In the matter of Force Corp Pty Ltd (in liq) [2020] NSWSC 1842

Subrogation

1. The doctrinal basis of equitable subrogation in Australian law is stated in Bofinger v Kingsway Group Limited (2009) 239 CLR 269; [2009] HCA 94 at [85]-[98], where the High Court rejected the "unjust" enrichment concept adopted in English authorities such as Banque Financiere de la Cite v Parc (Battersea) Ltd [1999] 1 AC 221.
2. In Aged Care Services Pty Ltd v Kanning Services Pty Ltd (2013) 86 NSWLR 174; [2013] NSWCA 393, I said at [49] (Meagher and Leeming JJA agreeing), that subrogation is the "process by which one party is substituted for another so that he may enforce the other's rights against a third party for his own benefit" (sic): C Mitchell, The Law of Subrogation, Clarendon Press, Oxford (1994) at 3, cited with approval by Santow J in Highland v Exception Holdings Pty Ltd (in liq) [2006] NSWCA 318; (2007) 60 ACSR 223 at [90].
3. In XDVD, White J said at [77] that the situation of a secured creditor or of a receiver appointed to a company by a secured creditor who, in accordance with s 433 of the Corporations Act, makes payments to priority creditors, is analogous to that of a person who, other than voluntarily, discharges the security of another, and that is a well-recognised circumstance in which rights of subrogation arise. I agree.
4. White J continued in XDVD at [77]-[79]: [77] … The payers in such circumstances are presumed to have preserved the security for their own benefit: Ghana Commercial Bank v Chandiram [1960] AC 732 at 745; Cochrane v Cochrane [1985] 3 NSWLR 403. In the latter case, Kearney J stated the principle as follows (at 405): This principle is based on equity's concern to prevent one party obtaining an advantage at the expense of another which in the circumstances of the case is unconscionable. Hence, there is a common thread running through the relevant cases to the effect that the conscience of the mortgagor should be affected so as to cause the mortgage to be kept alive. This is illustrated in the text book examples first, of a third party not being entitled to a right by way of subrogation where he simply lends the money on an unsecured basis to the mortgagor who then uses such funds to pay off the mortgage; and secondly, of a third party being so entitled where he advances the money to pay out the mortgage on the understanding that security would be provided for such advance upon the mortgage being paid out. (Emphasis added.) [78] In my opinion, there is no difficulty in imputing the requisite intention to receivers in circumstances like the present. They are quite different from strangers or volunteers who discharge the security of another. Receivers exercise their duties in the interests of their appointors, as well as in the interests of the company to which they are appointed. Rather than intending the loss of a security, their function is to preserve and realise the security. It would be inappropriate to impute an intention by them to forego that security when they make payments required by law. For the unsecured creditors or for the company itself to seek to have the benefit of the compulsory payment would, in my opinion, be both opportunistic and unconscionable. [79] Accordingly, although the present may be a new class of case, I consider that an equitable right of subrogation should be recognised. The effect is that CBA is subrogated, to the extent that the Receivers' payments to the priority creditors diminished its security, to the entitlements of those creditors to the free funds.
5. Given that the receivers paid the amount of $856,515.97 to employees for pre-appointment wages and superannuation from circulating assets that would otherwise have been covered by Lease Collateral's security interest then, subject to the proposed set-off referred to in Issue C below, the liquidators would be justified in treating Lease Collateral as entitled to be subrogated to the position of those employees with respect to a priority distribution in that amount pursuant to s 556(1)(e) of the Corporations Act.

C. The offsetting claim issue

1. The liquidators submitted that the amount of the priority distribution to Lease Collateral of $856,515.97 under s 561(e) should be reduced on account of a liability of Lease Collateral to Force Corp arising in the following circumstances.
2. The agreed facts record that $1,403,079.78 was recovered by the receivers from the circulating assets of Force Corp comprising $720,280.20 (the receivables drawdown) and $682,799.58 (the other circulating asset recoveries), but only an amount of $856,515.97 was paid by the receivers to Force Corp's employees, or withheld as PAYG tax and remitted to the ATO, or withheld as superannuation and subsequently remitted to various employee superannuation funds.
3. The difference between the total of the circulating asset recoveries of $1,403,079.78, which ought to have been applied to meet pre-appointment employees' wages and entitlements, and the amount of $856,515.97 that was so applied, being $546,563.81, was used as part of the receivership and was ultimately paid to or for the benefit of Lease Collateral. As a consequence, the receivers breached their statutory duty under s 433(3)(c) of the Corporations Act and are liable to restore this amount to Force Corp: Westminster Corporation v Haste [1950] Ch 442; [1950] 2 All ER 65; Inland Revenue Commissioners v Goldblatt [1972] Ch 498; [1972] 2 All ER 202; Steinberg v Herbert (1988) 14 ACLR 80 at 96; Whitton at 137B.
4. The liquidators submitted that apart from the receivers' liability, there is good reason to consider that Lease Collateral would also be liable to Force Corp for the amount that the receivers failed to pay to employees, either on accessorial grounds because it was "involved" in the contravention by the receivers, or otherwise pursuant to restitutionary principles as the recipient of the monies that were applied by mistake in breach of statutory duty. The latter analysis is the more natural way of characterising what occurred here.
5. Thus, where money is paid by reason of mistake, the payer may recover it from the recipient in a common law action for money had and received: Australian Financial Services Leasing Pty Ltd v Hills Industries Ltd (2014) 253 CLR 260 at 568; [2014] HCA 14. Although recovery by the claimant may depend upon whether it would be inequitable for the recipient to retain the benefit, it is not necessary for the claimant to allege or prove that the retention of the money received by the defendant would be unjust as that is a matter on which the defendant bears the onus: Hills Industries at 593; David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353 at 379; [1992] HCA 48 at [57].
6. Lease Collateral accepts for the purpose of this proceeding that it has a liability to Force Corp with respect to the sum of $546,563.81 and joined with the liquidators in submitting that this amount can be offset against the amount for which Lease Collateral would be otherwise entitled as a priority distribution under s 556(1)(e). Lease Collateral accepts that the effect of the setoff would be that its priority claim under s 556(1)(e) in relation to wages paid to employees is $309,952.16 (being $856,515.97 less $546,563.81).
7. The liquidators seek a direction that they are justified in proceeding on this basis. As indicated, the liquidators initially submitted that set-off under s 553C(1) is available. Prior to the hearing the Court raised with the parties the question whether the rule in Cherry v Boultbee [1839] Eng R 1099; (1839) 41 ER 171 applied. The liquidators provided supplementary submissions which maintained their contention that it was arguable that Lease Collateral is entitled to the right of set-off under s 553C(1), but alternatively, the rule in Cherry v Boultbee was applicable. Counsel for Lease Collateral adopted the liquidators' submissions.
8. In supplementary submissions served after the hearing, the liquidators advanced an alternative submission that equitable set-off may apply in the present case if insolvency set-off is not available. Reference was made to obiter statements in Hamersley Iron Pty Ltd v Forge Group Power Pty Ltd (in Liquidation) (receivers and managers appointed) (2018) 53 WAR 325; [2018] WASCA 163 at [155]-[177], that insolvency set-off under s 553C is not a code and does not exclude, at least in some cases, equitable set-off where s 553C(1) is not applicable, such as because of an absence of mutuality.

(1) Insolvency set-off

1. Corporations Act, s 553C provides: 553C Insolvent companies - mutual credit and set‑off (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.
2. The object of insolvency set-off is to do substantial justice between the parties: Gye v McIntyre (1991) 171 CLR 609 at 618-619; [1991] HCA 60. Thus it has been said that insolvency set-off should be given its widest possible scope: Gye v McIntyre at 619; Coventry v Charter Pacific Corp Ltd (2005) 227 CLR 234; [2005] HCA 67 at [56]. Nonetheless, set-off is to be confined within its limits. As the joint judgment in Coventry v Charter Pacific Corp said at [56] (in the context of bankruptcy set-off): One of the limits is that creditors of the bankrupt should not be disadvantaged by allowing set-off where the debts, credits or other dealings were not genuinely mutual as a matter of substance.
3. Some of the principles concerning insolvency set-off under s 553C are referred to in Re Hawden Property Group Pty Ltd (in liq) [2018] NSWSC 481; (2018) 125 ACSR 355 at [27]-[31]. In the present context, four matters should be emphasised.
4. First, insolvency set-off is self-executing in the sense that it operates automatically upon the occurrence of the winding up so as to bring about an extinguishment of the claims at that date to the extent of the set-off: Gye v McIntyre at 622; GM & MA Pearce & Co Pty Ltd v RGM Australia Pty Ltd [1990] 4 VR 888 at 891, 896, 899.
5. Second, the relevant date for determining whether the sum due from one party is to be set off against any sum due from the other party in respect of mutual dealings is the "relevant date" under s 553 for determining what claims are admissible to proof against the company: Re Parker (1997) 80 FCR 1 at 15; JLF Bakeries Pty Ltd v Baker's Delight Holdings Ltd [2007] NSWSC 894; (2007) 64 ACSR 633; Façade Treatment Engineering Pty Ltd v Multiplex Constructions Pty Ltd [2016] VSCA 247; 116 ACSR 493. That is also the date at which the winding-up of Force Corp is taken to have commenced: s 513B(b) and 513C(b).
6. Third, the "account" in accordance with s 553C(1) must be taken whenever it is necessary for any purpose to ascertain the effect which the section had: Gye v McIntyre at 622; Stein v Blake [1995] 1 AC 243 at 253. The account shall be deemed to be taken and the sums due from one party set-off against the other as at the date of the winding up: Stein v Blake at 255. The respective claims cease to have a separate existence as choses in action, and are replaced by a claim to a net balance: Stein v Blake at 255; Pearce & Co v RGM Australia at 891, 896, 899. This reasoning had been applied by Beaumont J, prior to Stein v Blake, in Gye v McIntyre (FCA, Beaumont J, 8 October 1992).
7. Fourth, debts in respect of mutual dealings which may be set-off under s 553C(1) include not only debts that are then due, but debts which are contingent and which ultimately mature into pecuniary demands: Hiley v Peoples Prudential Assurance Co Ltd (1938) 60 CLR 468 at 497: [1938] HCA 40; Gye v McIntyre at 624. As to the concept of "contingent debt", it is well-established that a company will owe or be owed a contingent debt if, as a result of an existing obligation, the company will be liable to pay or be entitled to receive a sum of money on the occurrence of a future event which may happen, not which must happen: Community Development Pty Ltd v Engwirda Construction Co (1996) 120 CLR 455 at 459; Federal Commissioner of Taxation v Gosstray [1986] VR 876 at 878.

Whether mutual dealings?

1. The liquidators' argument in support of insolvency set-off under s 553C(1) rested on an analogy with cases involving mutual dealings where debts were contingent at the date of the commencement of the winding-up, but ultimately matured into pecuniary demands: see, for example, Shirlaw v Lewis (1993) 10 ACSR 288 and JLF Bakeries Pty Ltd v Baker's Delight Holdings Ltd. That is not the present case.
2. Shirlaw v Lewis involved a contract for the sale of a business which provided that if the purchaser defaulted, the vendor would repurchase the purchaser's goods and saleable stock. The purchaser repudiated the contract and this was followed by a winding-up application and a liquidator was appointed. The vendor took possession of the stock and disposed of it after the filing of the winding-up application. The liquidator of the purchaser made a claim that the sale of the stock to the vendor after the commencement of the winding-up was a void disposition under a predecessor provision to s 468(1) of the Corporations Act and sought damages in conversion. Hodgson J found that the vendor could set-off its cross-claim for damages against the purchaser arising from repudiation against the liquidator's claim against the vendor, whether the claim was characterised as a claim in conversion or a claim based on unjust enrichment. His Honour reasoned at 296 that, "[w]hat ultimately happened after the crystallisation of mutual obligations" arose out of pre-liquidation dealings of the parties and that "these mutual obligations as crystallised are matters which would be set-off" under the applicable insolvency set-off provision; at that time s 86 of the Bankruptcy Act 1966 (Cth).
3. This reasoning has been criticised on the basis that whilst there were prior obligations by reason of the contract, that should not have sufficed for a contingent liability and therefore for a set-off: R Derham, "Set-off against statutory avoidance and insolvent trading claims in company liquidation" (2015) 89 ALJ 459 at 481.
4. JLF Bakeries Pty Ltd v Baker's Delight Holdings Ltd involved a set-off under s 553C of the Corporations Act of monies payable after the commencement of the winding-up pursuant to the exercise of an option to purchase the insolvent company's assets against debts owed by the company to the optionee. The debts were in respect of mutual dealings, one of which was contingent on the termination of an agreement and the exercise of an option ultimately matured into a pecuniary demand. Again, that is not the present case.
5. The liquidators also referred by analogy to cases which have held or suggested that a set-off under s 553C may be available in relation to statutory recovery claims by a liquidator which only arise on the winding-up of the company, such as the recovery of compensation for loss resulting from insolvent trading under s 588M and s 588W and uncommercial transactions which are voidable under s 588FF. In Hussain v CSR Building Products Ltd [2016] FCA 392; 246 FCR 62, an unfair preference case, Edelman J identified a number of such cases at [227], including:

• Re Parker, where Mansfield J allowed a set-off under s 553C to a claim for recovery of a payment from a holding company under s 588W, which was based on insolvent trading under s 588V;
• Smith (in his capacity as liquidator of ACN 002 864 002 Pty Ltd (in liq) (formerly known as Petrolink Pty Ltd) v Boné [2015] FCA 319 where Gleeson J in the Federal Court allowed a set-off to a liquidator's claim for recovery of compensation for insolvent trading under ss 588G and 588M;
• Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd (2011) 81 NSWLR 47; [2011] NSWCA 109, where Young JA said in obiter at [279], that set off would have been allowed under s 553C to a liquidator's claim under s 588FF(1) for an uncommercial transaction. Hodgson JA agreed "substantially", and Whealy JA agreed with Young JA;
• Hall v Poolman (2007) NSWSC 1330; (2007) 65 ACSR 123, where Palmer J allowed a set-off under s 553C to a liquidator's insolvent trading claim of a director under ss 588G and 588M: at [408]-[414].

1. These cases are controversial. Moreover, the "creeping assumption" from the insolvent trading cases under ss 588M and 588V to the avoidance cases under s 588F, such as Buzzle Operations, that the reasoning in Re Parker is applicable to liquidator's claims under s 588FF is suspect. One difficulty with the obiter statement of Young JA in Buzzle Operations is the reliance upon the liquidator being an officer of the court (which is no doubt correct in a court ordered winding up) for the proposition that for the court not to allow a set off in that case would be to permit the liquidator as its officer to act inequitably: at [259]. But s 553C which is self-executing, is confined within its limits: see [79] and [81] above. There is no room for the operation of a wider principle that set off will be allowed to prevent a liquidator acting inequitably.
2. In Bryant, in the matter of Gunns Limited (in Liq) (receivers and managers appointed) v Bluewood Industries Pty Ltd [2020] FCA 714, an unfair preference case, Davies J did not decide whether insolvency set-off was available to an unfair preference, holding that s 553C(2) excluded any set-off on the facts, but said at [130], with reference to the remarks of Edelman J in Hussain v CSR Building Products: Justice Edelman was of the view that there were "powerful contrary arguments … to suggest that a set-off is not available against a liquidator's claim to recover preference payments" (at 107 [235]), but his Honour ultimately did not decide the point because, amongst other reasons, the Court did not have the benefit of full argument on the issue.
3. More recently in Stone v Melrose Cranes & Rigging Pty Ltd, in the matter of Cardinal Project Services Pty Ltd (in liq) (No 2) [2018] FCA 530; (2018) 125 ACSR 406, Markovic J followed the decisions in Re Parker, Buzzle Operations and Hall v Poolman and held that set-off under s 553C(1) can be utilised in voidable transaction claims for an unfair preference: at [283].
4. The application of insolvency set-off to a claim by a liquidator for recovery of an unfair preference under s 588FF is contrary to a long line of authority that the right of set-off under s 553C (and predecessor provisions) is not available in unfair preference claims. In Gunns Limited (in Liq) (receivers and managers appointed) v Bluewood Industries Pty Ltd, Davies J referred at [130] to the following cases, by way of example: Re a Debtor [1927] 1 Ch 410; Re Clements; Ex parte Trustee; Goldsbrough Mort & Co Ltd (Respondent) (1931) 7 ABC 255; Re Smith; Ex parte Trustee; J Bird Pty Ltd and Tully (Respondents) (1933) 6 ABC 49; Calzaturuficio Zenith Pty Ltd (in liq) v NSW Leather & Trading Co Pty Ltd; Victorian Leather Co Pty Ltd [1970] VR 605; Painter v Charles Whiting & Chambers Ltd (1932) 4 ABC 203; and Re Buchanan Enterprises Pty Ltd (No 2) (1982) 7 ACLR 407.
5. The essential reasons for denying insolvency set-off with respect to a preference claim are first, the debt the subject of the preference is not provable in the liquidation until the preference payment is paid back in full, second, the obligation to repay the preference arises after liquidation, and third, there is a lack of mutuality.

Notice of insolvency

1. Let it be assumed, however, that s 553C(1) applies. The question would then arise whether insolvency set-off is excluded by s 553C(2) because, at the time of Lease Collateral receiving credit from Force Corp Lease Collateral had notice of the fact that Force Corp was insolvent.
2. In Jetaway Logistics Pty Ltd v Deputy Commissioner of Taxation [2009] VSCA 319; 26 VR 657, the Victorian Court of Appeal said of the concept of "notice of the fact" in s 553C(2) at [21]-[22]: [21] The section requires proof, not that the creditor at the relevant time knew that the company was insolvent, but that the creditor had notice of that fact. … A person will have "notice of the fact" that a company is insolvent if the person has actual notice of facts which disclose that the company lacks the ability to pay its debts when they fall due, within the meaning of s 95A. It is unnecessary to show that the person actually formed the view that the company lacked that ability. As the NSW Court of Appeal said in Hathaway Shirt Co Pty Ltd v B Rawe GmbH Co [[1989] NSWCA 98], it is "well established that there is a difference in law between receiving notice of a fact and being made fully and subjectively aware of the fact". [22] What is required is proof of facts known to the creditor which warranted the conclusion of insolvency. Since "grounds for suspecting" insolvency will not suffice, it is not enough that insolvency is a possible inference from the known facts. Whether it must be the only reasonable inference open is a question we need not decide.
3. The relevant time at which the creditor or debtor is required to have had notice of facts that would have indicated to a reasonable person that the company lacked the ability to pay its debts when they fell due is at the time of giving or receiving credit. Ordinarily, this would be when the transaction that gave rise to the liability occurred: Old Style Confections Pty Ltd v Microbyte Investments Pty Ltd (In liq) (1995) 2 VR 457 at 464; Grapecorp Management Pty Ltd (in liq) v Grape Exchange Management Euston Pty Ltd (2012) 265 FLR 33; [2012] VSC 112 at [72]-[76].
4. It has been said that the fact that administrators have been appointed to a company is not of itself conclusive evidence establishing that a party has notice of the fact that a company is insolvent from that date onwards: JLF Bakeries Pty Ltd at [32], although in that case, White J acknowledged, that where the administrators ceased to trade the business, there was a strong point of insolvency.
5. The onus of establishing notice of insolvency for the purposes of s 553C(2) rests on the party that resists set-off: Jetaway Logistics Pty Ltd v Deputy Commissioner of Taxation at [21]. In supplementary submissions filed after the hearing, the liquidators sought to resist a set-off by Lease Collateral relying upon s 553C(2).
6. The liquidators accepted that nothing in the agreed statement of facts, nor the evidence in Mr Lombe's affidavit, sheds light on the extent to which Lease Collateral had notice of the facts that would have indicated that Force Corp was insolvent following the appointment of the receivers and the administrators. Nonetheless, the liquidators submitted that in circumstances where Lease Collateral was the principal secured creditor of Force Corp, and had itself appointed the administrators, it would not be appropriate for the Court to proceed on the basis that Lease Collateral did not have notice of insolvency when it received payments from the receivers, which was at a date later than the appointment of the receivers and the administrators. The liquidators submitted that s 553C(2) may apply in the present case so as to prevent the operation of an insolvency set-off.
7. Lease Collateral was given the opportunity to make further submissions on this issue. It adopted the liquidators' submissions and confirmed that it does not seek to adduce any further evidence on whether it had notice of the fact that Force Corp was insolvent at the time the relevant payments were made. In these circumstances, the liquidators' submissions on notice should be accepted. Accordingly, if, contrary to my view, s 553C(1) is applicable, set-off would be precluded by s 553C(2).

(2) Equitable set-off

1. The classic statement of the nature of equitable set-off is that it requires "some equitable ground for being protected against" another's demand and the mere existence of cross demands is not sufficient. It is an indispensable requirement of equitable set-off that the defendant's counter claim actually goes to the root of, and essentially be bound up with, so much of the plaintiff's claim as to "impeach" the title of the plaintiff's claim: Hawes v Dean [2014] NSWCA 380 at [61]-[62] citing Lord Cottenham LC in Rawson v Samuel (1841) Cr & Ph 161; 41 ER 451 at 458, referred to with approval by the High Court in Hill v Ziymack (1908) 7 CLR 352 at 361; [1908] HCA 13.
2. The "impeachment of title" test remains applicable in Australia: HP Mercantile Pty Ltd v Dierickx [2013] NSWCA 479; (2013) 306 ALR 53 at [136], Hawes v Dean at [61]-[62]; Wollongong Coal Ltd v Gujarat NRE India Pty Ltd [2019] NSWCA 135 at [113] (Leeming JA, Bathurst CJ and McCallum JA agreeing).
3. As Emmett JA said in HP Mercantile at [136] (Beazley P and Meagher JA agreeing on this point) said: For there to be an equitable set-off, the set-off must essentially be bound up with and go to the root of, challenge, call in question, or impeach the title of the claimant. Equitable set-off is available where the party seeking it can show a recognised equitable ground for being, to the relevant extent, protected from its adversary's demand. The mere existence of a cross-claim is not sufficient. There must be some ground for equitable intervention beyond the mere existence of a cross-claim, such that it can be said that the equity of the defendant impeaches the claimant's title to the legal demand being enforced.
4. In Wollongong Coal, the Court of Appeal expressly refrained from deciding whether, in order for a debt to impeach another it is sufficient that it be found to be "unconscionable" to permit the enforcement of one without regard to the other. As Leeming JA said at [113], the term "unconscionable" is used in quite difference senses in equity and the notion of being contrary to good conscience as a theme explaining the availability of the equitable defence of set-off is not the same as factors sufficient to entitle a party to rescind a transaction relying upon an Amadio special disadvantage. The present case does not give rise to this question.
5. The liquidators submitted that Lease Collateral's obligation to make restitution to Force Corp for monies received by it in the external administration (which ought to have been used by the receivers to pay employee creditors) is inextricably bound up with its right to be subrogated in equity to the position of those same employee creditors to receive a distribution in the winding-up of Force Corp. I do not agree.
6. On the agreed facts, Lease Collateral is obliged to make restitution to Force Corp for monies paid to it by the receivers by mistake totalling $546,563.81, which ought to have been used to pay the pre-appointment wages and superannuation contributions of certain employees. That Lease Collateral is entitled to be subrogated to the claims of other employee creditors in the winding-up to priority payment under s 556(1)(e) by reason of payments made by the receivers totalling $856,515.97 to those "other" employees of Force Corp, does not answer the description of a counter-claim which goes to the root of, and impeaches the title of Force Corp's restitutionary claim against Lease Collateral in relation to the $546,563.81 received by Lease Collateral.
7. In the circumstances, it is not necessary to consider whether as a matter of principle equitable set-off may be available when there is no insolvency set-off under s 553C(1) as suggested in obiter statements in Hammersley Iron.

(3) The rule in Cherry v Boultbee

1. As indicated, the liquidator contends, in the alternative, that if insolvency set-off is not available, then the rule in Cherry v Boultbee is enlivened and the result is the same, at least in substance; namely, Lease Collateral's entitlement to a distribution in the winding up as a priority creditor is subject to its obligation notionally to pay or contribute $546,563.81 to Force Corp, with those amounts to be netted-off against one another.
2. Insolvency set-off under s 553C and the equitable principle in Cherry v Boultbee cover different fields and although the equitable principle continues to apply in liquidations notwithstanding the terms of s 553C, the principle in Cherry v Boultbee only applies where insolvency set-off is not available: Re Anglican Development Fund Diocese of Bathurst (receivers & managers appointed) [2015] NSWSC 44; (2015) 33 ACLC 15-010 at [37]-[39]; Hawden Property at [41]-[42]; Re PrimeSpace Property Investment Limited (in liquidation) [2018] NSWSC 919 at [27] (Black J).
3. The nature and operation of the rule in Cherry v Boultbee is addressed in Re Hawden Property Group Pty Ltd (in liq) [2108] NSWSC 481; (2018) 125 ACSR 355. Relevantly for the present context, it is convenient to reproduce what I said at [37]-[43]: [37] The so-called "rule in Cherry v Boultbee" is a somewhat inaccurate expression. The rule originated in Jeffs v Wood (1722) 24 ER 668 and Cherry v Boultbee is in fact an example of an exception to the rule. So much is clear from the analysis of the authorities by Palmer J in Otis Elevator Co Pty Ltd v Guide Rails Pty Ltd (in liquidation) (2004) 49 ACSR 531; [2004] NSWSC 383 at [33]-[47]. See also In Re Kaupthing Singer & Friedlander Ltd (In Administration) [2011] UKSC 48; [2012] 1 AC 804 at [13]-[20]. While the rule originally developed in the context of deceased estates, it has been subsequently applied in bankruptcy and company liquidations. [38] In Re Peruvian Railway Construction Company Ltd [1915] 2 Ch 144, Sargant J, at 150, described the rule in the following terms: … where a person entitled to participate in a fund is also bound to make a contribution in aid of that fund, he cannot be allowed so to participate unless and until he has fulfilled his duty to contribute. [39] This description of the rule was adopted in Gray v Gray [2004] NSWCA 408 by Young CJ in Eq (Sheller and Bryson JJA agreeing) at [90]. Young CJ in Eq also observed at [91] that the rule was an illustration of a more fundamental principle of equity, that he who seeks equity must do equity. [40] More recently, Lord Walker observed In Re Kaupthing Singer & Friedlander that the rule is not a complex technical rule and does nothing more than provide a method of netting-off reciprocal monetary obligations. Lord Walker said at [8]: The expression "the rule in Cherry v Boultbee" suggests a technical rule of some complexity. Any such impression would be misleading. It is basically a simple technique of netting-off reciprocal monetary obligations, even where there is no room for legal set-off, developed and used by masters in the Court of Chancery in giving directions for the administration of the estates of deceased persons. Complication arises only in a situation of insolvency, where the equitable rule produces a different outcome from that produced by statutory set-off. [41] In Derham on the Law of Set-Off (4th Ed, 2010, Oxford University Press), at [14.02], the learned author notes that the authorities have emphasised that that Cherry v Boultbee has a wider application than set-off, and rests upon quite different principles. As Swinfen-Eady J said in Re Rhodesia Goldfields Ltd; Partridge v Rhodesia Goldfields Ltd [1910] 1 Ch 239 at 246-247, the rule is of general application that where an estate is being administered by the Court, or where a fund is being distributed, a party cannot take anything out of the fund until he has made good what he owes to the fund. This is because it would be inequitable that a person entitled to a share of a fund should not receive anything in respect of that share without paying what he may be bound to contribute to the same fund. [42] The authorities also indicate that nothing is in strict language set-off; rather, the contributor is paid by holding in his own hand a part of the mass, which, if the mass were completed, he would receive back. The Court in effect says to the person claiming to be paid "you have in your hands that which is applicable to the payment - pay yourself out of that": Re Rhodesia Goldfields at 246, citing In Re Goy & Co Ltd [1900] 2 Ch 149 at 153 (Stirling J). [43] Consistent with the authorities referred to above, the principle is best described as a right to appropriate a particular asset as payment, as opposed to a right of set-off or a right of retainer: Derham on the Law of Set-Off at [14.03]. (See also Re D & D Corak Investments Pty Ltd (in Liquidation) [2020] NSWSC 1197 at [18] (Rees J).)
4. Accepting that the rule in Cherry v Boultbee requires a netting-off of reciprocal monetary obligations (In Re Kaupthing Singer & Friedlander Ltd (In Administration [2011] UKSC 48; [2012] 1 AC 804 at [13]-[20]), the liquidator submitted that, strictly, the netting off does not occur at the stage of Lease Collateral's claim to prove as a priority creditor under s 556(1)(e), but occurs at the earlier and first stage of Lease Collateral's right to prove as a priority creditor under s 556(1)(c), and to the extent that Lease Collateral's obligations to contribute to the fund remains unsatisfied, the netting off then occurs at a second stage under s 556(1)(e). That is, Lease Collateral's liability to pay to Force Corp the amount of $546,563.81 is not (wholly) netted off against its right to prove as a priority creditor under s 556(1)(e) for $856,515.97 as the table reproduced at [9] above suggests. I accept that submission.
5. Three further matters should be noted. First, no problem arises with Lease Collateral participating as a priority creditor under s 556(1)(e) without having first contributed the whole of the amount of $546,563.81 to the fund available to the liquidators in the winding-up, for the benefit of other priority creditors since there are no priority creditors at the s 556(1)(c) level other than Lease Collateral.
6. Second, Lease Collateral is to be treated as having a right to appropriate its claim as a priority creditor under s 556(1)(c) in the amount of $315,442.97 as part payment of its liability to contribute $546,563.81 to Force Corp.
7. Third, Lease Collateral is also to be treated as having a right to appropriate its priority claims under s 556(1)(e) for $51,142.62 and $856,515.97 to the extent necessary as payment of the balance of its liability to contribute $231,120.84 to Force Corp ($546,563.81 less $315,442.97).
8. To give effect to the rule in Cherry v Boultbee, counsel for the liquidators proposed that a direction be given the following terms: The liquidators are entitled to direct Lease Collateral Pty Ltd to appropriate its liability to contribute $546,563.81 to Force Corp Pty Ltd in part satisfaction of its right to prove as a priority creditor of Force Corp Pty Ltd for the amounts of: (a) $315,442.97 (under subsection 556(1)(c) of the Act); (b) $51,142.62 (under section 560 and subsection 556(1)(e) of the Act); and (c) $856,515.97 (under subsection 556(1)(e) of the Act), such that the amount payable to Lease Collateral Pty Ltd as a priority creditor in conformity with paragraphs 1, 2 and 3 above is $676,537.75.
9. Subject to some amendments to the terms of the direction, as indicated in the order below, it is appropriate that the Court give the liquidators a direction to this effect.

D. The LeasePLUS Payment Issue

1. Corporations Act, s 560 provides: 560 Advances for company to make priority payments in relation to employees If: (a) a payment has been made by a company: (i) on account of wages; or (ii) on account of superannuation contributions (within the meaning of section 556); or (iii) in respect of leave of absence, or termination of employment, under an industrial instrument; and (b) the payment was made as a result of an advance of money by a person (whether before, on or after the relevant date) for the purpose of making the payment; then: (c) the person by whom the money was advanced has the same rights under this Chapter as a creditor of the company; and (d) subject to paragraph (e), the person by whom the money was advanced has, in the winding up of the company, the same right of priority of payment in respect of the money so advanced and paid as the person who received the payment would have had if the payment had not been made; and (e) the right of priority conferred by paragraph (d) is not to exceed the amount by which the sum in respect of which the person who received the payment would have been entitled to priority in the winding up has been diminished by reason of the payment.
2. The effect of s 560 is that if a payment has been made by a company on account of wages or superannuation contributions (whether before, or after, commencement of the external administration, here, the administration commencing on 13 July 2015) and the payment was made as a result of an advance of money made for that purpose, then the payor has the same right of priority in the winding up as the recipient of the money with respect to the money so advanced. The provision operates as a form of statutory subrogation.
3. Lease Collateral, Force Corp and the receivers entered into an agreement on 10 August 2015 described as a Short-Term Funding Agreement which contained the following provisions: 1. Force Corp hereby requests Leas Collateral to make available to Force Corp advances solely to fund payments by Force Corp of the kind described by s 560(a) of the Corporations Act 2001 (Cth): (a) to LeasePLUS on account of unpaid employee wages comprising amounts owing under certain novated leases which form part of the salary package payable by Force Corp to employees (Outstanding Lease Payments) in an aggregate amount not exceeding $51,142.65 (or such greater amount that Lease Collateral in its absolute discretion agrees in writing) (Initial Advances) … 2. Lease Collateral agrees to provide each Initial Advance … subject to each condition set out in clause 9 (each a Condition) being satisfied or waived in writing as notified by Lease Collateral to Force Corp and this document [sic] … 6. Force Corp irrevocably and unconditionally directs Lease Collateral to arrange for the Initial Advances to be paid on behalf of Force Corp to LeasePLUS in satisfaction of the Outstanding Lease Payments. … 9. The Conditions are: (a) this document is duly executed by each party (other than Lease Collateral); and (b) evidence satisfactory to Lease Collateral that the EE Account [a separate account to be established and operated by Force Corp] has been established with a bank and on terms (including as to account signatories) acceptable to Lease Collateral.
4. On 12 August 2015, Lease Collateral paid the amount of $51,142.65 to LeasePLUS with respect to amounts outstanding from Force Corp for certain of its employees under a salary packing arrangement with respect to novated leases for motor vehicles which formed part of the salary package of those employees which amounts were deducted by Force Corp for their wages on a monthly basis. Those leasing arrangements were provided by LeasePLUS Service Pty Ltd and on the commencement of the administration there were unpaid amounts owing to LeasePLUS under those novated leases by Force Corp. These amounts fall within the definition of "wages" in s 9 of the Act which include amounts payable to or in respect of an employee of the company under an industrial instrument, which includes a contract of employment, including amounts payable by way of allowance or reimbursement.
5. The question on which the liquidators seek a direction is whether the payment by Lease Collateral of $51,142.65 falls within s 560 of the Corporations Act, in circumstances where that amount was paid by directly to LeasePLUS, rather than the payment to LeasePLUS being made out of a Force Corp account. The reference in s 560(b) to an "advance" of money is to loan to the company, which creates a debtor-creditor relationship, as distinct from a gift or transfer to the company to be held on trust; Lombe v Wagga Leagues Club Limited [2006] NSWSC 3 at [27].
6. The liquidators point to the textual requirement in s 560 that the payment be made "by the company" and accept, correctly in my view, that this means that s 560(a) only applies where the company the subject of the winding up pays the employee / related liabilities itself, using monies lent to it by another person: Re Dalma (No 1) Pty Ltd (in liq) [2013] NSWSC 1335; (2013) 279 FLR 80 at [11] (Brereton J).
7. The Short-Term Funding Agreement involved the provision of a loan by Lease Collateral to Force Corp. The effect of the direction to pay in clause 6 is that Lease Collateral, as lender, was directed by Force Corp, as borrower, to make payment of the sum of $51,142.65 direct to LeasePLUS. That payment answers the description in s 560(a) of a payment "made by a company" and the description in s 560(b) of a payment made as a result of an "advance" of money by a person for the purpose of making the payment. The payment had the effect of automatically discharging Force Corp's liability to LeasePLUS: Burness v Supaproducts Pty Ltd [2009] FCA 893; (2009) 259 ALR 339 at [44]-[45] (Gordon J).
8. The present case is distinguishable from Re Dalma, where Dalma Constructions paid the relevant liabilities to employees directly and contemporaneously wrote to the administrators of the company to the effect that it had made the payments and was seeking to rely on s 560. In Re Dalma, there was no payment made by direction of the company.
9. The liquidators properly drew the Court's attention to the possibility of a constructional choice that on a literal reading of the words "by a company" in s 560(a), the LeasePLUS payment does not fall within the terms of the provision. In my view, the effect of the provision is clear. Section 560(a) requires a payment "made by a company". A company makes a payment when it directs its lender to pay the advance to a third party "on account of wages".
10. A direction will be given that the liquidators would be justified in treating the LeasePLUS payment as falling within s 560 of the Act and accordingly, having the priority given under s 556(1)(e) of the Act.

Conclusion and Orders

1. The liquidators have made out a case for the directions they seek in the originating process, subject to amendment of the proposed direction in par [3] of the originating process to reflect the application of the rule in Cherry v Boultbee.
2. The liquidators seek an order that costs of the proceedings should be costs in the winding up of Force Corp. That order is appropriate. The liquidators submit that there should be no order as to the costs of Lease Collateral with the intent that it bears its own costs of the proceedings. Lease Collateral did not submit to the contrary.
3. Accordingly, the Court gives the following directions and makes the following order: 1. A direction that, subject to par (5) below, the liquidators would be justified in treating the amount of $315,342.97 as being monies advanced by Lease Collateral Pty Ltd to the first plaintiffs, in their capacity as the then joint and several administrators of Force Corp Pty Ltd (Force Corp), for their remuneration and disbursements during the administration of Force Corp, and as a debt or claim falling within s 556(1)(c) of the Corporations Act 2001 (Cth) (the Act). 2. A direction that, subject to par (5) below, the liquidators would be justified in treating the amount of $51,142.62 as being monies advanced by Lease Collateral Pty Ltd to the receivers and managers of Force Corp and to Force Corp, for the purpose of Force Corp paying pre-appointment wage entitlements to employees of Force Corp, and as a debt or claim falling within ss 560 and 556(1)(e) of the Act. 3. A direction that, subject to par (5) below, the liquidators would be justified in treating the amount of $856,515.97 as being monies paid by the receivers and managers of Force Corp to the employees of Force Corp out of the circulating assets of Force Corp, and as: 1. having been paid in accordance with s 433(3)(c) of the Act; and 2. a debt or claim falling within s 556(1)(e) of the Act. 1. A direction that the liquidators would be justified in treating the amount of $546,563.81 as being monies realised by the receivers and managers of Force Corp, and as: 1. having not been paid by the receivers and managers of Force Corp to the employees of Force Corp out of the circulating assets of Force Corp; and 2. having not been paid in accordance with s 433(3)(c) of the Act. 1. A direction that on the proper application of the rule in Cherry v Boultbee in the circumstances of the liquidation of Force Corp, the liquidators would be justified in directing Lease Collateral Pty Ltd to appropriate its liability to contribute $546,563.81 to Force Corp as follows: 1. as to $315,442.97, in full satisfaction of its right to prove as a priority creditor of Force Corp for the amount of $315,442.97 (under subsection 556(1)(c) of the Act) in conformity with par (1) above; 2. with respect to the balance of $231,120.84: 1. as to $51,142.62, in full satisfaction of its right to prove as a priority creditor of Force Corp for the amount of $51,142.62 (under s 560 and subsec 556(1)(e) of the Act); and 2. as to the balance of $179,978.22, in part satisfaction of its right to prove as a priority creditor of Force Corp for the amount of $856,515.97 (under subsec 556(1)(e) of the Act), such that the amount payable to Lease Collateral Pty Ltd as a priority creditor under s 556(1)(e) of the Act in conformity with pars (2) and (3) above is $676,537.75. 1. Order that the plaintiffs' costs of and incidental to the originating process shall be costs in the winding up of Force Corp Pty Ltd (in liq).

Amendments 21 December 2020 - "Decision": replace [133] with [136] 21 December 2020 - Amendments made to [136(1), (2), (6)] DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 21 December 2020