Sheahan v Carrier Air Conditioning Pty Ltd & Others, Air Con Serve Pty Ltd & Others

(1997) 189 CLR 407

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(Judgment by: Brennan CJ)

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

Court:

Judges:
Brennan CJDawson, 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

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Judgment by:
Brennan CJ

The appellant is the liquidator of TOC Pty Ltd (formerly known as T O'Connor & Sons Pty Ltd) ("TOC"), the winding up of which is deemed to have commenced on the filing of a summons for winding up on 27 May 1991. Prior to the winding up, the Australia and New Zealand Banking Group Limited ("the Bank") had appointed the respondent Mr A R Campbell ("the Receiver") receiver and manager of the undertaking and assets of TOC. The appointment was made in exercise of the Bank's powers under a mortgage debenture given by TOC to secure its liability to the Bank for advances which, at the time of the Receiver's appointment, stood at more than $4.5 million. TOC had sub- contracted with Jennings Industries Ltd for the installation of air conditioning equipment at the Adelaide Entertainment Centre and had further sub-contracted the work to the corporate respondents ("Carrier" and "Air Con"). When the Receiver was appointed, the work was incomplete. TOC had to complete the work in order to be paid by Jennings but it owed Carrier and Air Con substantial amounts for the work that they had performed up to that stage.

The Receiver was appointed by the Bank on 29 April 1991. On 2 May 1991 he issued a circular to the creditors of the Company notifying them that he had assumed control of the Company's affairs. In the circular he stated, in part:

"It is my intention to continue the company's operations for the time being. Accordingly, I would appreciate your making goods and services available to the company upon your normal trading terms and conditions when so requested by us. In this regard, would you please adopt the following procedure with regard to the company's account:

1.

Close your present account as at the close of business on 28th April 1991 and promptly render a statement of the account, as at that date, direct to the company; and

2.

Open a new account styled ' T. O'Connor & Sons Pty. Ltd. (Receiver & Manager Appointed) - Receiver & Manager's Account ' for all transactions occurring on and after 29th April 1991. Invoices and monthly statements in respect of this account should be rendered direct to my office.

Supplies and services upon this account will be treated as Receiver & Manager's liabilities and paid upon your usual trade terms provided they are supported by orders signed by ... myself".

The respondent Mr Schroder, who was employed by Mr Campbell's firm, was placed in charge of the day to day operations of the receivership. He negotiated agreements with Carrier and Air Con under which those companies returned to the site to continue their work under their respective sub-contracts. The terms on which Carrier was willing to continue with the work were set out in a facsimile of 3 May 1991, the relevant parts of which read as follows:

"Carrier Air Conditioning Pty Ltd accepts your offer of a payment in the sum of $139,332 conditional upon the following:-

A.

A written undertaking from KPMG Peat Marwick that this does not constitute a preferential payment and therefore cannot be subject to future recall.

B.

A written undertaking from KPMG Peat Marwick that this payment in no way prejudices Carrier's rights with regard to settlement of the outstanding balance.

C.

Payment, or an acceptable guarantee of payment, is received prior to the re-commencement of work, i.e, a bank guarantee."

Mr Schroder responded by letter dated 6 May 1991, which included the following:

"We confirm our agreement ... with respect to Carrier's continuing work on T O'Connor contracts as expressed in your fax of 3 May, 1991 and offer this letter as a Receiver's Guarantee of payment so that work may re-commence immediately on completion of the contracts that exist between Carrier and O'Connor."

Air Con returned to work under an agreement contained in Mr Schroder's letter of 6 May 1991 which stated in part:

"This letter is to confirm our agreement reached during meetings and telephone discussions on the 2nd and 3rd May, 1991.

1.

The Receiver & Manager of T O'Connor & Sons will guarantee payment of outstanding invoices due to Air Con Serve against our contract with you for work on the Entertainment Centre to the value of $79,600.00.

2.

We will also issue a Receivers order for work undertaken on this site from the date of our appointment, being Monday 29 April, 1991. The payment of this is guaranteed by the Receiver.

3.

Air Con Serve will return to site immediately and work with all dispatch to the successful completion of all O'Connor contracts at the Entertainment Centre."

In accordance with these agreements, payments were made to Carrier and Air Con on or about 16 May 1991, each in the sum of $30,000. Further payments were made to each of Carrier and Air Con by cheque drawn on 24 May 1991 and received by the respective payees on 27 May 1991. Carrier's cheque was for $30,000 and was received before the winding up commenced; Air Con's cheque was for $49,600 and was received after the winding up commenced. In each case, the payments were made by cheque drawn by the Receiver on a bank account styled "A R Campbell Receiver and Manager of T O'Connor & Sons Pty Ltd (Receiver and Manager Appointed)". The Receiver had opened that account in accordance with the requirements of s 421(1) of the Corporations Law ^[F1] .

The appellant as liquidator of TOC sought to recover the payments made to Carrier and Air Con as preferences void as against the liquidator pursuant to s 565(1) of the Corporations Law ^[F2] . That section imports the provisions of s 122 of the Bankruptcy Act 1966 (Cth). Sub- section (1) of s 122 in its relevant parts reads as follows:

" 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 ...:

(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; or

(b)

on or after the day on which the petition on which, or by virtue of presentation of which, the debtor becomes a bankrupt is presented and before the day on which the debtor becomes a bankrupt;

is void as against the trustee in the bankruptcy."

The trial judge held that the payments were void as against the liquidator. The Full Court of the Supreme Court of South Australia allowed an appeal and dismissed the liquidator's application ^[F3] . This appeal is brought by special leave and raises three related questions:

1.

Were the payments to Carrier and Air Con made by TOC?

2.

Is it material that the Bank had a beneficial interest in the Receiver's account from which the moneys paid to Carrier and Air Con were withdrawn?

3.

If the payments were made by TOC and the Bank's beneficial interest is not material, did each of the payments to Carrier and Air Con have the effect of giving the payee a preference over other creditors?

It is common ground that, at all material times, TOC was unable to pay its debts as they fell due from its own moneys and that the moneys which the Receiver had banked to the credit of the Receiver's account were the proceeds of realising assets of TOC. The mortgage debenture had created a floating charge over TOC's undertaking and assets which crystallised no later than 29 April 1991. It also appeared that the payments discharged pro tanto amounts owing by TOC to Carrier and Air Con respectively for work done prior to the appointment of the Receiver.

1. Who made the payments?

The agreements for resumption of work were made with Carrier and Air Con and the relevant payments were made by the Receiver or his agent Mr Schroder. The authority of the Receiver to make the agreements and to make the payments flowed from the terms of the mortgage debenture. The powers of the Receiver relevant to the present question were contained in cl 19:

"19. At any time after the moneys hereby secured become payable the Bank by notice in writing signed by any officer of the Bank may appoint any qualified person to be a Receiver of the mortgaged premises ... PROVIDED ALWAYS that every such Receiver shall be the agent of the Mortgagor and the Mortgagor alone shall be responsible for his acts and defaults and such Receiver so appointed shall without any consent on the part of the Mortgagor have power -

(a)

to take possession of collect and get in the whole or any part of the mortgaged premises;

...

(c)

to carry on or concur in carrying on the business of the Mortgagor and to make and effect all repairs purchases and insurances and to do all acts which the Mortgagor might do in the ordinary conduct of its business for the protection or improvement of the mortgaged premises or any of them or for obtaining income or returns therefrom;

...

(h)

to make any arrangements or compromises which such Receiver shall think expedient in the interests of the Bank;

...

(j)

to carry out and enforce specific performance of or otherwise obtain the benefit of all contracts entered into or held by the Mortgagor or entered into in exercise of the powers or authorities hereby conferred;

...

(o)

to exercise all the powers of the Mortgagor and all the powers of the governing body of the Mortgagor;

...

(q)

to do all or any of the things or exercise all or any of the powers aforesaid in the name of the Mortgagor or otherwise." (Emphasis added.)

Clause 20 added a broad power authorising the Receiver to act as attorney for TOC for the purpose of enabling him to do anything to facilitate the exercise of his powers under the debenture.

These clauses stamp the acts of the Receiver done within the powers conferred by the debenture with the character of acts done as agent of the company. The mortgage debenture is an example of what Williams J in Visbord v. Federal Commissioner of Taxation ^[F4] described as:

"a well-established legal device for a mortgagee, upon default by a mortgagor, to have the right to appoint a receiver, who is to be the agent of the mortgagor, so that the mortgagee obtains the benefits without being subject to the liabilities of a mortgagee in possession".

Although a receiver appointed with powers such as those contained in cl 19 is the agent of the debtor company so that, in his dealings with third parties, his acts are binding on that company, the receiver is not treated as an ordinary agent of the company in exercising powers (including the power of sale of the company's assets) which are conferred for the purpose of realisation of the security by the mortgagee. The receiver is appointed not for the benefit of the company but for the benefit of the mortgagee ^[F5] . The special nature and limited extent of a receiver's duty to the company in exercising his powers ^[F6] do not deny to the receiver's acts done in exercise of those powers the character of acts done by the company's agent.

As the assets of TOC were insufficient to satisfy the amounts due and owing to the secured creditor, the Bank, the Receiver would have had no power to pay the moneys received by him to an unsecured creditor but for his power to carry on the business of TOC. A receiver of a company's business who, in exercise of a power to carry on the business, pays an unsecured business debt does so as agent for the company: In re Hale; Lilley v. Foad ^[F7] . In the present case, the agreements with Carrier and Air Con to continue work under their respective contracts with TOC were made by the Receiver in exercise of his power to "carry on ... the business" of TOC and "to make ... arrangements ... which [the] Receiver shall think expedient in the interests of the Bank". Both of those powers were to be exercised by the Receiver as "the agent of the Mortgagor and the Mortgagor alone shall be responsible for [the Receiver's] acts". The fact that the agreements also contained the Receiver's guarantee of payments does not cast doubt on the agency of the Receiver. His only power to carry on TOC's business was an agency power.

It follows that the impugned payments to Carrier and Air Con were payments made by TOC's agent in discharge, pro tanto, of TOC's accrued liability to its sub-contractors.

2. Whose money was used to make the payments?

If a debtor (as defined in s 122 of the Bankruptcy Act ) makes a payment to an unsecured creditor that gives that creditor a preference over the debtor's other unsecured creditors, the payment is void against the debtor's trustee in bankruptcy even if the money used to make the payment was not the debtor's own money. In Octavo Investments Pty Ltd v. Knight ^[F8] , Stephen, Mason, Aickin and Wilson JJ pointed out that, in s 122 -

"The phrase 'from his own money' forms part of the description of the person who makes the payment or engages in the transaction in question and who subsequently becomes bankrupt. The reference is to a person 'who is unable to pay his debts as they become due from his own money'. We are unable to see any merit in the submission that the phrase 'from his own money' qualifies the classes of transaction covered by s 122(1)."

In the year following this decision, sub- s (1A) was inserted into s 122 ^[F9] :

" 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."

This provision was considered in Ramsey v. National Commercial Banking Corp of Australia Ltd ^[F10] . In dealing with a submission that par (b)(ii) was intended to cover only a disposition of money to which the bankrupt is entitled either alone or jointly, Marks J said ^[F11] :

" The interpretation for which [counsel for the bank] contended would involve reading the words to mean 'where the payment is made out of his own moneys or out of' in effect co- owned moneys, alternatively, as though the words 'or not' were omitted.

If that is what the legislature meant it did not say so. On balance, I think some meaning must be given the words 'or not'.

The construction for which [counsel for the bank] contended would render the reference to payment 'out of his own moneys' redundant, certainly unnecessary, because sec 122(1) clearly applies to a payment from the debtor's own money. But, in my opinion, the 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."

I agree.

Of course, a third party's ownership of money or property may be relevant to the question whether a debtor is acting on his own behalf or on behalf of the third party in paying the money or transferring the property to his creditor. In the present case, however, the money used to pay Carrier and Air Con was TOC's money in the hands of the Receiver. Clause 22 of the mortgage debenture provided for the application of all moneys received by the Receiver. It read as follows:

"All moneys received by any such Receiver or by the Bank under or by virtue of these presents shall be applied in manner following namely -

(a)

in payment of all rents rates taxes and other outgoings having priority to the charge hereby created or which such Receiver or the Bank shall think fit to pay;

(b)

in keeping down all annual sums or other payments (if any) and the interest on all principal sums (if any) having priority to the charge hereby created;

(c)

in payment of all costs charges expenses and outgoings properly incurred in or incidental to the exercise or performance or attempted exercise or performance of any of the powers or authorities hereby conferred such costs in the case of legal costs being charged as between solicitor and own client;

(d)

in payment of the remuneration of the Receiver;

(e)

in payment to the Bank of the moneys hereby secured.

The surplus (if any) shall belong to the Mortgagor but such surplus shall not carry interest. And the Receiver or the Bank shall be at liberty to pay the same to the credit of an account in the name of the Mortgagor in the books of the Bank and shall thereupon be under no further liability in respect thereof."

The terms on which the Receiver held the money in his bank account flowed from the agreement by TOC that money and property of TOC should be received by the Receiver and applied in accordance with cl 22. In Visbord v. Federal Commissioner of Taxation ^[F12] , Williams J stated the position thus:

" For valuable consideration the mortgagor has agreed with the mortgagee that the moneys which the receiver shall collect shall be applied by the receiver in the manner provided by the statute. In Yeates v. Groves ^[F13] Lord Thurlow , in a passage cited by Lord Cottenham in Burn v. Carvalho ^[F14] , said:- 'This is nothing but a direction by a man to pay part of his money to another for a foregone valuable consideration. If he could transfer, he has done it; and, it being his own money, he could transfer.' ... Subject to the right of the receiver to pay the outgoings and his commission thereout the money in the fund is owned by the mortgagee and mortgagor in the proportions fixed by the statute, and the receiver holds the fund in a fiduciary capacity on behalf of the mortgagee and the mortgagor to dispose of the moneys in this way. It is more than an agreement for valuable consideration that a fund shall be applied in a particular way. An obligation is imposed upon the receiver in favour of the creditor to make the payments to which the mortgagee is entitled out of the fund ( Palmer v. Carey ^[F15] )."

It is sometimes said that, when a floating charge crystallises, the assets subject to the charge are assigned in equity to the chargee ^[F16] . That is too imprecise a statement. The true position is stated by Lord Wrenbury in Palmer v. Carey ^[F17] referred to by Williams J in Visbord :

" The law as to equitable assignment, as stated by Lord Truro in Rodick v. Gandell ^[F18] , is this: 'The extent of the principle to be deduced is that an agreement between a debtor and a creditor that the debt owing shall be paid out of a specific fund coming to the debtor, or an order given by a debtor to his creditor upon a person owing money or holding funds belonging to the giver of the order, directing such person to pay such funds to the creditor, will create a valid equitable charge upon such fund, in other words, will operate as an equitable assignment of the debts or fund to which the order refers.'

An agreement for valuable consideration that a fund shall be applied in a particular way may found an injunction to restrain its application in another way. But if there be nothing more, such a stipulation will not amount to an equitable assignment. It is necessary to find, further, that an obligation has been imposed in favour of the creditor to pay the debt out of the fund. This is but an instance of a familiar doctrine of equity that a contract for valuable consideration to transfer or charge a subject matter passes a beneficial interest by way of property in that subject matter if the contract is one of which a Court of equity will decree specific performance."

In other words the extent of the equitable interest of a creditor in a fund to be applied in payment of his debt depends upon the terms governing the disbursement of the fund that are enforceable by specific performance. Therefore, a mortgagee under a mortgage debenture that contains a clause of the kind found in cl 22 has an equitable interest in the moneys in the receiver's hands the measure of which is found in the clause governing the disbursement of those moneys. It is erroneous to regard the charge over the moneys in the receiver's hands as effecting an equitable assignment of those moneys to the chargee. The charge is enforceable only in respect of money payable in accordance with the governing clause. Until the receiver pays the chargee, the secured debt remains outstanding between the debtor and the secured creditor. As Kekewich J said in White v. Metcalf ^[F19] :

"if the receiver taking the rents and profits levants leaving the mortgagee in the lurch, the result is that the mortgagor still remains liable on his covenant, and is bound to pay notwithstanding that his agent unfortunately has received more than sufficient to keep down the interest."

The moneys in the Receiver's account were "moneys of the corporation that come under the receiver's control", as s 421(1)(c) of the Corporations Law required, but the Receiver was under a fiduciary duty to both TOC and the Bank to apply them in accordance with cl 22.

Under cl 22, payment of the expenses properly incurred by the Receiver in carrying on TOC's business were payable in priority to the payment of the Bank's debt. The Receiver was directed to pay those expenses before accounting to the mortgagee. In no relevant sense were the moneys paid out from the Receiver's account to Carrier and Air Con the Bank's moneys. Although those moneys had been part of a fund charged with the payment of the Bank's debt, the Receiver paid TOC's money to Carrier and Air Con in accordance with the authority given by TOC in the mortgage debenture and in accordance with a direction in cl 22 which bound the Bank.

In my opinion, as the payments to Carrier and Air Con are properly to be characterised as payments by TOC to its creditors at a time when TOC was unable to pay its debts as they fell due from its own moneys, the question whether the payments gave Carrier and Air Con a preference arises.

3. Were the payments preferences?

At first instance, Judge Burley held that the payments were preferences by applying the test whether, at the times of the making of the respective payments, there was a creditor who was unpaid and who remained unpaid at the commencement of the winding up. The question of preference was not addressed in the Full Court as the Court held that the payments had not been made by the company. As the Full Court was, in my opinion, in error on this issue, it is necessary to consider whether the payments did in fact confer a preference on Carrier and on Air Con respectively.

The Bank's secured debt exceeded the moneys in the hands of the Receiver. There were no funds available to satisfy, even in part, the debts of the unsecured creditors. The question arises: is it sufficient to constitute a preference that an unsecured creditor is paid part of his debt and other unsecured creditors receive none when the other unsecured creditors' position is not adversely affected by the payment? The purpose of s 122(1) is to recoup the moneys of a bankrupt that have been paid preferentially in order to replenish the pool of assets which the creditors - that is, the general creditors ^[F20] - are entitled to share rateably. The language of s 122(1) - "preference, priority or advantage" - shows that the section is concerned with the effect of payments made to a creditor payee who is in competition with other creditors for a share in the bankrupt's estate. The only preference with which s 122(1) is concerned is a preference as between the payee and other general creditors who would otherwise be entitled to share in the money paid.

If a fund in the hands of a debtor or a debtor's agent is charged with the payment of a secured debt that would exhaust the fund, so that no part of the fund is available for distribution among the general creditors, and a payment to a general creditor is made out of the fund with the consent of the chargee, that creditor gains no preference at the expense of other general creditors. The effect of such a payment is not to prefer the payee among the general creditors but to prefer the payee to the secured creditor who would otherwise have been entitled to the money paid. And, as the secured creditor has consented to the payment, no recoupment of the money paid is possible. In James v. Commonwealth Bank of Australia ^[F21] Young J said:

" 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.

...

To my mind, cases such as Richardson v. The Commercial Banking Company of Sydney Ltd ^[F22] do focus consideration on the ultimate effect of the transaction with respect to the general creditors over and against the relevant creditor. Accordingly, in my view, if 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 ." (Emphasis added.)

In the present case, the payments made to Carrier and Air Con were not preferences vis-a-vis the general creditors.

For the reasons stated, the appeals should be dismissed.