Somes v Duke Group Ltd

Federal Court of Australia|2000-03-13|Before: Mullighan J, Doussa J

REASONS FOR JUDGMENT 1 This is an application brought pursuant to s 41 of the Bankruptcy Act 1966 (Cth) (the Act) to set aside a bankruptcy notice issued on 8 October 1999, and served on the applicant on 12 October 1999. In the alternative the application seeks that the time for compliance with the bankruptcy notice be extended. 2 The applicant was one of several defendants in consolidated actions 1874 of 1992 and 1810 of 1993 in the Supreme Court of South Australia (the consolidated proceedings). Those proceedings were brought by the respondent, The Duke Group Limited (in Liquidation) (the company), against a number of defendants, including Francis Anthony Quilty, Harold Abbott, the applicant, and Sir Ernest Lee-Steere who were former directors of the company. The principal allegation against these director defendants was that they breached their duties as directors in relation to a takeover by the company (formerly known as Kia Ora Gold Corporation NL) of a company called Western United Limited in early 1988. On 30 January 1998 the trial judge, Mullighan J, held the director defendants to be in breach of their fiduciary duty as well as certain statutory duties in relation to the takeover. Judgment was entered against each of them for $93,863,796.81. Appeals and cross-appeals were brought against the judgment of Mullighan J in the Full Court of the Supreme Court of South Australia: see Duke Group Limited (In Liquidation) v Pilmer & Others (1999) 73 SASR 64. Relevant to these proceedings, on 13 August 1999 the judgment of Mullighan J against the applicant was set aside by the Full Court and in lieu thereof judgment was entered against the applicant for $188,662,619.12. It is upon that judgment that the bankruptcy notice was issued. 3 In the bankruptcy notice, which followed the prescribed form, the company claimed against the applicant $182,412,619.12. The particulars of that debt set out in the schedule to the bankruptcy notice are as follows: "1. Amount of judgment or order $188,662,619.12 … less 5. Payments made and/or credits allowed since date of judgment or order 6,250,000.00 $182,412,619.12" 6. Total debt owing

4 The bankruptcy notice was a twenty-one day notice. Within that period the present application was brought, and a notice was served on the company pursuant to s 41(5) of the Act disputing the validity of the bankruptcy notice on the ground of misstatement, namely that the sum specified in the notice as the amount due to the creditor exceeded the amount in fact due. 5 Upon the hearing of the application, the applicant contended that the bankruptcy notice was invalid because it overstated the amount due by $6,825,000.00. It is common ground that the company has recovered this sum from a number of third parties. The applicant contended that the company should have given credit for this sum against the judgment entered against him. 6 When the present application was filed the applicant had on foot an application for special leave to appeal to the High Court of Australia from the judgment of the Full Court of South Australia. In his supporting affidavit the applicant argued that if the application for special leave, and subsequent appeal, were both successful, the amount of the judgment against the applicant (and several other defendants) would be reduced to an amount which was less than the total of moneys already recovered by the company, and moneys allegedly due under certain insurance policies. An extension of time to comply with the bankruptcy notice was sought on the ground that a successful appeal could mean that the judgment against the applicant would be satisfied from other sources. Prior to the hearing of this application, the application for special leave to appeal was heard by the High Court. It was successful only to a limited extent and the applicant has not taken advantage of the special leave by filing a notice of appeal within the prescribed time. Upon the hearing of the present application no submissions were made in support of an extension of time, although that remedy was not formally abandoned. 7 The company opposed the order sought by the applicant on the following grounds: first, that the amount claimed in the bankruptcy notice represented the debt due, and that the applicant was not entitled to credit for the sum of $6,825,000.00 recovered from third parties; secondly, even if the notice misstated the amount due as alleged by the applicant, the misstatement was a formal defect or irregularity so that the notice was saved from invalidity by s 306(1) of the Act as no injustice was caused to the applicant; thirdly, that the sum of $6,825,000.00 recovered by the company from third parties had been appropriated by the company to a debt other than the judgment debt; and finally that an application for extension of time should be refused upon the principles approved in Byron v Southern Star Group Pty Ltd (1977) 73 FCR 264 because the judgment of the Full Court of South Australia has not been stayed, and the applicant has not proceeded with an appeal to the High Court by filing a notice of appeal pursuant to the special leave given. 8 It was common ground on the hearing of the application that the company had reached an agreement with Francis Anthony Quilty to accept a sum of $3,000,000.00 in satisfaction of the judgment against him in the consolidated proceedings, and that a further $3,250,000.00 had been received from Sir Ernest Lee-Steere and Ernest Lee-Steere Pty Ltd in full satisfaction of claims made against Ernest Lee-Steere Pty Ltd and in satisfaction of the judgment against Sir Ernest Lee-Steere. These sums constitute the "payments made and/or credits allowed since the date of judgment of order" for which credit was given in the bankruptcy notice in calculating the total debt owing by the applicant. 9 The Court was provided with no documentary evidence relating to the payment by Mr Quilty, but the application was argued on the footing that the money was paid in satisfaction of the judgment entered against the defendant directors in the consolidated proceedings. 10 The Court was provided with limited information in respect of the payment by "the Lee-Steere interests", being Sir Ernest Lee-Steere and Ernest Lee-Steere Pty Ltd. On 6 July 1998 the company had issued separate proceedings in the Supreme Court of South Australia against Ernest Lee-Steere Pty Ltd alleging that the company had knowingly assisted in breaches of trust and fiduciary obligations owed by the defendant directors to the company, including Sir Ernest Lee-Steere, that the company along with the defendant directors and others had conspired to devise and implement an illegal and fraudulent scheme, that Ernest Lee-Steere Pty Ltd had received and was unjustly enriched at the expense of the company by reason of its participation in the fraudulent and dishonest design, and that it was a knowing recipient of funds diverted in breach of trust from the company. Subsequently, the company accepted from "the Lee-Steere interests" the sum of $3.25 million which sum the liquidator of the company agreed to accept in full satisfaction of all claims against both Ernest Lee-Steere Pty Ltd and against Sir Ernest Lee-Steere including the liquidator's rights under the judgment in the consolidated proceedings. 11 The sum of $6,825,000.00 received by the company for which the applicant alleged that credit should have been given was a payment received by the company from third parties described as the "Abbott interests" being three members of the family of Harold Abbott, and five companies associated with Harold Abbott and members of his family. That sum was paid pursuant to a Settlement Agreement made between the company and its liquidator on the one hand, and the Abbott interests on the other hand. The Settlement Agreement recites that the company and the liquidator are in dispute with the Abbott interests and that without any admission of liability in relation to the dispute by any parties, the parties have agreed to resolve the dispute on the terms set out in the Settlement Agreement. The dispute is defined in the Settlement Agreement as "the matters the subject of the Proceedings [being the consolidated proceedings], any appeal from the judgment in the Proceedings and the matters raised in the letter from Fisher Jeffries to [a named third party] dated 21 January 1999". 12 Harold Abbott, against whom judgment was entered in the consolidated proceedings, is not a party to the Settlement Agreement. The Court was informed that Harold Abbott, both at the time of the settlement and presently, is a bankrupt. 13 The Settlement Agreement provided for a payment of $6,825,000 by the Abbott interests in consideration for releases given by the company and the liquidator as follows: "8.1 …the Company and the Liquidator release each of the Abbott Interests from all liability, known or unknown, present or future, certain or contingent, or which might but for this Agreement arise, in respect of, relating to, or in connection with: 8.1.1 any matter, circumstance or thing which occurred before the date of this Agreement: (a) whether or not the subject of the Dispute; (b) whether in respect of matters disclosed to the Company or the Liquidator or undisclosed; and (c) whether within the knowledge of the Company or the Liquidator or outside it; 8.1.2 without limiting paragraph 8.1.1, the Dispute; and 8.1.3 without limiting paragraph 8.1.1, the judgment obtained by the Company against Harold Abbott in the Proceedings and any legal or other costs, charges, fees or expenses in respect of the Dispute; 8.1.4 without limiting paragraph 8.1.1, any matter whatsoever arising out of the liquidation of the Company." 14 The letter from Messrs Fisher Jeffries dated 21 January 1999, referred to in the definition of the dispute, outlined a proposed claim against the Abbott interests by the company and the liquidator for whom Messrs Fisher Jeffries were acting. The letter advised that proceedings had been prepared against the Abbott interests, and that the letter was written with a view to those interests "settling up with our client in a considered way". The letter said "We have had the opportunity to investigate this matter thoroughly during the course of the earlier lengthy trial in which Mr Harold Abbott was a defendant". The letter advised that: "The claim against the Abbott Family Interests is that they were: 1. Knowing participants in the breaches of trust and breaches of fiduciary duty by [Harold Abbott and another person]; To make out this claim Kia Ora will demonstrate: 1.1 The existence of a trust or fiduciary duty - this should be uncontroversial given the relationship between the directors and the company. 1.2 The existence of a dishonest and fraudulent desire on the part of the fiduciaries - this accords with the findings made by Mullighan J that the Western United takeover was but a means of removing the cash from Kia Ora and inappropriately allocating it to Western United shareholders. The bulk of the funds and shares were delivered to the Abbott Family Interests and interests associated with [another person]. 1.3 The knowledge of the Abbott Family Interests - the knowledge of [Harold Abbott and another member of the Abbott family] will be attributed to the Abbott Family Interests because these were the vehicles through which the Abbott family assets were held… Taken together we suggest the above matters will leave the court satisfied that the Abbott Family Interests were all party or privy to the dishonesty of [Harold Abbott and another member of the Abbott family]. On the evidence as found by Mullighan J benefiting the Abbott Family Interests was a principal part of the dishonest designs with respect to Kia Ora and Western United. This is, of course, fortified by the status of various of the Abbott Family Interests as substantial recipients of property misappropriated from Kia Ora which is discussed below. 2. Knowing recipients of funds and assets of Kia Ora diverted to them by Mr Harold Abbott and the directors generally … … 3. Unjustly enriched at the expense of Kia Ora … … 4. Party to a conspiracy to harm Kia Ora … … The Abbott Family Interests acted in combination [with another person] with a common intention to do the acts which were the object of a conspiracy. That involved positioning themselves to take advantage of a favourable Western United takeover by gaining control of an enlarged shareholding in Western United then puffing up the appearance of the value of Western United in preparation for takeover, and the conversion of Kia Ora's assets into cash which were used for the purpose of the takeover and for the purpose of puffing up Western United. The unlawful acts included proceeding with the takeover in breach of all of the statutory and fiduciary duties. These were done with the actual intention of harming Kia Ora's economic interests as it was clear that a takeover at an over value would harm Kia Ora. The over value meant that Kia Ora would suffer loss which was the same loss claimed in the recent proceedings before Mullighan J and assessed by Mullighan J at $100 million."

The letter went on to describe techniques by which the takeover at an over value occurred and by which the financial position of Western United Limited was puffed up. These techniques were said to be the subject of extensive evidence at the trial before Mullighan J. Fourteen techniques were described, the fourth of which was referred to on the hearing of the application before this Court as "the tenement transactions" which occurred in late 1986 and early 1987.

15 The letter concluded with the statement that in the premises the company is entitled to equitable damages being a sum in excess of $100 million and/or an account of each of the Abbott interests' profit from the takeover together with compound interest for a period in excess of ten years. 16 The applicant contended that even though the bankrupt estate of Harold Abbott was not a party to the Settlement Agreement, the payment made by the Abbott interests was a payment on account of the same claim and loss which was the subject of the judgment against the director defendants in the consolidated proceedings, and accordingly that the judgment creditor (the company) must give credit for the sum recovered when calculating the balance of the judgment due by the applicant. 17 The claim against the Abbott interests particularised in Messrs Fisher Jeffries' letter was said to be a claim for equitable damages. Insofar as the claim was based on a conspiracy to harm Kia Ora, and on fraudulent and dishonest conduct, it was also a claim in tort. In Royal Brunei Airlines SDN. BHD v Tan [1995] 2 AC 378 Lord Nicholls of Birkenhead, in delivering the Opinion of the Privy Council, observed at 387 that the beneficiaries of a trust or fiduciary relationship are entitled to expect that those who become trustees will fulfil their obligations. The beneficiaries are entitled to expect that third parties will refrain from intentionally intruding in the beneficiary relationship and thereby hindering a beneficiary from receiving his entitlement in accordance with the terms of the trust instrument. His Lordship observed: "There is here a close analogy with breach of contract. A person who knowingly procures a breach of contract, or knowingly interferes with the due performance of a contract, is liable to the innocent party. The underlying rationale is the same."

Insofar as a person is liable for knowingly procuring a breach of contract (as to which see Sanders v Snell (1998) 157 ALR 491 at 497-499 and Allstate Life Insurance Co v Australia and New Zealand Banking Group Limited (1995) 130 ALR 469) the liability is one arising in tort. Insofar as the causes of action alleged in the consolidated proceedings against the defendant directors, and in Messrs Fisher Jeffries' letter to the Abbott interests are causes of action in tort, the liability of the several tort feasors is joint and several. Insofar as the causes of action allege knowing participation in breaches of trust, and knowing receipt of trust funds, the liability alleged against the different parties is again joint and several: Snell's Equity, 29th ed. at 296; Edwards v Hood-Barrs [1905] 1 Ch 20.

18 Where a number of people are jointly and severally liable for a loss, proceedings may be brought separately against them, or against some of them in one action, and against others in another action. A judgment recovered against one or some of them in respect of the loss is not a bar to an action against any other person jointly and severally liable for the same loss. Where the judgment creditor obtains judgments against several parties liable for the same loss, the judgment creditor may execute separately against each of the judgment debtors for the full amount of the judgment debt, but may not recover a double satisfaction: see Midland Montagu Australia Limited v Harkness (1994) 124 ALR 407 at 416; Castellan v Electric Power Transmission Pty Ltd (1967) 69 SR (NSW) 159; National Mutual Property Services (Australia) Pty Ltd v Citibank Savings Limited (1995) 132 ALR 514 at 536; and Wah Tat Bank Ltd v Chan Cheng Kum [1975] AC 507 at 519. Thus, where the judgment creditor receives a payment in respect of the loss, credit must be given for that payment when executing on the judgment or judgments obtained. Execution may only be issued for the balance outstanding from time to time: Hamilton v Warne (1907) 4 CLR 1293 per Griffith CJ at 1298, per Isaacs J at 1300, per Higgins J at 1302, and In re Child, Ex parte Child [1892] 2 QB 77. 19 The question in this case is whether the moneys recovered from the Abbott interests were in respect of the same loss as the loss the subject of the judgment entered on appeal in the consolidated proceedings. On the information placed before the Court by the parties I consider the answer is plainly in the affirmative. The loss sought to be recovered in Fisher Jeffries' letter is the same loss suffered by the respondent in consequence of the breaches of fiduciary and statutory duty of the defendant directors which was the subject of the claim in the consolidated proceedings. 20 Counsel for the respondent argued that the payment made by the Abbott interests was not on account of the loss for which judgment was entered, but was in respect of a discreet and separate loss arising from the "tenement transactions". This submission is linked to the respondent's third submission that the money recovered from the Abbott interests was appropriated by the liquidator to a debt or liability owed to the company which was separate from the judgment debt. Counsel for the respondent informed the Court that the liquidator had appropriated the moneys recovered from the Abbott interests to the "tenement transactions". However, no evidence was adduced on this topic. If the asserted appropriation could otherwise provide an answer to the present application, it would be necessary to stand the application over to permit the respondent to place further evidence on the file. On the evidence tendered by the parties however, I do not consider that the appropriation argument is an open one. 21 The Fisher Jeffries' letter makes it plain that the "tenement transactions" were part of a course of conduct which ultimately caused the company loss when the takeover of Western United Limited occurred at an inflated value. Losses flowing from the tenement transactions were subsumed in the overall claim for which damages were awarded in the consolidated proceedings. 22 On the evidence before the Court I hold that the payment by the Abbott interests was a payment on account of the loss the subject of the judgment on which the bankruptcy notice was based. 23 It follows from this conclusion that the bankruptcy notice served on the applicant misstated the amount due, by overstating the balance of the judgment outstanding. 24 Counsel for the respondent argued that in the circumstances of this case the overstatement of the amount due was an irregularity which did not cause any injustice to the applicant, and hence was not an irregularity which invalidated the notice. The respondent contended that no injustice could occur in this case, as the evidence before the Court shows that the applicant's assets do not exceed $1 million. They contended that it was immaterial whether the amount due was that stated in the bankruptcy notice or the lesser sum due after giving credit for the moneys received from the Abbott interests, as the applicant had no prospect of paying either amount. Moreover, although the bankruptcy notice made no reference to the fact, the company was entitled to interest on the outstanding balance of the judgment under s 114 of the Supreme Court Act 1935 (SA), and costs yet to be taxed, which amounts would far exceed $6,825,000.00. 25 Counsel argued that this conclusion followed from s 306(1) of the Act and the decision of the High Court of Australia in Kleinwort Benson Australia Limited v Crowl (1988) 165 CLR 71 where it was held that a bankruptcy notice which understated the amount of interest due on a final judgment was saved from invalidity because the bankruptcy notice under consideration could not reasonably mislead the debtor as to what was necessary to comply with it. 26 It has long been considered settled law in Australia that a bankruptcy notice which overstates the amount due is a nullity, and that the misstatement is not merely a formal defect or irregularity of the kind which may be saved by s 306(1). The cases draw a distinction between situations in which a bankruptcy notice overstates the amount due, and situations where there is an understatement. It is only in cases of the latter kind, of which Kleinwort Benson is an example, that s 306(1) will operate unless the Court is of the opinion that substantial injustice has been caused by the defect or irregularity and that the injustice cannot be remedied by an order of the Court. 27 In Hamilton v Warne at 1298 Griffith CJ said on an appeal against the making of a sequestration order based on an unsatisfied writ of execution: "… the debtor must be called upon to satisfy the judgment. I am not prepared to say that if the officer called upon the debtor to pay less than was due, that that would necessarily be fatal. But I do think that, if the officer calls upon the debtor to pay more than he owes on the judgment, that is fatal, and I do not know of any case in which it has been held to the contrary. The English authorities on bankruptcy notices are not directly in point because the language of the English Statute is different. But, in my opinion, a demand upon the debtor to pay more than is due is a bad demand." 28 In Walsh v The Deputy Commissioner of Taxation (1984) 156 CLR 337 Gibbs CJ, with whom the other members of the Court agreed, said: "There is no doubt that a bankruptcy notice will be invalid if the sum specified in the notice as the amount due to the creditor exceeds the amount for which the creditor is entitled to issue execution, provided that the debtor gives a timely notice under s 41(5) of the Bankruptcy Act 1966 (Cth),as amended, that he disputes the validity of the notice on that ground." 29 Section 41(5) of the Act provides: "A bankruptcy notice is not invalidated by reason only that the sum specified in the notice as the amount due to the creditor exceeds the amount in fact due, unless the debtor, within the time allowed for payment, gives notice to the creditor that he or she disputes the validity of the notice on the ground of the misstatement." 30 The clear implication from s 41(5) is that where notice is given in accordance with the subsection, the notice will be invalidated by reason of the overstatement of the amount due. That this is the law in Australia is recognised by the dictum of Gibbs CJ in Walsh. It is only where there is an understatement of the amount due that s 306(1) has potential operation. It is in the context of an understatement that the majority of the court in Kleinwort v Benson said at 80: "If the amount specified in a bankruptcy notice is in fact due and payment is claimed in accordance with the judgment, the essential requirements of s 41(2)(a)(i) - the only requirements presently relevant - are met. Understatement of the amount due, whether it be an understatement of the judgment debt or of interest payable thereon, will thus constitute a defect which is substantive rather than formal only if the understatement is objectively capable of misleading the debtor as to what is necessary for compliance with the notice." 31 The "essential requirements" formerly prescribed in s 41(2)(a)(i) were that: "The prescribed form of bankruptcy notice shall be such that the notice (a) requires the debtor named in it, within a specified time (being the time referred to in subparagraph 40(1)(g)(i) or (ii), whichever is appropriate) to: (i) pay the judgment debt or sum ordered to be paid in accordance with the judgment or order…". 32 To require the debtor to pay a sum in excess of the amount for which execution could be levied on the judgment was not to require the judgment debt to be paid "in accordance with the judgment". 33 Section 41(2)(a)(i) was repealed by Act No 44 of 1996, the Bankruptcy Legislation Amendment Act 1996 (Cth). As part of that package of amendments, s 41(2) was amended to provide simply that "The notice must be in accordance with the form prescribed by the regulations". Regulation 4.02 provides: "4.02(1) For the purposes of subsection 41(2) of the Act, the form of bankruptcy notice set out in Form 1 is prescribed. 4.02(2) A bankruptcy notice must follow Form 1 in respect of its format (for example, bold or italic typeface, underlining and notes). 4.02(3) Subregulation (2) is not to be taken as expressing an intention contrary to section 25C of the Acts Interpretation Act 1901. [NOTE: Under section 25C of the Acts Interpretation Act 1901, where an Act prescribes a form, then, unless the contrary intention appears, strict compliance with the form is not required and substantial compliance is sufficient; see also paragraph 46(1)(a) of that Act for the application of that Act to legislative instruments other than Acts.]" 34 Form 1 requires the amount demanded by the creditor to be shown in a schedule to the notice. The Schedule prescribed is as follows: "Schedule Column 1 Column 2

Amount of judgment or order plus 2. Legal costs if ordered to be paid and a specific amount was not included in the judgment or order (see Note 1, below) plus 3. If claimed in this Bankruptcy Notice, interest accrued since the date of judgment or order (see Note 2, below)
Subtotal less 5. Payments made and/or credits allowed since date of judgment or order
Total debt owing

(NB: Amounts, where applicable, are to be inserted in column 2)

For the information of the creditor - notes to the Schedule Note 1: Legal costs (item 2 of the Schedule) If legal costs are being claimed in this Bankruptcy Notice, a certificate of taxed or assessed costs in support of the amount claimed must be attached to this Bankruptcy Notice. Note 2: Interest accrued (item 3 of the Schedule) If interest is being claimed in this Bankruptcy Notice, details of the calculation of the amount of interest claimed are to be set out in a document attached to this Bankruptcy Notice. The document must state: (a) the provision under which the interest is being claimed; and (b) the principal sum on which, the period for which, and the interest rate or rates at which, the interest is being claimed. (NB: If different rates are claimed for different periods, full details must be shown). …" 35 Notwithstanding the amendments to s 41(2), I consider that it remains an essential requirement of a bankruptcy notice that the notice make a demand on the debtor that is in accordance with judgment. The present requirement of Form 1 that the demand identify separately the amount of the judgment, the amounts claimed for costs and for interest, and payments and and/or credits allowed, emphasises this requirement. 36 The need for the notice to conform with Form 1 is imposed by s 41(2), and as Burchett J pointed out in Hilti (Australia) Pty Ltd v Millard (1997) 78 FCR 453 at 454-455, that requirement cannot be amended by the regulations read subject to the proviso contained in s 25C of the Acts Interpretation Act 1901 (Cth). In the present case, the notice served on the applicant showed against items numbered 2, 3 and 4 in the schedule the word "None" indicating that the amount demanded was calculated without bringing to account either costs or interest. I do not consider that the company can save the notice from the consequence of invalidity flowing from an overstatement of the balance of the judgment due, by asserting that the applicant is liable for costs and interest which the schedule does not claim. 37 In my opinion the notice fails to make a demand which is in accordance with the judgment. The notice fails to meet this essential requirement laid down by the Act. As a notice has been duly given under s 41(5), I consider it follows that the bankruptcy notice is invalid and must be set aside. 38 On the issue of appropriation, counsel for the respondent relied on the legal principle stated by Lockhart J in Re Walsh; Ex parte Deputy Commissioner of Taxation (NSW) (1982) 42 ALR 727 at 728-729. This statement of principle was not challenged by counsel for the applicant, and it accords with the principles stated by the learned authors of The Laws of Australia at 7.9:29. Lockhart J said: "A debtor who owes two debts to a creditor is entitled to appropriate a payment which he makes to his creditor to one debt rather than to the other. If he omits to do so, the creditor may make the appropriation. If neither makes any appropriation, the law appropriates the payment to the earlier debt. If there is specific appropriation by the debtor cadit quaestio. In the absence of a specific appropriation it is a question of fact whether there was any appropriation by the debtor. To constitute an appropriation there must be more than an intention to appropriate by the debtor. I respectfully adopt the following passage from the judgment of Greene LJ in Leeson v Leeson [1936] 2 KB 156 at 162-3:- 'When, however, he does not notify the creditor of his intention, and when the circumstances are such that the creditor receives the payment merely in satisfaction of the debts and the payment is not more appropriate to the payment of the one debt than to that of the other the creditor is entitled to make the appropriation. When it is said that there need not be an express appropriation of a payment, but that the appropriation can be inferred, that does not mean that appropriation of a payment can be inferred from some undisclosed intention in the mind of the debtor. It is to be inferred from the circumstances of the case as known to both parties. Any other view might lead to injustice, as the creditor's right to appropriate a payment would be defeated. When the matter is examined upon principle it will be found that an undisclosed intention in the mind of the debtor is not sufficient to suport an appropriation. If authority is needed for that proposition it can be found in the judgment of Lush J in Parker v Guinness 27 Times LR 129 at 130 where he said: 'What is to be considered is this. Is the true inference to be drawn from all the circumstances of the case that the debtor paid the moneys generally on account, leaving the creditor to apply them as he thought fit, or is the true inference that he paid them on account of special portions of the debt for the purpose and with a view to wipe these out of the account? His undisclosed intention so to do would, of course, not benefit him. It is what he did in fact, and not what he meant to do that is to be regarded.' A debtor's undisclosed intention to appropriate a payment to one of two debts owed by him to a creditor cannot benefit him.'" 39 There is no evidence before the Court as to any notification which the Abbott interests gave to the company at the time of payment of the moneys due under the Settlement Agreement. For present purposes I assume that there was no express statement that the payment was to be appropriated in discharge of the debt created by the Settlement Agreement. Nevertheless, the circumstances of the payment as known to both parties, and the coincidence of the amount paid with the amount due under the Settlement Agreement gives rise to the clear inference that the payment was made by the Abbott interests in satisfaction of the debt created by the Settlement Agreement. That being so, I consider that it is not open to the company to otherwise appropriate the payment. 40 There may be a further difficulty in any event with the appropriation argument. The applicant argues that even if there were no express appropriation by the Abbott interests to the Settlement Agreement debt, there was no other debt to which an appropriation could be made. The loss alleged by the company in respect of the "tenement transactions" was not a loss that had been acknowledged by the applicant, and, in any event, amounted to no more than an asserted legal liability to pay equitable compensation. Counsel for the applicant contended that the principles of appropriation do not apply in such a situation. No authority in support of this proposition was cited. A right of a creditor to appropriate a payment to a legal or equitable demand is implied in the statement of principle in Halsburys Laws of England, 4th ed vol 9(1), para 957, but rests on old authority which is not clear in its import: see The Laws of Australia 7.5:30. It is unnecessary to explore this question in this case. 41 For these reasons I conclude that the bankruptcy notice was invalid, and should be set aside. The occasion for the alternative application to extend time does not arise. I certify that the preceding forty-one (41) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice von Doussa.

Associate: Dated: Counsel for the Applicant: Mr R W Evans

Counsel for the Respondent: Mr T A Gray QC with Mr S J Doyle

Bankruptcy Legislation Amendment Act 1996(Cth)

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Judgment (9 paragraphs)

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Legislation Cited (4)

Cases Cited (11)

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