Supreme Court New South Wales

• Medium Neutral Citation: In the matter of Dalma No 1 Pty Limited (in liquidation) (ACN 111 772 260); Application of Bruce Gleeson and David Shannon in their capacity as joint and several liquidators of Dalma No 1 Pty Limited (in liquidation) and anor [2013] NSWSC 1335
• Hearing dates: 9 September 2013
• Decision date: 17 September 2013
• Jurisdiction: Equity Division - Corporations List
• Before: Brereton J

Decision

Answers provided to questions in originating process:

(a) No

(b) No

(c) Does not arise.

(d) Does not arise.

• Catchwords: CORPORATIONS - EXTERNAL ADMINISTRATION - Winding up - priorities - subrogation - Where third party voluntarily paid certain employee entitlements owing by company after date on which winding up deemed to have commenced - whether third party entitled to be subrogated, pursuant to Corporations Act 2001 s 560, to priority position enjoyed by employees in respect of liabilities of the company that it had discharged - No entitlement to subrogation per s 560 because company in liquidation did not pay the employee related liabilities using monies lent to it by third party, instead, the third party paid those liabilities directly itself.; EQUITY - SUBROGATION - Whether Corporations Act 2001 s 560 leaves any room for operation of equitable doctrine of subrogation - section 560 creates right of subrogation where one would not otherwise exist - in context of liquidation, equitable subrogation not excluded by provisions of Corporations Act - whether requirements for equitable subrogation satisfied - only context in which spontaneous voluntary payment by a third party may found a claim for subrogation is in exceptional category of the payment off of existing securities - basis for equitable subrogation not established because third party made payments spontaneously and voluntarily, in absence of any circumstances affecting the company's conscience.
• Legislation Cited: (Cth) Corporations Act 2001, s 439A, s 445F, s 511(1)(a), s 513B(b), s 556, s 560, s 561
• Cases Cited: Aetna Life Insurance Co v Middleport 124 US 534 (1888); B Liggett (Liverpool), Ltd v Barclays Bank, Ltd [1928] 1 KB 48; Bofinger v Kingsway Group Ltd [2009] HCA 44; 239 CLR 269; Boscawen v Bajwa [1995] 4 All ER 769; Butler v Rice [1910] 2 Ch 277; Campbell Auto Finance Co v Warren [1933] 4 DLR 509; Capt'n Snooze Management Pty Limited v McLellan [2002] VSC 432; Carter, Re Damilock Pty. Limited (in liquidation) [2012] FCA 1445; Challenger Managed Investments Ltd v Direct Money Corporation Pty Ltd [2003] NSWSC 1072; (2003) 12 BPR 222,57; Chetwynd v Allen [1899] 1 Ch 353; Cochrane v Cochrane (1985) 3 NSWLR 403; Cook (as liquidators of Italiano Family Fruit Co Pty Limited (in liquidation)) v Italiano Family Fruit Co Pty Limited (in liquidation) [2010] FCA 1355; Coptic Ltd v Bailey [1972] Ch 446; [1972] 1 All ER 1242; Exall v Partridge (1799) 8 Term Rep 308; Falcke v Scottish Imperial Insurance Co (1886) 34 Ch D 234; Ghana Commercial Bank v Chandiram [1960] AC 732; Hart v Barnes; Deputy Commissioner of Taxation v Barnes [1983] 2 VR 517; (1982) 7 ACLR 310; Hecimovic v Schembri (NSWSC, Holland J, 28 June 1974, unreported; Hill v ANZ Banking Group Ltd and Ericksen (1974) 4 ALR 634; Lombe v Wagga Leagues Club Limited [2006] NSWSC 3; Louisville Joint Stock Land Bank v Bank of Pembroke 9 SW (2d) 113 (Ky CA)(1928); Paul v Speirway Ltd (in liq) [1976] Ch 220; Porter v Associated Securities Ltd (1976) 1 BPR 9279; Re Cleadon Trust Ltd [1939] Ch 286; [1938] 4 All ER 518; Re Jick Holdings Pty Ltd (in liquidation) [2009] NSWSC 574; Re Sara Properties Pty. Limited (in liquidation) and the Companies Act, 1961 [1982] 2 NSWLR 277; (1982) 7 ACLR 186; 1 ACLC 454; Re Trivan Pty Ltd (1996) 134 FLR 368; Waikato Savings Bank v Andrews Furniture Limited [1982] 2 NZLR 520
• Texts Cited: Halsbury Laws of Australia, 3rd ed; Ashburner's Principles of Equity, D Browne (ed), 2nd ed, Butterworths, London, 1933; Meagher Gummow & Lehane's Equity Doctrines and Remedies (4th ed, Butterworths Lexis Nexis, 2002
• Category: Principal judgment
• Parties: Bruce Gleeson and David Shannon (as Liquidators of Dalma No 1 Pty Ltd (in liq)) - first plaintiffs; Dalma No 1 Pty Limited (in liq) - second plaintiff
• Representation: Counsel: Mr T Russell (solicitor); Solicitors: ERA Legal
• File Number(s): 2013/240107

Judgment

1 The First Plaintiffs Messrs Bruce Gleeson and David Shannon, in their capacity as liquidators of the company Dalma No 1 Pty Limited, apply to the Court pursuant to (Cth) Corporations Act 2001, s 511(1)(a), for the determination of questions arising in the winding up, the resolution of which will determine whether the available assets should be distributed to a third party Dalma Constructions Pty Limited which voluntarily paid certain employee entitlements in relation to the company after the date on which the winding up is deemed to have commenced, or to other creditors in accordance with the priority order set out in s 556.

2 The company went into administration under Corporations Act, Part 5.3A, on 13 May 2010, when Messrs Gleeson and Shannon were appointed as its joint and several administrators. Following their appointment, the administrators continued to trade the company's business.

3 The company was indebted to its employees in an amount of $598,767.09 for unpaid leave entitlements, superannuation, redundancy trust and income protection insurance payments. The debt in respect of redundancy trust and income protection insurance payments, being an obligation "payable to or in respect of an employee of the company (whether the employee is remunerated by salary, wages, commission or otherwise) under an industrial instrument", was included in "wages" by virtue of the definition of that term in Corporations Act, s 9. Accordingly, all these employee liabilities would, in the ordinary course, have attracted priority under s 556.

4 On 17 May 2010, Dalma Constructions, an entity related to the company, made a number of payments, in reduction or satisfaction of the outstanding superannuation contributions ($77,663.18), Australian Constructions Industry Redundancy Trust ("ACIRT") contributions ($52,485) and income protection insurance contributions ($11,833) owed by the company to or in respect of its employees.

5 On 7 June 2010, Dalma Constructions made a number of further payments, totalling $57,820.85, in reduction or satisfaction of those liabilities. Contemporaneously, Dalma Constructions wrote to the administrators in the following terms:

Re: Dalma No. 1 Pty Limited

(Administrators Appointed) ("the company")

I advise that Dalma Constructions Pty Limited has made an advance in the amount of $57,820.85 to the above company in relation to outstanding employee entitlements of the company to ACIRT, CBUS and U-PLUS.

This payment has been made pursuant to Section 560 of the Corporations Act 2001 ("the Act") and subject to the following conditions:-

1. That Dalma Constructions be afforded the same right of priority payment as the above entities in any distribution of the company's assets;

2. That in the event that a distribution is made to creditors of the company, Dalma Constructions Pty Limited is to be paid the amount that would otherwise have been paid to ACIRT, CBUS and U-PLUS in relation to the outstanding employee entitlements; and

3. That such distribution will be made in accordance with the priorities of Section 556 of the Act.

6 On 18 June 2010, at a meeting convened pursuant to s 439A of the Act, the creditors resolved that the company execute a deed of company arrangement. Pursuant to the deed of company arrangement, the company was required to make contributions to a deed fund. An initial distribution of the deed fund, which was made on 8 July 2010, resulted in payment of the company's remaining leave entitlement liabilities (that is, the balance remaining after the two payments that had been made by Dalma Constructions). However, after payment of the initial deed contributions, the company's director informed the administrators that the final deed fund contribution could not be made. As a result, a meeting of creditors was convened under s 445F at which, on 17 March 2011, the creditors resolved to terminate the deed of company arrangement and that the company be wound up. The administrators became the liquidators of the company, and the winding up of the company is taken to have commenced on the date on which they were appointed as administrators, namely 13 May 2010, before the payments in question were made [Corporations Act, s 513B(b)].

7 Dalma Constructions has asserted that it is subrogated to the priority position that was enjoyed by the employees in respect of the liabilities of the company that it has discharged. As will appear, the liquidators, having sought appropriate advice, quite legitimately remain in doubt about this contention, and seek the Court's determination of the following questions:

(a) In the circumstances described in the supporting affidavit, is Dalma Constructions Pty Limited entitled to subrogate to the priority claims of the former employees of the Second Plaintiff pursuant to section 560 of the Corporations Act 2001 (Cth);

(b) If the answer to (a) is negative, is Dalma Constructions Pty Limited entitled to subrogate to the priority claims of the former employees of the Second Plaintiff otherwise than pursuant to section 560 of the Corporations Act 2001 (Cth);

(c) If the answer to (a) or (b) is in the affirmative (that is, if subrogation is permitted), is Dalma Constructions Pty Limited entitled to subrogate in respect of the premiums paid by it for the "Coverforce U-PLUS" group income protection insurance cover obtained by the Second Defendant in respect of its employees.

(d) If the answer to (a) is in the negative, but the answer to (b) is in the affirmative (that is, if subrogation is permitted otherwise than pursuant to section 560), is Dalma Constructions Pty Limited entitled, at a meeting of creditors of the Second Plaintiff:-

(i) to cast a total of one vote for all subrogated claims (consistently with the provision of regulation 5.6.23A(1) of the Corporations Regulations 2001 (Cth)); or

(ii) to cast a separate vote for each subrogated claim.

8 It is preferable on an application of this kind that there be a contradictor. The liquidators have endeavoured to elicit a contradictor. The Originating Process (with Mr Gleeson's supporting affidavit) has been served on the Deputy Commissioner of Taxation (who is the major unsecured creditor); and on Dalma Constructions, whose interest is primarily at stake. In addition, the liquidators have distributed a circular to all known creditors. The only response received from any creditor or other person was from Dalma Constructions, whose solicitor responded on its behalf, indicating that it did not intend to seek to be heard.

9 Though it is preferable to have a contradictor, the absence of one is not an impediment to the determination of questions arising in the winding up, any more than it is to the giving of directions [as to which see Re Jick Holdings Pty Ltd (in liquidation) [2009] NSWSC 574, [7] (White J)]. It would be unreasonable to decline to come to the aid of a liquidator, in a proper case for the determination of questions, just because, despite reasonable endeavours, it did not prove possible to elicit a contradictor.

Subrogation under s 560

10 The first question is whether Dalma Constructions is entitled to be subrogated under Corporations Act, s 560, which provides as follows:

If:

(a) a payment has been made by a company:

(i) on account of wages; or

(ii) on account of superannuation contributions (within the meaning of section 556); or

(iii) in respect of leave of absence, or termination of employment, under an industrial instrument; and

(b) the payment was made as a result of an advance of money by a person (whether before, on or after the relevant date) for the purpose of making the payment;

then:

(c) the person by whom the money was advanced has the same rights under this Chapter as a creditor of the company; and

(d) subject to paragraph (e), the person by whom the money was advanced has, in the winding up of the company, the same right of priority of payment in respect of the money so advanced and paid as the person who received the payment would have had if the payment had not been made; and

(e) the right of priority conferred by paragraph (d) is not to exceed the amount by which the sum in respect of which the person who received the payment would have been entitled to priority in the winding up has been diminished by reason of the payment.

11 When invoking s 560, conformity with the "actual language and internal structure" of the provision is paramount, and if the apparent object of the provision (subrogation of the benefactor) cannot be achieved without doing violence to its wording, the provision is not engaged [Capt'n Snooze Management Pty Limited v McLellan [2002] VSC 432]. The fundamental difficulty in the present case is that none of the payments in question were made "by [the] company", in terms of s 560(a): Dalma Constructions paid the relevant liabilities directly. Section 560 only applies where the company (i.e. the company being wound up) pays the employee-related liabilities itself, using moneys lent to it by the donor. (The reference in s 560(b) to an "advance" of money is to a loan to the company, which creates a debtor-creditor relationship, as distinct from a gift, or transfer to the company to be held on trust [Lombe v Wagga Leagues Club Limited [2006] NSWSC 3, [27]]). Consequently, s 560 is not attracted. Accordingly, Dalma Constructions is not entitled to be subrogated pursuant to s 560, because the company in liquidation did not pay the employee-related liabilities, using moneys lent to it by Dalma Constructions; rather, Dalma Constructions paid those liabilities directly, itself.

12 There are two authorities which at first sight appear inconsistent with this result, but on examination turned on legislative provisions that were materially different to s 560(a). In Hart v Barnes; Deputy Commissioner of Taxation v Barnes [1983] 2 VR 517; (1982) 7 ACLR 310, a donor paid PAYE taxation liabilities of a company in liquidation and then sought to be subrogated to the Commissioner of Taxation's priority (such liabilities then being a statutory priority). The court allowed subrogation, saying:

...It is immaterial that the money went directly to the Commissioner and not first to the company and then to the Commissioner.

13 However, at that time the legislation was in a different form, and did not stipulate that the payment in question be made by the company in liquidation, as the present section does.

14 In Waikato Savings Bank v Andrews Furniture Limited [1982] 2 NZLR 520 a bank paid superannuation directly to employees and then claimed to be subrogated to their priority. Again, the court allowed subrogation; but once again, the then New Zealand equivalent of s 560 did not stipulate that the payment be made by the company.

15 Accordingly, the conditions for subrogation under s 560 are not satisfied. Question (a) in the Originating Process must be answered in the negative.

Equitable subrogation

16 That, however, is not necessarily the end of the case, as it may be that quite apart from the statutory right of subrogation under s 560, Dalma Constructions may be able to take advantage of the equitable doctrine of subrogation. In this respect, there are really two issues. The first is whether s 560 leaves any room for the operation of the equitable doctrine of subrogation in respect of a benefactor who discharges priority liabilities of a company in liquidation, enabling the benefactor to be subrogated (for the purpose of receiving distributions of the property of the company in the winding up) to the position that would have been enjoyed by the priority creditors. The second is, if so, whether the requirements of equitable subrogation are satisfied in this case.

17 There is authority, in this court, which suggests that subrogation is not permissible in the context of liquidation, beyond the scope of what the statute specifically authorises. In Re Sara Properties Pty. Limited (in liquidation) and the Companies Act, 1961 [1982] 2 NSWLR 277; (1982) 7 ACLR 186; 1 ACLC 454, a mortgagee allowed land tax (in respect of which there was then a statutory priority) to be paid out of the proceeds of sale of the land, and sought to be subrogated to that priority. Rath J refused to grant the relief sought, for two relevant reasons. The first (at 279) was that, upon payment of the priority claim, it was extinguished, so that there was nothing left to which the mortgagee could be subrogated; and the second (at 280) was that the way liquidators deal with company money is governed by legislation, which expressly permits liquidators to use company funds to pay priority claims, but does not permit them to use company funds to reimburse others who have done so.

18 However, more recent authority is to the contrary. In Cook (as liquidators of Italiano Family Fruit Co Pty Limited (in liquidation)) v Italiano Family Fruit Co Pty Limited (in liquidation) [2010] FCA 1355, a liquidator sought directions as to how to distribute funds recovered by the company in respect of unfair preference claims, where the liquidator had already appropriated "floating charge assets" under Corporations Act, s 561, to pay employee claims. Had the liquidator not made that preliminary distribution to employees, he could eventually have paid the employees from the proceeds of the unfair preference claims without resort to floating charge assets. The secured creditor whose floating charge assets had been appropriated claimed that it was entitled to be subrogated to the priority position of the employees. Finkelstein J (at [69]) observed that it was a pre-condition to the enlivenment of the provision allowing a liquidator to use floating charge assets to pay employee claims that the liquidator satisfy himself that the property of the company was otherwise insufficient to pay those claims, and that the liquidator should have waited until the outcome of the unfair preference actions was known before making an assessment as to whether or not the winding up property was in fact insufficient (at [70]-[73]); until a proper assessment was made, he merely held the floating charge asset moneys on trust, for the secured creditor and the employees (at [79]), and by paying the money to the employees when he did, the liquidator committed a breach of trust because the precondition to using that money for that purpose had not been satisfied (at [80]). His Honour held (at [98]) that, the bank's funds having been misapplied in breach of trust, the bank - to the extent that it had suffered loss - it should be subrogated to the rights of the priority creditors who had been paid out with its funds.

19 His Honour then considered whether the Corporations Act, which by s 560 made special provision for subrogation, manifested a legislative intention to exclude the more general right of subrogation, and concluded that it did not (at [104]):

In my view, there is no intention to do so. To the contrary, the intention of the Act, as manifested in provisions such as ss 433, 556, 560 and 561, is to facilitate the payment of employee entitlements and other priority claimants. Recognising a right of subrogation under an "early payment" arrangement is consistent with this intention.

20 In this context, Finkelstein J considered the judgment of Rath J in Sara Properties and rejected both reasons that supported the decision in that case (at [106]-[107]):

Rath J rejected the subrogation claim for several reasons. The first (at 279) was that where subrogation relates to a legal right, it can only be founded where the legal right subsists. He held that the rights of the Commission had been discharged by the payment. I do not think this proposition can be accepted. It is now well established that subrogation involves a legal fiction where rights formerly extinguished are "revived" for the purposes of subrogation...

The second reason Rath J rejected the mortgagee's subrogation claim was that it was inconsistent with the statutory scheme for the distribution of an insolvent company's assets. Rath J said (at 279-280) that the fundamental premise of the scheme was that assets are required to be distributed pari passu unless there is special provision made otherwise. To allow a priority payment by way of recoupment or reimbursement, he said, would require language that did not appear in the statute. I respectfully disagree with this reasoning. It assumes that the mortgagee could not stand in the shoes of the Crown whose debt had been extinguished. For the reasons set out above, I do not accept that the mortgagee was unable to stand in the shoes of the Crown. Indeed, Rath J acknowledged (at 281) that if the right of the Crown had been a prerogative right, there would have been no difficulty in keeping it alive for the purposes of subrogation - and presumably there would be no inconsistency with the winding up provisions. Further, the pari passu rule does not preclude subrogation. Just as an assignee of a priority debt may prove in a liquidation and obtain priority, the Act neither expressly nor impliedly excludes a party entitled to subrogation from proving in a winding up.

21 While I would differ from a judgment of Rath J with great hesitation, in my respectful opinion, the reasoning of Finkelstein J in Cook - which has since been followed in Carter, Re Damilock Pty. Limited (in liquidation) [2012] FCA 1445 - is compelling and correct. Moreover, there is an additional reason for reaching that conclusion, namely that the circumstance provided for by s 560 is one in which subrogation would not have been available in equity. It is a paradigm case for refusing to allow a payer to be subrogated where the payer, rather than paying off the debtor's liability, lends money to the debtor which the debtor then uses to discharge its liability [Porter v Associated Securities Ltd (1976) 1 BPR 9279; Cochrane v Cochrane (1985) 3 NSWLR 403, 405 (Kearney J)]. Thus, s 560 creates a right of subrogation where one would not otherwise exist; it is not to be taken implicitly to exclude rights of subrogation otherwise available.

22 Accordingly, I conclude that in the context of liquidation, equitable subrogation is not excluded by the provisions of the Corporations Act. The next question, then, is whether the requirements for its application are satisfied on the facts of this case.

23 In the present case, there was no obligation on Dalma Constructions to make the relevant payments, nor any express or implied request by the administrators/liquidators to do so; Dalma Constructions did so voluntarily and spontaneously of its own motion. It is true that the doctrine of equitable subrogation has on occasion been described in general terms as an entitlement of a person who pays off a creditor's debt. Thus Ashburner described the doctrine in the following terms (D Browne (ed), Ashburner's Principles of Equity, 2nd ed, Butterworths, London, 1933, p 243):

A payment by A to B may have the effect of swelling the assets or diminishing the liabilities of C, but it may not give A in law any direct remedy against C. In such a case a court of equity allows A to stand in the shoes of B to enforce against C in equity corresponding rights to those which B would have against him at law or in equity. A is treated as the assignee of B's claim against C, and can enforce it, subject to all equities and rights of set-off which C may have against B.

24 However, there is no all-embracing theory that explains when subrogation will be permitted; the equity arises from the conduct of the parties on well-settled principles and in defined circumstances which make it unconscionable for the defendant to deny the plaintiff's right [Boscawen v Bajwa [1995] 4 All ER 769, 777 (Millett LJ); Bofinger v Kingsway Group Ltd [2009] HCA 44; 239 CLR 269, 300-1]. Pomeroy identified those circumstances as follows [Pomeroy (1941) Vol 4 p 1074, [1419], citing Louisville Joint Stock Land Bank v Bank of Pembroke 9 SW (2d) 113, 115 (Ky CA)(1928); cited with approval in Re Trivan Pty Ltd (1996) 134 FLR 368, 371 (NSWSC, Young J)]:

The doctrine is in general applied in favour of all persons who are required to pay the debt of another for the protection of their own interests. [Without attempting a comprehensive classification of cases in which the doctrine of subrogation may be applied, it is generally held that the right of subrogation will arise where the party claiming it has advanced money to pay a debt, which, in the event of default by the debtor, he would be bound to pay; or where the one making the payment has some interest to protect; or where the money advanced to pay the debt was under an agreement with the debtor, or the creditor, express or implied, that he should be subrogated to the rights and remedies of the creditor.]

25 As pointed out by the authors of Meagher Gummow & Lehane's Equity Doctrines and Remedies (4th ed, Butterworths Lexis Nexis, 2002, [9-010]), so general a formulation of the doctrine as Ashburner's does not accommodate the proposition that subrogation is not available to a volunteer who pays the debt of another. Equity does not allow A to assume the rights of B against C merely by voluntarily discharging B's obligations to C. As Bowen LJ said in Falcke v Scottish Imperial Insurance Co (1886) 34 Ch D 234 (at 248):

The general principle is, beyond all question, that work and labour done or money expended by one man to preserve or benefit the property of another do not according to English law create any lien upon the property saved or benefited, nor, even if standing alone, create any obligation to repay the expenditure. Liabilities are not to be forced upon people behind their backs any more than you can confer a benefit upon a man against his will.

26 In Aetna Life Insurance Co v Middleport 124 US 534 (1887), the Supreme Court of the United States said (at 549-50):

The doctrine of subrogation is not applied for the mere stranger or volunteer, who has paid the debt of another, without any assignment or agreement for subrogation, without being under any legal obligation to make the payment, and without being compelled to do so for the preservation of any rights or property of his own. ... Subrogation as a matter of right, as it exists in the civil law, from which the term has been borrowed and adopted in our own, is never applied in aid of a mere volunteer.

27 See also Campbell Auto Finance Co v Warren [1933] 4 DLR 509, 516 (Ont CA), which cited the above passage with approval, and Re Cleadon Trust Ltd [1939] Ch 286; [1938] 4 All ER 518, in which Scott and Clauson LJJ rejected, as inconsistent with Falcke v Scottish Imperial Insurance Co, an argument that a person who has in fact paid the debts of another without authority has an equitable right of recoupment against that other.

28 Two of the varieties of circumstances in which subrogation is available are sureties, and the paying off of an existing mortgage or other security [Bofinger v Kingsway Group,300 [90]]. The former class, under which a surety who discharges the principal's obligation is entitled to be subrogated to all the rights of the creditor against the debtor and third parties and all the creditor's securities if any, applies to unsecured as well as secured debts. But the equitable basis for intervention is clear: the surety is under a legal obligation to pay the creditor, and as between the surety and the principal debtor it would be inequitable for the surety to bear the burden.

29 The latter class, concerning discharge of existing securities, is more difficult to explain. Subject to a possible qualification about volunteers, a person who pays off a mortgage debt is entitled - and unless the contrary appears is presumed - to preserve the security for its own benefit [Ghana Commercial Bank v Chandiram [1960] AC 732; Paul v Speirway Ltd (in liq) [1976] Ch 220 (Oliver J)]. In Cochrane, Kearney J explained the principle as follows (at 405):

This principle is based on equity's concern to prevent one party obtaining an advantage at the expense of another which in the circumstances of the case is unconscionable. Hence, there is a common thread running through the relevant cases to the effect that the conscience of the mortgagor should be affected so as to cause the mortgage to be kept alive. This is illustrated in the text book examples first, of a third party not being entitled to a right by way of subrogation where he simply lends the money on an unsecured basis to the mortgagor who then uses such funds to pay off the mortgage; and secondly, of a third party being so entitled where he advances the money to pay out the mortgage on the understanding that security would be provided for such advance upon the mortgage being paid out.

30 In this type of case, the debtor's concurrence in the transaction is immaterial, because the only alteration in its position is that it owes the money to the third party instead of to the original creditor [Chetwynd v Allen [1899] 1 Ch 353; Butler v Rice [1910] 2 Ch 277; Coptic Ltd v Bailey [1972] Ch 446, 454-5; [19072] 1 All ER 1242, 1248; Hecimovic v Schembri (NSWSC, Holland J, 28 June 1974, unreported]. See also Hill v ANZ Banking Group Ltd and Ericksen (1974) 4 ALR 634, 637, citing 27 Halsbury, 3rd ed, 270 (para 497) (emphasis added):

Although there has been no actual transfer of the mortgage, a person who advances money for the purpose of paying it off, and whose money is thus applied, becomes an equitable assignee of the mortgage and is entitled to have it kept alive for his benefit ... and even though the mortgagor is not a party, a stranger who pays off a mortgage is presumed to intend to keep it alive for his own benefit, and effect is given to this intention.

31 However, the role of the payer's intention is obscure. In Challenger Managed Investments Ltd v Direct Money Corporation Pty Ltd [2003] NSWSC 1072; (2003) 12 BPR 222,57, Bryson J said (in a passage not reported in the authorised report (2003) 59 NSWLR 452):

48 An explanation in terms of the intention or the presumed intention of the payer of the basis on which a person who pays off an existing mortgage is entitled to be subrogated to the position and the rights of the mortgagee who has been paid does not give the law a basis which is clear or can be readily understood. The reference to the intention or presumed intention of the payer may introduce an element which is not necessary for an understanding of subrogation but is unfortunately distracting, particularly where the intention is presumed or, it might be said, fictitious. It will be seen that in the first paragraph in the passage from Cochrane v. Cochrane which I have set out Kearney J referred to Ghana Commercial Bank v. Chandiram in which the Privy Council stated the rule in terms of presumed intention, but in the second paragraph Kearney J explained the principle in terms of the position in conscience of the mortgagor, to which the intention of the payer that he should or should not have security, if he had any intention about it, is relevant but not necessarily conclusive. Observations of Lord Hoffmann in Banque Financière de la Cité v. Parc (Battersea) Ltd at pp232-234 illustrate the difficulties of relating subrogation in this context to intention, when intention is a fictitious element and also when it is not.

49 References to the intention of the payer fail to express anything which is central to the doctrine of subrogation. It sometimes happens that the person to whom a presumed intention to keep a mortgage alive is imputed has actually acted to bring about its discharge; that is so in the present case. The essence of the doctrine is elsewhere than in an intention or presumed intention of the payer to rely on the mortgage which was paid off. Intention may be significant where it is for some reason clear that the payer did not intend to be secured at all; otherwise it appears to me to be unfortunate that it should have a part in a statement of the doctrine.

50 I would respectfully say that Lord Hoffman's relation, at 234, of subrogation to unjust enrichment was not articulated in the authorities to which his Lordship referred, and is not established in Australian case law. In my understanding explanation of subrogation in terms of restitution and unjust enrichment was introduced by Millett LJ in Boscawen v. Bajwa [1996] 1 WLR 328 at 334, and was not earlier found. Lord Hoffmann's reference to the law of restitution does not, in my respectful opinion, provide an explanation for the mortgagor's being treated as bound, in equity, to treat the person who paid off the previous mortgage as entitled to security under it. Restitution would provide a basis for treating the mortgagor as obliged to restore to the person who paid it the amount which had been paid to the mortgagee: the concept is inadequate for also treating the mortgagor as obliged to hold the payer secured. This is particularly clear where, as in this case, and in other cases where subrogation has been held to exist, the mortgagor in fact had no dealings with the payer, or where the payer believed that he was getting security under arrangements in which the mortgagor was not in fact involved. To my mind it is enough to see subrogation as an entitlement which equity accords to the payer, firmly established by judicial decisions notwithstanding that a satisfactory doctrinal basis is difficult to identify, and notwithstanding that classification of the mortgagor's position as unconscionable seems very attenuated.

32 What Bryson J there wrote is highly persuasive, and I respectfully agree with it, subject only to the caveat that it is difficult to disregard entirely the role of the payer's actual or presumed intention, when it has been mentioned in so many of the authorities. In my judgment, the explanation is no more than that sufficient unconscionability to engage the doctrine is to be found in the mortgagor insisting that the effect of the third party's payment is to discharge it from the encumbrance, unless that was the basis on which the third party made the payment. In other words, the position of a mortgagor who claims to be discharged as a result of the third party's payment, rather than that the mortgage subsists for the benefit of the third party, is prima facie unconscionable, even if that characterisation is somewhat "attenuated"; but that prima facie position is displaced if it is shown that the third party intended otherwise.

33 It can be accepted that in the present case, Dalma Constructions did not intend that the company's net assets be enlarged for the benefit of creditors generally, but intended that the priority debts be preserved for its benefit. Its letter of 7 June 2010 manifests that intention, albeit on the misconceived basis that s 560 would apply. However, the category of subrogation that is concerned with the payment off of existing securities is exceptional, insofar as an unsolicited voluntary payment by the third party can found a claim for subrogation. Not only is there is no authority for the application of the same approach in the context of unsecured debts; the cases [Falcke v Scottish Imperial Insurance Co; Aetna Life Insurance Co v Middleport; Campbell Auto Finance Co v Warren; and Re Cleadon Trust Ltd] are plainly against it. While the common law restitutionary claim for moneys paid might avail a third party who discharges a debt at the express or implied request of the debtor, its availability is contingent on an express or implied request; there is no such remedy for a third party who spontaneously pays off a debtor's unsecured liability [Exall v Partridge (1799) 8 Term Rep 308; B Liggett (Liverpool), Ltd v Barclays Bank, Ltd [1928] 1 KB 48, 60; Re Cleadon Trust Ltd, at 536 (Scott LJ)]. Of course, that category of subrogation which concerns sureties is different, because, as explained above, there is a legal obligation on a surety to pay, and a clear basis for holding the conscience of the principal debtor to be affected, whether or not the liability is secured.

34 In Italiano Family Fruit Co, however, subrogation was allowed in respect of an unsecured debt identical to the debt in this case. While acknowledging that the claim for subrogation might be thought of as novel in some respects, Finkelstein J considered it "supported by analogous, well-established categories in which a right of subrogation is recognised" (at [108]). Relevantly, his Honour said that, although it was commonly a bar to subrogation if a payment is made voluntarily (at [113]), a payment is not considered "voluntary" where it is made at the express or implied request of the debtor (at [113]), and as it was the liquidator who made the payment, this requirement was satisfied (at [114]). Moreover (at [115]), "it is unclear whether the voluntary nature of a payment is a bar to subrogation where prior securities have been paid out ... The position appears to be that, in those cases, subrogation will be denied where subrogation would put the claimant in a better position than he/she bargained for." His Honour concluded that it would, in all of the circumstances, be equitable to permit subrogation in the circumstances of the case, and unconscionable to deny it and therefore enable the "the company (and, indirectly, its unsecured creditors) to enjoy a windfall from the company's debts being paid out of floating charge assets when they could have been paid out of the company's free assets" (at [116]). As mentioned above, the bank's entitlement to be subrogated to the rights of the priority creditors who had been paid out with its funds was founded on the fact that the bank's funds had been misapplied in breach of trust to pay them out.

35 Italiano Family Fruit Co was subsequently considered and followed, in a practically identical factual situation, in Damilock at [14]:

I do not think it is necessary to recite in detail the reasoning of Finkelstein J in that case relevant to the present issue. In my view, it is on all fours with the present circumstances. For the same reasons as his Honour there gave, I think it is appropriate to give a direction in accordance with s 511 of the Act, and that the direction should be that the available funds held by the plaintiffs, subject to the payment of the proper fees and disbursements, should be applied in payment to ANZ as the primary secured creditor of the company. I so direct.

36 However, in Italiano Family Fruit Co (and Damilock), there was an equity for subrogation, which was created by the circumstance that the debtor company's liabilities had been discharged by a misappropriation of the third party's property. The bank was entitled to recoup from the company the funds so misapplied, and once the company acquired additional property from the preference recoveries, it would have been unconscionable for the company to deal with them otherwise than by replenishing the trust. There is no such equity in this case. In addition, the payments in those cases were not voluntary on the part of the chargee; they were made by the company (on the initiative of its liquidator) in purported reliance on s 561. Accordingly, there was both an equity affecting the conscience of the debtor company, and an involuntary payment; both critical features that are absent from the present case.

37 In my view, the only context in which a spontaneous voluntary payment by a third party may found a claim for subrogation is in the exceptional category of the payment off of existing securities. There is no authority for extending that exceptional case to unsecured debts. That Dalma Constructions made the payments on the mistaken basis that they would be entitled to subrogation under Corporations Act, s 560, does not affect this. The payments were made spontaneously and voluntarily by Dalma Constructions, and there was in the circumstances nothing to affect the company's conscience. The basis for equitable subrogation is not established.

Conclusion

38 My conclusions may be summarised as follows.

39 As the relevant payments were made directly by Dalma Constructions to the creditors and not by the company, the conditions for subrogation under s 560 are not satisfied.

40 In the context of liquidation, equitable subrogation is not excluded by the provisions of the Corporations Act. However, the payments were made spontaneously and voluntarily by Dalma Constructions, and there was in the circumstances nothing to affect the company's conscience. The basis for equitable subrogation is not established.

41 Accordingly, the questions posed in the Originating Process are answered as follows:

(a) In the circumstances described in the supporting affidavit, is Dalma Constructions Pty Limited entitled to subrogate to the priority claims of the former employees of the Second Plaintiff pursuant to section 560 of the Corporations Act 2001 (Cth);

Answer: No.

(b) If the answer to (a) is negative, is Dalma Constructions Pty Limited entitled to subrogate to the priority claims of the former employees of the Second Plaintiff otherwise than pursuant to section 560 of the Corporations Act 2001 (Cth);

Answer: No.

(c) If the answer to (a) or (b) is in the affirmative (that is, if subrogation is permitted), is Dalma Constructions Pty Limited entitled to subrogate in respect of the premiums paid by it for the "Coverforce U-PLUS" group income protection insurance cover obtained by the Second Defendant in respect of its employees.

Answer: Does not arise.

(d) If the answer to (a) is in the negative, but the answer to (b) is in the affirmative (that is, if subrogation is permitted otherwise than pursuant to section 560), is Dalma Constructions Pty Limited entitled, at a meeting of creditors of the Second Plaintiff:-

(i) to cast a total of one vote for all subrogated claims (consistently with the provision of regulation 5.6.23A(1) of the Corporations Regulations 2001 (Cth)); or

(ii) to cast a separate vote for each subrogated claim.

Answer: Does not arise.

42 The Plaintiffs were entirely justified in making this application. I declare that the First Plaintiffs' costs of these proceedings, including remuneration, are for the purposes of Corporations Act 2001, s 556(1)(dd) and (de), properly incurred by the First Plaintiffs.

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Decision last updated: 18 September 2013