Insolvency - Preferential payments - Running account - Doctrine of ultimate effect - Ultimate rather than immediate purpose of payment relevant - Court to look at business effect of parties' dealings - Whether payment results in decrease or increase in the net value of available assets - Whether payment in reduction of initial indebtedness - Relevance of appropriation of a payment to a past debt - Purpose of s 122 of the Bankruptcy Act 1966 (Cth).

Corporations Law, s 565. Bankruptcy Act 1966 (Cth), s 122.

3. Set aside the order of the Full Court of the Federal Court and in lieu save with respect to costs, be allowed.

4. Declare that the sum of $1,700,703.16 paid by Compass Airlines Pty Ltd (in liq) to the appellant was a preference and void as against the liquidators.

5. The respondents pay the appellant's costs of the appeal in this Court and four-fifths of the appellant's costs in the Full Court of the Federal Court.

6. The appellant pay the respondents' costs of the cross-appeal.

Notice: This copy of the Court's Reasons for Judgment is subject to formal revision prior to publication in the Commonwealth Law Reports.

BRENNAN CJ. Compass Airlines Pty Ltd ("Compass") went into liquidation upon its own application filed in the Federal Court of Australia on 20 December 1991. The respondents are the liquidators. Prior to the liquidation, Compass had conducted the business of a passenger transport airline. It utilised the airport and air navigation services provided by the Civil Aviation Authority ("CAA") which were essential to the conduct of the airline. CAA was authorised (1) to determine the charges for the services it provided and penalties for their late payment. In accordance with those determinations, CAA invoiced Compass for charges for services provided and for penalties. Compass fell into arrears in paying the invoices but from time to time made payments in respect of some of the amounts owing to CAA. CAA was entitled to impose liens on the Compass aircraft to secure the payment of unpaid charges after a payment period had expired (2), but it did not do so until 28 November 1991. These liens ceased to have effect on 1 December 1991 but liens were again imposed on 18 December 1991, virtually on the eve of the Compass application for winding up. In the six-month period prior to winding up (20 June 1991 to 20 December 1991 - hereafter "the preference period") Compass made nine payments to CAA totalling $10,351,523.90. The liquidators sought an order pursuant to s 565 of the Corporations Law that the payments made during the preference period had the effect of giving CAA a preference, priority or advantage over other creditors of Compass and as such were void as against the liquidators. After the action was commenced, the assets and liabilities of CAA were statutorily transferred and imposed on two new corporations: Civil Aviation Safety Authority and Airservices Australia (3), the present appellant. Airservices Australia was substituted as a party to this litigation (4).

2. By s 565 of the Corporations Law preferential payments by a corporation that would be void as against a trustee in bankruptcy if made by a natural person are void as against the liquidator of the corporation. Section 565 thus applies mutatis mutandis to a corporation in liquidation the provisions of s 122 of the Bankruptcy Act 1966 (Cth):

"(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 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."

At all material times Compass was unable to pay its debts as they became due from its own money.

3. Section 122(1) does not affect "the rights of a ... payee in good faith and for valuable consideration and in the ordinary course of business": s 122(2)(a). A payee seeking the benefit of that exception carries the burden of proving the matters that attract the exception (5). A payee is unable to prove "good faith" if the payment was made "under such circumstances as to lead to the inference that the (payee) knew, or had reason to suspect:

(i) that the debtor was unable to pay his debts as they became due

(ii) that the effect of the conveyance, transfer, charge, payment

or obligation would be to give him a preference, priority or advantage over other creditors." (6)

4. The history of the dealings between Compass and CAA shows that CAA must have known or, at the least, had reason to suspect at all times during the preference period that Compass was unable to pay its debts as they became due from its own money. And, if the payments made by Compass to CAA had the effect of giving a preference, priority or advantage (hereafter collectively a "preference") to CAA over other creditors, CAA, which knew it was competing for payments against other creditors of Compass, had reason to suspect that the effect of the payments would have been to give CAA a preference. The only issue in the present case is whether the payments made by Compass to CAA during the preference period had "the effect of giving (CAA) a preference, priority or advantage over other creditors".

5. Section 122 of the Bankruptcy Act corresponds with the previous s 95 of the Bankruptcy Act 1924-65 (Cth), the application of which was considered in a line of authority that illuminates the distinction between payments that are preferences and payments that are not. To ascertain whether a payment is a preference, the effect of the payment must be truly identified. Identification of the effect is not always obvious either because the debt discharged by the payment may be uncertain or because the payment and discharge of a debt may be only part of a wider transaction so that the true effect of the payment is to be found in the end result of the whole transaction. Thus in Richardson v The Commercial Banking Co of Sydney Ltd (7), Dixon, Williams and Fullagar JJ said:

"the effect (of a payment) is a consequence of the payment and ...

where the payment forms an integral, an inseparable, part of an entire transaction its effect as a preference involves a consideration of the whole transaction."

"In considering whether the real effect of a payment was to work a

preference its actual business character must be seen and when it forms part of an entire transaction which if carried out to its intended conclusion will leave the creditor without any preference priority or advantage over other creditors the payment cannot be isolated and construed as a preference."

6. Richardson was a case in which the respondent bank conducted a running account with a bankrupt during the preference period. The arrangement between the bank and the bankrupt was that the bank would meet cheques only if the amounts for which those cheques were drawn would not exceed the amounts first paid into the credit of the debtor's account. Cheques were met in accordance with this arrangement. In reference to payments made to the credit of the account before the cheques were met, their Honours said (9):

"The burden of showing that a preference resulted is upon the

Official Receiver, and we know that in the result there was none actually enjoyed by the bank. To infer that at a point the bank obtained one but that it was freely sacrificed by the spontaneous making of further advances by honouring cheques would we think be wrong. The true reading of the circumstances, we feel little doubt, is that the deposits were made on the footing that so far as the respective deposits would carry, the cheques coming in would be honoured, if it was not decided in consultation that to dishonour them was a safe and better course."

Although the payments made to the credit of the account reduced the balance then owing by the bankrupt, the Court held that those payments were not void as against the trustee. They found an analogy in a grocer's running account with his customer (10):

"A debtor who pays something off his grocer's account in order to

induce the shop keeper to give him further supplies of groceries can hardly be held, as it seems to us, to give the grocer a preference, if that was the clear basis of the payment. If the grocer credited the money as a payment for the future deliveries instead of the past deliveries of groceries he would in the end be in exactly the same position and yet he could not be attacked as having received a preference. But without stating any principle with an application beyond the facts of this case, it is enough to decide that the payments into the office account possessed in point of fact a business purpose common to both parties which so connected them with the subsequent debits to the account as to make it impossible to pause at any payment into the account and treat it as having produced an immediate effect to be considered independently of what followed and so to be adjudged a preference."

The payments are seen as part of a wider transaction by which the supplier (whether the supplier of credit in the case of a bank or the supplier of goods in the case of a grocer) maintains an ongoing commercial relationship with the debtor, accepting the debtor's payments in reduction of the balance for the time being of the running account but with both parties intending that further credit will be extended. Menzies J pointed out in Queensland Bacon Pty Ltd v Rees (11) that -

"the Court (in Richardson) had in mind a case where the payments

to be made would not exceed the value of the groceries to be supplied".

In such a case, the balance owing on the account would not ultimately be reduced by the payments made.

7. What of the case where the creditor-supplier insists that, although the running account is kept open and some credit arrangement is continued, payments be made in permanent reduction of the balance of the account? This was the situation in Rees v Bank of New South Wales (12) where Taylor J described the arrangement between the debtor company and its banker for the conduct of its current account (13):

"the arrangement was made on the basis that the company would

continue to pay the whole of its takings to the credit of its account with the respondent and that the latter should be entitled during each of the three succeeding months - December 1960 and January and February 1961 - to retain in permanent reduction of the company's indebtedness to the respondent so much of the amounts deposited in each of those months, not exceeding 7,000 pounds per month, as it should think fit. It is, I think, of no consequence that no individual deposit is attacked or can itself be attacked as a preference; it is sufficient for the appellant to show that the company paid moneys into the hands of the respondent partly in order that it might in some limited fashion be permitted to continue trading and partly in permanent reduction of its overdraft indebtedness. To my mind the payments made in pursuance of an agreement to this effect are void TO THE EXTENT TO WHICH THEY WERE, CONSISTENTLY WITH THE ARRANGEMENT IN QUESTION, APPROPRIATED BY THE RESPONDENT IN PERMANENT REDUCTION OF THE OVERDRAFT." (Emphasis added.)

Referring to that arrangement, Barwick CJ said (14):

"Such an arrangement with a company in this company's position,

however beneficient it might prove to the interest of the company and to its other creditors, both in continuing to provide an outlet for their goods and in providing the company with time for recovery, could only be made with safety to the bank if made in consultation with the company's other creditors. To make and implement it without such consultation meant that if the company failed within the statutory time, the bank must be taken to have accepted THE REDUCTION OF ITS OVERDRAFT with at least a suspicion, but I think with knowledge, of the insolvency of the company and that THAT REDUCTION as it took place involved a preference, priority or advantage in favour of the bank over other creditors whose debts were not being met." (Emphasis added.)

Although each payment by the debtor to the credit of the bank account reduced the balance of the debt then owing, the wider transaction of which the payments were a part had the effect of permanently reducing the debt by up to 7,000 pounds per month. The effect of the wider transaction was the amount of the reduction, not the aggregate amount of the payments. It was held that the bank had received a preference to the extent of the reduction in the balance of the overdraft.

8. To be a preference a payment must discharge, pro tanto, an existing debt. But a reduction in the balance for the time being of a running account is not taken to be the effect of a payment if the payment is part of a wider transaction and the wider transaction has some other effect. It is not the manner of keeping the account of credits and debits that is critical to the ascertainment of the effect of a payment. The critical question is whether the payment is in fact only part of a transaction that has a different effect from the discharge or reduction of a particular debt owing by the debtor to the creditor. The paradigm example of such a transaction is that of a creditor who continues to supply an intermittently paying debtor whose payments reduce the balance for the time being of a running account recording debits for what is supplied and credit for the amount paid. In such a case, the question whether a payment is part of a wider transaction depends on the credit arrangements made between the creditor-supplier and the debtor. In Queensland Bacon (15), Barwick CJ described a course of business from which such an arrangement might be inferred:

"the course of business between the company and each creditor was

such that the company could reasonably expect that so long as it paid the creditor's accounts according to the current credit arrangements between them, the creditor would continue to supply upon the company's order and upon the agreed terms of credit, goods in which they were mutually dealing. On the other hand, that course of business was such that the company could expect a rejection of its further orders for goods to be supplied on credit if it failed so to pay the creditor's account. All purchases of the company from the creditor were placed to the debit of the company in a single account in the books of the creditor and all payments made by the company, though generally made in response to and in accordance with specific accounts rendered by the creditor, were credited generally to that account."

In order that a payment be seen as part of a wider transaction, it is not necessary that the credit arrangement at the heart of the transaction be reached expressly. As Barwick CJ said in Queensland Bacon (16):

"In my opinion, it is enough if, on the facts of any case, the

court can feel confident that implicit in the circumstances in which the payment is made is a mutual assumption by the parties that there will be a continuance of the relationship of buyer and seller with resultant continuance of the relation of debtor and creditor in the running account, so that, to use the expressions employed in Richardson's Case (17), 'it is impossible' - I interpolate, in a business sense - 'to pause at any payment into the account and treat it as having produced an immediate effect to be considered independently of what followed ...'."

9. Although the effect of a payment that is part of a wider transaction is ascertained by reference to the effect of the transaction, the extent to which such a payment may be void as against a trustee or liquidator depends on the protection which s 122(2) gives to the creditor in respect of each payment. Sub-section (4) raises some difficulty in applying sub-s (2) to preferences created by payments to the credit of a running account. That is because sub-s (4) requires the creditor's state of mind as to the effect of the payment to be ascertained by reference to the circumstances at the time of the payment. The effect of payments made to the credit of a running account may depend on subsequent debits to the account (18) but s 122(4) speaks of knowledge of, or reason to suspect, what the effect "would be" of a payment at the time of its receipt (19). In Rees v Bank of New South Wales, Kitto J said (20):

"the effect referred to in sub-s (4) is the immediate effect, so

that a creditor who receives a payment from the debtor cannot be held to be a payee in good faith if, at the time of receiving it, he knows or has reason to suspect that the debtor is unable to pay his debts and that the payment, if allowed to stand, will place him in a better position vis-a-vis other creditors than he would occupy if the debtor became bankrupt with the amount unpaid. This is true, in my opinion, even in respect of a payment as to which it is impossible to say without looking to the result of a series of payments in and out whether it is caught by sub-s (1) as having in fact the effect of giving a preference."

In Queensland Bacon (21) Barwick CJ, citing what Kitto J had said in Rees v Bank of New South Wales, said:

"To apply s 95(2), (3) and (4) to this situation, it is of course

necessary to identify specific payments so that their circumstances can be considered for the purposes of s 95(4)."

10. When payments are made to the credit of a running account by a debtor who cannot pay his debts as they fall due out of his own money and the payments effect a reduction in the balance of the account, the amount of the preference that is avoided by s 122(1) as against a trustee or liquidator is limited by s 122(2). In other words, if, by reason of the creditor's knowledge or "reason to suspect" within s 122(4), one or more payments were not made "in good faith" for the purposes of s 122(2), the aggregate amount of those payments is the maximum amount of the preferential payments that are void as against the trustee or liquidator (22). The trustee or liquidator can recover from the creditor no more than the reduction of the balance of a running account or the amount of any individual payment that is not protected by s 122(2), whichever is the less.

11. These lengthy citations of authority have been made in order to base a restatement of the established principles. Relevantly, those principles are:

1. The effect of a payment for the purposes of s 122(1) depends on whether it is paid (a) simply to discharge a debt then owing to the creditor (including the permanent reduction of the balance of an account that is owing at the time of the payment), or (b) as part of a transaction which, if carried out to its intended conclusion, would include future dealings giving rise to further amounts owing by the debtor to the creditor.

2. A payment may be part of a transaction that includes such subsequent dealings although it reduces the amount of a debt owing at the time of payment.

3. Where the payment is part of such a transaction, it is the effect of the transaction that determines the effect of the payment for the purposes of s 122(1).

4. A payment is treated as part of such a transaction if it is made in circumstances showing that it is impossible in a business sense to treat the immediate effect of the payment as the only effect and to omit consideration of dealings subsequent to the payment.

5. If the effect of the transaction is the giving of a preference falling within s 122(1), the amount of the preference void as against the trustee or liquidator does not exceed the amount of any payment or payments that were not protected by s 122(2).

6. The question whether a payment was protected by s 122(2) is determined by reference to the circumstances existing at the time when the payment was made.

12. The question whether the payments made during the preference period are preferences depends on their effect. The appellant submits:

"(a) the effect of conferring a preference of which s 122 speaks

is the final or ultimate effect of the payment rather than its immediate effect, considered in isolation from other, connected events, such as ongoing dealings between debtor and creditor;

(b) if fresh value from the creditor is a consequence, as a matter

of business, of the making of a payment by the debtor, the final effect of the payment cannot be determined without taking into account the fresh value."

The respondent submits that the effect of the impugned payments is to be ascertained by reference to the debt discharged by each payment. If the appellant's submission is correct, there is no preference. Taking into account all debits and credits during the preference period (including the last payment) the amount owing by Compass to CAA increased from $4,301,071.74 on 1 July 1991 to $10,413,598.90 on 20 December 1991. Further, the charges incurred by Compass during the month of December fell due for payment on 1 January 1992. The appellant's argument treats each payment as part of a wider transaction whereby the parties intended to continue a commercial relationship between CAA and Compass pursuant to which CAA would continue to provide and charge for services but would extend credit to Compass which would make payments as against the amount owing from time to time. If that be the correct analysis of the dealings between CAA and Compass, the principle derived from Richardson governs this case.

13. However, the present case, unlike Richardson, Rees v Bank of New South Wales and Queensland Bacon, is not one in which a running account was maintained between creditor and debtor. True it is that Compass paid money from time to time which resulted in a reduction of the total amount owing to CAA but these payments were made in discharge of specific debts, not in reduction of the balance of a running account. Where a debtor owes a number of distinct debts to a creditor and the debtor, on paying an amount, directs that the payment be appropriated to one of those debts (23), or where the creditor thereafter elects to appropriate the payment to one of those debts (24), the debt to which the payment is appropriated is discharged. But in the case of a running account, when no appropriation of a payment to a particular debit item is made either by debtor or creditor, the immediate effect of the payment is not the discharge of a debt itemised in the account. The immediate effect is a reduction pro tanto in the balance of the account and, in so far as it is material to attribute the payment to particular debit items, the rule in Clayton's Case (25) prima facie applies to discharge the oldest debts that have not been discharged by intermediate payments.

14. Invoices were raised by CAA for particular services provided in respect of nominated aircraft and for penalties that were payable in respect of specific charges that were not paid in due time. Compass specified the invoice items in respect of which it made 7 of the 9 payments made during the preference period. The seventh payment, in an amount of $975,532, was paid by Compass on 31 October 1991 without prior appropriation to an invoice item but was then appropriated by agreement to the oldest of the outstanding items. The last of the payments was made on 18 December 1991 in the amount of $1,700,703.16. This payment was made following an agreement reached between CAA and Compass for the payment of arrears by instalments, the first of which was to be paid on 18 December 1991. The agreement provided for a payment on that date of $3,081,102.63, the payment to be made by a "Bank Settlement Plan" on behalf of Compass. The Bank Settlement Plan paid only $1,700,703.16. Compass failed to pay the balance and, shortly after 6.00pm on 18 December 1991, CAA imposed liens on each of the five aircraft operated by Compass for the amounts owing in respect of that aircraft. Except in the case of the last payment on 18 December 1991, the payments made by Compass during the priority period discharged in whole or in part specific debts which had theretofore been unpaid. Although monthly statements were rendered by CAA to Compass which aggregated the items of debt contained in the invoices and showed the aggregate balance (including accrued penalties) owing by Compass, none of the first eight payments was made to reduce the general balance owing on a running account. The last payment reduced the amount then owing by Compass to CAA ($12,114,302.06) to the amount owing at the end of the preference period ($10,413,598.90).

15. The immediate effect of each payment save the last was to discharge a specific debt. The last payment discharged an equivalent amount of the aggregate debt then owing by Compass to CAA. It is difficult to postulate a wider transaction of which the payments formed a part that had some effect different from the immediate effect of the respective payments.

16. Compass was endeavouring to establish an airline in competition with other airlines, attracting custom by offering discounted airfares. The running costs of the operation included the charges and, in the event of late payment, the penalties due to CAA. CAA was doubtful of its authority to refuse to provide services for Compass except on grounds of air safety, even though Compass was continually and increasingly in arrears in its payments.

17. Lockhart J stated his view of the relationship between CAA and Compass as to the withdrawal of services in these terms (26):

"During most of the relevant period I am satisfied that the

Authority and Compass conducted their relations with each other on the basis that the Authority was entitled to withdraw vital services from Compass if it wished to do so."

"In our opinion, the facts show that, throughout the preference

period, there did not exist between Compass and CAA what might be described, to adapt the language of Barwick CJ in Rees, current credit arrangements under which Compass reasonably could expect that so long as it paid accounts according to those arrangements, CAA would continue to provide services.

18. In our view, the primary facts indicate that there was no running account between Compass and CAA, either as regards total indebtedness or by taking the matter aircraft by aircraft. ... The parties conducted their affairs such that debits and credits were recorded in a fashion that attributed them to the particular provision of services and the imposition of penalty interest. There were distinct debts between which the parties distinguished at all relevant times, so that payments were not made merely on account of a 'running' indebtedness.

19. Nor, in our opinion, was there an 'entire transaction' between the parties in the sense that that term was used in Richardson. There were a number of dealings, the occasion or necessity for which arose from (i) CAA's statutory position as sole supplier of certain services required by Compass to operate its business, and (ii) the persistent failure after December 1990 of Compass to pay the charges to CAA under its trading terms as defined by or pursuant to statute.

20. Moreover, there was, in our view, no mutual assumption that CAA would refrain from exercising its remedies, including the imposition of statutory liens or that CAA would supply further services whilst Compass remained delinquent in its payments to CAA: CAA did not so conduct itself that Compass reasonably could expect that CAA would provide further services so long as periodic reductions were made in a 'general debit'."

21. Prior to the commencement of the preference period, Compass had made an agreement to bring its arrears in payment up to date by, inter alia, paying the May 1991 account on 1 July 1991. On 1 July 1991 it made the first of the nine payments during the preference period but that payment fell short of the May account indebtedness. After that default, although CAA continued to provide services to Compass, there was no express credit arrangement made between them until 1 December 1991. During that time, Compass gave assurances that particular payments would be made but those assurances were not met. CAA was trying to get Compass to pay the accounts in arrear but it gave Compass no ground for expecting that, if payment of the accounts were brought up to date (and they were not), CAA would continue to provide services on credit. No doubt Compass hoped or expected that, by making the payments which it did, CAA would be induced to continue to provide services. But the conduct of CAA and the hope or expectation of Compass were not the result of any understanding between them. Each party chose the course it took for its own reasons, though each for its own reasons was hopeful that Compass would remain in business.

22. On 1 December 1991, an agreement was reached calling for an instalment of $3,081,102.63 to be paid off the Compass debt by 4.00pm on 18 December 1991. The ninth payment, made on 18 December 1991, fell short of what had been promised. It is not reasonably open to argument that that payment had any effect other than the reduction of the debt owing to CAA.

23. The appellant's submission that the effect of the payments is to be determined by reference to the ultimate effect of the dealings between creditor and debtor mistakes the material facts. A payment which is made to discharge a specific debt must be given its intended effect. If it were to be treated as if it were a payment in a running account, its intended effect would be denied. The debt intended to be discharged would be revived as an item in that account. Even if, by the payment, the creditor were induced to extend further credit, the effect of the payment could not be other than the intended discharge of the particular debt. Such a payment could be part of a wider transaction having an effect other than the intended discharge of the particular debt only if an arrangement were made between the creditor and the debtor that upon the debtor making the payment, the creditor would extend further credit. The effect of the payment in such a case would be two-fold: the intended discharge of the debt and the earning of further credit. If credit were then extended, the preference (if any) would be the difference between the payment and the credit extended. But that is not the present case. The payments made by Compass provided inducements to CAA to continue to provide services but CAA did not provide those services in fulfilment of any arrangement made with Compass.

24. Before leaving this aspect of the case, mention should be made of CAA's refraining from imposing liens for the charges and penalties on Compass aircraft. The payments made and assurances given by Compass were inducements to CAA not only to continue to provide services but to refrain from imposing liens. At all times during the preference period, CAA had a statutory power (28) to secure Compass' debt by imposing liens on the Compass aircraft but, as Lockhart J found (29):

"During the period of six months before 20 December 1991 Compass

and the Authority conducted their relationship on the basis that the imposition of liens by the Authority would have had a serious adverse effect on the business of Compass and its capacity to continue to carry on that business. Had the Authority imposed liens on the aircraft of Compass (which were all leased to it by overseas owners) and allowed the liens to remain in force, it is plain that the leases would have been terminated by the owners, thus making it impossible for Compass to continue to carry on its business."

CAA was loath to take the step of imposing liens for a number of reasons: it hoped that Compass would trade itself out of its financial difficulties and - having regard to the political implications of diminished competition in the airline industry - it did not wish to be the instrument of triggering the Compass collapse. CAA's refraining from the imposition of liens prior to 18 December 1991 except for a brief period between 28 November and 1 December 1991 was not the result of any overall credit arrangement of which the payments might have formed a part. Rather, the repeated assurances by Compass did assist to induce CAA to refrain from imposing liens. But they were unilateral assurances, not mutual arrangements. It is not possible to infer, either from CAA's provision of services during the preference period or from the non-imposition of liens, that the first eight payments made by Compass were part of some wider transaction that involved an extension by CAA of further credit. For the reasons earlier given, the effect of those payments was no more than the discharge of the debts to which those payments were appropriated. As to the last payment, it clearly conferred a preference by reducing the aggregate amount of the debt owing to CAA.

25. Nevertheless, Lockhart J dismissed the liquidators' claim on the footing that CAA's power to impose liens gave protection to the payments received from Compass. His Honour said(30):

"The Authority was prepared at the request of Compass to forebear

from imposing liens provided Compass made satisfactory arrangements with the Authority with respect to the payment of outstanding and current charges. It is clear from the evidence that, in the absence of those arrangements and adherence to them, the Authority would have imposed liens to secure charges and penalties due to it and taken whatever steps were available to it to secure its position and recover its debt from Compass. The Authority did not impose liens on the aircraft of Compass throughout the relevant period except for the brief period from 5.30pm on 28 November 1991 to 4.10pm on 1 December 1991. Liens were imposed by the Authority at that time because of the inability of Compass to provide a satisfactory assurance to the Authority that outstanding charges and future charges would be paid within a reasonable time. The liens were removed when Compass gave such an assurance to the Authority. The liens were, of course, finally imposed after the end of the commercial relationship between the Authority and Compass.

26. Both the Authority and Compass dealt with each other on the basis that the imposition of statutory liens would be likely to bring the business of Compass to an end. There would have been adverse publicity following such a course of action, the goodwill of Compass would have been adversely affected and the lessors of the aircraft would in all likelihood have terminated the leases. It was for these reasons, together with the giving of assurance by Compass about payment, that the Authority did not impose liens to secure the outstanding indebtedness of Compass.

27. The capacity of the Authority to impose liens existed throughout the relationship between the Authority and Compass during the relevant period. The liens would have remained in force irrespective of any intervening winding up.

28. In these circumstances, in my opinion the payments did not deplete or diminish the assets of Compass available for distribution to other creditors."

29. Assuming that, had liens been imposed at the commencement of the preference period or at some subsequent time prior to the making of the impugned payments, CAA would have obtained a valid security for the debts discharged by those payments, it does not follow that, in the absence of liens, those debts are to be treated as though they were secured and payments made are to be treated as though paid in discharge of secured debts. Had liens been imposed, liquidation might have occurred earlier and the debts provable in that liquidation would have been vastly different from the debts of the creditors in the liquidation which has occurred.

30. As the effect of all payments made by Compass was to give a preference to CAA and as CAA knew, or at least suspected, that Compass could not pay its debts as they became due from its own money and knew, or at least suspected, that any payment received by it would give it a preference over other creditors that were unpaid, the payments made to CAA by Compass during the preference period must be held to be void as against the liquidators.

DAWSON, GAUDRON AND McHUGH JJ. The question in this appeal is whether payments made to the appellant by Compass Airlines Pty Ltd (in liq) ("Compass") during the six month period before its provisional winding up were preferential payments and void as against the liquidators of Compass.

2. The appeal is brought by Airservices Australia ("Airservices") against an order of the Full Court of the Federal Court reversing an order made by Lockhart J which declared that the payments were not preferences. In our opinion, only the last payment was a preference. The appeal should therefore be allowed and the order of the Full Court varied.

3. From December 1990 until it went into provisional liquidation on 20 December 1991, Compass operated an airline from airports controlled by Airservices, then known as the Civil Aviation Authority. During this period, Airservices provided services to Compass with respect to terminal and en route navigation, meteorological information, rescues and firefighting. The Civil Aviation Act 1988 (Cth) (31) authorised Airservices to determine the charge for these services and to impose penalties for late payments.

4. Airservices debited the account of Compass on the first day of each month for the services provided in the preceding month. It debited the account with the amount of penalties for late payment near the beginning or end of a month. Compass made payments during each of the months July-December 1991. But after 1 August, the balance never got below the opening balance on 1 July. As at 1 July, the balance owing on the account was $4,301,071.74, after a debit that day of $2,069,624.66 for charges for the preceding month. On 18 December 1991, the balance owing was $10,413,598.90, after crediting the account with a payment of $1,700,703.16 on that day.

5. Lockhart J found that, between 20 June 1991 and 20 December 1991, Airservices provided services to the value of $19,035,873.91 (32) to Compass and imposed penalties of $719,580.49 in respect of late payments (33). During the same period, Compass made nine payments, totalling $10,351,523.90, to Airservices in respect of these services and penalties (34).

6. The liquidators contend that each of the payments was a payment that gave Airservices a preference, priority or advantage over other creditors of Compass and was void as against them. They rely on s 565 of the Corporations Law. Under that section, preferential payments by a corporation that would be void against the trustee in bankruptcy, if made by a natural person, are void against the liquidator of that corporation. Under s 122 of the Bankruptcy Act 1966 (Cth), a payment made to a creditor within six months of the presentation of a petition on which the debtor becomes bankrupt is void as against the trustee in bankruptcy of the debtor if the payment has the effect of giving the creditor a preference, priority or advantage over other creditors. So the principal question in the appeal is whether any of the payments made by Compass to Airservices during the six months prior to 20 December 1991 had the effect of giving Airservices a preference, priority or advantage over other creditors of Compass at the time that it was made (35).

7. For the purpose of s 122, the effect of a payment on the other creditors of the debtor is determined objectively (36). If the payment has the effect of giving a creditor a preference over the other creditors, it does not matter that neither the creditor nor the debtor intended to give the creditor preferential treatment. As Starke J pointed out in S Richards and Co Ltd v Lloyd (37), the section "looks to the effect of the transaction and not to the intent, or state of mind, of the debtor". But that does not mean that the purpose of the debtor in making a payment has no evidentiary significance.

8. If a payment is part of a wider transaction (38) or a "running account" (39) between the debtor and the creditor, the purpose for which the payment was made and received will usually determine whether the payment has the effect of giving the creditor a preference, priority or advantage over other creditors. If the sole purpose of the payment is to discharge an existing debt, the effect of the payment is to give the creditor a preference over other creditors unless the debtor is able to pay all of his or her debts as they fall due. But if the purpose of the payment is to induce the creditor to provide further goods or services as well as to discharge an existing indebtedness, the payment will not be a preference unless the payment exceeds the value of the goods or services acquired. In such a case a court, exercising jurisdiction under s 122 of the Bankruptcy Act, looks to the ultimate effect of the transaction. Whether the payment is or is not a preference has to be "decided not by considering its immediate effect only but by considering what effect it ultimately produced in fact" (40).

9. As a consequence, a payment made during the six month period cannot be viewed in isolation from the general course of dealing between the creditor and the debtor before, during and after that period. Resort must be had to the business purpose and context of the payment to determine whether it gives the creditor a preference over other creditors. To have the effect of giving the creditor a preference, priority or advantage over other creditors, the payment must ultimately result in a decrease in the net value of the assets that are available to meet the competing demands of the other creditors (41).

10. Thus, where the payment is a step in a wider transaction, "its actual business character must be seen and when it forms part of an entire transaction which if carried out to the intended conclusion will leave the creditor without any preference priority or advantage over other creditors the payment cannot be isolated and construed as a preference" (42). If the purpose of a payment is to secure an asset or assets of equal or greater value, the payee receives no advantage over other creditors. The other creditors are no worse off and, where the value of the assets has increased, they are actually better off. Thus, a debtor does not prefer a creditor to the other creditors (43) if he or she pays a debt, or part of it, to induce the creditor to supply goods of equal or greater value than the amount of the payment. In that situation, it is of no relevance that the debt that is discharged happens to be a stale one (44). If the present value of the goods supplied is equal to or greater than the payment, the other creditors are no worse off. They are in the same position that they would have been in if the parties had so structured the transaction that the debtor paid for the new supply of goods instead of discharging the old debt. Thus, a customer does not prefer his or her banker to other creditors where, pursuant to an antecedent arrangement between the banker and its customer, the customer deposits money to meet a liability already incurred in respect of specific cheques that the banker has met on the faith of the arrangement (45). A court, exercising jurisdiction under s 122 of the Bankruptcy Act, does not allow itself to be unsighted by the shadow of the legal form when it can see that the economic effect of the transaction does not give the creditor any preference, priority or advantage over the general body of creditors.

11. Commonly, however, the relationship between a debtor and creditor will involve more than a single transaction. It will often involve a number of dealings in which goods or services are supplied at regular intervals but the payments for those goods or services neither are made regularly nor, when made, are appropriated to a specific or even the most recent delivery of the goods or services. Like the case of the wider transaction, s 122 does not require the court to look at the immediate effect of a particular payment if "the payment formed an integral step in a unified course" (46) of dealings between the parties. The court looks to the business effect of the parties' dealings which almost invariably proceed on the understanding, sometimes express but more often assumed, that the creditor will continue to supply goods or services to the debtor on a credit basis as long as the debtor substantially adheres to their credit arrangements.

12. If at the end of a series of dealings, the creditor has supplied goods to a greater value than the payments made to it during that period, the general body of creditors are not disadvantaged by the transaction - they may even be better off. The supplying creditor, therefore, has received no preference (47). Consequently, a debtor does not prefer a creditor merely because it makes irregular payments under an express or tacit arrangement with the creditor that, while the debtor makes payments, the creditor will continue to supply goods (48). In such a situation, the court does not regard the individual payments as preferences even though they were unrelated to any specific delivery of goods or services and may ultimately have had the effect of reducing the amount of indebtedness of the debtor at the beginning of the six month period (49). If the effect of the payments is to reduce the initial indebtedness, only the amount of the reduction will be regarded as a preferential payment (50).

13. When the initial indebtedness has been reduced the creditor may nevertheless be entitled to the protection of s 122(2)(a) of the Bankruptcy Act in respect of that reduction (51). In determining that issue, the court will treat the last payment or payments, or so much of them as equal the preferential amount, as the relevant payments. So, if after a course of dealing, a creditor has decreased its initial indebtedness by $10,000 and the last two payments were for $7,000, the circumstances surrounding each of these two payments are relevant in determining whether the creditor is entitled to the protection of s 122(2)(a) in respect of the $10,000 preference (52). Even where payments are expressly made for the purpose of reducing a debt earlier incurred as well as for the purpose of obtaining further goods or services, only the amount representing the reduction of the opening debt for the period will be regarded as a preference (53). But in such a case, the circumstances of each payment made for the purpose of reducing the debt have to be examined in order to determine the issue under s 122(2)(a), unless it is clear that the creditor's "knowledge in relation to the (debtor's) solvency and in relation to the effect of any permanent reduction in the (debtor's) indebtedness ... was the same throughout the period" (54).

14. Since the decision of this Court in Richardson v The Commercial Banking Co of Sydney Ltd (55), the term "running account" has achieved almost talismanic significance in determining when the ultimate, rather than the immediate and isolated, effect of a payment is to be examined for the purpose of a determination under s 122 of the Bankruptcy Act. However, the significance of a running account lies in the inferences that can be drawn from the facts that answer the description of a "running account" rather than the label itself. A running account between traders is merely another name for an active account running from day to day, as opposed to an account where further debits are not contemplated (56). The essential feature of a running account is that it predicates a continuing relationship of debtor and creditor with an expectation that further debits and credits will be recorded. Ordinarily, a payment, although often matching an earlier debit, is credited against the balance owing in the account. Thus, a running account is contrasted with an account where the expectation is that the next entry will be a credit entry that will close the account by recording the payment of the debt or by transferring the debt to the Bad or Doubtful Debt A/c.

15. If the record of the dealings of the parties fits the description of a "running account", that record will usually provide a solid ground for concluding that they conducted their dealings on the basis that they had a continuing business relationship and that goods or services would be provided and paid for on the credit terms ordinarily applicable in the creditor's business. When that is so, a court will usually be able to conclude that the parties mutually assumed that from a business point of view each particular payment was connected with the subsequent provision of goods or services in that account. Sometimes, however, the transactions recorded in the account may be so sporadic that a court cannot conclude that there was the requisite connection between a payment and the future supply of goods even though the account was kept "in the ordinary form of a running account in which debits and credits are recorded chronologically and in which payments are not shown as attributable to any particular deliveries but are brought generally into credit" (57). Thus, it is not the label "running account" but the conclusion that the payments in the account were connected with the future supply of goods or services that is relevant, because it is that connection which indicates a continuing relationship of debtor and creditor. It is this conclusion which makes it necessary to consider the ultimate and not the immediate effect of individual payments (58). As Barwick CJ said in Queensland Bacon Pty Ltd v Rees (59):

"In my opinion, it is enough if, on the facts of any case, the

court can feel confident that implicit in the circumstances in which the payment is made is a mutual assumption by the parties that there will be a continuance of the relationship of buyer and seller with resultant continuance of the relation of debtor and creditor in the running account, so that, to use the expressions employed in Richardson's Case (60), 'it is impossible' - I interpolate, in a business sense - 'to pause at any payment into the account and treat it as having produced an immediate effect to be considered independently of what followed ...'."

16. When these principles are applied to the present case, none but the last of the payments can be regarded as a preference. Apart from the fact that Airservices was a public authority determining and imposing charges according to a statutory regime, the case was a common one. It was the everyday case of a creditor supplying services to an undercapitalised and illiquid debtor who promised to clear its debt and pay new debts as they fell due, but who got further behind as month followed month. It was the very common situation of a debtor with a running account whose debit balance at the end of the six month period was greater than at the beginning, notwithstanding the making of large payments during that period. If the result of the dealings of Airservices and Compass is looked at from a business viewpoint, it is difficult to see how Airservices obtained any preferential treatment. But the Full Court took a different view. The learned judges of that Court held that all the payments in the six month period were preferential payments.

17. Their Honours found that, because of its statutory obligations, Airservices felt handicapped and believed that it could not withhold the provision of its services to a recalcitrant debtor except on safety grounds. The learned judges said that "there did not exist between Compass and (Airservices) what might be described, to adapt the language of Barwick CJ in Queensland Bacon (61), current credit arrangements under which Compass reasonably could expect that so long as it paid its accounts according to those arrangements, (Airservices) would continue to provide services" (62). Their Honours held "that there was no running account between Compass and (Airservices), either as regards total indebtedness or by taking the matter aircraft by aircraft" (63). Nor said their Honours was (64):

"there an 'entire transaction' between the parties in the sense

that term was used in Richardson (65). There was a number of dealings, the occasion or necessity for which arose from (i) (Airservices) statutory position as sole supplier of certain services required by Compass to operate its business, and (ii) the persistent failure after December 1990 of Compass to pay the charges to (Airservices) under its trading terms as defined by or pursuant to statute.

Moreover, there was, in our view, no mutual assumption that

(Airservices) would refrain from exercising its remedies, including the imposition of statutory liens or that (Airservices) would supply further services whilst Compass remained delinquent in its payments to (Airservices): (Airservices) did not so conduct itself that Compass reasonably could expect that (Airservices) would provide further services so long as periodic reductions were made in a 'general debit'."

18. Airservices challenged these conclusions. But it is not necessary to deal with all of the criticisms that Airservices directed at these findings. The points that we think are decisive are not based on disputed primary facts.

19. Throughout the six month period, Airservices provided Compass with services whose value far exceeded the value of the payments that Compass made during that period. At the end of the six month period, Airservices was more than $8m worse off than it had been at the commencement of the period. It gained no advantage over the general body of creditors unless one takes the jurisprudentially unsound view that, for the purpose of s 122, the court looks only to the debt that the payment discharges and ignores the business context of the payment. Moreover, the dealings of the parties were reflected in a series of services and payments unified by the many undertakings of Compass to meet the credit terms of Airservices. Although individual payments were appropriated to specific debts and penalties, from a business point of view each payment must be considered to be connected with the subsequent provision of services by Airservices. Compass harboured no illusion that it was a free rider on the public purse. Nor did it make the payments, payments that stretched its liquidity to the limit, merely because it wished to clear the backlog of debt. It understood only too well that the payments were the price that it had to pay if its planes were to continue to fly. Since May 1991, each monthly statement served on it had contained the warning "OVERDUE - Lien being considered".

20. It follows from what we have said about the nature of a running account that the Full Court erred in holding that there was no running account in this case. The account was an active one with daily dealings between the parties. Services rendered during the preceding month were debited to the account at the beginning of each month. In addition, penalties for late payment were debited monthly. The balance of the account rose and fell as debits and credits were recorded. There was but one account, not a series of separate accounts for each month or for each service.

21. The facts recorded in the "running account" indicate that Compass and Airservices had a continuing relationship which contemplated further debits and credits and that the individual payments were intended to continue and not determine that relationship. The various payments must therefore be regarded as so connected with the continuing provision of services, that it is the ultimate and not the immediate effect of each payment on the relationship of Compass and Airservices that is relevant.

22. We do not think that it is of any significance that Airservices may have perceived that there were political and legal problems in cutting off services to Compass. Airservices had the power to impose liens over the planes that Compass operated and eventually it was forced to do what it had been threatening to do since May 1991. The imposition of a lien had serious commercial consequences for Compass, as it knew only too well. Indeed, its strategy seems to have been to make payments in respect of past charges so that it could prevent penalties from continuing to run and thereby remove the grounds on which liens could be imposed. That is to say, its strategy was to pay the oldest debts so as to ensure that it could stay in business and continue to obtain the services without which its planes could not fly. The connection between the payments and the provision of services by Airservices is therefore readily apparent.

23. The Full Court placed great significance on the fact that the payments were appropriated to old debts and penalties. But with great respect to their Honours, we do not think that that fact has any significance. Indeed, where the relationship of debtor and creditor contemplates further debits and credits, it is difficult to see how the appropriation of a payment to an earlier debt has any significance at all unless, as in Rees v Bank of New South Wales (66), the parties expressly agree that one of the purposes of the payment is to permanently reduce the level of indebtedness below the level existing at the time of the agreement. Even then, as Rees assumes, where the relationship is a continuing one, the preference will be no more than the amount that constitutes the difference between the indebtedness at the commencement of the agreement and the indebtedness at the end of the six month period. Apart from cases where there is such an agreement, the appropriation of a payment to a past debt will generally have no bearing on the issue of preference (67). After all, both the creditor and the debtor have a real commercial interest in giving priority to discharging the oldest debt in the account. Both sets of accounts will present their respective enterprises in a better light if the oldest debts are discharged first. Where the relationship appears to be a continuing one, the fact that the parties agree to appropriate the payment to the oldest debt is neither unusual nor surprising. In that context, it can seldom, if ever, provide any ground for concluding that the payment was not connected with the future supply of goods or services.

24. The Full Court also held68 that there were no current credit arrangements under which Compass could reasonably expect that, so long as it paid accounts according to those arrangements, Airservices would continue to provide services. We doubt the correctness of that conclusion. But in any event the absence of such an arrangement does not mean that each of the payments must be isolated from the ongoing relationship and seen as giving an immediate preference. To do that would be to miss the whole point of the doctrine emanating from Richardson, Queensland Bacon and Rees, which is designed to ensure that the effect of a payment that induces the further supply of goods and services is evaluated by the ultimate effect that it has on the financial relationship of the parties. An arrangement of the kind referred to by the Full Court is powerful evidence of a connection between a payment and subsequent supplies. But its absence is not decisive. If other facts indicate that the payment was made to induce the further supplies, the creditor is entitled to have the ultimate effect of the transaction examined.

25. No doubt Airservices was fearful of the financial consequences for itself in continuing to supply Compass with services. Like many a creditor faced with a slow paying debtor who is asking for or demanding the further supply of goods or services, Airservices provided its services with misgivings. But it was not an involuntary supplier of those services. Nor, as we have said, did Compass regard itself as a free rider on the public purse. Both parties understood that the provision of further services was dependent on Compass making payments to reduce its growing debt. That is not to say that the parties contemplated that on a particular day the services would cease unless payments were made. But each party understood that future supply and continuing payments were inextricably joined. That is enough to bring the case within the doctrine of ultimate effect.

26. Once the doctrine of ultimate effect is applied, it follows that the payments to Airservices gave it no preference, priority or advantage over the general body of creditors. On the contrary, the general body of creditors benefited from the revenues that were generated as the result of the services provided by and at the expense of Airservices. The value of the services provided exceeded the amount of the payments during the relevant period by several million dollars.

27. To ignore the practical relationship between the payments and the subsequent supply of services and the ultimate effect of the dealings between the parties would not advance the purpose for which s 122 was enacted. That purpose is to strike down those payments by a debtor during the six months period prior to bankruptcy that have the effect of depleting the assets available to the general body of creditors. But it is no purpose of s 122 to prevent a debtor from making payments - even payments to existing creditors - if the purpose of the payments is to acquire goods or services equal to or of greater value than the payment. That is what happened here, except for the last payment which is the subject of the cross-appeal. It is beside the point that during the six month period there were other creditors who were not paid at all. Airservices gave value for the first eight payments and that is sufficient to take the case out of s 565 unless the amount of the payments exceeded the value of the services supplied, which it did not.

29. On 18 December 1991, the day before Compass went into provisional liquidation, it paid $1,700,703.16 to Airservices. The liquidators claim that, independently of whether other payments were preferences, this payment was a preference because Airservices had at the very least a strong suspicion that Compass would "fold" the next day and was demanding that Compass pay it $3,081,102,63, supported by an irrevocable authority and direction to its bank. Although this knowledge and demand make it impossible for Airservices to rely on the protection of s 122(2)(a) if the payment was a preference, that knowledge or demand does not necessarily make it one.

30. When Compass failed to pay the remainder of the $3m demanded, Airservices imposed liens over aeroplanes that Compass operated. Nevertheless, Airservices continued to provide its services to Compass. After the payment on 18 December, Airservices provided further services to the value of $351,122.55 to Compass. Moreover, it seems certain that on 18 December Airservices believed that it would continue to provide services to Compass after that date. But notwithstanding the running account and the provision of these services after 17 December, the better view on the evidence is that in making its demand Airservices was looking backwards rather than forwards; looking to the partial payment of the old debt rather than the provision of continuing services. Accordingly, we think that the whole of this payment should be regarded as a preference, notwithstanding the fact that Airservices subsequently provided services to Compass to the value of $351,000.

32. The appeal and the cross-appeal to this Court should be allowed. The orders of the Full Court should be set aside. In lieu thereof, it should be ordered that the appeal to that Court from the order of Lockhart J should be allowed and that it be declared that the sum of $1,700,703.16 paid by Compass to Airservices on 18 December 1991 was a preference and void as against the liquidators.

TOOHEY J. The appellant is a statutory body; at the time of the proceedings in the Federal Court which have led to this appeal it was known as the Civil Aviation Authority (69). The respondents are the liquidators of Compass Airlines Pty Limited ("Compass") which was wound up on 10 July 1992.

2. Lockhart J rejected the claim that certain payments made by Compass to the appellant constituted a preference and were void as against the respondents (70). The Full Court upheld the respondents' appeal against Lockhart J's decision (71). The appellant appeals to this Court.

3. The legislative background against which the appeal was argued was s 565(1) of the Corporations Law (72). The section provided that a payment made by a company that, if it had been made by a natural person, would, in the event of bankruptcy, be void as against the trustee in bankruptcy, was, in the event of the company being wound up, void as against the liquidator. This was a reference to s 122 of the Bankruptcy Act 1966 (Cth). Section 122(1) reads:

"A ... payment made ... 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 ... payment ... made ...

(a) within six months before the presentation of a petition on

is void as against the trustee in bankruptcy."

4. Section 122(2)(a) provides that nothing in s 122 affects the rights of a payee in good faith and for valuable consideration and in the ordinary course of business. The appellant has not relied upon this provision so that the argument turned on the meaning and application of the phrase in s 122(1) "having the effect of giving that creditor a preference, priority or advantage over other creditors". However, senior counsel for the respondents drew support from the existence of s 122(2)(a) as a guide to the operation of s 122(1). He argued that sub-s (1) is to be read without reference to the intention or state of mind of the parties and also that the language of s 122(2) is very apt to describe persons who are regular suppliers of goods or services to a company. The argument did not go so far as to say that such suppliers were confined to relying upon s 122(2). Rather it sought to emphasise difficulties in countering the literal operation of s 122(1), given the scope provided to the "innocent" supplier by sub-s (2).

5. By virtue of s 565(2) and (3) of the Corporations Law, the relevant date from which the period of six months was to be measured was the date of the application for the winding up of Compass, 20 December 1991. Thus the period during which payments by Compass to the appellant might be caught by the operation of s 565(1) was from 20 June 1991 until 20 December 1991. During this period Compass paid the appellant $10,351,523.90. This was the total of nine payments, the ninth of which was $1,700,703.16, made on 18 December 1991.

6. The appellant provides services to airlines including air route and airway facilities, air traffic control services, aeronautical information, fire fighting and rescue services. For these services it charges the airlines according to the category of service provided. It fixes charges by determinations. Payment overdue for more than a specified period attracts a penalty, also set by a determination. The appellant's practice was to invoice Compass on a monthly basis, payment being due on the first day of the month after the month in which the liability was incurred. In the event of non-payment the appellant was entitled to impose a lien on an aircraft and thereafter to cancel its certificate of registration or seize the aircraft (73).

7. For a proper understanding of the issues presented to the Court it is necessary to set out the relevant charges, penalties incurred and the payments made by Compass said to constitute a preference (74):

Date Charges Penalties Payments Balance Owing

19 06 91 $2,231,447.08

01 07 91 $2,069,624.66 $4,301,071.74

02 07 91 $840,838.39 $3,460,233.35

02 07 91 $66,291.59 $3,526,524.94

30 07 91 $29,824.35 $3,556,349.29

30 07 91 ($81,335.02) $3,475,014.27

(credit adj)

01 08 91 $3,121,430.77 $6,596,445.04

02 08 91 $1,397,394.47 $5,199,050.57

02 08 91 $52,125.22 $5,251,175.79

30 08 91 $46,821.47 $5,297,997.26

01 09 91 $2,925,886.75 $8,223,884.01

02 09 91 $79,469.94 $8,303,353.95

04 09 91 $2,069,624.66 $6,233,729.29

09 09 91 $66,291.49 $6,167,437.80

01 10 91 $3,081,102.63 $9,248,540.43

01 10 91 ($5,158.11) $9,243,382.32

(cred adj)

01 10 91 $43,888.30 $9,287,270.62

02 10 91 $93,169.87 $9,380,440.49

04 10 91 $1,600,000.00 $7,780,440.49

09 10 91 $1,641,551.05 $6,138,889.44

30 10 91 $46,139.16 $6,185,028.60

31 10 91 $975,532.00 $5,209,496.60

01 11 91 $3,483,452.60 $8,692,949.20

02 11 91 $78,142.46 $8,771,091.66

04 11 91 $59,588.68 $8,711,502.98

30 11 91 $52,251.79 $8,763,754.77

01 12 91 $3,219,090.95 $11,982,845.72

02 12 91 $131,456.34 $12,114,302.06

18 12 91 $1,700,703.16 $10,413,598.90

Preference

Period

20 6 91 to

20 12 91 $17,814,095.23 $719,580.49 $10,351,523.90

01 01 92 $2,487,236.51 $12,900,835.41

01 02 92 $12,793.17 $12,913,628.58

8. It can be seen that at the outset of the six months period in question there was a balance owing by Compass to the appellant of $2.2 million. During the period Compass incurred another $17.8 million in charges and $0.7 million in penalties so that, by the end of the period, notwithstanding the nine payments made, the balance amounted to $10.4 million.

9. The Full Court pointed out that even where one payment only is attacked as a preference, there is debate "as to the time at which and the hypothesis upon which the presence of the necessary 'effect' is ascertained" (75). It expressed a preference for the view that any comparison between the benefit received by a creditor from a transaction and the creditor's position in a winding up should be determined on the basis of the creditor's likely position in a hypothetical winding up at the time of the transaction and not a comparison based on the likely outcome for the creditor of the actual winding up which takes place later. That view is supported by the decisions of this Court in Richardson v The Commercial Banking Co of Sydney Ltd (76) and Burns v Stapleton (77). In the circumstances of the present case the issue is not crucial because the evidence established that, at the date of each of the nine payments, Compass was insolvent. It is unnecessary therefore to say anything more on this aspect.

10. What does arise, however, is the way in which the effect on other creditors is determined when there are several payments, particularly payments which are said to constitute but one transaction between debtor and creditor, in this case between Compass and the appellant. Lockhart J expressed the matter in these terms (78):

"It is also clear that in cases where a payment is not pursuant to

an isolated transaction but forms part of a wider transaction or is bound up with a series of transactions or where it is sufficiently connected with other items in a running account, it is the effect of the whole transaction or series of transactions or of all the connected items that must be considered".

Lockhart J cited decisions and writings in support of this approach. At this point I mention one source only, a passage from the judgment of Gibbs J in Re Weiss (79) where his Honour said:

" It is clear that for the purpose of deciding whether a payment

is void within s 95(1) of the Bankruptcy Act (80) it is the effect in fact of the making of the payment that is decisive. It is also clear that in some cases, where the payment forms part of a wider transaction, or where it is sufficiently connected with other items in a running account, it is the effect of the whole transaction, of all the connected items, that has to be regarded."

11. The appellant's argument, essentially, was that there was a running account between the parties and that, even if there were not, each payment made by Compass formed part of a wider transaction that must be viewed as a whole. Lockhart J acceded to both aspects of the argument, namely, that there was a "running account" between the parties and that, in any event, the payments made by Compass to the appellant formed part of an entire transaction between them.

12. The Full Court considered all the evidence in detail and concluded (81):

"In our opinion, the facts show that, throughout the preference

period, there did not exist between Compass and CAA what might be described, to adapt the language of Barwick CJ in Rees, current credit arrangements under which Compass reasonably could expect that so long as it paid accounts according to those arrangements, CAA would continue to provide services.

13. In our view, the primary facts indicate that there was no running account between Compass and CAA, either as regards total indebtedness or by taking the matter aircraft by aircraft. When dealing with the period in 1991, before the commencement of the preference period, we referred to the pervasive references to the indebtedness of Compass on the footing of particular monthly accounts for charges and penalties. This continued throughout the preference period. There was also, in that period, in respect at least of the payments of 4 and 9 October and 4 November appropriation by Compass to specific portions of past debt. The parties conducted their affairs such that debits and credits were recorded in a fashion that attributed them to the particular provision of services and the imposition of penalty interest. There were distinct debts between which the parties distinguished at all relevant times, so that payments were not made merely on account of a 'running' indebtedness.

14. Nor, in our opinion, was there an 'entire transaction' between the parties in the sense that that term was used in Richardson. There were a number of dealings, the occasion or necessity for which arose from (i) CAA's statutory position as sole supplier of certain services required by Compass to operate its business, and (ii) the persistent failure after December 1990 of Compass to pay the charges to CAA under its trading terms as defined by or pursuant to statute.

Moreover, there was, in our view, no mutual assumption that CAA would refrain from exercising its remedies, including the imposition of statutory liens or that CAA would supply further services whilst Compass remained delinquent in its payments to CAA: CAA did not so conduct itself that Compass reasonably could expect that CAA would provide further services so long as periodic reductions were made in a 'general debit'."

15. The appellant attacked the conclusions of the Full Court and sought to reinstate the result reached by Lockhart J. The grounds of appeal to this Court read:

"The Full Court erred in finding that each of the payments made by

Compass Airlines Pty Ltd ("Compass") to the appellant between 2 July 1991 and 18 December 1991 had the effect of conferring on the appellant a preference, priority or advantage over other creditors of Compass pursuant to Section 565 of the Corporations Law and in particular:

(a) the Full Court was led to treat the 'running account' concept

too narrowly by wrongly defining the policy behind it - that policy is primarily one of equity as between the creditors of the insolvent;

(b) the principle which underlies the various expressions used in

the cases is that a payment will not have the effect of conferring a preference if the consequence, in a practical business sense, of the making of the payment is that fresh value is provided by the creditor (at least to the extent that the fresh value exceeds the amount of the payment);

(c) the Full Court was influenced by three considerations:

- first, that Compass and the CAA in their dealings focussed on

the payment of particular past months' overdue accounts - which is irrelevant;

- second, that the CAA regarded itself as unable to withdraw

services from Compass - which was in error or required substantial qualification;

- third, that the CAA's perception was that the imposition of

liens on Compass' aircraft was a matter of such significance that the minister responsible would have an interest - which was irrelevant;

(d) the question of whether a payment has a preferential effect in

a case like the present is not determined by whether the accounts kept by the parties arrive at a 'general' debit balance or are maintained so that the parties can and do for particular purposes distinguish between parts of the indebtedness;

(e) the Full Court failed to deal at all with an alternative basis

on which the trial judge had concluded that none of the attacked payments had the effect of conferring upon the CAA a priority preference or advantage, because of the capacity of the CAA at any time to impose liens in respect of outstanding charges."

16. As an initial step to dealing with these grounds, some discussion is required of the operation of s 122 of the Bankruptcy Act as applied by s 565 of the Corporations Law.

17. "One of the fundamental precepts of corporate insolvency law is that the available assets of the company are to be shared rateably among its creditors." (82)

Section 565 seeks to give effect to this precept by bringing to account payments which prefer one creditor and which are not received in good faith, for valuable consideration and in the ordinary course of business.

18. Section 122 of the Bankruptcy Act requires that for a payment to a creditor to constitute a preference it must be a payment which has the effect of giving that creditor a preference over other creditors (83). Because the section speaks of payment to a "creditor", the payment must be in respect of a debt. A contemporaneous payment for goods or services is not a payment to a creditor. In Robertson v Grigg (84) Dixon J commented: "(N)othing can amount to a preference unless the person preferred is a creditor". And, as is made clear by Dixon J, the fact that there is past indebtedness will not affect a payment made in return for contemporaneous goods or services.

19. The words "having the effect of" fasten on to the transaction itself. They do not look to the intent or state of mind of the debtor when making payment. In this respect the bankruptcy law of this country and of the United Kingdom are in contrast. In S Richards and Co Ltd v Lloyd (85) Rich and Dixon JJ, in rejecting consideration of the debtor's intent or state of mind, relied upon "the language of the section, the history of the bankruptcy legislation in Australia and the course of the colonial decisions". In its judgment the Full Court traced that history and those decisions (86); there is no need to repeat what is said there.

20. The law becomes more complicated when a debtor makes a payment to his or her creditor and thereafter receives goods or services. If the payment is no more than a repayment of a past debt, it will constitute a preference if made within the six months period before application for winding up is made. If, however, the payment is in truth a prepayment for goods or services to be provided later, the payment does not constitute a preference, any more than a COD payment for goods to be delivered amounts to a preference. It is in this area of mutual dealings that there have been developed the concepts upon which the appellant relied, namely the need to look at the entire transaction and also the principle of the running account.

21. In Richardson v The Commercial Banking Co of Sydney Ltd (87) a solicitor had two accounts with the respondent bank. One was an overdraft account, supported by securities; the other was a trust account. The Official Receiver contended that any deposit in the office account reducing the overdraft within the limit of the security or any of the deposits made in the trust account when it was overdrawn constituted a preference. In this context the Court (Dixon, Williams and Fullagar JJ) said (88):

"In considering whether the real effect of a payment was to work a

preference its actual business character must be seen and when it forms part of an entire transaction which if carried out to its intended conclusion will leave the creditor without any preference priority or advantage over other creditors the payment cannot be isolated and construed as a preference."

"(T)he payments into the office account possessed in point of fact

a business purpose common to both parties which so connected them with the subsequent debits to the account as to make it impossible to pause at any payment into the account and treat it as having produced an immediate effect to be considered independently of what followed and so to be adjudged a preference".

22. In the present case the respondents accepted that if one payment is only part of an entire transaction, the effect of that payment cannot be considered in isolation. But they contended that the entire transaction principle had no application because there was a series of debits incurred each time a Compass plane took off. In no way, it was said, was there any prepayment of these charges.

23. It is clear from the authorities, particularly Richardson, that a payment by way of prepayment for goods to be supplied or services to be provided does not constitute a preference. What if the creditor, instead of requiring prepayment as a condition of supply, makes repayment of the amount outstanding a condition of supply? Is the repayment a preference in its entirety or only to the extent that it exceeds the value of the goods supplied? Or is it not a preference at all?

"A running account of any debtor who has reached insolvency must

present difficulties under s 95. A debtor who pays something off his grocer's account in order to induce the shop keeper to give him further supplies of groceries can hardly be held, as it seems to us, to give the grocer a preference, if that was the clear basis of the payment. If the grocer credited the money as a payment for the future deliveries instead of the past deliveries of groceries he would in the end be in exactly the same position and yet he could not be attacked as having received a preference."

It follows then that if a payment off an account is a condition of the supply of fresh value, whether of goods or services, it will not be a preference merely because it is credited against the existing account rather than against the goods or services then required. On the other hand, if the fresh value would have been supplied in any case, that is, if the supplier was prepared to advance further credit, the whole of the payment constitutes a preference, not merely the excess over the fresh value. This is, of course, subject to any defence under s 122(2)(a). Identifying the two situations is often a matter of great difficulty.

25. Two illustrations suffice to make the point. Rees v Bank of New South Wales (91) and Queensland Bacon Pty Ltd v Rees (92) both concerned payments by an insolvent chain of supermarkets before it was wound up. In Rees the liquidator sought recovery of the net amount by which the chain's overdraft with its bank had been reduced during the relevant period by reason of payments made by the chain. The liquidator conceded that the arrangements between the chain and the bank answered the description in Richardson of a common business purpose so that "the question whether the deposit had the effect of giving the bank a preference was to be decided not by considering its immediate effect only but by considering what effect it ultimately produced in fact" (93). Notwithstanding, the Court (Barwick CJ, Kitto and Taylor JJ) held that the payments made to reduce the overdraft constituted a preference. Kitto J said (94):

"That the ultimate effect of each deposit was to give the bank a

preference to the extent to which the deposit contributed to the excess of deposits over payments out made in the period is clear. To that extent each deposit was void as against the liquidator ... unless the bank discharged the burden of proving that in respect of that deposit it was a payee in good faith and for valuable consideration and in the ordinary course of business".

26. The facts in Queensland Bacon are more complicated but some reference to them is necessary in order to understand the decision. There were four appellants, each of which supplied the chain before it was wound up. In each case there was a running account, with purchases debited and payments credited. In support of their argument that the payments were not preferences, the appellants submitted that since their relationship with the chain was the subject of a running account, the inference had to be drawn that if payment was not made the goods would not be supplied. The respondent answered that the running account principle had no application unless there was a clear basis for the payment and the continuance of the account, not a mere hope or expectation of continuance.

27. In Queensland Bacon no certain ratio decidendi emerges for the purposes of this appeal. By majority (Barwick CJ and Kitto J, Menzies J dissenting) the Court held that, with one exception, all payments made by the appellants were received in good faith and therefore attracted the protection of s 95(2) of the Bankruptcy Act 1924 (Cth). Barwick CJ saw Richardson as applying to two situations in the way already mentioned, that is, where payment is part of a larger single transaction and where payment, though in discharge of a specific and identifiable indebtedness, is linked with other items in a running account. In the view of the Chief Justice, although there was no express arrangement whereby each creditor undertook to continue the supply of goods to the chain, there was "implicit in the circumstances in which the payment (was) made ... a mutual assumption by the parties that there will be a continuance ... of the relation of debtor and creditor in the running account" (95). Barwick CJ amplified this by saying that the course of business between the appellants and the chain "was such that the (chain) could reasonably expect that so long as it paid the creditor's accounts according to the current credit arrangements between them, the creditor would continue to supply upon the (chain's) order and upon the agreed terms of credit" but that if the chain failed to pay the account, it could "expect a rejection of its further orders for goods" (96). Barwick CJ reached this conclusion notwithstanding that in some cases the amounts paid off exceeded the orders in the following months; that in the case of two of the appellants, Burns Philp and Company Limited and Foley Brothers Pty Ltd, the effect of the payments was to reduce significantly the amount owed; and that there was no evidence that the appellants had insisted on a particular level of repayment as a condition of meeting future orders.

28. On the approach taken by Barwick CJ it would seem that the prospect that future orders may not be met unless repayments are made would justify the debtor repaying the entire amount owed even though no new orders are in fact met. This is at odds with the language of the section which refers to "the effect" of the payment rather than the intention of the parties (97). And, if the payment is in those circumstances not a preference, the creditor need not rely on the good faith defence. It would follow that the payment was not voidable even if the creditor knew that the debtor was insolvent at the time of receiving the payment.

29. In Queensland Bacon Kitto J allowed the appeal but on the basis that, even if the payments constituted preferences, the appellants had acted in good faith. Menzies J dissented. His Honour distinguished Richardson on the footing that there the payments were made solely to meet the outgoings. He considered that in the instant case, given the intention that each payment would exceed the fresh value provided and so improve the appellants' positions, the whole of each payment was a preference.

30. The running account principle has been considered in a number of cases (98). But it is not easy to extract a clear statement of the principle overall from those in which it has been either applied or rejected. Differing views have been expressed as to whether the principle applies only where there is a running account between the parties in the nature of a bank overdraft so that there is no distinction between debts or whether it may also operate where particular debts are to be repaid within specified time limits. Views also differ as to whether the principle requires that none of the debts be repaid or that there be a net improvement in the creditor's position during the preference period or in some other period. Again, there is debate as to whether the principle applies only where the creditor, expressly or impliedly, requires payment as a condition of further supply or whether it is enough that there is some kind of on-going relationship between the parties.

31. It is useful to note some of the decisions with a view to seeing how much unanimity there is on some of these matters. Thus in Re Weiss Gibbs J said of the situation there (99):

"although it is possible to say that some of the payments ... were

in discharge of an identifiable past indebtedness, the account kept by the respondent was in the ordinary form of a running account in which debits and credits are recorded chronologically and in which payments are not shown as attributable to any particular deliveries but are brought generally into credit".

His Honour held that all payments were made on a running account even though, in the case of the last three payments, the parties contemplated that the payments would greatly exceed the value of the goods to be supplied (100). In contrast, in Telecom v Russell Kumar and Sons (101) O'Bryan J held that payments made to Telecom in relation to telephone accounts were preferences because he regarded the running account principle as confined to situations where payments and services are credited to and debited from one ledger, as distinct from payments being made in relation to particular debts. And his Honour took this view even though payments were made to ensure that Telecom would not disconnect the service, in other words to ensure that future services would be provided.

32. Reference may also be made to two recent Queensland decisions, CSR v Starkey (102) and Hastings Deering v Starkey (103). In the first of these cases CSR supplied concrete to the debtor on credit to a limit of $250,000, with payments due 30 days after delivery. CSR was unable to rely on the good faith provision because it had reason to suspect insolvency. The Queensland Court of Appeal limited the amount of preference to the net reduction in indebtedness within the six months period.

33. This decision was applied by the Queensland Court of Appeal in Hastings Deering. The situations in the two cases were similar save that in Hastings Deering there were two accounts rather than one. Fitzgerald P and Davies JA saw the principal issue as "whether the 'running account' principle has scope for operation when the debtor has not one, but two accounts with the creditor, one of which is, by arrangement, effectively closed to further debit entries but credited with all, or almost all, receipts and the other of which contains all debit entries and no, or almost no, receipts". Their Honours expressed the running account principle in the following way (104):

"The running account principle is not concerned with the parties'

book-keeping records or arrangements as to how their accounts will be kept but is based on the premise that, where an insolvent company and one of its creditors continue with both supply and payments and supply and payments are inter-dependent, or, as it is sometimes put, 'integral parts of an entire transaction' (or an overall arrangement), both, and not merely the payments, are to be taken into account in determining the extent, if any, of the creditor's 'preference, priority or advantage over other creditors'. The principle is a recognition that, just as the other creditors are disadvantaged by the company's payments to the particular creditor, they are advantaged by that creditor's continuing supply to the company during the material period. And just as the creditor is advantaged by the payments, it is disadvantaged by its continuing to supply the company. The extent of any benefit is the net result of setting the advantage (payments) against disadvantage (supply)."

"The fundamental problem with the suggestion that the creditor who

is paid for current expenses somehow deserves to be paid is that it ignores the whole idea of preference law. By definition all contractual unsecured creditors of the debtor gave value to the debtor. At least part of that value may still be in the debtor's estate, even if it extended long before the bankruptcy. However, because of the debtor's insolvency, all of these creditors cannot be repaid in full. The question is why this current expense creditor should be treated better than those other creditors."

If a payment to a creditor is made in good faith and for valuable consideration and in the ordinary course of business, the creditor is protected by s 122(2)(a) of the Bankruptcy Act. To the extent that any payment is a contemporaneous payment for goods and services, there can be no preference because in respect of that transaction there is no payment to a creditor. If the relationship of creditor and debtor does exist, it has been suggested (106) that "if the debtor truly is in difficult straits, a careful creditor will insist on COD transactions no matter what the preference law says".

35. Harking back to Richardson where the Court declined to hold that there was a preference, there was no difference in substance between crediting a payment to new goods or services or to an old debt. In other words, there was no advantage to the debtor of one form of accounting over another. For example, there was no requirement that particular debts be met by a particular time; rather, interest was simply payable on the balance owing. It was express or implied in the arrangement between the parties that goods would not be supplied (that is, that further credit would not be advanced) unless the payments were made. And in Richardson there was no net improvement in the account over the time involved. These requirements spell out the scope (and the limits) of the running account principle.

36. It is at this point that some reference to the facts is called for. They are set out in considerable detail in the judgments below. For the purposes of this judgment it is enough to discuss them in a more general way.

37. There is in the judgment of Lockhart J "a useful summary of the services provided and penalties charged by the (appellant) to Compass and payments made by Compass to the (appellant) over the period 20 June to 20 December 1991" (107). The summary, with some corrections (108), is in these terms:

(a) value of services provided by the Authority to Compass -

(b) penalties charged by the Authority to Compass - $719,580.49;

(c) total services provided and penalties charged by the Authority

(d) payments made by Compass to the Authority - $10,351,523.90;

(e) excess of services supplied over payments made ((a) - (d)) -

(f) excess of services and penalties over payments ((c) - (d)) -

In addition, the Authority provided services to Compass after the last payment was made on 18 December 1991.

38. Lockhart J rejected the contention that the payments made to the appellant in the relevant period constituted preferences. Primarily he took the view that the payments formed an integral and inseparable part of an entire transaction which governed the relationship between the parties. Further, he held that there was a mutual assumption that there would be a continuance of the relationship between them, that the payments were made to reduce past indebtedness and on the clear understanding that further services would be provided on the usual terms of credit. His Honour was clearly influenced by the fact that the appellant was no better off by reason of the impugned payments; in fact it was substantially worse off at the commencement of the winding up than it was during most of the previous six months. The value of the services provided by the appellant was $17.8 million yet the payments made during that period were a little over half that figure.

39. The judgment of the Full Court contains a very detailed analysis of the facts. It is unnecessary to repeat that analysis; it is however necessary to point to the inferences which the Full Court drew and the conclusions it reached from that analysis. In the view of the Full Court there did not exist between Compass and the appellant current credit arrangements under which Compass reasonably could expect that, so long as it paid accounts according to those arrangements, the appellant would continue to provide services. In 1991, before the commencement of the preference period, there were in the records of the appellant many references to the indebtedness of Compass on the footing of particular monthly accounts for charges and penalties and this continued throughout the preference period. There was, at least in respect of the payments of 4 October and 9 October and 4 November, appropriation by Compass to specific portions of past debt. The parties conducted their affair in a manner that debits and credits were recorded in a fashion that attributed them to the particular provision of services and the imposition of penalty interest. In the view of the Full Court, there were distinct debts between which the parties distinguished, so that payments were not made merely on account of a running indebtedness. Furthermore, there was no entire transaction between the parties, rather a number of dealings as the occasion or necessity for them arose. The appellant did not conduct itself so that Compass could reasonably expect that the appellant would provide further services so long as periodic reductions were made in a "general debit".

40. In this regard, there is a portion of the Full Court's judgment which, I think, should be set out in full. It reads (109):

"Before and during the preference period (on at least 22, 28

March, 2, 20, 29 May, 19 July, 2, 4, 25, 29 October 1991) CAA stressed to Compass that it could not act as financier to Compass by, in effect, carrying its debt, or treat it more favourably than the other airlines. Compass continually gave undertakings to CAA to clear the arrears and to pay new debts as they fell due. From time to time (on 3 April and 1 December) Compass offered to provide security to CAA. But it also made it plain to CAA that it regarded the oil companies and the FAC as creditors whose claims to payment were more pressing than those of CAA; the conversation between Mr Baldwin and Mr Grey on 4 October, gave, if it were needed, a vivid reminder to CAA of the attitude of Compass.

41. For its part, CAA regarded itself, in the light of the legal advice it had received, as uniquely handicapped by its statutory obligations. These were considered to require CAA not to withhold provision of services, other than on 'safety issues', even to a recalcitrant debtor. Alternative measures, including the imposition of liens, were considered from time to time and eventually on 28 November and 18 December these measures were applied.

42. CAA also perceived that, if it pressed Compass too hard, this would embarrass the Executive Government by reflecting adversely upon the success of the government's deregulation policy. As we have observed earlier in these reasons, everyone in authority at CAA must have known or suspected throughout 1991 that a collapse of Compass would have political ramifications. These matters plainly weighed with CAA throughout the preference period as, over and over again, it was faced with the question whether it should, as a matter of good commercial practice, pursue its remedies against Compass in respect of its delinquent payment record and, as Mr Baldwin put it on 2 September, bring Compass to heel.

43. There was also, as appears, for example, from the letters of 31 October and 7 November, indications within CAA that it should 'assist' Compass through its cash flow crises, and keep the matter away from 'the public arena'. As early as May 1991, before the preference period commenced, CAA had been very anxious as to the possible repercussions of public revelation of the state of account of Compass, and of the methods adopted by CAA in dealing with the situation."

44. The inferences which the Full Court drew and the conclusions which it reached regarding the relationship between the parties were inferences which it could reasonably draw and conclusions which it could reasonably reach. In that connection it may be noted that the liquidators' report on the solvency of Compass shows that on the date of each payment to the appellant the company had a deficiency of net assets, a deficiency of working capital and a deficiency of cash to meet its liabilities as they fell due. The report identifies six creditors, amounting to $4.5 million, whose debts remained unsatisfied during the whole of the six months period. There is no sufficient foundation for treating the appellant more favourably than those creditors.

45. The Full Court accepted that in determining whether the payments made by Compass to the appellant were preferences regard should be had to whether there was an entire transaction to be considered or whether there was a running account between the parties. But, for the reasons already mentioned, the Court held that neither approach was appropriate in the present case. Those reasons were the product of inferences and conclusions reasonably open to the Full Court; indeed they are compelling.

46. The literal operation of s 122(1) of the Bankruptcy Act has been tempered by the principles which have been discussed in this judgment. Whatever criticisms may be levelled at the reasoning which has led to their development, their existence is well established in Australia (110) and the appeal was argued by reference to them.

47. Mention was made earlier of s 588FA of the Corporations Law which now governs preferences on the winding up of a company. There is in s 588FA(2) statutory recognition of a running account in terms which it is unnecessary to set out. Section 588FA(1) provides that a transaction is an unfair preference if and only if the transaction results in the creditor receiving from the company more than the creditor would receive if the transaction were set aside and the creditor were to prove for the debt in a winding up of the company. Sub-section (2)(c) requires all the transactions forming part of a continuing business relationship to be reduced to a single transaction and sub-s (1)(b) applied (111).

48. It may be that the application of the new provision would lead to a different result in the present case. However the appeal must be determined according to the operation of s 122(1) of the Bankruptcy Act. For the reasons given in this judgment, in essence that the appellant and Compass dealt with each other by reference to particular charges levied and penalties imposed from time to time, those payments did have the effect of preferring the appellant to other creditors.

49. The appeal must therefore be dismissed. In that event the respondents' notice of cross-appeal does not arise for consideration.

1 s 66(2), (8) of the Civil Aviation Act 1988 (Cth).

2 s 69 of the Civil Aviation Act.

3 See Civil Aviation Legislation Amendment Act 1995 (Cth), ss 9 and 11.

4 Pursuant to s 11(b) of the Civil Aviation Legislation Amendment Act.

7 [1952] HCA 8; (1952) 85 CLR 110 at 129.

8 [1952] HCA 8; (1952) 85 CLR 110 at 132.

9 [1952] HCA 8; (1952) 85 CLR 110 at 135.

10 [1952] HCA 8; (1952) 85 CLR 110 at 133.

11 [1966] HCA 21; (1966) 115 CLR 266 at 317.

12 [1964] HCA 47; (1964) 111 CLR 210.

13 [1964] HCA 47; (1964) 111 CLR 210 at 232.

14 [1964] HCA 47; (1964) 111 CLR 210 at 219.

15 [1966] HCA 21; (1966) 115 CLR 266 at 281.

16 [1966] HCA 21; (1966) 115 CLR 266 at 286.

17 [1952] HCA 8; (1952) 85 CLR 110 at 133.

19 See Queensland Bacon Pty Ltd v Rees [1966] HCA 21; (1966) 115 CLR 266 at 303, 312.

20 [1964] HCA 47; (1964) 111 CLR 210 at 222-223.

21 [1966] HCA 21; (1966) 115 CLR 266 at 300.

22 Thus, in Queensland Bacon, only the amount of the second payment to the Egg Marketing Board was declared to be a preference: see [1966] HCA 21; (1966) 115 CLR 266 at 298, 309.

23 The Mecca (1897) AC 286 at 293; Visbord v Federal Commissioner of Taxation [1943] HCA 4; (1943) 68 CLR 354 at 370-371.

25 [1815] EngR 77; (1816) 1 Mer 572 at 608 [1815] EngR 77; (35 ER 781 at 792-793).

26 Ferrier v Civil Aviation Authority [1994] FCA 891; (1994) 48 FCR 163 at 174; [1994] FCA 891; 125 ALR 122 at 148.

27 Ferrier and Knight v Civil Aviation Authority [1994] FCA 1571; (1994) 55 FCR 28 at 89-90; [1994] FCA 1571; 127 ALR 472 at 528-529.

28 s 69 of the Civil Aviation Act.

29 [1994] FCA 891; (1994) 48 FCR 163 at 174; [1994] FCA 891; 125 ALR 122 at 148.

30 [1994] FCA 891; (1994) 48 FCR 163 at 174-175; [1994] FCA 891; 125 ALR 122 at 148-149.

31 s 66(2), (8).

32 The amount billed for services during this period was $17,900,588.36. The discrepancy may be due to the fact that the last bill during the period was dated 1 December 1991. The difference between the two sums may be the cost of services rendered during the period 1 to 20 December. However, nothing turns on the difference.

33 Ferrier v Civil Aviation Authority [1994] FCA 891; (1994) 48 FCR 163 at 164; [1994] FCA 891; 125 ALR 122 at 126.

34 Ferrier v Civil Aviation Authority [1994] FCA 891; (1994) 48 FCR 163 at 164; [1994] FCA 891; 125 ALR 122 at 126.

35 The relevant time is the time of payment and not the date of liquidation: Calzaturificio Zenith Pty Ltd (in liq) v NSW Leather and Trading Company Pty Ltd [1970] VicRp 80; (1970) VR 605 at 610; Re Discovery Books Pty Ltd (1972) 20 FLR 470 at 475.

36 S Richards and Co Ltd v Lloyd [1933] HCA 26; (1933) 49 CLR 49 at 59-60, 62, 64; Matthews v Geraghty (1986) 4 ACLC 727 at 733.

37 [1933] HCA 26; (1933) 49 CLR 49 at 62.

38 Richardson v The Commercial Banking Co of Sydney Ltd [1952] HCA 8; (1952) 85 CLR 110 at 129, 132; Queensland Bacon Pty Ltd v Rees [1966] HCA 21; (1966) 115 CLR 266 at 283-284; Re Weiss; Ex parte White v John Vicars and Co Ltd (1970) ALR 654 at 657.

39 Richardson (1952) 85 CLR 110 at 133; Queensland Bacon (1966) 115 CLR 266 at 283-284; Re Weiss (1970) ALR 654 at 657-658.

40 Rees v Bank of New South Wales [1964] HCA 47; (1964) 111 CLR 210 at 221-222.

41 cf Re Discovery Books (1972) 20 FLR 470 at 475 per Fox J: "one must ultimately come back to considering whether by reason of the payment, or dealing, there is less money available for the general body of creditors".

43 Richardson (1952) 85 CLR 110 at 133; Queensland Bacon (1966) 115 CLR 266 at 284; Re Weiss (1970) ALR 654 at 658; Re Discovery Books (1972) 20 FLR 470 at 475; M and R Jones Shopfitting Co Pty Ltd (in liq) v The National Bank of Australasia Ltd (1983) 68 FLR 282 at 289; CSR v Starkey (1994) 13 ACSR 321 at 325.

47 See, for example, CSR v Starkey (1994) 13 ACSR 321 at 324.

48 Re Weiss (1970) ALR 654; CSR v Starkey (1994) 13 ACSR 321.

50 Queensland Bacon (1966) 115 CLR 266 at 291; CSR v Starkey (1994) 13 ACSR 321 at 325.

51 Section 122(2)(a) states: "nothing in this section affects ... the rights of a ... payee ... in good faith and for valuable consideration and in the ordinary course of business".

55 [1952] HCA 8; (1952) 85 CLR 110.

56 The term "running account" seems to come from the world of banking where it is synonymous with a current account "on which cheques are drawn and to which credits are paid, as opposed to a deposit account on which normally cheques are not drawn": Hanson, Dictionary of Banking and Finance, (1985) at 183, and see the definition of "current account" in Woelfel, The Fitzroy Dearborn Encyclopedia of Banking and Finance, 10th ed (1994) at 278, as an "open, continuing, and running account".

58 cf Rees [1964] HCA 47; (1964) 111 CLR 210 at 221-223 per Kitto J.

59 [1966] HCA 21; (1966) 115 CLR 266 at 286.

60 [1952] HCA 8; (1952) 85 CLR 110.

61 [1966] HCA 21; (1966) 115 CLR 266 at 281.

62 Ferrier v Civil Aviation Authority [1994] FCA 1571; (1994) 55 FCR 28 at 89; [1994] FCA 1571; 127 ALR 472 at 528.

63 Ferrier v Civil Aviation Authority [1994] FCA 1571; (1994) 55 FCR 28 at 89; [1994] FCA 1571; 127 ALR 472 at 528.

64 Ferrier v Civil Aviation Authority [1994] FCA 1571; (1994) 55 FCR 28 at 90; [1994] FCA 1571; 127 ALR 472 at 529.

65 [1952] HCA 8; (1952) 85 CLR 110.

66 [1964] HCA 47; (1964) 111 CLR 210.

67 In the absence of such an agreement, the payment would in any event be appropriated as a matter of law to the oldest debt: Clayton's Case [1815] EngR 77; (1816) 1 Mer 572 at 608 [1815] EngR 77; (35 ER 781 at 792-793).

68 Ferrier v Civil Aviation Authority [1994] FCA 1571; (1994) 55 FCR 28 at 90; [1994] FCA 1571; 127 ALR 472 at 529.

69 For the change of name, see Civil Aviation Legislation Amendment Act 1995 (Cth).

70 Ferrier v Civil Aviation Authority [1994] FCA 891; (1994) 48 FCR 163; 125 ALR 122.

71 Ferrier and Knight v Civil Aviation Authority [1994] FCA 1571; (1994) 55 FCR 28; 127 ALR 472.

72 Preferences in relation to the winding up of companies are now governed by s 588FA of the Corporations Law which began on 23 June 1993.

73 See Civil Aviation Act 1988 (Cth), Pt VI, Finance.

74 The table appears in the judgment of the Full Court: [1994] FCA 1571; (1994) 55 FCR 28 at 32-33; [1994] FCA 1571; 127 ALR 472 at 474-475, though with some differences in the two reports. The table earlier appeared in the judgment of Lockhart J: [1994] FCA 891; (1994) 48 FCR 163 at 164-165; [1994] FCA 891; 125 ALR 122 at 125, though with some errors of addition. The table set out in these reasons seeks to correct apparent errors in the various reports.

75 [1994] FCA 1571; (1994) 55 FCR 28 at 35; [1994] FCA 1571; 127 ALR 472 at 476.

76 [1952] HCA 8; (1952) 85 CLR 110 at 129.

77 [1959] HCA 34; (1959) 102 CLR 97 at 105.

78 [1994] FCA 891; (1994) 48 FCR 163 at 170; [1994] FCA 891; 125 ALR 122 at 145.

80 Section 95(1) of the Bankruptcy Act 1924 (Cth) was the predecessor of s 122(1) of the 1966 Act.

81 [1994] FCA 1571; (1994) 55 FCR 28 at 89-90; [1994] FCA 1571; 127 ALR 472 at 528-529.

82 O'Donovan, "Undue Preferences: Some Innocents 'Scape Not The Thunderbolt'", (1992) 22 University of Western Australia Law Review 322 at 322.

83 I shall use "preference" in these reasons as a compendious term for "preference, priority or advantage".

84 [1932] HCA 29; (1932) 47 CLR 257 at 271.

85 [1933] HCA 26; (1933) 49 CLR 49 at 60.

86 [1994] FCA 1571; (1994) 55 FCR 28 at 44-46; [1994] FCA 1571; 127 ALR 472 at 485-487.

87 [1952] HCA 8; (1952) 85 CLR 110.

88 [1952] HCA 8; (1952) 85 CLR 110 at 132.

89 [1952] HCA 8; (1952) 85 CLR 110 at 133.

90 [1952] HCA 8; (1952) 85 CLR 110 at 133.

91 [1964] HCA 47; (1964) 111 CLR 210.

92 [1966] HCA 21; (1966) 115 CLR 266.

93 [1964] HCA 47; (1964) 111 CLR 210 at 221-222 per Kitto J.

94 [1964] HCA 47; (1964) 111 CLR 210 at 222.

95 [1966] HCA 21; (1966) 115 CLR 266 at 286.

96 [1966] HCA 21; (1966) 115 CLR 266 at 281.

97 cf Baxt, "The Ballad of the Running Account - Voidable Preference in the Ordinary Course of Business", [1969] MelbULawRw 20; (1969) 7 Melbourne University Law Review 178.

98 See, for instance, Re Weiss (1970) ALR 654; Calzaturificio (in liq) v NSW Leather [1970] VicRp 80; (1970) VR 605; M and R Jones Shopfitting v NBA (1983) 68 FLR 282; CSR v Starkey (1994) 13 ACSR 321; Hastings Deering v Starkey unreported, Queensland Court of Appeal, 2 December 1994. See also Re Discovery Books Pty Ltd (1973) 20 FLR 470; Re A and J Lazzarotto Pty Ltd unreported, Victorian Court of Appeal, 16 December 1977; Telecom v Russell Kumar and Sons (1992) 10 ACSR 24.

100 Nevertheless, Gibbs J held that, for other reasons, the last three payments were preferences to the extent they exceeded the value of the goods supplied. See (1970) ALR 654 at 661.

103 Unreported, Queensland Court of Appeal, 2 December 1994.

104 Unreported, Queensland Court of Appeal, 2 December 1994 at 7.

105 Tabb, "Rethinking Preferences", (1992) 43 South Carolina Law Review 981 at 1020.

106 Tabb, "Rethinking Preferences", (1992) 43 South Carolina Law Review 981 at 1024.

107 [1994] FCA 891; (1994) 48 FCR 163 at 165-166; [1994] FCA 891; 125 ALR 122 at 126.

109 [1994] FCA 1571; (1994) 55 FCR 28 at 90-91; [1994] FCA 1571; 127 ALR 472 at 529. The references to CAA are of course references to the appellant. Mr Baldwin was the chief executive officer of the appellant. Mr Grey was the chief executive of Compass.

110 The judgment of the Full Court discusses the "net result" rule and the "running account" in the United States: see [1994] FCA 1571; (1994) 55 FCR 28 at 46-50; [1994] FCA 1571; 127 ALR 472 at 487-490.

111 See generally Keay, "An Analysis of Unfair Preferences under the New Avoidance Regime", (1996) 24 Australian Business Law Review 39.