Reported Decision : (2000) 34 ACSR 604 New South Wales Supreme Court CITATION : SJP Formwork (Aust) P/L & 1 Ors v Deputy Commissioner of Taxation [2000] NSWSC 604 revised - 18/07/2000 CURRENT JURISDICTION: Equity FILE NUMBER(S) : SC 4163/99 HEARING DATE(S) : 26/06/00 JUDGMENT DATE : 26 June 2000 SJP FORMWORK (AUST) PTY LIMITED (in liquidation) ACN 003 130 103 (First Plaintiff) RONALD JOHN DEAN-WILLCOCKS (Second Plaintiff) PARTIES : DEPUTY COMMISSIONER OF TAXATION (Defendant/Cross-Claimant) STEVE PEJKOVIC (First Cross-Defendant) LYDIA PEJKOVIC (Second Cross-Defendant) JUDGMENT OF : Santow J H Snow (Solicitor) (Plaintiff) COUNSEL : M R Aldridge, SC (Defendant/Cross-Claimant) J T Johnson (Cross-Defendants) Swaab Attorneys (Plaintiff) SOLICITORS : Australian Government Solicitor (Defendant/Cross-Claimant) Heaney Richardson & Nemes (Cross-Defendants) CATCHWORDS : CORPORATIONS — PROCEDURE — Unfair preference — What is effect of 1993 Harmer amendments to Corporations Law if order made to have recovered preference paid to "the company and liquidator" rather than to the company alone — Is such order "under s588FF" for the purposes of indemnity to Tax Commissioner pursuant to s588FGA — Effect of intervening charge on recovered preference payment — Kratzman principles — Construction of court order by reference to forensic context against background of legislation. LEGISLATION CITED : Corporations Law Pt 5.7B, s565, s588FF, s588FGA Corporate Law Reform Act 1992 CASES CITED : N A Kratzman Pty Limited (in liquidation) v Tucker [No. 2] (1965-66) 123 CLR 295 Mineral & Chemical Traders Pty Ltd v T Tymczszyn Pty Ltd (in liq) and Anor (1994-5) 15 ACSR 398 DECISION : Declaration granted. REVISED — 18 July, 2000 IN THE SUPREME COURT OF NEW SOUTH WALES IN EQUITY SANTOW J No. 4163/99 SJP FORMWORK (AUST) PTY LIMITED (in liquidation) ACN 003 130 103 First Plaintiff RONALD JOHN DEAN-WILLCOCKS Second Plaintiff DEPUTY COMMISSIONER OF TAXATION Defendant DEPUTY COMMISSIONER OF TAXATION Cross-Claimant STEVE PEJKOVIC First Cross-Defendant LYDIA PEJKOVIC Second Cross-Defendant JUDGMENT — ex tempore 26 June 2000 the central issue 1 The relevant facts are uncontroversial and are set out below. 2 "On 18 May 2000 consent orders were made by the Court as follows: "1 Pursuant to Section 588FF of the Corporations Law, the Defendant pay to the Plaintiffs the sum of $180,000.00 within 28 days of the date of this order. 2 The proceedings as between the Plaintiffs and the Defendant be discontinued. 3. The cross-claim be stood over to 15 June 2000." 3 The Cross-Claim brought by the Defendant (the Commissioner of Taxation) is a claim seeking relief by way of indemnity against the directors of the First Plaintiff, who are the First and Second Cross-Defendants. It is brought under s588FGA of the Corporations Law, which in its terms is dependent upon there being an "order under s588FF" whereby an "unfair preference" is recovered. 4 The argument raised by the Cross-Defendants is that, being orders against "the Plaintiffs", namely not only against the company in liquidation but also the liquidator, the inclusion of the latter is fatal to the orders being "under s588FF". This is because, it is said, s588FF no longer provides for recovery in favour of the liquidator, but only in favour of the company in liquidation. SALIENT FACTS 5 How the consent orders were taken out appears from the affidavit of Emma Whan dated 20 June 2000 for the Deputy Commissioner of Taxation as Cross-Claimant. 6 There exists a fixed and floating charge given pre-liquidation by the First Plaintiff company. It would by its terms attach to the proceeds of recovery of any asset, save as affected by the application of bankruptcy law on liquidation of the First Plaintiff. 7 The Cross-Defendants were two directors of the First Plaintiff. According to ASIC records, this was in the case of the First Cross-Defendant till the date of liquidation and in the case of the Second Cross-Defendant till 23 April 1996. The date of liquidation was 10 July 1996. CONTENTIONS OF THE PARTIES 8 The Cross-Defendants resist an indemnity order pursuant to s588FGA and in that context put these contentions. 9 They primarily contend that because the form of consent order requires the party receiving the unfair preference to pay "to the Plaintiffs", that is to say to both the company in liquidation and the liquidator, this is an order which does not meet the description of an order "under s588FF". The consequence is said to be that the indemnity under s588FGA could not then be sought. 10 The issues between the parties are crystallised by the Cross-Claimant's Notice of Motion of 9 June 2000 which relevantly seeks the following orders: "1. Orders 1 and 2 of the orders made in these proceedings on 18 May 2000 by Registrar Berecry be stayed pending final determination of this notice of motion; 2. The validity of order 1 of the orders made in these proceedings on 18 May 2000, as an order pursuant to section 588FF of the Corporations Law, be determined as a separate question prior to the hearing of the cross-claim; 3. In the event that the Court determines that order 1 of the orders made in these proceedings on 18 May 2000 is not an order pursuant to section 588FF of the Corporations Law, that orders 1 and 2 of the said orders be set aside or amended to comply with section 588FF;" 11 At one level, this might be said to constitute a summons for construction of a court order seeking a declaration as to its meaning. It also may be viewed as not so much controverting the proper construction of the orders, as attacking them on the basis that, being also against the liquidator, they for that fact alone fall outside the jurisdiction to make orders "under" s588FF. It is of course well-settled that on a conventional summons for construction a court can only construe the order. It cannot make the order it considers the original court should have made on the evidence. In that process, if ambiguity is found it is to be resolved by application of conventional rules of construction which direct attention to the forensic context in which the orders were made. See generally the note by Young J writing extra-judicially in 1998 72 ALJ 117-8 and the authorities there cited. That, as I explain, is the key to resolving the present issue along with an understanding of the changes wrought in 1993 to the Corporations Law as affecting the liquidation of companies. resolution of legal issues 12 The essence of the Cross-Defendant's attack on the validity of the order is based upon what might be thought, if correct, to be a surprising and completely unheralded change to well established principles of bankruptcy law as applicable to companies. Not only were preferences, now called "unfair preferences", no longer to be void against the liquidator, but, say the Cross-Defendants, an order directing payment both to the liquidator and the company in liquidation, or indeed even to the liquidator in that capacity was henceforth to be construed as either of no effect or, being of a superior court, capable of being set aside. This would be simply because the order for payment should have been only in favour of the company in liquidation. This radical change, if indeed it occurred, would have had to have taken place sub silentio when the other changes were made to the Corporations Law following the Harmer Report by the Corporate Law Reform Act 1992 effective on 23 June 1993. 13 That change was in relation to the previous regime exemplified by s565 of the Corporations Law as applicable immediately prior to that change. Section 565 is in the following terms: " SECTION 565 UNDUE PREFERENCE 565(1) [Certain payments etc. void as preference] A settlement, a conveyance or transfer of property, a charge on property, a payment made, or an obligation incurred, by a company that, if it had been made or incurred by a natural person, would, in the event of his or her becoming a bankrupt, be void as against the trustee in the bankruptcy, is, in the event of the company being wound up, void as against the liquidator. 565(2) [Relevant date] For the purposes of subsection (1), the date that corresponds with the date of presentation of the petition in bankruptcy in the case of a natural person is: (a) in the case of a winding up by the Court: (i) where, before the filing of the application for the winding up, a resolution has been passed by the company for winding up the company voluntarily — the date upon which the resolution to wind up the company voluntarily is passed; (ii) where the company is under official management at the time of the filing of the application for the winding up or had been under official management at any time within the period of 6 months before the filing of the application — the date of the commencement of the official management; or (iii) in any other case — the date of the filing of the application for the winding up; and (b) in the case of a voluntary winding up: (i) where the company is under official management at the time when the resolution to wind up the company voluntarily is passed or had been under official management at any time within the period of 6 months before the passing of that resolution — the date of the commencement of the official management; or (ii) in any other case — the date upon which the resolution to wind up the company voluntarily is passed. 565(3) [Date corresponding to date of bankruptcy] For the purposes of this section, the date that corresponds with the date on which a person becomes a bankrupt is the date on which the winding up of the company commences or is deemed to have commenced. 565(4) [Void transfers] Any transfer or assignment by a company of all its property to trustees for the benefit of all its creditors is void." 14 Comparing now the new Pt 5.7B of the Corporations Law, while significantly the application is still by the company's liquidator, the permitted orders provided for by s588FF(1)(a) are in these terms: "(a) an order directing a person to pay to the company an amount equal to some or all of the money that the company has paid under the transaction;" [emphasis added] 15 The remaining permitted orders are not presently relevant with the possible exception of that in para (c). 16 Thus it is contended that the order which s588FF contemplates in the present circumstances would be an order directing payment not to the liquidator and the company, but to the company alone. 17 The supposedly fatal flaw with the present orders is that they are in favour of both the liquidator and the company. 18 The short answer to this submission is to be found in the long established authority of N A Kratzman Pty Limited (in liquidation) v Tucker [No. 2] (1965-66) 123 CLR 295 in particular at 300-1 (explained further in Mineral & Chemical Traders Pty Ltd v T Tymczszyn Pty Ltd (in liq) and Anor (1994-5) 15 ACSR 398 at 416-7 per Santow J). There the High Court deals with the law as it had long stood since the 1930's. It affirmed that a charge that was not a specific one could not prevail over the trustee in bankruptcy or liquidator when monies were recovered by way of preference. The monies vested in the liquidator on behalf of the company rather than the chargee. 19 Significantly the orders made in Kratzman recognised that legal outcome by affirming that the monies were to be paid to the company in liquidation, not, be it noted, to the liquidator; see the trial judge at 296 and as made by the High Court at 304, where the reference is again to payment "to the respondent" being the company in liquidation. Thus even with the liquidation of companies governed by a regime that made voidness of preferences against the liquidator, the conventional order in relation to a recovered preference contemplated payment to the company; obviously a company in control of its liquidator who would then via the liquidator apply the money in accordance with the Kratzman principles for the benefit of unsecured creditors, not for the benefit of any chargee. 20 While the drafting of the present orders referred in the plural to the Plaintiffs, that drafting should be understood as being simply recognition, albeit not drafted with pellucid clarity, that the payment in question was recovered for the company though necessarily paid to the liquidator on behalf of the company. So understood, the orders meet the description of an order "under s588FF", for the purposes of s588FGA of the Corporations Law. That is how I conclude those orders should be understood in the forensic context in which made under a legislative regime which still governs the recovery of preferences by reference to the unaltered Kratzman principles. 21 Thus even to-day it would have been open to the court simply to make a declaration that the payment in question constituted an "unfair preference". Its voidability under Pt 5.7B would thus follow and could itself have been the subject of declaration. (In that regard I consider there is no difference in substance between the pre-1993 legislative wording declaring such payments void compared to the post-1993 wording treating them as voidable). Such a declaration may well amount to an order "under s588FF" provided there be a consequential order directing payment. For that purpose, it matters not whether it be in terms "to the company" alone or to the liquidator on behalf of the company, the latter being implicit in the plurality of the loose but understandable expression "to the plaintiffs". That plurality should be interpreted as an expression to be understood as embracing payment to the company via the liquidator. In a practical sense one would envisage such payment being made by payment into a liquidator's account for the company. It is thus in that sense a payment to the company, effected via the liquidator and subject to the normal incidents of liquidation. 22 It follows that the Cross-Claimant is successful in obtaining the orders that it seeks in its Notice of Motion. ORDERS 23 I make orders and declarations as follows: 1. Declaration that order 1 of the orders made in these proceedings on 18 May 2000 was an order "under s588FF" for the purposes of s588FGA(1) of the Corporations Law . 2. The costs of the cross-claim in the Notice of Motion of 9 June 2000 shall be paid by the First and Second Cross-Defendant. 3. I award the Second Plaintiff the sum of $500 for his costs. ********** Last Modified: 09/26/2000 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.