International Air Transpotr Association v Ansett Australia Holdings Ltd
[2005] VSC 113
•22 April 2005
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
CORPORATIONS LIST
IN THE MATTER OF ANSETT AUSTRALIA HOLDINGS LTD (SUBJECT TO DEED OF COMPANY ARRANGEMENT)
No. 8792 of 2002
| INTERNATIONAL AIR TRANSPORT ASSOCIATION | Plaintiff |
| V | |
| ANSETT AUSTRALIA HOLDINGS LTD (Subject to Deed of Company Arrangement) | First Defendant |
| MARK A KORDA and MARK F MENTHA | Second Defendants |
No. 6455 of 2003
| ANSETT AUSTRALIA HOLDINGS LTD (Subject to Deed of Company Arrangement) | Plaintiff |
| V | |
| INTERNATIONAL AIR TRANSPORT ASSOCIATION | Defendant |
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JUDGE: | Mandie J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 2 February 2005 | |
DATE OF JUDGMENT: | 22 April 2005 | |
CASE MAY BE CITED AS: | IATA v Ansett Australia Holdings Ltd | |
MEDIUM NEUTRAL CITATION: | [2005] VSC 113 | |
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CORPORATIONS – company subject to deed of company arrangement – whether British Eagle principle applicable to current IATA clearing house arrangements - whether IATA clearing house system was such that there were no debts as between member airlines – British Eagle International Airlines Ltd v Compagnie Nationale Air France [1975] 1 WLR 758; [1975] 2 All ER 390 distinguished.
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APPEARANCES: | Counsel | Solicitors |
| For International Air Transport Association | Mr A C Archibald QC with Mr C M Caleo | Clayton Utz |
| For Ansett Australia Holdings Ltd & MA Korda and MF Mentha | Mr M Garner with Ms K Dawson | Arnold Bloch Liebler |
HIS HONOUR:
Introduction
By originating process dated 23 December 2002, International Air Transport Association (“IATA”) challenges the decision of the Deed Administrators of Ansett Australia Holdings Ltd (“Ansett”) that IATA is not a creditor of Ansett in respect of certain IATA Clearing House monthly clearances.
By originating motion dated 27 June 2003, Ansett seeks a declaration that the Regulations of the IATA Clearing House (“the Clearing House Regulations”) and the IATA Clearing House arrangements ceased to apply to all claims by or with respect to Ansett under certain monthly clearances upon and by virtue of Ansett, on 2 May 2002, executing a Deed of Company Arrangement (“the DOCA”) pursuant to Part 5.3A of the Corporations Act 2001 Cth (“the Act”).
The principal issue in both proceedings is whether, notwithstanding execution of the DOCA, IATA remains a creditor of Ansett in respect of the relevant monthly clearances under the Clearing House Regulations. The parties now agree that the monthly clearances in question are those from August 2001 to December 2001 (inclusive). The amount claimed by IATA from Ansett under these clearances is the sum of $US 4,370,989.
In essence the question is whether the Clearing House arrangements to which Ansett was a party became repugnant to the insolvency legislation and contrary to public policy, by virtue of Ansett’s execution of the DOCA. There are some minor issues raised by Ansett in the alternative.
IATA is a body incorporated in 1945 under the Statutes of Canada. In or about November 1946, IATA established the IATA Clearing House which is a department or division of IATA responsible for the clearance of accounts between member international airline operators and some others. The primary function of the Clearing House is to effect monthly clearances and to pay or collect from IATA members and others the balances found to be due by or to the Clearing House (i.e. IATA).
International airline operators regularly sell tickets to passengers in respect of journeys partly or wholly over the routes of other airline operators and engage in similar transactions in respect of goods, baggage and cargo. To facilitate these transactions airline operators have entered into a number of Multilateral Interline Traffic Agreements (“Interline Agreements”). There are very many transactions conducted pursuant to the Interline Agreements. The Clearing House process, under the Clearing House Regulations, enables airline operators to avoid the necessity of having to make and receive numerous payments to and from other airlines in respect of such transactions. The essence of the Clearing House process is that appropriate debits and credits are entered against or in favour of each operator in respect of its dealings with other operators. Monthly clearances of these entries result in settlements involving either a payment by an airline operator to the Clearing House or a payment by the Clearing House to an airline operator, rather than there being a multitude of payments between the operators themselves. The “turnover” in relation to the transactions thus “cleared” are in the billions of dollars.
Ansett had been a member of the Clearing House since 1951. On 12 September 2001 Administrators were appointed to Ansett pursuant to Part 5.3A of the Act. The second defendants, who shortly thereafter replaced the original Administrators, became the Deed Administrators on 2 May 2002 when the DOCA was executed.
Under the DOCA (cl.18) the fund for distribution to Deed Creditors is constituted primarily of the proceeds from the sale of any Assets owned by Ansett and the proceeds from the realisation of any of its other Assets. “Asset” is defined to include “a mere cause of action or chose in action”. By cl.18.2 of the DOCA, the Distribution Amounts are to applied, after payment of the administrators, secured creditors and certain priority creditors (including employees), in payment of Participating Creditors “on a pro rata basis”. In substance “Participating Creditors” are defined so as to cover ordinary unsecured creditors. Clause 18.6.2 of the DOCA provides that no Deed Creditor shall be entitled to receive more than it is entitled to be paid in accordance with the DOCA.
The Interline Agreements:
Airline operators may be parties to the Interline Agreements whether or not they are parties to the Clearing House arrangements so that the Interline Agreements must be read in that light. The Interline Agreements are substantially the same but deal with different aspects of airline business. It is convenient for present purposes to refer only to the terms of the “Interline Traffic Agreement – Passenger”(“the Interline Passenger Agreement”). The Interline Passenger Agreement recites that the parties operate scheduled air transportation services and desire to enter into arrangements under which each party may sell transportation over the routes of the others.
Relevant provisions of the Interline Passenger Agreement include the following:
“Article 2 – Issuance of Tickets and MCOs
2.1 ISSUANCE
2.1.1 Each party hereto is hereby authorised to issue or complete:
2.1.1.1 tickets, or MCOs exchangeable for tickets, for transportation of passengers,
2.1.1.2 all other documents necessary or appropriate for such transportation;
all in the form approved by, and in accordance with the tariffs and the terms, provisions, and conditions of the tickets, and other documents of the party over whose routes the passenger is to be carried …
2.2 ACCEPTANCE
2.2.1 Each party agrees to accept each such ticket, or other transportation document and to honour each MCO issued by any other party hereto and to transport passengers and baggage as specified therein, subject to its applicable tariffs and subject to the terms of this agreement and applicable regulations and clearance procedures of the IATA Clearing House …
Article 8 – Interline Billing and Settlement
8.1 PAYMENT OF TRANSPORTATION CHARGES
Each issuing airline agrees to pay each carrying airline the transportation charges applicable to the transportation performed by such carrying airline and any additional transportation or non-transportation charges collected by the issuing airline for the payment of which the carrying airline in responsible, in accordance with applicable regulations and current clearance procedures of the IATA Clearing House, unless otherwise agreed by the issuing airline and the carrying airline.
8.2 BILLING AND SETTLEMENT
8.2.1 Billing of amounts payable pursuant to the Agreement shall be in accordance with the rules contained in the IATA Revenue Accounting Manual as amended from time to time.
8.2.2 Unless otherwise agreed settlements of amounts payable pursuant to this Agreement between parties that are members of the IATA Clearing House shall be in accordance with the Manual of Regulations and Procedures of the IATA Clearing House.
8.2.3 Except as may otherwise be provided in other agreements, rules or regulations, the right to payment hereunder arises at the time such services are rendered by a party hereto or its agent.
8.2.4 Except as provided in 8.2.5, settlement of transactions arising under the terms of this Agreement involving one or more parties that are not members of the IATA Clearing House shall be in accordance with the following procedures:
8.2.4.1 settlements shall be made monthly;
8.2.4.2 each party shall issue a monthly statement of invoices and credit notes rendered by it. The monthly statements shall be dispatched promptly but in any case not later than the 30th day of the month following that of the billing month, e.g. for billing month January not later than the last day of February;
8.2.4.3 settlement shall be effected promptly after the monthly statements are exchanged by offset of balances and cash payment of the net balance in the national currency of the net creditor.
8.2.5 Parties may expressly agree to settle transactions in a manner other than the procedure described in 8.2.4.1-8.2.4.3.”
The IATA Clearing House Regulations
The Clearing House Regulations contain a number of relevant provisions. It is sufficient to set out Regulations 1, 2, 8, 9, 10 and 12:
“DEFINITIONS
1. In these Regulations the following expressions have the following meanings:
Airlines Clearing House: The Airlines Clearing House, Inc., a company incorporated in the State of Delaware, U.S.A. for the clearance of certain accounts between its members.
Billings: Written advice of transactions to be notified to the Clearing House for clearance given by one member to another. A billing date does not govern the date upon which a transaction creates an obligation from one member to another.
Clearance: The ascertainment each month of the balances due to members by the Clearing House and the balances due by members to the Clearing House after set-off of all claims duly notified to the Clearing House in accordance with these Regulations.
To Clear: To effect a clearance.
Clearing House: The IATA Clearing House.
Director General: The holder of the office of Director General of IATA.
Board of Governors: The Board of Governors (Executive Committee) of IATA, established in virtue of the Association’s Act of Incorporation.
Financial Committee: A standing committee of IATA appointed by the Board of Governors with the confirmation of the Annual General Meeting and reporting to the Board of Governors.
IATA: The International Air Transport Association, a body incorporated by Act of the Parliament of Canada.
IATA Multilateral Interline Traffic Agreements: The multilateral agreements for the interchange of interline passengers and cargo established under the applicable IATA Traffic Conference Resolutions.
ESTABLISHMENT
2. The IATA Clearing House is a department of IATA for the clearance of accounts between air transport enterprises.
…
FUNCTION OF THE CLEARING HOUSE
8. The function of the Clearing House is to effect monthly clearances and to pay or to collect from members and such other organisations which are entitled to use the services of the Clearing House the balances found to be due by or to the Clearing House and to take such action as may be necessary or incidental thereto.
EFFECT OF ADMISSION TO MEMBERSHIP
9. The admission to membership in the Clearing House shall constitute a contract between each member and every other member and IATA to the effect following, that is to say:
(a)With respect to transactions between members of the Clearing House which are subject to clearance through the Clearing House as provide in Regulations 10 and 11 and subject to the provisions of the Regulations regarding protested and disputed items, no liability for payment and no right of action to recover payment shall accrue between members of the Clearing House. In lieu thereof members shall have liabilities to the Clearing House for balances due by them resulting from a clearance or rights of action against the Clearing House for balances in their favour resulting from a clearance and collected by the Clearing House from debtor members in such clearance;
(b)Notification to the Clearing House of any claim (debit or credit) for clearance shall, subject to the Regulations, constitute an irrevocable authority to clear the same in accordance with the Regulations and current clearing procedures and to pay or collect any balances due by or to the Clearing House as a result of the clearances effected; provided, however, that if the Clearing House receives notification that the amount of a claim that has been notified for clearance has been attached, garnished or otherwise seized by issue of an order of Court, the Clearing House Manager shall, whilst such situation exists, suspend all clearance between members concerned until notified by both parties that normal clearance between them may be reinstituted. During the period of suspension, the parties affected shall remain absolved from their respective obligations under Regulation 10 to settle only through the Clearing House.
(c) The effect of a clearance and payment of the balances due to or by the Clearing House in accordance with these Regulations and current clearance procedures shall constitute a satisfaction and discharge of every claim dealt with in such clearance. IATA shall be entitled to recover any balances due to the Clearing House by legal action.
(d)Members of the Clearing House may include in the second clearance in which a new member participates their unpaid claims against the new member referring to pre-membership transactions, unless otherwise agreed between the new member and the member having the claim.
(e)The contract created hereby and the obligations created hereunder shall be binding upon the successors in interest, including administrators, trustees and receivers, of each member.
SCOPE OF CLEARANCE
10. The following classes of transactions shall be cleared through the Clearing House and not otherwise in any manner, except for particular transactions or particular classes of transactions with respect to which the parties have expressly agreed that they shall not be cleared through the Clearing House: all transactions between members pursuant to their participation in the IATA Multilateral Interline Traffic Agreements, transactions arising from the Universal Air Travel Plan and Miscellaneous Charges of any nature including the carriage of mail, charters, Pool agreements, airport and terminal charges, aircraft servicing, maintenance and victualling charges, salvage work, catering and ground transportation services, telecommunications, etc. and all similar services customarily rendered between carriers, including billings for authorised cash advances made by national airlines to representatives of foreign airlines for the following purposes:
(a)advances to crews for the purpose of accommodation and subsistence;
(b)advances to local representatives of foreign airlines under standing authority and within agreed monthly maxima for the purpose of meeting normal weekly and monthly current airport or town expenditure.
…
12. All transactions within the scope of clearance are hereby deemed mutual debts of the parties involved. Unless otherwise agreed to by the parties, a claim for such transaction shall arise upon the performance of the services rendered therefor.”
Submissions on behalf of IATA
Counsel for IATA pointed to reg 9(a) of the Clearing House Regulations which established an express agreement between all members of the Clearing House and between each such member and IATA that, with respect to transactions subject to clearance, “no liability for payment and no right of action to recover payment shall accrue between members of the Clearing House”. It was submitted on behalf of IATA that this was the central repository of the Clearing House arrangements and should prevail over any “discordant” elements of other provisions of the regulations. It was submitted that the consequence of the clear terms of reg 9(a) was that, subject to the parties expressly agreeing that a transaction should not be cleared through the Clearing House, each and every interline transaction between airline operators who were members of the Clearing House did not result in any sum or sums becoming payable between the members, but gave rise only to a contractual right on behalf of the carrying airline to include its charge as a credit in a monthly account to be supplied to the Clearing House. Thus, it was submitted that no amount was ever due or payable between the member airlines so that, if one member airline went into liquidation, the property of that airline could not include any entitlement to receive payment from any other member, irrespective of whether clearance of the transaction had been effected prior to the date of liquidation or not, because no such entitlement between member airlines ever arose.
It was submitted on behalf of IATA that there could be no basis for a contention that, as a matter of public policy, the regulations ceased to apply to Ansett upon the appointment of the administrators.
Counsel for IATA noted that it was Ansett’s contention that IATA’s construction of the regulations was inconsistent with the decision of the House of Lords in British Eagle International Airlines Ltd v Compagnie Nationale Air France[1] (“British Eagle”). They characterised Ansett’s contention as being that the majority of the House of Lords in British Eagle had decided that, insofar as the Clearing House Regulations then in force sought to provide that the underlying debts between individual airline operators were to be settled and satisfied in a particular way, the agreement created by those regulations constituted an impermissible contracting out of the statutory expression of the pari passu principle applicable upon liquidation of a corporation, and that the public policy considerations applied in British Eagle operated whenever an airline member became insolvent and that, accordingly, an application of the Clearing House Regulations as currently in force to a company under administration was contrary to public policy. Counsel for IATA submitted that, contrary to Ansett’s abovementioned contentions, the decision in British Eagle was clearly inapplicable because the decision turned upon the construction of the Clearing House Regulations (and the Interline Agreements) as they then stood. Since the decision in British Eagle the regulations had been amended in vital respects and, in particular, regulation 9(a) was inconsistent with the proposition that the underlying transaction between individual airlines gave rise to a debt owed by the issuing airline to the carrier airline, or even, to use the words of Lord Cross in British Eagle gave rise to “innominate choses in action having some, but not all, the characteristics of ‘debts’”[2]
[1][1975] 1 WLR 758, [1975] 2 All ER 390.
[2][1975] 1 WLR 758, 778; [1975] 2 All ER 390, 409.
In the alternative it was submitted on behalf of IATA that the decision in British Eagle was wrong and should not be followed and that the dissenting speech of Lord Morris was more compelling in its construction and application of the regulations, even as they then stood.
IATA submitted that, whether or not British Eagle was correctly decided, the contention of Ansett that the public policy considerations underlying that decision operated whenever an airline member became insolvent was incorrect because those public policy considerations derived expressly from the statutory expression of the pari passu principle in s.302 of the Companies Act 1948 (UK) which, in common with the analogous local provisions, applied only to the winding up of a company. It was submitted that there was no statutory provision to similar effect which was expressed to apply upon the appointment of an administrator or upon the execution of a deed of company arrangement. The provisions of Part 5.3A of the Act did not prohibit an administrator from propounding, nor a company’s creditors from resolving to execute, a deed of company arrangement which proposed a regime of distributing the company’s property on a basis other than one which accorded with the pari passu principle.
Submissions on behalf of Ansett and the Deed Administrators
Ansett submitted that, by virtue of Ansett executing the DOCA on 2 May 2002, the Clearing House arrangements ceased to apply to the debts and credits between Ansett and the other airlines which had not been cleared as at the date of Ansett’s insolvency, namely 12 September 2001, being the date specified in the DOCA pursuant to s.444A(4)(i) of the Act. It was not submitted that, by virtue of Ansett entering voluntary administration, the Clearing House arrangements had ceased to apply but that they ceased to apply when Ansett executed the DOCA. It was submitted that upon Ansett “becoming subject to a scheme of distribution of its property, mandated by insolvency laws” that the Clearing House arrangements were ineffective in relation to claims not cleared as at the said date of Ansett’s insolvency.
Counsel for Ansett said that the reasoning of the majority in British Eagle was that the substance of the Clearing House arrangements amounted to a contracting out of the pari passu provisions of the UK Companies Act and was therefore repugnant to their insolvency legislation and contrary to public policy. Counsel for Ansett submitted that British Eagle was correct and in any event ought to be followed (at least at first instance). The decision had been applied in Australia and in other countries, and although it had been distinguished it had never been disapproved of by an English or Australian court.
It was submitted on behalf of Ansett that the changes in the Clearing House Regulations since the decision in British Eagle had not changed their substantive meaning or effect. Properly construed, the present form of the regulations and other contractual arrangements gave rise to debts (or choses in action with some of the characteristics of debts) between the Clearing House members. Alternatively, the changes made to the Clearing House arrangements had been made with the intention of depriving some creditors of their rights on an insolvency and were invalid for that reason.
Ansett submitted that the provisions of the Act concerning voluntary administration and deeds of company arrangement fell within the class of insolvency legislation in respect of which the British Eagle principle proscribed any contracting out. If the Clearing House arrangements were held to apply in respect of Ansett, for clearances effected after 12 September 2001, this would interfere with the distribution of Ansett’s property mandated by Ansett’s creditors (by voting for the DOCA) and mandated by ss.444A(4)(b) and (h) and 444D(1) of the Act. Counsel for Ansett submitted that the provisions of the DOCA, once executed, effectively had the force of law under s.444D(1) of the Act and formed part of the “insolvency law” which was protected by the British Eagle principle.
Ansett submitted that relevant IATA member creditors of Ansett had received more than their entitlement under the DOCA because of the clearing house arrangement – they had been preferred over the ordinary general body of creditors contrary to the provision of the DOCA that such creditors should share on a pro rata basis.
It was conceded on behalf of Ansett that the clearing house arrangements were not “repugnant to insolvency laws” or contrary to public policy simply by virtue of the provisions of Part 5.3A of the Act. The unenforceability of the clearing house arrangements depended, it was submitted, upon the terms of the DOCA. For example, if the DOCA had provided (as is sometimes the case) that a third party was to provide a sum of money for distribution to the deed creditors, and the assets of the company were not to be applied for the benefit of creditors, the clearing house arrangements would not be “repugnant to insolvency laws” or contrary to public policy. Thus, it was submitted, the provision of the DOCA whereby the proceeds of the assets (including choses in action) of Ansett were to be applied to a pro rata payment of ordinary unsecured creditors was the crucial provision which rendered the clearing house arrangements “repugnant to insolvency laws” and contrary to public policy. It was submitted that notwithstanding that the provisions of the DOCA were not known and could not be foreseen when the clearing house arrangements were created, Ansett could not “contract out” of the mandatory provisions of the DOCA. So, as I understood the submission, the clearing house arrangements were not necessarily repugnant to the corporations legislation – any repugnancy only arose when a DOCA was executed and had the force of law under s.444D of the Act (and then only if the terms of the DOCA gave rise to such repugnancy).
“The British Eagle principle”
There are a number of strands to the so-called British Eagle principle. One well-accepted proposition is that a person is not allowed, by stipulation with a creditor, to provide for a different distribution of the person’s effects in the event of bankruptcy than that which the law provides.[3] Another proposition is that in general there should be an equality of treatment between creditors unless the contrary is expressly provided. For example a creditor who executed a composition deed was entitled to repudiate it if he afterwards discovered that other creditors had been induced to execute the deed by means of a secret bargain or a payment to them in excess of the composition. Equality was an implied condition of the composition arrangement.[4] More generally, insolvency legislation including corporations legislation has provided for equality of distribution between ordinary unsecured creditors (“the pari passu principle”) and the courts have sought to prevent an insolvent person or company from evading the application of that principle. Then there is the so called anti-deprivation principle aimed at preventing an insolvent person or company from depriving creditors of the benefit of its assets.
[3]See Ex Parte MacKay (1873) 8 Ch App 643, 647 per James LJ.
[4]See Ex Parte Milner (1885) 15 QBD 605.
At first instance, in British Eagle,[5] Templeman J considered, looking at the contract as a whole, that the contract created by the clearing house regulations provided that a relevant transaction between member airlines did not give rise to a debt but, in the case at hand, conferred on British Eagle the right to include the cost as a credit in the monthly account to be prepared by IATA in the course of the clearing house system. Alternatively, the judge considered that the clearing house regulations effected an automatic satisfaction of credits which otherwise would have created debts enforceable by one airline against another. The judge interpreted particular provisions of the arrangements in the light of that overall construction. He concluded that the only liability or debt of an individual member was the liability to pay to IATA the amount which was arrived at as a result of the clearing house procedure. Templeman J agreed that a person could not contract out of the requirement of the Companies Act that the property of a company must be used to pay its creditors pari passu, but that rule depended upon the existence of a debt forming part of the company’s property at the date of liquidation. In the present case, he held, no such debt existed and the action was dismissed. It can be seen that the court at first instance emphasised both the principle that creditors should not be deprived of access to the property of an insolvent company and also the pari passu principle but concluded that the effect of the clearing house regulations was that there was no relevant property (ie a debt) forming part of the assets of the company at the date of liquidation.
[5]British Eagle International Airlines v Compagnie Nationale Air France [1973] 1 Lloyd’s Law Reports 414.
The Court of Appeal dismissed an appeal from the judgment of Templeman J.[6] Russell LJ considered that the first question in the case (and the crucial one if answered against the liquidator) was whether the claim to the excess value of the services rendered by British Eagle to Air France over that of the services rendered by Air France to British Eagle was ever properly to be regarded as a debt owed by Air France to British Eagle. Unless it was such a debt, then it was not at the time of the winding up any part of the property of British Eagle and the laws of insolvency dealing with the property of the insolvent company were inapplicable. Russell LJ said:[7]
“If you have a position such as the present in which the whole system or contract is based upon a background of inter-line transactions which but for the system would give rise to a number of bilateral debts and credits, it is not easy without unnecessary circumlocution to displace those debits and credits by another system without using language which appears to refer to the original background of the system in terms of bilateral debts and credits... The scheme and contract is world-wide and designed to cover the impact of many different legal systems. If therefore a provision was found which, if only English law were in mind, would appear to point conclusively for example to the continued existence of a bilateral inter-airline debt, it does not necessarily do so for there may be relevant jurisdictions in which some aspect of the law would not recognise a supercession of such a debt.”
[6]British Eagle International Airlines v Compagnie Nationale Air France [1974] 1 Lloyd’s Reports 429.
[7]British Eagle International Airlines v Compagnie Nationale Air France [1974] 1 Lloyd’s Reports 429, 432.
After examining the provisions of the regulations, Russell LJ, delivering the judgment of the court, reached similar conclusions to Templeman J, namely, that “British Eagle having contracted with every other member of the clearing house and with IATA not to enforce its net claim for services against, for example, Air France otherwise than through the Clearing House, it could not while a member do so. Nor, in our judgment is the liquidator … in any better position in respect of the claim now made … for we do not consider that the contract is one that can fairly be said to contravene the principles of our insolvency laws. Those laws require that the property of an insolvent company shall be distributed pro rata among its unsecured creditors: but the question here is whether the claim asserted against Air France is property of British Eagle… In our judgment it is not: British Eagle has long since deprived itself of any such property by agreeing to the Clearing House system.”
The House of Lords, so far as relevant, allowed the appeal by majority.[8] The reasons of the majority are contained in the speech of Lord Cross in which Lord Diplock and Lord Edmund-Davies concurred. Lord Morris and Lord Simon dissented.
[8]British Eagle International Airlines v Compagnie Nationale Air France [1975] 1 WLR 758, [1975] 2 All ER 390.
Lord Cross emphasised at the outset the provisions of the standard inter-line traffic agreement which provided that each issuing airline “agrees to pay” each carrying airline the relevant transportation charges and that “settlement” of amounts payable pursuant to the agreement should be in accordance with the clearing house regulations. Lord Cross said that the position therefore was that, whether or not the parties were members of the clearing house, the issuing airline incurred an obligation to the carrying airline to make it a money payment in respect of the services rendered by it. Lord Cross considered that the core of the matter arose under reg 18 of the clearing house regulations which then provided as follows:
“For the protection of creditors in general clearance the admission of each member to membership of the clearing house shall constitute a contract between such member and every other member and IATA to the effect following, that is to say:- (a) That, notification to the clearing house of any credit or debit for clearance shall subject to the regulations constitute an irrevocable authority to clearing house to clear the same and for that purpose to collect or pay (as the case may be) the amount thereof in accordance with the regulations and current clearing procedure and to make all necessary sets off in that behalf and to pay any ultimate balances due as a result of the clearances effected. The foregoing shall not apply in the event amounts claimed by one member become attached, garnisheed or otherwise validly seized through proper legal proceedings in the hands of another member who appropriately notifies the clearing house to that effect. On receipt of appropriate notification of valid legal process, the clearing house manager shall, whilst such situation exists, suspend all clearance between the members concerned until notified by both parties that normal clearance between them may be reinstituted. During the period of suspension, the parties affected shall remain absolved from their respective obligation under regulation 18(b) to settle only through the clearing house. (b) That it shall be deemed to be an express term of every contract, agreement or arrangement for the time being subsisting between any two members in respect of which any debit or credit … may arise that the amount of such debit or credit shall be payable or receivable through the medium of the clearing house in accordance with the regulations and current clearing procedure and not otherwise in any manner. (c) That the effecting of a clearance in accordance with the regulations and current procedure shall constitute a satisfaction and discharge of every debt dealt with in such clearance …”
Lord Cross said:[9]
“.. we heard much argument as to whether the right of British Eagle to have any given claim against Air France settled through the clearing house system could properly be called a debt due by Air France to British Eagle notwithstanding that British Eagle could not bring legal proceedings against Air France to enforce payment of the sums due from it. I have no doubt that in common parlance the right would be called a debt and the framers of the regulations … had no hesitation in describing the rights in question as ‘debts’ in regulation 18(c) … I can see no reason why the law should refuse to describe the legal right of British Eagle to be paid the sums in question by Air France as ‘debts’ because the contract under which the right to be paid arose did not permit British Eagle to sue Air France for payment but provided for payment exclusively through the medium of the clearing house.”
[9][1975] 1 WLR 758, 778; [1975] 2 All ER 390, 409.
However, his Lordship was prepared to assume in favour of Air France “that the legal rights against Air France which British Eagle acquired … were not strictly speaking ‘debts’ owing by Air France but were innominate choses in action having some, but not all, the characteristics of ‘debts’”.[10] He then referred to the pari passu provision of s. 302 of the Companies Act and to the submission by the liquidator that the credits to which British Eagle was entitled “were in substance debts owing to the company being applied not for the general benefit of all the creditors but exclusively for the benefit of what may be called the ‘clearing house creditors’” and that this would infringe the principle embodied in the section.[11]
[10][1975] 1 WLR 758, 778; [1975] 2 All ER 390, 409.
[11][1975] 1 WLR 758, 779; [1975] 2 All ER 390, 410.
Lord Cross went on to say that the power of the court to go behind agreements, the results of which were repugnant to the insolvency legislation, was not confined to cases in which the parties’ dominant purpose was to evade its operation (as in Ex Parte MacKay[12]). It was irrelevant that the parties to the “clearing house” arrangements had good business reasons for entering into them. Lord Cross concluded:[13]
“Such a ‘contracting out’ must, to my mind, be contrary to public policy. The question is, in essence, whether what was called in argument the ‘mini liquidation’ flowing from the clearing house arrangements is to yield or to prevail over the general liquidation. I cannot doubt that on principle the rules of the general liquidation should prevail. I would therefore hold that, notwithstanding the clearing house arrangements, British Eagle on its liquidation became entitled to recover payment of the sums payable to it by other airlines for services rendered by it during that period and that airlines which had rendered services to it during that period became on the liquidation entitled to prove for the sums payable to them.”
[12](1873) Ch App 643.
[13][1975] 1 WLR 758, 780-781; [1975] 2 All ER 390, 411.
Lord Morris in dissent considered that the judgment of Russell LJ lacked nothing in clarity by reason of its relative brevity and said that the Court of Appeal’s conclusion was correct.[14] He said that the essence of the scheme was that instead of there being debts as between members there should be either debits or credits in an account with IATA, but no debts as between members. When British Eagle went into liquidation, the “property” of the company did not include any claim to receive money from Air France but only the contractual right to have a clearance as was decided by Templeman J and the Court of Appeal. The liquidator took no better title to property than that which was possessed by the company.
[14][1975] 1 WLR 758, 760-761; [1975] 2 All ER 390, 393.
It would seem that the majority judgment in the House of Lords in British Eagle depended upon the finding that, even if debts did not exist at the date of liquidation, a species of property existed at that date (referred to as “innominate choses in action having some, but not all the characteristics of ‘debts’”). That finding justified the conclusion that the clearing house system deprived creditors of the benefit of property and also evaded the pari passu principle of the Companies Act and the system was therefore unenforceable in a liquidation as being contrary to public policy.
A number of subsequent decisions have distinguished British Eagle on the basis that, by virtue of the contract or other arrangement involved, no relevant property existed at the date of liquidation.
In Gericevich Contracting Pty Ltd (in liq) v Sabemo (WA) Pty Ltd[15], the appellant contracted with the respondent to carry out certain roadworks. The appellant employed subcontractors. Certain employees of one of the subcontractors obtained judgement for unpaid wages against the employer and the amounts of the judgment were paid by the respondent. The appellant’s contract with the respondent allowed the respondent to deduct or withhold from payments to the appellant any amount paid to employees of the appellant or any of its subcontractors. The appellant went into liquidation. The court held that, the money having been paid to the employees, the respondent was entitled to deduct it from the amount payable to the appellant. The money was no longer the property of the appellant. The payment or deduction did not infringe any legislative provision and the provision in the contract was not contrary to public policy. British Eagle was distinguished because that case was to be understood as a case of a simple contract debt and a scheme for satisfaction of that debt – whereas in the present case there was no debt.[16]
[15](1984) 9 ACLR 452 (Full Court of the Supreme Court of Western Australia).
[16]See too Glow Heating Ltd v The Eastern Health Board [1988] IR 110.
In Carreras Rothmans Ltd v Freeman Mathews Treasure Ltd[17] the plaintiff employed the defendant as an advertising agency. The defendant incurred financial difficulties and agreed with the plaintiff to set up a special account into which the plaintiff would pay a sum equivalent to monies due by the defendant to third parties. The plaintiff paid money into the special account and the defendant drew cheques necessary to pay the third parties, but went into liquidation before the cheques were cleared. The plaintiff paid the third parties and took assignments of their debts. The plaintiff brought an action against the defendant and its liquidator for a declaration that the monies in the special account were held on trust for the sole purpose of paying the third party creditors and for an order that those monies be repaid. The defendant and the liquidator alleged that the agreement between the plaintiff and the defendant was contrary to public policy as an attempt to avoid the pari passu principle of the Companies Act. Peter Gibson J held that the money paid by the plaintiff into the special account was never held by the defendant beneficially because the agreement had created a trust in favour of the third parties which the plaintiff had a right to enforce. The book debt owed by the plaintiff to the defendant had been discharged prior to liquidation by payment of the monies into the special account. British Eagle was distinguished and the judge referred to what Lord Cross said about “innominate choses in action”, on the basis that the principle in that case was that where the effect of a contract was that an asset which was actually owned by a company at the commencement of its liquidation would be dealt with other than in accordance with the Companies Act, then to that extent the contract as a matter of public policy was avoided. In Carreras, the judge said, that the monies in the special account were not assets of the defendant at the date of liquidation. It was further held that this reasoning, while applying to monies actually paid into the special account, did not apply to monies which the plaintiff had promised to pay into the special account but had not yet done so. As to the latter, the defendant had a cause of action which formed part of the property in the liquidation and it was contrary to British Eagle to permit the plaintiff to contend that that money had to be paid into the special account for third parties.
[17][1985] 1 Ch 207.
In Horne v Chester & Fein Property Developments Pty Ltd,[18] the liquidator of a company sought the directions of the court on the question whether s.440 of the Companies (Victoria) Code required him to distribute the assets to creditors pari passu notwithstanding that as between the three creditors in dispute contractual obligations would call for a different distribution. Southwell J said that the question was raised whether the court was bound by the decision of the House of Lords in British Eagle to find that s.440 was mandatory and that the liquidator must ignore the contract between creditors or whether that case was distinguishable.
[18][1987] VR 913.
Southwell J said that he would regard himself as bound to follow an indistinguishable decision of the House of Lords, unless the High Court had otherwise decided.[19]
[19][1987] VR 913, 916.
After referring to a number of cases, Southwell J said that “the policy of the insolvency laws” was never intended to alter the rights and obligations of parties freely entering into a contract, unless the performance of the contract would upon insolvency adversely affect the rights of strangers to the contract.
Southwell J discerned the principle underlying British Eagle to be that in insolvency law the whole of the debtor’s estate should be available for distribution to all creditors and that no creditor or group of creditors could lawfully contract in such a manner as to defeat other creditors not parties to the contract. On that basis he considered that the case before him was clearly distinguishable.
In Money Markets International Stockbrokers Ltd (in liq) v London Stock Exchange Ltd,[20] the facts of which need not be set out, Neuberger J said that the issue in the case concerned the principle “that there cannot be a valid contract that a man’s property shall remain his until his bankruptcy, and on the happening of that event shall go over to someone else, and be taken away from his creditors”[21]. Neuberger J noted that the result in British Eagle had not been the subject of universal approbation and in the end on the special facts of the case concluded that the public policy principle enunciated in British Eagle was inapplicable.
Is British Eagle distinguishable in the present case?
[20][2001] 4 All ER 223.
[21][2001] 4 All ER 223, 266 citing Ex parte Jay, re Harrison (1880) 14 Ch Div 19, at 26 per Cotton LJ.
Like Southwell J, I would regard myself as bound to apply British Eagle if it were indistinguishable on the facts.
The question arises whether British Eagle is relevantly distinguishable (as IATA contends):
(a)by reason of the changes to the clearing house regulations and interline agreements and/or
(b)by reason of the fact that Ansett is not in liquidation but is subject to a deed of company arrangement pursuant to Part 5.3A of the Act.
In my opinion the British Eagle principle is inapplicable by reason of the changes to the clearing house regulations and interline agreements.
Although there was detailed argument about the effect of numerous provisions of the clearing house regulations and the interline agreements, it seems to me that the essence of the changes can be described by reference to cl.9 of the Clearing House Regulations[22] and articles 2 and 8 of the Interline Passenger Agreement[23]. Clause 9(a) of the Clearing House Regulations expressly provides that “no liability for payment and no right of action to recover payment shall accrue between members of the Clearing House”. This appears to me to be a central and overriding provision by virtue of which no debt or chose in action ever arises as between the members of the Clearing House. The only debts that arise are as between each member and IATA. The form of the regulation which was considered in British Eagle[24] did not have or purport to have that effect (as was stated by Lord Cross)[25]. Furthermore, the relevant provisions of the Interline Passenger Agreement expressly make the rights and obligations of the parties “subject to the … applicable regulations and clearance procedures of the IATA Clearing House”.[26] Reference was made to numerous provisions which might be viewed as providing “contrary indications” but I consider that they have to be read subject to what I regard as the overriding provision in cl.9(a) of the Clearing House Regulations.
[22]See para [11] above.
[23]See para [10] above.
[24]See para [28] above.
[25][1975] 1 WLR 758, 778; [1975] 2 All ER 390, 409.
[26]See articles 2.2.1 and 8.1, set out in para [10] above.
In my opinion there was no relevant asset of Ansett, being a debt or other chose in action, of which the non-airline creditors were deprived by virtue of the clearing house arrangement. It was conceded on behalf of Ansett that, if this was so, the British Eagle principle “did not bite”. I so conclude.
I should add that I have difficulty in understanding how the clearing house arrangement might become contrary to public policy and hence unenforceable upon the execution of a deed of company arrangement under Part 5.3A of the Act but, even then, only if the terms and conditions which that deed of company arrangement happens to contain are considered to lead to a relevant repugnancy. However, I find it unnecessary to determine the question whether the British Eagle principle can be applicable to the situation where a company becomes subject to a deed of company arrangement pursuant to Part 5.3A of the Act.
Ansett put a subsidiary submission that the changes to the clearing house arrangements were invalidated by reason of IATA’s purpose or intention, in effect, to defeat the provisions of insolvency laws. Whatever might be said about the legal validity of the underlying proposition, I am not satisfied on the evidence that any such purpose or intent has been established.
Ancillary questions
It was argued by Ansett, in the alternative, that, in the calculation of the net balance owing to or by Ansett from or to IATA, the amount of US$ 2,784,467 claimed by United Airlines Inc. (“United”) against Ansett should be eliminated. The claim was made in the December 2001 clearance and protested by Ansett in February 2002 as an “improper billing”. The Clearing House retained the protested amount in the Clearing House and included it in the Clearance in respect of December 2001.
Clause 22(e) of the Clearing House Regulations gives the Clearing House Manager a discretion either to:
“(i)retain in the Clearing House the amount represented by the billings involved in the protest until such time as both members involved have given the Clearing House Manager agreed instructions for the disposition of the funds or until an adjudicating body shall have rendered a decision in accordance with Regulation 23; or
(ii) eliminate the protested amount from clearance.”
Ansett submitted that, upon the suspension and/or termination of its membership from the Clearing House, the Clearing House Manager was obliged to eliminate the protested amount from clearance because the provisions for review of protest by the adjudicating body were no longer applicable or available to a suspended or terminated member. In my view there is nothing in this contention because, having retained the protested amount in the Clearing House, the Clearing House Manager had no further power in the matter and no basis for the contention that the Clearing House Manger subsequently came under an obligation to eliminate the protested amount from clearance was established.
Finally Ansett submitted, again in the alternative, that a resettlement was carried out by the Clearing House on or about 5 March 2002 (or, alternatively, by virtue of the termination of Ansett’s membership on 2 June 2002) and that as a result Ansett was no longer indebted to the Clearing House. However I am satisfied on the evidence that what occurred on 5 March 2002 was a provisional resettlement which, in any event, did not eliminate the balance due by Ansett to IATA under the Clearing House Regulations.[27] Further no basis has been shown for the contention that the termination of Ansett’s membership had the effect of eliminating its debt to IATA.
[27]See cls. 34 to 37 of the Clearing House Regulations.
I invite counsel to submit minutes of judgment and orders in each proceeding in conformity with the above reasons. I will hear submissions as to costs.
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