United Builders Pty. Ltd. v Mutual Acceptance Ltd.
(1980) 144 CLR 673(1980) CLC 40-663
(Judgment by: Stephen J.)
United Builders Pty Ltd & TKM Finance (Aust) Ltd v Mutual Acceptance Ltd
Court:
Judges:
Barwick C.J.
Gibbs
StephenMason
Wilson JJ.
Judgment date: 7 NOVEMBER 1980
Judgment by:
Stephen J.
The issue for decision on this appeal is whether or not an unregistered charge granted by United Builders Pty. Ltd., now in liquidation, to Mutual Acceptance Ltd. over the former's interest in a partnership is "a floating charge on the undertaking or property of the company": The Companies Act of 1961 (Q.), s. 100(3)(d). If it is, the charge will, as against the liquidator and the creditors of United Builders, be void for non-registration; this will advantage one creditor which is the holder of a duly registered mortgage debenture subsequently granted by United Builders. (at p678)
An important feature of this case is that United Builders and Mutual Acceptance, the chargor and chargee respectively, were also the only two members of the partnership in question. Thus the charge which Mutual Acceptance took was a charge over the share of its sole partner. (at p678)
Clause 1 of the deed of charge begins by providing that United Builders "hereby charges all its right title and interest in the partnership . . . to the following intent and effect". There then follows the statement that this shall be so notwithstanding anything to the contrary contained in the deed of partnership. The clause then continues in three sub-clauses; of these, sub-cl. (i) provides that upon default by United Builders "this charge shall be deemed an automatic and absolute assignment and forfeiture in favour of Mutual Acceptance Limited of United Builders Pty. Ltd.'s interest in the said partnership, property and assets" and goes on to require United Builders in that event to perfect such assignment and to "vest such interest in the partnership, partnership property and assets" in favour of Mutual Acceptance. (at p678)
The only other relevant provision of the Deed is sub-cl. (iii) of cl. 1. It reads: "(iii) Save as provided for in this deed the rights, powers, interest and entitlement of United Builders Pty. Ltd. as a partner under the said Deed of Partnership are not abridged or affected in any way". In view of the comprehensive character of the charge, the extent of the rights which this sub-clause preserves for United Builders may not be immediately apparent. Its presence is, I think, to be explained by reference to sub-cl. (i). These sub-clauses are together intended to ensure that unless and until default occurs United Builders will retain its status as an active and competent member of the partnership. (at p678)
This brings me to the question of the effect of the words of charge and to the special significance of the fact that the chargee of United Builders' right title and interest in the partnership was also its sole partner. (at p678)
The words of charge in the opening provision of cl. 1 are expressed in the present tense and in the most comprehensive manner. They are apt to effect a present charging of all of United Builders' right title and interest in the partnership; not simply United Builders' share in the partnership property but the totality of those rights which United Builders enjoyed as a member of the partnership. Different but no less comprehensive words are used in sub-cl. (i). The rights of United Builders in the partnership were not confined to the right on dissolution to a due proportion of any surplus after realization of assets and payment of debts. They included that sui generis interest which a partner has in partnership assets, being his beneficial interest in every asset of the partnership, although not including title to any specific property of the partnership: Canny Gabriel Castle Jackson Advertising Pty. Ltd. v. Volume Sales (Finance) Pty. Ltd. (1974) 131 CLR 321 , at pp 327-328 . They also comprised various rights conferred upon each partner under the partnership agreement, such as the right to participate in the management of the partnership through appointees to its committee of management, the right to receive half yearly such nett profits of the partnership as might be available for distribution and the right to determine the partnership in the events specified in the partnership deed. (at p679)
The respondent has argued that, because of a general principle of partnership law, the charge given by United Builders over "all its right title and interest" could not actually take effect as a floating charge affecting management and other like rights; it should be treated as a fixed charge affecting a more narrowly defined partnership interest. It is trite law that a member of a partnership may not, without the consent of his partners, introduce a stranger into the partnership. Hence no assignment of his share in the partnership to a stranger, whether absolute or by way of security, will entitle the assignee to meddle in any way in the affairs of the partnership. This principle of partnership law now finds expression in s. 31 of the Partnership Act, 1980 (U.K.) and in its counterpart, s. 34 of the Partnership Act of 1891 (Q.). Those sections restrict the right of such an assignee of a partnership share by denying him any right "to interfere in the management or administration of the partnership business or affairs, or to require any accounts of the partnership transactions, or to inspect the partnership books". So long as the partnership continues as a going concern, the assignee's only right "as against the other partners" is to receive the assignor's share of profits; on dissolution he is entitled to the assignor's share of the partnership assets and, for the first time, to an account as from the date of dissolution. (at p679)
In the present case, however, there is no assignee, a stranger to the partnership, threatening to intrude into its affairs. Instead it is the only two members of the partnership who have agreed together concerning the partnership rights of one of them. To give precise effect to their agreement would neither offend against general principles of partnership law nor against s. 34 of the Queensland legislation. Consistently with general principle, that section looks only to partnerships in which, in addition to the assigning partner and the assignee, there are "other partners" capable of being affected by the intruding assignee. It is in protection of their interests that the section provides that "as against the other partners" the assignment shall be of quite limited effect so long as the partnership subsists. It has no application to the present case, where there are no such other partners. (at p680)
In Palmer v. Thompson (1879) OB & F (SC) 182 , the Supreme Court of New Zealand was confronted with a situation which, although involving different facts, does bear certain similarities. There the assignee was not a partner but had established contractual relationships with the other partners in relation to the assignment. The Court was concerned with the above principle of partnership law, not at the time incorporated in any statute. Prendergast C.J. observed (1879) OB & F at p 190-191:
"It thus appears that the present case is not the ordinary one of a partner mortgaging his share in a business, in which case there is no privity between the mortgagee and the other partners, but on the contrary that the security to be given to the plaintiff was made a matter of contract between the plaintiff and the defendants . . . "
and went on to refer to
"the various authorities collected in Mr. Justice Lindley's book on Partnership, which established the general principle that the mortgagee of the share of one partner takes subject to the right of the other partners to continue the partnership, and consequently to bring subsequent partnership dealings and transactions into account. The case of Cavander v. Bultee (1873) LR 9 Ch App 79 , referred to in the addenda, afterwards went before the Lords Justices, who affirmed the general principle as stated by Mr. Justice Lindley, 3rd ed., pp. 93-718 (sic). But our opinion in the present case stands upon the entirely different ground that the mortgagee has here acquired rights against the other partners in virtue of a distinct contract with them."
The present case is a fortiori ; it is not "other partners" who have become parties to a distinct contract with the chargor, the only other partner is itself the chargee of its partner's share. (at p680)
Somewhat closer to the facts of the present case was Rowe v. Wood (1822) 2 Jac & W 553 (37 ER 740) 1822. Wood, the mortgagee of a mine, became partner in the mining venture with the mortgagor, Rowe, so that he thereafter had a "demand on Rowe's share (in the partnership) for the balance of his account". Wood was in possession and Rowe was seeking the interim appointment of a receiver, which relief Lord Eldon L.C. denied. His Lordship observed (1822) 2 Jac & W, at p 558 (37 ER, at p 741) , at p. 558, that "if they had been merely partners, and no rights had been created by the relation of debtor and creditor, the case would have been very simple", one partner could not have excluded the other from equal management of the partnership business. But his Lordship was obliged to have regard to that other relationship and accordingly "the rules as to partners cannot regulate all their rights" (1822) 2 Jac & W, at p 559 (37 ER, at p 742) . Like Palmer v. Thompson it is an instance where the ordinary situation prevailing as between partners when one has encumbered his share in favour of a stranger is inapplicable, either because, as in Palmer v. Thompson, the other partners have all along been privy to the transaction, or as in Rowe v. Wood (1822) 2 Jac & W 554 (37 ER 740) because, there being only two partners, they also occupy the relationship of debtor and creditor, the latter having taken security over the former's share in the partnership. (at p681)
In the present case, in the absence of statutory impediment and of infringement of any principle of partnership law, the charge is free to operate according to its terms; "the rules as to partners" can no more regulate the position than they could in Rowe v. Wood. Those rules being inapplicable, the effect of the charge extends to the whole of United Builders' rights and interest in the partnership. It is in this situation and in the light of the terms of cl. 1 that it must be determined whether the charge operates as a fixed charge or as a floating charge. (at p681)
Whether a charge is floating or fixed will depend upon the intention of the parties, to be gathered from the terms of the document creating the charge and from surrounding circumstances. In the present case the words of charge are equivocal as to its precise nature but the surrounding circumstances, together with sub-cll. (i) and (iii), sufficiently reveal an intent that the charge should be a floating, not a fixed, charge. (at p681)
Ordinarily, a floating charge is a charge granted over the whole of a company's undertaking or over a class of its assets, such as stock-in-trade or book debts. While the company continues to carry on business, the property so charged will necessarily be subject to change. Unless the charge is permitted to float over the changing mass of charged assets, rather than to fasten upon them once and for all when created, the company will be unable to carry on its business. It is this intention of the parties, that despite the charge, the company should still continue to carry on its business, which, once made manifest, leads to the conclusion that the charge is a floating charge - In re Panama, New Zealand and Australian Royal Mail Co. (1870) LR 5 Ch App 318, at p 322 per Giffard L.J.; Illingworth v. Houldsworth [1904] AC 355 , at p 358 per Lord Macnaghten; Evans v. Rival Granite Quarries Ltd. (1910) 2 KB 979 , at p 994 per Fletcher Moulton L.J. The characteristic of a floating charge, which enables it to be employed so as to give effect to such an intention of the partners, is that, although it creates an existing charge, it does not "specifically affect any asset subject to it until it crystallizes into a fixed security": Luckins v. Highway Motel (Carnarvon) Pty. Ltd. (1975) 133 CLR 164 , at p 173 per Gibbs J. - and see Biggerstaff v. Rowatt's Wharf Ltd. (1896) 2 Ch 93 , at p 106 ; Evans v. Rival Granite Quarries Ltd. (1910) 2 KB 979 . (at p682)
In the present case, although the charge is not over the fluctuating assets of any business it does extend to rights which United Builders must continue to exercise as an independent partner if it and Mutual Acceptance are to continue together in active partnership. As it is the evident intention of the parties that this shall be the case it follows that the charge must take effect as a floating charge. (at p682)
It is revealing to see what would be the result were the charge to be regarded as a fixed charge. In relation to one right of the assigning partner, there would, no doubt, be involved no obvious inconsistency with the intent of the parties. That right, the right on dissolution to an account and to payment of whatever was due on the taking of such account, might be subjected to an immediate fixed charge without doing violence to what may be supposed to have been the parties' intent. It may quite appropriately be subjected to a fixed charge because, on execution of the charge, it is and thereafter remains both ascertained and certain in character, although its value will fluctuate from time to time. However other rights possessed by United Builders as a partner are of a different character. For them to be subjected to an immediate fixed charge would indeed imperil the continued operation of the partnership. (at p682)
This may best be shown by reference to these other rights themselves. First, United Builders is entitled to have and maintain equal representation with Mutual Acceptance upon the committee of management, the body responsible for the conduct of the business and affairs of the partnership. Then, the very objects of the partnership are largely dependent upon agreement from time to time between Mutual Acceptance and United Builders; they are expressed to be the development of one specific area of land "and such further or other object or objects as the partners may from time to time mutually agree upon". Again, United Builders is, as a partner, entitled to profits half yearly. It is also entitled, as a partner, to retire from partnership upon three months' notice in writing, receiving from the continuing partner upon such retirement the then nett value of its share in the partnership unless the latter elects instead to seek dissolution. In certain eventualities it is entitled, upon certain terms, to expel the other partner. (at p683)
Were the charge to operate as an immediate fixed charge in favour of Mutual Acceptance the consequence in the present case would be that United Builders would thereafter be obliged to exercise all these rights as Mutual Acceptance might direct. In other circumstances this would not, of course, be the consequence: s. 34 of the Partnership Act (Q.) would preserve to United Builders its continued free exercise of these rights. However, since the chargee is the only other partner that section has no application: instead the charge would operate according to its terms, and, being a fixed charge, would in substance bring to an end United Builders' active participation in the partnership. Mutual Acceptance would, in relation to these rights, be in much the same position as is a mortgagee of shares in a company in relation to the control of all the rights attaching to the mortgaged shares, as to which see Puddephatt v. Leith (1916) 1 Ch 200 , at p 201 , in argument, and per Sargant J. (1916) 1 Ch, at p 202 ; Wise v. Lansdell (1921) 1 Ch 420 , at p 430 ; Morgan v. Gray (1953) 1 Ch 83 , at p 86 and generally, Gore-Brown on Companies, 43rd ed. (1977), ch. 21.2. (at p683)
The surrounding circumstances, including the express terms of cl. 1, show that this consequence cannot have been intended by the parties to the deed. In particular sub-cl. (iii) reveals a clear intention that United Builders shall, despite its execution of the deed of charge, remain in a real sense an active member of the partnership. (at p683)
The conclusion to be drawn is, therefore, that the charge created by cl. 1 of the deed was intended to operate as a floating charge. Not only does this accord with the terms of sub-cl. (iii), it also serves to explain the terms of sub-cl. (i). The event referred to in that sub-clause, the making of default in the terms or conditions of any finance facilities provided by Mutual Acceptance, will be the crystallizing event, as may in any case be gleaned from the recitals in the deed and from the opening words of cl. 1. At first instance and in the Full Court it was held that if sub-cl. (i) were penal in operation its penal provisions were severable. In the absence of detailed argument on this aspect I prefer to express no conclusion on these matters; for present purposes nothing turns upon them. (at p684)
In my view Mutual Acceptance's charge is a floating charge; it has not been registered; accordingly it is void as against the liquidator and creditors of United Builders. I would allow the appeal accordingly. (at p684)