The Tap Inn Pty Ltd v Matthews
[2015] SASCFC 188
•10 December 2015
SUPREME COURT OF SOUTH AUSTRALIA
(Full Court)
THE TAP INN PTY LTD v MATTHEWS
[2015] SASCFC 188
Judgment of The Full Court
(The Honourable Justice Gray, The Honourable Justice Sulan and The Honourable Justice Peek)
10 December 2015
CORPORATIONS - WINDING UP - CONDUCT AND INCIDENTS OF WINDING UP - EFFECT OF WINDING UP ON OTHER TRANSACTIONS - PREFERENCES AND VOIDABLE TRANSACTIONS - UNFAIR PREFERENCES
PROCEDURE - MISCELLANEOUS PROCEDURAL MATTERS - DECLARATIONS - REQUIREMENT THAT ALL MATTERS IN CONTROVERSY BE DETERMINED
Appeal from the answer to a preliminary question given by a District Court Judge in proceedings relating to the winding up of the appellant. The Judge made an order, by consent, that a point of law in relation section 588FA(2) of the Corporations Act 2001 (Cth) be heard and determined as a preliminary issue prior to the trial of the action commencing. In answer to the preliminary question, the Judge held that for the purposes of section 588FA(2), the time to assess the value of the security is the date of the winding up of the debtor company. On appeal, the appellant contended that the Judge erred and that the date to assess the value of the security is the date of the creation of the security.
Held per Gray J (Sulan and Peek JJ agreeing)(allowing the appeal):
1. A review of the pleadings discloses that there is a considerable dispute of fact.
2. The preliminary question of law determined by the District Court Judge is properly characterised as a hypothetical question.
3. The Judge should not have proceeded to determine the preliminary question.
4. The appropriate course is to allow the appeal, set aside the Judge’s answer and give directions as to the trial.
Corporations Act 2001 (Cth) s 588FA(1), s 588FA(2), s 588FB(1) and s 588FE(3), referred to.
Rogers v Baillieu Bullock Wilkinson Pty Ltd (1981) 28 SASR 594; Walsh v Natra Pty Ltd (2000) 1 VR 523; Williams v Peters (2009) 232 FLR 98, considered.
THE TAP INN PTY LTD v MATTHEWS
[2015] SASCFC 188Full Court: Gray, Sulan and Peek JJ
GRAY J.
This is an appeal from the answer to a preliminary question given by a District Court Judge in proceedings relating to the winding up of the defendant and appellant, The Tap Inn Pty Ltd.
Proceedings were issued by Anthony Christopher Matthews, the liquidator of Pub Tap Investments Pty Ltd (in liquidation), seeking orders that The Tap Inn pay to the liquidator the amount of $374,772.22 together with interest, being uncommercial transactions under section 588FB(1) of the Corporations Act 2001 (Cth). By his second statement of claim, the liquidator asserts that 24 “Payments” were made between 30 June 2008 and 27 April 2010. It was said that those payments were voidable as uncommercial and insolvent transactions pursuant to section 588FE(3) of the Corporations Act. The following particulars were provided:
14.1 The Defendant, as vendor of a Hotel Business, extended finance to the Company, as purchaser of that business in the sum of $1,100,000 (“the Vendor Loan”).
14.2 The repayment terms of the Vendor Loan were governed by a Loan Agreement and an Allotment Deed the Company entered with the Defendant on 27 November 2007 (“the Deed”).
14.3 The effect of the Trust recorded in the Deed was to create Redeemable Preference Units (“the Units”).
...
15. At the time when the Payments were made the Company was:
15.1 insolvent and unable to pay its debts when they had fallen due for payment; or
15.2 alternatively the Company became insolvent because of the Payments.
16. The Payments made are:
16.1 uncommercial transactions pursuant to Section 588FB of the Corporations Act; and
16.2 each of them are insolvent transactions within the meaning of section 588FC of the Corporations Act.
In the alternative, it was alleged that five of the payments, being those made between 24 December 2009 and 27 April 2010, totalling $76,678.46, were preferential payments and recoverable as unfair preferences. The following particulars were provided:
18.Further and in the alternative the Payments referred to in paragraph 13.14 to 13.18 inclusive which total the sum of $76,678.46 (“the Preferential Payments”) were received by the Defendant as an unsecured creditor of the Company at the time the Company was insolvent or became insolvent as a result of the Preferential Payments.
19.The Preferential Payments are an unfair preference, pursuant to Section 588FA of the Act because of the following:-
19.1 The Company and the Defendant were parties to the transaction constituted by the Preferential Payments.
19.2 The Preferential Payments resulted in the Defendant receiving from the Company in respect of the unsecured debts that the Company owed to the Defendant more than the Defendant would have received in respect of the debts if the Preferential Payments were set aside and the Defendant was to prove the debts in the winding up of the Company.
20.The Preferential Payments are insolvent transactions, within the meaning of 588FC of the Corporations Act and voidable pursuant to section 588FE(2) of the Corporations Act.
By its second defence, The Tap Inn admitted to receiving the payments alleged and, in addition, pleaded six further payments had been received in the period 8 September 2008 to 27 February 2009. The defendant then advanced the following pleas:
3A.3All payments set out in paragraph 3A.1 of this Second Defence and paragraph 13 of the Statement of Claim consisted of:
3A.3.1Payments to redeem redeemable preference units issued under the Allotment Deed;
3A.3.2Payments of a preferential dividend pursuant to clause 8.1 of the Allotment Deed; and
3A.3.3Payments of interest due under clause 5 and Item 4 of the Schedule to the Loan Agreement.
4. The defendant says further that:
4.1 The payments set out at paragraph 13.1 - 13.13 were due to be paid pursuant to the Deed on or before 27 November 2009.
4.2The effect of clause 8.3 of the Deed was to give the trustee a qualified right to request a deferral of 12 months in respect of the redemption of the redeemable preference shares.
4.3The company did not at any time make a request pursuant to clause 8.3 of the deed.
...
5A.The defendant says further that the payments referred to in paragraph 3A of this Second Defence and paragraph 13 of the Statement of Claim:
5A.1 Insofar as the payments related to payments of a preferential dividend under the Allotment Deed, were payable calendar monthly in arrears pursuant to clause 8.1 of the Allotment Deed;
5A.2 Insofar as the payments related to payments to be applied to redemption of redeemable preference units on each Redemption Date (as that term is defined by the Allotment Deed), payments of $9,167 were made calendar monthly from the outset and provided a commercial benefit to the Company in that interest payable was calculated on a decreasing balance and calendar monthly payments assisted the cash flow of the Company;
5A.3 Insofar as the payments related to payments of interest due under the Loan Agreement, were payable calendar monthly in arrears pursuant to the Loan Agreement.
6. The defendant admits as to paragraph 18 of the statement of claim that it received $76,678.46 from the company as particularised in paragraphs 13.14 to 13.18 inclusive of the statement of claim. The defendant says that:
6.1 The payments in paragraphs 13.4 – 13.18 inclusive of the Statement of Claim were secured debts for the purposes of section 588 FA of the Corporations Act.
6.2 The liability of the company to the defendant was secured by a charge (‘the charge’) granted by the company dated 27 November 2007.
6.3 The charge was registered with the Australian Securities and Investment Commission on 28 November 2007.
6.4 The charge secured (clause 1.1.20) all moneys owed by the company to the defendant in respect of the loan agreement and the allotment deed.
6.5 The charge secured (clause 1.1.21) “all property, rights and undertaking of the (company)...”
6.6 The company made the payments commencing in December 2007 out of secured assets in the ordinary course of business for the commercial purpose of reducing the secured debt out of monthly cash flow.
6.7 In the premises of paragraphs 6.1 to 6.6 of this Second Defence, and by virtue of the defendant being a secured creditor of the Company, none of the payments had the effect of conferring a preference, priority or advantage over unsecured creditors.
7. The defendant says further that it:
7.1 Received the payments in good faith; and
7.2 Had no reasonable grounds for suspecting that the company was insolvent at that time or that it would become so as result of making the payments; and
7.3 A reasonable person in the defendant’s circumstances would have had no such grounds for so suspecting.
By his third reply, the liquidator pleaded:
1.Pleads the following answers to paragraphs 3A, 5A, 6.1, 6.2, 6.3, 6.4, 6.5, 6.6 and 6.7, of the Defence namely:- the payments referred to in paragraph 6 were payments in respect of unsecured debts by virtue of Section 588FA(2) of the Corporations Act as any security which may have been held by the Defendant over the assets of the Company was of no value at the time of the winding up of Pub Tap Pty Ltd (“Pub Tap”) or in the alternative at the time of each of the payments referred to in paragraph 6
2.Says further that the payments pleaded in paragraph 13 of the Third Statement of Claim provided an advantage to the Defendant who received a higher level of payment than it would have otherwise received had those monies been available to all creditors including by virtue of the priorities afforded by s561 and s556 of the Corporations Act.
3.As to paragraph 7 of the Second Defence says that the Defendant had reasonable grounds to suspect insolvency:
3.1 the Plaintiff repeats and refers to paragraph 14 of the Third Statement of Claim;
3.2 during 2008 and 2010, Di Lintern and Greg Howard, on behalf of Pub Tap had periodic discussions with Tom Hannah, on behalf of the Defendant, during which cash flow and solvency problems of Pub Tap were expressly discussed.
Particulars
a) In or about March 2008, Di Lintern on behalf of Pub Tap had a conversation with Tom Hannah on behalf of the Defendant and said words to the effect that the turnover of the Pub Tap business was not what she was expecting and that it did not reflect the turnover prior to the purchase. Tom Hannah said words to the effect, ‘what did you expect there were changes to the smoking laws’.
b)In or about July 2008, Di Lintern stepped out of a BDO accountants mid-year function at the Tap Inn and spoke briefly with Tom Hannah and said words to the effect that Pub Tap’s business was experiencing cash flow problems and Tom Hannah replied with words to the effect ‘You would make more money if you stopped having glasses of red wine with your free-loading Variety friends’.
c)In or about November 2008, Di Lintern met with Tom Hannah in the beer garden of the Pub Tap premises to further discuss Pub Tap’s cash flow and profitability problems and sought Tom Hannah’s advice and assistance. Tom Hannah replied with words to the effect that he would provide assistance and recommended that Pub Tap replace a number of its staff.
d)For two to three weeks prior to Easter 2009 Tom Hannah on behalf of the Defendant contacted Greg Howard by telephone on a number of occasions indicating that if a cash payment was made he would reduce moneys owed by Pub Tap to the Defendant by double the amount of such cash. For example, if $20,000 was paid $40,000 would be deducted from the amount owed. Greg Howard said words to the effect that he would have to speak to Di Lintern but they did not have the cash.
e)On Good Friday 2009, Tom Hannah at a staff party for Pub Tap repeated his request referred to in 3.2d). Greg Howard spoke to Di Lintern about it and he indicated to Tom Hannah again that they were unable to pay as they did not have the cash.
f)The sending of the following communications would have caused a reasonable person to suspect that Pub Tap was insolvent:
(i)On 1 April 2009 Tom Hannah sent an email to Di Lintern:-
(1)giving formal notice of moneys outstanding pursuant to the lease in which Pub Tap was the lessee
(2) recognising Pub Tap was in breach of the lease
(3) acknowledging the pressure Pub Tap was under
(4) expressing concern about the defendant’s financial exposure
(ii)On 3 April 2009 Di Lintern on behalf of Pub Tap sent to Tom Hannah the finaincials [sic] of the hotel business for the period ending February 2009 which showed a loss for the month of February 2009 of $97,145.00 and a year to date loss of $363,270.00.
g) In or about July 2009, Di Lintern and Greg Howard met with Tom Hannah in the saloon of the Pub Tap premises to discuss Pub Tap’s continuing cash flow problems and potential structural changes to Pub Tap’s business which could address them. Greg Howard and Di Lintern asked for there to be a moratorium on the payments that were required to be made by Pub Tap to the Defendant. Tom Hannah said words to the effect, why should my people take a hit just because you are in trouble. Tom Hannah said words to the effect ‘have you considered putting the business on the market. We will give you $4.5m.’ In response Greg Howard said that he would rather go broke.
h)Upon the defendant learning that Pub Tap was to put the business on the market it had prepared a second loan agreement requiring the moneys payable by Pub Tap for redemption of units to be converted to a loan repayable in accordance with the terms thereof.
By its rejoinder to the second reply, The Tap Inn pleaded:
1. Says as to paragraph 1 of the second reply that:
1.1. The payments were in respect of a secured debt for the purposes of section 588 FA of the Corporations Act. The debt was secured by a charge (‘the charge’) granted by the company on 27 November 2007.
PARTICULARS
1.1.1.The charge was registered with the Australian Securities and Investment Commission on 28 November 2007.
1.1.2.The charge secured (clause 1.1.20) all moneys owed by the company to the defendant in respect of the loan agreement and the allotment deed.
1.1.3.The charge secured (clause 1.1.21) “all property, rights and undertaking of the (company)...”
1.2. The time of determining the value of the security for the purposes of section 588FA of the Act is at the time of the creation of the charge namely 27 November 2007 not the date of liquidation.
1.3. at the time that the security was granted by the Company, the value of the secured assets of the Company were not less than $5,500,000 being the value of the assets purchased by the Company from the defendant with advice in an arm’s length transaction;
1.4. The payments were, by reason of the charge, not available to the general body of unsecured creditors.
1.5. The payments were made from assets that had been validly charged.
1.6. Further and in the alternative:
1.6.1.at all material times that payments were made by the Company to the defendant the security had value;
1.6.2.whether the security had value at the time winding up is irrelevant as the defendant did not at the time of winding up or subsequently seek to enforce its security over any of the secured assets of the Company.
2. Says as to paragraph 2 of the of the second reply that:
2.1. no creditors are afforded priority by virtue of section 565 of the Corporations Act 2001; but
2.2. if the plaintiff is referring to priority claims of employees pursuant to section 561 of the Corporations Act 2001 then:
2.2.1.the defendant did not seek to enforce its security in priority to employees or any other priority creditors following the winding up of the Company; and
2.2.2.section 561 has no application to payments prior to liquidation to a secured creditor in respect of its debt; and
2.2.3.priority employee creditors were, pursuant to section 561, entitled to be paid out of the property subject to a circulating security interest at the date of winding up; and
2.2.4.the first security holder exercised its rights in relation to the property over which it had a circulating security interest to the exclusion of the defendant such that if the priority employee creditors have a claim in respect of that property it can only be against the first security holder; and
2.2.5.no particulars have been given as to whether there were priority creditors and if so in what amount and whether they were in fact paid out of secured assets; and
2.2.6.absent such particulars the defendant is unable to respond as to whether any priority creditors in fact suffered any loss.
3. Says as to paragraph 3 of the second reply that:
3.1. there were no conversations as alleged in paragraph 3.2 of the Second Reply or at all in relation to cash flow or solvency problems of the Company; and
3.2. the conversations pleaded as particulars to paragraph 3 of the Second Reply do not support the assertion there were “periodic discussions” about “cash flow and solvency problems” during 2008 and 2010; and
3.3. the parties had conversations on the topics of management and smoking changes in 2008 but not in terms relevant to solvency and not in the terms pleaded at subparagraphs a)- c); and
3.4. there were no conversations as pleaded in subparagraphs d) – e) and:
3.4.1.there were conversations in 2009 to the effect that the Company was considering introducing additional investors and that if that resulted in the vendor finance being paid out early in whole or in part, the defendant would consider a discount for early repayment;
3.4.2. there was no discussion about payment in cash; and
3.5. Mr Hannah sent an email to Ms Lintern on 1 April 2009 which speaks for itself and says that the outstanding monies were then paid to the defendant but denies:
3.5.1.the inferences which are pleaded in subparagraph f) and in particular subparagraph f)(i); and
3.5.2.that the defendant received financial statements as pleaded in subparagraph f)(ii); and
3.6. denies the conversation pleaded in subparagraph g) and in particular that the defendant made any offer whether informal or otherwise or expressed any interest in purchasing the Company’s business; and
3.7. in relation to subparagraph h) admits that the defendant and the Company discussed entering into a loan agreement in substitution for the redemption agreement in the context of the discussions referred to in paragraph 3.4.1; and
3.8. Says that a reasonable person in the defendant’s position knowing:
3.8.1. the facts and matters set out above; and
3.8.2. the value of the hotel business as a going concern, and
3.8.3.the extent of the directors’ investment in the hotel and the extent of their support for it,
would not have had reasonable grounds to suspect insolvency at any material time.
There has been no resolution of the extensive disputes of fact, or issues as to fact, arising on or from the pleadings. There has been no application for summary judgment or summary relief, or for the striking out of any pleading.
On 28 May 2015, the District Court Judge made the following order:
By consent, on the defendant’s application (FDN 42) the following point of law to be heard and determined as a preliminary issue and the trial of the action to commence after a ruling is made thereon:
Whether the time of assessing the value of the security was –
(a)at the date the security was created; or
(b)at the date when each of the payments was made; or
(c)at the date of liquidation of the company; or
(d)another alternative date,
thus whether the defendant was secured for the purposes of s 588FA of the Corporations Act.
On 14 July 2015, the Judge answered the preliminary question as follows:
For the purposes of s 588FA(2) of the Corporations Act, the time to assess the value of the security is the date of the winding up of the debtor company.
The Judge in his reasons set out the following factual matters:
The Tap Inn traded in Kent Town, a suburb of Adelaide. As the name suggests, the hotel had a golfing theme.
The hotel was owned by the defendant. In 2007, the defendant sold the business to Pub Tap Investments Pty Ltd. The sale was financed in part by a bank and in part by the defendant. Pub Tap granted a first debenture to the bank and a second debenture to the defendant. The first debenture had priority, being the earlier security. Both debentures create both ‘fixed’ and ‘floating’ charges over the present and future assets of the company (Exhibit P4 [4]; Exhibit P3 [3]).
On 16 June 2010, Pub Tap went into administration, and on 16 July 2010 it was placed in liquidation. Mr Matthews, the plaintiff, is the liquidator of the company.
The terms of sale required Pub Tap to make periodic payments to the defendant. Between 30 June 2008 and 27 April 2010, Pub Tap made 24 payments. The total amount paid was $374,772.22. Of that total amount, $76,678.46 was paid within six months of 16 June 2010 (the ‘relation back day’). If those payments constituted an ‘unfair preference’ given by the company, then they constituted insolvent transactions and are therefore voidable (Corporations Act 2001 (Cth) s 588FE(2)).
The balance of the payments were made within two years of the relation back day. If, for the same reason, these payments also constituted insolvent transactions because they were unfair preferences, they may be voidable if they also constituted ‘uncommercial transactions’ (s 588FE(3)).
The Judge made no reference to the allotment deed or the redemption of redeemable preference units. The Judge made no reference at all to the many disputed factual allegations arising from a review of the pleadings.
There is a danger in dealing with preliminary questions without the underlying facts to the dispute being resolved. It may be accepted that the parties are seeking to find a quick way through their dispute. However, the danger referred to is that the determination of the preliminary question is hypothetical. In my view, that is what has occurred in the present proceeding.
The detailed extracts from the pleadings indicate the complex commercial nature of matters underlying the impugned transactions. In my view, it was necessary, or at the very least highly desirable, for the disputes of fact, which appear to be substantial, to be resolved and then for the construction and application of the relevant statutory provisions to be addressed.
Much of the argument before the Judge turned on the proper construction of section 588FA and, in particular, section 588FA(2). That section provides as follows:
(1)A transaction is an unfair preference given by a company to a creditor of the company if, and only if:
(a) the company and the creditor are parties to the transaction (even if someone else is also a party); and
(b) the transaction results in the creditor receiving from the company, in respect of an unsecured debt that the company owes to the creditor, more than the creditor would receive from the company in respect of the debt if the transaction were set aside and the creditor were to prove for the debt in a winding up of the company;
even if the transaction is entered into, is given effect to, or is required to be given effect to, because of an order of an Australian court or a direction by an agency.
(2)For the purposes of subsection (1), a secured debt is taken to be unsecured to the extent of so much of it (if any) as is not reflected in the value of the security.
(3) Where:
(a) a transaction is, for commercial purposes, an integral part of a continuing business relationship (for example, a running account) between a company and a creditor of the company (including such a relationship to which other persons are parties); and
(b) in the course of the relationship, the level of the company's net indebtedness to the creditor is increased and reduced from time to time as the result of a series of transactions forming part of the relationship;
then:
(c) subsection (1) applies in relation to all the transactions forming part of the relationship as if they together constituted a single transaction; and
(d) the transaction referred to in paragraph (a) may only be taken to be an unfair preference given by the company to the creditor if, because of subsection (1) as applying because of paragraph (c) of this subsection, the single transaction referred to in the last-mentioned paragraph is taken to be such an unfair preference.
The interpretation of section 588FA(1) has been the subject of considerable judicial consideration, including by the Victorian and Queensland Courts of Appeal.[1] In those decisions, section 588FA(2) did not receive separate consideration. It appears to have been accepted that the work undertaken by that subsection is to extend the meaning of unsecured debt. In the present proceeding, the contention was advanced that section 588FA(2) was a standalone provision and, properly construed, would raise the need to address the value of the security at times earlier than the date of liquidation. Counsel for The Tap Inn noted that this issue does not appear to be expressly addressed in the authorities.
[1] See Walsh v Natra Pty Ltd (2000) 1 VR 523; Williams v Peters (2009) 232 FLR 98.
In determining that, for the purposes of section 588FA(2) of the Corporations Act, the time to assess the value of the security is the date of the winding up of the debtor company, the Judge applied the Victorian decision of Walsh v Natra Pty Ltd.[2] That matter proceeded on the hearing of a defendant’s no case submission following an election to call no evidence. On appeal, it was the submission of The Tap Inn that Walsh v Natra could be distinguished from the case at bar.
[2] Walsh v Natra Pty Ltd (2000) 1 VR 523.
This Court is reluctant to enter into the determination of issues that may be described as hypothetical.
In Rogers v Baillieu Bullock Wilkinson Pty Ltd,[3] Walters J considered the circumstances in which a preliminary point of law might be referred for hearing and disposal. Walters J discharged an order referring preliminary points of law for hearing and disposal before trial. In the course of his reasons, Walters J reviewed the practice in the United Kingdom observed:[4]
[3] Rogers v Baillieu Bullock Wilkinson Pty Ltd (1981) 28 SASR 594.
[4] Rogers v Baillieu Bullock Wilkinson Pty Ltd (1981) 28 SASR 594, 599-600.
It is not the function of the Court to advise the parties as to what would be their rights under a hypothetical state of facts—in this case, upon the hypothesis that the representations relied on by the plaintiff were in truth and fact made by the defendant. In this connexion, it seems to me that the observations of Lord Cozens-Hardy M.R. in Stephenson, Blake & Co. v. Grant, Legros & Co. are very much in point. There the Court of Appeal was dealing with certain questions of law raised on the pleadings and submitted to the Court before trial, under English Order 25, rule 2. In giving judgment, the Master of the Rolls said:
“It is not part of the duty of the Court to answer abstract questions of law of the kind raised in the present case. It is an attempt which, according to my experience, invariably fails to save time or money … If the parties go to trial, the defendants may say that they did not do what they are alleged to have done. And it is the same with all the other abstract questions. I do not wish to encourage this sort of application. In fact, I wish to discourage it as much as I can”.
Warrington L.J. who, with Lush J., constituted the Court of Appeal, remarked: “The function of the Court is not to decide abstract questions of law, but to decide questions of law when arising between the parties as the result of a certain state of facts”. (Italics added.) Lush J. concurred in what fell from the Master of the Rolls and Warrington L.J.; and his Lordship observed: “I only wish to add that I have had some experience— not very large, but some experience—in these endeavours to pick out propositions of law and get them tried first, and I can only say that I can scarcely recollect a case in which in the end such an attempt did not entail more expense and delay than if the action had been tried in the ordinary Court”. To the like effect are the observations of Lord Evershed M.R. in Windsor Refrigerator Co. Ltd. v. Branch Nominees Ltd:
“I repeat what I said at the beginning, that the course which this matter has taken emphasises, as clearly as any case in my experience has emphasised, the extreme unwisdom—save in very exceptional cases—of adopting this procedure of preliminary issues. My experience has taught me (and this case emphasises the teaching) that the shortest cut so attempted inevitably turns out to be the longest way round”.
[Footnotes omitted.]
Against this background, Walters J concluded:[5]
For the foregoing reasons, I have come to the conclusion that it is right for me to discharge the order which referred preliminary points of law into open court for hearing and disposal before trial. In taking this step, I follow what was done in Western Steamship Co. Limited v. Amaral Sutherland & Co. Ltd. and Stephenson, Blake & Co. v. Grant, Legros & Co. Accordingly, the order will be discharged without prejudice to any question arising before, or at the time, the action goes to trial in the ordinary way. Having regard to the course of the proceedings before they reached me, I think it is consistent with a proper exercise of my discretion to order that the costs of and incidental to the proceedings in open court be the plaintiff's costs in the cause.
[Footnotes omitted.]
[5] Rogers v Baillieu Bullock Wilkinson Pty Ltd (1981) 28 SASR 594, 600.
The High Court in Bass v Permanent Trustee Company Ltd[6] emphasised the dangers of deciding hypothetical points. Gleeson CJ, Gaudron, McHugh, Gummow, Hayne, Callinan JJ said:[7]
As the answers given by the Full Court and the declaration it made were not based on facts, found or agreed, they were purely hypothetical. At best, the answers do no more than declare that the law dictates a particular result when certain facts in the material or pleadings are established. What those facts are is not stated, nor can they be identified with any precision. They may be all or some only of the facts. What facts are determinative of the legal issue involved in the question asked is left open. Such a result cannot assist the efficient administration of justice. It does not finally resolve the dispute or quell the controversy. Nor does it constitute a step that will in the course of the proceedings necessarily dictate the result of those proceedings. Since the relevant facts are not identified and the existence of some of them is apparently in dispute, the answers given by the Full Court may be of no use at all to the parties and may even mislead them as to their rights. Courts have traditionally declined to state - let alone answer - preliminary questions when the answers will neither determine the rights of the parties nor necessarily lead to the final determination of their rights. The efficient administration of the business of courts is incompatible with answering hypothetical questions which frequently require considerable time and cause considerable expense to the parties, expense which may eventually be seen to be unnecessarily incurred.
The procedure adopted in the present case is far removed from that concerned with demurrers, a form of procedure which assumes the truth of a particular set of facts. If the “facts” which are the basis of an answer to a legal question are identified, that answer will have utility for the parties provided that no other evidence could add to or qualify those “facts”. In such a case, the parties’ rights will be determined when the evidence finally determines the existence or non-existence of those “facts”. Because that is so, demurrers have been much used in determining the rights of parties to litigation. The demurrer proceeds upon identified facts and enables a court to declare whether or not they provide a cause of action or a defence or reply to another party's pleading. Unlike the present case, however, a demurrer assumes that the pleadings exhaust the universe of relevant factual material. The utility of demurrers is, however, heavily dependent on the pleadings containing all the relevant facts. When the parties are uncertain whether further investigation will reveal further factual material, the utility of the demurrer is diminished.
...
Preliminary questions may be questions of law, questions of mixed law and fact or questions of fact. Some questions of law can be decided without any reference to the facts. Others may proceed by reference to assumed facts, as on demurrer or some other challenge to the pleadings. In those cases, the judicial process is brought to bear to give a final answer on the question of law involved. Findings of fact are made later, if that is necessary. Where a preliminary question is a pure question of fact that, too, can be answered finally in accordance with the judicial process if the parties are given an opportunity to present their evidence and, also, to challenge the evidence led against them.
[6] Bass v Permanent Trustee Company Ltd (1999) 198 CLR 334.
[7] Bass v Permanent Trustee Company Ltd (1999) 198 CLR 334, 357-8.
The answers given by the Judge were not based on facts found or agreed; they were hypothetical. The answers will only dictate a result if certain facts raised on the pleadings are established. As pointed out in Bass, when facts determinative of the legal issue involved in the question asked are left open, any answer cannot assist the efficient administration of justice. The dispute between the parties will not be finally resolved. To decide the point raised without the facts first being resolved raises the real prospect that the decision will be made hypothetically.
Conclusion
In my view, the preliminary question of law determined by the District Court Judge is properly characterised as a hypothetical question. A review of the pleadings discloses that there is a considerable dispute of fact. This was confirmed by counsel on the hearing of the appeal. For the reasons discussed above, the Judge should not have proceeded to determine the preliminary question. Although neither party challenged the process followed by the Judge, the process was flawed. I am not prepared to entertain an appeal to further consider a hypothetical question. The appropriate course is to allow the appeal, set aside the Judge’s answer and give directions as to the trial.
As discussed above, the defendant seeks to have this Court depart from the decision in Walsh v Natra in the present proceedings. In these circumstances, the proceeding should be referred to this Court for hearing as a complex commercial cause.
As both parties consented to the course followed in the District Court, it would, in my view, be appropriate that the costs of that hearing and of this appeal be costs in the cause.
SULAN J. I agree with the reasons of Gray J and the orders he proposes.
PEEK J. I agree with the orders proposed by Gray J and with his reasons.
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