The Judicial Committee of the Privy Council Decisions

Privy Council Appeal No. 2 of 1997

 

(1) Anthony George Lewis and (2) Kevin Michael Thomas, as

Liquidators of The Prudential Building & Investment Society

of Canterbury (In Liquidation) Appellants

v.

(1) Barbara Eileen Hyde, Justine Lisa Hyde and Vaughan

Russell Hyde, as Trustees in the Estate of Bruce Russell

Hyde (Deceased) and

(2) Corinth Resources Limited Respondents

 

FROM

 

THE COURT OF APPEAL OF NEW ZEALAND

 

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JUDGMENT OF THE LORDS OF THE JUDICIAL

COMMITTEE OF THE PRIVY COUNCIL,

Delivered the 7th October 1997

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Present at the hearing:-

Lord Browne-Wilkinson

Lord Slynn of Hadley

Lord Lloyd of Berwick

Lord Hope of Craighead

Lord Hutton

  ·[Delivered by Lord Browne-Wilkinson]

 

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1. This appeal raises, apparently for the first time, the question whether a payment made by a debtor with the intention of preferring a creditor is unlawful as a voidable preference under section 309 of the New Zealand Companies Act 1955 even if, in the event, the creditor is not preferred.  The trial judge, Holland J., held that mere intention to prefer was sufficient.  The Court of Appeal (Thomas, Blanchard and Doogue JJ.) reversed that decision holding that an actual preference was required in addition to an intention to prefer.

 

2. The Prudential Building and Investment Society of Canterbury ("Prudential") carried on business as a building society.   It  was managed by Kearns Corporation Limited of which a Mr. Morris was a director.  Mr. Morris was involved in the management of Prudential.  His brother-in-law was a Mr. Hyde.  Mr. Hyde deposited (under false names) three sums with Prudential, relying at least in part on his personal connection with its management.  Mr. Hyde thought that the deposit moneys were repayable on demand, but the application form for such deposits recorded that seven days' notice of withdrawal was required.

 

3. At the beginning of February 1989 Mr. Hyde became aware of a proposed reorganisation in the management of Prudential.  This involved the replacement of the management he knew (including Mr. Morris) by a different, possibly hostile, management.  On 2nd February 1989 Mr. Hyde called at the offices of Prudential and sought immediate repayment of his deposits.  He was told that he would have to wait seven days.  He immediately went to see Mr. Morris who forthwith arranged for the immediate repayment of the deposits by way of bank cheques.  In the ordinary course, Prudential repaid deposits by cheques which it had itself drawn.

 

4. In January and February 1989 Prudential was in financial difficulties.  An application to wind up Prudential was filed on 23rd February 1989.  On that day a Provisional Liquidator was appointed and Prudential stopped trading.  From 2nd February until 21st February 1989 Prudential continued to trade in the ordinary way.  During that period it accepted over $500,000 by way of new deposits and repaid over $2,000,000 of existing deposits.  Therefore, even if Mr. Hyde had been required to wait for seven days for repayment and also for a further period in order to enable a cheque drawn by Prudential itself to be cleared ("the period of accelerated payment") he would have been repaid his deposits in full before the application to wind up Prudential was made.

 

5. In these proceedings the liquidators of Prudential seek to recover the deposits repaid to Mr. Hyde as being voidable preferences within section 309 of the Companies Act of 1955 which provides:-

"309. Voidable Preference.

(1)Every conveyance or transfer of property, every security or charge given over any property, every obligation incurred, every execution under any judicial  proceedings  suffered,  and  every payment made (including any payment made in pursuance of a judgment or order of a Court), by any company unable to pay its debts as they become due from its own money, shall be voidable as against the liquidator, if -

 

(a)It is in favour of any creditor or any person in trust for any creditor with a view to giving that creditor or any surety or guarantor for the debt due to that creditor a preference over the other creditors; and

 

(b)The making, suffering, paying, or incurring of the same occurs within two years before the commencement of the winding-up of the company."

 

6. Section 309 no longer applies to corporate insolvency, having been replaced by section 266 of the Companies Act 1955 (as amended) and section 292 of the Companies Act 1993 both of which sections concentrate primarily on the effect of the payment as opposed to the intention with which it was made.  However the point raised in this appeal is still capable of arising in the field of personal insolvency where section 56 of the Insolvency Act 1967, is in very similar terms to section 309.

 

7. The trial judge held that on 2nd February Prudential was unable to pay its debts as they fell due and that Prudential repaid the deposits to Mr. Hyde with the intention of preferring him.  He further held that it was not necessary for the liquidators to prove that Mr. Hyde was in fact preferred.  However, if it was necessary to prove preferment in fact, the trial judge held that he had been so preferred by reason of the means of payment i.e. that he had not been subjected to the requirement of seven days call and had been repaid by the use of bank cheques.  He further held that the repayments had not been made in the ordinary course of business.

 

8. Mr. Hyde had died during the course of the proceedings and those representing his estate appealed to the Court of Appeal.  The Court of Appeal, whilst upholding the decision that the repayments were not made in the ordinary course of business, reversed the trial judge and held that it was  a  requirement  under  section  309  to show an actual preference received by Mr. Hyde and that he had not in fact been preferred.  The Court of Appeal found it unnecessary to consider whether, on the evidence, Prudential was unable to pay its debts as they became due.

 

9. The liquidators of Prudential appealed to the Board against the decision of the Court of Appeal.  Those representing the estate of Mr. Hyde, in addition to supporting the decision of the Court of Appeal, sought to uphold that decision on the alternative ground that it had not been demonstrated that on 2nd February 1989 Prudential was unable to pay its debts as they became due.

 

10. The basis of Mr. Palmer's admirable submissions on behalf of the appellants was the argument which had commended itself to the trial judge viz. that neither section 309 nor the New Zealand and United Kingdoms statutes from which it is derived make any reference to any requirement that the transaction carried out with intent to prefer one creditor over the others should actually have operated so as to produce such a preference.  In the absence of such express statutory requirement of an actual preference, the court could not properly impose it.  Alternatively, Mr. Palmer submitted, there was an actual preference in this case during the period of accelerated payment which was a sufficient actual preference to satisfy the requirements of the section.

 

11. It is first necessary to determine what is meant by the word "preference" in the phrase "preference over the other creditors".  In their Lordships' view there can be no doubt that it refers to giving priority to the payment of one creditor over creditors whose only remedy is to prove in the insolvency.  The reference to "the" other creditors must be a reference to a group of creditors which can be ascertained at a specific time and the only possible time is the date of winding up.  In the events which happened, the transaction under attack did not give rise to any preference to Mr. Hyde over the body of creditors entitled to prove in the liquidation.  If Prudential had gone into liquidation during the period of accelerated payment, Mr. Hyde would have been so preferred.  But in the event the body of creditors proving in the liquidation have not been adversely affected in any way.  If Mr. Hyde's demand for repayment had not led to early repayment but had been satisfied, as were the demands of other depositors, in the ordinary course of business (i.e. after the  period  of  accelerated  payment  had elapsed) the creditors in the liquidation would have been in exactly the same position as they are now.  Therefore, even if, as the judge found, there was an intention to prefer Mr. Hyde's claims over those of the creditors in the liquidation, in fact no such preference transpired.

 

12. Is the existence of such an actual preference a requirement of section 309?  At first sight it would seem obvious that the section has no application where there has been no actual preference.  The effect of the section, if applied, is to require the preferred creditor to repay what he has received, the moneys recovered being applicable pari passu between the creditors in the liquidation.  The underlying purpose is to ensure compliance with the basic principle of insolvency law viz. pari passu distribution of the insolvent estate.  If the creditor from whom repayment is sought has not in fact been preferred the whole rationale of the section disappears.  Far from bringing back into the pool moneys which would, apart from the preference, have been available for pari passu distribution in the liquidation the effect would be to increase the pool by recovering moneys which would not, in any event, have been so available.

 

13. It is probably this basic consideration which accounts for the fact that their Lordships were not referred to any decision or textbook where the point has been directly raised or argued.  On the contrary, there are numerous obiter dicta which assume that an actual preference is required.  For example in Peat v. Gresham Trust Limited [1934] A.C. 252 at page 260 Lord Tomlin said:-

"Now it is to be observed that the appellant in order to succeed has to establish the validity of a number of propositions of law and fact, including the following: (1) ... (2) ... (3) that such suffering [of a judicial proceeding] (a) was done with a view of giving the respondents a preference over the other creditors of the debtor company and (b) did result in such a preference being given." (emphasis added)

 

14. In the decision of the New Zealand Court of Appeal in Tyree Power Construction Limited v. D.S. Edmonds Electrical Limited (In Liquidation) [1994] 2 N.Z.L.R. 268 at page 271 Hardie Boys J. said:-

"Under s 309 of the Companies Act, the deed was voidable  as  against  the liquidator if made `with a view

to giving ... a preference over the other creditors'.  Other conditions, that Edmonds was at the time unable to pay its debts as they became due from its own money, and that the assignment took effect within two years of the commencement of the winding up, are obviously satisfied.  There is also the requirement that the deed had the effect of conferring a preference.  There can be no doubt that this deed had that effect."  (emphasis added)

 

15. There are dicta to similar effect in Canadian authorities on voidable preference provisions derived from the English statutes: see Hudson v. Benallack (1975) 59 D.L.R. (3d) 1; Re Malisic (1994) 117 D.L.R. (4th) 409 at page 414.

 

16. The significance of these dicta is not that they provide persuasive authority to the effect that it is necessary to have an actual preference: that point was not argued in any of the cases.  What is significant is that ever since the first English statutory provision dealing with voidable preferences (from which all the later statutory provisions in the different common law jurisdictions derive) everyone has assumed that it is necessary to show an actual preference and not simply an intention to prefer.  The same assumption has always been made in Scotland, which has its own legislation in regard to unfair preferences: see Bankruptcy (Scotland) Act 1985, section 36; Insolvency Act 1986, section 246.

 

17. The researches of Mr. Whiteside, for the respondents, demonstrate the reason for this universal assumption.  The law of voidable (or as it used to be called fraudulent) preference is based on the common law as developed by Lord Mansfield.  He stated the law in Alderson v. Temple [1768] 4 Burr. 2235 at 2239:-

"All acts to defraud creditors or the public laws of the land are void; and if the nature of the act be a conveyance or grant, 'tis not only void, but an act of bankruptcy.  It has been determined `that a conveyance by a trader, of all his effects, for the payment of one or more bona fide creditors of the most meritorious kind, though his effects do not amount to half what is due, is void; because it is not an act in the ordinary course of business; it is not such an act as a man could do, but it must be followed by an immediate act of bankruptcy, and it is defeating the equality that is introduced by the Statutes   of  Bankruptcy,  and  the  criminal  (for  the bankrupt is considered as a criminal) is taking upon himself to prefer whom he pleases."

 

18. This excerpt demonstrates that the basis of Lord Mansfield's principle is that an act has been done which in fact defeats the equality between creditors in an insolvency.  The intent of the debtor to produce such result is essential: but Lord Mansfield was only considering a case in which such equality had in fact been defeated.

 

19. The first statutory intervention in the English law of voidable preference was contained in section 92 of the Bankruptcy Act, 1869 which has been re-enacted subsequently in the same terms by section 48A of the Bankruptcy Act 1883 and subsequent Bankruptcy Acts.  In Sharp v. Jackson [1899] AC 419 at page 421 Lord Halsbury L.C. expressed one of the obiter dicta to the effect that an actual preference is required.  Quoting Lord Esher he said:-

"The question whether there has been a fraudulent preference depends, not upon the mere fact that there had been a preference, but also on the state of mind of the person who made it.  It must be shewn not only that he has preferred a creditor, but that he has fraudulently done so."

 

20. Having stated that view, Lord Halsbury went on to express his agreement with the views of Lord Cairns in Butcher v. Stead (1875) L.R. 7 H.L. 839 at page 846 to the effect that section 92 of the 1869 Act did not attempt a completely comprehensive statement of the old common law of fraudulent preference so as to provide a statutory code: the section left certain matters to stand as they had at common law: see also Ex parte Blackburn (1871) L.R. 12 Eq. 358 at page 363.

 

21. These decisions demonstrate that the foundation of Mr. Palmer's argument - that the omission from section 309 of any express requirement that there should be an actual preference renders it impossible to require such actual preference - is not sound.  If the statute does not purport to state the whole law comprehensively, the basic common law assumption that an actual preference is necessary, which Lord Mansfield plainly thought necessary, survives in the common law.  The progression is as follows: Lord Mansfield plainly treated an actual preference as a requirement; section 92  of  the  1869  Bankruptcy  Act  was  not  a  comprehensive code regulating fraudulent preference but to the extent that it was silent on the matter left the old common law rule standing; the later statutory provisions (both in England and New Zealand) are simply re-enactments of section 92 of the 1869 Act and must therefore receive the same construction.  Therefore the common law rules of fraudulent preference which only applied where there had been an actual preference remains the law.

 

22. This result conforms with the common sense of the matter.  There is no reason to set aside a transaction so as to bring assets into the pool of assets available for distribution amongst creditors in the insolvency unless the transaction so set aside has in fact diminished the pool which would otherwise have been available.  In the circumstances, it is unnecessary for their Lordships to consider whether Prudential was able to pay its debts as they became due.

 

23. For these reasons their Lordships will humbly advise Her Majesty that the appeal should be dismissed.  The appellants must pay the respondents' costs before their Lordships' Board.

 

© CROWN COPYRIGHT as at the date of judgment.