JOHN SHEAHAN v CARRIER AIR CONDITIONING PTY LTD, ANDREW RYRIE CAMPBELL & ANOTHER, AIR CON SERVE PTY LTD

Judges: Brennan CJ
Dawson, Gaudron and Gummow

Kirby JJ

Subject References:
CORPORATIONS
Winding up
Preferences
Payments by receiver and manager to company's creditors from funds subject to debenture
Whether payments made by company or receiver
Effect of personal undertaking of liability by receiver
Nature of receiver's agency
Preferential effect where no unsecured creditors disadvantaged
Whether payments voidable preferences recoverable by liquidator.

Other References:
Corporations Law, ss 421(1), 565.
Bankruptcy Act 1966 (Cth), ss 122(1), 122(1A).

Judgment date: 12 AUGUST 1997

Judgment by:
Kirby J

These appeals from a decision of the Full Court of the Supreme Court of South Australia ^[F74] concern the law of preferential payments in the context of the liquidation of a company. They involve the application to largely undisputed facts of the Corporations Law, s 565(1) as elaborated by the Bankruptcy Act 1966 (Cth), s 122(1).

Two interpretations of the legislative provisions are available. One advances the general objects of the Corporations Law. It protects unsecured creditors of a company being wound up from preferential payments to some only of their number ^[F75] . The other interpretation would effectively immunise the actions of the receiver, regard those actions as being personal and not those of the company in liquidation and treat the funds in the receiver's account as separate from the property of the company. Upon this interpretation the existence of a preference would be denied and the advantages secured by the specially benefited creditors left untouched.

Common sense, corporate realism and practicality favour the first interpretation. So, in my view, does the proper understanding of the Corporations Law. The contrary opinion of the Full Court of the Supreme Court of South Australia should be set aside. The decision at first instance should be restored.

Payments by a receiver to continuing sub- contractors

Mr John Sheahan ("the appellant") is the liquidator of TOC Pty Ltd ("TOC"), formerly T O'Connor and Sons Pty Ltd. An order for the winding up of TOC was made on 11th September 1991. Before the summons giving rise to the order was filed on 27 May 1991, TOC had sub-contracted to Jennings Industries Ltd in relation to the installation of airconditioning equipment in the Adelaide Entertainment Centre. The first respondent in the first appeal, Carrier Air Conditioning Pty Ltd ("Carrier"), was a sub-contractor to TOC. The first respondent in the second appeal, Air Con Serve Pty Ltd ("Air Con"), was in the same position.

In June 1990 TOC had granted a mortgage debenture to the Australia and New Zealand Banking Group Limited ("the Bank") to secure TOC's indebtedness to the Bank. By the debenture, TOC granted the Bank a charge over its undertaking and all of its assets. The charge operated as a fixed charge over specified assets, and as a floating security over all of the other assets. Clause 19 of the debenture provided that the Bank would appoint a receiver in respect of the mortgaged assets, that the receiver was the agent of TOC and that TOC alone was responsible for the acts and defaults of the receiver. When, by a notice of demand dated 26 April 1991, the Bank required payment of over $4.5 million owed to it, TOC was unable to meet the demand. It invited the Bank to appoint a receiver and manager. On 29 April 1991, pursuant to powers provided in cl 19 of the deed, the Bank appointed Mr A R Campbell, then a partner of the firm of chartered accountants KPMG Peat Marwick, as receiver and manager of TOC ("the receiver"). Mr Campbell is the first of the second respondents to each appeal. The second of the second respondents is Mr R E Schroder, an employee of Mr Campbell's firm. He worked with, and under the direction of, the receiver in relation to the receivership.

At the date of the appointment of the receiver, TOC's sub-contract was only partly performed. For work already performed Air Con was owed about $80,000 under its sub-contract, while Carrier was owed about $220,000. Carrier and Air Con declined to perform further work and left the site. The proceedings have been conducted upon the assumption that, for default of payment, they were entitled to do so.

In early May 1991, soon after his appointment, the receiver entered into negotiations with both Carrier and Air Con, to encourage each of them to return to the site to complete their work. Both companies indicated that they would not do so until outstanding moneys, owed to them by TOC, were paid in full.

In a letter dated 6 May 1991, Mr Schroder wrote to Air Con on behalf of the receiver to confirm that the receiver would "guarantee payment of outstanding invoices", in return for Air Con's completion of its contract with TOC. On the same day a similar letter was sent to Carrier confirming an agreement evidenced by fax from Carrier to Mr Schroder dated 3 May 1991. This letter also guaranteed that the sub- contractor would be paid in return for the immediate recommencement of work. These terms were accepted by Carrier and Air Con. Each resumed work on the site.

The payments with which these appeals are concerned were made by the receiver following the foregoing correspondence. A payment of $30,000 was made to Air Con on or about 16 May 1991. Two payments, each of $30,000, were made to Carrier. The first was made on about 16 May 1991. The cheque for the second payment actually arrived on 27 May 1991, the very day the winding up took effect. However, the proceedings have been conducted upon the footing that all three payments were made before the commencement of the winding up of TOC ^[F76] .

The payments were made from an account bearing the title "A R Campbell Receiver and Manager of T O'Connor & Sons Pty Ltd (Receiver and Manager Appointed)". That account was opened by the receiver upon his appointment, in compliance with s 421 of the Corporations Law as it then stood. It contained the proceeds of the realisation of the charged assets of TOC the subject of the debenture deed.

When the order for the winding up of TOC was made, the appellant commenced proceedings against Carrier and Air Con for recovery of the amounts paid to them by the receiver. The issue arising in each action was whether the law prohibiting payments having a preferential effect in favour of some unsecured creditors but not others applied in favour of the appellant, as liquidator of TOC, to enable him to recover such sums from Carrier and Air Con. To proceed, the appellant was required to show that the sums were "made or caused to be made" by TOC, having the effect of giving those companies a preference over other creditors. The appellant made his claim pursuant to s 565(1) of the Corporations Law.

The decision of the Full Court

At first instance, in the Supreme Court of South Australia, the Master, Judge Burley, upheld the appellant's submissions. He found that each of the payments was made before the commencement of the winding up of TOC. Each was recoverable as a preference.

The Master noted that the receiver, having no property in the fund from which the payments were made, could only have made the payments as an agent for TOC as principal or the Bank as principal. The Bank could only be said to have made the payments if the funds in the receiver's account, once paid into the account, were taken by the Bank in discharge of the indebtedness arising under the debenture. This was not the case. Under the debenture, the receiver had control of the funds to meet, inter alia, the expenses of the receivership and the payment of preferential debts. Although the floating charge granted by the debenture had crystallised, and accordingly the Bank had an equitable interest in TOC's assets, until there was an appropriation of the funds to the Bank by the receiver, the indebtedness between the Bank and TOC remained undischarged. The Master therefore accepted the appellant's argument that the agreement to make the payments was that of TOC and that the payments should be taken to have been made by TOC through its agent, the receiver ^[F77] . They were not made by the receiver in satisfaction of a personal liability. Furthermore, the payments had the effect of preferring the two sub- contractors, as creditors of TOC, over other unsecured creditors ^[F78] .

An appeal from this decision was upheld by the Full Court of the Supreme Court of South Australia ^[F79] . That Court set aside the orders of the Master. It found in favour of the first respondents. It rejected the argument that the payments were void against the liquidator as a preference in the hands of the recipients.

Doyle CJ delivered the judgment of the Full Court. He agreed with the Master that, if the payments were made by TOC and not in discharge of a personal obligation of the receiver, this had the effect of preferring Carrier and Air Con in their capacities as creditors of TOC, there being at the time of each payment other creditors of TOC who remained unpaid ^[F80] . Likewise, Doyle CJ assumed, as had the Master, that upon crystallisation the debenture holder held an equitable interest in the property charged, but that legal title to the money in the Bank was vested in the receiver, who held the funds as agent of TOC, and not for the Bank ^[F81] . The same applied to those tangible assets of TOC the subject of the charge. The effect of the debenture was that the receiver was an agent of TOC, and a payment by the receiver from moneys resulting from the realisation of assets covered by the debenture was prima facie made by TOC ^[F82] . After considering the authorities relevant to the interests of debenture holders, charging companies and creditors in analogous contexts ^[F83] and the statutory context in which s 565 of the Corporations Law appears, Doyle CJ emphasised that "[o]ne cannot expect to find that a single factor, such as ownership of property or the existence of an interest in it ... will be a universal touchstone for the solution to different problems" ^[F84] . However, in the present case, the "statutory language and the context in which it arises" ^[F85] , as elucidated by relevant authority ^[F86] , led his Honour to agree with the Master's conclusion that the payments were payments by TOC through its agent the receiver ^[F87] .

However, Doyle CJ rejected the Master's finding that the payments were not made in satisfaction of a personal liability. He could find no authority precisely on the point ^[F88] . He was aware of the strong policy considerations involved in the conclusion that a payment by a receiver in discharge of a personal obligation, not being an obligation of the company in receivership, was not a payment by the company ^[F89] . He remarked that there was a "paradoxical aspect" in so holding, when the same bank account was resorted to and the potential impact on general creditors would be the same regardless of the capacity in which the receiver acted ^[F90] . Nevertheless, Doyle CJ concluded that when a receiver made a payment pursuant to a personal undertaking to meet a pre-receivership debt which the company has incurred, such a payment would not constitute a payment by the company, even if it were made out of the proceeds of the realisation of the charged assets of the company ^[F91] . It would thus fall outside the terms of s 565(1) of the Corporations Law.

Doyle CJ therefore found that it was the receiver personally, and not as agent of TOC, who undertook the obligation to pay Carrier and Air Con the pre-receivership debt conditional upon their return to the worksite. His Honour considered that it was clear that while Carrier and Air Con were concerned to obtain payment of the moneys owing to them, it was equally clear that the receiver had a personal interest in having them return to the site. If he could persuade them to do so he would receive substantial benefits from Jennings Industries Ltd. The evidence before the Master indicated that the negotiations between Mr Schroder, representing the receiver, and Carrier and Air Con progressed upon the assumption that the only way the two companies could be sure of payment was to obtain a guarantee from the receiver. The terminology employed in that correspondence (phrases such as "the Receiver & Manager ... will guarantee" and "Receiver's Guarantee"), used between non- lawyers, was consistent with the notion of the receiver's undertaking a personal obligation. The context was one in which Carrier and Air Con sought an assurance of payment and the receiver had personally offered one. To Doyle CJ's mind this interpretation "accords with the business realities of the situation" ^[F92] . He therefore concluded that the payments made to Carrier and Air Con in discharge of a personal obligation undertaken by the receiver were not, for the purposes of s 122(1) of the Bankruptcy Act , preferential payments by TOC. The appellant challenges these conclusions.

As receivership quite frequently precedes the liquidation of companies, especially in the case of large companies which get into financial difficulties, the questions before this Court are of great significance for the law of company receivership, liquidation and preferences.

Relevant legislative provisions

At the material time, s 565(1) of the Corporations Law provided, relevantly, as follows ^[F93] :

"A ... payment made ... 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."

By that sub-section, s 122(1) of the Bankruptcy Act was made applicable. It reads, relevantly:

"A ... payment made ... by a person who is unable to pay his debts as they become due from his own money (in this section referred to as 'the debtor'), in favour of a creditor, having the effect of giving that creditor a preference, priority or advantage over other creditors, being a ... payment ... made or incurred -

(a)

within 6 months before the presentation of a petition on which, or by virtue of the presentation of which, the debtor becomes a bankrupt

...

is void as against the trustee in the bankruptcy."

Section 122(1A) of the Bankruptcy Act , inserted by s 57(1) of the Bankruptcy Amendment Act 1980 (Cth), should also be noticed. It provides:

"Subsection (1) applies in relation to a conveyance or transfer of property, a charge on property or a payment made, or an obligation incurred, by the debtor in favour of a creditor;

(a)

whether or not the liability of the debtor to the creditor is his separate liability or is a liability with another person or other persons jointly; and

(b)

whether or not -

(i)

the property conveyed, transferred or charged is his own property or is the property of the debtor and of another person or other persons;

(ii)

the payment is made out of his own moneys or out of moneys of the debtor and another person or other persons; or

(iii)

the obligation is incurred by the debtor on his own account only or on account of himself and another person or other persons;

as the case requires."

Matters in issue and not in issue

During the course of the trial the parties agreed on certain material facts:

1.

At the time that the payments were made, the assets of TOC, combined with the moneys paid to Carrier and Air Con, were not sufficient to satisfy the amounts owing under the mortgage debentures.

2.

The floating charge held by the Bank crystallised no later than 29 April 1991, the date on which the receiver was appointed pursuant to powers conferred on the Bank by the mortgage debenture.

3.

The only moneys paid to the credit of the account maintained by the receiver were those secured from the realisation of assets of TOC the subject of the mortgage debentures.

4.

Other creditors of TOC were owed money at the time of the appointment of the receiver. The debts to such creditors were outstanding at the time the payments were made to Carrier and Air Con and remained unpaid at the time that the present proceedings were brought by the appellant.

The appellant contended that all five of the elements in s 122(1) of the Bankruptcy Act , incorporated into s 565(1) of the Corporations Law, had been satisfied. Payment had been made. It had been made by a company unable to pay its debts as they fell due. It had been made within six months of the winding up. It had been made to a creditor. It had the effect of giving that creditor a preference, priority or advantage over other creditors. The payments were therefore void as against him.

The respondents accepted that the payments were made at a time when TOC was unable to pay its debts as they fell due. Similarly, they accepted that, following the application for winding up, the payments had been made to creditors of TOC, and within six months of the applicable date ^[F94] .

Therefore, the issues remaining to be determined in these proceedings were:

1.

Whether payments by the receiver from moneys held by him in that capacity and subject to the debenture under which he was appointed could be characterised as payments "by a company" for the purposes of s 565(1) of the Corporations Law read with s 122(1) of the Bankruptcy Act .

2.

Whether the receiver undertook a personal liability to Carrier and Air Con to make the payments, and if he did, whether payment from moneys subject to the debenture in discharge of that personal liability could still be said to constitute a payment made by TOC.

3.

Whether, in the circumstances, the payments had the effect of giving Carrier and Air Con "a preference, priority or advantage over other creditors" within the legislative provisions.

The payments were made by TOC

The Corporations Law obliges a receiver to establish and maintain a bank account. At the time of Mr Campbell's appointment as receiver, s 421(1) of the Corporations Law was the applicable section. Its terms are set out in the reasons of Dawson, Gaudron and Gummow JJ.

In accordance with s 421(1), the receiver opened and maintained such a bank account. The parties agree that it was from that account that the receiver drew the funds by which he paid Carrier and Air Con the sums in dispute. In accordance with s 421(1)(c), the only moneys paid into that account were funds received from the realisation of the assets of TOC, the subject of the debentures held by the Bank.

Clause 22 of the debenture deed specifies the obligations of the receiver in dealing with the bank account. That clause is set out in the reasons of Brennan CJ. I will not repeat it.

Certain fundamental propositions of law were not disputed by the parties. When, in accordance with the statutory requirements, the receiver opened the bank account, legal title to the money in that account vested in the receiver. The receiver held a legal chose in action ^[F95] . An equitable interest in the account vested in the Bank as secured creditor ^[F96] . In the Court below ^[F97] , it was considered unnecessary to define the precise nature of this interest. So it is here. If the receiver had reached a stage where there was a surplus available, this would have been held for the benefit of TOC ^[F98] . But no such situation arose.

The consequences of the application of these propositions to the present facts were disputed. The appellant argued that the receiver was acting as an agent for TOC while utilising funds provided by the Bank as mortgagee. The debenture deed envisaged that the receiver would carry on the business of TOC, as he had done in this case. Carrying on that business necessarily required the expenditure of moneys. A receiver was appointed as an agent to expend such moneys as required. He did so solely for those purposes. It would follow, so it was argued, that the payments were made "by a company" within the meaning of s 565 (1) of the Corporations Law. The receiver submitted that, because the moneys in his account did not belong to TOC, it followed that the payments to the first respondents could not have been made "by a company". They were made by him.

The authority of this Court makes it clear that in ascertaining who made a "payment" for the purposes of s 122(1) of the Bankruptcy Act, ownership of the money from which the payment was made is not determinative. It was held in Octavo Investments Pty Ltd v. Knight ^[F99] that the phrase "from his own money" forms part of the description of the person who makes the payment in question and later becomes bankrupt. It does not operate to qualify the classes of transaction covered by s 122(1) ^[F100] . The Court held that in any case ^[F101] :

"[T]he words 'from his own money' may well be satisfied if a trustee makes payments to a creditor out of trust assets in respect of which he has not only the legal estate but also a beneficial interest to secure his right to an indemnity."

The correctness of this interpretation of s 122(1) was confirmed by the insertion of s 122(1A) by the Parliament the following year ^[F102] . The meaning of that sub-section was discussed by Marks J in Ramsey v. National Commercial Banking Corp of Australia Ltd ^[F103] in the following passage ^[F104] :

"[T]he clear legislative intent reflected by the words of subsec. (1A) is to widen the ambit of 'payment' to include not only one which is, but also one which is not, made out of the debtor's own money. The words suggest greater width of application than merely to jointly owned moneys."

In their reasons, the majority demonstrate that the meaning of s 122(1A) is not beyond doubt. However, I agree in the reasoning of Marks J. It may more readily be embraced because the sub- section was inserted so soon after the decision in Octavo. It is also an interpretation which gives effect to the apparent purpose of the words employed by the legislature.

The foregoing considerations lead me to the conclusion that the correct application of s 122(1) to the payments to Carrier and Air Con requires no inquiry into the ownership of the funds in the receiver's account from which those payments were made. The sole inquiry to be made is whether the payments can be said to have been made by TOC.

Much authority stands against the proposition that the relevant payments were made by the receiver to settle a personal obligation. One of the earliest expressions to this effect may be found in In re Sartoris's Estate. Sartoris v. Sartoris where Chitty J said ^[F105] :

"It being plain that there is no vesting of the debtor's property in the receiver, it follows, and has been decided, that notwithstanding the receiving order the bankrupt alone can bring actions for the recovery of property not in his possession, as for instance a debt due to him at law. ... A receiver appointed in an action, is to take care of, and receive the property which is put under his charge. He is not at liberty, and is not entitled, to bring an action in his own name; the reason being, that he has no property vested in him."

A line of authority to the same effect was discussed by Needham J in Re Scottish Properties Pty Ltd ^[F106] . His Honour there concluded that the receiver "is not entitled, merely by virtue of his appointment, to have the property of the company transferred into his own name".

The most recent authority supporting this conclusion appears in the opinion of O'Bryan J in Telecom v. Russell Kumar & Sons ^[F107] . In that case, the liquidator succeeded in recovering from the creditor preferential payments made by a receiver in respect of telephone accounts. The creditor had asserted, unsuccessfully, that two preferential payments did not come within the statutory provision, since the payments were not made by the company but by the receiver out of particular funds received from the sale of company assets. O'Bryan J accepted that the relevant principle was stated in Re Margart ^[F108] . He cited that decision as authority for the proposition that ^[F109] :

"When the receivers were appointed by the chargee the floating charge over the assets and undertaking of the company crystallised and an equitable interest in the assets and undertaking passed to the chargee."

On the question of the ownership of the assets of the company, O'Bryan J said ^[F110] :

"Upon appointment the receivers became the agents of the company but the assets and undertaking of the company did not vest in the receivers. ^[F111] "

He went on ^[F112] :

"The first proceeds of the sale of assets enabled the receivers to make two payments to Telecom. In my view... the money raised by the receivers from the first sale of assets belonged to the company and had not been transferred to the chargee before the two payments were made to Telecom."

O'Bryan J was therefore of the view that the moneys in the receiver's account, obtained from the sale of company assets, belonged to the company until the receiver had paid them to the mortgagee. He did not see any conflict between that finding and the actual decision in Re Margart . Nor do I.

Nor could the payments be said to have been made by the Bank. The Bank itself could only have made the payments if, after the funds had been paid into the receiver's account, the Bank received them pro tanto in discharge of the indebtedness that existed under the debenture. That was not the present case. The Bank did not have an unfettered power to use the funds. Rather, the indebtedness between TOC and the Bank remained until such time as there was an appropriation of the funds to the Bank by the receiver from his account ^[F113] . That had not occurred.

The terms of the debenture deed under which the receiver was empowered to deal with the funds support no other conclusion than that the relevant payments were made "by [TOC]" through its agent the receiver. The common law presumption that the receiver would be the agent of the debenture holder ^[F114] was expressly displaced by the debenture deed itself. Clause 19 of the debenture deed provided for the appointment of a receiver "PROVIDED ALWAYS that every such Receiver shall be the agent of [TOC] and [TOC] alone shall be responsible for his acts and defaults".

I accept that in acting as an agent for a mortgagor a receiver may occupy "a very special position" ^[F115] . The nature of the agency has been described as "logically untidy" ^[F116] . The use of the device of agency in this context was developed originally to ensure that no liability was imposed upon the mortgagee for the acts of the receiver whom the mortgagee appointed under the contract between the mortgagor and the mortgagee ^[F117] :

"For valuable consideration [the mortgagor] has committed the management of his property to an attorney whose appointment he cannot interfere with. The appointment so made will stand good against himself and all persons claiming through him, except incumbrancers having priority to the mortgagee who appoints the receiver."

Whilst a receiver acts as agent for the mortgagor, the reason for this is ultimately the law's concern for the protection of the secured creditor. It has even been suggested that for some limited purposes, in particular "realizing the security of the debenture holder", the receiver, while acting generally as agent of the mortgagor, may also "notwithstanding the language of the debenture", act as the agent of the debenture holder ^[F118] .

Relying on such reasoning, it was submitted by the receiver that he was acting in this case for the mortgagee, strictly in accordance with the mortgagee's interests. However, it is artificial to suggest that this Court should draw a distinction between those acts in which the receiver is acting as an agent of the company (where the agent binds the company), and those where the receiver is dealing with the proceeds of realisation of the company's assets and there is no need for him to act as an agent. Even if that were so it does not mean that the receiver ceases to act as an agent for the company at such times. The receiver's agency is undoubtedly "real" ^[F119] .

In ascertaining the scope and nature of the receiver's powers as agent it is necessary to refer to the terms of the debenture deed. When this is done, it is clear that, in making the relevant payments, the receiver was acting within the powers conferred by that document. Clause 19 granted the receiver power "without any consent on the part of [TOC]" to "carry on ... the business of [TOC]" ^[F120] ; "to carry out and enforce specific performance of or otherwise obtain the benefit of all contracts entered into or held by [TOC] or entered into in exercise of the powers or authorities hereby conferred" ^[F121] ; and "to exercise all the powers of [TOC]" ^[F122] . Clause 22(c) of the deed gave the receiver authority to apply the fund for certain purposes, including "in payment of all costs charges expenses and outgoings properly incurred in or incidental to the exercise or performance ... of any of the powers or authorities hereby conferred". There could therefore be no doubt that the receiver was authorised to act as an agent for TOC in securing an arrangement with Carrier and Air Con for the completion of the sub- contracting work through an agreement to pay debts owed by TOC to those companies ^[F123] . In order to secure payment from Jennings Industries Ltd to TOC, the receiver decided to allow continued trading by TOC. For that purpose he agreed to make the payments to the two sub-contractors to cover pre-receivership debts which had been incurred to them by TOC. The payments were drawn by the receiver on the statutory bank account. They were necessary incidents of carrying on the business of TOC.

The first respondents, sensibly, did not dispute that the receiver might be an agent for TOC for the purposes set out in cll 19 to 22 of the debenture deed. However, they submitted an alternative proposition which rested on the assertion that any attempt to analyse the payments from the bank account by reference to the law of agency was unhelpful. It was the effective control of the moneys which was determinative. Moneys which were in the receiver's account were subject to the rights of the secured creditor to have the fund applied in accordance with its security. The respondents argued that it followed that TOC itself could not deal with, and did not control, such moneys. As there were insufficient funds in the account to satisfy the debt owing to the secured creditors, there could be no surplus, and none of the moneys in the account could ever be paid to TOC or be under the control of TOC. Since TOC would not have the power to control or operate the fund and make the payment, the payment could not be a payment "by a company".

This argument has a superficial attractiveness. However, when the correct characterisation of the receiver's agency, described above, is understood, it is evident that the Bank's equitable interest in the funds held by the receiver did not alter the control over the funds which the receiver exercised as agent for TOC. The control and employment of such moneys was determined solely by the debenture document and relevant statutory provisions ^[F124] . That document vested power to control the moneys in the receiver and no one else. The Bank could not unilaterally alter the rules set out in the document or override its provisions. The Bank's sole measure of control at the time of the payments was the right to dismiss the receiver and substitute another in his place ^[F125] . Nor was the position of the Bank altered by the statutory provisions in question in this case. The language of those provisions does not invite an immediate inquiry into which creditors should have priority of interest in the funds in the receiver's account as a means of determining whether certain payments were made "by a company". The purpose of the provisions is to prevent preferential payments being made to some creditors at the expense of others where the interests of the paid creditors in the receiver's fund may have no greater legal or equitable priority over those of other unpaid creditors.

It follows that the authorities upholding the priority of the equitable interests of debenture holders in receivers' funds over other claims in the property of companies ^[F126] are not in point for the task of applying the legislation against preferences. Reliance was placed on the decision in Re Margart ^[F127] , in which a bank held an equitable charge over the assets of a company. After a summons to wind up the company was presented, the company paid money to the bank in reduction of its indebtedness, after which the winding up order was made. Helsham CJ in Eq concluded that the bank held a beneficial interest in the money and that s 368 of the Companies (New South Wales) Code, prohibiting dispositions of property made after the commencement of winding up, did not apply to a disposition by which a creditor, with a beneficial interest in the property, obtained that property at a time when it was entitled to it ^[F128] .

That decision is not analogous to the present case. Here the receiver was acting on behalf of the company in continuing to carry on the business of that company. He was utilising money from his separate bank account for that purpose to pay some unsecured creditors but not others. The beneficial interest of the Bank gives it priority of payment over unsecured creditors. However, it does not bestow upon it power of control over the way in which account moneys are distributed between unsecured creditors. By the debenture deed, that power descended upon the receiver. It was defined and limited by the terms of the deed and the applicable legislative provisions.

The correctness of this analysis may be tested against the effect which the payments to the unsecured creditors had upon the respective debts owed by TOC to the Bank and Carrier and Air Con. As the agent for TOC, the receiver did not hold the funds in the bank account for the debenture holder. The fact that the receiver had access to fund moneys could have no impact on the indebtedness between TOC and the Bank. Interest would continue to accrue on the secured debt until it was discharged by payment by the receiver to the Bank ^[F129] . The making of the payments in question did, however, have the result of discharging some of TOC's past debts. This is a most powerful reason for characterising the payments as payments "by a company" for the relevant purposes within the scope of the agency ^[F130] . This is so regardless of any equitable interest which the Bank held in the moneys in the receiver's account.

There is another good reason for finding that, in such a case, the receiver made the payments as agent for TOC. If it were otherwise, there would be circumstances where the indebtedness between the Bank and the company was discharged by a significant payment of funds into the receiver's account. If those funds were then utilised to discharge a pre-receivership liability of the company, the Bank could be left with no secured recourse to the company for reimbursement.

The payments were not for the receiver's personal obligations

The Master gave short shrift to the receiver's argument that his payments to Carrier and Air Con were to be regarded as made pursuant to a personal obligation and not as agent for TOC. However, the respondents asked this Court to accept the finding of the Full Court that the payments to Carrier and Air Con were payments made by the receiver in satisfaction of a personal liability which he had chosen to incur in order to ensure that the sub-contractors would complete their work.

The respondents submitted that, in fact, the receiver had no power to make payments to unsecured creditors on behalf of TOC. His powers were those, and only those, prescribed in the debenture deed. Whilst the receiver was authorised to carry on the business of TOC, he did not have the power that a liquidator had to deal with the general body of unsecured creditors. This Court was asked to accept that, although the receiver could be described in an imprecise way as an agent of TOC, it was a relationship of limited agency. Since the powers of the receiver were limited, relevantly, to those prescribed by cl 19 of the debenture deed, he had no power to make payments to unsecured creditors on behalf of TOC. Any payments by the receiver were therefore necessarily made pursuant to a personal obligation.

I would reject these arguments for reasons already stated. The receiver did have the power to act for TOC. He exercised that power in making the payments to Carrier and Air Con. The power of the receiver to make payments to unsecured creditors may be found under par (c) of cl 19 of the debenture deed conferring the power to carry on business. However, the power of the receiver to act as an agent for TOC was not confined to par (c) of cl 19. It also lay in pars (n), (o) and (p). These were general powers, the scope of which leaves no doubt that the receiver, in making the challenged payments, was acting within his powers under the debenture deed.

The respondents next suggested that the basis for the receiver's personal obligation was to be found in the letters written by Mr Schroder, on behalf of the receiver, to both Carrier and Air Con in an attempt to persuade them to complete their work for TOC. Those letters are extracted in the reasons of the majority.

In the Full Court, Doyle CJ cited a number of arguments to support his conclusion that the receiver had undertaken a personal obligation when he arranged for the payments to be made to Carrier and Air Con. In dealing with the sub-contractors on behalf of the receiver, the evidence showed that Mr Schroder had spoken (and written) of the receiver's "guaranteeing" payment of the amounts owing to Carrier and Air Con. Mr Schroder gave evidence in which he suggested that he had used the term "guarantee" in the sense of an undertaking rather than in its strict legal sense. Doyle CJ held that such words, used in such a context, suggested that the receiver had undertaken a personal obligation. His Honour's view was that non-lawyers would understand that language as consistent with a personal obligation assumed by the receiver. So far as this reasoning goes, I agree.

Doyle CJ then pointed out that it was necessary to secure the agreement with sub-contractors for them to resume work in order that the receiver should recover from Jennings Industries Ltd substantial payments owing to TOC. Thus, it was clear that the receiver was seeking to persuade Carrier and Air Con to return to the site and perform the balance of the work under their contracts with TOC where otherwise they would not have done so. In such a context, so it was argued, it would be reasonable for Carrier and Air Con to seek a personal guarantee of payment. Similarly, it would be for the receiver to undertake a personal obligation to meet that payment. Payments in discharge of such a personal obligation would not be payments "by a company".

With respect, these arguments do not determine the issue. Other powerful considerations convince me that the payments could not be characterised as having been made by the receiver in a personal capacity:

1.

Nothing in the facts referred to by Doyle CJ is inconsistent with the payments having been made by the receiver on behalf of TOC. The agreements and the wording used in the letters reflect the clear intention of the parties that the receiver would pay and discharge the debts on behalf of TOC. The parties did not distinguish between payment for work already done and payment for the work still to be done. The receiver, acting as an agent of TOC, gave a similar undertaking in respect of both kinds of payment.

2.

As the Master found, the respondents were fully aware that Mr Campbell had been appointed the receiver and manager of TOC. They were aware of the connection between the receiver and Mr Schroder. The letters dated 6 May 1991 were on the letterhead of TOC. Mr Schroder signed the letters on behalf of the receiver under that company's name. The respondents were aware that Mr Schroder was acting with Mr Campbell in administering the receivership. This undisputed evidence reinforces the conclusion that the payments by the receiver were far from personal. They were for and by TOC.

3.

Even if it could be said that, in one sense, the receiver had undertaken a "personal obligation" to Carrier and Air Con, that would not, for all purposes, fix the character of the payments made by the receiver pursuant to that obligation. For the purposes of s 565(1) of the Corporations Law, read with s 122(1) of the Bankruptcy Act, they would still, in my view, be regarded as payments made "by a company".

4.

The sub-contractors suggested that the fact that the payments operated to discharge the obligations of the company was merely coincidental. It did not alter the fact that the payments were made by the receiver to discharge a personal obligation which he had assumed. This argument is absurd. The fact that the payments operated to discharge TOC's liability goes to the heart of characterisation of the payments as payments by the company. It is that fact which distinguishes the present case from Expo International Pty Ltd v. Torma ^[F131] . In that case it was said that ^[F132] :

"[A] person to whom a payment has been made by a company within six months of its winding up does not obtain a preference merely by reason of the fact that he happens to be a creditor of the company. In order for the payment to be a preference, it must be made to the payee in his capacity as a creditor of the company and not otherwise."

That condition could logically only be fulfilled where the payment is not made by the receiver in discharge of a personal obligation but in discharge of an obligation of the company. That was precisely the effect of the payments in the present case.

5.

The contrary finding produces the "paradoxical" result, acknowledged by Doyle CJ ^[F133] , that if the receiver acted as agent for the company he would resort to the same bank account for payment where he acted in his own capacity in discharge of a personal obligation. The potential impact upon general creditors is precisely the same regardless of the capacity in which the receiver acts. As a matter of statutory construction, such an illogical outcome argues strongly that the artificial distinctions upon which the interpretation preferred by the Court below was based was never intended by the Parliament.

The correct view is that the payments were made by the receiver acting as an agent on behalf of TOC and as an incident of carrying on the business of that company as he was entitled to do. The receiver was acting in accordance with the agency relationship envisaged by the debenture deed. For the purposes of s 565(1) of the Corporations Law, read with s 122(1) of the Bankruptcy Act , the payments were made by TOC. The Full Court erred in holding otherwise.

The payments were preferential in effect

The Master found that, there being other unsecured creditors at the time the payments to Carrier and Air Con were made, who remained unpaid at the time of the winding up, the impugned payments were preferential. The Full Court, having decided that the payments were not made by TOC, did not need to decide whether they were preferential. It is necessary for me to consider this question. The receiver submitted that, even if the Court found that the payments to Carrier and Air Con were payments made "by TOC", such payments did not constitute preferences in the circumstances. He claimed that two conditions were necessary for a preference to be found, namely that a creditor had received an advantage and that other creditors had suffered a disadvantage.

In this case, so it was put, it could not be said that both of these conditions had been satisfied. True enough, the payments made by the receiver were made from a fund not available to the general body of unsecured creditors. The moneys in the hands of the receiver were insufficient to discharge the Bank's secured debt. Therefore, the receiver's choice, in paying one or more general creditors from that fund could not operate to the disadvantage of other unsecured creditors who did not have access to the fund. If it was to the disadvantage of any creditor, it was only to the disadvantage of the secured creditor, the Bank.

There is no binding authority on this question. Nor does the available case law provide convincing guidance about what constitutes a "preference, priority or advantage" in a particular case. Two approaches are available. The first, broader, approach is that applied by the Supreme Court of South Australia in Matthews v. Geraghty ^[F134] . That approach was expressed by King CJ as follows ^[F135] :

"To say that a disposition of property confers a preference upon a creditor in a liquidation conveys no more than that the disposition of property has placed the creditor in a position of advantage with respect to the general body of creditors."

A more recent interpretation of the intended operation of s 122(1) was expressed by Young J, in narrower terms, in James v. Commonwealth Bank of Australia ^[F136] :

" Although there appears to be a dearth of authority on the point, section 122(1) is directed at a situation of the pool of assets being available to creditors generally, being detrimentally affected by a transaction in favour of one creditor. Accordingly, in my view, what one has to do is to consider the situation of the creditors generally before the transaction, and then look at the situation afterwards and see whether the other creditors, that is the general creditors, have been disadvantaged."

Young J continued ^[F137] :

"[I]f one can see that the position of the general creditors after the transaction was no worse than it was before the transaction then the transaction does not have the effect of giving a preference to one creditor over the others."

The receiver urged that this Court should follow the narrower approach. I cannot agree. It represents a considerable qualification upon the plain words of s 122(1) . However, upon one view, both approaches can be accommodated by the terms of the section. Each focuses upon a particular manifestation of a preferential payment. Where a payment to one secured creditor imposes a manifest disadvantage to the general body of unsecured creditors, such disadvantage would clearly constitute strong evidence that the payment was preferential. However, it is not the only permissible manifestation of a "preference, priority or advantage". If it were, it would have been very easy for the legislature to make this clear by express language limiting the application of the section to such a case.

Section 122(1) is expressed in broad and ample terms. The challenged payments must have "the effect of giving that creditor a preference, priority or advantage over other creditors". The word "preference" is nowhere defined. It must therefore be given its ordinary meaning. Any thought that the word should be given a narrow construction is dispelled by the context in which it appears. A payment will offend the section not only if it has a preferential effect, but also if it has the effect of giving the payee a "priority" or "advantage". The use of the three concepts makes abundantly clear the broad ambit they are intended to cover.

Even if the words "preference, priority or advantage" could be read as being somehow more limited in scope than their ordinary meaning would suggest, such a construction would be displaced by the requirement in s 122(1) that the payments have the "effect of" bestowing such a "preference, priority or advantage". No intention to effect a preference is necessary ^[F138] . Nor does the preference need to be direct or obvious. The words "effect of" require this Court to look beyond form to the substance of the consequences arising as a result of the payment in question. When this approach is adopted, it is very difficult to justify reading down the scope of the provision by narrowly confining the words "preference, priority or advantage". Such an approach would subvert the intention of the Parliament that the legislation should cast a wide net protective of manifest equity and fairness as between all unsecured creditors.

Once the words of s 122(1) are given this meaning, it is clear that the fact that the receiver's account held insufficient funds to discharge TOC's secured debt to the Bank and to retain a surplus for distribution to unsecured creditors is not determinative. In the present case, the payments made to Carrier and Air Con had the "effect of" preferring them over the Bank. However, they also had the "effect of" preferring them over the other unsecured creditors. The two effects are not mutually exclusive.

It is no answer for the receiver to suggest that the payments to the creditors could not amount to preferences, since the debts were effectively "guaranteed" by the Bank. That is, if the sub-contractors had not been paid by the receiver, they would have had a claim against the Bank which appointed the receiver. The mere fact that there is a "guarantor" does not mean that a payment by the debtor is not a "preference". One creditor, by its private dealings, cannot escape the provisions of the Corporations Law, designed to protect all other creditors against preferences. There may still be a preference where the company pays the debt, regardless of whether it has been guaranteed by a bank from which the creditor could later have sought payment. Even where a receiver has chosen to undertake a "personal liability" to make a payment, this would not alter the preferential character of a payment to the unsecured creditor. In this respect, the Full Court failed to distinguish between the post-receivership obligation, which is incurred by a receiver personally and is independent of any pre-existing liability of the company, and the situation which existed in this case. Here, the receiver assumed a personal liability to meet pre-receivership debts for which TOC remained liable.

The appellant drew a helpful analogy between this situation and that which exists when a third party guarantees a particular debt owed by a company. When the third party pays the debt pursuant to that personal guarantee, there has been no payment by the company and hence no preference. However, that situation is to be contrasted with the payment of a debt by the company itself, where that debt is guaranteed by a third party. In such circumstances, there has been a preference. The company's assets are thereby depleted. The particular creditor is benefited. This is what the Corporations Law is expressed to remedy by affording a liquidator the power to unravel such preferential payments, out of equity to all creditors. This Court should adopt a construction of the Corporations Law which furthers the achievement of that purpose.

Two further arguments were advanced to repel the assertion that a "preference, priority or advantage" was enjoyed by the sub-contractors in this case. The first rested on the existence of the right of indemnity ordinarily enjoyed by a receiver over secured assets when the receiver undertakes a personal obligation. Octavo ^[F139] is authority for the proposition that the right of indemnity is a property right. The receiver's position is no different from that of an ordinary trustee in that the creditors of the receiver are entitled, in equity, to be subrogated to the rights of the receiver in respect to his right of indemnity ^[F140] . Having regard to the "right of subrogation", the creditors of the receiver are effectively secured creditors, not in the strict sense of having a direct right to legal access to property, but in an indirect sense where the receiver assumes an obligation to them as "quasi-secured" creditors so that they rank above unsecured creditors. Those remaining unsecured creditors could not be adversely affected in the relevant sense since they "do not stand equally" with creditors of a trustee or creditors of a receiver who have a right of subrogation. In short, it is only possible to "prefer" one creditor over another where they rank in equal degree in relation to their respective debts.

I cannot accept that this is the way in which to construe s 122(1) of the Bankruptcy Act . If the overall transaction is considered in this case, it is clear that the payments made to Carrier and Air Con elevated and advanced the rights of those unsecured creditors in preference to other unsecured creditors. In effect, the chosen creditors were, for the purpose of the payment of the particular unsecured debts, elevated to the position of a secured creditor. They became "quasi-secured" creditors (to adapt the respondents' terminology).

Secondly, the receiver characterised this case as a "running account" case. Properly classified, he had simply made a payment of a sum of money in order to obtain the continued supply of goods and services, not, as such, to discharge a past debt. In this connection the respondents relied on the decision in Ferrier v. Civil Aviation Authority ^[F141] , where the Full Court of the Federal Court of Australia held that it was only possible to assess the preferential effect of a payment in circumstances where the payment was made to produce goods and services for the company by looking at the net effect, rather than at the particular transaction in isolation. In this case, both of the Courts below had examined the payment by the receiver in isolation. The respondents submitted that this approach was impermissible, and contrary to Ferrier. It was erroneous to view one payment and conclude that it was a preference simply because it was made to a creditor when the debtor company was insolvent. Such an argument would ignore a later result, that a net advantage might be produced which, in turn, could be for the benefit of the company's creditors generally. Where, as in this case, there was not an isolated payment to secure a past debt, but payments to secure a future benefit, there could be no adverse effect upon other creditors. Properly analysed, therefore, there was no preferential payments if the benefits received exceeded the amounts paid.

This argument must also fail. At the time the payments were distributed to the sub-contractors, it was unclear what consequence would result. The making of the challenged payments may have been prudent from the receiver's and TOC's point of view at that time. But once liquidation occurred they still constituted a preference. The motivation of the receiver in making the payments is irrelevant to the determination of their effect for the purposes of s 122(1) of the Bankruptcy Act ^[F142] . So is the effect of the payments upon the financial position of TOC. It was correctly stated by McLelland J in Harkness v. Potts ^[F143] that:

"[T]he phrase 'preference, priority or advantage over other creditors' requires a comparison to be made between (i) the position of the recipient as a result of the challenged payment (and any sufficiently connected transactions) and (ii) the position of other creditors, in relation to the subsequent winding up. It does not invite a comparison between (i) the position of the insolvent company as a result of the challenged payment (and any sufficiently connected transactions) and (ii) the position which the insolvent company would have been in if the challenged payment had not been made."

Hence, there is no requirement to look at the question of whether there has been some damage to the company. What must be examined is the position of the recipients of the payments, Carrier and Air Con. Their position as creditors must then be considered in relation to the position of other unsecured creditors. If this is done, it is clear that the two chosen sub-contractors were favoured over other unsecured creditors. Accordingly, the payments made were preferential payments. The Master was correct in so finding.

Upholding the legislative policy against preferences

The foregoing conclusions, which are derived from the interpretation of the legislation, find support when consideration is given to the way in which that legislation was intended to operate in the real world of insolvent corporations. If the Full Court's decision is allowed to stand, there would be serious consequences for unsecured creditors in a less powerful bargaining position although equally deserving of payment once the debtor company became insolvent. Where a receiver arranged for payment of a pre-liquidation debt of the company, even where funds were drawn from the receiver's asset realisation account established pursuant to s 421 of the Corporations Law, such a payment would be effectively immune from a liquidator's later recovery action although falling within the preference period.

It was accepted by the Full Court that the language of s 122(1) of the Bankruptcy Act was not intended to be interpreted narrowly ^[F144] . There is a long line of authority to the same effect relating to similar provisions ^[F145] . This approach recognises the important social and commercial purposes of the sections, being designed to protect creditors against any attempt to favour one creditor or group of creditors over others during the time immediately before winding up. It would be completely inequitable, and destructive of the effectiveness of the legislation, to allow a receiver to undertake a personal obligation on behalf of an insolvent company where that action would result in the preference of one unsecured creditor over another in return for a promise of further work. The payments to such creditors from the funds of the company necessarily reduce the amount of funds available to pay other creditors. If a principle were established which would permit such payments to stand outside the power of recoupment by a liquidator, the pari passu principle, which lies at the very core of the administration of insolvency law, would be subverted. That principle is established to ensure that a company's available assets are shared with manifest equity among all of its unsecured creditors. Not just those with power over, or the ability to put pressure upon, the receiver. Not just those who find favour with the receiver. All of them.

Unless the Full Court's approach is reversed, creditors would be encouraged to bargain with receivers and to use their commercial muscle to secure payment of pre-receivership debts of the company in return for a promise of continued trading cooperation. This would allow deals to be done in which large or powerful creditors will be paid. Creditors with less bargaining power will not. This would not only fail to implement the long standing legislative policy against preferences but would seriously undermine that policy.

Orders

As the majority have noted, in respect of each appeal before this Court, an application was made by Carrier and Air Con for special leave to cross-appeal in order to have certain remaining third party proceedings remitted for determination by the Full Court. In the decision which it reached, the Full Court did not have to determine those proceedings. Such applications for special leave have been stood over pending the outcome of these appeals. The parties should have liberty to restore them for consideration in the light of this decision.

In each of the appeals the following orders should be made:

1.

Appeal allowed with costs.

2.

Set aside the judgment and orders of the Full Court of the Supreme Court of South Australia.

3.

In lieu thereof, order that the appeal to that Court from the judgment and orders of the Master be dismissed with costs.