The principle of hotchpot
87 Hotchpot is an expression of equity's concern for equality. "Equality is equity" as a maxim of equity lay at the foundation of doctrine concerning rights of all who are connected by any common bond of interest or of obligation. This reflected the notions of equality and impartiality lying at the foundation of the jurisprudence of Chancery, in contradistinction to the common law's protection of the rights of the person as a distinct and separate individual: Pomeroy J N, A Treatise on Equity Jurisprudence (5th ed, S W Symons (ed), The Law Book Exchange Ltd, 1941) Vol 2 p 144 at s405. The maxim is the source of a number of doctrines: pro rata distribution, contribution, ownership in common in preference to joint tenancy and survivorship, settlement of insolvent estates, and marshalling: Pomeroy (1941) pp 145-159 at s406-s412.
88 The principle of hotchpot reflected in the Statute of Distribution 1670 (22 & 23 Car 1 c 10) requiring settlements and advances to children in the lifetime of the intestate to be taken into account in their share of intestacy was, as Lord Chief Justice Raymond said in Edwards v Freeman (1727) 2 P Wms 435; 24 ER 803 at 806, cited by Barrett J in Idylic at 76 ACSR 138 [54], grounded on the "most just rule of equity, equality." (Emphasis in the original report.)
89 The examples of the expression of the maxim take their form according to the nature of the common bond of interest or obligation concerned and what is necessary to vindicate equality and avoid unconscionability in respect of the common bond: Pomeroy (1941) p 144 at s405; Idylic at 76 ACSR 139 [60]; and Letten (No 20) at 92 ACSR 651 [73].
90 The sharing equally of burden by co-sureties requiring one co-surety to share pro-tanto the benefit of any security from the principal debtor is an example stemming from the common bond of obligation: see Steel v Dixon (1881) 17 Ch D 825 approving the Vermont and North Carolina cases of Miller v Sawyer 30 Vt 412 (1858) and Hall v Robinson 8 Ired 56 (1847), respectively, referred to by Barrett J in Idylic at 76 ACSR 138 [56]-[57]. The expression of the matter in both these cases explains the requirement to bring into hotchpot because of the commonality of burden and the common ground of interest and right: Miller v Sawyer (cited by Barrett J in Idylic at 76 ACSR 138 [56]):
[P]ersons subject to a common burden stand in their relation to each other upon a common ground of interest and of right, and whatever relief, by way of indemnity, is furnished to either by him for whom the burden is assumed, enures equally to the relief of all the common associates.
See also Hall v Robinson (cited by Barrett J in Idylic at 76 ACSR 138 [57]):
The relief between co-sureties in equity proceeds upon the maxim that equality is equity, and that maxim is but a principle of the simplest natural justice. It is a plain corollary from it that, when two or more embark in the common risk of being sureties for another, and one of them subsequently obtains from the principal an indemnity or counter-security to any extent, it enures to the benefit of all. The risk and the relief ought to be co-extensive.
91 In a circumstance of co-sureties, the requirement to share the benefit of security from the debtor that is not held by all, arises from the common burden all have undertaken.
92 Idylic concerned the application or not of hotchpot to a mixed fund brought about by the management of two unregistered managed investment schemes where investors, who had been promised lucrative returns, had contributed to a pool of funds. From time to time some investors received "returns" from the fund. The questions for decision included the characterisation of the mixed fund and whether or not investors who had received returns should bring such into hotchpot in the sharing of what remained. The authorities to which Barrett J referred in Idylic and to which Campbell J had referred in Re French Caledonia Travel Service Pty Ltd (in liq) [2003] NSWSC 1008; 59 NSWLR 361 in dealing with mixed funds, and whether or not payments out should be required to be brought to account, recognised that the proper approach depended on the circumstances, the practical difficulties involved and what will be an equitable distribution as the best answer that the circumstances of the case allow: See the discussion by Barrett J in Idylic at 76 ACSR 140 [64]-[67] of In re Printers and Transferrers Amalgamated Trades Protection Society [1899] 2 Ch 184, In re Hobourn Aero Components Limited's Air Raid Distress Fund, Ryan v Forrest [1946] Ch 86, In re Lead Company's Workmen's Fund Society [1904] 2 Ch 196, Pearce v Piper (1809) 17 Ves 1; 34 ER 1 and Re French Caledonia Travel 59 NSWLR 361.
93 As Cohen J said in In re Hobourn Aero [1946] Ch at 97-98, quoted by Barrett J in Idylic at 76 ACSR 140 [66]:
… the general principle [is] that a person seeking to participate in the distribution of a fund must bring into hotchpot anything he has already received therefrom.
(Emphasis added.)
94 What is, however, "the fund" that gave content to the word used by Cohen J: "therefrom"? In the cases of mixed funds, it can be seen as the one pool of money augmented and depleted over time to which all have contributed, and some participated by withdrawal. This was how Barrett J conceived of the one fund in Idylic. His Honour rejected the argument put by the contradictor that the fund should not be seen as one fund, but as a series of funds, reconstituted from time to time as money was returned, such that once funds were returned, later contributors had no interest in the (previously) returned funds. This characterisation of multiple and successively reconstituted funds was rejected (at 76 ACSR 142 [74]) as failing "to afford necessary weight to the nature of a common or collective investment pool". The contributions were mixed and lacked any identity to the respective contributors, whose rights became "proportionate rights in relation to the fund as it exist[ed] from time to time".
95 The answer in Idylic was reached by the appropriate characterisation of the nature of the fund: not as a succession of separate estates, but as a common single pool. The personal equities among the contributors were described by Barrett J at 76 ACSR 142 [77]:
Applying the rationale in the Re French Caledonia case, personal equities can be seen to exist between the recipients of "returns" and other contributors to a particular scheme causing those recipients to merit a lower priority as to participation in the fund, which relegation will, however, be eliminated if the "returns" are brought into hotchpot. In order to "carry out the strict rights to the fullest extent", to quote the words of Byrne J in Re Printers (above), there must be an account of the "returns" in order to ascertain the whole of each remaining fund to which the principle of division in proportion to contributions is to be applied. The recipients of the "returns" must, as against the other persons interested in the pooled fund as a whole, do equity by giving up the advantage of the "returns" before participating rateably in what remains of the fund.
96 This process of characterisation (discussed by Dixon and Evatt JJ in Attorney General for New South Wales v Perpetual Trustee Company (Limited) [1940] HCA 12; 63 CLR 209 at 226-227) has regard to all relevant attendant circumstances, to the relevant informing considerations of equity, and to the proper attention to the reason one is asking the question that calls forth the need for the characterisation. In that process, danger lies in the "delusive search" for definitional certainty by reference to fixed, universal and exhaustive criteria: Heydon JD, Leeming MJ and Turner PG, Meagher, Gummow and Lehane's Equity: Doctrines and Remedies (5th ed, LexisNexis Butterworths, 2015) Ch 4, esp pp 106-107 at [4-005] and [4-010]; and Livingstone v Commissioner of Stamp Duties (Qld) [1960] HCA 94; 107 CLR 411 at 448-449 (Kitto J). As Holmes J said in Truax v Corrigan 257 US 312 (1921) at 342, cited by Gummow J in JT International SA v Commonwealth [2012] HCA 43; 250 CLR 1 at 35 [47]:
Delusive exactness is a source of fallacy throughout the law. By calling a business "property" you make it seem like land, and lead up to the conclusion that a statute cannot substantially cut down the advantages of ownership existing before the statute was passed. An established business no doubt may have pecuniary value and commonly is protected by law against various unjustified injuries. But you cannot give it definiteness of contour by calling it a thing.
The approach and technique of equity in its administration was described by Kearney J in Burns Philp Trustee Co Ltd v Viney [1981] 2 NSWLR 216 at 223-224:
… The administration of equity has always paid regard to the infinite variety of interests and has refrained from formulating or adhering to fixed universal and exhaustive criteria with which to deal with such varying situations. The approach traditionally adopted by equity has been to retain flexibility so as to accommodate the multitudinous instances in which fundamental equitable rules fall to be applied.
97 In Idylic, the bringing of the "returns" into hotchpot saw those funds returned to the fund by an account of them as taken from the fund, as would make the distribution of the remaining fund equal according to proportion. Once the movement of funds: the flow and ebb, the in and out of accounts was characterised as the movement in and out of one fund, the commonality of the fund could be seen as present.
98 The principle has been applied to the working out of entitlements in insolvency. The circumstances of transnational or multi-jurisdictional insolvencies is not new. How one deals with the assets of the insolvent entity fairly amongst equal creditors with different local rights for some reason is not a new problem. Three English authorities concerned with the problem were reviewed in Cleaver: Selkrig v Davis 2 Rose 291; Ex parte Wilson, In re Douglas (1871-72) 7 Ch App 490; and Banco de Portugal v Waddell (1879-80) 5 App Cas 161.
99 The consideration in Cleaver of the matter in these cases was directed to the question of timing as to when the creditor or creditors had acquired the insolvent's property in the other jurisdiction. If the assets had been acquired before the commencement of the insolvency, they would not form part of the common fund of the insolvent estate in which all creditors were entitled to share equally, that is, proportionately. It is unnecessary for present purposes to examine this question of precise timing as a satisfactory basis for a rule or criterion of the application of the principle.
100 The circumstances of the three cases were similar: In Selkrig, there was a sequestration of Scottish property by Scottish creditors and the requirement to bring such to account by those creditors who sought to prove in the English bankruptcy against the English assets. Ex parte Wilson concerned Brazilian assets administered under Brazilian law giving Brazilian creditors priority; such creditors were not entitled to a dividend from the English liquidation until all creditors had received a dividend equal to that received by them. Banco de Portugal concerned Portuguese assets which had been made available to Portuguese creditors by order of a Portuguese Court. In Cleaver [2001] 2 AC at 340 [26], Lord Scott said:
The three cases to which reference has been made demonstrate that the hotchpot requirement applies only to assets that, under English law, are regarded as forming part of the estate in liquidation.
All creditors were entitled to share in all the insolvent property; only some had taken some property; they must bring in or account for the benefit thus received if they wished to participate in the balance.
101 The appellant placed significant reliance upon Cleaver, which concerned the participation of a reinsurer creditor (Delta American Reinsurance Co) in the liquidation of its retrocessionaire (Transnational Insurance Co Ltd). Delta was incorporated in Kentucky and licensed to carry on reinsurance business in New York and Kentucky. Transnational was an insurance company incorporated and licensed under the laws of the Cayman Islands. It carried on business as a retrocessionaire: that is, as a reinsurer of reinsurers. Pursuant to agreement Transnational was Delta's retrocessionaire. Delta went into liquidation. It began proceedings against Transnational and other retrocessionaires in the United States District Court in New York. As a foreign company, Transnational was required by New York law, as a condition of defending the proceeding, to deposit in court, or provide security for, the full sum of the claim against it. The security was provided by a bank letter of credit, which was secured by the bank by a charge against deposits belonging to Transnational kept with the bank. As Delta's paid losses increased, the security required to be provided by the letter of credit increased, as did the required deposits for the charge to secure the bank. Eventually, Transnational was unable to increase further the deposits securing the letter of credit and it went into creditors' voluntary liquidation, under the supervision of the Grand Court of the Cayman Islands. Delta then sought and obtained default judgment; Delta claimed on the letter of credit; the bank paid; and the bank exercised its charge and deducted the relevant sum from Transnational's deposit account.
102 Delta submitted a proof of the balance of the debt owed to it by Transnational in the Cayman Islands liquidation of Transnational. The question was: Did Delta have to bring into hotchpot or account for the sums it received from the bank letter of credit, before participating in the Cayman Islands liquidation for the balance of the debt? The insolvency judge said, yes; the Court of Appeal of the Cayman Islands said, no; and the Privy Council agreed with the Court of Appeal. Lord Scott described hotchpot as a "rule": [2001] 2 AC at 341 [32]. Whether or not such elevates the principle as an expression of the maxim into possibly overly rigid categorisation need not detain us. It is sufficient to say that for the Privy Council the rule required the taking by one creditor of funds from a common fund after the commencement of insolvency. Delta had not taken from a common fund available to all creditors. It had called upon a letter of credit from a third party that was secured for that third party over deposits of the debtor. The letter of credit and the secured funds were not part of the common funds available to all creditors. Further, that arrangement pre-dated the commencement of the winding up of Transnational: see [2001] 2 AC at 341-342 [30]-[35]. The rule did not extend to "cater for all cases of 'unfair advantage'": at 342 [35]. There was, in any event, no unfairness. The arrangement, effectively a payment into court, transformed Delta into a species of secured creditor: WA Sherratt Ltd v John Bromley (Church Stretton) Ltd [1985] QB 1038; In re Gordon, Ex parte Navalchand [1897] 2 QB 516; and In re Ford, Ex parte The Trustee [1900] 2 QB 211.
103 The principle of hotchpot can, however, apply where one can see two funds: one of which is reserved to one group of creditors. Insurance or companies legislation protecting local creditors are familiar examples.
104 In Re Standard Insurance Company Limited [1968] Qld R 118, a New Zealand incorporated company was ordered to be wound up in New Zealand. Similar, but ancillary, orders were made in all Australian States and Territories where the company had carried on business. A provision of the Companies Acts 1931 to 1960 (Qld) required that all land in Queensland of a foreign company in liquidation should be applied, in the first instance, to paying debts contracted in Queensland. Upon application for directions, Lucas J held that whilst the statute provided for the payment of proceeds of land, the benefited Queensland creditors were not entitled to rank for or receive any further dividend from the other assets of the company in Queensland until the other creditors reached dividends at a level of equality with Queensland creditors. Justice Lucas (applying what today would be described as "modified universalism") said at [1968] Qd R 125 that where a winding up was proceeding in different jurisdictions the principle to be applied was that subject to priorities by reference to local law, all creditors of the company were as far as possible to be treated equally, wherever they were and wherever their debts were contracted, relying upon Re Alfred Shaw & Co Ltd, Ex parte Mackenzie (1897) 8 QLJ 93 at 96 (Griffith CJ), In re Matheson Brothers Limited (1884) 27 Ch D 225 at 231 (Kay J), and Sedgwick Collins and Company v Rossia Insurance Company of Petrograd [1926] 1 KB 1 at 13 (Scrutton LJ). As to distribution, Lucas J relied on Banco de Portugal, referring to the approach at [1968] Qd R 127 as "another example of the application of the doctrine of marshalling." Reliance was also placed by Lucas J on In re Oriental Inland Steam Co, Ex parte Scinde Railway Co (1874) LR 9 Ch App 577 (not referred to by, or cited to, the Privy Council in Cleaver) in which case a creditor, who had obtained execution against the assets of the company in a foreign country, was required to bring them to the liquidation for the benefit of all creditors equally.
105 The reference by Lucas J to the doctrine of marshalling should not deflect one from the substance of his Honour's approach. It was the necessity to vindicate equality among creditors of a liquidation when some had preferential access to an identified portion or fund of the company's assets, and so access to two funds over other equally ranking creditors having access to only one fund, that was seen as the essence of the applicable doctrine. The cognate or analogous doctrine of marshalling of funds or securities between creditors without a common bond between them and based on subrogation to avoid injustice to one by the legitimate choice of another (Meagher, Gummow and Lehane's Equity: Doctrines and Remedies (5th ed) Ch 11, esp 11-020) is not directly relevant, though one can see its analogical relevance: See Pomeroy (1941) pp 154-156 at s410 for the informing place of equality in this regard.
106 In New Cap Reinsurance 177 FLR 52, the insurer in liquidation had written international reinsurance in Australia. Section 116(3) of the Insurance Act 1973 (Cth) reserved assets in Australia of bodies licensed to carry on insurance business for the discharge of Australian liabilities. The Australian creditors had a form of priority in respect of Australian assets, but the rights of other creditors were not displaced, and s 116(3) did not transform Australian creditors into secured or priority creditors, that is, creditors of a different ranking: 177 FLR at 73. Following Re Standard Insurance, Windeyer J applied the hotchpot principle in circumstances where one group of creditors (by s 116(3)) had access to assets of the company denied to others (at least in point of timing) in circumstances where under the statute (s 556) the creditors were of equal ranking. The principle applied even though one could see from the effect of the statute that there were two funds available. But that was the point: One group of creditors (of equal standing to others) had access to more than one fund of assets of the insolvent company, whereas other (equally ranking) creditors had more limited access to the assets of the insolvent company. The difference in rights of access arose from a statute that gave some creditors an advantage, but one that did not transform them into secured or truly priority creditors.
107 In Re HIH Casualty and General Insurance 190 FLR 398, Barrett J dealt with a complex proposed scheme of arrangement concerning related insurance companies in the failed HIH Group. The proposal, otherwise commercially unobjectionable, saw the substitution of rights conferred by statute, by an arrangement modelled on English "run-off" schemes, which rearranged the assets of the companies into three funds applying assets to different groups of creditors. In refusing to approve the scheme, Barrett J said the following at 190 FLR 429 [108]:
Because the claims of a particular kind that may be met out of particular funds at successive stages are claims of equal degree (for example, several s 562A claims no longer enjoying priority because the relevant reinsurance proceeds have been exhausted, or several claims for wages enjoying the priority given by s 556(1)(e) or several non-preferred debts) and stand in a pari passu relationship with one another, the appropriate method of treatment is by way of hotchpot in accordance with the second method discussed under the immediately preceding heading. Participation by claims of equal degree in separate funds administered in a single winding up is logically to be treated in the same way as participation by claims of equal degree in several concurrent windings up.
(Emphasis added.)
108 This passage recognises that one liquidation may, by statute (such as s 116(3) of the Insurance Act or local companies legislation), have within it separate funds to be administered. Where that is so, and where the claims (even if to be met out of particular funds at successive stages) are claims of equal degree the appropriate approach is by way of hotchpot, involving treatment of claims of equal degree as if in several concurrent windings up of the same entity in different jurisdictions.
109 In each of the above circumstances, the creditors were of equal ranking, but a local statute gave some an advantage.
110 In Akers 223 FCR 8, an equally ranking creditor was subject to a disadvantage in a foreign jurisdiction in connection with access to the assets of the company. The question under the Cross-Border Insolvency Act 2008 (Cth) and the Model Law on Cross-Border Insolvency was whether assets in Australia of the insolvent company being wound up in the Cayman Islands should be transferred to that jurisdiction for the administration of the company in the foreign main proceedings. The assets remaining were the residue of what were said to be capital profits made by the company in Australia. The Deputy Commissioner of Taxation asserted rights of a creditor in respect of Australian taxation said to be owed by the company. The funds in Australia were property of the company otherwise available in the liquidation for the payment of creditors. The difficulty faced by the Deputy Commissioner was, consistently with the not unusual rule of private international law, that as a foreign (Australian) revenue authority, the Deputy Commissioner was not entitled to prove in the Cayman Islands winding up: 223 FCR at 40 [134]. If there were an ancillary winding up in Australia (hypothesised as if the Cross-Border Insolvency Act had not been enacted) along with the Deputy Commissioner all the foreign creditors would be entitled to prove against the Australian assets, but they would also be entitled to prove in the main Cayman Islands winding up. In that context, the Deputy Commissioner had only one fund of the company's property and all other creditors had two funds of the company's property, against which to prove: all creditors ranking equally, all property (subject to the rule in the Cayman Islands) was available to all creditors. At 223 FCR 40-42 [134]-[135] and [138]-[139], I explained (with the concurrence of Robertson J and Griffiths J at 50 [168] and [169] respectively) why hotchpot applied:
134 The DCT is not entitled to prove in the Cayman Islands winding up. All other creditors are entitled to prove in the posited local (ancillary) winding up, but are also entitled to prove in the Cayman Islands winding up (assuming they not to be other foreign revenue creditors). The DCT has, therefore, one fund of the company (the hypothesised local administration) in which to prove; all other creditors have two funds of the company (the hypothesised local administration and the Cayman Islands administration) in which to prove. A creditor who seeks to share in the assets of a debtor in an administration must bring to account the benefits of recovery from other assets of the debtor, whether by execution, self-help or through participating in a second administration: Selkrig v Davies (1814) 2 Dow 230; 3 ER 848 (Lord Eldon); Banco de Portugal v Waddell (1880) 5 App Cas 161 at 167-168, 170 and 175-176 (Earl Cairns LC, Lord Selborne and Lord Blackburn, respectively); Ex parte Wilson; Re Douglas (1872) 7 Ch App 490 at 492-493 and 493-494 (James LJ and Mellish LJ); Re Harris, Goodwin & Co (1887) 7 QLJ (NC) 94; Re Standard Insurance at 127-128 (Lucas J); Re National Employers' Mutual General Insurance Association Ltd (1995) 15 ACSR 624 at 626 (McLelland CJ in Eq); Cleaver v Delta American Reinsurance Company (in liq) [2001] 2 AC 328 at [16]-[29]; and Re HIH Casualty and General Insurance Co (2005) 190 FLR 398 at [96]. In these circumstances, the local liquidator would be entitled to require the foreign creditors to bring to account in the nature of hotchpot the value of their participation in the Cayman Islands winding up (or indeed any other foreign winding up) in the equal distribution of the assets of the company, and in the overall equal distribution of the local assets. An illustration of the approach is Re Oriental Inland Steam Company. There, the execution creditor in India was required to bring to account in England the value of the execution in India based on the fairness of bringing to account in the English winding up the access to the company's property that the creditor had achieved in India.
135 The analogue to the above cases here is close. If one hypothesises a local winding up the foreign creditors have access to more than one administration; the DCT to one only. Both administrations concern the assets of the company, although the nature of the task of the liquidator in the local (ancillary) winding up is limited in the way I have discussed. Even if the local ancillary winding up is limited to local assets or assets outside the place of incorporation, both administrations are dealing with the assets of the company that are to be available to unsecured creditors. Hotchpot (like marshalling) is an illustration of the maxim that equity is equality. The nature of the ancillary winding up, as a winding up of the company for the benefit of all its creditors, under local (here, Australian) law would permit (quaere require) an Australian liquidator to require foreign creditors to bring to account the value of their participation (or expected participation) in the other assets of the company (including through participation in another administration of the company's assets) before they obtained any benefit from the Australian assets. This would vindicate the equality of the local creditor and also vindicate the ancillary winding up as being one for all creditors. This would also reflect the operation of Art 32 of the Model Law.
...
138 Any hypothesised liquidation is just that: an hypothesis - a posited framework to assist in the organisation of informing principle. The most potent informing principle is the notion of fair and equal treatment of all creditors, and the pari passu distribution of the assets of the debtor company. The principle of pari passu distribution adopted by the primary judge is informed by fairness and equality: Re Harris, Goodwin & Company; The case of the Bankrupts (1592) 2 Co Rep 25, 76 ER 441; British Eagle International Airlines Ltd v Compagnie Nationale Air France [1975] 1 WLR 758; Hardy v Fothergill (1888) 13 App Cas 351 at 363; and see generally Symons SW, Pomeroy's Equity Jurisprudence (5th Ed) Vol 2 at pp 144-148 [405]-[407]. Though there is no local winding up, the DCT has access only to one fund of the company's assets and other creditors have access to more than one fund.
139 The fairness and equality in the approach of the primary judge is reinforced when one recognises the available principle of hotchpot that is based on the same notions of fairness and equality. The balancing of the protection of the local creditor under Art 21.2 and the protection of all creditors under Art 22.1 is thus achieved by recognising the equality of all creditors, when considering the dealing with, and access to, the funds of the company. The approach is consistent with the views of the reporters in the report to the American Law Institute (ALI) on Transnational Insolvency: Global Principles for Co-operation in International Insolvency Cases presented to the 2012 Annual Meeting of the ALI, at pp 127-128 on Global Principles 34 and 35.