Jarido Holdings Pty Ltd v Dorcon Constructions Pty Ltd

[1984] FCA 280

Re: JARDIO HOLDINGS PTY. LIMITED
And: DORCON CONSTRUCTION PTY. LIMITED (1984) 3 FCR 311
No. NT G6 of 1984
Companies
(1984) 2 ACLC 574

COURT

IN THE FEDERAL COURT OF AUSTRALIA

NORTHERN TERRITORY DISTRICT REGISTRY
GENERAL DIVISION
Woodward(1), Neaves(1) and Beaumont(1) JJ.

CATCHWORDS

Companies - Winding up - Companies Act (N.T.) s.227 - Application to validate disposition of company's property pending hearing of petition - Whether grant of mortgage could advance interests of company's general body of creditors.

Companies Act (N.T.), s.227

Companies - Winding up - Application to validate disposition of company's property pending hearing of petition - Whether grant of mortgage could advance interests of company's general body of creditors - Companies Act (N.T.), s. 227.

HEADNOTE

Upon an appeal from a judgment of the Supreme Court of the Northern Territory (Nader J.) refusing to validate, pursuant to s. 227(1) of the Companies Act (N.T.), an equitable mortgage granted after the date of presentation of a winding-up petition,

Held: (1) Section 227 confers upon the court a wide general discretion the object of which is to maintain the status quo during the pendency of the petition whilst permitting transactions which the court considers should be sanctioned. A transaction in good faith which offers actual or prospective advantage to the company or its general body of creditors would ordinarily be sanctioned.

Re Atlas Truck Service Pty Ltd (1974) 24 F.L.R. 220, applied.

(2) A transaction calculated to keep the company trading to enable the sale of its undertaking as a going concern or a transaction to overcome a temporary lack of liquidity may well be sanctioned.

(3) Knowledge of the company's insolvency is not necessarily fatal to an application for sanction.

(4) The merits of the transaction are to be looked at as at the date of entry into it, although subsequent events may throw light on the position at that date.

(5) The essential question is whether the transaction could, at the time of its occurrence, reasonably be perceived as offering some advantage or potential advantage to the company and its general body of creditors. It is necessary to weigh the benefits to the respondent against the detriment to the general body of creditors.

The terms of s. 227 are set out in the judgment.

(6) An alternative application that the security be validated impart would be refused for, amongst other objections, to grant it would place the court in the invidious position of remaking the parties' bargain.

HEARING

Darwin, 1984, August 15, 16, 24. #DATE 24:8:1984

Appeal from judgment and orders of the Supreme Court of the Northern Territory (Nader J.).

D.P. Drummond Q.C. and A. Wyvill, for the appellant.

G.K. Downes Q.C. and J. Batch, for the respondents.

Cur. adv. vult.

Solicitors for the appellants: Morris Fletcher & Cross.

Solicitors for the respondents: Mildren Silvester & Partners.

G.F.V.

ORDER

1. The appeal be dismissed.

2. The appellant pay the respondent's costs of the appeal.

Appeal dismissed with costs.

JUDGE1

This is an appeal from a judgment of a single judge of the Supreme Court of the Northern Territory refusing to validate, pursuant to s.227(1) of the Companies Act, (N.T.), an equitable mortgage dated 9 September 1982 granted by the respondent as mortgagor to the appellant as mortgagee. Section 227 provides:-

"(1) Any disposition of the property of the company, including things in action, and any transfer of shares or alteration in the status of the members of the company made after the commencement of the winding up by the Court is, unless the Court otherwise orders, void.

(By s.223(2), the winding up is deemed to commence at the time of the presentation of the petition.)

(2) Notwithstanding sub-section (1), the Court may, where a petition for winding up has been presented but a winding up order has not been made, by order-

(a) validate the making, after the presentation of the petition, of a disposition of property of the company; or

(b) permit the business of the company or a portion of the business of the company to be carried on, and such acts as are incidental to the carrying on of the business or portion of the business to be done, during the time before a winding up order (if any) is made,

on such terms as it thinks fit."

The history of the matter is as follows. In 1980, Specialised Engineering Services Pty. Limited ("S.E.S."), a company associated with the appellant, commenced the supply of specialised engineering components to the respondent, which was then engaged in the building and construction industry. The supply was made pursuant to an arrangement that S.E.S. would give the respondent credit for 60 days. In the period up to the middle of 1982, materials were supplied for a number of projects in which the respondent was engaged but, thereafter, the bulk was supplied for installation in the construction of a pumping station at Tennant Creek, From time to time, the respondent did not adhere to the arranged trading terms. By the end of August 1982, the respondent owed S.E.S. the sum of $42,938.01, subject to some minor adjustments. This sum represented the cost of materials supplied before the end of June 1982 and was thus payable by 31 August 1982. On 30 August 1982, the respondent paid S.E.S. the sum of $15,510.94 in reduction of its indebtedness. As a result of negotiations which then took place, to be elaborated shortly, the mortgage the subject of these proceedings was executed.

The mortgage, which was effected by deed, was granted by the respondent as mortgagor in favour of the appellant as lender and mortgagee. It recited that the appellant, upon the joint application and request of the respondent and Suttorini Investments Pty. Limited ("Suttorini"), a company associated with the respondent, had agreed to advance monies to the respondent. Under the deed, in consideration of the appellant's advancing to the respondent the principal sum of $50,000.00 and such further sums, if any, as the respondent and Suttorini should request and the appellant from time to time should advance, the respondent charged its undertaking and all its assets with the payment to the appellant of the monies thereby secured. Those monies were defined in one of the schedules to the deed to mean "all sums of money now or hereafter owing or payable to the (appellant) by the (respondent) on any account whatsoever and without limiting the generality thereof includes: (i) the principal sum and all further sums from time to time advanced paid or for which credit is given to the (respondent) or any other persons on behalf of the (respondent) by the (appellant) . . .". The respondent covenanted with the appellant to repay the monies thereby secured together with interest thereon as provided in the schedule to the deed. The principal sum was to be repaid upon demand and, subject to such demand, was to be repaid at the expiration of 3 months. The rate of interest specified was 15% per annum "or such other rate as the (appellant) may in its absolute discretion determine from time to time". Interest was to be paid in accordance with the appellant's demand and, subject to such demand, was to be paid monthly. The monies secured by the deed were expressed to be collaterally secured by an equitable mortgage by Suttorini in favour of the appellant.

On 9 September 1982, the deed of mortgage was executed and, upon execution, the appellant delivered to the respondent a cheque in its favour dated 10 September 1982 in the sum of $50,000.00. At the same time, the respondent delivered two cheques to S.E.S. in its favour. One, dated 9 September 1982 was for $27,304.68, being the balance of the overdue June account. The other cheque, postdated to 30 September 1982, was for $18,851.24, being the amount of the July account due for payment on that date. The cheques dated 9 and 10 September 1982 were met upon presentation on 10 September 1982. Although the post-dated cheque was presented for payment on 1 October 1982, it was not met until 27 October 1982.

The application in this proceeding was made necessary by the presentation on 27 July 1982 of a petition by a creditor of the respondent for its winding up. Although the learned judge found that the appellant was probably unaware of the presentation of the petition (it was not advertised until 24 September 1982) and although a winding up order was not made until 24 March 1983, as has been noted, the winding up is deemed to have commenced at the time of presentation of the petition. The application for validation was not made until 23 March 1983, a provisional liquidator having been appointed on 17 March 1983.

The learned judge summarised the position in these terms (at pp.10-11):

"As at 9 September 1982 Dorcon was overdue by several days in the payment of part of the June account to S.E.S.. About $27,300 then remained unpaid and Dorcon was unable to pay it. Ladd (a director of the respondent) was becoming desperate and this had become apparent to R.A. Goldsmith (managing director of the appellant and S.E.S.). S.E.S. had supplied goods ($18,851.24) to Dorcon in July, payment for which was to become due at the end of September. The total of both debts was a little over $46,000. In that context S.E.S. lent $50,000 to Jardio; Jardio lent $50,000 to Dorcon; Dorcon paid to S.E.S. the balance of its June account and gave to S.E.S. a post-dated cheque for the whole of its July account. S.E.S. thus obtained payment of the balance of its June account and some assurance of payment of its July account."

Although the application for validation originally sought the unconditional validation of the subject mortgage, the appellant modified its stance somewhat in this regard both at first instance and on appeal. During the proceedings before the learned judge, it emerged that the appellant had already received from Suttorini the sum of $25,000.00 in reduction of the principal sum of $50,000.00. The appellant therefore asked that the security be validated to the extent of $25,000.00 only. Although the notice of appeal sought, inter alia, an order validating the security to the extent of $50,000.00, this was abandoned on the opening of the appeal. Instead, the second order in the notice of appeal was initially pressed, namely an order that the mortgage be declared valid for the sum of $25,000.00 and "interest thereon at the rate referred to in the mortgage". (During the course of the appeal, the appellant further modified its position on the question of interest; reference will be made to this later.) Alternatively, the appellant sought validation of the security to the extent of the sum of $22,695.32, being the difference between the sum of $50,000.00 and the sum of $27,304.68, the latter being the amount paid by the cheque dated 9 September 1982 drawn by the respondent in favour of S.E.S.

The circumstances leading up to and surrounding the grant of the security now sought to be validated were considered in some detail by the learned judge (at pp. 6-9):

"According to R.A. Goldsmith, he was in constant communication with Ladd during May and June 1982 to remind him of his obligation to comply with the 60 days trading terms.

. . . Ladd promised R.A. Goldsmith during those discussions that Dorcon would pay the amount at the end of August. On 30 August 1982 Ladd delivered a cheque for $15,510.94 to the office of S.E.S. R.A. Goldsmith said he was very angry at the short payment and told Ladd it was simply not good enough. He told him S.E.S. could not continue to supply goods unless the June account was paid in full, immediately. R.A. Goldsmith for the first time began to worry about Dorcon's credit situation. Ladd said he could not pay the full amount because progress payments from current contracts had not been received when they were expected. He said he would be receiving further progress payments in the following week from which Dorcon would settle the balance of the June account. For about a week at the beginning of September 1982 S.E.S. stopped the supply of materials to Dorcon . . .

During the time the supply of materials was stopped, R.A. Goldsmith phoned Ladd daily pressing for payment of the June account. On about 6 September Ladd called on R.A. Goldsmith and said there was further delay with progress payments. R.A. Goldsmith said it appeared to him that Ladd was becoming desperate because the Tennant Creek contract was being held up as a result of S.E.S.'s non-supply of materials. Ladd asked R.A. Goldsmith to extend credit to ensure continuation of supply to the Tennant Creek job in order that the contract might be completed. Ladd said he had tried unsuccessfully to borrow from the C.B.A. Bank and from finance companies. R.A. Goldsmith said S.E.S. could not give credit. Ladd asked R.A. Goldsmith whether he knew of anyone who would lend Dorcon $50,000 to ensure continued supply of materials. According to R.A. Goldsmith, Ladd assured him the liquidity problem was temporary; the borrowing would be short term and would be repaid from the expected progress payments. R.A. Goldsmith then told Ladd that he was a director of Jardio and that Jardio might have access to money to lend. R.A. Goldsmith said the reason he did not offer the funds from S.E.S. was that he had been telling Ladd for some weeks that S.E.S. had its own cash flow problem and of its need for payment in full of the June account in order to continue supply. During the discussions R.A. Goldsmith made it clear to Ladd that a loan would be made only if Dorcon paid the balance of the June 1982 account. R.A. Goldsmith said that as a result of his conversations with Ladd he was satisfied that Dorcon had a surplus of assets over liabilities. He therefore decided to make an advance to Dorcon of $50,000 for a period of 3 months.

. . .

On 9 September 1982, R.A. Goldsmith visited Ladd's home. Ladd inspected the form of equitable mortgage supplied by R.A. Goldsmith and executed it. Ladd gave R.A. Goldsmith a cheque to pay the costs of the solicitors who prepared the security document."

His Honour held that the appellant had failed to satisfy him on the balance of probabilities that he should interfere with "the general legislative policy evinced by s.227". In this context, the learned judge was unable to believe that a person as astute as Mr. Goldsmith could be unaware of the great likelihood that the respondent was in serious financial difficulties when the security was taken. He found that "not a great deal of reliance (could) be placed on R.A. Goldsmith as a witness". The learned judge concluded (at p.19):

"I do not think the transactions culminating in the creation of the equitable mortgage were transactions calculated to assist Dorcon to overcome a short term liquidity problem and only incidentally calculated to assist the plaintiff and S.E.S. . I think it is more likely that R.A. Goldsmith was well aware of the perilous position of Dorcon and that the creation of the security was intended to ensure that R.A. Goldsmith's companies would not have to rank with unsecured creditors. He suspected, at the time the equitable mortgage was created that there were many unpaid creditors of Dorcon. I therefore accept the main thrust of the defendant's submission that the primary purpose of the series of transactions that occurred about 9 September 1982 was to convert unsecured debts of Dorcon into secured ones."

His Honour also held that, apart from his "misgivings as to . . . the subjective elements of the case, such as the (appellant's) motives and knowledge," the objective circumstances did not warrant the Court's interference. He referred to the circumstances that, with hindsight, the respondent was "doomed to fail" at the time when the charge was given; that the terms of the mortgage were "completely onesided in some respects (he referred to the interest provision giving the appellant an absolute discretion to fix interest); and that, for reasons he had already given, to be mentioned later, the mortgage in its terms purported to secure more than the sum of $50,000.00.

The appellant first submits that there was no evidence to support the learned trial judge's finding that "the primary purpose of the series of transactions that occurred about 9 September 1982 was to convert unsecured debts of Dorcon into secured ones". The appellant contends that, by tracing what happened to the proceeds of the advance of $50,000.00 after its receipt by the respondent, it can be demonstrated that his Honour's characterisation of the true purpose of the transactions was wrong. Of particular significance, it says, is the failure of the learned judge to deal with the destination of the loan monies after their receipt by the borrower.

In support of this contention, the appellant invites us to find or, at least, to infer that, although $27,304.68 was immediately paid to S.E.S. in payment of the balance of the overdue June account, the residue of $22,695.32 was applied by the respondent in or towards the discharge of some of its other debts. However, his Honour made no finding on the matter. The respondent's bank statements for the period indicate that it banked the advance and proceeded forthwith to draw against that amount to the point of its exhaustion. (In fact, the respondent's bank account was at all material times overdrawn, but this is presently of no consequence.) At the hearing, the respondent was prepared to admit that none of the payments which constituted the total sum of $22,695.32 was made to the appellant or to S.E.S. . But no attempt was made by the appellant to establish that, in fact, that sum was applied by the respondent in or towards the discharge of some of the respondent's other creditors.

The learned judge having made no finding on the point, in the absence of any material upon which to base an inference to the effect now urged upon us as proper to be drawn, it is not open to us to make the finding of fact sought. All that can be said is that, by a number of payments, the respondent disbursed the residue of the loan shortly after receipt of the advance. There is simply no evidence as to the purposes for which those payments were made or as to the identity of the payees.

In challenging the purposive finding made by the learned judge, the appellant further submits that it should be inferred that no part of the advance of $50,000.00 was applied to fund payment of that cheque, having regard to the interval of more than six weeks which elapsed between the making of the loan and the honouring of the cheque. It may be accepted that the proceeds of the advance were not in any direct sense the source of the funds available to meet the post-dated cheque. On the other hand, there can be little doubt that the injection of funds into the respondent in the form of the loan monies significantly improved the respondent's liquidity, even if only temporarily. In this sense, it may be said that the advance assisted the respondent, if only indirectly, in meeting the post-dated cheque. We shall return to this aspect later.

On this branch of the argument, the appellant further says that his Honour erred, first, in "lifting the corporate veil" and treating the appellant and S.E.S. as a single economic unit and secondly, in ignoring the legal form in which the transactions were couched. The appellant submits that, although making no explicit finding to that effect, the learned judge really held that the transactions were shams when, in fact, according to the appellant, the documents which were entered into did give genuine effect to what the parties intended to do (cf. Snook v. London and West Riding Investments Limited (1967) 2 Q.B. 786 at p.802).

The language of s.227 makes it plain that its operation in no sense depends upon any finding that the transactions had, or did not have, a particular purpose. The authorities establish that the words in the section "unless the Court otherwise orders" give the Court a wide general discretion which is not to be limited by any attempted classification of those cases which do, and those which do not, fall within them (see Re Atlas Truck Service Pty. Limited (1974) A.C.T.R. 19 per Fox, J. at p.20). The object of s.227 is to hold matters in statu quo during the pendency of the petition, while at the same time permitting those transactions to take place which the Court thinks should be sanctioned (see Re Atlas Truck Service Pty. Limited, supra, at p.21). A transaction entered into in good faith which offers actual or prospective advantage to the company or its general body of creditors would, ordinarily, be sanctioned by the Court even if an incidental advantage were obtained by one creditor or one class of creditors (ibid. at p.24).

Prima facie, an attempt by an unsecured creditor to gain security for a past debt is inimical to the interests of the general body of creditors of the debtor. It would seem that this consideration led his Honour to characterise the purpose of the transactions now impugned in the way he did. In reaching this conclusion, the learned judge may well have looked to the substance of the matter rather than the strictly legal form in which the transactions were couched. Given the width of the statutory discretion, we think that, in the circumstances, his Honour was justified in approaching the matter in this way, even if it be assumed, as we do, that no "sham" was intended.

Whilst s.227 proceeds upon the footing that, prima facie, a company against which a petition is presented should be deprived of the power to dispose of its assets pending the final hearing of the petition, the section also recognises the possibility that there may be some transactions which occur in this period which, by reason of their potential to advantage the company and, thereby, the general body of creditors, should be sanctioned by the Court. Thus, although dissipation of the company's assets should be avoided, if possible, in some cases it is in the interests of creditors as a whole to keep the company trading with a view to the sale of its undertaking on a "going concern" basis; and, in such cases, the Court, acting under s.227, may well sanction a transaction which advantages a particular creditor who takes security in return for a promise to extend the company credit for future transactions. The reason why sanction is granted is that it is thought that sale of the assets and undertaking of the company on a "going concern" basis will usually realise more, both generally and in respect of goodwill and the like, than a sale on a break-up or liquidation basis. In other cases, sanction under s.227 may be granted where the financial difficulties of the company indicate a temporary lack of liquidity rather than the terminal condition of insolvency. In the former kind of case, it may well be in the interests of the company's creditors as a whole if the Court were to sanction the grant of security to secure repayment of an advance made to the company with a view to enabling it to trade out of its difficulties. The rationale, therefore, is that, although the disposition of the company's assets is presumed to be inimical to the interests of the company's general body of creditors, the presumption is not a conclusive one; special circumstances may justify the intervention of the Court under s.227, but only as a means to an end; and that end is the promotion of the interests of creditors as a whole.

It follows, in our opinion, that the enquiry required by s.227 is essentially a commercial or economic one, calling for a balancing of the anticipated net gains or losses from the transaction for which approval is sought. When the learned judge attributed to the impugned transactions a particular "primary" purpose, he was doing no more than indicating a preference for substance over form. We think that the learned judge was right to place emphasis upon the commercial result of the transactions, considered as a whole, rather than to confine his attention, as the appellant would have the Court do, to the legal form the transactions took. In thus evaluating the substance or commercial reality of the situation, his Honour concluded that the balance was weighted in favour of the appellant and S.E.S. . For reasons we develop later, that view was at least open to him. Certainly, it has not been demonstrated that the exercise of the judicial discretion has miscarried.

We reject the first ground of appeal.

The second ground of appeal is that, in making the finding of the primary purpose already mentioned, the learned judge failed to have regard to the following circumstances:

(1) that of the $50,000.00 advanced, over $22,000.00 was applied immediately by the respondent in payment of debts owing by it to creditors unconnected with the appellant or S.E.S.;

(2) that no attempt was made by S.E.S. to present the post-dated cheque until 1 October 1982;

(3) that the making of the advance of $50,000.00 enabled the respondent to pay to S.E.S. the sum of $27,304.68 in respect of its June account "with the result that S.E.S. resumed the supply to (the respondent) of materials essential to the carrying on of (the respondent's) construction business being materials which (the respondent) could not readily obtain from any alternative supplier".

As to (1), as has been said, there is no evidence that the residue of $22,695.32 was applied in the manner alleged. If the appellant had proved the assertion it now makes, it may have gone some way towards establishing a sound case for the Court's sanction on the footing that economic advantage to the general body of creditors could be perceived as flowing from the transactions when looked at as a whole. But the evidentiary foundations for such an argument were not established and the argument fails at the threshold. And even if the appellant had made good its assertion, it would not necessarily have succeeded in the application. Payment to external creditors of the respondent in the amount of $22,695.32 would constitute only one of the factors to be taken into account in determining where, overall, the balance of advantage lay. For reasons we give later, having regard to the scope of the benefits from the transactions derived by the appellant and S.E.S., it unlikely that payment of the sum of $22,695.32 would itself be sufficient to outweigh the advantages otherwise accruing to the appellant and S.E.S.

As to (2), since the cheque was post-dated to 30 September 1982, nothing turns on the appellant's failure to present it until 1 October 1982. As has been said, although a period in excess of three weeks did elapse between delivery of the cheque and its presentation, it is possible, within those time limits, to infer that the injection of funds in the form of the advance of $50,000.00, improved the financial capacity of the respondent to meet the post-dated cheque in favour of S.E.S. in the following month. Again, in our view, the matter should be looked at in commercial or economic terms. Whatever strict legal consequences may flow in the present circumstances from the delivery of a postdated cheque or from applicationof the rule in Clayton's case or of the equitable rules as to tracing, it was open to the learned judge to infer that the injection into the respondent of the funds representing the $50,000.00 advance improved the liquidity of the respondent and thus contributed to its capacity to meet the post-dated cheque as it eventually did. Further, in our view, the delivery of the post-dated cheque provided obvious evidentiary advantages to S.E.S. at the time of its delivery. It also provided some incentive for the respondent to make funds available to meet its indebtedness to S.E.S. rather than to any other creditor whose payment might fall due at or about the same time.

As to (3), it may well have been open to the appellant to make out a case for sanction under s.227 along the lines asserted here, but this was not the case it sought to make out in the Supreme Court. That case was that, innocent of the respondent's serious financial problems, the appellant, having some surplus funds, decided to lend them to the respondent, seeing the advance, in the words of Mr. R.A. Goldsmith, as "an investment" made to "overcome a minor liquidity problem (of the respondent)". For this reason, Mr. Goldsmith said, "it never entered his head" that the advance might be used to assist S.E.S. to be paid the sum in excess of $46,000.00 owed to it at the time.

Having sought to make out such a case, it is to be expected that the appellant would experience considerable difficulty in the Supreme Court and before us in seeking to establish the alternative but somewhat inconsistent case that, in its insolvent or barely solvent condition, the respondent, as the appellant well knew, was unable to obtain supplies from any source other than from the appellant's associate, S.E.S., which was prepared to deal with the respondent only upon the terms later embodied in the transactions of 9 September 1982, namely the grant of security to the appellant, together with the immediate payment of the overdue S.E.S. debt and the delivery of a post-dated cheque for the amount of the July account of S.E.S. Having sought to present a different primary case to the learned judge, the appellant faces no easy task in asking this Court to infer from the subject transactions the existence of fringe benefits to the respondent of the kind now claimed in this ground of appeal. We doubt whether the evidence justifies such an inference but, in any event, we do not think that in a discretionary application the appellant should now be allowed to shift its ground in such a fundamental fashion by placing an emphasis upon the respondent's financial condition which is substantially different from that deposed to by Mr. Goldsmith in the evidence to which we have referred.

We should, however, make it clear that we are not to be taken to be deciding that, as a general rule, the type of quid pro quo now suggested by the appellant is inappropriate or irrelevant in an application under s.227. On the contrary, mutual benefits in the form now sought to be indicated may well provide a good reason for approval by the Court of a transaction capable of advancing the interests of creditors as a whole. We reject the particular argument now put because it is fundamentally inconsistent with the complexion of the transactions sought to be attributed by Mr. Goldsmith in his evidence.

As part of this ground of appeal, the appellant also contends that his Honour gave more weight than was justifiable to his conclusion that Mr R.A. Goldsmith was well aware of the respondent's perilous financial condition when the mortgage was given. It follows from what has already been said that knowledge of the company's financial embarrassment, or even its insolvency, is not necessarily fatal to an application for dispensation from the operation of s.227. In many cases, it is the company's desperate financial plight which supplies the rationale for entry into transactions which a company in a stronger economic bargaining position would not countenance. But this was not the primary case presented in the Supreme Court. There, the appellant sought in the first instance to persuade the learned judge that the transactions were embarked upon by both parties more or less in the ordinary course of business. In particular, Mr. Goldsmith, in his evidence, was concerned to discount any suggestion that he was apprised of the gravity of the respondent's situation. He said that it was his belief that the advance of $50,000.00 was made "(to enable) . . . Dorcon to overcome a minor liquidity problem".

In dealing with such a case, it is understandable that the learned judge made a finding adverse to Mr. Goldsmith's credit on this score. As has been said, knowledge of such a matter on the part of an applicant under s.227 may not always be fatal. But, given the case sought to be made, the finding made by his Honour was certainly relevant and was properly taken into account by him in deciding not to exercise his statutory discretion in favour of the appellant.

We reject the second ground of appeal.

For its third ground of appeal, the appellant says that the learned judge wrongly took into account the circumstance that, "looked at with hindsight, Dorcon was doomed to fail when the charge was given, despite any minor respite the loan may have provided" (reasons for judgment pp.19-20).

In our opinion, there is considerable force in the submission. Logically, the merits of the application should be tested as at the date of entry into the transaction sought to be validated. Subsequent events may be capable of throwing light on the position at an earlier point of time, but that is a different matter. If an applicant can make out a case for validation of a transaction upon the footing that, looked at as at the time of entry into the transaction, it was in the interests of the general body of creditors that the disposition of the company's property concerned should take place, sanction should not be denied because subsequent events prove wrong a judgment reasonably formed at the time that the transaction offered advantages or potential advantages to the general body of creditors.

It is not clear what weight his Honour gave to this aspect of the matter. It was not, of course, the only matter he relied upon. We are inclined to think that, this matter apart, the learned judge would still have declined to validate the mortgage. But, in any event, for reasons we will give later, even if the question of the exercise of the statutory discretion were to arise de novo for our consideration, we would decline to sanction the grant of this security.

By its fourth ground of appeal, the appellant complains of his Honour's failure to give it an opportunity to deal with the question of the "one-sided" character of the mortgage, with particular reference to the interest rate provision. The appellant says that no issue was raised at the hearing on this score. However, having regard to the summary nature of the application, there were no pleadings in the case and the appellant must have appreciated that it would be called upon to justify any provisions of the charge which favoured it to the detriment of the respondent. Such provisions would obviously be central to the determination of the application. In any event, both Mr. Goldsmith and the appellant's solicitor were cross-examined about the interest provision. That of itself would be sufficient to alert the appellant to the likelihood that the respondent would seek to make something of that provision.

In our opinion, the appelant was not denied an adequate opportunity to deal with these matters either in evidence or in submissions to his Honour. We reject this ground of appeal.

Finally, the appellant says that in evaluating what he described as the objective circumstances, his Honour wrongly took into account the consideration that the mortgage was so drawn as to provide a means whereby the unsecured debts owed by the respondent to S.E.S. could be converted, by assignment to the appellant by S.E.S., into debts owing to the appellant and thus secured by the charge. The appellant submits that the construction of the mortgage adopted by the learned judge was not open (see Re Clark's Refrigerated Transport Pty. Limited (In Liquidation) (1982) V.R. 989 at pp.994-5; The National Bank of Australasia Limited v. Mason (1975) 133 C.L.R. 191 at p.198). The appellant further says that this matter was never raised before his Honour and that it was denied any opportunity to deal with it.

In our view, there is force in both submissions. But, again, it is difficult to perceive what weight the learned judge gave to this consideration. Certainly, it was not decisive for him. No assignment of the kind described by the learned judge seems to have been contemplated; it seems to be a matter of academic interest only. In any event, for reasons we shall now give, if the discretion were ours to exercise (see House v. The King (1936) 55 C.L.R. 499 at p.505), we would nonetheless decline to sanction the mortgage.

Approaching the matter de novo, it seems to us that the essential question for determination is to ascertain whether, overall, the transaction embodied in the mortgage could, at the time, reasonably be perceived as offering some advantage or at least potential advantage, to the respondent and, thereby, its general body of creditors. It is necessary to weigh the benefits supposed to flow to the respondent from the transactions against the detriment to be suffered by its general body of creditors by the grant of the charge. That detriment was substantial. Since the charge extended to the whole of the respondent's assets and undertaking, it had at least the potential of depriving the respondent's other creditors from recourse to any of its assets, whether on a winding up, by way of execution or otherwise.

Against this, the appellant points to a number of countervailing benefits said to be derived by the respondent from the transactions considered as a whole. First, it argues that the injection of the sum of $50,000.00 must have improved the respondent's liquidity, even if only temporarily. But $27,304.68 was immediately paid to S.E.S. in discharge of an overdue debt and it is not established that other creditors were the beneficiaries of the residue. It is at least possible that the receipt by the respondent of the sum of $50,000.00 assisted the respondent, if only indirectly, in ultimately honouring the post-dated cheque given to S.E.S. Thus, S.E.S. must be seen as the principal beneficiary of the initial advance. In any event, this is not a case where, in consideration of the grant of security, finance in the long or even medium term is assured. The principal here was repayable upon demand or, at the latest, in three months' time. Interest, also payable upon demand, was capable of constituting a significant sum, given the width of the appellant's power to impose a rate of interest.

These considerations lead us to conclude that the grant of the mortgage conferred only limited, ephemeral benefits upon the respondent.

Then the appellant contends that some advantage accrued to the respondent by reason of the resumption of supply by S.E.S. in the last months of 1982. Although the evidence on the point is sketchy, it does appear that at the time of their negotiations for the grant of the charge, Mr. Goldsmith and Mr. Ladd did contemplate that S.E.S. would resume supplies. But no formal arrangement was arrived at and, again, the respondent received no assurance of the position in the long or even medium term. It would have been open to the appellant to seek to make out a case for sanction based upon a definite commitment to future supply on its part. However, no such case emerged. It appears that all that happened was that, for a few months, materials were supplied by S.E.S. on a consignment basis. We can perceive no substantial benefit to the respondent from such flimsy foundations.

In our opinion, when the transactions embarked upon on 9 September 1982 are considered as a whole, the balance of any advantage accruing may be seen as flowing to the appellant and S.E.S. rather than to the respondent. It follows, in our opinion, that the Court should not intervene for the purpose of validating a transaction which favours the appellant and S.E.S. to the detriment of the respondent's general body of creditors.

Finally, we do not think that it is appropriate, in the circumstances of the case, that we accede to the appellant's suggestion that the Court should validate the security in part. Validation is sought to the extent of the sum of $25,000.00, being the balance of the advance remaining after receipt by the appellant of the sum of $25,000.00 from Suttorini. Alternatively, validation is sought to the extent of the sum of $22,695.32, being the difference between the sum of $50,000.00 and the sum of $27,304.68. In addition to the reasons already given for declining to sanction the transaction as a whole, we see particular problems in, as it were, singling out particular parts of a transaction for validation. For one thing, it places the Court in the invidious position of remaking a bargain for the parties. For another, complications could arise which affect third parties. Take, for example, the position of the guarantor, Suttorini, which has already paid the sum of $25,000.00 to the appellant in reduction of the respondent's debt. Suttorini is not a party to these proceedings and, to say the least of it, nice questions could arise as to the impact of the partial validation now sought upon any rights of subrogation which Suttorini might have.

A further difficulty for the appellant is the interest clause. It is not easy to imagine a case where the Court would sanction such an oppressive provision. Recognising the problem, the appellant now invites the Court to sanction the security upon the footing that its power to determine the interest rate is excluded. We propose to decline the invitation. Although the Court has jurisdiction to grant relief under s.227 upon terms, real difficulties inevitably arise when the Court intervenes by attempting to make a new bargain for the parties after the event. We are especially reluctant to be involved in an attempted reconstruction of the arrangement at such a late stage.

In our opinion, only the most compelling circumstances could warrant interference by the Court in the form of partial validation of the kind now sought. No such circumstances have been demonstrated here.

The appeal is dismissed with costs.