NA Kratzmann Pty Ltd (In Liq) v Tucker (No 2) [1968] HCA 44; (1968) 123 CLR 295 (1 August 1968)

HIGH COURT OF AUSTRALIA

N.A. KRATZMANN PTY. LTD. (IN LIQ.) v. TUCKER (NO. 2) [1968] HCA 44; (1968) 123 CLR 295

Companies

High Court of Australia
McTiernan(1), Taylor(1) and Menzies(1) JJ.

CATCHWORDS

Companies - Winding up - Avoidance of preferences - Payment declared void - Preferred creditor a company in liquidation at time of declaration - Rights of preferred creditor and company in liquidation consequent upon declaration - Proper consequential order - The Companies Act of 1961 (Q.), s. 293 - Bankruptcy Act 1924-1959 (Cth), s. 95.

HEARING

Brisbane, 1968, May 31, June 3;
Sydney, 1968, August 1. 1:8:1968
APPEAL from the Supreme Court of Queensland.

DECISION

August 1.
THE COURT delivered the following written judgment :
Upon the application of the respondent the Supreme Court, on 23rd February payments made between 3rd December 1962 and 30th January 1963 by Reid Murray Developments (Qld.) Pty. Ltd. (the Development Company) to N. A. Kratzmann Pty. Ltd. (the Building Company). The declaration was made pursuant to s. 293 of The Companies Act of 1961 (Q.) and the Court also declared that the respondent was entitled to payment in full of an amount equivalent to such payments - totalling 47,300 Pounds- and ordered the appellant to pay this amount to the respondent. Further the order provided that the appellant was not entitled in the winding up of the Development Company to prove in respect of the amount in question without having first paid that amount to the respondent. (at p297)

2. An order for the winding up of the Development Company had been made on 11th July 1963 upon a petition presented on 30th May 1963 but the matter is complicated by the fact that an order for the winding up of the appellant also was made on 25th July 1963. No doubt the petition upon which this order was made was presented some little time before this date but the evidence does not disclose when this was done. (at p297)

3. Section 293 of The Companies Act provides that any transfer, mortgage, delivery of goods, payment, execution or other act relating to property made or done by or against a company which, had it been made or done by or against an individual, would in bankruptcy be void or voidable shall in the event of the company being wound up be void or voidable in like manner. When an order was made pursuant to s. 95 of the Bankruptcy Act (in the form in which it stood at all relevant times) declaring a payment made prior to the commencement of the bankruptcy to be void as a preference it has normally been the generally recognized practice to order the respondent to pay the amount in question to the trustee in bankruptcy and not to permit the respondent to prove in the bankruptcy until the amount has been paid. But as far as we have been able to ascertain there has been no case where the position of a bankrupt respondent to such an application, or that of a respondent company in liquidation, has been considered. The present proceedings were, it should be observed, commenced pursuant to an order of the Supreme Court giving the respondent liberty "to commence proceedings in this Court against the said N. A. Kratzmann Pty. Ltd. (in Liquidation) for certain declarations and orders pursuant to s. 293 of The Companies Act". (at p298)

4. Section 95 of the Bankruptcy Act, of course, dealt not only with payments of money having the effect of giving a preference to a creditor ; it dealt also with conveyances and transfers of property, charges upon property and judicial proceedings taken or suffered by a person unable to pay his debts as they became due from his own money having such an effect. The consequences of avoiding transactions or dealings of such an assorted character may well differ from case to case but there can be no doubt that the Court may, in an appropriate case, make not only a declaration but also afford consequential relief by an appropriate order. It may, for instance, declare a conveyance of land or a transfer of specific chattels void and direct the delivery up of the relevant instrument or a reconveyance of the land to the trustee or a re-transfer of the chattels to him. And this it may do even if the grantee or transferee has been adjudged bankrupt before the declaration was made. In such a case the avoidance of the conveyance or transfer annihilates, as against the trustee, the title of the grantee or transferee and means that the trustee may assert his bankrupt's original title and deny that the land or chattels form part of the estate of the bankrupt grantee or transferee. But what is the position where A has made a payment in discharge of his indebtedness to B and both have been adjudged bankrupt before A's trustee has obtained a declaration that the payment is void as against him ? In such a case the declaration in no way affects title to specific and identifiable property ; it merely means that the money was not paid in discharge of A's indebtedness to B and, if it is to be repaid, it must be repaid out of the estate of B. In Re Ward ; Thomas v. L. G. Abbott & Co. Ltd. (1950) 16 ABC 214 Paine J. expressed the view that in the case of a payment avoided as a preference the right of the bankrupt's trustee was equivalent to the right to maintain an action for money had and received and much the same was said as long ago as Marks v. Feldman (1870) LR 5 QB 275 . Again in N.A. Kratzmann Pty. Ltd. (in Liquidation) v. Tucker (No. 1) [1966] HCA 72; (1966) 123 CLR 257 the Chief Justice said :

"Whatever rights the liquidator has in this respect must
be derived from the general law which becomes applicable
upon the avoidance of the company's transaction. Of course,
the liquidator may assert such rights in proceedings taken in
the liquidation before the Supreme Court because of that
Court's general jurisdiction but the rights which are being
asserted are rights, other than a right to a declaration of the
avoidance of the debtor's transaction, which must, as I have
said, be found in the general law."
(1966) 123 CLR, at p 285

But, since the Court undoubtedly has authority to make orders affording relief consequential upon the making of such a declaration, we find it unnecessary to equate the right of a trustee to recover the equivalent of a payment declared to be void with the strict terminology of the common law ; it is sufficient to say that in such a case the declaration does not affect the title of the respondent to any specific or identifiable property, that the claim of the trustee is not made with respect to any property to which he asserts title and that the appropriate consequential order in ordinary cases is for payment to the trustee of the amount in question. In other words he has no higher right than that of an unsecured creditor and, if the payee is also bankrupt, the trustee is relegated to proving in his bankruptcy. (at p299)

5. The respondent, however, relied strongly on the decision in In re Yagerphone, Ltd. (1935) 1 Ch 392 where at the conclusion of an extempore judgment Bennett J. said :

"The right to recover a sum of money from a creditor who
has been preferred is conferred for the purpose of benefiting
the general body of creditors, and I think Mr. Montgomery
White was right when he said that the sum of money, when
recovered by the liquidators by virtue of s. 265 of the Companies
Act, 1929, and s. 44 of the Bankruptcy Act, 1914, did not become
part of the general assets of Yagerphone, Ltd., but was a sum
of money received by the liquidators impressed in their hands
with a trust for those creditors amongst whom they had to
distribute the assets of the company."
(1935) 1 Ch, at p 396

In the course of his reasons the learned judge had pointed out that "a secured creditor has no right to enforce for his benefit the remedy which is given to a trustee in bankruptcy or the liquidator of the company of avoiding a payment or setting aside a transaction made or entered into with a view to preferring a creditor of the bankrupt or a company in liquidation" (1935) 1 Ch, at p 395 . So much is clear and for this proposition Ex parte Cooper ; In re Zucco (1875) 10 Ch App 510 and Willmott v. London Celluloid Co. (1886) 31 Ch D 425 ; (1886) 34 Ch D 147 were cited but, having regard to the form of the proceedings, this proposition was not in question. The ultimate decision in the case proceeded upon the view that the moneys which had been paid to the creditor had not at the time of payment become subject to the debenture and did not become so subject by virtue of their recovery as a preference after the commencement of the winding up. As Bennett J. said :

"On 17th January 1933, the creditor to whom the money
was paid and from whom the money was recovered was a
creditor of Yagerphone, Ltd. When Yagerphone, Ltd., paid
to the creditor the 240 Pounds 11s. 2d., that sum, in my judgment,
ceased to be the property of Yagerphone, Ltd. The payment
to that creditor could not have been attacked or impeached,
unless within three months from the date of payment the
liquidation of Yagerphone, Ltd., had begun, and, in my
judgment, at the date when the security contained in the
debenture crystallized, the sum of 240 Pounds 11s. 2d. was not the
property of Yagerphone, Ltd., nor property in respect of
which it could, I think, be said Yagerphone, Ltd., had even a
contingent interest."
(1935) 1 Ch, at pp 395, 396 (at p300)

6. We have no doubt that the decision was correct but it seems to us, with respect, that the fact that the charge had not crystallized before the payment was made to the creditor was not of any consequence in the case. It should be remembered that in addition to the provisions of s. 293 (Companies Act, 1929 (Eng.), s. 265), to which we have already referred, s. 291 (2) of The Companies Act provides that "Subject to section two hundred and ninety-two in the winding up of an insolvent company the same rules shall prevail and be observed with regard to the respective rights of secured and unsecured creditors and debts provable . . . as are in force for the time being under the law of the Commonwealth relating to bankruptcy in relation to the estates of bankrupt persons, and all persons who in any such case would be entitled to prove for and receive dividends out of the assets of the company may come in under the winding up and make such claims against the company as they respectively are entitled to by virtue of this section" (Companies Act, 1929 (Eng.), s. 262) and that, so far as a problem of the nature which arose in the Yagerphone Case (1935) 1 Ch 392 is concerned, the bankruptcy law is that which is to be applied in solving it. Now in bankruptcy the property of a bankrupt vests in his trustee upon the making of the sequestration order. The property which so vests is, of course, subject, in the hands of the trustee, to any charges validly created in relation to it by the bankrupt prior to the bankruptcy. The position of a secured creditor who has a charge on specific property is, of course, not in question ; such property in the hands of the trustee will still remain subject to the charge. But where security has been given by a bankrupt over all of his assets and a payment to a creditor is made by him out of moneys subject to the charge and the payment is, as against the trustee, subsequently declared void as a preference the moneys paid, when recovered, will not be subject to the charge. In such a case it may be said that although the moneys paid as a preference were at the time of payment subject to the charge, the moneys recovered by the trustee are not the same moneys and that they do not, by virtue of payment to the trustee, become moneys of the bankrupt or in any way subject to the charge; when recovered they become the moneys of the trustee and his title to them does not depend, upon his succession to any title which the bankrupt had. It was, we think, in this sense that Bennett J. meant in the passage that we have first cited that, applying the bankruptcy rules in a winding up,

". . . the sum of money, when recovered by the liquidators
by virtue of s. 265 of the Companies Act, 1929, and s. 44 of the
Bankruptcy Act, 1914, did not become part of the general
assets of Yagerphone, Ltd., but was a sum of money received
by the liquidators impressed in their hands with a trust for
those creditors amongst whom they had to distribute the
assets of the company."(1935) 1 Ch, at p 396

The view which we have formed is, we think, borne out by the observations of Russell L.J. concerning the decision in the Yagerphone Case(1935) 1 Ch 392 where, in N.W. Robbie & Co. Ltd. v. Witney Warehouse Co. Ltd. (1963) 1 WLR 1324, at p 1338, he said:

". . . that a claim by the liquidator for repayment to him of
a fraudulent preference was not subject to the debenture-holder's
charge; a statutory right in and only in the liquidator
to make such a claim could never have been property of the
company subject to the charge."

It is of significance that his Lordship did not think that the decision in any such case could depend upon whether or not the charge had crystallized at the time when the payment to the creditor was made. (at p301)

7. The case would be otherwise, of course, where a preference consists of the disposition of specific and identifiable property subject to a charge validly created in relation thereto by a bankrupt prior to his bankruptcy and where the avoidance of the disposition affects title to such property. That this is so seems to us to be clear as a matter of principle. But further, in Albert Gregory Ltd. v. C. Niccol Ltd. (1916) 16 SR (NSW) 214 , the Supreme Court of New South Wales considered the cases of Ex parte Cooper; In re Zucco (1875) 10 Ch App 510 and Willmott v. London Celluloid Co. (1886) 31 Ch D 425; (1886) 34 Ch D 147 which were referred to by Bennett J. in the Yagerphone Case (1935) 1 Ch 392 . There, the Court took the view that those cases merely decided that a secured creditor could not himself assert a claim to set aside a dealing as a preference and that a trustee ought not to assert such a claim where the resultant benefit would accrue only to a secured creditor. No doubt, in propounding the latter rule, it was thought that the creditor should be left to rest upon his security. But the very existence of the rule plainly acknowledges that if specific property, to which a charge, validly created by the bankrupt prior to his bankruptcy, has attached prior to the time of its disposition, is subsequently recovered as a preference the trustee's title will be no higher or better than that of the bankrupt to which he has succeeded. The cases of Sanguinetti v. Stuckey's Banking Co. (1895) 1 Ch 176 and In re Farnham (a Lunatic) (1895) 2 Ch 799 are strong authority for the proposition that in such a case the result of the avoidance of the disposition is to revest the property in the trustee subject to the charge which the bankrupt had validly created prior to the bankruptcy. (at p302)

8. But this is not the problem in the present case; the question is not concerned with who may take the benefit of the situation created by the avoidance of the payments in question but rather with the extent to which consequential relief may properly be afforded against a company already in liquidation. For the reasons which we have given the appropriate relief in the case of dual bankruptcies in such a case would be by way of proof in the bankruptcy of the bankrupt creditor for the amount of the payments avoided, and we see no reason for supposing that the right of a liquidator differs in any relevant respect from that of a trustee in bankruptcy. It remains only to be said that to accept the proposition for which the respondent contends would mean that an order could be made - as it was in the present case - which would be in conflict with the statutory duties of the appellant's liquidator (see particularly ss. 291 and 292). (at p302)

9. This being so we are of the opinion that it was wrong to declare that the respondent was entitled to payment of the amounts in question in full and that it should have been declared that the respondent is limited to a right to prove in the winding up of the Building Company. (at p302)

10. The question whether or not the appellant may prove in the winding up of the Development Company is another matter. There are, of course, three possibilities suggested. The first is, but it was not so contended, that the appellant is entitled to prove whether it pays the amounts in question or not. Another is that it is entitled to prove in respect of such sums as may from time to time be paid by way of dividend on the respondent's proof. Then it is suggested that the appellant should be entitled to prove for the amount of any final dividend when it is paid. The first suggestion must be rejected entirely whilst the remaining suggestions lose sight of the fact that the appellant's proof of debt, if and when lodged, will be not in respect of the amount or amounts repaid but in respect of the original debts. And with this in mind we are satisfied that there can be no proof by the appellant in the winding up of the Development Company unless and until the amounts in question are repaid in full. It is, we think, enough to say that the second and third suggestions really mean that no final dividend could ever be declared by the appellant's liquidator for the payment of a dividend by him would result in further assets coming to the hands of the respondent from which a further dividend would be payable to the appellant and so on ad infinitum. (at p303)

11. In conclusion we observe that by s. 122 (5) of the Bankruptcy Act 1966 - which is the successor to s. 95 of the earlier bankruptcy legislation and which we are told came into operation on 4th March 1968 - it is provided that:

"Where -
(a) a conveyance, transfer or charge is set aside, or a
payment is recovered, by the trustee in a bankruptcy in
consequence of the operation of this section; or
(b) an obligation is void as against the trustee in a
bankruptcy by force of this section,
the creditor in whose favour the conveyance, transfer, charge,
payment or obligation was executed, made or incurred may
prove in the bankruptcy as if the conveyance, transfer, charge,
payment or obligation had not been executed, made or
incurred."

Because this sub-section did not come into operation until March 1968 it has no application to the present case but it does not, in our view, do more than give statutory recognition to the principles that have prevailed in bankruptcy in relation to a proof of debt by a person to whom a preference has been given. It is noticeable that the sub-section draws a sharp distinction between the setting aside of a conveyance, transfer or charge on the one hand and the recovery of a payment on the other. A creditor in whose favour a payment has been made is not entitled to prove upon the payment being set aside but only when the payment has been recovered and the reason for this distinction is, we think, obvious - the setting aside, or, avoidance, of a payment does not affect the title to any specific or identifiable property whereas the setting aside of a conveyance or transfer does. The sub-section also makes it clear that the subject matter of the creditor's proof, when lodged, will be his original debt "as if the . . . payment . . . had not been . . . made". (at p304)

12. In our opinion the order appealed from should be discharged except in so far as it directs the payment of costs and contains a declaration in the terms of the last declaration. Thereupon, it should be further declared that the respondent is at liberty to prove in the winding up of the Building Company for the sum of 47,300 Pounds and that the appellant is not entitled to prove in the winding up of the Development Company unless and until that amount has been paid to the respondent. The costs of the motion below should be borne by the appellant since in the first instance it disputed that the last two payments, totalling 30,000 Pounds, were preferences. There should be no order as to the costs of the appeal for, although the appellant has succeeded on the main point upon which we heard argument, the appeal was brought, inter alia, upon the ground that the last two payments were not preferences and it was only at the commencement of the hearing that the appellant abandoned this contention. (at p304)

ORDER

Order of the Supreme Court discharged except in so far as it declares the payments specified in the last declaration contained therein are void as preferences and makes provision for the payment of the costs of the application in that Court. Further declare that the respondent is entitled to prove in the winding up of N. A. Kratzmann Pty. Ltd. (in Liquidation) for the amounts of such payments and that the appellant is not entitled to prove in the winding up of Reid Murray Developments (Qld.) Pty. Ltd. for the debts in respect of which the payments were made unless and until the amount of $94,600 (47,300 Pounds) has been paid by the appellant to the respondent in respect of his liability occasioned by the avoidance of the payments in question.