Ansett Australia Holdings Ltd v International Air Transport Association

SUPREME COURT OF VICTORIA
COURT OF APPEAL

No. 8792 of 2002

ANSETT AUSTRALIA HOLDINGS LIMITED (SUBJECT TO DEED OF COMPANY ARRANGEMENT) ACN 004 216 291
	First Appellant
and
MARK A KORDA and MARK F MENTHA v. INTERNATIONAL AIR TRANSPORT ASSOCIATION	Second Appellants
	Respondent
	ANSETT AUSTRALIA HOLDINGS LIMITED (SUBJECT TO DEED OF COMPANY ARRANGEMENT) ACN 004 216 291 v. INTERNATIONAL AIR TRANSPORT ASSOCIATION	No. 6455 of 2003 Appellant Respondent

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JUDGES:	MAXWELL, P., NETTLE, J.A. and BONGIORNO, A.J.A.
WHERE HELD:	MELBOURNE
DATE OF HEARING:	19 June 2006
DATE OF JUDGMENT:	10 November 2006
MEDIUM NEUTRAL CITATION:	[2006] VSCA 242

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CORPORATIONS – External Administration – Deed of Company Arrangement – Airline operators – IATA clearing house scheme – IATA Clearing House Regulations – Regulations providing for clearing house to settle claims for payment between airline operators – Monthly settlement of debits and credits – Whether clearing house scheme repugnant to the scheme for the voluntary administration of companies established by Part 5.3A of the Corporations Act 2001 – Corporations Act 2001, ss.435A, 444A and 444D.

CONTRACT – Construction – IATA Interline Agreement – IATA Clearing House Regulations – Whether Regulation 9(a) to be read down as otherwise inconsistent with the meaning and effect of the IATA Interline Agreement construed as a whole.

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APPEARANCES:	Counsel	Solicitors
For the Appellants	Mr. M.C. Garner	Arnold Bloch Leibler
For the Respondent	Mr A.C. Archibald, Q.C. with Mr C.M. Caleo	Clayton Utz

MAXWELL, P.:

These appeals concern the construction of a contract, the Multilateral Interline Traffic Agreement (“the Agreement”),[1] to which Ansett was a party until its insolvency. As will appear, that task also involves construing the IATA Clearing House Regulations (“the Regulations”), which form part of the contract.
[1]There are actually four Multilateral Interline Traffic Agreements. This appeal concerns the Multilateral Interline Traffic Agreement – Passenger, and the Multilateral Interline Traffic Agreement – Cargo, which are relevantly identical.

The relevant facts and circumstances are fully set out in the judgment of Nettle JA. As there described, international airline operators regularly sell and issue tickets to passengers in respect of journeys for which the carrier will be, in whole or part, another airline operator. The Agreement obliges the issuing airline (“Issuer”) to pay to the carrying airline (“Carrier”) the charge applicable to transporting the passenger to whom the ticket was issued (“Passenger”).

The critical clause in the Agreement is clause 8.1, which provides as follows:

“Each issuing airline agrees to pay to each carrying airline the transportation charges applicable to the transportation performed by such carrying airline ... in accordance with applicable regulations and current clearance procedures of the IATA Clearing House, unless otherwise agreed by the issuing airline and the carrying airline.”

When Carrier transports Passenger, this clause is engaged. Its effect is that Issuer must pay to Carrier, in accordance with the Regulations the charges applicable to the transportation of Passenger.

Clause 8.2.3 of the Agreement provides that the right to payment arises when the transportation service is rendered.[2] Thus, Carrier’s rendering of the transportation service to Passenger has the effect of –

· imposing on Issuer an obligation to pay Carrier the transportation charge applicable to that service; and

· giving Carrier a right to be paid that charge by Issuer.

[2]Regulation 12 is to the same effect.

The issue in this appeal concerns the proper characterisation of that contractual obligation and that contractual right. Crucially, in my view, the contract provides that Issuer’s obligation is to pay Carrier in accordance with the Clearing House Regulations. Conversely, Carrier’s contractual right is a right to be paid by Issuer in accordance with the Regulations. The Regulations must therefore be read into clause 8.1. They form part of the Agreement. Both the right to payment and the obligation to pay are defined by clause 8.1 read together with the Regulations.

In order to ascertain the true character of the obligation and the right, it is therefore necessary to examine the Regulations. The key provision is Regulation 9(a), which provides as follows:

“(a)With respect to transactions between members of the Clearing House which are subject to clearance through the Clearing House as provided in Regulations 10 and 11 and subject to the provisions of the Regulations regarding protested and disputed items, no liability for payment and no right of action to recover payment shall accrue between members of the Clearing House. In lieu thereof members shall have liabilities to the Clearing House for balances due by them resulting from a clearance or rights of action against the Clearing House for balances in their favour resulting from a clearance and collected by the Clearing House from debtor members in such clearance” (emphasis added).

Regulation 10 lists various classes of transactions which must be cleared through the Clearing House. The relevant class comprises transactions between members “pursuant to their participation” in the Agreement. I will refer to these as “clearance transactions”. Thus, where both Carrier and Issuer are members of the Clearing House, the transaction involving the provision of a transportation service by Carrier to Passenger is a clearance transaction. It must be cleared through the Clearing House.

Stripped to its essentials, Regulation 9(a) declares that no liability for payment and no right of action to recover payment shall accrue between Issuer and Carrier in, or in respect of, any clearance transaction. Instead, Regulation 9(a) gives both Carrier and Issuer rights against, and liabilities to, the Clearing House in respect of balances resulting from the clearance of transactions.

The clearance procedure set out in the Regulations is conceptually simple. The Clearing House member notifies the transaction to the Clearing House for clearance. This is referred to in the Regulations as “notification of a claim.” In the case of Carrier, it will notify the Clearing House of a credit claim.[3] Carrier must give written advice to Issuer of the transaction being notified for clearance. This is known as “billing”.[4]
[3]Regulation 9(b).
[4]The term “billing” is defined in Regulation 1 to mean: “Written advice of transactions to be notified to the Clearing House for clearance given by one member to another”.

“Clearance” means the ascertainment each month of the balances –

(a) due to members by the Clearing House; and

(b) due by members to the Clearing House,

after set-off of all claims duly notified to the Clearing House in accordance with the Regulations.[5] The notification of a claim (debit or credit) to the Clearing House for clearance authorises the Clearing House –
“to clear the same in accordance with the Regulations and current clearing procedures and to pay or collect any balances due by or to the Clearing House as a result of the clearances effected”[6].

[5]Regulation 1.

[6]Regulation 9(b).

It is now possible to give an accurate account of the nature and character of the right to payment which Carrier has – and the obligation to pay which is imposed on Issuer - under clause 8.1 of the Agreement. Carrier’s right to payment of the charge for transporting Passenger (“the relevant charge”) is not a right to recover that particular sum of money. It is a right to be paid such credit balance as may exist to the credit of Carrier upon the clearance for the month in which that particular clearance transaction was notified for clearance. Carrier’s right to payment of that credit balance (if any) is a right against the Clearing House. Carrier has no right of action against Issuer, either in respect of the relevant charge or in respect of the credit balance (if any). Of course, if the monthly clearance shows a debit balance against Carrier, after taking into account its credit claim referable to the transaction with Issuer, Carrier has an obligation to pay that balance to Clearing House, and no right to be paid any sum at all.

Issuer’s obligation to pay has similar characteristics. Issuer has no obligation to pay to any person the amount of the relevant charge. No-one has a right to recover that sum from Issuer. Issuer has an obligation to notify the transaction for clearance and to pay the debit balance – or a right to receive the credit balance, as the case may be – as ascertained by the Clearing House in the monthly clearance.

Both the right to payment and the obligation to pay are stamped with this character from the moment of their creation. That, in my opinion, is the unambiguous and unequivocal effect of clause 8.1 (incorporating the Regulations). Carrier has the right conferred by clause 8.1, and no other. Issuer is under the obligation imposed by clause 8.1, and no other. I agree with IATA’s contention, as follows:

“This is not a scheme whereby debts between airlines for particular transactions come into existence but are then the subject of a mandatory settlement process which precludes direct enforcement against the debtor airline. Rather, the Regulations operate as a scheme whereby no debts ever arise between airlines in respect of particular transactions; no liability to pay ever arises between airlines whether or not accompanied by any right to enforce payment. The only debts which ever arise are between IATA and a member airline in relation to a balance of all items entered for clearance which relate to that airline.”

It follows, in my view, that the contractual relationship between Carrier and Issuer, in respect of the relevant charge, is not a relationship of debt. Nor, as between Carrier and Issuer, is there any chose in action generating liability for, or entitling recovery of, any amount. Because of the terms of their agreement, Issuer owes nothing to Carrier in respect of the provision of the transportation service to Passenger, and Carrier has no right of action against Issuer. No debt or other chose in action ever exists between them. Issuer never has an obligation to pay money to Carrier.[7] That is the bargain which they struck when they became parties to the Agreement.
[7]cf. The King v. Brown (1912) 14 C.L.R. 17 at 25 per Griffith C.J.

The incorporation of the Regulations into clause 8.1 is decisive in this regard. If the phrase “in accordance with the Clearing House Regulations” did not appear at the end of clause 8.1 – and if the Regulations were otherwise inapplicable[8] - Issuer would be obliged “to pay to [Carrier] transportation charges applicable to the transportation performed by [Carrier].” An obligation expressed in these terms would signify a conventional debtor/creditor relationship. Issuer’s promise to pay the transportation charge to Carrier would be enforceable by Carrier (as creditor) against Issuer (as debtor).
[8]In British Eagle International Air Lines Ltd v. Compagnie Nationale Air France [1975] 1 W.L.R. 758, the Regulations were held to be applicable even though not expressly incorporated into the Agreement.

But clause 8.1 is not in that form. The clause incorporates the Regulations, and Regulation 9(a) declares that the clearance transaction gives rise to no rights or liabilities as between the operators which are parties to that transaction. Instead – “in lieu” – of those rights and liabilities, the operators have rights against, and liabilities to, the Clearing House – and no other person. In my view, the parties to the Agreement could hardly have made their intention clearer.

The commercial advantage of the system of monthly clearances through the Clearing House is obvious. As explained in evidence by the Director of Legal Services of IATA, there is a very large number of clearance transactions. The Clearing House process enables airline operators to avoid the necessity of having to make and receive numerous payments to and from other airlines in respect of such transactions. As already described, the monthly clearances result in settlements involving either a payment by an airline operator to the Clearing House, or a payment by the Clearing House to an operator, but never in payments being made to or between operators. The number of actual financial payments is small compared to what the position would be if there was no such scheme and the operators instead had to make payments to each other.[9]
[9]Affidavit of David Hodgkinson (paragraph 8).

A coherent framework

Read as whole the Regulations provide a coherent framework for the clearance system. As already noted, every clearance transaction must be notified to the Clearing House. In relation to each such transaction, Carrier will lodge a credit claim and Issuer will lodge a debit claim.[10] Notification authorises the Clearing House to clear the claims, and to pay or collect any balances due by or to the Clearing House.[11] The effecting of a clearance, and the payment or collection of balances, together constitute –

“a satisfaction and discharge of every claim dealt with in such clearance.”[12]

The right of recovery of balances due to the Clearing House is conferred on IATA.[13]

[10]Regulation 9(b).

[11]Ibid.

[12]Regulation 9(c).

[13]Ibid.

Other Regulations are consistent with this scheme, and with the basal concept of rights against, and liabilities to, the Clearing House and no-one else. Thus:

· Regulation 8 defines the function of the Clearing House as being to effect monthly clearances and to pay to, or collect from, members the balances due by or to the Clearing House;

· Regulation 18 specifies the currencies in which members are required to settle balances due by them to the Clearing House and in which they will receive settlements from the Clearing House of balances due to them;

· Regulation 24 authorises the Clearing House to bring into clearance at face value all items duly notified by members in accordance with the Regulations;

· Regulation 38 provides that the right of the Clearing House to collect claims comes into existence at the earlier of –

(a) the time payment is made for services upon which the claim is based; and

(b) the time such services are rendered.

· Regulation 38 continues:

“It is the intent of the members that funds collected by an issuing airline pursuant to accounts for clearance and services provided by a carrying airline pursuant to interline agreements shall be used for discharge of respective obligations of such airlines to the IATA Clearing House.” (emphasis added)

· Regulation 39 provides that the liability of the Clearing House to any member arising from any clearance is –

(a) subject to payment of the balances due by debtor members in the clearance; and

(b) limited to any balance in favour of creditor members as the result of the clearance.

· Regulation 42(a) gives IATA a lien on each member’s Standing Deposit for (inter alia) “all moneys due to the Clearing House in respect of clearances.”

The terms “debtor member” and “creditor member” are used frequently throughout the Regulations. Regulation 9(a) itself refers to members having rights of action against the Clearing House –

“for balances in their favour resulting from a clearance and collected by the Clearing House from debtor members in such clearance”[14].

The term “debtor member” is not defined but it is plain that it means a member which has a balance due to the Clearing House resulting from a clearance. That this is so is confirmed by the provisions whereby –
·     debtor members must remit their balances to the account of the Clearing House (Regulation 28);
·     debtor members who do not remit their balances on time are charged interest (Regulation 29);
·     the Clearing House remits balances to creditor members “forthwith after completion of debtor settlements” (Regulation 30).

[14](Emphasis added). See also Regulations 22(c), 28, 29, 30, 31, 32, 33, 34, 36, 37, and 45.

Regulation 31 provides for the circumstance where the Clearing House has a deficiency in funds available to settle with creditor members “because of the delayed or partial payment by one or more debtor members”. In that case, the Clearing House Manager is entitled to “abate at his discretion” settlement to creditor members, who are entitled to interest on the amount abated. As already noted, the nexus between payments by debtor members and settlements with creditor members is made explicit in Regulations 38 and 39.

No internal inconsistency

As noted earlier, members are obliged (by Regulation 15) to “bill each other for transactions to be cleared through the Clearing House”. As appears from the definition of “billing”, this involves one member giving written advice to the other of a clearance transaction which is to be notified to the Clearing House for clearance. Under Regulation 21, the member notifying an “item” for clearance must promptly dispatch to the other party to the transaction the invoice and supporting documents. So understood, the procedure for billing does not connote – and could not by itself create – any debt between the members concerned.

Ansett draws attention to Regulations 22, 23 and 24, which concern disputed billings. Thus, a member can protest to the Clearing House Manager on the ground of “improper billing” when it objects to “an invoice or invoices relating to items notified to the Clearing House”. (Using my example, Issuer may protest that it has been “improperly billed” by Carrier in respect of the credit claim notified to the Clearing House by Carrier.) There are, as might be expected, dispute resolution procedures.[15]
[15]See Regulations 22(d), 23 and 24.

None of this detracts in any way from the efficacy or coherence of the clearance scheme. The billing procedure is necessary to ensure that each airline has the opportunity to check that a claim made to the Clearing House against that airline is a valid claim. Obviously, the intention of the parties is that the monthly clearance – the ascertainment of credit and debit balances – should be done on accurate figures and in respect only of valid claims.

Likewise, the notion of one member notifying a claim against another member[16] is consistent with the clearance scheme. When Carrier notifies a credit claim in respect of the transportation of Passenger, this is – obviously enough – a claim against Issuer. The amount of the claim will be a debit against Issuer in the monthly clearance. The phrase “claim against a member” involves no inconsistency with the terms of Regulation 9(a).
[16]See Regulations 22(b) and 23.

Counsel for Ansett argued that there was “a host of other provisions” in the Regulations and the Agreement which were “flatly inconsistent” with the construction of the Regulations adopted by the trial Judge (with which I agree). According to Ansett:

“The whole scheme of the Clearing House arrangements (including the provisions relating to default in payment, abatement, provisional re-settlement, adjustments, protests and rejections/re-billings) is that the claiming member is, and at all times remains, the true creditor of the other member against whom the claim was made.”[17]

Further, Ansett contends –
“The claims the subject of clearance under the ... Regulations are, in substance, simple contract debts between the transacting members. To hold otherwise would fly in the face of the commercial realities of the situation and flout business common sense.”[18]

[17]Outline of Submissions para 76.

[18]Ibid at [68].

The inconsistency argument fails because, in my view, there simply is no inconsistency. I have already dealt with some of the provisions relied on by Ansett . I now deal with the others.

Ansett argues that the Clearing House:

“is never out of pocket and never bears the commercial risk of default in payment by a Clearing House member. Rather, that risk remains at all times with the true creditor of the delinquent debtor member (namely, the other Clearing House member who transacted with that delinquent debtor member). The true creditor member is entitled to interest on the outstanding moneys, such interest being chargeable to the delinquent debtor member. Interest is not chargeable to IATA, because it never becomes a principal in respect of the underlying transaction between the true creditor member and the delinquent debtor member.”[19]

[19]Ibid at [67].

That the Clearing House does not bear the commercial risk of default is hardly surprising. Its function is to effect a monthly clearance of claims made by members against each other. It is not a bank. It has no funds of its own. Hence the Clearing House is not obliged to pay a credit balance to a creditor member until the debtor members in the clearance have paid their debit balances (Regulation 39). The Clearing House’s immunity from risk is consistent with its function, and in no way inconsistent with its having debtor/credit relationships with its members. After all, a secured creditor does not bear the commercial risk of a default by the debtor, but is no less a creditor for that.

The Regulations providing for the payment of interest by a defaulting debtor member, and the payment of interest to a creditor member affected by such default, are also entirely consistent with the scheme of rights and obligations created by Regulation 9. The entitlement to interest is an entitlement as against the Clearing House, and no other party. The obligation to pay interest is an obligation owed to the Clearing House, and to no other party. The fact that funds for the payment of interest to the creditor member are sourced from the defaulting debtor member is but a further illustration of the position of the Clearing House. Of necessity the Clearing House discharges its obligations to members using funds provided by other members. The existence, and character, of those obligations is unaffected. Exactly the same may be said of the provisions for exchange losses (Regulation 32). While the Clearing House is not a party to the clearance transactions themselves, it is plainly a principal in respect of the balances which emerge from the clearance process. It can sue, and be sued, in its own right (in the name of IATA). That is a defining characteristic of the scheme.

The clearance scheme, which is incorporated into clause 8.1 of the Agreement, binds members of the Clearing House, but only for so long as they are members. It will be recalled that Regulation 9(a) applies to, and only to, transactions “between members of the Clearing House which are subject to clearance through the Clearing House”.

Naturally, the Regulations contain provision for the suspension and termination of membership. According to Regulation 49(c), the suspension of a member –

“shall absolve other members, during the period of suspension, from their obligation to notify claims to the Clearing House with respect to the suspended member, and the suspended member is likewise absolved from its obligation to notify claims.”

In other words, if Carrier or Issuer were suspended, transactions between them during the period of suspension would not be subject to clearance. The payment obligation created by clause 8.1 in respect of a transaction entered into during that period would be enforceable by Carrier against Issuer in the ordinary way, that obligation not having the character defined by Regulation 9(a).

Exactly the same occurs if the proviso to Regulation 9(b) is engaged, that is, if the Clearing House –

“receives notification that the amount of a claim that has been notified for clearance has been attached, garnished or otherwise seized by issue of an order of court”.

Upon such notification, the Clearing House Manager is obliged to suspend all clearance between the members concerned until notified that normal clearance between them may be reinstituted. The proviso concludes as follows:

“During the period of suspension, the parties affected shall remain absolved from their respective obligations under Regulation 10 to settle only through the Clearing House.”

Once again, transactions between the parties during the period of suspension are not subject to clearance. The Regulations do not apply. In respect of transactions entered into during that period, the payment obligation imposed on Issuer by clause 8.1 would be enforceable by Carrier in the normal way.

The fact that the clearance system may be inapplicable, for a period, to transactions between Issuer and Carrier does not, in my view, detract in any way from the efficacy of the clearance system when it is in force. The fact that the first transaction between Issuer and Carrier which takes place following a suspension of membership will give rise to an ordinary debtor/creditor relationship between them says nothing about the character of their relationship in relation to transactions which are subject to clearance. The fact that transactions which occur outside the clearance system create the relationship of debtor and creditor serves only to reinforce the overriding importance of the clearance system, and of Regulation 9(a) in particular, in defining the character of that relationship in those transactions which are subject to clearance.

A similar analysis applies to the provisions for termination. A member whose membership has terminated remains obligated, for six months after the termination, to settle through the Clearing House all claims against it notified to the Clearing House by other members during that period. The member also remains obligated during that period to settle through the Clearing House its claims against other members of the Clearing House relating to transactions effected prior to the date of termination.[20]
[20]Regulation 52.

At the expiry of the six month period, the Clearing House Manager –

“shall, at an appropriate time, charge to the members concerned any amounts due to the Clearing House and unpaid by the member whose membership has terminated. Thereupon the member whose membership has terminated shall be directly liable to each member for such amounts, and each member shall have a right of action for recovery thereof.”[21]

In other words, if the terminating member still owes amounts to the Clearing House, the Manager may charge those amounts to the members whose claims against the terminating member gave rise to the balance due. In turn those members have, by contract, a direct right of action against the terminating member for recovery of the sums involved. In short, where it was intended to create direct rights of action as between members, the Regulations made express provision to that effect.

[21]Regulation 53.

I see no difficulty in the notion – recognised in the proviso to Regulation 9(b) – that the amount of a claim notified for clearance may be the subject of attachment, garnishee or other seizure by court order. (This will, of course, only arise where the claim notified for clearance is a credit claim.) I would respectfully adopt what was said in British Eagle in relation to the equivalent provision in the former Regulations. That provision was seen to be necessary to deal with the case where a creditor of Carrier knew that Carrier had transported many Passengers who had paid Issuer for their tickets but did not know that the transactions were subject to the clearance system. That creditor might well go to court and attempt to obtain an order on the assumption that there were conventional debts owing by Issuer to Carrier. All of their Lordships rejected the argument – which Ansett maintains here – that this provision demonstrated that there were debts actually owing between members.[22]
[22]Lord Morris at 767G (minority); Lord Cross at 777F (majority).

Ansett draws attention to the first part of Regulation 12, which provides:

“All transactions within the scope of clearance are hereby deemed mutual debts of the parties involved.”

Clearly, as Ansett contends, the reference here to “the parties involved” is a reference to the parties to the clearance transaction – Issuer and Carrier.

Ansett argues that this provision –

“may be of importance in the context of the bankruptcy provisions in the various jurisdictions in which Clearing House members operate, some of which require mutuality for bankruptcy set-off.”

Let it be assumed, Ansett says, that airline A had a number of claims against airline B within the scope of clearance, and airline B likewise had a number of claims against airline A within the scope of clearance. If airline A went into liquidation before the clearance was effected, it is said, the deeming of clearance transactions to be mutual debts would enable a balance of the account between them to be taken for the purpose of determining whether an amount was payable by airline B to airline A’s liquidator, or an amount was owing to airline B for which it could prove in airline A’s liquidation.

This submission may be disposed of shortly. As Nettle JA has pointed out[23], a deeming clause of this kind could not alter the application of insolvency laws to the rights and liabilities of Clearing House members arising from their dealings inter se. If there was in fact no state of mutual indebtedness between them, Regulation 12 could not create one.
[23]At [111] below.

For its part, IATA submitted that the deeming provision was inserted simply to remove any doubt which might exist about the capacity of the Clearing House to effect a clearance. As already noted, clearance involves the monthly ascertainment by the Clearing House of the balances due by and to members –

“after set-off of all claims duly notified to the Clearing House in accordance with these Regulations.”[24]

What is involved in the “set-off of all claims” is, in the case of a particular member, the setting off of the total of the debit claims notified against that member against the credit claims notified by that member.

[24]Regulation 1.

The process of set-off in relation to the relevant member is likely to include both debit claims against the member by a particular member airline and credit claims by the member against that same airline. The debit and credit claims will be set off against each other. For the reasons already given, there are no debts owed by the one airline to the other, so the claims are not “mutual debts”. In order to remove any doubt about the ability of the Clearing House to set off such countervailing claims, so the argument goes, all clearance transactions were deemed to be (that is, to give rise to) mutual debts. (Of course, a single transaction between Carrier and Issuer would not give rise to “mutual debts”. It would give rise to a unilateral debt. The provision presumably means that such transactions collectively give rise to mutual debts.)

The explanation advanced on behalf of IATA seems to me to be plausible. The requirement for mutuality of debts as a condition of set-off is not, of course, confined to insolvency law. Mutuality was a requirement for inter partes set-off at common law.[25] In the event, however, it is unnecessary to reach a final conclusion on the object sought to be achieved by the deeming clause or, indeed, as to whether the efficacy of the clearance scheme depended upon the inclusion of such a clause.
[25]Re KL Tractors Ltd [1954] V.L.R 505 at 507 per O’Bryan J; see further S.R. Derham The Law of Set-Off (3^rd ed., 2003) chapter 11.

Two things are, I think, quite clear in relation to Regulation 12. The first is that the deeming provision confirms the intention of the parties as expressed in Regulation 9(a), namely, that clearance transactions did not create debts as between the parties to those transactions. It was therefore necessary to create a deemed state of mutual indebtedness. Secondly, whatever the true import of the first sentence of Regulation 12, it could not possibly have the effect of subverting, or overriding, the clear and unequivocal intent of the clearance scheme, whereby the only rights and liabilities which arise are rights against and liabilities to the Clearing House. This last point needs to be made more generally, as follows.

Resolving any inconsistency

For the reasons given, I do not consider any of the provisions referred to by Ansett to be inconsistent with the characterisation of the rights and obligations which I have set out. None of those provisions provides support for the proposition that the relationship between the members in a clearance transaction is, in truth, that of debtor and creditor.

But even if the position were otherwise, and there were some inconsistency between the provisions relied on by Ansett and the scheme of rights and obligations established by Regulation 9(a), I consider that the Court would nevertheless be bound to give effect to the contractual intention expressed in Regulation 9(a). This seems to me to be the inevitable conclusion, whichever canon of construction were brought to bear.

Several rules of construction provide guidance. The first is that, in the event of inconsistency between provisions in a contract, it is “the main object and intent” of the contract which must prevail. In Glynn v. Margetson & Co[26], a particular clause was read down because, read literally, it would have defeated “the manifest object and intention” of the contract.[27] Lord Halsbury L.C. said:

“Looking at the whole of the document, and seeing what one must regard ... as its main purpose, one must reject words, indeed whole provisions, if they are inconsistent with what one assumes to be the main purpose of the contract.” [28]

This rule was recently applied by the New South Wales Court of Appeal in Thomas Cook Ltd. v. Kumari[29].

[26][1893] A.C. 351.

[27]At 355 per Lord Herschell L.C.; at 358 per Lord Halsbury L.C.

[28]At 357.

[29][2002] NSWCA 141 at [9] per Handley, J.A. (with whom Sheller, J.A. and Pearlman, A.J.A. agreed).

The second relevant rule, also alluded to in Glynn v. Margetson & Co, is that “a business sense will be given to business documents”.[30] Applying this rule recently in Homburg Houtimport B.V. v. Agrosin Limited[31], Lord Bingham said:

“The business sense is that which businessmen, in the course of their ordinary dealings, would give the document. It is likely to be a reasonably straightforward sense ... “.[32]

[30]At 359 per Lord Halsbury L.C.

[31][2003] 2 W.L.R. 711.

[32]At 718 [10]. See also AWB (International) Ltd v. Tradesmen International (PVT) Ltd [2006] VSCA 210 at [15] per Chernov JA.

It is clear beyond argument, in my view, that the “main object and intent” of the Regulations, read as a whole, is to establish a system of clearance which has as its foundation the sui generis scheme of rights and obligations defined by Regulation 9(a). That is the manifest commercial purpose, intended to confer the commercial advantages I referred to earlier. The court must seek to give effect to the contract as intended, so as not to frustrate the reasonable expectations of businessmen.[33]
[33]Homburg (supra) at 719 [12] per Lord Bingham.

Recourse to “the factual matrix” – surely permissible in the event of inconsistency[34] – leads to the same result. As the High Court said recently in Pacific Carriers Ltd v. BNP Paribas,[35] the task of construing commercial documents –

“requires consideration, not only of the text of the documents, but also the surrounding circumstances known to [the parties], and the purpose or object of the transaction. In Codelfa Constructions Pty Ltd v State Rail Authority of NSW, Mason J set out with evident approval the statement by Lord Wilberforce in Reardon Smith Line Ltd v Hansen-Tangen:
‘In a commercial contract it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating’.”[36]

[34]cf. Codelfa Construction Pty Ltd v. State Rail Authority of N.S.W. (1982) 149 C.L.R. 337 at 352 per Mason J. The Full Court of the Federal Court recently held that the decision in Pacific Carriers “should be understood as permitting regard to be had to context ahead of ambiguity”: Lion Nathan Australia Pty Ltd v. Coopers Brewery Ltd [2006] FCAFC 144 per Weinberg J at [51]. See also at [100] per Kenny J and [238] per Lander J.

[35](2004) 218 C.L.R. 451.

[36]At 462 [22] per Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ (footnotes omitted).

As mentioned below, it is common ground that the amendments which introduced Regulation 9(a) were made with the intention of overcoming the decision of the House of Lords in British Eagle. The House of Lords decided that, under the Regulations as then in force, debts did arise between members as a result of transactions of the kind under consideration here. That was “the genesis” of the contract in its present form. That context establishes – incontrovertibly, in my view – the paramountcy of Regulation 9(a).

Other rules of construction lead to the same conclusion. Thus, precedence should be given to the “dominating factor” in the contract, or the provision which is of “preponderant importance”.[37] Again, where a later clause is inconsistent with an earlier clause, the earlier clause prevails.[38] In the present case, Regulations 8 and 9(a) come first, as might be expected. They define the clearance scheme. They are of preponderant importance.
[37]Universal Steam Navigation Co Ltd. v. James McKelvie & Co [1923] A.C. 492 at 499 per Lord Shaw and 500 per Lord Sumner.
[38]Forbes v. Git [1922] 1 A.C. 256 at 259 per Lord Wrenbury; see Lewison, The Interpretation of Contracts (3^rd ed, 2004) [299] – [302].

The decision in British Eagle

As noted by Nettle JA[39], the House of Lords in British Eagle held (by majority) that the effect of the Interline Agreements and of the IATA Clearing House Regulations, as they then stood, was that debts did arise between members as a result of transportation transactions and that, upon the liquidation of a member, the ordinary rules of liquidation should prevail. The Clearing House arrangements were held to be an invalid attempt to contract out of the company law provisions requiring the payment of unsecured debts pari passu.
[39]At [77] below.

Following the decision in British Eagle, both the Agreement and the Regulations were amended. It is common ground that the amendments were made with the intention of overcoming the decision in that case. Both at first instance and in this Court, however, Ansett has contended that there is no relevant difference between the provisions which applied at the time of British Eagle and the provisions which now apply and, accordingly, that the decision in British Eagle remains applicable and should be followed.

In my opinion, that submission must be rejected. As Nettle JA points out[40], the new Regulation 9 is significantly different from the corresponding Regulation 18 with which the House of Lords was concerned. The differences are readily apparent upon examination of the terms of former Regulations 18(b), (c) and (d), which were as follows:

“(b)That it shall be deemed to be an express term of every contract agreement or arrangement for the time being subsisting between any two members in respect of which any debit or credit (being a debit or credit of a type for the time being handled by the clearing house) may arise that the amount of such debit or credit shall be payable or receivable by and through the medium of the clearing house in accordance with the regulations and current clearing procedure and not otherwise in any manner.

(c)That the effecting of a clearance in accordance with the regulations and current clearance procedure shall constitute a satisfaction and discharge of every debt dealt with in such clearance irrespective of whether the member by whom such debt was incurred shall be on balance in credit or debit as a result of such clearance save that if such member shall be in debit on balance such member shall remain liable to pay to the clearing house the amount by which such member is so in debit on balance.
(d)Notwithstanding the foregoing provisions it shall be open to any two members to agree between themselves that any particular transaction or class of transaction between them shall be settled otherwise than through the clearing house, in which case debits or credits arising in respect of those transactions or classes of transactions shall not be notified to the clearing house and this regulation shall not be applicable thereto.” (emphasis added)

[40]At [87] below.

Two points may be noted. First, the former Regulations referred to “debits or credits arising” in respect of contracts, and transactions, between members. It is clear from former sub-reg 18(d) that the debits and credits referred to were understood to arise in the transactions themselves, rather than in the clearance process. This also appears from sub-reg 18(a), which spoke of “notification to the Clearing House of any credit or debit for clearance”. Secondly, sub-reg (c) spoke of members incurring debts in their transactions inter se, which debts were treated as satisfied and discharged when dealt with by clearance. That sub-regulation drew a clear linguistic distinction between a member having incurred a debt, and a member being “on balance in credit or debit” as a result of a clearance.

The terms of the current Regulation 9(a) stand in striking contrast. Instead of referring to “debits or credits arising in respect of” clearance transactions, Regulation 9(a) declares that no liability for payment arises in respect of such transactions and no right of action to recover payment accrues. As Nettle JA says[41], the declaration that no liability for payment arises is – no doubt intentionally – the very converse of the view taken by the House of Lords of the former Regulations, that a liability for payment did accrue between the parties to a clearance transaction.
[41]At [87] below.

In British Eagle, Lord Cross (with whom Lord Diplock and Lord Edmund-Davies agreed) said he had no doubt that the right of one member (under the former Regulations) to have a claim against another member settled through the Clearing House would be called a debt in common parlance. His Lordship noted that –

“the framers of the regulations – some of whom were presumably lawyers – had no hesitation in describing the rights in question as ‘debts’ in Regulation 18(c).”[42]

In the event, His Lordship was content to assume that the legal rights acquired by Carrier against Issuer when Carrier rendered the service in question –

“were not strictly speaking ‘debts’ owing by [Issuer] but were innominate choses in action having some, but not all, the characteristics of ‘debts’.”[43]

[42]At 778F.

[43]At 778H.

It can now be seen that this conclusion turned on the particular language of the Regulations as they then stood. Because of the very significant changes made to the relevant Regulations since then, the decision in British Eagle has no application to the question before this Court. It is therefore unnecessary to consider whether, if the decision were applicable, it should be followed.

The purpose or intention of the amendments

Ansett submits that, if the Regulations and the Agreement in their current form do not infringe the so-called British Eagle principle, the amendments made since “were invalidated by reason of IATA’s purpose or intention, in effect, to defeat the provisions of insolvency laws.” The learned trial Judge rejected this submission on the ground that he was not satisfied that the evidence established any such purpose or intention.

As already mentioned, it was common ground that amendments to the Regulations and the Agreement had been made following the British Eagle decision and in response to it. Ansett refers to minutes of meetings of IATA committees, which appear to confirm that this was so. Ansett argues that –

“where a party enters into an arrangement with the intention of depriving some creditors of their rights on an insolvency, that may be sufficient to justify holding invalid the provision even in circumstances where it would not otherwise be held to be invalid.”

Reliance is placed on the decision of Neuberger J in Money Markets International Stockbrokers Limited (in Liq) v. London Stock Exchange Limited.[44]

[44][2001] 4 All E.R. 223 at 251, 255.

In my opinion, whatever may be the scope of the legal principle adverted to, it has no application to the present case. What has occurred is that, following a court decision ruling that the rights and liabilities of parties to a contract had a particular character, those parties have exercised their contractual freedom in amending the terms of the contract so as to make clear that the character of those relationships was thereafter to be different from that which the court had found it to be. On no view could that action – of making contractual amendments intended to govern countless

transactions between solvent parties into the indefinite future – be characterised as an attempt to deprive creditors of their rights on an insolvency. Third parties who deal with Clearing House members on and after the date of the amendments deal with them on the basis that the rights of members inter se are as prescribed by the amended Regulations and Agreement.

I would therefore dismiss the appeals.

NETTLE, J.A.:

These are appeals from judgments given in the Corporations List of the Commercial and Equity Division on 22 April 2005. The judge held that IATA Clearing House Regulations did not cease to apply to Ansett Australia Holdings Ltd (“Ansett”) upon Ansett entering into a Deed of Company Administration on 2 May 2002. In so holding, the judge rejected Ansett’s contention, based on the decision of the House of Lords in British Eagle,[45] that the IATA Clearing House Regulations were repugnant to Australian corporate insolvency legislation and thus contrary to public policy.
[45]British Eagle International Air Lines Ltd v. Compagnie Nationale Air France [1975] 1 W.L.R. 758.

The facts

As appears from his Honour’s reasons for judgment, international airline operators regularly sell tickets to passengers for journeys which are partly or wholly over the routes of other airline operators and engage likewise for goods, baggage and cargo. To facilitate those transactions, airline operators enter into IATA Multilateral Interline Traffic Agreements (“Interline Agreements”) with other airlines and undertake many such transactions pursuant to those agreements. In order to avoid the necessity of having to make and receive numerous payments to and from other airlines, the IATA Clearing House regulations provide for the Clearing House to enter debits and credits against and in favour of each operator in respect of its dealings with other operators and to set off credits against debits in

order to produce monthly balances to be cleared by payment by an airline operator to the Clearing House or payment by the Clearing House to an airline operator of the balance found to be due or owing. The “turnover” in relation to the transactions thus “cleared” runs to billions of dollars.
The Interline Agreeements

The IATA Multilateral Interline Traffic Agreement – Passenger and the IATA Multilateral Interline Traffic Agreement – Cargo are substantially the same and, as it was below, it is necessary for present purposes to refer only to the terms of the Passenger Agreement. They include the following:

“Article 2 – Issuance of Tickets and MCOs
2.1     ISSUANCE
2.1.1 Each party hereto is hereby authorised to issue or complete:
2.1.1.1 tickets, or MCOs exchangeable for tickets, for transportation of passengers,
2.1.1.2 all other documents necessary or appropriate for such transportation;
all in the form approved by, and in accordance with the tariffs and the terms, provisions, and conditions of the tickets, and other documents of the party over whose routes the passenger is to be carried ...
2.2     ACCEPTANCE
2.2.1 Each party agrees to accept each such ticket, or other transportation document and to honour each MCO issued by any other party hereto and to transport passengers and baggage as specified therein, subject to its applicable tariffs and subject to the terms of this agreement and applicable regulations and clearance procedures of the IATA Clearing House ...
Article 8 – Interline Billing and Settlement
8.1     PAYMENT OF TRANSPORTATION CHARGES
Each issuing airline agrees to pay each carrying airline the transportation charges applicable to the transportation performed by such carrying airline and any additional transportation or non-transportation charges collected by the issuing airline for the payment of which the carrying airline in responsible, in accordance with applicable regulations and current clearance procedures of the IATA Clearing House, unless otherwise agreed by the issuing airline and the carrying airline.
8.2     BILLING AND SETTLEMENT
8.2.1 Billing of amounts payable pursuant to the Agreement shall be in accordance with the rules contained in the IATA Revenue Accounting Manual as amended from time to time.
8.2.2 Unless otherwise agreed settlements of amounts payable pursuant to this Agreement between parties that are members of the IATA Clearing House shall be in accordance with the Manual of Regulations and Procedures of the IATA Clearing House.
8.2.3 Except as may otherwise be provided in other agreements, rules or regulations, the right to payment hereunder arises at the time such services are rendered by a party hereto or its agent.
8.2.4 Except as provided in 8.2.5, settlements of transactions arising under the terms of this Agreement involving one or more parties that are not members of the IATA Clearing House shall be in accordance with the following procedures:
8.2.4.1 settlements shall be made monthly;
8.2.4.2 each party shall issue a monthly statement of invoices and credit notes rendered by it. The monthly statements shall be dispatched promptly but in any case not later than the 30^th day of the month following that of the billing month, e.g. for billing month January not later than the last day of February;
8.2.4.3 settlement shall be effected promptly after the monthly statements are exchanged by offset of balances and cash payment of the net balance in the national currency of the net creditor.
8.2.5 Parties may expressly agree to settle transactions in a manner other than the procedure described in 8.2.4.1- 8.2.4.3.”

The IATA Revenue Accounting Manual

The relevant provisions of the IATA Revenue Accounting Manual are as follows:

BASIC BILLING RULES
1.1      Billing Passenger Flight Coupons
1.1.1. Subject to paragraphs 1.2.1 and 1.2.2 below, and to any rules relating to voluntary and involuntary rerouting (see IATA Resolution 735d and 736), the amount to be billed by the honouring airline to the issuing airline is the fare (or prorate thereof) due to the carrier shown in the “Fare Calculation” area or “From/To” panel, or where there is no entry, in the “Carrier” box in the “Good for Passage” section. The fare (or prorate thereof) shall be calculated in accordance with the original information as to rerouting, carrying airlines, coupon and fare basis/ticket designators and fare calculation points shown on the flight coupon…
…
CHAPTER A9 – INVOICES AND CREDIT NOTES
1         USE OF INVOICES
1.1      Initiated by Creditor against Debtor Airline
Interline Transactions are accounted for by an invoice issued by the creditor airline charging the debtor airline. Except as provided in Chapter A6 for Charges Collect Shipments, the debtor airline is the airline which issues the documents on which the charges are raised…
…

PREPARATION AND RENDERING OF INVOICES AND CREDIT NOTES
…
3.3 Preparation and Dispatch
Invoices and credit notes:
a)Should be typed and not hand-written;
b)Be prepared no later than the time limits specified in Chapter A 10 but no earlier than the IATA Clearance/billing month within which the transaction was performed; i.e. transaction month – June, invoice/credit note must be dated June or later and may only by included in a June or subsequent IATA Clearance/Statement. UATP UCCCF/Transportation Credits may be processed through a Clearance earlier than that of the transaction date.
c)i) For settlements made through the IATA Clearing House, invoices and supporting documents shall be forwarded to the carrier being billed no later than 7 calendar days after the closure day of the relevant clearance month as defined in the Clearing House Manual…

…
d)Unless otherwise agreed, invoices and supporting documents shall be forwarded directly to the carrier being billed at the address included in Chapter B7 by air mail…

The IATA Clearing House Regulations

The essence of the IATA Clearing House Regulations is contained in regulations 1, 2, 8, 9 and 12, as follows:

“DEFINITIONS
1.        In these Regulations the following expressions have the following meanings:
Airlines Clearing House: The Airlines Clearing House, Inc., a company incorporated in the State of Delaware, U.S.A. for the clearance of certain accounts between its members.
Billings: Written advice of transactions to be notified to the Clearing House for clearance given by one member to another. A billing date does not govern the date upon which a transaction creates an obligation from one member to another.
Clearance: The ascertainment each month of the balances due to members by the Clearing House and the balances due by members to the Clearing House after set-off of all claims duly notified to the Clearing House in accordance with these Regulations.
To Clear: To effect a clearance.
Clearing House: The IATA Clearing House.
Director General: The holder of the office of Director General of IATA.
Board of Governors: The Board of Governors (Executive Committee) of IATA, established in virtue of the Association’s Act of Incorporation.
Financial Committee: A standing committee of IATA appointed by the Board of Governors with the confirmation of the Annual General Meeting and reporting to the Board of Governors.
IATA: The International Air Transport Association, a body incorporated by Act of the Parliament of Canada.
IATA Multilateral Interline Traffic Agreements: The multilateral agreements for the interchange of interline passengers and cargo established under the applicable IATA Traffic Conference Resolutions.
ESTABLISHMENT
…
2.        2. The IATA Clearing House is a department of IATA for the clearance of accounts between air transport enterprises.
...
FUNCTION OF THE CLEARING HOUSE
8.        The function of the Clearing House is to effect monthly clearances and to pay or to collect from members and such other organisations which are entitled to use the services of the Clearing House the balances found to be due by or to the Clearing House, and to take such action as may be necessary or incidental thereto.
EFFECT OF ADMISSION TO MEMBERSHIP
9.        The admission to membership in the Clearing House shall constitute a contract between each member and every other member and IATA to the effect following, that is to say:
(a)     With respect to transactions between members of the Clearing House which are subject to clearance through the Clearing House as provide in Regulations 10 and 11 and subject to the provisions of the Regulations regarding protested and disputed items, no liability for payment and no right of action to recover payment shall accrue between the members of the Clearing House. In lieu thereof members shall have liabilities to the Clearing House for balances due by them resulting from a clearance or rights of action against the Clearing House for balances in their favour resulting from a clearance and collected by the Clearing House from debtor members in such clearance;
(b)     Notification to the Clearing House of any claim (debit or credit) for clearance shall, subject to the Regulations, constitute an irrevocable authority to clear the same in accordance with the Regulations and current clearing procedures and to pay or collect any balances due by or to the Clearing House as a result of the clearances effected; provided, however, that if the Clearing House receives notification that the amount of a claim that has been notified for clearance has been attached, garnished or otherwise seized by issue of an order of Court, the Clearing House Manager shall, whilst such situation exists, suspend all clearance between the members concerned until notified by both parties that normal clearance between them may be reinstituted. During the period of suspension, the parties affected shall remain absolved from their respective obligations under Regulation 10 to settle only through the Clearing House.
(c)     The effecting of a clearance and payment of the balances due to or by the Clearing House in accordance with these Regulations and current clearance procedures shall constitute a satisfaction and discharge of every claim dealt with in such clearance. IATA shall be entitled to recover any balances due to the Clearing House by legal action.
(d)     Members of the Clearing House may include in the second clearance in which a new member participates their unpaid claims against the new member referring to pre-membership transactions, unless otherwise agreed between the new member and the member having the claim.
(e)     The contract created hereby and the obligations created hereunder shall be binding upon the successors in interest, including administrators, trustees and receivers, of each member.
SCOPE OF CLEARANCE
10.     The following classes of transactions shall be cleared through the Clearing House and not otherwise in any manner, except for particular transactions or particular classes of transactions with respect to which the parties have expressly agreed that they shall not be cleared through the Clearing House: all transactions between members pursuant to their participation in the IATA Multilateral Interline Traffic Agreements, transactions arising from the Universal Air Travel Plan and Miscellaneous Charges of any nature including the carriage of mail, charters, Pool agreements, airport and terminal charges, aircraft servicing, maintenance and victualling charges, salvage work, catering and ground transportation services, telecommunications, etc. and all similar services customarily rendered between carriers, including billings for authorised cash advances made by national airlines to representatives of foreign airlines for the following purposes:
(a)     advances to crews for the purpose of accommodation and subsistence;
(b)     advances to local representatives of foreign airlines under standing authority and within agreed monthly maxima for the purpose of meeting normal weekly and monthly current airport or town expenditure.
...
12.     All transactions within the scope of clearance are hereby deemed mutual debts of the parties involved. Unless otherwise agreed to by the parties, a claim for such transaction shall arise upon the performance of the services rendered therefor.”

Ansett in Administration

Ansett became a member of the IATA Clearing House in 1951 and remained as such until its insolvency in 2001. Throughout that period it was party to a number of Interline Agreements under which it sold space over other airline operators’ routes and had space on its routes sold by other airline operators.

On 12 September 2001, administrators were appointed to Ansett pursuant to Part 5.3A of the Corporations Act 2001 and on 2 May 2002 Ansett entered into a Deed of Company Administration under which the second appellants were appointed the Deed Administrators.

Section 444D of the Corporations Act 2001 provides that:

“Effect of deed on creditors

(1)A deed of company arrangement binds all creditors of the company, so far as concerns claims arising on or before the day specified in the deed under paragraph 444A(4)(i).[46]
[46] Scil. the day (not later than the day when the administration began) or before which

(2)Subsection (1) does not prevent a secured creditor from realising or otherwise dealing with the security, except so far as:
(a)the deed so provides in relation to a secured creditor who voted in favour of the resolution of creditors because of which the company executed the deed; or

(b) the Court orders under subsection 444F(2).

(3)Subsection (1) does not affect a right that an owner or lessor of property has in relation to that property, except so far as:
(a)the deed so provides in relation to an owner or lessor of property who voted in favour of the resolution of creditors because of which the company executed the deed; or

(b) the Court orders under subsection 444F(4).”

Clause 1.4.1 of the Deed provides that if there is any inconsistency between the provisions of the Deed and the Constitution of the Company or any other obligation binding on the Company[47] the provisions of the Deed shall prevail.
[47]Other than the SEESA Deed and the SEESA Payments Deed.

Clause 3 of the Deed provides that the purposes and objects underlying the Deed are to provide the business, property and affairs of the Company to be administered in a way that provides the maximum possible return for the Deed Creditors from the orderly sale and realisation of assets of the Company, and for a moratorium on all Deed Creditors taking action against the Company.

Clause 4.2.5 provides that, subject to immaterial exceptions, a Deed Creditor shall not without the prior written consent of the Deed Administrators take any action whatsoever during the Deed Period to seek to recover any part of its Claim other than pursuant to the Deed. “Claim” is defined in clause 1 of the Deed as meaning:

“…a debt payable by, and all claims against, the Company (present or future, certain or contingent, ascertained or sounding only in damages), being debts or claims the circumstances giving rise to which occurred on or before the Appointment Date;…”

Clause 12.1 of the Deed provides that the Deed Administrators shall take reasonable care and endeavour to sell or otherwise realise all property, assets and rights of the Company for the best price that is reasonably obtainable having regard to s. 442C of the Act and the circumstances existing when those assets are sold and having regard to the diminution of the Company’s liabilities in general and a reduction of payments to Participating Creditors in particular. “Asset” is defined in Clause 1 of the Deed as including:

“… a mere cause of action or chose in action.”

Clause 14 of the Deed provides that the rules and mechanisms to be applied to proofs of debt and the ascertainment of Claims shall be similar to the rules and mechanisms of such things prescribed by the Corporations Act 2001 in the context of the liquidation of a company, amended or adjusted as appropriate to make the process as cost effective as possible.

The judgment below

In British Eagle[48] the House of Lords held by majority that the IATA Clearing House Regulations as they then stood amounted to a purported contracting out of the provisions in s.302 of the Companies Act 1948 (UK) for the payment of unsecured debts pari passu; that such a contracting out was contrary to public policy; and that, on that principle, the rules of general liquidation should prevail. It followed that, notwithstanding the clearing house arrangements, the liquidator of British Eagle was entitled to recover payment of the sums payable to British Eagle by other airlines for services rendered by it during the relation back period and that airlines which had rendered services to it during that period became on the liquidation entitled to prove for the sums payable to them.
[48][1975] 1 W.L.R. 758.

Before the judge below, it was contended on behalf of Ansett that the IATA regulations as they now stand amount to a purported contracting out of the provisions of the Deed of Company Administration and therefore of the requirements of s.444D of the Corporations Act 2001, and that, by parity of reasoning with British Eagle, such a contracting out should be seen as contrary to public policy and on that principle that the rules of the Deed should prevail.

The judge, however, rejected that contention because of changes made to the IATA Clearing House Regulations and the Interline Agreements since British Eagle was decided. As his Honour put it:

“44       In my opinion the British Eagle principle is inapplicable by reason of the changes to the clearing house regulations and interline agreements.
45       Although there was detailed argument about the effect of numerous provisions of the clearing house regulations and the interline agreements, it seems to me that the essence of the changes can be described by reference to cl.9 of the Clearing House Regulations and articles 2 and 8 of the Interline Passenger Agreement.Clause 9(a) of the Clearing House Regulations expressly provides that ‘no liability for payment and no right of action to recover payment shall accrue between members of the Clearing House’. This appears to me to be a central and overriding provision by virtue of which no debt or chose in action ever arises as between the members of the Clearing House. The only debts that arise are as between each member and IATA.[49]The form of the regulation which was considered in British Eagle did not have or purport to have that effect (as was stated by Lord Cross). Furthermore, the relevant provisions of the Interline Passenger Agreement expressly make the rights and obligations of the parties ‘subject to the ... applicable regulations and clearance procedures of the IATA Clearing House’. Reference was made to numerous provisions which might be viewed as providing ‘contrary indications’ but I consider that they have to be read subject to what I regard as the overriding provision in cl.9(a) of the Clearing House Regulations.”
46       In my opinion there was no relevant asset of Ansett being a debt or other chose in action, of which the non-airline creditors were deprived by virtue of the clearing house arrangement. It was conceded on behalf of Ansett that, if this was so, the British Eagle principle ‘did not bite’. I so conclude.”
[49]My emphasis.

The appellant’s contentions

The appellants contend that the judge’s conclusion was wrong. They submit that it was based upon a distinction which is illusory. They acknowledge that Regulation 9 (as it is now) provides in express terms that “no liability for payment and no right of action to recover payment shall accrue between members of the Clearing House”. The comparable Regulation 18 (as it was at the time of British Eagle) did not so expressly provide. But the respondents submit that Regulation 9 does no more in effect than state in express terms what Lord Cross and the other members of the majority in British Eagle perceived to be implicit in Regulation 18. That is to say, that :

“…if two airlines are members of the clearing house and do not agree that the payment for some service of a type normally handled by the clearing house shall be settled between them directly the airline entitled to the payment shall not have any right to enforce payment of the amount in question by legal proceedings but shall have simply a right to claim a credit for the service in the next clearance.”

It follows, in the appellants’ submission, that there is no relevant difference between the regulations as they were at the time of British Eagle and as they are now and therefore that the decision in British Eagle is as much applicable to the regulations as they are now as it was to the regulations as they were at the time of the decision.

The respondents’ contentions

The respondents submit that the judge was right. They say that the judge was correct that Regulation 9[50] is now the fundamental provision of the regulations dealing with the effect of admission to membership of the Clearing House and that it constitutes an express agreement between all members and between each member and IATA that, with respect to transactions subject to clearance: “no liability for payment and no right of action to recover payment shall accrue between members of the Clearing House”. In the respondents’ submission, Regulation 9 negates the existence as between member airlines of any chose in action generating liability in respect of any amount between them and the existence of any chose in action entitling recovery of such an amount, and puts in place liabilities to (and only to) and rights of action against (and only against) the Clearing House.
[50]AB vol 1, B80.

The respondents add that, if there were any doubt about the effect of Regulation 9, it is significant that it was was added only after British Eagle was decided and therefore, presumably, with the intention of overcoming the decision in that case. They argue, in accordance with the principle that courts should strive to give effect to the perceived intentions of the parties,[51] that this court should construe the IATA Clearing House Regulations as overcoming British Eagle.
[51]Hillas & Co v. Arcos Ltd (1932) 38 Com. Cas. 23 at 29; The Council of the Upper Hunter County District v. Australian Chilling and Freezing Co. Ltd (1968) 118 C.L.R. 429 at 437; Reardon Smith Line Ltd v. Yngar Hansen Tangen [1976] 1 W.L.R. 989 at 995-996; Pacific Carriers Ltd v. BNP Paribas (2004) 218 C.L.R. 451 at 461[22].

The respondents also emphasise that the Interline Agreements and IATA Clearing House Regulations are parts of a world-wide scheme, evidently designed to be given effect in many different legal systems, and that the parties to the scheme are drawn from numerous countries of the world. They submit that those circumstances provide added reason to construe Regulation 9 as a clear statement of the fundamental characteristics of the scheme and, therefore, as prevailing over any “discordant elements” apparent in the drafting of other elements of the documentation.

In the result, the respondents say, individual transactions between member airlines yield nothing by way of liabilities or rights of action - only “items” for submission to the Clearing House for computation of ultimate monthly balances - and there is, therefore, only ever one chose in action each month – a chose in action as against the Clearing House for the balance - susceptible to the description of a debt or an “innominate chose in action”[52] having many of the features of debt.
[52][1975] 1 W.L.R. 758 at 778, per Lord Cross.

The respondents concede that the right to have “items” placed into the clearance process may be counted as “property” of some species, but they say that if it be so, it is property which of its nature can only ever be fulfilled and realized upon and by notification to IATA and entry into the clearance process. Consequently, they contend, it is not property that is available for distribution among creditors.

The effect of the amendments to the IATA Regulations

I accept the respondents’ submissions, up to a point. Despite the ingenuity of the appellant’s argument, I do not think that the new Regulation 9 can be sloughed off as merely putting into express terms what was already implicit in the terms of the old Regulation 18. For even allowing for the apparent similarity as between Lord Cross’s description of the effect of the old Regulation 18 and the terms of new Regulation 9(a), the two are significantly different. Lord Cross spoke of regulation 18 as depriving the carrying airline of any “right to enforce payment of the amount in question by legal proceedings”. Arguably, that corresponds with the provision in Regulation 9(a) that there shall be “no right of action to recover payment”. But Regulation 9(a) goes further than that - by providing that “no liability for payment… shall accrue”, and in terms that is the very converse of the view taken in British Eagle under the regulations as they then were that a liability for payment did accrue. The additional words are seemingly calculated to preclude the possibility of the process of clearance being characterised as one of clearing debts.

That said, however, it is is one thing to make changes to a contract which are calculated to achieve a result and it is another to make changes which have the effect of producing that result. For regardless of what may appear to be the subjective intention of the parties, in the end the meaning of a written contract must be determined objectively by construing each clause according to its natural and ordinary meaning read in light of the contract as a whole.[53] And if then so construed the contract bespeaks a relationship which is of one kind, a provision which purports to proclaim that it is of another kind will be read down or read as ineffective. In the words of Lord Denning in Massey v. Crown Life Insurance Co.,[54] “the parties cannot alter the truth of that relationship by putting a different label on it”, and as Lord Brandon observed in a similar context when delivering the judgment of the Privy Council in Narich Pty Ltd v. Commissioner of Pay-roll Tax (N.S.W.),[55] that is so even if the label is added in good faith and with the desire that it should be effective.
[53]Australian Broadcasting Commission v. Australasian Performing Right Association Ltd (1973) 129 C.L.R. 99 at 109.
[54][1978] 1 W.L.R. 676 at 679.
[55](1983) 2 N.S.W.R. 597 at 606; 84 ATC 4035 at 4043.

I accept that the regulations as they now stand are relevantly different to those which were considered in British Eagle. I also accept that the changes made to the Regulations since British Eagle or at least some of them were in all likelihood designed to overcome the decision in that case. But, in my view, when the meaning of the Interline Agreement (including the Clearing House Regulations) is determined objectively, by construing each clause according to its natural and ordinary meaning in light of the contract as a whole, the relationship between issuing airline and carrying airline remains one of debt. Despite the contrary asseveration in Regulation 9(a), it is apparent that a carrying airline’s performance of services does give rise to a debt between the issuing airline and the carrying airline and that the debt so created remains in existence until cleared in accordance with the Clearing House Regulations or is otherwise satisfied.

As has been seen, clause 8.1 of the Interline Agreement provides for each issuing airline to pay to each carrying airline the transportation charge applicable to the transportation performed by the carrying airline. In turn clause 8.2.3. provides that, except as may otherwise be provided in other agreements, rules or regulations, the right to payment[56] arises at the time the services are performed. Subject, therefore, to any contrary agreement, rule or regulation, upon the carrying airline performing the transportation services in question the issuing airline incurs a definite liability to pay an ascertained sum and the carrying airline acquires a correlative definite right to be paid the ascertained sum. According to ordinary legal acceptation, such an obligation and correlative right is properly described as a debt.
[56]Of the transportation charges.

Clause 8.2.1 of the Interline Agreement provides that billing of the amount payable shall be in accordance with the rules contained in the IATA Revenue Accounting Manual. Those rules provide for the “creditor airline” charging the “debtor airline” to forward an invoice and supporting documents to the “carrier being billed”. Clause 8.2.2 of the Interline Agreement provides that, unless otherwise agreed, settlement of the amount payable[57] as between members of the IATA Clearing House shall be in accordance with the Manual of Regulations and Procedures of the IATA Clearing House. Clause 8.2.4 provides that settlement of the amount payable as between airlines of which one or more is not a member of the IATA Clearing House shall be paid monthly.
[57]scil. the transportation charges.

So, as it seems, the debt is payable in future. But it is still a debt.[58]
[58]There is debitum in praesenti solvendum in futuro; cf. Federal Commissioner of Taxation v. James Flood Pty Ltd (1953) 88 C.L.R. 492 at 507.

One turns then to the Clearing House Regulations, and first to the provision in Regulation 9(a), that:

“…with respect to transactions…subject to clearance through the Clearing House…no liability for payment and no right of action to recover payment shall accrue between members of the Clearing House. In lieu thereof members shall have liabilites to the Clearing House for balances due by them…or rights of action against the Clearing House for balances in their favour…”.

In the respondent’s submission, a transaction becomes “subject to clearance through the Clearing House as provided in Regulation 10” either at inception or, at latest, when notified for clearance. According to the respondents, the effect of clause 9(a) is, therefore, to annihilate “the amount payable” (ie.to annihilate the debt) either at the instant of creation of the debt or, at the latest, upon notification of the debt to the Clearing House for clearance. Thereafter, it is said, the carrying airline has no right to payment as against the issuing airline but only a right to be paid by the Clearing House such credit balance as may result from clearance.

If Regulation 9(a) stood alone, it would be hard to resist the respondents’ argument. Its terms do imply the annihilation of the debt and its replacement with rights as against the Clearing House alone. But, for the reasons already stated, the provision must be read in context and, in particular, having regard to the other paragraphs of Regulation 9. The first and perhaps most important of those for present purposes is Regulation 9(b).

As already noticed, Regulation 9(b) provides for the possibility of the Clearing House receiving notice that a claim notified for clearance is attached, garnisheed or otherwise seized by issue of an order of court. In that event, the regulation requires the Clearing House Manager to suspend the clearance and specifies that the parties shall be relieved of their obligation under Clause 10 to settle the claim through the Clearing House. Plainly, however, it would not be possible to garnishee, attach or seize a claim unless the claim were a debt which remained in existence. And, equally, it would not be possible to “relieve” the issuing airline and the carrying airline “of their obligation” to settle through the Clearing House if the debt the subject of clearance had already been transmogrified into rights and obligations vis-à-vis the Clearing House alone. Evidently, therefore, clause 9(b) is premised upon the assumption that there is a debt as between the issuing airline and the carrying airline and that, despite notification, the debt remains in existence until it has been cleared.

Regulation 9(c) is more equivocal but in my view to similar effect. As has been seen, it provides that: “The effecting of a clearance…shall constitute a satisfaction and discharge of every claim dealt with in such clearance.” In my view that too bespeaks recognition that “claims” (scil. debts due by issuing airlines to carrying airlines for payment of transport amounts under clause 8.2.2 of the Interline Agreements) are not extinguished upon creation or by notification to the Clearing House for clearance, but only once clearance is effected.

The respondents submit to the contrary. They say that “claims” in Regulation 9(c) means claims against the Clearing House to have credits and debits included in the settlement process. They also emphasise the expression “claim (debit or credit)” which appears in Regulation 9(b) and they suggest that the idea of a debit claim would be a nonsense if “claim” were a debt owed by an issuing airline to a carrying airline as opposed to a right as against the Clearing House to have either a debit or credit item entered in the clearance.

Thirdly, beyond the effect of a deed of company administration, the Corporations Act 2001 does not confer general power on administrators to effect a distribution of assets within the administration.

Fourthly, it is the creditors of a company and not the Act who determine which assets and which creditors’ claims are, or are not, to be the subject of the provisions of a deed of company administration.

In the respondents’ submission those differences leave no reason to think that the British Eagle principle prevents contracting out of the sort of insolvency regime for which provisions like Part 5.3A of the Corporations Act 2001 (Com) provide.

Further, the respondents say that failing all else there is no reason to suppose that such public policy as may inhere in a deed of company administration entered into in 2002 under the authority of Australian legislation passed in 1993 is capable of rendering void a contract with global effect and operation that was entered into in 1976.

There is some force in these submissions. It is true that Lord Cross based the British Eagle principle on the rules for distribution of an insolvent’s property that apply in bankruptcy and in company liquidation. It is also true that, whereas under those rules, creditors of the same class generally rank pari passu, that is not necessarily if ever the case under a deed of company administration entered into pursuant to Part 5.3A of the Corporations Act 2001 (Com). But in my view, it would be a mistake to think of the British Eagle principle as limited to the pari passu distribution of a debtor’s property. Certainly, pari passu distribution is one of the possible manifestations of the principle. But it seems to me that the principle itself rests in the broader conception that the whole of a debtor’s estate should be available for distribution among creditors in accordance with whatever regime for the distribution of property may apply according to the laws of insolvency.[81] Hence the effect of the principle, properly understood, is that a creditor may not lawfully contract with a debtor so as to achieve a distribution of property in insolvency which is different to that for which the laws of insolvency provide, or at least may not do so in a fashion which is to the prejudice of other creditors who are not party to the contract. [82] To adopt the words of R.J. Mokal in his learned article on the pari passu myth:

“… one may not bargain for immunity from the collective bankruptcy regime (except as provided by the law).
…
…What cannot be contracted out of (in an unacceptable way) is not the pari passu principle, but the whole collective system for the winding-up of insolvent estates…[I]t is forbidden for a creditor to leave his assigned place in the queue and step ahead of others.”[83]

[81]Ex parte Mackay (1873) 8 Ch. App. 643 at 647; Ex parte Williams (1877) 7 Ch. D. 138; Ex parte Jackson (1880) 14 Ch. D. 725, and see the incisive analysis of those cases undertaken by R.J. Mokal in Priority as Pathology: the Pari Passu Myth, [2001] C.L.J. 581 at 596-7.

[82]Horne v. Chester and Fein Property Developments Pty Ltd [1987] V.R. 913 at 919; Re Maxwell Communications Corporation Plc [1993] 1 W.L.R. 1402 at 1416; United States Trust Co of New York v. ANZ (1995) 37 N.S.W.L.R. 131 at 141 and 143; In the matter of SSSL Realisations (2002) Limited (in liquidation) [2004] EWHC (England & Wales High Court) 1760 (Ch), Lloyd, J. at [22] and [41].

[83]Mokal, [2001] C.L.J. 581 at 590-597.

Part 5.3A of the Corporations Act 2001 is part of Australia’s corporate insolvency laws. It was enacted in response to the recommendations of the Harmer Committee that, because the four methods then available for a company to deal with its affairs in a voluntary fashion when insolvent did not provide a satisfactory range of alternatives, a new voluntary procedure for insolvent companies was needed. The Explanatory Memorandum accompanying the Corporate Law Reform Bill 1992, by which Part 5.3A was introduced, so stated the objective as follows:

“CORPORATE INSOLVENCY
20 Part 4 of the Bill inserts a number of new or replacement sets of provisions into the Corporations Law, and amends a number of other provisions, in relation to corporate insolvency. These reforms implement recommendations by the Australian Law Reform Commission in the report on its ‘General Insolvency Inquiry’ (known as ‘the Harmer Report’).
Voluntary Administration of Insolvent Companies

21 Proposed Part 5.3A implements the Harmer Report’s recommendations in relation to the establishment of a new scheme for the voluntary administration of insolvent companies”...[84]

[84]Page 9 of the Explanatory Memorandum to the Corporate Law Reform Bill 1992.

Section 435A of the Corporations Act 2001 provides that the object of Part 5.3A is to provide for the business, property and affairs of an insolvent company to be administered in a way that maximises the chances of the company, or as much as possible of its business, continuing in existence or, if that is not possible, for the company or its business to continue in existence, in order to produce a better return for the company’s creditors and members than would result from an immediate winding up of the company.

Clearly enough, the regime for which Part 5.3A provides is in significant respects markedly different to the regime which applies in a winding up. As the respondents point out, Part 5.3A does not earmark from the outset the totality of the property of the company to go to the satisfaction of those who may be creditors of the company in administration. It does not prohibit an administrator from propounding, or prevent the company’s creditors from resolving to execute, a deed of company administration which provides for the distribution of the company’s property on a basis which does not accord with the pari passu principle. The powers of an administrator to effect a distribution of assets within the administration are constrained by the terms of the deed of company administration. It is the creditors, as opposed to statutory formula who determine which assets and which creditors’ claims are, or are not, to be the subject of the provisions of the deed.

But, at the same time, the combination of Part 5.3A and the contents of a deed of company administration entered into in accordance with its provisions are no less a collective statutory regime for the distribution of property in insolvency than are the provisions of Part 5.5:

Section 444A(4) provides that the deed must specify certain matters, including: “the property of the company (whether or not already owned by the company when it executes the deed) that is to be available to pay creditors’ claims” (s.444A(4)(b)); “the order in which proceeds of realising the property referred to in paragraph (b) are to be distributed among creditors bound by the deed” (s.444A(4)(h)); and “the day (not later than the day when the administration began) on or before which claims must have arisen if they are to admissible under the deed” (s.444A(4)(i)).

The effect of s.444A(5) and Regulation 5.3A.06 and Schedule 8A of the Corporations Regulations is that the administrator must apply the property of the company coming under his or her control under the deed in the order of priority specified in section 556 of the Act, unless the deed otherwise provides.

Section 444A(4)(b) requires that the deed specify, among other things, the property of the company that is to be available to pay creditors’ claims.

Section 444A(4)(h) requires that the deed specify the order in which proceeds of realisation of the property referred to in s.444A(4)(b) are to be distributed among creditors bound by the deed.

Section 444D(1) provides that the deed, once executed, binds all creditors of the company, so far as concerns claims arising on or before the day specified in the deed under paragraph 444(4)(i).

As Batt, J.A. observed in GM & AM Pearce and Co Pty Ltd v. RGM Australia Pty Ltd[85], the effect of ss.444A(4)(b) and (h) and 444D(1) is that, upon the execution of a deed of company arrangement under Part 5.3A, the order in which proceeds of realising the property of the company are to be distributed among creditors bound by the deed is given statutory force and effect.
[85][1998] 4 V.R. 888 at 893-4.

In point of principle, therefore, I see no reason why British Eagle should not apply as much to a statutory regime which like Part 5.3A as it does to a statutory regime like s.31 of the Bankruptcy Act 1914 (UK) or Part 5.5 of the Corporations Act 2001.

Such authority as there is on the point is also not inconsistent with that view. To the contrary, a Deed of Company Administration is in some respects akin to a composition with creditors or deed of arrangement under the bankruptcy legislation, and in Ex Parte Milner: In re Milner[86] the English Court of Appeal set aside a composition in which not all creditors shared equally. The arrangement there, which was to be effected by way of deed, was that the creditors would receive 10 shillings in the pound. But after the respondent had executed the deed, the debtor’s brother induced several other creditors to execute it by promising to make additional payments to them. When the respondent learned of the arrangement between the debtor’s brother and some of the other creditors he applied successfully to have the arrangement set aside. Brett MR stated:

“[I]t is of the very essence of a composition of this nature that all the creditors who come in under it oblige themselves to each other, and the debtor obliges himself to every one of them, that, so far as he is concerned, all of them shall come in upon a footing of equality. This equality is implied by law from the very nature of the transaction”.[87]

Similarly, Bowen, L.J. said:
“[T]he creditors who take part in the scheme act upon the faith and understanding that they are all coming in upon terms of equality, and if a deed is prepared to carry out this equal distribution, every creditor who executes it does so on the faith that there is no private bargain with any of the other creditors which will destroy this equality.”[88]

[86](1885) 15 Q.B.D. 605.

[87](1885) 15 Q.B.D. at 612.

[88](1885) 15 Q.B.D. at 616.

It is true that Ex parte Milner was concerned with an impugned agreement which was entered into after the arrangement with creditors was entered into, and therefore in circumstances where the parties to the agreement had knowledge of the terms of the arrangement. In this case the facts are the converse. It is also true that a number of the older cases concerning contracts purporting to alter the distribution of property in the event of bankruptcy appear based on the idea that one may not contract with the intention of avoiding the provisions of the applicable bankruptcy regime. To that extent, they assume that the parties could foresee in advance of insolvency what would be the nature of the arrangement that would apply in event of insolvency.

For example in Higinbotham v. Holme[89] the question concerned a settlement on marriage of freehold estates of inheritance, and leaseholds for lives and years by a man not indebted, in trade, or intending it, to the use of himself for life, unless he shall embark in trade, and in the life of his wife become bankrupt and from his decease or bankruptcy to secure an annuity for his wife, and subject thereto for his heirs, executors, &c. It was held that a provision of that sort could not be sustained against creditors because it looked forward to a change of intention, to the purpose of becoming a trader, and expressly to the possible consequences of that purpose, and was therefore a limitation by the effect of which the estate would go to the creditors; that change being adopted with the express object of taking the case out of reach of “the Bankrupt Laws”.
[89](1812) 19 Ves. Jun. 88; 34 E.R. 451.

In Wilson v. Greenwood[90] articles of partnership had been amended to provide that on the bankruptcy of a partner his share shall be taken by the solvent partners at a sum to be fixed by valuation and payable by instalment in a course of years. The Lord Chancellor, Lord Eldon said that:

“Whether, supposing the original deed had provided for the dissolution of the partnership by bankruptcy, as it has provided for the dissolution by other means, that provision would be good? I will not say that it would not; but I have heard nothing to convince me that it would…but I have not doubt, from the face of [the amending deed], that it was made, in a strict sense, in contemplation of bankruptcy; for it contains a recital which cannot be believed by any one who looks at the original deed, that the parties to that deed intended the same provision in cases of bankruptcy and insolvency, as in the case of dissolution from other causes.…
I have no doubt, therefore, whether, on general principle, or on the construction of the deeds, that the law of this case is, that the partnership was dissolved by bankruptcy; and the property must be divided as in the ordinary event of dissolution without special provision…”[91]

[90](1818) 1 Swans. 469; 36 E.R. 469.

[91](1818) 1 Swans. At 482-3; 36 E.R. at 473-4.

In Whitmore v. Mason[92] it was held that a provision in a partnership deed that, in the event of the bankruptcy or insolvency of a partner, his share in a mining lease (forming part of the partnership property) shall go over to his co-partners, is void, as being in fraud of the bankrupt law. Sir Page Wood, V.C. said that :

“…the law is too clearly settled to admit of a shadow of doubt that no person possessed of property can reserve that property to himself until he shall become bankrupt, and then provide that, in the event of his becoming bankrupt, it shall pass to another and not to his creditors.
But it is argued that the case of partnership is exceptional; that, in forming a partnership, each partner is making a bargain with the rest, and has a right to stipulate for such privileges as he can obtain; that, by contributing his share to the common fund, and thereby giving the advantage of that share to the other person entering into the partnership, he acquires the right to stipulate that, in the event of the others becoming bankrupt, their shares shall not pass to their creditors, but shall remain the property of the partnership. And it was said that the case resembled the ordinary condition in a demise of land, that in the event of the tenant becoming bankrupt the land shall revert to the landlord.
…
The rule is clearly laid down by Lord Eldon in the case of Higginbotham v. Holme (19 Ves. 88), that no one can be allowed to derive benefit from a contract that is in fraud of the bankrupt laws…it is not competent to a party giving a consideration for a contract that is a direct fraud upon the bankrupt laws to have the benefit of it.”[93]

[92](1861) 2 J. & H. 204; 70 ER 1031.

[93](1861) 2 J. & H. at 212-3; 70 E.R. at 1034-5.

In Ex parte Williams,[94] where the provision in issue was in the form of a mortgage attornment clause which provided in effect for the payment of rent if the mortgagor became bankrupt, the clause was held to be a mere device to give the mortgagee an additional security in the event of the mortgagor’s bankruptcy and therefore void as a fraud upon that bankruptcy law. As James, L.J. put it:

“In my opinion, looking at the whole scope and object of this deed, at the whole intention of the parties, and taking a common-sense view of the thing, it is impossible not to see that it was intended to make a different distribution of the property of the mortgagors according as they should or should not become bankrupt…It appears to me that the attornment clause was a mere sham, a mere contrivance and device to give the mortgagee an additional benefit in the event of the mortgagor’s bankruptcy.” [95]

[94](1877) 7 Ch. D. 138.

[95](1877) 7 Ch. D. at 143; see also at 144 per Thesiger, L.J.

In Ex parte Jackson,[96] where a mortgage attornment clause conferred a power to distrain a number of chattels set out in a schedule to the mortgage, Cotton, L.J. said:

“Must we not come to the conclusion that the stipulation for rent was an attempt to give the mortgagees, as a legal incident to rent, a power of distress, so as to cure the defect in the security arising from its non-registration as a bill of sale, and thus to make effectual as a security to a particular creditor of the bankrupt that which, but for the supposed legal incident of distress for the so-called rent, would have gone to the general body of creditors?
…in my opinion the clause which attempts to give the power of distress incident to rent in respect of that which is not rent, and thus to give to a mortgagee a right which he would only have as landlord and not as mortgagee – to give it to him as mortgagee and not as landlord – is an attempt to alter and disturb the legal distribution of the mortgagor’s property in bankruptcy. It is what is called a fraud upon the bankruptcy law. I do not for one moment suggest that any fraud was intended on the part of the bank; but it is a thing not allowed by the general policy of the law to attempt to avoid the provisions of the Bankruptcy Act and in that sense it is a fraud upon the bankruptcy law. The clause is a fraud upon the bankruptcy law or an evasion of the bankruptcy law…”[97]

[96](1880) 14 Ch. D. 725.

[97](1880) 14 Ch. D. at 740-741.

Similarly, in British Eagle, Lord Morris speaking for the minority gave as one reason for rejecting the appeal that in his Lordship’s view there was no provision in the contracts under examination which could rationally be regarded as a “device for defeating the bankruptcy laws” and that there could not be any inference of such a device.

To the contrary, however, Lord Cross speaking for the majority in British Eagle rejected that analysis on the basis that, whether or not the parties directed their minds to the question how the arrangement might be affected by insolvency of one or more of the parties, the contracting out was contrary to public policy. In other words, it is the objective effect of an impugned agreement rather than any subjective purpose of the parties to the agreement which determines the issue.

In this appeal the respondents do not challenge that part of the British Eagle decision. Accordingly, in reasoning to the conclusion that the British Eagle principle may apply as much to the statutory insolvency arrangement for which Part 5.3A of the Corporations Act 2001 provides as it does to the kind of regime that is prescribed by Part 5.5, I have assumed that it is not necessary that the parties be shown to have directed their minds to the nature of the arrangement that might apply in the event of insolvency.

But in case it matters, I should say that I have no doubt that the parties did direct their minds to the question of insolvency and that Regulation 9(a) was an attempt to give members of the clearing house a preference in respect of the debts of an insolvent member at the expense of other creditors. To adopt the approach of James, L.J. in Ex parte Williams, and therefore to take a common-sense view of the thing, it is in my view impossible not to see Regulation 9(a) as intended to make alter and disturb the legal distribution of the member’s property in insolvency. Indeed its only apparent objective is to quarantine so much of an insolvent member’s property as is comprised of debts owing by other members pursuant to Interline Agreements and thereby to make it available for realisation only by and for the benefit of those members.

There is then the question posed by the respondents of whether the British Eagle principle should be taken to apply to a deed of company administration entered into in 2002 under the authority of Australian legislation passed in 1993 so as to affect a contract with global effect and operation that was entered into in 1976. In my view the question is misplaced for at least two reasons.

In the first place, the question appears to me to proceed upon a misconception of the principle. It is not that one may not contract contrary to a bankruptcy regime but that one may not contract that or with the effect that in the event of bankruptcy property of the bankrupt will not be available for distribution among only some of the bankrupt’s creditors. Properly understood, the principle applies universally regardless of the particular bankruptcy regime in question.

In the second place, the question assumes that what applies to Ansett must apply to every other airline which is party to an Interline Agreement. That is not so. In this case the problem is confined to the provisions of the Interline Agreements to which Ansett is party and it is restricted in effect to transactions which had not been cleared as at 9 September 2001 and therefore which were not entered into until sometime in 2001, years after s.444D came into force. As has been seen, the Interline Agreements expressly provided that clearance could be effected under the Clearing House arrangements or as the parties otherwise agreed. It is to be inferred, therefore, that as each of the subject transactions was entered into the parties made a determination that the Clearing House principles should apply. In effect, it was those determinations, rather than anything done in 1976 or at any other time or by any other airlines elsewhere in the world which gives rise to the problem with which we are concerned. On that basis I see no difficulty in concluding that the British Eagle principle is capable of application.

The effect of the Deed of Company Administration

Section 444D of the Corporations Act 2001 makes the Deed of Company Administration binding on all the creditors of Ansett. They include the other airlines party to the Interline Agreements with Ansett and the Clearing House. “Claim” is defined in clause 1 of the Deed as meaning any debt and all claims present or future, certain or contingent, ascertained or sounding only in damages, the circumstances giving rise to which occurred on or before the Appointment Date. Each airline’s claim in respect of “amounts payable pursuant to the [Interline] Agreement is therefore either a debt or claim present or future, certain or contingent, ascertained or sounding only in damages, to which the circumstances giving rise occurred on or before the Appointment Date. Clause 4.2.5 of the Deed prohibits a creditor from taking any action whatsoever to seek to recover any part of its Claim other than pursuant to the Deed. Clause 14 of the Deed provides that the rules and mechanisms to be applied to proofs of debt and the ascertainment of Claims shall be similar to the rules and mechanisms for such things prescribed by the Act in the context of the liquidation of a company, amended or adjusted as appropriate to make the process as cost effective as possible. Clause 1.4.1 of the Deed provides that, to the extent that

there is any inconsistency between the Deed and “any other obligation binding on the Company”, the Deed prevails. As I see it, therefore, each of the airlines is bound by the deed to enforce its claims against Ansett only in accordance with the Deed and because the provisions of the Clearing House Regulations for the clearance of claims are inconsistent with the provisions of the Deed, the Deed prevails.
Conflict of laws

There is perhaps a further problem about the effect which would be given to s.444D in other jurisdictions. On one view of the matter the section purports to effect a discharge of debts, or at least a partial discharge of debts, as a result of bankruptcy. According to the conflict of laws principles which apply in bankruptcy, such a discharge would not be recognised in England (or presumably in other Commonwealth common law countries) unless the proper law of the debt were the law in force in one of the States or Territories of Australia.[98] Arguably, the same rule operates in the United States of America. It is unnecessary, however, to pursue the question for present purposes. This appeal was expressly argued on the basis that there is no evidence as to the proper law of the Ansett Interline agreements and no reason to suppose that it is any different to the law in force in Victoria. On that basis it may be assumed that the British Eagle principle would be held to apply to the agreements in at least the majority of jurisdictions in which or with which Ansett did business.
[98]Dicey & Morris, The Conflict of Laws 13^th Ed., Rule 170.

Conclusion

For the reasons which I have given, I would allow the appeals.

BONGIORNO A.J.A.:

I have read the judgement of Nettle JA and I concur. The appeals should be allowed.

claims must have arise if they are to be admissible under the deed.

[2006] VSCA 242

10 November 2006