Wily, Hugh Jenner v St George Partnership Banking Ltd
[1997] FCA 1442
•18 DECEMBER 1997
FEDERAL COURT OF AUSTRALIA
CORPORATIONS LAW - whether payments made by company in liquidation to the holder of an uncrystallised floating charge voidable transactions under s 122(1) of the Bankruptcy Act 1966 as applicable to companies in liquidation by reason of s 565 of the Corporations Law - whether regard should be had to s 221P(2) of the Income Tax Assessment Act 1936 in considering whether payments voidable transactions - whether holder of floating charge has equitable interest in the funds the subject of the charge.
Bankruptcy Act 1966, s 122
Corporations Law, ss 474(2), 553E, 554E, 565
Income Tax Assessment Act 1936, s 221P
Companies (New South Wales) Code, s 364
Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360, applied
Re Asiatic Electric Co Pty Ltd & The Companies Act [1970] 2 NSWLR 612, applied
Federal Commissioner of Taxation v Card (1963) 109 CLR 177, applied
The Governments Stock and Other Securities Investment Co Ltd v The Manila Railway Company Ltd [1897] AC 81, referred to
Illingworth v Houldsworth [1904] AC 335, referred to
KLDE Pty Ltd v Commissioner of Stamp Duties (Qld) (1983) 155 CLR 288, applied
Driver v Broad [1893] 1 QB 744, referred to
Hamilton v Hunter (1982) 7 ACLR 295, referred to
Wily v The Commonwealth (1996) 66 FCR 206, considered and applied
Lyford v Commonwealth Bank of Australia (1995) 130 ALR 267, applied
Sheahan v Carrier Air Conditioning Pty Ltd (1997) 71 ALJR 1223, applied
Ex parte Cooper; In re Zucco (1895) 10 Ch App 510, applied
Willmott v London Celluloid Co (1886) 31 ChD 425, applied
In Re Yagerphone Ltd [1935] Ch 392, applied
N A Kratzmann Pty Ltd (in liq) v Tucker (No 2) (1968) 123 CLR 295; applied
Re Discovery Books Pty Ltd (1972) 20 FLR 470, applied
Airservices Australia v Ferrier (1995) 185 CLR 483, referred to and applied
Burns v Stapleton (1959) 102 CLR 97, applied
National Australia Bank v KDS Construction Services Pty Ltd (1987) 163 CLR, referred to
HUGH JENNER WILY v ST GEORGE PARTNERSHIP BANKING LIMITED
NG 3453 of 1996
HILL J
SYDNEY
18 DECEMBER 1997
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
NG 3453 of 1996
BETWEEN:
HUGH JENNER WILY
IN HIS CAPACITY AS OFFICIAL LIQUIDATOR OF SPACE MADE PTY LIMITED (IN LIQUIDATION)APPLICANT
AND:
ST. GEORGE PARTNERSHIP BANKING LIMITED
(FORMERLY BARCLAYS BANK AUSTRALIA LIMITED)RESPONDENT
JUDGE:
HILL J
DATE OF ORDER:
18 DECEMBER 1997
WHERE MADE:
SYDNEY
THE COURT DECLARES THAT:
The following payments made by Space Made Pty Limited to the respondent are not voidable transactions pursuant to s 122(1) of the Bankruptcy Act 1966, as applicable to companies in liquidation by reason of the provisions of s 565 of the Corporations Law:
$900,000 on 15 February 1991;
$100,000 on 19 April 1991; and
$112,000 on 29 April 1991.
THE COURT ORDERS THAT:
The applicant pay the respondent’s costs.
Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
NG 3453 of 1996
BETWEEN:
HUGH JENNER WILY
IN HIS CAPACITY AS OFFICIAL LIQUIDATOR OF SPACE MADE PTY LIMITED (IN LIQUIDATION)APPLICANT
AND:
ST. GEORGE PARTNERSHIP BANKING LIMITED
(FORMERLY BARCLAYS BANK AUSTRALIA LIMITED)RESPONDENT
JUDGE(S):
HILL J
DATE:
18 DECEMBER 1997
PLACE:
SYDNEY
REASONS FOR JUDGMENT
Mr Hugh Jenner Wily is the Official Liquidator of Space Made Pty Limited (in liquidation) (“the company”). He seeks a declaration that three payments made by the company between 15 February 1991 and 29 April 1991 are voidable transactions pursuant to s 122(1) of the Bankruptcy Act 1966, (“the Bankruptcy Act”) as made applicable to companies in liquidation by reason of s 565 of the Corporations Law (“the Law”). He seeks as well an order that St George Partnership Banking Limited, formerly called Barclays Bank Australia Limited (“the Bank”), the recipient of the payments, repay to him the sum of $1,112,000, that being the total of them.
There is no dispute as to the facts, although to some extent the detail is scant.
As at 15 February 1991 and all relevant times thereafter, the company was unable to pay its debts as they became due from its own money. It was at that time, and at all relevant times thereafter, indebted to the Commissioner of Taxation in the sum of $786,491 for group tax which it had failed to deduct from the salary or wages of its employees and remit to the Commissioner and $872,748 for sales tax which it was liable to pay to the Commissioner but which it had not paid.
On 20 July 1988 the company had executed a deed of charge, to secure all monies then or thereafter owing to the Bank. The charge was a fixed charge on all present and future freehold and leasehold property, plant and machinery, uncalled and called but unpaid capital, goodwill, securities and other personal property and a floating charge on the rest of the “Mortgaged Property” defined as in essence all the undertaking of the company and all its property present or future. The charge was duly registered.
As at 31 January 1990 it appears to have been evident to the company and the Bank that the company’s financial position was not sound. A proposal was put to the Bank that a company called Artisan Industries Pty Ltd (“Artisan”) (“an untraded shelf co”) would borrow from the Bank $600,000 on the security of assets transferred to it by Space Made Industries Limited (“Space Made Industries”) in exchange for issued capital. The money so borrowed would be used by Artisan to purchase stock and debtors from the company. The company would sell by auction its plant and equipment and stock not required by Artisan and use the proceeds of the auction and the sale to Artisan to pay out the Bank. A company called Game Time (Australia) Pty Limited (“Game Time”) was to lend the company $300,000 which was to be used by the company in part to repay the Bank.
On 18 February the proposal was substantially implemented. Space Made Industries took the role of Artisan. It may be that Artisan changed its name, or it may be that Space Made Industries was an existing company and was substituted for it. That is not of any significance for present purposes. All that is necessary to know is that two cheques, one from Game Time for $300,000 and one from Space Made Industries for $600,000, were paid to the company. In each case the Bank provided, by way of overdraft accommodation to the companies making the payment, the funds to enable them so to do. These cheques were then deposited by the company to its account with the Bank and thus reduced the amount the company owed the Bank.
An auction took place on 16 April 1991. Together with the proceeds of the realisation of plant and equipment which had, it seems, been sold privately, the company realised approximately $310,000 before commission. In consequence the company deposited to its account with the Bank certain amounts. Although the evidence suggests that the amount deposited to the company’s account on 29 April 1991 was in excess of the amount of $112,000 referred to in the statement of claim, nothing turns upon this. The effect of the pleadings is an agreement between the parties that there was paid to the Bank by or on behalf of the company and in reduction of the company’s indebtedness to the Bank, $100,000 on 19 April 1991 and $112,000 on 29 April 1991 respectively.
Proceedings to wind up the company commenced on 7 May 1991 and an order was made on 31 July 1991 that the company be wound up and that Mr Wily be appointed its liquidator. The statement of affairs prepared by a director of the company and dated 23 September 1991 shows the company with only two assets as at 31 July 1991, debtors with a face value of $22,763 but a realisable value of $3,908, and a brand name with a realisable value of $1,000. There was an excess of liabilities over assets of $2,576,913.
The deed granting to the Bank its charge provided that that part of the charge which was a floating charge would become fixed upon the giving by the Bank of a notice in writing and without notice, inter alia, on the happening of the following events:
“(k)an application or order is made or a resolution is passed for the winding up of the Company or notice of intention to propose such a resolution is given;
...
(m)the Company is unable to pay its debts within the meaning of section 364(2) of the Companies Code;”.
THE APPLICABLE LAW
The winding up of the company was governed by the provisions of the Law. By force of the Law (s 565(1)), as then applicable, a payment made by a company, which if made by an individual would have been void as against the trustee in bankruptcy is, in the event that a company is wound up, void as against the liquidator. Thus there is incorporated into the Law governing a winding up the provisions of s 122 of the Bankruptcy Act. That section provided at the relevant time as follows:
“(1) A conveyance or transfer of property, a charge on property, or a payment made, or an obligation incurred, by a person who is unable to pay his debts as they become due from his own money (in this section referred to as “the debtor”), in favour of a creditor, having the effect of giving that creditor a preference, priority or advantage over other creditors, being a conveyance, transfer, charge, payment or obligation executed, made or incurred:
(a)within 6 months before the presentation of a petition on which, or by virtue of which, or by virtue of the presentation of which, the debtor becomes a bankrupt; or
(b)on or after the day on which the petition on which, or by virtue of presentation of which, the debtor becomes a bankrupt is presented and before the day on which the debtor becomes a bankrupt;
is void as against the trustee in the bankruptcy.”
For the purposes of its application to a winding up, s 122 is to be read for present purposes as if it referred to the filing of an application to wind up the company, rather than the presentation of a bankruptcy petition.
Although there are obvious analogies between the bankruptcy of an individual and the winding up of a company, there are necessarily differences. In bankruptcy the property of the bankrupt, defined to include amounts divisible among creditors under s 122, vests in the trustee in bankruptcy, but subject to the rights of a secured creditor to deal with property the subject of any security. In the winding up of a company the assets of the company remain vested in the company subject to any security over them, but come under the control of the liquidator who takes the position of the directors, in the absence of an order being made under s 474(2) of the Law vesting the property of the company in the liquidator. So, although proceedings are brought in the name of the liquidator to recover amounts which constitute a preference, if successful, the proceedings will result in an order that the relevant property or money be transferred or paid to the company, rather than the liquidator: Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360 at 372.
Generally speaking, the principles applicable in bankruptcy as to proofs of debt apply to, or mirror, those applicable in a winding up: s 553E of the Law. Section 554E of the Law deals specifically, however, with the lodgment of proofs of debt by secured creditors. A secured creditor may not prove in the winding up for the whole of the secured debt unless the creditor surrenders the security for the benefit of creditors generally. If the secured creditor realises the security and there is a shortfall, there may be a proof in respect of that shortfall. The secured creditor has, what Street J called its “property rights”, existing outside the winding up which it is entitled to enjoy to the exclusion of the liquidator except in so far as there is some statutory inroad made into them: Re Asiatic Electric Co Pty Ltd & The Companies Act [1970] 2 NSWLR 612 at 614.
So too, generally speaking, the statutory order of distribution among creditors in a winding up will mirror that in bankruptcy. Such differences as there are are not, for present purposes, material. In the course of the winding up the liquidator, who is for the purpose of the Income Tax Assessment Act (1936) a “trustee”, was obliged to abide by s 221P of that Act, which was in the following terms:
“(1)Where an employer makes a deduction...from the salary or wages paid to an employee and refuses or fails to deal with the amount so deducted in the manner required by this Division... he shall be liable, and where his property has become vested in, or where the control of his property has passed to, a trustee, the trustee shall be liable, to pay that amount to the Commissioner.”
(2)Notwithstanding anything contained in any other law of the Commonwealth, or in any law of a State or of the Northern Territory -
(a)an amount payable to the Commissioner by a trustee in pursuance of this section has priority over all other debts ... whether preferential, secured, or unsecured;”.
So, the liquidator, having control of the property of the company, was obliged in the winding up to pay to the Commissioner in the present case, in priority to other creditors, the sum of $786,491. The liability of the liquidator is, fortunately, limited to the extent of the assets which vest in, or which are under, the control of the liquidator. It is not unlimited, as the language of the section might otherwise suggest, and the Commissioner at one stage asserted: Federal Commissioner of Taxation v Card (1963) 109 CLR 177.
THE SUBMISSIONS OF THE LIQUIDATOR
It was submitted by senior counsel for the liquidator that the payments made to the Bank in reduction of the overdraft account of the company fell within s 122 of the Bankruptcy Act made applicable in the winding up of the company, notwithstanding the existence of the charge in favour of the Bank. For its part the Bank relied upon its charge. It was, it said, a secured creditor and a payment by a debtor to a secured creditor was not, it argued, a preference, except in a case (not the present case) where a payment to the secured creditor exceeded the value of its security.
The specific submissions advanced by the liquidator may be summarised as follows:
Because the charge was a floating charge and had not crystallised, it conferred upon the Bank no proprietary interest and so was to be ignored in determining whether the payments were preferences for the purpose of s122 of the Bankruptcy Act.
Whether or not the charge conferred a proprietary interest upon the Bank the payments to the Bank had a preferential effect at the time when the payments were made, that being the relevant time to consider the matter rather than the time of an ultimate winding up for, at the time the payments were made, the charge had not crystallised and the Bank was thus unsecured.
Even if s 122 presupposes a notional liquidation taking place on the date of payment (that being contended for by the Bank) that notional liquidation would bring into play the provisions of s 221P of the Income Tax Assessment Act 1936 and in consequence would operate as against the Commissioner to confer upon the Bank a preference which otherwise it would not have.
THE NATURE OF A THE CHARGEE’S RIGHTS TO THE ASSETS THE SUBJECT OF A FLOATING CHARGE
At the forefront of the liquidator’s case lay the submission that a floating charge before crystallisation did not confer an interest in the property the subject of the charge. The argument advanced was that because the charge had not crystallised the Bank had no entitlement to possession of, or indeed any interest in, the monies it received other than as a creditor. To put it in another way, the Bank at the time the payments were made stood, it was said, in no different position to any other unsecured creditor, so that to the extent that it received a benefit in excess of the rateable division of assets among unsecured creditors there was a preference.
For reasons which will emerge, it is not in my view necessary, in the resolution of the present case, to determine whether, as the liquidator contends, a floating charge does not confer an interest in property in equity upon the beneficiary of the security or, as the Bank contends it does. And indeed, considering the already voluminous literature on the subject, I feel somewhat loathe to add yet another expression of opinion to it. However, as it was at the forefront of the liquidator’s argument I feel constrained to deal with the issue.
If I were to approach the matter without regard to precedent or the learned commentaries upon the topic, but rather with an eye to principle, I would be inclined to the view that until a floating charge crystallised it conferred no equitable interest upon the chargee in the assets the subject of the floating charge.
Lord Macnaghten, in two cases, quoted whenever the nature of a floating charge is called into question, assayed descriptions of floating charges as they had developed around the turn of the century. I say descriptions, because his Lordship was careful to make it clear that he was not attempting to provide definitions. So, in The Governments Stock and Other Securities Investment Co Ltd v The Manila Railway Company Ltd [1897] AC 81 at 86 his Lordship said:
“A floating security is an equitable charge on the assets for the time being of a going concern. It attaches to the subject charged in the varying condition in which it happens to be from time to time. It is of the essence of such a charge that it remains dormant until the undertaking charged ceases to be a going concern, or until the person in whose favour the charge is created intervenes.”
Subsequently in Illingworth v Houldsworth [1904] AC 355 at 358 his Lordship said:
“A specific charge, I think, is one that without more fastens on ascertained and definite property or property capable of being ascertained and defined; a floating charge, on the other hand, is ambulatory and shifting in its nature, hovering over and so to speak floating with the property which it is intended to affect until some event occurs or some act is done which causes it to settle and fasten on the subject of the charge within its reach and grasp.”
No doubt Lord Macnaghten would view with some incredulity modern developments in both the drafting and concept inherent in floating charges. Nevertheless, the three essential characteristics which Romer LJ identified in Re Yorkshire Woolcombers Association Ltd [1903] 2 Ch 284 at 295, from which judgment Illingworth was the appeal, may still be found, namely a charge on a class of assets of the company, present or future, the class being one which in the ordinary course of business changes from time to time and the contemplation being that until some future step is taken by or on behalf of those interested in the charge the company may carry on its business in the ordinary way employing that class of assets in the business.
A charge is no more than an agreement that a debt may be satisfied out of a particular fund. What differentiates the floating charge from the fixed charge is that the actual content of the fund will not be capable of identification until the security crystallises, although the general nature of the fund will be known. It would not, however, be correct to say that a floating charge is but a future security. It operates as a present security, in the sense that it will be available to the mortgagee as and from the time it is given, although crystallisation may occur in the future. The charge and remedies to enforce it remain dormant until the happening of some event which the parties agree will operate to fix the security. It takes the form it does because the person giving the charge (“the borrower”) desires (perhaps needs) to deal with the assets the subject of the security in the ordinary course of business, and without the need to seek for each dealing the consent of the chargee.
It is a consequence of the agreement of the lender that the borrower may deal with the assets the subject of the floating charge in the ordinary course of business that the lender is entitled to injunctive relief to restrain the borrower from dealing with the assets otherwise than in the ordinary course of business: Re Hamilton Young & Co; Ex parte Carter [1905] 2 KB 772. In the event of default the Court will intervene to appoint a receiver to permit enforcement of the charge or enforce the contractual rights in the charge by way of specific performance. But it does not follow from the entitlement to injunctive relief that the chargee has an equitable interest in the property the subject of the charge.
There may be said to be an analogy between the nature of the interest of a chargee and that of a purchaser under a contract for the sale of land, although the analogy is far from complete. A purchaser under an unconditional contract of sale clearly has an equitable interest in the property the subject of the agreement. Indeed in such a case the purchaser has been said to be for some purposes, at least, the beneficial owner: KLDE Pty Ltd v Commissioner of Stamp Duties (Qld) (1983) 155 CLR 288. The interest is commensurate with the right of the purchaser to relief in equity by way of specific enforcement. However, if the contract be conditional, so that specific performance of it would not be granted, it is usual to say that no equitable interest is conferred upon the purchaser: eg Brown v Heffer (1967) 116 CLR 344. This is so notwithstanding that the purchaser could obtain injunctive relief restraining the vendor from dealing with the property inconsistently with the contract, and obtain the assistance of the Court to compel the vendor to do that which was necessary on the part of the vendor to have the condition performed: but see the discussion in the joint judgment of Deane and Dawson JJ in Stern v McArthur (1987-8) 165 CLR 489 at 523-4.
So it might be said that even if the holder of a fixed charge has an equitable interest in the subject matter of the charge, the fact that the charge is conditional upon the happening of an event of default, in the sense that it is only then that the charge will become fixed, may suggest that no equitable interest arises until the happening of the event of default.
There is another, and quite close analogy which would produce the same result. A beneficiary in an estate which is subject to a trust for sale has been held not to have an interest in the assets of that estate, which like the assets the subject of the floating charge, may be a fluctuating fund: In re Smyth; Leach v Leach [1898] 1 Ch 89 and cf the rights of an annuitant in a fluctuating fund held in Favorke v Steinkopff [1922] 1 Ch 174 not to constitute an interest in that fund.
However, as I have already indicated, there is a wealth of authority, unfortunately conflicting, on the question.
One line of authority, that in support of the view that the chargee has no equitable interest in the assets the subject of the floating charge, is to be found in Evans v Rival Granite Quarries Limited [1910] 2 KB 979 and is claimed to enjoy the support of Gibbs CJ as expressed in Luckins v Highway Motel (Carnarvon) Pty Ltd (1975) 133 CLR 164 and dicta in United Builders Pty Ltd v Mutual Acceptance Ltd (1980) 144 CLR 673 at 681-2 and 686.
In the former case the question arose whether a debenture holder under a floating charge could, prior to crystallisation of the charge prevent execution against an asset the subject of the floating charge by way of garnisheeing a debt. It was held that the debenture holder could not. In one sense the case required no more to be decided than that execution did not operate to crystallise the particular security. However, in the course of the judgments each of their Lordships commented upon the nature of a floating charge and the rights of the chargee. Buckley LJ said (at 999-1000):
“A floating security is not a future security; it is a present security, which presently affects all the assets of the company expressed to be included in it. On the other hand, it is not a specific security; the holder cannot affirm that the assets are specifically mortgaged to him. The assets are mortgaged in such a way that the mortgagor can deal with them without the concurrence of the mortgagee. A floating security is not a specific mortgage of the assets, plus a licence to the mortgagor to dispose of them in the course of his business, but is a floating mortgage applying to every item comprised in the security, but not specifically affecting any item until some event occurs or some act on the part of the mortgagee is done which causes it to crystallise into a fixed security.... it is a mortgage presently affecting all the items expressed to be included in it, but not specifically affecting any item till the happening of the event which causes the security to crystallise as regards all the items.”
His Lordship continued (at 1002):
“In the result there is nothing to prevent us from affirming the following proposition ... no equity arises in a debenture-holder, whose security is a floating charge ... he must do something to turn his security from a floating into a fixed charge.”
The issue in Luckins was whether a floating charge answered the description of “a charge on property outside the State”. It was not necessary, for the purposes of the case for the Court to decide whether the chargee under a floating charge did or did not have an interest in the assets the subject of the charge. In the course of his judgment Gibbs J, as his Honour then was, cited the description of a floating charge given by Lord Macnaghten in Government Stocks and Other Securities Investment Co Ltd v Manila Railway Ltd set out above and continued (at 173):
“In other words, although a floating charge is an existing charge - a present security - it does not specifically affect any asset subject to it until it crystallises into a fixed security: see Evans v Rival Granite Quarries Ltd.”
One may be forgiven for saying that to say that a floating charge does not specifically affect the asset the subject of the charge is not necessarily to say that the chargee has no equitable interest in the asset. It is no more than a description of a floating charge. The comments in United Builders are if a similar order. Be that as it may the comments of Gibbs J were relied upon by Williams J in Tricontinental Corporation Ltd v Federal Commissioner of Taxation (1987) 87 FLR 453 at 454, as constituting along with other dicta there referred to a “strong line of authority” in support of the proposition that prior to crystallisation the mortgagee has no proprietary interest in the property the subject of a floating charge and the other members of the Full Court of the Supreme Court of Queensland appear to have taken a similar view in following Evans v Rival Granite Quarries Limited. Special leave was refused by the High Court to appeal from this decision.
The view that no equitable interest is created in the chargee was accepted by Nicholson J in this Court in Lyford v Commonwealth Bankof Australia (1995) 130 ALR 267. The issue raised in that case was whether a floating charge might constitute a “settlement” for the purposes of s 120 of the Bankruptcy Act. It was held that because no equitable interest was created in the chargee until the charge crystallised there could be no disposition of property and hence no settlement falling within s 120. His Honour reviewed the authorities and academic literature but considered that in the light of the decision in Tricontinental, the reasoning of which his Honour accepted, no equity was created in the assets the subject of a floating charge until crystallisation.
The contrary line of authorities includes the following cases, all cited by Nicholson J: Driver v Broad [1893] 1 QB 744; Wallace v Evershed [1899] 1 Ch 891 and Re Dawson [1915] 1 Ch 626 in the United Kingdom and Landall Holdings Ltd v Caratti [1979] WAR 97; Hamilton v Hunter (1982) 7 ACLR 295 at 306 per Holland J; Re Margart Pty Ltd (in liq) and Hamilton v Westpac Banking Corp (1984) 9 ACLR 269 at 272 per Helsham CJ in Australia. There is also the decision of a Full Court of this Court in Wiley v The Commonwealth (1996) 66 FCR 206 decided approximately a year later than Lyford which is relied upon by counsel for the liquidator.
In Driver v Broad the issue for decision was whether a floating charge over land required writing for the purposes of the Statute of Frauds. That in turn depended upon whether it was a contract which dealt with “lands, tenements, or hereditaments or any interest in or concerning them”. The argument was that no interest in the land was created. The argument was rejected. The situation was said to be the same whether the charge was fixed or floating. Kay LJ (at 748-749) expressed his Lordship’s view as follows, speaking of a floating security:
“That term only expresses what is more fully expressed in the conditions ...viz, that the company shall, notwithstanding the debentures, be at liberty to carry on its business, and in the ordinary course of such business to dispose of the property, as if the debentures did not exist. That is the ordinary meaning of the term “floating security”. It does not mean that there is not to be a charge and an immediate charge, on the property, but merely that, notwithstanding the existence of the charge on all the property, including the real property, of the company, power is reserved to dispose of the property if in the ordinary courts of carrying on the company’s business it becomes necessary to do so. The charge is none the less a charge because such a power is reserved... I have no doubt that these debentures did create an immediate charge on the land and buildings, which the company had when they were given, and therefore did create an interest in land. “
Re Margart saw Helsham CJ in Eq consider the matter in the context of a realisation of assets of a company after the commencement of the winding up where the proceeds of the realisation were paid to the holder of a charge which was treated in the judgment as not having crystallised as at the time of payment. The argument was that the payments to the chargee were dispositions of its property by the company. It was held they were not. In coming to this conclusion the learned Chief Judge in Equity accepted what had been said by Holland J in the earlier case of Hamilton v Hunter (1982) 7 ACLR 295 where his Honour said (at 306):
“The judgments in some of the cases are expressed, and the plaintiff’s argument was put, as if the mortgagee had no proprietary interest whatever in the assets the subject of a floating charge until ‘crystallization’ occurred. I do not see why that should be so. The correct view would seem to me to be that from the commencement of a floating charge the mortgagee has an immediate and continuing equitable charge over the mortgagor’s assets but it is subject to the right of the company to dispose of or deal with the assets free of or released from the charge to the extent that may properly be implied from the common intention of the parties that the company will continue to carry on its business or operations until the occurrence of some stipulated or contemplated event:”
In the view of Helsham CJ the expression “disposition of the property of the company” with which his Honour was concerned referred only to a disposition of property with which the company was free to deal. Property the subject of a floating charge, albeit that the charge had not crystallised, was not within this description.
In Wily v The Commonwealth the liquidator sought to recover from the Commonwealth amounts which the receivers and managers of a company had paid by way of television licence fees after the commencement of the winding up. The issue was thus the same as in Re Margart, namely, whether the monies paid were dispositions of the property of the company. At the time of payment the charge had crystallised, so that the question whether a chargee had an interest in the assets the subject of a floating charge did not arise for decision. All judges on the appeal accepted the correctness of Re Margart. But they did so not in the context of a floating charge, but in the context of a fixed charge. In my view, the case can not be seen as authority for the proposition that a floating charge does confer an interest in the assets the subject of the charge.
As might be expected the views of academic writers are as diverse as the authorities which they consider. I do not propose to discuss them at length. Ms Everett in her monograph The Nature of Fixed and Floating Charges as Security Devices, Law Press, Faculty of Law, Monash University, 1988 espouses the view that a floating charge confers no proprietary interest. She seems, however, to be of the view (see p2) that fixed charges likewise operate in personam, and confer no proprietary interest, a view somewhat at odds with authority. But perhaps I do her a disservice in so stating her views.
Dr Gough, in his chapter printed in Equity and Commercial Relationships, edited by Professor Finn, as his Honour then was, (The Law Book Co Ltd, 1987) dismissed as a “misconception” the theory that a floating charge creates an immediate, although defeasible interest subject to a licence to deal with the asset. Commenting on that paper (the commentary is included at the end of the chapter) McClelland J points to Driver v Broad and the other English cases mentioned above as holding that such an interest existed, emphasising that none of those cases had been overruled. It emerges from some of his Honour’s comments that he was of the view that consideration should be given to the terms in which the parties to the transaction have expressed themselves, and that different outcomes might flow from them. More recently Dr Gough in his work Company Charges, Butterworths, 1996 has restated his earlier view.His dismissal of some of the cases opposed to his position is not particularly satisfactory. Farrar and Trotman in their chapter “Charges” in Australian Corporation Law, Butterworths, 1991 find Dr Gough’s position unsatisfactory. Professor Ford in his Principles of Corporations Law, Vol 2, Butterworths, 1995 states at 19,141 the two competing theories but comes out in favour of the view that the chargee does have a proprietary interest in the fund of changing assets. Goode in his work Commercial Law, 2d ed, Penguin Books, 1982 appears to support the no interest view.
The result of the above dissertation can hardly be said to be satisfactory. The diverging views stem in part, at least, from the use of inexact language. But not all can be dismissed so easily. On the whole I think that the prevailing view, and the view that accords best with principle is that the chargee under a floating charge does not have an equitable interest in the assets the subject of the floating charge from time to time. The decision in Wily v The Commonwealth does not require me to take a different view. Indeed it cites with approval the decision of Nicholson J in Lyford which, as a matter of comity I would follow unless of the view that it is clearly wrong. In the state of conflicting authority which exists it would be a brave person indeed who would be prepared to say of either view that it is clearly wrong. Hence, if the outcome of the present case depended upon the resolution of that issue, I would find for the applicant. But I do not think that it does. I turn to deal with other and more ultimately significant matters.
WAS THERE A PREFERENCE?
Some brief observations must now be made as to the application of s 122 of the Bankruptcy Act. They are not controversial, but they are important.
First, it must be said that the purpose of s 122(1) is to recoup the estate of a bankrupt where moneys of the bankrupt have been paid preferentially. The recoupment is for the benefit of the general body of creditors, so that they can share rateably in it. To use the language of Gibbs CJ in Sheahan v Carrier Air Conditioning Pty Ltd (1997) 71 ALJR 1223 at 1230:
“The language of s 122(1) - ‘preference, priority or advantage’ - shows that the section is concerned with the effect of payments made to a creditor payee who is in competition with other creditors for a share in the bankrupt’s estate. The only preference with which s 122(1) is concerned is a preference as between the payee and the other general creditors who would otherwise be entitled to share in the money paid.”
Thus the liquidator could not be compelled to bring proceedings to recover an amount for the benefit of a secured creditor, and a fortiori a secured creditor could not bring proceedings, either in his own name or in the name of the liquidator/trustee, to recover a preference: Ex parte Cooper; In re Zucco (1875) 10 Ch App 510; Willmott v London Celluloid Co (1886) 31 ChD 425; (1886) 34 Ch D 147; In re Yagerphone Ltd [1935] Ch 392 at 395 and N A Kratzmann Pty Ltd (in liq) v Tucker (No 2) (1968) 123 CLR 295.
The onus rests upon the liquidator to prove the elements of s 122(1): Re Discovery Books Pty Ltd (1972) 20 FLR 470 at 478. Of course, the tactical onus may shift during a trial, but nevertheless the overall burden will lie with the liquidator.
The elements necessary to be proved are (in a case where the claimed preference is constituted by a payment that is made by a company) :
a payment by the company
the payee of that payment is a creditor;
insolvency of the company at the time of payment;
the preferring effect of the payment; and
the timing of the payment, it being a requirement that the payment be made six months before the relation back date.
The preferring effect is determined objectively. However, as the joint judgment of Dawson, Gaudron and McHugh JJ in Airservices Australia v Ferrier (1995) 185 CLR 483 points out, this does not mean that intent will necessarily be irrelevant, particularly where, the payment may be seen to be part of a wider transaction. So, where the payment is, as it was in Airservices Australia, a payment made in the course of a running account between the debtor and creditor, the purpose for which the payment is made and received may determine the preferential effect.
Further, the question whether the necessary preferential effect exists must be considered as at the time the payment is made and not at the date of actual liquidation: Airservices Australia at 501, note 511 and the cases there referred to. What that means, as the cases such as Re Discovery Books makes clear, is that while the effect of the payment is to be judged after bankruptcy, the creditors to which s 122(1) refers are the creditors as at the time of the payment. Ultimately one comes back to decide whether there is less money available to the general body of creditors as a result of the payment than would otherwise have been the case.
A payment will be a preference where if it stands it would “dislocate the statutory order of priorities amongst creditors”: Burns v Stapleton (1959) 102 CLR 97. From this it follows, at least in the ordinary case, that the payment to a secured creditor in full or partial discharge of a secured debt will not be a preference, for it will not dislocate that statutory order. Thus, in a passage relied upon by the Bank the High Court comprising Mason CJ, Brennan, Deane, Dawson and Toohey JJ, said in National Australia Bank Ltd v KDS Construction Services Pty Ltd (1987) 163 CLR 668 at 679:
“a payment received in discharge of a valid security cannot amount to a preference, priority or advantage within the meaning of s 122(1).”
If that is an absolute proposition applicable to the Bank’s security, there is nothing further to be said. However, there are two problems about accepting it to be so. The first is that the reference in the case to a valid security was a reference to a subsisting lien. The statement was not necessarily made in the context of a charge which was, at the time the payment was made, a floating charge. The second, is that the statement would, with respect, seem in any event too wide. There seems no reason in principle to doubt that a payment made to a secured creditor in reduction of his debt could be a preference where the payment made exceeded the value of the security so that the secured creditor received an amount greater than the creditor would have received as an unsecured creditor in the bankruptcy. To the extent that the security is inadequate the secured creditor may be treated for the purpose of insolvency laws as unsecured. But that is not the issue presently falling for consideration.
The argument advanced for the liquidator is simple. It commences with the uncontroversial proposition stated above that the time for determining the preferential effect is the time the payment is made. It is then said, that as at this moment of time (contrast the situation at the time of liquidation when the charge would have crystallised) the Bank was merely the beneficiary of an uncrystallised charge, that is to say the Bank had no status at all as a secured creditor. Had a winding up taken place at this point of time the Bank would, of necessity, so it is said, have been required to share rateably with other creditors, the charge not having crystallised. So it is submitted, the payment was preferential, in that it preferred the Bank to the other unsecured creditors.
The submission is, in my view, misconceived. I think it places rather more emphasis on the preferential effect as at the time of payment than was intended by the High Court in the passage from Airservices Australia cited above on the authority of which the submission is made. While one takes into account the creditors as at the time of payment, and not bankruptcy, one judges the preferential effect of the payment after the bankruptcy, but paying due regard to the events occurring at and after the time of payment. To determine whether there is a preference within the section it is necessary to determine whether the statutory order on winding up is dislocated in consequence of the payment to the creditor. For this purpose it probably matters not whether one considers the matter by reference to the actual bankruptcy or some hypothetical bankruptcy deemed to take place as at the time of payment, so long as one bears in mind that the other creditors of which s 122(1) speaks are creditors as at the time of payment. That is to say there is to be made a comparison between what the payee obtained on the one hand and what the payee and the general body of other creditors would have received had the payment not been made and the statutory order of distribution in the winding up prevailed.
The reason why payment to a secured creditor (at least where the payment is not in excess of the value of the security) will not constitute a preference is because the general body of creditors will receive not a cent less in the bankruptcy than they would have received had the payment not been made. This is so whether the matter is tested at the time the payment is made by reference to the advantage on that day (in which event presumably the advantage is to be tested by reference to a hypothetical liquidation on that day) or by looking ultimately at what would later be available for distribution in the actual bankruptcy.
But the same result will follow where the security is a floating charge. If it is necessary to determine the advantage as at the date of payment, then in a hypothetical liquidation the charge will have crystallised (presentation of a winding up application being an act of default) and the chargee would be entitled to enforce its security. If one looks at the matter by reference to the ultimate liquidation the same result necessarily follows for the chargee is entitled to deal with the assets charged pursuant to the security. In no way can it be said as a matter of language that the payment to the Bank could operate to prefer the Bank over the general body of creditors existing as at the time of the payment.
Likewise, it is clear that the policy behind s 122 and the Bankruptcy Act generally is in no way breached by the result which the language of s 122(1) requires.. Bankruptcy is designed to ensure that the assets of a bankrupt will be distributed rateably among creditors save, in respect of secured creditors who do not surrender their security, that such creditors may exercise the rights which their security grants. Section 122(1) is designed to claw back payments made within six months of the bankruptcy which alter the rateable division by giving to one creditor an advantage that creditor would not have as against the general body of creditors in the bankruptcy. In the bankruptcy the chargee under a floating charge would be entitled to exercise its security rights.
Had the payment not have been made to the Bank but the money retained by the company no creditor (for present purposes I leave aside the statutory priority of the Commissioner of Taxation) would have received a cent more than will now have been received. The general body of unsecured creditors would share rateably only the assets not subject to the charge which on liquidation at the latest crystallised. To say, therefore, that some preference or advantage accrued to the holder of a floating charge by virtue of a payment made before bankruptcy smacks of unreality. The payment to the Bank did not, to use the language of the majority judgment in Airservices Australia (at 502):
“result in a decrease in the net value of the assets that are available to meet the competing demands of the other creditors.”
It is necessary, therefore, to consider whether this situation is altered, by virtue of the statutory priority given to the Commissioner of Taxation over secured creditors by force of s 221P(2) of the Income Tax Assessment Act.
THE COMMISSIONER’S STATUTORY PRIORITY
The provisions of s 221P(2) are, to say the least, “incredibly ill-drawn”: per Menzies J in Commissioner of Taxation v Card (1963) 109 CLR 177 at 194. Perhaps the kindest thing that can be said of the section is that it has now been repealed.
The submission which is advanced on behalf of the liquidator is that in considering whether a payment is a preference voidable under s 122(1), regard is to be had to s 221P(2). The consequence of the submission is that any payment to a secured creditor in circumstances where s 221P was ultimately applicable in the liquidation would be a preference, for it would result in the Commissioner as a result receiving less in the distribution to be made by the liquidator than would otherwise be the case. The submission, if correct, provides yet another qualification to the statement of the High Court in KDS Construction Services to which reference has earlier been made.
In my view the submission is not correct. What s 122 is concerned with is the giving of a preference to the recipient of a payment over and above the general body of creditors. It is concerned with the dislocation of the statutory order on a winding up, as that order is embodied in the Bankruptcy Act, or the Law, not with the avoidance of a payment where the competition is between one secured creditor and another (the Commissioner whose rights under s 221P are analogous to those of a secured creditor having security over the whole insolvent estate) where the rights of both stand outside the insolvency legislation.
WHEN DID THE FLOATING CHARGE CRYSTALLISE?
It is appropriate now to note an argument of construction advanced by the Bank. It will be recalled that among the events of default which operated to crystallise the charge was the company becoming unable to pay its debts within the meaning of s 364(2) of the Companies (New South Wales) Code. It is argued that, having regard to the concession that the company was at the time of payment unable to pay its debts as they fell due, the charge had crystallised, with the consequence that the Bank was the beneficiary of a fixed charge, and in consequence at all relevant times clearly a secured creditor.
Section 364(1) of the Companies (New South Wales) Code set out the grounds upon which a winding up order might be made, one of which is inability to pay debts. Subs (2) then provides:
“For the purposes of sub-section (1), if-
(a) a creditor by assignment or otherwise to whom the company is indebted in a sum exceeding $1,000 then due has served on the company a demand...
(b)execution or other process issued on a judgment, decree or order of any court in favour of a creditor of the company is returned unsatisfied in whole or in part; or
(c)the Court, after taking into account any contingent and prospective liabilities of the company, is satisfied that the company is unable to pay its debts,
the company shall be deemed to be unable to pay its debts.”
It is clear that neither pars (a) or (b) of the section apply. It is submitted for the Bank that the reference to s 364(2) should be interpreted so that even if pars (a) and (b) are not satisfied, if the company is unable to pay its debts that sufficies. For the liquidator it is submitted that the par (c) could only be called in aid if a Court had actually formed the satisfaction which is referred to in the paragraph. Since that had not happened, there had been no crystallisation.
Neither interpretation is completely satisfactory. It can not have been intended that par (c) of s 364(2) have a literal application because the only way a Court could come to form a view under par (c) would be if a winding up application had been filed. But the filing of such an application is itself an act of default. So par (c) could never have application if it depended upon the Court forming an opinion. The question of interpretation is thus whether the reference to s 364(2) in cl 10(2)(m) of the deed of charge should be read as a reference only to pars (a) and (b), or whether the reference should be taken to encompass actual inability to pay debts in circumstances where a Court could reach no conclusion other than such inability.
The question is one of impression. However, I am of the view that the proper interpretation of cl 10(2)(m) of the deed is that the reference to s 364(2) of the Companies (New South Wales) Code is a reference to so much of that section as could have application, that is to say, pars (a) and (b), with par (c) being, in the circumstances, otiose. I reach this conclusion fortified by the fact that the question whether a company is unable to pay its debts after taking into account contingent and prospective liabilities may well be a matter upon which minds could differ. It is for that reason that the Court is given a discretion in s 364(2)(c). The test would well be too vague and subjective to stipulate as an event operating to crystallise a charge. It would be vital that the parties would know with some precision that such an event has occurred. Each of the other matters chosen as acts of default in the deed are objectively ascertainable and involve no element of judgment.
WHETHER THE LIQUIDATOR SATISFIED THE ONUS OF PROOF
It was submitted on behalf of the Bank that the liquidator had not discharged the onus upon him to show the necessary preferential effect, assuming, as against the Bank that it was not for the purposes of s 122(1) to be treated as a fully secured creditor.
I do not accept the submission. It is true that the evidence of the events in February and April 1991 is somewhat scant. However, it can be inferred that at the time of the payments there were no, or virtually no, assets subject to the fixed charge, those assets having been disposed of either at the auction or by sale to Space Made Industries. I am satisfied that the liquidator has demonstrated that if the Bank were to be treated as an unsecured creditor the payments would have had the effect of preferring the Bank over the general unsecured body of creditors.
THE CIRCUMSTANCES OF THE IMPUGNED PAYMENTS
It was submitted by counsel for the Bank that when consideration is given to the circumstances as a whole in which the payments made to the Bank occurred there was no preference.
It is beyond controversy that in a particular case it may be necessary to look beyond the mere fact that payment has been made to a creditor in determining whether a payment has the necessary preferential effect: Richardson v Commercial Banking Co of Sydney Ltd (1952) 85 CLR 110 and Airservices Australia v Ferrier (1996) 185 CLR 483. Rather it is necessary to consider, as was said in the latter case (at 501-502):
“whether by reason of the payment, or dealing, there is less money available for the general body of creditors.”
Where a payment forms part of a “wider transaction” or “running account” the facts may lead to the conclusion that the net effect of the transaction was not to give one creditor a preference, priority or advantage over other creditors.
I fail to see on the present facts how reference to the overall transactions between the company, the Bank and related companies which I have earlier described avoids the conclusion that the payments in the present case would not have had a preferential effect if the Bank were to be regarded as an unsecured creditor. The facts make it clear that the intention of the transaction was to see the Bank paid out. The transaction has to be seen against the background described in a letter from the Chief Executive Officer of the company to the Bank dated 31 January 1990 of “liquidity problems within the group”. The transaction is one where the Bank’s facility with an insolvent company is wholly repaid and the business of that company transferred to a related company which the Bank finances. Far from demonstrating a non preferential effect, an examination of the wider transaction reinforces the preferential effect.
CONCLUSION
In summary, I am of the view that if the Bank is to be treated as an unsecured creditor, each of the payments would have the effect set out in s 122(1). I would find also that the Bank’s floating charge had not crystallised at the time of any of the payments. However, I am of the view that, whether or not the Bank as chargee under its floating charge had a beneficial interest in the assets of the company the subject of the floating charge, payments by the company to the Bank in repayment of monies secured by the floating charge will not constitute a preference. Put in another way, I am of the view that the Bank is in the same position vis a vis s 122(1) as it would be if it had held a fixed charge. Further it is my view that for the purposes of s 122(1) consideration should not be given to s 221P(2) of the Income Tax Assessment Act, which stands outside the ordinary administration in bankruptcy of an insolvent company. Preference is to be determined by reference to the general body of creditors, not by reference to the statutory right which in the event of a winding up accrues to the Commissioner by force of the Income Tax Assessment Act.
Accordingly, I would declare that the payments referred to in par 1 of the application were not voidable transactions pursuant to s 122(1) of the Bankruptcy Act as applicable to companies in liquidation by reason of the provisions of s 565 of the Law and order that the liquidator pay the costs of the Bank.
I certify that this and the preceding twenty-two (22) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Hill
Associate:
Dated: 18 December 1997
Counsel for the Applicant: BAJ Coles QC and MA Ashhurst Solicitor for the Applicant: McCrohon Bergeng Counsel for the Respondent: SD Epstein Solicitor for the Respondent: Gadens Ridgeway Date of Hearing: 8 & 9 December 1997 Date of Judgment: 18 December 1997
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