Cawthorn, David Saxby v D'Aquino Bros Pty Ltd

[1997] FCA 449

IN THE FEDERAL COURT OF AUSTRALIA	)
)
NEW SOUTH WALES DISTRICT REGISTRY	)     No. NG 3646 of 1995
)
GENERAL DIVISION	)

IN THE MATTER OF ILLAWARRA WHOLESALE LIQUOR PTY LIMITED (IN LIQUIDATION)

AUSTRALIAN COMPANY NUMBER: 053 687 719

BETWEEN:		DAVID SAXBY CAWTHORN in his capacity as Liquidator of Illawarra Wholesale Liquor Pty Limited (In Liquidation) ACN 053 687 719  Applicant
AND:		D’AQUINO BROS PTY LIMITED Respondent
CORAM:	EMMETT J
PLACE:	SYDNEY
DATED:	9 MAY 1997

EX TEMPORE REASONS FOR JUDGMENT

This is an application brought under section 565 of the Corporations Law (“the Law”) which provides, relevantly, that a payment made by a company that, if it had been made or incurred by a natural person, would, in the event of his or her becoming a bankrupt, be void as against the trustee in bankruptcy is, in the event of a company being wound up, void as against the liquidator.

The applicant is the liquidator of Illawarra Wholesale Liquor Pty Ltd to which I shall refer as “the Company”, having been appointed as such on 17 December 1992 by the Supreme Court of New South Wales. The application for the winding up of the Company was filed on 17 November 1992 and, accordingly, the relation back period for the purposes of section 565 of the Law, in so far as that section imports section 122 of the Bankruptcy Act 1966 (“the Act”) commenced on 17 May 1992.

The application relates to six payments said to have been made to the respondent (“D’Aquino”) by the Company during that period, being:

• a payment made by cheque dated 26 May 1992 in the sum of $89,880.67;

• a payment in the sum of $37,243.37 made by cheque dated 17 July 1992;

• three payments respectively in the sums of $20,000, $60,000 and $50,000 made by cheques dated 27 July 1992, 7 August 1992 and 18 August 1992; and

• a payment in the sum of $7,930 by cheque dated 6 October 1992. 

I grouped the three cheques for round figures together because they appear to fall within a single category. In effect, there are four questions that arise in the proceedings.  I shall deal with each of them separately.

The first payment was made by a cheque in the sum of $37,243.37 following the presentation and dishonour of a cheque for that sum which had previously been delivered to D’Aquino.  The Company carried on business as a seller of liquor and D’Aquino was a supplier of liquor to the Company.  As at May 1992 the Company was indebted to D’Aquino in a sum in excess of $200,000.  The Company drew a cheque for $69,165.27 on 12 May 1992.  There is some evidence that that cheque was cancelled.  It appears that it was presented and dishonoured.  On 20 May 1992, a cheque for $89,880.67 was also drawn, delivered to D’Aquino, presented for payment and dishonoured. Mr Rex Nunzio D'Aquino gave evidence concerning the dishonour of the cheque for $89,880.67.  Mr D'Aquino was the administration manager of D’Aquino at the time.  The Company had traded with D'Aquino for approximately two years before 1992 and at that stage the Company was indebted to D'Aquino for goods which had previously been sold and delivered but not yet paid for. 

The evidence is not totally clear as to the level of that debt.  However, Mr D'Aquino swore an affidavit of 7 May 1997 in which he said:

At the time D'Aquinos put the company onto C.O.D., D'Aquinos were owed $137,007.09. At the time D'Aquinos ceased to trade with the Company the debt owed by the Company to D'Aquinos was $141,321.44.

I shall refer directly to what was meant by putting the Company “onto C.O.D.”. That evidence indicates that at some point the records of D’Aquino indicated that the Company was indebted to it in the sum of $137,007.09.   The evidence concerning the Company being, "put... onto C.O.D.", related to the dishonour of the cheque.  Mr D'Aquino says that at about that time, although he was hazy as to the precise date and indeed his evidence changed as to when the communication took place, he had a telephone conversation with an officer of the Company as follows:

We will freeze your present account until you are able to make repayments. We will continue to supply you on a COD basis. You place your order, we will cost it and give you the amount required to be paid for it. Once you have paid for the order you can then come and collect it. Once you get back onto your feet you can start to pay your old accounts.

The response was that that would be acceptable. Subsequently Mr D'Aquino also gave evidence of a further conversation which had preceded that to which I have just referred.  Mr D'Aquino said:

Your last cheque has bounced.  You have now had a number of cheques that have bounced. We cannot continue to supply you on credit.

The response was:

The Company is going through some cash flow problems at the moment.  We really need your help in continuing to supply us until we get back on our feet.  You know things have been difficult with the recession but I am confident that we can trade out of our difficulties.

The evidence indicated there may well have been as many as three cheques in this period which were dishonoured, the third cheque being a cheque which was presented after the cheque for $89,880.67 to which I have referred. 

Mr D'Aquino agreed in cross-examination that it was unusual to have bounced cheques.  He formed the view that the Company was having some difficulty with cash flow and said that, having been involved in the liquor trade, he understood perfectly well the temporary cash flow difficulties caused when customers are slow in paying their accounts.  He said, however, that he had visited the Company's warehouse which appeared to be well stocked which, he said, indicated to him that the business was basically sound, notwithstanding any temporary cash flow difficulties.

Nevertheless he agreed that, following the dishonour of the cheques, he was worried that at the end of the day D’Aquino would not be paid. He acknowledged that the dishonour of the cheques meant that the Company had problems. He agreed that he knew there was a real risk that D’Aquino would not be paid. He knew that the Company could not pay the debt that was then outstanding and that there was a possibility that D’Aquino was exposed. He also agreed that it was unusual to put a customer on a COD basis. At that time D’Aquino was dealing with hundreds of customers and possibly all but the Company had some credit arrangements. It is in those circumstances that one must consider the payment made by the first cheque. Section 122 of the Act requires that a number of matters be established by a liquidator. First, there must be a payment. It is common ground that all of the payments to which I have referred are payments for the purpose of section 122. Second, the payments must take place within six months before the commencement of the winding up. It is common ground that that requirement is satisfied. Third, the payments must be made at a time when the Company was unable to pay its debts as they fell due. It is common ground that that requirement was satisfied.

The fourth requirement and the fifth requirement are that the payment must be made in favour of a creditor and that the effect of the transaction is to confer a preference or advantage on that creditor.  It is in relation to those two requirements that the issue before me arises.  It is common ground that the Company's financial position upon its winding up is that there is a very substantial deficiency.  Accordingly, if the payments were payments made to the respondent as a creditor, there is evidence that the effect of the payments was to confer a preference, priority or advantage over the other unsecured creditors.

I understand the paragraph of Mr D'Aquino's affidavit to which I have referred above as being evidence that, upon payment of the sum of $89,880.67, the balance of the Company’s account stood at $137,007.09.  D’Aquino “put the company onto COD” in the way to which I have referred, after that payment had been made, as I understand the evidence, although the evidence is by no means totally clear in that regard.  However, the paragraph was not challenged in substance in the sense that it was not objected to nor was there any cross-examination as to its substance. The effect of the payment was to reduce the indebtedness of the Company to D’Aquino by the amount of that payment in circumstances where Mr D'Aquino's understanding, which I must take to be the understanding of D’Aquino, was as I have indicated.

Reliance was placed by D’Aquino on observations made by Kitto J in Queensland Bacon Pty Ltd v  Rees (1966) 115 CLR 266 at 302 as follows:

In many situations, of course, the dishonour of a cheque unless otherwise explained carries a strong suggestion of insolvency;  but in others it may indicate, to those who are constantly dealing with the drawer and to know the general course he is pursuing in his business, no more than a policy of wringing the last ounce of credit out of everyone who can be fobbed off with promises.

With this general caveat against too ready an assumption that the dishonour of a trader's cheque must in all circumstances and inevitably create in the mind of a reasonably worldly - wise creditor a suspicion of insolvency, I shall deal separately with the facts of each case.

Kitto J  then went on to deal with the factual matters involved.

However, the evidence to which I have referred indicates that this is not a case such as was being referred to there. This was a case in which it must have been apparent to Mr D'Aquino that there was a real problem with the Company and he accepted that there was a risk that D'Aquino may not be paid. There is no doubt that the first payment was a payment to D’Aquino as creditor and the only answer to the claim would be reliance on section 122(2) of the Act which would exclude the operation of section 122 in favour of a payee in good faith and for valuable consideration and in the ordinary course of business.

Section 122(4)(c) of the Act provides that a creditor is to be deemed not to be a payee in good faith if the payment was made or incurred under such circumstances as to lead to the inference that the creditor knew or had reason to suspect that the debtor was unable to pay his debts as they became due from his own money and the effect of the payment would be give him a preference priority or advantage over other creditors. I consider that, in the light of the circumstances to which I have referred, section 122(4) of the Act would operate to deem D’Aquino not to be a payee in good faith. It would follow that D’Aquino is not able to rely on section 122(2).

I come now to the second payment in question being a payment made by cheque of 17 July 1992.  In dealing with that cheque it is necessary to consider the course of dealing between the company and D’Aquino.  The evidence indicates that between 26 May 1992 and 17 July 1992, there were 10 other payments made by the Company to D’Aquino.  Initially some of those payments were intended to be the subject of the application. However, in the course of address, counsel for the liquidator made it clear that, in the light of the evidence, he did not press the claim in relation to any of those payments.  That concession was properly made in the light of the evidence to which I am now about to refer.

From 26 May to 10 June 1992, there were eight invoices issued by D’Aquino to the Company for sums totalling $127,120.42.  On 10 June and 15 June 1992, there were payments made totalling $127,549.43.  On 16th, 17th, and 18th of June 1992, there were invoices totalling $70,620.13 and payments made on 24th and 25th of June 1992, totalling $70,600.13.  For the 24th of June 1992, there are invoices totalling $35,435.47 and on 1 July 1992 a payment was made in precisely that sum.  There are invoices dated 1st and 8th of July 1992, for sums totalling $99,744.60 and payments made on the 9th and 13th July 1992, for the sum of $99,656.67 an underpayment of $87.93.  There are two invoices of the 8th and 9th of July totalling $72,155.37 and payments made on the 15th and 22nd of July 1992, totalling $72,243.37, an overpayment if they are to be matched of $88 which is of course, is almost equivalent to the earlier underpayment.  The payment on 22 July is the one of $37,243.37 which is in issue.

Mr D'Aquino's evidence in some respects was not totally satisfactory. That is probably explicable by the time which has elapsed since the occurrence of the facts in question. The evidence was to the effect that a system was put in place after the discussion with the representative of the Company following the dishonour of the cheques to which I have referred. The system was that the Company would fax through an order. D’Aquino would raise what was referred to as a “pro forma invoice” which was faxed through to the Company, in effect by way of quotation.  It was only after payment, so the system provided, of the amount or part of the amount shown in such a pro forma invoice that D’Aquino would begin assembling the goods pursuant to the order.  The orders were large and some time would be needed to assemble them.

Mr D'Aquino's evidence was that the date on the invoice which was subsequently sent to the Company did not reflect the date when goods were collected by the Company but was the date on which the invoice was first prepared following receipt of an order from the Company.  The invoices in evidence show a date of the order which sometimes coincides with the date of the invoice but sometimes is a day or so before the date of the invoice.  The evidence was also to the effect that when goods were collected by the Company no documentation was required to be signed since that was not the practice of D’Aquino at that time.  Thus there is in fact no satisfactory evidence as to the dates on which goods were actually delivered to the Company.

The invoice dates and payments to which I have just referred must be considered in the light of that evidence.  While Mr D'Aquino's evidence, as I have said was not totally satisfactory, I accept him as an honest witness who was doing his best to recall the circumstances of these events some five years ago.  The effect of his evidence is that, although the invoices bear dates before the dates of payments which I have attributed to those invoices, the goods were not in fact delivered until the payments were received.

The fact that the liquidator has accepted all of the payments down to the payments of 15 July 1992, as being in accordance with that system is indicative of the fact that the evidence was credible.  Since I accept Mr D'Aquino's evidence in that regard, it follows that the payment of $37,243.37 on Mr D'Aquino's evidence was received before delivery of the goods which were the subject of the invoices dated 8th and 9th of July 1992, notwithstanding that the payment was in fact made on 22 July 1992.

That being so, it appears to me, that the payment does not fall within section 122 of the Act because it was not a payment made to D’Aquino as a payment by debtor to creditor. In Airservices Australia v Ferrier (1996) 185 CLR 483 at 502, the joint judgment of Dawson, Gaudron and McHugh JJ, contains the following observations:

If the sole purpose of the payment is to discharge an existing debt, the effect of the payment is to give the creditor a preference over the other creditors unless the debtor is able to pay all of his or her debts as they fall due. But if the purpose of the payment is to induce the creditor to provide further goods or services as well as to discharge an existing indebtedness, the payment will not be a preference unless the payment exceeds the value of the goods or services acquired. In such a case a court exercising jurisdiction under section 122 of the Bankruptcy Act, looks to the ultimate effect of the transaction.

Later their Honours say:

Thus where the payment is a step in a wider transaction, “its actual business character must be seen and when it forms part of an entire transaction which if carried out to the intended conclusion will leave the creditor without any preference priority or advantage over other creditors the payment cannot be isolated and construed as a preference”.

Those observations are derived from the earlier decision of the High Court in Richardsonv Commercial Banking Co of Sydney Ltd (1952) 85 CLR 110 at 132.

The substance of D’Aquino's answer in relation to the payments which I have identified above is that they were not payments made by way of discharge of existing indebtedness but were payments in advance for goods to be supplied.  In my view that submission is made good by the evidence to which I have referred in relation to the payment of $37,243.37.

I shall deal with the last payment next because I think it can be disposed of easily. The payment of $7,930 was the subject of evidence by Mr D'Aquino. He said that D’Aquino operated a retail division as well as a wholesale division. He also said that that payment was not received in respect of the wholesale account of the Company but was received from the sale of goods to the Company through the bottle shop operated by D’Aquino as a cash on delivery transaction. He was not challenged about that evidence. Accordingly I conclude that the payment of $7,930 was not a payment within section 122 of the Act.

That leaves me with the three payments made on 27 July 1992, 7 August 1992  and 18 August 1992 of $20,000, $60,000 and $50,000 respectively totalling $130,000.  D’Aquino’s case is that those payments relate to two invoices, one dated 15 July in the sum of $99,460.10 and one dated 21 August in the sum of $34,564.33 totalling $134,024.73 a sum which differs from the total of those three payments by only $4,024.73.  These payments cause me some difficulty. 

The evidence is by no means satisfactory as to the circumstances in which the invoice dated 21 August was prepared and whether it represents goods that were actually delivered.  Mr D'Aquino, in his affidavit of 7 May 1992, says in paragraph 16 the following:

Following the non-payment of 22 July, 1992 invoice, D'Aquinos terminated all wholesale arrangements with the Company and did not envisage that there would be any retail sales to the Company.

Precisely what was meant by that is not clear. There is no suggestion that there was any communication by D’Aquino to the Company to the effect that it will no longer supply goods.  Nor is there any evidence that any directive was given to employees or officers of D’Aquino without communication to the Company to that effect.  Counsel for the liquidator contended that the statement should be taken at face value, from which a conclusion should be drawn that the goods shown on the invoice of 21 August 1992. were never delivered.  Mr D'Aquino said that that invoice was located in what he referred to as the master file, being a file of invoices in respect of which goods had been delivered to the Company.  There was, however, an invoice of 22 July 1992 and D’Aquino's case is that the goods shown in that invoice, which totalled $89,500.02, were not delivered. The liquidator's case is that I should conclude that neither the goods shown in the invoice of 15 July 1992 nor the goods shown in the 21 August 1992 invoices were delivered.

It is the liquidator's onus to establish, on the balance of probabilities, that the payments in question were payments by debtor to creditor and that they had the effect of giving the creditor a preference, priority or advantage.  In the unsatisfactory state of the evidence I can but drawn inferences from the material. However, given that I accept Mr D'Aquino as being an honest witness, I find that the system to which I have referred was in place.  It was axiomatic, if that system applied, that, before goods were supplied, payment had to be made.  The liquidator's case is that the three payments in question were made but that no goods were delivered.  That seems to me to be unlikely.  Perhaps I should say, that seems to be less likely than the circumstances which D’Aquino contends for.

There is no evidence of any complaint having been made by the Company that it made a payment in respect of which goods were never delivered.  It seems to me that one possible explanation for the circumstances is that the Company placed an order on 15 July 1992 for goods totalling approximately $99,460 and then subsequently placed a further order for goods totalling approximately $89,563.63.  Mr D'Aquino's evidence was that no payment was received in respect of the goods shown on 22 July invoice.  It is consistent with that scenario that the Company was unable to provide the funds for delivery of goods in that quantity and that subsequent discussion resulted in acceptance of an order for $34,563.63 worth of goods following the payment of an additional $50,000 which took the payments at that stage to $130,000.  On that basis one would conclude that there were goods delivered in the sum of $134,024.73.

If that scenario is accepted then the payments were payments made in accordance with the system that had been put in place and the payments did not have the effect of giving the creditor, that is D’Aquino, a preference priority or advantage.  They were payments made in advance for the goods which were then subsequently delivered.

While I have considerable reservation about the conclusion, I am persuaded by the history of payments backwards and forwards, including several payments of round sums that it is more likely than not that the payments were made in advance of goods which were in fact delivered. It would follow from that conclusion that, for the reasons applicable to the payment of $37,243.37, section 122 of the Act would not apply to those three payments.

The net result of my conclusions is that there would be an order under section 565 of the Law in relation to the payment of $89,880.67 made on 26 May 1992. There would therefore be an order that that sum be paid by D’Aquino to the liquidator of the Company.

The question then arises as to the payment of interest. The summons makes a claim for $310,000 without being specific as to how that claim arose.  It became apparent that the claim was based on the payments in round figures that had been made during the period in question.  That case, of course, has now been abandoned. It is clear that by commencing the proceedings, a demand for payment of some sum was made.  After the hearing commenced, leave was sought and granted for the amendment of the application to claim the sum of $635,385.74, being all of the payments made during the period in question.  That claim however was not supported in the course of argument.  Nevertheless, as I have said, a demand was made for payment of a sum and in the circumstances it seems to me to be appropriate that interest be payable from the date of the commencement of the proceedings.

That leaves the question of costs.  Both parties have been partially successful although I would like to hear further argument in relation to the order which I should make.  The evidence of D’Aquino which has ultimately led to its success was not filed until very late in the proceedings. On the other hand the liquidator's case has changed considerably from that which was first made when the proceedings were commenced.  Having regard to the time of day, I propose to stand the matter over until tomorrow to hear further argument as to the question of costs.

Yesterday evening I gave reasons why I would order that the respondent pay to the applicant the sum of $89,880.67 plus interest from the date of commencement of the proceedings.  I have now heard argument from counsel on the question of costs.

In the original proceedings the sum claimed was $330,000 and it is common ground that that figure was the aggregate of a number of payments that were made during the period of the relation back which were round sums and appeared to bear no relationship to any particular supply of goods.  Bearing in mind that the applicant is the liquidator of an insolvent company his conduct in making that claim in the circumstances appears to be not unreasonable.

Evidence was filed by the respondent which went very little distance in the way of explaining what the respondent's case was in answer to the claims that were being made.  It was not until an affidavit sworn the day before the hearing was made available to the applicant that some semblance of indication of the respondent's case began to appear;  indeed it was not until the deponent gave evidence in the witness box that the material became apparent which led me to the conclusion which I reached.

The applicant has been significantly successful on a matter which was disputed by the respondent.  The applicant had indicated that he was prepared to compromise the proceedings by acceptance of a sum which may well be close to the figure which would ultimately be recovered even if I made only a partial order as to costs.

In all the circumstances I think that justice will be served by ordering the respondent to pay the applicant's costs.

So the orders I will now formally make are:  I order the respondent to pay to the applicant as liquidator of Illawarra Wholesale Liquor Pty Limited the sum of $89,880.67.  I order the respondent to pay interest to the applicant on that sum at the prescribed rate from the date of commencement of the proceedings until today.   And I order the respondent to pay the applicant's costs of the proceedings.

I certify that this and the preceding fourteen pages
are a true copy of the Reasons for Judgment of his
Honour Justice Emmett

Associate:

Date:              9 May 1997

Appearances:

Counsel for the Applicant:	C. R. C. Newlinds
Solicitor for the Applicant:	Kemp Strang & Chippindall
Counsel for the Respondent:	M. A. Wigney
Solicitor for the Respondent:	P. A. Somerset & Co.
Date of Hearing:	8,9 May 1997

Place:   Sydney

Date of Decision:   9 May 1997