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

7. These four appeals, which we heard together, are from similar judgments given in the County Court on 5 November 1997 in favour of the respondent John Martin Walsh, the liquidator of Thompson Land Ltd. (receiver and manager appointed). An order for the winding up of that company (which I shall refer to as "Thompson" or "the company") was made on 6 September 1990. Each of the appellants was sued in a separate proceeding in the County Court, the respondent alleging that in March and April 1990 the appellant had obtained a preference under s.451 of the Companies (Vic.) Code which was void as against him as the liquidator of Thompson. The respondent succeeded and judgment was given accordingly in all four proceedings in a money sum, plus interest and costs. The appellants now appeal, contending that there was no preference involved and that the respondent's proceedings against them should have been dismissed.

10. The appellants are four trade contractors who performed work on or about the construction of a shopping complex in Dandenong known as "Capital Centre", owned by Thompson, a public listed company. On that project, Thompson engaged Construction Engineering Pty. Ltd. ("Construction") in writing to be construction manager, "to organise, supervise and administer construction of the project" with authority to enter into trade contracts on the principal's behalf. Pursuant thereto the appellants each entered into a lump sum contract with Construction, expressly as agent for and on behalf of Thompson, to perform work on the Capital Centre. Those contracts were signed on 12 December 1988. By 22 December 1989 the project (or at least the relevant portion) had reached the point of practical completion and the appellants had submitted their final claims for payment. Hitherto all claims for payment had been met, but it was not to be so in the case of the final claims. The appellants were only four of 12 trade contractors who found themselves in like position and who employed a solicitor, one Rockman, for the purpose of securing payment.

13. Mr. Rockman negotiated with solicitors acting for Thompson. In consequence, an agreement was made with Thompson on 15 March 1990 whereby Thompson acknowledged the amounts which it owed respectively to each of the 12 contractors for whom Mr. Rockman was acting; agreed to make an immediate part payment (called a "deposit") on account of what was owing and to pay the balance on 20 April 1990; and gave as security for the payment of that balance a number of units which Thompson held in the M. & T. Property Fund. The part payments achieved on 15 March 1990 were made out of a fund of some $399,329 (about which more will be said shortly), each of the trade contractors receiving a proportion of the fund according to the amount owed to it. Nothing more was paid by Thompson itself before it went into liquidation. The units given to the trade creditors as security were sold on 20 April and the proceeds divided among the 12 creditors concerned, but the units did not realise a lot and each was left to prove in the winding up for whatever was still owing.

16. Thus, as a result of the arrangements put in place on 15 March each of the four appellants received a portion of the moneys owing by Thompson. For example, the fourth appellant, Barden-Steeldeck Industries Pty. Ltd., which was owed $599,689.65 for work done, was paid $22,761.75 by way of "deposit" and a further $1,285 when the units were sold. Both the "deposit" paid on 15 March and the giving of security over the units were alleged to involve a preference and so, when the liquidator succeeded in his claims, judgment was given against Barden-Steeldeck for $24,046.75 with interest and costs. Without detailing the figures, suffice it to say that all four appellants were treated similarly. Indeed at trial the liquidator's claim against Barden-Steeldeck was treated as illustrative; for evidence led in respect of that claim was treated by agreement as evidence in respect of all four. After a trial lasting some 12 days, his Honour took time for consideration. Reasons for judgment in respect of the claim against Barden-Steeldeck were delivered on 28 October 1997 and, with the outcome of that proceeding thus determined, judgment to like effect was given on the same day in all four proceedings.

19. On these appeals the appellants contend that they received no "preference, priority or advantage over other creditors" within the meaning of s.122 of the Bankruptcy Act 1966 (as made applicable in the winding up by s.451 of the Companies Code (Vic.)) - either when the "deposits" were paid or when the security was given over the units - and that on that account the judgments below should be reversed. In the County Court the further submission had been made on behalf of the appellants that the impugned transactions had taken place in good faith on their part and in the ordinary course of business. The judge found good faith, but found that the transactions had not taken place in the ordinary course of business. Although the notices of appeal included a challenge to this last finding, it was abandoned in argument before us.

22. The appellants developed in argument two principal submissions. The first concerned only the so-called "deposits" which were paid to the appellants, as already mentioned, from a fund of some $399,329. In fact that was money being held at the time by Construction as the project manager of Thompson and the appellants were paid by Construction, which led to the submission that the money which was applied in paying the appellants on 15 March was not that of Thompson at all.

25. According to the respondent, the money in question being held by Construction on 15 March consisted of over-payments made by Thompson to Construction in the course of the project. Acting as Thompson's agent, Construction had hitherto been making payments to trade contractors as and when appropriate. On making a final assessment of claims and payments, Construction came to the conclusion that it had over-claimed from Thompson to the extent of $399,329 and so, immediately before the payments made on 15 March 1990, Construction owed that sum to Thompson. By virtue of the agreement made between Mr. Rockman on the one hand and the solicitors for Thompson on the other, that sum of $399,329 was to be divided among all 12 trade contractors (including the appellants) for whom Rockman was acting, each being paid in proportion to the amount it was owed by Thompson and on account. Hence the payment on 15 March of the "deposits". The respondent contended, and the judge accepted, that these payments, though made by Construction at the direction of Thompson, were tantamount to payments made by Thompson and out of its own property. Thompson was owed the money by Construction, it appeared, and Thompson directed the payments to the 12 trade contractors, Construction thereby discharging its own indebtedness to Thompson. An insolvent does not avoid s.451 by directing some third party who holds funds for it, to make payment out of those funds directly to its (the insolvent's) creditor on its behalf: Sheahan v. Carrier Air Conditioning Pty. Ltd. (1997) 189 C.L.R. 407 at 437-8, Ramsay v. National Commercial Banking Corporation of Australia Ltd. [1989] VicRp 7; [1989] V.R. 59 at 61-2.

28. The appellants contended, however, that Construction was not simply holding the sum of $399,329 for and at the direction of Thompson as moneys previously overpaid by Thompson to Construction. Rather, they said, Construction was holding this sum as a retention fund on the terms of the contracts which Construction, on behalf of Thompson, had entered into with the appellants. Reference was made to the provisions in these contracts governing the withholding of moneys from contractors during the course of the work up to a maximum of 5 per cent of the contract price, but reducing to 2.5 per cent at practical completion. Practical completion had arrived and so half of the retention money was due for payment to the trade contractors. Hence, it was said, the payments made on 15 March by Construction, as project manager, were in satisfaction of the contractual entitlement of the payees.

31. The difficulty with the argument thus far is that so much may be accepted without advancing the appellants' case. The payment which constitutes a preference void against a subsequently-appointed liquidator is a payment made to discharge existing indebtedness, or the payee would not be a creditor. No doubt perceiving that difficulty, the appellants went further, submitting that the money being held by Construction was in truth trust money, belonging beneficially to those contractors from whom the money had been withheld in the first place. The argument was put on the basis of both implied and constructive trust, but, if I may say so, it was altogether unpersuasive.

34. First, it was by no means clear that the amount in question represented retention money, previously withheld from the trade contractors by Construction. The appellants could point only to one letter from Construction to support their contention in this regard and the terms of that letter were equivocal. Secondly, even if some sums had been retained by Construction as claimed by the appellants, I am far from persuaded that there was any separation out of the money so retained, any fund established in the hands of Construction to which a trust might attach, or indeed any obligation cast upon Construction which might have grounded such a trust. The appellants relied upon In re Australian Home Finance Ltd. [1956] VicLawRp 1; [1956] V.L.R. 1, Hospital Products Ltd. v. U.S. Surgical Corporation [1984] HCA 64; (1984) 156 C.L.R. 41 at 69, 72, 96-7, 125, Stephens Travel Service International Pty. Ltd. v. Qantas Airways Ltd. (1988) 13 N.S.W.L.R. 331, A.S.C. v. Melbourne Asset Management Nominees Pty. Ltd. [1994] FCA 1031; (1994) 49 F.C.R. 334 at 358-9 and Re Old Inns of N.S.W. Pty. Ltd.; Millar v. Leach (1994) 13 A.C.S.R. 141; but either the cases were distinguishable or the passages relied upon had no application. In my opinion, there was nothing to indicate that the amount of $399,329 was other than a sum within the general funds of Construction - even if, as calculated by Construction, the amount identified was held by it, for and on behalf of Thompson, to be paid out to the contractors under their contracts as and when appropriate. In my opinion the evidence fell a long way short of what would be needed to prove that the amount being held by Construction was subject to a trust for trade contractors before Thompson gave the direction for its payment.

37. 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.

40. It is correct that by 15 March when the "deposits" were paid and the security given over the units the bank already had a fixed charge over all of the assets of Thompson. On 13 May 1988 Thompson had executed a mortgage debenture over all its assets in favour of the bank and the charge was duly registered soon afterwards, on 30 May. As is usual, the charge was in part fixed and in part floating. In so far as it was floating, it was to become fixed, without any further act on the part of the bank, "upon the monies hereby secured becoming payable" which would happen inter alia upon demand by the bank (see clause 1). As already recounted, Thompson entered into the management agreement with Construction in December 1988 when the four appellants entered into their trade contracts with Construction; practical completion arrived a year later and by the end of January 1990 payment of final claims was due. Discussions followed between representatives of Thompson and the unpaid creditors and Thompson took the first steps towards voluntary liquidation. On 5 March 1990 Mr Rockman received his instructions to act for the 12 trade contractors who retained him and he threatened Thompson with liquidation proceedings if his clients were not paid. On 9 March the bank served notice of demand under the mortgage debenture and the trial judge found - and it was common ground on this appeal - that on 9 March the charge in the debenture, to the extent that it was previously floating, became fixed and covered all of the assets of Thompson. Also on 9 March Construction advised Thompson that it was holding the sum of $399,329 which, in view of what I have already said, must be regarded as having become then subject to the bank's fixed charge.

43. Thus, by 15 March when the agreement by Mr. Rockman with Thompson for payment to the 12 trade contractors, the bank was holding a fixed charge over all of the assets of Thompson. Hence the submission that the making of the payments to the 12 contractors, including the appellants, and the giving of the security over the units could not have disadvantaged those unsecured creditors who did not participate on 15 March, simply because the property applied in favour of the 12 that day was not property "available" in the winding up, being not available to any but the secured creditor, the bank: it was by then property "belonging" to the bank, and no longer Thompson's. Whether this last is directly relevant is another matter; for s.122 looks to a payment made "by the debtor" (Octavo Investments Pty. Ltd. v. Knight [1979] HCA 61; (1979) 144 C.L.R. 360 at 368-9), although, as Brennan, C.J. pointed out in Sheahan v. Carrier Air Conditioning Pty. Ltd. (1997) 189 C.L.R.407 at 420-1, whether the property is owned by a third party may bear upon the question whether in making the payment the debtor is acting on his own behalf or on behalf of the third party: compare the approach taken by Dawson, Gaudron and Gummow, JJ. at 438. In this instance the property did not belong to any but Thompson, unless crystallisation of the charge on 9 March effected a change.

46. In developing their submission, the appellants relied in particular upon certain statements by Brennan, C.J. in Sheahan and by Finkelstein, J. in Wily v. St George Partnership Banking Ltd. [1999] FCA 33; (1999) 161 A.L.R. 1. In Sheahan Brennan, C.J. said, at 424:

"If a fund in the hands of a debtor or a debtor's agent is charged with the payment of a secured debt that would exhaust the fund, so that no part of the fund is available for distribution among the general creditors, and a payment to a general creditor is made out of the fund with the consent of the chargee, that creditor gains no preference at the expense of other general creditors. The effect of such a payment is not to prefer the payee among the general creditors but to prefer the payee to the secured creditor who would otherwise have been entitled to the money paid. And as the secured creditor has consented to the payment, no recoupment of the money paid is possible." [Emphasis added]

"If one asks whether there is less money available for the general body of creditors by reason of the three payments to the bank the answer must be a clear `No'. The reason is that if the payments had not been made the property available for distribution among creditors would not have increased. The bank would have been entitled to receive payment out of the property in the hands of the liquidator in priority to the other creditors. Any payment out of property that is not available to meet the debts due to the other creditors cannot confer a preference in favour of the payee. In this case then, the other creditors are not any the worse off by reason of the payments to the bank." [Emphasis added]

In both these cases the impugned payments (in Sheahan to unsecured creditors and in Wily to the secured creditor itself) were made out of property over which the secured creditor was holding a comprehensive charge, in Sheahan a charge which had already crystallised and in Wily a charge which, though still floating, was shortly to become crystallised upon winding up. It is necessary to say something more about each of these cases.

53. In Wily the company which went into liquidation had earlier given a fixed and floating charge over existing and future property of the company in favour of the respondent. At a time when it was unable to pay its debts, the company, by agreement with the respondent, made three payments to the respondent to reduce existing indebtedness. When the company was wound up, the liquidator sought to recover these payments on the ground that they were preferences, contending that at the time the payments were made the respondent was an unsecured creditor as its floating charge had not crystallised. It was held that two of the payments represented the proceeds of the sale of property over which the charge was already fixed and on that account the payments were not recoverable as preferences. As for the third, it was held the payment was not a preference for much the same reason because, although at the time of payment the charge was still floating, the question of preference or no was to be decided in the context of a hypothetical winding up when the charge would have become fixed.

56. Finkelstein, J., who delivered the principal judgment, took as his starting point the proposition that "when a debtor makes a payment out of a fund or from assets that have been validly charged with the payment of that debt, the creditor has not been preferred" within the meaning of s.122. In such a case, his Honour pointed out, "it is the charge that has created the preferred position of the creditor and the payment does no more than give effect to the charge": 161 A.L.R. at 6, para.[23]. And where the payment does do no more than give effect to the charge, so much may be accepted: National Australia Bank Ltd. v. KDS Construction Services Pty. Ltd. [1987] HCA 65; (1987) 163 C.L.R. 668 at 679 (cited by Finkelstein, J.) Where the property over which the charge extends is being realised and the proceeds applied in satisfaction of the debt, the position of the unsecured creditors is not affected.

59. That answered the liquidator's claim to two of the three payments in question but, as I have said, when the third payment was made the bank held only a floating charge - or at all events the charge which it held was not yet fixed over the property which was applied in making the payment. In some circumstances, it may not matter that the payment is made out of funds not subject to the security. If, being fully secured over Blackacre, the creditor is paid the full amount of his debt from funds of the debtor which are not the subject of the security, the debt would be discharged and the security released for the benefit of creditors generally. Then there would be no preference, not because the payment was by way of realising the security, but because the general body of unsecured creditors was in no way disadvantaged: A.&J. Lazzarotto Pty. Ltd. (in liquidation) (Full Court, Victoria, 16 December 1977, unreported) as recounted by Finkelstein, J. in Wily at 12-13 para.[56]. It was not, however, suggested in Wily that the bank was fully secured; rather, as I followed it, the assets of the company in liquidation were probably much less than were necessary to satisfy the bank's debt in full. Hence the third payment under challenge, though going in reduction of the general indebtedness of the company to the bank, did not serve to effect any corresponding release of security, even pro tanto. Was it correct, then, to regard the bank, to whom payment was made on account before liquidation, as receiving no more than the fruits of its security?

62. While acknowledging that the relevant time to determine preference or no is the date of the payment, not the date of the liquidation (as to which see Airservices Australia v. Ferrier (1996) 185 C.L.R. 483 at 501 note (51), citing Calzaturificio Zenith Pty. Ltd. (in liq.) v. N.S.W. Leather & Trading Co. Pty. Ltd. [1970] VicRp 80; [1970] V.R. 605 at 610 and Re Discovery Books Pty. Ltd. (1973) 20 F.L.R. 470 at 475), Finkelstein, J. held in favour of the bank upon the basis that the relevant question fell to be determined as if the company were already in liquidation when the payment was made, by which time its charge would be fixed, not floating. But with great respect I wonder if that is so. His Honour rested his opinion upon dicta looking to the effect of the impugned transaction in the light of subsequent events: was the general body of unsecured creditors better off or worse off by reason of the transaction; was there any ultimate decrease in the assets that were in fact available to meet the claims of unsecured creditors in the winding up? Such tests are commonly posed in cases concerning running accounts, such as Richardson v. Commercial Banking Co. of Sydney Ltd. [1952] HCA 8; (1952) 85 C.L.R. 110 at 129 and Airservices Australia v. Ferrier at 501-2 where Dawson, Gaudron and McHugh, JJ. refer to S. Richards & Co. Ltd. v. Lloyd [1933] HCA 26; (1933) 49 C.L.R. 49 at 62 and Rees v. Bank of New South Wales [1964] HCA 47; (1964) 111 C.L.R. 210 at 221-2. Such dicta confirm that there is no preference within s.122 where the end result of the impugned transaction is not to the disadvantage of the general body of creditors. But can that be said where at the time of the impugned payment the payee holds no more than a floating charge and the assets are insufficient to pay the debt in full (so that payment to the secured creditor does not secure any release of security, even pro tanto)?

65. Where the assets over which the floating charge extends are less than are needed to pay the secured creditor's debt in full, that creditor is properly regarded as partly unsecured. When, before the charge crystallises, that creditor is paid something on account out of assets over which, ex hypothesi, the charge never becomes fixed (if only because the payment is made before crystallisation), why should the payee not be treated as having received the payment on account of the unsecured portion of the debt? The creditor obtains a payment otherwise than out of assets to which the fixed charge later attaches and at the same time without any reduction in the amount of the debt secured if (as on the present hypothesis) the assets are insufficient anyway to meet the whole of the debtor's liability. Such a payment, before crystallisation, to a wholly unsecured creditor would presumably be a preference voidable under s.122, unless distributed pro rata among all such creditors in like position. Should the result be different because the chosen payee is partly secured over other assets? Like the other members of the Court in Wily I express no opinion on whether the creditor with a floating charge over all the assets has a proprietary interest in the assets before crystallisation; for that seems to me not to bear upon the question of preference or no. (On the question of proprietary interest, however, contrast Fire Nymph v. The Heating Centre (in liq.) (1992) 7 A.C.S.R. 365 at 376 per Sheller, J.A.)

68. It will be apparent from the foregoing that I have some reservations, if I may say so with respect, about the conclusion in Wily that there was no preference within s.122 although the third payment was made before crystallisation of the charge and out of property over which the charge was still floating. In Wily Finkelstein, J. considered that nevertheless the property applied to make that third payment was not "available" for the general, unsecured creditors. However that may have been in Wily, is it the case here where the payments, though made to unsecured creditors (not the secured creditor), were made after crystallisation and thus after the time when the charge became fixed over all of the debtor company's assets? Clearly Wily is distinguishable, but is the principle which is relied upon by the appellants - that payment out of assets not generally available to unsecured creditors cannot be a preference - applicable none the less?

71. That brings me to Sheahan. In Sheahan the payments under challenge by the liquidator were payments to unsecured creditors, as here. But the payments were in that case made by the receiver and manager appointed by the secured creditor and out of assets which were in his hands as receiver and manager. The payments were made because he chose to make them in pursuance of powers he had under the debenture deed and presumably in furtherance of the administration thereunder. In those circumstances Dawson, Gaudron and Gummow, JJ. held that the payments were not made "by the debtor" (an essential requirement of s.122) and so were immune to the liquidator's challenge. Brennan, C.J. considered that the payments were made by the debtor or its agent, but held that the payments conferred no relevant advantage on the payees because the only person disadvantaged was the secured creditor which had appointed the receiver and manager, thus initiating administration under the deed. It was not suggested, as I follow it, that the charge in question did not cover all of the debtor's assets or that those assets would be sufficient to pay out the secured creditor and yield some surplus for the unsecured creditors. The only person who had any interest in the assets of the debtor company was the secured creditor which had appointed the receiver and manager who, as such, was holding the money which was applied by him to make the payments under attack.

74. It was in that context that Brennan, C.J. made the remark which I have quoted in para.[15] and upon which the appellants sought to rely, contending that, as in Sheahan, so here: there could be no preference because the property out of which the payments were made to the appellants was property over which the bank had at the time a comprehensive charge which had already crystallised. What makes the submission difficult to accept, however, is the failure by the bank to take any steps to enforce the charge which became fixed on 9 March 1990. The debenture charge having crystallised on 9 March, the bank did nothing under it until 27 April 1990 when it appointed a receiver and manager to take possession. On 15 May application was filed for the compulsory winding up of Thompson and an order was made accordingly on 6 September 1990. Thus by 15 March, while the secured creditor had caused the floating charge to fix upon the assets of the debtor company, that was all that had happened; nothing had been done to take possession of the assets or to remove from Thompson the de facto power to deal with those assets, or even to impede its dealing with the property now at issue. It was thus that Thompson was apparently still in position to give a direction to Construction to pay the money it was holding to the 12 trade contractors for whom Mr. Rockman acted and to give the security over the units from which they obtained some further payment on account when the units were sold soon afterwards.

77. Moreover, even after the appointment of the receiver and manager on 27 April nothing was done either by the bank or the receiver to claim the property or to recover the money which by then had found its way to the appellants. Even by the time of judgment in the County Court on 5 November 1997, neither the bank nor the receiver had taken any action over - or indeed made any claim to - the sum of $399,329 which was paid out on 15 March 1990 or the units which were given by Thompson as security on that day and which were later sold. This no doubt prompted a submission by the payees at trial that, by virtue of the bank's inaction, there had been a "decrystallisation" of the charge which otherwise became fixed on 9 March. That submission was not accepted by the judge and, as it was not repeated on appeal, I say nothing at all about it. It suffices for present purposes to note the bank's inaction both before and after 15 March in respect of events on that day; for it is that inaction which, in my opinion, now admits of the conclusion that the making of the payments to the appellants on 15 March, and the giving of the security over the units, amounted to a preference which the liquidator properly claimed was void as against him in the winding up of Thompson and in respect of which he properly recovered judgment against the appellants in the County Court.

80. The appellants submitted that the bank's failure to act was no impediment to their success on these appeals; it was simply irrelevant. The charge having crystallised and so having become fixed over all of the assets of Thompson, the assets were not "available" assets in the winding up, so far as unsecured creditors were concerned. As in Sheahan, there was no suggestion that the assets were sufficient to pay out the bank, and so no suggestion of any surplus for unsecured creditors. By the same token the bank's failure to put its hand upon the money or upon the units that were applied to pay the appellants (and the other eight trade contractors) remains unexplained. When asked in argument if there was any advantage to the bank in seeing that these payments were made to some of the unsecured creditors, counsel was unable to suggest any. The argument put (and rejected) below, that the payments were to secure the performance by the payees of further work to finish the project was no longer relied upon.

83. In developing the argument that, given the bank's fixed charge over all, there was no preference within s.122, appellants' counsel urged that once the floating charge crystallised the property on which it fixed became assigned in equity to the chargee; crystallisation was said to complete the assignment (and in this respect reference may be made, for example, to Ferrier v. Bottomer [1972] HCA 11; (1972) 126 C.L.R. 597 at 607 per Menzies, J., George Barker Ltd. v. Eynon [1974] 1 W.L.R. 462 at 467 per Edmund Davies, L.J., Business Computers v. Anglo-African Leasing [1977] 1 W.L.R. 578 at 582 per Templeton, J. and Moodemere Pty. Ltd. v. Waters [1988] VicRp 31; [1988] V.R. 215 at 228 per Tadgell, J.; contrast Sykes on Securities (4th ed., 1986) p.925). Upon crystallisation occurring on 9 March 1990, the appellants would have it that the bank as chargee became owner, at least in equity, of all the property over which the charge then fixed, Thompson's property thereafter "belonging" (as counsel put it) to the bank. But the proposition that upon crystallisation there is simply an equitable assignment of the property charged is, I think, apt to mislead. No doubt sufficient for some purposes, for others it is too imprecise, as Brennan, C.J. remarked in Sheahan. The Chief Justice said this, at 422 (and I incorporate the footnotes):-

"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."

87. In Sheahan it was important that the secured creditor's interest in the debtor company's assets was only as defined by the terms of the mortgage debenture; that was at once the source of the receiver's authority to pay the money to the unsecured creditors and the limit of the secured creditor's rights to interfere at all. What is important here is that the secured creditor, the bank, if an assignee at all, is an assignee only by way of security and only in equity (at all events so far as relevant in this instance). The bank then has the rights of an equitable assignee for the purpose of securing payment of what the debtor company is owing. It may, if it chooses, exercise those rights. That the bank might have taken steps after 9 March to enforce its claims cannot be doubted; after all, albeit some 7 weeks later, it appointed a receiver and manager who presumably took possession of all the rest of the property of the debtor company, Thompson. We have to decide what results while the secured creditor is choosing to remain inactive.

90. Of course once the floating charge crystallised and became a fixed charge, the bank obtained a proprietary interest in the assets of Thompson, including the money held for Thompson by Construction and the units over which Thompson purported to give security to the 12 trade contractors. Thompson thereafter lacked the capacity in law to alienate such property inconsistently with the bank's charge which had become fixed: it could not alienate the property otherwise than subject to that charge. Yet that is what it purported to do, and in doing so it acted in breach of the contract it had made with the bank by means of the debenture deed, by implication purporting to deny the bank's proprietary interest in the property in question. At the end of the day, the bank was surely left to take action or not, as advised, to enforce its proprietary claim to the property or to seek compensation for any wrongdoing. The latter would presumably be of little significance if pursued against an insolvent company already in liquidation, while the former could succeed only subject to the usual limitations on any claim to an equitable interest in property already in the hands of some third party: Fire Nymph v. The Heating Centre (In liq.) (1992) 7 A.C.S.R. 365 (Court of Appeal, New South Wales).

93. In Fire Nymph, the appellant ("FN") was the manufacturer in New Zealand of heating appliances which it sold to the first respondent ("THC") for sale in Australia, both wholesale and retail. Both companies fell into financial difficulties and FN re-purchased certain heaters from THC. A financier ("AGC") was holding a debenture charge over all the assets of THC and subsequently appointed receivers and managers to THC. Finding THC in possession of the heaters at the time of their appointment, the receivers claimed that the heaters were subject to AGC's charge and sold them, no doubt applying the proceeds to reduce what was owing by THC to AGC. FN sued THC and the receivers, claiming that the heaters belonged to FN, having been purchased by it from THC free from any charge in favour of AGC. The receivers contended that FN's re-purchasing of the heaters was a transaction which was not in the ordinary course of business; that upon such a transaction occurring there had been "automatic crystallisation" of AGC's otherwise floating charge; that such crystallisation occurred, according to the debenture deed, "immediately before" the re-purchase, and that accordingly FN took title to the heaters only subject to AGC's charge, by then fixed. The receivers succeeded at first instance and the appeal by FN was dismissed.

96. The Court of Appeal agreed that FN's re-purchasing of the heaters had not been something done in the ordinary course of THC's business and so on that account the floating charge had crystallised. Gleeson, C.J. held that it crystallised automatically because the contract so provided, although it crystallised contemporaneously, not "immediately before", the repurchasing. That was sufficient to justify concluding that a fixed charge attached to the property being repurchased at the point of repurchase. Sheller, J.A., with whom Handley, J.A. agreed, came to the like conclusion on the ground that FN's licence to continue dealing with its property while the charge was floating was limited generally to transactions in the ordinary course of business, so that FN had no authority at all to pass title on this occasion otherwise than subject to AGC's charge. The Court therefore considered that the receivers had been correct in asserting AGC's title as chargee of the heaters; for all three judges were of opinion that FN had not established that it had legal title as a bona fide purchaser for value without notice. It is this last in particular to which I would draw attention.

99. Thus, in the course of his judgment, Gleeson, J. said, at 373-4:-

"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."

103. This makes it plain that the secured creditor who holds an equitable charge over the debtor's property will succeed or not, after crystallisation, in asserting an equitable interest in the property only according to the usual limitations affecting the assertion of claims in equity. In Fire Nymph the property in question, the heaters, had been sold otherwise than in the ordinary course of business and so, the charge automatically crystallising at that very point, the sale could take effect only subject to the secured creditor's fixed charge. Here, the disposition by Thompson of the property in question (by directing Construction to make payment and by the giving of security) occurred some days after crystallisation, which makes it even plainer that the disposition of property by Thompson could have been effected only subject to the bank's fixed charge. What matters, however, is that the disposition having occurred and the property having reached the third parties, the secured creditor, the bank, is relegated to asserting its claim - albeit its proprietary claim - in equity against those who have taken. Of course, the bank has chosen to do nothing: but had it sought to assert its claim, its success or failure must have depended upon the usual limitations affecting the assertion of claims in equity. To add in such circumstances that the secured creditor is the "owner" of the property in question or that the property "belongs" to the secured creditor seems to me to add nothing and, as I have said, is apt to mislead.

106. The problem of a secured creditor's having to assert a proprietary interest in equity against some third party purporting to take title from the debtor company after crystallisation is perhaps of comparatively recent origin. Again, to quote Gleeson, C.J. in Fire Nymph at 371:-

"Originally the usual form of contract which was held to create a floating charge provided that, upon the happening of some stipulated event or events, the charge would become enforceable. The chargee was then entitled, but not bound, to intervene, ordinarily by appointing a receiver. The courts held that in such a case the charge crystallised (that is to say, became converted to a fixed charge on the subject assets) upon such intervention. This was usually a fairly public occurrence, and third parties would normally be aware of it. In more recent times it has become not unusual for contracts creating floating charges to provide that they will automatically crystallise upon the happening of a certain event, not necessarily involving any act on the part of the chargee."

For the old practice, reference may be made to such cases as In re Lewis Merthyr Consolidated Collieries [1929] 1 Ch. 498 at 507, and for the development generally of "automatic crystallisation", see Gough on Charges (2nd ed., 1996) 248-9; see also Goode, Legal Problems of Credit and Security (1982) pp.40-41. Automatic crystallisation now gives rise to the very real possibility of the debtor company's appearing to retain the capacity to deal with its property, free of any encumbrance, notwithstanding that, unbeknown to all but a few, its property is subject to a charge which is no longer floating but has become fixed. Granted that the chargee in such circumstances will commonly have an equitable interest, of a proprietary kind, in the assets over which the fixed charge extends, there seems no reason to suppose that the chargee cannot be left to take possession or otherwise to take action in terms of the debenture deed or, if it waits too long, be relegated to asserting its proprietary interest in equity as against those third parties who have, in the meantime, purported to take title from the debtor company, apparently free from any charge, fixed or otherwise.

111. In this instance Thompson, having been left in possession, as it were, notwithstanding the crystallisation occasioned by the demand on 9 March, entered into the agreement with Mr. Rockman, directing the payments by Construction and giving the units as security. The payments were made and the security was given "by" the debtor company, as required by s.122, and, were it not for the existence of the charge, there seems no reason to doubt that those who were thereby favoured obtained a preference, priority or advantage over other unsecured creditors which was void as against the subsequently appointed liquidator by virtue of s.122, as applied by s.451 in the winding up of Thompson. That being so, why should it be different when, though the bank had a charge, the bank made no claim to enforce it? Why should it be supposed that, if the appellants had not received the money they did, the money would not have been available in the winding up for unsecured creditors generally? What evidence is there of that? There is none. The only evidence (apart from the mere existence of the charge) is to the contrary. After all, the mere making of the payments in question did not bar the claims of the bank as the holder of the fixed charge; the bank could still have taken steps to enforce its claims under the debenture deed had it wished. Yet it did nothing and it may now be too late for it to do so. But if so, that is another matter, independent of its rights under the deed.

114. 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.

117. For these reasons I would reject the appellants' argument that there could be no preference in these cases because the property in question would not have been available otherwise to unsecured creditors generally. Indeed, that such an argument does not per se deny that there was a preference can be seen in Richardson itself, in the Court's treatment of the misapplication of moneys held on trust. There, the bankrupt was a defaulting solicitor, one Price; he misapplied funds (which included trust moneys) in making payments to his bank to reduce what was owing on the office overdraft account, an account in respect of which the bank was only partly secured. The liquidator sued the bank to recover a number of those payments and, as is well known, the Court held that none of the payments (save the last) gave the bank a preference, having regard in particular to the overall effect of the impugned payments in what was after all a running account. It is for that that the case is usually cited. But, when dealing specially with the last payment into the overdrawn account (which was in a separate category because, being the last, it advantaged none but the bank) the Court used this particular payment - a payment of £390 - as a vehicle for disposing of another argument of the bank of a more general kind. I refer to the contention (described by the Court at 135) -

". . . that no deposit to the credit of the office account out of trust moneys could be considered a preference because they were not moneys which would have been available to creditors and the respondent bank could obtain no preference over other creditors by receiving them in purported reduction of the overdraft." [Emphasis added]

121. The particular misapplication of the £390 is simply described. On the day of his arrest Price was handed a cheque from one Mrs. Turner, representing the balance of purchase money for a cottage she had bought. Price told the bank manager, Commins, that he had received it and Commins, after Price's arrest, cajoled his clerks into giving him the cheque which he then used to reduce the balance owing by Price to the bank on the ordinary office overdraft. (By this time Price's overdraft was well in excess of any security held by the bank). Speaking of this payment of £390 by way of example, Dixon, Williams and Fullagar, JJ. said, at 136:-

"If it had been Price's own money, the effect would have been to give a preference to the respondent bank over other creditors. The question whether such a use of other people's money is within s.95 is not easy. In Price's hands the cheque and its proceeds were subject to a trust and Commins knew this. It is correct that if the cheque or its proceeds had been preserved and had remained identifiable they never would have been assets available to Price's creditors. The Official Receiver as trustee of his bankrupt estate could have made no title to them. Again, if in an identifiable form the money represented by Mrs. Turner's cheque had come to the latter's hands, it would have been subject to her right to follow it specifically. [Emphasis added]

On the other hand, their Honours continued, Price himself could be taken to have converted the cheque in dealing with it as he did, so that Mrs. Turner was entitled, had she wished, to prove in his bankruptcy accordingly. Their Honours then said, at 136-7:-

"On the whole it appears to us that the payment of a cheque representing trust funds into the office account, were it otherwise to operate to give a preference to the bank, would be within s.95. It is within s.95 because, although the same moneys could never but for the misappropriation have been available to the bankrupt's creditors, there would be a preference, priority or advantage effected in favour of the bank as a creditor, in making a payment to it, when other creditors must prove and other creditors suffer the disadvantage of being exposed to the competition upon the assets of the proof of the defrauded owner of the funds. If the payment to the bank is undone at the suit of that owner, that would be another matter. If it is undone at the suit of the Official Receiver, then the owner may or may not be able to follow the moneys into his hands. That is a question involving matters of law and of fact and we are not now called upon to decide it in either branch." [Emphasis added]

It will be apparent how similar are these last remarks (about the rights of the true owner) to those of Gleeson, C.J. in Fire Nymph and in my opinion both cases, though quite different in themselves and both distinguishable from the present, lend considerable support to the analysis I have offered of the transactions here in issue.

128. In Richardson, the cheque which was misapplied belonged to Mrs. Turner in equity and she had all the rights of the beneficial owner to follow the cheque so long as it remained identifiable property. Yet once the cheque was misapplied, and wanting any steps by her to recover it as identifiable property, the Court was content to find that its misapplication in favour of one only of the unsecured creditors constituted a preference which was void against the trustee in bankruptcy of the wrongdoer. In the present appeals, the circumstances are much the same. The bank held a fixed charge over the property which, it can be said (at best for the bank) was "misapplied" by Thompson when the arrangements were made on 15 March which operated to the benefit of the 12 trade contractors, including the four appellants. Wanting any steps by the bank to recover the property so "misapplied", it cannot be said, I think, that the property in question was "not available to meet the debts due to the other creditors" in any sense relevant to the statements of either Brennan, C.J. or Finkelstein, J. which I quoted at the outset (in para.[15]). As in Richardson, so here: there was a preference notwithstanding the right of Mrs. Turner in the one case, and the bank in these cases, to lay claim to the property at issue (always supposing that claim was made in timely fashion).

131. The trial Judge held that the respondent was entitled to succeed in his claims in these four proceedings and for the reasons I have given I think that that conclusion was right. I would dismiss the appeals.

136. I have read the draft reasons for judgment prepared by Phillips, J.A. I agree with him that the appeals should be dismissed for the reasons he has stated.

139. The question whether a payment made by the debtor is a preference is not answered simply by determining whether the payment was made from the property of the debtor or another. The basic question remains whether in practical terms the creditor who has been paid gained an advantage at the expense of his fellow creditors. Thompson was able to alienate the property over which the charge had become fixed. It could do so only subject to the Bank's charge, but whether that factor diminished the value of the property alienated depended upon whether the bank took steps to enforce its charge. It has taken no step, and the practical result is that some unsecured creditors have received property that was in fact available to all.