JLF Bakeries Pty Ltd (in liq) v Baker's Delight Holdings Ltd

[2007] NSWSC 894

Reported Decision: (2007) 25 ACLC 1,164

New South Wales

Supreme Court

CITATION:	JLF Bakeries Pty Ltd (in liquidation) v Baker’s Delight Holdings Ltd [2007] NSWSC 894
HEARING DATE(S):	17 October 2006
JUDGMENT DATE :	15 August 2007
JURISDICTION:	Supreme Court Corporations List
JUDGMENT OF:	White J
DECISION:	See paragraph 51 of judgment.
CATCHWORDS:	CORPORATIONS – Winding up – Set-off – Mutual dealings – Time of receiving credit – Notice of insolvency – Contingent debt in respect of mutual dealings arising from option granted by plaintiff in contract entered into prior to commencement of plaintiff’s administration – Option characterised as a conditional contract for sale and purchase – Option exercised by defendant after commencement of winding up – Held that contingent credit received when contract entered into, not when option exercised – Held that defendant had no notice of plaintiff’s insolvency at time of receiving credit – Consideration of purpose of s 553C of the Corporations Act – Held that defendant entitled under s 553C of the Corporations Act to set off moneys, payable by it pursuant to exercise of option, against moneys owed to it by plaintiff. - (Cth) Corporations Act 2001, s 553C
LEGISLATION CITED:	Corporations Act 2001 (Cth) Bankruptcy Act 1966 (Cth)
CASES CITED:	Gye v McIntyre (1991) 171 CLR 609 Coventry v Charter Pacific Corp Ltd (2005) 227 CLR 234 GM & AM Pearce and Co Pty Ltd v RGM Australia Pty Ltd [1998] 4 VR 888 Re Parker (1997) 80 FCR 1 Cinema Plus Ltd (Administrators Appointed) v Australia & New Zealand Banking Group Ltd (2000) 49 NSWLR 513 SR Derham, The Law of Set Off, 3rd ed (2003) Great Britain, Oxford University Press Hiley v Peoples Prudential Assurance Co Ltd (1938) 60 CLR 468 Community Development Pty Ltd v Engwirda Construction Co (1996) 120 CLR 455 Federal Commissioner of Taxation v Gosstray [1986] VR 876 GPT RE Ltd v Lend Lease Real Estate Investments Ltd (2005) 12 BPR 23,217 Laybutt v Amoco Australia Pty Ltd (1974) 132 CLR 57 Re Kidsgrove Steel, Iron and Coal Co (1894) 38 Sol Jo 252 Paganini v The Official Assignee (New Zealand Court of Appeal, unreported, 11 March 1999) Paganini & Anor v Official Assignee (1999) 8 NZCLC 261,811 Ayerst (Inspector of Taxes) v C & K (Construction) Ltd [1976] AC 167 Franklins Self-Serve Pty Ltd v Federal Commissioner of Taxation (1970) 125 CLR 52 Commissioner of Taxation v Linter Textiles Australia Ltd (in liq) (2005) 220 CLR 592 McKinnon v Armstrong Brothers & Co (1877) 2 App Cas 531 Re Inglis; Ex parte The Trustees (1932) 5 ABC 255 Old Style Confections Pty Ltd v Microbyte Investments Pty Ltd [1995] 2 VR 457 Shirlaw v Lewis (1993) 10 ACSR 288 Law v James [1972] 2 NSWLR 573
PARTIES:	JLF Bakeries Pty Ltd (in liquidation) v Baker’s Delight Holdings Ltd
FILE NUMBER(S):	SC 2516/06
COUNSEL:	Plaintiff: R D Marshall Defendant: J T Johnson
SOLICITORS:	Plaintiff: Bilbie Dan Solicitors Defendant: Kemp Strang

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
CORPORATIONS LIST

WHITE J

Wednesday, 15 August 2007

2516/06 JLF Bakeries Pty Ltd (in liquidation) v Baker’s Delight Holdings Ltd

JUDGMENT

1 HIS HONOUR: This case raises a question of set-off pursuant to s 553C of the Corporations Act 2001 (Cth).

2 Prior to entering into administration, the plaintiff carried on a bakery business as a franchisee of the defendant.

3 On 30 December 2004, the defendant agreed to lend the plaintiff $250,000.

4 On 12 January 2005, the plaintiff entered into the franchise agreement. The franchise agreement provided that if it were terminated, the defendant should have an option to purchase the plaintiff’s fixtures, fittings, plant and equipment. If the option were exercised, ownership of such property would immediately pass to the defendant, whilst provision was made for the determination and payment of the price. The full purchase price was not payable until sixty days after the price was fixed.

5 On 25 October 2005, the directors of the plaintiff resolved that, in their opinion, the plaintiff was insolvent, or was likely to become insolvent, at some future time. They appointed Mr James Shaw as administrator of the company under Pt 5.3A of the Corporations Act. Notice of the appointment was given by the administrator to the defendant on 26 October 2005. On the same day, the administrator caused the plant and equipment owned by the plaintiff and used by it in the business to be removed from the franchised premises and delivered into the custody of an auctioneer. The defendant claims that this was a breach of the franchise agreement.

6 The franchise agreement provided that it could be terminated if, inter alia, the plaintiff entered into any form of insolvency administration, such as voluntary administration, or if the plaintiff voluntarily abandoned the bakery business. On 27 October 2005, the defendant terminated the franchise agreement. On 3 November 2005, it exercised its option to purchase. There was a dispute as to the price payable for the purchase of the plaintiff’s assets. However, at the hearing, it was agreed that the purchase price was $67,500.

7 The defendant was the lessee of the premises from which the plaintiff’s bakery business was conducted. It licensed the plaintiff to occupy the premises.

8 On 21 November 2005, a meeting of creditors of the plaintiff convened pursuant to s 439A of the Corporations Act resolved pursuant to s 439C(c) that the company be wound up.

9 Subsection 553(1) of the Act provides that all debts payable by, and all claims against, the company, the circumstances giving rise to which occurred before the “relevant date”, are admissible to proof. By virtue of the definition of “relevant date” in s 9 of the Act, and ss 513B(b) and 513C(b), the “relevant date” is the day on which the administration began, namely, 25 October 2005.

10 The defendant has lodged a proof of debt in the liquidation of the plaintiff claiming a debt of $223,600.73 owed to it as at 25 October 2005. This sum partly comprises an outstanding debt under the loan agreement. It partly comprises royalties and reimbursement of advertising expenses, being amounts payable under the franchise agreement. It partly comprises arrears of rent, and the balance of rent claimed to be due pursuant to the licence agreement. It seems that the defendant claims now to be entitled to prove as a creditor for $166,376.42. It does not press its claim for the balance of rent to become due under the licence agreement. Its claim has not been admitted by the liquidator. However, there is no dispute that as at 25 October 2005 the defendant was owed more by the plaintiff than the amount which it is now agreed is payable by the defendant to the plaintiff pursuant to its exercise of the option on 3 November 2005.

11 The principal question is whether the defendant can set off the debt owed by the plaintiff to it against the amount owed by it pursuant to its exercise of the option, notwithstanding that at the relevant date for the purpose of determining what claims should be admitted to proof, the franchise agreement had not been terminated and the option had not been exercised.

The Terms of the Option

12 The option to purchase the plaintiff’s business was given by clause 97(b) of the franchise agreement. Clause 97 relevantly provides:

“ Upon termination of this Agreement for any reason whatsoever
The Franchisee’s obligations
(a) the Franchisee and the Bakery Principal must:
(1) Immediately vacate the Bakery Premises (leaving them in the same condition as that on the date the Franchisee commenced trading from the Bakery Premises after allowing for fair wear and tear) and leave all fixtures, fittings, plant and equipment used by the Franchisee in running the Bakery Business in the Bakery Premises ,
(2) Immediately deliver to the Franchisor all keys to the Bakery Premises ,
...
(7) Immediately pay to the Franchisor all money which the Franchisee owes the Franchisor and all money payable under the Bakery Premises Lease , including any costs associated with the surrender or termination of the Bakery Premises Lease ,
(8) Compensate the Franchisor for the reasonable costs the Franchisor incurs in reinstating the Bakery Premises to the same condition as that on the date the Franchisee commenced trading from the Bakery Premises after allowing for fair wear and tear,
(9) Sell to the Franchisor such of the Franchisee’s fixtures, fittings, plant and equipment used in connection with the Bakery Business that are not already owned by the Franchisor and as the Franchisor chooses if the Franchisor exercises its option to purchase contained in sub-clause (b) hereof,
...
The Franchisor’s option to purchase
(b) The Franchisee grants the Franchisor an option (to be exercised by notice in writing by the Franchisor within 60 days of the termination of this Agreement) to purchase such of the Franchisee’s fixtures, fittings, plant and equipment and as the Franchisor chooses on the following terms
(1) Ownership of such fixtures, fittings, plant and equipment shall immediately pass to the Franchisor upon the option being exercised,
(2) the price shall be the amount the Franchisor nominates in the notice exercising the option, unless within 14 days of receipt of such notice the Franchisee advises the Franchisor in writing that it requires the price to be determined in accordance with the following clause,
(3) if the Franchisee gives notice under the preceding clause the price shall be the lower of
(i) the written down value of the fixtures, fittings, plant and equipment which the Franchisor chooses to purchase as recorded in the Franchisee’s books of account, or
(ii) a fair market value of the fixtures, fittings, plant and equipment which the Franchisor chooses to purchase as determined by a Valuer appointed by the Franchisor’s auditors,
(4) the price shall be payable as to 10% upon the price being determined and as to the balance within 60 days of the price being determined (‘the Settlement Date’) ”

13 Clause 110 provides that the Franchisor may at any time apply any money that the Franchisor may owe the Franchisee towards the satisfaction of any sum of money that the Franchisee owes the Franchisor. Clause 111 provides that the Franchisee may not exercise a like right of set-off.

14 Section 553C of the Corporations Act provides:

“ 553C Insolvent companies—mutual credit and set-off
(1) Subject to subsection (2), where there have been mutual credits, mutual debts or other mutual dealings between an insolvent company that is being wound up and a person who wants to have a debt or claim admitted against the company:
(a) an account is to be taken of what is due from the one party to the other in respect of those mutual dealings; and
(b) the sum due from the one party is to be set off against any sum due from the other party; and
(c) only the balance of the account is admissible to proof against the company, or is payable to the company, as the case may be.
(2) A person is not entitled under this section to claim the benefit of a set-off if, at the time of giving credit to the company, or at the time of receiving credit from the company, the person had notice of the fact that the company was insolvent. ”

15 The cognate provision of s 553C of the Corporations Act is s 86 of the Bankruptcy Act 1966 (Cth). It provides:

“ 86 Mutual credit and set-off
(1) Subject to this section, where there have been mutual credits, mutual debts or other mutual dealings between a person who has become a bankrupt and a person claiming to prove a debt in the bankruptcy:
(a) an account shall be taken of what is due from the one party to the other in respect of those mutual dealings;
(b) the sum due from the one party shall be set off against any sum due from the other party; and
(c) only the balance of the account may be claimed in the bankruptcy, or is payable to the trustee in the bankruptcy, as the case may be.
(2) A person is not entitled under this section to claim the benefit of a set-off if, at the time of giving credit to the person who has become a bankrupt or at the time of receiving credit from that person, he or she had notice of an available act of bankruptcy committed by that person. ”

16 In Gye v McIntyre (1991) 171 CLR 609, the High Court said at 618-619:

“ It has often been pointed out that the object of set-off in bankruptcy is, in the words of Parke B in Forster v Wilson (1843) 12 M & W 191, at 204 [152 ER 1165, at 1171], ‘ to do substantial justice between the parties, where a debt is really due from the bankrupt to the debtor to his estate’ . Where there are genuine mutual debts, credits or other dealings, it would be unjust if the trustee in bankruptcy could insist upon having one hundred cents in the dollar upon the whole of the debt owed to the bankrupt but at the same time insist that the bankrupt's debtor must be satisfied with a dividend of some few cents in the dollar on the whole of the debt owed by the bankrupt to him. It was to prevent such injustice that the ‘mutual credits’ and ‘mutual debts’, and later ‘mutual dealings’, provisions were introduced into bankruptcy legislation (see, e.g., In re Daintrey; Ex parte Mant [1900] 1 QB 546, at 572-573; Day & Dent Constructions Pty Ltd v North Australian Properties Pty Ltd (1982) 150 CLR 85, at 95. To the extent necessary to achieve that legislative purpose of ‘substantial justice’ to the parties, it is established by authority that a provision such as s86 of the Act should be given ‘the widest possible scope’ see, e.g., per Mason J, Day and Dent Constructions , at 108, quoting Lord Esher MR in Eberle's Hotels and Restaurant Company v Jonas (1887) 18 QBD 459, at 465). ”

See also Coventry v Charter Pacific Corp Ltd (2005) 227 CLR 234 at 254 [56].

17 Where the requirements of the section are satisfied, set-off under s 553C operates automatically (Gye v McIntyre at 622; GM & AM Pearce and Co Pty Ltd v RGM Australia Pty Ltd [1998] 4 VR 888 at 891, 896, 899). There is authority that the relevant date for determining whether the sum due from one party is to be set off against any sum due from the other party in respect of mutual dealings is the “relevant date” under s 553 for determining what claims are admissible to proof against the company (Re Parker (1997) 80 FCR 1 at 15). That is also the date at which the winding-up is taken to have commenced (s 513B(b) and 513C(b)). I was referred to the decision of the Court of Appeal in Cinema Plus Ltd (Administrators Appointed) v Australia & New Zealand Banking Group Ltd (2000) 49 NSWLR 513 which concerned the right of a bank to exercise a contractual right of consolidation of the accounts of a company under administration which was claimed to defeat the administrator’s lien under s 443F of the Corporations Law on the company’s property to secure his right of indemnity. However, in that case, no issue was raised concerning s 553C, presumably because the company was not being wound up. The argument before me proceeded on the basis that the relevant date for determining whether there were mutual dealings as a result of which a sum due from one party could be set off against the sum due from the other party was 25 October 2005, that is, the day on which the administrator was appointed. This question is not without its complexities (SR Derham, The Law of Set Off, 3rd ed (2003) Great Britain, Oxford University Press, 262-270 [6.37]-[6.45]). Having regard to the way in which the matter was argued, as well as the implication from s 513B(b), and s 513C(b), and having regard also to the authority of both Re Parker and GM & AM Pearce & Co Pty Ltd v RGM Australia Pty Ltd at 891 and 900, I am content to proceed on that basis.

18 Debts in respect of mutual dealings which may be set off under s 553C(1) include not only debts which are then due, but debts which are contingent and which ultimately mature into pecuniary demands. In Hiley v Peoples Prudential Assurance Co Ltd (1938) 60 CLR 468, Dixon J said (at 497):

“ It is enough that at the commencement of the winding up mutual dealings exist which involve rights and obligations whether absolute or contingent of such a nature that afterwards in the events that happen they mature or develop into pecuniary demands capable of set off. If the end contemplated by the transaction is a claim sounding in money so that, in the phrase employed in the cases, it is commensurable with the cross-demand, no more is required than that at the commencement of the winding up liabilities shall have been contracted by the company and the other party respectively from which cross money claims accrue during the course of the winding-up ... “

(See also Gye v McIntyre at 624).

19 The company will owe or be owed a contingent debt if, as a result of an existing obligation, the company will be liable to pay or be entitled to receive a sum of money on the occurrence of a future event which may happen, not which must happen (Community Development Pty Ltd v Engwirda Construction Co (1996) 120 CLR 455 at 459; Federal Commissioner of Taxation v Gosstray [1986] VR 876 at 878).

20 Clause 97 provided that it was upon the termination of the agreement that the plaintiff granted the defendant an option to purchase its fixtures, fittings, plant and equipment. However, I do not read the option given by clause 97(b) as an irrevocable offer, not resulting in a contract until it is accepted by a notice in writing by the defendant exercising the option. The better characterisation of clause 97 is that, pursuant to the contract then entered into, the plaintiff agreed to sell its fixtures, fittings, plant and equipment to the defendant if two conditions were satisfied, namely, that the franchise agreement was terminated, and the defendant gave notice of exercise of the option. Whether an option is better characterised as a conditional contract or as an irrevocable offer may turn on the terms in which it is expressed (GPT RE Ltd v Lend Lease Real Estate Investments Ltd (2005) 12 BPR 23,217 at 23,220 [25], 23,224 [51], 23,225 [56]). The better characterisation of the option in clause 97(b) is that it is a conditional contract for the sale and purchase of such of the plaintiff’s fixtures, fittings, plant and equipment as the defendant chooses, if the defendant gives notice of exercise of the option after the agreement is terminated (Laybutt v Amoco Australia Pty Ltd (1974) 132 CLR 57 at 75-76).

21 The option was granted on entering into the franchise agreement. On entry into the franchise agreement, there was a contingent debt owed by the defendant to the plaintiff. The debt was contingent on the franchise agreement being terminated for any reason whatsoever, the defendant giving notice of exercise of its option to purchase such of the plaintiff’s fixtures, fittings, plant and equipment as it chose, and the determination of the price in accordance with clause 97(b)(2) or (3). To adapt the language of Dixon J in Hiley v Peoples Prudential Assurance Co Ltd, at the commencement of the administration a liability had been contracted by the defendant, albeit contingently, that in the events that happened gave rise to money claims accruing during the course of the winding-up.

22 It follows that, subject to the operation of s 553C(2), the defendant is entitled to set off against its obligation to pay the purchase price for debts owed by the plaintiff company to it.

23 The defendant did not dispute this conclusion. It based its case on s 553C(2). However, it is necessary to consider two cases referred to by Dr Derham in The Law of Set Off at 530-533 [13.54]-[13.57], namely, Re Kidsgrove Steel, Iron and Coal Co (1894) 38 Sol Jo 252 and Paganini v The Official Assignee (New Zealand Court of Appeal, unreported, 11 March 1999). Both cases were analogous to the present and in both cases it was held that moneys payable pursuant to the exercise, after the commencement of the winding-up, of an option to purchase the insolvent company’s assets, could not be set off against debts owed by the company to the optionee.

24 In Re Kidsgrove Steel, Iron and Coal Co Ltd, the company in liquidation was a lessee of a colliery and ironworks. It was a term of the lease that the lessor should have the option, at the termination of the lease, to purchase the lessee’s plant and fixtures at valuation. The lessee company went into liquidation. Almost two years later, the lessor terminated the lease for non-payment of rent and, it would appear, exercised the option to purchase such of the plant and fixtures as were subject to the option. The lessor also agreed to purchase other items of plant and equipment from the liquidator. There could be no question of a set-off of moneys payable under such a contract with the liquidator, against the unpaid rent and claim for damages for breach of the lease (Hiley v The Peoples Prudential Assurance Co Ltd at 496). So far as the report discloses, the claim for set-off against moneys payable for assets purchased pursuant to the exercise of the option was dealt with in the following few sentences:

“ But it was said that there was a great distinction between that purchase [viz the purchase of assets from the liquidator] and the purchase under the option, and the trustees [lessor] relied on the mutual credit clause in the Bankruptcy Act . Had they any contract to purchase at the time of the winding-up? No. That only arose when they exercised the option. The option seemed to his Lordship to make no difference as to set-off, and he held that there was no such distinction as was contended for, and no method of applying the mutual credit clause. If he was right Lee v Chapman’s case had no application. ”

25 The case is only briefly reported. The question whether the option created a contingent debt which could be set off once the contingency was satisfied through the exercise of the option was not considered.

26 In Paganini v The Official Assignee, the lessors had an option under the lease to purchase the tenant’s chattels, plant and equipment at valuation on the termination of the lease. The tenant was wound up and on the next day, the liquidator agreed to sell the fixtures, fittings, chattels and stock in trade to the landlords for $50,000. The sale and purchase agreement between the liquidator and the landlords made no reference to the option, but stipulated that the parties would co-operate in resolving the issue of whether the landlords were entitled to set-off the purchase price against arrears of rent. The rent was in arrears by about the same amount.

27 On the facts disclosed in the reasons of the Court of Appeal, no question of set-off arose because the option was not exercised. The report of the reasons of the primary judge (Paganini & Anor v Official Assignee (1999) 8 NZCLC 261,811) records (at 261,813) that the landlords were asserting rights under the option clause of the lease and the liquidator was contending that if the landlord wanted the fixtures and chattels belonging to the tenant to remain on the premises, it must immediately come to terms and purchase them; that eventually an agreement for the sale and purchase of all items for $50,000 was reached; but that the exact nature of the arrangement immediately became controversial. The primary judge (Robertson J) said (at 261, 815) that the indebtedness of the landlords to the liquidator was incurred when the landlords were acting pursuant to an existing contractual right. Accordingly, the judgments at first instance and on appeal appear to proceed on the basis that the option was exercised, or at least, that it was common ground that the right of the landlord to set off the purchase price against unpaid rent should be determined on the assumption that the purchase price was payable pursuant to an exercise of the option after the commencement of liquidation.

28 It was held by the Court of Appeal, affirming the primary judge, that there could be no set-off because the debt for the purchase price arose after the commencement of liquidation and did not exist at the commencement of the liquidation (Court of Appeal reasons at [4], [6], [7]). The Court of Appeal concluded not only that mutual transactions giving rise to indebtedness must occur before the liquidation, but that the debt arising pursuant to the exercise of the option must arise before the liquidation (at [12]). The Court also said (at [13]):

“ In this case the landlords must establish that their interest (to choose a neutral word) in the option qualified, at the time of the liquidation, as a ‘debt’ or an aspect of ‘other mutual dealings’ between them and their tenant. We do not see how they can possibly do that. Under the option they had the power in certain circumstances to require the tenant to sell. At the time of liquidation they had not exercised that power. Had they done so, but, for instance, the valuation had not been completed there would have been a compelling argument that they were indebted at the critical time and the fact that quantification had not been completed did not defeat the claim, ... But in this case they had not taken that step and accordingly they could not be said to owe the debt to the company or to have engaged in mutual dealings with it. Nor could the power under the option be read as coming within the provisions of s303 on admissible claims: the power is simply not a ‘debt’ or ‘liability’. ”

29 With respect, the reasoning in this paragraph is not easy to follow. The question was not whether the landlords’ right to exercise their option to purchase the lessee’s goods was a debt or liability provable in the liquidation. The question was whether the debt the landlords would owe on exercise of the option could be set off against arrears of rent. The liability of the tenant to pay rent under the lease, and the grant by it in the lease of an option to the landlord on termination of the lease, must have been mutual dealings made before the company’s liquidation. It can readily be accepted that because the option had not been exercised at the time of liquidation, the landlords did not owe a debt to the company at that time. But the question is whether at the time of the liquidation there was a contingent debt. Whilst Hiley v Peoples Prudential Assurance Co Ltd was cited, the passage at 497 quoted earlier in these reasons at [18] was not.

30 A further reason for rejecting the claim for set-off was that there was no mutuality between the debt owed for rent and the debt arising pursuant to the exercise of the option because at the time the latter arose, the company no longer had a beneficial interest in its property (at [16]). This reasoning was based upon the decision of the House of Lords in Ayerst (Inspector of Taxes) v C & K (Construction) Ltd [1976] AC 167). However, that is not the law in Australia (Franklins Self-Serve Pty Ltd v Federal Commissioner of Taxation (1970) 125 CLR 52; Commissioner of Taxation v Linter Textiles Australia Ltd (in liq) (2005) 220 CLR 592).

31 The reasoning in the decisions in Re Kidsgrove Steel, Iron & Coal Co and Paganini v The Official Assignee has been queried by Dr Derham in The Law of Set Off at 531 [13.55]. I agree with his observations on those authorities. In my view, the reasoning in those cases is not consistent with that of Dixon J in Hiley v Peoples Prudential Assurance Co at 497, approved by the High Court in Gye v McIntyre at 624.

Notice of Insolvency when Credit Received

32 Counsel for the plaintiff did not rely on the decisions or the reasoning in Re Kidsgrove Steel, Iron & Coal Co or Paganini v The Official Assignee. Counsel was not disposed to dispute the proposition that there were mutual dealings between the parties which gave rise to debts owed by the plaintiff company to the defendant franchisor, and that a contingent debt was owed by the defendant franchisor to the plaintiff company at the relevant date. Rather, counsel submitted that even if there were such dealings giving rise to debts and contingent debts on both sides of the record at the relevant date, there could be no set-off because under the option, the defendant received credit when the option was exercised. The credit arose because, on exercise of the option, the defendant was entitled to such of the plaintiff company’s fixtures, fittings, plant and equipment as it chose to purchase, but the purchase price was not payable until sixty days after the purchase price was determined. It was submitted that that credit was received upon the exercise of the option, when the defendant had notice of the plaintiff’s insolvency. The plaintiff was already in administration. Whilst this might not itself be conclusive evidence of notice of insolvency, in the present case, the plaintiff, through its administrator, had abandoned its business. This was one of the grounds relied upon for terminating the franchise agreement. Hence, the plaintiff submitted, that s 553C(2) precluded the set-off because “... at the time of receiving credit from the company, the [defendant] had notice of the fact that the company was insolvent.”

33 The defendant did not dispute that it had notice that the plaintiff was insolvent at the time it exercised its option. It follows that if the time of exercise of the option was “the time of receiving credit” within the meaning of s 553C(2), the defendant is not entitled to claim the benefit of the set-off.

34 Counsel for the plaintiff referred to McKinnon v Armstrong Brothers & Co (1877) 2 App Cas 531, but did so for the purpose of distinguishing it. That case is an example of the principle stated in Hiley that it is enough that there are mutual dealings which give rise to contingent rights and obligations that ultimately mature into pecuniary demands (SR Derham, The Law of Set-Off at 282-283 [6.65]). It does not assist in resolving the present question.

35 Counsel for the plaintiff also referred to Re Inglis; Ex parte The Trustees (1932) 5 ABC 255. It was another example of the set-off of mutual debts and credits where the claims of one party (in that case the bankrupt) only matured after bankruptcy. But it does not assist in resolving the present question as the credit given on both sides undoubtedly was given before notice of an act of bankruptcy.

36 Of more assistance are Old Style Confections Pty Ltd v Microbyte Investments Pty Ltd [1995] 2 VR 457 and Shirlaw v Lewis (1993) 10 ACSR 288. In Old Style Confections Pty Ltd v Microbyte Investments Pty Ltd, a company in liquidation was entitled to be paid monthly licence fees for the right to use a machine. The debtor under the licence agreement (the licensee) had received an award of damages against the company. Hayne J held (at 462-464) that the licensee was entitled to set off its right to damages against its liability to pay licence fees, even those accruing after liquidation. His Honour held that the transactions which constituted the giving and receiving of credit for the mutual dealings occurred before liquidation and before the licensee had notice of the company’s insolvency. That is, for the purpose of s 553C(2), credit was not received from the company on each occasion a licence fee became payable.

37 In Shirlaw v Lewis (1993) 10 ACSR 288, the vendor of a business contracted to sell the business to a company, which company was authorised to carry on the business between the date of agreement and completion. The contract was made in April 1990. The sale agreement included a term entitling the vendor to terminate the licence and exclude the company from the business premises in certain events, whereupon: “the Vendor will purchase from the Purchaser all of the Purchaser’s goods and saleable stock in trade used in the conduct of the Business and on the Premises on the date of termination of the licence at the value thereof at such date and the provision of Clause 3.1 hereof shall apply, mutatis mutandis, in order to determine such value and saleability and the manner of payment for such stock.”

38 The vendor terminated the agreement. On 13 March 1991, the vendor retook possession of the premises. On 28 February 1991, a winding-up summons was filed and the company was subsequently ordered to be wound up. The winding-up commenced from the filing of the summons. The vendor received notice of the winding-up on 22 April 1991. The liquidator of the company claimed that the company was entitled to damages for conversion of the company’s stock. The vendor had a claim for damages for breach of contract which substantially exceeded this claim.

39 Hodgson J (as his Honour then was) held (at 295) that the agreement for purchase of stock contemplated by clause 5.12 did not arise until 13 March 1991, that is, after the commencement of the company’s winding-up. His Honour held that this was a void disposition under s 468, but that the retrospective avoidance of the disposition did not retrospectively make the disposal of the goods pursuant to a contractual right which existed as at 13 March 1991 a wrongful act of conversion (at 295). As to the claim of set-off, his Honour said:

“Since I have found that there was a disposition which would be void under s 468 unless validated, I would, in the first instance, approach any question of set-off, not on the basis that what may be set off is a claim for the price of the goods, but rather that what is being set off is a claim of the nature of the claim for unjust enrichment. However, it does seem to me that there have, in this case, been mutual dealings which were undertaken in the first instance through the contract for the sale of the business, well in advance of any question of insolvency or liquidation. What ultimately happened was the crystallisation of mutual obligations arising from these pre-liquidation dealings. It does seem to me that, on the authority of Gye v McIntyre , these mutual obligations as crystallised are matters which would be set off under s 86 of the Bankruptcy Act . Indeed, even if I had come to the view that there had been conversion, it could be contended that set-off would have been available. The taking of the stock was pursuant to a contractual obligation arising out of the pre-liquidation dealings. Gye v McIntyre makes it clear that liquidated claims can be set off against unliquidated claims; and it follows a fortiori, I think, that unliquidated claims can be set off against unliquidated claims.

Having regard to the circumstance that the mutual dealings in this case do arise out of, and are the crystallisation of, this original contract entered into well before insolvency or liquidation, I do not see any injustice in that approach, nor do I think there can be any question of unjust enrichment. As regards s 86(2), in so far as any credit was given, it was given in April 1990, and not in March 1991.”

40 It follows from his Honour’s finding concerning s 468 that on the termination of the licence the vendor was entitled under cl 5.12 to take possession of the company’s stock. It can be inferred that the purchase price was not immediately payable as another clause of the sale agreement provided a mechanism for determining the price and manner of payment. That is, the facts relating to the receiving of credit were on all fours with the present case, except that the vendor did not have notice of the company’s insolvency at the time it agreed to buy and was entitled to receive the company’s stock. However, the time of the taking possession of the stock was held not to be the time credit was given. Credit was given in April 1990 when the sale agreement was entered into.

41 I consider I should apply the reasoning of Hodgson J. Section 553C should be given its widest possible scope (Gye v McIntyre at 619; Coventry v Charter Pacific Corp Ltd (2005) 227 CLR 234 at 254-255 [56]). To do so is consistent with a purposive construction of the section of avoiding injustice where the liquidator can demand 100 cents in the dollar from the defendant on its exercise of the option, although the defendant will receive no dividend in the liquidation from the much larger debt owed to it, arising from the same dealings in connection with the leasing of the bakery premises and granting of the franchise. The purpose of s 553C(2) is to exclude a right of set-off where the creditor, in its dealings with the company, has notice of insolvency, or where the debtor manipulates the right of set-off, after notice of insolvency, to avoid payment (Gye v McIntyre at 619; Law v James [1972] 2 NSWLR 573 at 577). No such purpose would be advanced by holding that credit was received when the option was exercised.

42 In my view, credit was given by the plaintiff and received by the defendant when the franchise agreement was entered into, albeit contingently on the termination of the franchise agreement and exercise of the option. At that time, the defendant did not have notice of the plaintiff’s insolvency.

43 It follows that the plaintiff’s claim that the defendant pay the agreed price of $67,500 should be dismissed. The defendant is entitled to the declaration sought in its cross-claim that it is entitled to set off against the purchase price payable by it to the plaintiff, for the assets purchased pursuant to the Franchise Agreement, the amount of indebtedness of the plaintiff to it at the date of the commencement of the winding-up.

Other Issues

44 The plaintiff made a claim for the cost of storing the goods. The defendant disputed the claim contending that the administrator had caused the plaintiff to breach its contract by removing the goods, and could have no claim for costs which were only incurred because of the breach of contract. During argument the plaintiff abandoned its claim for storage fees.

45 The only remaining issue was a claim by the defendant against the plaintiff for damages for expenses incurred by the defendant as a result of the removal of the plaintiff’s plant and equipment from the premises and the cost of redelivery. The quantum of damages was agreed in the sum of $15,000.

46 Because the claim for damages arose from the administrator’s conduct in removing the plant and equipment, I granted leave to the defendant to bring the claim against the plaintiff. Leave was not opposed.

47 Clause 97(a)(i) of the Franchise Agreement required that on termination of the agreement the plaintiff was required to vacate the bakery premises, and leave them in the same condition in which they were when it commenced trading, allowing for fair wear and tear, and to leave all fixtures, fittings, plant and equipment used by it in running the bakery. The appointment of Mr Shaw as administrator and the plaintiff’s ceasing business were events which rendered the agreement liable to be terminated. The removal of the fittings, plant and equipment resulted in a breach of clause 97(1)(a) following termination, because those items were not left on the premises.

48 The defendant’s claim for damages is not a claim provable in the liquidation because it did not arise from circumstances existing before the appointment of the administrator. Mr Shaw was not a party to the proceedings. No claim was made against him personally. The question whether the company’s liability for damages as a result of Mr Shaw’s actions could be payable from the company’s assets as an expense properly incurred in the winding-up was not an issue before me. I do not decide that question. In any event, it may be academic if there are no available assets to meet the claim having regard to my finding that the defendant is entitled to set off its liability to pay the price for the plant and equipment against the other debts owed to it.

49 The defendant sought an order that the plaintiff deliver up the assets, at the plaintiff’s cost, by returning them to the premises. It is entitled to that order, although I assume from the measure of agreement reached that that will already have been attended to.

50 The plaintiff sought a number of declarations in its amended summons on matters which ceased to be the subject of controversy after agreement was reached as to the amount of the purchase price and the storage claim was dropped. Those declarations were not pressed and it is unnecessary to consider them further.

51 I have already made order 1 in the cross-claim. For the above reasons, I make the following further orders and declarations:

1. The summons be dismissed.

2. Declaration in accordance with paragraph 2 of the cross-claim.

3. Order in terms of paragraph 3 of the cross-claim.

4. Judgment in favour of the cross-claimant against the cross-defendant in the sum of $15,000 together with interest pursuant to s 100 of the Civil Procedure Act 2005 (NSW) at the prescribed rates from 21 December 2005.

5. Order that the cross-claimant not attempt to enforce the judgment the subject of order 4 against the assets of the cross-defendant without the prior leave of the Court.

6. The plaintiff pay the defendant’s costs of the proceedings including the cross-claim.

7. Exhibits may be returned after 28 days.

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