Walsh v Natra Pty Ltd [2000] VSCA 60

Court of Appeal (Vic)|2000-04-28|Before: PHILLIPS, CHARLES and CALLAWAY, JJ.A.

For the reasons I have given, I consider that the trial judge erred in two respects when he upheld the submission of the respondent that there no case to answer; first, in that he regarded s.588FA as requiring him to compare, in respect of each impugned payment, the amount received by Natra with the probable return to Natra in a winding up if the payment were set aside and Natra proved for the whole of its unsecured debt; and secondly, because he regarded s.588FA as requiring that that comparison be made by reference to a notional winding up on the day of the impugned transaction. As I see it, the judge's conclusion was affected as much by the first as the second.

A submission was made late in the day by counsel for the respondent that the appellant should not be heard on the second point because the liquidator had not put the matter so plainly below, his counsel contending rather that there was evidence of the probable return in a winding up, even a hypothetical winding up as at the date of each of the 11 impugned transactions. I am not disposed to accept that the appellant should be so limited in his submissions on appeal. The argument below was over the proper construction of s.588FA, which formed the basis of the respondent's submission that there was no case to answer. That submission was flawed in two respects, as I have said, and those two respects were interrelated. Below the appellant was seeking only to meet the submission made; it was the respondent who chose the ground and who, in my respectful view, led the judge into error. The judge accepted the respondent's submission and error has now been demonstrated in that regard. The decision that there was no case to answer depended on both the errors which have been identified and it is significant, I think, that the present submission of the respondent related to only one of those two.

Accordingly I would allow the appeal, set aside the judgment below and, unless there are other matters to be considered before final judgment can be given, substitute orders under s.588FF(1)(a) for the repayment of the moneys paid - or, as it is put in the notice of appeal, judgment for $51,000 with interest and costs. In the course of argument it was suggested that there might still be an issue over one aspect of the first payment of $40,000, and perhaps there are other problems too of which we have not been told. It is to be hoped, however, that if the foregoing proves to be the opinion of the Court the parties will see the sense in spending no more time or money over this proceeding.

At the close of the evidence before the primary judge, counsel for Natra Pty. Ltd. (the "creditor") made a no-case submission to the judge in which he argued that, on the proper construction of s.588FA of the Corporations Law, it was necessary for the liquidator to show that as at the date of each impugned payment, the financial position of Mooney & Co. Pty. Ltd. (the "company") was such that the creditor received more than it would have received from the company in respect of its debt in "a winding up". This result, that the financial position of the company had to be examined, and necessary calculations made, as at each of the 11 dates in question, was said to flow from the fact that s.588FA(1)(b) uses the indefinite article in referring to "a winding up".

The submission was, as both the other members of this Court have concluded, flawed. It follows that the learned judge fell into error, and the appeal should be allowed, unless the manner in which the case below was conducted should prevent the appeal now succeeding.

Having carefully read the transcript of the argument on the no-case submission, it seems to me that it was the respondent's counsel who chose the ground on which to defend the case, and who was principally responsible for leading the judge into error. There was little authority as to the proper construction of s.588FA. I would also accept that the liquidator's counsel came close to conceding the point of construction argued for the creditor. But I think the approach of the liquidator's counsel in attempting to answer the no-case submission and the argument made for the creditor, is more appropriately described as being that, whatever s.588FA(1) meant, on any view of the section the evidence then before the Court disclosed an unfair preference given by the company to the creditor to the extent of $51,000 (the total of the 11 payments in question).

Mr. Lucas, counsel for the creditor in this Court, in arguing that the liquidator was now wishing to present a new case on appeal and should not be permitted to do so, was not able, as I followed his argument, to show that the creditor would have conducted his case differently at trial, had the matter been argued differently.

On one view it might be said, I suppose, that the judge did not receive as much assistance as he might have from the liquidator's counsel in determining what was the proper construction of s.588FA(1). But that does not seem to me sufficient to disentitle Mr. Nolan, counsel for the liquidator in this Court, from making the submissions which Phillips, J.A. has given reasons for accepting.

I would therefore allow the appeal and join in the orders proposed by Phillips, J.A. for the reasons he gives.

In my opinion this appeal should be dismissed for procedural reasons. It will be as well if I set out the steps in my reasoning, even if that entails repeating some material that the learned presiding judge has already set out or to which his Honour has referred.

Section 588FA(1) of the Corporations Law provides:

"(1) A transaction is an unfair preference given by a company to a creditor of the company if, and only if: (a) the company and the creditor are parties to the transaction (even if someone else is also a party); and (b) the transaction results in the creditor receiving from the company, in respect of an unsecured debt that the company owes to the creditor, more than the creditor would receive from the company in respect of the debt if the transaction were set aside and the creditor were to prove for the debt in a winding up of the company; even if the transaction is entered into, is given effect to, or is required to be given effect to, because of an order of an Australian court or a direction by an agency."

Notwithstanding the expression "a winding up" in paragraph (b), the pleadings spoke of "the winding up". Paragraph 6 of the statement of claim read:

"6. The payments referred to in paragraph 5 resulted in the defendant receiving from the company more than the defendant would receive from the company in respect of the debt, if the transaction was set aside and the defendant were able to prove in the winding up of the company."

Paragraph 6(c) of the second amended defence pleaded, to the allegations contained in paragraph 6 of the statement of claim, that -

"if the company made the payments to it alleged in paragraph 5 thereof, which is not admitted, and if the payments were made to it in respect of an unsecured debt, which is not admitted but is expressly denied: (i) at each of the respective times that the company made the payments to it the company had no other unsecured creditors whose debts remained unpaid at the commencement of the winding up of the company and who or which are entitled to prove for debts in the winding up of the company."[11]

No reference was made to that aspect of the pleadings when counsel for the appellant (who was not counsel appearing before us) opened the case. Instead he emphasized the statutory language and said that it provided the respondent with its best point. He read s.588FA(1) to the learned judge and asked his Honour to note, as a matter of importance, "the word 'a' not 'the' in the expression 'a winding up of the company'." Counsel continued, "[W]hat will be an issue is whether or not the creditor, in this case Natra - if the company had been wound up at the time of the transactions, they would have received less than they would have received under the actual payments of $51,000." (Emphasis added.) Mr. Nolan submitted that those observations had been made only in the context of describing the defence case. Be that as it may, his Honour was not told that it would not be an issue for him to consider, let alone an important issue.

The substance of the no case submission was that, in respect of each impugned transaction, there was no evidence that it resulted in the respondent's receiving more than it would have received[12] in a hypothetical winding up on the date of that transaction. At no stage did counsel for the appellant contest that that construction of the legislation was open. He began by adopting it. In response to a question from his Honour counsel said:

"Indeed, that's the evidence but in my respectful submission that's not the test because what you're looking at is a hypothetical winding up at the date of the transaction - it's not 'the' winding up, it's 'a' winding up."

Later he said that the issue was what would have happened in a winding up on 26th November 1993. He referred to the possibility that it would make no difference whether the section referred to "a winding up" or "the winding up", but that was all. Shortly thereafter counsel expressly said that his opponent was correct and that "the word is, 'a winding up' and you've got to look at the date of each and every one of those transactions." The argument continued on that basis by reference to the position as at 26th November 1993.

The no case submission was successful. It is against that ruling that the present appeal is brought. The learned judge's essential reasoning appears from the following passage:

"The submission made to me is not based upon, nor does it have anything much in principle to do with the question of whether the company was insolvent or not insolvent on 26 November 1993. As I said to counsel for the defendant, I am quite happy to accept for the purposes of this submission - the present submission, that the company was indeed insolvent on 26 November 1993 and that it was so insolvent because it could not then pay the whole of the $213,000 of the debt of the defendant - the debt owing to the defendant. That, however, is not the question before me. The submission made to me is that there is no evidence, from which I can deduce or find on the balance of probabilities that had there been a winding up on 26 November 1993, the defendant, though it was owed $213,000 would have received less than $40,000 had it proved as unsecured creditor to the extent to which it was unsecured in such a winding up."

His Honour referred to the terms of s.588FA(1) and continued:

"I have, at the end of all the evidence, been left in no doubt that the liquidator, who gave evidence, made no investigation of the day to day trading position of this company as at or about 26 November 1993. Were it necessary for me to do so, I think I would be prepared to find that his investigations and calculations were very much along the lines of assets and liabilities which were appropriate to a person in his position under the law as it used to be when the Bankruptcy Act provisions were brought in to Corporations Law under the old Corporations Code. The law, of course, has changed as a comparison of that legislation with the s.588FA and the following sections will show." (Emphasis added.)

At first glance it may appear that the "winding up of the company" referred to in s.588FA(1)(b) is not the actual winding up of the company, but a hypothetical winding up on the date of the impugned transaction: parliamentary counsel has said a winding up rather than the winding up: but that first impression is wrong. There are at least three reasons why that is so:

1. Speaking very generally, the indefinite article is used the first time a person or thing is mentioned and the definite article, or "that" or "those", is used thereafter. Section 588FA contains several examples. Compare the way in which the words "transaction", "company" and "creditor" are used: at first it is "[a] transaction", "a company" and "a creditor" but thereafter, quite correctly, it is "the company", "the creditor" and "the transaction". The winding up of the company, the first time it is mentioned, is called "a winding up".[13] There is no implication that it is a different winding up from the winding up in the course of which the transaction is avoided.

2. Paragraph (b) postulates a cumulative test, namely whether the transaction results in the creditor's receiving more than the creditor would receive in respect of the debt if (i) the transaction were set aside and (ii) the creditor were to prove for the debt. The reference to the transaction's being set aside is a reference to the actual winding up. If parliamentary counsel desired to refer to a hypothetical winding up, he or she would have said something like "if the transaction had not taken place". The words "setting aside" refer not to the transaction's being disregarded but to its being avoided. Moreover, counsel would not have said "were to prove". Both "were set aside" and "were to prove" look to the future, scil. to a winding up after the transaction.

3. Section 588FA is expressly directed to "unfair preferences". Its purpose is to prevent a creditor from obtaining an unfair advantage by receiving more than the creditor would receive in the winding up if the transaction were avoided. The test of unfairness is not a hypothetical winding up that did not take place but the advantage in fact gained over other unsecured creditors in the actual winding up. To that extent the difference between s.588FA and s.122 of the Bankruptcy Act 1966, which expressly referred to other creditors, is less than might at first appear.[14]

There are other reasons for preferring the view that the words "a winding up of the company" at the end of paragraph (b) refer to the actual winding up. The contrary view requires the liquidator to adduce evidence of the result of a hypothetical winding up on the date of each impugned transaction and there may be many such transactions. Hypotheses are always problematic because, as readers of Professor C.S. Lewis know, no one is ever told what would have happened. Must the liquidator, for example, estimate the prospects of recovery from the company's debtors and preferred creditors on each of the transaction dates? The construction I prefer is also consistent with paragraph 10.39 of the explanatory memorandum, which refers to "the winding up".

It follows that the learned judge fell into error but that that error was contributed to by counsel for the appellant and the case below was conducted on a common assumption as to the meaning of s.588F(1) which was false. Indeed, as I read the portions of transcript summarized at [61], the point was expressly conceded.[15] I do not think the appellant can now complain that the test is not a hypothetical winding up. In fairness to counsel, I should add that the language of the Corporations Law is not crystal clear and even a distinguished commercial judge, writing as it now appears extra-judicially[16], has referred to a hypothetical bankruptcy or winding up.[17]

In those circumstances is it open to the appellant to rely on any of the first three grounds of appeal? (As Phillips, J.A. has explained[18], it was not open to him to rely on ground 4. The no case submission was not resisted, in the alternative or at all, by reference to s.588FB.) Grounds 1 to 3 read:

"1. The learned trial judge erred in finding that despite the evidence of insolvency of the company as at the date of the payments referred [to] in paragraph 5 of the statement of claim ('the payments'), the plaintiff had failed to establish that the defendant would have received less in a hypothetical winding up of the company as at the date of each of the payments. 2. The learned trial judge erred in holding section 588FA of the Corporations Law referred to a hypothetical winding up as at the date of each of the payments or transactions. 3. The learned trial judge erred in not finding that section 588FA of the Corporations Law required the plaintiff to establish that the defendant would receive less than in the court ordered winding up of 13 May 1994." (Emphasis added.)

Mr. Nolan submitted that, even if grounds 2 and 3 were not open to him, the appeal should still be upheld if there was evidence that the respondent would have received less in a hypothetical winding up of the company as at the date of each of the payments (ground 1).[19] I do not think we should follow that course. Because the test is not a hypothetical winding up, it is of no consequence whether his Honour erred in the respect complained of in ground 1. Grounds 1 and 2 are infected by error. Counsel might have argued that, although grounds 1 and 2 were not open, the appeal should be allowed if ground 3 was made out. He did not advance that argument and Mr. Lucas accordingly had no opportunity to meet it, but I think it would have failed for much the same reason. His Honour was not asked to find, or hold, that s.588FA required the appellant to establish that the respondent would receive less in the actual winding up.

In my view the first of the three points identified by Phillips, J.A. need not be decided. It is not the subject of a ground of appeal and is precluded by the course of argument below.[20] As I would dismiss the appeal for other reasons, there is no need to consider the notice of contention.

[11] There were no further sub-sub-paragraphs, only (i).

[12] It will be observed that the change of tense is necessary to accommodate the argument, not just because one is speaking of the transaction as a past event. That is another indication, in addition to those referred to below, that the section is not referring to a hypothetical winding up.

[13] Parliamentary counsel could have said "the winding up" on the footing that a winding up was understood but chose not to do so.

[14] See, generally, V.R. Dye & Co. v. Peninsula Hotels Pty. Ltd. [1999] VSCA 60; (1999) 17 A.C.L.C. 954 at [28-34] per Ormiston, J.A.

[15] It may also be significant that the concession was made, on behalf of a plaintiff who is an official liquidator, in the course of resisting a no case submission.

[17] Wily v. St. George Partnership Banking Ltd. [1999] FCA 33; (1999) 84 F.C.R. 423 at [51-53].

[19] The ground actually says that his Honour erred in finding that the appellant "had failed to establish" that fact. The point was not mentioned at the hearing. I have interpreted the ground consistently with a no case submission.

[20] Transcript 261-277; appeal book 225-241.

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