Cinema Plus Ltd (Administrators Appointed) v ANZ Banking Group Limited
[2000] NSWCA 195
•28 July 2000
Reported Decision: (2000) 35 ACSR 1
(2000) 49 NSWLR 513
(2000) 157 FLR 204
New South Wales
Court of Appeal
CITATION: CINEMA PLUS LTD (ADMINISTRATORS APPOINTED) & ANOR v ANZ BANKING GROUP LIMITED [2000] NSWCA 195 revised - 1/08/2000 FILE NUMBER(S): CA 40530/00 HEARING DATE(S): 21 July 2000 JUDGMENT DATE:
28 July 2000PARTIES :
Cinema Plus Limited (Adminstrators Appointed) - First Appellant
Steven John Sherman and Ian Doublas Ferrier - Second Appellants
Australia and New Zealand Banking Group Limited - RespondentJUDGMENT OF: Spigelman CJ at 1; Sheller JA at 71; Giles JA at 140
LOWER COURT JURISDICTION : Supreme Court - Equity Division LOWER COURT
FILE NUMBER(S) :3002/2000 LOWER COURT
JUDICIAL OFFICER :Windeyer J
COUNSEL: P M Wood - Appellants
J C Sheahan SC/J E Thomson/H N Newton - RespondentSOLICITORS: Henry Davis York - Appellants
Blake Dawson Waldron - RespondentCATCHWORDS: BANKING AND FINANCIAL INSTITUTIONS - Banker and customer - Debtor and creditor - Banker's rights to combine accounts - Whether banker entitled to consolidate current account and loan account - Where contract provided for consolidtion - Whether charge created, s440B Corporations Law - Priority of administrator's lien, s443E Corporations Law - CONTRACTS - Sale and lease back agreement - Whether clause void for uncertainty - Whether clause penal in nature - CORPORATIONS - Corporations Law - Where administrators appointed - Meaning of 'charge' under s440B - Whether, in consolidating accounts, banker acted 'on behalf of' customer pursuant to s437D - Meaning of 'recover' under s440C - Administrator's indemnity and lien pursuant to ss443E, 443F - Priority - EQUITY - Equitable charges and liens - Creation of charge over debt where chargee owes debt to chargor - D LEGISLATION CITED: Corporations Law 1991 CASES CITED: Associated Alloys Pty Ltd v ACN 001 452 106 Pty Ltd (2000) 74 ALJR 862
Bradford Old Bank Limited v Sutcliffe [1918] 2 KB 833
Broad v Commissioner of Stamp Duties (NSW) [1980] 2 NSWLR 40
Capital and Counties Bank Ltd v Rhodes [1903] 1 Ch 631
Cooper v Federal Commissioner of Taxation (1954-57) 97 CLR 397
EMCL Pty Ltd v Esanda Finance Corporation Limited (2000) FCA 612 and (1999) FCA 978
Esanda Finance Corporation Ltd v Jackson (1992) 59 SASR 416
Esanda Finance Corporation Ltd v Plessnig (1989) 166 CLR 131
Estate Planning Associates (Australia) Pty Ltd v Commissioner of Stamp Duties (1985) 2 NSWLR 495
Evans v Rival Granite Quarry Ltd [1910] 2 KB 979
Griffiths v Commonwealth Bank of Australia (1994) 123 ALR 120
Halesowen Presswork & Assemblies Ltd v Westminster Bank Ltd [1971] 1QB 1
In re Bank of Credit and Commerce International SA (No 8) [1998] AC 214
In re Bourne [1906] 1 Ch 697
In re Charge Card Services Ltd [1987] Ch 150
In re Ross; ex parte Attorney General for the Northern Territory of Australia (1979) 54 ALJR 145
Lewis v Keene (1936) 36 SR(NSW) 493
Matthews v Geraghty (1986) 4 ACLC 727
National Provincial and Union Bank of England v Charnley [1924] 1 KB 431
National Westminster Bank Ltd v Halesowen Presswork & Assemblies Ltd [1972] AC 785
Osborne Computer Corporation Pty Ltd v Airroad Distribution Pty Ltd (1995) 37 NSWLR 382
The Council of the Upper Hunter County District v Australian Chilling and Freezing Co Ltd (1968) 118 CLR 429
The King v Portus; ex parte Federated Clerks Union of Australia (1949) 79 CLR 428
Timbertown Community Enterprises Ltd v Holiday Coast Credit Union Ltd (1997) 15 ACLC 1679
Wily v Rothschild Australia Ltd (1999) 47 NSWLR 555DECISION: 1. Appeal allowed; 2. Notice of contention dismissed; 3. Set aside the orders made by Windeyer J on 10 July 2000; 4. The parties to bring in short minutes of order; 5. The respondent to pay one-half of the appellants' costs of the appeal.
THE SUPREME COURT
OF NEW SOUTH WALES
COURT OF APPEAL
CA 40530/00
ED 3002/00SPIGELMAN CJ
SHELLER JA
GILES JACINEMA PLUS LIMITED (ADMINISTRATORS APPOINTED) & ANOR v AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITEDOn 17 September 1999 Cinema Plus and ANZ entered into a sale and lease back agreement. The securities for the lease finance facilities consisted of cross guarantee and indemnities by Cinema Plus supported by a fixed and floating charge over the assets and undertakings of Cinema Plus. At this time Cinema Plus had a current account with ANZ. Subsequently, administrators were appointed of Cinema Plus by resolution of its directors. Under the agreement, such appointment constituted an event of default.
Clause 21 of the general conditions stated that ANZ might at any time consolidate any credit balance in any of Cinema Plus’s accounts by way of set off, lien or counterclaim towards payment of money due by Cinema Plus to ANZ under the agreement.
On 29 June 2000, ANZ issued a notice of consolidation of accounts in respect of the facilities. Cinema Plus filed a notice of motion for an order restraining ANZ until the end of the administration of Cinema Plus from combining or setting off its current account with any amounts owing to ANZ by Cinema Plus. Cinema Plus appealed from Windeyer J’s dismissal of its summons in the Court below.
Held:-
Whether right to consolidate and whether charge created
1. Absent a contractual provision, moneys owing to ANZ under the loan facilities cannot be combined with the moneys in the current account in discharge of the debt (by Sheller JA and Giles JA, Spigelman CJ agreeing with Sheller JA).2. The intention of the parties to create a charge could, in an appropriate case, override what would be regarded as a “conceptual impossibility” at common law and it is therefore possible to create a charge over a debt when the chargee owes the debt to the chargor (by Spigelman CJ).
Bradford Old Bank Limited v Sutcliffe [1918] 2 KB 833, referred to; National Westminster Bank Limited v Halesowen Presswork & Assemblies Limited [1972] AC 785, referred to.3. Clause 21 creates a contractual right and does not give rise to a charge within the meaning of s440B of the Corporations Law. Accordingly that section does not prevent ANZ from consolidating the accounts pursuant to cl 21 (by Spigelman CJ, Sheller JA and Giles JA).
Broad v Commissioner of Stamp Duties [1980] 2 NSWLR 40, referred to; In Re Charge Card Services Limited [1987] Ch 150, referred to; In Re Bank of Credit & Commercial International SA (No 8) [1998] AC 214, referred to; Capital and Counties Bank Limited v Rhodes [1903] 1 Ch 631, referred to; In Re Bourne [1906] 1 Ch 697, referred to.
In re Bank of Credit and Commerce International SA (No 8) [1998] AC 214, applied; Associated Alloys Pty Ltd v ACN 001 452 106 Pty Ltd (2000) 74 ALJR 862, referred to; National Provincial and Union Bank of England v Charnley [1924] 1 KB 431, referred to; Matthews v Geraghty (1986) 4 ACLC 727, referred to.
Whether ANZ acting “on behalf of” Cinema PlusWhen ANZ consolidated the accounts pursuant to clause 21, it was not acting “on behalf of” Cinema Plus. Section 437D of the Law therefore does not apply (by Spigelman CJ and Sheller JA, Giles JA agreeing with Sheller JA).
In re Ross; ex parte Attorney General for the Northern Territory of Australia (1979) 54 ALJR 145, referred to; The King v Portus; ex parte Federated Clerks Union of Australia (1949) 79 CLR 428, referred to.
Section 440C of the Corporations Law
“Recover” means to get back into one’s possession something lost or taken away. The term does not apply in the situation where Cinema Plus’s rights of possession were extinguished but where ANZ retransferred the goods to Cinema Plus. This is because the goods were, at all material times, in possession of Cinema Plus and would continue to remain so after the consolidation (by Sheller JA, Spigelman CJ and Giles JA agreeing).
The administrators’ indemnity and priority
1. In respect of debts incurred by the administrators and the remuneration to which they were entitled pursuant to s443D, the administrators were entitled to be indemnified out of Cinema Plus’s property. This right of indemnity was secured by a lien on the company’s property pursuant to s 443F and had priority over Cinema Plus’s debt to ANZ pursuant to s443E (by Spigelman CJ, Sheller and Giles JJA agreeing).
2. The lien attached to the whole of Cinema Plus’s property including the right to claim monies in the current account. The priority of the administrators with respect to the items within the statutory right of indemnity as against ANZ’s debt under the agreement was not disturbed by the consolidation as the consolidation took effect subject to the administrators’ priority and lien (by Spigelman CJ, Sheller and Giles JJA agreeing).Legislation:
Corporations Law 1991
Cases Cited:
Associated Alloys Pty Ltd v ACN 001 452 106 Pty Ltd (2000) 74 ALJR 862
Bradford Old Bank Limited v Sutcliffe [1918] 2 KB 833
Broad v Commissioner of Stamp Duties (NSW) [1980] 2 NSWLR 40
Capital and Counties Bank Limited v Rhodes [1903] 1 Ch 631
Cooper v Federal Commissioner of Taxation (1954-57) 97 CLR 397
EMCL Pty Ltd v Esanda Finance Corporation Limited (2000) FCA 612 and (1999) FCA 978
Esanda Finance Corporation Limited v Jackson (1992) 59 SASR 416
Esanda Finance Corporation Limited v Plessnig (1989) 166 CLR 131
Estate Planning Associates (Australia) Pty Limited v Commissioner of Stamp Duties (1985) 2 NSWLR 495
Evans v Rival Granite Quarry Ltd [1910] 2 KB 979
Griffiths v Commonwealth Bank of Australia (1994) 123 ALR 120
Halesowen Presswork & Assemblies Limited v Westminster Bank Limited [1971] 1QB 1
In re Bank of Credit and Commerce International SA (No 8) [1998] AC 214
In re Bourne [1906] 1 Ch 697
In re Charge Card Services Limited [1987] Ch 150
In re Ross; ex parte Attorney General for the Northern Territoryof Australia (1979) 54 ALJR 145
Lewis v Keene (1936) 36 SR (NSW) 493
Matthews v Geraghty (1986) 4 ACLC 727
National Provincial and Union Bank of England v Charnley [1924] 1 KB 431
National Westminster Bank Limited v Halesowen Presswork & Assemblies Limited [1972] AC 785
Osborne Computer Corporation Pty Ltd v Airroad Distribution Pty Ltd (1995) 37 NSWLR 382
The Council of the Upper Hunter County District v Australian Chilling and Freezing Co Limited (1968) 118 CLR 429
The King v Portus; ex parte Federated Clerks Union of Australia (1949) 79 CLR 428
Timbertown Community Enterprises Ltd v Holiday Coast Credit Union Ltd (1997) 15 ACLC 1679
Wily v Rothschild Australia Ltd (1999) 47 NSWLR 555ORDERS
1. Appeal allowed;
2. Notice of contention dismissed;
3. Set aside the orders made by Windeyer J on 10 July 2000;
4. The parties to bring in short minutes of order;
5. The respondent to pay one-half of the appellants’ costs of the appeal.
*****
THE SUPREME COURT
OF NEW SOUTH WALES
COURT OF APPEAL
CA 40530/00
ED 3002/00
SPIGELMAN CJ
SHELLER JA
GILES JA
Friday, 28 July 2000
CINEMA PLUS LIMITED (ADMINISTRATORS APPOINTED) & ANOR v AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITEDJUDGMENT
2 By the Notice of Consolidation of Accounts of 29 June 2000, the Respondent purported to consolidate the First Appellant’s current account with:
1 SPIGELMAN CJ: The facts and issues are set out in the judgment of Sheller JA. Subject to my own consideration of three matters, I agree with the reasons his Honour has given.3 The notice purported to state the effect of the consolidation:
“The amounts owing to the Bank by the Customer under the facilities granted pursuant to the Letter of offer dated 5 July 1999 as varied by the Variation letter dated 23 February 2000 the ‘facilities’ in the sum of $965,107.87 being the aggregate of:
(a) The Recovery Amount under the Lease Finance Facilities; and
(b) the balance of monies due in respect of the Facilities other than the Lease Finance Facility.”
4 The facilities made available by the Respondent to the First Appellant, and the Special and General conditions thereof, are set out more fully in the judgment of Sheller JA. Of particular relevance for the matters about which I wish to state my own reasons, is Clause 21 of the General Conditions which provides:
“Accordingly a balance of $487,020.09 remains to the Customer’s credit in its deposit account.
This consolidation has effected a complete discharge of the Customer’s indebtedness to the Bank under the facilities.”
5 The words “transaction document” were defined in Cl 23 in a way which encompassed the Lease Finance Facility.
“21 Consolidation of Accounts
We may at any time combine, consolidate, merge or apply any credit balance in any of your accounts, or any amount available to us by way of set-of [sic], lien or counterclaim, towards payment of money which is then, or will become, due and payable by you to us under any transaction document.
If we do any of these things, we will tell you in writing. We can do any of these things despite any previous agreement to the contrary. You authorise us to do anything in your name which is necessary for us to be able to do any of these things.
Our rights under this clause are in addition to any other rights we have at law or under any other agreement.”
6 The Appellants contended that the Cl 21 created a charge - which Counsel for the Appellants characterised as a floating charge - within the meaning of s440B of the Corporations Law 1991, which provides:
Section 440B of the Corporations Law
“440B During the administration of a company, a person cannot enforce a charge on property of the company, except:
(a) With the administrator’s written consent; or
(b) With the leave of the Court.”
7 The money standing to the credit of the current account represented a debt owed by the bank to its customer. The first issue that arose on this appeal was: Is it possible in law to create a charge over a debt, when the chargee owes the debt to the chargor? The second issue raised on the appeal was: If the answer to the first question is “Yes”, did Cl 21 created a “charge” within the meaning of s440B of the Corporations Law?
8 There is now a substantial literature on what is frequently described as the “conceptual impossibility” of a person having a charge over his own debt.
9 The issue was first considered in this Court by Lee J in Broad v Commissioner of Stamp Duties [1980] 2 NSWLR 40 where his Honour held at 46:10 His Honour referred to the particular clause in the agreement between customer and bank in that case and said at 48:
“… there can be no mortgage or charge in favour of oneself of one’s own indebtedness to another.”
“Such a contractual right to set off, even if considered to be a ‘security’ in the wide sense of that word, cannot be regarded as a mortgage or charge.”
11 His Honour applied the reasoning of Buckley LJ in Halesowen Presswork & Assemblies Limited v Westminster Bank Limited [1971] 1 QB 1 at 46 as approved on appeal in National Westminster Bank Limited v Halesowen Presswork & Assemblies Limited [1972] AC 785 esp by Lord Cross of Chelsea at 801.
12 The reasoning of Lee J in Broad was applied by Yeldham J in Estate Planning Associates (Australia) Pty Limited v Commissioner of Stamp Duties (NSW) (1985) 2 NSWLR 495 at 498-500.
13 Millett J (as his Lordship then was) discussed the issue in In Re Charge Card Services Limited [1987] Ch 150. In that case a credit card company paid persons who provided services to the holders of credit cards issued by the company, in advance of receiving payment from those holders and negotiated its receivables to a factor. The factor, Commercial Credits, had a contractual right of retention against the risk of bad debts.
14 Millett J said at 175:15 His Honour added at 176:
“If the right of retention constitutes a charge, there is no doubt that it is a charge on book debts and is a charge created by the company. But is it a charge at all? The sum due from Commercial Credit to the company under the agreement is, of course, a book debt of the company which the company can charge to a third party. In my judgment, however, it cannot be charged in favour of Commercial Credit itself, for the simple reason that a charge in favour of a debtor of his own indebtedness to the chargor is conceptually impossible.”
16 Millett J concluded at 177:
“Thus the essence of an equitable charge is that, without any conveyance or assignment to the chargee, specific property of the chargor is expressly or constructively appropriated to or made answerable for payment of a debt, and the chargee is given the right to resort to the property for the purpose of having it realised and applied in or towards payment of the debt. The availability of equitable remedies has the effect of giving the chargee a proprietary interest by way of security in the property charged.
It is true, therefore, that no conveyance or assignment is involved in the creation of an equitable charge, but in my judgment the benefit of a debt can no more be appropriated or made available to the debtor than it can be conveyed or assigned to him. The objection to a charge in these circumstances is not to the process by which it is created, but to the result. A debt is a chose in action; it is the right to sue the debtor. This can be assigned or made available to a third party, but not to the debtor, who cannot sue himself. Once any assignment or appropriation to the debtor becomes unconditional, the debt is wholly or partially released. The debtor cannot, and does not need to, resort to the creditor’s claim against him in order to obtain the benefit of the security; his own liability to the creditor is automatically discharged or reduced.”
“It does not, of course, follow that an attempt to create an express mortgage or charge of a debt in favour of the debtor would be ineffective to create a security. Equity looks to the substance, not to the form; and while in my judgment this would not create a mortgage or charge, would no doubt give a right of set off which would be effective against the creditor’s liquidator or trustee in bankruptcy, provided that did not purport to go beyond what is permitted by section 31 of the Bankruptcy Act 1914.”
17 The general proposition advanced in Broad and in In re Charge Card Services - that a debt cannot be made the subject of a charge in favour of the debtor - was approved by the Full Court of South Australia in Esanda Finance Corporation Limited v Jackson (1992) 59 SASR 416 at 418; and by Lee J in the Federal Court of Australia in Griffiths v Commonwealth Bank of Australia (1994) 123 ALR at 120. It has also been applied at first instance in this Court. (See Wily v Rothschild Australia Ltd (1999) 47 NSWLR 555 at [28]-[29]).
18 There are a number of judicial statements which appear to contradict this line of authority. (See the collections in Wood English and International Set-Off. London, 1989 at 5-161 to 5-175; Derham Set-Off (2nd ed) Oxford, 1996 at 554-558).
19 The matter must now be revisited in the light of the House of Lords decision in In Re Bank of Credit & Commerce International S.A. (No 8) [1998] AC 214. In that case Lord Hoffman, with whom all other members of the House of Lords agreed, rejected the “doctrine of conceptual impossibility”, propounded by Millett J in Re Charge Card Services.
20 His Lordship indicated at 226 that the passages in Halesowen relied upon by Millett J were concerned with a lien, being a right to obtain possession. They were not directed to the question of “whether the bank would have any kind of proprietary interest”.
21 His Lordship referred to the reasoning of the Court of Appeal in BCCI (reported at [1996] Ch 245 at 258) that: “A man cannot have a proprietary interest in a debt or other obligation which he owes another.” His Lordship added at 226-227:22 His Lordship concluded at 228:
“In order to test this proposition, I think one needs to identify the normal characteristics of an equitable charge and then ask to what extent they would be inconsistent with a situation in which the property charged consisted of a debt owed by the beneficiary of the charge. … An equitable charge is a species of charge, which is a proprietary interest granted by way of security. Proprietary interests confer rights in rem which, subject to questions of registration and the equitable doctrine of purchaser for value without notice, will be binding upon third parties and unaffected by the insolvency of the owner of the property charged. A proprietary interest provided by way of security entitles the holder to resort to the property only for the purpose of satisfying some liability due to him (whether from the person providing the security or a third party) and, whatever the form of the transaction, the owner of the property retains an equity of redemption to have the property restored to him when the liability has been discharged. The method by which the holder of the security will resort to the property will ordinarily involve its sale or, more rarely, the extinction of the equity of redemption by foreclosure. A charge is a security interest created without any transfer of title or possession to the beneficiary. An equitable charge can be created by an informal transaction for value (legal charges may require a deed or registration or both) and over any kind of property (equitable as well as legal) but is subject to the doctrine of purchaser for value without notice applicable to all equitable interests.
The depositor’s right to claim payment of his deposit is a chose in action which the law has always recognised as property. There is no dispute that a charge over such a chose in action can validly be granted to a third party. In which respects would the fact that the beneficiary of the charge was the debtor himself be inconsistent with a transaction having some or all of the various features which I have enumerated? The method by which the property would be realised would differ slightly: instead of the beneficiary of the charge having to claim payment from the debtor, the realisation would take the form of a book entry. In no other respect, as it seems to me, would the transaction have any consequences different from those which would attach to a charge given to a third party. It would be a proprietary interest in the sense that, subject to questions of registration and purchaser for a value without notice, it would be binding upon assignees and a liquidator or trustee in bankruptcy. The depositor would retain an equity of redemption and all the rights which that implies. There would be no merger of interests because the depositor would retain title to the deposit subject only to the bank’s charge. The creation of the charge would be consensual and not require any formal assignment or vesting of title in the bank. If all these features can exist despite the fact that the beneficiary of the charge is the debtor, I cannot see why it cannot properly be said the debtor has a proprietary interest by way of charge over the debt.”
“In a case in which there is no threat to the consistency of the law or objection of public policy, I think that the court should be very slow to declare a practice of the commercial community to be conceptually impossible. Rules of law must obviously be consistent and not self-contradictory … But the law is fashioned to suit the practicalities of life and legal concepts like ‘proprietary interest’ and ‘charge’ are no more than labels given to clusters of related and self-consistent rules of law. Such concepts do not have a life of their own from which the rules are inexorably derived.”
23 In In Re Charge Services itself, as quoted above, Millett J at 177 said that an attempt to create an express mortgage or charge in favour of debtor will be effective by way of what his Honour called “a security”. It would not however, his Honour reasoned, create something which could accurately be described as a “mortgage or charge”. His Honour came to that conclusion by application of the maxim “equity looks to the substance, not to the form”.
24 The maxim “equity looks to the intent, rather than to the form” has frequently been applied to create what, at common law, would be regarded as a “conceptual impossibility”. (See Meagher, Gummow and Lehane Equity Doctrines and Remedies (3rd ed) pars [331]-[338]). In my opinion, the application of that maxim may well lead, in an appropriate case, to a conclusion that a particular arrangement has a sufficient attachment to assets by way of security, to answer the description of a “charge”.
25 A particular example of the application of the maxim of equity, reasonably analogous to the issue presently under consideration, is the approach of equity to the merger of charges in estates. At common law a person entitled to an estate in fee simple who acquired a charge over that land could not hold both interests. There was a conclusive presumption of a merger, irrespective of the parties intentions. Holding both the fee simple and a charge was regarded as, to use the terminology that has found favour in the present area of discourse, a “conceptual impossibility”.
26 The position in equity was different. There was not necessarily a merger. An intention to the contrary, whether express or implied, would be given effect in equity. (See generally Meagher, Gummow and Lehane supra pars [4004]-[4009].
27 Cozens-Hardy LJ said in Capital and Counties Bank Limited v Rhodes [1903] 1 Ch 631 at 652:
“The rule of the former [the Courts of Law] was rigid, that whenever a term of years in a freehold estate, whether for life or in fee, immediately expectant upon the term, vested in the same person in his own right, the term was merged in the freehold, whatever may have been the intention of the parties to the transaction which resulted in the union. The Courts of Equity, on the other hand, in many cases treated the interest which merged at law as being still subsisting in equity. They had regard to the intention of the parties, and, in the absence of any direct evidence of intention, they presumed that merger was not intended, if it was to the interest of the party, or only consistent with the duty of the party, that merger should not take place.”
See also Lewis v Keene (1936) 36 SR (NSW) 493 at 499-500; Cooper v Federal Commissioner of Taxation (1954-1957) 97 CLR 397 at 407-408 per Kitto J.
28 Similar issues arise when a debtor is appointed as executor of his creditor. At common law the position was often that the liability of the debtor was extinguished. Equity, however, treated the debt as an asset in the hands of the executor.
29 Romer LJ said in In Re Bourne [1906] 1 Ch 697 at 708:
“He was indebted to the testator in his lifetime, and by the will he was appointed executor, and he proved the will. The effect of that was that at law the debt was extinguished because there was no one to sue or be sued, but in equity he as debtor is held to have paid himself as executor, and therefore as executor to have in his possession the full amount of the debt as having been paid to him as executor.”
(See also Jenkins v Jenkins [1928] 2 KB 501 at 50, 507; Bone v Commissioner of Stamp Duties (NSW) (1974) 132 CLR 38 at 44-46, 52-54; Commissioner of Stamp Duties (NSW) v Bone (1976) 135 CLR 223 at 227-228; [1977] AC 511 at 518, Meagher, Gummow and Lehane supra at pars [2903]-[2905]; Federal Commissioner of Taxation v Orica Ltd (1998) 194 CLR 500 at [114]).
30 In my opinion, there is no reason why, in an appropriate case, equity could not find that the intention of the parties to create a charge between a debtor and creditor, overrides what would be regarded, at common law, as a “conceptual impossibility”.
31 Whether the word “charge” in a specific statute encompasses such a relationship recognised as a charge in equity, depends on the construction of the statute.
32 The word “charge” where appearing in a statute does not necessarily bear the meaning which it is given at common law (including in that conception, in this respect, the doctrines of equity).
33 In particular statutory contexts, the word charge has been described as “a very general one” (Fell v Official Trustee of Charity Lands [1898] 2 Ch 44 at 57) and “a word of wide import” (Landers v Schmidt [1983] 1 QdR 188 at 195). In a context of a statutory imposition in relation to property, the issue was whether that imposition fell within the words “charged upon” in a statute of limitations. It was held that the statutory burden upon the land was a charge, understood in a “broad” sense (Payne v Esdaile (1888) 13 AppCas 613 at 622-623 and 623-624).
34 Section 9 of the Corporations Law contains a definition of “charge” in the following terms:
“ ‘Charge’ means a charge created in any way and includes a mortgage and an agreement to give or execute a charge or mortgage, whether on demand or otherwise.”
35 Subject to the inclusive part of the definition, the use of a definition which incorporates the word being defined, suggests that the meaning of the word is to be determined without reference to the uses of the word in the statute itself.
36 In Associated Alloys Pty Limited v ACN 001 452 106 Pty Limited [2000] HCA 25; 74 ALJR 862 the High Court determined that a retention of title clause did not constitute a charge for the purposes of the provisions requiring registration of charges, then found in Pt 3.5 of the Corporations Law. The Court at [9] focussed on a particular aspect of the retention of title clause there under consideration which created a trust. The decision of the Court turned on the difference between the institutions of a trust and of a charge. (See at [5]).
37 In the course of their joint reasons Gaudron, McHugh, Gummow and Hayne JJ said at [48]:38 Their Honours went on to say at [51]:
“The Proceeds Subclause is an agreement to constitute a trust of future acquired property. It is therefore not a ‘charge’ within the meaning of s9 of the Law and the detailed provisions of the Law governing charges thus do not apply to it.”
“In the Law the legislature has chosen to select as the criterion of operation of the registration provisions that which it defines as a ‘charge’. The contractual and trust arrangements with which this appeal is concerned did not involve the creation of such a charge or an agreement to create one. To treat the Proceeds Subclause as an agreement which falls foul of the Law is to rewrite the statute. It is not for the courts to destroy or impair property rights, such as those arising under trusts, by supplementing the list of those rights which the legislature has selected for such treatment.”
39 Section 440B has selected the same “criterion of operation”. As I understand the reasoning of the joint judgment in Associated Alloys, the word “charge” in the Corporations Law - at least in Pt 3.5 (as it then was) - is not used in any special statutory sense, subject to the words of inclusion in the definition. This reasoning would apply to Pt 5.3A. Whether an arrangement is a “charge” is to be determined by asking whether or not the matter under consideration would constitute a “charge” at common law (again understood as extending to equity).
40 It may be appropriate in some statutory contexts to construe the word “charge” as encompassing commercial arrangements which have the same practical consequences as a charge in the general law. Fell supra was a case in which a purposive construction was given to the word “charge” in the statute there under consideration. Subject to the words of inclusion in the s9 definition, it was not, in my opinion, the intention of Parliament with respect to the use of the word in the sections of the Corporations Law presently under consideration, to permit any such expansive construction. Parliament intended to apply the meaning of the word in the general law.
41 The most frequently cited description of an equitable charge is that of Atkin LJ in National Provincial and Union Bank of England v Charnley [1924] 1 KB 431 at 449-450:
“It is not necessary to give a formal definition of a charge, but I think there can be no doubt that where in a transaction for value both parties evince an intention that property, existing or future, shall be made available as security for the payment of a debt, and that the creditor shall have a present right to have it made available, there is a charge, even though the present legal right which is contemplated can only be enforced at some future date, and thought the creditor gets no legal right of property, but only gets a right to have the security made available by an order of the Court. If those conditions exist I think there is a charge. If, on the other hand, the parties do not intend that there should be a present right to have the security made available, but only that there should be a right in the future by agreement, such as a licence, to seize the goods, there will be no charge.”
42 The reference by Atkin LJ that a contractual right to seize goods in the future is not a charge, is of particular relevance for present purposes. In my opinion, Cl 21 is, in effect, a contractual right to “seize” an account in the future. I have set out the section above. It does not manifest an intention on the part of the parties to create any form of present right over property of the company. It confers a right to take steps in the future, which have the consequence that the company’s chose in action will be extinguished in whole or in part.
43 Equity recognises a floating charge which has such an effect after crystallisation. It is not necessary, for present purposes, to consider whether a floating charge creates an immediate proprietary interest or only creates such an interest upon crystallisation. (See e.g. Ford’s Principles of Corporations Law (2000) at par 19.320). It is sufficient to recognise that a floating charge creates some form of present right over property, whether characterised as a proprietary interest or not.
44 As Buckley LJ said in Evans v Rival Granite Quarry Ltd [1910] 2 KB 979 at 999:
“A floating security is not a future security; it is a present security, which presently affects all the assets of the company expressed to be included in it. On the other hand, it is not a specific security; the holder cannot affirm that the assets are specifically mortgaged to him.”
(Quoted with approval in Barcelo v Electrolytic Zinc Company of Australasia Pty Ltd (1932) 48 CLR 391 at 420 per Dixon J; Luckins v Highway Motel (Carnarvon) Pty Ltd (1975) 133 CLR 164 at 173-4 per Gibbs J).
45 The Appellant’s submissions pointed to one specific aspect of Cl 21 which it said assisted in the characterisation of that clause as a charge. It noted that the bank had extracted a specific authorisation for it to be able to act in the name of the customer. As Counsel for the Appellant submitted this is a common provision in a charge. That does not, however, mean that the incorporation of such a provision is of any particular significance in assisting the Court to characterise the clause as a charge. A right to act in the name of another is a right that can be extracted simply as a matter of contract.
46 Clause 21 does not manifest an intention to make available the company’s property in an account as security for the company’s obligations. There was no deposit specifically made by the customer for purposes of security. There was no obligation to maintain any account. There were no restrictions on the conduct of any account. Nor was any account, or indeed the body of accounts as they may exist from time to time, appropriated in any way, either immediately or contingently, as security for any present or future debt.
47 The cumulative effect of these aspects of Cl 21 leads to the conclusion that Cl 21 creates a contractual right. It does not, in my opinion, constitute a charge.48 The Appellant contends that the Notice of Consolidation is a dealing affecting the property of the company within the meaning of s437D of the Law. That section provides:
Section 437D of the Corporations Law
“473D(1) This section applies where:
(a) a company under administration purports to enter into; or,
(b) a person purports to enter into, on behalf of a company under administration;
a transaction or dealing affecting property of the company.
(2) The transaction or dealing is void unless:
(a) the administrator entered into it on the company’s behalf; or
(b) the administrator consented to it in writing before it was entered into; or
(c) it was entered into under an order of the Court.
(3) Subsection (2) does not apply to a payment made:
(a) by an Australian ADI out of an account kept by the company with the ADI;
(b) in good faith and in the ordinary course of the ADI’ss banking business; and
(c) after the administration began and on or before the day on which;
(i) the administrator gives to the ADI (under subsection 450A(3) or otherwise) written notice of the appointment that began the administration; or
(ii) the administrator complies with paragraph 458A(1)(b) in relation to that appointment;
whichever happens first.
(4) Subsection (2) has effect subject to an order that the Court makes after the purported transaction or dealing.
(5) If, because of subsection (2), the transaction or dealing is void, or would be void apart from subsection (4), an officer of the company who:
(a) purported to enter into the transaction or dealing on the company’s behalf; or
(b) was in any other way, by act or omission, directly or indirectly, knowingly concerned in, or party to the transaction or dealing;
contravenes the subsection.”
49 Section 437E makes provision empowering a Court, which finds a person guilty of an offence under s437D(5), to make an order by way of compensation.
50 Windeyer J held, and the Respondent contended in this Court, that the Notice of Consolidation was not an act entered into “on behalf of” Cinema Plus Limited. The Appellant relied on the effect of Cl 21 insofar as it went beyond the provision of an authority to the bank to consolidate etc. That act had the effect of applying Cinema Plus’ property in satisfaction of the indebtedness of Cinema Plus to the ANZ.
51 Stephen, Mason, Murphy and Aickin JJ said in In Re Ross; Ex Parte Attorney-General for Northern Territory (1979) 54 ALJR 145 at 149:52 In s437D, an indication of the scope of the conduct intended to be encompassed within the concept of entering into a transaction or dealing “on behalf of a company” is to be found in the express exclusion, in s437D(2)(a), of any “transaction or dealing” entered into by the administrator “on the company’s behalf”. Subsection 437D(1) is intended to address conduct at least as wide as the conduct permitted to the administrator to be engaged in on behalf of the company. The scope of such conduct is identified in s437A of the Act, which provides:
“The phrase ‘on behalf of’ is, as Latham CJ observed in the King v Portus: Ex parte Federated Clerks Union of Australia (1949) 79 CLR 428 at 435, ‘Not an expression which has a strict legal meaning’, it bears no single and constant significance. Instead it may be used in conjunction with a wide range or relationships, all however in some way concerned with the standing of one person as auxiliary to or representative of another person or thing.
In what is perhaps its least specific use, ‘on behalf of’ may be applied to someone who does no more than express support for persons or for a cause, as with one who speaks on behalf of the poor or on behalf of tolerance. It may be used when speaking of an agency relationship, but also of some quite ephemeral relationships, such as that which exist between a party to litigation and the witnesses he calls, a witness ‘on behalf of’ the defence. … Context will always determine to which of the many possible relationships the phrase ‘on behalf of’ is in a particular case being applied; ‘the context and subject matter’ (per Dixon J in the Federated Clerks case as p438) will be determinative.”
“437A(1) While a company is under administration, the administrator:
(a) has control of the company’s business, property and affairs; and
(b) may carry on that business and manage that property and those affairs; and
(c) may terminate or dispose of all or part of that business, and may dispose of any of that property; and
(d) may perform any function, and exercise any power, that the company or any of its officers could perform or exercise if the company were not under administration.
(2) Nothing in subsection (1) limits the generality of anything else in it.”
53 The scope of such conduct goes beyond agency, to encompass matters concerning the exercise of control in various ways over the property of the company.
54 The Appellants submitted that it was relevant to consider the effect of the payment out upon the rights of Cinema Plus over the equipment the subject of the Lease Finance Facility. It was submitted that, on the proper construction of the lease, upon satisfaction of its obligations of payment following upon the Notice of Consolidation, the rights of Cinema Plus as bailee or lessee were at an end. It is not necessary to consider this matter. At the most it goes to the question of whether or not a transaction or dealing was one “affecting property of the company” within the meaning of the statute. This aspect of the submissions does not impinge upon the relevant terminology : “on behalf of a company”.
55 The present issue turns on the construction of Cl 21 in the General Conditions. The act in fact performed by the company under its formal Notice was an act of consolidation. Accordingly Cl 21, relevantly, should be read as:56 The formulation of combining the verb “consolidate” with the word “towards”, used as a proposition, is not elegant. The word “towards”, in my opinion, indicates the relationship which the act of “consolidation” is to have with the “payment of money”. The intent is purposive. The reference to “payment” of an amount “due and payable” by the company, is not a reference to an act of the company or, relevantly for purposes of s437D(1)(b), an act “on behalf of a company”. Rather, the words “towards payment” are intended to identify the purpose for which the bank is entitled to take any of the relevant steps i.e., “combine, consolidate, merge or apply … etc.”. So understood the act of “consolidation” is not an act “on behalf of the company”.
“We may at any time … consolidate … any of your accounts … towards payment of money which is then, or will become, due and payable by you to us under any transaction document.”
Sections 443E and 443F of the Corporations Law
57 The Second Appellants, the administrators of the First Appellant, asserted a right of indemnity and a lien for that indemnity under Pt 5.3A Subdivision B of the Corporations Law. The administrators did not seek to rely on an equitable lien. (c/f Shirlaw v Taylor (1991) 31 FCR 222).
58 The relevant sections are as follows:59 Windeyer J identified this as the most difficult question before him and the strongest argument of the administrator. His Honour said:
“443D The administrator of a company under administration is entitled to be indemnified out of the company’s property for:
(a) debts for which the administrator is liable under Subdivision A or a remittance provision as defined in subsection 443BA(3); and
(b) his or her remuneration as fixed under section 449E.
443E(1) Subject to section 556, a right of indemnity under section 443D has priority over:
(a) all the company’s unsecured debts; and
(b) subject to subsections (2) and (3) of this section, debts of the company secured by a floating charge on property of the company.
(2) Where:
(a) debts of a company under administration are secured by a floating charge on property of the company; and
(b) before the beginning of the administration, the chargee:
(i) appointed a receiver of property of the company under a power contained in an instrument relating to the charge; or
(ii) obtained an order for the appointment of a receiver of property of the company for the purpose of enforcing the charge; or
(iii) entered into possession, or assumed control, of property of the company for that purpose; or
(iv) appointed a person so to enter into possession or assume control (whether as agent for the chargee or for the company); and
(c) the receiver or person is still in office, or the chargee is still in possession or control of the property;
the right of indemnity of the administrator under section 443D does not have priority over those debts, except so far as the chargee agrees.
(3) Where:
(a) debts of a company under administration are secured by a floating charge on property of the company; and
(b) during the administration, the chargee, consistently with this Part:
(i) appoints a receiver of property of the company under a power contained in an instrument relating to the charge; or
(ii) obtains an order for the appointment of a receiver of property of the company for the purpose of enforcing the charge; or
(iii) enters into possession, or assumes control, of property of the company for that purpose; or
(iv) appoints a person so to enter into possession or assume control (whether as agent for the chargee or for the company);
the right of indemnity of the administrator under section 443D has priority over those debts only in so far as it is a right of indemnity for debts incurred, or remuneration accruing, before written notice of the appointment, or of the entering into possession or assuming of control, as the case may be, was given to the administrator.
443F(1) To secure a right of indemnity under section 443D, the administrator has a lien on the company’s property.
(2) A lien under subsection (1) has priority over a charge only in so far as the right of indemnity under section 443D has priority over debts secured by the charge.”
“The purpose of the moratorium is to give a breathing space to enable investigations to take place as to whether creditor’s interests would be better provided for under a deed rather than on winding up. The purpose is not to take away rights from one creditor and confer the benefit of those rights on others. The question really is whether the entitlement to indemnity is an entitlement to be indemnified out of each individual item of property, as opposed to entitlement to indemnified out of property available after contractual rights have set-off or exercised. I have come to the conclusion that the more reasonable interpretation of the construction of s443D is that property of the company is to be determined after taking into account rights of set off or combination. In other words it is to be interpreted consistently with s437A and Osborne Computers .”
60 His Honour was referring to the decision of Rolfe J in Osborne Computer Corporation Pty Limited v Airroad Distribution Pty Limited (1995) 37 NSWLR 382.
61 In its Notice of Appeal the Appellants contended that his Honour erred in failing to hold:
“(a) That pursuant to ss443E and 443F of the Corporations Law the right of indemnity of the second appellants in respect to debts within s443D(a) and remuneration within s443D(b) and the lien of the second appellants to secure that indemnity have priority over the debts owing or which may become owing by the First Appellant to the Respondent under the Lease Finance Facility.
(b) That by reason of those rights and that priority the Respondent was not, or is not, entitled to exercise its rights under clause 21 of the General Conditions.”
62 Paragraphs (a) and (b) of this ground of appeal are separable. The Appellant may be entitled to priority with respect to debts and remuneration over the debts owing under the Lease Finance Facility. That does not, however, necessarily carry the consequence that a contractual right of set-off, such as that found in Cl 21, is not able to be exercised, at least with prospective effect. The exercise of such a contractual right may affect the quality or existence of “the company’s property” against which the administrator has a right of indemnity and to which the lien attaches.
63 Between the date of their appointment on 30 May 2000 and the Notice of Consolidation of Accounts of 29 June 2000, the administrators incurred debts and became entitled to remuneration, with respect to both of which, pursuant to s443D, they were “entitled to be indemnified out of the company’s property”. To secure that right of indemnity the administrators had a “lien on the company’s property”, pursuant to s443F. Furthermore, that right of indemnity had priority over the company’s debt to the bank under the Lease Finance Facility, pursuant to s443E.
64 The relevant property of the company was the chose in action which the company held vis a vis the bank, with respect to the monies standing to the credit of the current account. The fact that the chose in action was, pursuant to contractual rights available to the bank, subject to defeasance in the sense that it was capable of extinguishment in whole or in part by a unilateral action on the part of the bank, does not necessarily have the consequence that upon such a right being exercised, the statutory priority under s443E(1)(a) is lost.
65 The Respondent’s submission was that, as Windeyer J concluded, an administrator takes the property of the company as he finds it. Accordingly, the statutory priority does not override a pledge or a possessory lien or a contractual right of set-off. The same would be so, if relevant, to a common law right of combination of accounts.
66 In this respect the purpose of Pt 5.3A is material. Section 435A provides:
“435A The object of this Part is to provide for the business, property and affairs of an insolvent company to be administered in a way that:
(a) maximises the chances of the company, or as much as possible of its business, continuing in existence; or
(b) if it is not possible for the company or its business to continue in existence - results in a better return for the company’s creditors and members than would result from an immediate winding up of the company.”
67 It would best serve the achievement of this object if the reference to “the company’s property” in, relevantly, s443D, was understood to refer to the company’s property as it existed at the time that the debts were incurred and the right to remuneration accrued. Persons would be reluctant to accept appointment as administrators if they could not determine in advance whether the statutory indemnity would cover their exposure. If the practical value of the indemnity could be reduced by subsequent conduct of creditors which retrospectively exposed an administrator to personal liability or loss of remuneration, the statutory scheme would not operate effectively.
68 In the case of a floating charge, there is express provision to this effect in s443E(3)(b). (See also Commonwealth Bank of Australia v Butterell (1994) 35 NSWLR 64 at 71-72). The same result ensues with respect to “unsecured debts” within s443E(1)(a).
69 In my opinion, the administrators’ lien under s443F attached to the whole of the company’s property as at the respective times that the right of indemnity arose. Included in the property to which the lien attached was the chose in action, being the right to claim the monies in the current account. The priority of the administrators with respect to the items within the statutory right of indemnity as against the bank’s debt under the Lease Finance Facility, was not disturbed by the act of consolidation of accounts. The consolidation takes effect subject to the administrators’ priority and lien. It is not ineffective as an act of consolidation and has the consequence that “the company’s property” had changed as and from the date of the Notice coming into effect, by the extinguishment of the chose in action in whole or in part, as and from that date. It does not have a retrospective effect on the statutory indemnity, priority and lien. The time at which this effect occurred or occurs will need to be determined as Sheller JA indicates in his judgment.
70 I agree with the orders proposed by Sheller JA.
71 SHELLER JA:72 By a Letter of Offer dated 5 July 1999, ANZ offered the following loan facilities to Cinema Plus.
Introduction
On 30 May 2000 the second appellants, Steven John Sherman and Ian Douglas Ferrier, were appointed administrators of the first appellant, Cinema Plus Limited (“Cinema Plus”), by resolution of the directors of that company. The respondent, Australia and New Zealand Banking Group Limited (“ANZ”), was Cinema Plus’s banker. Cinema Plus had a current account with ANZ. On 30 May 2000 the account showed a credit balance of approximately $1,293,000 and, on 29 June 2000, a credit balance of $1,452,127.96.
AUD
“ Facility Facility Limit
Overdraft Facility 1,800,000
Lease Finance Facility 1,200,000
ANZ OnLine Facility 500,000
Encashment Facility 50,000”73 The purpose of the lease finance facility was to enable sale and lease back of various assets for terms not exceeding three years. The securities for the facilities were to be cross guarantees and indemnities by Cinema Plus (item A) and several subsidiary companies supported by fixed and floating charges over the assets and undertakings of Cinema Plus and the subsidiary companies except one (items B to G). Item (B) the charge over the assets and undertaking of Cinema Plus was described as “already held” and dated 21 April 1998. Item (A) was to secure all facilities. Items (B) to (G) inclusive were to secure the overdraft facility solely.
74 The Letter of Offer stated that ANZ’s “General Conditions (Second Edition 1995) apply to the facilities as well as any applicable Specific Conditions to the facilities.” On 20 July 1999 Cinema Plus accepted the offer.
75 On 17 September 1999 ANZ and Cinema Plus entered into a sale and lease back agreement. Schedule A was a lease finance facility acknowledgment addressed to ANZ in which Cinema Plus stated:
“We desire the transaction to be a lease for taxation purpose [sic] and for the consequent taxation deductions.
We understand that you are unwilling to enter into this transaction unless it is one of true leasing.”
There followed a number of warranties concerning the use of the goods and other matters.
76 The amount financed was $1,200,000. The residual value was $120,000 which represented the “estimated value of Goods at the expiration of the period of lease”. Rent instalments of $34,640.46 were to be paid monthly in advance. Duty was $280.74, making a total monthly in advance rent of $34,921.20. The primary lease term was 36 months.
77 A document described as “Specific Conditions Lease Finance Facility”, accepted to be part of the agreement, contained the following relevant clauses:78 The “General Conditions”, also accepted as part of the agreement, contained the following relevant clauses:
“ 9. YOU MUST DELIVER UP THE GOODS
(1) At the expiration of the lease or upon its sooner determination, you must deliver up the Goods to us at our address appearing on the Acknowledgment or such other place as we may direct in writing in the same good order and repair and condition as you ought to have kept the Goods as required in these Specific Conditions and to pay to us the cost of restoring the same to such condition.
….
14. OUR RIGHTS
….
You agree:
(4) Bailee
that our interest in the Goods is a legal interest and that the legal title to the Goods shall be at all times vested in us and your interest in the Goods shall be that of a bare bailee only.
15. DEFAULT
(1) Each of the following, unless waived by us, is an event of default:
…
(d) Winding up
if you are a company, an order is made or a resolution is passed for your winding up or a ground arises on which a court may order your winding up or upon which a meeting may be called placing you under administration or an inspector is appointed to investigate your affairs or you propose to, or enter into, any arrangements reconstruction or composition with your creditors;
….
(2) Without prejudice to any other right of ours under this agreement, if during the lease an event of default occurs and is continuing then there immediately becomes due and payable by you to us the total (in these Specific Conditions called the ‘ recoverable amount ’) of:
(a) the aggregate of the rent instalments not then accrued due rebated to reflect the present value, such value to be ascertained by applying the discount rate (as defined in these Specific Conditions) to each rental instalment in respect of the period by which the date of payment thereof is by virtue of this clause brought forward (together with an amount equal to any stamp duty or financial institutions duty payable in respect of such rebated total);
(b) the amount of any rentals or other moneys accrued due and unpaid;
(c) our costs and expenses in repossessing the Goods (including costs and expenses in satisfying any lien claimed over the Goods whether justifiably or not);
(d) interest (if any) (calculated at the relevant rate) on all overdue amounts payable under the Acknowledgment or this agreement; and
(e) an amount equal to the residual value of the Goods (discounted by applying the discount rate (as defined herein) to such amount in respect of the period over which the date for payment of or indemnity against the residual value is by virtue of this clause brought forward).
(3) We may at any time retake possession of the Goods; unless in the meantime:
(a) you have paid to us the recoverable amount and an amount (the ‘ security amount ’) nominated by us as sufficient to provide against possible non-performance of your continuing obligations including care, use and insurance of the goods, and the obligations to return the Goods at the end of the period of lease; and
(b) the safety, condition, safekeeping or insurance of or over the Goods is not in jeopardy or likely to be so.
(4) We may from time to time and to such extent and on such conditions as we may think fit elect to waive our rights under this clause. However, no such waiver will affect our rights under this clause in respect of any further or continuing or recurring breach or event.
(5) If clause 11 applies and you have paid us in full the measure of our loss under clause 11, then you do not have to pay us any further money under this clause 15.
(6) In this clause the ‘ discount rate ’ means the rate which, when applied to a future instalment or payment or the residual value as aforesaid will ensure that we receive the same rate of pre-tax return or profit after such discounting as we would have received from the lease if all instalments and payments had been paid on their respective due dates and an amount equal to the residual value had been received on the date of expiration of the period of the lease.
…
17. SALE OF GOODS
(1) If we receive the Goods back into our possession (whether at the expiration of the lease or any extension of the lease or upon a return or repossession) we will sell the Goods as soon as reasonably practicable at the best price that we can reasonably obtain at the time.
(2) ‘ actual sale price ’ means the price for which the Goods are sold.
(3) ‘ net proceeds ’ means the actual sale price less:
(a) all costs and expenses incidental to return and repossession (if applicable);
(b) all costs and expenses incidental to sale including care storage and selling expenses; and
(c) all costs and expenses of valuation (if applicable).
(4) If we receive the Goods back we will credit the amount of the net proceeds against the recoverable amount and any other money payable by you to us.
(5) However, if the net proceeds exceed the recoverable amount and any other money that is payable to us, we do not have to pay you the excess.
18. RESIDUAL VALUE - EXPIRATION OF LEASE
If we receive the Goods back at the end of the lease and the net proceeds are less than the residual value you agree to pay us in addition to any rent and other money which is payable by you to us, the amount of the deficiency.”
79 Clause 23 of the General Conditions provided that in the agreement, unless the context otherwise required, “transaction document” meant any of the following
“ DEFAULT
10. Default
Events of default for all customers
….
Companies - additional events of default
(2) If you are a company, you will also be in default if any of the following things happen:
(a) winding up : an application is made, a resolution is passed or an order is made for your winding up;
(b) external administration : you become an externally administered body corporate or a controller or a trustee for creditors is appointed in respect of any of your property; or
Note: Section 9 of the Corporations Law defines when a company is an externally administered body corporate and what a controller is.
….
11. Consequences of default
Our options
(1) If you are in default, we may waive the rights that we have.
Note: Clause 16 deals with waiver.
(2) If you are in default, we may do any one or more of the following:
(a) terminate immediately some or all of our obligations under this agreement;
(b) change immediately some or all of the conditions on which one or more of the facilities are made available (in particular, we may cancel an unused facility limit by reducing the facility limit for the facility or we may make the facility ‘on demand’);
(c) make some or all of the money that is or may become owing to us in respect of one or more of the facilities immediately due and payable to us (this includes the face value of all outstanding bills); and
(d) require you to provide us with enough cash to cover us for any contingent liabilities we may have under a facility (for example, a contingent liability under a letter of credit).
(3) We will give you written notice after acting under sub-clause (2)(a) or (b).
(4) We will make money due and payable ( see sub-clauses (2)(c) and (d) ) by giving you written notice, which becomes effective immediately we give it.
….
21. Consolidation of accounts
We may at any time combine, consolidate, merge or apply any credit balance in any of your accounts, or any amount available to us by way of set-off, lien or counterclaim, towards payment of money which is then, or will become, due and payable by you to us under any transaction document.
If we do any of these things, we will tell you in writing. We can do any of these things despite any previous agreement to the contrary. You authorise us to do anything in your name which is necessary for us to be able to do any of these things.
Our rights under this clause are in addition to any other rights we have at law or under any other agreement.”
80 In September 1999 Cinema Plus and its subsidiaries entered into a fixed and floating charge with ANZ. This was expressed to secure the due and punctual payment of “the Secured Moneys”, an expression defined to mean:
“the letter of offer;
these General Conditions;
any Specific Conditions for each of the facilities;
the securities; and
any other document required in connection with this agreement;
and also means any documents or agreements that amend any of these or replace them.”
“all money which the Chargor (whether alone or not) is or at any time may become actually or contingently liable to pay under, or in connection with, a Transaction Document to or for the account of the Chargee (whether alone or not) at any time, for any reason whatever, under, on account of or in connection with the Overdraft Facility, and whether the Chargee is the person who was originally entitled to any of the Secured Moneys, or the original Chargee under this Charge, or is an assignee, and:
(a) whether or not the Chargor consented to, or knew of, any assignment;
(b) no matter when any assignment occurred; and
(c) whether or not the entitlement to any of the Secured Moneys was assigned with this Charge.
It includes money by way of principal, interest, fees, costs, indemnity, Guarantee, charges, duties or expenses, or payment of liquidated or unliquidated damages under or in connection with the Overdraft Facility, or as a result of a breach of or default under or in connection with, a Transaction Document.”
81 “Transaction Documents” were defined to include the Facility Agreement contained in the Letter of Offer of 5 July 1999 and accepted by Cinema Plus on 20 July 1999 and as amended by a letter of agreement dated on or about the date of this charge.
82 Clause 2.3 of the charge was as follows:
“ Fixed and Floating Charge
This Charge is limited to assets and property from time to time situated in any jurisdiction and operates:
(a) as a fixed charge over all the Chargor’s right, title and interest (legal or equitable) both present and future in, to, under or derived from:
(i) all real property (freehold and leasehold), fixed plant, equipment having a value (being the highest of cost, market and replacement value) in excess of $10,000 (or its equivalent in another currency), goodwill, uncalled or unpaid capital (including any share premium), insurance policies, books of account, vouchers and other documents, patents and patentable rights, and trade marks and trade names;
(ii) all documents of title deposited with the Chargee by the Chargor for any purpose and any marketable securities (as defined in section 9 of the Corporations Law) other than marketable securities which are acquired and disposed of in the course of the ordinary day-to-day business of the Chargor;
(iii) all rights under agreements of any kind whatever;
(iv) all book and other debts which may be or become due or due and payable to the Chargor, but not the proceeds of those debts; and
(v) interests in personal property not referred to above and that are not acquired for disposal in the ordinary course of the Chargor’s business; and
(b) subject to clause 2.5, as a floating charge only, over all other property and assets.”
Under clause 2.5 the floating charge crystallised, inter alia, if an administrator was appointed of Cinema Plus.
83 On 9 March 2000 ANZ and Cinema Plus agreed to a variation of the facilities by cancelling the overdraft facility. By 30 May 2000 when the administrators were appointed, Cinema Plus had a shortfall to unsecured creditors of $39,734,000. The combined shortfall to unsecured creditors of Cinema Plus and its subsidiaries was $85,478,000.
84 On 31 May 2000 the administrators gave notice of their appointment to ANZ “[t]o the extent necessary and in accordance with section 450A(3) of the Corporations Law” (“the Law”). On 2 June 2000 the administrators wrote to ANZ confirming that the bank accounts maintained by Cinema Plus and its subsidiaries with ANZ were frozen immediately following the administrators’ appointment. The administrators gave instructions about the future operation of these bank accounts. One was to suspend any direct debit authorities in relation to the accounts.
85 On 6 June 2000 at the first meeting of creditors, an ANZ representative was appointed to the committee of creditors. On 8 June 2000 the administrators wrote to ANZ requesting ANZ to apply a “Stop Payment” to an attached list of cheques drawn from Cinema Plus’s account 014 002 8334 25214, that is, its current account. On 14 June 2000 ANZ consented to the administrators’ proposed Court application to extend time to convene the second creditors’ meeting. On 17 June 2000 the instalment of $34,921.20 due under the lease finance facility was not paid as a result of the freeze on direct debit payments. On 29 June 2000 the administrators called a second creditors’ meeting for 10 July 2000. They circulated a report to creditors under s439A of the Law indicating that, in the event of liquidation, there would be no return to unsecured creditors and recommending that Cinema Plus and its subsidiaries entered into a deed of company arrangement to enable a reconstruction. As already indicated, at that time, Cinema Plus’s current account with ANZ stood in credit in the amount of $1,452,127.96.
86 On the same day, ANZ wrote to the administrators enclosing by way of service “a Notice of Consolidation of Accounts in respect of the facilities”. The letter continued:87 For the period since their appointment up to 29 June 2000, the administrators had incurred liabilities on behalf of Cinema Plus to the value of $1,515,472, of which $1,256,836 remained unpaid. This included remuneration of $126,014.63.
“Please note that the Bank shall be appropriating the amount in the payment of the facilities on Friday 30 June 2000.”
The attached notice was in the following form:
“NOTICE OF CONSOLIDATION OF ACCOUNTS
To Cinema Plus Limited ACN 064 272 840
(Administrators Appointed)
c/- Ferrier Hodgson
Chartered Accountants
Level 17
2 Market Street,
SYDNEY NSW 2000 (the ‘ Customer ’)
Pursuant to its entitlements under the General Conditions (Second Edition 1995) and the Specific Conditions for Lease Facility the Bank hereby gives you notice that it has consolidated the following accounts:
1. Account no. 014002 8334-25214, and
2. The amounts owing to the Bank by the Customer under the facilities granted pursuant to the Letter of Offer dated 5 July 1999 as varied by the Variation Letter dated 23 February 2000 the ‘Facilities’ in the sum of $965,107.87 being the aggregate of:
(a) the Recovery Amount under the Lease Finance Facility; and
(b) the balance of moneys due in respect of the Facilities other than the Lease Finance Facility.
Accordingly a balance of $487,020.09 remains to the Customer’s credit in its deposit account.
This consolidation has effected a complete discharge of the Customer’s indebtedness to the Bank under the Facilities. The Bank will take steps to release its securities over the Company and its subsidiaries. The Bank has further decided in its discretion to re-transfer to the Company the plant and equipment the subject of the Lease Finance Facility (at no cost to the Bank).
Dated this 29 day of June 2000.”
88 On 30 June 2000 Cinema Plus and the administrators filed a notice of motion for an order restraining ANZ until the end of the administration of Cinema Plus from combining or setting off account 014 002 8334-25214 with any amounts owing or which might become owing to ANZ by Cinema Plus under the facilities granted pursuant to the Letter of Offer dated 5 July 1999 as varied by the variation letter dated 23 February 2000. Cinema Plus and the administrators sought a further order restraining ANZ until the end of the administration from exercising any right of consolidation, combination, set off or otherwise to withdraw or transfer any money from the account to reduce or satisfy any amounts owing or which might become owing to ANZ by Cinema Plus. On the same day, interim injunctions in the form sought were granted. The injunctions were continued on 3 July until the hearing of the proceedings began before Windeyer J on 5 July 2000. By this time, a summons had been filed. On 10 July 2000 Windeyer J dismissed the summons and ordered the plaintiffs to pay ANZ’s costs. From that decision, Cinema Plus and the administrators now appeal. On 11 and 14 July 2000 Mason P extended the injunctions until the determination of the appeal or further order.
Court Proceedings
89 Windeyer J identified four matters which required decision. Each related to the validity of the purported consolidation. The matters were:
Windeyer J’s Reasons for Judgment
90 Part 5.3A of the Law is entitled “Administration of a company’s affairs with a view to executing a deed of company arrangement” and is found in Chapter 5 of the Law which is entitled “External Administration”. Section 9 of the Law defines an “externally-administered body corporate” to mean a body corporate, inter alia, that is under administration. Division 3 of Pt 5.3A is headed “Administrator assumes control of company’s affairs”. Section 437A provides, relevantly, that while a company is under administration, the administrator has control of the company’s business, property and affairs. Section 437D provides, so far as material, as follows:
“1. Is consolidation in accordance with general common law principles available?
2. If not, is there a contractual right to consolidation under cl 21 of the General Conditions, or if otherwise available is it precluded because:
(a) it relies upon an acceleration provision in the event of default, which has not taken effect;
(b) clause 15 is invalid because 15(e) is penal in nature;
(c) clause 15 is void for uncertainty because the definition of ‘discount rate’ is void for uncertainty.
3. Does s440B of the Corporations Law prohibit the consolidation?
4. Is consolidation contrary to the general intention of Part 5.3A of the Corporations Law and the rights of indemnity and lien of the administrators pursuant to s443D and 443F.”
91 Division 6 in Pt 5.3A is entitled “Protection of company’s property during administration”. Section 440B provides:
“ONLY ADMINISTRATOR CAN DEAL WITH COMPANY’S PROPERTY
(1) [ Transaction affecting company property] This section applies where:
(a) a company under administration purports to enter into; or
(b) a person purports to enter into, on behalf of a company under administration;
a transaction or dealing affecting property of the company.
(2) [Transaction void] The transaction or dealing is void unless:
(a) the administrator entered into it on the company’s behalf; or
(b) the administrator consented to it in writing before it was entered into; or
(c) it was entered into under an order of the Court.
(3) [Exempt payments] Subsection (2) does not apply to a payment made:
(a) by an Australian ADI out of an account kept by the company with the ADI; and
(b) in good faith and in the ordinary course of the ADI’s banking business; and
(c) after the administration began and on or before the day on which:
(i) the administrator gives to the ADI (under subsection 450A(3) or otherwise) written notice of the appointment that began the administration; or
(ii) the administrator complies with paragraph 450A(1)(b) in relation to that appointment;
whichever happens first
(4) [Court order] Subsection (2) has effect subject to an order that the Court makes after the purported transaction or dealing.”
An Australian ADI is defined in s9 to mean, inter alia, an authorised deposit taking institution within the meaning of the Banking Act 1959.
92 Section 9 of the Law defines “charge” to mean:
“ CHARGE UNENFORCEABLE
During the administration of a company, a person cannot enforce a charge on property of the company, except:
(a) with the administrator’s written consent; or
(b) with the leave of the Court.”
“a charge created in any way and includes a mortgage and an agreement to give or execute a charge of mortgage, whether on demand or otherwise.”
93 Section 440C provides that during the administration of a company, the owner or lessor of property that is used or occupied by, or is in the possession of, the company cannot take possession of the property or otherwise recover it except with the administrator’s written consent or with the leave of the Court.
94 Section 441A, so far as presently material, provides:95 Division 9 of Pt 5.3A is entitled “Administrator’s liability and indemnity for debts of administration”. Sections 443D and 443F are in sub-Div B “Indemnity”. Section 443D provides that the administrator of a company under administration is entitled to be indemnified out of the company’s property for debts for which the administrator is liable under sub-Div A or a remittance provision as defined in subs 443BA (3) and his or her remuneration as fixed under s449E. Section 443E, so far as presently material, provides:
“(1) [Charge enforced] This section applies where:
(a) the whole, or substantially the whole, of the property of a company under administration is subject to a charge; and
(b) before or during the decision period, the chargee enforced the charge in relation to all property of the company subject to the charge, whether or not the charge was enforced in the same way in relation to all that property.
….
(3) [Chargee, etc may enforce charge] Nothing in section 437C or 440B, or in an order under subsection 444F(2), prevents any of the following from enforcing the charge, or any of the charges:
(a) the chargee;
…
(4) [Non-application of sec437D] Section 437D does not apply in relation to a transaction or dealing that affects property of the company and is entered into by:
(a) the chargee; or
(b) a receiver or person of a kind referred to in paragraph (3)(b) of this section;
in the performance or exercise of a function or power as chargee, or as such a receiver or person, as the case may be.”
Section 9 defines “decision period” in relation to a chargee in relation to a charge on property of a company under administration as the period beginning on the day when the administrators gave ANZ notice to the chargee of their appointment under s450A and ending on the tenth business day after that day.
96 Section 443F provides:
“ RIGHT OF INDEMNITY HAS PRIORITY OVER OTHER DEBTS
(1) [Priority of right of indemnity] Subject to section 556, a right of indemnity under section 443D has priority over:
(a) all the company’s unsecured debts; and
(b) subject to subsections (2) and (3) of this section, debts of the company secured by a floating charge on property of the company.”
In the events which happened, neither subss (2) nor (3) applied.
97 Dealing with the first of the matters he listed, Windeyer J said:
“ LIEN TO SECURE INDEMNITY
(1) [Administrator’s lien] To secure a right of indemnity under section 443D, the administrator has a lien on the company’s property.
(2) [Priority of lien] A lien under subsection (1) has priority over a charge only in so far as the right of indemnity under section 443D has priority over debts secured by the charge.”
98 About the second matter of whether there was a contractual right to consolidation under cl 21 of the General Conditions, Windeyer J said:
“Neither counsel was able to point to any case where, in the absence of contract, the right to combine had been held to exist in the case of a current account balance and a balance claimed to be due pursuant to a debt arising as a result of default under a lease. I do not consider that the right of combination arises, in the absence of some contractual right, in such a case. As I understand it, that view is in accordance with Bradford Old Bank Limited v Sutcliffe [1918] 2 KB 833 and Matthews v Geraghty (1986) 4 ACLC 727.”
“I consider it is clear that there is such a right if there is a present right to the recoverable amount payable under clause 15 of the specific conditions. If there were no present right to the recoverable amount the position may well be different, but as it is clear that there has been an event of default and it has not been argued that the bank has waived its rights to require repayment of the recoverable amount then if the clause is valid there is a contractual right of combination or consolidation.”
99 Windeyer J did not consider there was any penal provision present. In reliance upon The Council of the Upper Hunter County District v Australian Chilling and Freezing Co Limited (1968) 118 CLR 429 at 436 and the decisions of Heerey J and the Full Federal Court in EMCL Pty Ltd v Esanda Finance Corporation Limited (2000) FCA 612 and (1999) FCA 978, his Honour considered that calculation of “the recoverable amount” was one which could be determined with the aid of expert evidence.
100 This brought his Honour to consideration of the effect of s440B and whether or not the purported combination amounted to the enforcement of a charge in contravention of that section. In Broad v Commissioner of Stamp Duties (NSW) [1980] 2 NSWLR 40 at 46, Lee J said:101 In Wily v Rothschild Australia Ltd (1999) 47 NSWLR 555 Windeyer J at 564-5, applying the principles stated by Lee J in Broad, held that a finance provider could not have security over a debt in the form of a deposit account it owed its depositor. His Honour said at 564 that Broad was regarded as correct in law until the decision of the House of Lords in In re Bank of Credit and Commerce International SA (No 8) [1998] AC 214 (BCCI). Windeyer J said, at 564-5:
“The very fact that ‘the deposit’ means no more than an indebtedness of the bank to the plaintiff in the sum of $4,000 to be discharged on 2nd December 1981, makes it impossible, in my view, for it to be held that the instrument is a mortgage or charge, on the simple footing that there can be no mortgage or charge in favour of oneself of one’s own indebtedness to another.”
“In that case, although not necessary for the decision, the House of Lords disapproved the decision of Millett J in Re Charge Card Services Ltd [1987] Ch 150, in which case, according to Lord Hoffmann, the doctrine of conceptual impossibility was first propounded. At least so far as this country is concerned that is not the position. It was that decision which was discussed and affirmed in the Court of Appeal in Bank of Credit & Commerce International (No 8) [1996] Ch 245, after a careful review of authorities and academic writing most of which I have considered. The principal speech in the House of Lords was given by Lord Hoffmann, the other Law Lords agreeing with him. This decision leaves a trial judge in a difficult position. There is little to be gained by expressing an individual view and great weight must be given to the House of Lords decision, even if it has had a less than enthusiastic reception from at least one commentator, namely Professor Goode: see ‘Charge-Backs and Legal Fictions’ (1998) 114 LQR 178. However the fact that the decision in Broad has stood for nearly twenty years, and that it was followed in Estate Planning Associates (Australia) Pty Ltd v Commissioner of Stamp Duties (NSW) and accepted as correct in Esanda Finance Corporation Ltd v Jackson (1993) 11 ACLC 138, a decision of the Full Court of the Supreme Court of South Australia, provides a strong reason for continuing to follow it and to leave it to an appeal court to determine that such action is wrong. The position might have been different had the decision of the House of Lords been essential for its upholding the decision of the English Court of Appeal, but it was not, and seems partly at least to have been brought about through a desire to make the law accord with the desires of commerce rather than through totally convincing reasoning. In all these circumstances I have decided that I should follow the decision in Broad. ”
102 In his reasons for judgment Windeyer J adhered to his earlier decision and held that ANZ could not have a charge over the moneys in the current account, noting that the plaintiffs’ rights to appeal on the matter were preserved.
103 On the question whether the right of combination was a charge, his Honour referred to Timbertown Community Enterprises Ltd v Holiday Coast Credit Union Ltd (1997) 15 ACLC 1679, and said that in that case Young J had not made a final decision that the combination enforced a charge. Windeyer J acknowledged that there was some strength in the argument for the administrators that combination was contrary at least to the spirit of ss437A and 437D of the Law. However, in his Honour’s opinion, the act of combination was not contrary to s437D because it was not the act of the company under administration or the person on behalf of the company under administration. Reference was made to Osborne Computer Corporation Pty Ltd v Airroad Distribution Pty Ltd (1995) 37 NSWLR 382 where Rolfe J held that a pledge was not a charge within the definition, and that s437A did not prevent the person entitled to the benefit of the pledge from dealing with the property in accordance with the contractual arrangements with the company.
104 Windeyer J rejected an argument, apparently founded on s440C of the Law, that the notice of combination contemplated recovery of the leased assets and said that the notice made it perfectly clear that such right was to be waived and, in any event, it had not been exercised.
105 Windeyer J regarded the arguments put by reference to ss443D and 443F as the strongest for the administrators. His Honour said:106 The appellants relied on the following grounds of appeal:
“It would seem rather extraordinary if an administrator were able to prejudice what would be an ordinary right of set off of accounts, thereby benefiting one group of creditors to the detriment of the creditor entitled to set off. The purpose of the moratorium is to give a breathing space to enable investigations to take place as to whether creditors’ interests would be better provided for under a deed rather than on winding up. The purpose is not to take away rights from one creditor and confer the benefit of those rights on others. The question really is whether the entitlement to indemnity is an entitlement to be indemnified out of each individual item of property, as opposed to entitlement to indemnity out of property available after contractual rights of set off are exercised. I have come to the conclusion that the more reasonable interpretation of the construction of s443D is that property of the company is to be determined after taking into account rights of set off or combination. In other words it is to be interpreted consistently with s437A and Osborne Computers .”
Appeal
107 ANZ filed a notice of contention claiming:
“1. His Honour erred in adhering to his earlier decision in Wily v Rothschild Australia (1999) 47 NSWLR 555, and in not following the House of Lords decision in In re Bank of Credit and Commerce International SA(No 8) [1998] AC 214, in holding that the Respondent could not have a charge over moneys owed by it to the First Appellant, represented by the current account.
2. His Honour erred in failing to hold that clause 21 of the General Conditions created a charge for the purposes of section 440B of the Corporations Law.
3. His Honour erred in failing to hold that the exercise, or proposed exercise, of rights by the Respondent under clause 21 of the General Conditions was prohibited during the period of administration of the First Appellant by:
(a) s440B of the Corporations Law, and
(b) s437D of the Corporations Law.
4. His Honour erred in failing to hold that the exercise, or proposed exercise, of rights by the Respondent under clause 21 of the General Conditions:
(a) constituted, or would constitute, forfeiture of the First Appellant’s rights as lessee of the leased assets,
(b) amounted, or would amount, to recovery of the leased assets within s440C of the Corporations Law.
5. His Honour erred in failing to hold that the exercise, or proposed exercise, of rights by the Respondent under clause 21 of the General Conditions was prohibited during the period of administration of the First Appellant by s440C of the Corporations Law.
6. His Honour erred in failing to hold:
(a) that pursuant to sections 443E and 443F of the Corporations Law the right of indemnity of the Second Appellants in respect of debts within s443D(a) and remuneration within s443D(b) and the lien of the Second Appellants to secure that indemnity have priority over the debts owing or which may become owing by the First Appellant to the Respondent under the Lease Finance Facility,
(b) that by reason of those rights and that priority the Respondent was not, or is not, entitled to exercise its rights under clause 21 of the General Conditions.
7. His Honour erred in failing to hold:
(a) that clause 15(2) of the Lease Finance Facility was void for uncertainty by reason of the definition of discount rate in clause 15(6),
(b) that there was no acceleration of the amounts payable by the First Appellant to the Respondent under clause 15(2) of the Lease Finance Facility which could form the subject matter of the exercise, or proposed exercise, of rights by the Respondent under clause 21 of the General Conditions.
8. His Honour erred in failing to hold that clause 15(2) of the Lease Finance Facility amounted to a penalty provision and was void.”
“1. His Honour erred in concluding (at para 9 of the reasons for judgment) that the respondent did not have a general law right to combine the current account balance and the balance due pursuant to the lease.
Grounds 1, 2 and 3(a) of the appeal and the notice of contention
2. His Honour ought to have found that the respondent had a general law right to combine the current account balance and the balance due pursuant to the lease.”
108 The appellants submitted that cl 21 created a charge as defined in s9 of the Law and therefore within the meaning of that term in s440B and that that section prevented the enforcement of the charge during the administration of the company without the administrators’ consent or the leave of the Court. Accordingly, it was said, s440B prevented the exercise of the right to consolidate.
109 In BCCI at 226 Lord Hoffmann identified the normal characteristics of an equitable charge in order to test the reason given by the Court of Appeal that “a man cannot have a proprietary interest in a debt or other obligation which he owes another”. His Lordship said:110 In Associated Alloys Pty Ltd v ACN 001 452 106 Pty Ltd (2000) 74 ALJR 862 at 864-5 Gaudron, McHugh, Gummow and Hayne JJ referred to Lord Hoffmann’s speech and said that Lord Hoffmann
“There are several well known descriptions of an equitable charge (see, for example, that of Atkin LJ in National Provincial and Union Bank of England v Charnley [1924] 1 KB 431, at 449-450) but none of them purports to be exhaustive. Nor do I intend to provide one. An equitable charge is a species of charge, which is a proprietary interest granted by way of security. Proprietary interests confer rights in rem which, subject to questions of registration and the equitable doctrine of purchaser for value without notice, will be binding upon third parties and unaffected by the insolvency of the owner of the property charged. A proprietary interest provided by way of security entitles the holder to resort to the property only for the purpose of satisfying some liability due to him (whether from the person providing the security or a third party) and, whatever the form of the transaction, the owner of the property retains an equity of redemption to have the property restored to him when the liability has been discharged. The method by which the holder of the security will resort to the property will ordinarily involve its sale or, more rarely, the extinction of the equity of redemption by foreclosure. A charge is a security interest created without any transfer of title or possession to the beneficiary. An equitable charge can be created by an informal transaction for value (legal charges may require a deed or registration or both) and over any kind of property (equitable as well as legal) but is subject to the doctrine of purchaser for value without notice applicable to all equitable interests.”
111 In BCCI a bank, which subsequently went into liquidation, lent money to several companies. The loans were secured by purported charges executed by third parties over deposit accounts they maintained at the bank. The security documents consisted of letters, an example of which contained the following (at 221):
“gave a description of an equitable charge in which he emphasised that the proprietary interest created thereby is held by way of security, so that the chargee may resort to the charged asset only for the purpose of satisfying some liability due to the chargee. The charge is subject to the equity of redemption retained by the owner.”
112 Having rejected the argument that the letter could not operate as a charge over the deposit by reason of “conceptual impossibility”, Lord Hoffmann said at 228:
“In consideration of [BCCI] at our request providing from time to time banking facilities to ……(‘the borrower’) from time to time, I ….. hereby give a lien/charge on the balance maintained by me in my accounts with you for all of the outstanding liabilities of the borrower in respect of the banking facilities and so that you shall have the power to withdraw and utilise the proceeds thereof … for the reduction or adjustment of the outstanding liabilities of the borrower with the bank without reference to me. …..
It is understood that the balances held in the accounts under the lien/charge are not to be released to me, my heirs or assignees unless or until the entire outstanding liabilities of the borrower … are fully repaid….”
113 A banker has a prima facie right in law to combine the accounts of a customer and set off debits against credits. That prima facie right may be excluded by special contractual provisions, express or implied, requiring the banker to keep the accounts separate; see Matthews v Geraghty at 734. However, sums paid into a current account are appropriated by the customer to that account and cannot be set off by the bank against debits in the customer’s loan account without the consent of the customer; Bradford Old Bank Limited v Sutcliffe at 839, 843 and 847; National Westminster Bank Limited v Halesowen Presswork & Assemblies Limited [1972] AC 785 at 809 and 819 and per Roskill J and Buckley LJ [1971] 1 QB 1 at 22 and 47. In Bradford Old Bank Pickford LJ, as Lord Sterndale then was, remarked at 839:
“It follows that in my view the letter was effective to do what it purported to do, namely to create a charge over the deposit in favour of BCCI.”
“If it were otherwise, the [customer] would be extremely hampered in their business, for they could never safely draw on the current account so long as the credit balance did not exceed the amount due on the loan account. The effect of this arrangement is that payments to the credit of the current account are appropriated to that account and cannot be taken in reduction of the loan account.”
114 Absent a contractual provision such as cl 21 of the General Conditions, moneys owing to ANZ under the loan facilities could not be combined with the moneys in the current account to set off the credit in the current account against the amount owing under the loan facilities.
115 In Matthews v Geraghty at 734 King CJ said:116 The allocation of moneys between various accounts is a mere matter of mutual convenience. The prima facie right in law of the banker to combine such accounts does not of itself secure the debt owing to the banker by charge within the meaning of s9 of the Law. Strictly the consolidation or combination may be regarded as a matter of account rather than set off. The balance of all such accounts represents the debt; see In re Charge Card Services Limited [1987] Ch 150 at 173-4. No one has suggested otherwise. Clause 21 of the General Conditions extends the right at law to combine or consolidate so as to include on the debit side money owed by Cinema Plus to ANZ on loan accounts. It does not purport to give ANZ any proprietary right in the chose in action which comprised Cinema Plus’s right to claim payment of its deposit in the current account. As between the accounts, ANZ’s right, based on contract, is no greater and no different in nature from the right enjoyed at law to combine current accounts. In this regard, one can compare the contractual language with the form of the letter of lien/charge discussed in BCCI. It follows that even if the House of Lords in BCCI should be followed in Australia and Broad v Commissioner of Stamp Duties was wrongly decided on the question of “conceptual impossibility”, s440B of the Law does not prevent ANZ from exercising its contractual right under cl 21 without the administrators’ written consent or the leave of the Court.
“It is trite that the relationship between the customer and the bank is that of debtor and creditor. Moneys standing to the credit of an account at the bank are not impressed with any trust in favour of the customer….”
Ground 3(b): The meaning of s437D
117 The appellants submitted that s437D applied because ANZ, in giving the notice of consolidation of accounts and effecting in the language of the notice “a complete discharge of the Customer’s indebtedness to the Bank under the Facilities”, purported “to enter into, on behalf of a company under administration a transaction or dealing affecting property of the company.” It was pointed out that cl 21 of the General Conditions provided an authority to ANZ to do anything in Cinema Plus’s name necessary for the exercise of ANZ’s rights and that it contemplated an application of Cinema Plus’s property consisting of the debt owed by ANZ to Cinema Plus in satisfaction of the indebtedness of Cinema Plus to ANZ. The appellants submitted that this exercise of rights by ANZ under cl 21, in so far as it operated to satisfy Cinema Plus’s payment of obligations under the lease finance facility and to forfeit Cinema Plus’s rights to possession and use of the goods, constituted a transaction or dealing affecting Cinema Plus’s property, being its rights as lessee, purportedly entered into on behalf of Cinema Plus.
118 The argument turned on the meaning of the phrase “on behalf of”. Those words may mean, in different contexts, “on the part of”, “as representative of”, “on the side of” or “in the interest of”. The context may show that the connection is that of agency but it need not be. The Chief Justice has referred to In re Ross; ex parte Attorney General for the Northern Territoryof Australia (1979) 54 ALJR 145 at 149. Reference is there made to the judgment of Dixon J in The King v Portus; ex parte Federated Clerks Union of Australia (1949) 79 CLR 428 at 438 where, in the context under consideration, Dixon J said that the expression meant “for the purposes of, as an instrument of, or for the benefit and in the interest of, the Commonwealth.” But even giving the expression in s437D(1)(b) this meaning, ANZ was not, in my opinion, so acting when it combined the accounts pursuant to cl 21 of the General Conditions.
119 Clause 21 empowers ANZ to act independently and in no sense on behalf of Cinema Plus. Mechanically in a particular situation, authority to do something in Cinema Plus’s name may be necessary. It was not in the present case. But the act of ANZ was an act based on the terms of the contract. It acted on its own behalf. In my opinion, ANZ was not, in exercising its power under cl 21, purporting to enter into a transaction “on behalf of” Cinema Plus and, accordingly, s437D does not apply to the transaction.
Grounds 4 and 5: The meaning of s440C
120 The appellants submitted that the consolidation was in breach of s440C of the Law. They relied upon cl 9 of the Specific Conditions which provided that Cinema Plus deliver up the goods to ANZ at the expiration of the lease. In fact, as is apparent from the notice of consolidation of accounts, no goods were delivered up, the indebtedness of Cinema Plus to the bank was completely discharged and ANZ retransferred to Cinema Plus the plant and equipment the subject of the lease finance facility. The appellants submitted that the extinguishment of Cinema Plus’s rights of possession and use of goods under the lease finance facility amounted to the recovery by ANZ of property used or in the possession of Cinema Plus within the meaning of the section.
121 “Recover” means to get back into one’s hands or possession something lost or taken away. It is singularly inapt an expression to apply to what occurred between Cinema Plus and ANZ. None of the property the subject of the lease back was ever in the hands or possession of ANZ. At all material times it was in the hands or possession of Cinema Plus where it remained and, so far as ANZ was concerned, would continue to remain after the consolidation of accounts. Cinema Plus was released from its indebtedness to ANZ and the lease back, presumably, terminated. None of that, in my opinion, in any sense involved the recovery by ANZ of property used or in the possession of Cinema Plus. The arrangement did not offend s440C of the Law.
Ground 6: The administrators’ right of indemnity
122 The appellants claimed that pursuant to ss443D, 443E and 443F of the Law the administrators were entitled to be indemnified out of Cinema Plus’s property for debts for which they were liable under sub-Div A and the defined remittance provision and remuneration fixed under s449E of the Law, with priority over all Cinema Plus’s unsecured debts and, in the events which happened, over debts secured by a floating charge on the property of the company, and that the administrators were secured by a lien on Cinema Plus’s property. ANZ did not attempt to enforce its charge under s441A of the Law before or during the decision period so as to attract the operation of that section. Section 9 defines “floating charge” to include a charge that conferred a floating security at the time of its creation but has since become a fixed or specific charge. Accordingly, there is no significance in the happening of an event of crystallisation. The appellants submitted that their priority and lien took precedence over ANZ’s right to combine accounts so that the right could not be exercised to give ANZ the benefit of the credit balance in the current account rather than the administrators.
123 The effect of ss443D, 443E and 443F, in the events which have happened, was that the administrators enjoyed a right of indemnity out of Cinema Plus’s property for debts they had incurred in the course of their administration, inter alia, for services rendered, goods bought, or property hired, leased, used or occupied, liability relating to payments for property used or occupied by, or in the possession of Cinema Plus under agreements made before the administration began and after a period of grace, liability for lease payments or hire charges together with unremitted group tax and similar unremitted amounts deducted by the administrators in respect of the period of administration and for their remuneration as fixed under s449E. Subject to s556, which is not here material, their right of indemnity had priority over Cinema Plus’s unsecured debts together with the debts, including that owing under the lease finance facility, secured by the floating charge. Finally, the administrators had a statutory lien on Cinema Plus’s property to secure their right of indemnity the effect of which was to make them a secured creditor. See generally O’Donovan, “Corporate Insolvency”, (1994) 12 Companies and Securities Law Journal at 382 and following.
124 I agree with the Chief Justice for the reasons that he has given that, in respect of debts incurred by the administrators and the remuneration to which they were entitled between the date of their appointment on 30 May 2000 and consolidation, they were entitled to be indemnified out of Cinema Plus’s property. To that extent, the debt as evidenced by the credit in the current account was not available for consolidation.
125 I also agree that, in terms of any surplus beyond that amount, there was nothing in the Law, for reasons I have already given, which prevented or invalidated the consolidation of the remaining balance with the loan account. In short, like the Chief Justice, I think that ground 6(a) succeeds but that does not mean as is asserted in ground 6(b) that ANZ was not entitled to exercise its rights under cl 21 of the General Conditions in respect of the balance, after allowing for the amount of their indemnity for debts and remuneration until consolidation of the accounts.
126 Windeyer J treated the notice of consolidation of accounts as a notice that consolidation had taken place which in terms it was. ANZ gave notice that “it has consolidated the following accounts” and stated that the consolidation “has effected a complete discharge of the customer’s indebtedness to the bank under the Facilities”. Accordingly, his Honour did not regard it as clear that the injunction restraining consolidation was appropriate. In the covering letter of 29 June 2000 to Mr Sherman, ANZ wrote: “Please note that the bank shall be appropriating the amount in the payment of the facilities on Friday, 30 June 2000.” In an affidavit of 5 July 2000, Brian Soper, an account executive in ANZ’s Group Credit Management Department, deposed as follows:
“On 28 June 2000, the bank took the decision to combine its accounts and issued the combination notice to the first plaintiff the following day. Prior to the sending of that notice, I contacted Steven Sherman by telephone to advise him of the bank’s intentions in this regard.”
127 There is no evidence that before the injunction order was made on 30 June 2000 or served ANZ had in fact consolidated the accounts. It would not have done so after notice of the injunction. The way in which the submissions were put and the fact that the injunction was granted and continued without its being submitted that it was too late suggests that in fact the accounts had not been consolidated. If this be so, the question remains open whether the administrators’ indemnity should be only in respect of debts incurred and remuneration earned up to the date of the injunction or until some later date. This was not argued before us and should be remitted to the Equity Division for determination in the light of the reasons of this Court.
128 The appellants put an alternative argument, not run at the hearing and to which for that reason ANZ objected, that in respect of an estimated amount of $412,763 said to represent deposits made to the current account between 30 May and 29 June 2000, the deposits were fixed with the statutory lien at the time of deposit and that priority was not lost when the deposits were transformed into a part of the debt due by ANZ to Cinema Plus. In my opinion, for reasons I have already given, the administrators’ right to indemnity out of Cinema Plus’s property was limited to debts incurred and remuneration for the period between 30 May 2000 and the date of consolidation, subject to what I have said about the effect of the injunction. That limitation flowed from the unimpaired right of ANZ to consolidate and to that extent truncate the relevant property, namely the debt owed by ANZ to Cinema Plus.
Ground 7(a): Uncertainty
129 The argument was directed to the definition of “discount rate” in cl 15(6) of the Specific Conditions. Clause 15(2) provided that if during the lease an event of default occurred and continued, there became immediately due and payable to ANZ a total which was described as the “recoverable amount” and which included the aggregate of the rent instalments not then accrued which were to be rebated to reflect their present value and an amount equal to the residual value of the goods discounted. In each case the amount was calculated by applying the discount rate. Relevantly, the discount rate was one to be determined in a way that would ensure that ANZ received “the same rate of pre-tax return or profit after such discounting” as it would have received from the lease if all instalments and payments had been paid.
130 Two points were relied on: first, what was said to be the reference to two distinct and different concepts, namely “return” and “profit” without indicating which was to apply and secondly, what was said to be the implicit and necessary guesswork involved in predicting future return or future profit which ANZ would receive over the remaining period of the lease upon acceleration. This uncertainty was said to be manifested by three different figures which ANZ produced as the “recoverable amount”.
131 In The Council of the Upper Hunter County District v Australian Chilling and Freezing Co Limited at 436-7 Barwick CJ said:132 I am not persuaded that the words “return” and “profit” in the context in which they were here used are so precise that one can say they have different and irreconcilable meanings which would require the choice of one in preference to the other as applicable. It seems to me that in this context their meanings overlap and are intended as alternative expressions of the same concept. What the meaning of the composite expression is may require expert evidence. The expression was considered by the Full Federal Court in EMCL Pty Limited v Esanda Finance Corporation Limited at para 35 and following. The issue was referred back to Heerey J (2000) FCA 612 and presented in that case no problem of application. Prediction of future returns and future profits is an everyday function of courts. In my opinion, the clause is not void for uncertainty.
“But a contract of which there can be more than one possible meaning or which when construed can produce in its application more than one result is not therefore void for uncertainty. As long as it is capable of a meaning, it will ultimately bear that meaning which the courts, or in an appropriate case, an arbitrator, decides is its proper construction: and the court or arbitrator will decide its application. The question becomes one of construction, of ascertaining the intention of the parties, and of applying it.”
133 The appellants’ argument was that there were two separate default regimes, one found under cl 15 of the Specific Conditions and the other under cl 10 of the General Conditions. The General Conditions provided for default if Cinema Plus became an externally administered body corporate, which it did when the administrators were appointed. The regime under these conditions provided for acceleration on giving written notice which, it was argued, was here required. We were informed that this argument was not put to Windeyer J. At trial, default was conceded. In any event, there was clearly default within the meaning of cl 15(1)(d) of the Specific Conditions in that a ground arose on which a court might order the winding up of Cinema Plus which was manifestly insolvent. In my opinion, this ground of appeal should be rejected.
Ground 7(b): That there was no acceleration under cl 15(2) of the Specific Conditions
Ground 8: That cl 15(2) of the Specific Conditions amounted to a penalty provision and was void
134 The appellants’ submission was that cl 15(2)(e), which included in the recoverable amount an amount equal to the residual value of the goods, albeit discounted, was penal because if the lease had run its full course, no obligation would have remained upon Cinema Plus to pay ANZ the amount of the residual value. In this regard we were referred to cl 3 of the lease finance facility acknowledgment (Schedule A) and cl 9 of the Specific Conditions. Windeyer J said that the argument would have had some force were it not for the provisions of cl 17 which provided that the recovered goods would be sold and the sale price credited against the recoverable amount.
135 Under the sale and lease back agreement ANZ was the lessor and Cinema Plus the lessee of the goods. In the lease finance facility acknowledgment Cinema Plus emphasised that for taxation purposes the transaction was to be a lease. At the expiration of the lease property in the goods remained in the lessor, ANZ, and Cinema Plus was bound to deliver them up to ANZ. In the event of default under cl 15 of the Specific Conditions the recoverable amount became due and payable by Cinema Plus to ANZ. Part of that amount was an amount calculated by reference to the residual value of the goods discounted by applying the discount rate. Clause 15(3) provided that ANZ might at any time retake possession of the goods unless Cinema Plus had paid to ANZ the recoverable amount. Clause 15 proceeded on the basis therefore, as happened in the present case, that Cinema Plus retained possession of the goods. In this sense the discounted residual value was the price paid for the goods which belonged to ANZ but which Cinema Plus kept.
136 If ANZ received the goods back into its possession, it agreed pursuant to cl 17 of the Specific Conditions to sell the goods at the best price it could reasonably obtain. The net proceeds as defined in cl 17 were credited against the recoverable amount and any other money payable by Cinema Plus to ANZ. If the net proceeds exceeded the recoverable amount and any other amount that was payable to ANZ, ANZ retained the excess. The parties have agreed that to the extent to which the goods returned were worth less than the residual value stipulated, Cinema Plus would pay ANZ the difference. Similarly, under cl 18 of the Specific Conditions on the expiration of the lease if ANZ received the goods back and the net proceeds of sale were less than the residual value Cinema Plus agreed to pay the amount of the deficiency.
137 In brief, the scheme was that at the end of the lease Cinema Plus would keep the goods and pay the residual value or deliver up the goods and pay, effectively, the residual value less the net proceeds of the sale.
138 In Esanda Finance Corporation Limited v Plessnig (1989) 166 CLR 131 the High Court considered whether the provisions of a hire purchase agreement applicable on default were unenforceable by reason of being a penalty and held that they were not. The question there, as here, was whether the provisions were penal rather than compensatory in character, whether the agreed sum on default was out of all proportion to the damage likely to be suffered as a result of the default, or extravagant, exorbitant or unconscionable. Quite clearly the calculation in cl 15 was designed to achieve for ANZ compensation equivalent to the amount it would have received had the lease expired at the due time. In my opinion, the provisions complained of are not penal.139 The appellants succeed only partially in their appeal. In my opinion, ANZ should pay one-half of the appellants’ costs of the appeal. Unless agreed, the parties should make further submissions on the costs of the hearing before Windeyer J.
Costs:
140 I propose the following orders:
Orders:
1. Appeal allowed;
2. Notice of contention dismissed;
3. Set aside the orders made by Windeyer J on 10 July 2000;
4. The parties to bring in short minutes of order;
5. The respondent to pay one-half of the appellants’ costs of the appeal.
141 GILES JA: I have had the advantage of reading the reasons of Spigelman CJ and Sheller JA in draft. Subject to the following additional remarks, I agree with the reasons of Sheller JA and, together with his Honour, with the reasons of the Chief Justice in relation to ground 6 of the notice of appeal.
142 It was argued under the notice of contention that the lease finance facility was provided by ANZ as part of the relationship of banker and customer, that such facilities have become a common feature in banker and customer relationships, and that the indebtedness arising under the lease finance facility was a debt between banker and customer qualifying as an account capable of combination. It may be that banking business has expanded since Bradford Old Bank Ltd v Sutcliffe [1918] 2 KB 833 was decided, but loan transactions have long been part of banking business and that case shows that it is not enough that the parties are a banker and its customer. It is necessary that there be “really but one account” (In re European Bank [1872] LR 8 Ch App 41 at 44). A banker’s right to combine accounts does not extend to combination of a current account and a loan account where the accounts are not kept separate simply for convenience but to serve different functions inimical to their consolidation, see Bradford Old Bank Ltd v Sutcliffe at 839, 843, 847; Halesowen Presswork & Assemblies Ltd v Westminster Bank Ltd [1971] 1 QB 1 at 46.. In the present case the current account and the lease finance facility served different functions, and the reasoning where a current account may not be combined with a loan account is applicable: indeed, the parties were at pains to agree that the loan transaction was one of “true leasing”.
143 In In re Bank of Credit and Commerce International SA (No 8) [1998] AC 214 there was no doubt that the parties intended to create a charge. The question was whether they could do so. I do not think it necessary to debate conceptual impossibility; a sufficient question in the present case is whether the parties intended to create a charge.
144 A charge involves a proprietary interest held by way of security. It may arise in consequence of contractual rights, as in an equitable charge, but the objectively ascertained contractual intention must be to confer a proprietary interest as security for a present or future debt. Being proprietary, the charge must in its nature be assignable.
145 The common law right to combine accounts does not give rise to a charge. While cl 21 of the General Conditions provides for combination of accounts in circumstances beyond those in which combination of accounts is available at common law, in the description of accounts and debts, it does not by the contractual right depart from the model of the common law right. It does not purport to confer a proprietary interest. The contractual right is a personal right and is effectively not assignable - it is of no use to anyone other than ANZ, with whom the accounts are held, and can be given effect only by ANZ by book entries. If the parties have adopted a legal institution distinct from a charge, it should not be treated as a charge for s 440B of the Law: Associated Alloys Pty Ltd v ACN 001 452 106 Pty Ltd (2000) HCA 25 at [51].
146 In relation to ground 6, I understand the Chief Justice’s statements to the effect that “the company’s property” is Cinema Plus’s property at the respective times that the administrators’ right of indemnity arose to be in the context of the later exercise of a right extinguishing property. I do not take his Honour’s reasons to be concerned with after acquired property as such.
147 I agree with the orders proposed by Sheller JA.*****
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