Capital Finance Australia Limited & Anor v Tolcher (As Liquidator of Lloyd Scott Enterprises Pty Limited & Anor
[2008] HCATrans 282
[2008] HCATrans 282
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 WEDNESDAY, 6 AUGUST 2008, AT 10.04 AM
(Continued from 5/8/08)
Copyright in the High Court of Australia
__________________
GUMMOW J: Yes, Mr Harper.
MR HARPER: Thank you, your Honour. There are a few matters left hanging from yesterday, your Honour. The first is the question your Honour asked about the two articles written by Professor Keay. They were published in 1996 and a bit has happened since then.
GUMMOW J: Yes.
MR HARPER: Broadly speaking, we would not violently disagree with most of what he says. He does make some criticisms of the legislation in one article which from the perspective of 2008 might not be as well founded as they appeared then, for example, and we would not embrace that sort of thing. Broadly speaking, we would not violently disagree with what he says in those articles.
GUMMOW J: Thank you.
MR HARPER: Secondly, we have copies of the orders that were annexure A to the deed.
GUMMOW J: Yes. They can be handed up.
MR HARPER: I will hand those up, if your Honours please.
KIRBY J: Has Mr Coles seen these? He is looking frightened and anxious and disturbed.
MR HARPER: I am sure his fears will be allayed when he sees them, your Honour.
KIRBY J: What was this document?
MR HARPER: This formed annexure A to what has been called the “Second Deed” executed on 12 January 2001.
GUMMOW J: It is at page ‑ ‑ ‑
CRENNAN J: 409.
MR HARPER: Page 409, thank you, your Honour.
GUMMOW J: Yes, and it is specifically identified ‑ ‑ ‑
MR HARPER: Page 703, I think, is the reference your Honour is looking for.
KIRBY J: Somewhere in your written submissions ‑ this is a case of detail. Is there somewhere in the written submissions that you fix the present appellants with knowledge of the situation that had arisen by reason of Mr Scott’s activities, so that they were aware ‑ of when they first became aware of it and when they knew of it because that may be relevant to applying the statutory criteria to them.
MR HARPER: When your Honour says “the activities of Mr Scott” they knew about the Mareva injunction in December of 2000.
KIRBY J: Is that the first they knew about it?
MR HARPER: It appears to be, but there is then further investigation and the detail of the situation became more apparent to them between December and January of 2001.
KIRBY J: One of the delights of sitting here is that I have a full frontal vision of Mr Coles during your submissions. During some part of your submissions when you sought to attach the appellants with knowledge, he appeared to indicate surprise. If this becomes important in reasoning in the case, it might be as well if you were to send a note in which you indicate the points at which, and reference to the evidence for which, it is indicated that the appellants became aware of the matters that enliven the statutory criteria. Can you do that?
MR HARPER: Yes, I can do that, your Honour, but perhaps I should clarify one thing which might have been the source of Mr Coles’ facial expressions and that is that I ‑ ‑ ‑
KIRBY J: Judges look at these things. I mean, we have to have some interest and enjoyment during the course of the argument.
HEYDON J: A subtle influence of demeanour.
KIRBY J: Yes, I have always been strong on that.
MR HARPER: MrColes does have a very appealing demeanour most of the time. Yesterday I said in my submissions that Capital companies knew both about duplications and missing equipment. That is incorrect. The evidence only establishes they knew about duplications, not missing equipment.
KIRBY J: Well, you say that to us. We have all of this material. You have got to assist us with references to it, if you would.
MR HARPER: Yes, indeed, your Honour, and I was going to do that as well, but I just wanted to make clear that was the position.
KIRBY J: Thank you. I am just, at this stage, following your submissions yesterday and not knowing where you are going today, but, anyway, I will hold my horses.
MR HARPER: Can I just finish the interchange by saying that I endeavoured yesterday by the references that I took the Court to yesterday to cover some of that ground. We can certainly send you a note.
KIRBY J: I am not being critical of you, Mr Harper. On the contrary, I began my statements in this Court by paying my tribute to the way in which you put your written submissions, but it is just important that we get all the help we can whilst we have got you here.
MR HARPER: Certainly, your Honour, and we see our role here as to help and we will do so to the best of our ability.
GUMMOW J: These orders are undated. The document you handed up is undated.
MR HARPER: That may be so, your Honour.
GUMMOW J: Do you know the date? I notice that they are consent orders.
MR HARPER: That is right. I do not think ‑ ‑ ‑
GUMMOW J: It seems to have been at the instigation of Capital Finance because it was the third defendant which gave the undertakings to damages. The parties were restrained by Mr Scott and his company and ‑ ‑ ‑
MR HARPER: As we understand it, these orders were never actually filed. They were annexed to the deed, but they were not actually filed, so that would explain the absence of the date.
CRENNAN J: That is the in terrorem aspect in relation to the deed.
MR HARPER: In terrorem is one way of putting it, I suppose, your Honour. It was certainly one of the protections for the position of Capital which was attached to the deed.
CRENNAN J: Mr Scott would have to make payments.
MR HARPER: Yes, and the failure to pay triggered the right to file the orders even though in the events that happened that was not what was done.
GUMMOW J: The litigation in the Supreme Court seems to be that the institution of Leasetec, which was the third party out there, is it not?
MR HARPER: Another one of Lloyd Scott Enterprises’ financiers.
CRENNAN J: That is where the duplications came in, was it not, duplications where both Leasetec and Capital had arrangements in relation to the same equipment. Is that how it went?
MR HARPER: There were certainly duplications in relation to Leasetec and that was the basis of part of the settlement involving Leasetec. So that the first deed of 12 January was designed to deal with title issues as between Capital and Leasetec but it left floating the possibility of other double financing in a sort of general way.
GUMMOW J: What was the ownership of Leasetec, do we know, or do we just assume it is another emanation of Mr Scott?
MR HARPER: No, Leasetec was not an emanation of Mr Scott.
GUMMOW J: That is what I thought. I thought it was a third party.
MR HARPER: Sorry. If I gave the impression, I meant something different. I did not, your Honour. It was a third party financier of Mr Scott in the same way as Capital.
GUMMOW J: Hence the duplication problem that Justice Crennan has just referred to.
MR HARPER: Correct, your Honour.
GUMMOW J: Yes. Go on.
MR HARPER: Your Honours, first, in addition to what has already been said and written, the first thing that I take you to is the question of the extent to which the payments that were made – the eight payments which have been called the “NAB payments” – were used to satisfy the liability of LSE under the second deed. Submissions have been put by the appellants that, in a sense, the second deed was irrelevant and that there was a series of eight transactions between Capital and NAB.
The Full Court was unanimous in this respect and that is they all held that the moneys paid from NAB were used to satisfy pro tanto the liability of LSE under the second deed. The references are in the judgment of Justice Lindgren at pages 1340 to 1342 of volume 5, paragraphs 47 to 57. Now, paragraph 47 he says:
Capital submits that the purchases by NAB from CFAL supplanted the Second Deed. I accept that the Second Deed remained on foot although Capital and LSE recognised that LSE’s capacity to perform its obligations under it depended on LSE’s being able to refinance.
Then at the end of 48 he says:
The evidence shows that Capital regarded cl 4.1 as pro tanto complied with if, as happened, a financier paid out Equipment Rental Agreements in consideration of thereby requiring the equipment.
Then from 49 through to 56 he sets out fairly comprehensively the evidence in support of that conclusion. Then at 57 he says:
I think it clear on the above evidence that both Capital and LSE regarded cl 4.1 of the Second Deed as continuing to have binding effect during and after the sales by CFAL to NAB, and that LSE procured NAB to make the payments to Capital because of LSE’s obligations under the Second Deed.
That is how Justice Gordon treated the payments as well.
So, your Honours, in our submission, in substance, the transaction that we have identified was a case of Lloyd Scott Enterprises procuring payment of moneys to satisfy the obligations under the Second Deed through the instrument of the NAB and the result of that transaction was that its liability to the Capital companies under the Second Deed was pro tanto reduced, but it itself ‑ that is, LSE ‑soldiered additional liabilities to the NAB in the form of lease finance debit accounts.
KIRBY J: Do you know if NAB is aware of these proceedings before the Court and do you agree with what Mr Coles said yesterday that contingently they may have an interest in the outcome of the proceedings?
MR HARPER: Contingently, no, your Honour, I do not necessarily accept that. This is an issue between Capital and LSE and NAB was an instrument in producing an outcome between those two companies. Although the suggestion might have been made that in some way the leases involving the NAB might have been themselves uncommercial, that was never suggested by anybody down below at any point.
CRENNAN J: The liquidator would be in receipt of rents from those leases?
MR HARPER: Your Honour, the leases that were entered into between Capital and NAB were the subject of a charge. So that if LSE was receiving money in respect of any of the end users upon the crystallisation of the charge it became money of the NAB, in effect.
GUMMOW J: What do we know about this charge?
MR HARPER: It is in the appeal books, your Honours.
GUMMOW J: Is it in the documents?
MR HARPER: Yes, it is.
GUMMOW J: It seems to be important in a way.
MR HARPER: If your Honours go to volume 2, page 301.
GUMMOW J: Yes, this is the fixed and floating charge from LSE to the bank?
MR HARPER: Yes, your Honour, and it was entered into in November of 1998. On pages 306 to 308 there are some definitions, most of which are fairly standard it might be said. Then at page 309 there is the fairly usual clause which talks about the secured amounts and then at page 310 at clause 4 the “Nature of Charge” is set out. 4.1 indicates that it was “a fixed charge” in respect of the there set out items of property and 4.2 says it was “a floating charge” in respect of:
Property which is not charged by way of fixed charge under Clause 4.1.
And at (b)(ii)(B) it is noted that:
upon the appointment of a liquidator . . . or any other insolvency administrator ‑
the charge becomes fixed. It operates as many ‑ ‑ ‑
GUMMOW J: I am sorry, what clause was that fixation clause?
MR HARPER: It was 4.2(b)(ii)(B). The entirety of (b) talks about it fixing.
CRENNAN J: But in relation to NAB’s leases, it is the owner of the equipment until the residual is paid.
MR HARPER: Yes, your Honour.
CRENNAN J: So, in that setting, what is the significance you are giving to the charge in the context of the rentals which are flowing from the end customers?
MR HARPER: If I can answer your question this way, your Honour. The position of LSE under the master lease agreement was as a bailee, but in respect of each of the lease transactions, the eight, there was a lease finance debit account created which was a debit against LSE. It became a liability which it was obliged to pay and if there was a default under that, under the lease agreement between NAB and LSE, all of that would have become liable and that was a liability subject to the charge.
The position between LSE and the end user was that it was receiving the rent from the end user and it has been said by the Full Court and by my learned friends that the rent received from the end user in the hands of LSE was LSE’s money, in effect. Just assume that is correct for the moment, certainly that would still be, if it was LSE’s money, property, in a general sense, of LSE that still fell within NAB’s charge but it would be not subject to the fixed charge, one would think, until crystallisation took place, but it would certainly be subject ‑ ‑ ‑
GUMMOW J: It would be paid into a bank account, would it not?
MR HARPER: Yes, your Honour.
GUMMOW J: Do we know whether they were in overdraft?
MR HARPER: Yes, we do. There was a NAB overdraft. I will get the reference to that, your Honour.
GUMMOW J: Yes. All I am saying is, we have to be fairly careful before we starting tracing language about the moneys.
MR HARPER: Yes, but that is the ‑ ‑ ‑
GUMMOW J: I know you want to talk about substance and may be that is the only way you can approach it rather than form but the moneys just simply do not exist in any – it is not a bucket of duckets. They are going into an overdrawn account here.
MR HARPER: Yes, your Honour, but in a sense what your Honour puts to me there militates strongly ‑ ‑ ‑
GUMMOW J: There is no charge over them. They have gone into this account.
MR HARPER: Yes, but they would still form property of LSE that would be subject to the charge because the liability of the overdraft account is secured in that sense. Substance, your Honour, is certainly the way, we would submit, these provisions of the Corporations Act should be approached and that is, in my submission, consistent with the way the courts have defined broadly the concept of transaction, that is, to get to the substance of the situation rather than be constrained by the forms that parties might use to overcome their effect.
Your Honours, can I just say this. I am approaching the balance of these submissions on the basis that the question of unfair preference is before the Court either on the basis of a cross‑appeal or in the notice of contention. I do not wish to take time by addressing these things piecemeal unless the Court thinks it is desirable for me to do that. I propose just to make some further points on uncommercial transactions and unfair preferences.
KIRBY J: I am very interested in the unfair preference. Even if you lost everything else, that is the way to victory for you, but you have not had much success so far on that issue even from those who otherwise were in your camp. So you are going to have to spell it out, as far as I am concerned. You should not assume it is a theoretical matter to me.
MR HARPER: If the Court pleases. Going then to section 588FA, the first thing to notice about that is that under subsection (1)(a) the company and creditor have to be parties to the transaction and then under (1)(b) the transaction has to result in the creditor receiving more in respect of unsecured debt and we say for the purpose of the unfair preference case that the unsecured debt is the one that arrises under clause 4.1 of the deed. There was uncontested evidence from Mr Tolcher, the liquidator, that the payments received by Capital, the eight payments, resulted in it receiving more than it would have received in the winding up.
KIRBY J: Where do we find that? You have to put a bit of poison in the well, Mr Harper. Mr Coles did for his part, as it were, give a bit of flesh to this. We are the final Court of Appeal, but we are human beings too. We act to evidence.
MR HARPER: Sometimes badly, your Honour.
KIRBY J: We do not think so, we think ‑ ‑ ‑
MR HARPER: I just meant to say it was not an issue between the parties at all that ‑ ‑ ‑
KIRBY J: But that is all right, but you have to plant it in our brains, even just a little taste of it.
MR HARPER: If your Honour pleases. I will get the reference in just a minute, your Honour.
GUMMOW J: Justice Heydon wanted to ask you something, I think.
HEYDON J: You identified the unsecured debt as the clause 4.1 debt. Would it not be the case, though, that the unsecured debt that the company owes to the creditor must be something that is in existence before the transaction which constitutes the unfair preference?
MR HARPER: Yes. To make good the argument we have to say that the second deed that creates the debt is not part of the transaction for the purpose of unfair preference.
HEYDON J: What is the transaction then?
MR HARPER: The eight payments. Each of them is a transaction in itself.
HEYDON J: So that here the transaction is different from that which is involved in the uncommercial transaction limb of the case.
MR HARPER: Correct, your Honour.
HEYDON J: It would not be, would it, the debts that were already owed by LSE to Capital even before 12 January 2001 deed?
MR HARPER: But then the payment would have to be in respect of it. The evidence, as I recall it, was that there were some debts owed prior, but they were paid.
HEYDON J: There must have been lots of debts because that is the whole point of the 12 January 2001 deed. Capital wanted to get Mr Scott up to the mark and get him to pay within four months. It seems to me a question may be those earlier debts, those pre‑12 January 2001 debts, might be the ones in respect of which it got a preferential advantage over other creditors. But you do not analyse it that way?
MR HARPER: We do, your Honour, if we can identify some of those debts. Clause 4.1 did cover all pre‑existing debts itself, so gathered them in. The exposure gathered all those debts in itself. The exposure was defined as the aggregate which would have gathered in the pre‑existing debts of LSE as well as payouts under the lease.
HEYDON J: I just see from the pleadings that originally there seems to have been the type of case mounted that I was talking about, but that is all crossed out and what is left is paragraph 23, which is the second 12 January deed, pages 17 and 18 of volume 1 of the appeal book. I am not forcing you in any particular direction. I now understand the way you put it.
MR HARPER: Yes, your Honour, but if your Honour reads on, just taking up the pleading point, paragraphs 25 and 26, it gives a fair degree of flexibility about the definition, but it then goes on to 27 and 28. Going back to Justice Kirby’s question about the evidence from Mr Tolcher, that can be found in volume 1 beginning at page 34. You will see that in that affidavit Mr Tolcher, beginning at paragraph 4, sets out his method, follows that through at 5 and gets to the ultimate conclusion in paragraph 7. As I say, this evidence was not contested. He was not cross‑examined. It was not suggested to him that his approach was erroneous in any fashion.
Your Honours, can I then take you to the decision Walsh v Natra (2000) 1 VR 523. In that decision, which is a decision of the Court of Appeal of Queensland ‑ ‑ ‑
HEYDON J: Victoria.
GUMMOW J: No, it is not. Victoria.
MR HARPER: I am sorry. I meant to say Victoria. I do not know, I think the weather made me think I wanted to be in Queensland. The part of the decision which is most important, your Honours, for the point I want to make is that one of the arguments made in that case was that the overall general body of unsecured creditors was not being prejudiced by the payments that were impugned. If your Honours go to the report at page 538, paragraph 47 in the judgment of Justice Phillips, and we place significance on these dicta. He says there that:
Moreover, counsel’s argument depended very much on the submission that overall the general body of unsecured creditors were not being prejudiced; the general pool of creditors was no worse off, he said, after the transaction than before. I am by no means clear that that is an argument that still runs under the new s 588FA; the section does not in terms look to the effect of the transaction on “other creditors”, as did the former law . . . The effect of the transaction on “other creditors” does not per se have a part to play in the comparison required by s 588FA, although it might perhaps become material in certain circumstances when an order for repayment was being sought under s 588FF.
Now, your Honours, we read those words to mean that the correct approach in relation to Division 2 is that you, for example, in the case of an unfair preference, start with the words of section 588FA having once identified the transaction and you work out whether the criteria specified in that section are satisfied. You then move to section 588FC to work out if it is an insolvent transaction. There was no dispute on the evidence here that the company was relevantly insolvent at the time each of the payments was made. You then move to 588FE to ascertain if the transaction identified then falls within one of the voidable transactions. Having established they are voidable, you then move to the question of, what is the appropriate relief? Certainly 588FF seems to be expressly triggered by reaching the point where a transaction is voidable, because the opening words of subsection (1) say:
Where, on the application of a company’s liquidator, a court is satisfied that a transaction of the company is voidable because of section 588FE, the court may make one or more of the following orders –
So, in our submission, the way the division works means that you get to the point of finding whether or not a transaction is relevantly voidable and you work out what to do about it. If I have understood the questions put to me by Justice Gummow yesterday – the learned presiding Judge – it is not a case so much of the order creating the jurisdiction, but that you move through from 588FA or FB or FC towards 588FF. Certainly the dicta in Walsh v Natra that I have taken you to would, in our submission, at least the thrust of them, support that construction of the division.
So returning then in respect of unfair preference to this case we say – and I apologise if I appear to be repeating myself but just for emphasis ‑ that here in substance and substantially in form Lloyd Scott Enterprises initiated a course of conduct in respect of each of the eight payments, whereby it procured NAB to enter into agreements with Capital for the purpose of getting funds to be paid via NAB to Capital in satisfaction of the debts created under the Second Deed. That, in our submission, is very close to in broad terms the type of transaction that was considered in Re Emanuel, for example.
There is another aspect to it which I also seek to emphasise orally. If I could invite your Honours’ attention to the Master Lease Agreement, which can be found in volume 2 at page 349. At page 351 my learned friend took you to clause 2.4. Now that deals with the situation where a proposed lessee such as LSE makes a proposal for leasing. 2.4(a) gives an “absolute discretion” to the NAB to “accept or decline” and (c) and this is the important one – sorry (b) says that NAB:
may only accept the offer to lease by it or its authorised officer –
and then it says:
and such acceptance shall thereupon be complete without the necessity of notice to the Lessee.
Then (c) says:
The contract arising upon the Lessor’s acceptance of the Lessee’s offer to lease . . . shall oblige the Lessor to acquire the Equipment ‑
So, upon the NAB accepting each of the offers by LSE to lease the equipment the NAB became obliged to purchase it. So, in our submission, the result of that can be characterised as, in effect, Capital receiving the benefit of that agreement because once NAB was bound by the equipment the benefit of it in the sense of payment went to Capital, not of course to LSE. So in that sense Capital received the benefit of the chose in action that arose by that agreement between LSE and the NAB, in similar vein to the way the benefit of the chose in action was secured to the creditor in Re Emanuel. It is not identical, I accept that, but it is analogous.
KIRBY J: Now, where is the error in the treatment of this issue by the Full Court? You have to demonstrate error.
MR HARPER: The error is, your Honour, that the Full Court said there was no unfair preference because the 12 January deed, which created the debtor/creditor relationship formed part of the transaction, so there was not, in effect, pre‑existing debt.
CRENNAN J: I think for Justice Kirby’s assistance, the argument there in the judgment of Justice Gordon is to be found at 1370, appeal book 5, paragraphs 140 to 142.
KIRBY J: Justice Heerey simply agreed and Justice Lindgren, in terms agreed, did he not, with her Honour’s treatment of this issue?
MR HARPER: He did, your Honour.
KIRBY J: So put your finger on the error, please.
MR HARPER: The Full Court came to that view even though that was not an argument put by the appellants and it was not the subject of any argumentation as a result before the Full Court.
CRENNAN J: Was it your argument that the eight payments were the transaction in relation to the unfair preference point to be contra‑distinguished from the transaction in relation to the uncommercial transaction point?
MR HARPER: It was certainly our argument before the trial judge and it is what we say is apparent in the pleading. In the Full Court I cannot remember whether there a distinction drawn in the transaction, but certainly one view of the transaction we put was that it was the same for the unfair preference as for the uncommercial transaction, so we have to move away from that, I accept that.
HEYDON J: The Full Court seems to have viewed the second deed and each of the payments as a transaction, that is paragraph 140, line 4 and then in paragraph 142 it says that the Capital companies did not get any preference:
in respect of a debt . . . owed . . . prior to their entry into the transaction.
So the analysis seems to proceed along the lines of the parts of the statement claim that were crossed out as distinct from the part of the statement of claim that survives.
MR HARPER: No, with respect, I do not think that is entirely the case, your Honour. The parts of the statement of claim that survived, when you read paragraphs 24, 25 and 26 ‑ ‑ ‑
HEYDON J: Yes, treat second deed and the payments which are called “the said transactions” as being ‑ ‑ ‑
MR HARPER: Paragraph 24 defines the said transactions as the payments.
HEYDON J: Yes, but on that analysis, you would have to concentrate on the position before the second 12 January deed. In other words, you would have to concentrate on the indebtedness that had grown up over the years.
MR HARPER: We would say not, your Honour. You could concentrate on the deed and that creates the debtor/creditor relationship and the payments all came after that.
KIRBY J: Justice Tamberlin, at first instance, did not deal with this, did he? He dealt with the uncommercial transactions point and then he went on to deal with the statutory defence point. I just do not see where his Honour dealt with this point. If it was in the statement of claim before his Honour, why did he not deal with it? The answer to that may be because he came to his conclusions on the uncommercial transactions point and did not have to exhaust every other way of providing relief to you.
MR HARPER: That is the answer, your Honour. He did not consider any different version of the transaction, even though it was put to him.
KIRBY J: He did not have to in the conclusion he reached on the uncommercial transactions point, is that correct?
MR HARPER: That is correct but just so it is clear, he dealt with the unfair preference first and the uncommercial transaction second. If your Honour goes to volume 5.
KIRBY J: Yes. Actually, if I can say so, having been at law school with Justice Tamberlin, whether it is right or wrong, his reasons are a model of brevity and sharpness, I think, in the way they deal with the issues. Where does he deal with this issue?
MR HARPER: First, if your Honour goes to page 1306, paragraph 39 where he expresses satisfaction that “there was a debitor‑creditor relationship”. Then at 40 he starts to deal with the unfair preference question and refers in 42 to Walsh and a decision in Queensland of Sheldrake. Then at 43 he expresses his conclusion that “the requirements as outlined under s588FA have been established”. Then at 44 he considers the question of whether the payments were made by LSE and his conclusion expressed at the end of that paragraph is:
Therefore, these payments must be treated as having been paid, not by NAB on its own account as purchaser, but under the authorisation of LSE.
Then at 45 he deals with the uncommercial transaction aspect of the case. The pattern of his judgment was to deal with unfair preference first, then uncommercial transaction second.
KIRBY J: Yes, that is clear.
MR HARPER: But he does not consider any different transaction as between unfair preference and uncommercial transaction and the answer would appear to be that he did not feel any need to because he thought the transaction, as defined, was to be impugned under both sections. Your Honour, we certainly made the submission that the eight transactions, not including the deed, were unfair preferences for the purposes of section 588FA.
KIRBY J: So you made that submission both at trial and in the Full Court?
MR HARPER: We certainly made it at trial. I just have to check the position in the Full Court.
KIRBY J: Presumably you would have done so because the amended notice appearing at 1317 starts with unfair prejudices being structured in terms of Justice Tamberlin’s reasons. So you would have had to meet those grounds of appeal.
MR HARPER: Yes, your Honour. Just to get back to your Honour’s initial question, the problem that we have with what the Full Court did in respect of unfair preferences is that they formed a view about the debtor/creditor relationship and its pre‑existence and denied there was any unfair preference on that basis even though that was not the subject of argumentation.
KIRBY J: Before you wind up, I would like you at some stage to elaborate what you have touched on in your written submissions. For a person like myself who does not live in this world all the time, I would like ‑ ‑ ‑
MR HARPER: Nor do I, your Honour.
KIRBY J: That may be so, but this is partly unfamiliar territory to me. I would like your submissions on how your construction of the two points, the uncommercial transaction point and the unfair preference point, work best to achieve the objectives of the Parliament in the provisions that it has enacted. So that if we are looking at the text, context and purpose, we do not focus only on arguments of text, but look at the text in the light of the context of the statute and the purpose that Parliament is getting at in enacting these somewhat novel provisions when compared to the preceding statutory regime. I do need your help on that, so I would like you to address that at some stage, probably at the end.
MR HARPER: Yes, your Honour. I am detecting your Honour’s use of the words “before you wind up” as an exhortation to approach that point as soon as possible.
KIRBY J: Do not become paranoid, Mr Harper.
MR HARPER: It is not hard to become paranoid, your Honour.
CRENNAN J: Forgive me for going back to this, but at 1302, paragraph 27 of his Honour Justice Tamberlin’s judgment, he there describes the contention of the liquidator about the transaction in relation to those eight payments and he sets out there “was a composite series of arrangements” and you can of course read that. I am just having a lot of trouble understanding his Honour in this judgment. I take it you are agreeing, are you, that because of the way the judgment worked and his Honour’s focus on the uncommercial transaction, that he never deals with, I assume, this argument you say that was made that you isolated for the purposes of the unfair preference argument, the eight payments only as the transaction.
MR HARPER: I am agreeing with that, your Honour. He did not deal with it because he did not have to in the way he approached it in the judgment.
GUMMOW J: Now, just looking at the pleadings again on page 20, this is what you are now putting, unfair preferences, the “said transactions” being referred to there. We go back to 24 which is a series of payments and the payments are then called “the said transactions”. That is right, is it not?
MR HARPER: Yes, it is, your Honour.
GUMMOW J: All right, but that is not the way the primary judge approached the preference question?
MR HARPER: No.
CRENNAN J: Then, of course, there is paragraph 25 of the pleading on page 19, just after what Justice Gummow, the presiding judge, was referring to:
Each of the said transactions, and the entry by LSE into the second 12 January Deed, was a transaction within the meaning of section 9 ‑
MR HARPER: Yes, your Honour, but the way the pleading reads in total, in our submission, leaves open the flexibility of arguing it both ways, as was done.
GUMMOW J: What is the other way?
CRENNAN J: What is the other way?
MR HARPER: The first way was to argue that the deed was included in the transaction and the second way was that it was not.
CRENNAN J: Is there an alternative to paragraph 25 to be found somewhere in the pleading?
MR HARPER: If you go to paragraph 27 ‑ ‑ ‑
KIEFEL J: It takes you back to paragraph 23.
GUMMOW J: That is what I said: It takes you back to “said transactions”.
MR HARPER: Yes, your Honour, and that is said transactions which defines it as the payments.
GUMMOW J: Yes; that is right.
KIRBY J: Is that consistent with what you have been saying to us today by reference to the affidavit evidence of the liquidator?
MR HARPER: Yes, your Honour. If you go to paragraph 29, the allegation is made that:
In the premises each of the said transactions and / or the payments comprised an unfair preference ‑
so when you read the pleading in its totality you get to the proposition that the payments were isolated from the deed for the purpose of unfair preference.
KIRBY J: No one in the Full Court, as I recollect it, said that this argument fell outside the pleading.
MR HARPER: No, nobody said that.
KIRBY J: The question is, what is the argument, what are the payments to which the Full Court was addressing its attention when it addressed the issue of the unfair preferences?
MR HARPER: The eight payments that came from the NAB. There is a table of them in the reasons of Justice Gordon, your Honour.
KIRBY J: That is true, but where are they referred to either in terms or expressly in the statement of claim or by implication?
MR HARPER: If your Honour goes to page 25 you will see there is a document which formed annexure A to the statement of claim. There was a settlement in relation to a vast number of these payments, but the ones that did not settle are the ones that are not crossed out.
KIRBY J: It is a singularly horrible document. However, you say it is the survivors?
MR HARPER: Yes.
KIRBY J: Are the survivors the eight payments?
MR HARPER: Yes, your Honour. That is 17, 18, 19 and 94 through to 98.
GUMMOW J: To which paragraph does annexure A attach in the body of the document, the body of the pleading?
MR HARPER: If your Honour goes to paragraph 24, in particular (i) ‑ ‑ ‑
GUMMOW J: Yes I see. Particular little (i)?
MR HARPER: Yes.
GUMMOW J: Now, do you support the primary judge’s decision on preference that he actually made, even though it was not your favourite approach?
MR HARPER: Let me answer that question this way, your Honour.
GUMMOW J: We need to know because you have to provide judgments.
MR HARPER: Yes, your Honour.
GUMMOW J: We cannot say Mr Harper was cogitating.
MR HARPER: The approach that we would adopt is the one that we are contending for today and that is that the deed did not form part of the transactions.
GUMMOW J: So you nail your flag to the eight payment theory?
MR HARPER: We do and then as a fall back position we will nail it to what Justice Tamberlin did.
GUMMOW J: All right. Now, is there anything else you want to say about preference?
MR HARPER: Well, no, unless I can assist Justice Kirby any further.
GUMMOW J: It would be useful to have some view of how this statute fits together and what it is trying to do.
KIRBY J: Given the change of language which you explain by reference to the Harmer Report.
GUMMOW J: Part of the trouble with the decided cases – I am not criticising anyone who has decided them – but judges get terribly easily drawn in these voidable transaction cases into the details of the transaction without having what is called a road map.
KIRBY J: That is what Justice McHugh used to say, the theory of the statute, the theory of how it is supposed to be operating, which this Court has repeatedly said over the last decade is the way you should approach matters. You do not need ambiguity to look for the purpose, that is really what you start with after you have looked at the text.
MR HARPER: Yes, well, if your Honours go to the materials, including the Harmer Report and the explanatory memorandum which have been provided by the appellants, if we go, for example, to page 84 of the Harmer Report and the Harmer Report is the pages at the very back of the materials and the page number can be found in the middle of the top of the page.
KIRBY J: It is 84 of the confirmation it is actually page 276 of the Law Reform Commission Report.
MR HARPER: Yes that is correct, your Honour. Now, at paragraph 662 the report deals with the current legislation and at 664, for example, it mentions the antiquated language in relation to the existing laws. Just jumping ahead, it is this part of the report which lies behind section 588FB, as I read it. If we go over the page to paragraph 666 there is reference to the method of disposition approach.
GUMMOW J: Well, 667 is important. It comes back to what Justice Crennan was putting to you yesterday, I think.
MR HARPER: Yes, your Honour.
GUMMOW J: Undervalue.
MR HARPER: It does, there is an emphasis there on undervalue and at 668 the question of undervalue is addressed by a reference to things like “outright gift”:
a transaction for consideration, but where the consideration provided by the person involved is significantly less –
Those were parts of the Harmer Report that were relevant. If you then go to the explanatory memorandum in respect of 588FB.
KIRBY J: Where is that?
MR HARPER: It is at page 58, paragraph 1043. What is said at the end of paragraph 1043 is that:
In particular, the element of undervalue is expressed more clearly in proposed section 588FB.
1044. The tests under proposed section 588FB for whether a transaction is uncommercial relies on the phrase ‘if… it may be expected that a reasonable person in the company’s circumstances would not have entered into the transaction’.
What is clearly said to be done there is that the concept or the element of undervalue is linked to reasonable behaviour by the company in its circumstances.
GUMMOW J: It is the second sentence in 1044, is it not:
The provision is specifically aimed at preventing companies disposing of assets or other resources through transactions which resulted in the recipient –
et cetera.
MR HARPER: Yes, and what is focused on there is the magnitude of the bargain and that, whilst it must of course encompass the concept of undervalue, is something which is broader, that is, the magnitude of the bargain.
GUMMOW J: It is all about “disposing of assets or other resources”, right, which should be still in the pot. It should be available in the insolvent administration. In that sense it is restorative, I think.
MR HARPER: It has a restorative aspect.
GUMMOW J: It is not simply concerned with what one might call “bad behaviour”.
MR HARPER: No, but that is part of it as well, your Honour.
KIRBY J: Lying behind it is still the pari passu principle, is it not?
MR HARPER: Yes, your Honour, I would not disagree with that, but it is also ‑ ‑ ‑
KIRBY J: The Parliament is endeavouring to protect, where the company is facing liquidation or is insolvent, all of the creditors which is a legitimate social purpose and an ancient one.
MR HARPER: Yes, your Honour, but another purpose that lies behind it is to constrain creditors in rushing to produce situations where they get somehow ahead of the game ‑ ‑ ‑
KIRBY J: Although then defeating pari passu.
GUMMOW J: Yes, that distorts the pari passu idea by leapfrogging.
MR HARPER: One of the things that is said in the academic literature is that there is a deterrence aspect to it, which I think is similar to Justice Gummow’s comment about reining in bad behaviour and whilst that also has an impact on the pari passu principle, it is still there as a way of affecting the behavioural creditors.
KIRBY J: Why do you want to affect the behaviour of creditors, so they do not jump ahead in the queue?
MR HARPER: And you want to deter them from doing it in the first place.
KIRBY J: From trying?
MR HARPER: Trying.
KIRBY J: How does that apply in this case, in your submission? This is really very important to me so try to put a bit of fire into it because this is really what Parliament is on about and we should to uphold that, not defeat it.
MR HARPER: In the circumstances of this case you had Capital – if I can describe the two companies compendiously that way – Capital in a position where it had existing principal and agency agreements which gave it a relationship with end users as an undisclosed principal and LSE was a conduit for money. When it found out that there were problems in the way LSE was run, there were allegations of fraud, Mareva injunctions and duplicated equipment, it took a step of forcing LSE and Mr Scott to enter into the 12 January deed so it could place itself in a position where it passed all the risk in relation to those matters to LSE and Mr Scott and imposed obligations on LSE to pay millions of dollars over four months in order to protect the position of Capital.
As a result of LSE endeavouring to meet those obligations it procured a series of transactions involving NAB, resulting in payments into the hands of Capital as a result of which LSE was in the position where its liabilities went up, effectively, by some $4 million in liabilities owed to the National Australia Bank which became secured by reason of the National Australia Bank’s charge in circumstances where those liabilities had not previously existed.
KIRBY J: To the disadvantage of other creditors?
MR HARPER: Yes, your Honour.
KIRBY J: And that is the duty of the liquidator to protect the other creditors with the pari passu principle and that, you say, is the purpose of the legislation?
MR HARPER: Yes, your Honour, and there is a public interest in the liquidator taking the steps that he does to recover amounts of money for the benefit of the pool.
GUMMOW J: All right. We need to hear what Mr Coles responds, I think.
MR HARPER: You have had enough from me, your Honour?
GUMMOW J: No.
HEYDON J: The bank made those payments because it acquired some chattels, correct?
MR HARPER: Yes, your Honour.
HEYDON J: The result of the transaction was that the indebtedness of LSE fell to the extent of the payments. Correct?
MR HARPER: Yes, to Capital.
HEYDON J: There was no change to the asset position of LSE. How can that be a preference, then?
MR HARPER: The asset position of LSE, sorry, was changed because its overall liabilities had gone up and even though the payments might have reduced them as between LSE and Capital ‑ ‑ ‑
HEYDON J: They went up by reason of the 12 January 2001 deed?
MR HARPER: Yes. In fact, they came into existence by reason of that ‑.well, let us say they went up.
HEYDON J: That would depend on establishing what it owed just before 12 January was less than what it owed under clause 4.1.
MR HARPER: Your Honour, that must be an overwhelming inference from the situation because on any view of the deed, LSE went from not having any primary obligation in respect of any end‑user leases, whether you use it as a basis for calculation, to being obliged to pay an amount of money equal to all of them. So there was no possible view, in our submission, of the deed could lead to any other conclusion than that LSE’s liabilities were raised enormously.
HEYDON J: The exposure was the aggregate of some payouts and all amounts otherwise owed. So it is the aggregate of existing indebtedness.
MR HARPER: No, because the payouts were not an existing indebtedness.
HEYDON J: They were contingent or potential indebtedness, were they were not, depending on events?
MR HARPER: No, your Honour. Under the principal and agency agreements, the moneys received by LSE from end users was clearly always the money of Capital. It was not owed by LSE to the Capital companies. All LSE did was collect it and then pass it on. What the deed did was change the position so that LSE was obliged to pay an equivalent amount of money, the liability it had never had before. So, on any view, its liabilities must have gone up.
HEYDON J: In that case, the definition of “exposure” is an extremely misleading one. It says the aggregate of the payout and “all amounts otherwise owed” implying that payout was owed.
MR HARPER: It may be misleading, your Honour, but that is, in our submission, all it could mean. No one has ever contended, and nor could they sensibly, that prior to that deed LSE was liable to pay payout amounts to the Capital companies. In fact, if your Honour goes back to one of those agreements which my learned friend took you to, the payout provisions under those documents were payouts by the end user, not LSE. It was never contemplated LSE would be paying out any of the leases.
HEYDON J: Yes, but if there were a payout and LSE hung onto the money, it could be compelled, could it not, by the Capital companies to transfer it to Capital and that is how ‑ ‑ ‑
MR HARPER: But the way those principal and agency agreements operated, that money might have been held by LSE but was owned beneficially by the Capital companies. So it was never LSE’s money. I mean, there may have been remedies ‑ ‑ ‑
HEYDON J: But on the face of the transaction, LSE had some money. In reality, it owed it. It was a debt owed by it to the relevant Capital company.
MR HARPER: With respect, your Honour, we do not embrace that. The position must have been, we say, certainly in respect of the payouts, it is a totally new liability.
HEYDON J: I agree with Justice Gummow’s last intervention.
MR HARPER: Pardon me one moment.
GUMMOW J: Just before you sit down, Mr Harper, looking at your proposed cross‑appeal at 1399 on the preference point, it looks to me as if it does pick up as identifying the particular preference argument the eight payments theory outlined from paragraph 24. That is right, is it not?
MR HARPER: Yes, your Honour, and that is how we put it in the notice of contention as well.
GUMMOW J: Does the notice of contention also seek to support the Justice Tamberlin approach to preference?
MR HARPER: No, it does not.
GUMMOW J: Is that in any of your documents?
MR HARPER: In this Court?
GUMMOW J: Yes.
MR HARPER: No.
GUMMOW J: Well, if it is not there, why should we worry about it? We cannot be left ‑ ‑ ‑
CRENNAN J: Which ground is your fallback?
MR HARPER: That is the fallback, your Honour. Your Honour asked the question and that is the fallback.
GUMMOW J: I am just looking for a ground that is all. So are you seeking leave to amend your notice of contention or notice of cross‑appeal to add to it in the alternative a ground relying upon Justice Tamberlin in his treatment of the preference point? We need to get the record straight.
MR HARPER: No, your Honour, I am not. I do not say anymore about it. There is one point that perhaps needs slight clarification in respect of the costs. There is agreement between the parties that whatever the outcome of the appeal, the costs up to 30 June are already dealt with. So any costs order would only be in relation to costs after 1 July 2006. It is not clear from my learned friend’s notice of appeal, but I do not think there is any disagreement about that.
GUMMOW J: Is there any condition attached to a grant of special leave on the question of costs?
MR COLES: There is not, your Honour.
GUMMOW J: Should we give effect, if we get to it, to this agreement that has been indicated?
MR COLES: I understand so, your Honours.
GUMMOW J: Very well. Thank you, Mr Harper.
KIRBY J: It might be wise to give a little note to that effect so that we do not overlook it.
MR HARPER: If the Court pleases.
KIRBY J: What, in your submission, is the correct legal position? Is the matter that you have been lately arguing a notice of contention point or a cross‑appeal point? It seems to me it is really a notice of contention point as being an alternative basis upon which you were entitled to succeed in the Full Court.
MR HARPER: That is our first position because it does not require a variation of the order for payment, which is the critical one.
KIRBY J: It does not oblige you then to seek special leave to cross‑appeal.
MR HARPER: That is correct, your Honour. But we have put on a summons for cross‑appeal.
GUMMOW J: You want to cover yourself?
MR HARPER: That is right, your Honour.
GUMMOW J: Yes, Mr Coles. What do you say about that last point as to the need for special leave, cross‑appeal, whether the notice of contention would come ‑ ‑ ‑
MR COLES: I do not wish to make any submissions about it, your Honours. I think we have moved on, as it were, to the detail of the matter, if your Honours please.
GUMMOW J: Yes, we would like to move on at this stage.
MR COLES: Just, I think, a couple of short points which I will deal with more or less in the order that my friend dealt with them.
GUMMOW J: What is the answer to the propositions that at the end Mr Harper put to Justice Kirby and then in response to Justice Heydon?
MR COLES: Well, there are a number, your Honour. Can I come to them?
GUMMOW J: Yes.
MR COLES: It may be easier to dispose of the shorter points first, if that is convenient. Your Honours should not, we firstly say, entertain any consideration of the so‑called lost equipment point. It was never pleaded or particularised. It was never the subject of adequate submissions to the trial judge. It formed no part of the notice of contention to the Full Court.
HEYDON J: By “lost equipment” you mean non-existent equipment?
MR COLES: Non-existent, I should say.
GUMMOW J: The allegedly non‑existent?
MR COLES: I am sorry, the alleged non-existent equipment, yes. There are no factual findings about the matter in either of the courts below. Importantly, the Full Court was not invited by notice of contention to consider the matter at all and it is inappropriate, in our submission, for this Court to be invited as the final court of appeal to be trawling through material looking to make findings of fact about a matter which finally, we say, even if it is, is inconclusive so far as any issue in the proceedings about uncommercial transaction as between capital and LSE, whatever problems it may have been Capital and the National Australia Bank, even taking into account that if there was such a problem with non-existing equipment, it was LSE itself that must have produced that outcome, bearing in mind the various clauses in the documentation ‑ to put it generally ‑ which have LSE confirming the title to any equipment that Capital itself may purchase for it or NAB may purchase for it.
So really the liquidator is inviting you to attach some unspecified significance to a transaction which, on one view, you would have to find was fraudulently instigated by the LSE company in liquidation itself and that, in our respectful submission, still does not attach itself relevantly to any head of argument so far as the content of any uncommercial transaction, whether it be the trial judge’s six point identification of it or otherwise.
The charge, we say, does not really loom large. The existence of the NAB charge does not seem to have figured prominently in reasons below, but it does not matter much because the charge was, in any event, in place before the master lease agreement. The charge came in 1998.
GUMMOW J: The year before.
MR COLES: The year before, that is right. So that was the landscape, as it were, and there is nothing particularly notable or important about that. The next point I wish to address approaching the matter your Honour Justice Gummow just raised with me and in the process, I think dealing with a couple of other matters as well, it has been variously put that the payments by the National Australia Bank were used to satisfy debts under the second deed or that procuring the National Australia Bank to pay money to Capital involved, in some sense, the payment of money by the National Australia Bank, which was not really the National Australia Bank’s money at all, but in effect must have been LSE’s money and it is said that calls the case closely to the realm of Re Emanuel (No. 14) to which you have been taken.
GUMMOW J: Can you explain that again, Mr Coles?
MR COLES: Yes. The propositions, we detected their formulation in various ways. Our learned friend said the NAB’s payments were used to satisfy debts under the second deed and then he said that by procuring the National Australia Bank to pay money to Capital, in effect, the appellants brought about a transaction of payment by the appellants of a kind attracting the operation of the provisions. He referred to the similarity or the analogy, as we understood him, to the Re Manuel (No. 14) type of situation.
We simply say there is no such proper analogy. The National Australia Bank, as has been identified, did upon acceptance of an equipment purchase proposal acquire an obligation to purchase the equipment. That obligation required the National Australia Bank to enter into a very different transaction than would have been the case if, for example, as was the Emanuel situation, the National Australia Bank was holding a fund of money and had to comply with an obligation in the form of a direction by its customer to pay that money to a creditor of LSE. One can test the outcome at the end of the sequence of events quite simply. In that type of case when the money is paid, the supposed creditor simply hands over a receipt and says, “Thank you very much. I got the money”.
In our case, to the contrary, or rather differently, rather than handing over a receipt simply for acknowledging payment of a debt, Capital actually hands over or delivers title to the assets the subject of the sale. So we see no analogy at all, with the greatest respect ‑ ‑ ‑
KIRBY J: But there is no dispute that at the time of the second deed that your clients knew of the difficulties, to put it no higher, of the companies of LSE.
MR COLES: They certainly knew of the difficulties that had been identified by Leasetec and, indeed, it was disavowed this morning. There is not the slightest suggestion they had any knowledge of any deeper concerns than the irregularities occasioned by the matter described in the file note, which your Honours were taken to yesterday, by Mr Vendrell.
KIEFEL J: How would you describe LSE’s financial position as a result of the transaction with NAB?
MR COLES: Balance sheet wise, unchanged, practical wise, whilst it acquired liabilities to the National Australia Bank, it also acquired a corresponding asset in the form of the contractual rights to the lease of the goods and it is likely – we would think it is a matter of surmise, because the liquidator never conducted the case on that basis, but it is not to be assumed that the commercial value of the rights under the leases with the National Australia Bank was less than the National Australia Bank had paid for the equipment, for example, of liabilities in other words.
One needs to be cautious, in our respectful submission, in adopting what in effect was Justice Gordon’s observation at paragraph 136, I think, that once you find that the 12 January deed is an uncommercial agreement or deed, a matter which I suggested yesterday may depend on the construction of instrument being, as her Honour seems to have concluded, everything else followed and, indeed, once that conclusion was reached, it inevitably followed that everything else fell in behind it as it if it were an uncommercial transaction. But we simply point to the fact, your Honour, that one needs to be cautious in identifying – and part of your Honour’s question and part of the presiding judge’s initial question entails a consideration, of course, of a primary matter of concern in the appeal, namely, what was the transaction concerning the payment by the National Australia Bank to the appellant if, as we say, it was that payment for that transfer of title to that equipment.
So we suggest it is not to the point to consider something that was neither pleaded nor proved, namely, whether there were uncommercial elements of the transaction as between LSE and National Australia Bank under the leasing agreements.
KIRBY J: We do not leave our common sense outside the door when we come in to determine a case like this. Do you disagree with anything Mr Harper said when he endeavoured to explain the purposes of the Parliament in enacting section 588FT?
MR COLES: Not at all. Indeed, we have laid emphasis on the object of FB as the redressing or recouping the consequences of improvident or inappropriate gifts or other dispositions carrying a significant voluntary component. We agree, with respect, that that entails the conclusion that the section operates in a morally neutral environment; that is to say, one is not concerned with such matters as bad behaviour. Indeed, the classic uncommercial transaction one could identify, I suppose, is an extravagant gift by a company in extremeness to charity. That would undoubtedly be an uncommercial transaction despite the motives underpinning it and the havoc it could wreak on the part of the charity concerned.
KIEFEL J: Is there an onus point lurking here, though, in the sense that Justice Gordon identified a prima facie position, that is, that having paid out so much with the corresponding contractual rights that LSE acquired under the transaction with NAB, it could not be said that they were matched, that the onus then shifted to disprove what otherwise appeared to be an uncommercial transaction?
MR COLES: We suggest not because there was not identified in the – even if one is accepting – the unstated premise, of course, is that one rolls the whole NAB transaction up with the NAB purchase transaction and calls that the transaction. We have a difficulty with that as a matter of construction. But assuming for the moment that that is right, the liquidator did not establish – when I dealt with paragraphs 134 and 135 of her Honour’s judgment yesterday I sought to identify to your Honours that it was not established in the way her Honour felt in those paragraphs that the transaction with the National Australia Bank and LSE was a questionable or doubtful transaction from the point of view of the benefit of LSE. It was not established that that was particularly or necessarily or obviously so, or at least not in terms of the section so established because the section allows that there may be benefits and disbenefits.
Even when one buys a pencil sharpener, one is getting a bargain perhaps at someone’s expense if they are on sale or something. There will always be benefits and disbenefits in any commercial transaction but one is looking at whether they are of such an extravagant degree that no reasonable person in the circumstances of the company would enter into them. Our subsidiary argument was, even if you accepted the criticisms that Justice Gordon, particularly in those paragraphs to which I have referred, attempted – the analysis was her own, as we would follow it. It revealed, in our respectful submission, the errors which we sought to identify yesterday.
Even if that was correct, it might show that it was not the most advantageous leasing deal in the world, but, on the other hand, as we have put in our written submissions, one evaluates these matters in the context of the whole of the relation. In other words, you do not simply say the National Australia Bank leasing deal was, in relation to, for example, the three items of equipment on 14 February and five or six more in May. You would have to analyse properly the whole of the commercial consequences of all of the leases ‑ ‑ ‑
KIRBY J: Yes, but it is hard to ignore the sequence of events. I mean the sequence of events and the timeframe, the timeline here.
MR COLES: I so agree with your Honour. You have to evaluate as at 4 February, for example, what are the prospective transactions which that leasing arrangement with the National Australia Bank will involve; what are the predictions, perhaps, as to movements in the economy. We know, for example, from other material that even when the balloon was bursting around Lloyd Scott Enterprises as a result of the Leasetec investigations, Lloyd Scott Enterprises, I think the evidence shows, had a number of other promising deals from a number of other promising clients which, because of the hiccups that its business activities encountered, were interrupted or put on hold in some way.
Now, one would need to make an evaluation of the whole NAB/LSE portfolio across the board from all sources and with all customers and so forth to be able to come to a final conclusion. You would not come to that conclusion simply because one lease agreement here was perhaps, because of a larger residual or a shorter timeframe or the like; less advantageous when others because of other methods of calculation or factoring in of the time value of money, had other consequences. In other words, it would be wholly inappropriate to evaluate profit or return on the basis of two or three elements of what is a larger transaction. One would have to know by analysis and by expert investigation and report what the true financial consequences were, not what the random or selective consequences of isolated transactions in the spectrum of those parties commercial relationship amounted to, in our submission.
It is not, in our respectful submission, self‑evidently uncommercial, even though there may be disparities in immediate returns and the like, for one company to refinance. It is very common. Your Honours would wish to be cautious to spread panic in the refinancing industry because that really is the invitation which this Court is invited to take on board, in our respectful submission.
To come back to your Honour the presiding Judge’s question, Justice Kiefel’s question and my learned friend’s concluding wrap‑up remarks, one proceeds, in our respectful submission, by an analysis of detail in particularity collapsing, if I can use that expression compendiously to describe the payout of all of the leasing agreements that have been entered into under the principal agency agreement, paying them out and transferring the property and the collection of money rights and the risk entitled to the goods and the like, did not change anything so far as LSE was concerned. After all, its rights under those agreements were to receive and collect the money and to remit it as trust funds to the Capital companies.
It changed the method of its financing but not in a way which is either inherently uncommercial, inherently disbeneficial – if there is such a word – or disadvantageous. My learned friend is simply falling into the error that lawyers who try and grapple with accounting terms often do. He refers grandly to obligations to pay millions of dollars of money but of course he overlooks wholly the other side of the ledger. With the obligation to pay money comes the entitlement beneficially to receive money.
Our complaint about the courts below even considering that aspect of the matter as somehow infecting or poisoning the relation between National Australia Bank and Capital as vendor and purchaser, not only is it a discrete part of a transaction or severable from the instant transaction, an observation, with respect, that Justice Lindgren accepted, in our submission correctly, but ‑ ‑ ‑
KIRBY J: All of that needs consideration, but there are three important factors. One, that at a certain point you were on notice, two, that steps were then taken and, three, that those steps lifted you up vis-à-vis other creditors.
MR COLES: No, with respect, I must dissent from that observation, your Honour. Companies like Capital Finance lend money or advance money or supply funds to lessees, for example, because their business return is by the interest charges that lending money over time or supplying money over time to people who pay it back over time pay back to them. There is no obvious advantage to the Capital companies in closing out the leases, except to get rid of Mr Scott’s company which no doubt for a variety of reasons became an entity with which it no longer wished to have business dealings.
KIRBY J: I wonder what those reasons were.
MR COLES: That does not matter. One is not trawling through the quagmire of mixed motives.
KIRBY J: One theory is that it was going west. One theory it was going under.
CRENNAN J: One point you are making, Mr Coles, is that it is necessary to look at – this is in response to Justice Kirby – the present day values of the rental streams as a start in relation to what LSE is getting.
MR COLES: Exactly. The analysis just was not done and it is not for my learned friend to assert to your Honours baldly that there was some discernable extravagant disbenefit that justified the conclusion that the lease agreements were in providence and therefore that somehow poisoned the well so far as the sale and purchase transaction was concerned.
KIRBY J: Just coincidental?
MR COLES: There is an amount of unacceptable imprecision in the way the respondent floats that idea and, of course, it does not answer the need to view the affairs of the debtor as a whole, as we are constantly told in the insolvency context, we are supposed to do. It really isolates a handful of transaction and subjects them to a fairly imprecise, or a fairly inefficient or insufficient analysis, but to return to your Honour’s observation, the eventual burden of proof, in our respectful submission, must have been on the liquidator to show the final thing that he needed to demonstrate at the end of the day.
The evidential issues may have see‑sawed, but the ultimate legal burden was to demonstrate that by reference to a paragraph of section 588FF(1), there was some amount of money which was pleaded and proved as constituting the entitlement of the company to recoupment or recovery, or the creditors to compensation in accordance with the label and purpose of Part 5.7B of the Corporations Act itself. By pointing to suppositious disparities between commercial benefit and the like, in individual leasing transactions, even if what Justice Gordon had said in paragraphs 134 and 135 and elsewhere were defensible, which we respectfully submit it is not, but even if it were that would not establish an amount of money which could found an order under section 588FF.
Your Honours will not overlook that the liquidator took a very overarching view of his entitlements in this case. He said ‑ no doubt, influenced by the sort of reasoning perhaps, that my learned friend disavows, ultimately, but which attracted itself to Justice Tamberlin ‑ he saw these payments as payments made not by the National Australia Bank to purchase equipment but he said there was no purchase of equipment. He said this was just an arrangement whereby, in effect, the LSE company incurred a liability to the bank and the other side of that liability was utilised ‑ as my friend from time to time puts it ‑ to pay money to the Capital companies to reduce their liability as debtor under the deeds.
I went through that yesterday, your Honour. Our short answer to the preference case, I suppose, your Honour - my learned friend’s disavowal of the primary judge’s reasoning process enables me to be shorter on this point.
GUMMOW J: He fixes on the eight transactions.
MR COLES: Yes. We point out, of course, that primarily the argument in the court below depended upon the six point identification of the – it was after all the liquidator who persuaded the trial judge to adopt the six point categorisation of the transaction. It is probably, in our perception, not useful to involve your Honours in further discussion of the pleadings, but in our respectful submission, before one can come to any conclusion about a preference, the first thing, of course, one needs to find is a payment. This is insisted upon by the legislation, a payment by the company. That is the first thing then there are some other things that follow.
Here, recognition that the National Australia Bank was using its own money to buy Capital’s equipment negates at the threshold, in our respectful submission, any available conclusion that there was a payment by LSE. Otherwise, the transaction must partake of this quality, that the bank, in effect, as LSE’s agent, was buying for LSE the equipment from Capital and LSE itself was engaging in the somewhat anomalous transaction of leasing via the National Australia Bank equipment which somehow was its. No one suggests that is the transaction, but it is the necessary consequence of an outcome that says that LSE was paying for or made a payment to the Capital companies for the purposes of the acquisition of the equipment.
The next point, of course, is even more obvious. We have emphasised in our written outline of submissions that before there can be a preference, there must not only be a debtor/creditor relationship. There must not only be a payment by – a payment, I emphasise – by the debtor to the creditor, but the important qualifying words in paragraph (1)(b) are that that payment must be in respect of an unsecured debt, et cetera.
Now, of course, here one is able very readily to identify that the payment – and on this hypothesis the same argument would run even if it was a payment by LSE itself – but it was not a payment by LSE in respect of an unsecured debt. It was a payment in respect of the purchase price of the equipment. Now, if LSE made that payment contrary to the true conclusion, the same result would follow even though it might still be said that there was a debtor/creditor relationship arising under the deed.
Finally, of course, for the reasons we put yesterday, the debtor/creditor relationship, if it arose at all, which we deny must have been an indebtedness if it arose under the deed, had to factor into account the fact that the deed had reciprocal – or had purposes which would have had to have been performed, that is to say, there would have had to have been a – Capital could not have retained both its equipment and the progressive payments under 4.1 of the deed. They would pass to Capital by necessary implication or to such financier as Capital would nominate for that purpose.
So, whatever else may be the case, the amount of indebtedness which the liquidator would be entitled to recover even if he could satisfy all the hurdles we have just described which precluded his path through the requirements of section 588FA(1), he would still have to show what the extent of the preference was and it could have been no more than some unquantified difference between the amounts payable under the deed on the one hand and the benefit to Capital of retaining the equipment which was not paid out or the exposure in relation to which was not discharged by those payments, Capital not being entitled to keep, as it were, both the money and the box.
GUMMOW J: Just before you part from the case, Mr Coles, Mr Harper drew attention at paragraph 48 of Justice Lindgren’s reasons.
MR COLES: I will just turn that up, if your Honour pleases.
GUMMOW J: Yes. Paragraph 48.
MR COLES: Yes, thank you, your Honour.
GUMMOW J: I think particularly the second sentence.
MR COLES: Yes, indeed:
The evidence shows that Capital regarded cl 4.1 as pro tanto complied with if, as happened, a financier paid out the –
Yes, I think that is right, our point being, that is not the payment of a debt. It is not within the proper understanding – and maybe this simply resolves itself as these matters do – to the proper construction of the legislative language where one is looking at 588FA(1)(b) which draws attention to the necessity that the transaction in order to qualify as an unfair preference must be one which results in the creditor receiving from the debtor company, importantly, in respect of an unsecured debt that the company owes to the creditor.
Now, we have said that the amounts under clause 4.1 of the deed were not or were not wholly within the full extent of their amounts an unsecured debt with which LSE owed to Capital. Assuming for the moment they were, the payments that the NAB made and even, for that matter, the payments that Capital itself might have made, were payments, if they produced the outcome that Capital transferred the equipment to the payer, then they were not payments in respect of an unsecured debt. They were payments properly to be characterised as payments in respect of the acquisition cost of equipment.
The distinction is authorised because cases have from time to time drawn attention to what is the proper conclusion to reach when you find that an insolvent debtor makes a payment of money to a person who is a creditor. Three instances come to mind. One I mentioned yesterday is the Airservices situation where the payments were held not to be wholly
preferential because the payments were made not simply to discharge a debt, but to keep the business relation intact.
The next case is the V.R. Dye Case to which you have been taken where the payments, although made to a creditor, were made on, in effect a COD or goods about to be supplied basis and went in application or paid for the purpose mutually understood and agreed, unlike the present case, mutually agreed to be for the supply of services in the future even though there was an antecedent indebtedness and therefore a relation of a payment – literally there was, in terms of subparagraph (a), the company and the creditor were parties to the transaction and the creditor received money from the insolvent debtor, but that did not produce a preference because the payment was made for services yet to be supplied, not services past supplied.
The third example I have given you is Expo International v Torma (1985) 3 NSWLR 225 and your Honour read the reference yesterday. That is referred to in our submissions. Again, the parties were debtor and creditor and again the insolvent debtor made a payment to the creditor but they happened to have several accounts on foot between them. I am simplifying the facts and, in effect, the payment made did not go against the mere reduction of – without more of an indebtedness. Likewise here, the payment, even made by LSE, NAB being somehow cast merely for the purposes as its agent, the payment did not go simply in unqualified discharge of a pecuniary liability or debt of LSE because, as we keep emphasising necessarily, it went really to secure to NAB the title to the equipment which it was going to lease.
So, in our respectful submission, because there is no payment and because even if there were it is not a payment in respect of an unsecured debt, et cetera. One just simply does not engage the operation of section 588FA and if you did, you would have the problem of identifying the amount to found the basis of a proper order under section 588FF. Those are our submissions, may it please the Court.
GUMMOW J: Thank you, Mr Coles. We will consider our decision in this matter and we will take a short adjournment.
AT 11.48 AM THE MATTER WAS ADJOURNED
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