYDON J: I see. What was the justification for the Full Court’s declaration? Section 588FF gets power to declare that a transaction was uncommercial. The Full Court’s declaration was that it was uncommercial. The section gives a power to declare that an agreement was void, that is (h).

MR COLES: That is (h), yes.

HEYDON J: Is the source of the power to grant a declaration in the Federal Court of Australia Act or something?

MR COLES: That is not excluded, I would not have thought, readily by the, in effect – it would be a hard argument, I think, that the intention of Parliament enacting 588FF was to exclude the court’s other powers. I am not sure.

HEYDON J: What is the point of making a declaration unless some other concrete consequence is to spin off it?

MR COLES: None at all, in our respectful submission. A declaration must have utility.

GUMMOW J: Where do we find Justice Tamberlin’s - - -

HEYDON J: Justice Tamberlin’s orders are on page 1315 of volume 5. The first three orders were set aside by the Full Court and in lieu they made a declaration of uncommerciality, but they left orders 4, 5, 6, 7 and 8 in place.

MR COLES: Yes. Can I indicate, paragraph 1 on page 1314 indicates that Justice Tamberlin had eventually a fairly clear idea, albeit erroneous, as to what the transaction was. He said it is the payment and that really is a proper way to approach, in principle, how you identify a transaction. You look at all the steps and see, okay, what is the outcome of this?

GUMMOW J: Just look at order 4. How did his Honour then relate that to 1, 2 and 3? Is that the sum of the payments referred to, plus interest?

MR COLES: That is the totality of the payments made by the National Australia Bank or, in his Honour’s view, made by the company in liquidation because, as I say, he was not able to recognise that there had been a sale transaction. So the 5.5 is the whole of the sum of – it is 3,751,861, which is a total of the eight payments in February and May of 2001 to which is added, no doubt by calculation between the parties, the further nearly $2 million worth of interest.

KIEFEL J: But on the difference of approach that the Full Court took should they have made – the declaration – should it have been a declaration to identify the transaction which was void before – to found an order for repayment for the reason that the declaration it made looks rather more like a finding with a legislative effect, but no more. They have not really founded the basis for repayment.

MR COLES: No, that is one of our criticisms. As I say, at least in – we have acknowledged – so far as the trial judge was concerned, he at least found there was a transaction or payment and that is - - -

KIEFEL J: Yes.

GUMMOW J: Yes, but it goes back to Justice Heydon’s point, does it not? What is the point of making a declaration if you do not hook it in and give some content to the word “uncommercial” by reference to the appropriate - - -

MR COLES: And the importance, again, that we have referred to.

GUMMOW J: In other words, what is the point in making a direction that it is voidable when it is voidable only in this peculiar sense?

MR COLES: Exactly. We respectfully adopt that, but to return to what your Honour Justice Kiefel mentioned, the three steps, as it were, in the Full Court’s declaration at1377, they start with the agreements recorded in the deed to which I promise your Honours I am going to come, then the next element is the steps taken by LSE with the concurrence of the Capital Companies to procure funds from the bank through lease finance to which is then added the, I suppose, self-fulfilling argumentative observation that this was to satisfy the obligations that LSE had undertaken under the second deed and then the manner of application is then said to be an uncommercial transaction, but unfortunately – it is a just criticism, in our respectful submission, that the Full Court of the Federal Court does not, unlike the trial judge, go on and say, that results in a payment or that results in a disposition of property of some identifiable kind.

HEYDON J: Yes. They did not say that, but order 4 of Justice Tamberlin, which they left intact must be taken in their reasoning - - -

MR COLES: Yes, that is exactly right. They were intending to leave the 588FF order in place but they did not declare the disposition or content, if you like, of the transaction. I will put to your Honour that really the inspiration of the examples in the definition of “transaction” does involve the necessity, eventually, of recognising some outgoing or some departure from the company of some valuable property or money or thing. That is because it is to be construed in the context of recovering property for creditors or recovering compensation for creditors if the company is - - -

KIEFEL J: Do you mean it normally would identify the trail so that you could take it back to the company?

MR COLES: Yes. In our respectful submission, that is the proper approach to the purposive response to the statutory language.

GUMMOW J: Now, 588FF is hooked into both the preference and the uncommercial transaction, is it not?

MR COLES: And, for that matter, the unfair loans and - - -

GUMMOW J: It is hooked into 588FE?

MR COLES: Yes.

GUMMOW J: How would one fit Justice Tamberlin’s order, order 4, into 588FF looking at it as a preference situation? Which paragraph of 588FF?

MR COLES: You would go straight to (1)(a), I think, your Honour. It is an order directing a person to pay an amount equal – in this case – to all of the money that the company has paid under the transaction, if his Honour’s conclusion had been right.

GUMMOW J: Yes, I understand, but the awkwardness is then adjusting 588FF(1)(a) to its translation into a non-commercial transaction form of voidability?

MR COLES: Yes, there is an awkwardness, yes.

HEYDON J: How can a payment from NAB to Capital be a payment or a preference given by Lloyd Scott Enterprises?

MR COLES: They cannot.

HEYDON J: This is cross-appeal territory, I suppose?

MR COLES: Yes, they are cross-appeal territory. Once the judge’s error was exposed – and we might add, no attempt is made to support the judge’s rejection of the central element of the transaction, namely, the sale and purchase of Capital’s equipment to the National Australia Bank, once that was really identified as the – for the present purposes – informing core of the transaction, whatever else the transaction may have been - - -

GUMMOW J: Whatever else this case has it does not have shams?

MR COLES: No, and indeed, when one adds to that conclusion that there is no suggestion of sham, there is no suggestion that each of the transactions, be they the leasing transactions between LSE and the National Australia Bank, be they the sale transaction between NAB and the Capital companies, they were exactly as the parties intended in accordance with the agreements which they recorded upon the basis of which the commercial – or the transactions, if I can call them that, were undertaken, and the prima facie ones are.... we have suggested in our submissions in reply, the purpose and effect of a transaction from the agreement of the parties that informs and describes it.

There being no attack on the Full Court’s unanimous conclusion, at least from our perspective – at least to the extent of the Capital companies’ involvement – this was a transaction of sale, and there being no attack from the liquidator’s perspective that the transaction involving the National Australia Bank, so far as it was concerned, that is to say, the leasing transaction, it is not attacked as uncommercial. One asks, therefore, on those very, very plain and unadorned facts, where was the realm of conclusion available?

CRENNAN J: The liquidator would be receiving the lease payments presumably?

MR COLES: That is right, yes, undoubtedly. When I come to the principal and agency agreement, which I am now about to do, your Honours will see just the position the Capital companies were in even if the conclusion be right, that these things were done, as the Full Court concluded, in performance of or, in effect, in execution partly of the object and purpose of what is called the second deed. It is not, I emphasise, before I come to it, essential to our argument that it was so or was not, as will appear, but it is a matter I want to take your Honours to shortly. Can I move then - - -

HEYDON J: Could I just do one more matter under this order? As you pointed out, there are three elements in the Full Court’s declaration. Element one is pleaded in paragraph 30, but not elements two and three. Do you take any point about that or?

MR COLES: I am sorry, there was - - -

HEYDON J: There are three elements in the Full Court’s declaration.

MR COLES: That is right.

HEYDON J: Element one appears in paragraph 30 of the further amended statement of claim, but not elements two or three. Do you take any point?

MR COLES: Yes, we do. We object to that as a reform – and we particularly object to element three which contains a factual error, as will become apparent. Element three, your Honours will see, is the suggested application of the moneys received from the National Australia Bank in reduction or in satisfaction, I think their Honours say, of the debt of LSE created by the second deed. Your Honours will see how one could reach that conclusion, but why it is irrelevant eventually in the proper understanding of the relations between the parties in this particular case.

Indeed, your Honours will note that that was a conclusion reached by the majority of the Full Court of the Federal Court itself. It was not a conclusion, as we follow it, that the trial judge thought important. In principle, as we have otherwise said, not to overload the proposition, it is a little bit hard to see how one can evaluate an uncommercial transaction by reference to events occurring after the transaction itself, because, after all, 588FB focuses attention on entry into the transaction:

it may be expected that a reasonable person in the company’s circumstances would not have entered into the transaction, having regard to –

the matters necessarily on the table at the time of the transaction. It is a little hard to see, in our respectful submission, how you can sort of elevate a transaction that at the time of the transaction seemed well enough to be an uncommercial transaction merely because of the way down the track the actual participants subjectively may have appreciated it or have thought erroneously, as it turned out, the transaction was operating. That is the subject of the short submission to which I will come in a moment, if your Honours please.

Could I trouble your Honours to look at volume 2 of the appeal books. There are seen, as their Honours’ judgment records, two principal and agency agreements between the Capital companies respectively and the Lloyd Scott Enterprises company. I will ask your Honours to look at the second of the two for illustrative purposes. They are not wholly identical, but they are to be found in volume 2 of the appeal book, respectively at page 259, which is obviously the first of the documents and is an agreement made between the predecessor of one of the appellants with Lloyd Scott Enterprises. That is dated 7 July 1995. The second of the documents - - -

GUMMOW J: Page 409?

MR COLES: The second of the documents is at page 409 of volume 2 and is agreement made on 1 July 2000 between Capital Finance Australia Limited and Lloyd Scott Enterprises Pty Limited. I will briefly point out, as - - -

GUMMOW J: That is the second respondent.

MR COLES: Yes, that is right. Capital Finance Australia is the first respondent and Lloyd Scott Enterprises is the second respondent. Your Honour is right.

GUMMOW J: Capital Finance Australia Limited is the first appellant.

MR COLES: The first appellant and the second respondent. I am sorry. Your Honours will see the recitals record that the agent, which is Lloyd Scott Enterprises, expects to receive inquiries from persons who wish to lease equipment. Can I just observe, I hope uncontroversially, that the evidence generally showed that Lloyd Scott Enterprises was in a substantial way of business in the Newcastle area at least dealing in photocopies - - -

GUMMOW J: Yes. Their office seems to be in Hamilton, in that area.

MR COLES: Their clients, as your Honours will see, were substantial corporations, mining companies, universities and public authorities. They were, as their letterhead indicates, seemingly Xerox distributors and that was, in effect, their business, as your Honours will see from other material, involved not only the leasing of equipment but obviously the supply of such things as paper, toner and other things that are ancillary to the use of photocopy equipment. Therefore I understand that they expected to receive inquiries from persons who wished to lease equipment and it was observed that they may, from time to time, request Capital Finance to purchase equipment and lease it to third parties through the agent.

Passing over some definitional provisions, clause 2 on page 412 appointed Lloyd Scott Enterprises as the agent and clause 2.5 said that the agent is to hold on behalf of Capital Finance “all rights under or in relation to all Leasing Agreements, Securities, Equipment and Insurances”. To put it shortly, if a customer came along to Lloyd Scott Enterprises the customer would actually enter into the lease with Lloyd Scott Enterprises, although the lessor in law would be Capital Finance as the owner of the equipment.

GUMMOW J: So they would be an undisclosed principal?

MR COLES: An undisclosed agent. Capital Finance would be an undisclosed principal, that is right. Clause 3 provided that LSE “may deliver to” Capital “a Leasing Proposal requesting the Principal to purchase Equipment”. It may be interpolated that as often as not that might have been equipment which Lloyd Scott Enterprises itself had available to it from its own arrangements with manufacturers and the like.

Clause 4.3 on page 414 records that if Capital is satisfied of the various matters, including the documentation, the obtaining of a good title and the like, then Capital would authorise Lloyd Scott to acquire the equipment and then Capital would pay the agreed purchase price to the agent or, if the agent indicated, then to the supplier.

Clause 4.5 made it clear that the agent was to ensure that full title to the equipment free of encumbrances was obtained. Clause 5.3 over on page 415 dealt with the collection of rentals. In particular (b) provided that Lloyd Scott Enterprises:

must collect all amounts owing under the Copy Cost Agreements –

which is one of the forms of agreement –

on behalf of the Principal and deal with those amounts in accordance with –

the agreement. Subsection (a) said, “must ensure that all rentals and other amounts” in other transactions “are paid into the account of the Principal”. So, in effect, it what was the agent to collect and to remit in specie, as it were, the rental payments. Clause 5.4 recorded that if the agent received rental or any other money it was, in effect, to hold the money until deposited in the principal’s account on trust for Capital Finance. Clause 5.7 made explicit what one would infer, namely, that if the principal approves the leasing proposal then, in effect, its identity as principal was to remain undisclosed.

A very important clause, as it turns out, is clause 5.9 on page 418. This looks at the position where an equipment user under a lease agreement between that user and Lloyd Scott Enterprises wants to bring about an early payout of the obligations under the equipment lease. Subclause (a) contains Capital’s acknowledgment:

that Lessees may from time to time wish to pay out their liabilities under Leasing Agreements prior to the due date.

I interpolate there, if your Honours please, that they may of course wish to do so if they wish to avoid the ongoing finance costs or interest charges, in other words, to accelerate their liability to the present value rather than go on paying financing costs.

CRENNAN J: Most commonly it occurred in a situation where they wanted a new photocopier. They wanted to pay out the old one and start a new lease.

MR COLES: Indeed, where technological changes had brought about that – which would be the usual reason, one would suppose, because one of the reasons for leasing is that you actually do want to pay instalments in the future for apparently revenue related purposes. Subclause (b) records that:

Upon request by the Agent the Principal will quote a payout amount for a Leasing Agreement . . . the payout amount may include a payout fee –

at the discretion, in effect, of the principal and then the agent will tell the lessee what the payout fee is. Thus the principal may waive the payout fee on a case-by-case basis. The concept is a lessee may approach Lloyd Scott Enterprises and want an early payout, in effect.

HEYDON J: You said this was very important in the events that happened.

MR COLES: Yes, because this agreement does not itself give the same right and the same correlative obligations as between LSE and Capital. It only records that arrangement as between LSE and other end users and I will come to the significance of that in a moment.

Clause 10 describes events of default and clause 11 on page 423 provides that the agreement is to continue “until terminated in accordance with clause 11.2 or 11.3”. Significantly, the agreement may simply be brought to an end under clause 11.2 by either party “giving to the other one month’s written notice”, although not affecting the rights theretofore. Clause 11.3 deals with termination which is more immediate:

after an Event of Default occurs . . . the Agent must deliver to the Principal all documents and records, execute all documents and take all action which the Principal requires –

Importantly, for present purposes, 11.4 brings about the outcome that if there is a termination, then, in effect, Capital as principal steps back into the picture, in effect, declares its hand, I suppose, and becomes itself immediately entitled, if it wishes, to its rights. So that at the top of page 424 it is recorded:

Without limiting clause 11.3 . . . the Principal may terminate the authority of the Agent to collect any monies on behalf of the Principal under Leasing Agreements.

So when one is bearing in mind the relations which were later put in place between the parties by the 12 January deed, or the second deed as it is called, one bears in mind that any events of default, Capital itself had the right in any event to step in and commence itself to collect the relevant rents. Clause 14.6, if it matters, deals with assignment. I think this is a clause that was not in or was not at least in the same terms as the earlier deed, but it provides that the agent cannot assign or otherwise dispose or deal with the goods.

HEYDON J: What does it matter? You said, “if it matters”.

MR COLES: Well, mentioned for the sake of completeness, in our submission. More importantly, however, is 16:

“Sale Date” means, in relation to any Equipment, the date that the Leasing Agreement relating to that Equipment expires at the end of the completion of the contracted rental.

This is looking at the situation where the end user has paid all his or her or its instalments and apart from any nominal residual, which the evidence shows was always a dollar, or generally a dollar, the agreement is paid out:

“Sale Price” means, in relation to any Equipment:

(a) the price agreed between the parties –

that is to say, Capital and Lloyd Scott –

at the time the Principal approved the Leasing Proposal in relation to that Equipment’s residual –

that is a sort of finance industry term, one supposes, but will be familiar enough to your Honours and, as I say, there was other evidence that said that the residual, generally speaking, was a dollar. Clause 16.2 then said that:

In relation to each Leasing Agreement –

that is actually the leasing agreement that has expired –

the Principal agrees (subject to clause 16.4) to sell the relevant Equipment to the Agent, and the Agent agrees to purchase it from the Principal, on the Sale Date and for the Sale Price.

So the idea is when the leasing arrangement, which Capital has as undisclosed principal with the end user, comes to an end, the parties have made an agreement for sale of the equipment, in effect, for the remaining one dollar residual sum. But the conditions of that are set out in 16.3, namely, Capital must have by then received all of its rentals. Clause 16.4 says:

the Agent must pay the Sale Price to the Principal, and once that payment is made the property and risk in relation to the Equipment pass to the Agent.

So, in effect, there is an agreement binding the parties to a sale and purchase transaction at the end of the rental agreement, the result of which Lloyd Scott Enterprises will become obliged to in effect take the equipment off Capital’s hands and deal with it, in effect, as it may because, importantly, Capital will on that hypothesis have received all of the payments of the rental which it is entitled to under the agreement. It has, therefore, no further interest in the equipment as such.

CRENNAN J: I presume the lessees have mirror obligations, that is to say, when the residual is paid, title in the equipment would pass ultimately, would it not, to the lessee?

MR COLES: Yes, in a practical and commercial sense they would have. One is led to understand that sometimes for tax reasons they did not want the leasing agreement to look like, in effect, a hire purchase agreement so they did not necessarily confer the option to purchase. I think that is just one of those things. You do not necessarily give in a leasing agreement an option to purchase because then it would be a contract for sale rather than a leasing agreement and the instalments would be instalments perhaps of capital rather than on revenue account. But I think that is drawing perhaps on matters which the evidence does not really condescend to describe. But your Honours will understand the commercial concept.

We invite your Honours to consider against the background of that relation contractually between Capital and LSE that the second deed, as it has become known, came into play. Your Honours will see, and I do not believe I need to take your Honours to them, but the evidence contains examples of payout quotes, as they are called, in ways that I have previously described. The evidence supports the view that the residual was usually or almost invariably $1. I think that is evidence of Mr Campbell. I will read the reference on to the transcript. It is in paragraph 11 in appeal book volume 1 page 115. The second deed is in volume 3 and is, of course, as your Honour has seen if only from the form of a declaration, of central importance. Indeed, it was of decisive importance to the majority judges in the court below.

In volume 3 your Honours will see the second deed commencing at page 702. At page 703 the four parties are the two Capital companies, the Lloyd Scott Enterprises company and Mr Scott, who was the guarantor of its obligations and therefore necessarily a party to them. The recitals refer to and, indeed, later the agreement itself confirms the principal and agency agreements or P & A agreements whereby LSE acts as Capital’s agent on an undisclosed basis. Recital B seems to contain a misprint. The reference in the first line to Leasetec is undoubtedly, I think it is common ground, the reference to LSE, not to Leasetec.

Recital C records the holding of the rental moneys on trust for Capital, and importantly, recital D records that the two Capital companies:

no longer wish to provide finance to Lessees and over a period of three months wish to reduce the Exposure to nil.

Those words are very important because the concept of this deed is to bring about an outcome whereby the exposure is reduced to nil. It is crucial, in our respectful submission, to appreciate the content of the defined expression “exposure” in the definition section on page 705, line 24.

GUMMOW J: The difference between the first two parties at page 703, the two Capital companies. We have not seen the second of them before.

MR COLES: It stems basically from the fact that there are – there is the 1995 P & A agreement, and there is the 2000 P & A agreement.

HEYDON J: What, so KE Financial Corporation Limited changed its name to - - -

MR COLES: Capital Corporate Finance Limited – in fact, it says, formerly KE - - -

HEYDON J: Yes.

MR COLES: I am sorry, I should have pointed that out, your Honours. That is the reason, that it is intended to bring about a dissolution, I suppose, of the relation between the Capital companies and the leases they have with their lessees, as introduced by LSE. “Exposure” is important, as defined on page 705. It:

means the aggregate at any given time of the Payouts under all the Leasing Agreements plus all amounts otherwise owed by LSE or Scott to CFAL or Capital Corporate pursuant to this deed or any other agreement –

CRENNAN J: Were there debts outstanding of some sort?

MR COLES: There were, as your Honours will see, when I take your Honour to the particular payment covenants. There were some unremitted rents due in the current month and some matters of that kind. The evidence generally shows that it seems that for part and over most of the period – probably because they were fairly blue chip lessees – the rents were normally paid up to date, but they were, of course, paid to LSE, and it might not have been, one supposes, quite as quick in remitting, but I will show you that when we come to clause 4.

So the concept of the exposure is really to be seen in these terms; if at the moment of the deed every one of Capital’s lessees, introduced by LSE, had come along and said, we want to pay out our lease early, then they would have been given a payout quote, and the totality or the aggregate at any given time under all existing lease agreements is the total of what would have been all of the amounts if on the day all of the lessees – of course, who I emphasise knew nothing about this transaction, so one supposes - had come along and said, we want to terminate our leases and, in effect, accelerate our liability by paying a discounted amount to exit the agreement and pay our dollar and take over the equipment, once of course LSE itself had taken over the equipment by becoming a purchaser itself. So that is the position that would have been the case, as, indeed, if your Honours go to 706 your Honours will - - -

GUMMOW J: We do not seem to have the consent orders set out.

MR COLES: No, sadly, that is - - -

GUMMOW J: It says they are annexed, but they are not.

MR COLES: It does. It is an unavailing pursuit, as far as I have been able to endeavour to – I would not say we have stopped trying, your Honour, but it has been a problem that – I am told that eventually as a matter because they are the orders that Leasetec obtained. We are conscious of the need to try and perfect that deficiency but it is, as I say, your Honour - - -

GUMMOW J: All I am asking at the moment, though, is that what we have, starting at 702, is that a complete copy of the exhibit?

MR COLES: Yes, that is the copy. I am sorry - - -

GUMMOW J: So the instrument never had attached to it what it said it did, that is all I am trying to - - -

MR COLES: That is right. Your Honours have it in the form that the trial judge and the Full Court has and - - -

GUMMOW J: Where do we see it in that form? Do we ever see the consent orders in any shape or form?

MR COLES: You do not. No, you do not, your Honour.

GUMMOW J: I wondered why it was rather elliptically dealt with in the judgments. That is why.

MR COLES: Yes, that is right. They were not put in, your Honour.

GUMMOW J: Anyhow, the asset preservation order is discharged at some stage.

MR COLES: That is right, yes.

GUMMOW J: The existence of the asset preservation orders stimulated all this activity.

MR COLES: Absolutely, and it is quite important because when one is evaluating whether a reasonable person would have entered into the transaction or would have run a mile from it, well, the fact that one outcome is that you may be relieved from an asset preservation order is, one supposes, not wholly irrelevant. The definition on page 706:

“Payout” means the sum of money required to be paid by a Lessee under a Leasing Agreement to terminate the obligations of that Lessee under that Leasing Agreement –

Hence, my observation, your Honours, that one is looking at a sort of a notional situation that they have all come along and said, “We want to terminate at once” and that is how you derive the total figure that you will see in clause 4 in a moment.

So, it is in effect the total amount of money that – I suppose another way of putting it, if all the leases had ended on the one day and LSE had paid as many $1 residuals as there were leases – I think there were about 400 of them – then it would on that one day have become the owner of all of the equipment, or, alternatively, if they had not all terminated on that day then LSE would have had equipment to in effect do whatever.

Importantly, the payment of the payout terminates the lessee’s obligations and under the principal agency agreement, because Capital will have received all of the instalments of rent it, in effect, accelerates the obligation and the agreement for purchase which the parties have made in clause 16, to which I referred, upon payment of the residual dollar sum.

With that background and that assumption one looks then at the balance of the obligations. Clause 3 provides that certain rents, namely, the monthly rent for December 2000 is to be paid by the middle of January. One can infer from that - which may be of some small importance – that the rents were not in arrears for any substantial period of time. Then the next obligation is to pay the January rent by 24 January and then something called a D-D-Rent which is referred to. Then, 3.4 refers to the situation, “Until the Exposure is reduced to zero” then the monthly rent will be remitted, in effected, monthly. The clause which has caused debate is clause 4. Clause 4 provides that:

LSE shall reduce the Exposure -

and the recital, of course, envisages the reduction being a reduction of the exposure to..... –

and payout the LSE Leases by payment –

importantly –

in cleared funds, of the -

nominated amounts - $3 million, in effect, by 11 February, $3 million by 11 March, $4 million by 11 April, and the balance of the exposure as defined by 11 March 2001. We would respectfully suggest to your Honour that the principal matter that clause 4.1 is doing is firstly to lay down a timetable for reducing the amounts which comprise the total payout figure on the leases over time. Clause 4.1 needs to be read as a whole because failure to do so produces, in our respectful submission, what we think may have been not the correct construction put on the obligation under this deed by the – indeed by in one sense, all member of the Court – but I will mention it to your Honour, because in one sense the fate of the appeal does not depend on whether this is right or not.

It is important that 4.1 is concerned not with simply making payments. It is concerned with making payments which reduce the exposure. One does not importantly fasten on the obligation to make the payment out of the context or divorced from the connotation of that obligation with the reduction of the exposure, in effect, the discharge of the lease obligations.

The alternative, which commended itself to the Full Court, was in reality that this simply imposed upon LSE – presumably without qualification – a novel and unqualified liability to pay to the Capital companies $11 million. Now, it is possible for A who has never owed money to B to promise to pay a sum of money on a particular date and the result will be the creation of a debt.

That is uncontroversial so far as it goes, but the proper construction of this agreement, in our respectful submission, is that the obligation is to make the progressive payouts so that each lessee in relation to whom those payouts are made, under each lease agreement is treated as having paid up its obligations in full so that there is accelerated – under the terms of the principal agency agreement – the entitlement of LSE, in effect, to step into the shoes of the undisclosed lessor, and become, in fact, what it was on paper, namely, the lessor of that equipment to those end-user lessees because Capital, once it received payment of those lessee’s exposure, could not, as Justice Lindgren fairly pointed out, have any further interest at all in the leased goods.

The result of the deed is to leave those goods to LSE to go on collecting or receiving the rents from the lessees, but of course, beneficially and, in effect, to have accelerated what under the principal agency agreement is the sale component, the purchase and sale, because what this agreement does is supplement something that was not of course in the principal and agency agreement. Principal and agency agreements did not provide for LSE to make an early payment. It only provided for the lessees to make an early payment, so in order to exit the relationship, provision had to be made for LSE, in effect, to make an early payout.

GUMMOW J: Now, where does all this leave the end user?

MR COLES: This leaves the end user - - -

GUMMOW J: Gosford Shire Council – they are using their photocopiers.

MR COLES: It leaves the end user with a lease on foot between, as it had before - as well before as after, the end user has a lease with Gosford City Council, with the Lemington Colliery, with the North Coast Area Health Service and so forth, and goes on paying its monthly rent - - -

HEYDON J: Gosford City Council thought it had a lease with LSE, but it did not, but after these transactions it would actually have had a lease with LSE.

MR COLES: That is right. Precisely, exactly. It made the apparent principal the actual principal and removed the - - -

GUMMOW J: But not by any tripartite arrangement which involves Gosford Council. That is what is mystifying me at the moment.

MR COLES: Gosford Council was prevented - - -

GUMMOW J: I know what they thought, but in terms of legalities, there is no tripartite readjustment, is there, from them?

MR COLES: Probably commercially no need to. I mean, they had to pay the rent to Lloyd Scott Enterprises as well before as after the transaction and because they were good payers they no doubt did, so business as usual from the end user’s point of view. So one permissible way of regarding this deed is that, in effect, it provided for something which the P & A agreement itself did not provide for, namely an acceleration not by the end user, but by Lloyd Scott Enterprises qua Capital to make an early pay out, to take title to the goods and to go on as actual lessor rather than, as it was on paper, as undisclosed agent lessor, which is important, your Honours, because the Full Court, I have to say, did not see it that way.

They saw clause 4 not as a timetable for reducing the amount of the end lessee’s obligations in a practical sense, not as a progressive mechanism for paying capital out in full, for the aggregate of all the payout figures, rather, the Full Court seems to have seen the provisions of clause 4 as imposing some sort of unqualified obligation, one plainly, it must be acknowledged, which did not theretofore exist to make payments, as it were, in gross, or without qualification, at the monthly day specified in the agreement.

Indeed, the Full Court went so far, in our respectful submission, erroneously, to say that if, for example in one or other of the days referred to in (a), (b), (c), (d) and (e), for example, if on 11 April 2001, the sum of $4 million was not paid, that the Capital companies could sue and recover judgment, apparently, for $4 million.

HEYDON J: Where did the Full Court say that?

MR COLES: It is an observation in the judgment of Justice Gordon that Capital could have sued for – I probably have it to hand, your Honour. It is to be found at, I think, 123, Justice Gordon’s judgment. I may have that wrong. By coincidence, your Honour, I - - -

GUMMOW J: It is 123.

MR COLES: It is 123:

When each of the payments fell due under the Second Deed, LSE was indebted to Capital Finance for the amount then due. After each of the dates specified in the Second Deed, Capital Finance could have sued LSE to seek to recover any amount that remained unpaid and, further, could have proved as a creditor under the Second Deed in the winding up of LSE for the amount of the unpaid debt.

Can we respectfully say that the correctness of that may ultimately depend upon whether it might not fairly be said that if, for example, on or after 11 March, Capital sued for $3 million, it will be a fair observation and response to that claim that Capital still did retain, as undisclosed principle, the full benefit of the lease agreement which, it is hypothesised, had not been paid out by that particular instalment. So it would be impossible to recover judgment, we would respectfully think, for the lump round sums without taking into account that the consideration that would have moved from Capital, namely the putting LSE in the same position as Capital, in Capital’s shoes, with the entitlement to receive the rent, had not occurred.

KIEFEL J: You say that clause 4 is characterised as an acceleration of what could have occurred under the P & A agreement, but the sums to be paid are not linked to the receipt of any benefits under the leases.

MR COLES: No, that is correct.

KIEFEL J: So there is no mechanism for LSE actually receiving the benefit of the payout in the lease agreements.

MR COLES: That in turn picks up the P & A agreement on which we think this is - - -

KIEFEL J: You say you read them together.

MR COLES: You have to read them together or read them - - -

KIEFEL J: But if you read them together, there is still no relationship between the lump sums under clause 4 and the receipt of any particular benefits under any particular leases.

MR COLES: That is so, they did not, it is fair to point out, perhaps because they were in a hurry, identify which particular leases would make up each particular - - -

KIEFEL J: How do you say that you read it in practical business terms, then, that after the payment of all those moneys, all of the leases would be transferred over? Is that the only way to make sense of it?

MR COLES: Yes, your Honour. That is the only way to make sense of it and in an operational sense, just to take 4.1(a), upon the payment of $3 million what would happen, as indeed did happen, LSE would come along with identified leases which, when you add up all the exposure, all the payout figures for the identified leases, would approximate in effect each instalment. That seems to be what practically would have been expected.

KIEFEL J: Do you say that if LSE had breached clause 4.1, Capital’s remedy would have been an order for specific performance with a view to obtaining the bundle of leases at the end?

MR COLES: That would be one course, yes.

KIEFEL J: What other remedies were available to Capital?

MR COLES: If Capital simply sued for the sum of money it would, in our submission, be met with the defence that that money was going to be paid for a consideration, namely the accession to the - - -

KIEFEL J: I am sorry. It should not be specific performance, there is no action to be undertaken except payment, so they would sue for the payment.

MR COLES: They would have to pay, presumably, an amount of damages equivalent, if any, to the difference between the position they would have been in if they had – in effect by retaining the rights as principal, as lessor, under the lease agreements instead of handing over in effect the totality of their rights to LSE – to step into LSE’s shoes by way of - - -

CRENNAN J: You could never get a total payout figure in respect of all the leases without having each individual lease’s payout figure because the discount for each one in relation to early repayment will depend on the term which it still has to run and the interest payments that would have accrued during the term it still had to run. So every single one of them would have had to have an individual payout figure to work out the sums that had to be paid under 4.1.

MR COLES: Your Honour is absolutely correct. It makes a little bit fortuitous the identification of these very round figures, because it would be operationally very awkward to see how you would be delivering sets of leases with calculated payout figures discounting the rebates and so forth which absolutely, exactly and to the very last cent, corresponded to $3 million or $4 million. That is not going to happen.

HEYDON J: Would not the primary remedy be under clause 5? In other words, there would be events of default all over the – to start with, you go back to the asset preservation orders.

MR COLES: Yes – to file the consent orders. That is right.

HEYDON J: Then you – it is an event of default under any agreement that was ever made. So, speaking non-technically, clause 5 is a kind of device terrorising Mr Scott into performance of clause 4, and if he fails to then, the whole castle falls over.

MR COLES: The only other way, we would respectfully think, if one is trying to exhaust possibility, if you conclude the Full Court was right in thinking these paragraphs simply created an unqualified obligation to pay a round figure sum of money of a very large amount without anything else necessarily happening, you would have to regard that obligation, in effect, as an in terrorem – something in the nature of a penal bond. If it was a penal bond, in effect, you will suffer a penalty of three million if you do not pay off the exposure by - - -

GUMMOW J: Yes, that is right. Looking at 4.1(a), (b) and (c) are components of the exposure and that is defined back on page 705, and then that links you back to recital D.

MR COLES: Yes. That is the analysis we commend to your Honours, and we just think if that is right then it becomes inexact or incorrect to, in effect, treat these round sum payment obligations as if they were unqualified - - -

GUMMOW J: The sum of $3 million really means so much of - $3 million worth of the exposure?

MR COLES: Absolutely, with respect, yes, correct.

GUMMOW J: You might have trouble rounding it to the figure, actually?

MR COLES: You cannot, no. As I say, it would be serendipitous or fortuitous and it would not be happening, as I have suggested to Justice Crennan, it just would not be happening in the real world, because things do not work out that way unless you fiddle with discounts.

CRENNAN J: Yes, but it is the three million worth of the aggregate of the payouts?

MR COLES: Exactly, to deliver up leases that Capital have no further interest in, and you will see when I show your Honours how in reality the accounting was done when the moneys were received – that is exactly what happened, the leases were treated as paid out and discharged.

GUMMOW J: It is a bit more complicated than a simple debtor and creditor relationship?

MR COLES: Absolutely.

HEYDON J: Do you submit that the 588FB question is whether a reasonable person who is subject to asset preservation orders but is given a chance of escaping from them if these payments can be made within four months, would a reasonable person enter this transaction?

MR COLES: No, would he refuse to enter into it or would he not enter into it. It is put the other way. The onus is on the liquidator to show that, in effect, you just would not do it.

HEYDON J: No reasonable person would have.

MR COLES: I do not say it is a sort of barge pole proposition, but you are looking at would this person be doing this?

KIEFEL J: One difficulty for this Court in looking at the motivations of Mr Lloyd is that we might not know all of the factors which motivated him to enter into this agreement.

MR COLES: That is, with respect, a problem, that it seems to us that the section creates. For example, an unresolved – and I do not suggest this Court is necessarily anxious to resolve it, because I do not think it arises here – but is the reasonable person in the circumstances of the company, one who knows all of what is in the bottom of the can, as it were - - -

GUMMOW J: Including the pressures on the other side?

MR COLES: And including the fact that the company is insolvent, because the insolvency, if seen, grafts the insolvency aspect onto the uncommercial transaction, but on the other hand, the hypothesis upon which the section seems to be proceeding is that this only comes to the court’s attention axiomatically because no one is going to bring a claim under FB if there is no insolvency, you cannot.

CRENNAN J: That is the paradox about 588FB(1), that the attempt, if you particularly take into account Harmer’s recommendations, was to have an objective test.

MR COLES: Yes, and it still is objective in our respectful submission, but unfortunately it is objective in the sense that there is a fund of information that the Court, in effect, in the position of the reasonable person is not going to do this deal, sort of has to know apparently. It is not, I think, with respect, your Honours, something this Court necessarily has to resolve in this particular appeal, but it is relevant, as your Honour, the presiding Judge observed, that the circumstances of this company, as clause 5 emphatically dealt with, were that it had asset preservation orders over its head, which no doubt fitted its activity - - -

KIEFEL J: But there is not really, I think you were saying this, an issue about the uncommercial nature of either the second deed or the arrangement with NAB, is there? That is not really the issue. It is the identification of the transaction.

MR COLES: Yes, that is right, exactly, that is our point. So, lest your Honour misunderstand the emphasis I am putting on this, we simply say that it is relevant to observe that the Full Court seems to have misunderstood the concept of reducing the exposure and what followed, if it did, treating it as an, in effect, unqualified obligation to simply pay lump sums of money without more, but - - -

GUMMOW J: .....a bare covenant. It is not just a bare covenant to pay.

MR COLES: It is not just a bare covenant to pay money.

GUMMOW J: So it seems, yes.

MR COLES: It did not accordingly, without more or on its own, create a provable debt if none of the sums were paid because a liquidator – if none of these payments were made – and they total $11 million, if Capital, when liquidation supervened, put in a proof of debt for $11 million, the liquidator would say to it “Well, but hang on, you still own all this equipment, and they have not been paid out”.

CRENNAN J: Of course, the point about the ownership is that in a sense it functions like security, does it not?

MR COLES: It does, with respect, yes. We would adopt that.

CRENNAN J: So the debt is secured.

MR COLES: Yes, exactly. That is what I wanted to say if your Honours please about the second deed. Just to fit in some documentary features, your Honours should note the NAB master lease is in volume 2, page 349. It is dated 9 April 1999 and accordingly was on foot and in place and available for adoption some time prior to the January 2001 deed. We have emphasised, your Honour, that no one suggests that the master lease agreement itself was an uncommercial transaction and there is certainly nothing on the face or the content of it that would indicate that is likely to have been the case.

There are two NAB documents. One is the master lease agreement the other one is, in effect, a parallel for hire purchase style transactions and I will not trouble your Honours with the detail of that. But, so far as the master lease agreement is concerned its recital on page 350 indicates that:

the Lessor has at the request of the Lessee and the Guarantor agreed to consider acquiring equipment described in Item 3 of an Equipment Schedule and thereafter lease the equipment to the Lessee at the rental and upon the terms and conditions –

set out, in effect, in the template document. Clause 2 provides that:

If the Lessee –

Lloyd Scott –

wishes to lease equipment from the Lessor, it shall deliver to the Lessor an Equipment Schedule executed by the Lessee –

which in turn constitutes –

an irrevocable offer by the Lessee to lease from the Lessor –

that equipment. Clause 2.2 provides:

The Lessee’s offer will be to lease the Equipment on the terms and conditions appearing in this document –

so this is the standard form upon which the - - -

GUMMOW J: Clause 2 is some sort of standing offer by the bank, is it not?

MR COLES: Yes, it is. Lloyd Scott had put this in place whenever it wished to take up the bank’s standing offer to acquire equipment to lease to Lloyd Scott.

CRENNAN J: Item 3 could be varied from time to time?

MR COLES: Yes.

KIEFEL J: But the equipment is not specified, is it? So does it stand at anything more than a pro forma agreement?

MR COLES: That is what it is, yes.

KIEFEL J: It is not effective at this point?

MR COLES: Well, it becomes effective, I suppose, if LSE delivers the equipment schedule - - -

GUMMOW J: From time to time. See the definition of “Equipment Schedule”, clause 1.

MR COLES: Yes:

means the document so described in such form as required by the Lessor from time to time –

So there is a form you fill in and bring it to the bank. If you want to lease the equipment from the bank you bring that form and then thereby you offer to the bank to lease that from the bank and you do so on the terms of what your Honours have accurately seen is a set of terms and conditions pro forma. Clause 2.4 authorises:

(a) The Lessor may in its absolute discretion accept or decline (without any reason) the Lessee’s offer . . .

(b) The Lessor may only accept the offer to lease by it or its authorised officer –

If the lessor accepts it, then a contract obliges the lessor to – so I suppose one locks in this 2.4(c):

The contract arising upon the Lessor’s acceptance of the Lessee’s offer to lease . . . shall oblige –

importantly, imposes on the National Australia Bank an obligation –

to acquire the Equipment and thereafter lease it to the Lessee, subject to the this Agreement, for the whole Term –

So subject, of course, to the bank accepting the lease offer, there arose an affirmative legal obligation – hence, this is a transaction of its own – there arose an affirmative legal obligation on the National Australia Bank to buy the equipment nominated in the equipment schedule. In this case, of course, the equipment schedule nominated the equipment owned by the Capital companies and, correspondingly, at the initiative of Lloyd Scott Enterprises if the National Australia Bank accepted that equipment lease - - -

KIEFEL J: When was that done? When was the equipment schedule provided?

MR COLES: We can give that to your Honours. I can do it by illustration, I suppose, your Honour. If your Honours looked at volume 3, there is an example of an equipment schedule for one of a number, I think, but we can probably extract from the - - -

KIEFEL J: Am I taking you out of your sequence? You were going to take us through the NAB steps with LSE.

MR COLES: I was, your Honour, but I can tell your Honours that the affirmative answer to your Honour’s question is there are equipment schedule documents in the evidence and perhaps later in the day we could give your Honours a list of the pages where the particular - - -

GUMMOW J: Just give us an example now.

MR COLES: An example is at 879, which is, I am told, one of the Gosford City Council leases.

GUMMOW J: What date is this? Yes, I see, 14 January 2001.

MR COLES: So that is, of course, the same day as a payment or collection of payments were made, which are the subject of the proceedings. I just want to draw attention to what appears on 881, which, in effect, picks up the idea of the master lease agreement:

The Lessee acknowledges that in delivering to the Lessor this Equipment Schedule –

to the bank –

it is making an irrevocable offer to lease the Equipment from the Lessor on the terms and conditions of the Master Lease Agreement –

That sort of locks it in, as it were.

CRENNAN J: Every piece of equipment has an equipment schedule.

MR COLES: Yes, your Honour, it does. There is an individual equipment schedule under the NAB arrangements for each piece of equipment, as we understand it. That is why I was suggesting we could supply later in the day – could I just tell your Honours importantly just to show your Honours how the mechanics seem to work. If you look a little bit further forward in the document I drew the Court’s attention to commencing at 879, the equipment schedule for one of the Gosford leases, your Honours will see on page 884 it says:

THIS IS ANNEXURE ‘A’ REFERRED TO IN MASTER LEASE AGREEMENT EQUIPMENT SCHEDULE

and then the equipment is then described by reference to serial numbers and the like. It will be possible when your Honours see the actual payout quotes that the Capital companies gave to the National Australia Bank. They in turn also identified in the same way – and, indeed this schedule is probably drawn from – the payout “documents” which the Capital companies gave to the National Australia Bank as, in effect, the intimation of the sale price plus GST of the equipment.

GUMMOW J: Mr Coles, can you just tell us, looking at page 350 again, that is the master arrangement with the National. Had there been any transactions under that before these events of 2001?

MR COLES: The evidence is not fulsome, but - - -

GUMMOW J: With the Scott companies, or is that not clear?

MR COLES: Well, we believe so, your Honour. We know this because of a fact that arrangements between the – or the evidence indicates that the security which the National Australia Bank had from LSE under a floating charge had reached a particular amount relative to the assets of the Capital companies. So one can infer from that fact, I think it is controversial, that had been dealings under the master lease agreement before. It is possible there are hints to that effect in other documents but - - -

CRENNAN J: But there might have just been credit facilities or something of that order.

MR COLES: Yes, well, there certainly were credit facilities as well. There were overdraft accommodation and the like. Can I just remind your Honours in volume 1 of the appeal book a Mr Green, an officer of the - - -

GUMMOW J: Page?

MR COLES: Page 89, your Honour, is the first page of an affidavit sworn, not in these proceedings that are the subject of the appeal, but in another proceeding, the significance of which may need to be mentioned later. Paragraph 4 records Mr Green, the bank officer, saying:

4. At the time I assumed the role . . . Belinda Cook had worked on the LSE accounts with my predecessor, Greg Gladman, since 1998.

5. By December 2000, LSE held the following facilities –

and refers inter alia to a master lease agreement –

which had a combined facility limit of $4 million.

I think that is all he says. I notice, your Honour, paragraph 20 records a discussion with Mr Scott in which the bank gentleman at page 94, GG, Mr Gladman, says this:

That’s something LSE can do with the Master Lease or Lease Purchase facility it has.

So the.....is about all one can deduce from that, I think. I think that is probably as far as it goes, your Honour. The evidence did not deal with transactions comprehensively between LSE and the National Australia Bank after April 1999 one supposes principally for the reason that there was not the slightest suggestion that transactions of that kind were relevantly uncommercial in a way that would have shed any information about the outcome of these proceedings.

If I may, your Honours, return to the master lease agreement. Clause 8.2 your Honour will see contains some provisions about the use of the equipment and its repair. Clause 9 refers to the lessee’s maintenance obligations. Clause 11, in effect, confines the lessee’s relation to the property as bailee. Clause 12 deals with termination. I do not really think, your Honours, that there is any use to be gained by taking your Honours in detail, but the importance, I suppose, your Honour, was there was in place, and had been for some time this other financing facility which, when it became appropriate to do so, Lloyd Scott Enterprises activated for its commercial purposes.

Now, perhaps if I could show your Honours in volume 3 also – copies of them appear almost passim in the materials, but if your Honours would go to 853 of volume 3 – perhaps before I take your Honours to the details of those I would just, by way of background, invite your Honours to look at 834 which is a letter from the National Australia Bank to the Capital companies recording where things had progressed by 12 February 2001, a couple of days before the major payments in contention were made.

Your Honours will see that the bank wrote and said that previous documentation provided to Lloyd Scott Enterprises had not been acceptable for the bank’s purposes and asking the Capital companies to fax tax invoices pertaining to the items of equipment being acquired and gives the references to the Lemington Coal and Central Coast Area Health Service and the Gosford City Council and then says, “To allow for the correct preparation of these Tax Invoices”, there are some particular requirements of the bank. It may be perhaps, your Honour, that these formal requirements were not wholly an influence - - -

GUMMOW J: What are these tax invoices being talked about?

MR COLES: This is what had generated the tax invoices I am about to come to. It is to point out that the tax invoices take the form they do partly because they record the things Capital wanted to record, namely, what the payout quote or exposure, if one can adopt that expression, was and partly because – and one suspects it may be GST influenced – the bank had requirements of an appropriate formal kind.

GUMMOW J: Yes. If you look at 835 about line 17.

MR COLES: Yes, indeed, quite. If this had not been a sale, one would, by the way, want to know why GST was being included in something that was no more than repayment of a debt, but one passes over that, I suppose, rather gratuitous observation. At 853 your Honours see that Capital via Ms Foreman writes to the National Australia Bank with the payout details of those three contracts where it had been invited in the document I showed your Honour earlier by the NAB to furnish the payout quotes. She points out:

These agreements are “Equipment Rental & Full Service Maintenance agreement”s . . . Please find attached amended invoices, as per your request.

Then there are three of them set out at 854, 855 and 857 and many copies thereafter. Just looking at the 854 one, if your Honours please, as the shaded area just above line 20 indicates, it is a sort of hybrid. It is a combination payout quote recording Capital’s discounted entitlements under that particular lease agreement with Gosford City Council, but it is also a tax invoice to the purchaser, National Australia Bank, and it gives the payout quote in that case $880,000. Then it is slightly chopped out, but the next item is the GST item on top, and then the total payout is the payout quote plus the goods and services tax.

Then it identifies the assets as listed on the contracts Capital was holding, in that case 904326, and they are described as various items of used Xerox equipment and accessories. The one at 855 is the payout quote and takes invoice for Lemington Coal Mines following exactly the same format. Then the one with a further attachment on the back showing what the individual payouts were. Then the one at 857 is the payout quote for the total payout of $837,986 inclusive of GST for the Central Coast Area Health leases.

GUMMOW J: How are you going for time, Mr Coles?

MR COLES: I am most of the way there once I have - - -

GUMMOW J: The question is whether we sit again at 2.00 or 2.15. We would prefer to sit at 2 15, if that will give you some acceleration.

KIRBY J: Keep us in a good mood.

MR COLES: Can I invite your Honours to pursue that preference.

GUMMOW J: All right. Just finish what you are doing.

MR COLES: Yes. The last thing before your Honours rise, the leases then which the liquidating company entered into beforehand with the National Australia Bank, if your Honours still have volume 3, this is really to illustrate the way the paperwork hangs together.

At 879, for example, your Honour will see – this is the document I have already identified. At 884 there is the equipment, the subject of the sale to NAB from Capital, now being the subject of the equipment lease from NAB to LSE. Can I just read onto the record, your Honours, relevantly the three major February leasing transactions are at volume 3, pages 879 and 922 and volume 4, page 959. If that is a convenient time, your Honours.

GUMMOW J: Yes, and which is the relevant client here? Is it the council or the health people?

MR COLES: Yes, that is in fact the Central Coast Area Health Service.

GUMMOW J: Thank you.

MR COLES: We might give your Honours a table that ties these things together, if that is of assistance? If your Honours please.

GUMMOW J: Yes, thank you. We will adjourn until 2.15 pm.

AT 12.46 PM LUNCHEON ADJOURNMENT

UPON RESUMING AT 2.14 PM:

GUMMOW J: Yes, Mr Coles.

MR COLES: If your Honours please. Your Honours, the third element of the Full Court’s declaration was – if I can just remind your Honours in volume 5 where that appears – in terms that the Capital companies or Capital Finance applied the funds received from the National Australia Bank in satisfaction of LSE’s obligations under the second deed. Can I deal with that in two respects?

The first is at a factual plain. The evidence did in fact indicate how the Capital companies did apply the moneys. Can I give you two references. Firstly, if your Honours have volume 1, there was an affidavit read in the proceedings which is an affidavit of Lyn Frost, and if your Honours have volume 1, that is at 145 and was sworn in these proceedings. Ms Frost describes herself at page 145 of the appeal book as “Senior Quality Control Manager, Credit Quality” with the appellant.

If your Honours just note what appears at blue appeal book volume 1 page 155 commencing under the subheading “Payouts” she describes in paragraphs 17 and 18 the computer system with illustration. In paragraph 19 she says:

Any “Rebate” for an early payout is usually recorded after receipt of the payout. The “Rebate” . . . refers to the portion of discount interest that is rebated on the payout. There will also appear a number of entries on the CSE –

which is defined already as a contract statement enquiry. What she says, I should point out, in paragraph 17 line 30, the contract statement enquiry:

details every transaction, which CFAL/CCFL has had in relation to the particular LSE Rental Agreement, including particulars of rentals due, rentals paid, the amount paid to CFAL on the termination and payout of the particular rental agreement.

So there is, in effect, a record for each customer or its lease. Over on page 156, blue appeal, she says:

These figures record how the payout received from the customer, has been allocated –

Then she comes down, if I can take your Honours a little further down the page, to paragraph 22. She says:

The payout quote is the amount which CFAL will accept at the time of early termination of a rental agreement, in full satisfaction of the moneys which remain payable, at the time of termination, pursuant to the terms of the rental agreement. It also includes the amount of residual payable by LSE on the purchase by it of the equipment –

At paragraph 23 she says:

The calculation performed by the computer thought LLAS, calculates a discount for early termination of the lease. Details of the payout quote are available by highlighting the one line description and entering “Q” for quote details . . . The abbreviation S/Q is for “settlement quote” . . . The discount is allowed for the early payment of instalments of rental due in the future.

Then she gives in paragraph 24:

An amount received as a payout of the rental contract is recorded as “Payout” on the CSE.

or contract statement enquiry. Then she instances a particular contract and describes by way of illustration how that operates and in paragraph 25 she says:

Upon receipt of the payout, the system will indicate a zero balance. The zero balance means that all rental monies payable under the contract have been paid.

Then in paragraph 26 she gives a particular illustration by reference to the Gosford Council CSE and describes the various lines. The line where a payout quote appears, where the payout is made and the balance.

Perhaps I can take your Honours straight to page 163A of blue appeal book volume 1.

CRENNAN J: Just before you do that, paragraph 29 at 158 describes where the money comes from and to whom it goes.

MR COLES: Yes, indeed. For completion I probably should have taken your Honours right through really from the evidence of the witness really going up to 160 because she deals successively with each of the accounts, if your Honour pleases. If your Honours have blue appeal book volume 1, at page 163A your Honours will see – it is in the nature of these things that the documents are something of a challenge to one’s vision – the document is headed “Contract Statement Enquiry”. It is obviously a computer generated record. It gives the contract number, as the witness says; it gives the customer, Gosford City Council, the number of transactions. One can see by the very first line, line 33, there have, by this date, 31 January 2001, been some 32 prior transactions no doubt involving the payment of instalments and the like.

If one comes down to lines 35 and 36, one can see the settlement quotation references and then, importantly, if one comes down to line 41, one can see “Residual Payment”. The importance of lines 41, 42, 43 and 44 is that they are the entries dated 14 February. That is of course the date when the liquidator says the transaction involving this payment took place, 14 February 2001.

So you have on line 41 “Residual Payment”. Moving across to the amount column is “1.00”. Then you have line 42, “Payout” is the amount of “968,852.83”, which is the amount of the payout quote. It should be pointed out less the $1 which you can work out from line 36 which is $1 more. Then in line 43 is the “Rebate” and there is rebated from that payout figure “133,019.96”. Then the last item on that line is the GST adjustment.

So, in effect, if Gosford Council had itself come on that day and said, “We wish to effect early payout of our lease”, then that would have provided the amount of that exposure which would have to be paid, less the amount of the rebate of $133,000, and that was what was afforded to – that, in effect, became the price paid not by the retiring customer but by the National Australia Bank pursuant to the payout quotes.

A couple of things follow from that. The first is the undeniable factual position demonstrated by the balance of these documents, and they go through under various different accounts through to blue appeal book volume 1, 163N, but it is very plain that when one sees in each case the amount of payout that comes into the account, the credit, in effect, referable to the receipt by the Capital companies of the proceeds of sale from the National Australia Bank is appropriated against the particular customer account, in other words, the exposure of that particular customer under that particular contract.

It is not perhaps as the form of declaration the Full Court made suggests, at least in terms, an application by Capital Finance of those funds in satisfaction of LSE’s obligation under the second deed. It is not as if, for example, one finds a running balance with LSE to which various credit entries are made which show a progressively reducing balance on the part of a company.

It is true no doubt that pro tanto receipts by Capital from the National Australia Bank referable to the particular lease contracts relieved any obligation under the – reduce the exposure timetable, which the second deed itself acknowledged, but it would not be a complete statement of the factual position to describe that as being internally, for what it may matter, the application by Capital of those funds in satisfaction of LSE’s obligation. Rather, it is an application of those funds to reduce and eliminate the exposure, as the parties contemplated it, of the particular customer under the particular lease agreement, albeit, for reasons we discussed prior to the luncheon adjournment, the contracts carry on as between LSE and the particular end user.

The second importance of what I have just taken your Honours to can be seen, if your Honours will next go to volume 5, and some observations made at paragraph 134 of the judgment of her Honour. This is appeal book volume 5, page 1367 and at line 40 in paragraph 134 her Honour says:

There was no benefit to LSE or any other matter sufficient to suggest that LSE undertaking the obligations it did under the Second Deed was commercial. Only one benefit was suggested by the Capital Companies: that LSE was entitled to retain for itself any rental payments by the end users whereas it previously had to account to the Capital Companies for these amounts.

Then this is the important part with which we must cavil –

That so called “benefit” was to receive instalments of rent over the balance of each lease period.

That is true –

That “benefit” –

her Honour says, and this is the crucial part –

was worth far less than LSE’s obligation imposed by the Second Deed to pay Capital Finance (in effect) the whole of the amounts that lessees would ultimately pay over the life of the leases but do so in four instalments over four months. That “benefit” did not justify or explain the liability that was imposed on LSE by cl 4.1 of the Second Deed.

What her Honour, with respect, must have overlooked or not taken into account, may we respectfully say, is that the amount or amounts which LSE was procuring the payment of from the National Australia Bank over four months were the significantly and substantially discounted amounts and the whole of the instalments would be the undiscounted amounts and it would be the whole of the undiscounted lease instalments over the remaining life of the lease that the lessee, LSE, would be paying. Her Honour, indeed, if I can just mention this, your Honour, by way of completeness, did recognise, we observe, at paragraph 96 of her judgment on page 1354, blue appeal book at about line 3, that:

The payout amount was the sum of the remaining lease payments and the residual payment discounted for early payment.

So there is no doubt her Honour appreciated that, but when her Honour came to the significant task of looking at detriments for the purposes of section 588FB, her Honour, in our respectful submission, in paragraph 134 of her judgment, blue appeal book 1367, misapprehended the significance of that state of affairs.

That is not unimportant because her Honour recognised, and then more importantly Justice Lindgren highlighted, that of course the liquidator had not furnished the court with calculations as to the respective benefits or disbenefits of the new arrangements. In fact, if one attempts an analysis, one can see that the outcome her Honour was premising in paragraph 134 of her judgment was a little different. Could I invite your Honours to receive, if your Honours please, by way of submission, your Honour, some specimen calculations comparing – and we appreciate it is no part of our job to prove the benefits and disbenefits, the onus of which was upon the liquidator and which he avoided - - -

KIRBY J: This is the document that is headed “Gosford” on the first page?

MR COLES: It is, your Honour, yes. The first page is headed “Gosford”. The second page is headed “Lemington Coal Mines” and the third page is headed “Central Coast Area Health Service”. Can I, at the risk of straining your Honours’ patience, deal only with the first one because the concept underlying the documents is the same. Your Honours will see the first line simply describes the contract that LSE had with its customer at the time from May 2000 and an appeal book reference is given and tells them the total amount of the aggregate of payments times 60 months.

More importantly, the next line tells you by reference to blue appeal book volume 3/854, the payout quote which Capital gave to the National Australia Bank in that payout quote tax invoice document was for $968,000-odd but discounted, that is to say, rebated as per the document your Honours have seen at page 163A, by the rebate amount of $133,000-odd recorded in that document. Then, on the other hand, the information about the National Australia Bank lease after the transaction, the post event, shows from 14 February a 30 month lease with 29 payments each of $24,000 giving a total of $696,000 but a much larger residual giving a total all up through the life of the new lease, the National Australia Bank lease, of $925,000.

So, as the commentary points out, under the remaining term of the LSE lease, that is to say, the original Gosford City Council lease, Capital would have been entitled to receive $1,101,000, made up in the way we have referred to, by 29 May. Lloyd Scott Enterprises was now entitled to receive that same sum under that same lease with the client but had to pay not $1,101,000 but a lesser sum, that is to say, $925,000, by August 2003 to the National Australia Bank.

CRENNAN J: What happened with the end customers in these circumstances in terms of the monthly rentals they were expecting to have?

MR COLES: They did not change.

CRENNAN J: That means, does it, that LSE was making up the difference?

MR COLES: Here, in fact, it was deriving the difference, because it is a positive difference, at least in the rental term period, it is a positive difference, LSE’s way. It has to pay - - -

CRENNAN J: Overall, it is, but what about on the month-to-month basis?

MR COLES: On the month-to-month basis they are required – at least on this transaction – to remit less to the National Australia Bank than they receive for themselves from the customer, the point being this, that they have to pay over - - -

GUMMOW J: What is in it for the NAB?

MR COLES: The evidence, again because there was no attack on the NAB’s transaction, it is not explored but one would need to know more about the, I suppose, both the time value of money, the predictions internally they make about interest rates movements and all manner of fairly macro economic kind of ideas which were simply not explored, but this is all by way of saying that it was not a fair generalisation to say that what I have drawn your Honours’ attention to in connection with the – or at least that if you had a comparison it may be that all manner of comparisons could be done, but when one bears in mind the way in which the liquidator presents its case which was a case that LSE had paid to – via NAB – the whole amount of $3.7 million it really did not fairly present any basis for coming to that conclusion.

CRENNAN J: I might be missing something, but if Gosford are paying roughly $18,000 a month under the original arrangement and then the monthly payment becomes roughly $24,000 a month, my question was, how does that all pan out with the end customer, who after all has a lease agreement with LSE which would record, one presumes, $18,000 roughly per month. That is what I do not understand. That is why I mentioned to you, was LSE making up that difference?

MR COLES: For a time, yes, that seems right.

HEYDON J: But the end customer just keeps paying $19,642. One difference between the two arrangements is that one is much shorter than the other.

MR COLES: That is right, and the residual of course, is much larger. But one is again, because there is no attack made on the suggested uncommercial nature of the arrangements with which Lloyd Scott Enterprises made with the National Australia Bank, these differences are presumably accepted by the liquidator as part of the commerce of the marketplace. Our point is really no more than this, that the onus was on the liquidator to prove overall that the receipt by Capital of the sale proceeds of its equipment was the fruit of an uncommercial transaction and isolated or incomplete approaches selectively based on assumptions not fully explored in evidence as to what the daily economic to and fro was as between the National Australia Bank and its own customer, Lloyd Scott Enterprises, do not really shed any conclusive light at all on the uncommercial nature of any aspect of the transaction.

I suppose we are perhaps immersing ourselves in more detail in one sense than we need to because once it is accepted that the liquidator does not challenge at all the commerciality of the lease arrangements, then there is no need forensically or dispositively to be concerned with the pluses and minuses and the conveniences and inconveniences of giving effect to those new transactions. That brings me to the next point which comes from paragraph 135 of her Honour’s judgment on page 1368. Her Honour said:

Moreover, consideration of the benefits obtained by persons and entities other than LSE from execution of the Second Deed supports the view that the Deed was an uncommercial transaction . . . The benefits to those parties from execution of the Second Deed were significant. For example, Capital Finance secured receipt of the payments the subject of the appeal in circumstances where it was otherwise not only not entitled to receive them but had little or no expectation that it would receive them under the P&A Agreements, especially given the conduct of LSE.

Although her Honour’s observation is not necessarily lucidly recorded, her Honour seems to be suggesting that there was something very precarious about the entitlement of Capital itself to go on receiving, because of the conduct of LSE, the particular payments which it was entitled to receive if LSE performed its obligations to remit the monthly rentals.

The same might, one supposes, be said about the position of the NAB if it were given the conduct of LSE, but the point is irrelevant and erroneous in our respectful submission because there was no proper basis for the conclusion that Capital had little or no expectation that it would receive the amounts – the payments under the P & A agreements. Firstly, of course, the obligation to make the lease payments came from the customers. It did not come from LSE. LSE’s obligation was to collect them and remit them. It was the undisclosed agent, not the customer.

The second point is the customers themselves were, in effect, blue chip institutional customers. Indeed, they were described by Mr Scott himself in dealings with the National Australia Bank as “best quality customers . . . the Universities, councils, that sort of thing” – that is a reference in volume 1 of the appeal book at page 95 and also volume 3 of the appeal book, 854 to 856.

At the time, moreover, the Capital companies considered the credit quality of the customers as excellent and the reference there is volume 2, page 489, line 5. But equally, and perhaps overtaking all of this, if for some reason – taking into account her Honour’s observations about “especially given the conduct of LSE” – suggesting that LSE might be conducting its affairs in a manner that causes concern, the eventual entitlement of Capital under the principal agency agreements was simply in the event of a breach or default, or even on 30 days notice, to terminate those agreements in any event and step in and itself collect the rents directly from the customers.

If, for example, LSE became insolvent - and I will just give some references there, your Honour. At appeal book volume 2, pages 278 to 279 referring to clauses 9.2(t) and in the second document, appeal book volume 2, pages 422 to 423, clauses 11.3 and 11.4. Elsewhere there is other evidence, if your Honours please, that in general terms the monthly lease payment obligations of LSE, no doubt reflecting the performance by the underlying customers of their obligations, were generally on time and up to date. Indeed, even in a memorandum after LSE had gone into administration – I can give your Honours that reference in due course – it was recorded that in general terms LSE had been up to date with making its monthly payments.

So there is no proper factual basis, in our respectful submission, for the observation her Honour made at paragraph 135. Those two observations at 135 and 134, which I have sought to illustrate that the specimen calculations really seem to have provided the primary basis for her Honour’s conclusion that, although not the liquidator’s case, the lease agreements were in some respect to be seen as uncommercial, to have been driven by the second deed and to have together, in a way not wholly explained, produced the outcome of the sale price for the equipment that Capital sold the National Australia Bank to facilitate those lease agreements, was wholly the proceeds of an avoidable transaction because uncommercial.

We wrongly said in our written submissions that this particular document, which is a memorandum from Mr Vendrell to his file of 15 June 2001, was not reproduced. That is what part of the index to the appeal book records, but in fact it is reproduced in volume 4 at pages 1090 to 1091. The author of the file note records at line 30 on page 109 – and this is 15 June 1991, around the time when Lloyd Scott Enterprises was undoubtedly in difficulties – he records payments collected and remitted by LSE to CFAL are all currently up to date or in advance.

So there was not, in our respectful submission, the element of precariousness or uncertainty of potential receipt of all of the contractual instalments and nothing to indicate that in the fullness of time upon the payment of $1 at the end of it LSE itself would not become the owner of this equipment which, after all, was what the second deed effectively accelerated.

Could I point out also, while your Honours have a note of Mr Vendrell’s file note of 15 June 2001, it was relied upon as indicating in part the supposed application by Capital of the payout amounts from the bank as having the quality of applications of funds against the debt said to have been created by the 12 January deed, but it is a matter, I suppose, of fairly informal language. Back on page 1090 the author, Mr Vendrell, who was an officer of the appellant, said:

Lloyds initial arrangement (backed by a deed) with CFAL & Leasetec was to

a) Remit monthly portfolio pmts monthly in advance &

b) Refinance CFAL & Leasetec’s portfolio to the tune of $3m each per month

Initial finding for the refinance was principally via cash advances to LSE by the NAB.

Then he says in paragraph 2, “The above arrangement was short lived” and he goes on to explain that. Although the view is available, depending on one’s approach to the matter and it probably does not matter, that the 12 January deed had pervasive and enduring effect, it is not an impermissible conclusion that once the arrangements in the deed changed from, in effect, LSE itself making the payments which would have reduced to zero the exposure and thereby itself inevitably becoming entitled to the value of the underlying asset in the shoes of Capital itself, once that changed to an arrangement whereby the National Australia Bank became the purchaser of that same equipment, it is doubtful if there was much more work left for the deed to do because by selling the equipment to the NAB, Capital could hardly say to Lloyd Scott Enterprises, “You’re behind in your particular instalment”.

If, for example, it had sold all of the equipment to the NAB, it could hardly hold LSE to the round sum instalment plan because it would have no consideration itself to deliver in response to that particular payment. So it is correct to say, in our respectful submission, the second deed was itself overtaken by the NAB financing arrangements, and it is also correct – and we develop this in our written submissions – that the sale transaction to the NAB really cut across or ended unperformable in full the 12 January deed, in any event.

There are a couple of other matters, if I may, if your Honours please. These matters, your Honours, really call again into focus the form of the declaration that the court made and this really reflects the conclusion in paragraph 154 of the majority judgment at page 1373 of the book. The elements of the transaction constituted by the 12 January 2001 second deed, and, of course, bearing in mind the majority’s reasoning that the whole transaction was uncommercial because the 12 January deed was itself uncommercial, that is the reasoning.

Whether the 12 January deed was itself uncommercial depends significantly, in our respectful submission, on its proper construction and whether or not it truly does create no more than a naked obligation to pay large sums of money by the month or whether it has a purpose of the kind we made submissions about before the luncheon adjournment. We would respectfully think that an arrangement whereby there is an agreed dissolution of the relationship between the parties in the context and available alternative financier, in other words, to put it shortly, a refinancing arrangement, is on the ordinary dictionary understanding of the expression “commercial” a commercial as opposed to uncommercial transaction, but that, as I say, is a matter which I have covered and depends on the construction of the deed.

A second question, of course, emerges even if an adverse construction to the appellant be adopted and the construction which seems to have found favour with the Full Court be adopted. So that you could say the disbenefit of a naked obligation to pay $11 million which theretofore did not exist, was uncommercial. It would not then follow that the balance of what was described as the transaction firstly was the transaction or that it was an uncommercial transaction of the company.

The second element of the declaration then refers to the steps taken by LSE with the concurrence of Capital companies to procure funds through lease finance with the National Australia Bank, in effect, to do the lease finance transaction. As I have put several times, there was nothing particularly odd about the steps taken by LSE. It had already had the National Australia Bank facility in place. Importantly, it may be noted the 12 January deed, the second deed, did not itself require, although it did not exclude the possibility, LSE to go to the National Australia Bank or anywhere else. It left the way open for LSE to, for example, borrow the money to pay it out and acquire the title to the equipment itself or to go to a substitute financier, as in the events did.

It is very hard, for reasons I am about to develop when I take your Honour very shortly to Emanuel’s Case, to describe as a constituent element or describe a transaction as constituted, amongst other things, by steps taken to do various things which produce a various outcome – and I will develop that in a moment – even allowing that a transaction may itself be constituted by a set of composite or connected steps.

The final element of the matter that I have already deal with, which is the suggested application by Capital Finance of the funds in satisfaction of LSE’s obligations, that, as I put this morning, was a matter that the majority of the Full Court discerned and was not something regarded by the trial judge, apparently, as of particular significance.

Before I come to round off our submissions in connection with what was the transaction and what was the transaction, if any, of the company, LSE. There are a couple of short matters I should just mention by way of completeness. One is, if your Honours please, the other way which the Full Court used or deployed to come to the conclusion that Capital had appropriated in some way the payments from National Australia Bank to reduce the indebtedness, as it identifies, of LSE to the Capital companies and that was really because there appeared – or after LSE went into administration but before it went into liquidation there was drawn up – I think we have the reference to it. I will give your Honours the page reference. I am sorry. There was an informal proof of debt.

Your Honours will see it in appeal book volume 4, page 1099. It appears to have been signed by two officers of Capital, one of whom was Mr Vendrell and, as we know from the evidence, has some connection with these proceedings. It does not seem, I do not think, to be dated, although I think it has a fax imprint on it, but your Honours will bear in mind the relevant dates are 25 June 2001, the company LSE went into administration under 5.3A of the Act. Then, actually, just a couple of weeks before it became the Act, then 20 July 2001, by which time the Commonwealth Act, of course, was in, was the winding up. Now, the proof of debt, in our respectful submission, does not - - -

GUMMOW J: What was the date of administration again?

MR COLES: The date of the administration, your Honour, is 25 June 2001.

GUMMOW J: Thank you.

MR COLES: The proof of debt does not of itself, either directly or in combination with other evidence, establish that Capital was, in effect, treating the sums already paid, as it were, as a sort of reduction in a state of indebtedness and it is plainly, although it could be veered that way, but in our respectful submission, inconclusively. What it amounted to was the difference between the exposure as originally calculated of $11 million and the exposure as it had already been satisfied by the fact that NAB had taken over the relevant leases up to the amount of 3.7 on the other. There was not much point doing a proof of debt while the company was in administration because, after all, administrators do not and indeed cannot pay dividends.

So it was, as one would understand it, an informal proof of debt, perhaps put in, as people do, for what is sometimes described as “voting purposes”, whatever that may signify. But, of course, it could not have been a genuine proof of debt because, after all, the failure or the non-occurrence of the payment by LSE by the time it went into administration of the balance of the amounts required to reduce the exposure necessarily left Capital holding the equipment and holding as principle the contracts with the end users, people other than Gosford Hospital and so forth and, accordingly, you could hardly prove for a debt when you had the value of the thing which at very least had to be set off against it.

So, although our learned friends are inclined to make a little of it and certainly appeal to the majority of the Full Court, it is less plain, I think, that the primary judge attached much significance to it, but at best the document, we would respectfully say, records the subjective views of the persons concerned in the administration of Capital at the time as to what the – indeed, arithmetically accurate enough as to what the balance of exposure was, but legally deficient in miscategorising that exposure or the balance of it as itself constituting a debt.

To conclude, your Honours, with a number of observations, the question that presents itself squarely by the form of the declaration which the Court made calls attention to what one is looking for to identify “transaction” bearing it mind it is said and said frequently, and said authoritatively, and said.....that there may be composite steps involved in establishing a transaction. That is correct, in our respectful submission. I want to illustrate this by reference to Emanuel’s Case in a moment.

The point we would like to make is that at the end of the day, at the end of the inquiry, one is looking to see what is the transaction, for example, the payment, the disposition, the change in the asset position of the company by whatever means effected, which constitutes the transaction. The steps to bring that about may or may not be, themselves, part of the transaction. They may, however, in combination produce the transaction in the sense that, for example, if I request a bank to pay me money but I have no account with the bank and they choose not to, well, you would not call the request a transaction, even though it may be an encouragement to take a step.

On the other hand, if I have a credit balance with the bank and I ask them to pay me money, then because of the debtor/creditor relationship the bank would ordinarily, if on savings account, for example, be obliged to do so but what we are seeking to emphasise, and it is complex in a sense, that one must be cautious and one must be scrupulous and rigorous in identifying what is the transaction and whilst recognising that there may be composite steps to produce the transaction to recognise those composite steps will not themselves, or not themselves necessarily, either be or become the transaction or an element of the transaction.

Emanuel is perhaps an illustration, in our respectful submission, and it may be that the Full Court of the Federal Court in the present case was perhaps seeking to apply, we would respectfully think, perhaps, if our submissions be correct, without perhaps the precise degree of discrimination that may have been required, the concepts of composite steps in a transaction. Re Emanuel is reported in many places, if your Honours please, but for present purposes I think the reference we have given is in (1997) 24 ACSR 292.

GUMMOW J: Also in 147 ALR 381.

MR COLES: Yes, thank you, your Honour. What it is not in, seemingly, at least to our inquiry, is the Federal Court Reports. It can, with respect, be said that the facts were fairly straightforward. A company – there were, relevantly, of course, three companies involved – as a part of a settlement between two of them the company that was paying money decided that instead of paying the money it was liable to pay under the settlement to the creditor company it would pay some of it to a third company which was itself a creditor of the obligee company.

So, it is a not unfamiliar situation of a payment by direction. That is to say, the person who has the fund must at the request or direction of the person who is entitled to the fund apply the fund or part of it in accordance with the direction of the requesting or requiring party and if used to pay the debt of the person making that request one would ordinarily think - and this was never any problem in the cases before 1993 – one would have thought that without more there was a payment.

The transaction relevantly, in that case, as in probably most cases, will be a payment, the payment in question being effected by the circumstance that the debtor company repaid its debt to the recipient company in part by paying the recipient company and as to another part by paying the recipient company’s own creditor an amount to discharge that debt.

One would not, in our respectful submission, have very much difficulty describing that as a payment. After all, if one is entitled to money and one says “Pay it to someone else” one is, oneself, making the payment by directing a third party to make that payment. If one says to a bank, “Please write me a bank cheque to pay my indebtedness to Bloggs” the bank cheque given to Bloggs is not a payment by the bank that issued the bank cheque, it is a payment by the person who requested its issue.

As I say, your Honours, that was not, as is well known, any problem at all under the former legislation, but for some reason it was thought to be a problem under the current legislation because it was said, although erroneously, that when the payer makes the payment to the recipient creditor, the company that directs the payment is not – the debtor to the recipient is not a party to the transaction, and the definition of “transaction” in section 9 requires that it be a party.

It would have simplified, in our respectful submission, the analysis of the position – and indeed ultimately this was the result – in Emanuel’s Case if they had simply asked – instead of asking, what is the transaction, they would have said, is there evidence of a payment, and once they concluded there was evidence of a payment, they would have readily concluded for the purposes of section 9 that there must have been a transaction. But the matter became, in our respectful submission, as we would understand it - - -

GUMMOW J: I am just looking at the very first paragraph of the Full Court’s reasons with “A”, “B” and “C” what is the preference? Can it properly be said or what is the unfair preference in that example, with “A”, “B” and “C” there?

MR COLES: Are your Honours looking at the threefold classification of the - - -

GUMMOW J: In Emanuel.

MR COLES: The unfair preference is that the person who is entitled to all the money was themselves insolvent, but directed some of the money to be paid to satisfy fully the claim of one of its creditors. So that is what produced the unfair preference.

GUMMOW J: There is nothing revolutionary about that being bad, is there?

MR COLES: No, absolutely not. If we may respectfully say so - and it is easy to say these things with the benefit of hindsight – the problem may have been unnecessarily complicated by looking first to see whether there was a transaction rather than simply notice the fact that there was a payment and therefore there had to be a transaction, but perhaps as I say, wise after or an observation one can venture after the event, and it seemed to have been pulled back by Nilant’s Case to which reference is made, and which I need not repeat.

Relevantly, for present purposes, I just draw your Honours’ attention to the discussion about Nilant’s Case on page 298 and in the light of the time I will not spend time on this. Perhaps I should invite your Honours’ attention to what appears at the foot of page 299 of the report where their Honours say:

While s 9 does not define “transaction”, it does through the process of exemplification –

describe the common characteristics which I have put to your Honours earlier this morning. Then they say in the last paragraph on that page:

We confine our observations for present purposes simply to a course of dealing initiated by a debtor for the purpose of, and having the effect of, extinguishing a debt. It is not apparent to us why it should not be said that, where a debtor so acts and extinguishes a debt, the relevant “transaction” is the totality of the dealings through which the debtor procures the intended outcome, irrespective of whether one or more of the dealings in the sequence in question does not involve or require the participation of the debtor but does require that of a third party. The transaction, in other words, is the totality of the dealings initiated by the debtor so as to achieve the intended purpose of extinguishing the debt.

So much, in our respectful submission, must be right. Could we contrast, before I move on that, sort of position that the type of circumstance encountered in the present case. A lease request, for example, is a request to the National Australia Bank by LSE to purchase equipment under the master lease agreement.

It is not, for example, an agreement or setting in train a situation of itself whereby the National Australia Bank is being asked to pay some debt of Lloyd Scott Enterprises. To the contrary, the form and the substance and the reality of the transaction is the National Australia Bank is being requested pursuant to the contractual provisions in place to make that purchase and it does so. It is not being asked, we emphasise, to pay a debt.

Moreover, in the Emanuel sort of situation you have the person in the position of the Bank holding funds at the disposition of the requesting party, the customer – indeed, the creditor, and the creditor can say, “Pay me all of those moneys” or the creditor can say, “Pay some of those moneys to my own creditor”, and if I am insolvent, and I ask for my own creditor to be paid by my bank who owes me the money, then I will have made a payment to that creditor in circumstances where I will have conferred upon it a preference.

It is plain in the present case that the National Australia Bank – and the contrary is not suggested – was not holding a fund of money in any suspense account or any other account simply at the order and disposition of Lloyd Scott Enterprises in the way that Lloyd Scott Enterprises could have said, “Please pay me all of that money that you have earmarked for my lease financing because I have changed my mind and I do not want you to pay it to Capital Finance to buy the equipment”. The transaction or the payment of the – the National Australia Bank uses its own money to pay Capital for the equipment and maybe accounting entries which the evidence describes. So we are in a very different scenario of obligation and sequence of transactions in the present case.

I should just take your Honours over to 300. I have drawn your Honours’ attention – and I am going to come back to it in a moment – to the observation at the end of the first paragraph on page 300:

The transaction, in other words, is the totality of the dealings initiated by the debtor so as to achieve the intended purpose of extinguishing the debt.

That fairly precise observation and its formulation, in our respectful submission, has to be contrasted with the way the Full Court in this case approached the identification and, in effect, definition of the transaction. Passing over, the conclusion is at line 15 on that page 300:

a course of dealing initiated by a debtor that is intended to, and does, extinguish a creditor’s debt can in its - - -

GUMMOW J: We can read a manual for ourselves, Mr Coles.

MR COLES: I am sorry, thank you, your Honour.

GUMMOW J: It does not seem to me to be a case of cosmic importance, really. Not at the moment.

MR COLES: No, I could not agree more with the utmost respect to the learned judges who decide that and the fact that it was controversial in its time is a matter for present wonder and only so because of - - -

GUMMOW J: If the 1992 Act had never been passed, it would have been a simple preference case.

MR COLES: Absolutely. There were cases, Re Craftsman, for example, was one of them, and quite a number of cases which made that the simplest of cases. What is important is the question of viewing the transaction or the transaction being - - -

GUMMOW J: So to put it another way, it would be an odd result of the 1992 Act if it made it something that was completely kosher.

MR COLES: Would be utterly extraordinary. There is nothing special about that case except to dispel a misconception about really looking at categorisations or applying statutory labels before you actually look at what happened and then you can come to the conclusion that the statutory label was applicable.

GUMMOW J: All right. Well, it is 10 past 3 now.

MR COLES: I am sorry. I have two other short things, two other points. I wanted to refer your Honour to Airservices (1996) 185 CLR 483 at 501. The only portions I wish to invite the Court’s attention to, and I will just give the page references if that is convenient, commencing at 501 in the joint judgment of Justices Dawson, Gaudron and McHugh under the heading “The effect of a payment” there proceeds a lengthy and comprehensive discussion of the operations of the provisions and the need to see the overall business purpose and context.

What importantly – and this is the only point I want to make about this aspect of the case, I will give your Honours some other page references in a minute. Page 506 is of importance in the judgment. Also of the majority can I refer to 509, the last full paragraph of the page and may I refer, I think, Justice Toohey’s judgment particularly at 516 to 517, the point being this, that Airservices is, as are a number of other cases, an important illustration of the fact that although a particular payment may correspond with and fulfil a statutory formula or definition of, in that case, a preference, it is not necessarily preferential. In other words, more accurately, what one must do is look at circumstances outside the mere fact of the payment and look at the context and object in bringing it about.

GUMMOW J: Richardson v Commercial Banking [1952] HCA 8; 85 CLR 110 is a classic case of that, is it not?

MR COLES: Yes. I thank your Honour. The payments in that case individually fulfilled the requirement for a preference, but the purpose identified was not the purpose simply of paying debt after debt after debt. It was recognised in conformity with the usual current account type of arrangement that the payments were made partly to repay a debt but also for another important purpose, namely, to preserve the ongoing relationship between the parties to maintain the subsisting debtor/creditor relationship. That meant that each individual payment was not a preference, rather, seen as a whole, it was the overall effect of the payments.

Another case to which we have given your Honours a reference, I think, which is the Court of Appeal’s decision in Torma’s Case. One may make a payment of a sum of money to a person who is a creditor without thereby in the circumstances committing a preference because the payment may be a payment which is not in respect of the debt. Those words are now brought into the statute in 588FA.

GUMMOW J: Expo is at (1985) 3 NSWLR 225.

MR COLES: Yes, may it please the Court. In the present case one cannot, as Justice Lindgren importantly pointed out, obscure or overlook or simply disregard the fact that the purpose of the payments made by NAB was to acquire from Capital the title to the equipment and a purpose of Capital in receiving the money carried with it the consequence that Capital was giving up the title to its own equipment in consequence.

Your Honours will see that the next most notable thing about the declaration the Full Court made is nowhere is that important feature recognised or reflected. Although their Honours in the Full Court surprisingly upheld the appellant’s objections to the trial judge’s failure to appreciate it was a transaction of sale and purchase, nowhere in the judgment of the majority of the Full Court is that transforming, we have described it, or that significant feature of the transaction given account in the declaration the Full Court made. The transaction, let me make plain in this case, was, so far as the immediate parties to it were concerned, a transaction of sale and purchase between the National Australia Bank and the Capital companies.

GUMMOW J: I think we are seized of that, Mr Coles.

MR COLES: Yes, if your Honour pleases. The last point really focuses really for the first time in the Full Court in an overt sense, because the trial
judge did not fasten on any particular part of section 588FF, but in paragraph, I think, 154 or 155 of her judgment Justice Gordon singled out section 588FF(1)(a) as being the basis for the payment, that is to say, that the moneys which the Capital companies had received were an amount equal to some or all of the money that the company had paid under the transaction.

Your Honours have our submissions in relation to that. If the vice of the transaction was that LSE procured, although the ground was never made out, leasing arrangements of a relatively more or less disadvantageous.....and then that, under no view of any aggregation of facts deployed in the present case could its disadvantage a loss to its creditors, the loss to itself, have been the full measure of Capital’s sale price to the NAB of the money concerned. In fact, before and after the deed and before and after the receipt by Capital of the payments in question, the balance sheet of Lloyd Scott Enterprises altered not a bit. There was no subtraction of its assets. There was no dislocation of a statutory order of priorities applicable for the benefit of its creditors. There was no dissipation improvidently or otherwise of any of its assets and there was no basis at all, in our respectful submission, for the conclusion that there was an uncommercial transaction of the company. May it please the Court.

GUMMOW J: Thank you, Mr Coles. Yes, Mr Harper.

MR HARPER: Thank you. Your Honours, I propose to begin by referring to some factual matters. I realise there is a summons for the extension of time to cross-appeal, but rather than move on that now, it might be better for me to go - - -

GUMMOW J: What is your attitude to that, Mr Coles?

MR COLES: We can deal with it.

GUMMOW J: Say that again. To the summons.

MR COLES: Yes, well, we have done submissions on it, your Honour, and we are able to. We have a concern about the propriety of the respondent’s raising one particular matter in its notice of contention because it is not the subject of previous treatment in courts below, but so far as the cross-appeal relating to the supposed preferential aspect of the matter, we fought that at trial and we can deal with it before your Honours.

GUMMOW J: Very well. Yes, Mr Harper.

MR HARPER: Thank you, your Honours.

GUMMOW J: I do not think you have got any opposition to the preference point, but you have got some opposition to the notice of contention, which does not require permission.

MR HARPER: Yes, your Honour. I will endeavour to deal with that. The first matter which I would seek to take your Honours to is in volume 2 of the appeal books at page 443 and that is of the first version of the orders made on 15 December 2000. That is the asset preservation order. Can I say at this juncture also, your Honours, that the orders that were annexed to the second deed about which your Honour the learned presiding Judge asked some questions earlier, they were, to my recollection, handed up in the Full Court and formed part of the record in that court and it is unclear why they did not make it into these appeal books, but we will endeavour overnight to obtain copies so that they can be handed up, if that is a convenient course.

GUMMOW J: No opposition to that course, Mr Coles?

MR COLES: Not at all, your Honour.

GUMMOW J: I would not have thought so.

MR COLES: We were pursuing it ourselves.

GUMMOW J: Very well. What have we got at 443?

MR HARPER: At 443, this is the orders made by the Supreme Court of New South Wales on 15 December 2000 imposing the asset preservation orders. The matter came back before the court several times until the orders were eventually discharged on 12 January 2001. That can be found at page 726 of volume 3. Your Honours will see that the orders were discharged on the same day that the second deed was executed.

KIRBY J: What do you seek to get out of that?

MR HARPER: Well, that is just to show your Honours what happened to those orders. In between those two dates – that is 15 December and 12 January – there were a number of events - - -

GUMMOW J: You mentioned the suit remained on foot, though.

MR HARPER: Yes it did, your Honour, and you will see how that - - -

GUMMOW J: So 443 is an interlocutory order?

MR HARPER: Yes, but it discharged the earlier order so the evidence shows that it placed LSE in a position where it could attempt to deal with financiers, et cetera, in the marketplace without having the stigma of an asset preservation order hanging over it from 12 January. That was part of the arrangements negotiated between the parties as disclosed in the evidence.

If I could invite your Honours’ attention first of all back to volume 2 at page 458. Now, you see this is early in the piece. It is a few days after the asset preservation order on 19 December 2000. It is an email from Katherine Foreman which responds to one from Mr Vendrell and it is the one from Mr Vendrell on the second-half of the page which is the germane one. It says that:

Lloyd-baby is in the poo . . . If we play our cards right and with a bit of luck, CFAL can be fairly well out of the really smelly brown stuff by the end of Feb.

That shows that there was intention formed at that point in time in CFAL to set in train a situation where he could somehow exit its arrangements with Mr Scott and LSE. We then jump ahead to page 589 in the same volume. Your Honours will see this is – beginning on page 588 – the minutes of an executive committee meeting of the Capital companies or certainly involving their officers, including Mr Campbell can be seen amongst the attendees. On page 589 there is visible to read, because the balance of it was blacked out or covered at least, that one of the dot points made is of the:

credit quality of our vendor book continues to improve, we were alerted just prior to Christmas of a potential default by one of our long standing vendors Lloyd Scott. There appears to be a deficiency of funds . . . This could further flush out additional exposure –

and it is another indication of the mind of the Capital companies just prior to the execution of the deeds.

To go then to volume 1, at page 140 your Honours will find paragraph 24 of the affidavit of Mr Vendrell who is an officer of the appellant’s. In paragraph 24 he records a conversation with Mr Scott on 9 January. Your Honours will observe that he says at two places at the bottom of page 140, “We won’t be doing that”, that is, giving further support to Lloyd Scott:

We would like you to take us out of the picture by paying out our rental agreements.”

Then he finishes the conversation by saying:

“I will put that to Leastec and Ferriers. I have no problem with it. We do want you to take us out of the picture though.”

Now, your Honours, if you go then back to volume 3, page 608.

KIRBY J: I know you are building up the factual picture, but could you tantalise me by telling me what the bottom line is going to be so that my mind can be playing upon these facts and these evocative emails with that ultimate destination in mind?

MR HARPER: The ultimate destination, your Honour, in the first instance, is the second deed and my learned friend has made certain submissions about what that achieved and what it meant. This material is part of the surrounding circumstances which will bear upon an answer to some of those submissions and submissions that we will make about what various aspects of the deed are meant and what it was designed to achieve, and we are nearly there, too, your Honours.

KIRBY J: Is it what it was designed to achieve that is important or what, by its terms and by the application of the law, it did achieve?

MR HARPER: It is all of those things, your Honour, we will be submitting. The purpose behind it is important in working out or dealing with the submissions about the uncommerciality of the transactions or whether they were an unfair preference.

CRENNAN J: So, motive and effect, not just effect alone?

MR HARPER: Yes, your Honour, we do not think it is possible realistically to separate those in any kind of meaningful way. But, any way, at page 608 there is a file note of a meeting on 10 January. Your Honours will see below point 20 who the attendees were. They included Mr Campbell and Mr Vendrell from Capital Finance and representatives of other financiers of Lloyd Scott. You will see that in the first box on page 608 in the second last paragraph it says “Berne”. I think it should be “Bernie” meaning Bernie Campbell from Capital:

mentioned to LS that their research shows that there is possibly more double financed deals.

Then if you over to page 609, you will see in the second last paragraph in the bottom of the box “BC” meaning Bernie Campbell:

said he used the words embezzled and fraud in his discussions with LS and LS did not disagree.

GUMMOW J: The last line on 609 is nice and significant, is it not?

MR HARPER: Yes, there is that too, and that is also mentioned by Justice Tamberlin. His comments about that are recorded in the judgment of Justice Gordon as well. Then over the page in the third box it says, “BC”, Bernie Campbell, “Capital’s view”. Win to nothing”, et cetera. Just for your Honours’ assistance, the reference to Ferrier there is that there was a proposal that an investigative accountant be appointed to the affairs of Lloyd Scott. That was done, and Ferrier was the accountant, but the accountant only got partway through the exercise before it was called off. So, then, your Honours, we come to the second deed, which is at page 701 of the same volume. My learned friend has made a number of submissions about this document.

GUMMOW J: Wait a minute. Page 610, line 30, as you would expect:

Mareva function was inhibiting ability to transfer funds and hamstrung in ability to do this –

This is the setting in which all this was triggered, is it not?

MR HARPER: Not all of it, your Honour, but that was a factor. That is what I said before, that between 15 December 2012 and January these events happened, but on the 12th there is a discharge of the order for reasons that I mentioned before, which is really what this is just a reflection of, that comment there.

GUMMOW J: What is the “ME trust account” referred to in line 37 there:

NAB banking funds into ME trust account so LS can get around Mareva.

MR HARPER: “ME”, we think, is a reference to Mark Evans who is a solicitor then acting for Mr Scott and LSE.

GUMMOW J: Really? Yes.

MR HARPER: If we come then to the second deed, in our submission, when you look at the events that led up to its execution, the whole point of this document was to effectuate, in fact, revolutionise the relationship between the Capital companies, Lloyd Scott himself and Lloyd Scott Enterprises.

GUMMOW J: You said the whole object.

MR HARPER: Well, the fundamental point of it was to – perhaps the word “whole” is poorly chosen, your Honour, but certainly it was a fundamental objective of the document because, as my learned friend has pointed out, the relationship before this deed was entered into was governed by principal and agency agreements, the burden of which was to require Lloyd Scott to act, as it were, as a conduit for lease payments from end users into the hands of the Capital companies.

This document changes the landscape completely, in our submission, and what it was designed to do, at least in part, was to bring about a situation in a context where the Capital companies knew both that some equipment had been double financed and that some of it may not exist, to pass all the risk in relation to issues of title in respect of that equipment to LSE, because without this document it would still be in the position of being the undisclosed principal and would be in the position of having to take control of leases itself with end users in the event of an insolvency of LSE.

CRENNAN J: Does not that risk pass onto NAB when NAB steps into the picture?

MR HARPER: That is something I was going to come to, your Honour, but at the point in time when the deed is executed, the intention was to pass it to LSE. As Mr Vendrell said to Mr Scott, there is a way of taking the Capital companies out of the picture, to provide them, at least in their own mind – well, certainly that is the way this deed can be reasonably construed – to place the Capital companies in a much better position than they were in prior to its existence.

GUMMOW J: What do you mean by “better”. They wanted to get rid of Mr Scott bag and baggage, did they not?

MR HARPER: They did, but they wanted to do in such - - -

GUMMOW J: For commercially good reasons by the look of it.

MR HARPER: But they wanted to do it in such a way that they passed the risk in respect of title and, your Honour, that is a very significant matter because, in a sense, the whole of the appellant’s argument hinges upon this question of title. We say that the purpose of the deed, at least in part, was to take out of the play in respect of the Capital companies the risk relating to title in respect of the leased equipment because they all knew - - -

GUMMOW J: What do you mean by risk as to title?

MR HARPER: Well, they all knew that there had been double financing and that some equipment might not exist and the Capital companies did not want to be in a position where they, as it were, retained any risk from those situations by having a direct relationship with the end users pursuant to leases which certainly, events showed, in certain circumstances included equipment that did not exist in fact. Your Honours, my learned friend has made certain submissions about the definition of “exposure” but can I add to them and perhaps change the colour of them to some extent by the following submissions. “Exposure” is defined on page 705 and it is an aggregate amount under the leasing agreements.

GUMMOW J: An “aggregate amount at any given time”.

MR HARPER: Yes, “at any given time”, that is right, your Honour:

plus all amounts otherwise owed by LSE or Scott to CFAL or Capital Corporate pursuant to this deed or any other agreement or deed between the parties –

So the exposure was not at any point ever intended to be simply limited to the exposure as it referred to leases with end users. It was always intended to be wider than that. The reference to “any other amounts” - - -

GUMMOW J: Does the evidence disclose what was caught up, if anything, by that final part of that definition?

MR HARPER: The answer, is to some extent, your Honour – if your Honours go back to the first deed which was executed on the same day and begins on page 686, your Honours will see that this deed is between the Capital companies, Lloyd Scott and Lloyd Scott Enterprises and Leasetec. Most of it is not presently relevant. If your Honours go to clauses - - -

GUMMOW J: Leasetec is not a party to the page 703 document?

MR HARPER: No, that is the second deed, your Honour.

GUMMOW J: I know.

MR HARPER: No, that is right, it is not a party to the second deed, but it is a party to the first deed. But at page 693, clauses 4.2 to 4.4, 4.2, for example, obliges Lloyd Scott Enterprises to “pay all stamp duty and goods and services tax on this deed” and it creates an indemnity in favour of the Capital companies in respect of such an obligation. Clause 4.3 obliges Lloyd Scott Enterprises and Lloyd Scott to “bear their own costs . . . as well as the costs of the CFAL, Capital Corporate and Leasetec on an indemnity basis” et cetera.

CRENNAN J: One question, I suppose, is whether under the definition of “exposure” at 705 there were debts other than unremitted rents, which I think was Mr Coles’ answer when I asked him whether there were debts, other than those pursuant to the leasing arrangements. As I recollect it, his answer was there were some unremitted rents, in relation to the leasing arrangements, but not other debts, of course, that question bearing on debtor/credit relationship.

MR HARPER: Yes, your Honour, very much so. To deal with that question then the position as at 12 January - and I will have this checked - was that there were amounts owing by Lloyd Scott Enterprises itself as a lessee to the Capital companies. It had some leases of its own. That is the $323,000 figure referred to in (a).

CRENNAN J: Where there were no sub-bailments to - - -

MR HARPER: No, they were the end user, in effect, and I think that there were some other debts, but I will just have that checked. But when you read those clauses in the first deed and the definition of exposure in the second deed, we say you are driven overwhelmingly to the proposition that what was created by (a), (b), (c) and (d) of 4.1 was not some payout of leases arrangement as had always been contemplated under the principal and agency agreement, but they were pure obligations to paying money.

GUMMOW J: How do you get that as a matter of construction?

MR HARPER: Because, your Honour, there is nothing in the deed itself which talks about title at all and the reason for that would be that in fact the Capital companies did not want title to be dealt with by this deed. They wanted to be in a position – one might infer from the evidence that I have already taken you to – to keep title to any goods so that they could deal with third party financiers as need be. They certainly wanted to be in a position to get all the money paid without having to worry about title because of the risk of double financing and of goods not existing.

So what was purported to be created here was a simple obligation to pay exact sums of money on certain dates without any sort of qualification or problem connecting it to the title to equipment pursuant to leases. The fact that the definition of the exposure is an aggregate term which must involve amounts of money which did not cover lease arrangements militates very strongly in favour of that type of construction.

KIEFEL J: Why would they be worried about positions with title after receipt of payment?

MR HARPER: Well, I accept that if you got to 11 May and every last cent had been paid, their concern would go away. But until that point was reached - - -

KIEFEL J: Well, is that not the point they were attempting to achieve, though?

MR HARPER: Well, that they did not want to be in a position along the way of having to argue about any of those sorts of issues.

KIEFEL J: How does that square with the Capital companies’ willingness, apparently, to give invoices to the NAB for the goods?

MR HARPER: In our submission, your Honour, there is no tension between that at all because - - -

KIEFEL J: Just slightly more comfortable when they gave the invoice than they were when they made the deed?

MR HARPER: Yes, your Honour, and they knew the money was coming from the NAB, and in fact there is other evidence I can take you to in the evidence of Mr Campbell that there was always a perception that a third party financier would probably be - - -

KIEFEL J: But they would know they are making representations to the NAB when you say they have worries about title?

MR HARPER: That is right, your Honour, but that does not necessarily mean they did not do it. Whatever the truth or the reality of that situation as between NAB and Capital, in our submission, that does not change the force or the construction of 4.1 that we are urging.

GUMMOW J: What is your construction of – it is not just of 4.1. Barristers always love construing clauses. They do not like construing deeds. Now, how does 4.1 fit in and what do you say reading it all as a whole it means and to what extent – is your submission hitched to emphasis upon the concluding words of the definition of “exposure”, namely, “plus all amounts”?

MR HARPER: The elements in the definition of “exposure” that we focus on are “aggregate at any given time . . . plus all amounts otherwise owed”.

GUMMOW J: It seems to me as a matter of construction of 4.1, if one is going to look at it closely, (d) gives the game away against you, does it not? It is “the balance of the Exposure”. That suggests that what has gone before may be part of the exposure.

MR HARPER: It may be, your Honour, but there is no possible way – certainly in respect of (a), (b) and (c) of dividing up - - -

GUMMOW J: No. You either do or do not say it hinges on “Exposure”. To the extent that it hinges on the definition of “exposure” you then say, well that is expansive, because of the second part of it. If you throw away the definition of “exposure” what have you left to construe 4.1?

MR HARPER: I accept it is not possible to construe 4.1 without a reference to “exposure”.

GUMMOW J: To be specific, to the assertion that (b) and (c) are no more than a bare covenant to pay a sum certain on or before a particular date, full stop. So you just sue on the covenant – that is it.

MR HARPER: Yes, your Honour.

GUMMOW J: Mr Coles’ submission is that the parties were about a lot more than that.

MR HARPER: Yes, I know it was, your Honour. That is the construction that they have always contended for. But we say, when you look at the circumstances leading to the deed and all of its terms, but particularly 4.1, the idea of this was to bring about a situation where all exposure of the Capital companies, whether it had anything to do with a lease or not, was to be paid out by Lloyd Scott which was a situation which had never appertained prior to the deed being entered into.

One available construction is that the whole intention in respect of title, which is something that the appellants focus on, was that Capital would, in effect, keep that for itself and there would be no argument about its entitlement to do so at least until the very point in time at the end when all the exposure – every last cent had been paid.

Whilst that might seem to be an extreme construction, in our submission, this demonstrates or underlines the uncommerciality of the agreement – that the purpose of 4.1 was to bring into existence covenants to pay certain amounts of money and put Capital in a position where it could keep the money and not be obliged to transfer anything to LSE.

GUMMOW J: What content do you give this word “commercial”? These parties, all of them, would have been shocked to be told they were not engaged in a commercial activity when they had the meeting and produced that memorandum you took us through. They were ducking and weaving to accommodate their respective conflicting commercial interests as best they could.

MR HARPER: Yes, your Honour. But for the purpose of looking at the agreement in the context of the avoidance provisions, the question is whether it is uncommercial within section 588FB. The fact that people duck and weave is, in fact - - -

GUMMOW J: That is right. So you get some question of value, do you, undervalue? Is that what colours it?

MR HARPER: Professor Keay says that is at the heart of the section, but when you look at the Harmer Report and then the explanatory memorandum, whilst undervalue is certainly - - -

GUMMOW J: What do you have if you do not have that?

MR HARPER: I am not saying you do not, your Honour.

GUMMOW J: This is, after all, all about getting assets to be distributed in a winding-up.

MR HARPER: I am not suggesting you do not have undervalue as part of the underlying purpose of the section, but at the end of the day one does look at the section. It might be text, context and purpose, but one does - - -

GUMMOW J: It is all about restoring value to what should be the subject of the insolvent administration, is it not? That is what it is all about.

MR HARPER: Well, when you say “all about”, your Honour, that is certainly a purpose, but it is - - -

CRENNAN J: Section 588FF underscores the point the presiding Judge has just made, (a) and (c) in particular.

MR HARPER: Yes, but to answer your Honour’s question or comment - - -

CRENNAN J: That is to say, there is a restorative dimension to the types of orders that can be made which will correlate to the benefit.

MR HARPER: Received by a creditor? Is that what your Honour means by benefit?

CRENNAN J: No, I am saying that the orders that can be made, if you look at 588FF, the orders which can be made in relation to an uncommercial transaction may only be for restoration in relation to part of the moneys which were attached to the transaction or flowed from the transaction.

MR HARPER: That is certainly clear from the terms of the section, I do not disagree with that, your Honour, but the way it works is, we submit, you identify the transaction, you apply FA or FB, depending on what you want to contend. You then get to FE, which says those transactions become voidable, not void, just voidable and then that enlivens the powers and discretions of the Court under FF to make orders the Court thinks are appropriate in the circumstances, but it is quite possible in those circumstances to have a transaction which could even be got to the point of being voidable either as un unfair preference or as an uncommercial transaction. The Court might not exercise its discretion to make any order. That is a significant difference to the way the old system used to work to the way 5.7B works, in our submission.

GUMMOW J: It does not say the Court may declare anything.

MR HARPER: No, but there is no reason why the Federal Court’s ordinary powers to make declarations should not be brought into play, if the order that has the bite in it, that is the order for payment, is the one that is made under FF.

GUMMOW J: The alternative construction is that this is the creation of a new species of jurisdiction and the new species of jurisdiction is as of a whole, that is to say, the making of one of these orders is an integer in the very jurisdiction itself. Of course you could make the declaration, I suppose, under the general powers, but you would not make it unless it was going to have attached to it, the making of an order. If you have made the order, it is probably pretty apparent that you are doing it because it is voidable. But you see the point? You say “may make” is just some sort of discretion, which is the last carriage in the train. It may be more than that. The making of one of these orders is of the essence of this jurisdiction that is being created. It is new. It did not exist before. It is a new creature.

MR HARPER: Yes, your Honour, but, with respect - - -

GUMMOW J: This new creature has this characteristic which gives content to the meaning of “voidable”. I think that is what is put against you.

MR HARPER: Yes, your Honour. I might come back to that, if your Honour please.

GUMMOW J: All right.

MR HARPER: Let me then just complete what I was saying about the second deed, just to emphasise something which I think follows from a question asked by her Honour Justice Kiefel before lunch, and that is that there is no mechanism in this document for the provision of such things as payout quotes or anything of that sort by the Capital companies to LSE for the purpose of effectuating any of the payments in (a), (b), (c) or (d), which is another matter that we point to.

Your Honours, if we go then to the question of the identification of the transaction, my learned friend, Mr Coles, has taken you to some relevant passages in Emanuel. Let us take a moment to return to the decision in Kalls.

GUMMOW J: What is the citation?

MR HARPER: That is in [2007] NSWCA 191; 63 ACSR 557.

GUMMOW J: Yes.

MR HARPER: Now, the decision of Justice Giles beginning at paragraph [103] on page 577, his Honour deals with Re Emanuel and mentions the concept of the composite transaction. What I wanted to emphasise was that Re Emanuel spoke about a unifying purpose in the composite dealings that comprise a transaction. That is taken up, in effect, by Justice Giles. He says at the end of [104] at point 40:

It will be a question of fact, involving an evaluative judgment again having regard to the nature and extent of involvement, whether the particular composite transaction is a transaction of the company.

So, your Honours, the composite transaction, which can be a difficult concept, but the way through it is through this concept of unifying purpose.

GUMMOW J: But is not what is going on here giving some work to the words “of the company”?

MR HARPER: Yes, it is. I will come back to that factually, your Honour. We say the facts justify the conclusion that that is the right preposition as applying to the position of LSE, transaction of LSE, for reasons that I will cover. But just to make one other point, if your Honours go to the reasons of Justice Basten on page 601, his Honour is there finishing his discussion about the identification of transaction. My learned friend has taken you to some earlier paragraphs, but at the end of paragraph [239] he says:

The surrounding circumstances to which reference must be made to determine whether the transaction was “uncommercial”, “insolvent” and “voidable” need not form elements of the transaction.

So what he says there, in our submission, at least in its purport, is consistent with the idea of starting with an identification of the transaction, then you work out whether it is uncommercial or an unfair preference, and you may do so by reference to other matters. Returning to the question of the learned presiding judge in relation to transaction of the company, what the evidence discloses - - -

KIRBY J: Is that an important answer to the question Justice Gummow was earlier asking you, that if you concentrate simply on the documents there, they will often have been positively designed to establish the transaction as falling outside the protective provisions of the Act, but to give the flavour, colour and character to the transactional documents, you often have to look more widely in order to understand what they are truly getting at?

MR HARPER: Exactly, your Honour.

KIRBY J: It is a little bit like the sham issue, you know.

MR HARPER: I would not disagree that it is a little bit like it, your Honour.

KIRBY J: But it does not need us to go into that territory.

MR HARPER: No, that is right.

KIRBY J: But the fundamental point is that for the purpose of achieving the purpose that Parliament has enacted, you do not just focus your eyes rigidly on the transactional documents because that can lead you into error.

MR HARPER: And, in fact, it would be an inducement, at least by implication, to people to set their affairs in such a way that that would be the outcome in many instances.

KIRBY J: It must be inferred that that is what people do and that is what Parliament would know when enacting the provisions that are here in question.

MR HARPER: Yes, your Honour. To make my point, can I take the example of the Lemington Coal Mines, and if your Honours will just pardon me one moment, I will get these references in order.

KIRBY J: What is the citation of that case? This is the instance in the - - -

MR HARPER: It is in the facts, your Honour, yes.

KIRBY J: Yes, that is right. Where do we find that?

MR HARPER: The starting point, your Honour, is if you go to appeal book 2 at page 440. Your Honours will see that at 440 and 441 are the terms of the lease between LSE and Lemington Coal Mines and, could I just ask your Honours to look on page 440 under the heading “Serial Number”, and I know one risks wading into excruciating detail, but could you just make a note of the serial number of the first piece of equipment, the last four digits will do, 6721, as a reference point. Your Honours, if you go to 441, will see the standard terms and conditions of all the end user equipment leases between LSE and the end user. Your Honours will see – and the writing is very small – that clause 1 says:

This is a Hiring Agreement. As between the parties hereto the Equipment always remains the property of Lloyd Scott Enterprises (hereinafter referred to as L.S.E. –

et cetera. There what follows are some fairly - - -

GUMMOW J: Those words “As between the parties hereto” obscure the reality, do they not?

MR HARPER: They do, your Honour.

GUMMOW J: So it is some sort of estoppel or some sort of inter partes?

MR HARPER: Well, it may very well be that if a dispute arose between an end user and LSE, these terms could be used by one or other party as some kind of estoppel in relation to title, but we are not in that territory in this case except by way of observation.

If your Honours then go to volume 3, page 855. Now, your Honours, this is the “PAYOUT QUOTE” or one of the copies in the appeal books of it in relation to Lemington Coal Mines, and your Honours will see that there are six items of equipment set out in that tax invoice. According to the schedule attached to our written submissions and the evidence, the first three items of equipment, including the first one, 6721, which I invited your attention to in the earlier document, those three items did not exist.

GUMMOW J: When you say “did not exist”, is the inference that that was the result of what?

MR HARPER: The fraudulent activities of Lloyd Scott and Lloyd Scott Enterprises, and of course, at the time this document was produced, in a general sense, the appellants were aware of that activity.

HEYDON J: Take Lemington Coal Mines Pty Ltd. They signed, did they not, the document that begins on page 440 of volume 2 – Peter Kane?

MR HARPER: Yes, your Honour. That appears to be right.

HEYDON J: Peter Kane would not have signed, presumably, unless he thought his company was getting physical possession of those three items.

MR HARPER: Well, your Honour, I do not know. That is one available inference, but there is affidavit evidence in relation to this very equipment.

HEYDON J: What is the evidence that those three machines did not exist?

MR HARPER: It is in volume 1, your Honour.

GUMMOW J: There may be a question of dates.

HEYDON J: As to error, you would have said.

MR HARPER: In volume 1 at page 58 your Honours will see the reference in paragraph 17 to annexure A and then 17.1 and 17.2.

GUMMOW J: Who is the deponent?

MR HARPER: The deponent is – this can be found on page 55 – Shaun Herbert, who was a contracts manager who had been employed in the past by Fuji Xerox between the years 1996 and 2004. What he gives evidence about is a system of recording serial numbers.

The burden of 17.2 - and you will see the first one (a) is 6721 – the burden of that paragraph is that there is no record of any of those items of equipment existing. This evidence was all uncontentious. So to go back to the question of his Honour Justice Heydon, the fact that Mr Kane signed the document, in our submission, does not necessarily mean that he actually saw any of the equipment. He may have just executed it in an office or in some other circumstances. All I am saying is that your Honours cannot infer that the equipment existed by reason of the fact that he signed the lease.

HEYDON J: I just think we have to be careful. No doubt Mr Scott has to accept a fair bit of abuse, but I am not sure that the Mr Kanes of this world have to accept it.

MR HARPER: In the evidence before the court, Mr Scott is the only one who was convicted of any fraud.

KIEFEL J: But your point is that this equipment did not exist. It is not that there was any double leasing on this case? Is that the LSE lease that Capital Finance was actually as agent for Capital Finance?

MR HARPER: In respect of Lemington Coal Mines, yes.

KIEFEL J: I am sorry. What is the point then about the equipment not existing so far as concerns the transactions you have identified in Capital Finance.

MR HARPER: That goes to the point about what the benefits or detriments were and what has been sold here by Capital purports to be six items of equipment, but in truth only three of them existed.

KIEFEL J: How does that impact upon LSE?

MR HARPER: It is relevant to the argument that Capital makes, that it is somehow being disadvantaged unfairly by the order for full disgorgement of - - -

KIEFEL J: Whether it exists or not, it has paid for it one way or another, has it not?

MR HARPER: Your Honour, it is that last step that does not necessarily follow, in my respectful submission.

KIEFEL J: Was this gone into in this sort of level of detail at trial?

MR HARPER: When you say “this detail”, these factual matters - - -

KIEFEL J: You seem to be going way behind the transactions relied upon. Now we are looking into whether or not Capital actually paid for items. We are way off the mark that the Full Court dealt with, are we not?

MR HARPER: No, not necessarily, your Honour. We are really looking at what Capital gave away.

KIEFEL J: It sounds like we need an audit, not an appeal.

MR HARPER: God forbid, your Honour. No, that is not necessary - - -

KIEFEL J: That is what you appear to be taking us through.

MR HARPER: Your Honour, I know that the detail does seem to be a little excruciating, but it all falls into place, with respect.

KIEFEL J: But forgive me, if you would not mind just stating again for my benefit, the point is, in relation to the question of the complaint Capital is making about how it has paid for items but they do not exist anyway, so query, and we are left at that point, I think, query, where does that leave Capital? I am not sure where it leaves us, but it leaves a question mark, that is as far as I got with your point.

MR HARPER: The complaint made by Capital is that it sold equipment to NAB, got paid for it and has been ordered to disgorge the entire proceeds and that complaint has to be assessed in light of the fact that some of the equipment, at least, which it purported to sell did not exist. So when it is complaining that there is an anomalous result by the application of the avoidance provisions here, that is a factor that has be taken into account and just how it gets taken into account we - - -

KIEFEL J: It is difficult, as you say, because you do not know whether or not they have paid for it in some way – whether they have paid for it probably on LSE’s documentation. That is the missing element, is it not, one way or the other?

MR HARPER: It is. There is no evidence about what happened at the point in time where the Lemington Coal Mine lease was entered into about what Capital paid or did not pay.

GUMMOW J: Is there any evidence, is there, that this blue chip organisation was paying money on leases of photocopiers that did not exist? Why would they do that? I mean, if there was a clear finding of fact to that effect by the primary judge, well, that is one thing but there is not, is there?

MR HARPER: No, he does not make any finding - - -

GUMMOW J: It is a big thing to try and get – would the Full Court make it?

MR HARPER: No, but all this evidence was put to both the primary judge and to the Full Court.

CRENNAN J: I mean, there might be defects in the data collection systems at Fuji. That is one possible inference. It has been known to happen.

MR HARPER: Yes, but there was no evidence to suggest that was the case and no questions were asked of the Fuji officer to suggest that.

KIEFEL J: When you say it was put to the court, this always confuses us a little. Do you mean it was in an affidavit that was before the court amongst the bundles of documents or was it identified in detail in submission and the point made?

MR HARPER: Every piece of equipment that this evidence, on the balance of probabilities, demonstrated did not exist was drawn to the attention of the Full Court.

GUMMOW J: Yes, but did the court make a finding about it?

MR HARPER: No.

GUMMOW J: So this is a notice of contention point, is it?

MR HARPER: Yes, your Honour.

GUMMOW J: How much longer are you going to need, do you think, Mr Harper and Mr Coles?

MR HARPER: I will be more than five minutes, probably another hour or so, your Honour.

MR COLES: Five minutes so far, your Honour.

GUMMOW J: You have to deal with the cross-appeal.

KIRBY J: Your five minutes is a very unreliable estimate.

GUMMOW J: We will hear the next appeal not before 11.30 in the morning, but finish up the time you have now, Mr Harper.

MR HARPER: Yes, your Honour. Just going back to the point about whether the Full Court made a finding, with respect, we would submit that they did not have to make a finding about that. They refused the appeal and got us up, effectively, on other bases.

Just to finish off what I was going to take your Honours to, if we then go to page 978 in volume 4, this is a statement of the transactions in the office expense account of the NAB at Beaumont Street, Hamilton. Your Honours will see there are relevantly three credits with the word “Leasing” next to them on 14 February. Your Honours will see that there are three debits in exactly the same amounts on the same day and the entries next to the debits indicate in respect of which lease payout the money was paid, so there is Central Coast, Lemington and Gosford. Your Honours will see that the amount in respect of Lemington is $929,927. If you go back up to the credit entry for that amount, you will see there is a long series of numbers beginning with seven zeros and then there is 527126371 - - -

GUMMOW J: You say this is one of the fictional ones.

MR HARPER: No, I am just tracing how the money got into the suspense account, your Honour. Those numbers are then reflected in volume 3 at page 886. Your Honours will see at 886 it is a customer statement. The contract number shows that this is liked to the Lemington Coal Mines debit and credit. It is 527126371, as appeared on the office suspense account statement and the point I wanted to draw your Honours attention to is that there is a draw down of $1,028,922.92 on 14 February. What happened was, this debit account, in the name of Lloyd Scott Enterprises was created on 14 February and it was drawn down and the payout figure from the capital tax invoice was then credited, in effect, from this account. That is the practical effect of it, on the same day in the office suspense account and then paid out as a debit to Capital.

So the substance of this payment, and they are all in the pattern, was that a liability was created in favour of NAB against LSE in order for money to arrive in the office suspense account to then be paid to the Capital companies. We say, in effect, the money came from LSE because this liability under this lease finance debit account also formed part of the general liabilities of LSE to the NAB.

KIEFEL J: That makes the NAB transaction uncommercial, but we are not interested in that.

MR HARPER: Well, not necessarily, your Honour. But we are not interested in it, but it does not necessarily make it uncommercial either, with respect.

CRENNAN J: LSE always had a conduit function with all these arrangements though, did it not, in relation to both NAB and Capital? In other words, it was a bailee until the residuals were paid and the end customer was the sub-bailee always?

MR HARPER: In relation to the arrangement with Capital prior to the second deed, that may have been the case. The relationship with NAB is certainly under the master lease agreement LSE was the bailee. Whether or not there was then a sub-bailment to the existing end users may be a matter of slightly less clarity.

CRENNAN J: Under the NAB arrangements?

MR HARPER: Yes, your Honour, because the terms of the NAB master lease agreement, as Justice Lindgren noted, are not apt for a sub-bailment. I note the time. Is that a convenient time?

GUMMOW J: Is that a convenient time? Yes. The Court will adjourn until 9.15 am tomorrow to dispose of some special leave applications and we will resume this appeal at 10.00 am. The next appeal will be not before 11.30.

MR HARPER: May it please the Court.

AT 4.18 PM THE MATTER WAS ADJOURNED
UNTIL WEDNESDAY, 6 AUGUST 2008