CID Electrical Services Pty Limited v CNW Pty Limited

[2006] NSWLC 17

Local Court of New South Wales

CITATION:	CID Electrical Services Pty Limited v CNW Pty Limited [2006] NSWLC 17
JURISDICTION:	Civil
PARTIES:	CID Electrical Services Pty Limited (in Liquidation) CNW Pty Limited
FILE NUMBER:	10268/2005
PLACE OF HEARING:	Downing Centre
DATE OF DECISION:	04/18/2006
MAGISTRATE:	Magistrate S Freund
CATCHWORDS:	Liquidator - Insolvent Transactions - Voidable Transactions - Insolvent - Company solvent at the time of payments - debt - Creditor
LEGISLATION CITED:	Corporations Act 2001 C'th
CASES CITED:	Jones v Dunkel (1959) 101 CLR 298 Commercial Union Insurance Co of Australia Ltd v Fercom Pty Ltd (1991) 22 NSWLR 389 Ho v Howell (2001) 51 NSWLR at 572
REPRESENTATION:	S Golledge instructed by the Argyle Partnership J Jobson instructed by Nemes Thomas & Co
ORDERS:	I find in favour of the Plaintiffs and make the following orders: Judgment for the Plaintiff in the sum of $25,000 together with interest on that amount from 2 March 2004 (being the date of the letter of demand) to date to be calculated by the registry. In relation to costs, I propose that the usual order that costs follow the event in a sum agreed between the parties or as assessed. Parties may have liberty to apply in respect of the proposed order as to costs. If the matter is not relisted within 28 days by either party on the question of costs, the proposed order will be executed.

Reasons for Decision

1    These proceedings were commenced by the Second Plaintiff, Mark Roufeil the liquidator of the First Plaintiff (“the Liquidator”) by way of Statement of Claim in the Supreme Court of NSW on 27 March 2005 and transferred to this court on or about 9 June 2005. The Liquidator has sought to recover from the Defendant (“CNW”) 2 payments totalling the sum of $25,000 made by the First Plaintiff, CID Electrical Services Pty Limited (in liquidation) (“the Company”) to the CNW on 24 March and 23 June 2003 respectively (“the Payments”). The liquidator claims inter alia that:

a The Payments were Unfair Preferences pursuant to section 588FA Corporations Act, 2001 C’th;

b The Payments are therefore Insolvent Transactions pursuant to s. 588FC Corporations Act, 2001 C’th; and

c therefore the Payments are Voidable Transactions under s. 588FE Corporations Act, 2001 C’th.

2    CNW has defended the proceedings on the following grounds:

a That the Liquidator has not satisfied on the balance of probabilities that the Company at the relevant time was insolvent; or alternatively

b Pursuant to s.588FG(2) Corporations Act, 2001 C’th.

AGREED FACTS BETWEEN THE LIQUIDATOR AND CNW

3    CNW made 2 payments to the Company on 24 March 2003 and 23 June 2003 respectively;

4    The Relation Back Date is the date upon which the winding up petition was filed and resulted in the appointment of the Liquidator to the Company. Accordingly, the Relation Back Date was 10 September 2003;

5    The date upon which the Relation Back Period commenced was 10 March 2003, accordingly the Payments which are the subject of these proceedings come within the 6 month relation Relation Back Period;

6    The Payments were made by the Company to CNW in respect of an unsecured debt owed by the Company to CNW;

7    The effect of the payments gives CNW a preference over other unsecured creditors;

WAS THE COMPANY SOLVENT AT THE TIME OF THE PAYMENTS

8 The first issue to be determined by me is whether the Liquidator has established on the balance of probabilities that the Company was insolvent at the time the payments were made. The relevant provisions of the Corporations Act are as follows:

“ 95A (1) A person is solvent if, and only if, the person is able to pay the person’s debts , as and when they become due and payable.

(2) A person who is not solvent is insolvent.”

9    s.588FF states as follows:

“ If:

(a) the company is being wound up; and

it must be presumed that the company was insolvent throughout the period beginning at that time and ending on that day.”

10    The evidence relied on by the Liquidator can be summarised as follows:

a Between the period 10 March 2003 and 10 September 2003, (“the Relation Back Period”) the Company had a debt to the ATO that was never less than $100,000;

b The Company did not have the capacity to repay the ATO debt even with the use of its overdraft facility during the Relation Back Period;

c Besides the ATO debt, the Company had numerous other debtors. As at the date of the winding up of the Company it had outstanding debts totalling the sum of $190,112.78. Many of the debts had been outstanding for some or all of the Relation Back Period.

d The Company’s records indicate that from 1 July 2002 that it was in default of its trading arrangements with a number of creditors these include:

Date	Creditor	Narrative
11 Dec 02	E & S	“account well overdue”
Jan 03	Metal Manufacturers	“account overdue and Legal action threatened”
Jan 03	Intruder Security	letter of demand for debt due Since June 02
Feb 03	CNW	account on stop

e The Company commenced trading on or about 9 April 2001. From its commencement of trading it traded at a loss. It did not generate a profit during the period in which it operated. Accordingly, it follows that it could not trade out of its debts;

f The Company first defaulted on its account with CNW in about December 2002 (when it had an amount of $17,475.02 outstanding to CNW for over 60 days). On 28 February 2003 the Company’s credit account was stopped and the statement from CNW to the Company was marked “This account is on STOP SUPPLY”. Similarly a statement from CNW to the Company dated 31 March 2003 was marked “This account is on STOP SUPPLY” and also “URGENT ACTION : THIS ACCOUNT IS OVERDUE PLEASE PAY AT ONCE”. CNW’s credit department were unable to obtain payment of the outstanding debt.

11    Mr. Jobson Counsel for CNW submitted as follows:

a The liquidator had not provided a proper consideration of the Company’s financial position;

b A full audit of the Company’s position had not been carried out upon its liquidation;

c There is no evidence that the overdraft facility provided by the Commonwealth Bank was ever refused and in fact the Company had on a number of occasions exceeded the limit of the overdraft account without default;

d That the Company through its directors, reported that the only reason for the company being wound up was a problem with one contract. Mr Jobson argues this is confirmed or corroborated by the annexure on page 228 of the Affidavit of Mark Roufeil sworn 16 January 2006, which indicates that the company represented to a creditor that their cash flow difficulties would be resolved by the end of March 2003;

e That the fact that creditors of the company were indulging the company and extending it further credit or time to repay its debts is not evidence of insolvency;

12 I have considered all the evidence tendered and all the submissions of the parties and have formed the view that the Company as at 10 March 2003 was clearly insolvent. It was unable to pay its debts as and when they fall due within the meaning of s.95A(1) & (2) of the Corporations Act. This is clearly evidenced by the fact that it was operating at a loss, had a debt of at least $100,000 to the ATO that it was unable to pay and a number of other creditors during the period.

CAN CNW RELY UPON A DEFENCE UNDER S.588FG(2) OF THE CORPORATIONS ACT?

13 The alternate argument put by CNW was that it satisfies the tests as prescribed by s.588FG(2) of the Corporations Act which states as follows:

“ A Court is not to make under s.588FF an order materially prejudicing a right or interest of a person if … it is proved that:

14 The onus falls upon the Defendant, in this case CNW in order to establish a defence under s.588FG(2), therefore it is for CNW to establish on the balance of probabilities the absence of any actual suspicion as to the insolvency of the Company. The Court of Appeal in Cook’s Construction Pty Limited v-v Brown & Anor (2004) 49 ACSR 62 at 66 it was held by Young CJ that :

“There is no doubt that the onus is on the defendant in the proceedings to satisfy the court that: (1) it had no reasonable grounds for suspecting DML was insolvent, the so called subjective test; and (2) that a reasonable person in the appellant’s circumstances would have had no such grounds, the so called objective test… The question is always one of fact. Often it is necessary to look at the acts and words of a number of directors of the corporation… In other cases one can look at the controlling mind of the corporation or its appointed spokesperson…”

THE EVIDENCE OF CNW

15    CNW has failed to proffer any evidence from anyone in its employ who had direct involvement with the Company and the management of its account. It has simply relied on the evidence on Mr Mananos the Company Accountant of CNW. Mr Mananos was based in CNW’s head office in Murarrie Queensland and did not have day to day management of the CNW account.

16    It is clear from the cross examination of Mr Mananos that the person in CNW’s employ who had the most direct contact with the Company was Mr Dusan Dasic, the NSW branch manager of CNW who at the time of the proceedings worked out of CNW Alexandria office. According to the evidence of Mr Mananos it was Mr Dasic who had the day to day contact with the Company at the relevant time;

17    Similarly there is no evidence from the head of CNW’s credit collection department at the relevant time, namely, Ms Angie Tourambie. However, I note that at the time of the hearing she was no longer in the employ of CNW.

18    Furthermore, I note the non compliance by CNW to the notice to produce issued by the solicitors for the Liquidator seeking:

“1. All documents recording communication between the Second Plaintiff and the Defendant created or made between 10 September 2002 and 10 September 2003 relating to;
a) any debt owing by the Second Plaintiff and the Defendant;

2. All documents created, made or in force between 10 September 2002 and 10 September 2005 which relate to the indebtedness of the Second Plaintiff to the Defendant …”

19    The evidence from Mr Mananos in cross examination was that a file would have been created by the credit department of CNW in relation to the debt of the Company and a credit diary would have recorded any details of conversations and correspondence relating to the debt. I note no such credit diary or file was ever been produced by CNW.

20    Accordingly, the Defendant in its failure to put before the Court evidence from Mr Dasic and the Credit Diary and file without proper explanation allows me to infer that neither the credit diary or file nor the evidence of Mr Dasic would have assisted its case pursuant to the reasoning of Hodgson JA in Ho –v- Howell (2001) 51 NSWLR at 572 at 577 where he states:

“The case of Jones v Dunkel (1959) 101 CLR 298 is a particular application of this principle. That case itself related to a situation where there was evidence supporting an inference against a party, and that party did not give or call evidence, which that party was plainly in a position to have given or called, in order to explain or contradict the material presented. In my opinion, a similar principle applies where a person bearing the onus of proof does not give or call evidence which that person is plainly in a position to give or call; and unless some explanation is given of this failure, the tribunal of fact is entitled to infer that this evidence would not have assisted that person's case:…Commercial Union Insurance Co of Australia Ltd v Fercom Pty Ltd (1991) 22 NSWLR 389.”

This reasoning was upheld by Young JA in the Court of Appeal decision of Cook’s Construction.

21 Accordingly I am of the view having considered all the material before me that the Defendant, CNW has not discharged its onus with respect to the “so called subjective test” (as described by Young JA in Cook’s Constructions), which is the first element of the s.588FG(2) defence. Namely, that it has not provided any evidence to the court that it had no reasonable grounds for suspecting the Company was insolvent.

JUDGMENT AND ORDERS

Accordingly for the reasons set out above I find in favour of the Plaintiffs and make the following orders:

1. Judgment for the Plaintiff in the sum of $25,000 together with interest on that amount from 2 March 2004 (being the date of the letter of demand) to date to be calculated by the registry;

2. In relation to costs , I propose that the usual order that costs follow the event in a sum agreed between the parties or as assessed. Parties may have liberty to apply in respect of the proposed order as to costs. If the matter is not relisted within 28 days by either party on the question of costs, the proposed order will be executed.