Thompson Land v Salzer Constructions Pty Ltd - [1998] VSC 111

SUPREME COURT OF VICTORIA

CORPORATIONS LIST

Not Restricted
No. 5521 of 1996

In the Matter of Section 451 of the Companies (Victoria) Code
IN THE MATTER of THOMPSON LAND LTD
(Receiver & Manager Appointed) (In Liquidation)
(ACN 006 544 672)

JOHN MARTIN WALSH as liquidator of Applicant
THOMPSON LAND LIMITED (Receiver &
Manager Appointed) (In Liquidation)
(ACN 006 533 672)
v

SALZER CONSTRUCTIONS PTY LTD Respondent
(ACN 004 770 085)

---

JUDGE: Byrne, J.
WHERE HELD: Melbourne
DATE OF HEARING: 4, 8, 9, 10, 11, 14, 15, 16 September
DATE OF JUDGMENT: 13 November 1998
CASE MAY BE CITED AS: Re Thompson Land Ltd (in liq); Walsh v Salzer
Constructions Pty Ltd
MEDIA NEUTRAL CITATION: [1998] VSC 111

---

COMPANIES - winding up - undue preference - payment by insolvent holding company
to creditor of subsidiary - holding company liable to make payment under indemnity
guarantee - whether payment made for subsidiary or as indemnifier.
Bankruptcy Act 1966 s. 122
COMPANIES - winding up - settlement of property - whether payment to creditor a
settlement of property
Bankruptcy Act 1966 s. 120(1) (2), (8)

---

APPEARANCES: Counsel Solicitors
For the Plaintiff Mr F.G. Beaumont QC Abbott Stillman & Wilson
Mr A. Rodbard-Bean
For the Defendant Mr G.T. Bigmore QC Gadens Lawyers
Mr M.J. Galvin

TABLE OF CONTENTS

A THE UNDUE PREFERENCE CLAIMS 6

1. Salzer was a creditor of Thompson Land 7

2. Thompson Land was insolvent 13
3. A Payment by the Debtor to the Creditor 15
4. The Payments were Preferential 23

Earmarked Payments 23
A Running Account 30

5. The Good Faith Defence 33
6. Conclusion 34

B. THE SETTLEMENT CLAIMS 34

HIS HONOUR:

On 6 September 1990 Thompson Land Ltd (“Thompson Land”) was ordered to be wound up upon an application filed on 15 May 1990. The plaintiff, John Martin Walsh, was appointed liquidator. By originating motion filed on 14 May 1996 the liquidator seeks orders declaring void as preferential six payments allegedly made by Thompson Land to the defendant, Salzer Constructions Pty Ltd (“Salzer”). Alternatively the liquidator seeks orders setting aside as voidable settlements of property eleven payments made by Thompson Land to Salzer, the last six of these being the same payments as were alleged to be preferential. These payments were made under or in connection with progress claims made by Salzer for the construction of a building at 440 Elizabeth Street, Melbourne. Their details are as follows:

Date Claim Number Source Amount
1989
18 August 13 (part) Thompson Land $500,000
15 September 13 (balance) Thompson Land $2,331,698
22 September 14 Thompson Land $1,771,095
9 October 15 Thompson Land $1,545,864
8 November 16 Thompson Land $1,621,857
11 December 17 Thompson Land $1,259,149
1990
12 January 18 Thompson Land $1,170,545
6 February 19 Hongkong Bank $310,354
8 February Interest Thompson Land $99,992
2 March 20 Hongkong Bank $565,707
5 April 21 Hongkong Bank $491,518

The contractual arrangements under which the building was to be constructed are complicated. Parties to some of these contracts were Thompson Land and two other companies controlled by its director, Warren Alfred Thompson, and being part of the Thompson group of companies. They were Twenty-Eighth Codora Pty Ltd (“Twenty-Eighth Codora”), which was incorporated on 24 February 1988 and Thompson Project Management Pty Ltd (“TPM”) which was incorporated in 1985 but which assumed that name on 25 July 1988. The holding company in the Thompson Group, Thompson Land, was a listed public company. The seven agreements relating to the acquisition and construction of the Elizabeth Street project were all dated 15 August 1988:

1.

A contract of sale whereby Twenty-Eighth Codora purchased the land at 440 Elizabeth Street for $4.9M.

2.

A building contract between TPM as project manager and Salzer as builder whereby Salzer agreed to prepare final drawings and specifications, design and engineering services and to construct a 10 storey building on the land, all by 30 September 1989, for the price of $24.15M.

3.

A performance guarantee entered into between Thompson Land and Salzer whereby Thompson Land Guaranteed the performance of TPM of its obligations under the building contract and indemnified Salzer against loss (“the Thompson Land Guarantee”).

4.

A construction management agreement entered into between TPM and Landkon Pty Ltd, whereby Landkon agreed to manage the design and construction of the project for a fee of $3,157,500.

5.

A performance guarantee entered into between Thompson Land and Linkon Construction Pty Ltd whereby Linkon guaranteed the performance of its subsidiary, Landkon, of its obligations under the construction management agreement.

6.

A bonus deed entered into between Linkon and Thompson Land whereby Linkon would be paid a fee if it found a tenant for the building.

7.

A performance guarantee entered into between Landkon and Thompson Land whereby Thompson Land indemnified Landkon against losses the result of default by TPM under the construction agreement.

The finance for the project, and perhaps for the purchase of the land, was provided by Burns Philp Trustee Company Ltd as trustee for an entity within Estate Mortgage organisation (“Estate Mortgage”). Of the original finance agreement between Burns Philp and Thompson Land dated 18 June 1987, only the first page is available and included in the evidence. The content of most of this agreement is, therefore, unknown and no secondary evidence as to this was given. Nevertheless, there are indications of its content from a further amending agreement dated 12 September 1988. The parties to this further amending agreement are Burns Philp as lender; Thompson Land as borrower; and TLI Management Pty Ltd, another company within the Thompson Group, and Mr Thompson himself as covenantors; and Twenty-Eighth Codora. It appears from this agreement that, under the 18 June 1987 agreement, Burns Philp agreed to make a loan available to Thompson Land up to a limit of $2,795,000 which limit was increased to $10M by an amending agreement dated 16 December 1987. Under the amending agreement Burns Philp took additional security over another development property of the Thompson Group in King Street, Melbourne. By the further amending agreement the facility limit was increased again to $50.133M. It is significant for my purposes that under cl. 3.1 of the further amending agreement the entity to which Burns Philp agreed to make the facility available was Thompson Land.
Under the building contract TPM played the role of principal notwithstanding that it is described as project manager. The agreement is, as I have mentioned, a design and construct contract; it contained no provision for an independent superintendent or contract administrator. Functions which might have been performed by such a party were entrusted to TPM. TPM was given the function for approving claims for a time extension: cl. 1(b); of valuing variations: cl. 2(d); of certifying practical completion: cl. 10(b) and final completion: cl. 10(c); and of approving progress claims: cl. 12(e). The contract sum was fixed, subject to adjustment in accordance with the agreement, and was payable by instalments progressively as the work proceeded by a progress claims procedure. Progress claims were to be submitted on the 15th day of each month setting out the total value of the works executed including variations and unfixed materials: cl. 12(b). Within 15 calendar days of receipt of the claim TPM was obliged to consent to the claim and pay it or to notify any disagreement: cl. 12(e). Interest was chargeable upon money not so paid at the discretion of Salzer: cl. 12(g). The contract does not provide for the inclusion of interest in the progress claims procedure.
And so the project commenced and continued until September 1989. Salzer submitted its periodic progress claims. These were, on behalf of TPM, analysed by the construction manager, Landkon, who prepared in each case a document in which it set out in summary form the value of work completed, the amounts previously “certified”, and the amount due to Salzer and recommended by it for payment by TPM by a date which was also set out on this document. This document, which in form resembles a progress certificate issued by an independent contract administrator under a conventional contract, was not issued as such under the building contract. It will be recalled that the function of TPM was to accept the claim and pay it forthwith or to dispute it, giving reasons.
Since this had to be done all within 15 calendar days of the submission of the claim (subject to certain days which were not to be counted), the time was exceedingly short. Taking Progress Claim 18, for example, on a date which does not appear Salzer submitted its claim for work performed to Friday, 15 December 1989. This was considered by Landkon and on the same day, 15 December, it submitted its recommendation to its client, TPM, in the form which I have mentioned. This document, however, is dated 18 December 1989. The claims had already been discussed and agreed with the financier and a copy of the recommendation was sent to it on the same day, 15 December 1989. On this day, too, a copy of the document was sent to Salzer. This must be taken as a consent to the claim by TPM pursuant to cl. 12(e) of the building contract, at least to the extent of the recommendation. The document states that the due date for payment of the sum recommended for payment is 3 January 1990. It follows, then, that TPM was in breach of its obligation under the building contract if it did not pay the whole of the accepted claim on that date.
Over the first year of the project these claims were paid, always late but never more than four days late. It appears from the Salzer pay in records which were available for the first 10 claims, that cheques in payment of the progress claims were drawn, one by the ANZ Bank, three by Thompson Land, three by Twenty-Eighth Codora, two by TPM and one by Meladay Pty Ltd. This last company otherwise plays no part in this proceeding and is not shown as an associated company of Thompson Land in the 1989 annual report of Thompson Land.
Progress Claim 13 for work done to 15 July 1989 was also paid late. Part only was paid, and this 16 days after the due date. In his dealings with Salzer, Mr Thompson attributed this to financial difficulties where were then beginning to beset the financier, Estate Mortgage. In the succeeding months these difficulties became more acute and the balance of claim 13 was not paid until 15 September, 44 days late. At this time a new financier was introduced, by finance broker Wardley Australia Ltd (“Wardley”). This was Hongkong Bank of Australia Ltd (“the Hongkong Bank”), which agreed to participate in the funding of the Elizabeth Street project and that in King Street to a limit of $25M.
The agreements under which this further funding was put in place were dated 22 September 1989. A surprising feature of the principal agreement entered into at this time, the Loan Facility Agreement, is that it contains no express covenant on the part of the Hongkong Bank to advance any money to Thompson Land or indeed to any other party. There are, however, indications in it which suggest that payments by the Bank of further advances were to be paid to Thompson Land via Burns Philp: cll. 4.4, 5.3.2, 5.3.3, 8.2 and annexure A. Thompson Land is referred to in that agreement as the borrower and TPM is not a party to it. Thompson Land, TPM, the Hongkong Bank and Salzer are parties to another of the agreements, an Assignment Agreement whereby “as security for the due performance, observance and fulfilment of [Thompson Land’s] obligations [TPM] hereby assigns absolutely to the [Hongkong Bank] all [TPM’s] present and future right, title and interest in and under the Building Contract...”. Clause 2.2 of the Assignment makes it clear that TPM retains the burden of the building contract so that it, and not the Hongkong Bank, remains liable to perform its obligations under it, including, it may be supposed, the obligation to make periodic payments to Salzer in accordance with cl. 12 of the building contract. Under cl. 4 of the Assignment Agreement Salzer is obliged to inform the Hongkong Bank of any default by TPM under the building contract and agrees not to exercise its rights under the building contract without first having given to the Hongkong Bank notice of the default and the opportunity itself to rectify it. Further, Salzer agrees not to terminate the building contract without the consent in writing of the Hongkong Bank.

A THE UNDUE PREFERENCE CLAIMS

The liquidator’s claims for the return of the six alleged preferential payments provided the principal area of dispute at the trial. His entitlement to this relief is conferred by s. 451 of the Companies (Victoria) Code which in turn incorporates s. 122 of the Bankruptcy Act 1966 with certain modifications to accommodate the fact that the insolvent payer is a corporation rather than a natural person. The essential ingredients for recovery in a case such as the present are proof that a payment has been made by the company who is then insolvent to a creditor within six months before the filing of a winding up application in circumstances where the payment has a preferential effect. If these matters are established, the creditor may avoid an order for recovery where it establishes that the payment was received in good faith and for valuable consideration and in the ordinary course of business. Of these ingredients, only one, that the payments were made six months before the commencement of the winding up, was not in issue. Each of the six payments was made after 15 November 1989 when the six month period commenced to run. I shall now turn to each of the remaining ingredients.

1. Salzer was a creditor of Thompson Land

The question of whether there existed at the relevant times a debtor/creditor relationship between Thompson Land and Salzer was fundamental to the contest before me. The application was brought by notice of motion in the Corporations List and there were no pleadings. Nevertheless, the judge in the list directed the parties to deliver points of claim and points of defence with the objective of delineating the issues. In many respects these points were singularly deficient in terms of this objective. Indeed, the present issue was raised by the bald assertion made on behalf of the liquidator that Thompson Land was, during the six month period, a creditor of Salzer. This allegation was at first admitted and later, by an amendment made in November 1997, denied in an equally bald manner. Notwithstanding that the allegation was thereafter an issue, neither party set out in any detail its position on this important matter. Salzer pursued the matter by interrogatory which was answered by the liquidator at first objecting to the question on the basis that it required him to express an opinion of law. Under cover of that objection the liquidator deposed as follows:
“...the indebtedness referred to arose -
(a) pursuant to an agreement between Thompson Land, TPM and Salzer entered into in or about mid to late August 1989 and early September 1989 to the effect that thereafter Thompson Land would assume direct responsibility for payment under the building contract between TPM and Salzer, such agreement being partly in writing, partly oral and partly implied from the conduct of each of Thompson Land, TPM and Salzer, the particulars of which are referred to in my affidavit sworn 20 March 1997, or alternatively;
(b) under the performance guarantee agreement between Thompson Land and Salzer dated 15 August 1988.”
I should add that no further light was shed on this issue by reference to the liquidator’s 36 page affidavit sworn on 20 March 1997 or to the 118 exhibits to it. To my mind this is not the way to conduct commercial, or indeed any, modern litigation. Both parties are to be criticised for this, at least since the matter was put in issue in November 1997. Accordingly, I directed that particulars be provided by the liquidator and this was done on 14 September. It is there alleged that the debtor/creditor relationship arose -

1. from the liability of Thompson Land under an indemnity contained in cl. 2 of the Thompson Land Guarantee; or
2. from the contingent liability of Thompson Land under a guarantee contained in cl. 1 of the Thompson Land Guarantee; or
3. by an implied assignment or novation of the payment obligation of TPM under the building contract such that Thompson Land assumed direct responsibility for payment to Salzer. The implication is said to arise from a large number of facts and documents which were set out in the particulars provided. When pressed as to the date of this assignment or novation counsel for the liquidator said that it was made “round about 22 September”, 1989 about the time of the entry of the Hongkong Bank into the finance arrangements for the Elizabeth Street project.

The Thompson Land Guarantee was prepared and executed at the time the building contract was entered into on 15 August 1988. It was made between Thompson Land as guarantor and Salzer as builder. It recites the building contract between TPM and Salzer and that “the guarantor has agreed to guarantee the due performance by TPM of its obligations pursuant to the Building Agreement”. The two relevant clauses are in the following terms:

“1. Subject to:-

1.1

the Builder having remedied any default (as defined by the Building Agreement of its obligations in accordance with Clause 16 of the Building Agreement).

1.2

a default (as defined by the Building Agreement) having arisen and not being remedied by TPM in accordance with Clause 16 of the Building Agreement;

1.3

the Builder having not exercised any right to determine the Building Agreement; without first giving the Guarantor by notice in writing a period of 7 days from the day of receipt of said notice to remedy the default by TPM.

1.4

as at the date of service of the notice referred to in this Clause 1, the Building Agreement being valid and enforceable;
THEN UPON SERVICE by the Builder of a written notice (Builders

Notice) served in accordance with Clause 19 of the Building Agreement specifying the said default by the TPM the Guarantor shall rectify the said default within 7 days of the date of receipt of the Builders Notice.

2.

The Guarantor indemnifies the Builder against all losses, damages, costs and expenses or otherwise which may be incurred by the Builder by reason of any default on the part of TPM in connection with the covenant given in Clause 1.”

These clauses, as they appear above, are in the form of the executed document. It appears from handwriting on the exhibit that this final form was the result of amendments to the typed draft. Subject to certain limited exceptions which have no relevance here, I may not, for the purpose of construing the executed document, have regard to the unamended document any more than I can have regard to pre- contractual negotiations: Timber Shipping Co SA v London & Overseas Freighters Ltd [1972] AC 1 at 15, per Lord Reid.
The guarantee given by Thompson Land under cl. 1 is an extremely restricted one. To summarise its rather complicated and not altogether apposite terminology, the obligation of Thompson Land to make good the default of TPM does not arise (1) where Salzer itself is in default; (2) where Salzer has determined the building contract without first having given Thompson Land the opportunity to rectify TPM’s breaches; or (3) where for some reason the building contract is invalid or unenforceable. Absent those matters, Salzer might give to Thompson Land notice specifying the default of TPM and, in such an event, Thompson Land “shall rectify the said default within seven days of the date of receipt of the Builders Notice”.

I mention at this point an argument put by counsel on behalf of Salzer in their final address that the guarantee was not relevant to the issue presently under consideration because of the requirement in cl. 1.4 that the building contract be enforceable had not been satisfied. It was submitted that the building contract was not enforceable after the execution on 22 September 1989 of the Assignment Agreement in favour of the Hongkong Bank. The argument was to the effect that, under cl. 4.2 of this Assignment Agreement, the builder could not exercise any of its rights under the building contract unless it first gave notice to the Hongkong Bank. This, it was said, rendered the building contract unenforceable by Salzer, at least until the requirements of that clause had been satisfied. I refused to entertain this argument. It was not pleaded. The point was not flagged to the liquidator formally by the way of particulars or by informally by letter or otherwise. It was not opened or referred to in the course of the trial. Counsel for the liquidator protested that in these circumstances they were subjected to ambush. I agree.
Returning to the guarantee, the evidence showed that, during the period with which I am concerned, only one formal notice to Thompson Land under the Thompson Land Guarantee was given. This was that dated 12 September 1989 requiring rectification of TPM’s default in failing to pay $2,331,698 in respect of Progress Claim 13. The sum was in fact paid on 15 September 1989. During the period of the payment of the six allegedly preferential payments no such notice was given. Accordingly, it was accepted that, during that period, there was no present obligation on Thompson Land under cl. 1 of the Thompson Land Guarantee. Counsel for the liquidator argued that it was sufficient to establish a debtor/creditor relationship that Salzer be, immediately prior to each payment, a person entitled to prove and share in the winding up of Thompson Land if a liquidator supervened: In Re Blackpool Motor Car Company Ltd; Hamilton v. Blackpool Motor Car Company Ltd [1901] 1 Ch 77 at 82, per Buckley J; Re S & N (Nominees) Pty Ltd (in liq); Yeomans v Lease Industrial Finance Ltd (1986) 76 ACTR 1 at 7, per Jenkinson J; Since contingent debts are provable under s. 82, Salzer was a creditor on the date of each payment because on each of those dates, except one, TPM was in default in that a payment then due and payable under cl. 12 of the building contract was unpaid, so that Thompson Land was in the position of a surety who might be, but had not yet been called upon to pay: In Re Paine; ex parte Read [1897] 1 QB 122; Bank of Australasia v Hall [1907] 4 CLR 1514 at 1527, per Griffiths CJ and at 1535-6, per O’Connor J; Re JF Aylmer (Manildra) Pty Ltd; Burgess v Spooner [1968] 3 NSWR 330 at 334; Re Timbatec Pty Ltd (1974) 24 FLR 30. The single exception is the payment made under Progress Claim 20 which was made on the due date. On each of these dates, then, the relationship of debtor/creditor existed between Thompson Land and Salzer.
The second basis upon which the debtor/creditor relationship is said to arise is cl 2 of the Thompson Land Guarantee under which Thompson Land agreed to indemnify Salzer against losses and the like incurred by it “by reason of any default on the part of TPM in connection with the covenant given in cl. 1”. Notwithstanding that the document in which it is found is called a guarantee, this clause is, in its terms, an indemnity. See Total Oil Products (Australia) Pty Ltd v Robinson [1970] 1 NSWR 701 at 703-4, per Asprey JA, Sugerman and Holmes JJA concurring. The clause, however, provokes a further difficulty because TPM was a party to no covenant under cl. 1; the covenant given under that clause was given by Thompson Land. The default by TPM, therefore, cannot be a default under that covenant. The choice, then, seems to be between ignoring the words “in connection with the covenant given in cl. 1” as meaningless so that the default in cl. 2 then covers a default by TPM which, in the context, would have to be a default under the building contract; or construing the words in question to refer to a default referred to in cl. 1, namely a default under the building contract. The result is the same in either case. The relationship between the “default by TPM” on the one hand and the “covenant given in cl. 1” is expressed in cl. 2 in fairly flexible terms: “in connection with”. If default by TPM is to be understood as a default under the building contract, as it plainly does, the composite expression in cl. 2 becomes awkward and incomprehensible: “by reason of any default by TPM under the building contract in connection with the covenant given by Thompson Land to make good that breach”. The alternative construction involves ignoring the words “in connection with the covenant given in cl. 1”. This is a course of last resort but one which is, nevertheless, open to me where the words are meaningless: Nicolene Ld v Simmonds [1953] 1 QB 543 at 552, per Denning LJ; White Industries Ltd v Piling Contractors Pty Ltd (1986) 2 BCL 353 at 361, per Carruthers J. This is such a case. I will therefore treat the words “in connection with the covenant given in cl. 1” as superfluous and will ignore them.
Counsel for Salzer then submitted that cl. 2 should be read as a right in Salzer to look to Thompson Land only where the pre-conditions to liability under cl. 1 had first been satisfied. This is inconsistent with the terms and structure of the document and I do not accept it. Clause 2 on its proper construction creates an immediate obligation to indemnify whenever TPM falls into default under the building contract. This means that, subject to the same exception, on each of the dates of the six allegedly preferential payments, immediately before the payment Thompson Land was under an obligation itself to make that payment to Salzer under cl. 2 and was therefore a debtor of Salzer. The exception again is in respect of the amount payable under Progress Claim 20 in respect of which TPM did not fall into default.
The third basis put on behalf of the liquidator for the existence of a debtor/creditor relationship was a novation or assignment of the payment obligations of TPM under the building contract. I am entirely unable to conclude that there is any such novation or assignment. Given the complicated contractual structure which I have endeavoured to summarise, especially since the Hongkong Bank joined in the provision of finance, I would expect that a novation even of the TPM payment obligations to Salzer, must involve the financiers. There is no evidence from which I could infer an acceptance by them of a fresh obligation in Thompson Land to pay Salzer direct. Even if it were possible to put the financiers to one side, I find no agreement between Thompson Land, TPM and Salzer as alleged. The novation agreement as it was explained by counsel for the liquidator was that Thompson Land assumed a direct responsibility for payment to Salzer in addition to the existing liability of TPM to do so under the building contract. I will not enlarge this judgment by rehearsing and analysing the effect of the 29 documents and twelve matters which are said in the particulars to give rise to an inference that the novation or the assignment existed. Many of them post-date the alleged novation or assignment. The impact of many of them is diminished when they are considered in the light of the position of each of the relevant parties. The assumption of a direct obligation by the parent company within the Thompson Group does not serve any purpose for the other entities within the group. Salzer was not concerned who made the payments so long as it received its money. Salzer tended to write letters regarding overdue payments to Thompson Land because this was the holding company and because it was known that Mr Anderson was very much in control of both the holding company and TPM. I find no novation.
Likewise, I find no assignment. The same matters are relied on and I have indicated my reaction to these. Further, the suggested assignment is inconsistent with the express contracts which bound all the relevant parties.
I conclude, therefore, that Salzer was a creditor of Thompson Land immediately before it received the payments which were made on 11 December, 12 January 1990, 6 February, 8 February and 5 April, but not that made on 2 March 1990.

2. Thompson Land was insolvent

The question of the ability of Thompson Land to pay its debts out of its own money must be considered as at the date of each of the payments. The test is that laid down by the High Court in Sandell v. Porter (1966) 115 CLR 666. It involves an examination, not only of the company’s balance sheet, but also of the cash resources available to it to enable it to meet its debts as and when they fall due and also its ability to raise money to meet them. See Hymix Concrete Pty Ltd v. Garritty (1977) 13 ALR 321 at 327 - 8 per Jacobs J, Barwick CJ and Gibbs J concurring. It is a question which must be determined “as a matter of commercial reality in the light of all the circumstances”: Taylor v ANZ Banking Group Ltd (1988) 6 ACLC 808 at 811, per McGarvie J.
It is, nevertheless, convenient to start with the balance sheet. Audited accounts of Thompson Land and of the Thompson Group were taken as at 30 September 1989. They show a total shareholders’ equity of $57.126M and a surplus of current assets over current liabilities of $40.29M. Norman Kenneth Jones, an accountant who assisted the liquidator in his administration, subjected these figures to an analysis and concluded that, in truth, these figures should be a negative shareholders’ equity of $53.448M and a quick asset deficit of $137.2M. The two largest items which led to this adjustment were a reduction in the current receivables of $12M, and a write off of debts owed to the company by its subsidiaries in the sum of $66.2M.
The first item represented the expectation of Thompson Land that it would receive $12M on the sale of stage 2 of a development project at Dandenong. In fact, the sale was never completed and the expectation was not fulfilled. The second major item was written off because in a report dated 3 October 1990 prepared by Christopher Daly, the receiver and manager of Thompson Land, Mr Daly expressed that, as at 27 April 1990, the value of the assets of the subsidiaries available to meet this debt was nil. This opinion was born out by the actual realisation of these assets. Mr Daly was not cross examined and I accept his opinion. It was, however, put on behalf of Salzer that, while this might have been the position in April 1990, it does not warrant the inference that these assets were worthless to Thompson Land five months previously, given that the market was falling. Mr Jones, however, maintained his conclusion as to the lack of value of this asset. He said that Mr Anderson was unable to raise funds from outside the group on the security of the assets of the subsidiaries in August 1989 and February 1990. I conclude in accepting Mr Jones’ evidence and that of Mr Walsh on this matter, that there was at all times from 30 September 1989 a deficiency in shareholders’ funds.
I accept also that there was a deficiency in quick assets. Mr Jones showed that $151M of the non current creditors were then due and should be treated as current. Furthermore, the current liabilities figure for trade creditors which is shown as $6M in the balance sheet is very dubious. The investigations of Mr Jones disclose that the figures are understated by some $3M. I accept this to be the case.
The accounts and their analysis by Mr Walsh and Mr Jones show also that, throughout the six month period from 1st December 1989, Thompson Land was suffering from an increasingly severe deficiency in liquidity. An examination of its bank statements shows that it was frequently over the permitted limit and its confirmed by the evidence of its accountant, Ernest John Groenwald, that Mr Thompson personally signed company cheques, and that it was his style to delay their delivery as long as possible. This “management system” renders less significant the fact that Salzer had had to pursue him for payment of its progress claim. It is apparent from all of the evidence that this resistance to favouring creditors with prompt payment was, by December 1989 at least, driven by economic imperatives as much as by a reluctance on the part of Mr Thompson to part with something he held dear. Bruce Gordon Pippett, the company’s in-house solicitor, spoke of this same practice and of the increasing intensity of calls from creditors towards the end of 1989. Other significant evidence to the same effect was the non payment of the employees’ group tax from December 1989 and the fact that the company had not traded profitably after August 1989.
I have focused attention on the position of the company at the beginning of the six month period because it is apparent from the evidence that its financial health deteriorated from then until a receiver and manager was appointed on 27 April 1990 and thereafter until liquidation in September of that year. I find that on the date of each of the alleged preferential payments Thompson Land was unable to pay its debts as they fell due out of its own money.

3. A Payment by the Debtor to the Creditor

Of the six allegedly preferential payments three were made by cheque drawn in favour of Salzer on the cheque account of Thompson Land with the ANZ Bank and three were by direct payment to Salzer by the Hongkong Bank. For the liquidator it was said that the Thompson Land direct payments were made by it to discharge its indebtedness to Salzer. Counsel for Salzer said that they were in fact payments by TPM which were made by Thompson Land as its agent. With respect to the Hongkong Bank payments the same positions were adopted.
Reliance was placed by counsel for Salzer upon the decision of Hayne J in this Court in Walsh v Terranova Pty Ltd (1994) 14 ACSR 432 a case which arose out of the winding up of the same company, Thompson Land Ltd. The case concerned another of its projects, at Dandenong. This project was structured differently from the Elizabeth Street project. Thompson Land was the developer and it had engaged as its construction manager, Construction Engineering Australia Pty Ltd. The various sub-contractors, including Terranova, were directly engaged by Thompson Land and were included among its creditors. The payment which the liquidator sought to recover as preferential was made to Terranova by Construction Engineering out of a fund provided to it by Thompson Land for the purpose. His Honour was pressed on behalf of Terranova with an argument that the payment was made, not by Thompson Land, but by Construction Engineering and, for that purpose, reliance was placed upon the dictum of the Full Court in Ramsey v National Australia Bank Ltd [1989] VR 59 at 63.
“We have seen no authority for the proposition that a payment out of his own moneys by B to C, pursuant to a contractual obligation to discharge A’s debt to C, an obligation imposed upon B by a contract between A and B, can be said to be a payment made by A to C.”
The point of distinction identified by Hayne J between the facts considered by the Full Court and those before him lay in the circumstances of the party B. Where B makes a payment to a creditor, C, at the direction of the debtor, A, but from funds provided by A to it for the purposes of the payment, the payment is in truth a payment made by A through its agent, B. See Craftsman Modern Constructions Pty Ltd (in liq) v National Bank of Australasia Ltd (1968) 87 WN (NSW) 378.
The case before me is different in two significant respects from those before the court in the Terranova case and the Ramsey case. First, TPM did not put Thompson Land in funds to make the payments; these were obtained by Thompson Land from its own financiers. It was not asserted by Salzer that there existed an express agreement of agency between TPM and Thompson Land for the payment of its progress claims. Essentially, the inference of agency depended upon the existence of TPM’s own obligation under the building contract to make the payments to Salzer and the fact that Thompson Land procured the funds and made the payment to discharge that obligation.
This case has another very important feature which distinguishes it from the Terranova case. It is that Thompson Land was, under cl. 2 of the Thompson Land Guarantee, itself a debtor of Salzer when all but one of the payments was made. It was also a contingent surety pursuant to cl. 1 of the same guarantee. This provides a legal reason for Thompson Land to make a payment direct. I express myself in this way because there was no evidence that Mr Thompson or Thompson Land intended, if that be necessary, the payment to discharge Thompson Land’s obligations under the Thompson Land Guarantee. To my mind it is extremely unlikely that anyone gave a moment’s thought to cl. 2 of this guarantee or to the existence of an immediate obligation on the part of Thompson Land to make a payment to Salzer as indemnifier or a contingent obligation as guarantor. No demand for payment under cl. 2 was ever made by Salzer. If an entitlement under cl. 2 were present in the minds of those directing that company it is not likely that a cl. 1 notice would have been given by it on 12 September 1989. The true situation was that Thompson Land made the payment in each case because it was the entity within the Thompson Group which had the funds to do so.
Accordingly, it was submitted on behalf of Salzer that, even if Salzer was a creditor of Thompson Land and the payment in each case had the effect of discharging its liability to Salzer in whole or in part, it was, nonetheless, not a payment made by Thompson Land qua debtor to Salzer as its creditor. It was put that the payments made by it or by the HongKong bank at its direction were made in its capacity as treasurer for the Thompson Group including TPM. I was referred to the dictum of Hope JA, speaking for the Court of Appeal, in Expo International Pty Ltd (in liq) v Torma (1985) 3 NSWLR 225 at 229.
“In my opinion, a person to whom a payment has been made by a company within six months of its winding up does not obtain a preference merely by reason of the fact that he happens to be a creditor of the company. In order for the payment to be a preference it must be made to the payee in his capacity as a creditor of the company and not otherwise.”
This passage was quoted with approval by Kirby J in his dissenting judgment in Sheahan v Carrier Air Conditioning Pty Ltd (1997) 189 CLR 407 at 457. This case was, in a sense, the converse of the present. The receiver appointed by a bank over the assets of a construction company was concerned to keep its operations going and he wrote to the trade creditors asking that they maintain supply upon normal trading terms. With respect to two of them, Carrier Airconditioning Pty Ltd and Air Con the receiver agreed that they would resume work and that he would guarantee payment of outstanding invoices. Following liquidation, the liquidator sought to recover as preferential a number of payments made to these two creditors within the six month period pursuant to that guarantee. The relevant issue in that case for my purposes was whether the payments were made by the company by its agent the receiver. The majority of the High Court at 189 CLR 435 summarsied the conclusion of the Full Court of the Supreme Court of New South Wales as being that “the receiver had undertaken a person obligation and it was in discharge of that obligation that the payments in question were made. This was so even though the payments might incidentally have operated to discharge or reduce pre-existing liabilities of” the company. After examining the source of the funds from which the payments were made and analysing the legal relationship between the company and the receiver, the majority concluded that the Full Court was correct. Brennan CJ and Kirby J reached the contrary conclusion. The significance of this case for my purposes is that it demonstrates the approach of the court where payment is made to a creditor of a company by a person who may be acting in discharge of a personal obligation or in the discharge of the debtor’s obligation. The liquidator in this case must, therefore, show that the payment was made by Thompson Land in its capacity as debtor to its creditor, Salzer.

There was evidence from the liquidator that Thompson Land acted as treasurer for the Thompson Group of companies “in a loose sort of way”. This qualification was used by Mr Walsh to indicate that not all of the funds of the group passed through the holding company. Mr Jones, when asked whether Thompson Land acted as treasurer for another project, the Jam Factory project, said he recalled that it received one payment from the financier. Counsel for the liquidator disputed any suggestion that Thompson Land was treasurer and said that this was never put to Mr Groenwald who was the accountant of the Thompson Group. The question, however, is not to be considered only on a basis of whether Thompson Land acted as treasurer for the group. For my purposes it is whether Thompson Land acted as treasurer for the Elizabeth Street project, whether or not it acted as such for other or all of the entities within the Thompson Group or the projects conducted by those entities.
TPM had its own account with the ANZ Bank. In February and March 1989 payments were made from this account to Salzer in respect of Progress Claims 7 and 8 and in internal bank memoranda of December 1989 an account in its name is shown as being $234 overdrawn. The account, however, does not appear in the bank memoranda of 26 January 1990 or thereafter. The evidence shows that all payments to Salzer since August 1989 were made through the cheque account of Thompson Land with the ANZ Bank except for the three direct payments by the Hongkong Bank. It was through this account, too, that payments were made to Landkon, TPM’s construction manager. The accounts, at least to 30 September 1989, reflect this. Mr Jones explained how the receipt of money from the financiers was recorded in the books of Thompson Land as a liability of Thompson Land to the financiers and its payment to Salzer was shown as a debit to the loan account of its subsidiary, TPM. Mr Walsh confirmed this but said that the quality of the accounting records fell away after 30 September 1989. Even so, the payments to Salzer were recorded in the ledger of Thompson Land as a debit to TPM. No separate books of account for TPM were seen by the liquidator or Mr Jones. In the schedules of creditors of Thompson Land prepared by Mr Jones, Salzer was not included. This is consistent with the contention of Salzer, but its significance is diminished somewhat by the evidence of the liquidator that the entries would be the same had the payment been made to Salzer by Thompson Land pursuant to its obligation under the Thompson Land Guarantee.
Against this, my attention was drawn to the evidence of the identity of the payers of the early progress claims which I have summarised above. Of the first ten, only three were made by Thompson Land. Indeed, the variety of the sources of payment suggests that Mr Thompson, at this time at least, made payments from whatever account suited him.
Notwithstanding this, I have the very strong impression from the correspondence which passed, at least since August 1989, that all concerned saw the payments to Salzer as payments made in response to its progress claims and payments in satisfaction of the liability to it of TPM, not that of Thompson Land. In August a s. 364 Notice was given, not to Thompson Land, but to TPM. Such letters as were sent to Thompson Land on the topic of payment were sent to it as the holding company whose decision would be implemented by its subsidiary TPM. For the making of these payments finance had been procured in the name of Thompson Land under agreements to which TPM was not a party. This was convenient because, in September at least, funding was provided for more than one Thompson Group project from the same source. Moreover, Thompson Land was the holding company with a more impressive balance sheet. And it was probably convenient from Mr Thompson’s point of view for the money to pass through the Thompson Land bank account because it increased the cash-flow through that account and consequent ability to pay debts other than those connected with the Elizabeth Street project. The activity of the Thompson Land bank accounts in the difficult months of December 1989 and following, and the manner in which the financiers’ payments were dealt with, to which I shall refer, demonstrate this.
I conclude, therefore, that on the evidence available to me, the proper analysis is that the payments made to Salzer from the Thompson Land cheque account were made by it, not in its capacity as debtor of Salzer, but as the provider of funds for TPM which was itself a debtor of Salzer and in respect of the progress claims payable by TPM to Salzer under the building contract. The payments made by the Hongkong Bank at the request of Thompson Land are, likewise, to be seen as payments made by it in this capacity. It follows, therefore, that none of the six impugned payments was a payment made by Thompson Land to Salzer as its creditor. This requirement of the liquidator’s proofs for the establishment of a preferential payment has not been made out.
Counsel for Salzer put a further submission to the effect that the six payments were made, not by Thompson Land but by the Hongkong Bank. What was said here was that all money received from the Hongkong Bank was earmarked for payment to Salzer and that these payments were made to Salzer using the Thompson Land bank account as a conduit or agent. Accordingly, it was put on the authority of Walsh v Terranova Pty Ltd (1994) 14 ACSR 432, that all the payments were made, not by Thompson Land but by the Hongkong Bank itself.
The payments made in respect of Progress Claims 17 and 18 and that for interest on late payment were made by Thompson Land from its own cheque account. It was said that the funds against which these cheques were drawn were provided to Thompson Land for the purpose only of making these payments so that Thompson Land made the payment as agent for the Hongkong Bank. I an unable to accept this argument for a number of reasons. Although I would suppose that the Hongkong Bank expected that its draw-downs paid to Thompson Land would be applied to the building works over which it held security, it had no contractual right to insist on this. More fundamentally, the relationship between a financier and a developer is different from that between a developer and a construction manager. Finally, on the facts of this case this is not the way the financier’s money was in fact applied by Thompson Land. Mr Jones’ payments analysis shows that payments to Salzer in respect of Progress Claims 3 to 8 were all made on dates before the finance money was received from Estate Mortgage. Furthermore, as will be seen, Thompson Land treated the money received from the Hongkong Bank in November 1989 and thereafter very much as its own money. These payments were made by Thompson Land.
The three payments received by Salzer in respect of Progress Claims 19, 20 and 21 were made directly by the Hongkong Bank. In each case the payment was made by the bank by agreement with or pursuant to a request by Thompson Land. Where a bank holds funds at the direction of its customer or it is otherwise obliged to its customer to account to it, not by payment to it, but to its creditor the payment is for the purposes of s. 122(1) of the Bankruptcy Act 1966 made by the customer: Sheahan v Carrier Air Conditioning Pty Ltd (1997) 189 CLR 407 at 437, per Dawson, Gaudron, Gummow JJ. I have already mentioned that the terminology of the finance agreements, or such of them as are available, does not lend firm support for a conclusion that on each of these three occasions, the Hongkong Bank was obliged to pay to Burns Philp, to Thompson Land or even to Salzer the money accepted as being payable under the progress claims. Indeed, by letters dated 2 March 1990 and 5 April 1990 the bank was concerned to reserve its position in the light of the defaults by Thompson Land under the Facilities Agreement. Pursuant to cl. 3.3.12 of that agreement, in such an event the obligations of the financiers cease to have effect. It is very likely that on each occasion Thompson Land was in fact in default as alleged. Nevertheless, it seems that the Hongkong Bank agreed to make each of the draw- downs which in the ordinary course would be payable to Thompson Land via Burns Philp. Once this decision had been made, the Hongkong Bank held the money at the direction of Thompson Land so that its payment direct to Salzer is, for my present purposes, a payment by Thompson Land to Salzer. For reasons which I have already given, Thompson Land made these payments and those referred to in the preceding paragraph not on its own behalf, but on behalf of TPM.
I conclude, therefore, that the liquidator has failed to make out this ingredient of his claim to recover the six allegedly preferential payments.

4. The Payments were Preferential

The liquidator must show that each of the impugned payments had the effect of giving to Salzer a preference, priority or advantage over other creditors. It was put on his behalf that the analysis of creditors prepared by Mr Jones showed that there were at all relevant times creditors who, as things turned out, were not paid before Thompson Land went into liquidation. This was not put in issue by Salzer. Counsel on its behalf submitted that, even so, the payment in each case had no preferential effect for two reasons. The first depended upon the fact that each was made from funds which on their receipt by Thompson Land had been earmarked for the progress payment and which were, therefore, not otherwise available for creditors other than Salzer. The second reason was that the payment was made as much to induce Salzer to continue the building work as it was to discharge the indebtedness. Applying the principles appropriate to running accounts, the creditors generally were not therefore prejudiced.
Earmarked Payments
It will be recalled that, of the six payments in question, three were made by cheques drawn on Thompson Land’s bank account and three by direct payment by the financier, the Hongkong Bank. In the case of the payments made by Thompson Land itself it is necessary to consider whether the money received from the financiers to make the payment was earmarked for that purpose. In the case of the direct payments by the Hongkong Bank the same question must be asked of the funds in the hands of the bank before the payment was made.
Earmarked by whom? The terms of the Loan Facility Agreement of September 1989 show that draw-downs are to be made upon receipt by the Hongkong Bank of a certificate by its consultant containing the information specified in cl. 3.2 and a certificate from Thompson Land in accordance with Annexure A. These requirements confirm that the money is to be made available only as work has been performed and materials supplied for the projects sufficient to protect the financiers’ interests. It is of interest, however, to note that the amount of the draw-down is not specified. In particular, the bank is not required to release funds which are sufficient to pay a progress claim. It would be consistent with the terms of this agreement, for example, if the work had already been paid for and the money was then released to Thompson Land for its own purposes. It would be possible, too, for the financiers to release a lesser sum than the progress claim required. The terms of the Loan Facility Agreement do not earmark any payments by the financiers to Thompson Land. Nor is there any evidence, other than the coincidence between the amounts sought by Thompson Land and paid to it and those set forth in the accepted progress claims, that the Hongkong Bank at the time of each draw-down of funds imposed any restriction on their application. This is subject to one possible exception. On 29 November 1989 funds had been deposited by the financiers in Thompson Land’s bank account sufficient to pay Progress Claim 17 which was due on 4 December 1989. On 7 December Salzer sent a fax complaining of non-payment to Thompson Land with a copy to Wardley. On 11 December Wardley requested that payments be not delayed and threatened to make payments direct to Salzer if this occurred in the future. I do not construe this letter as amounting to an assertion that any funds had been earmarked for Salzer; but rather as an attempt by the financiers to protect themselves from complaint. I do not find that the financiers intended to earmark the sum paid to Thompson Land for the payment of the Salzer progress claims.
In order to determine whether Thompson Land as recipient of the draw-downs saw them as having been earmarked it is necessary to examine the circumstances of each draw-down in a little detail. Little is known of the early payments or even of their source other than what appears in Mr Jones’ schedule and in the Salzer pay in slips which were in evidence. These show, as I have mentioned, that funds were received from Estate Mortgage in respect of Progress Claims 3 to 8 after payments had been made to Salzer and that of these, only one, Progress Claim 3, was paid by Thompson Land.
A little more is known of the payments from September 1989 made in respect to Progress Claims 13 and following. The documents in evidence and the schedule prepared by Mr Jones, enabled me to get an understanding of how they were handled by Thompson Land. It is convenient to look at the movement of the funds received and paid out for each of the progress claims from Progress Claim 13.
Progress Claim 13 was accepted by TPM on 21 July 1989 in the sum of $2,831,698 and was payable by it to Salzer on 2 August 1989. A payment of $500,000 was made by Thompson Land on 18 August. On the previous day, Robert James Forsyth, a director of both Thompson Land and TPM told Salzer’s then general manager, Eric George Loft, that Estate Mortgage would be releasing interim funds of $500,000 on 17 August. The bank statement shows a deposit of that sum on 18 August and I infer that this was the source of the payment to Salzer on the same day. The balance of $2,331,698 was not paid until 15 September, a week before the finance agreements with the Hongkong Bank were signed on 22 September. In fact a cheque in that sum drawn by Thompson Land was handed to Salzer after the close of business on that day and the cheque was not presented for payment until the following Monday, 18 September. The cheque was handed over in anticipation of the finalisation of the Hongkong Bank finance agreements which had been accepted in principle by Thompson Land on 28 August but funds to cover it were not deposited until 22 September. The source of these funds is not clear. According to an internal memorandum of Andrew Duff, an employee of Wardley, the deposit of $2,334,208 deposited on that day was an advance by Estate Mortgage to Thompson Land for the balance of claims 13 and 14.
Progress Claim 14 was accepted by TPM in the sum of $1,771,095 and was payable by it to Salzer on 4 September. This amount included $15,430 for interest for late payment. It is not clear how this sum was calculated. It approximates the amount claimed for late payment of Progress Claims 7, 8, 9, 10, 11 and 12 and on the late payment of the first instalment made with respect to Progress Claim 13. A cheque drawn on Thompson Land’s bank account was given to the solicitors for Salzer on 22 September 1989 and it was paid on that day. A sum approximating this, namely, $1,755,655 had been deposited with Thompson Land’s bank account on 15 September. Assuming that this represented a payment by the financiers for this progress claim it is significant that it was not immediately passed on to Salzer for it was then already 15 days overdue. The explanation which emerges from an examination of the bank statements is that the account was in excess of its limit at that time or would be taken over the limit if a cheque in the sum required for the payment of this claim were presented. This suggests to me that Mr Anderson who, according to the evidence, made these decisions, was using the funds as they came in to meet such as the commitments of Thompson Land as he thought to be most pressing.
Progress Claim 15 was accepted by TPM in the sum of $1,545,864 and was payable to Salzer on 3 October 1989. This sum was paid into the Thompson Land bank account on Friday, 6 October and was paid out on Monday, 9 October.
Progress Claim 16 was accepted by TPM in the sum of $1,621,857 and was payable by it to Salzer on 2 November 1989. By this stage, Salzer’s claim for interest on late payments amounted to $107,402.80. Nevertheless, only the sum of $15,430 for interest appeared in the accepted claim as it had in the claims since claim 14. On 3 November Wardley drew down about $1.6M of which $1,598,769.65 was deposited in the Thompson Land cheque account. In its letter to Thompson Land advising it of the draw-down, Wardley makes no mention of how the money is to be applied. On 8 November Thompson Land paid to Salzer the full amount of the accepted Progress Claim 16.
Progress Claim 17 was accepted by TPM in the sum of $1,258,879 and was payable by it on 4 December 1989. The original claim sought a further $21,336 which was not recommended for payment by Linkon. This rejected portion of the claim comprised a small sum for preliminaries and $13,816 for interest on late payment. As before, the accepted claim included only $15,430 for late payments previously claimed and accepted in Progress Claim 14. On 30 November Thompson Land requested a draw- down in the sum of $1,261,647 for the Elizabeth Street project and $332,349.50 for King Street. In fact, the draw-downs were made and banked on the preceding day, 29 November. The sum of $1,588,996.50 deposited in the Thompson Land bank account represented the whole of the amount sought for the Elizabeth Street project and all but $2,500 sought for King Street. Again, in Wardley’s letter advising the draw-down there is no indication how the money was to be applied by Thompson Land. The funds were deposited in the Thompson Land cheque account but the payment was not made to Salzer until 11 December, some 12 days later. I have mentioned already that this payment was made after complaint made by Salzer on 7 December to Thompson Land and to Wardley. In reply to Wardley’s complaint to Thompson Land about this, Mr Thompson said that the builder was paid on the due date and that the cheque left the office prior to 7 December. This is probably false. In any event, an examination of the bank statements shows that the cheque may have been drawn by the due date but that it could not have been presented with any expectation of being met by the bank until 7 December. It is clear that the funds deposited by the financiers on 29 November were used by Thompson Land for its own purposes.
Progress Claim 18 sought payment of $1,270,537 including $115,152 for interest for late payments of Progress Claims 2-17. It seems that on 12 December 1989 Mr Forsyth of TPM instructed Linkon to treat this item as a variation and to include it in this progress claim. This was done and a variation quotation in the sum of $115,152 was submitted on 14 December. This was accepted by Linkon as variation 6 and included in its recommendation for acceptance by TPM on 15 December. The accepted progress claim therefore totalled $1,270537 and was payable by TPM to Salzer on 3 January 1990. On 21 December Wardley advised of a draw-down which included $1,533,709 to Thompson Land. This sum, representing $1,270,539, $2 more than the amount of the accepted Progress Claim 18, and $263,170 for King Street, was deposited in the bank account on that day. Payment was not made to Salzer on the due date and further complaints were sent by Salzer’s finance controller, Michael Normoyle, by faxes dated 8 January 1990 and 9 January 1990. The internal memoranda of the Hongkong Bank attest to the considerable effort expended by Mr Normoyle to collect this money. Eventually, a cheque was picked up on the morning of 12 January and banked on that day. It was, however, a cheque for only $1,170,545, that is, $99,992 short of the accepted claim. Accepting the possibility of arithmetic error, this sum may represent $99,722, the unpaid portion of the Salzer claim for interest for late payments of Progress Claims 2-17. It is not clear why this sum was withheld. As before, an examination of the bank statements for the Thompson Land account shows that the funds provided to it by the financiers were used by it for its own purposes and that the state of the account was such that a cheque for the accepted Progress Claim 18 could not have been drawn with any confidence that it would have been met. In short, Thompson Land treated the draw- down funds as its own money.

Progress Claim 19 was accepted by TPM in the sum of $507,838 and was payable by it to Salzer on 2 February 1990. This amount included the unpaid interest accepted in respect to Progress Claim 18, namely, $99,722. By this time, Salzer was concerned about short and late payments and it requested that the Hongkong Bank make payment to it direct. For some reason the Hongkong Bank treated the accepted claim as one for $410,346 only. By this time TPM was contending that the interest variation, or $99,992 being the unpaid portion of it was, in dispute and it seems that Wardley deducted this sum from the accepted claim less $2,500, which seems to have been the fee payable to Jones & Co, the financiers’ quantity surveyor. Having done this, the Hongkong Bank then deducted the disputed $99,992 a second time and agreed to draw-down the difference, $310,354. In its letter of 6 February 1990 advising the draw-down, the Hongkong Bank spoke of the direct payment to Salzer having been made pursuant to an agreement with Mr Thompson. The bank confirmed to him that it had informed Salzer that a cheque for $99,992 for unpaid interest would be paid as soon as possible. A cheque on the Thompson Land bank account for this amount was drawn and paid on 8 February 1990. Thompson Land had had the funding from the financiers to make this interest payment since 21 December 1989 and had used it for its own purposes thereafter.
Progress Claims 20 and 21 were paid directly by the Hongkong Bank and are of no interest for present purposes.
I return to the argument that the payments had no preferential effect because they were received by Thompson Land for the purpose of paying the Salzer claims and for no other purpose. Accordingly, the money was not at the time of payment available to the creditors generally. It is necessary again to deal separately with the payments made through the Thompson Land bank account. What was put on behalf of Salzer was that these moneys were paid to Thompson Land for the express purpose of funding the progress claims and so, if they had not been so applied, they would have been held for the financiers and not for the creditors generally.
Underlying this submission is an argument that the earmarked funds were held by Thompson Land on a constructive trust. I was referred to Re Barrington & Associates Pty Ltd (in Liq) [1989] VR 940 where Beach J found a trust where creditors of a project builder agreed that funds obtained from a financier should be applied to complete a specific project which would be sold for the benefit of all. The funds were provided for the purpose but liquidation supervened before the trades and suppliers were all paid. His Honour concluded that the liquidator should pay these creditors before the body of creditors because it was the mutual intention of the financier and the company at the time of payment that the funds should not become part of the assets of the company but should be used exclusively to pay those who were completing the project. In such a case, there arose what his Honour called a “relationship of a fiduciary character or trust” in favour of the trades and suppliers and, if that failed, in favour of the financier: [1989] VR at 949. See Quistclose Investments Ltd v Bells Razor Ltd [1970] AC 867. In Swiss Bank Corporation v Lloyds Bank Ltd [1979] 3 WLR 201 at 219, Browne-Wilkinson J observed that the Quistclose case “is wholly consistent with the proposition that a contractual promise to apply earmarked moneys for a specific purpose creates an equitable interest in those moneys whether by way of charge or by way of trust”. More recently, in Carreras Rothmans Ltd v Freeman Mathews Treasure Ltd [1985] Ch 207 at 222, Peter Gibson J, speaking of the same case said this:
“In my judgment the principle in all these cases is that equity fastens on the conscience of the person who receives from another property transferred for a specific purpose only and not therefore for the recipient’s own purposes, so that such person will not be permitted to treat the property as his own or to use it for other than the stated purpose. Most of the cases in this line are cases were there has been an agreement for consideration so that in one sense each party has contributed to providing the property. But if the common intention is that property is transferred for a specific purpose and not so as to become the property of the transferee, the transferee cannot keep the property if for any reason that purpose cannot be fulfilled.”
It will be apparent from this passage and from my analysis of the facts in this case that no such equitable relationship has been established here. There is no evidence of any intention on the part of the financiers or of Thompson Land of the kind required. It is clear that the money paid to Thompson Land was treated by all as being available, and in fact was used, as part of the general cash flow of Thompson Land. It is not possible, therefore, to conclude, as Salzer argued, that the payments to Salzer for this reason lacked the necessary preferential effect.
A Running Account
This argument was criticised at the outset by counsel for the liquidator on the basis that it was not pleaded. In his points of claim the liquidator asserts that by reason of each of the six payments in question Salzer has obtained a preference, priority or advantage. The points of defence merely deny these allegations. I have expressed criticism of the points of defence earlier in this judgment. I do so again. If points of claim and points of defence are to serve any useful purpose they must set out the facts or contentions relied upon in sufficient detail to identify the positions adopted by each party. The mere denial by Salzer particularly in a case such as this, does not to my mind expose the fact that it denies the preferential effect of the payments on the basis of a running account. Counsel for the liquidator urged me to refuse to entertain the argument for that reason. They said that, had the point been identified before they closed their case, they may have led evidence, for example, to show that the value of the benefit accruing to the company by the work performed after payment was less than the amount of the payment. The running account contention was mentioned obliquely by counsel for Salzer in their opening, but it did not appear explicitly until their final address. On reflection, however, I will not refuse to entertain the argument. I do so because the factual difficulty identified by counsel for the liquidator does not in my view arise.
In essence, counsel for Salzer said that in order to determine whether the payments had a preferential effect, it is necessary to place them in context. In Airservices Australia v Ferrier (1996) 185 CLR 483 at 501-2, Dawson, Gaudron and McHugh JJ put the proposition this way:
“If a payment is part of a wider transaction or a ‘running account’ between the debtor and the creditor, the purpose for which the payment was made and received will usually determine whether the payment has the effect of giving the creditor a preference, priority or advantage over other creditors. If the sole purpose of the payment is to discharge an existing debt, the effect of the payment is to give the creditor a preference over other creditors unless the debtor is able to pay all of his or her debts as they fall due. But if the purpose of the payment is to induce the creditor to provide further goods or services as well as to discharge an existing indebtedness, the payment will not be a preference unless the payment exceeds the value of the goods or services acquired. In such a case a court, exercising jurisdiction under s 122 of the Bankruptcy Act, looks to the ultimate effect of the transaction. Whether the payment is or is not a preference has to be ‘decided not by considering its immediate effect only but by considering what effect it ultimately produced in fact’.”
(footnotes omitted)
The work for which payments were made was work performed by Salzer under a building contract. The price for the work was a fixed lump sum payable by instalments. The cash flowed to the builder in the same way as the work continued for the proprietor. The payments were not, therefore, for a series of transactions as in the classic running account case. It was not open to TPM to withhold payment for work done without putting the whole contract at risk and exposing itself to the consequences set out in cl. 16(f), including damages. It is to distort this nature of the contract between TPM and Salzer to say that the payment of a progress claim is made to induce Salzer to keep working. In one sense only is this correct. In the event of non-payment Salzer was entitled to determine the contract pursuant to cl. 16(d) of the building contract after having first given notice to the Hongkong Bank pursuant to cl. 4.2 of the Assignment Agreement. Such a step, too, may have had the effect of disentitling Salzer from relying upon the guarantee provisions of cl. 1 of the Thompson Land Guarantee. For practical purposes, then, Salzer had every incentive to keep working. On 9 August 1989 and again on 12 September 1989 it gave to Thompson Land a notice pursuant to cl. 1.3 of the Thompson Land Guarantee that TPM had failed to pay Progress Claim 13 or the balance of that progress claim. On 23 August Salzer gave notice to TPM pursuant to cl. 16(d) of the building contract on the ground of non-payment of the balance of Progress Claim 13. Two days previously, it had given notice to TPM under s. 364 of the Companies (Victoria) Code relying upon non-payment of the same debt. The balance of Progress Claim 13 was paid on 15 September and the notices went no further. On 19 January 1990 it gave to the Hongkong Bank notice pursuant to the Assignment Agreement cl. 4.2 of TPM’s default in withholding part of its entitlement under Progress Claim 18. This was the non-payment of the $99,992 interest on late payment, which default was remedied by a payment by Thompson Land on 8 February 1990 at the instance of the Hongkong Bank.
But in this case, such an analysis is beside the point. The liquidator will succeed only if, contrary to my view, the payments were made, not by TPM under the building contract, but by Thompson Land in discharge of its obligation under cl. 2 or its contingent obligation under cl. 1 of the Thompson Land Guarantee. Between Thompson Land and Salzer there is no broader transaction which lends colour to these payments. It was conceded by counsel for Salzer that a payment by Thompson Land in discharge of its own debt must be an isolated one-off payment. Salzer’s argument under consideration, whether it be seen as one based on a running account or on some broader underlying principle, must therefore fail. On the assumption which I make for present purposes, each of the payments other than that made on 2 March 1990 discharged an obligation of Thompson Land under cl. 2 of the Thompson Land Guarantee to pay at least the full amount of the progress claim which was then unpaid by TPM. The effect of this, in the event of a winding up at the time of the payment, is that Salzer was paid in full its debt but that other persons who were creditors of Thompson Land at that time, would not. Each such payment had, therefore, a preferential effect: Calzaturificio Zenith Pty Ltd (in liq) v NSW Leather & Trading Co Pty Ltd [1970] VR 605 at 610 per Menhennitt J.

5. The Good Faith Defence

Under s. 121(2) Salzer will escape a claim by the liquidator for the recovery of a preferential payment where it shows that the payment in question was made to it in good faith and for valuable consideration in the ordinary course of business.
The evidence shows that Salzer cannot discharge the burden of establishing these requirements. Again, I assume for present purposes that each of the six payments was made by Thompson Land as debtor of Salzer. The correspondence and the evidence of Eric George Loft, the General Manager and director of Salzer at the time, shows that he and Salzer had good reason to infer that Thompson Land was unable to pay its debts as they fell due out of its own money at the time each of the six allegedly preferential payments was made. Mr Loft was aware of the considerable difficulties encountered by Mr Normoyle, Salzer’s finance collector, in collecting payment. He readily conceded that prior to the introduction of the HongKong Bank he was of the view that Thompson Land was unable to pay its debts. He maintained, however, that the introduction of this new source of finance changed the position and, indeed, Progress Claims 15 and 16 were paid more or less punctually. The payment of Progress Claim 17 which was the first of the alleged preferential payments was made only after Salzer made complaint direct to the finance broker, Wardley. The note of Wardley’s Mr Duff on the Salzer fax of 7 December 1989 shows that Mr Normoyle was actively involved in pursuing the payment. Mr Normoyle was not called. I infer that such evidence as he might have given would not have assisted Salzer. His activity was even greater in the pursuit of the subsequent payments. This appears from the correspondence and from the memoranda of Peter Anthony Wych, the accountant of Linkon, who had even greater difficulty collecting payments due from TPM to Landkon. A significant indication of this concern was the giving by Salzer on 19 January 1990 of a notice to the Hongkong Bank of default on the part of TPM in failing to pay Progress Claim 18, or at least the interest component of that claim. I add, too, that I was not impressed with the evidence of Neil Gordon Mallallue who was Salzer’s commercial manager at the time. His evidence that he had no doubts as to Thompson Land’s ability to pay its debts after the introduction of the Hongkong Bank finance in September 1989, as with much of his evidence, was unconvincing. I am satisfied that in early December 1989 Salzer had, with good reason, grave concerns as to the ability of Thompson Land to pay its debts as they fell due and that this concern increased as each progress claim fell due for payment and was not paid. To this must be added the fact, which I assume for present purposes, that the payments were made at this time under the Thompson Land Guarantee. The receipt of such payments is not for Salzer a receipt of money in the ordinary course of business.

6. Conclusion

I conclude, therefore, that the liquidator’s claims to recover the six payments as undue preferences must fail on the basis that the payments were not made to Salzer by Thompson Land as a debtor to its creditor, but rather to discharge the liability of its subsidiary TPM.

B. THE SETTLEMENT CLAIMS

The liquidator seeks recovery in the alternative of all eleven payments listed at the commencement of this judgment on the basis that each of them was a settlement of property and is therefore void pursuant to s. 451 of the Companies (Vic) Code and s. 120 of the Bankruptcy Act 1966. This claim was put in two alternative ways. First, that it was a voluntary settlement in the sense that it fell within s. 120(1)(a) of the basis that Thompson Land was not indebted to Salzer pursuant to the terms of the Thompson Land Guarantee at the relevant time. Second, that it was a settlement that fell within s. 120(2).
In each case, the liquidator must show that the payments were settlements of property as that expression is used in s. 120. For this purpose, counsel on his behalf called in aid the definition of “settlement of property” in s. 120(8) and the decision of Wilcox J in Re Ward; Official Trustee v Dabnas Pty Ltd (1984) 3 FCR 112. The expression “settlement of property” in the statutory pre-deceasors to s. 120 in England and in Australia has been authoritatively construed to mean a disposition of property including the payment of money to be held for the enjoyment of other persons and not for its immediate dissipation or consumption: Re Player; ex parte Harvey (1885) 15 QBD 682; Jack v Smail (1905) 2 CLR 684; Williams v Lloyd (1933) 50 CLR 341. If this be the correct test the payments to Salzer were plainly not settlements of property.
In Re Ward; Official Trustee v Dubnas Pty Ltd (1984) 3 FCR 112, Wilcox J concluded that the new definition of settlement introduced in 1966 by s. 120(8) meant that this learning is no longer apposite, although on the facts of the case the disposition before his Honour satisfied the test of permanency required by the old authorities. In Barton v Official Receiver (1984) 4 FCR 380, Sweeney J at 386-7 and in Re Finney; Ex Parte Official Trustee in Bankruptcy and Finney (1997) 35 ATR 259, Einfeld J both indicated a disposition to reconsider the traditional tests for settlement in the light of the 1996 Act but, again in each case, it was not necessary to reach a firm concluded view on the matter. See, too, Barton v Official Receiver (1984) 58 ALR 328 at 336, per Fisher J; Quigley v Cockburn (1993) 11 ACLC 424 at 429, per Scott J (WA).
What may be described as the traditional view of “settlement of property” has been supported by a number of decisions under the 1966 Act of which the following are representative: Re Pahoff; Ex Parte Ogilvie (1961) 20 ABC 17 at 19, per Clyne J; Re Hyams (1970) 19 FLR 232 at 252, per Gibbs J; Re Barton; Ex Parte Official Receiver v Barton (1983) 52 ALR 95 at 107, per McGregor J; Barton v Official Receiver (1984) 4 FCR 380 at 395, per Lockhart J; and on appeal Barton v Official Receiver (1986) 161 CLR 75 at 78; Official Trustee in Bankruptcy v Arcadiou (1985) 8 FCR 4 at 10-11, per Woodward, Northrop JJ; Re Katropil; Ex Parte Official Trustee in Bankruptcy v Katropil (1989) 33 FCR 135 at 138-142, per French J; Re J&M Hobbins Pty Ltd (in liq); Official Trustee in Bankruptcy v Mitchell (1992) 38 FCR 364 at 369, per Burchett, French, Einfeld JJ; Lyford v Commonwealth Bank of Australia (1995) 130 ALR 267 at 273-4, per Nicholson J; Pattison v Hobbin (unreported, SC (Vic), O’Bryan J, 27 January 1989); Re La Rosa; Ex Parte Norgard v Rocom Pty Ltd (1990) 21 FCR 270 at 281-2 per French J, an analysis which received the approval of the full Federal Court in Re Norgard (unreported 16 August 1990). It is, I think fair to say that the preponderance of authority is in favour of the traditional view and this view has also the support of two decisions of the full Federal Court and of the High Court. As a judge at first instance construing a national statute I see myself bound by such a line of authority. For what it is worth, having examined the reasoning behind the competing views, I would not be inclined myself to depart from the traditional view. The payments made to Salzer are not settlements of property within the meaning of s. 120.
It is not necessary now that I go further, but in case it should become necessary I conclude that each of the payments except that made on 2 March 1990 was not voluntary because each had the effect of discharging the liability of Thompson Land to Salzer under the Thompson Land Guarantee. I make this finding notwithstanding that the payments were not in fact made by Thompson Land qua debtor to its creditor. That such an indebtedness existed and was discharged by the payment now appears. It is sufficient to meet the statutory requirement that the payment be for valuable consideration and in this case it clearly was.
The further requirement of good faith is more difficult. Again, it is for the liquidator to show its absence by proving that Salzer, that is its executive officers, at the time of the receipt of each payment had no notice that the effect of the settlement was to prefer it over other creditors, to adapt the dictum of Gibbs J in Re Hyams; Official Receiver v Hyams (1970) 19 FLR 232 at 256, in the light of the criticisms made of it in Wansley v Edwards (1996) 68 FCR 555 at 558-9, per Olney, Whitlam, Sundberg JJ. The meaning of good faith in s. 120 preferred by the full Federal Court in that case would require the liquidator to show that Salzer, at the relevant time, did not know or suspect that the effect of the payment would be to disadvantage other creditors of Thompson Land: Wansley v Edwards (1996) 68 FCR 555 at 564, per Olney, Whitlam, Sundberg JJ. Whichever definition be adopted, I am concerned to determine the actual state of mind of Salzer as recipient. “Negligence, stupidity, or blindness to what others might well be able to see are not equivalent to lack of good faith”: Official Trustee in Bankruptcy v Mitchell (1992) 38 FCR 364 at 371, per Burchett, French, Einfeld JJ.

I am satisfied that on each occasion Salzer knew or suspected that Thompson Land was insolvent and that it had creditors other than Salzer. What is more difficult is to determine whether Salzer knew or suspected that the payment in each case had a preferential effect. I am satisfied that Mr Loft who held senior executive office with Salzer was aware when he signed the Thompson Land Guarantee as witness to the Salzer seal that it contained a guarantee and indemnity. He was, of course, aware that each of the payments was made but he said, and I accept, that he did not know were the money was coming from. He said later that he believed that Thompson Land was the borrower from Estate Mortgage and that it was merely a channel through which funds were going through to TPM. I accept this evidence and find that Salzer saw the payments which it received as discharging the liability of TPM, and not that of Thompson Land to it. In these circumstances I am unable to conclude that, on any of the occasions of payment, it saw itself as being preferred to the creditors of Thompson Land by the receipt of that payment.
I conclude, therefore, that the liquidator has failed to discharge the onus lying on him of proving lack of good faith in Salzer at the relevant time. It follows, then, that for this reason, too, the claims based on s. 120(1) must fail.
I will deal briefly with the s. 120(2) claims. Again, assuming that the eleven payments were settlements of property and that they do not fall within s. 120(1)(a), they are void unless Salzer proves that Thompson Land was, at the time of each payment, able to pay all its debts without the aid of the funds comprised in the payment. I have found that Salzer was unable to pay its debts at the time of making the last six payments. The present enquiry requires an examination of the financial position of Thompson Land from 18 August 1989 onwards.
I have no doubt that Thompson Land was unable to pay its debts from that date until the Hongkong Bank finance agreements were entered into on 22 September. So much was accepted by Salzer. The question of its inability to pay all of its debts on that date and on 9 October and 8 November is more difficult, even bearing in mind that Salzer bears the burden of proving this inability. The manner of its payment of Progress Claims 14, 15 and 16 does not assist it in discharging this burden. The analysis of the Thompson Land balance sheet as at 30 September 1989 carried out by Mr Jones and Mr Walsh, however, shows clearly that its debts could not be paid and I conclude that Salzer fails on this issue.
I conclude, therefore, that the liquidator’s claims based on s. 120 must, likewise, fail. His application will be dismissed.
---

JOHN MARTIN WALSH as liquidator of	Applicant
THOMPSON LAND LIMITED (Receiver &
Manager Appointed) (In Liquidation) (ACN 006 533 672)
v
SALZER CONSTRUCTIONS PTY LTD	Respondent
(ACN 004 770 085)

JUDGE:	Byrne, J.
WHERE HELD:	Melbourne
DATE OF HEARING:	4, 8, 9, 10, 11, 14, 15, 16 September
DATE OF JUDGMENT:	13 November 1998
CASE MAY BE CITED AS:	Re Thompson Land Ltd (in liq); Walsh v Salzer Constructions Pty Ltd
MEDIA NEUTRAL CITATION:	[1998] VSC 111

APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr F.G. Beaumont QC	Abbott Stillman & Wilson
Mr A. Rodbard-Bean
For the Defendant	Mr G.T. Bigmore QC	Gadens Lawyers
Mr M.J. Galvin

A THE UNDUE PREFERENCE CLAIMS	6
1. Salzer was a creditor of Thompson Land	7
2. Thompson Land was insolvent	13
3. A Payment by the Debtor to the Creditor	15
4. The Payments were Preferential	23
Earmarked Payments	23
A Running Account	30
5. The Good Faith Defence	33
6. Conclusion	34
B. THE SETTLEMENT CLAIMS	34

Date	Claim Number	Source	Amount
1989
18 August	13 (part)	Thompson Land	$500,000
15 September	13 (balance)	Thompson Land	$2,331,698
22 September	14	Thompson Land	$1,771,095
9 October	15	Thompson Land	$1,545,864
8 November	16	Thompson Land	$1,621,857
11 December	17	Thompson Land	$1,259,149
1990
12 January	18	Thompson Land	$1,170,545
6 February	19	Hongkong Bank	$310,354
8 February	Interest	Thompson Land	$99,992
2 March	20	Hongkong Bank	$565,707
5 April	21	Hongkong Bank	$491,518