Walsh v Salzer Constructions

[2001] HCATrans 515

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Melbourne  No M4 of 2001

B e t w e e n -

JOHN MARTIN WALSH as Liquidator of THOMPSON LAND LIMITED (In Liquidation) (Receiver and Manager Appointed)

Applicant

and

SALZER CONSTRUCTIONS PTY LTD

Respondent

Application for special leave to appeal

McHUGH J
GUMMOW J

TRANSCRIPT OF PROCEEDINGS

AT MELBOURNE ON FRIDAY, 14 DECEMBER 2001, AT 9.59 AM

Copyright in the High Court of Australia

MR D.M.B. DERHAM, QC:   May it please the Court, I appear with my learned friend, MR A.P. RODBARD‑BEAN, for the applicant.  (instructed by Abbott, Stillman & Wilson)

MR .A.C. ARCHIBALD, QC:   May it please the Court, I appear with my learned friends, MR G.T. BIGMORE, QC and MR M.J. GALVIN, for the respondent.  (instructed by Clayton Utz)

McHUGH J:   Yes, Mr Derham.

MR DERHAM:   If your Honours please, we have advised our learned friends and I understand a letter has been written to the Registry in which we intimated ‑ ‑ ‑

McHUGH J:   Yes, that you are pursuing ground 6 and 7, is it not?

MR DERHAM:   Yes.

GUMMOW J:   Section 120 is out?

MR DERHAM:   The section 120 point is not being pursued, your Honour, so that the application for special leave is confined to the issues concerning section 122 of the Bankruptcy Act.  May I begin by submitting, with respect, that the error into which we submit, with respect, that the Court of Appeal fell, although arising initially as a question of construction of the guarantee in question, has substantial effect in the administration of bankrupt estates and the winding up of companies throughout Australia because it casts a shadow over what is and what is not a contingent liability for the purposes of both bankruptcies and winding ups.

Could I take your Honours to page 64 of the application book just to identify, if needs be, what we submit to be the error and exemplify it.  At paragraph 14 of the judgment, which is the judgment of President Winneke on that page, he deals with the substantial point upon which the case was decided in the Court of Appeal in saying, after reciting submissions that were made to the court:

These submissions might have had substance were it not for the view, to which I have come, that his Honour’s findings that, at the relevant times, TLL was either actually or contingently liable to Salzer pursuant to the Thompson Land Guarantee were in error.  I agree with the submissions made by Mr Archibald, on behalf of Salzer, that no liability did arise, or could have arisen, in TLL pursuant to clause 1 of that Guarantee until such time as the restrictive pre‑conditions referred to in that clause had been fulfilled.  Notwithstanding that five of the six payments were overdue by reference to clause 12(e) of the building contract, that was not a default which had arisen and remained unremedied by TPM in accordance with clause 16 of the building agreement within the meaning of clause 1.1.2 of the Performance Guarantee.  In my view no liability, contingent or otherwise, could arise in TLL as a surety pursuant to clause 1 of that Guarantee – and thus no capacity in TLL to prove in the bankruptcy – until such time as the necessary steps required to be taken by Salzer under clause 16 of the building contract and clause 1 of the Performance Guarantee had been taken by Salzer.  Only then would there be any liability to TLL “to rectify” pursuant to the Guarantee.

Now, in our respectful submission – and I will take your Honours to the guarantee in a moment – this guarantee is in principle no different in effect from the general run of guarantees, a common form which is subject to two events or contingencies:  one, default by the principal debtor; and, two, the making of a demand by the creditor upon the guarantor.  They are events which may or may not happen, just as the events which in this case are described in the performance guarantee, which can be seen at page 60 of the application book, are events which may or may not happen.  So at page 60 in paragraph 9 President Winneke recites the terms of the guarantee:

“1.      Subject to:

1.1.[Salzer] having remedied any default (as defined by the Building Agreement . . . 

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

1.3.[Salzer] having not exercised any right to determine the Building Agreement without first giving [TLL] by notice in writing within a period of 7 days from the day of receipt of the said notice to remedy the default by TPM;

1.4.as at the date of service of the notice referred to in this clause 1, the Building Agreement being valid and enforceable;

Then upon service by [Salzer] of a written notice (Builder’s Notice) served in accordance with clause 19 of the Building Agreement specifying the said default by TPM, the Guarantor shall rectify the said default within 7 days –

Now, this is a guarantee, if one likes to classify guarantees in the way in which this Court did in Sunbird Plaza, is in the context of a building agreement pursuant to which progress payments are made by the owner to the builder, a guarantee of the first class where, upon default, the creditor is in a position to demand and, in default of the demand being met, to sue for a debt in the sum the subject of the demand.

The authorities show pretty clearly, in our submission, that this is a contingent liability within the meaning of section 82 of the Bankruptcy Act and, therefore, section 122 of the Bankruptcy Act embraces within the meaning of the creditor/debtor relationship a relationship arising between the creditor and contingent debtor, which in this case is Thompson Land or TLL. 

If there is any doubt about that, your Honours, I would seek to take you to, in the first instance, the decision of Community Development Pty Ltd v Engwirda Construction Company (1966) 120 CLR 455. It was in the bundle that we handed up, the ninth case or document. That was a case, curiously enough, involving a construction agreement, a building contract, and one of the issues was the question of a contingent liability arising. At page 459 Justice Kitto in the first main paragraph beginning on that page, about point 3, says:

Not much assistance is to be gained, I think, from observations that are to be found in reported cases as to the import of the word “contingent”, and I shall refer to one only.  In In re William Hockley Ltd, Pennycuick J suggested as a definition of “a contingent creditor” what is perhaps rather a definition of “a contingent or prospective creditor”, saying that in his opinion it denoted “a person towards whom, under an existing obligation, the company may or will become subject to a present liability upon the happening of some future event or at some future date”.  The importance of these words for present purposes lies in their insistence that there must be an existing obligation and that out of that obligation a liability on the part of the company to pay a sum of money will arise in a future event, whether it be an event that must happen or only an event that may happen.

Now, Justice Owen at greater length deals with the same point, but the point is that this guarantee is the existing obligation and the events which may happen are the contingencies upon which the liability will mature into a fixed liability.  So we say that accepting or given that the test for the definition, if you like, of the relationship of a creditor and a debtor under section 122 is, as we have submitted in our submission, on the authorities clearly determined by reference to section 82, which permits contingent liabilities to be proven in a bankrupt estate.  Accordingly, there has to be arising ‑ ‑ ‑

GUMMOW J:   But there is a lot of authority on what “contingent” means for section 82.

MR DERHAM:   There is, indeed.

GUMMOW J:   And your complaint really has to be that this just miscarried.

MR DERHAM:   It just miscarried and it is the consequences of the miscarriage which we submit make it important for this Court to determine the issue.

McHUGH J:   But why, Mr Derham?  In the end, the Court of Appeal held that there was no debtor/creditor relationship that had arisen, or could have arisen, until the various events referred to in clause 1 had occurred.  Now, they might be right or wrong about that, but why is it a special leave point?

MR DERHAM:   For these reasons, your Honour.  The authorities establish pretty clearly that sureties are, generally speaking, in a position to prove in the winding up of companies and in bankrupt estates.  This decision of a superior court, a court of appeal, is going to impact upon, and create uncertainty in, that area.  That is the first point, but there is a more significant flow‑on effect we submit:  for the purposes of section 122 it will throw into doubt claims of this kind which arise from time to time which turn upon the existence of contingent liabilities.

McHUGH J:   Well, I suspect that this decision, unless you have a case on all fours, will have very little, if any, effect on ‑ ‑ ‑

MR DERHAM:   Well, it may not be an aphorism, your Honour, but it is likely to be used and we submit it leads to another point, which is the point upon which the primary judge denied the claims of the applicant, and that is Justice Byrne said, “Well, I find the creditor/debtor relationship is established on the basis, amongst other things, that clause 1” – the clause that I have read out – “does give rise to a contingent liability”.  He got, with the greatest respect, we submit, that question right, but he went on to say, “But in this case the payment actually made was not made by Thompson Land qua debtor”.

Now, there is a serious problem because it provides a gloss on section 122 which we submit should not be made and the cases do not support.  The one case which provides the foundation for that ‑ ‑ ‑

McHUGH J:   But you do not get to that point, do you?

MR DERHAM:   We get to that point if we are right in the error and, in our respectful submission, leaving the primary judge’s, the trial judge’s, decision on that is itself going to create a problem in the area of the administration of estates and the winding up of companies because there will be authority which has to be followed, for example, in our Supreme Court by the masters and by likely other justices of the court which we submit needs to be settled.

Now, the decision which was relied on by Justice Byrne in support of that finding was a decision called Expo International v Torma and reference is made to it by Justice Byrne at page 19 of the application book.  It is this point which we would say, if we are successful in persuading the Court that the Court of Appeal made an error, becomes a matter of general public importance.

McHUGH J:   I suspect this is what you are really concerned about in this application.

MR DERHAM:   It is, indeed.

McHUGH J:   Yes.

MR DERHAM:   It is what will put a spanner in the works in all bankruptcy administrations and it can be seen, I think, in paragraph 33 of Justice Byrne’s decision.  He says:

Accordingly, it was submitted on behalf of Salzer that, even if Salzer was a creditor of Thompson Land and the payment in each case had the effect of discharging its liability to Salzer in whole or in part, it was, nonetheless, not a payment made by Thompson Land qua debtor to Salzer as its creditor.  It was put that the payments made by it or by the HongKong bank at its direction were made in its capacity as treasurer for the Thompson Group including TPM.  I was referred to the dictum of Hope JA, speaking for the Court of Appeal, in Expo International Pty Ltd (in liq) v Torma (1985) 3 NSWLR 225 at 229.

“In my opinion, a person to whom a payment has been made by a company within six months of its winding up does not obtain a preference merely by reason of the fact that he happens to be a creditor of the company.  In order for the payment to be a preference it must be made to the payee in his capacity as a creditor of the company and not otherwise.”

Now, the first part of that quotation, we submit, is unarguably correct.  The second part draws a conclusion which goes too far.  The facts of that case involved a finding that the payment the subject of the claim was, in fact, a payment for the purchase of shares from the creditor.  So it become possible for the court to find that there had been any debt discharged, in effect, so that the effect of the payment could not be found under section 122 to confer a preference.

What, in our submission, Justice Byrne has done is to provide a gloss on the operation of section 122 because it is the effect of the payment for pretty much all purposes that must be looked at and not whether or not the particular payor intended it to be a payment of the debt or contemplated it being a payment of the debt or, indeed, whether the moneys which provided the source, which happened to be the moneys of Thompson Land, provided the reason for Thompson Land to make the payment, as Justice Byrne found at page 19 of the application book.

So we say in that circumstance, your Honours, that there is an important question.  It does arise, or will arise, upon this Court finding the error in the Court of Appeal’s reasoning, as we submit it was, and it will settle an issue of significant importance in this area of the law.  If your Honours please.

McHUGH J:   Thank you, Mr Derham.  Yes, we need not hear you Mr Archibald.

The applicant complains of an error in the statement of principle by Justice Byrne which appears in paragraph 33 of his judgment.  Undoubtedly the statement there raises an issue which in other circumstances might very well attract the grant of special leave.  Nothing that we say in this case is to be taken as accepting the correctness or otherwise of what Justice Byrne said in that particular passage.  However, the point of principle cannot be reached unless this Court was to reverse the finding of the Court of Appeal that there was no debtor/creditor relationship that had arisen or could arise under clause 1 of the performance guarantee until the various antecedent events referred to in clause 1 had occurred.

The question whether or not there was a debtor/creditor relationship is not itself a matter that would warrant the grant of special leave.  It turns on the construction of the particular agreement.  That being so, it may be that the point of principle would not be reached.  Accordingly, in our view this is not a suitable vehicle for the grant of special leave.  The application is refused and it must be with costs.

AT 10.17 AM THE MATTER WAS CONCLUDED