Cuthbertson and Richards Sawmills Pty Ltd v Thomas

[1999] FCA 315

FEDERAL COURT OF AUSTRALIA

Cuthbertson & Richards Sawmills Pty Ltd  v Thomas [1999] FCA 315

CORPORATIONS LAW – winding up – floating charge created within six months before relation-back day – whether company solvent immediately after creation of charge – whether charge secured the amount of a liability under an obligation undertaken on behalf of, or for the benefit of the company.

Corporations Law 1989 (Cth), ss 9, 95A(1), 588FJ(1), (2)(c) and (3)

TheQueen v Toohey; ex parte Attorney-General (N.T.) (1980) 145 CLR 374 cited
The King v Porteus; ex parte Federated Clerks Union of Australia (1949) 79 CLR 428 referred to
Federal Commissioner of Taxation v Commonwealth Bank of Australia (1992) 105 ALR 294 cited
Walplan Pty Ltd v Wallace (1985) 8 FCR 27 referred to

Re Orleans Motor Co Ltd [1911] 2 Ch 41 referred to
Re Matthew Ellis Ltd [1933] Ch 458 (C.A.) referred to
Re Destone Fabrics Ltd [1941] Ch 319 referred to
Pennywise Smart Shopping Australia Pty Ltd (in liq) v Sommer & Co Pty Ltd (1992) 11 ACLC 31 referred to

Gillespie v City of Glasgow Bank (1879) 4 App Cas 632 referred to
Murray v King (1984) 4 FCR 1 referred to

CUTHBERTSON & RICHARDS SAWMILLS PTY LTD v
GAVIN FREDERICK CRICHTON THOMAS

AG 66 of 1998

HEEREY, CARR & MANSFIELD JJ
30 MARCH 1999
MELBOURNE (HEARD IN SYDNEY)

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	AG 66 of 1998

On appeal from a single judge of the Supreme Court
of the Australian Capital Territory

BETWEEN:	CUTHBERTSON & RICHARDS SAWMILLS PTY LTD Appellant
AND:	GAVIN FREDERICK CRICHTON THOMAS Respondent
JUDGES:	HEEREY, CARR & MANSFIELD JJ
DATE OF ORDER:	30 MARCH 1999
WHERE MADE:	MELBOURNE (HEARD IN SYDNEY)

THE COURT ORDERS AND DECLARED THAT:

1.        The appeal be allowed.

2.        The judgment of 7 July 1998 be set aside.

3.The charge undated but executed on or about 11 November 1994 by Glenwood Cottages Pty Limited ACN 064 629 018 in favour of the appellant is valid and secures repayment of the sum of $350,000 paid by the appellant to Westpac Banking Corporation on or about 1 March 1995.

4.The respondent pay the appellant’s costs of the appeal and at first instance.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	AG 66 of 1998

On appeal from a single judge of the Supreme Court
of the Australian Capital Territory

BETWEEN:	CUTHBERTSON & RICHARDS SAWMILLS PTY LTD Appellant
AND:	GAVIN FREDERICK CRICHTON THOMAS Respondent

JUDGES:	HEEREY, CARR & MANSFIELD JJ
DATE:	30 MARCH 1999
PLACE:	MELBOURNE (HEARD IN SYDNEY)

REASONS FOR JUDGMENT

THE COURT:

1.        Introduction

1. This is an appeal from a judgment of a judge of the Supreme Court of the Australian Capital Territory, given on 7 July 1998. The question is whether a floating charge (“the Charge”) in favour of the appellant over all of the assets of Glenwood Cottages Pty Ltd (in liquidation) (“New Glenwood”) is void as against the respondent, who is the liquidator of that company. The learned primary judge found that it was. There are two issues in the appeal. The first is whether New Glenwood was solvent at the time when it granted the Charge. The second issue is whether an obligation which New Glenwood undertook to indemnify the appellant in respect of any liability incurred by it pursuant to an indemnity which the appellant executed in favour of a bank, as part of an arrangement whereby $350,000 was lent by another bank to New Glenwood, was undertaken “… on behalf of, or for the benefit of, …” New Glenwood within the meaning of s 588FJ(2)(c) of the Corporations Law.

   2.        Factual Background

2. The following recital of the factual background is taken largely from the learned primary judge’s reasons for judgment:

3. From about the mid 1980s the appellant had a subsidiary company called Glenwood Cottages Pty Ltd ACN 003 004 055 (“Old Glenwood”) which carried on a home building business.  All of the issued shares in Old Glenwood were held on trust for the appellant.  On 6 May 1994 Old Glenwood changed its name to C & R Services Pty Ltd as part of arrangements then made to sell its business.

4. During 1994 arrangements were made to sell the business of Old Glenwood to Mr Allan Stewart, Mr Paul Pino and Mr Michael Collins (“the Directors”), all of whom had formerly been directors, and the main executives, of Old Glenwood.  This was described by senior counsel for the appellant as a “Management Buy-Out”, which seems an apt description.  On 9 May 1994 the Directors incorporated a new company, which we have identified in these reasons as New Glenwood, and became its directors.  It took some months for the sale to be formalised in writing, but on an uncertain date between 30 August and 31 October 1994, a Business Sale Agreement (“the Sale Agreement”) was executed, pursuant to which Old Glenwood sold its business to New Glenwood.  The Sale Agreement was backdated to 10 May 1994.

5. Recital G of the Sale Agreement stated that New Glenwood had been conducting the business since 1 May 1994 as if the Sale Agreement had been completed on that date.  Recital F stated that New Glenwood had agreed to assume responsibility for all liabilities of Old Glenwood in relation to the business, other than $1.5 million of bank debt.  Clause 4.1.1 stated that New Glenwood would assume sole responsibility for the discharge of all liabilities and would indemnify Old Glenwood in respect of all liabilities both before and after the “Effective Date” which was defined as the close of business on 30 April 1994.  Clause 4.1.2 recorded the understanding of the parties that all trade creditors of the business as at the Effective Date had been paid in full by New Glenwood.  By clause 4.3 New Glenwood undertook to notify in writing each of the suppliers to the business of its sale, as soon as possible after the date of the Sale Agreement.  However, it transpired that the notice was not sent out until 31 October 1994.      

6. On 20 May 1994 New Glenwood opened a bank account with the National Australia Bank Ltd (“the NAB”).  In October and November 1994 a funding arrangement was set up between the appellant, the Directors, and New Glenwood itself that would have resulted in a loan from the NAB to the Directors of $388,000 for a period of one year, with that sum to be on-lent by them to New Glenwood.  That amount was subsequently varied to $350,000.  At the request of the appellant, Westpac Banking Corporation Ltd (“Westpac”) executed an unconditional bank guarantee (“the Westpac Guarantee”) on 3 November 1994 in favour of the NAB for a maximum of $350,000 to be lent to the Directors.  On the same day, the appellant executed an indemnity in favour of Westpac in respect of any liability that it had under the Westpac Guarantee.  On 10 November 1994, a funding agreement between the appellant, New Glenwood and the Directors (“the Funding Agreement”), and the Charge between New Glenwood and the appellant were executed.  On 11 November 1994, NAB credited $350,000 to New Glenwood’s account with it.  The case has been conducted on the basis of these facts, although the Funding Agreement refers to the loan from the NAB to the Directors and the loan by them to New Glenwood as being in an amount of $500,000.  It was common ground that the relevant figure was $350,000 and that the term of the loan from the Directors to New Glenwood was eight months from 10 November 1994.

7. In the Funding Agreement:

   (a)the appellant agreed to procure Westpac to provide the Westpac Guarantee to the NAB (clause 2) as security for the repayment by the Directors of the advance by the NAB (clause 4.1.1);

   (b)the Directors undertook to on-lend the money to New Glenwood on substantially the same terms (clause 4.1.3);

   (c) New Glenwood agreed to repay the money to the Directors eight months from the date of the Funding Agreement (clause 4.3.1);

   (d)       security for the Westpac Guarantee was agreed to include:

   (i)an undertaking by New Glenwood and the Directors to indemnify the appellant against any claim or demand made on it by Westpac as a consequence of Westpac at any time being required to honour its guarantee to the NAB (clause 5(a));

   (ii)the Charge, over all of the assets and undertakings of New Glenwood in favour of the appellant (clause 1.1.1 and clause 3.1); and

   (iii)mortgages over the homes of Messrs Collins and Stewart in favour of the appellant; and

   (e)the purpose of the Westpac Guarantee was recited as being to assist New Glenwood in meeting its obligations under the Sale Agreement, that agreement being defined as the agreement for the sale and purchase of the business between C & R Services Pty Ltd (as seller) and New Glenwood (as buyer) dated on or around the date of the Funding Agreement.     

8. The Charge was created to fulfil New Glenwood’s obligations under the Funding Agreement as outlined above.  The Charge secured (among other things) the repayment by New Glenwood and the Directors to the appellant of moneys which it or they were liable to pay or might become liable to pay in the future, as well as moneys which the appellant might become liable to pay to a person in connection with a transaction entered into at the express or implied request of New Glenwood or any of the Directors (see the definition of “Secured Moneys” in clause 1.1.1 of the Charge).  The Charge was over all the property undertaking and rights (both present and future) of New Glenwood.  The Charge was both fixed and floating.  It provided that the floating charge would automatically and immediately crystallise and take effect as a fixed charge upon any of certain specified events of default.  One such event was the appointment of a liquidator to New Glenwood.

9. On 7 February 1995 the respondent was appointed provisional liquidator of New Glenwood.  On 1 March 1995 the NAB called on the Westpac Guarantee for $350,000, which Westpac duly paid and then debited to the appellant’s account.  The appellant claimed that that amount was therefore owed to it by New Glenwood under the indemnity in clause 5(a) of the Funding Agreement.

10. On 23 March 1995 the respondent was appointed official liquidator of New Glenwood.  The appellant asserted that the appointment was an event of default under the Charge, which caused it, insofar as it was originally floating, to crystallise and become fixed.  In a letter from the respondent’s solicitors, the respondent advised the appellant that he intended to treat the fixed and floating charge as void.  The appellant filed an originating  summons in the Supreme Court of the Australian Capital Territory seeking a declaration that the Charge was valid and that it secured repayment to it of the $350,000 which it had paid to Westpac.

    3.        The Legislation

11. Section 588FJ of the Corporations Law provides as follows:

    (1)      This section applies if:

    (a)       a company is being wound up in insolvency; and

    (b)the company created a floating charge on property of the company at a particular time that is at or after the commencement of this Part and:    

    (i)        during the 6 months ending on the relation-back day; or

    (ii)after that day but on or before the day when the winding up began.

    (2)The charge is void, as against the company’s liquidator, except so far as it secures:

    (a)an advance paid to the company, or at its direction, at or after that time and as consideration for the charge; or

    (b)       interest on such an advance; or

    (c)the amount of a liability under a guarantee or other obligation undertaken at or after that time on behalf of, or for the benefit of, the company; or

    (d)an amount payable for property or services supplied to the company at or after that time; or

    (e)interest on an amount so payable.

    (3)Subsection (2) does not apply if it is proved that the company was solvent immediately after that time.   

    (4)Paragraphs (2)(a) and (b) do not apply in relation to an advance so far as it was applied to discharge, directly or indirectly, an unsecured debt, whether contingent or otherwise, that the company owed to:

    (a)       the chargee; or

    (b)       if the chargee was a body corporate -- a related entity of the body.

12. At the hearing before the primary judge, the appellant accepted that the conditions in sub-section (1) were satisfied, including the condition that the Charge was created at the relevant particular time, but submitted that the Charge was not void as against the liquidator because it came within the exception in sub-section (2)(c). It also submitted that sub-section (2) did not apply in any event, because New Glenwood was solvent immediately after it granted the Charge – see s 588FJ(3).

    4.        The Decision at First Instance

    (a)Whether the obligation (New Glenwood’s undertaking to indemnify the appellant) was “on behalf of, or for the benefit” of the former?

13. His Honour referred to the purpose of s 588FJ(2) of the Corporations Law as being:

    “… to separate bona fide honest transactions carried out in the normal course of business from charges and guarantees designed to withdraw funds from the control of the liquidator in the winding up and provide money or security for the benefit of certain creditors or shareholders: Re Yeovil Glove Co Ltd [1965] Ch 148”

14. The primary judge cited the observation of Brinsden J in A E Ledger, the Official Liquidator of Wrights Hardware Pty Ltd (in liquidation) v Euro-National Investment Corporation Ltd (unreported Full Court Supreme Court of Western Australia, 29 May 1989, at 6) that each case is to be judged on its own facts, but noted that the burden was on the appellant to establish that the obligation which New Glenwood assumed to indemnify the appellant was undertaken for the benefit of the former. 

15. His Honour held that the obligation was not undertaken for the benefit of New Glenwood.  In so concluding, he noted that it was necessary to look at the substance, not merely the form, of the transactions, and to identify the purpose of the Charge: M Hoffman Nominees Pty Ltd v Cosmas Fish Processors Pty Ltd (1982) 1 ACLC 528 at 534; Pennywise Smart Shopping Australia Pty Ltd (in liq) v Sommer & Co Pty Ltd (1992) 11 ACLC 31 at 39-40. The main part of his Honour’s reasoning for finding that the requirement had not been satisfied was as follows:

    “47.Even if Glenwood repaid the $350,000 to the three directors, but for any reason the directors did not pay it back to the National Australia Bank, that Bank could call on the Westpac guarantee thus triggering the liability of Glenwood under the indemnity.  Far from benefiting Glenwood, Glenwood was therefore potentially liable to pay the moneys twice.

    48.New Glenwood needed money to enable it to meet its obligations under the Sale Agreement, the only relevant one for present purposes being to assume responsibility for the discharge of the debts and liabilities of old Glenwood. As the $350,000 was used to discharge or reduce those liabilities, the loan to new Glenwood replaced an unsecured liability to old Glenwood with a secured liability to the plaintiff under the indemnity. If the plaintiff had advanced $350,000 directly to new Glenwood and new Glenwood had then used it to pay old Glenwood’s debts, the charge would have been invalidated by section 588FJ(4). There is no difference in principle between that situation and what actually happened here.

    49.As the defendant submitted, the directors may have believed that if the National Australia Bank could be persuaded to advance funds to Glenwood so as to keep it alive, there would be time to find another investor to help save the significant funds they had previously injected.  It is not necessary to decide this question because the evidence did not establish that the $350,000 ensured that suppliers who were creditors would continue to supply the company or that it could continue to trade or that it was in its interests to try to do so.  The evidence did not establish that the loan would even enable the company to earn income, let alone to make or head in the direction of making a profit.  Indeed it ceased to trade three weeks after receiving the money because the $350,000 was not sufficient to enable new Glenwood to pay outstanding creditors and to have working capital.  According to the evidence, at least $500,000 would have been required for these purposes.”

    (b)Whether New Glenwood was solvent immediately after creating the Charge

16. The appellant relied also on s 588FJ(3) and contended that New Glenwood was solvent immediately after the Charge was created. His Honour rejected the respondent’s submission that a presumption of insolvency arises under s 588E(3). However, he noted that the appellant bore the onus of proving, on the balance of probabilities, that New Glenwood was solvent immediately after the time at which the Charge was created.

17. Solvency is defined in s 95A of the Corporations Law as follows:

    (1)      A [company] is solvent if, and only if, the [company] is able to pay all the [company’s] debts, as and when they become due and payable.

18. His Honour held that s 95A(1) adopted a “cash flow test” rather than a “balance sheet test” of solvency [Melbase Coporation Pty Ltd v Segenhoe Ltd (1995) 17 ACSR 187] and that, when determining solvency, it is necessary to consider the whole of the company’s resources, including its credit resources [Metropolitan Fire Systems Pty Ltd v Miller & Ewins [1997] 23 ACSR 699], and current and future debts [Bank of Australasia v Hall (1907) 4 CLR 1514]. His Honour concluded that New Glenwood was insolvent at the time the Charge was created.

    5.        Solvency or Otherwise of New Glenwood

19. It was common ground that the primary judge had applied the correct legal principles to this issue.  We think it is fair to say that the appellant did not put this ground at the forefront of its challenge to the judgment.  Having heard the appellant’s submissions, we indicated to counsel for the respondent that we did not need to hear from him.  We shall state, briefly, our reasons for taking that course.

20. The relevant time was “immediately after” 10 November 1994, being the date when the Charge was created.  As at 31 October 1994 New Glenwood owed $822,804.14 to suppliers and other creditors.  Of that amount, $617,531 was owing to creditors for thirty or more days.  $205,271 was owed to creditors incurred during the month of October.  As at 31 October 1994 the company’s bank account was overdrawn by $92,451.98 [AB 470].  There was no formal overdraft arrangement with the NAB i.e. it had a “limit” of zero [AB591].  On 11 November 1994 the $350,000 was credited to New Glenwood’s bank account.  By the Funding Agreement the company had a legal right to the advance of those moneys.  On that date the account was overdrawn by $483.40.  Cheques had been drawn and issued totalling $8273.27 which on presentation would have taken the overdraft to $8756.67.  Creditors owing for more than thirty days then totalled $433,879.  There was a further amount owing to sub-contractors and creditors payable within seven days of $87,085.  Even after receipt of the $350,000 and application of that sum towards creditors aged thirty days or more, sub-contractors and “seven days creditors”, there remained an amount of $170,964 outstanding in respect of that group (i.e. creditors of more than 30 days standing).  Furthermore an additional $205,271 was still owed to the October creditors, which fell due for payment on 30 November 1994.  There was no evidence of other liquid assets from which the company could pay its debts or of other assets which might have been used to raise funds for that purpose.  There were some management accounts which painted what the appellant described as “a healthy financial position”.  There was also a letter dated 3 November 1994 from investors, expressing an intention to invest $500,000 by way of taking equity in the company by mid November 1994.  There was no binding commitment in that regard.  In our respectful opinion, his Honour correctly concluded that immediately after granting the Charge, New Glenwood was not able to pay all its debts as and when they became due and payable.  This ground of appeal should be rejected.

    6.Whether the obligation was undertaken “on behalf of, or for the benefit of” New Glenwood

1. The phrase “on behalf of” does not have a strict legal meaning.  In TheQueen v Toohey; Ex parte Attorney-General (N.T.) (1980) 145 CLR 374 at 386 Stephen, Mason, Murphy and Aickin JJ referred to that phrase in these terms:

   “… it bears no single and constant significance.  Instead it may be used in conjunction with a wide-range of relationships, all however, in some way concerned with the standing of one person as auxiliary to or representative of another person or thing. 

   . . .

   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” (authority cited) will be determinative.”

2. In that case, the majority held that no straining of language was involved (see 387) to describe the Aboriginal Land Fund Commission as holding its leasehold station land “on behalf of” Aboriginals, although there was no relationship of trustee and beneficiary.  The Court relied upon the observations of Dixon and McTiernan JJ in The King v Portus; Ex parte Federated Clerks Union of Australia (1949) 79 CLR 428 at 438 and 440 respectively. There the question was whether employees of Qantas Empire Airways Ltd (“Qantas”) were employed by Qantas “on behalf of the Government of the Commonwealth”. The Commonwealth owned all of the shares in Qantas and, under its Articles of Association, the Minister for Air had the sole right to appoint directors to it. The High Court’s decision was unanimous. Despite the interposition of a company, the substance of the matter was that Qantas’ employees were employed on behalf of the Commonwealth. Those words were used in the wider sense of, “for the purposes of” or “as an instrument of or for the benefit and in the interests of the Commonwealth”. Similarly in Federal Commissioner of Taxation v Commonwealth Bank of Australia (1992) 105 ALR 294 at 299 a Full Court of this Court held that cheques drawn by members of a building society, under a facility agreement, upon a bank account maintained in the name of that society were drawn “on behalf of” the society even though they were not signed by it. The court said:

   “In our view, establishing and maintaining the cheque facility was something done “on behalf of” the society, even if these were activities for the benefit of members as well.” 

3. See also Walplan Pty Ltd v Wallace (1985) 8 FCR 27 at 37 where the Court held that in the context of s 84(2) of the Trade Practices Act 1974 (Cth) the phrase suggested some involvement by the person concerned with the activities of a company. The words conveyed a meaning similar to the phrase “in the course of the body corporate’s affairs or activities”, without being confined to any notion of master and servant.

4. We think it is useful to start by focusing upon the precise obligation undertaken by the appellant, which in turn was the subject of New Glenwood’s undertaking to indemnify the appellant, which was secured by the Charge.  It will be remembered that the appellant’s obligation was to indemnify Westpac pursuant to the terms of the Westpac Guarantee.  It was a condition of the NAB agreeing to advance $350,000 to the Directors, who in turn were obliged to lend those moneys to New Glenwood under the Funding Agreement, that the advance be secured by the Westpac Guarantee.  Accordingly, it was a vital and integral part of the steps whereby the NAB credited the sum of $350,000 to New Glenwood’s bank account with it, that the appellant entered into the obligation of indemnifying Westpac if, as turned out to be the case, the NAB called upon Westpac to honour that guarantee.  Exactly the same description (a vital and integral part) applies, in our view, to New Glenwood’s obligation whereby it in turn undertook to indemnify the appellant for the same amount.  At paragraph 25 of the primary judge’s reasons, his Honour expresses the view that the only relevant obligation of New Glenwood outstanding as at 10 November 1994 was its obligation under clause 4.1.1 of the Sale Agreement to assume responsibility for and discharge debts or liabilities of Old Glenwood.  His Honour appears to be making a similar finding at paragraph 31 of his reasons (although this passage may be a recitation of the respondent’s submission) when he said:

   “Thus, when new Glenwood used the loan money to discharge the debts to the business’ creditors, it was discharging the liabilities of old Glenwood in satisfaction of new Glenwood’s obligations under the Sale Agreement.”

5. It seems reasonably clear, from the facts as found, that the new business had been conducted on behalf of or by New Glenwood since 1 May 1994. We infer from the daily bank reconciliation [AB 466] that as at 11 November 1994, trade creditors dated back only to May 1994. It was only because notice of change of the ownership of the business was not sent until 31 October 1994 [paragraph 29 of his Honour’s reasons – AB 633] that Old Glenwood faced liability to those creditors. But, quite clearly, New Glenwood was also liable to those creditors. It is not necessary to identify the precise basis of such liability. But if, as the appellant argued, Old Glenwood could be characterised as having acted as agent for an undisclosed principal (New Glenwood) when incurring these debts between May and October 1994, then New Glenwood as principal was also liable to those creditors. Furthermore, as such principal, New Glenwood would have been liable to indemnify its agent Old Glenwood in respect of those liabilities. New Glenwood was also obliged, as his Honour found, to pay the liabilities of Old Glenwood in relation to the business both before and after the Effective Date (30 April 1994). The evidence points, inexorably in our opinion, to the borrowing of the sum of $350,000 as being for the purpose of paying those creditors. That purpose is confirmed when one looks at the amended bank reconciliation as at 14 November 1994 once those funds had been received. It can be seen from that document [AB 466-469] that the money was used to pay all of the May, June, July and August creditors, and nearly all of the “SUBBIES & 7 Day A/C’s Held”. At paragraph 48 of his reasons, his Honour said that if the appellant had advanced $350,000 directly to New Glenwood, which had then used it to pay the debts of Old Glenwood, the Charge would have been invalidated by s 588FJ(4). In regard to that, we think that there is considerable merit in the appellant’s submission, which we accept, that s 588FJ(4) enacts a rule of convenience in relation to an advance, and interest on such an advance, referred to respectively in s 588FJ(2)(a) and (b), regardless of whether the advance was for the benefit of the company. Where, in paragraph 48 of his reasons, his Honour uses the expression “… to assume responsibility for the discharge of the debts and liabilities of old Glenwood”, it would appear that he is referring to the pre-May 1994 debts. That does not describe the situation here, as we have just explained. Secondly, as we have mentioned, the relevant debts were the debts primarily of New Glenwood to the various suppliers, although on the facts, Old Glenwood became liable because (and only because) those creditors were not given notice of the disposal of the business. The debts were not debts of Old Glenwood incurred before the sale of the business. In any event, the question is not whether the application of s 588FJ(2)(a) or (b) is removed by the terms of subsection (4), the question is whether the facts fall within s 588FJ(2)(c). It is worth bearing in mind that this exception is additional and separate to the solvency exception. If s 588FJ(3) is satisfied, then there is no need to consider s 588FJ(2) and vice versa. An obligation may be undertaken on behalf of or for the benefit of an insolvent company and valid security given for liability arising thereunder. Solvency or otherwise is simply a factor (and doubtless, on most occasions, an important factor) to be taken into account when assessing whether the obligation was undertaken on behalf of or for the benefit of the company.

6. The first reason which his Honour gave for holding against the application of s 588FJ(2)(c) can be found in paragraph 47 of his reasons, which we have set out above. In that paragraph his Honour referred to the potential liability on New Glenwood’s part to pay the moneys twice. That might happen, so his Honour posited, if New Glenwood repaid the $350,000 to the Directors but for any reason they did not pay it back to the NAB. There would then be a call by the NAB on the Westpac Guarantee, thus triggering the liability of New Glenwood under the indemnity. With all due respect to the primary judge, we think that this ignores the relevant contractual provisions. Clause 4.3 of the Funding Agreement obliged New Glenwood to repay the moneys to the Directors. The same clause obliged the Directors “… upon the receipt of any such repayment …” to repay those moneys to the NAB. Unless New Glenwood or its advisers breached their duties of care, there would never be any real chance of New Glenwood paying the money to the Directors without immediate on-payment to the NAB. Both transactions would be organised to occur simultaneously i.e. there would be bank cheques produced by New Glenwood payable either to the Directors in exchange for bank cheques produced by the Directors payable to the NAB or, more likely, bank cheques made payable direct to the NAB at the direction of the Directors. New Glenwood had the legal right to insist on such a procedure. The likelihood of the detriment identified by his Honour was, in our respectful opinion, sufficiently remote in commercial terms as not to be taken into account.

7. We were not taken to any case directly in point on the application of s 588FJ(2)(c). The sub-paragraph was introduced into the Corporations Law by the Corporate Law Reform Act 1992 (Cth). We were taken to several cases on the application of the predecessors of s 588FJ(2)(a). Those were mainly concerned with issues such as:

   ·     whether cash had been paid to the company in consideration for the charge or in reality was to secure an antecedent independent transaction: Re Orleans Motor Co Ltd [1911] 2 Ch 41 at 45;

   ·     whether there had been in substance a payment of cash to the company or whether the debenture merely secured a past debt – Re Matthew Ellis Ltd [1933] Ch 458 at 468-479 (C.A.);

   ·     whether there had been a “transparent subterfuge” whereby a hopelessly insolvent company secured the advance of money provided to procure the payment to certain directors (and a guarantor) of sums due to them in preference to other creditors of the company – Re Destone Fabrics Ltd [1941] Ch 319 in particular at 324; and

   ·     whether the form and the substance of the transaction amounted to a payment to the company – Pennywise Smart Shopping Australia Pty Ltd (in liq) v Sommer & Co Pty Ltd (1992) 11 ACLC 31 at 48.

8. We must say that we did not find these decisions to be particularly helpful in the application of this relatively new provision to the circumstances of the present matter.  The authorities show that each case is to be judged on its own facts.  The facts of this case do not, in our view, bring it within the category of those cases where it can be seen that directors or other promoters of companies are seeking to enhance their position from being unsecured creditors (whether actual or contingent) into being secured creditors.  We think that the test to be applied is an objective one i.e. was the obligation undertaken on behalf of or for the benefit of the company?, not did the persons concerned think that to be the case?  However, in deciding the objective question, we consider that we are entitled to take into account, and we do, the fact that two of the Directors saw fit to mortgage their homes as additional security for the raising of these moneys which found their way directly into New Glenwood’s bank account.  We think that that evidence, though not determinative, assists us to draw an inference that the whole of the funding arrangements, including the Charge, were undertaken on behalf of or for the company.  When two of the three directors of a company put their houses on the line so that $350,000 finds its way into the company’s bank account, it is somewhat easier to characterise the overall transaction and its other components as being undertaken “on behalf of, or for the benefit of the company”.

9. It may be that there is no difference between the expression “on behalf of” and the expression “for the benefit of”.  See for example Federal Commissioner of Taxation v Commonwealth Bank of Australia at 299; Gillespie v City of Glasgow Bank (1879) 4 App Cas 632 at 642 and Murray v King (1984) 4 FCR 1 at 13. If there is a relevant difference between the two expressions, there cannot, in our view, be any doubt that the obligation which New Glenwood undertook to indemnify the appellant was on the former’s behalf. We think that it was also for the benefit of that company. The result of the funding arrangement, (of which the obligation formed a vital and integral part) was that a very substantial amount of debts, which were due immediately, was replaced with a debt which was not payable for eight months. This was, in our view, at least potentially, a significant benefit. It placed the company in a position where the prospects of continuing to receive supplies from its trade creditors were likely to be considerably enhanced. We think that the primary judge put the test too high when he spoke (in paragraph 49 of his reasons) of ensuring that suppliers who were creditors would continue to supply the company, that it would continue to trade and the like.  In the circumstances of this particular case, we consider that the obligation, being an essential part of the arrangement whereby the sum of $350,000 was deposited in New Glenwood’s bank account, was for the benefit of that company.  It may also have been for the benefit of its shareholders, including those of its shareholders who had advanced money to it.  But that, in our view, does not exclude the obligation having been undertaken on behalf of and for the benefit of the company.  The fact that something is done on behalf of or for the benefit of one person does not prevent it from also being done on behalf of or for the benefit of others as well – see again Federal Commissioner of Taxation v Commonwealth Bank of Australia at 299.

10. It is true, that just before Christmas 1994 (see the respondent’s evidence at AB 84), New Glenwood ceased to trade because, as his Honour found, the $350,000 was insufficient to enable it to pay outstanding creditors and to have working capital.  His Honour found that at least $500,000 would have been required for those purposes.  The fact that the attempt can be seen, with the benefit of hindsight, to have been unsuccessful, does not in our view preclude the conclusion, which we draw, that the appellant’s obligation was undertaken at the particular time (i.e. on or about the time when the Charge was created) on behalf of or for the benefit of New Glenwood. 

11. When we first read s 588FJ(2)(c) in terms of its possible application to this case, we thought that the relevant obligation was that undertaken by the appellant to Westpac. That would be consistent with the passage first cited above from The Queen v Toohey, i.e. that the expression “on behalf of” is concerned with the standing of one person as auxiliary to or representative of another person or thing.  However, it was common ground between the parties, and the case was fought on the basis, that the relevant undertaking was New Glenwood’s undertaking to indemnify the appellant.  The question whether that assumption was correct, remains, we think, one open for argument on another day and in another case.

    7.        Conclusion

12. For those reasons we will allow the appeal, set aside the judgment of 7 July 1998 and substitute a declaration that the Charge is valid, and that it secures repayment of the sum of $350,000 paid by the appellant to Westpac on or about 1 March 1995.  We also propose to order that the respondent pay the appellant’s costs of the appeal and at first instance.

I certify that the preceding thirty-two (32) numbered paragraphs are a true copy of the Reasons for Judgment of

their Honours Heerey, Carr and Mansfield JJ.

Associate:

Dated:             30 March 1999

Counsel for the Appellant:	Mr G K Downes QC with Mr F Carnovale
Solicitor for the Appellant:	Messrs Toomey Pegg Drevikovsky
Counsel for the Respondent:	Mr A J Meagher SC
Solicitor for the Respondent:	Parish Patience
Date of Hearing:	19 February 1999
Date of Judgment:	30 March 1999