Metal Manufactures Pty Limited v Gavin Morton as liquidator of MJ Woodman Electrical Contractors Pty Ltd (in liquidation) & Anor

[2022] HCATrans 166

[2022] HCATrans 166

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Brisbane  No B19 of 2022

B e t w e e n -

METAL MANUFACTURES PTY LIMITED (ACN 003 762 641)

Appellant

and

GAVIN MORTON AS LIQUIDATOR OF MJ WOODMAN ELECTRICAL CONTRACTORS PTY LTD (IN LIQUIDATION) (ACN 602 067 863)

First Respondent

MJ WOODMAN ELECTRICAL CONTRACTORS PTY LTD (IN LIQUIDATION) (ACN 602 067 863)

Second Respondent

KIEFEL CJ
GAGELER J
GORDON J
EDELMAN J
STEWARD J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON WEDNESDAY, 12 OCTOBER 2022, AT 10.03 AM

Copyright in the High Court of Australia

MR J.T. GLEESON, SC:   May it please the Court.  I appear with MR G.P. McNALLY, SC and MR J.W. POKONEY for the appellant.  (instructed by Breene & Breene Solicitors)

MR J.D. McKENNA, KC:   May it please the Court.  I appear with MR P.E. O’BRIEN for the respondents.  (instructed by Taylor David Lawyers)

KIEFEL CJ:   Yes, Mr Gleeson.  I believe there is an application to correct the appellant’s name on the Court file.

MR GLEESON:   I keep making the mistake, your Honour.  I make the application to correct “Manufacturers” to “Manufactures”, r‑e‑s.

KIEFEL CJ:   It is obviously not opposed; it is a matter of correction, and the affidavit of Mr Breene deposed as to the need for it.  The amendment will be made of the order to that effect.

MR GLEESON:   Thank you, your Honours.  Your Honours, could I commence with an observation about the issues before you.  As indicated in our outline at paragraph 2, the issue, at its narrowest, is whether the Full Court erred in its answer to the question set out at page 15 of the book, which is where the statutory set‑off under section 553C of the Corporations Act 2001 is available to my client as the defendant in this proceeding, against the plaintiff’s claim as a liquidator, for the recovering of an unfair preference under 588FA. The reference to “in this proceeding” in the question picks up the agreed facts in the amended special case, at pages 6 to 8.

So, at its narrowest, we will be addressing whether, when the liquidator seeks an order under section 588FF(1)(a) for the creditor to repay money to the company – that is the terms of the order – in respect of a pre‑liquidation transaction that satisfies the conditions for three matters:  firstly, if it is an unfair preference, that is section 588FA; secondly, it is an insolvent transaction, 588FC; and thirdly, it is a voidable transaction, 588FE.  In those circumstances, can the creditor rely upon section 553C to set‑off a trading debt due from the company to the creditor which is wholly separate from the debt underlying the unfair preference.  That is the issue at its narrowest.

Where the parties depart and where we assert the Full Court erred in principle is the Full Court said one can look at unfair preferences and set‑off and forget what is happening under every other recovery provision in the Corporations Act, whether antecedent or post‑liquidation recovery proceedings.  That is because the Full Court said you can distinguish the other provisions as a matter of purpose and whether the line of cases on those other provisions, all of which are our way, are correct can be left for another day.  Now, we submit that is an error in principle.  The Act needs to be looked at coherently.  As I will show you in a moment hopefully, all the recovery provisions follow a relatively common format and they all serve the same broad purpose, and the answer must be the same in respect to all of them.  So, as we would put it, the line of cases – Re Parker, Buzzle, Hall v Poolman, Melrose Cranes, Shirlaw – they are either right or they are wrong.  We would ask your Honours, ultimately, to look at the case in that broader framework.

Your Honours, as to paragraph 3 of our outline, there are four aspects of the scheme that, we submit, are important in understanding and giving a coherent interpretation to the questions before you.  The first, is to be perfectly clear on what role the liquidator has in respect to the property of the company.  I will be going to Linter Textiles for that purpose.  The second, is to understand exactly how the pari passu principle fits into the equation.  The third, will be to look in some detail – more detail that the Full Court did – at the structure of each of the recovery provisions which, we submit, in every case contains a relevant contingency which is capable of satisfying mutuality.  Fourthly, to work out where set‑off fits in relation to these provisions.

If that is convenient, your Honours, could I ask you first to go to Linter Textiles, which is at tab 16 in volume 3. A decision of the Court in 2005, in a context as seen from paragraphs 4 to 8 of the plurality judgment, and the supporting footnotes which spanned both the former Companies Code regime and the Corporations Law.  What is important about Linter is that Linter was the clear marker that Australian law fundamentally differs from English law in relation to the role of a liquidator in respect to the property of a company.

The precise issue in the case is a tax issue.  It is adequately covered in the headnote that the question of carry‑forward losses depended upon a continuity of beneficial ownership of the shares between the loss year and the tax year.  In that context, the argument that Mr Aldridge put for the Commissioner, which is seen at page 595, at about point 5, was to urge that the English authorities in Ayerst, Oriental Steam, and so on should be recognised to come to a conclusion that once the company goes into liquidation, it no longer owns its property beneficially. That is the argument the Court considered and rather squarely rejected in the analysis that runs following paragraphs 4 to 8, but most particularly in the sections between paragraphs 21 through to 49.

If I could just pick it up at 49, adopting what Justice Menzies had said in Franklin’s, when the company goes into liquidation, there is no trust engaged.  Of course, the assets must be held for the purpose of liquidation in accordance with the statute, but the company beneficially remains the owner of the whole of its property.

To similar effect, Justice McHugh addressed the matter in some detail between paragraphs 127 and 130.  Now, where that leads us is firstly, that English authorities, which continue to employ the notion of the liquidator holding the property on a form of trust and not good law in Australia; and secondly, there is a fundamental distinction between bankruptcy where the property vests in the trustee under section 58 of the Bankruptcy Act and liquidation, where all properties remains beneficially the property of the company under the control of the liquidator for the purpose of administration in accordance with the law.

Your Honours, why I have commenced at that point, which might seem straightforward, is simply this:  we submit that every bit of property or money that the liquidator gets in – whether it is a bank account, proceeds of a sale of an asset, proceeds of a common law or equitable claim, or a statutory recovery – goes into a fund, which is the property of the company beneficially, which the liquidator, as agent of the company, administers in accordance with the rules laid down by the statute.

So the proceeds of any form of recovery, whether it is unfair preference, insolvent trading, any of them, sits vis‑à‑vis the liquidator and the company in exactly the same character as every other aspect that has got in in the liquidation.  Now, if that proposition is correct, it at least raises a question whether the distinctions, which the Chief Justice has sought to draw below, are cogent ones.

GORDON J:   Can I just ask you what you mean by that, please?  When you say distinctions, which ones you are referring to.

MR GLEESON:   Well, when his Honour said he is bound by Linter and so he accepts the property is beneficially owned by the company, and he accepts in Australia there is no trust for the creditors; he accepts those two propositions, but then goes on to say something different is happening with an unfair preference recovery action because that money is somehow received by the liquidator charged with a different beneficial interest which his Honour describes as the interest of the administration of the estate and paying the unsecured creditors.  So his Honour says, well, there is equity and there is equity; there is beneficial interests and beneficial interests, and so when we come to mutuality we are not interested in what we would ordinarily regard as the beneficial interest under the rules of equity; we are interested in something broader.

We where submit, fundamentally, all that goes wrong is that, in respect to every bit of property and money that has got in – whether it is through a preference or anything else – it is in the same fund and it is applied in accordance with the same set of rules.  Those rules might have some variations to them to meet particular situations, but it is a singular set of rules found in the Corporations Act and, perhaps, supplemented by some general law principle, such as how securities intersect with the provisions in the Corporations Act.

           What his Honour was at pains to do was to say that unfair preferences are different because this money is somehow, in some broader equitable sense – not a beneficial sense of a traditional nature – charged with a very special type of administration and that destroys mutuality.  We submit that just misunderstands the basic principles I have just been to.

GAGELER J:   Part of his Honour’s concern, as I read him, was that there is something very odd about the recipient of an unfair preference being able to improve its position up as against other creditors by using a set‑off.

MR GLEESON:   Yes.

GAGELER J:   That pervades his judgment.

MR GLEESON:   It does.  Then, it is a question of whether that concern is (a) valid and (b) reflected in the Corporations Act.  This is the second main error we submit his Honour made.  His Honour attempted to – and the respondent defends this; it is in their outline – somehow see set‑off as a part of the pari passu principle in ensuring equality of distribution of the estate between creditors.  He was at great pains to try and explain how fairness and justice work together in these two principles.

However, the position with set‑off is that set‑off reflects a fundamentally different type of equity.  It is an equity which qualifies the company’s claim to get back some money – on whatever ground – and it is, therefore, necessarily at tension with the primary pari passu principle but, rightly so, because it is reflecting a different equity.  That is true of all set‑off.  If and whenever a set‑off is allowed, it has that effect.  That point – if your Honours have Professor Goode’s discussion on this, which is in tab 65, in volume 7, page 1917, Professor Goode says, at about point 3, that:

The right of set‑off on insolvency represents a major incursion into the pari passu principle, for its effect is that –

Then, Professor Goode sets out the effect.

GAGELER J:   Could you give us the page again please, Mr Gleeson?

MR GLEESON:   Yes.  It is page 1917.

GAGELER J:   Thank you.

MR GLEESON:   So Professor Goode’s first statement of set‑off – that is, any set‑off in insolvency, whether it is the one we seek or another one – is that it is a major incursion into pari passu for the reason stated, which is that it enables you to ensure that your claim is paid pro tanto ahead of other creditors.  That is exactly what set‑off does.  So his Honour’s attempt to say that you can never have a set‑off if you are creating an incursion into pari passu is contrary to the very nature of set‑off.

We would also draw attention to footnote 33, that Professor Goode said another way of approaching it – and we actually commend footnote 33 and we put this below squarely, this argument – is it is not a true exception to pari passu.  It is, rather:

an equity qualifying the claim of the company in liquidation, so that only what is left after allowing for the set‑off represents an asset available for distribution among the general body of creditors.

That, we submit, is the true nature of set‑off.  It goes to help ascertain what is the pool, which will then be applied under the rules, and it may, depending on the circumstances, also determine what are the claims on the pool.  So, in the present case, if we are allowed set‑off, the pool is smaller, yes, but our claim on the pool is also smaller, and so the set‑off has ascertained both those matters I have mentioned.

GAGELER J:   Mr Gleeson, when you start justifying set‑off in terms of fairness and equity, as you have, it is not hard to treat an unfair preference as in, at least potentially, in a different category from other forms of recovery.

GORDON J:   That is where I was going.  Is it not that have to start with the statute, even on your own argument ‑ ‑ ‑

MR GLEESON:   Yes, you have to start with the statute.

GORDON J:   ‑ ‑ ‑ because at the moment you have a number of concepts which, at the moment, are sitting there but not addressed, with respect. 

MR GLEESON:   Yes, that is what I am coming to, your Honour.

GORDON J:   One is mutuality, which underpins so much of what you have just put to us, I think.

MR GLEESON:   So can I just complete the topics.

GORDON J:   Can I complete that?  Because that is what Justice Menzies is talking about in that passage that you cited in Linter which was quoted.  It is the statutory framework which sets this up.

MR GLEESON:   It is.  So, your Honours, I have said what I want to say about the role of the liquidator of the company’s property.  That was our first sub-topic within proposition three.  The second sub-topic is the pari passu principle itself.

STEWARD J: Just before you go onto that, Mr Gleeson, the impression one gets from reading the judgment of the Full Court is that, in relation to the issue of mutuality, the funds here that need to be repaid by the creditor are necessarily imprest with a destination, namely creditors, and after creditors, members. I just wonder whether that was necessarily so, given that under section 482 of the Corporations Act you can apply to have a liquidation terminated, in which case the funds would then be available for the company to be used in an ongoing business.

MR GLEESON:   Your Honour, with respect, that is correct. Section 482 if but one of a series of examples which illustrate that the funds, under the whole scheme, could go in a whole series of directions.

STEWARD J:   Yes.

MR GLEESON:   It is perhaps the clearest example, but let us take another example.  Even on the authority of Kratzmann’s Case in this Court, which has been questioned, if the recovery of the preference is in specie, it can go under the floating charge.  So that is an example where it can go somewhere else.

It is accepted – and this is the statutory point I was going to come to now, that if your Honours have the Act which is in the book – it is in volume 1, tab 6.  This is the current version that the parties agree it is, materially, the version at the relevant date.  If we start at section 553, page 258, we have got the concept of the claims which were admissible to proof, including contingent claims.  I will come back to the set‑off under 553C.  We have then got the pari passu principle in section 555.  Your Honours see there the reference that:

if the property of the company is insufficient to meet them in full, they must be paid proportionately.

That property of the company includes the proceeds of a preference claim or any other recovery claim.

Then, under section 556, we have the priority payments.  If I just focus on paragraph 1(a), the liquidator’s expenses in getting in the property of the company:

or in carrying on the company’s business –

are to be paid first out of the fund.  The fund includes the proceeds of the preference, and the liquidator can resort to the fund for the expenses of carrying on business, if that is being done, and for the expenses of the preference claim itself.

In that sense, the proceeds of the preference claim are no different to any other property of the company.  Your Honours will see throughout the statutory order in section 556, repeated references to the property of the company; for example, paragraph (da) and (db), which cross‑refer to various other provisions which allow for things to be paid out of the property of the company and that it can include the proceeds of the preference claim.

Just to complete these provisions, in section 559 we again see the reference to “the property of the company”.  As one goes down each level of the order, one applies the property of the company, including the proceeds of the preference claim, either in full or proportionately.  At 561, we see another aspect of the priority, that in certain circumstances, the employees’ claims under 556(1)(e), (g), or (h) are to be paid ahead of the holder of the floating charge, even if the property is otherwise subject to the charge.  In the Kratzmann situation, where the property got back in is in specie and the chargee would ordinarily be able to claim it ahead of the rest of the creditors, there is a particular priority being given here to the employees.

The point I am seeking to make is simply that all preference proceeds, like everything else, come into the same fund, and like all other aspects of the fund they are applied in accordance with these rules which are in the statute or supplemented by the general law.

GORDON J:   It is not really the question posed by the issue in front of us, is it?

MR GLEESON:   In this sense it is, your Honour, because the Chief Justice said, I can put aside every other recovery provision because they are different.  Preferences are somehow special, and with a preference you simply must restore the fund in full.  You can then prove for your debt ‑ ‑ ‑

GORDON J:   The statute says you must.

MR GLEESON:   Then we read together how 588FF works with set‑off.  Your Honours, that is what I wanted to say about the pari passu ‑ ‑ ‑

GORDON J:   I had understood that the real issue between you was this question of mutuality.

MR GLEESON:   It is, but my submission is these are the building blocks to understand how the recoveries of the preference claim sit in pari materia with every other bit of property coming into the liquidator, and that is going to be critical to mutuality because his Honour thought the fact that it is the liquidator suing, the fact that you cannot sue until there is a liquidation ‑ ‑ ‑

GORDON J:   Well, he says – I think the critical paragraph is paragraph 7, where he sets out his list of lack of mutuality.

MR GLEESON:   Yes.  They are the two paragraphs I have got to get to.

GORDON J:   Then I think at 153 and 154 at the back end.

MR GLEESON:   Yes.  So, I am coming as quickly as I can.

STEWARD J:   Sorry to interrupt you.  Your point here is that the complaints about fairness and equity are substantially complaints about those who are entitled to a set‑off who are unsecured.

MR GLEESON:   Yes.

STEWARD J:   They all get a preference.

MR GLEESON:   Anyone who has the benefit of a set‑off benefits from the incursion into pari passu.  It is not peculiar to unfair preference.  Your Honours, the third subtopic in proposition 3 was to look more closely at the recovery provisions for antecedent and post‑liquidation transactions, and I seek to do this in particular with respect to paragraph 7 of the judgment, particularly the second proposition, that there cannot be mutuality because there is no contingent interest in the company and no contingent obligation in the creditor, and that destroys mutuality.  His Honour later says, it may well be different with every other recovery provision.

What I want to show is all the recovery provisions operate in the same way, and they all have the same contingency attached to them.  So, if your Honours could go to 588FA, we have the elements for an unfair preference, which involves a transaction between the company and a creditor – perhaps another- which has a particular result:  that the creditor receives more in respect of the unsecured debt than it would in a hypothetical where the transaction was set aside and the creditor proved in a winding‑up.

Just pausing there, your Honours, there is a question of construction whether you do the hypothetical at the date of receipt.  Strictly, you should because that is what the statute says.  In practice, some of the cases have looked at the actual winding‑up, which may be useful proof.  But strictly, at the date I receive either the property or the money the question is:  have I got more than I would have got if the transaction was set aside and I had to prove?  So that first condition is either true or false at the date of the transaction, preferably or certainly no later than the date of the winding‑up.

Under 588FB, your Honours see the definition of an uncommercial transaction, and again that is established at the date of the transaction.  Then those two categories – unfair preference and uncommercial transactions – are brought together under 588FC as insolvent transactions if a further condition is met, which is that the company is insolvent or becomes insolvent because of the transaction.

Pausing there, that means that unfair preferences and uncommercial transactions, which are brought together as insolvent transactions, must stand in the same category in respect to set‑off.  So, the first two conditions are satisfied for a contingent claim.  We then have some other transactions which may also lead to relief:  unfair loans, unreasonable director‑ related transactions, creditor‑defeating dispositions, and so on.

Now, just pausing there and coming to your Honour Justice Gageler’s question, unfair preference provisions do not sit in some singular universe where they have a wholly different purpose.  All of these provisions are fundamentally directed to the same ultimate purpose, which is that a transaction has occurred prior to the winding‑up, which is deemed by the standards of the law to interfere in some way with what is ultimately to be an orderly winding‑up.  And they may interfere in different ways.  So preference interferes by taking more than you should get for your debt.  The uncommercial transaction interferes.  Why?  Because the company will have greater liabilities than it should have, had it acted properly.   The unfair loan interferes.  Why?  Because the company will be paying too much interest.

So, in the first case, what the transaction is doing is depleting the fund that should be there.  In the other cases, the transaction may be increasing the liabilities.

GORDON J:   Is that not a justification for the distinction between the three categories, where the consequence of the unwind is different?

MR GLEESON:   No, your Honour.  I submit it is the exact opposite.  With the unfair preference, yes, the consequence of the unwind is to say that there were $100 in the fund; $50 got paid out, put the $50 back in; the fund is back at 100.  With each of these other transactions, what they are saying is, the fund was $100 – the fund may still be $100, but the claims that should properly have been made on the fund should have been $200, but now they are $400.  And the effect of them being $400 is ultimately the same for those who are standing to claim on the fund, because their claims will have to be pro rata.

GORDON J:   It may not be in this to this extent.  It may be that in relation to uncommercial transactions, that it is removing a liability off the balance sheet.

MR GLEESON:   It could also be that ‑ ‑ ‑ 

GORDON J:   In other words, the company balance says, owes debt of X for whatever, which is ongoing ‑ ‑ ‑ 

MR GLEESON:   With respect, your Honour is correct.  I have taken a very simple and commercial transaction.  A very simple unfair loan is the interest bill is now $10 million, when it should have been $5 million, and the effect of that is everyone who is claiming on the fund will stand to get less.  The point I am seeking to make is, his Honour has a focus on depletion of the fund, but if the ultimate purpose is ensuring pari passu distribution in accordance with the order of priorities, we must take into account increase in the claims of the fund, which is being reversed.

So, your Honours, I am down to the satisfaction of the second condition, which is an insolvent transaction, 588FC.  There is only one further condition that is necessary to make the transaction voidable, and that is under 588FE.  Your Honours will have observed that under 588FE there are a series of conditions – alternative conditions – for making a transaction voidable, which are largely referrable to when the transaction occurred referrable to the winding‑up.  So, in the simplest case – subsection (2), if:

it is an insolvent transaction –

that is, an “unfair preference” or “uncommercial transaction”, and it is done within six months before the relevant date for the winding‑up, it is voidable.

Just pausing on that one.  It is correct that the company going into the winding‑up is a necessary condition for this cause of action to complete.  So, if you have an unfair preference and the company in fact never goes into liquidation because things improve or a white knight comes along, the claim will never materialise.  So, the third condition to be satisfied is the company must go into winding‑up within a defined period.  That is the simplest period.  Passing over quite a bit of detail, under subsection (4), if:

(a)it is an insolvent transaction of the company; and

(b)a related entity of the company is a party to it –

it is a four‑year period.

Subsection (5):  if it is a Statute of Elizabeth transaction, it is a 10‑year period.  And then there are different periods for each type of transaction.  So, what we get from this structurally, is the Parliament has said, we have got a range of transactions which, in various senses, interfere with the proper administration of liquidation.  We will set down the conditions for them to be voidable and we will determine the period in which the liquidation must occur, but if those three conditions are met, the transaction as between company and party is voidable.

Now, your Honours will recall the Chief Justice in places emphasised that when the payment of the preference is made it discharges the debt, and he seemed there to be invoking ordinary principles of law as to discharge of a debt.  What these provisions are telling us is that from the moment my client got the payment of the debt, even if there was a discharge at general law, it was subject to a statutory contingency that the discharge as between company and creditor may be reversed.

GORDON J:   That contingency did not arise, did it, until the conditions were satisfied, and those conditions included the winding‑up order plus another contingency I might come to, I think, included not only the winding‑up order, but the date of insolvency being identified, so you could have a period on an insolvent transaction.  It may not be the whole of the relation to that period.  It might be a period in between that the company became insolvent.  So you do not even know that.  You do not know that fact until after the appointment of a liquidator and often sometimes considerable period after the appointment of the liquidator or the winding‑up of the company.  Then you have the election point.

MR GLEESON:   We agree entirely with that, your Honour.  What I am at pains to do is to say from the moment the transaction is entered – the receipt of the money, the uncommercial transaction, the unfair loan – if the first set of conditions I have identified exist, you are exposed to the possibility that the transaction may ultimately be reversed, and in that sense, you have a contingent liability as a company.  So the first set of conditions concern the circumstances of the date it is entered.  The second set of conditions concern whether you are insolvent or not at that time.  The third set of conditions concern exactly as your Honour has put to me, with respect – does the company ever go into liquidation and when, relevant to the transaction?  But that is true of every provision I have taken you to in Part 5.7B.  If the company does not go into liquidation within the right time or at all, none of these transactions are voidable.

EDELMAN J:   One might think of the ability of a party to avoid a transaction on the basis that the transfer of a benefit was vitiated for whatever reason in equity or at common law as giving rise to a liability subject to similar contingencies, including the election by the party with the power to avoid the transaction and associated contingencies, such as the ability to undo the transaction or make counter‑restitution, and so on.  Is there any authority that permits avoidance of a transaction to be set‑off against a previous debt?

MR GLEESON:   I will be coming to Hiley which is perilously close to that, because in Hiley, at the date of the liquidation, the mortgage had been lost from the company and transferred two steps away to a bank.  So, the liquidator, in the course of the liquidation, had to set aside that mortgage, get the property back in and, having got it back in, then the set‑off occurred.  Chief Justice Latham, in dissent, took the sort of reasoning the Full Court took here and said, no, you cannot have set‑off because that is new steps in the liquidation.  The majority of the Court said that is the working‑out of the rights – contingent they may be – at the date of the liquidation.

So, our proposition is – pausing where we are at section 588FE – that is the third of the critical set of conditions.  If the company does not go into winding‑up, this contingency has never materialised into a claim.  If it does not go into winding‑up within the right period, likewise, but if it does, the third condition is met and, at that point, the transaction is voidable.  So, on the moment the company goes into liquidation, objectively all the things have occurred to crystallise the claim.

GORDON J:   No.  Have they?

MR GLEESON:   To crystallise the claim, and from that point, it is a matter of ‑ ‑ ‑

GORDON J:   To crystallise the claim, you say, is a contingent liability.  Sorry, I just need to be precise about what you say is the claim that is crystallised upon the winding‑up.

MR GLEESON:   Yes.  I will try and put it precisely.  From the moment of the winding‑up, as between the company and the creditor, or the third party, the underlying payment or transaction is liable to be avoided and reversed by a court order.  If you were doing the accounts on the date of the winding‑up, your Honour, and, objectively, one knew the answer to these questions, you would say that is a contingent liability that has to be provided for because the only thing I am now awaiting is, will the liquidator sue and will the court then make the order which will follow as a matter of course – subject to defences.

So, at the date of the winding‑up, if these three conditions are being met as between the company – not just the liquidator, but as between the company and the creditor, or the third party, the payment or transaction is liable to be avoided or reversed.  Then, what your Honours see in section 588FF is one of the critical Harmer reforms in 1992.  Prior to 1992, in a fairly crude and unsatisfactory way, the Corporations Law applied by analogy the provisions in bankruptcy, as your Honours know, so the transaction was said to be void against the liquidator.  Then, one had to resort to the general law if money had not received or restitution to try and fashion the order.

The point of 588FF was to create greater remedial flexibility where the Court could, in response to the voidable nature of the transaction, make the appropriate order responding to its character.  Your Honours see under 588FF(1)(a) the order could be:

to pay to the company an amount equal to some or all of the money that the company has paid under the transaction –

So it is not necessarily all; it could be some.  Under (b):

an order directing a person to transfer to the company property that the company has transferred under the transaction –

Your Honours see that with each of these provisions – or most of them – the order is made to the company.  What has happened is the transaction by statute has been rendered voidable between the company and the third party, and the remedy is a remedy to the company.  That is a critical statutory point which is in this scheme, which is not self‑evidently clear in some of the earlier cases, because in the cases that were dealing with voidance against the liquidator, at one point in time the order was made to repay to the liquidator.  That is what happened in Kratzmann.  Then, this Court in the Octavo decision framed the order as payment to the company, and that now is the statutory mandate.

We would pose this simple question, your Honours:  if an order is made under 588FF(1)(a) to repay money to the company, does that become property of the company which is to be applied under the statutory regime?  Yes.  Is it beneficially owned by the company?  Yes.  Has the liquidator got that money in as agent of the company?  Yes.  The defences are in 588FG – we do not need to go to them.

Section 588FI is relied upon against us.  We say that section has a confined piece of work to do.  Under paragraph (1)(b), it applies in three cases and their alternatives:  if you are asked by a liquidator; or if the court order is made; or if, for any other reason, the creditor has put the company in the position as if the transaction had not been entered.  Then two things follow:  orders cannot be made against your by ASIC or the court, and you may proof as if the transaction had not been entered into.

So, what that means is, in an ordinary straightforward case where there is no question of set‑off, but you have received a $100 preference, if you reverse that preference, which you may do before a winding-up – because it says “for any other reason”.  If you reverse the preference, then the court cannot make orders against you and you can prove for the $100. That is all it says.  It does not say anything about how preferences intersect with set‑off.

GORDON J:   It may recognise that the asset which existed before liquidation is no longer an asset which exists; namely, a debt owed by a creditor, because that has been discharged.  And what it is doing is creating a statutory fiction, because it is creating the ability of that person to, in effect, resurrect a debt which is gone in order to permit them to prove in the winding‑up.  So, what it does is it recognises, in effect – not dissimilar to ideas about mutuality – that there the thing which once existed has gone, it is no longer on the balance sheet, and I have then, in effect, got to create a statutory right to put it back on.

MR GLEESON:   Well, your Honour notes the words “for any other reason” and we would submit you could do this before or after liquidation.  If a transaction has occurred ‑ ‑ ‑

GORDON J:   My analysis, I think, works for all three circumstances, because it is the fiction which is creating and recognising that the thing which once existed no longer exists.

MR GLEESON:   But, perhaps, what it is also doing is recognising the contingency we reply upon, because the original transaction at law may have been complete.  This is saying if, by reason of court order or otherwise, the transaction is reversed, then the underlying debt revives.  So, it is establishing – confirming the contingency that the debt may revive.  Your Honours, can I then go to the insolvent trading provisions?

STEWARD J:   Just before you do so, Mr Gleeson, can I ask you this question:  is it critical to your case that you had, as at the date of the winding‑up, a contingent liability, or is it sufficient that you can simply say there has been a mutual dealing of some kind and there arises, during the course of the winding‑up, by reason of that, amounts that are due going in both directions?

MR GLEESON:   It is the latter, your Honour.

STEWARD J:  Yes, I see.  And the mutual dealing here is the original creation of – I do not know what was supplied on the facts here, but the pre‑existing trade which was paid?

MR GLEESON:   Yes.  The mutual dealing was sale and purchase of goods in trade giving rise to debts and giving rise to payment of one of the debts but not the other.

STEWARD J:  Yes.  I see.

MR GLEESON:   That is the mutual dealing we rely upon.  Then the question is:  what is due between the parties arising out of those mutual dealings?  And I will come to it, but just to deal with the question, as your Honours see from our outline at paragraphs 16 and 17 – perhaps starting at 15, the mutual dealings were:

the supply of goods . . . incurring of debts . . . payment of some but not all of those debts.

If there was a discharge of a debt of general law, it was always subject to contingency in the sense of possibility that if all the conditions existed the day of the winding‑up, you would have to reverse the payment and, therefore, you would have to take the account of what is due and under the account, as we submit at paragraph 17 – because the preference claim has not yet been determined – if that claim fails, the result is the company owes us $194,000.  If the preference claim is made good, we set‑off the separate debt of $190,000 due to us against the liability under 588F(1)(a) and we prove for $4,000 in the winding‑up.  That is ultimately where we seek to go.

GORDON J:   Can I ask one last question just about the date of the contingency?  Would you have to account for it in an accounting sense?  And what point do you say that you would have to account for it?

MR GLEESON:   If one has to look at it through that perspective, we would submit, yes.  If proper accounts were drawn at the date of winding‑up and if these conditions are met, you would have to say first condition, it was an unfair preference.  Second condition:  was the company insolvent at that time or became an insolvent?  That is an objective fact.  Third condition:  did the company go into liquidation within the six‑month period?

GORDON J:   Would that apply also to the company that is not in liquidation – the trader?

MR GLEESON:   Well, prior to – so that is the date of liquidation.  Proper accounts would say that ‑ ‑ ‑

GORDON J:   For the creditor.

MR GLEESON:   Proper accounts for the company at the date of liquidation would say the three objective conditions necessary for us to have to pay money have been met.  The only contingency left is the election of a liquidator, the court order ‑ ‑ ‑

GORDON J:   And the date of insolvency being identified.

MR GLEESON:   I have put that in the group of the conditions.  The three conditions lead up to the final condition which is a liquidation within the relevant period.  The second condition was insolvency at the date of the transaction and the first condition was unclear preference.  If they are all met, the company should say, Well, I may not have put 100 cents in the dollar on it because there is a slight chance a liquidator may not get funded and may not sue me, but that is the sort of claim which an accountant would say, yes, you have got to provide for.

It is a harder question, what happens when the company has not yet gone into liquidation, because at that stage you are more in the area of possibility and I would not go so far as to say you must account for it.  You may, but whether you do would involve significant judgment by the auditors and the company.

EDELMAN J:   The legal position tracks almost precisely the accounting position.  So, prior to the winding‑up, there is at best, I suppose, the possibility of a liability in the strict legal sense.

MR GLEESON:   Yes.

EDELMAN J:   And, at the date of winding‑up, there is a legal liability which is, of course, subject to contingencies including the election by the liquidator.

MR GLEESON:   Yes, and the legal liability is that that transaction – which in the past was closed and settled at general law – has now, based on the three objective conditions, been deemed by the law to be a voidable transaction.  So, you would provide for a sum of money to reflect the remaining contingencies which are now getting pretty real.

GAGELER J:   Mr Gleeson, I may be misunderstanding this but, as I read your paragraph 16 – you did jump ahead to it – you are relying on the contingency for the mutuality.  Is that so?  You get your dealings in paragraph 15, but they do not look mutual until you take the contingency into account.

MR GLEESON:   Your Honour, that is why jumping ahead is always a mistake because I have got to cover the propositions on mutuality in paragraphs 5 to 9.  One of those critical propositions – which is paragraph 7 – is that, while the dealings must exist at the date of the liquidation, mutuality is assessed by reference to the claims which have arisen from those dealings – is what this Court has said.  So, I will come to that.

One of the little tricky things in this area is, in one sense, section 533C reads as if it is self‑executing.  At the date of the winding‑up, if the dealings are mutual, you must do the account; if not, you do not.  That is one of the issues this Court has grappled with in the three cases I will come to because it is often only in the course of the winding‑up that one works through to the claims which have arisen from the dealings and one can then ascertain their mutual character.  What this Court has distinguished is between the case where, in the winding‑up, it is a wholly new transaction.  If the liquidator engages in a wholly new transaction with the creditor, of course there is no set‑off, but if the liquidator has to take steps which perfect complete bring into money form the matters which had arisen out of the dealings, that is consistent with mutuality.

Your Honours, could I just quickly go to the insolvent trading provisions, because we submit the same notion of contingency, possibility and mutuality will arise from these provisions.  They are in pari materia.  So, if I start with 588G(2), which is in division 3,  there is no doubt that this provision, as the Chief Justice says, recognises a wrong.  It is a contravention of the law to allow the company to incur a debt in certain circumstances and there can be consequences for contravention.

When it comes to compensation, section 588M(1), your Honours will see that there are three additional conditions that have to be satisfied before any liability for compensation can arise.  So there has to be the contravention, but if there is merely a contravention no compensation is every payable.  What you need next is that the creditor:

suffered loss or damage . . . because of the company’s insolvency –

You need the debt to be unsecured, and you need the company to be wound‑up.  So, if I am a director or a holding company permitting insolvent trading, while I have committed a wrong, I am not liable to pay any money unless these three further conditions are satisfied, including the company going into a winding‑up.

Then, over the page – sorry, pausing there, in terms of your Honour Justice Gordon’s questions about timing, with insolvent trading it can be a winding‑up at any time, there is no – but there is, of course, a statute of limitations in subsection (4).  So, no winding‑up, no liability.  Winding‑up, there is liability if the other conditions are met.  Under subsection (2), which is the critical one, the liquidator:

may recover from the director, as a debt due to the company, an amount equal to the amount of the loss or damage.

Your Honours see while the liquidator is the agent of the company suing, the remedy is a debt due to the company.  So the money that comes in – exactly the same as with the preference order under 588FF – becomes property of the company and dealt with under exactly the same scheme.

The Chief Justice went to great lengths to say that this is some different category and the Re Parker line of cases can all be ignored for two reasons, I think.  One was, well, this is about contraventions, and secondly, you can find a relevant contingency in this case, and perhaps thirdly, his Honour said, well, this is about a different purpose, this is not about reversing depletions to the pool.  None of those are points of distinction for the purpose of mutuality.  What your Honours in fact see is that the contravening director has to restore the pool by the amount of loss or damage suffered by the creditor.  So, if the insolvent trading allowed an extra debt of $100 to be incurred, and if the creditor was only to receive $1 in the winding‑up, the loss is $99.  It gets paid to the company and then, applied under the ordinary rules, it may end up going for the liquidator’s fees, exactly as with an unfair preference.

Your Honours, this is one of the fundamental changes again brought in by Harmer, which is why the earlier cases need to be looked at carefully.  Under the old insolvent trading, which is in the Companies Code, volume 2 of the materials, the debt had to be paid to the creditor.  Here, it is to paid to the company.

EDELMAN J:   There is, certainly in point of law, significant distinction between 588G read with 588M and a preference.  And that is, 588M and 588G are creating the duty, which arises at the date of winding up to repay, where it is only a mere liability or a contingent liability in relation to a voidable preference.

MR GLEESON:   Well, in this case, if each of those conditions is met under 588M, you have a liability to repay something only to the liquidator bringing the action.  That is correct.

EDELMAN J:   Although you say that 588M(2) is the same sort of power to bring an action; so there is no actual debt that is crystallised until the liquidator elects to recover.

MR GLEESON:   If the conditions are met, which in this case are the four conditions in 588M(1), then you have the liability, subject to liquidator suing, and you should provide for it in your accounts accordingly.  Your Honours, that is the director provision.  The holding provision in 588V follows the same format.  But could I draw attention to 588Y, which governs all these provisions.  What subsection (1) does is to say that if the money comes in under insolvent trading to the company, any rights that the secured creditor may have at general law to claim that money are deferred until the unsecured debts have been paid in full.  And under subsection (2), the Court can exclude the particular creditor from a share in the recovery if the creditor had knowledge, et cetera.

Conceptually, what is occurring on insolvent trading is the money is coming in; when it comes in, the fund is augmented, and it is then applied in the statutory order, subject to any modifications.  Coming back to your Honour Justice Gordon’s questions – is something fundamentally different occurring with insolvent trading as to what is occurring with unfair preference?  We would submit, not in the terms of this scheme.  If I take the $50 I should not have taken, I have to put them back in the fund under the unfair preference so that it can be applied properly for everyone.  But if I cause the company to incur extra debts that it should not have incurred, I have to put something extra into the fund again, so that the people who are sharing in the fund under the order do not suffer prejudice.

GORDON J:   Can I just ask about that in the context of what you just took us to?  I had understood 588Y to apply to amounts paid as compensation under J, K, M, and W.  Do you accept that?

MR GLEESON:   Yes.

GORDON J:   That means those which are identified in division 4.

MR GLEESON:   Yes.  And so I have taken you to two of those four, but the same applies to all four of them.  It is a recognition that this is property of the company, and it is telling you ‑ ‑ ‑

GORDON J:   I accept that, but do you accept that they are in a different category from that which we have been looking at earlier in terms of the way in which they are being addressed?

MR GLEESON:   No.  What has happened ‑ ‑ ‑

GORDON J:   Sorry, in these terms they are dealing with them as compensation under those provisions in division 4 as distinct from the ones we were looking at earlier.

MR GLEESON:   I accept their compensation for a wrong, whereas the earlier ones are what you might call reversing in payments following a voidance.  But what is happening in each case is that the fund is being restored to the condition which the statute says it should have been in in the interests of all of the people that might share in it.  That is the commonality.

GORDON J:   Thank you.

MR GLEESON:   Your Honours, there is a set of provisions, finally, before I come to set‑off, which you will find at page 356 of the book.  It is in schedule 2 to the Insolvency Practice Schedule (Corporations).  The respondent, in writing, had submitted that the ‑ ‑ ‑

KIEFEL CJ:   I am sorry, what was that provision, Mr Gleeson?

MR GLEESON:   It is division 100‑5.  The respondent had submitted in writing that the preference action can only ever be brought by the liquidator, it cannot be assigned, and that that somehow strengthens its arguments.  We drew attention to these provisions which were introduced by the Insolvency Law Reform Act (2016).  They took effect from the 1 March 2017.  They were in force at the date of our facts.  There is no relevant extrinsic material.  What they indicate is that the liquidator can assign any right to sue, whether for an unfair preference or otherwise.  That, we would submit, is really the clincher that ‑ ‑ ‑

KIEFEL CJ:   That is referring to it shows in action, is it not, not a claim under the statute.

MR GLEESON:   With respect, no, your Honour, the right to sue – the right under 588FF or the right under 588M or W – can be assigned, and so the person bringing the preference claim may be someone other than the liquidator for their own benefit.  Your Honours, could I then go to ‑ ‑ ‑

GORDON J:   I thought that was just for practical issues in the sense of sometimes it is easier for the creditor to themselves do it, and then there is an arrangement between in order to recover it.

MR GLEESON:   Your Honour, it was thought in some of the earlier cases that there may be a problem assigning preference claims.  So the deal between the liquidator and the secured creditor or the funder would have to be off‑book.  What this is saying is that you can actually formally assign, by statutory right, the right to sue for any of these claims – insolvent trading, unfair preference, any of them at all – and so the third party can then sue in their own name.  It is an exception to what might be the general law position or a qualification of that.

GAGELER J:   If the third party brought the claim under section 588FF, what would the order be?

MR GLEESON:   The order would be to the third party, because of subsection (4).  So instead of it being an order to the company, it is an order for a payment to the third party.

GORDON J:   That arises because you have a secured bank who says, I am owed X million; the liquidator says, I am going to sign your right to recover this amount because I know it is going to go in discharge of your debt.

MR GLEESON:   That is one case where it arises.  It arises with the litigation funder.

GORDON J:   I agree with that too, but it recognises the nature of what it is we are dealing with.

MR GLEESON:   But it is any right under the Act, so any of these can be monetised in this fashion.  So what that tends to confirm is with any of these rights of recovery, they can be monetised by a payment from the third party, which will come into what I am calling the fund.  That payment in the fund will be dealt with under the statutory order, and the third party will then pursue, for better or worse, the action.  I notice the time, your Honours.

KIEFEL CJ:   Yes, thank you, Mr Gleeson.  The Court will adjourn for 15 minutes.

AT 11.16 AM SHORT ADJOURNMENT

UPON RESUMING AT 11.29 AM:

KIEFEL CJ:   Yes, Mr Gleeson.

MR GLEESON:   Thank you, your Honours.  Could I now move to our propositions 5 to 9 which concern mutuality and go first to Gye v McIntyre which is at tab 20 and volume 3?   Using the CLR page numbering at the bottom of page 618, the unanimous judgment identifies the object of set‑off and, over at page 619, explains that mutual dealings was added into the earlier text of “mutual credits” and “mutual debts” to achieve this purpose of substantial justice, and it:

should be given “the widest possible scope” –

In that next paragraph on page 619, there are a number of propositions stated, including when debts would not be genuinely mutual as a matter of substance.  At about point 8, the Court says:

In so far of manipulation of set‑off by a debtor of the bankrupt to avoid payment to the trustee is concerned, s. 86(2) provides protection . . . where the relevant steps have been taken before bankruptcy but after notice of an available act of bankruptcy.  Protection against abuse . . . by steps taken after bankruptcy lies, in the main, in the –

requirement of mutuality.  We emphasise that section 86(2), or now section 553C(2), is the provision which protects against abuse before liquidation because the creditor must have no notice of the insolvency at the date of any of the dealings relied upon for the purpose of the account.  In the present case, it is an agreed fact that the creditor had no notice of insolvency at either date, so there is no conduct prior to the liquidation which creates abuse, so we are left with the question of mutuality.

Page 622 is the passage I was referring to in answer to your Honour Justice Gageler about the curious fact that the action is, in one sense, self‑executing but, as seen at the end of the long paragraph:

it would be wrong to attribute to the legislature the illogical intent that a directive which was intended to be otherwise automatic . . . should not operate at all unless and until either . . . the creditor –

lodged the proof:

or the trustee in bankruptcy instituted proceedings for recovery of a debt –

So, the fact that the liquidator in our case has to choose to bring a proceeding under section 588F – without which we are not in set‑off territory – that is not a disqualifying feature.

Then at page 623, the Court again refers to the concept that mutual dealings are there to give:

a more extended right of set‑off and to ensure –

no “narrow or technical approach” is taken.  It is perhaps the middle of that paragraph I was trying to reach for in my answer, that the Court says in:

the requirement of mutuality in respect of “other … dealings” . . . is directed not so much to the relationship between the dealings as such but to the relationship between the claims which have arisen from them.  There will . . . be mutual dealings at the date of the sequestration order if there existed at that date “dealings” which involved the bankrupt and the other party and which were capable of giving rise to, and subsequently did give rise to, “mutual” claims –

in the relevant sense.  So, coming back to your Honour Justice Steward’s question about do we need strict contingency, we do not.  What we need are dealings which were “capable of giving rise to” because the underlying conditions were there and subsequently did give rise to dealings properly recognised as mutual.  Now, following that, there is the critical passage of this judgment that mutuality requires three aspects, and that is that the:

credits, the debts, or –

relevantly:

the claims arising from other dealings –

So, I focussed on that last point.  It is the claim under section 588FF on one side and the claim for a trade debt on the other side, be between the same persons.  That is satisfied here because each of those claims is between the company and the creditor.  The liquidator may bring the claim or the assignee – I will leave that case aside – may bring it, but the claim is in respect to every recovery transaction I have been to between the company on one side and the creditor or third party on the other side.  The second requirement is that the benefit and the burden lie in the same interests.  This is where our critical difference with the Chief Justice arises.  The Court explains that in determining whether they are:

between the same persons in the same interests, it is the equitable or beneficial interests . . . which must be considered –

citing Hiley, that I will come to. 

KIEFEL CJ:   Mr Gleeson, could I take you back to the first requirement of the “same persons”?  As I understand the issue between the parties, it is said against you that it is the liquidator, not the company, that is to be taken into account.  So there is no mutuality.  Your answer to that is that the liquidator stands as the agent of the company.

MR GLEESON:   Stands as the agent of the company, sues for an order for payment to be made to the company ‑ ‑ ‑ ‑

KIEFEL CJ:   And then it is said on the other side the liquidator is not an agent of the company for this purpose. 

MR GLEESON:   Well, that is said, but let us just focus on the order that he seeks and gets.

KIEFEL CJ:   Yes.

MR GLEESON:   The order is a payment to the company, and that is why I laboured this morning what happens to that money.  It goes into the fund, which the company owns beneficially, which the liquidator controls and applies for everyone entitled under the statutory order. 

If we are wrong on that, that is why I say all the cases would have to be overturned because exactly the same thing happens in the insolvent trading provision.  The liquidator sues for the debt to the company; puts it in the company’s fund.  Now, if that is not the same person, we lose, and all the cases fail.  Where perhaps there is an important difference between the parties here is this is not bankruptcy.  There is no vesting of this property in the liquidator.  This is the company’s property which the liquidator is augmenting.  But, yes, I agree, your Honour, that first one is critical.  We have to win on that.

Now, the second one is same interests, and the statement is crystal clear:  we are looking at the equitable or beneficial interests of the parties.  What the Court is concerned with there is:  is there a trust involved such as to destroy mutuality?  So if the claim on the creditor’s side was in the legal name of the creditor but beneficially owned by someone else, that would destroy mutuality.

So where we differ from the Full Court is the Chief Justice has said, well, there is equity and equity, there is beneficial interest and beneficial interest, I accept Linter rules that the money received by the company will be beneficially the company but I think there is some different, broader, looser inquiry into benefit that should be undertaken.  We submit that is just inconsistent with what the Court has ruled.

GAGELER J:   In that sentence – are you just relying on that sentence?  Is that it?

MR GLEESON:  I am going to come to –  no, Hiley, footnote 52.

GAGELER J:   All right.

MR GLEESON:   My submission is equitable or beneficial has been used there in the strict sense of let us look at the books on trusts.

GAGELER J:   An exclusive sense, you say?

MR GLEESON:   Yes.  If it is being used in the Chief Justice’s broader sense, it proves too much, because his broader sense, which is this is all to get some money in for the unsecured creditors and the liquidator’s fees ‑ ‑ ‑

GAGELER J:   Mr Gleeson, while I have interrupted you – I am sorry – all of this discussion that you have taken us to begins back at page 618 with a reference to Baron Parke and doing substantial justice.

MR GLEESON:   Yes.

GAGELER J:   Have we become decoupled from that starting point by the time we reach page 623?  Is it just an entirely technical inquiry or is it informed in some way by the whole concept of mutuality as being concerned to avoid substantial injustice?

MR GLEESON:   Your Honour, it is not entirely decoupled.  At a high level, that is where we are going.  But at the level of how the statute is implementing that policy, we are, I submit, carrying out the three‑step exercise on page 623.  The result of that exercise may be – as Professor Goode said – to produce a substantial incursion into mere pari passu because we are recognising a different form of equity.  The third requirement seems straightforward, that the dealings, or the claims, arising from them are commensurable because they sound in money.  That is satisfied in the present case.

EDELMAN J:   And of Hall v Poolman or Melrose Cranes?

MR McKENNA:   Hall v Poolman, there are a number of cases, your Honour, with – if I can describe it as Delphic comments in it.  Hall v Poolman, I think there is one dot point in the case which is not germane to the reasoning.  Hall v Poolman was a case where a director was being sued – or, at least, a recovery for insolvent trading was sought against him, and the set‑off was a contractual right of indemnity that was held.  As part of the analysis of the contractual right of indemnity, there is a dot point where the court said something like a preference recovery may be described as a contingent claim.  It was not essential to the reasoning; it is not something that affected the outcome.  I do not know that there are any other decisions that need to be upset as such.

The next point to very briefly make has really already been made.  In the analysis I have given you about the mutuality of interest, the same kind of analysis tells you that there is a problem about mutuality of timing.  The problem really is because the right – the obligation of the company accrued before the date of liquidation, but prior to the date of liquidation one just cannot see a provision – because it is a statutory right we are talking about – that gives anyone any right or obligation.  It is not like 588M, that makes it wrongful conduct to engage in insolvent trading.  The preference provisions simply describe facts which, if a winding‑up occurs, enlivens a power to seek relief from the Court.

Your Honours, as to the legal context at the time of enactment – meaning the pre‑existing authorities and the Harmer Report – we really cannot improve upon the analysis in the Full Federal Court’s judgment.  The court was taken through all these cases in detail.  You will see from the judgment that they have been very carefully considered and analysed, and we can do nothing better than adopt that analysis.

In relation to the other categories of case we have just been discussing, can I just very briefly take you to those provisions again, starting with 588G.  So in 588G(2), which you have been taken to, it expressly describes conduct – pre‑liquidation conduct – as a contravention of the section at the relevant time and, in some circumstances, a contravention can constitute an offence.

It is to be contrasted – well, it creates a clear contrast with the preference provisions we have been looking at, which do not by their nature involve any wrongful conduct at the time.  Earlier in my address I sought to draw an analogy between the duties directors owe to companies under section 180; duties to act honestly, reasonably and the like.  This is not expressed in the same terms, but in substance, which is what we are looking at, it is of an ilk – it is a duty or a norm that is created by statute that is breached prior to liquidation.

Then when one goes to the remedy in 588M.  It is true that subsection (2), like 588FF, gives the right of action to the company’s liquidator, but the right of action is given as – sorry:

The company’s liquidator may recover from the director, as a debt due to the company, an amount equal to the amount of the loss or damage.

The word “as”, in our respectful submission, has significance because it does rather suggest that in this respect the company’s liquidator is vindicating a right that the statute contemplates is a right of the company which, in substance, is no different to the kind of right companies have when directors breach their duties to it.  So it is not in the same category as the kind of statutory rights that are for the benefit of unsecured creditors in the sense of serving the purpose of augmenting the whole.

The other provision that is significant is the one you have also been taken to, 588Y, which deals with the question of whether recoveries are potentially caught by a secured creditor.  The very fact that there needs to be 588Y in this provision rather suggests that it is a right of the company that is being vindicated by those provisions.  So there does need to be a provision dealing with the position of a secured creditor which is not required for the earlier provisions.  There is no equivalent to 588Y applying to the preference provisions.

Your Honour, the last point I need to make really concerns costs.  You will see in our outline that an argument to similar effect about the public interest nature of this litigation was raised before the Full Federal Court after the matter was resolved.  The Full Federal Court made an order remitting that issue to the trial judge to resolve.  That order is not subject to appeal – not that that is a matter of any great moment – but, in our respectful submission, there was a lot to commend the approach the Full Federal Court had which was to treat the cost issue as a discrete issue which should be remitted, in any event, to the primary judge.

KIEFEL CJ:   Was the question of costs in this context raised in the special leave papers?

MR McKENNA:   I cannot answer that, your Honour, I am sorry.  I can make inquiries.

EDELMAN J:   Is your submission that the question of costs then, in this Court, should abide the decision of the trial judge in relation to the remitted matter?

MR McKENNA:   Yes.

GORDON J:   There are two aspect to the cost laws.  There is the cost of what happens below on a certain outcome and then there is a cost of here.

MR McKENNA:   That is so, your Honour.  So, in relation to the costs below, presently there is an appeal against the costs order that remits those costs to the primary judge.  But that is a matter of form.  I am not standing on dignities about that.  Our primary submission is that, in principle, when there is a discrete question about how this action was brought, what is the appropriate character of the action, it is really not something that your Honours are really in a position to deal with.  It was wise, in my respectful submission, of the Full Federal Court to remit it to the trial judge to determine.  So, if that is a course that commends itself to your Honours, we would welcome it, in any event.

KIEFEL CJ:   Yes, thank you, Mr McKenna.  Reply, Mr Gleeson?

MR GLEESON:   Your Honours, could I focus our reply around the central battleground which is substantial injustice as then reflected in mutuality or otherwise.  What you have heard is effectively a concession that all of the voidable transactions must have the same answer in this case.  Set‑off or no set‑off, it is the same for all.  We agree with that.  But you have heard that in respect to insolvent trading it would seem it is wholly indistinguishable and set‑off is available.

There has been no attack on any of the reasoning of Justice Mansfield in Re Parker today, and you are not asked to overrule Re Parker.  Your Honour Justice Gageler asked what cases would need to be overruled.  The answer on the voidable transaction cases is the following cases would have to be either overruled or said to be wrong in their dicta:  firstly, Melrose Cranes as a matter of ratio, because it was an unfair preference case; Buzzle as a matter of dicta, because it was an uncommercial transaction case; Hall v Poolman we would say as a matter of ratio, because the critical paragraph was an unfair preference.  So it is at least those three that I have just mentioned.

GORDON J:   Do you add Parker to that list?

MR GLEESON:   Buzzle, Melrose, Poolman – it is those three.  They are in issue on the concession that has been made, but what the respondent is saying is, you can leave Re Parker alone because insolvent trading is different and you have had no submission.  You should overrule Re Parker.  So where I would like to start in reply is why is it that set‑off is appropriate in the insolvent trading situation in order to avoid substantial injustice?  If I can establish that, I then want to move back to why it is appropriate in our situation.

If your Honours have, again, the statute, in the insolvent trading situation – section 588M – the conditions are first that there has been a legal wrong to the company and then there are the three additional conditions in subsection (1)(b), (c), and (d), including loss being suffered by a creditor, and:

(d)the company is being wound up –

Now, your Honours might admittedly observe that the language of (d), “the company is being wound up”, is the same language that is used in 588FE, in establishing the final condition for voidability.

So, to the extent you have heard an argument about timing, that somehow we cannot get set‑off with voidability because the timing is wrong, the timing of the last condition is identical in both cases.  But having said that, if we are in the insolvent trading world, we have a holding company or a director who has breached the law; has caused damage to a creditor; and has caused damage to the orderly winding‑up, in the sense that – as I said this morning – the fund now faces more claims on it than it should have.  The wrongdoing director or holding company is required – prima facie – to restore the company to the position it should have been in, but for all those circumstances.

So that establishes the equity on one side of the mutual dealing.  On the other side of the mutual dealing, according to Re Parker, that holding company or director has engaged in an ordinary proper dealing with the company – a loan of money, perhaps a provision of services.  By definition, it had no notice of the insolvency of the company, otherwise the set‑off is excluded, and yet, it is accepted that there would be a substantial injustice if the set‑off could not occur.

Now, what is that substantial injustice that is being accepted?  The way we would put it is this way:  the substantial injustice is to refuse to recognise set‑off would defeat the legitimate expectations and conduct of the holding company or the director when dealing with the company and extending the company credit.

So, even though the holding company or the director is a wrongdoer – they have caused loss, they have damaged the company in the winding‑up – on one side of the account they must compensate and, this is wholly statutory‑based.  In answer to Justice Gageler’s question, it is the statute saying you must, at the suit of the liquidator, restore the integrity of the fund.  Nevertheless, the set‑off is available because it would be an injustice to defeat the separate legitimate expectations of the holding company or director in extending credit to the company.  The circumstance in which the set‑off might be denied is section 553(2), which is the point of intersection.  If you had notice of the insolvency, you do not have legitimate expectations. 

That substantial injustice which Mr McKenna has not been said to say a word against, we submit, is the same substantial injustice in our case.  If your Honours come back to our case, which is section 588FE, it is the trigger point.  If the company is being wound up – so it is the identical framing of the condition – and if all the conditions are met for it to be a voidable transaction, yes, on one side of the account the creditor must make the company whole for the effect that this has had on the integrity of the winding‑up, but on the other side of the account, this creditor, on a wholly separate transaction – just as in Re Parker – has provided credit to the company and has done so in terms of section 553C(2) without notice of the insolvency. 

If the set‑off is denied, the legitimate expectations of the creditor in extending that credit are denied.  That is why the set‑off is available in both cases equally.  We would therefore say, if we are correct, Re Parker should be affirmed; if we are incorrect, Re Parker has to be overturned even though you have not heard an argument to that effect.  Your Honours, that is the first point I wanted to deal with in reply – and perhaps the main one.

The second point was – there was an argument raised about timing and mutuality which, as I heard it, asked your Honours to interpret the authorities of this Court as requiring the analysis to be conducted immediately prior to the commencement of the winding‑up, as opposed to on the commencement of the winding‑up.  The reason Mr McKenna made – what I will say is that slide – is that he then tried to say, on one day before the winding‑up order, because the last condition for the avoidance had not been met, the company had nothing.  That is a slide, with respect, because each of the authorities he has read indicate that the test is applied at the commencement of the winding‑up – that is, on the winding‑up – and, therefore, it can take into account the fact of the winding‑up.  Were that not so – as I have shown in the insolvent trading provisions – the set‑off would have to be denied in those cases.

So, if the test is applied at the commencement of the winding‑up, what one then can say under section 588FE is that the statute has attached to the transaction a character of voidability between the company and the creditor.  That is the critical aspect of the working out of the mutual dealings which both satisfies any timing concern and also satisfies the interest concern, because the company now is subject to a statutory avoidance of its earlier prior transaction, and that is between the company and the creditor.

Your Honour the Chief Justice asked me this morning some questions about agency of the liquidator versus statutory office holder.  I should make clear that although we advance the agency proposition, we do not stand or fall on that.  If you take the view that it is solely a statutory office holder under 588FF that the action is brought, our argument remains good because that action is being taken in response to the statutory avoidance under 588FE which has occurred between the company and the creditor.  So the liquidator, a statutory office holder, takes the action which then sees the money paid to the company.

Your Honour Justice Gordon asked about the form of the order.  Mr McKenna is correct, that what usually happens, as in this case, is the company is joined so it is a beneficiary and there was a court order that the money be paid to it, and if for some reason it was not paid it has the full rights of a judgment creditor to seek to have that money paid as its property.  To test it another way, if the liquidator were delinquent, creditors would have rights against the liquidator to compel the liquidator to take the proper action to get the money in for the company, and that is significant, we would submit, in characterising the transaction.

Your Honours, in the list of cases I said would have to be overturned if we are wrong, the other case we mentioned in writing was Shirlaw, which was Justice Hodgson’s decision on section 468.  Same category, it is either right or wrong.  One proposition was made this afternoon several times, which is overstated.  Mr McKenna said that a secured creditor can never get their hands on the recovery of a preference.  That is wrong.

If your Honours could go to Kratzmann, which is at tab 22.  It needs to be read carefully because it is on the earlier scheme, it is close to 50 years old, and it is pre‑Linter.  Your Honours will see on the argument on page 296 of Mr Brennan and Mr McPherson that the English authorities were being relied upon, and the proposition is that when the order is made for repayment of the preference:

the liquidator’s legal title is impressed with a trust for the distribution in the winding‑up.

And accordingly, if the payee is also in liquidation, the order should be for the full amount of the preference, not for the proof of debt in the second company.

That argument was rejected by the Court.  In the course of the rejection – and you will see it at the foot of page 297, this was the then‑recognised practice to order the respondent to pay the money to the trustee in bankruptcy, not permit the respondent to prove until it has been paid.  But over the page, no cases had considered where both companies were in liquidation. 

Then, on page 298, the Court drew a distinction between the case where the preference is given in the form of property, which can be ordered to be returned and can be caught by a charge, and the case where it is only money that is paid, where it was then said it will not be subject to the charge.  So, I am pausing there to say that if the preference were given in the form of property, and the order were made under section 588FF(1)(b), at least in that case it could be the subject of a charge.  But also, if your Honours see on page 299 at about point 4, the Court held that the order would be for a repayment of the amount provable in the liquidation of the second company, not for the full preference, because the first company was regarded as being no more than an unsecured creditor proving in the debt of the second company.

If your Honours could just go forward to page 302, in the middle paragraph where the Court repeats its reasoning, the Court says at the end of that paragraph, if it were to do otherwise, it would:

conflict with the statutory duties of the appellant’s liquidator –

that is of the payee’s liquidator, particularly the sections which are the equivalent of the pari passu principle. So, what Kratzmann illustrates here is that secured creditors may, depending on the circumstances, have rights to the preference recovery.  The broader proposition is incorrect, but it also illustrates a case where there is a reconciliation between the ordinary right, which will be to recover the preference in full, and a different equity, which arises through the statute.  In Kratzmann, the different equity is through the fact that the payee is in liquidation.  That equity qualifies the ability of the first company to get the preference in full.  We say set‑off operates in the same fashion.  It is another provision whereby what would otherwise be the ordinary right to get the preference in full needs to be qualified to meet a competing equity, which the statute has established.

On the topic of Kratzmann, I will just indicate, your Honours, that Justice Finkelstein in the decision in Cook – which is in the materials – has discussed in detail the current status of Kratzmann.

Your Honours, in terms of costs, the application that I have made, I make, but an alternative is the order that your Honour Justice Edelman raised, which would at least preserve the ability to have the issue determined.  We have at all points said that is the order we are seeking.  May it please the Court.

KIEFEL CJ:   Thank you, Mr Gleeson.

The Court reserves its decision in this matter and adjourns to 9.15 am tomorrow for pronouncement of orders, and otherwise to 9.45 am.

AT 3.27 PM THE MATTER WAS ADJOURNED