Section 440B of the Corporations Law
6 The Appellants contended that the Cl 21 created a charge - which Counsel for the Appellants characterised as a floating charge - within the meaning of s440B of the Corporations Law 1991, which provides:
"440B During the administration of a company, a person cannot enforce a charge on property of the company, except:
(a) With the administrator's written consent; or
(b) With the leave of the Court."
7 The money standing to the credit of the current account represented a debt owed by the bank to its customer. The first issue that arose on this appeal was: Is it possible in law to create a charge over a debt, when the chargee owes the debt to the chargor? The second issue raised on the appeal was: If the answer to the first question is "Yes", did Cl 21 created a "charge" within the meaning of s440B of the Corporations Law?
8 There is now a substantial literature on what is frequently described as the "conceptual impossibility" of a person having a charge over his own debt.
9 The issue was first considered in this Court by Lee J in Broad v Commissioner of Stamp Duties [1980] 2 NSWLR 40 where his Honour held at 46:
"… there can be no mortgage or charge in favour of oneself of one's own indebtedness to another."
10 His Honour referred to the particular clause in the agreement between customer and bank in that case and said at 48:
"Such a contractual right to set off, even if considered to be a 'security' in the wide sense of that word, cannot be regarded as a mortgage or charge."
11 His Honour applied the reasoning of Buckley LJ in Halesowen Presswork & Assemblies Limited v Westminster Bank Limited [1971] 1 QB 1 at 46 as approved on appeal in National Westminster Bank Limited v Halesowen Presswork & Assemblies Limited [1972] AC 785 esp by Lord Cross of Chelsea at 801.
12 The reasoning of Lee J in Broad was applied by Yeldham J in Estate Planning Associates (Australia) Pty Limited v Commissioner of Stamp Duties (NSW) (1985) 2 NSWLR 495 at 498-500.
13 Millett J (as his Lordship then was) discussed the issue in In Re Charge Card Services Limited [1987] Ch 150. In that case a credit card company paid persons who provided services to the holders of credit cards issued by the company, in advance of receiving payment from those holders and negotiated its receivables to a factor. The factor, Commercial Credits, had a contractual right of retention against the risk of bad debts.
14 Millett J said at 175:
"If the right of retention constitutes a charge, there is no doubt that it is a charge on book debts and is a charge created by the company. But is it a charge at all? The sum due from Commercial Credit to the company under the agreement is, of course, a book debt of the company which the company can charge to a third party. In my judgment, however, it cannot be charged in favour of Commercial Credit itself, for the simple reason that a charge in favour of a debtor of his own indebtedness to the chargor is conceptually impossible."
15 His Honour added at 176:
"Thus the essence of an equitable charge is that, without any conveyance or assignment to the chargee, specific property of the chargor is expressly or constructively appropriated to or made answerable for payment of a debt, and the chargee is given the right to resort to the property for the purpose of having it realised and applied in or towards payment of the debt. The availability of equitable remedies has the effect of giving the chargee a proprietary interest by way of security in the property charged.
It is true, therefore, that no conveyance or assignment is involved in the creation of an equitable charge, but in my judgment the benefit of a debt can no more be appropriated or made available to the debtor than it can be conveyed or assigned to him. The objection to a charge in these circumstances is not to the process by which it is created, but to the result. A debt is a chose in action; it is the right to sue the debtor. This can be assigned or made available to a third party, but not to the debtor, who cannot sue himself. Once any assignment or appropriation to the debtor becomes unconditional, the debt is wholly or partially released. The debtor cannot, and does not need to, resort to the creditor's claim against him in order to obtain the benefit of the security; his own liability to the creditor is automatically discharged or reduced."
16 Millett J concluded at 177:
"It does not, of course, follow that an attempt to create an express mortgage or charge of a debt in favour of the debtor would be ineffective to create a security. Equity looks to the substance, not to the form; and while in my judgment this would not create a mortgage or charge, would no doubt give a right of set off which would be effective against the creditor's liquidator or trustee in bankruptcy, provided that did not purport to go beyond what is permitted by section 31 of the Bankruptcy Act 1914."
17 The general proposition advanced in Broad and in In re Charge Card Services - that a debt cannot be made the subject of a charge in favour of the debtor - was approved by the Full Court of South Australia in Esanda Finance Corporation Limited v Jackson (1992) 59 SASR 416 at 418; and by Lee J in the Federal Court of Australia in Griffiths v Commonwealth Bank of Australia (1994) 123 ALR at 120. It has also been applied at first instance in this Court. (See Wily v Rothschild Australia Ltd (1999) 47 NSWLR 555 at [28]-[29]).
18 There are a number of judicial statements which appear to contradict this line of authority. (See the collections in Wood English and International Set-Off. London, 1989 at 5-161 to 5-175; Derham Set-Off (2nd ed) Oxford, 1996 at 554-558).
19 The matter must now be revisited in the light of the House of Lords decision in In Re Bank of Credit & Commerce International S.A. (No 8) [1998] AC 214. In that case Lord Hoffman, with whom all other members of the House of Lords agreed, rejected the "doctrine of conceptual impossibility", propounded by Millett J in Re Charge Card Services.
20 His Lordship indicated at 226 that the passages in Halesowen relied upon by Millett J were concerned with a lien, being a right to obtain possession. They were not directed to the question of "whether the bank would have any kind of proprietary interest".
21 His Lordship referred to the reasoning of the Court of Appeal in BCCI (reported at [1996] Ch 245 at 258) that: "A man cannot have a proprietary interest in a debt or other obligation which he owes another." His Lordship added at 226-227:
"In order to test this proposition, I think one needs to identify the normal characteristics of an equitable charge and then ask to what extent they would be inconsistent with a situation in which the property charged consisted of a debt owed by the beneficiary of the charge. … An equitable charge is a species of charge, which is a proprietary interest granted by way of security. Proprietary interests confer rights in rem which, subject to questions of registration and the equitable doctrine of purchaser for value without notice, will be binding upon third parties and unaffected by the insolvency of the owner of the property charged. A proprietary interest provided by way of security entitles the holder to resort to the property only for the purpose of satisfying some liability due to him (whether from the person providing the security or a third party) and, whatever the form of the transaction, the owner of the property retains an equity of redemption to have the property restored to him when the liability has been discharged. The method by which the holder of the security will resort to the property will ordinarily involve its sale or, more rarely, the extinction of the equity of redemption by foreclosure. A charge is a security interest created without any transfer of title or possession to the beneficiary. An equitable charge can be created by an informal transaction for value (legal charges may require a deed or registration or both) and over any kind of property (equitable as well as legal) but is subject to the doctrine of purchaser for value without notice applicable to all equitable interests.
The depositor's right to claim payment of his deposit is a chose in action which the law has always recognised as property. There is no dispute that a charge over such a chose in action can validly be granted to a third party. In which respects would the fact that the beneficiary of the charge was the debtor himself be inconsistent with a transaction having some or all of the various features which I have enumerated? The method by which the property would be realised would differ slightly: instead of the beneficiary of the charge having to claim payment from the debtor, the realisation would take the form of a book entry. In no other respect, as it seems to me, would the transaction have any consequences different from those which would attach to a charge given to a third party. It would be a proprietary interest in the sense that, subject to questions of registration and purchaser for a value without notice, it would be binding upon assignees and a liquidator or trustee in bankruptcy. The depositor would retain an equity of redemption and all the rights which that implies. There would be no merger of interests because the depositor would retain title to the deposit subject only to the bank's charge. The creation of the charge would be consensual and not require any formal assignment or vesting of title in the bank. If all these features can exist despite the fact that the beneficiary of the charge is the debtor, I cannot see why it cannot properly be said the debtor has a proprietary interest by way of charge over the debt."
22 His Lordship concluded at 228:
"In a case in which there is no threat to the consistency of the law or objection of public policy, I think that the court should be very slow to declare a practice of the commercial community to be conceptually impossible. Rules of law must obviously be consistent and not self-contradictory … But the law is fashioned to suit the practicalities of life and legal concepts like 'proprietary interest' and 'charge' are no more than labels given to clusters of related and self-consistent rules of law. Such concepts do not have a life of their own from which the rules are inexorably derived."
23 In In Re Charge Services itself, as quoted above, Millett J at 177 said that an attempt to create an express mortgage or charge in favour of debtor will be effective by way of what his Honour called "a security". It would not however, his Honour reasoned, create something which could accurately be described as a "mortgage or charge". His Honour came to that conclusion by application of the maxim "equity looks to the substance, not to the form".
24 The maxim "equity looks to the intent, rather than to the form" has frequently been applied to create what, at common law, would be regarded as a "conceptual impossibility". (See Meagher, Gummow and Lehane Equity Doctrines and Remedies (3rd ed) pars [331]-[338]). In my opinion, the application of that maxim may well lead, in an appropriate case, to a conclusion that a particular arrangement has a sufficient attachment to assets by way of security, to answer the description of a "charge".
25 A particular example of the application of the maxim of equity, reasonably analogous to the issue presently under consideration, is the approach of equity to the merger of charges in estates. At common law a person entitled to an estate in fee simple who acquired a charge over that land could not hold both interests. There was a conclusive presumption of a merger, irrespective of the parties intentions. Holding both the fee simple and a charge was regarded as, to use the terminology that has found favour in the present area of discourse, a "conceptual impossibility".
26 The position in equity was different. There was not necessarily a merger. An intention to the contrary, whether express or implied, would be given effect in equity. (See generally Meagher, Gummow and Lehane supra pars [4004]-[4009].
27 Cozens-Hardy LJ said in Capital and Counties Bank Limited v Rhodes [1903] 1 Ch 631 at 652:
"The rule of the former [the Courts of Law] was rigid, that whenever a term of years in a freehold estate, whether for life or in fee, immediately expectant upon the term, vested in the same person in his own right, the term was merged in the freehold, whatever may have been the intention of the parties to the transaction which resulted in the union. The Courts of Equity, on the other hand, in many cases treated the interest which merged at law as being still subsisting in equity. They had regard to the intention of the parties, and, in the absence of any direct evidence of intention, they presumed that merger was not intended, if it was to the interest of the party, or only consistent with the duty of the party, that merger should not take place."
See also Lewis v Keene (1936) 36 SR (NSW) 493 at 499-500; Cooper v Federal Commissioner of Taxation (1954-1957) 97 CLR 397 at 407-408 per Kitto J.
28 Similar issues arise when a debtor is appointed as executor of his creditor. At common law the position was often that the liability of the debtor was extinguished. Equity, however, treated the debt as an asset in the hands of the executor.
29 Romer LJ said in In Re Bourne [1906] 1 Ch 697 at 708:
"He was indebted to the testator in his lifetime, and by the will he was appointed executor, and he proved the will. The effect of that was that at law the debt was extinguished because there was no one to sue or be sued, but in equity he as debtor is held to have paid himself as executor, and therefore as executor to have in his possession the full amount of the debt as having been paid to him as executor."