Morton as Liquidator of MJ Woodman Electrical Contractors Pty Ltd v Metal Manufactures Pty Limited
[2021] FCAFC 228
•16 December 2021
FEDERAL COURT OF AUSTRALIA
Morton as Liquidator of MJ Woodman Electrical Contractors Pty Ltd v Metal Manufactures Pty Limited [2021] FCAFC 228
File number: QUD 31 of 2021 Judgment of: ALLSOP CJ, MIDDLETON AND DERRINGTON JJ Date of judgment: 16 December 2021 Catchwords: CORPORATIONS – question reserved for consideration of the Full Court pursuant to s 25(6) of the Federal Court of Australia Act 1976 (Cth) – whether set-off under s 553C(1) of the Corporations Act 2001 (Cth) (Act) available to the defendant against the plaintiff’s claim as liquidator for the recovery of an unfair preference under s 588FA of the Act – effect of a preference, nature of the preference action, and consequences of the success of such an action in Australian insolvency law – nature of mutuality – nature and history of set-off prior to and following the Harmer Report – set-off not available against the recovery of an unfair preference – requisite mutuality not present – right to the recovery of the preference is a right of the liquidator and not the company, in the liquidator’s own right for the benefit of all creditors and the administration of the estate under the terms of the relevant statutory regime Legislation: Bankruptcy Act 1924 (Cth)
Bankruptcy Act 1966 (Cth)
Corporate Law Reform Act 1992 (Cth)
Corporations Act 2001 (Cth)
Federal Court of Australia Act 1976 (Cth)
Federal Court Rules 2011 (Cth)
Income Tax Assessment 1936 (Cth)
Judiciary Act 1903 (Cth)
Bankruptcy Act 1883 (UK)
Bankruptcy Act 1914 (UK)
Companies (Consolidation) Act 1908 (UK)
Companies Act 1862 (UK)
Companies Act 1948 (UK)
Insolvency Act 1986 (UK)
Cases cited: Airservices Australia v Ferrier [1996] HCA 54; 185 CLR 483
Akers as a joint foreign representative of Saad Investments Company Limited (in Official Liquidation) v Deputy Commissioner of Taxation [2014] FCAFC 57; 223 FCR 57
Burns v Stapleton [1959] HCA 34; 102 CLR 97
Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd [2011] NSWCA 109; 81 NSWLR 47
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Carter Holt Harvey Woodproducts Australia Pty Ltd v Commonwealth [2019] HCA 20; 268 CLR 524
Citibank Ltd v Papandony [2002] NSWCA 375
Commissioner of Taxation v Lane [2020] FCAFC 184; 385 ALR 92
Community Development Pty Ltd v Engwirda Construction Company [1969] HCA 47; 120 CLR 455
Construction, Forestry, Maritime, Mining and Energy Union v Australian Building and Construction Commissioner [2020] FCAFC 192; 282 FCR 1
Cook v Italiano Family Fruit Company Pty Ltd [2010] FCA 1355 190 FCR 474
Day & Dent Constructions v North Australian Properties Pty Ltd (Provisional Liquidator Appointed) [1982] HCA 20; 150 CLR 85
Re Anglo French Cooperative Society; Ex Parte Pelly [1882] 21 Ch D 492
Federal Commissioner of Taxation v Jaques [1956] HCA 40; 95 CLR 223
Federal Commissioner of Taxation v Linter Textiles Australia Limited (In liq) [2005] HCA 20; 220 CLR 592
Flitcroft’s Case [1882] 21 Ch D 519
Foots v Southern Cross Mine Management Pty Ltd [2007] HCA 56; 234 CLR 52
Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher [2014] NSWCA 148; 87 NSWLR 728
Franklin’s Selfserve Pty Ltd v Federal Commissioner of Taxation [1970] HCA 33; 125 CLR 52Wily v St George Partnership Banking Ltd (1998) 84 FCR 423
G & M Aldridge Pty Ltd v Walsh [2001] HCA 27; 203 CLR 662
Gye v McIntyre [1991] HCA 60; 171 CLR 609
Hall v Poolman [2007] NSWSC 1330; 65 ACSR 123
Hicks v Minister [2003] FCA 757
Hiley v People’s Prudential Assurance Co Ltd [1938] HCA 40; 60 CLR 468
In re a Debtor; Ex parte Peak Hill Goldfield Limited [1909] 1 KB 430
In Re Leeds and Hanley Theatres of Varieties Ltd [1902] 2 Ch D 809
In Re Milan Tramways Company (1884) 25 Ch D 587
In re Mouat; Kingston Cotton Mills Co v Mouat [1899] 1 Ch 831
In the Matter of ACN 007 537 000 Pty Ltd (in liq) & Parker [1997] FCA 1264; 80 FCR 1
Jetaway Logistics Pty Ltd (rec & mgrs app’d) (in liq) v Deputy Commissioner of Taxation [2008] VSC 397; 68 ACSR 226
Jones (Liquidator) v Matrix Partners Pty Ltd; in the matter of Killarnee Civil & Concrete Contractors Pty Ltd (in liq) [2018] FCAFC 40; 260 FCR 310
Kuru v New South Wales [2008] HCA 26; 236 CLR 1
N W Robbie & Co Ltd v Witney Warehouse Co Ltd [1963] 1 WLR 1324
NA Kratzmann Pty Ltd (in liq) v Tucker, Liquidator of Reed Murray Developments Qld Pty Ltd (No 2) [1968] HCA 44; 123 CLR 295
NA Kratzmann Pty Ltd (in liq) v Tucker, Liquidator of Reed Murray Developments Qld Pty Ltd (No 1) [1966] HCA 72; 123 CLR 257
National Bank of Australasia Ltd v Mason [1975] HCA 56; 133 CLR 191
Octavo Investments Pty Limited v Knight [1979] HCA 61; 144 CLR 360
Perpetual Trustees Australia Ltd v Heperu Pty Ltd [2009] NSWCA 84; 76 NSWLR 195
Quickfund (Australia) Pty Ltd v Airmark Consolidators Pty Ltd [2014] FCAFC 70; 222 FCR 13
Re A & J Lazzarotto Pty Ltd (unreported) 1977 BC 7700145)
Re aDebtor; Ex parte Peak Hill Goldfield Ltd [1909] 1 KB 430
Re Amour (1956) 18 ABC 69
Re Clements (1931) 7 ABC 255
Re Country Stores Pty Ltd (1987) 11 ACLR 385; 5 ACLC 636
Re Discovery Books Pty Ltd (1973) 20 FLR 470
Re Fresjac Pty Ltd (in liq); Campbell v Michael Mount PPB (1995) 65 SASR 334
Re Grezzana (1932) 4 ABC 203
Re Hermann; Ex parte Official Assignee (1916) 16 SR (NSW) 264
Re Kolb; Ex parte England v Commissioners of Taxation (1994) 51 FCR 31
Re Kolb; Ex parte England v Commissioners of Taxation [1994] FCA 359; 51 FCR 31
Re Nortel Companies [2013] UKSC 52; 4 All ER 887
Re Smith (1933) 6 ABC 49
Re Trustee of the Property of O’Halloran [2002] FCA 1305
Re William Hockey Ltd [1962] 1 WLR 555
Re Yagerphone Ltd [1935] 1 Ch 392
Richardson v Commercial Banking Co of Sydney Ltd [1952] HCA 8; 85 CLR 110
Sheahan v Carrier Air Conditioning Pty Ltd [1997] HCA 37; 189 CLR 407
Shirlaw v Lewis (1993) 10 ACSR 288
SJP Formwork (Aust) Pty Ltd (in liq) v Deputy Commissioner of Taxation [2000] NSWSC 604; 34 ACSR 604
Smith v Boné [2015] FCA 319; 104 ACSR 528
Starkey (as liq of Allan Fitzgerald Pty Ltd (in liq)) v Deputy Commissioner of Taxation [1994] 1 Qd R 142
Union Bank v Wolas 502 US 151 (1991)
Williams v Lloyd [1934] HCA 1; 50 CLR 341
Willmott v London Celluloid Company (1886) 34 Ch D 147
Wily v St George Partnership Banking Ltd (1999) 84 FCR 423
Baldwin ET, A Treatise upon the Law of Bankruptcy and Bills of Sale (10th ed, Stevens and Haynes, 1910)
Ford HAJ, Austin RP, Anderson C, and Morrison DS, Principles of Corporations Law (7th ed, Butterworths, 1995)
Goode RM Principles of Corporate Insolvency Law (2nd ed, Sweet & Maxwell, 1997)
Holdsworth W, A History of English Law (2nd ed, Methuen and Co Sweet and Maxwell, 1971)
Hunter M, Graham D and Crystal M, The Law and Practice of Bankruptcy (19th ed, Stevens and Sons, 1979)
Lewis AN and Rose DJ, Australian Bankruptcy Law (10th ed, Law Book Co, 1994)
Lewis AN and Rose DJ, Australian Bankruptcy Law (8th ed, Law Book Co, 1984)
May HW and Edwards WD (ed), The Law of Fraudulent and Voluntary Conveyances (Steven and Haynes, 3rd ed 1908)
May HW and Edwards WD (ed), The Law of Fraudulent and Voluntary Conveyances (3rd ed, Steven and Haynes, 1908)
McDonald EF, Deane WP, Australian Bankruptcy Law and Practice (4th ed, Law Book Co, 1968)
McDonald EF, Henry HA, Meek HG, Manning JK and Bohringer LG, Australian Bankruptcy Law and Practice (3rd ed, Law Book Co, 1953)
McPherson BH, The Law of Company Liquidation (1st ed, Law Book Co, 1968)
Meagher RP, Heydon JD, Leeming MJ and Turner PG, Meagher Gummow and Lehane’s Equity: Doctrines and Remedies (5th ed, LexisNexis Butterworths, 2015)
Williams RLV and Hansell EW, The Law and Practice in Bankruptcy (7th ed, Stevens and Sons 1898)
Williams RLV, Hansell EW and Hansell ME, The Law and Practice in Bankruptcy (11th ed, Stevens and Sons, 1915)
Division: General Division Registry: Queensland National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Number of paragraphs: 221 Date of hearing: 26 August 2021 Counsel for the Plaintiffs: Mr J McKenna QC with Mr P O’Brien Solicitor for the Plaintiffs: Taylor David Lawyers Counsel for the Defendant: Mr J Gleeson SC with Mr G McNally SC and Mr J Pokoney Solicitor for the Defendant: Breene & Breene Solicitors
Table of Corrections 13 January 2022 Defendant’s name has been amended on the Court file from “Metal Manufacturers Pty Limited” to “Metal Manufactures Pty Limited”. ORDERS
QUD 31 of 2021 BETWEEN: GAVIN MORTON AS LIQUIDATOR OF MJ WOODMAN ELECTRICAL CONTRACTORS PTY LTD (IN LIQUIDATION) ACN 602 067 863
First Plaintiff
MJ WOODMAN ELECTRICAL CONTRACTORS PTY LTD (IN LIQUIDATION) ACN 602 067 863
Second Plaintiff
AND: METAL MANUFACTURES PTY LIMITED ACN 003 762 641
Defendant
ORDER MADE BY:
ALLSOP CJ, MIDDLETON AND DERRINGTON JJ
DATE OF ORDER:
16 DECEMBER 2021
THE COURT ORDERS THAT:
1.The question reserved by Derrington J for consideration of the Full Court pursuant to s 25(6) of the Federal Court of Australia Act 1976 (Cth), being:
Is statutory set-off, under s 553C(1) of the Corporations Act 2001 (Cth) (Act), available to the defendant in this proceeding against the plaintiff’s claim as liquidator for the recovery of an unfair preference under s 588FA of the Act?
be answered: “No”.
2.Within 14 days the parties submit an agreed order as to costs, or, in the absence of agreement, the parties file submissions of no more than two (2) pages on the question of costs.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
ALLSOP CJ:
The special case
Before the Court is a special case under rule 38.01 of the Federal Court Rules 2011 (Cth) to give effect to the reservation of a question for the Full Court under s 25(6) of the Federal Court of Australia Act 1976 (Cth) brought forward by Derrington J.
The question concerns the right of a creditor who had received an unfair preference under s 588FA of the Corporations Act 2001 (Cth) (Act) to avail itself of the statutory set-off in s 553C of the Act. The creditor claims to be entitled to set off its obligation under s 588FF of the Act to repay the preference received not against the underlying debt, but against another debt owed by the company in liquidation to it.
The special case was supported by agreed facts that the defendant creditor received payments during the relation back period of $190,000. The quantum of the creditor’s alleged set-off is admitted to be $194,727.23, arising otherwise than from the underlying debts owed by the company and the subject of the payments during the relation-back period said to be preferences. The liquidator concedes that subs 553C(2) does not apply on the facts. The liquidator concedes that if set-off is available the proceeding instituted to recover the preferential payments must be dismissed.
The question reserved by Derrington J for consideration of the Full Court was as follows: Is statutory set-off, under s 553C(1) of the Act, available to the defendant in this proceeding against the plaintiff’s claim as liquidator for the recovery of an unfair preference under s 588FA of the Act?
The answer to the question is: No.
A summary of the reasons for this answer, which summary is to be read with the more detailed reasons below is as follows.
There is a lack of mutuality between the indebtedness of the company to the creditor and the liability of the creditor pursuant to court order to pay the company at the suit of the liquidator. The lack of mutuality arises from the different interest in which the company owes money to the creditor and in which the company receives money pursuant to the liability to repay not as a creditor of the preferred creditor, but as a payee pursuant to court order in an action brought by the liquidator in the execution of her or his duty to gather in the estate of the insolvent company for the benefit of all unsecured creditors and the administration of the estate. The lack of mutuality also arises from the absence at the relevant date of any right or equity (vested or contingent) in the company or duty or obligation (vested or contingent) in the creditor to recover or to repay the preference, respectively. Thus, the essential requirements of s 553C are absent.
That this is the position derives from an understanding of the legal context before the Corporate Law Reform Act 1992 (Cth) (the 1992 Act), the text and context of changes made by the 1992 Act, including the enactment history and secondary materials, and the lack of any evident statutory purpose to bring about significant change in underlying principle affecting mutuality and unfair preferences. The above way of expressing the matter should not be seen as a departure from the importance of the text of the relevant provision or from the principles enunciated in the High Court as to statutory construction (about which there was no debate in the argument) and as encapsulated in the reasons of Middleton J, with which I agree. (See also Construction, Forestry, Maritime, Mining and Energy Union v Australian Building and Construction Commissioner [2020] FCAFC 192; 282 FCR 1 at 5–6 [2]–[5]). The text of a relevant provision of the Act introduced by the 1992 Act (s 588FI) is not consistent with s 553C being engaged by a debt to a preferred creditor and the liability of the preferred creditor to disgorge the preference. This construction and conclusion best reflects and vindicates the underlying purposes of both the law of set-off in insolvency and the law of preferences: by justly protecting creditors where genuinely reciprocal or mutual debts, credits or mutual dealings exist by netting such off in working out what is owed by and to the insolvent estate, which process in no way interferes with the pari passu distribution from the estate being part of an antecedent process to establish the estate and the claims upon it; and by ensuring that past preferential transactions are unwound to put the estate in the position in which it would have been had the preferential transaction not occurred, so that thereafter all creditors (including the erstwhile preferred creditor) may share equally in an estate unaffected by earlier preferential transactions.
The nature of the task by way of statutory construction
The question is one of statutory construction, being the meaning and content of s 553C and also the meaning and content of the provisions concerned with the unfair preference and the action to remedy its consequences in Pt 5.7B of the Act, in particular ss 588FA, 588FE, 588FF and 588FI, by reference to their text and context.
That task finds its place in the context of the law of insolvency (personal and corporate) as it has existed in this country since at least Federation.
Bankruptcy, at least since the passing of the Bankruptcy Act 1924 (Cth) (the 1924 Act) has been a matter of federal jurisdiction. As such, until 1988, “the common law of England” was directly applicable under s 80 of the Judiciary Act 1903 (Cth), until Act No 120 of 1988 replaced that phrase by “the common law in Australia”.
Until the 1992 Act, the companies and corporations legislation of States, Territories and the Commonwealth incorporated relevant provisions of the 1924 Act and the Bankruptcy Act 1966 (Cth) (the 1966 Act): see ss 291–293 of the Companies Acts 1961; ss 438, 441 and 451 of the Companies Codes 1981; and ss 553 and 565 of the Corporations Law; and for the position in England see s 164 of the Companies Act 1862 (UK), s 207 of the Companies (Consolidation) Act 1908 (UK), s 317 of the Companies Act 1948 (UK) and the modernisation of personal and corporate insolvency in the Insolvency Act 1986 (UK), relevantly involving ss 107, 239, 323 and 328.
These considerations made bankruptcy conceptions and authorities in both England and Australia relevant to the understanding and the operation of corporate insolvency.
The 1992 Act removed the adoption of bankruptcy provisions mutatis mutandis into companies legislation, and introduced specific provisions concerned with proof and ranking of claims: Div 6 of Pt 5.6 (where s 553C sits), and with recovery of property or compensation for the benefit of creditors of an insolvent company: Pt 5.7B (where s 588FA sits). This gave effect to the recommendation of the Australian Law Reform Commission’s General Insolvency Inquiry (Report 45 of 1988), led by the Commissioner-in-Charge, the distinguished insolvency practitioner, Mr Ron Harmer, and other distinguished Commissioners, Mr Richard Fisher, Professor David Kelly, Sir Maurice Byers and Professor Michael Chesterman (the Harmer Report).
Whilst the starting point in the task of statutory construction is the text of the provision, that takes one immediately in this case to historical legal context. This is so because of the repetition in s 553C of text and structure familiar for over a century, and because of the need to understand not only the accepted interpretation of the predecessor provisions to s 553C, but also the manner of operation of preference provisions for over a century to place the text and structure of s 588FA, the other relevant provisions of Pt 5.7B such as s 588FF in particular, and s 553C into their proper legal context. The similarity in the relevant set-off provisions can be seen in the relevant sections below.
Section 553C is in the following terms:
(1)Subject to subsection (2), where there have been mutual credits, mutual debts or other mutual dealings between an insolvent company that is being wound up and a person who wants to have a debt or claim admitted against the company:
(a)an account is to be taken of what is due from the one party to the other in respect of those mutual dealings; and
(b)the sum due from the one party is to be set off against any sum due from the other party; and
(c)only the balance of the account is admissible to proof against the company, or is payable to the company, as the case may be.
(2)A person is not entitled under this section to claim the benefit of a set-off if, at the time of giving credit to the company, or at the time of receiving credit from the company, the person had notice of the fact that the company was insolvent.
Section 86 of the 1966 Act is in the following terms:
(1)Subject to this section, where there have been mutual credits, mutual debts or other mutual dealings between a person who has become a bankrupt and a person claiming to prove a debt in the bankruptcy:
(a)an account shall be taken of what is due from the one party to the other in respect of those mutual dealings;
(b)the sum due from the one party shall be set off against any sum due from the other party; and
(c)only the balance of the account may be claimed in the bankruptcy, or is payable to the trustee in the bankruptcy, as the case may be.
(2)A person is not entitled under this section to claim the benefit of a set‑off if, at the time of giving credit to the person who has become a bankrupt or at the time of receiving credit from that person, he or she had notice of an available act of bankruptcy committed by that person.
Section 82 of the 1924 Act was in the following terms:
Where there have been mutual credits, mutual debts, or other mutual dealings between a bankrupt and any person proving or claiming to prove a debt in the bankruptcy, an account shall be taken of what is due from the one party to the other in respect of such mutual dealings; and the sum due from the one party shall be set off against any sum due from the other party, and the balance of the account, and no more, shall be claimed or paid on either side respectively:
Provided that no person shall be entitled under this section to claim the benefit of any set-off against the property of a debtor in any case where he had, at the time of giving credit to the debtor or at the time of receiving credit from the debtor, notice of an available act of bankruptcy.
Section 31of the Bankruptcy Act 1914 (UK) (the 1914 UK Act) was in the following terms:
Where there have been mutual credits, mutual debts or other mutual dealings, between a debtor against whom a receiving order shall be made under this Act and any other person proving or claiming to prove a debt under the receiving order, an account shall be taken of what is due from the one party to the other in respect of such mutual dealings, and the sum due from the one party shall be set off against any sum due from the other party, and the balance of the account, and no more, shall be claimed or paid on either side respectively ….
Section 38 of the Bankruptcy Act 1883 (UK) (the 1883 UK Act) as in the following terms:
Where there have been mutual credits, mutual debts, or other mutual dealings between a debtor against whom a receiving order shall be made under this Act, and any other person proving or claiming to prove a debt under such receiving order, an account shall be taken of what is due from the one party to the other in respect of such mutual dealings, and the sum due from the one party shall be set off against any sum due from the other party, and the balance of the account, and no more, shall be claimed or paid on either side respectively; but a person shall not be entitled under this section to claim the benefit of any set-off against the property of a debtor in any case where he had at the time of giving credit to the debtor, notice of an act of bankruptcy committed by the debtor, and available against him.
The question of the meaning to be ascribed to s 553C also depends contextually, in part, upon the relationship of the predecessor set-off provisions to the preference action and preference provisions, at relevant times, and also the other actions for the benefit of the estate of the insolvent person or company, being up to 1992, recognised by the phrases “voluntary settlements” (s 120 of the 1966 Act) and fraudulent dispositions (s 121 of the 1966 Act), as well as the provision concerning execution or attachment (s 118 of the 1966 Act).
The liquidator denies that a creditor liable to repay or disgorge a preference can avail itself of the set-off in s 553C. To the extent that a series of cases in this country can be seen to support such a right they were, it was submitted by the liquidator, wrongly decided.
The liquidator’s argument was founded on six propositions: First, the text and structure of the provisions and the Act disclose different spheres of operation for s 553C and s 588FA. Secondly, the statutory purpose of the preference provision (s 588FA) would be undermined by allowing the set-off under s 553C. Thirdly, the accepted approach prior to 1992 in England and Australia was that there could be no set-off of a debt owed by a company in liquidation or bankrupt to a creditor against a liability of the creditor to repay or disgorge a preference. Fourthly, the extrinsic materials for the 1992 Act, most importantly the Harmer Report itself, do not suggest any change to that pre-existing position. Fifthly, there is an absence of mutuality between the liquidator and the creditor. Sixthly, the requirement under s 553C that mutual obligations exist before the relevant date cannot be satisfied.
The third and fifth (the fifth being related to the sixth) of these propositions require an examination of a number of cases, English and Australian, before 1992. The creditor directly challenged these two propositions as involving, and being based on, an oversimplified reading of earlier important cases. It is appropriate to commence with an examination of the validity of these two propositions. The resolution of them is central to the answering of the question in the special case.
Before examining these propositions through the cases, it is appropriate to make a number of introductory comments.
Introductory comments
First, s 553C (as did its predecessor provisions) works as a form of statutorily imposed accounting that is part of the ascertainment of the proof of debt. Thus, conceptions relevant to what can be proved under, for instance s 82 of the 1966 Act, are also necessarily relevant to the operation of s 86 of the 1966 Act.
Secondly, the 1883 UK Act restated the law of bankruptcy. Its framework continued in the modern law, providing for proof of pre-bankruptcy debts (s 37), the creation of statutory rights of set-off (s 38), the distribution of assets pari passu (s 40), and the avoidance of fraudulent preferences (s 48). With the important exception of the objective nature of the preference in Australian law, the 1924 Act and the 1966 Act adopted a similar framework to the 1883 UK Act: proof of debt (s 81 in the 1924 Act and s 82 in the 1966 Act), set-off (s 82 and s 86), pari passu distribution (s 89 and s 108) and preferences (s 95 and s 122).
Thirdly, the conceptions of mutual set-off and pari passu distribution are both founded in equity. The former is often expressed as an exception to the latter (see Goode RM Principles of Corporate Insolvency Law (2nd ed, Sweet & Maxwell, 1997) at 153–154 and 172–173). At the foundation of each is equity’s concern with justice and fairness. In relation to the former, the injustice to the creditor of not recognising genuine mutual debts and credits and mutual dealings between the creditor and the debtor in ascertaining the respective rights and obligations of the insolvent debtor and the creditor. In relation to the latter, equity is concerned with equality of distribution, as a reflection of the equitable maxim “Equity is equality”: see Akers as a joint foreign representative of Saad Investments Company Limited (in Official Liquidation) v Deputy Commissioner of Taxation [2014] FCAFC 57; 223 FCR 57 at 41 [135]. The two manifestations of equity’s concern with fairness are directed to two different, but related, aspects of the insolvent administration: fairness in the ascertainment of the assets of and claims upon the estate; and fairness in the equal access to that estate amongst ranking unsecured creditors for their ascertained or accepted claims.
Fourthly, the statutory purpose of the avoidance or conclusion of voidableness of preferences, and of the preference action is the just remedying of dislocation of the equality of creditors reflected in pari passu distribution. The purpose was expressed by Gleeson CJ, Gaudron, Gummow, Hayne and Callinan JJ in G & M Aldridge Pty Ltd v Walsh [2001] HCA 27; 203 CLR 662 at 674–675 [29] and [30] in a two-fold form, drawn in part by adoption of what had been said by the United States Supreme Court in Union Bank v Wolas 502 US 151 (1991) at 161: The primary objective is the securing of equality of distribution amongst creditors of the same class; with the consequential purpose of deterring the “race to the courthouse” (put by the Supreme Court: “to dismember the debtor during his slide into bankruptcy”) and thereby enhancing the prospect of debtors trading out of difficulty.
Fifthly, the object of the statutory set-off was expressed by Mason CJ, Brennan, Deane, Dawson, Toohey, Gaudron and McHugh JJ in Gye v McIntyre [1991] HCA 60; 171 CLR 609 at 618–619, being to prevent injustice and to do substantial justice where “a debt is really due from the bankrupt to the debtor to his estate”. Provisions such as s 553C (s 86 of the 1966 Act) are to be given “the widest possible scope”: Day & Dent Constructions v North Australian Properties Pty Ltd (Provisional Liquidator Appointed) [1982] HCA 20; 150 CLR 85 at 108 and Gye v McIntyre at 619, as long as it be recognised that that width and the “substantial justice” is confined within the limits of genuine mutuality as a matter of substance: Day & Dent Constructions at 95 and Gye v McIntyre at 619. The construction and application of set-off provisions such as s 553C is to be approached in the context of these underlying values that is reflected in the binding legal principles of the authorities.
Sixthly, the practical effect of the correctness of the creditor’s position in this case should be acknowledged at the outset. The creditor does not seek to invoke s 553C to set off the debts the very subject of the asserted preference payments. The creditor accepts that that would entirely defeat the statutory purpose of the preference provision by the circularity involved. Circularity is an anodyne way of expressing the absurdity of the proposition that would strip the preference provision and action of all its utility and effect. The creditor submits, however, that it is legitimate to set off another debt owed by the company in liquidation to the same creditor and such falls within, and has always fallen within, the purview of s 553C and predecessor provisions in bankruptcy statutes. The consequences of the correctness of that proposition are as follows: If a creditor had two debts each of $100, and it was preferred as to one in full, it cannot set off the underlying debt in respect of which it was preferred against the obligation to disgorge the preferred payment of $100, but it can set off the obligation to disgorge against the other debt of $100. Thereby, it receives at least 50 cents in the dollar from the administration. This return on these hypothesised facts (though not strictly a dividend and which may, depending on arguments later considered, be supplemented by the value of the proof for the other $100) would be irrespective of what assets remain for all other creditors, of the extent of the insolvency, and of the pari passu distribution amongst the other creditors. In other words, the preferred creditor’s effective position can be seen by the operation of s 553C and as an effective “distribution” by reference to the size of its debts and the size of its preferred payment for which it has a liability to disgorge and not from the overall position of the insolvent company, the insolvent estate of the company, and the claims of all creditors. Not only would funds from the repayment or disgorgement of a preference not be available to contribute equally to other ranking unsecured creditors (otherwise than by the reduction of the creditor’s proof by operation of s 553C), but also the funds would not be available to contribute to priority creditors such as employees, or to the costs of the administration. This unavailability of the funds comprising the disgorgement of the preference to fund a distribution to priority creditors effectively means that an erstwhile preferred (likely non-priority) creditor gains access to preference recovery funds in priority to priority creditors, by operation of s 553C, a statutory provision built on equitable notions of mutuality and reciprocity, and fairness. On the other hand, if the creditor disgorged the preference in full and so restored the estate to the position in which it would have been had the preferential transaction not occurred, and was entitled thereafter to prove for both its debts, that is for the full $200, it might be thought that any dislocation of what would have been the distribution of the estate amongst all the creditors (including the preferred creditor) would have been remedied, and priority creditors and the liquidator would have available the full amount of the disgorgement for their claims and for the costs of the administration.
Seventhly, if the creditor’s position be correct there appears to be an affectation of the equality of distribution by mutuality encompassing the very obligation to remedy the transaction that infringed that equitable principle; whereas if the liquidator’s position be correct and mutuality does not encompass the obligation to remedy the preference the creditor is put into the very same position in which it would have been had it not been preferred by a transaction that was contrary to the statute and contrary to the underlying equitable principle of equality.
Whether or not s 553C permits this course proposed by the creditor is the question at hand. As the Court said in Gye v McIntyre at 619, protection against abuse of the section (s 553C) is provided for in subs 553C(2), and the requirement of mutuality at the relevant date.
The legal context in 1992 of s 553C
The nature of a preference and its recovery
Before turning to the relationship between set-off and preference, it is necessary to be clear as to the effect of a preference, the nature of the preference action, and the consequences of the success of such an action in Australian insolvency law.
In Burns v Stapleton [1959] HCA 34; 102 CLR 97 at 104, Dixon CJ, Kitto and Windeyer JJ pointed out that s 95(1) of the 1924 Act did not avoid instruments, but rather it avoided certain kinds of changes in the legal situation of the insolvent person. It made void, if it applied, the change which, if allowed to be effectual, would dislocate the statutory order of distribution amongst the creditors. That expression of the matter is to be understood in the light of what Dixon CJ, Fullagar, Kitto and Taylor JJ had said three years earlier in Federal Commissioner of Taxation v Jaques [1956] HCA 40; 95 CLR 223 about the nature of s 95(1) of the 1924 Act. The question in issue there was whether s 95 was a provision contemplated within s 5(3) of the 1924 Act dealing with provisions binding the Crown. In dealing with this question their Honours said at 229–230:
Even on this broad construction, however, s 95(1) cannot be held to relate to such remedies, for it stands apart from the provisions which provide for the divesting of property from a debtor on his becoming a bankrupt and for matters incidental to the divesting, and it does not affect any remedies which, but for the Act, might have been pursued against the debtor’s property. It relates, indeed, to property, money, obligations and judicial proceedings which, it assumes, would otherwise be valid and therefore immune from attack by means of any remedy provided by law. And it does not concern itself with creating any remedy. It simply renders certain transactions void as against the trustee, leaving the general law or other statutory provisions to supply appropriate remedies for the situations thus created. Its operation in respect of a payment to a creditor (and for present purposes the other kinds of transactions to which it applies may be ignored) is to make the payment, as against the trustee void as a payment, so that, in favour of the trustee, the creditor must be considered to have received money which belongs to the bankrupt’s estate, and his debt must be considered not to have been paid. The trustee’s remedies are to sue for the recovery of the money as money had and received to his use, which is a remedy provided by the common law, … or to apply to the Bankruptcy Court for an order for repayment, which is a remedy provided by s 25... The creditor, on the other hand, is remitted to the only remedy which he would have had if the payment had not been made, namely to prove in the bankruptcy...
It may be thought to be a question whether s 95(1) is not one of the provisions of the Act “relating to the priorities of debts”. It is true that it is not included in the group of sections by which the Act prescribes the order of priorities to be observed by the trustee in the application of the estate of a bankrupt, namely ss 84, 85, 86, 87, 88A and 89 in Div. 2 of Pt. VI. It is, however, in the nature of a corollary to those sections, in the sense that it is directed to ensuring that the administration of a bankrupt’s estate in accordance with them shall not be prevented by any conveyance, transfer, charge, payment, obligation or judicial proceeding, occurring within six months before the presentation of the petition and not possessing certain saving characteristics, which, if it were allowed to be effective, would put a debt ahead of the place appropriate to it in the prescribed order. Its operation, so far as payments are concerned, is to “prevent a payment to anybody who, but for such payment, would share in the administration of the bankrupt’s estate”, that is to say “any person who, at the date of the payment to him, would have had to come in and prove and rank with the other creditors in the bankruptcy”... The section is therefore analogous in its purpose to the old rule which invalidated a fraudulent preference on the ground that if it were permitted to stand “the policy of the bankruptcy laws would be defeated” … and to the provision now in force in England under s 44 of the Bankruptcy Act 1914 which has been described as invalidating such a preference as “a fraud upon the administration in bankruptcy”…
[footnotes omitted]
In Commissioner of Taxation v Lane [2020] FCAFC 184; 385 ALR 92 I said (with the agreement of Perram and Farrell JJ) the following at 140 [134] about Jaques and the preference provision (s 122 of the 1966 Act):
The following is to be noted about the text of s 122 and about these passages from Jaques: First, the avoidance is as against the trustee. Secondly, its operation in respect of a payment is to make the payment void as a payment so that, in favour of the trustee, the creditor is to be considered as having received money which is part of the bankrupt’s estate, and the creditor’s debt is considered not paid. Thirdly, the trustee in bankruptcy’s remedies as to monetary recovery include: a suit at common law, for moneys had and received (now in restitution) or an order for payment under the Bankruptcy Act (s 25 under the 1924 Act, s 30 under the 1966 Act). Fourthly, that the avoidance is as against the trustee in bankruptcy (not generally or as against the debtor, now bankrupt) means that the sequestration order marks the event to which the section speaks and the date of commencement of the bankruptcy marks the earliest time from which the avoidance operates: Williams v Lloyd at 374; and Re Fiorino;Fiorino v Woodgate [1994] FCA 181 at [42]. Fifthly, the provision does not provide for avoidance entitling the debtor to sue to recover the payment to which the trustee in bankruptcy succeeds by force of s 58. Rather, it is the trustee’s common law action because, by force of the statute and the making of the payment void as against the trustee in bankruptcy, the creditor is to be treated as having received money which belonged and belongs to the estate of the bankrupt. The trustee in bankruptcy would be the plaintiff in the action, not because he or she succeeded a right of action of the debtor (now bankrupt), but because the operation of the section treats the creditor as having received property of the bankrupt estate administered by the trustee in bankruptcy. In any event, an order could also be made under the Bankruptcy Act to pay to the trustee in bankruptcy moneys representing money belonging to the bankrupt’s estate. Sixthly, the creditor is remitted to the remedy that it had: to prove in the bankruptcy. Seventhly, the purpose of the section is to ensure that the administration of the estate takes place in the order prescribed by the Bankruptcy Act and that the payment not dislocate the working of the statute: in the language referable to the notion of the fraudulent preference – to avoid a fraud on the administration of the bankruptcy.
[emphasis added]
As shall be seen, the drafting of the unfair preference provisions in the 1992 Act did not use the expression “void against the liquidator”. Nevertheless, the notion that, as against the liquidator in the preference action, the payment is to be seen as having been made from the assets of the estate of the insolvent company is important in appreciating the proper character of the obligation to disgorge the preference and of the funds received by the company upon such disgorgement.
One further point relevant to the stated case should be made about Jaques and the preference provision. Their Honours in Jaques thought s 95 of the 1924 Act to be “in the nature of a corollary” to ss 84, 85, 86, 87, 88A and 89 of the 1924 Act prescribing the order of priorities.
The notion of “void against the trustee [or liquidator]” has a long provenance. Chief Justice Dixon and Fullagar J discussed it in the context of the Statute of Elizabeth in Brady v Stapleton [1952] HCA 62; 88 CLR 322 at 332–335. Fraudulent assignments were valid until a creditor intervened by levying execution or commencing legal proceedings. Void was void sub modo, that is, void under a qualification or condition. The transaction took effect until another creditor acted. Title passed, if there were title to give. Likewise, preferences were effective payment until a trustee or liquidator elected to set them aside: NA Kratzmann Pty Ltd (in liq) v Tucker, Liquidator of Reed Murray Developments Qld Pty Ltd (No 1) [1966] HCA 72; 123 CLR 257 at 277; and Starkey (as liq of Allan Fitzgerald Pty Ltd (in liq)) v Deputy Commissioner of Taxation [1994] 1 Qd R 142 at 152 (Re Starkey).
In Williams v Lloyd [1934] HCA 1; 50 CLR 341, in the context of settlements under s 94 of the 1924 Act (voluntary settlements), Dixon J said the following at 374:
… Sec 94(1) does not avoid the entire transaction for all purposes. It makes the “settlement” void against the trustee in the bankruptcy. Such a provision means voidable at the instance of the trustee as from the time as at which his title accrues … It invalidates the “settlement” only “against the trustee”, which means for the purpose of letting in his claim; in order that his demand may be given effect to … In all other respects and after the demands of the trustee have been satisfied, the settlement stands…
[footnotes omitted]
See also Lane 385 ALR at 139 [131] and Re Trustee of the Property of O’Halloran [2002] FCA 1305 at [76] and the other authorities there cited.
The present relevance of these considerations is that the statute prior to 1992 (such as ss 120, 121 and 122 in the 1966 Act) provided for an avoidance against, and at the election of, the trustee or liquidator, not in right of the debtor, now bankrupt or in liquidation. Subject to the rights of the trustee or liquidator created by the avoidance against him or her, the payment or disposition under s 95 or s 122 was valid to extinguish the debt as between debtor and creditor. The action for recovery or disgorgement was either at common law at the suit of the trustee or liquidator for money had and received or at the suit of the trustee in bankruptcy under s 25 of the 1924 Act or s 30 of the 1966 Act. (Now, the action is under s 588FF, also at the suit of the liquidator.) The right to recover was not of the erstwhile debtor; the right to recover did not represent property (by way of any right or equity, vested or contingent) capable of vesting under s 58 of the 1966 Act; (subject to the circumstance of the recovery of identifiable property: see [44] below) the moneys recovered did not fall into any valid pre-existing security as property of the bankrupt or company in liquidation secured by any such charge; (subject to the above exception) the action inured for the benefit of all creditors for the purposes, and under the terms, of the relevant bankruptcy or companies legislation administered by the trustee in bankruptcy or the liquidator. I will return to the nature of the right of action under s 588FF of the Act and to the question of the character of the funds received by the company pursuant to an order under s 588FF.
In NA Kratzmann Pty Ltd (in liq) v Tucker, Liquidator of Reed Murray Developments Qld Pty Ltd (No 2) [1968] HCA 44; 123 CLR 295, the Court (McTiernan, Taylor and Menzies JJ) considered the proper order to make in a successful preference action pursuant to s 293 of the Companies Act 1961 (Qld) invoking s 95 of the 1924 Act. Both the debtor company and the preferred creditor company were in liquidation at the time of the declaration. The debtor company was entitled to prove in the liquidation of the preferred company for the amount of the preference; and the preferred company was not entitled to prove in the liquidation of the erstwhile debtor company for the underlying debt until the preference was repaid in full. The Court referred with approval to what Chief Justice Barwick had said in NA Kratzmann Pty Ltd v Tucker (No 1) [1966] HCA 72; 123 CLR 257 at 285 as to the liquidator’s right to maintain the action for moneys had and received. In approving (with one irrelevant qualification) the judgment of Bennett J in Re Yagerphone Ltd [1935] 1 Ch 392, the Court in Kratzmann (No 2) made clear that the moneys recovered are not the same moneys as paid to constitute the preference, and are not moneys of the bankrupt or company subject to the pre-existing charge, nor did the title of the trustee to them come by succeeding to any title the bankrupt had. The Court endorsed the observations of Russell LJ in N W Robbie & Co Ltd v Witney Warehouse Co Ltd [1963] 1 WLR 1324 at 1338 that concerned Re Yagerphone, as follows:
… that a claim by the liquidator for repayment to him of a fraudulent preference was not subject to the debenture-holder’s charge: a statutory right in and only in the liquidator to make such a claim could never have been property of the company the subject to the charge.
That the position would be different in respect of the recovery of identifiable property (see Kratzmann (No 2) at 301–302) does not affect the relevant point that the right of recovery is the trustee’s or liquidator’s to recover money or property for the benefit of the creditors according to the statutory regime. If the property is identifiable as a matter of tracing it may still fall within an earlier security which had attached, at least prior to the preference, in which case the trustee or liquidator is unlikely to expend funds of the estate on such a recovery action.
The nature of mutuality
The nature and limits of the notion of mutuality are to be taken principally from the decisions of the High Court in Hiley v People’s Prudential Assurance Co Ltd [1938] HCA 40; 60 CLR 468; Day & Dent Constructions 150 CLR 85; and Gye v McIntyre 171 CLR 609.
The creditor emphasised the width of the concept of mutuality. The phrase “the widest possible scope” was used in Day & Dent Constructions at 108 and approved in Gye v McIntyre at 619. The creditor relied on Hiley’s case as founding a contingency sufficient for the notion of mutuality of dealings. In Hiley, a policy holder (the appellant, Mr Hiley) borrowed money from his life company giving a registered mortgage over certain land and depositing his life insurance policy as security. The life company transferred the mortgage along with other similar mortgages to a lender to it, which lender itself transferred the mortgage by way of security to a bank. The life company was later wound up. Its liquidator informed the policy holder that it would not carry out its obligations to him under the policy thereby repudiating it. After liquidation, when the bank sued the policy holder for the mortgage debt, a dispute arose about the validity of the transfers of the mortgages on the ground that the transfers by the life company were ultra vires. The policy holder sought to set off against the mortgage debt his right to damages for repudiation of the policy by the life company. This, of course, was not possible if only the bank was entitled to recover the mortgage debt. The dispute was settled and some of the policies (relevantly including that of the appellant) were re-transferred to the life company by the bank. The question in issue was whether the policy holder was entitled, at the date of liquidation of the life company, to set off his right to damages for repudiation of the policy against the debt under the mortgage, now that the policy had been reinstated to the life company. In concluding that there was relevant mutuality at the time of the commencement of the liquidation, Rich J said, at 60 CLR 487, that the answer to whether or not there was mutuality was to be gained by ascertaining the rights by reference to “the natural outcome of previous transactions”, citing In re Daintrey; Ex parte Mant [1900] 1 QB 546 at 568. Justice Rich said, again referring to In re Daintrey, that there was no need for there to be existing claims at the relevant time. Rather, Rich J said at 487:
Rights must be vested in the creditor and in the company which, without any new transaction, grow in the natural course of events into money claims capable of forming items in an account or capable of settlement by set-off.
[emphasis added]
Thus, the right to set aside the mortgage was the product of the right or equity (of the life company) vested in it at the time of liquidation. The policy holder was thus, at the relevant time so as to support the claim for mutuality, to be taken as indirectly liable to the life company (albeit apparently directly to the bank) for the mortgage debt.
Justice Starke said at 490 that the dealings “would end in a monetary claim” and at 492 said that the life company was always entitled in equity to the benefit of the mortgage and to the debt secured by it.
Justice Dixon at 496–497 rejected the proposition that there was a new claim by the liquidator against the bank. He made, relevantly, three points. First, there was no need for enforceable debts. Rather, he said at 496–497:
… the general rule does not require that at the moment when the winding up commences there shall be two enforceable debts, a debt provable in the liquidation and a debt enforceable by the liquidator against the creditor claiming to prove. It is enough that at the commencement of the winding up mutual dealings exist which involve rights and obligations whether absolute or contingent of such a nature that afterwards in the events that happen they mature or develop into pecuniary demands capable of set off. If the end contemplated by the transaction is a claim sounding in money so that, in the phrase employed in the cases, it is commensurable with the cross-demand, no more is required than that at the commencement of the winding up liabilities shall have been contracted by the company and the other party respectively from which cross money claims accrue during the course of the winding up...
[emphasis added; footnotes omitted]
Secondly, at 497, he said that the matter was not one of form but of substance:
In the second place, the equitable or beneficial interest of the parties in the mutual debts, credits or dealings must be considered and not merely the dry legal right. A set-off will be allowed between a debt owing by C to a liquidating company and a debt owing by it to B, if B as creditor holds the chose in action as bare trustee for C. Correspondingly, a set-off will be refused between a debt owing by B to a liquidating company and a debt owing by it to B, if B as creditor hold the chose in action as bare trustee for C …
[footnotes omitted]
Thirdly, at 498, Dixon J expressed the nature of the contingency in that case in a manner important for the resolution of the arguments of the creditor in this case:
In the present case, at the commencement of the winding up the respondent company no longer had the unencumbered ownership of the mortgage debt owing by Hiley. But it was at least entitled to an equity of redemption in that debt, which, under the registration system, was vested at law in the bank. This means that in equity the company was considered owner of Hiley’s mortgage debt, subject, however, to the debt or liability for which the bank held it as security and any further amount for which the Federal Building Assurance Co. Ltd. was entitled to hold the mortgage as security. Moreover, there existed a claim to set aside or treat as void or voidable the transfers of the mortgage from the respondent company to the Federal Building Assurance Co. Ltd. and from the latter company to the bank. This claim had not been propounded at the time but all the elements upon which it was afterwards based existed at the time when the winding up commenced.
[emphasis added]
Further to this, at 499–500, Dixon J summed up the position before the Court in Hiley:
The question in this case is, in my opinion, whether when in virtue of rights or claims subsisting at the commencement of the winding up, the liquidator gets in the interest antecedently transferred by the company, that is, accordingly as it may be regarded, when he clears off the encumbrance or substantiates in part by way of compromise the disputed claim the transfer was invalid, the interest so got in becomes subject to the rights of set-off to which it must have been subject, had it been continuously vested in the company.
In my opinion the answer is that the entire amount of the mortgage becomes subject to the statutory right of set-off. All the respondent company’s rights in relation to the mortgage arise out of and are referable to the rights subsisting at the time when the winding up began. It pursued or prosecuted whatever rights then belonged to it with the result that it obtained a right to call for an unencumbered legal title to the mortgage to which, unless the transfers or one of them were in truth invalid, it was entitled, on liquidation, only in equity subject to encumbrances. But this was the consequence of pursuing rights subsisting at that time and involved no new and independent transaction. Standing as the liquidator did upon claims forming part of the assets he was appointed to administer, he cannot assert a fresh and independent title to the asset got in so as to free it from the disability or disadvantage of set-off to which, if it formed part of those assets, it must be subject. …
[emphasis added]
The relevant right or equity and the relevant obligation which later grow into a claim or debt must be in existence as at the relevant date. The right or equity or obligation may be absolute or contingent. The call by Dixon J to have regard to the equitable or beneficial interest reflects the equitable character of the conception of the set-off embodied in the statutory provision. Equity long had a role in the administration and operation of bankruptcy and in aid and furtherance of the equitable conceptions and values that underpinned insolvency and bankruptcy: Holdsworth W, A History of English Law (2nd ed, Methuen and Co Sweet and Maxwell, 1971) volume 1 at 470–473, volume 8 at 241–244, and volume 12 at 281–283 and 541–542; May HW and Edwards WD (ed), The Law of Fraudulent and Voluntary Conveyances (3rd ed, Steven and Haynes, 1908) at 306–307; In re Mouat; Kingston Cotton Mills Co v Mouat [1899] 1 Ch 831.
It was said by the creditor here that there were mutual dealings between the two companies reflected in the case stated: goods supplied by the creditor leading to two debts of the company in liquidation, one being paid by the preferential payment. It was submitted that the right to recover the preference was contingent in the sense discussed in Hiley’s case, as the natural course of events if a liquidator were to be appointed or the circumstances were of such a nature that in the events that happened the dealings matured into pecuniary demands by the liquidator on behalf of the company in liquidation; that the claim is of the company in substance beneficially by the order to pay the company; and that the right of the liquidator was the dry legal right held for the benefit of the company.
It is the legitimacy of these submissions upon which the answer to the question reserved turns. It is to be answered by the reference to the text, structure and purpose of the statutory provisions. For the reasons later discussed, those submissions which were the core of the creditor’s argument, should be rejected.
In Day & Dent Constructions 150 CLR 85, Day & Dent (D & D) applied to borrow $100,000 from a finance company (Esanda) and requested it to direct the money to another company, North Australian Properties Pty Ltd (NAP). Esanda did so, taking security from D & D and NAP, both being borrowers, but NAP also guaranteeing payment by D & D. In due course D & D went into liquidation. Esanda made demand on NAP which repaid the $100,000. The liquidator of D & D sought repayment from NAP of the loan of $100,000 that D & D had made to NAP. The issue was whether the $100,000 payment by NAP to Esanda (after D & D’s liquidation) could be set off against the debt of $100,000 of NAP to D & D, or whether NAP had to repay the $100,000 loan and prove for the $100,000 payment to Esanda under the guarantee in D & D’s liquidation. After referring to Hiley’s case, Gibbs CJ (with whom Stephen J agreed) said at 91 that the principle was that “it is enough at the date of liquidation [that] there existed on the one hand a debt and on the other hand a liability which in due course might mature into a debt”. Justice Mason referred to Hiley’s case and in explanation of the principle referred at 103–104 to what Byles and Montague Smith JJ had said in Naoroji v Chartered Bank of India (1868) LR 3 CP 444 (a case cited by Dixon J in Hiley), as follows:
In support of this proposition Dixon J. cited Naoroji v. Chartered Bank of India (1868) LR 3 CP 444, at pp 451-452 ; Astley v. Gurney (1869) LR 4 CP 714 ; Palmer v. Day& Sons (1895) 2 QB 618, at p 622 ; and Daintrey (1900) 1 QB, at pp 568, 574. Sheppard J. in the Full Court thought that these cases did not stand for the proposition for which they were cited. Again his Honour sought to distinguish them as dealing with claims involving fixed, as opposed to contingent, liabilities. He referred to constant references in the judgments in Naoroji, Astley and Palmer to the fact that the claims in question "must", rather than may, have resulted in a debt.
What was meant by these statements is, I think, illustrated by the remarks of Byles and Montague Smith JJ. in Naoroji, Byles J. said (1868) LR 3 CP, at p 451:
Mutual credits I conceive to mean simply reciprocal demands which must naturally terminate in a debt. It seems to me that the transaction described in this case would naturally terminate in a debt. (Emphasis supplied.)
Montague Smith J. (1868) LR 3 CP, at p 452 said:
The object of the enactment seems to me to have been, that, where merchants have had mutual dealings, each giving credit to the other, relying upon each other's solvency, in the event of the bankruptcy of one of them, the account shall be taken between them of all such credits and dealings as in the natural course of business would end in debts, and the balance shall be the debt due from the one to the other.
Justice Mason at 104 recognised that Dixon J in Hiley extended the principle to contingent liabilities.
Gye v McIntyre 171 CLR at 618–620 reinforced the authority of Hiley’s case and Day & Dent. At 623–624 the Court said:
In the context of s.86, the word "mutual" conveys the notion of reciprocity rather than that of correspondence. It does not mean "identical" or "the same". So understood, there are three aspects of the section's requirement of mutuality. The first is that the credits, the debts, or the claims arising from other dealings be between the same persons. The second is that the benefit or burden of them lie in the same interests. In determining whether credits, debts or claims arising from other dealings are between the same persons and in the same interests, it is the equitable or beneficial interests of the parties which must be considered. … The third requirement of mutuality is that the credits, debts, or claims arising from other dealings must be commensurable for the purposes of set-off under the section. That means that they must ultimately sound in money.
The requirement that the credits, the debts or the claims arising from other dealings be commensurable does not mean they must be vested, liquidated or enforceable at the decisive date, that is to say, at the time of the sequestration order or special resolution accepting the composition. Provided they exist as contingent at that date and are of a kind which will ultimately mature into pecuniary demands susceptible of set-off, the requirement of the section may be satisfied in relation to them. In so far as "dealings" are concerned, Dixon J. pointed out in Hiley:
"It is enough that at the commencement of the winding up mutual dealings exist which involve rights and obligations whether absolute or contingent of such a nature that afterwards in the events that happen they mature or develop into pecuniary demands capable of set off. If the end contemplated by the transaction is a claim sounding in money so that, in the phrase employed in the cases, it is commensurable with the cross-demand, no more is required than that at the commencement of the winding up liabilities shall have been contracted by the company and the other party respectively from which cross money claims accrue during the course of the winding up.”
[emphasis added]
Thus, from Hiley, Day & Dent and Gye v McIntyre the requirements of the provision are: the absolute or contingent rights or equities or obligations from the mutual dealings that give rise to the credits, debts or claims must be between the same parties and in the same interests in the sense of the equitable or beneficial interests; and they must exist at the relevant date.
Section 553C is concerned with what is to be proved in the insolvent estate: see s 553C(1)(c). That is why it sits within Div 6 of Pt 5.6. Under s 553(1) provable debts (relevantly, any balance owed to the creditor after set-off under s 553C) are “all debts payable by, and all claims against, the company … the circumstances giving rise to which occurred before the relevant date”. Thus the binding connection between s 553 and s 553C means that the phrase “at the relevant date” must be understood as before the relevant date. This is the position in bankruptcy: Foots v Southern Cross Mine Management Pty Ltd [2007] HCA 56; 234 CLR 52 at 58 [10].
Authorities before 1992 concerning set-off and claims by trustees and liquidators
It is uncontroversial that set-off is available in respect of a right which the trustee or liquidator can pursue in an action, or in other proceedings where the right being enforced by the trustee or liquidator is one of the bankrupt or of the company in liquidation.: see In re Daintrey at 549 referred to by the Court in Gye v McIntyre 171 CLR at 621. Thus, a claim by the trustee to which he or she succeeded by s 58 of the 1966 Act which was a claim of the debtor against the creditor or a claim of the company against the creditor which the liquidator brings, is to be taken as set off, if in the same interest, against a claim of the creditor against the bankrupt or insolvent company.
Re Washington Diamond Mining Company [1893] 3 Ch 95 was strongly relied upon by the creditor. A director held partly paid up shares. His director’s fees were unpaid. The company was in “embarrassed” circumstances. On a day when the company had barely over £2 in the bank the director gave it a cheque for £70 to pay up his shares and took a cheque for £70 for his fees. The company was shortly thereafter wound up. The liquidator sought recovery of the £70 as a fraudulent preference. Sections 38(7) and 101 of the Companies Act 1883 (UK) prevented any set-off against calls on the winding up of the company. (For the present position in Australia, see s 553A of the Act.) At first instance, Vaughan Williams J refused to draw the necessary inference that there was an intention to prefer (the mental element absent from the Australian provision). It is important to recognise that under the 1883 Act the preference was fraudulent and void against the trustee, if it was made “with a view of giving such creditor a preference”. The effect of dislocation of the pari passu distribution, and so injury to other creditors, was assumed by the statute if the mental state was present. Lord Justice Lindley on appeal (with whom Bowen LJ concurred) comfortably drew that inference, saying at 109–110:
It is clear enough what each of the transactions impeached in truth was. It was an attempt by these directors to pay up their shares in full without really parting with any money. I will assume that each of them owed the company £70 in respect of his shares, but the company owed him £70 for fees. If the company could have paid him his fees, and had paid them, he could have applied the money so paid to him in paying up his shares, and all would have been well. So, if the company had had the money with which to pay him his fees, the cases shew that it would have been unnecessary to go through the form of paying him for them by a cheque, and taking back the same cheque, or another of the same amount, for the sum due from him on his shares. If the company had had the cash with which to pay him his fees, an assent to set them off against what he owed the company, and a set-off accordingly would be equivalent to a payment in cash of each of the cross-demands: see Spargo's Case. Although even then a question of fraudulent preference might arise if the company were wound up in three months. But in this case the company had no means whatever of paying Mr. M'Keand or Colonel Underwood his fees, unless he furnished the funds by first paying up his shares. Each of them accordingly did so. He paid them up in cash; but then the money he paid to the company became the company's money, and he was a mere creditor of the company for his fees. He was not entitled to be paid those fees in preference to any other creditor, but he and his co-directors pay him in full when they know that Farmer is pressing, and that the non-payment of the royalties jeopardizes the property of the company, and that the company has not a sixpence available to pay any of its debts. The circumstances are such as to drive me to the conclusion that Mr. M'Keand and his co-directors acting for the company made these payments of £70 to Mr. M'Keand and Colonel Underwood deliberately to give them a preference over the other creditors of the company, and thereby to refund to them the £70 which they had paid the moment before in respect of their shares.
[footnotes omitted]
His Lordship then at 110–112 went to the heart of the matter and came to the question of law:
In fairness, however, to these directors, I will say that, although I have no doubt that they made these payments with a view to prefer Mr. M'Keand and Colonel Underwood, yet that preference was not the ultimate object they had in view. The preference was only a means to an end, the end being to relieve them from the necessity of providing cash out of pocket in order to pay up their shares. The exchange of cheques was only a mode of setting off the amount due to them for fees against the amount due on their shares. The transaction, and the payment to them, would have been lawful and valid if the company had not been ordered to be wound up on a petition presented within three months after the payment; but the payment to them is made unlawful and void by the winding-up proceedings within that time. Whether the directors expected a petition so soon I do not know, nor need I inquire: Ex parte Griffith; Ex parte Hill. As regards Colonel Underwood it was also contended that, owing to some defect in his appointment or qualification, he was not entitled to any fees. But it is unnecessary to examine this point, and I therefore pass it over.
But now comes the question of law. If the company were an ordinary bankrupt trader to whom the mutual credit clause (sect. 38) of the Bankruptcy Act, 1883, was applicable, the preferential payments to Mr. M'Keand and Colonel Underwood could not be avoided by the trustee in bankruptcy, because they would have injured no one. The two debts could have been set one against the other after the bankruptcy just as effectually as before, and whether the debts were both paid or were set off against each other before the bankruptcy or after would be perfectly immaterial. This being unquestionably true of ordinary traders, it is contended that sect. 164 of the Companies Act, 1862, is so worded as to involve the same consequence on the winding-up of a company, which must for this purpose be treated as a bankrupt trader. This argument is certainly ingenious, but to give effect to it would be to defeat those sections of the Companies Act, 1862, which prevent all set-off against calls on the winding-up of a limited company so long as any of its creditors are unpaid. See sect. 38, sub-sect. 7, and sect. 101; Grissell's Case. Sect. 164 is a general section applicable to all the creditors of all companies governed by the Act, whether they are limited or not, and whether the creditors are members or not; its language is, therefore, wide enough to include all creditors of all companies governed by the Act. But, in applying the section to limited companies and to the members of such companies, the special legislation applicable to them must be regarded and must not be defeated. The first part of sect. 164 must be construed as referring to the class of acts described in sect. 48 of the present Bankruptcy Act, 1883; and the words “any trader” in sect. 164 must be held to include traders to whom the mutual credit clause in the Bankruptcy Act, 1883, s. 38, is inapplicable, as well as to include those traders to which the clause is applicable. This construction does no violence to the language used, and is obviously required by those sections of the Act which expressly prevent a member of a limited company in arrear for calls from obtaining payment in full of debts due to him in preference to other creditors. The disallowance of a set-off against calls between a limited company and its members on a winding-up is to prevent any such preference, and its prohibition removes the only reason why a preferential payment in bankruptcy, where a set-off is allowable, is not fraudulent and void. The maxim Cessante ratione cessat lex is properly applicable in such a case. This construction of sect. 164 is not new; it was seen to be right and was distinctly adopted by Lord Justice Cotton in Kent's Case, and it is the only construction which does not defeat the obvious intention of the Legislature. It must be borne in mind that it has been already decided that sect. 10 of the Judicature Act,1875, has not repealed or affected the enactments in the Companies Act, 1862, prohibiting set-off against calls in the winding-up of limited companies: see Gill's Case. In considering this case I have assumed that the sums paid by Mr. M'Keand and Colonel Underwood were really due and payable by them to the company, although no calls had been made as contemplated by the articles of association. I am by no means sure that this is not taking too favourable a view of the position of these gentlemen. If the moneys were not due the case is much stronger against them: see Sykes's Case.
[emphasis added and footnotes omitted]
The creditor points to the view of Lindley LJ that the payments would have been set off against each other had the director’s liability not been for a call on his shares. Thus, it was submitted, the case supports the proposition here that a liability to repay a preference can be set off against another debt owed to the creditor. That is, however, to distort the facts of the analysis by Lindley LJ and to fail to appreciate the operation of the fraudulent preference provision under the 1883 Act. If the debt of the director to the company in Re Washington Diamond had not been for a call, there would have been mutual debit and credit existing prior to the winding up. If the parties had agreed to set them off or each had paid his and its debt in full (as in fact was done by exchange of cheques) there would have been no injury to the assets of the company (as Lindley LJ said) and so no dislocation of priorities for other creditors. There was a fraudulent preference under the 1883 UK Act because there was the payment of a debt with the relevant intention (not because there had been shown to be the effect of a preference, ie. a dislocation of equal distribution). Whatever assets the debtor company had remained untouched (if an agreed set-off) or remained at the same level (if paid in full by the creditor and received in full by the debtor) leaving the creditor without a proof in the estate, and the trustee without a claim against the creditor.
Here, on the agreed facts of the special case and on the hypothesis that an unfair preference is made out, the available assets of the debtor were depleted by the payment of the preference; but the obligation to disgorge the payment which would restore the depletion of the insolvent estate is said to be able to be set off against another debt of the insolvent company to the same creditor. Unlike the circumstances in Re Washington Diamond, there has been, on this hypothesis, injury to the other creditors; there has been a depletion of the company’s assets to pay a preference and the restoration or making good of that depletion is sought to be prevented by a set-off against another claim by the same preferred creditor. Re Washington Diamond (leaving aside the question of the call) was the cancelling out (whether by agreement or by two equivalent payments) of the creditor’s one position and the debtor’s one position. It was the equivalent of the operation of s 38 of the 1883 UK Act (the equivalent of s 553C). As Lindley LJ expressed it, there was no injury to the estate compared to the position that would have obtained under s 38 had the parties done nothing (leaving aside the debt being for a call). Here, in the facts of the special case, had the parties done nothing, the assets of the company would not have been depleted by the asserted preference and the creditor would have the right to prove pari passu for its various debts. The order of distribution has been dislocated by the payment which was, on this hypothesis, a preference. If the obligation to disgorge and replenish is to be allowed to be set off against the second debt, this dislocation remains, at least in part, as the preferred creditor (not the liquidator and the creditors) receives the return of the preference in full. The creditor effectively receives a return based not on the overall assets of the insolvent company and the overall claims of ranking creditors, but (at least) on the basis of the percentage of the preferred debt to the sum of the preferred debt and other debts which the preferred creditor is owed. The creditor remains able to prove for the balance (if any of the second debt). It is unclear whether it could or can also prove also for the debt that was preferred as part of the “balance of the account” for the purposes of s 86 of the 1966 Act or s 553C(1)(c) of the Act bearing in mind Re Kratzmann (No 2) or the terms of s 588FI of the Act (to which I will come). On the other hand, other general creditors of equal rank receive a pari passu distribution from the balance of the assets unreplenished by disgorgement of the preference, though also partially unburdened by the reduction or elimination of the proof of the creditor for the second debt that has been set off. The distribution of the general creditors is calculated by reference to the available unreplenished estate and the total value of creditors’ proofs. Priority creditors lose their priority in relation to the funds allowed to be set off. The liquidator has no right to the funds allowed to be set off for the costs of the administration.
The above understanding of Re Washington Diamond (and its difference from the position in the special case before us) is illuminated by the discussion by Robson J in Jetaway Logistics Pty Ltd (rec & mgrs app’d) (in liq) v Deputy Commissioner of Taxation [2008] VSC 397; 68 ACSR 226 of the decision of the Full Court of the Supreme Court of Victoria in Re A & J Lazarotto Pty Ltd (unreported, 1977 BC 7700145). (This discussion is unaffected by the reversal of the decision of Robson J by the Court of Appeal: [2009] VSCA 319; [2009] 26 VR 657.) Justice Robson and the Full Court in Re Lazarotto (the former under the Act and the latter under the Companies Act 1961 (Vic) were dealing with the relationship between the set-off provision and the preference. In Re Lazarotto the Full Court applied the set-off provision of the 1966 Act to determine the ultimate effect of a transaction said to be a preference. That is, the Court applied the set-off provision in considering whether the transaction could be seen to have the effect of a preference. The facts and issues were described by Robson J at 68 ACSR 229 [11] as follows:
There the company owed its directors $7400 for rent of premises and the directors owed the company $8620 on a loan account. About a month before the company went into a creditors’ voluntary winding up, there was an exchange of cheques for $7400, satisfying the rent and reducing the loan account. The liquidator sought to set aside as a preference the payment for rent made by the company. The court observed that if the payment had not been made, in the liquidation, the directors could have set off against the loan they owed the company the rent owed to them. The court posed the question whether, by reason of the set-off provisions, the general body of creditors were worse off in the liquidation than they would have been if the transactions had not taken place. The court concluded the transaction had no effect on the payment of the general creditors in the liquidation.
This was the same position as in Re Washington Diamond. It is made clearer in expression, (with respect to Lindley LJ) by the absence of the mental element in the Australian provision. There was simply “no injury” to use Lindley LJ’s words, meaning that there was no prejudice or dislocation as the Full Court said in Re Lazzarotto: the payment did not have the effect of a preference given the operation of s 86, and so there was no preference.
The effect of giving a creditor a preference, priority or advantage is to be understood by reference to Richardson v Commercial Banking Co of Sydney Ltd [1952] HCA 8; 85 CLR 110 at 129. That effect is to be assessed as at the day of payment: Airservices Australia v Ferrier [1996] HCA 54; 185 CLR 483 at 501, applying Calzaturificio Zenith Pty Ltd (in Liq) v NSW Leather & Trading Co Pty Ltd [1970] VR 605 at 610; and Re Discovery Books Pty Ltd (1973) 20 FLR 470 at 475. As Fox J put it in Re Discovery Books at 475, approved by Dawson, Gaudron and McHugh JJ in Airservices at 501 (footnote 51):
… [T]he effect of a payment is to be judged after bankruptcy, with due regard for events occurring after the payment was made, and that one must ultimately come back to considering whether by reason of the payment, or dealing, there is less money available for the general body of creditors than otherwise might have been expected to be the case. …
See also the discussion by Finkelstein J in Wily v St George Partnership Banking Ltd [1999] FCA 33; 84 FCR 423 at 434–436.
Thus, Re Washington Diamond does not support the proposition sought to be drawn from it by the creditor.
Lister v Hooson [1908] 1 KB 174 concerned a voluntary settlement of £250 by a bankrupt on his wife declared void as against his trustee in bankruptcy. At the date of his bankruptcy, the husband owed the wife £700 in a marriage settlement of which £450 was secured. The wife claimed to set off her liability to repay the void voluntary settlement against the unsecured portion of £250 owed to her by her bankrupt husband. The right of set-off was (by majority in the Court of Appeal) rejected.
Lord Justice Vaughan Williams at 176 noted that once paid by the husband, the £250 could not be recovered from the wife by him, but it could be recovered by the trustee. At the date of the bankruptcy his Lordship said:
…[I]n order that debts may be set off they must be due respectively in the same right … [A] debt due to or from the trustee in bankruptcy and arising after the bankruptcy in the management of the estate cannot be set off against a debt from or to the bankrupt before the bankruptcy. Now the £250 which the husband paid to his wife in pursuance of the settlement which he had made on her never could have been recovered from her by the husband, but it can be recovered by the trustee in his bankruptcy. It is plain that at the date of bankruptcy there was no debt due from the wife to the husband and there is therefore no debt which the wife can utilise to pay herself the mortgage debt due to her from her husband, but she must come in and prove and get a dividend like the other creditors who have no available set-off.
Thus, for Vaughan Williams LJ there was no mutuality of debts between the same parties at the date of the bankruptcy, because at and before the relevant date there was no debt of any kind owed by the wife to the husband to set off against the debt he owed her. The settlement was void as against the trustee, but as between the parties the settlement was complete and not vitiated, even contingently.
One can see in (1) and (2) the similarity with the arguments of the liquidator in this special case. One must, however, appreciate and give weight to the statutory context of the provisions in order properly to characterise the nature of any rights or obligations vested or contingent of the subsidiary and holding companies, and so the nature of the action for recovery.
As to the first reason relied upon by the receivers and managers of the holding company, Mansfield J accepted at 80 FCR at 10–11 that the two debts were mutual. Though the statutory debt owed by the holding company did not arise from mutual dealings, it was a debt nevertheless, and his Honour said, correctly with respect, relying on Re Kolb; Ex parte England v Commissioners of Taxation [1994] FCA 359; 51 FCR 31 at 36 D–E: “There is no reason in logic or principle to exclude statutory debts from the compass of provisions such as 553C.”
His Honour then said:
… Although mutual credits and mutual debits will ordinarily result from prior dealings between the two parties, I do not think that is necessarily so. See Hankey v Smith (1789) 3 T R 507n; 100 ER 703; Forster v Wilson. As the Court in Gye v Mcintyre said (at 623): "the word 'mutual' conveys the notion of reciprocity rather than of correspondence." The broad purpose of s 553C would be frustrated rather than fulfilled if it were interpreted to require "mutual credits" or "mutual debts" to be defined so as to include not just the elements of mutuality the High Court has identified, but also that they must arise out of mutual dealings. The addition of the expression "or other mutual dealings" was not intended to limit the scope of those expressions, but to extend the circumstances of set-off to claims later crystallising from dealings before the bankruptcy, or winding up, which were capable of and did later give rise to mutual claims: see Gye v Mcintyre at 623. …
His Honour then discussed at 80 FCR 10–11 why it would be contrived to attempt to interpret the events and circumstances as “mutual dealings”. The debts were mutual in that they were reciprocal.
As to the second reason relied on by the receivers and managers of the holding company, Mansfield J first dealt with the fact that the claim was brought by the liquidator, saying at 80 FCR 11:
… I do not think that the fact that the claim against Amber Ceramics must be brought by the applicant in his own name, rather than in the name of Barossa Ceramics, means that there is no mutuality between the claims. As a matter of substance, the claim under s 588W is the claim of Barossa Ceramics. Section 588W(1) explicitly says that the amount of any claim arising by reason of contravention of s 588V is recoverable "as a debt due to the company". The fact that the claim may be enforced by the liquidator is but the procedural device for enforcing what is clearly a claim of the company.
Implicit in the above is the nature and purpose of the provisions in question to which I have referred. Sections 588V and 588W have the statutory purpose evident from their terms of protecting the subsidiary and its creditors from conduct of the holding company that is a contravention of the Act. This is the basis for the view (if it be valid) that within this statutory context and to vindicate the statutory purpose the action can be seen as the subsidiary’s in statutory substance. This can be contrasted with the different statutory context and purpose of the unfair preference provision and the recovery for it under s 588FF. The purpose there is to protect the estate from the effects of an otherwise valid inter partes transaction that has the effect of dislocating the order of distribution. The right of action in form and statutory purpose is of the liquidator (not the company) in right and interest and for the benefit of the due administration of the estate for all creditors, including priority creditors.
Justice Mansfield went on to say (at 11–12) that the “perfection” of the claim by the winding up did not prevent the set-off under s 553C. His Honour at 80 FCR 11–12 directed attention to the fact that the conduct constituting the contravention all occurred prior to the relevant date. In these respects the debt was seen by his Honour as contingent in the sense discussed in Hiley and Gye v McIntyre.
The third reason relied on by the receiver and managers of the holding company involved questions unnecessary to consider for the special case.
It is unnecessary to decide upon the correctness of all that was said by Mansfield J. That is so because, contrary to the submission of the creditor, the nature of the statutory provisions (ss 588V and 588W), the proper characterisation of any rights or obligations to which their engagement gives rise, and the proper characterisation of the action and of the proceeds of the action are important in any conclusion as to whether the debt due under the action can be seen as reciprocal or mutual to the debt owed by the subsidiary to the parent. In circumstances where the section can be seen to protect the subsidiary from contravention of the Act by the holding company by providing for an action for the benefit of the insolvent subsidiary against its parent producing a “debt due”, a conclusion that the action and recovery is for the benefit of the company in the relevant sense and can be seen to have grown from a contingency of an earlier contravention of the Act concerned with an injury to the subsidiary is understandable. The legitimacy of the set-off can be seen in the genuineness of the mutuality and in the good sense and fairness of seeing the two debts as mutual. The purpose of the substantive provisions is to protect the subsidiary and its creditors from the effects of the holding company’s contravention of the Act in allowing trading of the subsidiary to continue. In such circumstances, it may be reasonable to view the statutory debt as arising from the earlier contravention and so be contingent by the existence of a form of statutory equity in the subsidiary against the holding company, to be vindicated through any future liquidator. Looked at thus one can see a sense of equitable fairness in a characterisation of genuine mutuality. Such does not, however, tell one how one must characterise a preference action against the preferred creditor in circumstances when the voidableness depends on no wrong or contravention of the Act, gives rise to no contingent right or obligation in statute or equity, and where the very purpose of the action is to recover moneys seen by the section as having been paid not by the company beneficially, but by it from the funds available to the administration. In such circumstances the natural characterisation of the action, the role of the liquidator, and the recovered funds is as described by Barrett JA in Fortress. In such circumstances, there is no basis in equitable fairness or in equitable substance to characterise the debts (the liability under s 588FF to repay the unfair preference, and the debt to the creditor) as in any way reciprocal.
The decision of Mansfield J in Re Parker was followed by Young JA in Buzzle. The case was concerned with the liability of directors (under s 588M) for contravention of the Act (being s 588G) for the failure to prevent insolvent trading by company. The relevant provisions had a similar form to ss 588V and 588W. The case against a company which was a creditor of the company in liquidation and the finance director of the creditor company as shadow directors of the company in liquidation failed. The appeal was dismissed. Thus the question of any contravention of s 588G was not necessary to answer for the resolution of the appeal. Justice of Appeal Young, however, conformably with then current practice dictated or influenced by the High Court decision in Kuru v New South Wales [2008] HCA 26; 236 CLR 1, dealt with all other issues in the appeal including the question of set-off under s 553C if there had been liability proven. In respect of set-off Young JA said at 80–81 [274] and [278]:
[274] The respondents rely on the decision of Mansfield J in the Federal Court in Re Parker (1997) 80 FCR 1; (1997) 25 ACSR 560. That was a case where a liquidator recovered under s 588W of the Corporations Law a debt from the holding company of a company in liquidation because of insolvent trading (s 588V). His Honour, in a thoroughly reasoned judgment based on authority, held that set-off under s 553C applied.
…
[278] In the circumstances, especially as the point is not determinative, I consider that I should gratefully follow Re Parker and hold that, if it had been necessary, I would have declared that set-off was available under s 553C.
For the reasons given in relation to Re Parker, the question of the correctness of all that was said by Mansfield J (and so Young JA by its adoption, without analysis) need not be decided to resolve the special case.
In Hall v Poolman [2007] NSWSC 1330; 65 ACSR 123, Palmer J dealt with a complex case concerned with set-off under s 553C for liability under s 588M for insolvent trading. The case also involved a preference given to the Commissioner of Taxation. In dealing with the liability of a director (Mr Irving) of the relevant company (Wines) Palmer J concluded at 65 ACSR 217 [431]:
For these reasons, I hold that Mr Irving is entitled, pursuant to the indemnity deed and under s 553C of the CA, to set off against his liability to Wines under s 588M(2) the amount which he is required to pay to the Commissioner under s 588FGA(2) of the CA.
It is unnecessary to deal in detail with his Honour’s reasons. At 65 ACSR 215–216 [418] the above conclusion was explained as follows:
In summary, the position of the parties as at the date of liquidation of Wines was as follows:
•Mr Irving had breached s 588G(2) of the CA and was liable under s 588M(2) of the CA to pay compensation to Wines, recoverable as a debt, if the Liquidators prosecuted a claim. It may be said that Mr Irving was contingently liable for this debt to the company;
•the Commissioner had received preferential payments and was liable to repay them to Wines under s 588FF(1)(a) of the CA if the Liquidators prosecuted a claim. It may be said that the Commissioner was contingently liable for these repayments to Wines;
•the Commissioner could claim indemnity in respect of these payment to Wines from Mr Irving under s 588FGA(2) of the CA. It could be said that Mr Irving was contingently liable for the debt created by s 588FGA(3); and
•if Mr Irving was contingently liable for the debt to the Commissioner, Wines was contingently liable to indemnify him under the indemnity deed and under cl 38.1 of the constitution.
With respect, for the reasons I have given, I consider what appears adjacent to the second dot point to be wrong. As to the question of set-off of the liability under s 588M, for the reasons I have given that is unnecessary to decide.
In Smith v Boné [2015] FCA 319; 104 ACSR 528 in an insolvent trading case involving ss 588G and 588M, Gleeson J followed Re Parker, Hall v Poolman and Buzzle as a matter of comity referring to Hicks v Minister [2003] FCA 757 at [75]–[76]. Thus, no analysis of Smith v Boné is required.
It is necessary, however, to deal with the reasons of Hodgson J (as his Honour then was) in Shirlaw v Lewis (1993) 10 ACSR 288. The creditor submitted that for the liquidator to succeed in this special case the Court must conclude that Hodgson J was wrong in Shirlaw v Lewis in concluding that a set-off under s 86 of the 1966 Act was available in the circumstances before him. Consideration of the decision and its influence on the outcome of the special case requires close attention to the facts and to the reasoning of Hodgson J.
In and prior to 1990, a company called Australian Hospitality Management Pty Ltd (AHM) owned a nightclub business in Sydney called The Asylum. On 25 January 1990, receivers (the defendants) were appointed to AHM. On 18 April 1990, the receivers entered into an agreement for the sale of the nightclub business to a company called Petty Cash Pty Ltd (PC) for $85,000, plus the price of stock of the business including liquor stock. Completion was to be on 18 October 1990. PC entered possession on 4 May 1990, and paid rent and liquor licence fees up to and including November 1990. Completion did not take place on 18 October. Having breached certain terms and not having paid rent or liquor licence fees in December 1990 and January 1991, on 6 February 1991 PC purported to terminate the agreement. On 22 February 1991, AHM accepted the purported termination as a repudiation. It was agreed before Hodgson J that there was a repudiation on 6 February 1991 and that the acceptance of it on 22 February 1991 put an end to the agreement.
A clause of the purchase agreement (cl 5.12) provided for the consequences of termination by AHM for default of PC. Upon resumption of possession AHM “will purchase from [PC] all of [its] goods and saleable stock in trade used in the … Business and on the Premises at the date of termination … at the value thereof …”.
On 28 February 1991, a summons to wind up PC was filed in the Supreme Court of New South Wales. A liquidator was appointed to PC on 18 April 1991.
Meanwhile, on 13 March 1991 the receivers re-took possession of the nightclub and of the liquor stock previously owned by PC to the value of $23,997.04. The receivers operated the nightclub from 13 March 1991 until 18 May 1991 when they sold the business and in doing so they sold some or all of the liquor stock.
Proceedings were commenced by the liquidator (as first plaintiff) and PC (as second plaintiff) against the receivers for conversion of the liquor stock on the basis of the avoidance of the agreement on 13 March 1991.
The receivers gave evidence, which was accepted, that they were unaware of the winding up proceedings or of the summons until the liquidator contacted them on 22 April, 1991, four days after the winding up order was made and the liquidator appointed.
Meanwhile, in mid-February 1991, an employee of the receivers had agreed with a Mr Visalli, the principal of PC, that he, Mr Visalli, would keep operating the business so that it could be sold as a going concern. Mr Visalli ceased being prepared to do so on 13 March. This explains why the receivers took possession of the business on that date and not earlier. Repudiation and acceptance thereof occurred before the commencement of the winding up on the date of the filing of the summons, but the agreement on 13 March was after the commencement of the winding up.
A stocktake was done on or shortly after 13 March to determine the value of liquor stock, to offset this value against the debt of PC to AHM. The value was $23,903.04.
The business was run by the receivers until 18 May 1991 when it was sold for $250,000. During this period, 13 March to 18 May 1991, the receivers purchased $34,106.73 worth of liquor. They were left with a closing stock of $17,069 on 18 May. Taking into account the opening stock of $23,903.04 previously owned by PC, the cost of liquor sales was $40,940.77, with gross bar sales of $114,433.78.
On 22 July 1991, the receivers lodged a proof of debt of $795,043.16, being damages claimed to be owed from PC’s repudiation of contract.
Justice Hodgson was unpersuaded on the evidence of that sum, but accepted that the damages were substantial and very much in excess of the approximately $23,000 claimed by the plaintiffs for damages in conversion, being the value of the liquor stock taken over on 13 March.
The claim brought by the liquidator and PC was under s 468 of the Corporations Law, sub s (1) of which was as follows:
(1)Any disposition of property of the company, other than an exempt disposition, and any transfer of shares or alteration in the status of the members of the company made after the commencement of the winding up by the Court is, unless the Court otherwise orders, void.
Relevantly, the provision is identical to s 468(1) in Div 1 of Pt 5.4B of the Act.
To recapitulate: The contract giving the rights in cl 5.12 was entered into on 18 April 1990. PC repudiated the contract on 6 February 1991, which was accepted on 22 February 1991. The receivers did not take possession until 13 March 1991. Prior to then, and after the repudiation on 6 February, they had in mid-February sought and obtained (until 13 March) the agreement of Mr Visalli to run the club. The summons was filed on 28 February 1991, marking under the Corporations Law at the time the commencement of the winding up of PC. The stock was used between 13 March 1991 and 18 May 1991. The proceedings were commenced on 28 July 1992.
The arguments for the receivers were set out at 10 ACSR 292–293: First, that cl 5.12 gave AHM and so the receivers the benefit of a contract for the purchase of the liquor stock giving AHM and the receivers an equitable title to the stock at the time of the entry into the agreement in 1990, which become a legal right on 13 March 1991. So, it was submitted, there was no disposition for the purposes of s 468, reliance being placed on Re Country Stores Pty Ltd (1987) 11 ACLR 385; 5 ACLC 636. Secondly, it was submitted that this was a fair transaction for valuation and in the ordinary course of business. Thirdly, it was submitted, that any indebtedness of AHM to PC on and after 13 March 1991 for the stock could be set off under s 86 of the 1966 Act. Fourthly, any avoidance by s 468 gave the liquidator a right to the stock with the effect of retrospectively making the receivers’ dealings with the stock after the commencement of the winding up on 28 February a conversation.
Justice Hodgson found that by the date of the winding up order all of the stock previously owned by PC had been sold.
Whilst Hodgson J found that cl 5.12 was intended to apply after termination, he found that the actual agreement to purchase the stock contemplated by cl 5.12 did not arise until 13 March 1991 because possession was not resumed until that point. Thus, he concluded that Re Country Stores did not govern the position. In so finding, Hodgson was rejecting any proposition that there was an agreement for sale in 1990 from the entry into the purchase agreement. The agreement for the sale of the stock was made on 13 March 1991. That agreement was to be regarded as a disposition.
Importantly, Hodgson J considered the effect on transactions of the avoidance by the provision at the time of the winding up, from the commencement of the winding up. If the disposition was by way of payment the liquidator could claim to be repaid such sum as money had and received. If the disposition was (as here) of goods the liquidator could claim the property or the traceable proceeds of that property. See generally 10 ACSR at 295 (15)–(29). His Honour continued, at 295 (29)–(37), as follows:
… However if, as in this case, the goods have been disposed of, and there are no traceable proceeds of sale in the hands of the person to whom the goods were transferred, I am unaware of any authority that the liquidator has a personal remedy in conversion, or of some other kind, against that person. It seems to me contrary to principle to say that the retrospective avoidance of the disposition can retrospectively make the disposal of the goods a wrongful act of conversion. Nor do I think that the person would be retrospectively made a constructive trustee, liable to account for the proceeds of sale.
This expression of view of Hodgson J as to the unavailability of conversion in circumstances of a later avoidance is supported by the decision of the New South Wales Court of Appeal (Allsop P and Handley AJA, Campbell JA agreeing) in Perpetual Trustees Australia Ltd v Heperu Pty Ltd [2009] NSWCA 84; 76 NSWLR 195 at [75]–[81] and by the views of Hodgson JA (Meagher JA agreeing) in Citibank Ltd v Papandony [2002] NSWCA 375 at [68]. Counsel for the liquidator suggested some form of unjust enrichment action would be available. Justice Hodgson doubted that: 10 ACSR at 295 (38)–(44). Nevertheless, he posited that possibility: that is, some restitutionary action against the receivers for having sold goods the title in the receivers to which had been later avoided by the making of the winding up order, operative from the commencement of the winding up. At this point his Honour came to set-off under s 86 of the 1966 Act. Justice Hodgson said that there could not be seen to have been anything in the nature of unjust enrichment because of the availability of set-off. See 10 ACSR at 295 (41)–(44).
Approaching the question of set-off under s 86 against a possible action for unjust enrichment, Hodgson J said the following at 10 ACSR 295–296:
… I would, in the first instance, approach any question of set-off, not on the basis that what may be set off is a claim for the price of goods, but rather that what is being set off is a claim of the nature of the claim for unjust enrichment. However, it does seem to me that there have, in this case, been mutual dealings which were undertaken in the first instance through the contract for the sale of the business, well in advance of any question of insolvency or liquidation. What ultimately happened was the crystallisation of mutual obligations arising from these pre-liquidation dealings. It does not seem to me that, on the authority of Gye v McIntyre, these mutual obligations as crystallised are matters which would be set off under s 86 of the Bankruptcy Act. Indeed, even if I had come to the view that there had been conversion, it could be contended that set-off would have been available. The taking of the stock was pursuant to a contractual obligation arising out of the pre-liquidation dealings. Gye v McIntyre makes it clear that liquidated claims can be set off against unliquidated claims; and it follows a fortiori, I think, that unliquidated claims can be set off against unliquidated claims.
Having regard to the circumstance that the mutual dealings in this case do arise out of, and are the crystallisation of, this original contract entered into well before insolvency or liquidation, I do not see any injustice in that approach, nor do I think there can be any question of unjust enrichment. As regards s 82, in so far as any credit was given, it was given in April 1990, and not in March 1991.
A number of points need to be made about these passages. First, notwithstanding Hodgson J’s earlier expressed view as to the inapplicability of Re Country Stores, his Honour saw the earlier purchase agreement and cl 5.12 as giving a contingent right to the receivers arising from mutual dealings. Clause 5.12 was not a full blown contract for the sale of the liquor upon possession being taken, but it gave a contingent right within the purchase agreement that was capable of being later acted upon. So much can be accepted. For the reasons already given, that is not the position in relation to an earlier given preference where there is no contingent right or equity of any kind in the company to require repayment. Secondly, if there were a cause of action for unjust enrichment or restitution, it can be seen to be at the suit of both the liquidator and the company. The avoidance by s 468 was, and is, not “against the liquidator”, but generally expressed by the statute, thereby revesting title in property back to the company. That claim in unjust enrichment, at least of the company (and the liquidator’s claim cannot have any higher standing) can be seen as dating from the effective operation of the avoidance: the date of the commencement of the winding up of the company, being under the Corporations Law, the date of the filing of the application to wind up PC. Thus, at the date s 86 of the 1966 Act operated, the date of the winding up order, there could be seen to be a claim by PC for unjust enrichment (by the statutory retrospective avoidance of the title of the receivers and a countervailing contingent right in AHM available to the receivers against PC) going to the heart of the claim by PC, which arose from earlier mutual dealings between them being the purchase agreement in 1990 and the rights of AHM in cl 5.12. Again, this is different to the preference action under s 588FF, which is a statutory action of the liquidator, not the company. Remedial orders may be made to pay money to the company. That obligation in the defendant to pay arises in the course of the liquidation and does not exist at the date s 553C operates. The Act does not avoid the preferential transaction for all purposes, nor in one sense at all in the same way as the bankruptcy statute avoids the changes earlier made by the transaction “against the trustee”. The character of the transaction being voidable for the purposes of s 588FE is the subject of a finding by the Court in an action under s 588FF. If the Court is satisfied that the transaction is voidable, one or more of the orders in s 588FF(1) may be made. The provision does not, as did s 468(1) of the Corporations Law in and prior to 1993 at the time of Shirlaw v Lewis, or as does s 468(1) of the Act now, avoid, in terms, a disposition of property.
Thus, there can be seen in Shirlaw v Lewis to be mutual rights as between company and creditor existing at or before the date of the winding up for the operation of ss 82 and 86 of the 1966 Act that may support the operation of s 86 in the circumstances of that case. It is unnecessary to express any concluded view about the correctness of Shirlaw v Lewis or about all of the reasoning in it. Success for the liquidator on the special case does not require a conclusion by this Court that Hodgson J was wrong in Shirlaw v Lewis. It is unnecessary so to conclude.
The Court is answering a question under s 25(6) of the Federal Court of Australia Act. It is not appropriate that an opinion be expressed (unless necessary for the answering of the question) as to the translation of the above reasons to other voidable transactions in Div 2 of Pt 5.7B of the Act. I have discussed factors that may attend the consideration of other voidable transactions in Div 2 of Pt 5.7B, and void dispositions under s 468 of the Act. That discussion should not be seen as expressing final views about the operation of other sections not the subject of the question before the Court, especially Re Parker, Buzzle and Shirlaw v Lewis. This qualification is not, however, intended as a weakening or qualification of that which is expressed in these reasons.
I am sure that I speak on behalf of the Court in thanking counsel and solicitors for their thoughtful and scholarly submissions which were of great assistance to the Court.
Orders
The question posed should be answered “No”.
The parties should submit an agreed order on costs, or file brief submissions if there are competing orders sought in that regard.
I certify that the preceding two hundred and sixteen (216) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Chief Justice Allsop. Associate:
Dated: 16 December 2021
REASONS FOR JUDGMENT
MIDDLETON J:
I have had the considerable advantage of reading the reasons of the Chief Justice which sets out the legislative history of the relevant parts of the Act and the extrinsic materials pertaining to that legislative history. Understanding this context, so comprehensively detailed by the Chief Justice, “has utility if, and in so far as, it assists in fixing the meaning of the statutory text”: see Federal Commissioner of Taxation v Consolidated Media Holdings Ltd (2012) 250 CLR 503 at 519 [39] and Thiess v Collector of Customs (2014) 250 CLR 664 at 671 [22].
Then, as the Chief Justice observed, the task of determining the answer to the question reserved for the consideration of the Full Court is essentially one of statutory construction. The ultimate conclusion is that the relevant legislative provisions deny the character and quality of mutuality to the debt of the company to the creditor and the obligation of the creditor to pay the company under s 588FF.
The significant point (again as observed by the Chief Justice) is that the obligation to pay under s 588FF arises from an order of the Court sought upon the application of the liquidator. It is not an obligation owed to the company arising from a right it has against the creditor.
I agree with the reasons of the Chief Justice and the orders he proposes.
I certify that the preceding four (4) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Middleton. Associate:
Dated: 16 December 2021
REASONS FOR JUDGMENT
DERRINGTON J:
I agree with the reasons of the Chief Justice. There is nothing which I might add which could possibly improve upon what his Honour has written and anything I did would surely diminish it. I also agree with the orders proposed by the Chief Justice.
I certify that the preceding one (1) numbered paragraph is a true copy of the Reasons for Judgment of the Honourable Justice Derrington. Associate:
Dated: 16 December 2021
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