All Type Timber Pty Ltd v BGC Fibre Cement

[2007] NSWDC 90

CITATION:	All Type Timber Pty Ltd v BGC Fibre Cement [2007] NSWDC 90
HEARING DATE(S):	13, 14 and 15 February 2007
JUDGMENT DATE:	28 March 2007
JURISDICTION:	Civil Jurisdiction
JUDGMENT OF:	Johnstone DCJ at 1
DECISION:	Judgment for the Defendant
CATCHWORDS:	CORPORATIONS ACT - Insolvent corporation - Action by liquidator for recovery of alleged preferences - Continuing business relationship between corporation and defendant - Peak indebtedness on the running account - Defence as to no reasonable grounds for suspicion of insolvency: subjective and objective tests satisfied
LEGISLATION CITED:	Corporations Act 2001: ss 588E, 588FC, 588FA, and 588FG(2)(b)
CASES CITED:	Airservices Australia v Ferrier (1996) 185 CLR 483 at 503 Dean-Willcocks v Commissioner of Taxation [2004] NSWSC 1058 at [30] Sutherland v Eurolinx Pty Ltd [2001] NSWSC 230 at [43], [140] and [148] Whitton v Konemann Australia Pty Ltd [2002] NSWSC 1137 at [59]
PARTIES:	All Type Timber Pty Ltd (In Liquidation) (First Plaintiff) Adrian Duncan (Second Plaintiff) BGC (Australia) Pty Limited trading as BGC Fibre Cement (Defendant)
FILE NUMBER(S):	615/05
COUNSEL:	Mr C Locke for the Plaintiffs Mr J Johnson for the Defendant
SOLICITORS:	Smith Partners - Sydney (Plaintiffs) Hotchkin Hanly - Perth (Defendant)

JUDGMENT
Introduction

1. All Type Timber Pty Limited was placed under administration on 22 March 2002 (“the relation-back day”). Subsequently, it was placed into a creditors voluntary winding-up and Mr Duncan (the second plaintiff) became the liquidator.

2. Between 22 September 2001 and 22 March 2002 (‘the relation back period”) BGC Fibre Cement supplied fibre cement to All Type Timber Pty Limited pursuant to various orders, for which it received a number of payments: (“the payments”).

3. The liquidator claimed that each of the payments was an unfair preference and seeks repayment from BGC Fibre Cement of $78,768.97, together with interest.

4. BGC Fibre Cement denied that any payment was an unfair preference because:

(a) All Type Timber was not insolvent at the time that any transaction to which the payments

related was entered into or given effect: s 588FC(a) of the Corporations Act 2001(the

Act), or

(b) The payments constituted a single transaction that did not result in it receiving more than it

would have if the transaction were set aside: s 588FA of the Act.

5. Alternatively, BGC Fibre Cement said that it is not liable because it became a party to the transactions in good faith when it had no reasonable grounds for suspecting All Type Timber was insolvent, and a reasonable person in its circumstances would have had no such grounds for so suspecting: s 588FG(2).

6. The principal issues for determination are:

(a) Was All Type Timber insolvent at any time during the 12 months ending on 22 March 2002:

s 588E(3)?

(b) Were the payments a transaction that, for commercial purposes, was an integral part of a

continuing business relationship between them: s 588FA(3)?

(c) If so, did BGC Fibre Cement receive more than it would have if the transaction were set

aside and it were to prove for the debt in the winding up: s 588FA(1)?

(d) Did BGC Fibre Cements become a party to any transaction when it had no reasonable

grounds for suspecting All Type Timber was insolvent, and

(e) If so, would a reasonable person in its circumstances have had no such grounds for so

suspecting: s 588FG(2)(b)?

Was All Type Timber insolvent between 23 March 2001 and 22 March 2002?

7. The defendant, BGC Fibre Cement, argues that the liquidator did not prove All Type Timber was insolvent at any time prior to 22 March 2002. It submitted that the opinion evidence of Mr Duncan as liquidator is unreliable, because there was no relevant factual material to support it. The assumptions and analyses upon which Mr Duncan’s opinions were formed were not proved. Alternatively, his opinions should not be accepted because they were flawed in a number of significant respects. Further, there was no other evidence of insolvency.

8. It is appropriate, therefore, to firstly examine in more detail what Mr Duncan’s opinion was, and the basis on which it was formed. His evidence-in-chief is set out in two affidavits sworn on 28 June 2005 and 29 March 2006. Supporting documentation was contained in the Exhibits to his affidavits, the Solvency report (Exhibit A), Profit and Loss Statements (Exhibit C1) and General Ledger documentation (Exhibit C2).

9. In summary, it was Mr Duncan’s opinion that All Type Timber was not able to pay all of its creditors from its own funds at any time since it commenced trading in June 2000 (paragraph 26). It had a deficiency of assets over liabilities for that entire period (paragraph 16). It traded at a loss the entire time it operated the business, save for the final three months (paragraph 21). It was unable to generate sufficient sales to meet its current trading commitments from operations to satisfy its obligations to unsecured creditors since the commencement of the business (paragraph 22). It did not have an overdraft facility, nor was it in a position to obtain one, given the absence of any available security (paragraph 29). The age of accounts grew over the time it was trading (paragraph 33). Trading terms of suppliers were often not observed (paragraph 34). Demands for payment were received from trade suppliers from as early as May 2001 (paragraph 35).

10. I am satisfied that these matters, if factually supportable and otherwise reliable, are sufficient to establish that All Type Timber was not able to pay all its debts, as and when they became due and payable, from as early as 23 March 2001.

11. The main complaint made by BGC Fibre Cement is that the ‘source records’, being the electronic files containing the books and financial records of All Type Timber were never put in evidence, and further, the relevant ‘working papers’ associated with the various calculations derived from those records, relied on by the liquidator to form his opinions, were not put in evidence.

12. It was further submitted that Mr Duncan had never personally accessed the source records, and relied solely on reports, summaries and calculations prepared by his staff, that were not produced. In the absence of the source documents and working papers from Mr Duncan’s staff, his evidence should be given no weight.

13. I leave to one side for the moment the question of whether it was open to BGC Fibre Cement to seek and consider that material for itself, had it wished to do so, because it clearly was. I will look first at the question of whether Mr Duncan’s evidence was rendered unreliable having regard to flaws alleged in his analysis or any assumptions he relied on, and secondly I will look at whether facts were proved that were sufficient to support his opinion evidence, or a finding of insolvency independent of his opinion.

14. I am not persuaded that Mr Duncan’s evidence was unreliable and should be rejected because of flaws in his analysis or assumptions relied upon.

15. The first flaw asserted was Mr Duncan’s statements as to the non-existence of registration for GST purposes and no substantial recorded liability for GST or PAYG income tax. I discount this criticism on the basis that even if Mr Duncan’s statements were incorrect, the amounts involved did not affect the overall financial position of All Type Timber, sufficient to alter it from an insolvent state to a solvent state.

16. The second flaw alleged was the fact that in the balance sheet generated from 22 March 2002 there is a net equity recorded of $50,885.86, a turnaround from the balance sheet net equity as at 30 June 2001 of ($374,796.52), and a net income of $425,682.38, as against a loss for the period ending 30 June 2001 of ($132,610.16). As Mr Duncan points out, however, the balance sheet as at 22 March 2002 was clearly not correct (paragraph 14), and All Type Timber had a negative net equity as at 22 March 2002. It is suggested that there was clear evidence of a turnaround of the company in that 9-month period as a result of an expanding business and a dramatic increase in revenue. It was simply not true.

17. In the result, I am satisfied that Mr Duncan’s evidence was not rendered unreliable having regard to any flaws.

18. In my view there was credible admissible evidence capable of supporting Mr Duncan’s opinion, or otherwise to support a finding on the balance of probabilities that All Type Timber was not able to pay all its debts, as and when they became due and payable, from as early as 23 March 2001.

19. There is direct evidence supporting the probability of insolvency: habitual late payment of invoices, demands by trade creditors, a claim for a warehouse lien over stock accumulating to $180,000, inadequate and inaccurate financial accounts, misstated bank balances, dishonoured cheques, breaches of suppliers’ trade terms, an ageing debtor profile, and a negative net asset position. There is other supporting evidence of inadequate management of All Type Timber and neglect of its financial affairs, demands on funds to finance the defence of legal proceedings against the company, and withdrawal of supply and imposition of COD terms by suppliers. This evidence is supported by inferences readily drawn as to false, unrecoverable related party transactions, negative cash flows, and the absence of any capacity to raise a loan or obtain credit. The evidence supports a finding that the company’s financial problems were not of recent origin, but extended back over a long period of time, to at least 23 March 2001, if not before.

20. For all these reasons, I find that All Type Timber was not able to pay all its debts, as and when they became due and payable, from at least 22 September 2001, and was insolvent from that date.

21. It must therefore be presumed that All Type Timber was insolvent for the whole of the period in which the payments were made: s 588E(3). BGC Fibre Cement has led no evidence to rebut that presumption.

Were the payments part of a continuing business relationship?

22. BGC Fibre Cement relied upon s 588FA(3) of the Act and says the payments related to a transactions that, for commercial purposes, were an integral part of a continuing business relationship, in the course of which the level of All Type Timber’s indebtedness to BGC Fibre Cement was increased and reduced from time to time as a result of the payments, which formed part of that relationship.

23. The liquidator says there was no continuing business relationship within the meaning of the section, because the payments by All Type Timber were made solely to satisfy existing indebtedness, and not secure the continuation of supply by BGC Fibre Cement of fibre cement.

24. The evidence establishes that BGC Fibre Cement had been supplying fibre cement to All Type Timber since its incorporation, and prior to that time when Mr Morris conducted the business as a sole trader, and continued to do so right up until the appointment of the administrator. A credit arrangement had been put in place, and credit terms continued to be provided after the business was incorporated, although BGC Fibre Cement was unaware that the business had in fact been incorporated. All Type Timber was an habitual slow payer, which never traded strictly within the terms of the credit agreement. According to Mr Murphy, the National Credit Manager for BGC Fibre Cement (at paragraph 24 of his affidavit):

“ All Type Timber always paid its accounts during that period. As such, I allowed that history of payment to continue and allowed an increase to the credit limit. I never suspected that All Type Timber was insolvent or having financial difficulties”.

25. In cross-examination, Mr Murphy denied that credit was ever stopped to All Type Timber, and said that it was a continuing relationship about which he was never worried, because the account “never blew out beyond what we were concerned about”. Even the two dishonoured cheques in November 2001 raised no alarm, because they were replaced almost immediately with cheques that were honoured. That was something that happened regularly in the building industry.

26. Mr Small was the NSW Manager of BGC Fibre Cement at the relevant time, reporting to Mr Murphy. One of his duties was to collect outstanding accounts from NSW customers. This included All Type Timber, but its payment profile was ‘not unusual’ in that there were some 30-40 other customers with outstanding accounts each month, and it was common for them to ‘fluctuate’ with the payment of their accounts. His evidence was (at paragraph 5):

“ …I often requested Mr Morris of All Type Timber to pay All Type Timber’s outstanding accounts. However, those accounts were always paid, whether prior to or subsequent to my requests. On that basis, I never had any concern that All Type Timber was insolvent. If I did have such a concern, it was my responsibility to report it to Mr Murphy”.

27. I am satisfied that the purpose of the payments was not solely to discharge existing indebtedness, but also to induce BGC Fibre Cement to continue to supply fibre cement to All Type Timber. Interest was never charged on the running account. The business effect of their dealings proceeded on the mutually assumed understanding that BGC Fibre Cement would continue to supply, even though All Type Timber was from time to time exceeding the original credit limit, because it was substantially adhering to the credit arrangements: Airservices Australia v Ferrier (1996) 185 CLR 483 at 503. As was said in that case (at 504-5), the essential feature of a running account is that it predicates a continuing relationship of debtor and creditor with an expectation that further debits and credits will be recorded. That was precisely the situation here. That mutual assumption continued uninterrupted throughout the relevant period: Sutherland v Eurolinx Pty Ltd [2001] NSWSC 230 at [148].

28. For all these treasons I find that there was a continuing business relationship between All Type Timber and BGC Fibre Cement of which the payments were, for commercial purposes, an integral part. In the course of the relationship, the level of net indebtedness of All Type Timber was increased and reduced from time to time as the result of the series of transactions to which the payments related.

29. The transactions to which the payments related therefore constituted a single transaction: s 588FA(3)(c) of the Act.

Did BGC Fibre Cement receive more than it otherwise would have?

30. The question which then arises is whether that single transaction resulted in BGC Fibre Cement receiving more than it would receive if required to prove for the debt in the winding-up: s 588FA(3)(d) of the Act. That requires a consideration of the peak indebtedness of All type Timber by comparison with the amount owing at the end of the relevant period: Whitton v Konemann Australia Pty Ltd [2002] NSWSC 1137 at [59]. Counsel described this as the principle of ‘ultimate effect’.

31. The liquidator contended that the relevant amount was $25,637.88, being the difference between the highest level of indebtedness: $61,343.16 on 26 October 2001, and the lowest level of indebtedness: $35,705.28 on 22 September 2001.

32. However, that is not the appropriate method to calculate the ultimate effect of the single transaction, for the purposes of s 588FA(1) of the Act. The relevant indebtedness is that as at the end of the series of transactions: Sutherland v Eurolinx Pty Ltd [2001] NSWSC 230 at [140]. The amount outstanding as at 22 March was $38,503.20. The ultimate effect of the payments was, therefore, to produce a sum of $22,839.96 as the amount by which BGC Fibre Cement was preferred to other creditors.

33. Thus, unless BGC Fibre Cement has made out a defence under s 588FG(2)(b), by proving that when it became a party to the transactions it had no reasonable grounds for suspecting All Type Timber was insolvent, and that a reasonable person in its circumstances would have had no such grounds for so suspecting, it will be liable to repay to the liquidator the sum of $22,839.96, together with the relevant amount of interest thereon.

Were there no reasonable grounds to suspect insolvency?

34. The liquidator submits that BGC Fibre Cement did not prove that when it became a party to the transactions to which the payments related it had no reasonable grounds for suspecting All Type Timber was insolvent. It submits that this is a demanding subjective test, requiring the proof of a negative:

Dean-Willcocks v Commissioner of Taxation

[2004] NSWSC 1058 at [30].

35. The liquidator argues that whilst there is no evidence of actual suspicion, and no single factor by which the relevant suspicion is established, the cumulative effect of a combination of matters, apparent to BGC Fibre Cement, were more than sufficient to have triggered the necessary level of suspicion. These factors included the late payment of invoices and the dishonoured cheques in November 2001.

36. What is required, however, is for the court not to look at the whether a suspicion existed, in hindsight, but rather to look at the commercial circumstances then prevailing, through the contemporary eyes of the parties: Sutherland v Eurolinx Pty Ltd [2001] NSWSC 230 at [43].

37. The evidence is that the payment profile of All Type Timber was not unusual. Its level of indebtedness never got to the point that it caused a concern, neither to Mr Small, the NSW Manager, nor to Mr Murphy, the National Credit Manager. Likewise, two dishonoured cheques in the course of a relationship where there were otherwise no grounds for concern was a not unusual occurrence in an industry in which temporary cash flow problems were common.

38. For these reasons I find that BGC Fibre Cement did not at any time during the period concerned suspect that All Type Timber was insolvent and that there were no reasonable grounds for such a suspicion.

Would a reasonable person have suspected All Type Timber was insolvent?

39. The liquidator next submits that BGC Fibre Cement did not prove that a reasonable person in its circumstances would have had no reasonable grounds for suspecting All Type Timber was insolvent when it became a party to the transactions to which the payments related.

40. This is an objective test. It requires a consideration of what a reasonable business person would have suspected in the circumstances.

41. No evidence was led by either party that the belief held by Mr Murphy, that there was no cause for concern or suspicion of insolvency raised by the payment profile of All Type Timber or by reason of the two dishonoured cheques in November 2001, was unreasonable. There was nothing to put BGC Fibre Cement on notice that it might, for example, need to make further enquiries.

42. Rather, what the evidence does establish is that BGC Fibre Cement had a sophisticated credit control system and a vigilant process for monitoring and following up potential bad debts. The National Credit Manager, Mr Murphy, impressed me as an astute, professional and careful manager, whose judgment on matters of credit was sound. I would have little doubt that if there were any grounds for suspicion, he would have discovered them.

43. For these reasons I find that a reasonable person in the circumstances of BGC Fibre Cement would have had no reasonable grounds for suspecting All Type Timber was insolvent when it became a party to the transactions to which the payments related.

44. Accordingly, BGC Fibre Cement has made out a defence under s 588FG(2)(b) of the Act.

Summary

45. All Type Timber was not able to pay all its debts, as and when they became due and payable, from at least 22 September 2001, and was insolvent from that date.

46. There was a continuing business relationship between All Type Timber and BGC Fibre Cement of which the payments were, for commercial purposes, an integral part.

47. The payments constituted a single transaction, the ultimate effect of which was to produce a sum of $22,839.96 as the amount by which BGC Fibre Cement was preferred to other creditors.

48. BGC Fibre Cement has made out a defence, in respect of any preference, under

s 588FG(2)(b) of the Corporations Act 2001.

Disposition

49. For these reasons I find for BGC Fibre Cement and enter a verdict for the defendant.

50. I direct the entry of judgment accordingly.

51. I reserve costs pending argument.

52. The exhibits are to remain in court for 28 days, after which period they may be returned to the parties.