Court of Appeal Supreme Court New South Wales Medium Neutral Citation: Harris Health Care Pty Ltd (receivers and managers appointed) (in liq) v Hayes [2024] NSWCA 301 Hearing dates: 28 November 2024 Decision date: 19 December 2024 Before: Bell CJ at [1]; Leeming JA at [2]; McHugh JA at [158] Decision: 1. Appeal dismissed. 2. Appellant to pay the costs of the first respondent. 3. Remit the notice of motion filed on 12 December 2024 to be heard and determined by a single Judge of Appeal. Catchwords: CORPORATIONS – winding up – liquidators – after paying all creditors, liquidator achieved a surplus – where company being wound up had large unsatisfied judgment debt against its majority shareholder – where majority shareholder also being wound up – application of "rule in Cherry v Boultbee" – where liquidator sought and obtained special leave to distribute whole of surplus to shareholders other than majority shareholder – relationship between common law, equity and statute – whether continuing operation of "rule in Cherry v Boultbee" incoherent with purposes and policy of the Corporations Act – consideration of history and nature of "rule in Cherry v Boultbee" Legislation Cited: Bankruptcy Act 1966 (Cth) Civil Liability Act 2002 (NSW), s 5S Companies Act 1862 (25 & 26 Vict. c. 89), ss 102, 109 Companies Act 1867 (30 & 31 Vict. c. 131) Companies Act 1899 (NSW), s 117 Companies Act 1936 (NSW), s 250 Companies Act 1961 (NSW), ss 245, 247, 291 Companies Act 1981 (NSW), ss 386, 438 Corporations Act 2001 (Cth), Pts 5, 5.4, 5.4A, 5.4B, 5.6, ss 247A, 485, 488, 553, 553C, 555, 556, 558, 559, 560, 561, 562, 562A, 563, 563AA, 563AAA Court of Probate Act 1857 (20 & 21 Vict. c. 77) Insurance Contracts Act 1984 (Cth), s 7 Joint Stock Companies Act 1844 (7 & 8 Vict. c. 110) Judicature Act 1873 (36 & 37 Vict. c. 66), s 25 Judicature Act 1875 (38 & 39 Vict. c. 77), s 10 Jurisdiction of Courts (Foreign Land) Act 1989 (NSW), s 3 Limited Liability Act 1855 (18 & 19 Vict. c. 133) Personal Property Securities Act 2009 (Cth) Supreme Court Act 1970 (NSW), s 46 Supreme Court (Corporations) Rules 1999 (NSW), r 7.10 Trustee Act 1925 (NSW), s 100A Cases Cited: Baker v Bolton (1808) 1 Camp 493; 170 ER 1033 Bankstown City Council v Alamdo Holdings Pty Ltd (2005) 223 CLR 660; [2005] HCA 46 Bevan v Coolahan (2019) 101 NSWLR 86; [2019] NSWCA 217 Carbone v Fowler Homes Pty Ltd; Carbone v Fowler Homes Pty Ltd [2024] NSWCA 192 Cassaniti v Ball as liquidator of RCG CBD Pty Ltd (in liq) (2022) 109 NSWLR 348; [2022] NSWCA 161 Cherry v Boultbee (1838) 2 Keen 319; 48 ER 651 Cherry v Boultbee (1839) 4 Myl & Cr 442; 41 ER 171 China Life Trustees Ltd v China Energy Reserve and Chemicals Group Overseas Company Ltd [2024] HKCFA 15 Corporate Law Reform Act 1992 (Cth) Courtenay v Williams (1846) 15 LJ Ch 204 Day & Dent Constructions Pty Ltd v North Australian Properties Pty Ltd (1982) 150 CLR 85; [1982] HCA 20 Equuscorp Pty Ltd v Haxton (2012) 246 CLR 498; [2012] HCA 7 Franklin's Selfserve Pty Ltd v Federal Commissioner of Taxation (1970) 125 CLR 52; [1970] HCA 33 Fused Electrics Pty Ltd (in liq) v Donald [1995] 2 Qd R 7 Gray v Gray [2004] NSWCA 408; 12 BPR 22,755 Gye v McIntyre (1991) 171 CLR 609; [1991] HCA 60 Harris v Harris [2021] NSWCA 3 In re Akerman [1891] 3 Ch 212 In re Auriferous Properties Ltd [1898] 1 Ch 691 In re Auriferous Properties Ltd (No 2) [1898] 2 Ch 428 In re Glen Express Ltd [2000] BPIR 456 (Ch D, 15 October 1999) In re Goy & Co Ltd [1900] 2 Ch 149 In re Melton; Milk v Towers [1918] 1 Ch 37 In re Overend, Gurney and Company; ex parte Oakes and Peek (1867) LR 3 Eq 576 In re Overend, Gurney, and Co (1866) LR 1 Ch App 528 In Re Savage; Cull v Howard [1918] 2 Ch 146 In the matter of Anglican Development Fund Diocese of Bathurst (receivers & managers appointed) [2015] NSWSC 440; 33 ACLC 15-010 In the matter of Anne Lewis Pty Ltd [2016] NSWSC 1860 In the matter of Hawden Property Group Pty Ltd (in liq) (ACN 003 528 345) [2018] NSWSC 481; 125 ACSR 355 In the matter of Klaus Maertin Pty Ltd (in liq); Maertin v Klaus Maertin Pty Ltd [2009] NSWSC 618; 232 FLR 239 In the matter of Sirrah Pty Ltd [2018] NSWSC 1802 In the matter of Sirrah Pty Ltd (in prov liq) [2021] NSWSC 413; 152 ACSR 212 In the matter of Sirrah Pty Ltd (in prov liq) [2021] NSWSC 492 In the matter of Sirrah Pty Ltd (in liq) [2024] NSWSC 784 Jeffs v Wood (1723) 2 P Wms 128; 24 ER 668 John Alexander's Clubs Pty Ltd v White City Tennis Club Ltd (2010) 241 CLR 1; [2010] HCA 19 Knight as liquidator of Wenshang Developing Pty Ltd (in liq) v Wenshang Developing Pty Ltd (in liq) [2024] FCA 1395 Metal Manufactures Pty Ltd v Morton (2023) 275 CLR 100; [2023] HCA 1 Miller v Miller (2011) 242 CLR 446; [2011] HCA 9 Minister for Home Affairs v Benbrika (2021) 272 CLR 68; [2021] HCA 4 Otis Elevator Co Pty Ltd v Guide Rails Pty Ltd (in liq) [2004] NSWSC 383; 49 ACSR 531 PM v Childrens Court of the Australian Capital Territory [2018] ACTSC 258 Probuild Constructions (Aust) Pty Ltd v Shade Systems Pty Ltd (2018) 264 CLR 1; [2018] HCA 4 Re DS Millard & Son Pty Ltd (1997) 24 ACSR 71 Re Kaupthing Singer and Friedlander Ltd [2012] AC 804; [2011] UKSC 48 Re Minister for Immigration and Multicultural Affairs; ex parte Miah (2001) 206 CLR 57; [2001] HCA 22 Re Peruvian Railway Construction Co Ltd [1915] 2 Ch 144 Re Rhodesia Goldfields Ltd [1910] 1 Ch 239 Re SSSL Realisations (2002) Ltd (in liq) [2006] Ch 610; [2006] EWCA Civ 7 Sons of Gwalia Ltd v Margaretic (2007) 231 CLR 160; [2007] HCA 1 Teubner v Humble (1963) 108 CLR 491; [1963] HCA 11 Thompson v Australian Capital Television Pty Ltd (1996) 186 CLR 574; [1996] HCA 38 Wynbergen v Hoyts Corporation Pty Ltd [1997] HCA 52; 72 ALJR 65 Texts Cited: American Law Reports, "Right of retainer in respect of indebtedness of heir, legatee or distribute" 1 ALR 991 (1919) TT Arvind and C Burset, "Partisan Legal Traditions in the Age of Camden and Mansfield" (2024) 44 Oxford Journal of Legal Studies 376 JC Campbell, "The New Section 100A of Trustee Act 1925 (NSW): When a Beneficiary is Personally Liable to Indemnify a Trustee" (2020) 14 Journal of Equity 103 R Derham, Derham on the Law of Set-off (5th ed, 2024, Oxford University Press) A Fell, "The Concept of Coherence in Australian Private Law" (2018) 41 Melbourne University Law Review 1160 Hanbury, Modern Equity (2nd ed, 1937, Stevens & Sons) Lewin, A practical treatise on the law of trusts and trustees (8th ed, 1885, Maxwell) N Lindley, A treatise on the law of partnership (7th ed, 1905) R Stevens, The Laws of Restitution (Oxford University Press, 2023) J Story, Commentaries on Equity Jurisprudence (1st ed, 1836) Toller, The law of executors and administrators (7th ed, 1838) Category: Principal judgment Parties: Harris Health Care Pty Ltd (Receivers and Managers Appointed) (In liquidation) (Appellant) Alan John Hayes in his capacity as liquidator of Sirrah Pty Ltd (In Liquidation) (First Respondent) Gregory Thomas Harris and Monica Mary Brown as Executors of the Estate of the Late Aileen Joyce Harris (Second Respondents) The Bankrupt Estate of William Francis Harris (Third Respondent) Michelle Joy Harris (Fourth Respondent) Representation: Counsel: F T Roughley SC, B Lambourne (Appellant) B F Katekar SC, J R Anderson (First Respondent) G Carolan (Second Respondent) Solicitors: YPOL Lawyers (Appellant) Addisons (First Respondent) Lloyd & Lloyd Solicitors (Second Respondent) WLP Restructuring (Third Respondent) File Number(s): 2024/246775 Publication restriction: Nil Decision under appeal Court or tribunal: Supreme Court of New South Wales Jurisdiction: Equity – Corporations List Citation: [2024] NSWSC 784 Date of Decision: 26 June 2024 Before: Black J File Number(s): 2023/444411 [Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.] HEADNOTE [This headnote is not to be read as part of the judgment] The appellant, Harris Health Care Pty Ltd (HHC), is the majority shareholder of Sirrah Pty Ltd (Sirrah). In 2021, Sirrah obtained judgment against HHC for $17 million. At that time, Sirrah was in liquidation. HHC was wound up in 2022 after Sirrah issued a statutory demand for the judgment debt. Aside from the $17 million judgment debt, and putting to one side interim distributions, Sirrah's liquidator reported a $5 million surplus and obtained special leave pursuant to s 488(2) of the Corporations Act 2001 (Cth) to distribute the entirety of that surplus to Sirrah's minority shareholder. The primary judge held that "the rule in Cherry v Boultbee" applied when determining the distribution of any surplus to those "entitled" under s 488 of the Act. That is, a claimant to the fund must first account for any outstanding contributions owed to the fund. That had the effect of precluding any distribution to HHC because while HHC made a claim as shareholder to the surplus it owed a larger unsatisfied judgment debt to Sirrah. On appeal, HHC submitted that Part 5.4 of the Corporations Act does not accommodate the "rule in Cherry v Boultbee". HHC argued that the application of the rule to distributions under s 488 would be incoherent with the policy of the statutory scheme of liquidation in the Act. HHC noted that the Act already provides for set-off in winding up and that those provisions could not apply in the present case. HHC also submitted that Sirrah, by initiating HHC's liquidation and then lodging a proof of debt for the judgment sum, had elected to waive its right to net-off HHC's debt and instead chose to rely only on its right to prove in HHC's winding up. It was also argued that the netting-off of a debt owed to Sirrah would have the effect of impermissibly subverting the priority that the Act gives to HHC's secured creditors by satisfying that unsecured debt first. The Court (Leeming JA, Bell CJ and McHugh JA agreeing) held, dismissing the appeal: 1. The "rule" in Cherry v Boultbee is an example of neither set-off nor retainer. Rather, it is a simple technique of netting-off reciprocal monetary obligations by allowing an administrator of a fund to deem a claimant as having been satisfied out of a debt they still owe to the fund: at [73]-[123]. Jeffs v Wood (1723) 2 P Wms 128; 24 ER 668; Cherry v Boultbee (1839) 4 Myl & Cr 442; 41 ER 171; In re Overend, Gurney, and Co (1866) LR 1 Ch App 528; In re Auriferous Properties Ltd [1898] 1 Ch 691; In re Akerman [1891] 3 Ch 212; Otis Elevator Co Pty Ltd v Guide Rails Pty Ltd (in liq) [2004] NSWSC 383; (2004) 49 ACSR 531, considered. Re Kaupthing Singer and Friedlander Ltd [2012] AC 804; [2011] UKSC 48, followed. 1. The application of that accounting process is not incoherent with the policy or purpose of the Corporations Act. To the contrary, it accords with the purposes of the Act to facilitate the timely winding up of companies by relieving the liquidator of the need first to write off or compromise a claim against a contributory in order to determine a final surplus, an aliquot share in which is then to be distributed to that contributory. The Act's silence on this topic also reflects an intention to accommodate the familiar method of netting off that had been practised for centuries in cognate contexts: at [124]-[140]. 2. Sirrah was not confronted with irreconcilable alternatives, and should not be held to have made an election. Sirrah lodged a proof of debt in advance of a creditors' meeting to approve the liquidator's remuneration, and at a time when the liquidator advised that there would probably be no distribution to any creditor. Sirrah subsequently withdrew its proof of debt and never obtained any distribution: at [141]-[149]. Re Sewell [1909] 1 Ch 806, considered. 1. There was no subversion of the priority of secured creditors. The secured creditor's security was not over any property in the hands of Sirrah's liquidator. It had no security over the $5 million realised, and could have no security over the judgment debt owed by HHC to Sirrah, which was a liability of HHC not an asset: at [150]-[154]. JUDGMENT 1. BELL CJ: In this skilfully argued appeal, I have had the benefit (and privilege) of reading in draft the reasons for judgment of Leeming JA which address the so-called "rule" in Cherry v Boultbee (1839) 4 Myl & Cr 442; 41 ER 171 and trace its history. I agree with his Honour's reasons and share his Honour's support for the analysis of Lord Walker in Re Kaupthing Singer and Friedlander Ltd [2012] AC 804; [2011] UKSC 48 at [8] and [48]. I agree with the proposed order that the appeal be dismissed. I also agree with the separate reasons of McHugh JA. 2. LEEMING JA: The active protagonists in this appeal are two companies: "HHC" and "Sirrah". HHC is the majority shareholder of Sirrah. For the main part, and simplifying slightly, what matters is that: 1. the solvent company Sirrah and its insolvent majority shareholder HHC are both being wound up; 2. Sirrah has paid all creditors and has a surplus of some $5 million in realised assets, together with a judgment debt of some $17 million against HHC, and 3. HHC is insolvent, its largest creditor by far is Sirrah which petitioned for it to be wound up, but there are also other smaller creditors, one of whom is a secured creditor which has appointed a receiver. HHC's only potentially valuable asset is its shareholding in Sirrah. 1. The liquidator of Sirrah sought and obtained, over the opposition of the receiver, "special leave" pursuant to s 488(2) of the Corporations Act 2001 (Cth) to distribute the entirety of the $5 million surplus to its minority shareholder, making no distribution to HHC, in light of the latter's unsatisfied judgment debt of $17 million, in order to finalise the winding up. Did the grant of special leave disclose appellable error? 2. The submissions advanced in support of the appeal were of high quality. They aptly proceeded on the basis that the issue reflected the intersection between the "rules of law, principles of equity, [and] requirements of statute": Bankstown City Council v Alamdo Holdings Pty Ltd (2005) 223 CLR 660; [2005] HCA 46 at [27]. Here the considerations involved the entitlements of the members of Sirrah and the creditors of HHC to participate in "the statutory scheme of liquidation", the legal rights of Sirrah to its judgment debt and of HHC to its majority shareholding, and what was described as "the equitable 'rule' in Cherry v Boultbee (1839) 4 My & Cr 442; 41 ER 171" preventing a person eligible to participate in a fund from doing so unless and until he, she or it has discharged a liability to contribute to the fund. HHC emphasised its entitlement to participate in the "statutory scheme of liquidation" (the term reiterated by the High Court in Metal Manufactures Pty Ltd v Morton (2023) 275 CLR 100; [2023] HCA 1), and said that the application of the rule in Cherry v Boultbee detracted from the entitlements of the creditors and contributories of both companies under that statutory scheme, and in particular the entitlement of Sirrah's majority shareholder to participate rateably in the surplus. Despite decisions applying the rule in Cherry v Boultbee in similar situations, HHC submitted that the point had never been determined in the case of two companies both being wound up, at least under the regime enacted in 1992 by the Corporate Law Reform Act 1992 (Cth) which in certain respects departed from the earlier position. 3. For the reasons which follow, I would dismiss the appeal. I acknowledge that there is a deal of uncertainty about the precise nature of the so-called "rule" in Cherry v Boultbee, and indeed I am disinclined to regard it as either a form of set-off or retainer, which are two common characterisations in decisions and the academic literature. Instead, I favour the views expressed by Lord Walker in Re Kaupthing Singer and Friedlander Ltd [2012] 1 AC 804; [2011] UKSC 48 at [8] and [48] and Dr Derham in Derham on the Law of Set-off (5th ed, 2024, Oxford University Press) at 694 that it is a "technique of netting-off" or a right to appropriate a particular asset as payment (and I do not regard those characterisations as being mutually exclusive). But the main point in this appeal does not turn on characterisation or taxonomy, which to my mind serves only to distract. It turns simply on the fact that there is no incoherence between Sirrah's liquidator adopting the approach approved by the primary judge, and the entitlements of Sirrah's and HHC's shareholders and creditors under the statutory scheme of liquidation effected by the Corporations Act. Contrary to HHC's submissions, the legislation is to be understood as incorporating the processes which have long been used when a claimant to an aliquot share of a fund is itself a contributory to the same fund. Background The shareholders of Sirrah and HHC 1. At all relevant times, there have been four shareholders of the first respondent, Sirrah Pty Ltd. The appellant, Harris Health Care Pty Ltd ("HHC"), owns 389 shares, which is slightly more than 52% of the 741 ordinary shares issued. HHC's sole shareholder is William Francis Harris, and after 2019 he was that company's sole director. He owned one share. He was made bankrupt on 3 March 2022. He is the father of the fourth respondent, Michelle Joy Harris, who did not appear in this Court, and who also holds one share in Sirrah. He is the brother of the second respondents, Gregory Thomas Harris and Monica Mary Brown ("executors"), who are the executors of their mother's deceased estate, and who jointly own 350 shares, which is some 47% of the total. 2. In what follows, where nothing turns on it, it will often be convenient to put to one side the 0.134% shareholdings of William Francis Harris and Michelle Joy Harris, and refer simply to the majority shareholding of HHC and the minority shareholding of the executors (as occurred in the opening paragraphs of these reasons). The windings up of Sirrah and HHC 1. The companies are being wound up for very different reasons. Sirrah is solvent, while HHC is insolvent. 2. In relation to Sirrah, after the executors' mother's death in 2016, there ensued lengthy proceedings in the Equity Division, commencing with an application by the executors to inspect Sirrah's books pursuant to s 247A of the Corporations Act 2001 (Cth) (In the matter of Sirrah Pty Ltd [2017] NSWSC 1683), followed by the grant of leave to bring a derivative action (In the matter of Sirrah Pty Ltd [2018] NSWSC 1802) and culminating in a six day trial of those derivative proceedings in 2021 (In the matter of Sirrah Pty Ltd (in prov liq) [2021] NSWSC 413; 152 ACSR 212). The result was that the executors obtained substantial judgments in Sirrah's favour against each of William Francis Harris (some $17.7 million including interest) and his company HHC (some $17 million including interest). An appeal to this Court by William Francis Harris and HHC was dismissed: Harris v Harris [2021] NSWCA 329. 3. The executors had also sought and obtained the winding up of Sirrah, on the just and equitable ground, which was consented to at the commencement of the trial, and in due course made: In the matter of Sirrah Pty Ltd (in prov liq) [2021] NSWSC 492. Mr Alan Hayes had been appointed a provisional liquidator to Sirrah in 2019 and he was appointed that company's liquidator in May 2021. 4. Sirrah was not insolvent, and despite both the litigation and the findings upheld at trial of breaches of fiduciary duty by William Francis Harris in which HHC was in various ways involved, Sirrah still retained a substantial part of the proceeds of sale of the aged care facility it had formerly operated. 5. On the other hand, HHC is insolvent. On 2 August 2022, Sirrah's liquidator petitioned for HHC to be wound up, having issued a statutory demand based on the judgment debt, and Mr Mark Roufeil was appointed its liquidator on 1 September 2022. His second report to creditors identified no assets of any value, save perhaps for the majority shareholding in Sirrah, and liabilities of some $18.8 million, of which the $17 million judgment debt in favour of Sirrah was by far the largest. Sirrah lodged a proof of debt on 5 October 2022, in circumstances to which I shall return when dealing with ground 2 of this appeal. HHC's liquidator also identified an amount of some $1.75 million owed to the Australian Taxation Office, and a debt of some $468,000 owed to Yates Beaggi Lawyers, who had acted for the company in the Equity Division proceedings. It was accepted, at least in this Court, that Yates Beaggi had the benefit of an equitable charge over the entirety of the assets of HHC, including its majority shareholding in Sirrah, created by the retainer dated 12 June 2020 to secure that indebtedness, and which had been registered under the Personal Property Securities Act 2009 (Cth). 6. The primary judge explained at [170] of the main judgment how the judgments obtained by Sirrah against William Francis Harris and HHC were calculated: The judgment against [William Francis Harris] comprises the amount of his loan account ($1,014,244); the amount of HHC's loan account ($11,044,660.24) where I have found that loan was made in breach of his fiduciary duty; a portion of the management fees paid to HHC ($3,754,902.58), which I have held was paid in breach of that duty; and the amount of the "reimbursement" to HHC ($875,173) which I have held was also paid in breach of that duty. The judgment against HHC comprises the amount of its loan account ($11,044,660.24), that part of the management fees which it received ($3,754,902.58) and the "reimbursement" to it ($875,173). 1. Where nothing turns on it, I shall sometimes for concision omit reference to the details (such as the precise dollar amounts, on which interest is accumulating). The terminology of parts of what follows concerning the "rule in Cherry v Boultbee" is complicated enough without the added distraction of needless precision. Applicable statutory regime 1. Sections 485 and 488 of the Corporations Act provide as follows: 485 Claims of creditors and distribution of property (1) The Court may fix a day on or before which creditors are to prove their debts or claims or after which they will be excluded from the benefit of any distribution made before those debts are proved. (2) The Court must adjust the rights of the contributories among themselves and distribute any surplus among the persons entitled to it. (3) The Court may, in the event of the property being insufficient to satisfy the liabilities, make an order as to the payment out of the property of the costs, charges and expenses incurred in the winding up in such order of priority as the Court thinks just. 488 Delegation to liquidator of certain powers of Court (1) Provision may be made by rules of court or regulations for enabling or requiring all or any of the powers and duties conferred and imposed on the Court by this Part or Schedule 2 in respect of: (a) the holding and conducting of meetings to ascertain the wishes of creditors and contributories; and (b) the paying, delivery, conveyance, surrender or transfer of money, property or books to the liquidator; and (c) the adjusting of the rights of contributories among themselves and the distribution of any surplus among the persons entitled to it; and (d) the fixing of a time within which debts and claims must be proved; to be exercised or performed by the liquidator as an officer of the Court and subject to the control of the Court. (2) Despite anything in rules of court or regulations made for the purposes of subsection (1), a liquidator may distribute a surplus only with the Court's special leave. 1. Those provisions leave much unsaid. In part that is because the provisions, which are located in Division 3 of Part 5.4B, are supplemented by provisions in Parts 5.4 and 5.4A which deal with winding up in insolvency and by the Court on other grounds, and those in Part 5.6 which also apply to all forms of winding up including voluntary winding up. In part it is because they presuppose delegated legislation addressing various matters of detail. In part it is because other provisions, including those dealing with "adjusting" contributories' rights, no longer appear in the current statute. But in part it is also because, as will be seen in more detail below, they do not replicate all aspects of the procedural rules applicable to the distribution of a surplus which have been worked out by courts over many decades, in large measure in the form of giving advice and approval to, and supervising, liquidators. 2. In particular, it will be seen that s 485(2) imposes two obligations upon the Court: to "adjust" the rights of contributories, and to distribute a surplus to those "entitled" to it. The entitlement of a contributory to participate in a surplus, which was central to HHC's submissions on appeal, is the correlative of the duty imposed by the second limb of s 485(2). 3. Section 488(1) authorises the delegation of the Court's powers and duties, including in s 488(1)(c) those in respect of adjusting the rights of contributories among themselves and distributing any surplus among the persons entitled to a liquidator. Nothing more is said in s 485(2) or s 488(1)(c) about what is involved in "adjusting" the rights of contributories or determining the portion of any surplus to which each contributory is "entitled". As will be seen below, both terms have a long history. 4. The delegation envisaged by s 488 is effected by r 7.10 of the Supreme Court (Corporations) Rules 1999 (NSW). That rule authorises a court-appointed liquidator to exercise or perform all of the powers and duties conferred or imposed on the Court by Part 5.4B in respect of a wide range of matters. However, s 488(2) imposes a further condition upon the liquidator wishing to exercise the delegated power to distribute a surplus, by requiring the liquidator to seek "special leave" before any surplus is distributed. In In the matter of Klaus Maertin Pty Ltd (in liq); Maertin v Klaus Maertin Pty Ltd [2009] NSWSC 618; 232 FLR 239 at [40], Austin J said, by reference to Re DS Millard & Son Pty Ltd (1997) 24 ACSR 71 that "the words 'special leave' merely mean that a special application must be made to the court rather than the matter being dealt with as part and parcel of some other administrative procedure". The application before the primary judge 1. The substantive orders sought by Sirrah's liquidator from the primary judge involved not merely special leave for a distribution to shareholders other than HHC and William Francis Harris, but also that he be released as liquidator and that Sirrah be deregistered by ASIC. To that end, he supplied evidence that the winding up was complete. 2. That is to say, the orders sought contemplated the final determination of a surplus, and an ending of the process of collecting the assets and distributing them to Sirrah's creditors and shareholders. Another way of putting this is that, as the price of obtaining special leave to distribute the entirety of the surplus to members other than HHC and William Francis Harris, the liquidator would thereafter be discharged from his obligation to seek to enforce the judgments in Sirrah's favour against HHC and William Francis Harris (noting that the former was also being wound up and a sequestration order had been made in respect of the other). 3. There is a reason for my emphasising the finality in Sirrah's liquidator's application for special leave. Argument in this appeal proceeded on the basis that (save for the ground based on election) Sirrah's liquidator had renounced any entitlement to participate as a creditor in the winding up of HHC. To make explicit what was implicit in his application, Sirrah's liquidator was saying "I wish to distribute a surplus which is to say after paying out the $5,000,000 to contributories other than HHC and William Francis Harris, this company should be deregistered with no further steps being taken to realise the judgment debts against HHC and William Francis Harris". Further, HHC was likewise insisting that Sirrah had renounced its entitlement to prove the judgment debts, and would not be able, after some $2,500,000 of the surplus was distributed by Sirrah's liquidator to HHC, to come back and prove in the winding up of HHC. 4. There is another way of regarding the liquidator's application. The difference depends on whether one treats references to the "surplus" as being a reference to the realised surplus of some $5 million, or to the total surplus of assets over liabilities being that amount of money plus the choses in action constituted by the unrealised judgment debts against William Francis Harris and HHC, which by this time had been reduced to rights to prove in the bankruptcy of one and the winding up of the other and which for all practical purposes, subject only to HHC's submissions as to the distribution of the realised surplus, were worthless. (This concept of a total surplus may seem less artificial when it is borne in mind that Sirrah owned three choses in action: its $5 million debt from its bank, and its $17 million judgment debts. The debt owed by its banker was valuable, in contrast with the judgment debts which had been converted into rights to prove. But all these rights were the result of the liquidator's efforts at winding up Sirrah.) 5. Thus the liquidator was seeking approval to distribute the entirety of the realised surplus just to those members who were not judgment debtors. That was said to be appropriate, having regard to the fact that the proportion of the surplus to which the judgment debtors were otherwise entitled was so much less than the contribution those debtors would have made to Sirrah's assets had the judgment debts been satisfied. 6. Alternatively, focussing instead on the total surplus (being the bank account and the unrealised judgment debts which had been converted into rights to prove), Sirrah's liquidator was saying the entirety of the realised surplus should be distributed to the members of Sirrah aside from HHC and William Francis Harris, and HHC and William Francis Harris should be treated as having the judgment debts appropriated to them by way of payment of their entitlement to participate in the surplus. That course was said to be appropriate because had the $17 million judgment debt been realised and contributed to the realised surplus, each of the other members of Sirrah would have received more, and HHC and William Francis would have received less, on a distribution of $22 million, and HHC and William Francis Harris should not be better off, and the other members worse off, because of the former's insolvency and the latter's bankruptcy. 7. These different ways of characterising the grant of special leave were emphasised in HHC's submissions in reply: [S]ome parts of the RS contend the equity involves Sirrah appropriating an asset (the judgment debt) held in Sirrah's hands (RS[12]) and on that basis involves no interference with assets in the hands of HHC and the administration of HHC pursuant to Ch 5 of the Act: RS[19]. Elsewhere it is said that HHC "holds that which it might stand to receive back" (RS[13]) and the rule involves collection of Sirrah's property held by HHC (RS[27]) or is just a "book entry" or a "matter of accounting" (RS[27]). At one point Cherry is said not to involve the use of a remedy against HHC's property (RS[20]) but then it is said the process is analogous to enforcing a security interest (RS[16], [64]). 1. Those varying characterisations reflected inconsistencies in the authorities treating "the 'rule' in Cherry v Boultbee". I have already sketched how the imprecision in the word "surplus" gives rise to difficulties in analysis, and it is a point to which I shall return. 2. The liquidator's originating process joined all four of Sirrah's shareholders. William Francis Harris' trustee in bankruptcy filed a submitting appearance, and the primary judge noted (at [38]) that the liquidator was not seeking to "enforce any remedy" against him, or to commence "any legal proceeding in respect of a provable debt", and thus the moratorium imposed by s 58(3) of the Bankruptcy Act 1966 (Cth) was not engaged. The executors filed an ordinary appearance, and were represented at an early directions hearing, but did not participate in the hearing of the application. The same firm appeared for HHC and Michelle Harris. The application was opposed by HHC on instructions from the receiver and manager appointed to that company by Yates Beaggi, its submissions attaching an email from HHC's liquidator stating that he would submit to any decision made by the Court and that "Harris Health Care (in Liq) has no money to be involved in the application or any litigation or costs that might follow therefrom". 3. The liquidator sought special leave to distribute the surplus in accordance with the methodology stated by Gleeson JA in In the matter of Hawden Property Group Pty Ltd (in liq) (ACN 003 528 345) [2018] NSWSC 481; 125 ACSR 355 at [52]: The method of application of the principle in the present case is as follows: (a) the total notional fund available for distribution to the contributories is to be calculated by first adding to the relevant surplus, the amount of net judgment debt and interest thereon (up to the date of the bankruptcy of Mr Hawes); (b) the notional fund is then divided by two, in order to determine the 50 percent proportion payable to both contributories, Mr Dean and the Hawes estate; (c) the distribution is then paid to Mr Dean from the funds available to Hawden Property; (d) the distribution is then paid to the Hawes estate, but only insofar as there are funds still available to Hawden Property after payment of the distribution to Mr Dean. 1. The liquidator had supplied calculations which demonstrated that, after paying all creditors, he anticipated a net surplus of some $5.7 million, to which was added the other assets (the judgment debts and interest) of $21.5 million. Giving full credit for the interim distributions already made to the executors and Michelle Harris, those minority shareholders would be entitled to some $10.7 million, while HHC and William Francis Harris would be entitled to some $14.4 million. But since the net surplus available would be insufficient to pay even the distributions to the executors and Michelle Harris in full, the liquidator proposed that, in accordance with the "rule" in Cherry v Boultbee, it should be distributed proportionately to them, leaving no residual funds to pay any distribution to HHC or William Francis Harris. 2. The calculations supplied by the liquidator, which were uncontroversial, established that: 1. the indebtedness of each of HHC and William Francis Harris to Sirrah (in excess of $20 million) was much greater than (more than double) the surplus realised by the liquidator excluding that indebtedness; 2. HHC's and William Francis Harris' entitlement to a 52% share in the notional surplus of $27 million was less than their unsatisfied indebtedness to Sirrah; 3. conversely, even if the executors and Michelle Harris received the entirety of the realised surplus, they would still receive less than the 47% of the notional surplus to which they would have been entitled had HHC or William Francis Harris satisfied the judgment debt; and 4. therefore, HHC's and William Francis Harris' entitlements to share in the surplus were to be treated as being wholly satisfied by the attribution of some of their unsatisfied indebtedness to Sirrah's liquidator. 1. It was on that basis that Sirrah's liquidator proposed that, applying the rule in Cherry v Boultbee, there should be special leave to distribute the entirety of the surplus to the executors and Michelle Harris proportionately to their shareholding after making allowance for interim distributions. The reasons of the primary judge 1. The primary judge heard argument on 21 June 2024, reserved, and published a substantive judgment of 42 pages very promptly, on 26 June 2024: In the matter of Sirrah Pty Ltd (in liq) [2024] NSWSC 784. 2. His Honour set out a deal of the background summarised above. He also reproduced correspondence from June and August 2022 which crystallised part of the dispute between the parties. Mr Hayes had written in June 2022 to the shareholders of Sirrah saying that "given the significant outstanding judgment debts owed to [Sirrah], and having regard for the rule in Cherry v Boultbee, it is not intended that any surplus funds be paid to the other shareholders namely Mr William Harris and [HHC]". The solicitor for the receiver responded: [Mr Hayes] asserts that the Cherry v Boultbee principle applies to the judgment of 7 May 2021 in favour of Sirrah against HHC and Mr Harris. We disagree. Prior to that judgment, HHC charged all of its assets to Yates Beaggi Lawyers ([Yates Beaggi]) in respect of its unpaid fees. That charge was signed by Mr Harris. That charge is still extant as [Yates Beaggi]'s fees remain unpaid. The charge was created prior to [the Company] obtaining the unsecured judgment debt. The assets charged to [Yates Beaggi] include HHC's shares in [the Company], and all rights attached to it. Such rights include the rights to the surplus that is proposed to be paid. In those circumstances, [Yates Beaggi]'s interest as chargee is not subject to rights of set-off under the Cherry v Boultbee principle. Sirrah is not entitled to defeat the rights of a secured creditor. If surplus funds are to be paid they should be paid free [of] any claimed set-off. 1. That dispute continues to be reflected in ground 3 of this appeal. But the main ground of this appeal, to the effect that a distribution of the surplus based on the rule in Cherry v Boultbee was not available because that rule was incoherent with the statutory scheme, seems not at that stage to have been articulated. 2. The primary judge addressed the submissions advanced in relation to Cherry v Boultbee at [41]-[66]. Paragraphs [42]-[53] referred to decisions involving the "rule", to which reference will be made below. His Honour noted at [54] that "it can hardly be said that there is any novelty, given the longevity of the rule in Cherry v Boultbee and the recent Australia[n] case law, in the application of that rule where a statutory set-off is not available in a winding up". He then recorded the submissions advanced by counsel then appearing for HHC based on both coherence and inconsistency with the Corporations Act, which were largely narrowed during oral submissions, in part in light of an acceptance that the rule in Cherry v Boultbee was not a rule of set-off and could not be said on that account to be inconsistent with the statutory set-off provision in Part 5.4: at [54]-[58]. Even so, the primary judge ruled on the broader submissions originally advanced at [59], for reasons which warrant reproduction because of their resemblance to the points argued on appeal: I should briefly indicate why I would have rejected Mr Calabretta's initial and wider submissions had Mr Fernon not abandoned them. First, there is no lack of coherence between the rule in Cherry v Boultbee and the provisions for proof of debt now contained in Pt 5.4 of the Act, where they have operated in parallel for much of the period that insolvency legislation has applied to companies; in this area, as in many areas, the corporations legislation assumes the operation of the general law, including the rule in Cherry v Boultbee; and the Courts have repeatedly applied the rule in Cherry v Boultbee and the legislature has repeatedly amended the corporations legislation in the form in which it has existed since the mid nineteenth century without taking any step to exclude or override that principle. Second, Mr Calabretta's contention that Pt 5.4 of the Act is a code was rejected by Gleeson JA in Hawden, and it seems to me that it is plainly not correct, where that Part could not operate without drawing on general law principles and does not need to address matters that were adequately addressed by the general law when it, and predecessor legislation, were enacted. Third, so far as Mr Calabretta initially sought to rely on the decision in Fused as recognising a question whether Pt 5.4 excluded the rule in Cherry v Boultbee, that case does not advance that suggestion for the reasons summarised by Gleeson J in Hawden at [47]ff … Fourth, the rule in Cherry v Boultbee has been applied by English and Australian judges many times since that case was decided, and many times by Judges in this Court in recent years in analogous circumstances, including in the decisions to which I have referred above. Consistent decision making in respect of the national scheme of corporations legislation is a matter of great importance, and I should not depart from those decisions unless I consider that they are plainly wrong: Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485 (dealing with decisions of intermediate appellate courts); Ming Tian Real Property Pty Ltd v SGS Platinum Pty Ltd (2020) 145 ACSR 329; [2020] NSWSC 212 at [38]. I am not satisfied that those decisions are plainly wrong, and they seem to me to be plainly right, and consistent with both equitable principle and the purposes underlying Pt 5.4 of the Act. For these reasons, I would not have accepted the contention that Mr Fernon abandoned, that the rule in Cherry v Boultbee was inconsistent with Pt 5.4 of the Act or undermined the coherence of Australian law. 1. At [62]-[66] his Honour addressed a narrower submission, to the effect that any application of Cherry v Boultbee in the facts of this case would lead to inconsistency or incoherence with the statutory scheme. There seems to have been a deal of overlap between that submission and ground 2 of this appeal. The essence of the point, as it was then put, may be seen from the following submission, which his Honour reproduced at [62]-[64]: Mr Fernon instead put a narrower contention, that the application of the rule in Cherry v Boultbee would undermine coherence of the Australian law in the particular circumstances of this case. … Mr Fernon further elaborated the narrower submission that he put, directed to the facts of this case, as follows (T40): … "… having created the circumstance which has an impact on all other unsecured creditors. It would be, we say, in coherent to be able to rely upon the Cherry v Boultbee circumstances having created the circumstances himself to then be able to take the benefit and avoid the cooperation of the [Act] provisions. To rely upon the judge made operation of Cherry v Boultbee in those circumstances would cut across, we say, the [Act] principles in relation to winding up, differing circumstances where it's created by Sirrah." 1. The primary judge rejected this submission, and it will be convenient to defer, until dealing with the second and third grounds of this appeal, his Honour's rejection of the points based on election and Yates Beaggi's equitable charge. 2. The result was that orders were made on 26 June 2024 as sought by the liquidator, including the following substantive orders: 1. Order, pursuant to section 488(2) of the Corporations Act 2001 (Cth), that the Plaintiff (Mr Hayes) as Liquidator of Sirrah Pty Ltd (In Liquidation) (Company) be granted special leave to distribute the surplus in the winding up of the Company to the contributories of the Company, other than to: (a) the First Defendant, Harris Health Care Pty Ltd (Receiver and Manager appointed) (HHC); and (b) the Third Defendant, the bankrupt estate of Mr William Francis Harris (Bankrupt Estate), in accordance with and subject to orders 2 and 3 below. 2. Declare that Mr Hayes, as Liquidator of the Company, is entitled to apply the rule in Cherry v Boultbee as against each of HHC and the Bankrupt Estate to share in the surplus available to contributories in the liquidation of the Company. 3. Pursuant to s 90-15 of the Insolvency Practice Schedule, direct that, on the proper application of the rule in Cherry v Boultbee in the circumstances of the liquidation of the Company, Mr Hayes as Liquidator of the Company would be justified in distributing the surplus of the assets in the winding up of the Company to only the following contributories of the Company: (a) the Second Defendants, Gregory Thomas Harris and Monica Mary Brown as Executors of the Estate of the Late Aileen Joyce Haris, as to a proportionate amount of the net surplus available for distribution; and (b) the Fourth Defendant, Michelle Joy Harris, as to a proportionate amount of the net surplus available for distribution. 1. The form of the orders derived from the originating process. Both order 2 and order 3 referred to "the rule in Cherry v Boultbee" in terms. This is no criticism of the primary judge, who made orders in the terms sought in the originating process to the form of which there was no objection, and in circumstances when all three orders are considered together there can be no ambiguity. However speaking generally it may be unwise for a declaration of entitlement, authorising a liquidator to adopt a particular course, to be framed in terms of the "rule in Cherry v Boultbee". If order 2 stood alone, then it is easy to see how it could give rise to ambiguity and disputation, contrary to the ordinary principle that declarations should be clear on their face: see Carbone v Fowler Homes Pty Ltd; Carbone v Fowler Homes Pty Ltd [2024] NSWCA 192 at [29]-[31] and the authorities there cited, to which may be added JC Campbell, "The New Section 100A of Trustee Act 1925 (NSW): When a Beneficiary is Personally Liable to Indemnify a Trustee" (2020) 14 Journal of Equity 103. It would be regrettable, for example, if order 2 stood alone and there were a dispute between liquidator and contributory as to what "the rule in Cherry v Boultbee" permitted or required. As it happens, orders 1 and 3 make it clear that the entirety of the realised surplus was to go to shareholders other than HHC and Mr William Francis Harris, but that means that references to "the rule in Cherry v Boultbee" in orders 2 and 3 are otiose. HHC's submissions 1. HHC's submissions emphasised the "statutory scheme of liquidation". That phrase is repeatedly used in Metal Manufactures Pty Ltd v Morton (at [6], [9], [22], [24], [30], [45], [50] and [51]). It was a natural submission to make, because the joint judgment observed at [6], in the course of summarising the regime, that: The statutory regime for the administration of a company in liquidation is both an exhaustive and sufficient measure for the distribution of the company's property which does not necessitate or justify the intervention of equity. 1. However, HHC acknowledged that those words had to be considered contextually, and did not directly support the proposition that the part of the statutory regime dealing with the distribution of surpluses excluded the "rule" in Cherry v Boultbee. That concession was properly made. HHC did not make the mistake identified by Windeyer J in Teubner v Humble (1963) 108 CLR 491 at 503; [1963] HCA 11 of ransacking the law reports extracting sentences "apt to the facts of one case … from their context and treated as propositions of universal application". In Metal Manufactures, the High Court was referring, as had Menzies J in the passage from Franklin's Selfserve Pty Ltd v Federal Commissioner of Taxation (1970) 125 CLR 52 at 70; [1970] HCA 33 reproduced by the joint judgment immediately thereafter, to the broad proposition that a company in liquidation does not hold its property on trust for its creditors and members, as opposed to the narrow proposition whether some of the particular principles and rules governing the winding up might be governed by equity. Although the sentence at [6] is broadly stated, it is not to be understood as connoting a broad meaning which would displace, by a sidewind, settled rules. 2. Instead HHC's submissions were based not on the text of Metal Manufactures, but upon the elements of the statutory scheme, which it summarised as follows: 1. The company's assets are frozen, in that most dispositions of company property are void and proceedings and enforcement processes against the company stayed. 2. The liquidator is given power and authority to gather in the assets of the company and to apply them for the purpose of discharging the company's liabilities. 3. There are "careful limits" on the extent to which certain persons must contribute before statutory rights are exercised or entitlements determined: [f]or example, under s 553A, a contributory is required to pay all debts which "the person is liable to pay as a member of the company" (ie unpaid calls on shares) before that person can prove, as a creditor, for any debts owed by the company to the person in their "capacity as a member of the company" (ie unpaid dividends). This is a statutory refinement of the position at common law, previously embodied in Grissel's case … Under s 553A, the contributory's obligation to pay before it can prove as a creditor is now limited to membership debts and does not require a shareholder to pay other debts, such as trade debts, as a condition for admission to proof. 1. Another example was s 553C, which although it has a wide scope, has "important limits regarding the requirement for mutuality and lack of notice of the insolvency". HHC relied on Gageler J's observation at [69] that s 553C had "the object of confining the availability of set-off" to the circumstances there prescribed, and the similar point made in Gye v McIntyre (1991) 171 CLR 609 at 619; [1991] HCA 60 that "substantial justice" required the operation of set-off in liquidation to be confined to those limits. 2. The process for unsecured creditors to obtain payment was prescribed by s 553, namely, proof in the winding up. 3. Once the pool of assets and proving creditors are ascertained, a detailed scale of priorities is prescribed (by ss 555-563AAA), with all debt and claims ranking equally subject to some claims (for example liquidators' remuneration) being given priority. 4. Finally, HHC submitted: once creditors have been paid, s 485(2) mandates ("must") that the court take two steps. First, it must "adjust the rights of the contributories among themselves", for example having regard to unpaid calls. Second, it must "distribute any surplus among the persons entitled to it". By s 488G and (2), this power and obligation of distribution is delegable to and exercisable by a liquidator but subject to the liquidator obtaining "special leave" from the Court to make the distribution. Relevantly, by the Act there is careful delineation of the relevant "fund" for the purposes of distribution to shareholders. The statutory language is "any surplus". That is the net proceeds realised after the collecting of the assets, realisation and reduction of them to money dealing with proofs of creditors by admitting or rejecting them, paying creditors, and providing for costs and expenses. The relevant "fund" for the purposes of a s 485(2)/488 distribution is not any fund created on the order for winding up, but a "surplus" fund which arises later (if at all). Section 485/488 do not preclude the possibility that there may be successive surplus funds for distribution. 1. HHC's point was that those provisions, especially the carefully delineated statutory rules concerning the ascertainment and collection of debts and the distribution of any surplus, excluded the "rule in Cherry v Boultbee". HHC submitted that a fundamental object of insolvency law was "the provision of a fair and orderly system of rules to regulate the assessment, collection and distribution of a debtor's assets (whether an individual or corporate) between creditors where the assets are insufficient to satisfy all debts" (quoting J Allsop and L Dargan, "The History of Bankruptcy and Insolvency Law in England and Australia" in J Gleeson, J Watson and E Peden (eds), Historical Foundations of Australian Law (Federation Press, 2013), Vol II, 415). HHC said that only its argument gave effect to that object. 2. HHC's preferred course, reflected in its notice of appeal, was for some 52% of the surplus to be distributed to HHC. HHC's liquidator would then pay out its own creditors: first the secured creditor, and then its unsecured creditors. It is useful to unpack what HHC proposed. 1. The premise of the advice and special leave sought by Sirrah's liquidator was that Sirrah would not be proving in the winding up of HHC, because its own winding up will have come to an end and it will be deregistered. On that basis, HHC's liquidator would receive 52% of the realised surplus, from which its own creditors excluding Sirrah would be paid in full, with the balance being distributed to William Francis Harris' trustee. The improbable consequence would be that HHC, despite being Sirrah's largest debtor, would contribute no part of the $17 million it owed, and yet receive slightly more than half of the surplus realised from other assets. 2. On the other hand, if Sirrah had not renounced its entitlement to prove in the winding up of HHC but HHC was entitled to participate in the surplus proportionately with its 52% shareholding, then the result would be that the liquidator of Sirrah would not be seeking advice as to the distribution of a (final) surplus before completing the winding up and deregistering the company, and if an (interim) distribution were made, Sirrah's liquidator would then be able to prove when the liquidator of HHC (now with money in his hands) called for proofs of debt. Indeed, if HHC's submission were accepted and some $2.5 million were distributed to HHC and if Sirrah were permitted to prove for its judgment debt, then most of the distribution received by HHC's liquidator would in turn be distributed to its largest creditor after paying out the secured creditor, and in theory the process would repeat ad infinitum. 1. In due course these reasons will explain why as a matter of principle and authority HHC's submissions cannot be accepted. But based merely on what has already been said, it is difficult to see why the Corporations Act would be treated as having a purpose or policy which, by excluding "the rule in Cherry v Boultbee" produces results which are so counter-intuitive and so contrary to the "fair and orderly" system which HHC acknowledged was the object of those provisions. 2. Nonetheless, HHC submitted that the effect of what Sirrah's liquidator was seeking and had obtained was a better result than would be achieved by the scheme of winding up put in place by the Corporations Act and to the prejudice of the secured and unsecured creditors of HHC, contrary to the careful way in which the claims of all creditors of companies were treated. 3. In substance by way of response to what I have termed the counter-intuitive consequences of acceptance of HHC's submission, HHC insisted that there were two companies in liquidation, and two sets of company creditors each subject to the regime, and the effect of the advice and orders made on Sirrah's liquidator's application was that he was entitled to tell HHC to apply an asset in its hands for the payment of an unsecured creditor. HHC said that the Court ought not to give any such direction without looking at the entitlements of the creditors of each of Sirrah and HHC. 4. HHC also said that closer attention needed to be paid to the mechanics of what was sought than in applying any equitable principle. Counsel said that the submissions of Sirrah "effectively takes the outcome and says, well, actually, no, this is just your distribution. I've already paid you some of it. You treat it as having had that". This was said to be conceptually very difficult. 5. Thirdly, HHC insisted that while the Court had a discretion to provide advice to liquidators, it was not a "free-wheeling discretion to adjust things as seen fair or appropriate" but instead it was a discretion which "needs to start with what [is] the legal entitlement to participate in the distribution of the surplus", and then ask whether there was to be any adjustment. Counsel said that there might be an adjustment in respect of unpaid calls, but not in respect of unpaid debts to the company. 6. To anticipate what follows, I would accept the second and third submissions, and I agree that one should conceptualise what is occurring when special leave is granted to distribute a surplus contrary to the members' shareholdings by reference to principle, rather than some free-wheeling arbitrary discretion. I would also agree that in principle the regime for winding up companies must contemplate the everyday occurrence that the members of some companies being wound up will themselves be companies being wound up, and that it is improbable in the extreme that the result will be some infinite regress of proving in the windings up of both companies. 7. Counsel encapsulated the core of her argument in answer to a question from the Chief Justice which put to one side the making and withdrawal of Sirrah's proof of debt in the winding up of HHC: BELL CJ: … say the liquidator of Sirrah took no interest whatsoever in the winding up of HHC, didn't lodge a proof of debt for voting or other purposes, didn't initiate or trigger the winding up of the company, et cetera. On those facts, why wouldn't Cherry v Boultbee apply? ROUGHLEY: Because the premise of what your Honour just put to me is an assumption that an unsecured creditor can stand outside the liquidation, and the statutory process, and get payment at least in part of its unsecured debt. So, our position would be a secured creditor can certainly stand outside the ch 5 process, and the ch 5 process assumes the operation of the secured creditor's rights. But for an unsecured creditor, the rule in Cherry v Boultbee doesn't give it an alternative pathway for achieving some type of payment, as Sargant J said, security for a debt of the company in liquidation, being HHC. BELL CJ: It comes back to Leeming's J coherence argument-- ROUGHLEY: It does. BELL CJ: --or coherence characterisation of your-- ROUGHLEY: It does. One of the reasons I started with Metal Manufactures is that, the way that both the plurality and then Gageler J in his separate reasons analyse that statutory scheme, it's consistently emphasising that the point about it is that it is a regime for gathering in the assets and the payment of unsecured creditors, on a fair basis and with a parliamentary intention and policy that there will be set-off in the circumstances of s 553C. That's the substantial justice. That's parliament's choice about how substantial justice will be achieved. You're subject to the regime, but 553C may mean you have insolvency set-off, which operates automatically. 1. Ultimately these submissions, and especially those based on the "careful" and nuanced way in which s 553C is drafted, invite the Court to conclude that, by implicit corollary, a member or creditor is not otherwise entitled by way of set-off or something functionally similar to set-off, to defeat the pro rata distribution amongst creditors effected by the Act. Judge-made law and statute 1. The essential nature of HHC's main point was captured in the following exchange, early in the hearing, which was premised on a concession in HHC's written submissions that the Corporations Act was not a code which thereby excluded the "rule in Cherry v Boultbee": BELL CJ: But you've got a situation, haven't you, where this is an ancient principle, Cherry v Boultbee. You've taken us through the history. The corporation's legislation has passed, not as a code, against the background of the general law, which would include these principles. Now, sometimes where the subject matter of the general law was specifically addressed by the statute, such as set off, there'll be a question as what extent the general law survives that. I think that's the territory we're in. Don't we proceed on the assumption prima facie that the general law survives unless the statute is relevantly overtakes it? ROUGHLEY: Not necessarily, and I don't mean to be evasive. Let me put it this way. If a principle of general law has developed in a different legislative context, where no consideration has been given to whether it would be inconsistent with types of policy objectives and statutory scheme that exist in some other jurisdiction or at some later time, it would be in our submission wrong to assume that the principle of general law can just be transplanted into a different statutory context where equitable principles and statute do coexist, can just be transplanted and continue to operate without having to do that analysis of how consistent is this with the statutory scheme. But by applying this equity principle are we subverting what statute has said is the policy of corporations law in this country? Statute can displace judge-made rules and principles 1. Statute can displace the rules of common law and the principles of equity. But things have moved on since Blackstone's statement that statute should only be considered as displacing the common law if it was "so clearly repugnant, that it necessarily implies a negative": see TT Arvind and C Burset, "Partisan Legal Traditions in the Age of Camden and Mansfield" (2024) 44 Oxford Journal of Legal Studies 376 at 384-385, citing Commentaries, Introduction III:7. There are three main ways in which that can occur. 2. The first is that the statute may be inconsistent with judge-made law. That can occur explicitly by reference to some "rule" expressed in terms of a particular court decision, such as in s 100A of the Trustee Act 1925 (NSW), which provides "The rule of equity known as the rule in Hardoon v Belilios is abolished", or s 3 of the Jurisdiction of Courts (Foreign Land) Act 1989 (NSW), the title of which is "Jurisdiction with respect to foreign land (the Mozambique rule abolished)". It can also occur explicitly without naming the decision, such as the overturning by statute of the rule in Baker v Bolton (1808) 1 Camp 493; 170 ER 1033 that the death of a person cannot constitute a cause of action giving rise to a claim for damages. That was a long-standing rule at common law, but statute can also overturn a decision which itself is one of statutory construction: thus s 5S of the Civil Liability Act 2002 (NSW) provides that a court may determine a reduction of 100% for contributory negligence, contrary to what was held in Wynbergen v Hoyts Corporation Pty Ltd [1997] HCA 52; 72 ALJR 65. It can also occur when statute overrides one judge-made rule, and in so doing removes the foundation for a separate judge-made rule, as may be seen in Thompson v Australian Capital Television Pty Ltd (1996) 186 CLR 574 at 584 and 613-614; [1996] HCA 38 and Cassaniti v Ball as liquidator of RCG CBD Pty Ltd (in liq) (2022) 109 NSWLR 348; [2022] NSWCA 161 at [36]-[87]. And of course there are many examples where statute expressly or impliedly alters or qualifies or extends or otherwise modifies judge-made law; after all the reason for enacting a statute is normally to bring about some change in the legal regime. 3. The second is that statute may evince an intention that it is a code, so that, in the area the subject of exhaustive regulation, there is no longer scope for the former rule or principle. It will be a question of construction whether the legislation is in fact a "code" (and as Re Minister for Immigration and Multicultural Affairs; ex parte Miah (2001) 206 CLR 57; [2001] HCA 22 illustrates, the use of the word "code" need not be determinative). In one sense this second way may be regarded as a generalised form of the first way, because the conclusion that statute is a "code" amounts to a conclusion that the statute expressly or impliedly provides that any rule or principle of judge-made law within the field over which statute is an exhaustive statement of the position is abrogated. 4. The third way, which was relied upon by HHC, is based on considerations of coherence. HHC submitted that judge-made law, including the "rule" in Cherry v Boultbee, was displaced not by reason of an inconsistency with any provision of the legislation nor because the legislation was an exhaustive statement of the law, but by reason of an lack of coherence between the continuing operation of the rule or principle and the purpose of the statute. This mode of reasoning is distinct from the first and second. It may be seen by the reasoning in Equuscorp Pty Ltd v Haxton (2012) 246 CLR 498; [2012] HCA 7 at [25], where French CJ, Crennan and Kiefel JJ said that whether claims for money had and received could be pursued depended upon: whether vindication of those claims would have frustrated or defeated, or have been inconsistent with, the statutory purpose of the provisions of the Code relating to the issue of prescribed interests. The requirement of coherence in this area of the law is not satisfied by the mere exclusion of an implied legislative intention to render unenforceable a contract made in furtherance of a contravening purpose. Unenforceability flows from the application of the common law informed, inter alia, by the scope and purpose of the relevant statute. 1. The point there emphasised, namely that this method of displacing judge-made law by reference to the "scope and purpose" of the statute, was reiterated by Gummow and Bell JJ at [96] in the same case. Gummow and Bell JJ referred to a passage from Miller v Miller (2011) 242 CLR 446; [2011] HCA 9 which contrasted the "express or implied legislative prohibition" with "the policy of the law, commonly called public policy". Those and other examples may be seen in A Fell, "The Concept of Coherence in Australian Private Law" (2018) 41 Melbourne University Law Review 1160 at 1186-1192. The point was also addressed in Bevan v Coolahan (2019) 101 NSWLR 86; [2019] NSWCA 217 at [49]-[51], in a passage with which Basten JA agreed at [34]: … in a case such as the present, where statute neither expressly nor impliedly speaks to a duty of care, a more abstract notion of incongruity or incoherence between the posited duty of care and the statutory purpose is involved. Because the analysis in a case such as the present turns upon an identification of statutory purpose, in contrast with some express or implied legislative intention to qualify or alter the common law duty, there is necessarily an element of imprecision. To conclude that a statute evinces a purpose which is incoherent with a posited duty of care will commonly be more contestable than construing a statute and finding express or implied inconsistency with a posited duty of care. 1. I have addressed this distinction between inconsistency and incoherence somewhat elaborately, because it was not addressed in any detail by the primary judge and that is a consequence of how HHC (then appearing by different senior and junior counsel) had argued the case. Their written submissions were brief, and referred to Equuscorp and Miller (in a footnote), but the submission on coherence was not fully developed either in writing or orally, with emphasis being given instead to the submission that Mr Hayes had caused and elected to participate in the winding up of HHC. The primary judge repeatedly gave opportunities to counsel to explain what was meant by the separate claim of coherence if it were different from inconsistency, but nothing like the account presented above was supplied. In those circumstances, the primary judge cannot fairly be criticised for addressing the point relatively briefly. Statutes regularly accommodate judge-made law 1. Separately from the above, statutes can also, and very commonly do, accommodate the continuing operation of rules and principles of common law and equity. Sometimes this is done expressly, as in s 7 of the Insurance Contracts Act 1984 (Cth), which seeks to preserve except in cases of where it otherwise expressly or by necessary implication provides, the operation of "any principle or rule of the common law (including the law merchant) or of equity". More commonly the statute is not express on the point, but nonetheless statutes frequently incorporate and presuppose in order to implement their purpose and policy the continuing operation of rules and principles of judge-made law. For examples, (a) an application by a person to enjoy a statutory right (such as making an application for access to a document under freedom of information legislation or to review a licensing decision) may ordinarily be made by an agent such as a solicitor; (b) a new statutory form of property may ordinarily be owned by more than one person as joint tenants, and (c) the calculation of periods of time in statutory regimes may be affected by principles of judge-made law (see for example PM v Childrens Court of the Australian Capital Territory [2018] ACTSC 258). Each of those examples (which could readily be multiplied) reflects principles of judge-made law continuing to operate in relation to the new statutory regime. Indeed, were that not so, each statute would have to make its own provision for basic concepts such as agency, co-ownership and time (and many others). The nature of statutory regimes is that they tend to be premised on the proposition that they will operate within the existing legal system, including rules and principles of judge-made law. 2. Further, frequently the statutory regime is itself informed by the position reached immediately before its enactment. Take the central provision s 485(2) which imposes obligations on the Court to "adjust" the rights of contributories amongst themselves and then to distribute any surplus among the persons "entitled" to it. The legislation does not define what is involved in either the "adjustment" or the determination of a contributory's "entitlement". There could be no doubt that it extends at least to cases where some members are fully paid but others own partly paid shares and remain indebted to the company following a call. This was perhaps clearer when power was expressly conferred on the Court to make calls in amounts necessary to pay all creditors and the expenses of winding up "and for the adjustment of the rights of the contributories amongst themselves", especially when in the exercise of that power the Court was entitled to "take into consideration the probability that some of the contributories upon whom the same is made may partly or wholly fail to pay their respective portions of the same" (see s 102 of the 1862 Act, reproduced as s 245(3) of the Companies Act 1961 (NSW)). Courts had been dealing with this situation since limited liability companies were permitted, and had developed various rules. 3. Some basic rules find no express recognition in statute. One such rule – which as it happens is not unrelated to the present case – is the rule against double satisfaction. For although Sirrah had separate judgment debts, each slightly exceeding $17 million, against both William Francis Harris and HHC, even if both were solvent Sirrah would not be entitled to recover twice, because they very largely represent equitable compensation for the same loss. On no view could the liquidator achieve a surplus of $39 million (5 + 17 + 17 = 39). Another is the rule against double proof, namely, the "well established rule of bankruptcy that there cannot be two claims in respect of the same debt" to which Mason J referred in Day & Dent Constructions Pty Ltd v North Australian Properties Pty Ltd (1982) 150 CLR 85 at 101; [1982] HCA 20 and to which in the opening paragraph of Re Kaupthing Singer and Friedlander Ltd Lord Walker referred (by reference to the judgment of Neuberger J in In re Glen Express Ltd [2000] BPIR 456 (Ch D, 15 October 1999)) saying that it was "an overarching principle which still applies to insolvency". 4. In short, there are many ways in which statute may accommodate the continuing operation of rules and principles of judge-made law. 5. Further still, when statute has been re-enacted in the same terms, it is settled that the decisions applying the former provision will continue to apply: Probuild Constructions (Aust) Pty Ltd v Shade Systems Pty Ltd (2018) 264 CLR 1; [2018] HCA 4 at [52]. The fact that the critical provisions of the Corporations Act dealing with the distribution of a surplus are generally worded and have been re-enacted without change for at least 160 years tends to support the continuing existence of such rules. 6. In response to a question from the Court about the traditional practice of courts, especially the chancery court, administering funds in a particular way, HHC submitted that the situation was of recent provenance: We haven't been able to identify hundreds of years prior to the modern form of ch 5. Whether we start in 1992 or whether we go with 2001, I think the fair date is 1992. But if one looks at 1992, it is not possible to identify hundreds of years where there has been a situation, certainly none have been pointed to in the authorities the parties have amassed for this Court, where there was a shareholder, in liquidation, who was subject to the application of the rule in Cherry v Boultbee, in anything like analogous circumstances to this case. 1. Counsel's reference to 1992 was to the changes introduced by the Corporate Law Reform Act 1992 (Cth), which introduced provisions concerning administration and deed of company arrangements as well as, most importantly for the purposes of counsel's submission, changes to the provisions governing winding up. As explained in Sons of Gwalia Ltd v Margaretic (2007) 231 CLR 160; [2007] HCA 1 at [158], rights to prove in winding up were no longer tied to bankruptcy, as had been the case since at least s 10 of the Judicature Act 1875 and its counterparts in the Australian colonies. (Section 10 had amended s 25(1) of the Judicature Act 1873 by extending it from insolvent deceased estates to the winding-up of companies under the Companies Acts of 1862 and 1867.) Hayne J said at [160] that "The 1992 Act severed the connection between the statutory identification of debts and claims admissible to proof in a winding up, and the classes of debts admissible to proof in bankruptcy". But it may be doubted that there is relevantly such a disconnect between the corporations legislation before and after 1992. True it is that the Corporate Law Reform Act introduced important changes. But much was preserved, including provisions which are central to the entitlement of contributories to participate in a surplus. Those provisions have remained materially unchanged for at least the last 160 years. 2. It will be recalled that subsection 485(2) imposes two obligations on the Court: to "adjust" the rights of contributories among themselves, and to distribute any surplus to those "entitled" to it. Subsection 386(2) of the Companies Act 1981 (NSW) was materially identical, as was each of s 247(2) of the Companies Act 1961 (NSW), s 250 of the Companies Act 1936 (NSW), s 117 of the Companies Act 1899 (NSW) and s 167 of the Companies Act 1874 (NSW). All can be traced to s 109 of the English Companies Act 1862 (25 & 26 Vict c 89) which provided: The court shall adjust the rights of the contributories amongst themselves, and distribute any surplus that may remain amongst the parties entitled thereto. 1. The obligation to "adjust" has not been elaborated in legislation in the last 160 years in England or Australia, yet plainly it conveyed something familiar to liquidators and court officials involved in winding up, extending at least to addressing the problem that some contributories might not have satisfied all calls upon them. The main way in which the power and obligation to "adjust" the rights of contributories was to be exercised was in cases where not all members have paid up the capital on their shares in the same proportion. A point left unexplored in this litigation is whether the power to "adjust" the rights of contributories extended to a case where one contributory was a debtor of the company not by reason of an unpaid call, but by reason of an unpaid judgment debt. That would require attention being given to what was said in In the matter of Klaus Maertin Pty Ltd (in liq); Maertin v Klaus Maertin Pty Ltd at [38] that no question of adjustment will arise unless the proportions in which the shares have been paid up are unequal, and what was said In the matter of Anne Lewis Pty Ltd [2016] NSWSC 1860 at [16] to [17] about the ability in some cases for an adjustment to obviate reliance on the "rule in Cherry v Boultbee". 2. Instead, this litigation has focussed on the word "entitled", but that too is left undefined. Austin J went on to say in Klaus Maertin Pty Ltd (in liq) that: In the celebrated case of Birch v Cropper (1889) 14 App Cas 525, it was held that in the absence of provision to the contrary in the corporate constitution, surplus assets must be distributed rateably in proportion to the nominal amounts of the shares held by the members at the commencement of the winding up, though there was some doubt as to whether that principle was derived from the maxim that equality is equity or by implication from the statutory scheme (compare 542 per Lord Fitzgerald, with 543-5 per Lord Macnaghten). 1. HHC maintained that "entitled" bore that meaning, which was not to be cut down by an application of the "rule in Cherry v Boultbee". That is not self-evident. Indeed, the fact that such open-textured language as "entitled" (and "adjust") is used, and has been used since at least 1862 in this context, tends against the proposition that a legal meaning of those words which accommodates the "rule in Cherry v Boultbee" is incoherent with the statutory policy or purpose. 2. The question is whether a rule or principle of general application, which predates the modern law of limited liability companies from the mid-nineteenth century, and which extended to deceased estates and trust funds, has been excluded merely by the form of proportionate entitlement based on a member's shareholding reflected in the Corporations Act. In order to determine whether as HHC submitted the rule or principle is incoherent with the purpose or policy in Part 5 of the Corporations Act, it is necessary now to turn in more detail to that "rule". The "rule in Cherry v Boultbee" 1. I shall take the same course as was taken when the appeal was presented, and commence with a chronological review of the earliest cases, before turning to the legal nature of the "rule in Cherry v Boultbee". That commences with the two decisions invariably cited as the origins of the "rule": Jeffs v Wood and Cherry v Boultbee. Jeffs v Wood 1. Jeffs v Wood (1723) 2 P Wms 128; 24 ER 668 is regularly cited as the first reported case in which the "rule" was applied. See for example chapter 14 at [14.02] of R Derham, Derham on the Law of Set-off (5th ed 2024), which is the most comprehensive account of which I am aware (it occupies 70 closely reasoned pages). Jeffs v Wood has nothing to do with limited liability companies. When it was decided, the Bubble Act was in force, most companies tended to be "deed of settlement companies" (which in truth were partnerships), and members' liability was unlimited. It was more than a century before the enactment of the Joint Stock Companies Act 1844 (which permitted incorporation by registration, and discharged the personal liability of former members three years after they had transferred their shares) and the Limited Liability Act 1855 which permitted members to limit their liability to the shares held by them. 2. Robert Jeffs had taken in his infant nephew (the defendant Wood) whose father had died, and kept an account of all expenses of clothing, schooling and board provided to him. Robert Jeffs died and left a legacy of £500 to Wood, and made his son, Jeffs (the plaintiff) the executor of his estate and residuary legatee. Thereafter, Jeffs also gave Wood credit for goods and entrusted him to receive monies such that Wood became "further indebted to the plaintiff". Wood sued Jeffs in the ecclesiastical courts for the legacy, following which Jeffs brought a bill against Wood, and then following Woods' bankruptcy against his assignees, for an allowance to be made out of the legacy for the money owed by Wood to the testator and to Jeffs. The assignees brought a cross bill against Jeffs for the legacy. 3. Sir Joseph Jekyll MR said that "stoppage is no payment at law, nor is it, of itself, a payment in equity, but then a very slender agreement for discounting or allowing the one debt out of the other, will make it a payment, because this prevents circuity of action and multiplicity of suits". The Master of the Rolls continued, noting that there "may be a doubt, whether an insolvent person may in equity recover against his debtor, to whom he at the same time owes a greater sum; though I own, it is against conscience that A should be demanding a debt against B to whom he is indebted in a larger sum, and would avoid paying it". 4. The Master of the Rolls then articulated the following principle: … the defendant's the legatee's demand is in respect of the testator's assets, without which the executor is not liable; and it is very just and equitable for the executor to say, that the defendant the legatee has so much of the assets already in his own hands, and consequently is satisfied pro tanto; and forasmuch as it is probable the Spiritual Court will not allow of this discount, therefore the suit here is very proper, in order to have such an allowance. So that if the legatee himself had brought the bill for his legacy, it had been very proper for the executor to have insisted, that the legatee owing so much to the testator, and having already so much in his hands of the testator's assets, was consequently paid so far. 1. Wood's original suit for the legacy in the ecclesiastical courts reflected a jurisdiction retained until the creation of the secular Court of Probate by the Court of Probate Act 1857, but according to Holdsworth such claims were rare: though the court could, down to 1857, entertain suits for legacies and for the distribution of the residuary estate, it very rarely did so. In this matter, as in all matters relating to accounts as between the different claimants to the estate, the superior remedies given by the court of Chancery were rapidly rendering obsolete this branch of the testamentary jurisdiction of the ecclesiastical courts: History of English Law Vol XII, p 689. 1. However, the bill filed by Jeffs was in Chancery. It would have stayed the proceedings in the ecclesiastical court. The Master of the Rolls held that was appropriate, because it was "probable" that the ecclesiastical court would not have recognised the entitlement asserted by the executor. The reasoning supports the proposition that the principle is regarded as equitable, rather than civilian, in its foundation. Cherry v Boultbee 1. The facts of Cherry v Boultbee (1839) 4 My & Cr 442; 41 ER 171 were as follows. Thomas Boultbee was indebted to his sister Catherine Boultbee. He became bankrupt. Catherine made a will giving a sum to her trustees and executors by way of provision for Thomas, exceeding his debt to her, in a form apparently designed to avoid creditors' claims. She died without having proved in Thomas' bankruptcy. Thomas died ten years later, with his estate still being administered in bankruptcy. His assignee brought a bill against Catherine's executors for payment of the bequest. At first instance (Cherry v Boultbee (1838) 2 Keen 319; 48 ER 651), Lord Langdale MR said that the executors did not have the right to set off the legacies against the debt. This was because the testatrix only had a right to prove the debt in the bankruptcy, and the right to the legacy only vested in the assignee. An appeal to the Lord Chancellor was dismissed. 2. Lord Cottenham likewise observed there was a lack of mutuality, and thus distinguished set-off from the principle he purported to apply: It must be observed that the term "set-off" is very inaccurately used in cases of this kind. In its proper use, it is applicable only to mutual demands, debts and credits. The right of an executor of a creditor to retain a sufficient part of a legacy given by the creditor to the debtor, to pay a debt due from him to the creditor's estate, is rather a right to pay out of the fund in hand, than a right in set-off. Such right of payment, therefore, can only arise where there is a right to receive the debt so to be paid; and the legacy or fund, so to be applied in payment of the debt, must be payable by the person entitled to receive the debt. 1. The Lord Chancellor said that in the previous cases, the Court had simply considered that the party liable to pay the legacy "had actually done what the law considers him entitled to do, namely, to apply a sufficient part of the legacy to payment of the debt". 2. However, given Thomas' bankruptcy took place before Catherine's death, her executors were only ever entitled to receive from his assignee the dividends upon the debt, and there "never was a time at which the same person was entitled to receive the legacy and liable to pay the entire debt". Therefore, the Lord Chancellor said that the right of retaining a sufficient sum out of the legacy to pay the debt was never vested in anyone. However, the executors could deduct the amount of the dividend from the amount of the legacy. 3. Lord Cottenham returned to the point early in his second Chancellorship in Courtenay v Williams (1846) 15 LJ Ch 204 at 208: The executor is in possession of assets. He is to distribute those assets according to the will of the testator. Part of the assets are in the hands of the party who claims another portion of the assets. The executor says, "You have assets sufficient to satisfy your demand; apply them for that purpose." That was the rule laid down in a case, not indeed barred by the Statute of Limitations, but in a case cited at the bar, in the course of this argument; it was a case where the legatee was indebted for maintenance to the testator. The defendants', the legatees' demand (the Court says) is in respect of the testator's assets, without which the executor is not liable; and it is very just and equitable for the executor to say, that the defendant, the legatee, has so much of the assets already in his own hands, and consequently is satisfied pro tanto. 1. It will be seen that Jeffs v Wood and Courtenay v Williams referred to the appropriation of assets in the hands of the claimant which should have formed part of the fund to satisfy the claimant's demand on the fund. Subsequent decisions in corporate contexts 1. HHC's written submissions addressed a series of mid and late nineteenth century decisions in some detail, and the oral submissions on its behalf focussed on two of those decisions, Grissell's case and Re Auriferous Properties, following which the "rule" or "principle" became settled. Grissell's Case 1. In May 1866 Henry Grissell had £10,000 on deposit, and 80 partly paid shares in Overend, Gurney & Co, Ltd, the private bank which had converted from partnership to a limited liability company only the previous year (see for the history and the prospectus In re Overend, Gurney and Company; ex parte Oakes and Peek (1867) LR 3 Eq 576 at 577), when liquidators were appointed. The liquidators made a call of £10 on each share, and at the same time announced a dividend to creditors of around 4s or 5s in the pound. Grissell filed two summonses seeking orders that the liquidators pay out the dividend (of £2,000 or £2,500 on his deposit of £10,000) but after deducting the £800 call, or alternatively that they pay out the dividend based on the company's net debt to him of £9,200 (ie after deducting the unpaid call from his deposit). The liquidators proposed to make no dividend to depositors who were shareholders, at least until they had paid all calls. 2. Both summonses were dismissed, on 1 and 2 August 1866, although Kindersley V-C appears to have treated the firm as a "large partnership" (despite the restructuring the previous year to a limited liability company) to which the rule that a partner could not claim a debt owing from the partnership estate until all creditors had been paid. (The reference to partnership in the Vice Chancellor's judgment is elaborated by a newspaper report, which stated that "[t]he Vice-Chancellor decided that, according to present law, Mr Grissell is a partner, and as such can receive no part of his deposit until all other creditors are paid in full, but must meanwhile pay calls on his shares": The Times, 2 August 1866, p 7). Despite the end of law term, an appeal was heard six days later. The Court of Appeal in Chancery dismissed the appeal, but for quite different reasons. 3. Lord Chelmsford LC rejected the most extreme submission, that no dividends be paid until a member's shares had been paid in full, on the basis that until a call was paid, there was no debt, and thus if all calls had been made, then a member who was also a creditor was in precisely the same position as a creditor who was not a member. 4. Palmer QC (the future Lord Selborne) appearing for Grissell contended that after paying calls, a member was entitled to a set-off under general law which was not excluded by any provision of the Act. On that question, Lord Chelmsford said that the Act created "a scheme for the payment of the debts of a company in lieu of the old course of issuing execution against individual members", such that a set-off against a call would be "contrary to the whole scope of the Act". That was a reference to the history summarised by the Lord Chancellor in a subsequent decision in the winding up of the same company the following year (1867) 2 HL 325 at 347 dealing with the replacement of the right to issue execution against shareholders with the winding up of the company. In the same appeal, Lord Cranworth said at 363: It is obvious that when the Legislature had sanctioned the principle of limited liability, the powers given by the former Acts of taking out execution against individual shareholders necessarily fell to the ground. It would be impossible for a creditor to know to what extent his right to take the shareholder's goods in execution would exist. This difficulty, indeed, would not arise under the Act of 1862 as to companies formed with unlimited liability; but experience had shewn that the system of execution against individual shareholders often, operated very unfairly, and the Legislature probably thought, and correctly thought, that companies with unlimited liability would be but few in number, and the remedy by winding up, which was necessarily adopted in the case of limited companies, was equally just and efficacious where there was no limit, and the same course of proceeding was therefore prescribed in both cases. 1. Returning to Grissell's case, the Lord Chancellor continued at 536: And the argument against the allowance of a set-off – addressed to the Court on behalf of the official liquidators, is extremely strong – that if a debt due from the company to one of its members should happen to be exactly equal to the call made upon him, he would in this way be paid twenty shillings in the pound upon his debt, while the other creditors might, perhaps, receive a small dividend, or even nothing at all. 1. Lord Chelmsford then contrasted the availability of set-off in the case of an unlimited liability company with its unavailability in the case of a limited liability company, noting that "if a set-off were allowed against a call, it would have the effect of withdrawing altogether from the creditors part of the funds applicable to the payment of their debts". That is to say, permitting a set-off would privilege the position of depositors who were members, over the position of those who were merely depositors, and that was contrary to the scheme of the statute whereby all creditors were treated equally. 2. His Lordship then reasoned that if an unpaid call could not be set-off, then it "necessarily" followed that it must be paid before the member had a right to receive a dividend. HHC submitted that that conclusion was reached "because no other option would achieve the statutory policy as explained referable to various provisions in the Act", and sought in the present appeal likewise to invoke the policy in the Corporations Act 2001 (Cth). In re Auriferous Properties 1. In In re Auriferous Properties Ltd [1898] 1 Ch 691 and [1898] 2 Ch 428, African Gold was a partly paid shareholder of Auriferous, and by June 1896 was in debt following two calls of 5s per share on its 2,500 shares which remained outstanding, but was also owed £2,775 by Auriferous. In December 1896, Auriferous was ordered to be wound up, and in January 1898, African Gold was wound up voluntarily. African Gold proved in the winding up of Auriferous, and then its liquidator filed a summons asking whether its debt to Auriferous on the unpaid calls could be set off against the debt owing to it, in accordance with s 10 of the Judicature Act 1875. Grissell was a pre-Judicature Act case. It will be recalled that s 10 of the Judicature Act 1875 made applicable the law of bankruptcy as it was from time to time to the winding up of any company under the Companies Acts of 1862 and 1867 (a provision resembling s 291 of the Companies Act 1961 (NSW), s 438 of the Companies Act 1981 (NSW) and in a more attenuated form in s 553E of the Corporations Law). Wright J noted that in Grissell's case no set-off had been permitted by a solvent member faced with a call against a debt owed by the company, and that that result had been held to apply irrespective of whether the call was made before or during the liquidation. He noted that: [t]he ground of the rule is that all contributions from shareholders enforceable in the liquidation are by the Companies Acts made applicable for the payment of the company's creditors pari passu (ss 38, 101, 133 of the Companies Act 1862), and that a person who is a creditor and also a contributory cannot be allowed to do what might amount to paying his own claim in full out of a fund which ought to be distributed rateably. 1. As a matter of authority, Wright J held in [1898] 1 Ch 691 that the liquidator had no right of set-off, but only a right of proof. 2. Then the liquidator of Auriferous asked whether African Gold could not take any dividend until it had itself paid the calls it owed. No contractual set-off applied, nor did the statutes of set-off, nor set-off in bankruptcy (because the call was made during African Gold's liquidation, and set-off in bankruptcy applied to debts existing at the commencement of the bankruptcy). Nonetheless, the principle in Grissell was held to apply. Wright J said (at [1898] 2 Ch 428 at 431): If the creditor-contributory were allowed to take the dividend without paying the call, he would be receiving payment of a part of the debt which the company owes to him without making his contribution to the fund out of which that debt, with the other debts of the company, was to be paid. 1. HHC was critical of this decision. Ms Roughley said that counsel for the liquidator of African Gold made a very similar argument to HHC's submission in this appeal. He is recorded as submitting that: The Auriferous company is only a creditor of the gold company. It must take dividends pari passu with the other creditors. Otherwise, the effect would be that this particular creditor of the gold company would be paid in full. Grissell's case does not apply [when] the creditor contributory is an insolvent company in liquidation. 1. Ms Roughley's point was that Wright J did not address that submission, and instead "what was said by the Lord Chancellor in Grissell's case is set up as, in effect, an inflexible rule". She further contended that: Nowhere after this will your Honour see any Court seeking to do that kind of analysis that was in Grissell's case, of how consistent is this outcome, with the statutory scheme applying relevantly to a company in liquidation. Of course, in Grissell's case, there was only one company that needed to be considered against the statute. We have the situation, as was the case in Re Auriferous, where there were two companies in liquidation, to which the statutory scheme applied. There's just no consideration of how the statutory scheme applying to the second company, the shareholder in liquidation, might have some relevance to whether or not resort can be had to equity, and whether equity would follow in the last place. Later English decisions 1. In In re Akerman [1891] 3 Ch 212, Kekewich J was required to distinguish between the position of some of the testator's sons who were both specific devisees or legatees and residuary beneficiaries taking under a will, and who were also indebted to the estate. The sons were entitled to the specific gifts under the estate, but could not participate in the residuary estate until they had made good the debt. Kekewich J said of the latter at 218: a debt due to the estate of a testator is part of the residue. It has to be paid in whole or in part, in whole if it can be recovered, in order that the residue may be constituted, and there is therefore a clear distinction between a specific legacy and a residuary legacy so far as concerns a debt due from the legatee to the estate. 1. His Lordship accepted the submission advanced by the other beneficiaries, namely, that "[t]he principle upon which the doctrine of the so-called retainer or set-off is based is a general one" (at 216), noting at 219 that The Lord Chancellor, Lord Cottenham, in the case of Cherry v Boultbee, took occasion to remark that the expression "set-off" is very inaccurately used in cases of this kind, and he might have added, no doubt, that inaccuracy implies confusion. I will venture to add to that remark that the term "retainer" also is inaccurately used in cases of this kind. I have heard more of "retainer" in this case than I have heard of "set-off", but neither the one term nor the other can really be used with propriety, and either, I think, equally introduces confusion. 1. Kekewich J identified as applicable the principle "laid down in Cherry v Boultbee" as follows (at 219): A person who owes an estate money, that is to say, who is bound to increase the general mass of the estate by a contribution of his own, cannot claim an aliquot share given to him out of that mass without first making the contribution which completes it. Nothing is in truth retained by the representative of the estate; nothing is in strict language set off; but the contributor is paid by holding in his own hand a part of the mass, which, if the mass were completed, he would receive back. 1. This was an express endorsement of a general proposition that the principle applied generally where there was a "mass" or a "fund" from which the contributory claimed a share, but to which he she or it was required to contribute. Because the sons were both specific devisees and residuary legatees, the decision demonstrates that what matters is not the obligation to contribute per se, but the obligation to contribute to a general mass from which the person claims an aliquot share. 2. Further, Akerman is a clear instance of the rule being distinct from set-off. Set off under statute was unavailable because the debts were time-barred, but the equitable principle nonetheless applied. 3. Thereafter the principle was regarded as settled. In Re Rhodesia Goldfields Ltd [1910] 1 Ch 239, Swinfen Eady J applied Re Akerman in a winding up, holding that "[t]he principle is well settled and is not open to question" and "is to be found in numerous cases", and then quoted Kekewich J's statement of principle in Re Akerman, and the following statement of Stirling J in In re Goy & Co Ltd [1900] 2 Ch 149 at 153: It has been repeatedly held inequitable that a person entitled to a share of a fund should receive anything in respect of that share without paying what he may be bound to contribute to the same fund. Under such circumstances the Court in effect says to the person claiming to be paid, "You have in your own hands that which is applicable to the payment – pay yourself out of that". 1. Although the cases cited in argument showed that an unliquidated demand could not be set off against a liquidated debt, nor a debt not due against a debt due, the rule being applied here was "of much wider application than the doctrine of set-off": at 247. His Lordship described the rule as follows: In my judgment the rule is of general application that where an estate is being administered by the Court, or where a fund is being distributed, a party cannot take anything out of the fund until he has made good what he owes to the fund. It is immaterial whether the amount is actually ascertained or not. If it is not actually ascertained it must be ascertained in order that the rights of the parties may be adjusted, and it would be a strange travesty of equity to hold that in distributing the fund Partridge was entitled to be paid at once all that was due to him out of the company's money, and subsequently to find, after it had been established that he owed money to the fund, that the amount could not be recovered from him. The legal nature of the "rule in Cherry v Boultbee" 1. In Re Peruvian Railway Construction Co Ltd [1915] 2 Ch 144 at 150, Sargant J referred to the broad "principle" stated in Cherry v Boultbee that "where a person entitled to participate in a fund is also bound to make a contribution in aid of that fund, he cannot be allowed so to participate unless and until he has fulfilled his duty to contribute". Palmer J referred to a "qualification" or "exception" to that rule (to which I shall return) in Otis Elevator Co Pty Ltd v Guide Rails Pty Ltd (in liq) [2004] NSWSC 383; 49 ACSR 531 at [39] that: this proposition ought more accurately to be called, if anything, the "rule in Jeffs v Wood" and Cherry v Boultbee should be regarded as a qualification or exception to that rule, as Sargant J himself recognised in Re Peruvian Railway. ... The decision in Cherry v Boultbee may, therefore, be seen to add a qualification to the principle expressed in Jeffs v Wood, so that the "rule in Cherry v Boultbee" might more fully be stated thus: "A person who is both a claimant on, and a debtor to, a fund cannot obtain payment of his claim out of the fund until he has first paid his debt into the fund PROVIDED THAT if the claimant's estate is being administered in insolvency at the time that his claim against the fund arises, the claimant's insolvent estate cannot obtain payment of the claim out of the fund until it first pays into the fund such dividend on the claimant's debt to the fund as is available from the claimant's insolvent estate." 1. Similarly, Gleeson JA has observed that "[t]he so-called "rule in Cherry v Boultbee" is a somewhat inaccurate expression": Re Hawden Properties Group Pty Ltd (in liq) [2018] NSWSC 481; 125 ACSR 355 at [37]. Professor Hanbury put it best when he observed in Modern Equity (2nd ed, 1937, Stevens & Sons) at 69: The limits of the actual decision are somewhat narrow, but, like so many leading cases, it has attained this position almost in spite of itself, and "the rule in Cherry v Boultbee" is a phrase used where the correct phrase would be "the rule which would have applied in Cherry v Boultbee" had the facts been different. 1. In Gray v Gray [2004] NSWCA 408; 12 BPR 22,755 at [97], Young CJ in Eq, with whom Sheller and Bryson JJA agreed, observed that: the general equitable principle is not confined to the Cherry v Boultbee situation, but applied whenever a person seeks equity but owes money in a case where the creditor is able to claim repayment of the debt without having to bring an action to recover it, at least where the relevant limitation acts bars only the remedy. 1. The statements summarised above refer to both a "rule" and a "principle". Similarly, the parties' correspondence prior to this litigation referred indifferently to the "rule in Cherry v Boultbee" and "the Cherry v Boultbee principle". There are many other examples. Mostly courts have referred to a "rule", but a recent example of a reference to the "principle", arising coincidentally in an application for special leave to distribute a surplus, may be seen in Knight as liquidator of Wenshang Developing Pty Ltd (in liq) v Wenshang Developing Pty Ltd (in liq) [2024] FCA 1395 at [21]. 2. The lack of consistency about whether to refer to a "rule" or a "principle" is one indication that the subject matter is not well understood. So too is the fact that many formulations are expressed by reference to the name of a decision almost two centuries old in which the "rule" or "principle" was not applied. I respectfully agree with Edelman J's observation in Minister for Home Affairs v Benbrika (2021) 272 CLR 68; [2021] HCA 4 at [205] that "[i]t is a sign of difficulty in understanding the rationale for a legal rule when the legal rule is described by reference to the case in which it was recognised". The same point was more recently been echoed by Gummow NPJ in China Life Trustees Ltd v China Energy Reserve and Chemicals Group Overseas Company Ltd [2024] HKCFA 15 at [103]-[104], citing Professor Stevens' observation about the use of such labels (such as "the rule in Rylands v Fletcher") disguising a lack of understanding of the doctrine (R Stevens, The Laws of Restitution (Oxford University Press, 2023), p 98). 3. In those circumstances, it comes as no surprise that a range of characterisations has been put forward to describe the operation of the "rule" or "principle" in Cherry v Boultbee. 4. Early writers invoked set-off, and indeed the practical effect resembles that of set-off. In Jeffs v Wood, Sir Joseph Jekyll MR referred to "stoppage" (an old term for set-off), and the 8th edition of Lewin on Trusts treated Jeffs and Cherry as strict applications of equitable set-off ("A could set off his own debt; he was to that extent aid in full in preference to the other simple creditors": at 869), doing so despite Lord Cottenham's express observation in Cherry v Boultbee that "the term 'set-off' is very inaccurately used in cases of this kind". On the other hand, many decisions criticise labelling the doctrine as set-off, noting it is wider and applies in many circumstances where there can be no set-off. Indeed, Brereton J stated in In the matter of Anglican Development Fund Diocese of Bathurst (receivers & managers appointed) [2015] NSWSC 440; 33 ACLC 15-010 at [39] that "the rule in Cherry v Boultbee applies only where set-off is not available". 5. Early academic writers referred to ademption and satisfaction: see Toller, The law of executors and administrators (7th ed, 1838) at 338; N Lindley, A treatise on the law of partnership (7th ed, 1905) at 682 and J Story, Commentaries on Equity Jurisprudence (1st ed) at §1119. 6. A deal of judicial authority considered that it is a form of retainer, an example being Lord Cottenham's statements in Cherry about the ability to "retain" so much of the estate as was necessary to discharge debts. However, Kekewich J disapproved this in In re Akerman [1891] 3 Ch 212 at 219: A person who owes an estate money, that is to say, who is bound to increase the general mass of the estate by a contribution of his own, cannot claim an aliquot share given to him out of that mass without first making the contribution which completes it. Nothing is in truth retained by the representative of the estate; nothing is in strict language set off; but the contributor is paid by holding in his own hand a part of the mass, which, if the mass were completed, he would receive back. 1. But despite Kekewich J's disapproval of that concept in Re Akerman, Sargant J in In Re Savage; Cull v Howard [1918] 2 Ch 146 at 148 said that "Notwithstanding what was said by Kekewich J in In re Akerman, I think that the right, where it exists, is properly called one of 'retainer'." 2. It was in light of that unsettled history that Lord Walker said for the Supreme Court of the United Kingdom in Re Kaupthing Singer and Friedlander Ltd at [8]: The expression "the rule in Cherry v Boultbee" suggests a technical rule of some complexity. Any such impression would be misleading. It is basically a simple technique of netting-off reciprocal monetary obligations, even where there is no room for legal set-off, developed and used by masters in the Court of Chancery in giving directions for the administration of the estates of deceased persons. Complication arises only in a situation of insolvency, where the equitable rule produces a different outcome from that produced by statutory set-off. 1. After putting set-off to one side, Derham characterises the position as follows at 693 and 705: Lord Cottenham described the operation of the principle as a right in the executor to "retain" a part of a legacy as payment of the debt, but the courts on a number of occasions have rejected retainer as a description of the right. As Kekewich J remarked [in Re Akerman [1891] 3 Ch 212, 219]: Nothing is in truth retained by the representative of the estate; nothing is in strict language set off; but the contributor is paid by holding in his own hand a part of the mass, which, if the mass were completed, he would receive back. There has still nevertheless been a tendency to refer to the principle in terms of retainer, and indeed in a later case Sargant J criticized the rejection of that epithet by Kekewich J [Re Savage; Cull v Howard [1918] 2 Ch 146]. Kekewich J would appear to have been correct, however. The more popular explanation, which can be traced back to the judgment of Sir Joseph Jekyll in 1723 in Jeffs v Wood, is that the principle in effect provides a method of payment. The administrator of the fund asserts that a person who is entitled to participation in the fund and who is also a debtor to the fund already has an asset of the fund in his own hands, in the form of the debt, which should be appropriated as pro tanto payment of his right to participate. The administrator in truth does not 'retain' anything as payment of the debt. Rather, the administrator directs the debtor to satisfy his entitlement to a share of the fund from a particular fund asset. The principle is better described as a right to appropriate a particular asset as payment, as opposed to a right of set-off or a right of retainer. … The equitable rules operates by way of an appropriation of an asset of the estate in the debtor's hands (the obligation to contribute) as pro tanto satisfaction of the debtor's right to participate. 1. That account accords with the annotation published as "Right of retainer in respect of indebtedness of heir, legatee or distribute" 1 ALR 991 (1919): Many of the difficulties attending the question under discussion are due to the failure of the courts to agree upon the nature of the right. This vagueness is hardly surprising when it is taken into consideration that the right has never been so definitely marked out as to receive a name. Although, for the sake of brevity, it has been spoken of, in this note and elsewhere, as a right of retainer, it is not properly such, but a right in the nature of a right of retainer. The right of retainer, strictly speaking, is the right of an executor or administrator, who is himself a creditor of the estate, to retain (inasmuch as he cannot sue himself) the amount of such debt out of funds of the estate in his hands; and is thus explained and defined by Blackstone: "If a person indebted to another makes his creditor … his executor, or if such creditor obtains letters of administration to his debtor, in these cases the law gives him a remedy for his debt by allowing him to retain so much as will pay himself, before any other creditors whose debts are of equal degree." 3 Bl Com 18. … The right has been described as a right to pay out of the fund in hand (Cherry v Boultbee (1839) 4 Myl & C 442, 41 ER 171; … but it is rather a right to treat the distributive share, or legacy, as having been paid pro tanto out of the assets of the estate which the debtor has in hand. 1. I favour characterising what occurs as an appropriation. It accords with what was said in some of the earliest decisions, and the most recent decisions and authoritative texts, and, most importantly, it is an accurate statement of what is occurring; in contrast, neither set-off nor retainer is correct. Here Sirrah's judgment against HHC, which has now been transformed into a right to prove in HHC's winding up but which remains an asset in the control of Mr Hayes, is appropriated to effect the distribution to HHC of its entitlement to the surplus. 2. That said, I propose to follow the approach taken by Scrutton LJ in In re Melton; Milk v Towers [1918] 1 Ch 37 at 59: I do not think it necessary to decide exactly what the right of the executors is. I am rather disposed to agree with Kekewich J that it is not retainer. I have great difficulty, in spite of the dictum of the Lord Chancellor in Cherry v Boultbee, in seeing how it is a lien. I do not think it is necessary for me, beyond stating the principle in the way I have done, to say what the exact legal description of the right is. 1. Legal characterisation is unnecessary because the issue posed in this appeal is much simpler. Whatever label be given to the mode of distribution proposed by Mr Hayes and granted "special leave" by the primary judge, the question is whether it is incoherent with the purpose or policy in the Corporations Act. 2. The parties also engaged in submissions about whether the doctrine was "equitable". It is true that historically it seems to have developed in Chancery, as is most clear from Jeffs v Wood, and plainly enough cases on the administration of insolvent estates typically arose in chancery proceedings. But once again this is not an especially useful inquiry. 3. HHC sought to submit that if the "rule in Cherry v Boultbee" was an equitable principle, it would be defeated by the common law and statutory entitlements of a shareholder under the Corporations Act. HHC invoked the maxim that equity follows the law. But this is not dispositive. The rule or principle is quite general, applying to the administration of a fund in circumstances where the size of the fund cannot be determined until a contributory who seeks an aliquot share makes his, her or its contribution. The fact that a contributory's right is based on the legal ownership of shares, and the obligation to distribute a fund to those "entitled" is sourced in statute, does not speak helpfully to whether the rule or principle applies or is displaced, even if that rule or principle be regarded as "equitable". Very numerous equitable doctrines and principles qualify or enhance the enjoyment of rights at law and under statute – indeed, that in large measure is the point of equity's auxiliary jurisdiction. Consideration of HHC's main submission 1. In point of principle, I cannot accept HHC's main submission, based on incoherence with the Corporations Act. I do accept that a rule or principle of judge-made law may be excluded because it is incoherent with the purpose reflected in statute, and that in order to identify such incoherence it is neither necessary to identify a provision which is directly inconsistent with the rule or principle, nor for the statute to be a code which exhaustively regulates parties' rights. I further acknowledge that, so far as the parties' and my own researches disclose, a submission resembling that advanced by HHC, based on incoherence as opposed to inconsistency, is relatively novel, and finds some support in part of the reasoning in Fused Electrics Pty Ltd (in liq) v Donald [1995] 2 Qd R 7 at 8, in particular that: the so-called rule is a principle of equity only and must give way to any statutory provision to contrary effect. The priority of payments in a company winding up is fixed by statute (s 441) and a general principle of equity cannot interfere with the order thereby established. 1. On that basis it was said that it was doubtful that the principle applied to the assets of a company in liquidation. But those doubts have been rejected by the English Court of Appeal in Re SSSL Realisations (2002) Ltd (in liq) [2006] Ch 610; [2006] EWCA Civ 7, where Chadwick LJ observed at [99] that: It seems to me impossible to suggest that the observations in the English authorities to which I have just referred overlooked the existence of the statutory code. The inter-relation of the equitable principles applicable in the distribution of a fund and the statutory code for administration in insolvency was, I think, recognised and explained by the observation of Lord Chelmsford, Lord Chancellor, in Grissell's case to which Mr Justice Wright referred in Auriferous Properties (supra, at 431): where there is no set-off under the statute "it necessarily follows in the last place" that the equitable principles must fill the gap. 1. More recently, Gleeson JA and the primary judge were of the same view. I respectfully agree, for the reasons they give, and those that follow. I note that neither Grissell nor Re Auriferous Properties appear to have been provided to the Supreme Court of Queensland. 2. To recapitulate, the position confronted by Sirrah's liquidator and the proposed distribution for which he sought special leave was as follows: 1. HHC, which had not satisfied its judgment debt, notionally held property which is to be regarded as part of the surplus achieved by the liquidator of Sirrah. Sirrah's liquidator said that he was entitled to appropriate that property in satisfaction of HHC's right to participate in the distribution of the surplus. 2. Because the judgment debt owed by HHC was $17 million, greatly exceeding the surplus, Sirrah's liquidator said that he was entitled to treat the entirety of HHC's entitlement to participate in the surplus as being appropriated in that way. 3. Precisely the same reasoning applied in relation to the judgment debt against William Francis Harris om respect of his much smaller entitlement to participate in the surplus. 1. Does that distribution, which excludes two of Sirrah's shareholders from any distribution of the surplus, lack coherence with the purpose and policy of the Corporations Act? I am unable to accept HHC's submission that it does. 2. I first put to one side an issue arising from the qualification or exception to the rule to which Palmer J referred in Otis Elevators. It concerns timing. It is whether it matters that "the fund" came into existence before or after the winding up of HHC (and the bankrutpcy of William Francis Harris). It will be recalled that Mr Hayes was appointed as Sirrah's liquidator in 2021, following Sirrah's success at trial, and that an appeal was dismissed at the end of 2021. In 2022, William Francis Harris was made bankrupt, and HHC was wound up, in both cases in reliance on the $17 million judgments against each of them. However, Mr Hayes only moved to finalise the liquidation of Sirrah and determine the surplus in 2023, and it might on one view be thought that the time the "fund" in respect of which HHC claimed an aliquot share came into existence after a liquidator had been appointed to it. But in the facts of this case, it is clear that the distribution of the surplus and the application of the "rule in Cherry v Boultbee" is to occur by reference to the position in 2021 when Sirrah was wound up, not 2023. Unusually, the winding up of Sirrah was the winding up of a solvent company which at all times was anticipated to have a substantial surplus. Mr Hayes' report to creditors dated 7 December 2023 discloses that on his appointment some $8.7 million dollars were transferred into the Liquidation bank account from the Provisional Liquidation bank account. Further, interim distributions in excess of $2.2 million were made during the liquidation to certain shareholders on the basis that creditors would nonetheless be paid 100 cents in the dollar. In those circumstances it would be artificial in the extreme to treat the determination of shareholders' entitlements to participate in the surplus which would inevitably be achieved upon the winding up of an asset-rich company as turning on the events of 2023. To the contrary, the surplus was inevitable at the time Mr Hayes was appointed Sirrah's liquidator, and was indeed the premise of the winding up (so as to release the assets of a closely held company where there had been an irreconcilable breakdown between majority and minority shareholders). Accordingly, the exception or qualification to which Palmer J referred in Otis Elevators does not arise. It is possible (I express no view one way or the other) that there may be other cases where a later point of time is appropriate than the liquidator's appointment. 3. The Corporations Act empowers and obliges a liquidator to collect and realise assets so as to discharge debts owed to creditors and distribute any "surplus". But a final surplus cannot be determined until all those required to contribute have made their contribution or alternatively those claims have been compromised or written off or otherwise resolved. To my mind, it is a basic and essential element of the scheme for winding up companies that the process not be stymied by the happenstance that persons entitled to share in a surplus are themselves contributories. It cannot be the case that the liquidator has to write off or compromise the claim against that contributory in order to determine a final surplus, an aliquot share in which is to be distributed to that contributory. In the present case, it cannot be the case that Mr Hayes has to treat his claims against HHC as worthless, so as to finalise Sirrah's surplus at some $5 million after making allowance for interim distributions, only then to distribute more than half of that surplus to HHC. And it also cannot be the case that the liquidator cannot determine a final surplus and must maintain his proofs of debt in the winding up of HHC and the bankruptcy of William Francis Harris until all three are completed (presumably, on the same day). Right from the outset, in Jeffs v Wood itself, Jekyll MR referred to the prevention of circuity of action. 4. Those are results which could fairly be regarded as perverse. Only if there were no other construction available would either be reached. That favoured by HHC would mean that Sirrah's largest debtor would have its debt reduced to nil and would still receive more than half of the surplus. 5. HHC placed heavy emphasis on its legal right as a majority shareholder in Sirrah to participate in the surplus. But the surplus is small compared to HHC's unsatisfied judgment debt. No set-off is available under statute, but it would be a large conclusion to infer that the purpose or policy of the Corporations Act when determining the rights of contributories to both companies being wound up is to in effect ignore HHC's failure to pay any part of the $17 million it owes Sirrah when determining when it is entitled to participate in a surplus realised by Sirrah's liquidator which, ex hypothesi, is $17 million smaller than it would have been had the HHC satisfied its obligations at law. 6. To the contrary, there have been bankrupt members, and insolvent members, of companies being wound up for many decades. The need to resolve the conflict between the member's obligation to contribute and the member's claim upon a dividend, in circumstances where the member cannot pay in full, is found in large measure in the importation of principles from bankruptcy and their more recent modification, which addresses many aspects in terms. It is true that no express provision deals with the (rare) circumstances presented by this appeal that there is a surplus but nonetheless the members who are prima facie entitled to that surplus remain debtors to the company and are being wound up or bankrupt (the bar in s 553A to a member proving applies only to cases where a member has undischarged obligations as a member). But the proper conclusion to draw from the legislative silence (or, as HHC would put it, the "careful limits" of the regime) is not to exclude the method of netting off which has been applicable to this sort of case for centuries because it is incoherent with the Corporation Act's purpose or policy. Instead, one should proceed on the basis that the legislative silence on this topic reflects an intention to accommodate the familiar method of netting off that had been practised for centuries in cognate contexts. 7. HHC submitted that it is difficult in point of principle to see how that result is reached. HHC was correct to observe that there were inconsistencies in the submissions advanced by Sirrah's liquidator. These turn ultimately on the ambiguity in the words "fund" and "surplus". It is quite natural to reason on the basis that the entirety of Sirrah's surplus, and the entirety of the fund in the liquidator's hands, is the $5 million so far realised remaining in the liquidator's hands after interim distributions, and to disregard the judgment debts which have been converted to rights of proof and which for practical purposes are worthless. But in truth the total assets of Sirrah following the liquidator's exertions are the $5 million plus two rights to prove reflecting the judgment debts against HHC and William Francis Harris. Once that is appreciated, the inconsistencies to which HHC pointed disappear. The rule or principle, in its application to a case like the present where the unsatisfied debts exceed the amount to which those debtors would be entitled in the event that the debts were satisfied in full, simply empowers the liquidator to require HHC and William Francis Harris to appropriate to themselves the entirety of those judgment debts to the distributions to which they would have been entitled had the debts been satisfied, leaving the $5 million to be distributed to other shareholders. 8. This is not a set-off (and so HHC's submissions to the effect that s 553C confined the availability of set-off are not to the point). Nor is it a retainer. Little is served by seeking to pigeonhole the principle into a legal category. It is a long-established mode of finalising and distributing a surplus when a claimant of an aliquot share in a fund is also a debtor. It prevents the potentially endless circle of distributing an interim surplus, and then enforcing a claim on that distribution in satisfaction of the outstanding debt, and it prevents the absurd result that the liquidator must on the one hand write off a claim against a contributory which is shortly to receive a distribution of a surplus to which it has not contributed. 9. Far from being incongruous or incoherent with the statutory purpose, all of this to my mind wholly accords with the purposes of the Corporations Act to facilitate the timely winding up of companies. I respectfully agree with the substance of [59] of the reasons of the primary judge addressing substantially the same point, which are reproduced above. 10. There is a further difficulty in accepting HHC's submission. HHC's submission was based on the changes introduced by the 1992 amendments, altering the treatment of debts admissible in a winding up from debts admissible to proof in bankruptcy. If those changes in truth reflected a different policy (thereby explaining the absence of earlier authority on the precise position which obtained in the present appeal), then there must be a material difference between the policy reflected in the Bankruptcy Act and that reflected in the corporations legislation which is relevant to the distribution of a surplus in a situation such as the present. If so, what occurs when the claimants on a surplus realised by a liquidator include both a company itself being wound up and a trustee in bankruptcy? It would seem strange for the rule in Cherry v Boultbee to apply to the unpaid debt owed by the bankrupt estate, but not to the unpaid debt owed by the contributory which is being wound up. This is no mere academic question. Although for obvious reasons attention has focussed upon the entitlement of the majority shareholder HHC upon the surplus, it is to be recalled that the bankrupt estate of William Francis Harris includes one Sirrah share, and that share was excluded from participating in the surplus by the same grant of special leave as excluded HHC's majority shareholding. The fact that the co-existence of the statutory scheme and the rule or principle avoids that anomaly is a further reason to reject HHC's submissions. 11. HHC also relied upon the express reasoning in the judgment which resulted in the judgment debts against it and William Francis Harris not to order a constructive trust: [2021] NSWSC 413; 152 ACSR 212 at [157] and [161]. That reflected, among other things, the principle in John Alexander's Clubs Pty Ltd v White City Tennis Club Ltd (2010) 241 CLR 1; [2010] HCA 19 at [128]-[129] that third party interests must be borne in mind in deciding whether a constructive trust should be granted. HHC's point was that there was a third party with security over its shares in Sirrah to which regard should be had. 12. This is either a jury point or a red herring or both. The position of Sirrah, its liquidator and HHC is unaffected by the nature of the causes of action which were advanced at trial, leading to the judgment debts in Sirrah's favour against HHC and William Francis Harris. Those causes of action have all merged in the judgments, and the judgments give Sirrah a merely personal, unsecured claim against HHC and William Francis Harris. 13. For those reasons, I conclude that the main ground of appeal is not made out. Election (ground 2) 1. Separately from the above, but very much by way of fallback, HHC submitted that the primary judge had erred in rejecting its contention that Sirrah had, by lodging proof of debt in HHC's winding up, made an election preventing its reliance upon the rule in Cherry v Boultbee. As noted above, on 5 October 2022, Sirrah lodged a proof of debt for the full amount of its judgment debt. Both before and shortly thereafter, the liquidator of HHC advised that it was unlikely that there would be any recoveries for creditors. 2. On 18 June 2024, shortly before the hearing before Black J, the solicitors for Sirrah's liquidator advised: It has come to our client's attention, in the course of preparing for the hearing before Black J, that Sirrah's lodgement of the POD (albeit one for voting purposes only) may be asserted against our client as an election to prove in the winding up of HHC and not pursue the application of the rule in Cherry v Boultbee (despite our letter of 9 June 2022 and the application before Black J). If that contention is made, it will be rejected; and further, our clear instructions are that our client did not submit the POD in the winding up of HHC with the intention that it would or might affect the application of the rule in Cherry v Boultbee in relation to Sirrah's estate. In any event we are instructed to hereby withdraw the POD and seek your consent (pursuant to regulation 5.6.56 of the [Corporations Regulations]) to that withdrawal. Please confirm your position by reply as soon as possible before noon tomorrow. 1. The liquidator responded the following day including by stating: 2. The Proof of Debt lodged by [Mr Hayes] was admitted for voting purposes only on proposed resolutions and all resolutions proposed were passed. 3. I have not called for Proofs of Debt in the liquidation for dividend purposes because there have been no funds realised and I do not expect any realisation will be made in the liquidation. 4. No Proofs of Debt lodged with me in the liquidation of HHC have been admitted or rejected for dividend purposes. I have not dealt with them because it has not been necessary to do so other than for the purpose of voting on resolutions without a meeting. 5. I acknowledge that the Proof of Debt lodged by Sirrah dated 05/10/2022 in the liquidation of HHC was withdrawn yesterday by your email below. 1. On the same day, in answer to a question from Mr Amirbeaggi, the liquidator confirmed that Sirrah's proof of debt had been withdrawn. 2. HHC contended that in circumstances where Sirrah had issued a statutory demand, had been the petitioning creditor, on whose application HHC had been placed into liquidation, and in which liquidation Sirrah had lodged a proof of debt for the judgment sum, it should be taken to have elected to participate in the "statutory scheme of liquidation", and was unable to subvert that scheme by the unequal distribution of its own assets to its contributories and ceasing to rely on its own proof of debt in HHC's winding up. It was said that: Having issued a demand to HHC under s 459E and positively invoked the winding up provisions of the Corporations Act, which it did on behalf of, and at the expense of, all other creditors and shareholders of HHC under s 471, it is both inequitable and inconsistent for Sirrah now to assert an "equity" that subverts the principles of that regime and to take priority over those creditors. Having made an election that binds all other creditors under s 471, Sirrah must also be bound. 1. HHC noted that the primary judge's observation that Sirrah's proof of debt had no effect on other creditors ignored the fact that it was Sirrah's winding up petition which subjected all creditors to the statutory scheme of liquidation. It said that irrespective of whether the proof of debt could be withdrawn, the serving of a statutory demand and the issuing of a winding up petition were unequivocal acts which could not be revoked. 2. But while Sirrah issued a statutory demand and was the petitioning creditor in the second half of 2022, HHC's winding up was inevitable no later than the bankruptcy of its sole shareholder and director William Francis Harris in March 2022 when it was apparent that the judgment debt against him would not be satisfied. Until and unless HHC could obtain some undertaking from Sirrah not to enforce the judgment, it was hopelessly insolvent, and if it had not been wound up on the petition of Sirrah, its board would have had no choice but to wind it up voluntarily. In short, I see no reason why the fact that it was Sirrah that took steps to execute its judgment by invoking the processes available to creditors of companies under the Corporations Act is inconsistent with Sirrah also being entitled to employ the methodology in Cherry v Boultbee when distributing the surplus. 3. It is true that there would be at least a tension in Sirrah or its liquidator on the one hand insisting on its rights as a creditor within the winding up of HHC and on the other hand obtaining special leave to treat Sirrah's own contributories unequally. It is not necessary to express a view whether that tension would suffice to displace the rule, because it never arose. The question is surely one of substance rather than form. As a matter of substance, Sirrah lodged a proof of debt in advance of a creditors' meeting to approve the liquidator's remuneration, and at a time when the liquidator advised that there would probably be no distribution to any creditor. Sirrah subsequently withdrew its proof of debt. Sirrah never obtained any distribution. In no way was any other creditor of HHC prejudiced by Sirrah's proof of debt. Sirrah was not confronted with irreconcilable alternatives, and should not be held to have made an election. This is consistent with the reasoning in Re Sewell [1909] 1 Ch 806 at 809, referring to the proof in bankruptcy by trustees who had a lien over real estate, and who were permitted to realise their security and amend their proof by proving only for the balance owed after their security had been realised. 4. This ground is not made out. Defeating the secured creditor of HHC (ground 3) 1. Finally, HHC said that the primary judge had been wrong to observe that HHC's debt to Sirrah preceded Yates Beaggi's security. Instead, while that debt existed, HHC charged its shares in favour of its solicitor (on 12 June 2020), and thereafter on 7 May 2021 it went into liquidation. There was no fund in respect of which any entitlement under Cherry v Boultbee was available until at least 7 May 2021 (and if it was necessary to ascertain a surplus, it was still later). Thus Yates Beaggi had an equitable interest in the shares of Sirrah as chargee which predated any claim on the fund. Two consequences were said to follow. First, "there was no mutuality in order for the equity in Cherry to arise prior to [Yates Beaggi] taking its equitable interest in HHC's shareholding in Sirrah. Rather, [Yates Beaggi's] equitable interest in the shares as equitable charge existed prior to the time any claim on the fund arose, while the debt remained a liability owed by HHC". Secondly, "if and to the extent the equity could arise (which is disputed), YBL had a prior equitable interest to which Sirrah's equity took subject on the basis that the earlier in time prevails". 2. Like ground 2, this ground was far from the forefront of oral address (it occupied less than a page of transcript). I shall likewise be brief. 3. Let all of what was said on behalf of HHC in support of this ground be assumed. It does not follow that there was any error in the grant of special leave to Sirrah's liquidator. Yates Beaggi's security was not over any property in the hands of Sirrah's liquidator. It had no security over the $5 million realised, and of course it could have no security over the judgment debt owed by HHC to Sirrah, which was a liability of HHC not an asset. It follows that I see no basis on which Yates Beaggi, or the receiver appointed by it, could complain of the proposed distribution of the surplus. 4. The position would be different if the judgment debt owed by HHC to Sirrah were less than the actual surplus the liquidator had realised. If say the liquidator had realised $5 million, together with a judgment debt of say $2.5 million against HHC, then it would be wrong for there to be no distribution to HHC. Assuming HHC were a 50% shareholder of Sirrah, then applying the methodology in In the matter of Hawden Property Group Pty Ltd (in liq) (ACN 003 528 345) if HHC were solvent and were able to pay the $2.5 million judgment debt, there would be a notional fund of $7.5 million, to which HHC would be entitled to one half (or $3.75 million). Thus HHC would be entitled to receive a net amount of $1.25 million from the fund, in respect of which Yates Beaggi could enforce its security. 5. But Yates Beaggi, as a secured creditor of HHC, can be in no better position than HHC. Where, as here, the unsatisfied indebtedness of HHC to Sirrah is such that Sirrah is entitled to net off the entirety of any obligation to distribute the surplus to HHC against that indebtedness, HHC has no entitlement to the surplus, and the fact that Yates Beaggi is a secured creditor of HHC makes no difference. Conclusion and orders 1. For those reasons, I propose that the appeal be dismissed. 2. At the end of the hearing, counsel for Sirrah's liquidator flagged an application to amend to join the receiver for the purposes of seeking a costs order against him. A notice of motion to that effect, supported by affidavit, was filed on 12 December 2024. It is not clear at present what the receiver's attitude to the motion is, and indeed whether there are disputed questions of fact. In circumstances where the issue was only formalised after the hearing, and relates only to costs in this Court, it is appropriate that the motion be remitted to a Judge of Appeal to be dealt with pursuant to s 46(1)(d) of the Supreme Court Act 1970 (NSW). 3. I propose the following orders: 1. Appeal dismissed. 2. Appellant to pay the costs of the first respondent. 3. Remit the notice of motion filed on 12 December 2024 to be heard and determined by a single Judge of Appeal. 1. McHUGH JA: I have had the considerable advantage of reading in draft Leeming JA's reasons, with which I agree. 2. The appellant's argument that the approach taken by the primary judge leads to incoherence with the "statutory scheme of liquidation", of both Sirrah and HHC, involves the proposition that for the purposes of HHC's liquidation its property includes the right of a contributory to a proportionate share of the surplus in Sirrah's liquidation. But whether HHC has any such property at all, that is, whether it is "entitled" to any part of Sirrah's "surplus" within the meaning of ss 485(2) and 488(1)(c) of the Corporations Act 2001 (Cth), depends at all times on the liquidation of Sirrah. Any surplus is a creature of Sirrah's liquidation; it has no existence prior to, or independent of, Sirrah's liquidation. Nor does HHC have any property in any such surplus independent of the workings of Sirrah's liquidation. That is so, whether or not HHC is in liquidation, and whether or not it is insolvent. Once it is appreciated that any entitlement of HHC to Sirrah's surplus is an artefact of the liquidation of Sirrah, no question of incoherence with the statutory scheme of liquidation arises with respect to either company. 3. As to the workings of Sirrah's liquidation, the question whether HHC is to receive a distribution of Sirrah's surplus is ultimately governed by the statutory words "any surplus" and, particularly, "entitled". As Leeming JA has shown, these words have occupied the same place in predecessor legislation going back to the dawn of modern company law. For reasons which his Honour explains, these words should not be construed to exclude the firmly established (if at times under-theorised) general law technique of netting off associated with Cherry v Boultbee (1839) 4 My & Cr 442; 41 ER 171. 4. The appeal should be dismissed. I agree with the orders proposed by Leeming JA. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 19 December 2024