Capital Finance Australia Limited & Anor v Tolcher & Anor

[2008] HCATrans 184

[2008] HCATrans 184

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney  No S640 of 2007

B e t w e e n -

CAPITAL FINANCE AUSTRALIA LIMITED

First Applicant

CAPITAL CORPORATE FINANCE LIMITED

Second Applicant

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

Application for special leave to appeal

GLEESON CJ
GUMMOW J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 16 MAY 2008, AT 9.50 AM

Copyright in the High Court of Australia

__________________

MR B.A.J. COLES, QC:   May it please the Court, I appear with my learned friend, MR M.A. ASHHURST, SC, for the applicants.  (instructed by Kemp Strang)

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

GLEESON CJ:   Yes, Mr Coles.

MR COLES:   May it please the Court.  If your Honours please, the question that arose in the proceedings concerned whether payments received by the applicant companies – to which I will refer to as Capital – from the National Australia Bank in consequence of the sale by the Capital companies to that bank of equipment and via the Capital companies were properly to be characterised as uncommercial transactions within the meaning of section 588FE of the Corporations Act, being uncommercial transactions of the company in liquidation, Lloyd Scott Enterprises, or, as it is referred to in the judgment and the submissions, LSE.

GLEESON CJ:   What was the essence of the difference between Justice Lindgren and the majority?

MR COLES:   Essentially, Justice Lindgren took the view, which we of course espouse, that the element of what I will call progress of events which involved events that happened, the sale by the Capital companies to the National Australia Bank of the equipment, was not a component of or an element of a transaction of the company or, in the terms of section 588FB, a transaction of the company which was an uncommercial transaction of the company.

His Honour Justice Lindgren, in our respectful submission, was correct in that conclusion for reasons which are deployed at rather great length in the written submissions, but to be a transaction of the company firstly, of course, one must – or that is the expression defined in section 9, without staying to take your Honours through the definitional provisions – a fairly clear indication from section 9 of the Corporations Act of what is a transaction of the company is to be seen in the fact that each of the given examples disclose features which show the conclusion of a legal relationship.  So that is the first point we would wish to be expanding upon.

Next, of course, they must be a transaction of the company, that is to say, the company in liquidation relevantly, or the company in relation to whose affairs the provisions are of the Corporations Act part are engaged.  It follows from the definitional provisions, we would be submitting, that one is not concerned simply to look at transactions in the sense of purely commercial arrangements, accepting as all judges accepted and as we have accepted that the concept of a transaction may be a wide one and accepting necessarily that the particular features of the transaction must be viewed in their entirety.

The point is, to be a relevant transaction of the company one must still find an element which involves the making of legal relations as opposed to merely precipitating commercial outcomes; that is our construction submission about transaction.  It must secondly – and this is our second construction submission – it must be a transaction of the company; that is to say, of the company in liquidation.  Here, of course, there arises immediately a question whether it can be said that a sale by the Capital companies of assets unofficially owned by them to an incoming financier taking over that equipment and paying a purchase price for it is a transaction of the company in liquidation, albeit accepting for the moment or accepting indeed that it may have been that the impulse for the sale transaction and the consequent receipt of the proceeds of sale were at the initiative of or instigated by the insolvent company, and indeed it may be accepted for present purposes that the deed described in the judgment as the second deed and held by the majority to be an uncommercial transaction and accepted for the purposes of the argument by Justice Lindgren as such on the majority’s preferred construction.

It does not follow, is our fairly short submission on that point, that because the company has entered into an uncommercial transaction, in that instance the deed, which provided, let us accept, the motivation for the payment transaction, the transaction which produced the receipt by the Capital companies of the $3.7 million-odd from the ‑ ‑ ‑

GUMMOW J:   Justice Heerey used the expression, opportunistic advantage in the situation.

MR COLES:   They are colourful and expressive words, but at one level, of course, opportunism and commercial advantage are elements of commercial transactions as well as elements of uncommercial transactions, mere emotive – and I say that not disrespectfully – but mere colourful description of the transaction should not, in our respectful submission, obscure the real necessity to identify with exactitude – and that is really Justice Lindgren’s point – the precise elements of the transaction to see whether they really are transactions, as that word is understood, of the company, as that important qualification requires, and then go on because it is a double up in the section.

It has got to be a transaction of the company which is an uncommercial transaction of the company, which in turn, once one finds it is a transaction of the company, one then has to pose a series of questions indicated by section 588FD(1), that is to say, one looks at the benefits to the company of entering into the transactions, the detriments of entering into the transactions and, importantly, the respective benefits to the other parties to the transaction.

GUMMOW J:   Was the genesis of this section some perceived shortcomings in the traditional preference provision?

MR COLES:   Yes.  There was not an analogue of uncommercial transactions before 1993, but there was merely the incorporation of what was then section 120 of the Bankruptcy Act which dealt with settlements.  The same flavour is there in the sense that you are looking at, in effect, voluntary dispositions or improvident dissipations of the company’s assets for no appreciable return to the company.  It is impossible, we wish to emphasise, in our respectful submission, impossible to characterise the receipt by the Capital companies of the sum of money for the sale of its own assets disposed of to the National Australia Bank as causing any improvident dissipation of the assets of the company.

Indeed, if one just tests it pragmatically, the consequence of this case is that the Capital companies have sold and given up title to their assets.  The National Australia Bank has acquired that title and has paid good money for it.  The consequence is, however, the Capital companies have neither equipment nor purchase proceeds.  They are to hand over, by the orders of the majority, the entire proceeds of sale of what on any view was their equipment to the liquidator, or indeed to the company in liquidation, which has no self‑evident pre‑liquidation entitlement to lay claim to those assets or their proceeds of realisation.

That, in our respectful submission, is a very curious outcome because it does not redress any anterior dissipation or in issue of the improvident dissipation of the company’s assets which, it is our submission, it is the object of the provisions to redress.  To go back to your Honour’s question, we extracted in our written outline of submissions the observations from the Harmer Report which do lay emphasis on the purpose of section 588FB, the uncommercial transactions provisions, as seeking to redress or to forestall the problem that arises where a company simply dissipates its assets.  It is a flavour of the concept of uncommercial transaction, but instead of having a business purpose it has a purpose of simply giving away in effect the assets of the company.

Now, those theories, or those themes, were not on any view engaged in the transaction, however one regards it in the present case.  The result was simply as we have described, that the Capital companies have neither money nor equipment.  The liquidator, or the company in liquidation which had no entitlement to either, now has both the leasehold benefits of its arrangements, or had for a time, with the National Australia Bank because it remains lessee to the bank and, of course, it has the use of – it simply accedes to the proceeds of sale.

Again, the important issue in the case is the identification of the elements of a transaction of the company which is an uncommercial transaction.  There was no attack made by the liquidator on the arrangements involving the National Australia Bank itself.  It was not, for example, asserted that the sale by the Capital companies, the applicants, to the National Australia Bank of Capital’s own equipment, was an uncommercial transaction.  The National Australia Bank was not a party to the proceedings, it was not accordingly able to be said, and it was not said, that the lease arrangements entered into between the National Australia Bank and the company now in liquidation in relation to that same equipment were themselves uncommercial transactions.

Indeed, in our respectful submission, it would be difficult to say that a company whose business it is to engage in leasing transactions of particular sorts of equipment engages in an uncommercial transaction when it simply procures a substitute financier to supply the facilities for the type of business it is carrying on.

There is, we point out also, a real difficulty in sourcing the order eventually made by the Court to the powers conferred – and they seem to be exclusive statement of the powers – in section 588FF of the Corporations Act which gives rise to the next question of statutory construction if one is simply focusing on the issues of interpretation of the Corporations Act which arise.

If I could just remind your Honours, the Full Court, and by implication the trial judge, made the order purportedly pursuant to 588FF, that is to say, the Court’s power to make an order directing a person to pay to the company – that is the company in liquidation – an amount equal to some or all of the money that the company has paid under the transaction.  Now, it is difficult to see how that power was engaged when on no view did the company make any payment to the applicant.  The payment was obviously made by the National Australia Bank.

The trial judge, of course, did not appreciate that fact.  The Full Court, however, unanimously differed from the trial judge in identifying what the nature of the arrangements between the Capital company and the bank were; they were transactions of sale and purchase.  However, and this is perhaps the central source of the error in the majority of the Full Court’s judgment ‑ ‑ ‑

GUMMOW J:   The matter you have just pointed out, is that a reason why the Full Court differed from the primary judge on the preference issue?

MR COLES:   I do not think directly, if your Honour pleases.  The reason why the Full Court differed from the primary judge on the preference issue is the Full Court focused on the uncommercial transaction nature of the deed.  The deed, of course, as your Honours recollect, did – the National Australia Bank was not a party to the deed.

GUMMOW J:   They said no preference.

MR COLES:   Yes, they said no preference for the reason that the deed created artificially a debt where none theretofore had existed and therefore there was no element of reducing a pre‑liquidation indebtedness.  That has its own problems but, of course, we are not concerned to challenge the reasoning at the moment.  One would need to deploy the consequences of that reasoning as perhaps to an extent undermining on one view the reasoning on the conclusion as a whole about the uncommercial transaction.

The reasoning on the preference aspect of the matter perhaps shows that the Full Court indeed underscores really, it is not a subtle matter, the point firstly, of course, that having identified the primary judge’s failure to take notice sufficiently of the fairly transforming consequence that this was a sale and purchase transaction that generated the receipt, not some other sort of transaction.  The Full Court nevertheless failed at all to adjust or to classify or categorise the transaction as a whole in terms of an element that included that profound change in the transactional landscape and that really can be identified as the source of the error.

To come back to what your Honour says, the point really underscores the pre‑eminent emphasis which the Full Court placed on what is described as the second deed, which, of course, as I have said, the NAB was not a party to it.  The second deed may have envisaged a variety of methods of implementation.  It seems that because, and seemingly on one view principally because, the proceeds received by the Capital companies from the NAB for the sale of the equipment also went in effect as a credit against what was identified as the artificially created indebtedness under the earlier deed.  That somehow brought the earlier uncommercial deed into play as a kind of undermining factor in or, to put it more accurately, a factor which controlled – more likely a controlling factor in the analysis of the transaction, which again – and in this aspect of the case we cannot really do better than point out the powerful reasons of Justice Lindgren dissenting in the Full Court where he described the result as anomalous.  They are our submissions, your Honour.

GLEESON CJ:   Yes, Mr Harper.

MR HARPER:   Your Honours, this case was about three main issues, or three steps; the identification of the relevant transaction, deciding whether it was uncommercial and then deciding what orders were to be made if it was uncommercial.  The difference between the parties was in the characterisation of the transaction.  As the submissions just made by the applicants demonstrate, they characterise the transaction simply as the sale of goods between National Australia Bank and the applicants.

The contention of the liquidator at all times was that the transaction was much broader, involved the NAB to the extent that certain loose transactions were entered into by the insolvent company with the NAB.  That was all part of a broader transaction by which the insolvent company procured the payment or satisfaction of obligations that it had entered into by reason of what has been called the second 12 January deed.

Now, this is not an appropriate vehicle for consideration of any special leave point because, pausing there, that simple outline of the basic underlying scheme of the proceedings demonstrates that it is very fact specific.  Characterisation of a transaction for the purpose of ‑ ‑ ‑

GUMMOW J:   Well, are not these provisions, 588 and thereabouts, all designed to claw back into the fund for distribution amounts that one would expect otherwise should have been in the fund for distribution in the insolvency?

MR HARPER:   At a broad level they are, yes, your Honour.

GUMMOW J:   Does not this produce, and this is one of the complaints, a windfall for the fund?

MR HARPER:   Your Honour, that is not necessarily the case.  The question of identifying the transaction we say is – and this is what the authorities seem to clearly say – a question of fact and degree involving involvement of the company.  Looking at the ultimate result for the purpose of characterising a transaction we would submit is not the correct approach to ‑ ‑ ‑

GUMMOW J:   No, no.  No doubt characterising the section is what they are trying to do.  What is the mischief to which the section is addressed?

MR HARPER:   The mischief to which the sections are addressed is to stop creditors getting advantage in various ways that are adumbrated in the subsections and the subparagraphs of the sections.  But, your Honour, it is very difficult to answer that question with a simple statement because one must look at the terms of each section, and the relevant one here is 588FB, and that requires a focus on a number of different things, including the benefits to the company.

GUMMOW J:   No, they have to be attached to some notion of insolvency law, have they not, otherwise if they are federal laws, they are expropriating people’s property?  You have to remain grounded in some way or other.

MR HARPER:   Your Honour, that is right, but if you proceed from 588FB, which requires the Court to look at certain things, you then get to the insolvency issue in 588FC and that means you have to consider the transaction in the context of insolvency and then you move to the question of what the right sort of order is that is to be made under 588FF.

GUMMOW J:   You are talking about grounding the sections?

MR HARPER:   With respect, your Honour, that is how they are grounded, we would say.  What Justice Lindgren seems to have been particularly affected by in his reasoning is what was said in, for example, the explanatory memorandum.  Justice Gordon refers to the same memorandum and the same authorities as Justice Lindgren but came to a different view about the transaction in this case and that is because this is a very fact‑specific case and it is a very complex set of facts arising out of ‑ ‑ ‑

GUMMOW J:   I am not going to be scared by that.

MR HARPER:   I would not think your Honour would be for a moment, but when we are considering a special leave application and what is an appropriate vehicle, your Honours would be mindful of the fact that where the particular case in question is extremely complicated, but it does not raise the necessary simple issue of principle which would be decided by the Court on appeal to the High Court sitting in full session.  So, your Honours, we say that if you look at the fact that we are broadly speaking only about characterisation of facts, what was done by the Full Court and the trial judge was more than open to them on the facts.  There is nothing unreasonable or glaringly improbable about their findings and the findings they came to fall squarely within what was open to them under the sections in question in Part 5.7B.

Your Honours, the submissions made by the applicants really start from an incorrect premise, and that is that they simply characterise the transactions as a sale of goods between the NAB and the Capital companies.  Once you move away from that to the broader characterisation, then there is no error to be identified in the reasoning of the Full Court, in our submission.

The next point is that it is important to bear in mind that to the extent any anomaly is said to be identified in the result, that only arises by reason of the form of any order that was made, in our submission.  It is quite possible to characterise a transaction on the basis of the facts in a particular way and it is quite possible to characterise that transaction as being uncommercial.  The question is, what relief would then be ordered?  What happened in this case was the trial judge gave his reasons for finding it was both an uncommercial transaction and a preference and left it to the parties to formulate the orders.  Those orders were formulated by consent, which those orders by consent were that there would be full disgorgement of the amounts paid.

Now, if some other or lesser amount was ever going to be contended for, it was at that point it should have been done, and at no point has it been argued in this case that some different form of order should have been made apart from a complete reversal of the orders for disgorgement.  That is another reason why this case would be an inappropriate vehicle for special leave because the anomaly, as I say, identified by Justice Lindgren would require consideration of the form of the orders, and he makes some mention in his judgment about allowing the parties to do that.  That has never been done, no argument has ever been put along those lines and therefore it would not be appropriate for this case to be given special leave for those reasons as well.

Your Honours, it is impossible to say, in our submission, that this case would have general importance because of the highly complex nature of the facts.  As your Honours would have appreciated from the written submissions, the genesis of the whole problem was a massive fraud by the principal of Lloyd Scott Enterprises which resulted in double financing of

office equipment and sometimes leases being entered into in respect of equipment that simply did not exist.

All those matters would bear significantly, or did bear significantly upon how ultimately the transaction was to be characterised and also ultimately on how the question of uncommerciality was to be assessed, because the section 588FB does require consideration of the respective benefits to other parties to the transaction, which in this case included Mr Lloyd Scott himself because he was a party to the 12 January deed and he was also the person who actually procured the lease arrangements with the National Australia Bank in order to satisfy the obligations of the insolvent company under the 12 January deed.

GUMMOW J:   Is this section an entirely Australian product?  Was the Harmer Report drawing on legislation in similar form elsewhere?

MR HARPER:   As far as I know, it was an entirely Australian product.

GUMMOW J:   Yes, I thought so.

MR HARPER:   For that reason, it is just so much the better.  Of course, your Honour, 588FB(2)(a) does specify that a transaction may be uncommercial even if the creditor is not a party to it.  So, that is one indication that there is a very broad approach to be taken to this question of transaction and ‑ ‑ ‑

GUMMOW J:   Part of the trouble with this sort of section is it is drawn by people who do not always appreciate that commerce is a rather ruthless operation.

MR HARPER:   That may well be so, your Honour, but that is what the liquidator has to deal with in carrying out his public interest function.  Those are our submissions.

GLEESON CJ:   Thank you, Mr Harper.  Yes, Mr Coles.

MR COLES:   If your Honours please.  The suggested complication of the facts, in our respectful submission, is not of such a kind that would persuade your Honours from a grant of special leave and, indeed, one can see the factual basis of the applicant’s claim contracts very considerably if one notices one fairly important circumstance.  This transaction, or more accurately or more neutrally, the payments which the applicant received but must now disgorge might just as readily have been received in the self same transaction with the National Australia Bank whether there had been or had not been an earlier deed made in January that year between parties other than the National Australia Bank.

I suppose that draws attention to the factual dimension as to whether as an ultimate conclusion the Full Court was right to characterise the transaction as controlled by a deed, albeit that the best view from the respondent’s point of view inspired it rather than caused it or required it, but, in our respectful submission, this is not a transaction which needed the underlying uncommercial deed to bring it about.

Indeed, if our learned friend is concerned about the range of remedies, it was the liquidator’s position to select them.  His primary case at trial, of course, was this was an unfair preference, but if the liquidator were looking for proper remedies to redress that feature which commended itself to the Full Court as uncommercial, that is to say, the deed which the parties entered into, there was plenty of power in the Court to set aside that deed as an uncommercial transaction, leaving, as Justice Lindgren in fact properly pointed out, the eight payments which were made by the National Australia Bank to Capital on foot. 

In our respectful submission, if that is so then it is very difficult to see why the component of the transaction which causes the applicant’s present liability was itself to be in effect stigmatised as bearing that uncommercial quality.  They are our submissions, your Honours.

GLEESON CJ:   In this matter there will be a grant of special leave to appeal.

MR COLES:   May it please the Court.

AT 10.19 AM THE MATTER WAS CONCLUDED