CATCHWORDS CORPORATIONS - effect of winding up on other transactions - undue preference - what constitutes preference - two equitable mortgages by way of fixed and floating charge - whether charge can be a settlement - whether floating charge a settlement - whether fixed charges intended to be retained - whether fixed charges made in good faith - whether chargor insolvent at date of creation of each charge and whether chargee aware of insolvency. Corporations Law s565 Bankruptcy Act 1966 s120 CORPORATIONS - directors - fiduciary position - whether breach of fiduciary obligations in granting equitable mortgages - whether grantee participated in breach of fiduciary obligation. PROCEDURE - Amendment to pleadings - whether should be allowed after commencement of trial - whether amendment only raises construction point - whether amendment requires extrinsic evidence to be called. Federal Court Rules O13 r2 Bluecorp Pty Ltd (in liquidation) and Anor v ANZ Executors and Trustee Co Ltd (1993) 13 ACSR 386 Re Trautwein; Richardson v Trautwein (1944) 14 ABC 61 Re Hyams; Official Receiver v Hyams (1970) 19 FLR 230 Official Trustee v Marchiori (1983) 69 FLR 290 PT Garuda Indonesia Ltd v Grellmann (1992) 35 FCR 515 Official Trustee in Bankruptcy v Mitchell (1992) 38 FCR 364 Briginshaw v Briginshaw (1938) 60 CLR 336 Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 110 ALR 449. Re Player; Ex parte Harvey (1885) 15 QBD 682 Williams v Lloyd (1934) 50 CLR 341 Re Tankard (1899) 2 QB 57 Re La Rosa; Ex parte Norgard v Rocom Pty Ltd (1990) 21 FCR 270 Re Pahoff: Ex parte Ogilvie (1961) 20 ABC 17 Official Trustee in Bankruptcy v Arcadiou (1985) 8 FCR 4 Shrager v March [1908] AC 402 Re I A McGoldrick; Ex parte Australia and New Zealand Banking Group Ltd v The Official Trustee in Bankruptcy & Viceconte (Olney J, 26 February 1992, unreported) Re Zampatti; Ex parte R J Levack Ltd and Anor (Lee J, 21 April 1993, unreported) Landall Holdings Ltd v Caratti [1979] WAR 97 Hamilton v Hunter (1982) 7 ACLR 295 Re Margart Pty Ltd (in liq); Hamilton v Westpac Banking Corporation & Anor (1984) 9 ACLR 269 Driver v Broad (1893) 1 QB 744 Wallace v Evershed [1899] 1 Ch 891 Re Dawson [1915] 1 Ch 626 Re Pacific Projects Pty Ltd (1990) 2 Qd R 541 Re Florance; Ex parte Andrew (1983) 52 ALR 339 Government Stock and Other Securities Investment Co Ltd v Manila Railway Co Ltd [1897] AC 81 Illingworth v Houldsworth [1904] AC 355 Evans v Rival Granite Quarries [1910] 2 KB 979 Luckins v Highway Motel (Carnarvon) Pty Ltd (1975) 133 CLR 164 United Builders Pty Ltd v Mutual Acceptance Ltd (1980) 144 CLR 673 Tri-Continental Corporation v FCT [1988] 1 Qd R 474 Swiss Bank Corporation v Lloyd's Bank Ltd [1982] AC 584 Carreras Rothmans Ltd v Freeman Matthews Treasure Ltd [1985] Ch 207 Re Bond Worth Ltd [1980] 1 Ch 228 Askrigg Pty Ltd v Student Guild Curtin University of Technology (1989) 18 NSWLR 738 Barton v Official Receiver (1984) 4 FCR 380 Lego Australia Pty Ltd v Paraggio (1993) 44 FCR 151 Bank of Australasia v Hall (1907) 4 CLR 1514 Sandell v Porter (1966) 115 CLR 666 Re Toowong Trading Pty Ltd (in liq) (1988) 13 ACLR 121 Hymix v Garrity (1977) 13 ALR 321 Re Amour (1956) 18 ABC 69 Kyra Nominees Pty Ltd (in liq) v National Australia Bank Ltd (1986) 4 ACLC 400 Re Mike Electric (Aust) Pty Ltd (1983) 1 ACLC 758 Carrier Airconditioning Pty Ltd v Kurda (1993) 11 ACSR Re Norfolk Plumbing Supplies Pty Ltd (1992) 6 ACSR 601 Taylor v ANZ Banking Group Ltd (1986) 13 ACLR 780 Re RHD Power Services Pty Ltd (1990) 3 ACSR 261 Geraldton Building Co Pty Ltd v Woodmoore (1992) 8 ACSR 585 Williams and Glyn's Bank v Barnes [1980] Com LR 205 Universal Management (in liq) (1981) NZ CLC 95-026 3M Australia v Kemish (1986) 4 ACLC 185 Pioneer Concrete Pty Ltd v Ellston (1986) 10 ACLR 289 Londish v Gulf Pacific Pty Ltd (1993) 45 FCR 128 National Australia Bank Ltd v Nobile (1988) 100 ALR 227 Corozo Pty Ltd v Total Australia Ltd (1988) 2 Qd R 366 Rooper v Harrison (1885) 2 K & J 86 112; 69 ER 704 Jones v Barker [1909] 1 Ch 321 Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 Re Interwest Hotels Pty Ltd (in liq) (1993) 12 ACSR 78 Schuler L AG v Wickman Machine Tool Sales Ltd [1974] AC 235 Helvetic Investment Corp Pty Ltd v Knight (1984) 9 ACLR 773 Elders Trustee and Executor Co Ltd v E G Reeves Pty Ltd (1987) 78 ALR 193 Walker v Wimborne (1976) 137 CLR 1 Nicholson v Permacraft (NZ) Ltd (1985) 3 ACLC 453 Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722 Equiticorp Finance Ltd (in liq) v Bank of New Zealand (1993) 11 ACSR 642 Jeffree v NCS [1990] WAR 183 Charterbridge Corporation Ltd v Lloyds Bank Ltd [1970] Ch 62 Howard Smith Pty Ltd v Ampol Petroleum Ltd [1974] 1 NSWLR 68 Barnes v Addy (1874) LR 9 Ch APP 244 Jones v Dunkel (1959) 101 CLR 298 Fabre v Arenales (1992) 27 NSWLR 437 MAURICE HODGSON LYFORD & ANOR v COMMONWEALTH BANK OF AUSTRALIA NO WAG 3030 OF 1993 R D NICHOLSON J PERTH 26 MAY 1995 IN THE FEDERAL COURT OF AUSTRALIA ) WESTERN AUSTRALIA DISTRICT REGISTRY) GENERAL DIVISION ) NO WAG 3030 OF 1993 B E T W E E N: MAURICE HODGSON LYFORD (As Liquidator of Glenisia Investments Pty Ltd) (ACN 009 059 474) First Applicant and GLENISIA INVESTMENTS PTY LTD (ACN 009 059 474) Second Applicant and COMMONWEALTH BANK OF AUSTRALIA Respondent MINUTE OF ORDER JUDGE MAKING ORDER: R D NICHOLSON J DATE OF ORDER: 26 MAY 1995 WHERE MADE: PERTH THE COURT ORDERS AND DECLARES THAT: (1) The equitable mortgage granted by the second applicant to the respondent and dated 13 July 1990 is void as against the first applicant and voidable as against the second applicant to the extent in each case it is expressed to be a fixed charge. (2) The equitable mortgage granted by the second applicant to the respondent and dated 31 December 1990 is void as against the first applicant and voidable as against the second applicant to the extent in each case it is expressed to be a fixed charge. (3) The application is otherwise dismissed. (4) The parties be heard on the issue of costs. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA ) WESTERN AUSTRALIA DISTRICT REGISTRY) GENERAL DIVISION ) NO WAG 3030 OF 1993 B E T W E E N MAURICE HODGSON LYFORD (As Liquidator of Glenisia Investments Pty Ltd) (ACN 009 059 474) First Applicant and GLENISIA INVESTMENTS PTY LTD (ACN 009 059 474) Second Applicant and COMMONWEALTH BANK OF AUSTRALIA Respondent CORAM: R D NICHOLSON J DATE: 26 MAY 1995 PLACE: PERTH REASONS FOR JUDGMENT The first applicant ("the liquidator") was appointed on 14 April 1993 as the liquidator of the second applicant ("the company"). On or about 13 July 1990 the company created an equitable mortgage ("the first equitable mortgage") to the respondent ("the Bank"). On 31 December 1990 the company created a further equitable mortgage ("the second equitable mortgage") to the Bank. The applicants now seek declarations that both mortgages are void against each of them either by virtue of s565 of the Corporations Law or because the creation of each involved a breach of fiduciary duty by the directors of the company in which the Bank was a participant. The company was a building company. It was part of a group of companies controlled and managed by interests representing Mr and Mrs Margaria. It also acted as trustee of the F P Margaria Family Trust. The company was the operating company and Moneta Holdings Pty Ltd ("Moneta") was the property holding company. The consequence was that the company had very little property to offer as security for its borrowings. In early 1990 the company and Moneta were both banking with the Bank. The company had a formal overdraft limit of $350,000. Moneta did not have a formal overdraft limit. The company had entered into building contracts to construct a hotel, a shopping centre and a night club. By February or March 1990 it was apparent that progress payments were not being made in respect of the work carried out by the company. There were three consequences of that non-payment. Firstly, the company began to exceed its overdraft limit. Secondly, it ceased to pay its debts in the normal course of business. Thirdly, it commenced to draw cheques but to retain them. At the commencement of 1990 the security held by the Bank in respect of the overdraft account of the company was a guarantee from Mr and Mrs Margaria and a registered second mortgage over property owned by Moneta. In June 1990 the Bank obtained from Mr and Mrs Margaria a third party security over a block of land. It was against this background that the equitable mortgages, the subject of this proceeding, were brought into being. Section 565 of the Corporations Law is accepted by the parties as applying s120 of the Bankruptcy Act 1966 ("the Act") to companies wound up before 23 June 1993. In order for s565 to apply it is necessary for the applicants to establish that the equitable mortgages are "a settlement of property" within the meaning of s120 of the Act. Section 120(8) of the Act provides that "settlement of property" includes any disposition of property. Section 120(1) voids a settlement of property occurring within two years before bankruptcy or after it where (relevantly here) the settlement is not made in favour of a purchaser or encumbrancer in good faith and for valuable consideration. S120(2) voids a settlement of property - not being a settlement voided by s120(1) - made within five years before bankruptcy or after it which is not also a settlement made for good faith and valuable consideration. It follows that s120(2) only becomes relevant if, firstly, s120 is shown to apply and, secondly, if adverse findings are made against the Bank on one or both of the elements of good faith and valuable consideration referred to in s120(1)(a): cf Bluecorp Pty Ltd (in liquidation) and Anor v ANZ Executors and Trustee Co Ltd (1993) 13 ACSR 386. The burden of proof in the context of s120 in relation to the absence of good faith and of valuable consideration is on the applicants: Re Trautwein; Richardson v Trautwein (1944) 14 ABC 61 at 75; Re Hyams; Official Receiver v Hyams (1970) 19 FLR 230 at 256; Official Trustee v Marchiori (1983) 69 FLR 290 at 297; PT Garuda Indonesia Ltd v Grellmann (1992) 35 FCR 515 at 527-528. See also Official Trustee in Bankruptcy v Mitchell (1992) 38 FCR 364 at 369. The standard of proof will vary in accordance with the seriousness or importance of the issue: Briginshaw v Briginshaw (1938) 60 CLR 336; Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 110 ALR 449. Can a charge be "a settlement"? It is accepted on behalf of all parties that the equitable mortgages are "charges". In each mortgage the charge is given in relation to all of the company's undertaking property and assets, both present and future, including uncalled capital. In the second equitable mortgage there was in addition a charge over future and present property held by the company as trustee of the F P Margaria Family Trust. In both mortgages it was provided that the charge should operate as a fixed charge over real and leasehold property and certain chattel items and as a floating security as regards all other assets. For the Bank it is contended, firstly, that s120 of the Act, properly construed, cannot apply to charges. This contention is supported by reference to the sections adjacent to that section in the Act. Section 121, which deals with fraudulent dispositions of property, provides in subs(3) that in that section "disposition of property" includes "a mortgage of property or a charge on or in respect of property". Section 122, which deals with the avoidance of preferences, has application to "a conveyance or transfer of property, a charge on property, or a payment made or an obligation incurred". It is contended for the Bank that the express reference to "charge" in ss121 and 122 and the absence of any such reference in s120 has the consequence that s120 was not intended to, and does not, apply to charges in accordance with the expressio unius rule. As is stated in Pearce and Geddes, Statutory Interpretation in Australia 3rd ed (1988) at 80, par4.22 the precision in the drafting of the legislation and the similarity of the subject matter in the provisions being considered are of importance in determining the appropriateness of the application of the rule. In the case of these particular sections they are similar in that they deal with aspects of avoidance but they also deal with different aspects of avoidance. It is apparent that the definitions in each section are worded in a manner appropriate to the scope of the section to which the definitions relate. In the case of s121(3) it has been necessary for the legislature to define the term "disposition of property". In the case of s122(6) the legislature has defined the matters to which the section extends. In the case of s120(8) it is the description "settlement of property" which is defined. In my opinion neither the subject matter nor the structure of the sections would justify the application of the expressio unius rule. Indeed, the application of the process of reasoning urged on behalf of the Bank would deny that any mortgage might be a settlement for the purposes of s120 and it is now well established to the contrary by authorities to which reference will be made. In a similar vein it was contended for the Bank that s566 of the Corporations Law specifically provides for the invalidity of floating charges and that no reference is made to charges in s120. Section 565(1) does, however, contain a specific reference to "a charge on property". Reference to s565 does not aid construction of s120. The Bank then contends that the nature of an equitable charge is such that it does not confer any proprietary interest and consequently its creation cannot give rise to a disposition of property. The word "disposition" is to be understood in its normal meaning as "the action of getting rid of or making over" (The Shorter Oxford English Dictionary, Clarendon Press: Oxford (1993) at 700). The meaning of "disposition" has been considered in a number of cases. In Re Player; Ex parte Harvey (1885) 15 QBD 682, Cave J at 687 stated that "the end and purpose [of the transaction] must be a settlement, that is, a disposition of property to be held for the enjoyment of some other person": Williams v Lloyd (1934) 50 CLR 341 at 375. Further, it has been stated that the retention of the property in some sense must be contemplated and not its immediate dissipation or consumption: Re Tankard (1899) 2 QB 57 at 59 approved in Williams (supra). The history of the words of s120(8) are examined in Re La Rosa; Ex parte Norgard v Rocom Pty Ltd (1990) 21 FCR 270 at 284. The word "property" is defined in s5 of the Act to mean "real or personal property of every description, whether situate in Australia or elsewhere, and includes any estate, interest or profit, whether present or future, vested or contingent, arising out of or incident to any such real or personal property". It is well settled that a registered mortgage over Torrens System Land, having effect in accordance with the relevant statutes as a security and an interest in land without operating as a transfer of the land mortgaged, is a settlement for the purposes of s120 of the Act: Re Pahoff; Ex parte Ogilvie (1961) 20 ABC 17 at 20; Re Hyams (supra) at 248-252; Official Trustee in Bankruptcy v Arcadiou (1985) 8 FCR 4 at 10-11. As was said by Gibbs J in Re Hyams (supra) at 252, the use of the word "settlement" was intended to have a wide signification and to include the conveyance of interests in property, short of ownership, including mortgages. However, he also said that it is only those mortgages in which the retention of the property in some sense is contemplated and not its immediate dissipation or consumption which will satisfy the dicta in Williams v Lloyd (supra) and qualify as settlements. In Re Hyams (supra) it had been contemplated that the mortgage would for an indefinite time be retained by and for the benefit of the Bank and, although it permitted the Bank to give an immediate demand in order to call‑up the debt, there was not the least likelihood of that occurring and it was accordingly held to be a settlement. In Re Hyams (supra) at 252, Gibbs J recognised that a disposition of an equitable interest can be a settlement within the meaning of the section. He relied for that conclusion on Shrager v March [1908] AC 402 which was a case in which a settlor altered his position from that of beneficial owner to that of trustee for his wife and children, although ultimately on default to himself. It was held there had been a valid settlement. It has also been accepted in recent decisions of this Court that an equitable charging of property may amount to a settlement for the purpose of s120 of the Act. In Re I A McGoldrick; Ex parte Australia and New Zealand Banking Group Ltd v The Official Trustee in Bankruptcy and Viceconte (Olney J, 26 February 1992, unreported) it was held that an equitable assignment of money constituted a disposition of property and thus a settlement for the purposes of s120 of the Act. In Re Zampatti; Ex parte R J Levack Ltd & Anor (1993) (Lee J, 21 April 1993, unreported) it was held that an equitable charge over a motor vehicle conferred a proprietary interest in the vehicle which amounted to a disposition of property for the purpose of s120(8) of the Act. The authority of these two decisions is challenged by the present contention for the Bank. For the applicants reliance is placed on authorities which support the view that a floating charge creates an immediate equitable interest in the property of the chargor at the time of the grant: Landall Holdings Ltd v Caratti [1979] WAR 97 at 103 per Lavan SPJ and 108 per Wickham J; Hamilton v Hunter (1982) 7 ACLR 295 at 306 per Holland J; Re Margart Pty Ltd (in liq); Hamilton v Westpac Banking Corp & Anor (1984) 9 ACLR 269 at 272 per Helsham CJ in Eq. There are also older authorities which support that view: Driver v Broad (1893) 1 QB 744 at 749; Wallace v Evershed [1899] 1 Ch 891; Re Dawson [1915] 1 Ch 626. Driver (supra) and Dawson (supra) were unanimous decisions of the Court of Appeal in which it was held that, prior to crystallisation, the holder of a floating charge over (inter alia) real property, has an interest in land within the meaning of the Statutes of Frauds and the Mortmain and Charitable Uses Act (1888) (UK) respectively. In Wallace (supra) it was held that prior to crystallisation, the holder of a floating charge over (inter alia) land is, by virtue of having a present interest in that land, a necessary party to a foreclosure suit. It should also be noted that a deed of guarantee and indemnity being a disposition of a contingent interest in personal property is a settlement for the purposes of s120 of the Act: Re Pacific Projects Pty Ltd (1990) 2 Qd R 541 at 543. This has not been disputed by the parties. Similarly a grant of options by a bankrupt to purchase his interests in respect of a number of properties which came into operation within two years before the commencement of the bankruptcy, although contingent interests, was voided pursuant to s120 because of the absence of valuable consideration: Re Florance; Ex parte Andrew (1983) 52 ALR 339. It is submitted for the applicants that a floating charge contingent upon crystallisation cannot be of less legal effect than the creation of either of these contingent interests. For the Bank reliance is placed upon a line of authority to the effect that no immediate equitable interest is created prior to crystallisation by the mere existence of a floating charge. The essence of this view is that although a floating charge is an existing charge and a present security, it does not specifically affect any asset subject to it until it crystallises into a fixed security. The authorities for this view are: Government Stock and Other Securities Investment Co Ltd v Manila Railway Co Ltd [1897] AC 81 at 86; Illingworth v Houldsworth [1904] AC 355 at 358; Evans v Rival Granite Quarries [1910] 2 KB 979 at 994 and 999; Luckins v Highway Motel (Carnarvon) Pty Ltd (1975) 133 CLR 164 at 173-4; United Builders Pty Ltd v Mutual Acceptance Ltd (1980) 144 CLR 673 at 681-2 and 686; Tri-Continental Corporation v FCT [1988] 1 Qd R 474. In Tri-Continental (supra) Connolly J concluded at 480-1 that the point at issue lies in determining what the equity is when it is said that a floating charge creates an equitable interest because, until the charge is crystallised, there is not an equity entitling the debenture holder to possession of particular assets. Williams J at 484-5, after referring to Landall (supra), Hamilton (supra) and Re Margart (supra) said: "Certainly the holder of the mortgage debenture has the right prior to crystallisation to intervene and obtain an injunction to prevent the company from dealing with its assets otherwise than in the ordinary course of its business (Cf per Nourse J in In re Woodroffes (Musical Instruments) Ltd [1986] 1 Ch 366, 378), but I find it difficult in the light of the decisions referred to above to define with any degree of precision the nature of the equity which gives the mortgagee the right to obtain an injunction. Clearly the mortgage debenture is a present security, and the mortgagee may, without crystallising the charge, obtain relief in equity to protect his interest in the property. But given the High Court approval of the reasoning in Evans v Rival Granite Quarries Ltd, and the observations in Clyne v Deputy Commissioner of Taxation (1981) 150 CLR 1, especially by Mason J on the reasoning of Jenkinson J in Sicree & Watt v Deputy Commissioner of Taxation (1980) 80 ATC 4302, I feel reluctantly constrained to conclude that prior to crystallisation the holder of a mortgage debenture has no proprietary interest, even in equity, in the property subject to the charge which would defeat the s218 notice." An application for special leave to appeal to the High Court from the decision in Tri-Continental (supra) was refused. There are further authorities which rely upon statements that an equitable charge which is not an equitable mortgage confers on the chargee a right of realisation by judicial process, that is to say, by the appointment of a receiver or an order for sale, but not any proprietary interest in the subject of the security: Swiss Bank Corporation v Lloyd's Bank Ltd [1982] AC 584 at 595; Carreras Rothmans Ltd v Freeman Matthews Treasure Ltd [1985] Ch 207 at 227; Re Bond Worth Ltd [1980] 1 Ch 228 at 250; Askrigg Pty Ltd v Student Guild Curtin University of Technology (1989) 18 NSWLR 738 at 744. Some of these authorities rely upon statements in English texts for example: Fisher and Lightwood, Lightwood's Law of Mortgage, 9th ed (1977) at 13-14 and Megarry and Wade, The Law of Real Property, 4th ed (1975) at 902 and 925. W J Gough in Company Charges Butterworths London (1978) at 17 accepts that an equitable charge other than an equitable mortgage and not in the nature of a floating charge confers an equitable interest and a proprietary interest. The author does so because such a charge involves some deduction from the ownership of the debtor and there is a transfer of certain proprietary incidents. As Gough expresses it "what the debtor transfers away from, or abridges in respect of, his ownership in creating a charge is the full, unfettered right to `deal' with the property charged in denial of, derogation from, or otherwise inconsistently with the agreement creating the charge" (at 17). However, in the case of a floating charge he considers that neither the ownership of present property nor the acquisition of future property of itself constitutes a specific identification or ascertainment such as to permit an equitable proprietary interest without more to vest in the security holder (at 120). That view is not accepted in Fisher and Lightwood 10th ed (1988) at 132, fn(q), where reliance is placed upon the authorities cited for the applicants including Landall (supra), Hamilton (supra) and Margart (supra). Nevertheless I consider that in the light of the decision of the Full Court of the Supreme Court of Queensland in Tri-Continental (supra) and the reasoning of that Court in relation to the authorities, the view stated by Gough is the present correct position of the law in Australia. It is consistent with the first instance decisions of judges of this Court in McGoldrick (supra) and Zampatti (supra). In short, an equitable charge which is not a floating charge confers an equitable interest and a proprietary interest so that its creation is capable of being a disposition of property and therefore a settlement within s120 of the Act. However, in the case of a floating charge, no equity is created until crystallisation so that there is no conferral of an equitable interest or a proprietary interest by the creation of a floating charge. The consequence is that a floating charge cannot be a disposition of property for the purposes of s120 of the Act. In the present case the equitable mortgages are equitable charges which are both fixed and floating. It follows that so far as they are fixed securities they constitute a disposition of property and hence a settlement for the purposes of s120 of the Act. To the extent they are floating securities their creation cannot give rise to a disposition of property and to that extent there is no settlement for the purposes of that section. Retention of fixed charge These conclusions are, of course, subject to the further requirement that the equitable mortgages so far as they are fixed securities satisfy the requirement referred to in Re Hyams (supra) that they be dispositions of an enduring nature in circumstances where there was no contemplation of the immediate dissipation or consumption of the property which passed. So far as there may be controversy as to whether this retention requirement remains part of Australian law I follow the view that it does and the reasons and decision of French J in Re La Rosa (supra) at 589. See also Barton v Official Receiver (1984) 4 FCR 380 and P T Garuda Indonesia Ltd v Grellman (1992) 35 FCR 515 at 533-4. The question therefore becomes whether the applicants have established on the evidence that the company intended to transfer to the Bank property for its retention rather than consumption or dissipation. This involves ascertainment of the purpose of the chargor and the consideration of the circumstances in which the charge was created: cf Zampatti (supra). In that case it was held by Lee J that as the immediate realisation of the motor vehicle over which the equitable charge was granted was a consequence which would follow if the debtor did not discharge or make satisfactory arrangements in respect of the indebtedness, the charge failed to satisfy the necessary requirement of retention to make it a settlement. The evidence upon which the applicants rely to discharge the onus of proof that the equitable mortgages were granted for an indefinite period so that they satisfy the retention requirement, is as follows: the mortgages in their terms were to provide security for all advances, made or to be made, and whenever made; the advances were made on overdraft and were not of finite duration; and the company had an overdraft facility of $350,000 as at 13 July 1990 and $600,000 on 31 December 1990. There is nothing in the correspondence from the Bank approving the application for each advance to suggest that the overdraft facility was other than an arrangement which was to continue from an indefinite period although it was subject to annual review. The company plainly intended to trade on with the aid of financial accommodation from the Bank and intended the overdrawn account to be reduced from further receipts from trading. If the Bank crystallised the charges, the company would of necessity have had to cease to trade. There was nothing in the evidence of the three bank officers, Messrs Bunter (Deputy Regional Manager), Hunter (Regional Manager Branches) and Kendle (Branch Manager) which suggested that an equitable mortgage was not a usual form of banker's security taken to secure an indebtedness for an indefinite period. In my opinion the evidence leads inevitably to the inference that the company intended each of the mortgages to be granted for an indefinite period and did not intend they be for immediate disposition or consumption. It follows that I do not accept the submission for the Bank that there is no evidence concerning the intention of the company. In my opinion that intention is available by way of inference from the circumstances to which I have referred. For the Bank it is also contended that the equitable mortgages were treated by the Bank as a collateral security to which no lending margin was applied by the Bank and consequently they did not represent "property to be retained" but rather covered "loose assets" which the Bank intended to consume or dissipate. I accept that these premises are established by the evidence but the conclusion that the Bank intended to consume or dissipate the assets covered by the equitable mortgages is neither part of that evidence nor is it able to be derived by way of inference. It follows that I am of the opinion that the equitable mortgages, to the extent they were fixed charges, were dispositions of property of the type that results in them being a settlement of property within s120 of the Act. That conclusion accords with an alternative submission made for the Bank. Good faith To avoid the operation of ss120(1) and (2) the applicants must establish that the settlement was not made in favour of the Bank "in good faith and for valuable consideration". There is no issue between the parties that the settlement was made in favour of the Bank for valuable consideration. In Official Trustee v Mitchell (1992) 38 FCR 364 at 371-2 the Full Court of the Federal Court favoured the test of good faith, as stated by Gibbs J in Re Hyams (supra) at 256, as meaning "without knowledge that any fraud or preference contrary to the statute is intended". In Re Pacific Projects Pty Ltd (supra) Connolly J at 545, in accepting the test of good faith in Re Hyams (supra), said that if the Bank in the case before him was aware that the securities it was about to take would secure for it a further $500,000 and that this was not unlikely to be at the expense of unsecured creditors in a situation where the company was unable to pay its debts as they fell due, it could not be regarded as a purchaser in good faith. Moynihan J at 549 said that in the circumstances the appellant must have been put on inquiry which would have told it that the security it required gave it a reasonable prospect of recovering the debt owed from the company at the expense of the company's unsecured creditors. Such a settlement could not be said to be in good faith. I do not accept that the law requires, as the submissions for the Bank suggest, that to negative good faith the Bank must be shown to have had privity to dishonesty or fraud. The Court in Mitchell (supra) at 372 said that the test in Re Hyams (supra) "may be satisfied where the Court can infer the receipt of notice so that the person concerned knew of the fraud or preference: if the person then went on with the transaction, he or she must be regarded as privy to the fraud". The essential question is whether the knowledge of the Bank extended to knowledge that the taking by it of either of the equitable mortgages would constitute a preference. For the determination of this fact deliberate abstention from inquiry may be equated to actual knowledge but wilful blindness is to be distinguished from ignorance caused by failure to make more extensive inquiries: the former is akin to fraud, the latter to negligence: Lego Australia Pty Ltd v Paraggio (1993) 44 FCR 151 at 171 and Mitchell (supra) at 371. Here it is contended for the applicants that if the company was insolvent as at the date of grant of each of the equitable mortgages and the Bank knew or had reason to suspect that insolvency, there would be an absence of good faith because it would have known or suspected that the creation of both equitable mortgages preferred it as a creditor over all other creditors. It is therefore necessary to consider the questions of insolvency and knowledge in relation to each of the equitable mortgages. Insolvency The question of whether a person is able to pay debts as they become due from his or her own monies is not a question of whether the debtor would be able, if time were given, to pay the debts out of his or her assets, but rather whether he or she is presently able to do so with monies actually available: Bank of Australasia v Hall (1907) 4 CLR 1514 at 1528 cited in Re Pacific Projects (supra) at 546. However, in Sandell v Porter (1966) 115 CLR 666, Barwick CJ at 670 stated that the "monies that are available" are not limited to cash resources immediately available, but also extend to monies which the debtor can procure by a realisation by sale or by mortgage or pledge of his or her assets within a relatively short time - relative to the nature and amount of the debts and to the circumstances, including the nature of the business, of the debtor. Barwick CJ emphasised that the conclusion of insolvency ought to be clear from a consideration of the debtor's financial position in its entirety and generally speaking ought not to be drawn simply from evidence of a temporary lack of liquidity. Such a lack must be distinguished from an endemic shortage of working capital which can only be restored by the successful outcome of business ventures in which the existing working capital has been deployed: Re Toowong Trading Pty Ltd (in liq) (1988) 13 ACLR 121 at 125 citing Hymix v Garrity (1977) 13 ALR 321 at 328 per Jacobs J. It is also the case that the debtor's balance sheet position, that is whether there is a surplus of assets over liabilities, is not decisive in favour of solvency, indeed it may be decisive against it: Bank of Australasia (supra) at 1528; Re Pacific Projects Pty Ltd (supra) at 546-7. Money advanced to a debtor by a bank as "temporary excesses" on a current account are not the "debtor's own monies". If the monies are unsecured or only partially secured they are not the debtor's own monies: Re Amour; Ex parte Official Receiver v Commonwealth Trading Bank of Australia (1956) 18 ABC 69 at 74; Kyra Nominees Pty Ltd (in liq) v National Australia Bank Ltd (1986) 4 ACLC 400 at 405; Bank of Australasia v Hall (supra) at 1528-1543. Where the temporary excesses are secured on assets of third parties, even though those parties be directors or associates, they are not the debtor's monies: Re Mike Electric (Aust) Pty Ltd (1983) 1 ACLC 758 at 763. Where a bank overdraft is repayable on demand it cannot be relied upon. However, if it is secured and not due for review, it can be regarded as not a debt reasonably expected to become due: Carrier Airconditioning Pty Ltd v Kurda (1993) 11 ACSR at 252‑3. In Re Norfolk Plumbing Supplies Pty Ltd (1992) 6 ACSR 601 at 615, Kearney J followed McGarvie J in Taylor v ANZ Banking Group Ltd (1986) 13 ACLR 780 at 788, in which the authorities previously referred to were cited and applied, and concluded that monies available by way of overdraft facilities did not qualify as a debtor's own money nor would an arrangement with creditors be something which should be taken into account, their debts being then due and payable. See also Re RHD Power Services Pty Ltd (1990) 3 ACSR 261 at 263-4 and Geraldton Building Co Pty Ltd v Woodmoore (1992) 8 ACSR 585 at 597-8. Where sums available as unsecured "temporary excesses from a bank" have already been paid to the debtor to enable it to meet its obligations, the sums paid become a liability of the debtor due on demand: Weaver and Craigie, The Law Relating to Banker and Customer in Australia vol1 (1990) par7.120; Williams and Glyn's Bank v Barnes [1980] Com LR 205 at 210. These principles are not put into contention for the Bank. It is necessary therefore to turn to the evidence to which the principles must have application. Insolvency as at 13 July 1990 As at 13 July 1990 the company had an overdraft limit of $350,000 which was overdrawn at the bank to the extent of $2,170,068 on its current account. There was no formal arrangement permitting this excess. This position had pertained for some months and certainly since 31 March. In May and June reduction of the overdraft at the bank had been achieved only as a consequence of the company's decision to withhold payment from its creditors. The overdrawn account was being monitored on a daily basis by Mr Kendle, each cheque in excess of $10,000 being drawn to his attention and a decision being made whether or not to honour it. Arrangements were also made with Mr Margaria to ensure the cheques which the Bank told the company it was not prepared to honour would not be presented. The company could only pay its debts by resort to the bank overdraft and this was not its own monies: Amour (supra) Kyra Nominees (supra) and Bank of Australasia (supra). On 12 July 1990 all the securities provided in respect of the overdrawn account were third party securities namely, guarantees by directors, a registered mortgage over land owned by the directors and a second registered mortgage over freehold land owned by Moneta. The overdraft was therefore secured on the money of others and for that reason additionally the bank overdraft could not be regarded as the company's own monies: Re Mike Electric (supra). Even with the aid of temporary excesses on its bank account, the company could not meet all its trade creditors' debts then due for payment. Many suppliers were not paid within their thirty days terms of trade. In many cases payment was in excess of sixty days or between sixty to ninety days and in some cases in excess of ninety days. In some cases creditors were requiring immediate payment which the company could not meet. It is significant also that the company had agreed with the Bank that the time of payment of creditors would be extended with the object of reducing the overdraft at the bank. The increase in unpresented cheques went from $575,590 at the 31 May to $976,130 at 30 June. This demonstrates that the agreement was carried into effect. It is not sufficient that a debtor be able to pay some of its creditors from its own monies; it must be capable of paying them all: Bank of Australasia (supra) at 1543; Re Universal Management (in liq) (1981) NZ CLC 95-026; 3 M Australia v Kemish (1986) 4 ACLC 185 at 190-1. The time for payment is when the debts are legally due: See Re Universal Management (in liq) (supra); Carrier Airconditioning (supra) at 255-256; Pioneer Concrete Pty Ltd v Ellston (1986) 10 ACLR 289 at 298. It was also the case that the company did not, as at the 12 July 1990, have assets which it could mortgage either to the Bank or any other party to secure borrowing which would enable it to pay its debts. It therefore could not provide security to enable it to pay its debts including temporary excesses owed to the Bank ($2,170,068) or its outstanding creditors whose debts were due and payable, including the unpresented cheques of $976,130 pertaining at 30 June. The debts in both those categories were immediately payable, although no demand had been made in respect of the temporary excesses. Each of these matters was conceded by the Bank's expert Mr Gamble. They are also evident from the company's balance sheet as at 30 June 1990 which disclosed that it had tangible assets of $575,122 and intangible assets (debtor's work in progress and unsecured loans to associates) of $35,270.85. Mr Gamble agreed that banks were not normally prepared to lend on the latter. The matters are also evident from the tangible securities which the Bank took for the company's overdrawn account prior to 13 July 1990 being securities provided by third parties, in particular by Moneta and Mr and Mrs Margaria. Even these were regarded by the Bank as inadequate to secure the company's temporary excesses. The position was therefore that as at 13 July the company did not have assets upon which it could raise loans to pay all its debts, whether unsecured temporary excesses and outstanding creditors or the outstanding creditors only. Further consideration of the company's balance sheet at 30 June 1990 demonstrates that it was not then able to pay its debts from its own monies. Creditors and borrowings at that date were $3,308,732 of which $2,543,479 was "bank overdraft" including unpresented cheques of $976,130. The current assets identified by Mr Gamble to meet these were debtors ($1,291,979), work in progress ($1,210,273) and related party loans of $1,024,833. Of the debtors $843,174 were long outstanding and related to the hotel and tavern projects. The work in progress was only available upon invoicing following completion of the projects to which the work related. The related party loans were principally loans to Moneta which it was not in a position to repay on demand or in the proximate future. The current assets available to meet the company's creditors could not be immediately realised and at best would only be likely to be paid in the indefinite future. Indeed, the respondent's expert Mr Gamble reported on the position of the company at this date on the assumption the assets could be realised in twelve months. The company's inability to pay all its debts as they fell due from its own monies was due in part from its funding of development projects by Moneta in the 1989/90 year. As the manager of the Bank's branch explained, the funds were drawn from the company to fund Moneta's projects. A cash flow analysis, approved by the Bank's expert, demonstrated that in the year to 30 June 1990 the company's cash flow position had deteriorated by over $2,500,000. This meant that the company had $2,500,000 less to pay its creditors due on demand and had to rely on debtors, work in progress and repayment of loans made to the insolvent Moneta to pay its creditors. The detailed evidentiary support for the applicant's submissions to the effect that the company was insolvent at 13 July 1990 was not seriously contested in written submissions on behalf of the Bank. In my opinion, in accordance with the principles outlined, the company was insolvent at 13 July 1990. Insolvency as at 31 December 1990 By 31 December 1990, the company's position had worsened significantly. Its account with the Bank now had an overdrawn balance of $2,541,484 and an overdraft limit of $600,000. The manager of the branch of the Bank at which the account was maintained was under firm instructions from regional office that under no circumstances was he to honour cheques which would take the account balance over $2,500,000. However, he found it necessary to do so on 28 December 1990, the alternative being to "bounce" a large number of payments to suppliers. He reported the matters to regional office. The company's cheques retained in the drawer had grown from $976,000 at 30 June 1990 to $1,589,470. Self evidently the company was unable to pay its creditors when their debts fell due. The company had no assets from which it could repay its bank overdraft if demanded. The securities for the company's overdraft included only one security granted by the company, which was granted over a home with a security value of $95,714. On 19 November 1990 the Bank expressly threatened to appoint a receiver if the company did not strictly observe the conditions of the overdraft approval to the limit of $600,000. On that date the Bank had insisted on a firm of Chartered Accountants having the financial management of the company. The company was not honouring its promises to the Bank to reduce the balance on its overdrawn account. Actual payments exceeded budgeted payments in the period from August to December 1990 by $1,758,000. In the month of December the company's revised cash flow projection was $1,996,181 and in fact the cash receipts were $813,000. The Bank's expert, Mr Gamble, was of the opinion that as at the 31 December 1990 the company could not pay all its debts from its own money. In my opinion it is patent from this evidence that as at the 31 December 1990 the company was insolvent. I make this finding without the necessity of relying upon the report of the applicant's expert Mr Hurt to which objection was taken on behalf of the Bank. Knowledge of Bank at 13 July 1990 In further consideration of whether the Bank acted in good faith in granting the first equitable mortgage, it is necessary to consider whether it knew or had reason to suspect that the company was unable to pay its debts from its own monies on 13 July 1990 so that the first equitable mortgage preferred it as a creditor. In my opinion the evidence establishes that the Bank was, as at 13 July 1990, aware that the company was unable to pay its debts then due from its own money or alternatively that it suspected the company's insolvency. In the first place it is apparent that the Bank had knowledge of the state of the company's overdrawn account namely, that it stood at $2,170,068 and was increasing and that such sums were due and payable on demand. The position was that at that time the account was subject to daily reports and it was of sufficient concern to the Bank for the company's account balance to be considered daily. The manager of the relevant branch of the Bank made a specific decision whether to pay each and every cheque presented on the account in excess of $10,000. Consequently the option to the Bank to dishonour a cheque was open at all times. Indeed the state of the Bank's knowledge was such that on 3 July 1990 the Regional Manager Mr Islip instructed Mr Kendle to impress upon Mr Margaria the "seriousness of his situation" and to ensure that the Bank's security position was improved by the obtaining of at least registered equitable mortgages over the two main companies in the group and a charge over any available freehold. Secondly, the Bank knew that the company did not have its own tangible security for borrowings but rather had to rely on the security provided by third parties. The Bank's only security for the account as at 12 July 1990 was the third party unlimited guarantee given by directors, a second registered mortgage over freehold property given by Moneta and a registered mortgage over freehold property given by Mr and Mrs Margaria. Thirdly, the Bank was aware that the company was not paying all its creditors when their debts fell due. It had agreed with the company that the overdraft should be reduced at the expense of creditors. The knowledge was that of Mr Kendle. A file note made by him on 2 March 1990 refers to cheques being released to creditors and shows an awareness by him the cheques had been drawn and withheld. He made an agreement with Mr Margaria to contain the company's accounts within limits and those limits were to be maintained by allowing creditors to grow. Fourthly, the Bank had knowledge through Mr Kendle that substantial debtors were not making payments due to the company. The current account first went "out of order" in November/December 1989 and at that time Mr Kendle asked Mr Margaria for an explanation. He was told that progress payments on a hotel and other projects were not being paid. On 2 March 1990 he recorded that payments due from the hotel project had not been made, the sums overdue being recorded as about $700,000 and said to be subject to further delays. On that date he recorded a promise by Mr Margaria that the account would be brought back into order by a reduction of the overdraft of below $50,000 by the end of March. At that date the overdraft had increased to $2,025,124.54. He was aware from monitoring the daily reports on the overdrawn account that many of the other progress payments had not been made. On 11 May 1990 Mr Kendle recorded that further delays in relation to payments on the hotel project had resulted in the account not reducing below the overdraft limit of $350,000 by the end of April. On 31 May 1990 Mr Kendle obtained a cash flow from the company showing projected receipts of $1,299,000 in June. By the end of June $448,000 had been received. Mr Kendle testified he was aware that progress payments had not been received but not necessarily of their precise amounts. On 31 July 1990 Mr Kendle recorded that the total sum due under the hotel project was $1,325,000 of which none had been paid. He was also aware that $70,000 due on a tavern project had been outstanding for more than twelve months. In a memorandum of 31 July 1990 Mr Kendle referred to debts of the company of $843,000 as overdue and questioned whether they were collectable. In my opinion it follows that at the very least Mr Kendle was aware that the company could not reasonably rely on many of its debtors to provide funds to discharge debts to creditors which were then due and payable. It may be inferred that he knew well by mid July 1990 that there was a serious doubt as to the collectibility of a significant part of the debt of the company namely, the debt on the hotel project whether in the medium or long term. Fifthly, it follows from the findings of fact recently referred to that the Bank was aware that promises made by Mr Margaria to bring the overdraft account back into order in March and April 1990 had been dishonoured. Sixthly, the Bank was aware that the endemic shortage of working capital of the company could only be remedied if long term development projects being undertaken by Moneta were successful. Mr Kendle was aware that at 4 July 1990 that the company had funded Moneta in development projects although he was not aware of the detail until some time in July 1990. A memorandum to him from the Regional Manager dated 3 July 1990 which instructed him to obtain security described the debt owed to the Bank by the company as including a large component of equity in various developments. Seventhly, the Bank was aware of the company's trading or liquidity position and was supplied with lists of debtors and creditors on a regular basis. From May 1990 Mr Kendle requested Mr Margaria to provide lists of debtors and creditors on a regular basis. Certainly Mr Kendle had obtained lists of debtors on 31 May 1990. Finally, on 3 July 1990 the Regional Manager had expressed concern to Mr Kendle about the seriousness of the situation. In my opinion the combination of these circumstances is such as to enable it to be inferred that when the Bank took the first equitable mortgage it was aware that it was not unlikely to be at the expense of unsecured creditors. Unlike Re Norfolk Plumbing Supplies (supra) at 620, the inference arising extends to the Bank having reason to suspect that the effect of the payments would be to give it a preference, priority or advantage over other creditors. In reaching this conclusion I do not regard it as material that the Bank did not consider itself as dishonest or acting in bad faith or that it may be able to objectively state (as to which there is no evidence) that it acted in accordance with prudent banking practice. The essential question is whether on the occasion each equitable mortgage was executed the Bank knew or suspected the company was not able to pay all its present debts as they fell due so that the taking of the security in either case preferred the Bank over other unsecured creditors. It is not relevant that the Bank may have thought that the company might ultimately trade out of its then condition of insolvency. It is the knowledge of insolvency at the time of the taking of the security which negatives good faith. Knowledge as at 31 December 1990 The state of the Bank's knowledge at 31 December 1990 included those matters previously referred to as lying within its knowledge at the 13 July 1990. In addition, after that date, the company's overall position had deteriorated. The increasing level of the overdrawn account at any time (by 31 December 1990 the amount of $2,541,484) and the failure by the company to meet cash flow projections given to the Bank, were well known to it as a consequence of daily monitoring. On 31 July and 19 October 1990 Mr Kendle reported that the financial management of the company had got away from Mr Margaria and that he had over extended his companies. In a memorandum of 13 November 1990 Mr Kendle reported to the regional office that approval of increased overdraft accommodation had been made conditionally upon the company engaging a firm of chartered accountants to assume financial management of the group. He further recorded that failure by the company to observe the terms of the approval would leave the Bank with no alternative than to consider the appointment of a receiver manager to manage the group's operations and to oversee the orderly sale of the assets of both companies. On 7 November 1990 the acting Regional Manager was of the view that the control of the account had been disappointing and that either the Bank should issue a demand leading to liquidation or the appointment of a receiver manager, or allow the position to stand for a further six weeks with some further excesses in the hope that progress payments would be received in terms of the cash flow budget. On the same date the General Manager's Inspector, Mr Harman, considered that the consolidated balance sheet of the company and Moneta made it apparent that the proprietors no longer owned the businesses, that is that both companies were insolvent. His opinion was that the appointment of the firm of chartered accountants in an active financial management role would also reduce the risk of a creditor winding up the company. In mid November 1990 a head office Inspector, Mr Poulter, recorded that both the company and Moneta were in parlous financial situations and he questioned the accuracy of the nett profit claimed on the accounts for the financial year to 30 June 1990. On 13 November 1990 the Bank's acting State Manager, Mr Howard, authorised an increase in the Bank's overdraft limit to $600,000 plus temporary excesses and directed the client be advised that if present arrangements were not observed the Bank would place the affairs of both the company and Moneta in the hands of a receiver. One of the conditions was that the overdraft would be reduced to $1.6M by 31 December 1990. By 20 December 1990 the Bank was aware the reduction would not occur. By 31 December 1990 the overdraft in fact exceeded the maximum limit placed upon it of $2,500,000. On 28 December 1990 Mr Kendle reported to the regional office that he had found it necessary to honour cheques above the strict temporary excess limit of $2,500,000 to avoid the company's credibility and solvency being brought into question across a broad spectrum. The purpose of the second equitable mortgage was made apparent by a memorandum from Mr Hunter of 9 January 1991 recording that the branch had become aware of a deficiency in the first equitable mortgage in that it did not charge the assets over which the company was trustee. The second equitable mortgage was therefore taken to remedy the deficiency in the scope of the assets charged. In my opinion this evidence establishes that as at 31 December 1990 the Bank knew or at the very least suspected that the company was insolvent. For the same reasons as have been given in relation to the first equitable mortgage, it may also be inferred that the effect of the taking of the second equitable mortgage would be to give to the Bank a preference over other unsecured creditors. It follows that neither of the equitable mortgages were given in good faith so that neither s120(1) nor s120(2) of the Act are excluded from application. Amendment of Statement of Claim At the hearing the applicants moved the Court for leave to amend the statement of claim to plead that the first equitable mortgage did not on its true construction mortgage, charge or encumber any of the assets of the F P Margaria Family Trust. Although the application for amendment was not raised until the commencement of the hearing, that of itself will not be a bar to the granting of leave for amendment if the amendment is necessary to raise and determine the real questions in controversy between the parties. It is only if bad faith is demonstrated or where there is consequential injury or prejudice to the opposing party which is incapable of remedy that an amendment will be refused: Londish v Gulf Pacific Pty Ltd (1993) 45 FCR 128 at 140-2; National Australia Bank Ltd v Nobile (1988) 100 ALR 227 at 235-6. In Corozo Pty Ltd v Total Australia Ltd (1988) 2 Qd R 366 at 372-3, Andrews CJ in the Full Court of the Supreme Court of Queensland accepted generally the proposition that phrases such as "all the right title estate and interest which the mortgagor now has or may... acquire" do not extend to properties held "in autre droit" and relate to no more than the person creating the interest in question has at that time. He considered Rooper v Harrison (1885) 2 K & J 86 112 (69 ER 704 at 715) and Jones v Barker [1909] 1 Ch 321 at 327 supported that proposition. The applicants rely upon it to contend that if the amendment is allowed the point pleaded can be resolved by reference to the documents only. So far as the Bank is concerned it is contended that the point cannot be resolved without resort to evidence relating to its dealings with the company which it says will establish that the company was acting in its capacity as trustee. In short, the Bank maintains reference to extrinsic evidence is essential to decide the issue raised by the proposed amendment. The rule of construction referred to in Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 at 352 requires there to be ambiguity, or susceptibility of more than one meaning in the language of the contract before evidence of the surrounding circumstances is admissible. Where there is a plain meaning extrinsic evidence is not admissible as an aid to construction. I do not consider that the provision in cl17 of the first equitable mortgage, which states that if the debtor is a trustee the mortgage would remain effective notwithstanding any change in the trustee body, creates any ambiguity: it simply imposes a condition where the debtor is executing as a trustee. In Re Interwest Hotels Pty Ltd (in liq) (1993) 12 ACSR 78 the primary question was whether a company was contracting solely in its own right when it gave a guarantee in which no reference was made to the capacity in which the company executed it. Eames J accepted that there was no doubt that the document itself was the primary source from which the intention of the parties was to be ascertained and that it was only if that document was incapable of giving an unambiguous answer that reference to other sources could be contemplated: Schuler L AG v Wickman Machine Tool Sales Ltd [1974] AC 235 at 261; Codelfa (supra) at 348. He then referred to Helvetic Investment Corp Pty Ltd v Knight (1984) 9 ACLR 773 and Elders Trustee and Executor Co Ltd v E G Reeves Pty Ltd (1987) 78 ALR 193. In Helvetic (supra) it was held that when a trustee expressly signed as trustee of a family trust the words constituted an appropriate description of the legal person and did not exclude personal liability. In Reeves (supra) rectification of a security was sought to limit liability to the extent of the assets of a particular trust. Eames J (at 85) distinguished those cases on the grounds that they were dealing with an attempt to limit the exposure of trust assets or a trustee's own assets. They were not directly on point because the question at issue in Interwest (supra) was whether the company was in fact acting in the capacity of trustee or else was acting solely in its own right. That is, the issue raised by the proposed amendments to the pleadings here. In Interwest (supra) Eames J (at 86-7 and 89-90) held that extrinsic evidence was admissible to determine the question of which capacity the company had contracted in. Such evidence being admissible either as evidence of the fact of that capacity or evidence permitted under Codelfa principles to provide the "objective framework of facts within which the contract came into existence". I see no reason to apprehend the issue differently here. For the Bank it is contended that it is common cause that at all times the company was the trustee of the F P Margaria Family Trust and indeed that is the allegation sought to be introduced into the statement of claim by the amendment. It is also said for the Bank that in its dealings with the company the parties considered the company was acting in its capacity as trustee. These are matters of evidence which prima facie should be admitted. Unless the Bank had been given the opportunity to call evidence in relation to these matters it would be prejudiced. Because it is not possible for the matter to be resolved purely as a construction point I therefore consider that leave to amend the pleadings should be refused. That must have the consequence that the construction point remains undecided but may yet require resolution for effect to be given to orders resulting from this proceeding. Breach of Fiduciary Duty It is pleaded in the alternative for the applicants that the creation of the first and second equitable mortgages was a breach of duty by the directors of the company, a breach in which the Bank participated by requesting the company to execute those mortgages and by taking and registering the same. It is necessary to consider this pleading because the opinion which I have reached thus far is that the applicants are only entitled to set aside the equitable mortgages pursuant to s565 of the Corporations Law to the extent that they were fixed charges. The alternative pleading is therefore relevant to those securities as floating charges. Where a company is insolvent, nearly insolvent or of doubtful solvency, the directors owe a fiduciary obligation to the company. This duty extends to not prejudicing the interests of creditors: Walker v Wimborne (1976) 137 CLR 1 at 7; Nicholson v Permacraft (NZ) Ltd (1985) 3 ACLC 453; Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722 at 729 to 733. Where the company is insolvent "it may well be said that the welfare of the company is of greater concern to the creditors than to anyone": Equiticorp Finance Ltd (in liq) v Bank of New Zealand (1993) 11 ACSR 642 at 725. Where directors of an insolvent company put property outside the reach of certain of its creditors they breach that fiduciary duty to the company: Jeffree v NCS [1990] WAR 183 particularly at 194. As has earlier appeared, the precondition of insolvency for the application of this rule has in my view been satisfied in relation to the company both at July and December 1990. For the Bank it is contended that this formulation of the fiduciary duty does not reflect the test in Charterbridge Corporation Ltd v Lloyds Bank Ltd [1970] Ch 62 at 74, which is said to have been accepted in Equiticorp (supra). Reference to Equiticorp at 725-7 shows that Charterbridge (supra) was referred to by the Court in connection with the issue of the difficulty which arises when directors of a particular company enter into a transaction on behalf of that company because they consider the transaction is of a benefit to the group as a whole and do not give separate consideration to the benefit of their company. It has not been contended here that the company should be considered as part of a group for the present purpose. Furthermore, although a majority in Equiticorp were content to deal with the issues in the case upon the basis of the test proposed by Pennycuick J in Charterbridge (supra) at 74 ("whether an intelligent and honest man in the position of a director of the company concerned, could, in the whole of the existing circumstances, have reasonably believed that the transactions were for the benefit of the company") they indicated that they had reservations about that test. It is not therefore correct to say that in Equiticorp, Charterbridge (supra) was "accepted as part of our law". The question whether the directors did act in the interests of the company and not for any collateral purpose requires consideration to be given to the state of mind of those who acted, and the motive on which they acted and what their intention was, collecting from the surrounding circumstances all the materials which genuinely throw light upon the question of the state of mind of the directors so as to show whether they were honestly acting in discharge of their powers in the interests of the company or were acting from some bye‑motive, possibly of personal advantage, or for any other reason: Hindle v John Cotten Ltd (1919) 56 Sc LR 625 per Viscount Finlay at 630-31, cited in Howard Smith Pty Ltd v Ampol Petroleum Ltd [1974] 1 NSWLR 68 at 77 and Equiticorp (supra) at 727. In Equiticorp, it was said that it must be borne in mind that the directors are involved in making business decisions and the courts have traditionally not pronounced upon the commercial justification for such decisions. For the applicants it is contended that a breach of duty by the directors occurred when they entered into each of the equitable mortgages because the effect of those mortgages was to give one unsecured creditor a preference or priority over other unsecured creditors. In other words the applicants seek to infer the state of mind of the directors of the second applicant from the effect of the act as they contend it should be characterised. No further evidence is adduced to show the directors' state of mind beyond the nature of the act. In my opinion the consequence of this is that the applicants have failed to discharge the onus of establishing that the directors acted for a collateral purpose in granting the equitable mortgages in preference to the interests of the company. In the circumstances in which the company found itself it may have been open to the directors to reach the view that in order to secure pecuniary value for the company in relation to past and future advances it was in the best interests of the company to continue its trading operations notwithstanding the interests of other creditors. In my opinion it is simply not possible to infer the necessary state of mind to establish a breach of fiduciary obligation from the occurrence of the act itself. Even if it could be said that the directors had breached their fiduciary obligations as pleaded there is the further question whether the Bank knowingly participated in the breach of fiduciary duty within the second limb of Barnes v Addy (1874) LR 9 Ch APP 244. That is, whether the Bank assisted in the dishonest and fraudulent design of the directors. For the applicants it is contended that participation is established by the evidence that Mr Kendle, as a result of instruction from Mr Islip, requested Mr Margaria to execute the first equitable mortgage and to grant the second equitable mortgage as a consequence of perceived deficiencies in the first. On the issue of knowledge the applicants contend that it is sufficient if the Bank had knowledge of facts which would indicate a breach of trust to a reasonable person and that it is not necessary for there to be expressly found any dishonesty or privity to fraud in a subjective sense. Again the submissions for the applicants seek to deduce the knowledge of participation from the nature of the act. The applicants submit that if the company was insolvent and each of the equitable mortgages constituted a preference to the Bank and the Bank caused the company to grant those securities when it knew or suspected the insolvency and the receipt of a preference, then knowing participation in a breach of fiduciary duty is inescapable. Extensive submissions have been made particularly on behalf of the Bank concerning the requirements of knowledge within the second limb of Barnes (supra). The Australian, English and New Zealand authorities on the matter have recently been usefully collected and analysed: see M Lodge, "Barnes v Addy: The Requirements of Knowledge" (1995) 23 Australian Business Law Review 25. However, once there is a finding of an absence of dishonest or fraudulent design, that is, a finding that there was no breach of fiduciary obligation, the issue of knowledge becomes otiose because there is nothing for it to relate to. It is therefore not necessary in the circumstances of this proceeding to examine the difficult issue of the requisite degree of knowledge. I therefore consider that the applicants fail to make out the pleading in respect of a breach of fiduciary obligation. For the Bank it was also submitted that the failure of the applicants to call Mr Margaria and Mrs Blake (the Company Secretary) to give evidence gives rise to an adverse inference pursuant to Jones v Dunkel (1959) 101 CLR 298 in relation to evidence which those persons could have given concerning the intention of the company in granting the two mortgages to the Bank and the state of knowledge of the directors both of its financial state and the alleged breach of fiduciary duty. The finding which I have made in relation to the failure of the applicants to make out the breach of fiduciary duty results in the issue being of no significance. In any event I accept the submission for the applicants that it could have been anticipated that these witnesses had every reason not to assist the applicants so that the rule would not be applicable: Fabre v Arenales (1992) 27 NSWLR 437 at 449-50. For these reasons I conclude that the plaintiffs are entitled only to orders that the first and second equitable mortgages be set aside and be declared void to the extent that those mortgages are fixed charges. I certify that this and the preceding 33 pages are a true copy of the Reasons for Judgment of his Honour Justice R D Nicholson. Associate: Date: APPEARANCES Counsel for the Applicants: Mr D Stone & Ms G Pitt Solicitors for the Applicants: Williams & Hughes Counsel for the Respondent: Mr J Sher & Mr K Dharmananda Solicitors for the Respondent: Corrs Chambers Westgarth Date of Hearing: 22-24 February 1995 Date of Judgment: 26 May 1995