Capital Finance Australia Limited and Anor v Tolcher and Anor

[2008] HCATrans 281

[2008] HCATrans 281

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney  No S220 of 2008

B e t w e e n -

CAPITAL FINANCE AUSTRALIA LIMITED

First Appellant

CAPITAL CORPORATE FINANCE LIMITED

Second Appellant

and

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

First Respondent

LLOYD SCOTT ENTERPRISES PTY LIMITED (IN LIQUIDATION)

Second Respondent

GUMMOW J
KIRBY J
HEYDON J
CRENNAN J
KIEFEL J

TRANSCRIPT OF PROCEEDINGS

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

Copyright in the High Court of Australia

__________________

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

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

GUMMOW J:   Yes, Mr Coles.

MR COLES:   May it please the Court.

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

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

GUMMOW J:   All right.

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

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

MR COLES:   Yes, that is right.

GUMMOW J:   Was it widened at any stage?

MR COLES:   I am sorry, was it widened?

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

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

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

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

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

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

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

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

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

MR COLES:   Yes.

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

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

CRENNAN J:   Certainly.  Do that at your convenience.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

MR COLES:   Yes.

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

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

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

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

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

MR COLES:   Yes.

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

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

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

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

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

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

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

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

GUMMOW J:    Section 588FB itself is a definition.

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

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

(e)an obligation incurred by the body; and

(f)a loan to the body –

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

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

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

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

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

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

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

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

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

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

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

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

HEYDON J:   Justice Ipp or Justice Basten?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

MR COLES:   Yes.

GUMMOW J:   What does that mean?  It said:

There must be a practical and realistic –

whatever “realistic” means –

appraisal of the constituent dealings and the overall transaction.

These are just exhortations, are they not?

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

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

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

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

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

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

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

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

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

GUMMOW J:   Of your client.

MR COLES:   No, of his client.

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

MR COLES:   That is right.

CRENNAN J:   We are focusing on the effect partly.

MR COLES:   Section 588FB itself focuses on effect.

CRENNAN J:   Does direct you in that direction?

MR COLES:   It does.

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

MR COLES:   Exactly.

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

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

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

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

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

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

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

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

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

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

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

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

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

GUMMOW J:   In due course?  All right.

MR COLES:   If that is convenient?

GUMMOW J:   Where do we go now?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

the elements I have just referred to.

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

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

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

MR COLES:   Yes, it is.

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

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

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

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

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

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

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

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

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

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

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

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

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

GUMMOW J:   He thought it was a preference too.

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

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

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

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

MR COLES:   That is (h), yes.

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

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

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

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

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

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

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

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

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

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

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

KIEFEL J:   Yes.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

MR HARPER:    No.

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

MR HARPER:    Yes, your Honour.

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

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

MR COLES:   Five minutes so far, your Honour.

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

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

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

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

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

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

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

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

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

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

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

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

CRENNAN J:   Under the NAB arrangements?

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

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

MR HARPER:   May it please the Court.

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