Matthews v The Tap Inn P/L - [2015] SADC 108

DISTRICT COURT OF SOUTH AUSTRALIA
(Civil)
MATTHEWS v THE TAP INN P/L
[2015] SADC 108
Decision of His Honour Judge Chivell
14 July 2015
CORPORATIONS - WINDING UP - CONDUCT AND INCIDENTS OF WINDING UP - EFFECT OF WINDING UP ON OTHER TRANSACTIONS - PREFERENCES - GENERALLY
Defendant sold a business to a company and partly financed the sale through a fixed and floating debenture – company made periodic repayments to defendant within six months, and other payments within two years, of the company being placed into administration and then liquidation – plaintiff as liquidator of the company asserting that repayments constituted unfair preferences pursuant to s 588FA(1) of the Corporations Act because s 588FA(2) deemed the debt to be unsecured for those purposes. Preliminary question to be decided before the trial proper - whether for the purposes of s 588FA(2) the value of the security should be assessed as at the date it was created or the date each payment was made or the date of the winding up or some other alternative date.
Held: For the purposes of s 588FA(2) of the Corporations Act, the time to assess the value of the security is the date of the winding up of the debtor company.
Corporations Act 2001 (Cth) s 554E, s 588FA(1), s 588FA(2), s 588FA(3), s 588FE(2), s 588FE(3), s 588FG(2); Bankruptcy Act 1966 (Cth) s 122; Corporations Law s 565(1); Acts Interpretation Act 1901 (Cth) s 15AB, referred to.
Wily v St George (1999) 84 FCR 423, distinguished.
Great Wall Resources Pty Ltd (in Liquidation) v Davidovic Pty Ltd [2011] NSWSC 660; Minister Administering the Crown Lands Act v NSW Aboriginal Land Council [2008] HCA 48; Foots v Southern Cross Mine Management Pty Ltd [2007] HCA 56; International Finance Trust Company Limited v NSW Crimes Commission [2009] HCA 49; Plaintiff M70/2011 v Minister for Immigration and Citizenship [2011] HCA 32; Baker v Markellos (2012) 114 SASR 379; Martinez v Minister for Immigration & Citizenship [2009] FCA 528; Muller v Dalgety & Co Ltd (1909) 9 CLR 693; Woodlock v Commissioner of Land Tax (NSW) [1974] 2 NSWLR 411; Walsh v Natra Pty Ltd (2000) 1 VR 523; BP Australia Ltd v Brown (2003) 58 NSWLR 322; Tolcher v Capital Finance (2006) 60 ACSR 584; Williams v Peters (2009) 232 FLR 98; Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89; Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485; VR Dye & Co. v Peninsula Hotels (1999) 150 FLR 307, considered.

MATTHEWS v THE TAP INN P/L
[2015] SADC 108

This is the determination of a preliminary question to the trial of the action, pursuant to Rule 211 of the District Court Rules 2006.
The Tap Inn traded in Kent Town, a suburb of Adelaide. As the name suggests, the hotel had a golfing theme.
The hotel was owned by the defendant. In 2007, the defendant sold the business to Pub Tap Investments Pty Ltd. The sale was financed in part by a bank and in part by the defendant. Pub Tap granted a first debenture to the bank and a second debenture to the defendant. The first debenture had priority, being the earlier security. Both debentures create both ‘fixed’ and ‘floating’ charges over the present and future assets of the company (Exhibit P4 [4]; Exhibit P3 [3]).
On 16 June 2010, Pub Tap went into administration, and on 16 July 2010 it was placed in liquidation. Mr Matthews, the plaintiff, is the liquidator of the company.
The terms of sale required Pub Tap to make periodic payments to the defendant. Between 30 June 2008 and 27 April 2010, Pub Tap made 24 payments. The total amount paid was $374,772.22. Of that total amount, $76,678.46 was paid within six months of 16 June 2010 (the ‘relation back day’). If those payments constituted an ‘unfair preference’ given by the company, then they constituted insolvent transactions and are therefore voidable (Corporations Act 2001 (Cth) s 588FE(2)).
The balance of the payments were made within two years of the relation back day. If, for the same reason, these payments also constituted insolvent transactions because they were unfair preferences, they may be voidable if they also constituted ‘uncommercial transactions’ (s 588FE(3)).
Section 588FA of the Act defines an unfair preference. It states:
588FA Unfair preferences
(1) A transaction is an unfair preference given by a company to a creditor of the company if, and only if:
(a) the company and the creditor are parties to the transaction (even if someone else is also a party); and
(b) the transaction results in the creditor receiving from the company, in respect of an unsecured debt that the company owes to the creditor, more than the creditor would receive from the company in respect of the debt if the transaction were set aside and the creditor were to prove for the debt in a winding up of the company;
even if the transaction is entered into, is given effect to, or is required to be given effect to, because of an order of an Australian court or a direction by an agency.
(2) For the purposes of subsection (1), a secured debt is taken to be unsecured to the extent of so much of it (if any) as is not reflected in the value of the security.
…
If the payments by Pub Tap to the defendant were to discharge an unsecured debt, then the plaintiff submits that they would constitute an unfair preference because, having regard to the other debts of Pub Tap, an unsecured creditor is likely to receive much less than 100% of the debt if it is proved for in the winding up of the company.
It is the plaintiff’s case that the payments discharged an unsecured debt by virtue of s 588FA(2). If that is so, then the transactions are voidable at the option of the liquidator, and the funds must be disgorged and Tap Inn must prove for the debt in the liquidation.
The plaintiff argues that the date at which the value of the defendant’s security should be assessed is the date of the winding up. The value of the defendant’s security at that stage was nil. The defendant’s secured debt should therefore be taken as wholly unsecured, and the payments made should be regarded as preferential.
The defendant contends that the value of its security should be assessed at the date it was created, when the amount secured was less than the value of the security. In those circumstances, the debt was wholly secured, and so the payments were not preferential.
The effect of s 588FA(2) is critical to the resolution of the dispute between the parties. It has been agreed that the following preliminary question be heard and determined:
Whether the time of assessing the value of the security was:
(a)     at the date the security was created; or
(b)     the date when each of the payments was made; or
(c)     the date of the winding up or some other alternative date.
The question does not seem to have been directly considered before. Section 588FA(2) was mentioned in Great Wall Resources Pty Ltd (in Liquidation) v Davidovic Pty Ltd.[1] However, Macready AsJ declined to express a view as to its construction, since it was not necessary to do so for the purposes of that case ([56]).
[1] [2011] NSWSC 660.
Mr Douglas, counsel for the plaintiff, helpfully set out the following principles in his written submissions:
Principles of Law
24 During the last fifteen years or so, the High Court of Australia has unanimously endorsed certain now well-known principles as necessary to the accurate reading of legislation. In particular:
24.1the correct starting point for analysis is the text of the legislation and not judicial statements of the common law or even judicial elaborations of the statute;
24.2the overall objective of statutory construction is to give effect to the purpose of parliament as expressed in the text of the statutory provisions;
24.3in deriving meaning from the text, so as to fulfil the purpose of parliament, it is a mistake to consider statutory words in isolation. The proper approach demands the derivation of the meaning of words from the legislative context in which those words appear;
24.4the proper approach is to examine at the very least the sentence; often the paragraph; and preferably the immediately surrounding provisions (if not a wider review of the entire statutory context) to identify the meaning of the words in the context in which they are used.
This approach to statutory interpretation has been described as the ‘tripartite modern approach to interpretation of legislation’ (Minister Administering the Crown Lands Act v NSW Aboriginal Land Council[2]) - that is, the ‘text, context and purpose of the applicable provisions of (the) Act’ (Foots v Southern Cross Mine Management Pty Ltd[3]). This approach has since been approved in other High Court decisions (see International Finance Trust Company Limited v NSW Crimes Commission[4] and Plaintiff M70/2011 v Minister for Immigration and Citizenship[5]).
[2] [2008] HCA 48 at [37] per Kirby J.
[3] [2007] HCA 56 at [130].
[4] [2009] HCA 49 at [41] per French CJ.
[5] [2011] HCA 32 at [109] per Gummow, Hayne, Crennan & Bell JJ.
Mr Douglas proceeded to discuss the relevant legislative scheme:
25    Having that in mind, it is useful to say something of the history and accepted purpose of the voidable transactions scheme in the Act.
26 Section 588FA, which defines unfair preferences, nests within part 5.7B of the Act.
27    The Corporations [sic] Law Reform Act introduced Part 5.7B in 1992.
28    Prior to the introduction of the Part, the avoidance of transactions by a liquidator was governed by the equivalent provisions of the Bankruptcy Act 1966 (Cth), which were incorporated into the then Corporations Law by s 565.
29 The various species of voidable transaction brought under the one umbrella by Part 5.7B have a disparate history and separate foundations in policy because they developed to respond to particular issues in the context of the laws of bankruptcy.
30 At a very general level, the purpose of the Part 5.7B provisions is to prevent unsecured creditors from being prejudiced by the disposition of assets or the incurring of liabilities by a company in a period shortly before winding up, which would favour certain creditors.
31 However, in reality, it is difficult to identify a coherent single rationale applicable to all of the provisions in Part 5.7B.
32    For example, unfair preferences and uncommercial transactions each have a distinct historical development and are said to serve different purposes.
33    In consequence, discrete bodies of jurisprudence have developed surrounding the various species of avoidance provisions.
34 Despite the historical development of the common law applicable to specific types of avoidance provisions in the context of bankruptcy law, primacy is given to the text of Part 5.7B and the courts have come to conclusions which differ from the result when considering equivalent provisions in the Bankruptcy Act 1966 (Cth).
35    The unfair preferences provisions are enacted for the purpose of achieving justice in balancing interests as between creditors.
36    With respect to the competing claims of unsecured creditors the pari passu principle is a fundamental principle of insolvency law. This is the principle of equality under which all unsecured creditors receive equal treatment in the distribution of available funds irrespective of the context in which their debt arose.
37    Under the Act, all unsecured debts rank, after the payment of priorities, equally and receive a proportionally equal distribution.
38    The operation of the preference section is also to deter “the race of diligence” of creditors to dismember the debtor before bankruptcy furthers the goal of equality of distribution.
39    In contrast, s 588FA excludes secured creditors from preference claims in the usual course and such claims are ranked in a hierarchical structure determined by the nature of the security, the Act and the general law.
40.   A secured creditor is generally accepted not to receive a preference because [a] secured creditor does not receive the payment qua creditor, but pursuant to the creditor’s own property rights.
[Citations omitted]
The validity of these principles was not disputed by Mr Riggall, counsel for the defendant. I regard them as an accurate statement of the law.
Looking to the text of the statute, the first thing to be noted is that the deeming provision in s 588FA(2) is ‘For the purposes of subsection (1).’ This clause limits the application of subsection (2), so that it has no operation elsewhere in the Act (see Baker v Markellos[6]).
[6] (2012) 114 SASR 379 at [59] per Gray J.
Secondly, the phrase ‘a secured debt is taken to be unsecured’ is the operative provision in the subsection. There is no ambiguity in this. A secured debt will be taken to be unsecured if the specified circumstance exists. This is a deeming provision (Martinez v Minister for Immigration & Citizenship[7]). It creates a ‘statutory fiction’ (Muller v Dalgety & Co Ltd[8]). However, the fiction is only created if the factual circumstances which are the prerequisite of the deeming provision are proved to exist (Woodlock v Commissioner of Land Tax (NSW)[9] and other cases cited by Pearce and Geddes in Statutory Interpretation in Australia.[10]
[7] [2009] FCA 528.
[8] (1909) 9 CLR 693 at 696 per Griffith CJ.
[9] [1974] 2 NSWLR 411 per Samuels J.
[10] D C Pearce & R S Geddes, Statutory Interpretation in Australia (LexisNexis Butterworths, 8^th ed, 2014) at [4.45].
The fiction created by s 588FA(2) is that even though a debt is secured in the sense that it is covered by a valid security, it is to be treated as unsecured in the specified circumstance.
For those reasons, there is little to be gained from an analysis of the differences between a fixed and a floating charge (as to which, see Ford’s Principles of Corporations Law[11]). The subsection assumes that the debt in question is secured.
[11] LexisNexis Butterworths, Ford’s Principles of Corporations Law, vol 2 (at Service 114) [19.190]‑[19.211].
For the same reasons, the plaintiff’s other arguments, that the floating portion of the charge had not crystallised at the time of the payments, and that there was no pro tanto reduction in the amount secured which corresponded with each payment, are also irrelevant for the purpose of answering the particular question before me.
Thirdly, the prerequisite circumstance creating the fiction which is specified by subsection (2) is that the debt will be deemed ‘unsecured to the extent of so much of it (if any) as is not reflected in the value of the security.’
The use of the word ‘reflected’ is curious. Taken literally, ‘to reflect’ means ‘to mirror’ or to ‘cause to return or rebound’ (Macquarie Dictionary), or to ‘throw back (an object) without absorbing it’ (Oxford English Dictionary).
Applying those meanings to the words of the section results in a somewhat awkward statement. It is that the debt will be deemed to be unsecured to the extent of so much of it (if any) as is not ‘reflected’ or ‘mirrored’ by the value of the security.
In practical terms, I conclude that the phrase means that the debt will be deemed to be unsecured to the extent of so much of it (if any) as constitutes a shortfall between the value of the security and the debt.
I will refer to the date at which the value of the creditor’s security is to be assessed as the ‘assessment date’.
Mr Douglas submitted that the assessment date should be the date of the winding up. The purpose of the legislation is to make the assessment then in order to determine whether there are any means whereby the debt can be satisfied from the assets of the company at liquidation. If there are no assets at the date of winding up on which the security can operate, then the security is valueless to the creditor, and the debt is unsecured. Likewise, if the assets are insufficient to fully secure the debt, then the security is valueless to the extent of the shortfall. Conducting that assessment at any other stage is a meaningless exercise.
Mr Douglas referred to Great Wall Resources (supra) by analogy. At [53], Macready AsJ observed that s 554E entitles a creditor who has not realised or surrendered its security to estimate its value and prove for the balance due after deducting the value so estimated.
Mr Douglas submitted that such an exercise could only take place if a winding up had occurred. It would have no purpose if the value was to be assessed at the date the security was created. He submitted that the same considerations apply to a valuation under s 588FA(2).
I do not accept Mr Douglas’ submission that s 588FA(2) would have no work to do in almost all cases if the assessment date is the date when the security was created. He argued that, assuming the parties were acting commercially, the value of the security will always be greater than the amount of the debt at the time when the security is created. However, it is not uncommon for a creditor to take a partial security, over whatever property is available, from a debtor to secure a debt in circumstances where the debtor’s financial position is deteriorating. An example of this is described in Walsh v Natra Pty Ltd,[12] where a trade creditor took a second mortgage over the debtor’s land to secure a trading account debt.
[12] (2000) 1 VR 523.
Section 588FA(2) is expressed to be ‘For the purposes of subsection (1).’ The precise purposes of sub-s (1) are not easy to discern. In BP Australia Ltd v Brown,[13] Spigelman CJ said:
It is difficult to identify a single overriding rationale for the various kinds of transactions which are susceptible to avoidance. (See generally A R Keay, Avoidance Provisions in Insolvency Law, (1997) Sydney, LBC, Ch 3.) Nevertheless, there do appear to be two distinct focal points of attention. With respect to preferences, the focus of attention is upon the interrelationship of creditors inter se. With respect to uncommercial transactions and unfair loans, the focus of attention is on the relationship between the debtor company and the rights and interests of those who have had commercial dealings with it, including, but not limited to, creditors.
In the case of preferences and many uncommercial transactions, the longstanding principle of equality between creditors applies. (See for example the observations in Ferrier and Knight v Civil Aviation Authority (1994) 55 FCR 28 at 42–43, observations not affected by the judgment of the High Court on appeal.) Equality, as the foundation principle for the law of preference recapture, was expressed in the statement of principles adopted by the Harmer Report at par 33 in the following terms: “The principle of equal sharing between creditors should be retained and in some areas reinforced”.
[13] (2003) 58 NSWLR 322 at [92]-[93].
It seems to me that s 588FA(2) might be one of those reinforcements of what is known as the ‘pari passu’ principle, that is, the principle of equality between creditors.
Walsh v Natra involved a series of payments to a creditor in similar circumstances to those in which the payments were made here. The issue in that case was the interpretation of s 588FA(1)(b); that is, whether in receiving payment for an unsecured debt, the creditor received more than it would have received if the transaction was set aside and the creditor proved for the debt in the winding up.
It was submitted on behalf of the creditor that the date on which that calculation should be made is the date on which the payment was made – so that on the date of each payment, the calculation should be made in the context of a notional winding up on that date. There were eleven such payments.

Phillips JA, with whom Charles JA agreed, said:[14]
Again I think that the submission on behalf of Natra must be rejected. In my opinion s 588FA(1)(b) does not require consideration of a hypothetical winding up as at the date of the payment which is impugned. The comparison it draws is between the amount which the creditor receives by way of the impugned payment and the probable return to the creditor if that transaction were set aside and the creditor proved instead in “a winding up”. Why should that not be taken at face value? … I see no reason not to conclude that the best evidence of what a creditor would receive in “a winding up” is what unsecured creditors did receive in the winding up that followed and which has given rise to the proceeding in which the transaction under scrutiny is impugned.
[14] at [31].
Callaway JA said:
Section 588FA is expressly directed to “unfair preferences”. Its purpose is to prevent a creditor from obtaining an unfair advantage by receiving more than the creditor would receive in the winding up if the transaction were avoided. The test of unfairness is not a hypothetical winding up that did not take place but the advantage in fact gained over other unsecured creditors in the actual winding up.
Walsh v Natra was followed in Tolcher v Capital Finance[15] and by the Queensland Court of Appeal in Williams v Peters.[16]
[15] (2006) 60 ACSR 584 at [40].
[16] (2009) 232 FLR 98 at [6] per McMurdo P, [45] per Muir JA.
In Williams v Peters, Muir JA said, at [51]:
This Court should not depart from the construction of the subject provision determined in Walsh v Natra Pty Ltd unless of opinion that the decision is clearly wrong and in my respectful opinion that is not the case.
[Citation omitted]
Mr Douglas submitted that, for the same reasons, I should also follow Walsh v Natra (see Farah Constructions Pty Ltd v Say-Dee Pty Ltd,[17] Australian Securities Commission v Marlborough Gold Mines Ltd[18]). He submitted that it would be ‘bizarre’ if s 558FA(2) should be read differently from sub-s (1), since sub-s (2) is stated to be ‘For the purposes of subsection (1).’
[17] (2007) 230 CLR 89.
[18] (1993) 177 CLR 485.
If I were construing s 588FA(1)(b), I would, of course, follow Walsh v Natra and the cases which followed it. I am construing a different subsection and I am therefore not obliged to follow those cases if their only relevance is by analogy. However, I acknowledge the strength of Mr Douglas’ argument. Indeed, I think it is correct.
Mr Riggall sought to distinguish this line of cases on the basis that they all involved instances where the creditor had only a partial security. He argued that in this case the defendant had full security for its loan because, at the time the security was created, it was intended by the creditor that the value of the assets provided full security for the money lent. He submitted that a creditor with full security avoids the application of s 588FA(2).
I do not accept that argument. There is no warrant for the interpretation of s 588FA(2) in that way.
Mr Riggall then argued that the only time that the status of the creditor as fully secured can be determined is when the security is given. Hence, the appropriate assessment date is the date the security is given. I do not accept that such a conclusion follows as a matter of logic. There is no reason why the status of the creditor cannot be determined at the date of winding up, if that is what the sub-section requires.
For the reasons I expressed earlier, the question of full or partial security is irrelevant. No matter whether the security is full or partial, the debt is deemed by s 588FA(2) to be unsecured if the condition therein is met.
For the same reason, it is also irrelevant that the impugned payments came from secured property.
Mr Riggall argued that the decision in VR Dye & Co. v Peninsula Hotels[19] is authority for the proposition that the new provisions were not intended to be significantly different from the provisions in s 122 of the Bankruptcy Act 1966 (Cth). That section also applied to corporations pursuant to s 565 of the Corporations Law prior to the enactment of Part 5.7B, including s 588FA, in 1992. However, VR Dye concerned only the definition of an unfair preference under s 588FA(1). That is not in contention here. Section 588FA(2) was entirely new and its provisions were not under consideration in that case.
[19] (1999) 150 FLR 307.
Mr Riggall submitted that the decision in Wily v St George[20] supports his argument. The events under discussion in that case occurred prior to the enactment of s 588FA in 1992. That was a case which involved the interpretation of s 122 of the Bankruptcy Act.
[20] (1999) 84 FCR 423.
Section 122 did not contain an equivalent provision to s 588FA(2). Wily was decided on the basis that certain impugned payments were made from the proceeds of the sale of property which was the subject of a fixed charge. Finkelstein J held that these payments were not recoverable by the liquidator as preferences, since the security was effective to prevent the operation of s 122. The remaining payments were from assets which were the subject of a floating charge, which had not crystallised at the time of payment. The issue was whether the second category of payment was the subject of a secured debt and hence not recoverable by the liquidator (see [24]).
At [51], Finkelstein J observed that if the floating charge had not crystallised, and the creditor was unsecured, the question of whether a preference was given must be determined ‘on the basis of their likely position in a hypothetical bankruptcy or winding up at the time of payment.’ His Honour said, at [52]:
Accordingly, the position of the Bank must be determined as if Space Made was wound up when the three payments were made. On that assumption the floating charge would have crystallised, that is become a fixed charge … with the consequence that the property the subject of the charge would not be available for the general body of unsecured creditors. In that event the three payments to the Bank could not be regarded as preferential.
[Citations omitted]
The grounds on which Wily should be distinguished from this case become immediately apparent. Finkelstein J’s decision is based upon a finding that the payments in the second category were in relation to a secured debt, and hence immune from the operation of s 122 of the Bankruptcy Act. Section 588FA(2) renders that consideration irrelevant, because it deems what was secured to be unsecured if the stipulated condition exists.
For the same reason, the judgment of the Victorian Supreme Court in VR Dye does not assist here. It, too, was concerned with the definition of a secured debt, and whether s 588FA(1) had a different operation from s 122 of the Bankruptcy Act.
The decision in Wily is therefore of no assistance in answering the question before me.
Finally, Finkelstein J’s decision was distinguished by Phillips JA in Walsh v Natra on the basis that the language of s 122 of the Bankruptcy Act was materially different from that of s 588FA(1) and did not lead to the conclusion that under s 588FA(1) a notional winding up on the date of each payout was called for (see [34]).
Mr Riggall’s other submissions centred around the difficulties which would be created for lenders if the plaintiff’s interpretation of s 588FA(2) was adopted. He referred to the ‘brutality’ of the plaintiff’s interpretation. His written submissions included:
10.The alternative too is that if secured creditors are at risk of competing for their security not only with defined debenture priorities but also with unsecured creditors then they would be obliged to go to the expense of assessing their security much more pessimistically, would be much less likely to lend and would be more like [sic] to call in the security early and in circumstances which might destroy the prospects of an otherwise healthy business. This would be against both public policy and commercial common sense.
…
40.Parliament cannot have intended to make the security in existence at the time of payment retrospectively less valuable.
There is no indication from extrinsic material as to the intention of the legislature when s 588FA(2) was enacted. I am entitled to consider such material by virtue of s 15AB of the Acts Interpretation Act 1901 (Cth). However, the Explanatory Memorandum produced by the Attorney-General at the time of the 1992 amendments is silent on the operation of s 588FA(2). The reference at [1042] appears to be erroneous, having regard to the context. The reference is clearly to s 588FA(3).
I am left with the text of the subsection and the context in which it appears. It is clear to me from the text of the sub-section that its purpose is to prevent a creditor from retaining that part of an otherwise secured payment to the extent that the security no longer has value.
I have no basis to conclude that the legislature had an intention other than to achieve that result, and to that extent I am bound to enforce it.
As to the issue of fairness, I observe that s 588FG(2) gives protection to transactions which might otherwise be voidable provided:
·the transaction is not an unfair loan to the company;
·the person became a party to the transaction in good faith;
·at that time the person had no reasonable grounds for suspecting that the company was insolvent or would become insolvent;
·a reasonable person in the person’s circumstances would have had no such grounds for so suspecting; and
·the person has provided valuable consideration under the transaction or has changed his or her position in reliance on the transaction.
It is apparent that the legislature considered such protection sufficient.
Conclusion
The answer to the preliminary question posed is:
For the purposes of s 588FA(2) of the Corporations Act, the time to assess the value of the security is the date of the winding up of the debtor company.