Otis Elevator Co Pty Ltd v Guide Rails Pty Ltd (In liq)

[2004] NSWSC 383

Reported Decision: 49 ACSR 531

Supreme Court

CITATION:	Otis Elevator Co Pty Ltd v. Guide Rails Pty Ltd (in liq) & Ors [2004] NSWSC 383
HEARING DATE(S):	6 February, 2004
JUDGMENT DATE:	7 May 2004
JURISDICTION:	Equity Division
JUDGMENT OF:	Palmer J
DECISION:	Declarations in accordance with reasons for judgment.
CATCHWORDS:	CORPORATIONS - LIQUIDATION - DISTRIBUTION OF ASSETS - RULE IN CHERRY V BOULTBEE - WP (a corporation) owed a substantial debt to GR (a corporation) - WP was also a shareholder of GR - WP went into liquidation - subsequently GR went into liquidation with a surplus of assets available for distribution to shareholders - whether liquidator of GR could apply rule in Cherry v Boultbee against liquidators of WP - principles discussed. - ELECTION - whether liquidator of GR lost right to apply rule in Cherry v Boultbee by lodging proof of debt in liquidation of WP - principles discussed.
LEGISLATION CITED:	- Corporations Act 2001 (Cth) - s.176, s.439A, s.479(3), s.488(2), s.513A, s.513C - Corporations Law - s.436A(1), s.439A(4), s.461
CASES CITED:	- Borda v Burgess [2003] NSWSC 1171 - Cherry v Boultbee: 4 Myl & Cr 442; (1839) 41 ER 171 - Fenton (No 2), Re; ex parte Fenton Textile Association [1932] 1 Ch 178 - Glowbind Pty Ltd (In Liq), Re; Takchi v Parbery (2003) 48 ACSR 456 - Hodgson (dec'd), Re; Hodgson v Fox (1878) 9 Ch D 673 - Jeffs v Wood (1723) 2 P Wms 28 [24 ER 668] - G.B. Nathan & Co Pty Ltd (in liq), Re (1991) 24 NSWLR 674 - Orpen, Re (1880) 16 Ch D 202 - Peruvian Railway Construction Company Ltd, Re [1915] 2 Ch 144 - Sargent v ASL Developments Limited (1974) 131 CLR 634 - Sewell, In re; White v Sewell [1909] 1 Ch 806 - Stammers v Elliott (1868) LR 3 Ch App 195 - Wood "English and International Set-off" (1989) para.8-131
PARTIES :	Guide Rails Pty Ltd (in liq) - Applicant (First Defendant/Second Cross Defendant) Wood Parsons Pty Ltd - First Respondent (Third Cross Defendant) Otis Elevator Co Pty Ltd - Second Respondent (Plaintiff/First Cross Defendant) East Coast Rail Systems - Second Defendant/First Cross Claimant Colorado Elevators Inc - Third Defendant/Second Cross Claimant
FILE NUMBER(S):	SC 4383/00
COUNSEL:	R.K. Eassie - Applicant B.J. Coles QC and D. Kell - First Respondent M. Addison (Sol) - Second Respondent (Excused)
SOLICITORS:	Coudert Bros - Applicant Baker & McKenzie - First Respondent Dibbs Barker Gosling - Second Respondent

Introduction

1 On 12 March 2002, Guide Rails Pty Ltd (“Guide Rails”) was wound up by the Court and Mr John Vouris was appointed Liquidator. 2 By an Interlocutory Process filed in the winding up proceedings on 7 August 2003, Mr Vouris seeks the directions of the Court under s.479(3) Corporations Act 2001 (Cth) (“ CA ”) as to the legal principle according to which the surplus assets of Guide Rails are to be distributed to its members. By the same Interlocutory Process he seeks the leave of the Court under s.488(2) to distribute the surplus. 3 The question which arises for consideration is whether, and if so how, the so-called rule in Cherry v Boultbee (4 Myl & Cr 442; (1839) 41 ER 171) should be applied as between Guide Rails and its principal shareholder, Wood Parsons Pty Ltd (“Wood Parsons”), which is also in liquidation. Mr Vouris, as liquidator of Guide Rails, is of the view that the rule applies in the circumstances of this case in a certain way and the liquidators of Wood Parsons are of the contrary view. The difference in views gave rise to the present application by Mr Vouris for directions. Notice of the application was given to the liquidators of Wood Parsons, who seek to place before the Court arguments contrary to those of Mr Vouris. 4 When the matter was called on, Mr Eassie of counsel appeared for the liquidator of Guide Rails, Mr Coles QC appeared with Mr Kell of counsel for the liquidators of Wood Parsons, and Mr Addison, solicitor, appeared for the other shareholder of Guide Rails, Otis Elevator Co Pty Ltd (“Otis”). Mr Addison informed the Court that Otis did not wish to take part in the proceedings and he was excused. The remaining parties then agreed that the questions raised in these proceedings should be determined in a manner that would be binding on the parties so that it was appropriate to join Wood Parsons and Otis as parties to the application. 5 The parties agree that Wood Parsons and Otis as contributories may be joined as respondents to the Interlocutory Process under CLR 2.13(3), and I so order. Joinder of Otis will not expose it to the risk of a costs order. 6 Joinder of Wood Parsons and Otis as Respondents to the Interlocutory Process means that it is no longer appropriate to treat the application as one for directions pursuant to s.479(3) CA . Directions given to a liquidator under that section would have no binding effect on Wood Parsons and Otis: see Re G.B. Nathan & Co Pty Ltd (in liq) (1991) 24 NSWLR 674, at 679, and see the cases referred to by Burchett AJ in Re Glowbind Pty Ltd (In Liq); Takchi v Parbery (2003) 48 ACSR 456, at para.18. Accordingly, prior to making final orders, I propose to direct Guide Rails to file an Amended Interlocutory Process seeking appropriate declarations which raise for determination the issues which have been argued.


How the problem arises

7 There is no dispute as to the facts. At all material times Wood Parsons held 75% of the shares in Guide Rails and Otis held the remaining 25%, although Wood Parsons’ ownership of the shares was subject to dispute for a time, as will shortly appear. 8 By its Originating Process filed on 30 October 2000, Otis sought, inter alia, an order that Guide Rails be wound up pursuant to s.461(f) and (k) of the Corporations Law . 9 On 6 November 2000, Mr Vouris was appointed as Provisional Liquidator of Guide Rails by the Court. On 4 December 2000, Mr Vouris issued his first report to the shareholders of Guide Rails in which he noted a substantial debt payable by Wood Parsons to Guide Rails (“the Wood Parsons Loan”). He appears to have assumed that Wood Parsons would be able to repay the Loan in full. 10 On 7 December 2000, Messrs Adrian Duncan and John Schmierer were appointed joint and several administrators of Wood Parsons pursuant to s.436A(1) of the Corporations Law , after Wood Parsons’ creditors had resolved to place Wood Parsons into voluntary administration. 11 On 14 December 2000, the first meeting of creditors of Wood Parsons pursuant to s.439A CA was held, and the appointment of Messrs Duncan and Schmierer as administrators was confirmed. At that meeting Guide Rails, through Mr Vouris’ employee Mr Murray Godfrey, caused to be lodged a Form 535 Proof of Debt (“First Proof of Debt”) with the administrators of Wood Parsons in respect of the Wood Parsons Loan claiming an amount of $1,185,123. 12 By letter dated 3 January 2001, Wood Parsons’ administrators issued their first Report to Creditors pursuant to s.439A(4)(a) of the Corporations Law . That report estimated a return to unsecured creditors of Wood Parsons of nil cents in the dollar, and recommended that Wood Parsons be wound up. 13 On 10 January 2001, Guide Rails lodged with Wood Parsons’ administrators a second Form 535 Proof of Debt (“Second Proof of Debt”) in respect of the Wood Parsons Loan, this time for the amount of $1,177,378.05, ostensibly as a revised version of the First Proof of Debt for consideration by Wood Parsons’ administrators prior to a second meeting of creditors of Wood Parsons pursuant to s.439A CA which was to be held the next day. 14 At the second meeting of creditors of Wood Parsons, held on 11 January 2001, it was resolved, inter alia, that Wood Parsons be wound up. Accordingly, the day on which the liquidation of Wood Parsons is assumed to have commenced is the date on which its administration began, i.e. 7 December 2000: s.513B(b), s.513C(b) CA . 15    By letter dated 25 January 2001, Mr Vouris presented his second Report to the shareholders of Guide Rails. By that time it was clear that if Guide Rails’ loan to Wood Parsons of about $1.2M could have been repaid in full, there would be a substantial surplus in Guide Rails available for distribution to its shareholders, i.e. 75% to Wood Parsons and 25% to Otis. Under the heading, “Loan to Wood Parsons Pty Limited & Majority Shareholding”, Mr Vouris noted that there was a dispute between Wood Parsons and two other parties, East Coast Rails Systems Inc (“East Coast”) and Colorado Elevators Inc (“Colorado”), as to whether all of Wood Parsons’ shares in Guide Rails had been validly transferred to East Coast and Colorado. Mr Vouris advised that he believed that the shares had not been validly transferred so that Wood Parsons would retain its 75% shareholding in Guide Rails. He continued: “I note that this will permit the realisation of the debt due from Wood Parsons in its entirety via a dividend set-off” . Doubtless, Mr Vouris was referring to his belief that application of the rule in Cherry v Boultbee would mean that Guide Rails could treat the Wood Parsons Loan as notionally repaid. Mr Vouris went on to recommend that Guide Rails be placed in official liquidation. 16    To digress for a moment: on 5 March 2001, East Coast and Colorado filed a Cross Claim in the winding up proceedings commenced by Otis, seeking orders, inter alia, that the share register of Guide Rails be rectified by the registration of themselves as holders of all of the shares in Guide Rails held by Wood Parsons, pursuant to transfers of those shares alleged to have been executed in August 2000. During 2001 and 2003, very little was done to bring this Cross Claim to trial, due to inactivity on the part of East Coast and Colorado. Eventually, the Cross Claim was dismissed on 7 April 2003, so that Wood Parsons’ status as a 75% shareholder of Guide Rails was confirmed. 17    I return to the contest between Guide Rails and Wood Parsons. 18    By letter dated 7 December 2001, Messrs Duncan and Schmierer, as liquidators of Wood Parsons, delivered their Report to Creditors stating that they had admitted Proofs of Debt totalling $123,302. As Guide Rails’ Second Proof of Debt, which had been lodged in Wood Parsons’ administration, was for the amount of $1,177,378.05, it is clear that that proof had not yet been admitted in Wood Parsons’ liquidation. 19    By letter dated 3 January 2002, Mr Vouris sought confirmation from the liquidators of Wood Parsons that Guide Rails’ Second Proof of Debt had been admitted. By letter dated 22 January 2002, Mr Duncan, as liquidator of Wood Parsons, advised Mr Vouris that Guide Rails’ Second Proof of Debt had been “reviewed and accepted in full” . No indication was given in that letter as to whether or not any interim or final dividend would be paid by Wood Parsons to Guide Rails in respect of the Wood Parsons Loan. 20 On 4 March 2002, Barrett J heard the application for an order that Guide Rails be wound up which had been filed by Otis in October 2000. On 12 March 2002, his Honour ordered that the company be wound up and that Mr Vouris be appointed Official Liquidator. Pursuant to s.513A(e) CA , the liquidation of Guide Rails commenced on that day. 21    On 27 March 2002, Mr Vouris caused a further Form 535 Proof of Debt (the “Third Proof of Debt”) to be lodged on behalf of Guide Rails in the liquidation of Wood Parsons at a meeting of creditors of Wood Parsons. The Third Proof of Debt claimed an amount of $1,193,805 in respect of the Wood Parsons Loan. 22    By letter dated 28 March 2002, Mr Vouris advised Wood Parsons that at the next meeting of creditors he would, inter alia, oppose the liquidators’ remuneration, propose a resolution that the joint liquidators be removed from their office or, alternatively, seek the joint liquidators’ resignation from their office. 23    On 9 April 2002, at a meeting of the creditors of Wood Parsons Mr Godfrey, as representative of Guide Rails, proposed a number of resolutions affecting the conduct of the Wood Parsons’ liquidation and voted on those and other resolutions. 24    On 13 May 2003, a fourth meeting of the creditors of Wood Parsons was held. The Minutes of that Meeting record that during discussion Mr Godfrey indicated that it was the intention of Guide Rails:
“… to proceed with his [Mr Vouris] dividend distribution within 7 days in a manner consistent with the Cherry v Boultbee principle.”

The Minutes record that Mr Godfrey:
“… rejected the argument that by claiming as a creditor of Wood Parsons, the liquidator of Guide Rails had waived his right to apply Cherry v Boultbee . He said that as far as he was concerned the company [Guide Rails] remained a creditor of Wood Parsons until such time as the Guide Rails dividends had been declared.”

It was unanimously resolved that the meeting would be adjourned until 21 May 2003.

25    Following the Meeting of Creditors of Wood Parsons on 13 May 2003, there was an exchange of correspondence between the solicitors for Guide Rails and Wood Parsons as to whether the rule in Cherry v Boultbee could be applied in the distribution of surplus assets in the liquidation of Guide Rails. That dispute culminated in the filing by Mr Vouris of the present Interlocutory Process. 26    Guide Rails presently has a cash surplus in hand available for distribution in the amount of approximately $508,714. There is no dispute that the shareholding of Guide Rails is in accordance with the List of Contributories settled and certified by Mr Vouris on 27 June 2003, namely, Wood Parsons holds 107,000 “A” class shares and 53,000 “C” class shares, and Otis holds 53,500 “B” class shares. 27    The broad parameters of the dispute between the parties can be summarised thus. Mr Vouris says that:


– Wood Parsons is indebted to Guide Rails in the sum of (approximately) $1.2M in respect of the Wood Parsons Loan;

– Wood Parsons – as 75% shareholder of Guide Rails – is entitled to 75% of the surplus assets of Guide Rails available for distribution to contributories;

– in accordance with the rule in Cherry v Boultbee , the fund for distribution in the hands of Guide Rails must be treated as notionally including the Wood Parsons Loan and Wood Parsons must be treated as having received its distribution from the fund, so constituted, pro tanto in the amount of the Wood Parsons Loan which it has not repaid;

– accordingly, the amount which Wood Parsons is entitled to receive from the distribution of Guide Rails’ surplus assets is calculated thus (using rounded approximate figures for the purposes of illustration):

Cash surplus available for distribution	509,000
Add Wood Parsons Loan	1,200,000
Total notional fund for distribution	$ 1,709,000

Wood Parsons’ entitlement (75%)	1,281,750
Treat Wood Parsons as having received payment of its dividend up to $1,200,000	1,200,000
Wood Parsons’ entitled to payment of cash balance	$ 81,750

28    Wood Parsons contends that the rule in Cherry v Boultbee does not apply in the circumstances of this case so that it would simply be entitled to 75% of the cash surplus presently remaining in the hands of Guide Rails, namely, $391,750. Mr Coles QC submits that the rule in Cherry v Boultbee does not apply to entitle Guide Rails to distribute to Wood Parsons less than 75% of the present cash surplus for three reasons. 29    First, says Mr Coles, the application of the rule on the facts of the case results in the liquidator of Guide Rails being entitled to add notionally to the fund for distribution, not the amount of the Wood Parsons Loan, i.e. $1.2M, but only what the liquidators of Wood Parsons are obliged to pay Guide Rails as a dividend in the winding up of Wood Parsons, i.e. nil. The fund for distribution, therefore, remains (to use the same figures for illustration) $509,000, of which Wood Parsons’ 75% is $391,750. In accordance with the rule, Wood Parsons is treated as having already received the amount which it is obliged to pay Guide Rails in respect of the Wood Parsons Loan, which is to be deducted from its share of the distribution. But as the amount which Wood Parsons is obliged to contribute is a nil dividend, there is nothing to deduct. Wood Parsons must, therefore, receive the full amount of $391,750. 30    Second, and in the alternative, Mr Coles says that even if the rule in Cherry v Boultbee would operate in the present case as Mr Vouris contends it does, Mr Vouris is nevertheless estopped from relying upon the rule because he has elected an inconsistent remedy in order to recover payment of the Wood Parsons Loan. He has elected to prove for a dividend as a creditor in the winding up of Wood Parsons rather than electing to pay himself as liquidator in full by retaining from the notional fund of $1,709,000 the full sum of $1,200,000 in payment of the Wood Parsons Loan. 31    Third, Mr Coles says, the rule in Cherry v Boultbee is impliedly ousted by the provisions of the Corporations Act . 32    I will deal with each of these submissions in turn. First, however, it is necessary to understand exactly what Cherry v Boultbee decided.


The rule in Cherry v Boultbee

33    Cherry v Boultbee is frequently cited as authority for the proposition “where a person entitled to participate in a fund is also bound to make a contribution in aid of that fund, he cannot be allowed so to participate unless and until he has fulfilled his duty to contribute (to the fund) ” : Re Peruvian Railway Construction Company Ltd [1915] 2 Ch 144, at 150 per Sargant J. But this proposition ought more accurately to be called, if anything, the “rule in Jeffs v Wood ” and Cherry v Boultbee should be regarded as a qualification or exception to that rule, as Sargant J himself recognised in Re Peruvian Railway . 34    In Jeffs v Wood (1723) 2 P Wms 28 [24 ER 668], a testator had provided goods on credit to the defendant. In his will, the testator left a legacy of £500 to the Defendant. After the testator’s death, the defendant sued the executor to enforce payment to him of the legacy. The executor countered with a claim for retention out of the legacy of the money which the defendant owed to the testator’s estate. The defendant then became bankrupt. His assignees in bankruptcy claimed against the executor for the payment of the legacy, and the executor claimed against the assignees to retain out of the legacy the amount which the bankrupt owed to the estate. The court held that the executor was required to pay to the bankruptcy assignees only what remained of the legacy after deducting the amount of the defendant’s debt. Sir Joseph Jekyll MR said:

“…it is very just and equitable for the executor [the plaintiff] to say, that the defendant the legatee has so much of the assets [of the estate] in his own hands, and consequently is satisfied pro tanto …

In the present case, the assignees of the commission of bankruptcy against the defendant Wood bring their bill for the legacy, and standing in the place of the legatee, can be in no better case; and therefore, as the legatee had he brought his bill for the legacy, might have been told by the executor, that having so much of the assets in his hands, he was consequently paid so much of his legacy, surely the same thing may now be insisted upon against the assignees, who stand in the place of, and represent the legatee.”
35    It is important to note that at the time that the defendant’s claim to payment of the legacy out of the testator’s estate arose (i.e. when the testator died), the defendant was not bankrupt and was, therefore, indebted to the estate for the whole amount which the testator had lent him. The defendant’s entitlement out of the estate at that moment was subject to his equitable obligation to contribute to the estate the whole of what he owed to it. Jeffs v Wood is, therefore, a simple illustration of the proposition that a person who is both a claimant on and a debtor to a fund cannot obtain payment of his claim out of the fund until he has first made payment of his debt into the fund. 36    The facts in Jeffs v Wood were very different from those in Cherry v Boultbee . There, a testatrix had lent money to her brother but, before he could repay her the money, he became bankrupt. In her will, the testatrix gave legacies on trust for her brother and never proved in his bankrupt estate. When the testatrix died, the brother was still an undischarged bankrupt. His bankruptcy assignees sued the executors of the testatrix’s estate for payment of the legacies given on trust for the brother, which the bankrupt assignees said was property of the bankrupt which had vested in them. The executors, relying upon Jeffs v Wood , claimed that they were entitled to set off against the legacies the amount of the bankrupt’s debt to the estate. 37    At 447 (ER 173), Lord Cottenham LC observed that “set off”, in its proper sense, is applicable only to mutual demands, debts and credits. He continued:

“The right of an executor of a creditor to retain a sufficient part of a legacy given by the creditor to debtor, to pay a debt due from him to the creditor’s estate, is rather a right to pay out of the fund in hand, than a right of set-off. Such right of payment, therefore, can only arise where there is a right to receive the debt so to be paid; and the legacy or fund, so to be applied in payment of the debt, must be payable by the person entitled to receive the debt.

In the present case, however, the bankruptcy of the debtor having taken place in the lifetime of the testatrix, her executors never were entitled to receive from the assignee more than the dividends upon the debt ; and although the bankrupt had not obtained his certificate, and the liability incident to that state remained upon him, yet he, for the same reason, was never entitled to receive the legacy; and consequently, there never was a time at which the same person was entitled to receive the legacy and liable to pay the entire debt; the right, therefore, of retaining a sufficient sum out of the legacy to pay the debt can never have been vested in anyone.” [Emphasis added]
38    The Chancellor accordingly affirmed the decision of the Master of the Rolls that the executors should deduct from the legacy payable to the bankruptcy assignees, not the whole of the bankrupt’s debt, but only the amount which the bankruptcy assignees were obliged to pay to the executors by way of dividend out of the bankrupt’s estate. 39    The decision in Cherry v Boultbee may, therefore, be seen to add a qualification to the principle expressed in Jeffs v Wood , so that the “rule in Cherry v Boultbee ” might more fully be stated thus:
“A person who is both a claimant on, and a debtor to, a fund cannot obtain payment of his claim out of the fund until he has first paid his debt into the fund PROVIDED THAT if the claimant’s estate is being administered in insolvency at the time that his claim against the fund arises, the claimant’s insolvent estate cannot obtain payment of the claim out of the fund until it first pays into the fund such dividend on the claimant’s debt to the fund as is available from the claimant’s insolvent estate.”
40    The application of this “expanded” rule in Cherry v Boultbee to corporate insolvencies as well as to insolvencies in bankruptcy, is seen in Re Peruvian Railway . In that case, a shareholder, who owed the company a large sum, died insolvent in 1908 and his estate was administered in insolvency. In 1914, the company was wound up voluntarily and its surplus assets became distributable to the shareholders. The executors of the shareholder’s insolvent estate sought a declaration against the company’s liquidator that the liquidator was not entitled to set off against the estate’s share of the surplus the debt due from the estate to the company. 41    Sargant J observed (at 151) that the rule in Cherry v Boultbee would extend to prevent a person who was at the commencement of the liquidation both a debtor of the company and a shareholder of the company from receiving a share of the surplus assets without contributing to that surplus by the amount of the debt. His Lordship continued:
“But if the date when the right thus arises is July 15, 1914, the persons between whom it arises are the liquidator on the one hand, and the executors of the testator on the other hand. And the amount for which the executors are liable is obviously not the full amount of the ascertained debt, but such dividend on that debt as the executors can pay in a due course of administration. The facts are, indeed, in my judgment precisely analogous to those in Cherry v Boultbee , where it was held that a legacy from a testatrix to a bankrupt debtor of hers could only be retained against his assignee to the extent of the dividends on his debt.
…
The actual decision in Cherry v Boultbee is the more important, because it was in that very case that the general principle was so completely recognized.”

His Lordship then referred, at 153, to four other cases in which:
“… there was an entire absence of the special feature present in Cherry v Boultbee and in the case before me, namely, the insolvency of the original debtor be f ore the right of retainer or quasi set-off had first arisen.” (Emphasis added.)
42    Consequently, Sargant J declared that the liquidator was not entitled to deduct as against the executors more than the proper dividend payable by the executors on the original debt of the shareholder to the company. The decision was affirmed on appeal. 43    The reasoning in Re Peruvian Railway is consistent with the decisions in many other cases in which, at the time when the fund became liable to pay the claimant/ debtor, the claimant/debtor had already become insolvent so that the claimant/debtor’s “contribution” to the fund was the dividend, not the full value of the debt: see e.g. Re Hodgson (dec’d); Hodgson v Fox (1878) 9 Ch D 673; Re Orpen (1880) 16 Ch D 202; Re Fenton (No 2) [1932] 1 Ch 178, at 186-187. 44 In my opinion, the rule in Cherry v Boultbee , as explained in Re Peruvian Railway , is applicable to the facts of the present case. Wood Parsons, as a shareholder of Guide Rails, became entitled to participate in the surplus assets of Guide Rails only upon the liquidation of Guide Rails. By that time, however, Wood Parsons itself was in liquidation – it was obliged to pay into the fund of Guide Rails’ assets, not the whole of the Wood Parsons Loan, but only such dividend as it could. That dividend was nil. 45    The result, according to the rule in Cherry v Boultbee , is that if one were to make the calculation for distribution from the surplus assets of Guide Rails which is set out in paragraph 27, one would substitute “zero” for “$1.2M”, wherever occurring. Guide Rails is, therefore, required to pay to Wood Parsons 75% of the cash surplus available for distribution, without deduction. 46    This conclusion makes it unnecessary for me to decide the other two issues raised by Mr Coles, namely, that the rule in Cherry v Boultbee does not apply because the liquidator of Guide Rails has irrevocably elected against it and because the rule is ousted implicitly by the provisions of the Corporations Act . Whether or not those two submissions are correct, the result in the case would not change: if the rule in Cherry v Boultbee , as I have explained it, is applicable then Wood Parsons is still entitled to 75% of the cash surplus presently available in the Guide Rails liquidation without deduction. On the other hand, if the rule does not apply at all, Wood Parsons is entitled to the same distribution. 47    However, in case I am wrong in my understanding of the operation of the rule in Cherry v Boultbee in the circumstances of the present case, I should make the necessary findings of fact for the resolution of the remaining issues. I will then state briefly the conclusions which I have reached.

Election

48    It is now established that a fund administrator such as a liquidator, a bankruptcy trustee or an executor of a deceased estate may lose the right to apply the rule in Cherry v Boultbee against an insolvent debtor/claimant of the fund if the fund administrator elects to pursue another remedy for payment of the debtor/ claimant’s debt to the fund. The most common instance is where the fund administrator proves in the insolvent estate of the debtor/claimant rather than applying the rule in Cherry v Boultbee : see Stammers v Elliott (1868) LR 3 Ch App 195; In re Sewell; White v Sewell [1909] 1 Ch 806; Wood English and International Set-off (1989) para.8-131. 49    Mr Eassie does not take issue with the proposition that a right to apply the rule in Cherry v Boultbee may be lost by election. 50    Mr Coles QC submits that on 27 March 2002, when Mr Vouris lodged the Third Proof of Debt with the liquidators of Wood Parsons, he irrevocably elected to take actual payment of a dividend in the winding up of Wood Parsons rather than to rely on his right under the rule in Cherry v Boultbee to treat the Wood Parsons Loan as pro tanto paid by the retention in the hands of Wood Parsons of whatever dividend was payable to Guide Rails on the Wood Parsons Loan. 51    The elements of the doctrine of election may be summarised thus. The electing party must:


– have two alternative and inconsistent legal rights;

– have knowledge of the facts which give rise to the alternative and inconsistent rights;

– by words or conduct unequivocally communicate to the other party a decision to exercise one of the rights to the exclusion of the other: Sargent v ASL Developments Limited (1974) 131 CLR 634, at 642ff per Stephen J and at 655ff per Mason J.

52    There remains uncertainty as to whether, in addition to knowledge of the facts giving rise to the alternative and inconsistent rights, the electing party must also have knowledge of the existence of the inconsistent rights and of the legal consequences of enforcing one of them: see the observations of Young CJ in Eq in Borda v Burgess [2003] NSWSC 1171, at paras.64-76. 53 Mr Eassie says that the lodgement of the Third Proof of Debt in the liquidation of Wood Parsons did not constitute an election by Guide Rails to prove for the Wood Parsons Loan rather than to apply the rule in Cherry v Boultbee because at the time of its lodgement:


– Mr Vouris did not know a material fact upon which his right to apply the rule in Cherry v Boultbee depended, namely, whether Wood Parsons was a shareholder in Guide Rails or whether East Coast and Colorado were entitled to be registered as shareholders;

– Mr Vouris did not know that his right to apply the rule in Cherry v Boultbee would be lost under the doctrine of election if he lodged the Third Proof of Debt.

54    I accept Mr Eassie’s submission that at the date of lodgement of the Third Proof of Debt Mr Vouris did not know that Wood Parsons’ title to the Guide Rails’ shares was absolute and unimpeachable. East Coast and Colorado had filed their Cross Claim seeking rectification of the Guide Rails share register on 5 March 2001. By 27 March 2002, when Guide Rails lodged the Third Proof of Debt, the Cross Claim had still not been determined. Although Mr Vouris had stated in several reports to creditors that he believed that the Cross Claim would fail, and although he stated in a letter dated 18 February 2002 to Wood Parsons’ liquidators that he believed that the rule in Cherry v Boultbee was applicable against Wood Parsons as a shareholder of Guide Rails, he could not have been certain of that result as at 27 March 2002. It was possible that if the Cross Claim had proceeded to a final hearing on its merits, East Coast and Colorado could adduce evidence of facts and circumstances of which he was unaware. 55    As at 27 March 2002, therefore, Mr Vouris was in a quandary. If he held off lodging a proof of debt in the winding up of Wood Parsons until the Cross Claim of East Coast and Colorado was finally determined he would have no status in the meantime to do anything in the Wood Parsons liquidation as a creditor. If the Cross Claim was ultimately dismissed, Guide Rails’ position as a creditor might nevertheless have been already irretrievably prejudiced, although its right to apply the rule in Cherry v Boultbee against Wood Parsons as a shareholder would be confirmed – possibly to no purpose. This quandary illustrates how important it was that the status of Wood Parsons as a shareholder of Guide Rails be known with absolute certainty to Mr Vouris at the time that he lodged the Third Proof of Debt. 56 I do not overlook that, as at 27 March 2002, Wood Parsons was shown on the share register of Guide Rails as the holder of 75% of the shares in Guide Rails, and that s.176 CA relevantly provides that “in the absence of evidence to the contrary” the share register would be proof of the shareholding of Wood Parsons. However, Mr Vouris was aware that share transfers of the Wood Parsons’ shares in Guide Rails had been executed in favour of East Coast and Colorado; he himself was not party to the transaction and his knowledge of it must necessarily have been derivative. He could not, therefore, safely act on the basis that the share register of Guide Rails was conclusive of the ownership of the shares held by Wood Parsons. 57    In my view, Mr Vouris did not have certain knowledge as to a disputed fact upon which the right to apply the rule in Cherry v Boultbee depended at the time that he lodged the Third Proof of Debt. It follows that the lodgement of that Proof of Debt did not constitute an election to abandon the right to apply the rule in Cherry v Boultbee against Wood Parsons. 58    In the light of this holding, it is not necessary to decide whether, for the purpose of the doctrine of election, a party must have knowledge of his alternative and inconsistent rights and of the legal consequences of enforcing one rather than the other. I would prefer not to decide this question for three reasons. First, the decision is unnecessary to the result of the case. Second, it was not fully argued by Counsel. Third, Mr Vouris did not give direct evidence as to the state of his knowledge at the time that the Third Proof of Debt was lodged and I am unwilling to determine such a point only upon inferences. For what it is worth, however, I would respectfully adopt the observations of Young CJ in Eq in Borda v Burgess . Speaking particularly of election between alternative rights not expressly provided by contract, his Honour says at para.70:
“… fairness dictates that people should not too easily lose important rights by unwitting conduct unless that conduct has been acted upon by another to his or her detriment. Losing a right by conduct which is undertaken in ignorance of its legal consequences should be confined to estoppel. The law should preserve the distinction between election, where no detriment to the other side is required, and estoppel where detriment is required.”
59    In the result, therefore, I would hold that Mr Vouris did not lose by election the right to apply the rule in Cherry v Boultbee against Wood Parsons. As I have said, however, that conclusion makes no difference to the result of the case. If the rule in Cherry v Boultbee , as explained in Re Peruvian Railway , applies because there has been no inconsistent election by Guide Rails then Guide Rails must still distribute 75% of the present cash surplus in the liquidation to Wood Parsons. If, however, the rule does not apply because there has been an inconsistent election by Guide Rails, the same amount must still be paid to Wood Parsons.

Whether proof or dividend necessary for election

60    Mr Eassie submitted that one does not lose a right to apply the rule in Cherry v Boultbee merely by proving in an insolvent estate; one must actually receive a dividend on the proof. In the present case, there will be no dividend payable in the liquidation of Wood Parsons. Mr Eassie says, therefore, that Mr Vouris has not lost by election the right to apply the rule in Cherry v Boultbee against Wood Parsons’ liquidators. 61    It is not necessary to decide this question. First, as I have said, it makes no difference in the result of the case whether or not Guide Rails has lost the right to apply the rule in Cherry v Boultbee . Second, the question requires no fact finding – it is a question of law which depends upon an examination of the authorities. Third, I have held on another ground that Guide Rails has not, in any event, elected against application of the rule.

Implied ouster by Corporations Act

62    Mr Coles submits that the rule in Cherry v Boultbee has been impliedly ousted by the provisions of the Corporations Act . Again, this submission requires no fact finding: it raises a pure question of law, namely, the construction of the Corporations Act in the light of the law as it would otherwise be applied. 63    For the reasons which I have explained earlier, on the facts of this case it makes no difference in the result whether I find that the rule in Cherry v Boultbee has been impliedly ousted by the Corporations Act or has not been ousted. Accordingly, I do not think that this case is the appropriate vehicle to decide this question.

Conclusion

64    In the result, there will be a declaration that Mr Vouris, as liquidator of Guide Rails, is entitled to apply the rule in Cherry v Boultbee as against the liquidators of Wood Parsons but that the application of the rule in the circumstances of this case requires Mr Vouris to distribute 75% of the cash surplus presently available in the liquidation of Guide Rails to Wood Parsons without deduction. I will grant leave to Mr Vouris under s.488(2) CA to distribute the surplus accordingly. 65    The Interlocutory Process filed by Mr Vouris will have to be amended, as directed in paragraph 6 of these reasons. I will stand the proceedings over for a short time to enable an Amended Interlocutory Process to be filed and to enable Short Minutes of Order reflecting these reasons to be prepared. When the matter is returned for the making of orders, I will hear argument as to costs.

– oOo –

Last Modified: 05/10/2004