Associated Alloys Pty Ltd v Metropolitan Engineering

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
Sydney No S65 of 1999

B e t w e e n -
ASSOCIATED ALLOYS PTY LIMITED
Appellant
and
ACN 001 452 106 PTY LIMITED (IN LIQUIDATION)

First Respondent

KEVIN R. SHIRLAW
Second Respondent

GAUDRON J
McHUGH J
GUMMOW J
KIRBY J
HAYNE J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON TUESDAY, 7 DECEMBER 1999, AT 10.17 AM

MR F.M. DOUGLAS, QC: May it please the Court, I appear with my learned friends, MR W. HAFFENDEN and MR J.A. SPRINGTHORPE, for the appellant. (instructed by K.J. Minotti & Co)

MR B.A.J. COLES, QC: If your Honours please, I appear with MR M.J. COHEN for the respondents. (instructed by Messrs Brown & Partners)

GAUDRON J: Yes, Mr Douglas.

MR DOUGLAS: If it please the Court. This case concerns a clause, the text of which is set out at page 123 of the appeal book, the relevant part of the clause being the fifth subclause which appears from lines 25 to 30 and provides that:

In the event that the purchaser uses the goods/product in some manufacturing or construction process of its own or some third party, then the purchaser shall hold such part of the proceeds of such manufacturing or construction process as relates to the goods/product in trust for the vendor. Such part shall be deemed to equal in dollar terms the amount owning by the purchaser to the vendor at the time of the receipt of such proceeds’.”

It is, I understand, uncontroversial that that is the only part of the clause which is relevant to the particular facts and circumstances of the case, although the earlier parts of the clause are obviously relevant from the point of view of contextual interpretation. It is a situation in which steel which was supplied by Associated Alloys was used by Metropolitan Engineering in manufacturing processes and the product of that was then on‑sold to a third party whom we shall call for the purposes of discussion Lucky Goldstar.

GAUDRON J: These issues arose in proceedings for a declaration.

MR DOUGLAS: But also for an account, your Honour.

GAUDRON J: Yes, but I just want to know this because it does not necessarily emerge from the judgment. Was there evidence which identified what steel, as it were, was referable to what account?

MR DOUGLAS: There was evidence, your Honour, that steel which had been supplied by my client had in fact been used.

GAUDRON J: Yes, but I want to know a bit more than that. Can you trace the steel the subject of a particular invoice to goods which are the subject of a further invoice to the Korean firm?

MR DOUGLAS: There was an affidavit of a Mr Gebilagin.

GUMMOW J: Then, to take that the next step, can you attach to the product of that activity some specific sum of $197,911.29 that is the subject of the summons?

KIRBY J: I thought there is a finding by Justice Bryson against you on that, is there not, that it has all been lost, that you cannot trace it?

MR DOUGLAS: Certainly money has not been set aside in a specific account.

KIRBY J: No, but I think even more fundamentally in answer to Justice Gaudron’s question, that you cannot trace it into any particular items.

MR DOUGLAS: Your Honour, we can say that the steel which was supplied by us was used to manufacture items which were on‑sold to Lucky Goldstar.

KIRBY J: Yes, but particular items.

GAUDRON J: But do you not have to link the steel the subject of the invoice from Associated Alloys to the moneys which are the subject of an invoice by Metropolitan Engineering to the Korean company?

MR DOUGLAS: Ultimately, your Honour, yes.

GUMMOW J: Not ultimately, essentially.

MR DOUGLAS: But the question is whether we have to do that now or at some other stage of the proceedings on a taking of an account.

GUMMOW J: No, no.

GAUDRON J: The proceedings were commenced by you seeking a declaration. I am just trying to trace where we are going in these proceedings, as it were. You were refused on the basis that, essentially ‑ ‑ ‑

MR DOUGLAS: It was a charge and not ‑ ‑ ‑

GAUDRON J: It was a charge. Let us assume for a moment it is not. I am just wondering how we link everything up.

KIRBY J: The passages I was thinking of in Justice Bryson’s reasons are encapsulated in paragraph 7 and 8 of the respondent’s submissions; the two little findings of fact which I do not take to have been challenged before the Court of Appeal or in this Court.

MR DOUGLAS: Yes, the finding of fact in paragraph 7 is not challenged.

KIRBY J: And 8:

no basis on the evidence on which any particular one of the derived products, whether they have been delivered to Lucky Goldstar or are still in Metropolitan Engineering’s hands, can be identified as having been produced from the goods in any one of the three invoices.

MR DOUGLAS: I think the situation is, your Honour, that we cannot show that any particular part, on the evidence as filed, of the proceeds from the sale of the items to Lucky Goldstar are, in fact, the product of any particular steel supplied by us under any particular invoices. But the view seems to have been taken, at least down below, that that, in fact, would be a matter for an account.

GUMMOW J: But what is the subject of the trust? To what does the trust attach?

MR DOUGLAS: So much of the proceeds of such manufacturing or construction process as we are able to show on a taking of accounts is derived from the steel which was supplied by us under particular invoices.

GUMMOW J: So much of what, of the proceeds?

MR DOUGLAS: Yes, your Honour.

GAUDRON J: Yes, but do you not have to show a trust before you get to the taking of accounts?

MR DOUGLAS: Your Honour, we would say that we have a trust - that is a trust which is created expressly by agreement.

GUMMOW J: Yes, but what does it attach to?

MR DOUGLAS: It would, if in fact the trust had been performed in accordance with its terms by the trustee, have attached to the dollar amount set aside by ‑ ‑ ‑

GUMMOW J: No, it would, if the trust had been performed, have attached. That is not quite right.

GAUDRON J: No. What did it attach to? A trust attaches. A trust of property.

GUMMOW J: Is the property the chose in action under these invoices? You are in trouble if it is that, are you not? You are in trouble with the charge provisions, are you not?

MR DOUGLAS: If it is the book debts?

GUMMOW J: Yes.

MR DOUGLAS: We suggest not, but the view has been taken down below that we are. If it is merely a trust of a book debts, as distinct from a charge by way of security, we would say we are not in trouble. On the other hand, if it is merely a trust or a charge which affixed to the proceeds of those book debts, then we would not be in trouble with the charge provisions. But it does seem to be uncontroversial, to come back to the point which the Court is raising with me, that we do not in fact have a trust fund set aside as was intended by the terms and conditions of the contract but there was an obligation upon the company and upon the administrator and the liquidator at the time that proceeds were received from the sale of product to Lucky Goldstar to set aside moneys in accordance with the fifth subclause of the terms and conditions of the contract.

GUMMOW J: Just assume that is right for the minute, you just have an action for breach of trust, do you not? You do not have a proprietary remedy and you have an insolvent party on the other side.

MR DOUGLAS: Except, your Honour, that it may be, for example, that if the administrator or the liquidator has, in fact, failed to act in accordance with the terms and conditions of the trust or if persons who were involved in the administration of a company prior to its going into liquidation or into administration have failed to act in accordance with the provisions of clause 5 then we may have a derivative cause of action against that arising from breaches of trust. They may have either directly benefited ‑ ‑ ‑

GUMMOW J: What, against Mr Shirlaw personally?

MR DOUGLAS: Yes, your Honour, and there is evidence that money has been received since the date of the administration and the date of the liquidation by Mr Shirlaw arising out of the sale of steel fabricated products to Lucky Goldstar. There is not evidence which says, “Well, that particular invoice was related to the steel which went to that particular product which went to Lucky Goldstar. We do know that Lucky Goldstar ultimately received a mixed product which included steel which was supplied by our client under the terms and conditions, or the invoices, which are the subject of the proceedings. So, as we would see it, there would be utility in the taking of an account ‑ ‑ ‑

GAUDRON J: There may be and there may be not.

HAYNE J: For a start, you would not know the basis for the taking of account, would you?

GAUDRON J: Unless you can identify a trust of certain goods, is it not, and ‑ ‑ ‑

MR DOUGLAS: We can identify a trust. We cannot identify now ‑ ‑ ‑

GAUDRON J: Of what?

GUMMOW J: Of what?

MR DOUGLAS: Put it this way: it was intended that particular property be the subject of a trust.

GUMMOW J: No, that elides it, does it not? It was not presently existing property.

MR DOUGLAS: No, it was not, it was future property. Yes, your Honour, I accept that.
MR DOUGLAS: Yes, your Honour.

GAUDRON J: But assuming it could be identified.

GUMMOW J: Yes, exactly, at that time.

GAUDRON J: And if it could not be identified, is there any trust?

HAYNE J: Well, could not for want of record, could not because impossible; could not in what sense may become quite important.

MR DOUGLAS: Certainly, the approach which seems to have been taken down below has been that if we obtain the relief which we seek in the summons we would then be able to have a taking of accounts and we would then be able to find out ‑ ‑ ‑

HAYNE J: The taking of accounts on the basis ‑ ‑ ‑

GUMMOW J: You keep saying that.

MR DOUGLAS: I know.

HAYNE J: The taking of accounts on the basis of wilful default by the administrator or his knowing participation in a breach of trust by the trustee?

MR DOUGLAS: Yes, certainly those causes of action have not been raised on the summons. I recognise that, your Honour. I realise that but it does seem, as we would see it ‑ ‑ ‑

GUMMOW J: It is a mistake to do these things by summons, as you know.

MR DOUGLAS: - - - to be important as between these parties for the question as to whether, in fact, there was a trust which was, in fact, or intended to be a trust or a charge because, if there was intended to be a trust, then all of those secondary considerations to which I have referred would apply.

GUMMOW J: But they are not secondary; they are primary, I think.

GUMMOW J: Yes.

MR DOUGLAS: But it is an express trust for our benefit of future property which, when received by the company, was intended to be kept in an account for us and for ‑ ‑ ‑

GUMMOW J: It is an agreement for value which would attach to this future property as and when it came into the ownership of the party constituting the trustee, is that right?

MR DOUGLAS: Yes, your Honour.

GAUDRON J: But assuming it could be identified.

GUMMOW J: Yes, exactly, at that time.

GAUDRON J: And if it could not be identified, is there any trust?

HAYNE J: Well, could not for want of record, could not because impossible; could not in what sense may become quite important.

HAYNE J: The taking of accounts on the basis ‑ ‑ ‑

GUMMOW J: You keep saying that.

MR DOUGLAS: I know.

HAYNE J: The taking of accounts on the basis of wilful default by the administrator or his knowing participation in a breach of trust by the trustee?

MR DOUGLAS: Yes, certainly those causes of action have not been raised on the summons. I recognise that, your Honour. I realise that but it does seem, as we would see it ‑ ‑ ‑

GUMMOW J: It is a mistake to do these things by summons, as you know.

GUMMOW J: But they are not secondary; they are primary, I think.

GAUDRON J: Well, it would seem at this stage – correct me if I am wrong and then perhaps we can go to your argument – that all that this Court can do is determine whether or not, if there was a trust, it was – and this puts a little oddly, does it not – whether or not if clause 5 had effect, there was an equitable charge.

MR DOUGLAS: Yes, your Honour.

GAUDRON J: We cannot determine whether or not clause 5 had any relevant effect in the light of the evidence.

MR DOUGLAS: Your Honour, that seems to me to be the situation.

GUMMOW J: What would we do? Mr Coles will say you had your chance and you did not take it, and why should it go back to get more evidence?

McHUGH J: Was there not an affidavit that was never ruled on which alleged that 11.5 per cent of the price of these goods was attributable to your client?

MR DOUGLAS: That is the affidavit that I think I had started to take the Court to at page 45, your Honour, which was in fact read, as I understand it.

McHUGH J: Read?

MR DOUGLAS: Yes, so I am told.

McHUGH J: If it is the one I have in mind, it had not.

MR DOUGLAS: You can see in paragraph 44, it says:

4. Regarding –

if I can use the word “Lucky Goldstar” –

contract, there were 35 jobs ‑ ‑ ‑

GAUDRON J: Paragraph 44?

MR DOUGLAS: Paragraph 4 on page 45, your Honour.

GAUDRON J: Thank you.

MR DOUGLAS: ‑ ‑ ‑

with the final payment representing fifty percent of the final item upon completion and delivery to the wharf.

He says:

5. I can work out an approximate relationship between the costs of steel material supplied by the plaintiff being $476,913.93 to the total costs of other material and labour in constructing the 35 jobs which is estimated to be $3,875,047.61before any variances.
6. I say that the materials supplied by the plaintiff represents about 11.45% of the total contract price of $4,129,386.00.

McHUGH J: Now, I am not sure that that is the affidavit that should be before us because on the judge’s copy, if I remember from the special leave application, there were the words “object” and “ruling deferred”.

MR DOUGLAS: As your Honours are aware, I was not present.

McHUGH J: No.

MR DOUGLAS: Could I just seek some instructions on that?

McHUGH J: Yes.

KIRBY J: Presumably the file is in Court and we can have a look at it.

MR DOUGLAS: Yes. Mr Coles has shown me his notated copy – sorry, a copy from the Court of Appeal, Court of Appeal book, and there is notation there “object defer”, which appears to be contemporaneous, so ‑ ‑ ‑

GAUDRON J: And is that this affidavit or a different one?

MR DOUGLAS: No, it is this affidavit, your Honour.

GUMMOW J: Yes, there are questions marks against paragraphs 11 and 12 and I do not know who put them in. Maybe they were objected to. I understand why they might be.

McHUGH J: Which are the clauses that had that objection on about ‑ ‑ ‑

MR DOUGLAS: Your Honour, it is clauses 4 and 5 and 11 and 12 and just looking at the Court of Appeal appeal book at page 89 of that, if the Court has it, there is a notation of his Honour’s rulings and I could provide this to the Court, if required. It says:

Affidavit of Demetrio Gebilagin sworn 26 April 1996 read paragraphs 5 and 6 objected to unless are only read as a calculation and not as a matter of fact.

And his Honour says:

I am going to defer ruling on that because it may be capable of being overcome by showing some working notes.

Paragraphs 5 and 6 are objected to and a ruling is deferred and paragraph 8 the words “Some invoices” objected to and he allows paragraph 8:

Paragraph 11 first sentence objected. The objection is to paragraph 11 and the first sentence. I defer ruling on it.

And paragraph 12 and Annexure B objected. His Honour:

Paragraph 12 and Annexure B are objected to and allowed.

McHUGH J: This point came up in the special leave application about - there was an argument and Mr Coles raised an objection on the special leave application as to whether or not you could get an account and Mr Ellicott produced some documents, if I remember rightly.

MR DOUGLAS: Yes, he did, your Honour and I have seen the transcript of that.

McHUGH J: Yes.

MR DOUGLAS: I do not presently have those documents here, so I must say I have taken the view that the matter having been raised on the special leave application, it was more relevant to that application than it was to this. I could, in fact, make some inquiries about that.

GAUDRON J: You do accept that the most this Court can do is say if it has effect, from your point of view, it does not have effect as a charge?

MR DOUGLAS: Yes, your Honour.

GAUDRON J: And then the matter would have to go back really to first instance, to the trial judge, would it not?

MR DOUGLAS: Yes, your Honour, as we would see it.

HAYNE J: For trial of what issue, an issue not yet raised?

GAUDRON J: Whether or not there is any property to which the trust attaches.

HAYNE J: Or an issue of whether there has already been a breach of trust for which one of the respondents is liable.

MR DOUGLAS: Yes, your Honour.

HAYNE J: I am by no means certain that I understand, at least, how it would work.

MR DOUGLAS: In part the constitution of a proceedings arises, as I understand it, because we originally moved, I think, for an injunction to restrain the dealing of certain of the proceeds and the matter was dealt with against us on the basis that we were not entitled to an injunction because it was a void charge ‑ ‑ ‑

GUMMOW J: In any event.

MR DOUGLAS: In any event, yes, and so that is as far as the matter went and one was not considering at that point of time, if one could put that way, the derivative causes of action which we may have against persons who are parties to the proceedings and persons who may not, at this stage, be parties to the proceedings.

GUMMOW J: Where is the injunctive relief? That was on another summons, was it? Yes, as Justice Gaudron says, it was an ex parte application.

MR DOUGLAS: Yes, your Honour.

GUMMOW J: Then it got turned into this summons, which is rather different. Is that right?

MR DOUGLAS: So effectively it was said against us there is a complete answer to your case.

GUMMOW J: Is that how Justice Bryson’s judgment is constructed?

MR DOUGLAS: He certainly really only deals with the question of charge, as we would see it, relevantly. His judgment, as your Honour knows, is to be found at about 121 and following and there are factual findings which are made in the judgment but they relate to the state of the facts which were before him at that time. Those factual findings are to be found at pages 121 through to 125 and, relevantly, the one about admixture is at 129 at about point 55 to point 30 where he says:

Metropolitan Engineering has received large sums from Lucky Goldstar, and will receive further sums as time passes, more goods are delivered and payments are received.

But, in effect, we were not only dealing with the past at the time when this application was brought but the future:

However Metropolitan Engineering has done nothing to identify any part of the proceeds as relating to the steel in these invoices, and has done nothing to set aside and hold any part of the proceeds in trust for Associated Alloys. An agreement to hold proceeds when received on trust could be enforced by compelling Metropolitan Engineering to hold some part of proceeds already received, if they could be identified, in trust, and by compelling Metropolitan Engineering to hold in trust part of proceeds of the manufacturing process to be received in the future.

The other aspect of the evidence which throws some light on the fact that as at the time when this hearing went forward, all of the moneys had not been received is to be found in the administrator’s report and that is at appeal book, page 60. That is where it commences. You will see at page 67 there is detailed review of “Work in progress”. It says:

A detailed review of the company’s work in progress (“WIP”) AT 9 February 1996 has been conducted since my appointment and a summary of the WIP to be completed through to June 1996 is as follows:

The relevant contract is the one with “LG Engineering”. It says, “To Invoice” $2,048,500”; “Materials” and “Labour” identified and then “Profit” is identified and then you will also see a note about that at about line 45 on that page which says:

The major project currently being completed by the company is the LG Engineering Co, Ltd contract. The original contract value is $4,097,000 and 50% remains to be invoiced. After incurring further material and labour costs, an estimated profit of $1.4 million is expected.

So, that as at that date, which was I think in February 1996, 50 per cent remained to be invoiced.

Also, if you go to the affidavit that I think was filed on an expedition proceeding of Mr Cussen which is to be found at page 140, filed on 11 November 1997, you will see in paragraph 13 that there is a reference to $206,469 being held by Lucky Goldstar as retention money “in respect of a contract completed by Metropolitan Engineering and Fabrications”. Having done that, I think to respond to what Justice McHugh put to me before, I think the three documents I have taken your Honour to are in fact the documents which Mr Ellicott referred to on a special leave application.

GUMMOW J: Now, it may be, Mr Douglas – if you can just look at the clause on 123, line 25, for a minute. This is a contract.

MR DOUGLAS: It is a contract, yes.

GUMMOW J: It is a promise that if the purchaser uses:

the purchaser uses the goods/product in some manufacturing or construction process….then the purchaser shall hold such part…..as relates –

in trust for the vendor and that would mean that they are promising to hold in trust, it seems to me, by isolating and separately treating, and in particular by putting in a separate account the relevant part of the proceeds.

MR DOUGLAS: Yes, I would accept that, your Honour.

GUMMOW J: If they fail to do so they have failed to perform their promise.

MR DOUGLAS: Yes, your Honour.

GUMMOW J: That is a common law failure. They just have not performed their covenant. That may produce some damages. I come back to the question, because the net result of not doing that is that the trust cannot come into operation because they have contracted to constitute it in this way, and they have not constituted it in this way. So there is damages for failure to constitute the trust as promised, but how does that then help you? I think that, in a way, is involved to some extent in the notion of account, that you are trying to encourage us to follow. It is not really an account in that sense. It is an action for damages for failure to perform the covenant, and that is just an unsecured remedy.

MR DOUGLAS: It is an agreement to hold future property when received on trust for us.

GUMMOW J: Yes, and it has not been done. To perform that they would have to put in a separate account, or in some way isolate it out.

MR DOUGLAS: But if they do not do that ‑ ‑ ‑

GUMMOW J: We do not know that they have not.

MR DOUGLAS: We do not, that is part of the problem. But, assuming they have not, does that mean the trust remedies are not available to us simply because the genesis of a relationship is in contract? Because, in other circumstances such as Quistclose Case courts have recognised common law and equitable obligations can co‑exist in the same transaction.

GUMMOW J: They do here. The problem is you are stuck at the common law end, it seems to me.

MR DOUGLAS: Does that mean that someone having agreed to constitute a trust to future property can avoid the personal obligations which flow, for example against the trustee or persons associated with the trustee, under the principles advanced in Addy?

GAUDRON J: Well, that depends on the property, does it not?

MR DOUGLAS: Well, obviously we cannot trace ‑ ‑ ‑

GUMMOW J: Yes, that is the area we are into and you have not run the case that way as regards Barnes v Addy.

MR DOUGLAS: We certainly cannot trace into a specific fund and have tracing remedies.

GUMMOW J: No, but this clause was designed to put you in that position, that you could, I suppose.

MR DOUGLAS: That was one of the things it was supposed to do, your Honour.

GUMMOW J: Yes.

MR DOUGLAS: But it was also intended, I would respectfully submit, to put us in the position where we could have other equitable remedies, not only common law remedies, and if, in fact, they do not honour their promise and constitute the trust fund, we would be entitled to have equitable remedies such as those which I have outlined, which are very…..to your Honour.

GAUDRON J: Well, what account? Is that what you are saying your remedy is?

MR DOUGLAS: Well, it is not the only thing, your Honour, but it is what the summons asked for, but ‑ ‑ ‑

GAUDRON J: Specific performance?

GUMMOW J: Specific performance does not seem quite the ticket, does it?

MR DOUGLAS: No, specific performance does not sound a very good idea, your Honour, but certainly – I have adverted to Barnes v Addy and that does seem to us – and equitable compensation. So, in other words, our only remedy in these circumstances would not be common law damages; remedy would be equitable compensation.

GUMMOW J: But, again, that is an unsecured remedy.

MR DOUGLAS: But if, in fact, there was an obligation to constitute a trust of future property and if that obligation has not been honoured, it cannot be the situation that someone can avoid participatory liability or liability as a recipient under the principles in Barnes v Addy simply because they do not choose to constitute the trust.

GUMMOW J: Well, it may be that Mr Shirlaw has adduced a breach of contract; behaved tortiously.

MR DOUGLAS: Yes, he could have and we could pursue that remedy as well.

GUMMOW J: These are all questions that are not really before us.

MR DOUGLAS: Yes, your Honour, but what seems to be relevant between – it is, as we would see it, a relevant issue between the parties to determine whether, in fact, this relationship agreed to be constructed by contract would have given rise to the relationship of trustee and beneficiary or whether it gave rise to a void charge.

GUMMOW J: Yes, I understand that.

MR DOUGLAS: So on that footing, your Honour, if I could perhaps then return to the main theme of the argument. The decision of Mr Justice Bryson, whether there is a registrable charge, is to be found at page 131 under that heading at about line 30 where he says:

If the fifth subclause creates a registrable charge, the charge is void as against the Administrators, under subs 266(1) of the Corporations Law –

being:

a charge on a book debt”.....In my opinion the proceeds of a manufacturing or construction process to which the fifth subclause applies are book debts, both before and after they are received and held in trust. (It was contended that the fifth subclause creates a floating charge within para (a) of subs 262(1), but in my opinion there is no floating charge because there is no authorisation to deal with proceeds in the course of business irrespective of the charge, and no provision relating to some crystallising event which would end that authorisation.

We rely upon that reasoning and the decision of Re Bond Worth in answer to one of the arguments which is advanced by my learned friend. Then he goes on to say at about line 10 on page 132:

When all the provisions of this subclause are taken together they have the effect that the vendor is given an entitlement to be paid the amount which is owing to it at the time of receipt of proceeds of a manufacturing process in which the goods were used, has a right to be paid out of those proceeds, and has an equitable interest in the proceeds until paid. If these arrangements were not created by a term in a contract for the sale of goods they would be unhesitatingly identifiable as an equitable charge over debts due by Lucky Goldstar to Metropolitan Engineering, charging those debts with the amount due to Associated Alloys and to be discharged by paying that amount.

It then refers to Bond Worth and Clough Mill and says:

extensive consideration was given to whether a charge was created over the goods themselves. The present case does not turn on any similar question.

Then he refers to Tatung and Romalpa. It says:

That case did not relate to the sale of derived products, and the subject of tracing proceeds of sub-sales is in the present case dealt with expressly by the third subclause.
Important as it is to resist imposing –

I am reading from line 10 on page 133 –

equitable interpretations on commercial relationships as primary and as well-understood as sales of goods, and to resist introducing into them remedies which turn on complex tests and discretions, where parties expressly cast their rights in terms of equitable interests, as they do on the fifth subclause ‑ ‑ ‑

GAUDRON J: Now, do they?

MR DOUGLAS: Does your Honour want to go back to the debate we had this morning?

GAUDRON J: No, but I mean, that is the question, is it not?

MR DOUGLAS: Yes.

GAUDRON J: I mean you must come to grips with that proposition, it seems to me, both to deal with what is put against you by way of equitable charge, so that we can come to a view about what it is that subclause (5) does because, ultimately, that has to be decided, does it not?

MR DOUGLAS: Yes, your Honour. We say, and, I mean, our written submissions bear it out, your Honours are well familiar with the authorities. I think Justice Gummow wrote one of the leading ones we rely upon of the Elizabethan Theatre Trust, but it is the question of intention. If you look at the intention of the parties to this clause, you must look at it against the background of the decided cases and when you look at the decided cases, you are looking at cases like Romalpa, Bond Worth and Clough Mill.

GAUDRON J: But they are different clauses.

GUMMOW J: They are all different clauses.

MR DOUGLAS: They are all different clauses, but one can see in those cases, in particular in ‑ ‑ ‑

GAUDRON J: It might be that the end of the day, you would be entitled, if you are correct as to your interpretation and - well, if you are correct and it is not a charge and so forth and so on, it might be that all you are entitled to is an injunction to prevent breach of contract.

GUMMOW J: Yes.

MR DOUGLAS: If in fact our remedies are purely contractual, that may be all we are entitled to or ‑ ‑ ‑

GAUDRON J: But your remedy might come by way of injunction because of the intention to create a trust, as distinct from limiting you to a remedy of damages.

MR DOUGLAS: Yes, well, that would be one way of putting it, but ‑ ‑ ‑

GAUDRON J: But to even get to that point, you must find out what subclause (5) does.

MR DOUGLAS: Yes, your Honour, but ‑ ‑ ‑

GAUDRON J: And it is not sufficient to say it creates equitable interest, it seems to me.

MR DOUGLAS: Yes, but to say that the clauses which were considered in the other cases are differently worded is true, but one can see in subclause (5) an attempt to avoid the problems, particularly those which were adverted to by Lord Justice Goff and Lord Justice Oliver in Clough Mill [1985] 1 WLR 111, because whilst it was not relevant to the particular facts of that case, there was, in fact a subclause which provided – it is set out on page 113:

If any of the material is incorporated in or used as material for other goods before such payment the property in the whole of such goods shall be and remain with the seller until such payment has been made, or the other goods have been sold as aforesaid, and all the seller’s rights hereunder in the material shall extend to those other goods.

So it was effectively a – if I could put it that way – a claim to the whole of the manufactured goods and the proceeds thereof. The reasoning of Lord Justice Gough, from about page 119 between point C and D, he sets out that clause. He then says at point F:

The submission of Mr. Blackburne was that the effect of this provision is to confer on the plaintiff an interest in the buyer’s property and so must have been to create a charge; and he further submitted that, having regard to the evident intention that the plaintiff’s rights in goods in which the material provided by it has been incorporated shall be the same as its rights in unused material, the plaintiff’s rights in unused material should likewise be construed as creating a charge.

So it is a derivative argument in many ways. The court was able to find that because there had been no transfer of illegal title under the earlier clauses, that it was not a charge. He says:

Now it is no doubt true that, where A’s material is lawfully used by B to create new goods, whether or not B incorporates other material of his own, the property in the new goods will generally vest in B, at least where the goods are not reducible to the original materials –

and refers to Blackstone’s Commentaries, and then down at the foot of the page says:

in considering the fourth sentence, we have to take into account not only the possibility that the buyer may have paid part of the price for the material but also that he will have borne the cost of manufacture of the new goods, and may also have provided other materials for incorporation into those goods; and the condition is silent, not only about repaying such part of the price for the material as has already been paid by the buyer, but also about any allowance to be made by the plaintiff to the buyer for the cost of manufacture of the new goods, or for any other material incorporated by the buyer into the new goods. Now, no injustice need arise from the exercise of the plaintiff’s power to resell such goods provided that, having applied the price received from the resale in satisfaction of the outstanding balance of the price owed to the plaintiff by the buyer, the plaintiff is bound to account for the remainder to the buyer. But the difficulty of construing the fourth sentence as simply giving rise to a retention by the plaintiff of title to the new goods is that it would lead to the result that, upon the determination of the contract under which the original material was sold to the buyer, the ownership of the plaintiff in the new goods would be retained by the plaintiff, uninhibited by any terms of the contract which had then ceased to apply; and I find it impossible to believe that it was the intention of the parties that the plaintiff would thereby gain the windfall of the full value of the new product, deriving as it may well do not merely from the labour of the buyer but also from materials that were the buyer’s, without any duty to account to the buyer for any surplus of the proceeds of sale above the outstanding balance of the price due by the buyer to the plaintiff. It follows that the last sentence must be read as creating either a trust or a charge. In my judgment, however, it cannot have been intended to create a trust. Those who insert Romalpa clauses in their contracts of sale must be aware that other suppliers might do the same; and the prospect of two lots of material, supplied by different sellers, each subject to a Romalpa clause which vests in the seller the legal title in a product manufactured from both lots of material, is not at all sensible. Accordingly…..in In re Peachdart Ltd, I have come to the conclusion that, although it does indeed do violence to the language of the fourth sentence of the condition, that sentence must be read as giving rise to a charge on the new goods in favour of the seller.

A similar expression of view is to be found in the judgment of Lord Justice Oliver at page 123 from line F over to page 124 at line E, particularly at about line C on 124 he says:

I do, however, accept that for the reasons given by Robert Goff L.J. in his judgment one is almost driven to the conclusion that the intention of this part of the clause was the creation of a charge on the newly manufactured article as and when it comes into being, for it is difficult to see how, in practice, this provision could otherwise be given a sensible operation, particularly where the manufactured article incorporates also material supplied by other manufacturers which may have been supplied on similar terms.

Sir John Donaldson ‑ ‑ ‑

HAYNE J: No doubt this is all very interesting, Mr Douglas, but what is the point you take us to these passages for?

MR DOUGLAS: The point I take you to these passages for, your Honours, is that when you come to this particular clause you will see that rather than seeking to impose a trust or to agree that there should be a trust of the whole of a manufactured product, what this clause has sought to do is simply to require the purchaser to hold a part of the proceeds of such manufacturing or construction process as relates to the goods product and trust for the vendor, equal in dollar terms to be amount owing by the purchaser to the vendor at the time of a receipt of such a proceed.

GUMMOW J: What about interest? That is not involved in this clause?

MR DOUGLAS: I do not think so, your Honour. That would seem to us to be the situation, that we get the trust of that specific amount of money and it does not fluctuate.

GUMMOW J: But the amounts owing by the purchaser, do those contractual arrangements include a promise to pay interest on overdue amounts, or do we not know that?

MR DOUGLAS: I had thought about that. Your Honour, I stand to be corrected but I do not believe that there is such an agreement but I will look at the standard terms and conditions and I will see.

HAYNE J: And is the part that is the subject of this arrangement the whole of the then outstanding account, the whole of the running balance between the parties?

MR DOUGLAS: Yes, your Honour.

GAUDRON J: I would not have read it that way.

HAYNE J: Is the amount owing by the purchaser to the vendor, the amount by the purchaser to the vendor on it on this account, that is on this invoice or is it the amount owing by purchaser to vendor on this or any other account whatsoever?

MR DOUGLAS: Your Honour, I will put the submissions in the alternative but I would have thought it would be all accounts.

GAUDRON J: You have the second sentence, of course:

Such part shall be deemed to equal in dollar terms the amount owing…..at the time of the receipt of such proceeds.

MR DOUGLAS: Yes, so we have a specific point of time identified. We have a specific amount of money identified and it is such part of the proceeds as relates to the goods which we have supplied.

HAYNE J: The goods the subject of the invoice concerned, is it?

MR DOUGLAS: The earlier part seems to be more limited than the latter part so up to the first sentence seems to be limited to the proceeds of such manufacturing or construction process related to the invoice in respect of the goods which were consumed in that manufacturing process whereas, whilst I would put the submission in the alternative, the second sentence seems to encompass all amounts which are owing at that particular point of time but it is a sum, certainly.

GAUDRON J: If you give the first sentence the more limited meaning, the logical approach to the second sentence is to say that that simply allows for amounts that may already have been paid so it does not create a trust, assuming it is carried into effect, for an amount greater than is owing.

MR DOUGLAS: No, it does not create a trust for an amount that is greater than what is owing.

GAUDRON J: Which you might find just by reading the first sentence in isolation.

MR DOUGLAS: Yes, your Honour, I accept that, but if you read the paragraph as a whole that would not be the situation because it is effectively a deeming provision, the last sentence, which acts as a limitation upon the amount which has to be held in trust under the first sentence.

HAYNE J: How, if at all, is the construction affected by what appears at lines 15 to 20 on 123?

MR DOUGLAS: That is directed to, as we would see it, a separate situation which is where title has never passed because up until the time when the goods and – the consumed and manufacture, title never does pass and consistently with authority such as Clough Mills, the first three paragraphs are valid and enforceable. There are words in that third paragraph which seem to have had some effect upon the judges down below and they are the words:

until the liability to the vendor shall have been discharged.

Because, in a sense, those words are capable of importing the concept of security, but no such similar words are found in lines 25 to 30. Part of my learned friend’s submissions proceedings along the lines, “Well, what if the debt was repaid from moneys other than the moneys which were to be kept in the particular trust?” and we would say that under the fifth subclause there is no contractual right to do that. I mean, as a practical matter that may happen but if one, for example, imagines the circumstance of insolvency or pending insolvency of Metropolitan we would obviously be very well advised, if in fact the trustee had paid the moneys into the account, to insist upon payment of the moneys out of the account. Not least, because it may not be a voidable preference in those circumstances, and secondly, because it avoids any suggestion of a charge because if it is only a trust until such time as a debt is repaid you may then find yourself drifting back into these earlier authorities, one of which I have taken the Court to but the Court is familiar with all the others, and finding that it is read as a charge and not a trust.

So, as we would see it, from a contractual perspective, they have to put the money into the separate account and, contractually, we would be entitled to insist upon payment of the moneys out of that trust fund and, therefore, we have an absolute and indefeasible interest in those money, and so, therefore, it is a trust.

If, in an alternative situation, for example, if one looks at the contractual relationship, the relationship of debtor and creditor, if the company chose to pay us with moneys which were not kept in the trust fund and we did not inquire, it is probably the situation that in those circumstances the legal and beneficial title would merge again in Metropolitan and it would then retain the moneys for its own benefit, but only in those circumstances.

We would always, contractually, be entitled to insist upon payment out of a trust fund, particularly because this is, in many respects, a clause which is intended to protect us from insolvency, and that, as we would see it, and the absence of those words from the fifth subclause and the presence of them in the third subclause does, in our respectful submission, make it quite clear that what these parties had in mind was a trust and not a charge.

GAUDRON J: Or, perhaps, just an agreement to create a trust.

MR DOUGLAS: An agreement to create a trust, yes.

GUMMOW J: It is executory.

MR DOUGLAS: I do not think I can avoid the fact that it is an agreement to create a trust.

GAUDRON J: As distinct from a completed trust?

MR DOUGLAS: Yes, it is not completed, your Honour. I would like to say that there is a large sum of money there for my client but I cannot, your Honour. In fact, this approach, if I could put it that way, to drafting these types of clauses was suggested by Benjamin on Sale of Goods which is set out in paragraph 14 of our written submissions. I am told that we may have the paragraph from the earlier edition there but it is not, in substance, any different. Perhaps if I could just read that. It says:

It is clear, however, that, for reasons of cash flow alone, no buyer would willingly accept that the seller was absolutely entitled to claim the entire proceeds of resale. The parties may in consequence be held to have intended that the seller’s interest in the proceeds is to be defeasible upon payment of the sums owing from the buyer to the seller, and is, in consequence, an interest by way of security rather than an absolute interest. If such is the true construction of the provision, then it is submitted that a charge is created over the proceeds of sale. If created by the buyer company, it will require registration under section 396 of the Companies Act 1985. It is perhaps for this reason, and possibly because such a provision might appear more acceptable to the buyer, that “Romalpa” clauses sometimes contain a provision that the buyer is to hold as trustee on behalf of the seller, not the entire proceeds of resale of the goods, but only such part of those proceeds as represent or are equivalent to the price at which the goods resold were invoiced by the seller to the buyer. Although a declaration of trust of an unquantified part of a specific fund would fail for uncertainty – - -

GUMMOW J: What is the fund they are talking about? Who is the editor of this 4th edition of Benjamin? It just slips into this language of “funds”. There is no fund that this has been constituted.

MR DOUGLAS: I accept that, your Honour. I will see if I can find a front page and find out who is the editor, your Honour, but:

there is no reason to suppose that a trust of a quantified amount forming part of a fund –

I accept what your Honour says –

would likewise fail. It may, therefore be that such a provision would be upheld, provided that the parties thereby intended that the seller should have an absolute and indefeasible interest in the trust money and provided that the buyer company was not free to use that money as it pleased.

So, in a sense that is one of the commentators on the previous - the existing authorities. There are others.

GUMMOW J: It is not getting a high D at the moment.

MR DOUGLAS: There are others and I am not going to read them to the Court, but it possibly would be useful for the Court to have copies of the relevant passage from Jacobs’ and also the relevant passage from Gough. There is also a useful article by Mr Justice Priestley in one of those ‑ ‑ ‑

KIRBY J: Do you have that article?

MR DOUGLAS: Yes, your Honour. I will just organise for those to be given to the Court and give a copy to the other side. So, essentially, what the draftsman of this clause has sought to do is to avoid the earlier authorities which say that once the goods have become mixed normally a provision which seeks to protect the interest of the seller in the goods, or the seller, will be, in substance, regarded as a charge, even if that does violence to the language in which the relevant intention is expressed.

GAUDRON J: What do you understand by a “charge”, Mr Douglas, an equitable charge? At this point, perhaps we should find that out.

MR DOUGLAS: An equitable charge is one constituted by an agreement. It would be different from a trust.

GAUDRON J: It is a security interest in property, is it not?

MR DOUGLAS: Yes.

GAUDRON J: Yes; and you have the same problem in identifying the property for the purposes of a “charge” under subclause (5) as you have in terms of identifying a trust, do you not?

MR DOUGLAS: Is it not just a matter of language, your Honours? It is the part of a proceeds of a manufacturing process as relates to these goods.

GAUDRON J: There is nothing in clause (5) to suggest it is a charge over the whole of the proceeds, is there?

MR DOUGLAS: No, in fact ‑ ‑ ‑

GUMMOW J: The word “proceeds” is ambiguous too.

MR DOUGLAS: It is, and we have ‑ ‑ ‑

GUMMOW J: It is a commercial expression, I understand that. It does not have a single legal character.

MR DOUGLAS: We have, down below and I think on appeal in the Court of Appeal, said that “proceeds” means effectively the proceeds of realisation of the book debts, and not the book debts themselves. We seek in submissions which we have put in reply yesterday to say that even if it were the book debts, as the Court of Appeal I think found, and as Mr Justice Bryson found, that it would nonetheless be a trust of the book debts and not a charge over the book debts.

If one were looking at the trust property, if I could put it that way, as being the book debts themselves, rather than the specific part of them which is defined in subclause (5), then there is no difficulty in ascertaining the trust property or the property which would be the subject of the charge, however it may be framed.

In so far as they are - the value of them, if I can put it that way, is greater than that which is required to meet the specific requirements of subclause (5), then the surplus would be held on a secondary trust, as discussed in Quistclose, for the benefit of Metropolitan. So that would be a way of looking at it which would avoid some of the problems of construction and quantification which otherwise the Court may feel attend to the construction of subclause (5).

Our primary submission, however, is that by the language used they have sought to carve out a specific monetary sum from the proceeds and to say that this is what shall be the subject of a trust, not a charge.

I think that alternative submission which I was suggesting is to be found in paragraph 4(g) of some submissions in reply which were filed yesterday where we say that the courts below have found that subclause (5) operated not only to charge proceeds of realisation of the book debts which came into existence upon Metropolitan entering into a contract for sale of the derived goods to Lucky Goldstar but also of the book debts themselves. The submissions which have been made heretofore have been to the effect that “proceeds” as used in subclause (5) is a reference to the amount received as distinct from the book debt itself. If contrary to those submissions and consistently with the findings of the courts below it is found that subclause (5) operates not only in relation to the amount received from Lucky Goldstar, that the book debts owing by Lucky Goldstar to Metropolitan is not fatal to our case.

GUMMOW J: Received as distinct from receivable, is that the ‑ ‑ ‑

MR DOUGLAS: Yes, your Honour.

GUMMOW J: Receivable suggests just the book debt, does it not?

MR DOUGLAS: Yes, your Honour, but one can imagine a situation in which the proceeds are of a book debt for the receivables. Effectively what clause (5) does is say ‑ ‑ ‑

GUMMOW J: Justice Hayne raised with you the third paragraph on page 123 which talks about “all proceeds whether tangible or intangible”, et cetera. Would not one ordinarily read that as throwing light on what “proceeds” meant in the rest of the clause?

MR DOUGLAS: Yes, except for words not used in clause (5).

GUMMOW J: No, ‑ ‑ ‑

MR DOUGLAS: It may be that they were not used in subclause (5) for the very reason that it was intended to make it entirely clear that the trust only attached when “proceeds” as used in a different sense had been received. Certainly when one looks at the words “all proceeds whether tangible or intangible” in subclause (3), it is quite clear that under that clause “proceeds” has a wider meaning. But of course, these clauses are not attended by such difficulties when one is dealing with an express relationship of bailor and bailee and fiduciary agent where title has never passed, as is the situation in clauses (1), (2) and (3), as distinct from clauses which have sought to provide some protection for the buyer in respect of the goods which have arisen from the manufacturing process.

In those circumstances, as the authorities point out, bearing in mind the permission which must exist to sell the manufactured goods, title is lost in the manufactured goods and effectively what is sought to be done by subclause (5) is to acquire an interest in something which comes into existence subsequently. So it is a situation, subclause (5), in which there has in fact been a change in beneficial title.

HAYNE J: Can we in the appeal book trace the contractual documents that incorporate these terms?

MR DOUGLAS: The invoices are to be found as annexures to an affidavit of Mr Walton of 18 April 1996 which commences at page 23 and in paragraph 4 – I am sorry, he describes a product. In paragraph 4 he annexes:

true copies of Invoices from the Plaintiff to the First Defendant which I caused to be delivered to the First Defendant.

HAYNE J: I am sorry, what page are you reading at?

MR DOUGLAS: I am reading at page 24 paragraph 4 and the relevant annexures are to be found at pages 27, 28 and 29 and then after that you have copies of delivery dockets.

HAYNE J: But we do not in that run at least have an order or acceptance of order. We have only invoices.

MR DOUGLAS: We have only invoices, yes, your Honour. The relevant finding in relation to the supply of products is to be found in Mr Justice Bryson’s judgment at page 122 where he said there had been a course of supply over a period of some 15 years and says:

For some time, since 1991 or earlier, it has been the course of business for its invoices to Metropolitan Engineering to state at the foot of the front page “Romalpa Clause set forth on the reverse side hereof applies”. The following has appeared on the reverse.

There was one instance when it did not and that is the subject of written submissions and that is the finding of his Honour. So ‑ ‑ ‑

HAYNE J: Yes.

GAUDRON J: Well, from the delivery particulars at least at the bottom of the invoices commencing at page 27 we would be able to exclude invoices from Metropolitan Engineering to Lucky Star that were made before the estimated arrival time of the ship, if we had that evidence.

MR DOUGLAS: Yes, your Honour.

GAUDRON J: So, if we had the evidence or if a court had the evidence, there might be some ability to connect, one, the invoice from Associated Alloys to an invoice to Lucky Star.

MR DOUGLAS: Well, you may, but certainly from the timing perspective one could in the way in which your Honour has suggested, otherwise you have a situation in which steel has been supplied and I think his Honour has found that, if you look at point 50 on page 123, it says:

it had several large contracts on hand. By far the largest was for manufacture of pressure vessels, heat exchangers, columns and other industrial equipment for a Korean company referred to as Lucky Goldstar. Steel supplied by Associated Alloys was used in the manufacture of these products. The steel so supplied was in various forms, including steel plate and formed dished ends for pressure vessels. Metropolitan Engineering ordered supplies of steel from Associated Alloys in a series of orders commencing on 31 May 1995 transmitted and accepted by fax messages. Various terms of supply were set out in these messages, including prices, times and manner of delivery, incidence of customs duty and terms of payment, but there was no mention of Retention‑of‑Title clauses in these messages. Some of the goods ordered for use in the Lucky Goldstar jobs were delivered, invoiced and paid for, but this litigation relates to the goods in three invoices which were not paid, or not fully paid.

GUMMOW J: I am looking at page 28. You were taking us to invoices between Metropolitan and Associated. I am looking at the bottom of page 28. Why was the funding in US dollars? Why was the money in account US dollars to go into a particular bank account at Westpac?

MR DOUGLAS: Possibly because the trade was a trade in US dollars rather than converting it all the time to Australian dollar equivalent. These commodities have a world market price usually expressed in US dollars rather than the obligation being one which is subject to the vagaries of the conversion rate between the Australian dollar and the American dollar. They chose to express the contractual obligation in American dollars. The confirmation – it is there if one looks at the very foot of the page your Honours will see on each of 28, 29 and 30 the words:

Romalpa Clause set forth on the reverse side hereof applies –

His Honour has found that except in one instance there was in fact a Romalpa Clause which accompanied the relevance invoice.

GAUDRON J: It is certainly small print, is it not?

MR DOUGLAS: It is, is it not. In relation to that his Honour made a finding - if I can just deal with that. It is dealt with in our written submissions and I do not think I need to take up much of the time of the Court with it, but there was a question as to the incorporation of the terms on one particular invoice, invoice 583, and his Honour Mr Justice Bryson found, as set out in paragraph 41 of our written submissions, that is to be found at page 124 of the appeal book where it says:

Metropolitan Engineering must be taken to have known, from the course of business over some years, that Associated Alloys did business and sold steel on the basis that its standard Romalpa Clause would appear on the back of its invoices and would be incorporated in its agreements for sale. As a result Metropolitan Engineering was bound by the Retention-of-Title clauses in cases where those clauses did appear on the backs of invoices and Metropolitan Engineering accepted delivery and (as was invariably the case) raised no objection to the clauses.

Reference is made to a decision of Mr Justice Cohen of Chattis Nominees Pty Ltd v Norman Ross Homeworks Pty Ltd which applied a decision of the House of Lords in Henry Kendall (a firm) & Sons v William Lillico & Sons which we have given the Court a reference to. He said:

However this effect was only produced when the plaintiff did in fact use an invoice with a Retention-of-Title clause printed on the back…..Metropolitan Engineering’s knowledge of the course of business would have no affect unless the clause was in fact incorporated in a particular agreement for sale. The clause was not incorporated simply by stating on the front of the invoice that a clause set forth on the reverse side applies; unless there was a clause on the reverse side, this statement was meaningless and can have no effect.

That was not dealt with by the Court of Appeal but we submit that based on the decision in Chattis Nominees v Norman Ross Homeworks, the decision of Henry Kendall v William Lillico & Sons ‑ ‑ ‑

GAUDRON J: Let me interrupt you there. The best you can hope for, if you were to succeed in this matter, is for it to be remitted to the Court of Appeal, is it not? For the whole matter to be remitted to the Court of Appeal.

MR DOUGLAS: And then to the Court of Appeal to decide what they want to do with it.

GAUDRON J: Yes. So that that point would go back to them to ‑ ‑ ‑

MR DOUGLAS: That point has to go back but, of course, that does not dispose of the matter entirely because it only relates to one of the invoices.

GAUDRON J: Exactly. There is no way, I think you have conceded, that this Court can dispose of the matter entirely, otherwise than by rejecting your arguments.

MR DOUGLAS: No. This Court could not dispose of the matter entirely, your Honour. I would not even suggest that for one moment.

GAUDRON J: Yes. So that issue should go back to the Court of Appeal.

MR DOUGLAS: It should go back to the Court of Appeal and not be dealt with here.

GAUDRON J: If other matters go back to the Court of Appeal that should too.

MR DOUGLAS: Yes, your Honour.

GAUDRON J: Yes.

MR DOUGLAS: So, I think, essentially, we have in the written submissions sought to put our argument that it is an express trust or intended to be of future property but the property was not, as seems to be common ground, ever kept separately in an account as was intended by the agreement but nonetheless it is of importance, as would see it, to the parties for a determination to be made by this Court whether, in fact, what was done by the agreement did, in fact, express an intention to create a trust and what relief we may get ‑ ‑ ‑

GAUDRON J: Yes, there are two questions involved in that, an intention to create a trust instanter or an agreement to take steps to create a trust in the future. There are two possibilities.

MR DOUGLAS: Yes. It is essentially an agreement, as we would see it, your Honour, to create a trust of future property.

KIRBY J: Are there not two matters that you have to deal with, one of which relates to the preliminary question of whether this clause was introduced into the relationship between the parties by reason of the dealings and the apparent mistake seemingly unexplained, the failure to include the clause in the back of one of the invoices. I mean, that is a gateway you have to pass through first, have you not?

MR DOUGLAS: Only in respect of one of the invoices and that was not dealt with by the Court of Appeal and I thought what Justice Gaudron was putting to me was that, really, that is a matter which has to go back to the Court of Appeal.

GAUDRON J: If you succeed on the main point.

MR DOUGLAS: If I succeed.

KIRBY J: That is only if you succeed.

GAUDRON J: If you do not succeed it does not ever arise.

MR DOUGLAS: It does not ever arise, your Honour. That is how I understood it, your Honour.

KIRBY J: The other question which is, it seems to me – I mean, you deal with it how and when you want – but a large issue of whether or not by their private dealings parties can make these arrangements which have the effect against the world, against third parties who deal with the corporation and subsequently it becomes insolvent, I mean this is the Corporations Law issue, and so far as I am concerned it is a very real question as to whether you can go making your own little clauses which are happily made as between you but which have, as you assert, consequences for completely innocent and ignorant, in the sense of unknowing, third parties who are dealing with the corporation in the meantime and who, it is the duty of the voluntary administrator to protect.

MR DOUGLAS: Your Honour, those sorts of issues, the public policy issues relating to these types of clauses, are dealt with in part in cases such as Clough Mills and it is true that there is a tension which exists between the rights of unsecured creditors and the rights of ‑ ‑ ‑

KIRBY J: There certainly is. As far as I am concerned, it is the will of the Parliament or the Parliament’s concern it will have priority over the private clauses self‑serving arrangements which parties make to try to protect themselves in the event that things go wrong.

MR DOUGLAS: Your Honour, it is well to refer to such arrangements as self‑serving arrangements.

KIRBY J: That is what it is.

MR DOUGLAS: I have deliberately not in my submissions sought to make any cry of misericordia in respect of anyone’s particular interest, but more often than not ‑ ‑ ‑

KIRBY J: No, but I am merely saying that you make your own private arrangements but they will not stand against the will of Parliament.

MR DOUGLAS: I just wanted to say what I was going to say, which is to this effect, that more often than not these particular clauses quite often protect small traders against large banks who have large floating securities over the assets of companies. There are questions of public policy ‑ ‑ ‑

KIRBY J: That does not affect me in the slightest, Mr Douglas. Large banks and mega banks are entitled to protection of their position in courts of law.

MR DOUGLAS: Then what your Honour is putting to me does not affect me in the slightest, may I say so with the greatest of respect, because the question here is: is it a charge or is it a trust? Section 262 of the Corporations Law has said you cannot have a charge. It has not said you cannot have a trust. If we have been successful ‑ ‑ ‑

KIRBY J: Why can a trust not be a charge?

MR DOUGLAS: I think there are difficulties in that, your Honour.

KIRBY J: You seem to be assuming that these are two boxes which are entirely separate categories. I do not accept that.

MR DOUGLAS: Your Honour, if we are talking about an express creation of something, if they either expressly intend to create a trust or create a charge, that – I mean, if one looks at Becktive’s Case, Sir Owen Dixon, your intention can be manifested in a number of different ways but it cannot be manifested in two entirely inconsistent ways. As we would see it, when one is talking about express creation of interest, one is either talking about a charge or a trust. On the other hand, if one is looking at a situation where the issue is what remedy will a court provide, for example, as Sir George Jessel pointed out in Re Hallett’s Estate, it will in a fiduciary relationship allow tracing and will impose an equitable lien or charge. There is a discussion as to whether it is a lien or a charge to enable or to protect that tracing right. But we are here dealing with the express creation of something and not what courts will do by way of charge, lien or constructive trust.

KIRBY J: On your theory then, by calling it a trust and creating a trust parties can by their self‑serving or non‑self‑serving arrangements walk straight out of insolvency law. I find that very hard to accept.

MR DOUGLAS: The sort of relationship which we are talking about here, your Honour, is no more self‑serving than a relationship which exists between a funding bank which has a floating security over the assets of a company. That is also a self‑serving arrangement between two parties at arm’s length who choose to deal on certain terms.

McHUGH J: Subject to this, that the charge must be registered, otherwise it is void.

MR DOUGLAS: Exactly, your Honour, yes.

McHUGH J: Which of course is not the case.

MR DOUGLAS: Yes, and what the law has provided is that in those circumstances ‑ ‑ ‑

KIRBY J: Why is that provided? It is provided to protect innocent outsiders to the private arrangements of parties who slip these clauses into their invoices.

MR DOUGLAS: Your Honour, another view may be, just as capable of being held, that a company such as Metropolitan, if it obtains goods on credit and then uses them to swell its assets without paying the vendor of those goods, has in fact been unjustly enriched at the expense of that particular creditor.

HAYNE J: Is that right, Mr Douglas? Is it useful to examine the question in those terms, or is it more useful to examine the question in terms of the quite elaborate provisions made by the Corporations Law for the ordering of claims in the event of introduction of compulsory management or insolvency or financial distress? The very elaborateness of the arrangements thus made bespeaks a deal of care by the legislators in trying to order what necessarily are competing interests.

MR DOUGLAS: Your Honour, that is, as we would see it, a perfectly appropriate consideration to take into account, but ‑ ‑ ‑

HAYNE J: But the question then becomes where in that elaborate legislative order this particular transaction falls.

MR DOUGLAS: Yes.

HAYNE J: That is the outcome that follows from that elaborate consideration.

MR DOUGLAS: Your Honour, I accept everything that your Honour has put to me. What we see as being the guiding principle is that the legislature has chosen only to talk in terms of charges and not trusts. The co-existence of legal and equitable relationships in the one transaction have been recognised in cases such as Quistclose and since the decision in Romalpa in 1976. It has been competent for the legislature, if it chose to do so, to in some way prohibit, as it has done, with charges, or require a system of registration of ‑ ‑ ‑

HAYNE J: And that which is made available to the body of unsecured creditors is the body of assets legally and beneficially owned by the company in question.

MR DOUGLAS: Yes, your Honour, and ‑ ‑ ‑

HAYNE J: If it is not both legally and beneficially owned, but there are other separate beneficial interests, they are to be dealt with according to those arrangements.

MR DOUGLAS: Exactly, your Honour. Those are the submissions we would wish to ‑ ‑ ‑

GUMMOW J: Just before you sit down, I am not sure I understand the course of trade of your client. The goods it sold to Metropolitan, and it may be it does come out of the evidence, it self-manufactured them, or it itself had purchased them from somebody else?

MR DOUGLAS: Your Honour, it in fact had purchased them from somebody else, as I understand it.

GUMMOW J: Yes.

MR DOUGLAS: Wholesale, so it is as a wholesale merchant, the sheet metal, and there seem to have been parts ‑ ‑ ‑

GUMMOW J: From an overseas manufacturer or supplier, by the look of it.

MR DOUGLAS: We still have BHP in this country, I am not sure.

GUMMOW J: Some of the invoices seem to suggest that the goods were coming in by ship.

MR DOUGLAS: Yes, they were goods supplied from overseas, your Honour, I am told.

GUMMOW J: Hence the US dollars, perhaps.

MR DOUGLAS: Yes, because we were buying in US dollars and then selling in US dollars.

GUMMOW J: Thank you.

MR DOUGLAS: Is there anything further? I am sorry, your Honour.

KIRBY J: Justice Bryson refers to Williston. Do you have that in Court or do you have any other material? I mean, as we have the matter now before us, it is desirable that we should be looking at the issues of general principle. Do you have any other academic writing or writing that we ought to consider as we are approaching this matter?

MR DOUGLAS: Your Honour, I do not have Williston in Court, but I have sought to circulate to the Court - - -

KIRBY J: Who was the article in 68 ALJ? I saw it mentioned but I have not read it. It is mentioned in something that I have been looking for and I cannot find it. Do you know?

MR DOUGLAS: I have seen that, your Honour, I just cannot remember it. We selected out the articles which we thought the most helpful. There is a very useful discussion by Mr Justice Priestley ‑ ‑ ‑

KIRBY J: Yes, we have that. Thank you for that.

MR DOUGLAS: There is a very useful discussion in Jacobs’ Sixth Edition. It is written by a Professor Di Everett, the 68 ALJ article. She was a professor at the University of New South Wales and I think possibly now at Bond University.

KIRBY J: Yes, she is at Bond.

GAUDRON J: She was at Macquarie.

MR DOUGLAS: We have also extracted for your Honours the relevant pages from Mr Vann and Mr Justice Austin’s book on Public Company Finance.

KIRBY J: And we have those?

MR DOUGLAS: Yes, you do, your Honour. Those articles do, in various ways, look at the question as it arises from a public policy point of view. There is a reference in Mr Justice Priestley’s article to the situation as it exists in America.

KIRBY J: I am not familiar with the American development, and I see Justice Bryson suggests that in the United States under the uniform commercial code they have not permitted this development to occur. Have I understood that correctly?

MR DOUGLAS: That is my understanding of the situation, yes, your Honour.

KIRBY J: Why should, simply by a nomenclature, a party of its own motion be able to walk out of the extremely important public policy protections for innocent creditors?

MR DOUGLAS: But, your Honour, is not the situation this: the question is whether Metropolitan would ever have had a beneficial interest in the proceeds of the goods if, in fact, we had not supplied steel. We were only prepared to supply steel on the terms we supplied it.

GAUDRON J: Perhaps the more basic question is whether it is walking out of the protection afforded, and that is not a question that arises at this stage except in relation to the charge issue.

KIRBY J: I am not sure about that. I think it may well rise in considering whether it is consistent with the Corporations Law for parties to be able to call an instrument or an invoice a trust, thereby escape the duties which are imposed by the law upon charges.

MR DOUGLAS: I understand the public policy considerations which your Honour is putting to me.

KIRBY J: They are pretty important.

MR DOUGLAS: They are important, but essentially, as we would see it, it is a question of freedom of contract, and we said “We will supply steel to you but on these terms”.

HAYNE J: But also, the points that Justice Kirby raises with you may arise in this way, may they not: at the point of appointment of administrator it may be that proceeds have been received, proceeds have not been dealt with in the way in which this clause required. It may be - I simply do not know – that your claims in respect of those past proceeds may be unsecured claims resting with the general body of creditors and the that the real bite of this clause – if it has a bite – may come immediately upon appointment of the administrator, and it may be that your remedy then is to compel or, more accurately, restrain the administrator from acting other than in accordance with the clause. And it is those after‑acquired items which might be the real subject of the bite.

GAUDRON J: And the question is not one with respect to the rights of unsecured creditors. The question is as to how the company is to be managed at a point when it has not gone into liquidation.

MR DOUGLAS: Yes, well, again I suppose I would come back to my freedom of contract point but, secondly, we did in these proceedings try to obtain such relief and could not. Obviously it is an important case from that point of view because if, in fact, one has a right to intervene by way of injunction at that early state, well then ‑ ‑ ‑

HAYNE J: That is one issue that is certainly not before us, is it not, Mr Douglas, whether you had a right to intervene by way of injunction.

MR DOUGLAS: That summons has not come up to you, no, I do not think it has.

McHUGH J: But this problem does not always arise in the context of administration of companies, does it, or in winding up? It can arise on execution of a judgment debt.

MR DOUGLAS: Yes, it could arise in those circumstances too. As we would see it, one should not look at these clauses simply by reference to the provisions of the Corporations Law and what the Corporations Law seeks to achieve. It is a matter which has wider public policy implications than that and whilst, more often than not, the provisions relating to registrable charges come up in this context because it often occurs in the context of liquidation, there are other contracts in which these clauses are relevant. If it please the Court.

GAUDRON J: Yes, thank you, Mr Douglas. Yes, Mr Coles.

MR COLES: If your Honours please.

MR DOUGLAS: I am sorry, we just have some copies of Mr Vann’s book and we will circulate that to the Court.

GAUDRON J: Thank you.

MR COLES: If your Honours please. Your Honours ‑ ‑ ‑

GUMMOW J: Are you in receivership as well? I am just looking at the heading, that is all, on the front page of the appeal book.

MR COLES: No, there is a misnomer, I think, in the title. Your Honours, can I ask your Honours to just briefly look at page 1 of the appeal book which is a summons? I do this, your Honours, because of concerns we have about the generality of the submissions that have been put to this Court as to what might be the remedy ‑ ‑ ‑

GUMMOW J: Is the first defendant inaccurately described there?

MR COLES: So far as there is a reference to receivers and managers, I think so, yes.

GUMMOW J: Well, should that be deleted?

MR COLES: In the interests of accuracy, yes.

GUMMOW J: It is a good idea to be accurate.

GAUDRON J: Yes.

MR COLES: Sometimes.

GUMMOW J: Now and again.

MR COLES: Well, may I correct myself, your Honours. It is probable that at the time the proceedings were commenced there may have been a receiver. The company is no longer in receivership.

GUMMOW J: I thought Wespac had appointed a receiver at some stage.

MR COLES: Yes.

McHUGH J: It has a different name as well, has it not?

MR COLES: The company is no longer called Metropolitan Engineering and Fabrication, it is now ‑ ‑ ‑

GAUDRON J: Why do we not correct the record? Let us know precisely where we stand.

HAYNE J: I am sure the voluntary administrators are not still there either.

MR COLES: Exactly. There is nothing about the present description of the first defendant except, perhaps, its ACN number which is accurate.

GAUDRON J: Are you in a position to tell us how the proceeding should be entitled?

MR COLES: Can I get some complete instructions in the interests of absolutely accuracy on that, your Honours?

GUMMOW J: Very careful instructions, too.

GAUDRON J: Yes.

MR COLES: I want to be very cautious about that. Your Honours, the relief sought on page 1 was, in the first instance, a declaration that one or other of the defendants held upon trust a specified sum of money, that is to say, $US197,000 in respect of specified goods. The application for an account in paragraph 1(b) of that order was obviously directed to that sum of money. There is, in the summons – and it has never been amended and no application to expand or build upon the relief sought has ever been made – the following things should be noted: one, the summons proceeded on the view, now seemingly accepted as erroneous, that there was some identifiable trust fund in respect of one or other or both of the defendants could account; secondly, the summons proceeded on the basis, probably for that reason, that there was no need for, or certainly no endeavour made to ask for or to make, any application to set aside any future sum by way of proceeds of resale that might be derived in the future even on the supposition - and our submission is, of course, that that could not now be the subject of any relief in these proceedings because, firstly, no such relief has ever been claimed against the administrators, so they cannot be in breach of anything if there was never any order sought against them requiring them to set aside a fund in the future.

That would, in turn, suppose that notwithstanding the findings of Justice Bryson they might have been able to do so in any event because if the funds that had already been received before the administrators were appointed had, in effect, sunk without trace then that was not going to simplify the task for the administrators in the future to match their respective invoices through the chain of title of goods through – manufactured products through proceeds of resale. If your Honours look at page 68 ‑ ‑ ‑

GUMMOW J: Just before you leave that, Mr Coles, what is the sequence of events? There were some proceeds that had come in and disappeared before appointment of your ‑ ‑ -

MR COLES: If your Honour looks at page 68. What seems to have happened - yes, before the appointment of the administrators certainly a large sum, some 50 per cent. I am looking now on page 68 but the narrative commences in the portion Mr Douglas read at the foot of page 67. Apparently some 50 per cent, or thereabouts, of the original price had been received. The material on page 68 tells us the following that between 9 February, which was the date of the appointment of the administrators, and 29 February 1996, which is the date of the 439A report to creditors ‑ ‑ ‑

GUMMOW J: The date of?

MR COLES: The report under section 439A of the Corporations Law – they had:

Receipts
Debtors $13,674.00
Bank Advance $45,000.00 –

And what was described as:

Work in Progress Funding $400.000 –

If your Honours look over briefly to page 69 the work in progress funding is described about new line 45 in these terms:

The Administrators requested finance from the company’s bankers, certain financial institutions, industry contacts and company creditors. A funding advance of $400,000 was finally obtained from Flame-Cut Pty Ltd, a creditor of the company. The advance was in two instalments –

If your Honours then go back to page 68 the item:

Cash at Bank as at 29 February 1996 $276,067.000 –

is the result of the various trading payments, absorbing, largely, the $400,000 which the administrators independently borrowed to support the company through the administration period.

Lastly, if your Honours would read the last sentence on page 68:

Numerous creditors have been paid substantial amounts in the months prior to the Administrators’ appointment and further investigation of these payments is required.

In other words, what had happened is a large amount of money had come in from Lucky Goldstar and been used to pay off the various creditors, including, of course, the present appellant.

GUMMOW J: Even before 9 February 1996?

MR COLES: Even before 9 February, yes.

GAUDRON J: And nothing came in from Goldstar between 9th and the 29th, it seems.

MR COLES: Nothing came in from Goldstar between 9 and 29 and the evidence before Justice Bryson did not establish what, if anything, came in between then and 10 May which is the date his Honour disposed of the proceedings.

HAYNE J: Although his Honour’s judgment seems predicated on the assumption, in part it seemed to me, that the balance of work in progress had not been paid.

MR COLES: There was 50 per cent outstanding.

HAYNE J: And was outstanding at the time of judgment. I refer particularly to 125, lines 55 and following.

MR COLES: Indeed. So there was not, at any time so far as the proceedings were before the Equity Division of the Supreme Court at first instance, any fund of money, either already received by the company in administration or received by the present administrators which was shown to have been a fund of money upon which the subject matter of the proceedings could bite and hence, it may be for that – we do not know the reason, but we do point to the fact that these proceedings were never constituted for the purposes of requiring by specific performance or any other remedy a requirement that the administrator should set aside any proceeds that they might receive in the future. That would, of course, have attracted a factual debate, particularly livened by the very consideration which his Honour describes.

GUMMOW J: Then you would have had to join the bank. They had some security over all of this. When did the charge fix, do we know that?

MR COLES: The charge, at least, included the company’s land.

GUMMOW J: If it fixed, these proceeds would have to go to it, I suppose.

MR COLES: If your Honours go back to page 63 there is a summary of the financial affairs of the company which rather suggests that the Westpac security would have been paid out of fixed assets, land and buildings and the like.

GUMMOW J: Right, but nevertheless, that is not quite the point though, is it? They might have ultimately got paid in that way.

MR COLES: Yes, your Honour is right.

GUMMOW J: I am sure – yes, they did.

MR COLES: The point is they still have an interest in the corpus, as a chargee - under a floating charge they have an interest upon it having, of course, crystallised, no doubt, upon the appointment of the administrator. You do not know the - - -

GUMMOW J: One would assume it crystallised when your client was appointed.

MR COLES: Indeed. So, your Honour is, with respect, probably correct. The bank was another party with an interest in the assets of the company. But we say, your Honours, that whatever the view this Court came to about the subject matter or about the charge versus trust question, there is simply no subject matter remaining in these proceedings as they were constituted and formulated which justifies or requires them to be sent back for the taking of any account.

In our respectful submission, before a party, presumably a fiduciary could be ordered to account, he must firstly be found to be liable to account. An account is not the first step of the judicial inquiry. It is the latter step and unless and until it were shown in the proceedings, the subject matter of the appeal before your Honours, or, in particular, I, of course, speak of Mr Shirlaw, that he ever fell under any liability to account, then there is no subject matter in these proceedings.

Of course, Mr Shirlaw and one other gentleman who is not a party to the proceedings became, in August 1996, some four or five months after Justice Bryson’s judgment, the liquidators of the company. That was, in effect, a creditors voluntary winding‑up through the processes of Part 5.3A of the Corporations Law.

GUMMOW J: But at some stage before that had there been a receivership under appointment by the bank, do we know?

MR COLES: Well, we only know what is set out in Mr Shirlaw’s report about the position of the bank. At page 69 line 20, if your Honour pleases, it is recorded that:

On 22 February 1996 the secured lender, Westpac Banking Corporation Ltd, under its fixed and floating charge, appointed Mr Greg Hall of Messrs Price Waterhouse –

and your Honours see that the ‑ ‑ ‑

GUMMOW J: That was only over the ‑ ‑ ‑

MR COLES: It is only over “the land and buildings and plant and equipment”.

GUMMOW J: Yes.

MR COLES: But that, of course, was not seemingly an exhaustive description of the secured rights of Westpac and was simply a limited appointment and this is some years ago, of course, so it may have had other purposes.

GUMMOW J: Is there anything that indicates that the security was over other than the fixed assets?

HAYNE J: Line 25 on 69 speaks of the administrators consenting to a “partial appointment over the assets”. Does that ‑ ‑ ‑

MR COLES: And the financial material I took your Honours to suggests that the charge was a fixed and floating charge, that is to say at page 63. No, I am sorry, it simply describes “Estimated Surplus subject to Realisation of Floating Charge Assets” at line 20 and then there are the assets set out as “Subject to Floating Charge”, again, in favour of Westpac Bank who, on this hypothesis has been - on this description of things should be paid out of the fixed assets.

GUMMOW J: Where do we see that that is Westpac, the floating charge?

MR COLES: Only by the absence of any reference to any other registered chargee, your Honours.

GUMMOW J: Yes.

HAYNE J: Page 65 line 45:

Westpac Banking Corporation is a first ranking fixed and floating charge holder ‑ ‑ ‑

MR COLES: Yes. I am getting to it, your Honour, yes. So in short, your Honours, we have set these matters out at some length in our submissions but we would submit that a resolution one way or the other of the charge or trust question does not leave any – whatever other consequences it may have would be a matter, of course, for the appellants otherwise, but it leaves no subject‑matter remaining so far as these proceedings are concerned in any event because the application to the Court was of a limited kind.

May I then turn, your Honours, to the question of whether there was a security. Our starting point, in our respectful submission, is that one looks not simply at the relevant portion of the relevant fifth subclause of what is described as the Romalpa clause, but one must, of course, look globally at the contract for sale between the parties as a whole and its features include certain features which have already been mentioned, namely that – and, of course, a contract for sale of specific goods with terms as to delivery and payment which are not wholly captured or wholly wrapped up in the so‑called Romalpa clause itself.

The invoices at pages 27, 28 and 29 which were the subject of the proceedings record an important term in the contract for sale or contracts for sale, namely that there was an agreement, perhaps an oral one, between a gentleman described as Peter Tutt and another gentleman named Peter Walton – and I think it is common ground they are officers of the respective buyer and seller companies ‑ ‑ ‑

KIRBY J: Do you know what point the subscribed provision is in? That is in a point of print which is - certainly, I cannot even read it with my glasses.

MR COLES: Your Honour is looking at the very fine print which says “Romalpa Clause set forth on the reverse side hereof applies”.

KIRBY J: Just a moment, I will put two pairs of glasses on and I will get close to it. Oh yes, I can see it now.

MR COLES: Whilst one may lament the absence of Lord Denning’s red hands, we have not, I must say, taken any point about its non-incorporation on grounds of minusculeness of type, our point is a different one, but – before coming to that, however, could I draw your Honours’ attention to the fact that a crucial term of the contracts for sale in this case are the terms as to payment. The invoice is sent on – I am just looking at the invoice on page 27, it is the first of the three – it is dispatched on 31 August 1995. It relates to orders which your Honours will find recorded later in the material at page 79, and the same exercise can be replicated for each of the three invoices, but by way of illustration, at page 79, there is Metropolitan Engineering’s order upon Associated Alloys for the supply of the goods, the subject matter of the invoice on page 27. That order, however, is really, we would be inclined to submit, in the nature of an acceptance of an offer, because the next document on page 80 is Associated Alloys’, in effect, quote for the supply of the materials in question.

Your Honours will see by the facsimile time impressions at the top of the respective pages that what has happened is the sequence commences with the letter on page 80 of 31 May from the appellant being sent to Mr Regan at the first respondent’s office, setting out the prices for the goods and the goods listed correspond with the description of the goods on pages – in the first bulk of them – the invoice on page 28 in the second invoice and page 27. The prices are set out. The delivery details are set out:

subject to your order confirmation by 31st May 1995; all cargo ready for shipment Week 35 –

So this is otherwise, apart from Romalpa considerations, this would otherwise be either a contract for sale of specific goods in a deliverable state or a standard FOB type of contract which would itself attach certain consequences so far as the transmission of property was concerned. But that offer, we would say, was accepted by the order which is the next page back, that is page 79, “Please supply”, and obviously, in the meantime, or roundabout the same time, Mr Tutt and Mr Wilson proceeded with the discussion as part of the contractual arrangements involving the important detail about payment and they decided, as a term of their contract, that payment should be towards either mid to late November of 1995.

If your Honours then go back to the invoice on page 27, it is perfectly plain, in our submission, that by the time that invoice was delivered or dispatched on 31 August, the inference one would draw is that the contemplated dispatch of the goods which the original offer on page 80 described, namely the shipment on 31 August, had happened and what happens, one would infer, is that the invoice is sent when the goods are dispatched.

We know that the fair inference from the invoice on page 27 dated 31 August is that by that date the goods were on board the vessel. The vessel is identified and its estimated time of arrival some six days later in Sydney is specified and there is said to be attached a mill test certificate and a copy of a bill of lading, all of which suggests that the goods have been appropriated to the contract and were being shipped on board to the purchaser and that all of that had happened by the time the invoices in question in each case were despatched to the purchaser.

It is those simple facts, your Honours, that enliven the submission that we have put that normal course of business may serve to incorporate clauses but, if the normal course of business proceeds contract after contract without the clause being incorporated, then the mere fact that the clause comes at the tail end after the deal is done merely means that the normal course of business is that the clause comes at the tail end after the deal is done. It does not lead to the osmotic conclusion that the clause becomes included as a term of the agreement. In other words, if Mr and Mrs Olley visiting the Marlborough Court Hotel ‑ ‑ ‑

GAUDRON J: Did you take this point at first instance?

MR COLES: I do not think we did, your Honour.

GAUDRON J: Or in the Court of Appeal?

MR COLES: We sought to in the Court of Appeal and we were not ‑ ‑ ‑

GAUDRON J: May it not require consideration of factual matters that were not the subject of evidence?

MR COLES: The way we sought to deal with that, your Honour, is by the submission that in bringing forward its contract as the foundation of its cause of action in the trial at first instance, the plaintiff must be taken to have brought forward the whole contractual ‑ ‑ ‑

GAUDRON J: I am not too sure about that. These were proceedings by summons.

MR COLES: Yes.

GAUDRON J: The next question ‑ ‑ ‑

MR COLES: Based, we submit, on a contract.

GAUDRON J: Is there a notice of contention here?

MR COLES: Yes, and we move orally on that notice of contention for the purposes of this limited submission. It is our answer really to the proposition – one way of putting it.

GAUDRON J: You must accept, must you not, that this may be a point that, if taken, would have required other evidence or would have led to other evidence?

MR COLES: Ordinarily one would be driven freely to confess that immediately. We simply would not take the point, but our answer to it is that ‑ ‑ ‑

GAUDRON J: Once that confession is made though, is it not the end of the point?

MR COLES: It would be, but in the present case our submission is that it was for the plaintiff to put forward the whole of the contract. You cannot sue on a half of the contract. You have to bring forward as a plaintiff with a cause of action in contract the whole of your contract.

GAUDRON J: It may have if you had taken this point.

HAYNE J: Indeed, are they your side’s submissions at pages 6 and following, “Statements of Defence”?

MR COLES: Yes, that is right.

HAYNE J: Statements of defence which seem, at least at first blush, to the uninformed reader to assume the incorporation of the clause.

MR COLES: I agree with that.

HAYNE J: It is really a bit late, is it not, Mr Coles?

MR COLES: If your Honours are not disposed to allow the notice of contention, what I have said, however, is in part by way of the point we want to make in any event, that the contract contains and must be seen as containing important other stipulations, in particular the one relating to the payment of the purchase price at a defined and identifiable time. In other words, there is allowed to the buyer a relatively substantial period of credit. That period of credit, or alternatively that fixed date for the payment obligation, floats wholly independently of any external or third party arrangements that the consignee may have with itself as participating in the process of manufacture or with anybody to whom it re‑sells the finished products and from whom payment can be expected.

In other words, the payment obligations of Metropolitan do not depend and cannot depend on whether or not they have received a trust fund from somebody – for the present case let us suppose Lucky Goldstar in Korea. Equally, for example, it would be no answer to a claim brought for the price by Alloys that Metropolitan had not received and had not therefore appropriated in some way to some trust their moneys from any sub‑purchaser to which it was entitled under the contract for the sale of the finished goods.

Equally, in my respectful submission, it follows also that if Metropolitan received from a sub-purchaser the proceeds of the resale before the contractual date for payment arose, it would be inconsistent with the plain objective of the parties that Metropolitan should either pay in advance of the agreed contractual payment date or inhibit its own working capital arrangements by reposing the moneys in question to some nominated or exclusive account. The parties did not so provide and, in our respectful submission, to imply such a provision would be inconsistent and is traditionally regarded, in our submission, on the authorities as inconsistent with a contractual period of credit.

So, in our respectful submission, one then looks to see what the evident purpose of the so-called Romalpa clause on the portion of the invoice is and its purpose must, in our respectful submission, regarded in the context of an obligation to pay at a time more or less certain, a contractual price. Its purpose must be simply to secure to the seller the payment of that price in the event of some contractual default. In other words, its substance ‑ ‑ ‑

GAUDRON J: Let us take that more slowly. Its evident purpose is to secure to the seller, yes, payment ‑ ‑ ‑

MR COLES: Some basis for trying to recoup payment in the event of default.

GAUDRON J: Yes, well, that does not take us very far, does it? We have to find out what that basis was.

MR COLES: When parties make more than one provision for payment of the one obligation, it would be legitimate to infer that one of them might be security for the performance of the other.

HAYNE J: It may be legitimate to infer that one sees commercial advantage in obtaining the promise, but more than that I find hard to determine a priori.

MR COLES: Well, it would be, in our respectful submission, reasonable to assume that parties who stipulate for and parties who agree to these sort of clauses more likely than not intend their operation in circumstances where there is, if not some contractual default or if not some supervening solvency or external administration occurrence, at least some contractual default in the nominated payment arrangements. They are fall-back positions, in other words and, therefore, capable of being appreciated ‑ ‑ ‑

GAUDRON J: Yes, well, there is nothing strange about that, is there?

MR COLES: No, but it is not irrelevant, we submit, your Honour, in weighing up the store of ‑ ‑ ‑

GAUDRON J: Weighing up what? What are we looking for in your submission, Mr Coles?

MR COLES: We are looking, your Honour, for indicia of an intention to create a security interest rather than a bare or absolute trust.

GAUDRON J: You are looking for indicia outside the words of the clause? Are you submitting that the words of the clause are a sham?

MR COLES: No.

GAUDRON J: Well then, I fail to follow the point of all this if you accept that the words are not a sham ‑ ‑ ‑

MR COLES: What we say is your Honour must look at the commercial relationship as described by the evidence ‑ ‑ ‑

GAUDRON J: Why not proceed on the basis that the parties meant what they said and said what they meant?

MR COLES: Well, one may, but that does not resolve an ambiguity as to whether the trust agreed to be created.

GAUDRON J: Where is the ambiguity? Let us start at the beginning. If there is an ambiguity, then that is one thing.

MR COLES: There are a number of ambiguities in the particular clause but one of them is whether the trust intended to be established with respect to whatever are the proceeds – that is the other ambiguity – was intended to be a trust absolutely or intended to be a trust by way of charge.

GAUDRON J: Or intended simply to be an agreement to create a trust.

MR COLES: Yes, well, to restate my position, both propositions. Intended to be in agreement to create a trust absolutely or intended to be in agreement to create a trust by way of charge only.

GAUDRON J: How do you create a trust by way of charge only?

MR COLES: In our respectful submission, that is certainly known to the law and indeed, it is supported by ‑ ‑ ‑

GAUDRON J: Sorry, that is what?

MR COLES: That is supported by authority to which I will take your Honours.

GAUDRON J: That you create a trust by way of charge.

MR COLES: Yes, just as one can convey property either absolutely or convey property by way of charge, one can equally establish a trust of property absolutely or a trust by way of charge. The Court of Appeal quoted in that context, and we respectfully adopt the observation, your Honours, what was said at page 155 of the judgment of Mr Justice Sheller. He quoted, at the foot of the page, an observation of Justice Mummery in Compaq Computer Limited v Abercorn Group:

“In determining whether any given agreement creates a charge, equity looks to the substance and reality of the transaction. What on the face of it may appear to be an out‑and‑out disposition of a legal or equitable interest in property by way of assignment or conveyance or an out‑and‑out disposition of a beneficial interest in property by way of trust, may in fact be by way of security only, with a right of redemption –

GUMMOW J: Yes, but he is talking about Boydell v James and Price v Parsons and those cases where something on the face means one thing and in substance it is said to mean another.

MR COLES: The idea has ‑ ‑ ‑

GUMMOW J: Which is related to sham, it is related to it. He is not saying that the trusts are securities. He is saying, on the face of it, it is a trust but it is not because it is a charge. It is not an answer in support of it, it is a query to you.

MR COLES: Yes. In our respectful submission, equally one can, by analysis, determine that a conveyance or a transfer of ‑ ‑ ‑

GUMMOW J: Yes, it looks like an outright conveyance but it is a mortgage.

MR COLES: It is really a mortgage, yes.

GUMMOW J: That is the territory that is being mentioned there.

MR COLES: And A says, “I constitute myself trustee of this property for B”. There is an inquiry available or it is certainly not precluded by the fact that he nominated himself a trustee, that he may have done so by way of providing security for the interest to which B may be entitled. That certainly emerges, in our respectful submission, in the very context of the sort of clauses we are concerned with in cases, for example, like Bond Worth to which I do want to take your Honours fairly shortly.

Could I just summarise, if I may, your Honour, why we say in substance - and it is a matter of substance - and, indeed, the paragraphs which our learned friends have referred your Honours to from the Sixth Edition of Jacobs’ Law of Trusts do draw attention, with citation of local authority as well, to the need to have regard to substance and may I also remind your Honours that, indeed, the paragraph my learned friends read you from Lord Justice Goff’s judgment in Clough Mill appears to authorise doing even what his Lordship described as violence to the language, if appropriate to really and truly determine the intention to be ascribed to the parties and Lord Herschell, as your Honours will recall, in a famous dictum ‑ ‑ ‑

GAUDRON J: So are we looking at the substance of a transaction or are we looking at the intention of the parties?

MR COLES: It is difficult to separate the two.

GAUDRON J: Essentially, there may be two quite separate questions involved in it.

MR COLES: There may, your Honour, but we would think that they overlap to a point which makes their discrimination sometimes ‑ ‑ ‑

GAUDRON J: What are we looking for here, first? What is the first step?

MR COLES: What we say is the first step is to look at in terms of the contractual arrangements made whether what was intended was in substance a security or whether it was a bare or absolute trust. The consideration, shortly ‑ ‑ ‑

McHUGH J: I must say I am not quite following this at the moment. At the bottom of page 156 in the judgment is the Court of Appeal saying that although the word “trust” may be used, nevertheless you look at it as a matter of substance, or are they saying, as you contended surprisingly to me, that you can have a trust by way of charge?

MR COLES: The Court of Appeal, in quoting with apparent approval the extract I read from Justice Mummery, seems to be putting this proposition.

McHUGH J: But I did not read that passage that way. I read it as saying, “Well, what may appear to be a trust is nevertheless only a security”.

MR COLES: Yes.

GUMMOW J: It is the same ‑ ‑ ‑

MR COLES: In other words, even if described as a trust it is the words he used that may be ‑ ‑ ‑

GUMMOW J: Yes, well, a sale with an option to repurchase may be a mortgage, that is the line of territory that applied to ‑ ‑ ‑

MR COLES: That is the line of country.

McHUGH J: Accepting that is so, and I do, it does not mean that you can have an agreement to create a trust that operates by way of charge, can you?

MR COLES: An agreement to ‑ ‑ ‑

McHUGH J: All you are really saying is that the agreement is in fact a charge.

MR COLES: That is right, yes.

GUMMOW J: That is all that is being said.

MR COLES: That is all I am putting, really, is that.

GUMMOW J: You have not answered Justice Gaudron’s point.

GAUDRON J: I think I understand what you are putting.

MR COLES: Very well. I am grateful to your Honour.

GUMMOW J: Which was that it is oil and water. How you work out whether it is oil or water is another matter.

MR COLES: Yes, it is one or the other. The reason why we say it is in substance to be seen as a security in the ‑ ‑ ‑

McHUGH J: Correct me if I am wrong but, if it is merely a charge, then the underlying property is in A with a charge to B but, if it is a trust, then the beneficial interest in the property is in B.

MR COLES: Yes, and absolutely, and questions such as those that have been raised about entitlement to intermediate interests and separation of accounts and so forth necessarily do arise. In summary, the factors we would point to to say that it appears more likely than not it was intended to be security are, firstly, that the contractual terms as to payment seem to prevail over the trust terms in the sense that they nominate a defined period for payment which are not themselves conditioned or conditional on the receipt of the proceeds of the manufacturing process for subclause (5) purposes.

Secondly - and here we disagree with our learned friends – the trust or whatever the fund that arises if the agreement envisaged in the fifth subclause is performed, whatever it is does not appear to be, and in our respectful submission probably could not be, the fund to which the parties were looking to satisfy the buyer’s payment obligation. That fund may not exist, of course, at the time the payment obligation arises but if it did of course the payment obligation, for example, as has been pointed out, is an obligation to pay in United States dollars, whereas the fund received from the proceeds of resale would be received in Australia and credited to a bank account here.

GUMMOW J: Or goes into some bank account at Westpac, so it would seem, a US dollar account.

MR COLES: It would become in Australia a fund in Australian dollars and just would not be a fund out of which the payment could necessarily conveniently be made.

GUMMOW J: Well, the money inaccount on the invoices is US dollars, but what is the money in payment? That is Australian dollars?

MR COLES: That is Australian.

GUMMOW J: Why?

MR COLES: Well, that is what the buyer has received or what he has under his control.

HAYNE J: Why? Why?

MR COLES: Well, it is possible, your Honours, that if the moneys were paid in US dollars, of which there is no evidence, that they could be credited in US dollars to a US dollar account at Westpac.

GUMMOW J: I am looking at page 28.

MR COLES: Yes. But what one is here looking at, the moneys ‑ ‑ ‑

GUMMOW J: I am looking at the last line on 28 “ACCOUNT NO USD”.

MR COLES: Yes.

GUMMOW J: It seems to be a US dollar account maintained by Associated Alloys with Westpac, which they can do, can they not, under current banking laws?

MR COLES: Yes. Well, be that as it may, the central point or the limited point we make is that one could not regard the fund intended to be constituted by the performance of whatever obligation the fifth subclause imposes as the source or the fund to which the buyer would look as the source for its payment and, again, we disagree with our learned friends that they would be entitled to compel the receipts in their favour of moneys out of that fund supposing it to have been created if the seller were willing to supply them the agreed price out of its other funds.

There would have to be implied into the fifth subclause some agreement to that effect and, in our respectful submission, the requirements of commercial necessity do not justify it. In other words, Metropolitan is perfectly at liberty to pay its debts to Alloys out of whatever funds it has available to it at whatever time the payment obligation arises.

GAUDRON J: And if it does not?

MR COLES: If it does not, well, it can be sued in debt.

GAUDRON J: And?

MR COLES: It could have – steps could be taken to appoint perhaps a receiver over the proceeds that come in, which, of course, is a characteristic remedy for the enforcement of a charge, not, in our respectful submission, anything else. Those remedies would be available. The next thing we point to is there is no express requirements to separate the proceeds that clause (5) is concerned with ‑ ‑ ‑

GUMMOW J: Well, that is a construction point.

MR COLES: That is a construction point, but we say there are three reasons why that does not seem to be available. The first is that as a matter of textual analysis clause (5) does not replicate the subclause (3) provision about which your Honours have previously noted, but subclause (3) at least in the context of the proceeds with which it is apparently concerned envisages such proceeds will be kept in a separate account until the liability shall have been discharged. So most obviously no such words appear in the fifth subclause. Secondly, as is pointed out in a passage in – the second question is would you imply it.

GAUDRON J: Yes, but the fact that you could make subclause (3) into a charge, which you may well do, does not necessarily have the same impact as clause (5), does it, because they are quite distinct provisions.

MR COLES: And they are dealing with distinct areas of subject matter, I agree with that.

HAYNE J: If clause (5) constitutes somebody trustee for somebody else in some way, is this to the exclusion of whatever other obligations may be imposed on that trustee by the general law?

MR COLES: These are the other two points. I have drawn attention to the textual disparity. The second point is that one would need, if one were to find the obligation imposed contractually, it would have to be found by the process of implying a term that the funds would be extracted and appropriated and separately identified. In our respectful submission, no compelling commercial necessity requires the implication of such a term. The third reason is really one that begs the question: if, as a matter of construction as a trust, then one would say the general law of trusteeship generally requires the appropriation of moneys to a separate account and their maintenance intact are mixed. But, of course, we would submit that the same does not necessarily follow if the true subject matter of the agreement is, in effect, a security rather than absolute trust.

GAUDRON J: Security over what, though?

MR COLES: Security over such fund of money as from time to time as can be found to represent, if suitably identified, as being the proceeds of sale of the re‑sold derived goods.

GAUDRON J: That is a very convoluted answer, in a sense. You are not suggesting, are you, that clause (5) operates as a charge over all the money received by Metropolitan Engineering in respect of product manufactured by it from steel provided by your client?

MR COLES: Limiting it to the specific invoices in question, the relevant charge would apply at least in the first instance, we would think. Let me take an example.

GAUDRON J: You are begging the question by saying “the relevant charge”.

MR COLES: Yes, very well. The relevant obligation, I should say.

GAUDRON J: Yes. Does the clause apply to the total proceeds received by Metropolitan Engineering or not?

MR COLES: In the first instance it must.

GAUDRON J: Why?

MR COLES: Because what Metropolitan Engineering receives is a lump sum from its invoice.

GAUDRON J: It does not say that at all.

MR COLES: No, it does not say that, but the reality is that unless there was a coincidental connection between what Lucky Goldstar paid to Metropolitan and what Alloy’s debt was, there would be received a sum of money out of which presumably an appropriation had to be made.

Unless and until that appropriation were made, presumably, the entire proceeds, because they are an undistinguished fund of money, would be a fund which, on this view, would need to be made the subject of that appropriation and until May, presumably, are charged in the ‑ ‑ ‑

GAUDRON J: Well, presumably, you keep saying “presumably are charged”

MR COLES: Well, simply because ‑ ‑ ‑

GAUDRON J: But not in terms charged?

MR COLES: No, but on the Robertson v Grigg type of analysis, namely that if A and B have got an agreement that a debt will be paid out of a certain fund coming in the future to the other party, then the fund is charged with the ‑ ‑ ‑

HAYNE J: You are just not grappling with the words, are you, Mr Coles? You have to grapple with the words, and you have the words “such part of the proceeds”.

MR COLES: Yes, that is the second – the other construction question which the clause requires consideration. The view the Court of Appeal took, the view Justice Bryson took was that one reads it simply as meaning what it says, that one is looking at the “part of the proceeds of the manufacturing or construction process”. Now, it is a leap, a textual leap from those words to say that one bypasses all that goes before and goes straight to the proceeds of the resale received in the hands of Metropolitan from Lucky Goldstar.

GAUDRON J: It is not a textual leap from the words; it may be a leap in the parties’ intentions, but that is what the words seem to indicate, do they not?

MR COLES: Well, the words are capable and, one would suppose, intended to operate at various stages of the process with which they are concerned. In the first instance, one has proceeds of a manufacturing or construction process which may not even have left the factory floor. I will come to deal with the last sentence in a minute, but just dealing with the first sentence of the fifth subclause, literally, one could encounter proceeds of a manufacturing or construction process which are simply the undelivered finished goods. The next stage in the process is one sells those goods and the relevant proceeds of that process are as the Court of Appeal held that, in our respectful submission, correctly, the indebtedness or the contract price which the purchaser of the goods, Lucky Goldstar, at that stage owes the seller of the goods. At that stage the Court of Appeal said, well, that really is a charge on a book debt because the relevant proceeds are ‑ ‑ ‑

GAUDRON J: But that is reading something into it that is not there.

MR COLES: Well, so is the alternative construction that you would leap straight to the monetary receipts of the ‑ ‑ ‑

GAUDRON J: It may be that by leaping straight to the receipts that the creditor has no protection beyond that of any other creditor until the proceeds are received. But that may well be what was intended. That is not what it is say. Why do you assume it is not what was intended? More particularly, having regard to the provisions of the Corporations Law as to charges.

MR COLES: Can I offer this suggestion, if your Honour pleases? Suppose that a situation of supervening insolvency at a point in time where the goods have not even left the factory floor, albeit they have been constructed ‑ ‑ ‑

HAYNE J: And nothing is paid. The clause does not bite.

MR COLES: The contentions that no doubt would be put against us in that instance is that you have proceeds that seek – starting with the proposition that the seller’s title has become extinguished by the manufacturing process, one could imagine an argument be put by Alloys that it clause operated with respect to the proceeds of the manufacturing or construction process representing the finished but undelivered goods to the extent that their value - that there was represented in them a value and to the extent to which a proportion of the value corresponded with the debt due to the vendor.

HAYNE J: That if you read clause (3) back down, do you, “proceeds whether tangible or intangible”? So the manufactured goods are proceeds tangible of a dealing with the goods. Is that the way in which you are reading it on this construction?

MR COLES: You do not need to invoke for the purposes of this construction the third subclause because you simply look at the question of what is meant by the proceeds of the manufacturing construction process and that is equally applicable to one of three possibilities: the finished but undelivered goods, in which case there would be a charge on a chattel, and void for non-registration, a charge on so much of the proceeds as consists of the, as they have become, when sold and delivered to Lucky Goldstar, that is to say the sale price due to Metropolitan, in other words, the book debt, in which case it is charged on the book debt, or, thirdly, the third possibility, or the third consequence in the progressional development may be the receipts of the proceeds of that book debt which either take the same character as the book debt that they extinguish or, on our alternative argument, are themselves the subject of a floating charge. That is in our submission, how one reads the clause.

One would not suppose, your Honours, that the appellant intended it to have a limited operation. One would suppose that it intended ‑ ‑ ‑

GAUDRON J: But you have still got such part. You see if you could say that you have – there is force, of course, in what you say about proceeds and if it were with respect to the entire proceeds but whatever interest there was came to an end when the debt was paid, you might be on firmer ground, but the clause only talks about “part”.

MR COLES: Yes. Well, that is right, but one could suppose an argument that albeit – in the case, for example, of where the proceeds are a book debt, well, one can hold, I suppose, on trust or one can give security over a part of a – one may have difficulties assigning, but that is a separate question – one can deal with part of the book debt and that is ‑ ‑ ‑

GAUDRON J: Is a book debt property as such? What is property is the chose in action.

MR COLES: Well, for present purposes it is capable as a matter of language as being read as being a part of the proceeds of the manufacturing or construction process because that is the terminal consequence of the manufacturing process ripening into a concluded sale where the sub‑purchaser has not paid his price and that is the construction the Court of Appeal took and, in our submission, it really is not for our learned friends to read down or read up their own clause to find a more beneficial scope for its operation in spite of its words, but we do take the somewhat simple point that it would have been quite easy to say, as many of the reported cases illustrate one can say, that upon resale the proceeds of that resale to the extent of the seller’s debt will be held on trust.

McHUGH J: Yes, but if you read the particular clause and the context of the third subclause and the last sentence in the fifth clause, it seems to me it is as plain as a pikestaff that it is talking about ‑ ‑ ‑

MR COLES: Well, the last sentence might cause us a superficial difficulty because it tends to direct attention to the question of the receipt of the proceeds, which would ordinarily mean the receipt of money, but as has been pointed out, the last sentence really is to ensure there is definition to the quantum of the seller’s claim and to avoid the pitfalls that arose in Clough Mills where the interest, the beneficial interest, was said contractually to attach to the whole of the proceeds of the finished items, not the ‑ ‑ ‑

McHUGH J: But you need the last clause to identify what the part is, do you not? You do not know what the part is without the last clause, so you have got to read it together.

MR COLES: It tells you what the part is. In our submission, it is to be seen really as a definitional clause telling you how you work out the part.

McHUGH J: Yes, but on your argument, the first sentence is only dealing with the proceeds of the construction process. Part would have no meaning, would it? How would you be able to identify what the part was at that stage? You cannot identify what the part is unless you know what that ‑ ‑ ‑

MR COLES: No, you cannot. That is an awkwardness of the clause rather than anything else. It does not justify, in our submission, leaping over the central proposition contained on the third line of the clause straight to the last sentence and saying this is really an agreement to create a trust of the proceeds of resale as a matter of construction when the clause does not say so.

GAUDRON J: On the other hand, it does not say it charges the book debt, the whole book debt or the whole of the chose in action or the whole of the moneys received from the subsequent purchaser.

MR COLES: No. It does leave that to interpretation, in our submission. The principal features are, in our submission, that if there is a beneficial interest created in the proceeds of the resale on the view of the clause most favourable to the appellants, then it is certainly a defeasible one because what happens to the moneys held on trust once the debt is otherwise paid out of the ordinary assets of the company, the answer must be that the trust simply evaporates and they become, beneficially, the property of Metropolitan.

In our respectful submission, it does not largely advance the argument to say that that is, in effect, a secondary trust in Quistclose dimensions. It simply means it is a defeasible trust and therefore a trust bearing the ingredient, that is to say the defeasibility ingredient, which is one of the characteristics, as we would commend the authorities to your Honour, of a trust that is really an arrangement by way of security rather than beneficially.

GUMMOW J: Suppose one were against you on that, but suppose Mr Douglas’s revised submission were accepted, namely that this was a contract that as and when Metropolitan received payments from Lucky Goldstar, it would be obliged to set those proceeds apart and hold them as a trustee. Assume he is right that that is the construction of it, how would that, as you see it, factually line up with the claim that seems to be made on the summons in relation to these $197,000 worth of invoices for what had been supplied by Associated Alloys to Metropolitan?

MR COLES: It does not. Our submission is the summons has proceeded on the assumption that the contractual work had been done and the fund has somehow been set aside or can be set ‑ ‑ ‑

GUMMOW J: But is there factual findings to show that the Korean business had made these 197,000 payments?

MR COLES: No, there is factual findings that the Korean business had paid some money, but there is findings, or evidence, that the moneys, in effect, had been spent without any endeavour to identify them ‑ ‑ ‑

GUMMOW J: I know you took us to evidence that would suggest that, but are there findings about that by Justice Bryson?

MR COLES: There are the findings we have set out in ‑ ‑ ‑

GUMMOW J: I am wondering whether on that hypothesis it does not have to go back for findings, you see.

MR COLES: The findings of Justice Bryson are at page 130 and your Honours have been taken to it already. At page 130 commencing at the top of the page;

However Metropolitan Engineering has done nothing –

et cetera. And on the following page ‑ ‑ ‑

GAUDRON J: The question really might more accurately, on one view, be phrased not as a question of identifying but as apportioning so much of the proceeds as represents.

GUMMOW J: Yes, that is what Justice Bryson talks about at 26, really, a process of apportionment.

MR COLES: Yes, and I assume he is saying that in the context of moneys already received.

HAYNE J: Well, 124 lines 6 or 7:

this litigation relates to the goods in three invoices which were not paid, or not fully paid.

What is the date at which that statement is made? Is his Honour speaking of paid at date of trial, paid at time of institution of proceedings, which was only a month or so before ‑ ‑ ‑

HAYNE J: Yes, it did.

MR COLES: Yes.

HAYNE J: This judgment is 10 May 1996. The summons was issued 18 April. So, it is a bit under four weeks.

MR COLES: Yes. Your Honours have seen the three invoices but as his Honour records on the preceding page there were a series of orders commencing on 31 May and your Honours see the invoices which commence on 31 August and follow ‑ ‑ ‑

GUMMOW J: Yes, they are the invoices in schedule 8 of the summons, are they not?

MR COLES: Yes, that is right.

GUMMOW J: Yes.

MR COLES: They were all contractually payable by the end of November 1995 and plainly had not been paid by the institution of the proceedings in early May.

GAUDRON J: Would that be a convenient time, Mr Coles?

MR COLES: Yes, thank you, your Honour.

GAUDRON J: We will adjourn until 2.15.

AT 12.44 PM LUNCHEON ADJOURNMENT

UPON RESUMING AT 2.18 PM:

GAUDRON J: Yes, thank you, Mr Coles.

MR COLES: May it please the Court. If your Honours please, may I next turn to our submissions that assert in the alternative that if this is not contrary to the conclusions of Justice Bryson in the Court of Appeal, a charge over a book debt, it is, nevertheless, confronted with the same plight by reason of being a floating charge.

Shortly, your Honours, may I invite your Honours’ attention to a couple of decisions which we say support this conclusion, or support a proposition I will shortly put. The first one is Re Bond Worth (1980) 1 Ch 228. The judgment is lengthy, your Honours, so whilst we commend this decision as having a deal to say about the subject problem, it is obviously inappropriate to read your Honours extensive extracts.

The case concerned property and goods which were through a successive manufacturing process. Fibres were converted into manufactured carpets and thus lost their identity and thus, from the seller’s perspective, the seller lost any relevant right of property. The issue in the case did concern whether there was a creation of a trust of some kind or a charge and the relevant clause, which your Honours will see reproduced at the foot of page 235 of the judgment, when all read together, produces the result that the contractual intent, at least on the face of it, appeared to be that there should be a beneficial entitlement attaching in the seller’s favour in respect to the proceeds of sale of manufactured items, that is to say, the carpets which had emerged as a result of the application of the processes to the yarn. So, in that respect, it has, at least, some analogical relevance.

Indeed, at page 247, if I can just give your Honours short references, by the letter C, Justice Slade recorded how he saw the issues as posing a choice between either a trust of which the supplier “was the sole beneficiary” or “by way of a trust under which Monsanto”, which was the supplier, “had a charge in equity”.

GUMMOW J: Floating charge over what on this hypothesis of yours, Mr Coles?

MR COLES: On the floating charge theory, it is a charge over various features or various proprietary interests in succession.

GUMMOW J: The proprietary interests being?

MR COLES: The proprietary interests of the purchaser, the buyer.

GUMMOW J: In what?

MR COLES: In our present case, in the manufactured goods.

GAUDRON J: Prior to sale or subsequent to sale?

MR COLES: Prior to sale and subsequent to sale and I will develop how we see the devolution of the respective interests shortly but just to indicate the principles which, we say, emerge, if your Honours would then be kind enough to look at the passage on page 248, and this is, in a sense, a relatively oft-quoted or a portion of an oft-quoted passage and Justice Slade’s judgment, of course, in this case has been frequently cited with approval including, I think, some decisions in this Court – Hewett v Court is one of them. They have not claimed beyond the point which engages your Honours’ present attention.

At page 248, below the letter B, his Honour records some observations about the need both to have regard to the “ordinary meaning” of words and also the need to have regard to the:

substance of the transactions as appearing from the wording of the whole of the retention of title clause, and indeed the other provisions of the relevant contracts –

and he says just below letter C:

for the purpose of deciding whether the essence of the transactions which the clause embodied was on the one hand a bare trust or on the other a trust by way of equitable mortgage or charge –

and he cites ‑ ‑ ‑

GAUDRON J: I do not understand that. I simply do not understand it.

MR COLES: It is another variant, I suppose, of the proposition that I had read to your Honours from Justice Mummery as quoted by the Court of Appeal and I draw your Honours’ attention to it, and we submit that – without repeating what I put to your Honours this morning – that such a distinction can and must be recognised in this area of information.

GAUDRON J: If it is distinction known to the law, perhaps.

MR COLES: Perhaps that is all this passage supports, but if I could ask your Honours to read down below the letter E on page 248 is what we would submit is an important observation where his Honour says:

In my judgment, any contract which, by way of security for the payment of a debt, confers an interest in property defeasible or destructible upon payment of such debt, or appropriates such property for the discharge of the debt, must necessarily be regarded as creating a mortgage or charge, as the case may be. The existence of the equity of redemption is quite inconsistent with the existence of a bare trustee-beneficiary relationship.

Then ‑ ‑ ‑

McHUGH J: In the common law mortgage, the title passed.

MR COLES: Quite, yes, that is the difference between a mortgage and a charge, but fundamentally is the assignment of property, but ‑ ‑ ‑

HAYNE J: All his Lordship is saying is that a security is a security.

MR COLES: Well, he is, yes, but he is, in our respectful submission, at least by – and one must start somewhere ‑ giving some analogical guidance as to what features may be relevant in a given case to the decision - whether or not something said to be a security is such or not.

GAUDRON J: But that whole passage could as easily be written by working on the assumption that it is a trust. The choice of language, in a sense, predisposes the outcome. You could say in the last sentence, discharge of a trust is quite inconsistent with the continued existence of a trust relating ‑ ‑ ‑

MR COLES: Well, that is why his Honour’s prefatory words about the need to view the substance of the transaction as a whole to indicate from its characteristics whether it is substantially a security interest or whether it is a beneficial interest.

HAYNE J: That one must read the instrument as a whole is unexceptionable. That one reads it as a whole with a presupposition that it falls into one category or another is a proposition that I would take some persuasion of. The parties have undoubtedly had in mind some objective, an objective of commercial advantage to one or both of them. More than that, sit down and read the words and find out what they have done.

MR COLES: Indeed, and we emphasise find out what they reasonably could be expected to have intended the practical working out of their contractual provision to be, which is very important when one comes to one of the other features. Well, one of the features to which Justice Slade refers is the defeasibility of the supposed trust interest on extinguishment of the contractual debt. Now, that is a feature which, if it can be inferred as part of the common intention in the circumstances, points towards a security interest rather than a trust interest.

McHUGH J: But he begins by characterising it as a security for the payment of a debt. Now, on one view it is not a security at all, is it?

MR COLES: He does it from the respective of a situation where the seller has lost any retained right of property in the goods concerned but has nevertheless stipulated contractually for a means of enforcing payment in certain events. He says it is possible to regard that as a security interest, let us look at its other features, one of which may be its defeasibility, another one of which may be – and these are not the only features, there are a number of them that emerge from the case. But, the particular one to which I have drawn attention in this context is that if you find that what would, in the practical working out of the clause - let us say an absented insolvency situation or the supervening occurrence of an external administration - if you find that the trust regularly appropriated and all the rest of it comes into being, but then you find the contractual date for payment falls due and out of other resources the debtor company pays its debt, well obviously the trust collapses, or the supposed trust collapses, because it has no useful function to fulfil; its useful function having been in the common assumption of the parties, limited to provide a security fund in the event of contractual default. There are other indicia, however.

At page 250, if your Honours please, there is again an observation which we just refer to, again to at least explain part of his Honour’s reasoning. By letter B:

subject to the provisions of the Bills of Sale Acts, a person may create an effective equitable charge over chattels by declaring that he holds them in trust for a creditor by way of security for the payment of a specified debt. Likewise he can for good consideration create an effective equitable charge over chattels of a specified category to be acquired by him in the future, or over future book debts, in such manner that the charge will attach to chattels when acquired…..All these things can in my judgment be done by the chargor declaring himself a trustee of the relevant assets for the purposes of the security:

And reference is made to the intermediate decision in the case that I think later became the Illingworth Case, the Yorkshire Woolcombers Case.

McHUGH J: It is certainly a striking proposition that you just disregard the words “equitable and beneficial ownership” of its primary meaning.

MR COLES: In our respectful submission, it is not to disregard them but it is to regard them as a matter of construction as having operation by way of conferring a security interest rather than an absolute or beneficial interest on the person entitled. In other words, if it were an absolute beneficial interest, the beneficiary can say, “Pay it to me; it’s mine”. If it is a security interest, he cannot have both the payment of his debt and the payment of the fund in which, on this hypothesis, he has the beneficial interest because he would be recovering twice. Therefore, the supposed trust interest collapses results, perhaps on one view, to the buyer but in effect just suffers defeasance. That feature of defeasance of the supposed trust instrument is identified as a characteristic, perhaps one of the more important characteristics, of the arrangement as constituting the security interests.

Lastly, before I move on, if your Honours please, could I invite attention to the foot of page 265 in Justice Slade’s judgment. He says:

The implicit authority –

because these are other features of the floating charge conception –

and freedom of Bond Worth to employ the relevant raw materials, products and other moneys as it pleased and for its own purposes during the subsistence of the operation of the retention of title clause were in my judgment quite incompatible with the existence of a relationship of Bond Worth as trustee and Monsanto as beneficiary solely and absolutely entitled to such assets, which is the relationship asserted.
I have, however, already indicated that this is not my own view of the effect, if any, of the retention of title clause when properly construed, but that such effect, if any, is a declaration of trust by Bond Worth in respect of the relevant assets by way of equitable charge…..It is in my judgment quite incompatible with the existence of an effective trust by way of specific charge in equity over specific assets that the alleged trustee should be free to use them as he pleases for his own benefit in the course of his own business.

There then follows a passage of some importance which I will not read to your Honours extensively, but he then says:

There is, however, one type of charge (and I think one type only) which, by its very nature, leaves a company at liberty to deal with the assets charged in the ordinary course of its business, without regard to the charge, until stopped by a winding up or by the appointment of a receiver or the happening of some other agreed event. I refer to what is commonly known as a “floating charge”.

He then cites a little further down – and the citation removes the necessity to take your Honours to Lord Justice Romer’s observations in full because the prefatory words are important. Lord Justice Romer says:

“I certainly do not intend to attempt to give an exact definition of the term ‘floating charge’ –

But he says, if it has got these characteristics then you could say it is a floating charge.

GAUDRON J: You only get to a floating charge, do you not, if you get a charge over the subsequently manufactured goods, then over the book debts and then over the money that comes in, but I thought we were proceeding at this stage on the basis that there was no charge over the book debts.

MR COLES: The proposition put against us is forget about book debts, you have got a charge over the eventual proceeds of the collection of the book debts.

GAUDRON J: You have got an interest, an equitable interest.

MR COLES: Yes.

GAUDRON J: The question is, what sort of interest.

MR COLES: To come straight to the point, the reason I put that it is a floating charge over the proceeds of collection of the book debts, the fund represented, is simply that – this is the other – when one adds this to the feasibility proposition I have already referred to the next important feature is the entitlement which we submit on the proper construction of this cause will exist to make use of the proceeds of receipt of the book debts at least during the period of agreed contractual credit because we say that there is an inconsistency which would have to be resolved between affording a period of credit to a buyer of goods and an obligation immediately upon receipt prior to expiration of that period of credit of the fund which might, if it is a trust, be required to be separately earmarked and put in an identifiable account and so forth.

That tension can, and on the authorities only is, resolved by the conclusion, I suppose, that the obligation to deal in a fiduciary way with the proceeds of resale only arises, at the earliest, when the period of credit expires, otherwise you have just got inconsistency, you cannot leave ‑ ‑ ‑

GAUDRON J: I do not know. That may not be so at all.

MR COLES: You have got a commercial inconsistency. You may not have a legal inconsistency but there is a commercial tension between leaving somebody ‑ ‑ ‑

GAUDRON J: We are concerned with the legal relationship created.

MR COLES: The cases have emphasised, in our respectful submission, the – because one, after all, is looking at the common intention of the parties as commercial people and it would not be a ‑ ‑ ‑

GUMMOW J: Your big point, I suppose, is under this arrangement the vendor could get paid twice.

MR COLES: Yes, absolutely. Yes, your Honour. If the trust is a ‑ ‑ ‑

GUMMOW J: That is not the right way to put it, but could obtain payment of moneys which at the end amounted to twice the indebtedness.

MR COLES: Yes, your Honour.

GUMMOW J: Partly through the mechanism of enforcing the trust and partly by getting paid anyway from some other source.

MR COLES: Because if the trust money falls into position before the contractual date and he then sues at the end of the contractual date and recovers judgment and successfully, through the processes of execution, perhaps, on other assets, he is not compelled to execute on the trust fund. He would have a judgment debt satisfied and a trust fund available as well. Now, one has to resolve that ‑ ‑ ‑

GAUDRON J: Are we not being a little fanciful though because the clause does not take effect unless there is some money outstanding on the invoice?

MR COLES: Yes, well, that will always be the case before the invoice is paid, self-evidently, and however ‑ ‑ ‑

GAUDRON J: Yes, and if it is paid for one reason or another, looking at subclause (5), it is paid before, which may well explain why the parties made no reference to anything that would encounter book debts, if it is paid before the money has come in ‑ ‑ ‑

MR COLES: Before the contractual date, yes.

GAUDRON J: No, whether or not it is paid before the contractual date. If it is paid before, in this case, the money comes from Lucky Goldstar, no equitable interest arises ‑ ‑ ‑

MR COLES: Quite, yes.

GAUDRON J: Yes.

MR COLES: But one has to contemplate the clause in all its aspects.

GAUDRON J: And if they are not paid and the money comes in from Lucky Goldstar, then, so be it. They are not going to get paid twice.

MR COLES: The other difficulty is, if there is an immediate and available fully constituted trust, then the credit provisions have been defeated because it would be the obligation of the trustees who account to the beneficiary for the trust fund in being ‑ ‑ ‑

GAUDRON J: Not necessarily. Maybe they are allowed to hold it ‑ ‑ ‑

MR COLES: Well, that is what breaks the tie. The disconformity is resolved by the readily commercially imaginable conclusion that in the period of credit the reseller, the buyer, has free use of the money and the obligation to appropriate as a matter of construction does not arise.

HAYNE J: I do not follow that. You can see if I understand it. You are looking at the period before payment is due to the supplier on the terms of credit.

MR COLES: Yes, and on the supposition that the money ‑ ‑ ‑

HAYNE J: And at that point is there any amount owing by the purchaser to the vendor within the terms of clause (5)?

MR COLES: Due and owing in the sense of due and owing not, I suppose, payable because of the contractual terms.

HAYNE J: Well, is there any amount owing by the purchaser to the vendor within the terms of clause (5)?

MR COLES: Yes. It would be owing but not payable.

GUMMOW J: Why not payable?

MR COLES: Well, it may be payable, but it will not be payable under the terms of the contract until the contractual date for credit expires whereas it may come into possession as a resale fund before that date and our submission is that a commonsense view of the relation as between the parties there would be no express term negativing it in that ‑ ‑ ‑

HAYNE J: Assume then clause (5) bites on the receipts of on‑sale which has occurred and been received before credit has expired. What do you say follows from that?

MR COLES: In our submission, in either case it works for the respondents. If they are subject to absolutely no obligation at all before the crystallising or defining event occurs, then they are proceeds available for use by the putative chargor in the ordinary course of its business and, therefore, fall well within the accepted notion of property that passes in the ordinary course through a company prior to the crystallising event and, therefore, claim their floating charge.

HAYNE J: What I am not understanding is a clause either bites or it does not.

MR COLES: Yes.

HAYNE J: If it bites, it bites to preserve the money untouchable.

MR COLES: If it bites, if it bites immediately upon receipt of the moneys but the moneys are not accountable immediately because ahead in time to the contractual payment date, then on the proper construction of the clause we submit the ‑ ‑ ‑

HAYNE J: The funds are available for use.

MR COLES: Metropolitan has the use of the funds.

HAYNE J: Why on the proper construction of the clause? What are the words in the clause which you say lead to that conclusion?

MR COLES: The contractual stipulation for credit, that is to say the contractual right on the part of the purchaser, the buyer, to not pay for the goods until the date fixed suggests that in the meantime he should not have his resources fettered or his – in other words, there would be a disconformity between saying you have six months to pay this debt but nevertheless you have to earmark in a separate account and have no access to or no use in the ordinary course of the fund which you have received. That would sterilise in a commercial sense, that would sterilise the advantage of having the credit. I mean, what is the point of having credit if you have to earmark a fund which you may as well just pay? So that feature has been taken into account in the authorities, in our submission, also as an indicia of security interest rather than beneficial interest.

GUMMOW J: Now, suppose the contract clause (5) is performed. The Korean people pay and the purchaser sets it aside and holds it on trust for the vendor. If that trust is then discharged by payment to the vendor and if the vendor then sued the purchaser in debt – well, on the goods contract for unpaid money on the contract, would a plea of payment then lie to that second action?

MR COLES: Because the funds had been appropriated?

GUMMOW J: Yes.

MR COLES: Our answer is no, because payment is payment and setting aside a fund is setting aside a fund. Now, it is the same problem that arises, for example, who is entitled to the intermediate interest and by whom is tax on it paid and at what rate and these questions arise which strongly suggest ‑ ‑ ‑

GAUDRON J: There may be a perfectly good commercial reason for a disparity between the credit arrangements and the trust payments. It may be to allow the ultimate creditor to take the advantage of fluctuation from the money market, given that it is to be paid in US dollars.

MR COLES: That is a possibility but, in our respectful submission, it is more appreciable than tangible effect. It is simply to tie up moneys that otherwise it was the contractual contemplation should be available as part of the circulating capital of the enterprise. That is our submission. There are many possibilities, we submit, but the businessmen concerned ‑ ‑ ‑

GAUDRON J: But even if one goes to the substance it is not irrelevant to have regard to the fact that the contract price is stipulated for in US dollars payable in Australia in respect of a contract, prima facie, entered into between Australian companies.

HAYNE J: And who is going to wear the risk of fluctuation?

MR COLES: There is no doubt about that here because there is a dollar sum certain payable on the contractual dates so that it is at the seller’s risk. Your Honours, I have spent perhaps a little more time on Bond but may I respectfully submit that there is advantage in the analysis of Justice Slade in Bond Worth for issues in the present case.

GUMMOW J: Just coming back to this plea of payment which does seem to me rather important, would there be any commercial efficacy in this contract by implying a term in this clause which set up all this arrangement that there would not be an effective plea of payment, that the discharge of the trust was a good answer so that there is no double payment?

MR COLES: One could imagine some such plea.

GUMMOW J: If that is right, that is bad for you, is it not?

MR COLES: Yes, yes it is. I am not shrinking from that, but when one is looking at the presumed intentions of parties to a contract, one, in our submission, does not necessarily exhaust every conceivable possibility. There will be indicia in both directions. One treats the contracting parties as commercial men not as analysts and philosophers, in our respectful submission.

GUMMOW J: No, but that last proposition we were discussing does have a flavour of Quistclose about it, does it not?

MR COLES: Yes, it does, it does, yes, I acknowledge that.

Your Honours, may I briefly then mention Borden (UK) Ltd v Scottish Timber Products, [1981] 1 Ch25, a decision of the English Court of Appeal , the court comprising Lord Justices Buckley, Bridge and Templeman, each of whom gave separate judgments. We draw your Honours’ attention to this case, again, because as in the former case and as in the present case, it comprised a subject matter of a sale, that is to say resin, which had been wholly consumed in the process of the manufacture of chipboard and was no longer identifiable, recoverable, or the like, and in consequence of which any reserved proprietary interest on the part of the seller necessarily had become wholly extinguished. That was what was held in the case but the case is authority, in effect, almost, I suppose, as obiter dicta. If the interest had survived the extinction of the subject matter, then the conclusion appears to have been reached that it would have been a charge which would have failed for want of registration under the equivalent but not identical English provisions.

Some short references just to pages, if your Honours please: on the top of page 41 in the judgment of Lord Justice Bridge, some observations occur. Before reading these to your Honours, may I perhaps suggest that one really, despite inapplicability of portions of it, one does really need to read the whole five subclauses presently in dispute and the other provisions of the contract which I have mentioned altogether because they do deal with different phases of the commercial relationship between the parties and they, therefore, afford a conspectus of the successive transmission of the various proprietary interests in question, and on the reasoning I am about to commend to your Honour do, therefore, assist in the conclusion that there is a security interest by way of floating charge.

At the top of page 41 near the letter B, omitting the first few lines, after a reference to Sir George Jessel, Lord Justice Bridge says:

In the instant case, even if I assume that so long at the resin remained resin the beneficial ownership of the resin remained in the plaintiffs, I do not see how the concept of the beneficial ownership remaining in the plaintiffs after use in manufacture can here possibly be reconciled with the liberty which the plaintiffs gave to the defendants to use that resin in the manufacturing process for the defendants’ benefit, producing their own chipboard –

that is of slightly anterior background to the analysis in the present case because what we have in the fifth subclause in the present case is by parity of reasoning an implied permission on the part of Alloys to Metropolitan to use the relevant steel products in a construction or manufacturing process, with the ‑ ‑ ‑

GAUDRON J: You have permission to sell.

MR COLES: ‑ ‑ ‑ and indeed, we would go further to ‑ ‑ ‑

GAUDRON J: Express permission to sell.

MR COLES: Express permission to sell which starts off what we – we submit, when one looks at these matters across the board, one sees a conspectus of changing relationships which assist - they do not compel but they assist, eventually in the recognition of a floating charge within the meaning at least of that expression in section 262 of the Corporations Law.

If I could ask your Honours to look over the page ‑ ‑ ‑

GAUDRON J: The floating charge which you assert, presumably, would allow Metropolitan Engineering to use the proceeds of the sale in any way they wished.

MR COLES: Yes, one important feature, in our respectful submission – sorry ‑ ‑ ‑

GAUDRON J: Then we would cut right across what is said.

MR COLES: But may we draw your Honours’ attention to this observation. Consistently with what our learned friends put, that is to say there is no interest at all of any kind until the proceeds of resale are collected and received, from that it follows that prior to the proceeds of resale being collected by Metropolitan, there is nothing at all on our learned friend’s argument that would prevent Metropolitan from factoring or assigning what anterior thereto is a book debt.

GAUDRON J: Yes, exactly. But I wish to know, when you say this charge would crystallise and, with respect, to what, and how you read that into the Romalpa clause?

MR COLES: That is something I do need to deal with separately when I come to answer the criticisms ‑ ‑ ‑

GAUDRON J: No, I think if you want to assert it is a charge ‑ ‑ ‑

MR COLES: It is a matter, if your Honours please, I do need to deal with in something Justice Bryson said, if your Honours will bear with me, shortly, in a moment. But it is a valid observation, in our respectful submission, but we do answer it in a way to which I will return. Can I say, your Honour, we do, of course, pray in aid in our general proposition that one sees from all of the steps which the fifth subclause envisages, all of the steps involved in whatever is meant by the proceeds of the manufacturing or construction process. Inherent in the circumstances, seemingly, would be the right of the seller to assign, for example, to a factoring company, the debt.

It would be difficult to say, of necessity, that the assignment might be a way of satisfaction of another debt so it would be very difficult to say that the consideration received for the assignment of the book debt due otherwise by Lucky Goldstar itself came into the possession of Metropolitan in a way that could afford any comfort to Alloys. So, in other words, the book debt just goes – or the proceeds of the manufacturing process, on the theory put against us, are simply capable of vanishing out the window without any entitlement to Alloys at all which we would say is another feature of the ambulatory or disposable nature of the succession of rights which Metropolitan enjoys in the circumstances which the fifth subclause envisages.

In Lord Justice Templeman’s judgment in the same authority there is a passage of importance to which we would briefly draw your Honours’ attention. At the foot of page 44, Lord Justice Templeman says:

For good measure, it seems to me that if the plaintiffs have any interest or share in chipboard or proceeds of sale of chipboard, or property representing proceeds of sale of chipboard, they fall foul of section 95 of the Companies Act 1948 -

which is the equivalent of 266 of the Corporations Law –

Any such interest or share must have been agreed to be granted by the defendants when they bought and accepted delivery of resin….. Any such interest or share must have been created by the defendants when they employed the resin in the manufacture of chipboard. Any such interest or share must have been agreed to be granted and must have been created as security and only as security for the payment of the debts incurred and to be incurred by the defendants to the plaintiffs in respect of the supply of resin. Those debts were charged on the interest or share granted and created by the defendants. If tracing is permissible, the charge attached to the chipboard, when chipboard was manufactured, then attached to the proceeds of sale when the chipboard was sold, and finally attached to any property representing those proceeds of sale of chipboard. If the defendants created a charge on chipboard, such a charge is void against the liquidator and creditors of the defendants under section 95, which makes void against…..creditors an unregistered charge…..which, if executed by an individual, would require registration as a bill of sale.

In the next sentence we would, perhaps, lend some emphasis to:

If the interest floated from the chipboard to proceeds of sale and onwards, so floated the charge, and section 95 makes void any unregistered floating charge on the undertaking or property of the company.
It was said that a floating charge of this nature has not so far been comprised in any authority on section 95; the fact that this is the first authority does not seem to me to be any drawback.

Can I add one observation to that, if your Honours please. Because, as Lord Justice Romer said, that no one was compendiously or definitively defining what a floating charge is, it is, of course, a matter of construction of the relevant provision of the Corporations Law what the words “floating charge” mean in that context. In our respectful submission the advance of authority now indicates that credit arrangements, or payment security arrangements of the kind which we submit your Honours should regard the present arrangements as typifying, are within the expression “floating charge” in the Corporations Law on its true construction.

Before I depart from Borden I should draw your Honours’ attention to what Lord Justice Buckley said, particularly at the foot of 46 to 47, when Justice Buckley did not, himself, come to the conclusion there was a floating charge. It is not wholly clear that his Honour was against the idea of there being a charge at all, but the view seems to be taken that one simply did not get that far at all, so that whilst Lord Justice Buckley’s comments do not directly support us they seem to be limited to the particular circumstances of the case with which he was dealing, and are therefore not, we submit, wholly against us.

The case to which I would finally invite your Honours short attention is a case which, I suppose, has two features about it. One is that it was not decided at the time of the Court of Appeal or Justice Bryson considered this problem; and the second is that it itself considered Justice Bryson’s own judgment. That is the decision of the Court of Appeal sitting in Wellington in New Zealand, ICI New Zealand Ltd v Agnew (1998) 2 NZLR 129. The facts were more straightforward than some of the others. The contract for sale was a contract for sale of plastic pellets which were in the course of manufacture turned into plastic containers. The conclusion of facts was reached that in that process they ceased to be plastic pellets and became absorbed in the manufacturing process. Of importance, apart from the two considerations I have just mentioned, is the relative similarity, at least in apparent purpose, of the cause in question which is set out on page 131. If I could just briefly invite your Honours’ attention to 10.2, 10.3 and 10.4, particularly the first and third of those – all three.

If any of the goods are incorporated in or used as material…..so as to lose their separate identity, then ownership of that proportion of the new products equal in value to the total sum owing to ICI shall on manufacture immediately vest in ICI absolutely and not by way of charge –

An interesting feature we there observe. A similar draftsman’s technique in terms of earmarking a proportionality in the finished product, but a strong linguistic bent against having a charge, which did not prevail.

10.3 Until ICI receives payment in full the buyer shall hold or deal with the goods…..in every respect as a fiduciary and agent.

That being – borrowing from – well, the earlier one, I suppose, is inspired by Clough Mills.

10.4 If the goods are sold by the buyer prior to payment having been made to ICI, where the buyer is expressly required to do so by ICI the sale proceeds shall be held in trust…..in a separate account -

So, all things considered, a stronger clause, we would respectfully submit, and a less promising clause than the present one for the argument I have been seeking to put. The discussion is not extensive, your Honours, but, in our submission, what it puts is short and to the point. At page 133 below line 35, after a discussion of, amongst other cases, Borden and Clough Mills v Martin, though surprisingly not Bond Worth, there is a reference to Justice Bryson’s decision in Associated Alloys at line 36. The reasoning of the court in holding that the relevant purported imposition of an absolute trust was really a security interest by way of charge. The conclusion is seen at page 135 line 45 or thereabouts. If I could read to your Honours from line 45. After considering a number of features of the subclause at line 35, their Honours say at line 45:

There are additional factors which lead us to the conclusion that the true meaning and effect of the subclause is to create a charge, despite its wording. First, there is no prohibition against incorporating other materials into a manufacturing process. Secondly, the supplier of those materials may also rely on a similar provision as to title.

This is a feature, I interpolate, Justice Sheller drew attention to in the present case. In the present case there was not that evidence of other suppliers having other reservation of title clauses.

HAYNE J: That may provoke interesting questions of priority and the like, but the fact that people make inconsistent contracts is not unknown.

MR COLES: No, quite. I put that really to one side, if your Honour pleases, because for our purposes it is the last point at line 50 that seems to be of greater significance:

The evidence disclosed that the buyer was allowed a period of credit, envisaging the exercise of a right to sell and retain the proceeds pending the agreed date for payment.

Their Honours were prepared to say that the period of credit did envisage a right to sell and retain the proceeds pending the agreed date for payment.

This is also inconsistent with the fiduciary duty set out in cl 10.3, which taken literally would require the buyer to retain separately identifiable either the products themselves or the proceeds of sale, for such time as any indebtedness up to their value remained. Thirdly, ownership of the new product does not relate to the price of the goods used to manufacture the individual product, nor does it transfer to the buyer when proportionality is reached. In the latter case, all that happens is that ownership of further new products will not vest in the seller.
Viewed as a whole, we are satisfied that the true meaning and effect of cl 10.2 is to create a floating charge over the new product. As Mr Turner pointed out, if the buyer continues to purchase on credit the seller would never “receive payment in full of all sums owing”, and the buyer would never obtain title to the new product it manufactured and sold. That cannot have been the true intention of the parties.

Your Honours, perhaps it might be said that the reasoning does not exactly proceed to analyse historically the evolution of the conception of a floating charge. Indeed, it might be said the reasoning is terse but, in our respectful submission, it at least affords analogical authority for treating arrangements of this kind as capable of falling within the conception of a floating charge. It is our submission that, whatever else floating – and this is the only conclusion your Honours need to reach ‑ ‑ ‑

GAUDRON J: What do you say that it would have floated to had the ‑ ‑ ‑

MR COLES: This is really the proposition, that where you have a situation where title, which might have originally been retained in the seller, has become lost or ceased to exist through a construction process – sorry, perhaps I should put this in a more orderly fashion, if your Honours please.

Our submission is that the cases that have upheld contractual arrangements generically of this kind have ordinarily been, and are proceeding towards state of being confined to, those cases where what is reserved is the original title of the seller in the goods and that operates because of section 22 of the Sale of Goods Act because title does not pass unless the parties intend it to pass and a reservation of title clause is, of course, an expression of a contrary intention and therefore ‑ ‑ ‑

GUMMOW J: That has been blessed by the House of Lords in ‑ ‑ ‑

MR COLES: Yes, indeed. In that event, so long as the goods exist and have not lost their identity then the reservation of title clause can be upheld on that principle but once title has been lost in the construction process and if one finds a confluence of perhaps one or more of these circumstances, then the conclusion can be reached, and in a case like the present should, but what really has happened is the creation of a floating charge. The circumstances are these, and we submit the fifth part of the subclause justifies the submission we make textually.

There is firstly an apparent licence or permission to use and consume the purchased goods in the process of manufacture or construction, then to sell them, as has been pointed out, then, if our learned friends are right, perhaps to assign the proceeds of sale and never see them again in satisfaction of some other creditor’s claim, or, alternatively, to retain the proceeds but, we would submit, to retain them beneficially, until at least the contractual date for payment arises. Then when the contractual date for payment arises, to pay the debt and collapse the trust, thereby occasioning a defeasance of the supposed absolutely vested trustee interest. That very defeasance, of course, is one of the features I pointed out previously that is recognised as symptomatic of a security interest rather than a trustee interest.

So, in our submission, the cases show that proposition, that if you have this confluence of circumstance, not all of which we would submit need to be present, then there is justification for labelling that sequential or serial activity a floating charge. There are two ways we would put the floating charge. One is just that, that the charge – to adopt what Lord Justice Templeman said as the ‑ ‑ ‑

GAUDRON J: But this assumes, again, the book debts. The argument, you said half an hour ago, was now proceeding on the basis that it did not attach to book debts.

MR COLES: No, but in our respectful submission, when one is looking at just the book debts one just cannot do that in isolation of all that may have gone before.

GAUDRON J: No, but I thought you were putting some argument on the basis that whatever interest was created it was not in the book debt.

MR COLES: Yes. The alternative way of putting the floating charge argument is to direct it simply and solely to that and that is simply this that the charge, the security interest in favour of the seller, floats over the proceeds of sale as collected from Lucky Goldstar and is available to be used by Metropolitan in the course of its business until such time as whatever event it is that is ultimately found, if one needs to be found, that triggers or ‑ ‑ ‑

GAUDRON J: It is a very strange sort of charge, is it not?

MR COLES: No.

GAUDRON J: Would it ever crystallise?

MR COLES: It may never, but it would, because charges do crystallise but that is a separate argument.

GAUDRON J: Yes. Well, there must be a point at which ‑ ‑ ‑

MR COLES: Yes. But, in our submission, there must always be recognised a situation where once the Lucky Goldstar proceeds are received in cash form no particular dollar in – that credit balance in a bank account can be said to belong to Alloys.

GAUDRON J: Now, if it is a charge that does not attach to any particular dollar or dollar amount or does not require any apportionment but is hovering over the total proceeds of sale and never crystallises, it seems to me it is not a charge at all.

MR COLES: Well, I have got to deal with the - your Honour anticipates my submissions on that to which I will shortly come, but the reason why there must be a charge hovering or floating over the proceeds of sale is that even on the best construction of the fifth subclause favourable to the appellant it requires an appropriation out of the large chose in action constituted by the moneys presumably on deposit with a bank. There must be an appropriation from the bulk to make the fund and unless and until that happens then there is necessarily, in our respectful submission ‑ ‑ ‑

GAUDRON J: And let us assume it does happen.

MR COLES: Well, taking it a step at a time. Before it happens there is a floating charge over the entire proceeds pending their appropriation.

GAUDRON J: That is not what it says.

MR COLES: Well, one is dealing with its practical operation. Well, it does say that, in our respectful submission, because one is talking about “part of proceeds”. The hypothesis is that there will be a larger corpus of money which represents the proceeds of which Alloy’s entitlement is but a part. That part must be identified and segregated and separated out on the appellant’s best position. Unless and until that happens there must be a security interest on their best position over the whole of the proceeds pending that segregation or appropriation. That is a floating charge. When it is segregated out, perhaps it becomes then a fixed charge, but that does not matter because ‑ ‑ ‑

GAUDRON J: Fixed charge over what?

MR COLES: Over the trust fund.

GAUDRON J: So it crystallises if and only if there is a segregation out?

MR COLES: Well, that is a probable outcome, but may we remind your Honours that the definition of ‑ ‑ ‑

GAUDRON J: So it does not crystallise unless the purchaser, in this case, Metal ‑ ‑ ‑

MR COLES: Lucky Goldstar.

GAUDRON J: No, no, no. Unless Metropolitan ‑ ‑ ‑

MR COLES: Metropolitan, yes.

GAUDRON J: ‑ ‑ ‑ Engineering segregates out ‑ ‑ ‑

MR COLES: Well, there is just no property the subject of the cause until Metropolitan crystallises it out, except ‑ ‑ ‑

GAUDRON J: So what is it floating over?

MR COLES: Well, it is floating over the proceeds.

GAUDRON J: You seem to be ‑ ‑ ‑

MR COLES: It is floating over the proceeds pending the ‑ ‑ ‑

GAUDRON J: You seem to me to be putting inconsistent arguments in this area, Mr Coles.

MR COLES: Well, can I test it this way, your Honours. Supposing Metropolitan, the purchaser, receive from Lucky Goldstar a $1 million and put it in, let us say, a US dollar account with Westpac in its own name and let us suppose at the same time there could be identified as due under specific invoices in respect of which the payment had been made a sum of money less than one million dollars due to Alloys and let us say that wrongly and in breach of its supposed contractual obligations under this fifth subclause Metropolitan does nothing at all, as his Honour found it had not done, to appropriate or segregate the funds which contractually it was bound to appropriate. Let us suppose that. In that eventuality equity would intervene to impose a charge over the whole funds to ensure the appropriation from it.

GAUDRON J: Well, it might intervene and do that by way of remedy, but that is an entirely different proposition from what you are putting here. It might intervene, for example, by giving injunctive relief to Metropolitan, freezing the assets, or perhaps declaring that the assets are charged by way of remedy. It is not what we are concerned with in this case.

MR COLES: I can answer that by presupposing a similar situation where Metropolitan is not in violation or repudiation of its obligations to set aside the fund. It just has not got around to doing it yet. There is an instant in time when the moneys must come into its account before the appropriation in relation to which a recognisable equitable interest, we would say by way of charge, must apply to the whole of the proceeds to support their appropriation to the individual fund and we say that that is a charged fund. That is charged with the obligation to appropriate the specific fund.

GAUDRON J: This arises by implication, a matter of necessary implication, is it, from subclause (5)? Well, I understand it - - -

MR COLES: It must, in our respectful submission. Your Honour Justice McHugh drew my attention to the importance of the word “part” and part of its importance is just that, in our respectful submission. Of course, that is important because under the Corporations Law a floating charge – if, let us say, the security interests, if it can be so classified for the reasons I have already put in other context, then attaches to the fund as so separated out, because, for example, its defeasibility and the like, and let us suppose that is not a floating charge but it is a fixed charge, it is nevertheless the result of an anterior floating arrangement and the Corporations Law defines “floating charge” as including a fixed charge that was once upon a time a floating charge but, by some means, has become a fixed charge so one does not escape the legislature’s interest in floating charges simply by saying that they later become fixed.

Now that brings me to two final matters, if your Honours please. I said I would deal with what Mr Justice Bryson said in his reasons for denying our contention about a floating charge. They appear succinctly at page 131 of the appeal book, line 45. They are two in number and our submissions, which we submit, deal with these two matters, in our submission, answer his Honour’s criticisms of the floating charge argument. I will endeavour to avoid repetition, your Honours, but Justice Bryson at line 50 identified two reasons, (1):
there is no authorisation to deal with proceeds in the course of business irrespective of the charge, and –

secondly –

no provision relating to some crystallising event –

As to the first proposition, I make these short submissions because it does involve a degree of repetition which I would avoid. We say firstly no express authorisation is necessary. Indeed, what probably matters is the absence of an express prohibition to deal with the funds in question pending the accrual of whatever right the buyer may have. Central to this proposition is, of course, the credit terms argument and that does not require repetition and it is supported, of course, by the Court of Appeal, New Zealand, so no authorisation is necessary. It is also supported by the absence, we think, of a separation clause or a separation‑out clause.

So far as the second of his Honour’s arguments is concerned, namely that there is no provision relating to a “crystallising event”, that is answered, in our respectful submission, shortly by this point, that it is not necessary for the event which crystallises a floating charge to be contractually defined. Prior to more modern times when the drafting of equitable mortgages became the elaborate drafting activity that it is, the courts recognised, really, as a matter of general law that there were certain events which crystallised the charge found to be a floating charge.

They were events associated with the cessation of business and ordinarily, at their latest, were found in such supervening external circumstances as the appointment of a liquidator or a receiver by another chargee, in other words anything that brought the company’s ability itself to deal with its own business assets to an end. Also, vis-a-vis, the chargee brought the company’s ability to deal with its business assets in the ordinary course to an end.

The extract we have previously taken the liberty of supplying to the Court from Dr Gough’s book, “Company Charges”, 2^nd edition, commencing at chapter 8 under the chapter heading - your Honours will find it about eight pages into the extract, Dr Gough’s description of “Crystallisation events”, and he summarises – certain events of crystallisation are summarised, and later dealt with in greater detail by the learned author, if a company goes into winding up; if the company, in fact, stops trading or ceases to carry on business without being wound up; if it disposes of the whole of its undertaking or assets with a view to ceasing trading; if some other chargee takes possession or if a receiver is appointed; which are, in substance, the ones I summarised, they are events which cause a floating charge to crystallise quite independently of any contract.

Although, of course, their application in an individual case may be subject to particular contractual provisions. For present purposes it is sufficient to refer to page 137, second paragraph. Dr Gough says:

Crystallisation events occur in three broad categories: where the company goes into winding up or otherwise ceases business; where the chargee enforces his floating charge; and where crystallisation arises as a result of an express contractual term. In the absence of an appropriate express crystallisation provision, crystallisation by reason of winding up, cessation of business and charge enforcement arises as a result of an implied term in the charge contract to that effect.

In our respectful submission, that is the answer we put forward to the second of Justice Bryson’s criticisms, namely, that there was no provision in clause fifthly dealing with a crystallising event which will end the authorisation. But the short proposition is it is not essential to the defeasance of a floating charge by crystallisation but the crystallising event should be contractually defined. It is sufficient that one can be extrinsically derived because ‑ ‑ ‑

GUMMOW J: What species of implied term is it?

MR COLES: That is, with respect, a difficult question, your Honour.

GUMMOW J: Yes, I know. Is it one faced by this author?

MR COLES: One mentioned by him several times later in the discussion of the various ‑ ‑ ‑

GUMMOW J: With what result?

MR COLES: In fairness to Dr Gough, I would want to be precise about this and I am not sure the materials I have extracted for your Honour permit that, but business necessity is the justification for the implication.

GAUDRON J: But that assumes that it is a charge whereas it may only be a charge if you apply the term. There is an element of circularity in that.

MR COLES: Well, inevitably there – it depends which sort of part of the radius of the circle one sets out on the journey, but we do – we proffer that, with respect, your Honour, as an answer to the immateriality of the criticism that there is no provision for a crystallising event. In the present case it does not matter because one never gets to consider a crystallising event. If this were a registered charge, then it would be necessary in the absence of contractual provisions to consider which particular events and in which order it crystallised it, but if the charge is ex hypothesi invalid because not registered ‑ ‑ ‑

GAUDRON J: If a charge never attaches to any specific property and hovers without effect over some property and never crystallises, then maybe that is not a charge is what is put against you and you cannot say it is a charge because you imply a term. That seems to be ‑ ‑ ‑

MR COLES: Well, no, no, it is not the implication of a term that leads to the conclusion it is a charge. That is a question of construction and not implication. The implication question depends on the identification or drives the question of the identification of the crystallising event, in our submission. The further answer given by Justice Sheller as to why there was not a floating charge appears at page 165. The discussion commences at line 20 by reference to the remarks of Lord Justice Templeman, which I have really taken your Honours to already, but at line 35 Justice Sheller, who wrote the judgment of the court, said:

The fifth subclause of the Alloys standard clause provided for the part of the proceeds charged to be held in trust for Alloys which inhibited Metropolitan from dealing with that part of the proceeds in any way contrary to the terms of the trust, that is to say, in any way other than for the benefit of Alloys. Moreover, as is pointed out in Jacobs’ Law of Trust in Australia, 6th ed, para 227 a person in whose favour property is charged has only a security interest in the property and has not the equitable ownership in the same way as a beneficiary under a trust.

Now, in our respectful submission, two things could be said about that passage. One, it falls into the same circularity as really one – I mean, it begs the question really. If the proper construction of the arrangement is that it is intended to be a charge, then calling it a trust and saying, therefore, it is not a charge is a labelling exercise, and the other observation we would make is that there is a degree of obscurity about Justice Sheller’s comments in that respect. There is nothing particularly in the passage in Jacobs that furthers the discourse as we would read it, but there does seem to be a certain inconsistency between his Honour’s conclusion that the trust ultimately was a charge in any event with the argument set forth as to why it is not a floating charge.

GUMMOW J: Yes, I follow that, but how would this charge, whether it is a fixed charge or a floating charge, be enforced?

MR COLES: By appointment of a receiver.

GUMMOW J: To do what?

MR COLES: To sell the charged property.

GAUDRON J: Yes. Well, you are appointing a receiver to what, to receive what? That is the first question.

MR COLES: In the case of money in the bank account representing the proceeds of resale or any of the anterior property with which clause (5) may be concerned.

GUMMOW J: If you have a security, at the end of the day you have to come to sell something because there is an equity of redemption. How does that all work here?

MR COLES: If the ‑ ‑ ‑

GUMMOW J: I do not think that is really faced up to in some of these English cases.

MR COLES: If the security is over a fund of money, the reason why you have to sell the subject matter of the security is to produce a fund of money for the benefit of the security holder. If the security is in fact itself a fund of money, well ‑ ‑ ‑

GUMMOW J: You say you have a foreclosure?

MR COLES: Yes, or ‑ ‑ ‑

GUMMOW J: Without going to court?

MR COLES: Not necessarily. One would need the assistance of equity to recognise the interest, in my submission.

The final matter we put, your Honours, is that in as much as assistance is to be drawn from any evident policy in the Corporations Law, there are a couple of matters to be borne in mind, we would respectfully submit. One is that there is a central theme in solvency administration embodied in section 555, for example, of the Corporations Law that all ordinary unsecured creditors, unless statutorily advanced in priority by some means, are to be treated equally and there is to be a pari passu distribution.

Having said that, if a particular contractual provision produces a certain result which does not offend that pari passu distribution, one has no quarrel with it. However, when one comes to consider this type of arrangement ‑ ‑ ‑

GUMMOW J: Unless it is a transaction which is then set aside.

MR COLES: Indeed. In our respectful submission, one would bear in mind the policy dictating pari passu distribution when one is giving consideration to what the legislature intended the conception of a floating

charge to extend to, and it would be conformable with the statutory purpose evidenced in section 555, for example, that a floating charge should bear no mean or ungenerous meaning but should bear an expansive practical commercial meaning capable of alighting on transactions of this kind which, in our respectful submission, is the drift of the authorities such as they have evolved to date. I of course particularly refer to Bond Worth, Borden and the more recent New Zealand decision, as well as of course the decisions the subject of the appeal.

In our respectful submission, if one were able otherwise to look at policy considerations, there is no virtue, in our submission, in promoting one class of unsecured creditor over another merely because he has reserved a clause in a particular way which generates this sort of dispute. The practical commercial effect of these clauses is simply to encourage, we would respectfully submit, poor credit management and lacks debtor control. People rely on their supposed clauses rather than ‑ ‑ ‑

GUMMOW J: There is no reason why the legislature cannot pass an amendment which sets aside these as settlements, just like they are in bankruptcy. Some sort of trusts are set aside as settlements that should not have been made.

MR COLES: Like they used to be in bankruptcy.

GUMMOW J: The remedy is there but has not been taken for over 20 years.

MR COLES: We would submit, your Honour, that there are policy reasons which favour a liberal interpretation of the conception of both floating charge and book debt and that so liberally construed those provisions are capable of engaging the present transaction.

GAUDRON J: You are suggesting it is not used with any technical legal meaning in the Corporations Law? It is just an ordinary word and we can give it any meaning we choose.

MR COLES: Not in the Alice in Wonderland sense of word meaning. Not in the Humpty Dumpty sense, no, but bearing in mind that Lord Justice Romer eschewed the task of being exhaustive in his definition and bearing in mind one can discern, and again I mention the recent New Zealand case, a degree of flexibility, if not liberality of viewpoint, that view is open to this Court, in our respectful submission. They are our submissions, if your Honours please.

GAUDRON J: Yes, thank you, Mr Coles. Yes, Mr Douglas.

MR DOUGLAS: If it please the Court, just a couple of matters. There was some discussion earlier this morning about the status of paragraphs 4 and 5 of our affidavit which is in the appeal book and it has been drawn to my attention that in the transcript of cross-examination of Mr Gebilagin those paragraphs are cross-examined back in, so there was some evidence about 11.45 per cent ‑ ‑ ‑

GUMMOW J: We had better be supplied with that.

MR DOUGLAS: Yes, I am going to give it to the Court. I have got some copies here for my learned friend and for the Court. Your Honours will see, I think, the question at about line 20. The specific paragraph is referred to and he says that the information in that paragraph is correct. In relation to that could I just add one further thing to what I said this morning. It being an agreement to create an express trust of future property when that property is received, but if in fact that property is received and not dealt with in accordance with the obligations under the contract, it would be our submission that until that is done there would be a relationship of constructive trusteeship between the company and Associated Alloys until that in fact was done. That would provide a basis for ‑ ‑ ‑

GAUDRON J: But not of the whole fund?

MR DOUGLAS: Not of the whole fund, no, but there would be a constructive trust for so much of the fund as fell within the definition in clause 5.

GUMMOW J: What is the foundation of the constructive trust, the availability of the injunction?

MR DOUGLAS: Yes, your Honour, and I suppose also that equity regards as done what ought to be done, and they have not done it. If I could then pass from that, my learned friend has referred principally to three authorities – Borden. There was no equivalent to our clause in Borden’s Case. That is apparent from the passages at pages 42, 45 and 35 to 36 of the judgments of Lord Justices Bridge and Templeman, which my learned friend has referred to. It was a case in which tracing remedies were being sought and there was no clause which sought in any express way to say what happened once the goods had been consumed in manufacture. In fact, Lord Justice Bridge said at page 42D that if you want to do it that is the way you have to do it.

We agree with the criticisms which fell from the Bench as to what Mr Justice Slade said in Bond Worth at 247 to 248, and do not need to elaborate on that. The case of ICI New Zealand was a case where it was a proportionate ownership of the product, not a case such as here where we have an express agreement in relation to the proceeds, not the product itself.

There was some discussion with the Bench as to some of the wording of clause 5, in particular the last part where it says:

Such part shall be deemed to equal in dollar terms the amount owing by the purchaser to the vendor at the time of the receipt of such proceeds’.”

It is our respectful submission that unless moneys are in fact owing, and in that sense due and owing, by Metropolitan to Associated Alloys, there is no obligation to hold any moneys in trust and if they are in fact due and owing, there is only an obligation to hold so much in trust as is described in that clause.

If you had asked the parties to these arrangements what they thought would happen after that, it would not be, as my learned friend has suggested, that Metropolitan would be free to deal with those moneys, but they are to be held on trust to pay that debt.

GUMMOW J: You say to pay that debt. What debt?

MR DOUGLAS: To be the amount which was owing at the time of the receipt of the proceeds.

GUMMOW J: So, what would happen – this goes back to a question I was asking you, Mr Coles – as between purchaser and vendor if there was an action in debt for the liquidated sum that was owing?

MR DOUGLAS: Your Honour, in those circumstances, as we would see it, there are both legal and equitable aspects to this relationship, and a la Quistclose, the Court would look at it and say, well, there is really no action in debt remaining. What the intention of these parties was, was that the moneys in the trust would be paid in satisfaction of that indebtedness.

GUMMOW J: Yes, I know, but how would it be pleaded?

MR DOUGLAS: The defence?

GUMMOW J: Yes, that is the way to test it.

MR DOUGLAS: Well, at common law it would be a discharge of the indebtedness so it is due and has been paid.

GUMMOW J: The indebtedness?

MR DOUGLAS: Well, there is a relationship of debtor and creditor at law, there is a relationship of trustee and beneficiary ‑ ‑ ‑

HAYNE J: Discharge by performance?

MR DOUGLAS: Discharge by performance, yes.

HAYNE J: Performance of the contract by setting aside and creation of the trust?

MR DOUGLAS: We would say that the payment ‑ ‑ ‑

HAYNE J: A trust which they would be entitled to collapse at once. Why is it not discharged by performance?

MR DOUGLAS: I think I am happy with that analysis, your Honour, yes. My learned friend seeks to construct a situation in which you could, in fact, have continuing obligations between the trustee and beneficiary at a time when, at law, the debt has been paid and ‑ ‑ ‑

GUMMOW J: Well, there might be some set off between trustee and beneficiary.

MR DOUGLAS: There could be an equitable set off, yes, your Honour.

GUMMOW J: Arising out of something else.

MR DOUGLAS: Yes.

HAYNE J: But if attention is confined to the position at law, as opposed to in equity, the position at law is that it is a contract having terms more than “I sell, you pay”.

MR DOUGLAS: Yes, by the introduction of this clause, rather than there then being an absolute obligation to pay the moneys as and when they become due from any fund, it is really an obligation to pay out of that particular trust fund.

GUMMOW J: To accept payment out of that trust fund as being as good as.

MR DOUGLAS: Yes.

HAYNE J: To perform in a particular way.

MR DOUGLAS: Yes, cases such as Re Kayford or Quistclose, Carreras Rothmans all bear out the fact that the courts are prepared to look at relationships where there are both legal and equitable obligations and seek to ensure that they are harmonised in a way which makes common sense. My learned friend’s approach to it suggests that, in fact, its completely disjointed relationship is really contrary to what we would submit was the real intention of these parties and ‑ ‑ ‑

GUMMOW J: But one does get out of the English cases some attitude, I suppose, is not quite the right word. It does not matter what the parties have actually said or actually intended. This is what it is because we say so. Rather like saying once a mortgage, always a mortgage.

MR DOUGLAS: One gets that, to a certain extent, from what Lord Justice Goff and Lord Oliver said in Clough Mills.

GUMMOW J: Yes.

MR DOUGLAS: But they did not have to do as much violence to the language in that case as you would have to do to the language here, and the language here has ‑ ‑ ‑

GUMMOW J: But what is the basis for doing any violence, that is what I want to know?

MR DOUGLAS: Well, your Honour, as we would see it ‑ ‑ ‑

GUMMOW J: You say it should not be done.

MR DOUGLAS: No, we say if one looks at ‑ ‑ ‑

HAYNE J: The violence, if it has been done, has been done on account of the fact that there is a retention of title to goods. The courts are then confronted by the fact that the goods have gone, they have been transformed, incorporated, et cetera. How on earth are we to make all this work is, I suspect, the unstated premise.

MR DOUGLAS: Yes, but in the course of doing that they have confused the concept of the charge and the trust. Some, I think, even in the Court of Appeal here, they have suggested you can have a trust in the nature of the charge or a charge in the nature of the trust created expressly by agreement and none of that seems to us ‑ ‑ ‑

GUMMOW J: I thought there was an odd case – I do not know if it is odd – there is a case called Countess of Bective v The Commissioner of Taxation where Sir Owen Dixon dealt with some odd cases in this area of trust and charge, did he not?

MR DOUGLAS: Your Honour has referred to that in Re Aust Elizabethan Theatre Trust which I have not take the Court to but which is a very useful discussion of Quistclose and, as your Honour would remember, and also of the question of intention to create a trust, and it catches up on the remarks of Sir William Deane in Trident. In Bective’s Case, Sir Owen Dixon looked at a situation ‑ ‑ ‑

GUMMOW J: Bective’s Case is about family dealings.

MR DOUGLAS: Yes, it was a sum of money given for maintenance and the question was whether it was held on trust or whether she was entitled to a charge. There were four possible categories that Sir Owen Dixon looked at and he looked at the nature of the intention which you would have to have, whether it fell into any one of those four categories. I think it was a question of a condition, a trust, a charge, and one other which I cannot recall at this point of time.

HAYNE J: Have the parties, Mr Douglas, agreed on the present status and name of the first respondent yet?

MR DOUGLAS: No. Perhaps, if I could deal with parties also. The question was raised as to Westpac’s interest in the proceedings.

HAYNE J: …..simply leave the question unaddressed, but there we are.

MR DOUGLAS: My learned friend can call his client whatever he wants to call him, your Honour, but there is a passage in this administrator’s report, yes, at page 69 at line 30 to 35 where it says that, effectively, it is proposed to pay out the bank from a sale of land ‑ ‑ ‑

GUMMOW J: Which page, Mr Douglas?

MR DOUGLAS: Page 69, line 30 to 35.

GUMMOW J: Yes, we have been taken to that.

MR DOUGLAS: There is a reference to the fact that they propose “on the sale of the land and buildings, that the Bank will be paid out in full, thus retiring the Receiver and Manager”. This question of parties really has not been raised before now so far as I understand it, but my understanding is also that Westpac has, in fact, been paid out of the sale of the land and the buildings. The evidence is unclear, in any event, as to what rights they had

under their floating charge in respect of these debts which are the subject matter of this action.

Your Honours, perhaps whilst I am on my feet, at page 140 of the appeal book there is an affidavit of a Mr Cussen in paragraph 7 where he says that:

the First Respondent changed its name from Metropolitan Engineering and Fabrications Pty Limited (in liquidation) to ACN 001 452 106 Pty Limited (in liquidation).

Whether one calls the case by that name or not may cause confusion to the legal fraternity in future years if we are looking for the case which was decided in the Court of Appeal, but the name of the case can bear that title, if it please the Court. I have nothing further to say in reply.

GAUDRON J: Yes, thank you, Mr Douglas. Do you wish to identify for whom you act, Mr Coles?

MR COLES: Yes, I appear for ACN 001 452 106 (in liquidation), your Honour, and, of course, Mr Shirlaw.

GUMMOW J: Still in liquidation?

MR COLES: Still in liquidation.

GAUDRON J: And should the title of the proceedings be amended?

MR COLES: They should, your Honour, because it does raise a slight difficulty which is merely one of the many difficulties about the question whether any relief can be yet afforded to the appellant even if it succeeds on the charge point, but it should be. There is a further problem, we might point out, that when it went into liquidation, of course, leave would have needed to have been sought over again to make any claim against the company in liquidation and ‑ ‑ ‑

GUMMOW J: Well, yes, that is right and at page 180 seeks that order.

MR COLES: Well, it would be a matter of identifying the cause of action to be brought against the company in liquidation and its liquidator before that leave could be considered and that is not a matter this Court has the materials to undertake.

GAUDRON J: Yes.

GUMMOW J: Well, wait a minute.

GAUDRON J: Well, I do not think that is any longer pressed, is it, Mr Douglas?

MR DOUGLAS: No, it is not.

GAUDRON J: If that is proceeding, it will proceed elsewhere.

MR DOUGLAS: Yes, your Honour.

GUMMOW J: And leave was not sought in the Court of Appeal.

GAUDRON J: It did not get that far.

GUMMOW J: Yes.

KIRBY J: Mr Coles, do we, by amending the record, imply any such leave?

MR COLES: Well, your Honours have granted leave in effect de facto by hearing the appeal and your Honours have not granted ‑ ‑ ‑

KIRBY J: But that is within the boundaries of what was argued below.

MR COLES: Yes, of course, but, of course, indeed, but a question of leave would remain outstanding for any other cause of action of the kind not referred to in the summons if your Honours were, contrary to our earlier submissions, be minded to send this matter back for re-agitation to the court below.

But it is our submissions, your Honour, that the only orders your Honours are asked to make is, in effect, an order that there should be an account and I have put submissions ‑ ‑ ‑

GAUDRON J: I think the only order we are asked to make now is allow the appeal and remit the matter to the New South Wales Court of Appeal.

MR COLES: Yes, your Honours would then need to consider, if your Honours were otherwise minded to allow the appeal, whether the second part of the order should be made.

GAUDRON J: Yes, because you say that there is nothing to remit.

MR COLES: There is nothing to remit, no.

GAUDRON J: Therefore, no order should be made allowing the appeal. The appeal should be dismissed on the grounds that there is nothing ‑ ‑ ‑

MR COLES: That is right.

GAUDRON J: Yes, thank you. The title of the proceedings will be amended in accordance with what has been said on transcript and the Court will consider its decision in this matter and adjourn until 10.15 am tomorrow morning.

AT 3.41 PM THE MATTER WAS ADJOURNED

[1999] HCATrans 442

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