Civil Aviation Authority v Ferrier

[1995] HCATrans 179

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney  No S26 of 1995

B e t w e e n -

CIVIL AVIATION AUTHORITY

Applicant

and

IAN DOUGLAS FERRIER and  DESMOND WILLIAM KNIGHT

Respondents

Application for special leave to appeal

DAWSON J
TOOHEY J
McHUGH J

TRANSCRIPT OF PROCEEDINGS

AT BRISBANE ON THURSDAY, 22 JUNE 1995, AT 9.31 AM

Copyright in the High Court of Australia

MR P.A. KEANE, QC, Solicitor-General for the State of Queensland:  May it please the Court, I appear with MR D.J.S. JACKSON, QC, and MR J.C. SHEAHAN, for the applicant.   (instructed by Mallesons Stephen Jaques)

MR D.M.J. BENNETT, QC:  May it please the Court, I appear with my learned friend, MR J.E. THOMSON, for the respondents.   (instructed by Blake Dawson Waldron)

DAWSON J:   Mr Keane.

MR KEANE:   Your Honours, the case concerns the operation of section 122 of the Bankruptcy Act of the Commonwealth.  That section makes void against the trustee in bankruptcy a payment made by an insolvent person in favour of a creditor where the payment has:

the effect of giving the creditor a preference, priority or advantage over other creditors -

and the payment is made -

within 6 months before the presentation of a petition on which.....the debtor becomes a bankrupt.

Your Honours, the concept of a running account in this particular context has been developed by the courts and principally, as a result of three judgments in this Court, in Richardson v Commercial Banking Company, Rees v Bank of New South Wales and Queensland Bacon v Rees, to assist in determining whether a payment has, as the statute puts it, the effect of conferring a preference, priority or advantage over creditors.

The concept has been put in a number of ways in the cases but to say that there are, as the Full Court had it, three tests, or as our learned friends’ submissions have it in part III of their written summary, four tests, developed by the courts is to fail to appreciate, in our respectful submission, an underlying unity and what are said to be different tests are, we submit, different ways of explaining that the effect of conferring a preference of which section 122 speaks is the final effect of the payment in the preference period involving ongoing dealings between debtor and creditor. 

The Full Court have taken these judicial dicta and read them in a strict and mutually exclusive way which does not give effect, in our submission, to the underlying conception, and that conception can be shortly put as follows:  if fresh consideration from the creditor is a consequence, as a matter of business of the making of a payment by the debtor, then the final effect of the payment as a preference cannot be determined without taking into account the fresh consideration.

DAWSON J:   In other words, if you are $10 or $12 million worse off you hardly received an advantage.

MR KEANE:   And, Your Honour, in our submission, that is this case.

DAWSON J:   We do not need to hear you any further on that point, Mr Keane.  You have a second point though.

MR KEANE:   We do, your Honours.  In relation to that point it is whether a payment to a creditor, having rights under which it could, if it wished, perfect a security for payment of the indebtedness, whether the payment to such a creditor can be said to have the effect of giving a preference, priority or advantage over other creditors in the bankruptcy.  His Honour at first instance resolved this question in our favour and your Honours will see his reasons in the record at pages 59 to 62.  That was quite a separate basis for deciding the case in favour of our client.  It was not dealt with in the Full Court.  It is, in our submission, an important point in its own right and, we would submit, in terms of the due administration of justice, it is inappropriate that a reasoned decision in favour of the applicant on this point should be set aside without reasons. 

As to the strength of the point, by reference to what is said in part IV, particularly paragraph 3 of the respondents’ summary of submissions, we would make three points:  firstly, it may not be correct to say in fact that Compass relevantly had no assets affected by the liens if one is approaching the matter from the point of view taken by his Honour which is whether the assets of the bankrupt were reduced by the payment.  Compass had an interest as lessee in the aircraft.

DAWSON J:   That did not affect the validity of the lien, the fact that Compass did not own the aircraft.

MR KEANE:   No, your Honour.  Well, certainly not as between - no.

DAWSON J:   As between - - -?

MR KEANE:   As between these parties, no.

DAWSON J:   And the lessors?

MR KEANE:   It may be that as between the lessors and our client there is a contention as to whether the statute is effective in accordance with its terms to create such a lien in favour of a Commonwealth authority without compensation but that issue has not arisen here and in terms of the statute, that lien is effective even in the case of bankruptcy.  It is subordinant only to charges in favour of others other than a floating charge.

In any event, your Honours, it is our submission, whatever be the soundness of his Honour’s reasoning, as we submitted in our summary of argument, that the question is whether the creditor has been preferred by the payment.  The question whether a creditor who has been paid has also been preferred as against other creditors does arise where, as here, the creditor had an entitlement over and above its right - - -

DAWSON J:   At least had a lever in - - -

MR KEANE:   It had an entitlement to perfect that lever and get paid.  So that, in our submission, it had a right over and above its rights as a creditor so that the fact of payment, which it could have secured in any event by the imposition of the liens, does not have the consequence that it has been preferred by the payment in the bankruptcy.  That is our submission in response to the other side’s submission that his Honour the trial judge’s decision of the second point was manifestly wrong.

DAWSON J:   Thank you, Mr Keane.  Mr Bennett.

MR BENNETT:   If your Honour pleases.  It is convenient to deal with the second point first because that is the easier one.  When a guarantor guarantees a debt, that does not prevent a payment being a preference.  If an insolvent debtor owes $1 million and the creditor is fortunate enough to have a guarantee from Westpac and the day before bankruptcy the debtor pays the debt of $1 million, that is a preference. 

It is true that the creditor could have and would have been paid in any event.  The creditor must disgorge the preference and may or may not then have a claim against the guarantor, depending whether the wording of the guarantee is such that is survives the payment and repayment.  But the fact that there is a guarantor and therefore the creditor is no better off by being paid does not prevent it being a preference.  That is basic - - -

DAWSON J:   Is there any authority for that proposition?

MR BENNETT:   It is basic bankruptcy law.

DAWSON J:   There is American authority against it, is there not?

MR BENNETT:   No, your Honour.  The American authorities referred to in the judgment are both cases where the security was over the debtor’s property.

McHUGH J:   That is the point, is it not, that the guarantee is not a proper analogy?

MR BENNETT:   Your Honour, if a third party gives security over the third party’s property to secure a principal debt, then that is, in law, a guarantee even if it is non-recourse as it would be here.  There is ample authority for that proposition.  And, of course, it has the same effect as a guarantee.  If Westpac, instead of guaranteeing the debtor’s debt puts up its head office as security for it on a non-recourse basis, it is exactly the same as if it had guaranteed it.  There is no suggestion and there has never been a suggestion in any case ever that there is no preference because the creditor has recourse or may have had recourse to third party security.  Your Honours, the proposition is as simple as that.  It is just contrary to the whole basis of preferences to suggest that the ability of a creditor to obtain payment from third party security or a third party can have any effect whether the transaction is a preference.

If that were not so, there would not be the whole line of authority on creditors who, having had the preference extracted from them, seek to sue their guarantors and the question is whether the wording of the guarantee is sufficient to require payment after the debt is paid and it has been disgorged.  There is a line of authority on that which - - -

McHUGH J:   But is not one difference that in this particular case Compass had an interest in the particular asset?

MR BENNETT:   But, your Honour, Compass’s interest - there was no evidence at the trial, on my instructions, that Compass’s lease had any commercial value.  Certainly it had a business value in the sense that it could not do business without it but there was no suggestion that it was underpaying for the aircraft so that there was some valuable commodity it had in that lease.  That being so, the fact that its lease may not have been affected by sale under the lien does not bring it into the area where its property is secured.  If it had been Compass’s aircraft, own aircraft, which could have been attached by the lien then, of course, my friend would have an arguable case.  But once it is third party security, his case becomes unarguable.  That is not an interesting or difficult or unusual question of law, it is just a simple basic proposition.

DAWSON J:   Should the court below have dealt with it, nevertheless?

MR BENNETT:   Yes, but it was, we would submit, so obvious it did not need to.

DAWSON J:   That is hardly so when the court below decided in a particular way.

MR BENNETT:   That may be a function of the way the matter was argued below.  But, your Honour, there has never been any suggestion in any case of which I am aware, in America or here, that where a creditor holds or is able to obtain - there is no difference - third party security or the management of a guarantee that that precludes - - -

DAWSON J:   That is a guarantee, as has been pointed out but - - -

MR BENNETT:   This is a guarantee, your Honour, in effect.  One is looking at preferential effect, one is not looking at legal concepts.  One is looking to see is the effect of this payment to give a preference.

DAWSON J:   An advantage, yes.

MR BENNETT:   An advantage.  That is not negated by showing that the creditor could have obtained the same advantage from a third party.  If it was, the entire jurisprudence of guarantees and preferences would fall down.  That is the proposition my friend has to make.  He says that because a lien could have been imposed on the property of a third party - we take no issue on this application about the ‘could have been imposed’ -  let us assume that the liens were there for that matter, it is the property of a third party and, in effect, the third party is a guarantor.  It is, for the purposes of the laws about preferences, in exactly the same position as a guarantor.

DAWSON J:   We see how you put it, yes.

MR BENNETT:   Your Honour, that is the second point.  Your Honours, on the first point I fully accept what my learned friend says, that the three ways it is put in the Full Court and the four ways that we refer to are really different ways of putting an overall concept.  We accept that.  We would not cavil greatly, although I have not had a chance to go through it in detail, with my learned friend’s formulation of the concept.  What he does is he sets up - and the cases appear to support it - what is virtually a “but for” test.  He says if “but for” the payments further services would not have been rendered, then there is no preference.

If I can just give your Honours a couple of examples to show how that operates because we accept that as the principle of law.  In this case it cannot possibly help my friend, as I will show in a moment.  But taken at the one extreme, the banker and customer.  The debtor has an overdraft limit of $100,000.  The debtor’s account is at $99,000 and he is able to draw cheques and pay moneys in which he does during the six months, and the moneys paid in and drawn out total over $1 million but the overdraft limit is always observed, and at the end of the six months the bank debt is at the same level of $99,000.  Now, clearly, there is no preference there.  The reason is that each payment the bank permitted the debtor to make was, in effect, because of the moneys coming in because of the overdraft limit.  So, that is the classic case where there was no preference.  There is, one could use words like “running account”.  But the real reason there is no preference is that the further advances which are made by the bank would not have been made but for the payments and the payments are made, in a very real sense, to enable those payments to be made and it is a matter of “but for”.

Can I move down a step to the account between the debtor and his fruiterer and assume the debtor orders each week $100 worth of fruit and eats it and, again, there is a running account.  It is in debit at the beginning and end of the preference period by the same amount, and the fruiterer is only supplying fruit to the debtor on the basis that he is paid and the account is kept below a limit.  Again, one can apply a simple “but for” test.  There was further consideration provided by the fruiterer which would not have been provided but for the payments, hence, no preference.

McHUGH J:   But part of the reasoning of Full Court in this case would lead to the conclusion, in your illustration, that if one order for fruit was for $200 and there was a payment of $200 that would indicate that it was not a running account.

MR BENNETT:   That is merely an indication, your Honour, not a conclusive matter.

McHUGH J:   I know.

MR BENNETT:   But if I can just finish putting the illustration.  The third example, on the other side of the line, is tax.  Assume that there is an income tax which is payable weekly and that the debtor starts the six months owing $100,000; it ends in owing $100,000 to the Commissioner but is earning money during the period and paying weekly tax off the original part of the tax debt.  There, the whole of the payments are a preference.  There is no consideration given by the taxation authorities.  The Commissioner cannot say, “I won’t let you earn money if you’re not paying tax on it”.  So, there is nothing to set off-off against it.  Although the debtor is receiving money and paying tax, there is clearly no defence to an allegation of preference.

Now, this case involved a very unusual creditor.  Indeed, a creditor that I cannot think of any other example of except, perhaps, the Taxation Commissioner.  This case involved a creditor who was not able to prevent the debt continuing to incur - - -

McHUGH J:   That is not absolutely right because it could have wound Compass up.

MR BENNETT:   It could do that and it could impose liens which might have the effect of the leases terminating.  But what it could not do, your Honour, is withdraw the services.

DAWSON J:   That is the view it took, anyway.

MR BENNETT:   Yes, and I will show your Honours the regulations in a moment and show your Honours that that is correct, and that is what the Full Court found.

DAWSON J:   We can assume that for the purposes of the argument.

MR BENNETT:   Assume that.  It cannot withdraw the services and it knew it could not withdraw the services - that is perhaps more important than whether it could or it could not - because there was an opinion it had obtained and an internal memorandum in May, which is before the preference period where, in discussing internally its possible remedies, it said, “We can’t withdraw our services.  We’ve got an opinion saying we can’t”.  And, of course, there was another reason it could not withdraw services which there was some evidence of and that was the obvious political reason, that one had a third airline that was offering cheap fares and there was a real problem for the government in being seen to bring it down.

Now, in that situation, my friend’s “but for” test falls to the ground because once the payments are not, in the mind of the creditor, causing the continued supply of the services, the “but for” test which he propounds as the general test and which we do not greatly disagree with, as I say, subject to analysis, fails.

McHUGH J:   But that seems to me to ignore altogether, which the Full Court did, the fact that if they did not pay Compass would have wound them up.  You just cannot ignore that.  Assuming you are correct that Compass had a legal obligation to continue to fly and CAA had an obligation to provide the services nevertheless, they had one recourse, they could wind Compass up.

MR BENNETT:   But, your Honour, every creditor has that recourse.  If one applied that test, there would never be a preference.  Every creditor has the - - -

McHUGH J:   No, but one has to look at the overall picture here and services are being provided; money is coming into account.  It just strikes me, prima facie anyway, as commercially unreal to say that this is not a running account.

MR BENNETT:   Your Honour, I do not say it is not a running account.  There is no doctrine of “running account” in which those words have some magic significance.

DAWSON J:   You look at the end result and the end result is that it was a disadvantage because of what it had done.

MR BENNETT:   If, your Honour, one applies the rule found in the running account cases.  But those running account cases depend on - and it is my friend’s own test - a “but for” relationship between the continued supply of services and the payments.

DAWSON J:   It is artificial to say there was not a “but for” relationship, taking the whole of the circumstances into account here, is it not?

MR BENNETT:   Your Honour, there is a finding of the Full Court on that subject.  Does your Honour have the Australian Law Reports version?  It is probably the most convenient.

DAWSON J:   No, we do not.

MR BENNETT:   It is a short passage, your Honour.  It is at page 509, line 45.  This is the internal memorandum which is in May and which sets out other remedies like liens and so on.  It then says:

On occasion objection is raised to the Pt VI Div 2 provisions on the grounds that normal commercial debt recovery process should be used and that the legislative provisions are too draconian.

That is the lien provisions.

The answer to this is that the Authority is in a unique position as a provider of services in that it cannot withhold the provision of its services.  Hence a basic response to a recalcitrant debtor is denied to the Authority.  Enclosed is a recent opinion obtained on this point.  This opinion supports the view that only safety issues can be lawfully considered in the provision of services - - -

TOOHEY J:   Mr Bennett, is that the sole basis upon which you seek to take this case out of the ordinary principle that would apply here?

MR BENNETT:   It is the primary basis, your Honour.  We would have some submissions, which I would not make on the leave application, in relation to the precise relationships between payments and debts and matters of that sort.  But that is the primary consideration that this was a very unusual creditor and, of course, it is a case in which the Act has now been changed in any event so the case is not going to arise in the future.

If I could just finish answering the question your Honour Justice McHugh asked me about the ability to wind Compass up.  May I go back to my example about the Income Tax Commissioner and let us assume that under a future income tax law the periodic payments by companies are weekly, not quarterly, and a company is earning money weekly; its tax is payable from week to week - perhaps a week in arrears; the company is 6 months behind; it owes the Commissioner a lot of money at the beginning and end of the preference period, roughly the same amount, and during the preference period it makes substantial payments to the Commissioner.  Now, there is no doubt those are preferences.

McHUGH J:   That may be but I have never heard it suggested that the Commissioner for Taxation provides services to anybody.

MR BENNETT:   No, your Honour, it does not.

McHUGH J:   That is the difference here.  The CAA was providing services.

MR BENNETT:   I am using that as an answer to your Honour’s suggestion because the Commissioner, in that example, could wind the company up.  He could stop the company trading by doing that; cause a stop to the income.  But no one would suggest that that means, the fact that he can stop the company earning income, that the payments become a running account payment “in consideration of you letting us earn income, we will make you payments.”

McHUGH J:   But your argument seems to me that although this may be a running account, nevertheless, it is a preference because there was no way the CAA could stop providing the services, so that there was no quid pro quo for these payments that were being made and all I was putting to you is that they could stop providing the services.  They could wind Compass up.

MR BENNETT:   Your Honour, in my submission, that sort of ability is just not the sort of ability that takes the case out of the preferential effect concept and, your Honour, it has never been suggested that it does.  May I add this, that under the new Corporations Law there was an entirely different test which, in effect, codifies the running account concept in a very different way.  That is section 588FA.  I will not take your Honours to that unless your Honours wish.  Your Honours have the reference.

So, this case is concerned with a past area of law.  It may have some continuing relevance in relation to bankruptcy depending on what amendments take place to the Bankruptcy Act over the next few years but, of course, in relation to bankruptcy it is comparatively rare for the sort of problem that would arise here to arise.  The specific problem, the problem of the creditor who is bound to supply services, is a unique and unusual one which only applies to this creditor and therefore is of no general application.  So, on any view of it, this case has no general application.

It is, in the first place, concerned with an unusual type of creditor and, in the second place, it is concerned with a provision which will no longer apply to companies.  In our respectful submission, the overall effect of that is that the appeal has no general public importance.  For the reasons I have given, we would submit the decision was right.  If it was wrong on that aspect, it was only wrong because of the argument your Honour Justice McHugh puts to me which is an argument which has never been raised before in bankruptcy and is unlikely ever to be raised again, simply because the facts are unlikely to occur.

The argument involves the proposition that the ability every creditor has to prevent trading by winding up a corporate debtor - and, of course, that does not apply to an individual, so that is not going to continue under the bankruptcy regime - is to be equated with the ability of a creditor to withdraw services if it has the result that the source of income will disappear.  In my respectful submission, that simply cannot detract from preferential effect overall.  May it please the Court.

DAWSON J:   Thank you, Mr Bennett.  Mr Keane.

MR KEANE:   Your Honours, as to the second point - and we say, first of all, the point was fully argued in the Full Court as to the point that there was no evidence that the leases had a commercial value; on the other hand, there was no evidence that they did not and the onus in terms of establishing preference is on the liquidator.  The guarantor analogy fails if the leases had a commercial value but, in any event, it does not go far enough to answer this case and will not answer any case about secured creditors because the question would never arise where the guarantor pays.

DAWSON J:   What do you say about the suggestion that the point will no longer arise because of amendments to the Corporations Law?

MR KEANE:   Your Honours, it will continue to apply in relation to individual insolvency. In relation to corporate insolvency, it is perhaps a strong thing to say that it will never arise in that context because, as we point out in paragraph 21 of our written summary, the amendments that were effected by the Corporations Law Amendment Act 1992 adopt the concept of running account and do so in terms which, in our respectful submission, reflect the substance of the test we propose so that if this decision were to stand as an elucidation of what a running account is, one could expect a divergence between what the Parliament intended and what was enacted and a divergence between what the situation ought to be in terms of individual insolvency and corporate insolvency.

Your Honours will find the text of the new provision at 114 of the record and, in our respectful submission, the text of section 588FA(2) which your Honours will see between lines 10 to 15 is, in substance, the test we propose.  It is:

Where:

(a) a transaction is, for commercial purposes an integral part of a continuing business relationship (for example, a running account) -

So that, in our respectful submission, it is not correct to say that this question will never arise again.  It will certainly arise in relation to individual insolvencies and, in our respectful submission, the intent of the legislature in enacting this provision of the Corporations Law was to give effect to the running account principle as enunciated in Queensland Bacon v Rees.

Your Honours, the only other thing we would wish to mention to your Honours is that as to the suggestion that we could not withdraw services, as your Honour Justice McHugh has pointed out, we could do that as part of actually closing the business down and that Compass was aware of that is amply demonstrated at page 19 of the record in a memorandum of 26 March 1991, that is to say, a memorandum before the commencement of the preference period reflecting Compass’s appreciation of its situation which your Honours will see at lines 20 to 25.

TOOHEY J:   How vital is that aspect of it to the success of an appeal if special leave was granted?

MR KEANE:   Your Honour, we submit that it is not a feature which makes this case different.  The point about the running account is that we could have - the question which the running account invites an answer to is could we have ceased supply and the answer is, certainly.  We could have done more than that, we could have put them out of business and ceased supply.

McHUGH J:   Mr Bennett’s argument seems to be that - perhaps I am misstating what he was putting but his argument seems to be that true it is that there is a running account, true it is you were providing services and true it is that there were payments being made but you had no power to prevent the services, therefore, there must be a preference and all I was putting to him was that you did have the power.

MR KEANE:   Yes, your Honour, and the suggestion that we did not has not been decided against us by the Full Court.  They, in fact, refer to the question as arguable.  They do not resolve it.  And as to the suggestion that it was the view of individuals as a matter of fact - and the answer to that is at page 58 of the record in the findings of Mr Justice Lockhart where his Honour find that the view that there was a difficulty in that respect referred to by our learned friends in relation to the memorandum of May was the view of one man, a view which had not commended itself to his superiors in the organisation.  Your Honours will see that at page 58, lines 5 to 15.  And Compass had been expressly threatened with the imposition of liens and with the withdrawal of services.

DAWSON J:   Thank you, Mr Keane.  There will be a grant of special leave in this case.

AT 10.04 AM THE MATTER WAS CONCLUDED