Plaintiff v Defendant [2007] VSC 326 | Case summary

Supreme Court of Victoria|2007-09-19|Before: HARGRAVE J

CORPORATIONS - Insolvency - Administration - Set-off - Corporations Act 2001 (Cth), s.553C - Mutual dealings - Whether mutual dealings at relevant date.

EQUITY - Assignment - Future chose in action - Set-off clause in loan agreement - Whether an agreement to assign a future debt - No assignment.

EQUITY - Rule in Cherry v. Boultbee [1839] EngR 1099; (1839) 4 My & Cr 442; 41 ER 171 - Meaning of "fund" - Undistributed profits of solvent company whilst a going concern - No fund established.

1 The defendant, Travel Software Solutions Pty Ltd ("TSS"), is a company owned by the plaintiff, Ansett Australia Ltd (subject to deed of company arrangement), as to 25 per cent, Qantas Airways Ltd as to 50 per cent and Air New Zealand Ltd as to 25 per cent.

2 In March and April 2001, TSS sold its principal businesses and realised substantial profits ("the profits"). TSS sought taxation advice about how the profits could be distributed to its shareholders in the most tax effective manner. Pending the receipt of final advice, TSS lent an amount approximating the profits to shareholders in proportion to their shareholdings. The amount lent to Ansett was $17 million.

3 The loan agreements each contained a provision permitting TSS to set-off any amount owing by TSS to a shareholder (including in respect of any dividend) against that shareholder's liability to repay the loan.

4 The taxation advice was to the general effect that significant tax savings could be made if TSS delayed payment of dividends from a substantial proportion of the profits until after 30 June 2001. Based on this advice, the directors of TSS resolved to distribute part of the profits to shareholders by a dividend payable prior to 30 June 2001. The amounts due to shareholders in respect of this dividend were set-off against the loan debts due by them to TSS.

5 On and from 1 July 2001, there was no taxation reason why TSS could not declare a dividend for the balance of the profits, and exercise its power of set-off under the loan agreements to effect repayment of the shareholder loans. However, TSS did not do so until December 2005, when its directors resolved to pay a dividend of $16 million and to set-off that dividend against the amounts owing on the shareholder loans.

6 Ansett disputes the right of TSS to set-off its share of the dividend ($4 million) against its liability to repay its shareholder loan.

7 The validity of the set-off arises as an issue because Ansett is insolvent. Administrators were appointed to Ansett on 12 September 2001 under the provisions of s. 436A of the Corporations Act 2001 (Cth) ("the Act"). Subsequently, at a meeting of creditors held pursuant to s. 439A of the Act, Ansett's creditors resolved that Ansett execute a deed of company arrangement. That deed was executed in May 2002, varied in November 2003 and further varied in August 2006. Pursuant to s. 444D(1) of the Act, the deed of company arrangement binds all creditors of Ansett in relation to claims arising on or before 12 September 2001.

8 TSS was incorporated in 1977. It was then called Travel Industries Automated Systems Pty Ltd ("TIAS"). It has not, since that time, repealed its memorandum and articles of association. Accordingly, the "replaceable rules" contained in the Act do not form part of its constitution.

9 Under its articles of association, TSS or its directors may declare a dividend out of profits, or declare such interim dividends as appear to the directors to be justified by the profits of the company.[1] The company and its directors are not obliged to declare dividends out of profits, but may create reserves or carry forward any profits which they may think prudent not to divide.[2]

10 The TSS articles also provide, in effect, that all resolutions of shareholders, and all decisions and resolutions of its board of directors, must be unanimous.[3]

11 Prior to 2001, the primary focus of the business of TSS was the development and licensing of software to support computer reservation systems for travel agents. TSS owned two principal subsidiaries, Southern Cross Distribution Systems Ltd, and Sabre Pacific Ltd. Southern Cross and Sabre were the holders of regional exclusive licences for the "Sabre" and "Galileo" computer reservation systems.

12 In 1999, TSS decided to sell its shareholdings in Southern Cross and Sabre. By early 2001, the terms of the relevant sale agreements had been agreed. The consideration payable to TSS comprised a mixture of cash and credit notes. The credit notes were issued by Galileo International and could later be used by the TSS shareholders to set-off against future fees payable by them.

13 The proposed sale was considered by the TSS board of directors at a meeting on 8 February 2001. The directors resolved that, for a period of at least six months following the completion of the sale of Southern Cross and Sabre, the board would continue to consider future opportunities for the company and that any opportunities that arose in relation to investment would be considered by the board on their merits in the context of the company continuing "as an on-going entity."

14 With settlement of the sale of Southern Cross and Sabre approaching, TSS sought taxation advice from its accountants as to the best way to maximise the return to its shareholders. In the executive summary of their advice, the accountants advised:

These dividends and profits will result in significant franking credits, which can be utilised to frank the dividends paid to [TSS] shareholders. However, as discussed in the respective reports for the sale of [Southern Cross] and Sabre, a significant portion of these franking credits will not be available until after 30 June 2001, due to the timing of the tax payments to be made on the capital gains arising from the respective sales. Accordingly, you may wish to delay payment of the final dividends arising from the sale until after 30 June 2001 to ensure the group is able to access these franking credits.

15 This advice was considered at a meeting of the TSS board of directors on 20 April 2001. The board deferred the issue pending further discussions with shareholder representatives.

16 On 24 April 2001, there was a meeting between Michael Small, then the company secretary of TSS, the accountants for TSS and representatives of each of the shareholders. A contemporaneous email prepared by Mr Small records that, amongst other things, the following matters were agreed at the meeting:

(1) TSS would defer payment of any dividend until the accountants further reviewed the options open to shareholders after completion of the sale transactions and the preparation of final accounts reflecting the sales.

(2) The accountants would prepare a summary paper concerning, amongst other things, the amount of the dividend that could be paid before and after 30 June 2001 and related franking issues.

(3) TSS should consider entering into a loan agreement with each shareholder for a total of $70 million "whilst the dividend issue is worked through." (This total loan amount was later adjusted to $68 million).

(4) The Qantas representative would circulate a draft loan agreement for consideration.

17 The TSS board of directors met again on 31 May 2001. The board received a report from Mr Small, as acting chief executive, which noted that the dividend proposal was waiting upon completion of accounts following completion of the sales, and subsequent assessment by the accountants, before a recommendation could be made to directors. The minutes of the board meeting contain no resolution relating to the payment of dividends. However, at the 31 May board meeting, the directors did two relevant things. First, the board noted that management had tabled a background document relating to a possible investment by TSS in Tourism Technologies Pty Ltd. The board agreed that management should continue discussions about this proposal, at least to the next stage of reviewing the financials and the technology.

18 Second, the board of directors resolved that TSS should:

enter into a short-term Loan Agreement with Qantas, Ansett and Air New Zealand for the following amounts:

1. Qantas Airways A$34m
2. Ansett Airlines A$17m
3. Air New Zealand A$17m.[4]

19 Pursuant to this resolution, on 31 May 2001 TSS entered into a loan agreement with each of its shareholders. The moneys were advanced the next day. Under the terms of the loan agreements, each shareholder was required to pay interest at an agreed rate and was obliged to repay the loan on demand or, if the borrower became insolvent, without any demand being necessary. Clause 6.1 of the loan agreements is highly relevant. It provides:

6.1 The Lender may without notice to the Borrower or any other person, set-off and apply any credit balance on any account of the Borrower with the Lender and any other moneys owing by the Lender to the Borrower against the liabilities (including any dividend) of the Borrower under this Agreement.

20 It is common ground that cl. 6.1 contains an obvious mistake. The parenthesis and words "(including any dividend)" appear in the wrong place. They should appear after the words "owing by the Lender to the Borrower". Otherwise, the clause does not make sense, because TSS at no time owned any shares in any of its shareholders and the shareholders could not therefore become indebted to TSS in respect of any dividend. Accordingly, cl. 6.1 should be read as if it stated:

6.1 The Lender may without notice to the Borrower or any other person, set-off and apply any credit balance on any account of the Borrower with the Lender and any other moneys owing by the Lender to the Borrower (including any dividend) against the liabilities of the Borrower under this Agreement.

21 This re-working of cl. 6.1 may, because it requires reference to extrinsic evidence to the effect that TSS did not hold shares in any of its shareholders, require rectification.[5] However, it is not necessary to determine this issue. The case was conducted on the basis that cl. 6.1 should be read in accordance with the way I have restated it, either as a result of construction or an obvious case for rectification.

22 On 20 June 2001, the TSS board resolved to declare the following dividends:

(1) A fully franked interim dividend of $30,538,932;

(2) A fully franked in-specie dividend of credit notes.

23 On 21 June 2001, the cash component of the interim dividend declared for each of the shareholders was set-off against that shareholder's loan balance pursuant to cl. 6.1 of the loan agreements. TSS notified the shareholders of the dividend and subsequent set-off by facsimiles dated 5 July 2001. In Ansett's case, the set-off had the effect of reducing its loan balance to approximately $9,400,000.

24 On 9 July 2001, TSS received final accounting advice, including advice that the interim dividends declared on 20 June 2001 had been "over franked" and this resulted in a franking deficit tax liability. As a result, TSS made a call on shareholders of $2 million in total. Ansett's share of this was $500,000. This amount was paid and credited to its loan account, thus reducing Ansett's loan balance to approximately $8,900,000. This was the last reduction by Ansett of its loan debt.

25 On 3 August 2001, the TSS directors met and considered, amongst other things, a report and recommendation prepared by management as to future investment opportunities for the company. There were two investment opportunities identified by management. One of these was an opportunity to purchase all of the shares in Tourism Technologies Pty Ltd. This is the same opportunity which had previously been considered by the board at its 31 May meeting, when the board resolved to enter into the loan agreements with shareholders. The second business opportunity related to the purchase of a controlling interest in Penzance Travel Technology. Management recommended to the board that TSS enter into a memorandum of understanding with each of Tourism Technologies and Penzance Travel, with a view to proceeding with the proposed investments. If both these opportunities were proceeded with, this would have involved TSS in a total investment of between $20 million and $35 million.

(1) Michael Small. Mr Small was a long-term employee of TSS. From 1992, he had a senior executive role at TSS. In April 2001, he was appointed the chief executive officer of TSS and remained in that position until the remaining assets of TSS were sold in May 2002.

(2) Michael Vodicka. Mr Vodicka was a long-term Qantas employee. In that capacity, he was appointed as a director of TSS in 1996. He remained a director until December 2005.

(3) Barry Stevens. Mr Stevens is an employee of Air New Zealand. He is, and has been since 1997, the Chairman of the TSS Board of Directors.

27 Each of Mr Small, Mr Vodicka and Mr Stevens agreed in cross-examination, with varying degrees of alacrity, that if the TSS board had decided to proceed with an investment in one or both of Tourism Technologies or Penzance Travel, it was possible that any such investment would have been funded with the undistributed balance of the profits arising from the sales of Southern Cross and Sabre.

28 At the board meeting on 3 August 2001, the TSS board resolved to discuss the investment opportunities at a "closed session" (at which management would not be present) on 13 August 2001. The evidence does not disclose whether this meeting took place on that day. However, there is evidence that a sub-committee of the TSS board met on 24 August 2001 and, at their meeting, the shareholders reached agreement on their objectives for TSS going forward. In a subsequent report prepared for the TSS board, this agreement was summarised in the following way:

The Board Sub-Committee met on Friday 24th August to clarify its position on its continued investment in [TSS]. A paper summarising the exit options was circulated prior to the meeting and was discussed further.

The shareholders have now reached agreement on its (sic) objectives for [TSS]. These can be summarised as:

(a) [TSS] is no longer strategic to the airlines and now is the right time to exit from the business.

(b) Given the relative size of the remaining business the sale process should occur expeditiously.

(c) The airlines recognise that there are a number of favourable opportunities for [TSS] and does not (sic) want to inhibit the realisation of those opportunities.

(d) The airlines have a clear preference to complete the sale in one tranche.[6]

29 There is a dispute between the parties as to the significance of the TSS board giving consideration to the possibility of acquiring Tourism Technologies and Penzance Travel. It was submitted on behalf of TSS that, notwithstanding the board's consideration of these possible investments, the board nevertheless intended at all times to distribute the whole of the profits arising from the sales of Southern Cross and Sabre to shareholders as dividends. Ansett disputes this. It was submitted on behalf of Ansett that the TSS board actively considered these investment opportunities on 31 May 2001, the date that entry into the loan agreements was approved, and thereafter. Ansett submitted that this demonstrates that TSS was under no obligation to distribute the balance of the profits as dividends. The significance of this factual issue will become apparent.

30 I find that on 31 May 2001, and at all times thereafter until at least 12 September 2001 when Ansett was placed in administration, TSS was giving consideration to investing in alternative business ventures. The following matters establish this:

(1) The resolution of the TSS board on 8 February 2001 that, for a period of at least six months following the completion of the sale of Southern Cross and Sabre, the board would continue to consider future opportunities for the company and that any opportunities that may arise in relation to investment would be considered by the board on their merits in the context of the company continuing "as an on-going entity."

(2) The resolution of the TSS board on 31 May 2001 to authorise management to continue discussion with Tourism Technologies. This is the same board meeting at which the board approved the making of the shareholder loans.

(3) The recommendation by management to the TSS board that TSS enter into memoranda of understanding with a view to acquiring Tourism Technologies and a controlling interest in Penzance Travel. This recommendation was considered by the board at its meeting on 3 August 2001 and referred to a closed session for discussion between shareholders in the absence of management.

(4) At the closed session meeting, the shareholders agreed to exit from the TSS business. However, the shareholders expressly recognised "that there are a number of favourable opportunities for [TSS]" and that they did not wish to "inhibit the realisation of those opportunities."

(5) In fact, TSS did not declare a further dividend in the period before the collapse of Ansett on 12 September 2001.

(6) TSS continued to consider investment opportunities for a number of years after 1 July 2001. For example, in the directors' reports for the financial years ended 30 June 2002 and 2003, the TSS directors stated that the principal activities of TSS and its subsidiaries included "the assessment of alternatives in relation to the Group's future". Further, at a TSS board meeting in February 2003, the TSS board received a draft strategic plan prepared by management. The draft plan refers to opportunities for TSS to expand and diversify and notes the business objectives of TSS in the following terms:

Longer-term business objectives of [TSS] are summarised as:

To expand the business and offer above-average returns to shareholders
To become the leading innovative systems company within the travel services and airline industries in the Asia-Pacific region

Although this draft plan was not the subject of any discussion at the TSS board meeting, it is consistent with the statement in the directors' report for that financial year.

31 Further, there was no impediment to TSS distributing the balance of the profits by declaring a dividend at any time from 1 July 2001. However, no witness could explain why this was not done prior to the collapse of Ansett on 12 September 2001. In all the circumstances, I infer that TSS did not declare a dividend in this period because it was giving consideration to utilising the undistributed balance of the profits for the purpose of making one or more of the investments which were being considered by it. In other words, TSS was deferring any decision about declaring a further dividend, at least until it had determined whether to proceed with the investment opportunities which were then under consideration.

32 An attempt was made to explain the non-declaration of a dividend prior to 12 September 2001 by reference to the need for TSS to seek legal advice. However, the evidence discloses that no relevant legal advice was sought until after the collapse of Ansett. There is no evidence of any reason to seek legal advice prior to that time. I accept that the need to obtain legal advice following the collapse of Ansett has contributed to the delay in declaring the dividend which has given rise to this dispute.

33 On 12 September 2001, administrators were appointed to Ansett.

34 On 2 May 2002, following a meeting of its creditors, Ansett executed a deed of company arrangement. That deed of company arrangement was amended, in respects which are not relevant, in November 2003.

35 On 21 December 2005, the TSS board resolved to pay an interim dividend. The resolution is in the following terms:

Resolved to pay a fully franked interim dividend of $3.84 per ordinary share... totalling $16,000,000 on the next business day after this resolution. The dividend is to be set off against shareholder loans.[7]

36 On 19 January 2006, TSS wrote to Ansett in the following terms:

Attached is the shareholder distribution statement for the interim dividend which the directors resolved at their meeting on 21 December 2005 to pay to Ansett.

The distribution is settled by way of a setoff against the Ansett loan from the company.[8]

37 By letter dated 8 March 2006 from Ansett's solicitors to the solicitors for TSS, Ansett demanded payment of its share of the dividend, in the sum of $4 million.

38 This proceeding was commenced on 24 August 2006.

39 On 31 August 2006, the deed of company arrangement was further varied.

40 It is necessary to set out a number of the definitions and relevant terms of the deed of company arrangement ("the deed"). The relevant terms of the deed are set out below. Underlined portions constitute variations made in August 2006. Otherwise, the terms of the deed are those which applied at the time the dividend was declared.

41 Clause 1 of the deed contains the following definitions:

(1) "Appointment Date" means the date administrators were first appointed to Ansett, being 12 September 2001.[9]

a debt payable by, and all claims against, [Ansett] (present or future, certain or contingent, ascertained or sounding only in damages), being debts or claims the circumstances giving rise to which occurred on or before [12 September 2001]...

It is common ground that the claim by TSS against Ansett under the loan agreement was a "Claim" within the meaning of the deed at all relevant times.

(3) "Distribution Amounts" are defined to include the proceeds of sale of Ansett's assets, including recoveries in legal proceedings, and refunds. There are also arrangements to pool the assets of other Ansett group companies. However, it is not necessary to refer to the pooling provisions of the deed for the purposes of this case.

the amount of a Claim that a Participating Creditor is entitled to be paid as a distribution in accordance with the provisions of the Deed.[10]

It is common ground that the claim of TSS under the loan agreement brings it within the definition of a "Participating Creditor". Ansett submits that the deed and all amendments to it operate retrospectively and apply as at 12 September 2001, with the effect that the "Claim" of TSS under the loan agreement has been converted to "Entitlement" from that date. TSS denies this, and relies upon the original form of the deed.

42 Clause 14 of the deed concerns proofs of debt and the ascertainment of claims. It is in the following form:

The rules and mechanisms to be applied to proofs of debt and the ascertainment of Claims shall be similar to the rules and mechanisms for such things prescribed by the Act in the context of the liquidation of a company, amended or adjusted as appropriate to make the process as cost effective as possible. Without limiting the generality of this clause, and for the avoidance of doubt, section 553C of the Act applies to Claims as if the reference to a company that is being wound up were a reference to a company subject to a DOCA, and clause 8 of the Schedule 8A of the Regulations, to the extent that clause relates to and adopts section 553C of the Act, applies to and is incorporated into this deed...

43 It is common ground that s. 553C of the Act applies to the claim by TSS against Ansett for the balance due under the loan agreement, and that s. 553C provides a mechanism for determining whether that claim can be set-off against the dividend debt which would otherwise be due by TSS to Ansett. Ansett contends that s. 553C is the only way in which such a set-off could possibly be established. TSS contends that, if there has been no statutory set-off under s. 553C, it is nevertheless entitled to rely on its alternative grounds to establish the set-off.

44 Clause 18.2 of the deed provides that the "Distribution Amounts" shall be applied in the order there stated. There are numerous priority claims which rank above the claim by TSS under the loan agreement. The evidence establishes that the Distribution Amounts will not, in any circumstances, be sufficient to pay any dividend to ordinary participating creditors such as TSS. Accordingly, for the purposes of the deed, the Entitlement of TSS in respect of its claim against Ansett under the loan agreement is nil.

45 Clauses 18.9, 18.10 and 18.11 of the deed were added by the variation effected in August 2006. They provide:

Deed Creditors must accept their Entitlements in full and final settlement and satisfaction, and complete and irrevocable discharge, of their claims. Each Deed Creditor will, if called upon to do so by the Deed Administrators, execute and deliver to the Company such forms of release of any such Claim as the Deed Administrators require.

On payment to a Deed Creditor of his, her or its Entitlement, that Deed Creditor's Claim is extinguished.

This Deed may be pleaded by the Company and the Deed Administrators in their capacities as deed administrators of any Ansett Group Company... in absolute bar in any demand, action, suit, claim or proceeding (including set offs, counterclaims, cross-claims and the like) in relation to any Claim.

46 Ansett's case is straightforward. It claims that TSS has, by resolving on 21 December 2005 to pay the interim dividend on the next business day (22 December 2005), become indebted to it for the amount of the dividend due in respect of its shares ($4 million). This claim is based upon s. 254V of the Act, which provides:

(1) A company does not incur a debt merely by fixing the amount or time for payment of a dividend. The debt arises only when the time fixed for payment arrives and the decision to pay the dividend may be revoked at any time before then.

(2) However, if the company has a constitution and it provides for the declaration of dividends, the company incurs a debt when the dividend is declared.

47 Ansett places reliance upon s. 254V(1), because there is a well recognised distinction between a power to pay an interim dividend and the power to declare a final dividend.[11] In this case, there was no declaration of a final dividend, only a resolution to pay an interim dividend. Accordingly, s. 254V(1) is applicable. However, it does not matter whether subsection (1) or (2) applies. In any event, the dividend debt did not arise until 21 December 2005 at earliest.

48 TSS raises a number of defences to Ansett's claim for the dividend debt. First, TSS contends that, by clause 6.1 of the loan agreement, Ansett agreed that, until payment in full of Ansett's loan debt to TSS, Ansett would assign to TSS any dividend debt due to Ansett by TSS. It is contended that this agreement constitutes an "equitable assignment" of the dividend debt, and that this assignment is enforceable against the administrators of Ansett. Second, TSS contends that the dividend debt has been validly set-off against the liability of Ansett to it under the loan agreement. TSS relies upon a number of grounds to support its entitlement to set-off. Third, TSS relies upon the so-called rule in Cherry v Boultbee.[12]

49 Both parties agree that a shareholder in a company has no enforceable claim for a dividend, unless and until a dividend debt arises in accordance with s. 254V of the Act. For a dividend debt to arise, the company must either declare a dividend, in accordance with a power contained in its constitution, or must resolve to pay an interim dividend and the time for payment must arrive prior to that resolution being revoked. This statutory position reflects the common law.[13]

50 It was submitted on behalf of TSS that, notwithstanding that no dividend debt arose until December 2005, it was within the power of Ansett prior to that time to agree to assign any right which it may subsequently acquire to be paid a dividend by TSS, provided that the assignment was for valuable consideration. I accept that TSS had this power, and that such an agreement to assign would, if established, be enforceable in equity and prevail against a liquidator or administrator.[14]

51 It is not strictly possible to assign a mere expectancy or possibility, because it is not an existing chose in action. However, equity will give effect to an agreement to assign an expectancy or possibility, such as a dividend which is yet to be declared, provided that the agreement is supported by valuable consideration.[15] In order to establish such an agreement, no particular form of words is required but there must be a sufficiently clear expression of intention to assign.[16]

52 The position was summarised by Windeyer J in Norman v Federal Commissioner of Taxation[17] in the following way:

But in equity a would-be present assignment of something to be acquired in the future is, when made for value, construed as an agreement to assign the thing when it is acquired. A court of equity will ensure that the would-be assignor performs this agreement, his conscience being bound by the consideration. The purported assignee thus gets an equitable interest in the property immediately the legal ownership of it is acquired by the assignor, assuming it to be have been sufficiently described to be then identifiable. The prospective interest of the assignee is in the meantime protected by equity. These principles, which now govern assignments for value of property to be acquired in the future, have been developed and established by a line of well-known cases, of which Holroyd v. Marshall; Collyer v. Isaacs; Tailby v. Official Receiver; and In re Lind; Industrials Finance Syndicate Ltd. v. Lind are the most important. "And so", to use Maitland's words, "lawyers easily slipped into the way of saying that in equity one could make an assignment of goods hereafter to be acquired though one could not do so at law. This was a compendious way of putting the matter and was not likely to deceive any equity lawyer" Maitland, Equity 2nd ed (1936) p. 150. The effect of the decisions was summarised by Dixon J., as he then was, in Palette Shoes Pty. Ltd. v. Krohn.[18]

53 The nature of the assignee's interest under such an agreement was explained by Dixon J (as he then was) in Palette Shoes Pty Ltd v Krohn:[19]

As the subject to be made over does not exist, the matter primarily rests in contract. Because value has been given on the one side, the conscience of the other party is bound when the subject comes into existence, that is, when, as is generally the case, the legal property vests in him. Because his conscience is bound in respect of a subject of property, equity fastens upon the property itself and makes him a trustee of the legal rights or ownership for the assignee. But, although the matter rests primarily in the contract, the prospective right in property which the assignee obtains "is a higher right than the right to have specific performance of a contract," and it may survive the assignor's bankruptcy because it attaches without more eo instanti when the property arises and gives the assignee an equitable interest therein (In re Lind; Industrials Finance Syndicate Ltd. v. Lind. In that case Swinfen Eady LJ describes the effect of the decisions thus: - 'It is clear from these authorities that an assignment for value of future property actually binds the property itself directly it is acquired - automatically on the happening of the event and without any further act on the part of the assignor - and does not merely rest in, and amount to, a right in contract, giving rise to an action. The assignor, having received the consideration, becomes in equity, on the happening of the event, trustee for the assignee of the property devolving upon or acquired by him, and which he had previously sold and been paid for'.[20]

54 It was submitted on behalf of TSS that, upon it true construction, cl. 6.1 of the loan agreement constitutes an agreement by Ansett to assign to TSS any right which Ansett subsequently acquired to be paid a dividend by TSS, until payment in full of Ansett's loan debt to TSS. It was submitted that cl. 6.1 should be construed in this manner, because the Court is entitled to have regard to evidence of the surrounding circumstances in which the loan agreement was entered into. It was submitted that, when taken as a whole, the evidence establishes that all parties (TSS, Qantas, Air New Zealand and Ansett) intended that the shareholder loans would be repaid from dividends as and when they became due by TSS to its shareholders. I do not accept this submission.

55 The evidence establishes that, for taxation reasons, the parties agreed that TSS would defer payment of a dividend in respect of the profits and, in the meantime, would lend an amount approximating the profits to the shareholders in proportion to their respective shareholdings as "short term" loans "whilst the dividend issue [was] worked through."

56 There is no evidence that the parties sought any tax advice concerning an intention that the shareholders would agree to assign future dividend debts to TSS. In circumstances where the parties sought and obtained advice about the most tax effective manner to deal with the profits arising from the sales of Southern Cross and Sabre, I infer that it is more probable than not that, if they intended to effect an assignment of any future dividend entitlement, they would have sought tax advice on that issue.

57 There is no evidence of any communication between the parties as to the set-off provision contained in cl. 6.1 of the loan agreements.

58 The evidence of surrounding circumstances does not establish an objective intention to assign to TSS any future dividend entitlement payable by TSS to shareholders.

59 The issue remains as to whether the words used in cl. 6.1 of the loan agreement, construed in the context of the surrounding circumstances and the loan agreement as a whole, contain a sufficiently clear expression of an intention to assign future dividend debts. In my view, they do not. The words used in cl. 6.1 do not sufficiently express an agreement by Ansett to assign to TSS any future dividends payable by TSS to Ansett. Such an intention is inconsistent with the words used in cl. 6.1, which contemplate that, when TSS becomes indebted to Ansett on any account whatever, TSS "may" at its option exercise a right of set-off. This permissive language is inconsistent with an equitable assignment of the dividend debt being perfected "immediately the legal ownership of it is acquired by [Ansett]"[21] or "automatically" on the dividend debt becoming payable.[22]

60 TSS relies on a number of grounds in support of its contention that the dividend debt has been validly set-off against Ansett's liability to it under the loan agreement. First, TSS contends that the set-off was automatically effected by virtue of s. 553C of the Act. Second, TSS contends in the alternative that the set-off was effected by the dividend resolution itself, which fixes set-off as the method of payment of the dividend. In this regard, TSS relies upon s. 254U(1)(c) of the Act and its right of set-off under cl. 6.1 of the loan agreement. I will deal with each of these grounds separately.

A. Has there been a set-off under s. 553C?

61 Section 553C(1) of the Act provides:

553C Insolvent companies - mutual credit and set-off

(1) Subject to subsection (2), where there have been mutual credits, mutual debts or other mutual dealings between an insolvent company that is being wound up and a person who wants to have a debt or claim admitted against the company:

(a) an account is to be taken of what is due from the one party to the other in respect of those mutual dealings; and

(b) the sum due from the one party is to be set off against any sum due from the other party; and

(c) only the balance of the account is admissible to proof against the company, or is payable to the company, as the case may be.

62 TSS contends that, at the time the deed became operative on 12 September 2001, the debt due to it by Ansett under the loan agreement, on the one hand, and the expectation that Ansett would receive a dividend from TSS in respect of the undistributed balance of the profits, on the other hand, constituted "mutual dealings" for the purposes of s. 553C. Accordingly, TSS submits that the dividend debt which it incurred to Ansett on 22 December 2005 was, on that date, automatically set-off in reduction of Ansett's liability to it under the loan agreement. Ansett disputes this. It contends in summary that, at 12 September 2001, the expectation that TSS would pay a dividend in respect of the undistributed balance of the profits was a mere possibility, and not an existing obligation capable of constituting a mutual dealing in respect of its liability to TSS under the loan agreement. Accordingly, Ansett submits that s. 553C has no application, and no set-off occurred on either 12 September 2001 or when the dividend debt arose on 22 December 2005.

63 It is common ground that, unless cl. 8 of schedule 8A of the Corporations Regulations is excluded by the relevant deed of company arrangement:

(1) section 553C of the Act applies to all claims capable of being made by or against a company which is subject to a deed of company arrangement;[23]

(2) the relevant date for ascertaining what is due from one party to the other in respect of mutual dealings, as required by paragraphs 553C(1)(a) and (b) of the Act, is the date upon which the deed becomes binding on all creditors, in this case 12 September 2001;[24]

(3) on the relevant date, s. 553C applies automatically to effect the set-off mandated by that section "so as to produce a balance which alone could be claimed in the administration or recovered by the company."[25]

64 It is also common ground that cl. 8 of schedule 8A of the Corporations Regulations is not excluded by the deed in this case, either in its original or amended form. Accordingly, it is common ground that, where there are mutual dealings, s. 553C applies automatically to all claims capable of being made by or against Ansett on 12 September 2001.

65 In order for there to be mutual dealings within the meaning of s. 553C, it is not necessary for there to be, on the relevant date, an accrued debt due in respect of each dealing. For example, there will be mutual dealings on the relevant date where, on the one hand, the company owes a creditor an accrued debt and, on the other hand, the creditor is contingently liable to the company in respect of an existing transaction.[26]

66 In Hiley v The Peoples Prudential Assurance Co Ltd[27] Dixon J stated:

It is enough that at the commencement of the winding up mutual dealings exist which involve rights and obligations whether absolute or contingent of such a nature that afterwards in the events that happen they mature or develop into pecuniary demands capable of set off. If the end contemplated by the transaction is a claim sounding in money so that, in the phrase employed in the cases, it is commensurable with the cross-demand, no more is required than that at the commencement of the winding up liabilities shall have been contracted by the company and the other party respectively from which cross money claims accrue during the course of the winding up...[28]

67 In the same case, Rich J stated that, for there to be mutual dealings:

Rights must be vested in the creditor and in the company which, without any new transaction, grow in the natural course of events into money claims capable of forming items in an account or capable of settlement by set-off.[29]

68 To the same effect are the statements of a Full Bench of the High Court (Mason CJ, Brennan, Deane, Dawson, Toohey, Gaudron and McHugh JJ) in Gye v McIntyre: [30]

The requirement that the credits, the debts or the claims arising from other dealings be commensurable does not mean they must be vested, liquidated or enforceable at the decisive date, that is to say, at the time of the sequestration order or special resolution accepting the composition. Provided they exist as contingent at that date and are of a kind which will ultimately mature into pecuniary demands susceptible of set-off, the requirement of the section may be satisfied in relation to them.[31]

69 The issue arises as to what is required in order for a right or liability to "exist as contingent" at the relevant date. The effect of the cases is that a contingent right or liability will only exist where there is an existing right or obligation out of which, on the happening of a contingency (an event which may or may not occur) there will arise a right to be paid, or an obligation to pay, a sum of money, which sum of money may be liquidated or sounding only in damages.[32]

70 In Community Development Pty Ltd v Engwirda Construction Co[33] the High Court considered whether a builder, who had a building contract with a company under which it was entitled to be paid for work when performed, was a "contingent or prospective creditor" of the company at the relevant date. It was held that the builder was a contingent creditor from the time the building contract was made. In this regard, Kitto J (Barwick CJ, Taylor, Windeyer and Owen JJ agreeing) stated:

Not much assistance is to be gained, I think, from observations that are to be found in reported cases as to the import of the word "contingent", and I shall refer to one only. In In re William Hockley Ltd Pennycuick J suggested as a definition of "a contingent creditor" what is perhaps rather a definition of "a contingent or prospective creditor", saying that in his opinion it denoted "a person towards whom, under an existing obligation, the company may or will become subject to a present liability upon the happening of some future event or at some future date". The importance of these words for present purposes lies in their insistence that there must be an existing obligation and that out of that obligation a liability on the part of the company to pay a sum of money will arise in a future event, whether it be an event that must happen or only an event that may happen. A building contract creates, as soon as it is entered into, an obligation upon the building owner to pay the contract price, either as a whole upon a future event or, more usually, by progress and final payments each of which is to be made on a future event. The event or events may not happen, but if and when one of them does happen the building owner, by force of the contractual obligation, must pay the builder a sum of money. It is, I think, nothing to the point that the event may be complex, as where the payment is agreed to be made when the whole or some part of the work has been done to the satisfaction of an architect as expressed in a certificate or to the satisfaction of an arbitrator as expressed in an award: the building owner is bound from the time the contract is made to pay money to the builder upon a contingency; and that in my opinion makes the builder a contingent creditor of the owner.[34]

71 In National Bank of Australasia Ltd v Mason[35] Barwick CJ referred to the judgment of Kitto J in Engwirda and the reliance by Kitto J upon the definition of a contingent creditor in Re William Hockley Ltd, [36] in the following terms:

As was emphasized in that judgment, the importance of that definition is its insistence on the presence of an existing obligation out of which the ultimate liability will grow.[37]

72 In Federal Commissioner of Taxation v Gosstray[38] Tadgell J referred to Engwirda and continued:

The notion that a contingent debt must be founded on an existing obligation is strengthened when it is realised that a monetary claim for it, if made the subject of a proof, is to be stated as on the date of the bankruptcy;... If when the proof is lodged the contingency has not happened, the amount of the claim must be estimated as accurately as possible:... see s. 82(4) of the Bankruptcy Act 1966. If the value of the claim cannot be fairly estimated s. 82(6) provides that the debt or liability should be deemed not to be provable. Of course, it is open to the court to assess the value of a claim at nil:... If, however, a claim were made not founded on an obligation of the bankrupt existing at the date of bankruptcy which could ripen into a debt upon a contingency, the proper conclusion, in my view, would be not that the provable claim should be assessed at nil but that there was no claim on the bankrupt estate at all.[39]

73 It was submitted on behalf of TSS that, at the relevant date on 12 September 2001, it was under an existing obligation to its shareholders (including Ansett) to pay a dividend in respect of the undistributed balance of the profits. It was submitted that this obligation is to be inferred from the circumstances taken as a whole, under which TSS lent to its shareholders, on a "short term" basis, an amount approximating the amount of the profits. It was submitted that these loans were made upon the express contemplation or expectation of all parties (TSS and each of its shareholders) that the loans would be repaid partly from a dividend payable from the profits prior to 30 June 2001 and, as to the balance, from dividends payable after 30 June 2001 out of the undistributed balance of the profits.

74 I do not accept these submissions. The evidence establishes that, for taxation reasons, the parties agreed that TSS would defer payment of a dividend in respect of the profits and, in the meantime, would lend an amount approximating the profits to the shareholders in proportion to their respective shareholdings as "short term" loans "whilst the dividend issue [was] worked through." This decision to defer a dividend was made in circumstances where the TSS board had already resolved to consider further investment opportunities, for a period of at least six months following completion of the sales of Southern Cross and Sabre. The dividend which was declared on 20 June 2001, and set-off against the shareholder loans on 21 June 2001, effected a partial distribution of the profits to shareholders. However, there remained a real possibility that TSS might not, at least in the short term, declare a further dividend in respect of the undistributed balance of the profits. This possibility is reinforced by the fact that, at the same board meeting at which the directors gave approval for the "short term" loans, the TSS board had authorised management to continue discussions about the proposal to acquire Tourism Technologies.

75 Taken as a whole, the evidence establishes that the parties contemplated, or expected, that any portion of the profits which was not distributed to shareholders before 30 June 2001 would, depending on the circumstances, be distributed to shareholders by a further dividend to be paid after 30 June 2001, and that TSS would then rely upon cl. 6.1 of the loan agreements to set-off that dividend against the loan debts due by shareholders. The qualification "depending on the circumstances" is necessary because the evidence establishes that, at 31 May 2001 and at all relevant times thereafter until 12 September 2001, TSS was giving active consideration to purchasing Tourism Technologies and a controlling interest in Penzance Travel. If one or both of these investments, or any alternative investment, was proceeded with, it was open to TSS to fund that investment from the undistributed balance of the profits. In such circumstances, TSS may have sought repayment of the shareholder loans, in whole or in part, and deferred the payment of dividends in respect of the undistributed balance of the profits to another time or indefinitely.

76 The evidence does not support any agreement obliging TSS to act in accordance with this contemplation or expectation. Whether or not a dividend was declared, and (if so) in what amount and at what time, depended upon the unanimous decision of the shareholders and the board in the circumstances then pertaining. As appears above, it was possible that TSS may have decided to utilise the undistributed balance of the profits to fund investment opportunities.

77 Indeed, the TSS audited accounts show that TSS lost all of its retained profits during the course of the financial year ended 30 June 2002. No evidence was placed before the Court as to how these retained profits were lost, or as to the source of the profits which are the subject of the dividend which the TSS board resolved to pay in December 2005.

78 Before leaving this aspect of the case, I should mention that counsel for TSS placed reliance upon the decision of the Full Court of the Supreme Court of Western Australia in In re the West Australian Lighterage, Stevedoring and Transport Co Ltd; Ex parte Bank of New South Wales.[40] In that case, a shareholder owed the company an accrued debt. Before the debt was paid, the company went into voluntary liquidation, in circumstances where it was solvent at the time and there was no doubt that the shareholder would be entitled to be paid by the liquidator, in due course, an amount representing his share of the net assets of the company. Later, whilst the shareholder's debt to the company remained unpaid, the shareholder became bankrupt. Soon after, the liquidator declared a "liquidator's dividend" to shareholders. The liquidator then set-off the amount of the shareholder's debt against the amount due to the shareholder in respect of the dividend, and paid the balance arising to the shareholder's trustee in bankruptcy.

79 It was held that, even though the dividend was declared after the date of the shareholder's bankruptcy, the liquidator was entitled to set-off the debt against the dividend. This was because there were mutual dealings as at the date of the shareholder's bankruptcy. The Court expressly held that, at the date of bankruptcy, there was an existing liability on the part of the liquidator, "which would ultimately mature into a debt",[41] to pay the shareholder the amount of his share of the net assets of the company. Accordingly, "it was clear at the time of liquidation, and at the time of the [bankruptcy of the shareholder], that there would be something due from the liquidator" to the shareholder.[42]

80 It was submitted on behalf of TSS that, as at 12 September 2001, Qantas and Air New Zealand (as owners of 75% of the issued shares in TSS) had a right to force the winding up of TSS and that, if they exercised that right, all shareholders would have a right to participate in the surplus assets of TSS.[43] It was submitted that the existence of this right meant that there was therefore an amount "due" by TSS to its shareholders at the relevant date, so as to constitute a mutual dealing to be set off against Ansett's loan debt to TSS. This submission has no merit. The existence of a right to have a voluntary liquidator appointed to TSS is altogether different from a situation in which, at the relevant date, a voluntary liquidator has already been appointed, as in the West Australian Lighterage case. Accordingly, that case is of no assistance to TSS in support of its submission that it was under an existing obligation to pay a dividend to Ansett as at 12 September 2001.

B. Did the dividend resolution effect a set-off?

81 It was submitted on behalf of TSS that, even if s. 553C did not operate to effect a set-off, a set-off has nevertheless taken place because the terms of the TSS board resolution to pay the dividend specify that "the dividend is to be set-off against shareholder loans." It was submitted that the TSS board was entitled to specify this method of payment of the dividend, because it has both a contractual right of set-off under cl. 6.1 of the loan agreement and a statutory right under s. 254(1)(c) of the Act to specify set-off as the method of payment. Accordingly, it was submitted that the actions of TSS were "lawful in every respect".

82 The foundation for this argument is the submission that Ansett's loan debt to TSS was not extinguished by the deed and converted into an "Entitlement", as contended for by Ansett, but was subject only to a moratorium on its enforcement. Accordingly, it was submitted that the deed did not, as at the time when the TSS board resolved to pay the dividend and set it off against the loan debt due by Ansett, prohibit TSS from exercising its right of set-off.

83 I do not accept this submission. It is common ground that the original deed was binding on all creditors of Ansett in respect of "Claims" arising on or before 12 September 2001. Clause 4.2 of the deed provides for a moratorium on all forms of enforcement and recovery of any "Claim". This includes the loan debt due by Ansett to TSS.

During the Deed Period, without the Deed Administrators' prior written consent, a Deed Creditor shall not in relation to its Claim:

4.2.1 make an application for an order to wind up the Company;

4.2.2 proceed with any such application made before this Deed became binding on the Deed Creditor;

4.2.3 begin or continue any proceeding against the Company or in relation to any of its property except with the leave of the Court and in accordance with such terms (if any) as the Court imposes;

4.2.4 begin or continue with any Enforcement Process in relation to the property of the Company except with leave of the Court and in accordance with such terms (if any) as the Court imposes;

4.2.5 take any action whatsoever to seek to recover any part of its Claim other than pursuant to the Deed; or

4.2.6 commence or take any further step in any arbitration against the Company or to which the Company is a party.[44]

85 The critical provision is contained in cl. 4.2.5. Viewed in the context of cl. 4.2 as a whole, I am of the view that it prohibits a creditor from taking any action to set-off against Ansett any debt due by the creditor to Ansett which is not the subject of the statutory set-off mandated by s. 553C of the Act.

86 It was submitted on behalf of TSS that cl. 4.2.5 of the deed does not prevent it from relying upon its right of set-off under cl. 6.1 of the loan agreement, or its right to specify the method of payment of the dividend under s. 254U(1) of the Act. TSS submitted that, in a dictionary sense, "action" means "something done; an act" and that "recover" means "to get again, or regain, something lost or taken away". It was submitted that no action was taken by TSS to recover any part of its debt when it unilaterally resolved to pay the dividend on terms "which then automatically (ie without further conduct on the part of [TSS]) reduce[d] [Ansett's] debit balance."[45] It was submitted that the reduction in Ansett's debt to TSS happened "automatically" by force of the terms of the resolution to pay the dividend, including the specification that "the dividend is to be set-off against shareholder loans."

87 I do not accept this submission. It assumes that the resolution to pay the dividend, including the specification of set-off as the manner of its payment, can be considered in isolation from the source of the right to set-off. That is impermissible. In circumstances where s. 553C of the Act does not apply, the only basis of a right to set-off the dividend debt due by TSS to Ansett against Ansett's loan debt to TSS is to be found in cl. 6.1 of the loan agreement. As stated above, cl. 6.1 does not operate automatically. Where it operates, it provides a right of set-off. In order to effectuate the contractual right of set-off, TSS must act to exercise its right. By resolving that the dividend "is to be set-off against shareholder loans" TSS acted to exercise its right of set-off.

88 Next, TSS contends that, even if it acted to effectuate its right of set-off, that was not an action "to seek to recover any part of its Claim" because, by exercising its right of set-off, TSS did not get back into its hands or possession something lost or taken away. In this regard, TSS placed reliance upon Cinema Plus Ltd (Administrators Appointed) v ANZ Banking Group Ltd.[46] In that case, the relevant issue was whether the extinguishment of the plaintiff's right of possession and use of goods under a lease facility amounted to the recovery by ANZ of property used or in the possession of the plaintiff, within the meaning of s. 440C of the Act. Section 440C provides:

During the administration of a company, the owner or lessor of property that is used or occupied by, or is in the possession of, the company cannot take possession of the property or otherwise recover it, except:

"Recover" means to get back into one's hands or possession something lost or taken away. It is singularly inapt an expression to apply to what occurred between Cinema Plus and ANZ. None of the property the subject of the lease back was ever in the hands or possession of ANZ. At all material times it was in the hands or possession of Cinema Plus...[48]

90 The Cinema Plus decision is of no assistance to TSS. It concerns the recovery of physical property which was never in the hands of or possession of ANZ. In this case, TSS possessed a large sum of money. It lent part of it to Ansett. By exercising its right of set-off, TSS has taken action to recover part of the money lent by it to Ansett. If the set-off is effective, Ansett's liability to TSS will be reduced from approximately $9 million to approximately $5 million and TSS will be relieved of its obligation to pay the dividend. In ordinary language, TSS will have recovered $4 million of the debt due to it.

91 For the above reasons, the attempt by TSS to exercise its right of set-off under cl. 6.1 of the loan agreement was in contravention of the original deed and is invalid.

92 Furthermore, I do not accept that the position should be determined in accordance with the original deed. In my view, the amended deed governs the situation. The structure of Part 5.3A of the Act provides for deeds of company administration to operate retrospectively. An administration begins when an administrator is appointed under s. 436A. Later, if the creditors so resolve under s. 439C, a deed of company arrangement may be entered into by the company. Section 444D(1) provides that a deed of company arrangement binds all creditors "so far as concerns claims arising on or before the day specified in the deed under paragraph 444A(i)." Paragraph 444A(4)(i) provides that the specified day must be "not later than the day when the administration began." Accordingly, every deed of company arrangement must operate retrospectively.

93 It follows, in my opinion, that any amendments to a deed of company arrangement also operate retrospectively. If that be the case, then cl. 18.11 of the deed operates to provide Ansett with an absolute answer to the defence of set-off raised by TSS in response to Ansett's claim in debt for payment of the dividend.

94 Finally, there is in any event a fundamental answer to the contention of TSS that there can be a set-off outside of the operation of s. 553C of the Act. Where s. 553C applies to a deed of company arrangement, the set-off regime mandated by that section is the only means by which a set-off can be effected by a person who, as at the specified day under s. 444A(4)(i) of the Act, has mutual dealings with the company. To the extent that the contractual arrangements between the company and a creditor are inconsistent with the operation of s. 553C, they are void.[49] Accordingly, where it applies, s. 553C is a mandatory, automatic and exclusive regime for dealing with all rights of set-off between a company in administration and its creditors.

95 The possibility remains that a creditor may wish to exercise an analogous right of "quasi set-off" in accordance with the so-called "rule in Cherry v Boultbee". I turn to consider that issue.

VII. DOES THE RULE IN CHERRY V BOULTBEE PROVIDE A DEFENCE FOR TSS?

96 In Otis Elevator Co Pty Ltd v Guide Rails Pty (in liquidation), [50] Palmer J analysed and restated the rule in Cherry v Boultbee.[51] Palmer J commenced his analysis with the following statement:

Cherry v Boultbee is frequently cited as authority for the proposition "where a person entitled to participate in a fund is also bound to make a contribution in aid of that fund, he cannot be allowed so to participate unless and until he has fulfilled his duty to contribute (to the fund)": Re Peruvian Railway Construction Co Ltd [1915] 2 Ch 144, at 150 per Sargant J. But this proposition ought more accurately to be called, if anything, the "rule in Jeffs v Wood" and Cherry v Boultbee should be regarded as a qualification or exception to that rule, as Sargant J himself recognised in Re Peruvian Railway.[52]

97 Palmer J considered and compared Jeffs v Wood[53] and Cherry v Boultbee and concluded:

The decision in Cherry v Boultbee may, therefore, be seen to add a qualification to the principle expressed in Jeffs v Wood, so that the "rule in Cherry v Boultbee" might more fully be stated thus:

A person who is both a claimant on, and a debtor to, a fund cannot obtain payment of his claim out of the fund until he has first paid his debt into the fund PROVIDED THAT if the claimant's estate is being administered in insolvency at the time that his claim against the fund arises, the claimant's insolvent estate cannot obtain payment of the claim out of the fund until it first pays into the fund such dividend on the claimant's debt to the fund as is available from the claimant's insolvent estate.[54]

98 Palmer J referred to a number of insolvency cases which have applied the rule in this restated form[55] and concluded that, as the claimant upon the fund was insolvent at the time it became entitled to participate in the fund, it was only obliged to pay into the fund "such dividend as it could."[56] As that dividend was nil, the claimant was entitled to full participation in the fund.[57]

99 Two issues arise for determination in this case. First, is Ansett a claimant against, and a debtor of, a "fund" in the relevant sense? Second, if there is a fund in the relevant sense, and the rule in Cherry v Boultbee therefore applies, is Ansett entitled to payment of the dividend out of the fund if it first pays to TSS, in respect of its loan debt, such dividend as is available from its insolvent estate, in this case nil?

100 As to the first question, it was submitted on behalf of TSS that the rule in Cherry v Boultbee applies to the facts of this case, because Ansett is both a claimant against a fund and the debtor of that fund. The suggested fund is the undistributed balance of the profits, which counsel for TSS referred to in argument as "the dividend pool". It was submitted that, viewed in this way, Ansett is not entitled to be paid its share of the dividend until it satisfies its obligation to pay the loan debt to TSS, and to thus contribute to the fund from which the dividends are to be paid.

101 I do not accept these submissions. There is no "fund" in the relevant sense because TSS is and was at all relevant times a going concern. In the third edition of Mr Derham's text, "The Law of Set-Off",[58] the learned author states:

The essence of Cherry v Boultbee is that there is a right to participate in, and an obligation to contribute to, a fund. The concept of a "fund" is flexible; it includes a trust fund, an estate administered under a will or in an intestacy, and the pool of assets of a bankrupt or a company in liquidation which is administered in accordance with the relevant statutory scheme. It does not include, however, a company's assets while the company is still a going concern.[59]

102 The authorities cited by Mr Derham for the emphasised statement are Re Peruvian Railway Construction Co Ltd[60] and Selangor United Rubber Estates Ltd v Cradock (No. 4).[61] Those authorities support the statement, as do others, including the Otis Elevator case.[62]

103 It was submitted on behalf of TSS that, following the sale of its major assets and the decision of its shareholders to sell the remaining businesses, TSS was to be equated with a solvent company in voluntary liquidation, because it was effectively a non-functioning or dormant company which was making small losses and was possessed of a fund constituted by the undistributed balance of the profits. TSS submitted that, in order to distribute that fund, it needed to obtain repayment of the shareholder loans because it did not otherwise have money available to pay the dividends.

104 I do not accept these submissions on behalf of TSS. The undistributed balance of the profits was not set aside by the TSS directors as a separate fund for the purpose of distributing it to shareholders. An amount approximating the profits was lent to the shareholders, pending a decision as to what TSS would do with the money. As appears above, TSS was not obliged to distribute the money as a dividend. There were other uses to which the shareholders may have decided to put the money, such as investment in Tourism Technologies or Penzance Travel. Further, as appears above, TSS lost all of its retained profits in the year ended 30 June 2002. The suggested fund either never came into existence or, if it did, it was wholly dissipated before the dividend in issue became payable.

105 Further, the equity which requires a claimant to a fund, who is also a debtor of the fund, to pay into the fund what is due from him before he can take a share out of the fund is based upon the principle that it would be inequitable to allow the claimant to compete against the other persons entitled to share in the fund until the whole fund has been constituted, by getting in the asset which the claimant's debt represents.[63] In this case, there is no competition between the shareholders in TSS as to the amount of their respective entitlements to receive dividends. TSS is no longer possessed of the money representing the profits out of which the dividend debts are payable. That money was lent to the shareholders. The other shareholders, Qantas and Air New Zealand, have received their dividends in full, by the set-off of those dividends against their liabilities to TSS. If Ansett were to lose this case, neither Qantas nor Air New Zealand would receive any further dividends as a result of that fact. In these circumstances, the justification for the rule in Cherry v Boultbee is not present in this case.

106 I turn to the second issue. Even if there were a fund to which the rule in Cherry v Boultbee were capable of operating, it would make no difference in this case.

107 It was submitted on behalf of TSS that, under the terms of the original deed as it applied at the time of the resolution to pay the dividend in December 2005, its "Claim" to be paid the loan debt due by Ansett was not extinguished but was merely the subject of a moratorium. According, so it was submitted, Ansett should be required to contribute the whole of the loan debt as a condition of recovering the dividend.

108 I do not accept this submission. It does not matter which of the original deed or the amended deed applies. The evidence establishes that, on any view of the facts, there will be no dividend payable to ordinary unsecured creditors such as TSS. In these circumstances, the only obligation of Ansett to contribute to any fund would be to pay the amount of any dividend payable to TSS under the terms of the deed. The evidence establishes that there will be no dividend for any unsecured creditor such as TSS. Accordingly, Ansett would be entitled to full participation in the hypothetical fund.

VIII. IS ANSETT ENTITLED TO RECOVER INTEREST ON THE DIVIDEND?

109 Ansett claims interest pursuant to the provisions of the Supreme Court Act 1986 in the event that it succeeds in its claim to be paid the dividend. Section 254U(2) of the Act provides that interest is not payable on a dividend. However, s. 254U is a replaceable rule which does not, by virtue of s. 135 of the Act, apply to TSS.

110 TSS requested that, in the event that it was unsuccessful in defending Ansett's claim, it be given a further opportunity to make submissions on the question of interest. Ansett did not oppose that request. Accordingly, I will hear further argument as to whether Ansett is entitled to recover interest on the dividend.

(1) Ansett did not agree to assign to TSS any dividend debt which may become due to Ansett by TSS.

(2) The dividend debt is not the subject of a valid set-off against the liability of Ansett to TSS under the loan agreement.

(3) The rule in Cherry v Boultbee has no application to this case. Even if it does, its application does not assist TSS in its defence of Ansett's claims.

112 Accordingly, Ansett is entitled to judgment on its claims. I will hear the parties as to the form of judgment, as to interest and as to costs.

[5] See Meagher, Gummow & Lehane's Equity Doctrines & Remedies (4th ed), [26-040].

[9] The case was conducted on this basis, based upon the operation of ss. 444D(1) and 444A(4)(i) of the Act.

[11] Industrial Equity Ltd v Blackburn [1977] HCA 59; (1977) 137 CLR 567, 572-578.

[13] Industrial Equity Ltd v Blackburn [1977] HCA 59; (1977) 137 CLR 567, 572-578; Marra Developments Ltd v BW Rofe Pty Ltd [1977] 2 NSWLR 616, 619, 622, 640; Potel v IRC [1971] 2 All ER 504, 512-3.

[14] Palette Shoes Pty Ltd v Krohn [1937] HCA 37; (1937) 58 CLR 1; Norman v Federal Commissioner of Taxation [1963] HCA 21; (1963) 109 CLR 9; Tailby v Official Receiver (1888) 13 App.Cas. 523.

[15] Norman v Federal Commissioner of Taxation [1963] HCA 21; (1963) 109 CLR 9. In this case, the making of the $17m loan obviously constitutes valuable consideration.

[16] Ibid, 22, 32; Shepherd v Commissioner of Taxation [1965] HCA 70; (1965) 113 CLR 385, 391-2; JG Starke QC, Assignments of Choses in Action in Australia (Butterworths, 1972), 15-16.

Plaintiff v Defendant

At a glance

Court

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Before

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Judgment (237 paragraphs)

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Legislation Cited (1)

Cases Cited (9)