Stein v Saywell

Stein v Saywell - [1969] HCA 16 - HCA 1969 case summary — Zoe

[6]

The company at relevant times was a member of the Metal Trades Employers' Association which during those times was a respondent bound by The Vehicle Industry Award, 1953 (the award). As to employees who were dismissed on or after 26th October 1965 it was bound by the Vehicle Industry (Long Service Leave) Award, 1965 (the Long Service Leave Award). Prior to that date the company's employees were entitled to the benefit of the Long Service Leave Act. On 13th August 1965 a petition to wind up the company was lodged in the Supreme Court by a creditor of the company and on that date the respondent Saywell was appointed provisional liquidator of the company with power to carry on its business. On 24th August the respondent Saywell was appointed receiver and manager of the company under powers conferred by a deed of floating charge which had been given by the company to creditors other than the respondent creditors. That charge was supported by specific charges over land and chattels of the company which in the event were realized to produce the amount secured: thus no resort by those creditors to the security comprised in that floating charge was necessary. However, the appointment of the receiver and manager under that deed of charge made the sum secured to the respondent creditors by another deed of floating charge immediately payable according to the terms of the latter deed. Also, because the sum secured became due, the floating charge, again according to the terms of the deed of charge, then crystallized and became specific. But no receiver was appointed under this deed till 11th November 1965, when the respondent Saywell was appointed receiver and manager of the company on behalf of the respondent creditors. The company was ordered by the Supreme Court to be wound up under the provisions of the Companies Act on 22nd November 1965 and the respondent Saywell was appointed liquidator. Apparently the business of the company was carried on after the presentation of the petition to wind up and none of its employees on whose behalf claims to priority in payment are made in these proceedings was dismissed prior to or upon the presentation of the petition: but they were all dismissed by 29th October 1965.

[50]

But, I would prefer not to base my reasons for the appellant's success on that ground. This Court is not bound by the decision in that case. In my opinion, the proposition that s. 292 (4) does not defer the claim of the debenture holder if in any case before the making of the winding-up order, or the commencement of the liquidation, the charge over the assets of the company has crystallized is, in my opinion, insupportable. I can derive neither assistance nor find compulsion from or in the circumstance that subsequent to that decision a legislature has enacted ss. 196 and 292 (4). It is quite clear to my mind that the legislature in enacting these sections did not intend that the priority which it accorded to such debts as those due to employees for wages or accrued leave should be defeated by the circumstance that the floating charge had become crystallized before the time had arrived for determining and giving effect to that priority. The policy behind s. 196 and s. 292 (4) is, I think, quite plain. A creditor who accepts a floating charge over a company's assets allows the business of the company to be carried on and the assets of the company which are subject to the floating charge to be altered, perhaps augmented, by the efforts of the company and its employees. The holder of the floating charge is not to be able to displace the priorities which the legislation accords certain debts which accrue during the carrying on of the business; amongst those priorities is certain remuneration of employees of the company. The method of ensuring that the holder of such a charge does not compete with those creditors to whose debts priority of payment is given is best seen, I think, in s. 196. Under that section, in the period prior to the actual commencement of the liquidation of a company, a receiver for the debenture holder, with funds in hand which are the produce of the realization of the charge created initially as a floating charge is bound to pay out of those funds the debts of the preferred creditors. Of course, there will be occasions when the appointment of the receiver is the event which crystallizes the floating charge. Quite clearly the fact that the charge then becomes specific is irrelevant to the operation of the section. But in general the appointment of a receiver follows upon the falling due of the sum charged and the consequential crystallization of the floating charge. This was so in the present case. The description in the section "on behalf of the holders of any debentures secured by a floating charge" ought to be read as wide enough to include the chargees whose rights derive from a floating charge which had become specific. It would be, in my opinion, far too narrow and an unduly literal construction to confine that description to those chargees only so long as the charge remained floating. Indeed, it would in a practical sense denude the section of much, if not the greater part, of its utility. I can find no reason, connected with the evident policy the section is designed to effect, which would support such a construction. Further, the alternative in the section, namely, the taking of possession of any property comprised in or subject to a floating charge, in my opinion, tends against such an interpretation of the section. Possession could only be taken if the amount charged had become due in which event in general the charge becomes specific. I would think it would in every case be specific before the actual taking of possession of a particular asset.

[51]

In my opinion, s. 292 (4) must be construed in the same sense. It seems to me that the expression "the claims of the holders of debentures" has been chosen to describe the right of the chargee whose charge originated as a floating charge to be paid out of any of the assets or the proceeds of any assets which in the event come within the charge by reason of the terms of the charge initially created by the company. The two sections are complementary. Section 196 governs the matter provided the company is not in the course of being wound up, and s. 292 (4) governs it from the commencement of the winding up: it provides part of the rules applicable in the winding up. Where the making of the order to wind up is the commencement of the winding up, the total scheme is easily seen; the operation of the two sections, where both operate, dovetails. But when the winding up is deemed to commence at the date of the lodging of the petition, an appearance of an overlap between operation of the two sections emerges. But actually I doubt if there is any real overlap. If no receiver is appointed before the making of the order to wind up, s. 292 (4) will provide the occasion to defer the claims of the debenture holder. If a receiver is appointed before the petition to wind up is lodged, s. 196 will operate to defer the claims of the chargee to so much of the employees' preferred claims as have accrued to the date of the appointment of the receiver. On the making of the order to wind up upon a subsequently lodged petition, s. 292 (4) will operate with respect to any sums which after the appointment of the receiver come within the preference provisions of s. 292 (1) (d): see In re Griffin Hotel Co. Ltd.; Joshua Tetley & Son Ltd. v. The Company [1] on this point. Where as here the receiver is appointed after the commencement of the winding up but before the making of the winding-up order, it seems to me that s. 292 (4) will be the provision under which the rights of the chargee and preferred creditors will be worked out. But the possibility that in the interval between the lodging of the petition and the making of the order to wind up proceedings may be taken against the receiver on behalf of the preferred creditors must be considered. In my opinion, in such a case, if before the order to wind up is made, the employees have received the amounts relevantly due to them at the date of the appointment of the receiver, there will be no scope for the operation of s. 292 (4). It might be noticed in passing that the amount in respect of which priority of payment is given, whilst related to the date of the appointment of the receiver, may well be further limited by the fact of the lodgment of the petition. For on that event occurring the extent of the preference in payment in the winding up is limited by s. 292 (1) (d) to the amount payable in respect of a period prior to that event. Of course if no winding up supervenes upon the petition that limitation will not be present. Further, if no receiver has been appointed under a charge which according to the terms of the deed creating it has become specific before the making of an order to wind up, s. 196 would have no operation. But as I have said, when, as here, no proceedings have been taken against the receiver before the winding-up order has been made, s. 292 (4) in my opinion, and not s. 196, provides the means by which the preferred creditors will obtain such access to the assets covered by the charge to which they are entitled. Under s. 292 (4) as much as under s. 196 the claims of the chargee are to be deferred, in my opinion, in the given circumstances not because the charge under which the chargee derives his rights remains floating but because it has been floating. Logically the priority as against the chargee would be expected to be limited to debts which arose during the period it was floating. But neither s. 196 nor s. 292 (4) is so limited.

[81]

The next problem is to determine whether employees entitled to priority under s. 292 (1) (d) against unsecured debts have priority by virtue of s. 292 (4) over the debenture holders here. The claims of the debenture holders in the winding up - and it is with the competition between the appellants and such claims that we are here concerned - were originally claims under a floating charge created by the company, but on 24th August 1965 the debentures crystallized. It is, of course, clear that s. 292 as a whole is not merely concerned with the position as at the commencement of the winding up of the company, i.e., 13th August 1965. The section is concerned with the priority in which specified obligations should be paid and it gives first priority to obligations arising, for the most part, both after the commencement of the winding up and after the making of a winding-up order, viz. the costs and expenses of the winding up. Furthermore, when in s. 292 (4) there is a reference to "assets of the company available for payment of general creditors" the reference cannot be to the position as at the commencement of the winding up. The balance from which general creditors are payable can only be determined by taking into account assets acquired subsequently and obligations incurred subsequently. It is not possible, however, to read s. 292 (4) as referring simply to the point, which may occur at a late stage in a liquidation, when the liquidator is in a position to pay claims. Every floating charge would, of necessity, crystallize at the latest upon the making of a winding-up order, for the essence of such a charge is that it is over the assets of a going concern. A floating charge, however, may, as a matter of common practice, survive the commencement of a winding up as specified by s. 222 (2) for it is quite usual to specify the making of a winding-up order as one of the occasions to cause the floating charge to crystallize. In these circumstances we consider the difficult problem of construing s. 292 (4) should be solved by the application of established authority to the effect that the subsection is concerned with debentures which are floating charges at the time when legal steps giving rise to liquidation are completed, i.e., upon the passing of a resolution for winding up, or, in the absence of such a resolution before the presentation of a petition for winding up, upon the making of a winding-up order. Up to this point a floating charge may continue to exist, notwithstanding an earlier presentation of a petition to wind up. In re Griffin Hotel Co. Ltd. [1] was, of course, decided upon a statute which did not contain the provisions of s. 223, sub-s. (2), but we do not think that the inclusion of this provision in the New South Wales Act does require a changed interpretation to be given to s. 292 (1) (d).

[89]

As I read sub-s. (4), it is at the latter time that a charge must be floating if it is to be postponed to the claims of creditors whose debts are preferential under par. (d) of sub-s. (1). This is the view which has prevailed in England in respect of a similar provision ever since Bennett J. affirmed it in In re Griffin Hotel Co. Ltd. [1] ; and in amending and consolidating company legislation in New South Wales since that time recurring opportunities to displace it have not been taken. Twenty years after Bennett J.'s decision, sub-s. (4) was re-enacted in New South Wales, in the Act of 1961, and some strong reason would need to be found to justify placing a different construction upon it now. I have not been able to see any such reason, and indeed the decision seems to me, if I may say so with respect, to be correct. Subsection (4) operates as a qualification upon the general provision in s. 292 (2) that the rights of secured creditors are governed by the same rules as are in force under the law of the Commonwealth relating to bankruptcy, which include the rule in s. 58 (5) of the Bankruptcy Act 1966 Cth that the right of a secured creditor to realize his security is not affected by provisions against the enforcing of remedies in respect of provable debts. The provision in s. 291 (2) applying bankruptcy rules in respect of debts provable (operating by reference to s. 82 of the Bankruptcy Act and the definition in s. 5 of the date of the bankruptcy) makes the date of the winding-up order the date for determining what debts are provable. Obviously the order of priorities established by s. 292 is for provable debts. It necessarily follows, as I see the matter, that sub-s. (4) of s. 292 must be applied as at the date of the winding-up order, so that a charge, to be affected by the grant of priority to the preferential debts there referred to, must be at that date within the description of "floating charge". That conclusion accords with the restatement by Younger J. in Westminster Corporation v. Chapman [1] , of the effect of the corresponding English provisions. His Lordship said [2] :

[92]

It is plain in terms in s. 209, that in the case of winding up, the priority is only given in relation to assets which are subject to the floating charge. In the view I take the same result follows in the case of a debenture holder's action where there is no winding up. Mr. Grant says there are reasons why it should be otherwise. I am not sure that I am satisfied that any such reasons exist at all. I quite understand that in regard to a floating charge there may be a reason for giving the priority, because until the receiver is appointed or possession is taken, the charge does not crystallize, and it may well be said that this particular class of debts, which may perhaps have contributed to produce the very assets upon which the floating charge will crystallize, are proper to be paid out of those assets before the debenture holder takes his principal and interest out of them. That seems to me to be a perfectly intelligible reason for the legislation, and is in accord with the view which I take of the section. This reasoning, as applied to a case of winding up, would treat a floating charge as within the section if it crystallizes upon the making of the winding-up order - not if at some earlier time, possibly years before, it had ceased to be a floating charge. It is not, of course, a distinguishing feature, though it is a feature, of a floating charge that it attaches to future-acquired property. Its distinguishing feature is that, the class of present and future assets that are charged being such as in the ordinary course of the company's business would be changing from time to time, the company is left at liberty, until one of the "crystallizing" events happens, to dispose freely, in the ordinary course of its business, of any property to which it attaches: see In re Yorkshire Woolcombers Association Ltd. [1] . The explanation of the enactment of ss. 196 and 292 (4) that suggests itself is perhaps that, the decision having been made to give the relevant remuneration a priority over all unsecured debts existing at the date of the winding-up order, the view was taken that debts secured only by a charge which until that date the company was at liberty to ignore in carrying on its business were sufficiently similar in kind to unsecured debts to be subjected to the same postponement; and that consistently with this conception a similar course was adopted for the other event upon which the company would cease to be carrying on its business freely, namely the appointment of a receiver. It is clear that the debts which are postponed to the claims described in s. 292 (1) (d) are those which were unsecured at the date of the winding-up order. Section 223 (2) does not alter that. It would be odd if s. 292 (4), postponing to the same class of claims debts which though not entirely unsecured were at some date secured only by a floating charge, had selected a different date as the date as at which the charge must be found to have been floating. 1. [1929] 1 Ch. 498. 2. [1929] 1 Ch., at pp. 507, 508. 3. [1903] 2 Ch. 284 (affirmed, sub nom. Illingworth v. Houldsworth, [1904] A.C. 355).

[109]

Unfortunately throughout the proceedings in the Supreme Court and during the oral argument before us the case proceeded upon a basis of fact which has since turned out to have been incorrect. The responsibility for this rests with the parties since no close investigation of the relevant facts relating to the rights of the company's employees in respect of annual and long service leave appears to have been made by any of them. After we reserved judgment in the appeal, however, the parties placed before us what they agreed to be a correct statement of the position and asked that we determine the questions of law on that basis. I have felt some doubt about the propriety of doing this but in all the circumstances I am prepared to adopt the course which the parties have asked us to take. From this agreed statement it appears that, as at 13th August 1965, the rights of employees to annual leave were governed by cl. 14 of the federal Vehicle Industry Award, 1953 and not, as was earlier thought, by the New South Wales Annual Holidays Act. In the view that I have formed of the case, however, this does not affect the position. The right to long service leave, as at 13th August 1965, was governed by the New South Wales Long Service Leave Act although on 26th October 1965, the federal Vehicle Industry (Long Service Leave) Award came into force and the rights of employees to long service leave thereupon became dependent upon it. But here again this does not affect the conclusion to which I have come. It appears further that, as at the date of the presentation of the petition for winding up, a number of employees had served for fifteen years or more with the company and with an earlier employer of whose business the company had become the successor or "transmittee" and that these employees had thus become entitled to remuneration for long service leave under the Long Service Leave Act, while others had become entitled to remuneration for annual leave under the Vehicle Industry Award.

At a glance

Court

Decision date

Before

Source

Judgment (113 paragraphs)

Parties

Cited By (2)