G & M Aldridge Pty Ltd v Walsh; Elecraft Pty Ltd v Walsh; K & V Plumbers Pty Ltd v Walsh; Barden-Steeldeck Industries Pty Ltd v Walsh [1999] VSCA 179

G & M Aldridge Pty Ltd v Walsh; Elecraft Pty Ltd v Walsh; K & V Plumbers Pty Ltd v Walsh; Barden-Steeldeck Industries Pty Ltd v Walsh [1999] VSCA 179 - VSCA 1999 case summary — Zoe

[14]

That brings me to the second and more troublesome submission made by the appellants: namely, that the payments made on 15 March (and by implication the giving of security over the units on the same day) did not constitute a "preference, priority or advantage over other creditors" within the meaning of s.122 of the Bankruptcy Act because by 15 March the property which was applied in making the payments (and the giving of the security) was already the subject of a fixed charge in favour of the ANZ Banking Group Ltd ("the bank"), and so the only one who could have been disadvantaged by the making of the payments was the bank, not other unsecured creditors. By reason of its security a secured creditor has an advantage over other creditors who hold no security and he may, if he chooses, stand aloof from any distribution of the debtor's assets in insolvency, relying solely upon the security to recover payment of what is owed. The property over which the security extends is not then available for distribution among unsecured creditors unless of course there is a surplus over and above the needs of the secured creditor (and it was not suggested that there would, or even might, be any surplus here). Section 122 does not derogate from the position of the secured creditor; rather it is concerned to maintain the integrity of the distribution of the insolvent's property among unsecured creditors, the section being directed at precluding any one or more of them obtaining unfairly a last minute advantage over the others. In this instance (the appellants contended), because of the bank's comprehensive security over all of the assets of Thompson there was no such advantage given or obtained, nor could there have been. The property applied in making the payments to the 12 trade contractors (and in giving the security) was all subject to the bank's fixed charge; therefore it was property "belonging to the bank" and as such was property which was simply not "available" for unsecured creditors in the winding up.

[32]

"It is sometimes said that, when a floating charge crystallises, the assets subject to the charge are assigned in equity to the chargee (National Mutual Life Nominees Ltd. v. National Capital Development Commission (1975) 37 F.L.R. 404 at 409-410; In re ELS Ltd. [1995] Ch.11 at 17-19). That is too imprecise a statement. The true position is stated by Lord Wrenbury in Palmer v. Carey [1926] A.C. 703 at 706-7 referred to by Williams J in Visbord: `The law as to equitable assignment, as stated by Lord Truro in Rodick v. Gandell (1852) 1 DeG.M.&G. 763 at 777-8 [1852] EngR 909; [42 E.R. 749 at 754], is this: "The extent of the principle to be deduced is that an agreement between a debtor and a creditor that the debt owing shall be paid out of a specific fund coming to the debtor, or an order given by a debtor to his creditor upon a person owing money or holding funds belonging to the giver of the order, directing such person to pay such funds to the creditor, will create a valid equitable charge upon such fund, in other words, will operate as an equitable assignment of the debts or fund to which the order refers." An agreement for valuable consideration that a fund shall be applied in a particular way may found an injunction to restrain its application in another way. But if there be nothing more, such a stipulation will not amount to an equitable assignment. It is necessary to find, further, that an obligation has been imposed in favour of the creditor to pay the debt out of the fund. This is but an instance of a familiar doctrine of equity that a contract for valuable consideration to transfer or charge a subject matter passes a beneficial interest by way of property in that subject matter if the contract is one of which a Court of equity will decree specific performance.' In other words the extent of the equitable interest of a creditor in a fund to be applied in payment of his debt depends upon the terms governing the disbursement of the fund that are enforceable by specific performance."

[38]

"The essence of crystallisation is that a charge fixes upon certain specific property, and that the mortgagor company's contractual right as against the chargee to dispose of the property comes to an end. Where that right, whether flowing from the practical consequences of a negative stipulation, or what is sometimes referred to as an implied licence, is a right to deal with the subject property in the ordinary course of business, and the charge provides that a dealing other than in the ordinary course of business crystallises the charge, then it must be possible for the parties to agree that if the company engages in an impermissible dealing of a kind that crystallises the charge, the charge will attach to the property the subject of the impermissible dealing. It is not a sufficient objection to this to say that such a result could possibly be unfair to third parties. We are dealing with the operation of a contract, and there is nothing in legal theory that prevents parties from making a contract that might produce results adverse to third parties. In any event, the way in which third parties are affected will depend upon the rules as to priorities, often involving questions of notice, and those rules, generally speaking, operate in a fashion that gives practical effect (albeit in a somewhat formalised way) to considerations of fairness. The present case provides a good illustration of the point just made. If FN were, in the September transaction, a bona fide purchaser for value of the legal title to the units without notice of AGC's interest, then FN's legal title would prevail, notwithstanding the provisions of the clause. If, on the other hand, the charge became fixed as the clause provided, by the fact of the sale to FN, and FN was on notice of that, then the consequence is not unfair. A difficult question, which it is not necessary to resolve in this case, would arise where the relevant dealing created an equitable interest in a third party, and it became necessary to work out which of the equitable interests, that of the chargee or that of the third party, was prior in time. Notwithstanding the terms of cl 3.1 AGC may face the problem that the language which purports to make the charge become fixed before the relevant dealing is in the nature of a deeming provision, which may have significant consequences as between the contracting parties, but cannot retrospectively create an interest."

[44]

I say that it may now be too late for the bank to enforce any claim to the moneys that were paid to the appellants because it is established that, when winding up supervenes and a liquidator takes action to recover payments under s.122, the money, once recovered, belongs in the liquidator's hands to the unsecured creditors generally and not to the secured creditor. It is established that where payments are involved so that the liquidator sues for money had and received (as distinct from suing to recover some specific and identified item of property) the fruits of action, once received, belong to the unsecured creditors. Neither the liquidator's right to seek recovery nor the fruits of action are assets to which the charge of the secured creditor attaches, no matter how comprehensively expressed; for neither is ever property of the debtor company. As I understand it, that is what N.A. Kratzman Pty. Ltd. (in liq.) v. Tucker (No.2) [1968] HCA 44; (1968) 123 C.L.R. 295 affirmed, their Honours incidentally making the point that it was so, whether the charge had or had not crystallised. See also In re Yagerphone Ltd. [1935] 1 Ch. 392, N.W. Robbie & Co. Ltd. v. Witney Warehouse Co. Ltd. [1963] 1 W.L.R. 1324; compare Campbell v. Michael Mount PPB [1995] SASC 5378; (1995) 14 A.C.L.C. 218 where the majority applied the like principle to the recovery by the liquidator of property the subject of a disposition made void by an altogether different provision. That the payments, if and when recovered in this instance, belong to the unsecured creditors generally and not to the secured creditor was relied upon by the appellants to support the argument that there can have been no preference here, but it seems to me not to advance their case. By the same token neither does it advance the case of the respondent liquidator; for the antecedent question is whether there was a preference which is open to attack under s.122. To my mind the consequences of recovery do not throw any light at all on that antecedent question: the two are altogether independent. That the unsecured creditors may alone share in the fruits of the liquidator's recovery action is not inconsistent with the bank's having had the power to pursue some remedy in relation to the company's misapplication of the property over which the charge extended, even if (and I need not decide it) the bank's power to pursue some remedy is prejudiced once the liquidator succeeds in his action.

At a glance

Court

Decision date

Before

Source

Judgment (55 paragraphs)