Walsh v Natra Pty Ltd
[2000] VSCA 60
•28 April 2000
SUPREME COURT OF VICTORIA
COURT OF APPEAL Not Restricted
No.5363 of 1998
| JOHN MARTIN WALSH as liquidator of MOONEY & CO. PTY. LTD. (in liquidation) (ACN 004 295 916) |
| Appellant(Plaintiff) |
| v |
| NATRA PTY. LTD. (ACN 004 399 188) |
| Respondent (Defendant) |
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JUDGES: | PHILLIPS, CHARLES and CALLAWAY, JJ.A. | |
WHERE HELD: | MELBOURNE | |
DATES OF HEARING: | 16 and 17 February, 2000 | |
DATE OF JUDGMENT: | 28 April, 2000 | |
MEDIUM NEUTRAL CITATION: | [2000] VSCA 60 | |
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Corporations – Insolvency – Winding up - Unfair preferences – Payment to partly secured creditor before winding up – Whether voidable transaction – Comparison with likely return in “a winding up” – Whether comparison requires hypothetical winding up on date of payment – Meaning of likely return when only part payment is made to unsecured creditor – Whether payment made to creditor as secured or unsecured: Corporations Law Pt.5.7B Division 2, ss.588FA, 588FC, 588FE.
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APPEARANCES: | Counsel | Solicitors |
For the Appellant | Mr. A.A. Nolan | Abbott Stillman & Wilson |
| For the Respondent | Mr. G.S. Lucas | Phillips Fox |
PHILLIPS. J.A.:
For many years, Mooney & Co. Pty. Ltd. (“the company”) carried on business as a retailer of motor vehicle radiators and the respondent, Natra Pty. Ltd. (“Natra”), was its supplier, on running account. In May 1992 Natra took a mortgage over certain land at Carlsruhe which the company owned, as security for the amount that was owing from time to time. It was a second mortgage because the bank at which the company kept its trading account already held a first mortgage for what was owing to it.
In June 1993, Natra refused to supply the company with any more radiators except for cash on delivery. On 30 August, Natra ceased supplying goods altogether and the company had to find an alternative supplier, which it did. By September, the amount owing by the company to Natra was in excess of $200,000 and on 15 October 1993 Natra served notice to pay under the mortgage. A little later it served a notice under s.459 of the Corporations Law. At about this time, there was some discussion between debtor and creditor about the company making payments on account and paying the balance from the sale of the land which was mortgaged. Natra was apparently aware that the land, if sold, would not yield sufficient to pay all that was owing to it.
In the result, between 26 November 1993 and 10 February 1994, the following payments were made out of the company’s bank account to Natra on account of what was owing to it:-
26 November 1993 $40,000
7 December 500
17 December 500
23 December 500
30 December 500
2 January 1994 500
6 January 500
12 January 500
14 January 500
1 February 5,000
10 February 1994 2,000
Thus, in a period of three and a half months Natra received payments totalling $51,000, though the land was not sold. The company continued trading and in the course of trading paid all of its trade creditors, save Natra. It is common ground on this appeal, however, that as at 26 November 1993 and ever since the company was and has been insolvent. On 10 February 1994, Natra filed notice of motion for the winding up of the company and, in its affidavit in support, it claimed that $171,912.39 was still owing to it. On 13 May 1994, an order was made in the Supreme Court for the winding up of the company and the appellant was appointed its liquidator.
As at 13 May 1994, the company had two unsecured creditors in addition to Natra. First, there was the Deputy Commissioner of Taxation to whom the company owed $5,396.58 for sales tax (which became due and payable in December 1992 and January 1993), for additional tax for late payment and for penalties. (The Deputy Commissioner lodged a proof of debt on 9 January 1997, nearly three years after the winding up order.) The company was also indebted to an employee, one Mullally, for long service leave and holiday pay in the sum of $6,500. Mr. Mullally had been employed for something like 25 years and he lodged a proof of debt on 4 October 1994. (This claim was subsequently discharged by another company, a debtor and against whom the liquidator instituted proceedings. The liability to Mr. Mullally was transferred to that other company and he withdrew his proof of debt as part of the settlement of those proceedings.) Thus, at the date of liquidation a little less than $12,000 was owing to those other two unsecured creditors, over and above what was owing to Natra.
Before the appointment of the liquidator on 13 May 1994, the company had attempted to sell at auction the land which was mortgaged to the bank and to Natra. There were no bidders and in August 1994, the liquidator sold the land, after auction, for $125,000. The bank, as first mortgagee, was repaid $25,200 and, after expenses were deducted, $92,997.19 was paid to Natra. That left a balance owing to Natra, and unpaid, of $78,915. The liquidator incurred significant expenses in the winding up (due largely, I suppose, to the legal proceedings which he instituted) and in the result, although there were still some trade debtors owing money when the winding up order was made, there was no dividend at all for unsecured creditors.
On 8 April 1996, the appellant commenced this proceeding to recover from Natra each of the 11 payments listed above, totalling $51,000. The liquidator claimed that each payment was a voidable transaction under s.599FE of the Corporations Law, by reason of either s.588FA or s.588FB. The trial of the proceeding commenced in the County Court on 18 March 1998 and concluded two days later when his Honour upheld a no-case submission made by Natra’s counsel, who elected to call no evidence. The proceeding was accordingly dismissed. The liquidator now appeals contending that the no-case submission should not have been upheld.
The statute
I turn first to the relevant provisions of the Corporations Law affecting voidable preferences in insolvency. These are to be found now in Part 5.7B - headed “Recovering property or compensation for the benefit of creditors of insolvent company” – and more particularly in Division 2, which is headed simply “Voidable transactions” and consists of ss.588FA to 588FJ.
Section 588FA, which is critical to this appeal, defines an “unfair preference”. So far as relevant it reads as follows:-
"(1)A transaction is an unfair preference given by a company to a creditor of the company if, and only if:
(a)the company and the creditor are parties to the transaction (even if someone else is also a party); and
(b)the transaction results in the creditor receiving from the company, in respect of an unsecured debt that the company owes to the creditor, more than the creditor would receive from the company in respect of the debt if the transaction were set aside and the creditor were to prove for the debt in a winding up of the company; …
(2)For the purposes of subsection (1), a secured debt is taken to be unsecured to the extent of so much of it (if any) as is not reflected in the value of the security.”
Only passing reference is needed to s.588FB which defines an “uncommercial transaction”. In his statement of claim the liquidator relied upon s.588FB as well as s.588FA and counsel for the appellant sought before us to argue that the trial judge was wrong in failing to consider that aspect of the case before upholding the no-case submission. But that point was not taken below and we did not hear respondent’s counsel on it. It is not open now and I say nothing more about it.
Section 588FC defines an “insolvent transaction” and it commences:-
"A transaction of a company is an insolvent transaction of the company if, and only if, it is an unfair preference given by the company, or an uncommercial transaction of the company, and:
(a)any of the following happens at a time when the company is insolvent:
(i) the transaction is entered into;
(ii)an act is done, or an omission is made, for the purpose of giving effect to the transaction; or “
Paragraph (b) of s.588FC is of no present relevance; nor is s.588FD which defines an “unfair loan to a company”.
Section 588FE is important, for, building upon the preceding sections it prescribes what transactions among the foregoing are voidable when a company is being wound up. It deals thus with an unfair preference which is an insolvent transaction:-
"(2) The transaction is voidable if:
(a)it is an insolvent transaction of the company; and
(b)it was entered into, or an act was done for the purpose of giving effect to it:
(i)during the 6 months ending on the relation-back day; or
(ii)after that day but on or before the day when the winding up began.”
In contrast by subs.(3) an uncommercial transaction which is an insolvent transaction is made voidable if entered into within two years of the relation-back day.
With “voidable transactions” established by s.588FE, s.588FF sets out the powers of the Court in relation thereto. Subsection (1) commences:-
“(1)Where, on the application of a company’s liquidator, a court is satisfied that a transaction of the company is voidable because of section 588FE, the court may make one or more of the following orders:
(a)an order directing a person to pay to the company an amount equal to some or all of the money that the company has paid under the transaction;
(b)an order directing a person to transfer to the company property that the company has transferred under the transaction - ...”
and a number of other orders are then described, against the letters (c) to (j). According to subs.(3) an application under subs.(1) must be made within three years after the relation-back day or within such longer period as the Court orders (on application by the liquidator within those three years). Whether the powers conferred by s.588FF are discretionary is still a question: Sands & McDougall Wholesale Pty Ltd. (In liq.) v. Commissioner of Taxation (Cth)[1] at 515-6 per Charles, J.A.
[1][1999] 1 V.R. 489
What follows after s.588FF is a series of sections providing protection for those who may be party to a transaction otherwise caught within the foregoing provisions or whose interests might be affected by an order under s.588FF. Thus s.588FG(2) protects those who take in good faith, for valuable consideration and without reasonable grounds for suspecting that the company was or would become insolvent. It is unnecessary to go further into the sections which provide protection; for none of them was relied upon here. Nor is it necessary to refer to any of the other sections in Division 2.
For present purposes, the legislative scheme in Division 2 may be summarised in this way. To be successfully impugned by the liquidator as a voidable preference (1) the relevant transaction must constitute an “unfair preference” within the meaning of s.588FA (whether or not it is also an uncommercial transaction under s.588FB); (2) the unfair preference must constitute an “insolvent transaction” according to s.588FC; and (3) if the insolvent transaction was entered into within the time frame allowed by s.588FE, it becomes a voidable transaction - in which case, on the application of the liquidator, the Court may make an order under s.588FF (including an order of repayment of money or re-transfer of property received). On this appeal, there was no issue about most of the steps in this chain: the payments made on and between 26 November 1993 and 10 February 1994 were to be considered separately, each as a discrete transaction for the purposes of Division 2; each payment was made (and thus the transaction entered into) at a time when the company was insolvent within the meaning of s588FC, with the result that if it was an unfair preference it was also an insolvent transaction; and, if it was an insolvent transaction, it was carried out within the time frame marked out by s.588FE so that it became a voidable transaction in respect of which an order might be made by the Court under s.588FF. As I followed it, all that was in dispute on this appeal was whether the trial judge was correct in holding that there was no evidence that each of the 11 payments in question was an “unfair preference” within the meaning of s.588FA.
The course of the trial
The argument below proceeded upon the footing that on 26 November 1993, the date of the first payment under attack, Natra was an unsecured creditor for about $83,000. This was because at the time Natra was owed approximately $213,000 and the bank $30,000 and according to the valuer who gave evidence the land was worth $160,000. On the face of it at least, it would seem that the liquidator’s case could have been put quite simply in this fashion: that the 11 payments totalling $51,000 which were made by the company to Natra on and after 26 November 1993 were made to it as an unsecured creditor and that, given the existence of two other unsecured creditors during November (the Deputy Commissioner and Mr. Mullally) who were still owed money when the order for winding up was made on 13 May 1994 and given further that the company was insolvent at all material times and that there was no dividend at all for unsecured creditors in the winding up which followed, the case for recovery had been established.
But that was not how the matter fell out because counsel for Natra, after electing to call no evidence, submitted that s.588FA called for a comparison between the amount received by the creditor in the transaction which was impugned and the amount which that creditor would probably have received, as an unsecured creditor, in a winding up of the company at the date of the transaction, had the creditor repaid the amount received in the impugned transaction and proved for the full amount owing to it as an unsecured creditor. There was no detailed evidence, counsel submitted, about the asset and liability position of the company in a hypothetical winding up on the date of the impugned transaction and thus no evidence about the amount of the dividend which would have been received had Natra proved as an unsecured creditor – and in this regard counsel pointed to the company’s having been able, apparently, to pay all trade creditors before the order was made in May for winding up.
Perhaps not surprisingly, the argument below tended to focus on the first of the 11 payments in issue, that of $40,000 made on 26 November 1993. In relation to that payment the trial judge said this of the argument:-
"The submission made to me is not based upon, nor does it have anything much in principle to do with the question of whether the company was insolvent or not insolvent on 26 November 1993. As I said to counsel for the defendant, I am quite happy to accept for the purposes of this submission – the present submission, that the company was indeed insolvent on 26 November 1993 and that it was so insolvent because it could not then pay the whole of the $213,000 of the debt of the defendant – the debt owing to the defendant.
That, however, is not the question before me. The submission made to me is that there is no evidence, from which I can deduce or find on the balance of probabilities that had there been a winding up on 26 November 1993, the defendant, though it was owed $213,000 would have received less than $40,000 had it proved as unsecured creditor to the extent to which it was unsecured in such a winding up.”
Counsel for the liquidator sought to persuade the judge that even on the basis of a hypothetical winding up on 26 November there was sufficient evidence to permit a finding that Natra would have received less by way of dividend in that winding up than it received by means of the impugned transaction, but his Honour held otherwise. The company was still trading at the time; it had a new supplier in place of Natra, “giving adequate or satisfactory discounts” upon which “the company’s profitability depended” and as at 30 June 1993, only five months previously, it had trade debtors of more than $100,000. His Honour concluded by saying (and I correct an obvious typing mistake in the transcript):-
“Bearing in mind that it is the plaintiff who carries the burden of persuading me affirmatively of the proposition that had there been a winding up on 26 November 1993, the defendant would have received less, had it proved in the winding up. I have, as I said at the outset, come quite firmly to the view that such evidence as there might be of use is totally inadequate for me to draw the necessary inference.
What I have said, with respect to the 26 November 1993 applies with equal force to the other 10 dates.”
This was the basis on which the judge ruled that there was no case to answer. It reflects directly the approach to s.588FA taken by counsel for Natra in his submissions and on this appeal the like arguments were advanced, counsel for Natra (now the respondent) urging us to approve the reasoning below and to dismiss the appeal accordingly. But the appellant submitted that the approach taken below to s.588FA was erroneous - and on more than one count. The appeal was very well argued on both sides, if I may say so, and three points in particular emerged affecting the construction of s.588FA. I take each in turn.
When only part of the debt has been paid
All three points turned on the proper meaning and application of para.(b) of s.588FA(1) which stipulates when a transaction between the debtor company and the creditor is an unfair preference and that paragraph may be usefully recalled here:
“(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”. [My emphasis]
Pointing to the references in this paragraph to “the debt” of the unsecured creditor, Mr. Lucas, for Natra, submitted that the comparison required was not between the amount of the payment received by the creditor by means of the impugned transaction and the amount which the creditor would have received had the transaction not occurred and the creditor proved instead for that amount in a winding up; but between the amount of the payment made to the creditor and the amount which the creditor would have received in a winding up had the impugned transaction not taken place and the creditor proved in the winding up for the full amount of its unsecured debt. Of no significance if the creditor is paid the whole of its debt by means of the impugned transaction, there is a significant difference where the creditor is paid part only of the unsecured debt before winding up supervenes – and so it was here.
To take the figures that were bandied about in argument in this case: the creditor (Natra) was owed $213,000 (or thereabouts) by the company, of which $83,000 (or thereabouts) was unsecured (given that the land securing payment was worth $160,000 and the bank, having a first mortgage, was owed $30,000). By reason of the impugned transaction on 26 November 1993, Natra received $40,000. According to the argument put by Mr. Lucas, the question posed by paragraph (b) was whether, by virtue of the transaction which was impugned (by which the creditor was paid $40,000), the creditor received from the company (to use the language of the section) “in respect of an unsecured debt [of $83,000] more than the creditor would receive from the company in respect of [that debt of $83,000] if the transaction [by which it received payment of $40,000] was set aside and the creditor were to prove for the debt [that is, the unsecured debt of $83,000] in a winding up of the company.”
At first glance the language of s.588FA appears to lend itself to the construction advocated by Mr. Lucas, but I cannot think it correct. Requiring, as it does, a comparison of the dividend in a winding up on the whole of the unsecured debt ($83,000) with the payment of merely part of the unsecured debt ($40,000), the construction which counsel advocated does not require a comparison of like with like. If, as submitted, the whole debt is relevant though part only has been paid in the impugned transaction, the comparison of like with like would surely require comparing the probable dividend on proof in a winding up for $83,000 with not merely the payment of $40,000, but with that payment coupled with the probable dividend in a winding up on the balance of the debt (i.e, on a further $43,000, using the example given). On that analysis the creditor will obviously have received more by reason of the impugned transaction occurring before winding up than it would receive in a winding up (even a hypothetical winding up) if, as we may assume, all the creditors are not paid in full; for $40,000 plus a dividend on $43,000 in winding up must be more than simply a dividend on $83,000. At least part of the provable debt has been paid in full.
But in my opinion the better view is that s.588FA(1) is looking to the unsecured debt or, if part only is involved in the impugned transaction, to such part of the unsecured debt as is involved. That is in line with the position under the former legislation, and it has been said that the new division 2 was not intended to make great change: V.R. Dye & Co v. Peninsula Hotels Pty. Ltd. (In liq.)[2] at 961 per Ormiston, J.A. In a case like the present, it can fairly be said that the creditor received 100 cents in the dollar in respect of an unsecured debt, being a portion only of a total unsecured debt of $83,000. In respect of $40,000 of that debt, the creditor received $40,000: and the comparison which is sought by paragraph (b) is between that payment of $40,000 and the probable return to the creditor in a winding up if that payment of $40,000 were set aside and the creditor were to prove for that $40,000 (being its resuscitated debt) in that winding up. In a case like the present, the question becomes this: is 100 cents in the dollar (which was received for the relevant part of the total unsecured debt) more than the probable dividend on proof for the like sum in a winding up, supposing that the impugned transaction were first set aside?
[2](1999) 17 A.C.L.C. 954
Of course it can be argued that either construction of the paragraph puts some strain on the language, but it seems to me less likely that the former was intended than the latter. As I have said, to compare like with like requires, on the first construction, to bring to account what the creditor would receive in a winding up for the balance of its unsecured debt: and there is no reference to a winding up in the first portion of the paragraph. On the second view, the words “an unsecured debt that the company owes to the creditor” must be taken to refer only to such portion of the debt as is involved in the transaction. In the case I have posited, it is a portion amounting to $40,000. That is not to say that in every case if one looks only to the portion of the total debt which is involved in the transaction the creditor must always be receiving 100 cents in the dollar; the creditor may not be receiving so much. Creditor and debtor may have done a deal whereby on, say, a total unsecured debt of $83,000 the creditor is willing to receive half, and then by instalments. If the first instalment were to be $20,000, it could fairly be said that the creditor was receiving, by reason of the impugned transaction, $20,000 in respect of an unsecured debt of $40,000. Paragraph (b) would then require that result to be compared with what the creditor would probably receive in a winding up if the transaction were set aside, the sum of $20,000 paid to the liquidator and the creditor proved for $40,000. The question then would be whether 50 cents in the dollar was more than the likely return to the creditor in a winding up, if the impugned transaction were set aside.
That is the first of the three points exposed in the argument on appeal and I would resolve it against the respondent. At trial, it is apparent that the judge was persuaded to the view I have rejected and with great respect I think that that was error - and error which in itself tainted the decision that there was no case to answer.
A winding up
But the trial judge referred, too, to a winding up on 26 November 1993; that is, he considered the question whether the evidence was sufficient in the context of a hypothetical winding up at the date of each of the impugned payments. Whether that was correct was the second of the three points argued before us.
Again, Mr. Lucas put a well-developed argument that the reference in paragraph (b) to “a winding up” meant necessarily a winding up on the date of the impugned transaction. Thus, he submitted, in a case like this in which there were 11 payments in all (and each of them a separate transaction), s.588FA(1) required the court to consider what the creditor would probably have received in a notional winding up on each of 11 dates. Perhaps after showing that in respect of the first, it would not be difficult to show it in relation to the second, although that might depend upon how far the presumption of continuance could be taken, how far significant differences might be demonstrated, and how far apart the two dates were. But in principle, counsel said, in respect of any impugned transaction there must be proof of how much the creditor would probably receive in a winding up if that transaction were set aside and the creditor were to prove in a hypothetical winding up as at the date of that transaction.
First, if Mr. Lucas’ submission be correct, it seems to me to confirm that, where the relevant transaction has resulted in part payment only of an unsecured debt, the comparison cannot be between the amount paid on one occasion and the amount likely to be received in a winding up by way of dividend if the transaction were set aside and the creditor proved for the whole of the unsecured debt. Let it be supposed that the creditor was owed $83,000 and received on each of 8 occasions a discrete payment of, say, $10,000, the respondent’s argument would presumably involve considering on the first occasion a comparison between the amount received of $10,000 and the likely dividend on the whole of the unsecured debt of $83,000 in a winding up on the date of the first payment; but in relation to the last of these payments, a comparison between $10,000 and the likely dividend on a proof for $13,000 in a winding up on the date of the last payment – and between these two would lie an ever-diminishing scale of the amount of the proof if, as I am supposing, credit must be given for each of the previous payments that were made. Or should credit not be given for each of the previous payments if that payment was itself impugned and rendered a voidable transaction by the provisions of this division? Or should such credit be given pending an order being made for repayment under s.588FF, or perhaps pending repayment itself? Such considerations simply tend to confirm, as I have suggested, that paragraph (b) looks not to the whole of the unsecured debt in a case of part payment, but only to such part of the unsecured debt as is involved in the transaction.
But the wider problem is whether paragraph (b) looks to a notional winding up at all: does it look to a hypothetical winding up on the date of each impugned payment, or does it look to a winding up which is, in a case like this, the winding up that actually occurs? In most cases it simply will not matter: it would be obvious that the company, being insolvent, was insolvent when the payment was made and insolvent at the commencement of the winding up: so that whether the winding up to which paragraph (b) directs attention takes place (notionally) at the date of the impugned transaction or (actually) when winding up actually follows, the result is the same: the creditor having received 100 cents in the dollar on such part of the unsecured debt as was involved in the transaction has surely received more than he would receive in a winding up, especially a winding up in insolvency. But, said Mr. Lucas, this was a very unusual case in which the difference in dates could matter, because all trade creditors were paid while trading continued after 26 November 1993 and before the making of the winding up order; there were significant trade debtors (the source no doubt for the payments to trade creditors) and when winding up did supervene only Natra itself was still unpaid – save for the debt which subsequently emerged (some years later) owing to the Deputy Commissioner of Taxation and the debt owing for long service leave to the employee Mullally (a debt which in the end was satisfied by its being transferred to a company which itself owed money to Natra). In upholding the submission of no case, the judge said that the debts owing to the Deputy Commissioner of Taxation and to Mr. Mullally were about $8,500, and although in argument we were referred to figures suggesting that the total was perhaps $9,500, that small difference does not matter for present purposes. On any view those two debts, though reaching back to a time before 26 November 1993, totalled less than $10,000. This was a case therefore, counsel argued, in which evidence was important of the probable dividend in a hypothetical winding up as at the date of each impugned transaction (all 11 of them); and without such evidence there was no case to answer.
Again I think that the submission on behalf of Natra must be rejected. In my opinion s.588FA(1)(b) does not require consideration of a hypothetical winding up as at the date of the payment which is impugned. The comparison it draws is between the amount which the creditor receives by way of the impugned payment and the probable return to the creditor if that transaction were set aside and the creditor proved instead in “a winding up”. Why should that not be taken at face value? In this instance, there was ample evidence that in a winding up an unsecured creditor would receive nothing; for in the winding up that was ordered on 13 May 1994 there was no dividend at all for unsecured creditors. That winding up was “a winding up” and so the comparison required by s.588FA(1)(b) could be drawn, and drawn quite simply. Of course, to be relevant, the actual winding up must occur within the time frame implicitly marked out by s. s.588FE; but this winding up did so occur and the claim was therefore made to recover the 11 payments in question. I see no reason not to conclude that the best evidence of what a creditor would receive in “a winding up” is what unsecured creditors did receive in the winding up that followed and which has given rise to the proceeding in which the transaction under scrutiny is impugned.
If for any reason the evidence of what happened in the actual winding up that followed an impugned transaction was unavailable or unsatisfactory, a liquidator seeking to recover a voidable transaction which was an unfair preference might, I suppose, be permitted to lead evidence of what the creditor would have received in some hypothetical winding up on a date relevant to s.588FA. Obviously, to be relevant a winding up must be one in which the impugned transaction could properly be set aside and in which the creditor could prove instead; but I see no reason why, when the statute refers only to the probable return to the creditor in “a winding up”, evidence might not be led of the probable return in a hypothetical situation. Indeed, that may have to be the case to the extent that s.588FA becomes relevant in an administration under Part 5.3A of the Law. Under ss.438A and 439A(4) the administrator expresses an opinion on whether or not winding up would serve the interests of the creditors, and the possibility of voidable preferences is one consideration: reg.5.3A.02. In such circumstances the setting aside of the transaction and the creditor’s proving instead in a winding up will be altogether hypothetical – which may explain why the section does not refer to “the winding up”; but it does not follow that the hypothetical winding up which the section must then be taken to posit must be as at the date of the impugned transaction. Indeed the express hypothesis of setting aside the impugned transaction and the creditor’s proving instead suggests to me a winding up which takes place after, and not at the time of, the transaction in question.
To my mind this case is quite straightforward. A winding up has followed; it is a relevant winding up by virtue of s.588FE and I see no reason why the liquidator cannot rely upon the probable return to the unsecured creditor in that winding up for the purpose of establishing the comparison required under s.588FA(1)(b). There was ample evidence here before the trial judge to show that unsecured creditors were to receive nothing in the winding up. His Honour sought other evidence because he accepted the submission for Natra that there must be evidence of the probable return in a hypothetical winding up as at the date of the impugned transaction and for the reasons that I have given I think that that was error. (And that error was simply compounded by his Honour’s also accepting the submission that the return which was relevant was the probable dividend in a winding up on a proof for the whole amount of the unsecured debt, as distinct from such portion of the unsecured debt as was involved in the impugned transaction.)
The notion of a hypothetical winding up at the date of the impugned transaction comes, I think, from previous decisions on some of which Mr. Lucas relied. They were decisions on s.95 of the Bankruptcy Act 1924 (Cth.) concerning the relevant “effect” of the impugned transaction. According to s.95, the transaction was void in bankruptcy (supposing sequestration within six months) if it had “the effect of giving the creditor [benefited by the transaction] a preference, a priority or advantage over the other creditors”. In a number of decisions, it was held that these “other creditors” must be creditors in existence at the date of the impugned transaction and this has led, I believe, to the notion that, in assessing that effect, one should have regard to a hypothetical winding up at the date of the transaction: Wily v. St. George Partnership Banking Ltd.[3], para.[49] per Finkelstein, J. But with respect, the need to have regard to “other creditors” at the date of the impugned transaction does not, I think, lead to the need to consider any hypothetical winding up at that date.
[3](1999) 161 A.L.R. 1
In Calzaturificio Zenith Pty. Ltd. (In liq.) v. N.S.W. Leather Trading Co. Pty. Ltd.[4] at 610, Menhennitt, J. considered in detail whether the reference to “other creditors” should be taken to mean creditors in the subsequent bankruptcy or creditors at the time of the impugned transaction. He held the latter, and that has been followed since: for example Re Discovery Books Pty. Ltd.[5] at 475 and M. & R. Jones Shopfitting Co. Pty. Ltd. (in liquidation) v. National Bank of Australia Ltd.[6] at 289. But that is to do no more than to identify the creditors whose position must be compared with that of the creditor who was party to the impugned transaction. It does not require the liquidator to establish that those other creditors would probably have received less than 100 cents in the dollar on their debts, had the winding up occurred at the date of the impugned transaction; it is enough that in the winding up that followed, perhaps some months later, those other creditors received less in respect of their debts than did the creditor who was party to the impugned transaction. The vice of the transaction is that one creditor has received more for his debt than the other creditors receive in the subsequent winding up: Re RHD Power Services Pty. Ltd. (in liquidation)[7] at 264 (McPherson, SPJ).
[4][1970] V.R. 605
[5](1972) 20 F.L.R. 470 (Fox, J.)
[6](1983) 68 F.L.R. 282 (Wootten, J.)
[7](1990) 3 A.C.S.R. 261
So much is implicit, I think, in the approach taken by McLelland, J. in Spedley Securities Ltd. (in liquidation) v. Western United Ltd. (in liquidation)[8]at 114-115. There his Honour said:-
[8](1992) 27 N.S.W.L.R. 111
"A matter of contention in the present proceedings is whether the ‘other creditors’ whose position is to be compared with that of the creditor to which the payment is made, are creditors as at the time of that payment (as the defendant contends) or creditors in the subsequent winding up (as the plaintiffs contend). This question is significant because, although it is clear that creditors in the winding up of Spedley will not receive 100 cents in the dollar, there is no evidence that any creditor as at the time of the relevant payments remained a creditor at the time of the winding up.”
After canvassing the cases and concluding that “other creditors” meant persons having that status at the time of the impugned transaction, his Honour concluded, at 115:-
“For these reasons in my opinion the plaintiffs cannot succeed in respect of any payment in the absence of proof that the payment had the effect of giving Western United [the creditor who was paid before the winding up] a preference, priority or advantage over at least one other creditor of Spedley at the time it was made. In the circumstances of this case, such proof would be sufficiently provided by evidence showing that at least one creditor of Spedley as at the date of the payment remained unpaid as at the date of the winding up.”
With respect, that seems to me the proper approach and it is altogether different from supposing that the liquidator must put before the Court evidence that at the date of the impugned transaction the other creditors who were then in existence would have received less than 100 cents in the dollar had the winding up occurred then and there.
There is also support for the view I prefer in Richardson v. Commercial Banking Company of Sydney Ltd.[9], a case in which the relevant “effect” of a running account was considered. The Court consisted of Dixon, Williams and Fullagar, JJ. and in the course of their joint judgment, their Honours said this about what kind of “effect” was decisive under s.95, at 129:-
"It must be ‘the effect of giving the creditor a preference, a priority or advantage over the other creditors’: it is then void in bankruptcy if the sequestration is within six months. Section 95 supposes a bankruptcy, and it is in relation to that bankruptcy that the question arises whether, over the other creditors, a preference priority or advantage has been given to the particular creditor. Section 52(c), on the other hand, propounds the hypothetical question whether in the event of bankruptcy such an effect would be produced. The bankruptcy or the petition must of course be within six months: s.55(1)(c).”
It will be observed that the position under s.95 is contrasted with that under s.52(c), and it is the latter which, according to their Honours, “propounds the hypothetical question whether in the event of bankruptcy” the relevant effect (of preference, priority or advantage) would be produced. Section 95 “supposes the bankruptcy”, but it is the bankruptcy which occurs which colours the decision on whether or not the impugned transaction produced the relevant effect.
[9](1952) 85 C.L.R. 110
Under the former law, then, I think that the notion of a hypothetical bankruptcy at the date of the impugned transaction is at best misleading. What had to be established was that the creditor who was party to the impugned transaction gained a benefit amounting to a “preference, priority or advantage” over other creditors in existence at that time, but the benefits accruing to those other creditors could be determined according to their fate in the subsequent winding up. If then they received less than 100 cents in the dollar on their debts but the creditor who was party to the impugned transaction received 100 cents in the dollar, the necessary preference, priority or advantage was established. If, as has been said, the Corporations Law intended to make no great changes in the law relating to the avoidance of preferences in winding up, there is no reason for supposing that s.588FA propounds a hypothetical winding up as at the date of the impugned transaction; and for the reasons I have given earlier I do not think it does.
Natra as a partly secured creditor
The third point agitated in argument before us was a point not taken below. It was raised in the respondent’s Notice of Contention as an independent ground on which the decision below should be sustained. It concerned the relevance to s.588FA(1) of the security held by Natra, Natra being a second mortgagee over the land. Section 588FA(1) applies in terms only to a transaction between the company and an unsecured creditor (as to which see also s.588FA(2)) and Mr. Lucas submitted that the section had no application here because the 11 payments in question were made to Natra as a secured creditor. He accepted, as I suggested in G. & M. Aldridge Pty. Ltd. v. Walsh[10], that if a partly secured creditor is paid $100 on account of a total debt of more than that, that payment is to him as an unsecured creditor unless it can be shown that in return for the payment of $100 the security was discharged or released pro tanto. But, he urged, in this instance Natra did release its security pro tanto in return for the payments which are now impugned. This is not immediately apparent and so Mr. Lucas carefully explained why he said it was so.
[10][1999] V.S.C.A. 179
Again for the sake of convenience, I refer to the payment of $40,000 on 26 November 1993. As first and second mortgagees respectively, the bank and Natra were both secured over the land which, at a valuation which counsel took for present purposes to be $160,000, was less than the debts of the two of them, if added together. With its first mortgage, the bank was amply secured, but Natra, with its second mortgage was only partly secured. When $40,000 was withdrawn from the bank account for the purpose of making payment to Natra, what was owing to the bank was increased by that sum, thereby increasing the claim of the bank on its security, the land; and correspondingly the ability of Natra to have recourse to the land for the payment of its debt was diminished – that is, by $40,000. That, said Mr. Lucas, amounted to a release or discharge by Natra of its security in return for the payment of $40,000 on account, and so the payment of that amount was to Natra as a secured creditor.
Nor, added counsel, were the unsecured creditors disadvantaged by the transaction in question. Natra’s ability to have recourse to the land might thus have been diminished to the tune of $40,000 which, had nothing further happened, must have increased correspondingly the unsecured portion of its debt to the detriment of the general body of unsecured creditors. But something more did happen: Natra was paid $40,000 on account, thus cancelling the increase that would otherwise have occurred in the unsecured portion of its debt. Thus, at the end of the day, as an unsecured creditor Natra was still owed the same amount as before and, although as a secured creditor Natra was owed $40,000 less while the bank, as the other secured creditor, was owed $40,000 more, the general pool of unsecured debt was not thereby affected.
In response, Mr. Nolan sought to establish that, in truth, the general pool of unsecured debt was enlarged in this particular instance. He said that Natra had been pressing for the payment of $40,000 (indeed more than that), but the company had found itself unable to make the payment. Accordingly, either directly or indirectly, it borrowed $30,000 from some third party which was paid into the bank account to enable withdrawal of the $40,000 which was used to pay Natra. The net increase in the overdraft, at the end of the day, was therefore only $10,000 and if, as Mr. Lucas submitted, that increased the need of the bank to have resort to the land as security and correspondingly diminished the ability of Natra to have recourse to that same land for the payment of what was owing to it, the shift was only in the sum of $10,000 (not $40,000), while at the same time there was an addition to the general pool of unsecured debt of the $30,000 which had been borrowed from the third party. But the answer to Mr. Nolan lies in the fact that the $40,000 paid to Natra served to reduce the sum total otherwise owing to Natra: perhaps it did become unsecured to the extent of a further $10,000 (by reason of the increase in the bank overdraft and Natra’s position as second mortgagee only), but the total amount owing to Natra was reduced by $40,000. Of course that is also the total of the extent to which Natra became unsecured by reason of the transaction ($10,000) and the amount then owing to the third party as another unsecured creditor ($30,000). Mr. Lucas can therefore claim again that the pool of unsecured debt remains the same, while the only change to occur is as between the bank and Natra in their respective capacities to have resort to the land as security.
There is no doubt but that Mr. Lucas’ submission to this effect has some attraction. On one view, as matters panned out on this occasion the only immediate change occasioned by the transaction involving the company appears to have been in the position of the secured creditors inter se, rather than in the position of the unsecured creditors. Yet Natra, which doubtless was pressing for payment because it recognised that its security would not extend to the whole of its debt, managed to have the amount owing to it reduced (in the example taken) by $40,000; and if, as Mr. Lucas submitted, Natra’s ability to have recourse to the security was necessarily diminished by the amount which was first borrowed from the bank in order to make the payment, can it not be said that a fortiori the payment of $40,000 to Natra was to it as an unsecured creditor? It was not in truth the payment of the $40,000 to Natra that went to reduce the extent to which Natra would be relying upon the security, the land; that reduction was the direct result of the further increase in the company’s bank overdraft and it is only by running the two steps together – the borrowing from the bank and the payment to Natra – that the basis can be laid for Mr. Lucas’ argument. And therein lies the answer to the argument in my opinion.
It may be that the payment from the company’s bank account, by enlarging the overdraft which was secured by the first mortgage, did correspondingly diminish the extent to which Natra, as second mortgagee, could have resort to the security for payment of what was owing to it. By the same token that was clearly not the result of any act or omission on the part of Natra. Natra did not, I think, “release” or “discharge” its security, even in part: Natra was simply pushed aside by the first mortgagee which had first call on the security. (As Mr. Nolan’s example demonstrated, it may or may not have been to the full extent of $40,000). The whole of the debt owing to the first mortgagee was secured on the land, as indeed was the whole of what was owing to Natra (according to the documents). That Natra was only partly secured was wholly the consequence of the land not being sufficient to cover the debts of both the bank and Natra. In the ordinary course, the bank overdraft would be expected to fluctuate, up and down, and no movement in what was owing to the bank would do more than increase or decrease (according to whether the fluctuation was up or down) the bank’s need to have resort to the security should the debtor company prove unable to pay what was owing to the bank otherwise. It may be accepted that such movement in the bank overdraft would be reflected (in reverse) in Natra’s ability to have resort to the land to obtain payment of what was owing to it; but no mere reduction in that ability for the time being effected any long-term “release” or “discharge” of the security. If Natra’s ability to have resort to the land to obtain payment was diminished one day when the bank overdraft increased, it might just as well be expanded on the following day if the bank overdraft fell - and of course that is what was happening in the lead-up to the liquidation. On this analysis, there was no relevant release or discharge of the security effected on the part of Natra. Nothing at all was given up by Natra for the benefit of unsecured creditors generally.
One difficulty underlying Mr. Lucas’ argument was, I think, exposed by an example suggested by Mr. Justice Charles in argument. Suppose that trade debtors, which stood at about $100,000 in June 1993, were realised in part and $30,000 was paid into the bank’s account. Serving to reduce the company’s overdraft (at least in the short term), that payment must reduce the bank’s reliance upon the security by $30,000 and correspondingly increase Natra’s own ability to have recourse to the land by the same amount. Natra would become secured instead of unsecured in respect of that further sum of $30,000. At first glance, the unsecured creditors have not been prejudiced; $30,000 which otherwise might have been available to them in the winding up (when trade debtors were realised) has been withdrawn from them, but so too has an unsecured portion of Natra’s debt, to the same amount. The difference is this: that Natra receives 100 cents in the dollar on that further $30,000, while the unsecured creditors are left with a smaller pool on which to draw for their dividend – and that is prejudice if the dividend is less than 100 cents in the dollar.
In relation to this example, Mr. Lucas submitted that we should not look beyond the transaction involving the $40,000: he said it would be altogether unwarranted, on the terms of s.588FA, to look at the surrounding circumstances (involving realisation of trade debtors and the like). But to my mind that is the very weakness in the argument he advanced. I think that the payment to Natra was to be examined on its own and when so examined it was a payment to Natra as an unsecured creditor. It did not affect in any way the amount for which Natra could claim against the land; that was reduced by $40,000 only if one had regard to the antecedent borrowing from the bank by which the company was enabled (or assisted) to make the payment to Natra. In the winding up Natra would doubtless be the last to claim that any part of what had been paid by way of these 11 impugned payments was on account of what otherwise was secured – a consideration which itself emphasises what I think is plain, namely, that the payments were made to Natra as an unsecured creditor, and not as a secured creditor.
Moreover, counsel’s argument depended very much on the submission that overall the general body of unsecured creditors was not being prejudiced; the general pool of creditors was no worse off, he said, after the transaction than before. I am by no means clear that that is an argument that still runs under the new section 588FA; the section does not in terms look to the effect of the transaction on “other creditors”, as did the former law. Here the question is, in terms at least, whether the transaction results in the creditor receiving more than it would in a winding up if the transaction were set aside and the creditor were to prove – which as I have said invites a comparison between a return in this case of 100 cents in the dollar on $40,000 and a dividend of nothing in the winding up. The effect of the transaction on “other creditors” does not per se have a part to play in the comparison required by s.588FA, although it might perhaps become material in certain circumstances when an order for repayment was being sought under s.588FF. I merely mention the possibility; I say nothing more about it. It does not fall for consideration on this appeal, which is only concerned with the trial judge’s ruling that there was no case to answer under s.588FA.
Conclusion
For the reasons I have given, I consider that the trial judge erred in two respects when he upheld the submission of the respondent that there no case to answer; first, in that he regarded s.588FA as requiring him to compare, in respect of each impugned payment, the amount received by Natra with the probable return to Natra in a winding up if the payment were set aside and Natra proved for the whole of its unsecured debt; and secondly, because he regarded s.588FA as requiring that that comparison be made by reference to a notional winding up on the day of the impugned transaction. As I see it, the judge's conclusion was affected as much by the first as the second.
A submission was made late in the day by counsel for the respondent that the appellant should not be heard on the second point because the liquidator had not put the matter so plainly below, his counsel contending rather that there was evidence of the probable return in a winding up, even a hypothetical winding up as at the date of each of the 11 impugned transactions. I am not disposed to accept that the appellant should be so limited in his submissions on appeal. The argument below was over the proper construction of s.588FA, which formed the basis of the respondent’s submission that there was no case to answer. That submission was flawed in two respects, as I have said, and those two respects were interrelated. Below the appellant was seeking only to meet the submission made; it was the respondent who chose the ground and who, in my respectful view, led the judge into error. The judge accepted the respondent’s submission and error has now been demonstrated in that regard. The decision that there was no case to answer depended on both the errors which have been identified and it is significant, I think, that the present submission of the respondent related to only one of those two.
Accordingly I would allow the appeal, set aside the judgment below and, unless there are other matters to be considered before final judgment can be given, substitute orders under s.588FF(1)(a) for the repayment of the moneys paid – or, as it is put in the notice of appeal, judgment for $51,000 with interest and costs. In the course of argument it was suggested that there might still be an issue over one aspect of the first payment of $40,000, and perhaps there are other problems too of which we have not been told. It is to be hoped, however, that if the foregoing proves to be the opinion of the Court the parties will see the sense in spending no more time or money over this proceeding.
CHARLES, J. A.:
At the close of the evidence before the primary judge, counsel for Natra Pty. Ltd. (the "creditor") made a no-case submission to the judge in which he argued that, on the proper construction of s.588FA of the Corporations Law, it was necessary for the liquidator to show that as at the date of each impugned payment, the financial position of Mooney & Co. Pty. Ltd. (the "company") was such that the creditor received more than it would have received from the company in respect of its debt in "a winding up". This result, that the financial position of the company had to be examined, and necessary calculations made, as at each of the 11 dates in question, was said to flow from the fact that s.588FA(1)(b) uses the indefinite article in referring to "a winding up".
The submission was, as both the other members of this Court have concluded, flawed. It follows that the learned judge fell into error, and the appeal should be allowed, unless the manner in which the case below was conducted should prevent the appeal now succeeding.
Having carefully read the transcript of the argument on the no-case submission, it seems to me that it was the respondent's counsel who chose the ground on which to defend the case, and who was principally responsible for leading the judge into error. There was little authority as to the proper construction of s.588FA. I would also accept that the liquidator's counsel came close to conceding the point of construction argued for the creditor. But I think the approach of the liquidator's counsel in attempting to answer the no-case submission and the argument made for the creditor, is more appropriately described as being that, whatever s.588FA(1) meant, on any view of the section the evidence then before the Court disclosed an unfair preference given by the company to the creditor to the extent of $51,000 (the total of the 11 payments in question).
Mr. Lucas, counsel for the creditor in this Court, in arguing that the liquidator was now wishing to present a new case on appeal and should not be permitted to do so, was not able, as I followed his argument, to show that the creditor would have conducted his case differently at trial, had the matter been argued differently.
On one view it might be said, I suppose, that the judge did not receive as much assistance as he might have from the liquidator's counsel in determining what was the proper construction of s.588FA(1). But that does not seem to me sufficient to disentitle Mr. Nolan, counsel for the liquidator in this Court, from making the submissions which Phillips, J.A. has given reasons for accepting.
I would therefore allow the appeal and join in the orders proposed by Phillips, J.A. for the reasons he gives.
CALLAWAY, J.A.:
In my opinion this appeal should be dismissed for procedural reasons. It will be as well if I set out the steps in my reasoning, even if that entails repeating some material that the learned presiding judge has already set out or to which his Honour has referred.
Section 588FA(1) of the Corporations Law provides:
"(1)A transaction is an unfair preference given by a company to a creditor of the company if, and only if:
(a)the company and the creditor are parties to the transaction (even if someone else is also a party); and
(b)the transaction results in the creditor receiving from the company, in respect of an unsecured debt that the company owes to the creditor, more than the creditor would receive from the company in respect of the debt if the transaction were set aside and the creditor were to prove for the debt in a winding up of the company;
even if the transaction is entered into, is given effect to, or is required to be given effect to, because of an order of an Australian court or a direction by an agency."
Notwithstanding the expression "a winding up" in paragraph (b), the pleadings spoke of "the winding up". Paragraph 6 of the statement of claim read:
"6.The payments referred to in paragraph 5 resulted in the defendant receiving from the company more than the defendant would receive from the company in respect of the debt, if the transaction was set aside and the defendant were able to prove in the winding up of the company."
Paragraph 6(c) of the second amended defence pleaded, to the allegations contained in paragraph 6 of the statement of claim, that –
"if the company made the payments to it alleged in paragraph 5 thereof, which is not admitted, and if the payments were made to it in respect of an unsecured debt, which is not admitted but is expressly denied:
(i)at each of the respective times that the company made the payments to it the company had no other unsecured creditors whose debts remained unpaid at the commencement of the winding up of the company and who or which are entitled to prove for debts in the winding up of the company."[11]
[11]There were no further sub-sub-paragraphs, only (i).
No reference was made to that aspect of the pleadings when counsel for the appellant (who was not counsel appearing before us) opened the case. Instead he emphasized the statutory language and said that it provided the respondent with its best point. He read s.588FA(1) to the learned judge and asked his Honour to note, as a matter of importance, "the word 'a' not 'the' in the expression 'a winding up of the company'." Counsel continued, "[W]hat will be an issue is whether or not the creditor, in this case Natra – if the company had been wound up at the time of the transactions, they would have received less than they would have received under the actual payments of $51,000." (Emphasis added.) Mr. Nolan submitted that those observations had been made only in the context of describing the defence case. Be that as it may, his Honour was not told that it would not be an issue for him to consider, let alone an important issue.
The substance of the no case submission was that, in respect of each impugned transaction, there was no evidence that it resulted in the respondent's receiving more than it would have received[12] in a hypothetical winding up on the date of that transaction. At no stage did counsel for the appellant contest that that construction of the legislation was open. He began by adopting it. In response to a question from his Honour counsel said:
"Indeed, that's the evidence but in my respectful submission that's not the test because what you're looking at is a hypothetical winding up at the date of the transaction – it's not 'the' winding up, it's 'a' winding up."
Later he said that the issue was what would have happened in a winding up on 26th November 1993. He referred to the possibility that it would make no difference whether the section referred to "a winding up" or "the winding up", but that was all. Shortly thereafter counsel expressly said that his opponent was correct and that "the word is, 'a winding up' and you've got to look at the date of each and every one of those transactions." The argument continued on that basis by reference to the position as at 26th November 1993.
[12]It will be observed that the change of tense is necessary to accommodate the argument, not just because one is speaking of the transaction as a past event. That is another indication, in addition to those referred to below, that the section is not referring to a hypothetical winding up.
The no case submission was successful. It is against that ruling that the present appeal is brought. The learned judge's essential reasoning appears from the following passage:
"The submission made to me is not based upon, nor does it have anything much in principle to do with the question of whether the company was insolvent or not insolvent on 26 November 1993. As I said to counsel for the defendant, I am quite happy to accept for the purposes of this submission – the present submission, that the company was indeed insolvent on 26 November 1993 and that it was so insolvent because it could not then pay the whole of the $213,000 of the debt of the defendant – the debt owing to the defendant.
That, however, is not the question before me. The submission made to me is that there is no evidence, from which I can deduce or find on the balance of probabilities that had there been a winding up on 26 November 1993, the defendant, though it was owed $213,000 would have received less than $40,000 had it proved as unsecured creditor to the extent to which it was unsecured in such a winding up."
His Honour referred to the terms of s.588FA(1) and continued:
"I have, at the end of all the evidence, been left in no doubt that the liquidator, who gave evidence, made no investigation of the day to day trading position of this company as at or about 26 November 1993. Were it necessary for me to do so, I think I would be prepared to find that his investigations and calculations were very much along the lines of assets and liabilities which were appropriate to a person in his position under the law as it used to be when the Bankruptcy Act provisions were brought in to Corporations Law under the old Corporations Code. The law, of course, has changed as a comparison of that legislation with the s.588FA and the following sections will show." (Emphasis added.)
At first glance it may appear that the "winding up of the company" referred to in s.588FA(1)(b) is not the actual winding up of the company, but a hypothetical winding up on the date of the impugned transaction: parliamentary counsel has said a winding up rather than the winding up: but that first impression is wrong. There are at least three reasons why that is so:
1.Speaking very generally, the indefinite article is used the first time a person or thing is mentioned and the definite article, or "that" or "those", is used thereafter. Section 588FA contains several examples. Compare the way in which the words "transaction", "company" and "creditor" are used: at first it is "[a] transaction", "a company" and "a creditor" but thereafter, quite correctly, it is "the company", "the creditor" and "the transaction". The winding up of the company, the first time it is mentioned, is called "a winding up".[13] There is no implication that it is a different winding up from the winding up in the course of which the transaction is avoided.
2.Paragraph (b) postulates a cumulative test, namely whether the transaction results in the creditor's receiving more than the creditor would receive in respect of the debt if (i) the transaction were set aside and (ii) the creditor were to prove for the debt. The reference to the transaction's being set aside is a reference to the actual winding up. If parliamentary counsel desired to refer to a hypothetical winding up, he or she would have said something like "if the transaction had not taken place". The words "setting aside" refer not to the transaction's being disregarded but to its being avoided. Moreover, counsel would not have said "were to prove". Both "were set aside" and "were to prove" look to the future, scil. to a winding up after the transaction.
3.Section 588FA is expressly directed to "unfair preferences". Its purpose is to prevent a creditor from obtaining an unfair advantage by receiving more than the creditor would receive in the winding up if the transaction were avoided. The test of unfairness is not a hypothetical winding up that did not take place but the advantage in fact gained over other unsecured creditors in the actual winding up. To that extent the difference between s.588FA and s.122 of the Bankruptcy Act 1966, which expressly referred to other creditors, is less than might at first appear.[14]
[13]Parliamentary counsel could have said "the winding up" on the footing that a winding up was understood but chose not to do so.
[14]See, generally, V.R. Dye & Co. v. Peninsula Hotels Pty. Ltd. (1999) 17 A.C.L.C. 954 at [28-34] per Ormiston, J.A.
There are other reasons for preferring the view that the words "a winding up of the company" at the end of paragraph (b) refer to the actual winding up. The contrary view requires the liquidator to adduce evidence of the result of a hypothetical winding up on the date of each impugned transaction and there may be many such transactions. Hypotheses are always problematic because, as readers of Professor C.S. Lewis know, no one is ever told what would have happened. Must the liquidator, for example, estimate the prospects of recovery from the company's debtors and preferred creditors on each of the transaction dates? The construction I prefer is also consistent with paragraph 10.39 of the explanatory memorandum, which refers to "the winding up".
It follows that the learned judge fell into error but that that error was contributed to by counsel for the appellant and the case below was conducted on a common assumption as to the meaning of s.588F(1) which was false. Indeed, as I read the portions of transcript summarized at [61], the point was expressly conceded.[15] I do not think the appellant can now complain that the test is not a hypothetical winding up. In fairness to counsel, I should add that the language of the Corporations Law is not crystal clear and even a distinguished commercial judge, writing as it now appears extra-judicially[16], has referred to a hypothetical bankruptcy or winding up.[17]
[15]It may also be significant that the concession was made, on behalf of a plaintiff who is an official liquidator, in the course of resisting a no case submission.
[16]Re Wakim (1999) 73 A.L.J.R. 839.
[17]Wily v. St. George Partnership Banking Ltd. (1999) 84 F.C.R. 423 at [51-53].
In those circumstances is it open to the appellant to rely on any of the first three grounds of appeal? (As Phillips, J.A. has explained[18], it was not open to him to rely on ground 4. The no case submission was not resisted, in the alternative or at all, by reference to s.588FB.) Grounds 1 to 3 read:
"1.The learned trial judge erred in finding that despite the evidence of insolvency of the company as at the date of the payments referred [to] in paragraph 5 of the statement of claim ('the payments'), the plaintiff had failed to establish that the defendant would have received less in a hypothetical winding up of the company as at the date of each of the payments.
2.The learned trial judge erred in holding section 588FA of the Corporations Law referred to a hypothetical winding up as at the date of each of the payments or transactions.
3.The learned trial judge erred in not finding that section 588FA of the Corporations Law required the plaintiff to establish that the defendant would receive less than in the court ordered winding up of 13 May 1994." (Emphasis added.)
[18]At [9].
Mr. Nolan submitted that, even if grounds 2 and 3 were not open to him, the appeal should still be upheld if there was evidence that the respondent would have received less in a hypothetical winding up of the company as at the date of each of the payments (ground 1).[19] I do not think we should follow that course. Because the test is not a hypothetical winding up, it is of no consequence whether his Honour erred in the respect complained of in ground 1. Grounds 1 and 2 are infected by error. Counsel might have argued that, although grounds 1 and 2 were not open, the appeal should be allowed if ground 3 was made out. He did not advance that argument and Mr. Lucas accordingly had no opportunity to meet it, but I think it would have failed for much the same reason. His Honour was not asked to find, or hold, that s.588FA required the appellant to establish that the respondent would receive less in the actual winding up.
[19]The ground actually says that his Honour erred in finding that the appellant "had failed to establish" that fact. The point was not mentioned at the hearing. I have interpreted the ground consistently with a no case submission.
In my view the first of the three points identified by Phillips, J.A. need not be decided. It is not the subject of a ground of appeal and is precluded by the course of argument below.[20] As I would dismiss the appeal for other reasons, there is no need to consider the notice of contention.
[20]Transcript 261-277; appeal book 225-241.
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