Airservices Aust v Ferrier

[1995] HCATrans 311

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney   No S80 of 1995

B e t w e e n -

AIRSERVICES AUSTRALIA

Appellant

and

IAN DOUGLAS FERRIER and DESMOND WILLIAM KNIGHT

Respondents

BRENNAN CJ
DAWSON J
TOOHEY J
GAUDRON J
McHUGH J

TRANSCRIPT OF PROCEEDINGS

AT PERTH ON TUESDAY, 24 OCTOBER 1995, AT 10.07 AM

(Continued from 23/10/95)

Copyright in the High Court of Australia

BRENNAN CJ:   Yes, Mr Jackson.

MR JACKSON:   Your Honours, may I indicate the course that I propose to follow in relation to the matter and that is that I will be generally following our outline of submissions but I wish to make some observations in the course of doing so and may I proceed to do that?  Your Honours, as we seek to say in paragraph 1 of our outline of submissions, the starting point for identifying any legislative policy in relation to preferences ‑ if I could use the expression “preferences” for brevity rather than complete accuracy ‑ is to be found in section 122 itself.  Section 122 read, of course, with two supplementations, as it were; the first is in the context of the legislation as a whole and, secondly, reading section 122 itself as a whole.

Your Honours, in relation to the first of those matters I say, I say, read in the context of the legislation, because the legislation does demonstrate, in our submission, that to speak, for example, of section 122 being intended to effect equality amongst creditors, is to give only, in a sense, part of the picture.  It is certainly part of the picture, but it is not the complete one.  What I mean by that, your Honours, is this, that, of course, not all creditors are treated equally by the Act, and there is priority of payment provided for by the Act, and the legislature has chosen some classes of obligations as being those which are to be first paid out of the available assets in the liquidation.  They include, your Honours, a variety of matters, and I leave aside costs and expenses of the liquidation and prior administrations, but they include such matters as cases thought to be deserving of special consideration by the legislature, such as claims for unpaid wages, injury compensation, superannuation contributions and matters of that kind.

Your Honours will find the relevant provisions in section 556(1) of the Corporations Law.  I do not think your Honours will have a copy of that but your Honours will see that provisions are to the effect which I have stated.  For a company to continue carrying on business in circumstances where it is unable to pay its debts as they fall due may disadvantage those persons as well as disadvantaging other creditors.  Indeed, that is so as this case demonstrates, because in the material that was before the primary judge what appeared was that by the time the company went into liquidation, it had come to owe, and still owes and will continue to owe unless the liquidator is successful in this case, more that $3 million to its staff in wages.

If one is speaking about the kinds of competition that are to be observed in relation to the position of creditors, it is not quite the case ‑ and I say so with respect ‑ to say that the only competition is competition between unsecured creditors; unsecured creditors of the last class.  What one has to look to see also is that the Act is intended to seek to ensure that there is money available to pay those to whom it is given a statutory priority.

That is the first thing, your Honours.  The second thing is that one has to read section 122 itself as a whole, and if one goes to the terms of section 122 ‑ and I invite your Honours to do that ‑ what one sees is that one starts, of course, with the fact that the provisions select transactions ‑ and again, your Honours, I use the term “transactions” as a compendious description of the various matters referred to in the opening words of section 122(1) ‑ which occur in a specified period, namely six months.  That period, your Honours, might have been three months, it might have been a year, but it is the period the legislature has chosen as six months.  But in relation to that period, your Honours, no distinction is drawn between debts, for example, incurred before that period but paid during it and debts incurred during the period and also paid within it.  In fact, both occurred here.

Now, your Honours, section 122(1) then requires that at the time of the transaction in question the company has been unable to pay its debts as they fell due.  Your Honours, that is the assumption on which the provision operates, namely that the company is unable to pay its debts as they fall due, and it is immaterial at that point whether the creditor, or indeed the debtor, knew of that fact.  Your Honours, the second feature then is that one has to seek to resolve, or perhaps reconcile, two concepts that were adverted to yesterday.  The first is the expression “having the effect” et cetera, which your Honours will see in section 122(1).  The second is the provisions of section 122(2), supplemented by subsections (3) and (4).

Your Honours, could I go first to those.  Section 122(2)(a) is important because its words provide a specific but limited exception ‑ “exception” might not be perhaps the most exact description of it, but it is a convenient one ‑ to the operation of section 122(1) in what one might have thought was really the very common, the very normal case, of the regular supplier of goods.  That is, if one looks at the words used by section 122(2)(a) in circumstances that represent the ordinary course of business.  Your Honours, I do not mean to convey, of course, that that is the extent of the operation that the ordinary suppliers ‑ if I can use that expression ‑ are the only persons covered by 122(2)(a), but the words of 122(2) are very apt to describe persons who are, to use a neutral expression, regular suppliers of goods and services to a company.

BRENNAN CJ:   What is the meaning of “in good faith” there, Mr Jackson?

MR JACKSON:   Well, your Honour, I could start perhaps from the negative side of it,  Your Honours will see in subsection (4)(c) that it is not in good faith if made under the circumstances there referred to but, apart from that, your Honour, it would seem to be really to ‑ your Honour, perhaps it reflects, in a sense, no more than the obverse of the proposition referred to in subsection (4). 

Could I say then, going to subsection (4), that a payment will not be one that falls within subsection (2) if it be that the payment is made in the circumstances there referred to.  Your Honours, they are the circumstances that refer to, amongst other things, knowledge or means of knowledge, to put it shortly.  Your Honours, a person who establishes the matters referred to in section 122(2)(a) ‑ and I put it in that way because of the provision of subsection (3) which allocates the burden of proof to that person ‑ will not be held to have received a preference, priority or advantage by payment of the person’s debt in the circumstances which, ex hypothesi, exist, namely that there is not enough to pay all.  If you establish those things, even though you were paid in full, you do not obtain a preference, priority or advantage.

But, your Honours, in the light of the presence of the specific provisions of subsections (2), (3) and (4), and the words used in those provisions, “in the ordinary course of business” et cetera, what we would submit is that it is a possible, of course, but, in our submission, with respect, not the better, view of section 12291), to say that the term “having the effect of giving a preference, priority or advantage” should be given a meaning which would exclude even cases where a person could not satisfy the terms of section 122(2).  What I mean by that, your Honours, is really that if one has a situation where a person is a person who could not and, as in this case, did not attempt to, satisfy the requirements of section 122(2), then it seems odd, we would submit, that such a person is able to say that even though they have been paid in full in respect of things that are, admittedly, debts, even though they are not able to say that they receive them in good faith in the ordinary course of business, but they are yet able to say that they received no preference, priority or advantage by the payment of the debts.

McHUGH J:   Is this an attack on the running account doctrine?

MR JACKSON:   Yes, your Honour.  Could I say two things about them ‑ I will come to it a little later.  The first is, as indeed my learned friend said, what the running account doctrine exactly is is a matter of some debate perhaps.  There seem to be certainly two aspects that can be described broadly as being the running account notion.  One is the entire transaction concept, and your Honour, there is really no difficulty with that.  As in any other context one has to look to see what the transaction is and one does not take a part only of the transaction if there is another part that in truth gives it its true character.  But, as to the other part of it, your Honours, what we would say is that it really should be treated as being simply a case where one has to look to see whether, in fact, a debt was paid.  If the debt was paid and in circumstances where there is nothing to take away that character from it, then it falls within section 122(1), and the remedy is not by creating some doctrine such as the running account, and I do not mean that in the slightest way offensively, because all that one does have really is two opposing judgments in a sense, Queensland Bacon and Rees.  One of them has been followed and the other not.  I suppose that s the simple situation.

McHUGH J:   Section 95(2) is the equivalent of 122(2), if I remember rightly in the old Act.

MR JACKSON:   Yes, but it does have considerable difficulties, in our submission.  So, your Honours, yes, it is an attack, or else an attempt to confine it, your Honour, and your Honour will see in ‑ ‑ ‑

TOOHEY J:   It is not so much an attack, is it.

MR JACKSON:   No, what does it mean, your Honour?

TOOHEY J:   I mean, where it strikes at the running account concept is if the running account is constantly running behind.  I mean, if you have got a running account where payments are made more or less commensurate with debts incurred, then I suppose there is no reason why you could not bring yourself within subsection (2)(a).

MR JACKSON:   Your Honour, that is what we say really.  It is a question of identifying what happened.  If when one looks as the facts what one sees is that something that was a debt was paid ‑ and, your Honours, that is important in this case, because it is clear, we submit that the payments were made here in respect of specific debts.  If one sees that the debts were paid, then that is the trigger for bringing into play section 122(2)(a), and you either fall within that, or you do not.  If you do not, of course, then you have to prove as an unsecured creditor, as 122(5) says.

McHUGH J:   Would section 122(2)(a) cover the case where, say, an oil company delivered petrol on the Thursday, got a cheque on Friday from the reseller not for the Thursday delivery, but for the account three months beforehand?

MR JACKSON:   Well, it might, your Honour.  It would depend ‑ your Honour, I do not mean to be more evasive than usual, if I can put it that way, in seeking to answer that question.  What I am seeking to say is that it would depend on a couple of things, but principally what was the ordinary course of business, and that is where one sees, your Honours, this debated over great length at both levels of Queensland Bacon and Rees and the several cases that go to make that up, where the Hennessy’s Self‑Service Stores arrangements blew out and then improved, and so on.  It just depends on what the ordinary course of business it.  And, your Honour, one would expect that where one has regular dealings with a supplier, then in most cases it should not be difficult for the supplier to satisfy the requirements of section 122(2)(a).

GAUDRON J:   Unless, of course, as will be the case in most of these cases, the man is not paying his debts as they fall due.

MR JACKSON:   Yes, your Honour.

GAUDRON J:   So the effect you give subsections (2) and (4) together is, in effect, that no supplier could ever be party to somebody’s trading out of debt without receiving an advantage?

MR JACKSON:   Well, your Honour, if I could just say, it does not really go quite as far as that, perhaps, because it must depend on what the course of business is a bit.

GAUDRON J:   But the “good faith” definition is the one that seems to be critical.

MR JACKSON:   Yes, your Honour ‑ perhaps if I could just start back a bit.  What I am seeking to say is this:  the condition of operation and effect ‑ the condition on which section 122(1) comes into play is that, as a matter of objective fact, the company is unable to pay all its creditors.  So that is the situation.  Now, the way in which section 122(2)(a) then works is that if someone, in fact, is paid in full, and paid a debt, of course, then that person can keep it if they can demonstrate what is in 122(2)(a).  Now, the concept of “good faith” is one that is given a statutory content by subsection (4) and, not surprisingly, your Honours, because if one looks at the history of the provision I will come to it in just a moment, not surprisingly it looks to the question of the knowledge of the person or means of knowledge of that person in relation to the ability of the company to pay its debts. 

Now, your Honour, if it happens then that the person, in circumstances where section 122(4)(a) would disentitle them, in fact, has their past debts paid, then they are in a situation that they go into the fund.  They have to prove.  Your Honours, that that is so is not a very surprising thing, and indeed, if I could take your Honours for just a moment to a reference that we have given a little later in our outline of submissions, and your Honours will see that it is in the last few lines of paragraph 2 at the top of page 3 of Rees v Bank of New South Wales 111 CLR at page 219 and to the observations of Chief Justice Barwick, first of all, in that case,. Now, your Honours, I say immediately that the context in which the observations were made was one in which the liquidators had made a perhaps reduced claim; they claimed for balances. Your Honours will see, if I could go to page 219, the paragraph is the one that commences at about point 4 on the page, but the part of it immediately relevant, your Honours, is the part commencing about 10 lines down ‑ or a little above that ‑ where:

as it determined up to a maximum of £7,000 per month in permanent reduction of the company’s indebtedness to the bank ‑

Now, if your Honours read the rest of that paragraph, what your Honours will see is that what is said there is that:

To make and implement, without such consultation ‑

that is, consultation with the other creditors ‑

meant that if the company failed within the statutory time, the bank must be taken to have accepted the reduction of its overdraft with at least a suspicion ‑

and so on ‑ and that such reduction as took place involved a preference, priority or advantage.

TOOHEY J:   That would almost follow from any arrangement by which extended credit was given over a period of time, at any rate.  That may be.  I am not suggesting that that is a consequence that should not follow, but it would be a consequence, I imagine, because if credit was extended regularly it might not be difficult to draw the inference of knowledge that the debtor was unable to pay ‑ or suspicion ‑ that the debtor was unable to pay the debts as they fell due.

MR JACKSON:   Yes.  What your Honour puts to me is correct, but could I just add a couple of things to it.  One is that, indeed, as the circumstances of Queensland Bacon and Rees and of the several cases involved there show, there can be a lot of variance to that and that occurred, as your Honours will see from the reasons, at the time of, I think it was, the 1960 credit squeeze ‑ what I have always called the “jolt from Holt” politically at the time.  But one of the things that was relied on was that there was a credit squeeze, and your Honours, perhaps that does not happen as much as it used to, but general economic events can also play a part, so that it may be that someone is in a position to say, “We need to have three months credit extended in order that we don’t have to do this or do that to be able to pay you now”, not demonstrating an inability to pay their debts, but so that they do not have to rearrange affairs in order to pay them. 

So, all I am trying to say, your Honour, in that rather long‑winded response, is simply to say that whilst what your Honour puts to me may be right in many cases, there may be many cases also where to arrange for an extended period of credit does not necessarily mean that the protection otherwise given by subsection (2)(a) would be taken away.  What one would have to look to see would be to see whether that could still be regarded as being either within subsection (4) or regarded as the ordinary course of business.

Your Honours, I refer also in relation to the same matter to page 232 of that case at about point 9, and your Honours will see at perhaps about point 8 his Honour said:

It is, I think, of no consequence that no individual deposit ‑

and then it continues to the bottom of the page.

Your Honours, if I could just say this, that the broad structure of section 122 is, in our submission, as we have submitted already.  If I could just go then to paragraph 2(a) of our outline of submissions, what your Honours will see of course is that prior to the Bankruptcy Act, part of the first Commonwealth Bankruptcy  Act ‑ there had been some debate about whether it was necessary to show an intention to prefer, and the decision of the Court in S Richards & Co Ltd v Lloyd 49 CLR 49 demonstrated clearly that the question was simply one of effect.

Could I take your Honours in that regard first to page 59.  Could I just say that some additional emphasis seemed to be given in that case to the fact that the words “priority or advantage” had been added in 1932.  Your Honours, first of all, at the bottom of page 59, your Honours will see in the joint reasons of Justices Rich and Dixon, the last paragraph on the page, going through to the end of the first paragraph on page 60, and page 61 of Justice Starke ‑ page 61 point 7 through to half‑way down page 62, and could I say, particularly, your Honours, that the penultimate sentence of what Justice Starke said in that passage is one that was adopted by three members of the Court in Richardson v The Commercial Banking Company of Sydney Limited in the reference that we have given at the bottom of page 1 of our outline of submissions.

The third reference is at page 63 point 4 through to page 64 point 3, and your Honours will see again there the reference to the fact that the test is completely objective and not subjective, and the ambit of the concept is emphasised, in our submission, by the fact that whilst one commonly says preference, what is spoken of as well as preference is priority and advantage. Now, your Honours, could we move then to paragraph 2(b) of our submissions, and what we would submit is that the term “preference” does mean really no more than what is there set out. That is, that the disposition or the payment has placed the creditor in a position of advantage with respect to the general body of creditors. Your Honours, we have given references to a decision of the South Australian Full Court. The case is not concerned with section 122, but it is concerned with the term “preference” when used by itself and it looks to the cases on section 122. May I take your Honours ‑ I think I only go to one passage of it ‑ and that is the first in the judgment of the Chief Justice, 4 ACLC 727, the Chief Justice at page 733, about half‑way down the left column, where your Honours will see his Honour says:

The word “preference” has a long history of use in bankruptcy and company law. 

He refers to the absence of “subjective or purposive element”, and then your Honours will see in the second sentence the passage which we have extracted.  I should note perhaps on the last page of the case, 736, Mr Justice Cox, having agreed with the other reasons, in the last few lines on the left column says that:

the payment.....was a disposition to the bank, and conferred a preference upon the bank, because the bank was entitled to use it, and did use it, to satisfy the company’s debt to the bank.

Now, his Honour goes on to say the running account cases are distinguishable, but that is all he says about them, and does not indicate the ground of distinction.  If I could go then to Rees v Bank of New South Wales 111 CLR 210. In the passage to which I referred earlier, at page 219 in the Chief Justice’s reasons, your Honours will see in that passage it is the paragraph commencing, “I agree”, that his Honour makes it clear that a preference, priority or advantage is given because one creditor was paid when others were not, and it is the passage really commencing, “Such an arrangement” half‑way through.

We refer in paragraph 2(c) of our outline of submissions to the fact that the additional words “priority and advantage” emphasise the intended width of the provision, and your Honours ‑ ‑ ‑

BRENNAN CJ:   It refers only to the reduction in the overdraft at page 219.

MR JACKSON:   Yes, your Honour.

BRENNAN CJ:   It does not refer to those amounts which were credited to the account and as against which other cheques of a trading nature were drawn.

MR JACKSON:   That is because the only claim was for reduction, your Honour.

BRENNAN CJ:   Quite, and is that not an indication of the nature of the problem?  If you are looking to the effect, you are looking to the effect as a net result after taking account of the fact that something has been received and something has been given, and it is only the excess of the receipt over the giving that constitutes the preference, priority or advantage.

MR JACKSON:   Your Honour, that really must depend very much on the circumstances, if I may say so, with respect, as distinct from being a general proposition.  What I am seeking to say by saying that, is this:  if one looks, for example, at the first of the cases, that is the decision in Richardson v The Commercial Banking Company of Sydney Limited, one can really quite easily understand what occurred in that case, because what was done was whatever the exact timing be, to put the bank in funds so that cheques could be paid.  Now, that was the nature of the transaction.  That is why one sees it referred to, for example, as being the two aspects of it being inseparable. 

So that one cannot really say in relation to that that the true nature of it is that past debt is being paid.  What is being done is to put money in to allow present debt.  Equally one sees that occur if one says that the true nature of a payment to a creditor is that it is a payment in respect of what is to be provided in the future.  Now, your Honours, no doubt there is perhaps a band, and there may be difficulties in deciding one way or the other in particular cases.  But if what one does see is that in respect of a transaction which is concluded which has given rise to a debt, a definable and defined debt, and if one sees, for example, as one does in the present case, in relation to those debts that they are accruing, that each item on them is accruing interest or penalty, whatever one likes to call it, at a particular rate, and if - and I should say in respect of each element that goes to make it up, one sees that there has already been given the consideration for which the payment is to be made ‑ already given because one is paying for events in the past ‑ and if one sees in relation to that that the payment that is being made is not a payment which is expressed to be a payment for the future, but a payment to pay a consideration already paid in the past, there is not any good reason, in our submission, why one should treat that as being other than what it is expressed to be, and that is a payment which is a payment for the past ‑ a payment which pays off past debts.

BRENNAN CJ:   Unless its effect is twofold:  one to discharge the past debts; the second to secure future credit.

MR JACKSON:   Your Honour, could I just say in relation to that that it is really sufficient, in our submission, to attract the section, that the nature of it is to do the first of those things.

DAWSON J:   Why?  Why do you look at the payment in isolation if it was not made in isolation?

MR JACKSON:   Your Honour, because it is a payment which has had the effect of giving the creditor in respect of that debt a preference ‑ ‑ ‑

DAWSON J:   If you look at it in isolation.  If you do not, it has not, because when you look at the result of the transaction, at the end of the six months, the creditor is worse off.

MR JACKSON:   Well, your Honour, that is really looking at it from the point of view of the creditor, but what one has to do ‑ ‑ ‑

DAWSON J:   That is what you have to do, because you have got to see whether he has been given a preference.

MR JACKSON:   Well, your Honour, what one has to do is to look to see whether - in relation to the creditor what has occurred is that that has given that creditor a preference, et cetera, over other creditors.

DAWSON J:   And what you want to do is to look at it through a keyhole, as it were, rather than looking at the whole picture.  That is a question of fact, at the end.

MR JACKSON:   Yes, it is, your Honour, a question of fact in relation to which one view is taken by the Full Court; one view taken by the primary judge.

DAWSON J:   Yes, but one view is a correct view and the other one was not.  You have got to decide which.

MR JACKSON:   Well, your Honour, it is a question of which one.  Your Honour, no doubt there is an element of fact and I do not suggest otherwise, but what one has to look to see, we would say, is that one has to look to see whether the payment had the effect of giving the preference, priority or advantage. 

DAWSON J:   One looks at it in a practical business sense, and not in a narrow technical sense, surely?

MR JACKSON:   Well, your Honour, there is nothing, with respect, narrow and technical in looking at payments of the kind presently in question if one starts off not with ‑ and I do not mean this offensively, of course, your Honour ‑ a preconception about their nature but simply looks to see the basis on which the payments were obliged to be made and were made.  Your Honour, if one sees, for example, that there is a statutory obligation, in effect, which keeps them separate because of the requirement that interest be paid and the ability to obtain liens in respect of any particular payment, if one sees that a payment is made in respect of particular items, that has the result of bringing to an end an obligation to pay interest in respect of that.  Now, your Honour, there is no reason why one really needs to look any further than that.

McHUGH J:   But your argument leads to this conclusion, does it not, that if the debtor is unable to pay his debts as they become due from his own money, every payment is a preference unless the payment is made contemporaneously in exchange for goods or services?

MR JACKSON:   Or, your Honour, falls within subsection (2).

McHUGH J:   Yes, but prima facie it is a preference within (1).

MR JACKSON:   Yes.

McHUGH J:   So the words “having the effect” have really got little content, have they?

MR JACKSON:   Well, no, your Honour ‑ ‑ ‑

McHUGH J:   I mean, the hypothesis is that the debtor cannot pay his debts as they become due.

MR JACKSON:   I am sorry, your Honour, but when your Honour says they have little effect, what they were introduced to do was to change the rule from being one where it was necessary in order to establish a preference that there be, to put it shortly, the intention to prefer.  So that that element was taken away and, in effect, the burden of proof in relation to it reversed.  So that one then had a situation where one looked to see simply whether there had been the preference, priority or advantage given which ordinarily would be shown by saying that one creditor had a debt paid in full, and then one looks to see if section 122(2) is made out.

McHUGH J:   But that means the only purpose of the words is to overcome the question of intention.  They do not have any other practical effect.

MR JACKSON:   Well, they do, your Honour.  The principal purpose is as I said, your Honour, that is, to overcome and to make it clear that the rule to be applied was, in effect, in Australia the Australian rule rather than the United Kingdom rule.  That is the first thing.  Now, your Honour, in determining whether there is a preference, priority or advantage by the making of the payment or the giving of the security or whatever, we would entirely accept that one has to look to see what the nature of the payment is and, for example, the entire transaction rule is an obvious thing, but that is really about it.

BRENNAN CJ:   Mr Jackson, the words of the section are, “having the effect of giving that creditor a preference”.  It is looking at the financial position of the creditor, not of the creditor’s position in respect of a particular debt, and if the effect is to be judged as on the winding up or as on the bankruptcy, and the creditor has received money on the basis that the creditor will extend further credit so that at the end of the period the creditor is worse off than he was at the time when the payment was first made, the section is not satisfied.

MR JACKSON:   Well, your Honour, the phrase does not, with respect, finish after the words, “preference, priority or advantage”.  It is “preference, priority or advantage over other creditors”.  Now, your Honour, if one has, as one has in the present case, and one has to have for there to be a section 122 case - if what one has is a situation where, in respect of a creditor there are creditors who, for example, existed at the commencement of the preference period, remained creditors throughout and whose debts have not been paid in circumstances where debts that existed at, for example, the start of the preference period.  In the case of the particular creditor were paid during the preference period, then, your Honour, in relation to those debts, in our submission, just to take those, what one sees is a situation where the creditor has had those debts paid in full.  Other creditors have not had their debts paid in full.

Now, it is true to say that the creditor who has been paid in full has given, let us say, more credit or - your Honour, “given more credit”, with respect, is a phrase that carries with it a tone, but what I am seeking to say is no more than that there have been further transactions; the transactions, of their very nature, giving rise to new liabilities.

BRENNAN CJ:   I can follow that so long as you deny any connection, which is the term that has been used in the cases I think, between the transaction of the impugned payment of a debt and the further extension of credit.  But if you take the body of creditors as being those who have provable debts as on the winding up and you are endeavouring to compare their situation with that of the creditor who was attacked under section 122(1), then you are faced with the situation of discovering what the position of that attacked creditor is on one or two hypotheses:  one, that his payment that he has received is simply in discharge of a debt that otherwise would be provable; the second, that you are looking at the running account or connected transaction in which you see that he is worse off as the result of taking payment and giving a credit.  It seems to me that that is the problem of the doctrine of running account and that is the problem of the doctrine of the connection between the transactions.

MR JACKSON:   Well, your Honour, it does in the end come down, I suppose, to a couple of things:  one is the question of what is the intended operation of the provision as a whole?  Now, your Honour, what we would seek - I do not want to labour the point - to submit in relation to it is that if one does look at the sections, if one looks first of all at the intended operation - and by that I mean the historical intended operation of section 122(1) - that it is intended to look at each payment.  You then have an exception given by section 122(2) and, your Honours, if one looks at the words of section 122(2), “payments in the ordinary course of business”, they would be the payments that one would think most often would be the ones that are the payments being made to persons with whom there is a continuing relationship; not always, but most often.

McHUGH J:Perhaps I am doing you an injustice, but your submissions seem so far to have skilfully avoided stating whether or not one looks to the actual winding up or a hypothetical winding up at the date of the payment.

MR JACKSON:   Your Honour, I have not said one because in the particular case - it is a difficult question, your Honour.

McHUGH J:But I think it is quite important in this case, because your submissions seem to straddle both worlds.

MR JACKSON:   Well, your Honour, can I say as a matter of fact, as we set out in our submissions, there were very significant debts, the same very significant debts existed throughout the period of six months, so that, as a matter of fact, it does not require resolution.  However, having said that, your Honour, there is certainly something to be said, as some of the cases do, for the view that the time at which the issue should be looked at is the time of the making of the payment.

McHUGH J:Well, I thought your submissions really compel that proposition.

MR JACKSON:   Well, your Honour, may ‑ ‑ ‑

McHUGH J:They may fall into place once you accept that proposition, but once you accept the ultimate effect, or the actual winding up, then there would seem to be some difficulties in accepting the thrust of your submission.

DAWSON J:   Could I ask you, before you answer that, do your submissions deny the application of the entire transaction in principle?

MR JACKSON:   No, not at all.

DAWSON J:   Can you give us an example of where the entire transaction principle operates.

MR JACKSON:   Yes, your Honour.  I would say that if one looked at the first of the three cases in the court, that is, Richardson v The Commercial Banking Company of Sydney Limited.  That is an entire transaction case where you can say that if one looked at the payments without looking to the circumstances to which they were connected, one could say, prima facie, these are payments which appear to be in reduction of indebtedness, but ‑ ‑ ‑

DAWSON J:   That is what you do say in relation to this, and in relation to that you must say the same thing surely, that at the time the debtor could not pay his debts, a payment was made and the net effect was that other creditors were at a disadvantage, looking at it in isolation, which is what you say you must do.

MR JACKSON:   What I was going to add to what I was saying about Richardson’s Case was this, that Richardson’s Case was one where if one were to look in isolation at the payments without regard to the rest of the material, what one would have seen, or what one might have said, was these payments are payments that are in reduction of an overdraft, but what appeared was that there was an arrangement that the payments were there to put the Bank in funds to that the manager would then pay cheques to the extent of the funds so provided.  So what one had in circumstances of that kind was that the two transactions were interconnected.  Now, your Honour, that is the sense in which I was using the term.

DAWSON J:   The arrangement here was that if the payment was made then Compass would be allowed to continue in business.

MR JACKSON:   Well, your Honour, that, with respect, overstates it, if I may say so.  The position was, at all times, that there were flights going on by Compass; Compass could choose, in effect, how many aircraft it chose to use and whatever flights it chose to fly.  Having done that, there arose, by the operation of the various provisions of the statute and of the determinations made pursuant to it, obligations to pay within the time fixed after delivery of the invoice.  When I say obligations to pay, there was an interest penalty if it was not paid within a certain number of days.  Now that applied to each of the flights, each of the charges.  Now, your Honour, each of those items together would be liable to accrue a penalty after a particular time.  What one then saw was that during the period that Compass was operating - and I will not go through the whole of the detail of it - one had a situation where it deferred during the first half of the year, it fell behind and badly behind in its payments and, as one might expect in the ordinary course of events, attempts were made to get the money from them with varying degrees of success.  Finally, by the start of, coincidentally, the preference period they were more or less up to date.  And then, during the preference period, the moneys payable in the event, every month, with new debts arising every month, after some time they fell behind.  Then attempts were made to get those moneys paid, and in due course, some were paid, some were not.

DAWSON J:   But the attempts to gain payment and the payment being made was upon the basis that Compass would continue.

MR JACKSON:   Well, your Honour ‑ ‑ ‑

DAWSON J:   I mean, the arrangement may have been less precise than other arrangements in the cases, but that is the nature of business, but nevertheless if you can see the link then that is all that you need.

MR JACKSON:   Well, your Honour, with respect, that must mean that on every occasion on which a person continues to trade, there cannot be a preference, and your Honour ‑ ‑ ‑

DAWSON J:   No, that does not mean that at all.  Certainly if the person who is paid is better off at the end, there is a preference.

MR JACKSON:   Your Honour, what I was seeking to say is, what it must mean is that, even if the parties deliberately pay particular past debt, that there cannot be a preference in relation to that, leaving aside any question of adjustments one way or the other because, your Honour, that is really what happened in this case.  All that you have is someone who is continuing to operate, paying off defined past debt.  Paying it off certainly in circumstances where what has occurred is that the steps have not been taken to bring the operations to an end; that is all it is.  That is why I say, if that is the case then there would not be really a preference, leaving aside questions of adjustment of dollars, in any case where one continues to have dealings with the same creditor, and your Honours, if that is so ‑ ‑ ‑

DAWSON J:   But then, by the same token, if you really apply your test, there could never be a case of an entire transaction, because you would look at the payment in isolation and say, well the net result of that was that this creditor was paid where others were not.

MR JACKSON:   Well, no, your Honour, with respect, that is not quite what would follow from what we would say.  I mean, what we are simply saying is that you have to, in the case - if a payment is in truth a payment for some present thing, then in truth it is.

DAWSON J:   What, you mean you bring yourself within section 122(2)(a), that is all right; well of course that is.

MR JACKSON:   Well no, your Honour, that is one thing.  What I am saying is that if one sees that there is a payment which appears to be - and your Honours, it is like anything else; if a document looks like an absolute transfer, but evidence demonstrates it is a mortgage or vice versa, one can look to the additional evidence to see what its true nature is.  That is all I am saying about it really, your Honour.  That if one has a situation where there is a payment, it does not automatically follow that it is a payment for a past debt.  I mean, one could produce evidence to show that in fact the payment was made for some other purpose.  Now, your Honour, could I just say in relation to that, that if one looks at the particular case, if it is manifest that the payments are being made in respect of past debt and to pay off past penalties, for example, then the fact that it is expected they will keep on going, and maybe hope they keep on going ‑ ‑ ‑

DAWSON J:   But any payment is a payment of past debt in these circumstances unless it is a COD payment; even then it really is, but it is taken up by the section.

MR JACKSON:   Well, your Honour, COD payment is not really a payment in favour of a creditor qua creditor, which is required by the ‑ ‑ ‑

DAWSON J:   Well, one might be able to analyse it subtlely, but it is taken out anyway, but what other payment?  It always, otherwise than in that situation, an amount is paid where the person to whom the payment is made is in the position of a debtor, it will always be in payment of a past debt.

MR JACKSON:   Well, your Honour, that is the normal case, yes.

DAWSON J:   Yes.

MR JACKSON:   And that is why the current account cases, in our submission - or perhaps I should say for example, the view of Chief Justice Barwick, really gives too much work to the words “having the effect of”, because the place that gives the benefit to, or the exception to, the person who is the honest trader as it were, is subsection (2), not subsection (1), and one does have a situation where one could have, and I do not want to labour the point, a person who knows that the debtor is unable to pay the debts and just keeps on trading ‑ ‑ ‑

DAWSON J:   That is why, I do not want to labour the point, you really have to put questions of the entire transaction aside, looking at it at the moment when a payment is made by a debtor to a creditor, the debtor owing debts to other people, that creditor has an advantage for that moment, on your argument, and in a sense it does.

MR JACKSON:   Your Honour, it depends what “entire transaction” means.  If by entire transaction one intends to cover all the running account cases, the answer to your Honour’s question is yes.  If however, it is not, and one is looking to a transaction such as that referred to in Richardson’s Case, then in our submission the answer is no.  One can, the entire transaction cases simply become, as your Honour we really say in, I think, paragraph 5 of our written submissions, that the entire transaction approach is perfectly applicable.

BRENNAN CJ:   Mr Jackson, I think you got an unanswered question from Justice McHugh.

MR JACKSON:   Yes, your Honour.  I think I dealt with part of that but not the whole.  Your Honour, could I just say that if one looks at the terms of section 122(1), what it looks to in terms is something done by a person unable to pay debts at a particular time, that is, as they become due.  The payment is made “in favour of a creditor”.  One has to look then, your Honour, to see what the time is, and as your Honour said, there are two possible times.  Probably, your Honour, the better view is that one has to look at the situation as at the liquidation or in the liquidation.

McHUGH J:I know that is the view, and that is the view that Richardson’s Case proceeds on, but the definition of good faith tends to tell against that view.  In section 122(4)(c)(ii):

knew, or had reason to suspect:

that the effect of the conveyance -

et cetera, must be the individual transaction, must it not?

MR JACKSON:   Yes.

McHUGH J:It cannot be the ultimate effect.  Now Justice Kitto perceived that in Rees v Bank of New South Wales and he said, well effect means the ultimate effect in subsection (1), but it means the effect of the individual transaction in subsection (4).  That does not seem a very satisfactory or consistent view.  I am putting that in your favour, it supports your ‑ ‑ ‑

MR JACKSON:   Yes, I understand that, your Honour.  Could I just say that the situation can be complicated factually in the sense that a company can go - the relevant date could be, to pick a date 1 January, but during that period, the six months beforehand, there could have been periods when the company was able to pay its debts in full from its own money and maybe, perhaps in those circumstances, the issue would ultimately go away, but prima facie, we would submit - and your Honour, perhaps I would like to have a bit of each, if I may, because the facts do not ultimately require resolution of the question here - but what your Honour puts to me is correct in terms of the time at which ones has to look to see whether the, for example, good faith defence is made out, because it is clear in terms of (4)(c) that that is the time at which one then has to look.

Your Honour, if one looks at, for example, subsection (2), “the ordinary course of business” one is looking at would prima facie be the ordinary course of business as at the time of the payment and, your Honours, in those circumstances there is, if I could put it this way, a lot to be said for the view that one looks to the situation as at the time of the payment.  Could I also say, however, that if one looks at the situation as at the time of the liquidation, the situation which arises then is that one does have a payment, having been made at an earlier time, but if one has a situation where at that time there are other creditors who are or remain unpaid, then that person who received the payment has in fact still obtained a preference, priority or advantage over those persons, because that person has been paid, the other creditors have not.

BRENNAN CJ:   The words in (4)(c)(ii) would be to give him a preference.

MR JACKSON:   Yes, your Honour, but the earlier words were made under such circumstances as to lead to the inference that the creditor knew and, your Honour, that seems to refer to a knowledge as at a particular time.  Now I am conscious in saying that, the words of (c)(ii) are capable of being referable either to then or to later, but if the knowledge is a knowledge which has to exist at a particular time, one seems to be looking to that time to see then what the facts were that would lead to that conclusion.

BRENNAN CJ:   Why is that not a matter of suspicion of a likely result?

MR JACKSON:   Well, your Honour, because there are difficulties as a factual thing in a sense, because it would be easy enough if one is talking about the day before the petition is presented, to put it shortly.  If one is talking about the day five months and 11 days before that, your Honour it would be very difficult to satisfy the test.  What one has to look to is the knowledge at that point and perhaps it does not add a great deal one way or the other in the event.

BRENNAN CJ:   Yes.

DAWSON J:   And the effect of (4)(c) is limited; it is only to take you out of the definition of a payee in good faith.

MR JACKSON:   Yes.

DAWSON J:   So it just leaves the ultimate question in place.

MR JACKSON:   Yes.

BRENNAN CJ:   And it does not really determine the scope of the operation of subsection (1), since it is an exception to the exception.

MR JACKSON:   Yes, your Honour.  In terms of the operation of it, for that purpose, what your Honour says is right.  Could I just say, however, that what paragraph (4)(c) does do is to say, in relation to the provision, the meaning of good faith for the purposes of (4)(2)(c) is something that is related to the basic concept that one sees in subsection (1).  What I mean by that, your Honours, is this:  if one assumes that the question of intension to prefer is removed by the words of subsection (1), all that one has to have is that in fact there be an inability to pay the debts, assuming that for the moment.  One then goes to see in what circumstances a person may retain the money that one has been paid fully, and it is at that point that the question of the knowledge in effect of the creditor is something that becomes relevant.  Your Honour, whilst it is an exception to an exception, it is something that really is a definition provision, so far as the concept of good faith is concerned.

Your Honours, could I go then to paragraph 2(d) of our written submissions, and I think in a sense I have dealt with a number of the matters that are already there referred to; could I just say some things about it?  Your Honours, we would submit as to the underlying policy that the presence of section 122(2) should be treated as providing the best indication of the legislature’s view, and that is the way in which, and the extent to which, the honest trader, as it were, is protected.  The second thing is that one has to bear in mind the question of priorities of prior creditors to which we have already referred, and the third thing, your Honours, is this, that ex hypothesi again, the company has gone into liquidation, the continued trading, or attempts to prop it up, if such they were, have failed, most of the company’s debts, including perhaps those entitled to priority, are likely, in the ordinary course of events, to have increased and, your Honours, we would submit there is no underlying social policy which militates in favour of protecting the payments made to the more frequent trader, because of that fact alone.  And, your Honours, what we would submit is that what was said by Chief Justice Barwick and by Justice Taylor in Rees v Bank of New South Wales in the passages to which I have already gone, does not support it.

Your Honours, if I could go then to paragraph 3 of our written submissions.  We set out there, and I have given your Honours the liquidator’s report without the annexures.  I wonder if I could take your Honours to that for just one moment.  What your Honours will see, if one goes to paragraph 1.1 on the fourth page of the document your Honours have, at the top of the page, your Honours will see in the last three lines that:

Compass was, at all times.....Insolvent -

during that period.  Then in paragraphs 2.1.1 sets out the payments, and at the top of page 2, you will see particularly in paragraph 2.1.2 a reference to “the Relevant Dates”; they are the dates of the payments that were made.  If I could go then to paragraph 9.1.1 on page 16, in the second paragraph, the liquidator summarises his view of there being:

a deficiency of net assets, deficiency of working capital and deficiency of cash.....Compass’ liquidity shortages were endemic -

and then what your Honours will see is the summary on page 17 in particular at 9.1.2 paragraph c, and the six creditors to whom reference is made are those set out at the bottom of page 15.

BRENNAN CJ:   What is the situation then about the payment of wages to air crew and its staff?

MR JACKSON:   Well, your Honour, I can give you the resulting situation; that was a ‑ ‑ ‑

BRENNAN CJ:   No, I am just asking you, in your argument are they all preferential payments?

MR JACKSON:   Well, your Honour, I suppose in a sense, yes; it just depends on the terms of payment, of course.

BRENNAN CJ:   Well assuming they were paid on Friday for last week’s work.

MR JACKSON:   Well, in the ordinary course of events, prima facie, they would be, your Honour, but of course it would be highly unlikely for a liquidator to take the view that they were payments which fell other than within 122(2), particularly in view of the fact that even if they were recovered their order of priorities would probably require them to be paid in full anyway.  But the answer, your Honour, probably yes; it would depend, depend on the terms of employment.

BRENNAN CJ:   It seems to raise the question of the intention of the legislature if such a result could occur and if one substituted for “employees”, “independent contractors”, who were working with the insolvent company on a regular basis.

MR JACKSON:   Your Honour, in the course of the - and I do not mean this in any way offensive - ordinary employee, if one took a flight attendant, for example, then one would expect that flight attendant’s salary to be paid perhaps partly in advance, perhaps partly in arrears.  Partly in advance, no issue arises; partly in arrears an issue may arise.  Now, your Honours, so far as it is paid in arrears, it would be mostly a fairly odd situation if 122(2) would not be thought to apply.  Very few employees would be in a position where they would not fall within the provision.

McHUGH J:I am not so sure about that in this particular case.

MR JACKSON:   Well ‑ ‑ ‑

BRENNAN CJ:   It depends upon whether the management takes the employees into its confidence.

MR JACKSON:   Yes it may, your Honour, but the second aspect to what I was saying before was that, assume the money came back, the likelihood would be that they would be paid in full anyway.  So a liquidator would have to say, this is a ridiculous thing to do to sue them, to get their money back, it would have to be paid to them anyway.  But having said that, it may not be such an odd thing in the case of persons who are paid very substantial salaries, as sometimes happens, or consultants being paid very large sums.  Now, in the case of persons being paid very large salaries, in circumstances where the company is very badly in liquidation, it may be that the circumstance would arise where something is sought to be recovered back, but of course, even in doing that, your Honour, one would still have to be faced with the question of the priority anyway.  In the case of persons who were engaged as consultants, the position may be different.  The protection is really 122(2) and the priority.

Now, your Honours, I think I had taken you to paragraph 3 and to the liquidator’s report.  What we say in paragraph 4 of our submissions is that prima facie the payments were preferences.  To get out of it one has to go to some kind of doctrine, such as that of the entire transaction or of the running account.  The way in which the issue was dealt with in Richardson v The Commercial Banking Company of Sydney Limited, may I take your Honours to that in 85 CLR.  Your Honours will see the quotation at page 129 that we have extracted.  It comes from about point 7 on the page, and what was said there was that:

where the payment forms an integral, an inseparable, part of an entire transaction its effect involves a consideration of the whole transaction.

And your Honours, if one moves on from that to page 131 at the bottom of the page, what was said in the last couple of lines was that:

none of the deposits had the effect of giving the respondent bank a preference priority or advantage -

and what is said then at the top of the page is that:

They were not, in our opinion, payments made to the bank independently of the arrangement by Price with Commins that the latter should honour cheques outstanding, but, on the contrary, they were made only to enable him to meet cheques which Price had given or was about to give.

And your Honours, if one goes on through that page, to about point 3 on the page:

But what is important here is the severability of the deposits from the payments out of the account; the payments out which were entered as subsequent, whatever the actual sequence.  It was rightly remarked -

and your Honours will see at the next sentence:

that Commins was not seeking to get money into the account for the benefit of the bank but out of it for the benefit of Price.

And your Honours, commencing then halfway down the page, your Honours will see the reference, the inseparable nature of the transaction, again.  If it forms part of an entire transaction, then you cannot isolate it and treat it as a preference.  And your Honours will see at page 133, the last few lines of the first paragraph, it said:

it is enough to decide that the payments into the office account possessed in point of fact a business purpose common to both parties which so connected them with the subsequent debits to the account as to make it impossible -

et cetera.  Now, your Honours, that we would submit, or the fact that the payments were made to put the bank in funds to pay particular cheques represents what is contemplated by the concept of the inseparable transaction, if one likes to use that expression.

Your Honours, we then say in paragraph 6, there are a number of features fundamentally too, I think, which took the case out of there being any entire or larger or inseparable transaction.  Your Honours have seen, and if I could refer to paragraph 6(a), some of the parts of the determination.  If I could go to the determination in paragraphs 27 and 28, in volume 5 at page 1040, what your Honours will see from paragraph 27 of it is that a choice was given as to the manner of charging.  You could either:

issue an invoice, or make a demand -

for payment.  And in paragraph 28:

Where an invoice was duly issued.....the amount of the charge is due and payable commencing on the day of the making of the demand, or where an invoice is issued, on the first day of the month after the month in which the liability is incurred.

And then paragraph 29 provided for the making of the imposition of the penalty and the penalty related to the various charges.

Now your Honours, if one goes then to the actual payments that were made, it is clear, in our submission, that each of the payments was treated as referable to specific identified past charges or penalties.  Your Honours, I do not intend to take you page by page through the document we have prepared in relation to that, but may I refer your Honours to some aspects of it.  Your Honours will see a document which is headed:

The payments made by Compass were made to satisfy specific past debts -

The document is divided up into two parts.  The first two pages, and I will take your Honours to those references there briefly, refer to the types of invoices complying with the determination and statements which were received, and the second part, which commences on page 3, deals with the payments made by Compass throughout the period that Compass operated.

Could I take your Honours, for just a moment, to the first part of it, that is paragraph 1.  What was done, your Honours, was to invoice Compass each month for the charges which became due, and for the penalties.  Could I take your Honours to a typical invoice in relation to it, in volume 4.  That is the one for August.  The volume contains the various statements and invoices and the relevant one is at page 834.  If your Honours look at that document at page 834 it goes through in total to page 850, and the first two pages of it at 834 and 835 are the statement and the remaining documents 836 to 850 are the invoices.  Your Honours will see at the top right-hand corner of each page indicates what it is, a statement or an invoice.

Your Honours will see at page 834 the registration numbers of the aircraft involved, for example “VH-YMA”, and if I could refer to that, you will see that it refers to three classes of items which go to make up what is there described as being the “Aircraft balance”; that is about a quarter of the way down the page.  And the three items are:  an unpaid balance of $1,566,739.89 in respect of previous months; secondly, penalties in respect of debts on previous invoices.  Your Honours will see the invoices are numbered as commencing 129289 and going through to 129288, and they total $35,000 odd, and then you will see the charges in respect of August for that aircraft, which is said to be set out in invoice number 130,722, those charges totalling $688,000.

Your Honours, if I could ask you to note that number, invoice 130,722, that document appears at page 836.  You will see immediately under the heading, the aircraft number VH-YMA, then the invoice number, and your Honours will see that invoice concludes on page 839, and halfway down the page you will see VH-YMA, invoice 130,722, to the total charged $688,000.  Your Honours, as we say in paragraph 6, there are similar invoices for the other aircraft, each one identifies the date and time of arrival of the flight, flight number and the various elements of the charges involved.

Could I just then go to paragraph 7.  If one goes back to page 834, what it shows, for example, is that in respect of the two aircraft, YMJ and YMK, a payment on 2 August was received in the sum of $1,397,394.47 and the apportionment, for example, of that payment to particular debts due in respect of those two aircraft was done at the request of Compass, and that is set out.  How that came about is referred to later.

Now, your Honours, if I could just pause at that point, that was a typical statement together with the invoices and Compass, of course, had operated from December 1990, and in paragraphs 8 through to, for example, paragraph 19 of the document, there is set out the details of the payments made in respect of the period prior to the preference period.  Your Honours, I will not go to the detail of that, but if I could invite your Honours to read paragraphs 20 and 21, what your Honours will see then in paragraph 22 is that at the start of the preference period Qantas was up to date and it had to pay the May charges, but the May charges were payable in late June.  Could I take your Honours to volume 2 and to page 339.  Your Honours will see at page 339, a reference to the fact that the payment was for April and that they will pay May charges on time at the end of this month and they can be expected to be paid in due course.

Your Honours, the May charges may be seen set out in volume 4 at page 791.  Your Honours will see the statement for May and your Honours will see there set out in the way referred to - your Honours will see the various invoices for May being there referred to.  In fact, if I could ask your Honours to go back then to volume 2, they were not all paid on time.  That appears at page 340.  As appears from page 341, a part payment was made on 2 July.  What one sees from the letter at page 341 is that it really could not be clearer than that payment of $840,000 was a payment in respect of the May penalties and particular invoices in respect of past debt.

There were then, as we say in paragraph 24, discussions and correspondence in which firm commitments were sought to be obtained by the Authority in respect of the moneys due.  That appears at pages 344 through to 349.  The balance in fact was paid, as appears at page 348 in the first paragraph, on 2 August, the balance of the May account.  If one looks at the first paragraph on page 348, it is again clear that what was being done was to pay a particular past debt.  As we say in paragraph 25, the correspondence continued.  It is pages 349 to 351.  Your Honours will see, for example, in the first paragraph on page 350, “not able to pay the June account at this point of time”.  I refer to, without reading, pages 353 and 356.

As appears from page 356, what was to happen was that there was to be a payment of $2.129 million on 4 September which was to be a payment in respect of three things:  the charges for June and the penalties for May and June.  Two payments in fact were made - this is paragraph 26 - one on 4 September and one on 9 September, and for those I have to take your Honours to volume 4 first of all at page 928.  At that page your Honours will see a payment made of $2.069 million on 4 September.  If I could go back to volume 2 at page 359, your Honours will see the other payment of $66,000‑odd.  The result then was, as we say in paragraph 26, that June had been paid, July had not been paid, there were penalties due in respect of June and July.  That appears at pages 381 and 382.

If I could refer your Honours then to paragraph 27 of our submissions, what your Honours will see from the references there, in particular page 392, is that on 4 October $1.6 million was paid in respect of particular earlier invoices - that is the July invoices - there specified.

BRENNAN CJ:   Are these matters of controversy, Mr Jackson?

MR JACKSON:   In a sense, your Honour.  There is no doubt about the amounts that were paid and the amounts that were not paid, but what we would seek to demonstrate is in respect of each of them that there was a payment which is clearly a payment which, in the terms in which it is made and by reference to the surrounding documents, was a payment to clear particular past debts.  It is in no way something that one can say is a payment off a running account.  It is a payment to clear particular penalties, a payment to clear particular past obligations and payments to bring about a situation where the ability, for example, to impose liens in respect of past transactions no longer existed.

That is the sum total of it, your Honour, and I do not want to trouble your Honours with going through it in excessive detail, but one does need to get the flavour of it to some extent to see that it is not just a case of saying this is someone who has really a running account where you pay some money off, it does not matter whether it comes off one end or the other.  What you have in the present case is a case where the nature of the statutory provisions was such that they brought about consequences by reason of non‑payment of particular things and that occurred, and the payments that were made were payments to avoid, amongst other things, those consequences.

Having taken what your Honour said, I will not go through the detail of it, but we would invite your Honours to read the various references that we have set out in the document because they do in fact give to it an air which is really far removed from the circumstance of someone who is supplying to a customer goods or services where there is a really voluntary element on both sides.  One clearly has the impression reading the documents that the view that was expressed by the Full Court is the one that is correct.

If I could move then to paragraph 6(c) of our outline of submissions, and this is in relation to what I was saying a moment ago, what one really has is a case that is an aggregation of instances.  Could I then seek to take your Honours to the references to which we refer in paragraph 7.  If one looks at what happened in relation to each of these transactions, taking what was said first of all in Richardson’s Case 85 CLR 133, at the end of the first paragraph on that page, what was there said by their Honours was that the common business purpose so connected them:

as to make it impossible to pause at any payment into the account and treat it as having produced an immediate effect to be considered independently of what followed -

Your Honours, if one treats that, for example, as being the test, each of the payments in question here did produce an immediate effect which could be treated independently of what followed.  It produced an immediate effect of making the penalties cease to run or it paid off penalties and it also, in relation to that unpaid payment, pro tanto removed the ability to impose a lien.

GAUDRON J:   Mr Jackson, may one take it that if the penalties had continued to run and the money had been applied to current provisions, that the debt of Compass would have been greater than in fact in turned out to be?

MR JACKSON:   It may, your Honour.  If the situation had been that they had not paid their - I am sorry, I will start again.

GAUDRON J:   If that is the case, is that not a matter to be taken into account in determining whether there was an advantage over other creditors?

MR JACKSON:   I am sorry, perhaps I missed what your Honour was putting to me in the first place.

GAUDRON J:   What I am putting to you is that if the penalties had not been paid out and continued to run and the money had been applied to current services, would the indebtedness of Compass have been greater at the end of the day than in fact it was?

MR JACKSON:   It would have been likely to be, your Honour, yes.

GAUDRON J:   Is that then a matter to be taken into account in determining to what extent, if any, there was an advantage over other creditors?

MR JACKSON:   Your Honour, in our submission, not really.  It really does not, with respect, take one beyond the situation where one identifies that there was a preference or priority or advantage, because what one is able to see is that prior debts have been paid.  Having done that, that simply takes one into a situation where the provision operates.  It does not, with respect, in our submission, affect the quantum of it because the quantum of it perhaps does not matter very much.

GAUDRON J:   Because you deal with each one as a separate item?

MR JACKSON:   Yes.  Without taking your Honours one by one through the references in paragraph 7, what your Honours will see, in our submission, is that each of the payments did do the various things that are referred to in the passages extracted from the cases.  There was a permanent reduction of particular past indebtedness, the relationship of debtor and creditor was ended in respect of the particular transactions including liability to pay the penalty.  What we would submit is that Mr Justice O’Bryan, if I could take your Honours to that case for a moment in, to put it shortly, Telecom v Russell Kumar & Sons 10 ACSR 24, in dealing with in effect the ordinary telephone account. If I could go to page 29 between lines 7 and 17, it is a situation not materially different from the present where he simply says:

There was a traditional relationship of debtor and creditor -

They had not paid, they would have had the phone cut off, and really that was it.  There is a possibility that perhaps that decision is wrong but, in our submission, it really represents a situation not materially different from the present and one where there is, we would submit, simply an obligation which arises not really from month to month but arises as an invoice is rendered for the events of each month and that invoice is paid.

Finally, if I could just take your Honours to the last reference in paragraph 7 in Queensland Bacon v Rees 115 CLR 266 at page 317, to pick up the words used by Justice Menzies at about point 4 on that page, he said:

that it was intended that, upon each occasion in the future when -

a cheque was to be received -

its position would be improved.....and that the object of the arrangement was to bring about a reduction of the existing liability.

Your Honours, could I just say in relation to Queensland Bacon v Rees, what we would submit is - and this is referred to in paragraph 8 of our submissions - that what happened in that case was that there only two members of the Court out of the three dealt with the issue. Chief Justice Barwick decided one way and Justice Menzies the other. If one goes to Justice Menzies’ reasons at page 315, his discussion of the issue commences about point 6 on the page and your Honours will see that he refers to Richardson v The Commercial Banking Co of Sydney.  Could I invite your Honours to read that paragraph.  In the next paragraph he is dealing with the general account to which he refers.  He said at about point 8 on the page:

Payments so made have.....been avoided as preferences.

We would invite your Honours to read the remainder of that paragraph including in effect to the end of the table on page 316.  Your Honours will see that he then said immediately following the table:

I do not think that the payments in question ought to be regarded as giving no preference.  Surely the January figures give a very strong indication to the contrary.

He then proceeds to deal with Richardson’s Case.  What your Honours will see is that he says - in our submission, correctly, with respect - that:

Richardson’s Case was a very special case in that the payments there in question were made by a debtor to his bank, not to reduce the debt owing to the bank, but to be dispersed forthwith by the bank honouring cheques to be drawn by arrangement upon the account.

May I invite your Honours to read the remainder of that paragraph through to the bottom of the page and the top of the next page to about the fifth line.  At page 317, if one goes to the sixth line on the page, your Honours will see when Justice Menzies starts talking again himself, he says:

It is to be observed, however, that the Court had in mind a case where the payments to be made would not exceed the value of the groceries to be supplied, for the statement is -

then his Honour quotes that.  Then at about point 4 on the page he says:

In the present case it seems to me that it was intended that, upon each occasion in the future when the appellant was to receive a cheque from its debtor, its position would be improved, notwithstanding current supplies and that the object of the arrangement was to bring about a reduction of the existing liability -

which is really the present case, in our submission.

Every payment having that effect would improve the position of the creditor and it is sufficient that the payment actually made should give the creditor some advantage over other creditors.

Your Honours will see then that in the last paragraph of his Honour’s reasons he deals with the position of what was described as the “Sugar Account”.  The decision that his Honour makes, whether it was a seven day credit in effect, was, I think, not very different from a decision in relation to a situation that one of your Honours put to me about there being a short gap between the time of delivery and the time for payment.

So that, your Honours, what we would submit is that the view taken by his Honour in that case is really the better view of however one chooses to describe the relevant principle.

BRENNAN CJ:   It is a dissenting judgment, is it not?

MR JACKSON:   Dissenting only in the sense that - perhaps I can put it this way.  The Court decided upon, in effect, a number of different bases.  What was said in relation to the question of the running account principle, et cetera, was dealt with only by two members of the Court.  The third member of the Court decided on a completely different basis.  So it is right to say, your Honour, that in the result it was a dissenting judgment, but on this point there is no majority.  So that one can say the Chief Justice was part of the majority but the majority was not a majority on this point.

Could I deal with a couple of other matters.  It is clear of course that this is a case where it was recognised that aggressive action on behalf of the Authority, if I can put it that way, was likely to bring about adverse publicity and perhaps to cause the company to go out of business.  There was no doubt an understandable reluctance to do that.  In the case of a new company trying to break into a market dominated by the two airlines which had been the airlines of the policy which had been known for many years.  But at the same time there was a recognition that the Authority had to treat the new airline pari passu with the old ones.  All that one has in reality, in our submission, is a body saying in a gradually more exasperated fashion, “Pay up or we’ll have to take some action”.  If they do take some action, as is likely to happen in the case of any business, the business may fold.  But to say that there was a common understanding that the payments were made as part of any kind of a running account in any ordinary sense of that term, in our submission, is at odds with the facts.  The Authority was owed discrete sums and they were paid discrete sums in respect of those obligations.

Could I turn for just a moment to my learned friend’s submissions about the American cases.  Could I take your Honours to the outline that was provided in relation to them.  I want to refer particularly to paragraph 3 at page 3 first of all where it was said that comfort was taken from the decisions in respect of two matters.  The first of them, your Honours, the three references at the bottom of page 3, the observations that are made in there must depend, in our submission, on the circumstances of particular cases.

The second thing is this.  If one goes to page 4, what one sees in the cases there referred to and on page 5 are cases where what is being spoken about is what in Australia would be picked up by subsection (2).  Your Honours will see at the top of page 4 the quotation from Farmers Bank of Clinton Missouri v Julian which says “When a creditor in good faith”.  Then at the bottom of the same page, “If, then, a creditor innocently preferred”.  Then at the last line on the page, “who innocently has received preferences, “in good faith” on the next page.  Then the third line on page 5, “innocently preferred creditor”.  Then the reference two quotations down from Re Fred Stern & Co Inc, your Honours will see half‑way through it a reference to “unjust preferences” and so on.  In our submission, in Australia the scheme is one that involves the two elements to which I have referred before:  the prohibition in effect - that is not quite the right word - in subsection (1) and the ability to get out of it in subsection (2).

Your Honours, could I go then to the submissions that we make in relation to the second aspect of the case, the submissions in relation to the question of the lien.  Could I refer particularly to paragraph 9 on page 6 of our submissions.  Your Honours will see in paragraph 6 that we endeavour to summarise the statutory provisions, but of course the fact of the matter is that there were no liens in force at any material time.  The position was that the debts were wholly unsecured unless and until a lien was imposed and at all times the Civil Aviation Authority was an unsecured creditor.

The Bankruptcy Act of course - and we refer to this in paragraph 11 - distinguishes between those who are and those who are not secured creditors.  It does not involve, as we submit there, a third category:  those who have the ability to become but who have not become secured creditors during the time of the preference period.  Indeed, your Honours, in very many cases the giving of security during that period would itself give rise to a preference, because the words of section 122(1) do not relate just to payments.  They relate to transactions which in effect give a preference or priority or advantage to a creditor.  A classic way of there being a conflict with that is by the giving of a security.

Your Honours, if I could revert to paragraph 10 of our submissions, what the primary judge said was that the entitlement to impose liens protected the payments from being preferences because the assets were not depleted in favour of the Authority because the assets were not available to unsecured creditors of Compass.  We would submit, for the reasons first of all we have in paragraph 11, that that should not be adopted, but may we also say what we have in paragraph 12, and that is that section 122 is not concerned just with the depletion or diminishment of the bankrupt’s estate.  What it applies to is cases where there is also, or there may be, a priority or an advantage given over other creditors.  In circumstances such as the present where one creditor is paid in advance of others, there is a priority or advantage given.

But, your Honours, could we also say that underlying the notion in the cases to which reference has been made by our learned friend and perhaps underlying also what was said by Mr Justice Lockhart is the concept that something to benefit the estate is given up by the creditor.  That that is so can be seen adverted to in Re Discovery Books Pty Ltd 20 FLR 470 at page 479. I refer to that because the relevant passage is a bit easier to read, but what your Honours will see at page 479 is that Mr Justice Fox was quoting from Stevenson v Wood and the passage at about point 3 on the page that he quotes is this:

“The landlord has by law a right of distress; he has a legal lien on the bankrupt’s goods, unconnected with the bankruptcy; if he thinks fit to waive that right, and accept of the rent from the assignees, who may be benefited by having the goods, without being sold under the distress -

Your Honours, what is contemplated is in effect that the estate is augmented by having the asset with which it can deal itself.  One can understand perhaps it would be appropriate to take into account matters of this kind that in circumstances where what is left in the estate is something that can itself be dealt with and sold to the advantage of creditors, then it may be appropriate to say that in circumstances of that kind there has not been any preference obtained by the payment because one can see a direct, in effect, quid pro quo.  But in the present case there is nothing that satisfies that test.  There is nothing that gives the kind of equivalence that one would need to have.

In particular, your Honours, there was throughout the whole of the relevant period the ability to apply a lien.  Compass remained in default throughout the whole of the relevant period when the payments were made.  It is not as if the ability to apply a lien to the property was given up

completely.  True it is that the amount for which the lien might be applied varied from time to time, but Compass remained in default throughout the whole period and the position of the Civil Aviation Authority did not vary in relation to the effects which it might have on the operation for the company.  All that occurred, your Honours, in our submission, was that a person who might have been but who did not become a secured creditor in the end was paid.

Could I move then to what I have described as the cross‑appeal.  Could I just say this.  It is right to say that the issue of lien was not dealt with by the Full Court.  It was argued before the Full Court.  Why it was not dealt with we do not know, your Honours.  Equally, however, the question of the entitlement in any event to the $1.7 million was a question that was argued before the primary judge as a distinct and separate issue.  For reasons that do not appear, this issue was not, if I may say so with respect, dealt with by the primary judge as a separate issue to be resolved.  However, it was of course an issue that was agitated before the Full Court.

Your Honours, we would seek to maintain the judgment of the Full Court as to that last payment.  We have set out our submissions in relation to it in two places:  first of all in paragraphs 13 to 15 of page 7, and then in the document which we have given your Honours entitled Respondent’s Submissions re the 1.7 million payment of 18 December 1991.  I had not proposed to go through the detail of it unless your Honours wish me to, because what we would wish to say is set out in those documents.  Could I just say that it is a case where, in our submission, all we are seeking to do if the appeal is otherwise successful is to maintain part of the judgment below.

That is a matter for which we would submit we do not need special leave.  If the Court were to take a different view, then, in our submission, because of the nature of the case in which what is sought to be set aside is the whole of the judgment and where we are seeking to maintain part of that judgment by reference to a matter intimately connected with it, then it would be appropriate, in our submission, in the interests of justice to grant special leave.  Your Honours, those are our submissions.

BRENNAN CJ:   Thank you, Mr Jackson.  Mr Solicitor.

MR KEANE:   Your Honours, if we can to my learned friend’s principal outline of submissions, can we say firstly in relation to the submissions that are made in paragraphs 2, particularly 2(c) and 7, that is to say in relation to the language of the statute and, in particular, the language of effect, priority and advantage.  The first point we would wish to mention in way of reply is a point that was raised in discussion with your Honours with our learned friend, the language of the statute is not directed to payments likely to have the effect, nor is it directed to payments to a creditor.  That language would be apt to produce the result contended for in paragraph 7, but that is not the language which has been used and, plainly advisedly so.  If one goes to section 122 one sees, of course, that in subsection (1) the section does not strike at a payment to a creditor but a payment “having the effect of giving that creditor a preference, priority or advantage over other creditors” and, your Honours, as well, in (4)(c)(ii) which is stating the requirements for the purposes of the defence under 122(2):

a creditor shall be deemed not to be a purchaser, payee or encumbrancer in good faith if the.....payment was made or incurred under such circumstances as to lead to the inference that the creditor knew, or had reason to suspect:
that the effect of the.....payment would be to give a preference, priority or advantage over other creditors.

If all that is really meant by 122(1) is a payment, it is curious, indeed, that that more elaborate language is used in (c)(ii) when, on our learned friend’s argument, what is in issue is simply the making of the payment.  One of the things we would say in relation to (c)(ii) in relation to a question your Honour Justice McHugh raised with my learned friends is that in (c)(ii) it is that the effect of payment “would be to be give him a preference”.  That is some, albeit slight, indication, in our respectful submission, in support of the view taken in Richardson’s Case that 122 is looking towards the liquidation that does occur, not some hypothetical liquidation assumed to occur immediately on the making of the payment.

McHUGH J:   Except that Justice Kitto in one of the cases said that the creditor might have reason to suspect what the effect of the conveyance, et cetera, would be, but that he would not know what it would be unless it refers to the actual conveyance, et cetera.

MR KEANE:   That is looking to the suspicion about the likely effect in the liquidation that ultimately occurs, in our submission. 

Your Honours, in relation to the stability and worth of what we have been calling the “running account” principle, we mentioned in our submissions in-chief the adoption of section 588F(2) in the Corporations Law.  We should mention that that provision was adopted on the strength of a recommendation of the Law Reform Commission following its general insolvency inquiry, and we hand to your Honours the relevant page from that report of the Law Reform Commission supporting the adoption of what is ‑ it may be said summarily, but accurately, in our respectful submission ‑ the view of the law propounded by Chief Justice Barwick in Queensland Bacon v Rees.  Your Honours will see that from paragraph 654 and the reference to footnote 33 and then the recommendation is in 655 and that is the recommendation which is section 588F in the Corporations Law. 

The next thing we wish to say is in relation to paragraph 3 of our learned friend’s submissions and, in particular, to the reference to the liquidator’s report on the solvency of Compass during the relation back period.  The only thing we wish to say about that is in relation to the reference to the six identified creditors totalling $4.5-odd million.  The report at paragraph 8.1.3 suggests that that position remains static at all relevant times.  The observation we would make is that so far as those creditors are concerned, it is certainly not a case of advantage accruing to the more frequent trader, namely the Authority.  It is not a case where the Authority was advantaged by its continued trading, rather the reverse.

The next observation we would make is in relation to paragraph 6(a), the last sentence:

The terms of the Act and the determinations required that each transaction be treated separately.

With respect, to assert that is to beg the question whether they are to be treated separately for the purposes of bankruptcy.  Next, in relation to paragraph 7, may we say, firstly, that what is said in the first sentence assumes without foundation that the liens could not have been imposed for other debts.  Secondly, the relevant effect for the purposes of section 122(1) is the effect of the payment as an advantage, not as a disadvantage, which is to be taken into account.  Thirdly, the reference in the sentence:

Each payment was made “to end the relationship of debtor and creditor” and the statutory consequences of that relationship, in respect of particular past transactions.

Is not correct in that the relationship of debtor and creditor plainly continued and could only be correct if one assumed, which is to beg the question, that one looks at individual debts alone, and even there it is not correct to look at particular invoices because the invoices relate to many, many charges over a whole month, many, many transactions collected for convenience in a particular invoice.

BRENNAN CJ:   Mr Solicitor, the argument that is put against you is this, is it not, that you have got a number of debts accumulating over a time, that there are payments which are made in discharge of specific debts, and that there is no relevant relationship between the parties except that of being the debtor and the creditor in respect of several consecutive but isolated debts and the only effect of the payment is, (a), to discharge the debt, (b), to induce the creditor not to take other action in respect of the outstanding liabilities.

MR KEANE:   Once it is accepted that the second effect reflects the relationship of the parties and leads to the correctness of the conclusion that the relationship of creditor and debtor was to continue and was not to be terminated, then none of the argument made in the paper our learned friends have handed up which deals with the particular payments to particular past debts, none of them, none of that argument, none of those particulars, deny the correctness of the finding that if the payments were not made the business would have ceased.

BRENNAN CJ:   Put it another way.  Let us assume that the situation was such that your client was paid out and yet there was a continuation of the relationship month by month and a new debit item, a new amount in debit was accumulated, what would you say then?

MR KEANE:   We would respond by referring your Honour to the observations made in Richardson’s Case as to the unreality of regarding the relationship as having involved a termination of a relationship of debtor and creditor and then a fresh commencement of a new relationship of debtor and creditor which would involve the spontaneous sacrificing of the benefit of a preference and the commencement of a new relationship.  We would submit that one sees, as a matter of business - and we come back again to saying that it is a matter of looking at the dealings and ascertaining whether there is a common business foundation to them - and when one does that one sees the unreality of treating, in this case, where there are thousands of transactions every month, each and every month, in circumstances where the parties on both sides are fully aware that unless payments are made those transactions will cease, there is an unreality, as a matter of business, in regarding the payments which are made as being unrelated to the provision of further services and being apt to conclude the relationship of debtor and creditor rather than to produce, or to induce, its continuation. 

The point we wish to make, with respect, is that our learned friend’s argument in the second of the documents which they handed to your Honours does not controvert the finding, does not deny the correctness of the finding that his Honour made, his Honour the trial judge made, as to the common business purpose which was the footing on which the trading continued.

BRENNAN CJ:   Is there any distinction to be drawn between a payment which is made for the purpose of ensuring the extension of further credit, at least to the extent of the payment, and a payment which is made for the purpose of reducing an outstanding liability?

MR KEANE:   Yes, there is, your Honour, if it has the effect of reducing the outstanding indebtedness.  That is the effect of the decision in Rees v Bank of New South Wales.

BRENNAN CJ:   That is the effect at the end of the day.

MR KEANE:   The ultimate effect at the end of the day.

BRENNAN CJ:   Yes, but what if payment is made for the purpose of reducing the amount.  Let us say the bank manager says, “Unless you reduce you liability by 7,000 pounds a month, then we will not be extending any further credit to you.”?

MR KEANE:   In that case one cannot judge the effect of the reduction without looking at the further advances that may be made on the strength of that reduction.  What your Honour puts to us, with respect, is the view of Justice Menzies in Queensland Bacon v Rees. That is precisely the result which his Honour achieved by following the process of reasoning at page 317, to which our learned friends took you. That process of reasoning involves looking at the intent of the payment and if it is even to some extent concerned with reducing the debt in a permanent way, if it is intended to some extent to reduce the debt in a permanent way, then the whole of that payment would be regarded itself as a preference independently of what follows.

It is not a matter of looking at the course of trading engaging the ultimate effect.  It would be to characterise that particular payment as having achieved a permanent effect in terms of the relationship of creditor and debtor.  A permanent reduction pro tanto of the creditor’s relationship with the debtor of creditor and debtor, and that view of Justice Menzies in Queensland Bacon v Rees was the view which Sir Harry Gibbs rejected in Weiss’s Case and it is inconsistent with the decision in Bank of New South Wales v Rees where one sees, particularly, in the last paragraph of Sir Alan Taylor’s judgment, the point made quite clearly that it the overall pro tanto effect of the payments rather than individual payments, part of which might be intended to permanently reduce, to which one looks.

The other thing we want to say about Justice Menzies’ judgment is that in our submissions in-chief we mentioned a number of cases where the views of Sir Garfield Barwick were preferred.  Our learned friends are unable to point to one case where, in subsequent decisions, the views of Sir Douglas Menzies were preferred, whereas there have been a course of decisions which one does observe culminated in an amendment to the Corporations Law reflecting the effect of those decisions rejecting the view which your Honour has put to us which is, with respect, the view of Justice Menzies, that one looks at the particular payment and if any part of it is apt to effect a permanent reduction in the relationship of debtor and creditor, then the whole of that payment is to be characterised separately from what goes before and after it.

In terms of principle, apart from authority, might we say that that view could only be correct if it is correct to look at the effect of the payment by postulating some hypothetical winding-up immediately at that time rather than looking at the effect of the payment in the liquidation that actually occurs.  The only thing we wish to say in relation to what our learned friends said in relation to the liens point is in relation to their paragraph 12, the last sentence.

We should mention to your Honours in relation to potential delays and difficulties involved in enforcing a lien that section 78A of the Civil Aviation Act provided that:

A person who, knowing or having reasonable grounds to believe that a statutory lien is in effect in respect of an aircraft -

must not remove that aircraft from Australian territory without the prior approval of an authorised officer of the Authority.  If the existence of the lien were not otherwise sufficient to ground a Mareva injunction to prevent the removal of the aircraft from the jurisdiction until the lien could be enforced by sale then, in our respectful submission, that provision could be prayed in aid. 

In relation to the reference to the American authorities and, in particular, our learned friend’s reference to the phrase “innocently preferred”, it is, in our respectful submission, not sufficient to distinguish the United States cases by referring to that phraseology and by invoking the argument that the policy is covered in Australia by section 122(2).  In the United States legislation which was the subject of those decisions a transfer was a preference and had to be determined to be a preference whether or not the creditor was innocent in terms of acting in good faith in the ordinary course of business.  Just as before, one gets to the question of defences under section 122(2), one must determine whether there has relevantly been a payment having the effect of giving a preference, priority or advantage.

Your Honours, if we can go then to what has been referred to the “cross-appeal”, but we do not wish to say anything about how your Honours deal with whether it is a cross-appeal, in which case it needs leave, or whether it is a matter by way of sustaining the judgement as to part.  In relation to that, our submission is that the trial judge’s findings were that the footing, the business purpose common to both parties on which the payments were made, that is to say, on a live account, had not changed as at 18 December.  His Honour’s findings in that regard are at volume 5, page 1129, line 24, over to 1130, line 3, and 1132, lines 2 to 19.

TOOHEY J:   Does that do any more than simply look at the situation overall and not attempt any differentiation in respect of the 1.7 million payment?

MR KEANE:   Your Honour, the reasoning there covers the argument that the relationship had changed in some way so that the common business purpose that it informed the parties dealing prior to the 18th had ceased in relation to the payment on the 18th.  The point about his Honour’s reasoning there is he is concluding that the relationship had not so changed.

TOOHEY J:   Do you mean by reference to that particular payment on that particular date or simply because he does not find it necessary to treat that particular payment any differently?

MR KEANE:   Your Honour, I think it really is that he found that the relationship had not changed by reason of the circumstances of that payment.  In fact, there were further services provided after that payment was received and after the liens were imposed and there were negotiations with a view to making alternative arrangements, namely, involving lifting the liens.  And on the strength of that evidence, his Honour correctly, in our respectful submission, concluded that nothing had changed in the relationship to lead to the conclusion that one should treat that last payment differently from the other payments that had come in and, indeed, if one looks at the course of dealing, so far as the relationship of debtor and creditor is concerned, one can observe that the ultimate net effect of the course of dealing including that last payment, certainly did not have the effect of reducing the extent of the indebtedness.

In that regard we would refer your Honours to In re Weiss.  We can hand to your Honours copies, and if we can ask your Honours to go firstly to page 657 where your Honours will see the table that is there set out.  Your Honours will see that in relation to that table the - - -

BRENNAN CJ:   What is the reference to this case, Mr Keane?

MR KEANE: It is (1970) ALR 654. Your Honours will see a table at 657 which shows amounts paid and goods delivered, and these are cumulative figures, so that the peak indebtedness was in March. If one then goes to page 660, at line 25 one sees that his Honour says:

Each of the three payments -

they are the payments made before 16 April 1962 -

was made in reduction of a running account and the basis of the payments was the continuance of the supply of cloth to the bankrupt.  Moreover, the parties must have assumed, when each of these payments was made, that the value of the goods to be supplied on and after the date of each payment would exceed the amount of the payment, and this was in fact the case.  On any view, the question whether any of these payments was preferential in effect an only be determined by looking at the net effect of the series of payments and deliveries on the running account, and when this is done it is clearly seen that none of these payment had the effect of giving a preference to the respondent.

We need to read that to your Honours for what comes after that:

By the time the payment of 16 April 1962 was made the position had changed.

Now, if we can invite your Honours to read what follows.  His Honour makes the point that there was a permanent reduction achieved in the level of indebtedness after 16 April.  His Honour then refers to the difference of views between Justice Menzies and Chief Justice Barwick in Queensland Bacon v Rees and decides that he should follow the judgment of the Chief Justice, and he said at line 5:

I have considered whether, on that view, it would be right to regard the running account as having had an earlier terminal date than the date of the bankruptcy, but it seems to me that the three final payments were still make on a running account on the basis of the continuance of supply, even though it was contemplated that, for a time at least, the value of the goods to be supplied would not be large in itself or as great as the amount of the payments to be made.  In my opinion these payments also cannot be considered in isolation, and it is the net effect of the operations from the first impugned payment to the date of the bankruptcy that determines the fact and the extent of preference.  However, when the applicant trustee fails in his challenge to the validity of the earlier payments, he is entitled, in the alternative, to choose a later date as the starting point of the examination of the net effect of the operations on the account.

And he refers to Rees v Bank of New South Wales, and then says:

In the present case, having failed in his challenge to the payments made on 15 January and 8 March, the applicant can impugn the payment of 16 April and claim that the net effect of payments on and after that date was to give a preference.  In the circumstances that I have mentioned the change in the situation that had occurred by 16 April 1962, provides abundant justification for taking that date as the starting point of an examination of the account.  When that is done, it is seen that during the period on and from 16 April 1962, payments amounted to 7500 pounds and deliveries to 644‑odd pounds, and that the payments had the effect of giving a preference to the extent of 6800‑odd pounds.

The point of this, your Honours, is that it is a calculation worked not from the date of peak indebtedness but from the date on which it is possible to say that as a matter of a business footing on which the parties dealt with each other the relationship had changed.  In our respectful submission, there is not a sound factual basis for concluding, contrary to the findings, contrary to the decision of his Honour, that the basis had changed.

In our submission, that approach, that is to say the approach that Sir Harry Gibb took in Re Weiss, is consistent with the approach of the Court in Richardson.  We will just give your Honours the relevant passage: at 131, about point 5 of the page to the bottom of the page and what one will see there is that the Court held that the only payment that was to be treated as a preferential one was the payment explained at page 119, at about point 2 to 3, and that was a payment of a cheque for 390 pounds which, upon being received, was banked and a letter was immediately sent to the debtor saying that no further trading would be allowed on the account, so that once again the Court identified the change in the business relationship as fixing the date on which one looked to see whether there was a change in the net indebtedness and that approach is the approach that was taken in two decisions by single judges which we will give your Honours.

The first is Calzaturificio Zenith v NSW Leather and Trading Company, and the relevant passage is in the judgment of Justice Menhennitt at 620 point 5 to 620 point 7, where your Honours will see that his Honour calculated the preferential effect of the payment on the relationship, not by reference to the date on which the indebtedness peaked but by reference to the date when the relationship changed because the creditor took the payment as effecting a permanent reduction, and to similar effect is the approach of Justice Wootten in M & R Jones Shopfitting Co Pty Ltd v The National Bank of Australasia (1983) 7 ACLR 445, and we can hand your Honours copies of that.

Your Honours will find in the passage at the bottom of page 452, the paragraph numbered 6 - we really need to ask your Honours to read from there to about point 5 on page 453 where his Honour makes the point that the calculation is to be effected from the date on which the position changed, that is to say, the position in terms of the basis on which the parties dealt with each other changed.  In the present case it is our submission there is no basis for a finding that the payment was paid or received on a different footing from the other payments.

As we have said, Compass had agreed to pay a sum slightly in excess of that, slightly in excess of $3 million on that day.  During the course of the day it became apparent that it would not be able to do so and the liens were imposed late in the day at about 6 pm, which your Honours will see in the appeal book at volume 3, page 688.  Despite the imposition of those liens though Compass’s aircraft did continue flying and your Honours will see that the relationship of debtor and creditor continued in that regard as his Honour found at 1083, line 12. 

Your Honours should understand that paragraph 4 of our learned friend’s submissions deals with some later invoices.  The December invoices show trading in the ordinary way, that is to say, the provision of services, non-penalty, the provision of services for which charges being non-penalty charges were made.  Your Honours will see that that is so.  We will just give your Honours the references to the record where you can see the charges being made for services provided after 18 December in volume 4 at pages 912, 914 to 915, 917, 919 to 920, and 922, and I understand that our learned friends accept and will say they accept the total value of services provided was $351,122.55, and we say that apropos of the last sentence of paragraph 5 at page 3 of their submissions, the third document in their submissions.

As it happened on a previous occasion when liens were imposed, the parties negotiated with a view to seeing the liens removed and your Honours will see that from volume 3, 735 and 737 to 739.  As is apparent from the document at 735, the CAA was willing to give favourable consideration to

proposals for alternative security, that is to say, to lifting the liens in continued trading.

Your Honours, the appeal books are faulty in that we need to ask your Honours to insert two pages after page 736, in volume 3, and can we hand up copies of the pages to be inserted which show those negotiations or which show the correct picture of those negotiations.  The only other thing we want to say is that we apprehend that the only decision since the decisions of this Court in the Rees Cases and Richardson’s Case which is inconsistent with the position for which we contend is Telecom v Kumar, the decision of Justice O’Brien.  In relation to that, might we simply say that it is difficult to discern the basis in principle upon which his Honour proceeded and in so far as his Honour’s decision on this point, in so far as his Honour’s decision cannot stand by reason of findings on other matters, we would submit that it is wrongly decided.  Those are our submissions, your Honours.

MR JACKSON:   May I say two administrative things and seek to do so very briefly.  The first is in relation to costs.  We have agreed that because there are a number of possible outcomes of the case, that if, after the Court has delivered its reasons, the parties could have seven days within which to put written submissions as to costs to the Court?

BRENNAN CJ:   Yes.

MR JACKSON:   The second thing, your Honours, concerns the figure that was mentioned by my learned friend.  It is right to say that there needs to be a figure which represents the value of services provided by the Civil Aviation Authority after the last payment was made in order to make intelligible the number of dollars referred to in the last sentence of our document concerning what I have called the “cross appeal”.  The figure that my learned friend mentioned is the one that we believe is the correct figure but may we have five days to check it because the figure does not appear in the documents that your Honours have and your Honours may assume, unless we let your Honours know to the contrary, that we are in agreement with the figure that was quoted.

BRENNAN CJ:   Thank you.  The Court will consider its decision in this matter.

AT 12.48 PM THE MATTER WAS ADJOURNED