Cashflow Finance v WestpacCOD Factors v Cashflow FinanceStar v Kylon P/LCOD Factors v Walters

In this, it differs from the misappropriated moneys which CODFA seeks to recover from Transpac No 2. (b) At no stage did CODFA ever have a commercial relationship (of any kind) with any Transpac company. It had no commercial relationship with Transpac No 1 or Transpac No 2. (c) Cashflow had a commercial relationship with both Transpac No 1 and Transpac No 2 or, at least, Transpac No 1.

Whether or not Cashflow's commercial relationship with Transpac No 1 was "irregular" insofar as it involved payments and receipts outside the two companies' formal factoring agreement, the fact is they had a commercial relationship.

Further, senior counsel for Cashflow has conceded in these proceedings that Cashflow received moneys from Transpac No 2, and paid moneys to the same company, whether or not those receipts and payments were pursuant to a formal factoring agreement. (d) In the records of Cashflow the disputed $20,000.00 was brought to account as between itself and Transpac No 1: Exhibit "D1Q" (second entry). (e) Mr Walters, who physically effected the theft of CODFA's moneys, regarded the disputed $20,000.00 as having been paid out of CODFA's moneys on account of Cashflow. It is part of the net sum of $180,000.00 which he confessed was owed by Cashflow to CODFA as a result of the unauthorized inter-company payments. At the time of his confession, and for a period thereafter, Mr Walters was and remained an officer of Cashflow. See Mr Kull's statement of 14 April 1998 (Exhibit "D1A") paragraph 51 and the computer "loan accounts" which Mr Walters prepared shortly after his confession (CODFA's Tender Bundle No. 2, at document No. 2, within Exhibit "D1X"). (f) Despite Mr Walters' dishonesty (which he has not disputed, even when present during the hearing, in these proceedings), there is no evidence to suggest that the payment of $20,000.00 out of CODFA's bank accounts on 2 April 1996 was for his personal benefit or for the benefit of the Transpac companies to the exclusion of Cashflow. Mr Walters certainly made imprudent payments which culminated in benefits to the Transpac companies but, on the evidence, he did so on Cashflow's account and not otherwise. If (contrary to CODFA's submissions) it is necessary to consider whether Cashflow had a "genuine factoring arrangement" with the Transpac companies, that question must be answered in the affirmative on the undisputed evidence of Alan Maudsley (Exhibit "D1L"), the only expert "Factor" from whom evidence is available. As summarized in his conclusions (on page 20 of Exhibit "D1L") a factoring arrangement did exist between Cashflow and Transpac No 1; payments made by Cashflow to Transpac No 1 are properly to be characterized as within the general terms of payments made in the course of factoring; and Cashflow both stood to benefit, and benefited from, such payments.' 409 CODFA's submissions that the making of a winding up order against Cashflow is irrelevant to CODFA's claim for restitution generated considerable further attention of the parties. Cashflow and Mr Star commenced by submitting that the combined effect of Sections 553 and 555-556 Corporations Law is to limit CODFA's entitlements (in respect of inter-company transfers, including amounts received by Mr Star from CODFA pursuant to 5.7B of the Law) to an entitlement to prove a debt in the winding up of Cashflow, such debt to rank with (and to have no priority over) unsecured creditors generally. CODFA then addressed responsive submissions. Cashflow then replied. 410 The respective submissions were as follows: CODFA's Submissions as to the Operation of Corporations Law ss 553 and 555-556 'The submissions of Cashflow and Mr Star must be rejected, as will be shown by an examination of: (a) sections 553 and 555-556 of the Law. (b) the nature of the restitutionary obligations of Cashflow and Mr Star, and the circumstances in which those obligations came to attach to them. (c) the nature of the relief claimed by CODFA. [I] In summary, CODFA contends that it is entitled, on any view of the case, to "rank above" the general unsecured creditors of Cashflow. This is because: (a) Cashflow and Mr Star have a continuing liability to account to CODFA for the moneys stolen from it and (with or without an entitlement in CODFA to proprietary relief) an obligation to restore CODFA's estate; and (b) if it is correct to characterize CODFA's entitlement to restitution as a "debt" (or an equitable entitlement "in the nature of a debt", that debt is a "post-liquidation debt" entitled, as such, to priority under section 556(1)(a) of the Law. [II] At the risk of oversimplification, and leaving aside the disputed $20,000.00 of 2 April 1996, the dispute between Cashflow/Mr Star and CODFA in this area is essentially one of priorities: (a) On 15 March 1999 Cashflow and Mr Star conceded that Cashflow has restitutionary obligations to CODFA. (b) It is common ground (as established by Exhibit "D1R" at page 4) that Cashflow has no "secured creditors". (c) The contest of priorities is between CODFA (to which "restitutionary obligations" are admittedly owed and which claims, inter alia, equitable relief) and the unsecured creditors of Cashflow generally. [III] In considering the operation of sections 553 and 555-556 of the Law the Court should bear in mind that: (a) CODFA's claims for equitable relief are essentially founded on the existence in Cashflow and Mr Star of a liability to account for CODFA's moneys. That is so whether the relief under consideration relates to orders for: (i) the recognition and/or imposition of a constructive trust; or (ii) equitable compensation, with or without security for its payment. (b) the equitable relief sought by CODFA (including non-proprietary relief to effect compensation) is available as a "remedy", not as "a right" in the same sense as a common law entitlement is said to be a "right". It is discretionary relief vindicating entitlements dependent, in the absence of agreement, on the making of a court order. (c) whether the restitutionary obligations of Cashflow and Mr Star are regarded as having equitable or legal foundations, they must be regarded as continuing beyond, or arising after, the commencement of Cashflow's winding up. (d) Even if CODFA has an entitlement to restitution at common law, its entitlement to equitable relief is additional to it: Nocton v Lord Ashburton [1914] AC 933 at 956-957. [IV] In relation to section 553 of the Corporations Law the following points should be noted: (a) section 553(1) is permissive rather than mandatory. It does not exhaust circumstances in which a person's entitlements against a company may be vindicated. (b) the sub-section relates (by the words "being debts or claims the circumstances giving rise to which occurred before the relevant date") to debts or claims which arise before the commencement of a winding up. (c) the sub-section does not govern "post-liquidation debts or claims". They may be enforced directly against the company in liquidation or its liquidator and, to the extent that section 556 applies, they have "first ranking priority" over "all other unsecured debts and claims" insofar as they fall within section 556(1)(a). [V] In relation to section 555 of the Law, note that it only applies to "debts and claims proved" in a winding up. It does not apply to other debts or claims. It, thus, does not operate to limit: (a) post-liquidation debts or claims; (b) curial relief granted against a company; or (c) relief granted against, or obligations incurred by, a liquidator who then seeks (by reference to section 556(1)(a)) to be indemnified from the property of the company. [VI] In relation to section 556 of the Law the following points should be noted: (a) section 556(1) relates to priority of "debts and claims…in the winding up of a company". (b) it relates to the priority of certain "debts and claims" over "all other unsecured debts and claims". (c) it does not limit curial relief granted against a company and/or its liquidator in the course of a winding up. (d) in the context in which the section operates, section 556(1)(a) affords priority to the entitlement of a company liquidator to be indemnified from the property of the company of which he or she is liquidator. [VII] Insofar as CODFA seeks equitable relief, such entitlements as it may have (whether to proprietary relief or otherwise) are not, in the absence of any agreement between Cashflow (and/or Mr Star) and CODFA, limited by sections 553, 555 and 556 of the Law. This is because: (a) even if (which Young J has suggested in Re Trivan Pty Ltd (1996) 14 ACLC 1654 at 1657 and 1658 is doubtful) an "entitlement" to equitable relief can be asserted in a proof of debt, in the circumstances of this case CODFA's entitlements cannot properly be characterized as having arisen before the commencement of the winding up. (b) CODFA's entitlements cannot be said to have arisen before the commencement of the winding up because: (i) at no time before the commencement of the winding up did Cashflow agree to account to CODFA or to make restitution in favour of CODFA for the moneys stolen from CODFA. (ii) either CODFA is entitled to a constructive trust (as it has earlier submitted), or its entitlements to non-proprietary relief in equity arise on the making of a Court order (and no Court order was made before the commencement of the winding up). (iii) on the case for which Cashflow and Mr Star have contended, the "entitlement" of Cashflow to make an election about whether or not it would retain CODFA's stolen moneys and benefits derived from those moneys, did not arise until after Mr Bonvino became fully aware of the inter-company transfers on or about 28 October 1996 (Bonvino Affidavit sworn 27 April 1998 paragraph 52(c)) and was not exercised (at least expressly) until the opening address of Mr Campbell QC on 15 March 1999 (transcript pages 30-31). (iv) Cashflow and Mr Star (having retained and used CODFA's moneys, having obtained and elected to retain benefits derived from those moneys, and having elected to acknowledge restitutionary obligations) cannot limit the legal effect of their conduct by retrospectively characterizing Cashflow's restitutionary obligations as no more than an obligation to permit CODFA to prove in Cashflow's winding up as if its entitlements were limited to an unsecured, pre-liquidation debt or claim. CODFA's Submissions as to the Restitutionary Obligations of Cashflow and Mr Star [I] A plaintiff who establishes a breach of fiduciary duty has available to him a range of remedies. Not only does he have a range of remedies from which to choose but those remedies are relatively flexible. They include the remedy of constructive trust (including tracing trust property as may be appropriate), the remedy of account and the remedy of compensation in equity: J. J. Doyle QC (as Doyle C.J. then was) at page 211 of P.D. Finn (ed), Equity and Commercial Relationships (1987). [II] The nature of the case will determine the appropriate remedy available for selection by a plaintiff: Maguire v Makaronis (1997) 188 CLR 449 at 467, citing Spence v Crawford [1939] 3 All ER 271 at 288. [III] The fundamental liability of a defaulting fiduciary is to account: Justice J B Kearney, "Accounting for a Fiduciary's Gains in Commercial Contexts" (in Finn, Equity and Commercial Relationships) at 203. [IV] A constructive trust is merely a means of achieving such an accounting: Kearney, op cit. Once it is established that a fiduciary is liable to account for a profit or benefit which he has obtained there can be no objection to his being held to account as a constructive trustee of that profit or benefit: Hospital Products Ltd v United States Surgical Corpn (1985) 156 CLR 41 at 107-108 per Mason J.

It is open to an Equity Court to "retrospectively impose a constructive trust" by way of "equitable remedy" in circumstances in which the remedy is based upon an underlying failure to account by a fiduciary and not merely (as may be allowed in USA) upon "idiosyncratic notions of fairness and justice": Muschinski v Dodds (1985) 160 CLR 583 at 614-616 per Deane J.

The fact that a defendant's "profit or gain" cannot readily be identified is not an impediment; the Court can, by awarding equitable compensation in lieu of an inquiry, measure the fiduciary's gain by reference to the loss of the beneficiary: Kearney J, ibid page 207.

[V] Whether by moulding orders for a constructive trust or otherwise it is open to the Court, exercising equitable jurisdiction, to mould relief so as to secure performance of the fiduciary's obligation to account. Accordingly, it is open to the Court (for example) to grant a lien over an identifiable asset of the fiduciary, whether or not trust property can be "traced" into that property and a constructive trust declared.

That is the context of the quotation from Goff and Jones, The Law of Restitution (4th edition, 1993) page 96 in paragraph 37.2.3.2 on page 33 of Cashflow's undated "Written Overview Submission".

In United Surgical Corpn v Hospital Products International Pty Ltd [1982] NSWLR 766 at 816B-F McLelland J accepted that it was open to him, as a matter of jurisdiction, to secure the performance of a liability to account by the imposition of a lien even though it was difficult, if not impossible, to trace profits into any particular asset of the defaulting fiduciary concerned. His decision not to impose a lien was based upon discretionary, not jurisdictional grounds.

[VI] It was by reference to McLelland J's observations in that passage that Gummow J wrote (in an article entitled "Compensation for Breach of Fiduciary Duty" published in T G Youdan ed, Equity, Fiduciaries and Trusts (1989) at page 64) that, "stated in terms of liability to account for loss, the obligation is to submit to the taking of accounts and to make compensation for loss occasioned by breach of duty.

[VII] This passage emphasises the common origins of equitable "entitlements" to proprietary relief and compensation on enforcement of a defaulting fiduciary's liability to account. It also emphasises the fact that vindication of equitable "entitlements" may (as in these proceedings) require an order of the Court.

[VIII] The interrelationship between the various remedies available in Equity is also illustrated by the observation of Professor J D Heydon (as he then was) in an article entitled "Recent Developments in Constructive Trusts" (1977) 51 ALJ 635 where (at 644) he wrote: "If in a constructive trustee's hands there is wrongly acquired property, or property representing it, he can be compelled to disgorge it or a tracing claim may lie. If there is now no property in the constructive trustee's hands or if there never was, a personal action for account lies against him. In such a case, the dogma that a man cannot be trustee without trust property is infringed, and the 'constructive trust' looks much more like a remedy than a substantive institution". That passage was approved by Kearney J, ibid at pages 207-208.

[IX] Maguire v Makaronis (1996) 188 CLR 449 confirms not only the range of remedies available in equity (at 467-468) but also the following points: (a) Equity intervenes not so much to recoup a loss suffered by a plaintiff as to hold a fiduciary to, and vindicate, the high duty owed by a fiduciary to the plaintiff: 465, 468, 470. (b) the obligation of a defaulting fiduciary is essentially one of effecting restitution to the plaintiff's estate: 469. (c) until restitution is made, the Court presumes that a default continues: 470. [X] In Black v S Freedman & Co (1910) 12 CLR 105 the High Court authoritatively determined the "high duty" of a person who receives and retains stolen property. Cashflow and Mr Star are persons upon whom the High Court, as a matter of policy, has imposed a fiduciary obligation to account.

[XI] In Mr Star's case that obligation is reinforced by his duty as an officer of the Court to act conscionably: Re Condon Ex Parte James (1874) 6 Ch App 609 at 614, considered by Gummow J in Hartogen Energy Ltd (in liquidation) v AGL (1992) 36 FCR 557 at 571-575.

[XII] The observations of Griffith CJ in Black's case (at 12 CLR 109.9), and in Creak's case (at 15 CLR 432-433) are consistent with the proposition that a person who innocently receives stolen property may have a limited time within which he or she can decide how to account for the property. The existence of such an opportunity does not assist Cashflow or Mr Star in this case.

[XIII] In these proceedings it is common ground that Cashflow received property, and derived benefits from property, of CODFA in circumstances in which (to put it neutrally) CODFA did not authorize any disposition of the property to or on the account of Cashflow.

Immediately upon the disposition of CODFA's property for the benefit of Cashflow Cashflow came under a fiduciary obligation to account, which obligation continued and was reinforced by deliberate decisions made by or on behalf of Cashflow (between 28 October 1996 and 15 March 1999, if not earlier) to retain the benefit of CODFA's property. In those circumstances, having retained and accepted the benefit Cashflow must bear the burden of disgorging the property. Its fiduciary obligation to account cannot properly be said to have been displaced by dissipation of CODFA's property (particularly as it has received benefits and recovered moneys referrable to the dissipation of property funded by use of CODFA's property) or by the commencement of its winding up.

[XIV] Cashflow and Mr Star cannot render their obligation to account to CODFA nugatory by their contention that they were entitled to investigate the facts and thereafter to "elect" how they would account to CODFA. Until 15 March 1999 they denied the existence of any restitutionary obligation in favour of CODFA. Any "election" they were entitled to make, and did make, would not displace their continuing fiduciary obligation to account to CODFA. On the contrary, any performance of that obligation by Mr Star or enforcement of it against him as liquidator of Cashflow would result in either: (a) a payment of moneys to CODFA by Cashflow, unaffected by the order of priorities for which section 556 of the Law provides; or (b) a payment of moneys to CODFA by Mr Star (as liquidator) and indemnification of him, from property of Cashflow, as a first-ranking creditor under section 556(1)(a).' 411 Cashflow's responsive submissions were as follows: ' When did the obligation to make restitution arise . / Is the obligation to make restitution a post-liquidation obligation 1. CODFA submits that Cashflow's alleged liability to account is a post-liquidation liability, and so entitled to priority under section 556 (1) (a) Corporations Law. That submission should be rejected. 2. Section 556 (1) (a) says 556 (1) [Ranking] Subject to this Division, in the winding up of a company the following debts and claims must be paid in priority to all other unsecured debts and claims: (a) first, expenses (except deferred expenses) properly incurred by a relevant authority in preserving, realizing or getting in property of the company, or in carrying on the company's business; 3. Any obligation of Cashflow to make restitution in relation to the WUPs does not fit inside that language. 3.1. It is not an "expense incurred". 3.2. The only possible "relevant authority" is the liquidator. He has not incurred the restitutionary obligation to repay the WUPs. 3.3. Further, the restitutionary obligation to repay the WUPs has not been incurred "in preserving, realizing or getting in property of the company, or in carrying on the company's business". 4. The obligation to make restitution of money paid does not arise from the fact that Cashflow admitted it, in the course of the present litigation. Nor was it necessary for Cashflow to have knowledge of the circumstances of the payments before it is under a restitutionary obligation. 4.1. If Cashflow had changed its position on the faith of the payment, the fact that it did not have knowledge of the circumstances which gave rise to the obligation of restitution would be relevant to whether it could make out that defence of change of position. It is, however, irrelevant to the existence of CODFA's right (subject to any defence) to have restitution. 4.2. (It may be that knowledge of the defendant has a different role to play when restitution is sought in relation to the value of services conferred, for there "acceptance" of the benefit of the services has a role to play in whether a restitutionary obligation arises. Acceptance of the benefit requires knowledge that the benefit has been conferred, not just the fact that the benefit has been conferred. The need for there to be acceptance of the benefit, in the case of a restitutionary action for the value of services conferred, arises from the fact that services conferred cannot be given back in the same way that money paid can be given back.) 5. The right of CODFA to have restitution of those payments which passed through the bank account of Cashflow arose immediately any payment of CODFA's money was made to Cashflow. 5.1. In David Securities Pty Ltd v Commonwealth Bank of Australia Mason CJ, Deane, Toohey Gaudron and McHugh JJ said If we accept the principle that payments made under a mistake of law should be prima facie recoverable, in the same way as payments made under a mistake of fact, a defence of change of position is necessary to ensure that enrichment of the recipient of the payment is prevented only in circumstances where it would be unjust. This does not mean that the concept of unjust enrichment needs to shift the primary focus of its attention from the moment of enrichment. From the point of view of the person making the payment, what happens after he or she has mistakenly paid over the money is irrelevant, for it is at that moment that the defendant is unjustly enriched. However, the defence of change of position is relevant to the enrichment of the defendant precisely because its central element is that the defendant has acted to his or her detriment on the faith of the receipt. Brennan J said If, under a mistake, money is paid to and unjustly enriches a payee, the payer's right to recover the amount paid accrues at the moment when the payee received the money.

5.2. See also Commissioner of State Revenue (Vic) v Royal Insurance Australia Ltd (1994) 182 CLR 51, at 67 per Mason CJ. (Brennan J, with whom Toohey and McHugh JJ agreed, found no need to consider whether there was a restitutionary obligation to repay.)

In relation to those of the WUPs where there was payment direct from CODFA to a solvent client of Cashflow, the obligation to make restitution arose either when the payment was made by CODFA, or alternatively at the latest when Cashflow received a benefit arising from that payment.

6.1. Each of the payments to a solvent client generated a benefit, in the form of fee income, immediately the payment was made to the solvent client. 6.2. Further, immediately the payment was made to the solvent client, Cashflow would receive the benefit of: 6.2.1. covenants from that solvent client that the debts sold were valid and enforceable 6.2.2. the right to place 20% of the face value of the debts purchased into a retention fund, 6.2.3. covenants to pay any further fees which might accrue in relation to the debts purchased by that payment, and 6.2.4. covenants that the solvent client would refund any balance of the debt which was outstanding after 90 days, together with 6.2.5. all the other rights which arise under the factoring deed in relation to any factored debt. Thus the obligation to make restitution, in relation to the WUPs made to solvent clients, arose well before liquidation.

Benefits of that kind (or any other kind) were not received by Cashflow in relation to the payment of $20,000 made direct from CODFA to Trans-pac on 2 April 1996. The reasons for this are because 7.1. that payment was received by Trans-pac No 2 (and so was not to a client of Cashflow at all), 7.2. no fees were in fact received from Trans-pac No 1 or Trans-pac No 2 in relation to that payment, 7.3. there was no factoring of debts occurring in relation to that payment, and 7.4. no factoring deed existed with Trans-pac No 2 under which any contractual benefits could arise Is the obligation to make restitution one which arises because Cashflow has a fiduciary obligation to account

The obligation to make restitution is a common law obligation, which arises from the fact of receipt of the payment itself, or of benefits attributable to the payment. The authoritative explanation of the restitutionary obligation, which has been given in David Securities, makes no mention of the possibility of there being an equitable basis for the obligation.

Chase Manhattan does not provide an acceptable basis for saying that there was a fiduciary obligation imposed on Cashflow by reason of the receipt of the WUPs. It should not be regarded as stating the current law in Australia. There have been some scattered references to Chase Manhattan in cases over the years, but nothing which obliges this court to accept that it imposes a fiduciary obligation on Cashflow.

9.1. In Daly v The Sydney Stock Exchange Limited Brennan J made reference to Chase Manhattan Bank v Israel-British Bank, as follows There is no analogy between the present case and one in which a constructive trust is imposed on money or other property which is acquired by a fiduciary in breach of his duty but not pursuant to a voidable contract. In such a case there is no question of avoiding the contract before the constructive trust is imposed. A fortiori, there is no analogy between the present case and one where a constructive trust is imposed on money or other property which is acquired by a non-fiduciary otherwise than by contract: as, e.g., in Chase Manhattan Bank N.A. v. Israel-British Bank (London) Ltd.[1981] 1 Ch 105, at pp 118-120.. In other words, Brennan J regards Chase Manhattan as a case of a remedial constructive trust imposed on a person who is not a fiduciary. None of the other judges of the High Court in Daly made reference to Chase Manhattan, notwithstanding that counsel for the appellant had submitted Alternatively, the money was entrusted to the firm because it was held on a constructive trust for Dr. Daly. The legal title passed by reason of a transaction procured by the transferee in breach of fiduciary duty. Dr. Daly obtained an equitable interest in the money by reason of the equitable fraud of the transferee. [He referred to Black v. S. Freedman & Co. 10 (1910) 12 CLR 105, at p 110.; Spedding v. Spedding 11 (1913) 30 WN (NSW) 81.; Scott on Trusts, 3rd ed. (1967), par. 462.4; Stansbury v. United States 12 (1982) 543 F Supp 154.; and Chase Manhattan Bank N.A. v. Israel-British Bank (London) Ltd. 13 [1981] Ch 105..]

9.2. In Stephenson Nominees Pty Ltd v Official Receiver Gummow J dissented. His Honour was the only judge to mention the Chase Manhattan case. His only remark in any way relevant to its status in Australia was saying Any principle to be deduced from that case does not appear in the present case. That remark is consistent with his Honour regarding Chase Manhattan as wrongly decided.

9.3. In Ilich v R [1986] 162 CLR 110, Wilson and Dawson JJ said at 129: There is, we should add, a civil action to recover money paid under a mistake of fact and equitable rights may arise: see Chase Manhattan Bank NA v Israel-British Bank (London) Ltd. That observation did no more than recognize that equitable rights "may" arise. The observation was obiter in the judgment of Wilson and Dawson JJ. It was quite unrelated to the matter for decision by the court (which concerned a conviction for a crime involving taking bank notes). The other three judges who delivered judgments in the case (Gibbs CJ, Brennan and Deane JJ) said nothing on this topic.

9.4. In Hartogen Energy Ltd v AGL Co Gummow J, in the course of deciding whether a liquidator should be permitted to maintain a claim to legal professional privilege for documents, gave consideration to the rule in Ex parte James.

9.4.1. That case was one which related to a situation where a trustee in bankruptcy had demanded that an execution creditor, who had received some of the property of the bankrupt, should pay to the trustee the amount that he had received. The execution creditor paid the money, then brought an action to have it returned to him. The trustee in bankruptcy resisted that claim on the ground that the execution creditor had paid the money under a mistake of law. James LJ held that the trustee was obliged to give the money back. In the course of his reasons James LJ said that the money that the trustee held belonged in equity to someone else. Gummow J said, at 573 The crucial passage in the judgment of James LJ (at 614) is as follows: "With regard to the other point, that the money was voluntarily paid to the trustee under a mistake of law, and not of fact, I think that the principle that money paid under a mistake of law cannot be recovered must not be pressed too far, and there are several cases in which the Court of Chancery has held itself not bound strictly by it. I am of opinion that a trustee in bankruptcy is an officer of the court. He has inquisitorial powers given him by the court and the court regards him as his officer, and he is to hold money in his hands upon trust for its equitable distribution among the creditors. The court, then, finding that he has in his hands, money which in equity belongs to someone else, ought to set an example to the world by paying it to the person really entitled to it. In my opinion, the Court of Bankruptcy ought to be as honest as other people." Two years later the same judge said, in Rogers v Ingham (1876) 3 Ch D 351 at 355: "I have no doubt that there are some cases which have been relied on, in which this Court has not adhered strictly to the rule that a mistake of law is not always incapable of being remedied in this Court; but relief has never been given in the case of a simple money demand by one person against another, there being as between those two persons no fiduciary relation whatever, and no equity to supervene by reason of the conduct of either of the parties." The passage which I have set out from Ex parte James has to be read with this in mind. The passage is concerned with explaining what in the circumstances of that case led the court to find that there was an equity in the party claiming repayment. Further, the proposition that the money in equity belonged to the claimant for repayment is consistent with modern authority, exemplified by Chase Manhattan Bank NA v Israel-British Bank London [1981] Ch 105.

9.4.2. In the circumstances of Ex parte James it was quite clear that the trustee in bankruptcy held the property which had been paid to him by the execution creditor as a fiduciary - it was clearly not his own, simply because the only reason why it had been paid to him was because he was the trustee in bankruptcy. In that situation, the only choice concerned whether it was held on the trusts on which the property of the bankrupt estate was held, or whether it was held for the execution creditor.

9.4.3. There is nothing in Ex parte James to suggest that any unauthorised payment which CODFA makes to Cashflow, or to a solvent client of Cashflow, will result in the money being held in any sort of similar fiduciary fashion.

9.4.4. The final sentence of the extract quoted from the judgment of Gummow J is obiter, and hardly an endorsement of the decision in Chase Manhattan.

9.4.5. The derisory remarks about Chase Manhattan that are contained in Meagher Gummow and Lehane Equity Doctrines & Remedies, 3rd edition, paragraphs 505,1402 and in Jacobs' Law of Trusts in Australia, 6th edition, paragraphs 2703,2705 show that Gummow J does not accept that it is correct if it holds that a fiduciary obligation arises when there is a mistaken payment.

9.4.6. We also mention here that, contrary to the submissions which CODFA makes in s23 of its latest submissions, the decision in Ex parte James, as explained by Gummow J in Hartogen, has no bearing on whether Mr Star ought to recognise any sort of equitable obligation in relation to the assets of Cashflow. A fundamental distinction between the present case and ex parte James is that all the assets in Mr Star's' hands are ones which the company owned at the time of its liquidation, or (like the right to receive money from Westpac for settlement of the litigation against it) are the fruits of a right of action which the company had at the time it went into liquidation.

9.5. In Commonwealth of Australia v ANZ Banking Group (O'Keefe CJ Comm Div 7 October 1993 unreported, accessible in Butterworths unreported judgments no BC9302376 at 7 ) his Honour said Monies paid as a result of fraud or mistake are impressed with a trust in favour of the payer, who is entitled to an order for the return of those monies; (Chase Manhattan Bank NA v Israel British Bank (London) Ltd (1981) 1 Ch 105 at 117 to 120, 128.)

Where money has been stolen, that money is held in trust by the thief. Once such money has been impressed with that trust, he, the thief, cannot remove from it its character as trust money. If he pays it over to another person, then it may be followed into that persons hands. (Black v S Freedman and Co (1910) 12 CLR 105 at 117.) Mr Eliades therefore in my view holds the various monies referred to above as trustee for the ANZ. Those remarks were made in the context of a tracing claim, brought by the true owner of money against a true thief. They do not assist the present case. In so far as his Honour drew any principle from Chase Manhattan at all, it was relating to moneys paid as a result of "fraud or mistake".

9.6. In Chippendale v Commissioner of Taxation, Lehane J said that the obligation to repay money paid under mistake was treated as a common law obligation, not an equitable one. His use of a "cf" when referring to Chase Manhattan suggests that he is contrasting his own view with that expressed in Chase Manhattan. Equally, relief would be available in accordance with common law principles in a case where money was paid as tax under a mistake of fact: for example, if a taxpayer applied the right principles in calculating tax due but made an error in the calculation or, overlooking the fact that the tax due had already been paid, mistakenly paid it again (cf Chase Manhattan Bank NA v Israel-British Bank (London) Ltd [1981] 1 Ch 105).

9.7. In Attorney-General (UK) v Heinemann Publishers Australia Pty Ltd (1987) 75 ALR 353 at 455 McHugh JA made mention of Chase Manhattan, but for the conflicts of law principle decided by it, not the point which is relevant to this case.

9.8. It follows that there is no authority which prevents the Court from following the English cases set out in Cashflow's submissions on constructive trust, in denying that there is any fiduciary obligation here. Is the obligation to make restitution one which is provable in the winding up

Section 82 Bankruptcy Act 1966 says 82. Debts provable in bankruptcy (1) Subject to this Division, all debts and liabilities, present or future, certain or contingent, to which a bankrupt was subject at the date of the bankruptcy , or to which he or she may become subject before his or her discharge by reason of an obligation incurred before the date of the bankruptcy , are provable in his or her bankruptcy . (1A) Without limiting subsection (1), debts referred to in that subsection include a debt consisting of all or part of a sum that became payable by the bankrupt under a maintenance agreement or maintenance order before the date of the bankruptcy . (2) Demands in the nature of unliquidated damages arising otherwise than by reason of a contract, promise or breach of trust are not provable in bankruptcy . (3) Subject to subsection (3A), penalties or fines imposed by a court in respect of an offense against a law, whether a law of the Commonwealth or not, are not provable in bankruptcy . (3AA) An amount payable under an order made under paragraph 1317EA (3) (b) of the Corporations Law of a State or Territory is not provable in bankruptcy . (3A) An amount payable under a pecuniary penalty order or an interstate pecuniary penalty order is provable in bankruptcy . (3B) A debt is not provable in a bankruptcy in so far as the debt consists of interest accruing, in respect of a period commencing on or after the date of the bankruptcy , on a debt that is provable in the bankruptcy . (4) The trustee shall make an estimate of the value of a debt or liability provable in the bankruptcy which, by reason of its being subject to a contingency, or for any other reason, does not bear a certain value. (8) In this section, "liability" includes: (a) compensation for work or labour done; (b) an obligation or possible obligation to pay money or money's worth on the breach of an express or implied covenant, contract, agreement or undertaking, whether or not the breach occurs, is likely to occur or is capable of occurring, before the discharge of the bankrupt ; and (c) an express or implied engagement, agreement or undertaking, to pay, or capable of resulting in the payment of, money or money's worth, whether the payment is: (i) in respect of amount - fixed or unliquidated; (ii) in respect of time - present or future, or certain or dependent on a contingency; or (iii) in respect of the manner of valuation - capable of being ascertained by fixed rules or only as matter of opinion. 11. A claim for restitution of money paid to or to the use of a person who has become bankrupt is a claim which is provable in a bankruptcy, because it is a liquidated demand. CODFA's claim to an account is in reality a claim to get back the money it parted with, with interest. That is a liquidated claim. 12. The bankruptcy provisions setting out what were provable debts were deliberately cast in wide terms, excluding nothing but claims for personal torts, so as to provide the bankrupt with the fullest opportunity to make a fresh start after the bankruptcy, freed from nearly all claims and demands. 13. While there was not the same policy objective (of allowing a natural person a fresh start) in drafting the winding up provisions relating to provable debts, the provisions of the bankruptcy legislation about provable debts were taken across into legislation governing the winding up of insolvent companies. 14. In the time before the enactment of section 553 and 554A Corporations Law, it was held that where a company has received money which is money out of which A has been cheated, and the company has subsequently gone into liquidation, A has a right of proof in the liquidation for the amount in relation to which A has been cheated, and in relation to which A has a claim in restitution against the company. However, no claim for interest was allowed to be proved in the winding up. Cutten & Harvey v Mount (1988) 50 SASR 81 at 87-88. That authority remains applicable today. 15. When s 553 and 554A Corporations Law were introduced, it was with the intention of allowing even claims for unliquidated damages to be provable in the winding up of insolvent companies. Butterworths Corporations Law - Principles and Practice, para 5.6.0225 says Generally Unliquidated claims are provable in the winding up of a company. However, in the case of insolvent companies, this is subject to s 82(2) of the Bankruptcy Act 1966 (see s 553E). That section provides that demands in the nature of unliquidated damages arising otherwise than by reason of a contract, promise or breach of trust are not provable in bankruptcy. The limitation on the ability to prove, contained in s 82(2) of the Bankruptcy Act 1966, should be construed narrowly. The expression "by reason of" in that section indicates that it is not necessary to establish more than an appropriate nexus between the damages claimed and the contract or promise. Tort Until the passing of the CLRA it was settled law that unliquidated damages for tort could not be proved in a winding up of an insolvent company. ….. . However, it is recognized that a strict application of the bankruptcy rule to corporate insolvency may lead to "extraordinary consequences": see the comments by Gummow and von Doussa JJ in McIntyre v Perkes (1990) 92 ALR 577 at 590; Fielding v Vagrand Pty Ltd (in liq) (1992) 111 ALR 368; 9 ACSR 505 at 511; 11 ACLC 172. This rule does not apply where there are surplus assets. There is nothing in the law of bankruptcy or in the law of companies which prevents an unsatisfied claimant, in respect of a claim in tort which was still unliquidated by judgment at the commencement of a winding up, from obtaining satisfaction out of the surplus assets which remain after debts and costs of winding up have been paid, before anything is paid to the shareholders. 30. Nor does it prevent the proof of claims which were already liquidated at the time of the making of a winding up order (being the relevant date): Re Autolook Pty Ltd (1984) 2 ACLC 30. ….. The Explanatory Memorandum to the CLRA states that the effect of ss 553 and 554A will overcome the effect of s 82(2) of the Bankruptcy Act 1966"and thereby permit claims in tort which are unliquidated at the time of the winding up to be admissible in the winding up": para 853. 16. Thus, under the present Corporations Law, with section 553 and 554A allowing the proof of unliquidated claims, there is no doubt that the obligation of Cashflow to make restitution to CODFA in relation to the WUPs gives rise to a claim which is provable in the winding up of Cashflow. 17. The basis on which a court decides whether it will permit an action against a company in liquidation is that it is more convenient to allow the matter to be dealt with by an action than by lodgment of a proof of debt. That the court has decided that it is more convenient to allow the present action to proceed, rather than insisting on CODFA lodging a proof of debt and then dealing with an appeal against the rejection of that proof of debt, ought not result in CODFA being in any better position than it would have been in if the proof of debt route had been followed. Is a personal obligation of a fiduciary to make good a loss, one which is provable in the winding up of the fiduciary 18. We dispute, for reasons given in the course of the hearing, that Cashflow owes, or ever owed, fiduciary obligations in relation to the WUPs. However, if we are wrong about that, all that any fiduciary obligation to account results in, is a personal obligation on the fiduciary to pay money. If the fiduciary becomes insolvent, that personal obligation results in a proof of debt. 19. There is old and uncontradicted authority that the amount for which a natural person fiduciary can be required to account is provable in the bankruptcy of the fiduciary. (If the claim against the fiduciary was in the nature of a claim for unliquidated damages, it might not have been provable in the bankruptcy.) 20. Section 82 (2) Bankruptcy Act makes clear that a personal liability of a trustee to make restitution for breach of trust is provable in the bankruptcy. If that species of fiduciary obligation is provable in the bankruptcy, it is consistent that an action for other types of breach of fiduciary duty ought also be provable in the bankruptcy. 21. It is the effect of section 553 and 554A Corporations Law that any doubts that there might be about whether all and every claim for breach of fiduciary duty are provable in the winding up of a corporation (including claims which are in the nature of unliquidated claims) has been removed. 22. A dictum of Young J in Re Trivan is to the effect that an entitlement to the equitable relief of subrogation cannot be asserted in a proof of debt, because subrogation is an equitable remedy, not a right. (The ratio of the decision was that subrogation was not available, because the person seeking it had failed to do equity.) Nothing in Re Trivan casts doubt on the ability to lodge a proof of debt for the loss sustained by reason of breach by a company in liquidation of a fiduciary obligation. Alleged "financial support" by Bonvino of Cashflow 23. That it would have been possible, in December 1994, for Pyrafount to inject a further $500,000 does not bear upon the solvency of Cashflow in the 12 months from 12 September 1995. 24. As to the alleged "inference" that Bonvino and his company had agreed not to withdraw their funds without arranging alternative financing 24.1. that is contrary to the express evidence of Bonvino in his affidavit of 14 March, "I will be able to withdraw the funds in three months even if you cannot find a replacement" 24.2. it was never put to Bonvino in cross-examination that there was any such agreement. 27. The affidavit of 14 March 1999 makes clear that Bonvino had, at the outset, the right to withdraw the funds at any time. His holding 51% of the shares, and therefore having the practical ability to change the board of directors, meant that he had the capacity to ensure that Cashflow agreed to whatever terms for withdrawal of funds he wished to have. Bonvino had this practical ability to get his funds out, and vary any agreement under which they had been provided, whenever he wanted, regardless of the terms that had been originally agreed for their withdrawal. 26. There never was any agreement that Bonvino, or Pyrafount (or anyone else) would continue to provide financial support to Cashflow.' 412 'CODFA's Submissions as to Assessment of Cashflow's Solvency in light of Mr Bonvino's Financial Support for the Company [I] The law relating to assessment of solvency is summarized in H.A.J. Ford, R.P. Austin and I.M. Ramsay, Ford's Principles of Corporations Law (9th ed, 1999) paragraph [20.140]. The basic authorities are Bank of Australasia v Hall (1907) 4 CLR 14 and Sandell v Porter (1966) 115 CLR 666 at 670-671. [II] The question whether an assessment of a company's insolvency requires consideration of the availability of unsecured credit from its officers or promoters is one of fact which depends upon the degree of certainty with which such funds are, and are likely to remain, available for use by the company. See, for example, Taylor v ANZ Banking Group Ltd (1988) 13 ACLR 780 at 784; Re RHD Power Services Pty Ltd (in liq) (1990) 3 ACSR 261 at 264; Re Kerisbeck Pty Ltd (1992) 10 ACLC 619 at 621. [III] In these proceedings there is evidence of Mr Bonvino's continuing support of Cashflow. See: (a) paragraph 52(c) of Mr Bonvino's Affidavit sworn 27 April 1998, in which he said that Cashflow never needed to borrow money from CODFA and that Cashflow had no need of funds from CODFA. (b) paragraph 64 of the same affidavit, in which he said: "To my knowledge Walters and Wright were aware that Pyrafount No 3 Pty Ltd, the major funder of Cashflow, had additional funds to inject from time to time if necessary. At about that time (December 1994) it would have been possible for Pyrafount No 3 Pty Ltd to have injected further capital in the order of $500,000.00." (c) the annexure at page 87 (described in paragraph 11) of the same affidavit, from paragraph 3 of which it may be inferred that Mr Bonvino and his company had agreed not to withdraw their funds in Cashflow without arranging alternative finance. (d) paragraph 2 of Mr Bonvino's Affidavit sworn 14 March 1999, in which he refers to a conversation he had with Mr Wright as to the investment of moneys in Cashflow, in the course of which he indicates that there was a requirement of three months' notice prior to the withdrawal of funds from Cashflow.

(e) document No. 18 within CODFA's Tender Documents, at page D332-D333, which comprises a letter from the solicitors of Cashflow and Mr Star dated 30 September 1998, in which it is conceded that Pyrafount No 3 Pty Ltd had made no written demand for the repayment of that company's funds in Cashflow prior to August 1996.' Dealing with CODFA's Constructive Trust Case General Principles 413 As recently as March 1999, the High Court of Australia has had occasion to caution that care is required in the use of the term 'constructive' in this context. In Giumelli v Giumelli [1999] HCA 10, (24 March 1999), Gleeson CJ, McHugh, Gummow and Callinan JJ at paragraph 2, cited the following statement from Scott on Trusts 4th edition (1989) volume 5 paragraph 462.4: 'It is sometimes said that when there are sufficient grounds for imposing a constructive trust, the Court 'constructs a trust'. The expression is, of course, absurd. The word 'constructive' is derived from the verb 'construe', not from the verb 'construct'. . . . The Court construes the circumstances in the sense that it explains or interprets them; it does not construct them.' 414 In Beatty v Guggenheim Exploration Co (1919) 225 N.Y. 380, Cardozo J explained the principle which informs the raising of a constructive trust as follows: 'A constructive trust is the formula through which the conscience of equity finds expression. When property has been acquired in such circumstances that the holder of the legal title may not in good conscience retain the beneficial interest, equity converts him into a trustee.' 415 At page 389 Cardozo J said: 'A court of equity in decreeing a constructive trust is bound by no unyielding formula. The equity of the transaction must shape the measure of relief.' [Applied by Mason J, as he then was, in Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at 108]. 416 The inquiry is as to whether, according to the principles of equity, it would be a fraud for the defendant to deny the trust. Hence, the inquiry is not as to the actual or presumed intention of the parties. Cf Jacobs' Law of Trusts in Australia, 6th edition, Butterworths, 1997 edited by R.P. Meagher and W.M.C. Gummow at paragraph 1301. 417 Deane J stated in Muschinski v Dodds (1985) 160 CLR 583 at 614: 'Viewed in its modern context, the constructive trust can properly be described as a remedial institution which equity imposes regardless of actual or presumed agreement or intention (and subsequently protects) to preclude the retention or assertion of beneficial ownership of property to the extent that such retention or assertion would be contrary to equitable principle.' 418 Hence, one may proceed upon the basis that CODFA must show that some legal or equitable principle operating in its favour, justifies treating as unconscionable, the retention by Cashflow of the moneys (a) now held by Cashflow in respect of which CODFA claims a declaration that a constructive trust exists or (b) which may be ordered to be repaid by CODFA to Cashflow as a consequence of the application of the insolvency provisions of the Corporations Law. It is insufficient to appeal to general notions of fairness or reasonableness. [Cf Ford and Lee, Principles of the Law of Trusts, 3rd edition 1996, LBC Information Services, paragraph 22020.] 419 Clearly the list of constructive trusts is not closed. English v Dedham Vale Properties [1978] 1 All ER 382 at 398 per Slade J. 420 This case throws up the importance of taking into account commercial considerations. In Woodson (Sales) Pty Ltd v Woodson (Australia) Pty Ltd (1996) 7 BPR 14,685 at 14,709 Santow J said: 'Remedies of equity, flexibly applied in a modern commercial context, must be adapted to commercial realities. Thus, for example, relief which is appropriate to dealing with breaches of traditional family settlements may require adjustment in a commercial context, if it is not to be unduly heavy handed. That does not mean there are automatically lesser standards in a commercial setting, necessarily rendering equitable relief inappropriate. Rather it recognises there may be wholly different circumstances and expectations. Such an adaptation of equitable relief removes much of the objection to equity's intrusion into commercial dealings, so long too as that intrusion remains principled rather than unpredictable.' The Case Fails at Threshold 421 CODFA's constructive trust case fails at threshold for at least the following reason: In order for a constructive trust to be imposed in the circumstances of this case, there would have to be: (a) as to the moneys the subject of Cashflow's claim described in paragraph 418(a), identifiable trust property now held by Cashflow to which such trust would attach. No such identifiable trust property exists; (b) as to moneys which become subject to the order referred to in Cashflow's claim described in paragraph 418(b), a legal or equitable principle which justifies treating as unconscionable, the liquidator's retention of such moneys for the purpose of their being made available to creditors pursuant to the winding up. No such principle justifies that treatment in the circumstances proven in this case. 422 Before turning to this question, it is convenient to examine another threshold consideration. Whilst not in itself determinative of CODFA's case, it is clearly an important issue. I refer here to the attribution to Cashflow of notice or knowledge of Mr Walters' misappropriations from CODFA of the paid funds. The two routes to the attribution of knowledge to a corporation are through agency and through the directing mind and will of the corporation. I turn to deal with each. The Imputing of Notice or Knowledge Knowledge through Mr Walters' acting as agent for Cashflow 423 In Re Hampshire Land Company [1896] 2 Ch 743, approved by the House of Lords in JC Houghton & Company v Nothard, Lowe & Wills Ltd [1928] AC 1, the facts involved the Hampshire Land Company which was closely connected to a building society. Both the company and the society had their offices in the same building, four directors of the company were also directors of the society and both corporations had a certain Mr Wills as secretary. In 1892, the society went into liquidation and in 1893, the company passed an extraordinary resolution in favour of voluntary winding up. The proceedings concerned a claim by the liquidators of the society to prove in the winding up of the company for a debt of over £30,000 for money lent by the society to the company. The facts of the case turned on the borrowing power of the company, which was not to exceed the paid up capital (that being £10,000), unless authorised by general meeting. Vaughan Williams J found as a matter of fact that in 1881 a general meeting was held and a resolution was passed authorising the directors of the company to borrow the moneys from the society. His Lordship also found that that meeting was irregularly convened, not being in accordance with the company articles. It was argued by the company that the resolution was not binding on the company as the society was said to have taken with notice of the irregularity, Mr Wills as common officer of both the society and the company, being aware that the borrowing was ultra vires the company directors. 424 In considering the general proposition that the knowledge of a common officer is always the knowledge of the two companies, Vaughan Williams J rejected that proposition stating at page 748 that: 'Knowledge which has been acquired by the officer of one company will not be imputed to the other company, unless the common officer had some duty imposed on him to communicate that knowledge to the other company, and had some duty imposed on him by the company which is alleged to be affected by the notice, to receive the notice.' [Cf Sargent v ASL Developments Ltd (1974) 131 CLR 634 at page 658 per Mason J] 425 Relevantly to the facts there under consideration, Vaughan Williams J, in admitting the proof of debt, continued at page 749 as follows: '[I]f Wills had been guilty of a fraud, the personal knowledge of Wills of the fraud that he had committed upon the company would not have been knowledge of the society of the facts constituting that fraud; because common sense at once leads one to the conclusion that it would be impossible to infer that the duty either of giving or receiving notice, will be fulfilled where the common agent is himself guilty of fraud. It seems to me that if you assume here at Mr Wills was guilty of irregularity - a breach of duty in respect of these transactions - the same inference is to be drawn as if he had been guilty of fraud.' 426 The principles in accordance with which a corporation may be attributed with the knowledge of a person who is an officer of that corporation are analogous to the principles determining whether a principal may be attributed with the knowledge of his or her agent. 427 A fundamental principle of agency is that in certain circumstances, the principal must be attributed with the agent's knowledge. In Bowstead and Reynolds on Agency 16th Edition 1996 at 8-206, two lines of reasoning are stated to justify this principle. The first, outlined by Palles CB in Taylor v Yorkshire Insurance Co Ltd [1913] 2 Ir R1 at 21, goes to the identity of the principal and agent: '. . . every act of the agent, within the scope of his authority, is the act of the principal. Consequently all knowledge acquired by the agent when acting within the scope of his authority is the knowledge of the principal.' 428 The second line of reasoning is based on the presumption that where an agent has notice or knowledge of a matter relevant to the principal, that notice or knowledge will be passed on to the principal. That presumption is rebuttable - A/S Rendal v Arcos Ltd [1937] 3 All ER 577. 429 In Bowstead and Reynolds on Agency, the authors make clear at 8-207 that the presumption that knowledge will be passed on from the agent to the principal may be 'nullified by proof that the agent was defrauding the principal in that transaction, whether or not the third party knew this; it can, in such a case, be said that there was a moral certainty that the information would not be communicated, or that communication would require disclosure of the very fraud being practiced upon the principal by the agent [the text contains a typographical error transposing the words 'agent' and 'principal'], or that the agent was not acting for the principal when he received the information'. 430 In short, when the company is the victim of the conduct of particular officers or servants, their knowledge and conduct may not be imputed or attributed to the company [see Duke Group Ltd (In Liquidation) v Pilmer & Ors (Unreported, Supreme Court of South Australia, 30 January 1998, Mullighan J)]. 431 In Cave v Cave [1880] 15 Ch D 639, Fry J explained at 644 that this exception may be put in the following two ways: 'In the one view notice is not imputed, because the circumstances are such as not to raise the conclusion of law, which does ordinarily arise from the mere existence of notice to the agent; in the other view . . . the act done by the agent is such as cannot be said to be done by him in his character of agent, but is done by him in the character of a party to an independent fraud on his principal, and that is not to be imputed to the principal as an act done by his agent.' 432 I note that von Doussa J in Beach Petroleum v Johnson (1993) 115 ALR 411, in acknowledging a difficulty with the above exception, sought to set limits to the exception: 'I return to the Houghton principle. It is one which may be applied without difficulty where the company is the victim of the fraud or misfeasance of a director and does not gain any benefit from the transaction, as was the situation in Re Hampshire Land Co, Houghton and the Belmont Finance cases. In the Belmont Finance cases the common officers of the plaintiff and the two defendant companies who organised the illegal transaction would have been in breach of fiduciary duty to the defendant companies in that they caused them to enter into an illegal transaction. Yet this fact was not addressed in the judgments. What insulated the plaintiff, but not the defendants, from having the knowledge of those officers imputed to them was the fact that only the plaintiff company was treated as a victim. The defendant companies were parties who benefited by reason of the transaction. Difficulty arises where the director's fraud or misfeasance, whilst in some aspects inimical to the interests of the company, nevertheless achieves a benefit for the company.' [at 571-572] 433 The limitation, being predicated on the circumstance where the fraudulent officer acted within the scope of his or her actual or apparent authority, was described thus: 'If the director is guilty of fraudulent conduct which is not totally in fraud of the corporation, and by design or result the fraud partly benefits the company, the knowledge of the director in the transaction will be attributed to the company.' [115 ALR at 574] 434 Senior counsel for Cashflow and for CODFA characterised the Walters' unauthorised payments in different terms. Mr Campbell QC, counsel for Cashflow, submitted that the payments were an 'unauthorised activity'. Mr Lindsay, senior counsel for CODFA, submitted that the payments represented an 'unauthorised mode of carrying out an authorised activity'. To my mind, Mr Campbell's submission is correct. Mr Walters' actions fell outside the scope of his actual or apparent authority as an employee or officer of Cashflow. 435 Use of the word 'fraudulent' requires care when the state of mind of the person of whom fraud is alleged is unclear. In these proceedings, the evidence does not permit a finding as to precisely why Mr Walters acted as he did. All that the evidence establishes is that his conduct was outside the scope of the authority conferred upon him by either Cashflow or CODFA. Using the above description to provide a dictionary for the use which follows of the words 'fraudulent' or fraud, to my mind, Mr Walters' conduct was clearly fraudulent and clearly represented gross breaches of duty owed relevantly to CODFA. He acted totally in fraud of CODFA. He acted totally in fraud of Cashflow. His knowledge was an element of his actions in fraud of both companies. It is not possible to impute knowledge acquired by Mr Walters in his capacity as an officer of CODFA to Cashflow in the circumstances of the evidence in this case. As Mr Campbell submitted at transcript 130, as Mr Walters wore two hats 'even if he were acting as the legitimate officer of Cashflow in receiving the CODFA funds, he would not tell himself that the payments were in breach of duties which he owed to CODFA'. 436 I note that in Farrow Finance Company Ltd (In Liquidation) v Farrow Properties Pty Ltd (1997) 26 ACSR 544 Hansen J at 587 extended the criterion to cases of breach of fiduciary duty. Referring to Beach Petroleum NL v Johnson (1993) 43 FCR 1, a decision of von Doussa J, Hansen J said: 'That discussion illustrates that in a case of fraud involving two companies, both of which share a common director who is involved in the fraud, the knowledge of the director will be imputed to the company taking the benefit of the fraud if the director was acting within the scope of his or her actual or apparent authority as a director of the benefiting company. In my opinion, that criterion applies equally to a case not of fraud, but of breach of fiduciary duty.' [at p 587] Knowledge through the directing mind and will 437 Viscount Haldane LC in Lennard's Carrying Company Ltd v Asiatic Petroleum Company Ltd [1915] AC 705 said: 'My Lords, a corporation is an abstraction. It has no mind of its own any more than it has a body of its own; its active and directing will must consequently be sought in the person of somebody who for some purposes may be called an agent, but who is really the directing mind and will of the corporation, the very ego and centre of the personality of the corporation. That person may be under the direction of the shareholders in general meeting; that person may be the board of directors itself, or it may be, and in some companies it is so, that that person has an authority co-ordinate with the board of directors given to him under the articles of association, and is appointed by the general meeting of the company, and can only be removed by the general meeting of the company. My Lords, whatever is not known about Mr. Lennard's position, this is known for certain, Mr. Lennard took the active part in the management of this ship on behalf of the owners, and Mr. Lennard, as I have said, was registered as the person designated for this purpose in the ship's register.' [at p 713] 438 Hoffman LJ in commenting in El Ajou v Dollar Land Holdings plc [1994] 2 All ER 685 (Court of Appeal), on the above statement says: 'Viscount Haldane LC therefore regarded the identification of the directing mind as primarily a constitutional question, depending in the first instance upon the powers entrusted to a person by the articles of association. The last sentence about Mr Lennard's position shows that the position as reflected in the articles may have to be supplemented by looking at the actual exercise of the company's powers. A person held out by the company as having plenary authority or in whose exercise of such authority the company acquiesces, may be treated as its directing mind. It is well known that Viscount Haldane LC derived the concept of the 'directing mind' from German law (see Gower Principles of Modern Company Law (5th edn, 1992) p 194, n 36) which distinguishes between the agents and organs of the company. A German company with limited liability (GmbH) is required by law to appoint one or more directors (Geschäftsfuhrer). They are the company's organs and for legal purposes represent the company. The knowledge of any one director, however obtained, is the knowledge of the company (see Scholz Commentary on the GmbH Law (7th edn, 1986)), s 35). English law has never taken the view that the knowledge of a director [is] ipso facto imputed to the company: see Powles v Page (1846) 3 CB 15, 136 ER 7 and Re Carew's Estate Act (No 2) (1862) 31 Beav 39, 54 ER 1054. Unlike the German Geschäftsfuhrer, an English director may, as an individual, have no powers whatever. But English law shares the view of German law that whether a person is an organ or not depends upon the extent of the powers which in law he has express or implied authority to exercise on behalf of the company.' [(1994) 2 All ER at 705] 439 The doctrine attributes to the company the mind and will of the natural person or persons who manage and control it's actions. 440 The parties were at issue as to whether as CODFA submitted, Mr Walters was 'the directing mind and will' of Cashflow concerning the Walters' Unauthorised Payments. CODFA sought to rely in this regard on the decision in El Ajou. 441 CODFA's contention faces an immediate difficulty already dealt with. This is that the knowledge of a person, whether sought to be imputed to a corporation by principles of principal and agent, or by the organic theory, is not so imputed where the person's knowledge is an element of his fraud against the corporation. R v Roffel [1985] VR 511 at 525 per Brooking J (dissenting on other issues). Hence the findings referred to in paragraph 435 above are determinative on this issue. 442 El Ajou dealt with a particularly complex set of facts. The following description is taken from Ford and Austins 'Principles of Corporations Law' Butterworths, 1995, 7th edn at para 16.210: 'The plaintiff owned funds controlled by a Swiss investment manager who improperly invested them in fraudulent schemes operated by certain Canadians. The operators of the schemes loaned the funds to the defendant (DLH), an English company controlled off-shore by Americans unconnected with the fraud and their agent S. DLH was a holding company with directors who were mere cyphers doing the bidding of the overseas proprietors and S in the signing of whatever documents they were instructed to sign. The plaintiff sued DLH for a declaration that it was liable as a constructive trustee of the funds for the plaintiff on the grounds that it had received the funds knowing that they had been transferred out of the plaintiff's account by the Swiss investment manager in breach of fiduciary duty. The only basis for showing that DLH knew of the breach of duty was that F, its chairman of directors, knew of it. But F acquired the knowledge when acting for the Canadian operators of the fraudulent scheme and not when acting as an agent of DLH. Millett J held that DLH was not fixed with F's knowledge. The alternative basis for attributing knowledge was not present because, in the view of Millett J, F was not the directing mind and will of DLH. He exercised no independent judgment. He was chairman of a board of mere nominee-directors. On appeal, the Court of Appeal reversed on the issue of whether F was the directing mind and will. The Court of Appeal focussed attention on the transactions by which DLH obtained the funds. The activity of F, even though under the direction of others, in signing documents and otherwise committing DLH was enough to make F the directing mind and will.' 443 To my mind, the decision is clearly distinguishable from the facts in the present case. The directors of DLH were Mr Ferdman (described in the above extract as 'F'), Mr Favre and Mr Jaton. The trial judge described the three of them as nominee directors who represented the interests of the beneficial owners and played no part in the conduct of DLH's business which was carried on by Mr Stern (described in the above extract as 'S') in consultation with the Americans. 444 The decision of the Court of Appeal turned on the fact that Mr Ferdman was a director of DLH, was in a different position from the two other directors and critically, signed an agreement with Yulara Realty Ltd on behalf of DLH, and so signed at the request of Mr Stern whom he knew to be clothed with authority from the Americans. This appears most clearly from the judgment of Hoffman LJ: 'The authorities show clearly that different persons may for different purposes satisfy the requirements of being the company's directing mind and will. Therefore the question in my judgment is whether in relation to the Yulara transaction, Mr Ferdman as an individual exercised powers on behalf of the company which so identified him. It seems to me that Mr Ferdman was clearly regarded as being in a different position from the other directors. They were associates of his who came and went. SAFI charged for their services at a substantially lower rate. It was Mr Ferdman who claimed in the published accounts of DLH to be its ultimate beneficial owner. In my view, however, the most significant fact is that Mr Ferdman signed the agreement with Yulara on behalf of DLH. There was no board resolution authorising him to do so. Of course we know that in fact he signed at the request of Mr Stern, whom he knew to be clothed with authority from the Americans. But so far as the constitution of DLH was concerned, he committed the company to the transaction as an autonomous act which the company adopted by performing the agreement. I would therefore hold, respectfully differing from the judge, that this was sufficient to justify Mr Ferdman being treated, in relation to the Yulara transaction, as the company's directing mind and will.' [1994 2 All ER at 706] Nourse LJ said: 'In disagreeing with the judge on this question, I start from the position that the transactions to be considered are those by which DLH received assets representing the moneys fraudulently misapplied. The responsibility for the management and control of those transactions is not to be determined by identifying those who were responsible for deciding that DLH would participate in the Nine Elms project and the nature and extent of that participation, far less by identifying those who were responsible for business decisions generally. Neither Mr Stern nor the Americans made any of the arrangements for the receipt or disbursement of the moneys by Grangewoods. Nor did they commit DLH to the obligations correlative to their receipt. None of them had the authority to do so. That was the responsibility of Mr Ferdman. The crucial considerations are that Mr Ferdman made all the arrangements for the receipt and disbursement of the £270,000 and the £1,030,000; that it was he who signed the letter of 20 March to Roth; that it was he who, on 25 March, copied that letter to Mr D'Albis; that it was he who signed and dispatched the letter of 7 April to Yulara; that it was he who, on 6 May, signed the agreement with Yulara; and that it was those steps that caused DLH to become involved in the project and enabled it later to acquire the assets representing the moneys fraudulently misapplied. Each of the steps taken by Mr Ferdman was taken without the authority of a resolution of the board of DLH. That demonstrates that as between Mr Ferdman on the one hand and Mr Favre and Mr Jaton on the other it was Mr Ferdman who had the de facto management and control of the transactions. It may be that that state of affairs involved some breach of the directors' duties to DLH. But that would not enable DLH to say that Mr Favre and Mr Jaton were parties to its directing mind and will in any relevant respect. Mr Tager sought to show that they did perform duties as directors of DLH. No doubt they did. But there is no real evidence that they had any responsibility for the transactions in question. In my view the directing mind and will of DLH in relation to the relevant transactions between March and June 1986 were the mind and will of Mr Ferdman and none other. That means that DLH had the requisite knowledge at that time.' [[1994] 2 All ER at 696-697 para 16.210] 445 Ford and Austin express the view that: 'Ordinarily, the off-shore proprietors and S could have been seen to be the directing mind and will. Presumably, the view that F was the directing mind and will did not negate that. The decision owed something to DLH being a holding company with no business of its own save being a conduit from its proprietors to subsidiaries which did have businesses. But even so, the decision takes an expansive view of the concept of directing mind and will.' [at paragraph 16210] 446 The present is far removed from a case where a company had no business of it's own. Cashflow clearly had a business. And plainly Cashflow was never committed by any act of Mr Walters to a formal contract dealing with loans from CODFA. Cashflow did not adopt the transactions. Mr Walters had no authority whatever vested in him to commit Cashflow to any transaction involving borrowings from CODFA. He was not a director of Cashflow. He was not 'the directing mind and will' of Cashflow concerning any of the Walters' Unauthorised Payments. Finding as to Attribution of Knowledge 447 In my judgment, the knowledge of Walters is not attributed to Cashflow in the fashion forming an important basis for CODFA's constructive trust contentions. Identifiable Trust Property 448 Deane J in Muschinski v Dodds made plain that 'the constructive trust . . . demands the staple ingredients of [express and resulting or implied trusts]: subject matter, beneficiary (or, conceivably, purpose), and personal obligation attaching to property . . .'. [1984 160 CLR at page 614] 449 Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669 involved an amount of £2,500,000 paid by the bank to a local authority pursuant to an interest swap agreement. The agreement was held to be ultra vires the Council. The bank sought to recover the moneys it had paid the Council under the ineffective contract, together with interest. The bank had entered the transaction with the intention of becoming a general creditor of the Council. At issue before the House of Lords was whether the interest should be simple or compound. The question debated was whether the bank's right to recover the payment was personal or proprietary. 450 The majority holding was that on a claim at common law for recovery of moneys paid in pursuance of an ineffective contract the claimant was entitled under section 35A of the Supreme Court Act 1981 to simple interest only; that in the absence of fraud equity had never awarded compound interest except against a trustee or other person in a fiduciary position in respect of profits improperly made; that the recipient of moneys under a contract subsequently held void for mistake or as being ultra vires did not hold those moneys on a resulting trust and it would be undesirable so to develop the law of resulting trusts since to do so would give the claimant a proprietary interest in the moneys and produce injustice to third parties and commercial uncertainty; and that the council was not otherwise in a fiduciary position vis-a-vis the bank.' 451 In Westdeutsche Bank Lord Browne Wilkinson, with whose judgment Lord Slynn of Hadley and Lord Lloyd of Berwick agreed, set out four propositions which are fundamental to the law of trusts. The third deals with the need for there to be identifiable trust property. The four propositions are: '(i) Equity operates on the conscience of the owner of the legal interest. In the case of a trust the conscience of the legal owner requires him to carry out the purposes for which the property was vested in him (express or implied trust) or which the law imposes on him by reason of his unconscionable conduct (constructive trust). (ii) Since the equitable jurisdiction to enforce trusts depends upon the conscience of the holder of the legal interest being affected, he cannot be a trustee of the property if and so long as he is ignorant of the facts alleged to affect his conscience, i.e. until he is aware that he is intended to hold the property for the benefit of others in the case of an express or implied trust, or, in the case of a constructive trust, of the factors which are alleged to affect his conscience. [But see the expansion of this proposition dealt with at 705G and following.] (iii) In order to establish a trust there must be identifiable trust property. The only apparent exception to this rule is a constructive trust imposed on a person who dishonestly assists in a breach of trust who may come under fiduciary duties even if he does not receive identifiable trust property. (iv) Once a trust is established, as from the date of its establishment the beneficiary has, in equity, a proprietary interest in the trust property, which proprietary interest will be enforceable in equity against any subsequent holder of the property (whether the original property or substituted property into which it can be traced) other than a purchaser for value of the legal interest without notice.' 452 Tracing is of course an evidence finding activity having as its object, the identification of the property the subject of the restitutionary claim. Cf Re Montagu's Settlement Trusts [1987] Ch 264 per Megarry V-C at 285. 'Tracing properly so called, however, is neither a claim nor a remedy but a process. Moreover it is not confined to the case where the plaintiff seeks a proprietary remedy; it is equally necessary where he seeks a personal remedy against the knowing recipient or knowing assistant. It is the process by which the plaintiff traces what has happened to his property, identifies the persons who have handled or received it, and justifies his claim that the money that they handled or received (and if necessary, which they still retain) can properly be regarded as representing his property. He needs to do this because his claim is based on the retention by him of a beneficial interest in the property which the defendant handled or received. Unless he can prove this he cannot (in the traditional language of equity) raise an equity against the defendant or (in the modern language of restitution) show that the defendant's unjust enrichment was at his expense.' [Boscawen v Bajwa [1996] 1 WLR 328 at 334 per Millett LJ] 453 I accept as correct, Mr Campbell's submission that it is insufficient for CODFA's purposes, to prove that there was once property received by Cashflow which at the time of receipt, or soon after, was subject to a constructive trust. Hence what CODFA must prove, if it is to establish that there is any property which is now held by Cashflow and is to be declared as subject to a constructive trust, is that there is still held by Cashflow property subject to such trust. 454 I accept Mr Campbell's further submission that there is no allegation in the pleadings, nor any evidence of, any specific funds now in the hands of Cashflow, upon which any constructive trust could fasten. This was indeed not in issue. CODFA's written submissions earlier set out [see para 406], in fact stated that 'CODFA is not seeking "to trace funds through Cashflow".' 455 No allegation was made or pursued by CODFA to the effect that all or part of the business of Cashflow was built up by use of the moneys misappropriated from CODFA, such that a constructive trust should be declared over all or part of the goodwill of Cashflow's business. Compare for example the claims to such a constructive trust which were made in Hospital Products [supra]. And see Timber Engineering Co Pty Ltd v Anderson [1980] 2 NSWLR 488. Presumably this is because Cashflow has a deficiency of $1,622,083 in which event goodwill may be non-existent or negligible. Alternatively, the circumstances leading to these proceedings may explain that no goodwill exists or that CODFA was not able to make good such a claim. 456 CODFA has not been able on the evidence to make out it's claim that any property to which it can point as having been in Cashflow's hands at the start of the liquidation, is subject to a constructive trust. Had such a claim been made good, that property would fall outside the assets administered by the liquidator. 457 Nor can I accept that upon the Court by order avoiding the payments made by Cashflow to CODFA as preferential payments or as uncommercial transactions, the Court could or must order that such moneys, at the moment they are paid to Cashflow, become impressed with a constructive trust. 458 CODFA's arguments in support of this analysis fail at a number of levels. 459 The first is that the reasons advanced in favour of such a trust 'undercut the well settled principles founding insolvency law'. [Cf Re Australian Elizabethan Theatre Trust (1991) 30 FCR 491 per Gummow J]. 460 In Daly v The Sydney Stock Exchange Ltd (1986) 160 CLR 371, an investor, Dr David Daly, had sought the advice of a firm of stockbrokers, Patrick Partners, about shares in which he might invest. At the time the firm, although apparently prosperous, was in a parlous financial position, and this was known to the partners. An employee, who was not aware of the firm's position, advised Dr Daly that it was not a good time to buy shares and that he should place the money on deposit with the firm until the time was right to buy. Dr Daly, lent the money to Patrick Partners, at interest. Patrick Partners subsequently ceased trading and was unable to repay the loan. The case involved an application by Dr Daly to recover compensation from the Fidelity Fund, established by section 97(1) of the Securities Industry Act 1975 (NSW). 461 The High Court held that a fiduciary relationship existed between Dr Daly and Patrick Partners and that Patrick Partners had been in breach of duty in not disclosing it's unsatisfactory financial position to Dr Daly. However, the Court held that the moneys deposited with Patrick Partners were not the subject of a constructive trust in favour of Dr Daly and had accordingly not been received by the firm as a trustee within section 97(1)(b)(ii). Gibbs CJ, Wilson and Dawson JJ held that it was not necessary to find that a constructive trust existed in order to ensure that Patrick Partners was not unjustly enriched. The benefit that Patrick Partners obtained in consequence of it's breach of fiduciary duty was held to be a loan of money such that as a debtor, it was bound to repay the debt to the creditor. 462 Gibbs CJ referred to the effect of the constructive trust in withdrawing assets from the general body of creditors: '. . . the consequences of holding the money to be subject to a constructive trust and thereby transforming the creditor into a beneficiary suggest that it would be contrary to principle to recognize the existence of a constructive trust in a case such as the present. One consequence would be that the money, and any property acquired with it, would, on the firm's bankruptcy, be withdrawn from the general body of creditors . . . For the reasons I have given, and particularly because the existence of a constructive trust was on the one hand unnecessary to protect the legitimate rights of the lender and on the other hand could lead to consequences unjust both to the creditors of the borrower and the borrower itself, I hold that no constructive trust came into existence when the moneys were paid by Dr Daly to Patrick Partners.' [160 CLR at 379-380; Cf Stephenson Nominees Pty Ltd v Official Receiver (1987) 76 ALR 485 at 505 per Gummow J] 463 CODFA's submissions raise centrally the question as to in what circumstances a claimant to the assets of an insolvent company is able to claim priority over the general creditors by means of a proprietary claim and what the present state of the law in Australia on this topic is. 464 The respective submissions as to Black v S Freedman and Co have already been set out. It is clear that money stolen 'is trust money in the hands of the thief'. [Black v S Freedman & Co (1910) 12 CLR 105 at 110 per O'Connor J; Australian Postal Corporation v Lutak (1991) 21 NSWLR 584 at 589 per Bryson J; Zobory v Federal Commissioner of Taxation (1995) 64 FCR 86 at 90 per Burchett J] 465 I accept that the constructive trust arises as soon as the thief takes the property. And as Ford and Lee point out at paragraph 22430, 'persons who receive the proceeds of a theft, or property into which proceeds can be traced, otherwise than as bona fide purchasers for value without notice, will hold on a constructive trust for the victim of the theft (Fowkes v Deputy Director of Public Prosecutions [1997] 2 VR 506), or will be personally liable to pay compensation for knowing receipt'. 466 I do not see that the closely argued question as to whether or not the appellation 'stolen' is appropriately used in respect of the paid funds is determinative of any issue. The finding is that there was both an unauthorised payment of the moneys by Mr Walters having utilised his access to the CODFA bank account and an unauthorised receipt of the moneys by Mr Walters using his access to the Cashflow account. 467 I accept as correct Cashflow's submission that any purpose that Mr Walters had in connection with the use of the paid funds cannot be decided on the state of the evidence and is not one of which the directors of Cashflow knew or approved. While one possible theory as to Mr Walters' motivation is plainly that he wished to help Cashflow, Cashflow does not admit that this was his motivation and the case remains one in respect of which his motivation remains a mystery. 468 In Westdeutsche Bank, Lord Browne Wilkinson expressly rejects an argument put by Professor Birks that a resulting trust ought arise whenever money is paid under a mistake of fact [1996 AC at 708-709]. 469 Lord Browne Wilkinson recognised that a thief holds property on a constructive trust but accepts that the reason for this is his own fraud and that the effect of this is that the property is traceable in equity. 'The argument for a resulting trust was said to be supported by the case of a thief who steals a bag of coins. At law those coins remain traceable only so long as they are kept separate; as soon as they are mixed with other coins or paid into a mixed bank account they cease to be traceable at law. Can it really be the case, it is asked, that in such circumstances the thief cannot be required to disgorge the property which, in equity, represents the stolen coins? Moneys can only be traced in equity if there has been at some stage a breach of fiduciary duty, i.e. if either before the theft there was an equitable proprietary interest (e.g. the coins were stolen trust moneys) or such interest arises under a resulting trust at the time of the theft or the mixing of the moneys. Therefore, it is said, a resulting trust must arise either at the time of the theft or when the moneys are subsequently mixed. Unless this is the law, there will be no right to recover the assets representing the stolen moneys once the moneys have become mixed. I agree that the stolen moneys are traceable in equity. But the proprietary interest which equity is enforcing in such circumstances arises under a constructive, not a resulting, trust. Although it is difficult to find clear authority for the proposition, when property is obtained by fraud equity imposes a constructive trust on the fraudulent recipient: the property is recoverable and traceable in equity. Thus, an infant who has obtained property by fraud is bound in equity to restore it: Stocks v Wilson [1913] 2 K.B. 235, 244; R. Leslie Ltd v Sheill [1914] 3 K.B. 607. Moneys stolen from a bank account can be traced in equity: Bankers Trust Co. v Shapira [1980] 1 W.L.R. 1274, 1282C-E: see also McCormick v Grogan (1869) L.R. 4 H.L. 82, 97.' [1996 AC at 715-716] 470 The difficulty for CODFA which accepts that it is now unable to trace the moneys paid to Cashflow, is to overcome the principle that in such a circumstance a claimant is unable to claim by way of constructive trust and is left with only a personal remedy. 471 I do not accept that where a bankrupt estate has been swollen by an amount for which the claimant could have claimed against the bankrupt, the claimant is entitled to claim priority over unsecured creditors, notwithstanding that the claimant cannot trace the original property into property vested in the trustee in bankruptcy. There is no authority binding upon this Court to so hold. Nevertheless the authorities on the subject require careful examination. 472 In an article 'Proprietary Claims and their Priority in Insolvency' by A.J. Oakley 1995 CLJ 377, the author makes the point that a person who seeks to assert an equitable proprietary claim will be relying on the existence of an equitable proprietary interest in the property in question. That equitable proprietary interest may arise in a variety of ways; under an express trust, by virtue of a resulting trust, by virtue of the imposition of a constructive trust, or as a result of a void, voidable or mistaken transaction. 473 The author continues: 'No matter how the equitable proprietary interest has arisen, the effect of a successful equitable proprietary claim is the same; the other party will hold the property on trust for the claimant to give effect to his equitable proprietary interest therein. If the claimant is able to show that any particular item of property in the hands of the other party is, in equity, either entirely his own property or entirely the product of his own property, he will obviously be able to call for that property to be transferred to him. If, on the other hand, he is only able to show that any particular item of property in the hands of the other party is partially the product of his own property, then he will normally have alien or charge over that item of property for the amount of his contribution thereto and will enjoy the rights appropriate to the holder of such an interest in the type of property in question. Because mixing the property or its product with other money is no bar to an equitable proprietary claim, that claim can proceed despite the fact that the property in question has passed into the general assets of the person against whom the claim is being brought. It is therefore apparent that the sudden appearance of an equitable proprietary claim to an asset which appears to be the beneficial property of the person against whom the claim is being brought is capable of causing considerable prejudice to his general creditors in the event of his bankruptcy. Where the claimant has a clearly established pre-existing equitable proprietary interest such as, for example, a beneficial interest under an express trust, the priority conferred on that beneficiary causes no more prejudice to the general creditors than the priority conferred in the case of a legal proprietary claim. As Lord Templeman said in Space Investments v Canadian Imperial Bank of Commerce Trust Company (Bahamas) [1986] 3 All ER 75 at 76-77. "This priority is conferred because the . . . unsecured creditors voluntarily accept the risk that the trustee bank might become insolvent and unable to discharge its obligations in full. On the other hand, the settler of the trust and the beneficiaries interested under the trust never accept any risks involved in the possible insolvency of the trustee bank". The potential prejudice to the general creditors arises out of the possibility of an equitable proprietary interest actually being created by the imposition of a constructive trust on property which appears to any outsider to be beneficial property of the bankrupt . . . The question of whether or not the Courts are willing to impose constructive trusts in such circumstances determines if equitable proprietary claims in fact unduly prejudice the interests of general creditors.' [At pages 380-381] 474 In Chase Manhattan Bank NA v Israel-British Bank (London) Ltd [1980] 2 WLR 202, the plaintiff New York Bank, as the result of a clerical error, made twice rather than once a payment of $US2million to another New York Bank for the creditor of the defendant London Bank, which subsequently became insolvent. The plaintiff duly proved in the liquidation in respect of the second payment made under a mistake of fact, but this gave no priority over the other creditors of the defendant. The plaintiff therefore, also claimed to be entitled to trace the second payment in equity against the defendant. The legal effects of the mistaken payment had to be determined in accordance with the law of the State of New York, where a payment under a mistake of fact of money which the payee cannot conscientiously withhold gives rise to the imposition of a constructive trust. Goulding J held that this was 'also in accord with the general principles of equity as applied in England' [at 208]. His Lordship justified this conclusion on the grounds that 'a person who pays money to another under a factual mistake retains an equitable property in it and the conscience of that other is subjected to a fiduciary duty to respect his proprietary right' [at page 209]. [See the article by A.J. Oakley at p 399] 475 The decision in Chase Manhattan Bank, was applied by the Court of Appeal of New Zealand in re Liggett v Kensington [1993] 1 NZLR 257 which was reversed by the Privy Council [sub nom. In re Goldcorp Exchange Ltd [1994] 3 WLR 199.] There, a gold dealer had offered its purchasers the option of leaving their bullion in its custody on the purchaser's behalf as 'non allocated bullion'. The majority of the Court of Appeal of New Zealand imposed fiduciary obligations on the gold dealer. Purchasers who accepted this option were issued with a certificate of ownership and were entitled to take physical possession of their bullion on seven days notice. The gold dealer subsequently became bankrupt and the question for decision was as to whether such purchasers were entitled to an equitable proprietary claim in priority to a debenture holder. The conclusion that the company was a fiduciary (and that the purchasers consequently had priority) was based on the propositions firstly that it was bound to protect the interests of the purchasers and, secondly, that it was, for all practical purposes, free from control and supervision by the purchasers. The Privy Council, as A.J. Oakley at 394 reminds us, referred to the warnings given many decades ago by Lindley LJ in Manchester Trust v Furness [1895] 2 QB 539 at 545 and by Atkin LJ in Re Wait [1927] 1 Ch 606 at 634 and following, of the dangers of applying equitable doctrines to commercial transactions and paid heed to those warnings. Lord Mustill said: 'But what kind of fiduciary duties did the company owe to the customer? None have been suggested beyond those which the company assumed under the contracts of sale read with the collateral promises . . . No doubt the fact that one person is placed in a particular position vis a vis another through the medium of a contract does not necessarily mean that he does not also owe fiduciary duties to that other by virtue of being in that position. But the essence of a fiduciary relationship is that it creates obligations of a different character from those deriving from the contract itself . . . Many commercial relationships involve just such a reliance by one party on the other, and to introduce the whole new dimension into such relationships which would flow from giving them a fiduciary character would (as it seems to their Lordships) have adverse consequences far exceeding those foreseen by Atkin LJ in Re Wait. It is possible without misuse of language to say that the customers put faith in the company, and that their trust has not been repaid. But the vocabulary is misleading; high expectations do not necessarily lead to equitable remedies'. [[1994] 3 WLR 199 at 216] 476 Chase Manhattan Bank is to be properly regarded as an example of a situation 'where a constructive trust was imposed on money or other property which is acquired by a non-fiduciary otherwise than by contract'. [Daly v Sydney Stock Exchange Ltd, per Brennan J at 391] 477 In re Goldcorp Exchange Ltd, the Privy Council reserved the question of whether Chase Manhattan was correctly decided, but made the point that the practicability of tracing remained an important integer: 'It may be - their Lordships express no opinion upon it - that the Chase Manhattan case correctly decided that where one party mistakenly makes the same payment twice it retains a proprietary interest in the second payment which (if tracing is practicable) can be enforced against the payees' assets in a liquidation ahead of unsecured creditors.' [1994 3 WLR 199 at 221] 478 The decision in Chase Manhattan has in effect been overruled by the House of Lords in Westdeutsche to which reference has already been made. Hence, it is appropriate to regard Lord Browne Wilkinson to have authoritatively rejected the proposition that, without more, receipt of money paid under a mistake renders the recipient a trustee and leaves the payee holding an equitable proprietary right in the money. Jacobs Law of Trusts in Australia, 6th ed, Butterworths 1997 edited by R.P. Meagher and W.M.G. Gummow at paragraph 2704 479 Although Lord Templeman's statements of principle in Space Investments Ltd v Canadian Imperial Bank Commerce Trust Co (Bahamas) [1986] 3 All ER 75 do not appear to have been confined to a situation where tracing was possible, the later decision of the Privy Council in re Goldcorp Exchange Ltd, where Lord Templeman was a member of the Board, so confined Lord Templeman's dicta. In Space Investments, Lord Templeman had said: 'A bank in fact uses all deposit moneys for the general purposes of the bank. Whether a bank trustee lawfully receives deposits or wrongly treats trust money as on deposit from trusts, all the moneys are in fact dealt with and expended by the bank for the general purposes of the bank. In these circumstances it is impossible for the beneficiaries interested in trust money misappropriated from their trust to trace their money to any particular asset belonging to the trustee bank. But equity allows the beneficiaries, or a new trustee appointed in place of an insolvent bank trustee to protect the interests of the beneficiaries, to trace the trust money to all the assets of the bank and to recover the trust money by the exercise of an equitable charge over all the assets of the bank. Where an insolvent bank goes into liquidation that equitable charge secures for the beneficiaries and the trust priority over the claims of the customers in respect of their deposits and over the claims of all other unsecured creditors. This priority is conferred because the customers and other unsecured creditors voluntarily accept the risk that the trustee bank might become insolvent and unable to discharge its obligations in full. On the other hand, the settlor of the trust and the beneficiaries interested under the trust never accept any risks involved in the possible insolvency of the trustee bank. On the contrary, the settlor could be certain that if the trusts were lawfully administered the trustee bank could never make use of trust money for its own purposes and would always be obliged to segregate trust money and trust property in the manner authorised by law and by the trust instrument free from any risks involved in the possible insolvency of the trustee bank. It is therefore equitable that where the trustee bank has unlawfully misappropriated trust money by treating the trust money as though it belonged to the bank beneficially, merely acknowledging and recording the amount in a trust deposit account with the bank, then the claims of the beneficiaries should be paid in full out of the assets of the trustee bank in priority to the claims of the customers and other unsecured creditors of the bank: '". . . if a man mixes trust funds with his own, the whole will be treated as the trust property" . . . that is, that the trust property comes first' (per Jessel MR in Re Hallett's Estate, Knatchbull v Hallett (1880) 13 Ch D 696 at 719, [1874-80] All ER Rep 793 at 802, adopting and explaining earlier pronouncements to the same effect). Where a bank trustee is insolvent, trust money wrongfully treated as being on deposit with the bank must be repaid in full so far as may be out of the assets of the bank in priority to any payment of customers' deposits and other unsecured debts.' [1986] 3 All ER at 76-77 In Re Goldcorp Exchange Ltd , Lord Mustill delivering the judgment for the Board said: 'For these reasons the Board must reject all the ways in which the non-allocated claimants assert a proprietary interest over the purchase price and its fruits. This makes it unnecessary to consider whether, if such an interest had existed, it would have been possible to trace from the subject matter of the interest into the company's present assets. Indeed it would be unprofitable to do so without a clear understanding of when and how the equitable interest arose, and of its nature. Their Lordships should, however, say that they find it difficult to understand how the judgment of the Board in Space Investments Ltd. v. Canadian Imperial Bank of Commerce Trust Co. (Bahamas) Ltd. [1986] 1 W.L.R. 1072, on which the claimants leaned heavily in argument, would enable them to overcome the difficulty that the moneys said to be impressed with the trust were paid into an overdrawn account and thereupon ceased to exist: see, for example, In re Diplock [1948] Ch. 465. The observations of the Board in the Space Investments case were concerned with a mixed, not a non-existent, fund.' [1994, 3 WLR at p 222] 480 In any event, ultimately the nature of the case must always determine the appropriate remedy; Maguire v Makaronis (supra) at 467 per Brennan CJ and Gaudron, McHugh and Gummow JJ. No case has been made out by CODFA for an order of the type referred to in paragraph 457. CODFA's claim that absent an entitlement in it to proprietary relief, Cashflow (and Mr Star) have a continuing obligation to restore CODFA's estate. 481 I reject CODFA's claim that absent an entitlement in it to proprietary relief, it is entitled to 'rank above' the general unsecured creditors of Cashflow. At its highest, this claim is grounded upon the suggested principle that the obligation of a defaulting fiduciary is essentialy a personal obligation of effecting restitution to the estate of his principal. Naturally, I accept that a plaintiff who establishes a breach of fiduciary duty, has available to him a range of remedies including the remedy of account. But assuming in CODFA's favour that Cashflow is for relevant purposes to be classed as a fiduciary, the circumstances of Cashflow's insolvency leave CODFA in the same position as other unsecured creditors. Is the Obligation to make Restitution a Post-liquidation Obligation? 482 To my mind, the analysis given in Cashflow's submissions earlier set out [paragraph 411] is correct. Cashflow's liability to account is not a post-liquidation liability and is not entitled to priority under section 556(1)(a) Corporations Law. 483 Any obligation of Cashflow to make restitution in relation to the WUPs does not, I accept, fit within the language used in section 556(1)(a) Corporations Law. It is not an 'expense incurred'. The only possible 'relevant authority' is the liquidator. It was not he who here incurred the restitutionary obligation to repay the WUPs. Additionally, the restitutionary obligation to repay the WUPs has not, I accept, been incurred 'in preserving, realising or getting in property of the company, or in carrying on the company's business'. 484 The so-called 'concession' is dealt with hereunder. The obligation to make restitution of money paid does not arise from the fact that Cashflow admitted that obligation in the course of the present litigation. Nor was it, I accept, necessary for Cashflow to have knowledge of the circumstances of the payments before it became under a restitutionary obligation. 485 In David Securities Pty Limited v Commonwealth Bank of Australia, Brennan J said, as has earlier been pointed out, that: 'If, under a mistake, money is paid to and unjustly enriches a payee, the payee's right to recover the amount accrues at the moment when the payee received the money.' 486 I further accept as correct Cashflow's submission that in relation to those of the WUPs where there was payment direct from CODFA to a solvent client of Cashflow, the obligation to make restitution arose either when the payment was made by CODFA, or alternatively at the latest when Cashflow received a benefit arising from that payment. 487 For the reasons given by Cashflow in its submission set out in paragraphs 6.1-6.25 [see paragraph 411 Judgment], the obligation to make restitution in relation to the WUPs made to solvent clients, arose well before liquidation. Is the Obligation to make Restitution one which is provable in the winding up? 488 I accept as correct Cashflow's submissions on this topic set out in Judgment paragraph 411. Under Corporations Law sections 553 and 554A allowing the proof of unliquidated claims, it is clear that the obligation of Cashflow to make restitution to CODFA in relation to the WUPs gives rise to a claim which is provable in the winding up of Cashflow. 489 I accept that a claim for restitution of money paid to or to the use of a person who has become bankrupt is a claim which is provable in a bankruptcy. It is a liquidated claim. I further accept that CODFA's claim to an account is here in reality a claim to receive back the money it had parted with. 490 Unliquidated damages are provable in the winding up of insolvent companies. Section 553E Corporations Law provides that this right is subject to section 82(2) Bankruptcy Act 1966. That section provides that demands in the nature of unliquidated damages arising otherwise than by reason of a contract, promise or breach of trust, are not provable in bankruptcy. That limitation on the ability to prove which is contained in section 82(2) of the Bankruptcy Act 1966, I accept, should be construed narrowly. The expression 'by reason of' in that section I accept, indicates that it is not necessary to establish more than an appropriate nexus between the damages claimed and the contract or promise. [Cf Australian Corporations Law, Butterworths, 1991 volume 2 paragraph 5.6.0225] Is a personal obligation of a fiduciary to make good a loss, one which is provable in the winding up of the fiduciary? 491 Whether or not in the circumstances proven, Cashflow owes fiduciary obligations in relation to the Walters' unauthorised payments. I accept that all that any fiduciary obligation to account results in, is a personal obligation on the fiduciary to pay money. Hence, if the fiduciary becomes insolvent, that personal obligation permits of a proof of debt. 492 Section 82(2) Bankruptcy Act makes clear that a personal liability of a trustee to make restitution for breach of trust is provable in the bankruptcy. I accept Cashflow's submission that if that species of fiduciary obligation is provable in the bankruptcy, it is consistent that an action for other types of breach of fiduciary duty ought also be provable in the bankruptcy. 493 Ultimately, as Cashflow submitted, it is the effect of sections 553 and 554A Corporations Law that any doubts that there might be about whether all and every claim for breach of fiduciary duty is provable in the winding up of a corporation (including claims which are in the nature of unliquidated claims) has been removed. The 'Concession' 494 I do not see that the 15 March 1999 statements by Mr Campbell QC from the Bar table alter the antecedent position in any material way. The relevant concession was made in the following terms: 'His Honour: Well, does this raise the question which you or Mr Lindsay has, or both in your issues, namely what sort of benefit can be sheeted home, if any to Cashflow in terms of the whole exercise as opposed to it simply being entitled to claim that every cent it paid to Transpac No 2 is money had and received to the full dollar? Campbell: Your Honour I can say now what I told my friend before Court this morning and that is not something that will be troubling your Honour . . . If I could take your Honour to our outline of submissions concerning CODFA. They have annexed to them an annotated version of GMG4 . . . Campbell: That sets out material which is common ground about how money flowed from CODFA, Cashflow and certain of Cashflow's clients. His Honour: Yes. Campbell: What we accept is that if the payment was received in the Cashflow bank account from CODFA then there is an obligation to make restitution of the amount that has been received . . .' [Transcript of 15 March 1999 at pages 29 and 30] 'Campbell: The third category then is one transaction. Your Honour will find it referred to at the top of page 4 of . . . GMG4. His Honour: $20,000? Campbell: Yes, paid off $20,000, which was made direct from CODFA to Transpac. His Honour: Yes. Campbell: That is a transaction which we say we have no obligation to make restitution in relation to because we didn't actually receive it and now that we have the knowledge of the circumstances in which it was made, we do not elect to treat it as binding on us.' [Transcript 15 March 1999 at page 31] Campbell, referring to the written overview submissions of Cashflow on 15 March 1999 at transcript page 59: 'At 1.2 we say that for the purpose of the avoidance claims, you need to decide just which of the Walters' unauthorised payments are ones which gave CODFA a right of restitution and the reason why that is so is because of [sic] in relation to any particular claim CODFA had a right of restitution, then that is a right of restitution that arose the instant payment was made . . .' [Transcript page 59] 495 Both before and after the making of these statements, Cashflow had an obligation to make restitution to CODFA of an amount equivalent to CODFA's payments made without consideration to Cashflow. That obligation is one in respect of which, in the absence of CODFA being able to trace the moneys paid to Cashflow or to identify any profits said to flow from Cashflow's use of such moneys, CODFA must prove in Cashflow's liquidation. The Amounts Owing between Cashflow and CODFA The Liquidator of Cashflow's Avoidance Claims against CODFA 496 I accept Cashflow's submission that the result that the Court reaches in proceedings 50177 of 1997 will depend upon which of the payments which were made from Cashflow's funds to CODFA are set aside as preferences or otherwise under Part 5.7B of the Corporations Law. 497 The reason of principle why this is the case is that any balance of account that is found to be owing one way or another in those proceedings, will relate only to whichever of those transactions have not been avoided. 498 If for example, it were to be found that the payment of $100,000 which is dated 9 August 1996, made by Cashflow to CODFA was a preference, and was the only payment which could be avoided as a preference or uncommercial transaction, CODFA would have to repay that $100,000 to the liquidator, arguably together with interest. The August 1996 payment of $100,000 having upon this basis been set aside as void, it would then disappear from consideration in working out what was owed by CODFA to Cashflow (or vice versa) in proceedings 50177 of 1997. 499 If for example, it were to be found that CODFA owed $X to Cashflow, as a result of the transactions that remained to be considered in proceedings 50177 of 1997, CODFA would be ordered to pay $X (arguably plus interest), in addition to refunding the preference (plus interest). 500 If it were to be found that Cashflow owed $Y to CODFA, as a result of the transactions that remain to be considered in proceedings 50177 of 1997, then CODFA would have a right of proof in the liquidation of Cashflow for $Y (plus such interest as could properly be admitted to proof), and would have an additional right of proof in relation to the $100,000 that had been held to be a preference. 501 Hence, the liquidators' avoidance claims must logically be considered before one considers the claims in proceedings 50177 of 1997. 502 I accept also Cashflow's analysis which is that for the purpose of considering the various avoidance claims, it is necessary to come to a view about which of the payments from CODFA's account are ones which conferred on CODFA a right of restitution. This, I accept, is because if there was a right of restitution in CODFA at any time, that right needs to be taken into account in considering the liabilities of Cashflow at that time. 503 Reference has already been made to Cashflow's description of certain payments as 'the Walters unauthorised payments' [WUPs]. This use of terminology was adopted by Cashflow in an attempt to avoid presupposing the answer to a vital question which needs to be determined. That question is whether the payments between the various accounts constitute a running account. Hence, the various payments which passed between Cashflow and CODFA, the Burkett account and various of the Cashflow's clients are generally referred to in Cashflow's submissions and have been referred to thus far in the Judgment as 'WUPs'. 504 It is common ground that Part 5.7B of the Corporations Law commenced on 23 June 1993. All the relevant events concerning the claims brought in proceedings [50047 of 1998] occurred after that date, hence Part 5.7B Corporations Law contains the law to be applied to them. Preferences 505 Cashflow's claim relates to payments of $498,506 made during the six months before the Relation Back Day. Those payments can be identified as items 14 to 23 inclusive in schedule 2 to the amended statement of claim in proceedings 50177 of 1997. The WUPs do not Constitute an Integral Part of a Continuing Business Relationship 506 I accept that Cashflow's preference claim will succeed for the entire amount only if the WUPs are held not to constitute an integral part of a continuing business relationship between Cashflow and a creditor of Cashflow. 507 Section 588FA(3) now codifies the law about what series of transactions are treated in the same way that a running account used to be treated for the purpose of the law concerning preferences. Cashflow's submission is that it ought not be held that the WUPs fall within section 588FA(3). I accept that submission. The reasons for this holding follow. 508 The notion of 'an integral part of a continuing business relationship' requires that there be acts of Cashflow, and acts of CODFA, entered into deliberately, to make up the relationship. I accept that the situation where Walters was, unauthorised, passing the money of one company to the other, does not meet this description. Hence section 588FA(3)(a) is not satisfied. 509 I accept as correct Cashflow's submission that while it is true that the level of indebtedness of Cashflow to CODFA has in fact increased and reduced from time to time, it cannot be said that that increase and reduction is 'as a result of a series of transactions forming part of the relationship'. It was no part, I accept, of the business relationship between Cashflow and CODFA that Walters should make the WUPs. 510 The only example which section 588FA(3) gives of a transaction which falls within it's scope, is a running account. The WUPs do not constitute a running account as that term has previously been used in the law of preferences. 511 In Air Services Australia v Ferrier (1996) 185 CLR 483, Dawson, Gaudron and McHugh JJ put the matter as follows at pages 504-506: 'Since the decision of this Court in Richardson v Commercial Banking Co of Sydney Ltd . . . the term "running account" has achieved almost talismanic significance in determining when the ultimate, rather than the immediate and isolated, effect of a payment is to be examined for the purpose of a determination under s 122 of the Bankruptcy Act. However, the significance of a running account lies in the inferences that can be drawn from the facts that answer the description of a "running account" rather than the label itself. A running account between traders is merely another name for an active account running from day to day, as opposed to an account where further debits are not contemplated. . . . The essential feature of a running account is that it predicates a continuing relationship of debtor and creditor with an expectation that further debits and credits will be recorded. Ordinarily, a payment, although often matching an earlier debit, is credited against the balance owing in the account. Thus, a running account is contrasted with an account where the expectation is that the next entry will be a credit entry that will close the account by recording the payment of the debt or by transferring the debt to the Bad or Doubtful Debt A/c. If the record of the dealings of the parties fits the description of a "running account", that record will usually provide a solid ground for concluding that they conducted their dealings on the basis that they had a continuing business relationship and that goods or services would be provided and paid for on the credit terms ordinarily applicable in the creditor's business. When that is so, a court will usually be able to conclude that the parties mutually assumed that from a business point of view each particular payment was connected with the subsequent provision of goods or services in that account. Sometimes, however, the transactions recorded in the account may be so sporadic that a court cannot conclude that there was the requisite connection between a payment and the future supply of goods even though the account was kept "in the ordinary form of a running account in which debits and credits are recorded chronologically and in which payments are not shown as attributable to any particular deliveries but are brought generally into credit". . .. Thus, it is not the label "running account" but the conclusion that the payments in the account were connected with the future supply of goods or services that is relevant, because it is that connection which indicates a continuing relationship of debtor and creditor. It is this conclusion which makes it necessary to consider the ultimate and not the immediate effect of individual payments . . .. As Barwick CJ said in Queensland Bacon Pty Ltd v Rees . . .: "In my opinion, it is enough if, on the facts of any case, the court can feel confident that implicit in the circumstances in which the payment is made is a mutual assumption by the parties that there will be a continuance of the relationship of buyer and seller with resultant continuance of the relation of debtor and creditor in the running account , so that, to use the expressions employed in Richardson's Case . . ., "it is impossible" - I interpolate, in a business sense - "to pause at any payment into the account and treat it as having produced an immediate effect to be considered independently of what followed . . .'." [Emphasis added]. Cf Sutherland v Liquor Administration Board (1997) 15 ACLC 875 at 879-880 per Young J. 512 There is I accept, no basis for concluding that any WUP of Cashflow's money that was made to CODFA was 'connected with the future supply of goods or services'. [Air Services Australia v Ferrier 1996 185 CLR 483 at 505]. 513 In Olifent v Australian Wine Industries Pty Ltd (1996) 14 ACLC 510, Burley J said at pages 513-514: 'The manner in which this case was argued was based on the assumption by both parties that the dealings between the parties constituted a running account. Accordingly, in their respective final addresses, counsel addressed me, first, as to whether or not the impugned payments constituted a preference taking into account the provisions of s 588FA(2) and, second, if the impugned payments otherwise came within Section 588FA, as to whether or not the defences available to the defendant under Section 588FG had been made out. I am content to deal with each of those separate contentions individually but subject to a qualification: it is clear from the decision of Wells J in Re Baronga Nominees (1983) 108 LSJS 331, (and see also Rothmans Exports Pty Ltd v Mistmorn Pty Ltd 1994) 12 ACLC 936 at 945 and Toowong Trading Pty Ltd (in liq) (1988) 6 ACLC 436), that the two concepts argued separately by counsel for the parties may to some degree overlap. For example, the question of whether or not the impugned payments or any of them were received in "good faith" may have a bearing upon the question of whether or not a running account continued to exist. Wells J, having referred to the concept of "good faith" encompassed by Section 122(2)(b) and Section 122(4)(c) of the Bankruptcy Act, said (at 337), in relation to the running account defence, "that when Barwick CJ, in the Queensland Bacon Case [(1966) 115 CLR 266] at p 286, spoke of 'a mutual assumption by the parties that there will he [sic] a continuance of the relationship of buyer and seller with resultant continuance of the relation of debtor and creditor in the running account' he was asserting, by necessary implication, that there would be such a meeting of the minds of the parties as would support that assumption. It follows that if the creditor receives payment upon an assumption that is other than that described by Barwick CJ the foundation that might have existed for the relationship referred to is absent, and the creditor loses the chance of invoking the running account principle." In my view the approach taken by Wells J in Baronga Nominees is equally applicable to the current provisions because the use of the phrase "continuing business relationship" in s 588FA(2) and the fact that a running account is given as an example indicate that the subsection embraces the concept of a mutual assumption existing between the debtor and creditor of the same nature contemplated by Barwick CJ in the Queensland Bacon Case (supra). It seems to me that receipt of payments other than on the basis of the "mutual assumption" includes payments which were received by the creditor other than in good faith or other than in the ordinary course of business or, to use a shorthand expression borrowed (and modified) from the case law, with bankruptcy in view: Robertson v Grigg (1932) 47 CLR 257.' 514 I accept Cashflow's submission that Master Burley was correct in holding that before section 588FA(3) applies, there must be a 'mutual assumption by the parties that there will be a continuance of the relationship of buyer and seller with the resultant continuance of the relationship of buyer and creditor in the running account. [I interpolate that in understanding this notion, the expression 'buyer and seller' would extend to a supplier and an acquirer of services]. It seems to me that receipt of the payments other than on the basis of the 'mutual assumption'; includes payments which were received by the creditor other than in good faith or other than in the ordinary course of business or . . . with bankruptcy in view'. 515 I accept as correct Cashflow's submission that in the present case, it is impossible for there to be the 'mutual assumption' when: (a) the directing mind of both of the companies involved knew nothing at all about the WUPs; (b) the payments were not received in good faith (because the only one who knew about them at all was Walters, who knew that they were seriously improper), and ( c) it is difficult to imagine payments which were less in the ordinary course of business. Quantum if the Section 588FA(3) Submission is made out by CODFA 516 Cashflow submitted that, if contrary to its submissions, the various WUPs were held to fall within section 588FA(3), it is necessary (because of section 588FE(3)) to look at how the account has moved during the last six months before the Relation Back Day. In light of the above holding that the WUPs do not fall within section 588FA(3), it is unnecessary to consider these alternative arguments. Unfair Preference Is a WUP a Transaction within the Meaning of Section 588FA Corporations Law? 517 I accept as correct Cashflow's submission that the WUPs are each a 'transaction' within the meaning of section 588FA. 518 I accept that the WUPs fit within the definition of 'transaction' in section 9 of the Corporations Law because: (i) They are a 'conveyance, transfer or other disposition by the body of the property of the body', and so fall within (a) of that definition. (ii) They are a 'payment made by the body', and so within (d) of that definition. (iii) In construing (a) and (d), the expression 'by the body' in my view ought be construed widely, to include the sort of transaction which occurred here, where an officer of the body was acting dishonestly and outside the scope of his authority. (iv) I accept Cashflow's submission that there is no requirement that a 'transaction' be one in which the body is the active party. [ Re Macks & Emanuel (No. 14) Pty Ltd (In Liquidation) v Blacklaw & Shadforth Pty Ltd (1997) 15 ACLC 1099 at 1,105, rejecting the reasoning of Nicholson J in Charles Philip Louis Nilant v Plexipack Packaging Services Pty Limited (1996) 14 ACLC 1559.] 519 In support of the proposition that there is no requirement that a 'transaction' be one in which the body is an active party are, I accept, the following factors: (a) A 'transaction' can include elements in which the body does not participate at all. (b) Insofar as the examples occur in the definition, 'Common to the examples is the characteristic that the conduct or dealing engaged in by the debtor company has the consequence of effecting a change in the rights, liabilities or property of the company itself'. [ Re Macks & Emanuel (No. 14) Pty Ltd (In Liquidation) v Blacklaw & Shadforth Pty Ltd (1997) 15 ACLC 1099 at 1,105 column 2] (c) Even if the WUPs do not fit within paragraph (a) or (d), the WUPs, I accept, still fall within the definition of 'transaction' in section 9. In support of that finding are the following factors: (i) The paragraphs in the definition are not exhaustive. Those paragraphs are expressly stated to be examples of the actual definition of 'transaction' and also to be '(but without limitation)'. (ii) The only requirement which is mandatory in the definition is, I accept, that it be a 'transaction to which the body is a party' . (a) There is a definition of 'party' in section 9 Corporations Law, but it is an inclusive definition and I accept, is of no assistance. (b) When Cashflow's money has been paid away by its secretary and accountant, without authority, that is I accept, a transaction to which Cashflow is a party, in the relevant sense. (c) There is, I accept, no requirement of knowledge, or consent, or voluntary participation in the notion of being a 'party' to a transaction - a defendant becomes a party to litigation by being named as such, regardless of whether he knows about it or consents to it. (d) The Macquarie Dictionary (3rd edn) definition of 'party' is: 'party noun plural parties; 1. a group gathered together for some purpose, as for amusement or entertainment. 2. a social gathering or entertainment, as of invited guests at a private house or elsewhere: to give a party. 3. a detachment of troops assigned to perform some particular service. 4. (often cap.) a number of body of persons ranged on one side, or united in purpose or opinion, in opposition to others, as in politics, etc: the Australian Labor Party. 5. the system or practice of taking sides on public questions or the like. 6. attachment or devotion to a side or faction: partisanship. 7. a person immediately concerned in some transaction or legal proceeding. 8. Mining a group of men performing geophysical work of a specific project, ordinarily using a single method. 9. one who participates in some action or affair. 10. the person under consideration. 11. a person in general, adjective. 12. of or relating to a party or faction: partisan: party issue. 13. of or for a social gathering: a party dress. 14. given to partying: a party girl. 15. Heraldry divided into parts, usually two parts, as a shield. Verb (i) (partied; partying). 16. to take part in festivities at or as at a party. Phrase. 17. come to the party to assist, especially with money; fall in with one's plans. 18. party on to continue a party. [ME parti(e), from OF, pp. Of partir PART, verb]' I accept Cashflow's submission that the seventh meaning is the appropriate one to the present situation. (e) The etymology of 'party' (as stated in the Macquarie dictionary) suggests that all that is required for A to be 'party to' a transaction, is that A is part of what happened in that transaction. If the transaction is the theft of A's property, A is, I accept, a party to the transaction, even though not involved in any deliberate activity in connection with that transaction. 520 I accept as correct Cashflow's submission that there is no basis for restricting the definition of 'transaction' to acts in the law which the body enters deliberately. The list of examples of transaction includes (e), and 'obligation incurred by the company'. There is, I accept, nothing to stop the circumstances which result in the arising of a restitutionary obligation being an 'obligation incurred'. Further, as a restitutionary obligation can be incurred through circumstances (like the present, or like State Bank of NSW v Swiss Bank Corporation (1995) 39 NSWLR 350), where there is no voluntary action or deliberate action on the part of the entity which incurs the obligation, there is no reason to restrict the definition of 'transaction' to transactions which involve action on the part of the company. 521 I further accept Cashflow's submission that the policy of the preference provisions is that one creditor of a company ought not be better off, as the result of transactions which occur in the six months before the winding up starts, than that creditor would be if the transaction had not occurred. As a matter of policy, if the secretary of a company disburses the company's money (outside the scope of his or her authority) in selectively paying off certain favoured creditors of the company, and the company goes into liquidation soon thereafter, the liquidator, I accept, ought not be in any worse position than he would be if the same payments had been made with full authority of the board. This policy, I accept, supports the wider meaning of 'party'. Is CODFA a Creditor of Cashflow in Relation to each WUP? 522 At the time of each of the WUPs, CODFA was, I accept, a creditor of Cashflow, within the meaning of section 588FA(1)(a) and (b). It is sufficient I accept, to be a creditor that someone would have a right of proof in the winding up of Cashflow, at the date of receiving the putative preference. [See in Re Paine; Ex parte Read [1897] 1 QB 122 at 124] It is sufficient, I accept, for being a creditor (in that sense) that Cashflow has an obligation to repay CODFA which is based on restitution. 523 It is then necessary to examine the course of payments which make up the WUPs to see whether, in relation to each of them, CODFA has a right to restitution. That matter is dealt with below. 524 There is no longer any need for a payment to a creditor to be one also made 'in the capacity of creditor'. [At least some authorities held this to be a requirement under previous law - Expo International Pty Ltd (In Liquidation) v Torma [1985] 3 ACLC 748; Cf Yeomans v Lease Industrial Finance Ltd (1986) 5 ACLC 103.] 525 Rather, the Corporations Law simply requires the payment to be in fact made to someone who is a creditor, and looks to the effect of the transaction in improving the position that that creditor has in a winding up, as the test for voidness. 526 It will be recalled that some of the WUP cheques were to, or from, the Burkett account. The undisputed evidence, I accept, is that the Burketts were acting as agent for CODFA in making their account available. Hence, payments to, and from, the Burkett account are to be viewed as in no different situation to payments to, and from, CODFA's own account. 527 Each payment alleged by Cashflow to be an unfair preference, is one which reduced an amount which was already owing by Cashflow to CODFA and hence was a payment made 'to a creditor'. [Re Jaques McAskell Advertising Freeth Division Pty Ltd (In Liquidation) [1984] 1 NSWLR 249. 528 Exhibit GMG4 shows that at all times during the last six months before the Relation Back Day (that is, all transactions from and including the payment of $15,767 on 9 April 1996), payments from Cashflow to CODFA were ones which reduced a balance owing by Cashflow to CODFA. The same result applies if one does not regard the payment of $20,000 which CODFA made on 2 April 1996 direct to Trans-pac No. 2, as an amount owing by Cashflow to CODFA. Is Section 588FA(1)(b) Satisfied - Is the result that the Creditor receives more than the Creditor would Receive by Proving in the Winding-Up? 529 I accept as correct Cashflow's submission that section 588FA(1)(b) is satisfied. The evidence is that there will be substantially less than a full return to unsecured creditors of Cashflow. The latest report as to affairs of Cashflow in evidence, shows a deficiency of $1,622,083. [See Affidavit of Mr Bonvino of 5 March 1999, page 46] While an amount has been paid by Westpac in settlement of Cashflow's claim against it, that amount is, I accept, insufficient to make up the deficiency. An amount of $125,680 (being the proceeds available from the only one of the Panayi mortgages which was not discharged) remains in a solicitor's trust account awaiting the outcome of a dispute between various of the Panayis, and Cashflow, concerning who is entitled to it - Mr Thorpe's statement, 4 March 1999. The maximum possible return to Cashflow from that source is $125,680 (which would happen if Cashflow were to win completely it's dispute with the Panayis, and recover all the legal costs associated with that dispute, which is presumably an unlikely event). Even if the maximum return were, however, to be received, there would still be a deficiency in the Cashflow liquidation. Liquidator's fees of in the order of $227,000 and disbursements in the order of $35,000 remain to be paid. Legal fees concerning these proceedings (totalling $277,208 as at 10 March 1999) remain to be paid from the assets of the company. I accept Cashflow's submission that it follows that the amount that CODFA received in each of the transactions alleged to be preferences, was more than CODFA would receive if the transaction were set aside and the creditor required to prove in the winding-up. Insolvency of Cashflow 530 Under section 513A(e) Corporations Law, the winding-up is taken to have commenced on the day the winding-up order was made. Under the definition of 'Relation Back Day' in section 9 Corporations Law, the Relation Back Day of the company is the day on which the application for the winding-up order was filed. That, in the present situation, was 12 September 1996. 531 The definition of 'insolvent' is to be found in section 95A Corporations Law. 532 Under section 588E Corporations Law, Cashflow is presumed, for the purposes of any recovery proceedings brought by the liquidator, to continue to be insolvent during certain periods of time. 'Recovery proceedings' are defined in section 588E(1). The present applications by the Cashflow liquidator are all 'recovery proceedings' because they are (in one alternative way of reading Cashflow's case), applications made under section 588FF. 533 The periods of time during which the presumption of continuance of insolvency operates are: (a) continually from the time of any proved insolvency - section 588E(3) Corporations Law, and (b) continually through the period (not exceeding twelve months prior to the Relation Back Day) during which there is a failure to keep proper books and records in the manner required by section 289(1) Corporations Law - [through the combined operation of section 599E(3) and (4) Corporations Law]. 534 Evidence before the Court from Mr Cachia, provides evidence of actual insolvency of Cashflow from November 1995 onwards. Hence, Cashflow is presumed to be continually insolvent from November 1995. 535 In the alternative and had CODFA been right in its assertion about being entitled to restitution in connection with the WUPs, Cashflow can be shown to be insolvent from August 1995. [See Judgment paragraph 540 and following] 536 There was, I accept, a failure to keep proper books and records in the manner required by section 289 Corporations Law for the whole of the last twelve months of Cashflow's existence ending on the Relation Back Day. Hence, I accept, that Cashflow is presumed to be insolvent during the whole of that period. That contravention, I accept, is fourfold: (i) Cashflow has failed to keep accounting records that correctly record and explain its transactions for the whole of the period - section 588E(4)(a)(i). (ii) Cashflow has failed to keep accounting records which correctly record and explain its financial position for the whole of the period - section 588E(4)(a)(ii). (iii) For the whole of the twelve months, Cashflow has failed to keep accounting records in a manner so that sure and fair accounts of the company can be prepared from time to time - section 588E(4)(a) final phrase plus section 289(1)(b)(i). (iv) For the whole of the twelve months, Cashflow has failed to keep its accounting records in such a manner that it's accounts can be conveniently and properly audited in accordance with the Corporations Law - section 588E(4)(a) final phrase plus section 289(1)(b)(ii). 537 I accept as made out Cashflow's submission that the falsification of the books was deliberate, systematic, long term and significant in amount. Evidence which supports the failure to keep books and records properly, I accept, includes the following: (i) Mr Cachia has given evidence on which he was not cross-examined, that the books and records were not being kept in the manner required by the Corporations Law - Exhibit P8 pages 3-4. (ii) The provisional liquidator's report states that the books and records of Cashflow were incorrect - Exhibit PX1 pages 1476 and 1479. The incorrect entries included ones made in the monthly management accounts - Exhibit PX1 page 1478. (iii) The accounts as at 30 June 1995 were falsified by the inclusion of the 'dummy' entry for $140,000. The journal entry which Mr Gelder inferred, from the ledger accounts, is one which would increase the apparent cash at bank by $140,000, and decrease the Trans-pac debt by $140,000 - Transcript page 120. There was also another false entry or entries which Mr Gelder could not identify - transcript page 121. The comparison between what the accounts showed as cash at bank, and the actual cash at bank on 30 June [transcript pages 121-122], demonstrated that there must have been another entry in the accounts. Mr Gelder did not know whether the $140,000 entry had affected the profit and loss for the year or not - transcript page 124. (iv) On occasions (semble in the period after January 1995), if the total of invoices listed by Trans-pac was insufficient to support amounts that Walters had paid to Trans-pac, he is shown to have recorded fictitious invoices in the accounting records - see the report by Mr Gelder of 9 September 1998 pages 5 and 12; transcript 64. One place where he recorded the fictitious invoices was in Trans-pac's debtor ledger which Cashflow maintained - transcript page 66. (v) The false entries made their way through to the monthly profit and loss accounts, each month where there were false entries - transcript page 66. (vi) Mr Walters created not only false invoices, but also false credit notes and receipts in the accounting records of Cashflow - see report of Mr Gelder of 9 September 1998 page 16. (vii) Overpayments to Trans-pac arose over time, and were not properly disclosed in the accounting records of Cashflow - see the report of Mr Gelder of 9 September 1998 page 16. The overpayments occurred in the months of January, March, April, May and every month from July to December in 1995, and in January, February, March and June of 1996 - see Mr Gelder's report of 9 September 1998 page 21 column 14. It follows that in each of those months, the records are shown to have been falsified. (viii) Mr Walters may also have made some false entries on First Schedules - transcript page 64. (ix) Many of the First Schedules were missing - transcript page 64. (x) There were not enough debtors enquiry lists to match up with every amount that had been paid by Mr Walters as purported factoring - transcript page 65. (xi) Cheques were written on the Cashflow bank account from 9 September 1995 which showed as the payee someone other than the person to whom the cheque was really paid - listed in annexure to report of Mr Gelder of 4 June 1998 at dates 9 September 1995, 6 December 1995, 7 December 1995, 5 January 1996, 7 February 1996, 10 May 1996, 15 May 1996 and 31 May 1996. (xii) Cheque no. 400212 dated 10 May 1996 for $20,000 was noted in Cashflow's books as payable to Trans-pac. In fact it was paid into the Burkett account - see Mr Gelder's 9 September 1998 report page 17. (xiii) Mr Gelder agreed that, as an auditor, he could not give Cashflow a clear certificate - transcript page 68. (xiv) In each of the months of March, April and May 1995 and in each month from July 1995 to March 1996 (inclusive), there was an overpayment to Trans-pac - see Exhibit D1H page 21 (schedule page 1) column 14. Whenever there was an overpayment, this was one of the occasions when Mr Walters made false accounting entries - transcript page 89. Hence, those months can positively be identified as ones where a false entry was made. Given that the records include accounts which continue from month to month, those false entries would affect the accounts in all months after March 1995. (xv) In particular, the recording of false invoices would mean that the company records show the company as receiving fee income (from the discounting of those false invoices which it did not receive - transcript 106-107). This would have happened from at least March 995 onwards. (xvi) There is, I accept, an unexplained mystery about there being two different versions of the profit and loss account for June 1996 - transcript page 103-104. 538 None of the contraventions of section 289 is one which falls within an exception in section 588E, and this for the following reasons: (i) The contravention of section 289 is not one which is only minor or technical. Hence the exception in section 588E(5) does not apply. (ii) the contravention of section 289 is not one which arises from someone destroying, concealing or removing accounting records of the company. Rather, the contravention arose from Mr Walters' deliberately making false entries in the accounting records of the company. Hence the exception in section 588E(6) does not apply. (iii) The recovery proceedings in this litigation are, I accept, all applications under section 588FF. However, another party to each transaction (each Walters Unauthorised Payment) was CODFA. CODFA is, I accept, a related entity of Cashflow. The definition of 'related entity' is in section 9 Corporations Law. CODFA is a body corporate, one of whose directors (Mr Wright) is also a director of Cashflow. Hence, CODFA falls into paragraph (k) of the definition of 'related entity'. Hence the exception in section 588E(7) does not apply. Has CODFA Rebutted the Presumption of Insolvency 539 When there is a presumption of insolvency, the onus is plainly on CODFA to rebut that presumption. 540 There was in my view, ample evidence to support a conclusion of insolvency of Cashflow throughout the twelve months before the Relation Back Date. All this evidence supporting insolvency would require to be explained away for CODFA to be able to rebut the presumption of insolvency. Evidence which Cashflow put forward as supporting the conclusion of insolvency and which, in my view does support that conclusion, is as follows: (i) Mr Cachia expressed the view that the company was insolvent over the whole of the period in relation to which the liquidator seeks to set aside the transactions, and he was not cross-examined on this. (ii) The company had practically no assets apart from any debts that it had factored. - The balance sheet as at 30 June 1995 showed assets consisting of $25,446 cash, $1,613,998 receivables and $950 intangibles - Mr Bonvino affidavit of 27 April 1998, page 154. This, I accept, is an imprudent way of running a factoring company. A factoring business, I accept, is the type of business that needs to have access quickly to large sums, to be able to carry on - transcript page 94. It means that the company does not have assets against which money can readily be borrowed if it needs to raise money. (iii) The effect of Mr Walters dispensing with the procedures laid down by the factoring deed since 7 December 1994, was I accept, that there was no effective assignment of any debts from Trans-pac No. 1 from that date. (iv) When Cashflow's money started to be paid to Trans-pac No. 2 there was no assignment of debts by Trans-pac No. 2. (v) The company had no arrangements with any banker to provide overdraft accommodation if it were to be needed. (vi) The debts that were owed to Cashflow by Trans-pac No. 1 and the obligation of Trans-pac No. 2 to make restitution for the money of Cashflow it had received, were worthless (or alternatively worth far less than their face value). The liquidation of Trans-pac No. 1 has concluded, with a nil return to creditors and the debtors of $1.2million charged to Cashflow were said to be worthless. (vii) The interest which Cashflow was to pay to Pyrafount and to other lenders was payable monthly - Mr Bonvino's affidavit at page 87. The amount of interest per month ranged (over the year ended 30 June 1996) from $23,827 per month [September 1995] to $33,059 per month [June 1996]. (viii) The fees that were payable to Walters & Associates and to Factors were payable monthly. So was the office services fee payable to CODFA. (ix) From September/October 1995 the monthly meetings of Cashflow were being held later and later. It was at the monthly meetings that the cheques were signed for the interest, and the fees. The effect of the meetings being held late was that those expenses of Cashflow were not being paid when they fell due. (x) The flow of funds through Cashflow that is shown in the Schedule to Mr Gelder's first report - Exhibit D1G - is one which occurred in the context that the interest and fees owed by Cashflow were being paid late. In that context, on every day save one when Cashflow money was used to repay WUPs, Cashflow did not have sufficient money in the bank to be able to repay the amount that had been 'borrowed' from CODFA by means of the WUPs - Transcript page 79 and following. This is, I accept, strong evidence of insolvency. I infer that Mr Walters would have repaid the WUPs if he thought that Cashflow would be able to continue without them - he had of course 'borrowed', then 'repaid', on three separate occasions before 17 August 1995. Further, that a sum of money appears as a credit in the bank account of Cashflow at the start of a day does not, I accept, mean that it is cleared funds that can be drawn against - a deposit is usually only available to be drawn against only a few days after it is deposited - Transcript page 83. The only occasion when there was a partial repayment of the WUPs when Cashflow had enough money in the bank, at the start of the day when repayment was made, to be able to repay the WUPs is, on the evidence, 7 February 1996 - Exhibit D1G pages 11-21. The only reason why Cashflow had money in the bank in February is that Pyrafount made an additional advance of $200,000 to Cashflow on 1 February 1996. Other lenders also lent a further $150,000 on 1 February 1996. Given that the interest and other payments were being made late, and that Mr Walters' view of the needs of Cashflow was that he did not see his way clear to repay all the WUPs, that I accept, does not amount to positive proof that Cashflow was solvent on 7 February 1996. Cashflow was effectively trying to operate without working capital. Trans-pac was also insolvent. Hence, debts owed by Trans-pac were, I accept, irrecoverable. (xi) From Mr Bonvino's first involvement with Cashflow, he was told 'in order for Cashflow Finance Pty Limited to meet its factoring commitments on time, we will require funds to be banked to our bank account a day or so before required'. The company operated so that it had few liquid funds. This I accept, is also evidence that there was no special arrangement with the bank permitting the company to draw against uncleared funds. 541 I have earlier in the Judgment set out the fact that the reconstruction of the account of Trans-pac which Mr Bonvino carried out (after deleting the various entries which Mr Walters had told him were false) showed understatements in the monthly statements of the total amount outstanding on the Trans-pac account of particular amounts - see paragraph 358(xi). 542 Hence, when the debt in the Trans-pac account was worthless, this understatement of the true extent of the indebtedness had the effect of reducing the net assets of Cashflow by the same amount, below what the records at the time would suggest. 543 Cashflow relies upon the following matters, each of which seems to me to be of substance and is made out: (a) The accounts of Cashflow at 30 June 1995 showed it as having an operating profit after tax of $105,430. At the time of drawing those accounts, the obligation to pay the tax was a real one (in that the reasonable expectation was that an assessment would issue for the income tax expense of $51,930 and would need to be paid). It is now, I accept, known that the taxable income was overstated, in the accounts, by at least the amount of the Trans-pac fees that had been shown as accrued due, and possibly by the $140,000 adjustment that Walters made. The conclusion from the accounts is, I accept, that Cashflow may well have made a loss of the order of $35,000 or more in the year ended 30 June 1995. (b) Whether or not the payment of $140,000 affected the profitability of Cashflow in the year ended 30 June 1995, I accept that it affected its liquidity. Mr Walters has admitted to Mr Star that 'somewhere in the April/May/June period (of 1995), he advanced $140,000 or thereabouts too much to Trans-pac - Exhibit PX 1 page 575. Mr Walters' other admissions about the amounts of unauthorised advances after 30 June 1995 I accept, understate the position. (c) The tax was actually paid in December 1995. The whole of the amount that was shown as operating profit in the accounts ($105,430) was distributed as a dividend, in February 1996. From that time onwards, those amounts were not available to fund the debts of the company. (d) After liquidation, Cashflow submitted an amended tax return for the year ended 30 June 1995 and in November 1996 obtained a refund of the tax it had paid, plus some interest. [Exhibit PX1 page 1571] However, in the period from December 1995 to liquidation, the amount that had been wrongly paid for tax, reduced the liquid assets of Cashflow. (e) The balance sheet of Cashflow as at 30 June 1995 includes (as by far the most significant asset) receivables of $1,613,998. [Affidavit of Mr Bonvino, 27 April 1998 page 154]. These receivables would include debts owing to Trans-pac No. 1 and Trans-pac No. 2 which had been taken up in the accounts of Cashflow. There is, I accept, no allowance for bad debts. The amount of the receivables as at 30 June 1995 is overstated by $224,706 [Mr Cachia Annexure 'A', first column] on the basis on which Mr Cachia did his calculations (namely, accepting that a debt which appears in the books of Cashflow as owing from a Trans-pac customer is really owing and calculating the difference between the amount of debt of Trans-pac to Cashflow that appears in the accounts and the amount that the reconstruction of the Trans-pac account - Annexure 'B' to Mr Cachia - shows as owing. That basis is, I accept, too generous to Cashflow's solvency, in that it does not take account of the fact that many of the debts owing to Trans-pac taken up in the accounts of Cashflow had not really been assigned. Nor I accept does it make any allowance for bad debts. (f) On the strength of the accounts as at 30 June 1995, Cashflow paid dividends totalling $105,430 [- Affidavit of Mr Bonvino, 27 April 1998 paragraph 17(e) and (f).] The dividend was paid even though accounts had certainly overstated the profit of the company, and possibly overstated the profit (and the available funds) by at least $140,000. This I accept, worsened the insolvency of the company. (g) Any profit that had been made in the year to 30 June 1995 was not available in cash to meet the debts of the company as they fell due, but rather had been reinvested in the business - Transcript page 49. (h) The amount of the total of the WUPs that was outstanding at one time, represents the extent to which Cashflow could not pay its debts as they fell due from its own money. I accept Cashflow's submission that it is difficult to see what could be more indicative of an inability to pay debts as they fall due, than that Mr Walters needed to make unauthorised 'borrowings' of money from CODFA. Exhibit GMG4 appended to this Judgment shows that there were substantial unauthorised takings of the money of CODFA to make up for the cash deficiency of Cashflow, continually from August 1995. (i) I accept that it was because Cashflow was insolvent that Mr Walters needed to engage in the complicated subterfuges that were involved in the WUPs. (j) On some occasions, cheques that Mr Walters and Mr Wright wrote out to Trans-pac, were deposited back into the bank account of Cashflow, so that it looked as though Cashflow was receiving deposits [- Affidavit of Mr Bonvino, 27 April 1998 para 29(b).] That is, I accept, another litmus test for insolvency. (k) Not only did Cashflow not make a profit of $157,000 in the year ended 30 June 1995, it is shown to have made a loss. After Cashflow went into liquidation, an amended income tax return, disclosing a loss, was accepted by the Commissioner, and a refund made of the tax that had been paid [- PX 1571-1573.] (l) Trans-pac No. 1 was a substantial debtor of Cashflow. Over the period from February 1995, the debt which Trans-pac owed to Cashflow fluctuated within the range of 50-60% of the total indebtedness owed to Cashflow - Mr Bonvino's affidavit of 14 March 1999, Annexure 'B'. Trans-pac No. 1 was itself a company which I accept was insolvent during the time from February 1995. In this regard I accept the following matters put forward by Cashflow as proven: (i) Trans-pac No. 1 was incorporated on 30 December 1993 and stopped trading in November 1995. It went into liquidation with a deficiency of $2,644,487. If that loss was incurred evenly over the 23 months it was trading, that was a loss of nearly $115,000 per month. (ii) Trans-pac No. 1's annual return for the financial year ended 30 June 1994, showed it at that time as having negative shareholders equity of $12,695 - Exhibit P5. Trans-pac No. 1's annual return for the year ended 30 June 1995 showed it as having negative shareholders equity at that time of $1,117,870 - Exhibit P5. (iii) Trans-pac No. 1 had itself had significant losses arising from the paymistress taking company funds. An amount of $30-40,000 was identified as money that the pay mistress had taken, 'but there was a lot more money going that they haven't disclosed. It could have been $3-400,000' - Exhibit PX1 page 1530. As a result of this, Mr Peter Panayi told Mr Star that Trans-pac (at some stage in mid to late 1995) was insolvent - Exhibit PX1 page 1530. (iv) The Panayis took over the business of Trans-pac No. 1 on an assurance from Barnes that it was viable, 'and Peter (Panayi] subsequently found out it was quite the opposite' - Exhibit PX1 page 1531. (v) It's statement of affairs shows it as going into liquidation owing $1.2million to Cashflow, secured by a charge over debts, but the debts are shown as worthless. There were $148,000 of preferential creditors (namely the ATO, for superannuation for employees). The unsecured creditors included $318,000 of unpaid payroll tax, $703,000 of unpaid group tax, nearly $96,000 in unpaid PPS tax, various insurers, Mobil and the local council. I accept that these are the sort of debts which cannot be run up in a short time. I accept that they support the conclusion that Trans-pac was itself insolvent many months before November 1995. (vi) When Trans-pac was such an important debtor of Cashflow, this I accept, makes Cashflow insolvent. (vii) Further, the trade debts that Trans-pac had, and purported to assign to Cashflow, were themselves I accept, not good debts. A high proportion of the debts purportedly assigned to Cashflow were more than 90 days old - Report of Mr Gelder, 9 September 1998 page 23. (viii) The bank account of Trans-pac No. 1 was in overdraft, at various times from at least July 1995 until the account was closed - PX1 28 - 33, 556. (When it was closed, the debit balance was brought to zero by a cheque drawn on Trans-pac No. 2.) 544 Trans-pac also owed amounts to Cashflow for fees. The sources of income of Cashflow, according to its management accounts, were nearly all fees. A high proportion of the fees that were owed to Cashflow were owed by Trans-pac. While they accrued due and appear in the monthly management accounts, they are not money that can be relied on to actually pay Cashflow's debts. If they are deducted from the monthly profit that appears in Cashflow's monthly management accounts, Cashflow is seen to make a loss every month from June 1995 onwards. 545 Trans-pac No. 2 as has already been made plain, is also in liquidation. It changed its name to Kemps Creek Distributors Pty Limited on 27 April 1998. A liquidator had been appointed on 3 August 1998. It has a deficiency of $1.926million. The priority claims by employees are $241,948. The Australian Tax Office is an unsecured creditor for $691,937 out of claims of $1,022,666 by unsecured creditors. Its only assets are the subject of a charge to the Panayi family. I accept Cashflow's submission that the likely conclusion is that Cashflow could never attribute any value, as money available to pay its debts, to its legal right to restitution of the money Mr Walters had paid to Trans-pac No. 2. 546 The above matters demonstrate, it seems to me, that Cashflow was insolvent, quite apart from any consideration of whether there was or was not a liability on it to repay the Pyrafount loan. However, the Pyrafount loan ought also, I accept, be regarded as a current liability due to be repaid. In this regard, I accept the following matters put forward by Cashflow as made out: (i) Mr Gelder relied on a minute of a supposed directors' meeting in April 1994 as setting out the terms of repayment of the Pyrafount loan. That minute is one that Mr Bonvino did not sign. [See Mr Bonvino's evidence of 22 March 1999]. It attributes the directors' meeting to a time before Mr Bonvino first saw the advertisement in the Herald which first brought him into contact with Mr Wright. The minute, I find, is a fabrication. (ii) The uncontradicted evidence about the terms on which funds could be withdrawn is that funds could be withdrawn on three months notice even if a replacement investor could not be found - Mr Bonvino, 14 March 1999, paragraph 2. Further, Mr Wright and Mr Bonvino agreed that if ever there was a problem, Mr Bonvino had the capacity (through his 51% shareholding) to take control of the company, and receive the money even quicker than in three months, being able to withdraw the money when he chose to do so - Mr Bonvino, statement 14 March 1999, paragraph 3. (iii) The 'very rough draft of the minute for our agreement' [- Mr Bonvino statement 27 April 1998 page 86] states: 'Conditions of loan fund withdrawal (replacement investor/funds prior to withdrawal)' [- Mr Bonvino statement 27 April 1998 page 87.] That I accept, means no more than that the topic of the conditions of loan fund withdrawal needed to be addressed, concerning both the circumstances in which a replacement investor would be found, and concerning when the funds are withdrawn from being used in the factoring business before being returned to the lender. (iv) The inclusion of the loan funds as a current liability, in the balance sheet of the company as at 30 June 1995 (which Mr Wright had signed) supports Mr Bonvino's evidence. (v) I accept that whilst it is correct that no demand had actually been made for the loan funds to be withdrawn, if Mr Bonvino had known the truth about how the company was being run it is inevitable that he would have withdrawn the funds no later than 30 June 1995. As the funds would have been withdrawn if Mr Bonvino had known the truth, I accept that they should be regarded as funds which need to be provided for, when considering whether the company is able to pay its debts as they fall due. (vi) There were two small investors (Jay and Milner), who lent money direct to Cashflow. They appear to have been introduced by Mr Bonvino and to have acted on his advice. Their loans are in the same position as the Pyrafount loans. 547 I accept Cashflow's submission that Mr Gelder's report does not establish solvency. I accept that Mr Gelder's solvency statement was built on the precarious foundation of the accounts that Mr Walters had prepared, which have been shown to be works of creative fiction. One indication of the extent to which they are works of fiction can be obtained from comparing the amount of Trans-pac debt which Mr Walters asserted in the statements, with the amount of the Trans-pac debt which Mr Gelder stated really applied - that is by comparing lines 11 and 12 of Mr Gelder's solvency statement. The significance of Mr Gelder using the Walters' accounts to come to a conclusion of solvency is quite different, I accept, to the effect of Mr Cachia using those same accounts as a starting point to come to a conclusion of insolvency. Mr Cachia is able to say 'I know that Mr Walters was showing a better position than really existed with these accounts, but by making a few sensible adjustments to them, I can show that the company is really insolvent'. I accept Cashflow's submission that it is a vastly different exercise to use the accounts as Mr Gelder has sought to do to base a conclusion of solvency. 548 The profit in the first line of Mr Gelder's solvency statement cannot, I accept, be accepted, as funds available for payment of debts, in the month in which the profit is shown by the management accounts to arise, because: (a) It is based on accounts prepared on an accrual basis. Fee income which accrues due in a particular month will not necessarily ever be received - it depends on the solvency of the client which is charged the fees - Transcript page 108. (b) Even if the fee income is ultimately received, it will not be likely to be available for the payment of debts in the month in which it accrues - Transcript page 107. (c) the fee income is overstated in the management accounts, because of Mr Walters having entered false invoices into the accounting system - Transcript page 107. 549 The exercise of adding on positive amounts in line 4 for the year ended June 1995 and the amounts of July, August, October and November 1995, is, as Mr Gelder admitted, in error - Transcript pages 125-126. I accept Cashflow's submission that those amounts should be zero (if the calculation in lines 11-14 is correct. If, as a result of the alteration of the calculation in lines 11-14, the figure in line 14 becomes a negative, that negative should be transferred up to line 4). 550 The calculation in lines 11-14 is, I accept, incorrect. In this regard I accept the following submissions of Cashflow as made out: (a) It contains the admitted error which was corrected in the amended solvency statement - Exhibit P15. Correction of that error causes the adjusted profit/loss always to be a lower figure - Transcript page 113. (b) It understates the amount of the Trans-pac actual debt by the various figures identified by Mr Bonvino in Exhibit P3. I accept Cashflow's submission that when Mr Bonvino was not cross-examined concerning Exhibit P3, it must be accepted as correct. The effect is that all the figures in line 12 should increase by (at minimum) $141,000, the effect of making that correction alone being to move the figures in line 14 for the months of August, October and November 1995 into negatives. (c) The statement of recoverable debtors in line 13 I accept, overstates the amount of debtors that can be relied on for solvency purposes. Mr Gelder treated a debtor as 'recoverable' if there is a legal right to recover it, regardless of whether there is a practical likelihood that the debt will be recovered - Transcript pages 104 and 118. I accept that this is inadequate - Transcript page 105. Many of the Trans-pac debtors were more than sixty days, and many more than ninety days - [the actual amounts each month are stated in Mr Gelder's second report page 23, otherwise numbered as page 3 of the Schedule to that report]. Trans-pac ultimately went into liquidation having debts of $1.2million charged to Cashflow which debts were worthless. If only the 90-plus day debtors are disregarded for solvency purposes, the combined effect of this and the $141,000 adjustment in line 12, is I accept, to have a negative figure in each column of line 5. 551 I accept Cashflow's submission that it is incorrect to treat the value of the mortgages given by the Panayis as money available for the purposes of calculating solvency. This is for the following reasons: (a) The $600,000 figure attributed to them has no firm foundation. (b) The mortgages secure amounts due under the guarantee. There is, I accept, good reason to believe that the guarantees secure nothing, and hence that the mortgages secure nothing. (c) I accept that even if the mortgages did secure some substantial sum of money, they could not be enforced fast enough for the proceeds ultimately available from the mortgages to be a sum that should be taken into account in calculating whether or not Cashflow had enough liquid funds to be able to meet its debts as they fell due. 552 Cashflow submitted that CODFA faces a dilemma in the proceedings concerning what it should say is the legal effect of the WUPs. The submission was that if CODFA was correct in saying that it had a right to restitution in relation to the WUPs, that provided a clear demonstration that Cashflow was insolvent. 553 Cashflow's detailed submission in this regard was as follows: '18.11.16.1. If CODFA is right in saying that it has a right to restitution in relation to the WUPs, that right of restitution is one which came into existence immediately the payment of any sum of CODFA's money was made. If CODFA's assertion is accepted, then at any time Cashflow had an obligation to make immediate repayment to CODFA of the net balance of the "account" of the WUPs. [Baker v Courage & Co Ltd [1910] 1 KB 56 at 65 per Hamilton J. Halsbury's Laws of Australia para 370-6270. There are some decisions dating from before the time when restitution was properly understood, which suggest that a demand is necessary. However, those decisions are wrong in principle - see Oughton, Lowry & Merkin, Limitation of Actions (Lloyds Commercial law Library (1998) page 225-226; Mason & Carter Restitution Law in Australia para 422.2720-2722.] Those net balances are shown in the annotated version of GMG4. 18.11.16.2. The monthly management accounts of Cashflow are unreliable in many respects, but it can safely be inferred that they do not overstate the profitability of Cashflow from time to time. The monthly accounts do not take up, as a liability of Cashflow, any obligation it has to make restitution of the WUPs. If one adjusts them to take up that liability, the following picture emerges:

Thus, if CODFA is right in saying that it is entitled to restitution in relation to the WUPs, Cashflow is insolvent continually from August 1995.' 554 At the end of the day, to my mind the positive evidence in favour of Cashflow's insolvency resulted in CODFA being unable to rebut the presumption of insolvency. 555 I turn then to examining whether the unfair preferences are insolvent transactions: Are the Unfair Preferences Insolvent Transactions 556 Paragraph 5(c) of CODFA's defence raises an issue that CODFA 'does not admit that transactions were entered into between CODFA and Cashflow within the meaning of Part 5.7B Corporations Law'. I accept Cashflow's submission that this raises a false issue. 557 There is no requirement that a transaction be 'entered into' before it can be set aside as a preference. Section 588FA(1) contemplates that a transaction can be an unfair preference if it is 'entered into', or if it is 'given effect to', or if it is 'required to be given effect to'. The context which section 588FA so contemplates, is one which regards these activities relating to a transaction as being only three examples of possible activities that there can be in connection with a transaction. It is, I accept, quite consistent with section 588FA(1) that a transaction simply 'occur', whether or not it is 'entered into'. 558 Section 588FC contemplates that a transaction could be an insolvent transaction if the company is insolvent 'when the transaction is entered into'. I accept that clearly that route to being an insolvent transaction requires the transaction to be 'entered into'. However, one alternative way in which section 588FC says the transaction could be an insolvent transaction is if the company is insolvent when 'an act is done, or an omission is made, for the purpose of giving effect to the transaction'. Another alternative way in which section 588FC says that a transaction could be an insolvent transaction, is if the company becomes insolvent because of, or because of matters including, a person doing an act, or making an omission, for the purpose of giving effect to the transaction. I accept that neither of those routes require the transaction to be 'entered into'. Were the Unfair Preference Transactions 'Entered Into' within the meaning of Section 588FC? 559 Each of the unfair preference transactions (the WUPs) was 'entered into' within the meaning of section 588FC. The expression 'was entered into' is, I accept, in the passive voice. It does not say who it is that is required to have done any act, for the transaction to 'be entered into'. That the payments were in fact made, as a result of Mr Walters acting without authority, is I accept, enough for them to be 'entered into'. It does not matter, I accept, that Mr Walters was not acting on behalf of Cashflow when he passed the money back and forth. 560 In my view, at the time that each of the transactions was 'entered into', Cashflow was insolvent. Hence, each of the WUPs is an insolvent transaction within section 588FC(a)(i). 561 Cashflow became insolvent because of (or because of matters including) the entering into of each of the WUPs. Hence each of the WUPs is an insolvent transaction, within section 588FC(b)(i).) Whether, even if the Transactions were not 'Entered Into', they were still 'Insolvent Transactions' 562 At the time that Mr Walters caused each of the cheques pursuant to which the WUPs were made to be drawn on Cashflow's bank account, and paid to CODFA (or Burkett), and banked into the account of CODFA (or Burkett), an act was done (by Mr Walters) for the purpose of giving effect to the transactions. I accept that at each of those times, Cashflow was insolvent. I accept that this establishes each of them as an insolvent transaction within section 588FC(a)(ii). 563 Cashflow became insolvent because of (or because of matters including) a person (Mr Walters) doing an act for the purpose of giving effect to the transaction. I accept that at each time Walters did such an act, Cashflow was insolvent. I accept that this establishes each of the WUPs as an insolvent transaction within section 588FC(b)(ii). 564 Cashflow then submits that the appropriate order is that the transactions be avoided and that CODFA pay to Cashflow an amount equal to the amount that Cashflow paid to CODFA under the transaction. CODFA's Defence under Section 588FG(2) 565 I accept as correct Cashflow's submissions that this defence does not apply to any 'transaction' sought to be avoided. I accept that each such transaction is one in which Cashflow's money was paid to CODFA. I accept Cashflow's submission that the defence does not apply because: (i) CODFA did not become a party to the transaction in good faith. The relevant directing mind of CODFA became party to the transaction without knowing it was party to the transaction at all. Hence, I accept that section 588FG(2)(a) is not satisfied. (ii) At the time when CODFA became party to the transaction, a reasonable person in CODFA's circumstances would have had reasonable grounds for suspecting that Cashflow was insolvent at the time or would become insolvent as mentioned in section 588FC(b). A reasonable person in CODFA's situation would realise that the money was a repayment of an unauthorised borrowing which Walters had engaged in to prop Cashflow up. Hence section 588FG(2)(b)(ii) I accept is not satisfied. (iii) Section 588FG(2)(c) I accept is not satisfied for the following reasons: (a) CODFA has not provided valuable consideration under the transaction: (i). CODFA has not provided valuable consideration at all. The notion of 'valuable consideration' is, I accept, the language of contract. Here, there was no contract at all between CODFA and Cashflow relating to the WUPs. (ii). I accept that CODFA has not provided valuable consideration 'under the transaction'. The transaction is the repayment of the unauthorised borrowing. That is not, I accept, the type of transaction 'under' which any consideration is provided at all. (iii). Section 95(2) of the Bankruptcy Act 1924 used to provide that nothing in section 95 (the preference section in that Act) shall affect '. . . the rights of a . . . payee . . . in good faith and for valuable consideration and in the ordinary course of business'. In relation to section 95(2), when a loan was repaid, the past consideration consisting of the making of the loan was sufficient to provide the 'valuable consideration' - Taylor v White (1964) 110 CLR 129 at 139. However, the previous law does not apply here because here there is no contractual loan, and also the new statutory requirement that the consideration be provided under the transaction, I accept, distinguishes the present section from the old section 92. (b) Further, I accept that CODFA has not altered its position in reliance on the transaction. I accept that rather CODFA did not know about the transaction at all. Hence, I accept that section 588FG(2)(c) is not satisfied. (c) As well as relying on the literal words of section 588FG(2), Cashflow sought to rely on the purpose of the provisions. I accept Cashflow's submission that the purpose of the provision is to protect ordinary commercial transactions from being avoided. I accept that the transactions that Cashflow attacks as preferences or uncommercial transactions are shown to have been very far indeed from ordinary commercial transactions. Hence I accept that it was not within the scope of the mischief to protect these types of uncommercial transactions. Discretion of the Court to make no Order? 566 CODFA pleaded that CODFA had not been unjustly enriched by the receipt of any of the WUPs and that accordingly, it would be unconscionable for CODFA to be required to pay any money (either under section 588FF, or at all). 567 I accept Cashflow's submission that the pleading is legally irrelevant. I accept Cashflow's submission that there is no role for general law notions of unconscionability here. The right to set aside the transaction is plainly a statutory one - see section 588FE. The consequences of a transaction being set aside are well established in the law. Under the law which applied before the commencement of Part 5.7B, there was no express conferral of a right of recovery of a preferential payment - the right to recover it arose as a matter of law. [Star v O'Brien (1996) 40 NSWLR 695 at 702 - 703 recounting the argument of counsel at 705B-D] 568 The consequences include that any person who has received money under the transaction which is avoided must repay it. I accept Cashflow's submission that there is no room for the Court to assert that it has a superior sense of justice to that which Parliament has enacted - see Commonwealth of Australia v SCI Operations Pty Ltd (1998) 72 ALRJ 687. 569 Cashflow submitted and I accept that the presence of the word 'may' in section 588FF does not mean that there is a discretion in the Court concerning whether to make an order in the circumstances of the present case. In this regard, I accept the following propositions which were put forward by way of Cashflow in its submissions as correct: (i) Section 588FF more naturally reads as conferring a jurisdiction on the Court, rather than stating that there is a discretion in the Court. (ii) The jurisdiction that is conferred by section 588FF(1) is to make 'one or more of the following orders'. There is, I accept, clearly a choice to be made by the Court as to which of the orders, in the list set out in paragraphs (a) to (j) of section 588FF(1), is appropriate to be made. That does not mean that, once the Court is satisfied that the circumstances exist which make it appropriate for a preference or uncommercial transaction to be set aside, there is then some separate discretion which the Court can exercise on 'palm tree justice' grounds, in deciding whether to actually make the order. (iii) The power conferred by section 588FF is one where: 'The word 'may' is merely used to confer the authority: and the authority must be exercised, if the circumstances are such as to call for its exercise.' [Per Windeyer J Finance Facilities Pty Ltd v Federal Commissioner of Taxation (1971) 127 CLR 106 at 134-135 (with whom Barwick CJ agreed at 128). See also at 138-139 per Owen J.] (iv) The decision in Re Pacific Hardware Brokers (Qld) Pty Ltd (1997) 16 ACLC 442, concerns a different situation to the present. That was a case where company funds were used to purchase an asset (an engagement ring) which was given to an unsuspecting third party. The question was whether the third party should be ordered to pay the value of the asset to the company. It is understandable that there might be a discretion in such a case. In any event, the discretion was there exercised in favour of ordering the payment of the money. 570 If there was a discretion in the Court concerning the making of an order under CODFA, I accept Cashflow's submission that it would need to be exercised in light of the purpose of section 588FF. That purpose is, I accept, to ensure that a creditor did not receive a benefit over and above that received by other creditors - Pegulan Floor Coverings Pty Ltd v Carter (1997) 15 ACLR 1293 at 1301 column 1 per Doyle CJ. Once it is shown that CODFA has received a payment which is indeed an insolvent transaction, I accept that there is no room for operation of any discretion in the court. 571 CODFA's argument is, I accept, really the 'running account' argument but put in another guise. If one looks at the WUPs on a transaction by transaction basis, I accept that each transfer of the money from Cashflow to CODFA has reduced the indebtedness of Cashflow to CODFA and thereby put CODFA into a better position in the liquidation of Cashflow, than it would have been if that payment had not been made. 572 CODFA submits that Cashflow is seeking to use Part 5.7B in an unconscionable and impermissible way. CODFA submits that Cashflow is seeking to 'compound the theft' by ordering repayment of the partial restitution which Walters had made. Cashflow, in opposing this submission, relied upon the following matters: (i) Cashflow submitted that to characterise the WUPs as 'theft' is legally incorrect and an emotional distraction. Cashflow submitted that theft requires an asportation and carrying away of a chattel. Cashflow submits that this did not happen. Cashflow also pointed out that there are other criminal offences connected with employees fraudulently depriving their employers of property. Cashflow submitted that the question of whether theft, or any of those other criminal offences, had been committed, had not been raised for decision in these proceedings. Cashflow further submitted that another element of theft is that there be an intent permanently to deprive the owner of the property in a thing stolen. The pattern of dealings which Walters engaged in on Cashflow's submissions, I accept, looks more like (or at the least is equally consistent with) a series of borrowings and payings back (or attempts to pay back) rather than attempts to permanently deprive CODFA of the moneys. Cashflow further submitted that the Court could not make a finding (particularly in Mr Walters' absence and particularly where he had not been given any notice that the allegation would be made and particularly when the allegation is a serious one) that Mr Walters intended to permanently deprive CODFA of the money. (ii) Cashflow submitted that it is wrong to say that the amount of CODFA's money that Mr Walters had 'stolen' is $180,000. The submission was that the fact is that Mr Walters had caused to be paid away a total of $1,240,641 of the money of CODFA. The submission was that Mr Walters had caused CODFA to receive back $1,060,641. The submission was that if there was any 'theft' by Mr Walters, it was a theft of $1,240,641. Cashflow submitted that CODFA sought to be put into a better situation than other creditors of Cashflow, by not having to bring back into the liquidation the partial repayments that it had received. That, on Cashflow's submissions was exactly what the voidable transaction provisions was designed to prevent. (iii) Cashflow submitted that CODFA had assumed that it would be outrageous for the preference provisions to operate to deprive the victim of a thief of restitution that had been made. On Cashflow's submissions, that assumption is incorrect. Cashflow posits an assumption that A has actually stolen $1million from B and had then been overcome with remorse and sold all his assets and made restitution to B and that within six months of making the restitution, A had gone bankrupt with a deficiency of another $1million. In that situation, Cashflow submitted that the preference provisions would claw back into the bankruptcy, the amount that had been paid to B as restitution, unless B could establish the defence under section 122(2) of the Bankruptcy Act 1966. (iv) Cashflow submitted that in seeking to portray itself as 'a victim of theft', CODFA was ignoring the following facts: (a) That it was CODFA's own officer, Mr Walters, who engineered the payment out of CODFA's money in a way that was unauthorised. (b) That CODFA's own managing director, Mr Wright, signed every one of the cheques by which the payment out of CODFA's money was made. (c) That it was CODFA's own managing director, Mr Wright, who ran CODFA in such a slack way that Mr Walters was able to carry out his plans undetected and unhindered. (d) That it was CODFA's other director, Mr Kull, who limited his involvement to attendance at a monthly meeting. 573 Cashflow points out that any suggestion that was made sub silentio that CODFA was a wronged innocent did not bear scrutiny. Irrelevance of any Set-Off 574 It is well established that if a transaction is a preference, it cannot be the subject of a set-off - Cf McPherson on the Law of Company Liquidation, 3rd Edition, page 385; Keay Avoidance Provisions in Insolvency Law LBC Information Services 1997 page 331. The same rationale must apply to a transaction which is a voidable uncommercial transaction. Interest Payable on Any Preferential Payment which is Set Aside 575 Cashflow submitted that when an order is made under section 588FF requiring the repayment of a preferential payment, interest should also be paid to the liquidator - Pegulan Floor Coverings Pty Ltd v Carter (1997) 15 ACLC 1293 at 1302; Star v O'Brien (1996) 40 NSWLR 695; 1996 15 ACLC 144; 1996 22 ACSR 434. Cashflow's submission was that the appropriate date from which interest was to run was the date of demand by the liquidator - Star v O'Brien (1996) 40 NSWLR 695; special leave to appeal refused 1997 8 Leg Rep SL2b. Cashflow's submission was that that date was the date of the filing of the amended defence and amended cross-claim in proceedings 50177 of 1997 (namely 26 September 1997). The Claim of the Liquidator of Cashflow to Set Aside Transactions alleged to be 'Uncommercial Transactions' Pursuant to Section 588FB Corporations Law 576 I accept Cashflow's submission that it entered uncommercial transactions during the 12 months before 12 September 1996, these being payment of $722,172 to CODFA. 577 Under section 588FC, those transactions are also 'insolvent transactions'. 578 Section 588FB reads as follows: '1. A transaction of a company is an uncommercial transaction of the company if, and only if, it may be expected that a reasonable person in the company's circumstances would not have entered into the transaction, having regard to: (a) the benefits (if any) to the company of entering into the transaction; and (b) the detriment to the company of entering into the transaction; and (c) the respective benefits to other parties to the transaction of entering into it; and (d) any other relevant matter. 2. A transaction may be an uncommercial transaction of a company because of sub-section 1: (a) whether or not a creditor of the company is a party to the transaction; and (b) even if the transaction is given effect to, or is required to be given effect to, because of an order of an Australian Court or a direction by an agency.' 579 Section 588FC provides: 'A transaction of a company is an insolvent transaction of the company if, and only if, it is an unfair preference given by the company, or an uncommercial transaction of the company, and (a) Any of the following happens at a time when the company is insolvent: (i) the transaction is entered into; (ii) an act is done, or an omission is made, for the purpose of giving effect to the transaction; or (b) the company becomes insolvent because of, or because of matters including: (i) entering into the transaction; or (ii) a person doing an act, or making an omission, for the purpose of giving effect to the transaction.' 580 The effect of the liquidator of Cashflow pleading that transactions during the 12 months prior to the Relation Back Day are uncommercial transactions is, I accept, that the transactions which occurred during the six months before the Relation Back Day are attacked as preferences, and also attacked in the alternative as uncommercial transactions. Hence, if either attack succeeds the transaction requires to be set aside. 581 I note that there is no equivalent to section 588FA(2) so far as uncommercial transactions are concerned. Hence, if the WUPs during the last six months in fact amount to a single transaction because of section 588FA(2), they are still transactions which need to be considered singly (and I accept can be set aside singly) if they are uncommercial transactions. 582 I generally accept Cashflow's submissions that each of the WUPs is an uncommercial transaction. I accept that the reasons differ, depending on whether they are transactions which relate to Trans-pac, or to solvent clients of Cashflow. They also differ depending on whether or not one adopts a Clayton's Case approach to the allocation of payments between Cashflow and CODFA. 583 So far as the transactions which relate to Trans-pac is concerned, I accept as correct Cashflow's submission that a reasonable person in Cashflow's circumstances would not have repaid money to CODFA which had been advanced by CODFA to Trans-pac. At the start of the 12 month period (that is to say 12 September 1995) (and accepting for the purposes of the analysis all payments made by CODFA which passed through the Cashflow bank account as ones which are chargeable to Cashflow), Cashflow owed CODFA $80,000. That debt, I accept, had arisen from the 'Warrior' and 'Scentinelle' cheques. [These are cheque 6549 for $30,000 dated 17 August 1995 and cheque 6545 for $50,000 dated 18 August 1995 respectively]. These cheques had been paid into Cashflow's bank account, and amounts of equal magnitude paid out from Cashflow's bank account to Trans-pac No. 1. The account balance rose to $180,000 on 19 September, when the cheques 6651 for $100,000 was paid into the Cashflow bank account, and an equal amount was then paid out to Trans-pac No. 1. 584 I further accept Cashflow's submission that it is preferable not to adopt a Clayton's Case approach to the allocation of payments made from Cashflow to CODFA. To my mind, this is indeed because Clayton's Case applies as a matter of presumed intention to an ordinary running account - Creak v James Moore & Sons Pty Ltd (1912) 15 CLR at 433-434 per Griffith CJ. The evidence suggests that Mr Walters had an intention to appropriate payments of particular sums of money to 'borrowings' of equal amount from CODFA. 585 I further accept as correct Cashflow's submissions that, even if one were to adopt the Clayton's Case method of allocation to the facts here proved, all the payments would be uncommercial. The reasons are as follows: 586 Adopting a Clayton's Case approach to the allocation of payments from Cashflow to CODFA, the payment of $98,556 by Cashflow on 7 September 1995 paid off the whole of the $30,000 provided by CODFA on 17 August 1995, the whole of the $50,000 that CODFA provided on 18 August 1995 and $18,556 of the $98,556 that CODFA had provided on 1 September 1995. The payment of $100,318 on 6 December 1998 repaid the $80,000 still outstanding from 1 September 1995 and in addition, paid $20,318 of the $100,000 that had been provided by CODFA on 19 September 1995. The $16,699 paid by Cashflow on 7 December 1998 also paid off part of the $100,000 from CODFA on 19 September 1995 (reducing the amount owing from that $100,000 to $62,983). That $62,983 was repaid in total by the payment which Cashflow is proven to have made to CODFA on 5 January1996. Each of the payments made on 6 December 1995, 7 December 1995 and 5 January 1996, is an uncommercial transaction in that a reasonable person in the company's circumstances would not, I accept, have paid that money to CODFA. The reasons for this are as follows: (i) The payment was to repay a 'loan' from CODFA to Cashflow, which was unauthorised by CODFA, and unauthorised by Cashflow. (ii) The proceeds of the 'loan' had been applied in a way that was completely outside the scope of Walters' authority to act on behalf of Cashflow (and indeed contrary to his instructions about how to deal with a client). (iii) The 'loan', and the 'repayment' were each kept secret from the Board of Cashflow. (iv) The transaction with Trans-pac had conferred no benefit on Cashflow (or alternatively a benefit worth considerably less than it's face value). 587 I accept as correct Cashflow's submission that the test that section 588FB establishes for an uncommercial payment is not one of whether, on analysis, there is a legal obligation on Cashflow to repay the money that has come from CODFA. Rather, it is whether a reasonable person in the company's circumstances would have entered into the transaction, having regard to the four identified criteria. Legal obligations can, of course, arise from wildly uncommercial transactions. I accept Cashflow's submission that what section 588FB looks to is whether the transaction is out of the ordinary course of commerce. To the extent that there is a legal obligation on Cashflow to repay the money of CODFA that Walters has passed through Cashflow's bank account and again to Trans-pac, CODFA is able to prove in the liquidation. 588 CODFA did submit that the transactions are not uncommercial because a reasonable person would 'repay stolen moneys'. That analysis seems to me flawed in its failure to take into account all of the circumstances. 589 Further, section 588FB(1) does not permit the decision as to whether a reasonable person would have entered the transaction to be made on a completely unfettered basis. I accept Cashflow's submission that rather, the decision is to be made whether a reasonable person in the company's circumstances would have entered the transaction 'having regard to' the matters listed in paragraphs (a) to (d). When a statute says that a decision is to be made 'having regard to' certain matters, that, I accept, usually means that the decision-maker must give weight to the specified matters, as a fundamental element in making the decision. Re Hunt; Ex parte Sean Investments Pty Ltd (1979) 53 ALJR 552 at 554; Pioneer Concrete Services Ltd v Yelnah Pty Ltd (1986) 5 NSWLR 254 at 260; R v Toohey; Ex parte Meneling Station Pty Ltd (1982) 158 CLR 327 at 333; Australian Capital Television Pty Ltd v Minister for Transport and Communications (1989) 86 ALR 119 at 145; Queensland Medical Laboratory v Blewett (1988) 84 ALR 615 at 623. The criteria that are here listed are ordinary commercial ones. 590 Cashflow also submitted that on a Clayton's case analysis, part of two of the three payments was used to repay a debt which arose from sources other than a payment for Trans-pac. Cashflow then submitted that there is no basis in section 588FB to strike down only part of a payment. I accept that submission as one of substance. In the result, the whole of those two payments meet the test for being an uncommercial transaction, even though in part, two of them repaid debt other than the $180,000 that found it's way to Trans-pac. Hence the whole of the three payments ought be set aside. 591 Part of the three payments were used to pay off amounts which went from CODFA to solvent clients of Cashflow. I accept Cashflow's submission that whilst this was not as irregular a transaction as the transactions where Walters caused Trans-pac to receive the money, it remained an uncommercial transaction. The payment was to 'repay' a 'loan' from CODFA to Cashflow, which was unauthorised by CODFA, and unauthorised by Cashflow. The proceeds of the 'loan' had been applied in a way that was completely outside the scope of Walters' authority to act on behalf of Cashflow and was contrary to his instructions about how to deal with a client. Further, the 'loan', and the 'repayment' were each kept secret from the Board of Cashflow. 592 I accept as correct Cashflow's submission that analogous reasoning applies to all the payments which appear in GMG4 during the last 12 months before the Relation Back Day. All the amounts paid by Cashflow to CODFA I accept, ought be set aside as uncommercial transactions. 593 Cashflow further submitted that even if one were not to adopt the Clayton's Case approach to the allocation of payments made to, and from, CODFA and Cashflow, the result would be the same. I accept this submission as one of substance. The inference, I accept, is clear that Mr Walters regarded some of the WUPs as temporary 'borrowings' which were 'repaid'. I accept that the preferable approach is to attribute a 'repayment' of $X to a 'loan' of $X. The effect of this way of allocating the payments from Cashflow to CODFA will be different to what it is on a Clayton's Case approach, but I accept Cashflow's submission that the end result is the same. 594 If one links repayments in this fashion, the 'borrowings' which were not for solvent clients of Cashflow are those marked in colour on the annotated version of GMG4. The 'repayments' of those 'borrowings' occurred (in part) by the payments from the Cashflow account on 10 May 1996, 13 May 1996 and 9 August 1996 (totalling $170,000). Those, I accept, are uncommercial transactions on the basis that a repayment of a 'borrowing' made to fund a Trans-pac payment, is uncommercial. All the other repayments, which can be linked to specific 'borrowings' for solvent clients of Cashflow are also uncommercial for reasons already given. 595 In the result, for the reasons set out above, each of the uncommercial payments occurred whilst the company was insolvent. Each of the four alternatives in section 588FC(a)(i), 588FC(a)(ii), 588FC(b)(i) and 588FC(b)(ii) is, I accept, applicable. Each is therefore an insolvent transaction. 596 Being transactions which are both uncommercial, and insolvent, and entered into during the period of twelve months ending on the Relation Back Day, each of the transactions is voidable. 597 Cashflow also directed submissions to the approach which it was suggested would apply if contrary to Cashflow's primary submissions, the repayments of the 'borrowings' for solvent clients of Cashflow were not treated as uncommercial, and if a non-Clayton's Case method of allocating the payments were to be adopted. That submission was that the payments by Cashflow which were not to repay 'borrowings' for solvent clients were as follows: 10 May 1996 $20,000 13 May 1996 $50,000 9 August 1996 $100,000 598 On that alternative submission, Cashflow contended that it was those transactions totalling $170,000 which should be set aside as uncommercial. It is unnecessary to now deal with that alternative submission as Cashflow's primary submission has been accepted. 599 Cashflow submitted that when a transaction is set aside as uncommercial, it should be ordered to be repaid to the liquidator together with interest from the date of the liquidator's demand, namely 26 September 1997. The disputed $20,000 payment 600 As to the disputed sum of $20,000 paid out of CODFA's bank account on 2 April 1996, the evidence establishes that the payment was made on the account of Cashflow. The disputed sum was brought to account between Cashflow and Trans-pac No 1 in the records of Cashflow. [Exhibit D1Q (second entry)] 601 CODFA at no time had a commercial relationship with either of Trans-pac No 1 or Trans-pac No 2. I accept CODFA's submission that 'whether or not Cashflow's commercial relationship with Trans-pac No 1 was 'irregular', insofar as it involved payments and receipts outside the two companies normal factoring agreement, the fact is that they had a commercial relationship'. Office Services Fee Issues 602 The amounts of the office services fee paid monthly by Cashflow to Codfa are shown in the right-hand column of Annexure 'AO' to Mr Bonvino's affidavit of 27 April 1998. The amounts are as follows: Date Amount 30 June 1995 $18,800 31 July 1995 1,680 31 August 1995 2,830 30 September1995 1,510 31 October1995 2,240 30 November1995 1,640 31 December 1995 2,120 31 January 1996 3,800 28 February 1996 2,670 31 March 1996 2,510 30 April 1996 2,500 31 May 1996 2,040 30 June 1996 2,110 Total 27,650 603 Cashflow puts forward various alternative bases for its claim against CODFA in respect of the office services fee. 604 I note that the calculation of the amount to be paid was performed by Mr Walters on the basis of the fees that he asserted were earned by Cashflow and by CODFA. 605 It will be recalled that the Relation Back Day was 12 September 1996. 606 The total of the office services fees paid in the period from 12 months before the Relation Back Day amounts to $23,140. 607 The first alternative way Cashflow put its case is that payment of fees in the sum of $23,140 is an uncommercial transaction within section 588FB Corporations Law. This is because it is said that the calculation of the amount of the fees was done on the basis of incorrectly treating fees accrued in Cashflow's accounts as falling due from Trans-pac as really earned. It is then put that during the whole of the 12 months before the Relation Back Day, the amount of fees that accrued due in the accounts included some fees which were not earned at all, because they were 'earned' on fictional invoices. It is said that they also included some fees which were said to be factoring fees, at a time when Trans-pac No 1 was not factoring debts (because Mr Walters was making advances in the hope that invoices would become available for factoring and there were fundamental departures from the Factoring Agreement), and so it is put that no fees fell due. It is also put that they also treated the 'fees' as earned from Trans-pac at a time when Trans-pac No 1 was insolvent and the fees would never be actually received. Additionally it is put that they also included (in the period after November 1995) factoring fees which were calculated by reference to invoices which were really the result of Trans-pac No 2 carrying on business, so that no factoring fees could possibly be earned by Cashflow. All these reasons are put forward by Cashflow in support of the proposition that the payment of the office services fee in the amount that it was paid, was an uncommercial transaction. 608 The consequence of accepting Cashflow's first way of putting its case on office services fee, would be that the amount of $23,140 would be set aside as an uncommercial transaction and that CODFA would be obliged to pay to Cashflow the amount of $23,140 plus interest from 26 September 1997. Cashflow accepts that upon the making of that payment, CODFA would be entitled to prove in the liquidation for ($23,140 minus $17,203) equals $5,937 on account of the office services fee. The $17,203 overpayment is referred to below. 609 The second way in which Cashflow puts its claim in an alternative, is to refer to the total of the fees paid from and including 1 December 1995 as being $15,630. That is said to cover a time when there was no factoring at all (not even purported factoring) being carried out with Trans-pac No 1. Cashflow says that there is no basis whatever on which it was entitled to receive a fee from Trans-pac No 2. Thus Cashflow submits that the payment of the fees of $15,630 is an uncommercial transaction. 610 If the second argument of Cashflow is successful, Cashflow submits that the amount of $15,630 would be set aside as an uncommercial transaction and that CODFA would be obliged to pay to the liquidator $15,630 plus interest from 26 September 1997. The submission is that upon making of that payment CODFA will not be entitled to prove in the liquidation on account of the office services fee and Cashflow will be entitled to set-off the amount of ($17,203 minus $15,630) equals $1,573 against any amount for which CODFA is entitled to prove arising from the WUPs. 611 The third alternative way of putting it's case by Cashflow is to submit that whether or not there is an uncommercial transaction concerning the office services fee, the fact is that there has been a simple overpayment by Cashflow, relating to the period to the end of June 1996. What is here sought by Cashflow is to enable recovery of the overpayment of office services fees to include all fees which had been overpaid. Cashflow submits that the office services fee properly payable (by reference to the actual fees received of CODFA and Cashflow) in the 1995 and 1996 financial years was less than the amount of fees actually paid by Cashflow and that it is entitled to receive credit for the difference. Cashflow submits that the quantum of that difference is $17,203 and in this regard relies upon Mr Bonvino's evidence given on his affidavit of 11 March 1999 paragraphs 5 and 6 to be referred to below. Cashflow submits that to the extent to which that excess of $17,203 is an insolvent transaction, it is to be set aside; that to the extent to which it is not an insolvent transaction but was nonetheless paid, it is to be set off against any liability that Cashflow has to CODFA (so reducing CODFA's right to prove in Cashflow's liquidation), or added to the amount that CODFA must pay to Cashflow. 612 In short, Cashflow submits that it's third alternative argument which is put on the basis that it completely fails in setting aside any of the office services fee as uncommercial transactions, will result in Cashflow still being entitled to set-off the amount of $17,203 against any amount for which CODFA is entitled to prove arising from the WUPs. 613 Cashflow's submission is essentially that the payments of the office services fee should be set aside. It's submission is that CODFA should repay the amount of the fees received with interest from the date of the liquidator's demand or alternatively the date of the filing of the amended defence and amended cross-claim in proceedings 50177 of 1997, namely 26 September 1997. Cashflow submits that CODFA will have a right to be admitted as a creditor in the liquidation for the amount that is owing for office services fees, based on a correct calculation of the amount due. 614 In Mr Bonvino's affidavit of 11 March 1999, he deposed in paragraphs 5 and 6 as follows: 'Cashflow has claimed from COD Factors Australia Pty Limited ("CODFA") in the proceedings the sum of $17,203.00, as an overpayment of the office services fee. Cashflow shared the office expenses of CODFA, by making a contribution to those expenses, pro rata to the fees received by it when compared to the fees received by CODFA. The office services fee overpayment has been calculated by me by not taking into account the "fees" received by Cashflow from Trans-Pac, on the basis that such fees are mere accruals, and will not be recovered. For example, in 1995, I have calculated that the actual fees received by Cashflow, leaving aside accrued fees in the Trans-Pac loan account, was $205,092.00. the actual fees received by CODFA was $825,441.00. Accordingly, total fees received by both Cashflow and CODFA amounted to $1,030,533.00. the actual contribution that Cashflow paid to CODFA in respect of the office expenses for 1995 was $18,800.00. This contribution was calculated on the basis that Cashflow had received fees from Trans-Pac. However, if Cashflow's contribution is calculated on the basis of actual fees received of $205,092.00, as a percentage of the total fees of $1,035,533.00, the amount that Cashflow should have paid was $10,577.00. Accordingly, the overpayment amounts to $8,222.00. I have made a similar calculation of the overpayment of the office services fee for 1996. Annexed and marked "D" is a true copy of a document entitled "Expense Transfer from COD Aust to Cashflow",prepared by CODFA. The hand written numbers and words on the document have been made by me. The statements I made in the immediately preceding paragraph in relation to 1995 are repeated in summary form on the document. Similarly, in relation to 1996, I calculated the actual fees received by Cashflow after reversal of the Trans-Pac fees. I have written in a separate column in the schedule entitled "Cashflow actual fees received", and those actual fees amount to $395,514.00. As a percentage of the total actual fees of both Cashflow and CODFA, the amount that should have been paid by Cashflow as a contribution to CODFA's office expenses was $20,686.00 in respect of the 1996 period. In fact, Cashflow paid $29,667.00, resulting in an overpayment of $8,981.00. The total overpayments for the 1995 year and the 1996 year, being $8,222.00 and $8,981.00 respectively, amount to $17,203.00.' 615 Mr Bonvino, as Cashflow points out, was not cross-examined on this evidence. 616 CODFA in turn, disputes the claim for relief made by Mr Star to the alleged overpayment of office services fees by Cashflow to CODFA during the financial years ended June 1995 and June 1996. 617 CODFA claims that the evidence does not support Cashflow's claim that the agreement between CODFA and Cashflow for sharing of office expenses was based on fees recovered and that this allowed for the reversing of fees at a time following the payment by Cashflow of each month's contribution fee for office expenses such as a later point in time permitting a claim for any alleged overpayment of contribution fees. CODFA submits that the evidence shows that the contribution fee payable by Cashflow for office expenses was based on the amount for total fees showed in the monthly profit and loss statements of CODFA and Cashflow and thus was based on fees accrued. In this regard, CODFA relies upon the statement of Mr Kull dated 2 September 1998 at paragraph 21. 618 In Mr Kull's statement of 2 September 1998, he gave evidence which I accept, that in about July 1994 in his discussions with Mr Wright in relation to the sharing of office expenses between Cashflow and CODFA, words to the following effect were said: 'Mr Kull: We need to work out a method for Cashflow to pay for office expenses such as rent and electricity and other expenses such as advertising, computer costs, staff costs and your car and telephone expenses. Mr Wright: Office expenses can be apportioned based on fees received by CODFA and Cashflow during the previous months. Whomever receives more fees pays more expenses. Mr Kull: I agree.' 619 Mr Kull's evidence in paragraphs 20 and 21 was that, to the best of his knowledge, from about December 1994 to May 1996, Cashflow paid to CODFA a contribution fee for rent, advertising, cleaning, light/electricity, printing and stationery, telephone and motor vehicle expenses. In this regard he referred to the monthly profit and loss statements of CODFA and Cashflow for the period December 1994 to May 1996. He also gave evidence that his understanding was that the figure for the total fees of both CODFA and Cashflow used in the monthly expense transfer invoices were those shown in the profit and loss statements produced monthly for each company. 620 In my judgment, the agreement between Cashflow and CODFA was as Cashflow asserts, based on fees recovered so that that agreement did allow for the reversing of fees at a time following the payment by Cashflow of each month's contribution fee at a later point in time, permitting a claim for any alleged overpayment of contribution fees. A mechanism had to be put in place for monthly payments and this then followed the monthly profit and loss statements. This is not to say that the agreement reached is to be taken to exclude a later verification of the actual fees recovered. 621 This means as CODFA submits, that Cashflow's entitlement to the sums claimed depends upon a finding being made that it did not recover any fees from either Trans-pac No1 or Trans-pac No 2 and that all fees shown to be earned by Cashflow and Trans-pac No 1 in their monthly profit and loss statements should be reversed for the purpose of determining the correct contribution fee payable by Cashflow to CODFA for office services. 622 To my mind there is substance in Cashflow's submission that Mr Bonvino, not having been cross-examined on paragraphs 5 and 6 of his affidavit of 11 March 1999, the Court should accept as proved Cashflow's assertion that the amount in respect of which the office services fee properly payable by reference to the actual fees received of CODFA and Cashflow in the 1995 financial year and in the 1996 financial year, was less than the amount of fees actually paid by Cashflow is $17,203. 623 I remain unclear as to how the parties may seek to put that my acceptance of paragraphs 5 and 6 of Mr Bonvino's affidavit of 11 March 1999 may affect Cashflow's arguments put in alternatives 1 and 2 of it's written submissions. It seems to me that it is appropriate to give the parties an opportunity to address further submissions on this matter before finally dealing with so much of the office services fee issues as involve Cashflow's claims. CODFA's Claim for Relief against Mr Star for Recovery of Office Expenses 624 CODFA makes a claim for relief against Mr Star for recovery of office expenses in the sum of $6,050 said to be owed for the use by Cashflow of CODFA's office premises during the period 12 September 1996 to 28 February 1997. 625 At transcript page 22, on 18 March 1999 Mr Campbell QC accepted as I understand the position, that CODFA is an unsecured creditor for $6,050 in relation to the office occupancy fee and that this amount is an expense of the liquidation. Earlier, on 16 March 1999 at transcript page 109, Mr Campbell had responded as follows to the following submission by Mr Lindsay: 'His Honour: The office expenses item, as I recall it, unless it is a different framework, is something like possibly 17 or possibly $23,000, is that correct? Lindsay: That is the claim that is made a claim of that order. His Honour: Yes. Lindsay: By Cashflow, based not only but largely upon the Corporations Law uncommercial transaction provisions. Mr Star, when he became liquidator, agreed with CODFA that he would pay, for memory it is something like $250 a week or something like that, towards office expenses. That sum has not been paid. We don't understand the agreement to be in dispute for the non-payment but as we understand Mr Star's position, he just says: "Well, I made that agreement but any amount that I have to pay should be set-off against what you should pay me. His Honour: Yes. Campbell: I might say this is something I overlooked. So far as that is concerned, we agree with the quantification of the office expense that is contained in my learned friend's pleading. We accept that that amount is an amount which is provable in liquidation as an expense of liquidation and therefore has a first priority of payment.' 626 There is thus a concession as I understand on the issue. I accept that there was an agreement between CODFA and Mr Star that in consideration of Cashflow being permitted to use the premises and office services of CODFA, Mr Star would pay $250 per week to CODFA from the date of his appointment as provisional liquidator until Cashflow ceased to occupy the office premises. [See statement of Mr Kull, 2 September 1998 paragraphs 33 and 34, letter from Mr Star to CODFA dated 16 December 1998 and letter from Star Dean Wilcocks to CODFA dated 11 February 1997.] 627 I accept that Cashflow occupied the office premises of CODFA during the period from Mr Star's appointment as provisional liquidator on 12 September 1996 to March 1997 - see statement of Mr Kull dated 2 September 1998 at paragraphs 28, 30, 31 and 39. 628 In the result, Mr Star owed CODFA $6,050 as office rent for the period 12 September 1996 to 28 February 1997. 629 To my mind, the agreement pursuant to which the office services fee was to be paid is not an 'uncommercial transaction' within the meaning of section 588FB of the Corporations Law. It was perfectly appropriate for the two companies to reach the agreement which they did at the time when it was entered into for the sharing of office expenses. A reasonable person in the circumstances of Cashflow would have, it seems to me, entered into the transaction being the office services agreement having regard to the benefits to Cashflow of entering into the transaction, the detriment to Cashflow of entering into the transaction, the respective benefits to both Cashflow and CODFA being parties to that transaction on entering into it. I do not see that any other relevant matter proven affects this conclusion. 630 The fact that calculation of the amount of the office services fees took place on the basis of an incorrect treatment of fees accrued in Cashflow's accounts as falling due from Trans-pac as really earned, is simply a matter which postdated the entry into of the agreement and requires an adjustment in respect of overpayment. Further Submissions and Short Minutes 631 The four sets of proceedings raised a large number of complex issues. The proceedings will be relisted for further submissions in relation to: (a) any specific claims which any party contends has not yet been dealt with; (b) matters in respect of which leave has been expressly reserved in the Judgment for the addressing of further submissions; (c) any area of overlap or incorrect addition or detail to be found in schedules and the like in relation to calculations which, bearing in mind the matters adjudicated upon as a matter of principle, either party seeks to submit ought be taken into account and/or corrected. Appendices are available from the Supreme Court Registry.

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