R W Whitton v Acn 003 266 886 P/L [1996] NSWSC 534

[28]

When Mr Whitton received his two appointments on 8 March 1995 Boswell Printing was conducting an active printing business, with a number of employees, and the business continued to be conducted under Mr Whitton's control until he sold the business on 27 April 1995. On 8 March 1995 the business had a number of employees, some of whom had been in employment for periods of up to 15 years, and they continued to work in the business until Mr Whitton terminated their employment on the day he sold the business. Mr Whitton paid all wages which fell due for payment between 8 March and 27 April (and wages which fell due on the first pay day after 8 March included wages for three days before 8 March) and he also paid all employees their annual leave entitlements in respect of their employment from 8 March to 27 April. There are no unpaid wages, but employees have not been paid by anybody in settlement of annual leave entitlements in respect of their employment up to 8 March 1995, Long Service Leave entitlements for any period or entitlements to severance pay on retrenchment at the conclusion of their employment on 27 April. Employees may have entitlements of various kinds to these payments; Mr Whitton may have become the transmittee of the business of Boswell Printing, and may have entered into a direct employment relationship with employees himself; he may have become liable for employees' entitlements under s.419 of the Corporations Law, or he may have become liable for some or all of their claims on the basis of his not having complied with s.433 of the Corporations Law which requires him to pay several classes of preferred creditors, including employees, out of assets of the company subject to a floating charge. The second defendant Mr Wood was joined as a party so as to represent the interests of employees, but he did not take up this responsibility. The third defendant Mr Lewington was joined as a party to represent the interests of one class of employees and the fourth defendant Ms Horner was appointed to represent the interests of another class of employees. It appears that those representing Ms Horner took the view that the questions to be determined by me did not require consideration of the respects in which the interests which she represents differ from the interests represented by Mr Lewington, so they did not take part in the hearing.

[152]

Floating charges are a creation of commercial ingenuity and judicial laisser faire in the Nineteenth Century. As legislation removed the predominating power which older methods of enforcement had conferred on creditors, judicial recognition greatly enhanced the power available to financiers of businesses. Floating charges are now prominent features of the raw deal which, according to Lord Templeman, unsecured creditors receive: see Border (U.K.) Ltd v. Scottish Timber [1981] Ch 25 at 42. The first judicial recognition of a floating charge is attributed by text writers to In Re Panama, New Zealand, and Australian Royal Mail Company (1870) LR 5 Ch App. 318 where Gifford LJ, apparently the only member of the Court of Appeal in Chancery, considered a series of mortgage debentures by which the company was expressed to charge "... undertaking, and all sums of money arising therefrom, and all the estate, right, title, and interest of the company therein". Gifford LJ interpreted "undertaking" as having reference to both present and future property and said at 322: "And I take the object to meaning of the debenture to be this, that the word `undertaking' necessarily infers that the company will go on, and that the debenture holder could not interfere until either the interest which was due was unpaid, or until the period had arrived for the payment of his principal, and that principal was unpaid. I think the meaning and object of the security was this, that the company might go on during that interval, and, furthermore, that during the interval the debenture holder would not be entitled to any account of mesne profits, or of any dealing with the property of the company in the ordinary course of carrying on their business. I do not refer to such things as sales or mortgages of property, but to the ordinary application of funds which came into the hands of the company in the usual course of business." By about 30 years later it seems that floating charges had become well known and were created in more explicit language which did not leave so much a burden on the interpretation of the word "undertaking". Lord Macnaghten made what came to be regarded as classic statements in that period. His statement in Governments, Stock and Other Securities Investment Co. Ltd v. Manila Railway Co. Ltd [1897] AC 81 at 86 said of a floating charge: "It is of the essence of such a charge that it remains dormant until the undertaking charged ceases to be a going concern, or until the person in whose favour the charge is created intervenes." In Illingworth v. Houldsworth [1904] AC 355 at 358 Lord Macnaghten again gave a definition and included these words: "... a floating charge ... is ambulatory and shifting in its nature, hovering over and so to speak floating with the property which it is intended to affect until some event occurs or some act is done which causes it to settle and fasten on the subject of the charge within its reach and grasp." In the same case in the Court of Appeal - Re Yorkshire Woolcombers Association Ltd [1903] 2 Ch 284 at 294-295 Romer LJ set out three characteristics of a floating charge in language which was less figurative and seemed more precise.

[173]

I mentioned elsewhere the apparent anomaly that the proceeds in money of collection of book debts are the subject of a floating charge whereas they represent the conversion into money of an asset over which the chargee had a present and specific interest. Of a greater significance, and at a deeper level than appearance is the anomaly that the book debts which according to the parties' designation are not subject to a fixed charge are placed within the chargeor's control and at its disposition to the extent that the chargeor has authority conferred by cl.3.5 to collect the book debts, and immediately on their collection the chargeor has the advantage that their proceeds are at its own disposition, not subject to a fixed charge, but subject to a floating charge and, of course, to the restriction that they may only be dealt with in the ordinary course of business. It was to this anomaly that Mr Lewington's counsel directed much attention, and although he made many other observations in relation to this subject, I am of the view that this is the only point at which there is a substantial question raised about whether the parties' characterisation of the charge over book debts as a fixed charge is correct. Counsel made many observations directed to the interaction between the Deed of Charge and the Receivables Discount Facility, and other documents in the scheme, but in my opinion the characterisation of the charge created by the Deed of Charge is not in truth assisted by consideration of any of the other documents. The apparent contemplation of the parties that the documents would all act together, at least in the beginning, and that while they act together many and probably most book debts would soon pass out of the range of operation of the Deed of Charge, casts no real light on what that operation was. Nor did I feel much assisted by references to English decisions in which courts addressed, in some cases upheld and in some cases repelled, endeavours to establish the character of charges by documents which were strange and artificial constructs.

[221]

The principal line of argument began with a submission that the appointment and entry of the agent for the mortgagee into possession of a business with power to conduct it, where he does conduct it, brings about termination of existing employment contracts of the company. This contention was said to be supported by the decision of the Court of Appeal of England in Reid v. Explosives Co. Ltd (1887) 19 QBD 264. In that case the contention of the plaintiff was that on the appointment by the Court of a receiver and manager the plaintiff's employment contract continued. The Court held that it was then terminated without the contractual notice, but that no damage was suffered as thereafter the plaintiff actually continued in office and was paid for more than the contractual period of notice. There was of course no contention that the receiver and manager had become the employer. Lord Esher MR reasoned from the case of an employer who shut up business without giving an employee contractual notice, which would amount to wrongful dismissal and give the employee a right of action. He went on at p.267 to apply the same conclusion where one or several mortgagees took possession of the business on the failure of the mortgagor to comply with the terms of the mortgage. It must respectfully be said that his Lordship's reasons do not explain in any clear way how the two situations resemble each other; shutting up business and leaving the employee with no employment to attend is a very different situation to suffering the company's affairs to pass into the management of a receiver and manager and continuing to employ the employee under that new control. It should be noted from p.265 that the jury expressly found that the plaintiff after the appointment of the manager was not in point of fact in the employment of the manager, but continued in that of the company. Lord Esher does not seem to have appreciated that this had been so found as his expressions at the foot of p.267 and the top of p.268 seem to proceed on the basis that after employment of the manager the plaintiff passed into the employment of the manager, and the ground on which the plaintiff was not entitled to damages was that he suffered no damage from the wrongful dismissal because he had had other employment with the same salary for the six months period of notice which he should have received. Fry LJ reached the same conclusion for reasons which he expressed differently, and said at 269: "I am not prepared to lay down that every entry by a mortgagee is a dismissal of the servants of the mortgagor on his employment. I think to see whether that has happened we should look to the facts in each case. But in the present case I think the facts shew that the entry did determine the service of the plaintiff and was a dismissal, which by the terms of the agreement was wrongful." Lopes LJ disposed of the matter in a very few words. Nothing in the judgments, and to my reading nothing in the report explains why, when the business continued under the control of the receiver and manager, his appointment worked a dismissal on the facts of that case. I would have thought that a dismissal would be brought about only if the receivers and managers dismissed the plaintiff, or if there were some repudiatory conduct which the plaintiff accepted. There does not seem to be any expressed basis in the reasons for either of those conclusions.

[235]

In s.419(1) it is not sufficient to support a conclusion that an agent incurred a debt in the course of the receivership that the debt became due for payment while he was a receiver, nor is it necessarily sufficient that some of the acts or events constituting entitlement to the debt, whether or not they were the final precipitating acts or events, were acts of or were caused by the receiver. For both Long Service Leave liabilities and redundancy liabilities, the company was, by 8 March 1995 in a position where, with the exception of relatively rare events which the company did not control such as misconduct of employees, it was inevitable that a liability would fall in at some time with the maturity of a chain of events which had already been in course for a period of some years, and in view of the company's financial difficulty that could well happen soon. Liability for Long Service Leave would fall in with the grant of leave or termination of employment, and liability for redundancy payment could be expected to fall in ordinary circumstances, on the termination of employment; and while the exact times at which these events would happen were to a considerable extent under the influence of whoever was in control of the company's affairs, it was fair certainty that they would fall in at some time, and quite likely that that would be soon if the company could not avoid default. They would fall in if the company closed down or sold its business, but if the company did not close down or sell its business, it could be expected with a high probability that they would fall in at some time. Mr Whitton was in control as agent for the mortgagee for the last 50 days before the termination of employment, and the sale of the company's business by him as agent for the mortgagee was itself the result of a chain of events which were largely the acts of others, including the original financing, granting the mortgage and the circumstances which led to default. Although the final and precipitating events were his acts as agent for the mortgagee, it should not, in my finding, be found that the Long Service Leave liabilities and redundancy liabilities were incurred by him. Mr Whitton took a relatively small part in the whole array of acts and conduct which brought about their payability, and, with fair certainty, the company was committed to their becoming payable at some time whether or not Mr Whitton had ever been appointed or had ever done anything.

R W Whitton v Acn 003 266 886 P/L [1996] NSWSC 534 - NSWSC 1996 case summary — Zoe

At a glance

Court

Decision date

Before

Source

Judgment (255 paragraphs)

R W Whitton v Acn 003 266 886 P/L [1996] NSWSC 534 (8 November 1996)

Parties

Legislation Cited (10)

Cases Cited (4)