In the matter of: AMN Pty Ltd (in liquidation) (ACN 0101 048 987) [1997] FCA 6 (20 January 1997)

CATCHWORDS

CORPORATIONS - liquidators' application for directions pursuant to s 479(3) of the Corporations Law that liquidators justified in continuing to treat assignment of debts as void as against them within s 121 of the Bankruptcy Act 1966 (Cth) - power of Court to resolve substantive issues affecting rights of third parties to the liquidation - whether appropriate to convert application into proceedings for the determination of substantive issue.

Corporations Law s 479(3), s 471B, s 565

Bankruptcy Act 1966 (Cth) s 121

Corporations Regulations 5.6.54, 5.6.55, 5.6.63, 5.6.67

News Limited v Australian Rugby Football League Limited [1996] FCA 1256; (1996) 64 FCR 410 (FC)

Re G B Nathan & Co Pty Ltd (in liq) (1991) 24 NSWLR 674

Re Dallhold Investments Pty Ltd [1994] FCA 1398; (1994) 53 FCR 339

Re Sportsman's Leisure and Hobby Warehouse Pty Ltd [1990] 2 Qd R 93

Australian Securities Commission v Melbourne Asset Management Nominees Pty Ltd (1994) 49 FCR 334

Sanderson v Classic Car Insurances (1985) 10 ACLR 115

Re Magic Aust Pty Ltd (in liq) (1992) 7 ACSR 742

Tanning Research Laboratories Inc v O'Brien [1990] HCA 8; (1990) 169 CLR 332

Re Everything Australia Pty Ltd (1993) 11 ACLC 50

Re Barton; Ex parte Official Receiver v Barton (1983) 52 ALR 95

Official Trustee in Bankruptcy v Alvaro (1996) 138 ALR 341 (FC)

Manzi v Smith [1975] HCA 35; (1975) 132 CLR 671

AMN Pty Ltd (In Liquidation)

No QG 3010 of 1996

Cooper J

Brisbane

20 January 1997

IN THE FEDERAL COURT OF AUSTRALIA

QUEENSLAND DISTRICT REGISTRY

GENERAL DIVISION

No QG 3010 of 1996

IN THE MATTER OF:

AMN PTY LTD (IN LIQUIDATION)

(ACN 010 048 987)

JUDGE MAKING ORDER: Cooper J

WHERE MADE: Brisbane

DATE OF ORDER: 20 January 1997

MINUTES OF ORDER

THE COURT ORDERS THAT:

1. The application for directions filed on 4 July 1996 be refused.

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

IN THE FEDERAL COURT OF AUSTRALIA

QUEENSLAND DISTRICT REGISTRY

GENERAL DIVISION

No QG 3010 of 1996

IN THE MATTER OF:

AMN PTY LTD (IN LIQUIDATION)

(ACN 010 048 987)

CORAM: Cooper J

PLACE: Brisbane

DATE: 20 January 1997

REASONS FOR JUDGMENT

Introduction

By application filed 4 July 1996, the liquidators of AMN Pty Ltd (in liquidation) ("AMN") seek, pursuant to s 479(3) of the Corporations Law ("the Law") :-

"1. Directions as to whether the transaction referred to in paragraph 25 of the Affidavit of Ross Andrew Duus sworn 3 July 1996 was a void transaction under Section 565 of the Corporations Law and Section 121 of the Bankruptcy Act and whether the liquidators of AMN Pty Ltd (In Liquidation) should continue to treat the transaction as void.

2. An order that the costs of this application be costs in the winding up of AMN Pty Ltd (In Liquidation), or alternatively, SCA Properties Pty Ltd (In Liquidation).

3. Such further or other order as the Court deems meet."

The transaction the subject of the application is deposed to in an affidavit of Ross Andrew Duus, one of the liquidators of AMN. Relevantly Mr Duus deposes :-

"19. The financial books of account of AMN disclosed that prior to 30 June 1990, the following debts were owed to AMN by related entities:

Sunrealty Pty Ltd $1,735.00

QMM Industries Pty Ltd $10,151.00

Oceana Fisheries (Aust) Pty Ltd $151.00

Western Goldfields Limited $20,876.44

Sunsui Corporation Limited $541,924.05

SCA Properties Pty Ltd $1,561,076.73

Hui $71,515.33

Elizabeth Hui $1,459.48

Total $2,208,889.03

20. Prior to 30 June 1990 the books of account of AMN showed that AMN owed a debt in the amount of $1,245,852.24 to Mastergrade.

...

25. On 30 June 1990, Hui arranged for the assignment of debts described in paragraph 19 herein from AMN to Mastergrade. Annexed and marked RAD12, RAD13 and RAD14 respectively are true copies of the journal entries in the financial books of account of AMN and the corresponding journal entries in the books of account of Mastergrade and SCA relating to the loan account transfers on 30 June 1990."

As appears from paragraph 25, the liquidators have treated the journal entries as effecting an assignment of the debts from AMN to Mastergrade Products Pty Ltd ("Mastergrade") with notice and acknowledgment of the assignment to and by those companies by which and persons by whom the debts were owed.

The liquidators of AMN have to date treated the assignment by AMN to Mastergrade of the debts owing to AMN as alleged in paragraph 25 of Mr Duus' affidavit as void as against them by operation of s 121 of the Bankruptcy Act 1966 (Cth) as applied by s 565 of the Law and seek a direction that they should continue to do so.

On 12 July 1996, Drummond J ordered that a copy of the application and all material relied on to show that the transaction the subject of the application is void be served on Mastergrade. His Honour did not purport by his order to make Mastergrade a respondent to the application for directions, and for reasons which appear later, it would have been inappropriate to do so. Notice of the proceedings to Mastergrade without more did not make Mastergrade a respondent to the application or amenable to any order of the Court adversely affecting its rights (News Limited v Australian Rugby Football League Limited [1996] FCA 1256; (1996) 64 FCR 410 (FC) at 524 - 526). When the application came on before me on 20 November 1996, Leslie Sing Chee Hui, a director and shareholder of Mastergrade appeared and sought leave to represent Mastergrade on the hearing of the application. According to Mr Hui, the company cannot afford legal representation. Mr Hui's application for leave was supported by the liquidators of AMN. I granted the leave sought. Mr Hui appeared to oppose the making of the direction sought by the liquidators.

Events Leading to the Application

It is not in dispute that, at all times relevant to the issues raised on the application, Mr Hui was a director of each of Mastergrade, AMN and SCA Properties Pty Ltd ("SCA").

AMN was wound up by order of the Supreme Court of Queensland on 22 March 1993. Mr Duus and Neil Edwin Summerson were appointed liquidators. SCA was wound up by order of this Court on 9 September 1994. Mr Duus and Roger Walker were appointed liquidators.

The books of account of SCA revealed that AMN had funded certain transactions on behalf of SCA on account of which SCA appeared to be indebted to AMN. However, the books of account did not disclose the amount of that indebtedness. Further investigations by the liquidators of SCA revealed the amount of the indebtedness to be $661,076.73.

On 26 September 1995, Mr Duus wrote to Mr Hui, in Mr Hui's capacity as a director of both SCA and AMN, requesting further particulars of the debt apparently owed by SCA to AMN. Mr Duus did not receive a response to the letter. On 29 September 1995, Mr Duus wrote to Mr Hui via facsimile requesting that Mr Hui and his accountant, who was also a director of AMN, attend at the offices of the liquidators on 2 October 1995 to discuss, amongst other things, the debt apparently owed by SCA to AMN. Mr Hui and his accountant attended on 2 October 1995. For present purposes it is sufficient to say that the liquidators did not consider Mr Hui or his accountant to have shed any light on the issue of SCA's indebtedness to AMN at the meeting on 2 October 1995.

On 10 October 1995, Mr Duus, in his capacity as liquidator of AMN, lodged a formal proof of debt in the winding up of SCA in an amount of $661,076.73. On 17 November 1995, the liquidators of SCA filed an application to this Court seeking, pursuant to s 479(3) of the Law, directions as to whether the proof of debt lodged by Mr Duus in his capacity as liquidator of AMN should be admitted as a debt in the winding up of SCA. The application was thought necessary because of Mr Duus' position of conflict as a liquidator of both AMN and SCA.

Kiefel J heard the application on 8 December 1995, and on that day, ordered that the proof of debt lodged by Mr Duus be admitted as a debt in the winding up of SCA. The application was made ex parte. Kiefel J was not informed of the purported assignment by AMN to Mastergrade of the debt owing to it by SCA, which assignment is the subject of the present application.

On 2 January 1996, Mr Duus wrote to the creditors of SCA advising that AMN's proof of debt had been admitted "pursuant to an Order of the Federal Court of Australia made on 8 December 1995" and calling for outstanding proofs of debt in the winding up of SCA to be lodged by 30 January 1996.

On 29 February 1996, Mastergrade lodged a proof of debt in the liquidation of SCA claiming to be owed $1,680,000, being "Balance of Loan Account". On 5 March 1996 Mr Duus wrote to Butler McMurtrie, a firm of chartered accountants retained by Mastergrade, rejecting Mastergrade's proof on the ground that no supporting documentation had been provided in respect of it. The period for an appeal to the Supreme Court of Queensland against the liquidator's decision to reject the proof of debt was set in the notice at fourteen days from the date of service of the notice. Also on that day, the liquidators of AMN received a first dividend of $21,815.54 from SCA on account of the debt admitted "pursuant" to Kiefel J's order.

Mr Duus wrote a second letter to Butler McMurtrie on 5 March 1996 noting, amongst other things, that Mastergrade disputed the claim of AMN in the liquidation of SCA and advising that he (Mr Duus) would hold funds which had been received by AMN from SCA on account of the debt which Mastergrade claimed was owed to it to enable Mastergrade to apply to the Court in respect of its claim. Butler McMurtrie replied via facsimile on 6 March 1996 advising that Mastergrade intended to make the application referred to by Mr Duus in his letter of 5 March 1996.

By letter dated 12 March 1996, Mr Duus again wrote to Butler McMurtrie. Mr Duus wrote that he required any application to the Court to be filed by 5.00 pm 18 March 1996 and that, absent such application, he would "proceed to distribute the funds in AMN Pty Ltd." On 18 March 1996, Jones King Lawyers, who then acted for Mr Hui and Mastergrade, wrote to Mr Duus via facsimile, relevantly as follows :-

" ...

We have been handed your facsimile of 12 March 1996 to Butler McMurtrie, Chartered Accountants with instructions to respond.

We are currently investigating our clients' claim against these companies. We have been instructed that a proof of debt has been lodged but this proof has been rejected and you require an application to be filed by today.

As you can appreciate, we do not have the instructions to file an application today and further, our client believes that this matter can be resolved without the need to litigate.

As you are aware, Tony Hancock of RE Murphy has been examining your files. The files are quite sizeable and Mr Hancock envisages that it will be quite some time before he can `piece together' the accounting chain which effects our client's claim, which, as you are aware, is quite complicated and involved.

We hope to have something in writing to you setting out our client's position this week however, we are holding the funds paid from SCA to AMN and our client's [sic] put you on notice that they require these funds held until this matter can be resolved. If you refuse, perhaps you can advise who these funds are going to be paid out to and what prejudice these people will suffer if the funds are retained slightly longer.

Our client certainly thanks you for the assistance given to date with respect to access given to files and we hope this spirit will be continued in an attempt to resolve this matter.

We again reiterate our instructions are that our clients hope to resolve this matter without the need to litigate which will save all parties time and expense."

Mr Duus replied by letter dated 21 March 1996 insisting that, because of concerns he had in relation to the financial position of Mr and Mrs Graham, who were funding the liquidation of AMN, the matter "be resolved as quickly as possible." Mr Duus noted that Jones King had hoped to be in a position to provide him with a letter setting out their client's position "this week" and indicated that he required that timetable to be adhered to.

On 25 March 1996, Jones King wrote to Mr Duus setting out the basis upon which Mastergrade claimed to be owed an amount from SCA in fact greater than the amount claimed in the proof of debt lodged on 29 February 1996. Mr Duus replied by letter dated 29 March 1996 :-

"I refer to your facsimile dated 25 March 1996 and advise as follows :

(i) As liquidator of SCA Properties Pty Ltd I have instructed my solicitors to make a further application to Court pursuant to Section 479(3), providing full details to the Court of the treatment by the liquidators of AMN Pty Ltd, of the transaction whereby the loan account owed by SCA Properties Pty Ltd to AMN Pty Ltd, was transferred so that it became owed to Mastergrade Pty Ltd, as void.

Your client will be notified of the application in due course.

I note that in a letter from Mr Hui dated 4 July 1995, he advised that the debt owed by SCA Properties Pty Ltd to AMN Pty Ltd was repaid in May 1991 by way of a transfer of $1,000,000 to AMN Pty Ltd bank account. My investigations have indicated that no amount of $1,000,000 was deposited into the AMN Pty Ltd bank account in May 1991, however an amount of $900,000, which was a payment from SCA Properties Pty Ltd, was deposited on 22 May 1991. As you are aware this amount has been included in my reconstruction of the loan account. I note that the information provided to me by Mr Hui conflicts with his advice to you regarding the purpose of the payment of $900,000 by SCA Properties Pty Ltd to AMN Pty Ltd.

Various information was sought form your client, Mr Les Hui, at the time when the loan account between SCA Properties Pty Ltd and AMN Pty Ltd was being reconstructed. Mr Hui was advised by letter dated 26 September 1995 that I had conducted investigations into the loan account between SCA Properties Pty Ltd and AMN Pty Ltd which indicated that AMN Pty Ltd was a creditor of SCA Properties Pty Ltd for the amount of $661,076.73. Mr Hui was provided with a copy of my working papers and he was requested to advise whether there were any further transactions not included in my working papers which altered the amount of the debt as it was my intention to apply to the Court for directions in regard to the admission of the debt.

Mr Hui did not provide any information in response to my letter.

(ii) I am presently considering the information provided by you in respect of the claim by Mastergrade Pty Ltd and will respond in respect of this matter in due course."

The liquidators of AMN filed the present application on 4 July 1996. They expect to receive a final dividend of $150,000 to $200,000 relating to the debt admitted in the winding up of SCA "as soon as this application is determined."

Conclusions on the Application for Directions

When the hearing of the application proceeded before me on 20 and 21 November 1996, I heard evidence, including oral evidence, and received submissions going to the substantive issue of whether the alleged assignment of debts by AMN deposed to by Mr Duus in paragraph 25 of his affidavit was a disposition of property made with an intent to defraud creditors within s 121 of the Bankruptcy Act. Counsel for the liquidators did not address the question of the Court's power, on an application for directions pursuant to s 479(3) of the Law, to resolve substantive issues in dispute between a liquidator and a third party to the liquidation. Quite understandably Mr Hui, who has no legal training, did not raise the issue. In the event, for the reasons which follow, I have concluded that I do not have power in these proceedings to resolve the substantive issue raised on the application by making an order which binds Mastergrade or which affects its substantive rights. I have also concluded that it is not appropriate to attempt to resolve the substantive issue in dispute by converting the application to an application for a declaration. Nor is it appropriate to direct that the liquidators of AMN would be justified in commencing such a proceeding.

The weight of modern Australian authority holds that, on a liquidator's application for directions pursuant to s 479(3) of the Law or its equivalents in the companies legislation of the States, the Court has no power to make orders binding upon or affecting the rights of third parties to the liquidation (Re G B Nathan & Co Pty Ltd (in liq) (1991) 24 NSWLR 674 at 679 - 680; Re Dallhold Investments Pty Ltd [1994] FCA 1398; (1994) 53 FCR 339; Re Sportsman's Leisure and Hobby Warehouse Pty Ltd [1990] 2 Qd R 93 esp at 98; cf Australian Securities Commission v Melbourne Asset Management Nominees Pty Ltd (1994) 49 FCR 334).

In Sanderson v Classic Car Insurances (1985) 10 ACLR 115, Young J, in considering the New South Wales equivalent of s 479(3) of the Law, said (at 116 - 118) :-

"Although s 379(3) of the Companies Code is expressed in wide terms, it seems to me clear that it does not permit the liquidator or a provisional liquidator to come to the court whenever he feels some unease about a situation and wishes to obtain some sort of insurance against the possibility of error, as well as assurance that he is on the right track. A liquidator is an officer of the court, and the modern liquidator today performs many of the functions which in former ages, were dealt with by a judge, master or registrar, at least in the first instance. In addition, the persons eligible to be registered as liquidators and to be appointed liquidators only are so eligible because they possess not only the appropriate qualifications in accountancy, but also are experienced in the world of commerce. The Companies Code and the orders of the court these days usually commit the entire conduct of the liquidation to the liquidator, and empower him to do what in his commercial judgment he thinks best in the interests of the creditors as a whole, leaving persons aggrieved to their remedy by appeal to the court, and also leaving the liquidator free where he can foresee a challenge to his powers, or where there is some extremely difficult problem, to apply to the court whose officer he is for directions.

.....

... However, it is also true to say that virtually all the cases on s 379(3) or its predecessors, involve one of the following four classes of cases:

(a) guidance to the liquidator on matters of law: see eg Re Australian Home Finance Pty Ltd [1956] VR 1 and Re Standard Insurance Co Ltd (1963) 80 WN (NSW) 1355;

(b) questions involving legal procedure (eg whether a liquidator should settle curial proceedings, and if so, on what terms);

(c) whether a liquidator should act on his commercial judgment to postpone a sale because he recognizes his legal duty ordinarily requires him to reduce the company's assets into cash as soon as possible and to distribute (an example is Re Statewide Investments Ltd, supra,); or

(d) where there are two or more competing purchasers for the company's property and the liquidator can see that it may be alleged that the liquidator has acted mala fide or in an absurd or unreasonable or illegal way, see Re Bayswood Pty Ltd (1981) 6 ACLR 107 at 113.

.....

Of course, creditors are not usually parties to this sort of application (and indeed it may be that in the light of the Court of Appeal's decision in Re Laymar Constructions Pty Ltd (1977) 3 ACLR 65, they should only rarely be parties), although usually in cases where there is a dispute as to whether the liquidator should sell the property of the company to A or B, both sets of views will be supported by the commercial opinions of sets of creditors, see eg Re Codisco Pty Ltd, supra.

Another limitation that the court imposes on itself in the use of s 379 is set out in the judgment of Blackburn CJ in Re Security Provident Fund Ltd (in liq); Rodger v Gourlay (1984) 9 ACLR 56 at 57, `The function of a liquidator's summons for directions is to give him advice as to his proper course of action in the liquidation; it is not to determine the rights and liabilities arising from the company's transactions before the liquidation'."

To similar effect, McLelland J said in Re G B Nathan (at 679 - 680) :-

"The historical antecedents of s 479(3), the terms of that subsection and the provisions of s 479 as a whole combine to lead to the conclusion that the only proper subject of a liquidator's application for directions is the manner in which the liquidator should act in carrying out his functions as such, and that the only binding effect of, or arising from, a direction given in pursuance of such an application (other than rendering the liquidator liable to appropriate sanctions if a direction in mandatory or prohibitory form is disobeyed) is that the liquidator, if he has made full and fair disclosure to the court of the material facts, will be protected from liability for any alleged breach of duty as liquidator to a creditor or contributory or to the company in respect of anything done by him in accordance with the direction.

Modern Australian authority confirms the view that s 479(3) `does not enable the court to make binding orders in the nature of judgments' and that the function of a liquidator's application for directions `is to give him advice as to his proper course of action in the liquidation; it is not to determine the rights and liabilities arising from the company's transactions before the liquidation: see Re Security Provident Fund Ltd (In Liq) (1984) 73 FLR 264 at 265; 9 ACLR 56 at 57; 2 ACLC 594 at 595; Murdoch v Crawford [1986] VR 97 at 99; Re Sportsman's Leisure & Hobby Warehouse Pty Ltd (In Liq) [1990] 2 Qd R 93 at 96 and Re Byron Moore Journeaux Ltd (In Liq) [1990] VR 683 at 684; see also Re TTC (SA) Pty Ltd (In Liq) (1983) 32 SASR 532 at 535 and, in relation to a receiver's application for directions Re Odessa Promotions Pty Ltd (1979) ACLC 40-523 at 32,105 - 32,106. Canadian authority is to similar effect. In Re Ward (1987) 66 CBR (NS) 165 at 171, Dickson J of the Supreme Court of New Brunswick said in relation to the equivalent provision under the (Canadian) Bankruptcy Act:

`It seems well settled in law that in an application under s 16 of the Act a court must confine itself, in giving directions, to matters concerning administration of the estate and has no authority to resolve substantive matters in dispute between a trustee and a third party.'"

Any direction which I might give to the liquidators of AMN on the present application would not be determinative of the competing claims of Mastergrade and AMN to title in the debt owing by SCA. A direction to the effect sought would not, for example, subject to compliance with the Law and the requirements or Regulation 5.6.54 of the Corporations Regulations, preclude Mastergrade from bringing such application as it may be advised to have its proof of debt admitted in the winding up of SCA or seeking to have the admission of AMN's proof of debt reversed or set aside. Nor could a direction found an issue estoppel between AMN, by its liquidators, and Mastergrade as to which of them is entitled to the benefit of the debt, not least because Mastergrade is not a respondent to any substantive application. In the circumstances of the instant case therefore it is not appropriate that the direction sought be given (see Re Magic Aust Pty Ltd (in liq) (1992) 7 ACSR 742 at 745).

The Court does have power on a liquidator's application for directions to convert or change the application into proceedings for the determination of substantive rights provided that those affected consent to that course or will not suffer injustice in consequence of the alteration to the status of the proceedings (Re G B Nathan at 680; see also the procedure adopted in this Court in Melbourne Asset Management). I considered adopting that course in the present case. The liquidators of AMN and Mr Hui on behalf of Mastergrade appeared, gave evidence and made submissions on the basis that I was to determine as between them the substantive issues raised on the application. However, for the reasons set out hereunder I formed the view that it would be inappropriate to do so.

Once the liquidators of AMN, having determined that AMN was owed a debt by SCA, lodged a proof of debt for the amount claimed in the liquidation of SCA and that proof of debt was admitted by the liquidators of SCA, AMN was entitled to be paid the amount admitted to proof or, if the property of SCA was insufficient to meet its debt in full, AMN was entitled to be paid proportionately (s 553 and s 555 of the Law) in accordance with the priority contained in s 556 of the Law. As the order of Kiefel J has not been vacated, set aside as an order made ex parte or on appeal and the admission of AMN's proof of debt by the liquidators of SCA has not been set aside or reversed, AMN is entitled by the operation of the Law to receive payment to the extent of the debt admitted to proof. The liquidators of AMN after the proof of debt was admitted by the liquidators of SCA had no interest to further assert AMN's title to the debt or attempt to disprove Mastergrade's claim to title or to take any steps to attempt to validate the conduct of the liquidators of SCA in admitting AMN's proof of debt. Once AMN's proof was admitted and Mastergrade's was rejected, it was for Mastergrade, if it wished to pursue its claim to title in the debt and prove in the winding up of SCA, to apply to the Court under Regulation 5.6.54(2) of the Corporations Regulations and s 1321 of the Law to have the rejection of its proof of debt and the acceptance of AMN's proof of debt by the liquidators of SCA reversed or modified (Tanning Research Laboratories Inc v O'Brien [1990] HCA 8; (1990) 169 CLR 332 at 340 - 341). That AMN's proof of debt was admitted pursuant to Kiefel J's order would not preclude such an application (Re Magic Aust Pty Ltd at 745). The proceedings instituted by such an application are originating proceedings which the Court hears de novo (Tanning Research at 341) to which AMN could be joined as a respondent so that a binding determination as to the competing claims to title in the debt would result.

In the absence of an application by Mastergrade seeking to reverse or modify the decision of the liquidators of SCA, rejection of Mastergrade's proof of debt means that Mastergrade is not entitled to receive any dividend in the winding up of SCA in payment or part payment of the claimed debt (Regulation 5.6.63 of the Corporations Regulations). Prior to the admission of AMN's proof of debt, when the liquidators of SCA were faced with the possibility of two competing claims to title in the same debt because of the alleged assignment and no binding determination by a court as to which of them was properly entitled, the liquidators could, if it were thought necessary, have applied pursuant to s 479(3) of the Law for a direction that if one of the claimants did not abandon its claim to title to the debt within, for example, fourteen days, the liquidators of SCA would be justified in commencing substantive proceedings against Mastergrade and AMN for a declaration as to title in the debt in order that the party found to be entitled to the debt may be admitted to proof by the liquidators of SCA (see for example the order made in Re Everything Australia Pty Ltd (1993) 11 ACLC 50 at 51). This course was not followed and the liquidators of SCA have rejected Mastergrade's subsequent proof of debt. In the circumstances which occurred, it was not for the liquidators of AMN to commence proceedings to disprove Mastergrade's subsequent title to the debt and thereby affirm the correctness of the conduct of the liquidators of SCA. In particular, it is not appropriate for them to seek to do so by way of an application pursuant to s 479(3) of the Law.

If any application for directions was to be brought because of the situation which had arisen it ought to have been brought by the liquidators of SCA as part of the winding up of that company. That this is so is highlighted by the substantial difficulties faced by the liquidators of AMN on the issues sought to be raised by the application. These difficulties arise because the liquidators of AMN have attempted to disprove Mastergrade's claim to title to the debt owing by SCA in circumstances where, since the rejection of its proof of debt by the liquidators of SCA, Mastergrade has taken no step to establish in a legally binding way against both SCA and AMN a right to payment of the debt and to prove up the underlying transaction or transactions which Mastergrade contends gave it a legal entitlement to payment. Shortly put, until Mastergrade established a title to the debt superior to that of AMN, no issue of avoiding a transaction giving effect to a disposition of the debt as property arose. The assertion of an agreement to assign the debts alleged in the letter of Jones King of 25 March 1996 to the liquidators of SCA is totally inconsistent with the later assertion of Mr Hui that no debt was owing to AMN and that at all times the debt was owed to Mastergrade. Until it was resolved whether or not SCA was ever legally indebted to AMN in the amount alleged by Mr Duus, it was impossible to determine whether or not there was a disposition of property from AMN to Mastergrade.

Under s 121 of the Bankruptcy Act, the liquidators of AMN assume the onus of establishing each element of the section (Re Barton; Ex parte Official Receiver v Barton (1983) 52 ALR 95 at 121; Official Trustee in Bankruptcy v Alvaro (1996) 138 ALR 341 (FC) at 346), including that there was a disposition of property. The liquidators ran their case on the basis that the disposition of property was the assignment of debts deposed to by Mr Duus and that the assignment was effected by the journal entry in the books of account of AMN. This approach is problematic. The journal entry, of itself, is not effective to assign the debts from AMN to Mastergrade (Manzi v Smith [1975] HCA 35; (1975) 132 CLR 671 at 674 per Barwick CJ, 674 per Mason J, 675 per Jacobs J). In the face of Mr Hui's assertion that there was no assignment of debts but that the journal entry was simply a correction of a "major error" in the books of account of AMN, the liquidators for the purpose of s 121 must show by credible evidence that the journal entries reflect an underlying transaction legally binding on the parties to it whereby the debts were assigned from AMN to Mastergrade.

The evidence as to the underlying transaction is equivocal. Indeed, there is evidence from which it is possible to conclude that there was no assignment. After the purported assignment of the debts, including the debt owing by SCA, an amount of $900,000 was paid to AMN by SCA and was characterised a "repayment of loan". Interest owing by SCA to AMN on the loan from AMN to SCA was brought to account in the books of SCA for a period extending beyond the date of the purported assignment. The Report as to Affairs of SCA, which was prepared by Mr Hui, did not list Mastergrade as a creditor of SCA.

Further, it is not sufficient for the liquidators simply to assert that Mr Hui was the controlling mind of the relevant companies so that he could, as it were, agree with himself to assign debts as between them. The liquidators must show that it was agreed as between AMN and Mastergrade by a person or persons properly authorised to act on behalf of each of them to assign the debts. There is no evidence that Mr Hui was a person properly authorised. There is no evidence of any minutes of meetings of the boards of directors of the companies authorising him to act or ratifying his actions. It may well be that Mr Hui considered himself able to agree on behalf of AMN and Mastergrade to assign the debts. However, in the absence of proper authority or ratification, any such agreement would not be effective.

At the conclusion of the hearing, I invited counsel for the liquidators of AMN to provide written submissions relating to the issue of whether any debt assigned by AMN continued to exist in specie so as to enable a re-vesting order to be made if I concluded that the assignment fell within s 121 of the Bankruptcy Act (see Alvaro at 389 - 390). In those written submissions, counsel for the liquidators sought to argue in the alternative that the assignment of debts was a sham. Such alternative basis for impeaching the assignment was said to be open by paragraph three of the prayer to the application which seeks "[s]uch further or other order as the Court deems meet."

During the course of argument, counsel for the liquidators disavowed reliance on any basis to impeach the assignment other than s 121 of the Bankruptcy Act. The proposition that the journal entry was a sham, involving, as it does, a finding that Mr Hui instructed AMN's accountant to make a false entry in the books of account, was not put to Mr Hui in cross-examination. Nor was the issue specifically raised in the evidence given on behalf of the liquidators. The issue of sham was not distinctly raised by the liquidators until the supplementary written submissions were provided to the Court some twenty-two days later. The possibility of the journal entries being a sham was mentioned as an aside in the original written submissions handed up by counsel for the liquidators. It does not assist the liquidators that a copy of the supplementary submission was sent to Mr Hui to allow him to file a submission in reply. There would be real prejudice to Mastergrade in allowing the liquidators of AMN to now raise the issue of sham. The case was conducted and the evidence was tendered on the basis that the transactions were real and not shams and that the only basis that the liquidator of AMN could avoid the consequences of the transactions was by successfully invoking the provisions of s 121 of the Bankruptcy Act. Paragraph three of the prayer for relief in the application is insufficient to allow the liquidators to raise a substantive case of sham against Mastergrade and did not by its terms put Mastergrade on notice of any such claim being asserted.

There is no claim threatened or pending against AMN or its liquidators by Mastergrade that AMN is not entitled to receive payment from SCA to the extent of the debt admitted to proof by the liquidators of SCA. Having been admitted as a creditor of SCA to the extent of the proof, the liquidators of AMN have no interest in initiating substantive proceedings which call into question the correctness of the decision of the liquidators of SCA. The party with the alleged interest to challenge the decision is Mastergrade. Despite opportunity being offered by the liquidators of SCA, Mastergrade has failed to do so. Nor has any claim been threatened or instituted by Mastergrade against AMN or its liquidators on the basis that the liquidators of AMN are not free to apply any dividend received from the winding up of SCA in the winding up of AMN in accordance with the provisions of the Law. No such claim could be instituted without the leave of the Court (s 471B of the Law). When Mastergrade failed to appeal against the rejection of its proof within the fourteen day period Regulation 5.6.54(2) and Regulation 5.6.54(3) required Mastergrade to obtain an order of the Court extending the time. The distribution made to AMN by the liquidators of SCA could not be disturbed unless the liquidators of SCA or the Court revoked the admission of the proof of debt (Regulation 5.6.55(6) and Regulation 5.6.55(4)). The liquidators of AMN were entitled to conduct the winding up of AMN on the basis that having proved in the winding up of SCA they were free to receive and apply any dividend received from the liquidators of SCA in the winding up of AMN.

There was, in my view, no occasion for this application to have been brought by the liquidators of AMN. As I have indicated above, it was either for the liquidators of SCA to resolve the conflicting claims by initiating a substantive action against both AMN and Mastergrade or make a decision based on advice. Once the decision was made, absent reversal or modification in proceedings instituted by Mastergrade within the time provided by the Corporations Regulations, the decision has the consequences and takes effect in respect of AMN's entitlement to payment in the winding up of SCA in accordance with the Law. The fact that AMN had been admitted to proof could not prevent the liquidators of SCA themselves revoking or amending the decision to admit AMN's proof if subsequent information or the claim of Mastergrade caused them to doubt the entitlement of AMN to prove (Regulation 5.6.55). This course was available notwithstanding the earlier direction of Kiefel J. The liquidators of SCA had a duty to as soon as practicable declare and distribute dividends among creditors whose debts or claims had been admitted (Regulation 5.6.67(1) and (2)). Accordingly, it was for the liquidators of SCA to decide for themselves what to do with respect to the proofs or alternatively, to apply to the Court for directions as to what steps they should take having regard to the decision of the liquidators of AMN to treat the assignment of the debts claim to Mastergrade as void and to the debts as remaining due and owing to AMN. Indeed, the liquidators of SCA in their letter of 29 March 1996 to Jones King set out above advised that such an application was to be made to the Court by them.

The application for directions will be refused. The application was unnecessary. I decline to order that the costs of the application be paid out of the assets of AMN or SCA as costs of the winding up.

I certify that this and the preceding eighteen (18) pages are a true copy of the reasons for judgment of his Honour Justice Cooper.

Date: 20 January 1997

Associate

Counsel for the Applicant: Ms E M O'Reilly

Solicitors for the Applicant: Freehill Hollingdale & Page

L S C Hui appeared on behalf of Mastergrade Products Pty Ltd by leave of the Court.

Date of Hearing: 20 and 21 November 1996

Place of Hearing: Brisbane

Date of Judgment: 20 January 1997