Cinema Plus v ANZ Bank

[2000] NSWSC 658

Reported Decision: [2000] 34 ACSR 621

New South Wales

Supreme Court

CITATION:	Cinema Plus v ANZ Bank [2000] NSWSC 658
CURRENT JURISDICTION:	Equity
FILE NUMBER(S):	SC 3002 of 2000
HEARING DATE(S):	5 and 6 July 2000
JUDGMENT DATE:	10 July 2000
PARTIES :	Steven John Sherman and Ian Douglas Ferrier (Second Plaintiffs) Australia and New Zealand Banking Group Limited (Defendant)
JUDGMENT OF:	Windeyer J at 1

COUNSEL :	Mr P.M. Wood (Plaintiffs) Mr J.E. Thomson with him Mr N Newton (Defendants)
SOLICITORS:	Henry Davis York (Plaintiffs) Blake Dawson Waldron (Defendant)
CATCHWORDS:	CORPORATIONS - voluntary administration - powers of administrator - control of current account - contractual right to consolidate accounts not a charge - exercise of contractual right of combination permissible - Corporations Law, s437As, s437D, s440D - CORPORATIONS - voluntary administration - powers of administrator - administrator’s right to indemnity - whether priority over rights of set-off or combination - Corporations Law, s443D, s443F - BANKING AND FINANCIAL INSTITUTIONS - Banker and Customer - banker’s general law right to combine accounts - whether current account could be consolidated with debt arising for default under lease - CONTRACT - construction and interpretation - uncertainty - sale and lease back - provision for acceleration of payments on default - failure to specify method of calculation for rebate for future interest - CONTRACT - penalty - finance by sale and lease back - provision for acceleration of payments - whether lessor entitled to retention of lease goods and their residual value
LEGISLATION CITED:	Corporations Law ss 9, 437A, 437D, 440B, 440C, 440D, 443D, 443F, 444B, 444D, 553D, Pt 5.3A Corporations Regulations, Sch 8A
CASES CITED:	Bradford Old Bank Limited v Sutcliff [1918] 2 KB 833 EMCL v Esanda Finance Corporation Limited (2000) FCA 612 and (1999) FCA 978 Citicorp Australia Limited v Hendry (1985) 4 NSWLR 1 at 35 Matthews v Geraghty (1986) 4 ACLC 727 Osborne Computer Corporation Pty Limited v Airroad Distribution Pty Limited (1995) 37 NSWLR 382 Timbertown Community Enterprises Limited v Holiday Coast Credit Union Limited (Young J SCNSW unreported 22 October 1997). Upper Hunter District Council v Australian Chilling & Freezing Co Limited (1968) 118 CLR 429 at 436 Wily v Rothschild Australia (1999) 47 NSWLR 555
DECISION:	See paragraph 18

10

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

WINDEYER J

MONDAY 10 JULY 2000

3002/00 CINEMA PLUS LIMITED & ORS v AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED

JUDGMENT

Facts

1    The plaintiff administrators were appointed administrators of Cinema Plus Limited (Cinema Plus) by resolution of the directors of that company on 30 May 2000. The second meeting of creditors of the company is to be held at 10.00 a.m. on 10 July 2000, as a result of certain extensions of time and remedial orders made by me on 6 July.

2    The defendant, Australia and New Zealand Banking Group Limited (ANZ) was a banker to Cinema Plus. That company had a current account with ANZ which on 29 June 2000 had a credit balance of $1,452,127.90. Cinema Plus, pursuant to a letter of offer from ANZ accepted on 20 July 1999, had certain finance facilities with ANZ, the one relevant to these proceedings being a lease finance facility pursuant to which ANZ was to purchase assets from Cinema Plus for $1,200,000 and lease them back for a period of three years. By sale and lease-back agreement dated 17 September 1999, the leasing facility was put into effect. The monthly rent payable under the leasing agreement was $34,640.46, plus duties of $280.74. The residual value was fixed at $120,000. The lease document is quite complicated as it appears to incorporate an acknowledgment, specific conditions and general conditions, some of which just duplicate others.

3    So far as the specific conditions are concerned, clause 9 provides for delivery up of the goods at the expiration of the lease or its earlier determination. Clause 15 sets out events of default, including an event upon which a meeting may be called placing the company under administration. The events of default are in effect self-executing. The following specific conditions are of importance:

15
…
(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 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.
…
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.

4    The general conditions include an additional event of default namely if the lessee becomes an externally administered body corporate. Clause 21 of the General Conditions is as follows:

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, 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.

"Transaction document" includes the lease document itself. In addition to the lease document all moneys due to ANZ under its facility agreement are subject to a fixed and floating charge dated September 1999, which is a transaction document under the lease agreement, the lease agreement being a transaction document under the charge. So far as the charge is a floating charge, it crystallises and becomes a fixed charge immediately upon an administrator being appointed to the borrowing company. After this it operates on all the assets and undertakings of Cinema Plus with certain exceptions which are not relevant here.

5    On 29 June 2000 ANZ wrote to the administrators enclosing notice of consolidation of accounts in respect of the facilities. The letter said inter alia:

Please note that the Bank shall be appropriating the amount in the payment of the facilities on Friday 30 June 2000.

That letter is somewhat strange but in any event the attached notice of consolidation was as follows:

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 Finance Facility the Bank hereby gives you notice that it has consolidated the following accounts:
1. Account no. 014002 8334025214, and
2. The amounts owing to the Bank by the Customer under the facilities granted pursuant to the Letter of offer dated 5 July 19999 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
(signed)
Australia and New Zealand Banking
Group Limited ACN 005 357 522

It is to be noticed that this was not a notice of intention to consolidate but notice that consolidation has taken place.

6    On 30 June the administrators sought and obtained an ex parte injunction restraining ANZ from consolidating the credit account with or against amounts due under the facilities. That order has been extended and is now extended until the determination of these proceedings or earlier order. Whether or not its terms are appropriate is not altogether clear as it would seem from the notice that consolidation has already taken place. By the summons the plaintiffs seek declarations that the defendant is not entitled to consolidate in accordance with its notice until the end of the administration and seek the injunctive order now obtained on an interlocutory basis as a final order until the end of the administration.

7    When the hearing commenced before me I was told, probably correctly, that it required the determination of questions of considerable importance in banking law and on the rights of the creditors of companies during the period a company is under administration. That is undoubtedly right. There has been little time in which to give proper consideration to these matters as any decision will be futile unless it is given before the second meeting of creditors takes place. The administrators intend to recommend to the creditors at that meeting that a deed of company arrangement be entered into rather than that the company be placed into liquidation. The reasons for this are that if the company is placed into liquidation it is unlikely that there would be any moneys available to unsecured creditors including preferential claims of employees whereas a deed may produce something for those creditors and note-holders. The administrators have stated that a scheme relies upon the moneys standing, or which stood to the credit of Cinema Plus in its current account prior to combination, being available. They also claim to have a lien over those moneys for liabilities incurred during the course of the administration including, but not limited to, their own fees.

8    It is now possible to deal with the various matters which require decision. These are:

1. Is consolidation in accordance with general common law principles available?

2. If not, is there a contractual right to consolidation under clause 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.

I deal with these matters in turn. It must be understood that in view of the urgency it has now been possible to give any extensive citation of authority although I trust the judgment is consistent with authority.

General law combination or consolidation of accounts

9    Combination of accounts is a right which arises through the relationship of banker and customer. In general it arises as a result of two current accounts held between banker and customer, but it may be implied in the case of loan accounts and current accounts. 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 Sutcliff [1918] 2 KB 833 and Matthews v Geraghty (1986) 4 ACLC 727.

Is there a contractual right to consolidation under clause 21 of the general conditions?

10    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. Upon one of the events default preceded administration.

Penalty

11    The plaintiffs argue that clause 15 insofar as it entitles immediate recovery of the recoverable amount, amounts to a penalty through the incorporation of sub-section (e). That argument is based on the assumption, as I understand it, that a penalty arises because the lessor bank would be entitled, not only to retention of the leased goods, but also to the amount of the residual value of those goods as specified. That argument would have had some force were it not for the provisions of clause 17 which I have set out, which provide that the recovered goods would be sold and the sale price credited against the recoverable amount. I consider, as a result of that, no penal provision is present.

Uncertainty

12    The final argument of the plaintiffs is that clause 15(2) is void for uncertainty because the definition of "discount rate" is uncertain in that it is not capable of calculation. Counsel for the plaintiffs says that it would be easy enough for the bank to have provided for a discount mechanism in one of the ways suggested by Priestley JA in Citicorp Australia Limited v Hendry (1985) 4 NSWLR 1 at 35. So it would but those ways are not the only way to certainty. While counsel for the plaintiff argued otherwise, it is my view that the concepts of pre-tax return or pre-tax profit are one and the same thing. Return on investment is generally regarded as being the same as profit on investment or rate of interest on investment. The question then is whether or not there is an impossibility of any certain objective content in the concept of pre-tax return or profit. It is fair to say that ANZ has already produced three figures for the recoverable amount. The first is in the notice of combination, namely $965,107.87, the second is Exhibit 2 $964,852.98 and the third in Exhibit C being the documents produced by the bank under notice to produce where the amount calculated is $967,356.63, leaving aside a GST component which is not applicable. These different calculations do not necessarily mean that the agreement is void for uncertainty. When parties have entered into a commercial bargain, the courts should not assume the terms are uncertain just because calculation is arithmetically difficult: Upper Hunter District Council v Australian Chilling & Freezing Co Limited (1968) 118 CLR 429 at 436. It is not possible, I think, for this Court to determine, looking at the clause, that it is incapable of being construed in a way so that a calculation of the recoverable amount after applying the discount rate, is possible. I consider that it is likely to be difficult, but I do not consider that it would be impossible. A clause in almost precisely the same terms has been considered by the Federal Court of Australia in EMCL v Esanda Finance Corporation Limited by Heerey J (2000) FCA 612 and by the Full Court of that Court in (1999) FCA 978. It is not clear whether or not it was ever argued that the clause was void for uncertainty but the case before the Full Court appears to have proceeded upon the basis that what would be the equivalent of calculation of "the recoverable amount" was one which could be determined with the aid of expert evidence. Unless I were of the view that was not the position, then the plaintiffs' argument on this aspect of the case must fail.

What effect has the Corporations Law on these rights?

Section 440B

13 The administrators say that the purported combination amounts to the enforcement of a charge in contravention of this section. The definition of charge under s9 is as follows:

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.


This is of no assistance in determining what "charge: means.

First I should say that while counsel for the plaintiffs raised the question to preserve the rights of the plaintiffs, it seemed to be accepted that I would adhere to my decision in Wily v Rothschild Australia (1999) 47 NSWLR 555 and hold that ANZ could not have a charge over the moneys in the current account. I note the plaintiffs' rights to appeal on this matter are preserved. The question then is whether the right of combination is a charge. Counsel for the plaintiffs said it was, in accordance with the decision of Young J in Timbertown Community Enterprises Limited v Holiday Coast Credit Union Limited (unreported 22 October 1997). In that decision the following passage appears:

The Corporations Law makes it quite plain that, whilst a company is in administration, no one is to improve its position by curial or other action, except with the administrator's or with the leave of the court, including (s440B) enforcing a charge.

The bank in that case had purported to exercise a right of combination. The administrators had sued for moneys which would have been held to the credit of the company under administration were it not for the combination. The bank applied for security for costs and the decision was given in that application. In other words it was a decision on an interlocutory application in proceedings for recovery of moneys. His Honour went on to say:

what the defendant did was either (a) to improve its position with respect to equitable charges by actually seizing cash; or (b) of no effect at all. If what the defendant did was to breach s444B and to deprive the administrator of the capacity of carrying out his duties under Pt 5.3A of the Corporations Law in the public interest, then one would think it would be the duty of the court not to lay any barriers in the path of the administrator.

His Honour refused to order security for costs. It could not, on any basis, be said that he determined as a final decision that the combination was enforcement of a charge. A combination of accounts has the same effect as is brought about by the law relating to mutual credits or set off in a winding up. It takes effect either pursuant to a common law right or to a contractual right. All contractual rights are not charges and the exercise of rights to deal with property of another in a certain way do not necessarily mean that one is enforcing a charge. In the instant case what the bank would say it was doing was using moneys lent to it by a customer ,to discharge a liability of the customer to it, in accordance with a contractual right of set off. There is, of course, some strength in the arguments of counsel for the administrators that combination is contrary at least to the spirit of s437A and 437D of the Corporations Law . While that may be so, the act of combination is not contrary to s437D because it is not the act of the company under administration or of a person on behalf of the company under administration.

14    Similar questions to those which arise here were considered in detail by Rolfe J in Osborne Computer Corporation Pty Limited v Airroad Distribution Pty Limited (1995) 37 NSWLR 382. In that case His Honour held that a pledge was not a charge within the definition. Having come to that conclusion he found 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 which existed between it and the company. In the same way then, while the administrator has the control of the company's business property and affairs, property does not mean particular items unaffected by contractual rights. As I adhere to the view that it is not possible to have a charge over one's own property, s440D does not bear upon the rights of the bank.

15    It was argued that the notice of combination contemplates recovery of the leased assets. I do not think that is correct. If there is a right to recovery then the notice makes it perfectly clear that such right is to be waived, but in any event it has not been exercised.

16 In addition to this I have been unable to understand why, if the right of combination is a charge, it would be affected by a resolution to enter into a deed of company arrangement. Either the bank is a secured creditor by reason of the right of combination or it is not. If it is then its security would be protected under s444D. As I have stated I do not think that it is. If it is not a secured creditor then the contractual position should apply. Counsel for the plaintiffs raised the somewhat difficult question of the application of s553C to administrations in accordance with clause 8 of Schedule 8A of the Corporations Regulations if that is not excluded. I am not sure that this represents a problem assuming that credits taken after knowledge of insolvency must be excluded when determining the set off account. That is something which can be done in the administration but I do not think it possible to deal with that matter further here. This paragraph is not strictly relevant to the issues to be determined. The administrators seek only to prevent action during the administration. They need the money which stood to the customer's credit to pay debts they have incurred and to pay their fees.

Section 443D and 443F

17 This is, I consider, the most difficult question and is probably the strongest argument of the administrators. 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.

Conclusion

18    The claim of the plaintiffs fails. The summons should be dismissed with costs.

Last Modified: 09/26/2000