Wily v St George Partnership Banking Ltd [1999] FCA 33 (29 January 1999)

Last Updated: 5 February 1999

FEDERAL COURT OF AUSTRALIA

Wily v St George Partnership Banking Ltd [1999] FCA 33

CORPORATIONS - winding up in insolvency - preference - payment by company to holder of a floating charge - whether effect of giving creditor a preference priority or advantage - relevance of priority given by s 221P of the Income Tax Assessment Act 1936 - whether a floating charge confers an equitable interest over the property of the debtor

Corporations Law s 565(1)

Bankruptcy Act 1966 (Cth) s 122(1)

A & J Lazzarotto Pty Ltd (In liq) (unreported, Full Court of the Supreme Court of Victoria, 16 December 1977) discussed and applied

Airservices Australia v Ferrier (1996) 185 CLR 483 applied

Burns v Stapleton [1959] HCA 34; (1959) 102 CLR 97 applied

Calzaturificio Zenith Pty Ltd (In Liq) v N.S.W. Leather & Trading Co Pty Ltd [1970] VR 605
applied

Discovery Books Pty Ltd, Re (1972) 20 FLR 470 applied

Evans v Rival Granite Quarries Limited [1910] 2 KB 979 referred to

Governments Stock & Other Securities Investment Co Ltd v Manilla Railway Co Ltd [1897] AC 81 referred to

London Pressed Hinge Co Ltd, In re [1905] 1 Ch 576 discussed

Lyford v Commonwealth Bank of Australia [1995] FCA 1261; (1995) 130 ALR 267 cited

National Australia Bank Ltd v K.D.S. Construction Services Pty Ltd [1987] HCA 65; (1987) 163 CLR 668 cited

National Provincial Bank Ltd v Ainsworth [1965] UKHL 1; [1965] AC 1175 discussed

Richardson v The Commercial Banking Company of Sydney Ltd [1952] HCA 8; (1951-1952) 85 CLR 110 applied

Sheahan v Carrier Air Conditioning Pty Ltd [1997] HCA 37; (1997) 189 CLR 407 applied

The Queen v Toohey; Ex parte Meneling Station Pty Ltd [1982] HCA 69; (1982) 158 CLR 327 cited

Tricontinental Corp Ltd v Commissioner of Taxation [1988] 1 QdR 474 mentioned and followed in part

Wallace v Evershed [1899] 1 Ch 891 referred to

HUGH JENNER WILY, IN HIS CAPACITY AS OFFICIAL LIQUIDATOR OF SPACE MADE PTY LIMITED (IN LIQUIDATION) V ST GEORGE PARTNERSHIP BANKING LIMITED

NO. NG 1150 OF 1997

JUDGES: WILCOX, SACKVILLE and FINKELSTEIN JJ

DATE: 29 JANUARY 1999

PLACE: SYDNEY

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NG1150 OF 1997

ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA

BETWEEN:	HUGH JENNER WILY Applicant
AND:	ST GEORGE PARTNERSHIP BANKING LTD Respondent
JUDGES:	WILCOX, SACKVILLE AND FINKELSTEIN JJ
DATE OF ORDER:	29 JANUARY 1999
WHERE MADE:	SYDNEY

THE COURT ORDERS THAT:

1. The appeal be dismissed.

2. The appellant pay the respondent's costs of the appeal.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NG1150 OF 1997

ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA

BETWEEN:	HUGH JENNER WILY Applicant
AND:	ST GEORGE PARTNERSHIP BANKING LTD Respondent
JUDGES:	WILCOX, SACKVILLE AND FINKELSTEIN JJ
DATE:	29 JANUARY 1999
PLACE:	SYDNEY

REASONS FOR JUDGMENT

1 WILCOX J: I have had the advantage of reading in draft form the reasons for judgment of Finkelstein J. Although I am respectfully inclined to agree with his Honour that a floating charge confers a proprietary (rather than merely personal) right, I prefer not to commit myself to any concluded view about that matter. Even if the contrary assumption is made, it seems to me clear, for the reasons given by Finkelstein J, that the payments in suit did not constitute a "preference, priority or advantage over other creditors" within the meaning of s122 of the Bankruptcy Act 1966 .

2 I agree that the appeal should be dismissed with costs.

I certify that the preceding two (2) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Wilcox.

Associate:

Dated: 29 January 1999

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NG 1150 OF 1997

BETWEEN:	HUGH JENNER WILY, IN HIS CAPACITY AS OFFICIAL LIQUIDATOR OF SPACE MADE PTY LIMITED (IN LIQUIDATION) Applicant
AND:	ST GEORGE PARTNERSHIP BANKING LIMITED (FORMERLY BARCLAYS BANK AUSTRALIA LIMITED) Respondent

JUDGE:	WILCOX, SACKVILLE AND FINKELSTEIN JJ.
DATE:	29 JANUARY 1999
PLACE:	SYDNEY

REASONS FOR JUDGMENT

SACKVILLE J:

3 I have had the advantage of reading in draft the judgment prepared by Finkelstein J. I agree with his Honour that, assuming a floating charge does not confer on the chargee a proprietary interest over the charged assets prior to crystallisation, the payments to the Bank in the present case did not have the effect of giving it "a preference, priority or advantage over other creditors" within the meaning of s 122(1) of the Bankruptcy Act 1966 (Cth) as applied to corporations by s 565(1) of the Corporations Law. I agree with his Honour's reasons for reaching this conclusion.

4 As Finkelstein J has explained, it is not necessary in this case to attempt to resolve the longstanding controversy concerning the juridical nature of a floating charge. That different views continue to be expressed on such an apparently fundamental question reflects the fact that particular cases (like the present) usually turn on more prosaic issues, such as the construction of a statute or the terms of the particular charge: see, for example, Evans v Rival Granite Quarries Ltd [1910] 2 KB 979, at 999-1000, per Buckley LJ; Tricontinental Corporation Ltd v Federal Commissioner of Taxation (1987) 1 QdR 474 (S Ct Qld, CA), at 560-561, per Connolly J. I might, however, be permitted a brief comment.

5 From a lawyer's perspective, the concept of property is inextricably interwoven with the content of legal rules and principles. As Jeremy Bentham observed (Theory of Legislation, Kegan Paul ed, 1911, at 113)

"Property and law are born together, and die together. Before laws were made there was no property; take away laws, and property ceases."

It is not surprising, therefore, that there is often an element of circularity in determining whether a particular interest should be classified as proprietary or not. Are remedies granted because an interest is proprietary? Or is the interest proprietary because legal or equitable remedies are available to the holder?

6 Doubtless, it is unwise to be dogmatic about the indicia of a proprietary interest. As I have said in another context, the concept of property may have different connotations for different legal purposes: R Sackville, "Property Rights and Social Security" [1978] UNSWLawJl 3; (1978) 2 UNSWLJ 246, at 250. The test of whether there has been an "acquisition of property" for the purposes of s 51(xxxi) of the Constitution, for example, may not be the same as that for determining whether a floating charge constitutes a "security" for the purposes of legislation governing priority among lenders or is subject to the Statute of Frauds: cf Re Manurewa Transport Ltd [1971] NZLR 909; Driver v Broad [1893] 1 QB 744.

7 Even so, as Finkelstein J suggests, I think there is much to be said for the view that a useful test for determining whether a particular interest is proprietary in character, at least where the interest is created by agreement, is whether the holder is able to enforce the interest against third parties (as distinct from the other contracting party or parties). If this is the test, the answer to the question whether a floating charge, prior to crystallisation, creates a proprietary interest in the chargee over the chargor's assets will depend on whether the chargee has remedies in respect of those assets enforceable against third parties.

8 Some authorities have answered this question in the affirmative: see, for example, Re Manurewa Transport, at 914-916; Hamilton v Hunter (1982) 7 ACLR 295 (S Ct NSW/Holland J) (holding that, where a chargor purports to assign assets subject to a floating charge in contravention of the terms of the charge, an assignee having knowledge of those terms and of the circumstances giving rise to the contravention takes subject to the charge). Whether these decisions are correct in holding that the chargee has remedies against third parties depends on policy issues of the kind that arise whenever courts are required to consider whether they should recognise (or create) novel proprietary interests. Well-known examples of such cases are Tulk v Moxhay (1848) 2 Ph 774; 41 ER 1143 (restrictive covenants over land); National Provincial Bank Ltd v Ainsworth [1965] UKHL 1; [1965] AC 1175 (the "deserted wife's equity"); Victoria Park Racing and Recreation Grounds Co Ltd v Taylor [1937] HCA 45; (1937) 58 CLR 479 (a promoter's asserted broadcasting rights over a sporting event); and Mabo v Queensland [No 2] [1992] HCA 23; (1992) 175 CLR 1 (native title).

9 Although it is not necessary to express a view as to the correctness of Re Manurewa and Hamilton v Hunter, the conclusions reached in those cases would seem to be supportable on a policy basis. The commercial object of the floating charge, broadly speaking (and subject to the terms of a particular charge), is to facilitate a form of secured lending which permits the chargor to dispose of assets in the ordinary course of business, but allows the chargee to have recourse to other business assets of the chargor as security for the advance. That object is advanced if a chargee has remedies in respect of business assets acquired by an assignee from the chargor where, for example, the assignee is aware of the floating charge and that the assignment contravened the terms of the charge. In these circumstances, any remedy against the chargor may well be of little or no commercial value. It is perhaps not easy to see why the assignee should be free to deal with the assets immune from action by the chargee, whether or not the wrongful assignment can be said of itself to have crystallised the charge.

10 Of course, the fact that a floating charge creates a proprietary interest in the charged assets prior to crystallisation (assuming this to be the correct position) does not necessarily determine what remedies are available to the chargee against third parties and in what circumstances any such remedies are available. The law recognises many different forms of proprietary interest and classifications are not necessarily rigid. Nor is the proprietary character of a floating charge necessarily relevant to other questions concerning the remedies available to a chargee prior to crystallisation (for example, the chargee's entitlement to injunctive relief against the chargor). And, as I have said, the correct classification of a floating charge does not govern the outcome of the present case.

I certify that the preceding eight (8) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Sackville.

Associate:

Dated: 29 January 1999

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NG 1150 OF 1997

On appeal from a Judge of the Federal Court

BETWEEN:	HUGH JENNER WILY, IN HIS CAPACITY AS OFFICIAL LIQUIDATOR OF SPACE MADE PTY LIMITED (IN LIQUIDATION) Appellant
AND:	ST GEORGE PARTNERSHIP BANKING LIMITED (FORMERLY BARCLAYS BANK AUSTRALIA LIMITED) Respondent

JUDGES:	WILCOX, SACKVILLE AND FINKELSTEIN JJ
DATE:	29 JANUARY 1999
PLACE:	SYDNEY

REASONS FOR JUDGMENT

FINKELSTEIN J:

11 The question raised by this appeal is whether the payment of a debt by an insolvent company to a creditor who holds a floating charge over the property of the company in respect of that debt, being a payment made within six months before the company is wound up, is recoverable as a preference.

12 On 20 July 1988, Space Made Pty Ltd (Space Made) created a charge over its property in favour of Barclays Bank Australia Ltd (now known as St George Partnership Banking Limited) (the Bank). The charge was to secure all monies that were then or that might later become payable by Space Made to the Bank in any manner and on any account. The charge was fixed on certain existing and future property (land, uncalled and unpaid capital, good-will, securities, books of account and personal property) and floating on all other present and future property.

13 As at 15 February 1991, Space Made was indebted to the Bank in the sum of $1,212,790. It is to be assumed that a sale of the property of Space Made would have produced an amount sufficient to discharge that debt. The evidence at the trial was not to the contrary and the case below was conducted upon this assumption.

14 Also as at 15 February 1991, Space Made was indebted to the Australian Taxation Office (ATO) in the sum of $1,716,535.72 comprising $803,108.22 for unremitted group tax and $913,427.50 for unpaid sales tax. It is not in dispute that, as and from 15 February 1991, Space Made was unable to pay both the debt due to the Bank and the debts due to the ATO. Space Made also owed other debts which it could not pay in full.

15 In February 1991 Space Made and the Bank agreed to implement a series of steps that would bring about a significant reduction of the company's indebtedness to the Bank. The Bank would lend $600,000 to a company called Space Made Industries Limited which would use that sum to purchase stock and debtors from Space Made. The Bank would also lend $300,000 to Game Time (Australia) Pty Limited which would, in turn, lend that amount to Space Made. The money received by Space Made would be applied to reduce its indebtedness to the Bank. It was also agreed that Space Made would sell certain items of plant and equipment and pay the net proceeds to the Bank in further reduction of its indebtedness.

16 These arrangements were put into effect and Space Made made the following payments to the Bank: $900,000 on 15 February 1991, $100,000 on 19 April 1991 and $112,000 on 29 April 1991. Space Made's indebtedness to the Bank was reduced accordingly.

17 On 31 July 1991, Space Made was wound up in insolvency on the application of the Deputy Commissioner of Taxation. The appellant, Hugh Jenner Wily, was appointed as its liquidator.

18 The appellant, in his capacity as liquidator of Space Made, brought an action against the Bank to recover the three payments. It was alleged that each payment was void as against the liquidator by reason of s 565(1) of the Corporations Law. In substance, that sub-section relevantly provides that a payment made by a company is void as against its liquidator in circumstances where, if the payment had been made by a natural person, it would have been void as against his or her trustee in bankruptcy. The appellant's contention was that if the payments had been made by a natural person they would have been void in consequence of the application of s 122(1) of the Bankruptcy Act 1966 (Cth). In that event, at least according to the current state of authorities, the amounts recovered by the appellant would not be subject to the Bank's charge and would be distributed amongst the other creditors of the company: In re Yagerphone Ltd [1935] 1 Ch 392; N A Kratzmann Pty Ltd (In liq) v Tucker [No 2] [1968] HCA 44; (1968) 123 CLR 295.

19 When the three payments were made, the relevant parts of s 122(1) read as follows:

"(1) 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 or 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."

20 Before turning to consider the operation of this sub-section, it is convenient to mention three established principles of Anglo-Australian law which provide the background to the issues raised by this appeal. The first is that, in general, a debtor is entitled to discharge his or her liabilities in any order that he or she pleases. So, a debtor is perfectly entitled to pay out one creditor even though other creditors will remain unpaid. The Fraudulent Conveyances Act 1571 (the Statute of Elizabeth) (13 Eliz 1 c 5), which has been adopted in all Australian jurisdictions (in Victoria see s 172 of the Property Law Act 1958 (Vic); in New South Wales see s 37A of the Conveyancing Act 1919 (NSW)), creates an exception but it only applies in limited circumstances.

21 The second principle is that in insolvency, by which I mean bankruptcy in the case of a natural person and liquidation in the case of a company, legislation provides that, with certain limited exceptions, all unsecured creditors of a bankrupt or an insolvent company are to be treated equally: that is, their liabilities are to be discharged rateably. This principle can be found in bankruptcy statutes dating back to 1542 (see 34 & 35 Hen 8 c 4, s 1 which was concerned with absconding debtors) and in company statutes since the Winding Up Act of 1844 (7 & 8 Vict c 111). See now s 108 of the Bankruptcy Act and s 555 of the Corporations Law.

22 The third principle is the recognition that certain dispositions made by a debtor who subsequently becomes bankrupt, or by a company that subsequently is wound up, should be recovered and be available to meet the claims of the creditors generally. Section 122 of the Bankruptcy Act is one example of the operation of this principle. Others are to be found in the Bankruptcy Act and the Corporations Law. Many other systems of law have comparable provisions.

23 Section 122, when it applies, will strike down a transaction that has a particular effect. That effect is "of giving [a] creditor a preference, priority or advantage over other creditors". Accordingly, when a debtor makes a payment out of a fund or from assets that have been validly charged with the payment of that debt, the creditor has not been preferred within the meaning of the section. The effect of such a payment is not to prefer the secured creditor at the expense of other creditors. It is the charge that has created the preferred position of the creditor and the payment does no more than give effect to the charge: see National Australia Bank Ltd v K.D.S. Construction Services Pty Ltd [1987] HCA 65; (1987) 163 CLR 668 at 679; Sheahan v Carrier Air Conditioning Pty Ltd [1997] HCA 37; (1997) 189 CLR 407 at 424-425.

24 It will be obvious that one possible answer to the liquidator's claim is that the Bank was a secured creditor and that it received the three payments in that capacity. However, the Bank's charge was both a floating charge and a fixed charge and it appears that only the last two payments, totalling $212,000, represented the proceeds of the sale of property (plant and equipment) which were the subject of the fixed charge. Thus it is clear enough that these amounts are not recoverable by the liquidator. But the payment of $900,000 was out of assets that were the subject of a floating charge which had not crystallised at the time of payment and the authorities are in conflict as to whether a floating charge, before its crystallisation, confers a proprietary interest in the property the subject of the charge.

25 The general nature of a floating charge has been discussed in many cases. The better known include the following.

26 Wallace v Evershed [1899] 1 Ch 891 where Cozens-Hardy J said (at 894):

"A floating security gives an immediate equitable charge on the assets, subject to a right to the company in the ordinary course and for the purposes of the business of the company, but not otherwise, to dispose of the assets as though the charge had not existed, ..."

27 Governments Stock & Other Securities Investment Co Ltd v Manilla Railway Co Ltd [1897] AC 81 where Lord MacNaghten said (at 86):

"A floating security is an equitable charge on the assets for the time being of a going concern. It attaches to the subject charged in the varying condition in which it had happens to be from time to time. It is of the essence of such a charge that it remains dormant until the undertaking charged ceases to be a going concern, or until the person in whose favour the charge is created intervenes. His right to intervene may of course be suspended by agreement. But if there is no agreement for suspension, he may exercise his right whenever he pleases after default."

28 Finally reference should be made to Evans v Rival Granite Quarries Limited [1910] 2 KB 979. In that case Buckley LJ said (at 999):

"A floating security is not a future security; it is a present security, which presently affects all the assets of the company expressed to be included in it. On the other hand, it is not a specific security; the holder cannot affirm that the assets are specifically mortgaged to him. The assets are mortgaged in such a way that the mortgagor can deal with them without the concurrence of the mortgagee. A floating security is not a specific mortgage of the assets, plus a licence to the mortgagor to dispose of them in the course of his business, but is a floating mortgage applying to every item comprised in the security, but not specifically affecting any item until some event occurs or some act on the part of the mortgagee is done which causes it to crystallize into a fixed security."

29 One possible view of the effect of a floating charge is that it creates an immediate equitable interest over the property of the company and that the company is permitted (licensed) to deal with those assets free of the charge in order to carry on its business until the charge has crystallised. The cases that support this view include Re Otway Coal Co Ltd [1953] VLR 557; Landall Holdings Ltd v Caratti [1979] WAR 97; Hamilton v Hunter (1982) 7 ACLR 295; Re Margart Pty Ltd (in liq); Hamilton v Westpac Banking Corp (1984) 9 ACLR 269; Moodemere Pty Ltd (in liq) v Waters [1988] VR 215. The opposing view is that because a floating charge does not specifically affect any asset until it crystallises into a fixed security it cannot confer a proprietary interest before crystallisation. The authorities that have adopted this approach include Tricontinental Corp Ltd v Commissioner of Taxation [1988] 1 QdR 474 and Lyford v Commonwealth Bank of Australia [1995] FCA 1261; (1995) 130 ALR 267. This is the view that was preferred by the trial judge.

30 This appeal can be disposed of without the need to resolve the conflicting views concerning the effect of a floating charge. Nevertheless I would not wish to depart from this aspect of the case without briefly venturing to express my own views on the matter.

31 The existence of the distinction between rights in personam and rights in rem is familiar. William Blackstone devoted much of Book 1 of his "Commentaries on the Laws of England" (1765) to the former and Book 2 to the latter. He described a right of property as "that sole and despotic dominion which one man claims and exercises over the external things of the world, in total exclusion of the right of any other individual in the universe"; Bk 2 at 1-2. This definition has two elements, viz. (a) a physical "thing" which was the object of property rights; and (b) the notion that property could only be the subject of exclusive (despotic) ownership. Insofar as incorporeal hereditaments were concerned, being rights issuing from a thing, Blackstone regarded them as "things" "only in contemplation" so that they too could be the subject of ownership.

32 By the nineteenth century the courts came to accept that there could be property where no tangible "thing" existed. Trade marks and trade secrets are obvious examples: as to trade marks see Singleton v Bolton (1783) 99 ER 661 and as to trade secrets see Morison v Moat [1851] EngR 790; (1851) 68 ER 492. And with the recognition that there existed non-physical forms of property which did not fit well into Blackstone's physicalist or absolutist conceptions, legal commentators sought to give a new meaning to the concept of property.

33 The most important of these jurists was Wesley Hohfeld. In the early twentieth century he published two influential articles entitled "Some Fundamental Legal Conceptions as Applied in Judicial Reasoning" (1913) 23 Yale LJ 16 and "Fundamental Legal Conceptions as Applied in Judicial Reasoning" (1917) 26 Yale LJ 710 where he presented a new concept for analysing property rights. Hohfeld identified certain fundamental legal relations each of which was defined relative to its opposite and correlative: being rights, privileges, powers and immunities on the one hand and no rights, duties, disabilities and liabilities on the other. As to the distinction between rights in rem and rights in personam Hohfeld argued that "[a] paucital, right or claim, (right in personam) is either a unique right residing in a person (or group of persons) and availing against a single person (or single group of persons) or else it is one of a few fundamentally similar, yet separate, rights availing respectively against a few definite persons" and "[a] multital right, or claim, (right in rem) is always one of a large class of fundamentally similar yet separate rights, actual and potential, residing in a single person (or single group of persons) but availing respectively against persons constituting a very large and indefinite class of people"; 26 Yale LJ at 718.

34 This differed from Blackstone's view in two important respects. First, there was no need for the existence of "things". According to Hohfeld property could exist whether or not there was any tangible thing to serve as the object of the right: property comprised legal relations not things. Secondly, Hohfeld did not consider it necessary that the dominion of the owner be absolute or fixed. Property, he said, consisted of a set of legal relations but not necessarily any particular set. Thus property could be defined by reference to the particular rights, powers, privileges and immunities that may subsist between or against other persons.

35 Hohfeld's formulation of the distinction between rights in rem and rights in personam has not escaped criticism. In an article entitled "Rights of Exclusion and Immunities Against Divesting" (1960) 34 Tulane Law Review 453, A M Honoré has argued that Hohfeld's test, which he described as primarily a numerical one, was deficient because it is possible, for example by a series of contracts, to have the same bundle of rights against many people and, in a small jurisdiction, rights in rem will be held against very few. Thus Honoré said that if Hohfeld's test was unqualified it was simply a matter of degree whether any right is in personam or in rem.

36 Honoré's view was that "rights in rem are protected by claims against all except those exempt or privileged"; 34 Tulane Law Review at 458. Further, Honoré said that it is an essential element of a right in rem that it survives changes in the identity of the persons against whom the right holds, particularly changes that do not involve the substitution of the person against whom the right is exercisable. Thus, according to Honoré (at 465):

"The distinction [between rights over property and personal rights] is that, in the case of the former, the right over the property, or the right to do something or have something done in relation to the property, is not liable to be divested [by alienation] whilst, in the latter case, though the claim against the present owner is not thus liable to be divested, the right over the property, etc. may be divested by alienation."

37 Honoré did not suggest that the immunity against the loss of the right by alienation should be absolute. He recognised that the immunity could not exist in the case of alienation by consent and acknowledged that most systems of law provide for exceptions to the principle in any case. Examples would include, sales in a market overt, sales by a factor and sales under a voidable title.

38 In summary then, according to Hohfeld a right in rem represents the multiplicity of duties imposed on an indeterminate number of persons not being duties of positive performance but of exclusion; ie the right consists of a general protection from interference. That is to say, according to his view, a right in rem should be held to exist when it is in relation to "things", physical or non-physical, being "things" that the law recognises are capable of ownership, where the right is capable of protection by action against an indeterminate class, a class that includes the grantor, and where the right is not generally liable to be defeated by alienation of the "thing".

39 I now turn to deal with the surprisingly few cases that have attempted to define a right in rem or a proprietary interest as I prefer to describe the right. A convenient starting point is the speech of Lord Wilberforce in National Provincial Bank Ltd v Ainsworth [1965] UKHL 1; [1965] AC 1175. In that case his Lordship said (at 1247-1248):

"Before a right or an interest can be admitted into the category of property, or of a right affecting property, it must be definable, identifiable by third parties, capable in its nature in assumption by third parties, and have some degree of permanence or stability."

40 This passage was cited with qualified approval by Mason J in The Queen v Toohey; Ex parte Meneling Station Pty Ltd [1982] HCA 69; (1982) 158 CLR 327 at 342-343. However, as Gummow J has pointed out in Commissioner of Taxation v Orica Ltd [1998] HCA 33; (1998) 72 ALJR 969 at 992, neither the decision in Ainsworth nor the decision in Toohey was concerned with the existence of a proprietary interest created under the general law of contract. Ainsworth dealt with the

development of the "deserted wife's equity" and in Toohey the High Court was considering rights created by a statute.

41 As a general definition of a proprietary interest the statement by Lord Wilberforce is too broad. In the first place, as Mason J acknowledged in Toohey (at 342) the proposition that a property right must be capable of assumption by third parties, that is that it must be capable of alienation, is not always an essential characteristic of such a right. It is of course true that, speaking generally, one of the principal and most important rights incident to the ownership of property is the right of disposition. But it is not in all circumstances an essential characteristic: see National Trustees Executors and Agency Company of Australasia Ltd v Federal Commissioner of Taxation [1954] HCA 71; (1954) 91 CLR 540 at 558 per Dixon CJ; Georgiadis v Australian and Overseas Telecommunications Corporation [1994] HCA 6; (1993-1994) 179 CLR 297 at 311-312 per Brennan J. In the second place the definition does not suggest a mechanism by which a proprietary interest is to be distinguished from a personal right unless the statement by Lord Wilberforce that the right must have "some degree of permanence or stability" means that the right could not subsist merely at the will of the donor and that it could be exercised not only against the donor but against third parties as well: a personal right could not usually be protected in this way. It is also possible, although it is not altogether clear, that by ascribing to the right "some degree of permanence" his Lordship contemplated that the right could not be defeated by alienation.

42 In relation to lesser interests, equitable in nature, the High Court has identified the ability of a court of equity to protect the "right" as one criterion for its characterisation as a right in rem. Thus in Brown v Heffer [1967] HCA 40; (1967) 116 CLR 344, in relation to purchaser's equitable interest arising under a contract of sale, the High Court said that the interest was commensurate only with the purchaser's ability to obtain specific performance of the contract. Specific performance here means, not merely specific performance in the sense of enforcing an executory contract, but all remedies available in equity to protect the interest that the purchaser has acquired under the contract: Legione v Hateley [1983] HCA 11; (1983) 152 CLR 406 at 446-447; Stern v McArthur [1988] HCA 51; (1988) 165 CLR 489 at 522-523.

43 However, for an equitable interest in property to subsist it would not be sufficient, in my opinion, if the holder of the interest is only able to protect his right, whether by specific performance, injunction or otherwise, against the grantor. The right must also be enforceable against third parties before it could be described as proprietary although the protection that is available against third parties may not be absolute: for example, an equitable interest is liable to be defeated by a purchaser for value without notice. No doubt it is also generally correct to say that the interest must be capable of disposition before it will be classified as proprietary.

44 In this context it is necessary to mention that in National Provincial Bank, supra, Lord Wilberforce said (at 1253) that the argument that an interest is proprietary if an injunction would issue to protect it was "fallacious". His Lordship said of the word "equity":

"In the authorities, the word is used in several senses and for several purposes. Sometimes it is used as referring merely to the exercise of an equitable remedy, such as a remedy by injunction: the thought seems to have been that since the courts will interfere by injunction to prevent interference with or departure from a right, that gives to the proprietor of the right something which is capable of binding not only the other party but his assignees, or successors, provided of course they have notice of the right. In this form the argument is clearly fallacious. The fact that a contractual right can be specifically performed, or its breach prevented by injunction, does not mean that the right is any the less of a personal character or that a purchaser with notice is bound by it: what is relevant is the nature of the right, not the remedy which exists for its enforcement."

45 I do not doubt the accuracy of the statement that the availability of an injunction does not necessarily mean that the interest protected is a proprietary interest. But it should be noted that his Lordship was speaking of an injunction issuing to protect a merely contractual right against the grantor of that right. Where the protection that a court of equity will afford is in respect of a "thing" that the law regards as property and that protection is available not only against the grantor but against third parties, including assignees or successors, there is much to be said for the view that the right being protected is a proprietary right. That is to say, a right is an (equitable) proprietary right when a court of equity will grant an equitable remedy, such as an injunction, to protect the right against third parties instead of leaving the holder to his or her claim in damages against the party with whom the holder has a direct relationship, for example of a contractual or fiduciary nature.

46 In the case of a floating charge there can be no doubt that, subject to any applicable discretionary considerations, the mortgagee is entitled, before crystallisation, to protection against a dealing with the charged property that is contrary to the provisions of the instrument creating the charge. So, an injunction will issue against the grantor (mortgagor) to restrain it from dealing with the charged property otherwise than in the ordinary course of business: In re Woodroffes (Musical Instruments) Ltd [1986] Ch 366 at 378. An injunction will also be granted against a third party to prevent that party interfering with the rights of the mortgagee over the charged property. In In re London Pressed Hinge Co Ltd [1905] 1 Ch 576 Buckley J granted relief in equity, in that case by the appointment of a receiver, to prevent a judgment creditor issuing execution against property the subject of a floating charge notwithstanding that the mortgagor was not in default. The law, as it was then understood, was that an execution creditor took subject to the rights of debenture holders (In re Standard Manufacturing Co [1891] 1 Ch 627) and thus could have no more than the benefit of the equity of redemption (Davey & Co v Williamson & Sons [1898] 2 QB 194). However, in Evans v Rival Granite Quarries Ltd, supra, it was decided that the existence of a floating charge did not prevent a judgment creditor enforcing his judgment. The reason given was that a floating charge permitted the company to carry on its business and the payment of debts, whether voluntarily or by execution, was a dealing in the ordinary course of business. The result is that the foundation for the ruling in In re London Pressed Hinge Co Ltd has been removed, but, in so doing, the Court of Appeal did not deny to a mortgagee the right to protection in an appropriate case. In this regard the statement by Williams J in Trincontental Corp Ltd, supra, at 485 that "the mortgagee may, without crystallising the charge, obtain relief in equity to protect his interest in the [charged] property" is in accordance with principle.

47 This discussion demonstrates that, subject to the powers reserved to the mortgagor, the property the subject of a floating charge will be preserved to meet the unpaid debts due to the mortgagee. That a court of equity will protect charged property in this way shows, in my opinion, that the rights that are being protected are proprietary and not perceived in nature.

48 I can now turn to consider the case upon the assumption made by the trial judge namely that, before crystallisation, a floating charge does not confer a proprietary interest over the property of the company.

49 To determine whether the payments made to the Bank had the effect of giving it a preference over the other creditors of Space Made it is necessary to consider the position at the time when each payment was made. That is, the enquiry is whether, at those times, it can be said that the Bank has been preferred: Calzaturificio Zenith Pty Ltd (In Liq) v N.S.W. Leather & Trading Co Pty Ltd [1970] VR 605; Re Discovery Books Pty Ltd (1972) 20 FLR 470 at 475; Airservices Australia v Ferrier (1996) 185 CLR 483 at 501 (footnote 51).

50 The liquidator says that when the three payments were made, the Bank was an unsecured creditor, its charge not having crystallised, and hence the payments preferred the Bank to the other unsecured creditors.

51 However, s 122(1) "supposes a bankruptcy, and it is in relation to that bankruptcy that the question arises whether, over the other creditors, a preference, priority or advantage has been given to the particular creditor": Richardson v The Commercial Banking Company of Sydney Ltd [1952] HCA 8; (1951-1952) 85 CLR 110 at 129. The comparison that must be made between the position of the creditors is on the basis of their likely position in a hypothetical bankruptcy or winding up at the time of payment. It would be both anomalous and unjust if the position of one creditor (in this case the Bank) was considered on the basis that there had been no bankruptcy or winding up. Nor would it result in a true comparison for the purpose of determining whether one creditor has received a preference over the others.

52 Accordingly, the position of the Bank must be determined as if Space Made was wound up when the three payments were made. On that assumption the floating charge would have crystallised, that is become a fixed charge (see Illingworth v Houldsworth [1904] AC 355; Evans v Rival Granite Quarries Ltd, supra) with the consequence that the property the subject of the charge would not be available for the general body of unsecured creditors. In that event the three payments to the Bank could not be regarded as preferential.

53 Even if, contrary to the view that I have expressed, the payments to the Bank would appear to be preferential in a hypothetical winding up, if that is not their true effect they will not be caught by s 122. By this I mean that a payment will not be preferential unless it results in a decrease in the assets that are in fact available to meet the claims of the unsecured creditors in the actual winding up of a company: Airservices Australia v Ferrier, supra, at 502 per Dawson, Gaudron and McHugh JJ. In Airservices Australia v Ferrier the High Court referred with approval to the decision of Fox J in Re Discovery Books Pty Ltd, supra, where his Honour said (at 475):

"[T]he effect of a payment is to be judged after bankruptcy, with due regard for events occurring after the payment was made, and that one must ultimately come back to considering whether by reason of the payment, or dealing, there is less money available for the general body of creditors than otherwise might have been expected to be the case."

54 See also Burns v Stapleton [1959] HCA 34; (1959) 102 CLR 97 where the High Court (Dixon CJ, Kitto and Windeyer JJ) said (at 104):

"What the sub-section [the former section 95(1) now section 122(1)] clearly intends to make void, where it applies, is the change which, if allowed to be effectual, would dislocate the statutory order of priorities amongst creditors."

55 The same position prevails in the United Kingdom. In Williams & Muir Hunter "The Law and Practice in Bankruptcy" (19th ed) (1979) the learned editors state (at 355):

"A payment to a creditor who is himself a debtor of the amount paid in discharge of his debt, resulting in the discharge of cross-claims of equal amount, cannot be a voidable preference, for the right of set-off would have remained in bankruptcy, so that no one is harmed by the transaction".

56 One instance of the application of this principle is to be found in the unreported decision of the Full Court of the Supreme Court of Victoria in A & J Lazzarotto Pty Ltd (In liq) (unreported, 16 December 1977). In that case the insolvent company was owed $8,620 by two of its directors but it was indebted to them in the sum of $7,400 for unpaid rent. Shortly before its winding up the company paid the outstanding rent and the directors returned the amount to the company in reduction of their indebtedness to it. The effect of the transaction was that no tangible assets changed hands yet the liabilities of the company were reduced by $7,400. After referring to Richardson's case and Burns v Stapleton the Full Court, comprising Young CJ and Lush and Fullagar JJ, said (at 6-7):

"In the present case, if one asks whether the appellants were better off, or the general body of the creditors were worse off in the liquidation of the company than they would have been if the transaction of 16 March had not been carried out, the answer is that their position was unchanged by it, because the appellants' obligation in respect of the liquidation, by virtue of the set off provisions of s.86, was to pay to the liquidator the sum of $1,220, and this was exactly what it would have been if the transaction of 16 March had not been carried out. Nor has there been any other intermediate change in the assets of the company apart from the reduction in the amount of the debt owed by the applicants, a reduction which for the reasons stated has no effect on the payment of the general creditors in the liquidation."

Accordingly it was held that the payment by the company in discharge of its indebtedness was not a preferential payment.

57 If one asks whether there is less money available for the general body of creditors by reason of the three payments to the Bank the answer must be a clear: "No". The reason is that if the payments had not been made the property available for distribution amongst creditors would not have increased. The Bank would have been entitled to receive payment out of the property in the hands of the liquidator in priority to the other creditors. Any payment out of property that is not available to meet the debts due to the other creditors can not confer a preference in favour of the payee. In this case then, the other creditors are not any the worse off by reason of the payments to the Bank.

58 This leaves one final matter for determination. The liquidator argues that, even if it be the case, as I have found, that the effect of the payments must be judged by reference to the dislocation of the statutory order of priorities then he says that order has been dislocated at least in relation to the debt due to the ATO for unremitted group tax.

59 At the time of the liquidation of Space Made s 221P of the Income Tax Assessment Act 1936 (Cth) imposed upon a trustee (who was defined to include a receiver of property of a company, a trustee in bankruptcy and a liquidator of a company) an obligation to pay to the Commissioner of Taxation, out of money held by the trustee, any unpaid group tax in priority to the payment of other debts: the section has since been repealed; see Taxation Laws Amendment Act (No. 3) 1995 (Cth), s 3, sch 2, item 33. It was said that the payments to the Bank at least disturbed this statutory priority and, accordingly, the payments must be judged to be preferential.

60 As I have mentioned earlier, one of the principal objects of bankruptcy legislation is to make provision for the equal distribution of assets among all creditors. No longer would the quality of the debt owed by a bankrupt confer priority: as to the common law position see Blackstone's Commentaries Bk 2 at 549.

61 To avoid the impact of this legislation it was not uncommon for a debtor, who was aware of his impending bankruptcy, often in consequence of undue pressure, to pay out one creditor in full leaving the others worse off. In Alderson v Temple [1746] EngR 5; (1768) 96 ER 384 Lord Mansfield held that in such a case, that is where the debtor makes a payment that he knows is in contravention of the spirit of the bankruptcy laws, the payment is recoverable as a fraudulent preference. This principle was given statutory force by s 92 of the Bankruptcy Act 1869 (UK) (32 & 33 Vict c 71).

62 In support of the fundamental rule that all creditors are to share and share alike in the assets of a bankrupt estate the New South Wales parliament enacted legislation that was wider in its application than the law as laid down in the United Kingdom. Thus s 8 of the Insolvent Act 1924 of 1841 (NSW) (5 Vict No 17) provided that "all alienations transfers gifts [etc] ... made by any person being insolvent ... and having the effect of preferring any then existing creditor to another shall be and are hereby declared to be absolutely void." When the Commonwealth parliament enacted the Bankruptcy Act to replace the legislation of the States the counterpart of s 8 was s 95, the antecedent of s 122.

63 Having regard to this history, the short answer to the liquidator's submission is that provisions such as s 122 are designed to protect the statutory order of priority established by the Bankruptcy Act and, when it applies in a winding up, the statutory order established by the Corporations Law: the statutory order being the right to receive payments pari passu. Section 122 is not concerned to protect the rights of a creditor who is accorded priority by some other legislation, whether State or Federal.

64 There is another difficulty with the liquidator's argument. The liquidator assumes that, under the repealed enactment, it was inevitable that unremitted group tax would be paid to the Commissioner although the property of the company was burdened by a charge. That this assumption is false is demonstrated by cases such as Deputy Commissioner of Taxation v General Credits Ltd [1988] VR 571 and Chant v Deputy Commissioner of Taxation (1994) 15 ACSR 184 where it was held that a mortgagee in possession of property the subject of a charge is not liable to pay unremitted group tax by reason of s 221P. It cannot be correct to say that one creditor, the Bank, has been preferred over another creditor, the Commissioner, when the second creditor, the Commissioner, did not have an absolute right, on bankruptcy or liquidation, to be paid the debt due to him out of the assets applied in payment of the debt due to the first creditor.

65 It has not been necessary to consider whether a payment made by a bankrupt or by an insolvent company can be a preferential payment in the case where the competition is between a secured creditor and a creditor who is given priority in a bankruptcy by the Bankruptcy Act or in a liquidation by the Corporations Law, as for example in the case of certain debts due to employees and the like. It may be that considerations different from those discussed in these reasons would then have application.

66 In the trial below, the trial judge found that the payments to the Bank were not preferential. For the reasons that I have given, which differ in some respects from those of the trial judge, I am of the opinion that the appeal must be dismissed with costs.

I certify that the preceding fifty-six (56) paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Finkelstein

Associate:

Dated: 29 January 1999

Counsel for the Appellant:	Mr B Coles QC Mr M Ashhurst
Solicitor for the Appellant:	McCrohon Bergseng
Counsel for the Respondent:	Mr S Epstein
Solicitor for the Respondent:	Gadens
Date of Hearing:	10 November 1998
Date of Judgment:	29 January 1999