The text, structure and purpose of the legislation and the proper construction of s 553C
107 It can be accepted that s 553C and preferences are in different parts of the Act and contain no explicit reference to each other. That said, as Dixon CJ, Fullagar, Kitto and Taylor JJ said in Jacques, the preference provision (there, s 95(1) of the 1924 Act) is in the nature of a corollary to the provisions dealing with the control over the administration of property and proofs of debt and priority of debts. The relationship is one related to the proper administration of the estate and in ascertaining whether the payment does have the effect of a preference. This is the point made by the Full Court in Re Lazarotto discussed by Robson J in Jetaway Logistics, by Buckley LJ in Lister v Hooson, by Astbury J in In Re a Debtor, and, properly understood, by Lindley LJ in Re Washington Diamond.
108 Thus, it is not correct to say, as the liquidator did in his first proposition (see [23] above) that Pt 5.7B (in which the unfair preference provision appears) and Pt 5.6 (in which s 553C appears) are in different spheres of operation.
109 The text of s 553C was drawn closely by reference to pre-existing provisions in bankruptcy legislation. That is made clear in the Harmer Report to which reference has already been made. Thus, it would be surprising if a significantly different position obtained under new drafting designed to be clear and simple and to maintain the policy of the existing law. The question is whether there have been, before the relevant date, mutual credits, mutual debts, or other mutual dealings between the company and the creditor, such that an account is to be taken of what is due from one to the other (the company and the creditor) such that they be set off. The analysis of such will take place by reference to the authorities on mutuality to which reference has been made. Though mutual credit and set-off can be expressed as an exception to the fairness of equity being equality as the underpinning value of pari passu distribution, it is perhaps better expressed as a cognate reflection of equity's concern with substantive fairness, based, as it is, on substantial fairness of reciprocity before the imposition of equality of distribution. If there is genuine mutuality of debts or credits or genuine mutuality of dealing between the debtor and creditor, an insistence upon the creditor paying in full its debt and being required to prove (and only receive a pari passu distribution) for the debtor's mutual obligation to pay its debt can be seen as unfair. To satisfy fairness is not to dislocate the equal division of the available estate, it is to ascertain the extent of the available estate and what can be proved in it. The words of the section and the cases that explain them (through earlier provisions) should thus be examined in this light and with the recognition of the purpose and context of the inquiry: the administration of the insolvent estate of the debtor in a way that vindicates the fairness of recognising substantive reciprocal mutuality of obligations and entitlements, and the fairness of equal and orderly access of creditors to the insolvent estate of the debtor, including the access of priority creditors.
110 Before further discussing s 553C and mutuality, it is necessary to discuss the provisions concerning unfair preferences: ss 588FA, 588FC, 588FE, 588FF and 588FI, and other relevant provisions. These provisions are found in Div 2 of Pt 5.7B concerning other voidable transactions: uncommercial transactions in s 588FB, unfair preferences and commercial transactions may be insolvent transactions in s 588FC, unfair loans to a company in s 588FD, unreasonable director-related transactions in s 588FDA. This is so because the proper construction and reach of s 553C is to be arrived at in the context and purpose of the provisions concerning unfair preferences and the Act as a whole.
111 The structure of the Division is, first, to define these transactions (ss 588FA-588FDA); secondly, to identify when they are voidable (s 588FE); and thirdly, to set out the suite of orders that can be made by the Court if it is satisfied that the transaction is voidable (s 588FF).
112 Section 588FA(1) is as follows:
(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.
113 The text and structure of the provision reflects the simplicity and clarity referred to in the Harmer Report. The nature of the preference is to be derived from its objective character, as under s 122 of the 1966 Act and s 95(1) of the 1924 Act. It is the difference between the effect of the transaction on the one hand, and setting it aside (and implicitly the company receiving the disgorged payment) and proving for the debt, on the other. The section describes the dislocation of the pari passu distribution of the estate.
114 Section 588FB(1) defines uncommercial transactions as follows:
A transaction of a company is an uncommercial transaction of the company if, and only if, it may be expected that a reasonable person in the company's circumstances would not have entered into the transaction, having regard to:
(a) the benefits (if any) to the company of entering into the transaction; and
(b) the detriment to the company of entering into the transaction; and
(c) the respective benefits to other parties to the transaction of entering into it; and
(d) any other relevant matter.
115 Section 588FC defines insolvent transactions as follows:
A transaction of a company is an insolvent transaction of the company if, and only if, it is an unfair preference given by the company, or an uncommercial transaction of the company, and:
(a) any of the following happens at a time when the company is insolvent:
(i) the transaction is entered into; or
(ii) an act is done, or an omission is made, for the purpose of giving effect to the transaction; or
(b) the company becomes insolvent because of, or because of matters including:
(i) entering into the transaction; or
(ii) a person doing an act, or making an omission, for the purpose of giving effect to the transaction.
116 The reason for the collective definition of unfair preference and the uncommercial transaction can be seen in the use of the phrase "insolvent transactions" in s 588FE dealing with "voidable transactions".
117 Section 588FE(1) provides that, if a company is being wound up a transaction may be voidable because of any one or more of subss (2) to (6) if the transaction was entered on or after 23 June 1993 and because of subs (6A) if it was entered after the commencement of legislation in 2003 dealing with directors' bonuses, as follows:
(1) If a company is being wound up:
(a) a transaction of the company may be voidable because of any one or more of subsections (2) to (6) if the transaction was entered into on or after 23 June 1993; and
(b) a transaction of the company may be voidable because of subsection (6A) if the transaction was entered into on or after the commencement of the Corporations Amendment (Repayment of Directors' Bonuses) Act 2003; and
(c) a transaction of the company may be voidable because of subsection (6B) if the transaction was entered into on or after the commencement of that subsection.
118 The word "voidable" reflects to a degree the pre-existing conception of void against the trustee in bankruptcy or against the liquidator meaning voidable. The conditions of the transaction being able to be characterised as voidable do not bring about an avoidance of the transaction as between the parties to it: the company and the creditor. Nor do they provide the foundation for the liquidator to elect to treat the transaction as avoided to entitle him or her to avail him or herself of an action for moneys had and received. Rather, as one sees from s 588FF, the presence of the conditions that permit such characterisation entitle the liquidator to commence an action under the statute for a range of relief, including payment of money to the company. The consequences of the transaction being voidable are consistent with the previous law that the nature of the voidableness was related to, and had relevance to, the insolvent administration, as opposed to having general legal consequences of avoidance of the transaction or its constituent instruments as between the parties to the transaction or for all purposes.
119 Section 588FE(2) provides for the voidableness of insolvent transactions (unfair preferences and uncommercial transactions) as follows:
(2) The transaction is voidable if:
(a) it is an insolvent transaction of the company; and
(b) it was entered into, or an act was done for the purpose of giving effect to it:
(i) during the 6 months ending on the relation‑back day; or
(ii) after that day but on or before the day when the winding up began.
120 The "relation-back day" referred to in s 588FE(2)(b)(i) is defined by ss 9 and 91 and referentially s 513C and Div 1A of Pt 5.6 variously depending upon the circumstances. In a winding up by the Court where there is no administration involved as provided in items 1-13 of s 91 and where because of Div 1A of Pt 5.6 the winding up is taken to have begun on the day when the winding up order was made, the relation-back day is the day when the application for the winding up order was filed. So, in such a case an unfair preference entered into at the time when the company is insolvent within six months prior to the date of the filing of the application for the winding up order is voidable.
121 Subsections 588FE(2A) and (2B) concern transactions of a company under administration and subject to a deed of company arrangement, respectively.
122 Section 588FE(3) extends the period for the voidableness of insolvent transactions that are uncommercial transactions to two years before the relation-back day.
123 Section 588FE(4) extends the period of voidableness of insolvent transactions (and so unfair preferences) to which a related entity is a party to four years before the relation-back day.
124 Section 588FE(5) extends the period for the voidableness of insolvent transactions (and so unfair preferences) to which the company became a party for the purpose of defeating creditors to ten years before the relationship-back day.
125 Section 588FE(6) concerns unfair loans.
126 Section 588FE(6A) concerns unreasonable director-related transactions.
127 Section 588FF(1) provides for the power of the Court on the application of the company's liquidator to make one or more of various orders in paras (a) to (j) where a court is satisfied that a transaction of the company is voidable because of s 588FE. The reliance upon the general law of an action for money had and received in the right of the liquidator has been replaced by a wide and flexible suite of orders to permit the court to remedy the position justly. As before, the action is that of the liquidator. Paragraphs 588FF(1)(a) to (j) are as follows:
(a) an order directing a person to pay to the company an amount equal to some or all of the money that the company has paid under the transaction;
(b) an order directing a person to transfer to the company property that the company has transferred under the transaction;
(c) an order requiring a person to pay to the company an amount that, in the court's opinion, fairly represents some or all of the benefits that the person has received because of the transaction;
(d) an order requiring a person to transfer to the company property that, in the court's opinion, fairly represents the application of either or both of the following:
(i) money that the company has paid under the transaction;
(ii) proceeds of property that the company has transferred under the transaction;
(e) an order releasing or discharging, wholly or partly, a debt incurred, or a security or guarantee given, by the company under or in connection with the transaction;
(f) if the transaction is an unfair loan and such a debt, security or guarantee has been assigned - an order directing a person to indemnify the company in respect of some or all of its liability to the assignee;
(g) an order providing for the extent to which, and the terms on which, a debt that arose under, or was released or discharged to any extent by or under, the transaction may be proved in a winding up of the company;
(h) an order declaring an agreement constituting, forming part of, or relating to, the transaction, or specified provisions of such an agreement, to have been void at and after the time when the agreement was made, or at and after a specified later time;
(i) an order varying such an agreement as specified in the order and, if the Court thinks fit, declaring the agreement to have had effect, as so varied, at and after the time when the agreement was made, or at and after a specified later time;
(j) an order declaring such an agreement, or specified provisions of such an agreement, to be unenforceable.
128 Section 588FF(1)(g) gives the court a discretion in relation to the proving of the creditor in relation to the debt the subject of the transaction. In relation to unfair preferences this can be seen to ameliorate, by judicial discretion, the rigidity of the approach required by Kratzmann (No 2) (See [43] above.) As the creditor submitted, s 588FF(1)(g) is directed to the proving for the debt the subject of the preference.
129 By subs 588FF(2) nothing in subs (1) limits the generality of anything else in it.
130 The time for making an application under s 588FF(1) is set out in subs (3): it may only be made either (a) during the period beginning on the relation-back day and ending on the later of three years after that day or 12 months after the first appointment of a liquidator in relation to the winding up of the company or (b) within such longer period as the Court orders on application by the liquidator made within the time period provided for in para (a).
131 Section 588FG(1) provides for circumstances where the transaction is not voidable, as follows:
(1) A court is not to make under section 588FF an order materially prejudicing a right or interest of a person other than a party to the transaction if it is proved that:
(a) the person received no benefit because of the transaction; or
(b) in relation to each benefit that the person received because of the transaction:
(i) the person received the benefit in good faith; and
(ii) at the time when the person received the benefit:
(A) the person had no reasonable grounds for suspecting that the company was insolvent at that time or would become insolvent as mentioned in paragraph 588FC(b); and
(B) a reasonable person in the person's circumstances would have had no such grounds for so suspecting.
(emphasis added)
132 Section 588FI appears in Subdiv E of Div 2 and deals with "Various rules about voidable transactions". It provides for a creditor proving as if the transaction had not been entered into. It provides as follows:
Creditor who gives up benefit of unfair preference may prove for preferred debt
(1) This section applies where:
(a) a transaction is an unfair preference given by a company to a creditor of the company after 23 June 1993; and
(b) at the request of the company's liquidator, because of an order under section 588FF or 588FGAA, or for any other reason, the creditor has put the company in the same position as if the transaction had not been entered into.
(2) A court must not make under section 588FF, on an application relating to the transaction, an order prejudicing a right or interest of the creditor.
(2A) ASIC must not make an order under section 588FGAA that relates to the transaction and prejudices a right or interest of the creditor.
(3) The creditor may prove in the winding up as if the transaction had not been entered into.
133 The creditor submitted that the section is directed only to the debt in question. That submission is supported by the heading to the section. The heading is part of the Act: s 13(1) of the Acts Interpretation Act 1901 (Cth). However, as the Full Court said in Quickfund (Australia) Pty Ltd v Airmark Consolidators Pty Ltd [2014] FCAFC 70; 222 FCR 13 at 31 [82]: "… the section heading is just that - a heading. The text of the provision is crucial." The section is expressed in general terms, and is certainly not directed in its terms only to the debt the subject of the preference, though of course it covers such debt. The premise of the section is that an order under s 588FF(1) such as an order under para (a) to pay an amount equal to all of the money that the company has paid under the transaction will put the company in the same position as if the transaction had not been entered into. That is inconsistent with s 553C being engaged. The company cannot be put "in the same position as if the transaction had not been entered into" without replenishing the assets of the company and leaving the creditor with its two debts to be the subject of proof. If the unfair preference transaction had not been entered into there was no debt of the creditor to the company to set off against either debt of the company to the creditor. To allow a set-off under s 553C would see one creditor paid in full as to one debt (the second debt) to the extent of the preference repayment, and the assets of the estate unreplenished, though with a reduced burden of claim to prove by the creditor for the second debt. This is not "the same position as if the transaction had not been entered into."
134 Further, if s 553C brings about a set-off in relation to the payment under s 588FF(1) and the second debt, what of the preferred debt? If the creditor can prove for it, notwithstanding s 588FI, the dislocation is further compounded. If it cannot prove there has still been dislocation, because the creditor by the set-off of the obligation to pay under s 588FF(1) and the second debt receives an effective return which is arbitrary based on the proportion of the preferred payment to the sum of the preferred debt and the second debt, such having no relationship to (being possibly more, possibly less, than) what would have been its return had the transaction not been entered into, and having no relationship to the returns of the other ranking creditors based on the remaining assets of the insolvent company.
135 Section 588FI sits incongruously and uncomfortably with any proposition that an obligation to repay an unfair preference is to be set off against a second debt of the company to the preferred creditor the subject of the order. Indeed, for the above reasons it can be seen as inconsistent with s 553C being engaged in the manner propounded by the creditor.
136 A number of other observations may be made about the above provisions, in particular as they apply to unfair preferences, as relevant to the later discussion of the authorities relevant to s 553C. First, the notion of voidableness aligns with the pre-existing conception of void against the liquidator. That is, there is no "avoidance" brought about by the insolvency. Rather, at the election of the liquidator, a proceeding can be brought by the liquidator under s 588FF and the character of the transaction being voidable is relevant only to the availability of relief in the proceeding: cf Kratzmann (No 1) 123 CLR at 277; and Re Starkey [1994] 1 Qd R 142 at 152. The consequence of the status of voidableness is not to undo or set aside the transaction or its constituent documents thereby putting the parties (debtor and creditor) into their antecedent legal position and thereby creating rights in the debtor company or obligations in the creditor, based on the avoidance. Rather, satisfaction of the Court of the character of the transaction as voidable is the condition for the remedial powers of the Court in s 588FF(1) to be exercised on the application (only) of the liquidator. It is the liquidator's action, as it previously had been in the action for moneys had and received.
137 Secondly, the application can only be made by the liquidator during a period beginning with the relation-back day: s 588FF(1) and (3). The liquidator cannot, of course, bring the action before he or she is appointed and so the action cannot be brought at a time prior to the order or the resolution to wind up the company.
138 Thirdly, the character of voidableness is not drawn from any breach of duty of the creditor or the creation or emergence of a contingent or nascent right or equity of the debtor to have the preferential transaction set aside and any payment disgorged. In particular, the nature of the unfair preference in s 588FA(1), the character of an insolvent transaction under s 588FC, and the voidable nature under s 588FE are all conditioned, in respect of an unfair preference, on objective facts. As between debtor and creditor the debt is paid and discharged. There is no contingent right or equity, or obligation to have repaid, or to repay, the payment. At the time of the transaction the liquidator does not exist in that he or she has not been appointed. Looking at the matter knowing of the company's financial position, one may, depending on the facts, foresee the risk or possibility or likelihood of a winding up. That depends on the facts and what one knows. It gives no conditional or contingent right to the company and creates no conditional or contingent obligation upon the creditor, to the company or to anyone else.
139 Fourthly, the order for payment to the company under para 588FF(1)(a), on the application of the liquidator is different in form to the order made in Kratzmann (No 2), being payment to the respondent (to the proceedings in the High Court) being Mr Tucker the liquidator; though see SJP Formwork (Aust) Pty Ltd (in liq) v Deputy Commissioner of Taxation [2000] NSWSC 604; 34 ACSR 604 and Cook v Italiano Family Fruit Company Pty Ltd [2010] FCA 1355; 190 FCR 474 at 487 for a different view. However, the judgment of Stephen, Mason, Aickin, and Wilson JJ in Octavo Investments Pty Limited v Knight [1979] HCA 61; 144 CLR 360 at 372 makes clear that the proper order was payment to the company. The liquidator is, nevertheless, the proper plaintiff in the proceeding: Re Fresjac Pty Ltd (in liq); Campbell v Michael Mount PPB (1995) 65 SASR 334 at 343. This must be so under the Act given the express words of s 588FF(1): "on the application of a company's liquidator". There is no right of action of the company: Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher [2014] NSWCA 148; 87 NSWLR 728 at 749-750 [127].
140 Fifthly, the substance of what is occurring in the action under s 588FF has some differences from the recovery action before 1992 based on the 1966 Act. Before the 1992 Act, the 1966 Act made relevant to corporate insolvency made the transaction void against the liquidator, leaving him or her to general law remedies, including the action for money had and received. Under s 588FF upon the satisfaction of the court that the transaction is voidable because of s 588FE orders can be made remedying the changes made by the transaction which, if allowed to be effectual, would dislocate the statutory order. Thus, the Act has changed the remedial tools, in particular making them more flexible, though the flexibility of equitable orders in aid of, and consequential upon, a declaration of a preference under the 1966 Act should not be underestimated: cf Kratzmann (No 2). There was, however, no change to the fundamental remedial purpose of the orders: to remedy the dislocation of the statutory priorities of distribution.
141 Sixthly, though an interlocking structure is set out in Div 2 of Pt 5.7B, it does not necessarily follow that each voidable transaction engages identically with s 553C. The conception of mutuality underpinning s 553C is the equity of fairness and justice born of mutual reciprocity. The nature and subject of each type of voidable transaction, and the legal policy drawn from each relevant provision in respect thereof, must be examined and taken account of in considering the application or engagement of s 553C. In this respect, whilst in respect of each voidable transaction there may be one set of rights, how they are described or characterised depends upon why the question that calls for the description or characterisation is being asked, being the purpose at hand. As Kitto J said in Livingston 107 CLR at 448 "Which description [of one set of rights] is to be used on a given occasion is a question of appropriateness to the purpose in hand." Justice Kitto went on to say, in rejecting the use of universal definitions of equitable property, that "for the purpose of solving a concrete legal problem with respect to such a set of rights, more hindrance than help is likely to come from an attempt to classify them according to Austinian terminology as rights in personam or in rem." Here, each voidable transaction comes from certain circumstances, some born of contravention of the Act, some not; all actions being brought by the liquidator; and each action has its own evident statutory purpose. All these matters may affect the description or characterisation of the action or the remedial proceeds of the action for the purpose of considering reciprocal mutuality under s 553C. This perhaps is most evident in considering the case of In the Matter of ACN 007 537 000 Pty Ltd (in liq) & Parker [1997] FCA 1264; 80 FCR 1 (Re Parker), below.
142 Seventhly, by way of note, the matters in s 588FG(1)(c) correspond with the suggested preclusion in the draft legislation C9(2) in Appendix A at 153 of Volume 2 of the Harmer Report. (See [102]-[106] above.)
143 It is necessary to say something more about the significance of the character of the funds ordered to be paid to the company under s 588FF(1) on the application of the liquidator. If a set-off under s 553C is available between a debt of the company and the obligation of the preferred creditor to pay money under s 588FF(1) the character of the funds must be such as to reflect the underlying mutuality. In particular, the character of the funds must reflect that the two debts or obligations are between the same parties in the same interest. For mutuality to be present the character of the funds must, in point of relevant beneficial entitlement (in the sense discussed in Hiley and Gye v McIntyre) reflect the nature of the legal right of the company, the enforcement of which produces the recovery payment, that is in the same interest as the creditor is owed the debt beneficially. The statute provides for the moneys to be paid to the company: s 588FF(1)(a) and (c). The nature of that payment and receipt was discussed by Barrett JA in Fortress 87 NSWLR at 749-750 [125]-[129] (in a way unaffected by the decision on appeal in the High Court: Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher [2015] HCA 10; 254 CLR 489 or in the cognate judgment Grant Samuel Corporate Finance Pty Ltd v Fletcher [2015] HCA 8; 254 CLR 477). In speaking of all the voidable transaction provisions in Div 2 of Pt 5.7B, his Honour said as follows:
[125] In the form in which they have existed since 1993, the voidable transaction provisions in Pt 5.7B Div 2 of the Corporations Act 2001 (Cth) serve the purpose of redressing imbalance to the detriment of the general body of creditors resulting from favourable treatment of certain persons in transactions undertaken while the company was still a going concern.
[126] The unstated premise is that certain forms of activity in the period leading up to the commencement of winding-up interfere with due operation of the pari passu principle by causing to be in other hands resources that should form part of the insolvent estate for the benefit of creditors as a whole.
[127] The voidable transaction provisions do not create any right of action in the company. Nor do they allow the liquidator to recover. They enable the liquidator, as the official charged with the task of collecting and administering the insolvent estate, to seek the assistance of the court in augmenting that estate for the benefit of creditors by countering the effects of pre-liquidation transactions of certain kinds.
[128] When I refer to augmenting the insolvent estate for the benefit of creditors, I intend to recognise the reality that, although in a simple s 588FF(1)(a) case, the order is an order for the payment of money "to the company", the right by virtue of which the money is received is a right of neither the company nor the liquidator; that the company has no capacity to mount a recovery action; and that the benefit of the recovery inures wholly for the benefit of the persons who will participate under the winding-up. Among early cases under the present provisions in which this was recognised are Tolcher v National Australia Bank Ltd [2003] NSWSC 207; (2003) 174 FLR 251 and Tolcher v National Australia Bank Ltd [2004] NSWSC 6; (2004) 182 FLR 419. The provisions now in force share with their predecessors the characteristic that they are "only intended to apply in … a winding-up and for the benefit of the general creditors": Willmott v London Celluloid Co (1886) 34 Ch D 147 at 150 per Cotton LJ (and see In re Yagerphone Ltd [1935] Ch 392; N A Kratzmann Pty Ltd v Tucker (No 2) (1968) 123 CLR 295).
[129] Because the voidable transaction provisions represent part of the machinery that the legislation puts at the disposal of a liquidator to assist in assembling the pool of assets from which claims cognisable in the winding-up will be satisfied, the s 588FF(3) time limit is principally concerned with the conduct of liquidators. The section regulates liquidators by instilling a sense of due dispatch in the pursuit of claims with a view to augmenting that pool. Liquidators are told, in effect, that it is their duty, generally speaking, to initiate any voidable transaction proceedings within the specified three-year period; and that, if there is good reason to think that further time is needed, they must, before the expiration of the three years, make an application to the court with a view to persuading it that an extension should be granted. The clear expectation is that liquidators will, within the three years, do two relevant things: commence all such recovery actions as available evidence and resources make it feasible and sensible to pursue; and consider whether there are genuine prospects that pursuit of other recovery actions might prove to be feasible and sensible if further time is made available.
(Emphasis added.)
144 With respect, I agree with these remarks. In Lane 385 ALR 92 at [145]-[149], I dealt with the matter similarly. See also Re Starkey at 152-154. That the unsecured creditors will benefit in the administration from the receipt of the funds paid under the order does not lead to the conclusion that the funds are not the company's or are held by the company on trust for the creditors in the sense of the creditors acquiring a beneficial interest or ownership distinct from the beneficial ownership of the company: Franklin's Selfserve Pty Ltd v Federal Commissioner of Taxation [1970] HCA 33; 125 CLR 52; Federal Commissioner of Taxation v Linter Textiles Australia Limited (In liq) [2005] HCA 20; 220 CLR 592 at 612-613 [52]-[55] and Re Starkey at 154. This marks out a different doctrinal approach to the question of the beneficial ownership of property by a company in liquidation between Australia and England: see Meagher RP, Heydon JD, Leeming MJ and Turner PG, Meagher Gummow and Lehane's Equity: Doctrines and Remedies (5th ed, LexisNexis Butterworths, 2015) at 118-120 [4-115]-[4-120].
145 The enquiry presently at hand being the genuine mutuality of debts, credits or mutual dealings, however, is not simply satisfied by an answer as to who has beneficial ownership of funds received by the company pursuant to an order under s 588FF(1). The question as to who has beneficial ownership is not a question to be answered once, for all purposes. Here, under an order under s 588FF(1), the funds are paid to the company. They are not held on trust for the creditors. They are under the control of the liquidator to be employed pursuant to the statutory order, affected, if relevant, by equitable considerations such as discussed in Lane at [147]-[148]. That statutory order provides not only for creditors, but also for the costs of the administration and for some creditors, such as employees, to have priority.
146 The creditor relied on a passage from the judgment of Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ in Linter 220 CLR at 612-613 [54], being the passage emphasised below. The context was the proper construction of the phrase "beneficially owned" in s 80A(1) of the Income Tax Assessment 1936 (Cth). The Commissioner of Taxation had submitted that in that context the phrase meant the ability of the Linter Group to use its shares in Linter Textiles for its own benefit, by sale and application of proceeds of sale as it saw fit. It was submitted that this had been lost because in insolvency the liquidator was bound to apply the proceeds of sale in accordance with the statutory regime. That submission was rejected by their Honours, saying at 612-613 [52]-[55]:
[52] The term "beneficial" is usually employed in trust law as a cognate of "beneficiary". That term identifies those persons for whose benefit the trustee of a private trust (ie not a charitable purpose trust) is bound to administer the trust property. Where A holds Blackacre on a bare trust for B, it may accurately be said that B is the beneficial owner.
[53] But that use of the word "owner" does not entail enjoyment by B of all the rights which the law as a whole confers in relation to Blackacre. Thus, as Hope JA explained in DKLR Holding Co (No 2) Pty Ltd v Commissioner of Stamp Duties [66], although B may be entitled by equitable remedies to be put into possession, B cannot sue A in ejectment. Again, the will or settlement conferring an equitable fee simple may qualify that gift and render it determinable by the conferral upon another of an option to purchase, or by the imposition of a condition subsequent which is certain and does not contravene the policy of the law.
[54] The authors of a leading Australian text correctly wrote as follows of the effect of a winding‑up order:
Whether the company is insolvent or solvent, the company holds its property beneficially but subject to the statutory scheme of liquidation under which the liquidator is to pay creditors and distribute any surplus among members. Unsecured creditors and contributories have the benefit of the liquidator's administration of the company's estate. Their special interest is to some extent like that of objects of a discretionary trust; they have a right to have a fund of assets protected and properly administered. That interest, although not an interest in specific assets, will be protected against third persons. For example, a holder of an unregistered registrable charge who asks the court to extend the time for registration or a person who seeks rectification of an instrument of charge which could prejudice unsecured creditors will not ordinarily succeed if the company is in liquidation or on the verge of liquidation.
The critical point is that the change in control of the affairs of the company has no impact upon its beneficial ownership of its assets.
[55] By analogy with the general law, the circumscribing or suspension by reason of the appointment of the liquidator of the exercise by the usual organs of the company of the incidents of ownership of the assets of the company does not mean that the company itself has ceased to own beneficially its assets within the meaning of s 80A(1). Power to deal with an asset and matters of ownership or title are not interchangeable concepts.
(footnotes omitted; emphasis added)
147 The creditor here sought to use the emphasised portion of the approved quotation from the cited text (Ford HAJ, Austin RP, Anderson C, and Morrison DS, Principles of Corporations Law (7th ed, Butterworths, 1995) at 1013) to support the submission that the company in liquidation is therefore the beneficial owner of proceeds of a recovery action under s 588FF. Thus, it was submitted, the character of mutuality is satisfied for s 553C.
148 With respect, that is to take one description of the rights of ownership of the company for one purpose and use it mechanically for another purpose. This is the type of approach criticised by Kitto J in Livingston at 448. The context here is the question of reciprocal mutuality. The company is paid the money in the context described by Barrett JA in Fortress. The money is received by the company not on trust for the creditors, but nevertheless in virtue of the interest and right, and for the benefit of all those entitled in the administration: all creditors, including priority creditors, and those charged with administering the estate and expending money therefor. That interest, right and benefit does not give those parties beneficial ownership of, or a beneficial interest in, the property constituting the estate, just as beneficiaries under a discretionary trust or legatees interested in an unadministered estate do not have such beneficial ownership or interest. But that does not lead to a conclusion that the notion of mutuality is satisfied in the sense that the company is entitled to the funds in the same interest as it is liable to the creditor for the debt and the creditor is entitled to receive the debt the subject of the asserted set-off. Beneficial ownership may be one characterisation for a purpose in question; an answer as to beneficial ownership does not detract from the proper characterisation of the action not as that of the company but as that of the liquidator, not as agent of the company vindicating any vested or contingent right of the company, but in his or her own right vindicating his or her own statutory rights and duty to augment the estate for the benefit of all creditors. The money is received by the company beneficially in one sense, but in virtue of the interest and right, and for the benefit of those interested in the estate: the creditors, and those charged with its administration, pursuant to the statutory order: see Sheahan v Carrier Air Conditioning Pty Ltd [1997] HCA 37; 189 CLR 407 at 428; Willmott v London Celluloid Company (1886) 34 Ch D 147 at 149-150; and Kratzmann (No 2) at 299-302. The money is received by the company not in the interest of a creditor receiving payment of a pre-existing debt or of an obligation owed to it by the creditor and vindicated by the action. It is received consequent upon the liquidator exercising his or her important statutory right in the performance of his or her important statutory duties.
149 The reliance by the creditor upon Re Starkey at 154 is subject to the same considerations.
150 It is delusive and productive of error to search for universal definition of equitable proprietary interests by reference to fixed, universal and exhaustive criteria: Meagher Gummow and Lehane's Equity: Doctrines and Remedies (5th ed) at 107 [4-010]. Likewise it is productive of error to fix upon characterisation or to give a description of equitable interests for one purpose and use the characterisation or description as if it were a thing available for use, almost mechanically, for another distinct purpose or other distinct purposes: Livingston at 448. As Kearney J said in Burns Philp Trustee Co v Viney (1981) 2 NSWLR 216 at 223-224:
… The administration of equity has always paid regard to the infinite variety of interests and has refrained from formulating or adhering to fixed universal and exhaustive criteria with which to deal with such varying situations. The approach traditionally adopted by equity has been to retain flexibility so as to accommodate the multitudinous instances in which fundamental equitable rules fall to be applied.
As Bell, Gageler and Nettle JJ said in Carter Holt Harvey Woodproducts Australia Pty Ltd v Commonwealth [2019] HCA 20; 268 CLR 524 at 561-562 [84], citing Kitto in Livingston at 448:
[T]he choice of description should conform to rather than dictate, the application of fundamental principles to 'solving a concrete legal problem'.
151 That the funds are beneficially those of the company for one purpose does not answer the question of mutuality for the purposes of s 553C, in its statutory context. For the purposes of reciprocity and the statutory purpose within s 553C, the funds are received in virtue of the interest and right, and for the benefit of the creditors and those charged with the administration. This is not in the same interest as the company was liable for or the creditor entitled to receive the second debt of the company to the creditor.
152 It is necessary then to return to s 553C. It is clear from the discussion earlier in these reasons that the legal context of the enactment of s 553C and the provisions in Div 2 of Pt 5.7B was that the obligation to repay or disgorge a preference could not be set off under s 86 of the 1966 Act. No part of s 553C or Div 2 of Pt 5.7B provides a foundation for any different view. Section 553C is available to provide the foundation of the proposition that a payment made to a creditor or the release of a liability of the creditor within the relevant period when the company is insolvent does not have the effect of a preference if the circumstances are that there was a countervailing payment or a release of liability by the creditor. Such can be seen in the circumstances with which Lindley LJ was dealing in Re Washington Diamond, with which the Full Court was dealing in Re Lazarotto, and with which Robson J was dealing in Jetaway Logistics. In these cases there was no injury, because there was no preference - no dislocation of priorities. The payment made was matched by an equivalent payment received or there was an agreement to set off equivalent payments. The place of the set-off provision in such circumstances was in the working out of the contents of the insolvent estate. Here, a creditor is owed more than one debt by the company. The creditor owes nothing to the debtor company. The company makes a payment against one of those debts. The payment discharges the debt to the creditor. There is no contractual, legal, equitable, or statutory right of any kind (vested or contingent) in the company to call for repayment. There may or may not in the future be a winding up and an order of the Court under s 588FF. The payment is made in the relevant period when the company is insolvent. The transaction is voidable under ss 588FA and 588FE. The payment would cause a dislocation of the statutory order by satisfying s 588FA(1)(b). The right to apply for an order can only be made by the liquidator, on or after his or her appointment, thus after the relevant date. The company has no right to bring the action. The liquidator makes the application as part of his or her duties to administer the insolvent estate. The money upon disgorgement is held as described above, and as described in Linter, by Barrett JA in Fortress, in Re Starkey at 152-154, and in Lane at [145]-[149].
153 In such circumstances, the debts are not, and cannot be, mutual. One debt was owed by the company in its own right to the creditor arising out of historical events in the ordinary course of business dealings. The other obligation to pay is payable by the creditor to the company not as its pre-existing creditor, but pursuant to an order of the court obtained by the liquidator pursuant to his or her rights and exercising his or her statutory duties. Whilst in one sense the payment is received by the company beneficially, it is not payable to, or received by the company in virtue of its own interest or right, or for its own benefit, but in the interest or right, or for the benefit (through the liquidator) of all creditors and for the estate's administration, under a statutory regime. The creditors of the estate have no beneficial interest in the funds received, but the funds are paid and received in virtue of their and the administration's interest and right and for their and the administration's benefit, under the statutory regime. The place of the liquidator and the general body of creditors is not a matter of equitable ownership, nor, however, is it a matter of mere form, or dry legality; rather it is a matter of statutory, legal and equitable substance, one that denies the character of the recovery as being in the same interest as the company owing the debt to the creditor, for the purposes of set-off.
154 That the right in the liquidator to apply for an order to pay money to the company, albeit beneficially in one sense, but in virtue of the interest or right, or for the benefit of the creditors and the administration of the estate, arose from dealings between the debtor and creditor being the supply of goods and services and the payment therefore does not mean that all that flows from such dealings can be said to be the result of mutual dealings and entitle the creditor to a set-off. There is simply no mutuality between debtor and creditor in respect of the obligation of the creditor to comply with an order of the Court made under s 588FF on the application of the liquidator. It is a new right; and a new obligation; one to cure the dislocation to the order of priorities made by the payment, which discharged the debt, subject to the operation of the statute. The obligation to pay under s 588FF is not owed to the company by virtue of a right it has against the creditor. It is an obligation found in a judgment or order of the Court of which the company is the recipient pursuant to a successful application brought by the liquidator in his or her own right. In that sense, it is not received by the company in the same interest as the company owes the obligation to pay the debt to the creditor or in which the creditor receives payment of the debt. The creditor does not owe the money representing the disgorgement of the preference to the company as a (pre-existing) creditor of it. The sum that is payable under s 588FF is not and cannot be due, even contingently, before the relevant date, indeed before the relevant order of the Court. It is a product of the exercise of the liquidator's function as the officer charged with collecting and administering the insolvent estate of the company. It is payable to the company, beneficially in one sense, but in virtue of the interest and right, and for the benefit of the general creditors and the administration under the control of the liquidator.
155 Ultimately, the matter is one of statutory construction. The legal context of the provision in question, and the rights and obligations created by the provisions in question deny the character and quality of mutuality to the debt of the company to the creditor and the obligation of the creditor to pay the company under s 588FF. The words of s 553C cannot be read as requiring that the debt owed by the company and the possible future liability of a creditor to pay the company under an order pursuant to s 588FF are mutual debts or mutual credits or what is due from one party to the other in the same interest from mutual dealings. This is especially so in the light of the terms of s 588FI, especially against the background of Re Kratzmann (No 2). The words of s 553C are to be read in the context of the Act as a whole in a way that conforms with its operation, set in the context of an orderly administration, built on the foundation of genuine mutuality, recognising the importance of the vindication for the general body of creditors of remedies to cure efficaciously the effect of a preferential transaction, of equality of distribution, and of the statutory regime of administration. A conclusion of mutuality for the purposes of s 553C as propounded by the creditor would see a result described at [31] above, including the consequence that proceeds of a preference recovery action under s 588FF would go first to pay (by a set-off) an erstwhile preferred creditor in priority to priority creditors, such as employees of the insolvent company. Such a conclusion offends the notion of fairness that underpins mutuality in s 553C and the statutory order of priority of certain creditors, built in respect of some (in particular employees) upon the protection of the vulnerable. See the discussion of the relationship between equity and corporations law and insolvency in Jones (Liquidator) v Matrix Partners Pty Ltd; in the matter of Killarnee Civil & Concrete Contractors Pty Ltd (in liq) [2018] FCAFC 40; 260 FCR 310 at 339-341, relevantly for present purposes at [112]-[113] and [115]-[116]. Even if one could construct through some logical process of reasoning some contingency at the time of the unfair preference transaction to recover or repay the preference, the application of set-off in these circumstances so ill-conforms with the policy of the Act as to require the conclusion that such contingency is not apt to give rise to mutuality for the purposes of the Act. However, for the reasons given there is and was no such contingency at or after the time of the transaction until the bringing of the proceeding under s 588FF by the liquidator.
156 The words of judges in cases are not statutory expressions to be construed. Nothing in Hiley, Day & Dent Constructions or Gye v McIntyre requires an inflexible or impractical application that produces a result that sees preferential dislocation of statutory order of priorities caused by a payment unremedied by a successful preference action. These cases are to be read and understood against the legal context that I have described: the clear rejection of the proposition that there can be a set-off of the obligation of the creditor to disgorge a preference under a statutory provision (here, s 588FF) and another pre-existing debt of the insolvent company. If such were the case, the arbitrary result referred to at [31] would obtain. The words of s 553C should not be interpreted to bring about such an arbitrary result dependent upon the position of the creditor and the debtor in question, and divorced from the state of the company's affairs and the interests of the general body of creditors when there has been found to be a preference. This is not to be answered by saying: "If the statute so applies so be it." The different equities of mutuality and equality of distribution should engage harmoniously through fairness. That engagement should not produce an arbitrary failure to remediate the giving of a preference. The clearest statutory text would be required to lead to such a conclusion. No such clear statutory text is present here.
157 In any event, none of the expressions of principle in Hiley, Day & Dent Constructions and Gye v McIntyre provides any textual foundation for the conclusion of mutuality here. There are no rights vested in the company or obligations vested in the creditor to repay the preference which "without any new transaction" grow in the natural course of events into [a] money claim" (Rich J in Hiley at 487); nor is there any contingent right of the company or contingent obligation of the creditor to the company, or to the as yet unappointed liquidator (Dixon J in Hiley at 496-500 and the Court in Gye v McIntyre at 623-624). There has been no necessary breach of a legal duty by the company or the creditor in making or taking the payment. The Act may or may not be satisfied in the circumstances to warrant a court being satisfied that the transaction is voidable. Whilst the circumstances at the time of the transaction may give cause to think that there is a risk that in the future a court will be satisfied that the transaction is or was voidable as an unfair preference, such a risk is not a contingency at least for s 82 of the 1966 Act: Foots v Southern Cross Mine Management Pty Ltd [2007] HCA 56; 234 CLR 52 at 66 [36], and equally so for s 86 of the 1966 Act, and by parity of reasoning, for s 553C of the Act. A contingency in the context of a contingent creditor requires an existing obligation and out of that obligation a liability to pay a sum on money will arise in a future event whether the event be one that must happen or only may happen: Community Development Pty Ltd v Engwirda Construction Company [1969] HCA 47; 120 CLR 455 at 459 per Kitto J (Barwick CJ and Windeyer J agreeing) referred to with approval in Foots v Southern Cross Mine Management Pty Ltd 234 CLR at 66 [36] and see also National Bank of Australasia Ltd v Mason [1975] HCA 56; 133 CLR 191 at 201 where Barwick CJ, also citing Re William Hockey Ltd [1962] 1 WLR 555, referred to the importance in the definition of contingent creditor of the insistence on the presence of an existing obligation out of which the ultimate liability will grow.
158 The creditor relied upon the decision of the United Kingdom Supreme Court in Re Nortel Companies [2013] UKSC 52; 4 All ER 887 which dealt, relevantly, with when a contingent liability arose under a statute for the purposes of proof in insolvency. To the extent that there is anything in in Re Nortel that is or may be to the contrary of these decisions of the High Court it cannot be determinative. However, as Lord Neuberger said at [77]: "… the mere fact that a company could become under a liability pursuant to a provision in a statute which was in force before the insolvency event, cannot mean that, where the liability arises after the insolvency event, it [is a contingent liability]". His Lordship said that it was dangerous to try and suggest a universal formula given the variety of statutes that may arise for consideration, but said that at least normally in order for a company to have incurred a relevant "obligation" it must:
… have taken, or been subjected to, some step or combination of steps which (a) had some legal effect (such as putting it under a legal duty or into some legal relationship), and which (b) resulted in it being vulnerable to the specific liability in question, such that there would be a real prospect of that liability being incurred. If those two requirements are satisfied, it is also, I think, relevant to consider (c) whether it would be consistent with the regime under which the liability is imposed to conclude that the step or the combination of steps gave rise to an obligation under [the relevant] rule.
159 Contrary to the submission of the creditor Re Nortel is not of assistance to its argument. For the reasons already given the objective circumstances that may found the conclusion of voidableness for the purposes of ss 588FE and 588FF do not satisfy his Lordship's condition (a). The giving of the preference creates no legal duty or legal relationship between the company and the creditor. (Though the same cannot necessarily be said if there is a contravention of the Act by reason of insolvent trading.) Further, the policy of the Act would tend to deny the notion of contingency for the purposes of mutual set-off for the purposes of (c) in Lord Neuberger's test: see the discussion at [155] above.
160 As a matter of construction of the text of s 553C set against the relevant parts of the Act to which I have referred, set in the historical legal context and having regard to the purposes of the set-off provision and the unfair preference provisions, there can be no set-off between a debt owed by the company to a creditor and the obligation of the creditor to pay moneys to the company under s 588FF upon the satisfaction of the Court that the transaction was voidable as an unfair preference, such order being made on the application of the liquidator.