Capt'n Snooze Management Pty Ltd v McLellan
[2002] VSC 432
•18 October 2002
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
No. 5310 of 2002
| IN THE MATTER of DREAM HAVEN BEDDING & FURNITURE LTD (In Liquidation) | |
| CAPT'N SNOOZE MANAGEMENT PTY LTD | Plaintiff |
| v | |
| ANDREW McLELLAN AND IAN CARSON | Defendants |
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JUDGE: | Hansen J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 4 & 23 September, 8 October 2002 | |
DATE OF JUDGMENT: | 18 October 2002 | |
CASE MAY BE CITED AS: | Capt'n Snooze Management Pty Ltd v McLellan | |
MEDIUM NEUTRAL CITATION: | [2002] VSC 432 | |
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CORPORATIONS – Winding up – Preferential debts – Redundancy payments and wages – Whether funds paid to company for purpose of making redundancy and wage payments – Deposited to company's overdraft account – Rule in Clayton's case – Redundancy and wages paid from overdraft account - Whether payment made out of money advanced for purpose of paying redundancy and wages – Corporations Act 2001, s 560 – Construction of expression "out of".
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr M L Sifris | Gadens Lawyers |
| For the Defendant | Mr M J Galvin | Arnold Bloch Leibler |
HIS HONOUR:
This is an appeal against the defendant liquidators' rejection of a creditor's claim to priority in payment in the winding up of Dream Haven Bedding & Furniture Ltd ("Dream Haven"). The claim is made by Capt'n Snooze Management Pty Ltd ("CSM") which in June and July 2001 advanced three sums totalling $224,492.33 to Dream Haven. CSM made the advances after entering into a written agreement with Dream Haven under which CSM agreed to lend Dream Haven up to $500,000 "for the sole Purpose of [Dream Haven] making payment of Employee Entitlements pursuant to" s 560 of the Corporations Act.[1] The expression Employee Entitlements was defined to mean "wages and superannuation contributions and … leave of absence or termination of employment entitlements".[2] Under the agreement Dream Haven agreed that any advances "will be used solely for the Purpose",[3] the "Purpose" being the payment of employee entitlements referred to above. CSM deposited the three advances in Dream Haven's overdraft cheque account with the Commonwealth Bank of Australia as follows: $74,492.33 on 28 June 2001, $100,000 on 29 June 2001, and $50,000 on 5 July 2001. Dream Haven did not repay the advances, and went into liquidation. CSM asserted in its claim to the liquidators, and contends on this appeal, that the advances fall within s 560 and, in particular, that the advance of $74,492.33 was for redundancy payments and is within s 556(1)(g) or (h), and that the second and third payments were for wages and superannuation and are within s 556(1)(e).
[1]Clause 1.2.
[2]Recital A.
[3]Clause 2.1(a).
The liquidators rejected the claim to priority but admitted the whole amount as an unsecured or non-priority debt of Dream Haven. The claim for priority was disallowed on the ground that there was an insufficient nexus or traceable flow of funds from the making of the advances by CSM to the application of funds from the overdraft account to pay various employee entitlements. As appears below, the critical factor relied on by the liquidators is that, in addition to the receipts from CSM and payments out to employees, during the relevant period receipts from debtors were deposited into the account and payments to trade creditors were made from the account, and the account (which was an ordinary overdraft trading account) had a fluctuating debit balance.
At the hearing of the appeal the originating process was amended by the inclusion of an alternative basis on which CSM claimed priority. The alternative basis is that the advances were made for a specified purpose and, Dream Haven having failed to ensure that they were used solely for such purpose, the amounts now held by the liquidators are held on trust for CSM to the extent that the protection of s 560 is not available.
I was informed by counsel that, at present, the liquidators hold about $220,000, $75,000 of which is payable in respect of superannuation entitlements. I was also informed that under a Commonwealth Government scheme amounts in excess of $500,000 have been advanced to pay employee annual leave entitlements and that such payment gives rise to an entitlement to the scheme, under s 560, to prove in priority under, it would seem, s 556(1)(g) or (h). As that claim ranks below wages and superannuation contributions, if CSM succeeded on the $150,000 part of its claim, the scheme would receive nothing in the winding up. Whatever sum of money may ultimately be available for distribution, and whatever be the amount and ranking of other claims, the present appeal falls to be decided on its merits, without regard to the effect of the outcome on other creditors.
I now refer to the circumstances in which CSM and Dream Haven entered into the loan agreement.
Dream Haven was a publicly listed company which manufactured and distributed furniture. The business encountered financial difficulties. In late 2000 Dream Haven suggested to CSM, which conducted business as the franchisor of a national chain of Capt'n Snooze retail bedroom furniture stores, that the companies merge their businesses. The proposal was for a reverse take-over of Dream Haven, and would require Dream Haven to undertake a public capital raising. CSM conducted a due diligence investigation to assess the viability of Dream Haven's business. As part of this process, and to aid a smooth handover if the merger proceeded, an employee of CSM, Phillip Andrew Smith, began working at Dream Haven's office. He worked closely with the managing director, Clifford Rodney Sneider, and other employees of Dream Haven. As a result Smith had a day-to-day knowledge of the operations of Dream Haven, including its cash flow situation, debtors, creditors and work force. He monitored and regularly discussed the cash flow situation with Sneider and the financial controller of Dream Haven, Peter Caton. He also maintained regular contact on these and other matters with CSM in particular with a director, Craig John Willmott.
Dream Haven continued to conduct business. Thus it had ongoing trade debtors and creditors. It had about 100 employees of whom seven were engaged in sales. The employment of sales staff was not essential to the business and was not going to be required if the merger proceeded, due to the nature of CSM's business.
Smith said in evidence that it became apparent to him in June 2001 that Dream Haven's cash flow would not be adequate to meet its obligations to employees and creditors. He discussed this with Sneider who agreed that either Dream Haven's overdraft facility must be extended, or a cash injection provided, to allow Dream Haven to continue trading. There is some evidence of Sneider to the effect that no such assistance was required and that Dream Haven could have managed within its overdraft, with the receipts from debtors. I prefer Smith's evidence. It accords with the probabilities, including the fact of the loan agreement. In my view, Sneider's evidence was affected by an element of hindsight, and self-justification. It is not necessary to detail other differences in their evidence. I also accept the evidence of Willmott that Sneider and Smith told him that without a cash injection or extended loan facilities Dream Haven would not be able to pay its employees or trade creditors.
Dream Haven decided to terminate the employment of the sales staff at the end of June. That would produce a requirement to pay redundancy entitlements to those employees.
On 26 June 2001 Smith told Willmott that Dream Haven required an immediate cash injection or it would not be able to meet the cost of the redundancies that were about to be made and could not meet its wages bill in the immediate future. It was apparent to Willmott, from this and earlier advice, that Dream Haven was in severe financial difficulty. In that respect, I note Willmott's evidence that in 2001 Dream Haven's bank account was very near the overdraft limit. That evidence was not disputed. As I understand it, the actual limit was not disclosed in the evidence. Willmott further stated that the directors of CSM had discussed the possibility of providing funding to Dream Haven. CSM's interest in doing so was to ensure that Dream Haven continued trading while the merger proposal remained under consideration.
On 27 June 2001, Willmott attended a meeting at the Commonwealth Bank with Sneider. Sneider requested that the bank provide short term funding for working capital purposes to ensure Dream Haven could continue to trade pending completion of the merger with CSM. He referred to the redundancies and said that Dream Haven required funds to meet their cost, and ongoing trading liabilities. The bank refused to advance any further funding and required Dream Haven to operate within its overdraft limit. It was then clear that any financial assistance must come from CSM. I note that the evidence did not disclose the amount of the overdraft limit.
Willmott apprehended that if wages were not paid, Dream Haven was likely to cease trading immediately. That was not in CSM's interest while the merger proposal remained alive. At that point the proposal was contingent on Dream Haven’s ability to raise funds from the public. That prospect was uncertain. In view of Dream Haven's precarious financial state, the board of CSM considered it unwise to provide cash flow assistance without security. As Dream Haven could not provide security, the board indicated that it would not lend any money. Willmott then sought and obtained legal advice. He was advised that if CSM advanced moneys to Dream Haven only for the purpose of paying employee entitlements, CSM would have a priority equal to the advance by virtue of s 560 in the event that Dream Haven went into liquidation. Willmott discussed the proposal with Smith and Sneider, who agreed that, should CSM advance moneys to pay employees, the cash flow from debtors and banking facilities would be sufficient to meet payments to trade creditors. On this basis the board of CSM agreed to provide funding to Dream Haven. Willmott so advised Smith. Sneider agreed to accept funds on that basis.
On 27 June 2001, Smith sent a letter by facsimile to Willmott in which he advised Willmott of the redundancy and payroll figures. The letter, which was printed on Dream Haven’s letterhead, stated:
"Re: Cash Flow Assistance
Craig, as discussed by telephone yesterday, I confirm that Dreamhaven (sic) will require some short term cash flow assistance.
I have spoken to Clifford and he is in agreement.
In particular we require the following.
1.Approximately $75,000 for redundancy payments for the sales force.
2. Approximately $100,000 to cover the payroll for 3rd July.
3. A contribution of $50,000 towards the payroll for 10th July.
Please advise me of the timing of the inflows and I will provide the exact figure required for the redundancies being announced this week."
I find that, as indicated by the letter, Smith and Sneider had discussed the matters referred to in the letter.
It was in those circumstances that CSM, as lender, and Dream Haven, as borrower, executed an agreement whereby CSM agreed to lend Dream Haven money for the purpose of paying employee entitlements. The document bears the name of a firm of solicitors and "Draft: 28/06/2001". The agreement was prepared by CSM's solicitors on Willmott's instructions, who wanted to ensure that Dream Haven understood the arrangements. The agreement provided as follows:
"Recitals
A.Borrower is currently indebted and will become further indebted to certain of its employees (Employees) on account of wages and superannuation contributions and in respect of leave of absence or termination of employment entitlements (Employee Entitlements).
B.In a winding up of Borrower, all of the Employee Entitlements would be debts and claims of Borrower afforded priority by section 556(1) of the Corporations Law.
C.Lender has agreed to advance monies (Loan) for the purpose of Borrower paying the Employee Entitlements to the Employees.
1Loan
1.1Loan
Lender agrees to advance to Borrower the Loan on the terms of this Agreement.
1.2Purpose
The Loan is advanced to Borrower for the sole purpose of Borrower making payment of the Employee Entitlements pursuant to section 560 of the Corporations Law (Purpose).
1.3Drawdown
To drawdown monies under the Loan, Borrower will make a request to Lender (Requested Drawdown). Lender may, in its sole discretion, approve or refuse the Requested Drawdown. If the Requested Drawdown is approved, Lender will advance the monies to Borrower.
1.4Loan Maximum
The maximum amount that may be outstanding under the Loan is $500,000; however, it is agreed that Lender is not obliged to advance any monies under this Agreement.
1.5Interest
Interest on the monies outstanding under the Loan will accrue at 10% p.a., payable on demand.
1.6Repayment
The Loan is immediately due and payable on demand by Lender, including without limitation, at the sole discretion of Lender should any event occur which may or will impair the acquisition of Lender by Borrower.
2.Borrower Acknowledgments
2.1Borrower Acknowledgments
Borrower acknowledges and agrees that:
a) the Loan will be used solely for the Purpose; and
b)on payment of the Employee Entitlements, Lender will be subrogated to rights of the Employees in relation to the Employee Entitlements, including but not limited, to their rights to priority payment under section 556(1) of the Corporations Law.
3. General
3.1 Recitals
The parties agree that the recitals are accurate and form part of this document."
On the same day, 28 June 2001, CSM deposited $74,492.33 into Dream Haven's overdraft account. Smith had provided this as the exact figure payable for redundancies. He had given CSM a schedule listing the seven employees and the amounts to which they were entitled on termination of their employment, which totalled $74,492.33, and which CSM thus paid pursuant to the loan agreement. The schedule included the details of Dream Haven's bank account, to facilitate direct deposit. The payment undoubtedly represents the amount of approximately $75,000 referred to in Smith's letter dated 27 June 2001 and in para 4 of Sneider's affidavit.
The letter dated 27 June 2001 further specified a requirement for payroll of $100,000 on 3 July 2001, and $50,000 on 10 July 2001. Accordingly, on 29 June 2001 CSM paid $100,000, and on 5 July 2001 paid $50,000, to Dream Haven's bank account for the purpose of meeting the wages bill.
Willmott said, and I find as a fact, that the three payments were made pursuant to the loan agreement for the sole purpose of meeting redundancy and wages payments to employees. Those payments having been made to the overdraft account, I find that Dream Haven drew cheques on the account in payment of the redundancy and wage entitlements in respect of which CSM's payments were made. All such entitlements were met. In addition, during the relevant period (which may be taken as 28 June to 13 July 2001) in which these deposits and payments were made, receipts from debtors and payments to creditors were made to and from the account. In other words, the account was not used solely for the purpose of receiving funds from CSM, and disbursing such funds pursuant to, and solely for the purpose of, the loan agreement.
The next fact to mention concerns the procedure that was followed in the relevant period when Dream Haven considered making payments to trade creditors from the account. Smith agreed, and I find as a fact, that subsequent to the CSM deposits Sneider and Caton would consider the payment of trade creditors from the bank account (as they had done before the CSM deposits). After they had determined the payments to be made to trade creditors, Sneider obtained Smith's approval before cheques were sent to trade creditors. When Smith gave his approval he considered that with the loan agreement in place to cover wages, and the combination of the overdraft and expected debtor and stock clearance receipts, there would be sufficient funds to pay trade creditors (as agreed) until the merger transaction was completed in August.
In mid August CSM decided not to proceed with the merger proposal. Some alternatives were discussed, but none came to fruition. As a result, on 24 August 2001 the defendants were appointed as administrators of Dream Haven, and they became the company’s liquidators on 7 November 2001 when the creditors resolved that Dream Haven be wound up.
I now summarise the movement of funds in and out of Dream Haven's account in the relevant period:
(a)On 28 June 2001 the account had an opening debit balance of $453,754.51. CSM made the deposit of $74,492.33 on 28 June 2001. On the same day:
·$35,750.20 was deposited from debtors.
·$422.92 was paid for wages.
·$527.13 was paid to a creditor.
(b)On 29 June 2001 the opening debit balance was $344,462.03. CSM deposited the sum of $100,000 into the account. There were also:
·deposits of $117,583.96 from debtors.
·payments to creditors of $98,024.14.
(c)On 2 July 2001 there were:
·deposits from debtors of $65,211.31.
·payments to employees of $48,953.84. This sum comprised $34,393.84 for termination payments to three of the seven employees referred to above as entitled to redundancy payments, $6,989.08 for wages paid to another two of the seven employees made redundant, and $7,570.92 for wages paid to two employees.
·payments to creditors (including account fees, interest and government charges) of $210,174.05.
(d)On 3 July 2001 there were:
·deposits from debtors of $34,328.86.
·payments to creditors of $2,546.63.
(e)On 4 July 2001:
· $9,003.42 was deposited from debtors.
· $77,465.26 was paid for wages. This is the evidence in the affidavit sworn by Andrew McLellan, one of the liquidators. In his address in reply on 4 September 2002, and again on 8 October 2002, counsel for the liquidators said that this figure seemed wrong, as an amount of $25,170.70 included in it appeared to be a payment to a trade creditor. If that was so, the amount paid for wages was $52,294.56. However, on 8 October counsel for CSM said the payment was for wages within the Dream Haven entity and the matter was left on the basis that if counsel for the liquidator was to seek to press his contention an affidavit should be filed to establish it. A day or so after the hearing on 8 October counsel for Dream Haven informed my Associate that no such affidavit would be filed. Accordingly I act on the basis of the sworn evidence.
· $1,303.50 was paid to a creditor.
(f)On 5 July 2001 CSM deposited $50,000 into the account. There were also:
· deposits from debtors of $30,441.41.
· a payment to a creditor of $1,000.00.
(g)On 6 July 2001:
· $35,850.57 was deposited from debtors.
· employee wages of $2,293.50 were paid.
· $50,032.63 was paid to creditors.
(i)On 9 July 2001 there were:
· deposits from debtors of $83,763.97.
· payments to creditors of $2,081.22.
(j)On 10 July 2001:
· $19,157.94 was deposited from debtors.
· $333.34 was paid to a creditor.
· employee wages of $2,739.02 were paid.
(k)On 11 July 2001:
· $63,877.30 was deposited from debtors.
· $22,534.99 was paid to creditors.
· employee wages of $52,250.70 were paid.
(l)Thereafter, on 12 and 13 July there were receipts from debtors and payments to creditors. The closing balance on 12 July was $259,159.53. On 31 July redundancy payments were made to the remaining four employees on the list referred to above.
The total of the redundancy payments and the related tax is $73,482.10. That is $1,010.23 less than the amount of $74,492.33 provided by CSM. For one reason or another the final calculations produced that small difference. It is accepted by the liquidators that the amount advanced by CSM was the exact amount which had been calculated by Dream Haven as the amount due for the redundancy payments and that, if all things were equal, the amount expended represented the amount provided by CSM.
There is not a similar parity between the advance of $100,000 and the amounts paid to employees as wages on 2 and 4 July, and the advance of $50,000 and the amounts paid to employees as wages on 6, 10 and 11 July. In relation to the amount of $100,000, between 2 and 4 July $92,025.26 was paid as wages. In relation to the amount of $50,000, between 6 and 11 July $57,283.22 was paid as wages. Hence, on that analysis there is not an exact correlation between the amounts paid by CSM for wages and the amount expended on wages. On the other hand, as counsel for CSM pointed out, the amounts paid for wages total $149,308.48 which is only $691.52 less than the full $150,000. That calculation demonstrates how carefully and accurately Dream Haven calculated the amount it required for wages. It is not merely consistent with the accuracy of the calculation of the redundancy payments, in relative percentage terms it is less of a difference than the $1,010.23 represented to the amount of $74,492.33. The wages calculation was less than one half of one per cent, whereas the redundancy payments calculation was less by a bit more than one per cent. It is convenient to note that in the same period, as indicated above, receipts from debtors were $494,788.94 and payments to trade creditors were $388,577.63.
Section 560 provides that:
"Where a payment has been made by a company on account of wages or of superannuation contributions (within the meaning of section 556), or in respect of leave of absence, or termination of employment, under an industrial instrument, being a payment made out of money advanced by a person for the purpose of making the payment, the person by whom the money was advanced has, in the winding up of the company, the same right of priority of payment in respect of the money so advanced and paid … as the person who received the payment would have had if the payment had not been made."
Two elements must be satisfied for the section to operate. First, the money must have been advanced for the "purpose" of making a payment of the specified kind. Secondly, the payment must have been made "out of" the money advanced.
I deal first with the element of purpose.
Counsel for the liquidators conceded that the payment of $74,492.33 was made for the purpose of Dream Haven making redundancy payments. That was because of the demonstrable link between the amount calculated and sought by Dream Haven for redundancy payments, the amount provided by CSM for that purpose, and the amount actually paid by Dream Haven. Counsel submitted, however, that the subsequent payments of $100,000 and $150,000 were not made for a s 560 purpose but, rather, to assist Dream Haven's general cash flow, and, in particular, to see trade creditors paid and to safeguard the company's ability to continue to trade. After CSM made the payments, CSM, through Smith, approved payments to trade creditors "from those moneys". In those circumstances, it could not be said that the sums of $100,000 and $50,000 were paid for the purpose of paying employee entitlements.
In my view the concession concerning the first payment for redundancies is correct, but the balance of the submission concerning the second and third payments is incorrect. It is incorrect because it is contrary to the fact. The relevant purpose is that of CSM when it made the payments. The fact is that the payments were made for the purpose of Dream Haven paying employee wages. The amounts were requested for that purpose prior to, and were paid subsequent to, entry into, and pursuant to, the loan agreement. The purpose was to enable employee entitlements to be paid and to thus enable Dream Haven, with the benefit of the overdraft facility and debtor receipts, to continue trading pending a decision on the merger. And, if what happened subsequently is relevant to CSM's purpose in making the payments, there is seen to have been a very close correlation between the second and third amounts sought by and paid to Dream Haven on the one hand, and the amounts actually paid by Dream Haven for wages on the other hand. That was because, as I find, Dream Haven had, for the purpose of paying wages, carefully calculated the relevant amounts. That is, Dream Haven calculated the amounts expected to be required for those purposes and advised CSM of the anticipated amount. The payments were made for that purpose.
In seeking to support his submissions counsel for the liquidators said that the advances were made after discussions between Smith and Sneider as to Dream Haven's funding requirements to pay redundancies and trade creditors, but not wages. Counsel said that Dream Haven "did not require assistance to pay wages". These statements had their foundation in the evidence of Sneider. Not only is the position contended for by counsel contrary to the facts as I have found them, but, in addition, to be absolutely clear, to the extent that Sneider gave such evidence, I reject it. I also reject Sneider's evidence that he did not know that it mattered to CSM whether CSM's money was used to pay wages or creditors. I found Sneider's evidence somewhat puzzling. CSM had provided funds to assist Dream Haven on written terms of a loan agreement that were clear, yet Sneider seemed to be seeking to subvert CSM's reliance on the agreement. It seemed somewhat disingenuous to suggest that Dream Haven did not require assistance to pay wages in light of the loan agreement freely and voluntarily entered into by Dream Haven following the bank's refusal to provide increased funding.
In further support of his submission concerning the $150,000, counsel for the liquidators submitted that Smith's approval of the use of funds in the bank account to pay trade creditors meant that the $150,000 could not be said to have been paid for the purpose of paying employee entitlements. I reject the submission. It is contrary to the fact as to CSM's purposes, and is contrary to the basis on which Smith acted.
For these reasons I conclude that the CSM funds were advanced for the purpose of paying redundancies and wages.
The second element is that the payments made by Dream Haven for redundancies and wages must have been made "out of" the advances.
Counsel for the liquidators submitted that for the following reasons it could not be said that the payments were made "out of" the advances. The principal reason was that the account being overdrawn, applying the rule in Devaynes v Noble; Clayton's case,[4] the deposits must be taken to have been applied in reduction of the debit balance of the account. There was no evidence of an agreement, which must have involved the bank, waiving the application of the rule. As the account was always in debit, the redundancy and wage payments were made with money lent by the bank to Dream Haven under the terms of the overdraft account.[5] The position might have been different if the account had operated in credit or had been established as a separate account to deal only with CSM's advances and their disbursement. But that was not the case, and in the present circumstances it was not possible to link or trace the payments in and payments out for the relevant purposes. In this respect, counsel for the liquidators submitted that for s 560 to apply it was essential that CSM demonstrate that specific money went to specific employees in payment of wages.
[4](1816) 1 Mer 572.
[5]See Paget's Law of Banking, Hopgood, 11th ed, 167.
Counsel for CSM commenced his submission on the second element of s 560 by stating that neither he nor counsel for the liquidators had discovered a reported instance of a case such as the present. In re Primrose (Builders) Ltd,[6] In re Rampgill Mill Ltd[7] and ReJames Rutherford & Sons Ltd[8] concerned transactions between a banker and a customer, in which the bank claimed to be a preferred creditor. They did not involve a tripartite situation as in the present case, in which a third party depositor to the bank account claimed preference in respect of payments made from that account, by the holder of the account, to other parties. Furthermore, in the present case the bank was not a party to the arrangement between CSM and Dream Haven. In the absence of a decision in a like case, counsel submitted that the present circumstances were novel.
[6][1950] Ch 561.
[7][1967] Ch 1138.
[8][1964] 3 All ER 137.
Counsel stated that, on the facts, there was not a direct or exact correlation between the deposits and the payments. That was clear from the bank statements. According to counsel, the account operated in such a way that money came in from a variety of sources and was used to pay a variety of things, including creditors and wages. It could no more be said that wages were not paid out of the $150,000 than it could be said that they were, and vice versa, and likewise as to creditors. Hence, he conceded, money deposited by CSM might have gone to pay creditors, but equally, it must have gone to pay wages. He submitted that the inability to establish a direct or exact correlation between the deposits and the payments for wages did not matter. On its proper construction s 560 did not require such a correlation. It was sufficient to be able to identify deposits made for the purpose of paying redundancies and wages. From the pool of funds thus produced, payments of the relevant kind were made.
Counsel for CSM conceded that s 560 was capable of bearing the interpretation and operation contended for by the liquidators. But that was "a very strict interpretation". There was a contrary approach to interpretation, which he submitted was open and should be adopted. That was to give s 560 a liberal construction, having regard to the important object of ensuring that employees did not lose their entitlements. Consistently with the attainment of that object, s 560 should be given a beneficial interpretation and application, having regard to the position of a party who puts money into a financially troubled business to aid the employees of the business. The legislation should be applied in a way that encouraged parties to act as CSM did.
Counsel for CSM went so far as to say that s 560 would be a meaningless provision if preference under s 560 was to be denied to a creditor such as CSM as a result of applying the rule in Clayton's case and the principle that it was the bank's money that was advanced in payment. He submitted that there was no reason for the rule in Clayton's case to apply in the present circumstances. It was applicable in the three authorities referred to because in each of those cases the transaction was with the bank. But the present case involved a third party and thus raised different considerations.
There was a sense of frustration in the submission of counsel for CSM which derived from the fact that CSM had advanced moneys for a s 560 purpose, and on terms which were considered to provide the protection afforded to a preferential creditor in a winding up. However, the medium used was an overdraft cheque account of a third party, Dream Haven, in relation to which no terms of operation were agreed with the bank and Dream Haven to ensure, to the extent possible, that the intended preference would be available in a winding up.
There is nothing in the language of s 560 to indicate an intention to vary or in any way render inapplicable for the purposes of its application principles of law otherwise applicable to the relationship between banker and customer. The earlier authorities referred to recognise the application of the rule in Clayton's case. In addition, in my view, the principle that payments from an overdraft account constitute a loan by a bank to its customer also remains applicable. If it were otherwise, what would the limit be to the effect of s 560 as it affects legal relationships? It is clear in my view that neither in its terms nor by necessary implication does s 560 bear the construction and application contended for by CSM in the sense of ousting the operation of the rule in Clayton's case and the principles of law applicable to the banker and customer relationship.
Yet, was the application of that rule and those principles of law determinative of the case? Was there, notwithstanding the application of that rule and those principles, room for s 560 to work? That seemed to turn on the interpretation of the expression "out of" in s 560. Which of the constructions, wide or narrow, was correct? To an extent, the submissions were assertive in nature, and perhaps that can happen in a statutory interpretation argument. Sometimes, in such cases, the argument is not capable of much elaboration. Yet, allowing for that, neither counsel expressly identified and grappled with the meaning of "out of" in their submissions. Having considered the matter, I took the course of seeking further submissions from counsel as to the meaning and construction of the expression "out of". I received some helpful submissions, and was referred to some authorities in which the expression "out of" had been considered.
The Corporations Act does not define the expression. The Oxford Dictionary gives an extensive range of meanings. They include the following:
"1. From within (a containing space or thing).
c. From among (a number), from a group of. Arith. From (in subtraction).
5. From (a source or origin): either implying literal motion, or fig. derivation.
b. From (something) as a cause or motive: As the result or effect of; because or by reason of, on account of."
Counsel for CSM submitted that the expression "out of" should be construed in accordance with meaning 5. The expression "out of" included the sense of a payment made as the result of, or because of, or by reason of, the advance in the sense of the advance being the source or origin or thing which enabled the payment. That was consistent with meaning 15 of the word "out" in the Macquarie Dictionary, namely, "from a source, ground or cause, material, etc". Counsel then referred to several cases, none of which concerned s 560 or a provision in like terms. Beresford v Browning[9] concerned the construction of the expression "out of the business" in partnership articles. I was not referred to the report, merely to a note of the case in Stroud's Judicial Dictionary. Then I was referred to three other cases which arose in different areas from the present statutory context. They were St Helen's Colliery Company Ltd v Hewitson,[10] a workmen's compensation case concerned with whether injury arose "out of or in the course of employment"; Law v Repatriation Commission[11] where the question was whether death had "arisen out of or is attributable to his war service"; and Bate v Priestley,[12] where the question was whether the proceedings arose "out of" the marriage relationship.
[9]1 Ch D 30.
[10][1924] AC 59.
[11](1980) 29 ALR 64 at 71-72.
[12](1989) 97 FLR 310.
In Law Toohey J decided[13] that the requirement that the death arise out of or be attributable to war service introduced a causal relationship between death and war service but it required no more than that the death have "some causal connection" with the war service. That connection was not as direct as the expression "caused by" would require.
[13]At 71-72.
In St Helen's Colliery Lord Wrenbury said:
"The words 'out of' connote origin. In matters physical a plant arises 'out of' a seed – a vessel may be wrecked 'out of' the violence of the waves. In matters metaphysical a motor-car accident may arise 'out of' the carelessness or 'out of' the inefficiency of the driver. The words indicate an origin, a source or a cause."[14]
[14]At 91.
Counsel for CSM relied on these authorities as reflecting a beneficial and wide construction of the expression "out of". Of course, as he acknowledged, they arose in different contexts. Also, it must be said, Bate is of little if any assistance in supporting the argument. The basic point relied on is that made by Toohey J in Law, that "out of" required a causal connection that was less direct than the expression "caused by" would require.
Counsel for the liquidators had not found any authority dealing with the meaning of "out of" in the context of a provision like s 560. He turned to the Oxford Dictionary meanings of "out of" and submitted that meaning 1c and not meaning 5b was the appropriate meaning in the present context. In the examples under meaning 5b ("out of my neglect", "out of kindness", "out of compliment to me", "out of curiosity") the word following the preposition "out of" contains the purpose, cause or motive. In s 560 by contrast, the preposition is followed by "money advanced" which is not a statement of purpose, cause or motive. In fact, counsel submitted, the statement "out of money advanced" is more consistent with meaning 1c. The sense is of taking something from that thing, being the money advanced for the statutory purpose.
Further, the statutory context is "a payment made out of money advanced … for the purpose of making the payment". The statement of purpose relates to the reason why money was advanced. The second element counsel addressed is the proposition that if money has been advanced for the statutory purpose, the relevant payment has been made "out of" it. That is a question of fact, unrelated to the purpose. Regarding the cases referred to by counsel for CSM, and in particular the requirement of "arising out of", counsel submitted that they concerned different concepts and involved different requirements. Whether an event arose out of something was a vastly different notion, which required some causal connection, from s 560, which required that "a payment [be] made out of money advanced". The ordinary meaning of those words was that the payment came from the money advanced, akin to the notion of putting the hand into the bag containing the money and taking out the amount of the payment.
The approach to construction of s 560 contended for by CSM is understandable. It would promote the attainment of the object of employees of companies in financial difficulty of being paid their entitlement. Furthermore, it is reasonable to suppose that a construction of s 560 that required only that some causal relationship be shown between the advance and the payment would better promote satisfaction with the requirements of the section.
Against that, however, it is imperative to focus on the actual language and internal structure of s 560. Having regard to that language and structure I conclude that the section contemplates that the payment be made from the money advanced or the fund that it represents. It is not a causative issue as arises under a statutory expression of the type considered in Law and St Helen's Colliery. The "out of" requirement is not satisfied by identifying the origin or source of the money. The provision of the money is known. The question is whether the subsequent payment is made "out of" the money. In my view, it is not sufficient that the advance led to a state of affairs in the course of conducting the account which enabled the subsequent payment to be made.
I have already referred to the closeness in amount between CSM's deposits and the amounts paid for redundancies and wages. Yet there is the conceded inability to correlate the deposits and the payments in the sense of being able to show a direct link in the money flow. Counsel for CSM said, however, that the absence of a direct connection cut both ways, or against both sides. Hence, one might say that, generally regarded, the payments for redundancies and wages came "from" or were "out of" the CSM deposits. But, as stated above, there were also the amounts received and deposited from debtors and the payments to creditors. In the context of the overdraft account with a fluctuating debit balance, reflecting movements in and out of the account, how is it to be said what actual amount paid in wages, for instance, was made "out of" or "from" the advances of $100,000 or $50,000? Counsel did not essay that task, recognising, it would seem, that it could not be done. The consequence is that, even if it could be said that the payments were made "out of" the money advanced by CSM, and not money lent by the bank, for this further and separate reason, the second element is not satisfied.
For all the above reasons I conclude that the second element is not satisfied. It follows that CSM is not entitled to preference under s 560.
That leaves the alternative basis of claim, that there was a trust of the type recognised in Barclays Bank Ltd v Quistclose Investments Ltd.[15] Counsel for CSM recognised that for this basis of claim to be of any use CSM must be held entitled to a proprietary right in respect of the funds now held by the liquidators. There were difficulties in this, also recognised by counsel, including that other interested parties might need to be considered and given the opportunity to be heard. The argument was not developed at length. There was reference to some passages in Equity & Trusts in Australia and New Zealand[16], Jacobs' Law of Trusts[17] and Hill v Rose.[18]
[15][1970] AC 567.
[16]Dal Pont & Chalmers, Equity and Trusts in Australia and New Zealand, LBC Information Services, 2nd ed, pp 78-79, 81, 103-106, 110-111, 120-123.
[17]Meagher & Gummow, Jacobs' Law of Trusts in Australia, Butterworths, 6th ed (1997), pp 328-331.
[18][1990] VR 129.
Counsel for the liquidators, in submissions a little briefer than those of counsel for CSM, advanced several reasons why the trust basis could not succeed. In my view it is sufficient to say of the trust argument that payments from the account to employees and creditors, were made with the concurrence of CSM by its employee Smith. What Dream Haven did in making payments was done with CSM's knowledge and approval. In those circumstances, even assuming the existence of a trust, it cannot be held that Dream Haven, as a fiduciary, acted in breach of the trust.
For these reasons the appeal fails and must be dismissed. I will hear counsel on the question of costs.
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