Ferrier, Ian.Douglas v Civil Aviation Authority

No judgment structure available for this case.

IAN DOUGLAS FERRIER AND DESMOND WILLIAM KNIGHT (AS LIQUIDATORS OF COMPASS
AIRLINES PTY LIMITED (IN LIQUIDATION)) v. CIVIL AVIATION AUTHORITY
No. NG3136 of 1994
FED No. 1019/94
Number of pages - 74
Corporations - Interest
(1994) 55 FCR 28

COURT

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
BEAUMONT, GUMMOW AND LINDGREN JJ

CATCHWORDS

Corporations - winding up - alleged preference under bankruptcy legislation (Bankruptcy Act 1966 (Cth) s122) - "running account" - services provided by government instrumentality - whether periodic payments for services were not preferences because inseparable part of a wider transaction - whether principle of "running accounts" applicable - whether United States "net result" doctrine applicable - whether the capacity of the creditor to impose a lien rendered the payments non-preferential

Interest - order for payment of interest on preferential payments - date from which calculated

Statutes:
Corporations Law (Cth), s565, s588FA
Bankruptcy Act 1966 (Cth), s122
Bankruptcy Act 1924 (Cth), s95
Civil Aviation Act 1988 (Cth), s8, s9, s12, s13, s20AA, s27, s28, s32B, s66, ss68-76, s98
Civil Aviation Regulations (Cth), reg7A, reg8, reg10, reg13, reg97, reg98, reg100, reg167(b), reg 169A
Insolvent Act 1841, 5 Vic. No. 17 (NSW), s8
Insolvency Statute 1865 28 Vict. No. 273 (VIC), s31
Bankruptcy Act 1869 c.71 (U.K.), s92
Bankruptcy Act 1914 c.59 (U.K.), s44
Insolvency Act 1986 c.45 (U.K.), s340(4)
The Bankruptcy Act of 1800 (US), 2 Stat.19
The Bankruptcy Act of 1841 (US), 5 Stat.440, s2
The Bankruptcy Act of 1867 (US), 14 Stat.517, s35
The Bankruptcy Act of 1898 (US), c.541, 30 Stat.544, s57g, s60
The Bankruptcy Reform Act of 1978 (US), s547

Statutes Relating to Interest:
Federal Court of Australia Act 1976 (Cth), s51A
Supreme Court Act 1970 (NSW), s94

Cases:
Calzaturificio Zenith Pty Ltd (In Liq) v New South Wales Leather and Trading Company Pty Ltd (1970) VR 605, 610, 614, 620-1, considered
Re J.F. Aylmer (Manildra) Pty Ltd (1968) 12 FLR 337, 345, 354-5, 352, considered
Spedley Securities (In Liq) v Western United Ltd (In Liq) (1992) 27 NSWLR 111, 114-5, considered
Re Discovery Books Pty Ltd (1972) 20 FLR 470, 474-5 478-9, considered
Richardson v The Commercial Banking Co. of Sydney Ltd (1952) 85 CLR 110, 129, 132, 133, 135, considered
Rees v Bank of New South Wales (1964) 111 CLR 210, considered
Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266, considered
Re Weiss; Ex parte White v John Vicars and Co. Ltd (1970) ALR 654, 657, 659, 660-1, considered
CEA Technologies Pty Ltd v Civic Aviation Authority (1994) 122 ALR 724, 731, considered
Union Bank v Wolas, 116 L. Ed. 2d 514, 524 (1991), considered
S. Richards and Co. Ltd v Lloyd (1933) 49 CLR 49, 60, considered
Humphery v McMullen (1868) 7 SCR (L) 84, 89-94, considered
The Bank of Australasia v Harris (1861) 15 Moo 96, 15 E.R. 429, 437, considered
Sheldrick v Aitken (1869) 6 WW and A'B (L) 59, 64, considered
Arnold v Maynard 1 F. Cas. 1181 (1842), considered
Toof v Martin 80 U.S. 40, 48 (1871), considered
Smyth v The Queen (1957) 98 CLR 163, 166-7, considered
Muntz v Smail (1909) 8 CLR 262, 266, 271, considered
Jaquith v Alden, 189 U.S. 78 (1903), considered
Yaple v Dahl-Millikan Grocery Co., 193 U.S. 526 (1904), considered
Joseph Wild and Co. v Provident Life and Trust Co., 214 U.S. 292 (1909), considered
In re Thomas W. Garland Inc., 19 B.R. 920, 922-925 (E.D. Mo. 1982), considered
In re St. Louis Globe Democrat, Inc., 99 B.R. 946, 948-9 (E.D. Mo. 1989), considered
Pirie v Chicago Title and Trust Co., 182 U.S. 438, 446-7 (1901), considered
In re Fred Stern and Co. Inc., 54 F.2d 478 (2d Cir. 1931), considered
CSR Ltd v Starkey (1994) 13 ACSR 321, 325, 327-8, considered
In re Fulghum Construction Corp. 706 F.2d 171, 174 (6th Cir. 1983), considered
Cimmaron Oil Company, Inc. v Camerson Consultants, Inc., 71 BR 1005 (N.D. Tex. 1987), considered
Goodsole v Jeffery 168 N.W. 461 (1918) in 1 ALR 1060-70, considered
Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266, 281, 283, 316-7, considered
Page v Commonwealth Life Assurance Society Ltd (1935) 36 SR (NSW) 85, 89, considered
Re Price (No. 6); Richardson v Commercial Banking Co. of Sydney Ltd (1949) 15 ABC 26, 41, 42, 43, considered
Stephen v Doyle (1882) 3 NSWLR (Eq.) 1, 3, considered
Rees v Bank of New South Wales (1964) 111 CLR 210, 221-2, considered
Re Patullo; Ex parte Official Receiver (1931) 3 ABC 197, 203-4, considered
Re A. and J. Lazzarotto Pty. Ltd., the Supreme Court of Victoria, Full Court, 16 December 1977, unreported, at 7, considered
M and R. Jones Shopfitting Co. Pty. Ltd. (in Liq.) v The National Bank of Australasia Ltd., (1983) 7 ACLR 445, 453, considered
Re Baronga Nominees Pty. Ltd (In Liq.) (1983) 8 ACLR 265, 273, considered
Petagna Nominees Pty Ltd v A E Ledger Liquidator of Linun Pty Ltd (in liq) (1989) 1 ACSR 547, 567, considered
Re Captain Homemaker Pty Ltd (In Liq) (1984) 8 ACLR 1005, 1013, considered
Australian and Overseas Telecommunications Corporation Ltd v Russell
Kumar and Sons Pty Ltd (1992) 10 ACSR 24, 29, considered
Harkness v Potts (1993) 10 ACSR 517, 521, considered
Willcox v Goess, 92 F.2d 8, 1Z (2d Cir. 1937), cert denied, 303 U.S. 647 (1938), considered
The "Mecca" (1897) AC 286, 293-5, considered
Knysh v Corrales Pty Ltd (1989) 15 ACLR 629, considered

Cases Relating to Interest:
Re Ward (1950) 16 ABC 214, 222, considered
N.A. Kratzmann Pty Ltd (In Liq.) v Tucker (No. 1) (1966) 123 CLR 257, 285, considered
N.A. Kratzmann Pty Ltd (In Liq) v Tucker (No. 2) (1968) 123 CLR 295, 298-9, considered
Spedley Securities Ltd (In Liq) v Western United Ltd (In Liq) (No. 2) (1992) 10 ACLC 887, 887-8, considered
Maurice Drycleaners Pty Ltd (In Liq) v National Australia Bank Ltd (1990) 8 ACLC 798, and Hamilton v Commonwealth Bank of Australia (No. 2) (1992) 10 ACLC 1611, considered
Re Fiorino (Gummow J, 14 April 1994, unreported, considered
In re Roco Corp., 37 BR 770 774 (D. RI. 1984), considered
In re Art Shirt Ltd., Inc., 93 BR 333, 341-2 (E.D. Pa. 1988), considered
Smith v Mark Twain National Bank, 805 F.2d 278, 291 (8th Cir. 1986), considered

HEARING

SYDNEY, 29, 30 September 1994
#DATE 21:12:1994

Counsel and solicitors Mr D.F. Jackson QC and
for the appellants: Mr J. Thompson instructed

by Blake Dawson Waldron.

Counsel and solicitors Mr D.J. Jackson QC and
for the respondents: Mr J.C. Sheahan instructed

by Mallesons Stephen Jaques.

ORDER

The Court makes the following orders: (1) Direct that the appellants file and serve draft short minutes of the orders to be made in accordance with the reasons for judgment. (2) Stand the matter over to a date to be fixed for the purpose of hearing submissions on costs and on the form of the orders to be made.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

JUDGE1

BEAUMONT, GUMMOW AND LINDGREN JJ The appellants ("the Liquidators"), as liquidators of Compass Airlines Pty Limited ("Compass"), appeal from an order of a Judge of the Court (Lockhart J) dismissing their application for relief by way of recovery, pursuant to s. 565 of the Corporations Law ("the Law"), and s. 122 of the Bankruptcy Act 1966 ("the Act"), of amounts totalling $10,351,523.90 paid by Compass to the Civil Aviation Authority ("CAA"). The Liquidators asserted that the payments were void as against them as preferences. His Honour's judgment is reported at (1994) 48 FCR 163.

On 20 December 1991 Compass filed an application seeking an order for its winding up and for the appointment of provisional liquidators in the interim. On that date, the Liquidators were so appointed. The Court ordered that Compass be wound up on 10 July 1992, and on that date the Liquidators were appointed. Accordingly, the relevant six month period referred to in s. 122 of the Act was from 20 June 1991 to 20 December 1991.
It appears that the parties accepted before the primary Judge that relevant charges made by CAA to Compass, penalties incurred by Compass for late payment, and the impugned payments made by Compass to CAA were as follows:

Date Charges Penalties Payments Balance Owing 01 07 91 $2,069,624.66 $4,301,071.74 02 07 91 $66,291.59 $3,526.524.94 02 07 91 $840.838.39 $3,460,233.35 30 07 91 $29,824.35 $3,556.349.29 30 07 91 ($81,335.02) $3,475,014.27 (credit adj)

01 08 91 $3,121,430.77 $6,596,445.04 02 08 91 $1,397,394.47 $5,199,050.57 02 08 91 $52,125.22 $5,251,175.79 30 08 91 $46,821.47 $5,297,997.26 01 09 91 $2,925,886.75 $8,223,884.01 02 09 91 $79,469.94 $8,303,353.95 04 09 91 $2,069,624.66 $6,233,729.29 09 09 91 $66,291.49 $6,167,437.80 01 10 91 $3,081,102.63 $9,248,540.43 01 10 91 ($5,158.11) $9,243,382.32 (cred adj)

01 10 91 $43,888.30 $9,287,270.62 02 10 91 $93,169.87 $9,380,440.49 04 10 91 $1,600,000.00 $7,780,440.49 09 10 91 $1,641,551.05 $6,139,889.44 30 10 91 $46,139.16 $6,185,028.60 31 10 91 $975,532.00 $5,209,496.60 01 11 91 $3,483,452.60 $8,692,949.20 02 11 91 $78,142.46 $8,771,091.66 04 11 91 $59,588.68 $8,711,502.98 30 11 91 $52,251.79 $8,763,754.77 01 12 91 $3,219,090.95 $11,982,754.72 02 12 91 $131,456.34 $12,114,302.06 18 12 91 $1,700,703.16 $10,413,598.90 Preference

Period

20.6.91 to

20.12.91 $19,035,873.91* $719,580.49 $10,351,523.90 01 01 92 $12,900,835.41 01 02 92 $2,487,236.51 $12,913,628.58 $12,793.17

(* As appears below, the figure of $19,035,873.91 was stated by the primary Judge as the "value of services provided" by CAA to Compass. The figures in the column above do not exactly total that amount, but nothing appears to turn on this for our purposes.)

By virtue of the provisions of the Civil Aviation Act 1988 ("the CA Act"), which will be discussed further later, in default in payment in certain circumstances, CAA was entitled to place a "statutory lien" on an aircraft in respect of which CAA had provided services for which there was an outstanding indebtedness.
The four grounds of appeal, the first two of which are interrelated, are stated to be as follows:

"1. His Honour erred in failing to find that each and every payment made by (Compass) to (CAA) between 2 July 1991 and 18 December 1991 totalling $10,351,523.90 had the effect of giving (CAA) a preference, priority or advantage over other creditors of Compass pursuant to Section 565 of the Corporations Law.

2. His Honour erred in finding that the payments made to (CAA) formed an integral and inseparable part of an entire transaction between the parties or otherwise qualified as payments made on a running account for the purposes of the law as to preferences.

3. Alternatively, his Honour erred in failing to find that the payment of $1,700,703.16 made to (CAA) on 18 December 1991 occurred at a time and in a context when the relationship giving rise to a running account between Compass and (CAA) had ceased to exist and that that payment had the effect of giving (CAA) a preference, priority or advantage over other creditors of Compass within the meaning of Section 565 of the Corporations Law.

4. His Honour erred in holding that (CAA's) right to impose statutory liens on aircraft leased and operated by Compass but owned by others, had the effect of protecting the payments from being characterised as a preference, priority or advantage over other creditors of Compass for the purposes of Section 565 of the Corporations Law."

The primary Judge said (48 FCR at 167) that ultimately the evidence turned primarily upon the documents and the unchallenged evidence of the witnesses. In fact, the documentary evidence was extensive - over 1200 pages, although the oral evidence was relatively brief.

CAA provided services to Compass during 1991. It charged Compass for those services and imposed penalties for lateness in payment. There was no issue as to CAA's right to impose the charges and penalties, nor was there any issue as to the correctness of the account given earlier of the dates and amounts of the charges, penalties and payments during the period 20 June 1991 to 1 February 1992.
Lockhart J summarised (at 165-6) the value of the services provided by CAA to Compass, the penalties imposed and the payments made over the six-month period from 20 June 1991 to 20 December 1991 in these terms:

"(a) value of services provided by the Authority to Compass - $19,035,873.91;

(b) penalties charged by the Authority to Compass - $719,580.49;

(c) total services provided and penalties charged by the Authority to Compass ((a) + (b)) - $19,755,454.40;

(d) payments made by Compass to the Authority - $10,351,523.90;

(e) excess of services supplied over payments made ((a) - (d)) - $8,684,350.01;

(f) excess of services and penalties over payments ((c) - (d)) $9,403,930.50."

In addition, his Honour found that CAA continued to provide services to Compass after Compass made its last payment of $1,700,703.16 on 18 December 1991.

Sub-section 565 (1) of the Law provides, relevantly, that a payment made by a company that, if it had been made by a natural person, would, in the event of his or her becoming a bankrupt, be void as against the trustee in the bankruptcy, is, in the event of the company being wound up, void as against the liquidator. Sub-sections 565 (2) and (3) provide respectively for the date that, in the case of the winding up of a company, corresponds with the date of presentation of the petition in bankruptcy and to the date on which the person becomes a bankrupt. So far as relevant, in the present case the date is, in each instance, the date when the application for the winding up order was filed, that is to say, 18 December 1991.
Sub-section 122 (1) of the Act provides, so far as material, as follows:

"122(1) A ... payment made, ... by a person who is unable to pay his debts as they become due from his own money (in this section referred to as 'the debtor'), in favour of a creditor, having the effect of giving that creditor a preference, priority or advantage over other creditors, being a ... payment ... made ... :

(a) within six months before the presentation of a petition on which, ... the debtor becomes a bankrupt; or

(b) ........ ........ ........ ........ ........ ........ .... is void as against the trustee in bankruptcy."

Sub-section 122 (2)(a) provides that nothing in s. 122 affects the rights of a payee in good faith and for valuable consideration and in the ordinary course of business. But since CAA did not rely upon this provision, the case turns upon the applicability of sub-s. 122 (1) (a), and, in particular, upon the phrase "having the effect of giving that creditor a preference, priority or advantage over other creditors ...".

It should be noted at the outset that even in cases where there is but one payment attacked as a preference there is some dispute as to the time at which and the hypothesis upon which the presence of the necessary "effect" is ascertained. Two views have been put forward. They are summarised as follows in Mr K. Bennetts' article "Establishing Preferential Effect under Avoidance Powers, Corporations Law" (1994) 12 Aust. Bar Rev. 170 at 171-2:

"One involves the liquidator establishing the financial position of the company at the time of the transaction and a determination of the likely return to the preferred creditor in a hypothetical winding up at that time, taking into account other creditors' claims existing at that time. The other approach involves the same exercise related, however, to the financial position of the company and the claims of its creditors in the actual winding up of the company.

The better and more logical view of preferential effect is that which suggests that any comparison between the transactional benefit received by a creditor and the creditor's position in a winding up should be determined on the basis of the creditor's likely position in a hypothetical winding up at the time of the transaction and not a comparison based on the likely outcome for the creditor of the actual winding up arising subsequent to the transaction."

Support for this preferred view is supplied by the decision of Menhennitt J in Calzaturificio Zenith Pty Ltd (In Liq) v New South Wales Leather and Trading Company Pty Ltd (1970) VR 605 at 610, the judgments of Street J and Walsh JA in Re J.F. Aylmer (Manildra) Pty Ltd (1968) 12 FLR 337 at 345 and 354-5 respectively, and what was said by McLelland J in Spedley Securities (In Liq) v Western United Ltd (In Liq) (1992) 27 NSWLR 111 at 114-5 where there is a collection of other authorities perhaps supporting the contrary view. See also the discussion of the point by Professor R.M. Goode in Principles of Corporate Insolvency Law, 1990, pp. 168-9; the learned author is dealing with the British legislation, but what he says on this point appears equally applicable in Australia.

In the present case, this matter would give rise to no difficulty for the case presented by the Liquidators. This is because the evidence establishes that at the date of each of the nine payments in issue, Compass was insolvent.
What immediately is in issue is a related but distinct point. In Aylmer at 345 and Re Discovery Books Pty Ltd (1972) 20 FLR 470 at 474-5, Street J and Fox J respectively considered the situation where on a proper analysis there was but a single entire transaction, albeit one involving several elements. If a plurality of dealings or payments constitutes but one transaction, then one does not look to the effect (whether ascertained upon one or the other of the above hypotheses) of each payment. Rather, the Court considers the overall result of the transaction as a whole after the last of the payments in question. It then decides whether the effect of this was to give a preference. The issue on the present appeal is whether the primary Judge correctly determined that the "effect" which was to be gauged here was that of an entire transaction. Hence the significance for this case of the "running account principle" recognised in three important decisions of the High Court in Richardson v The Commercial Banking Co. of Sydney Ltd (1952) 85 CLR 110, Rees v Bank of New South Wales (1964) 111 CLR 210 and Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266.
At the outset, we should note what is involved in these three High Court cases. They were decided under s. 95 of the Bankruptcy Act 1924 ("the 1924 Act"). In Re Weiss; Ex parte White v John Vicars and Co. Ltd (1970) ALR 654 at 657, Gibbs J said:

"It is clear that for the purpose of deciding whether a payment is void within s.95 (1) of the Bankruptcy Act it is the effect in fact of the making of the payment that is decisive. It is also clear that in some cases, where the payment forms part of a wider transaction, or where it is sufficiently connected with other items in a running account, it is the effect of the whole transaction, of all the connected items, that has to be regarded."

His Honour's use of the disjunctive, so as to yield a proposition with two branches, should be noted. On the present appeal, it was submitted for CAA that even if there was no running account in the sense used by Gibbs J, nevertheless each payment formed part of a wider transaction to be regarded as a whole.

II. THE REASONING AT FIRST INSTANCE
14. The primary Judge examined the legislative basis for, and detail of, the charges which CAA made to Compass and the penalties which CAA imposed on Compass for late payment, as well as the circumstances in which each of the nine impugned payments totalling $10,351,523.90 in the period 20 June 1991 to 20 December 1991 was made.

His Honour then examined the legislative basis for the statutory liens which CAA "imposed" upon all five aircraft operated by Compass. CAA first imposed such a lien on 28 November 1991. It caused this to be "removed" on 1 December 1991, and then imposed a further lien on 18 December 1991.
The Liquidators contended that, for the purpose of s. 122, the "effect" of the nine payments was to be ascertained by looking at the effect of each payment regarded in isolation and assessed immediately after it was made. CAA contended that the "effect" of the nine payments was to be ascertained by treating them as part of a "running account" transaction, and so by setting off against them the charges for services provided by CAA to Compass over a period terminating on 20 December 1991. The Liquidators responded that the payments were not made or received on account of or in consideration for or upon any express or implicit mutual assumption or agreement that payment of past indebtedness would ensure future supply of services by CAA. It would, they submitted, be an odd result if, although an airline operator making timely payments to CAA of statutory charges was not paying on a running account, an operator which was continually delinquent in discharging its obligations was paying on a running account with CAA.
His Honour reached certain conclusions by drawing inferences based upon the primary facts. The evidence of these was documentary. Of relevance to the first two grounds of appeal are the following passages:

"The payments which are under attack in this case form an integral and inseparable part of an entire transaction which governed the relationship between the parties.

There was a mutual assumption by (CAA) and Compass that there would be a continuance of the relationship between them of a commercial nature, with the resultant continuance of the relation of debtor and creditor in the running account. The payments were made in this case both to reduce past indebtedness and on the clear understanding that further services would be supplied by (CAA) to Compass on the usual terms of credit for which the Act, Regulations and the Determinations provide ..., from a business point of view the payments made were connected with future provision of services. Each of the payments was made in reduction of the running account and the basis for the payments was the continuance of the supply of services to Compass." (48 FCR at 170-1) "(T)he question of whether a preference has been received by a creditor is examined by seeing if the creditor is better off as a result of the impugned payments being made than he would otherwise have been if the payments had not been made. In the present case

(CAA) was substantially worse off at the commencement of the winding up than it was during most of the previous six months. The balance owing on 1 July 1991 was $4,301,071.74 and on 20 December 1991, $10,413,598.90. It is true that in the meantime payments had been made by Compass to (CAA) in substantial sums; but (CAA) had provided services and facilities to Compass of substantial value during that time." (48 FCR at 171) "The payments ... were payments made for the continuing provision of services which were vital to enable Compass to continue in business." (48 FCR at 172)

"Payments were made to reduce the general debit as it stood periodically and to maintain a relationship between Compass and

(CAA) that promised advantage to both of them. The payments fell within the so-called running account exception and the mutual assumption referred to by Barwick CJ in Queensland Bacon." (48 FCR at 172)

"The fact that (CAA) is a government instrumentality and a monopoly is not to the point. Nor is it to the point that the trading terms of (CAA) are defined by the (CA) Act, the regulations and the Determinations (thereunder) .... (T)he operation of the principles relating to running accounts in the law of preferences (is not

excluded) merely because the creditor is a monopolist." (48 FCR at 173)

His Honour also held (48 FCR at 174) that CAA was entitled throughout the preference period to impose statutory liens on the Compass aircraft securing Compass's indebtedness to CAA, and that in the result the payments did not deplete the assets of Compass because to the extent of the indebtedness, those assets were not available to unsecured creditors.

As a result of his characterisation of the payments and the dealings between the parties, the primary Judge held that the so-called "running account" concept applied and also that the mutual assumption of the parties meant that the payments formed part of a whole transaction. Thus, his Honour's decision involved the applicability of both branches of the proposition explained by Gibbs J in Weiss and set out earlier in these reasons. The result, Lockhart J held, was that the payments made did not have the "effect" of giving CAA a preference, priority or advantage over other creditors of Compass. In this respect his Honour did not distinguish between the final payment of $1,700,703.16 made on 18 December 1991 and the earlier eight payments.

III. CONCLUSIONS ON THE APPEAL
A. The Operation of the CA Act; the Determinations and the CA Regulations; the CAA and the Statutory Framework of the CA Act
19. CAA is established by the CA Act as a body corporate (s. 8). Section 9 sets out the general functions of CAA. These include the conduct of safety regulation of civil air operations in Australia, the provision of air route and airway facilities, air traffic control services, a rescue and fire fighting service, a search and rescue service and an aeronautical information service. Sub-section 9 (4) provides that, subject to s. 12, "the functions to provide services and facilities may be performed at the discretion of the Authority". Section 12 states that the Minister may give CAA written directions as to the performance of its functions or the exercise of its powers with which CAA must comply, but in the present case there is no suggestion that the Minister had given any such direction as a result of which CAA was dispossessed of the discretion vested in it by sub-section 9 (4). However, the evidence does show an awareness or belief at all material times upon the part of the board and senior executives of Compass that the Minister had a real and proper interest or concern in the conduct of its affairs. There is also a question as to precisely what that discretion was, and in particular, as to whether it embraced a discretion not to provide a particular service or facility to Compass while CAA was providing the same service or facility to other operators. (It may be noted here that, as Neaves J held in CEA Technologies Pty Ltd v Civic Aviation Authority (1994) 122 ALR 724 (at 731), s. 9 does no more than set out the functions of CAA; it does not require or authorise, in any relevant sense, the making of a particular decision.) Section 13 gives CAA "power to do all things necessary or convenient to be done for or in connection with the performance of its functions", including power to enter into contracts.

Part III (ss. 17-32) is headed "REGULATION OF CIVIL AVIATION". Section 20AA relevantly prohibits a person from flying an aircraft in Australia unless it is registered under the Civil Aviation Regulations ("CA Regulations"). Section 27, which empowers CAA to issue "Air Operators' Certificates" for the purposes of its functions, provides that, except as authorised by such a Certificate, an aircraft shall not operate in Australia, and further provides that a Certificate has effect subject to its conditions, being conditions specified in the CA Regulations and any other conditions specified by CAA in the Certificate or in a written notice given to the holder of the Certificate. Section 28 provides that CAA shall issue an Air Operator's Certificate when applied for unless the applicant has not complied with, or has not established the capability to comply with, the provisions of the CA Regulations relating to safety. In addition CAA shall not impose or vary a condition of, or suspend or cancel, such a Certificate except for the purpose of ensuring compliance with safety provisions of the CA Regulations. Accordingly, it was never open to CAA to cancel or suspend Compass's Air Operators' Certificate for non-payment or delay in payment.
Part IV (ss. 32A-42) of the CA Act is headed "BOARD OF AUTHORITY". Section 32B provides that the CAA Board's purposes are:

"(a) to decide the objectives, strategies and policies to be followed by the Authority; and

(b) to ensure that the Authority performs its functions in a proper, efficient and economical manner."

Part VI (ss. 49-83E) is headed "FINANCE". Within this Part, Division 2 (ss. 66-83) is headed "Charges and Statutory Liens". Sub-section 66 (2) provides as follows:

"The Board may make a determination:

(a) fixing the amounts of charges (relevantly, charges for a service or facility provided by CAA); or

(b) setting out a method by which the amounts of charges may be worked out; or

(c) fixing penalties for the purposes of subsection (8)."

As noted later, the Board did make such determinations.

Sub-sections 66 (8), (9), (10) and (11) are as follows:

"66. (8) Subject to subsection (9), where a charge is not paid within the period determined by the Board, being a period beginning of the day on which the charge became due and payable, the person liable for the charge is liable to pay the Authority, in addition to the charge, a penalty, calculated upon the unpaid amount of the charge from the day on which the charge became due and payable, and compounded.

(9) The penalty shall not exceed a penalty equivalent to 1.5%, or such other percentage as is prescribed, of the unpaid amount of the charge for each month or part of a month during which it is unpaid, calculated from the day on which the charge became due and payable, and compounded.

(10) Subsection (9) does not require the penalty to be calculated on a monthly basis.

(11) Charges and penalties may be recovered as debts due to the Authority."

Clearly, the remedy of suing Compass from time to time in respect of charges and penalties was available to CAA.

Sections 68-83 provide for statutory liens. Section 68 specifically provides for a "Register of Statutory Liens". Sub-section 69 (1) is as follows:

"69. (1) Subject to section 76, where:

(a) at the end of the payment period after a charge became payable in respect of an aircraft, the charge is not paid; and

(b) at the end of that period, a statutory lien is not in effect in respect of the aircraft; and

(c) the charge or penalty in respect of the charge remains unpaid;

then, if an appropriate officer so directs at any time, the Registrar (defined in s. 3 as "the person by whom the Register is maintained") shall make an entry in the Register in the manner prescribed and, upon the making of the entry, there is vested in the Authority in respect of the aircraft a statutory lien covering the following:

(d) the charge or penalty;

(e) any penalty that becomes payable in respect of the charge after the entry is made;

(f) any further outstanding amounts in respect of the aircraft."

Sub-section 70 (2) provides as follows:

"70. (2) For the purposes of priorities amongst creditors and the purposes of the distribution of the proceeds of a sale made under section 73, the statutory lien has effect as a security interest in respect of the aircraft ranking in priority:

(a) after any security interest (other than a floating charge) in respect of the aircraft created before the time of registration of the statutory lien, to the extent that that security interest covers a debt incurred before that time; and

(b) before any security interest not falling within, or to the extent that it does not fall within, paragraph (a)."

Section 71 provides, relevantly, that if an outstanding amount covered by a statutory lien is unpaid at the end of six months after the day on which it became an outstanding amount or the day on which the lien was registered, whichever is the later, an authorised officer of CAA may cancel the Certificate of Registration of the Aircraft in the register of Australian aircraft maintained under the CA Regulations. Section 71 also provides that once the Certificate of Registration of an Aircraft is cancelled, the aircraft shall not be re-registered until the statutory lien ceases to have effect.
Sections 72 and 73 provide that if an outstanding amount covered by a statutory lien is unpaid at the end of nine months after the day on which it becomes an outstanding amount or the day on which the lien is registered, whichever is the later, (a) the aircraft may be seized (and possession of it kept until all outstanding amounts covered by the statutory lien are paid), and/or (b) the aircraft may be sold. Section 74 provides for the order of application of the proceeds of sale. Section 75 provides, inter alia, that an appropriate officer of CAA may direct in writing that the statutory lien ceases to have effect, and the Registrar is empowered to make an entry in the Register as prescribed.
Section 76 provides as follows:

"76. (1) Upon a request made in writing in respect of an aircraft by a prescribed person, an authorised officer shall issue a certificate in writing, stating whether or not, as at a specified date and time, any charge or penalty, ... is payable and unpaid in respect of the aircraft and, in respect of any such charge, penalty or debt, the amount of it and the date upon which it became payable.

(2) Where a certificate has been so issued, any statutory lien in respect of the aircraft, whether imposed before or after the time to which the certificate relates, does not cover:

(a) any such charge or debt in respect of the aircraft that was payable and unpaid as at that time but was not specified in the certificate; or

(b) any penalty relating to any such charge."

In Part VIII (ss. 93-98) headed "MISCELLANEOUS", s. 98 empowers the Governor-General to make regulations covering a wide range of matters.

B. The Determinations of the Charges
29. Pursuant to sub-section 66 (2) CAA made two Determinations which were in evidence: one published in the Commonwealth of Australia Gazette No. P21, Monday 25 June 1990, which came into effect on 1 July 1990, and the other published in Commonwealth of Australia Gazette No. P18, Friday 28 June 1991, which came into effect on 1 July 1991. There is no relevant difference between them, and it suffices to describe the terms of the second Determination ("the Determination").

The Determination distinguishes between "avtur aircraft" and "non- avtur aircraft". "Avtur aircraft" is defined to mean "an aircraft powered by an engine or engines using aviation turbine kerosene", and "non-avtur aircraft" is defined to mean an aircraft other than an avtur aircraft. The Determination provides for the making of "landing charges", "en-route charges" and "meteorological charges". All charges are related to the "weight" of the aircraft which is defined to mean "maximum take-off weight". (Compass was to allege that CAA had been making charges calculated otherwise than on "maximum take-off weight".)
Paragraphs 27-29 of the Determination, are as follows:

"RECOVERY OF CHARGES

27. For the purposes of this Determination, the Authority or an authorised officer may issue an invoice, or make a demand, to a person for payment in relation to a liability in respect of a charge under this Determination.

28. Where an invoice is duly issued, or a demand made, to a person pursuant to paragraph 27, the amount of the charge is due and payable commencing on the day of the making of the demand, or where an invoice is issued, on the first day of the month after the month in which the liability is incurred.

PENALTIES

29. Where the liability of a person to pay a charge under the Act is not discharged within 28 days after the day on which the charge became due and payable, that person is liable to pay to the Authority, by way of penalty, in addition to the amount of that charge, an amount calculated upon the amount of that charge or penalty remaining unpaid at the rate of 1.5% for each month or part of a month for which that amount is unpaid, to be computed from the day on which that charge became due and payable and to be compounded."

CAA relied on the issuing of invoices as distinct from the making of demands. It recorded its charges in respect of each of the Compass aircraft on a daily basis. Invoices apparently were issued on the last day of each calendar month in respect of the charges relating to each aircraft for that month. Compass treated the amount of the invoice as being due and payable on the first day of the following month. Thus, in respect of the month of May, the charges for services provided during that month relating to each Compass aircraft were the subject of an invoice which asserted that the total amount of the invoice was "due and payable" on 1 June. Under para. 29 of the Determination, Compass was liable to pay a penalty to CAA if, for instance, that amount was not paid by 29 June, the amount of the penalty being calculated as compound interest of 1.5% of the amount unpaid for each month, or part of a month, after 1 June for which the May invoice remained unpaid.

C. The CA Regulations
32. Part III (rr. 7A-20) of the CA Regulations is headed "REGISTRATION AND MARKING OF AIRCRAFT". Regulation 7A provides, relevantly, that an aircraft is required to be registered, and regulation 8 requires CAA to establish and keep a register of Australian aircraft called "the Aircraft Register". Regulation 10 provides for applications for the registration of aircraft, and regulation 13 provides for the registration of aircraft by CAA.

Part IXB (rr. 97-132) is headed "AIR TRAFFIC SERVICES". Regulations 97 and 98 empower CAA to establish, maintain and operate a service to be known as "Air Traffic Control" and for its functions. Regulation 100 provides that an aircraft must comply with air traffic control instructions. In particular, it prohibits an aircraft from entering, operating in, or leaving a control area except in accordance with air traffic control clearance in respect of the aircraft.
Part XI (rr. 160-181) is headed "RULES OF THE AIR". Regulation 167 (b) provides that where aerodrome control is in operation at an aerodrome, the pilot in command of an aircraft forming part of the aerodrome traffic must "obtain, either by radio or visual signals, prior authorisation for any manoeuvre preparatory to or associated with taxi- ing, landing or taking-off". Regulation 169A provides that a pilot in command who contravenes, inter alia, regulation 167 is guilty of an offence for which the maximum penalty is a fine of $2,500.00.

D. The Remedies Available to CAA
35. For default by Compass in payment of charges and penalties to CAA, CAA had the following remedies available:

(a) it could sue for the debt (CA Act, sub-s. 66 (11));

(b) once the CAA Board had determined a period beginning on the day on which a charge became due and payable (where an invoice was issued, the first day of the month after the month in which the liability was incurred) expired, CAA could impose a lien: (CA Act s. 69);

(c) if an outstanding amount covered by such a statutory lien were unpaid at the end of six months after the day on which it became an outstanding amount, or the day on which the lien was registered, whichever was the later, the Certificate of Registration of the aircraft could be cancelled (CA Act s. 71);

(d) if an outstanding amount covered by a statutory lien was unpaid at

the end of nine months after the day on which it became an outstanding amount or the day on which the lien was registered, whichever was the later,

(i) the aircraft could be seized and retained; and/or

(ii) the aircraft could be sold (CA Act ss.72-73);

(e) it was arguable that CAA could decline to provide services and facilities to Compass (CA Regulations 167 (b) and 169A). (The primary Judge was of the opinion that CAA was entitled under the CA Regulations to refuse permission to Compass for its aircraft to taxi on airport runways and to take off, since non-compliance with such directions constituted an offence: 48 FCR at 173. The evidence of Mr Beer, an executive of CAA, was that, in his opinion, CAA could not refuse such services.)

E. The Law as to Preferences
36. Sufficient has been said of the facts to provide an appreciation of the issues which arise on the appeal. It will be necessary later to consider the facts, and the proper inferences to be drawn from the facts, in greater detail but before doing so, it is appropriate to consider the legal norms that are involved and the objects or purposes which they seek to achieve. It is with those matters in mind that the facts then should be considered and evaluated.

The applicable legal principles are only to be appreciated with a proper understanding of the way in which they have developed in Australia, particularly in comparison with their development in the United Kingdom and the United States. It is fair to say, as was submitted by counsel, that the present litigation does present unusual features. Hence, the need for the inquiry we have described.

(1) The Rationale of Preference Recapture
38. There has been little discussion in the Australian authorities of the objectives sought to be attained by the preference provisions of the modern legislation in which regard is had to the "effect" of the impugned dealing rather than to the intent of the debtor. As will appear, the federal legislation in the United States for more than a century has looked at preference questions "objectively", giving that law closer resemblance to that of this country than to that of the English law. The moral shortcomings of the creditor do not inform the policy of the law in either country. The decisions of Lord Mansfield, to which we later refer, had "punished" the debtor who had tried to impose his own scheme of distribution: Robert Weisberg, "Commercial Morality, the Merchant Character, and the History of the Voidable Preference", 39 Stanford L. Rev. 3, 44-51, (1986).

It has been said in the United States that there are two predominant objectives of preference law: (i) equality between creditors; and (ii) deterrence. In Union Bank v Wolas 116 L. Ed. 2d 514 (1991) the Supreme Court considered s. 547, the preference provision of The Bankruptcy Reform Act of 1978. Stevens J, giving the judgment of the Court, cited (at 524) the following passage from the House Committee Report No. 95-595 (1977), pp. 177-178:

"The purpose of the preference section is two-fold. First, by permitting the trustee to avoid prebankruptcy transfers that occur within a short period before bankruptcy, creditors are discouraged from racing to the courthouse to dismember the debtor during his slide into bankruptcy. The protection thus afforded the debtor often enables him to work his way out of a difficult financial situation through co-operation with all of his creditors. Second, and more important, the preference provisions facilitate the prime bankruptcy policy of equality of distribution among creditors of the debtor. Any creditor that received a greater payment than others of his class is required to disgorge so that all may share equally. The operation of the preference section to deter 'the race of diligence' of creditors to dismember the debtor before bankruptcy furthers the second goal of the preference section - that of equality of distribution."

Stevens J said (at 524):

"As this comment demonstrates, the two policies are not entirely independent. On the one hand, any exception for a payment on account of an antecedent debt tends to favour the payee over other creditors and therefore may conflict with a policy of equal treatment. On the other hand, the ordinary course of business exception may benefit all creditors by deterring 'the race to the courthouse' and enabling the struggling debtor to continue operating its business."

What one might call the "deterrence" rationale has been questioned. It has been suggested that any economically rational creditor usually will decide to take a preference because the sanction of the preference law is the restoration of the status quo so that the creditor receives in the bankruptcy administration that which would have been received without the preference. As Professor CJ Tabb puts it, "Rethinking Preferences", 43 S. Carolina L. Rev. 981, 991 (1992):

"The only potentially lost costs are those associated with receiving the preference in the first place ... and with defending a preference lawsuit, if the creditor chooses to do so. If recapture were absolutely certain, then deterrence might work, given these transaction costs. However, recapture is not a certainty, and the prudent creditor will discount that likelihood accordingly."

(2) "Effect" Contrasted with "Intent" in s. 122 (1)
40. Sub-section 122 (1) of the Act fixes upon certain payments and other dispositions "having the effect of giving that creditor a preference, priority or advantage over other creditors ..." (emphasis added). The expression "having the effect" has a long history in bankruptcy law in this country, one which marks off in a significant respect the law in Australia from that established in the United Kingdom: Spedley Securities Ltd (In Liq.) v Western United Ltd (In Liq.), supra at 115.

Section 95 of the 1924 Act spoke of certain payments "having the effect" of giving a preference. The meaning of the phrase was disputed in learned articles, each entitled "Fraudulent Preferences" by P.E. Joske and V.G. Braham in (1929) 3 ALJ 174 and 211 respectively.
In S. Richards and Co. Ltd v Lloyd (1933) 49 CLR 49, the High Court rejected a submission that s. 95 looked to the intent or state of mind of the debtor, not merely to the effect of the transaction. Rich and Dixon JJ (at 60) drew support for rejecting that submission from "the language of the section, the history of the bankruptcy legislation in Australia and the course of the colonial decisions ...".
Some mention should be made of that history and of those decisions. Section 8 of the Insolvent Act 1841, 5 Vic. No. 17 (NSW) introduced the phrase "having the effect of preferring any then existing creditor to another". It stated:

"And be it enacted, That all alienations transfers gifts surrenders deliveries mortgages or pledges of any estate goods or effects real or personal warrants of attorney cognovits actionem and judgments entered up thereon made by any person being insolvent or in contemplation of surrendering his estate as insolvent or knowing that legal proceedings for obtaining an order for the sequestration of his estate as insolvent, have been commenced or within sixty days preceding the making of any order for sequestration of his estate as insolvent, and having the effect of preferring any then existing creditor to another shall be and are hereby declared to be absolutely void." (Emphasis added)

On the other hand, the treatment of preferences in the first comprehensive British bankruptcy statute, the Bankruptcy Act 1869 c.71 (U.K.) ("the 1869 Act") was different. Section 92 of the 1869 Act stated:

"92 Every conveyance or transfer of property, or charge thereon made, every payment made, every obligation incurred, and every judicial proceeding taken or suffered by any person unable to pay his debts as they become due from his own monies in favour of any creditor or any person in trust for any creditor, with a view of giving such a creditor a preference over the other creditors, shall, if the person making, taking, paying, or suffering the same become bankrupt within three months after the date of making, taking, paying, or suffering the same, be deemed fraudulent and void as against the trustee of the bankrupt appointed under this Act; but this section shall not affect the rights of a purchaser, payee, or incumbrancer in good faith and for valuable consideration." (Emphasis added)

The phrase "with a view of giving such a creditor a preference" concentrated upon the result intended by the debtor, rather than merely upon the effect of what was done. Section 92 also reflected the then current understanding of the earlier English case law, whereas s. 8 of the 1841 Act had departed from it.

In Humphery v McMullen (1868) 7 SCR (L) 84 at 89-90, the New South Wales Full Court considered the state of the law in England at the time of the enactment of the 1841 Act. The Court said:

"The doctrine of fraudulent preference attached itself, in the first instance, without any positive enactment, to the bankrupt laws. Springing from the general principle that fraud renders every act void, in its inception it supposed fraud on the part of the debtor; for, when the bankrupt laws established as their governing principle that the bankrupt's property should be equally distributed amongst all his creditors, it necessarily followed that any act done by the debtor, which unjustly favoured a particular creditor, to the prejudice of the other creditors, and so prevented the equal distribution which the law required, should be treated as a fraud, in respect of the other creditors, and consequently as a fraud upon the bankrupt laws, and therefore void.

The Courts, however, did not go so far as to say that every transaction between the debtor, even when he contemplated bankruptcy, or was on the eve of bankruptcy, and a particular creditor, by which such creditor obtained an advantage or preference over the other creditors was void. Thus in Harman v.

(Fishar) (1774) 1 Cowp. 117, 98 ER 998, Lord Mansfield says (at 123, 1001):

'But no case ever came before us where we were warranted to say that no case can exist of a legal preference. For if a man were to make a payment but the evening before he becomes bankrupt, independent of the Act of Parliament and in a course of dealing and trade, it would be good; or suppose legal diligence used by a creditor, and execution on a ca. sa. is in the house, and under terror of that he makes an assignment and delivery of his effects, it would be valid; the object not being to give a preference, but to deliver himself.'

And in the same case, Lord Mansfield laid it down, that 'where an act is right to be done, and the single motive is not to give an unjust preference, the creditor will have a preference'. The doctrine was thus reduced within very narrow limits; and after this it seems to have been fully established that no transaction would be avoided as a fraudulent preference, unless it was voluntary on the part of the debtor, and unless his sole motive was to give a preference. Any circumstance that negatived either of these conditions took the transaction out of the class of fraudulent preferences and protected it."

Harman was a significant decision in the development of the law. It is analysed in detail by Professor Robert Weisberg in his article "Commercial Morality, the Merchant Character, and the History of the Voidable Preference", supra at 48-51.

The Full Court in Humphery v McMullen went on (at 90-3) to discuss a number of early 19th century decisions and statutory provisions by which Lord Mansfield's doctrine appeared to have "crept into the statute law". The statutes included 6 Geo. IV, c. 16 (1825); 7 Geo. IV, c. 57 (1826); Judgments Act 1838, s. 59; and 2 and 3 Vic., c. 29. (All but the Judgments Act have since been wholly repealed.) Their Honours continued (at 94) by remarking upon the significant change wrought by the 1841 Act in New South Wales. They said:

"Such then was the state of the law on this point, and such was the nature of the decisions in England, when our Statute, 5 Vic., No. 17, was passed. And it must be assumed that the framers of our Act had in view not only the English enactments, but also the decisions upon the subject. When, under such circumstances, we find the local Legislature, which has in other respects made considerable departures from the English law on the subject of bankruptcy and insolvency, using in this enactment terms so very different from those used in the English enactments, we may fairly ask whether the preference indicated by the 8th section of our Act is not altogether different from the 'fraudulent preference' of the English law. Are we to assume that the words 'fraudulent' and 'voluntary', which occur in the English enactments, but are altogether omitted (we must suppose advisedly and intentionally) from ours, are to be introduced by implication into the latter? Is it not, on the contrary, more reasonable to conclude that the framers of our Act meant to get rid of these questions of intention, on the part of the insolvent debtor, which caused so much difficulty in some of the English cases, and to rest the validity or invalidity of the transactions solely on the question whether, in point of fact, the creditor obtained a preference? This construction would embrace not only those cases which, according to the English doctrine, depend on the debtor's voluntariness and intention to prefer, but also those in which such voluntariness and intention may not exist."

The Bank of Australasia v Harris (1861) 15 Moo 96, 15 ER 429, was an appeal to the Privy Council from the Supreme Court of Queensland, in which colony at the relevant time the 1841 Act applied. The judgment was delivered by Knight Bruce LJ who expressed the view (at 437) that the phrase "having the effect of preferring any then existing creditor" in s. 8 of the 1841 Act was not intended to refer to any case of preference which was not fraudulent. Humphery v McMullen, supra, was decided seven years later. The New South Wales Full Court, as appears from what has been set out above, was of the contrary view and held that the expression of opinion by the Privy Council did not compel the overrruling of a long series of decisions of the Supreme Court of New South Wales.
Section 31 of the Insolvency Statute 1865, 28 Vict. No. 273, was in identical terms to s. 8 of the 1841 Act. Nevertheless, in Sheldrick v Aitken (1869), 6 WW and A'B (L) 59, the Victorian Full Court was influenced by observations by their Lordships (at 64) upon the bankruptcy law in force in Jamaica, Nunes v Carter (1866) LR 1 PC 342 at 347, as affirming what had been said in The Bank of Australasia v Harris. The Full Court decided that s. 31 of the statute applied only to preferences which were fraudulent.
It was this conflict in interpretation of the colonial legislation which finally was resolved by the enactment of s. 95 of the 1924 Act and the interpretation given s. 95 by the High Court in S. Richards and Co. Ltd v Lloyd, supra.
It should be noted that under s. 44 of the Bankruptcy Act 1914 c.59 (U.K.), the mental element for the giving of a preference was identified in terms of the principal or dominant desire of the debtor, whereas under the current United Kingdom legislation, s.340(4) of the Insolvency Act 1986 c.45 (U.K.), it is enough that the giving of the preference was influenced by a desire to produce the relevant effect: Halsbury's Laws of England 4th ed., Reissue, vol. 3 (2) para 646; R.M. Goode, Principles of Corporate Insolvency Law, 1990, pp. 163-4, 172-3.

(3) The "Net Result" Rule and the "Running Account" in the United States
51. We were referred, as had been the primary Judge, to several United States decisions. It is appropriate to consider briefly the pattern of federal legislation in that country. That legislation has not operated continuously. The Bankruptcy Act of 1800, 2 Stat.19, was repealed in 1803 and the next federal law, The Bankruptcy Act of 1841, 5 Stat.440, (of which Story had been a proponent) was repealed in 1843. The Congress again legislated with The Bankruptcy Act of 1867, 14 Stat.517 (which was repealed in 1878), followed by The Bankruptcy Act of 1898, c.541, 30 Stat.544. After various amendments, that statute was replaced by The Bankruptcy Reform Act of 1978, which itself has been amended.

The decisions of Lord Mansfield which established a judicial doctrine of fraudulent preferences in England had been followed in early American decisions: Tabb "Rethinking Preferences", supra at 1000-2. At that time, the law of bankruptcy was concerned with insolvent traders, and there was no voluntary bankruptcy. Section 2 of the 1841 Act provided for the recapture of preferences which were identified in terms of transactions effected "for the purpose of giving any creditor ... any preference or priority ...". Section 35 of the 1867 statute used the phrase to be found in s. 92 of the 1869 English Act - "with a view" to giving a preference. However, both statutes were construed in such a fashion as to place upon the debtor the burden of disproving what otherwise would flow from the objective circumstances known to the debtor at the relevant time, and the debtor was said to have presumed against him the natural consequences of his acts: Arnold v Maynard 1 F. Cas. 1181 (1842), a decision of Story J sitting as Circuit Judge in the District of Massachusetts; Toof v Martin 80 U.S. 40, 48 (1871). The requirement that the debtor have an intent to prefer the creditor was finally abandoned in s. 60 of the 1898 Act; see Tabb, supra, at 1007-8.
The High Court of Australia has, in more recent times and in other contexts, held that the supposed presumption, conclusive or otherwise, that a man intends the natural, or natural and probable, consequences of his acts, is unsatisfactory where a specific intent must be found: Smyth v The Queen (1957) 98 CLR 163 at 166-7. Nevertheless, as developed in the United States by Story J and other judges, this notion played an important part in bringing about what ultimately was a legislative recognition that preferences were concerned with effect rather than with the intent of the debtor. In Australia, in the course of argument upon s. 73 of the Insolvency Act 1890 (54 Vict. No. 1102) which substantially corresponded to s. 92 of the English Act of 1869, Griffith CJ asked "(m)ust not a man be presumed to intend the natural consequences of his act?": Muntz v Smail (1909) 8 CLR 262 at 266, 271. But in the years before the enactment of the 1924 Act, the idea does not seem to have taken root in the Australian cases.

Whilst what one might call "debtor intent" has for long not been required in the United States in connection with recapture of preferences, s. 35 of the 1867 Act introduced, and s. 60b of the 1898 Act continued, a requirement of knowledge on the part of the creditor. Section 35 required "reasonable cause to believe" that the debtor was insolvent, and s. 60b required that the creditor had "reasonable cause to believe" that it was intended by the transaction in question to give a preference. The presence of this requirement of "creditor intent" must be taken into account if one is to appreciate what truly was involved in the decisions propounding what in the United States was called "the net result" rule. We were referred to this, as the primary Judge had been (48 FCR at 172), as being analogous to the Australian decisions dealing with running accounts.
Particular reference was made to three decisions of the United States Supreme Court, Jaquith v Alden, 189 U.S. 78 (1903), Yaple v Dahl-Millikan Grocery Co., 193 U.S. 526 (1904), and Joseph Wild and Co. v Provident Life and Trust Co., 214 U.S. 292 (1909). These decisions have been placed in their statutory context and their significance explained by Professor V. Countryman in his detailed study, "The Concept of a Voidable Preference in Bankruptcy", 38 Vand. L. Rev. 713, (1985), and by the decisions of the United States Bankruptcy Court in In re Thomas W. Garland Inc., 19 BR 920, 922-925 (ED Mo. 1982) and In re St. Louis Globe Democrat, Inc., 99 BR 946, 948-9 (ED Mo. 1989). So viewed, their importance for our purposes is difficult to justify.
Professor Countryman points out (at 722) that s. 57g of the 1898 Act provided that the claims of creditors who had received preferences were not to be allowed unless they surrendered those preferences. The Supreme Court construed this provision as applying to any creditor who had received any preference as defined in s. 60, even though the preference was not voidable under that section because the creditor did not have reasonable cause to believe that the debtor intended to give a preference: Pirie v Chicago Title and Trust Co., 182 U.S. 438, 446-7 (1901). The creditor was given the choice of retaining the technical preferential payment and foregoing any participation in a distribution by the trustee, on the one hand, or of returning the preference and participating with other creditors in any distribution by the trustee, on the other. The Congress then, in 1903, amended s. 57g so as to forbid the allowance of claims of those creditors who did not surrender preferences which were voidable under s. 60, thereby reversing the effect of Pirie.
As we have indicated, the primary Judge (48 FCR at 171) asked whether CAA was better or worse off by reason of receiving the payments in question and decided that the net result was that it was substantially worse off.
In the United States, what was called the "net result" rule was developed to place a gloss upon the statute as it existed between 1898 and 1903. In explaining this development, Professor Countryman refers (at 783) to the three decisions of the Supreme Court cited above, and continues:

"The rule developed when old section 57g required creditors to surrender 'technical' preferences, which were not voidable because the creditor had no reasonable cause to believe the debtor insolvent, before their claims would be allowed. To mitigate the rigors of section 57g, lower courts developed, and the Supreme Court approved, a 'net result' rule under which all 'technical,' nonvoidable preferences received by a creditor and all unsecured credit extended by that creditor during the then four month preference period were viewed as a single transaction. Only to the extent that the 'net result' showed a gain by the creditor would the creditor be required to surrender it before his claim would be allowed. Courts, however, applied that rule only under section 57g and only to creditors who had received nonvoidable preferences; the rule did not apply to creditors who received preferences that the trustee could avoid under old section 60. Those creditors might have been able to set off subsequent unsecured credit extensions under section 60c, but they could not invoke the 'net result' rule. When Congress amended section 57g in 1903 to confine its operation to voidable preferences, there was no longer any occasion to apply the 'net result' rule. Every court that has considered the effect of the amendment of section 57g on the 'net result' rule has reached this conclusion."

However, even after the 1903 legislation eliminated the foundation for the net result rule, some courts applied it to achieve an "equitable" operation of the preference law in deserving cases, and the "net result" rule seemed to acquire "a life of its own": Gerald B. Kirksey, "A Simplified Approach to Preference Calculations ..." 61 Am. Bankr. LJ 255, 259 (1987). See also Collier on Bankruptcy 15th ed (1993) para 547.12.

In re Fred Stern and Co. Inc., 54 F. 2d 478 (2d Cir. 1931), the Court of Appeals for the Second Circuit applied, by analogy, the federal decisions dealing with the "net result rule" to a State statute, the New York Stock Corporation Law, s. 15. However, in his concurring judgment, Learned Hand J, after referring to Jaquith and other Supreme Court decisions, said that he was "not sure that I understand on what principle those cases rest" and that it was "(o)n the authority of (those) cases and for that reason alone" that he concurred.
This reservation by Learned Hand J is important in the light of the significance given to this decision in one of the Australian authorities to which we refer later (CSR Ltd v Starkey (1994) 13 ACSR 321 at 327-8).
The authorities referred to by Collier (at para553.05(2), n9) notably In re Fulghum Construction Corp., 706 F. 2d 171, 174 (6th Cir. 1983) indicate that whatever otherwise might be the status of the "net result" rule, it now yields utterly to the specific provision of s. 547 (c) (4) of the 1978 Act. This, as has been said, transforms any "net result" rule into a "subsequent advance" rule by requiring that the "new" or additional value be given after the preferential dealing (See also the discussion of Fulghum by Countryman, supra at 784; as to whether the surrender by operation of law of the right to perfect a statutory lien constitutes "new value", see Cimmaron Oil Co. Inc. v Camerson Consultants, Inc., 71 BR 1005 (N.D. Tex. 1987)).
Section 547 (c) (4) is one of the seven exceptions to the operation of the general provision (s. 547(b)) rendering a voidable preference one that benefits a creditor, is made on account of an antecedent debt, while the debtor was insolvent, and within ninety days before bankruptcy, so as to enable the creditor to receive a larger share of the estate than if "the transfer" had not been made. The particular exception in s. 547 (c) (4) is as follows:

"(c) The trustee may not avoid under this section a transfer -

(4) to or for the benefit of a creditor, to the extent that, after such transfer, such creditor gave new value to or for the benefit of the debtor -

(A) not secured by an otherwise unavoidable security interest; and

(B) on account of which new value the debtor did not make an otherwise unavoidable transfer to or for the benefit of such creditor."

The outcome is that even though the creditor may have received a preference, in some circumstances the creditor may still offset against a preference claim any subsequent unsecured credit which was extended to the debtor. Illustrations are given by Kirksey, supra, at 256-8.

Thus the present United States legislation does not, and its predecessors may never have, provided any direct assistance in dealing with the "running account" principle involved in decisions dealing with s. 95 of the 1924 Act and s. 122 of the Act.
The expression "running account rule" also has been used in America to describe the "net result" rule. In In re St. Louis Globe Democrat, Inc., supra at 948, it was said that a running account is created where the debtor makes a payment and the creditor extends new credit so that the net result is a corresponding increase in the value of the estate; but that there will be no "running account" in this sense where the debtor makes the payment unconditionally, so that it is not contingent upon the extension of new credit.
As several American commentators have noted, and we return to this later, significant questions remain unresolved in the policy area in the United States law of preferences, such that we are reluctant to adopt the "net result" rule for present purposes, the operation of sub- s.122(1) of the Act, and we do not do so.

(4) The General Concept of a "Running Account"
66. The term "running account" is used in several areas of the law. Whether there is a "running account" may be significant for the operation of limitation statutes, for the tracing of trust funds and for the application of the rule in Clayton's Case. The term also may be used in the provisions of commercial contracts.

The precise denotation of the term probably varies with the particular discourse in which it is used. It may indicate an account which is not closed or stated, but in which the inclusion of further dealings between the parties is contemplated. It may be that the account is classified as a running account because, by express or implied agreement of the parties, it is only the balance due from one to the other that is payable. Finally, it may be said that there is no running account unless there are mutual dealings, there being debits and credits on either side. American authorities for all these propositions, for instance, are collected in the Annotation to Goodsole v Jeffery 168 NW 461 (1918) in 1 ALR 1057, 1060-70 (a limitation case).

(5) The "Running Account" in the High Court of Australia
68. It is appropriate now to turn to the evolution in Australian bankruptcy law of what might be called the "running account" doctrine. It will be apparent that it turns upon the interpretation given the word "effect" in s. 95 of the 1924 Act and the compression of the term "entire transaction" into the statutory phrase "every conveyance or transfer of property, or charge thereon made, every payment made, every obligation incurred and every judicial proceeding taken or suffered ...".

In Richardson, the High Court was dealing with a succession of deposits to and withdrawals from an overdrawn current bank account. As we have indicated, in Weiss Gibbs J was concerned with the application of s. 95 of the 1924 Act. The bankrupt had carried on business as a tailor and had obtained supplies of cloth from the respondent. Gibbs J said (at 659):

"(T)he account kept by the respondent ... was in the ordinary form of a running account in which debits and credits are recorded chronologically and in which payments are not shown as attributable to any particular deliveries but are brought generally into credit."

In Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266 at 283, Barwick CJ said:

"In general, to pay one of a number of creditors, and neither paying, securing nor arranging with the others, is to prefer the creditor who is paid. But it seems to me that it is one thing to pay a sum of money in the liquidation of an indebtedness, so as to end the relationship of debtor and creditor and, that it may be quite another to make a payment on account of a 'running' indebtedness, the payment not in anywise intended or understood to end the relationship of the debtor and creditor, but rather to ensure its continuance."

The Australian Law Reform Commission's "General Insolvency Inquiry" (Report No. 45, Vol. 1) summed up the position as follows (para654):

"'Running' accounts

Claims against banks and traders alleging a preference in their favour often involve the assertion that, in the operation of an overdraft or a trading account, the bank or trader has been repaid all or part of the credit extended to the now insolvent customer. Where the conduct of business between the bank or trader and customer involved a 'running' account consistent with an arrangement that the account would fluctuate, the courts have developed the principle that regard must be had to the debits and credits over the relevant period of time in order to determine whether a preference (if any) has resulted. If a reduction of the overall amount outstanding in the relevant period has occurred, then the issue is whether the amount of the reduction is a preference. The courts have consistently rejected the notion that each payment to the credit of such an account should necessarily be viewed in isolation as possibly amounting to a preference."

It will be noted that the Commission discussed the topic in terms of an arrangement for the extension of credit so that the account would fluctuate.

(Section 588FA of the Corporations Law, which is in the new Part 5.7B introduced by s. 111 of the Corporate Law Reform Act 1992 (with effect 23 June 1993) introduces a new treatment of unfair preferences. Sub-section 588FA (1) is the general provision and sub-s. 588FA (2) may give statutory effect to the "running account" cases. It provides:

"588FA(2) (Transaction part of continuing business relationship) Where:

(a) a transaction is, for commercial purposes an integral part of a continuing business relationship (for example, a running account) between a company and a creditor of a company (including such a relationship to which other persons are parties); and (Emphasis added)

(b) in the course of the relation-ship, the level of the company's net indebtedness to the creditor is increased and reduced from time to time as the result of a series of transactions forming part of the relationship;

then:

(c) subsection (1) applies in relation to all the transactions forming part of the relationship as if they together constituted a single transaction; and

(d) the transaction referred to in paragraph (a) may only be taken to be an unfair preference given by the company to the creditor if, because of subsection (1) as applying because of paragraph

(c) of this subsection, the single transaction referred to in the last-mentioned paragraph is taken to be such an unfair preference."

But the present dispute has to be determined in accordance with the law as it stood before the commencement of s. 588FA on 23 June 1993.)

In Page v Commonwealth Life Assurance Society Ltd (1935) 36 S.R. (NSW) 85 at 89, Jordan CJ said that the policy of the bankruptcy law has always been regarded as a useful guide in determining the operation and limitations of the letter of the law. His Honour gave two instances, (i) proceedings which, although within the letter of the law, had been regarded as obnoxious to the policy of the bankruptcy law, and therefore, avoided by it, and (ii) limitations upon the application of the letter of the law which have been extracted from its "general policy". Although Jordan CJ did not advert to them, the decisions of Lord Mansfield from which the law of preferences developed illustrate proposition (i). The "running account" doctrine may perhaps be seen as an illustration of proposition (ii).
This passage was referred to by Clyne J in Re Price (No. 6); Richardson v Commercial Banking Co. of Sydney Ltd (1949) 15 ABC 26 at 42. His Honour continued:

"I do not think that s.95 (1) can be given a strictly literal interpretation. Such an interpretation would have strange results and results which, in my opinion, were not intended by the legislature. On a strictly literal interpretation of s.95 (1), any payment into a banking account by a debtor, however trivial an amount, and made nearly six months before the debtor's bankruptcy, would be a preference, because at the time of payment it gave the banker a momentary advantage, though in substance and in fact it had no effect in preferring the banker to other creditors. Such an interpretation would give to the section an application which had no regard to the policy of the law, or to the continuous and reciprocal obligations which are contracted from day to day between debtors and creditors in the course of their business operations. In my opinion, to create a preference under this section, there must, in the event of bankruptcy, be a discrimination between creditors of a final or ultimate character."

(Emphasis supplied)

Clyne J had earlier (at 41) observed that the element of preference in s. 95 in the 1924 Act had appeared in New South Wales in the 1841 Act and that the requirement that the transaction had the effect of giving a preference, not that it be entered into with a view to giving a preference, was an important distinction between Australian and English law. His Honour also (at 42) referred to Stephen v Doyle (1882) 3 NSWLR (Eq.) 1. There, Martin CJ had said, with reference to s. 8 of the 1841 Act, "that the effect of the transfer must be judged by the fact of its ultimately producing a preference or not", and Faucett J had said that "having the effect" meant not being put into the position of being able to take an advantage, but having the effect of preferring in the case of an insolvency.

Clyne J went on (at 43) to conclude that where effect, not intent, was a test of preference, a cheque deposited by a customer in a banking account which has the effect of enabling the customer to meet his obligations or some of them when due, is not a payment which amounts to a preference to the banker within the meaning of s. 95. His Honour said:

"(I)n my opinion payments made to a banker by a customer in the course of their current relationship as banker and customer which have the effect of enabling the customer to meet his liabilities are not preferences within s.95 unless, in their ultimate result, they give the banker an advantage over the other creditors. These payments, while affording the bank some temporary or incidental advantage, do not in the course of the business of banking bring about a diminution of the property available for division between the creditors in the event of the debtor becoming bankrupt, and they do not contravene that policy of the bankruptcy law which requires an equal division of the debtor's property between his creditors."

(Emphasis supplied)

Stephen v Doyle, supra, is a significant decision because unlike the case with which Clyne J was dealing, it did not involve a running account between banker and customer. The facts were as follows. Sheehy was indebted to Doyle. He sold to Doyle certain property for "600, "200 of which was paid at once. It was agreed that Doyle should pay the balance of "400 when required. Before Sheehy became insolvent, Doyle paid the balance. The old debt of Sheehy to Doyle remained unpaid. It was contended unsuccessfully that Doyle had received a preference. The argument by the future Sir Alexander Gordon and Sir Adrian Knox which was rejected was as follows (at 3):

"It is not the intention of the parties that governs questions arising under sec.8 of the 'Insolvent Act' (5 Vict. No. 17), but the 'effect' of their dealings. And that 'effect' must be judged, not by the actual result, but by the possible result - by the use the creditor might put it to, though in the end he does not. Applying this test it is easy to see how Doyle might have obtained a preference. If he had refused to pay the "400 and Sheehy had sued him, Doyle could have set off his previous debt, or, if Sheehy had become insolvent before all the "400 was paid to him, Doyle could have still set off the debts and paid or proved for the balance under sec.37."

Minter Ellison, solicitors ("Minters") wrote to Mallesons on 8 November disputing the debt asserted in the statutory demand of which it sought withdrawal. Mallesons replied on 12 November advising that CAA was not prepared to withdraw the statutory demand.
An internal CAA memo was prepared on 26 November headed "FINANCIAL OUTLOOK - PESSIMISTIC". Its purpose was stated to be "to identify the worst-case financial impact on the CAA of a financial collapse by major operators" and proceeded to "hypothesise" certain facts which either were precisely those relating to Compass or were so similar that the document may be accepted as showing CAA's thinking in relation to Compass at the time. A copy of the paper is annexed to these reasons and marked "C".
The CAA Board met on 27 November 1991. Baldwin presented a lengthy report on Compass dated 18 November. The report gave an account of developments since the last preceding Board meeting on 30 October. As at the date of the report, Compass's position was described in the report as being as follows:

"August Account

(invoice payment date 30.9.91) $2.825m Less paid 0.975m 1.950m Less held over pending MTOW

confirmation of adjustment 0.250 $1.700m September Account (invoice payment date 31.10.91) $3.081m October Account (invoice payment date 30.11.91) $3.483m"

Those figures total $8.264m. Paras 1.11-1.15 and the recommendation in the report were as follows:

"1.11 The issue to be addressed by management and the Board is - what action do we take against Compass in the event that:

i the balance of the August invoice is not paid by the end of the 3 week period since the serving of the Section 460, (25 November 1991) and ii Compass have made no move to have their dispute on the MTOW settled by the court.

1.12 Management recommendation based on the opinion of our legal adviser in this matter is to: apply to the court for consent to wind up. This action will force Compass to formally seek a dispute, which in turn will require the Judge to hear and arbitrate on whether there is such a dispute. If it is found there is a dispute the matter will be heard and dealt with almost immediately. This should settle the issue of the application of the MTOW once and for all. That settled, Compass will have no option but to settle the overdue account in compliance with the agreed procedure or the CAA will have the option to wind up Compass and/or issue liens against their aircraft.

1.13 In following this course of action we have to be very aware that Compass has a major cash flow problem, and it could be a question of survival now or delaying the crisis for the new year.

1.14 As we have said to Compass and others, it is not in the interest of the CAA to put Compass down if it can be made to survive, - but equally it is not in the interests of the CAA for Compass to go down owing us $10m+.

1.15 The Directors should be aware we are positioned our lawyers to place liens against all Compass aircraft and if necessary to issue injunctions to prevent them leaving Australia. The risk in this scenario is whether our intelligence is good enough to keep abreast of other any parties actions.

2.0 RECOMMENDATION

2.1 It is recommended that if the $1.7m owing to the CAA for the August invoice is not paid at the end of the 3 week period since serving the Section 460 of the Corporations Law (25 November 1991) then;

(i) the CAA file for consent of the court to wind up Compass Airlines Limited, and in doing so have any dispute of the account settled by the court;

(ii) on settlement of such a dispute the CAA give Compass 48 hours to settle the outstanding amounts in accordance with the agreed terms;

(iii) failure to do so either

- seek an immediate Government "guarantee" for the payment of all Compass' debts or immediately issue a liens against Compass' aircraft to protect our debt.

2.2 To avoid any bureaucratic delay in obtaining a Government Guarantee to protect our Compass debt, we have put a proposal to our Minister Bob Collins for consideration by the Government."

On 19 November 1991, CAA (Baldwin) reported to Senator Bob Collins, Minister for Shipping and Aviation Support. The letter said that it was necessary that a decision be taken whether CAA should proceed to seek a winding up order and/or place liens on Compass aircraft, and in the latter event, also seek an injunction to restrain the lessors of the aircraft from flying them out of Australia. The letter included the following:

"We appreciate it is not in CAA's or Australian domestic aviation's interests to take airlines - especially major domestic airlines such as Compass - out of service; but Compass owes us $8.264m plus interest as at 31 October 1991. Under the terms of their agreed proposal, Compass will continue to owe us not less than $6.0m at any one time from now until 30 June 1992. The CAA is prepared to carry that $6.0m risk providing Compass meets their part of the agreement and pay their accounts in full within 28 days of the invoice due date. The CAA sees no reason why it should carry any greater risk and if Compass cannot meet their payments in accordance with the agreement, it would be reasonable to assume they are in considerable financial difficulties and we should move to protect our own interests. Whatever action we take at that point, it is almost certain to put them out of business. To avoid that possibility and continue to let Australian domestic travellers enjoy the benefits of deregulation, we ask - 'Will the Government give a guarantee to cover CAA's debt with Compass in the event of Compass going in to receivership or being wound up in some other way and not paying its debts in full?' It may appear to be an unusual request to make, but if we are to protect our own financial interests and keep Compass in business, what other options do we have? Compass have no other security to offer us - if we put a (sic) liens on their aircraft they have said the lessor will take the aircraft out of service as it is in conflict with their lease agreement. We would appreciate a reply by 25 November - the day we may need to apply to the court if the balance of our August account is not paid."

The response of the Government to this "unusual request" was to be given on 2 December, and we will refer to it in due course.

On 25 November, CAA called upon Compass to pay $1,640,766.07 (being the August invoice of $2,925,886.75 less (a) the payment of $975,532 made on 31 October, (b) the payment of $59,588.68 made on 4 November and (c) $250,000 set aside in respect of the MTOW dispute) plus penalties. As well, CAA reminded Compass that it was obliged to pay a further $3,081,102.63 plus penalties in respect of the September account on 26 November.
On 27 November CAA faxed Compass stating that action would be taken the following morning under s. 69 of the CA Act to impose liens on Compass's five aircraft, and under s. 77 of that Act to advise organisations known to have a financial interest in the aircraft, including lessors, of the action taken.
At its meeting on 27 November, the CAA Board resolved that liens be imposed on Compass aircraft at 12 noon on 28 November unless the outstanding charges were settled or acceptable security for payment was provided by that time. Later on that date CAA advised Compass of the Board's decision. As well, on 27 November, Baldwin wrote a confidential letter to the Minister advising him of the CAA Board's decision.

(18) CAA Imposes Liens on the Five Compass Aircraft on 28 November 1991
181. On the morning of 28 November, Compass offered CAA security over its receivables estimated at $8m, but CAA replied that the offer was not sufficiently defined or detailed to constitute acceptable security, but that CAA would defer imposing liens until 4.00 pm to give Compass an opportunity to amplify on its offer. That was done by a subsequent memo faxed at 3.45 pm, but was rejected by CAA which advised that it was imposing liens forthwith. At 5.30 pm CAA raised statutory liens on all five aircraft operated by Compass.

The lien on aircraft registered VH-YMA was in respect of the following:

"Invoice number: 130722 due on: 01/09/1991 amount: $720,272.51 Invoice number: 132190 due on: 01/10/1991 amount: $713,755.18 Invoice number: 133725 due on: 01/11/1991 amount: $679,875.71 Total unpaid charge, including penalty $2,113,903.40"

In addition, it was stated in the relevant certificate of charges recorded that charges for flights (no doubt from 1 to 28 November) to the value of $67,148.54 would be included on CAA's next invoice.

The lien which was imposed on aircraft registered number VH-YMB was in respect of the following:

"Invoice number: 130724 due on: 01/09/1991 amount: $51,094.50 Invoice number: 132192 due on: 01/10/1991 amount: 666,038.64 Invoice number: 133727 due on: 01/11/1991 amount: $707,354.10 Total unpaid charge, including penalty $1,424,487.24"

In addition, the certificate of charges under s. 76 of the CA Act said that charges for flights (no doubt from 1 to 28 November) to the value of $97,439.97 would be included on the next invoice.

In respect of invoice registered number VH-YMI, the certificate of charges recorded that charges under the Act were payable as follows:

"Invoice number: 130723 due on: 01/09/1991 amount: $735,019.74 Invoice number: 132191 due on: 01/10/1991 amount: $452,646.72 Invoice number: 133726 due on: 01/11/1991 amount: $749,964.77 Total unpaid charge, including penalty $1,937,631.23"

In addition, the certificate of charges under s. 76 of the CA Act said that charges for flights (no doubt from 1 to 28 November) to the value of $96,477.65 would be included on the next invoice.

The lien in respect of aircraft registered number VH-YMJ was, according to the certificate of charges under s. 76 of the CA Act in respect of the following:

"Invoice number: 130721 due on: 01/09/1991 amount: $552,748.68 Invoice number: 132189 due on: 01/10/1991 amount: $679,846.73 Invoice number: 133724 due on: 01/11/1991 amount: $684,392.05 Total unpaid charge, including penalty $1,916,987.46"

In addition, according to the certificate, charges for flights (no doubt from 1 to 28 November) to the value of $32,867.41 would be included on the next invoice.

The final lien was in respect of aircraft registered number VH-YMK and was, according to the certificate of charges under s. 76 of the CA Act, in respect of the following:

"Invoice number: 132188 due on: 01/10/1991 amount: $656,627.68 invoice number: 133723 due on: 01/11/1991 amount: $661,865.97 Total unpaid charge, including penalty $1,318,493.65"

In addition, according to that certificate, charges for flights (no doubt from 1 to 28 November) to the value of $70,575.34 which had been recorded would be included on the next invoice.

On 28 November CAA forwarded to Compass a copy of a notice relating to the creation of the statutory liens over the five aircraft, stating that it expected that the notice would be published in the Commonwealth Gazette on 4 December. The letter pointed out that if the debt remained outstanding six months from the date of creation of the liens, CAA would have a discretionary power to de-register the aircraft, and that if the debt remained outstanding after a further three months, the CAA would have the further discretionary power to seize and/or sell the aircraft.
On the same date (28 November) CAA advised the Hon Kim Beazley, Minister for Transport and Communications, and Senator Collins of the creation of the liens. At the same time, Blake Dawson Waldron, solicitors for Polaris, Monarch and Canadian Airlines, wrote to CAA requesting that by Monday 2 December, CAA fax their clients with details of the CAA charges payable or recorded against the aircraft of which the respective clients were lessors.
On 29 November Compass requested, under sub-section 82 (2) of the CA Act, that the chief executive officer of CAA review the imposition of the liens and ensure that they were lifted or cancelled forthwith. The letter offered a floating charge over all of Compass's assets that were not the subject of specific charges, including certain rotables, spare parts and stores, accounts receivable and fixed assets.
There was a telephone conversation on 29 November at about 8.50 am between Baldwin and Michael Grey and David Reynolds. The conversation was recorded. There was discussion about the provision of security by Compass. The conversation included the following:

"MG We are a bit confused to tell you the truth because, whilst we understand CAA's desire and need to collect its debts, our perspective is the CAA is really jeopardising our ability to keep paying you, CAA charges in the future. FB Well, we have acknowledged the point that it is in both out interests to keep Compass flying and we have said that, and I have said that to you in my letters. That's why we have been out of our way, and I have got to say we have gone out of our way in commercial terms to accommodate your cash flow problem and this is why, when your own Company put up the proposal of the 28 days after interest due date agreement, we clearly, reluctantly - and I think that message has probably come through - accepted that whereas with other companies we have actually put on liens earlier to protect our interest. We have to have some security. Now, the fact is we did agree to your terms and your terms have not been honoured - that makes us nervous Michael; I mean, let's be fair."

In the course of the telephone conversation it was agreed that Mallesons and Minters should discuss what might be an acceptable form of security.

On 29 November Compass advised CAA that negotiations were under way through Potter Warburg for placement of shares in the capital of Compass which would raise $17m for the company and that other sources of funds were being explored. The letter advised that as:

"In the unlikely event that the placement does not occur we would anticipate paying the CAA on Wednesday 18 December. As you are aware, we are entering into a high cash flow and profitable period.

The date of 18 December has been chosen as that is the date Compass will be receiving its BSP payment sufficient to cover the amount owed."

On 29 November Compass advised CAA that if the placement of shares proceeded, all the outstanding debt would be paid on 24 December, and that if it did not proceed, payments would be made as follows:

18 December 1991 $3,205,384.25 2 January 1992 (the October Account) $3,483,452.60 17 January 1992 (disputed

charges) $2,253,157.00 9,941,993.85

(19) On 1 December 1991 a "Deal" is Done Between CAA and Compass
193. By 1 December, a "deal" was done between Compass and CAA settling, inter alia, the dispute over MTOW and the calculation of the charges and penalties payable by Compass to CAA, on the basis that Compass furnished to CAA an irrevocable authority addressed to the Bank Settlement Plan ("BSP") authorising and directing it to pay to CAA out of the proceeds of sale of passenger tickets for the carriage of passengers on Compass aircraft amounts as follows:

(a) Up to $3,081,102.63 by 4.00pm on 18 December 1991;

(b) the sum of $3,478,294.49 by 4.00pm on 2 January 1992;

(c) the sum of $2,027,825.00 by 4.00pm on 17 January 1992; and

(d) the balance of the charges and penalties and the additional penalties up to the amount certified to be payable and unpaid in respect of Compass aircraft in accordance with s. 76 (1) of the CA Act, by 4.00 pm on 28 January 1992.

(20) On 2 December 1991 CAA "Removes" its Liens Imposed on 28 November 1991
194. On 2 December the CAA wrote to the lessors and/or their representatives advising that subject to this, CAA agreed to direct that the statutory liens cease to have effect and that the Registrar of Statutory Liens make an appropriate entry in the Register. CAA advised the lessors and/or their representatives that the statutory liens had ceased to have effect, and fresh certificates under s. 76 of the CA Act were issued to them.

Also on 2 December, Senator Collins advised CAA that the Government would not guarantee the Compass debt since this would be inconsistent with its "withdrawal from aviation-specific regulation". The letter said that the question of recovery of the Compass debt was "a commercial matter for resolution by the Authority on the basis of its normal commercial processes".
On 11 December representatives of the lessors called on CAA's Canberra office and expressed concern over CAA's recent imposition of liens. Mayoh explained that CAA operated at arm's length from the Government.

(21) On 18 December 1991 only $1,700,703.16 (the Last of the 9 Payments in the Preference Period) is Paid by the Bank Settlement Plan and Compass Does Not Pay the Shortfall of $1,380,399.47 Necessary to Make the Payment of $3,081,102.63 Promised for that Date.
197. The amount which the BSP paid to CAA on 18 December was only $1,700,703.16, which left a balance of $1,380,399.47 which Compass itself would have to pay by way of "topping up" the BSP payment in order that a total of $3,081,102.63 be paid on 18 December. CAA monitored the flights of Compass aircraft on 18 December in case it should be necessary to apply statutory liens and obtain injunctions. Blake Dawson Waldron, solicitors representing the aircraft lessors, requested fresh statements under s. 76 of the CA Act, which were issued. The recorded debts against the five aircraft comprised invoiced debt aggregating $12,114,302.06, and accrued December charges of $1,751,901.49, making an overall total of $13,866,203.55.

(22) Imposition of Liens on 18 December 1991
198. Although the BSP paid $1,700,703.16 on 18 December, Compass did not pay the top-up amount required. The CAA imposed liens. On Tuesday 17 December 1991, it issued five certificates of charges under s. 76 of the CA Act. These certified the charges payable as at 9.00 am on 17 December 1991 as follows:

Aircraft registered number VH-YMA:

"Invoice number: 130722 due on: 01/09/1991 amount: $731,076.60 Invoice number: 132190 due on: 01/10/1991 amount: $724,461.51 Invoice number: 133725 due on: 01/11/1991 amount: $700,424.96 Invoice number: 135142 due on: 01/12/1991 amount: $611,492.08 Total unpaid charge, including penalty $2,767,455.15"

In addition, recorded charges for flights to the value of $354,407.01 were to be included on the next invoice.

Aircraft registered number VH-YMB:

"Invoice number: 130724 due on: 01/09/1991 amount: $51,860.92 Invoice number: 132192 due on: 01/10/1991 amount: $676,029.22 Invoice number: 133727 due on: 01/11/1991 amount: $728,733.88 Invoice number: 135144 due on: 01/12/1991 amount: $575,157.98 Total unpaid charge, including penalty $2,031,782.00"

In addition, according to the certificate, recorded charges for flights to the value of $372,023.59 which had been recorded were to be included on the next invoice.

Aircraft registered number VH-YMI:

"Invoice number: 130723 due on: 01/09/1991 amount: $746,045.04 Invoice number: 132191 due on: 01/10/1991 amount: $459,436.42 Invoice number: 133726 due on: 01/11/1991 amount: $772,632.45 Invoice number: 135143 due on: 01/12/1991 amount: $749,746.55 Total unpaid charge, including penalty $2,727,860.46"

In addition, according to the certificate, recorded charges for flights to the value of $328,955.65 were to be included on the next invoice.

Aircraft registered number VH-YMJ:

"Invoice number: 130721 due on: 01/09/1991 amount: $561,039.91 Invoice number: 132189 due on: 01/10/1991 amount: $690,044.43 Invoice number: 133724 due on: 01/11/1991 amount: $705,077.80 Invoice number: 135141 due on: 01/12/1991 amount: $629,934.52 Total unpaid charge, including penalty $2,586,096.66"

As well, according to the certificate, recorded charges for flights to the value of $260,110.80 were to be included on the next invoice.

Aircraft registered number VH-YMK:

"Invoice number: 132188 due on: 01/10/1991 amount: $666,477.10 Invoice number: 133723 due on: 01/11/1991 amount: $681,870.87 Invoice number: 135140 due on: 01/12/1991 amount: $652,759.82 Total unpaid charge, including penalty $2,001,107.79"

Further, according to the certificate, recorded charges for flights to the value of $267,108.75 would be included on the next invoice.

(23) The End of the Relationship Between CAA and Compass
199. On 20 December 1991, Compass filed in this Court (in proceedings number NG 3189 of 1991) an application for an order that it be wound up and a notice of motion returnable instanter for an order that liquidators of Compass be appointed provisionally. The latter order was made on that date. Also on 20 December, possession of the five aircraft of Compass passed to the lessors. Accordingly, CAA rendered no services to Compass after 20 December. However, the charges invoiced by CAA to Compass for December, apparently of $2,487,236.51, fell due for payment on 1 January 1992.

H. The Proper Inferences to be Drawn from the Primary Facts
200. In our opinion, the facts show that, throughout the preference period, there did not exist between Compass and CAA what might be described, to adapt the language of Barwick CJ in Rees, current credit arrangements under which Compass reasonably could expect that so long as it paid accounts according to those arrangements, CAA would continue to provide services.

In our view, the primary facts indicate that there was no running account between Compass and CAA, either as regards total indebtedness or by taking the matter aircraft by aircraft. When dealing with the period in 1991, before the commencement of the preference period, we referred to the pervasive references to the indebtedness of Compass on the footing of particular monthly accounts for charges and penalties. This continued throughout the preference period. There was also, in that period, in respect at least of the payments of 4 and 9 October and 4 November appropriation by Compass to specific portions of past debt. The parties conducted their affairs such that debits and credits were recorded in a fashion that attributed them to the particular provision of services and the imposition of penalty interest. There were distinct debts between which the parties distinguished at all relevant times, so that payments were not made merely on account of a "running" indebtedness.
Nor, in our opinion, was there an "entire transaction" between the parties in the sense that term was used in Richardson. There was a number of dealings, the occasion or necessity for which arose from (i) CAA's statutory position as sole supplier of certain services required by Compass to operate its business, and (ii) the persistent failure after December 1990 of Compass to pay the charges to CAA under its trading terms as defined by or pursuant to statute.
Moreover, there was, in our view, no mutual assumption that CAA would refrain from exercising its remedies, including the imposition of statutory liens or that CAA would supply further services whilst Compass remained delinquent in its payments to CAA: CAA did not so conduct itself that Compass reasonably could expect that CAA would provide further services so long as periodic reductions were made in a "general debit".
Before and during the preference period (on at least 22, 28 March, 2, 20, 29 May, 19 July, 2, 4, 25, 29 October 1991) CAA stressed to Compass that it could not act as financier to Compass by, in effect, carrying its debt, or treat it more favourably than the other airlines. Compass continually gave undertakings to CAA to clear the arrears and to pay new debts as they fell due. From time to time (on 3 April and 1 December) Compass offered to provide security to CAA. But it also made it plain to CAA that it regarded the oil companies and the FAC as creditors whose claims to payment were more pressing than those of CAA; the conversation between Mr Baldwin and Mr Grey on 4 October, gave, if it were needed, a vivid reminder to CAA of the attitude of Compass.
For its part, CAA regarded itself, in the light of the legal advice it had received, as uniquely handicapped by its statutory obligations. These were considered to require CAA not to withhold provision of services, other than on "safety issues", even to a recalcitrant debtor. Alternative measures, including the imposition of liens, were considered from time to time and eventually on 28 November and 18 December these measures were applied.
CAA also perceived that, if it pressed Compass too hard, this would embarrass the Executive Government by reflecting adversely upon the success of the government's deregulation policy. As we have observed earlier in these reasons, everyone in authority at CAA must have known or suspected throughout 1991 that a collapse of Compass would have political ramifications. These matters plainly weighed with CAA throughout the preference period as, over and over again, it was faced with the question whether it should, as a matter of good commercial practice, pursue its remedies against Compass in respect of its delinquent payment record and, as Mr Baldwin put in on 2 September, bring Compass to heel.
There was also, as appears, for example, from the letters of 31 October and 7 November, indications within CAA that it should "assist" Compass through its cash flow crises, and keep the matter away from "the public arena". As early as May 1991, before the preference period commenced, CAA had been very anxious as to the possible repercussions of public revelation of the state of account of Compass, and of the methods adopted by CAA in dealing with the situation.

IV. RESULT OF THE APPEAL
208. Having regard to all these matters, in our view, in the result the conclusion must follow that this is not a case in which, on any footing, the reasoning of the High Court in Richardson and the Rees cases applies. There was no running account in the relevant sense, nor did the nine payments comprise an "entire transaction".

It follows, in our view, that the payments did amount to preferences. Accordingly, the appeal should be allowed.
It remains to consider the question whether interest should be recovered upon the amounts recovered as preferences. As a matter of principle, this question turns, we think, upon the true nature of a proceeding to recover preferential payments.

V. INTEREST
211. In Re Ward (1950) 16 ABC 214, the applicable period of limitation to an action to recover alleged preferences was considered. It was contended unsuccessfully that the action was one upon a specialty, being a debt arising from statute, s. 95 of the 1924 Act. Paine J held (at 222) that the cause of action to recover moneys paid preferentially arose partly from the effect of s. 95 and "for the rest" depended upon the common law as it affected the result brought about by the section. The common law action was one for money had and received. It followed that, because the action did not solely arise from statute, the longer period of limitation which governed actions on specialty debts did not apply.

In N.A. Kratzmann Pty Ltd (In Liq.) v Tucker (No. 1) (1966) 123 CLR 257 at 285, Barwick CJ spoke of the rights of the liquidator as being derived from that part of the general law which becomes applicable upon the avoidance of the transaction in question. However, it would be unnecessary for the trustee to bring a separate claim outside the proceeding in which a declaration is obtained as to the avoidance of the transaction of the bankrupt. An appropriate consequential order to the declaration, in ordinary cases, is an order for the payment to the trustee of the amount in question: N.A. Kratzmann Pty Ltd (In Liq) v Tucker (No. 2) (1968) 123 CLR 295 at 298-9. Accordingly, in the present case, such an order should be made consequent upon the declaratory relief to which the Liquidators are entitled.
It is against that background that the recovery of interest falls for consideration.
Sub-section 51A (1) of the Federal Court of Australia Act 1976 ("the Federal Court Act") is as follows:

"51A (1) In any proceedings for the recovery of any money (including any debt or damages or the value of any goods) in respect of which a cause of action that arises after the commencement of this section, the Court or a Judge shall, upon application, unless good cause is shown to the contrary, either:

(a) order that there be included in the sum for which judgment is given

interest at such rate as the Court

or the Judge, as the case may be,

thinks fit on the whole or any part of the money for the whole or any

part of the period between the date when the cause of action arose and

the date as of which judgment is

entered; or (Emphasis supplied)

(b) without proceeding to calculate interest in accordance with

paragraph (a), order that there be

included in the sum for which

judgment is given a lump sum in lieu of any such interest."

The question then arises in the present case as to "the date when the cause of action arose" within the meaning of the sub-section.

As McLelland J pointed out in Spedley Securities Ltd (In Liq) v Western United Ltd (In Liq) (No. 2) (1992) 10 ACLC 887, a preference is void only as against the liquidator so that until a liquidator is appointed there can be no cause of action. His Honour concluded (887-8):

"As a matter principle and logic it is very difficult to see any proper basis for an award of interest in respect of a period prior to the accrual of any relevant cause of action."

His Honour also said that rarely would it be appropriate to allow any amount for interest in respect of a period prior to a demand being made for the recovery of a preference. His Honour said (at 888):

"I am not proposing any inflexible rule, but in the ordinary run of cases, and particularly in the present case, it seems to me that it would not be proper to allow interest in respect of any period prior to a demand by the liquidator that any particular payment was in fact recoverable as a preference."

McLelland J also pointed out (at 888) that s. 94 of the Supreme Court Act 1970 (NSW) (which relevantly corresponds to s. 51A) was "the only foundation for the inclusion of interest in any event".

It will be recalled that on 20 December 1991 Compass applied for an order that it be wound up and sought the appointment in the meantime of provisional liquidators; that the Liquidators were appointed on that day as provisional liquidators; and that on 10 July 1992, Compass was ordered to be wound up, and the Liquidators were appointed. Demand upon CAA for repayment of the preferences was made by the Liquidators by notice dated 30 July 1992.
The foregoing reasoning would indicate that interest under s. 51A of the Federal Court Act should not run before 10 July 1992 and in the particular circumstances, should run from the demand on 30 July 1992.
However, the Liquidators rely upon two decisions of Hodgson J, Maurice Drycleaners Pty Ltd (In Liq) v National Australia Bank Ltd (1990) 8 ACLC 798, and Hamilton v Commonwealth Bank of Australia (No. 2) (1992) 10 ACLC 1611. These cases are authority for the proposition that the appropriate commencement date in this case is the commencement of the winding up, that is, 20 December 1991.
Hodgson J pointed out that a preference once avoided is treated as void from the commencement of the winding up. This may be important where a specific item of property was transferred or a fund is held, and there are supervening claims of third parties or questions arise as to the tracing of proceeds: Re Fiorino (Gummow J, 14 April 1994, unrep.). But the relevant point for present purposes remains that the cause of action of the trustee arose, within the meaning of s. 51A, only upon the appointment of the Liquidators. It follows that we prefer the reasoning of McLelland J on this issue.
We also accept that in the ordinary course interest should be allowed only from the date of demand by the Liquidators. However, CAA submits that, as a matter of discretion, there should be no award of interest. This would, it is submitted, reflect the circumstance that it was the making of preferential payments by Compass to CAA which induced CAA further to extend the provision of services to Compass; cf Re Carr (Morling J, 17 December 1987, pp 12-13, unrep.). That, in our view, rather over-simplifies the present facts.
In all the circumstances, we find nothing to displace the ordinary proposition that the period should run from the date of the demand, that is, 30 July 1992. If necessary, we will hear the parties on the rate of interest to be allowed.
We add a reference to the position in the United States, where a result has been reached which is broadly the same as that which commends itself to us. There has been no specific provision in the federal bankruptcy statutes to provide for the award of interest upon an amount recovered as a preference. The bankruptcy court has relied upon its equitable powers to make such an award. There is no right to interest, but if the court decides to award interest it usually does so from the date of demand for return of the preference, or, if there be no earlier demand, from the institution of the suit, this itself being a demand (see 9A Am. Jur.2d para1779). Interest is awarded from the date of the transfer only in exceptional cases, for instance where the transfer was made with actual intent to hinder, delay or defraud creditors or the transferee is guilty of culpable misconduct. Authority for these propositions is found in In re Roco Corp., 37 BR 770, 774 (D. RI. 1984), and In re Art Shirt Ltd., Inc., 93 BR 333, 341-2 (E.D. Pa. 1988).
The rationale for the general rule applied in the United States is that until the trustee exercises his election and makes demand for repayment or retransfer, the preferred creditor cannot be said to hold the property wrongfully: Smith v Mark Twain National Bank, 805 F.2d 278, 291 (8th Cir. 1986).

VI. ORDERS ON THE APPEAL
224. It follows that the appeal should be allowed; the Liquidators should have declaratory and consequential relief, including an order for interest under s. 51A of the Federal Court Act to operate from 30 July 1992. The appeal will stand over after the delivery of these reasons, for the bringing in of short minutes to give effect to the reasons for judgment. We also will then hear the parties on the question of costs.

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Citations

Ferrier, Ian.Douglas & Anor v Civil Aviation Authority [1994] FCA 1019 ((1994) 55 FCR 28)

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21 DECEMBER 1994