development of the "deserted wife's equity" and in Toohey the High Court was considering rights created by a statute.
41 As a general definition of a proprietary interest the statement by Lord Wilberforce is too broad. In the first place, as Mason J acknowledged in Toohey (at 342) the proposition that a property right must be capable of assumption by third parties, that is that it must be capable of alienation, is not always an essential characteristic of such a right. It is of course true that, speaking generally, one of the principal and most important rights incident to the ownership of property is the right of disposition. But it is not in all circumstances an essential characteristic: see National Trustees Executors and Agency Company of Australasia Ltd v Federal Commissioner of Taxation (1954) 91 CLR 540 at 558 per Dixon CJ; Georgiadis v Australian and Overseas Telecommunications Corporation (1993-1994) 179 CLR 297 at 311-312 per Brennan J. In the second place the definition does not suggest a mechanism by which a proprietary interest is to be distinguished from a personal right unless the statement by Lord Wilberforce that the right must have "some degree of permanence or stability" means that the right could not subsist merely at the will of the donor and that it could be exercised not only against the donor but against third parties as well: a personal right could not usually be protected in this way. It is also possible, although it is not altogether clear, that by ascribing to the right "some degree of permanence" his Lordship contemplated that the right could not be defeated by alienation.
42 In relation to lesser interests, equitable in nature, the High Court has identified the ability of a court of equity to protect the "right" as one criterion for its characterisation as a right in rem. Thus in Brown v Heffer (1967) 116 CLR 344, in relation to purchaser's equitable interest arising under a contract of sale, the High Court said that the interest was commensurate only with the purchaser's ability to obtain specific performance of the contract. Specific performance here means, not merely specific performance in the sense of enforcing an executory contract, but all remedies available in equity to protect the interest that the purchaser has acquired under the contract: Legione v Hateley (1983) 152 CLR 406 at 446-447; Stern v McArthur (1988) 165 CLR 489 at 522-523.
43 However, for an equitable interest in property to subsist it would not be sufficient, in my opinion, if the holder of the interest is only able to protect his right, whether by specific performance, injunction or otherwise, against the grantor. The right must also be enforceable against third parties before it could be described as proprietary although the protection that is available against third parties may not be absolute: for example, an equitable interest is liable to be defeated by a purchaser for value without notice. No doubt it is also generally correct to say that the interest must be capable of disposition before it will be classified as proprietary.
44 In this context it is necessary to mention that in National Provincial Bank, supra, Lord Wilberforce said (at 1253) that the argument that an interest is proprietary if an injunction would issue to protect it was "fallacious". His Lordship said of the word "equity":
"In the authorities, the word is used in several senses and for several purposes. Sometimes it is used as referring merely to the exercise of an equitable remedy, such as a remedy by injunction: the thought seems to have been that since the courts will interfere by injunction to prevent interference with or departure from a right, that gives to the proprietor of the right something which is capable of binding not only the other party but his assignees, or successors, provided of course they have notice of the right. In this form the argument is clearly fallacious. The fact that a contractual right can be specifically performed, or its breach prevented by injunction, does not mean that the right is any the less of a personal character or that a purchaser with notice is bound by it: what is relevant is the nature of the right, not the remedy which exists for its enforcement."
45 I do not doubt the accuracy of the statement that the availability of an injunction does not necessarily mean that the interest protected is a proprietary interest. But it should be noted that his Lordship was speaking of an injunction issuing to protect a merely contractual right against the grantor of that right. Where the protection that a court of equity will afford is in respect of a "thing" that the law regards as property and that protection is available not only against the grantor but against third parties, including assignees or successors, there is much to be said for the view that the right being protected is a proprietary right. That is to say, a right is an (equitable) proprietary right when a court of equity will grant an equitable remedy, such as an injunction, to protect the right against third parties instead of leaving the holder to his or her claim in damages against the party with whom the holder has a direct relationship, for example of a contractual or fiduciary nature.
46 In the case of a floating charge there can be no doubt that, subject to any applicable discretionary considerations, the mortgagee is entitled, before crystallisation, to protection against a dealing with the charged property that is contrary to the provisions of the instrument creating the charge. So, an injunction will issue against the grantor (mortgagor) to restrain it from dealing with the charged property otherwise than in the ordinary course of business: In re Woodroffes (Musical Instruments) Ltd [1986] Ch 366 at 378. An injunction will also be granted against a third party to prevent that party interfering with the rights of the mortgagee over the charged property. In In re London Pressed Hinge Co Ltd [1905] 1 Ch 576 Buckley J granted relief in equity, in that case by the appointment of a receiver, to prevent a judgment creditor issuing execution against property the subject of a floating charge notwithstanding that the mortgagor was not in default. The law, as it was then understood, was that an execution creditor took subject to the rights of debenture holders (In re Standard Manufacturing Co [1891] 1 Ch 627) and thus could have no more than the benefit of the equity of redemption (Davey & Co v Williamson & Sons [1898] 2 QB 194). However, in Evans v Rival Granite Quarries Ltd, supra, it was decided that the existence of a floating charge did not prevent a judgment creditor enforcing his judgment. The reason given was that a floating charge permitted the company to carry on its business and the payment of debts, whether voluntarily or by execution, was a dealing in the ordinary course of business. The result is that the foundation for the ruling in In re London Pressed Hinge Co Ltd has been removed, but, in so doing, the Court of Appeal did not deny to a mortgagee the right to protection in an appropriate case. In this regard the statement by Williams J in Trincontental Corp Ltd, supra, at 485 that "the mortgagee may, without crystallising the charge, obtain relief in equity to protect his interest in the [charged] property" is in accordance with principle.
47 This discussion demonstrates that, subject to the powers reserved to the mortgagor, the property the subject of a floating charge will be preserved to meet the unpaid debts due to the mortgagee. That a court of equity will protect charged property in this way shows, in my opinion, that the rights that are being protected are proprietary and not perceived in nature.
48 I can now turn to consider the case upon the assumption made by the trial judge namely that, before crystallisation, a floating charge does not confer a proprietary interest over the property of the company.
49 To determine whether the payments made to the Bank had the effect of giving it a preference over the other creditors of Space Made it is necessary to consider the position at the time when each payment was made. That is, the enquiry is whether, at those times, it can be said that the Bank has been preferred: Calzaturificio Zenith Pty Ltd (In Liq) v N.S.W. Leather & Trading Co Pty Ltd [1970] VR 605; Re Discovery Books Pty Ltd (1972) 20 FLR 470 at 475; Airservices Australia v Ferrier (1996) 185 CLR 483 at 501 (footnote 51).
50 The liquidator says that when the three payments were made, the Bank was an unsecured creditor, its charge not having crystallised, and hence the payments preferred the Bank to the other unsecured creditors.
51 However, s 122(1) "supposes a bankruptcy, and it is in relation to that bankruptcy that the question arises whether, over the other creditors, a preference, priority or advantage has been given to the particular creditor": Richardson v The Commercial Banking Company of Sydney Ltd (1951-1952) 85 CLR 110 at 129. The comparison that must be made between the position of the creditors is on the basis of their likely position in a hypothetical bankruptcy or winding up at the time of payment. It would be both anomalous and unjust if the position of one creditor (in this case the Bank) was considered on the basis that there had been no bankruptcy or winding up. Nor would it result in a true comparison for the purpose of determining whether one creditor has received a preference over the others.
52 Accordingly, the position of the Bank must be determined as if Space Made was wound up when the three payments were made. On that assumption the floating charge would have crystallised, that is become a fixed charge (see Illingworth v Houldsworth [1904] AC 355; Evans v Rival Granite Quarries Ltd, supra) with the consequence that the property the subject of the charge would not be available for the general body of unsecured creditors. In that event the three payments to the Bank could not be regarded as preferential.
53 Even if, contrary to the view that I have expressed, the payments to the Bank would appear to be preferential in a hypothetical winding up, if that is not their true effect they will not be caught by s 122. By this I mean that a payment will not be preferential unless it results in a decrease in the assets that are in fact available to meet the claims of the unsecured creditors in the actual winding up of a company: Airservices Australia v Ferrier, supra, at 502 per Dawson, Gaudron and McHugh JJ. In Airservices Australia v Ferrier the High Court referred with approval to the decision of Fox J in Re Discovery Books Pty Ltd, supra, where his Honour said (at 475):
"[T]he effect of a payment is to be judged after bankruptcy, with due regard for events occurring after the payment was made, and that one must ultimately come back to considering whether by reason of the payment, or dealing, there is less money available for the general body of creditors than otherwise might have been expected to be the case."
54 See also Burns v Stapleton (1959) 102 CLR 97 where the High Court (Dixon CJ, Kitto and Windeyer JJ) said (at 104):
"What the sub-section [the former section 95(1) now section 122(1)] clearly intends to make void, where it applies, is the change which, if allowed to be effectual, would dislocate the statutory order of priorities amongst creditors."
55 The same position prevails in the United Kingdom. In Williams & Muir Hunter "The Law and Practice in Bankruptcy" (19th ed) (1979) the learned editors state (at 355):
"A payment to a creditor who is himself a debtor of the amount paid in discharge of his debt, resulting in the discharge of cross-claims of equal amount, cannot be a voidable preference, for the right of set-off would have remained in bankruptcy, so that no one is harmed by the transaction".
56 One instance of the application of this principle is to be found in the unreported decision of the Full Court of the Supreme Court of Victoria in A & J Lazzarotto Pty Ltd (In liq) (unreported, 16 December 1977). In that case the insolvent company was owed $8,620 by two of its directors but it was indebted to them in the sum of $7,400 for unpaid rent. Shortly before its winding up the company paid the outstanding rent and the directors returned the amount to the company in reduction of their indebtedness to it. The effect of the transaction was that no tangible assets changed hands yet the liabilities of the company were reduced by $7,400. After referring to Richardson's case and Burns v Stapleton the Full Court, comprising Young CJ and Lush and Fullagar JJ, said (at 6-7):
"In the present case, if one asks whether the appellants were better off, or the general body of the creditors were worse off in the liquidation of the company than they would have been if the transaction of 16 March had not been carried out, the answer is that their position was unchanged by it, because the appellants' obligation in respect of the liquidation, by virtue of the set off provisions of s.86, was to pay to the liquidator the sum of $1,220, and this was exactly what it would have been if the transaction of 16 March had not been carried out. Nor has there been any other intermediate change in the assets of the company apart from the reduction in the amount of the debt owed by the applicants, a reduction which for the reasons stated has no effect on the payment of the general creditors in the liquidation."
Accordingly it was held that the payment by the compan`y in discharge of its indebtedness was not a preferential payment.
57 If one asks whether there is less money available for the general body of creditors by reason of the three payments to the Bank the answer must be a clear: "No". The reason is that if the payments had not been made the property available for distribution amongst creditors would not have increased. The Bank would have been entitled to receive payment out of the property in the hands of the liquidator in priority to the other creditors. Any payment out of property that is not available to meet the debts due to the other creditors can not confer a preference in favour of the payee. In this case then, the other creditors are not any the worse off by reason of the payments to the Bank.
58 This leaves one final matter for determination. The liquidator argues that, even if it be the case, as I have found, that the effect of the payments must be judged by reference to the dislocation of the statutory order of priorities then he says that order has been dislocated at least in relation to the debt due to the ATO for unremitted group tax.
59 At the time of the liquidation of Space Made s 221P of the Income Tax Assessment Act 1936(Cth) imposed upon a trustee (who was defined to include a receiver of property of a company, a trustee in bankruptcy and a liquidator of a company) an obligation to pay to the Commissioner of Taxation, out of money held by the trustee, any unpaid group tax in priority to the payment of other debts: the section has since been repealed; see Taxation Laws Amendment Act (No. 3) 1995 (Cth), s 3, sch 2, item 33. It was said that the payments to the Bank at least disturbed this statutory priority and, accordingly, the payments must be judged to be preferential.
60 As I have mentioned earlier, one of the principal objects of bankruptcy legislation is to make provision for the equal distribution of assets among all creditors. No longer would the quality of the debt owed by a bankrupt confer priority: as to the common law position see Blackstone's Commentaries Bk 2 at 549.
61 To avoid the impact of this legislation it was not uncommon for a debtor, who was aware of his impending bankruptcy, often in consequence of undue pressure, to pay out one creditor in full leaving the others worse off. In Alderson v Temple (1768) 96 ER 384 Lord Mansfield held that in such a case, that is where the debtor makes a payment that he knows is in contravention of the spirit of the bankruptcy laws, the payment is recoverable as a fraudulent preference. This principle was given statutory force by s 92 of the Bankruptcy Act 1869 (UK) (32 & 33 Vict c 71).
62 In support of the fundamental rule that all creditors are to share and share alike in the assets of a bankrupt estate the New South Wales parliament enacted legislation that was wider in its application than the law as laid down in the United Kingdom. Thus s 8 of the Insolvent Act of 1841 (NSW) (5 Vict No 17) provided that "all alienations transfers gifts [etc] … made by any person being insolvent … and having the effect of preferring any then existing creditor to another shall be and are hereby declared to be absolutely void." When the Commonwealth parliament enacted the Bankruptcy Act 1924 to replace the legislation of the States the counterpart of s 8 was s 95, the antecedent of s 122.
63 Having regard to this history, the short answer to the liquidator's submission is that provisions such as s 122 are designed to protect the statutory order of priority established by the Bankruptcy Act and, when it applies in a winding up, the statutory order established by the Corporations Law: the statutory order being the right to receive payments pari passu. Section 122 is not concerned to protect the rights of a creditor who is accorded priority by some other legislation, whether State or Federal.
64 There is another difficulty with the liquidator's argument. The liquidator assumes that, under the repealed enactment, it was inevitable that unremitted group tax would be paid to the Commissioner although the property of the company was burdened by a charge. That this assumption is false is demonstrated by cases such as Deputy Commissioner of Taxation v General Credits Ltd [1988] VR 571 and Chant v Deputy Commissioner of Taxation (1994) 15 ACSR 184 where it was held that a mortgagee in possession of property the subject of a charge is not liable to pay unremitted group tax by reason of s 221P. It cannot be correct to say that one creditor, the Bank, has been preferred over another creditor, the Commissioner, when the second creditor, the Commissioner, did not have an absolute right, on bankruptcy or liquidation, to be paid the debt due to him out of the assets applied in payment of the debt due to the first creditor.
65 It has not been necessary to consider whether a payment made by a bankrupt or by an insolvent company can be a preferential payment in the case where the competition is between a secured creditor and a creditor who is given priority in a bankruptcy by the Bankruptcy Act or in a liquidation by the Corporations Law, as for example in the case of certain debts due to employees and the like. It may be that considerations different from those discussed in these reasons would then have application.
66 In the trial below, the trial judge found that the payments to the Bank were not preferential. For the reasons that I have given, which differ in some respects from those of the trial judge, I am of the opinion that the appeal must be dismissed with costs.
I certify that the preceding fifty-six (56) paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Finkelstein