51 There is no dispute that, at a prima facie level, Method 1 is appropriate. Beyond that, however, there is disagreement. The liquidator takes the view that, having regard to the "returns", Method 3 should be adopted. The contradictor contends for Method 1 in its unmodified form. The differing views are explained, in a practical sense, by the fact that returns (in reality, distributions of capital) were mainly made early in a scheme's life and so were received by persons who were early investors, that is, members of the class whose interests are represented by the contradictor. Those persons would receive more under Method 1 than under Method 3.
52 The rationale for bringing returns into hotchpot in accordance with Method 3, as perceived by the liquidator, is that the payment of the returns depleted the pool of capital that ultimately became available for distribution on a scheme's winding up, so that investors who did not receive returns would be unfairly disadvantaged, as against the recipients of returns, if those recipients were entitled both to keep the benefit of the returns and to participate in the remaining pool on a basis of proportionate equality with non-recipients.
53 The position taken by the contradictor is that the case is not one to which the hotchpot principle should be applied.
The hotchpot principle
54 Hotchpot was enacted for limited purposes by the Statute of Distributions 1670 (22 & 23 Car 1 c 10). The effect of that Act was that settlements and advancements conferred by an intestate on his children in his lifetime were to be taken into account in determining their shares upon intestacy. The underlying principle - no doubt reflecting social standards of the era - was that there should be equality among children after the parent's death, free from distortions arising from benefaction conferred by the parent while living. The statute was enacted to resolve conflict between temporal courts and ecclesiastical courts. It imposed civilian rules preferred by the latter and was said by Lord Chief Justice Raymond, in Edwards v Freeman (1727) 2 P Wms 435; 24 ER 803, to be "grounded upon the most just rule of equity, equality".
55 It became common for the same principle to be adopted expressly through hotchpot clauses in wills, particularly where residue was left to the widow with remainder to the children equally. Such a clause was typically to the effect that the trustees should, before dividing the residue among the children, deduct from a child's share whatever had been advanced to the child so as to make the children's respective shares equal. A discussion of numerous issues raised by such clauses is found in Re Tennant; Mortlock v Hawker [1942] HCA 3; (1942) 65 CLR 473.
56 The principles of equity that, in their civil law form, found expression in the Statute of Distributions also had an operation independently of statute. In the case of co-sureties, the general rule is that they share equally the burden to which all are subject: Dering v Earl of Winchelsea (1787) 1 Cox Eq Cas 318; 29 ER 1184. But adjustment is required where one co-surety has received a benefit by way of indemnity or security from the principal debtor. In that case, the benefit must be brought into hotchpot so that it may be shared pro tanto with the other co-sureties. In so holding in Steel v Dixon (1881) 17 Ch D 825, Fry J approved the following observation of Barrett J in the Vermont case of Miller v Sawyer 30 Vt 412 (1858):
"[P]ersons subject to a common burden stand in their relation to each other upon a common ground of interest and of right, and whatever relief, by way of indemnity, is furnished to either by him for whom the burden is assumed, enures equally to the relief of all the common associates."
57 Fry J also quoted with approval a passage in the judgment of Chief Justice Ruffin of the Supreme Court of North Carolina in Hall v Robinson 8 Ired 56 (1847):
"The relief between co-sureties in equity proceeds upon the maxim that equality is equity, and that maxim is but a principle of the simplest natural justice. It is a plain corollary from it that, when two or more embark in the common risk of being sureties for another, and one of them subsequently obtains from the principal an indemnity or counter-security to any extent, it enures to the benefit of all. The risk and the relief ought to be co-extensive."
58 A like principle applies to proof in concurrent bankruptcies. In Banco de Portugal v Waddell (1880) 5 App Cas 161, certain creditors of wine merchants carrying on business in both England and Portugal had proved their debts in the merchants' Portuguese insolvency and received dividends there equivalent to less than twenty shillings in the pound. Those creditors then proved in the separate bankruptcy in England. Each was, of course, entitled to do so but, as Earl Cairns LC said (at 167), applying the principle stated by Lord Eldon LC in Selkrig v Davies (1814) 2 Dow 230; 3 ER 848, only "upon the terms of bringing in, for the purpose of dividend, the sum which he has received abroad". His Lordship said that "on the principle that he who asks for equity must do equity, he must bring into the common fund that which he had already received in respect of the obligations of the same debtors".
59 On the same basis, the principle that a secured creditor may, subject to surrendering the security, prove for the whole debt in the debtor's bankruptcy and share rateably with other creditors has been said to entail "bringing into hotchpot the security which he holds or its value": Taylor v Secretary to the Department of Social Security (1988) 79 ALR 327 at 337.
60 The hotchpot concept is a reflection of the maxim "equality is equity" (with "equality", in an appropriate case, understood as proportionate equality), supplemented by the maxim "he who seeks equity must do equity". The equality (or proportionate equality) that equity in general will promote can only be struck after a person seeking the benefit of it has, as a preliminary, borne whatever burden equity demands be borne in order to ensure that the ultimate equality (or proportionate equality) is not distorted by the effects of unconscientious retention of separately received benefit.
The application of the principle to this case
61 The contradictor says that hotchpot is largely confined, in its application, to established classes of case and that the present case does not fall within any such class. Obvious cases are those of co-sureties and concurrent insolvency administrations already mentioned.
62 The liquidator, by contrast, argues that the relevant principles are not confined by categories of operation and apply more generally. The liquidator advocates as applicable to this case the approach taken by Campbell J in Re Sutherland; French Caledonia Travel Service Pty Ltd [2003] NSWSC 1008; (2003) 59 NSWLR 361 which involved the mixing of funds held upon distinct trusts. His Honour referred to a question that must be addressed once the respective claims upon the mixed fund have been established, that is, "whether by reference to any personal equities whatever which exist between the various claimants, there is any reason to treat any of the claimants as postponed to any of the others".
63 Campbell J then said that an example of such a personal equity is to be found in Re Hobourn Aero Components Ltd's Air Raid Distress Fund; Ryan v Forrest [1946] Ch 86. That case concerned a fund established and maintained through voluntary contributions made by nearly all employees of a particular company. The fund was to be applied in making discretionary payments to or for the benefit of contributing employees on war service or in distress as a result of enemy action. A question arose as to the correct treatment of a surplus remaining after war's end. There was no dispute that the several contributors were properly regarded as entitled in proportion to contributions made. But there was a question about whether benefits received should first be brought into hotchpot.
64 Cohen J referred (at 97) to two cases in which distribution had been made without regard to benefits received. The first was Re Printers and Transferrers Amalgamated Protection Society [1899] 2 Ch 184 which concerned a contributory fund for the provision of financial support to trade union members during strikes and lockouts. It was held that a surplus should be distributed among contributors according to their contributions. Byrne J added, however (at 189):
"If I were to carry out the strict rights to the fullest extent, I might have to direct an account as to fines and forfeitures and payments made. But, as in the case of Cunnack v Edwards [[1895] 1 Ch 489], Chitty J thought himself entitled to disregard the amounts paid for fines or forfeitures and annuities received by widows in taking the account, on the ground of the expense, loss, and delay that would thereby be occasioned; so in the present case I think I am justified also in saying those amounts need not be taken into account in ascertaining the proportions in which this fund is to be distributed."
65 The second case referred to by Cohen J was Re Lead Company's Workmen's Fund Society [1904] 2 Ch 196 where the case just mentioned was followed and no allowance was made for participation in the fund, apparently again because of the practical impossibility of ascertaining and bringing to account anything other than contributions. Warrington J saw the basic question as that posed by Lord Eldon LC in Pearce v Piper (1809) 17 Ves 1; 34 ER 1: "what will be an equitable distribution of the fund subscribed". The question must, no doubt, receive the best answer that the circumstances of the case allow.
66 In the Hobourn Aero case, there was no difficulty in ascertaining the amounts of benefits paid to recipients during the active life of the fund. That being so, Cohen J said (at 97-98):
"I have come to the conclusion that I should not be justified in deviating from the general principle, that a person seeking to participate in the distribution of a fund must bring into hotchpot anything he has already received therefrom. Accordingly, I propose to declare that the fund now available for distribution ought to be distributed amongst all the persons who during their employment by Hobourn Aero Components, Ld., contributed to the fund at any time after December 12, 1940, in proportion to the total amount contributed by them respectively to the fund, each such person bringing into hotchpot any amount received by him by way of benefit out of the fund."
67 The rationale for this was described by Campbell J in French Caledonia Travel Service in this way (at [183]):
"The manner of distribution supports the view that all the contributors have a charge over the fund in which their contributions are mixed, to support their interest in the fund by way of a contingent resulting trust if the committee were not to exercise its discretion and distribute the entire fund. As contributions are made week by a [sic] week, so the interest of each contributor increases; as the fund is expended, so the interest of each contributor is proportionately decreased. Further, the requirement to bring into hotchpot benefits received from the fund is an illustration of a personal equity which results in the charge which one contributor has being held to be of lower priority than the charge which another contributor has, though with the possibility of becoming of equal ranking if one of the chargees performed an action which he had no obligation to perform, but the performance of which was a precondition to his charge being accorded equal rank."
68 In arguing against the application of hotchpot in this case, the contradictor placed reliance on the decision of the Privy Council (Lord Steyn, Lord Lloyd of Berwick, Lord Cooke of Thorndon, Lord Scott of Foscote and Sir Patrick Russell) in Cleaver v Delta American Reinsurance Co [2001] 2 AC 328, a company winding up case. The question was whether a particular creditor who had proved in the winding up was required to bring into hotchpot a sum of some $735,000 already received by it. The creditor in question had obtained a judgment in a foreign court against the company in liquidation. Having done so, the creditor was able to call on a bank letter of credit in the sum of $735,000. The bank, upon making payment under the letter of credit, recouped $735,000 out of the company's credit balances with it, over which it held a charge. Those credit balances would otherwise have formed part of the pool of assets available in the winding up available for division pro rata among creditors, including the particular creditor which remained unsatisfied as to a balance of its debt.
69 The argument put to the Privy Council was that the particular creditor, by taking recovery action in the foreign court that enabled it to call on the letter of credit and thereby to achieve partial satisfaction of its debt, had obtained an inequitable advantage over the other unsecured creditors and, as a condition of proving in the winding up, ought to bring the $735,000 into hotchpot.
70 That argument was rejected. The purpose of the hotchpot principle, it was explained, is to ensure that no creditor obtains a share of the available assets otherwise than as part of the creditor's pro rata share. In the particular case, the $735,000 received by the creditor was not received out of the assets of the company. It was received from the bank, which admittedly thereby became entitled to retain an equivalent amount out of the company's credit balances. But those balances were charged to the bank - and, importantly, had been so charged before the commencement of the winding up - so as to be unavailable, in any event, for the benefit of unsecured creditors to an extent equivalent to the company's secured indebtedness from time to time. On that basis, acceptance of the submission that the creditor should bring the $735,000 into hotchpot would have made available in the winding up assets that had never formed part of what their Lordships called "the estate in liquidation". The Privy Council said (at [26]):
"[T]he hotchpot requirement applies only to assets that, under English law, are regarded as forming part of the estate in liquidation. . . . The asset constituting the security never formed part of the liquidation estate. The equity of redemption would, theoretically, have been an asset of the estate but, in a case where the secured debt exceeded the value of the security, would be worthless."