The rule that arose from the case of “Cherry v Boultbee” is a longstanding rule where a person who is eligible to participate in a fund is prevented from doing so unless they have discharged their liability to contribute to the fund. The case of Harris Health Care Pty Ltd (receivers and managers appointed) (in liq) v Hayes [2024] NSWCA 301 considers whether this rule is still applicable today or if it is incoherent with the purposes and policy of the Corporations Act 2001 (Cth) (the Act). In doing so, the Court explored the relationship between statute and judge-made law.

Facts
The appellant, Harris Health Care Pty Ltd (Receivers and Managers Appointed) (In liquidation) (HHC) was the majority shareholder of the company Sirrah Pty Ltd (Sirrah). Both companies were being wound up. After paying all its creditors, Sirrah had a surplus of approximately $5 million in realised assets and a judgment debt of $17 million against HHC. Sirrah petitioned for HHC to be wound up. HHC was insolvent with its only potentially valuable asset being its shareholding in Sirrah. On 5 October 2022, Sirrah lodged a proof of debt for its judgment debt in HHC’s winding up.

The liquidator of Sirrah sought “special leave” under s 488(2) of the Act to distribute all of the $5 million surplus to only its minority shareholder and make no distribution to HHC considering its unsatisfied judgment of $17 million.

Issues
The primary judge in this case granted special leave to the liquidator to distribute to the minority shareholder and declared that the liquidator was entitled to apply the rule in “Cherry v Boultbee” against HHC and the bankrupt estate of William Francis Harris (the sole shareholder of HHC) from sharing in the surplus.

HHC sought to appeal the decision on three grounds:
1. a distribution of the surplus based on the rule in “Cherry v Boultbee” was not available because the rule is incoherent with the statutory scheme;
2. the primary judge erred in rejecting the contention that by lodging a proof of debt, Sirrah had made an election that prevented it from relying on the rule in “Cherry v Boultbee”; and
3. the primary judge erred in observing that HHC’s debt to Sirrah preceded Yates Beaggi’s security (a secured creditor).

Judgment
The Court dismissed the appeal. Leeming JA in his judgment (with which Bell CJ and McHugh JA agreed) noted that statute can displace the rules of common law and principles of equity in three main ways:
1. statute may be inconsistent with judge-made law;
2. statute may be a code meaning in the area of law there is no longer scope for the former rule or principle; and
3. if there as a lack of coherence between the continuing operation of the rule or principle and the purpose and policy of the statute, which was argued by HHC in this case.

Leeming JA explored the commencement of the rule in “Cherry v Boultbee” and its application in subsequent cases. His Honour acknowledged that there was uncertainty surrounding the rule but did not consider it as a form of set-ff or retainer as it is commonly characterised, and instead referred to Lord Walker in Re Kaupthing Singer and Friedlander Ltd [2012] 1 AC 804 that it is a “technique of netting-off” or a right to appropriate a particular asset as payment.

First ground of appeal – incoherence with the Corporations Act 2001
Leeming JA agreed that judge-made law can be excluded because it is incoherent with the purpose of the statute and that it is not necessary to identify a section that is directly inconsistent with the rule. However, he could not accept HHC’s submission that the rule of “Cherry v Boultbee” was incoherent with the Act. Leeming JA noted that excluding the rule creates results that are contrary to the fair and orderly system that is the purpose of those provisions.

Second ground of appeal – election
Leeming JA also held that the second ground of appeal was not made out. Sirrah lodged its proof of debt to approve the liquidator’s remuneration, and the Liquidator advised it was unlikely that there would be any distribution to any creditor. Sirrah later withdrew its proof of debt. Leeming JA noted that Sirrah did not have “irreconcilable alternatives” and should have been held to have made an election.

Third ground of appeal – defeating the secured creditor of HHC
HHC had charged its shares in favour of its solicitor, Yates Beaggi and argued that Yates Beaggi had an equitable interest in the shares of Sirrah as chargee which predated any claim on the fund. Leeming JA found that Yates Beaggi’s security was not over the surplus realised and it could have no security over the judgement debt of $17 million. Therefore, this ground was also not proven.

Impact
This case illustrates how the courts determine whether a judge-made rule is inconsistent or incoherent with statute. It confirms that the rule in “Cherry v Boultbee” still holds today even considering the statutes governing corporate law.