Casey Interiors Pty Ltd (in Liquidation) v Specialised Roofing Systems Pty Ltd No. 4220 Judgment No. SCGRG 92/2060 Number of Pages 8 Corporations

[1993] SASC 4220

COURT IN THE SUPREME COURT OF SOUTH AUSTRALIA ANDERSON J

CWDS
Corporations - Winding up - action by liquidator to recover as preferences funds paid to defendant and, in partial alternative, as funds converted by defendant from chegue in relation to which the first plaintiff had an entitlement to immediate possession - running account defence will not overcome Bankruptcy Act 1966s.122(4). Corporations Law s565 and BankruptcyAct 1966 sl22. Rees v Bank of New South Wales (1964) 111 CLR 210, applied. Re: Weiss; Ex parte White v John Vicars and Co. Ltd (1970) ALR 654 and Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266, considered.

HRNG ADELAIDE, 20-21 September 1993 #DATE 15:10:1993
Counsel for plaintiff:     Dr R J Baxter
Solicitors for plaintiff:    Johnson Winter
   and Slattery
Counsel for defendant:     Mr D A Trim
Solicitors for defendant:    Kelly and Co

ORDER
Judgment for plaintiffs.

JUDGE1 ANDERSON J The second plaintiff was appointed liquidator of the first plaintiff (Interiors) on 12 June 1991 by order of this Court. The application to wind up was filed in this Court on 6 May 1991 and advertised in the Government Gazette on 9 May 1991. 2. These proceedings seek an order that the defendant repay to the plaintiffs the aggregate of sums paid by Interiors to reduce its indebtedness to the defendant in the relation-back period prior to 6 May 1991. Particulars of the payments sought to be impugned are set out in para.5 of the statement of claim as hereunder: 3. Particulars Date Cheque No. Amount 7 November 1990 237.00 22 November 1990 001194 35.30 21 December 1990 001345 1,415.25 1 March 1991 001565 4,490.55 8 April 1991 000121 10,000.00 16 April 1991 000160 10,000.00 22 April 1991 000180 14,388.90 24 April 1991 000200 11,304.77 By the conclusion of the trial the plaintiffs no longer sought an order in relation to the initial payments of $237 and $35.30. 4. In addition to these sums which were claimed as preferences pursuant to s.565 of the Corporations Law, the plaintiffs also sought the return of $8,924.18 which sum was taken by the defendant from a cheque received by it from Construction Services Civil Pty Ltd (CSC) made payable to Casey Ceilings Pty Ltd (Ceilings) pursuant to that section, or in the alternative, as damages consequent upon the conversion by the defendant of the cheque to which Interiors was entitled. 5. The narrative of the events leading up to and surrounding all payments is not substantially in dispute. What follows is that narrative with the facts as I find them to be. At the outset it is necessary to refer to the witnesses, the principal of whom were Miss Casey and Mr Casey for the plaintiffs and Mr S. Stefani for the defendant The Caseys had very vague recollections of precise detail of what occurred in the relevant period. Mr Stefani had a better and more detailed recollection and where there is doubt, I accept him. That, however, does not reflect adversely upon the Caseys. They, like Mr Stefani, gave the historical evidence to the best of their ability. 6. Ceilings was a well established family company. In November 1989 it was decided by the directors, of whom the Caseys were two, to enter into a joint venture with Beton Industries Pty Ltd (Beton). A new company, Interiors, was formed. Heads of agreement were drawn up and executed and the shareholding was split two-thirds to Casey interests and one-third to Beton interests. The directors were representative. From the agreement and by the evidence, existing contracts were treated a belonging, in an income sense, to Interiors and when payments were made on account of those existing contracts they were, after endorsement, paid into Interiors' bank. 7. Notification of this arrangement, including a request that payments of Ceilings' accounts be made to Interiors was given to all relevant trade creditors, debtors and suppliers by circular dated 24 November 1989 over the hand of Miss Casey. 8. In March 1990, Interiors applied by standard form to the defendant for a credit rating so it might open an account. Mr Stefani made the usual inquiries including those of referees and the application was granted. The account was to be a 30 day account. I accept Mr Stefani's evidence that this was from the date of the statement at month's end and not from date of invoice. Thereafter, Interiors traded with the defendant each month until April 1991. The purchases, except for September 1990, were modest. 9. In September 1990, Interiors, through Mr Casey, placed a large purchase order, being No.3429, with the defendant for a number of ceiling tiles and associated fittings. This order was placed after discussion with Mr Stefani. When the tiles arrived in Australia, the defendant gave Interiors an invoice numbered 920 and dated 7 December 1990 for tiles totalling $40,128 in value. These tiles were to be used by Interiors to fulfil its contract with Sabemo (Australia) Pty Ltd, the builder of a project referred to in the evidence as the multi-tenanted building at Science Park. Arrangements had been made between Interiors and the defendant to have this invoice delivered early so that Interiors could claim from Sabemo in relation thereto. Hence its description in the evidence as the "materials off site" invoice. It was agreed and understood between Interiors and the defendant that the defendant would not be paid until Interiors had been paid by Sabemo. Mr Stefani expected this payment to be made to the defendant by the end of March 1991 allowing for Interiors to claim, Sabemo to claim from its principal and the Christmas break in the construction industry. The tiles were mostly delivered to Interiors and inspected in late December 1990. 10. In early 1991 Miss Casey continued to advise Mr Stefani that Interiors would pay when it had the money from Sabemo. He accepted this as a separate arrangement from the usual credit terms because of the nature and size of the transaction. Because of the manner in which Mr Casey prepared the monthly claims showing previous credits, and because value added work was performed to the tiles by Interiors, in the claims which Miss Casey sent to Sabemo for the months of December 1990, January 1991, February and March 1991, there remained outstanding a claim for "materials off site". Unbeknown to Miss Casey the initial claim for tiles was paid by Sabemo to Interiors in late January 1991. Because of the manner of formulation of the claims, she did not appreciate that the initial claim for the raw product had been paid. 11. In February Mr Stefani ascertained from Sabemo that Interiors had been paid. He thought that to be in that month and so still expected to be paid by Interiors by payment at the end of March. The March payment was received by him on 8 April 1991 and was in the sum of $10,000. He expected it to be for at least $40,128. On 10 April 1991 he spoke to his colleague Mr Hollings who spoke to Mr Casey who was not then aware that the account had not been paid in full. He spoke to his sister and she and Mr Stefani then made the arrangement to pay which is confirmed in an exchange of facsimiles (being the exhibit P10) dated 10 April 1991. This was an arrangement to settle the then outstanding account for the months of December 1990 and January 1991 by instalments within two weeks. 12. The first of three payments to achieve this end was collected by Mr Stefani on 15 April 1991. Within an hour of having done so, he was advised by Miss Casey that the cheque might not be met on presentation. 13. The explanation which she gave was that a cheque which she was expecting from Sabemo to enable Interiors' cheque to be met had been delayed through an unexpected personal difficulty within Sabemo. That cheque was honoured upon its re-presentation and the remaining cheques were paid as agreed on 22 and 24 April 1991. The outstanding balance was then $8,782.69 which forms the basis of the claim in conversion to which I shall come. 14. Before 8 April 1991, Mr Stefani maintained that he had no reason to contemplate that Interiors may not be able to pay its accounts as and when they fell due. This was notwithstanding that the usual 30 day account was late in payment. He said this was usual in the industry and it was necessary to be commercially realistic in regard to accounts and payments. 15. This was his explanation to Dr Baxter of his endorsements in red ink upon the February 1991 and March 1991 statements which are in evidence. The endorsement on the February statement may have been as innocuous as Mr Stefani explained. However, on the March 1991 statement which was despatched at month's end when he believed Sabemo had paid Interiors the previous month and when he expected payment in full within a few days he endorsed: "Attention : Kathryn Casey $15,000 - 8/4/91 $33,890.22 - AND balance due by 30/4/91" 16. This referred to the sum of $48,89.25 which was three months overdue on that statement. This endorsement was written before the Interiors cheque in the sum of $10,000 was received on 8 April 1991 and at a time when at least $40,128 was expected. Why in those circumstances propose a method of payment by instalments when, if what was expected eventuated, the three month balance would be reduced to $8,562.25? Dr Baxter postulated this question. He then suggested that it was because Mr Stefani was concerned about the ability of Interiors to pay irrespective of its receipt of funds from Sabemo. No reasonable alternative explanation was given by Mr Stefani who had ample time and opportunity to do so in cross-examination. Thus, I find that in March 1991 he was concerned about Interiors' ability to pay and so endorsed the statement with a suggested payment program. This concern strengthened when the 8 April, 1991 payment arrived and was for only $10,000. 17. The trading relationship between the parties continued until early April 1991. By this time the defendant was aware from Mr Casey that Interiors had won a tender for a building to be built by Rivers Corporation. Mr Stefani knew that the defendant was a supplier of the material required by the specifications for that building and wanted therefore to remain on good terms with Interiors for the sake of future business. That business was, however, some time away; no orders were placed, no promises given nor agreements undertaken. Whilst there may have been hope I am not able to accept that that hope on the part of Mr Stefani was the cause of this endorsement. It was more likely caused by his fears about the ability of Interiors to pay its debts in full as and when they fell due. 18. In this context, and in light of the admission by Mr Trim of counsel for the defendant, that at the relevant time Interiors was insolvent and that the effect of Mr Kennedy's evidence, if completed, would have been to establish "that as at 6 November 1990, there was one outstanding creditor of Casey Interiors Pty Ltd and the debt that had been incurred as at or prior to that date remained unpaid as at the date of the commencement of the winding up and still remains unpaid" (transcript p.125) it is not then difficult to find that payments made to the defendant after that date were preferences in the required sense. 19. Pursuant to the provisions of s.122(2)and (3) of the Bankruptcy Act 1966 the onus falls upon the defendant to establish that the payments received from 21 December 1990 to 24 April 1991 were received in good faith and for valuable consideration and in the ordinary course of business. As to the second there is no dispute. It is the first and third requirements which Dr Baxter attacked. 20. Whilst the payments received on 21 December 1990 and 1 March 1991 are impugned in the pleadings, Dr Baxter did not concentrate upon them to any great extent. His prime concern were the payments received subsequently. 21. The payment of $1415.25 received on 21 December 1990 was in relation to the October statement and the payment of 1 March 1991 relates to goods delivered in November and included in the November statement. Even though both these payments were late in the strict trading terms sense, there is sufficient evidence in relation to them to support a finding that they were received in good faith for valuable consideration and in the ordinary course of business. It was apparent from the evidence of Mr Stefani that late payments were not unusual in the industry and even more so after the Christmas break. In relation to these payments the defendant has discharged the onus which is upon it. 22. The remaining April payments may be considered collectively for the purpose of the burden which the defendant has pursuant to s.122(2) and the plaintiff has pursuant to s.122(4). 23. Mr Trim submitted that these payments should be seen as various payments made in the usual operation of a running account between Interiors and the defendant which had commenced in March 1990 and extended to April 1991. He relied upon the judgment of Gibbs J in Re Weiss; Ex parte White v. John Vicars and Co. Ltd (1970) ALR 654 to submit that, as Barwick CJ said in Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266 at p.283, each payment was "not ... intended or understood to end the relationship of the debtor and creditor but rather to ensure its continuance". He effectively adopted the words of Gibbs J at p.659 when his Honour said: "The payments were made to reduce past indebtedness, but they were made on the clear assumption that further supplies ... would be delivered in future on credit in accordance with the arrangement on which the running account was operated". 24. In that case when cloth was supplied the payments made to reduce the account were on the basis of further supply to the bankrupt. At p.660, Gibbs J said: "On any view, the question whether any of these payments was preferential in effect can only be determined by looking at the net effect of the series of payments and deliveries on the running account, and when this is done it is clearly seen that none of these payments had the effect of giving a preference to the respondent." 25. His Honour followed Barwick CJ and held that even later payments made when future supply would not be as large as the payments credited would still relate to a running account. 26. In this case, Mr Stefani said he expected the trading relationship to continue. Mr Casey had a similar expectation. This being so, Mr Trim submitted that there is no real doubt that the payments made in April 1991 were made as part of a running account even though the payments far outstripped contemporaneous or immediately anticipated supply. On this basis these payments could not be preferences. 27. Mr Trim submitted that such a finding was the end of the matter. Were that so then it would not be necessary to go on and consider the effect of sub-ss.(2) and (4) of s.122 as Gibbs J did in Re Weiss (supra).    In addition, were it so it would be possible for almost any trading arrangement to avoid having payments so impugned as preferences simply by maintaining the account irrespective of what may be thought of the ability of the creditor to pay. 28. That this is a running account cannot be an end to the matter, having regard particularly to the test applicable to sub-s.(4) as expounded by Kitto J. in Queensland Bacon (supra) at p.303:
    "The notion which 'reason to suspect' expresses in sub-s.(4) is,
    I think, of something which in all the circumstances would
    create in the mind of a reasonable person in the position of the
    payee an actual apprehension or fear that the situation of the
    payer is in actual fact that which the sub-section describes -
    a mistrust of the payer's ability to pay his debts as they
    become due and of the effect which acceptance of the payment
    would have as between the payee and the other creditors." 29. As did Gibbs J in Re Weiss (supra) it is convenient to here pass directly to a consideration of s.122(4) in considering whether the April 1991 payments are protected by s.122(2). 30. The narrative sets out the circumstances in which the payment of 8 April 1991 was received. By then, Mr Stefani knew Sabemo had paid Interiors. He expected that the cheque which he received from Interiors would be for the full sum. He had proposed a schedule of payments on the March 1991 statement which was sent before the 8 April 1991 payment was received. 31. On 10 April 1991 he engaged in negotiations which led to a schedule of repayments being fixed and his diary note of 26 April 1991 notes a promise by Miss Casey to pay the balance. I attach no significance to the initial dishonour of the cheque of 15 April 1991. No goods were supplied after 10 April 1991. 32. The amount of the 8 April 1991 payment, having regard to the knowledge of Mr Stefani and his endorsement of the March 1991 statement, strongly justifies the inference that at the end of March he had reason to suspect Interiors' solvency. This was confirmed in his mind on 8 April 1991 and when he knew that the 15 April 1991 cheque could not be met without expected funds being received. I am therefore satisfied that the four April 1991 payments were paid when Mr Stefani had reason to suspect that Interiors was unable to pay its debts as and when they fell due and that the effect of the payments was to give the defendant a preference over other creditors. In such circumstances, the defendant could not be a payee in good faith as described by Kitto J at pp 223-223 in Rees v. Bank of New South Wales (1964) 111 CLR 210, where his Honour said:
    "... a creditor who receives a payment from the debtor
    cannot be held to be a payee in good faith if, at the time of
    receiving it, he knows or has reason to suspect that the debtor
    is unable to pay his debts and that the payment, if allowed to
    stand, will place him in a better position vis-a-vis other
    creditors than he would occupy if the debtor became bankrupt
    with the amount unpaid. This is true, in my opinion, even in
    respect of a payment as to which it is impossible to say without
    looking to the result of a series of payments in and out whether
    it is caught by sub-s.(1) as having in fact the effect of giving
    a preference." Thus the payments received in April 1991 have been successfully impugned by the plaintiffs. I turn then to the plaintiffs' claim in conversion. 33. The sum of $8924.18 was taken by the defendant from the cheque referred to in para.7 of the statement of claim. That cheque was sent to it mistakenly by CSC and was made payable to Ceilings. Interiors say it is better entitled to it than the defendant and seeks a refund of those funds as damages for the conversion of the cheque. 34. It is not in dispute that Interiors was indebted to the defendant at this time in the sum of $8782.69 (the difference being interest charged by the defendant). From the evidence it is likely that CSC had a pre-existing contract with Ceilings and paid a cheque in April 1991 to Ceilings but sent it to the defendant as is pleaded. It was banked on 5 June 1991. 35. The plaintiff, through its counsel, no longer contends that the receipt of these funds by the defendant was a preference but rather relied upon the allegation of conversion set out in para.15 of the Statement of Claim. 36. Mr Trim sought to end such a claim by submitting that this cheque in fact belonged to another and not the plaintiff. On the evidence of Mr Casey, that seems to be so as the contract with CSC was with Ceilings. It is submitted on behalf of the defendant in these circumstances that the plaintiff has no claim to it at all and the manner of dealing with the cheque is quite irrelevant in this action. 37. Dr Baxter took issue with this submission which he took to rely upon the defence of jus tertii. In brief, he submitted that of all involved with this cheque, i.e. Interiors, Ceilings and the defendant, it was clear from the evidence that, at best, Ceilings had a better title than the defendant and because of the arrangements of November 1989 which led to the creation of Interiors,that company had a better title to it than the defendant and was entitled to assert its rights to it. In those circumstances he contended that the conversion of the cheque was made out and the sum detained was the measure of the defendant's loss. 38. There seems to be no doubt that a plea of jus tertii is available to an alleged converter against a plaintiff who has an immediate right to possession of the item at the time of the conversion, cf. The Law of Torts in Australia Trindale and Cane at p.128. To overcome such a plea "a person not dispossessed but with an immediate right to possession, must in modern law prove an absolute title in himself", cf. Fleming The Law of Torts 8th edn at p.67. Fleming also writes at p.64 that "(t)he plaintiff in an action for conversion must have either been in actual possession or entitled to immediate possession of the goods". 39. In order to discharge this onus, Dr Baxter relied upon the evidence relating to the creation of Interiors. He submitted that from the evidence of Miss Casey and Mr Casey and from the documents there can be no doubt that rather than Ceilings, the original Casey company, being involved in a merger, it was Interiors which was created to undertake a joint venture with Beton. That much is shown by the shareholdings of Interiors. In addition, the Heads of Agreement document contemplates shared directorships and by clauses 7 and 8, the following: "Contracts in hand and contract negotiations as at the date of this agreement will be transferred to Casey Interiors Pty Ltd. Current works in progress as at 1st December 1989 to be transferred to Casey Interiors S.A. Pty Ltd." 40. This was obviously not sufficient to unilaterally alter contracts then extant between Ceilings and others but it did point to an intention. That intention was well publicised four days later when by circular of 24 November 1989 over the hand of Miss Casey, all relevant contracting parties, suppliers and others were informed of this "merger". The circular indicated that henceforth all accounts held in the name of Ceilings would be transferred to Interiors. The evidence is that whilst Ceilings continued to exist legally from 1 December, 1989 it did not do business. All payments received by it in respect of outstanding accounts were paid into the Interiors account in the spirit of the Heads of Agreement and the circular. 41. Dr Baxter relied upon this established circumstance to submit that at the relevant time it was Interiors which was more entitled to the CSC cheque and hence its proceeds. I find myself in agreement with him. The plaintiff has rebutted the plea relied upon by the defendant. Re-arrangement and practice between Ceilings and Interiors meant that at this time the plaintiff had an immediate right to possession of the cheque. This would be facilitated by Ceilings. The defendant converted the CSC cheque by its actions on 5 June 1991 and the measure of the loss sustained by the plaintiff as a consequence thereof is the sum of money taken by the defendant to clear Interiors account being $8,924.18. 42. That there had been some discussion between Miss Casey and Mr Stefani to the effect that she would ensure the defendant was paid when other funds became available from CSC is of no assistance to the defendants. By the time the defendant took the funds the winding up order had been made. Irrespective of the payee on the cheque it was Interiors which was entitled to immediate possession of the cheque by virtue of the commercial arrangements between Ceilings and Interiors which had been put in place in November 1989 and acted upon thereafter. 43. The plaintiffs are to have judgment for the April payments and the converted sum which aggregates $54,617.85. I shall hear counsel as to interest and costs.