[2008] VSC 416 (Robson J)

CORPORATIONS - Insolvency - Winding up - Voidable transaction - Insolvent transaction - Unfair preference - Doctrine of ultimate effect - Whether proof of unfair preference dependent on 'ultimate effect' of 'entire transaction' - Whether payments of mining lease rent and royalties unfair preferences - VR Dye & Co v Peninsula Hotels Pty Ltd (in liq) [1999] VSCA 60; [1999] 3 VR 201, Beveridge v Whitton [2001] NSWCA 6, followed: Sheldrake v Paltoglou [2006) QCA 52, doubted - Corporations Act 2001 (Cth), s 588FA.

1 This is an appeal from a judgment given in the Commercial and Equity Division. The appellants' claim below was for the recovery of payments made by Centaur Mining and Exploration Ltd ('Centaur Mining') on account of mining lease rents and royalties to the Minister administering the Mining Act 1978 (WA). The appellants contended that the payments were unfair preferences, insolvent transactions and voidable transactions under ss 588FA, 588FC and 588FE of the Corporations Act 2001 (C'th) ('the Act'). After a trial of four days' duration, the judge held that none of the payments was an unfair preference and thus dismissed the claim.

2 I have had the advantage of reading in draft the reasons for judgment of Mandie JA and I gratefully adopt his Honour's statement of the facts and pleadings. I also agree with his Honour's conclusion that the appeal should be allowed in relation to payments made on account of royalties but should otherwise be dismissed. My reasons are as follows.

3 The principal issue at trial concerned the correct construction of s 588FA(1)(b) of the Act and, more precisely, whether the doctrine of ultimate effect survived the 1992 amendments to insolvency law made by the Corporate Law Reform Act 1992 (Cth). There was also an issue as to whether, if the doctrine of ultimate effect still applied, it applied equally to payments on account of royalties as to payments of rent.

4 The appellants contended below that the doctrine of ultimate effect (including its application by way of what the judge described as 'the landlord's defence')[1] was replaced by the voidable transaction provisions of the Act, including s 588FA(1), introduced by the Corporate Law Reform Act 1992 (C'th). In the appellants' submission, those provisions constituted a new, exclusively statutory, regime which fundamentally altered the law relating to preferences.

5 The judge rejected the submission. His Honour preferred the view expressed in VR Dye & Co v Peninsula Hotels Pty Ltd (in liq)[2] that, notwithstanding the changes made by the Corporate Law Reform Act, s 588FA of the Act[3] is still directed against unfair preferences and should be construed in the same way as the former provisions, except to the extent that the language of the new provisions clearly points to a contrary conclusion. Thus, for the purposes of characterising an impugned transaction and its effect under the preference provisions, in each case the court should look at the 'ultimate effect' of the 'entire transaction' in order to determine whether it has worked an unfair preference within the meaning of the section.

6 Importantly, as the judge observed, that view of s588FA was supported by the conclusion of Heydon JA (with whom Mason P and Powell JA agreed) in Beveridge v Whitton,[4] that:

the court ought not to refuse to follow the decision of the Victorian Court of Appeal in VR Dye & Co v Peninsula Hotels Pty Ltd (In Liq) without being convinced that it is plainly wrong: Akins v Abigroup Ltd.[5] The same is true in my opinion of well-considered dicta even if, which is questionable, the statements of the Victorian Court of Appeal can be regarded as obiter dicta. I am far from being convinced that either the decision or the dicta, if that is what they are, were wrong.[6]

7 The judge added that, in his view, there was also good reason apart from authority to conclude that the ultimate effect principle had not been revoked by s 588FA. His Honour said that:

It is unlikely that parliament intended to materially alter the preference laws with their 1992 amendments. The explanatory memorandum to the Corporate Law Reform Bill 1992 does not say that parliament so intended. The Harmer Committee decided the policy of the existing law should not be altered. The Harmer Committee did not recommend that any changes be made to the existing principles. The previous legislation did not define what a preference was although it did say its effect should be to give a preference, priority or advantage over other creditors. The High Court of Australia has explained in a long line of cases what this means.

The amended provision defines what a preference must involve, that is the creditor receiving more than what it would in a winding up of the company. In my opinion, the provision does not exhaustively define when such a transaction would constitute an unfair preference. In my opinion, that was left to be governed by well established existing principles. This view is supported by the fact that the least controversial transaction not considered to be a preference under the ultimate effect principle would be caught by the literal words of s 588FA. If, during the relevant period, a creditor, who did not conduct a running account with the debtor, agreed to supply on credit goods to the debtor of equal value to an existing debt owed by the debtor if the debtor paid off the existing debt, this creditor would receive more for an existing unsecured debt than it would if it were to prove for the debt in a winding up. The liquidators conceded this would not be caught by s 588FA although this would be caught by the construction they put forward. In my view, the principle and rationale is clear. The existing creditors have not been disadvantaged by the transaction. By the transaction, the payee has not obtained a preference, priority or advantage over other creditors.[7]

a) the doctrine of ultimate effect, and the consequent 'landlord's defence', survived the 1992 amendments with the result that, in order to succeed, the appellants had to show that payments to the Minister ultimately resulted in a decrease in the net value of the assets of Centaur Mining available to meet the competing demands of the other creditors;[8]

b) the 'landlord's defence' applied equally to both the rent payments and the royalty payments;[9] and

c) the Minister had adduced sufficient evidence to establish the 'landlord's defence' in respect of each of the payments.[10]

(i) Does the doctrine of continuing effect still apply to windings up?

9 The appellants contended before this court that the views expressed in VR Dye as to the continuing relevance of 'the entire transaction' and 'ultimate effect' were obiter and erroneous, and that the judge was wrong to follow them. Counsel for the appellants submitted that s 588FA(1) means what it says: a transaction is an unfair preference given by a company to a creditor of a company 'if, and only if' it has the characteristics specified in the section, and that the expression 'if and only if' is one which 'emphasises the exclusiveness of [the] definition' and should be construed as meaning 'but not otherwise'.

10 Counsel supported that submission by reference to the decision of the Queensland Court of Appeal in Butler Rains Menzies & Co v Devine,[11] that 'if an only if' in s 589(4) of the Corporations Law meant that the only way in which to establish the events described in the section was by proof of the facts stated in the section. Counsel emphasized the reasoning of the court in that case, that:

in our view the phrase 'if, and only if' in each of subss. (2), (3) and (4) must be given some and the same meaning. In the first of these it means or at least emphasises that the only way in which the fact that the affairs of a company are under investigation may be proved is by proof of the facts stated in that subsection. We think that it has a similar meaning in subss (3) and (4).

Like Gleeson CJ in Macquarie Bank Ltd we think that this construction derives support from paragraphs (e) and (f) of the definition of 'relevant day' in s 589(5) for the reasons which he gives. And it follows from what we have said that we prefer the result reached by the majority of the Court of Appeal in that case to that reached by the Full Court of Western Australia in Cooper & Dysart Ltd.

11 Counsel also prayed in aid the decision of Hampel J in Sunshine Management Services Pty Ltd v Russo[12] that 'if and only if' in s 553(1)(f) of the Corporations Law was equivalent to 'not otherwise'.

12 In counsel's submission it was plain, too, from the Harmer Report which preceded the enactment of the Corporate Law Reform Act, and from the Explanatory Memorandum which accompanied the passage of the Corporate Law Reform Bill through Parliament, that the purpose of the amending legislation was to abrogate the use of insolvency criteria deriving from s 122 of the Bankruptcy Act 1966 (Cth) and to set out comprehensively in clear and simple terms the matters to be taken into account. Counsel emphasised the following passages from the Explanatory Memorandum:

Proposed Division 2 establishes a new regime under which the liquidator may seek court orders having the effect of avoiding certain transactions preceding the winding up of a company. The provisions of the present law which enable liquidators to avoid certain antecedent transactions have their effect by importing into the Corporations Law by reference the provisions of the Bankruptcy Act which enable a trustee in bankruptcy to avoid certain transactions in the case of a bankrupt. The Harmer Report recommended that there should be separate (although similar) provisions regulating antecedent transactions in both the relevant bankruptcy and companies legislation.

The Harmer Report made the observation that insolvency law has long adopted the policy of avoiding transactions by which an insolvent individual or company disposed of property within a relevant period prior to the commencement of formal insolvency in circumstances where to allow the transaction would be unfair to the general body of unsecured creditors... The proposed provisions seek to set out clearly the transactions and the circumstances in which a liquidator may avoid them in the context of a corporate winding up. The new provisions set out comprehensively matters which may be taken into account by a court and also provide the Court with a broad range of options for the orders which may be most appropriately made...

The purpose of the provisions in this proposed Division is to ensure that unsecured creditors are not prejudiced by the disposition of assets or the incurring of liabilities by a company in a period shortly before the winding up which would have the effect of favouring certain creditors or other persons, and especially related entities. This might occur where a creditor (whether or not that creditor has some connection with the company) was paid out in full rather than having to prove for a proportion of the debt in the winding up...

Proposed sections 588FA, 588FB, 588FC and 588FD define a number of types of transaction (unfair preferences, uncommercial transactions, insolvent transactions and unfair loans). Proposed section 588FE then provides the rules concerning when these transactions are voidable. The application of these rules will depend on the type of transaction involved, the relationship between the parties to the transaction, the time which has elapsed between the entering into the transaction and the winding up of the company and the nature of the benefit to the company from the transaction.

...

Proposed section 588FA - Unfair preferences

Proposed section 588FA defines an 'unfair preference' to be a transaction to which a company and the creditors are parties and which results in the creditor receiving in respect of the debt that the company owes to the creditor more than the creditor would receive in respect of the debt if the transaction had been set aside and the creditor had to prove for the debt in the winding up of the company.

At present such transaction may be attacked by a liquidator under section 122 of the Bankruptcy Act as it is applied by section 565 of the Corporations Law. Section 122 refers at present to a transaction which has the effect of giving to the creditor a 'preference, priority or advantage' over other creditors of the company, whereas the new provision specifies quite clearly what that expression means in the context of a corporate wining up.

...

Subsection 588FA(2) provides that where a transaction is, for a commercial purpose, an integral part of a continuing business relationship such as a running account between a creditor and the company (including such a relationship to which other persons are parties), it should not be attacked as a preference, but rather the effect of all the transactions which form the relationship between the creditor and the company should be taken into account as though they constituted a single transaction. This provision is aimed at embodying in legislation the principles reflected in the cases of Queensland Bacon Pty Ltd v Rees[13] and Petagna Nominees Pty Ltd & Anor v A E Ledger.[14] The effect of these principles is that it is implicit in the circumstances in which payments are made to reduce the outstanding balance in a running account between purchaser and supplier that there is a mutual assumption that the relationship of purchaser and supplier would continue as would the relationship of debtor and creditor. The net effect, therefore, is such that payments 'in' are so integrally connected with payments 'out' that the ultimate effect of the course of dealings should be considered to determine whether the payments are preferences.[15]

13 Finally, counsel submitted that the construction of s588FA for which he contended was effectively put beyond doubt by the decision of the Queensland Court of Appeal in Sheldrake v Paltoglou[16] and the decision of Gzell J in New Cap Reinsurance Corporation Ltd (in liq) v All American Life Insurance Company.[17]

14 It is convenient to deal with counsel's points in reverse order. In Sheldrake v Paltoglou[18] De Jersey CJ, with whom McMurdo P and Muir J agreed, concluded without apparent hesitation that the notions of entire transaction and ultimate effect have no role to play in the application of s 588FA. De Jersey CJ said that:

The respondent also submitted that these circumstances nevertheless gave rise to no unfair preference, because of the balancing element of benefit to the company, through the respondent's facilitating completion of the sale of the business (cf Re Discovery Books Pty Ltd[19]). That case concerned the materially different s 122 Bankruptcy Act 1966 (Cth). In terms of s 588FA of this legislation, it sufficed, for there to be an unfair preference, that in respect of the unsecured debt, the respondent received more than she would receive were she left to prove in the winding up, and that was plainly the position here.

15 It does not appear, however, that De Jersey CJ considered the decision of this court in VR Dye or the decision of the New South Wales Court of Appeal in Beveridge v Whitton. At least, his Honour did not refer to them in his reasons.

16 In New Cap Reinsurance Corporation Ltd (in liq) v All American Life Insurance Company,[20] Gzell J also took the view that s 588FA does not look to the effect of a transaction on the assets of the debtor but only to whether the transaction results in the creditor receiving more that it would in a winding up. His Honour said that:

Mr Coles QC who with Ms McCallum appeared for the plaintiffs, pointed out that the Corporations Act 2001 (Cth), s 588FA(1) directed attention to the advantage received by the creditor. It was no element of an unfair preference that there should be some adverse affectation [sic] upon the assets of the insolvent company. Reference was made to the observation of Phillips JA in Walsh v Natra Pty Ltd,[21] in rejecting an argument that there was no affectation upon the general body of creditors, that s 588FA did not in terms look to the effect of a transaction on other creditors as did the former legislation: rather the question was whether the transaction resulted in the creditor receiving more than it would in a winding up if the transaction were to be set aside and creditor were to prove.[22]

In my view, it is no part of the proof of an unfair preference to establish an affectation upon the assets of the insolvent company and it is unnecessary to plead any such affectation. The definition of 'transaction' in the Corporations Act 2001 (Cth), s 9 is not a closed class. Arrangements that have a neutral effect on the assets of a company may constitute transactions. A simple example is a put option for an off-market sale of listed shares at the last on-market price per share.

17 With respect, however, it appears that his Honour may have overlooked an aspect of Phillips JA's reasoning. The point for decision in Natra was whether, for the purposes s 588FA(1), the impugned transaction resulted in:

the creditor receiving from the company, in respect of an unsecured debt that the company owe[d] to the creditor, more than the creditor would receive from the company in respect of the debt if the transaction were set aside and the creditor were to prove for the debt in a wining up of the company.[23]

Counsel for the creditor in Natra submitted that, upon its proper construction, s 588FA(1) required a comparison to be made between the amount received by the creditor in the impugned transaction and the amount which the creditor would probably have received, as an unsecured creditor, in a winding up of the company at the date of the impugned transaction.[24] Phillips JA rejected that contention because, among other reasons, it had been held in VR Dye that 'the Corporations Law intended to make no great changes in the law relating to the avoidance of preferences in winding up'[25] and that, under the former law, the comparison was between the benefit received by the creditor as a result of the impugned transaction and the benefits accruing to other creditors existing at the time of the impugned transaction, as determined according to what they would have received in the subsequent winding up. So far, therefore, from concluding that 's 588FA did not in terms look to the effect of a transaction on other creditors as did the former legislation', Natra proceeded on the basis that s 588FA made so little change to the law that the matter was to be decided in effect as it would have been decided under the former law. As Phillips JA said:

Under the former law, then, I think that the notion of a hypothetical bankruptcy at the date of the impugned transaction is at best misleading. What had to be established was that the creditor who was party to the impugned transaction gained a benefit amounting to a 'preference, priority or advantage' over other creditors in existence at that time, but the benefits accruing to those other creditors could be determined according to their fate in the subsequent winding up. If then they received less than 100 cents in the dollar on their debts but the creditor who was party to the impugned transaction received 100 cents in the dollar, the necessary preference, priority or advantage was established. If, as has been said, the Corporations Law intended to make no great changes in the law relating to the avoidance of preferences in winding up, there is no reason for supposing that s 588FA propounds a hypothetical winding up as at the date of the impugned transaction; and for the reasons I have given earlier I do not think it does.[26]

18 Admittedly, Natra was not concerned with notions of ultimate effect and total transaction, and nothing which was said in the case was directly relevant to whether VR Dye was correctly decided on those points. But it is significant that Natra made no criticism of VR Dye, and to the extent that Natra embraced the idea that s 588FA 'makes no great changes in the law relating to the avoidance of preferences in winding up', it is consistent with the reasoning in VR Dye.

19 I come then to the language of s 588FA and to the fact, as De Jersey CJ in effect observed in Sheldrake that, according to the plain and ordinary meaning of the words of the section, 'it sufficed, for there to be an unfair preference, that in respect of the unsecured debt, the respondent received more than she would receive were she left to prove in the winding up'. That being so, and in face of the statement in the Explanatory Memorandum that the new provisions were designed to operate as an exclusive self-contained statutory regime, how can it be that the common law conceptions of ultimate effect and total transaction still operate?

20 The reasoning of Ormiston JA in VR Dye is instructive. Fundamentally, it proceeds from the notion that, if the words of the section were construed literally, or at least as unconstrained by some sort of overarching test of fairness, they would apply indiscriminately to transactions which have never before been conceived of as voidable preferences, including COD transactions and even cash transactions involving slight delay between the supply of goods or services on the one side and payment for them on the other. So, for example, if a company ordered parts COD on terms that title and risk should pass upon dispatch, and paid for the parts upon delivery, the payment would be susceptible to being set aside as a voidable transaction even though the company received the parts in good order in return for the payment. Similarly, if a commercial traveller with authority to purchase petrol on behalf of his corporate employer drove one of the company's vehicles into a service station and filled the car with petrol costing $100.00, and then walked from the forecourt to the attendant to pay $100.00 of the company's money for the petrol, the payment would be susceptible to being set aside as a voidable transaction even though the company received a full $100.00 worth of petrol in return for the payment.

21 Secondly, as Ormiston JA observed, before the coming into force of the new provisions, it had been accepted for many years that, as long as a company does not pay out an existing creditor without obtaining an effective corresponding advantage, it should be allowed to acquire goods and services by prepayment or on cash on delivery terms and the rational behind that was that the company gains goods and services to an equivalent value (in broad terms) to that which it pays out to obtain them. The authorities established that, for the purpose of characterising any impugned transaction and its effect for the purposes of the preference provisions, the court should look at the 'ultimate effect' and the 'entire transaction'.

22 Thirdly, it was apparent from what was said in the Harmer Report and in the Explanatory Memorandum that 'no change was intended to be made to the nature of a preference under the new legislation, whatever other alterations were made to the law'. To some extent, that is supported by the observation of the Full Federal Court in Re Emanuel Pty Ltd (in liq)[27] that cases on the earlier provisions will often provide guidance in the interpretation of aspects of Part 5.7B.

23 Fourthly, the qualification applying to running account payments is expressly recognised in s 588FA(3), and it would be odd if that exception but no 'other, formerly exiting, apparent exceptions' were intended still to apply.

24 Admittedly, not all of the reasoning in VR Dye is completely convincing. It does not deal squarely with the apparently plain and ordinary meaning of the legislation or the indications in the Harmer Report and Explanatory Memorandum that the new regime was intended to be a comprehensive statutory regime that avoids common law conceptions. It is also possible to envisage ways of accommodating COD transactions that may do less violence to the language of the section than the preservation of principles developed in the context of the previous regime. For example, Ford[28] postulates that such transactions might be excepted on the basis that, because payment is made against delivery, there is never a point in time at which a debt exists. Perhaps, even that idea suffers from the logical defect that a debt arises upon delivery and exists, albeit only in scintilla temporis, until discharged by payment. But perhaps such fine theoretical distinctions should not be allowed to stand in the way of the rational operation of a regime which is intended to be essentially practical.

25 Those difficulties notwithstanding, however, it is apparent that the new statutory regime was not intended to change the basic structure of voidable preference law and, that unless some sort of qualification or exception is read into s 588FE, it would have the effect of making very significant changes to the existing law with wide ranging consequences.

26 Further, while there may be other ways of accommodating the sorts of transactions which, in theory, could be regarded as preferential but which, traditionally, have not been so regarded, the common law doctrines of ultimate effect and total transaction are capable of continuing to provide a rational basis by which to identify which such transactions should be exempt. So, as Heydon JA said in Beveridge v Whitton,[29] it is far from plain that VR Dye was wrong.

27 Finally, and most importantly, the decision in VR Dye has stood and been acted upon in this State for more than 10 years, and has been followed by the New South Wales Court of Appeal in Beveridge v Whitton, and the importance of intermediate appellate courts following each other in the interpretation of national legislation[30] has recently been re-emphasised by the High Court in Farah Constructions Pty Ltd v Say-Dee Pty Ltd[31] and CAL (No 14) Pty Ltd v Motor Accidents Insurance Board.[32] In those circumstances, I consider that it would be wrong for this court now to depart from VR Dye. If the reasoning in VR Dye is to be overturned, it is for the High Court to say so.

(ii) Application of the doctrine of ultimate effect to the royalty payments

28 Counsel for the appellants conceded that, if the doctrine of ultimate effect were held to apply, the payments made to the Minister on account of rent did not have a preferential effect, and so would not be unfair preferences within the meaning of s 588FA. But he argued that the judge was wrong to hold that the payments on account of royalties did not have that effect.[33] In counsel's submission, the law is clear that it is necessary to consider 'the business purpose and context of the payment to determine whether it gives the creditor a preference over other creditors' and that '[i]f the sole purpose of the payment is to discharge an existing debt, the effect of the payment is to give the creditor a preference'.[34] Here, it was clear, counsel said, that the royalties were paid in arrears and thus in satisfaction of existing debts. Unlike the rent (which could be viewed as the price paid to obtain a future period of occupation),[35] the royalties merely prevented recovery action by the Minister. And as counsel put it, the fact that a payment results in a creditor's abstention from taking action to close down a debtor's business or to wind the debtor up to enforce an existing debt, does not mean that payment is anything other than the discharge of an existing debt.[36]

29 In my view, that submission should be accepted. The royalties were payable in respect of ore which had already been extracted. They were paid, therefore, for ore for which the right to mine had been provided on credit. Thus, upon each payment of royalties, the Crown received a preference as a creditor in respect of an existing debt. It is true, as the judge found, that the Crown could have terminated the licences if the royalties had not been paid. It is also true, as the judge found, that payment of the royalties thus resulted in the preservation of the licences, which were later sold for value. But that does not alter the fact that what was paid to the Crown on account of royalties was paid in satisfaction of debts already incurred and due.

30 In principle, the position here is no different to that in Australasian and Overseas Telecommunications Corp Ltd (t/as Telecom Australia) v Russell Kumar & Sons Pty Ltd[37] or in Sutherland v Liquor Administration Board.[38] In Telecom v Russell, O'Bryan J held that payments made to Telecom on account of a company's telephone bill were preferences despite the fact that, if the company had not paid, its telephone service would have been disconnected. In Sutherland v Liquor

Administration Board, Young J held that payments made by an insolvent company on account of poker machine duty levied on previously generated profits was a preference despite the fact that, if it had not been paid, the state could have terminated the poker machine licence. In each case, the payments in question liquidated an existing debt and so preferred the creditor, despite the fact that the payments had the economic effect of preserving a valuable asset which might otherwise have been forfeit.

31 For those reasons, I would allow the appeal in respect of the royalties but otherwise dismiss the appeal.

32 The appellants are the liquidators of Centaur Mining & Exploration Ltd ('Centaur Mining') and Centaur Nickel Pty Ltd[39] and, in that capacity, they appeal against a judgment given by a judge in the Trial Division on 15 October 2008 whereby their claim against the respondent, the Minister administering the Mining Act 1978 (WA), was dismissed.

33 The Centaur companies, at all relevant times, leased mining tenements in Western Australia upon which they conducted mining operations. The respondent or 'the Minister' was responsible for the collection of rents, royalties and other revenues associated with mining tenements in Western Australia. The appellants' claim related to a number of payments by Centaur Mining to the respondent that the appellants alleged each constituted an unfair preference within the meaning of s 588FA(1) of the Corporations Act 2001 (Cth) ('the Act'). The respondent contended that the payments did not give him a preference, priority or advantage over the other creditors and that, therefore, the claim should be dismissed.

34 Section 588FA of the Act provides as follows:

Unfair preferences

(1) A transaction is an unfair preference given by a company to a creditor of the company if, and only if:

(a) the company and the creditor are parties to the transaction (even if someone else is also a party); and

(b) the transaction results in the creditor receiving from the company, in respect of an unsecured debt that the company owes to the creditor, more than the creditor would receive from the company in respect of the debt if the transaction were set aside and the creditor were to prove for the debt in a winding up of the company;

even if the transaction is entered into, is given effect to, or is required to be given effect to, because of an order of an Australian court or a direction by an agency.

(2) For the purposes of subsection (1), a secured debt is taken to be unsecured to the extent of so much of it (if any) as is not reflected in the value of the security.

(3) Where:

(a) a transaction is, for commercial purposes, an integral part of a continuing business relationship (for example, a running account) between a company and a creditor of the company (including such a relationship to which other persons are parties); and

(b) in the course of the relationship, the level of the company's net indebtedness to the creditor is increased and reduced from time to time as the result of a series of transactions forming part of the relationship;

then:

(c) subsection (1) applies in relation to all the transactions forming part of the relationship as if they together constituted a single transaction; and

(d) the transaction referred to in paragraph (a) may only be taken to be an unfair preference given by the company to the creditor if, because of subsection (1) as applying because of paragraph (c) of this subsection, the single transaction referred to in the last-mentioned paragraph is taken to be such an unfair preference.

35 The appellants (or 'the Liquidators') commenced the proceeding on 12 August 2005, filing their statement of claim that day.

36 The claim against the Minister was to recover 15 payments made by Centaur Mining to the Minister totalling $1,345,796.24 which were alleged to have been unfair preferences, insolvent transactions and voidable transactions under ss 588FA, 588FC and 588FE (respectively) of the Act.[40]

37 The Liquidators then filed a further amended statement of claim[41] on 23 February 2007, which deleted claims in respect to three payments but added another, taking the total number of payments to thirteen and amended the amount claimed to $1,630,095.93 comprising the following payments ('the Payments'):

• $18,660.51 on 18 January 2001 ('Second Payment');

• $197,703.82 on 2 February 2001 ('Sixth Payment');

• $35,681.60 on 16 February 2001 ('Seventh Payment');

• $774,478.48 on 6 February 2001 ('Eighth Payment');

• $235,065.86 on 20 February 2001 ('Ninth Payment');

• $82,797.29 on 21 February 2001 ('Tenth Payment');

• $12,495.10 on 27 February 2001 ('Eleventh Payment');

• $110,497.68 on 12 March 2001 ('Twelfth Payment');

• $7,833.42 on 14 March 2001 ('Thirteenth Payment')

38 During 2000, Centaur Mining was a company that conducted mining operations on particular mining tenements in Western Australia. Those operations included a gold mining operation at Mt Pleasant ('Mt Pleasant Project'), a gold mining operation at Lady Bountiful ('Lady Bountiful Project') and a cobalt and nickel mining operation at Cawse ('Cawse Nickel Project').

39 Centaur Mining was the lessee of each of the mining tenements. Under the Mining Act 1978 (WA) it was obliged to:

a) pay rent annually in advance on mining tenements to the Minister;

b) pay royalties for metals extracted from particular mining tenements.

All such payments were made to the Minister's department.

40 On 30 October 2000, a royalty payment in relation to the September 2000 quarter in the sum of $774,478.48 became payable by Centaur Mining to the Minister in respect to the mining of nickel and cobalt at the Cawse Nickel Project.

41 On 30 November 2000, the WA Director General for Mining sent a letter to Centaur Mining complaining about the failure to pay outstanding royalty payments in respect to cobalt from the Cawse Nickel Project for the September 2000 quarter by the due date of 30 October 2000.

42 On 21 December 2000, Centaur Mining sent a letter to the Minister seeking relief from paying the gold and silver royalties due in respect to the Mt Pleasant Project.

43 On 31 December 2000, Centaur Mining became insolvent within the meaning of s 95A of the Act and thereafter remained so, and the Minister had reasonable grounds for suspecting that Centaur Mining was insolvent or would become insolvent.

44 In January 2001 (prior to 22 January), Centaur Mining made the First, Second and Third Payments to the Minister, with respect to the rent of certain tenements.

45 On 22 January 2001, Centaur Mining sent a letter to the Minister seeking relief in relation to the payment of royalties in respect to cobalt and nickel arising from the Cawse Nickel Project for the September and December 2000 quarters until 31 March 2001.

46 On 22 January 2001, Centaur Mining made the Fourth Payment to the Minister, with respect to the rent of certain tenements.

47 On 23 January 2001, the Minister sent a letter to Centaur Mining agreeing to the royalty relief request for the gold royalty.

48 On 25 January 2001, the WA Manager of Mineral and Petroleum Royalties sent a letter to Centaur Mining refusing to recommend to the Minister that royalty relief for the cobalt and nickel royalty be provided.

49 On 30 January 2001, Centaur Mining secured an extension of time in which to pay the September 2000 quarter royalty with respect to cobalt and nickel by paying the following day.

50 On 31 January 2001, the payment due that day for the September 2000 quarter royalty with respect to cobalt and nickel was not made, but rather a further indulgence was requested.

51 On 31 January 2001, a royalty payment with respect to cobalt and nickel in relation to the December 2000 quarter in the sum of $940,263.44 became payable.

52 On 1 February 2001, Centaur Mining sent a letter to the Minister that proposed an instalment plan to clear the royalty arrears in respect to cobalt and nickel for both the September and December 2000 quarters.

53 On 2 February 2001, Centaur Mining made the Fifth Payment to the Minister, mainly with respect to the rent of certain tenements.

54 On 2 February 2001 Centaur Mining made the Sixth Payment to the Minister, with respect to gold and silver royalties arising from the Mt Pleasant Project. The specific tenements to which the payment related were a matter of dispute between the parties.

55 On 6 February 2001, Centaur Mining made the Eighth Payment to the Minister, with respect to nickel and cobalt royalties arising from the Cawse Nickel Project. The specific tenements to which the payment related were a matter of dispute between the parties.

56 On 8 February 2001, the Minister sent a letter to Centaur Mining agreeing to a payment proposal in relation to the December 2000 quarter royalty payment of $940,263.44 with respect to nickel and cobalt in four equal instalments of $235,065.86 on the following dates:

57 On 13 February 2001, the Minister's department sent a letter to the Crown Solicitor's Office seeking legal advice as to 'how the Department should be positioning itself to protect the outstanding [cobalt and nickel] royalty' in light of 'the real possibility of voluntary administration'.

58 On 16 February 2001, the Crown Solicitor's Office sent a letter referring to the Minister's department's request for 'urgent advice on whether the Minister should issue a notice of intention to forfeit' and advising that the Crown Solicitor's Office did not 'consider forfeiture proceedings can be commenced at this stage in view of the 'time to pay' arrangements ... which arrangement have not yet been breached (and may not be breached if full payment is received before 2 April 2001)'.

59 On 16 February 2001, Centaur Mining made the Seventh Payment to the Minister, mainly with respect to the rent of certain tenements.

60 On 20 February 2001 the Manager of Mineral and Petroleum Royalties of the Minister's department requested the Director, Mining Titles to enter a notation on the register of particular mining tenements which in part comprised the Cawse Nickel Project to prevent their transfer, until all royalties were paid.

61 On 21 February 2001, Centaur Mining made the Ninth Payment to the Minister, with respect to nickel and cobalt royalties, which was the first payment in the instalment agreement referred to in paragraph [56] above. The specific tenements to which the payment related were a matter of dispute between the parties.

62 From 21 February 2001 to 14 March 2001, Centaur Mining made the Tenth, Eleventh, Twelfth and Thirteenth Payments to the Minister, with respect to the rent, or mainly with respect to the rent, of certain tenements.

63 On 14 March 2001, certain secured creditors appointed receivers and managers ('receivers') to Centaur Mining. On 14 March 2001, Messrs L P Maxsted and S A Hawke were appointed voluntary administrators of Centaur Mining under s 436A of the Act.

64 On 15 March 2001 the Manager, Mineral and Petroleum Royalties, requested the Director, Mining Titles to enter a notation on the register of particular mining tenements which in part comprised the Mt Pleasant Project and the Lady Bountiful Project to prevent their transfer, until all royalties were paid.

65 On 19 March 2001, a draft memorandum was prepared from the Deputy Director General to the Director General referring to the appointment of both receivers and administrators to Centaur Mining and noting that 'Crown Solicitors advice on this matter suggests that the Department may not be able to proceed with any intended notice of intent to forfeit on behalf of the Cawse Nickel/Cobalt Project or the Mt Pleasant Gold Project to recover outstanding royalties'.

66 On 2 August 2001, Hawke and Robyn Beverley McKern were appointed as deed administrators of Centaur Mining under a deed of company arrangement dated 2 August 2001.

67 The receivers paid to the Minister's department royalties for the Cawse Nickel Project and the Mt Pleasant Project that were owing either prior to or after their appointment.

68 On 14 August 2001 the receivers of Centaur Mining caused it to enter into an agreement to sell certain mining tenements in the Lady Bountiful Project. This agreement was referred to at trial as the 'Lady Bountiful Agreement'. These tenements were sold for approximately $2M.

69 On 15 October 2001, the receivers of Centaur Mining caused it to enter into an agreement to sell mining tenements in the Mt Pleasant Project. This agreement was referred to at trial as the 'Mt Pleasant Agreement'. These tenements were sold for approximately $38M.

70 On 27 December 2001, the receivers of Centaur Mining caused it to enter into an agreement to sell certain mining tenements in the Cawse Nickel Project. This agreement was referred to at trial as the 'Cawse Agreement'. These tenements were sold for approximately $25M.

71 Where its consent was required under the Mining Act, the Minister's department permitted the transfer of particular mining tenements in the Lady Bountiful Project, the Mount Pleasant Project and the Cawse Nickel Project, pursuant to the Lady Bountiful Agreement, the Mt Pleasant Agreement and the Cawse Agreement, respectively, once all outstanding royalties had been paid .

72 On 2 August 2002, Hawke and McKern were appointed as Liquidators of Centaur Mining pursuant to s 446A of the Act. On 20 September 2005, the Supreme Court of Victoria ordered inter alia that Hawke be removed as a Liquidator and leave was granted to appoint Colin McIntosh Nicol and Samuel Charles Davies and they were appointed as joint and several Liquidators, with McKern, of Centaur Mining.

73 When the matter came on for trial, on 15 July 2008 the following matters were not disputed:

1. the making of the Payments by Centaur Mining to the Minister;
2. that the Payments resulted in Centaur Mining and the Minister becoming parties to transactions involving the payment of $1,630,095.93 to the Minister;

1. that Centaur Mining was insolvent on and from 31 December 2000 (and thus when each of the Payments was made) and that the Payments were made during the relevant relation back period.

74 The following principal matters were disputed at trial:

1. whether the receipt of the Payments resulted in the Minister receiving from Centaur Mining in respect of unsecured debts that Centaur Mining owed to the Minister more than the Minister would receive from Centaur Mining in respect of the debt if the transactions constituted by the Payments were set aside and the Minister was to prove for the debts in the winding up of Centaur Mining thereby rendering the Payments unfair preferences within the meaning of s 588FA of the Act;
2. whether the Payments were insolvent transactions and voidable transactions (consequent on the Minister's denial that the Payments were unfair preferences);

1. whether the Liquidators bore the onus of proving that the payments created a preference, priority or advantage for the Minister over the other creditors.

75 One of the principal issues at trial was the correct construction of s 588FA(1)(b) of the Act, as to whether 'the doctrine of ultimate effect' survived the 1992 amendments to insolvency law brought about by the Corporate Law Reform Act 1992 (Cth) where no running account was alleged, so that:

1. it was not sufficient for a liquidator to establish preferential effect by reference to the express terms of s 588FA(1)(b);
2. the so-called _'_landlord's defence', said to be founded on the decision of Fox J in Re Discovery Books Pty Ltd,[42] remained available to the Minister after the 1992 amendments.

76 The Liquidators argued, in essence, that s 588FA(1)(b) operated to the exclusion of the previous doctrine of ultimate effect and the 'landlord's defence', so that it was sufficient, in order to discharge the onus as to preferential effect under the section so as to as give rise to an unfair preference, to show that the payee's dividend in the winding up would have been less than the amount of the payment it had received.

77 The Minister argued, in essence, that the doctrine of ultimate effect and the 'landlord's defence' survived the 1992 amendments and, in order to establish an unfair preference, the Liquidators bore the onus of establishing that the payment in question, in order to have the effect of giving the creditor a preference, priority or advantage over other creditors, must ultimately have resulted in a decrease in the net value of the assets that were available to meet the claims of the other creditors.

78 There were also issues in the proceeding, as to whether, assuming the Liquidators' principal contentions about the correct construction of s 588FA(1)(b) were rejected:

1. the _'_landlord's defence' applied to both rent and royalty payments;
2. the Minister had adduced sufficient evidence to establish the _'_landlord's defence', including whether it had been shown that the impugned Payments were made to secure, and enabled Centaur Mining to secure, an asset of equal or greater value than the Payments and did not result in a decrease in the net value of the assets that were available to meet the competing demands of the other creditors;

1. the Ninth Payment, being the final royalty payment, was nevertheless an unfair preference given the circumstances attending its being made.

79 After a trial lasting four days, the judge handed down reasons for judgment on 15 October 2008.[43] His Honour found that the Payments were not unfair preferences within the meaning of s 588FA of the Act and dismissed the claim.

80 In summary, the judge found for the Minister against the Liquidators inter alia on the grounds that:

1. the Minister's contentions concerning the continued relevance of the doctrine of ultimate effect and availability of the _'_landlord's defence' were correct (with the consequence that the Liquidators had to establish preferential effect not merely by proof of the comparison of the amount of each Payment and the likely dividend in the winding up as stated in s 588FA(1)(b), but in accordance with the doctrine of ultimate effect);[44]
2. the _'_landlord's defence' applied to both the rent and royalty payments;[45]

1. the Minister had adduced sufficient evidence to establish the _'_landlord's defence' in respect to each of the Payments and that the onus was on the Liquidators to establish that each Payment effected a preference in the sense referred to in sub-paragraph (a) above.[46]

81 On 15 October 2008, his Honour ordered that the Liquidators' claim be dismissed. The Liquidators filed a notice of appeal on 29 October 2008.

82 The judge summarised the issues and his conclusion as follows:[47]

The so-called landlord's defence is an instance of the so-called ultimate effect doctrine whereby the court looked to see whether the transaction as a whole and not just the payment gave a preference, priority or advantage to the payee over other creditors. Under the landlord's defence, the tenant secured the right to remain in occupation of the leased premises in exchange for the rent paid where the value to the company of the right equalled or exceeded the rent paid. Accordingly it was said, the company was no worse off by reason of the transaction and the landlord did not receive a preference, priority or advantage over other creditors.

The liquidators say that the landlord's defence did not survive the repeal of the old unfair preference laws in 1992 and their replacement with the new rules now found in Division 2 of Part 5.7B of the Corporations Act 2001 (Cth). If the defence did survive, the liquidators say that it does not apply to the circumstances of this case. Alternatively, the liquidators say that the Minister has not established sufficient facts to attract the landlord's defence. If it does apply to the rental payments, the liquidators say that it does not apply to the royalty payments. The royalty payments differed from the rental payments. The rent was payable in advance. On the other hand, the royalties were paid in arrears.

If the liquidators succeed, the unsecured creditors of the company will receive a little more than they otherwise might, but still be out of pocket. The second plaintiff, Centaur Nickel Pty Ltd (in liquidation) (receiver and managers appointed) plays no role in this case.

Thus, the issues are as follows:

(a) Did the landlord's defence survive the 1992 amendments to the unfair preference laws?

(b) If the landlord's defence did survive, does it apply to the rental payments made in this case?

(c) If the landlord's defence did survive, does it apply to the royalty payments made in this case?

(d) If the landlord's defence does apply to the rental and/or royalty payments, has the Minister established sufficient facts to succeed in this defence?

For the following reasons, I find that the landlord's defence did survive the 1992 amendments to the unfair preference laws and it does apply to both the rental and royalty payments. Further, I find that the Minister has established sufficient facts to succeed in this defence.

83 The judge then explained what he meant by the 'landlord's defence':[48]

In Re Discovery Books Pty Ltd the liquidator of the company asked that several rental payments made within the relation back period be declared void as preferences. Whilst the company was insolvent and shortly prior to it being wound up, it paid rent due under a lease of its business premises as well as instalments of a premium also due under the lease. The premium had been agreed to on the taking of the lease. Fox J held, applying inter alia Richardson v Commercial Banking Co of Sydney, Rees v Bank of New South Wales and Queensland Bacon Pty Ltd v Rees, that the effect of the payments was not to give a preference, priority or advantage at the expense of other creditors, as the payments enabled the company to retain the use of its business premises where it carried on business. He observed that if the rent had not been paid the lessor could have taken possession. Applying the cases referred to above, Fox J held it was necessary to consider the effect of the transaction as a whole and not just the immediate effect of the payment and discharge of the debt. He said that as the rent and premium had to be paid to retain possession, the effect on creditors should take into account the benefit the company received through its continued occupation of the premises.

Fox J's decision constituted a particular example of the ultimate effect doctrine where the court has regard to the ultimate effect of a transaction on other creditors in assessing whether the particular transaction constitutes a preference, priority or advantage for the purposes of s 122(1)(c) of the Bankruptcy Act 1966 (Cth). Another recognised instance involves the application of the set-off provisions. The ultimate effect doctrine was confirmed by the High Court of Australia in Air Services Australia v Ferrier. Dawson, Gaudron and McHugh JJ said:

If the sole purpose of the payment is to discharge an existing debt, the effect of the payment is to give the creditor a preference over other creditors unless the debtor is able to pay all of his or her debts as they fall due. But if the purpose of the payment is to induce the creditor to provide further goods or services as well as to discharge an existing indebtedness, the payment will not be a preference unless the payment exceeds the value of the goods or services acquired. In such a case a court, exercising jurisdiction under s 122 of the Bankruptcy Act, looks to the ultimate effect of the transaction. Whether the payment is or is not a preference has to be 'decided not by considering its immediate effect only but by considering what effect it ultimately produced in fact'.

As a consequence, a payment made during the six month period cannot be viewed in isolation from the general course of dealing between the creditor and the debtor before, during and after that period. Resort must be had to the business purpose and context of the payment to determine whether it gives the creditor a preference over other creditors. To have the effect of giving the creditor a preference, priority or advantage over other creditors, the payment must ultimately result in a decrease in the net value of the assets that are available to meet the competing demands of the other creditors.

84 The judge then considered whether the landlord's defence survived the 1992 amendments:[49]

The unfair preference provisions of the Corporations Act 2001 (Cth) were introduced into the Act's predecessor by the Corporate Law Reform Act 1992 and replaced provisions in the then Corporations Law which incorporated the preference provisions from the Bankruptcy Act 1966 (Cth) to apply to companies. Under the Bankruptcy Act 1966 (Cth), the transaction was required to have the effect of giving a creditor 'preference priority or advantage' over other creditors. These words were taken to connote some unfair preference, priority or advantage over other creditors. As indicated above, in forming such a view, the court looked at the 'ultimate effect' the transaction had on the financial relationship of the parties and in particular whether the payee received some preference, priority or advantage at the expense of the other creditors.

...

In VR Dye v Peninsula Hotels Ormiston JA (with whom Winneke P and Tadgell JA agreed) said that the 1992 amendments to the unfair preference laws were not intended to make any significantly different provision for identifying what is an unfair preference, except in a few minor respects and except insofar as the sections now appear in the Corporations Law (as it then was). Ormiston JA said that the ultimate effect principle, as recognised by the High Court of Australia in Air Services Australia v Ferrier and Richardson v Commercial Banking Co of Sydney and as applied in Re A and J Lazzarotto Pty Ltd, applied to the construction of s 588FA.

Consistently, Ormiston JA said:

The qualification applying to running account payments must be considered as being accepted by Parliament in as much as subs (3) of s 588FA explicitly recognises it. I would therefore conclude also that the other, formerly existing, apparent exceptions were intended still to apply and, to the extent, the legislative definition must be treated as purposive. In other words the section is still directed against unfair preferences. If that be so, then I would conclude that the new provision should be construed in the same way as the former provision, except to the extent that the language of s 588FA clearly points to a contrary conclusion.

Consequently, although a number of judges at first instance have expressed different views as to the extent to which the earlier cases may bear upon the proper interpretation of s 588FA, it is not necessary to examine those in detail for in my opinion it is clear that no change was intended to be made to the nature of a preference under the new legislation, whatever other alterations were made to the law.

The liquidators contend that I do not need to disagree with anything that is said in Dye's case and claim it is irrelevant to this case. I accept the facts at issue in Dye's case were different to those in issue in this case. As observed by Tadgell JA, at the time of the alleged preferential payment no debt was in fact owed to the payee. The payment was made for services in advance of those services being provided. Nevertheless, the observations by the Court of Appeal referred to above in my view are authority or at least persuasive upon me for the proposition that the landlord's defence survived the 1992 amendments.

The liquidators contend that the word 'unfair' as appears in s 588FA does no work and could have been left out. Under s 15AA of the Acts Interpretation Act 1901 (Cth) regard is to be had to the purpose or object of a provision of an Act. In Dye's case, the Court of Appeal considered the purpose or object of s 588FA and concluded the section was still directed against unfair preferences as that expression was understood in the context of s 122 of the Bankruptcy Act 1966. I accept the Court of Appeal's finding and reject the liquidators' contention.

The Minister also relies upon Beveridge v Whitton, where Heydon JA (with whom Mason P and Powell JA agreed) of the New South Wales Court of Appeal applied the doctrine of ultimate effect to an alleged preferential payment under s 588FA. Heydon JA cited with approval Re Discovery Books. Heydon JA also said the court ought not refuse to follow Dye's case without being convinced it is plainly wrong. He said:

In any event, the court ought not to refuse to follow the decision of the Victorian Court of Appeal in VR Dye & Co v Peninsula Hotels Pty Ltd (in liq) without being convinced that it is plainly wrong: Akins v Abigroup Ltd. The same is true in my opinion of well-considered dicta even if, which is questionable, the statements of the Victorian Court of Appeal can be regarded as obiter dicta. I am far from being convinced that either the decision or the dicta, if that is what they are, were wrong.

The Minister also refers to Re Lanpac International Pty Ltd to support his contention that the landlord's defence survived the 1992 amendments where Chernov J considered an unfair preference claim under the amended legislation. He said:

The parties agreed, rightly, I think, that the circumstances which constitute an 'unfair preference' under section 588FA(1) are the same as those which constitute a preference under section 122 of the Bankruptcy Act 1966 (Cth). In other words, if the payment of the two sums in question would not give the respondent a preference, priority or advantage over other creditors (for the purposes of section 122 of the Bankruptcy Act 1966I (Cth)) they are unlikely to be 'unfair preferences' under section 588FA(1).

Chernov JA also cited Re Discovery Books Pty Ltd with approval.

Without in any way seeking to detract or qualify the observations of Ormiston JA in Dye's case, I make the following brief observations on why I consider the ultimate effect principle has not been revoked by s 588FA. It is unlikely that parliament intended to materially alter the preference laws with their 1992 amendments. The explanatory memorandum to the Corporate Law Reform Bill 1992 does not say that parliament so intended. The Harmer Committee decided the policy of the existing law should not be altered. The Harmer Committee did not recommend that any changes be made to the existing principles. The previous legislation did not define what a preference was although it did say its effect should be to give a preference, priority or advantage over other creditors. The High Court of Australia has explained in a long line of cases what this means.

The amended provision defines what a preference must involve, that is the creditor receiving more than what it would in a winding up of the company. In my opinion, the provision does not exhaustively define when such a transaction would constitute an unfair preference. In my opinion, that was left to be governed by well established existing principles. This view is supported by the fact that the least controversial transaction not considered to be a preference under the ultimate effect principle would be caught by the literal words of s 588FA. If, during the relevant period, a creditor, who did not conduct a running account with the debtor, agreed to supply on credit goods to the debtor of equal value to an existing debt owed by the debtor if the debtor paid off the existing debt, this creditor would receive more for an existing unsecured debt than it would if it were to prove for the debt in a winding up. The liquidators conceded this would not be caught by s 588FA although this would be caught by the construction they put forward. In my view, the principle and rationale is clear. The existing creditors have not been disadvantaged by the transaction. By the transaction, the payee has not obtained a preference, priority or advantage over other creditors.

For these reasons, I find that the landlord's defence and the ultimate effect principle did survive the 1992 amendments and apply under s 588FA.

86 Having decided that the landlord's defence and the ultimate effect principle survived the 1992 amendments and applied under s 588FA, his Honour went on to consider whether those principles applied, first, to the rental payments and, second, to the royalty payments.

87 In relation to the rental payments, his Honour said that they were payable in accordance with the relevant act and regulations which required, in substance, the payment of rent to the Minister annually in advance and that they were paid in advance in exchange for the right to occupy and mine the mining tenements and that '[t]he purpose of the payments was to secure an asset for the benefit of Centaur Mining'. His Honour then said:[51]

As indicated, the rental payments were paid in advance in exchange for the right to occupy and mine the mining tenements. The purpose of the payments was to secure an asset for the benefit of Centaur Mining. In Air Services Australia v Ferrier, Dawson, Gaudron and McHugh JJ said as follows:

Thus, where the payment is a step in a wider transaction, 'its actual business character must be seen and when it forms part of an entire transaction which if carried out to the intended conclusion will leave the creditor without any preference, priority or advantage over other creditors, the payment cannot be isolated and construed as a preference.' If the purpose of the payment is to secure an asset or assets of equal or greater value, the payee receives no advantage over other creditors. The other creditors are no worse off and, where the value of the assets has increased, they are actually better off. Thus, a debtor does not prefer a creditor to the other creditors if he or she pays a debt, or part of a debt, to induce the creditor to supply goods of equal or greater value than the amount of the payment. In that situation, it is of no relevance that the debt that is discharged happens to be a stale one. If the present value of the goods supplied is equal to or greater than the payment, the other creditors are no worse off.

Adopting those words, the purpose of the payment in this case was to secure an asset or assets of equal or greater value than the rental payment. In those circumstances, the High Court has said the payee receives no advantage over other creditors and the payment is not an unfair preference. As noted above, the High Court in this passage cited Re Discovery Books as authority for this proposition.

The evidence concerning what the Minister may or may not have done in the event of the non-payment of rent is of some relevance, but is not, in my opinion, determinative of the matter. It is clearly relevant in considering the business consequences of not making the payment. As the High Court said in Air Services Australia v Ferrier:

To have the effect of giving the creditor preference, priority or advantage over other creditors, the payment must ultimately result in a decrease in the nett value of the assets that are available to meet the competing demands of the other creditors.

In my opinion, there is no evidence to suggest that this was the case here. On the contrary, there was evidence that the mining tenements were ultimately transferred for millions of dollars and were exceptionally valuable. In my view, the onus lies on the liquidators who allege the preference to establish it, and that would mean in this context they would be required to establish that the payment resulted in a decrease in the nett value of the assets of Centaur Mining. They have not sought to do so. Accordingly, the liquidators have not established that the rental payments constituted unfair preferences.

88 His Honour then turned to the royalties and said:[52]

Three of the disputed payments relate to royalties. There is no dispute that the payments were royalty payments, however the liquidators assert that the Minister is unable to tie them all to particular mining tenements.

Royalties are calculated upon metals extracted from mining tenements at the time of their sale by the mining tenement holder. They are payable on a percentage of the sales value. The sale of a metal and a payment of royalty can occur many months after the metal is produced. Gold royalties are calculated each month and are payable for each quarter: March, June, September and December. Nickel royalties are calculated quarterly and payable quarterly. The due date for each quarter, whether it is gold or nickel royalties, is 30 days after the quarter ends.

Mr Sherman, a Senior Royalties Officer with the Department of Industry and Resources, deposes that failure to pay royalties may lead to the forfeiture of the mining leases in relation to which the royalties are levied. At the relevant time, it is likely the transfer of the mining leases would not have been permitted by the Minister if all royalties outstanding were not paid.

The three disputed royalty payments are as follows:

2 February 2001 $197,703.82

6 February 2001 $774,478.48

20 February 2001 $235,065.86

The Minister had the power to grant the deferment of payment of royalties. The third payment was the first of four instalments on royalties of some $940,063 that Centaur Mining owed for the December quarter for which the Minister had granted relief.

It was a term of each relevant lease that royalties due were to be paid. Under s 63A of the Mining Act 1978 (WA), an exploration licence is liable to forfeiture if, inter alia, the prescribed rent or royalty in respect thereof is not paid in accordance with the Act. Further, under s 82 of the Act, every mining lease is to contain and be subject to the prescribed covenants by the lessee and, in particular, shall be deemed to be granted subject to the conditions that the lessee shall, inter alia, pay the rents and royalties due under the lease at the prescribed time and in the prescribed manner. Accordingly, it was a term of each relevant lease that the royalties due were to be paid. Under s 97 the Minister could declare a mining lease forfeited for breach of the lessee's covenant to pay rent or royalty. Similar provisions for forfeiture related to other tenancies for non-payment of rent or royalties.

The Minister contends that there is no relevant distinction between rent and royalties in all the circumstances of this matter so far as the application of the principles concerning unfair preferences is concerned. The Minister contends that both rental and royalty payments had the ultimate effect of bestowing upon the company a benefit no less valuable than the amount of the payment. The Minister further contends there has been no decrease in the value of the assets available to other creditors. The liquidators, on the other hand, contend that both the rental payments and the royalty payments were caught by the unqualified words of s 588FA.

The cases referred to by the liquidators and described above where the Court found there was an unfair preference draw a distinction between a payment made to procure a valuable asset for the company, such as the lease of premises, and a payment made to avoid the creditor taking some action which would harm the company.

For example, in Telecom v Russell Kumar & Sons, O'Bryan J found that a payment of an outstanding telephone account to Telecom to avoid the phone being disconnected was nevertheless a preference. The ultimate effect defence was not expressly raised and his Honour was only considering the matter in the context of an alleged running account. Nevertheless, as indicated above, his Honour made express reference to Re Discovery Books Pty Ltd. In Sheldrake v Paltoglou, the Queensland Court of Appeal found that the payment of arrears of rent on a restaurant to the landlord to allow the company to assign a lease to a purchaser of the restaurant business was nevertheless an unfair preference. It could be argued in that case, that the ultimate effect of the transaction was to protect and preserve the value of the restaurant business for the benefit of creditors. In Sutherland v Liquor Administration Board, Young J of the New South Wales Supreme Court held that payment by the insolvent company of outstanding poker machine taxes was an unfair preference, even though their non-payment may have led to the company's loss of their use and a significant diminution of the value of the assets otherwise available to creditors. In Sands & McDougall v Commissioner of Taxation, the Victorian Court of Appeal held that payment of outstanding sales tax to the Commissioner of Taxation to avoid the Commissioner taking proceedings to wind up the company was nevertheless a preference. In Olifent v WorkCover Corporation of South Australia, Debelle J of the Supreme Court of South Australia held that WorkCover payments made by an insolvent roofing company were preferences. Debelle J considered both a running account defence and that payment was part of a wider transaction which requires regard to be had to the whole transaction. Debelle J observed that payment of the levy would not cause the WorkCover Corporation to provide any goods or services to the company.

The respective arguments in support of whether the royalty payments were an unfair preference or not appear to be as follows. In support of the contention that payment of the royalties were not an unfair preference: Payment of the royalties were a condition of the lease. To preserve the lease and protect this valuable asset from being lost, it was necessary to pay the royalties. The payments, therefore, retained for the company an asset whose value exceeded the payments. If the royalty payments had not been made, the value of the leases would have been reduced by at least the amount of the outstanding royalties. The leases could not have been sold without the outstanding royalties being paid. They were akin to a charge on the leases. The creditors are no worse off by reason of the payment. The other creditors would not be disadvantaged by the transaction as a whole.

In support of the contention that the payment of royalties were an unfair preference: Payment of royalties enabled the Minister to be paid in preference to other creditors. The payment did not, of itself, result in an increase in the nett value of assets available. No service or asset was acquired. Insofar as the payment may have avoided the mining lease tenements being forfeited, that is purely speculative.

Which argument is correct? As discussed above, Air Services Australia v Ferrier makes clear the meaning of preference priority or advantage over other creditors as that expression is used in s 122 of the Bankruptcy Act 1966. The effect of the payment to the creditor is judged by reference to its effect on other creditors. If the effect is that the nett assets are not decreased, despite the payment to the creditor, then the other creditors have not been disadvantaged by the transaction as a whole. Accordingly, the payment to the creditor has not had the effect of giving that creditor a preference, priority or advantage over other creditors. In other words, the position of the other creditors is assessed before and after the transaction. If they are no worse off, then the payment does not constitute an unfair preference. In Air Services Australia v Ferrier, the majority said:

To have the effect of giving the creditor a preference, priority or advantage over other creditors, the payment must ultimately result in a decrease in the nett value of the assets that are available to meet the competing demands of the other creditors.

In other words, the transaction as a whole must disadvantage the other creditors.

In this case, if the royalties had not been paid and Centaur Mining went into liquidation, it is likely the nett assets available to the other creditors would be no greater than if the royalty was paid, as the unpaid royalties would have been paid in any event by the receivers to enable the sale and transfer of the mining tenements. In other words, the value of the assets retained by the company were at all times subject, in effect, to payment of the royalties. Centaur Mining's payment of the royalties increased the value of the tenements by an equivalent amount. Further, the payment of the royalties avoided the tenements being forfeited to the disadvantage of other creditors.

The fact that the payment of the royalties was a condition of the lease distinguishes this case from the cases referred to above regarding telephone charges, poker machine duties, sales tax and WorkCover premiums. The payment of the royalties should be treated in a similar way to payment of the rent. The main difference is that the rents were in advance, whereas the royalties were in arrears. I do not see a material difference, however, between securing an asset by procuring it or securing it by preserving it. The payment had two effects: It avoided the tenements being forfeited and extinguished the liability that would have to be paid to realise the tenements in a winding up. Accordingly, I find that the landlord's defence, or the ultimate effect principle, extends to the royalties. Their payment, in the circumstances, was not an unfair preference.

89 The appellants rely upon the following grounds of appeal:

1. The learned judge erred in holding that each of:

was not an unfair preference within the meaning of s 588FA(1) of the Act because the respondent had received no preference, priority or advantage in that the ultimate effect of the payments was not to decrease the net value of the assets of the company so as to disadvantage the other creditors.

2. The learned judge erred in failing to hold that each of:

was an unfair preference within the meaning of s 588FA(1) of the Act because the evidence disclosed that by receipt of each of the payments, the respondent received more than he would receive from the company in respect of the debt the subject of the payment if the payment were repaid and the respondent were to prove for the debt the subject of the said payment in a winding up of the company.

3. The learned judge erred in failing to hold that the royalty payment of $235,065.86 made on 20 February 2001 was an unfair preference within s 588FA(1) of the Act where the evidence disclosed the following circumstances attending the said payment:

a. it was the first payment in an instalment arrangement to clear existing arrears in respect of a liability for royalties;

b. it was made at a time when the respondent had received legal advice that he could not initiate forfeiture action if the said payment was not made;

c. it was made at a time when it was known to the respondent that voluntary administration of the debtor company was expected imminently.

4. The learned judge erred in holding that the 10 payments in respect of rent were paid in advance of the time when they became due and payable.

5. The learned judge erred in holding that the respondent had established which payments related to rent and which payments to royalties where:

a. there was no proper or sufficient evidence that the payment of royalties of $197,703.82 made on 2 February 2001 was in fact referable (wholly, in part or at all) to the tenements alleged by the respondent; and

b. there was no proper or sufficient evidence that the payment of royalties of $774,478.48 made on 6 February 2001 was in fact referable (wholly, in part of at all) to the tenements alleged by the respondent.

6. The learned judge erred in holding that the mining tenements were ultimately transferred for millions of dollars and were exceptionally valuable where:

a. the evidence disclosed that portions of the individual payments related to types of tenements which were not in fact sold by the receivers of the company; and/or

b. there was no evidence as to the value of many of the tenements.

a. the payment of rental and royalty payments secured the mining tenements;

b. the payment of the royalties avoided the tenements being forfeited to the disadvantage of other creditors;

c. there was no probative evidence as to what action the respondent would have taken in the event of non-payment;

d. portions of the individual payments related to types of tenements in relation to which the respondent had no power to withhold consent to transfer or to forfeit; and

e. on 16 February 2001, the respondent had received legal advice that he could not initiate forfeiture action because of the instalment plan then in place.

8. The learned judge erred in law in finding that the onus fell on the appellants to establish that the value to Centaur Mining of a year's (or alternatively not less than nine months) prospective tenure of each of the relevant mining tenements was less than that part of the relevant royalty and/or rental payments relating to the relevant mining tenement.

9. The learned judge erred in failing to reject the opinion evidence of Dean Carville.

10. The learned judge erred in law in that he failed to provide adequate reasons for his decision in relation to the following:

a. the learned judge failed to refer to or otherwise consider the appellants' submission that regardless of the correct interpretation of s 588FA(1) of the Act, the royalty payment of $235,065.86 made on 20 February 2001 was an unfair preference by virtue of the following circumstances attending the said payment:

i. it was the first payment in an instalment arrangement to clear existing arrears of royalties;

ii. it was made at a time when the respondent had received legal advice that he could not initiate forfeiture action if the said payment was not made;

iii. it was made at a time when it was known to the respondent that the voluntary administration of the debtor company was likely to be imminent.

b. the learned judge failed to refer to or otherwise consider the submission of the appellants that the opinion evidence of Dean Carville should be rejected and otherwise gave no reasons for his acceptance of same;

c. the learned judge failed to provide reasons as to his finding that:

i. the respondent had established which payments related to rent and which payments to royalties;

ii. the mining tenements were ultimately transferred for millions of dollars and were exceptionally valuable;

iii. the payment of rental and royalty payments secured the mining tenements;

iv. the payment of the royalties avoided the tenements being forfeited to the disadvantage of other creditors.

90 The appellants said that the efficacy of these grounds depended on establishing that the judge was wrong in deciding that the ultimate effect doctrine survived the amendments to insolvency law brought about by the Corporate Law Reform Act 1992 (Cth). In other words, these grounds raise the question of the proper construction of s 588FA(1) of the Act.

91 The appellants submitted at the outset that the 'landlord's defence' was not and never had been a substantive principle or independent doctrine of Australian company law. However, as was put to senior counsel for the appellants during his argument, this expression was only used as shorthand by the trial judge to refer to the ultimate effect doctrine as applied to the situation of a landlord and tenant relationship and as exemplified by the decision of Fox J in Re Discovery Books Pty Ltd.[53]

92 In that case, the liquidator of Discovery Books Pty Ltd (the company) sought to recover payments made by the company to a sub-lessor (the landlord) under a sub-lease of business premises for a term of 5 years commencing on 1 November 1968. Under the sub-lease there was a yearly rental of $15,600 payable by equal calendar monthly payments, in advance, of $1,300. The company also agreed in the sub-lease to pay a premium of $15,000 forthwith but if the rent was duly paid it was entitled to pay the premium by 60 equal calendar monthly payments of $250. The monthly payments of rent and premium were due (by agreement) on the 11th day of each month and in practice were paid together. The company was wound up in November 1970 and the liquidator challenged a series of late payments of rent and premium made in August, September and October of that year.

93 Fox J, after referring to the authorities, said:[54]

The fact is that a payment made for a past debt arising from an isolated transaction is probably, but not necessarily a preference, and a payment made for a contemporaneous consideration, such as the supply of goods, is probably not a preference, but it may be. The question, which is one of fact in each case, is whether the business or commercial effect in the bankruptcy, of the payment or other disposition was to give to one creditor a preference, a priority or an advantage over other creditors. There must be cases where the relevant effect of a payment or other dealing is unclear; in those cases the onus on the official receiver or liquidator may be crucial.

In the present case, it would be wrong to treat the payments as void because it does not appear that Excelsior thereby obtained preferences over other creditors. They were payments which were for the current use of the premises. On those premises the company carried on business. The use of the premises was calculated to produce income which would have increased, at least temporarily, the assets of the company and this in turn was likely to have been of benefit to creditors. One cannot correlate rent payments with benefits to the creditors, or evaluate the benefit (if any), but this is simply to say that a preference cannot be proved. It is well accepted that in general a payment for goods supplied at or about the time of payment is not a preference, and the present position is analogous. There is of course the difference in the present case, which makes it a stronger one, that the right to possession and the correlative right to receive rent were not the result of separate ad hoc agreements, but flowed directly from the original lease agreement made in 1969. Moreover, what was said in Richardson's case [1952] HCA 8; (1952) 85 CLR 110, and decided by Barwick CJ in Queensland Bacon Pty Ltd v Rees [1966] HCA 21; (1966) 115 CLR 266, shows that when looking to see whether there is a preference it is appropriate to look not only at what the payment is for, but to the business consequences of making the payment. In those cases the situation in mind was one in which failure to pay for goods already delivered would have led to a refusal to make further supplies. In a lease situation, such as the present, the likely consequences are more obvious and no less serious. When rent was fourteen days in arrear, Excelsior could re-enter (cl 5(a)) and it had the old and summary remedy of distress. The power to distrain gave it the right to become a secured creditor, pro tempore, and, of course, the sale of goods on the premises, under a distress, could have been quite disastrous to the continuation of the company's business. It is interesting to note in this connexion the decision of Lord Ellenborough in Stevenson v Wood (1805) 5 Esp 200; 170 ER 785, in which rent paid under threat of a distress during the period of relation back was not recoverable by the assignee in bankruptcy from the landlord. His Lordship is reported as saying: 'The landlord has by law a right of distress; he has a legal lien on the bankrupt's goods, unconnected with the bankruptcy; if he thinks fit to waive that right, and accept of the rent from the assignees, who may be benefited by having the goods, without being sold under the distress, the landlord should not be placed in a worse situation than if he had made an actual distress; it would be a fraud on his legal rights to hold otherwise. The defendant has, therefore, a right to hold the money which under those circumstances he has obtained.'

What I have said of the payments as a whole seems to me to be true of each payment. The first payment, of $1,000, was in relation to a debt which had accrued due on 11th July, but it was in respect of a period which ran to 11th August. There is no way in which the amount, being an advance payment, could be apportioned, but in any event to attempt to do so would be an incorrect exercise. It was in substance a payment for current use, it had to be paid to secure continuation in possession, and no preference in fact can be shown. For the reasons given, it would also be wrong to treat the payments as preferences to the extent of the net reduction shown by the account ($250).

I have so far only considered rent payments. The premium payments were instalments of an amount which became due on the grant of the lease. Under cl 4(d) the premium could be paid by monthly instalments of $250, provided that rent was duly paid and covenants were duly performed. There is no evidence that by reason of the lessee's default the balance of the premium was treated as payable, and nothing to this effect was submitted in argument. I shall therefore act on the basis which the parties seem to have accepted, namely that instalments only were due each month. The first premium payment attacked was made on 17th August. At the time two instalments were due. Subsequent payments brought the premium payments up to date, so that on 15th October nothing remained due. Because the instalments were not in respect of any period of possession, but were simply amounts due at certain times, the position is not the same as that in relation to rental payments. However, consistently with the authorities cited, it seems to me that no part of the premium payments should be treated as a preference. Whatever may be said in general as to the payment of debts as payment falls due, the essence of the situation in the present case is that they were payable under the lease agreement, and their payment, as a matter of practical reality was necessary in order that possession be retained of the leased premises. The payments were of business advantage to the company. Although, if one takes the period overall, the net gain to the lessor was only $250, it does not seem appropriate, or helpful in the circumstances to talk of running accounts. The fundamental point is that no preference over other creditors, in a practical business sense, can be shown. The particular reason for this is that the company received as a result of the payments benefits which were of value in a business sense, and those benefits can be taken as having enured, to a greater or less extent, for the benefit of the other creditors.

I am therefore of the view that the payments in question do not to any extent disclose a preference. It is unnecessary therefore to consider the application of s 122(2) of the Bankruptcy Act.

94 It is clear from the above that Re Discovery Books Pty Ltd was a case in which the ultimate effect doctrine was applied to a fact situation arising from the relationship of landlord and tenant. The appellants did not dispute the validity of the decision of Fox J in that case. Rather, their submission was that s 588FA(1) no longer permitted the application of the ultimate effect doctrine in circumstances such as those that obtained in that case or, indeed, in any circumstances (except to the extent that the doctrine was preserved by the express language of s 588FA(3)). Putting it another way, the appellants said that the 'old law' that involved the incorporation of the principles developed under s 122 of the Bankruptcy Act had been superseded by the language contained in s 588FA(1).

95 The appellants said that the 'old law' had been explained and applied by the High Court in Air Services Australia v Ferrier,[55] a case that had been referred to by the trial judge. It is convenient to refer to that case for its summary of what the appellants said was the 'old law'.

96 In Air Services Australia v Ferrier, the High Court was concerned with the provisions of s 122(1) of the Bankruptcy Act 1966 (Cth), as rendered applicable to the winding up of a company by s 565 of the Corporations Law. Section 122(1) of the Bankruptcy Act provided:

A conveyance or transfer of property, a charge on property, or a payment made, or an obligation incurred, by a person who is unable to pay his debts as they become due from his own money (in this section referred to as 'the debtor'), in favour of a creditor, having the effect of giving that creditor a preference, priority or advantage over other creditors, being a conveyance, transfer, charge, payment or obligation executed, made or incurred:

(a) within 6 months before the presentation of a petition on which, or by virtue of the presentation of which, the debtor becomes a bankrupt; ...

is void as against the trustee in the bankruptcy.

97 The facts in that case were that the Civil Aviation Authority provided air navigation services to an airline company until the commencement of its winding up. Nine payments were made to the authority during the six month period before the commencement of the winding up which the liquidators alleged had the effect of giving the authority a preference, priority or advantage over the other creditors. The company and the Authority both understood that the provision of further services in that period depended on the company's making payments to reduce its growing debt. The Court held (Dawson, Gaudron and McHugh JJ, Brennan CJ and Toohey J dissenting) that there was in effect a running account between the company and the authority showing regular debits and credits which indicated a continuing relationship and that having regard to the ultimate effect of the payments and not the immediate effect of each payment, none, other than the last, preferred the authority over the other creditors - the last payment was different because it was a partial payment of an existing debt and was not made to secure the provision of continuing services.

98 The principles were stated by the majority judgment in Air Services Australia v Ferrier as follows:[56]

For the purpose of s 122, the effect of a payment on the other creditors of the debtor is determined objectively. If the payment has the effect of giving a creditor a preference over the other creditors, it does not matter that neither the creditor nor the debtor intended to give the creditor preferential treatment. As Starke J pointed out in S Richards & Co Ltd v Lloyd, the section 'looks to the effect of the transaction and not to the intent, or state of mind, of the debtor'. But that does not mean that the purpose of the debtor in making a payment has no evidentiary significance.

If a payment is part of a wider transaction or a 'running account' between the debtor and the creditor, the purpose for which the payment was made and received will usually determine whether the payment has the effect of giving the creditor a preference, priority or advantage over other creditors. If the sole purpose of the payment is to discharge an existing debt, the effect of the payment is to give the creditor a preference over other creditors unless the debtor is able to pay all of his or her debts as they fall due. But if the purpose of the payment is to induce the creditor to provide further goods or services as well as to discharge an existing indebtedness, the payment will not be a preference unless the payment exceeds the value of the goods or services acquired. In such a case a court, exercising jurisdiction under s 122 of the Bankruptcy Act, looks to the ultimate effect of the transaction. Whether the payment is or is not a preference has to be 'decided not by considering its immediate effect only but by considering what effect it ultimately produced in fact'.

As a consequence, a payment made during the six month period cannot be viewed in isolation from the general course of dealing between the creditor and the debtor before, during and after that period. Resort must be had to the business purpose and context of the payment to determine whether it gives the creditor a preference over other creditors. To have the effect of giving the creditor a preference, priority or advantage over other creditors, the payment must ultimately result in a decrease in the net value of the assets that are available to meet the competing demands of the other creditors.

Thus, where the payment is a step in a wider transaction, 'its actual business character must be seen and when it forms part of an entire transaction which if carried out to the intended conclusion will leave the creditor without any preference priority or advantage over other creditors the payment cannot be isolated and construed as a preference'. If the purpose of a payment is to secure an asset or assets of equal or greater value, the payee receives no advantage over other creditors. The other creditors are no worse off and, where the value of the assets has increased, they are actually better off. Thus, a debtor does not prefer a creditor to the other creditors if he or she pays a debt, or part of it, to induce the creditor to supply goods of equal or greater value than the amount of the payment. In that situation, it is of no relevance that the debt that is discharged happens to be a stale one. If the present value of the goods supplied is equal to or greater than the payment, the other creditors are no worse off. They are in the same position that they would have been in if the parties had so structured the transaction that the debtor paid for the new supply of goods instead of discharging the old debt. Thus, a customer does not prefer his or her banker to other creditors where, pursuant to an antecedent arrangement between the banker and its customer, the customer deposits money to meet a liability already incurred in respect of specific cheques that the banker has met on the faith of the arrangement. A court, exercising jurisdiction under s 122 of the Bankruptcy Act, does not allow itself to be unsighted by the shadow of the legal form when it can see that the economic effect of the transaction does not give the creditor any preference, priority or advantage over the general body of creditors.

Commonly, however, the relationship between a debtor and creditor will involve more than a single transaction. It will often involve a number of dealings in which goods or services are supplied at regular intervals but the payments for those goods or services neither are made regularly nor, when made, are appropriated to a specific or even the most recent delivery of the goods or services. Like the case of the wider transaction, s 122 does not require the court to look at the immediate effect of a particular payment if 'the payment formed an integral step in a unified course' of dealings between the parties. The court looks to the business effect of the parties' dealings which almost invariably proceed on the understanding, sometimes express but more often assumed, that the creditor will continue to supply goods or services to the debtor on a credit basis as long as the debtor substantially adheres to their credit arrangements.

If at the end of a series of dealings, the creditor has supplied goods to a greater value than the payments made to it during that period, the general body of creditors are not disadvantaged by the transaction - they may even be better off. The supplying creditor, therefore, has received no preference. Consequently, a debtor does not prefer a creditor merely because it makes irregular payments under an express or tacit arrangement with the creditor that, while the debtor makes payments, the creditor will continue to supply goods. In such a situation, the court does not regard the individual payments as preferences even though they were unrelated to any specific delivery of goods or services and may ultimately have had the effect of reducing the amount of indebtedness of the debtor at the beginning of the six-month period. If the effect of the payments is to reduce the initial indebtedness, only the amount of the reduction will be regarded as a preferential payment.

...

Since the decision of this Court in Richardson v Commercial Banking Co of Sydney Ltd, the term 'running account' has achieved almost talismanic significance in determining when the ultimate, rather than the immediate and isolated, effect of a payment is to be examined for the purpose of a determination under s 122 of the Bankruptcy Act. However, the significance of a running account lies in the inferences that can be drawn from the facts that answer the description of a 'running account' rather than the label itself. A running account between traders is merely another name for an active account running from day to day, as opposed to an account where further debits are not contemplated. The essential feature of a running account is that it predicates a continuing relationship of debtor and creditor with an expectation that further debits and credits will be recorded. Ordinarily, a payment, although often matching an earlier debit, is credited against the balance owing in the account. Thus, a running account is contrasted with an account where the expectation is that the next entry will be a credit entry that will close the account by recording the payment of the debt or by transferring the debt to the Bad or Doubtful Debt A/c.

If the record of the dealings of the parties fits the description of a 'running account', that record will usually provide a solid ground for concluding that they conducted their dealings on the basis that they had a continuing business relationship and that goods or services would be provided and paid for on the credit terms ordinarily applicable in the creditor's business. When that is so, a court will usually be able to conclude that the parties mutually assumed that from a business point of view each particular payment was connected with the subsequent provision of goods or services in that account. Sometimes, however, the transactions recorded in the account may be so sporadic that a court cannot conclude that there was the requisite connection between a payment and the future supply of goods even though the account was kept 'in the ordinary form of a running account in which debits and credits are recorded chronologically and in which payments are not shown as attributable to any particular deliveries but are brought generally into credit'. Thus, it is not the label 'running account' but the conclusion that the payments in the account were connected with the future supply of goods or services that is relevant, because it is that connection which indicates a continuing relationship of debtor and creditor. It is this conclusion which makes it necessary to consider the ultimate and not the immediate effect of individual payments. As Barwick CJ said in Queensland Bacon Pty Ltd v Rees:

'In my opinion, it is enough if, on the facts of any case, the court can feel confident that implicit in the circumstances in which the payment is made is a mutual assumption by the parties that there will be a continuance of the relationship of buyer and seller with resultant continuance of the relation of debtor and creditor in the running account, so that, to use the expressions employed in Richardson's Case, "it is impossible" - I interpolate, in a business sense - "to pause at any payment into the account and treat it as having produced an immediate effect to be considered independently of what followed...".'

99 After considering the particular facts, the majority in Air Services Australia v Ferrier went on to say:[57]

Once the doctrine of ultimate effect is applied, it follows that the payments to Airservices gave it no preference, priority or advantage over the general body of creditors. On the contrary, the general body of creditors benefited from the revenues that were generated as the result of the services provided by and at the expense of Airservices. The value of the services provided exceeded the amount of the payments during the relevant period by several million dollars.

To ignore the practical relationship between the payments and the subsequent supply of services and the ultimate effect of the dealings between the parties would not advance the purpose for which s 122 was enacted. That purpose is to strike down those payments by a debtor during the six-month period prior to bankruptcy that have the effect of depleting the assets available to the general body of creditors. But it is no purpose of s 122 to prevent a debtor from making payments - even payments to existing creditors - if the purpose of the payments is to acquire goods or services equal to or of greater value than the payment. That is what happened here, except for the last payment which is the subject of the cross-appeal. It is beside the point that during the six-month period there were other creditors who were not paid at all. Airservices gave value for the first eight payments and that is sufficient to take the case out of s 565 unless the amount of the payments exceeded the value of the services supplied, which it did not.

100 The appellants submitted that the plain language of s 588FA(1) left no room for the application of the ultimate effect doctrine. The appellants submitted that the decision in VR Dye & Co v Peninsula Hotels Pty Ltd (In liq)[58] was not authority to the contrary and that what was said by Ormiston JA in that case was obiter. It is necessary to refer to that case in some detail.

101 In Dye, the facts were that an accountant was engaged by a company to assist in its creditors' voluntary winding up. The company agreed to pay the accountant a sum of money 'on account of ... fees pending the performance of work ... and the incurring of disbursements in connection therewith'.[59] The sum of $8,500 was paid into a trust account of the accountant. The accountant then performed the work and finally issued an invoice and memorandum of fees and disbursements and drew the sum of $4,154.90 from the trust account (within the relation back period). The liquidator sought repayment of the sum of $4,154.90 as an unfair preference under s 588FA of the Corporations Law. A magistrate ordered repayment and the decision was affirmed on appeal to the Supreme Court. The judge in essence found that the money in the trust account was held on trust until the work was completed and that there was therefore no genuine prepayment of fees - the accountant had no beneficial interest in the money until he drew it from his trust account. A debtor-creditor relationship had come into existence prior to that time. The accountant appealed to the Court of Appeal. The appeal was allowed.

102 Ormiston JA (with whom Winneke P agreed) said that it was only if one were able to say that the money held in the trust account by the accountant was held on trust beneficially for the company alone, that one could say that the only transaction by way of payment in favour of the accountant took place when he withdrew the money. His Honour said that it was:[60]

commercially unrealistic not to conclude that the transaction the parties agreed upon was intended to effectuate payment of various sums which would become owing to the appellant by means which comprehended both the original payment to the trust account and the drawing down by [the accountant]. If that be so then the totality of the transaction did not involve the receipt of a payment in respect of an existing debt but merely the setting up of what was seen to be an efficient and appropriate mechanism for the payment of a new obligation, to be incurred for services yet to be provided but of what are assumed to be equivalent value. In effect it may be seen to have been a prepayment, of the kind traditionally excluded from the purview of voidable preference legislation: ...

The expression 'prepayment' has no doubt been used as a convenient means of distinguishing a payment of that kind from payments, transfers, charges and the like which under the earlier, incorporated by reference, provisions of the Bankruptcy Act were made voidable if they had the effect of giving a creditor 'a preference, priority or advantage over other creditors'...

103 Ormiston JA then noted that the provisions of the Corporations Law, introduced by the Corporate Law Reform Act 1992 (Cth), were 'differently expressed' from those previously incorporated from the Bankruptcy Act and then said:[61]

However, so far as one can gather, they were not intended to make any significantly different provision for identifying what is an unfair preference, except in a few minor respects and except in so far as the sections now appear in the corporations law itself and form part of a not untypical collocation of sections intended to give effect to the primary provisions but which at times appear to obfuscate the intentions of the legislature by separating the substantive provisions from the machinery provisions in a convoluted way.

104 After setting out the substantive provisions and the definition of 'transaction' and making some other additional comments, Ormiston JA said:[62]

Fortunately, it appears that the presently relevant provisions are intended to have no different effect, other than in minor respects from those which made preferences voidable when the Companies Act of this State was no more than 253 pages long. That recent amendments were intended to have such a limited effect may be seen from the explanatory memorandum published for the Corporate Law Reform Bill 1992, especially paras 1033 - 1042, from Report No 45 of the Law Reform Commission: 'General Insolvency Inquiry' (1988), vol 1, paras 629-638, and from the relatively few reported cases which have dealt with s 588FA.

105 His Honour then directly considered the question of the extent to which s 588FA(1) altered the law as to preferences and said:[63]

However, before turning to what appear still to be relevant authorities as to the meaning and application of the provisions permitting the avoidance of preferences, I should briefly touch on the language now adopted in subs (1) of s 588FA. As is clear from its terms the new provision concentrates on the potential result of an impugned transaction inasmuch as it requires the court to ascertain whether the allegedly preferred creditor has received more from the company than that creditor would receive if the transaction were set aside and it had to prove for the debt in 'a winding up of the company'. In the past, of course, it was necessary to ascertain whether the transaction had the effect of giving a creditor a 'preference, priority or advantage' over other creditors and, although the earlier applicable sections were construed so as not to require such preference to be intentional, the words connoted some unfair advantage, priority or preference. The new subsection concentrates, some might say unfortunately, only on the hypothetical result, that is, assuming the words used in the subsection are intended to be an exclusive definition. If there be an avoidance of a transaction where a company is insolvent, then it follows as the night the day that the creditor will share pari passu with the other creditors and will receive less than full payment. If it is not set aside, presumably because it is not an 'unfair preference', then that creditor will obviously have received more, but the words now employed give no inkling as to which transactions will be set aside and which will not. In other words the definition looks only to the consequences, not to the reason for that 'result'.

It is only then if one has regard to the history of the provision and its obvious purpose that one can determine which transactions should be set aside. The word 'unfair' appears in the terms of the provision, although that would seem more likely to be the result of the legislature's choice of the composite expression 'unfair preference' which is, in fact, defined in s 9 as having 'the meaning given by section 588ZA'. However, the object sought to be achieved by Parliament can be seen from the explanatory memorandum para 1040 where it was said:

'Section 122 refers at present to a transaction which has the effect of giving to the creditor a "preference, priority or advantage" over other creditors of the company, whereas the new provision specifies quite clearly what that expression means in the context of a corporate winding up.'

It might be said that the old provisions also looked only to the consequences of avoidance but that would overlook the fact that s 122 and its predecessors did not purport to be definitions, as does the present section. The words of the earlier section, though not importing intent, connoted unfairness in that they required an inquiry as to whether there was shown to have been the 'giving' of a 'preference', 'priority' or 'advantage' effected by the disposition in question. That is why, in my opinion, C.O.D. transactions and payments in the course of a running account were accepted as not being voidable under that section. Doubtless if such payments had been or are now to be set aside the recipients would be relegated to proof in the winding up and would thereby receive less than they had earlier received. The recipients would have to be treated as unsecured creditors because the avoidance of the payments or other dispositions would not consequentially result in the return of the consideration, the goods (possible) or the services (impossible), for it is not the whole contractual transaction which has been set aside.

Yet it has been accepted for many years that a disposition in favour of such a recipient will not be avoided: see eg Richardson v Commercial Banking Co of Sydney Ltd [1952] HCA 8; (1952) 85 CLR 110 and Airservices, and the cases therein cited. Largely that would seem to have flowed from the fact that an equivalent benefit was received by the insolvent company or individual. (In the C.O.D. cases the recipient was also held not to be a creditor at the relevant time.) In truth it was the element of 'unfairness' which was there seen not to be present, because the benefits also received by the insolvent denied the payments etc. the character of being a 'preference, priority or advantage' of the kind which the legislature was seeking to strike down: see and cf Richardson, esp at 133 and Airservices at 455-89, 491-8, 501-6, 516-23. What, however, is critical to the reasoning of the majority in the latter case is that, though actual intention to give a preference is irrelevant, 'that does not mean that the purpose of the debtor in making a payment has no evidentiary significance': at 501. Moreover, at 502, the majority stated in passages set out fully below (at [37]) that resort may be had to 'the business purpose and context' of any payment, and that, '[i]f the purpose of [the] payment is to secure an asset or assets of equal or greater value, the payee receives no advantage over other creditors'. As they later said no relevant advantage over other creditors will have been received. From a passage in almost identical terms half a page earlier such an 'asset' may consist of either 'goods or services'.

That significant qualification was read into s 122 but, having regard to the date on which the judgment in Airservices was given and that of the passing of the new provisions, no inference can be drawn as to Parliament's understanding of the legislation. However, though the bare language of s 588FA and following might seem to deny the purposive element read into s 122, these sections are but manifestations of a more general policy of the law as to insolvency. Many years earlier Lord Mansfield CJ had read into the common law an implicit prohibition against the preferring of creditors at a time when no relevant legislative provision applied: see, eg, Alderson v Temple [1746] EngR 5; (1768) 1 Black W 660; 96 ER 384, albeit that at that time the decision seemed in part based on a form of 'fraud'. See also as to the history of the common law as to preferences: Harkness v Partnership Pacific Ltd (1997) 41 NSWLR 204 at 226-64 (and in particular at 237-9) per Priestley JA and Weisberg, 'Commercial Morality, the Merchant Character, and the History of the Voidable Preference' (1986) 39 Stanford L Rev 3 at pp 5-55 esp at 39-55 (although one cannot usefully obtain guidance from the later legislative history in the USA: cf the judgment of the Full Federal Court in Ferrier v Civil Aviation Authority [1994] FCA 1571; (1994) 55 FCR 28 at 42-50, 63); Keay, 'An Exposition and Assessment of Unfair Preferences' (1994) 19 MULR 545 and Keay, Avoidance Provisions in Insolvency Law, (1997), at pp 15-18.

The qualification applying to running account payments must be considered as being accepted by Parliament inasmuch as subs (3) of s 588FA explicitly recognises it. I would therefore conclude also that the other, formerly existing, apparent exceptions were intended still to apply and, to that extent, the legislative definition must be treated as purposive. In other words the section is still directed against unfair preferences. If that be so, then I would conclude that the new provision should be construed in the same way as the former provision, except to the extent that the language of s 588FA clearly points to a contrary conclusion.

Consequently, although a number of judges at first instance have expressed different views as to the extent to which the earlier cases may bear upon the proper interpretation of s 588FA, it is not necessary to examine those in detail for in my opinion it is clear that no change was intended to be made to the nature of a preference under the new legislation, whatever other alterations were made to the law. That appears to be accepted in the only appellate decisions on the issue to which we were referred or which has come to my attention, in particular in Re Emanuel, although the Federal Court there was cautious in accepting that the broad policy of the earlier legislation had been adopted in the new provisions: at 283. It is sufficient to say that the court considered that cases on the earlier provisions 'will often provide useful guidance in the interpretation of aspects of Pt 5.7B', though care will need to be taken to ensure that 'proper account is taken of the significant textual differences between the old and the new regimes': ibid. That case in fact involved a consideration of the meaning of the word 'transaction', an expression added to the legislation by the new provisions and given a definition which would seem to cover more transactions than were previously capable of being avoided. This court in Sands & McDougall Wholesale Pty Ltd v Commissioner of Taxation [1998] VSCA 76; [1999] 1 VR 489 also had to consider the provisions relating to unfair preferences but, although it might be said that the issue as to whether there was any difference for present purposes between the provision in s 122 and s 588FA was not explicitly addressed, the reasoning of the court appears to have accepted that there was no difference to the limited extent that that general question arose: see, eg, at [35]-[37] and [49] per Charles JA and at [75]-[76] per Kenny JA.

(v) Effect and meaning of s. 588FA

For the purpose of analysing these provisions, both past and present, one may start with a generality which is now reflected in the language of s 588FA(1): '"One of the fundamental precepts of corporate insolvency law is that the available assets of the company are to be shared rateably among its creditors"': per Toohey J in Airservices at 516, citing an article by O'Donovan, 'Undue Preferences' (1992) 22 UWAL 322. Against that broad principle, however, there has been recognised the necessity of ensuring that a company facing winding up must have some capacity to live out and possibly survive its feared fate. It is in the interests of the body of unsecured creditors that there should remain a business which can be sold as a running concern, so long as its liabilities are not increased in the mean time. So it has been accepted for many years that, as long as the company does not pay out existing creditors without obtaining an effective corresponding advantage, then it should be allowed to acquire goods and services by prepayment or on cash on delivery terms. The rationale behind the 'exception' (more precisely, the non-inclusion within the general rule) is that the company gains goods and services to an equivalent value (in broad terms) to that which it pays out to obtain them, so that the existing creditors cannot in theory be prejudiced by the payment. I say 'in theory' because the 'rule' assumes that there is an equivalence between price and benefit obtained, which may not always occur, but to engraft some further exception upon the exception would tend to commercial impracticability.

The object sought to be obtained by the legislation over the years, and still by the present legislation, has been to prevent existing creditors from being disadvantaged. So, in one of the earlier cases on preferences in the High Court, it was said by Dixon J (with whom Rich and McTiernan JJ agreed) in Robertson v Grigg [1932] HCA 29; (1932) 47 CLR 257 at 271:

'The relationship of debtor and creditor was for long the very foundation of the provisions of the bankruptcy law affecting preference, and, although exceptions have been introduced, the old rule otherwise remains and nothing can amount to a preference unless the person preferred is a creditor.'

As his Honour there said the charge there in question would not be a preference within s 95 'because it did not operate to prefer him in respect of any then existing debt'. (Emphasis added.) Thus the rule is directed towards preventing the preferring of one or more creditors over the rest of the body of creditors: cf also Burns v Stapleton [1959] HCA 34; (1959) 102 CLR 97 at 105 per Dixon CJ, Kitto and Windeyer JJ. Again, as was more recently stated by Brennan CJ in Airservices at 491: 'To be a preference a payment must discharge, pro tanto, an existing debt.': see also per Dawson, Gaudron and McHugh JJ at 502.

In each case the court is obliged to look at the transactions between the parties in a manner which accords with the commercial realities. It is not a matter of isolating particular individual steps in the course of a business relationship so as to give one element a different characteristic from that which the totality of that relationship would evidence. That is but one aspect, but a principal aspect, of the running account cases which have realistically faced the way in which companies and other parties carry on business when close to insolvency. The general principle may be stated in the terms expressed by the High Court in Richardson at 132 per Dixon, Williams and Fullagar JJ:

'In considering whether the real effect of a payment was to work a preference its actual business character must be seen and when it forms part of an entire transaction which if carried out to its intended conclusion will leave the creditor without any preference priority or advantage over other creditors the payment cannot be isolated and construed as a preference.'

See also at 129, as to the need to look to the 'entire' or 'whole' transaction, cited with approval by Barwick CJ in Queensland Bacon Pty Ltd v Rees [1966] HCA 21; (1966) 115 CLR 266 at 283. The passage at 132 was recently cited with approval by the majority in Airservices (Dawson, Gaudron and McHugh JJ) at 502, where they introduced it with these words:

'As a consequence, a payment made during the six month period cannot be viewed in isolation from the general course of dealing between the creditor and the debtor before, during and after that period. Resort must be had to the business purpose and context of the payment to determine whether it gives the creditor a preference over other creditors. To have the effect of giving the creditor a preference, priority or advantage over other creditors, the payment must ultimately result in a decrease in the net value of the assets that are available to meet the competing demands of the other creditors.'

After quoting the cited passage from Richardson, they continued:

'If the purpose of a payment is to secure an asset or assets of equal or greater value, the payee receives no advantage over other creditors. The other creditors are no worse off and, where the value of the assets has increased, they are actually better off.'

(See also per Brennan CJ at 491 and per Toohey J at 516-18.) The only qualification I would seek to place on these passages, which is doubtless implicit, is that a precise evaluation of services and goods provided can never be made satisfactorily and, unless there be some dishonest attempt to overvalue particular goods or services, they ought for practical purposes to be taken as having been received at face value, that is, at the value at which the company agreed to acquire them. This process of analysis of each transaction was later described by the majority as the 'doctrine of ultimate effect': at 509.

I would see the logical consequence of these authorities as requiring that, for the purpose of characterising any impugned transaction and its effect for the purposes of the preference provisions, in each case the court should look at the 'ultimate effect' of the 'entire transaction' (Airservices at 505 and 509) before determining whether it has worked an unfair preference within the meaning of s 588FA. Not only does that flow from the language of the court in Richardson, as adopted in Airservices, but also from the subsequent use and approval of those words by the Full Court of the Federal Court in Re Emanuel at ALR 289; ACSR 300; ACLC 1105. Indeed it would not be appropriate, because of the rule laid down by the High Court in Australian Securities Commission v Marlborough Gold Mines Ltd [1993] HCA 15; (1993) 177 CLR 485, to depart from any interpretation of s 588FA (and the related provisions), reached by that court and necessary to its reasoning. Nevertheless, apart from indicating a general approach to the interpretation of the new provisions largely consistent with that given to the former provisions, Re Emanuel by its own terms stands for relatively limited propositions of law. Thus, where that court accepted that the definition of 'transaction' effected some widening of the nature of transactions which may be struck down as voidable or unfair preferences, it confined its conclusion expressly to dealings which had the effect of extinguishing a debt. So one may agree that the s 9 definition 'through the process of exemplification [typifies] the forms of conduct or dealing engaged in by a company that will be characterised as a transaction' and that '[c]ommon to the examples is the characteristic that the conduct or dealing engaged in by the debtor company has the consequence of effecting a change in the rights, liabilities or property of the company itself': at 288. Nevertheless the Federal Court immediately qualified this by saying (ibid):

'We confine our observations for present purposes simply to a course of dealing initiated by a debtor for the purpose of, and having the effect of, extinguishing a debt. It is not apparent to us why it should not be said that, where a debtor so acts and extinguishes a debt, the relevant "transaction" is the totality of the dealings through which the debtor procures the intended outcome ... [Emphasis added.]

In the present case the same process of interpretation and reasoning should be adopted so as to enable the court to look at the totality of the dealings whereby the company engaged the appellant and agreed to pay for its services. That is not to say that the contract of engagement is the transaction or part of the transaction to be set aside, for even under the new definition what may be avoided under s 588FE is the disposition or other alteration to the assets of the company in favour of the preferred creditor, inasmuch as each disposition or transaction depletes or may deplete the total fund which would otherwise be available for distribution among the creditors. The new sections are in that sense consistent with the earlier provisions about which it was said that they were intended to make void every 'change which, if allowed to be effectual, would dislocate the statutory order of priorities amongst the creditors': see Burns v Stapleton at 104. That is not say, however, that in order to ascertain the true nature of the disposition or other transaction one cannot look at the agreement or arrangement which led to that disposition or transaction. Clearly that must be so as the whole history of the law relating to 'running accounts' over the years has demonstrated. Likewise with a payment resulting from a C.O.D. transaction, it is only possible to see that there is no real preference by knowing that there was an agreement which resulted in the transfer of goods or services to the company which took place at the same time. That the latter kind of dealing does not come within the unfair preference provisions was recently reiterated in the unreported judgment by Chernov J in Re Lanpac International [1998] VSC 9, which was not examined in detail in the course of argument but is merely an exemplification of a well-understood principle, as discussed in [40]-[44] of his Honour's judgment. As Chernov J expressed it (at [42]), a C.O.D. transaction does not usually create a preference as 'the parties to them usually do not deal with each other as debtor and creditor'. The critical words in s 588FA(1)(b) are those which qualify the nature of the receipt from the company as being 'in respect of an unsecured debt that the company owes to the creditor ... '.

106 Ormiston JA then went on to consider in detail the particular transaction involved in that case and in the course of doing so said:[64]

Looked at in that way there was a payment made in advance for the provision of services by the appellant which was effectuated only in part by the drawing down on 2 July. At the time the first stage of the transaction took place the appellant was not a creditor of the company: it was in exactly the same position as a person receiving a prepayment or obtaining payment in a C.O.D. transaction. The only difference was that effectuating the payment in this case was, for convenience, split into a number of stages.

That a payment into trust was chosen as the first stage of the transaction effectuating payment for fees to be earned does not require the court to ignore that stage of the whole transaction which led to payment of the appellant in order to determine in a commercial context what the ultimate effect of the whole transaction was.

108 After further lengthy consideration, Ormiston JA in substance rejected the view that might be taken that the Court was 'driving a coach and horses through the restrictions now imposed on the giving of unfair preferences'[66] and reiterated that in each case it would be the entirety of the transaction and its 'ultimate effect' which must be considered.

109 Tadgell JA also agreed with Ormiston JA and added:[67]

Like Ormiston JA, I cannot discern in the elaborate provisions of Div 2 of Pt 5.7B of Ch 5 of the Corporations Law, in which s 588FA is found, any distinction now relevant from their forerunners in the Commonwealth bankruptcy legislation of 1924 and 1966. It was and remains a quintessential prerequisite of a transaction to be avoided by any of those statutory provisions that it should operate to give a preference to a creditor in respect of an existing debt. So much was succinctly explained by Dixon J in Robertson v Grigg [1932] HCA 29; (1932) 47 CLR 257 at 270-1; and, as I respectfully apprehend, the explanation is as valid now as it was then. Obviously enough, no existing debt was owed to the appellant by the respondent at the time the sum of $8500 was paid by the respondent; and none was owed at the time the appellant drew down the sum of $4154.90. The payment of $8500 was an agreed payment, in advance of the provision by the appellant of services, made in order that the appellant, upon providing services (at latest), might draw on the prepayment otherwise than as a creditor.

110 The appellants said that the decision in Dye was undoubtedly correct but that it was a 'true prepayment' case - 'so there was never a debt...there was no possibility of a preference in any event, either under the old law or under the new law.'

111 The proposition that an obligation incurred or a payment made at a time when there was no existing debt cannot constitute the giving of a preference is one of long standing. Robertson v Grigg[68] was a case of an obligation incurred, rather than of a payment made, prior to the existence of a debt. In that case, a debtor assigned his estate to a trustee for the benefit of creditors pursuant to Part XI of the Bankruptcy Act. More than six months before that assignment, the debtor had obtained loans under agreements to repay them out of progress payments becoming due to him under several road construction contracts. Within six months he obtained further advances under these loan agreements and he also gave orders in writing in favour of the lender directed to the road authority to pay the money due under road construction contracts to the lender. The trustee applied to set the orders aside and recover the money received thereunder on the ground inter alia that they constituted a preference.

112 Dixon J (with whom Rich and McTiernan JJ agreed) said that the original agreement to repay out of progress payments constituted a valid equitable assignment (a charge on a fund) for valuable consideration and each charge was created in favour of the lender in respect of each such advance as it was made. As to those payments made within the 6 month period, the charge therefore did not operate to prefer the debtor in respect of any then existing debt and thus did not have the effect of giving the lender a preference. '... nothing can amount to a preference unless the person preferred is a creditor'.[69] The lender did not obtain any benefit or advantage in relation to the past indebtedness. '[The lender] did not deal with the debtor in his capacity of creditor. No pre-existing debt was better secured or otherwise affected by reason of any subsequent advance. There was, therefore, no preference to him as a creditor'.[70]

113 In Dye, the accountant was not a creditor when the payment of $8,500 was made into the accountant's trust account. The Court of Appeal considered whether that payment was a payment to the accountant (in which case it preceded the existence of any debt) or was a payment held for the company beneficially (in which case the payment of $4,154.90 was made in respect of a past indebtedness) and decided that the former was the appropriate analysis. On that basis, one can understand the appellants' submission that the case was about whether there was a genuine prepayment or not. However the Court of Appeal also considered the transaction as a whole, looking at the payment of $4,154.90 in the light of the full transaction, thereby applying the ultimate effect doctrine.

114 It seems to me, therefore, that the careful and elaborate reasoning of Ormiston JA as to the proper interpretation of s 588FA(1), with which Winneke P agreed and with which Tadgell JA also agreed, adding his own words to the same effect, formed part of the ratio decidendi of the case and was not mere obiter as the appellants submitted. That reasoning should therefore be followed and applied unless plainly wrong, especially as it relates to national legislation.[71] Further, even if the construction of s 588FA(1) by the Court of Appeal in Dye constitutes obiter dicta, what was said about it in Beveridge v Whitton by Heydon JA[72] (as he then was) cannot be disregarded:

In any event, the court ought not to refuse to follow the decision of the Victorian Court of Appeal in V R Dye & Co v Peninsula Hotels Pty Ltd (In Liq) without being convinced that it is plainly wrong: Akins v Abigroup Ltd (1998) 43 NSWLR 539 at 547. The same is true in my opinion of well-considered dicta even if, which is questionable, the statements of the Victorian Court of Appeal can be regarded as obiter dicta. I am far from being convinced that either the decision or the dicta, if that is what they are, were wrong.

115 I further note that in Mann v Sangria Pty Ltd,[73] Bryson J said in relation to Dye that he found Ormiston JA's judgment highly persuasive and then said:[74]

Although a decision of the Court of Appeal of Victoria is not strictly binding upon me, a decision of an appellate court on uniform companies legislation is an authority which I ordinarily should follow. I find the words of s 588FA very bare of indications of the purpose which the provision was intended to serve. If it was intended simply to avoid all the insolvent company's payments to creditors during the relation-back period unless they were exactly equal to the liquidation dividend that result could have been produced directly without introducing the word 'unfair' or any connotation of an unfair preference. If the subsection is read in the most strictly literal way the word 'unfair' appears to be introduced to no purpose, except to lend a pejorative epithet to a highly general avoidance of transactions. Unless the purposive approach taken by Ormiston JA is correct, I am unable to see what unfairness would be corrected and what advantage there might be in laying hands on all dealings with an insolvent company and retrospectively invalidating all payments of money for money's worth; that would make an insolvent company an economic pariah and ensure its failure. Considerations related to the purpose of the provision appear to me to support indications in the text of s 588FA(1) which seem to pick up a transaction which already has at its opening a creditor, a company and a debt and applies its comparison to a receipt which is a result of the transaction.

116 The appellants advanced a number of arguments, based firmly upon a literal interpretation of the statutory language but also upon a line by line critique of the reasoning of Ormiston JA in Dye, and with reference to extraneous material, devoted to showing that the statutory construction adopted by the Court of Appeal was wrong. Reference was also made to some judicial statements supporting the construction urged by the appellants but those statements did not refer to Dye or attempt to grapple with the reasoning therein.[75]

117 The appellants' primary contention was that the words in s 588FA(1) 'if, and only if' showed that Parliament intended to thereafter exclusively set out the only conditions required to establish that a transaction was an unfair preference, relevantly that the transaction resulted in the creditor receiving more for an unsecured debt than the creditor would receive in a winding up. The appellants referred to statements in the explanatory memorandum and in the Harmer Report[76] which they said supported this contention. On the other hand, the Court of Appeal in Dye stated substantial reasons as to why a change with consequences as sweeping as this, by eliminating the ultimate effect doctrine,[77] could not have been intended. In addition, the trial judge in this case suggested persuasive reasons to the same effect.[78]

118 I intend no disrespect to the appellants' arguments by not canvassing them further here but it was plain to me that those arguments, legitimate and reasonable as they were, could not support a conclusion that the statutory construction of the Court of Appeal was manifestly or plainly wrong. It cannot in my view be said that the Court of Appeal's reasoning is manifestly or plainly wrong. Indeed, in my opinion, the reasoning of Ormiston JA, and in addition that of Bryson J in the passage quoted above, is very persuasive.

119 The appellants raised one alternative argument under these grounds. The appellants submitted that, even if the judge's conclusion that s 588FA(1) did not operate to exclude the ultimate effect doctrine was correct, his Honour erred in concluding that the doctrine applied to the payment of the royalties. Accepting, on this hypothesis, that, by reason of the ultimate effect doctrine, the rental payments were not unfair preferences, the appellants submitted that the royalties were paid in arrears and that the payments were thus made in respect of past debts - unlike the rental payments, which might be said to have been the price paid to obtain future periods of occupation. On the other hand, the respondent submitted that the failure to pay royalties could have caused the relevant tenements to be forfeited, would have reduced the value of the tenements by at least the amount of the unpaid royalties and would have prevented the tenements from being sold. The respondent submitted that the royalty payments did not ultimately result in a decrease in the net value of the assets that were available to meet the competing demands of the other creditors.

120 As noted earlier,[79] the judge said, in relation to the three payments relating to royalties, that the royalties were calculated on a percentage of the sales value of the metals extracted from mining tenements and were payable quarterly. Thus the royalties were always payable in respect of past transactions and not to procure the provision of future services or benefits (unlike the rental payments). It is convenient to consider the authorities to which the judge referred and which he, in effect, distinguished.

121 In Australian and Overseas Telecommunications Corporation Ltd (t/as Telecom Australia) v Russell Kumar & Sons Pty Ltd,[80] liquidators had sought to recover three payments made to the appellant for arrears of telephone accounts by receivers and managers of the respondent. A magistrate's decision that two of these payments were preferential was upheld on appeal. The payments were made by the receivers under a threat of suspension for cancellation of the telephone service which was vital to the continuation of the respondent's business and its value. O'Bryan J decided that the payments were not made in good faith and in the ordinary course of business within the meaning of s 122(2)(a) of the Bankruptcy Act. Although no express reference was made to the ultimate effect doctrine, O'Bryan J said that he had read carefully, inter alia, the decision of Fox J in Re Discovery Books. The analogy to the payment of royalties in the present case is that the payment of the telephone account arrears was not made as consideration for the provision of future services although it was made, as a matter of practical reality, to preserve the continuation of those services. The argument in the present case was that although the royalty payments were not made in consideration or for the provision of any future services or benefits they served to protect Centaur Mining against the risk of forfeiture of tenements or any prejudice in respect of the sale of tenements.

122 In Sutherland v Liquor Administration Board,[81] the liquidators of a company that operated a registered club sought to recover, as preferential payments, instalment payments negotiated by official managers of the company and made for arrears of duty payable to the Liquor Administration Board in respect of the profits of poker machines. The Board argued, inter alia, that, by not calling up its debt, it had permitted the company to trade and generate moneys which were used to pay unsecured creditors and to allow the members to enjoy their facilities and thus supplied 'services' to the company. Young J (as he then was) referred to a number of cases which he classified under the heading of 'running account' cases but which also involved the question whether defendants were providing or continuing to provide services. Young J then said that the payments in the case before him were the liquidation of a past debt and:[82]

The mere fact that the defendants could have closed the company's operation down does not seem to me to be sufficient. Indeed, in the Telecom case that fact did not seem to be considered by O'Bryan J to be of very much weight at all.

123 Thus in Sutherland v Liquor Administration Board, although the ultimate effect doctrine was not expressly mentioned, the Court again distinguished between payments made for the provision of continuing services and payments made to avoid the closure of the business.

124 In Olifent v Workcover Corporation of South Australia,[83] a case involving the payment of arrears of workers compensation levies, Debelle J distinguished Air Services Australia v Ferrier saying:[84]

The payment of levies to the Corporation were not part of a running account or part of a wider transaction which requires regard to be had to the whole transaction. Although there was a continuing relationship between [the company] and the Corporation in the sense that [the company] was a registered employer, the levy payable for each month constituted a separate transaction. Payment of a levy or part thereof would not cause the Corporation to provide any goods or services to [the company] either at the time of payment or at any future time. Each month, [the company] had a statutory liability to pay a levy. ... notwithstanding its failure to pay a monthly levy, [the company] would continue to be entitled to the benefit of the indemnities from liability provided by ... the Act. The decision in Air Services Australia v Ferrier must, therefore, be distinguished.

125 Although the matter is not without difficulty, in my opinion the above cases support the proposition urged by the appellants that the ultimate effect doctrine does not extend to circumstances where the payment is made in respect of a past debt and is not made to secure the continuing provision of services (or goods) or the acquisition of assets, of a value corresponding with the payment made. The fact that as a practical matter the payment was made to protect the assets of the company or to prevent harm or prejudice to its business prospects or assets is of itself insufficient to take the payment out of the reach of the unfair preference provisions. The formulation of the ultimate effect doctrine in Air Services Australia v Ferrier,[85] while accepting that the purpose of the debtor in making a payment is of evidentiary significance, emphasises that such purpose is likely to be one 'to induce the creditor to provide further goods or services as well as to discharge an existing indebtedness'. There is also reference to a purpose 'to secure an asset or assets of equal or greater value', a phrase which was emphasised by the judge below. However, in the context, I consider that what their Honours were referring to was the acquisition of an asset of value equal to or greater than the amount of the payment and not simply to a purpose of protecting the assets or business of the debtor from destruction or prejudice.

126 For the foregoing reasons, grounds 1, 2 and 8 are not made out in relation to the rental payments but the appellants succeed in relation to the royalty payments.

127 The appellants submitted, additionally and in the alternative, that the Ninth Payment, the final payment of royalties made on 20 February 2001, was an unfair preference even on an application of the ultimate effect doctrine. The appellants said that the relevant evidence was as follows. On 8 February 2001 the Minister wrote to Centaur Mining agreeing to the payment of the royalty for the December 2000 quarter in 4 equal instalments. On 13 February 2001 the Minister's Department wrote to the Crown Solicitor's office seeking legal advice as to how the Department should be positioning itself in light of the real possibility of Centaur Mining going into voluntary administration. On 16 February 2001 the Crown Solicitor's office advised the Minister's Department that forfeiture proceedings could not be commenced at that stage in view of the instalment arrangements which had not yet been breached. The appellants submitted that the Ninth Payment (being the first instalment pursuant to this arrangement) did not secure the continued use of the relevant tenements because by that time the Minister's Department had been advised that it could not forfeit the tenements. The Minister was looking to the partial payment of an old debt rather than the provision of continuing services.

128 In answer, the respondent submitted that the appellants' submission overlooked the evidence that the non-payment of royalties ultimately led the Minister's Department to prevent the transfer of relevant tenements until all the royalties had been paid. The receivers and managers of Centaur Mining had paid all outstanding royalties to the Minister in order, inter alia, to enable the sale of the relevant tenements. The respondent submitted that, by making the Ninth Payment, Centaur Mining had preserved its right, for the time being, to transfer the relevant tenements for valuable consideration and the other creditors were, as a result, not thereby disadvantaged.

129 In my opinion, if the judge had been generally correct in relation to the royalty payments, the respondent's submissions would have been in line with the judge's reasoning. However, having rejected the respondent's submissions in relation to the royalties generally, their submissions in relation to the Ninth Payment would also fail.

130 This ground was not pressed as it depended on a misconception concerning the judge's findings.

131 This ground related to the Sixth Payment and the Eighth Payment which were payments of royalties. The appellants submitted that the judge's finding[86] that the Minister had established that the payment of rents and royalties 'secured the mining tenements' was not supported by the evidence in so far as the evidence did not show that the Sixth Payment and the Eighth Payment related to specific tenements which were ultimately sold. The appellants said that the evidence of the witness John Sharman on this topic, in relation to the Sixth Payment, had been shown to be speculation and that there was no evidence linking the Eighth Payment with any particular tenement or tenements.

132 The respondent submitted that, to the contrary, the evidence of John Sharman provided ample evidence to enable the judge to find that particular payments of royalties related to certain tenements and that the appellants had not produced any evidence from the records of Centaur Mining to rebut Mr Sharman's evidence.

133 Had I not rejected the respondent's submissions generally in relation to the royalty payments, I would have accepted the respondent's submissions on this evidentiary point because, in my opinion, paragraphs 45 to 56 of the affidavit of John Edward Sharman sworn 31 October 2007 and the exhibits therein referred to provided sufficient evidence concerning the tenements in relation to which the Sixth and Eighth Payments of royalties were made. In any event, it could have been reasonably inferred that the tenements in relation to which royalties were paid were productive tenements and thus likely to have had a value which was realised upon subsequent sale.

134 The appellants submitted that the judge erred in finding that 'there was evidence that the mining tenements were ultimately transferred for millions of dollars and were exceptionally valuable'[87] and that 'the tenements had significant value in any event in excess of the rental and royalty payments'.[88] The appellants said that each payment related to a number of individual tenements and that tables had been tendered showing to which tenements each payment related and that those tables showed that a large number of tenements were not sold and that the expert valuer (Dean Carville) called by the Minister did not opine a value in respect to a large number of the tenements. In answer, the respondent submitted that there was ample evidence upon which the judge was able to make the challenged findings and that no evidence had been adduced by the appellants to the contrary. Further, the respondent submitted that the evidence as a whole showed that the payments of rental and royalties had preserved very valuable assets that had been sold for very substantial amounts.

135 Again, had I not rejected the respondent's submissions generally in relation to the royalty payments, I would have accepted the respondent's submissions in relation to this ground. The evidence adduced by the Minister was, at least, adequate and the judge was entitled to find that the appellants (who had access to the books and records of Centaur Mining) had not rebutted this evidence.

136 This ground incorporates a number of separate points which are unnecessary to be dealt with because they are in substance covered by my conclusions in relation to grounds 1 to 6.

137 As stated earlier, Mr Carville gave expert evidence as to the value of certain tenements. The appellants provided detailed written submissions to the judge below as to why Mr Carville's evidence should be rejected and the appellants complain that the judge did not deal with those submissions and did not indicate whether he accepted or rejected them. The respondent argued that the trial judge did not need to deal with Mr Carville's evidence for two reasons. First, the onus of proof rested on the appellants to show that the creditors were disadvantaged by the payments to the Minister. Second, it was open to the trial judge on the available evidence to infer that the tenements were at least as valuable as the rent and royalties paid.

138 Having regard to my previous conclusions, it is unnecessary to deal with this ground. However it is strongly arguable that, the ground is erroneous because the appellants' said written submissions were tendered some time after Mr Carville's affidavit had been accepted in evidence without objection and after Mr Carville had been extensively cross-examined on the relevant issues.

139 This ground relates to aspects of the judge's reasons in respect of which the appellants submitted that there was inadequacy. Having regard to my previous conclusions, it is unnecessary to consider this ground.

140 For the foregoing reasons, I would allow the appeal but only in relation to the recovery of the royalty payments by the appellants.

[1] Re Discovery Books Pty Ltd (1973) 20 FLR 470.

[2] [1999] VSCA 60; [1999] 3 VR 201.

[3] The case was concerned with the effect of s 588FA of the Corporations Law, but, relevantly, the provisions were identical to those of the Corporations Act 2001.

[4] [2001] NSWCA 6.

[5] (1998) 43 NSWLR 539, 547.

[6] [2001] NSWCA 6, [30].

[7] [2008] VSC 416, [26] and [27] (Citations omitted).

[9] Reasons, [35]-[37] and [48]-[50].

[12] (1991) 4 ACSR 192, 195.

[13] [1966] HCA 21; (1967) 115 CLR 266.

[14] (1989) 1 ACSR 547.

[15] The emphasis replicates the passages which counsel emphasised.

[16] [2006] QCA 52.

[17] [2004] NSWSC 366; (2004) 49 ACSR 417.

[18] [2006] QCA 52, [9].

[19] (1972) 20 FLR 470, 478.

[20] [2004] NSWSC 366; (2004) 49 ACSR 417, 419 [14]-[15].

[21] [2000] VSCA 60; (2000) 1 VR 523, 538.

[23] [2000] VSCA 60; (2000) 1 VR 523, 529 [20].

[27] (1997) 147 ALR 281, 283.

[28] R P Austin and J M Ramsay, Ford's Principles of Corporations Law, 13th Ed, [28,340].

[29] [2001] NSWCA 6,[30].

[30] Australian Securities Commission v Marlborough Gold Mines Ltd [1993] HCA 15; (1993) 177 CLR 485.

[31] [2007] HCA 22; (2007) 230 CLR 89.

[32] [2009] HCA 47; (2009) 239 CLR 390.

[34] Airservices Australia v Ferrier (1996) 185 CLR 483, 502 (Dawson, Gaudron and McHugh JJ). The decision concerned s 122 of the Bankruptcy Act 1966 (Cth).

[35] A period of between nine months and one year: see paragraph 11(c) of the Minister's Defence. See also reg 109, Mining Regulations 1981 (WA).

[36] See and compare Sutherland v Liquor Administration Board (1997) 24 ACSR 176, 181, 184; Sands & McDougall Wholesale Pty Ltd v Commissioner of Taxation [1998] VSCA 76; [1999] 1 VR 489, [46] and [48].

[37] (1992) 10 ACSR 24.

[38] (1997) 24 ACSR 176.

[39] Centaur Nickel played no part in the case.

[40] The Minister filed a defence on 27 March 2006 and a succession of amended defences on 10 May 2006, 16 June 2006 and 15 December 2006.

[41] The Minister filed a defence to the further amended statement of claim on 27 April 2007 and an amended defence to the further amended statement of claim on 23 November 2007.

[42] (1972) 20 FLR 470.

[43] [2008] VSC 416.

[45] Reasons, [35]-[37], [48]-[50].

[47] Reasons, [3]-[7] (citations omitted).

[48] Reasons, [9]-[10] (citations omitted).

[49] Reasons, [11], [13]-[18] (citations omitted).

[51] Reasons, [34]-[37] (citations omitted).

[52] Reasons, [38]-[50] (citations omitted).

[53] (1972) 20 FLR 470.

[54] (1972) 20 FLR 470, 478-480.

[56] (1995) 185 CLR 483, 501-506 (citations omitted).

[58] [1999] VSCA 60; [1999] 3 VR 201.

[59] [1999] VSCA 60; [1999] 3 VR 201, 204.

[60] [1999] VSCA 60; [1999] 3 VR 201, 209.

[61] [1999] VSCA 60; [1999] 3 VR 201, 209.

[62] [1999] VSCA 60; [1999] 3 VR 201, 210.

[63] [1999] VSCA 60; [1999] 3 VR 201, 210-216.

[64] [1999] VSCA 60; [1999] 3 VR 201, 217.

[65] [1999] VSCA 60; [1999] 3 VR 201, 218.

[66] [1999] VSCA 60; [1999] 3 VR 201, 222.

[67] [1999] VSCA 60; [1999] 3 VR 201, 202.

[68] [1932] HCA 29; (1932) 47 CLR 257.

[69] [1932] HCA 29; (1932) 47 CLR 257, 271.

[70] [1932] HCA 29; (1932) 47 CLR 257, 271.

[71] See Nguyen v Nguyen [1990] HCA 9; (1989) 169 CLR 245; Australian Securities Commission v Marlborough Goldmines Ltd [1993] HCA 15; (1993) 177 CLR 485; R v BDX [2009] VSCA 28; Gett v Tabett (2009) 254 ALR 504.

[72] [2001] NSWCA 6, [30] (Mason P and Powell JA agreeing).

[73] [2001] NSWSC 172; (2001) 38 ACSR 307.

[74] [2001] NSWSC 172; (2001) 38 ACSR 307, [37].

[75] See Walsh v Natra Pty Ltd [2000] VSCA 60; (2000) 1 VR 523, [47] (Phillips JA) and Sheldrake & anor v Paltoglou [2006] QCA 52, [9].

[76] Australian Law Reform Commission, Report No 45, 'General Insolvency Inquiry' (1988) vol 1.

[77] Except to the extent preserved by s 588FA(3).

[78] See [85] above.

[79] See [88] above.

[80] (1992) 10 ACSR 24 (O'Bryan J).

[81] (1997) 24 ACSR 176 (Young J).

[82] (1997) 24 ACSR 176, 184; see too Sands & McDougall Wholesale Pty Ltd (In liq) & Anor v Commissioner of Taxation (Cth) [1998] VSCA 76; [1999] 1 VR 489, [47] (Charles JA).

[83] (1996) 135 FLR 423.

[84] (1996) 135 FLR 423, 433.

[85] See [98] above.

[86] [2008] VSC 416, [52].

[87] [2008] VSC 416, [37].

[88] [2008] VSC 416, [52].