Chicago Boot Co P/L v Davies & Nicol as Joint & Several Liquidators of Harris Scarfe Ltd
[2011] SASCFC 92
•23 August 2011
SUPREME COURT OF SOUTH AUSTRALIA
(Full Court: Civil)
CHICAGO BOOT CO P/L v DAVIES & NICOL AS JOINT & SEVERAL LIQUIDATORS OF HARRIS SCARFE LTD
[2011] SASCFC 92
Judgment of The Full Court
(The Honourable Justice Nyland, The Honourable Justice Anderson and The Honourable Justice White)
23 August 2011
CORPORATIONS - WINDING UP - CONDUCT AND INCIDENTS OF WINDING UP - EFFECT OF WINDING UP ON OTHER TRANSACTIONS - PREFERENCES
The trial Judge held that six payments made to the appellant in the six months prior to the Harris Scarfe group's insolvency constituted unfair preferences - the Judge held that, although the appellant had received the payments in good faith, it did have reasonable grounds for suspecting that Harris Scarfe was insolvent, and that a reasonable person in its circumstances would also have had reasonable grounds for such a suspicion - as a result, the appellant could not establish the defence in s 588FG of the Corporations Act 2001 (Cth) - the appellant challenged this decision.
Whether the Judge had erred in assessing the circumstances of the payments in a global fashion, rather than individually - whether the Judge had placed undue weight on the content of communications between the appellant and Harris Scarfe - whether the Judge had given insufficient weight to evidence that Harris Scarfe's own board of directors and auditors had been unaware of its financial predicament, and the apellant's continued supply of foot wear to Harris Scarfe - whether the Judge erred in rejecting aspects of the evidence given by the appellant's directors.
Held: appeal allowed inpart - the Judge erred in his assessment of the circumstances existing at the time of three payments - appeal otherwise dismissed - the existence or otherwise of a reasonable suspicion to suspect insolvency is to be assessed by reference to the circumstances which existed at the time of each payment.
Corporations Act 2001 (Cth) s 9, s459E, s 588FA, s 588FE, s 588FF, s 588FG, s 1400; Corporations Law s 459C, s 459E, s 459F, referred to.
Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266, applied.
Chicago Boot Co P/L v Davies & Nicol as Joint & Several Liquidators of Harris Scarfe Ltd (No 2) [2011] SASC 27; Sims v Celcast Pty Ltd (1988) 71 SASR 142; Cussen v Commissioner of Taxation (2005) 51 ACSR 530; Harkness v Commonwealth Bank of Australia Pty Ltd (1993) 32 NSWLR 543; Smith v Deputy Commissioner of Taxation (1977) FCR 339; Sydney Applicances Pty Ltd (In Liq) v Eurolinx Pty Ltd (2001) 37 ACSR 477; Jonas & Lanpac International Pty Ltd v Automation House Pty Ltd & Anor [1998] VSC 9; Re: K & R Fabrications (Qld) Pty Ltd (in liq) (1980) 32 ALR 183; Muller & McIntosh v Academic Systems Pty Ltd [2007] QCA 218; Moutere Pty Ltd v Deputy Commissioner of Taxation [2001] 34 ACSR 533; Re: QBS Pty Ltd [1967] Qd R 218; Fitness First Australia Pty Ltd v Dubow [2011] NSWSC 531; Buddies Liquor Pty Ltd v Wah Lai Investment (Australia) Pty Ltd [2001] NSWSC 337; Poonon v Deputy Commissioner of Taxation [1999] NSWSC 1121; Bluehaven Trasnport Pty Ltd v Commissioner of Taxation (2000) 157 FLR 26, considered.
CHICAGO BOOT CO P/L v DAVIES & NICOL AS JOINT & SEVERAL LIQUIDATORS OF HARRIS SCARFE LTD
[2011] SASCFC 92Full Court: Nyland, Anderson and White JJ
NYLAND J: I agree with the reasons of White J and agree that the appeal should be allowed to the extent that the decision with respect to the payments received on 4 October 2000 and 2 January 2001 be set aside.
ANDERSON J. I would allow the appeal for the limited purpose set out by White J in his reasons. I agree with his reasons.
WHITE J. The respondents are the liquidators of the Harris Scarfe group of companies. At trial, the respondents argued successfully that payments made by Harris Scarfe to the appellant (Chicago Boot) in the six months prior to the group entering into administration constituted an unfair preference, and were therefore voidable under s588FF of the Corporations Act 2001 (Cth). The question on this appeal is whether the trial Judge erred in finding that Chicago Boot had not made out the good faith defence under s 588FG(2) of the Corporations Act 2001 (Cth)[1] so as to defeat the respondents’ claim.
[1] The payments to Chicago Boot were made at a time when the Corporations Law is in force. However, it was common ground that the effect of s 1400 of the Corporations Act 2001 was that s 588FG of that Act was to be applied to the liquidators’ claims.
For many years before 2001, the Harris Scarfe group conducted retail department store businesses at various locations in South Australia and in other states. Harris Scarfe Wholesale Pty Ltd (HSW) and Harris Scarfe Limited (HSL) were members of the group of which Harris Scarfe Holdings Limited (HSHL) was the parent. HSHL was listed on the Australian Stock Exchange.
Until about 1997, HSL acquired stock from suppliers and sold that stock to its customers. In 1997 HSW became the purchaser of the goods from suppliers and then provided those goods to HSL for sale in the various stores. Upon the introduction of the GST on 1 July 2000, HSW ceased trading in that way and it seems that HSL resumed acquiring stock directly from suppliers.
Chicago Boot was one such supplier. Under a contract, or a series of contracts for supply, it supplied footwear to HSL or HSW. Chicago Boot’s terms of trade required payment to be made within 60 days of the date of delivery. For a long time, however, HSL and HSW had exceeded those terms.
On 3 April 2001 administrators were appointed to HSL and HSW. Later, on 3 June 2002, the administrators were appointed as liquidators and, later still, those liquidators were replaced by the present respondents.
In the six month period expiring on 3 April 2001, HSL and HSW made payments to Chicago Boot as follows:
Payer of Cheque Date Cheque Drawn Date Cheque Presented Amount
$
HSW
31 July 2000
4 Oct 2000
43,540.10
HSL
30 Sept 2000
2 Jan 2001
1,079.01
HSL
31 Oct 2000
2 Jan 2001
3,444.92
HSL
31 Dec 2000
19 Jan 2001
100,779.13
HSL
30 Nov 2000
2 Feb 2001
151,893.49
HSL
16 Feb 2001
22 Feb 2001
16,064.68
TOTAL
316,801.33
The evidence also indicated that HSL made payments totalling $41,209.96 to Windsor Smith Pty Ltd on 2 February 2001. Windsor Smith and Chicago Boot are related companies with common employees and directors and a common place of business. Windsor Smith also supplied footwear to Harris Scarfe. The payment to Windsor Smith on 2 February 2001 was not in issue in the proceedings at first instance.
The Judge held that the payments to Chicago Boot were an unfair preference within the meaning of s 588FA of the Corporations Act. He found that although Chicago Boot had received the payments in good faith, it did have reasonable grounds for suspecting that HSL and HSW were insolvent (s 588FG(2)(b)(i)), and that a reasonable person in its circumstances would also have had reasonable grounds for such a suspicion (s 588FG(2)(b)(ii)). Accordingly, the Judge rejected Chicago Boot’s good faith defence and entered judgment for the respondents in the sum of $517,848.68, inclusive of interest. [2]
[2] Davies and Nicol as Joint & Several Liquidators of Harris Scarfe Ltd v Chicago Boot Company Pty Ltd (No 2) [2011] SASC 27.
Chicago Boot now appeals against that judgment.
At the trial, Chicago Boot put in issue the insolvency of Harris Scarfe at relevant times and also claimed that it had retained title in the footwear which it had supplied. The Judge found for the respondents on both issues. Chicago Boot did not appeal against the dismissal of its retention of title claim.
It was common ground at trial and on the appeal that it was not necessary to distinguish between the positions of HSL and HSW. Like the Judge, I will refer to them collectively as “Harris Scarfe”.
Statutory Provisions and Relevant Principles
By s 588FF of the Corporations Act, a court may order a person to repay to a company in liquidation the amount of any voidable transaction. A transaction is voidable if it was made when the company was insolvent and during the six month period ending on “the relation back day” (s 588FE(1) and (2)). In the present case, the “relation back day” was 3 April 2001, the date upon which the administrators were appointed to Harris Scarfe.[3]
[3] See the definition of “relation back day” in s 9, and ss 513A and 513C of the Corporations Act 2001 (Cth).
As already noted, the Judge found that Harris Scarfe was insolvent at relevant times. Chicago Boot’s grounds of appeal indicated that it intended to challenge this finding. However, at the hearing it abandoned those grounds and accepted that each of the impugned payments was an insolvent transaction for the purposes of s 588FC.
Chicago Boot also accepted on appeal that each payment was an unfair preference because each resulted in it receiving more than would have been the case if it had had to prove the debt in a winding up of Harris Scarfe (s 588FA).
Section 588FG(2) of the Corporations Act provides:
(2)A court is not to make under section 588FF an order materially prejudicing a right or interest of a person if the transaction is not an unfair loan to the company, or an unreasonable director‑related transaction of the company, and it is proved that:
(a) the person became a party to the transaction in good faith; and
(b) at the time when the person became such a party:
(i)the person had no reasonable grounds for suspecting that the company was insolvent at that time or would become insolvent as mentioned in paragraph 588FC(b); and
(ii)a reasonable person in the person’s circumstances would have had no such grounds for so suspecting; and
(c) the person has provided valuable consideration under the transaction or has changed his, her or its position in reliance on the transaction.[4]
Chicago Boot had the onus of establishing the defence under subs (2). This meant that it had to satisfy the Judge that:
(a)it had received each payment from Harris Scarfe in good faith (subs(2)(a));
(b)at the time of each payment it did not have reasonable grounds for suspecting that Harris Scarfe was insolvent or would become insolvent by reason of making the payment (subs (2)(b)(i));
(c)at the time of each payment a reasonable person in its circumstances would not have had reasonable grounds for such a suspicion (subs (2)(b)(ii));
(d)it had provided valuable consideration for the payments (subs (2)(c).
[4] The Judge’s reasons indicate that he considered s 588FG(1) to be the relevant provision. This was a slip as it is s 588FG(2) which is applicable. Chicago Boot did not suggest that anything turned on the slip.
The respondents accepted at trial that Chicago Boot and its directors had acted in good faith in relation to the payments.[5] They also accepted that Chicago Boot had provided valuable consideration for each payment, as the monies were overdue payments for footwear which it had previously supplied.
[5] Davies & Nicol as Joint & Several Liquidators of Harris Scarfe Ltd v Chicago Boot Company Pty Ltd (No 2) [2011] SASC 27 at [80].
Accordingly, to make out the defence in this case, Chicago Boot had to establish the two negative propositions contemplated by subs (2)(b).
The principles relevant to the proper application of s 588FG(2)(b) were not in dispute. The suspicion to which subs (2)(b) refers is a “positive feeling of actual apprehension or mistrust” that the debtor will be able to pay its debts. So much is established by the well-known passage in the judgment of Kitto J in Queensland Bacon Pty Ltd v Rees[6] in relation to a corresponding provision in the Bankruptcy Act 1924-60 (Cth):
A suspicion that something exists is more than a mere idle wondering whether it exists or not; it is a positive feeling of actual apprehension or mistrust, … Consequently, a reason to suspect that a fact exists is more than a reason to consider or look into the possibility of its existence. 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.[7]
[6] (1966) 115 CLR 266.
[7] Ibid at 303.
This Court discussed the requirements of s 588FG(2) in the then applicable Corporations Law in Sims v Celcast Pty Ltd.[8]Williams J, with whom Cox and Mullighan JJ agreed, held that each of subss (2)(b)(i) and (2)(b)(ii) have work to do independently of the other and then said:
Therefore, under sub-par (b)(ii) the court will be concerned with the conclusion (in terms of logic or commonsense) which a reasonable person ought reasonably to have made in terms of a relevant suspicion. Under sub-par (b)(i) the court will assess the conclusion which ought reasonably to have been reached by a creditor who in fact has taken a particular step or steps formally or informally in the process of deductive reasoning.[9]
Thus, Williams J reasoned that sub-par (b)(i) requires consideration of whether the particular creditor, with its perspicacity, the information available to it, and with such analysis (if any) of that information as it had made, had reasonable grounds to suspect the debtor’s insolvency. Sub-par (b)(ii) on the other hand, requires consideration of whether a reasonable person in the creditor’s circumstances, using the information reasonably available in those circumstances and making the analysis of that information which a reasonable person would make, would have had reasonable grounds to suspect the debtor’s insolvency. This is because a reasonable person in the circumstances of the creditor (sub‑par (b)(ii)) may have grounds for suspicion whereas the particular creditor, acting reasonably in its perception and analysis (if any) of the circumstances (sub‑par (b)(i)) may not, and vice versa.
[8] (1998) 71 SASR 142.
[9] Ibid at 146.
It has been said that sub-par (b)(ii) denotes an objective test which is to be applied by considering whether a hypothetical person with the assumed knowledge and experience of the average business person (as opposed to the acumen, perspicacity and resources of the particular creditor) would have suspected insolvency.[10]
[10] Cussen v Commissioner of Taxation [2004] NSWCA 383 at [17], [30]-[31]; (2005) 51 ACSR 530 at 535-8 approving Harkness v Commonwealth Bank of Australia Pty Ltd (1993) 32 NSWLR 543 at 546.
The existence or otherwise of a reasonable suspicion to suspect insolvency is to be assessed by reference to the circumstances which existed at the time of payment and without the wisdom of hindsight.[11] All the circumstances must be considered. Santow J spoke of this requirement in Sydney Appliances Pty Ltd (in liq) v Eurolinx Pty Ltd[12] when he said:
The case law illustrates that there is no single factor whose presence invariably establishes that there was, or should have been, the requisite suspicion. Rather it is a question of looking not in hindsight but through the contemporary eyes of the parties, at the commercial circumstances then prevailing between them. This is to identify in that context those factors pointing towards insolvency of the debtor. This in turn is in order to ascertain which of those factors were apparent to the payee, and then the cumulative impact that knowledge of them should have had, or did have, upon the payee. There will also be potentially countervailing factors and circumstances to be weighed in the balance which could have tended to dispel suspicion at the time.[13]
(Emphasis added)
Chicago Boot’s central submission was that in the present case the Judge had not had regard to, or had given insufficient weight to, a number of countervailing factors which existed at the time of each payment.
[11] Smith v Deputy Commissioner of Taxation (1997) 75 FCR 339 at 351.
[12] [2001] NSWSC 230; (2001) 37 ACSR 477.
[13] Ibid at [43]; 483-4.
The Decision of the Trial Judge
The Judge accepted that it was customary for HSL and HSW to delay payments to their suppliers and that for many years they had had a deliberate practice of not complying with their suppliers’ terms of trade. He described the practice of HSL and HSW in paying accounts in the following terms:
[26]In 1998, and during the relevant period, HSW and HSL operated a system known as Merman, which was a merchandising system which dealt with the ordering of new stock and the management of stock-on-hand. The system was designed to generate cheques in respect of payments which fell due at a certain date. Mr Johnson said that all vendors were under terms pursuant to which their invoices were payable 30 days from the end of the month. The system worked on the basis that invoices received from suppliers were entered into the system. The system would then show when those invoices were due and payable. At the due and payable date, cheques would automatically be printed. However, when cheques were printed, they were not necessarily sent. A list of cheques not sent was created. In dealing with its suppliers, Harris Scarfe had a practice that it would pay them when there were sufficient funds available. Even though cheques were printed when a debt became due, the cheques were often withheld, sometimes for extended periods, until there was the cash available so that, upon presentment, the cheque would be honoured. Mr Johnson said that, usually, throughout the year the list of cheques held but not paid would increase, and would then decrease at around the Christmas period when more cash was generated from sales. He gave evidence that Mr Hodgson, the Chief Financial Officer, would consider the cash flow position each month and advise the General Manager of Purchasing, Mr Clarke, as to how much money was available for payment. Mr Clarke would then decide which cheques on the held but not paid list were to be released.
[27]In practice, therefore, suppliers were not paid on time, but were paid when Mr Clarke was advised that there were sufficient funds for them to be paid. It was only at that time that cheques were released, even though they had been drawn, on occasions, some months before.
Harris Scarfe’s practice of drawing cheques but not forwarding them to suppliers until it had funds available explains the long periods between the drawing and presentation of the cheques shown in the table at the commencement of these reasons. The practice had the effect, as described by the first respondent in his report on the solvency of the Harris Scarfe group, that the trade creditors were “the Group’s unofficial financier”.
The Judge found that the total value of the cheques drawn by Harris Scarfe against overdue accounts, but not sent to suppliers was as follows:
Month Ending
$
December 1999
18.2m
May 2000
29.1m
June 2000
23m
July 2000
24.9m
August 2000
30m
September 2000
40.1m
October 2000
45.9m
November 2000
47.2m
December 2000
33.6m
January 2001
Actual figure not stated but described as “no significant change”.
February 2001
51m
This table reveals the increasing indebtedness of Harris Scarfe. There was however no suggestion that any of the information in the table was known to Craig or Leanne Mance, the active directors of Chicago Boot, or to their staff, or that it would have been known to, or suspected by, a reasonable person in Chicago Boot’s circumstances.
The Judge found that HSHL operated a bank overdraft with a limit of $4.25m, largely for the benefit of HSL and HSW.[14] In April 2000 the ANZ Bank agreed to advance $10m as a short-term facility to be repaid from the proceeds of a convertible note issue in May 2000. Some $6.1m of the $10m was applied to reduce Harris Scarfe’s indebtedness to its suppliers. The evidence did not disclose how much, if any, of this amount was paid to Chicago Boot but it seems reasonable to suppose that it would have been amongst the suppliers to whom payment was made. The convertible note issue raised $14.2m. Again the evidence did not disclose how much, if any of the balance remaining after repayment of the ANZ advance was used to pay suppliers. In any event, the amounts overdue to suppliers continued to increase during the rest of 2000 as indicated by the above Table. The reduction at 31 December 2000 was attributable to the proceeds from Christmas trading.
[14] Ibid at [32].
Leanne Mance was in charge of Chicago Boot’s finance and administration. She gave evidence that Chicago Boot had been dealing with Harris Scarfe for 30 years.[15] The Judge accepted Ms Mance’s evidence that Harris Scarfe’s record of paying Chicago Boot’s invoices had, for many years, been poor; that Harris Scarfe would draw cheques but not deliver them to Chicago Boot for periods which were well in excess of the 60 day trading terms; that Harris Scarfe’s employees would tell Chicago Boot that cheques would be sent when Harris Scarfe felt like it; and that in 2000 it was common for Chicago Boot to receive pre-dated cheques.
28 [16]
[15] At [2] the Judge also found that Chicago Boot had been supplying Harris Scarfe from the early 1990s, but Ms Mance’s evidence that the association had extended for about 30 years was not contradicted.
[16] Davies & Nicol as Joint & Several Liquidators of Harris Scarfe Ltd v Chicago Boot Company Pty Ltd (No 2) [2011] SASC 27 at [46], [103].
To some extent, Chicago Boot was prepared to, and did, tolerate the late payments. Harris Scarfe was a significant purchaser of its products, accounting for some 10 per cent of its annual turnover. A decision to cease supply altogether because of late payment would have been a significant one for Chicago Boot and the tension between its wish to continue supply, but also to receive timely payment, was a feature of the relationship between the companies.
As previously noted, the Judge considered that Chicago Boot had established neither of the two limbs of s 588FG(2)(b). The Judge said:
I conclude that there were reasonable grounds for suspecting that Harris Scarfe was insolvent. Further, I am of the view that a reasonable person, in the circumstances of the officers of Chicago Boot, would have had reasonable grounds for suspecting that Harris Scarfe was or would become insolvent at the time of the payments.[17]
[17] Ibid at [86].
The Judge referred to three particular matters for his conclusion that a reasonable person in Chicago Boot’s circumstances would have had reasonable grounds for suspecting Harris Scarfe’s insolvency. These were the fact that Harris Scarfe’s indebtedness to Chicago Boot had never been so high and it was taking longer than usual to pay Chicago Boot’s invoices; that Chicago Boot had, on 16 January 2001, served on HSL a notice of statutory demand under s 459E of the Corporations Law seeking payment of the sum of $286,152.76; and the written communications between Harris Scarfe and Chicago Boot.[18] I will refer to the content of these communications in more detail shortly.
[18] Ibid at [104].
In relation to sub-par (2)(b)(i), the Judge did not accept the evidence of Ms Mance that she had believed that Harris Scarfe was in a good financial position.[19] He found that Craig and Leanne Mance had avoided asking themselves the question of whether Harris Scarfe was insolvent.[20] This was because Harris Scarfe was a significant customer of Chicago Boot and they did not wish to create a situation in which the relationship between the two companies deteriorated to the point at which it lost Harris Scarfe as a customer.[21] His Honour concluded that the communications between the two companies, together with the fact that Chicago Boot had put its debt recovery in the hands of solicitors. indicated that it had reasonable grounds to suspect Harris Scarfe’s insolvency.[22]
[19] Ibid at [101].
[20] Ibid.
[21] Ibid.
[22] Ibid at [101-[102].
The Communications Between Chicago Boot and Harris Scarfe
Somewhat curiously, neither party led evidence at trial of the actual state from time to time of Harris Scarfe’s account with Chicago Boot and Windsor Smith. Some indication of Harris Scarfe’s indebtedness from time to time can be gleaned from the evidence but the Judge was not given evidence disclosing the extent of Harris Scarfe’s indebtedness to Chicago Boot at the end of each month or of the extent, from time to time, by which Harris Scarfe was exceeding Chicago Boot’s terms of trade.
A table in the insolvency report prepared by the first respondent indicated that in the period from January 2000 to March 2001 there was an average delay of 53 days between the drawing of cheques in favour of Chicago Boot (ie, the date on which the payments became due) and their presentation (ie, the date on which the cheques were delivered to Chicago Boot). This average tends to confirm Harris Scarfe’s practice of withholding payments, but by itself it says nothing about any progression in the periods by which payments were over due.
At the trial, the respondents tendered written communications between Chicago Boot and Harris Scarfe during the relation back period. These communications are important but neither the trial Judge nor this Court was able to consider them in the context of actual trading history both before and during the relation back period, and in the context of Harris Scarfe’s payment history prior to the relation back period.
The written communications commenced with an email of Tuesday, 3 October 2000 from Mr Emanouel, the National Sales Manager of Chicago Boot, to Mr Hunter, Harris Scarfe’s buyer. The email was copied to Mr Palmer, another buyer at Harris Scarfe. The subject of the email was described as “Stop supply” and its content was as follows:
Dear David
The situation we currently find ourselves in with regards to your continued late payment is a most concerning one. No doubt you would be aware of the success we have both shared with your recent week 9 catalogues. On speaking with you last week you did assure me payment would be forthcoming yesterday. I did indicate to you that your poor performance with payment would only slow or cease the current momentum we are both enjoying. Craig departed this morning for overseas and his explicit instruction to me was that Harris Scarfe make available to W/S & [Chicago Boot] today $130,000 which is currently owed outside 120 days. In the event that this money is not made available today all stock owing to Harris Scarfe will be sold off and immediate legal action for recovery will be instigated. David, we have been most patient and fair over the years, even forwarding you “gold” stock when it appeared dangerous to do so. We are exhausted by the continued non-replies from yourself and office staff and the broken commitments to pay. It is now our firm belief that you have no capacity to pay. Obviously David, for us to continue supplying you our brands on a 120 plus credit basis defies all commercial logic. I would appreciate your immediate response.
(Emphasis added)
Although it is not entirely clear, the reference in this email to 120 days appears to be a reference to the period since supply, rather than to the period commencing 60 days after supply when payment became due.
Whether or not it was prompted by this email, Harris Scarfe did provide a cheque for $43,540.10 (drawn on 31 July 2000) which was banked by Chicago Boot on 4 October 2000. On the same day, Mr Emanouel sent an email to Mr Palmer which commenced, perhaps with some irony, with the words “Oh happy days – we got the money – thanks a million.” and then continued with some details regarding the way in which Chicago Boot proposed meeting current orders from Harris Scarfe. Neither in that email, nor in the emails exchanged later that week, was there any suggestion that Chicago Boot would act upon its foreshadowed cessation of supply. Nor was there any reference to the sum of $130,000 referred to in the email of 3 October, or to the balance remaining after crediting the 4 October 2000 payment. However, on 4 October 2000, an accounts clerk in Chicago Boot sent a facsimile transmission to Harris Scarfe pointing out that it had omitted to include in the cheque provided on 4 October 2000 payment for certain invoices relating to footwear supplied in May 2000. The facsimile concluded “Urgent payment is required to bring account back into trading terms”.
The evidence did not disclose any further written communications between Harris Scarfe and Chicago Boot or Windsor Smith until 11 January 2001. However, on 11 December 2000 Mr Emanouel sent an internal email to the Chicago Boot accounts clerk saying:
Cheryl – just spoke with David Hunter at Harris Scarfe re payment: he has a cheque there ready and waiting signature for release:
Cheque sum: $152,000 for O/N’S 430744/354917/379884/419499
He is hopeful this cheque will be released this month, will keep us updated as to release date.
As can be seen from the table at the commencement of these reasons, on or shortly before 2 January 2001, Harris Scarfe provided Chicago Boot with cheques drawn on 30 September 2000 and 31 October 2000 in the sum of $1,079.01 and $3,444.92 respectively. It did not deliver at that time the cheque for $152,000 to which Mr Hunter had referred in his mid‑December conversation with Mr Emanouel.
On 11 January 2001, Ms Mance sent a facsimile to Mr Clarke at Harris Scarfe concerning its indebtedness to Windsor Smith. The substance of the facsimile was as follows:
The following amounts are outstanding and summary of your account:
Sept $3,694.99
Oct $3,439.98
Nov $30,053.36
Dec $9,192.14
Jan ($2,586.34)
Total $43,794.13
I have made numerous attempts to contact you and no answer is supplied. We have supported Harris Scarfe Ltd over the years, but we will be left with no option but to put this matter in legal hands, as we cannot keep holding on with no answer and no amount of money. With regrets to do this as our only option, and to come to this as we valued your business and future business.
This letter related to Harris Scarfe’s indebtedness to Windsor Smith. It can be seen that Ms Mance was pressing for payment of some amounts which had not then become due in accordance with the usual terms of trade.
The next communication between the companies was significant. On 16 January 2000, Chicago Boot’s solicitors served on HSL a statutory demand under s 459E of the Corporations Law seeking payment of $286,152.76. The demand was accompanied by an affidavit from Ms Mance who deposed that the amount demanded was due and payable by HSL. The evidence indicates that Windsor Smith also served a statutory demand on HSL at the same time but a copy of the demand was not tendered at trial and the Judge did not make any findings concerning it.
Three days later, on 19 January 2000 HSL delivered the cheque (drawn on 31 December 2000) for $100,779.13 shown in the table at the commencement of these reasons. On the appeal, Chicago Boot submitted that it could not be inferred that it was the service of the notice of statutory demand which had elicited the payment. However, the Judge accepted that the payment on 19 January 2001 was a response to the statutory demand and, to my mind, that is a reasonable inference. It is also pertinent to note that Harris Scarfe did not, at that time, deliver the larger cheque for $151,893.49 which it had drawn on 30 November 2000 to which Mr Emanouel had referred in his email of 11 December 2000.
As noted at the commencement of these reasons, HSL made payments totalling $41,209.96 to Windsor Smith on 2 February 2001. It is probable that those payments included most, if not all, of the outstanding amounts referred to in the facsimile of 11 January 2001 and in the statutory demand served by Windsor Smith.
Harris Scarfe’s solicitors wrote to Chicago Boot’s solicitors on 30 January 2001 in relation to the two statutory demands. Whilst acknowledging on HSL’s behalf that a substantial proportion of the amount claimed in the statutory demand of Chicago Boot was owing, the solicitors indicated that there were some amounts in dispute because of non-deliveries, failures to invoice and the fact that some invoices were “still within terms”.[23] The solicitors proposed that HSL would pay the indebtedness which it acknowledged and that the two companies should then negotiate between themselves in relation to the balance. On 31 January 2001, Chicago Boot’s solicitors responded accepting the proposal in principle and pointing out that the balance outstanding to Chicago Boot was $175,616.94.
[23] There appeared to be no dispute as to the amount claimed in the statutory demand of Windsor Smith.
On 5 February 2001, HSL paid $151,893.49 to Chicago Boot and thereafter it seems that no action was taken on the statutory demand. Chicago Boot’s solicitors did, however, continue to press for payment of the outstanding balance which, after some adjustments, was $21,392.94.
In the meantime, the two companies continued to communicate directly. On 25 January 2001, Chicago Boot’s accounts clerk sent a letter to Mr Clarke, HSL’s general buying manager. The substance of the letter was as follows:
Re outstanding account balance.
Can you please inform me as to when payment will be made, we have tried many times to get answers but to no avail.
Legal action is pending this account and unless correspondence is made the action will be enforced.
The amount owing to Chicago Boot at 31.01.01 is $183,316.94 & Windsor Smith is $13,750.19 = $197,067.13.
Please inform me if this payment will be forthcoming, all claims have been faxed to your accounts department with answers to the problems otherwise credits have been issued.
The evidence did not disclose what, if any, response Mr Clarke made to that letter.
On 25 January 2001, HSL’s footwear buyer, Mr Palmer, sent an email to Mr Emanouel. This email was in response to an email from Mr Emanouel, but that email was not proved in evidence. The relevant portions of Mr Palmer’s email of 25 January 2001 are as follows:
Just in way of replying to the payment issues. You are quite right in what you say about our slow payment and if we were a stand alone footwear business what you say would make even more sense. However our rate of sale of your product makes no difference in a department store set up. Our contribution of sales goes into general revenue and decisions on which suppliers are paid first [are] made by our accountants using their own set of criteria.
There are two issues that Steve should have told you about.
1.As a result of a downturn in trading conditions coupled with a continuing problem with payment issues the company have imposed restrictions on our “open to buy”.[24]
The cut backs have been so harsh that it is no longer possible to arrange product in our general ladies’ shoe department (190).
We now only have money to finance our catalogue programme.
As a direct result the only orders we will be going ahead with are the week 32 catalogue order …
2.As a further complication it seems your efforts to be paid have taken you to a stage where legal action will now be taken to recover monies owed. This I should say is a highly successful way to be paid quickly.
In an effort to avoid this problem occurring again in the future, we have been asked not to do business with any supplier who chooses this course of action. Rather we should do business with people who believe in us and are prepared to support us during the difficult times.
So delivery of our week 32 catalogue order will be your last delivery.
That’s why I asked Steve to confirm that, with all of this considered, you would still be prepared to send the shoes. I think it sad that you and I ended up being caught in the middle of all of this.
(Emphasis added)
[24] The expression “open to buy” refers to the authority given to a buyer to place an order with a supplier for the delivery of stock.
The next correspondence on 30 January 2001 concerned the delivery of orders already made, and Chicago Boot’s provision of promotional subsidies in relation to those orders. However, in the last of the emails on that day, Mr Palmer told Mr Ross at Chicago Boot:
As I explained in previous emails the orders for week 32 are the only ones that we will go ahead with. OTB[25] cut backs have meant we can no longer range any shoes in our 190 department. At this stage we only have funds to finance our catalogue programme.
(Emphasis added)
It can be seen that this email was sent three days before Chicago Boot made the payment of $151,893.49.
[25] An abbreviation for “open to buy”.
Thereafter the communications concerned the possibility of further supply. The tension between a desire to continue supplying Harris Scarfe, on the one had, and a concern about payment, on the other, is seen in an email of 7 February 2001 from Mr Barry, a Windsor Smith salesman, to Mr Palmer:
Hi,
Michael is interstate so cannot see your email … so here [are] details as best I can do for you …
1.Will be happy to sign your dockets, we only ask of you that you understand that it is only yesterday that we have received a payment of approx $180,000. This as you know is after legal pressure applied. You are a fair man and we now ask you to consider the following.
A. We need to know that the goods for the catalogue that we deliver will be paid in the terms of our agreement 60 days.
B. The orders that were cancelled by Harris Scarfe with the threat of blocking us out of your business should be reinstated.
C. A meeting between Craig Mance and this mystery person so high up in Harris Scarfe who can say to a supplier oh we don’t know when we can pay you your $300,000 so don’t bother us and if you do bother us we will not deal with you should be made at your earliest convenience, mate show me the way here.
Craig will come to Adelaide especially for this and any person of a fair nature should be prepared to discuss a supplier’s concerns openly and allay any fears. I need your assistance on this meeting as it can be only for the good of both parties. Please confirm your honour will prevail on this occasion and you will go to bat for what is right … Mike seriously, [imagine] going on holidays being owed all your holidays to find nothing goes in the bank, call your employer and he fobs you off like a piece of sh-t. This is what Craig, Leanne, Brett must [have] felt last Christmas …
Mate anyone that cannot talk out a situation loses, please help me here, I know you are very fair.
I will sign the papers after I hear from you.
It is noteworthy that as at the date of the email Windsor Smith was still willing to supply footwear to Harris Scarfe.
The Grounds of Appeal
Chicago Boot challenged the Judge’s conclusions on a number of grounds. These can be summarised as complaints that the Judge:
1.had placed undue weight on the written communications between Chicago Boot and Harris Scarfe by failing to have regard to what counsel described as the “countervailing” effect of information concerning Harris Scarfe which was in the public domain, or known to Mr and Ms Mance;
2.had not given sufficient weight to the evidence that Harris Scarfe’s own board of directors, and its auditors, had been unaware of its financial predicament, as the chief financial officer had been falsifying the company accounts;
3.had not given sufficient weight to the evidence that, despite the increasingly strident terms of the written communications, Chicago Boot was continuing to supply footwear to Harris Scarfe;
4.had erred in rejecting certain aspects of the evidence of both Mr and Ms Mance as to the state of their knowledge and belief at relevant times.
In addition, on the hearing of the appeal, Chicago Boot contended that the Judge had erred by failing to consider separately the circumstances at the time of each payment when determining that there were reasonable grounds for suspicion about Harris Scarfe’s insolvency. It submitted that the Judge had considered the circumstances over the whole of the relation back period in a global way with the effect that he had determined its good faith defence on the basis that all the matters concerning Harris Scarfe’s possible insolvency had been known from at least the time of the first payment on 4 October 2000. As will be seen, I consider that this submission should be upheld.
Separate Consideration at the Time of Each Payment
Section 588FG(2)(b) makes it plain that the time at which the existence or otherwise of reasonable grounds to suspect a debtor’s insolvency is to be assessed is the time at which each payment is made. Kitto J emphasised this point in Queensland Bacon Pty Ltd v Rees when he said:
The question thus posed by the sub-section is to be answered in the present cases as at the time when each of the relevant payments was about to be accepted.[26]
[26] (1966) 115 CLR 266 at 303.
The need to consider separately the circumstances at the time of each payment is important in the present case. The payments were made over a period of just less than five months during which time there were at least three relevant changes in circumstances: Harris Scarfe’s increasing indebtedness to Chicago Boot; Chicago Boot’s service of the statutory demand on 16 January 2001; and Mr Palmer’s rather rueful emails of 25 and 30 January 2001.
The Judge did not advert expressly to the need to consider separately the circumstances at the time of each payment, and his reasons do not indicate any such consideration. Instead, the Judge’s reasons suggest that he considered the circumstances in an omnibus fashion as indicating the existence of reasonable grounds to suspect Harris Scarfe’s insolvency. The Judge referred on several occasions to the position “at the relevant time”[27] without going on to indicate that there were possibly five separate times which might be relevant in the circumstances. It is true that on two occasions the Judge referred to “the time of the payments” in question[28] but he did so without giving separate consideration to the different circumstances which existed at the times of the various payments.
[27] For example [79], [85], [86], [88], [90] and [103].
[28] Ibid at [86], [107].
At one stage the Judge referred to the sum of $316,801.33 having been paid “between 2 January 2001 and 22 February 2001”.[29] This was a mistake as the first payment was made on 4 October 2000. It may be, however, that the Judge’s apprehension that all payments were made between 2 January 2001 and 22 February 2001 led him to consider that the time frame was so narrow that it was not necessary to consider separately the circumstances existing at the time of each payment.
[29] Ibid at [4].
I consider that Chicago Boot’s submission that the Judge considered the circumstances in a global way and did not differentiate between the circumstances existing at the time of each payment should be upheld.
The Countervailing Factors
As noted earlier, the Judge attached considerable significance to the circumstances disclosed in the communications between the two companies. Chicago Boot submitted on the appeal that in so doing the Judge had either ignored, or given little weight to, “countervailing factors” which militated against an actual apprehension or mistrust by it, or the hypothetical reasonable person in its circumstances, that Harris Scarfe was insolvent. It referred in this respect to a number of features in the evidence indicating that Harris Scarfe was a large, stable and financially viable enterprise, including:
1.HSHL’s status as a publicly listed company whose history extended back some 150 years;
2.Harris Scarfe was at relevant times the third biggest department store chain in Australia with 35 stores trading in four States;
3.The content of the Harris Scarfe’s Group’s financial statements for its last full financial year (to 30 July 2000);
4.The contents of the Group’s published half yearly results to 30 January 2001;
5.The media reports of Harris Scarfe’s activities which were, for the most part, positive;
6.The evidence that HSHL’s own directors did not, until well after the last of the payments to Chicago Boot, form any view that the Group or any entity within it was insolvent, and that the appointment of the administrators was made only after a major fraud in its accounts had been revealed.
Chicago Boot drew attention to a number of features of the annual report published to the Australian Stock Exchange in, apparently, late October 2000.[30] Mr Trescowthick, the Executive Chairman, highlighted in the report an increase in operating profit (before abnormal items) of 12.9 per cent to $14.1m which he said reflected progress by Harris Scarfe in increasing its margin on sales; an increase of 8.8 per cent to $406m of total sales of the year; and the opening of new stores in Victoria, Western Australia and South Australia. The consolidated financial report indicated total revenue for the year of $422m, and an operating profit after income tax of $13.2m. The financial statements also indicated that retained profits at the end of the financial year were $29m and that the value of current assets exceeded the value of current liabilities by some $57m. The Group’s net assets were said to be $103m. Net cash inflow from operating activities were said to be $18.2m and the net increase in cash held was said to be $6m. With one exception, all of these figures were improvements on the previous year.
[30] HSHL had made a public release on 12 September 2000 of the full year financial result contained in that report.
HSHL’s directors made a declaration in the annual report that the financial statements gave a true and fair view of the Group’s financial position as at 31 July 2000 and a declaration that “there are reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable”. In addition, PricewaterhouseCoopers, the Group’s auditor, certified that the financial report gave “a true and fair view of the Company’s and consolidated entities’ financial position as at 31 July 2000 and of their performance for the financial year ended on that date”.
Chicago Boot submitted that Harris Scarfe appeared to be a well established, stable and respectable company and that the content of HSHL’s annual report would have suggested to a reasonable person that Harris Scarfe was in a healthy financial state.
Although there is force in Chicago Boot’s submissions concerning the annual report, I consider that its reliance upon HSHL’s half yearly report to 31 January 2001 was misplaced. That report was not published until 16 March 2001, just on one month after the last of the payments to Chicago Boot. There was no evidence that its contents were known to Chicago Boot or would have been known by a reasonable person in its position any earlier than that date.[31]
[31] I note that HSHL did announce to the Australian Stock Exchange on 16 February 2001 (ie, the same day upon which Chicago Boot received the last of its payments) its half yearly financial results. Although the announcement had a reassuring tone, it is not necessary, in my opinion, to refer to it in any detail.
Chicago Boot tendered at trial a number of media clippings and press announcements concerning Harris Scarfe in 1999, 2000 and 2001. Each of Mr and Ms Mance said that it had been their practice to monitor any public statements of the entities to which Chicago Boot made supplies and this included Harris Scarfe. They said that they had seen, at the time of their publication, the originals of the press clippings, examples of which included:
1.A statement in the Australian Financial Review on 25 June 1999 that HSHL expected to have 40 stores across Australia by mid 2000 as it continued its expansion plans, together with the report from the stores then being opened by Harris Scarfe;
2.A statement in the Australian Financial Review of 18 August 1999 that Harris Scarfe had produced “a solid 7.3 per cent rise in full year sales to $373.5m” together with a report of further planned expansions;
3.A report in the Australian Financial Review of 9 November 1999 that Harris Scarfe had achieved an 8.7 per cent rise in sales for the first quarter of the current financial year;
4.A report in The Age and the Australian Financial Review on 8 February 2000 that Harris Scarfe had achieved an 8.6 per cent increase in sales for the first half of the financial year (to 30 January 2000) and that it was achieving savings by outsourcing its distribution network to Toll Logistics;
5.A report in the Australian Financial Review of 18 August 2000 of Harris Scarfe’s financial results for the financial year ending on 31 July 2000. The Australian Financial Review’s headline for this article was “Scarfe’s Booming Fourth Quarter”;
6.A report in the Herald Sun of 13 September 2000 that Harris Scarfe planned “several expansion and initiatives” for the 2000-2001 year, including internet retailing;
7.A report in The Age on 22 November 2000 to the effect that Harris Scarfe’s financial results were affected by slow trading following the introduction of the GST but that sales had improved since October, together with a report that Harris Scarfe was to provide order and delivery services to an internet service conducted by the Seven Network;
8.An announcement published in the Herald Sun on 2 December 2000 that Harris Scarfe was acquiring Dstore, an on‑line retailer, with the expectation that that would assist the Group to increase revenue.
Chicago Boot submitted that the media reports generally presented Harris Scarfe in a favourable light and had not, in any respect, raised any questions about its financial viability.
The Judge referred to the media reports in his summary of the evidence of Ms Mance[32] and in his summary of counsel’s submissions[33] but did not make any findings concerning them. His Honour did reject Ms Mance’s evidence that she had believed Harris Scarfe to be in “a good financial position” but did not make a finding as to the effect of the media publicity concerning Harris Scarfe on Ms Mance, or on the hypothetical average business person in Chicago Boot’s circumstances. It may be implicit in his Honour’s ultimate finding that he did not regard the media publicity as sufficient by itself, or in combination with other evidence, to discharge the onus on Chicago Boot, but it is not clear what significance his Honour attached to the evidence.
[32] Ibid at [88].
[33] Ibid at [92].
In these circumstances, I consider it appropriate to consider Chicago Boot’s remaining submissions with reference to the circumstances at the time each payment was made to Chicago Boot.
First Payment: 4 October 2000
The cheque for the payment of $43,540.10 which was paid to Chicago Boot on 4 October 2000 had been drawn on 31 July 2000. The payment was accordingly just on two months overdue.
Counsel for the respondents emphasised, in addition, the email of 3 October 2000 which indicated that at that time Harris Scarfe owed Chicago Boot $130,000 “outside 120 days” and contained Mr Emanouel’s statement of “firm belief that you have no capacity to pay”. Counsel contended that the latter statement, in conjunction with the large outstanding liability, gave rise to a reasonable suspicion about Harris Scarfe’s solvency.
These are important considerations. However, these circumstances have to be considered in the context of the trading relationship between the companies. As noted above, a feature of that relationship was that for many years Harris Scarfe had deliberately withheld payment, sometimes for long periods, of the amounts which it was liable to pay to Chicago Boot and Windsor Smith, and that Chicago Boot had, to a certain extent, tolerated that practice.
In Jonas & Lanpac International Pty Ltd v Automation House Pty Ltd & Anor[34] Chernov J spoke of the importance of considering the overall trading relationship in circumstances such as the present:
51.In my view, there were some indications, if taken in isolation from other events, that would constitute reasonable grounds for the hypothetical respondent suspecting that Lanpac was or was about to become insolvent. I refer particularly to the failure by Lanpac to pay for a long period, the large amounts that were invoiced to it by the respondent, thereby compelling the respondent vigorously to chase payment of those accounts. That, by itself, could be regarded as a reasonable ground for suspecting relevant insolvency. The same can be said of the change to the terms of trading imposed by the respondent (requiring the payment of 50% of the invoice price "up front" and payment on delivery). The same can also be said about the two dishonoured cheques.
52.But these matters have to be placed in the context of the knowledge of the respondent as to Lanpac's business and the relationship which existed between he parties. Part of that context was that it was virtually standard practice for many years for Lanpac not to pay its accounts until it was virtually badgered into so doing by the respondent. In the end, however, it always paid the invoiced amounts. Furthermore, the evidence to which I have referred, shows to someone like the respondent, that Lanpac gave the appearance of a financially successful company which was interested in merging its operations (and those of its associated company, AFPL) with those of the respondent.
[34] [1998] VSC 9.
Similar considerations apply in the present case. Further, as noted earlier, in the period from January 2000 to March 2001 the average delay between the drawing of cheques and their delivery to Chicago Boot was 53 days. The delay from 31 July 2000 to 4 October was 65 days. The difference was not so significant as to give rise to a suspicion of Harris Scarfe’s insolvency.
Taken at face value, Mr Emanouel’s statement of his belief about Harris Scarfe’s incapacity to pay is damning. However, in my opinion, it is inappropriate to treat the statement in that way. Other statements made by Mr Emanouel in the same email were in the nature of bluff, for example, the threat to discontinue to supply. Plainly Chicago Boot had no intention of carrying out such a threat, as is evidenced by its subsequent conduct. I consider that Mr Emanouel’s statement about Harris Scarfe’s capacity to pay should be understood in a similar way, ie, as either a harsh statement designed to embarrass Harris Scarfe into payment or a statement of Chicago Boot’s awareness that Harris Scarfe was using funds due to its suppliers to fund its own expansion and thereby depriving itself of the capacity to pay.
I am confirmed in the conclusion that a reasonable person in Chicago Boot’s position as at 4 October 2000 would not have suspected insolvency by reference to Harris Scarfe’s perceived status, the contents of its annual report referred to above, and the favourable media reporting of its activities.
In my respectful opinion, the Judge erred in failing to find that Chicago Boot had discharged the onuses under s 588FG(2) in relation to the payment on 4 October 2000.
The Two Payments on 2 January 2001
Chicago Boot received two relatively small payments on 2 January 2011: a cheque for $1,079.01 and a cheque for $3,444.92 drawn on 30 September 2000 and 31 October respectively. The first payment was received some 93 days after it became due and the second, some 63 days after it became due.
The evidence disclosed very little of what occurred between 4 October 2000 and 2 January 2001. Mr Emanouel’s internal email of 11 December 2000 indicates that Chicago Boot was very concerned about the payment of $151,893.49 which had become due on 30 November 2000 but Harris Scarfe’s delay in making that payment was well within the average period of 53 days by which Harris Scarfe was delaying payments which were due to Chicago Boot.
Harris Scarfe’s overall liability to Chicago Boot had, by 2 January 2001, increased significantly and that is of course a very pertinent circumstance. That increase had occurred despite the additional funds available to Harris Scarfe from Christmas trading. However, in my opinion, when regard is had to all the circumstances, it cannot be concluded that Chicago Boot itself had reasonable grounds for suspecting that Harris Scarfe was insolvent as at 2 January 2001, or that it would become insolvent by reason of the making of the two small payments on 2 January 2001, or that a reasonable person in Chicago Boot’s circumstances would have had reasonable grounds for suspecting Harris Scarfe’s insolvency.
The Payment of 19 January 2001
The payment of $100,799.13 was made after Chicago Boot and Windsor Smith had served their respective notices of statutory demand on Harris Scarfe. As indicated above, I consider that it was appropriate for the Judge to infer that it was the receipt of the statutory demands which prompted the payment on 19 January.
A number of features of the circumstances at the time of this payment are pertinent. First, Harris Scarfe’s indebtedness to Chicago Boot had never been so large (approximately $280,000 and approximately $41,000 to Windsor Smith). Secondly, Harris Scarfe had not delivered the larger cheque for $151,893.49 which Mr Emanouel had discussed with Mr Hunter on 11 December 2000. Thirdly, Chicago Boot and Windsor Smith had served their respective notices of statutory demand. Ms Mance said that this was the first occasion upon which Chicago Boot had resorted to any legal action in relation to Harris Scarfe, let alone the first occasion upon which it had arranged for a statutory demand to be served. Ms Mance said that she intended, when giving the instructions in relation to the statutory demands, if Harris Scarfe did not make payment of the amounts demanded, that Chicago Boot would issue proceedings for the winding up of Harris Scarfe. Finally, it is appropriate to note that Harris Scarfe’s response to the statutory demand on 19 January 2001 was the payment of part only of the demanded and undisputed debt.
Each of Mr and Ms Mance said that the service of the notices of statutory demand had been prompted by the rudeness and dismissiveness of Harris Scarfe’s employees in relation to Chicago Boot’s requests for payment. That may have been so but nevertheless the service of the statutory demands was significant. By s 459C of the then Corporations Law a court would have been required to presume HSL’s insolvency if it failed to comply (in the manner contemplated by s 459F) with the demand. In other words, the very act of serving the statutory demands put the presumed insolvency of HSL in prospect.
In Re K & R Fabrications (Qld) Pty Ltd (in liq),[35] Connolly J said that:
[E]xcept in the most unusual circumstances, it will not be possible to describe a payment made in response to a notice under s 222 of the Companies Act as one which a man might make or receive without the insolvency of the debtor being in view.[36]
Similarly, in Muller & McIntosh v Academic Systems Pty Ltd,[37] Williams JA said:
Whilst one could not conclude that a creditor, who becomes so frustrated with an inability to recover a debt that he serves a statutory demand and within the period provided for by that demand accepts a lesser sum in full settlement, could never discharge the onus of establishing a defence under s 588FG, it has to be said that ordinarily the inference would be open in such circumstances that the creditor had grounds for suspecting that the company was insolvent at the time payment was made.[38]
Atkinson J, who agreed with Williams JA, added that:
… a creditor that uses a statutory demand procedure to collect a debt which is due and payable and about which there is no dispute would have real difficulty in demonstrating that a payment made by the company in response to the statutory demand is not voidable as an insolvent transaction if the company is would up in insolvency within the following six months.[39]
[35] (1980) 32 ALR 183.
[36] Ibid at 186.
[37] [2007] QCA 218.
[38] Ibid at [33].
[39] Ibid at [41].
It may be that there is more scope for absence of a suspicion of insolvency in respect of payments made after service of a notice of statutory demand than these dicta would suggest. There is of course considerable authority to the effect that the service of a statutory demand under s 459E should not be undertaken as a mere debt collection device. Austin J stated the position in Moutere Pty Ltd v Deputy Commissioner of Taxation[40] in the following passage:
The policy underlying s 459H is that the statutory demand procedure should not be used to coerce a person to pay a disputed amount. A statutory demand is not an instrument of debt collection. By analogy, the Commissioner should not use the statutory demand procedure to apply coercive pressure to a taxpayer who genuinely objects to the Commissioner’s decision. …
If the Commissioner decides not to await the outcome of the objection, the proper course will often be for him to take proceedings for the recovery of the debt rather than to summon up the spectre of liquidation by issuing a statutory demand. If the Court forms the view that the Commissioner has acted oppressively or unfairly by issuing a statutory demand in such circumstances, the appropriate course is for the Court to set the demand aside under s 459J(1)(b). By doing so the Court does not deny that the debt is recoverable although an objection has been made, but it thereby insists that the statutory demand procedure should not be used to apply pressure for payment of an amount which might ultimately be found not to be payable.[41]
Reference may also be made to Muller & McIntosh v Academic Systems Pty Ltd;[42] Re QBS Pty Ltd,[43] and to Fitness First Australia Pty Ltd v Dubow.[44] Santow J summarised the position succinctly in Buddies Liquor Pty Ltd v Wah Lai Investment (Australia) Pty Ltd when he said:
It is long settled that Statutory demands may not be used as some kind of commercial lever to exact favourable settlement of disputed debts.[45]
[40] [2000] 34 ACSR 533 at 543.
[41] Ibid at [54]-[55], 543.
[42] [2007] QCA 218 at [42].
[43] [1967] Qd R 218 at 224;
[44] [2011] NSWSC 531 at [174].
[45] [2001] NSWSC 337 at [2].
However, I do not understand the authorities to indicate that the statutory demand procedure may not be used as a means of enforcing payment by a recalcitrant debtor of an undisputed debt. For example, Austin J in Poonon v Deputy Commissioner of Taxation[46] said:
The use of the statutory demand procedure for debt collection may be objectionable as an abuse of process in cases where, for example, the creditor is aware that there is a genuine dispute in respect of the debt. But there is nothing in the law which per se prevents a person who claims indebtedness from using the statutory demand procedure and subsequently making an application for winding up.[47]
Similarly in Bluehaven Transport Pty Ltd v Commissioner of Taxation,[48] Williams J said:
The applicant contended that the use of a statutory demand as a debt collection device was an abuse of process. That is too sweeping a generalisation. Clearly one of the objects of the winding up procedure is the realisation of the company's assets and the distribution of them in discharge of its liabilities. It has long been recognised that the winding up procedure may properly be used with the aim of at least getting paid in part. What is equally clear is that the winding up procedure must not be used for any indirect or improper motive. Those basic principles have been clear at least since 1876 when Jessell MR delivered judgment in Re St Thomas' Dock Co [1876] 2 Ch D 116. The use of winding up proceedings where the debt is clearly the subject of a bona fide dispute would be an abuse of process of the type in question. But where the debt is large, and there is some reason to believe that the company is not in a position to satisfy it, there is no element of abuse of process in seeking a winding up order though the only real interest of the creditor is in being paid.[49]
[46] [1999] NSWSC 1121.
[47]Ibid at [21].
[48] (2000) 157 FLR 26.
[49] Ibid at 31
In my opinion, courts should not be oblivious to the prospect that some creditors may use a statutory demand as a means of enforcement of the payment of undisputed debts by a dilatory debtor. In other words, there may be some circumstances in which statutory demands are served in which there is no real spectre of insolvency.
Nevertheless, the fact that a creditor, as an act of last resort, considers the service of a statutory demand to be appropriate will usually be a very relevant consideration.
In the present case, the Judge attached considerable significance to the service of the statutory demands on Harris Scarfe. He regarded that conduct, by itself, as indicating reasonable grounds for suspecting insolvency.[50]
[50] Davies & Nicol as Joint & Several Liquidators of Harris Scarfe Ltd v Chicago Boot Co Pty Ltd (No 2) [2011] SASC 27 at [104].
Counsel for Chicago Boot submitted that the statutory demands in the present case should more appropriately be understood as a means adopted by Chicago Boot to enforce the payments to it. Harris Scarfe had at time been rude and dismissive, and at other times prevaricatory when Chicago Boot had pressed it for payment. Both Mr and Ms Mance referred to Harris Scarfe “stuffing them around”. In this context, counsel submitted that the statutory demands were more in the nature of a signal to Harris Scarfe that Chicago Boot’s requests for payment should be taken seriously.
I agree that there is some evidence which supports that characterisation of the matter. However, the Judge at first instance did not make that characterisation. As noted earlier, the Judge did not accept Ms Mance’s evidence that she had believed Harris Scarfe to be in a good financial position.[51] The Judge considered that the email exchanges between the two companies together with the fact that the recovery of the outstanding amounts had been placed in the hands of solicitors suggested a real concern about the financial position of Harris Scarfe and its ability to pay the amounts outstanding.[52]
[51] Ibid at [101].
[52] Ibid.
I do not consider that the Judge’s characterisation was wrong. On the contrary, it is supported by Ms Mance’s own evidence to the effect that she contemplated winding-up proceedings if Harris Scarfe did not pay the amount sought by the statutory demands. In addition, Harris Scarfe had allowed its liability to Chicago Boot to grow to unusually large levels. A reasonable person in Chicago Boot’s position would, in my opinion, have suspected that it was not being singled out for this disadvantageous treatment. That is to say, a reasonable creditor in the circumstances would have thought it likely that other creditors were being treated in the same way and have suspected that Harris Scarfe had problems which were, or were becoming, endemic. That is especially so given the additional feature that, despite the additional funds available from Christmas trading, HSL’s indebtedness to Chicago Boot had increased, rather than following the usual pattern of decreasing.
For these reasons I do not consider that Chicago Boot did discharge the onuses cast on it by s 588FG(2) in respect of the payment it received on 19 January 2001.
The Payments on 2 and 22 February 2001
The conclusion that Chicago Boot’s appeal with respect to these two payments must fail can be reached more confidently when one has regard, in addition to the matters referred to above, to Mr Palmer’s emails of 25 and 30 January 2001. The first email raised clearly the prospect that HSL was in financial straits. Mr Palmer indicated that, for financial reasons, the authority of HSL’s buyers had been very much restricted so that, for example, it was no longer possible for Harris Scarfe to purchase a full range of products for its general ladies’ shoe department. Mr Palmer said that Harris Scarfe “now only have money to finance our catalogue program”. The email of 30 January contained a statement to similar effect. I understand this to mean that Harris Scarfe could finance only the purchase of products to be sold as “specials” and not the normal range of stock of a large department store. That Harris Scarfe was in financial straits was also indicated by Mr Palmer’s statement that the buyers had been instructed to deal only with “people who believe in us and are prepared to support us during the difficult times”.
In my opinion, these emails, in combination with the other circumstances to which reference has already been made, indicates that there were reasonable grounds, at least by 25 January 2001, to suspect Harris Scarfe’s insolvency.
Conclusion
For the reasons given above, I would allow the appeal but only for the purpose of setting aside the Judge’s decision with respect to the payments received on 4 October 2000 and 2 January 2001. Otherwise I would dismiss the appeal. As it will be necessary for there to be a re-calculation of the award of interest, I would hear the parties on that topic before entering judgment on the appeal.
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