Editions Tom Thompson Pty Ltd v Pilley

Federal Court of Australia|1997-11-20|Before: Mansfield J

REASONS FOR JUDGMENT ACN 007 537 000 Pty Ltd (formerly Barossa Ceramics (SA) Pty Ltd) ("Barossa Ceramics") was incorporated under the Companies Act 1934 (SA) on 2 February 1951. Its business was the manufacture of clay brick ceramic tiles. On 30 May 1995 it resolved under s 436A of the Corporations Law ("the Law") to appoint Robert Colin Parker ("the applicant") and Richard George Freer ("Mr Freer") joint and several administrators of Barossa Ceramics. At that time Amber Ceramics (SA) Pty Ltd ACN 008 176 485 ("Amber Ceramics") was the holder of all the issued capital in Barossa Ceramics, and so was the holding company of Barossa Ceramics for the purposes of s 588V(1) of the Law. Subsequently, on 27 June 1995, at a meeting convened under s 439A of the Law, the creditors of Barossa Ceramics resolved that the company be wound up and the applicant and Mr Freer were appointed as joint and several liquidators of Barossa Ceramics pursuant to s 446A of the Law. Amber Ceramics also resolved under s 436A of the Law to appoint the applicant and Mr Freer joint and several administrators of Amber Ceramics. Then on 2 June 1995, Westpac Banking Corporation ("Westpac") appointed Robert Anthony Ferguson and another joint and several receivers and managers of the property of Amber Ceramics pursuant to powers granted to it under charge number 130261 dated 20 September 1988. On 15 June 1995, the applicant and Mr Freer resigned from their offices as administrators of Amber Ceramics. The applicant now applies in his capacity as a liquidator of Barossa Ceramics pursuant to s 511 of the Law to determine certain questions arising in the winding up of Barossa Ceramics, namely: (1) Is he entitled to set-off pursuant to s 553C, or otherwise, the sum due to Amber Ceramics as its claim against Barossa Ceramics in the winding up of Barossa Ceramics the sum he would otherwise be entitled to recover from Amber Ceramics pursuant to s 588W of the Law? (2) Is he entitled to revoke his decision to admit the proof of debt of Amber Ceramics and to reject all of it pursuant to reg 5.6.55 of the Corporations Regulations? (3) Is he entitled to refuse to declare a dividend to Amber Ceramics? (4) What other course of action (if any) should he take in the winding up of Barossa Ceramics with respect to the claim made by Amber Ceramics therein? The Court is asked to assume that Amber Ceramics has contravened s 588V of the Law so that the applicant is entitled as liquidator of Barossa Ceramics to recover from Amber Ceramics under s 588W of the Law as a debt due to Barossa Ceramics an amount equal to the loss or damage due to that contravention, agreed for the purposes of this application only at $314,796.73. The applicant and Mr Freer are in partnership as accountants and the applicant brings this application on behalf of each of them. In those circumstances, no issue arises as to the appropriateness of the Court giving answers to the questions sought by reason that only one of two joint liquidators makes the application. To determine whether it is appropriate for the Court to provide answers to those questions, and if so as to what answers should be given, it is necessary to consider the circumstances in a little more detail. Both the applicant and Amber Ceramics were represented before me. Amber Ceramics supported the Court answering the questions posed. Of course, it contended for answers different from those proposed by the applicant. Amber Ceramics lodged a formal proof of debt in the liquidation of Barossa Ceramics on 23 May 1996. It asserted indebtedness of $516,453.74 made up of a loan account owing by Barossa Ceramics standing at $456,870.41 at 30 May 1995 and sundry debts of $59,583.33. The applicant on 9 October 1996 admitted that claim to the extent of $460, 977.53, but at that time also expressed the tentative view that he may have a claim against Amber Ceramics as the holding company to the extent of $314,796.73 by reason of s 588V of the Law. Section 588V(1) provides: "A corporation contravenes this section if: (a) the corporation is the holding company of a company at the time when the company incurs a debt; and (b) the company is insolvent at that time, or becomes insolvent by incurring that debt, or by incurring at that time debts including that debt; and (c) at that time, there are reasonable grounds for suspecting that the company is insolvent, or would so become insolvent, as the case may be; and (d) one or both of the following subparagraphs applies: (i) the corporation, or one or more of its directors, is or are aware at that time that there are such grounds for so suspecting; (ii) having regard to the nature and extent of the corporation's control over the company's affairs and to any other relevant circumstances, it is reasonable to expect that: (A) a holding company in the corporation's circumstances would be so aware; or (B) one or more of such a holding company's directors would be so aware; and (e) that time is at or after the commencement of this Part."

Section 588W(1) provides a remedy for a contravention of s 588V in the following terms: "Where: (a) a corporation has contravened section 588V in relation to the incurring of a debt by a company; and (b) the person to whom the debt is owed has suffered loss or damage in relation to the debt because of the company's insolvency; and (c) the debt was wholly or partly unsecured when the loss or damage was suffered; and (d) the company is being wound up; the company's liquidator may recover from the corporation, as a debt due to the company, an amount equal to the amount of the loss or damage."

The applicant's view was that Barossa Ceramics was insolvent at 1 July 1994 and that, by allowing it to continue to trade thereafter, Amber Ceramics had caused damage to various unsecured creditors of Barossa Ceramics. The amount of that loss of $314,796.73 is made up of amounts owing by Barossa Ceramics to its creditors and incurred between 1 July 1994 and 30 May 1995. The applicant invited comments on that view from Amber Ceramics, including whether it sought to rely upon any one or more of the defences expressed in s 588X of the Law. It is not necessary for present purposes to review the subsequent material in any detail. The applicant's tentative view has been confirmed by his subsequent investigations, in particular that Barossa Ceramics was insolvent as and from 1 July 1994. He is presently satisfied that he has a good claim against Amber Ceramics for $314,796.73 under ss 588V and 588W of the Law. I am asked to assume that is so. However, the practical problem confronting the applicant is that Amber Ceramics has no assets available to meet any such claim, other than such dividend as it receives in the winding up of Barossa Ceramics. Its assets otherwise are expected to be absorbed in satisfying the charge granted by it to Westpac. In addition, it is common ground that any dividend payment made to Amber Ceramics, in the winding up of Barossa Ceramics may also be absorbed in satisfying that charge. The applicant presently has admitted proofs of debt in the winding up of Barossa Ceramics totalling $1,296,125.70 including $460,977.53 on the loan account from Amber Ceramics, and has paid out $467,809.66. He holds $519,934.62. He wants to set-off against the Amber Ceramics admitted debt of $460,977.53 the sum of $314,796.73 being the amount of his claim against it. That will reduce the admitted creditors, so as to increase their dividend. The financial position of Amber Ceramics means that separately pursuing a claim for the $314,796.73 against it, even if that claim is successful, will not increase the funds available for distribution to creditors simply because it does not have assets available to meet any judgment. The right of set-off is said to be found in s 553C of the Law. It is with that background that the Court is asked to answer the questions referred to, and on the assumptions noted. In my view it is appropriate to proceed as requested. If the answer to those questions means that the applicant cannot in a legal sense 'set-off' his claim against Amber Ceramics, he has the view that it will not be worthwhile separately pursuing it, and the administration will proceed accordingly. He will not have to incur the costs of establishing that claim only to find it is of no practical value. Nor will there be the delay associated with that process, and the costs inevitably incurred in prolonging the liquidation whilst it is ongoing. If the answer to those questions means that he can somehow set-off his claim against Amber Ceramics, then he will be in a position to pursue that claim as necessary including by proceedings under s 588W of the Law, or possibly by amending the admitted debt of Amber Ceramics by reducing it by the amount of his claim thus leaving Amber Ceramics to take action itself against that decision. In either event, he will know that the expense to be incurred is in a practical sense warranted, or at least make decisions about whether or how to pursue that question knowing the potential practical consequences. There is a great deal of sense reflected in the shared approach of the applicant and of the receivers and managers of Amber Ceramics in asking the Court to so proceed. There is no need to consider in detail the amounts of the Amber Ceramics' claim in the winding up of Barossa Ceramics, or of the applicant's claim against Amber Ceramics, as the latter will clearly be less than the former. Section 511 is in Div 4 of Pt 5.5 of the Law, dealing with voluntary winding up of companies. In my view, the winding up of Barossa Ceramics falls within the scope of Pt 5.5 of the Law. The initial appointment of the applicant and Mr Freer as administrators of Barossa Ceramics was made under s 436A of the Law. The creditors' resolution to wind up Barossa Ceramics was made at the meeting convened in that administration under s 439A of the Law, and was made in exercise of the power under s 439C(c) of the Law. Section 446A of the Law thereby applies, and in particular s 446A(2)(a) means that Barossa Ceramics is taken to have passed at the time of that meeting a special resolution under s 491 of the Law that it be wound up voluntarily, and without a declaration of solvency under s 494 of the Law. Section 511(2) empowers the Court to accede to the application to determine any question arising in the winding up if satisfied that the determination of such question or questions will be "just and beneficial". It is similar, but not identical, in its terms to s 479(3) of the Law in the case of a court-ordered winding up of a company. In Editions Tom Thompson Pty Ltd v Pilley (1997) 148 ALR 146, Lindgren J referred to and reviewed many of the recent decisions on s 479(3) of the Law, or on its legislative ancestors. As his Honour observed, the preponderance of authority is that the Court has no power under that provision to make orders binding on third parties external to the winding up, and that generally speaking directions should not be given where action the liquidator might take as a result of the directions would affect such rights. No such problem arises here. The directions sought concern Amber Ceramics only, and are in relation to its debt as sought to be proved in the winding up. Amber Ceramics through its receivers and managers supports the Court giving directions on the topics identified. Whether it is the secured creditor or the unsecured creditors of Amber Ceramics who receive the benefit of any dividend in the winding up of Barossa Ceramics, Amber Ceramics would benefit if it were able to receive the dividend from Barossa Ceramics to which it would be entitled but for the claimed set-off. The applicant represents the interest of the unsecured creditors of Barossa Ceramics in establishing the claimed set-off. The directions sought do not involve the Court being asked to direct the applicant as to how he should exercise his commercial judgment in the winding up. The applicant seeks guidance on a matter of law, in the light of which he proposes to exercise his commercial judgment as to whether and how then to pursue a claim which he presently considers is available to him under ss 588V and 588W of the Law. Thus the directions sought fall within the sort of matters where it has been regarded as appropriate to give directions: Sanderson v Classic Car Insurances Pty Ltd (1985) 10 ACLR 115; Re Murphy; Re BPTC (in liq) (1996) 19 ACSR 569; Re G B Nathan & Co Pty Ltd (in liq) (1991) 24 NSWLR 634. The expression in s 511 of the Law "will be just and beneficial" has most recently been discussed by Young J in Dean-Willcocks v Soluble Solution Hydroponics Pty Ltd (1997) 24 ACSR 79. His Honour said at 81: "Section 511(2) provides that the court is only to accede to the liquidator's application if the determination of the question or exercise of power "will be just and beneficial". These words have been in companies legislations since the English Act of 1862. Although there have been some observations from judges from time to time as to what these words comprehend; see, for example, Re Serene Shoes Ltd [1958] 1 WLR 1087 and Re Mascot Home Furnishers Pty Ltd (in liq) [1970] VR 593, 595, it seems to me that they plainly mean that the court has a discretion as to whether making an order under the section will be of advantage in the liquidation. There are many questions where the only order that the court should make is that the liquidator or the claimant proceed in the ordinary courts in the ordinary way for the determination of a dispute. However, there are many other situations where the court can summarily solve the difficulty that has arisen in the liquidation by an order under the section in a cheap and efficient manner. Where this can be done it is "just and beneficial" to exercise the power." For reasons which appear above, in my view this case clearly falls within that prescription. I should give directions if the questions raised admit of appropriate answers. Accordingly, I turn to consider in detail the questions asked. The critical provision to those questions is s 553C of the Law. It provides: "(1) Subject to subsection (2), where there have been mutual credits, mutual debts or other mutual dealings between an insolvent company that is being wound up and a person who wants to have a debt or claim admitted against the company: (a) an account is to be taken of what is due from the one party to the other in respect of those mutual dealings; and (b) the sum due from the one party is to be set off against any sum due from the other party; and (c) only the balance of the account is admissible to proof against the company, or is payable to the company, as the case may be. (2) A person is not entitled under this section to claim the benefit of a set-off if, at the time of giving credit to the company, or at the time of receiving credit from the company, the person had notice of the fact that the company was insolvent." The section in that form was introduced into the Law, effective from 23 June 1993, by the Corporate Law Reform Act 1992 (Act 210 of 1992, s 92). Prior to that time, s 553(2) of the Law dealt with the issue of mutual credits and set-offs by reference to the Bankruptcy Act 1966, in particular s 86 of that Act. There is no apparent conceptual alteration effected from that position by s 553C of the Law. It amounts to an adoption of the concepts underlying s 86 of the Bankruptcy Act 1966 in terms more appropriate to corporations. That is confirmed by the Explanatory Memorandum circulated with the Corporate Law Reform Bill 1992, pars 867-869 and the Australian Law Reform Commission Report No 45 'General Insolvency Inquiry', Vol 1, pars 815-819 which gave birth to the amendment. Thus, decisions based upon the earlier legislative regime may be of assistance in discerning the proper operation of s 553C of the Law. The words of s 553C should therefore be generously construed: cp Gye v McIntyre (1990-1991) 171 CLR 609 at 625. See also Old Style Confections Pty Ltd v Microbyte Investments Pty Ltd (In Liq) [1995] 2 VR 457 per Hayne J. The proof of debt of Amber Ceramics, admitted for $460,977.53, is largely represented by a loan account of monies owing by Barossa Ceramics to Amber Ceramics at and prior to 30 May 1995. That date is the date of commencement of the winding up of Barossa Ceramics: s 553(1) of the Law. The claim by the applicant against Amber Ceramics of $314,796.73, if successful, will be a claim due by Amber Ceramics to Barossa Ceramics: s 588W(1) of the Law. The assumptions I am asked to make adverse to Amber Ceramics in respect of that claim, on which the applicant's proposed claim is founded, involve in part events after 30 May 1995. The short question is whether the two claims are "mutual credits, mutual debts or other mutual dealings" between Barossa Ceramics and Amber Ceramics under s 553C of the Law. If so, they may be set-off. Only the balance of Amber Ceramics' claim against Barossa Ceramics would then be admissible to proof in its winding up: s 553(1)(c). No issue arises under s 553C(2) because Amber Ceramics' knowledge of Barossa Ceramics' insolvency from 30 May 1995 is a matter I am asked to assume. It is also a matter which is encompassed within one of the elements of the cause of action under ss 588V and 588W of the Law: s 588V(1)(c) and (d), although that test is a less vigorous one. The object of set-off in bankruptcy is to "do substantial justice between the parties, where a debt is really due from the bankrupt to the debtor in his estate": Parke B in Forster v Wilson (1843) 12 M & W 191 at 204. Thus, s 553C should be construed to be given "the widest possible scope": Gye v McIntyre (above, at 619) citing with approval Mason J in Day & Dent Constructions Pty Ltd v North Australian Properties Pty Ltd (1982) 150 CLR 85 at 108. In Gye v McIntyre, the Court added at 619: "On the other hand, "substantial justice" requires that the operation of set-off in bankruptcy be confined within limits which protect the creditors of the bankrupt from being disadvantaged by a set-off being allowed in circumstances where debts, credits or other dealings have not been genuinely mutual as a matter of substance, such as where beneficial ownership is not the same or where, after bankruptcy or notice of an act of bankruptcy, a debtor of the bankrupt has bought up liabilities of the bankrupt at a discount for the purpose of setting them off against his own indebtedness: see, e.g., Day & Dent Constructions (1982) 150 C.L.R. 85, at p.95. Thus, it is established by the cases that set-off under a provision such as s. 86 is not available in circumstances where the beneficial entitlement and liability in respect of the countervailing credits and debits do not correspond: see, e.g., In re City Life Assurance Co. [1926] Ch. 191, at pp. 216-217; Hiley v. Peoples Prudential Assurance Co. Ltd. (1938) 60 C.L.R.. 468, at p.497." For the reasons given, in my view, Gye v McIntyre (above) provides direction in relevant respects as to the operation of s 553C of the Law. Thus, it is that passage which leads to identifying the issues before me. It is accepted for present purposes both that Barossa Ceramics is an insolvent company that is being wound up, and that Amber Ceramics wants to have a debt admitted against it. Provided the circumstances of the two respective claims described above comprise "mutual credits, mutual debts or other mutual dealings" between the two companies, s 553C will operate to prescribe a set-off. Subsection (1)(c) makes it clear that the set-off will then operate, whether the resulting balance is in favour of Barossa Ceramics as the company being wound up or is in favour of Amber Ceramics. Amber Ceramics by its receivers and managers contends, by reason of three matters, that the element of mutuality is lacking. They are: (1) the claim under ss 588W and 588V is but a statutory claim which does not result from any mutual dealings between Amber Ceramics and Barossa Ceramics at all; (2) the claim under ss 588W and 588V could arise only after the commencement of the winding up of Barossa Ceramics on 30 May 1997 and is a claim of the applicant rather than of Barossa Ceramics, whereas the claim of Amber Ceramics arose out of events before that date, so again the necessary mutuality could not exist; and (3) the relevant date to determine whether a set-off can exist is the date of the winding up resolution, namely on 27 June 1995. By that date as a result of the appointment of receivers and managers to Amber Ceramics, its claim against Barossa Ceramics had vested beneficially in Westpac, so that there was at the critical time no mutuality because the respective claims of Amber Ceramics and Barossa Ceramics were not in the same interests. It was accepted by counsel for Amber Ceramics that if the Court rejected those contentions and found that, but for the acceptance of the proof of debt, the two claims could be set-off, then the applicant could amend the acceptance of the proof of debt to reflect such adjustment as is appropriate by set-off. That would be done under reg 5.6.55 of the Corporations Regulations. I do not therefore need to further address that issue. It is encompassed within the second question identified in the application. I am not to be taken as providing any directions, even if set-off is available, that the amending of the acceptance of the proof of debt is an appropriate action, or whether the applicant should take some other action to make out his claim on behalf of Barossa Ceramics. The assumptions I am asked to make really preclude any such direction. The High Court in Gye v McIntyre (above, at 623) identified the elements of mutuality as involving: "... the notion of reciprocity rather than that of correspondence. It does not mean "identical" or "the same" So understood, there are three aspects of the section's requirement of mutuality. The first is that the credits, the debts, or the claims arising from other dealings be between the same persons. The second is that the benefit or burden of them lie in the same interests. In determining whether credits, debts or claims arising from other dealings are between the same persons and in the same interests, it is the equitable or beneficial interests of the parties which must be considered: see, e.g., Hiley (1938) 60 C.L.R., at p. 497. The third requirement of mutuality is that the credits, debts, or claims arising from other dealings must be commensurable for the purposes of set-off under the section. That means that they must ultimately sound in money."

Their Honours explained that the need for commensurability did not require that the debts, credits or claims arising from other dealings must be vested, liquidated or enforceable at the decisive date. They must exist as contingent at that date and be of a kind which will ultimately mature into pecuniary demands capable of set-off. The focus in Gye v McIntyre (above) then was upon whether the dealings between the parties, constituted by the negotiations leading up to, and the financing and sale of a hotel business, were mutual even though the respondent was not a party to the actual contracts of sale. In one respect the submissions made in that case touch upon the present issues. It was contended that the claim against the respondent, for unliquidated damages for misrepresentation, matured in a judgment only after the date of the sequestration order and so could not be the subject of a set-off. The Court found no such restriction was evident in s 86 of the Bankruptcy Act 1966. It said that there is (at 630): "... no convincing reason for further confining set-off under s. 86 by an implied restriction to the effect that no subsequently arising claim in respect of a credit, debt or other dealings which existed or had occurred at the time of the sequestration order can be set-off unless it is a claim in contract. To allow set-off in respect of such subsequently arising claims is neither to prevent a drawing of the line as at the time of the sequestration order nor "to alter the rights of the parties by reference to subsequent transactions" (per Rich J., Hiley (1938) 60 C.L.R., at p. 487. It is merely "to ascertain [those rights] by reference to the natural outcome of previous transactions" (ibid.)." The first of the issues raised in response by Amber Ceramics as set out above can be dealt with fairly shortly. The applicant accepts that in one sense the nature of his claim against Amber Ceramics does not result from any dealings between the two companies. His contention is that there are simply mutual debts between them. The debt in this instance, assuming his claim is made out, may not arise from any dealings between the two companies. In my view, that does not mean that the debt may not qualify for set-off under s 553C of the law. Subject to the two other matters raised, the two debts are between the same companies. The burden of them would lie in the same interests. They are commensurable, in that they both sound in money. I see no reason why, having regard to the substance of the two debts, they should not be set-off. There is no reason in logic or principle to exclude statutory debts from the compass of provisions such as s 553C: Re Kolb; ex parte England v Federal Commissioner of Taxation (1994) 51 FCR 31. Although mutual credits and mutual debits will ordinarily result from prior dealings between the two parties, I do not think that is necessarily so. See Hankey v Smith (1789) 3 T R 507n; Forster v Wilson (1843) 12 M & W 191. As the Court in Gye v McIntyre said (above, at 623): "the word 'mutual' conveys the notion of reciprocity rather than of correspondence". The broad purpose of s 553C would be frustrated rather than fulfilled if it were interpreted to require "mutual credits" or "mutual debts" to be defined so as to include not just the elements of mutuality the High Court has identified, but also that they must arise out of mutual dealings. The addition of the expression "or other mutual dealings" was not intended to limit the scope of those expressions, but to extend the circumstances of set-off to claims later crystallising from dealings before the bankruptcy, or winding up, which were capable of and did later give rise to mutual claims: see Gye v McIntyre (above, at 623). Furthermore, that approach avoids the necessity of endeavouring to analyse the expression "other mutual dealings" in circumstances such as the present. As counsel for the applicant submitted, it may be the case that the relationship of the holding company to its subsidiary including any periodic review of its financial position and decisions taken to continue to support it, reports to the holding company, and the like, may well constitute "dealings" for the purposes of any determination that the debt in the necessary sense arose out of dealings between the two companies. It would be surprising if the question whether a debt founded upon ss 588V and 588W was capable of set-off under s 553C of the Law would vary depending upon the extent of interaction between the holding company and the subsidiary. That is the more so when it is seen that s 588V specifies the criteria for the existence of the contravention, and the foundation for the debt. It would be ironical if such a debt were capable of set-off only where the holding company had been active in relation to its subsidiary but perhaps mistaken in its assessment of its financial status, but not where the holding company had not taken any active interest in the affairs of the subsidiary at all. It would also not well serve the function of s 553C if it were necessary in a case such as the present for the applicant, having made out a claim under s 588W, to then have to re-investigate the detailed nature of the relationship between the holding company and its subsidiary including the day to day contact between them or the knowledge each of the other through shared staff or facilities, or in other respects, for the purpose of having that debt qualify for set-off under the section. It would avoid the necessity sometimes to consider a refined, if not somewhat contrived, meaning for the expression "dealings" to ensure fair and equal application s 533C of the Law. If that analysis be incorrect, then there is simply inadequate information before me to determine whether there were such transactions (including communications and shared information by common officers) between the two companies as to constitute "dealings" between them for the purposes of s 553C. The second of the two matters raised by Amber Ceramics is, in my view, partly resolved adversely to it by Gye v McIntyre (above). I do not think that the fact that the claim against Amber Ceramics must be brought by the applicant in his own name, rather than in the name of Barossa Ceramics, means that there is no mutuality between the claims. As a matter of substance, the claim under s 588W is the claim of Barossa Ceramics. Section 588W(1) explicitly says that the amount of any claim arising by reason of contravention of s 588V is recoverable "as a debt due to the company". The fact that the claim may be enforced by the liquidator is but the procedural device for enforcing what is clearly a claim of the company. Nor do I think that the fact that the claim is only "perfected" as a consequence of the liquidation disqualifies it from being eligible for set-off under s 553C of the Law. The conduct constituting the contravention all occurred before the commencement of the liquidation. After the liquidation, it is necessary to determine whether the persons to whom the company in liquidation owes debts have suffered loss or damage by reason of the contravention because of its insolvency: s 588W(b). It is also necessary to see whether those debts were in part unsecured: s 588W(c). The latter of those two matters involves addressing events before the liquidation. The former of them does involve looking in part at what will be the practical consequences of debts outstanding at the liquidation and in the circumstances of the liquidation. Although the primary transaction between the insolvent company and its creditor will have occurred before the winding up, what the consequences of that transaction to the entity supplying that credit to the company in liquidation will only emerge with any accuracy as the winding up unfolds. As is apparent, also notwithstanding a contravention of s 588V, the claim itself is not capable of enforcement unless and until the liquidation order is made: s 588W(d). Gye v McIntyre (above) addressed those sorts of issues. Although much of the focus was upon the expression "mutual dealings", it is clear that on this aspect the Court was not confining itself to that limited aspect but referring to the more compendious expression "mutual credits, mutual debts or other mutual dealings". At 623-4, the Court said: "The requirement that the credits, the debts or the claims arising from other dealings be commensurable does not mean that they must be vested, liquidated or enforceable at the decisive date, that is to say, at the time of the sequestration order or special resolution accepting the composition. Provided they exist as contingent at that date and are of a kind which will ultimately mature into pecuniary demands susceptible of set-off, the requirement of the section may be satisfied in relation to them."

The passage in this decision at 630 referred to earlier in these reasons is also to the same effect. In my view, to reflect the words of Rich J in Hiley v The Peoples Prudential Assurance Co Ltd (In Liq) (1938) 60 CLR 468 at 487 which were quoted with approval in Gye v McIntyre (above), the steps which s 588W addresses post the winding up order merely ascertain the rights of Barossa Ceramics by reference to the natural outcome of the earlier transactions. The events which give rise to the claim, both from the perspective of those supplying credit to Barossa Ceramics, and from the perspective of Amber Ceramics as its holding company, occurred before 30 May 1997. The contravention of s 588V, which I am asked to assume, had occurred by the commencement of the winding up of Barossa Ceramics. The natural outcome of those matters was the claim which the applicant now asserts. The third of the matters raised by Amber Ceramics through its receivers and managers involves consideration firstly of the critical date to determine mutuality of debts. If the relevant date is 30 May 1995, then it is accepted that the debts are mutual in the sense that the benefit or burden of them lies in the same interests. If, as Amber Ceramics contends, it is 27 June 1995 when the winding up resolution was passed, then it is necessary to consider the significance of the appointment of receivers and managers of Amber Ceramics on 2 June 1995 to the nature of the respective interests in which those debts lie at that date. I have referred above to the legislative course by which the winding up of Barossa Ceramics is categorised as a voluntary winding up. Section 446A(2) of the Law provides that the winding up resolution effectively under s 491 is to be taken as passed on the occasion of the creditors' resolution. In this case, that resolution was passed on 27 June 1995. Section 513B(b) of the Law provides that in the case of such a winding up, the winding up itself is taken to have commenced "on the section 513C day" in relation to its administration because it was at that time under administration: s 435C(1). Section 513C(b) provides relevantly for present purposes the day as the day on which the administration began, namely when the applicant and Mr Freer were appointed on 30 May 1995. In its contention, Amber Ceramics referred to Derham 'Set-Off' (2ed, Oxford UniversityPress, 1996 at 166-167) under the heading "The Relevant Date for Determining Rights of Set-off". As I understand the contention, it is said firstly that in a winding up all debts payable by, and all claims against, the company are admissible to proof against the company if the circumstances giving rise to them occurred before "the relevant date", being the day on which the winding up is taken to have begun: s 553(1). That day is 30 May 1995. Dr Derham observes however that the concept of "the relevant date" has not been specifically incorporated into s 553C of the Law. That much is true. Then it is said that the date for determining whether mutual debts, mutual credits or other mutual dealings between a company in liquidation and a creditor so as to quality for a set-off is the date of the liquidation, which in the case of a voluntary liquidation is the date of the resolution, namely 27 June 1995. The elapse of time between 30 May 1995 and 27 June 1995 is significant because it was during that period Westpac appointed receivers and managers to Amber Ceramics, and so (it is contended) by the relevant date for the purposes of s 553C the beneficial interest in the debt of Barossa Ceramics to Amber Ceramics had passed to Westpac under its debenture and there was therefore at that date no mutuality. Counsel for Amber Ceramics relied upon Day & Dent Constructions (above), and Hiley (above) as establishing that the date for assessing whether a set-off under s 553C should occur is the date of the resolution to wind up rather than the date when the liquidation commences. In Hiley (above) the question was whether a policy holder whose policy in a life assurance company was not honoured following the liquidation of that assurance company could set-off the damages claim for that breach against a debt owing to that assurance company. The policy holder had borrowed money from that assurance company, secured by a mortgage over land. That mortgage, by the time of the liquidation order, had been transferred by the assurance company to another entity as security, but subsequent to the liquidation order had been retransferred to the assurance company. The Court (Rich, Starke and Dixon JJ, Latham CJ dissenting) held that the policy holder was in the circumstances entitled to set-off the two amounts. The Court determined the date of liquidation as the relevant date to determine if mutual credits, mutual debts or mutual dealings must exist (per Latham CJ at 480-481, Rich J at 487, Starke J at 490 and Dixon J at 495-496). Rich and Starke JJ concluded that rights existed at that time in the assurance company which, without any new transaction, developed into a money claim capable of being set-off by the retransfer of the mortgage. Dixon J at 496-497 expressed the position at the commencement of the winding up as one where each of the policy holder and the assurance company had contracted with each other from which cross-money claims accrued in the course of the winding up. Day & Dent Constructions (above) involved a company having sought and procured a loan from a financier for the use of a third party, and becoming jointly liable with the third party for its repayment. After the company was ordered to be wound up, it sought repayment of the amount advanced to the third party, and later the financier also sought repayment of that amount from the third party. The third party repaid the financier. It was held that the third party was liable to repay the loan to the company, but was entitled to set-off its payment to the financier. The Court rejected the submission that, because the liability of the third party to the financier was contingent only until demanded by the financier some time after the winding up order, there could be no set-off. The facts in each of those cases did not require particular focus on the time between the commencement of the winding up on the one hand, and the time of the winding up resolution on the other. Certain expressions in the judgments suggest that some of the members of the Court did not specifically seek to distinguish between those two times: in Hiley, Latham CJ at 480 referred to ascertaining the parties rights "as at the time of the liquidation", Rich J at 487 used the term "at the commencement of the liquidation", Starke J at 491 referred to "the date of the winding up order" and Dixon J at 492-493 seems to treat "the commencement of the liquidation" and "the winding up order" as coterminous for practical purposes on the facts of that case. See similar expressions in Day & Dent Constructions per Gibbs CJ at 89 and 91.

However, Mason J (with whom Stephen and Aickin JJ agreed) in Day & Dent Constructions specifically addressed the point. His Honour said at 98-99: "Whether this means the date when the liquidation is deemed to commence, i.e., the date of presentation of the petition, or the date when the administration of the winding up commences, i.e., the date of the winding up order, has been a matter of controversy. In Motor Terms Co. Pty. Ltd. v. Liberty Insurance Ltd. (1967) 116 C.L.R. 177, Barwick C.J. at p. 179 favoured the former and Kitto J. at p. 180 the latter. In Stein v Saywell (1969) 121 C.L.R. 529, their Honours reaffirmed their conflicting views at pp. 538 and 555. Subsequently, in In re Northside Properties Pty. Ltd. [1971] 2 N.S.W.L.R. 320, Street J. concluded that the view of Kitto J. should be accepted in preference to that of Barwick C.J. and that the date of the winding up order is the date for determining what debts are provable [1971] 2 N.S.W.L.R., at p. 323 et seq. See also Re H. & S. Credits Ltd. (1969) 90 W.N. (Pt 1) (N.S.W.) 495. I agree, for the reasons given by Kitto J., which I need not repeat, that his view is to be preferred to that of Barwick C.J. Like Street J., I find it difficult to accept that all debts incurred after presentation of the petition are not provable. Although in the present case the controversy does not require to be resolved, it is as well that I express my opinion in view of the practical importance of the point."

In Gye v McIntyre (above), the Court at 619-620 referred to that passage with the observation that: "In this context, the date of bankruptcy is to be understood as being the date of the actual making of the sequestration order."

Those observations, whilst strictly speaking not forming part of the ratio decidendi of those cases, were clearly intended to provide a definitive guide to lower Courts. It is necessary to consider whether there is any distinction relevant to those observations between the legislative structure in force when Kitto J expressed his views and the Law. The dissenting views of Kitto J in Motor Terms Co Pty Ltd v Liberty Insurance Ltd (in Liq) (1967) 116 CLR 177 at 180-181 were in the context of the question whether a petition based upon a debt which became statute-barred between the date of presentation of the petition and the date of hearing could found a winding up order. The relevant legislative provision was s 221(1)(b), Companies Act 1961 (NSW). As his Honour pointed out, under the law as then in force, it was the making of the winding up order rather than any deemed commencement date for the winding up which substituted for the creditors' rights of suing to recover debts the creditors' rights to participate in the distribution in the winding up. He said that certain provisions of the Act pointed to that as the critical date. Those provisions included the following: that placing all the company's property in the custody of the liquidator upon the making of the winding up order, that requiring the assets to be applied in discharge of the company's liabilities, that giving creditors their right of proof in the winding up, and that preventing any further action or proceeding after the winding up order, although such remedies could be pursued even after the presentation of the winding up petition and to the date of the winding up order. To an extent, the Law now removes the impact of some of those matters. Section 553 now provides that debts must exist at the "relevant date" to be provable in a winding up, and s 554 directs its quantification as at that date. Previously there was no such explicit legislative expression. The operation of s 9 and ss 513A, 513B and 513C will commonly result in that date being the date of the winding up order, but in the present circumstances it is the date the administration commenced on 30 May 1995. Thus debts of Barossa Ceramics incurred after that date are not provable in its winding up under s 553, although they may nevertheless have priority by reason of s 556(1)(a) of the Law: see Re Crawford House Press Pty Ltd (1995) 13 ACLC 874. The liability for debts incurred during the administration rests with the administrator: s 443A. The appointment of the liquidator operates only from the winding up order with no element of retrospectivity: Energy & Resource Conservation Co Ltd (In Liq) v Abigroup Contractors Pty Ltd (1997) 41 NSWLR 169. For present purposes, the significant feature is that the cut-off date for proof of debts in the winding up is 30 May 1997, and not the date of the resolution itself. Section 471B prevents the institution or maintenance of proceedings against a company "while a company is being wound up in insolvency or by the Court", without the leave of the Court. Although in a practical sense, that can operate effectively only from the date of the winding up resolution or order, in its terms in the particular circumstances now before the Court it covers the period from 30 May 1997.

In other respects the matters referred to by Kitto J remain pertinent under the Law. Section 474 obliges the liquidator, upon appointment, to take control of the property of the company. Sections 478, 501 and 506 oblige the liquidator to collect the assets of the company and to apply them to the discharge of its liabilities. The particular consequence of s 553(1), as it operates in the present circumstances, is to effect the substitution of the rights of Amber Ceramics to sue to recover its debt for the rights to participate in the distribution of the assets of Barossa Ceramics in its winding up as at 30 May 1997. Section 471B reflects that position in its terms. Accordingly, I do not think that the legislative structure within which Kitto J's remarks were expressed is consistent with the Law, and his Honour's remarks no longer apply to the present circumstances. Whilst s 553C does not itself identify the date to determine set-off entitlements by reference to "the relevant date", there is no clear indication within its terms that any other date was intended. It is within subdiv A of Div 6 of Pt 5.6 of the Law, and was incorporated into the Law with s 553 in its present terms and including ss 553A-553E. Those sections are clearly designed to supplement and serve the proper operation of s 553. None of them refer to the "relevant date", but in my view that is simply because of their subsidiary function in relation to s 553. The position of s 553C in the Law, in that context, provides no reason to think that the legislature intended the date for assessing whether set-offs should occur was other than the date fixed for determining what debts are provable in the winding up. Quite the contrary. This conclusion is also consistent with other provisions of the Law, which deal with the respective rights and obligations of an administrator in relation to the company and its trading. Those matters in the period between the appointment of the administrator and the appointment of the liquidator are specifically and separately dealt with. There is no reason to think the legislature nevertheless intended s 553C to operate only at the later date. It also has the result that the crystallisation of a security after the appointment of the administrator will not remove from the assets of the company available to the unsecured creditors eligible to prove in the winding up as at 30 May 1995 assets of the company as at that date. There is preserved a contemporaniety between the date to determine the assets available in the winding up, not vulnerable to change even through the processes of s 553C of the Law, and the date to determine those eligible to participate in the distribution of those assets. So far as I can determine, and as reported to me by counsel, there is no decision specifically on this point. There are some cases in which the particular point may have been relevant, but in the result in each case was not addressed. In Old Style Confections (above), Hayne J was confronted with the question of whether a judgment creditor of a company could set-off in the winding up of that company claims by the liquidator for licence fees payable under a licence agreement. Those licence fees were payable for periods both before and after the liquidation. However, the decision does not disclose any focus upon any period between the date when application was made for the winding up of the company and the date when the winding up order was made. I do not think that decision throws light upon resolution of the issue. Similarly, in Emerson v Wreckair Ltd (1991) 103 ALR 404, although the issue was the ability to set-off hiring fees due both before and after the winding up commenced, the particular point now in issue was not addressed. Accordingly, in my view, the date to determine whether there were mutual credits, mutual debts or other mutual dealings is 30 May 1995. It is accepted that, as at that date, the debts of Amber Ceramics and Barossa Ceramics were in the same interests. It may be helpful if I were nevertheless to address the final issue as if the relevant date for that purpose were 27 June 1995. It is said then that the beneficial interest in the debt owed by Barossa Ceramics to Amber Ceramics lay with Westpac, by reason of the crystallisation of its charge by the appointment of receivers and managers on 2 June 1995 following the appointment of the applicant and Mr Freer as its administrators, whereas the burden of the claim by Barossa Ceramics lay against Amber Ceramics itself. By mortgage debenture dated 20 September 1988 Amber Ceramics charged its present and future assets to secure financial accommodation made available to it by Westpac from time to time. The charge was a fixed charge in relation to certain assets and a floating charge as regards other assets, including Amber Ceramics' loan to Barossa Ceramics. The monies advanced to Amber Ceramics were to become payable, relevantly, if a receiver of the undertaking of Amber Ceramics were appointed (cl 19(b)). It also provided by cl 20 that the floating charge should automatically crystallise and thereafter operate as a fixed charge (inter alia) upon the appointment of a receiver. In the course of submissions it became apparent that the parties were not agreed as to the significance of the agreed fact that on 2 June 1995 Westpac appointed receivers and managers to Amber Ceramics. In particular, it was unclear whether it was agreed that that appointment was validly made under the mortgage debenture. I was told I was to construe the agreed facts to determine whether they carried with them the fact of a valid appointment. In the normal course, an agreed fact that such an appointment was made would, in the absence of any suggestion to the contrary, clearly convey that the appointment was a valid one. But, in my view, it is not appropriate for the Court on an application such as the present, to endeavour to discern the nature of the parties' agreement if it is ambiguous, or if the Court is aware that it is incomplete. I cannot now ignore that submissions give rise to that possibility. It is up to the parties to provide the Court with the unequivocal terms of their agreement. If there is a contested matter of fact, it can be addressed in evidence. Of course, that there may be a need for such evidence might well mean that the procedure under s 511 of the Law is an inappropriate one. In addition, there is no agreement, nor any evidence, as to the event or events of default under the mortgage debenture which Westpac relied upon to appoint the receivers and managers. One can read that document and speculate as to what that event or events might have been. I should not in the circumstances find the event or events of default, which might carry through to a finding as to the validity of the appointment of the receivers and managers. For those reasons, I decline to find that the appointment by Westpac on 2 June 1995 of receivers and managers under the mortgage debenture was a valid one. I also decline to find that there was any event of default under the mortgage debenture. It follows that I decline to find that the floating charge crystallised and operated as a fixed charge over Amber Ceramics' assets as at 2 June 1995. Any real issues on those matters will need to be determined in a more appropriate proceeding. I note the contention that the floating charge under cl 18(a) of the mortgage debenture automatically crystallises and then operates as a fixed charge, inter alia, under cl 20(b): "in respect of all of the mortgaged premises instantly and immediately upon the occurrence of any of the events specified in paragraphs (a), (b), (c), (d), (e), (f), (m), (q) and (t) of clause 19 hereof PROVIDED ..." and that cl 19 specifies numerous matters which constitute events of default. One such event, under cl 19(a), is the appointment of a receiver of Amber Ceramics' property. If that be the event of default relied upon, there may be some circularity in that cl 21 entitles Westpac to appoint a receiver of Amber Ceramics' property only after the occurrence of an event of default under cl 19. However, for the reasons given, I do not need to consider such matters. I should nevertheless consider whether, assuming that appointment to have been valid and that by reason of it the charge over Amber Ceramics' assets did become a fixed charge on 2 June 1995, there was the necessary mutuality in the respective debts of Amber Ceramics and Barossa Ceramics as at 27 June 1995. On those assumptions, it was contended that the beneficial interest in Amber Ceramics' loan account with Barossa Ceramics moved from Amber Ceramics to Westpac. The crystallisation of the charge granted by the mortgage debenture is said to have that effect. Consequently, at 27 June 1995, there was no mutuality between the equitable benefit in that asset of Amber Ceramics on the one hand with that of Barossa Ceramics in its claim under s 588V of the Law on the other. The cases to which I was referred do support the proposition that crystallisation of the charge does have that consequence: National Mutual Life Nominees Ltd v National Capital Development Commission (1975) 37 FCR 404 per Blackburn J at 407-408; In re Els Ltd [ 1995] Ch. 11; see also Lyford v Commonwealth Bank of Australia (1995) 130 ALR 267 per Nicholson J at 273; Re Margart Pty Ltd; Hamilton v Westpac Banking Corp (1984) 9 ACLR 269. In Sheahan v Carrier Air Conditioning Pty Ltd (1997) 147 ALR 1 Brennan CJ at 8-9 described the proposition that, when a floating charge crystallises, the assets subject to the charge are assigned in equity to the chargee, as "too imprecise". As his Honour explained, the measure of the equitable interest in the charged assets is found in the clauses governing the disbursement of the assets so charged and received. One case where the fact that the assignment in equity is not absolute, but by way of charge only is Vibex Industries Pty Ltd v Gaylor (1997) 15 ACLC 750 per Byrne J at 753. That point also emerges from Lloyds Bank NZA Ltd v National Safety Council of Australia Victoria Division (1993) 115 ALR 93 where the bank sought to set-off the shortfall after the realisation of security under one secured loan against the surplus after the realisation of security under two separate secured loans. It was held that it could not do so, as the surplus in each case was held in trust for the mortgagor. It had to be restored to the corpus of the mortgagor available generally to its creditors. I note in passing that it was agreed between the parties in that case that the date to determine mutuality was the commencement of the winding up rather than the date of the winding up order. However, no submission was made for the applicant that there was no assignment in equity upon crystallisation of the charge, nor that the assignment in the circumstances or under the terms of the mortgage debenture was limited in any way which was relevant to the question of whether the necessary mutuality existed. It was not suggested that the decisions relied upon by counsel for Amber Ceramics were wrong, or inapplicable. On such an application as the present, it is not for the Court to itself embark upon a factual enquiry to explore whether there is some matter of relevance to quality or limit the extent of the equitable interest of Westpac following crystallisation of its charge. In those circumstances, in my view it is appropriate to follow those decisions. They effectively determine that particular question adversely to the applicant. That is of course on the assumptions specifically noted above. Accordingly, upon the particular assumptions identified by the parties and to the extent necessary upon the further assumptions recorded in my reasons for my decision, I answer the first question raised in the application as follows:

The applicant as liquidator of Barossa Ceramics is entitled pursuant to s 553C of the Law to set-off the amount of his claim on behalf of Barossa Ceramics against Amber Ceramics under s 588W of the Law against the amount for which Amber Ceramics is otherwise entitled to prove as an unsecured creditor in the winding up of Barossa Ceramics. It is unnecessary to answer the second question because Amber Ceramics acknowledges the applicant's entitlement to vary the admitted proof of debt if circumstances otherwise call for it. Ultimately I was not asked to answer the third and fourth questions in the application. I certify that this and the preceding twenty-four (24) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Mansfield.

Associate: Dated: Counsel for the Applicant: Mr S W Tilmouth QC

Solicitors for the Applicant: Camatta Lempens Pty Ltd

Counsel for Amber Ceramics by its receivers and managers: Ms R M Pak-Poy

Solicitors for Amber Ceramics by its receivers and managers: Minter Ellison

Date of Hearing: 11 September 1997

Date of Judgment: 20 November 1997

Companies Act 1934(SA)

Companies Act 1961(NSW)

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Judgment (16 paragraphs)

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