Rolling over bills under a pre-existing commercial bill acceptance facility does not create new post-liquidation liabilities entitled to priority as costs and expenses of winding up; the substance of the arrangement as a continuing pre-liquidation obligation will be examined.
Later decisions that cite K D Morris & Sons Pty Ltd (In Liq) v Bank of Queensland Ltd
Decisions cited by K D Morris & Sons Pty Ltd (In Liq) v Bank of Queensland Ltd
K. D. MORRIS & SONS PTY. LTD. (IN LIQ.) v. BANK OF QUEENSLAND LTD. [1980] HCA 20; (1980) 146
CLR 165
Companies
High Court of Australia
Stephen(1), Mason(2), Murphy(3), Aickin(4) and Wilson(1) JJ.
CATCHWORDS
Companies - Winding-up - Application of assets - Priorities - Liability under commercial bill facility - Arrangement between company and bank for rolling over bills - Renewal by liquidator - Bills drawn by company accepted by bank after commencement of winding-up - Whether pre-liquidation liabilities - Whether costs and expenses of winding-up - Companies Act, 1961 (Q.), ss. 236(1)(b), 292(1)(a).
HEARING
Sydney, 1979, August 8; 1980, July 24. 24:7:1980DECISION
1980, July 24.2. The Bank's facility gave to the Company for the next five years assured access to funds of up to $1 million. This was to be provided by the Bank's acceptance of accommodation bills of some 180 days' currency which the Company could immediately discount with Tricontinental, thus providing the Company with cash to the value of the bills, less discount. Every 180 days the bills would be "rolled over", new bills taking the place of those retired on maturity, thus providing continuity of finance to the Company so long as the facility continued to be provided by the Bank. (at p170)
3. The process of rolling over was, in outline, that shortly before the maturity date of bills the Bank would accept new bills drawn by the Company for a further term of 180 days. These Tricontinental would immediately discount, the proceeds being credited to the Company's account with the Bank. When, on maturity, the Bank paid to their holders the face value of the bills it had accepted, the proceeds of discounting, credited to the Company's account, would go towards reimbursing the Bank, the difference between proceeds and face value of the retired bills being made good by the Company. The result for the Company was that it effectively retained the use of the funds, less only the amounts successively lost with each discounting. Those amounts, together with the Bank's charges for the facility and for each roll over operation, represented the cost to the Company of procuring the funds of which it stood in need. (at p171)
4. For the Bank this mode of providing finance to the Company had the advantage that it involved no actual advance of funds to the Company; instead the moneys came from the discounter, Tricontinental, and ultimately from other operators in the commercial bill market to whom Tricontinental might in turn dispose of the bills. What the Bank supplied was ready acceptability of the Company's bills in the market-place. This it did by its acceptance of the bills and its resultant undertaking of liability to meet them on maturity. (at p171)
5. The Company would ultimately have to find, from other sources, the funds to which the Bank was giving it access. If the facility were not extended beyond its initial term of five years this would occur at the end of that term when the Company for the last time would have to put the Bank in funds to retire maturing bills, but on this occasion without having earlier received fresh bills accepted by the Bank and available to it for immediate discounting. (at p171)
6. Continuity in the acceptance of bills by the Bank, in their ready discounting by Tricontinental and in the funding of the Bank by the Company, so that the Bank might pay maturing bills, was essential to the satisfactory operation of the facility. Moreover the Bank required security from the Company lest there be default in funding by the Company. All this was provided for by agreements with the Bank and with Tricontinental, the Company mortgaging to the Bank a valuable tract of outer suburban land in Brisbane as security. (at p171)
7. Initially all went as planned. The Company availed itself of the whole of the $1 million which the facility provided for and bills were duly rolled over on maturity. However the Company, in common with the group of which it formed a part, soon encountered financial difficulties and on 28th October 1974, some fourteen months after the facility began to operate, a petition for its winding up was presented and provisional liquidators were appointed. (at p171)
8. The Bank, although holding security in respect of the liability which the Company would incur to it when the then current bills were paid by the Bank on maturity, did not choose, as it might have, to await that event and look to its mortgage security. It apparently shared with the Company's provisional liquidators the view that it was a bad time to attempt to sell the mortgaged land. Indeed the evidence suggests that despite its very considerable value the land was unsaleable in one lot in the depressed market conditions then prevailing. Instead a new agreement for continued rolling over of bills was negotiated between the Bank and the provisional liquidators and Tricontinental agreed to continue to discount bills accepted by the Bank. (at p172)
9. The then current bills were in two series of $1/2 million each, the first series being due to mature on 3rd February 1975. On 31st January 1975 an order was obtained from the Supreme Court of Queensland authorizing the provisional liquidators to take the various steps necessary to effect a rolling over of that series of bills and on maturity they were duly rolled over. (at p172)
10. On 24th February 1975 the Company was ordered to be wound up and thereafter, without benefit of further Court orders, bills continued to be rolled over on maturity until the facility was brought to an end in January 1976. In that month a series of bills maturing on 27th January 1976 were paid by the Bank on presentation. The Company was of course unable to reimburse the Bank in respect of this outgoing and the Bank debited the Company's account accordingly. (at p172)
11. It is in these circumstances that the Bank began its action against the Company in liquidation which has now led to this appeal. Instead of having recourse to its security, the Bank sought judgment for $1 million, due to it following its payment, as acceptor, of bills totalling that sum, which, as it pleaded, it had accepted at the Company's request, some maturing in January 1976 and some in March 1976. These bills had been drawn by one of the liquidators on behalf of the Company in July and September 1975 respectively in the course of effecting the latest rolling over of bills. It also sought in its action to recover acceptance fees, miscellaneous charges, interest and an amount described as further advances. Only the last, the further advances, call for comment: they represent the amount by which, on each rolling over of bills after liquidation, the discounted sum received by the liquidators and deposited with the Bank fell short of the amount paid out by the Bank on the then maturing bills. Whereas before liquidation such shortfalls were made good out of the Company's funds, they were, after liquidation, debited to its account with the Bank. In its action the Bank also sought declarations that the liquidators had properly incurred the total indebtedness sued for and that the Bank was entitled to payment of it, with interest, "in priority to all other unsecured debts pursuant to s. 292(1)(a) of the Companies Act 1961 to 1975". (at p172)
12. It is this last claim to relief which reflects what has been, in its
progress through the courts, the principal area of debate
in this case. That
is, whether or not the sum of $1 million, the origins of which we have
outlined above, is a cost or expense of
the winding up within s. 292(1)(a) of
the Companies Act. If it is the Bank will be entitled to payment of it in
priority to all unsecured
creditors of the Company. Section 292(1) of the
Act
provides:
"Subject to the provisions of this Act, in a winding up there shall be
paid in priority to all other unsecured debts -
(a) firstly, the costs and expenses of the winding up including the taxed
costs of a petitioner payable under section two hundred
and twenty-four,
the remuneration of the liquidator and the costs of any audit carried out
pursuant to section two hundred and eighty-one."
At first instance Connolly J. (1978) 3 ACLR 870 denied the Bank such priority
in respect of the sum of $1 million but he was reversed
on appeal to the Full
Court (1979) Qd R 483 , from whose order the Company now appeals to this
Court. (at p173)
13. These being the circumstances of the case, it is useful to view, against the background of s. 292(1)(a), the nature of the Company's indebtedness of $1 million owed to the Bank. As already mentioned, that indebtedness originated in the satisfaction of the Company's need for funds in 1973, a need which the Bank was able to satisfy by associating its own creditworthiness with the proposed fund-raising by the Company on the Australian commercial bill market: by becoming acceptor of the Company's bills the Bank allowed the Company readily to convert accommodation bills into discounted cash, the market relying upon the Bank's acceptance as an assurance that the bills would be met on maturity. (at p173)
14. It is true that the Company's present indebtedness to the Bank was immediately attributable to the Company's failure to idemnify the Bank after it had paid, as acceptor, the last series of bills on their maturity dates in 1976 and it is in that way that the Bank now frames its claim to the sum of $1 million. But to regard the matter in this light is to treat the Company's liability to the Bank as if it first arose at earliest when that last series of bills was accepted by the Bank. This seems to us to be erroneous. This was no case of the occasional acceptance of bills by the Bank in a number of transactions each one unconnected with the others. It was, rather, a case of acceptances by the Bank pursuant to a contractual obligation originally undertaken by it in 1973. It was essential to the whole concept of the Bank's commercial bill acceptance facility that there should be this continuity of obligation; without it the facility was denied its prime character, that of a means of providing to the Company over a period of years access to funds. (at p173)
15. The Bank's contractual obligation arose out of the concluded negotiations between it and the Company in the second half of 1973, which culminated in the acceptance on 30th August 1973 of the Bank's offer contained in its several letters written on various dates earlier in that month. That offer, once accepted, obliged the Bank to accept the Company's initial bills up to a maximum of $1 million and to go on accepting new replacement bills as existing bills matured and were retired (we ignore as presently irrelevant the Bank's cryptic reference in its main letter of offer to a "usual formal, annual review"). (at p174)
16. Once it availed itself of the facility the Company also became subject to a continuing obligation. That obligation was to put the Bank in funds in respect of the Bank's payment of bills on their maturity. Whether, as a matter of interpretation, the Company's obligation was to do this on each occasion by rolling over bills or whether it was free at any time to discontinue reliance upon replacement bills, instead putting the Bank in funds from other sources, does not matter. What is significant is that, so long as the Company had bills outstanding which the Bank had accepted, as it in fact had at all times, this obligation to the Bank subsisted. It was not a contingent liability but an existing liability, which required the making of a series of payments at particular dates, dictated by the cycle of 180 days fixed by the bills. Once the facility was availed of by the Company it was inevitable that, either at the end of its five year term or upon the sooner ending of the facility, the Company would become presently indebted to the Bank in respect of the latter's payment of bills on maturity. This happened in 1976 but would in any event have occurred in 1978 had the term of the facility not been extended beyond its initial term of five years. (at p174)
17. So long as the Company continued, as it in fact did, to use the roll over mechanism to discharge its periodic obligation to the Bank it was continually subject to this liability. When, during the 180 day cycle, the date arrived for it to put the Bank in funds, the liability became a present liability calling for present performance. Otherwise the liability was a present liability but calling for performance only in the future. Performance of it on the occasion of a roll over did not bring the continuing liability to an end because, the facility still being availed of, there were necessarily bills still outstanding in respect of the retirement of which, pursuant to the terms of the arrangement, the Company was bound to put the Bank in funds. (at p174)
18. This clearly enough appears from the way in which the roll over procedure operated. To permit the Company to put the Bank in funds on the maturity dates of bills, new bills were accepted by the Bank and discounted in time to allow the proceeds of discounting to be available to retire the old bills. Thus there were always bills outstanding in respect of which the Company had, under the agreement, accepted liability to the Bank to put it in funds on their maturity. (at p175)
19. Had the Bank been only a casual acceptor of the Company's bills, bound by no agreement to accept them and only doing so in each case as an isolated transaction, there would be no continuing liability. Instead there would be a series of unconnected relationships whereby the Bank became surety for the Company for particular accommodation bills and the Company assumed a liability to the Bank accordingly, which liability would be discharged when the Company put the Bank in funds to retire the bills on maturity. The acceptance of each new bill would give rise to a fresh liability. (at p175)
20. But that is not the present case, nor could it be if the commercial bill acceptance facility were to serve the Company's purpose as a reliable source of medium term finance. To achieve that purpose it was essential that there should be an agreement under which the Bank accepted obligations. It was likewise under that agreement that the Company's obligations arose once it exercised its rights under that agreement. (at p175)
21. We have not, as yet, referred to the effect of the making of a new agreement by the provisional liquidators, on behalf of the Company, with the Bank in January 1975. On 31st January 1975, shortly before maturity date of the last series of bills drawn by the Company before presentation of the winding up petition, a new agreement was entered into, providing, as before, for commercial bill acceptance facilities for the Company. That new agreement differed from the agreement of 1973 only in that, realistically, it no longer required the Company to make good out of its own funds the shortfall between face value of bills and their discounted proceeds; instead the Bank would, in effect, provide overdraft accommodation in respect of that shortfall. But while the terms of the agreement were much the same, the circumstances in which it was to operate were marked by one important difference, quite apart from the fact that the Company was now under threat of liquidation. This was that the facility came into existence at a time when the Company was already subject to a continuing liability to the Bank such as we have already described: accommodation bills were outstanding of which the Bank was acceptor. Unlike the position in 1973, the Company was not seeking for the first time to raise additional funds, it was endeavouring to postpone the termination of the existing funding arrangements. Since the Bank took the view that it was no longer obliged to accept the Company's bills, this required for its attainment some fresh assent by the Bank. (at p175)
22. Accordingly, although this agreement of January 1975, made after presentation of the winding up petition, was in substitution for the original agreement of August 1973, it did no more than provide a means of prolonging the already established cyclical character of the liability of the Company to the Bank on new terms which took account of the now insolvent nature of the Company. (at p176)
23. To regard any of the several occasions upon which, after presentation of the petition, the Company became liable to put the Bank in funds to meet the approaching maturity dates of bills as involving the incurring of some new liability of $1 million to the Bank appears to us to mistake the true position. As Connolly J. said (1978) 3 ACLR, at p 875 , the effect of such a view "is that liquidators may discharge in full a liability of the company substituting a new liability of the same value as an expense of the liquidation with absolute priority. Such a startling proposition would require compelling authority. It is wholly inconsistent with the fundamental principles of insolvency administration. It is only possible to reach this position by regarding each issue of bills in isolation." (at p176)
24. In Re Bairnsdale Food Products Ltd. (In liq.) [1948] VicLawRp 45; (1948) VLR 264 Fullagar J. applied "the ancient axiom that equity regards the substance rather than the form" to the case of the powers of a liquidator in the advantageous realization of a company's assets (1948) VLR, at p 268 . His Honour treated what at first sight seemed to be an unauthorized purchase of property by a liquidator as no more than an integral part of the overall process of disposing of the company's assets by sale [1948] VicLawRp 45; (1948) VLR 264 : he was able to do so because he held that "the contract of purchase is not to be viewed as an isolated transaction", but as associated with a quite distinct arrangement made for the resale of the property to a third party, the two forming one whole (1948) VLR, at p 267 . In the quite different circumstances of the present case we too would pay regard to substance and would view the matter as an entire transaction, involving a liability incurred in 1973 and subsisting thereafter. (at p176)
25. Connolly J. was aided in arriving at his conclusion that "the rolling over operations which are part of a bill line facility cannot be regarded in isolation" by an analogy which he perceived in this Court's approach to allegedly preferential payments to creditors in Richardson v. Commercial Banking Company of Sydney Ltd. [1952] HCA 8; (1952) 85 CLR 110 . With respect, we would adopt all that his Honour has said in this regard. The analogy proves to be close. At first sight one sees, perhaps, only a question of related subject-matter, each being concerned with the winding up of companies and each thus falling within that jurisdiction in equity which the Court of Chancery gained as its domain, wholly exclusive of the courts of bankruptcy, in the 1850s: Gower, Modern Company Law, 3rd ed. (1969),p. 44. However, each can also be seen to be concerned with the interests of creditors in a winding up: just as the interest of creditors generally require that no one creditor of an insolvent company be improperly preferred over others, so too they require that a liquidator, if he is to undertake the proper realization of available assets, should be able to incur liabilities in respect of his costs and expenses in the knowledge that those liabilities will have priority over all other calls on the assets available to unsecured creditors. Moreover, each can involve pre-liquidation indebtedness of the company which, after liquidation, becomes the subject of some post-liquidation dealing said to effect unsecured creditors generally: running accounts and financing arrangements like that here in question provide instances. In each the question will be whether a particular post-liquidation dealing, as, for instance, a payment claimed to be a preference or the incurring of a liability said to be a cost or expense of the winding up, is to be treated as a distinct transaction or is, rather, to be characterized by reference to one entire transaction having its origin before commencement of the winding up and of which the payment or liability incurred is but a part. (at p177)
26. Connolly J. in his reasons for judgment, in addition to extensive citation from Richardson's Case, also referred at some length to the judgment of Barwick C.J. in another case concerned with preferential payments to creditors, Queensland Bacon Pty. Ltd. v. Rees [1966] HCA 21; (1966) 115 CLR 266, at p 283 : these citations we need not repeat. It is enough for us to recall that in each of these cases reference is made to the circumstances in which it may be both proper and necessary to consider particular payments not in isolation but as "part of the overall series of not unrelated transactions recorded in the running account" - per Barwick C.J. (1966) 115 CLR, at p 282 . Connolly J. concluded that the object of the recurring payments made by the Company to the Bank and, indeed, "of the roll over operations in their entirety, was to ensure the continuance not merely of the relationship of the parties but of the precise obligation". Accordingly, what occurred involved no payment in full of the Bank within s. 236(1)(b) of the Act, but rather "the purchase of a further deferment of the day when the contingent liability became absolute", and equally no undertaking of an obligation of $1 million by the liquidators so as to become a cost or expense of the winding up. Instead the liquidators were "doing no more than buying time. The liability of the company to the bank for this face value of the bills which became absolute early in 1976 was the very liability which had been contemplated from the inception of the arrangement". (at p178)
27. That individual bills of exchange do not necessarily reflect on their face the true transaction which they represent is inherent in their nature. The very definition of an accommodation party in s. 33(1) of the Bills of Exchange Act 1909 (Cth) refers to that party's "purpose in lending his name to some other party". The relationship between the accommodation party, here the Bank, and the accommodated party, the Company, is that of surety and principal - Halsbury's Laws of England, 4th ed., vol. 4, par. 383 - and the terms of that relationship will depend upon the arrangement between them underlying the drawing and acceptance of the bills. This is in itself sufficient reason to turn to that arrangement in determining whether in paying the last bills in the cycle the liquidators were incurring costs or expenses of winding up. It was such an approach which led Connolly J. to his conclusion, whereas the Full Court tended, we think, rather to look at the bills on their face in coming to its decision to reverse the judgment at first instance. That the approach of Connolly J. was correct happens, we think, to have been made explicit by the parties in this case. By prior arrangement between them each group of bills drawn by the Company, when submitted to the Bank, was to be, and in fact was, accompanied by a written request for their acceptance which expressly acknowledged that the acceptances should be "in accordance with the terms and conditions related to the provision of the facility by your bank". Each rolling over of bills was thus recognized as no more than the exercise of rights and the performance of obligations conferred and incurred at the time of the grant of the facility. (at p178)
28. In some, although by no means all, respects the position in this case resembles that of an instalment contract under which distinct future deliveries of goods are to be made. The true view of such an arrangement is that there is "a single contract, not a complex of as many contracts as there are instalments under it": Maple Flock Co. Ltd. v. Universal Furniture Products (Wembley) Ltd. (1934) 1 KB 148, at p 154 , cited by Lord Wright in Ross T. Smyth & Co. Ltd. v. T.D. Bailey, Son & Co. (1940) 3 All ER 60, at p 73 . In the present case, for instalment deliveries were substituted the periodic roll over operations and their accompanying drawing and accepting of bills. (at p179)
29. Concluding as we do that the sum of $1 million was not incurred after the commencement of the winding up as a cost or expense but was a pre-liquidation liability of the Company, it is unnecessary for us to consider the effect, if any, of the liquidators' failure to obtain the sanction of the Court to the rolling over of any but the first series of bills maturing after presentation of the petition for winding up. We likewise need not consider the submission as to estoppel made on behalf of the appellant. (at p179)
30. We would allow the appeal and restore the order of the learned trial judge. (at p179)
MASON J. I am in agreement with the reasons for judgment prepared by Aickin J. and, accordingly, I would dismiss the appeal with costs. (at p179)
MURPHY J. Section 236(1) of the Companies Act, 1961 (Q.), as amended, provides that the liquidator may, with the authority either of the Court of a committee of inspection, perform various specified acts, including carry on the business of the company, pay any class of creditors in full, or make any compromise or arrangment with creditors or persons having any present or future, certain or contingent claim. Section 236(2) provides that the liquidator may perform various other specified acts, including draw, accept, make and indorse any bill of exchange or promissory note in the name and on behalf of the company, and a general provision that he may do all such other things as are necessary for winding up the affairs of the company and distributing its assets. (at p179)
2. Section 236(1) means that a liquidator may, only with the authority of the Court or the committee of inspection, exercise the powers referred to (see Rendall v. Conroy (1897) 8 QLJ 89, at p 91 , Chubb J.). He cannot, under the specific or general powers in s. 236(2), do what is not permitted, except with authority under s. 236(1). Thus, if a liquidator enters into a compromise or arrangement without authority, contrary to s. 236(1), he cannot implement it by reference to powers under s. 236(2). (at p179)
3. The new agreement for the bills facility was a compromise or arrangement within the meaning of s. 236(1) (see In re Guardian Assurance Co. (1917) 1 Ch 431 ; In re New Zealand Investment Trust Ltd. (1941) NZLR 460 ) without the required authority of the Court or committee of inspection. Further, each roll over of the bills was a compromise or arrangement. An order was obtained from the Court on 31st January 1975, which authorized the provisional liquidators to "roll over" the series of bills due to mature on 3rd February 1975; accordingly, the Company, by the provisional liquidators, drew a fresh set of bills on the respondent, payable to Tricontinental and accepted by the respondent on 3rd February 1975 for a total of $500,000, maturing on 31st July 1975. The second set of bills, which matured on 6th March 1975, were rolled over by the liquidators (not now provisional) without authority of the Court or committee by a fresh series maturing on 2nd September 1975. When these two sets of bills matured on 31st July and 2nd September 1975, they were rolled over, without authority of the Court or committee, with maturity dates, 27th January and 1st March 1976. (at p180)
4. Such an unauthorized compromise or arrangement has been held to be binding on the parties to it (see In re Stuckey & Co.; Ex parte Williams (1918) QWN 35 ; Dublin City Distillery (Great Brunswick Street, Dublin) Ltd. v. Doherty (1914) AC 823 ; In re Associated Travel Leisure and Services Ltd. (In liq.) (1978) 1 WLR 547; (1978) 2 All ER 273 ; Cyclemakers' Co-operative Supply Co. v. Sims (1903) 1 KB 477 but in In re Stuckey, Chubb J. held that it was not binding on shareholders who were not parties. In my opinion, payment under such an unauthorized arrangement is not a cost or expense of the winding-up which, under s. 292(1) of the Companies Act, is payable in priority to unsecured debts, other than those referred to in the sub-section. To hold otherwise would be to defeat the purpose of s. 236(1). (at p180)
5. Promissory estoppel. The Bank contended it was entitled to the benefit of promissory estoppel, and relied upon cases such as Evenden v. Guildford City Association Football Club Ltd. (1975) 1 QB 917 ; Bank Negara Indonesia v. Hoalim (1973) 2 MLJ 3 . In those cases, the parties were in unequal positions, but here we are concerned with commercial dealings between a bank and a liquidator, In any event, there is no factual basis for any estoppel. (at p180)
6. The appeal should be allowed. (at p180)
AICKIN J. The transactions out of which the present appeal arose began with
an approach made by Keith Morris Construction Ltd, (which
was the parent
company of the appellant, K.D. Morris and Sons Pty. Ltd.) to Tricontinental
Corporation Ltd. ("Tricontinental"), a
merchant banker for what it called
"long term development loans" and a "five year facility", which was confirmed
in its letter to
Tricontinental of 24th July 1973. Keith Morris Construction
Ltd. ("K.M.C.") wrote again on 3rd August 1973 after a further discussion
which had concerned a financial facility. The letter referred to "a possible
$2,000,000 facility" and suggested that the security
to cover such facility
should comprise two items, the first being a property near Brisbane called
"The Gap property". It was said
to be "future subdivisional land", and was
described as a "long term 5 to 10 year venture". The property had been
purchased for $1.75
million in February 1973 at K.M.C.'s own valuation. The
other suggested security was a commercial building contract held by K.M.C.
and
due to commence in October 1973. At about that time Tricontinental had been in
touch with the respondent, Bank of Queensland
Ltd. ("the Bank"). On 7th August
1973 the General Manager of the Bank wrote to Tri-continental concerning the
"Application for Commercial
Bill (Acceptance) Facility" by K.M.C. for
"$1,000,000: Rollover Facilities for 5 Years". The letter stated:
"With regard to your discussions with the Chief Accountant, you have
offered the bank $1,000,000 of the total $2,000,000 facility
required by Keith
Morris Construction Limited. I understand our part of the facility would be by
direct arrangement with Keith Morris
Construction Limited for a commercial
bill (acceptance) limit secured direct to the bank with freehold, and with
roll over
facilities to provide an all-up five year term.
I further understand Tricontinental Corporation Limited will give the bank
a written undertaking to provide discount facilities
for the whole period, but
would give the bank opportunity to discount at then ruling market rates up
to $250,000 at any one time."
The letter set out the fees which the Bank expected to receive and referred to
security and to The Gap property. A number of practical
details were dealt
with in the letter concerning stamp duty and the like. The Bank's letter
included the following statement:
"As the proposal under out consideration is an acceptance facility,
maturing bills will be presented to this bank for payment.
It will
therefore be necessary for applicant company to open a current account for
the purpose.
Your office and mine will need to arrange the mechanics from the outset to
ensure replacement bills are drawn and stamped in
time to enable discount
proceeds to be available in the account (together with provision of funds
equivalent to discount interest)
to meet maturing bills." (at p181)
2. On 14th August 1973 the Bank wrote to K.M.C. stating that it had been
informed by Tricontinental that K.M.C. was seeking "bill
facilities" and that
the Bank had been invited to consider one-half of K.M.C.'s requirements. The
letter stated that approval: "has
been given on the bank's usual terms and
conditions to grant Keith Morris Construction Limited a commercial bill
(acceptance) limit
of $1,000,000 (one million dollars) for the required term
of five years; subject to the following normal general conditions". It
is not
necessary to set out all the conditions but some are material. Condition 4
required as security a registed mortgage over The
Gap property. Condition 5
required "the written undertaking of Tricontinental Corporation Limited to
provide discount facilities
for the full term of five years saving that the
Bank shall at its discretion have opportunity itself to discount bills drawn
under
the facility to the extent of $250,000 per $1,000,000 face value".
Condition 6 provided that the bills were to be limited to 190
days (later
changed to 180 days). Condition 7 provided that the face value of individual
bills should not exceed $2000,000. Conditions
10 and 11 were as follows:
"10. Keith Morris Construction Limited will need to open a current
account with this Bank. As bills will be accepted by this
bank they will
become payable at this bank upon maturity and the account is necessary for
that purpose, to receive discount proceeds
(see 11) and to meet line and
acceptance fees (see below). Whilst it is fully recognised Keith Morris
Construction Limited has other
bankers for the normal course of business,
it is hoped some balances will be maintained by your company with this
bank in reciprocation
for the assistance hereby granted. Requisite
operating authority is enclosed for completion and return.
11. Keith Morris Construction Limited will two weeks prior to each
maturity date prepare replacement bills so that their discount
proceeds
will be available in the current account of Keith Morris Construction
Limited with Bank of Queensland Limited (together
with at least the amount
of discount interest from the resources of Keith Morris Construction
Limited) in ample time to meet the
face value commitment of maturing
bills." (at p182)
3. The remainder of the letter dealt with detailed arrangements with respect
to fees and the like as well as stamp duty, and concluded
by saying "You will
be pleased to know, as a bill facility is involved rather than an advance in
the Bank's books, the Bank's security
documents need only be stamped to a
nominal $100 and consequential stamp duty (allowing for twenty-five cents on
the duplicate document)
will be restricted to 75 cents". (at p183)
4. On 16th August the Bank wrote to Tricontinental informing it of the Bank's
approval of the offer of a "facility" to K.M.C. as
set out in its letter of
14th August 1973. The Bank's letter also stated "With regard to General
Condition 5, may we please have
your Company's written undertaking, into which
we ask you to incorporate an acknowledgment that discount proceeds will be
credited
to the account of Keith Morris Construction Limited, with Bank of
Queensland Limited". On 17th August Tricontinental wrote to K.M.C.
as
follows:
"Referring to our recent discussions concerning your company's future
financial requirements I am pleased to submit the following
for your
Board's consideration.
We have enclosed a letter of acceptance from the Bank of Queensland to
an invitation by ourselves for them to provide your
company with a $1 million
acceptance facility. It was pleasing to note the promptness by which the
Bank agreed to this matter.
The details in the Bank's letter are self-explanatory, however, in
summary the arrangement would be as follows:
That the Bank of Queensland would provide a $1 million acceptance
facility for a period of five years based on certain security
to be arranged.
Tricontinental in turn will arrange the details, the drawing of the bills by
yourself, the arranging of stamp duty
and the guarantee to the Bank of
Queensland of a five year discounting facility for these bills. As regards
the cost, the
initial Bank of Queensland charges total 1.5% per annum.
In addition there would be the following charges by Tricontinental:above the market rate for Bank Accepted Bills of Exchange plus incidental costs, notably the cost of stamp duty.
a an 0.25% management fee
b an 0.5% guaranteed discount facility
c incidental charges covering out of pocket expenses by Tricontinental.
The total cost of this facility initially would, therefore, be 2.25%
Thank you for permitting us to place this submission before you."As a result of further discussions the Bank wrote to K.M.C. on 23rd August 1973 varying some of the details of the arrangements, particularly those dealing with fees to be paid and the provision of a valuation of the security. (at p184)
5. On 30th August 1973 a formal application was lodged by the Company with the Bank for a "commercial bill (acceptance) facility" on a standard bank form, the precise terms of which are not material, it being clear that the relationship between the Company, the Bank and Tricontinental was defined in the correspondence to which I have referred. (at p184)
6. On 30th August 1973 K.M.C. wrote to the Bank as follows:
"RE: COMMERCIAL BILL (ACCEPTANCE) FACILITY - $1,000,00014th August, 1973, 23rd August, 1973 and 27th August, 1973 and the general conditions contained therein are accepted by this Company and in accordance with your agreement given today, will be taken out in the name of our wholly owned subsidiary, K.D.Morris & Sons Pty. Ltd.
The offer of the $1,000,000 facility outlined in your letters dated the
7. On 6th February 1974 Tricontinental wrote to the Bank as follows:
"This is to confirm that Tricontinental Corporation Limited will provide
a discount facility for Bills of Exchange drawn by
K.D. Morris and Sons
Pty Ltd., and accepted by the Bank of Queensland. The facility will be for
$1,000,000.00 for a term of 5 years
saving that the Bank of Queensland
shall at its discretion have opportunity itself to discount bills drawn
under the facility to
the extent of $250,000.00 per $1,000,000.00 face
value." (at p184)
8. The Company's first use of this commercial bill acceptance facility was on
8th February 1974 when it wrote to the Bank as follows:
"We hereby request your bank to accept Commercial Bills detailed in the
schedule following and submitted herewith drawn by
K.D. Morris & Sons Pty.
Ltd. for a total of $500,000.00 (Five Hundred Thousand dollars), and all
maturing on 7th August, 1974.
In
the bank agreeing tt accept the within bills,
we hereby acknowledge that the said acceptances will be in accordance with
the
terms and conditions related to the provision of the facility of your
bank and this letter shall be sufficient authority for
you to charge the
account (or any of them) of K.D. Morris & Sons Pty. Ltd. with your bank
with any amount whether more
or
less than the amounts stated herein which
the bank may be called upon to pay or which the bank in its discretion may
pay
in connection with the said bill(s), together with interest thereon
and all costs charges and expenses in connection therewith
and also to
debit our said account(s) from time to time with the bank's usual charges
in respect of the said facility and the
said acceptance(s).
SCHEDULEwill effect discounting in terms of arrangements. Discount proceeds are to be credited to our account with your bank."
Bill Number(s) Payee Face Value
2746 Tricontinental Corporation Limited $100,000
2750 Tricontinental Corporation Limited $100,000
3251 Tricontinental Corporation Limited $100,000
3252 Tricontinental Corporation Limited $100,000
3253 Tricontinental Corporation Limited $100,000
After duty stamping by us the bills will be returned to your bank which
9. I refer to subsequent letters in this form as "standard form" letters, the form having in fact been provided by the Bank. On 12th March 1974 a standard form letter was sent by the Company to the Bank in respect of four commercial bills payable to Tricontinental for $100,000 and two bills for $50,000 maturing on 10th June 1974. Such bills were referred to as the beginning of the "second series". (at p185)
10. On 10th June 1974 the Company sent to the Bank a standard form letter in respect of seven commercial bills having a face value, four at $100,000, one at $50,000 and two at $25,000, all maturing on 9th September 1974. (at p185)
11. On 7th August 1974 the Company wrote to the Bank as follows:
"We attach our cheque for $43,034-24 for deposit to our account No.
10-13307. This payment represents amount required to cover
$500,000 of
bank accepted Bills maturing today, together with an amount of $3,082-19
representing bank acceptance fee at 1.25% on
the additional $500,000 of Bills
which we are now drawing.
We are advised by Tricontinental Corporation Limited that they shall
deposit $460,047-95 to our account." (at p185)
12. The exhibits in evidence do not include a request in a standard form
letter in respect of the bills referred to in this letter
but there is no
reason to suppose that one was not sent. The sum of $460,047-95 is plainly
enough the discounted value paid by Tricontinental
for bills drawn that day to
mature on 3rd February 1975. (at p186)
13. On 15th August 1974 the Bank wrote to the Company as follows:
"We refer to the above facility and wish to remind you that commercial
bills amounting to $500,000 are due to mature on the
9th September, 1974.
Would you please therefore arrange for fresh bills to be executed and
forward same together with the usual request authority
to this office as soon
as possible." (at p186)
14. On 6th September 1974 the Company wrote to the Bank a standard form
letter with respect to six commercial bills of exchange
payable to
Tricontinental, four at $100,000 and two at $50,000, all maturing on 6th March
1975. (at p186)
15. On 28th October 1974 the Company presented its own petition for winding
up and on the same day Mr. J.R. Rees and Mr. L.G. Rees
were appointed
provisional liquidators by the Supreme Court of Queensland. On 30th October
the Bank wrote to the solicitors acting
for the provisional liquidators as
follows:
"K.D. MORRIS & SONS PTY. LTD.informed you that we have received no formal advice that control of the company was in the hands of Mr. Lloyd G. Rees as liquidator.
REPORTED IN LIQUIDATION.
Reference is made to our telephone conversation this morning when we
Certificate of Title Volume FolioMorris & Sons Pty. Ltd.
- 4851 17
- 4647 137
- 4647 136
171569 1039 59
705568 3372 58
705569 3372 59
706011 3374 1
2. Guarantee by Keith Morris Construction Limited in favour of K.D.
Maturity Total Amountprovided for continuity of the facility for at least five years from date of offer (our letter 14th August 1973) providing Tricontinental Corporation Limited undertook to provide discount facilities for the same period.
3rd February 1975 $500,000
6th March 1975 $500,000
Amongst other things the terms under which the facility was granted
16. On 3rd January 1975 the Bank wrote to the provisional liquidators as
follows:
"We refer to the Bank's arrangement to make available to K.D. Morris &
Sons Pty. Ltd. a commercial bill (acceptance) facility
up to an amount of
$1,000,000-00 evidenced by that company's letter to the Bank dated 30th
August, 1973 and the Bank's reply of the
1st September, 1973. Since the
appointment of the provisional liquidator in respect of K.D. Morris & Sons
Pty. Ltd. we have had
discussions
with your office regarding the
possibility of the provisional liquidator rolling over after their
respective maturities
the bills
presently drawn by K.D. Morris & Sons Pty.
Ltd.
Any such arrangement would be by way of separate contract between the
Bank and the provisional liquidator and if the provisional
liquidator
wishes to pursue the matter we ask that you make appropriate application
to the Bank.
In the meantime, we point out that the appointment of the provisional
liquidator terminates the previous arrangement between
the Bank and K.D.
Morris & Sons Pty. Ltd. with regard to the continuance of the facility and we
must inform you that in the absence
of separate agreement with the provisional
liquidator upon the maturity of the present bills if they are not duly paid
the Bank will
be obliged to consider its legal position with a view to
ensuring recovery." (at p187)
17. On 29th January 1975 the solicitors for the provisional liquidators wrote
to the solicitors for the Bank referring to discussions
which had taken place
concerning the proposed roll over of the bills due to mature on 3rd February
1975. The letters stated that
they agreed that the proposed transaction should
be sanctioned by the Court before being implemented. The letter then asked the
Bank's
solicitors to consider a draft summons and affidavit in support of an
application for the Court's approval, and pointed out that
the application
related only to the series of bills maturing on 3rd February 1975. The letter
stated "The reason for confining the
application to the first series at this
stage is that the winding up petition is to come before the Court on 14th
February and at
the moment it cannot be stated what the fate of the petition
will be on that date." (at p188)
18. On 31st January 1975 the Supreme Court of Queensland made an order that
the provisional liquidators be at liberty:
"in the exercise of their powers as Provisional Liquidators of the
company -
(i) to draw in the name and on behalf of the company a series of Bills of
Exchange in such denominations as they shall determine
to a total value of not
more than $500,000 (five hundred thousand dollars) payable 180 (one hundred
and eighty) days from the date
of drawing the same.
(ii) to have the said Bills of Exchange accepted by the Bank of Queensland
Limited.
(iii) to have the said Bills of Exchange when so drawn and accepted
discounted upon the best basis reasonably obtainable according
to current
market conditions for the discounting of such Bills of Exchange in order
to raise monies for the use of the company.
(iv) to pay and apply the monies so raised towards the payment of the
liability of the company in the total sum of $500,000 upon
a current
series of similar Bills of Exchange drawn by the company in the month of
August 1974 which series of Bills of Exchange
is due to mature for payment
on 3rd February, 1975.
(v) to borrow from the Bank of Queensland Limited upon the security of
Bill of Mortgage No. E662461 previously granted by the
company in favour
of the said bank and registered in the office of the Registrar of Titles
at Brisbane such further sums of money
as may be requisite to pay the said
sum of $500,000 in satisfaction of the said current series of Bills of
Exchange after deduction
therefrom of the net funds realized upon
discounting of the said new series of Bills of Exchange and in addition
the costs charges
and expenses payable by the company as fees or other
outgoings in relation to the drawing acceptance stamping and discounting
of
the new series of Bills of Exchange." (at p188)
19. On 31st January 1975 the Bank wrote to the provisional liquidators a
letter which began as follows:
"Following the Supreme Court ruling empowering the provisional
liquidators of K.D. Morris & Sons Pty. Ltd. to negotiate
with
this Bank
for a Commercial Bill (Acceptance) Facility of $500,000 to enable
provisional liquidators to retire bills drawn by
the
Company maturing on
the 3rd February 1975, the Bank has pleasure in offering to you a
Commercial Bill (Acceptance) Limit of $500,000,
for a term not exceeding
five years and subject to the following general conditions:
(1) Completion of formal application for establishment of bill limit
(Attachment A).
(2) Security for the facility to be by way of existing Registered Mortgage
No. E662461 given by K.D. Morris & Sons Pty. Ltd.,
over freehold land at
the Gap, such security presently held by the Bank in support of Commercial
Bill (Acceptance) Limit of $1,000,000
on the Company's behalf.
(3) A written undertaking by Tricontinental Corporation Limited to provide
discount facilities for a term of five years, excepting
the fact that the Bank
may at its' discretion have opportunity itself to discount bills drawn
under the facility to the extent
. . ." (at p189)
20. The letter goes on in terms virtually identical with those in the Bank's
letter to K.M.C. dated 14th August 1973 to which I
have already referred. The
variations between the original offer and the new offer are not material. On
31st January 1975 the Bank
also wrote to the provisional liquidators
confirming an agreement that the Bank would provide funds to meet the cost of
"discount
interest, stamp duty, bank fees and merchant bank fees" by way of
overdraft on the Company's account. On the same day the provisional
liquidators wrote to the Bank accepting on behalf of the Company the offer
contained in the Bank's letter. Also on the same day the
provisional
liquidators signed the formal application for a commercial bill (acceptance)
facility of $500,000, that document being
in the same form as that executed by
the Company on 30th August 1973. I refer to the agreement so made as the
"substituted agreement".
On 3rd February 1975 the provisional liquidators
wrote formally authorizing and requesting the Bank to allow overdraft
accommodation
to the extent of $30,000 to be secured by the existing
securities held by the Bank. (at p189)
21. On 6th February 1975 Tricontinental wrote to the provisional liquidators confirming that bills of exchange maturing on 31st July 1975 drawn by the Company and accepted by the Bank were discounted on 3rd February 1975, at the rate of 9.75 per cent. The letter stated that the discounted amount less stamp duty was $475,726.03 and that a cheque for that amount had been handed to the Bank on 3rd February 1975. On 12th February 1975 the Bank wrote to the provisional liquidators referring to the "roll over of bills which occured on 3rd February 1975", and stating that the proceeds received on discounting had been credited to the account and that the Bank's acceptance charge was $3,047.94. It also stated that an "Advance Account" had been established with a limit of $30,000. (at p189)
22. On 24th February 1975 the Supreme Court made an order on the Company's petition of 28th October 1974 that the Company be wound up and that the persons who had previously been the provisional liquidators should be the liquidators for the purposes of the winding up. (at p189)
23. On 5th March 1975 the liquidators signed a further application to the Bank for a commercial bill (acceptance) facility for $500,000 in the same form as the provisional liquidators had signed on 31st January 1975 but referring to bills in the other series "to enable Official Liquidators to retire Commercial Bills Face Value $500,000 maturing 2/9/75 drawn in the name of K.D. Morris and Sons Pty. Ltd. (in liquidation)". An application was signed on the same day in respect of an overdraft limit " for the purpose of: - meeting costs of discount interest, stamp duty, Bank & Merchant Bank fees in connection with drawing of Commercial Bills Face Value $500,000 on 6th March 1975". On 3rd March the liquidators on behalf of the Company sent to the Bank a standard form letter relating to bills dated 6th March 1975 for $500,000, all maturing on 2nd September 1975. (at p190)
24. The effect of that correspondence may be regarded as either extending the substituted agreement so that it related to a limit of $1 million rather than $500,000, or constituting a second agreement for a further $500,000, but whichever it be the result was the same. I refer to this arrangement and the "substituted agreement" as together being the "substituted agreements". (at p190)
25. On 10th March 1975 the Bank wrote to the liquidators confirming that the roll over of bills totalling $500,000 had taken place on that date and stating that the net proceeds of the discounting, namely $476,575.34, had been received and credited to the account, and that various charges had been debited to the overdraft account. (at p190)
26. On 3rd July 1975 the Bank wrote to the liquidators enclosing commercial bills to the value of $500,000 in the aggregate to be drawn by the liquidators, together with the standard form letters requesting acceptance and request for overdraft accommodation for signature by the liquidators. On 9th July 1975 the liquidators returned the various documents to the Bank duly executed. The bills were dated 31st July 1975 and matured on 27th January 1976. (at p190)
27. On 29th July 1975 Tricontinental wrote to the Bank stating that it was happy to continue the arrangement as set out in its letter of 6th February 1974 and that the commitment then undertaken continued in full force and effect. That arrangement was expressed to run for five years as from 6th February 1974, that is, for a shorter period than the Bank's offer to the provisional liquidators dated 31st January 1975. (at p190)
28. On 1st August 1975 the Bank wrote to the official liquidators advising that the net proceeds received from the new series of bills on 31st July 1975 was for $477,808.29. (at p190)
29. On 20th August 1975 the Bank again wrote to the official liquidators enclosing commercial bills dated 2nd September 1975 to the face value of $500,000 maturing on 1st March 1976, together with a request for further overdraft accommodation and a standard form letter requesting the Bank to accept the bills. Those bills and the other documents, all duly signed by the liquidators on behalf of the Company, were returned to the Bank on 26th August 1975. (at p191)
30. From time to time Tricontinental negotiated the bills to other operators in the commercial bill market at appropriate discounts. When the bills were presented to the Bank they were presented by whoever was the holder at the date of maturity. (at p191)
31. On 28th January 1976 the Bank wrote to the official liquidators referring
to commercial bills to the face value of $500,000
accepted by the Bank on 31st
July 1975 and due for payment on 27th January 1976. The letter went on to
say:
"As funds were not provided by the Company to enable payment of the
maturing bills in terms of arrangements, the Bank was obliged
as acceptor
of the bills to effect payment to the holders, debiting the company's
current account with the Bank (balance of which
now stands at $609,789-70
DR.) to obtain value. This development of course necessitates the
cancellation of the bill limit facility
extended by the Bank to K.D.
Morris and Sons Pty. Ltd. (In Liquidation), through arrangements made with
the Company's Liquidators.
For your information, a further set of bills also totalling $500,000 is
due for payment on 1 March 1976, representing the balance
of the $1M facility
made available by this Bank to the Company." (at p191)
32. On 4th March 1976 the Bank wrote a similar letter to the liquidators
concerning the commercial bills totalling $500,000 due
for payment on 1st
March 1976. (at p191)
33. On 30th March 1977 the Bank wrote to the liquidators claiming that the total of the indebtedness of the Company in respect of bills drawn by the liquidators, which together with various bank charges and interest totalled $1,276,556.25, constituted an expense of the winding up. The letter stated that all the items making up that total were incurred after the date of the winding up and that the Bank therefore could not prove for them. The letter also stated that the Company's account with the Bank was in credit at the commencement of the winding up. On 16th August 1977 the liquidators' solicitors rejected the claim that the amount was a post-liquidation debt and stated that the Bank was entitled to rely on whatever rights it had under its security but that, if any shortfall occurred on the realization of the security, it would not be a debt provable in the winding up nor a post-liquidation debt and that any shortfall would be payable only after all the creditors of the Company had been paid in full. (at p191)
34. On 2nd March 1978 the Supreme Court granted the Bank leave to institute proceedings against the Company for the recovery of the moneys in question and for a declaration that the amount owing formed part of the costs and expenses of the winding up, and was therefore payable in priority to other unsecured debts pursuant to s. 292(1)(a) of the Companies Act, 1961 to 1975 (Q.). (at p192)
35. Connolly J., the trial judge, found that the provisional liquidators were willing to have what he called the "line of credit" continue because they believed that the true value of the land was such that when the market recovered it would realize sufficient not only to pay up the Bank but to provide a surplus for unsecured creditors. Connolly J. said that he did not think it was beyond the powers of the liquidators to roll over the bills "as a means for deferring the falling due of an actual debt for $1,000,000.00 which would have led to the realization of the Bank's security over the land at The Gap to the prejudice, as it was thought, of the unsecured creditors" (1978) 3 ACLR, at p 874 . (at p192)
36. Connolly J. took the view that "from the time of the acceptance of the first set of bills in each series at the latest, the defendant" (the Company) "was under a contingent obligation to the bank in the sum of $500,000.00, which sum was to become due and payable when the bank, at the end of the five-year period ceased to accept replacement bills, or when the company within the five-year period failed to draw discount and pay over the proceeds of replacement bills whichever occurred the earlier" (1978) 3 ACLR, at pp 874-875 . He also said (1978) 3 ACLR, at p 875 , "It is important that this contingent obligation did not arise on the bills or out of the relationship of drawer and acceptor. It was inherent in the nature of the bill line acceptance facility. It was within the power of the defendant to defer for the full period of five years the time at which the obligation to pay became absolute", and that the rolling over operations could not be regarded in isolation. He treated the roll-over arrangements and the payment of various charges as a purchase of a "further deferment of the day when the contingent liability became absolute" (1978) 3 ACLR, at p 876 . (at p192)
37. In the result therefore Connolly J. held that only the amounts in respect of bank charges and like amounts debited to the Company's account on the roll over of the bills drawn by the liquidators on behalf of the Company were post-liquidation debts. He held that no part of the $1 million claimed by the Bank was a post-liquidation debt. (at p192)
38. Connolly J.'s decision was reversed by the Full Court (1979) Qd R 483 . It was there held that the obligation of the Company depended not on the availability of the facility but on its use by the Company in accordance with its terms and that accordingly that the drawing, accepting and paying of each set of bills should be regarded as a separate transaction. From that decision of the Full Court this appeal is brought by the Company. (at p193)
39. Connolly J. held that what he called the costs of delaying the obligation were a cost or expense of the winding up comparable with, for example, the payment of rent of premises occupied for the purpose of winding up a business after the commencement of winding up. On this basis he treated the costs of the rolling over of each set of bills as costs and expenses bona fide incurred by the liquidators. In this respect I think he was right as the cases reviewed by Burbury C.J. in Re Davis; Ex parte Hammond (1970) 16 FLR 402 clearly show. It was therefore necessary for him to consider the effect of there being no authority from the Court or the committee of inspection as referred to in s. 236 of the Companies Act. He examined the principal authorities and concluded that the transactions entered into by the liquidators were not invalid on that ground. I respectfully agree with his view that authorities such as In re English and Scottish Marine Insurance Co. Ltd. (1870) 23 LT (NS) 685 and Cyclemakers' Co-operative Supply Co. v. Sims (1903) 1 KB 477 warrant that conclusion and I do not need to add to what he said on these tow points. (at p193)
40. I have chosen to set out the facts somewhat fully, and so far without comment, because much turns upon a proper understanding of those facts and upon the characterization of the legal relationships arising therefrom. (at p193)
41. I am unable to agree that the arrangements produced the result that "from the time of the acceptance of the first set of bills in each series at the latest, the defendant (the Company) was under a contingent obligation to the bank in the sum of $500,000 which sum would become due and payable when the bank, at the end of the five year period, ceased to accept replacement bills, or when the Company within the five year period failed to draw discount and pay over the proceeds of replacement bills, whichever occurred the earlier". Nor can I agree that what the trial judge called the "contingent obligation" did not arise on the bills themselves. The transactions were of a common commercial kind, taking advantage of the existence of a commercial bill market, in which commercial bills are bought and sold, or, as it is usually described, "discounted". It is a mistake to treat what was done, as the trial judge did, as if it were the equivalent of a loan of money repayable at the expiration of five years, or in certain events earlier. (at p194)
42. In my opinion it is clear that the transaction entered into by the Bank and the Company did not involve the borrowing of money repayable on a contingency, or at all, or anything equivalent in law thereto. This view may not necessarily lead to a different ultimate determination of the issues in the appeal, but it does require a different approach to them. (at p194)
43. It is well settled, as Lord Devlin, speaking for the Privy Council, said
in Chow Yoong Hong v. Choong Fah Rubber Manufactory
(1962) AC 209, at p 215
that:
"The business of buying bills at a discount, that is, for their value at
the date of purchase, is well known and is quite distinct
from
moneylending. Nowadays the buyer is usually a bank or a discount house,
but the fact that he cannot be put into either of those
categories does
not alter the nature of the transaction, neither does the designation of
the discount as interest. There is here
no loan of money and no promise of
repayment. Their Lordships' conclusion on this point is in accordance with
the decision of Branson
J. in Qlds Discount Co. Ltd. v. John Playfair Ltd.
(1938) 3 All ER 275 that a purchase of book-debts for a specific sum was
not a
moneylending transaction." (at p194)
44. His Lordship further said (1962) AC, at pp 216-217 :
"The fundamental error that underlies the defendants' case on both
groups of cheques is that because they were, so they say,
in need of ready
cash, and because the plaintiff supplied them with it and made, if he did,
a profit out of doing so, therefore there
was a loan and a contract for
its repayment. There are many ways of raising cash besides borrowing. One
is by selling book-debts
and another by selling unmatured bills, in each
case for less than their face value. Another might be to buy goods on
credit or against
a post-dated cheque and immediately sell them in the
market for cash. Their Lordships are, of course, aware, as was Branson J.,
that
transactions of this sort can easily be used as a cloak for
money-lending. The task of the court in such cases is clear. It must
first
look at the nature of the transaction which the parties have agreed. If in
form it is not a loan, it is not to the point to
say that its object was
to raise money for one of them or that the parties could have produced the
same result more conveniently
by borrowing and lending money." (at p194)
45. Their Lordships go on to say that the situation would be different if the
form of the transaction were only a sham but it certainly
has not been
suggested in the present case at any stage that the form of this transaction
was only a sham and there is on the facts
no basis for such a suggestion. (at
p195)
46. Olds Discount Co. Ltd. v. John Playfair Ltd. (1938) 3 All ER 275 was a case where a retailer supplied goods on hire purchase. The retailer assigned to a finance company the outstanding instalments to become due on the hire purchase contracts, but undertook to collect those debts at its own expense as agent of the assignee and to remit to the assignee all the money so collected. It also gave a series of monthly bills for further securing the book debts. It was contended that the transaction was one of moneylending and did not comply with the Moneylenders Act 1927 (U.K.). Branson J. held that the transaction was a sale of book debts and not moneylending. (at p195)
47. He said (1938) 3 All ER, at p 277 :
". . . there is no doubt that, if it be the fact that the agreement
entered into between these parties was an agreement for
the purchase of
book debts, the agreement is a perfectly good and lawful agreement,
notwithstanding that the operative reason in
the minds of the defendants
for entering into it was that they desired to raise money as a temporary
matter in the same way as they
would have raised it if they had merely
entered into a transaction of loan. In other words, it is the nature of
the agreement entered
into, and not its object, at which the court has to
look in order to decide whether in any particular case the agreement is a
moneylending
agreement or otherwise." (at p195)
48. In Inland Revenue Commissioners v. Rowntree and Co. Ltd. (1938) 3 All ER
275 the Court of Appeal dealt with a situation which
in my opinion does not
differ in any material respect from the facts of the present case. In that
case, in pursuance of arrangements
covering a period of years, the company
raised money for the purpose of its business by drawing sight bills, payable
at four months
and six months, on an acceptance house which accepted the bills
in consideration of a commission paid to it by the company and then,
as agent
for the company, discounted the bills on the market and remitted the proceeds
to the company. Under the arrangement the
company was bound to put the
acceptance house in funds shortly before the maturity dates of the respective
bills. Money was raised
in this way during the company's relevant tax period
and a dispute arose as to the proper treatment of this course of business for
tax purposes. The Special Commissioners were of opinion that the words
"borrowed money" in the relevant schedule of the Finance (No.
2) Act 1939
(U.K.) for the purposes of excess profits duty should not be given a "strained
meaning" and that in ordinary commercial
usage the relationship between the
company, the acceptance house and the holders of the bills was not that of
borrower and lender,
nor were the transactions one of loan. They therefore
held that the money so raised was not "borrowed money" within the relevant
provision. On appeal Macnaghten J. held that there was no lending by the
acceptance house but that there was lending by the discount
house. In the
Court of Appeal he was upheld on the first point but reversed on the second.
(at p196)
49. After setting out the facts Tucker L.J. said (1948) 1 All ER, at p 486 :
"It is argued for the Crown here that there was, in fact, a borrowing
and a lending, and the Solicitor-General put in the forefront
of his argument
the contention that the company were the borrowers and that Erlangers" (the
acceptance house) "were the lenders.
As to that, I find myself in complete
agreement with the judgment of Macnaghten J., in which he said, 'I am
unable to see how
it could be said that the acceptance house lent any
money.' I think they clearly did not, and that the fact that the letters
passing between the parties contemplated a number of transactions of the
kind set out therein made the position no different
from what it would
have been if there had been one isolated transaction by way of the
acceptance of a bill and the discounting
of it and handing over of the
proceeds. There was merely an arrangement to carry out a transaction of
that kind in a large
number of cases over a considerable period of time,
and it seems to me that, whether one looks at it from a narrow legal
point
of view or from a broad commercial point of view, there was no lending by
Erlangers" (the acceptance house) "to the company".
(at p196)
50. His Lordship then said that as an alternative argument the
Solicitor-General had contended that if the acceptance house were
not lenders
then the discount house was the lender, and said (1948) 1 All ER, at p 486 :
"As to that, if the word 'lender' is to be given its strict legal
meaning, I am unable to see how the discount houses lent
any money to anybody.
They did not. They purchased these bills, and I think it is a fallacy to
regard a transaction of this kind
as one of borrower and lender. 'But,'
said the Solicitor-General, 'even if Erlangers are not strictly lenders in
law, none
the less, if you look at this transaction as a whole, if you
regard it as a tripartite arrangement, its object was to raise
money in
the money market, the money was in fact raised, it was made available for
the use of the company by the discount house,
and, therefore, the discount
house is to be regarded as the lender in a commercial sense, and for the
purposes of this taxing
Act there is a borrowing of money wherever A makes
available for B money for B's use on the terms that B will pay an
equivalent
sum to A at some future date.' I think the speeches in the Port
of London Case (Inland Revenue Commissioners v. Port of London
Authority
(1923) AC 507 ) in the House of Lords indicate that the proper approach to
this case is to construe these words
'borrowed money' as words which
require the existence of a borrower and lender, and that there must be a
real borrowing in the
legal sense of the word. I find it difficult, if not
impossible, to appreciate how there can be borrowed money unless the
legal
relationship of lender and borrower exists between A and B. After all, the
words 'borrow' and 'lend' are not words
of narrow legal meaning. They
represent a transaction well known to business people which has taken its
place in the law as a
result of commercial transactions among the
merchants of this country, and when the law, under the Bills of Exchange
Act
or elsewhere, has to deal with matters of this kind, it is dealing
with commercial transactions. As Somervell L.J., put it
during the
argument, whether the words are to be looked at from the point of view of
Bullen and Leake or whether they are
to be looked at from the point of
view of a commercial transaction in the city of London, one arrives at the
same result, that
for there to be borrowed money there must be the legal
relationship of lender and borrower, and I find it impossible to discover
that there was such a relationship existing either between the company and
Erlangers or between the company and the discount houses."
(at p197)
51. Somervell L.J. delivered a short judgment concurring with Tucker L.J. in
which he said (1948) 1 All ER, at p 487 :
"I think that the Solicitor-General's argument rather proceeded on the
basis that any 'raising' of money must be regarded as
a 'borrowing' of money.
There I think it fails, and I agree with the learned judge, for the reasons
which he gives, that Erlangers
cannot be regarded as lenders. Nor do I
think (and here I disagree with the learned judge) that the discount house
can be
regarded as lenders. It seems to me that this case brings out very
well that there are two ways at least (there may be more)
of raising
money. One is by borrowing it and the other is by discounting a bill of
exchange. They are both quite well known methods.
One is borrowing and the
other is discounting a bill. The fact that in many cases they produce the
same result of providing financial
resources for carrying on a business
does not mean that words which are apt to describe one must be construed
as covering the other."
(at p197)
52. This view of the nature of such a transaction is reflected in the
decision of the House of Lords in Willingale (Inspector of
Taxes) v.
International Commercial Bank Ltd. (1978) AC 834 where it was held that the
amount of discount at which the bank purchased
bills was not "interest" so as
to be taxable under that heading. (at p197)
53. Those authorities seem to me to be quite inconsistent with the proposition that the obligation of the Company to the Bank did not arise on the bills or out of the relationship of drawer and acceptor, but out of the nature of a bill line acceptance facility. The obligation arose from the drawing and accepting of the bills. (at p198)
54. It is, I think, of great importance in the present case that the agreement and the course of business conducted under it should be properly analysed and properly classified. This is a very common means for the provision of finance by the discounting of the bills on the commercial bill market. To characterize it now as involving consequences appropriate only to a loan may well have adverse effects, not presently foreseeable in their nature, upon ordinary commercial transactions, the legal nature of which has been laid down in the authorities to which I have referred. There can be no doubt that business has been conducted in reliance upon those authorities as establishing the true nature both for commercial and tax purposes of such a transaction as this. Unless there is some compelling reason, not peculiar to the present case, I do not think that the settled course of authority should be departed from, affecting as it would the ordinary conduct of business and the provision of financial facilities for business activities. (As to the extent of the use in Australia of accommodation bills, see Walker, "The Australian Revival of the Bill of Exchange", Australian Law Journal, vol. 52 (1978), p. 244.) (at p198)
55. Even if those cases were, contrary to my view, considered to have been wrongly decided it would be a serious question whether they should now be departed from. That would disturb retrospectively the legal consequences of ordinary commercial transactions entered into, and in many cases completed, on the basis of settled authority. It may sometimes be correct to take that course but it would in my opinion require the most exceptional circumstances, which are not here present. (at p198)
56. I proceed therefore to consider the central questions which arise in the case, upon the basis that the liability in question arose upon the bills and not from the existence of the bill facility. (at p198)
57. Each of the bills brought into existence pursuant to the arrangements was an "accommodation bill" and the Bank was an accommodation party within the meaning of s. 33 of the Bills of Exchange Act 1909-1973 (Cth). The Bank as acceptor would be liable to a holder in due course pursuant to s. 59. It is obvious enough that a bill accepted by a bank is more readily negotiated on the market by reason of that fact. Indeed published discount rates show a lower rate for bank accepted bills. For "lending its name" in that way the Bank received an "acceptance charge" in respect of each bill at the rate specified in the original agreement or the substituted agreement as the case may be. (at p199)
58. The importance of the true nature of the transaction lies in the fact that the Bank's claim is that the acceptance of the last of the series of bills gave rise to a liability which fell within the description "the costs and expenses of the winding up" and was therefore entitled to payment "in priority to all other unsecured debts" pursuant to s. 292(1)(a) of the Companies Act, 1961 to 1975 (Q.). The Bank's contention was that the relevant transactions took place after the commencement of the winding up (28th October 1975) and were entered into by the liquidators in the course of and for the purposes of the winding up. It was argued for the Company that the present situation was different from a single acceptance of bills drawn by the liquidators on its behalf because it was an acceptance pursuant to an original agreement, of a binding contractual nature, under which it was said that there was an originally contingent liability which ultimately became a present liability, i.e. the liability to idemnify the Bank. It was said that that liability arose under the pre-liquidation agreement and not by reason simply of the acceptance and ultimate payment by the Bank of the last two series of bills and that the Bank's right was merely to the repayment of money under the original agreement the contingency on which it became payable having occurred. (at p199)
59. The first reason for rejecting this argument is the nature of the original arrangement made in August 1973. It did not provide for moneys to be paid on a contingency or at all. The cases to which I have referred and their reasoning make this clear. They also make it clear that this is not a case for the application of the equitable maxim that "Equity looks to the substance rather than the form". It is a maxim of somewhat limited application and has rightly been said to have been much misapplied and misunderstood. The maxim does not warrant the substitution of a different transaction for the one into which the parties have entered, there being in the present case no suggestion that the transactions entered into were a sham. As between the Bank and the Company the only transaction entered into in August 1973 was that the Bank agreed to provide the bill acceptance facility on the terms specified. This was not in substitution for any other transaction, actual or contemplated. The cases show that the fact that it could be said to produce somewhat the same financial consequences as a loan of money is not to say that it has the same legal consequences or character. The cases to which I have referred deal with this very argument and decisively reject it. I respectfully agree with that rejection and the reasons for it. They also deal with and reject the argument that repetition of the acceptance and discounting of accommodation bills may give them a different character - see the passage from the judgment of Tucker L.J. [1980] HCA 20; (1980) 146 CLR 165 at pp 196-197 quoted above. In my opinion repetition of a well known commercial transaction, whether or not pursuant to an agreement for that repetition, does not give it a different character. There is nothing in the original agreement which warrants such a conclusion. The agreement on proper examination reveals that it was concerned with the terms and the mechanics of the process of acceptance of the accommodation bills and the charges involved therein. True it provided for the "rolling over" of the bills, so that as each set of bills matured the Company should indemnify the Bank, as it was bound to do from the very nature of the bills as accommodation bills, in respect of the liability which the Bank undertook as acceptor and discharged when it paid the face value of the bills to the holder on presentation. A procedure for financing the Company's obligation to indemnify the Bank was provided but the obligation to indemnify arose from the drawing by the Company and the acceptance by the Bank of the maturing bills not from the agreement. The fact that the procedure provided for the discounted proceeds of new bills to be paid to the Bank, together with sufficient additional funds to enable the Bank to recoup the whole of the amount paid to the holders of the previous bills, does not alter the nature or source of the obligations under the old or the new bills, any more than it did in Inland Revenue Commissioners v. Rowntree and Co. Ltd. (1948) 1 All ER 482 . (at p200)
60. The liability to indemnify the Bank was not contingent except in the sense that, if a bill were not presented, there would be no occasion for indemnification. Once the bills were presented the Bank was obliged to discharge its liability to the holders, and the obligation on the Company to indemnify it arose, unless it had been discharged by the provision of the full face value to the Bank in advance. To describe the process as "rolling over" or the facility as "revolving" does not alter its essential character. The fact that the Bank might be obliged under the agreement to accept further bills at appropriate intervals for a period of time does not change the nature of the transactions or eliminate the fact that the liability of the Company on each bill was discharged on the payment to the Bank of the full face value, whether or not the means of doing so was the use of the proceeds of discounting new bills plus the amount of the discount. The use of those expressions does not have the consequence that the liabilities of the drawer and the acceptor on the old bills are continued or revived. Separate liabilities arise from the drawing and accepting of each individual bill, in each series. Such liabilities are discharged so far as the Bank is concerned on payment of the full face value to the holder who presents it, whatever the source of the funds used by the acceptor (the Bank) to make such payment, and so far as the drawer (the Company) is concerned by its payment to the Bank of the amount so paid by the Bank, whatever the source of the funds so used by the Company. Those liabilities arise under the bills so drawn and accepted and not from the agreement. (at p201)
61. On this view the obligations of the Bank and the Company, in respect of all bills save those in the last two sets in respect of which the Company made no payment to satisfy its obligation to indemnify the Bank for the full amount paid to the holders on their maturity, had long since been satisfied prior to the date of maturity of the last two sets of bills. No party could sue or be sued in relation to the drawing, accepting, discounting or negotiation of any of those bills; equally no proof of debt in the liquidation could be lodged by the Bank in respect of any of the earlier bills. (at p201)
62. It is for these reasons that it is correct to say, as the cases referred show, that the rights and obligations of the parties to the bills were the same as those arising from a single transaction involving the drawing, accepting, discounting, negotiation and presentation for payment of an accommodation bill. (at p201)
63. The trial judge appears to have assumed that it was a consequence of the agreement that the Company was bound to draw bills up to the full amount of the "commercial bill (acceptance) limit", whether in one series or two, and to continue the process of rolling over the bills for the full term of five years. He took the view that this produced what he called a contingent obligation to pay the Bank the two sums of $500,000 either at the end of the five year period or when the Company ceased to draw replacement bills. In my opinion this is to misconstrue the agreement as well as to misunderstand the true significance of the bills of exchange. There is no basis for concluding that the Company was bound to draw bills and submit them to the Bank, although it was plainly intended that that was what would happen. The Company was however at liberty to draw on the facility in part or in full time to time and could satisfy its obligation to indemnify in respect of each bill by putting the Bank in funds to meet the liability or by paying the Bank after it had met its liability to the holders, using for that purpose funds from any source it chose. Indeed it could have acquired the bills from Tricontinental or subsequent holders and cancelled them. The agreement indeed obliged the Bank to accept bills when presented, but there was no obligation on the Company to draw them and present them for acceptance. This is demonstrated by the description of the arrangement as a "bill facility" and by the letter of 23rd August 1973, which formed part of the original agreement, which contemplated that the Company could reduce the "limit" and thereby reduce the "line fee". It is plain that the parties contemplated that the amount of the bills outstanding at any one time might be reduced below the top of the limit and indeed could plainly be reduced to zero if the Company so desired. The liability of the Company must depend on what was done from time to time under the agreement and not upon the agreement itself and what was done on each occasion must stand on its own feet as a separate drawing on the bill facility giving rise to obligations related to those bills only. It was thus the bills themselves which gave rise to the periodic liabilities of the Company and not the making of the agreement. The liability of the Company was not dependent upon any contingency once the bills had been discounted. On the Bank paying each bill on presentation, the liability to indemnify arose by reason of the inherent characteristics of an accommodation bill. The liability of the Company under the agreement was to provide funds to the Bank in advance of the maturity date by discounting replacement bills but that was a mere consequence of the liability to indemnify the Bank. It was rather a means of satisfying the primary liability to indemnify than a separate and independent liability. If the Company had paid from other sources the full amount of the bill to the Bank on or prior to the maturity date it could not have been said to have been in breach of an obligation to draw and present substitute bills. The presence of the express provisions with respect to reduction in the limit clearly makes this an essential feature of the agreement. This can be effective only if liability is related to each bill drawn from time to time. These considerations provide additional reasons for regarding the obligations as dependent upon the bills of exchange which were current from time to time and not upon the agreement. This is entirely consistent with and indeed is involved in the decision of the Court of Appeal in Inland Revenue Commissioners v. Rowntree and Co. Ltd. (1948) 1 All ER 482 . (at p202)
64. Moreover the separation between a bill of exchange and the transaction pursuant to which it was given is well illustrated by the decision of the House of Lords in Nova (Jersey) Knit Ltd. v. Kammgarn Spinnerei G.m.b.H. (1977) 1 WLR 713; (1977) 2 All ER 463 where it was held that a claim for unliquidated damages under a contract for the sale of machinery was no defence to a claim under a bill of exchange accepted by a purchaser, nor was it available as a set off or counterclaim: see per Lord Wilberforce (1977) 1 WLR, at p 720; (1977) 2 All ER, at p 469 , who refers to earlier cases on this point, and per Lord Russell (1977) 1 WLR, at p 732; (1977) 2 All ER, at p 479 . (at p203)
65. The second reason for reaching the same ultimate conclusion is that the original agreement between the Bank and the Company came to an end and was superseded by the substituted agreements entered into by the provisional liquidators and the liquidators after the date of the commencement of the winding up. (at p203)
66. It is clear enough that pre-liquidation contracts do not generally come to an end automatically at the commencement of a winding up or on the making of a winding up order, but subsequent acts of the parties may bring such contracts to an end otherwise than in circumstances which would enable proof of a claim for damages for breach (see Mersey Steel and Iron Co. v. Naylor, Benzon & Co. (1884) 9 App Cas 434, at p 440 ). In the present case the agreement made in August 1973 was brought to an end no later than the making of the substituted agreements. (at p203)
67. If, contrary to my view, there were a contingent liability under an agreement which would have arisen on the Company's failure to roll-over bills or otherwise to indemnify the Bank in respect of the amount which it was bound to pay and did pay in respect of the bills which matured on 27th January 1976 and on 1st March 1976 respectively, that liability must have arisen out of the substituted agreements. I can see no way in which it could be attributed to the original agreement. (at p203)
68. It is true, but not material, that the order obtained from the Supreme Court of Queensland on 31st January 1975 was limited to the bills to be drawn on 3rd February 1975, and that the agreement went much further than the order, as did the conduct of the Bank and the liquidators in relation to the bills drawn and accepted after 24th February 1975. (at p203)
69. The substituted agreement of 31st January 1975 provided in one of its terms for the written undertaking by Tricontinental to provide discount facilities for the full term of five years. However Tricontinental, after the substituted agreement was made, undertook merely to provide discount facilities for the balance of the original five year period. It is however clear that the Bank waived this requirement as it accepted the bills drawn on 3rd February 1975 and subsequent series of bills notwithstanding that Tricontinental's written undertaking was not provided to the Bank until 29th July 1975 and then related only to the original five year period. This provides no basis for regarding the substituted agreements as inoperative, or as not bringing the original agreement to an end. (at p204)
70. For the reasons which Connolly J. gave in respect of the post-liquidation charges, the absence of consent by the Court or the committee of inspection did not prevent the Bank from recovery on the outstanding bills, or on the substituted agreements if, contrary to my view, the liability arose under the agreement and not under the bills for on that basis the source of the obligation was the agreements made after the winding up had commenced. (at p204)
71. The remaining question raised before us was the contention on behalf of
the Company that it could rely upon a "promissory estoppel".
It had alleged in
its defence that the Bank had represented that:
"(a) the rolling over of the bills on 3rd February 1975 and subsequent
rolling over of other bills would not result in any
alteration of the
Bank's status as a secured creditor,
(b) that any increase in the liability of the Company would be secured
by the mortgagee, and
(c) such transactions were simply to maintain the status quo as at the
date of the petition and in order to defer the need
for the Bank to pay
the amount due to holders of the bills, and that the Company entered in
the transactions comprising the rolling
over of the bills in reliance on
those presentations."
The defence then alleged that by reason of the representations and the
Company's reliance thereon the Bank was estopped from asserting
that the
amounts claimed were costs and expenses of the liquidation within s. 292(1)(a)
of the Companies Act. (at p204)
72. The trial judge did not make any finding of fact in relation to this
matter. On the view which he took of the case it was not
necessary for him to
deal with it. This argument was rejected in the Full Court of the Supreme
Court. The particulars furnished of
the representations alleged that they had
been made orally by Bray and Murrell, officers of the Bank, on 28th and 29th
January in
the course of discussions with the solicitors for the liquidators.
In the case of the conversations with Bray they related to the
discussion of
the form of affidavit which was being drafted by the liquidators' solicitor
for the purpose of the application to the
Court on 31st October 1975. He had
asked the bank officer to explain to him the mechanics of the operation of the
commercial bill
market and the use of accommodation bills. The affidavit
prepared by the Company's solicitors contained a statement that:
"Such transactions would represent an extension or repetition of the
same type of fund raising operation previously carried
out by the company
on a number of previous occasions as deposed to above. Implementation of
the proposed transactions would represent
a maintaining of the status quo
so far as the financing arrangements of the company in relation to the
said lands are concerned with
the exception only that the company will
incur liability for the sums which will become payable by way of costs
charges expenses
and fees arising upon the drawing acceptance and
discounting of the new series of bills and in addition the liability which
will
be incurred by the company by reason of the discounting of the
bills." (at p205)
73. It is not necessary in the present case to consider the content or extent
of the doctrine of "promissory estoppel", or to consider
whether the alleged
representations were incorrect, because even if what took place can be
regarded as a "promise" in the relevant
sense, it is clear on the evidence
that the liquidators did not rely on the alleged representations. The
provisional liquidator then
handling the matter (Mr.L.G.Rees) stated expressly
in his evidence that he did not rely on what Mr. Bray had said. In argument no
reliance was placed on anything said by Mr. Murrell. I am therefore of opinion
that there is no basis for the application of the
rule of promissory estoppel
in this case. (at p205)
74. In the result therefore I am of opinion that this appeal should fail and I would dismiss it with costs. (at p205)
ORDER
Appeal allowed with costs.Order that the judgment of the Full Court of the Supreme Court of Queensland be set aside and in lieu thereof it be ordered that the appeal to that Court be dismissed with costs.