v R Dye & Co (a firm) v Peninsula Hotels Pty Ltd (in liq)
[1999] VSCA 60
•20 May 1999
SUPREME COURT OF VICTORIA
COURT OF APPEAL Not Restricted No. 7040 of 1997
V.R. DYE & CO. (A FIRM)
Appellant
v
PENINSULA HOTELS PTY. LTD. (IN LIQ.) &
ANOR.
Respondents
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JUDGES: WINNEKE, P., TADGELL and ORMISTON, JJ.A. WHERE HELD: MELBOURNE DATE OF HEARING: 23 and 24 March 1999 DATE OF JUDGMENT: 20 May 1999 MEDIA NEUTRAL CITATION: [1999] VSCA 60
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Corporations - Winding-up - Preferential Transactions - Accountant engaged to advise insolvent company - Agreement to pay fees for services into own trust account “on account of fees pending performance of work” - Sum paid in, work done and money drawn out of account of accountant in accordance with agreement within 6 months of relation back day - Company placed in voluntary liquidation - Liquidator claims sum - Whether “transaction” constituted only by drawing out of sum from trust account or by both payment into trust account and later drawing out - Held - No preference - Corporations Law ss. 9, 588FA, 588FC, 588FE, 588FF.
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APPEARANCES: Counsel Solicitors For the Appellant Mr. G.T. Bigmore Q.C. and Gadens Lawyers Ms. M.J. Hughes For the Respondents Mrs. S. Marks Mills Oakley Lawyers
Pty.Ltd.
WINNEKE, P:
I have had the advantage of reading in draft the judgment prepared by Ormiston, J.A. For the reasons which his Honour assigns, I agree that the appeal should be allowed and the orders of both the Court below and the Magistrates’ Court should be set aside and that, in substitution for those orders, there should be an order in the Magistrates’ Court dismissing the respondent’s claim.
TADGELL, J. A.:
I have had the generous benefit of reading in draft the reasons that have been prepared by Ormiston, J.A., with which I agree.
His Honour has set out the circumstances in which, on 2 July 1996, a trust account of the appellant, a firm of accountants, showed a debit balance of $8,500 in favour of the respondent and in which, on that day, the appellant caused the balance to be reduced by $4,154.90 in the appellant's own favour. The question for decision is whether that constituted a transaction being a payment made by the respondent so as to be an "unfair preference" in terms of s.588FA of the Corporations Law, the respondent having gone into liquidation on 26 August 1996.
Like Ormiston, J.A., I cannot discern in the elaborate provisions of Division 2 of Part 5.7B of Chapter 5 of the Corporations Law, in which s.588FA is found, any distinction now relevant from their forerunners in the Commonwealth bankruptcy legislation of 1924 and 1966. It was and remains a quintessential prerequisite of a transaction to be avoided by any of those statutory provisions that it should operate to give a preference to a creditor in respect of an existing debt. So much was succinctly explained by Dixon, J. in Robertson v. Grigg (1932) 47 C.L.R. 257, at 270-1; and, as I respectfully apprehend, the explanation is as valid now as it was then. Obviously enough, no existing debt was owed to the appellant by the respondent at the time the sum of $8,500 was paid by the respondent; and none was owed at the time the appellant drew down the sum of $4,154.90. The payment of $8,500 was an agreed payment, in advance of the provision by the appellant of services, made in order that the appellant, upon providing services (at latest), might draw on the prepayment otherwise than as a creditor.
Although the agreement between the appellant and the respondent was that the sum received by the appellant should be debited to a trust account, the agreement was not that it was received by the appellant for and on behalf of the respondent. On the contrary, the facts, so far as they are disclosed, do not indicate that the appellant was obliged to treat the sum received as the respondent client's money. The money was paid by the respondent and received by the appellant for and on account of fees and disbursements to be incurred by the respondent; and inherent in the agreement was an authorisation to the appellant to take fees and disbursements out of that money. There can be no objection in principle to the conferral by a client of authority of that kind, even when the client is on the verge of insolvency. Indeed, an arrangement such as was made in this case may be, as it was here, a practical necessity.
The position in this case may be usefully contrasted with that which it fell to Helsham, J. to consider in Stewart v. Strevens [1976] 2 N.S.W.L.R. 321. His Honour had to decide whether a solicitor who, having performed work and disbursed money for a client, had an implied authority, arising out of the relationship of solicitor and client, or that of trustee and beneficiary, to reimburse himself out of money standing to the credit of the client in his trust account. Helsham, J. assumed that the solicitor might obtain express authority from the client to reimburse himself in that way but held that, in the absence of express authority, the provisions of s.41(1) of the Legal Practitioners Act 1898 of New South Wales did not permit any comparable authority to be implied. His Honour did however observe, at 327, that in the absence of statutory restraint -
"... it is conceivable that a client may direct disbursements to be made from his money not expressly but by implication. For example, if a solicitor asks his client for money to put him 'in funds', and if he pays any money given him in pursuance of that request into his client's trust account, there may well be an implied direction that he should meet such disbursements as are necessary to be paid as they arise. [But] ... in the present case there is nothing in the evidence that could be said to be an implied direction to the solicitor to disburse any of the client's money to himself. There was no express direction."
I mention that case only because of its stark and revealing contrast with the present case, in which there was express agreement granting authority to apply money in a trust account to meet fees and disbursements later to be incurred, and thereby indicating that the money, which might otherwise have been thought to be and to be treated as the client's money, could properly be treated otherwise. Section 588FA did not stand in the way of the grant of any such authority because, as Ormiston, J.A. has shown, and to use the words of Dixon, J. in Robertson v. Grigg, at 271, no "pre-existing debt was better secured or otherwise affected" by reason of the transaction.
I would allow the appeal, with the consequences proposed by Ormiston, J.A.
ORMISTON, J. A.:
(i) Relevant facts and circumstances
The facts giving rise to this appeal are on their face not very complex and so were made the subject of an agreed statement of facts put before the magistrate before whom this claim to avoid an unfair preference originally came. However, its very simplicity and the disarmingly simple solution reached by the magistrate has led to an appeal to a judge in the Trial Division and now to this Court, albeit that the amount in dispute is but $4,154.90.
A matter of principle is said to arise in relation to insolvent companies engaging and paying accountants and other professional persons to assist them in their dying days which has arisen on this occasion in the following circumstances. The firstnamed respondent was placed in liquidation on 26 August 1996 and the secondnamed respondent, Gideon Isaac Rathner was appointed liquidator. Before that time the company had conducted a hotel business in Baxter known as the Baxter Tavern. The company fell upon hard times and it is accepted that from some date early in 1996 it was and remained insolvent until it was wound up voluntarily on 26 August 1996.
On or about 18 June 1996 the Board of Directors approached Mr V.R. Dye who is the sole principal of the appellant firm of chartered accountants. They had discussions on that day, the directors expressing their desire to engage the appellant "to provide services to assist the directors in the conduct of a creditors' voluntary winding up of the Company", which by then they saw as inevitable. Although those are in substance the words used in the agreed statement, it is clear from the arrangement thereafter reached that they wished Mr Dye to provide his services not merely after the company had been placed in liquidation but also beforehand. Thus he told the directors that he would agree to his being appointed upon the basis of the company's paying the following fees:
"(1) Professional costs to be incurred up to date of the liquidation of
the company in the sum of $4,000.(2) Professional costs to be incurred after the date of liquidation of
the company in the sum of $4,000.(3) Disbursements to be incurred in the sum of $500."
Mr Dye further told the directors that he required the company to pay the sum of $8,500 to the appellant to be deposited in the appellant's trust account "on account of the [appellant's] fees pending the performance of work by the [appellant] and the incurring of disbursements in connection therewith". Part only of that arrangement appears to be reflected in the minutes of a meeting of the board of the company held two days later to which I shall return.
In accordance with this arrangement, on 19 June 1996 or thereabouts, the appellant received from the company a cheque postdated for 25th June in the sum of $8,500 which was drawn on an account of the company described on the cheque as "Frank Deegan Baxter Tavern Operations Account". No explanation appeared in evidence as to why the cheque was postdated and so it is mere speculation to ask whether that was because the company was then immediately pressed for funds or whether it was merely contemplated that the appellant would not seek to draw the fees until some time thereafter. The appellant deposited the cheque into its "trust account" on 19 June 1996, that account being described on a bank statement as the "V.R. Dye & Co. Trust Account".
It seems that a number of these matters were formally approved by the board at a meeting of the directors held the following day at which resolutions were passed, among other matters, that the meeting of members be convened for the purpose of passing a special resolution for the voluntary winding up of the company, which meeting was fixed for 15 July 1996 at 10.15 a.m., that a creditors' meeting be held immediately thereafter at 10.30 a.m., and for various other matters relating to the giving of notice, the advertising of the meetings and the signing of a report as to affairs and a summary of affairs. It seems that Mr Dye was to be involved in the preparation of those documents and so his appointment primarily for those purposes was confirmed by the final resolution of that meeting which read:
"It was resolved that Messrs V.R. Dye & Co., chartered accountants of 159 Springvale Road Nunawading 3131 be appointed to assist the directors with the preparation of the notices of meetings and a report as to affairs and to despatch and lodge the notices of meetings and advertisement and that their fee for these services would be fixed at an amount of $4,000."
The other limb of the appointment earlier agreed upon was, of course, to take place after the liquidation of the company but it may be inferred, although there was no explicit evidence as to the matter, that Mr Dye was not chosen as liquidator and that Mr Rathner was chosen in his stead.
From about 19 June to about 2 July 1996 the defendant provided "professional services", including assistance given to the directors in preparing the various notices, advertisements and reports and in "other steps preparatory to the holding of the necessary meetings". It seems the appellant also incurred a number of disbursements amounting to some $154.90, being primarily for printing, postage, search fees and the like. After 2 July a number of disbursements were made to satisfy certain other expenses incurred on behalf of the company but it seems from the trust account that, more likely than not, they were paid directly from that account to those who were entitled to payment.
On 1 July 1996 the defendant issued an invoice and memorandum of professional fees in relation to the professional services and disbursements in the sum of $4,154.90 of which $4,000 was attributed "to our fee as fixed by board of directors". Then, according to the agreed statement, "on 2nd July 1996 the [appellant] drew from the [appellant's] trust account an amount of $4,154.90 and applied that sum in payment of the invoice ('the transaction')." Details of the transaction are said to be recorded in the trust account, but that account, in the name of "Peninsula Hotels Pty. Ltd.", merely set out in conventional form the debits and credits which I have so far described, together with a number of presently irrelevant payments to others which in the end resulted in the appellant remitting a balance of $402.26 to the company when in liquidation.
Not surprisingly the facts so far stated, and which were taken from the agreed statement, left much unsaid which has posed difficulties both at the hearings below and in this Court. There was, however, some further evidence given at the Magistrates' Court which appeared from a number of affidavits sworn for the purpose of the appeal from that court but which regrettably left as much still in contention as they clarified. It seems Mr Rathner gave some evidence which one must assume was intended to provide evidence as to the practice of accountants when taking on work of this kind on behalf of insolvent companies but which, upon analysis, appears to be little more than a summary of what Mr Rathner himself did in those circumstances. At the highest it supported a contention that "in his experience" it was usual for liquidators to invoice for work to be performed and to receive payment prior to performing any work, although in cross-examination it appeared that his practice was in fact to invoice the directors individually for that work. However, an affidavit sworn in opposition on behalf of the respondents, although agreeing that he had said that it was his practice to invoice directors individually beforehand, deposed that he paid those moneys straight into his firm account. Significantly, when asked what was "the usual practice among liquidators", he had said that he could not comment for all other practitioners. What he said in re- examination, likewise appearing in the affidavit, does little more than seek to describe his beliefs as to what the legal consequences of his practice were.
More importantly, Mr Dye also gave evidence on the same subject and agreed that it was the usual practice for accountants to require "payment" prior to the performance of the work and said, to the extent that it may be relevant, that he would not have agreed to do the work unless he had received payment before performance. However, the answering affidavit said Mr Dye had not used the word "payment" in relation to these matters but had used the word "funds" or "money".
Finally Mr Dye gave evidence about depositing the hotel's cheque into the appellant's trust account on 19 June 1996 but saying that thereafter he was "at all times in control of the money", so that he had drawn the sum of $4,154.90 from that account on 2 July "on account of the work he had performed, in accordance with the agreement he had reached with the directors ...". He said that he "regarded himself as entitled to draw the $4,154.90 only after performing the work". Although he said that he was "legally entitled to draw the money", he expressed the view that he was not "morally, ethically or professionally comfortable withdrawing money from his trust account prior to performing the work". However an answering affidavit disputed that Mr Dye had given evidence that he was "legally entitled" to draw the money before performing the work, but he had disagreed with the proposition put to him in cross-examination that it was not his money until the work had been done. He had explained, so the affidavit continued, that "the money was under his control but professionally he did not think he could take it until the work was done". He had further said that he had done the work because "he knew he was a secured creditor because he had control over the money in trust".
This confusing evidence pointed to a difficulty which arose out of the absence of any detailed evidence as to the nature of Mr Dye's accounting practices and the "trust account" which he had chosen to open. There was a tendency in the course of argument below, as it seems there has been in other cases regarding accountants, to assume that the same regime applies to accountants which applies to solicitors in relation to their trust accounts, assuming for the present that those regimes are uniform across Australia which is by no means clear. However, it was agreed between the parties that there were no statutory controls over accountants and their trust accounts as there are with legal practitioners in this State. It also seems to be accepted that there were rules of conduct which the Institute of Chartered Accountants had promulgated for its members. At the end of argument pages from a handbook were handed up setting out the rules applicable to members of both the Institute of Chartered Accountants and the Australian Society of Accountants which it seems were "ethical" rules which members choose to abide by, but that document only came into operation on 1 April 1998. Subsequently counsel forwarded to the Court the rules of ethical conduct applicable to members of the Institute which it seems had been in operation from at least December 1995. It appears from rules 24 and following of those rules that members of the Institute were required to have their trust accounts audited. The rules otherwise imposed requirements not dissimilar, but not identical, to the later rules and to those applicable to solicitors under the Legal Practice Act 1996. Any member who held trust moneys was obliged under rule 7 to "establish and maintain a general trust account for client moneys". "Client moneys" were defined to mean any moneys of other persons coming into members' hands or control in the course of that member's practice but did not include, among other moneys, "fees paid in advance". The expression "trust account" was also defined to mean an account established by a member for clients "if kept for the sole purpose of receiving and holding deposits of client moneys and the withdrawal of client moneys from the account". Rule 11 prohibited a member from paying into a trust account any moneys other than client moneys received, but from that there was an exception under rule 12 "where part or all of the moneys received is attributable to professional costs ... and other proper outlays already incurred or disbursed". So rule 17 prohibited a member from withdrawing moneys from a trust account except for the purpose of making a payment to the client, making a payment authorised by law and "making a payment to the member for professional costs, reimbursement for disbursements paid ... and other proper outlays which payment shall be supported by authorisation in writing by the client for or on whose behalf the moneys received are held". It should be emphasised that none of these matters were put directly or indirectly to the appellant so that, in the end, it was left to inference as to whether the appellant was seeking to abide by the rules to which I have just referred or whether he had tried to set up some separate trust account for the purpose of the transaction here in issue.
On the evidence other than that referred to in the last paragraph the magistrate found in favour of the respondents. It seems from the reasons which are recounted in indirect speech and in incomplete form that he considered the relevant transaction was confined only to the withdrawal of the fees from the trust account on or about 2 July and that up to that time the $8,500 were trust moneys to which the appellant could not have recourse until the work had been completed. He was not entitled to remove those funds from the account up until the time he in fact withdrew them. At the time he had completed the work a debtor-creditor relationship had then arisen. It seems that the learned magistrate held that, by withdrawing the moneys at the time he did, he was effectuating a payment on behalf of the company which gave preference to himself as creditor.
On appeal the learned judge of the Trial Division took essentially the same approach. The moneys were held on trust until the work was completed. There was no genuine prepayment of fees because it was agreed, as the appellant had informed the first respondent, that it was to be held in his trust account. He thus had no beneficial interest in that money until the time it was effectively handed over by the company when the appellant drew it from his trust account. Because there was no prepayment in the sense of a payment to the appellant beneficially, thereafter a debtor-creditor relationship had come into existence by the time the moneys were in fact taken from the trust account and applied for the benefit of the appellant. At that stage that drawing down or payment effected an unfair preference within the meaning of the Corporations Law ("the Law"). Accordingly the appeal was dismissed.
Against these findings the appellant has yet again appealed, this time to this Court. The three grounds are neither clear nor elegantly expressed but in substance they can be telescoped into two grounds:
(1) That the learned judge wrongly held that the sum of $8,500 had
been held in trust solely for the first respondent company; and(2) That his Honour wrongly held that the appellant was a creditor of the first respondent at the time the relevant payment was made.
As I would understand the latter ground it is intended to raise not merely the timing of the ultimate transfer of the $4,154.90 but whether the payment or transaction should be confined to that latter payment or whether it should comprehend the company's initial payment of $8,500 to be placed in the appellant's trust account.
(ii) The issues
On the facts set out above the respondent liquidator asserted that the payment effected by the appellant's withdrawing of the $4,154.90 from its trust account for the fees and disbursements agreed to be paid was an "unfair preference" given by the first respondent company within the meaning of s.588FA of the Corporations Law and so in turn an "insolvent transaction" within s.588FC of the Law. Consequently, a "voidable transaction" within the meaning of s.588FE was said to have been "entered into ... during the six months ending on the relation back day" applicable to the company. Thus, by reason of the provisions of s.588FF (1)(a) of the Law and s.42B of the Corporations (Victoria) Act 1990, the Magistrates' Court had power to make the orders it made on 1 September 1997 whereby it ordered repayment of moneys to the respondents. The simple basis for their contention in this Court, as it had been in the courts below, was that, until the moneys were drawn down on 2 July 1996, the only beneficial owner of the moneys in the trust account was the company. Consequently, when drawn down, the moneys were applied to the payment of an existing debt and that payment was not otherwise protected from the operation of the Law.
On the contrary, the appellant says, at the threshhold, that there was no unfair preference within the meaning of the Law, inasmuch as the drawing down of the moneys on 2 July was not the relevant "transaction" for the purpose of Part 5.7B and that the true "transaction" was the payment of $8,500 to the appellant's trust account on or about 19 June 1996 or, alternatively that payment taken in combination with the agreed drawing down on 2 July. That payment did not amount to an unfair preference, so it was said, in that it did not have the characteristics necessary to satisfy the terms of s.588FA(1) inasmuch as it had no result or effect, preferential or otherwise, "in respect of a debt that the company [owed] to the creditor". A number of other propositions were advanced to show that the magistrate and judge had erred in their analysis inasmuch as they had wrongly accepted that the fact that the $8,500 was in a trust account meant that no payment or transaction of the relevant kind could have been made until the drawing made on 2 July. The appellant asserted that at the least it had the right to withdraw the money or any part thereof, as the company's agent, as it said in fact had occurred. However, the appellant also argued, if it were not originally at the forefront of counsel's arguments, that the relevant transaction for the purposes of s.588FA (and for the definition in s.9) was a transaction consisting not merely in the payment said to have been effected by the partial withdrawal on 2 July but also the original payment of $8,500 to the appellant for deposit in his trust account upon the agreed basis on 19 June, as part of the arrangement for the holding of those moneys and their later drawing down. Looking at the whole transaction it could be seen that no part of it served to give any form of preference by payment of an existing debt or liability.
For reasons about to be explained I think that the appellant's contentions should prevail. It is only if one were able to say that the moneys held in the trust account by the appellant were held on trust beneficially for the company alone, that one could say that the only transaction by way of payment in favour of the appellant took place on 2 July. On that narrow analysis then there would be no reason to doubt the magistrate's and the trial judge's conclusions that the payment then effected, divorced entirely from that which had gone before, should be treated as the preferential payment of an existing debt then owed to the appellant. On the contrary, whatever the appellant ought in strictness to have done in order to comply with the rules of the Institute, it seems to me to be commercially unrealistic not to conclude that the transaction the parties agreed upon was intended to effectuate payment of various sums which would become owing to the appellant by means which comprehended both the original payment to the trust account and the drawing down by Mr Dye. If that be so then the totality of the transaction did not involve the receipt of a payment in respect of an existing debt but merely the setting up of what was seen to be a sufficient and appropriate mechanism for the payment of a new obligation, to be incurred for services yet to be provided but of what are assumed to be equivalent value. In effect it may be seen to have been a prepayment, of the kind traditionally excluded from the purview of voidable preference legislation: cf. Airservices Australia v. Ferrier (1996) 185 C.L.R. 483 at 517 and 518 per Toohey, J. (dissenting, but not as to these matters of general principle).
The expression "prepayment" has no doubt been used as a convenient means of distinguishing a payment of that kind from payments, transfers, charges and the like which under the earlier, incorporated by reference, provisions of the Bankruptcy Act were made voidable if they had the effect of giving a creditor "a preference, priority or advantage over other creditors": see s.122 of the Bankruptcy Act 1966 (before amendment in 1996), made applicable, inter alia, by s.565 of the Law (before amendment in 1992) and earlier by s.451 of the Companies Act 1981, and s.95 of the Bankruptcy Act 1924 made applicable by sections such as s.293 of the Companies Act 1961.
(iii) Current Legislative provisions relating to preferences
The provisions of the Corporations Law now relevant, introduced by the Corporate Law Amendment Act 1992, are differently expressed from those previously incorporated from the Bankruptcy Act. However, so far as one can gather, they were not intended to make any significantly different provision for identifying what is an unfair preference, except in a few minor respects and except insofar as the sections now appear in the Corporations Law itself and form part of a not untypical collocation of sections intended to give effect to the primary provisions but which at times appear to obfuscate the intentions of the legislature by separating the substantive provisions from the machinery provisions in a convoluted way. For present purposes the substantive provision is now contained in s.588FA of the Law of which s.s.(1) reads:
"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."
The expression "transaction" now employed is defined in what is misleadingly called a "dictionary" in s.9 of the Law which reads:
"'Transaction', in Part 5.7B, in relation to a body corporate or a Part 5.7 body, means a transaction to which the body is a party, for example (but without limitation):
(a) a conveyance, transfer or other disposition by the body of property of the body; and
(b) a charge created by the body on property of the body; and
(c) a guarantee given by the body; and
(d) a payment made by the body; and
(e) an obligation incurred by the body; and
(f) a release or waiver by the body; and
(g) a loan to the body;
and includes such a transaction that has been completed or given effect
to, or that has terminated."For present purposes it is not necessary to set out the provisions which exempt persons receiving payments and the like by reason of their taking in good faith and for valuable consideration appearing in s.588FG. It should be noted, however, that s.588FA now contains in sub-s.(3) what appears to be a codification of the implied exception as to running accounts read into the earlier legislation and examined in such detail, albeit after the earlier provisions had been replaced, in Airservices and (at least to a degree) in Sheahan v. Carrier Air Conditioning Pty. Ltd. (1997) 189 C.L.R. 407. These exercises, which might otherwise seem exercises in futility while the companies legislation continues to undergo constant and piecemeal revamping, would appear to have continuing application, though cf. per Toohey, J. in Airservices at 526. Fortunately, it appears that the presently relevant provisions are intended to have no different effect, other than in minor respects, from those which made preferences voidable when the Companies Act of this State was no more than 253 pages long. That recent amendments were intended to have such a limited effect may be seen from the Explanatory Memorandum published for the Corporate Law Reform Bill 1992, especially paras.1033-1042, from Report No. 45 of the Law Reform Commission: "General Insolvency Inquiry" vol. 1 paras.629-638, and from the relatively few reported cases which have dealt with s.588FA: see, e.g., Re Emanuel (No. 14) Pty. Ltd. (in liquidation); Macks v. Blacklaw and Shadforth Pty. Ltd. (1997) 147 A.L.R. 281 esp. at 283 and Re Lanpac International Pty. Ltd. (In Liq): Jonas v. Automation House Pty. Ltd. [1998] VSC 9. Moreover what might appear to have effected an alteration to the law, this is, the provision now found in s.s.(3) of s.588FA is said in the Explanatory Memorandum (at para.1042) to be "aimed at embodying in legislation the principles reflected" in cases such as Queensland Bacon Pty. Ltd. v. Rees (1967) 115 C.L.R. 266. In substance that sub-section says that where "a transaction is, for commercial purposes, an integral part of a continuing business relationship (for example, a running account) ... and the company's net indebtedness is increased and reduced from time to time, as a result of a series of transactions", then s.s.(1) of s.588FA "applies in relation to all the transactions forming part of the relationship as if they together constituted a single transaction". Indeed, again for present purposes, only the newly introduced definition of "transaction" seems to have produced any effective change: Re Emanuel at 283.
(iv) Extent to which s.588FA(1) altered the law as to preferences
However, before turning to what appear still to be relevant authorities as to the meaning and application of the provisions permitting the avoidance of preferences, I should briefly touch on the language now adopted in sub-s.(1) of s.588FA. As is clear from its terms the new provision concentrates on the potential result of an impugned transaction inasmuch as it requires the Court to ascertain whether the allegedly preferred creditor has received more from the company than that creditor would receive if the transaction were set aside and it had to prove for the debt in "a winding up of the company". In the past, of course, it was necessary to ascertain whether the transaction had the effect of giving a creditor a "preference, priority or advantage" over other creditors and, although the earlier applicable sections were construed so as not to require such preference to be intentional, the words connoted some unfair advantage, priority or preference. The new sub-section concentrates, some might say unfortunately, only on the hypothetical result, that is, assuming the words used in the sub-section are intended to be an exclusive definition. If there be an avoidance of a transaction where a company is insolvent, then it follows as the night the day that the creditor will share pari passu with the other creditors and will receive less than full payment. If it is not set aside, presumably because it is not an "unfair preference", then that creditor will obviously have received more, but the words now employed give no inkling as to which transactions will be set aside and which will not. In other words the definition looks only to the consequences, not to the reason for that "result".
It is only then if one has regard to the history of the provision and its obvious purpose that one can determine which transactions should be set aside. The word "unfair" appears in the terms of the provision, although that would seem more likely to be the result of the legislature's choice of the composite expression "unfair preference" which is, in fact, defined in s.9 as having "the meaning given by section 588ZA". However, the object sought to be achieved by Parliament can be seen from the Explanatory Memorandum para. 1040 where it was said:
"Section 122 refers at present to a transaction which has the effect of giving to the creditor a 'preference, priority or advantage' over other creditors of the company, whereas the new provision specifies quite clearly what that expression means in the context of a corporate winding up."
It might be said that the old provisions also looked only to the consequences of avoidance but that would overlook the fact that s.122 and its predecessors did not purport to be definitions, as does the present section. The words of the earlier section, though not importing intent, connoted unfairness in that they required an enquiry as to whether there was shown to have been the "giving" of a "preference", "priority" or "advantage" effected by the disposition in question. That is why, in my opinion, c.o.d. transactions and payments in the course of a running account were accepted as not being voidable under that section. Doubtless if such payments had been or are now to be set aside the recipients would be relegated to proof in the winding-up and would thereby receive less than they had earlier received. The recipients would have to be treated as unsecured creditors because the avoidance of the payments or other dispositions would not consequentially result in the return of the consideration, the goods (possible) or the services (impossible), for it is not the whole contractual transaction which has been set aside.
Yet it has been accepted for many years that a disposition in favour of such a recipient will not be avoided: see e.g. Richardson v. Commercial Banking Co. of Sydney Ltd. (1952) 85 C.L.R. 110 and Airservices, and the cases therein cited. Largely that would seem to have flowed from the fact that an equivalent benefit was received by the insolvent company or individual. (In the c.o.d. cases the recipient was also held not to be a creditor at the relevant time.) In truth it was the element of "unfairness" which was there seen not to be present, because the benefits also received by the insolvent denied the payments etc. the character of being a "preference, priority or advantage" of the kind which the legislature was seeking to strike down: see and cf. Richardson, esp. at 133 and Airservices at 455-489, 491-498, 501-506, 516-523. What, however, is critical to the reasoning of the majority in the latter case is that, though actual intention to give a preference is irrelevant, "that does not mean that the purpose of the debtor in making a payment has no evidentiary significance" (at 501). Moreover, at 502, the majority stated in passages set out fully below (para.29) that resort may be had to "the business purpose and context" of any payment, and that, "if the purpose of the payment is to secure an asset or assets of equal or greater value, the payee receives no advantage over other creditors". As they later said no relevant advantage over other creditors will have been received. From a passage in almost identical terms half a page earlier such an "asset" may consist of either "goods or services".
That significant qualification was read into s.122 but, having regard to the date on which the judgment in Airservices was given and that of the passing of the new provisions, no inference can be drawn as to Parliament's understanding of the legislation. However, though the bare language of sections 588FA and following might seem to deny the purposive element read into s.122, these sections are but manifestations of a more general policy of the law as to insolvency. Many years earlier Lord Mansfield, C.J. had read into the common law an implicit prohibition against the preferring of creditors at a time when no relevant legislative provision applied: see, e.g., Alderson v. Temple (1768) 1 Black. W. 660; 96 E.R. 384, albeit that at that time the decision seemed in part based on a form of "fraud". See also as to the history of the common law as to preferences: Harkness v. Partnership Pacific Ltd. (1997) 41 N.S.W.L.R. 204 at 226-264 (and in particular at 237-239) per Priestley, J.A. and Weisberg: "Commercial Morality, the Merchant Character, and the History of the Voidable Preference" (1986) 39 Stanford L. Rev. 3 at pp.5-55 esp. at 39-55 (although one cannot usefully obtain guidance from the later legislative history in the U.S.A.: cf. the judgment of the Full Federal Court in Ferrier v. Civil Aviation Authority (1994) 55 F.C.R. 28 at 42-50, 63); Keay: "An Exposition and Assessment of Unfair Preferences" (1994) 19 Melb. Univ. L. Rev. 545 and Keay: Avoidance Provisions in Insolvency Law (1997) at pp.15-18.
The qualification applying to running account payments must be considered as being accepted by Parliament inasmuch as sub-s.(3) of s.588FA explicitly recognises it. I would therefore conclude also that the other, formerly existing, apparent exceptions were intended still to apply and, to that extent, the legislative definition must be treated as purposive. In other words the section is still directed against unfair preferences. If that be so, then I would conclude that the new provision should be construed in the same way as the former provision, except to the extent that the language of s. 588FA clearly points to a contrary conclusion.
Consequently, although a number of judges at first instance have expressed different views as to the extent to which the earlier cases may bear upon the proper interpretation of s.588FA, it is not necessary to examine those in detail for in my opinion it is clear that no change was intended to be made to the nature of a preference under the new legislation, whatever other alterations were made to the law. That appears to be accepted in the only appellate decisions on the issue to which we were referred or which has come to my attention, in particular in Re Emanuel, although the Federal Court there was cautious in accepting that the broad policy of the earlier legislation had been adopted in the new provisions: at 283. It is sufficient to say that the Court considered that cases on the earlier provisions "will often provide useful guidance on the interpretation of aspects of Part 5.7B", though care will need to be taken to ensure that "proper account is taken of the significant textual differences between the old and the new regimes": ibid. That case in fact involved a consideration of the meaning of the word "transaction", an expression added to the legislation by the new provisions and given a definition which would seem to cover more transactions than were previously capable of being avoided. This Court in Sands & McDougall Wholesale Pty. Ltd. (in liquidation) v. Federal Commissioner of Taxation [1998] VSCA 76 also had to consider the provisions relating to unfair preferences but, although it might be said that the issue as to whether there was any difference for present purposes between the provision in s.122 and s.588FA was not explicitly addressed, the reasoning of the Court appears to have accepted that there was no difference to the limited extent that that general question arose: see, e.g., at paras.35-37 and 49 per Charles, J.A. and at paras.75-76 per Kenny, J.A."
(v) Effect and meaning of s.588FA
For the purpose of analysing these provisions, both past and present, one may start with a generality which is now reflected in the language of s.588FA(1): "'One of the fundamental precepts of corporate insolvency law is that the available assets of the company are to be shared rateably among its creditors'": per Toohey, J. in Airservices at 516, citing an article by O'Donovan "Undue Preferences" (1992) 22 University of Western Australia Law Review 322. Against that broad principle, however, there has been recognised the necessity of ensuring that a company facing winding up must have some capacity to live out and possibly survive its feared fate. It is in the interests of the body of unsecured creditors that there should remain a business which can be sold as a running concern, so long as its liabilities are not increased in the mean time. So it has been accepted for many years that, as long as the company does not pay out existing creditors without obtaining an effective corresponding advantage, then it should be allowed to acquire goods and services by prepayment or on cash on delivery terms. The rationale behind the "exception" (more precisely, the non-inclusion within the general rule) is that the company gains goods and services to an equivalent value (in broad terms) to that which it pays out to obtain them, so that the existing creditors cannot in theory be prejudiced by the payment. I say "in theory" because the "rule" assumes that there is an equivalence between price and benefit obtained, which may not always occur, but to engraft some further exception upon the exception would tend to commercial impracticability.
The object sought to be obtained by the legislation over the years, and still by the present legislation, has been to prevent existing creditors from being disadvantaged. So, in one of the earlier cases on preferences in the High Court, it was said by Dixon, J. (with whom Rich and McTiernan, JJ agreed) in Robertson v. Grigg (1932) 47 C.L.R. 257 at 271:
"The relationship of debtor and creditor was for long the very foundation of the provisions of the bankruptcy law affecting preference and, although exceptions have been introduced, the old rule otherwise remains and nothing can amount to a preference unless the person preferred is a creditor."
As His Honour there said the charge there in question would not be a preference within s.95 "because it did not operate to prefer him in respect of any then existing debt". (Emphasis added.) Thus the rule is directed towards preventing the preferring of one or more creditors over the rest of the body of creditors: cf. also Burns v. Stapleton (1959) 102 C.L.R. 97 at 105 per Dixon, C.J., Kitto and Windeyer, JJ. Again, as was more recently stated by Brennan, C.J. in Airservices at 491: "To be a preference a payment must discharge, pro tanto, an existing debt.": see also per Dawson, Gaudron and McHugh, JJ. at 502.
In each case the Court is obliged to look at the transactions between the parties in a manner which accords with the commercial realities. It is not a matter of isolating particular individual steps in the course of a business relationship so as to give one element a different characteristic from that which the totality of that relationship would evidence. That is but one aspect, but a principal aspect, of the running account cases which have realistically faced the way in which companies and other parties carry on business when close to insolvency. The general principle may be stated in the terms expressed by the High Court in Richardson at 132 per Dixon, Williams and Fullagar, JJ.:
"In considering whether the real effect of a payment was to work a preference its actual business character must be seen and when it forms part of an entire transaction which if carried out to its intended conclusion will leave the creditor without any preference priority or advantage over other creditors the payment cannot be isolated and construed as a preference."
See also at p.129, as to the need to look to the "entire" or "whole" transaction, cited with approval by Barwick, C.J. in Queensland Bacon Pty. Ltd. v. Rees (1966) 115 C.L.R. 266 at 283. The passage at 132 was recently cited with approval by the majority in Airservices (Dawson, Gaudron and McHugh, JJ.) at 502, where they introduced it with these words:
"As a consequence, a payment made during a six month period cannot be viewed in isolation from the general course of dealing between the creditor and the debtor before, during and after that period. Resort must be had to the business purpose and context of the payment to determine whether it gives the creditor a preference over other creditors. To have the effect of giving the creditor a preference, priority or advantage over other creditors, the payment must ultimately result in a decrease in the net value of the assets that are available to meet the competing demands of the other creditors."
After quoting the cited passage from Richardson, they continued:
"If the purpose of a payment is to secure an asset or assets of equal or greater value, the payee receives no advantage over other creditors. The other creditors are no worse off and, where the value of the assets has increased, they are actually better off."
(See also per Brennan, C.J. at 491 and per Toohey, J. at 516-518.) The only qualification I would seek to place on these passages, which is doubtless implicit, is that a precise evaluation of services and goods provided can never be made satisfactorily and, unless there be some dishonest attempt to overvalue particular goods or services, they ought for practical purposes to be taken as having been received at face value, that is, at the value at which the company agreed to acquire them. This process of analysis of each transaction was later described by the majority as the "doctrine of ultimate effect" (at 509).
I would see the logical consequence of these authorities as requiring that, for the purpose of characterising any impugned transaction and its effect for the purposes of the preference provisions, in each case the Court should look at the "ultimate effect" of the "entire transaction" (Airservices at 505, and 509) before determining whether it has worked an unfair preference within the meaning of s.588FA. Not only does that flow from the language of the Court in Richardson, as adopted in Airservices, but also from the subsequent use and approval of those words by the Full Court of the Federal Court in Re Emanuel at 289. Indeed it would not be appropriate, because of the rule laid down by the High Court in A.S.C. v. Marlborough Gold Mines Ltd. (1993) 177 C.L.R. 485, to depart from any interpretation of s.588FA (and the related provisions), reached by that Court and necessary to its reasoning. Nevertheless, apart from indicating a general approach to the interpretation of the new provisions largely consistent with that given to the former provisions, Re Emanuel by its own terms stands for relatively limited propositions of law. Thus, where that Court accepted that the definition of "transaction" effected some widening of the nature of transactions which may be struck down as voidable or unfair preferences, it confined its conclusion expressly to dealings which had the effect of extinguishing a debt. So one may agree that the s.9 definition "through the process of exemplification [typifies] the forms of conduct or dealing engaged in by a company that will be characterised as a transaction" and that "common to the examples is the characteristic that the conduct or dealing engaged in by the debtor company has the consequence of effecting a change in the rights liabilities or property of the company itself": at 288. Nevertheless the Federal Court immediately qualified this by saying (ibid.):
"We confine our observations for present purposes simply to a course of dealing initiated by a debtor for the purpose of, and having the effect of, extinguishing a debt. It is not apparent to us why it should not be said that, where a debtor so acts and extinguishes a debt, the relevant 'transaction' is the totality of the dealings through which the debtor procures the intended outcome ..." (Emphasis added.)
In the present case the same process of interpretation and reasoning should be adopted so as to enable the Court to look at the totality of the dealings whereby the company engaged the appellant and agreed to pay for its services. That is not to say that the contract of engagement is the transaction or part of the transaction to be set aside, for even under the new definition what may be avoided under s.588FE is the disposition or other alteration to the assets of the company in favour of the preferred creditor, inasmuch as each disposition or transaction depletes or may deplete the total fund which would otherwise be available for distribution among the creditors. The new sections are in that sense consistent with the earlier provisions about which it was said that they were intended to make void every "change which, if allowed to be effectual, would dislocate the statutory order of priorities amongst the creditors": see Burns v. Stapleton at 104. That is not say, however, that in order to ascertain the true nature of the disposition or other transaction one cannot look at the agreement or arrangement which led to that disposition or transaction. Clearly that must be so as the whole history of the law relating to "running accounts" over the years has demonstrated. Likewise with a payment resulting from a c.o.d. transaction, it is only possible to see that there is no real preference by knowing that there was an agreement which resulted in the transfer of goods or services to the company which took place at the same time. That the latter kind of dealing does not come within the unfair preference provisions was recently reiterated in the unreported judgment by Chernov, J. in Re Lanpac International [1998] VSC 9, which was not examined in detail in the course of argument but is merely an exemplification of a well-understood principle, as discussed in paras.40-44 of his Honour's judgment. As Chernov, J. expressed it (at para.42), a c.o.d. transaction does not usually create a preference as "the parties to them usually do not deal with each other as debtor and creditor". The critical words in s.588FA(1)(b) are those which qualify the nature of the receipt from the company as being "in respect of an unsecured debt that the company owes to the creditor ...".
There still remains the question of how one should properly approach a transaction other than a c.o.d. or running account transaction, the latter being dealt with in sub-s.(3) in terms which need not here be examined. In my opinion it is still necessary, in order properly to characterise any transaction, to look at the totality of the business relationship between the parties so as to see whether there is a true preferring of a creditor by the insolvent company. The passages to which I have referred earlier from cases such as Robertson v. Grigg, Richardson and Airservices still entitle a court to look at what the parties are intending to effectuate and how that was effectuated, in part or in whole, by the impugned transaction. As was said in the unreported judgment of the Full Court by Young, C.J., Lush and Fullagar, JJ. in Re A. & J. Lazzarotto Pty. Ltd. (unreported, 16 December 1977), cases such as Richardson are relevant "because it shows that the whole transaction which in fact is agreed upon and carried out must be regarded for the purpose of determining what the effect of one component part of it is" (at p.7). (Cited with approval by the Full Federal Court in Ferrier v. Civil Aviation Authority at 59, which was reversed by the High Court in Airservices v. Ferrier largely on the question of the application of the particular facts to accepted principles.)
Consistently with this view the majority in Airservices said (at 502) that "The purpose for which the payment was made and received will usually determine whether a payment has the effect of giving the creditor a preference, priority or advantage over other creditors". Conceding, as was made explicit at p.501, that the subjective intention of the parties is irrelevant, nevertheless that case clearly recognises that the objective purpose, in a business sense, of the whole transaction must be considered by the Court in order that it can "look to the ultimate effect of the transaction" (at 502).
(vi) Whether preference given to appellant
Here the relevant transaction or dealing was that which the company and the appellant entered into on or about 19 June 1996 and which involved at least three stages. The first was the engagement upon condition that $8,500 was paid into the appellant's trust account; the second was the giving of the cheque in that sum by the company to the appellant; and the third was the drawing down of $4,154.90 from that account by the appellant on 2 July after it had done the first stage of the work. If one looked only at the latter stage, as did the magistrate and the learned judge, it was not difficult to say that by that time (2 July) the appellant was a creditor to whom the company owed an unsecured debt, and thus that final payment, looked at in isolation, was a preference. But here that final receipt of $4,154 by the appellant involved no act on the part of the company, unless it could be said that Mr. Dye was its agent for that purpose. It certainly formed no part of the respondent's argument that the appellant was such an agent, although it may be said to be implicit in that analysis of the facts, but authority to that effect was not given at that time and must be traced back to earlier events.
Be that as it may, the effective transaction in this case had begun a fortnight earlier on about 19 June 1996 when the cheque for $8,500 was paid over to the appellant. The relevant "transaction" consisted of both that payment and the later drawing down of $4,154.90 in favour of the appellant, and, if it were relevant, the other later payments out which exhausted the original $8,500, albeit that some of those payments were not as originally contemplated. Looked at in that way there was a payment made in advance for the provision of services by the appellant which was effectuated only in part by the drawing down on 2 July. At the time the first stage of the transaction took place the appellant was not a creditor of the company: it was in exactly the same position as a person receiving a prepayment or obtaining payment in a c.o.d. transaction. The only difference was that effectuating the payment in this case was, for convenience, split into a number of stages. Each stage was essential to the whole of the transaction but neither should be looked at on its own. The objective purpose of the transaction which commenced with the payment of the cheque for $8,500 was to induce the appellant to provide services to be carried out in the future and, as the appellant was not then a creditor of the company, the ultimate effect of both that payment and the later drawing down was not to give a preference of the kind proscribed by s.588FA. The transaction was for present purposes the two-stage payment for those services, the price for which was not suggested to be in excess of their agreed value. The company obtained the benefit of those services in return for the "transaction" so agreed upon on 19 June. Having regard to "its actual business character" the final drawing down of $4,154.90 must be seen as "part of an entire transaction" which when carried out to its intended conclusion left the creditor without any preference priority or advantage over other creditors, to adapt the language used by the majority in Airservices (at 502).
The respondents, for their part, have contended, as they successfully did before both magistrate and judge, that this analysis of the dealings between the parties overlooks the fact that the original payment was paid into a trust account and therefore remained in the beneficial ownership of the company until the drawing down took place. So it was said that no part of the sum passed from the company until the appellant drew down the sum for its fees on 2 July 1996. To my way of thinking that overlooks the true nature of the transaction here agreed upon. The argument makes certain assumptions about the nature of the trust account in question, as to which no evidence was called on either side. It likewise would appear to make the assumption that the trust account in question was similar in nature to those opened by solicitors pursuant to their obligations under the Legal Practice Act. The rules of ethical conduct which might appear to apply to the appellant as a chartered accountant do not, however, have the sanction of law, at least so far as it was argued before this Court, and so they are to be applied as a matter of common sense in order to give assurance to their clients. If, however, a client agrees to a different mode of dealing with the money placed in a trust account, there is no bar to that agreement being effectuated. This was not a case where the moneys came into the appellant's trust account by chance, nor was it a case where the use of moneys in that trust account was left entirely to implication. It may be that these fees should not have been put with other client moneys in an ordinary trust account, though in fact a separate account was opened, and it may be that otherwise moneys should not be disbursed from a trust account except by authorisation in writing from the client company. But that was not what here occurred. The parties specifically contemplated that fees should be paid into a trust account and likewise contemplated that they would be drawn down without any further authorisation from the company. It was not alleged that what was done was in breach of trust: indeed, if it had been, the claim would not have been for a preference but for repayment of moneys taken in breach of trust. But in any event it is not what ought to have occurred which is relevant but what in fact occurred. The point was made by the Full Court in Re A. and J. Lazzarotto when in discussing Richardson (at p.7):
"That decision makes it clear that questions of the enforceability of the alleged agreement are irrelevant, and so also is the possibility that one party, having derived the advantage given to him by the agreement, may not honour his own obligations under the agreement. If the agreement is in fact made, and fully carried out, it is the effect of the performed agreement which the court must assess."
In the present case the moneys were drawn down on 2 July entirely in conformity with the agreement made a fortnight before on about 19 June when the original cheque for $8,500 was handed over to be placed in the appellant's trust account.
In any event, even if the sum in question was held beneficially for the company until the very moment it was drawn down, that would still not prevent the Court from analysing by reference to earlier events the whole of the means whereby the appellant was paid for its services. Perhaps as an accountant Mr Dye might have devised a different means for obtaining payment of his fees in advance, as frequently occurs, but the means the parties chose to effectuate that payment must be examined as a whole having regard to the "business purpose and context of the payment": Airservices at 502. However, having regard to the need to reach an arrangement and to ensure payment in circumstances where the company was in extremis, a method of payment was chosen which seemed to protect and satisfy both sides. That a payment into trust was chosen as the first stage of the transaction effectuating payment for fees to be earned does not require the Court to ignore that stage of the whole transaction which led to payment of the appellant in order to determine in a commercial context what the ultimate effect of the whole transaction was. Whether or not the company was beneficially entitled at all times to the whole of the $8,500, the transaction as a whole was designed to induce the appellant who formerly had not been a creditor to provide its services at an agreed fee. There seems no vice in that; indeed the authorities already analysed treat that kind of an arrangement as both necessary and desirable. To shut out from consideration the earlier agreed payment into the trust account merely because the moneys are thereafter be seen to be held beneficially for the company would be to ignore commercial reality. To be fair to both magistrate and judge, it is by no means clear that the argument was put along these lines when it was argued below. Nevertheless, as was said in Airservices at 503:
"A court, exercising jurisdiction under [section 588FA of the Corporations Law], does not allow itself to be unsighted by the shadow of the legal form when it can see that the economic effect of the transaction does not give the creditor any preference, priority advantage over the general body of creditors."
Perhaps the last part of that proposition should be converted into the terms adopted now in s.588FA but the gist of the matter remains essentially the same. There was at the time the whole transaction was entered into no debt currently owed to the appellant as creditor and so the transaction, which had begun to be effectuated on 19 June 1996, could not and did not create an "unfair preference".
Against this, however, it was argued that there was binding authority on the meaning of the section in question which this Court was bound to follow, having regard to the principle laid down by the High Court in Marlborough. So it was said that the decision of the Full Federal Court in Higgins v. G.S. Enterprises Pty. Ltd. (In Liq.) (1989) 7 A.C.L.C. 410 provided a precise precedent both in fact and in law which could not be distinguished and must thus be followed. (The decision was later followed, as it necessarily had to be, by Steytler, J. in Ballan Pty. Ltd. (In Liq.) v. Hood (1994) 13 W.A.R. 385, where an accountant sought, successfully in part and unsuccessfully in part, to obtain payment of fees in advance.) It should be observed that Higgins was decided, as was Ballan Pty. Ltd. v. Hood, on proceedings to avoid a payment pursuant to s.122 of the Bankruptcy Act, as adopted by s.451 of the Companies Act 1981 and s.565 of the Law respectively. There are obviously difficulties when seeking to apply Marlborough in cases where the section is so different in form from the section in issue in the present case but, since I have substantially accepted that the changes to the legislation have made no relevantly significant alterations to the law as to what is a preference, I shall for the present assume that this Court ought not to depart from what was held in Higgins unless there is good reason to do so.
There are, however, compelling reasons in the present case why Higgins should not be treated as relevantly authoritative for deciding the present case. What there occurred was that a firm of solicitors had acted over the years for a company close to liquidation and also for one of its directors. One director had been charged with an offence which made it not inappropriate that the company should indemnify him in relation to his legal costs. The firm had told the director that it "required to be put in funds sufficient to recover the expected costs" and the director told the firm that the company would provide those funds. The firm seemed to have had no other direct dealings with the company on this issue, but the board of the company then resolved that it would pay $10,000 to the firm "for legal costs". No payment was then made but the resolution was made known to the firm. The director was then told by the firm that the trial costs would be greater and that it had to be put in funds to the extent of $15,000. Before the company had made any payment the director took possession of $15,000 of weekend takings of the company and handed it to a partner of the firm on 14 November 1983. The money was then placed in the firm's trust account. The trial took place that very day and two days later the director was acquitted. The following day the company's shareholders resolved that the director's payment to the solicitors should be ratified reciting, in terms of minutes drawn up by the partner of the firm, that the $15,000 had been paid into the trust account "on account of these costs". About a fortnight later, on 29 November 1983, a statement of account was prepared showing that some $14,172 had been incurred as relevant costs and disbursements in acting for the director (curiously from a date some nine months earlier) and it also gave credit in an equal amount which was there described as having been "transferred from Trust". (The balance of the $15,000 was admittedly paid in respect of earlier services and thus conceded to have been a preference.) Either on that day or some time later $14,172 was transferred to the appellant's Trust account to its general account.
The issue in Higgins related to the payment of $15,000 which was paid into the appellants' trust account on the first day of the trial. It seems also to have been conceded that, although the trial actually began on that day, all the legal services agreed to be supplied had yet to take place. So the Court held (at 417) that
"... the relationship of debtor and creditor necessarily arose on completion by the appellants of their part of the bargain. It was only because that relationship arose that the transfer of the funds from the appellants' trust account to their general account could validly be made."
This conclusion and the analysis implicit in it were said "to be implied in all the circumstances, if not sufficiently expressed" (at 417). It seems to have been assumed that, because the moneys were in the trust account of the appellant firm, payment could not have been effectuated until after the work had been completed. That seems to follow from a finding made on the same page that:
"When [the director] and therefore the respondent made the payment it was in respect in large part of work yet to be done and disbursements yet to be incurred."
That finding might in other circumstances have seen the occasion for concluding that the payment was made as a prepayment, were it not for the significance the Court placed on the moneys being in the trust account.
The answer seems to lie in the way in which the case was fought and in assumptions apparently made by reason of the transaction taking place between a client and a firm of solicitors. As to the manner in which the case was fought, there seems to have been no or no apparent attempt to link the payment into the trust account on 14 November 1983 with the transfer into the appellants' general account some time on or after 29 November 1983. Likewise there seems to have been no attempt to argue that the payment should be characterised after looking at the whole of the relevant transaction or to enquire what its ultimate effect was. Richardson was not referred to, nor was Airservices because that case, of course, had not then been decided, and there was no attempt to characterise the payment as part of a running account. The real issue, as argued, seemed largely directed to whether the payment could be recovered as a "settlement" under s.120 of the Bankruptcy Act inasmuch as it had come into the hands of the appellant firm without the then authority of the board of directors and in circumstances which the Court characterised as leading to a conclusion that as at 14 November 1983 the money was "money had and received by the appellants to the use of the respondent" (at 415). However, the Court considered the nature and effect of the subsequent resolution and, after citing a lengthy passage from Broom's Legal Maxims (10th ed.), concluded that not only had the payment by the director been ratified by the board but it also had been ratified retrospectively (at 415-416). Nevertheless, although the appellants succeeded on that argument, a success not unimportant to the partner as a solicitor, they failed to establish that the ultimate payment was not a preference.
The reason for that conclusion lies, it seems, in the following characterisation by the Court of the rights of the parties, and in particular of the appellant solicitors, upon the basis that the moneys were held on behalf of the company in the firm's trust account. It would have been therefore lawful for the sums to be transferred from the trust account to the general account only upon satisfying conditions expressed in these terms (at p.415):
"Further, the appellants had no right to transfer any part of the fund so provided from their trust account to their general account unless and until the legal services had been provided, the costs and disbursements had been quantified, a proper account in respect of them had been rendered and no dispute as to their amount had arisen."
Why such a precise restriction was imposed upon the appellants was not explicitly stated but, although there was no direct reference to the statutes which control solicitors in the Australian Capital Territory or any relevant regulations or practice rules, it is not difficult to guess why the restrictions were so expressed. They bear some similarity to that which is required under the Legal Practice Act 1996 of this State: see in particular ss.106, 107, 108, 115 and 174 (especially s.s.(3)) and rules 30 and 31 of the Trust Account Practice Rules made pursuant to s.72 of the Legal Practice Act.
One may fairly assume that the members of the Federal Court, who included at least two who had practised within the Territory, would have been familiar with the local requirements as to disbursement of trust moneys by solicitors, which were not otherwise set out in the judgment. It seems from the reasoning at 417 that those conditions had been satisfied by about 29 November 1983 but the conclusion there reached by the Court was that there was no right to the fees before that process had been exhausted and so it seems there could have been no agreement to pay those fees unless and until the conditions had been satisfied. With respect, I am by no means sure that that conclusion follows, for it is one thing to say that "the relationship of debtor and creditor necessarily arose on the completion by the appellants of their part of the bargain", but it is another thing to say that an agreement could not have been reached in advance for effectuating the payment of those fees by a transaction which involved two steps or stages. However, Higgins stands only for the conclusions reached in the peculiar circumstances of that case. The facts may seem similar but the way in which they came to pass was very different. There seems to have been no explicit agreement between the appellant firm and the company as to the way in which it was to be paid for services relating to the director's trial and, inasmuch as the board had a limited understanding as to the appellants' requirements, they were never carried out and were left to the director to put in train in what was clearly then an unauthorised manner. The retrospective ratification of the $15,000 payment cannot result in there being inferred some arrangement of the type here reached with the present appellant. Moreover, and more importantly, Higgins Case involved no analysis of the statutory provisions relating to voidable preferences, except by implication, and the real issue was the nature of the relationship between the parties, especially that which arose out of the trust there under consideration with the incidents which the Court there held to apply to the payment in issue.
The present case was argued on quite different lines raising squarely what was the nature of the entire transaction which led to payment of the appellant. The legal restrictions there under consideration were imposed, presumably, by statute but it is accepted in the present case that such obligations as existed in relation to trust moneys held by members of the Institute of Accountants at the relevant time were imposed consensually by rules of ethical practice. Those rules were capable of being varied, even if they had directly affected the parties to the present transaction, but I would not wish to express any view as to what conclusion might properly be reached if similar circumstances arose in relation to payments made on a similar basis to solicitors.
Although the judge in Ballan Pty. Ltd. v. Hood accepted so far as relevant what had been said in Higgins, the significance of that reference is of no great consequence. Three payments were held to have been made explicitly in advance for work yet to be performed and three were made for what seems to have been clearly conceded to be arrears of fees. An attempt to treat the relations between the parties as forming integral parts of an entire transaction in accordance with Richardson failed on the facts.
(viii) Conclusion
I am therefore not persuaded that the decision in Higgins requires this Court to come to any conclusion, different from that which I have already expressed, as to the nature of the transaction entered into for the payment of the appellant's fees and as to absence of any preference consequent upon that payment. The agreement of 19 June both contemplated and permitted that the appellant could draw down its fees when each stage of the work was done and, in order to achieve that ultimate result, the parties agreed that the moneys should be remitted and drawn in the manner in which that in fact occurred. At the time the transaction leading to payment commenced, by the giving of the cheque on about 19 June, the appellant was not a creditor of the company and the agreed transaction for payment was with respect to services yet to be performed. The fact that it was paid into a trust account was merely a means to an end for it did not change the essentials of that two-stage transaction. The company was irrevocably committed to that method of payment from the moment that it paid the cheque to the appellant firm and it could not go back on the agreed arrangement even though in form the moneys were held in a trust account. As a matter of business reality the agreement and transaction were entirely prospective so that the withdrawal of funds by the appellant was merely the agreed completion of that transaction.
Lest it be thought that by acceding to the appellant's arguments in this case the Court might be driving a coach and horses through the restrictions now imposed on the giving of unfair preferences, it should be emphasised that the conclusion I would reach does not permit parties to avoid s.588FA by agreeing to provide goods or services in the future merely upon the basis of an agreed payment by an insolvent company at a later date. The transaction in question in each case is not the agreement for the supply of goods and services (with or without an arrangement for payment) but is the transaction whereby the company in fact pays for the goods or services. If the payment transaction be put in place contemporaneously or at a time before the company becomes indebted to the provider, there can be no objection as, having regard to commercial realities, the ultimate effect will not be a "transaction" in favour of an existing creditor. The "transaction" to be examined is the payment or other disposition of a kind now contemplated by the new definition, although the agreement for the provision of goods or services or the like may be looked at in order to determine the purpose of the transaction remunerating the supplier. If that restriction be kept in mind, then there should be no reason why an appropriate transaction should not be worked out in a number of stages, so long as it is a genuine means of effectuating payment or the like. In each case it will be the entirety of the transaction and its "ultimate effect" which must be considered.
The appeal should be allowed and the orders of both the Court below and the Magistrates' Court should be set aside, with the substitution of an order in the Magistrates' Court dismissing the respondents' claim.
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