Hendersons Automotive Technologies Pty Ltd (in liq) v Flaton Management Pty Ltd
[2011] VSCA 167
•10 June 2011
SUPREME COURT OF VICTORIA
COURT OF APPEAL
S APCI 2009 3782
| HENDERSONS AUTOMOTIVE TECHNOLOGIES PTY LTD (IN LIQUIDATION) (ACN 108 967 611) | Appellant |
| v | |
| FLATON MANAGEMENT PTY LTD (ACN 108 988 932) | Respondent |
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| JUDGES | ASHLEY, NEAVE and TATE JJA |
| WHERE HELD | MELBOURNE |
| DATE OF HEARING | 11 November 2010 |
| DATE OF JUDGMENT | 10 June 2011 |
| MEDIUM NEUTRAL CITATION | [2011] VSCA 167 |
| JUDGMENT APPEALED FROM | Hendersons Automotive Technologies Pty Ltd v Flaton Management Pty Ltd [2009] VCC 0834 (Judge Shelton) |
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RESTITUTION – Unjust enrichment – Appellant (now in liquidation) purchased business and respondent purchased land on which business was conducted from a common vendor – Appellant paid more than purchase price of business – Claimed that excess reduced sum payable by respondent for land – Claimed that excess was a benefit to which respondent was not legally entitled – Trial judge determined that excess was repayment of loan and no benefit was conferred – Whether trial judge erred as to principles governing restitutionary relief – Whether trial judge erred in method of calculation – Lumbers v W Cook Builders Pty Ltd (in liq) (2008) 232 CLR 635, discussed – Appeal allowed.
SET-OFF – Novation – Appellant’s debt discharged – Day & Dent Constructions Pty Ltd (in liq) v North Australian Properties Pty Ltd (1980) 150 CLR 85, discussed – Lloyds Bank NZA Ltd v National Safety Council of Australia Victorian Division (in liq) [1993] 2 VR 506, discussed.
LIEN – Whether legal requirements for an equitable lien satisfied.
PRACTICE AND PROCEDURE – Need for re-pleading, further discovery and further evidence – Matter remitted.
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| Appearances: | Counsel | Solicitors |
| For the Appellant | Mr J L Evans | Herbert Geer |
| For the Respondent | Ms M B Loughnan SC with Mr P F Agardy | Harwood Andrews |
ASHLEY JA:
I have had the advantage of reading in draft the reasons for judgment of Tate JA. I respectfully agree with them.
NEAVE JA:
I have had the advantage of reading, in draft form, the judgment of Tate JA and agree, for the reasons she gives, that the appeal should be allowed and the proceeding remitted for re-determination by the court below.
TATE JA:
This appeal arises out of the purchase of a business, and the purchase of the land on which the business was conducted. The business was the manufacture and distribution of component parts and assemblies for the motor vehicle industry. The relevant land was at 8-20 Corio Quay Road, North Geelong, Victoria (‘the land’). The business was purchased by Henderson’s Automotive Technologies Pty Ltd (‘HAT’) and the land was purchased by Flaton Management Pty Ltd (‘Flaton Management’).
The question is whether HAT can recover from Flaton Management an amount it paid to the vendor of both the business and the land (Hendersons Industries Pty Ltd (‘HIPL’)), in excess of the purchase price of the business, thereby reducing the amount which Flaton Management had to pay for the land.
HAT, the appellant, now in liquidation, argued that the excess it paid was an advance to Flaton Management, the respondent, to enable it to buy the land; that is, the excess was a benefit conferred on Flaton Management to which it was not legally entitled and which it should now repay to HAT by way of restitution.
HAT unsuccessfully brought proceedings in the County Court alleging that Flaton Management had unjustly enriched itself at HAT’s expense.[1] HAT had also sought a declaration that the amount owed to it by Flaton Management was secured by an equitable lien over the land which is registered in the name of Flaton Management. The original statement of claim had alleged a resulting trust but this was abandoned at trial after evidence had been given.
[1]Hendersons Automotive Technologies Pty Ltd v Flaton Management Pty Ltd [2009] VCC 0834 (‘Reasons’).
Flaton Management denied that it had received any benefit from HAT and contended that it owed no monies to HAT.
The trial judge found that Flaton Management had not received a benefit. He concluded there was therefore no need for him to consider whether HAT was entitled to an equitable lien over the land. Accordingly, he gave judgment for Flaton Management.
As mentioned below, following the hearing of the appeal the Court received numerous further submissions from the parties with the final set of submissions being filed on 12 May 2011.
The purchase of the business and the land
Before May 2004, Mr Gunther Jakob Flaton was the general manager of HIPL that operated an automotive manufacturing business on the land, which it owned. HIPL was a wholly owned subsidiary of Nylex Limited (‘Nylex’) and was not a related entity to HAT. Mr Flaton negotiated with Nylex to purchase the land, on which stood factory buildings, and to purchase the business run by HIPL there.
Mr Flaton was advised by his accountants and solicitors to have one entity purchase the land and another separate entity purchase the business. In May 2004, each of HAT and Flaton Management was incorporated. Mr Flaton was the sole director of HAT and a director, along with his wife, Mrs Josie Flaton, of Flaton Management.
HAT was to operate the business as the trustee company of the Hendersons Automotive Technologies Trust (‘the HAT Trust’). Flaton Management, in purchasing the land, acted as the trustee company of the Flaton Property Trust. Mr Flaton was also the director and controlling mind of a building company, Flamar Pty Ltd (‘Flamar’), in its own right and as trustee of the Flaton Investment Trust. He was also the director and controlling mind of Flamar Investments Pty Ltd. The companies and trusts (save for Flaton Management and HAT) together with Mr and Mrs Flaton comprised ‘the Flaton Entities’.
Income from both the HAT Trust and the Flaton Property Trust flowed to the Flaton Investment Trust and was distributed to Mr and Mrs Flaton and to Flaton Investments Pty Ltd.
The Contract of Sale between HIPL and Flaton Management for the purchase of the land was dated 13 May 2004 and specified a purchase price of $1.5 million.
The Sale of Business Agreement between HIPL and HAT was dated 13 May 2004 and specified a purchase price of $855,000.
Between 13 May 2004 and 29 September 2004, HAT and Flaton Management made payments to HIPL (or directly to Nylex) referable to one or other of the two contracts. The instalments were made by one or other of HAT or Flaton Management, or by one of the Flaton Entities, depending on the availability of funds in their respective bank facilities.
There were agreed adjustments by the parties to the contract prices. One issue for determination before the trial judge was whether the adjustments should be attributed to the sale of the land or the sale of the business, and thus to the price payable for the land or business respectively. The trial judge found that the adjusted purchase price for the land was $1,526,598.07 (including stamp duty) and the adjusted purchase price for the business was $636,606 (including stamp duty). On the appeal, the parties did not dispute these findings.
There was a dispute as to the date on which the Contract of Sale for the land was settled. Flaton Management had argued that the date of settlement was 1 November 2004. The trial judge found that it was 31 August 2004 when, as he noted, Flaton Management received a transfer of title to the land in exchange for two bank guarantees from the Commonwealth Bank of Australia (‘the CBA’) in favour of Nylex totalling $1.05 million, the approximate balance then outstanding under the Contract of Sale for the land. In any event, both contracts had settled by 1 November 2004. At that time, HAT was solvent, being able to pay its debts as they fell due for payment.
HAT was placed into administration pursuant to Part 5.3A of the Corporations Act 2001 (Cth) on 1 November 2007. It was placed into liquidation on 29 February 2008.
Reasons of the trial judge
The trial was conducted in April 2009. Before the trial judge, HAT had argued that it was necessary only to calculate the sums it had paid to HIPL and deduct the amount it was obliged to pay under the business contract. HAT contended that it had paid HIPL $1,210,106 and that the amount payable for the business was, as the trial judge had found, $636,606. After making certain adjustments, the excess was to be regarded as paid under the Contract of Sale for the land. This was alleged to be the sum of about $661,125.
At trial, HAT calculated the figure of $661,125, for which it sought restitution, on the basis of two sets of factors, the first set being relevant to the calculation of the purchase price of the business and the second set being relevant to the payments HAT made. None of the first set of factors was in dispute on appeal (although some had been at trial). It is the second set of factors which was disputed at trial and which remained in dispute on appeal.
The first set of factors consisted of the following:
(1) After adding $52,606 as stamp duty on the transfer of the business, the initial purchase price under the Sale of Business Agreement was $907,606 (that is, $855,000 plus $52,606).
(2) A deduction needed to be made of $78,000 being ‘the Occupational Health and Safety Adjustment’ pursuant to Clause 3.7(e) of the Sale of Business Agreement (the adjusted purchase price of the business was thus $829,606 (that is, $907,606 minus $78,000)).
(3) A further deduction needed to be made of $193,000 pursuant to Clause 3.7(d) of the Sale of Business Agreement, being the Completion Statement adjustment. The trial judge found that the purpose of the Completion Statement adjustment was to show adjustments due to ‘Stock, Accrued Employee Entitlements, Land & Buildings and Plant & Equipment … and the Further Employee Provisions Adjustment’. The further adjusted purchase price of the business was thus $636,606.
The second set of factors, those relevant to HAT’s payments, consisted of the following:
(1) HAT made three principal payments that it argued were referable to the performance of both contracts. These comprised a payment to Nylex of $270,000 on 30 August 2004;[2] a payment of $805,000 to Nylex on 1 November 2004,[3] and $135,106 to the State Revenue Office on 19 October 2004 (the sum of the stamp duty owing on the Sale of Business Agreement ($52,606) and the stamp duty on the Contract of Sale for the land ($82,500)) (collectively the ’three principal payments’). These amounted to the sum of $1,210,106.
[2]By a CBA cheque numbered 640370 063978 1007210 from funds debited to the account of HAT with the CBA.
[3]By a CBA cheque numbered 336120 063978 10043246 from the same account referred to in footnote 2, in the name of HAT.
(2) From the sum of $1,210,106 it was necessary to deduct the amount HAT was obliged to pay under the Sale of Business Agreement, the further adjusted purchase price being (as shown above) $636,606, leaving a balance of $573,500.
(3) HAT argued that it was necessary to add the deposit ($85,000)[4] paid by Flamar under the Sale of Business Agreement, leaving a balance of $658,500.
(4) HAT also argued that it was necessary to add interest payments on the bank guarantees from the CBA for the months of September and October 2004 of $2,625, leaving a balance of $661,125.
[4]This was contentious but ultimately the trial judge found it unnecessary to determine.
Flaton Management argued that the excess paid by HAT was not a payment under the Contract of Sale for the land but rather was a repayment of loans made by Flaton Management or the Flaton Entities to HAT. It argued that it was not sufficient to calculate the total of the payments made by HAT while deducting the amount it owed under the Sale of Business Agreement. There was a need to see the payments in the context of the overall financial arrangements between the entities within the group, including the making and re-paying of no-interest loans. In particular, there was a need to identify what inter-company loans had been made and which of the payments HAT made could properly be characterised as repayments.
The trial judge accepted that the proper approach was to view the payments made in the context of the arrangements between the various entities in the group. He generally accepted the evidence of Mr Flaton and said:[5]
Flaton had full authority to act on behalf of both plaintiff [HAT] and defendant [Flaton Management], as well as other Flaton [E]ntities. As between plaintiff and defendant, any ‘agreement’ was, in effect, what Flaton intended. Secondly, as a consequence, and not unexpectedly, the passing of monies between the plaintiff, defendant and Flaton [E]ntities was not as fully and accurately recorded as might have been the case had the parties been at arm’s length. There were no written loan agreements or company minutes recording the repayment of loan accounts. Thirdly, Flaton gave evidence that relevant financial records were now missing. Fourthly, at the time the transactions under scrutiny took place, there was no suggestion that the plaintiff was in a parlous financial state and that Flaton was moving monies out of the plaintiff to defeat its creditors.
[5]Reasons, [16].
The trial judge accepted that, in the circumstances, it was sufficient that the loans were recorded in various book entries. He relied on what the High Court said in Sheahan v Carrier Air Conditioning Pty Ltd:[6]
Thus, in Re Stevens, it was said that the debtor ‘parted with his assets, and the payment which he himself should have received he has authorised to be made to the creditor, and it is just the same as if he had received payment himself and had himself handed such payment to [the creditor]’.
[6](1997) 189 CLR 407, 437 (Dawson, Gaudron and Gummow JJ).
To the same effect Finkelstein J stated:[7]
There is every reason to permit a payment to be made by a book entry. Often it is simply a short-hand for money or a cheque being handed across the table and money or a cheque being handed back. … All that is required is an actual agreement by the relevant parties that payment be made by means of entries in books of account.
[7]Re York Street Mezzanine Pty Ltd (in liq) (2007) 162 FCR 358, 366 [26].
His Honour accepted the validity of the book entries even though the loan account was described in a detailed spreadsheet relied on in evidence as ‘Share Capital’. Mr Flaton’s evidence was that HAT’s in-house accountant, Mr Davey, who had become hostile to Mr Flaton, had recorded loans under this heading as part of an antiquated accounting system that was used.
Having accepted the need to view the three principal payments in context, the trial judge approached the matter primarily as an accounting exercise to determine if he could identify an excess paid by HAT which would represent the benefit it conferred on Flaton Management, such benefit being assumed to be recoverable under the law relating to unjust enrichment. Flaton Management supported this approach on the basis that it could ‘beat the quantum’ without much attention needing to be paid to whatever cause of action was in issue.
The trial judge rejected HAT’s claim largely by rejecting the characterisation of the payment it made to Nylex of $805,000 (the second of the three principal payments) as a payment made with respect to the performance of both contracts. He held that it largely consisted of a repayment by HAT of loans made by the Flaton Entities before 1 November 2004. He accepted that, during 2004, advances were made by the Flaton Entities and Flaton Management to HAT and that it was Mr Flaton’s intention in 2004 that all advances made by the Flaton Entities to HAT in 2004 would be treated as loans, and that those loans would in each case be repaid by HAT.
He noted that Mr Flaton:[8]
gave evidence that, since debtors had not been purchased under the business contract, it was necessary to inject funds into the plaintiff by way of loans to finance its operation and this was done by loans from Flaton [E]ntities to the plaintiff [HAT]. At 1 November 2004, advances made to the plaintiff totalled $780,402.13. Flaton gave detailed evidence as to how this sum was calculated. The payment of $805,000 [from HAT to Nylex] on 1 November 2004 was … a payment at his direction to repay funds advanced to the plaintiff of $780,402.13 and in addition, advancing a further sum of $24,597.87 rather than a payment under the property contract. He referred to a speadsheet which although entitled ‘Share Capital’, was in fact a loan account. … Share Capital is shown for October 2004 at $1,010,892 and for November 2004 as $205,892, a difference of $805,000. I accept Flaton’s evidence as to how the payment of $805,000 is to be characterised.
[8]Reasons, [29].
Importantly, the trial judge found that HAT required funds to be provided by Flaton Management for its working capital, it having been incorporated, as mentioned above, in May 2004, for the purpose of purchasing the business but without having purchased any debts owed to it. HAT could not have commenced operations without borrowing capital.
Furthermore, having characterised HAT’s payment of $805,000 as containing within it the repayment (at Mr Flaton’s direction) of loans totalling $780,402.13, he further deducted $50,000 (leaving a balance of $730,402.13) in respect of a 300-ton press which, it was adjudged, Mr Flaton had bought on HAT’s behalf. He also deducted the sum of $24,597.87 overpaid, leaving a balance of $705,804.26.[9]
[9]Ibid [31].
As the sum of the loans HAT repaid (the sum of $705,804.26) was greater than the sum it claimed was a contribution to the purchase of the land (the sum of $661,125), his Honour concluded[10] that, in effect, HAT had not paid any excess monies with respect to the purchase of the land. There was thus no benefit enjoyed by Flaton Management at HAT’s expense and Flaton Management had not been unjustly enriched.
[10]Ibid [31].
The Appeal
The appeal brought by HAT was based on a number of grounds, many of which overlapped and through all of which ran the allegation that HAT had conferred a benefit on Flaton Management to which Flaton Management was not lawfully entitled. Some of these grounds related to particular payments that his Honour should or should not have taken into account. There was also an attack on his Honour’s general methodology. The grounds of appeal were as follows:
(1) The learned trial judge erred in law, in that he failed to consider properly the existence of, or to quantify, the benefit received and retained by the defendant at the expense of the plaintiff as a result of the payments of $1,210,106 paid by the plaintiff to Nylex Ltd and the State Revenue Office between 30 August 2004 and 1 November 2004 (the ‘Payments’).
(2) The learned trial judge erred in law, in that he failed to consider properly or at all whether the retention of the benefit received by the defendant at the expense of the plaintiff as a result of the Payments would be unconscionable in all the circumstances.
(3) The learned trial judge erred in law, in that he failed to consider properly or at all whether the plaintiff was entitled to an equitable lien against the land to secure the payment by the defendant to the plaintiff of an amount equal to the benefit received by the defendant at the expense of the plaintiff as a result of the Payments.
(4) The learned trial judge erred in fact and law, in that (at paragraph [31] of his reasons) he applied a credit of $705,804.26 in favour of the defendant against the sum claimed by the plaintiff of $661,125, and concluded that by reason of this credit the defendant had not failed to account to the plaintiff for the benefit received by it, where:
(a) there was no basis in fact or law for the methodology adopted by his Honour;
(b) the sum of $705,804.26 identified by his Honour included an amount of $16,500 which the defendant had conceded during trial had been separately repaid by the plaintiff in February 2005 and was no longer claimed by the defendant;
(c) the sum of $705,804.26 identified by his Honour included an amount of $54,497 which formed part of the $78,000 which was a credit given by HIPL against the sale of the business contract, and therefore should not have been included;
(d) his Honour failed to give any reasons, or any adequate reasons for accepting that the sum of $705,804.26 identified by his Honour included the sums of $8,752.57, $69,783.04 and $23,144.19 which had been disputed by the plaintiff as being debts owed by the plaintiff to persons associated with Gunther Flaton prior to 1 November 2004.
(5) Even accepting the findings made by the learned trial judge at paragraphs [1] to [30] of his reasons for decision were correctly made (and adequate reasons for those findings given), the learned trial judge erred in fact and law, in that had he applied those findings correctly to the plaintiff’s claim, he should have found that the defendant had been unjustly enriched in the sum of not less than $423,720.87, together with an amount representing interest on that sum from 1 November 2004.
Flaton Management, in its Amended Notice of Contention on the appeal, also alleged that errors were committed by the trial judge. These related, inter alia, to the calculation of the flow of funds out of loan monies provided by the Flaton Entities and Flaton Management to purchase the land. In addition, they related to the failure to find that HAT’s claim of unjust enrichment was not supported by any cause of action pleaded by it or available to it on the evidence, as well as a failure to find that HAT had not established any of the circumstances required for the implication of an equitable lien.
The core accounting exercise continued to loom large in the appeal, despite protestations from HAT that it was not engaging in the ‘top-down reasoning’ criticised by the High Court;[11] that is, it argued that it was not seeking primarily to calculate a sum it had overpaid and then find a legal category in which to place it. Flaton Management responded by arguing that the liquidators, having access to all of HAT’s books of account and other documents, ought to have conducted a liquidators’ examination, pursuant to the powers under Division 1 of Part 5.9 of the Corporations Act, rather than commencing a suit by HAT against Flaton Management on specious grounds and on the basis of inadequate and incomplete documentation. However, if the appeal was to be allowed, Flaton Management urged, the matter ought to be remitted to the County Court, pursuant to s 74(3) of the County Court Act 1958 for expert accountancy evidence to be led on the group accounts and the internal and external transactions into which the entities in the group had entered. Such expert evidence had not been led at trial, the reason being, it submitted, because HAT had refused to accept that the relationship between Flaton Management and the Flaton Entities, on the one hand, and HAT, on the other hand, was that of lender to borrower. That refusal caused Flaton Management prejudice because experts could otherwise have been engaged, or directions obtained for a special referee, in relation to the loan transactions between the parties, if the relationship of lender to borrower had been accepted.
[11]Lumbers v W Cook Builders Pty Ltd (in liq) (2008) 232 CLR 635, 662 [77].
During the course of the appeal, it emerged that the working capital HAT required from the commencement of its operations in 2004 had not been provided directly as a loan from Flaton Management, or any of the Flaton Entities, but rather that Flaton Management had stood as a guarantor for a loan from the CBA to HAT for working capital in the sum of $1,050,000 (dated August 2004) by means of a Bank Facility (127958).
It further emerged during the course of the appeal that Flaton Management had ultimately discharged HAT’s indebtedness to the CBA by means of a novation on 1 October 2008 (through a new Bank Facility 139398 which replaced the earlier Bank Facility 127958).
It became apparent that there were particular documents that had not been produced before the County Court that were relevant to the nature of the legal relationships between the parties. These included the deed of guarantee by which Flaton Management had acted as a surety for HAT’s indebtedness to the CBA. In addition, there were relevant documents in respect of the novation of HAT’s agreement with the CBA by Flaton Management that had not been before the trial judge.
The question was raised on appeal as to whether Flaton Management could set off the money it had paid to discharge HAT’s indebtedness to the CBA against any money that it might be found to owe to HAT (which it otherwise denied). The Court directed that documents be produced by Flaton Management to HAT relevant to the issue of the novation, documents which Flaton Management had not previously placed in evidence and which the liquidator for HAT had not previously sought. It was contemplated by the Court that the production of these documents might lead to the resolution of the matter, but this is far from what occurred.
The Court directed that the parties exchange further submissions in the light of these documents. This was done following the hearing of the appeal with the parties indicating to the Court that they had no objection to the documents being admitted on appeal. The documents were produced in several discrete bundles over a protracted period of time.
Flaton Management also filed submissions regarding the further documents it produced. HAT responded with supplementary submissions. On 19 April 2011, Flaton Management filed submissions it described as ‘Respondent’s Submissions in Response to the Appellant’s Supplementary Submissions dated 15 March 2011’. In addition to those submissions, Flaton Management filed a further set of documents including a number of separate trust deeds and copies of email correspondence. HAT responded again with a final set of submissions dated 12 May 2011. HAT indicated that it was hopeful that the filing of its submissions would not serve as an invitation for Flaton Management to seek to file further evidence or further submissions.
Ultimately, the issues on appeal consisted of the following:
(1) What was the cause of action brought by HAT?
(2) Did the trial judge err in double counting?
(3) Were the requirements at law for a set-off satisfied?
(4) If HAT were successful, were the requirements for an equitable lien satisfied?
I shall deal with each of these issues in turn.
Ultimately, it is my opinion that the appeal should be allowed and the matter should be remitted for further hearing before the trial judge, pursuant to s 74(3) of the County Court Act. I consider that the trial proceeded on a false conceptual footing and that the trial judge erred, inter alia, in the calculations he performed. Furthermore, the factual and legal issues in contest on appeal have moved some considerable distance from those that were raised at trial. This is apparent from the documents produced to this Court and the lengthy exchange of submissions between the parties. This Court is now faced with a ’paper trail’ of documents about which little or no evidence was given below and in relation to which it is being invited to draw inferences that would be decisive of the contest between the parties. In my opinion, this Court could not be confident that the documents produced are exhaustive or that there has been the equivalent of comprehensive discovery.
In my opinion, the matter should return to the County Court for the issues to be properly pleaded and for full discovery to be made (including on the issue of the securities provided for the loans from the CBA, the guarantees, the novation, the nature of the various trusts, the beneficiaries of the trusts, and any other documents relevant to the question of whether there is the requisite mutuality of parties for the purpose of a set-off). The re-hearing of the matter would also allow for the taking of expert accountancy evidence to be led on the group accounts and the internal and external transactions into which the entities in the group had entered, that evidence being likely to have considerable utility. A remitter would also allow there to be a proper testing of all the evidence in the light of which proper findings of fact can be made. The parties may ultimately consider that a cheaper and more effective way of resolving the dispute would be for the liquidator to conduct an examination.
What was the relevant cause of action? – the primacy of legal relationships
In its amended statement of claim, HAT relied on two causes of action arising from the three principal payments it had made, a claim in debt and, in the alternative, a claim that Flaton Management had ‘been unjustly enriched at the expense of HAT’ and was thus required to make restitution. HAT claimed that it had made the three principal payments at the direction or request of Flaton Management and it had received no consideration.
These claims were in addition to the claim that there was a resulting trust, which, as mentioned above, was abandoned at trial.
In response to HAT’s amended statement of claim, Flaton Management contended, in particular, that the second of the three principal payments (the sum of $805,000) was paid pursuant to an agreement, to be implied from the conduct of the parties, that the Flaton Entities and/or Flaton Management would advance funds to HAT from time to time as required by HAT for use as working capital and as amounts payable by HAT under the Sale of Business Agreement. The funds used for working capital were to be repaid to Flaton Management on demand and, more specifically, on the dates that it required those funds in order to pay amounts it owed to HIPL under the Contract of Sale for the land as and when those amounts fell due.
At trial it appeared to have been common ground that HAT’s case, if made out, fitted within the requirements of a restitutionary claim, without any detailed submissions on the conceptual basis of the claim. The trial judge had proceeded on this basis. On the appeal, Flaton Management submitted that HAT’s claim based on unjust enrichment did not and could not establish a cause of action against it as HAT had failed properly to analyse the legal relationships between the parties and others involved in the transactions forming the subject matter of the claim and thus had failed to articulate a recognised category of conduct in relation to which restitutionary relief could be sought.
At trial the parties invoked, and the trial judge relied upon, the observations made by the Full Court of the South Australian Supreme Court in W Cook Builders Pty Ltd (in liq) v Lumbers[12] as governing the claim for restitutionary relief, where Sulan and Layton JJ said:
[T]here are three basic elements of unjust enrichment which are satisfied in the categories of case in which an unjust enrichment has been found. First, the defendant must receive a benefit. Secondly, that benefit must be received at the plaintiff’s expense. Thirdly, it must be shown that it would be unjust if the plaintiff were not remunerated; this element can also be expressed as requiring the plaintiff to establish that it would be unconscionable for the defendant to retain the benefit. A fourth consideration is that there is no defence applicable or available to the claim.
[12](2007) 96 SASR 406, 420 [63].
The trial judge stated that ‘[i]t was not in issue that the law as to unjust enrichment was as stated by Sulan and Layton JJ’[13] in Cook v Lumbers. That was the position presented by the counsel before him. Unfortunately for his Honour, the statement of the law as to unjust enrichment as expressed by Sulan and Layton JJ should have been contested because the decision in Cook v Lumbers had been reversed by the High Court in Lumbers v Cook[14] and the principles enunciated in Cook v Lumbers were there criticised. Indeed, insofar as the statement by Sulan and Layton JJ suggests that unjust enrichment is a principle of law which can be directly applied as a premise from which to seek relief, it has been expressly rejected by the High Court.[15]
[13]Reasons, [15].
[14](2008) 232 CLR 635.
[15]Ibid 665 [85].
Lumbers v Cook arose out of the construction of an expensive house of unusual design in Adelaide. The Lumbers owned the land and contracted with W Cook & Sons Pty Ltd (‘Sons’) for the construction of the house. During the course of the construction and unbeknownst to the Lumbers, Sons entered into an arrangement with an associated company, W Cook Builders Pty Ltd (‘Builders’) to perform much of the work required by the building contract. The Lumbers paid all amounts claimed by Sons but Sons paid less than the amount incurred by Builders in the construction and in the supervision and payment of the sub-contractors engaged by Builders. The High Court held that Builders (then in liquidation) had no claim for the price of any work or labour performed, or any money it might have paid in relation to the construction, because it had no contract with the Lumbers and it had not performed the work or made the payments to the sub-contractors at their request.
The High Court held that the majority of the Full Court had wrongly applied the doctrine of ‘free acceptance’[16] (that is, acceptance of a benefit in the absence of a request), in upholding the plaintiff’s claim in restitution; had wrongly put aside consideration of the contractual arrangements as relevant to the parties’ obligations; and had applied, when it should not have done so, the principles from Angelopoulos v Sabatino.[17] In Angelopoulos, it was held that, in addition to an implied request for work to be done or money paid, there were numerous other factors to be given separate consideration before restitution could be awarded, including, as a factor, whether a benefit was conferred at another party’s expense. In considering the analysis proffered by the majority below, in Lumbers v Cook, Gummow, Hayne, Crennan and Keifel JJ said:[18]
The application of a framework for analysis expressed only at the level of abstraction adopted in this case, by reference to ‘benefit’, ‘expense’ and ‘acceptance’ coupled with considerations of unconscionability, creates a serious risk of producing a result that is discordant with accepted principle, thus creating a lack of coherence with other branches of the law. There are two reasons of particular relevance to this case why that is so. … First, does applying the posited framework for analysis to the facts of the present case extend the availability of recovery beyond the circumstances in which a claim for work and labour done (or money paid) for and at the request of the defendant would be available? Secondly, and no less importantly, how is the result of applying this framework for analysis consistent with the obligations relevant parties undertook by their contractual arrangements?
The doing of work, or payment of money, for and at the request of another, are archetypal cases in which it may be said that a person receives a ‘benefit’ at the ‘expense’ of another which the recipient ‘accepts’ and which it would be unconscionable for the recipient to retain without payment. And as is well apparent from this Court’s decision in Steele v Tardiani, an essential step in considering a claim in quantum meruit (or money paid) is to ask whether and how that claim fits with any particular contract the parties have made. It is essential to consider how the claim fits with contracts the parties have made because, as Lord Goff of Chieveley rightly warned in Pan Ocean Shipping Co Ltd v Creditcorp Ltd, ‘serious difficulties arise if the law seeks to expand the law of restitution to redistribute risks for which provision has been made under an applicable contract’. In a similar vein, in the Comments under s 29 of the proposed Restatement, (3d), ‘Restitution and Unjust Enrichment’, the Reporter says:
‘Even if restitution is the claimant’s only recourse, a claim under this Section will be denied where the imposition of a liability in restitution would overturn an existing allocation of risk or limitation of liability previously established by contract.’
[16](2007) 96 SASR 406, 423-4 [83]-[84].
[17](1995) 65 SASR 1. See also Cadorange Pty Ltd (in liq) v Tanga Holdings Pty Ltd (1990) 20 NSWLR 26; Brenner v First Artists’ Management Pty Ltd [1993] 2 VR 221.
[18](2008) 232 CLR 635, 662-3 [78]-[79] (citations omitted).
There can be no doubt from these pronouncements that, even where a claim for restitution is properly brought, primacy is to be given to any legal relationships that exist between the parties, as Flaton Management argued on the appeal. Moreover, as Lumbers v Cook makes clear, where there is an agreement between the parties, the scope of that agreement will almost invariably govern the relationship between the parties independently of any questions about so-called incontrovertible benefits or unconscionability.
More generally, it has been confirmed that:[19]
The doctrine settled by decisions of the High Court is that the concept of unjust, or unjustified, enrichment of a defendant at the expense of the plaintiff is not a principle of law which supplies a sufficient premise for direct application in a particular case. The most recent statement of principle is that in Bofinger.
[19]The Honourable Justice WMC Gummow, ‘Moses v Macferlan: 250 years on’ (2010) 84 Australian Law Journal 756, 759 (citations omitted).
In Bofinger v Kingsway Group Ltd,[20] the High Court considered the equitable doctrine of subrogation in the context of guarantees given by a surety for a mortgage. The Court said:[21]
The appeal to this Court in Friend v Brooker, which concerned the equitable doctrine of contribution, was correctly conducted on the footing that the concept of unjust enrichment was not a principle supplying a sufficient premise for direct application in a particular case. The same is true of the equitable doctrine of subrogation. …
In a passage in their reasons in David Securities Pty Ltd v Commonwealth Bank of Australia, Mason CJ, Deane, Toohey, Gaudron and McHugh JJ rejected the submissions that in Australian law unjust enrichment was more than ‘just a concept’ and that it was ‘a definitive legal principle according to its own terms’. The use of the phrase ‘unifying legal concept’ earlier in the joint reasons must be understood with what was said in that later passage. In the years which have followed the Court has reaffirmed this position and all other Australian courts are bound accordingly.
[20](2009) 239 CLR 269.
[21]Ibid 299 [85]-[86] (citations omitted). See also Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89, 156 [151]; Lumbers v Cook (2008) 232 CLR 635, 664-5 [83]-[85].
Here, while HAT’s case was presented at trial as resting directly on the principle of unjust enrichment, in fact HAT did not seek to base its claim for restitution upon any doctrine of ‘free acceptance’ of a benefit independently of a request having been made. Rather, counsel for HAT argued that the claim for restitution reflected the traditional money paid count, that is, money paid at one party’s request to the benefit of another. So conceived, the claim falls within long-established principles. This was emphasised in Lumbers v Cook when consideration was given to the second of the nine factors identified in Angelopoulos as relevant to a claim for restitution:[22]
It will be noted that the second of the matters identified was the making of an ‘implied request’ by the Lumbers to the Builders to do the work and to pay money. At once it should be pointed out that, if Builders did whatever work it did and paid whatever money it paid at the Lumbers’ request, Builders’ claim for a reasonable price for the work and for the money it paid would fall neatly within long-established principles. It would matter not at all whether the request was made expressly, or its making was to be implied from the actions of the parties in the circumstances of the case. Builders would have an action for work and labour done or money paid for and at the request of the Lumbers.
And if Builders did work or paid money at the Lumbers’ request, it would also follow that it would be neither necessary nor appropriate to consider any of the other eight factors identified in Angelopoulos in deciding whether Builders could recover a fair price for the work it had done and the amount it had paid for and at the request of the Lumbers. To the extent that Angelopoulos is understood as requiring separate or additional consideration of those other factors, where a plaintiff seeks to recover a fair price for work done at the defendant’s request, or the amount the plaintiff has paid for the defendant at the defendant’s request, Angelopoulos is wrong and should not be followed.
[22](2008) 232 CLR 635, 666-7 [89]-[90] (emphasis added, citations omitted).
In a case where a request is made (as here) it is unnecessary to consider the question of whether a ‘benefit’ was conferred at the other party’s ‘expense’, factors considered relevant in Angelopoulos.
While the reasoning of the High Court in Lumbers v Cook supports the conceptual basis of HAT’s claim to be based on the historical count of money paid, it also creates three difficulties for HAT.
The first difficulty was that the allegation that Flaton Management was unjustly enriched at HAT’s expense was no more than a distraction of little or no utility to HAT’s case. The failure to articulate the claim for restitution as a simple money paid count in the pleadings, or in argument at trial, meant that the case proceeded as if the concept of unjust enrichment of a defendant at the expense of a plaintiff was a ‘principle of law which supplies a sufficient premise for direct application in a particular case’. Yet this is precisely the understanding of unjust enrichment that the High Court has rejected. This error in the conceptual basis of HAT’s claim had the unfortunate effect that the trial judge, in the face of the common ground between the parties, set about analysing the case in terms of the very factors that the High Court said should not be understood as requiring separate or additional consideration from the requirement on the money paid count for an implied request to make the payment. The emphasis on unjust enrichment caused the trial judge to focus primarily on the question of whether Flaton Management had received a ‘benefit’ at HAT’s ‘expense’, the very factors considered to be irrelevant to the traditional money paid count.
The second difficulty counsel for HAT faced in the circumstances of the case, as he conceded, was that he was unable to distinguish in substance the claim for money paid from the so-called alternative claim HAT had pleaded in debt,[23] resting as it did on the allegation that money was paid by HAT at the request of Flaton Management, and that the money was intended to, and did, thereby relieve Flaton Management pro tanto of its obligation to pay for the land.
[23]See Keith Mason, J W Carter and G J Tolhurst, Mason and Carter’s Restitution Law in Australia (2nd ed, 2008) 16-7 [116]: ‘Count for money paid. … The count averred a debt arising from payment of money by the plaintiff to and for the use of the defendant, pleaded the request that the money be so laid out, and averred the breach of a promise to pay the debt on the plaintiff’s request for payment. The principal use of the count for money paid was where B, at the request of A, discharged a debt owed by A. Assume, for example, that A was indebted to C. If A requested B to pay off the debt … and B discharged the debt by payment to C, the common count was available to enable B to recover the payment from A. … The count was available in relation to actual, implied and non-contractual requests.’ The similarity to the circumstances here is apparent.
The third difficulty is that the conceptual error on which the case was based caused the trial judge to give little attention to the contractual and other legal arrangements between the parties (including the terms of the guarantee and any indemnities created by reason of payments by Flaton Management as a surety). The trial judge found that HAT’s payment of $805,000 to HIPL was properly characterised as a repayment of a loan previously made by Flaton Management to HAT, pursuant to an informal agreement between HAT and Flaton Management that had included the earlier injection of funds by Flaton Management into HAT to provide its working capital. At least with respect to the $805,000 payment, the trial judge concluded that there was an agreement between the parties that governed their obligations to each other. However, because of the apparent importance of the claim for unjust enrichment, his Honour dealt with each of the payments made as though they could simply be added together to yield a total, or subtracted from that total, to determine if Flaton Management had received a net benefit. Approaching the matter as if it were principally an accounting exercise, his Honour gave little regard to whether the contractual and other arrangements, such as they were, permitted crediting and debiting in the manner he undertook.
There are also to my mind at least two curiosities arising from the facts as they unravelled on the appeal. The first is this: if Flaton Management served as a guarantor for a loan by the CBA to HAT of working capital of $1,050,000 in August 2004 (rather than providing the loan itself), it would not have been entitled to be ‘repaid’ until the guarantee was called upon in October 2008. How then is HAT’s payment of $805,000 on 1 November 2004 to be characterised as a repayment of a loan from Flaton Management? This is distinct from the question of whether Flaton Management is entitled to a set-off of the amounts paid to discharge HAT’s indebtedness to the CBA.[24]
[24]See further below, ‘Were the requirements at law for a set-off satisfied?’
The second curiosity is that the Court was told very little about the settlement in relation to the purchase of the land yet this appeared to involve guarantees by the CBA in favour of Nylex to the value of $1.05 million. It is not clear whether there were financial arrangements with the CBA between August – November 2004 of $2.10 million (arising from the arrangements for settlement of the land ($1.05m) in addition to those providing for working capital by HAT ($1.05m))?
All of these difficulties suggest that the most appropriate disposition of this matter by this Court is to remit the matter to the trial judge for determination according to law not as an unjust enrichment claim but as a claim for money paid. This would provide the parties with an opportunity to provide comprehensive discovery and enable the trial judge to focus upon identifying the contractual and other arrangements between the parties and the Flaton Entities.
I turn then to consider the question of whether the trial judge made an error by double counting.
Did the trial judge err in double counting?
On appeal, HAT argued that the trial judge had twice taken into account, in favour of Flaton Management, a super payout for Mr Flaton and his redundancy payout (or a portion thereof) in arriving at the figure of $780,402.13[25] which he found was owed by HAT to Flaton Management (and which, even after adjustments,[26] exceeded the $661,125 Flaton Management owed to HAT). This calculation was critical in his Honour’s reasoning that there was no benefit conferred upon Flaton Management.
[25]See paragraph [31] above.
[26]The deduction of $50,000 for the press and $24,597.87 overpaid, leaving a balance of $705,804.26.
The trial judge accepted that the maximum balance claimed by HAT as referable to the purchase of the land was $661,125. HAT had calculated that figure in a manner recorded in its ‘Opening Summary of Calculations’. That calculation was the simple and primary one[27] of taking the three principal payments made by HAT (which were not disputed as having been made) totalling the sum of $1,210,106 and subtracting the purchase price of the business of $636,606, adding the amount of $85,000 paid with respect to the Sale of Business Agreement by Flamar and adding the interest payments of $2,625, leaving a figure of $661,125.
[27]Set out in paragraph [23] above.
The greater complexity arose with respect to the calculation of the sum of $780,402.13. His Honour isolated this sum within the payment of $805,000 made by HAT to Nylex on 1 November 2004[28] as a repayment of loans made to HAT, a repayment made at the direction of Mr Flaton. He considered[29] the loan accounts (entitled ‘Share Capital’), and noted that Share Capital was shown for October 2004 as $1,010,892 and for November 2004 as $205,892, a difference of $805,000.
[28]The second of the three principal payments.
[29]As set out in the extract quoted from his Honour’s reasons at paragraph [31] above.
The submission made by HAT was that when his Honour found that advances were made to HAT in the sum of $780,402.13 he included within that sum the amount of $241,564.28 recorded in the spreadsheet prepared by Mr Flaton as 30/8/2004 - ‘Commonwealth Bank/G. Flaton Super Payout/ G. Flaton – Loan to HATech/Settlement Payment to Nylex’ and at least the sum of $180,435.72 (part of a payment of $276,533.79) recorded in the same spreadsheet as 30/8/2004 - ‘Nylex Payment Off-Set/G. Flaton Redundancy Pay-Out/G. Flaton-Loan to HATech’, together amounting to the sum of $422,000. However, HAT submitted, these two amounts ought not to have been included within the sum of $780,402.13 as credit had already been given to Flaton Management for those amounts when HAT calculated that $661,125 of the $1,210,106 it paid with respect to both contracts should be treated as attributable to the purchase of the land.[30] Had those two amounts not been treated by his Honour as the repayment of loans he would have found, at least, that of the $805,000 payment made by HAT no more than about $358,402.13[31] was properly to be characterised as the repayment of loans. The balance would have represented the excess paid by HAT in favour of Flaton Management, that is, as money paid by HAT at the request of Mr Flaton and in relation to which it sought repayment.
[30]See below paragraph [76].
[31]This figure is approximate.
If this point can be made out, it demonstrates appellable error on behalf of the trial judge. The critical question is: did the trial judge, in accepting the sum of $661,125 as the amount HAT claimed, fail to recognise that that sum was arrived at after credit had been given to Flaton Management for the super and redundancy payouts as a contribution towards the purchase price of the land, and thus those payouts could not be included again within the sum of $780,402.13 which represented loans made to HAT? The significance of the question is most clearly demonstrated by reference to the alternative method used by HAT for calculating its claim.
On the appeal, HAT invited close consideration of the manner in which it had calculated its demand. While its primary method of calculation was the simple one mentioned above of subtracting the purchase price of the business from the overall payments it had made (together with some adjustments), there was the alternative method of determining how much Flaton Management should be given credit with respect to the purchase of the land, leaving HAT’s payments to make up the balance. The alternative method of calculation concentrated only on the credit to be given to Flaton Management towards the purchase of the land (and put to one side the purchase of the business).
It was not in dispute that the purchase price of the land was $1,526,598.07.[32] HAT calculated that the payments made by Flaton Management or the Flaton Entities that could be credited to the purchase of the land totalled $868,098.07. These payments included crediting Flaton Management with the payment of $241,564.28 to Nylex on 30 August 2004 and representing Mr Flaton’s super payout, as well as crediting Flaton Management with the $150,000 deposit on the Contract of Sale for the land contract on 13 May 2004, a further payment of $200,000 on 30 August 2004 and the personal redundancy payment of $276,533.79. The super and redundancy payments had been allowed by HIPL to be set off against the price payable under the two contracts.
[32]See paragraph [17] above.
If Flaton Management was to be credited with paying $868,098.07 towards the purchase price of the land it followed that the contribution made by HAT from the payments it made with respect to either contract must have made up the balance, namely, about $658,500. That contribution had its source in the payment of $1,210,106 made by HAT in respect of the two contracts. As on this alternative method of calculation, credit had already been given for the super and redundancy payments, it was not open to the trial judge to seek to detract from the $658,500 paid by HAT by treating the bulk of the payment of $1,210,106 it had made (namely, the $805,000 paid on 1 November 2004, or more accurately, the $780,402.13[33]) as a repayment of loans to HAT from Flaton Management arising from, inter alia, the payment of the super and redundancy payments. It was not open because those sums had already been credited as payments made by Flaton Management to the purchase of the land – they could not also be treated as loans made to HAT that were repaid by contributions to the purchase of the land. To do that was to commit the error of double counting.
[33]Subtracting the advance by HAT to Flaton Management of $24,597.87.
In my opinion, there were errors made by the trial judge in the methods adopted for the calculations he performed. The errors may also have involved confusing the primary and alternative methods of calculation (neither of which I endorse as the correct method). The errors may well have been due to the fact that, as is apparent from the preceding discussion, some of the figures appear to be somewhat elastic and many of the payments seem to be attributable to a variety of sources, depending on the perspective adopted. The errors may also have been attributable to the need, in the context of a proceeding brought by a liquidator, to treat the transactions, quite artificially in the circumstances of the case, as having a clear single purpose when it would appear that many of the transactions had multiple purposes or triggered countervailing transactions.
It is difficult to estimate quite what the effect of the errors may have been, particularly in relation to a trial in which there have been issues left undetermined.
For example, HAT argued that his Honour had failed to address or resolve the question of the status of a sum of $312,386. The issue at trial was whether Flaton Management should be given ‘credit’ for a sum of $312,386 (or the sum debited from HAT). The sum was distributed by HAT to Flamar, as trustee of the Flaton Investment Trust, on 30 June 2005, but never paid to Flamar or any other person.
Flaton Management submitted that the sum of $312,386 represented a distribution of profits from HAT to the unit holders of the Flaton Investment Trust in proportion to the units held but claimed that there was no monetary payment made. It argued the funds remained with HAT and were treated, and recorded, as a loan from ‘Flaton Investment Trust (Flamar)’. The balance sheet of the HAT Trust as at 30 June 2005, 30 June 2006 and as at 31 October 2007, immediately before HAT was first placed in external administration, disclosed as a current liability ‘Beneficiaries Funds – Flaton Investment Trust $312,386’. The balance sheet as at 30 June 2005 also showed the entry ‘Borrowings – Loans – Gunther Flaton $153,206’.
Mr Flaton in his evidence said that the sum of $312,000 (in round figures) was treated as a loan from Flamar to HAT and that the sum of $153,206 was loaned to HAT by Mr Flaton. These distributions were recorded as loans and credit as the amounts were left in HAT as loan monies. Flaton Management argued that Flamar was entitled to call them up. HAT argued that the liability of HAT to Mr Flaton of $153,206 had been satisfied by 30 June 2006 and pointed to the evidence given at trial that there was no suggestion that Mr Flaton intended that the sum of $312,386 be made available for the benefit of Flaton Management at any time. There was also evidence that the $312,386 sum could not be reallocated in the accounts from the Flaton Investment Trust to the Flaton Property Trust (of which Flaton Management was the trustee) and that the Flaton Investment Trust and the Flaton Property Trust were separate legal entities. Flaton Management submitted that there was no need for reallocation – it was sufficient to demonstrate that the funds were retained by HAT as loan monies to it from Flamar. HAT responded by submitting that it did not dispute that Flamar, as a creditor of HAT, was entitled to call up its loan of $312,386 to HAT but that it was significant that Flamar never did that and had only sought to ‘direct’ that HAT repay that debt by setting it off against HAT’s claims against Flaton Management after HAT went into liquidation, as to which there was no evidence of such a direction ever being given to HAT, and, in any event, Flamar was precluded from doing so after HAT went into administration by reason of s 553C(2) of the Corporations Act, given that Mr Flaton was a director of both HAT and Flamar.
The issue of the status of the sum of $312,000 thus needs to be specifically addressed and resolved by the trial judge on the remitter.
Flaton Management also argued that there were accounting errors in the trial judge’s calculations and that a careful consideration of the flow of funds out of loan monies provided by Flaton Management and the Flaton Entities to purchase the land revealed that, far from HAT having conferred any ‘benefit’ on Flaton Management, HAT was actually indebted to Flaton Management in the sum of $44,498.13. Importantly, Flaton Management argued that it was necessary to take account of the amount owed by HAT to Flaton Management as a surety for HAT’s indebtedness to the CBA, constituted by its guarantee and mortgage over the land. The value of the surety, if added to the $44,498.13, showed that HAT was indebted to Flaton Management in the sum of $1,094,498.13. Flaton Management also relied on its role as a surety for the loans the CBA had made to HAT in the context of rejecting the implication of an equitable lien. It relied on this to deny that it would be acting unconscionably in disposing of the land before repaying any indebtedness to HAT, if there was any.
Clearly the question of the role of Flaton Management as a surety for HAT’s indebtedness is a fundamental question for the further hearing of this matter, on the remitter.
Were the requirements at law for a set-off satisfied?
As mentioned above, the provision of working capital for HAT was provided by loans from the CBA, in the form of Bank Bills. These were guaranteed by Flaton Management, Flamar, and Mr and Mrs Flaton. Flaton Management’s guarantee was supported by a mortgage on the land and a charge on its assets.
Mr Flaton was asked about the security at trial:
In respect of the property [the land] is the property subject to a mortgage? – Yes, because I gave guarantees so HAT could borrow $1,050,000 for working capital.
Who is paying the interest on that mortgage? – As of now?
Yes? – I am. …
The liquidator is claiming against you – the liquidator is claiming against Flaton Management a number of items which have been discussed? – Yes.
They include interest payable by HAT, what do you say about that claim? – Totally unfounded because the $1,050,000 was required for working capital at all times and basically this was a – nearly a $12,000,000 business it required a million dollars of working capital at any one time, right, so from day one of trading it required a million dollars, right, up to basically settlement of the land and building, it was using my funds, thereafter it took up its loan and was paying the interest up to liquidation.
Although it appeared that the relevance of Flaton Management being a surety was not explored at trial, amongst the documents relied on by Flaton Management at trial was a Bank Bill from the CBA dated 25 August 2006 (having been approved on 11 August 2006) for a facility to HAT of $1,050,000.00 with the specified purpose ‘[t]o assist with the extension of expiring Bill Facility 127958 for a further 2 year term’. One can infer that the initial facility was thus provided in or about August 2004. The terms of the facility included its being provided on an interest only basis for a term of two years, to be met when due, and to be repaid in full at the expiry of the two year term, unless further extended. The facility was executed by HAT under the signature of Mr Flaton, the sole director and sole company secretary. It was guaranteed by Flaton Management (and signed by its directors, Mr and Mrs Flaton) and by Flamar (and signed by its directors, Mr and Mrs Flaton). The security provided included:
(1) a registered equitable mortgage by HAT over the whole of its assets and undertakings;
(2) an unlimited guarantee by Flaton Management in its own capacity and as trustee of the Flaton Property Trust supported by a first registered mortgage by Flaton Management in its own capacity and as trustee for the Flaton Property Trust over the land;
(3) a registered equitable mortgage by Flaton Management in its own capacity and as trustee of the Flaton Property Trust over the whole of its assets and undertakings;
(4) an unlimited guarantee by Flamar in its own capacity and as trustee for the Flaton Investment Trust;
(5) A guarantee limited to $1,400,000 by Mr Flaton;
(6) A guarantee limited to $1,400,000 by Mrs Flaton;
(7) A deed of subordination to $1,000,000 by Mr and Mrs Flaton of loans to Flamar as trustee for the Flaton Investment Trust.
HAT traded profitably for the 2005 and 2006 financial years. Accumulated profits for these years were held by HAT on account for Flamar as trustee of a discretionary trust, the beneficiaries being Mr and Mrs Flaton. The business lost some critical customers during 2007; it appears that the customers may have placed their orders with suppliers in China and India.
On the day that HAT went into administration, 1 November 2007, HAT remained indebted to the CBA in the sum of $1,050,000. HAT has not repaid the debt to the CBA. Rather, Flaton Management paid the debt by a novation with the CBA on 1 October 2008.
Flaton Management argued on the appeal that because it had ‘paid as guarantor the liability of HAT under the CBA facility that provided working capital in the sum of $1,050,000’, it was entitled to set off so much of that amount as is necessary to repay any indebtedness it may have to HAT. It called in aid the principles in Day & Dent Constructions Pty Ltd (in liq) v North Australian Properties Pty Ltd[34] and asserted that its claim against HAT is for a full indemnity as a surety of HAT’s debts to the CBA. It relied upon s 553C of the Corporations Act which provides for a regime of statutory set-off between a company in liquidation and a creditor, being a transposition of s 86 of the Bankruptcy Act 1966 (Cth).[35] Section 553C provides:
[34](1980) 150 CLR 85; see also JLF Bakers (in liq) v Baker’s Delight Holdings Ltd [2007] NSWSC 894.
[35]HAT agreed with Flaton Management that s 553C of the Corporations Act is indistinguishable in its operation from s 86 of the Bankruptcy Act.
Insolvent companies - mutual credit and set-off
(1)Subject to subsection (2), where there have been mutual credits, mutual debts or other mutual dealings between an insolvent company that is being wound up and a person who wants to have a debt or claim admitted against the company:
(a)an account is to be taken of what is due from the one party to the other in respect of those mutual dealings; and
(b)the sum due from the one party is to be set off against any sum due from the other party; and
(c)only the balance of the account is admissible to proof against the company, or is payable to the company, as the case may be.
(2)A person is not entitled under this section to claim the benefit of a set-off if, at the time of giving credit to the company, or at the time of receiving credit from the company, the person had notice of the fact that the company was insolvent.
Flaton Management submitted that the date for the set-off is not the date of administration of HAT but rather the date on which the relevant debt arose. In Gye v McIntyre[36] the High Court, in considering the comparable s 86 of the Bankruptcy Act[37] said:[38]
It has often been pointed out that the object of set-off in bankruptcy is, in the words of Parke B. in Foster v Wilson, ‘to do substantial justice between the parties, where a debt is really due from the bankrupt to the debtor to his estate’. Where there are genuine mutual debts, credits or other dealings, it would be unjust if the trustee in bankruptcy could insist upon having 100 cents in the dollar upon the whole of the debt owed to the bankrupt but at the same time insist that the bankrupt’s debtor must be satisfied with a dividend of some few cents in the dollar on the whole of the debt owed by the bankrupt to him. It was to prevent such injustice that the ‘mutual credits’ and ‘mutual debts’, and later ‘mutual dealings’, provisions were introduced into bankruptcy legislation: see, e.g., In re Daintrey; Ex parte Mant; Day & Dent Constructions Pty. Ltd. v North Australian Properties Pty. Ltd. To the extent necessary to achieve that legislative purpose of ‘substantial justice’ to the parties, it is established by authority that a provision such as s.86 of the Act should be given ‘the widest possible scope’: see, e.g., per Mason J., Day & Dent Constructions, quoting Lord Esher M.R. in Eberle’s Hotels and Restaurant Company v Jonas.
[36](1991) 171 CLR 609.
[37] Section 86 of the Bankruptcy Act provides:
[38](1991) 171 CLR 609, 618-9 (Mason CJ, Brennan, Deane, Dawson, Toohey, Gaudron and McHugh JJ) (citations omitted).
However, giving the terms of the section the widest possible scope does not mean the section is unrestricted. As the Court went on to say:[39]
On the other hand, ‘substantial justice’ requires that the operation of set-off in bankruptcy be confined within limits which protect the creditors of the bankrupt from being disadvantaged by a set-off being allowed in circumstances where debts, credits or other dealings have not been genuinely mutual as a matter of substance, such as where beneficial ownership is not the same or where, after bankruptcy or notice of an act of bankruptcy, a debtor of the bankrupt has bought up liabilities of the bankrupt at a discount for the purpose of setting them off against his own indebtedness: see, e.g., Day & Dent Constructions. Thus, it is established by the cases that set-off under a provision such as s. 86 is not available in circumstances where the beneficial entitlement and liability in respect of the countervailing credits and benefits do not correspond: see, e.g., In re City Life Assurance Co.; Hiley v Peoples Prudential Assurance Co. Ltd.
[39]Ibid 619 (citations omitted).
HAT’s principal resistance to the claim for a set-off was that the requirement of mutuality was not satisfied in the circumstances of the case. The meaning of correspondence or ‘mutuality’ was further expanded upon in Gye v McIntyre:[40]
In the context of s. 86, the word ‘mutual’ conveys the notion of reciprocity rather than that of correspondence. It does not mean ‘identical’ or ‘the same’. So understood, there are three aspects of the section’s requirement of mutuality. The first is that the credits, the debts, or the claims arising from other dealings be between the same persons. The second is that the benefit or burden of them lie in the same interests. In determining whether credits, debts or claims arising from other dealings are between the same persons and in the same interests, it is the equitable or beneficial interests of the parties which must be considered. The third requirement of mutuality is that the credits, debts, or claims arising from other dealings must be commensurable for the purposes of set-off under the section. That means that they must ultimately sound in money.
[40]Ibid 623.
The position of a trustee was considered by this Court in Lloyds Bank NZA Ltd v National Safety Council of Australia Victorian Division (in liq)[41] where Marks J said that the High Court authorities dealing with the meaning of ‘mutuality’[42]
are not concerned with the characterisation of debts, but they hold, among other things, that ‘the benefit or burden’ of credits, claims and dealings must not only be between the same persons but also be between them ‘in the same interests’. It goes without saying that money in the hands of a trustee in that capacity is not held in his ‘interest’ as a party to dealings on his own account (not as a trustee) with the debtor.
[41][1993] 2 VR 506.
[42]Ibid 508.
To the same effect, JD Phillips J (with whom Fullagar J agreed) stated:[43]
Put shortly, the existence of the trust affecting the two surpluses in the bank’s hands destroys the ‘mutuality’ which is a prerequisite of the right to set off arising under s 86 … A trustee who is holding money for his beneficiary is not entitled to set off against the beneficiary’s claim to have the money transferred to him some other and separate indebtedness of the beneficiary to the trustee personally. The cross claims, if between the same parties, are not between them ‘in the same interests’ … the requisite element of ‘mutuality’ is altogether lacking in this case because of the trust affecting the surpluses.
[43]Ibid 515.
Flaton Management accepted that the mutuality required under the statutory regime for set-off required that the debts must be between the same parties; the benefits or the burdens of the credits or debts respectively must be in the same right or capacity as that of the party under the other claim and the dealings must be commensurate in that they sound in money. Flaton Management argued that all of these conditions were met in the circumstances of the set-off claimed here.
In particular, Flaton Management argued that although its payment of HAT’s indebtedness to the CBA was made after the winding-up commenced, this did not preclude that payment as giving rise to a debt that could be set off against HAT in the winding up because the liability of Flaton Management as guarantor of HAT’s indebtedness was assumed by Flaton Management at the time HAT first borrowed monies from the CBA in August 2004. It was thus a contingent liability which subsequently became fixed.
A claim sought to be set off by the creditor of a company may be contingent at the date of the commencement of the liquidation which subsequently becomes a fixed liability.[44] Once the liability becomes fixed, there is a right to set off the payment, even though the payment is made after liquidation. As Mason J said in Day & Dent Constructions:[45]
I acknowledge that until the surety pays the principal debt he has only a future chose in action since, until default, he has nothing more than a prospect or expectancy that the principal debtor will default on the payment of the debt which is guaranteed. In the words of Latham C.J. in Bakewell v Deputy Federal Commissioner of Taxation (S.A.):
‘It cannot in any sense be described as a debt … The liability may, it is true, be described as a contingent debt, but the phrase ‘contingent debt’ merely means the possibility of a debt. Until the possibility becomes an actuality there is no debt …’.
After default, the possibility remains that the principal debtor may himself discharge his liability to the principal creditor. Until the surety makes payment he (the surety) is owed no debt at all. But this does not matter. The important factor is that, by virtue of a guarantee given before bankruptcy or liquidation as the case may be, the surety has undertaken an obligation which on payment to the principal creditor will result in a debt owing to him (the surety) by the principal debtor. There is no reason why the liability thus undertaken, once payment is made, should not ground the right to set off the debt created by the payment.
[44]Day & Dent Constructions Pty Ltd v North Australian Properties Pty Ltd (1982) 150 CLR 85, 108.
[45]Ibid 108-9 (citation omitted).
The contingent nature of the liability HAT owed to Flaton Management would thus not preclude a set-off being recognised, if the other requirements were met.
HAT argued that the lack of mutuality between the parties was demonstrated by, for example, the fact that the copy of the executed guarantee dated 24 August 2004 given by Flaton Management to the CBA in respect of HAT’s indebtedness to the CBA was given by Flaton Management in its own capacity and as trustee of the Flaton Property Trust. It was in its capacity as trustee of the Flaton Property Trust that it had acquired the land. However, the Bill Facility taken out by Flaton Management to replace Bill Facility 127958 (in the name of HAT[46]) was taken out by Flaton Management in its capacity as trustee of the Flaton Business Trust (and solely in the capacity, not including its own capacity). Flaton Management was thus the trustee of two separate trusts, the Flaton Property Trust and the Flaton Business Trust. The new Bill Facility was no: 139398. That facility, acquired in the name of Flaton Management, was drawn down on 9 June 2009 with proceeds utilised to repay the Bills Matured Account in the name of HAT (BDF 127958 which had been retired to a Bills Matured Account at loan term expiry on 21 August 2008).
[46]Referred to in paragraph [87] above.
HAT argued that there was no evidence of the CBA ever making a demand on Flaton Management pursuant to the guarantee it gave in August 2004, nor to the guarantees mentioned above[47] given by Flamar in its own capacity and as trustee for the Flaton Investment Trust, and by Mr and Mrs Flaton personally, in respect of Bill Facility 127958.
[47]See paragraph [87] above.
HAT submitted that the circumstances behind the decision by Flaton Management, in its capacity as trustee of the Flaton Business Trust, to pay out the CBA Bill Facility 127958 was not the subject of evidence, either at trial or on appeal, but, in any event, it was not paid pursuant to the guarantee dated 24 August 2004 given by Flaton Management to the CBA; it could not have been, as the payment was made by Flaton Management acting in its capacity as trustee of a trust which had no apparent obligation to the CBA to make the payment. HAT submitted that the premise that Flaton Management had relied on for a set-off was thus not well-founded as Flaton Management had not paid as guarantor the liability of HAT under the CBA facility that provided working capital in the sum of $1,050,000. Further, while the Flaton Property Trust was a unit trust where the whole of the issued units were held by Flamar as trustee of the Flaton Investment Trust, Flaton Business Trust was a discretionary trading trust, about which there was no evidence as to its terms or its beneficiaries. HAT called in aid the observations of Marks J and JD Phillips J in Lloyds Bank NZA Ltd v National Safety Council of Australia Victorian Division, quoted above,[48] to submit that, if the requirement of mutuality is not satisfied with respect to the interest a trustee has on his own account, in his personal capacity, and the interest he or she has as trustee, a fortiori the requirement is not satisfied where one is dealing with a trustee in respect of separate trusts. It submitted that Flaton Management thus cannot successfully assert that it is entitled to set off whatever rights it may have in relation to HAT that it acquired by establishing the CBA Bill Facility 139398 against its liability to HAT in its capacity as trustee of the Flaton Property Trust.
[48]Paragraphs [94] and [95] above.
To these submissions Flaton Management responded by submitting that it was implicitly conceded by HAT that it was appropriate, on the question of mutuality, to consider who are the beneficiaries of the various trusts.
Flaton Management filed with the Court a range of trust deeds, none of which had been produced by way of discovery before the trial judge, nor had been the subject of evidence at trial. They included the Flaton Property Trust Deed, dated 7 May 2004; Flaton Property Trust Deed certificates No 1, dated 7 May 2004, and No 2, dated 31 August 2004; the Current Flaton Property Trust Unit Holding Register; the Flaton Investment Trust Deed, dated 24 May 2004, and the Flaton Business Trust Deed, dated 1 December 2007. The net result, it alleged, was that the beneficiaries who are eligible to benefit from the Flaton Property trust and the Flaton Business Trust are identical. This was so, it was argued, because the units in the Flaton Property Trust are owned by Flamar as trustee for the Flaton Investment Trust and the Flaton Business Trust has the same class of beneficiaries as the Flaton Investment Trust. The two trusts have identical terms in their respective deeds as to the primary and general beneficiaries. The primary beneficiaries of both those discretionary trusts are Mr and Mrs Flaton and the children and remoter issue of each of them. The general beneficiaries are defined in equivalent terms in both trust deeds, including the parents, grandparents, children, and grandchildren of the primary beneficiaries, any corporation beneficially owned or held by any of various relevant persons, the trustee of any self-managed superannuation fund, and so on. The beneficiaries of the Flaton Investment Trust and the Flaton Business Trust being identical, Flaton Management submitted that mutuality is established despite Flaton Management acquiring Bill Facility 139398 (the proceeds of which were utilised to repay Bank Bill 127958 in HAT’s name) as the trustee of the Flaton Business Trust and not as the trustee of the Flaton Property Trust.
In any event, Flaton Management argued that it should not be overlooked that the guarantee provided by Flaton Management was provided to the CBA in Flaton Management’s own capacity, as well as in its capacity as a trustee. That guarantee was supported by a mortgage over the land and a charge over Flaton Management. Further, the debt that is sought to be set off is the indemnity that HAT owes to Flaton Management in its own capacity and as trustee for the Flaton Property Trust as a paying surety for the debts of HAT to the CBA.[49] It had a right of indemnity against HAT as principal debtor when it paid HAT’s indebtedness to the CBA and, as the security provider and in accordance with the terms of the security it provided,[50] it held that right on its own behalf and as trustee of the Flaton Property Trust. If HAT had not become insolvent, Flaton Management could have pursued HAT under its indemnity to recover the sum of $1,050,000 from HAT on the basis of a right of indemnity owed to it and in its capacity as trustee of the Flaton Property Trust to which it would have been required to account on receipt of the sum.
[49]See paragraph [87] above. Paragraph 21 of the Guarantee also made clear that where the Guarantor entered into the Guarantee as trustee of a trust, the Guarantee bound the Guarantor personally and in the Guarantor’s capacity as trustee of the trust.
[50]Especially paragraph 21 of the Guarantee.
Flaton Management argued that HAT should not be permitted to use the fact that it was the Flaton Business Trust that provided the funds to satisfy Flaton Management’s liability as guarantor as a means of escaping its duty to indemnify Flaton Management. The mere fact that Flaton Management’s liability as guarantor had been funded by a loan by it as trustee of a new trust ought not impact on the obligation of HAT to indemnify Flaton Management in its own right and as trustee of the Flaton Property Trust. (After all, it said, the Flaton Business Trust, by providing the necessary funds, has itself a right of indemnity against Flaton Management which may be satisfied by having recourse to both the assets of Flaton Management and the assets it holds on trust for the Flaton Property Trust.)
To this HAT disputed that a right of indemnity was ever created in favour of Flaton Management by reason of Flaton Management’s payment of HAT’s indebtedness to the CBA. This is because the payment of HAT’s indebtedness to the CBA was not paid pursuant to the guarantee Flaton Management had given the CBA – rather it was paid by Flaton Management as trustee of the Flaton Business Trust (and not in its own capacity). This was a trust which, as noted above, did not exist at the time the guarantee was given. Further, HAT contested the purpose for which the funds were provided by Flaton Business Trust; it argued that it could not be inferred from the documents alone that the funds were provided to satisfy a liability of Flaton Management in its capacity as trustee of the Flaton Property Trust. This issue is clearly one on which the trial judge, on the remitter, will need to arrive at a concluded view.
Moreover, HAT argued that even if it could be held that Flaton Management had sought to discharge HAT’s debt to the CBA by reason of the guarantee being in its own right, and not in its capacity as a trustee, its making of a payment to the CBA as trustee of the Flaton Business Trust would not be a payment in its own capacity. Finally, it said that the proceeding brought by HAT against Flaton Management related directly to Flaton Management’s acquisition of the land, which it acquired not in its own capacity but as trustee of the Flaton Property Trust. It is of no consequence to raise questions about Flaton Management’s interests it had in its own capacity – it does not assist Flaton Management, it argued, to raise questions of its own personal, non-trustee, right to a set-off.
The relationships between the parties are clearly complex; so too are the relationships between the parties and other entities. It will be necessary for the trial judge, on the remitter, to clarify with a high degree of exactitude precisely what are the legal relationships between all the entities within the group of Flaton Entities and between Flaton Management and HAT. In addition, it will be necessary to clarify the relationship between those entities within the group of Flaton Entities and other entities, such as the Flaton Business Trust, of which no mention was made at the first trial. As mentioned above, it will be necessary to determine for what purpose Flaton Management, as trustee of the Flaton Business Trust, discharged HAT’s indebtedness to the CBA and what was the legal effect of that payment with respect to any indemnity.
In my opinion, these are matters about which there should be evidence led at trial, after comprehensive discovery. Each party should now have the opportunity of properly testing the evidence relied on by the other party. It is not appropriate for this Court to determine the rights and obligations of the parties by reference to documents not seen by the trial judge and in relation to which there has been no assurance given that they provide a complete picture of the transactions between the parties. The examination of the parties submissions on the question of set-off has confirmed my opinion that the matter should be remitted to be heard again.
If HAT were successful, were the requirements for an equitable lien satisfied?
The fourth issue addressed on the appeal was whether a declaration of an equitable lien should be made, in relation to the land, in HAT’s favour, if HAT were to be successful.
In Hewett v Court,[51] Deane J set out the requirements for an equitable lien to be implied. He said:[52]
It is adequate for present purposes that I identify what I consider to be the circumstances which are sufficient for the implication, independently of agreement, of an equitable lien between parties in a contractual relationship. … They are: (i) that there be an actual or potential indebtedness on the part of the party who is the owner of the property to the other party arising from a payment or promise of payment either of consideration in relation to the acquisition of the property or of an expense incurred in relation to it …; (ii) that that property … be specifically identified and appropriated to the performance of the contract …; and (iii) that the relationship between the actual or potential indebtedness and the identified and appropriated property be such that the owner would be acting unconscientiously or unfairly if he were to dispose of the property … to a stranger without the consent of the other party or without the actual or potential liability having been discharged.
[51](1983) 149 CLR 639.
[52]Ibid 668.
With respect to these requirements, Flaton Management argued that the claim fell at the first hurdle as there was no evidence, either direct, or from which it could be inferred, that HAT in paying monies in relation to the purchase price of the land did so in the belief that it was entitled to it or had an interest in it. Indeed, Flaton Management argued, and, in my opinion, convincingly, that it was the absence of any evidence to support such an intention (and indeed the presence of ample evidence to the contrary) that removed any foundation for HAT’s original allegation that Flaton Management held the land on a resulting trust for HAT. No doubt this contributed to HAT’s abandonment of the allegation at trial.
Moreover, as has been discussed, Flaton Management argued that the payment of monies by HAT in relation to the purchase of the land was in the nature of the repayment of loans from Flaton Management to HAT and thus in the performance of its contractual obligations and not an advance of monies by HAT to Flaton Management for the purpose of acquiring the land. This submission returns to the question of the characterisation of the second of the three principal payments, the payment of $805,000, and I have said enough above to indicate that this is not an issue on which this Court can be determinative.
Furthermore, Flaton Management argued that it would not be acting unconscionably if it were to dispose of the land before discharging any indebtedness to HAT (which it denies or says is immaterial) for the very reason that it is able directly to defeat HAT’s claim for restitution based on the money paid count, namely, that it was a surety for HAT’s indebtedness to the CBA by reason of the guarantee and mortgage it gave over the land and that its rights as a surety, in the circumstances, would permit it to dispose of the land. As I have already indicated, there is a need for the trial on the remitter to resolve exactly the various legal relationships between Flaton Management and HAT before determining the question of whether it would be unconscionable for it to dispose of the land before repaying any debt it may owe to HAT.
It may well be that Flaton Management will be able successfully to resist HAT’s claim for a declaration that it has an equitable lien against the land at trial, on the remitter. However, whether it can do so or not will inevitably turn on the myriad of findings yet to be made by the trial judge.
I would allow the appeal and remit the matter to be reheard before the County Court pursuant to s 74(3) of the County Court Act. On balance, I consider it best for the Court to be constituted by the judge before whom the matter was originally heard. For the reasons which I have set out above, the matter will need to be re-pleaded, and full discovery given, before the re-hearing proceeds. It is almost certainly desirable for the matter initially to be listed before the trial judge for directions concerning these matters, and perhaps others. I add that the remitter should not be used as a vehicle to revisit findings of fact made by the trial judge which are uncontroversial, or to withdraw concessions made below or on the appeal, merely because there is to be a remitter.
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Mutual credit and set-off
(1) Subject to this section, where there have been mutual credits, mutual debts or other mutual dealings between a person who has become a bankrupt and a person claiming to prove a debt in the bankruptcy:
(a) an account shall be taken of what is due from the one party to the other in respect of those mutual dealings;
(b)the sum due from the one party shall be set off against any sum due from the other party; and
(c)only the balance of the account may be claimed in the bankruptcy, or is payable to the trustee in the bankruptcy, as the case may be.
(2)A person is not entitled under this section to claim the benefit of a set-off if, at the time of giving credit to the person who has become a bankrupt or at the time of receiving credit from that person, he or she had notice of an available act of bankruptcy committed by that person.
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