Tolcher v National Australia Bank

1 By Originating Process filed on 14 February 2003, the Plaintiff, who is the liquidator of Lloyd Scott Enterprises Pty Ltd ("LSE") seeks:

• a declaration that the monies paid to him as liquidator of LSE pursuant to a Deed dated 5 December 2001 are not the subject of a charge in favour of the Defendant which is dated 6 November 1998 ("the Charge");

• a declaration that the Plaintiff is to apply the monies paid under the said Deed, in accordance with Subdivision D of Division 6 of Part 5.6 of the Corporations Act 2001 (Cth) as to the priorities therein in the payment of unsecured debts or claims provable in the winding-up of LSE;

• consequential relief. 2 The facts are not in dispute. On 6 November 1998, LSE entered into a first ranking debenture with the Defendant to secure certain financing to be provided by the Defendant. The debenture provided for a fixed and floating charge over all of the assets of LSE. The charge was fixed as to "all the present and future estate, right, title and interest" of LSE in all its real and personal property, and was floating as to whatever property, if any, was not the subject of the fixed charge. 3 The Plaintiff was appointed liquidator of LSE on 20 July 2001. In the course of carrying out his investigations into the affairs of LSE, the liquidator came to the view that a claim under s.588FA of the Corporations Act in respect of an unfair preference could be made against Key Equipment Finance Australia Pty Ltd ("Key") and, as well, another claim against Key for insolvent trading under s.588M of the Corporations Act . Key was said to be answerable for insolvent trading because it was said to be a "shadow director" of LSE within the definition of "director" in s.9 (b)(ii) of the Corporations Act . 4 The claims of the liquidator against Key were the subject of mediation. Both parties presented position papers. The liquidator's position paper clearly identified the claims being made against Key as a claim to recover an unfair preference under s.588FA and s.588FF(1)(a), and a claim by him under s.588M(2) to recover compensation for loss resulting from insolvent trading. 5 The mediation was successful and resulted in a deed dated 5 December 2001 being executed ("the Settlement Deed"). The parties were the Plaintiff as liquidator of LSE, Key, and two directors of LSE. The Settlement Deed referred to the claims which the liquidator was making against Key and provided that, upon payment by Key to the liquidator of the sum of $2.5M, the liquidator covenanted not to sue Key in respect of the liquidator's claims. Key in turn covenanted not to sue the liquidator in respect of any claim it might have or might have had "by reason of or related to or connected with" the liquidator's claims. 6 The question which has arisen for determination is whether the fund of $2.5M recovered from Key under the Settlement Deed is property of LSE which is the subject of the Charge, or is property which is available for distribution to LSE's unsecured creditors in the administration of the winding-up. 7 Mr Wood, in his thorough argument on behalf of the Defendant, submits that the fund recovered under the Settlement Deed can be characterised in either of two ways. It can be said to represent the proceeds of two claims made by the liquidator, namely, an unfair preference claim and an insolvent trading claim. Alternatively, it can be said to be merely a fund paid to the liquidator as agent for LSE. If the second classification is adopted, says Mr Wood, the fund is the property of LSE and is therefore subject to the Charge. 8 There is no doubt that property recovered by a liquidator or coming into possession of a company in liquidation may, in certain circumstances, become subject to a prior charge and will therefore not be available for distribution to the company's unsecured creditors. That is the case where the particular property recovered was the subject of a specific charge. But the position is otherwise when non-specific property which would otherwise have been the subject of a floating charge - such as money of the company - has come into the possession of a liquidator as a result of proceedings taken or claims made by the liquidator. 9 The law in this regard was explained in N A Kratzmann Pty Ltd (in liq) v Tucker (No 2) (1968) 123 CLR 295, at 300-301: "Now in bankruptcy the property of a bankrupt vests in his trustee upon the making of the sequestration order. The property which so vests is, of course, subject, in the hands of the trustee, to any charges validly created in relation to it by the bankrupt prior to the bankruptcy. The position of a secured creditor who has a charge on specific property is, of course, not in question; such property in the hands of the trustee will still remain subject to the charge. But where security has been given by a bankrupt over all of his assets and a payment to a creditor is made by him out of moneys subject to the charge and the payment is, as against the trustee, subsequently declared void as a preference the moneys paid, when recovered, will not be subject to the charge. In such a case it may be said that although the moneys paid as a preference were at the time of payment subject to the charge, the moneys recovered by the trustee are not the same moneys and that they do not, by virtue of payment to the trustee, become moneys of the bankrupt or in any way subject to the charge; when recovered they become the moneys of the trustee and his title to them does not depend upon his succession to any title which the bankrupt had. It was, we think, in this sense that Bennett J. meant in the passage that we have first cited that, applying the bankruptcy rules in a winding up, '… the sum of money, when recovered by the liquidators by virtue of s.265 of the Companies Act, 1929 , and s.44 of the Bankruptcy Act, 1914 , did not become part of the general assets of Yagerphone, Ltd., but was a sum of money received by the liquidators impressed in their hands with a trust for those creditors amongst whom they had to distribute the assets of the company.' [[1935] 1 Ch., at p.396]

The view which we have formed is, we think, borne out by the observations of Russell L.J. concerning the decision in Yagerphone Case ([1935] 1 Ch. 392) where, in N.W. Robbie & Co. Ltd. v. Witney Warehouse Co. Ltd. ([1963] 1 W.L.R. 1324, at p.1338) , he said:

'… that a claim by the liquidator for repayment to him of a fraudulent preference was not subject to the debenture-holder's charge; a statutory right in and only in the liquidator to make such a claim could never have been property of the company subject to the charge.'

It is of significance that his Lordship did not think that the decision in any such case could depend upon whether or not the charge had crystallized at the time when the payment to the creditor was made.

The case would be otherwise, of course, where a preference consists of the disposition of specific and identifiable property subject to a charge validly created in relation thereto by a bankrupt prior to his bankruptcy and where the avoidance of the disposition affects title to such property. That this is so seems to us to be clear as a matter of principle." 10 Mr Harper, in his cogent argument for the Plaintiff, submits that if the reasoning in Kratzmann is still good law, it disposes entirely of the Defendant's contentions. It would not matter whether the fund recovered by the liquidator under the Deed of Settlement is classified as one lump sum or two sums of indeterminate amounts, namely, one in settlement of the liquidator's claim under s.588FA for an unfair preference, the other in settlement of the liquidator's claim under s.588M founded upon insolvent trading. In either case, the money would have been recovered because the liquidator threatened to enforce, not property rights which the company itself would have had prior to liquidation, but rather statutory rights which the liquidator alone has under s.588F(1) and 588M(2). 11 Mr Wood says, however, that Kratzmann in this respect is no longer good law. He says that prior to the introduction of s.588FF, the relevant corporations legislation (namely s.565) made it clear that funds recovered as voidable preferences were not subject to any charge over the company's property; this was so because the section made preferential payments "void as against the liquidator" . The new section, s.588FF(1)(a), he says, has changed all of that because under that section the Court is empowered to make an order directing a person "to pay to the company" the amount of the voidable transaction. 12 In support of this proposition, Mr Wood relies upon an unreported decision of Jones J in Jonsson, Milner and Riaps Pty Ltd (in liq) v Tim Ferrier Pty Ltd and Anor [2001] QSC 010. That was a case in which the defendants applied to set aside a judgment entered by default against them in respect of a claim to recover an unfair preference under s.588FF. There were four grounds relied upon, one of which was that the order entering judgment was defective because it ordered the defendants to make payment to the liquidator of the plaintiff, whereas s.588FF(1)(a) authorised payment only to the company in liquidation. At paragraphs 13 to 16, his Honour said: "The coming into effect of the Corporations Law brought about a change in the way in which liquidators could recover monies paid in transactions which gave an unfair preference to the creditors of a company. Previously, the action was brought by the liquidators in a capacity as trustee of the unpaid creditors of the company.

The representative capacity of a liquidator in this regard is well noted. In re Yagerphone Ltd 1935 1 Ch 392, Bennett J said (at p396): "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, and I think Mr Montgomery White was right when he said that the sum of money, when recovered by the liquidators by virtue of s265 of the Companies Act, 1929, and s44 of the Bankruptcy Act, 1914, did not become part of the general assets of Yagerphone, Ld, but was a sum of money received by the liquidators impressed in their hands with a trust for those creditors amongst whom they had to distribute the assets of the company."

In N A Kratzmann Pty Ltd v Tucker the High Court said (at p166): "But where security has been given by a bankrupt over all of his assets and a payment to a creditor is made by him out of moneys subject to the charge and the payment is, as against the trustee, subsequently declared void as a preference the moneys paid, when recovered, will not be subject to the charge. In such a case it may be said that although the moneys paid as a preference were at the time of payment subject to the charge, the moneys recovered by the trustee are not the same moneys and that they do not, by virtue of payment to the trustee, become moneys of the bankrupt or in any way subject to the charge; when recovered they become the moneys of the trustee and his title to them does not depend upon his succession to any title which the bankrupt had."

S588FF(1)(a) would appear to make a change insofar as it directs that monies recovered by the liquidators which have been subject to a voidable transaction becomes the property of the company. It would seem, though it is unnecessary, to determine the point, that such funds would then be subject to any charge which a creditor would have over the company's assets. This is further supported by the fact that all the other forms of relief available under s588FF are to the benefit of the company." 13 His Honour was apparently not referred to the decision of Santow J in SJP Formwork (Aust) Pty Ltd (in liq) v Deputy Commissioner of Taxation (2000) 34 ACSR 604, a decision directly in point. In that case it was submitted that a consent order made under s.588FF(1)(a) for payment both to the company in liquidation and to the liquidator of the amount of an unfair preference was not authorised by the subsection and was defective. At paragraph 12 his Honour said: "The essence of the cross-defendant's attack on the validity of the order is based upon what might be thought, if correct, to be a surprising and completely unheralded change to well established principles of bankruptcy law as applicable to companies. Not only were preferences, now called "unfair preferences", no longer to be void against the liquidator, but, say the cross-defendants, an order directing payment both to the liquidator and the company in liquidation, or indeed even to the liquidator in that capacity was henceforth to be construed as either of no effect or, being of a superior court, capable of being set aside. This would be simply because the order for payment should have been only in favour of the company in liquidation. This radical change, if indeed it occurred, would have had to have taken place sub silentio when the other changes were made to the Corporations Law following the Harmer Report by the Corporate Law Reform Act 1992 (Cth) effective on 23 June 1993."

His Honour continued at paragraphs 17 to 20: "The supposedly fatal flaw with the present orders is that they are in favour of both the liquidator and the company.

The short answer to this submission is to be found in the long established authority of NA Kratzmann Pty Ltd (in liq) v Tucker (No 2) (1968) 123 CLR 295; [1968] ALR 616 in particular at CLR 300-1: explained further in Mineral & Chemical Traders Pty Ltd v T Tymczyszyn Pty Ltd (in liq) (1994) 15 ACSR 398; at 416-7 per Santow J. There the High Court deals with the law as it had long stood since the 1930s. It affirmed that a charge that was not a specific one could not prevail over the trustee in bankruptcy or liquidator when monies were recovered by way of preference. The monies vested in the liquidator on behalf of the company rather than the chargee.

Significantly the orders made in Kratzmann recognised that legal outcome by affirming that the monies were to be paid to the company in liquidation, not, be it noted, to the liquidator; see the trial judge at CLR 296 and as made by the High Court at CLR 304, where the reference is again to payment "to the respondent" being the company in liquidation. Thus even with the liquidation of companies governed by a regime that made voidness of preferences against the liquidator, the conventional order in relation to a recovered preference contemplated payment to the company ; obviously a company in control of its liquidator who would then via the liquidator apply the money in accordance with the Kratzmann principles for the benefit of unsecured creditors, not for the benefit of any chargee.

While the drafting of the present orders referred in the plural to the plaintiffs, that drafting should be understood as being simply recognition, albeit not drafted with pellucid clarity, that the payment in question was recovered for the company though necessarily paid to the liquidator on behalf of the company. So understood, the orders meet the description of an order "under section 588FF", for the purposes of s 588FGA of the Corporations Law. That is how I conclude those orders should be understood in the forensic context in which made under a legislative regime which still governs the recovery of preferences by reference to the unaltered Kratzmann principles." 14 In my respectful opinion, the views expressed by Santow J in SJP Formwork are correct and ought to be followed, particularly his Honour's conclusion that s.588FF(1)(a) has not altered the law as laid down in Kratzmann . The view to the contrary, tentatively suggested by Jones J in Jonsson Milner was, as his Honour himself observed, obiter dictum and was per incuriam of a decision directly in point. 15 The decisions in Kratzmann and SJP Formwork relate to recoveries for preferences but their reasoning is equally applicable to recoveries for claims for insolvent trading under s.588M. This conclusion is fortified by the express statement of a legislative intention that if a liquidator institutes proceedings under s.588M(2) and recovers a judgment, the proceeds are not available in priority to a secured creditor. Section 588Y(1) relevantly provides: "(1) An amount paid to a company under section … 588M … is not available to pay a secured debt of the company unless all the company's unsecured debts have been paid in full." 16 It is noteworthy that this section refers to "an amount paid to a company" under s.588M, whereas under s.588M(2) only the liquidator is empowered to commence proceedings under the section to recover a debt due "to the company" . It is clear, therefore, that reference to payment "to the company" in s.588M(2) does not indicate a legislative intention that property recovered by a liquidator in exercise of the statutory right conferred by s.588M is to be regarded as property of the company so as to be available to a secured creditor contrary to the principle established in Kratzmann . There is no evident reason to adopt a different construction of the words "pay to the company" where appearing in s.588FF(1)(a). 17 For these reasons, in addition to those give by Santow J in SJP Formwork , I conclude that Kratzmann is still good law and that the principle for which it stands disposes of the Defendant's case. It is clear that whether the fund recovered under the Settlement Deed is regarded as one lump sum payable to the liquidator or as comprising two amounts in settlement of two claims threatened under s.588FA and s.588M, the fund was recovered in exercise of rights available only to the liquidator. 18 I conclude, therefore, that the Plaintiff is entitled to declarations as sought in paragraphs 1 and two of the Originating Process. 19 The costs of the proceedings should follow the event. I order that the Defendant pay the Plaintiff's costs of the Originating Process. The exhibits may be returned. - oOo -

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