NA Kratzmann Pty Ltd v Tucker

[65]

The Liens Act gives to a building contractor a lien for work done upon the land of the building owner: s. 4. That land becomes bound at the latest on the giving of a notice of intention to claim a lien: see s. 9 of the Act; Stapleton v. F. T. S. O'Donnell, Griffin & Co. (Q.) Pty. Ltd. [1] . Such a notice was given in this case. Sections 15, 16 and 17 of the Liens Act provide for a summary procedure to be taken in a court of competent jurisdiction to enforce the lien. Such summary procedure must be taken within thirty days of the completion of the work in respect of which the lien is claimed. There is no precise evidence before the Court that the proceedings commenced by the Building Company on 26th April 1963 were so commenced. But the notices of intention to claim a lien were given on 21st March and state that "no date is fixed for completion" of the work in respect of which it is proposed to claim the liens. Also, the amounts claimed in the summary proceedings differ from those named in some of the notices. These facts tend to indicate that the work was not complete when the notices were given. But, in any case, no record of any objection to the summary proceedings as being out of time has been placed before the Court and nothing said in the reasons for judgment suggests that the liens had been extinguished for failure to commence the summary proceedings in due time, although the judge who disposed of them said he had more than one reason for dismissing the claims. In these circumstances, in my opinion, it should be accepted for present purposes that the proceedings by the Building Company were commenced in time. Shortly after they were commenced liquidation of the Developments Company supervened. Upon the commencement of the liquidation, the Building Company would become a secured creditor for the amount of the lien: see Stapleton v. F. T. S. O'Donnell, Griffin & Co. (Q.) Pty. Ltd. [1] : and no further proceedings to enforce the liens could be taken without the leave of the Court: s. 263 (2) of the Act. It does not appear whether or not any leave to continue the summary proceedings was obtained. It may be that one should infer such leave from the fact that the Supreme Court heard the proceedings after liquidation. However, whether by leave or not, the proceedings came on for hearing after judgment had been reserved in the applications by the liquidators of the Developments Company and of Torhaven for declarations of invalidity of the mortgages respectively given by the Developments Company and by Torhaven. It might perhaps have been thought sufficient to deal with the claims founded upon the building work done by the Building Company by proof of debt and proceedings thereon in the liquidation: and, in any case, the precise consequence of the dismissal after liquidation of the statements of claim may remain a question. But those matters are outside the present appeals.

[68]

Now it seems to me evident that, if that assertion in the claim should be disputed, it must rest upon the claimant to establish it. The Building Company had asserted in the proceedings in which judgment had been reserved that the mortgage by the Developments Company was valid. That mortgage was given in consideration of a promise by the Building Company to forbear for a period of time to sue for a sum of £100,000 being part of a larger debt of some £165,483. It was either proved in some manner, or conceded that the amounts claimed in the proceedings under the Liens Act formed part of this sum of £100,000. In those proceedings the bill of mortgage was tendered by the liquidator of the Developments Company who made the submission in substance that the bill of mortgage was inconsistent with the statement in the claim that "no credit has been given" for payment of the sum for which the lien was claimed. It was, in my opinion, quite clear to the parties who had been litigating the question of the relevant validity of that mortgage for many days before the Supreme Court, with the same counsel engaged in each proceeding, that the liquidator of the Developments Company was not actually asserting in the lien enforcement proceedings the validity of the mortgage as against himself as liquidator. The Building Company, which by this time was itself in liquidation, could not have been misled in that respect. But once the document was introduced into evidence it was clear that unless the Building Company established its invalidity, it could not make out its assertion in the statements of claim that no period of credit had been given. I do not understand what the liquidator for the Developments Company could have done but introduce the bill of mortgage into evidence. He had to contemplate the possibility of failure in his proceedings to invalidate it and, whilst the claimant would not concede its invalidity, its terms denied the statement of the Building Company in its statements of claim. Having pressed on with the summary proceedings rather than determine in the liquidation the question whether or not the Building Company was a secured creditor in respect of the sums to which the lien proceedings related and, if so, for what amount, the parties might well have adjourned the summary proceedings until the reserved judgment on the liquidator's application to avoid the mortgage had been delivered. However, it seems to me that by proceeding then with these proceedings the Building Company could not place the liquidator of the Developments Company in the position where he could not protect himself against possible failure in his proceedings to recover the title to the land the subject of the bill of mortgage. I do not think it can properly be said that by tendering the bill of mortgage and claiming that it denied the Building Company's claim not to have given credit the liquidator of the Developments Company asserted the validity of the mortgage as against himself after liquidation, or that he thereby abandoned the position he had adopted in the other proceedings, or elected to adopt the bill of mortgage as valid as against himself notwithstanding the liquidation. Nor can I think that in seeking to accept and act upon the reserved judgment in his favour in his proceedings after having tendered the bill of mortgage and having made his submission in the summary lien proceedings, the liquidator did anything unconscionable. Rather, as I have indicated, he took a course he could properly take in the interests of the creditors of the Developments Company.

[83]

Subsequently, in January 1963, by means of certain book entries, an amount of £25,000 was credited to the Building Company in the books of the Hardware Company and a similar amount credited to the account of the Developments Company in the books of the Building Company. By journal entry in the books of the Developments Company, this resulted in a credit in favour of the Hardware Company. But clearly this was not carrying out what was decided on 8th October 1962. At some stage, after 8th October 1962 and before 5th December 1962, the idea was conceived that the Developments Company should give a mortgage for £100,000 to the Building Company grounded upon a promise to forbear to sue for that sum for a stated but relatively short time. This amount of £100,000 was part of a larger indebtedness due by the Developments Company to the Building Company and bore no relationship whatever to the sum of £100,000 mentioned in the minute of 8th October 1962. That sum was composed of £25,000 already owed by the Building Company to the Hardware Company, £25,000 to be raised outside the Reid Murray group and the Hardware Company and £50,000 to be provided by the Holding Company. But though the sums were unrelated, it is quite likely that when it was suggested that the Developments Company should give such a mortgage its assignment to the Hardware Company was in mind. However, whether this is so or not, it is clear, in my opinion, that the proposal, whenever it originated, to give the mortgage over the lands of the Developments Company to the Building Company to secure the sum of £100,000, part of the Developments Company's indebtedness to it, did not indicate the existence of any agreement of the kind suggested by counsel. Nothing more is known of the proposal than that the secretary of the Developments Company in his circulatory minute, to which I have referred, and perhaps in his oral evidence, thought that it was an implementation of the "decision" of the directions of the Building Company on 8th October 1962. Quite clearly it was not. No agreement to give the mortgage for £100,000 is shown to have been made by the Developments Company prior to the signature of the circulatory minute. The signature of that document before the commencement of the period of six months prior to the presentation of the petition to wind up was not made out. And, in my opinion, there are other reasons for concluding that no binding arrangement by the Developments Company to give security for £100,000 to the Building Company was made before the commencement of the said period of six months. However, what I have said is sufficient to dispose of this submission of the Hardware Company.

[94]

Before concluding I should notice a submission made on behalf of the Hardware Company based upon s. 44, read with the definitions of property and land in s. 3, and ss. 35, 43 and 109 of The Real Property Act of 1861 Q.. The argument was founded upon the premiss that the liquidator was asserting an interest in the land which would fall within the description of an encumbrance lien estate or interest mentioned in s. 44. The submission was to the effect that by virtue of that section, the registration of the assignee of the mortgage, as its proprietor, without fraud on its part, precluded the existence in the official liquidator of any such estate or interest in the land. But clearly, s. 293 (1) of The Companies Act does not itself create or vest in the Official Receiver any estate or interest in the land over which the charge has been given. Upon avoidance of the mortgage vis-à-vis the liquidator, he may exercise the rights against the chargee or his assigns which the company may have exercised by virtue of its ownership of the land had it not made the transfer or given the charge. Section 293 of The Companies Act gives the liquidator no other rights, nor are any other relevant rights given by any other part of that Act. By the incorporation of s. 95 (2) of the Bankruptcy Act, The Companies Act does protect purchasers from the creditor for value without notice who must rely on the instrument which has been avoided as against the liquidator as an indispensable element in their title to the property purchased. But it does not give any specific rights to the liquidator against such purchaser. Whatever rights the liquidator has in this respect must be derived from the general law which becomes applicable upon the avoidance of the company's transaction. Of course, the liquidator may assert such rights in proceedings taken in the liquidation before the Supreme Court because of that Court's general jurisdiction but the rights which are being asserted are rights, other than a right to a declaration of the avoidance of the debtor's transaction, which must, as I have said, be found in the general law.

[101]

The evidence established that while the proceedings before Stanley J. were pending there came before another judge, Hart J., six applications by Kratzmann Building against Developments under the provisions of The Contractors' and Workmen's Lien Acts, 1906 to 1921 Q. (the Liens Act) to recover moneys alleged to be owing for the supply and erection by Kratzmann Building of certain buildings upon lands of Developments. In each proceeding Kratzmann Building claimed a lien under the Act upon a particular parcel of land for the moneys owing in respect of a building erected on that land. The order for winding up of Developments having been made, the liquidator resisted the proceedings, and his counsel put in evidence the bill of mortgage of 5th December 1962 in order to found certain submissions which he then made to Hart J. One submission was that the bill of mortgage had granted Developments a "period of credit" of which no mention was made in the statements of claim. (Indeed the statements of claim expressly stated that no credit was agreed to by the appellant; but that allegation is beside the point.) The force of the submission lay in the fact that s. 20 (d) of the Liens Act provides that a claim under the Act must state, inter alia, the date of the expiry of the "period of credit" agreed to by the claimant for payment for his work where credit has been given. The reason for this requirement seems to be that the date of expiry of any period of credit binding upon the claimant is relevant to the competence of the proceedings. They must be commenced within thirty days after the completion of the work in respect of which the lien is claimed (s. 19); but while the Act specifically authorizes the giving of a preliminary notice of intention to claim a lien although the time for payment has not arrived (s. 9), it does not authorize the initiation of proceedings for recovery of the moneys or for a lien before that time. Consequently, if the contract allows a period of credit which exceeds thirty days after completion of the work, no proceedings under the Act can be commenced, and the claimant must rely upon his common law remedies: see McGregor & Co. v. Quartz Reef Point Sluicing Co. [1] . Two things at least are clear. First, the requirement of s. 20 (d) is peremptory: "The claim must state" is the expression used in the section. And, secondly, the requirement applies only where credit has been agreed to for a specific period. It was common ground before Hart J., and it is common ground between the parties here, that the moneys that were claimed in the six proceedings under the Act, or at least some part of those moneys, were included in the total indebtedness of Developments to Kratzmann Building which, as to £100,000 thereof, was the subject of the bill of mortgage of 5th December 1962. It was on this footing that the liquidator of Developments tendered the instrument as evidence in the proceedings. He contended that it had the effect of granting Developments a period of credit within the meaning of the Act, namely a period to expire on 30th April 1964, and that the omission of the statements of claim to state that that date was the date of expiry of a period of credit given was fatal to the proceedings. (If the fact had been stated, that too would no doubt have been fatal.) Hart J. upheld the contention and dismissed all six proceedings.

[102]

Assuming that the bill of mortgage was in all respects valid, the contention put to Hart J. and accepted by him was plainly right. The instrument contained a recital that Developments had requested an extension of time for payment of the £100,000 and that Kratzmann Building had agreed to grant the extension and to forbear to sue for the immediate recovery of that sum, "upon the mortgagor entering into these presents"; and it contained a covenant by Developments to pay the £100,000 on or before 30th April 1964. A covenant by Kratzmann Building not to sue for the £100,000 before 30th April 1964 seems clearly to be implied. Thus a "period of credit" was agreed to. It may be conceded for present purposes that the validity of the instrument as a security was a fundamental assumption upon which the agreement for credit rested, and that accordingly there was a necessary implication in the instrument that the two things should stand or fall together. But to go so far with Kratzmann Building would be to say no more than that if the instrument had proved to be void for all purposes the implied covenant by Kratzmann Building not to sue before 30th April 1964 would not have been binding. The order under appeal, however, does not mean that the security which the instrument purports to give is void for all purposes. It means only that the security is to be treated as void so far as necessary for the purposes of the winding up: cf. In re Sims; Ex parte Sheffield v. Prince [1] ; In re Holden; Ex parte Official Receiver [2] . The basic assumption of the proceedings to have it declared void as against the liquidator was that except in so far as avoided by the Act it was valid and effectual. When the liquidator contended before Hart J., as in effect he did, that the condition of general validity upon which the agreement for credit depended was fulfilled, he was doing no more than stating what was in truth the starting point of his application before Stanley J. and was not taking up inconsistent positions at all. The case was not like Sanguinetti v. Stuckey's Banking Co. [1] where the trustee in bankruptcy, having set aside a settlement, took proceedings in which he sought to stand in the place of beneficiaries under it. This was a plain attempt to approbate and reprobate, and it failed. But here the liquidator seeks to have a security set aside for purposes of the liquidation, having done no more in the earlier proceedings than to set up that the security document operated as against the creditor to allow the period of credit.

[107]

Next it was contended that the bill of mortgage did not give a preference within six months before the commencement of the winding up, because all that it did was to confirm the position of Kratzmann Building as a creditor who had obtained a security before the six months' period began. It was said that more than six months before the commencement of the winding up a binding agreement was made between Developments and Kratzmann Building for the indebtedness of the former to the latter to be secured upon the subject property, that Kratzmann Building thus obtained an equitable charge for the indebtedness, and that the moneys thus secured were the same as those for which the bill of mortgage was given on 5th December 1962. The argument in support of this contention began with the fact that Kratzmann Building owed £25,000 to Kratzmann Hardware for money lent. It was badly in need of finance to carry on its building activities, and Developments and its parent company Reid Murray Holdings Ltd. decided to assist it, provided that Kratzmann Hardware, which was outside the Reid Murray group of companies, would convert its loan of £25,000 into a loan for a fixed period of two years upon certain terms including a term that Developments should give a mortgage for £100,000 (part of its indebtedness) to Kratzmann Building and the latter should assign that mortgage to Kratzmann Hardware as security for payment of the £25,000 at the end of two years. An elaborate endeavour was made to support the contention by reference to contemporaneous documents, including company minutes recording unilateral decisions which were not shown to have been communicated as offers or made the subject of unqualified acceptances. But it was not established, in my opinion, that at any point of time before the commencement of the winding up there emerged, from all the comings and goings which the evidence reflected, either, on the one hand, a concluded contract binding Kratzmann Hardware to leave its loan to Kratzmann Building outstanding for the two-year period and entitling it to such a security as was ultimately given by the transfer of the bill of mortgage of 5th December 1962, or, on the other hand, a concluded contract binding Developments to give Kratzmann Building security for the £100,000 that is referred to in the bill of mortgage over the property to which that instrument relates.

[108]

Finally it was submitted for Kratzmann Hardware that its title as registered transferee of the bill of mortgage under the provisions of The Real Property Act of 1861 Q. should have been held to be indefeasible by virtue of s. 44 of that Act. The section contains one of the key provisions of the Act, namely that notwithstanding the existence in any other person of any estate or interest which, but for the Act, might have been held to be paramount or to have priority, the registered proprietor of land or of any estate or interest in land under the provisions of the Act shall except in the case of fraud hold the same subject to such encumbrances, liens, estates or interests as may be notified on the folium of the register-book constituted by the land grant or certificate of title of such land, but absolutely free from all other encumbrances, liens, estates or interests whatsoever. Exemptions are provided for, but they have no application in the present case. The argument is that the interest of Kratzmann Building as registered mortgagee of the land comprised in the bill of mortgage was an interest in land of which that company was the registered proprietor immediately before the transfer to Kratzmann Hardware, that the title of the latter as registered transferee of the interest is, by force of the section, indefeasible unless fraud be proved, and that fraud was not proved. The difficulty in the way of this argument, in my opinion, is that it misconceives the nature of the statutory right of a liquidator to avoid a preference. Just as there was a need to remember, in dealing with the submission of Kratzmann Building concerning the use which the liquidator of Developments made of the bill of mortgage in the lien proceedings before Hart J., that when The Companies Act makes a preference void as against the liquidator it does no more than require that the preference be treated as void for the purposes of the liquidation, so there is need to remember it in the present connexion, when the question that arises is whether the liquidator's statutory right to avoid a preference consisting of a security over land is an "encumbrance, lien, estate or interest" over or in that security. In my opinion it is not. The assumption of the preference sections of The Companies Act and the Bankruptcy Act is that the preference has been validly given, and that save so far as may be necessary for due payment of the debts and the costs and expenses of the winding up or the bankruptcy it will continue to be valid as between the parties to it. No encumbrance or lien is placed upon it; no estate or interest is carved out of it. It remains intact, but is nevertheless to be treated as non-existent in the winding up or bankruptcy of the debtor who gave it. To apply this to the case where the preference has been given by means of a registered bill of mortgage and the mortgage has vested in a third person by means of a registered transfer is not to say that the indefeasibility of a Torrens title is impaired. It is only to say that the subject matter of the Torrens title, though an interest in land, is an interest of a particular kind, namely an interest created by way of security to a creditor, and therefore an interest of which one of the inherent and inescapable incidents is a liability to be treated as void in a winding up (commencing within six months from its creation) or bankruptcy (on a petition presented within six months from its creation) of the debtor by which or by whom it was given. The title to that interest, with that characteristic necessarily attaching to it, has the full degree of indefeasibility for which s. 44 provides. However, bearing in mind the further question mentioned by the Chief Justice in reference to s. 126 of The Real Property Act, I agree with his Honour that we ought not to treat this case as calling for a final decision as to the operation of s. 95 of the Bankruptcy Act, as adapted by s. 293 of The Companies Act to the winding up of a company, in relation to a registered transferee of a registered mortgage of land under The Real Property Act, where it is the giving of the mortgage that is attacked as a preference.

NA Kratzmann Pty Ltd v Tucker - [1966] HCA 72 - HCA 1966 case summary — Zoe

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Judgment (118 paragraphs)

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