Rule To Apply In Respect of Autonomous Obligations
64 Lumley submitted that the rule to apply was one which recognised the fact of payment to the purchasers. It was submitted that it did not matter how that rule was characterised, whether it be by determining that there had been a pro tanto reduction of the debt or as a matter of doing justice between two competing claims. On either basis Lumley should be entitled to prove in the liquidation of the builders for its $5 million and the purchasers for $10 million.
65 All parties acknowledged that there was no direct authority on point. Lumley submitted however, that the T.O.S.G. case provided some assistance.
66 T.O.S.G. was a company established by a group of travel agents and tourist operators for the purpose of providing financial assistance to travellers should they be left stranded, or having paid for holidays be left without their arrangements being able to be fulfilled, where their travel agent had for some reason, for example due to liquidation, defaulted in the provision of the travel services. The funding for the scheme was provided by means of bank bonds or other securities provided by the travel agents in favour of T.O.S.G.
67 Barclays and a number of other banks had provided bank bonds to T.O.S.G. at the instance of Clarksons. At the time of giving the bonds, Barclays and the banks had obtained counter indemnities from Clarksons. Clarksons went into liquidation, leaving clients without their contracted travel services. T.O.S.G. thus called up the bonds which were duly paid. Although T.O.S.G. had a complete discretion (within the parameters of its charter) as to the use of the monies paid under the bond, it in fact used those monies to make payments to the holidaymakers and other customers of Clarksons who had suffered a loss. As a condition of payment, the Clarksons' clients were required to assign such rights as they had against Clarksons to a government agency. That agency had a statutory obligation to make payments to stranded and other customers of failed travel agencies and tourist operators.
68 The Banks sought to prove in the liquidation pursuant to their counter indemnities for the amounts paid by T.O.S.G. to the Clarksons' clients. The agency sought to prove in respect of the assigned customer claims to the extent it was out of pocket pursuant to its statutory obligations to those clients. The Clarksons' liquidators contended that the two proofs reflected the same debt and by operation of the rule against double proofs, only one proof could be lodged. The Bank and the agency each sought declaratory relief that their respective debts should be admitted and that of the other rejected.
69 At first instance, all parties proceeded on the basis that the rule against double proofs applied. Nourse J considered that the surety analogy applied or alternatively that a "broad equity" applied. On the surety analogy, his Honour found that the bank was analogous to a creditor who had guaranteed the whole debt up to a monetary limit. On the application of "broad equity principles" his Honour considered the result was to be derived from the intentions of the parties as deduced from their contracts. On either basis, his Honour held that the banks were not entitled to prove in the liquidation. This decision was reversed on appeal.
70 On appeal to the Court of Appeal the question whether the case involved a case of double proofs was raised. In dealing with that question, Oliver LJ at 636 referred to the operation of the rule against double proofs in these terms:
"It is simply whether the two competing claims are, in substance , claims for payment of the same debt twice over. … the rule against double proofs in respect of two liabilities of an insolvent debtor is going to apply wherever the existence of one liability is dependent upon and referable only to the liability to the other and where to allow both liabilities to rank independently for dividend would produce injustice to the other unsecured creditors.
… and stems from the fundamental rule of all insolvency administration that, subject to certain statutory priorities, the debtor's available assets are to be applied pair passu in discharge of the debtor's liabilities. … A simpler test, perhaps, is to postulate the question - what would the position be as regards the payment of the liabilities in respect of which proofs have been lodged if the debtor were now solvent?"
71 In re Oriental Commercial Bank provides an example. There Mellish LJ observed at 102:
"It appears to me clearly that it is substantially the same debt; because if all parties had been solvent, whatever sums the Oriental Commercial Bank might have paid to the Agra Bank, although they would have paid it, no doubt, for the purpose of performing the contract they had entered into by their indorsement, yet, substantially, whatever sums they might have paid to the Agra Bank would have gone in reduction of the sums which the Oriental Commercial Bank had promised to pay the European Bank. In that case the Oriental Commercial Bank could never had been called upon to pay these bills twice over. It would have made no difference that they had entered into two contracts with two separate parties that they would pay the bills … It is clear that they would have performed both contracts by paying the bills once …"
72 Oliver LJ considered that the rule against double proofs did apply. In determining how the rule should be applied, his Honour relied upon the following features of the transaction. The bonds given by the banks to T.O.S.G. could be called up by T.O.S.G. upon the happening of a nominated event - here the liquidation of Clarksons. However, T.O.S.G. was not obliged under the terms of the bond to pay the monies for any purpose associated with the nominated event. The banks had also taken an independent charter of indemnity from Clarksons. Oliver LJ at 639 reasoned the matter this way:
"Suppose that no counter-indemnity had been sought or given and disregard altogether Clarksons' insolvency. The banks undertake, for what they no doubt regard as an adequate consideration, to provide moneys to a third party in a certain event. If the event occurs and if some part of the moneys are applied in fact in paying debts of Clarksons, by what title could the banks claim, in effect, a recoupment for which they never stipulated as part of the original consideration? I can see none."
73 Oliver LJ at 645 also considered that the surety analogy was applicable but, contrary to the finding of Nourse J, found that the relevant rule was the second of those referred to in Ellis v Emmanuel, namely, that of the guarantee of the whole of a debt subject to a fluctuating balance up to a monetary limit.
74 It followed on the application of this rule that the banks were entitled to prove in priority to the agency.
75 Oliver LJ then dealt with the matter on the "broad equity" approach. Nourse J's reasoning in that regard was as follows:
"But in the end I do not need to rely on the analogy at all. I agree with [counsel] that the decisive feature of the present case is the trust fund's power to recoup to the customers any shortfall remaining after they had received all available dividends in Clarksons' liquidation. Once you get to that stage it is apparent that it would indeed be most inequitable for the banks to claim, as against the customers, a rateable proportion of any dividends receivable or received by them. This is not a narrow equity, but a broad one. And it is a surer basis for decision than any mere analogy."
76 Oliver LJ found however, at 647-648:
"… I cannot, for my part, share the [trial] judge's view that there is anything inequitable in allowing the banks who have paid real money to recover a dividend on the sums which they have paid and in reducing the proofs of the customers, who have received real money in priority to other creditors, by the amounts which they have in fact received. Leaving aside, for the moment, the suretyship analogy, if the amounts of the customers' claims had been equal to or less than the bond moneys, there could be no question whatever that the banks were entitled to prove for what they had paid. What is there then in the fact that the customers' debts exceed the amount of the bond moneys that displaces the banks' claims? It is only the rule against double proof and that brings one back to the suretyship analogy. If one discards that as a guide, one is left with competitive claims between a class of creditors (the banks) who are out of pocket to the full nominal amount of their claims and a class of creditors (the customers) who are in fact out of pocket to an extent less than the full nominal amount of their claims because of their receipt of the banks' money. … I can see no equity which dictates that the customers' claims should be preferred."
77 Kerr LJ did not endorse the surety analogy and for the reasons given by Oliver LJ considered the banks could prove to the exclusion of the agents. Slade LJ applied the surety analogy.
78 Lumley submits that the reasoning of Oliver LJ grounds support for its primary submission that it is entitled to prove for the amounts paid under the performance bonds. It had paid "real moneys" and the purchasers had correspondingly received "real moneys".
79 In the House of Lords, the view was taken that the arrangement did not involve any notions of surety and therefore those principles did not apply. Lord Brightman at 668 took the view that there was no impediment to the banks claiming under their counter indemnity whether pursuant to the rule against double proofs or otherwise.
80 Lumley, however, particularly draws attention to the speech of Lord Templeman at 672-673, as being apposite to their case:
"In my view, upon the true and simple construction of the bond and the indemnity, when T.O.S.G. paid £ 1,000 of Barclays' money to a customer whose claim against Clarksons amounted to £1,000, the claim of that customer against Clarksons was extinguished and there became vested in Barclays an indisputable claim against Clarksons for £1,000 under the indemnity. If T.O.S.G. paid £200 to a customer whose claim was £1,000, then the customer could thereafter only claim and prove for the balance of £800 and Barclays could claim and prove under its indemnity for £200. By the indemnity Clarksons agreed to repay to the banks every penny that the banks paid under the Bond and that T.O.S.G. paid to the customers.
In the event, T.O.S.G. extinguished claims of Clarksons' customers to the extent of £1,268,000 and the banks became entitled to prove for £1,268,000 under their indemnities.
81 His Lordship concluded at 674:
"But equity, broad or narrow, does not overlook the distinction between a debt and a dividend on a debt, nor does it enable T.O.S.G. to ignore or modify the legal rights of the banks under the bonds and the indemnities. ... The liquidators will pay the dividends on £1,268,000 to the banks because the banks provided that sum pursuant to the bonds in discharge of the liabilities of Clarksons to its customers, and because the banks became entitled to be indemnified by Clarksons pursuant to the indemnities. The liquidators will pay to the agency dividends on the sums which the agency provided in discharging further liabilities of Clarksons to its customers."
82 Lumley submits the same position should apply here, the basic proposition being that the purchasers should not be entitled to receive more than 100 cents in the dollar. It was also submitted that in cases such as Westpac, and T.O.S.G. it was assumed there should be a pro rata reduction of the debt.
83 Austin J rejected Lumley's submissions on this point. He considered that on the facts in T.S.O.G.:
"considerations of equity may well have pointed to preferring the banks over the customers, since the customers' claims had been artificially preserved by an assignment notwithstanding that the customers were paid out, and their claims were now being asserted for the benefit of the agency rather than the customers. Moreover, the arrangement in that case was a public compensation scheme involving non-commercial considerations."
84 His Honour thus preferred to base his decision on the nature and purpose of the transaction entered into.
85 With respect to his Honour, I do not necessarily see any relevant point of distinction in the fact that the agency's obligations to pay the customers arose under a public compensation scheme. However, as was submitted by Oceanfast Marine, Oceanfast and the administrators, T.S.O.G. is distinguishable because in that case there was an express stipulation in the bonds for the return of any surplus. There was no such reservation here.
86 This very much brings one back to determining whether the answer is to be found in the terms of the contracts between the parties. This was the position of Oceanfast Marine, Oceanfast and the administrators. They contend that the actual result arrived at by his Honour for the reasons expressed in para 81 of his judgment is correct. They further point out that notwithstanding that the obligation is autonomous, the Court cannot be blind to the fact that the obligation is payable against the due performance of the contract: see cl 5(1). In other words, the arrangements between the parties provided a means whereby the purchasers had available the equivalent of cash, should it happen that there was default or non-performance of the tug construction contract.
87 Senior counsel for the administrators also submitted that it was appropriate to establish some prima facie rule which gives effect to the commercial purpose of the bonds as explained in Wood Hall. In support of this submission, the administrators say that Lumley was best placed to price the credit risk that it was assuming when it issued the bonds. It would be expected that the risk would be reflected in the fee which it charged for the facility.
88 Likewise, the purchasers' primary position is that the trial judge's decision is correct for the reasons given by Austin J in para 81 of his judgment. They contend that the money paid to them under the Performance Bonds were 'collateral benefits' which they are entitled to retain for their own benefit. They point out that the law has always recognised the availability of two forms of compensation for one loss: see Farrow Finance Co Ltd v ANZ Executors & Trustee Co Ltd (1997) 15 ACLC 529 at 553. They submit that in issuing the bonds Lumley accepted autonomous obligations, providing the purchasers with an equivalent of cash, without reserving any right to undermine the commercial operation of the bonds by lodgement of a competing proof of debt.
89 It is clear that there are competing arguments either way in this matter. There is force in each argument. Both may be put simply. On the one hand, there is the contention of Lumley that there should be a pro tanto reduction of the purchasers' claim, because they had already received from Lumley a portion of the "loss" for which it sought to prove. On the other hand, there is the argument that the parties entered into a commercial arrangement, the purpose of which was to provide security against breach so that the obligee ought to be entitled to the full benefit of the contract without reduction of its rights against the debtor.
90 A number of considerations point to the second of these approaches as being the appropriate one to adopt. First, in the cases which have dealt with the rule against double proofs, other than in surety situations, emphasis has been given to the circumstances of the particular case: see T.O.S.G per Slade LJ at 660 (cited with approval by French J in Western Australia v Bond Corporation):
"Difficulty may well arise in determining whether, in any given case, two proofs are in respect of what is in substance the same debt. Though various broad tests have been canvassed by both Bar and Bench in argument in this case, I have, for my own part, found none of them wholly satisfactory. The question can, I think, only be determined by reference to the particular facts of the case before the court, bearing in mind that it is the substance of the relevant liability, rather than the form, on which attention must be concentrated ." (emphasis added)
91 In this case, the "particular facts of the case" are to be derived initially from the contracts between the parties. The following features of those transactions which are relevant are as follows. First, Lumley's obligation under the performance bond is a joint and several one with Oceanfast Marine. Secondly, Oceanfast Marine could not "stop" or "undermine" the obligation to pay (cl 4). Thirdly, Lumley was able to pay out the bond and thus bring to an end its obligation without being required to do so (cl 5). Fourthly, as Lumley could have attained the position it now asserts by a relevant contractual provision, the terms of the contract should govern the outcome. Finally, under the Deed of Indemnity and Guarantee, Oceanfast guaranteed Lumley against "all loss" (cl 2.1), being the "aggregate at any time of all payments made and liabilities incurred by [it] in connection with [the performance bond]" (cl 1.1).
92 This combination of provisions highlights certain essential features of the transaction. The bonds were required so as to provide the purchasers with security against loss should there by default by Oceanfast Marine. The provisions of the performance bonds were directed to that end. There were no provisions directed to protecting Lumley should its restitutionary rights against Oceanfast Marine prove to be inadequate or worthless. This is underscored by the fact that Lumley sought to protect its position, that is, to recover any payment made under the bond by obtaining the indemnity from Oceanfast. The fact that the right was also rendered worthless because of Oceanfast's insolvency is not to the point.
93 I have come to the conclusion, therefore, that the second of the two views is preferable and that the purchasers should be entitled to prove in priority to Lumley. The consequence in this case is that Lumley will not be entitled to prove in the liquidation as there are insufficient funds to meet the purchaser's claim of $15 million.
94 It also follows on the view I have reached it is unnecessary to determine the Notice of Contention.
95 Accordingly, the appeal should be dismissed with costs.
96 GILES JA: Beazley JA has described the contracts between the parties. Although there were seven transactions, it was common ground that they were relevantly identical and could be treated as one transaction. In what follows I have done so by compressing the separate contracts and the separate bonds into one contract and one bond, by compressing the separate contracting parties with Oceanfast Marine into the one contracting party Adsteam, and by combining the losses of the separate contracting parties into one figure and the payments under the separate bonds into one figure.
97 The broad question can be stated as follows. Oceanfast Marine contracted to build a tug boat for Adsteam. Its parent company Oceanfast guaranteed performance of Oceanfast Marine's obligations under the contract. The contract required that Oceanfast Marine provide to Adsteam an insurer's bond for the due performance of the contract. Lumley issued the bond. Oceanfast indemnified Lumley in respect of its obligations under the bond. Oceanfast Marine and Oceanfast went into voluntary administration and Oceanfast Marine failed to complete performance of the contract. Adsteam incurred losses of $15 million. Adsteam made demand under the bond and was paid $5 million. Which of Adsteam and Lumley can prove in the administrations of Oceanfast Marine and Oceanfast and for what amount?
98 There are mathematically a number of possible answers to the broad question, but the particular question ordered for separate determination was confined to three possible answers. It came down to whether, in each administration, Adsteam can prove for $15 million and Lumley for $5 million; Adsteam can prove for $15 million and Lumley for nothing; or Adsteam can prove for $10 million and Lumley for $5 million.
99 The particular question included "having regard to the rule known as 'the rule against double proofs'". That is a rule to the effect that only one dividend will be paid in an insolvent administration for what is in substance the one debt, see for example re Oriental Commercial Bank, ex parte European Bank (1871) LR 7 Ch App 99 at 103-4; Day & Dent Constructions Pty Ltd (in liquidation) v North Australian Properties Pty Ltd (1982) 150 CLR 85 at 100; Barclays Bank Ltd v TOSG Trust Fund (1984) 1 AC 626 at 637-8, 649, 659-60 (CA); Western Australia v Bond Corporation Holdings (No 2) (1992) 37 FCR 150 at 161-4. The rule, of course, throws up which of the creditors claiming in respect of the one debt is to be preferred. It is part of the question, and does not provide an answer to the question.