Re KL Tractors Ltd [1961] HCA 8

The proceeding before the Court consists in an application by a creditor in a winding-up to a judge of the Supreme Court of Victoria for an order expunging the proof of debt of the Commonwealth; the proceeding being removed into this Court by an order made pursuant to s. 40 of the Judiciary Act 1903-1959 Cth. The matter came into the list as the result of earlier proceedings beginning in the Supreme Court and transferred or treated as transferred into this Court but as the initial proceeding as well as its subsequent course was of doubtful sufficiency or correctness the parties took the step of superseding the earlier proceedings by the summons and transfer first referred to and they call for no further mention until the order for costs is reached. The summons was issued under r. 96 of the Rules of the Supreme Court under the Companies Act 1938 Vict., a rule which enables the Court to expunge a proof of debt upon the application of a creditor if the liquidator declines to interfere. The proof the expungement of which is sought is by the Commonwealth of Australia for the sum of £144,786 12s. 7d.: it was admitted by the liquidator in full to rank as an unsecured debt. As to £107,975 11s. 7d. of this sum the Commonwealth had treated it as a debt for the purpose of basing thereon a petition for the compulsory winding-up of the company. The petition was opposed but on 6th May 1954 O'Bryan J. in the Supreme Court of Victoria made a winding-up order [1] . The creditor now applying to expunge the proof by the Commonwealth is the E. S. & A. Bank. The advantage to other creditors of the rejection of a proof for so large a debt as the Commonwealth claims is of course evident but in addition to that consideration it is a fact that if the Commonwealth is entitled to the priority of the Crown for its debt the assets will not suffice to cover it and there will be nothing left for other creditors.

The debt to the Commonwealth which is in question is for the balance of account for goods sold and delivered to the company from three ordnance or munitions factories or establishments operating for or on behalf of the Commonwealth and for work and labour done there and for materials for the same provided. The dates between which the goods were sold and delivered, the work and labour was done and the materials were provided were from 22nd April 1948 to 27th April 1954. The factories were the Commonwealth Annexe at Alexandria, N.S.W., the Commonwealth Ordnance Factory at Maribyrnong, Victoria, and the Commonwealth Ordnance Factory at Bendigo, Victoria.

The goods in question were gears and gear boxes and incidental parts and accessories which the company incorporated in tractors and agricultural machines produced by the company for peaceful uses. The application to expunge the Commonwealth's proof is based upon the thesis that during the period between the dates set out above the use of the factories for the manufacture, production and sale of civilian goods of the descriptions stated was outside the legal competence of the Executive Government of the Commonwealth - it could not be referred to the defence or any other power - and accordingly the moneys claimed for the goods and services to the company could not be recovered by the Commonwealth or proved for.

Needless to say, the factories developed into huge undertakings during the war and at the end of actual hostilities the scale at which they should be maintained and the purposes for which they should be kept in operation presented a problem. It was a problem depending not only upon the economic difficulties attending the transition of a community from a war footing to a peace-time economy but also upon the future requirements of the armed services and upon the needs of the Commonwealth in peace for engineering equipment. Again, the state of international relations and the emergencies that might be feared could not be left out of consideration. These were of course matters affecting policy but they serve to explain what was done. The factories were not closed; work concerned with the requirements of the armed forces was continued; work for civilian requirements of government was undertaken and continued but it was considered necessary to go further in order to keep up an adequate staff and train men or familiarize men with work of a kind which would fit them for munitions production if a pressing demand again should arise for munitions of war and to keep in being a trained and experienced management. Accordingly the factories undertook civilian work from outside and entered into extensive contracts for the production of certain things for civilian use. It is not necessary to distinguish in detail between the three factories mentioned, but while the two in Victoria were directly operated departmentally, the annexe in New South Wales was operated by a company under contract with the Commonwealth. The work done, however, in the annexe was executed on behalf of the Government, so that in the proof of debt the goods supplied and the work done are as much goods supplied and work done by the Commonwealth as are the goods and work supplied and done by the two Victorian establishments. The history of the provisions of statute and of National Security Regulations governing the administration of the factories need not be traced. It is enough to mention the National Security (Munitions) Regulations, S.R. 1940 No. 111 and its amendments, replaced as we neared the conclusion of hostilities by Munitions Regulations, S.R. 1945, No. 84, which in turn was replaced by Supply and Development Regulations, S.R. 1949 No. 59, made under the Supply and Development Act 1939-1948.

It seems clear enough that so far as these sources of statutory authority go, provided the Minister considered it to be in the interests of defence to do so, he might authorize the acceptance of the contracts or orders from K. L. Tractors Ltd. at any time between the beforementioned dates and the performance of the contracts or the execution of the orders. "In the interests of defence" is a vague and elastic phrase embodying a notion of wide application and there is no need to treat the Minister as having misapplied his statutory discretion. What happened was that the three munitions factories undertook the work from K. L. Tractors Ltd., executed it, delivered the goods to that company and claimed payment. The company over the years, it is needless to say, made many payments on account of the goods supplied by the factories. The company incorporated the gears and the gear boxes in their tractors and agricultural machines which were disposed of in the ordinary course of trade. However, at length the company fell hopelessly into arrear in its payments and on 16th July 1953 the Commonwealth presented a petition for winding-up. Although the company contested the petition it did not take the ground that the debt to the Commonwealth had not been incurred: it was not suggested that the Commonwealth was under a constitutional incapacity to become the creditor. The application to expunge the proof of debt lodged by or on behalf of the Commonwealth and admitted by the liquidator is, however, based upon the ground that constitutionally the whole transaction fell outside the province of the Commonwealth.

It is necessary to see exactly what this contention means. It is not a case where the valid operation of some statute, regulation or other instrument purporting to prescribe the conduct of persons or affect their liberties or rights and duties is in question. It is not a case where any governmental power or authority over the individual is asserted by or on behalf of the Commonwealth. No question arises under s. 81 or s. 83 of the Constitution nor does any such question of Commonwealth expenditure of money arise as was incidentally discussed in Attorney-General (Vict.) v. The Commonwealth [1] . There is no doubt that the establishment and maintenance of the munition factories are within the purposes of the Commonwealth: it is the manufacture there and sale of the gears and gear boxes for civilian or commercial disposal and use that is said to be beyond any purpose of the Commonwealth. The view which in Attorney-General (Vict.) v. The Commonwealth [1] Starke J. took in his dissenting judgment of the manufacture of civilian clothing in peace-time, the view that it was not conceivably incidental to defence power, is in effect that put forward with respect to the possibility of that power extending at the material times to the production for civilian use of gears and gear boxes under contracts or orders made or given commercially. In the present case the facts perhaps tend somewhat more strongly against the application of the view adopted by the majority of the Court in that case to the manufacture of articles in order to fulfil or meet the civilian orders of K. L. Tractors Ltd. For the facts show a more complete devotion of the factories to the civilian purpose, a greater departure in the work of the factories from the description of work probably forming the subject of future military requirements. On the other hand the need for keeping defence establishments in a state of readiness may be more fully recognized at the present day than it was in 1935. But it seems unnecessary to inquire further into the question whether the civilian production in question should be regarded as reasonably incidental to the authority of the executive government in reference to preparedness for defence. For that does not seem necessarily to be involved in the basis upon which the proof of debt rests. The Commonwealth is here claiming for the cost of goods and, to a minor extent, services which the Commonwealth in fact supplied. In fact the labour to manufacture the goods and perform the services was paid for out of moneys of the Commonwealth covered in fact by parliamentary appropriation. So was the raw material used. (There were exceptional cases where the work was done upon material or things provided by the company but that need only be mentioned for accuracy.) The objection made is that in the demarcation of powers between States and Commonwealth the power to do all this must on a proper appreciation of the matter be considered to fall to the Crown in right of a State or States and not in right of the Commonwealth. Therefore, it is argued, the moneys representing the goods and services in fact supplied by the Crown in right of the Commonwealth cannot be recovered. It is not a question of a corporate body or a body politic resisting the enforcement of an obligation on the ground that to incur the obligation was beyond the powers of the corporation or of the body politic. It was of course entirely within the corporate powers of the company to incur the debt by acquiring the goods and taking the benefit of the services; it was part of its trade or business. But what is claimed is that the company need not pay for them because the Commonwealth in supplying them exceeded the limits of its constitutional "powers". The word "powers" here really means "capacity", for we are dealing with the "capacity" or a "faculty" of the Crown in right of the Commonwealth. Had the company received the money of the Commonwealth for purposes outside the province of the Commonwealth, that would have been considered a reason for paying it back rather than for making it irrecoverable. In fact the money was applied in the manufacture of goods which at all events for the most part if not in every case became when produced the property of the Commonwealth in point of law. For no support in constitutional principle can be found for the suggestion that the Crown in right of the Commonwealth rested under such an unqualified legal incapacity even to acquire raw material or employ servants or agents if the ultimate end was the manufacture and supply of clutches to the company that the servants or agents could not be considered to have been employed by the Crown or the raw material to have become the property of the Crown. Is it possible for the purchaser of goods to resist payment on the ground that in producing and selling them to him the Commonwealth exceeded the limits of the province assigned to it by the Constitution? There is no decided case upon constitutional limitations which suggests such a doctrine. Nor, if the analogy be at all appropriate, does there appear to be any decided case in the law of ultra vires, whether of companies or of other corporations, which suggests that the company or corporation cannot recover the price of goods it has sold and delivered or of services it has rendered because it exceeded its powers in selling the goods or giving the services. The correct view seems to be that this amounts to an inversion of the whole doctrine: cp. The Effect of an Unconstitutional Statute by Oliver P. Field (1935) p. 215; Doctrine of Ultra Vires by H. A. Street (1930) p. 28; Modern Company Law by L. C. B. Gower, 2nd ed. (1957) p. 91.

1. (1945) 71 C.L.R. 237, at pp. 250, 256, 265, 266, 268, 273-275, 281, 282. 2. (1935) 52 C.L.R. 533.

For these reasons the debt should be held to have been incurred and the summons to expunge the proof should be dismissed. What Mr. Colman, counsel for the liquidator, described as the second substantial question in the case arises on the liquidator's summons consequentially on its being held that the Commonwealth has a debt provable in the winding-up. That debt is of course a debt due to the Crown in right of the Commonwealth, and the Commonwealth claims that it is entitled in respect of that debt to priority over all other creditors: In re Henley & Co. [1] ; New South Wales Taxation Commissioners v. Palmer [2] .

1. (1878) 9 Ch. D. 469, at pp. 481, 482. 2. [1907] A.C. 179.

The general rule is well established: see Federal Commissioner of Taxation v. Official Liquidator of E. O. Farley Ltd. [1] , per Starke J. [2] , per Dixon J. [3] . The priority of the Crown is not affected by s. 156 (3) or by s. 262 of the Companies Act 1938 Vict., whether the latter section is construed as relating to priorities or not: In re Oriental Holdings Pty. Ltd. (in liquidation) [4] . But the argument for the creditors other than the Commonwealth was that the priority does not apply in respect of mere "trading" or "commercial" debts due to the Crown. It exists, it was said, in relation to debts owing by virtue of an exercise of legislative or executive power by the Commonwealth, but not in relation to debts arising out of ordinary commercial contracts. Thus it would apply in relation to a debt for income tax or land tax, but not in relation to a debt for the price of goods sold and delivered. The argument was supported by reference to what was said by Lord Shaw in Food Controller v. Cork [5] .

1. (1940) 63 C.L.R. 278. 2. (1940) 63 C.L.R., at p. 294. 3. (1940) 63 C.L.R., at pp. 301, 302. 4. [1931] V.L.R. 279. 5. [1923] A.C. 647, at pp. 665-668.

The observations of Lord Shaw are, of course, entitled to the greatest respect, but they were dicta only: his Lordship expressly said that he was "merely reserving the point". The distinction which it was sought to draw does not appear to have any foundation in theory. According to all the statements of the rule, it depends not on the nature of the origin of an obligation, but on the mere facts that there is a debt, and that the creditor is the Crown and the competing creditors are subjects. Except so far as the matter may be affected by statute, the Crown does not lose its character as the Crown by entering into a contract for the sale of land or goods. The distinction seems moreover to be incapable of practical application, and the question in the present case must be answered by saying the Commonwealth debt has priority over the debts of the other creditors.

In all the circumstances the costs of all parties of the proceedings not only under the summons by the E. S. & A. Bank but also under the summons by the liquidator both in the Supreme Court and this Court should be treated as costs in the liquidation and paid out of the assets.

I agree with the judgment which has been delivered, and I wish to add only a few words.

The argument before us ranged over a fairly wide field, but the case for the creditors other than the Commonwealth rested on one ultimate and essential point, and with that point only does it seem necessary to deal. On that point those creditors must, in my opinion, fail.

Substantially the claim of the Commonwealth in the winding up of the company is a claim for the price of goods sold and delivered by the Commonwealth to the company. By way of answer to that claim it is said that the goods were manufactured and delivered by the Commonwealth to the company in pursuance of contracts which it was beyond the constitutional powers of the Commonwealth to make. Those contracts, it is said, were void ab initio, so that they gave no enforceable rights to either party. And it is said to follow that nothing can be claimed by the Commonwealth in respect of the goods, although they were delivered to, and accepted by, the company. This represents perhaps a simplification of an argument which was put in a variety of ways, but it is, I think, the way in which it was finally put, and I think it is the only way in which it can be put.

It may be assumed (though it could obviously not be decided on the material before us) that the questioned activities of the Commonwealth were such that the Attorney-General of a State, proceeding of his own motion or ex relatione, could have obtained the relief which was refused in Attorney-General (Vict.) v. The Commonwealth (the Clothing Factory Case [1] ). It may be assumed too that it follows that, while any of the relevant contracts was executory, neither party could enforce it against the other. That it could not be enforced by the company against the Commonwealth may be taken to have been decided in Ashbury Railway Carriage Co. v. Riche [2] . And it would seem to follow that it could not, while executory, have been enforced at law by the Commonwealth against the company. (We can imagine, but we need not pause to consider, circumstances in which some equitable relief might be sought and had: cf. Sinclair v. Brougham [3] ). But, even if we make all the necessary assumptions, the consequence asserted by the final step in the argument for the creditors does not, in my opinion, follow. Suppose that the contracts in the present case were void in the first place. It is not a consequence that the company, having accepted the goods delivered to it, is not bound to pay for them.

1. (1935) 52 C.L.R. 533. 2. (1875) L.R. 7 H.L. 653. 3. [1914] A.C. 398.

The so-called doctrine of ultra vires was evolved for the protection of corporations of limited capacity and of their corporators, not for the advantage of persons who deal with corporations of limited capacity. It is because of this that persons who deal with such a corporation are said to be put upon inquiry as to the powers of the corporation. The concern of the law is that the moneys or other property of a corporation shall not be transferred into other hands by an unauthorized act of the corporation, and that, if such an unauthorized transfer does take place, the corporation shall, so far as possible, be saved from incurring loss thereby. It is consistent with this policy of the law that, if a corporation makes an ultra vires borrowing, the lender should be unable to recover his money at law: Baroness Wenlock v. River Dee Co. [1] . It would be entirely inconsistent with it that, if a corporation makes an ultra vires lending, the borrower should be able to maintain that he was never indebted. It may indeed be said that, if a borrower is bound to repay an intra vires loan, he is, in a sense, a fortiori bound to repay an ultra vires loan. I should think it clear that, if a corporation made an ultra vires loan in terms repayable at the end of three years, it need not wait for the expiration of the three years but could sue for repayment at any time.

The above considerations make it clear, I think, that to accede to the argument of the creditors in this case would be to act not in conformity with, but rather in violation of, the true intent and purpose of the rule that a corporation is not bound by a promise which it had no power to make. The claim of the Commonwealth is for goods sold and delivered. The company has accepted the goods and had the benefit of them, and there is no reason why it should not pay for them.

It may seem curious that there is so little in the books bearing directly on the argument now raised. But a not uncommon reason for dearth of direct authority on a point is that there has been a general consensus of opinion that the point is not tenable. It may be mentioned that a similar point was taken and was rejected by Mann J. (as he then was) in City of Camberwell v. Cooper [2] . Reference may also be made to Re Newcastle P. I. & B. Society [3] .

1. [1930] V.L.R. 289. 2. (1897) 18 N.S.W.L.R. (Eq.) 76, at pp. 82, 83. Windeyer J.

I agree. It is not, in my view, necessary to decide here whether, in proceedings brought by a competent plaintiff, the Commonwealth might have been restrained or prohibited from engaging in or appropriating moneys for the activities that it was contended were beyond its constitutional powers because foreign, so it was said, to any function that it could properly undertake. However this may be - and I express no opinion on the question either in general or in the particular circumstances - this case depends on other, and simpler, matters. The company has had the goods. They were in nearly all cases the property of the Commonwealth: it seems to me a quite unreal abstraction to say they were not. Why then should not the company have to pay the Commonwealth the price it had agreed to pay? Ultra vires acts of a trading corporation are only indirectly relevant to the present question, but Lord Davey's statement in National Telephone Company v. Constables of St. Peter Port [1] may be quoted: "If the business was ultra vires of the company, that is a question for the shareholders or for the Attorney-General, and not one which the Constables [the defendants there] had any interest to raise" [2] . A person who is by law prohibited from carrying on a particular trade cannot claim under a contract, whether express or implied, for anything done by him in carrying on such a trade: "for it cannot be permitted to a person to recover a compensation for an act which the law interdicts him from doing" (per Parke B. in Cope v. Rowlands [3] ). But this has no analogy with the assumed constitutional limitation that is asserted here.

1. [1900] A.C. 317. 2. [1900] A.C., at p. 321. 3. (1836) 2 M. & W. 149, at p. 158 [150 E.R. 707, at p. 710].