Calzaturificio Zenith Pty Ltd (In Liq) v New South Wales

Civil Aviation Regulations (Cth), reg7A, reg8, regi0, reg13, reg97, reg98, reg100, regl67(b), reg 169A

Insolvency Statute 1865 28 Vict. No. 273 (VIC), s31 Bankruptcy Act 1869 c.71 (U.K.), s92

The Bankruptcy Act of 1867 (US), 14 Stat.517, s35 The Bankruptcy Act of 1898 (US), ¢c.541, 30 Stat.544, s57g, s60

Statutes Relating to Interest: Federal Court of Australia Act 1976 (Cth), s51A

Calzaturificio Zenith Pty Ltd (In Liq) v New South Wales Leather & Trading Company Pty Ltd [1970] VR 605, 610, 614, 620-1, considered

Re J.F. Aylmer (Manildra) Pty Ltd (1968) 12 FLR 337, 345, 354-5, 352, considered

Spedley Securities (In Lig) v Western United Ltd (In Li (1992) 27 NSWLR 111, 114-5, considered

Re Discovery Books Pty Ltd (1972) 20 FLR 470, 474-5 478-9, considered

Richardson v The Commercial Banking Co. of Sydney Ltd (1952) 85 CLR 110, 129, 132, 133, 135, considered

Rees v Bank of New South Wales (1964) 111 CLR 210, considered

Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266, considered Re Weiss; Ex parte White v John Vicars & Co. Ltd [1970] ALR 654, 657, 659, 660-1, considered

CEA Technologies Pty Ltd v Civic Aviation Authority (1994) 122 ALR 724, 731, considered

Union Bank v Wolas, 116 L. Ed. 2d 514, 524 (1991), considered S. Richards & Co. Itd v Lloyd (1933) 49 CLR 49, 60, considered

Humphery v McMullen (1868) 7 S.C.R. (L) 84, 89-94, considered The Bank of Australasia v Harris (1861) 15 Moo 96, 15 E.R.

Sheldrick v Aitken (1869) 6 W.W. & A'B (L) 59, 64, considered Arnold v Maynard 1 F. Cas. 1181 (1842), considered

Smyth v The Queen (1957) 98 CLR 163, 166-7, considered

Muntz v Smail (1909) 8 CLR 262, 266, 271, considered

Yaple v Dahil-Millikan Grocer Co., 193 U.S. 526 (1904), considered

Joseph Wild & Co. v Provident Life & Trust Co., 214 U.S. 292 (1909), considered

In re Thomas W. Garland Inc., 19 B.R. 920, 922-925 (E.D. Mo. 1982), considered

In re St. Louis Globe Democrat, Inc., 99 B.R. 946, 948-9 (E.D. Mo. 1989), considered

Pirie v Chicago Title & Trust Co., 182 U.S. 438, 446-7 (1901), considered

In_re Fred Stern & Co. Inc., 54 F.2d 478 (2d Cir. 1931), considered

CSR_Ltd v Starkey (1994) 13 ACSR 321, 325, 327-8, considered

In re Fulghum Construction Corp. 706 F.2d 171, 174 (6th Cir. 1983), considered

Cimmaron Oil Company, Inc. v Camerson Consultants, Inc., 71 B.R. 1005 (N.D. Tex. 1987), considered

Goodsole v Jeffery 168 N.W. 461 (1918) in 1 ALR 1060-70, considered

Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266, 281, 283, 316-7, considered

Page v Commonweaith Life Assurance Society Ltd (1935) 36 S.R. (NSW) 85, 89, considered

Re Price (No. 6); Richardson v Commercial Banking Co. of Sydney Ltd (1949) 15 ABC 26, 41, 42, 43, considered

Stephen v Doyle (1882) 3 NSWLR (Eq.) 1, 3, considered

Rees v Bank of New South Wales (1964) 111 CLR 210, 221-2, considered

Re Patullo; Ex parte Official Receiver (1931) 3 ABC 197, 203-4, considered

Re _ A. & J. Lazzarotto Pty. Ltd., the Supreme Court of Victoria, Full Court, 16 December 1977, unreported, at 7,

M_& R. Jones Shopfitting Co, Pty. Ltd. (in Lig.) v The National Bank of Australasia Ltd., (1983) 7 ACLR 445, 453,

Re Baronga Nominees Pty. Ltd (In Lig.) [1983] 8 ACLR 265, 273,

Petagna Nominees Pty Ltd v A_E Ledger Liquidator of Linun Pty Ltd (in lig) (1989) 1 ACSR 547, 567, considered

Re Captain Homemaker Pty Ltd (In Lig) (1984) 8 ACLR 1005, 1013, considered

Australian and Overseas Telecommunications Corporation Ltd v

Russell Kumar & Sons Pty Ltd (1992) 10 ACSR 24, 29, considered

Harkness v Potts (1993) 10 ACSR 517, 521, considered Willcox v Goess, 92 F.2d 8, 1% (2d Cir. 1937), cert denied, 303 U.S. 647 (1938), considered

Knysh v Corrales Pty Ltd (1989) 15 ACLR 629, considered

N.A. Kratzmann Pty Ltd (In Lig.) v Ducker [No.1] (1966) 123 CLR 257, 285, considered

N.A. Kratzmann Pty Ltd (In Liq) v Tucker [No. 2] (1968) 123 CLR 295, 298-9, considered

Spediey Securities Ltd (In Lig) v Western United Ltd (In Lig) (No. 2) (1992) 10 ACLC 887, 887-8, considered

Maurice Drycleaners Pty Ltd (In Lig) v National Australia Bank Ltd (1990) 8 ACLC 798, and Hamilton v Commonwealth Bank of Australia (No. 2) (1992) 10 ACLC 1611, considered

Re Fiorino (Gummow J, 14 April 1994, unreported, considered In_ re Roco Corp., 37 BR 770 774 (D. RI. 1984), considered In_re Art Shirt Ltd., Inc., 93 BR 333, 341-2 (E.D. Pa. 1988), considered

Smith v Mark Twain National Bank, 805 F.2d 278, 291 (8th Cir. 1986), considered

IAN DOUGLAS FERRIER AND DESMOND WILLIAM KNIGHT (AS LIQUIDATORS OF COMPASS AIRLINES PTY LIMITED (IN LIQUIDATION)) v CIVIL AVIATION AUTHORITY

CORAM: Beaumont, Gummow, Lindgren JJ WHERE: Sydney DATE: 21 December 1994

NEW SOUTH WALES DISTRICT REGISTRY NO NG 3136 of 1994

ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA

Appellants AND: CIVIL AVIATION AUTHORITY Respondent CORAM: Beaumont, Gummow and Lindgren JJ PLACE: Sydney DATE: 21 December 1994

(1) Direct that the appellants file and serve draft short minutes of the orders to be made in accordance with the reasons for judgment.

(2) Stand the matter over to a date to be fixed for the purpose of hearing submissions on costs and on the form of the orders to be made.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

I. INTRODUCTION 1 II. THE REASONING AT FIRST INSTANCE 10 III. CONCLUSIONS ON THE APPEAL 14

A. The Operation of the CA Act; the Determinations and the CA Regulations; the CAA and the Statutory Framework

of the CA Act 14 B. The Determinations of the Charges 20 c. The CA Regulations 22 D. The Remedies Available to CAA 23 E. The Law as to Preferences 25 (1) The Rationale of Preference Recapture 25

"Running Account" in the United States 34 (4) The General Concept of a "Running Account" 42

(5) The "Running Account" in the High Court of Australia 43

(7) The Application of the "Running Account" Principle in the Australian Courts

Other Than the High Court 58 F. The Principles to be Applied Here 71 G. The Primary Facts 72 (1) Dramatis Personae 73 (2) The Aircraft 73 (3) The Beginning of the Relationship between CAA and Compass - November 1990 74 (4) Avcharges for December 1990 75 (5) Payment on 5 March 1991 of $1,430,485.25 and its Sequelae 76 (6) Payment on 15 May 1991 of $1,453,780.37 83

Payment on 2 July 1991 of $840,838.39 - First of the 9 Payments Within the Preference Period

Payment on 2 August of $1,397,394.47 - Second of the 9 Payments Within the Preference Period

Payment on 4 September 1991 of $2,069,624.66 - Third of the 9 Payments in the Preference Period

Payment on 9 September 1991 of $66,291.59 - Fourth of the 9 Payments in the Preference Period

Payment on 4 October 1991 of $1,600,000 - Fifth of the 9 Payments in the Preference Period

Payment on 9 October 1991 of $1,641,551.05 - Sixth of the 9 Payments in the Preference Period

Payment on 31 October 1991 of $975,532.00 - Seventh of the 9 Payments in the Preference Period

Payment on 4 November 1991 of $59,588.68 - Eighth of the 9 Payments in the Preference Period

CAA Imposes Liens on the Five Compass Aircraft on 28 November 1991

On 1 December 1991 a "Deal" is Done Between CAA and Compass

On 2 December 1991 CAA "Removes" its Liens Imposed on 28 November 1991

On 18 December 1991 Only $1,380,399.47 (the Last of the 9 Payments in the Preference Period) is Paid by the Bank Settlement Plan and Compass Does Not Pay the Shortfall of $1,380,399.47 Necessary to Make the Payment of $3,081,102.63 Promised for that Date

• iii - (22) Imposition of liens on 18 December 1991

(23) The End of the Relationship Between CAA and Compass

H. The Proper Inferences to be Drawn From the Primary Facts

) ) NEW SOUTH WALES DISTRICT REGISTRY ) No NG 3136 of 1994 ) )

ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA

Respondent CORAM: Beaumont, Gummow and Lindgren JJ PLACE : Sydney DATE: 21 December 1994 REASONS FOR JUDGMENT THE COURT:

The appellants ("the Liquidators"), as liquidators of Compass Airlines Pty Limited ("Compass"), appeal from an order

of a Judge of the Court (Lockhart J) dismissing their

application for relief by way of recovery, pursuant to s. 565 of the Corporations Law ("the Law"), and s. 122 of the Bankruptcy Act 1966 ("the Act"), of amounts totalling $10,351,523.90 paid by Compass to the Civil Aviation Authority ("CAA"). The Liquidators asserted that the payments were void as against them as preferences. His Honour's judgment is

On 20 December 1991 Compass filed an application seeking an order for its winding up and for the appointment of provisional liquidators in the interim. On that date, the Liquidators were so appointed. The Court ordered that Compass be wound up on 10 July 1992, and on that date the Liquidators were appointed. Accordingly, the relevant six month period

referred to in s. 122 of the Act was from 20 June 1991 to 20 December 1991.

It appears that the parties accepted before the primary Judge that relevant charges made by CAA to Compass, penalties incurred by Compass for late payment, and the impugned

Date o70708os og Q90910 101010i1111291919191919191 919191919191 Preference Period 20.6.91 to 20.12.91

$4,301,071.74 $3,526.524.94 $3,460,233.35 $3,556.349.29 $3,475,014.27

$6,596,445.04 $5,199,050.57 $5,251,175.79 $5,297,997.26 $8,223,884.01 $8,303,353.95 $6,233,729.29 $6,167,437.80 $9,248,540.43 $9, 243,382.32

$9,287,270.62 $9,380,440.49 $7,780,440.49 $6,139,889.44 $6,185,028.60 $5,209, 496.60 $8,692,949.20 $8, 771,091.66 $8,711,502.98 $8,763, 754.77 $11,982,754.72 $12,114, 302.06 $10,413,598.90

[* As appears below, the figure of $19,035,873.91 was stated by the primary

Judge as the "value of services provided" by CAA to Compass.

in the column above do not exactly total that amount, but nothing appears to turn on this for our purposes. J

By virtue of the provisions of the Civil Aviation Act

1988 ("the CA Act"), which will be discussed further later, in

default in payment in certain circumstances, CAA was entitled

to place a "statutory lien" on an aircraft in respect of which

CAA had provided services for which there was an outstanding

The four grounds of appeal, the first two of which are

His Honour erred in failing to find that each and every payment made by [Compass] to [CAA] between 2 July 1991 and 18 December 1991 totalling $10,351,523.90 had the effect of giving [CAA] a preference, priority or advantage over other creditors of Compass pursuant to Section 565 of the Corporations Law.

His Honour erred in finding that the payments made to [CAA] formed an integral and inseparable part of an entire transaction between the parties or otherwise qualified as payments made on a running

account for the purposes of the law as_ to preferences.

Alternatively, his Honour erred in failing to find that the payment of $1,700,703.16 made to [CAA] on 18 December 1991 occurred at a time and in a context when the relationship giving rise to a running account between Compass and [CAA] had ceased to exist and that that payment had the effect of giving [CAA] a preference, priority or advantage over other creditors of Compass within the meaning of Section 565 of the Corporations Law.

His Honour erred in holding that [CAA's] right to impose statutory liens on aircraft leased and operated by Compass but owned by others, had the effect of protecting the payments from being characterised as a preference, priority or advantage over other creditors of Compass for the purposes of Section 565 of the Corporations Law."

The primary Judge said (48 FCR at 167) that ultimately the

unchallenged evidence of the witnesses. In fact, the

documentary evidence was extensive - over 1200 pages, although

CAA provided services to Compass during 1991. It charged Compass for those services and imposed penalties for lateness in payment. There was no issue as to CAA's right to impose the charges and penalties, nor was there any issue as to the correctness of the account given earlier of the dates and amounts of the charges, penalties and payments during the

Lockhart J summarised (at 165-6) the value of the services provided by CAA to Compass, the penalties imposed and

the payments made over the six-month period from 20 June 1991

"(a) value of services provided by the Authority to Compass - $19,035,873.91;

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

(c) total services provided and penalties charged by the Authority to Compass ((a) + (b)) - $19,755,454.40;

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

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

• (d)) - $8,684,350.01;

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

• (d)) $9,403,930.50."

In addition, his Honour found that CAA continued to provide services to Compass after Compass made its last payment of

Sub-section 565 (1) of the Law provides, relevantly, that a payment made by a company that, if it had been made by a Natural person, would, in the event of his or her becoming a bankrupt, be void as against the trustee in the bankruptcy, is, in the event of the company being wound up, void as against the liquidator. Sub-sections 565 (2) and (3) provide respectively for the date that, in the case of the winding up of a company, corresponds with the date of presentation of the petition in bankruptcy and to the date on which the person becomes a bankrupt. So far as relevant, in the present case the date is, in each instance, the date when the application for the winding up order was filed, that is to say, 18

"122(1) 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 which, +». the debtor becomes a bankrupt; or

Sub-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. But since CAA did not rely upon this provision, the case turns upon the applicability of sub-s. 122 (1) (a), and, in particular, upon the phrase "having the effect of giving that

creditor a preference, priority or advantage over other

It should be noted at the outset that even in cases where there is but one payment attacked as a preference there is some dispute as to the time at which and the hypothesis upon which the presence of the necessary "effect" is ascertained. Two views have been put forward. They are summarised as follows in Mr K. Bennetts' article "Establishing Preferential Effect under Avoidance Powers, Corporations Law" (1994) 12

"One involves the liquidator establishing the financial position of the company at the time of the transaction and a determination of the likely return to the preferred

creditor in a hypothetical winding up at that time, taking into account other creditors' claims existing at that time. The other approach involves the same exercise related, however, to the financial position of the company and the claims of its creditors in the actual winding up of the company.

The better and more logical view of preferential effect is that which suggests that any comparison between the transactional benefit received by a creditor 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 arising subsequent to the transaction."

Support for this preferred view is supplied by the decision of

Menhennitt J in Calzaturificio Zenith Pty Ltd (In Liq) v New South Wales Leather & Trading Company Pty Ltd [1970] VR 605 at 610, the judgments of Street J and Walsh JA in Re _ J.F. Aylmer (Manildra) Pty Ltd (1968) 12 FLR 337 at 345 and 354-5 respectively, and what was said by McLelland J in Spedley Securities (in Lig) v Western United Ltd (In Lig) (1992) 27 NSWLR 111 at 114-5 where there is a collection of other authorities perhaps supporting the contrary view. See also the discussion of the point by Professor R.M. Goode in Principles _of Corporate Insolvency Law, 1990, pp. 168-9; the learned author is dealing with the British legislation, but

what he says on this point appears equally applicable in

In the present case, this matter would give rise to no

difficulty for the case presented by the Liquidators. This is

because the evidence establishes that at the date of each of

What immediately is in issue is a related but distinct point. In Aylmer at 345 and Re Discovery Books Pty Ltd (1972) 20 FLR 470 at 474-5, Street J and Fox J respectively considered the situation where on a proper analysis there was but a single entire transaction, albeit one involving several elements. If a plurality of dealings or payments constitutes but one transaction, then one does not look to the effect (whether ascertained upon one or the other of the above hypotheses) of each payment. Rather, the Court considers the overall result of the transaction as a whole after the last of the payments in question. It then decides whether the effect of this was to give a preference. The issue on the present appeal is whether the primary Judge correctly determined that the "effect" which was to be gauged here was that of an entire transaction. Hence the significance for this case of the "running account principle" recognised in three important decisions of the High Court in Richardson v The Commercial

Banking Co. of Sydney Ltd (1952) 85 CLR 110, Rees v Bank of

New South Wales (1964) 111 CLR 210 and Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266.

At the outset, we should note what is involved in these

three High Court cases. They were decided under s. 95 of the

Bankruptcy Act 1924 ("the 1924 Act"). In Re Weiss; Ex parte

White v John Vicars & Co. Ltd [1970] ALR 654 at 657, Gibbs J

"It is clear that for the purpose of deciding whether a payment is void within s.95 (1) of the Bankruptcy Act 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."

His Honour's use of the disjunctive, so as to yield a proposition with two branches, should be noted. On the present appeal, it was submitted for CAA that even if there was no running account in the sense used by Gibbs J,

nevertheless each payment formed part of a wider transaction

The primary Judge examined the legislative basis for, and detail of, the charges which CAA made to Compass and the penalties which CAA imposed on Compass for late payment, as well as the circumstances in which each of the nine impugned

payments totalling $10,351,523.90 in the period 20 June 1991

His Honour then examined the legislative basis for the statutory liens which CAA "imposed" upon all five aircraft

operated by Compass. CAA first imposed such a lien on 28

November 1991. It caused this to be "removed" on 1 December

1991, and then imposed a further lien on 18 December 1991.

The Liquidators contended that, for the purpose of s. 122, the "effect" of the nine payments was to be ascertained by looking at the effect of each payment regarded in isolation and assessed immediately after it was made. CAA contended that the "effect" of the nine payments was to be ascertained by treating them as part of a "running account" transaction, and so by setting off against them the charges for services provided by CAA to Compass over a period terminating on 20 December 1991. The Liquidators responded that the payments were not made or received on account of or in consideration for or upon any express or implicit mutual assumption or agreement that payment of past indebtedness would ensure future supply of services by CAA. It would, they submitted, be an odd result if, although an airline operator making timely payments to CAA of statutory charges was not paying on a@ running account, an operator which was continually delinquent in discharging its obligations was paying on a

His Honour reached certain conclusions by drawing inferences based upon the primary facts. The evidence of these was documentary. Of relevance to the first two grounds

"The payments which are under attack in this case form an integral and inseparable part of an entire transaction which governed the relationship between the parties.

There was a mutual assumption by [CAA] and Compass that there would be a continuance of the relationship between them of a commercial nature, with the resultant continuance of the relation of debtor and creditor in the running account.

The payments were made in this case both to reduce past indebtedness and on the clear understanding that further services would be supplied by [CAA] to Compass on the usual terms of credit for which the Act, Regulations and the Determinations provide ..., from a business point of view the payments made were connected with future provision of services.

Each of the payments was made in reduction of the running account and the basis for the payments was' the continuance of the supply of services to Compass." (48 FCR at 170-1)

"[T]he question of whether a preference has been received by a creditor is examined by seeing if the creditor is better off as a result of the impugned payments being made than he would otherwise have been if the payments had not been made. In the present case [CAA] was substantially worse off at the commencement of the winding up than it was during most of the previous six months. The balance owing on 1 July 1991 was $4,301,071.74 and on 20 December 1991, $10,413,598.90. It is true that in the meantime payments had been made by Compass to [CAA] in substantial sums; but [CAA] had provided services and facilities to Compass of substantial value during that time." (48 FCR at 171)

"The payments ... were payments made for the continuing provision of services which were vital to enable Compass to continue in business." (48 FCR at 172)

"Payments were made to reduce the general debit as it stood periodically and to maintain a relationship between Compass and [CAA] that promised advantage to both of them. The payments fell within the so-called running account exception and the mutual assumption referred to by Barwick CJ in Queensland Bacon." (48 FCR at 172)

"The fact that [CAA] is a government instrumentality and a monopoly is not to the point. Nor is it to the point that the trading terms of [CAA] are defined by the [CA]

Act, the regulations and the Determinations [thereunder] cee. [T]he operation of the principles relating to running accounts in the law of preferences [is not excluded] merely because the creditor is a monopolist." (48 FCR at 173)

His Honour also held (48 FCR at 174) that CAA was entitled throughout the preference period to impose statutory liens on the Compass aircraft securing Compass's indebtedness to CAA, and that in the result the payments did not deplete the assets of Compass because to the extent of the indebtedness, those

As a result of his characterisation of the payments and the dealings between the parties, the primary Judge held that the so-called "running account" concept applied and also that the mutual assumption of the parties meant that the payments formed part of a whole transaction. Thus, his Honour's decision involved the applicability of both branches of the proposition explained by Gibbs J in Weiss and set out earlier in these reasons. The result, Lockhart J. held, was that the payments made did not have the 'effect" of giving CAA a preference, priority or advantage over other creditors of Compass. In this respect his Honour did not distinguish between the final payment of $1,700,703.16 made on 18 December

III. CONCLUSIONS ON THE APPEAL A. The Operation of the CA Act: the Determinations and the

CA Regulations; the CAA and the Statutory Framework of

CAA is established by the CA Act as a body corporate (s. 8). Section 9 sets out the general functions of CAA. These include the conduct of safety regulation of civil air operations in Australia, the provision of air route and airway facilities, air traffic control services, a rescue and fire fighting service, a search and rescue service and an aeronautical information service. Sub-section 9 (4) provides that, subject to s. 12, "the functions to provide services and facilities may be performed at the discretion of the Authority". Section 12 states that the Minister may give CAA written directions as to the performance of its functions or the exercise of its powers with which CAA must comply, but in the present case there is no suggestion that the Minister had given any such direction as a result of which CAA was dispossessed of the discretion vested in it by sub-section 9 (4). However, the evidence does show an awareness or belief at all material times upon the part of the board and senior executives of Compass that the Minister had a real and proper interest or concern in the conduct of its affairs. There is also a question as to precisely what that discretion was, and in particular, as to whether it embraced a discretion not to provide a particular service or facility to Compass while CAA was providing the same service or facility to other operators.

(It may be noted here that, as Neaves J held in CEA

Technologies Pty Ltd v Civic Aviation Authority (1994) 122 ALR

724 (at 731), s. 9 does no more than set out the functions of CAA; it does not require or authorise, in any relevant sense, the making of a particular decision.) Section 13 gives CAA "power to do all things necessary or convenient to be done for or in connection with the performance of its functions",

Part III (ss. 17-32) is headed "REGULATION OF CIVIL AVIATION". Section 20AA relevantly prohibits a person from flying an aircraft in Australia unless it is registered under the Civil Aviation Regulations ("CA Regulations"). Section 27, which empowers CAA to issue "Air Operators' Certificates" for the purposes of its functions, provides that, except as authorised by such a Certificate, an aircraft shall not operate in Australia, and further provides that a Certificate has effect subject to its conditions, being conditions specified in the CA Regulations and any other conditions specified by CAA in the Certificate or in a written notice given to the holder of the Certificate. Section 28 provides that CAA shall issue an Air Operator's Certificate when applied for unless the applicant has not complied with, or has not established the capability to comply with, the provisions of the CA Regulations relating to safety. In addition CAA shall not impose or vary a condition of, or suspend or cancel, such a Certificate except for the purpose of ensuring

compliance with safety provisions of the CA Regulations.

Accordingly, it was never open to CAA to cancel or suspend Compass's Air Operators' Certificate for non-payment or delay

Part IV (ss. 32A-42) of the CA Act is headed "BOARD OF AUTHORITY". Section 32B provides that the CAA Board's

"(a) to decide the objectives, strategies and policies to be followed by the Authority; and

(b) to ensure that the Authority performs its functions in a proper, efficient and economical manner."

Part VI (ss. 49-83E) is headed "FINANCE". Within this Part, Division 2 (ss. 66-83) 1s headed "Charges and Statutory

(a) fixing the amounts of charges [relevantly, charges for a service or facility provided by CAA]; or

(b) setting out a method by which the amounts of charges may be worked out; or

(c) fixing penalties for the purposes of subsection (8)."

As noted later, the Board did make such determinations.

Sub-sections 66 (8), (9), (10) and (11) are as follows:

Subject to subsection (9), where a charge is not paid within the period determined by the Board, being a period beginning of the day on which the charge became due and payable, the person liable for the charge is liable to pay the Authority, in addition to the charge, a penalty, calculated upon the unpaid amount of the charge from the day on which the charge became due and payable, and compounded.

The penalty shall not exceed a _e penalty equivalent to 1.5%, or such other percentage as is prescribed, of the unpaid amount of the charge for each month or part of a month during which it is unpaid, calculated from the day on which the charge became due and payable, and compounded.

Subsection (9) does not require the penalty to be calculated on a monthly basis.

Charges and penalties may be recovered as debts due to the Authority."

Clearly, the remedy of suing Compass from time to time in

respect of charges and penalties was available to CAA.

Sections 68-83 provide for statutory liens. Section 68

specifically provides for a "Register of Statutory Liens".

(a) at the end of the payment period after a charge became payable in respect of an aircraft, the charge is not paid; and

(b) at the end of that period, a statutory lien is not in effect in respect of the aircraft; and

(Cc) the charge or penalty in respect of the charge remains unpaid;

then, if an appropriate officer so directs at any time, the Registrar [defined in s. 3 as "the person by whom the Register is maintained"] shall make an entry in the Register in the manner prescribed and, upon the making of the entry, there is vested in the Authority in respect of the aircraft a statutory lien covering the following:

(e) any penalty that becomes payable ain respect of the charge after the entry is made;

(£) any further outstanding amounts in respect of the aircraft."

"70. (2) For the purposes of priorities amongst creditors and the purposes of the distribution of the proceeds of a sale made under section 73, the statutory lien has effect as a security interest in respect of the aircraft ranking in priority:

(a) after any security interest (other than a floating charge) in respect of the aircraft created before the time of registration of the statutory lien, to the extent that that security interest covers a debt incurred before that time; and

within, or to the extent that it does not fall within, paragraph (a)."

Section 71 provides, relevantly, that if an outstanding amount covered by a statutory lien is unpaid at the end of six months after the day on which it became an outstanding amount or the day on which the lien was registered, whichever is the

later, an authorised officer of CAA may cancel the Certificate

of Registration of the Aircraft in the register of Australian aircraft maintained under the CA Regulations. Section 71 also provides that once the Certificate of Registration of an Aircraft is cancelled, the aircraft shall not be re-registered

Sections 72 and 73 provide that if an outstanding amount covered by a statutory lien is unpaid at the end of nine months after the day on which it becomes an outstanding amount or the day on which the lien is registered, whichever is the later, (a) the aircraft may be seized (and possession of it kept until all outstanding amounts covered by the statutory lien are paid), and/or (b) the aircraft may be sold. Section 74 provides for the order of application of the proceeds of sale. Section 75 provides, inter alia, that an appropriate officer of CAA may direct in writing that the statutory lien

ceases to have effect, and the Registrar is empowered to make

"76. (1) Upon a request made in writing in respect of an aircraft by a prescribed person, an authorised officer shall issue a certificate in writing, stating whether or not, as at a specified date and time, any charge or penalty, ... is payable and unpaid in respect of the aircraft and, in respect of any such charge, penalty or debt,

the amount of it and the date upon which it became payable.

(2) Where a certificate has been so issued, any statutory lien in respect of the aircraft, whether imposed before or after the time to which the certificate relates, does not cover: (a) any such charge or debt in respect of the

aircraft that was payable and unpaid as at that time but was not specified in the certificate; or

In Part VIII (ss. 93-98) headed "MISCELLANEOUS", s. 98 empowers the Governor-General to make regulations covering a

Pursuant to sub-section 66 (2) CAA made two Determinations which were in evidence: one published in the Commonwealth of Australia Gazette No. P21, Monday 25 June 1990, which came into effect on 1 July 1990, and the other published in Commonwealth of Australia Gazette No. P18, Friday 28 June 1991, which came into effect on 1 July 1991. There is no relevant difference between them, and it suffices to describe the terms of the second Determination ("the

The Determination distinguishes between ""avtur aircraft" and "non-avtur aircraft". "Avtur aircraft" is defined to mean "an aircraft powered by an engine or engines using aviation

turbine kerosene", and "non-avtur aircraft" is defined to mean

an aircraft other than an avtur aircraft. The Determination provides for the making of "landing charges", "en-route charges" and "meteorological charges". All charges are

related to the "weight" of the aircraft which is defined to Mean "maximum take-off weight". (Compass was to allege that CAA had been making charges calculated otherwise than on

Paragraphs 27-29 of the Determination, are as follows:

27. For the purposes of this Determination, the Authority or an authorised officer may issue an

invoice, or make a demand, to a person for payment in relation to a liability in respect of a charge under this Determination.

28. Where an invoice is duly issued, or a demand made, to a person pursuant to paragraph 27, the amount of the charge is due and payable commencing on the day of the making of the demand, or where an invoice is issued, on the first day of the month after the month in which the liability is incurred.

29. Where the liability of a person to pay a charge under the Act is not discharged within 28 days after the day on which the charge became due and payable, that person is liable to pay to the Authority, by way of penalty, in addition to the amount of that charge, an amount calculated upon the amount of that charge or penalty remaining unpaid at the rate of 1.5% for each month or part of a month for which that amount is unpaid, to be computed from the day on which that charge became due and payable and to be compounded."

CAA relied on the issuing of invoices as distinct from the

making of demands. It recorded its charges in respect of each

of the Compass aircraft on a daily basis. Invoices apparently were issued on the last day of each calendar month in respect of the charges relating to each aircraft for that month. Compass treated the amount of the invoice as being due and payable on the first day of the following month. Thus, in respect of the month of May, the charges for services provided during that month relating to each Compass aircraft were the subject of an invoice which asserted that the total amount of the invoice was "due and payable" on i June. Under para. 29 of the Determination, Compass was liable to pay a penalty to CAA if, for instance, that amount was not paid by 29 June, the amount of the penalty being calculated as compound interest of 1.5% of the amount unpaid for each month, or part of a month,

after 1 June for which the May invoice remained unpaid.

Part III (rr. 7A-20) of the CA Regulations is headed "REGISTRATION AND MARKING OF AIRCRAFT". Regulation 7A provides, relevantly, that an aircraft is required to be registered, and regulation 8 requires CAA to establish and keep a register of Australian aircraft called "the Aircraft Register". Reguiation 10 provides for applications for the registration of aircraft, and regulation 13 provides for the

Part IXB (rr. 97-132) is headed "AIR TRAFFIC SERVICES".

Regulations 97 and 98 empower CAA to establish, maintain and

operate a service to be known as "Air Traffic Control" and for its functions. Regulation 100 provides that an aircraft must comply with air traffic control instructions. In particular, it prohibits an aircraft from entering, operating in, or leaving a control area except in accordance with air traffic

Part XI (rr. 160-181) is headed "RULES OF THE AIR". Regulation 167 (b) provides that where aerodrome control is in operation at an aerodrome, the pilot in command of an aircraft forming part of the aerodrome traffic must "obtain, either by radio or visual signals, prior authorisation for any manoeuvre preparatory to or associated with taxi-ing, landing or taking- off". Regulation 169A provides that a pilot in command who contravenes, inter alia, regulation 167 is guilty of an

offence for which the maximum penalty is a fine of $2,500.00.

penalties to CAA, CAA had the following remedies available: (a) it could sue for the debt (CA Act, sub-s. 66 (11)); (b) once the CAA Board had determined a period beginning on

the day on which a charge became due and payable (where

an invoice was issued, the first day of the month after

the month in which the liability was incurred) expired,

if an outstanding amount covered by such a statutory lien were unpaid at the end of six months after the day on which it became an outstanding amount, or the day on which the lien was registered, whichever was the later, the Certificate of Registration of the aircraft could be

if an outstanding amount covered by a statutory lien was unpaid at the end of nine months after the day on which it became an outstanding amount or the day on which the lien was registered, whichever was the later, (i) the aircraft could be seized and retained; and/or

it was arguable that CAA could decline to provide services and facilities to Compass (CA Regulations 167 (b) and 169A). {The primary Judge was of the opinion that CAA was entitled under the CA Regulations to refuse permission to Compass for its aircraft to taxi on airport runways and to take off, since non-compliance with such directions constituted an offence: 48 FCR at 173. The evidence of Mr Beer, an executive of CAA, was that, in

Sufficient has been said of the facts to provide an appreciation of the issues which arise on the appeal. It will be necessary later to consider the facts, and the proper inferences to be drawn from the facts, in greater detail but before doing so, it is appropriate to consider the legal norms that are involved and the objects or purposes which they seek to achieve. It is with those matters in mind that the facts

The applicable legal principles are only to _ be appreciated with a proper understanding of the way in which they have developed in Australia, particularly in comparison with their development in the United Kingdom and the United States. It is fair to say, as was submitted by counsel, that the present litigation does present unusual features. Hence,

There has been little discussion in the Australian authorities of the objectives sought to be attained by the preference provisions of the modern legislation in which regard is had to the "effect" of the impugned dealing rather than to the intent of the debtor. As will appear, the federal legislation in the United States for more than a century has looked at preference questions "objectively", giving that law

closer resemblance to that of this country than to that of the

English law. The moral shortcomings of the creditor do not inform the policy of the law in either country. The decisions of Lord Mansfield, to which we later refer, had "punished" the debtor who had tried to impose his own scheme of distribution: Robert Weisberg, "Commercial Morality, the Merchant Character, and the History of the Voidable Preference", 39 Stanford L.

It has been said in the United States that there are two predominant objectives of preference law: (i) equality between creditors; and (ii) deterrence. In Union Bank v Wolas 116 lL. Ed. 2d 514 (1991) the Supreme Court considered s. 547, the

preference provision of The Bankruptcy Reform Act of 1978.

Stevens J., giving the judgment of the Court, cited (at 524) the following passage from the House Committee Report No. 95-

"The purpose of the preference section is two-fold. First, by permitting the trustee to avoid prebankruptcy transfers that occur within a short period before bankruptcy, creditors are discouraged from racing to the courthouse to dismember the debtor during his slide into bankruptcy. The protection thus afforded the debtor often enables him to work his way out of a difficult financial situation through co-operation with all of his creditors. Second, and more important, the preference provisions facilitate the prime bankruptcy policy of equality of distribution among creditors of the debtor. Any creditor that received a greater payment than others of his class is required to disgorge so that all may share equally. The operation of the preference section to deter 'the race of diligence' of creditors to dismember the debtor before bankruptcy furthers the

second goal of the preference section - that of equality of distribution."

"As this comment demonstrates, the two policies are not entirely independent. On the one hand, any exception for a payment on account of an antecedent debt tends to favour the payee over other creditors and therefore may conflict with a policy of equal treatment. On the other hand, the ordinary course of business exception may benefit all creditors by deterring 'the race to the

courthouse' and enabling the struggling debtor to continue operating its business."

What one might call the "deterrence" rationale has been questioned. It has been suggested that any economically rational creditor usually will decide to take a preference because the sanction of the preference law is the restoration of the status quo so that the creditor receives in the bankruptcy administration that which would have been received without the preference. As Professor C.J. Tabb puts it,

"Rethinking Preferences", 43 S. Carolina LL. Rev. 981, 991 (1992):

"The only potentially lost costs are those associated with receiving the preference in the first place ... and

with defending a preference lawsuit, if the creditor chooses to do so.

If recapture were absolutely certain, then deterrence might work, given these transaction costs. However,

recapture is not a certainty, and the prudent creditor will discount that likelihood accordingly."

(2) "Effect" Contrasted with "Intent" in 5s. 122 (1)

Sub-section 122 (1) of the Act fixes upon certain payments and other dispositions "having the effect of giving that creditor a preference, priority or advantage over other creditors ..." (emphasis added). The expression "having the effect" has a long history in bankruptcy law in this country, one which marks off in a significant respect the law in Australia from that established in the United Kingdom: Spedley

Securities Ltd (In Liq.) v Western United Ltd (In Lig.), supra at 115.

Section 95 of the 1924 Act spoke of certain payments "having the effect" of giving a preference. The meaning of the phrase was disputed in learned articles, each entitled "Fraudulent Preferences" by P.E. Joske and V.G. Braham in

In sS. Richards & Co. Ltd v Lloyd (1933) 49 CLR 49, the High Court rejected a submission that s. 95 looked to the intent or state of mind of the debtor, not merely to the effect of the transaction. Rich and Dixon JJ. (at 60) drew support for rejecting that submission from "the language of the section, the history of the bankruptcy legislation in

Australia and the course of the colonial decisions ...".

Some mention should be made of that history and of those

Section 8 of the Insolvent Act 1841, 5 Vic. No. 17 (NSW) introduced the phrase "having the effect of preferring any

"And be it enacted, That all alienations transfers gifts surrenders deliveries mortgages or pledges of any estate goods or effects real or personal warrants of attorney cognovits actionem and judgments entered up thereon made by any person being insolvent or in contemplation of surrendering his estate as insolvent or knowing that legal proceedings for obtaining an order for' the sequestration of his estate as insolvent, have been commenced or within sixty days preceding the making of any order for sequestration of his estate as insolvent, and having the effect of preferring any then existing creditor to another shall be and are hereby declared to be absolutely void."

On the other hand, the treatment of preferences in the first comprehensive British bankruptcy statute, the Bankruptcy

Act 1869 c.71 (U.K.) ("the 1869 Act") was different. Section

"92 Every conveyance or transfer of property, or charge thereon made, every payment made, every obligation incurred, and every judicial proceeding taken or suffered by any person unable to pay his debts as they become due from his own monies in favour of any creditor or any person in trust for any creditor, with a view of giving such a creditor a preference over the other creditors, shall, if the person making, taking, paying, or suffering the same become bankrupt within three months after the date of making, taking, paying, or suffering the same, be deemed fraudulent and void as against the trustee of the bankrupt appointed under this Act; but this section shall not affect the rights of a purchaser, payee, or incumbrancer in good faith and for valuable consideration." [Emphasis added]

The phrase "with a view of giving such a creditor a preference" concentrated upon the result intended by the debtor, rather than merely upon the effect of what was done. Section 92 also reflected the then current understanding of

the earlier English case law, whereas s. 8 of the 1841 Act had

In Humphery v McMullen (1868) 7 S.C.R. (L) 84 at 89-90, the New South Wales Full Court considered the state of the law in England at the time of the enactment of the 1841 Act. The

"The doctrine of fraudulent preference attached itself, in the first instance, without any positive enactment, to the bankrupt laws. Springing from the general principle that fraud renders every act void, in its inception it supposed fraud on the part of the debtor; for, when the bankrupt laws established as their governing principle that the bankrupt's property should be equally distributed amongst all his creditors, it necessarily followed that any act done by the debtor, which unjustly favoured a particular creditor, to the prejudice of the other creditors, and so prevented the equal distribution which the law required, should be treated as a fraud, in respect of the other creditors, and consequently as a fraud upon the bankrupt laws, and therefore void.

The Courts, however, did not go so far as to say that every transaction between the debtor, even when he contemplated bankruptcy, or was on the eve of bankruptcy, and a particular creditor, by which such creditor obtained an advantage or preference over the other

creditors was void. Thus in Harman v. [Fishar] (1774) 1 Cowp. 117, 98 E.R. 998, Lord Mansfield says [at 123, 1001]:

'But no case ever came before us where we were warranted to say that no case can exist of a legal preference. For if a man were to make a payment but the evening before he becomes bankrupt, independent of the Act of Parliament and in a course of dealing

and trade, it would be good; or suppose legal diligence used by a creditor, and execution on a ca. sa. is in the house, and under terror of that he makes an assignment and delivery of his effects, it would be valid; the object not being to give a preference, but to deliver himself.'

And in the same case, Lord Mansfield laid it down, that

'where an act is right to be done, and the single motive

is not to give an unjust preference, the creditor will

The doctrine was thus reduced within very narrow limits;

and after this it seems to have been fully established

that no transaction would be avoided as _a fraudulent

reference, unless it was voluntary on the part of the debtor, and unless his sole motive was to give a

preference. Any circumstance that negatived either of these conditions took the transaction out of the class of fraudulent preferences and protected it."

Harman was a significant decision in the development of the law. It is analysed in detail by Professor Robert Weisberg in his article "Commercial Morality, the Merchant Character, and

the History of the Voidable Preference", supra at 48-51.

The Full Court in Humphery v McMullen went on (at 90-3) to discuss a number of early 19th century decisions and statutory provisions by which Lord Mansfield's doctrine appeared to have "crept into the statute law". The statutes included 6 Geo. IV, c. 16 (1825); 7 Geo. IV, c. 57 (1826); Judgments Act 1838, s. 59; and 2 & 3 Vic., c. 29. (All but the Judgments Act have since been wholly repealed.) Their Honours continued (at 94) by remarking upon the significant

change wrought by the 1841 Act in New South Wales. They said:

"Such then was the state of the law on this point, and such was the nature of the decisions in England, when our Statute, 5 Vic., No. 17, was passed. And it must be assumed that the framers of our Act had in view not only the English enactments, but also the decisions upon the subject. When, under such circumstances, we find the local Legislature, which has in other respects made considerable departures from the English law on the subject of bankruptcy and insolvency, using in this enactment terms so very different from those used in the English enactments, we may fairly ask whether' the preference indicated by the 8th section of our Act is not altogether different from the ''fraudulent preference' of the English law. Are we to assume that the words 'fraudulent' and 'voluntary', which occur in the English enactments, but are altogether omitted (we must suppose advisedly and intentionally) from ours, are to be introduced by implication into the latter? Is it not, on the contrary, more reasonable to conclude that' the framers of our Act meant to get rid of these questions of intention, on the part of the insolvent debtor, which caused so much difficulty in some of the English cases, and to rest the validity or invalidity of the transactions solely on the question whether, in point of fact, the creditor obtained a preference? This construction would embrace not only those cases which, according to the English doctrine, depend on the debtor's voluntariness and intention to prefer, but also those in which such voluntariness and intention may not exist."

The Bank of Australasia v Harris (1861) 15 Moo 96, 15 E.R. 429, was an appeal to the Privy Council from the Supreme Court of Queensland, in which colony at the relevant time the 1841 Act applied. The judgment was delivered by Knight Bruce L.J. who expressed the view (at 437) that the phrase "having the effect of preferring any then existing creditor" in s. 8

of the 1841 Act was not intended to refer to any case of

preference which was not fraudulent. Humphery v McMullen, supra, was decided seven years later. The New South Wales

Full Court, as appears from what has been set out above, was

of the contrary view and held that the expression of opinion

by the Privy Council did not compel the overrruling of a long

series of decisions of the Supreme Court of New South Wales.

Section 31 of the Insolvency Statute 1865, 28 Vict. No. 273, was in identical terms to s. 8 of the 1841 Act. Nevertheless, in Sheldrick v Aitken (1869), 6 W.W. & A''B (L) 59, the Victorian Full Court was influenced by observations by their Lordships (at 64) upon the bankruptcy law in force in Jamaica, Nunes v Carter (1866) L.R. 1 P.C. 342 at 347, as affirming what had been said in The Bank of Australasia v Harris. The Full Court decided that s. 31 of the statute

It was this conflict in interpretation of the colonial legislation which finally was resolved by the enactment of s. 95 of the 1924 Act and the interpretation given s. 95 by the

High Court in sS. Richards & Co. Ltd v Lloyd, supra.

It should be noted that under s. 44 of the Bankruptcy Act 1914 c.59 (U.K.), the mental element for the giving of a preference was identified in terms of the principal or dominant desire of the debtor, whereas under the current United Kingdom legislation, s.340(4) of the Insolvency Act 1986 c.45 (U.K.), it is enough that the giving of the

preference was influenced by a desire to produce the relevant

effect: Halsbury's Laws of England 4th ed., Reissue, vol. 3

(2) s646; R.M. Goode, Principles of Corporate Insolvency Law, 1990, pp. 163-4, 172-3.

(3) The "Net Result" Rule and the "Running Account" in the United States

We were referred, as had been the primary Judge, to several United States decisions. It is appropriate to consider briefly the pattern of federal legislation in that

country. That legislation has not operated continuously. The

Bankruptcy Act of 1800, 2 Stat.19, was repealed in 1803 and

the next federal law, The Bankruptcy Act of 1841, 5 Stat.440, (of which Story had been a proponent) was repealed in 1843. The Congress again legislated with The Bankruptcy Act of 1867, 14 Stat.517 (which was repealed in 1878), followed by The Bankruptcy Act of 1898, c.541, 30 Stat.544, After various

amendments, that statute was replaced by The Bankruptcy Reform Act of 1978, which itself has been amended.

The decisions of Lord Mansfield which established a judicial doctrine of fraudulent preferences in England had been followed in early American decisions: Tabb "Rethinking Preferences", supra at 1000-2. At that time, the law of bankruptcy was concerned with insolvent traders, and there was no voluntary bankruptcy. Section 2 of the 1841 Act provided for the recapture of preferences which were identified in terms of transactions effected "for the purpose of giving any

creditor ... any preference or priority ...". Section 35 of

the 1867 statute used the phrase to be found in s. 92 of the 1869 English Act - "with a view" to giving a preference. However, both statutes were construed in such a fashion as to place upon the debtor the burden of disproving what otherwise would flow from the objective circumstances known to the debtor at the relevant time, and the debtor was said to have presumed against him the natural consequences of his acts: Arnold v Maynard 1 F. Cas. 1181 (1842), a decision of Story J. sitting as Circuit Judge in the District of Massachusetts; Toof v Martin 80 U.S. 40, 48 (1871). The requirement that the debtor have an intent to prefer the creditor was finally abandoned in s. 60 of the 1898 Act; see Tabb, supra, at 1007-8.

The High Court of Australia has, in more recent times and in other contexts, held that the supposed presumption, conclusive or otherwise, that a man intends the natural, or natural and probable, consequences of his acts, is unsatisfactory where a specific intent must be found: Smyth v The Queen (1957) 98 CLR 163 at 166-7. Nevertheless, as developed in the United States by Story J. and other judges, this notion played an important part in bringing about what ultimately was a legislative recognition that preferences were concerned with effect rather than with the intent of the debtor. In Australia, in the course of argument upon s. 73 of the Insolvency Act 1890 (54 Vict. No. 1102) which

substantially corresponded to s. 92 of the English Act of

1869, Griffith C.J. asked "[mjust not a man be presumed to intend the natural consequences of his act?": Muntz v Smail (1909) 8 CLR 262 at 266, 271. But in the years before the enactment of the 1924 Act, the idea does not seem to have

Whilst what one might call "debtor intent" has for long not been required in the United States in connection with recapture of preferences, s. 35 of the 1867 Act introduced, and s. 60b of the 1898 Act continued, a requirement of knowledge on the part of the creditor. Section 35 required "reasonable cause to believe" that the debtor was insolvent, and s. 60b required that the creditor had "reasonable cause to believe" that it was intended by the transaction in question to give a preference. The presence of this requirement of "creditor intent" must be taken into account if one is to appreciate what truly was involved in the decisions propounding what in the United States was called "the net result" rule. We were referred to this, as the primary Judge had been (48 FCR at 172), as being analogous to the Australian

Particular reference was made to three decisions of the United States Supreme Court, Jaquith v Alden, 189 U.S. 78 (1903), Yaple v Dahl-Millikan Grocer Co., 193 U.S. 526 (1904), and Joseph Wild & Co. v Provident Life & Trust Co.,

214 U.S. 292 (1909). These decisions have been placed in

their statutory context and their significance explained by Professor V. Countryman in his detailed study, "The Concept of a Voidable Preference in Bankruptcy", 38 Vand. L. Rev. 713, (1985), and by the decisions of the United States Bankruptcy Court in In re Thomas W. Garland Inc., 19 B.R. 920, 922-925 (E.D.Mo. 1982) and in_re St. Louis Globe Democrat, Inc., 99 B.R. 946, 948-9 (E.D.Mo. 1989). So viewed, their importance

Professor Countryman points out (at 722) that s. 57g of the 1898 Act provided that the claims of creditors who had received preferences were not to be allowed unless' they surrendered those preferences. The Supreme Court construed this provision as applying to any creditor who had received any preference as defined in s. 60, even though the preference was not voidable under that section because the creditor did not have reasonable cause to believe that the debtor intended

to give a preference: Pirie v Chicago Title & Trust Co., 182

U.S. 438, 446-7 (1901). The creditor was given the choice of retaining the technical preferential payment and foregoing any participation in a distribution by the trustee, on the one hand, or of returning the preference and participating with other creditors in any distribution by the trustee, on the other. The Congress then, in 1903, amended s. 57g so as to forbid the allowance of claims of those creditors who did not surrender preferences which were voidable under s. 60, thereby

As we have indicated, the primary Judge (48 F.C.R. at 171) asked whether CAA was better or worse off by reason of receiving the payments in question and decided that the net

In the United States, what was called the "net result" rule was developed to place a gloss upon the statute as it existed between 1898 and 1903. In explaining this development, Professor Countryman refers (at 783) to the three

decisions of the Supreme Court cited above, and continues:

"The rule developed when old section 57g required creditors to surrender 'technical' preferences, which were not voidable because the creditor had no reasonable cause to believe the debtor insolvent, before their claims would be allowed. To mitigate the rigors of section 57g, lower courts developed, and the Supreme Court approved, a 'net result' rule under which all 'technical,' nonvoidable preferences received by a creditor and all unsecured credit extended by that creditor during the then four month preference period were viewed as a single transaction. Only to the extent that the 'net result' showed a gain by the creditor would the creditor be required to surrender it before his claim would be allowed. Courts, however, applied that rule only under section 57g and only to creditors who had received nonvoidable preferences; the rule did not apply to creditors who received preferences that the trustee could avoid under old section 60. Those creditors might have been able to set off subsequent unsecured credit extensions under section 60c, but they could not invoke the 'net result' rule. When Congress amended section 57g in 1903 to confine its operation to voidable preferences, there was no longer any occasion to apply the 'net result' rule. Every court that has considered the effect of the amendment of section 57g on the 'net result' rule has reached this conclusion."

However, even after the 1903 legislation eliminated the foundation for the net result rule, some courts applied it to achieve an "equitable" operation of the preference law in deserving cases, and the "net result" rule seemed to acquire

"a life of its own": Gerald B. Kirksey, "A Simplified Approach

to Preference Calculations ..." 61 Am. Bankr. L.Jd. 255, 259 (1987). See also Collier on Bankruptcy i5th ed (1993) s547.12.

In re Fred Stern & Co. Inc., 54 F.2d 478 (2d Cir. 1931), the Court of Appeals for the Second Circuit applied, by analogy, the federal decisions dealing with the "net result rule" to a State statute, the New York Stock Corporation Law, s. 15. However, in his concurring judgment, Learned Hand J, after referring to Jaquith and other Supreme Court decisions, said that he was "not sure that I understand on what principle those cases rest" and that it was "[o]Jn the authority of

[those] cases and for that reason alone" that he concurred.

This reservation by Learned Hand J. is important in the light of the significance given to this decision in one of the Australian authorities to which we refer later (CSR Ltd v

The authorities referred to by Collier (at s553.05[2], n9) notably In_re Fulghum Construction Corp., 706 F.2d 171,

174 (6th Cir. 1983) indicate that whatever otherwise might be

the status of the "net result" rule, it now yields utterly to the specific provision of s. 547 (c) (4) of the 1978 Act. This, as has been said, transforms any "net result" rule into a "subsequent advance" rule by requiring that the "new" or additional value be given after the preferential dealing (See also the discussion of Fulghum by Countryman, supra at 784; as to whether the surrender by operation of law of the right to perfect a statutory lien constitutes "new value", see Cimmaron Qil_ Co. Inc. v Camerson Consultants, Inc,., 71 B.R. 1005 (N.D.

Section 547 (c) (4) is one of the seven exceptions to the operation of the general provision (s. 547(b)) rendering a voidable preference one that benefits a creditor, is made on account of an antecedent debt, while the debtor was insolvent, and within ninety days before bankruptcy, so as to enable the creditor to receive a larger share of the estate than if "the transfer" had not been made. The particular exception in s.

"(c) The trustee ma not avoid under this section a t £ ¥ ransfer -

(4) to or for the benefit of a creditor, to the extent that, after such transfer, such creditor gave new value to or for the benefit of the debtor -

(A) not secured by an otherwise unavoidable security interest; and

(B) on account of which new value the debtor did not make an otherwise unavoidable transfer to or for the benefit of such creditor."

The outcome is that even though the creditor may have received a preference, in some circumstances the creditor may still offset against a preference claim any subsequent unsecured credit which was extended to the debtor. Illustrations are

Thus the present United States legislation does not, and its predecessors may never have, provided any direct assistance in dealing with the "running account" principle invoived in decisions dealing with s. 95 of the 1924 Act and

The expression "running account rule" also has been used in America to describe the "net result" rule. In In _ re St. Louis Globe Democrat, Inc., supra at 948, it was said that a running account is created where the debtor makes a payment and the creditor extends new credit so that the net result is a corresponding increase in the value of the estate; but that there will be no "running account" in this sense where the debtor makes the payment unconditionally, so that it is not

As several American commentators have noted, and we return to this later, significant questions remain unresolved

in the policy area in the United States law of preferences,

such that we are reluctant to adopt the "net result" rule for present purposes, the operation of sub-s.122(1) of the Act,

The term "running account" is used in several areas of the law. Whether there is a "running account" may be significant for the operation of limitation statutes, for the tracing of trust funds and for the application of the rule in

Clayton's Case. The term also may be used in the provisions

The precise denotation of the term probably varies with

the particular discourse in which it is used. It may indicate an account which is not closed or stated, but in which the inclusion of further dealings between the parties is contemplated. It may be that the account is classified as a running account because, by express or implied agreement of the parties, it is only the balance due from one to the other that is payable. Finally, it may be said that there is no running account unless there are mutual dealings, there being debits and credits on either side. American authorities for all these propositions, for instance, are collected in the

Annotation to Goodsole v Jeffery 168 N.W. 461 (1918) in 1 ALR

(5) The "Running Account" in the High Court of Australia

It is appropriate now to turn to the evolution in Australian bankruptcy law of what might be called the "running

account" doctrine., It will be apparent that it turns upon the

interpretation given the word "effect" in s. 95 of the 1924 Act and the compression of the term "entire transaction" into the statutory phrase "every conveyance or transfer of property, or charge thereon made, every payment made, every

obligation incurred and every judicial proceeding taken or

In Richardson, the High Court was dealing with a succession of deposits to and withdrawals from an overdrawn current bank account. As we have indicated, in Weiss Gibbs J was concerned with the application of s. 95 of the 1924 Act. The bankrupt had carried on business as a tailor and had

obtained supplies of cloth from the respondent. Gibbs J. said

"(T]he 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

In Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266 at 283, Barwick CJ said:

"In general, to pay one of a number of creditors, and neither paying, securing nor arranging with the others, is to prefer the creditor who is paid. But it seems to me that it is one thing to pay a sum of money in the liquidation of an indebtedness, so as to end the relationship of debtor and creditor and, that it may be quite another to make a payment on account of a 'running' indebtedness, the Payment not in anywise intended or understood to end the relationship of the debtor and

creditor, but rather to ensure its continuance." The Australian Law Reform Commission's "General

Insolvency Inquiry" (Report No. 45, Vol. 1) summed up the

Claims against banks and traders alleging a preference in their favour often involve' the assertion that, in the operation of an overdraft or a trading account, the bank or trader has been repaid all or part of the credit extended to the now insolvent customer. Where the conduct of business between the bank or trader and customer involved a 'running' account consistent with an arrangement that the account would fluctuate, the courts have developed the principle that regard must be had to the debits and credits over the relevant period of time in order to determine whether a preference (if any) has resulted. If a reduction of the overall amount outstanding in the relevant period has occurred, then the issue is whether the amount of the reduction is a preference. The courts have consistently rejected the notion that each payment to the credit of such an account should necessarily be viewed in isolation as possibly amounting to a preference."

It will be noted that the Commission discussed the topic in terms of an arrangement for the extension of credit so that

(Section 588FA of the Corporations Law, which is in the new Part 5.7B introduced by s. 111 of the Corporate Law Reform Act 1992 (with effect 23 June 1993) introduces a new treatment of unfair preferences. Sub-section 588FA (1) is the general provision and sub-s. 588FA (2) may give statutory effect to

"588FA(2) [Transaction part of continuing business relationship] Where:

(a) a transaction is, for commercial purposes an_integral part of a continuing business

account) between a company and a creditor of a company (including such a relationship to which other persons are parties); and [Emphasis added]

(b) in the course of the relation-ship, the level of the company's net indebtedness to the creditor is increased and reduced from time to time as the result of a series of transactions forming part of the relationship;

(c) subsection (1) applies in relation to all the transactions forming part of the relationship as if they together constituted a single transaction; and

(ad) the transaction referred to in paragraph (a) may only be taken to be an unfair preference given by the company to the creditor if, because of subsection (1) as applying because of paragraph (c) of this subsection, the single transaction

referred to in the last-mentioned paragraph is taken to be such an unfair preference."

But the present dispute has to be determined in accordance

with the law as it stood before the commencement of s. 588FA

In Page v Commonwealth Life Assurance Society Ltd (1935) 36 S.R. (NSW) 85 at 89, Jordan C.J. said that the policy of

the bankruptcy law has always been regarded as a useful guide in determining the operation and limitations of the letter of the law. His Honour gave two instances, (i) proceedings which, although within the letter of the law, had been regarded as obnoxious to the policy of the bankruptcy law, and therefore, avoided by it, and (ii) limitations upon the application of the letter of the law which have been extracted from its "general policy". Although Jordan C.J. did not advert to them, the decisions of Lord Mansfield from which the law of preferences developed illustrate proposition (i). The "running account" doctrine may perhaps be seen as an

This passage was referred to by Clyne J. in Re Price (No.

6); Richardson v Commercial Banking Co. of Sydney Ltd (1949)

"I do not think that s.95 (1) can be given a strictly

literal interpretation. Such an interpretation would have strange results and results which, in my opinion, were not intended by the legislature. On a strictly

literal interpretation of s.95 (1), any payment into a banking account by a debtor, however trivial an amount, and made nearly six months before the debtor's bankruptcy, would be a preference, because at the time of payment it gaye the banker a momentary advantage, though in substance and in fact it had no effect in preferring the banker tq other creditors. Such an interpretation would give te the section an application which had no regard to the!policy of the law, or to the continuous and

reciprocal obligations which are contracted from day to

day between debtors and creditors in the course of their business operations. In my opinion, to create a preference under this section, there must, in the event

of bankruptcy, be a discrimination between creditors of a final or ultimate character."

Clyne J. had earlier (at 41) observed that the element of preference in s. 95 in the 1924 Act had appeared in New South Wales in the 1841 Act and that the requirement that the transaction had the effect of giving a preference, not that it be entered into with a view to giving a preference, was an important distinction between Australian and English law. His Honour also (at 42) referred to Stephen v Doyle (1882) 3 NSWLR (Eq.) 1. There, Martin C.J. had said, with reference to s. 8 of the 1841 Act, "that the effect of the transfer must be judged by the fact of its ultimately producing a preference or not", and Faucett J. had said that "having the effect" meant not being put into the position of being able to take an

advantage, but having the effect of preferring in the case of

Clyne J. went on (at 43) to conclude that where effect, not intent, was a test of preference, a cheque deposited by a customer in a banking account which has the effect of enabling the customer to meet his obligations or some of them when due, is not a payment which amounts to a preference to the banker

"[I]n my opinion payments made to a banker by a customer in the course of their current relationship as banker and customer which have the effect of enabling the customer to meet his liabilities are not preferences within s.95 unless, in their ultimate result, they give the banker an advantage over the other creditors. These payments, while affording the bank some temporary or incidental advantage, do not in the course of the business of banking bring about _a_diminution of the property available for division between the creditors in the event of the debtor becoming bankrupt, and they do not contravene that policy of the bankruptcy law which requires an equal division of the debtor's property between his creditors."

Stephen v Doyle, supra, is a significant decision because unlike the case with which Clyne J. was dealing, it did not involve a running account between banker and customer. The facts were as follows. Sheehy was indebted to Doyle. He sold to Doyle certain property for £600, £200 of which was paid at once. It was agreed that Doyle should pay the balance of £400 when required. Before Sheehy became insolvent, Doyle paid the balance. The old debt of Sheehy to Doyle remained unpaid. It was contended unsuccessfully that Doyle had received a preference. The argument by the future Sir Alexander Gordon

and Sir Adrian Knox which was rejected was as follows (at 3):

"It is not the intention of the parties that governs questions arising under sec.8 of the 'Insolvent Act' (5 Vict. No. 17), but the 'effect' of their dealings. And that 'effect' must be judged, not by the actual result, but by the possible result - by the use the creditor might put it to, though in the end he does not. Applying this test it is easy to see how Doyle might have obtained a preference. If he had refused to pay the £400 and Sheehy had sued him, Doyle could have set off his previous debt, or, if Sheehy had become insolvent before all the £400 was paid to him, Doyle could have still set

off the debts and paid or proved for the balance under sec.37."

The decision is authority for the proposition that it is the actual result of obtaining a preference that is relevant, not the possibility of this coming about. In other words, the effect is to be determined as at the date of a sequestration

order, having regard to supervening events between the payment

Re Price (No. 6) supra was affirmed by the High Court:

Richardson v The Commercial Banking Co. of Sydney Ltd (1952)

85 CLR 110. In the course of the joint judgment of Dixon, Williams and Fullagar JJ., the following propositions appear (at 129, 132): (i) s. 95 supposes a bankruptcy and in relation to that bankruptcy the question arises whether, over the other creditors, a preference, priority or advantage has been given to the particular creditor; (ii) the relevant "effect" must be a consequence of the payment; (iii) in looking to effect the Court is considering the "real effect", namely the "actual business character" of the payment; (iv) if the payment forms

an integral, inseparable, part of "an entire transaction", its

effect as a preference involves consideration of that whole transaction; (v) the question then is whether the payment forms part of "an entire transaction" which "if carried out to its intended conclusion will leave the creditor without any preference, priority or advantage"; if so, the payment cannot be isolated and construed as a preference; [this consideration was Significant for Menzies J. in his later treatment of the subject in the Rees litigation, to which we refer below]; (vi) if the creditor carries on relations with the debtor "on the intended footing" and obtains, "in the result", no preference, priority or advantage over other creditors, the fact that it was open to the creditor to interrupt "the course of dealing" or "the progress of the transaction", so as to secure for himself a preference, is not sufficient to show that the payment had that effect, for that was not its "final effect in fact". This last proposition is of particular importance as indicating that the "intended footing" and the "entire transaction" need not be contractual whether expressly or by implication, in character; something less may suffice to take

In Rees v Bank of New South Wales (1964) 111 CLR 210 at 221-2, Kitto J. described as follows what he understood the

"[T]he arrangements made between the bank and the company from time to time during the period were such that by a common business purpose of the company and the bank each

deposit was so connected with subsequent payments out 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."

This, of course, presents the further question as to what is involved in "common business purpose" and what criteria are used to assess the sufficiency of the connection between deposits and payments. However, the phrase "common business purpose" suggests contract is not essential, even if it may have been possible in this context to infer or imply a

In Richardson the High Court examined with much care the arrangement between the solicitor Price and the manager Commins who was in charge of the relevant branch of the bank. Payments were made by Price to the bank account to enable to the bank to meet cheques which he had drawn or was about to

"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."

Earlier (at 133) their Honours had described "the whole purpose of Commins and Price was to find means not of paying

off the bank but of carrying on from day to day by honouring

as many cheques as possible". This was described (at 132) as "the arrangement" between the solicitor and the bank manager. It was in this setting that the High Court used such expressions as "entire transaction" and "actual business

In Richardson, where the dispute turned upon the relationship of banker and customer, the judgment of the High Court is readily to be understood against the background of a running account in the ordinary sense. Outside the sphere of

banker and customer, the position is not s0 clearly

established. In Queensland Bacon at 283, Barwick CJ spoke of

the making of "a payment on account of 'running' indebtedness". Hence, in these cases, the emphasis is given to such concepts as "mutual assumption" and "entire transaction".

In Queensland Bacon at 281, Barwick CJ found a course of

business between the parties in the following terms:

"Each of the four appellants at the time of the receipt by it of a payment from the company whilst it was unable to pay its debts as they became due had been trading with the company for some time, some of them for a longer period than others, on the footing that goods of the kind dealt in by both the company and the creditor would be supplied by the creditor on agreed terms of credit upon the order of the company. There was not in any case any binding agreement that the company's order would be accepted, or that payment according to the agreed terms for goods already delivered would entitle the company to obtain further supplies on credit. But clearly 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." (Emphasis supplied)

Menzies J. (at 316-7) took a different view. His Honour emphasised that in the present case it was intended that upon each occasion when a cheque was received by the creditor from its debtor, the position of the creditor would be improved, notwithstanding current supplies and that the object of the arrangement was to bring about a reduction of that existing liability. His Honour contrasted that situation with the circumstances in Richardson. Menzies J. said (at 316) that Richardson was a very special case in that the payments there in question were made by the solicitor to his bank, not to reduce the debt owing to the bank, but to be dispersed

forthwith by the bank honouring cheques drawn by arrangement

"In other words, the payments into the account were

measured exactly by the payments to be made out of the account so that the account would remain as it

was, notwithstanding the payments in and _ the payments out."

Menzies J. contrasted that arrangement with the present case, saying that the object of the arrangement was to bring about a

reduction of an existing liability. His Honour said (at 317):

"Every payment having that effect would improve the position of the creditor and it is sufficient that the payment actually made should give the creditor some advantage over other creditors. I consider that payments made in the carrying out of such an arrangement could constitute preferences ..."

It follows that, on the view taken by the Chief Justice, the amount recoverable as a preference was the sum by which the series of transactions eventually reduced the debit balance; whilst on the approach taken by Menzies J., the amount recoverable will be the total of each of the separate payments that were made. The result advocated by Menzies J., supports a construction of the term "effect" in s. 122 which discourages the making of private arrangements which are for the benefit of a particular creditor even though the implementation of the arrangement assists the insolvent debtor in continuing in business presumably in the hope of overcoming present difficulties. The other creditors who continue trading with the debtor thus may derive an advantage from the private arrangement. But, by definition, the problem only

The argument, on policy grounds, in favour of a broad meaning of "effect" to encompass the "running account" appears to be this: (i) debtors should be permitted selectively to Meet current debts in order to continue operations outside bankruptcy so as to encourage creditors to continue doing business with the debtor in the knowledge that they will not be penalised if the attempt to stay outside bankruptcy fails; (ii) the withholding of credit from financially distressed debtors inevitably would drive more of them out of business and into bankruptcy; and (iii) the creditors in question have added value to the estate and should not be penalised by application of the preference law. See Countryman, supra at

forcefully by Professor Tabb, supra at 1020, 1023-4:

"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 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. A value-added notion does not sufficiently justify the distinction. If the rationale is to encourage last minute prop-ups of a distressed debtor, we again are back to the incentive effect, which is discussed in the next part. ... .

[T]he creditor's estimation of the likelihood of the debtor's payment on a timely basis dwarfs all other considerations. Whether a debtor will or will not go into bankruptcy, whether a preference action will even be brought if bankruptcy does ensue, and whether such a preference action will be successful if brought are all much more remote concerns than the basis question of whether the debtor will pay. In every credit extension the creditor must consider that problem; the spectre of bankruptcy and preference recapture is much less immediate.

Thus, if the debtor truly is in difficult straits, a careful creditor will insist on C.0.D. transactions no matter what the preference law says. The fact that the preference law would permit the creditor to keep any payment that the debtor made on account even if the debtor soon goes bankrupt does not in any way enhance the debtor's liquidity so that the debtor has the money to make that payment. Conversely, a creditor who is willing to take a credit chance in order to make a sale is likely to take that chance whatever the state of the preference law."

It is with these considerations in mind that one approaches

the homely example given by the High Court in Richardson 85 CLR at 133:

"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."

Of that passage, Menzies J. in Queensland Bacon (115 C.L.R. at 317) said:

"It is to be observed, however, that the Court had in mind a case where the payments to be made would not exceed the value of the groceries to be supplied, for the statement is:'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 could not be attacked as having received a preference.'"

In his discussion of the subject, it is apparent that Professor Goode, like Menzies J., has taken a fairly narrow view of what is involved in the High Court authorities. The learned author says (Principles of Corporate Insolvency Law,

"The operation of a current account between the parties to record mutual dealings raises special considerations. Suppose that a company whose account with its bank is overdrawn pays a cheque into the account, thus reducing the overdraft. Tf the company were at that time insolvent the payment in would constitute a preference and would be vulnerable to attack if made with intent to prefer the bank. But suppose a few days later the bank honoured a further drawing. Would it be liable to repay the preference without being given credit for the fresh advance? Such a result would seem unfair in the extreme, giving a windfall to the general body of creditors. Could the fresh drawing be treated as a reversal of the preferential payment? This is one way out of the dilemma. The court makes no order because the bank has already put right the wrong. Another way of approaching the matter is to say that 'where a payment is not in pursuance of an isolated transaction but is bound up with a series of transactions, it is the effect of the total transactions, of all the connected items, that has to be looked at.' [M. & R. Jones Shopfitting Co. Pty. Ltd v National Bank of Australasia Ltd (1983) 7 A.C.L.R. 445, citing Re Weiss [1970] A.L.R. 654, in which all the earlier Australian authorities are reviewed. ] This approach by the Australian courts has much to commend it, for even if a payment into the account was intended to be preferential, a connected payment out should be treated as negating the preference pro tanto for it restores the

lioss of assets which is the rationale of the preference provisions."

Professor Goode goes on to point out, with reference to the

"Moreover, the fact that there is a series of mutual dealings, with debits and credits on both sides, will usually suffice to negate an intention to prefer, for it suggests either that a payment into the account was made in the expectation that further drawings would be allowed or that the bank allowed a further drawing on the understanding that it would be covered by a further

payment into the account. In either case there is no intention to prefer or, indeed, a true preference at all."

(7) Zhe Application of the "Running Account" Principle in the Australian Courts Other Than the High Court

It is to the High Court authorities that we must have primary regard. We were referred to a number of other Australian decisions, both at first instance and of other intermediate courts of appeal. In the end, they do not, in our view, add greatly to what we have attempted to draw from the High Court authorities for the purposes of the present

appeal. We should, however, refer to some of these cases.

(1) In Re Patullo; Ex parte Official Receiver (1931) 3 ABC

197, decided before Richardson's case, a bankrupt purchased goods on monthly account and made certain payments on account, but the balance owing on such account increased from month to

month, since the value of new purchases exceeded the amount of

payments made. Lukin J. said (at 203-4) that throughout the time the payments allegedly were made, the creditor continuously supplied the bankrupt with goods to a greater value than those amounts which the bankrupt paid on account. As a result, his Honour said, these payments did not have the effect of giving the company as a creditor a preference over

(2) Richardson's case was applied in Re J.F. Alymer (Manildra) Pty. Ltd., supra, where an insolvent company issued

debentures to depositors in return for payments made by the depositors. Walsh J.A. said (12 FLR at 352) that the fact that the company issued the debentures in return for payments made by the depositors for its own benefit was not the sole consideration. Rather, more importantly, the bank would not have permitted the depositors to cancel the deposits and receive the money in cash unless the company's account was placed in credit, and the depositors would continue to be

(3) As Gibbs J. pointed out in Re Weiss, supra, ({1970] ALR at 657), Lukin J. did not attempt in Patullo to lay down the principle upon which it may be decided whether there is a sufficient connection between the debits and the credits to an account to require the ultimate effect to be regarded as a preference, In Weiss, the bankrupt made three payments, each

of which reduced a running account, on the basis that the

supply of cloth to the bankrupt would continue. Gibbs J. found that, at first, the parties must have proceeded on the footing that the value of the goods to be supplied to the bankrupt on and after the date of each payment would exceed the amount of the payment, and this was in fact the case. In

respect of this period, Gibbs J concluded (at 660):

"On any view, the question whether any of these payments was preferential in effect can only be determined by looking at the net effect of the series of payments and deliveries on the running account, and when this is done it is clearly seen that none of these payments had the effect of giving a preference to _ the respondent."

"By the time the payment of 16 April 1962 was made the position had changed. Of the orders previously placed and accepted, only a few remained to be fulfilled, and of the orders placed on 16 March 1962, and not accepted, most were for delivery in August and the quantities which the parties contemplated supplying before that date under those orders were quite small. eee [G]oods delivered on and after 16 April 1962, pursuant to orders placed before March, amounted to about [pounds}528, and goods delivered on and after that date pursuant to orders placed in March amounted to about [pounds ]116. On the other hand, ... when the three final payments each of [pounds]2500 were made, the parties contemplated that the payments to the credit of the account would greatly exceed the deliveries, and that the debit balance oon the account would be substantially reduced. It is true that the parties contemplated some further deliveries on the account, but these were to be insignificant in comparison with the value of the goods supplied until, after an interval of a few months, deliveries were again resumed."

Gibbs J. was of the opinion (at 661) that the change in the situation by 16 April 1962 justified using that date as the starting point for examining the account. This examination revealed that the payments had the effect of giving a preference, the value of which equalled the aggregate payments less the aggregate deliveries made on and after the starting

(4) In Calzaturificio Zenith Pty. Ltd. (in Lig.) v M.S.W. Leather & Trading Co. Pty. Ltd., supra, Menhennitt J. held that the determination of whether a payment constitutes a preference requires a "look at the arrangement operative at the time" ([{1970] VR at 614). The proper inquiry is "to ask what was the arrangement express or implied, what was the implicit mutual assumption", and when did it commence? Further, if the goods were being supplied only in return for a continuing understanding or arrangement that payment would be made, and they would not be supplied in the absence of an understanding or arrangement to pay, and there is an overall

"then any payment made substantially in accordance with that arrangement or understanding is not a preference, priority or advantage, even although the goods are supplied before the payment takes place and even although the payment is made during the relevant six-month period for goods supplied before the relevant six-month period."

Menhennitt J. went on to say (at 620-1) that the payment of

two cheques did not amount to a preference, because -

",.. if there had not been the promise to pay for those goods at the end of 60 days, they would not in fact have been supplied in April and the company would not have had the goods, and, therefore, in the liquidation the plaintiff company would not have had either the benefit of the goods or the proceeds from the sale or manufacture of those goods. And because of the arrangement to pay, the goods were supplied, and the company has had the benefit of the goods or their proceeds, and that is why, in my view, the payment of the two amounts of $850 does not amount to a preference...."

(5) In Re Discovery Books Pty. Ltd., supra, it was held that rent and premium payments were not shown to constitute a preference. Fox J. said (20 FLR at 478-9) that "when looking to see whether there is a preference it is appropriate to look not only at what the payment is for, but to the business consequences of making the payment." Referring to those cases where the failure to pay for goods already delivered leads to a refusal to make further supplies, Fox J. went on to say that

the consequences in a lease situation are no less serious:

"When rent was fourteen days in arrear, Excelsior could re-enter (cl. 5(a)) and it had the old and summary remedy of distress. The power to distrain gave it the right to become a secured creditor, pro tempore, and, of course, the sale of goods on the premises, under a distress, could have been quite disastrous to the continuation of the company's business."

(6) In Re A. & J. Lazzarotto Pty. Lid., the Supreme Court of

Victoria, Full Court, 16 December 1977, unreported, arrived at a similar conclusion. Young C.J., Lush and Fullagar JJ. said

"... shows that the whole transaction which in fact is agreed upon and carried out must be regarded for the purpose of determining what the effect of one component part of it is. That decision makes it clear that questions of the enforceability of the alleged agreement are irrelevant, and so also is the possibility that one party, having derived the advantage given to him by the agreement, may not honour his own obligations under the agreement. If the

agreement is in fact made, and fully carried out, it. is the effect of the performed

agreement which the Court must assess. It is therefore not permissible in the present case

cross-payment in respect of the loan." [Emphasis added]

This passage suggests that the agreement, arrangement or understanding, if made, is to be taken after it has been performed or observed, and its overall effect then ascertained. As will appear from the discussion of the facts on the present appeal, whilst it may be true to say that from

time to time before and during the preference period, Compass gave various undertakings and assurances to CAA as to future

payments, in the events that happened, these were not observed

(7) In M& R. Jones Shopfitting Co. Pty. Ltd. (in Lig.) v The National Bank of Australasia Ltd., (1983) 7 ACLR 445, a

company deposited moneys to the credit of a bank account in reduction of an overdraft. Wootten J concluded (at 453) that there was a continuing arrangement between the company and the bank, whereby the bank met cheques in anticipation of, and on the assurance that the cheques would be covered by payments resulting from the company's collection of outstanding debts. Therefore, those payments could not be considered preferences, as they merely ensured the continued operation of the

arrangement, which was necessary for the company business.

However, Wootten J also concluded (at 453) that subsequently the position changed. The bank then refused to continue the running arrangement, demanding a substantial reduction in the level of the company's account and requiring a much lower account level thereafter. Wootten J held that the subsequent reduction in the company's account did constitute a preference. On 14 January 1981, as a result of the bank's change in attitude, the company's overdraft was reduced to $11,035.11, very much the level at which it stood

(8) In Re Baronga Nominees Pty. Ltd (In Lig.) (1983) 8 ACLR

265, a series of payments were made on a supply account. Wells J. held (at 273) that the payments did not have the effect of giving a preference; rather, they were genuine payments which reduced a daily debit and which maintained a

business relationship of mutual benefit to both debtor and

creditor. In short, the payments fell within the so-called running account exception, and the mutual assumption referred

to by Barwick CJ in Queensland Bacon had been made by the parties. (See also Petagna Nominees Pty Ltd v A_E Ledger

Liquidator of Linun Pty Ltd (in Liq) (1989) 1 ACSR 547 (at 567); Spedley Securities Ltd (In Lig) v Western United Ltd. (in Lig.), supra, (at 114-5)).

(9) In Re Captain Homemaker Pty Ltd (In Liq) (1984) 8 ACLR

1005 payments had been made to an associated company. Thomas

"In many cases it will be impossible to evaluate the commercial effect in the bankruptcy of such payments. Payments of rent afford a good example as discussed in Re Discovery Books ... . In other cases it will be clear that payments were not and were never going to be for the benefit of the company, but were a vehicle for the conveyance of benefits to a friend. Of course, it will not matter whether such payments be to friend or foe, but it may be easier to identify the process of siphoning benefits to an associated company or person than to a stranger.

present case stands. By making these payments it effectively siphoned $17,894.41 of its own moneys to Holdings. It could have abstained

from making each and every of the payments without any significant commercial consequence to itself. It could at any stage have paid its own overheads instead of paying a greater sum to Holdings for payment of the same items. This is a case where the relevant effect of the payments is clear and where the liquidators can discharge their onus in respect of payments made for a contemporaneous consideration."

(cf. Ramsay v National Bank Australia Ltd (1988) 13 ACLR 732 (at 744)).

(10) In Australian and Overseas Telecommunications Corporation

Ltd v Russell Kumar _& Sons Pty Ltd (1992) 10 ACSR 24, O'Bryan J. held that a telephone account did not fall within

the "running account" principle. O'Bryan J. said (at 29):

"These cases [inter alia, Discovery Books] illustrate a variety of circumstances in which suppliers and public utilities may receive payment of their debts during a receivership but not in circumstances which create a preference. No two cases are alike in their facts.

I am not persuaded that the learned magistrate erred in rejecting the defence based upon s122.

The 'running account' defence must also fail because the nature of the telephone account is not a 'running account' as that expression is defined in the authorities for the purpose of preference law. ...

There was a traditional relationship of debtor and creditor between Telecom and the company at all material times. An itemised account was delivered periodically to the company by Telecom and became due for payment according to the terms of trade on a specified date. The company was required to pay the account in full on or by the specified date or _ face cancellation or suspension of the service."

(11) In Harkness v Potts (1993) 10 ACSR 517, McLelland J. said

",.. the following four propositions may be taken to be established in relation to [s.122(1)] as it

applies to a payment challenged in a subsequent winding up:

(1) A number of otherwise separate transactions may have such a connection as to require the ultimate all to be considered in determining the 'effect' of one of them.

(2) The relevant 'effect' is the ultimate effect in relation to the subsequent winding up.

(3) The 'other creditors' whose position is to be compared with that of the creditor to which the challenged payment is made, are creditors as at the time of that payment.

(4) The expression 'creditors' includes not only persons to whom a debt is immediately due and payable at the time of the challenged payment, but also persons who by reason of a then existing liability of the debtor company would

be entitled to prove in a hypothetical winding up occurring at that time.

Furthermore, in my opinion, the phrase 'preference, priority or advantage over other creditors' requires a comparison to be made between (i) the position of the recipient as a result of the challenged payment (and any sufficiently connected transactions) and (ii) the position of other creditors, in relation to the subsequent winding up. It does not invite a comparison between (i) the position of the insolvent company as a result of the challenged payment (and any sufficiently connected transactions) and (ii) the position which the insolvent company would have been in if the challenged payment had not been made

(unless of course the latter comparison can be shown to be relevant to the former)."

(12) In CSR _Ltd v Starkey, supra, Fitzgerald P. and Mackenzie J. said (13 ASCR at 325) that the sequence of events, viewed objectively being the "history of uninterrupted supply" punctuated by payments, right up until the making of the winding up order, provided a strong foundation for an

inference that the appellant had accepted the "need to

continue supplying in order to keep the company trading and paying". This inference was reinforced, their Honours thought, by the appellant's internal decision on 9 April 1987 to double the company's credit limit temporarily. Nevertheless, Fitzgerald P. and Mackenzie J. held that, in the ultimate analysis, to some extent, preference had in fact been

"There is a dispute between the parties concerning the amount of the 'preference, priority or advantage' received by the appellant, based on a difference as to the period to which the 'running account principle' is to be applied. The appellant's submission is that, since the respondent sought to avoid all payments between 20 October 1986 and 12 April 1987, that must be taken as the period of the 'running account'.

There is no logical reason why that should be so and principle suggests to the contrary. The received view is that a liquidator can choose any point of time during the material period as the commencement of the operations of the running account which gives the payee a preference, priority or advantage over other creditors eae The respondent has selected 20 November 1986 as the starting point, at which time the company owed the appellant $369,443.81.

Since the appellant was owed $177,533.04 immediately prior to the commencement of the winding up, the 'effect which [the payments] ultimately produced in fact' was a preference, priority or advantage of $191,910.77."

Pincus JA. took a broader approach. He said (at 327) that if frequency and regularity of debits and credits were needed to bring the running account principle into operation, neither was wanting there; nor was there any question of trading having been carried on merely as a cloak or guise under which to obtain a preference so that the running account principle must be applied in favour of the creditor. It was not correct to decline to give the creditor the benefit of the principle because it made no promise to continue to trade, nor because the creditor considered itself free at any time to refuse to supply further. Looking as one should primarily at what the parties did, rather than what (years after the events in question) they said they once thought or believed, the case bore the appearance of a perfectly ordinary and bona fide carrying on of regular and frequent trading with a customer

"That was no doubt done from a mixture of motives, including a desire to earn profits by the trading. But an analysis of the creditor's reasons for letting trading continue is not

likely to be, in a case of this sort, of great significance."

+». to speak of Richardson's case as 'very special' may imply that it is to be confined to situations very like the facts with which it dealt and perhaps to instances in which the debits and credits were intended to balance out so that the debt would not decrease. That appears to be too narrow a reading of

Richardson's case, as may be seen from the result of Re Weiss ... . There the running account principle was applied during a period in which the debt fell sharply ... ."

Pincus JA. said (at 327-8) that in the United States, where the relevant principle "found some acceptance", it has been pointed out that failure to apply it is particularly unreasonable "where [the payments] have increased the net indebtedness to the creditor and effected a corresponding increase of the bankrupt's estate: Re Fred Stern & Co. Inc.

+++, per Manton J, with whom Learned Hand J agreed ... ."

"If one were to accept that the running account principle applies only where there is an 'assumption' that the trading relationship will continue, as was contended here, then unless the assumption is shown to exist, a course of dealing which enhances the value of the estate may be held to involve the giving of preferences. Particularly where the dealing is with a bank, that might lead to an absurd result: that the bank has, on balance, put cash into the company, yet is obliged to repay all the money paid to it during the relevant period."

Although the reasoning of Fitzgerald P. and Mackenzie J. proceeded upon traditional lines, it appears that Pincus JA. was prepared to embrace the American "net result" rule. As has been said, we see difficulties in this. We have already

mentioned the reservations expressed by Learned Hand J in Re

Fred Stern. Subsequently, in Willcox v Goess, 92 F.2d 8, 12

(2d Cir. 1937), cert. denied, 303 U.S. 647 (1938), Judge Hand

again commented unfavourably on the rule as follows:

"(I]t is true that at times when the debtor and the creditor have had a running merchandise account, begun after the debtor is insolvent, and ending in an enrichment of the estate, payments made upon the account are not treated as preferences [citations omitted]. The doctrine is somewhat anomalous at best, and can be defended _in principle only by the fiction of treating ail items of the account as one and the payment as therefore subject to set-off of the dividends payable on all." (Emphasis added)

It follows from what we have written that the present question becomes a matter of applying the principles which emerge from the three High Court decisions (Richardson and the two Rees cases) to the somewhat unusual facts of this case. At the outset, it may be observed that if existing principle be seen in the terms used by Menzies J., the present case could not fall within it. It is far removed from a case of payments made into an account and measured exactly by payments

The propositions extracted from the joint judgment in Richardson present the issue whether the actual business character of the nine payments made by Compass in the preference period, or of any of them, was such that they formed an integral and inseparable part of "an entire

contractual) conclusion of which, if attained, would leave CAA

The formulation by Kitto J. ain the first Rees case invites the inquiry as to whether there as a common business purpose of CAA and Compass that each payment to CAA was so connected with subsequent provision of services to Compass, that what is to be considered is whether the ultimate effect

Finally, the formulation by Barwick C.J. in the Rees litigation is different again. It poses the issue whether the course of business CAA and Compass immediately before and during the preference period was such that Compass reasonably could expect that so long as it paid CAA''s accounts according to current credit arrangements between them, CAA would

It is with these matters in mind that we turn further to

In order to understand the issues that arise on the appeal, it will be necessary to go to the primary facts in some detail. Although the primary facts are not contentious, the appellants now seek to challenge the conclusions drawn by

(1) Dramatis Personae The officers who, from time to time, were involved on behalf of CAA and Compass in their dealings with each other

CAA: Frank Baldwin, Chief Executive Officer ("Baldwin").

Graham Maurice Beer, Manager, Financial Strategy, Corporate Finance Division ("Beer").

Michael John Mayoh, General Manager, Corporate Finance Division ("Mayoh").

Business Strategy, Corporate Finance Division ("Barnes").

Alex Hannink, Manager, Avcharges Centre ("Hannink").

COMPASS: David Reynolds, Vice-President, Finance ("Reynolds").

Michael J. Grey, Vice President, Corporate & Legal ("Michael Grey").

Statements by Beer, Mayoh and Barnes were in evidence. Beer

and Mayoh gave oral evidence and were cross-examined.

(2) The Aircraft Compass leased all of its aircraft from Monarch Airlines Limited ("Monarch"), Canadian Airlines International Limited

("Canadian") and Polaris Holding Company ("Polaris").

(3) The Beginning of the Relationship between CAA and Compass

• November 1990

CAA's first charges to Compass were made in November 1990. In early December, CAA issued the first invoice in respect of those charges in a sum of $36,641.94, asserting that the charges had become due and payable on 1 December, Compass paid the invoice on 28 December 1990. Compass''s account with CAA never again had a nil balance, that is to say, no other monthly invoice was paid within 28 days of the first day of the month following the month in which liability for the charges was incurred. It is important to keep this fact in mind when one is considering the detail of the events throughout 1991, and, in particular, during the alleged

It is also useful to recall three well established propositions for which The "Mecca" [1897] AC 286 is authority. First, when a debtor is making a payment to his creditor, the debtor may appropriate the money as the debtor pleases and the creditor must apply it accordingly. (And the debtor's appropriation may be inferred from a variety of circumstances, see for instance Knysh v Corrales Pty Ltd (1989) 15 ACLR 629.) Second, in the absence of such an appropriation, at the time when the debtor makes the payment, the right of appropriation devolves upon the creditor. Third, there will be no current or running account between parties where what is involved is a number of "distinct insulated debts" rather than "one blended

The evidence was that CAA had a practice of appropriating payments by airlines in two ways. If the party making the payment requested a particular appropriation, this would be done. If there was no such request, then there was what was described as a "default distribution within the computer system". This meant that the payment was applied first

against the oldest outstanding debt of the party making the

The amount of Avcharges for December 1990 was $1,367,997.36 which became due and payable on 1 January 1991. As it was not paid by 29 January 1991, penalty interest accrued. The January charges amounted to $1,411,124.04. In an internal CAA memo dated 5 March 1991, Hannink recorded that Reynolds, had said on the telephone that morning that December charges of "$1.4 m+" would be paid that day and that January charges, also "$1.4 m+" burdened with "two lots of penalty interest" would be paid within the next two weeks. The memo recorded that Hannink had told Reynolds that the CAA Board was most concerned and that "accounts such as Compass' should be closely monitored, and that we would invoke statutory debt

recovery powers at an early stage unless we were at least kept

(5) Payment on 5 March 1991 of $1,430,485.25 and Its Sequelae On 5 March 1991, Compass deposited $1,430,485.25 to the

credit of CAA's bank account, which a memo from Compass to CAA

December Charges $1,367,997.36 Penalty 62,487.89 $1,430,485.25

Thus, Compass appropriated the payment to antecedent debt.

An internal CAA memo dated 7 March 1991 from Beer to

"An update on payment by Compass of its air traffic service charges. At this early stage, they are proving to be a slow payer.

Yesterday Compass paid $1.4m (plus penalties) for December flights. They have not yet paid the $1.4m they owe us for January flights (this payment became due 5 days ago).

Invoices for February flights, issued this week, will include about another $1.3m for Compass.

We continue to keep in regular telephone contact with Compass. Latest advice is that the $1.4m (with penalties) for January will be paid 'within two weeks'.

Interestingly enough, representatives for Monarch Airlines (UK) who have leased two A300's to Compass have approached the Manager, Avcharges seeking information on penalties or debts outstanding in relation to these aircraft.

While it is not unusual for financiers or lessors to keep tabs on aircraft in this way, it does raise a question as to whether associates/financiers dealing with Compass are nervous about its financial position.

My policy will be that if Compass defaults for more than two months we will impose liens on their aircraft and obtain in writing their proposal to repay the debt. The fact that Compass' aircraft are leased, not owned, is a factor in deciding whether we would also seek to take other action (such as using the courts) to ensure payment. I am writing to Compass politely seeking firm assurance that they will clear the current debt and reminding them of the debt recovery provisions in our legislation."

By letter to Compass dated 11 March 1991, CAA referred to Compass' undertaking that the account for January flights which had by then accrued two lots of penalty interest, would be paid "within the next two weeks". The letter contained the

"You are aware that the CAA imposes penalty interest for late payment of accounts. Also, it is only fair that I put on record at this early stage of our financial relationship that the Authority reserves the option, available under its enabling legislation, to impose statutory liens on aircraft against which payment of Avcharges is overdue. Liens imposed on aircraft are recorded in public issues of the Government Gazette and

other organisations with a known financial interest in the aircraft are advised.

Liens are not imposed without due cause and only after the customer has the opportunity to negotiate suitable arrangements to clear a debt with us. We are always ready to discuss with customers problems they might be experiencing in paying our charges on time. Nevertheless we do review regularly the status of each overdue debt and in the absence of satisfactory arrangement to clear an overdue payment in reasonable time, consider imposing liens on aircraft operated by debtors who are more than 30 days in arrears.

To do otherwise would be unfair to those of our customers who do pay their Avcharges on time. Operators not paying our charges distort the even playing field by obtaining a short-term advantage over their competitors. Further, any bad debt we eventually must write-off becomes a cost

to be recovered by the Authority through future charges for air traffic services.

You or other representatives of your airline wishing to discuss arrangements for the payment of overdue Avcharges can contact the undersigned ..."

In a reply dated 19 March 1991, Compass asserted that following the payment on 5 March, only $145,378.41 in accordance with CAA's account number 603200 was accruing penalty interest. The letter acknowledged that on 1 March 1991 invoices totalling $1,389,493.93 had become due and payable and further acknowledged that penalties would accrue on this amount if it was not paid by 3 April 1991. In

relation to CAA's option of imposing a lien, Compass said,

"Naturally, any such action would jeopardise our commercial relationship with Monarch Airlines Limited the aircraft lessor."

"Compass finds itself in a position where it seeks to defer the settlement of current outstanding accounts to be paid in equal installments over the six month period commencing the 1st April, 1991. As such, prior to imputation of interest charges, each monthly amount would then be $473,879."

By letter dated 22 March 1991, CAA rejected that request,

"The Authority is not a financier, and expects debts incurred to be paid as they fall due, ie, monthly, 28 days from the date of the relevant invoice. Any debtor who fails to meet these requirements will be subjected to debt recovery action available to the CAA under its

enabling legislation - statutory liens and, if necessary, deregistration, seizure and sale of aircraft."

The letter concluded by expressing the hope that Compass could see its way clear to pay all monies owing to CAA by the next

due date which, because of Easter, was 2 April 1991.

In a letter to CAA dated 26 March 1991, Compass referred to the outstanding charges for January amounting to $1,411,129.04 which were said to have been due and payable on 28 February 1991 and to the charges for February amounting to $1,389,493.93., Compass also said that by reference to its cash flow projections, it expected to be in a position to settle the January account by 30 April 1991 and the February account by 31 May 1991. Compass also indicated that it would

This is one of the characteristic and pervasive references throughout the total period of the parties'

relationship to the amounts of particular monthly accounts

There followed exchanges of correspondence in relation to Compass's request to pay particular monthly accounts later than 28 days after the first day of the particular month on which they became due and payable. A letter dated 28 March

"What you are proposing would place the CAA in the position of unsecured creditor to the extent of $1.4m. per month, to rise shortly to around $3m. per month. This is an unacceptable position, as, if any of those funds proved unable to be collected the loss would have to be borne by the rest of the aviation industry and the CAA would be answerable to both the industry and the Government as to why it failed to secure the outstanding debt."

On 3 April 1991 Compass wrote to CAA offering security

An internal CAA memo dated 18 April 1991 recorded that Compass had not paid its CAA charges for flights in January, February and March totalling $4.379 million, of which $2.907 million relating to January and February was described as "now overdue and attracting penalty interest". The same memo recorded that "[{t]he normal course of action would be for CAA to raise statutory liens on the Compass aircraft" but that Compass had said that if this occurred, public knowledge of it would probably lead to a significant loss of passengers, and in any event Compass's position with its lessor, Monarch, would be prejudiced. The recommendation made in the memo was that CAA not invoke the statutory lien remedy, but take security in the form of a floating charge over the rotable spares owned by Compass, provided their value exceeded the amounts of the overdue accounts; in addition, this arrangement was to apply only to the end of June 1991, and CAA would be at liberty to impose statutory liens if any accounts remained

then overdue, or if at any time the value of the security was

less than the amounts owing, or if Compass failed to pay

In a memo to CAA dated 26 April 1991,. Compass outlined

"January account 2nd May 1991 ~ $700,000.00 16th May 1991 - balance

Four days later, on 30 April 1991, Compass proposed a revised

"16th May 1991 $700,000 against January 1991 C.A.A. account.

31st May 1991 Balance of January 1991 C.A.A. account.

15th June 1991 February 1991 C.A.A. account to be paid in full.

Ist July 1991 March 1991 C.A.A. account to be paid in full.

i5th July 1991 April C.A.A. account to be paid in full.

31st July 1991 May C.A.A. account to be paid in full."

On 2 May 1991, CAA wrote a letter to Compass which included

"Our objective in dealings with you is to secure the earliest payment to the Authority by Compass Airlines of overdue air traffic service charges. The type of aircraft operated by your airline and the frequency of their operation has meant that Compass Airlines already owes a very large amount to the Authority and the prospect is that it will rapidly increase. As put to you previously, the CAA's charter does not include financing the operations of an airline. We assume that fuel suppliers are not long term creditors of Compass; if so, your failure to pay overdue Avcharges means that the

Authority is also in the unacceptable position of financing the oil companies."

The letter went on to state that CAA would not apply statutory liens as long as certain conditions were met, including Compass's giving of a first charge by Compass to cover moneys

owed to CAA during "the agreed repayment period" which was to

"16 May 1991 January 1991 CAA account paid in full. 31 May 1991 February 1991 CAA account paid in full. 15 June 1991 March 1991 CAA account paid in full.

1 July 1991 April and May CAA accounts paid in full."

CAA also proposed a term that it would undertake not to impose a statutory lien without advance notification to Compass, and that it only would impose a lien or pursue other debt recovery avenues during the agreed repayment period if

On 3 May 1991 Compass replied, accepting CAA's proposal.

(6) Payment on 15 May 1991 of $1,453,780.37 On 15 May 1991, Compass paid $1,453,780.37 and asserted

that this left a balance outstanding, of $2,925,301.50. Apparently Compass was treating the payment of $1,453,780.37 as the amount of the January account. Under the payment plan, the February 1991 account was to be paid in full on 31 May 1991. By its letter dated 15 May 1991, Compass said that it expected to pay on 31 May 1991 $1,389,493.93 plus penalties of $151,901.65 and that after the payments on 15 May and 31 May, the amount outstanding would be $3,443,565.93, apparently representing the March and April accounts. The letter went on to say that on 1 June 1994 the April account of $1,971,562.57 would become overdue and so subject to a penalty. The letter

proposed that the floating charge should secure $4 million.

In an internal CAA memo dated 20 May 1991 from Beer to Baldwin, Beer reported that he had sent the form of deed to

Compass for completion by 1t the next day, and he said:

"If Compass defaults we can impose a lien and take other action immediately and, in this sense, we have not lost that much by holding back on the lien."

On the same day CAA wrote to Compass enclosing a draft deed, together with forms of statutory declarations to be made by three directors to the effect that Compass was unable to

pay its debts as they became due, but that it was able to pay

CAA accounts for particular months by stipulated dates. The

"The obvious course of action for the Authority in the Matter of Compass' debts is to exercise its statutory powers. The acceptance of this deed together with the Statutory declarations represents a commercial decision intended to facilitate Compass' repaying its debts to the Authority.

It is stressed that there can be no repetition of this arrangement. Following the conclusion of this arrangement on 1 July 1991, Compass will be expected to pay its debts to the Authority as they fall due. If there is any default after that date, the Authority

intends to exercise its powers under Part VI Division 2 of the Act."

The form of deed which CAA sent to Compass on 20 May 1991 recited that CAA's charges for February 1991, March 1991 and April 1991 and penalties in relation to them were due and owing but unpaid, and that Compass had requested CAA to forebear from exercising its powers under s. 69 of the CA Act (to impose liens) in respect of three aircraft identified by registration numbers. The form of deed set out certain conditions precedent including receipt by CAA of statutory declarations by not less than three directors of Compass to the effect that it was solvent and could pay all its debts as they fell due. CAA undertook not to exercise its powers under s. 69 of the CA Act with respect to the three aircraft provided Compass paid CAA's charges for February and March (including penalties) by 3 June 1991, CAA's charges for April 1991 (including penalties) by 19 June 1991 and CAA's charges

Compass furnished two, rather than three, completed statutory declarations, and those which it furnished omitted the statement that Compass was able to pay CAA'sS May account by 1 July 1991. As well, Compass requested amendments to the form of deed. On 22 May 1991 CAA sent two faxes in reply. In

"The Deed, if signed by us, does not fully protect the CAA against the significant amount of monies owed to the Authority by Compass. From our position the debt will still remain unsecured. I consider that it is not unreasonable, when measured against the fiduciary duty required of a Director, for the Authority to require at least three Directors of Compass to assure the CAA, as Major creditor of Compass, that the Company is able to pay the very large amount of monies owed. Anything less than this sows a doubt in our mind that Compass will clear the debt owed to us. If Compass is unable to meet this essential requirement in the draft Deed, I can see no alternative other than to turn to debt recovery powers available under the Civil Aviation Act."

In the other fax dated 22 May 1991, CAA expressed agreement to some of Compass's amendments, insisted upon three statutory declarations, all including the assurance that Compass was able to pay the May account by 1 July, and again threatening to "turn to debt recovery powers available under the Civil Aviation Act" if agreement was not reached. CAA also specifically threatened to use its powers under Part VI, Division 2 of the CA Act (the power to impose a statutory lien and the consequential powers of de-registration, seizure and sale). Later on 22 May, Compass replied, dealing with the question of amendments to the form of deed and asserting that

typographical error. Compass said that CAA should be

In an important internal CAA memo dated 22 May 1991, Beer addressed shortcomings which had been detected in Division 2 of Part VI of the CA Act. In the memo, he said that the power to impose a statutory lien ({s. 69) was "a highly useful tool in debt recovery" and that the power to seize (s. 72) and the power to sell (s. 73) were for several reasons less useful.

"The Authority's standard procedure when a debt is overdue is to impose a statutory lien on an aircraft and then proceed no further. Usually the debt is paid out by the owner or operator or is paid out when the aircraft is sold.

(a) where the aircraft is at the end of its economic life, and

Beer addressed the question of possible amendment of the CA Act to deal with the second problem. Importantly, for present

purposes, the memo contained the following paragraph:

"On occasion objection is raised to the Part VI Division 2 provisions on the grounds that normal commercial debt recovery processes should be used and that the legislative provisions are too draconian. The answer to

this is that the Authority is in a unique position as a

provider of services in that it cannot withhold the provision of its services. Hence a basic response to a

recalcitrant debtor is denied to the Authority. Enclosed is a recent opinion obtained on this point. This opinion

supports the view that only safety issues can be lawfully considered in the provision of services but then goes on to suggest how pressures may still be brought to bear on the Authority's debtors." (emphasis supplied)

The "recent opinion" to which the memo referred was not in evidence. As noted earlier, CAA could not refuse to issue, cancel or suspend an Operator's Licence except on safety grounds. Beer and/or the opinion which he held may have reasoned that this and the remedies provided by Division 2, of Part VI of the CA Act revealed a legislative intention that CAA's powers under the Regulations also should not be used to deny facilities and services except to an aircraft so long as

On 24 May 1991 Beer reported to Baldwin. He described the deed as representing "a trade-off between our immediate security interest in the form of a lien against the schedule of repayment together with some undertakings by Compass". After describing the deed as not, in his view, limiting CAA's

statutory powers to any great degree, he said this:

"I see the Deed as more likely to facilitate payment to us than the alternatives of either imposing a lien now

(which would worsen Compass' ability to repay) or reserving the right to impose the lien at any time (which does not force the positive undertakings required of Compass under the Deed).

Early this afternoon, I became aware that the Sydney Morning Herald has told the Minister's Office today that

they understand that the CAA is negotiating with Compass in respect of monies owed to the CAA to the value of $4m and asked if Compass owed money to any other GBE's such as FAC. The Minister's Office made no comment.

The CAA's PR Unit and our solicitor has been alerted. I have also arranged for David Andersen to fax Directors advising them to offer no comment if approached by the press.

Given this development I intend not to proceed further with the Deed (which has yet to be sent in final form to Compass) until I see the nature and impact of any press reports over the weekend.

I will advise you further on Monday after reviewing our position again. At this stage we still have the right to

impose the lien without notice and the paperwork has been prepared to do this quickly."

On 28 May 1991, Reynolds spoke to Barnes making a revised offer on the basis that they not proceed with the deed. On the same date, Compass wrote a "COMMERCIAL IN CONFIDENCE" letter to CAA undertaking to pay CAA charges for February in full the next day 29 May, to dispatch forthwith a post-dated cheque dated 3 June for CAA's March account, to dispatch forthwith a post-dated cheque dated 19 June 1991 for CAA's April account, and to pay CAA's May account by 1 July 1991, in consideration for which CAA was not to invoke its powers under

Part VI Division 2 of the CA Act if the undertakings were

(8) Payment on 29 May 1991 of $1,453,298.10 On 29 May 1991 Compass deposited $1,453,298.10 by deposit into CAA's bank account purportedly in payment of the February

account plus interest of $63,804.17. By letter of the same

date, CAA accepted Compass's undertaking in its letter dated 28 May, on the basis that if timeous payment should not be made, CAA would be at liberty to invoke its powers under Part VI, Division 2. CAA said that it wished it "to be clearly understood" that it was not prepared to reconsider any arrangement involving deferred payment beyond the due date, and that, without notice to Compass, it might invoke those statutory powers if Compass failed to pay current charges by

(9) Three Payments in June 1991 by Post-Dated Cheques

On 29 May 1991, Compass despatched to CAA two cheques post- dated 3 June 1991 for $1,472,003.36 and $88,097.48 respectively for the March account and no doubt for interest thereon, and a third cheque post dated 19 June 1991 for

Pursuant to the arrangement offered in Compass's letter dated 28 May and accepted by CAA the next day, the May charges were to be paid by 1 July. Compass defaulted. It offered to pay 50% immediately and the balance, with interest, once

Two matters indicated in this narration are the persistent references by both parties to, and identification of, monthly accounts and penalties as discrete sums owing, and

the appropriation by Compass when it made delayed payments to

particular charges and penalties which were past due. These characteristics are manifested also in the dealings between

[It will be recalled that the preference period commenced

(10) Payment on 2 July 1991 of $840,838.39 - First of the 9 Payments Within the "Preference Periad"

Compass paid $840,838.39 on 2 July representing the amounts of two of the May invoices and May penalties. On 18 July 1991 Compass advised CAA that it expected to pay the balance of the May account on 2 August. CAA replied on 19 July, expressing concern that Compass was now operating four aircraft and incurring indebtedness to CAA approaching $3 million each month, and saying that CAA expected payment on

"While we recognise the difficulties encountered in establishing a new, large organisation, the CAA is not prepared to allow such a rapid accumulation of unpaid debts. Certainly, we do not want a repeat of the outstanding debt position which your airlines faced a few weeks ago. Unless your account is regularised by the end of July 1991, we will have no choice but to secure our interests as we would with any other airline."

On 30 July 1991 Compass advised CAA that it would settle the balance of the May charges on 2 August 1991 and that it

expected to pay the June charges on or about 31 August.

On 2 August 1991 CAA wrote to Compass referring to the latter's indication that it would not be paying the June account until 31 August and to the fact that it had not indicated when it expected to pay the July account which normally should be paid on 29 August. CAA requested early advice as to when Compass would regularise its payments so

that Avcharges accounts were paid when they fell due.

(11) Payment on 2 August of $i, 397,394.47 - Second of the 9 Payments Within the Preference Period

Apparently, on 2 August 1991, Compass paid the balance of the May account. On 5 August it wrote to CAA referring to this and advising that Compass would attempt to pay the June account as soon as possible "after the due date". On 16 August 1991 CAA (Beer) wrote Compass expressing concern at the lack of any assurance that Compass would pay the balance of its Avcharges account. The letter said that if Compass could not regularise its account, CAA would have to consider "how best to secure the Authority's interests and recover the debt." On 19 August, Compass advised that it could not pay the June account at that time, that it was believed that it would be paid on 30 August, but that the July account would not be able to be paid by that date and that it was not

possible to advise an exact date by which it would be paid.

On 27 August CAA advised Compass that the following

Unpaid penalties on Charges due on 1 June 1991 76030.06 Unpaid penalties due on

The letter said that upon receipt of that payment, Compass would be one month in arrears by still owing $3,121,430.77 invoiced as due for payment on 1 August 1991 (no doubt the July charges) and that this amount would attract penalty interest of 1.5% on 30 August and a further 1.5% compounded on 2 September. The letter sought confirmation that $2,129,745.02 would be paid on 30 August and advice as to when

the $3,121,430.77 originally due on 1 August would be paid.

On 28 August 1991 Compass advised CAA that the $2,129,745.02 would be paid on 4 September 1991. Compass predicted that the July account would be settled during September. It was reported to the chairman and directors of CAA at a meeting on 28 August 1991 under an agenda item "DEBT RECOVERY/STATUTORY LIENS - AUGUST 1991" that Compass. had overdue charges for June 1991 of $2.048 million; further, Compass had advised CAA that settlement could be delayed until the end of August, and that Compass had been told "that it should regularise its account promptly, and pressure is being

In an internal CAA memo to Mayoh dated 2 September 1991, Baldwin recorded his view that CAA "should not hesitate to go through the liens process if they are unable to maintain the payment of the account up to within one month of debt at all times". He said that Compass was clearly using its low price future airfares income to pay current debts and was struggling to maintain a cash flow capable of doing that, and that Compass had to be "brought to heel" as would any other account holder unable to give a commitment date for payament of a debt two months overdue. Baldwin observed: "In a cash flow

(12) Payment on 4 September 1991 of $2,069,624.66 - Third of the 9 Payments in the Preference Period

On 4 September 1991, Compass made a payment of $2,069,624.66.

(13) Payment on 9 September 1991 of $66,291.59 - Fourth of the 9 Payments in the Preference Period

On 9 September, Compass deposited $66,291.59 to a bank

On 11 September CAA (Baldwin) wrote to Senator Collins, Minister for Shipping and Aviation Support. Baldwin told the Minister he had been advised that concerns had been raised with the Minister that CAA was providing de facto finance to Compass because of delays by Compass in its payments to CAA.

Baldwin said that for the preceding two months Compass had

settled its accounts around 60 days after due date, that is, slightly in excess of 30 days after the date on which late

payment penalties applied. The letter included the following:

"In Compass' case, we have concerns that imposition of liens may trigger default clauses in their aircraft leasing agreements. Also, we are not sure whether the additions to its fleet due shortly will improve or jeopardise its financial situation.

Management is meeting with Mr Grey next week to seek regularisation of their account. Subject to the outcome of that discussion, we intend to advise any major airlines who are late with payments that in the event of

payments being delayed beyond 30 days into the penalty period without prior agreement, statutory liens will be invoked to protect the Authority's position.

I would appreciate any comment that you might wish to offer regarding political sensitivities of this proposed action."

This was the first letter to a Minister that was in evidence. It serves aS a reminder of the obvious: that everyone in authority at CAA must have known or suspected throughout that

a collapse of Compass would have political ramifications.

A CAA internal memo dated 17 September 1991 referred to a meeting of representatives of CAA and Compass proposed for 20

September, and recorded a particular agenda item as being

"intention to tighten debtor management by adopting an approach which included taking formal debt recovery action (including consideration of imposing liens) if an invoice is unpaid 15 days after it was due to be paid."

At the meeting on 20 September, the representatives of CAA (Beer and Mayoh) advised Reynolds that failure to pay any future invoice before the fifteenth day after the penalty free period would trigger debt recovery action in the form of imposition of liens or other action. Reynolds told the CAA representatives that he would advise when the July and August charges would be paid and that he expected that this would be by the end of September and 15 October respectively. On 24 September, Reynolds advised CAA that the July charges would be paid on 2 October but was not able to say when the August

For the CAA Board meeting on 25 September 1991, there was

an agenda item "DEBT RECOVERY/STATUTORY LIENS - SEPTEMBER 1991". The agenda recorded that $3.3 million was overdue from Compass for July flights. It referred to the "personal

enquiry" of the Minister and recorded that the alleged indebtedness had received radio publicity. The document stated that on 17 September 1991, Graeme McMahon of Ansett had telephoned Baldwin to inquire whether Compass did indeed owe more than $3.0m; Mr McMahon had said that he could not see any reason why other carriers, such as Ansett, should carry the debt of Compass when it collapsed. The agenda recorded that, as at 31 August, the debt of Compass was $6.2m, of which $3.3m was due for payment by 29 August for July flights, and $2.9m was due for payment on 30 September for August flights. The

agenda included the following statement by Mr Baldwin:

".,. we have advised Compass that we are giving very serious thought to imposing a lien to protect any debt not paid within 15 days after the first 30 days. This is a very severe approach but I believe is justified on two

i Minimise our risk when dealing with fairly large amounts of debt, and

ii maintaining a fair business-like approach to others in the same industry who pay their debts on time."

According to the minutes of the meeting, the CAA board emphasised its concern at CAA's exposure to substantial debt from Compass over several months and other persistent slow payers, and supported management in the actions undertaken and proposed in respect of debt recovery. Baldwin undertook to keep "Ministers and Board members" briefed as appropriate on

On 27 September CAA wrote to Compass advising that the penalties in respect of June and July totalled $120,120.28 including $25,775.03 for June and $94,345.25 for July. That amount had been arrived at after allowing credit for Compass's

On 2 October Baldwin reported to the CAA Board that Compass, that same day, had written advising that it was not in a position to pay the July charges on 2 October, as it had not finalised certain financing arrangements. The minutes of

"It was noted that with over $6m currently owed by Compass, the Board had a commercial responsibility to secure CAA interests as a creditor. However, the Board recognised that the placing of a statutory lien on Compass aircraft, given the consequences for the company, was an extremely sensitive political issue.

The Board agreed that Mr Baldwin would speak personally with the Chief Executive of Compass, Mr Bryan Grey, and advise him in writing of the Authority's intention to place liens on his aircraft in 48 hours time if payment was not forthcoming. Mr Baldwin undertook to advise the relevant Ministers of this action immediately."

CAA wrote to Compass on 2 October referring to the July account of $3.121 million plus interest which Compass had undertaken to pay on 2 October, the August account of $2.970 million payable by 30 September, and the pending September account payable by 31 October. CAA noted that in its letter dated 2 October, Compass had not even referred to the August

"It is therefore our intention to take additional moves to protect the debt owing by Compass to the CAA. This could include liens being placed on your aircraft within the next 48 hours and/or other options such as _ the refusal of air traffic services.

I'm sure you appreciate we do have an obligation to protect the collection of debts owing to us and equally I'm sure you appreciate that we have been very fair and

reasonable to Compass - especially when we understand some of your other debtors, such as oil companies, do get paid."

(14) Payment on 4 October 1991 of $1,600,000 - Fifth of the 9 Payments in the Preference Period

telephone conversation between Baldwin and Grey. Grey

undertook to forward a payment of $1.6 million that day representing 50% of the July account and promised a further 50% on Tuesday 8 October, subject to Compass's receiving by then a substantial payment arising out of its claim against Airbus. Baldwin's file note of the conversation including the

"Bryan Grey confirmed that the oil companies do get paid and his reasoning for doing so is that they commit themselves to handing over a 'real live product' (fuel oil) which is then consumed by the airline and is in fact 'real cost' to the oil company, whereas the 'service' provided by the CAA is 'an incremental cost' but not a

'real cost' ... [I]f Compass are unable to front up with the cash for ail their debts ... those who do not suffer an actual cost ... should wait.

Bryan Grey suggested that in pressing hard for payment of our debts, CAA were trying to put Compass out of business.

I assured him that we were not and that we would not be a party to such a deliberate attitude; but as a business we still had a real responsibility to all users of our service to ensure that everybody paid their fair and just share.

I then suggested to Bryan Grey that for the moment that we should look at such a scenario, - that for some reason other than the CAA's collection of its debt, Compass

'folded'. If that happened to day CAA would be a Compass creditor for something in the vicinity of $10M. This was a very unhealthy and unbusinesslike position in which we would find ourselves and we did not intend to allow that

to happen. Bryan Grey acknowledged that it was a substantial debt.

I also suggested to Bryan Grey that FAC, who supply a similar type of service to that of the CAA, were being paid ahead of the CAA. There was no justification whatsoever for such a situation.

Bryan Grey went away to check FAC's position and came back and stated that FAC's July account was paid in full as at yesterday (3 October) with a payment of $700,000.

I asked him for the justification for favouritism to the FAC when we were still waiting for the payment of our July account and were only being offered 50% today and a maybe 50% next Tuesday. I also advised him that part of the FAC's July account had been paid earlier than yesterday for which again was no justification.

His response was that FAC's account is a substantially lesser amount that CAA and could be settled in full. I made it quite clear to Bryan Grey I did not accept such a pathetic argument and all it did was add justification for us to protect our interests."

On 4 October 1991 Compass paid to CAA $1,600,000.00 which it

advised was to be applied against the invoices for July as

follows: "Invoice No. 129289 $408,194.89 Invoice No. 129290 $417,547.31 Invoice No. 129288 $396,634.41 Invoice No. 129287 $377,623.39 Representing at total amount of - $1,600,000.00"

Since the July account was $3.121 million, the payment

Compass advised that it intended to pay the balance of the July account together with penalties on Tuesday 9 October, subject to its receiving funds from Airbus in respect of the settlement of Compass's claim against it. It advised that it

On 7 October CAA issued certificates of unpaid charges in

respect of aircraft VH-YMI which was on lease from Canadian

Airlines and aircraft VH-YMA and VH-YMB which were on lease from Polaris Holding Company. In relation to aircraft VH-YMI, the certificate was to the effect that the following amount

including penalty was outstanding as at Monday 7 October 1991:

"Invozce Number: 129290 due on: 01/08/1991 amount: $434,252.50 Invoice number: 130723 due on: 01/09/1991 amount: $724,157.38 Invoice number: 132191 due on: 01/10/1991 amount: $439,366.86 Total unpaid charge, including penalty $1,597,776.74"

The certificate also recorded that, in addition, charges for services and facilities provided from 1 October to 7 October to the value of $25,166.80 had been recorded which would be

In respect of aircraft number VH-YMA, CAA certified that

as at Monday 7 October 1991, 9.00 am, the following charges

"Invoice number: 127809 due on: 01/07/1991 amount: $26,161.66 Invoice number: 129289 due on: 01/08/1991 amount: $424,525.93 Invoice number: 130722 due on: 01/09/1991 amount: $709,628.09 Invoice number: 132190 due on: 01/10/1991 amount: $692,814.85

Total unpaid charge, including penalty s$1,853,130.53"

In addition, the certificate said that charges for services and facilities provided from 1 October to 7 October to a value

of $45,084.33 had been recorded which would be included on the

Finally, in respect of aircraft VH-YMB, it was certified that as at Monday 7 October 1991 at 9.00 am the following

"Invoice number: 130724 due on: 01/09/1991 amount: $50,339.41 Invoice number: 132192 due on: 01/10/1991 amount: $646,498.23 Total unpaid charge, including penalty $696,837.64"

In addition, it was certified that charges for services and facilities provided from 1 October to 7 October to the value of $30,330.22 had been recorded which would be included on the

Annexed to these Reasons for Judgment and marked "A" is a summary prepared by CAA as at 7 October 1991 in respect of the

On 8 October, CAA (Baldwin) wrote to Compass (Bryan Grey) stating that as at 7 October 1991, the debt owing by Compass

"Invoice for July Services $3.215m Less amount paid 4 Oct 1.600m Balance July A/c overdue $1.615m plus interest Invoice for August Services $2.876m plus interest

at 7 Oct 1991 $7.572m (Plus $0.213m penalty interest)"

As well, the letter set out the annexed summary. The letter said that CAA needed to have security if Compass was not able

On 7 October, CAA issued to two of the tlessors certificates of charges outstanding by Compass on their aircraft. The lessors had sought this information and CAA

decided that it was obliged to supply it by virtue of s. 76 of

(15) Payment on 9 October 1991 of $1,641,551.05 - Sixth of the 9 Payments in the Preference Period

On 9 October Compass deposited $1,641,551.05 to CAA's bank account, representing $1,521,430.77 for the balance of the July invoices, and $120,128.28 for penalties on the June and July statements. The sum of $1,521,430.77 for the July

"Invoice No. 129289 $388,150.18 Invoice No. 129290 $397,043.33 Invoice No. 129288 $377,157.37 Invoice No. 129287 $359,079.89

According to a CAA internal memo dated 10 October, the payment

of $s1,641,551.05 together with the earlier payment of

$1,600,000.00, left $48,623.26 outstanding against the July charges and accumulated penalties. The payments were appropriated by CAA in accordance with a fax sent by Compass

On 15 October, Compass advised CAA that the outstanding charges due on 30 September 1991 in respect of August would be paid on 28 October 1991. Compass requested CAA to confirm that it would not put in place a statutory lien because that would "trigger off clauses in [Compass's} lease agreements

which could have the aircraft repossessed immediately".

On 18 October, CAA (Mayoh) wrote to Compass (Reynolds) advising that pending a forthcoming meeting between the chief executive officers and chairmen of CAA and Compass, CAA would not seek to impose liens on Compass aircraft prior to 29 October 1991. In the letter, CAA sought confirmation from Compass that no other major "debtors" [scil. ~- creditors]

At a meeting of the CAA Board on 30 October 1991 there was lengthy consideration of the indebtedness of Compass, and of a meeting which had occurred on 25 October between representatives of Compass and of CAA. Baldwin made a written report to the CAA Board. He said that other creditors were being paid ahead of CAA. These included oil companies, paid

within 14 days, and the Federal Airports Corporation ("FAC").

The FAC had its July account for $0.7m paid in full before the

Compass again requested the CAA not to use the powers under the Act to place a lien on its aircraft and confirmed they had no alternative security to offer. Compass also refused to

provide us with details of their creditors or an interim balance sheet.

Compass claimed that the power to place a lien on the aircraft within 24 hours was sufficient protection.

I explained that once a Receiver moves in and take possession of the assets, we are not necessarily in a guaranteed position to place a lien. Such security preferences usually need to be registered before a company is placed in receivership. That is the purpose of the lien - to protect our substantial debt and give us preference over other creditors. We have used that position successfully in the past on several occasions. It is not like an injunction that automatically takes the aircraft out of service."

The report said that Compass had offered "a firm proposal" to

pay its account 60 days after invoice until June 1992 by which

time its profitability would have enabled it to catch up its

cash flow problems and to pay invoices within the 28 day

"15.8 Compass restated they would not treat all their creditors the same as the CAA because,

We had the power to place a lien on the aircraft at short notice, while other creditors did not

The oil company would be paid within 14 days, otherwise they would not supply fuel.

We advised Compass that there was no logic in that argument - especially with creditors such as the FAC and it was not acceptable.

The meeting closed on the basis that we would consider the matters raised and advise Compass." (Emphasis supplied)

The Compass debt is currently approximately $3.0m per month. This means that on its "60 day guaranteed payment proposal", Compass will always be in debt to us for approximately $6.0m - until June 1992. This is a high risk.

If we place a lien on their aircraft, Compass says it will result in the aircraft being withdrawn from service. We have not as yet seen concrete evidence of this, but there is every likelihood that its lease agreement would contain such a clause.

One option to which we should give serious consideration is to very formally accept Compass's offer to pay all our invoices and penalty interest within 60 days of invoice, on the clear and specific understanding that if any payment is not made within the agreed 60 days of the invoice date, we will without notice place a lien on its aircraft.

We would require formal acceptance of such a proposal, which is a confirmation of Compass's verbal offer at a formal meeting of Chairmen and CEOs on Friday 25 October.

Under such a proposal the CAA is being more than very fair and in the meantime, is accepting Compass's own formal offer. In

doing so it must be appreciated we are putting ourselves at a higher risk than any other Compass creditor.

16.6 I recommend the Board adopt the proposal set out in 16.3, and 16.4 above.

16.7 I further recommend that if Compass is successful in having a lower MTOW incorporated into their Flight Operations Manual, for charging purposes, we _ should recognise that change as having effect from the date at which they originally presented documentation to the CAA seeking that change (8 May 1991). I would bring this into effect by exercising my power under the CAA Act to waive charges, including a proportionate amount of relevant 'late payment' penalties. Cost will be in the order of $180,000- $190,000.

adjustment in charges beyond that described above."

Compass did not pay the August charges on 28 October and in fact advised CAA on 29 October that it proposed to make a claim on CAA in respect of the fact (as alleged by Compass) that CAA had been calculating charges erroneously due to its having used wrong figures for maximum take-off weight ("MTOW")

and for adjustments arising from recalculation of penalties.

On the same date (29 October) CAA replied dealing with

the "MTOW" and "penalties" issues and concluding, relevantly,

"More pertinently, as of tomorrow, the total of your debts overdue to the CAA will amount to in excess of S6m.

customers, CAA should demand payment of the whole of the monies overdue tomorrow.

We have endeavoured to be accommodating during your initial period of operation. Unless you undertake to pay CAA $ 3.014m within 36 hours, I will be recommending to the Chief Executive and the Board that CAA must take action, through imposition of statutory liens, to protect its interests.

Payment of $3.014m by that date still leaves Compass owing $3.157m (plus further penalties) overdue for payment, less any amounts which may legitimately be disputed."

The CAA Board met on 30 October. The minutes of the

"Debt Recovery/Statutory Liens. The Board noted current

debt recovery action undertaken by management, as well as legal advice indicating that the Civil Aviation Act would require amendment if the CAA wished to have the power to refuse service to debtors. The Chief Executive was asked to discuss with the Department of Transport = and Communications the need to have power to refuse service while maintaining the liens power.

Mr Mayoh advised that the Supreme Court decision on Montchel's aircraft had wider implications in indicating that CAA charges need not necessarily relate to specific services provided. He also advised that the CAA was

close to placing a lien on aircraft, following advice to the Minister.

Mr Ayling present. He advised the Board that it was possible for a statutory lien to be imposed on an aircraft following the appointment of a receiver. This

had already been tested in respect of the National Safety Council aircraft. Mr Mant advised the Board that a lien offered security similar to that afforded by a first mortgage.

The Board was informed by management that imposing a lien on a single Compass aircraft would not secure the whole

debt for the CAA, but only the debt owed in respect of that aircraft.

The Board agreed that Mr Baldwin should send to the Chief Executive of Compass that day a letter agreeing to waive

the charge differential between the present MTOW and a lower approved MTOW if the Compass application to decrease MTOW was successful, and accepting until June 1992 the Compass proposal to pay CAA charges not later than 28 days after the normal payment due date. The letter would also state that if Compass failed to honour the commitment it had made the CAA would-without notice

place lien(s) on Compass aircraft. Noting that Compass was already in breach of this undertaking in respect of August charges, the Board supported management 's intention for the Authority to impose lien(s) if Compass did not pay its debt by close of business on 31 October. Mr Ayling left the meeting."

Compass replied on 30 October, again claiming MTOW and "penalties" adjustments. Compass asserted that taking the adjustments into account, Compass was "completely up to date with its CAA charges". It said that it agreed to pay future

charges no later than 28 days after normal due date.

CAK replied on the same date (30 October 1991), acknowledging there was a possibility that Compass should have been charged on the basis of a lower MTOW than that on which it had been charged. On that basis, it said that it would allow a provision of $250,000 for this concession. CAA

concluded by noting the parties' telephone agreement made that afternoon, that the August account less the $250,000 would be

(16) Payment on 31 October 1991 of $975,532.00 - Seventh of the 9 Payments in the Preference Period

On 31 October 1991 someone in the CAA penned an internal

"Urgent Note to Mick Mayoh. 1900 hrs Thursday 31 Oct 91.

Bob Collins specifically asked if we would delay issuing and wait until Monday 4 Nov 91 so that he could have a chance to talk to Kim Beasley [sic] and if necessary brief Kim Beasley on Compass - & Kim Beasley may want to talk to Brian Grey. I agreed - it was not our intention to embarrass the Gvt - but we must collect our debts:

I advised Bob Collins the amount owing is Aug $3.0m Sept 3.0m and Oct invoices to be issued $3.0m."

On 31 October 1991, Compass paid to CAA $975,532. No direction was received by CAA from Compass with the payment. After discussion between the parties, there was a "default distribution" or "auto location" by the computer system of CAA, with the agreement of Compass. The effect was to apply

Compass told CAA that it calculated the amount of $975,532 as the amount of the August invoice less two amounts, namely $1,639,973 which it alleged was an overcharge of Avcharges for the period 1 December 1990 to 31 August 1991 based on erroneous MTOW, and $447,440 representing overcharges in interest over the same period. Compass's letter said that the payment of the $975,532 brought it "up to date as far as the accounts for August 1991 are concerned", Compass forwarded a detailed statement on the same day showing that the $975,532 was calculated as CAA's August charges as invoiced of $2,925,887 plus interest of $137,058 minus "rebates" of charges and interest overpaid in the period from December 1990

to August 1991 of $2,087,413. CAA rejected the allegation

that Compass had been overcharged and noted that the payment of $975,532 would leave a balance of $1,950,355 owing for August plus penalties, and further noted that CAA had offered to "set aside $250,000 pending resolution of [Compass's] request for revision to MTOW". The letter continued by advising that the offer in relation to $250,000 would remain open until 4.00 pm that very afternoon, and was conditional upon Compass's expressing agreement by 4.00 pm to all the terms of CAA's letter of offer dated 30 October. The letter finally advised that if agreement was not forthcoming by 4.00 pm, CAA would "commence immediate action to protect its

interests, not extending to imposition of liens today."

Finally on 31 October came a letter from CAA (Baldwin) with the knowledge of CAA's chairman, Dick Smith, asserting that there had been no error in the MTOW applied, referring to

Compass's various dishonoured undertakings, and concluding as

"Taking Compass's payment performance for the July and August invoices, the question has to be asked - What faith can we possibly have in future promises?

We clearly need to protect our interests. It also needs to be said that in making the above arrangements for Compass, the CAA are going out of their

way to assist Compass through their cash flow crisis. It is in ail our interests to keep Compass in business."

There was a further exchange of faxes over the MTOW issue

and on 1 November CAA faxed Compass acknowledging receipt of

$975,532 on 31 October and advising that after allowing for the further sum of $250,000 set aside provisionally pending resolution of the MTOW dispute, there was a balance of $1,700,354.75 outstanding in respect of the August invoice. The letter advised that if this amount was not paid by noon on

Monday 4 November, the CAA would commence legal proceedings.

On 1 November 1991 the Avcharges Centre invited Compass to specify the desired allocation of the payment of $975,532, advising that if none was indicated there would be an automatic allocation to the oldest charges on Compass's

On 4 November 1991, CAA served a demand under s. 460 of the Corporations Law in the sum of $1,700,354.75. On the same date, Compass said that it was paying $59,584.68. The basis for this was that Compass claimed that it had detected an error in its calculation of the sum of $975,532 paid on 31

Notwithstanding its advice that it was paying $59,584.68, Compass in fact paid $59,588.68 on 4 November 1991. This payment was appropriated by Compass to what it identified as

An internal CAA memo dated 4 November 1991 reported on the advantages of the service of the statutory demand under s. 460 which had occurred that afternoon. The memo included the

"There are 2 distinct advantages of this course over serving a writ. The first is that the action remains a confidential matter between the CAA and Compass (unless, of course, Compass chooses to make it public). Therefore, whilst demonstrating to Compass that we are serious, we are doing nothing which might adversely affect the business interests of Compass with all of the attendant potential for action for damages.

Confidentiality also means that there is no risk that the lessors of Compass' aircraft will 'pull the pin' and repossess their assets. This is a risk that was present in the event that we had taken out a writ.

The second advantage is that it is a much _ speedier process if it is ultimately decided to apply to wind up

Compass. Hugh advises that there are normally significant delays involved in the process between issuing of a writ and the final outcome. On the other

hand, the action we have taken obliges Compass to satisfy the court that it has a bona fide dispute with the CAA

over our charges before any deferral of action to wind up the company would be considered."

By internal CAA memo dated 6 November, Baldwin advised Mayoh that it was very important that CAA be ready to move to place liens on all Compass's aircraft at any hour of any day and to obtain an injunction against any aircraft being moved from Australia. The memo recorded the current indebtedness of Compass as being between $6m and $8m until the dispute over the MTOW was settled, and that even after settlement of it, CAA's exposure was likely to be no less than $6m at any time

On 7 November 1991, CAA (Baldwin) wrote to Compass (Bryan Grey) outlining the courses of action which had been open to CAA, namely registration of statutory liens, commencement of court action, and service of a statutory demand. The possibility of CAA's ceasing to supply services to Compass was not mentioned. CAA said that it had adopted the statutory demand procedure in order to keep the matter out of the public arena, at least for the time being. The letter advised that if the statutory demand was not complied with within the time stipulated (3 weeks after 4 November) CAA would apply for an order winding up Compass and would take such other action as it might think fit, including registration of statutory liens

This provoked a lengthy reply from Compass (Bryan Grey) dated 8 November. Most of the letter dealt with the MTOW issue. Compass said that it would seek redress "under appropriate administrative appeal procedures rather than the unprecedented oppressive move adopted by [CAA], which obviously is designed to circumvent [Compass's] proper rights and to prevent [CAA's] extraordinary conduct and position

Minter Ellison, solicitors ("Minters") wrote to Mallesons on 8 November disputing the debt asserted in the statutory

demand of which it sought withdrawal. Mallesons replied on 12

November advising that CAA was not prepared to withdraw the

An internal CAA memo was prepared on 26 November headed "FINANCIAL OUTLOOK - PESSIMISTIC". Its purpose was stated to be "to identify the worst-case financial impact on the CAA of a financial collapse by major operators" and proceeded to "hypothesise" certain facts which either were precisely those relating to Compass or were so similar that the document may be accepted as showing CAA's thinking in relation to Compass

at the time. A copy of the paper is annexed to these reasons

The CAA Board met on 27 November 1991. Baldwin presented a lengthy report on Compass dated 18 November. The report gave an account of developments since the last preceding Board meeting on 30 October. As at the date of the report,

Compass's position was described in the report as being as

"August Account (invoice payment date 30.9.91) $2.825m Less paid 0.975m 1.950m

Less held over pending MTOW confirmation of adjustment 0.250 $1.700m

September Account (invoice payment date 31.10.91) $3.081m

October Account (invoice payment date 30.11.91) $3.483m"

Those figures total $8.264m. Paras 1.11-1.15 and the

"1,11 The issue to be addressed by management and the Board is - what action do we take against Compass in the event that:

i the balance of the August invoice is not paid by the end of the 3 week period since the serving of the Section 460, (25 November 1991) and

ii Compass have made no move to have their dispute on the MTOW settled by the court.

1.12 Management recommendation based on the opinion of our legal adviser in this matter is to:

apply to the court for consent to wind up. This action will force Compass to formally seek a dispute, which in turn will require the Judge to hear and arbitrate on whether

there is such a dispute. If it is found there is a dispute the matter will be heard and dealt with almost immediately. This

should settle the issue of the application of the MTOW once and for all. That settled, Compass will have no option but to settle the overdue account in compliance with the agreed procedure or the CAA will have the option to wind up Compass and/or issue liens against their aircraft.

1.13 In following this course of action we have to be very aware that Compass has a major cash flow problem, and it could be a question of survival now or delaying the crisis for the new year.

1.14 As we have said to Compass and others, it is not in the interest of the CAA to put Compass down if it can be made to survive, - but equally it is not in the interests of the CAA for Compass to go down owing us $10m+.

1.15 The Directors should be aware we are positioned our lawyers to place liens against all Compass aircraft and if necessary to issue injunctions to prevent them leaving Australia. The risk in this scenario is whether our intelligence is good

enough to keep abreast of other any parties actions.

It is recommended that if the $1.7m owing to the CAA.for the August invoice is not paid at the end of the 3 week period since serving the Section 460 of the Corporations Law (25 November 1991) then;

(i) the CAA file for consent of the court to wind up Compass Airlines Limited, and in doing so have any dispute of the account settled by the court;

(ii) on settlement of such a dispute the CAA give Compass 48 hours to settle the outstanding amounts in accordance with the agreed terms;

• seek an immediate Government "guarantee" for the payment of all Compass' debts or immediately issue a liens against Compass' aircraft to protect our debt.

To avoid any bureaucratic delay in obtaining a Government Guarantee to protect our Compass debt, we have put a proposal to our Minister Bob Collins for consideration by the Government."

On 19 November 1991, CAA (Baldwin) reported to Senator

Bob Collins, Minister for Shipping and Aviation Support. The letter said that it was necessary that a decision be taken whether CAA should proceed to seek a winding up order and/or Place liens on Compass aircraft, and in the latter event, also seek an injunction to restrain the lessors of the aircraft

from flying them out of Australia. The letter included the

"We appreciate it is not in CAA's or Australian domestic aviation's interests to take airlines - especially major

domestic airlines such as Compass - out of service; but Compass owes us $8.264m plus interest as at 31 October 1991. Under the terms of their agreed proposal, Compass will continue to owe us not less than $6.0m at any one time from now until 30 June 1992.

The CAA is prepared to carry that $6.0m risk providing Compass meets their part of the agreement and pay their accounts in full within 28 days of the invoice due date.

The CAA sees no reason why it should carry any greater risk and if Compass cannot meet their payments in accordance with the agreement, it would be reasonable to assume they are in considerable financial difficulties and we should move to protect our own interests. Whatever action we take at that point, it is almost certain to put them out of business.

To avoid that possibility and continue to let Australian domestic travellers enjoy the benefits of deregulation, we ask - 'Will the Government give a guarantee to cover CAA's debt with Compass in the event of Compass going in to receivership or being wound up in some other way and not paying its debts in full?'

It may appear to be an unusual request to make, but if we are to protect our own financial interests and keep Compass in business, what other options do we have? Compass have no other security to offer us - if we put a [sic] liens on their aircraft they have said the lessor

will take the aircraft out of service as it is in conflict with their lease agreement.

We would appreciate a reply by 25 November - the day we

May need to apply to the court if the balance of our August account is not paid."

The response of the Government to this "unusual request" was

to be given on 2 December, and we will refer to it in due

On 25 November, CAA called upon Compass to pay $1,640,766.07 (being the August invoice of $2,925,886.75 less (a) the payment of $975,532 made on 31 October, (b) the

payment of $59,588.68 made on 4 November and (c) $250,000 set

aside in respect of the MTOW dispute) plus penalties. As well, CAA reminded Compass that it was obliged to pay a further $3,081,102.63 plus penalties in respect of the

On 27 November CAA faxed Compass stating that action would be taken the following morning under s. 69 of the CA Act to impose liens on Compass's five aircraft, and under s. 77 of that Act to advise organisations known to have a financial interest in the aircraft, including lessors, of the action

At its meeting on 27 November, the CAA Board resolved that liens be imposed on Compass aircraft at 12 noon on 28 November unless the outstanding charges were settled or acceptable security for payment was provided by that time. Later on that date CAA advised Compass of the Board's decision. As well, on 27 November, Baldwin wrote a

confidential letter to the Minister advising him of the CAA

(18) CAA Imposes Liens on the Five Compass Aircraft on 28 November 1991

On the morning of 28 November, Compass offered CAA security over its receivables estimated at $8m, but CAA replied that the offer was not sufficiently defined or

detailed to constitute acceptable security, but that CAA would

defer imposing liens until 4.00 pm to give Compass an

opportunity to amplify on its offer. That was done by a subsequent memo faxed at 3.45 pm, but was rejected by CAA which advised that it was imposing liens forthwith. At 5.30 pm CAA raised statutory liens on all five aircraft operated by

The lien on aircraft registered VH-YMA was in respect of

"Invoice number: 130722 due on: 01/09/1991 amount: $720,272.51 Invoice number: 132190 due on: 01/10/1991 amount: $713,755.18 Invoice number: 133725 due on: 01/11/1991 amount: $679,875.71 Total unpaid charge, including penalty s2,113,903.40"

In addition, it was stated in the relevant certificate of charges recorded that charges for flights (no doubt from 1 to

28 November) to the value of $67,148.54 would be included on

The lien which was imposed on aircraft registered number

"Invoice number: 130724 due on: 01/09/1991 amount: $51,094.50 Invoice number: 132192 due on: 01/10/1991 amount: $666,038.64 Invoice number: 133727 due on: 01/11/1991 amount: $707,354.10 Total unpaid charge, including penalty $1,424,487.24"

In addition, the certificate of charges under s. 76 of the CA

Act said that charges for flights (no doubt from 1 to 28

November) to the value of $97,439.97 would be included on the

In respect of invoice registered number VH-YMI, the certificate of charges recorded that charges under the Act

"Invoice number: 130723 due on: 01/09/1991 amount: $735,019.74 Invoice number: 132191 due on: 01/10/1991 amount: $452,646.72 Invoice number: 133726 due on: 01/11/1991 amount: $749,964.77 Total unpaid charge, including penalty $1,937,631.23"

In addition, the certificate of charges under s. 76 of the CA Act said that charges for flights (no doubt from 1 to 28

November) to the value of $96,477.65 would be included on the

The lien in respect of aircraft registered number VH-YMJ was, according to the certificate of charges under s. 76 of

"Invoice number: 130721 due on: 01/09/1991 amount: $552,748.68 Invoice number: 132189 due on: 01/10/1991 amount: $679,846.73 Invoice number: 133724 due on: 01/11/1991 amount: $684,392.05 Total unpaid charge, including penalty $1,916,987.46"

In addition, according to the certificate, charges for flights (no doubt from 1 to 28 November) to the value of $32,867.41

The final lien was in respect of aircraft registered number VH-YMK and was, according to the certificate of charges

under s. 76 of the CA Act, in respect of the following:

"Invoice number: 132188 due on: 01/10/1991 amount: $656,627.68 invoice number: 133723 due on: 01/11/1991 amount: $661,865.97 Total unpaid charge, 2zncluding penalty s1,318,493.65"

In addition, according to that certificate, charges for flights (no doubt from 1 to 28 November) to the value of

$70,575.34 which had been recorded would be included on the

On 28 November CAA forwarded to Compass a copy of a notice relating to the creation of the statutory liens over the five aircraft, stating that it expected that the notice would be published in the Commonwealth Gazette on 4 December. The letter pointed out that if the debt remained outstanding six months from the date of creation of the liens, CAA would have a discretionary power to de-register the aircraft, and that if the debt remained outstanding after a further three months, the CAA would have the further discretionary power to

On the same date (28 November) CAA advised the Hon Kim Beazley, Minister for Transport and Communications, and Senator Collins of the creation of the liens. At the same

time, Blake Dawson Waldron, solicitors for Polaris, Monarch

and Canadian Airlines, wrote to CAA requesting that by Monday 2 December, CAA fax their clients with details of the CAA charges payable or recorded against the aircraft of which the

On 29 November Compass requested, under sub-section 82 (2) of the CA Act, that the chief executive officer of CAA review the imposition of the liens and ensure that they were lifted or cancelled forthwith. The letter offered a floating charge over all of Compass's assets that were not the subject of specific charges, including certain rotables, spare parts

There was a telephone conversation on 29 November at about 8.50 am between Baldwin and Michael Grey and David Reynolds. The conversation was recorded. There was discussion about the provision of security by Compass. The

"MG We are a bit confused to tell you the truth because, whilst we understand CAA's desire and need to collect its debts, our perspective is the CAA is really jeopardising

our ability to keep paying you, CAA charges in the future.

FB Well, we have acknowledged the point that it is in both out interests to keep Compass flying and we have said that, and I have said that to you in my letters. That's why we have been out of our way, and I have got to say we have gone out of our way in commercial terms to accommodate your cash flow problem and this is why, when your own Company put up the proposal of the 28 days after interest due date agreement, we clearly, reluctantly - and I think that message has probably come through -

accepted that whereas with other companies we have actually put on liens earlier to protect our interest. We have to have some security. Now, the fact is we did agree to your terms and your terms have not been honoured - that makes us nervous Michael; I mean, let's be fair."

In the course of the telephone conversation it was agreed that Mallesons and Minters should discuss what might be an

On 29 November Compass advised CAA that negotiations were under way through Potter Warburg for placement of shares in the capital of Compass which would raise $17m for the company and that other sources of funds were being explored. The

"In the unlikely event that the placement does not occur we would anticipate paying the CAA on Wednesday 18

December. As you are aware, we are entering into a high cash flow and profitable period.

The date of 18 December has been chosen as that is the

date Compass will be receiving its BSP payment sufficient to cover the amount owed."

On 29 November Compass advised CAA that if the placement of shares proceeded, all the outstanding debt would be paid on 24 December, and that if it did not proceed, payments would be

18 December 1991 $3,205,384.25 2 January 1992 (the October Account) $3,483,452.60 17 January 1992 (disputed

(19) On _1 December 1991 a "Deal" is Done Between CAA and Compass

By 1 December, a "deal" was done between Compass and CAA settling, inter alia, the dispute over MTOW and the calculation of the charges and penalties payable by Compass to CAA, on the basis that Compass furnished to CAA an irrevocable authority addressed to the Bank Settlement Plan ("BSP") authorising and directing it to pay to CAA out of the proceeds of sale of passenger tickets for the carriage of passengers on

(a) Up to $3,081,102.63 by 4.00pm on 18 December 1991;

(b) the sum of $3,478,294.49 by 4.00pm on 2 January 1992;

(c) the sum of $2,027,825.00 by 4.00pm on 17 January 1992; and

(d) the balance of the charges and penalties and the additional penalties up to the amount certified to be payable and unpaid in respect of Compass aircraft in accordance with s. 76 (1) of the CA Act, by 4.00 pm on 28

(20) On 2 December 1991 CAA "Removes" its Liens Imposed on 28 November 1991

On 2 December the CAA wrote to the lessors and/or their representatives advising that subject to this, CAA agreed to direct that the statutory liens cease to have effect and that the Registrar of Statutory Liens make an appropriate entry in the Register. CAA advised the lessors and/or their representatives that the statutory liens had ceased to have effect, and fresh certificates under s. 76 of the CA Act were

Also on 2 December, Senator Collins advised CAA that the Government would not guarantee the Compass debt since this would be inconsistent with its "withdrawal from aviation- specific regulation". The letter said that the question of recovery of the Compass debt was "a commercial matter for

resolution by the Authority on the basis of its normal

On 11 December representatives of the lessors called on CAA's Canberra office and expressed concern over CAA's recent

imposition of liens. Mayoh explained that CAA operated at

(21) On 18 December 1991 only $1,700,703.16 (the Last of the 9

Payments in the Preference Period) is Paid by the Bank Settlement Plan and Compass Does Not Pay the Shortfall of

$1,380,399.47 Necessary to Make the Payment of $3,081,102.63 Promised for that Date,

The amount which the BSP paid to CAA on 18 December was only $1,700,703.16, which left a balance of $1,380,399.47 which Compass itself would have to pay by way of "topping up" the BSP payment in order that a total of $3,081,102.63 be paid on 18 December. CAA monitored the flights of Compass aircraft on 18 December in case it should be necessary to apply statutory liens and obtain injunctions. Blake Dawson Waldron, solicitors representing the aircraft lessors, requested fresh statements under s. 76 of the CA Act, which were issued. The recorded debts against the five aircraft comprised invoiced debt aggregating $12,114,302.06, and accrued December charges

of $1,751,901.49, making an overall total of $13,866,203.55.

(22) Imposition of Liens on 18 December 1991 Although the BSP paid $1,700,703.16 on 18 December, Compass

did not pay the top-up amount required. The CAA imposed liens. On Tuesday 17 December 1991, it issued five certificates of charges under s. 76 of the CA Act. These

certified the charges payable as at 9.00 am on 17 December

"Invoice number: 130722 due on: 01/09/1991 amount: $731,076.60 Invoice number: 132190 due on: 01/10/1991 amount: $724,461.51 Invoice number: 133725 due on: 01/11/1991 amount: $700,424.96 Invoice number: 135142 due on: 01/12/1991 amount: $611,492.08

Total unpaid charge, including penalty $2,767,455.15"

In addition, recorded charges for flights to the value of

$354,407.01 were to be included on the next invoice.

"Invoice number: 130724 due on: 01/09/1991 amount: $51,860.92 Invoice number: 132192 due on: 01/10/1991 amount: $676,029.22 Invoice number: 133727 due on: 01/11/1991 amount: $728,733.88 Invoice number: 135144 due on: 01/12/1991 amount: $575,157.98 Total unpaid charge, including penalty $2,031,782.00"

In addition, according to the certificate, recorded charges

for flights to the value of $372,023.59 which had been

"Invo1rce number: 130723 due on: 01/09/1991 amount: $746,045.04 Invoice number: 132191 due on: 01/10/1991 amount: $459,436.42 Invoice number: 133726 due on: 01/11/1991 amount: $772,632.45 Invoice number: 135143 due on: 01/12/1991 amount: $749,746.55

Total unpaid charge, including penalty s2,727,860.46"

In addition, according to the certificate, recorded charges

for flights to the value of $328,955.65 were to be included on

"Invoice number: 130721 due on: 01/09/1991 amount: $561,039.91 Invoice number: 132189 due on: 01/10/1991 amount: $690,044.43 Invoice number: 133724 due on: 01/11/1991 amount: $705,077.80 Invoice number: 135141 due on: 01/12/1991 amount: $629,934.52

Total unpaid charge, including penalty $2,586,096.66"

As well, according to the certificate, recorded charges for

flights to the value of $260,110.80 were to be included on the

"Invoice number: 132188 due on: 01/10/1991 amount: $666,477.10 Invoice number: 133723 due on: 01/11/1991 amount: $681,870.87 Invoice number: 135140 due on: 01/12/1991 amount: $652,759.82 Total unpaid charge, including penalty $2,001,107.79"

Further, according to the certificate, recorded charges for flights to the value of $267,108.75 would be included on the

(23) The End of the Relationship Between CAA and Compass On 20 December 1991, Compass filed in this Court (in

proceedings number NG 3189 of 1991) an application for an order that it be wound up and a notice of motion returnable instanter for an order that liquidators of Compass be appointed provisionally. The latter order was made on that date. Also on 20 December, possession of the five aircraft of Compass passed to the lessors. Accordingly, CAA rendered no services to Compass after 20 December. However, the charges invoiced by CAA to Compass for December, apparently of

$2,487,236.51, fell due for payment on 1 January 1992.

H. Phe Proper Inferences to be Drawn from the Primary Facts

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.C.J. 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

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.

Nor, in our opinion, was there an "entire transaction" between the parties in the sense that term was used in Richardson. There was 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

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 1t 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

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

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 in on 2 September, bring Compass to heel.

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.

Having regard to all these matters, in our view, in the result the conclusion must follow that this is not a case in which, on any footing, the reasoning of the High Court in Richardson and the Rees cases applies. There was no running account in the relevant sense, nor did the nine payments

It follows, in our view, that the payments did amount to

preferences. Accordingly, the appeal should be allowed.

It remains to consider the question whether interest should be recovered upon the amounts recovered as preferences. As a matter of principle, this question turns, we think, upon the true nature of a proceeding to recover preferential

In Re Ward (1950) 16 ABC 214, the applicable period of limitation to an action to recover alleged preferences was considered. It was contended unsuccessfully that the action was one upon a specialty, being a debt arising from statute, s. 95 of the 1924 Act. Paine J held (at 222) that the cause of action to recover moneys paid preferentially arose partly from the effect of s. 95 and "for the rest" depended upon the common law as it affected the result brought about by the section. The common law action was one for money had and received. It followed that, because the action did not solely arise from statute, the longer period of limitation which

In N.A. Kratzmann Pty Ltd (In Lig.) v Tucker [No. 1 (1966) 123 CLR 257 at 285, Barwick CJ spoke of the rights of

the liquidator as being derived from that part of the general law which becomes applicable upon the avoidance of the transaction in question. However, it would be unnecessary for the trustee to bring a separate claim outside the proceeding in which a declaration is obtained as to the avoidance of the transaction of the bankrupt. An appropriate consequential order to the declaration, in ordinary cases, is an order for the payment to the trustee of the amount in question: N.A.

Kratzmann Pty Utd (In Lig) v Tucker [No. 2] (1968) 123 CLR 295

at 298-9. Accordingly, in the present case, such an order

should be made consequent upon the declaratory relief to which

Sub-section 51A (1) of the Federal Court of Australia Act

In any proceedings for the recovery of any money (including any debt = or damages or the value of any goods) in respect of which a cause of action that arises after the commencement of this section, the Court or a Judge shall, upon application, unless good cause is shown to the contrary, either:

(a) order that there be included in the sum for which judgment is given interest at such rate as the Court or the Judge, as the case may be, thinks fit on the whole or any part of the money for the whole or any part of the period between the date when the cause of action arose and the date as of which judgment is entered; or [Emphasis supplied]

(b) without proceeding to calculate interest in accordance with paragraph (a), order that there be included in the sum for which judgment is given a lump sum in lieu of any such interest."

The question then arises in the present case as to "the date

when the cause of action arose" within the meaning of the sub-

As McLelland J pointed out in Spedley Securities Ltd (in Lig) v Western United Ltd (In Liq) (No. 2) (1992) 10 ACLC 887, a preference is void only as against the liquidator so that until a Liquidator is appointed there can be no cause of

"As a matter principle and logic it is very difficult to see any proper basis for an award of interest in respect of a period prior to the accrual of any relevant cause of action."

His Honour also said that rarely would it be appropriate to allow any amount for interest in respect of a period prior to a demand being made for the recovery of a preference. His

"I am not proposing any inflexible rule, but in the ordinary run. of cases, and particularly in the present case, it seems to me that it would not be proper to allow interest in respect of any period prior to a demand by the liquidator that any particular

payment was in fact recoverable as a preference." .

McLelland J also pointed out (at 888) that s. 94 of the

Supreme Court Act 1970 (NSW) (which relevantly corresponds to s. 51A) was "the only foundation for the inclusion of interest

It will be recalled that on 20 December 1991 Compass

applied for an order that it be wound up and sought the

appointment in the meantime of provisional liquidators; that the Liquidators were appointed on that day as provisional liquidators; and that on 10 July 1992, Compass was ordered to be wound up, and the Liquidators were appointed. Demand upon CAA for repayment of the preferences was made by the

The foregoing reasoning would indicate that interest under s. 51A of the Federal Court Act should not run before 10

July 1992 and in the particular circumstances, should run from

However, the Liquidators rely upon two decisions of

Hodgson J, Maurice Drycleaners Pty Ltd (In Lig) v National Australia Bank Ltd (1990) 8 ACLC 798, and Hamilton v

Commonwealth Bank of Australia (No. 2) (1992) 10 ACLC 1611.

These cases are authority for the proposition that the appropriate commencement date in this case is the commencement

Hodgson J pointed out that a preference once avoided is treated as void from the commencement of the winding up. This May be important where a specific item of property was transferred or a fund is held, and there are supervening claims of third parties or questions arise as to the tracing

of proceeds: Re Fiorino (Gummow J, 14 April 1994, unrep.).

But the relevant point for present purposes remains that the cause of action of the trustee arose, within the meaning of s. 51A, only upon the appointment of the Liquidators. It follows

that we prefer the reasoning of McLelland J on this issue.

We also accept that in the ordinary course interest should be allowed only from the date of demand by the Liquidators. However, CAA submits that, as a matter of discretion, there should be no award of interest. This would, it is submitted, reflect the circumstance that it was the making of preferential payments by Compass to CAA which induced CAA further to extend the provision of services to Compass; cf Re Carr (Morling J, 17 December 1987, pp. 12-13,

unrep.). That, in our view, rather over~simplifies the

In all the circumstances, we find nothing to displace the ordinary proposition that the period should run from the date of the demand, that is, 30 July 1992. If necessary, we will

hear the parties on the rate of interest to be allowed.

We add a reference to the position in the United States, where a result has been reached which is broadly the same as that which commends itself to us. There has been no specific

provision in the federal bankruptcy statutes to provide for

the award of interest upon an amount recovered as a

preference. The bankruptcy court has relied upon its equitable powers to make such an award. There is no right to interest, but if the court decides to award interest it usually does so from the date of demand for return of the preference, or, if there be no earlier demand, from the institution of the suit, this itself being a demand (see 9A Am. Jur.2d s1779). Interest is awarded from the date of the transfer only in exceptional cases, for instance where the transfer was made with actual intent to hinder, delay or defraud creditors or the transferee is guilty of culpable misconduct. Authority for these propositions is found in In re Roco Corp., 37 BR 770, 774 (D. RI. 1984), and In re Art Shirt Ltd., Inc., 93 BR 333, 341-2 (E.D. Pa. 1988).

The rationale for the general rule applied in the United

States is that until the trustee exercises his election and makes demand for repayment or retransfer, the preferred

creditor cannot be said to hold the property wrongfully: Smith

v Mark Twain National Bank, 805 F.2d 278, 291 (8th Cir. 1986).

It follows that the appeal should be allowed; the Liquidators should have declaratory and consequential relief, including an order for interest under s. 51A of the Federal Court Act to operate from 30 July 1992. The appeal will stand

over after the delivery of these reasons, for the bringing in

of short minutes to give effect to the reasons for judgment.

We also will then hear the parties on the question of costs.

I certify that this and the preceding one hundred and thirty eight (138) pages are a true copy of the reasons for judgment of the

Court. Associate: (Peiaee a hres Date: 21 December 1994 Counsel and solicitors Mr D.F. Jackson QC and for the appellants: Mr J. Thompson instructed by Blake Dawson Waldron. Counsel and solicitors Mr D.J. Jackson QC and for the respondents: Mr J.C. Sheahan instructed by Mallesons Stephen Jaques. Dates of hearing: 29, 30 September 1994.

CHARGES AMCUNT LAST DAY AMOUNT 3 DAYS INCURREC INVOICED FOR BAYMENT Paz OVERDUE Novamser $ 0 Q3én 31y/t2/59 S$ 9.038n 26/12/90 -- Decemséer S$ 1 367m 29/01/S1 $ 1.430m O5/03/S1 35 January $ 1 4iin OL/03/Gi $ 1.453m 15/05/91 75 February s 1.386% G2/04/9i $f 433m 23/05/91 $7 Maroh S$ 1.272n 29/04/91 S$ 1.472m 02/06/91 35

S$ 0.088" 03/06/91 35 April S$ 1 $7in 239/05/$2 $ 1.$7im 13/06/91 21 May s 2 155m O1/07/E1 $ 0.840m 02/07/91 i

$ 0.023m 09/09/91 (A) June S$ 2 0é5n 29/07/51 $ 2.069n 04/09/91 37

$ 9Q.043m Os/O9/9i (A) July $ 3 121m 29/08/91 $ 1,600m Q4/10/91 39 August $ 2.925m 30/09/91 7 September $ 3.081m 29/10/91 NOT YET OVERDUE

This table concentrates on invoiced cnarges. Some cf the paym covered penalty interest, and in addstion, some senaltres stil outstandin