Solicitors for applicant: Dobson Mitchell and Allport

WRIGHT J The liquidator of Tasmanian Primary Distributors Pty Ltd (in liquidation) applies to the court for directions pursuant to the Corporations Law, s479(3), in relation to the following matters, viz:

"(a) whether the funds held by the liquidator resulting

from the collection by the liquidator of payments void

under section 468 of the Corporations Law;

(b) whether the funds held by the liquidator as a

result of the avoidance by the liquidator of voidable

preferences under and pursuant to section 565(1) of the

Corporations law;

are affected by the charge of the Respondent lodged on

the 14th April 1989 registered number 12, 437-23-56."

2. At the time of the liquidator's appointment on 7 October 1991 the respondent, the National Australia Bank Limited, held a registered floating charge over the assets of the company. There is no suggestions that the charge is ineffective or inoperative. During the course of liquidation, $73,562 has been recovered from creditors of the company as void dispositions under s468(1) and $17,683.47 has been recovered from creditors of the company as void preferences under s565(1). The total amount still owing to the National Australia Bank Limited under its charge (as at 31 October 1994) was $262,459.22.

3. The essential question for my determination is whether either or both sums recovered by the liquidator from creditors should be paid to the respondent or to creditors generally including unsecured creditors. The property charged included all of the company's "property, assets, rights and privileges whatsoever and wheresoever both present and future." It constituted a fixed charge in relation to certain specified property (irrelevant for present purposes) and a floating charge as to all other property.

"468(1) Any disposition of property of the company,

other than an exempt disposition, and any transfer of

shares or alteration in the status of the members of

the company made after the commencement of the winding

up by the Court is, unless the Court otherwise orders,

void."

5. None of the dispositions now in question were exempt dispositions. In considering the meaning of the word "void" in a comparable provision, the Companies (New South Wales) Code, s368(1), members of the Court of Appeal of that State made the following observations in National Acceptance Corporation v Benson (1988) 12 NSWLR 213. Kirby P said at 215:

"It is sufficient to dispose of the present appeal to

conclude that the word 'void' as used in s 368(1),

means void for all purposes related or incidental to

the administration of the winding up of the company and

as between the company and a person dealing with the

company. At the least that is what the word means.

Upon that basis, when the winding up order was made in

the present case, payment by the company to the

appellant was thereby rendered by the Act to be 'void'

when made. In the result, at least between the company

and the appellant and the appellant and the present

respondents, the law treats the payment as never having

happened."

6. Priestly JA (with whom Clarke JA agreed) said at 220:

"To this point, it seems to me that the meaning of the

subsection is that unless the court otherwise orders,

upon a winding up order being made any disposition,

transfer or alteration within the meaning of the

subsection that has taken place after the time of the

filing of the application for the winding up IS TO HAVE

NO LEGAL EFFECT FROM THE TIME THAT IT TOOK PLACE. That

is, once the winding up order is made, the transaction

must be regarded as NEVER HAVING TAKEN PLACE AT ALL IN

LAW, unless the court otherwise orders." (My emphasis)

7. Similar views in respect of a comparable provision in the Companies (Queensland) Code, s368 were expressed by Ryan J in Re Allan FitzGerald Pty Ltd (In Liquidation) (1993) 11 ACLC 183 at 189.

8. On the basis of these opinions, which appear to me to be plainly correct, the funds which were improperly disposed of after the commencement of liquidation proceedings remained the property of the company at all relevant times and upon being restored to the company by the liquidator's actions became once more subject to the respondent's floating charge.

9. As a consequence it is my view that the sum of $17,683.47 recovered as void dispositions under s468(1) is payable to the respondent.

10. The appropriate disposition of the remaining sum is not quite so obvious and it is necessary to review the relevant cases. The Corporations Law, s565(1) provides:

"565(1) A settlement, a conveyance or transfer of

property, a charge on property, a payment made, or an

obligation incurred, before the commencement of Part

5.7B, by a company that, if it had been made or

incurred by a natural person, would, in the event of

his or her becoming a bankrupt, be void as against the

trustee in the bankruptcy, is, in the event of the

company being wound up, void as against the

liquidator."

11. It will be noted that, unlike dispositions affected by s468(1), preferences coming within the ambit of s565(1) are not "void" in any absolute sense but are "void as against the liquidator" only.

12. In Re Yagerphone Ltd (1935) 1 Ch 392 the liquidators in a company winding up recovered a sum of money alleged to have been paid to a creditor by the company by way of a fraudulent preference. A debenture holder took out a summons seeking an order that the money recovered from the creditor should be paid to the receiver of the property charged by the debenture. Bennett J held that the money did not become part of the general assets of the company but was received by the liquidators and impressed in their hands with a trust for those creditors among whom the assets of the company were distributable. Bennett J said at 395:

"... There have been two cases which establish quite clearly

that, whether in bankruptcy or in the liquidation of a

company, a secured creditor has no right to enforce for his

benefit the remedy which is given to a trustee in bankruptcy

or the liquidator of the company of avoiding a payment or

setting aside a transaction made or entered into with a view

to preferring a creditor of the bankrupt or a company in

liquidation. The authorities are Ex parte Cooper LR 10 Ch

510 and Willmott v London Celluloid Co (1886) 31 Ch D 425; 34

Ch D 147."

13. His Honour took the view that upon payment of the preferential sum to the creditor that money ceased to be the property of Yagerphone. He continued at 396:

"... The payment to that creditor could not have been

attacked or impeached, unless within three months from the

date of payment the liquidation of Yagerphone, Ld, had begun,

and, in my judgment, at the date when the security contained

in the debenture crystallised, the sum of 240l 11s 2d was not

the property of Yagerphone, Ld, nor property in respect of

which it could, I think, be said that Yagerphone, Ld, had

even a contingent interest.

The right to recover a sum of money from a creditor who has

been preferred is conferred for the purpose of benefiting the

general body of creditors ..."

14. The Yagerphone case was approved in the joint judgment of the High Court in N A Kratzmann Pty Ltd (In Liquidation) v Tucker (No 2) [1968] HCA 44; (1968) 123 CLR 295. The court there drew attention to the fact that in bankruptcy the property of the bankrupt vested in the trustee upon sequestration but, nonetheless, when monies paid as a preference were recovered they became the trustee's moneys and his title to those monies was in no way dependent upon his succession to any title which the bankrupt had. In a company liquidation, in the absence of a vesting order under s474(2), the property of the company does not vest the liquidator.

15. In Bibra Lake Holdings Pty Ltd (In Liquidation) v Firmadoor Australia Pty Ltd (1992) 10 ACLC 726 it was put to the Full Court of the Supreme Court of Western Australia that the views of the majority of the High Court in their joint judgment in Octavo Investments Pty Ltd v Knight [1979] HCA 61; (1979) 144 CLR 360 at 372 established that moneys recovered by a liquidator as a void preference vested in the company, not the liquidator, and thus the proceeds of any such preference which might be recovered must necessarily form part of the assets of the company; "The corollary being that the company should sue in its own name to recover undue preferences". Ipp J at 730-731 rejected this submission saying:

"In my view this submission is incorrect.

In the context of the joint judgment as a whole it seems to

me plain, with respect, that in Octavo Investments Pty Ltd v

Knight their Honours were merely pointing out that the legal

title to the company's property remains in the company being

wound up, and does not vest in the liquidators; and where

liquidators obtain an order that the amount of an undue

preference be paid, the amount of that preference should be

paid to the company rather than the liquidators themselves"

16. He then reviewed Kratzmann's case and the Yagerphone case and concluded at 731:

"Monies paid in circumstances which create an undue

preference, and which are recoverable under s 451(1), are

monies which are recoverable for the benefit of the creditors

and contributories. Such monies cannot be said to have been

the property of the company and nor are they owed by the

recipients thereof as a debt to the company. Accordingly,

the following words of Lord Davey in La Communaut Des Soeurs

De Charit De La Providence at 266 are apposite to a claim

brought under s 451(1): 'It is appropriate for the liquidator

to sue in his own name in the interests of the creditors and

contributories to impeach some act or deed of the company

committed for winding up.'

The phrase 'void as against the liquidator' first appeared in

Western Australian company legislation, in relation to the

recovery of preferences upon winding up, in s 451 of the

Companies Code. Prior to 1981 no such provision was

incorporated in the legislation (see s 293 of the Companies

Act 1961, s 273 of the Companies Act 1943 and s 180 of the

Companies Act 1893). As is pointed out in the reasons of

Rowland J, which I have had the advantage of reading, the

practice in Australia for many years has been for the

liquidator to sue in his own name for the recovery of undue

preferences. In my view the insertion, in s 451 of the

Companies Code, of the phrase in question, was to provide the

force of legislation to what so long had been the accepted

practice. Undue preferences are void as against liquidators,

not as against companies. Section 451 confers upon

liquidators the sole right to bring proceedings for the

recovery of undue preferences."

17. Pidgeon J agreed with Ipp J and also Rowland J who expressed compatible views.

18. Ryan J was referred to and discussed all of the decisions cited above in Re Allan FitzGerald Pty Ltd (In Liquidation) (supra) saying:

"If a liquidator is to be liable to pay an amount to the

Commissioner pursuant to s 221P(1) of the Act in respect of

the amounts recovered pursuant to s 451, it must appear that

those amounts are 'property' in the sense of s 221P(1). The

effect of the cases to which I have referred is that such

moneys are not the property of the company, and hence it

might be supposed that s 221P(1) is inapplicable to them.

But this ignores the consequence of making the dispositions

void as against the liquidator. In Re Farnham (A Lunatic)

(1895) 2 Ch 799, an argument was addressed to the court based

on a provision of the Bankruptcy Act 1883 under which a

settlement of property was void if it was made within two

years of the bankruptcy. Lindley LJ said (at p 808): 'If the

settlement is void as against the trustee, it is void

altogether. The section does not mean that the property, the

subject of the settlement, vests in the trustee by a title

which overrides both that of the donor and the donee. The

settlement being void, the property reverts to the donor, and

it is as the donor's property that it vests in the trustee

and must be distributed correctly.'

That case, and a decision to the same effect in Sanguinetti v

Stuckey's Banking Co (1895) 1 Ch 176, were referred to in N A

Kratzmann v Tucker at p 302 '... for the proposition that in

such a case the result of the avoidance of the disposition is

to revest the property in the trustee subject to the charge

which the bankrupt had validly created prior to the

bankruptcy.'

In my opinion, the effect of avoidance of preferences by a

liquidator is to revest the property in the company, and that

property, when recovered, is subject to the same liabilities

and encumbrances as originally existed. Control of that

property passes as a consequence of liquidation to the

liquidator, and it is property in respect to which the

liquidator is liable to pay unremitted tax instalment

deductions."

19. FitzGerald went on appeal to the Court of Appeal in Queensland sub nom Starkey v DFC of T (1993) 11 ACLC in respect of this part of Ryans J's judgment. Macrossan CJ summarised the appellant's submissions as follows:

"... Shortly stated, the argument for the appellant is that

(i) the respondent is only entitled to payment out of the

property of the company in liquidation which 'has become

vested in or the control of (which) has passed to' the

appellant as trustee, and (ii) that money obtained by the

appellant by the avoidance of preferences, while 'vested in'

or under 'the control of' the appellant, neither is nor was

the property of the company in liquidation."

"I have not found it necessary to consider the second limb of

this argument because, in my opinion, the first limb cannot

be sustained. It is not disputed that the property of the

company in liquidation has vested in, or passed into the

control of, the appellant. Further, the section does not

expressly state that the respondent's right to payment (or

payment in priority to other debts) is limited to property

(or the proceeds of property) of the company in liquidation

which has so vested or passed into control. The appellant's

submission is that, nonetheless, that is the effect of

decisions of the High Court which are binding on this Court

although, as is acknowledged, the actual point has not been

decided."

21. On this approach his Honour obviously did not find it necessary to examine Ryan J's reasons and conclusions in any detail. McPherson JA analysed the appellant's arguments as follows (at 566):

... If money representing proceeds of preference payments

that have been avoided are, in the hands of the liquidator,

to be considered not as part of the general assets of the

company but as being impressed with a trust for the unsecured

creditors among whom they are to be distributed, then for the

purposes of s 221P they must, it was contended, be regarded

as property belonging to the creditors. As such they are, it

was submitted, outside the scope of the provisions of that

section which, on the authority of FC of T v Card and FC of T

v Barnes, requires payments to the Commissioner only from

property of the company and not property belonging to someone

else."

"The argument suffers from several difficulties. In the

first place, although in Kratzmann (No 2) the High Court

accepted the correctness of the decision in Re Yagerphone

Ltd, it is by no means clear that their Honours adopted

everything that was said by Bennett J in support of his

decision in that case. A close reading of the reasons of

their Honours leaves some doubt whether they approved the

proposition that the preference money received by the

liquidators was impressed in their hands with a 'trust' for

the unsecured creditors. What their Honours plainly did

accept was a line of authority holding that a secured

creditor cannot himself assert a claim to set aside a dealing

as a preference, with the consequence that 'a trustee ought

not to assert such a claim where the resultant benefit would

accrue only to a secured creditor'. See Albert Gregory Ltd v

C Niccol Ltd (1916) 16 SR (NSW) 214, and the other decisions

to which the High Court referred at [1968] HCA 44; 123 CLR 295, 299-230, and

301-302.

If a secured creditor may not set in motion for his own

benefit a procedure for avoiding preferences that exists for

the benefit of the unsecured creditors, it is a logical

consequence that he should not be able to claim the proceeds

of avoiding such a preference when recovered. But it is

another matter to say that the liquidator holds those

proceeds in trust for the unsecured creditors if what is

meant by that is a 'trust' in the full sense of the word,

under which the unsecured creditors are equitable owners of

the assets in winding up. There is little in recent

decisions to support that view of the rights of creditors.

See, for example, Ayerst v C and K (Construction) Ltd (1976)

AC 167, 177-178, where the comparison drawn by Lord Diplock

was with the position of a residuary beneficiary in respect

of assets of an unadministered estate.

It is secured creditors who, under the decision in Re

Yagerphone Ltd, are denied a share in the proceeds of

avoiding preferences in winding up. Unlike the claimant in

that case the Commissioner here is not a secured creditor

with rights that are enforceable against identified property

independently of winding up. Section 221P does, it is true,

confer on the Commissioner's claim a priority that elevates

it above all other debts, whether preferential, secured or

unsecured; but it stops short of making him a secured

creditor. The result is that, like any other ordinary

unsecured creditor, he has no more than a claim to be paid in

winding up, and then only if the assets are sufficient to

meet in full the costs, charges and expenses of winding up:

see s 221P(3). Exceptionally under s 221P(3) the

Commissioner may even claim priority over those costs and

expenses if the case is one in which the Crown in right of

the State is entitled to be paid in priority to such costs

and expenses, and title to that priority has not been waived.

Proceeds of preferences recovered by the liquidator may be,

and in practice often are, a constituent of the fund of

assets out of which costs and expenses of winding up are

paid. Section 221P evidently has in view a single fund from

which costs and expenses are payable before the balance, if

any, is applied in meeting the Commissioner's claim accorded

priority by s 221P(2). Section 221P(3) speaks of those costs

and expenses as being 'payable out of the assets ... of the

company ...'. A fund of assets that may be composed, wholly

or in part, of proceeds of preference payments avoided and

recovered is thus treated in s 221P(3) as 'assets of the

company', and is made available for payment of the

Commissioner's priority claim after the costs and expenses

have been met, or, exceptionally, even before they are met.

The result is, we think, that, while proceeds of payments

recovered as preferences in winding up do not become the

property of the company, nor the property of the unsecured

creditors, they do form part of the general assets under the

administration and control of the liquidator that are

available for payment of the costs and expenses of winding up

and the claims of unsecured creditors, including that of the

Commissioner under s 221P."

23. Pincus JA agreed with both Macrossan CJ and McPherson JA.

24. It will be noted that McPherson JA stops well short of endorsing the view expressed by Ryan J that "the property, when recovered, is subject to the same liabilities and encumbrances as originally existed". If Ryan J had confined his observations to cases where specific property was charged with an encumbrance prior to a winding up order being made, his views may be correct. It may well be that he intended to so confine his opinion. However it seems to me that the weight and preponderance of authority establishes that irrespective of whether for some purposes the recovered funds may be viewed as the "property" of the company being wound up, in the present circumstances they are not property which was or could have been subject to the floating charge at the time that charge crystallised viz, the date upon which liquidation proceedings commenced. Thus, in my opinion, the fund constituted by those moneys is not available to the respondent, but is distributable to the general creditors subject only to the statutory priorities provided by the Corporations Law.

25. Accordingly I propose to direct the liquidator as follows:

(a) The funds held by the liquidator resulting from the

collection by the liquidator of payments void under the

Corporations Law, s468 are subject to the charge of the

respondent lodged on 14 April 1989.

(b) The funds held by the liquidator resulting from the

avoidance by the liquidator of voidable preferences under and

pursuant to the Corporations Law, s565(1) are not subject to

the charge of the respondent lodged on 14 April 1989.