Knysh v Corrales Pty Ltd
[1989] FCA 466
•15 AUGUST 1989
Re: SWIATOSLAV KNYSH and ROBERT G. MAY
And: CORRALES PTY LIMITED
No. G 46 of 1989
FED No. 466
Company Law
COURT
IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY
GENERAL DIVISION
Morling(1), Pincus(1) and Lee(1) JJ.
CATCHWORDS
Company Law - company in receivership - debts incurred after receiver appointed - payments by receiver - payment appropriated by creditor to pre-receivership debts - intention of receiver in making payments - whether communicated to creditor - appropriation by creditor invalid.
HEARING
BRISBANE
#DATE 15:8:1989
Counsel for appellants: R.I. Hanger Q.C. with D. Smith instructed by: Connolly Suthers
Counsel for respondent: R.N. Chesterman Q.C. with J.C. Bell
instructed by: Q.D. George, Hillhouse & Co.
ORDER
Leave to appeal granted.
Appeal allowed.
Decision of the Honourable Mr Justice Spender set aside.
Declare that Swiatoslav Knysh and Robert George May are not indebted indebted to Corrales Pty Limited as claimed in Bankruptcy Notice No. 1798 of 1987.
Respondent to pay the appellants' costs of the appeal and of the proceedings before the Honourable Mr Justice Spender to be taxed.
NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
JUDGE1
This appeal raises for consideration a question arising out of the trading of a company in receivership. The question is whether money paid by the receiver of a company to one of its creditors was properly appropriated by the creditor to partially discharge a debt of the company incurred before it went into receivership. If it was, the receiver is left in the invidious position that he has insufficient funds of the company at his disposal to meet post-receivership debts for which he is personally responsible.
The appellants are accountants carrying out their profession under the firm name of Knysh & Partners. The first appellant ("the receiver") is a qualified receiver and manager. On 6 February 1987 he was appointed Receiver and Manager of Good-ee Smallgoods Pty Limited ("Good-ee"). The second appellant assisted the receiver in conducting the affairs of the company in receivership.
The receiver decided to carry on Good-ee's business, which involved the processing of pork smallgoods. At the time of his appointment as receiver, Good-ee owed Corrales Pty Limited ("Corrales"), trading as "Hibiscus Wholesale Meats", $55,055.50 for meat products supplied to it by Corrales. In order for the receiver to carry on Good-ee's business it was necessary for him to obtain further supplies of meat. On 24 February 1987 the appellants executed a form of guarantee in favour of Corrales whereby they made themselves personally liable for the cost of goods supplied to Good-ee whilst it was in receivership. Prior to the receivership Corrales recordedits dealings with Good-ee in an account styled "Good-ee No. 227". After receivership, it recorded its dealings with the company in receivership in an account styled "Goodies S/Goods Rec. App. No. 39".
Thereafter meat was sold and delivered by Corrales to Good-ee but the receiver was apparently only able to pay for part of it out of the company's funds. On 17 June 1987 the second appellant wrote to Mr Wild, a director of Corrales, making what he described as "my repayment proposal for the outstanding account with your company". After setting out the terms of the proposal he referred to the fact that "the receiver has personally indemnified your debt ...". It is plain from the terms of the letter that the proposal related to the amount outstanding for goods supplied to the company after the appointment of the receiver. Perhaps in response to that letter, or coincidentally, Corrales wrote to the receiver on 18 June 1987 referring to the receiver's personal liability and demanding payment of an amount of $44,654.95 described therein as "overdue". That letter was followed by a letter from Corrales' solicitors to the receiver dated 29 June 1987 referring to "the debt which has been incurred since the appointment of a receiver ..." and stating that "you have an immediate and personal liability to our client under Section 324 and 556 of the Company Code, as well as the personal guarantee given to them by you". That letter also demanded payment of the amount of $44,654.95.
No statement of account in respect of goods supplied to Good-ee prior to receivership on account No. 227 was ever sent to the receiver.
On 10 July 1987 Corrales issued a writ out of the Supreme Court of Queensland. The first defendant to the writ was named as Good-ee Small Goods Pty Limited (Receivers and Managers Appointed) and the appellants were named as additional defendants. The amount claimed in the writ was $95,129.95. The writ related to the cost of meat sold and delivered by Corrales to Good-ee both prior to and after the appointment of the receiver. On 30 July 1987 judgment was entered against Good-ee in the sum of $95,129.95 (plus interest and costs). Judgment was also entered against each of the appellants in the sum of $40,074.45 (plus interest of $798.84 and costs). This last mentioned sum was the balance of the running account No. 39 for the cost of meat sold and delivered to Good-ee after it went into receivership.
After judgment was obtained against the appellants, Corrales continued to supply goods to Good-ee. Some goods were delivered against payment of cash on delivery and others were delivered on credit, purportedly in continuation of the running account (No. 39) in respect of which judgment had been obtained against the appellants for the amount outstanding on that account as at 10 July 1987. During the months of August and September 1987 the second appellant had several telephone conversations with Wild concerning payment of the moneys owing by the company on account No. 39 which included the amount for which judgment had been entered.
On 9 September 1987 the second appellant, on behalf of the receiver, wrote to Wild in the following terms:
"re: Good-ee Smallgoods Pty Limited (Receiver and Manager Appointed) Further to your request, I attach herewith a list of current debtors of the above named company and confirm my verbal advices that I will be reducing the outstanding indebtedness to you in the sum of $40,174.95 at the rate of $5,000 per week from debtors collections. As discussed we anticipate formal contracts in the matter of the sale of the business prior to Friday 18th September. In terms of the tender document settlement will take place 28 days after formal execution of the tender document. As also discussed with you, should for any reason the tender document not be executed by Friday 18th September we will immediately be arranging for the sale of the equipment by way of auction to finalise this matter and discharge all the receivers liabilities. I trust the foregoing meets with your approval, however, should there be any other matter which needs clarification please do not hesitate to contact me."
On 6 October 1987 a bankruptcy notice was issued against the appellants. The notice required payment of the sum of $40,873.29. After the bankruptcy notices were issued, the appellants had a number of discussions with Wild about payment of moneys owing to Corrales.
Thereafter the following payments were made by the receiver:
26 October 1987 $10,000 11 November 1987 2,500 13 November 1987 4,000 7 December 1987 25,000 8 December 1987 3,000 $ 44,500
All these payments were made by cheque drawn on the bank account of Good-ee Smallgoods Pty Limited (Receivers and Managers Appointed) paid directly to the credit of Corrales' account at its bank.
Corrales purported to appropriate the abovementioned sums totalling $44,500 in payment of the judgment debt of $95,129.95. No part of it was appropriated to reduce or extinguish the liability of the appellants under the judgments signed against them.
On 9 December 1987 the second appellant, on behalf of the receiver, wrote a letter in the following terms to Corrales' solicitors:
"As you are aware the business of Good-ee Smallgoods Pty. Limited has been sold by the Receiver and your client Corrales Pty Limited has been paid the sum of $41,000 in respect of the judgement obtained against the company in Receivership.
In order that I may finalise amounts due to your client, would you please advise what additional sums (if any) are payable in terms of your judgement against the said company in Receivership.
Your early attention to the foregoing would be appreciated."
On 10 December 1987 Corrales' solicitors wrote a letter to the receiver stating, inter alia, that:
"Our clients records disclose that the sum of $44,500.00 has been received into the Company account in reduction of the Judgment obtained against Good-ee Small Goods Pty Ltd. Receivers and Managers Appointed First Defendant named in the action".
The letter requested confirmation "that the sum $44,500.00 has been paid into that account rather than the $41,000 referred to in your letter under reply."
On 15 December 1987 solicitors instructed by the appellants replied to that letter by stating, inter alia:
"Quite clearly, and despite our client's letter to you of 9th instant the moneys paid to you recently totalling $44,500.00 was payment of the Judgment debt, interest and costs owing by the fourth and fifth Defendants. At no stage was this sum ever intended to be paid in reduction of the debt which your client has against Good-ee Smallgoods Pty. Ltd.
To treat the payment other than as a payment of a debt owing by the fourth and fifth defendants is totally contrary to the history of the matter. . . .
"Quite clearly, there has been a slip or error made in requesting that the sum of $44,500.00 be paid in liquidation of the debt owing by Good-ee Smallgoods Pty. Ltd."
Thereafter, Corrales issued a bankruptcy petition against the appellants. Why a bankruptcy petition was issued is not clear. Corrales was aware that the receiver was to be indemnified by his appointor. The prospect of the appellants being unable to show that they were able to pay their judgment debts either from their own means or by relying upon the first appellant's right of indemnity may not have been so obvious as to warrant resort to the provisions of the Bankruptcy Act 1966. When the petition came on for hearing before Spender J, it was submitted on behalf of the appellants that the judgments against them had been satisfied by the payments made by the receiver. Spender J. rejected the submission. He was of the opinion that Corrales was justified in appropriating the payments made by the receiver in partial satisfaction of the judgment against Good-ee for $95,129.95 and that, accordingly, the appellants were still indebted to Corrales for the full amounts of the judgments recovered against them. His Honour made an appropriate declaration to give effect to his findings. This appeal is brought against the making of the declaration. Since the orders made by his Honour were interlocutory, leave to appeal is necessary.
Upon the hearing of the petition Wild was questioned about his state of mind when the abovementioned payments were made. He was asked whether, at that time, he believed that the payments were made by the receiver "in answer to the judgment obtained against them and in answer to the bankruptcy notice issued against them". His reply to this question was:
"Yes. But we had no instructions to that effect."
The learned trial judge was of the opinion that the evidence did not disclose that the receiver had appropriated the payments made by him to the debts for which he was responsible. His Honour was in no doubt that that was what the receiver intended to do. However, he held that to constitute an appropriation there must be more than an intention to appropriate. He said that he was not satisfied that "funds paid in reduction of the company debt were to be applied in satisfying the later, post-receiver component of that debt". Accordingly, he held that the amounts paid by the receiver did not have the effect of extinguishing the appellants' debts to Corrales.
In our opinion, it is beyond question that the receiver had the right to appropriate the money paid by him to the judgment debt for which he was responsible. He was entitled to be indemnified by Good-ee in respect of debts which he, as receiver, incurred on its behalf. He was thus entitled to apply Good-ee's funds to discharge the debt for which he was personally responsible and which he had incurred on the company's behalf. It was submitted by senior counsel for Corrales that the whole of Good-ee's indebtedness (in respect of both pre- and post-receivership trading) merged in the judgment debt of $95,129.95 and that it was not competent for the receiver to appropriate the company's funds to a particular portion of that debt. We find it unnecessary to determine whether the assumption that such a merger would prevent appropriation is correct; in our opinion the argument fails to recognize the fact that separate judgments were obtained against the appellants and that the payments were intended to discharge the indebtedness under those judgments. If that intention was communicated to Corrales so as to amount to an appropriation of the payments to the separate judgment debts (a question which we shall presently address), it is not to the point that, had no such appropriation been made, it would not have been possible for the receiver to appropriate payments made by the company in part satisfaction of the judgment obtained against it for $95,129.95.
The learned trial judge did not accept the argument that it was not open to the receiver to make an appropriation, and we think his decision in this respect was correct.
However, we respectfully differ from His Honour in his conclusion that the actions of the receiver were not sufficient to constitute an appropriation of the amounts paid by him to the judgment debts for which he and the second appellant were liable.
Where a debtor makes a payment to his creditor, and the inference to be drawn from the circumstances is that the payment is, in fact, appropriated by the debtor at the time of payment, the fact that he makes no express statement on the subject at the time is immaterial. An appropriation by the debtor may be inferred from a variety of circumstances: Parker v Guinness (1910) 27 TLR 129. In Leeson v Leeson (1936) 2 KB 156, Greene L.J. considered the situation where the debtor does not give a specific indication of his intention to appropriate a payment made by him to a particular debt. He said, at pp 162-3:
"When, however, he does not notify the creditor of his intention, and when the circumstances are such that the creditor receives the payment merely in satisfaction of the debts and the payment is not more appropriate to the payment of the one debt than to that of the other the creditor is entitled to make the appropriation. When it is said that there need not be an express appropriation of a payment, but that the appropriation can be inferred, that does not mean that appropriation of a payment can be inferred from some undisclosed intention in the mind of the debtor. It is to be inferred from the circumstances of the case as known to both parties. Any other view might lead to injustice, as the creditor's right to appropriate a payment would be defeated. When the matter is examined upon principle it will be found that an undisclosed intention in the mind of the debtor is not sufficient to support an appropriation. If authority is needed for that proposition it can be found in the judgment of Lush J. in Parker v Guinness 27 Times LR 129 at 130, where he said: 'What is to be considered is this. Is the true inference to be drawn from all the circumstances of the case that the debtor paid the moneys generally on account, leaving the creditor to apply them as he thought fit, or is the true inference that he paid them on account of special portions of the debt for the purpose and with a view to wipe these out of the account? His undisclosed intention so to do would, of course, not benefit him. It is what he did in fact, and not what he meant to do that is to be regarded.' A debtor's undisclosed intention to appropriate a payment to one of two debts owed by him to a creditor cannot benefit him."
See also R. v Miskin Lower, Glamorganshire Justices; Ex parte Young (1953) 1 QB 533.
In our opinion, the proper inference from the evidence is that the receiver intended to appropriate the payments made by him to the debt for which he was responsible and that his intention was known to Corrales at the time the payments were made. The correspondence which passed between the parties prior to the payments being made made it clear that the payments the receiver would be making would be in reduction of his indebtedness. It was said, in terms, in the letter of 9 September 1987 that the payments to be made would be made in reduction of the indebtedness in respect of the post-receivership trading.
Furthermore, after the bankruptcy notices were issued on 6 October 1987, a number of discussions took place between the appellants and Wild about proposals for payment of the moneys owing. No doubt service of those notices would have brought the position of the appellants to the forefront of those discussions if the entry of judgment against the appellants had not done so already. Service of the notices would militate against an inference that such discussions were solely related to proposals for payments to discharge the judgment debt of Good-ee to the exclusion of the discharge of the liability of the appellants.
Much reliance was placed by senior counsel for Corrales on the letter of 9 December. He submitted that that letter was destructive of the receiver's argument, since it acknowledged that the payments had been made in part satisfaction of the judgment obtained against Good-ee. We do not accept this argument. Looked at in isolation, the letter may bear the interpretation placed upon it by senior counsel. But, read in the context of all that had preceded it, it could not have induced in Corrales the belief that the payments had not been made in satisfaction of the judgments obtained against the appellants. The critical question was whether Corrales appreciated at the time it received the payments that they were intended to be made by the receiver in satisfaction of his liability. It is apparent from the evidence given by Wild to which we have already referred that the receiver's intention was well understood by Corrales at the time the payments were made.
His Honour thought there was a certain commercial unreality in the receiver's contention that Corrales would continue to supply meat to Good-ee after it went into receivership, but that he would be under no obligation in respect of the amount owing by the company in respect of goods supplied prior to his appointment. With respect we do not share his Honour's view. On the contrary, we think it would have been unreal for Corrales to expect that the receiver would make payments otherwise than on the basis that his personal liability would first be discharged. At no stage did Corrales contend, nor could it have, that the receiver was personally liable for pre-receivership debts. Having regard to the commercial realities of the situation, it would have been naive in the extreme for Corrales to have believed that the moneys paid to it by the receiver were not paid by him in discharge of his debt.
It is not in doubt that it was obligatory on the receiver to communicate to Corrales, either expressly or by implication, his intention to appropriate his payments to the judgment debt for which he was responsible: Leeson (supra); Stepney Corporation v Osofsky (1937) 3 All ER 289 and Chitty on Contracts, 25th ed. (1983), p 793. In the light of the correspondence between the parties, the appropriation in the present case fell a little short of being express. It was certainly implied from all the circumstances in which the payments were made.
As we have observed the trial judge seems to have been of the view that it was obligatory on the receiver to prove that there was an agreement or a direction that his payments should be applied in satisfaction of the post-receivership debt. We do not think it was obligatory on the receiver to prove any agreement to that effect or to prove that he gave a specific direction. It was sufficient that he gave Corrales to understand at the time the payments were made that they were made in discharge of his personal indebtedness. Wild's evidence, of itself, was sufficient to show that that was, indeed, his understanding. The fact that he did not receive a specific direction, even if strictly correct, was not effectual to prevent the appropriation taking effect. He was not entitled to call for a specific direction when he well knew the receiver's intention in making the payments.
Leave to appeal should be granted. The appeal should be allowed, and the decision of the trial judge set aside. A declaration should be made that the appellants are not indebted to Corrales as claimed in the bankruptcy notice. The respondent must pay the costs of the appeal and of the proceedings before Spender J.
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