SKELLERUP ROTOCURE LIMITED vy CHADWICK INDUSTRIES PTY LTD SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL GLEESON CJ, KIRBY P and MAHONEY JA 2-3 October 1990, 4 October 1990 [1990] NSWCA 166 DEED — Charge to secure indebtedness of company — whether charge attaches only to debts in existence at the date of the charge — Held: (Mahoney JA; Gleeson CJ and Kirby P concurring) (1) A fixed charge may be created over choses in action not now in existence; (2) To give effect to the purpose of the parties in the grant of the charge and the language of the charge in question here, the charge given by the deed applied to debts resulting from obligations which, at the date of the execution of the deed had not yet crystallised into liquidated damages. WORDS AND PHRASES — "debt": Bank of Australasia v Hall (1907) 4 CLR 1514; Ex parte Kemp: In re Fastnedge (1874) LR 9 Ch App 383 referred to. Gleeson CJ In this matter I have had the benefit of reading in draft form the judgment of Mahoney JA. I agree with his Honour's judgment. Kirby P I agree with the orders proposed by Mahoney JA and with his reasons. Mahoney JA Chadwick Industries Pty Ltd ("Chadwick") had contracted to do work in relation to the Darling Harbour development. It claimed that it should have been paid, or should be paid, moneys because of what it had done. It claimed this against the Darling Harbour Authority and those who had worked with or for it. By April 1989 these moneys had not been paid. In April 1989 Chadwick owed Skellerup Rotocure Limited ("Skellerup") $NZ.411,324.32. Skellerup pressed Chadwick for the money owed to it. Ultimately it was agreed that Chadwick should give to Skellerup a charge to secure Chadwick's indebtedness to Skellerup. On 11 April 1989 a deed of charge was executed. Chadwick pressed its claims against Darling Harbour Authority. At the end of 1989, as the result of the efforts of a mediator, an agreement was made between Chadwick and the Darling Harbour Authority whereby $1.1 million was agreed to be paid to Chadwick. In due course that amount ("the contract sum") was paid to Chadwick. Skellerup claimed and Chadwick has denied that the contract sum is within the charge created by the deed and, accordingly, charged by it. Skellerup has sued Chadwick accordingly. Young J held that the charge granted by the deed did not extend to the contract sum. Skellerup claimed that, if this was the construction of the deed of charge, the deed should be rectified. The learned judge rejected that claim. Skellerup has appealed to this Court against his Honour's judgment. The deed of charge consisted of some 25 pages. The portions of it directly relevant for the purposes of this appeal are as follows. The deed recited: (A) that Chadwick was indebted to Skellerup in the sum of $NZ.411,324.32 for the supply by the mortgagor (Chadwick) to the mortgagee (Skellerup) of building materials (sic); (B) that Chadwick had agreed to acknowledge the amount outstanding; and 2 UNREPORTED JUDGMENTS (C) that Chadwick had agreed to give a charge to Skellerup over certain debts payable to Chadwick and the proceeds thereof "more particularly described in the first schedule hereto as security for the performance and observance of the covenants and agreements herein contained or implied and the payment to" Skellerup of the amount outstanding and all other moneys thereinafter mentioned. The deed then witnessed "that in consideration of the Mortgagee... forebearing to sue forthwith in respect of the amount outstanding and for the purpose of securing the amount outstanding and all other moneys hereinafter mentioned the Mortgagor HEREBY CHARGES ALL AND SINGULAR the debts and the proceeds thereof more particularly described in the First Schedule hereto to the extent described in the First Schedule hereto (hereinafter referred to as 'the mortgaged premises') with the performance and observance of the covenants and agreements herein contained or implied and with the payment to the Mortgagee of:..." the amount outstanding and interest. CLS provided: "5. THAT the Mortgagor will: (a) in all respects perform his obligations under the contracts referred to in the First Schedule hereto and do all things which may reasonably be required or desirable to cause the moneys comprising the mortgaged premises to become payable; (b) keep the Mortgagee informed of all proceedings and negotiations relating to the contracts referred to in the First Schedule hereto and if so requested by the Mortgagee allow the Mortgagee to inspect and take copies of the said contracts and any documents and correspondence relating thereto or to matters or proceedings arising out of the said contracts; and (c) so long as the Mortgagee is indebted to the Mortgagee for the amount outstanding or any part thereof and notwithstanding that demand therefor may not have been made by the Mortgagee, as and when he shall receive any of the moneys payable in respect of any of the debts comprising the mortgaged premises, forthwith: (i) Pay the same into a bank account opened for the purpose of holding such moneys and into which no other moneys shall be paid. (ii) Pay an amount to the Mortgagee in accordance with the formula set out hereunder to be applied in payment of the moneys hereby secured: P=T-R Where: P is the payment to be made by the Mortgagor to the Mortgagee. T is the greater of two hundred and fifty thousand Australian dollars (A$250,000.00) and fifteen per centum (15%) of the sum of all amounts received by the Mortgagor in relation to the debts comprising the Mortgaged Premises. R is the sum of all amounts previously paid to the Mortgagee pursuant to this CLS(c)(ii). NOTWITHSTANDING the foregoing in relation to moneys received on account of the debt arising from the third mentioned contract referred to in the First Schedule hereto, the Mortgagor shall pay to the Mortgagee the lesser of fifteen per centum (15%) of such moneys and the amount payable in accordance with the formula set out above. (iii) Hold the same to the extent of the amount payable pursuant to paragraph O(sic) on trust for the Mortgagee." CLI5 provided: \HRKELLERUP ROTOCURE LIMITED v CHADWICK INDUSTRIES PTY LTD (Mahoney JAB "15. THAT: (a) the charge hereby created shall operate as a fixed charge; The First Schedule was in the following terms: "THE FIRST SCHEDULE HEREINBEFORE REFERRED TO Debts (and the proceeds thereof) payable to the Mortgagor pursuant to, as a result of or as a result of proceedings arising out of the following contracts: 1. Contract for metal roofing works on the Exhibition Centre at Darling Harbour between the Mortgagor and Barclay Bros Limited dated 5 February 1986 No. SCNPWC 3 Subcontract No 265/25; 2. Contract for the erection of a roof on the National Maritime Museum at Darling Harbour between the Mortgagor and Leighton Contractors Pty Ltd as agent for and on behalf of the Darling Harbour Authority dated 19 April 1988 as varied on 29 February 1988 No. NPWC 3 02.60; 3. Contract for supply and installation of metal roofing on the Convention Centre at Darling Harbour between the Mortgagor and Baulderstone Hornibrook Pty Ltd dated 31 March 1987 as varied on 18 May 1988 No SCNPWC 3; and 4. Contract for metal roofing works on the Festival Marketplace, Darling Harbour between the Mortgagor and White Industries Limited dated 3 September 1986 No SCNPWC 3 Subcontract No 256/21. To the extent of A$250,000.00 or fifteen per centum (15%) of the total of the above debts, whichever is the greater amount." In order to determine the construction of the paragraph it is necessary to refer to what happened in respect of the claims made by Chadwick upon the Darling Harbour Authority. Prior to the execution of the deed of charge, Chadwick had been pressing the Darling Harbour Authority for payment of the moneys which it claimed were due to it. In November 1988 a preliminary conference was held in relation to an arbitration between them. Thereafter arbitration proceedings were commenced and were pending when, on 11 April 1989, the deed of charge was executed. In fact, the arbitration proceedings were never completed. In May 1990 the parties engaged the services of a mediator Sir Laurence Street. By a document dated 12 May 1990, signed by senior counsel for Chadwick and for the Darling Harbour Authority, the disputes between them were settled. The terms of settlement, as far as here relevant, provided: "TERMS OF SETTLEMENT 1. The DHA agrees to pay to Chadwick Industries the sum of $1,100,000 in full settlement and discharge of all existing claims and demands of every nature whatsoever arising out of or in any way relating to the roofing contracts for the Convention Centre and the National Maritime Museum. 2. Chadwick Industries agrees to accept the said sum in full settlement and discharge as aforesaid. 3. The said sum of $1,100,000 to be paid by cheque in favour of Chadwick Industries Pty Ltd on or before 18 May 1990. On or about 16 May 1990 that sum was paid to Chadwick by the Darling Harbour Authority. It is the sum so paid that, Skellerup claims, is subject to the charge in its favour. It is not in contest but that the contracts referred to in the First Schedule to the deed of charge are or include the contracts the subject of the terms of settlement and for which the sum of $1,100,000 was paid. 4 UNREPORTED JUDGMENTS The argument advanced by Skellerup is that the contract sum fell within the description of the First Schedule to the deed of charge, viz, "Debts (and the proceeds thereof) payable to the mortgagor pursuant to, as a result of or as a result of proceedings arising out of the following contracts:...". The argument was that the obligations to Chadwick arising from the relevant contracts fell within those words; and that (alternatively), upon the signature of the Terms of Settlement, a debt, being the contract sum, was owing by the Darling Harbour Authority to Chadwick, that that debt was payable to Chadwick pursuant to, as a result of, or as the result of proceedings arising out of, the relevant contracts, and that it was accordingly the subject of the deed of charge. The submission suggested that the amount, when received by Chadwick, represented "proceeds" within the description in the First Schedule. In my opinion, subject to the matters to which I shall refer, the contract sum fell within the terms of the charge. The term "debt" is capable of a narrow or a wide interpretation depending upon its context. In Bank of Australasia v Hall (1907) 4 CLR 1514 at 1534, O'Connor J said: "During the argument the controversy turned upon what is the proper interpretation of the word 'debts'. Like all general expressions it is capable of a narrow and a wide interpretation. The former would, strictly speaking, cover only money demands, fixed, liquidated, and payable at the material date. The latter would include such a liability as that of the debtor to Phillipson before the damages had been awarded." O'Connor J referred to what was said by Mellish LJ in Ex parte Kemp: In re Fastnedge (1874) LR 9 Ch App 383 at 387: "Now, the words 'debts due to him' are certainly words which are capable of a wide or a narrow construction. I think that prima facie, and if there be nothing in the context tO give them a different construction, they would include all sums certain which any person is legally liable to pay, whether such sums had become actually payable or not. On the other hand, there can be no doubt that the word 'due' is constantly used in the sense of 'payable', and if it is used in that sense, then no debts which had not actually become payable when the act of bankruptcy was committed would be included. Lastly, the expression "debts due' is sometimes used in bankruptcy proceedings to include all demands which can be proved against a bankrupt's estate, although some of them may not be strictly debts at all." There is, in my opinion, no doubt that the obligation owed by the Darling Harbour Authority to Chadwick consequent upon the terms of settlement was a debt in both the narrower and the wider sense of the term. The payment made to Chadwick was the proceeds of such a debt. And it is, I think, clear that the debt was payable to Chadwick pursuant to, as a result of and as a result of the arbitration proceedings arising out of, the contracts to which I have referred. Young J, in his detailed consideration of the construction of the deed, said: "Here we have a situation where, as a result of an unliquidated claim for breach of contract or possibly as a settlement for a claim in quantum meruit following frustration of a contract, an unliquidated demand is settled and produces a sum of money. That, to my mind, is not a debt nor is the settlement proceeds of a debt and accordingly the moneys that have been received from the Authority are not covered by the charge." I respectfully differ from his Honour in my construction of the effect of the terms of settlement. It may be assumed that the original claim under the building contracts referred to in the First Schedule to the deed of charge had given rise to \HRKELLERUP ROTOCURE LIMITED v CHADWICK INDUSTRIES PTY LTD (Mahoney JAB unliquidated claims for breach of contract or other unliquidated claims. The terms of the contracts are not before the court but, in my opinion, the result of the terms of settlement was, as I have said, to constitute a debt which, by the terms of settlement, was immediately due and payable by Darling Harbour Authority to Chadwick. The answer made to this by Chadwick was, in the end, that the debts referred to in the deed and in particular in the First Schedule to it were limited only to debts which, at the date of the execution of the deed, were debts payable to Chadwick in the context of the contracts there referred to. The submission was to the effect that debts resulting from obligations existing at the date of the execution of the deed did not fall within that description. In my opinion the term "debts" as used in the First Schedule to the deed is not limited to debts in existence as such at the date of execution of the deed. If regard be had to the circumstances surrounding the execution of the deed, as known to both parties, it is in my opinion apparent that it was not the intention of the parties that the term be so limited. Counsel were not able to point to any debts, in the narrower sense of the term, in existence at the date when the deed was executed. But both parties were aware that, at that date, arbitral proceedings were contemplated or pending which were apt to produce, in the form of an award or from the terms cf settlement of them, an obligation in the nature of a debt in the narrow sense of the term. Prima facie there appears no reason why the charge to be given by the deed should not apply to debts resulting from obligations which, at the date of execution of the deed, had not yet crystallised into liquidated obligations. So to construe the deed would apparently defeat the purpose of the parties in the grant of the charge. Mr Conti QC, for Chadwick, suggested reasons why the parties might have intended that the charge attach only to debts in existence at the date of execution of the deed. He pointed to the fact that the charge created was, in terms, to ke a fixed charge. But it is not unusual for parties to seek to create a fixed charge over choses in action not then in existence. The result of such a transaction is that the chargor in effect contracts to grant a charge over the chose in action when it comes into existence and, in appropriate circumstances, equity will deem that to be done which ought under such obligations to be done: Tailby v Official Receiver (1888) 13 App Cas 523; Norman v Federal Commissioner of Taxation (1963) 109 CLR 9 at 21-22, 24-5. Mr Conti referred to what, in his submission, was the understanding which the persons concerned in the drafting of the deed had in relation to the matter and, as I understand it to have been suggested, their decision to confine the debts charged to debts in existence at the date of execution of the ceed. It is not, I think, necessary to examine in detail the material to which reference was made or to consider the extent to which, in the construction of the deed, it is proper to refer to it. I do not see in what the parties understood at the time any intention to limit the obligations the subject of the charge in the manner suggested. This being the construction of the deed, it is not necessary to consider the issue of rectification raised by Chadwick. In my opinion, therefore, the judgment of the learned trial judge should be set aside and Skellerup should have judgment in accordance with the views which I have expressed. I propose that it be ordered that the plaintiff bring in short minutes of the orders to give effect to the views expressed and that the proceeding 6 UNREPORTED JUDGMENTS be stood over for one week to enable this to be done. The costs of the plaintiff Skellerup, at first instance and on appeal, should be paid by the defendant Chadwick. 5 1. Appeal allowed; 2. Judgment of Young J set aside; 3. Plaintiff to bring in short minutes of order; 4. Plaintiff to have costs at first instance and on appeal; 5. Proceeding adjourned to 11 October 1990.COUNSEL: Appellant - CSC SHELLER QC/HK INSALL COUNSEL: Respondent - RA CONTI QC/CD CURTIS 15 SOLICITORS: Appellant - MINTER ELLISON SOLICITORS: Respondent - MADGWICKS253545