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In the matter of Emanuel (No. 14) Pty Ltd (in liquidation) (ACN 008 080 206). Pater Ivan Macks & Anor v Blacklaw & Shadforth Pty Ltd (ACN 010 474 734) [1997] FCA 18 (24 January 1997)

COMPANIES - winding up - pre-liquidation deed between company and third party providing for third party to make payment to creditor of the amount owed by company - whether a transaction an unfair preference - whether company and creditor parties to the transaction.

Corporations Law s 588FA and s 588FF

Nilant v Plexipack Packaging Services Pty Ltd (1996) 14 ACLC 1559

Analogy Pty Ltd (Receiver & Manager Appointed)(In Liquidation) v Bell Basic Industries Ltd (Full Court of the Supreme Court of Western Australia, 23 August 1995, unreported)

Octavo Investments Pty Ltd v Knight [1979] HCA 61; (1979) 144 CLR 360

Sheahan v Air Con Serve Pty Ltd [1995] SASC 5193; (1995) 13 ACLC 1157

Ramsay v National Australia Bank Ltd [1989] VR 59

No SG 3069 of 1996

IN THE MATTER OF EMANUEL (NO.14) PTY LTD (IN LIQUIDATION)

(ACN 008 080 206)

PETER IVAN MACKS and EMANUEL (NO.14) PTY LTD (IN LIQUIDATION)

(ACN 008 080 206) v BLACKLAW & SHADFORTH PTY LIMITED

(ACN 010 474 734)

Mansfield J

Adelaide

24 January 1997

IN THE FEDERAL COURT OF AUSTRALIA )

)

SOUTH AUSTRALIA DISTRICT REGISTRY ) No SG 3069 of 1996

)

GENERAL DIVISION )

IN THE MATTER OF

EMANUEL (NO.14) PTY LTD

(IN LIQUIDATION)

(ACN 008 080 206)

PETER IVAN MACKS and

EMANUEL (NO.14) PTY LTD

(IN LIQUIDATION)

(ACN 008 080 206)

Applicants

- and -

BLACKLAW & SHADFORTH PTY

LIMITED (ACN 010 474 734)

Respondent

MINUTES OF ORDER

CORAM: Mansfield J

PLACE: Adelaide

DATE: 24 January 1997

THE COURT ORDERS THAT:

1. The application be dismissed.

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

IN THE FEDERAL COURT OF AUSTRALIA )

)

SOUTH AUSTRALIA DISTRICT REGISTRY ) No SG 3069 of 1996

)

GENERAL DIVISION )

IN THE MATTER OF

EMANUEL (NO.14) PTY LTD

(IN LIQUIDATION)

(ACN 008 080 206)

PETER IVAN MACKS and

EMANUEL (NO.14) PTY LTD

(IN LIQUIDATION)

(ACN 008 080 206)

Applicants

- and -

BLACKLAW & SHADFORTH PTY

LIMITED (ACN 010 474 734)

Respondent

REASONS FOR JUDGMENT

CORAM: Mansfield J

PLACE: Adelaide

DATE: 24 January 1997

Application under Part 5.7B, Division 2 of the Corporations Law ("the Law").

The applicant Peter Ivan Macks ("Macks") is the liquidator of the applicant Emanuel (No.14) Pty Ltd (in liquidation) ("Emanuel"). The claim is made under s588FF for orders declaring void a payment of $322,313.54 made to Blacklaw & Shadforth Pty Ltd ("Blacklaw") on 21 March 1995 and for payment of that sum plus interest, on the basis that the receipt of that sum was an unfair preference given by Emanuel to Blacklaw: s588FA, and an insolvent transaction: s588FC and so voidable under s588FE of the Law.

Background

Emanuel was incorporated on 25 July 1985. Its principal business was as a property owner. On 23 March 1995 it entered into voluntary administration under Part 5.3A of the Law, and on 24 January 1996 it was wound up. Macks is the liquidator. By operation of ss513A(b) and 513C of the Law, the winding up is taken to have commenced on 23 March 1995, and the relevant period for the purposes of determining whether a transaction is voidable is therefore the period of six months prior to 23 March 1995: s588FE(2)(b).

There is no dispute that as at 21 March 1995 Emanuel was indebted to Blacklaw for $322,313.54, and that on that date Blacklaw was paid that sum. The issue in the case is whether that payment was made as, or as part of, a transaction which constitutes an unfair preference under s588FA of the Law. It is also not disputed that in other respects the conditions for the operation of s588FF(1) of the Law existed at the relevant time, in particular that at the time Blacklaw received the payment Emanuel was insolvent: s588FC, and that Macks has sought to avoid the payment as an unfair preference, and thus as an insolvent transaction.

Events leading up to the payment

On 13 September 1993 Emanuel applied to E.F.G. Australia Ltd for funding to construct a haul road to enable removal of timber from Bribie Island in Queensland. It had engaged Tod Group (Brisbane) Pty Ltd ("Tod Group"), consulting engineers, to prepare costings and a time frame for the construction and completion of the haul road. That application was approved, and the funds sought were agreed to be made available by ELFIC Limited ("ELFIC") to Emanuel Management Pty Ltd ("Emanuel Management") to be secured by mortgage to be granted by Emanuel. The letter of offer from ELFIC dated 26 October 1993 was for $1,317,500 for the proposal, to be advanced progressively during construction "on a cost to complete basis at the discretion of ELFIC". Tod Group was to confirm to ELFIC that all statutory approvals for the road and ancillary works were in place. It also provided that claims for progress payments were to be submitted by Tod Group to the "Emanuel Group" which would then authorise payment and onforward the claim to ELFIC for its consideration. Once the payment was approved by ELFIC, the contractors and project creditors were to be paid by ELFIC direct. Solicitors for ELFIC were stated to be Clayton Utz. That offer was accepted.

Emanuel, and Emanuel Management, were treated as part of a larger group of companies called in documents (and in this judgment) the Emanuel Group. It is clear that this particular financing arrangement became part of an ongoing financing arrangement between ELFIC and the Emanuel Group. A Deed of Variation of Deed of Master Agreement dated 16 November 1993 reflected that. It provided in respect of the particular advance that:

"[ELFIC] has agreed to pay the ... [a]dvance by way of progress payments to the sub-contractors and project creditors in accordance with the [budget] such progress payments to be made upon receipt by [ELFIC] of certificates from [Tod Group] certifying as to the work completed and the cost of the work completed as claimed in the progress claim and such payments to be made at the absolute discretion of [ELFIC]."

It also stated that ELFIC would make no progress payments until such time as it had received from Tod Group written confirmation that all necessary statutory and local government approvals had been given.

On 6 July 1994, Blacklaw tendered to Emanuel to construct the haul road for $1,043,887. That tender was accepted by letter from Tod Group on 19 August 1994, and a contract between Emanuel and Blacklaw was duly entered into on that date. It provided for Blacklaw to provide security of 2.5% of the tender sum to ensure its due and proper performance of the contract and also for the retention by Emanuel for the same purpose of 10% of the value of the contract until 5% of the contract sum was held, during performance of the works.

Blacklaw then commenced the haul road construction works. It is not clear on the evidence whether all necessary approvals for those works had been procured, but that seems unlikely. By about the end of September 1994 (and probably by 22 September 1994) the works had ceased, due to a "stop order" imposed by a local government authority. The evidence does not disclose the circumstances in which that occurred. By then Blacklaw had carried out substantial work and on 12 October 1994 it issued a Progress claim under the contract to Tod Group for $401,822.74 less 10% retention, making a claim for $361,640.74. The claim was considered by Tod Group. On 21 October 1994, Tod Group issued and forwarded to Emanuel Progress Certificate No.1 authorising payment to Blacklaw of the sum of $322,313.54 for works completed to 22 September 1994. It had disallowed $14,700 of the claim, and then deducted 10% as the retention sum and a further sum being 2.5% of the tender sum as the security deposit. There is no dispute that the sum of $322,313.54 then became payable by Emanuel to Blacklaw as an unsecured liability.

Emanuel did not make payment of that sum either directly or, as the financing arrangement provided, through ELFIC. On 14 November 1994 Blacklaw wrote to Emanuel threatening legal action, unless security was offered for the outstanding debt. On 30 November 1994, Blacklaw issued to Tod Group Progress Claim No.2 for $79,509.20. It represented simply the claim for the retention sum, security sum and disallowed claim for $14,700 all deducted by Tod Group from its initial claim. On 2 December 1994, Blacklaw by its solicitors served upon Emanuel a creditor's demand for payment of $322,313.54 pursuant to s459E(2)(e) of the Law. Failure to comply with that demand provided Blacklaw with grounds for an application for the winding up of Emanuel. No such application appears to have been made.

In December 1994, there were clearly some communications between Emanuel and ELFIC, but it is unclear to what extent, and at least one discussion between Peter Esmond Shadforth ("Shadforth"), a director of Blacklaw, and ELFIC or another member of its group. It will be necessary to refer to those communications in a little more detail shortly.

By late December 1994, at least, it was apparent to Shadforth for Blacklaw that Emanuel was insolvent and, in the absence of its financiers' support, would be unable to pay the debt. He was aware that the EFG Group was mortgagee in possession of the Emanuel Group's secured land. I interpose that the parties treated the financiers' group, including EFG Australia Ltd, ELFIC, EFG Finance Ltd and Lensworth Properties Pty Ltd, generally without the need to discriminate between the individual companies comprising that group. Save to the extent necessary, I shall do the same and hereafter call that group EFG. He received from Giuseppe Emanuele, a director of Emanuel, a copy of a letter dated 21 December 1994 from Thomsons, solicitors for Emanuel, to Clayton Utz, solicitors for EFG. That letter reported that Emanuel did not have the financial capacity to pay Blacklaw, and suggested that the stop work order was the consequence of Emanuel's incorrect belief that all necessary statutory approvals had been procured before work began. It sought confirmation from EFG that, upon fulfilment of all conditions precedent to the loan, it would fund the works to date and in the future. Shadforth about then had communications with EFG, in which he asserts that EFG agreed to reimburse Blacklaw for the work performed by it to that time in any event. It will be necessary to make specific findings in relation to that alleged agreement. It will also be necessary to make findings as to the nature of communications between Emanuel and Blacklaw at about this time. On the topic of payment of the $322,313.54, there were thereafter on the evidence no further communications by Blacklaw with either Emanuel or EFG until shortly before 21 March 1995.

The focus of communications in January and February 1995 was the ongoing performance of the works. Price Waterhouse, as accountants for EFG, sought Blacklaw's estimates of the time and costs involved in completing the haul road, and was provided with those estimates. At that time, nothing came of those proposals.

Emanuel's financial position, and that of the Emanuel Group, was grave. On 15 November 1994, Branson J had given judgment dismissing the claims of the Emanuel Group to have set aside a Deed of Orderly Realisation of Securities between itself and EFG under which EFG was able to realise extensive securities granted to it by the Emanuel Group in support of its borrowings, and its claim to have EFG continue to provide it with funding to continue operating. There was an appeal instituted against that decision on 6 December 1994. On 17 March 1995 a Deed of Forbearance and Release was enacted between EFG and the Emanuel Group ("the DOFR"). Blacklaw was not a party to the DOFR, nor was it involved in negotiations in relation to the DOFR. In the DOFR, Emanuel acknowledged that it was in default under its financing arrangements with EFG, and that EFG was entitled to enforce its securities, including in respect of a judgment awarded against the Emanuel Group on 27 February 1995 of $186,880,302.71. The DOFR then recited that the Emanuel Group wished to compromise and settle all differences with, and claims against, EFG in accordance with the DOFR.

Under the DOFR, the Emanuel Group released EFG in respect of any claims of any kind which it might have against EFG or anyone associated with it, effectively including removing any entitlement which the Emanuel Group might have had to contest any issues relating to the claims by EFG against it and including the discontinuance of the appeal against the decision of Branson J referred to above. The Emanuel Group further agreed to undertake specified steps to facilitate the transfer and realisation of the extensive securities granted by it to EFG. EFG, for its part, agreed not to pursue action against the Emanuel Group outside the DOFR, and to pay certain monies, and give certain other benefits. Clause 6 of the DOFR deals with the payment of monies. Under clause 6, EFG agreed to the following:

"6.1 to pay:-

(a) to the Emanuel Group the sum of $650,000 on the Settlement Date by cheque drawn in favour of Messrs Johnson Winter & Slattery whose receipt for and on behalf of the Emanuel Group shall be a sufficient discharge to EFG Group for such payment; and

(b) to Messrs Johnson Winter & Slattery the sum of $50,000 on the Settlement Date on account of that firm's legal costs of and incidental to acting for the Emanuel Group;

. . . . . .

6.7 to pay, at the direction of the Emanuel Group, to Blacklaw & Shadforth Pty Ltd ACN 010 474 736 the sum of $322,313.54 for work performed for the Emanuel Group in relation to the construction of the Haul Road on Bribie Island;

. . . . . ."

The other provisions of clause 6 relate to occupation of premises, voting at certain meetings and the like. Clause 10 of the DOFR gave to EFG an unrestricted power of attorney on behalf of the Emanuel Group to execute any documents for it.

It is the payment made pursuant to clause 6.7 of the DOFR of $322,313.54 which is the subject of this application.

Communications surrounding the payment

Solicitors for EFG, Clayton Utz, sent various documents to solicitors for the Emanuel Group, then Johnson Winter & Slattery, for execution pursuant to, but in anticipation of the execution of, the DOFR including an authority to disburse the payment to Blacklaw. They sought, and received, from EFG payment to their trust account funds to enable settlement under the DOFR including the monies to be paid to Blacklaw, and other monies.

On 17 March 1995 Emanuel executed an authority directed to Elfic and to Clayton Utz in the following terms:

"We, the undersigned hereby request, authorise and direct you to pay for and on our behalf the amount of $322,313.54 to [Blacklaw] for work performed by [Blacklaw] in relation to the construction of the Haul Road on Bribie Island.

In consideration of payment by you of the said sums we agree not to make any claim against you relating to the disbursement of the said sums and to indemnify you against any claim, demand or action arising from or in relation to the above disbursement."

Clayton Utz on 17 March 1995 drew a trust account cheque for $322,313.54 payable to Blacklaw, and made it available to Blacklaw with a letter of 21 March 1995 in the following terms:

"Emanuel Group

Construction of Haul Road on Bribie Island.

We refer to our telephone conversation of this morning and enclose in accordance with the instruction of the Emanuel Group of companies a cheque in the sum of $322,313.54 in full and final settlement of all claims which your company may have against the Emanuel Group of companies.

Please acknowledge receipt of the cheque on the duplicate of this letter attached."

Blacklaw collected the letter and cheque, and deposited the cheque so that it was credited to its account on 21 March 1995. It sought, and obtained, a special clearance of the cheque.

To address the submissions, it is necessary first to determine whether the payment was made (as Blacklaw asserts) pursuant to an agreement made with, or undertaking given by, EFG in late December 1994 to pay Blacklaw the amount outstanding under the haul road contract in any event, and to make findings as to communications surrounding the payment. Evidence on those topics was given by Shadforth, and by Philip Maxwell Ahrens ("Ahrens"), then Senior Manager of EFG, and by John David Elliott ("Elliott"), solicitor and partner in Clayton Utz, whose affidavit was tendered, and not challenged by cross-examination.

It is unnecessary to recite the evidence of each of those witnesses. I am confident each was attempting to be truthful, but as is sometimes the case through the elapse of time, and because participants often have a different focus in the course of conversations, their versions differed in some material respects. I have generally preferred the evidence of Ahrens and Elliott where it contradicts that of Shadforth. There are objective factors which tend to make Ahrens' account of his discussions with Shadforth in late December 1994 inherently more likely, in particular on the topic of whether at that time (as Shadforth asserted) EFG agreed to pay Blacklaw for the work it had performed for Emanuel to date in any event. Those factors include the fact that his actual authority on behalf of EFG did not extend that far, the absence of any clear commercial benefit to EFG in so doing at that time, the absence of any firm figure being nominated in those discussions even on Shadforth's evidence, the absence of any confirmatory correspondence whilst negotiations were being pursued for Blacklaw to complete the works on EFG's direct instruction (including the terms of Blacklaw's letter to Price Waterhouse of 1 February 1995 when it provided a cost estimate to complete the works including the cost of the work to date without asserting or referring to any such agreement), the terms of Blacklaw's letter to Clayton Utz of 23 March 1995 which did not assert such an agreement, and the claim made for the outstanding balance made first to the administrator and later to the liquidator of Emanuel.

The evidence of Shadforth, who as I have said was doubtless trying to be truthful, was I suspect the consequence of him reading rather too much into what had been said to him.

I find that EFG did not, in December 1994, agree or undertake to Blacklaw to pay to it the amount of $322,313.54 or any amount, although Ahrens did in a general way reassure Shadforth that EFG planned to have the works completed and would give Blacklaw the opportunity to tender for the completion of those works and would prefer Blacklaw to do so provided price and timing was reasonable. Indeed, I am satisfied that Ahrens made it plain to Shadforth that the outstanding liability of Emanuel to Blacklaw was not a liability which EFG would take over. It was common to those discussions that Emanuel was not, apart from any funds made available to it by EFG, in a position to pay Blacklaw. The copy letter of 21 December 1994 from Emanuel's then solicitors, Thomsons, to EFG's solicitors Clayton Utz thus provided to Blacklaw made Shadforth aware that Clayton Utz were solicitors for EFG.

Discussions in January and February 1995 were directed at the resumption of the works, and Blacklaw's role in that resumption. Ultimately, it was not until later in 1995 that the necessary approvals were obtained and on 20 September 1995 ELFIC contracted with Blacklaw for the completion of the works.

On 21 March 1995, Shadforth was contacted by someone from Clayton Utz on behalf of EFG. I find that that person, who was not Elliott, identified himself in that capacity. I am unable to make any finding as to the content of that conversation except that, at least, it sought to have confirmation that Blacklaw was owed the sum of $322,313.54 by Emanuel. That confirmation was given. Blacklaw was not then aware of the DOFR. Blacklaw's letter of 23 March 1995 in response to Clayton Utz' letter of 21 March 1995 confirms that Shadforth understood that Clayton Utz' role was as solicitors for EFG, as it refers to the contract being brought to completion "for your client" at a time when, on all accounts, any completion of the works was to be effected by EFG and not by Emanuel. That had been the common understanding from late December 1994. Blacklaw's letter of 23 March 1995 pointed out that payment of the balance for work carried out to date was required so that, from Blacklaw's point of view, it had not accepted the $322,313.54 in full and final settlement of all claims against the Emanuel Group. In response to that letter, Elliott contacted Shadforth and made it plain that EFG accepted no liability to Blacklaw in respect of the work performed by it on behalf of Emanuel. The evidence does not suggest that he then requested repayment of the amount paid, or insisted in any way that its receipt amounted to a final discharge to Emanuel for the full claim and other claims.

Subsequent Communications

Following Emanuel going into administration on 23 March 1995, Blacklaw sent to the administrator on 29 March 1995 a "completed informal claim form and instrument of proxy" together with the certificated values of work completed on two projects, including the haul road project. It asserted the following amounts owing:

"1. Construction of Haul Road $387,122.74

2. Construction of Roundabout $ 7,457.71

Total $394.580.45

Less payment received $322,313.54

Total outstanding $ 72,266.91."

Following the liquidation of Emanuel, a formal proof of debt was lodged by Blacklaw with the liquidator for both Emanuel and Emanuel Management for that sum of $72,266.91, for the balance of payments for work completed for construction of the wood chip haul road on Bribie Island, Queensland.

On 7 February 1996 Macks as liquidator of Emanuel wrote to Blacklaw demanding repayment of the sum of $322,313.54.

Subsequent communications relate to the later contract between EFG and Blacklaw for the completion of the works, or comprise communications between solicitors relating to the events referred to above. I do not think that later material can change the quality of the events as they had occurred.

The issues

It is common ground that Emanuel's claim stands or falls on whether the payment, in the circumstances outlined above, comes within s588FA(1) of the Law.

Section 588FA(1) provides:

"A transaction is an unfair preference given by a company to a creditor of the company if, and only if:

(a) the company and the creditor are parties to the transaction (even if someone else is also a party); and

(b) the transaction results in the creditor receiving from the company, in respect of an unsecured debt that the company owes to the creditor, more than the creditor would receive from the company in respect of the debt if the transaction were set aside and the creditor were to prove for the debt in a winding up of the company;

even if the transaction is entered into, is given effect to, or is required to be given effect to, because of an order of an Australian court or a direction by an agency."

"Transaction" is defined in s9 of the Law as follows:

"in Part 5.7B, in relation to a body corporate or Part 5.7 body, means a transaction to which the body is a party, for example (but without limitation):

(a) a conveyance, transfer or other disposition by the body of property of the body; and

(b) a charge created by the body on property of the body; and

(ba) a guarantee given by the body; and

(c) a payment made by the body; and

(d) an obligation incurred by the body; and

(e) a release or waiver by the body; and

(f) a loan to the body;

and includes such a transaction that has been completed or given effect to, or that has terminated".

The critical issues of dispute identified by the parties, under s588FA, are firstly under subparagraph (a) whether both Emanuel and Blacklaw were parties to the transaction by virtue of which the payment resulted, and secondly under subparagraph (b) whether the transaction resulted in Blacklaw receiving from Emanuel in respect of the undisputed indebtedness the proven and uncontested benefit, namely that Blacklaw received more than if the transaction were set aside and it had to prove that debt in the liquidation of Emanuel. I find that the result of the transaction involving the payment was that Blacklaw received more than it would receive if it were to prove that debt in Emanuel's liquidation; on the evidence of the liquidator, the likely dividend to unsecured creditors of Emanuel will be significantly less than 50 cents in the dollar. But it is less clear whether the relevant transaction included both Emanuel and Blacklaw as parties, or that the result of the relevant transaction was Blacklaw receiving the payment of $322,313.54 from Emanuel.

Part 5.7B of the Law was introduced effective from 23 June 1993 as part of the package of the Corporate Law Reform Act 1992. Prior to that time, whether by virtue of s565 of the Law or its legislative predecessors, the legislation made void as against a liquidator a preferential transaction if such transaction would, if made or incurred by a natural person, be void as against the trustee in bankruptcy. Thus, previously, the importation of ss120-122 of the Bankruptcy Act 1966 into the Law provided the measure of transactions void as preferences. As the Explanatory Memorandum then made clear Part 5.7B, although structurally different from the previous legislative regime, was directed to the same objective, namely to ensure that unsecured creditors are not prejudiced by the disposition of assets or the incurring of liabilities by a company in a period shortly before the winding up which would have the effect of favouring certain creditors or other persons.

Consequently, whilst it is necessary to be mindful of the significant textual changes introduced by Part 5.7B compared to the earlier provisions, decisions in respect of that earlier statutory regime will still prove useful in assessing the proper operation of Part 5.7B of the Law.

For Emanuel, it was contended that the relevant transaction for the purposes of s588FA of the Law was one of the following:

(1) a contract between Emanuel and Blacklaw for the payment of the sum of $322,313.54, evidenced by and limited to the Clayton Utz letter of 21 March 1995 in the context of Emanuel's authority dated 17 March 1995 and the acceptance and banking of the Clayton Utz cheque, or

(2) the payment by Emanuel to Blacklaw of the sum of $322,313.54, either on the basis that that payment was procured by and so was made by Emanuel pursuant to the original contract between Emanuel and Blacklaw of 19 August 1994 under which Emanuel was indebted to Blacklaw in that amount or on the basis that it was a discrete payment by Emanuel from its funds, being funds made available to it pursuant to the DOFR, or

(3) the payment to Blacklaw by Clayton Utz pursuant to the DOFR, being a payment procured by Emanuel as part of the Emanuel Group reflected in clause 6.7 of the DOFR, and under which Emanuel procured that payment (and other promises) from EFG in consideration of the Emanuel Group granting to EFG a release in respect of claims the Emanuel Group had or might have had against EFG and agreeing to other action including the transfer of properties over which EFG had been granted security.

As Blacklaw was not a party to the DOFR, it was not sufficient for Emanuel's purposes simply to establish that the payment was made by EFG under the DOFR. Nor would it be sufficient for Emanuel's purposes to describe the transaction simply as the payment, as the payment then would be made by EFG (for whatever commercial reason) to Blacklaw, from its own funds and without intervention of Emanuel; in that instance Emanuel would not be a party to the transaction.

Blacklaw's contentions in response were twofold. It submitted that the relevant transaction was simply the payment to it by Clayton Utz on behalf of EFG albeit pursuant to its contractual obligation to Emanuel under clause 6.7 of the DOFR to make that payment. Accordingly, it submitted, Emanuel was not a party to the transaction. Secondly, but really as part of that submission, it urged that the payment to Blacklaw was not made by Emanuel.

As to the first contention on behalf of Emanuel, in my judgment, such an agreement is not made out. I have found that, so far as Blacklaw was concerned, the letter followed both its awareness from December 1994 that Clayton Utz were solicitors for EFG rather than Emanuel and the common knowledge that in the absence of funding from EFG then Emanuel could not pay that amount, and further that shortly before the payment Shadforth was contacted by someone from Clayton Utz acting for EFG, not Emanuel, in relation to the amount owing. The letter itself does not assert explicitly that Clayton Utz were proffering the payment only on behalf of Emanuel, and it is uncontroverted that in fact Clayton Utz were at the time acting for EFG. From Emanuel's viewpoint, it had no direct dealings with Blacklaw in relation to the payment, and its role once the DOFR was entered into was to provide the disbursement direction referred to.

In the light of the findings of fact above, it is hard to see that there is any scope for a finding of the agreement primarily contended for. However, it was urged upon me by counsel for Emanuel that, for the purposes of that issue, I could not go outside the terms of the Clayton Utz letter of 21 March 1995 and the banking of the cheque; that included an agreement not simply effecting the payment but also accepting that Blacklaw had no further claims against it arising out of the haul road construction contract. I do not accept that contention. The letter itself refers to an earlier telephone conversation that day, which I have found was between someone from Clayton Utz for EFG and Shadforth, so as to extend the communications potentially comprising the contract. In any event, I do not think that that letter clearly identifies the 'contracting party' (assuming for a moment the existence of a contract in its terms) as Emanuel. In the event of any ambiguity, the admission of intrinsic evidence to identify parties to a contract is permitted: Codelfa Construction Pty Ltd v State Rail Authority of New South Wales [1982] HCA 24; (1982) 149 CLR 337; Rossiter v Miller (1878) 3 App. Cas. 1124; Edwards v Edwards [1918] HCA 2; (1918) 24 CLR 312. I do not think there is scope, on the particular facts as I have found them, for it to be found that there was a contract between Emanuel and Blacklaw when from the perspective of both EFG and Blacklaw it was they, and not Emanuel, who were parties to the asserted contract or (to use a neutral word) the arrangement. Furthermore, I find that Blacklaw banked the cheque promptly upon its collection from Clayton Utz before the terms of the letter came to the attention of Shadforth or anyone who could represent the mind of Blacklaw. Shadforth, upon being told of the availability of the cheque, arranged from Buderim for a clerk to collect it in Brisbane and to bank it; he did not see the letter until the following day. He then responded to Clayton Utz by letter of 23 March 1995 rejecting its terms as a term of payment. There was thereafter no suggestion that the payment should be refunded, presumably because clause 6.7 of the DOFR did not include such a condition as a term of the proposed payment; cp. Harris v Jenkins [1922] SASR 59.

As in Amos v Citibank Ltd (Court of Appeal, Supreme Court of Queensland, 10 May 1996, unreported), the act of acceptance of the payment was not an act of Blacklaw by anyone authorised by it to accept payment on the terms offered, but was merely an act of receipt of money. Also, as in that case, there was no agreement between Blacklaw and EFG (or Emanuel) because EFG (or in Emanuel's case, Emanuel) by its agent Clayton Utz knew that Blacklaw did not intend by the receipt of the money to be bound by the terms stated in its letter; the subsequent communications and conduct confirm that to have been the case.

I also reject Emanuel's second contention. In my view it is plain that the payment was not made by Emanuel but by EFG. In so far as it is said the transaction is the payment itself made under the DOFR, in my view Emanuel was not a party to the transaction. In so far as it is said the transaction is the DOFR itself, Blacklaw was not a party to it. That is so even though Blacklaw was the proposed beneficiary of one of the provisions of clause 6.7, and might in such circumstances have been able to enforce that promise: Trident General Insurance Co Ltd v McNiece Bros Pty Ltd [1988] HCA 44; (1988) 165 CLR 107 at 117.

R D Nicholson J was confronted with a similar contention in Nilant v Plexipack Packaging Services Pty Ltd (1996) 14 ACLC 1559. In that case, a vendor company contracted to sell its business, upon terms including that the purchaser pay a certain sum to the respondent, one of the vendor's creditors. The liquidator of the vendor sought to have that payment declared void under s588FE as an unfair preference. The respondent contended successfully that it was not a party to the transaction by virtue of which it was paid. His Honour first determined that the respondent was not a party to the sale and purchase agreement, even though it might have been able to enforce promise of payment contained in it. Then he addressed the question whether the relevant transaction extended beyond that contract, having regard to the definition of 'transaction' in s9 so as to encompass a transfer of the property of the company as vendor, a payment made by the purchaser, and a release by extinguishment of the debt by the respondent. His Honour made the point that the definition preserved the requirement that the company which, through its liquidator, is challenging the payment must be a party to the relevant transaction, so that s588FA(1) added to the scope of the definition in s9 only the feature that someone else may also be a party to the relevant transaction. In relation to the argument, he concluded (at 1565):

"If that were the case it would have the effect of joining in the transaction the acts of payment and extinguishment neither of which singularly qualifies as a transaction. In my view that course is not open because the subparagraphs of the definition of "transaction" in s 9 are each specifically qualified by use of the words "by the body". Each type of transaction exemplified in those subparagraphs must be one in which "the body" is the active party. The words "but without limitation" do not have the effect of qualifying as a "transaction" actions by others as transactions to which the body is a party. If it was intended by the draftsperson that the definition should have the wider compass, I do not consider that intention has been accomplished."

Thus, as the respondent had not participated in the formulation of the sale and purchase contract, the respondent was not a party to the transaction. And he found that the company was not a party to the payment by the purchaser to the respondent. Consequently, he concluded that there was no transaction upon which s588FA could operate. He did not therefore need to address the additional question whether in any event the transaction resulted in the respondent receiving payment from the company.

This case is, if anything, more removed from the operation of s588FA than in Nilant's case because in that case the funds directed to the respondent were specifically identified as part of the purchase price for the sale of the business, that is they were monies to which the vendor was entitled. In the present circumstances, under the DOFR the monies paid to Blacklaw were not monies to which Emanuel asserted any entitlement independently of the DOFR or pursuant to its terms, although the promise to pay that sum to Blacklaw comprised part of the consideration moving from EFG. On the other hand, clause 6.1(a) directs payment of a sum to certain solicitors which sum is clearly recognised as a sum to which Emanuel itself became entitled under the DOFR.

In following Nilant's case, in my view I must also reject the third contention of Emanuel as to the nature of the transaction. As R D Nicholson J pointed out, each of the illustrative transactions given in the definition of "transaction" involves "the body", namely the company whose liquidator is seeking to set the transaction aside, being the active party. This contention involves Emanuel as actor releasing EFG under and in terms of the DOFR, and the payment of the $322,313.54 by EFG to Blacklaw as the one transaction. Neither of those two component steps of itself would constitute a transaction to which both Emanuel and Blacklaw were parties, and in the absence of Blacklaw having any role in the events or negotiations leading up to the DOFR, or being a party to it, I conclude as a matter of fact that there was no transaction of the broader scope contended for.

So far as I am aware there have been no other decisions on the point in issue in this action specifically under Part 5.7B of the Law. Some decisions under previous legislation or the bankruptcy legislation were referred to by counsel for each party in support of their respective contentions, including the point that "transaction" is a word which had currency under that legislation to describe the event or combination of events giving rise to the preference complained of, cf. Richardson v The Commercial Banking Co of Sydney Ltd [1952] HCA 8; (1951-1952) 85 CLR 110, a case involving issues where a payment forms an integral and inseparable part of an entire transaction, or running accounts (see per Dixon, Williams and Fullagar JJ at 129, 132-133). Section 588FA(2) deals specifically with running accounts; it provides that in appropriate circumstances the transaction involving one payment should be taken together with all other dealings on that account to comprise the one transaction for the purposes of applying the section. It is a word which, depending on its content, can encompass a series of dealings with respect to property, e.g. Barron (Inspector of Taxes) v Littman [1953] AC 96 at 113.

The question is ultimately a question of fact to be determined in the circumstances of each particular case. R D Nicholson J made that point in Nilant by distinguishing between the circumstances in that case and the case where the recipient of the payment in some way participated in the formulation of the transaction leading to the payment. Thus, for example, the preferred creditor in Re Stevens; ex parte The Official Receiver (1928-29) 1 ABC 90 would still be caught within the net of s588FA, although he was paid directly by the purchaser of the debtor's business from the agreed purchase price, because he introduced the purchaser to buy that business and contrived to get the whole of the purchase price directly into his possession. A similar result occurred in Analogy Pty Ltd (Receiver & Manager Appointed) (In Liquidation) v Bell Basic Industries Ltd (Full Court of the Supreme Court of Western Australia, 23 August 1995, unreported). That was a complex case with a number of issues, and ultimately its outcome turned upon the characterisation of arrangements for the making of certain payments or proposed payments under challenge. For present purposes, it is sufficient to note the following: a principal contractor PC was in dispute with its subcontractor A, but acknowledged some indebtedness to it, and the subcontractor A, which was in severe financial difficulties, was in turn admittedly indebted to a further subcontractor B. PC was anxious for B to return to the site to complete its portion of the works, and in negotiations involving all three parties it was agreed that PC would engage B directly to complete the works, and would also pay B directly $300,000, with A's authorisation, in relation to the disputed liability of PC to A although $100,000 of that liability was acknowledged. In respect of a payment of $100,000 of that amount, it was found to be a preference as it was money which PC acknowledged was owing by it to A, and was "truly A's money". The balance of $200,000 was unpaid, but as that was not a sum which was otherwise then payable by PC to A it was not an entitlement of B against PC which operated to the disadvantage of A's creditors. Unlike that case, here there is no part of the $322,313.54 to which Emanuel asserts any entitlement as against EFG prior to the DOFR; in particular it does not assert that prior to the DOFR it could have recovered that sum or any part of it from EFG, nor could it have specifically enforced any contractual promise on the part of EFG to pay that sum or any part of it to Blacklaw.

Counsel for Emanuel referred to Octavo Investments Pty Ltd v Knight [1979] HCA 61; (1979) 144 CLR 360 and to Sheahan v Air Con Serve Pty Ltd [1995] SASC 5193; (1995) 13 ACLC 1157 as supporting the proposition that the payment in the present circumstances was a payment received from Emanuel within the meaning of s588FA(1)(b) and so was a payment under a transaction to which Emanuel and Blacklaw were parties under s588FA(1)(a) . In Octavo the central issue was whether money paid by a trustee from trust assets was not money divisible among the creditors of the trustee, and so not recoverable as a preferential payment. It was held that the trustee's interest in the trust property involved the right to be indemnified from the trust property in respect of liabilities incurred in the performance of the trust, and consequently, that the creditors of the trust business may have resort to the assets of the trust to the extent of the liabilities incurred by the trustee. Thus, s122 of the Bankruptcy Act 1966, and in turn (the then) s293 of the Companies Act 1961 (Qld) could operate to render void as against the liquidator the payment in question. A subsidiary argument was that s122 did not apply because the payment was not one made by the trustee "... who is unable to pay his debts as they become due from his own money ...". It was rejected because the phrase 'from his own money' described the payer rather than the class of transaction, and in any event the trustee's beneficial interest in the trust assets to secure the right to indemnity brought the payment within that phrase anyway. In my view that decision does not advance Emanuel's claim in this matter.

The circumstances in Sheahan were also well removed from the present facts. The liquidator of a company unsuccessfully sought to recover as preferential payments moneys paid by a receiver of the company to two of its creditors to ensure their continued work on certain projects on which the company was engaged. It was held that the equitable interest of the secured creditor in the funds of the company did not preclude the payments made by the receiver being payments made by the company (see per Doyle CJ at 1163-166). However the application failed as it was found that the payments were made by the receiver in satisfaction of a personal liability undertaken by him personally and not as agent of the company.

Counsel sought to categorise the role of EFG under the DOFR in terms analogous to the potential alternative (and rejected) finding in Sheahan that the receiver as agent for the company entered into a new obligation on behalf of the company to perform an existing obligation of the company. But I do not think that is an appropriate comparison. EFG did not have any existing liability to pay Emanuel the amount of its Blacklaw debt nor any part of it, and the evidence indicates that it did not undertake any such responsibility on behalf of Emanuel; indeed, it positively evinced an intention not to do so. The terms of the DOFR do not disclose such an intention. In any event, unlike the facts in Sheahan, the payment by EFG was not from the funds of Emanuel or from funds to which it was entitled prior to the DOFR. The more appropriate comparison, in my view, is to the circumstances which arose for consideration in Ramsay v National Australia Bank Ltd [1989] VR 59. In that case, the Full Court of the Supreme Court of Victoria addressed what it called a "miserable transaction". D owed C $72,429, and was put into liquidation on the petition of C. During the six months relation back period, D sold its business to I for $1, and I covenanted to take over D's liabilities, apparently except to C; the shareholders and directors of both D and I were the same. The sole purpose of that transaction was to defeat C's claim by leaving D as no more than a shell, but there was no attack on it. To protect the bank's position, I then drew a bill for $50,000 which was discounted by the bank to $47,000, and used those funds to discharge D's overdraft to the bank. I's new account with the bank was debited with the same amount, and was again guaranteed and secured. Thus, money owed by D to the bank was repaid and the bank became a creditor of I. The liquidator of D unsuccessfully claimed that the repayment to the bank of D's overdraft in that manner was void as a preference. The Full Court (Murphy, Southwell and Phillips JJ at 63) commented:

"We have seen no authority for the proposition that a payment out of his own moneys by B to C, pursuant to a contractual obligation to discharge A's debt to C, an obligation imposed upon B by a contract between A and B, can be said to be a payment made by A to C. The words of s. 451 must be given their ordinary, natural meaning. Accordingly we are bound to conclude that the payment by Industries to the bank of $54,045.77 on 24 August 1984 was not a payment "made by" Distributors within the meaning of that section."

In my view, that properly describes the circumstances of the present payment. It is apposite to recall the remarks of Doyle CJ in Sheahan (at 1165) on the question of whether a payment such as that made here is to be regarded as a payment by the company:

"In dealing with this issue it is necessary to pay careful attention to the issue produced by the statutory language and the context in which it arises. In considering relevant materials it is again necessary to consider the context. One cannot expect to find that a single factor, such as ownership of property or the existence of an interest in it, which will be a universal touchstone for the solution to different problems."

As mentioned, in the present circumstances, I think the absence of any entitlement by Emanuel to funds from EFG prior to the DOFR, the terms of the DOFR, and various dealings between EFG, Emanuel and Blacklaw all combine to the conclusion that the payment was not made by Emanuel. The need for Emanuel's direction for the payment does not tilt the balance, nor demonstrate that by reason of the DOFR it had an equitable interest in those moneys identified in clause 6.7. Nor does the fact that the payment to that extent relieve Emanuel of its liability to Blacklaw; cp. Walsh as liquidator of Thompson Land Ltd v Terranova Pty Ltd (1994) 14 ACSR 432 where the payment by the third party was pursuant to the direction of the debtor, but also from funds provided by the debtor to the third party for the purpose of payment to the creditor; Craftsman Modern Constructions Pty Ltd (In Liq.) v National Bank of Australasia Ltd (1968) 87 WN (NSW) 378.

Accordingly, I have reached the conclusion that this application must fail as the applicant has not made out an unfair preference under s588FA of the Law, both because there is no relevant transaction to which both Emanuel and Blacklaw are parties and because Blacklaw did not, by virtue of any transaction to which s588FA(1)(a) might attach, receive from Emanuel the sum of $322,313.54.

The application is therefore dismissed.

I certify that this and the preceding pages are a true copy of the Reasons for Judgment of the Honourable Justice Mansfield.

Associate:

Dated:

Counsel for the Applicants : Mr M Blue

Solicitors for the Applicants : Fisher Jeffries

Counsel for the Respondent : Mr M Samios

Solicitors for the Respondent : Peter Shepherd

Hearing Dates : 26 & 27 November 1996