Australian Independent Distributors Ltd v Winter

[1964] HCA 78

HIGH COURT OF AUSTRALIA

Kitto, Taylor and Owen JJ.

AUSTRALIAN INDEPENDENT DISTRIBUTORS LTD. v. WINTER

(1964) 112 CLR 443

17 December 1964

Industrial and Provident Societies (S.A.)

Industrial and Provident Societies (S.A.)—Winding up—Applicability of companies legislation—Amounts standing to credit of members in books—To what extent share capital—Whether business of banking carried on—Industrial and Provident Societies Act, 1923-1958 (S.A.)—Companies Act, 1934-1960 (S.A.), s. 187—Banking Act 1945 (Cth), s. 7.

Decision

December 17.
THE COURT delivered the following written judgment:-
Pursuant to a resolution passed on 31st January 1962 the Adelaide Co-operative Society Ltd., a society registered under the Industrial and Provident Societies Act, 1923-1958 (S.A.), went into voluntary liquidation and Messrs. Winter and Garrard, two of the respondents to this appeal, were appointed liquidators. They applied to the Supreme Court on originating summons for the determination of certain questions which had arisen in the winding up and in the course of the proceedings appropriate representative orders were made to enable all parties interested in the winding up to be represented. The appellant was appointed to represent the trade creditors of the Society. The questions asked were:

1. Whether the whole, or if not what part, of the sum standing to the credit of members of the Society in their respective pass books and the corresponding ledger accounts in the books of the Society consists of share capital. 1A. In what priority ought the assets of the Society to be

distributed between the following classes:

(a) The owners of share capital, (b) Members who have lent money to the Society on call, (c) Members who have lent money to the Society for fixed terms, (d) Outside creditors.

At a later stage a further question was asked:

1B. Whether s. 187 (1) (g) of the Companies Act, 1934-1960 applies to the winding up of the Society and, if so, by what means and on what principles should the liquidators

determine whether any and what part of the sums standing to

the credit of members in their respective pass books are sums due to such members by way of dividends, profits or otherwise within the meaning of the section.

The originating summons came on for hearing before Chamberlain J. and the questions asked were answered by his Honour as follows:

1. Subject to any evidence to indicate any special contract with any individual member, which was not before the Court on the hearing of the originating summons, the sum standing to the credit of each member of the Society in its books is share capital to the extent of 5 pounds and no more. 1A. Subject to the prior payment of any preferential claims and the costs and expenses of the winding up the persons comprising all classes referred to in the said originating summons should share in the distribution of the assets of the Society pari passu except members to the extent of their shareholdings. 1B. The provisions of s. 187 (1) (g) of the Companies Act, 1934- 1960 have no application to the said winding up.

It is apparent from the careful and detailed reasons given by the learned judge that he appreciated the difficulty of dealing with some of the questions on originating summons. He referred to the fact that objection had been taken by counsel representing the trade creditors and counsel representing persons who had lent money to the Society for fixed terms that the application to the Court was prematurely made and that the liquidators should first have settled a list of contributories. His Honour went on: "As the argument proceeded it appeared that this list, in the view contended for by these interests, would have included, prima facie, the whole 6,000 members to the full extent of the 'capital investment' figure shown in the books as 128,333 pounds. It would then be for anyone included in the list to take steps to have his name removed or the amount attributed to him corrected. Since Mr. King, for the liquidators, has assured me that they have put before the Court all the available evidence which is likely to assist in the determination of these questions, and since no party has suggested the existence of any other evidence, it seems that the Court would in due course come back, by other proceedings, to the same question as I am now asked to answer. I think therefore that I should answer it in so far as I can and with the necessary reservations." On the appeal to this Court the same objection was raised by the appellant although it was not taken in the notice of appeal. We decided, however, to hear argument on all the matters raised and the appeal proceeded on that footing. (at p447)

2. It appears from the evidence that the funds in the hands of the liquidators available for distribution amount to 94,689 pounds and amounts totalling 109,159 pounds are owing to trade creditors. There are some six thousand members of the Society and what is described in its books and records as members' "Capital Investment" is shown as 128,333 pounds. "Loan Investment" as 3,076 pounds, and "Fixed Terms Loans" as 42,157 pounds. The difficulties which faced the liquidators and led to their approach to the Court arise, in the main, from the inadequate fashion in which the Society's books and records were kept. But before dealing with that subject in more detail it is convenient to refer to some of the provisions of the relevant legislation and of the rules of the Society. (at p447)

3. The Society is registered under the Industrial and Provident Societies Act, 1923-1958 and has for many years carried on business as a general storekeeper. Section 5 (1) of the Act provides for the registration of a society formed for the purposes for which this Society was formed and, until 1958, a member might not have "any interest in the shares of the society exceeding 500 pounds" (s. 5 (1) (I)). In that year the maximum permissible interest was increased to 2,000 pounds by an amending Act, No. 26 of 1958. A society registered under the Act is forbidden to carry on "the business of banking" (s. 5 (1) (II)) but "the taking by a society of deposits repayable in the manner provided by the rules of such society" is declared not to be part of "the business of banking" (s. 5 (2)). To be registered a society must have at least seven members (s. 6 (I)) and its rules must contain provisions in respect of the several matters mentioned in the second schedule to the Act (s. 12 (1)). Amongst the matters so mentioned, the rules must determine the amount of interest, not exceeding 2,000 pounds (formerly 500 pounds ) in the shares of the society which any member may hold and whether the shares shall be "withdrawable". If they are "withdrawable" provision must be made for the mode of withdrawal and for payment of the balance due thereon on withdrawing from the society. By s. 16 of the Act, an annual return must be made by the society to the Registrar of Industrial and Provident Societies showing inter alia (a) the amount of share capital actually withdrawn during the financial year to which the return relates ; (b) the number of new shares taken up during that year ; (c) the amount by which the paid-up capital has been decreased or increased by such withdrawl of share capital and the taking up of new shares ; and (d) the amount of share capital as to which notice of withdrawal has been received. Once at least in every three years the society must make a special return showing the holding of each person in the society (whether in shares or loans) (s. 16 (6)). The rules of the society are to bind its members to the same extent as if each had subscribed his name and affixed his seal thereto (s. 23). The Act does not expressly require a society to keep a share register but, if it does keep one, it is made prima facie evidence of the number of shares held by each member and of the amount paid or agreed to be considered as paid on any such shares (s. 31). A society may be dissolved by an order to wind it up or by a resolution for its winding up (s. 49 (1) (a)) and, by s. 49 (2), "Subject to this Act, where a society is wound up all the provisions of the Companies Act, 1934, so far as the same are applicable and with such alterations, modifications and substitutions as are necessary, shall apply with respect to the winding up". Section 50 provides that: "Where a society is wound up in pursuance of an order or resolution, the liability of a present or past member of the society to contribute for payment of the debts and liabilities of the society, and the expenses of winding up, and the adjustment of the rights of contributories amongst themselves, shall be qualified as follows: - " There follows a number of qualifications including one numbered IV that "No contribution shall be required from any individual . . . exceeding the amount (if any) unpaid on the shares in respect of which he is liable as a past or present member". Section 50 contains no provision similar to that to be found in s. 187 (1) (g) of the Companies Act, 1934 by which, in the event of the winding up of a company, a sum due to any member of it "in his character of a member by way of dividends, profits, or otherwise shall not be deemed to be a debt of the company payable to that member in a case of competition between himself and any other creditor not a member of the company . . . ." . (at p449)

4. One of the objects of the Society as set out in Rule 2 was to obtain funds from its members for the purpose of making loans to its members to enable them to acquire land or buildings to be used for the purpose of residence or residence and business, but no power was given to lend money to persons other than members or for other purposes. By Rule 4, it was provided that the Society should consist of all persons "who shall sign a declaration of their readiness to hold at least five shares, pay a deposit of not less than one shilling and have been admitted by the Board of Directors". Under Rule 6, the capital of the Society was to be raised in shares of one pound each. Each member, after the first year of membership, was required to hold at least one paid-up share and, after the second year of membership, to hold at least two paid-up shares and so on until he held at least five paid-up shares, and the Rule provided that "so much shall be deducted from the dividend of each member as will with his subscription, pay up his shares at the above rate" and no member was entitled to hold more than two thousand shares. Prior to 1958 the Rule provided that the maximum permissible holding should be five hundred shares. (at p449)

5. Regulation 7 required the Society to issue to each member a pass book which was to contain an account of all deposits and withdrawals of capital. Rule 9 enabled the Society to borrow money from its members or others on deposit or otherwise. By Rule 11, shares were declared to be "withdrawable" with the consent of the board of directors and upon such "withdrawal" the amount of capital paid up on the shares so "withdrawn" was to be payable as and when the board thought fit but not later than ten years from the date of such "withdrawal". Upon the "withdrawal" or removal of any member he was, within six months, to be paid the value, as certified by the auditors, of his shares together with all moneys owing to him from loans, interest, dividends or otherwise (Rule 13). Interest was to be paid on the paid-up shares standing to a member's account in the books of the Society at a rate (not exceeding 10% per annum) declared at each half-yearly meeting of the Society (Rule 18). (at p450)

6. A person who wished to become a member of the Society was required to sign an application form in which he declared his willingness to abide by the rules of the Society. The form did not require him to state the number of shares for which he was making application. Upon acceptance of an application the member was issued with a numbered "Member's Pass Book" which was thereafter used by him both for deposits and withdrawals in the same way as a Savings Bank pass book is used. It contained a notification that "The balance in this pass book must not exceed 500 pounds". It also contained statements that "Members must hold a minimum number of shares", followed by a reference to the provisions of Rule 6 ; that "If shares are not fully paid, the amount needed to bring them up to the above scale may be retained from the member's rebate" ; and that "Additional shares, not exceeding a total of 500 pounds, may be acquired". Inside the back cover of the book it was stated that "The Capital of the Society is subscribed in shares of 1 pound each. Each member must hold a minimum of five shares. A person applying to join the Society must complete a form of application for the minimum number of five shares and pay a minimum deposit of one shilling . . . If he buys his requirements at the Store, the rebates which accrue to him should pay the balance owing on his shares. At the same time the Society offers a safe and profitable investment for savings, and members may buy extra shares up to a maximum of 500 pounds". Whether these various references to 500 pounds were altered to 2,000 pounds in "Members' Pass Books" issued after s. 5 (1) (I) of the Act was amended in 1958 does not appear. In the body of the book there was a number of pages divided into columns headed "Date", "Withdrawals", "Deposits", "Previous Balance" and "Balance", and under these headings were shown amounts deposited and withdrawn, the deposits including interest credited and rebates for purchases. The book gave no indication of the number of shares held by the member concerned and the credits for interest were in a form consistent with the amount credited being interest on shares or on money lent. A list of members, each identified by a number, was kept by the Society but share certificates were not issued. Moneys paid to the Society by a member, whether for shares or as a loan, other than loans for fixed terms, were credited in his "Member's Pass Book" and in the Society's books of account but without identifying the purpose for which they were paid and rebates on purchases of goods from the Society by a member were shown merely as deposits. The deposit and withdrawal slips which were used to operate on a member's account identified the account and showed the amount paid in or withdrawn but afforded no other relevant information. The amount standing to the credit of a member in his "Member's Pass Book" was shown in the Society's books under the heading "Capital Investment" and no records existed which would permit the amount thus shown to be dissected. (at p451)

7. When the amount standing to the credit of a member in his "Member's Pass Book" exceeded 2,000 pounds and before 1958, when it exceeded 500 pounds, the member was asked to withdraw the excess from his account or lend it to the Society for a fixed term. If he agreed to the latter course, the amount of the excess was credited to him in a separate ledger account described as "Fixed Term Loan", and interest was paid on the amount lent at 5%, 5 1/2% or 6% per annum according to whether the term of the loan was for one, two or three years. In the case of a "Fixed Term Loan", a pass book similar to that already described was issued to the member, in which was credited the amount of the loan and interest paid on it. The book differed from a "Member's Pass Book" only in that there was pasted across the front of it over the words "Member's Pass Book" a slip of paper bearing the words "Fixed Term Loan" and on the inside of the cover the term of the loan and the rate of interest payable were set out. If the member did not comply with the Society's request to withdraw the amount in excess of 2,000 pounds shown in his "Member's Pass Book" or agree to lend the excess to the Society for a fixed term, the amount was treated as a loan repayable on call bearing interest at 4% per annum and was entered in a ledger account marked "Loan Investment". (at p451)

8. As Chamberlain J. pointed out in his judgment, it is clear from an examination of the evidence that the figure of 128,333 pounds shown in the Society's books under the heading of "Capital Investment" is merely the total of the amounts standing to the credit of members in their "Members' Pass Book" and, as has been already said, the books and records provide no means of ascertaining how much of the total figure or of the individual amounts which go to make it up represents share capital subscribed by members nor can any assistance on these matters be obtained from the Society's last special triennial return made before it went into liquidation. (at p451)

9. The difficulties which the liquidators have felt in determining whether the whole or, if not the whole, what part of the amount standing to the credit of each member in his "Member's Pass Book" represents share capital subscribed by him were increased by the fact that in October 1960 the Society issued a circular to its members and, according to its terms, to non-members. The circular invited persons to become members of the Society and take advantage of its trading facilities. It contained a heading "Your money can earn up to 6% at the Co-op" and went on to ask members to increase their "deposits with the Co-op. Banking System", stating that the "interest rate is now 5% on banked deposits. On fixed deposits your money will earn you 5 1/2% on a 2-year term, and 6% on a 3-year term". Non-members were told that they could "become a member for only 5/- and may invest or bank your money with the Society - any amount from 5/- to 2,000 pounds". The circular enclosed an application form enabling application to be made for any or all of the following: "Membership, with an enclosed payment of 5/-" ; "Open a banking account with the Society - interest rate 5%" ; "Apply for investment in Fixed Deposit - interest rate 5 1/2% to 6%". It stated that "By banking with the Society, I will receive normal Savings Bank facilities with an interest rate of 5%". As a result of the circular approximately 40,000 pounds appears to have been lent by members on "Fixed Term Loan", of which 22,000 pounds was transferred by members from their "Capital Investment" and 18,000 pounds represented new money. How much was "banked" with the Society and credited to "Members' Pass Books" does not appear but, as Chamberlain J. rightly observed, it is difficult to see how it could be said that those who accepted the invitation to "bank" their money with the Society to obtain "normal Savings Bank facilities" had contracted to subscribe for shares. (at p452)

10. Yet another problem faced the liquidators as the result of the issue of the circular. Section 5 (1) (II) of the Industrial and Provident Societies Act to which reference has already been made forbids the carrying on of "the business of banking", subject to the qualification expressed in s. 5 (2). And s. 7 of the Banking Act 1945 (Cth) prohibits a corporate body from carrying on "any banking business" in Australia except with the authority of the Governor-General. If the Society was acting in contravention of either or both of these provisions, the question would arise whether a member who accepted the invitation to "bank" with the Society and deposited money with it for this purpose had entered into an illegal or at least an ultra vires transaction in which case, so it was suggested in argument, he might not be able to assert any right to recover the money so lent or, if he could assert such a right, his claim might be postponed to the claims of other creditors. No specific questions directed to these matters were asked in the originating summons but they are involved in the determination of the answer to Question 1A. (at p453)

11. Having regard to all these matters and to the fact that the liquidators had placed before the Court all the information discoverable from an examination of the books and records of the Society, the learned judge took the view that, in the interests of all concerned, the better course would be to answer the questions asked, subject to some qualification, and thus assist the liquidators to determine the manner in which they should settle the list of contributories and proceed with the winding up. In the unusual circumstances of the case we think his Honour took the proper course. (at p453)

12. It is plain from the foregoing facts that every person whose application for membership of the Society was accepted agreed to take up at least five shares in the Society. It is equally plain that, so far as the Society's books and records are concerned, there is no means of ascertaining whether any member when he joined the Society or afterwards agreed to take up a number of shares in excess of five. And, having regard to the way in which entries were made in "Members' Pass Books" and in the Society's books and to the course of dealing between members and the Society in relation to deposits and withdrawals, it cannot be inferred that the total amount standing to the credit of a member in his "Member's Pass Book" represented the amount of capital agreed to be invested by him in shares. In these circumstances the learned judge rightly advised the liquidators that on the evidence before him the amount standing to the credit of a member in the Society's books should be treated by them in making up the list of contributories as share capital to the extent of 5 pounds and no more. But this ruling, his Honour said, was subject to any evidence being discovered which was not before the Court on the hearing of the originating summons indicating that "any special contract with any individual member" existed by which that member had agreed to take more than five shares. (at p453)

13. For reasons which were discussed during the hearing of the appeal, it seems desirable, however, that this qualification of his Honour's answer to Question 1 should be varied so as to read: "In the case of a member in respect of whom no other relevant information is available to the liquidators than was before the Court on the hearing of the originating summons, the amount standing to the credit of that member of the Society in its books is share capital to the extent of 5 pounds and no more". (at p454)

14. The remaining questions are whether s. 187 (1) (g) of the Companies Act, 1934-1960 applies to the winding up, and whether the Society carried on "the business of banking" contrary to the provisions of s. 5 (1) (II) of the Industrial and Provident Societies Act or in contravention of s. 7 of the Banking Act passed by the Commonwealth Parliament in 1945. (at p454)

15. On the first of these matters it has already been pointed out that s. 49 (2) of the Industrial and Provident Societies Act makes the provisions of the Companies Act, 1934 applicable to the winding up of a registered society but only so far as those provisions can be applied and subject to anything contained in the first-mentioned Act. Section 187 of the Companies Act deals with the liabilities as contributories of present and past members of a company which is being wound up and Section 50 of the Industrial and Provident Societies Act deals with the same subject, namely the liability as contributories of present and past members of a society registered under that Act. Up to a point, the two sets of provisions are almost identical but s. 187 (1) (g) has no counterpart in s. 50. A comparison of the sections, however, leaves no room for doubt, as Chamberlain J. decided, that s. 50 was intended by the Legislature to govern the rights and liabilities as contributories of present and past members of a registered society which is being wound up and that s. 187 of the Companies Act has no application to such a case. (at p454)

16. There remains the question whether the Society, amongst its other activities, was carrying on the business of banking contrary to s. 5 (1) (II) of the Industrial and Provident Societies Act or to s. 7 of the Banking Act. (at p454)

17. What constitutes "the business of banking" was considered by this Court in Commissioners of the State Savings Bank of Victoria v. Permewan, Wright &Co. Ltd. (1914) 19 CLR 457 . The question was whether the Commissioners of the Savings Bank were "bankers" within the meaning of s. 88 of the Commonwealth Bills of Exchange Act 1909 and s. 83 of the Victorian Instruments Act 1890. In each Act "banker" was defined to include persons "who carry on the business of banking". Griffith C.J. was of opinion that the Commissioners were not carrying on such a business because depositors, other than Friendly Societies, could not operate upon their accounts by cheque. The majority of the Court took the opposite view and, in the course of his judgment, Isaacs J. said: "That expression 'business of banking', or an equivalent as 'business of bankers', 'business as bankers', and 'business of a banker', has been of constant use in English legislation. To go no further back than 1826, I may refer to the following Acts: - 7 Geo. IV. c. 46 ; 3 &4 Will. IV. c. 83 ; 1 &2 Vict. c. 96 ; 7 &8 Vict. c. 32, and c. 113 ; 17 &18 Vict. c. 83 ; 21 &22 Vict. c. 20 ; and the phrase was continued in the English Bills of Exchange Act 1882, on which Australian Acts have been modelled. This indicates a constant signification of the term 'banking' as a business. The fundamental meaning of the term is not, and never has been, different in Australia from that obtaining in England. Various writers attempt various definitions, more or less discordant, and many of them referring to functions that are now very common and convenient, and even prominent, as if they were indispensable attributes. The essential characteristics of the business of banking are, however, all that are necessary to bring the appellants within the scope of the enactments ; and these may be described as the collection of money be receiving deposits upon loan, repayable when and as expressly or impliedly agreed upon, and the utilization of the money so collected by lending it again in such sums as are required. These are the essential functions of a bank as an instrument of society. It is, in effect, a financial reservoir receiving streams of currency in every direction, and from which there issue outflowing streams where and as required to sustain and fructify or assist commercial, industrial or other enterprises or adventures. If that be the real and substantial business of a body of persons, and not merely an ancillary or incidental branch of another business, they do carry on the business of banking (1914) 19 CLR, at pp 470, 471 ". (at p455)

18. With this statement Gavan Duffy and Rich JJ., agreed and in Melbourne Corporation v. The Commonwealth (1947) 74 CLR 31 it was quoted with approval by Rich J. (1947) 74 CLR, at pp 64, 65 . (at p455)

19. If that definition is applied to the present case, as we think it should be, it is apparent that the second of these essential characteristics is absent. The power to lend money conferred upon the Society by Rule 7 was limited to the making of loans to its members to enable them to acquire land or buildings to be used for residential or business and residential purposes and in fact none of the Society's moneys was used for the making of loans for that or any other purpose. Having regard to that circumstance, Chamberlain J. held, and rightly held, that the Society had not carried on "the business of banking" and had not therefore contravened either s. 5 (1) (II) of the Industrial and Provident Societies Act or s. 7 of the Banking Act. (at p456)

20. We were referred, however, to Re The Bottomgate Industrial Co-operative Society (1891) 65 LT (NS) 712 in which Smith J., with whom Mathew J. agreed, speaking of the prohibitions against carrying on "the business of banking" contained in the Industrial and Provident Societies Acts of 1862 and 1876, expressed the view that it was not necessary "in order to constitute a banking business prohibited by the statute, that the Society should carry on every part of a business carried on by some bankers ; it is sufficient to bring the business within the prohibition, if the Society carried on what is a principal part of the business of a banker, viz, receiving money on deposit, allowing the same to be drawn against as and when the depositor desires, and paying interest on the amounts standing on deposit". There is no doubt that the receipt of money on deposit capable of being drawn against by the depositor is a common feature of the business of banking but, as Griffith C.J. pointed out in Permewan, Wright's Case (1914) 19 CLR, 457 , transactions of that kind are frequently carried on in Australia by commercial institutions "whom no one would think of calling bankers" (1914) 19 CLR, at p 464 . (at p456)

21. For these reasons we are of opinion that the answers given by Chamberlain J. to questions 1A and 1B were correct. The answer to question 1 should be varied in the way mentioned earlier and otherwise the appeal should be dismissed. The costs of all parties to the appeal as between solicitor and client should be paid out of the assets of the Society. (at p456)

Orders

Order of Supreme Court varied by omitting the direction and declaration that "Subject to any evidence to indicate any special contract with any individual member which was not before the Court on the hearing of the said Originating Summons, the sum standing to the credit of each member of the Society in its books is share capital to the extent of 5 pounds and no more" and substituting therefor the following direction and declaration: "In the case of a member in respect of whom no other relevant information is available to the liquidators than was before the Court on the hearing of the Originating Summons, the amount standing to the credit of that member of the Society in its books is share capital to the extent of 5 pounds and no more".

Subject to this variation, appeal dismissed. Costs of all parties to the appeal as between solicitor and client to be paid out of the assets of the Society.