Plaintiffs v Defendant

CORPORATIONS - Whether payment of royalties paid in arrears on minerals sold from mining tenements an unfair preference - Liquidators' claims dismissed - s 588FA Corporations Act 2001

Airservices Australia v Ferrier (1996) 185 CLR 483

Beveridge v Whitton [2001] NSWCA 6

Olifent v WorkCover Corporation of South Australia (1996) 15 ACLC 47; 135 FLR 423

Queensland Bacon Pty Ltd v Rees [1966] HCA 21; (1966) 115 CLR 266

Re A & J Lazzarotto Pty Ltd (Unreported, Full Court of the Supreme Court of Victoria, Young CJ, Lush and Fullagar JJ, 16 December 1977) (annexed to Re Jetaway Logistics [2008] VSC 397)

Re Discovery Books Pty Ltd (1973) 20 FLR 470

Re Lanpac International Pty Ltd [1998] VSC 9

Re Weiss [1970] ALR 654

Rees v Bank of New South Wales [1964] HCA 47; (1964) 111 CLR 210

Richardson v Commercial Banking Co of Sydney [1952] HCA 8; (1952) 85 CLR 110

Sands & McDougall v Commissioner of Taxation [1998] VSCA 76; [1999] 1 VR 489

Sheldrake v Paltoglou [2006] QCA 52

Sutherland v Liquor Administration Board (1997) 24 ACSR 176

Telecom v Russell Kumar & Sons (1992) 10 ACSR 24

VR Dye v Peninsula Hotels [1999] VSCA 60; [1999] 3 VR 201

1 Centaur Mining and Exploration Ltd (in liquidation) (receivers and managers appointed) mined gold and nickel at several mines in Western Australia known as the Mt Pleasant Mining Project, the Cawse Nickel Project and the Lady Bountiful Mining Project. By the end of 2000, the company was insolvent. Nevertheless, during the first ten weeks at the beginning of 2001, it paid the State of Western Australia (represented by the Minister) $1,630,095.93 for rent in advance for the lease of certain of its mining tenements and royalties due on ore previously extracted from its mining tenements leased from the State.

2 On 14 March 2001, receivers and managers were appointed to the company and sold the mines on behalf of secured creditors for some $66 million. Centaur Mining is now in liquidation and the liquidators seek the recovery of the rental and royalty payments as unfair preferences. The Minister raises the so-called landlord's defence and says the payments were not unfair preferences. The Minister contends it was a statutory condition of each tenement held by Centaur Mining that the rent and royalties were to be paid and that the tenancies could be forfeited for non-payment.

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

4 The liquidators say that the landlord's defence did not survive the repeal of the old unfair preference laws in 1992 and their replacement with the new rules now found in Division 2 of Part 5.7B of the Corporations Act 2001 (Cth).[1] If the defence did survive, the liquidators say that it does not apply to the circumstances of this case. Alternatively, the liquidators say that the Minister has not established sufficient facts to attract the landlord's defence. If it does apply to the rental payments, the liquidators say that it does not apply to the royalty payments. The royalty payments differed from the rental payments. The rent was payable in advance. On the other hand, the royalties were paid in arrears.

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

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

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

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

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

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

8 Accordingly, I dismiss the liquidator's claims with costs.

DID THE LANDLORD'S DEFENCE SURVIVE THE 1992 AMENDMENTS TO THE UNFAIR PREFERENCE LAWS?

9 In Re Discovery Books Pty Ltd[2] the liquidator of the company asked that several rental payments made within the relation back period be declared void as preferences. Whilst the company was insolvent and shortly prior to it being wound up, it paid rent due under a lease of its business premises as well as instalments of a premium also due under the lease. The premium had been agreed to on the taking of the lease. Fox J held, applying inter alia Richardson v Commercial Banking Co of Sydney[3], Rees v Bank of New South Wales[4] and Queensland Bacon Pty Ltd v Rees[5], that the effect of the payments was not to give a preference, priority or advantage at the expense of other creditors, as the payments enabled the company to retain the use of its business premises where it carried on business. He observed that if the rent had not been paid the lessor could have taken possession. Applying the cases referred to above, Fox J held it was necessary to consider the effect of the transaction as a whole and not just the immediate effect of the payment and discharge of the debt. He said that as the rent and premium had to be paid to retain possession, the effect on creditors should take into account the benefit the company received through its continued occupation of the premises.

10 Fox J's decision constituted a particular example of the ultimate effect doctrine where the court has regard to the ultimate effect of a transaction on other creditors in assessing whether the particular transaction constitutes a preference, priority or advantage for the purposes of s 122(1)(c) of the Bankruptcy Act 1966 (Cth). Another recognised instance involves the application of the set-off provisions.[6] The ultimate effect doctrine was confirmed by the High Court of Australia in Air Services Australia v Ferrier[7]. Dawson, Gaudron and McHugh JJ said:

If the sole purpose of the payment is to discharge an existing debt, the effect of the payment is to give the creditor a preference over other creditors unless the debtor is able to pay all of his or her debts as they fall due. But if the purpose of the payment is to induce the creditor to provide further goods or services as well as to discharge an existing indebtedness, the payment will not be a preference unless the payment exceeds the value of the goods or services acquired. In such a case a court, exercising jurisdiction under s 122 of the Bankruptcy Act, looks to the ultimate effect of the transaction. Whether the payment is or is not a preference has to be 'decided not by considering its immediate effect only but by considering what effect it ultimately produced in fact'.[8]

As a consequence, a payment made during the six month period cannot be viewed in isolation from the general course of dealing between the creditor and the debtor before, during and after that period. Resort must be had to the business purpose and context of the payment to determine whether it gives the creditor a preference over other creditors. To have the effect of giving the creditor a preference, priority or advantage over other creditors, the payment must ultimately result in a decrease in the net value of the assets that are available to meet the competing demands of the other creditors.[9] [10]

Did the Landlord's Defence survive the 1992 amendments?

11 The unfair preference provisions of the Corporations Act 2001 (Cth) were introduced into the Act's predecessor by the Corporate Law Reform Act 1992 and replaced provisions in the then Corporations Law which incorporated the preference provisions from the Bankruptcy Act 1966 (Cth) to apply to companies.[11] Under the Bankruptcy Act 1966 (Cth), the transaction was required to have the effect of giving a creditor "preference priority or advantage" over other creditors. These words were taken to connote some unfair preference, priority or advantage over other creditors.[12] As indicated above, in forming such a view, the court looked at the "ultimate effect" the transaction had on the financial relationship of the parties and in particular whether the payee received some preference, priority or advantage at the expense of the other creditors.[13]

588FA(1) [What is unfair preference] A transaction is an unfair preference given by a company to a creditor of the company if, and only if:

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

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

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

13 In VR Dye v Peninsula Hotels[14] Ormiston JA (with whom Winneke P and Tadgell JA agreed) said that the 1992 amendments to the unfair preference laws were not intended to make any significantly different provision for identifying what is an unfair preference, except in a few minor respects and except insofar as the sections now appear in the Corporations Law (as it then was).[15] Ormiston JA said that the ultimate effect principle, as recognised by the High Court of Australia in Air Services Australia v Ferrier[16] and Richardson v Commercial Banking Co of Sydney[17] and as applied in Re A and J Lazzarotto Pty Ltd[18], applied to the construction of s 588FA.[19]

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

Consequently, although a number of judges at first instance have expressed different views as to the extent to which the earlier cases may bear upon the proper interpretation of s 588FA, it is not necessary to examine those in detail for in my opinion it is clear that no change was intended to be made to the nature of a preference under the new legislation, whatever other alterations were made to the law.[20]

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

16 The liquidators contend that the word "unfair" as appears in s 588FA does no work and could have been left out. Under s 15AA of the Acts Interpretation Act 1901 (Cth) regard is to be had to the purpose or object of a provision of an Act. In Dye's case, the Court of Appeal considered the purpose or object of s 588FA and concluded the section was still directed against unfair preferences as that expression was understood in the context of s 122 of the Bankruptcy Act 1966.[21] I accept the Court of Appeal's finding and reject the liquidators' contention.

17 The Minister also relies upon Beveridge v Whitton[22], where Heydon JA (with whom Mason P and Powell JA agreed) of the New South Wales Court of Appeal applied the doctrine of ultimate effect to an alleged preferential payment under s 588FA. Heydon JA cited with approval Re Discovery Books.[23] Heydon JA also said the court ought not refuse to follow Dye's case without being convinced it is plainly wrong. He said:

In any event, the court ought not to refuse to follow the decision of the Victorian Court of Appeal in VR Dye & Co v Peninsula Hotels Pty Ltd (in liq) without being convinced that it is plainly wrong: Akins v Abigroup Ltd[24]. The same is true in my opinion of well-considered dicta even if, which is questionable, the statements of the Victorian Court of Appeal can be regarded as obiter dicta. I am far from being convinced that either the decision or the dicta, if that is what they are, were wrong.[25]

18 The Minister also refers to Re Lanpac International Pty Ltd[26] to support his contention that the landlord's defence survived the 1992 amendments where Chernov J considered an unfair preference claim under the amended legislation. He said:

The parties agreed, rightly, I think, that the circumstances which constitute an 'unfair preference' under section 588FA(1) are the same as those which constitute a preference under section 122 of the Bankruptcy Act 1966 (Cth). In other words, if the payment of the two sums in question would not give the respondent a preference, priority or advantage over other creditors (for the purposes of section 122 of the Bankruptcy Act 1966I (Cth)) they are unlikely to be 'unfair preferences' under section 588FA(1).[27]

Chernov JA also cited Re Discovery Books Pty Ltd[28] with approval.[29]

19 The liquidators submit even if the law was not substantially changed by s 588FA, that nevertheless these transactions would not be saved by the ultimate effect principle. In support of that proposition, the liquidators referred to Telecom v Russell Kumar & Sons[30]. Shortly prior to its liquidation, Russell Kumar & Sons Pty Ltd paid Telecom outstanding telephone fees. The liquidator claimed that payment of outstanding telephone fees during the relation back period were preferential payments pursuant to the provisions of s 451 of the Code that incorporated s 122 of the Bankruptcy Act 1966. Telecom's standard conditions entitled it to suspend service when payment for a telephone service was overdue. O'Bryan J rejected Telecom's defence that the payments were made in good faith and for valuable consideration and in the usual course of business. He also rejected the defence that the company's account with Telecom was a running account. O'Bryan J said he had read Re Discovery Books Pty Ltd[31] and observed that no two cases were alike. He said there was a traditional relationship of debtor and creditor between Telecom and the company at all material times. O'Bryan J was not asked to consider the ultimate effect principle other than as part of the running account argument.

20 The liquidators also rely on Sheldrake v Paltoglou.[32] There the Queensland Court of Appeal (de Jersey CJ, McMurdo P and Muir J) considered an appeal by liquidators of a company which conducted a restaurant at Port Douglas. The respondent was the owner of the restaurant premises. A substantial debt had accrued on account of unpaid rent. The company sold the restaurant business for the sum of $185,000. The owner entered into an arrangement with the company under which she granted it a back dated lease and she also consented to an assignment of the lease to facilitate the sale of the business. From the proceeds of the sale of the business, the company paid the owner unpaid rental. The liquidators had unsuccessfully sought from the primary judge, orders under s 588FF of the Corporations Act 2001 (Cth) for repayment of those amounts. The owner submitted that the transaction gave rise to no unfair preference, because of the balancing element of benefit to the company through the owner facilitating completion of the sale of the business and relied on Re Discovery Books Pty Ltd.[33]

21 De Jersey CJ who delivered the lead judgment said:

That case concerned the materially different section 122 Bankruptcy Act 1966 (Cth). In terms of section 588FA of this legislation, it sufficed, for there to be an unfair preference, that in respect to the unsecured debt, the respondent received more than she would receive were she left to prove in the winding up, and that was plainly the position here.

De Jersey CJ made no reference to Dye's case or the ultimate effect principle. Further, he made no analysis of the section or its history. McMurdo P and Muir J agreed with de Jersey CJ without any analysis or reference to Dye's case.

22 The liquidators also refer to Sutherland v Liquor Administration Board.[34] The plaintiff was the liquidator of the Balmain-Rozelle RSL Club Ltd which operated a registered club. The club was authorised to keep poker machines and was liable to pay duty on the profits of those machines. The Liquor Administration Board was authorised to administer the collection of the duty. Whilst insolvent, the club paid arrears of duty to the board. The arrears had been paid when the company was in official management and all duty incurred during the official management through the operation of the poker machines was paid as and when it was accrued. The arrears of tax pre-dated the period when the company was put under official management. Nevertheless, the official manager negotiated the payment of the outstanding tax on an instalment basis. The official manager retired and the instalments were then paid until the company went into administration some six months later. The board argued the debts formed part of a running account and further argued that it could have closed the company's operations down if the arrears had not been paid. Young J of the Supreme Court of New South Wales held that the payment of the arrears was no running account but rather the liquidation of a past debt. He said that the mere fact that the board could have closed the company's operations down did not seem, to him, to be sufficient. He expressly referred to O'Bryan J's decision in Telecom v Russell Kumar & Sons[35] and how O'Bryan J did not consider that fact to be of much weight at all.[36] Young J did consider Air Services Australia v Ferrier[37] and made reference to the ultimate effect principle. He also referred to Richardson v Commercial Banking Co of Sydney Limited[38] and other running account cases.

23 The liquidators refer to and rely on Sands & McDougall v Commissioner of Taxation[39] a decision of the Victorian Court of Appeal comprising Brooking, Charles and Kenny JJA. A company and its liquidators sought to recover as voidable transactions pursuant to s 588FF of the Corporations Law sales tax payments remitted by the company to the Commissioner of Taxation in the six months preceding the commencement of the company's winding up. Amongst the various defences raised by the Commissioner, he alleged that each payment formed part of a continuing business relationship or running account, between the company and the Commissioner, relying on s 588FA(3) of the Corporations Law, so that only the final balance of the account should be considered under s 588FF. Charles JA (with whom Brooking and Kenny JJA agreed) held that a continuing business relationship involving a running account would ordinarily be expected to involve at least two parties linked by a contract, one supplying goods or services to the other on a credit basis, the other paying on a continuing basis both to reduce or extinguish past liability and to ensure continuant of a supply. As the head note states, he found that in the present case, the most that the evidence showed was that occasionally the company sought time to meet its tax obligations and the Commissioner refrained from immediately pursuing his remedy. He held that the disputed remittances did not form part of a continuing business relationship or running account so as to be treated as a single transaction within the meaning of s 588FA(3) of the Corporations Law and each payment was therefore capable of being an unfair preference. Charles JA said that the argument that no running account was involved was supported by the decision of Young J in Sutherland v Liquor Administration Board.[40] He also cited with approval Olifent v WorkCover Corporation of South Australia[41] where a company became insolvent owing monies to the Workers' Rehabilitation and Compensation Corporation. An agreement was reached that the Corporation would allow the company to pay its arrears over 12 months. The company was later wound up, having made a number of such payments. Debelle J held the payments were preferences. After referring to Air Services Australia v Ferrier, Debelle J said that

The payment of levies to the Corporation were not part of a running account or part of a wider transaction which requires regard to be had to the whole transaction. Although there was a continuing relationship between [the debtor company] and the Corporation in the sense that [the company] was a registered employee, the levy payable for each month constituted a separate transaction. Payment of a levy or part thereof would not cause the Corporation to provide any goods or services to [the company] either at the time of payment or at any future time.[42]

24 Charles JA also referred with approval to Telecom v Russell Kumar & Sons Pty Ltd.[43] Charles JA said:

On no view could they (the Commissioner of Taxation and the company) be described as trading partners. The ATO supplied neither goods nor services to the company, nor were the impugned payments made by the company in connection with any subsequent provision of goods or services. The company did indeed seek time to meet its tax obligations, but all the Commissioner gave in return was a willingness not to move immediately to wind up the company or pursue legal remedies for immediate payment of the sales tax debt.[44]

25 These cases raise issues which I will address shortly on whether or not the payment of the royalties were an unfair preference. The cases, perhaps save for Sheldrake v Paltoglou, [45] do not throw doubt on the landlord's defence as set out in Re Discovery Books Pty Ltd[46] and the ultimate effect doctrine as reflected in that case. As indicated above, there was no reference to Dye's case in Sheldrake v Paltoglou.

26 Without in any way seeking to detract or qualify the observations of Ormiston JA in Dye's case, I make the following brief observations on why I consider the ultimate effect principle has not been revoked by s 588FA. It is unlikely that parliament intended to materially alter the preference laws with their 1992 amendments. The explanatory memorandum to the Corporate Law Reform Bill 1992 does not say that parliament so intended. The Harmer Committee decided the policy of the existing law should not be altered.[47] The Harmer Committee did not recommend that any changes be made to the existing principles. The previous legislation did not define what a preference was although it did say its effect should be to give a preference, priority or advantage over other creditors. The High Court of Australia has explained in a long line of cases what this means.

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

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

DOES THE LANDLORD'S DEFENCE APPLY TO THE RENTAL PAYMENTS MADE IN THIS CASE?

29 Ten rental payments were made between 9 January 2001 and 20 February 2001. The receivers and managers and voluntary receivers were appointed on 14 March 2001. It is necessary to give further details of the rental payments. At all material times, Centaur Mining held an interest in mining tenements granted pursuant to the Mining Act 1978 (WA) which partly comprised mining projects known as "The Cawse Project", "The Mount Pleasant Project", and "The Lady Bountiful Project" and in relation to which the disputed rent payments were made.

30 The rental payments were made in accordance with sections of the Mining Act 1978 (WA) and provisions of the Mining Regulations 1981 (WA) to pay to the Minister rent annually in advance (or at least by the expiration of a notice given under regulation 50, that is to say, by no later than three months after the beginning of each year of the term of the rental of the tenement). Regulation 109(4) of the Mining Regulations 1981 provided as follows:

The prescribed rent for a mining tenement for the second and subsequent years of the term of the tenement shall be paid yearly in advance within one month after the anniversary of the date on which the term commenced.

31 The Minister alleges that if the rents were not paid, then, pursuant to ss 96A or 97 of the Mining Act 1978 (WA), each of the tenements could have been forfeited. As a result of each rental payment, Centaur Mining received the benefit of continuing a year's (or alternatively not less than nine months) prospective tenure in respect of the relevant tenement. The allegation that the tenements would have been forfeited is disputed by the liquidator.

32 The Minister further alleges that in the period 31 December to 14 March 2001, the value to Centaur Mining of continuing a year's (or alternatively not less than nine months) prospective tenure of each of the relevant tenements equalled or exceeded that part of the relevant rental payment. As discussed below, in my opinion the burden falls on the liquidators to establish that this would not be the case if they so wished to allege.

33 Evidence was given to the Court on the procedure for payment of rent. The Department gave notices to each mining tenement approximately one month before the anniversary date of its mining tenement. If the rent was not paid when due, the Department would send to the tenement holder a notice of intention to forfeit under which the Department gave notice to the tenement holder that they had 30 days from the date of the notice to pay the rent and, failing payment, then forfeiture action would be instituted. There is no evidence to suggest that in respect to the disputed rental payments they were paid otherwise than when due, and I proceed on that basis.

34 As indicated, the rental payments were paid in advance in exchange for the right to occupy and mine the mining tenements. The purpose of the payments was to secure an asset for the benefit of Centaur Mining. In Air Services Australia v Ferrier,[48] Dawson, Gaudron and McHugh JJ said as follows:

Thus, where the payment is a step in a wider transaction, 'its actual business character must be seen and when it forms part of an entire transaction which if carried out to the intended conclusion will leave the creditor without any preference, priority or advantage over other creditors, the payment cannot be isolated and construed as a preference.'[49] If the purpose of the payment is to secure an asset or assets of equal or greater value, the payee receives no advantage over other creditors. The other creditors are no worse off and, where the value of the assets has increased, they are actually better off. Thus, a debtor does not prefer a creditor to the other creditors[50] if he or she pays a debt, or part of a debt, to induce the creditor to supply goods of equal or greater value than the amount of the payment. In that situation, it is of no relevance that the debt that is discharged happens to be a stale one.[51] If the present value of the goods supplied is equal to or greater than the payment, the other creditors are no worse off.[52]

35 Adopting those words, the purpose of the payment in this case was to secure an asset or assets of equal or greater value than the rental payment. In those circumstances, the High Court has said the payee receives no advantage over other creditors and the payment is not an unfair preference. As noted above, the High Court in this passage cited Re Discovery Books[53] as authority for this proposition.

36 The evidence concerning what the Minister may or may not have done in the event of the non-payment of rent is of some relevance, but is not, in my opinion, determinative of the matter. It is clearly relevant in considering the business consequences of not making the payment.[54] As the High Court said in Air Services Australia v Ferrier:

To have the effect of giving the creditor preference, priority or advantage over other creditors, the payment must ultimately result in a decrease in the nett value of the assets that are available to meet the competing demands of the other creditors.[55]

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

DOES THE LANDLORD'S DEFENCE APPLY TO THE ROYALTY PAYMENTS?

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

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

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

41 The three disputed royalty payments are as follows:

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

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

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

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

45 For example, in Telecom v Russell Kumar & Sons,[56] O'Bryan J found that a payment of an outstanding telephone account to Telecom to avoid the phone being disconnected was nevertheless a preference. The ultimate effect defence was not expressly raised and his Honour was only considering the matter in the context of an alleged running account. Nevertheless, as indicated above, his Honour made express reference to Re Discovery Books Pty Ltd[57]. In Sheldrake v Paltoglou,[58] the Queensland Court of Appeal found that the payment of arrears of rent on a restaurant to the landlord to allow the company to assign a lease to a purchaser of the restaurant business was nevertheless an unfair preference. It could be argued in that case, that the ultimate effect of the transaction was to protect and preserve the value of the restaurant business for the benefit of creditors. In Sutherland v Liquor Administration Board,[59] Young J of the New South Wales Supreme Court held that payment by the insolvent company of outstanding poker machine taxes was an unfair preference, even though their non-payment may have led to the company's loss of their use and a significant diminution of the value of the assets otherwise available to creditors. In Sands & McDougall v Commissioner of Taxation,[60] the Victorian Court of Appeal held that payment of outstanding sales tax to the Commissioner of Taxation to avoid the Commissioner taking proceedings to wind up the company was nevertheless a preference. In Olifent v WorkCover Corporation of South Australia,[61] Debelle J of the Supreme Court of South Australia held that WorkCover payments made by an insolvent roofing company were preferences. Debelle J considered both a running account defence and that payment was part of a wider transaction which requires regard to be had to the whole transaction. Debelle J observed that payment of the levy would not cause the WorkCover Corporation to provide any goods or services to the company.

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

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

48 Which argument is correct? As discussed above, Air Services Australia v Ferrier makes clear the meaning of preference priority or advantage over other creditors as that expression is used in s 122 of the Bankruptcy Act 1966. The effect of the payment to the creditor is judged by reference to its effect on other creditors. If the effect is that the nett assets are not decreased, despite the payment to the creditor, then the other creditors have not been disadvantaged by the transaction as a whole. Accordingly, the payment to the creditor has not had the effect of giving that creditor a preference, priority or advantage over other creditors. In other words, the position of the other creditors is assessed before and after the transaction. If they are no worse off, then the payment does not constitute an unfair preference. In Air Services Australia v Ferrier,[62] the majority said:

To have the effect of giving the creditor a preference, priority or advantage over other creditors, the payment must ultimately result in a decrease in the nett value of the assets that are available to meet the competing demands of the other creditors.[63]

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

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

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

HAS THE MINISTER ESTABLISHED SUFFICIENT FACTS TO SUCCEED ON THE LANDLORD'S DEFENCE?

51 The onus lies on the liquidators to make out their case that the payments constituted unfair preferences. The Minister has not pleaded any of the statutory defences but has denied that the payments are unfair preferences and raises the landlord's defence in support of that. The Minister accepts, however, it bears the evidentiary onus in relation to some aspects of the matter. In my view the Minister bears the evidentiary onus of raising the fact that the transactions and their affects went beyond merely payment of outstanding debts. He has done that.

52 The liquidators have put forward a list of factual matters which they contend require resolution. Before turning to those matters, I should set out that which the Minister has established to my satisfaction. The Minister has established which payments relate to rent and which payments to royalties. He has established that the payment of rental and royalty payments secured the mining tenements. It is likely, in view of the value for which the mining project was sold and in view of the value evidence of the expert, Mr Carville, that the tenements had significant value in any event in excess of the rental and royalty payments. The Minister has established that it is likely that the mining tenements could not be sold and transferred without any outstanding royalties being paid. The liquidators have not established that the value of the tenements was in fact less than the rent and royalty payments.

53 In Re Discovery Books Pty Ltd,[64] Fox J said, after considering examples of the ultimate effect, as follows:

The question which is one of fact in each case, is whether the business or commercial effect in the bankruptcy, of the payment or other disposition was to give one creditor a preference, a priority or an advantage over other creditors. There must be cases where the relevant effect of a payment or other dealing is unclear; in those cases the onus on the official receiver or liquidator may be crucial.[65]

54 Bearing in mind the onus lies on the liquidators to establish the transactions did affect an unfair preference, in my view, the liquidators have not established that any of the payments were an unfair preference. After reviewing the list of factual matters which the liquidators contend require attention, in my view, I have decided those matters that require to be decided to dispose of the liquidators' claim.

55 For the reasons set out, I conclude that the landlord's defence is available to meet the allegation that the payments for rent and royalties were unfair preferences. Accordingly, I dismiss the plaintiff's claim with costs.

I certify that this and the 2422 preceding pages are a true copy of the reasons for Judgment of Justice Robson of the Supreme Court of Victoria delivered on 15 October 2008.

[1] New rules introduced by Corporate Law Reform Act 1982 (Cth)

[2] (1973) 20 FLR 470.

[3] [1952] HCA 8; (1952) 85 CLR 110.

[4] [1964] HCA 47; (1964) 111 CLR 210.

[5] [1966] HCA 21; (1966) 115 CLR 266.

[6] See A and J Lazzarotto Pty Ltd (unreported, FC SCV, Young CJ, Lush and Fullagar JJ, 16 December 1977, annexed to Jetaway Logistics [2008] VSC 397

[8] Rees v Bank of New South Wales [1964] HCA 47; (1964) 111 CLR 210 at 221-222

[9] Cf Re Discovery Books Pty Ltd (1973) 20 FLR 470 at 475, per Fox J: "One must ultimately come back to considering whether by reason of the payment, or dealing, there is less money available for the general body of creditors

[11] See history discussed in V R Dye v Peninsula Hotels [1999] VSCA 60; [1999] 3 VR 201

[13] Airservices Australia v Ferrier (1996) 185 CLR 483 per Dawson, Gaudron and McHugh JJ at 509

[14] [1999] VSCA 60; [1999] 3 VR 201.

[17] (1952) 85 CLR 100.

[18] (Unreported, FC FCV, Young CJ, Lush and Fullagar JJ, 16 December 1977, annexed to Re Jetaway Logistics [2008] VSC 397.

[19] [1999] VSCA 60; [1999] 3 VR 201 at [38]

[21] [1999] VSCA 60; (1999) 3 VR 201 at [33]

[22] [2001] NSWCA 6.

[23] (1973) 20 FLR 470.

[24] (1998) 43 NSWLR 539 at 547.

[26] [1998] VSC 9.

[28] (1973) 20 FLR 470.

[29] [1998] VSC 9 at [43]

[30] (1992) 10 ACSR 24.

[31] (1973) 20 FLR 470.

[32] [2006] QCA 52.

[33] (1973) 20 FLR 470.

[34] (1997) 24 ACSR 176.

[35] (1992) 10 ACSR 24.

[38] [1952] HCA 8; (1952) 85 CLR 110.

[39] [1998] VSCA 76; [1999] 1 VR 489.

[40] (1997) 24 ACSR 176.

[41] (1996) 15 ACLC 47; 135 FLR 423.

[42] [1991] 1 VR 489 at [48].

[43] (1992) 10 ACSR 24 at 29-30.

[44] [1991] 1 VR 489 at [46].

[45] [2006] QCA 52.

[46] (1972) 20 FLR 470.

[47] The Law Reform Commission Report No 45 Volume 1 para 632.

[49] Richardson's case [1952] HCA 8; (1952) 85 CLR 110 at 132

[50] Richardson [1952] HCA 8; (1952) 85 CLR 110 at 133; Queensland Bacon [1966] HCA 21; (1966) 115 CLR 266 at 284; Re Weiss [1970] ALR 654 at 658; Re Discovery Books (1972) 20 FLR 470 at 475; M & R Jones Shopfitting Co Pty Ltd (in liq) v National Bank of Australasia Ltd (1983) 68 FLR 282 at 289; CSR Ltd v Starkey (1984) 13 ACSR 321 at 325

[51] Re Weiss [1970] ALR 654 at 658

[53] (1972) 20 FLR 470 at 475

[54] See Richardson's case [1952] HCA 8; (1952) 85 CLR 110 and Queensland Bacon [1966] HCA 21; (1966) 115 CLR 266

[55] Cf Re Discovery Books Pty Ltd (1973) 20 FLR 470 at 475 per Fox J: "One must ultimately come back to considering whether by reason of the payment, or dealing, there is less money available for the general body of creditors."

[56] (1902) 10 ACSR 24

[57] (1973) 20 FLR 470

[58] [2006] QCA 52

[59] (1997) 24 ACSR 176

[60] [1998] VSCA 76; [1999] 1 VR 489

[61] (1996) 135 FLR 423

[63] Cf Re Discovery Books Pty Ltd (1973) 20 FLR 470 at 475, per Fox J: "One must ultimately come back to considering whether, by reason of the payment, or dealing, there is less money available for the general body of creditors". Ibid 502

[64] [1972] 20 FLR 470