Cook v Westcon Group Pty Ltd
[2011] VCC 823
•28 June 2011
IN THE COUNTY COURT OF VICTORIA
Unrestricted
AT MELBOURNE
CIVIL DIVISION
COMMERCIAL
GENERAL DIVSION
Case No. CI-10-02886
| PAUL JOHN COOK (in his capacity as Liquidator of | First Plaintiff |
| TOPS BUSINESS TECHNOLOGY SOLUTIONS PTY LTD) (ACN 056 279 988) | |
| and | |
| TERRENCE JAMES O’CONNOR (in his capacity as Liquidator0 of | Second Plaintiff |
| TOPS BUSINESS TECHNOLOGY SOLUTIONS PTY LTD (ACN 056 279 988) | |
| and | |
| TOPS BUSINESS TECHNOLOGY SOLUTIONS PTY LTD (in liquidation) | Third Plaintiff |
| (ACN 056 279 988) | |
| v | |
| WESTCON GROUP PTY LTD | Defendant |
| (ACN 050 539 672) |
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| JUDGE: | HIS HONOUR JUDGE GINNANE |
| WHERE HELD: | Melbourne |
| DATE OF HEARING: | 24 February and 7 March 2011 |
| DATE OF JUDGMENT: | 28 June 2011 |
| CASE MAY BE CITED AS: | Cook & Ors v Westcon Group Pty Ltd |
| MEDIUM NEUTRAL CITATION: | [2011] VCC 823 |
REASONS FOR JUDGMENT
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Catchwords: Corporations – liquidation – voidable transaction – defence – suspicion of insolvency – reasonable grounds of suspicion of insolvency: Corporations Act 2001, ss.588FA and 588FG
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| APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Mr T I Purdey | TressCox Lawyers |
| For the Defendant | Ms S Maharaj QC | Madhu Dubey |
| HIS HONOUR: |
1 The plaintiffs apply for orders under s.588FF of the Corporations Act 2001 (“the Act”) in respect of payments by the third plaintiff, Tops Business Technology Solutions Pty Ltd (“Tops”), to Westcon Group Pty Ltd (“Westcon”), the defendant, in the total sum of $73,751.88. The plaintiffs allege that the payments were insolvent transactions within the meaning of s.588FC of the Act and voidable pursuant to s.588FE(2) and (3).
2 On 11 August 2009, Mr P Cook and Mr T O’Connor, the first and second plaintiffs, were appointed Tops’ joint and several administrators pursuant to s.436A of the Act. Mr Cook estimated that the amount of unsecured debts which remained unpaid at that date was $2,898,061.[1]
[1] Transcript (“T”) 36 and affidavit of Paul John Cook of 22 December 2010 - Exhibit PJC 1 - Court Book 51
3 On 14 September 2009, Tops was wound up pursuant to a resolution of its creditors and Mr Cook and Mr O’Connor were appointed joint and several liquidators of it.
4 The relation-back day was the date of the appointment of the joint and several administrators, namely, 11 August 2009 – see the definition in s.9. During the six-month period ending on the relation-back day, Tops paid a total of $73,751.88 to Westcon in respect of unsecured debts owed to it.
5 Westcon admitted the elements of the plaintiffs’ cause of action, but relied on the defence that, at the time that it became a party to the transactions:
(a)
it had no reasonable grounds for suspecting that Tops was insolvent at that time or would become insolvent; and
(b)
a reasonable person in its circumstances would have had no such grounds for so suspecting; and
(c) it has provided valuable consideration under the transactions. 6 The primary issues argued related to the elements of the defence contained in s.588FG(2)(b), namely, that:
(i) Westcon had no reasonable grounds for suspecting that Tops was insolvent at that time or would become insolvent as mentioned in paragraph 588FC(b); and (ii) whether a reasonable person in the circumstances of Westcon would have had no such reasonable grounds for so suspecting, i.e, that Tops was insolvent at the time the benefit was received or would become insolvent in accordance with s.588FC(b). 7 The amount of $73,751.88 was made up of the following separate payments:
Payment Date Amount 4 March 2009 $30,000.00 8 April 2009 $15,000.00 30 April 2009 $10,000.00 2 June 2009 $11,000.00 11 July 2009 $7,751.88 Total $73,751.88
The Businesses of Tops and Westcon
8 Tops provided information technology services and solutions, particularly in connection with architecture.
9 Westcon is a global IT networking, security storage and convergence distributor. It buys technology from manufacturers and sells it to customers such as Tops, who in turn sell it to end users. This method of business operation is called channelling. In this case the end user was Transend Networks, which is a wholesale electricity supplier in the Tasmanian electricity grid.
10 Westcon is one of a number of distributors from whom resellers can make purchases. Its core business is distributing specialised products, although it is not the exclusive distributor of them. Because of Westcon’s specialisation, resellers may not need to purchase products from it for twelve months or more.
11 Westcon is a significant supplier of McAfee IT products. It also does hold in stock some popular products, which are described as run rate stock.
12 Westcon usually has 30 days in which to pay a manufacturer without incurring penalty. In turn, Westcon’s invoiced terms of payment are 30 days from invoice or statement.
The June 2008 Purchase Order
13 In June 2008, Tops sent Westcon a purchase order for various IT products and services to the value of $143,440.51. In turn, Westcon placed an order with McAfee for the products.
14 The products were delivered to Tops as they arrived from McAfee as follows. First, on 23 June 2008, licences and support, some of which was anti-virus software for the invoiced price of $35,982.96 and for which payment was received in September. The terms of payment were 30 days.
15 Second, on 8 August 2008, hardware for $97,909.55. The terms of payment were also 30 days.
16 Third was a McAfee IntruShield product to be installed and commissioned for $9,900.00. There is a dispute about when that product was installed.
17 Most of the payments, which are the subject of the plaintiffs’ claim, were for the delivery of hardware on 8 August 2008. On that day Westcon issued invoice 286941 for $97,909.55 payable within 30 days. That amount was paid by the sum of $31,909.55 on 1 December 2008 and by the first four payments set out in the table in paragraph 7 above in March, April and June 2009.
18 The defendant relies on the defence provided by s.588FG (2) which in relevant terms states:
“(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.”
19 In Sutherland t/as Southern Livestock and Nutrition v Lofthouse,[2] Nettle JA stated:
“The effect of the section is to put the burden on the creditor of establishing both the subjective and objective legs of the defence. It follows that in this case the burden was on the appellants to establish both that they had no reasonable grounds for suspecting that the company was insolvent and that a reasonable person in their circumstances would not have had reasonable grounds for so suspecting. ‘Suspicion’ for that purpose means a mistrust of the company’s ability to pay its debts as they become due and of the effect which acceptance of a payment would have as between the appellants and the company’s other creditors.” [3]
[2] (2007) 64 ACSR 655
[3] supra at 660. Nettle JA cited Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266 at 313; Sands and McDougall Wholesale Pty Ltd (in liq) v Commissioner of Taxation [1999] 1 VR 489 at 509
20 There is a difference between the two elements of the defence contained in s.588FG (2)(b). Thus in Sutherland v Lofthouse, Nettle JA stated:
“But whatever the appellants may have thought about the solvency of the company, I do not disagree with the judge that a reasonable person in the appellants’ position would have mistrusted the company’s ability to pay its debts as they became due and would have suspected the effect which acceptance of a payment would have had as between the appellants and the company’s other creditors.”[4]
[4] at [31] and p.664
21 In Sims v Celcast Pty Ltd,[5] Williams J, with whose judgment Cox and Mullighan JJ agreed, stressed that s.588FG(2)(b)(ii) had work to do independently of (b)(i) and stated that:
“The reasonable person in the circumstances of Celcast (subpar (b)(ii)) is not necessarily to be equated with Celcast acting reasonably in its perception of events under subpar (b)(i).”[6]
[5] (1998) 71 SASR 142
[6] supra at 145
22 Williams J considered that the case, the subject of the appeal, was one in which the signs of insolvency were there for a reasonable person to read, but that the creditor’s officers had misread them.[7]
[7] supra
23 In Sutherland v Eurolinx Pty Ltd,[8] Santow J stated:
“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. In Re Ermayne provides an illustration of this appraisal and balancing process. This Wicks J noted (at 334):
‘Cash flow problems can be indicative of or raise a suspicion of insolvency although not necessarily so. It is important to put them in context. One may be dealing with a trader with a persistent and long history of delay in payment of accounts ... In my view ‘cash flow problems’ are a factor and nothing more.’”[9]
[8] (2001) 37 ACSR 477
[9] at [43]
The Plaintiffs’ Evidence
24 The plaintiffs called Mr Paul Cook, the liquidator of Tops, to give evidence. He is a liquidator of twenty-five to thirty years’ experience, who has himself conducted an IT company. He swore an affidavit exhibiting the Insolvency Report, part of which was admitted into evidence. Mr O’Connor, the other liquidator, swore two affidavits.
25 Mr Cook gave evidence that until near the time of insolvency, Tops was paying creditors on time. He stated that after 30 June 2008, Tops’ payment record became poor and stretched out. The complete payment of Westcon’s August 2008 invoice took seven months. Tops had gone into liquidation because of poor management, lack of revenue and excessive expenditure.
26 Mr Cook did not agree that it was a practice of the IT industry that resellers could wait to pay suppliers until the end user paid it.
The Defendant’s Evidence
27 The defendant called Mr David Corcoran to give evidence. Mr Corcoran made a lengthy affidavit in support of Westcon’s defence. He is a director, Chief Financial Officer and Chief Operations Officer of the Asia Pacific region of the Westcon Group. He has been its Chief Operations Officer since 2004 and involved in an operations role since 2000. He is a Chartered Certified Accountant. He gave evidence that he had worked in, and had a very strong knowledge, of the Australian IT industry.
28 Westcon’s accounts’ receivable department consisted of a finance manager, who reported to Mr Corcoran, and three staff.
29 Mr Corcoran was involved in monthly meetings, where every account and overdue payments were discussed. He had no direct contact with Tops about payment of accounts.
30 A central feature of Mr Corcoran’s evidence was that the orders placed by Tops were in connection with a project for Transend. He referred to an industry practice, that where a product has to be deployed and commissioned for the end user, the supplier would wait until the completion of those steps before it was paid. Mr Corcoran assumed that Tops was waiting for Transend to pay it and that installation had not occurred. His staff informed him that that was the case.[10] He believed that Tops had used part of its own working capital to make progress payments before the final commissioning of the product and the sign off by the end user.
[10] T89
31 Westcon had not previously been involved in project business with Tops.[11]
[11] T 105
32 Westcon has running accounts with Tops and other resellers, which were established by a credit application and the grant of a credit limit, following a series of checks and an independent credit appraisal performed by National Credit Insurance Pty Ltd (“NCI”) and Westcon’s insurer, Coface Australia Pty Ltd (“Coface”). Once a running account was established, the reseller could purchase products and services from the Westcon Group up to the “not to exceed credit limit” of the running account.
33 Mr Corcoran stated that ordinarily, the small, or medium, business reseller expected to be paid by the end user before it paid Westcon, as they may not have sufficient working capital to pay earlier. Westcon had to give latitude in respect of the payment of invoices to resellers to be competitive with other suppliers.
34 Although Westcon’s standard payment terms are 30 days, late payment for project-related business in excess of 90 days was not uncommon. Two-thirds of its retailers operate outside the standard payment terms. Westcon consistently had resellers owing up to $3 million for over 120 days out of a total of $45 million or more in debts by resellers. In July 2009, 67 out of 503 resellers, operating with Westcon, owed in excess of $90,000 and many owed over $1 million.
35 Once an invoice becomes overdue and no payments are received, Westcon’s standard practice is to commence to chase payments and send reminders. As long as it received a satisfactory explanation for the late payment, it does not place the account on hold. However, it does so if it was in any way, or at any time, uncertain about, or has any concerns about the financial position of the reseller.
36 Westcon’s non-payment risk insurance policy with Coface underwrote Westcon’s debtors to 90 per cent of the payment of the value of the invoice. The general provisions of the policy required that the insurer be notified of adverse information, or an overdue account, and provided:
“In case of an overdue account you must take all measures as may be considered necessary, whether by you or us, to prevent or minimise the consequences of a claim. You must pursue diligently and in good time any rights you may have over, including rights to recover goods or to protect your or our rights or to secure the payment of the debt.”
37 Westcon considered that the policy required it to chase the payment of overdue invoices, including by phone calls, emails, and by issuing collection letters.
38 Mr Corcoran stated that Coface was conservative with its credit limits. Westcon approved Tops for an increased credit limit of $500,000 on 11 June 2008. It had previously been $200,000. Westcon requested the credit increase in an anticipation of an upcoming, large project order from Tops.
39 Westcon had to obtain the approval of Coface to increase Tops’ credit limit. Mr Corcoran considered that the approval indicated the financial strength of Tops. Westcon also has an independent review undertaken on all credit limits.
40 Westcon has systems in place to alert it if any resellers had solvency problems. These were: an internet alert system with NCI and Coface and with Dunn and Bradstreet; regular communication with other distributors, vendors and key contacts in the channel; regular meetings with NCI to discuss problem accounts and monthly management meetings to review account balances.
41 The fact that Tops had not placed further orders with Westcon was not a concern, as the products could have been ordering elsewhere.
42 Mr Corcoran was taken to a number of communications, which are set out below, in which Tops had made promises of payment, but later failed to meet them.
43 He stated that Westcon did not place a resellers’ account on hold so long as it was under its credit limit, within payments terms or provided sufficient explanation as to why it was not, e.g. project delivery, and there was no concern regarding its liquidity or insolvency. Westcon had no apprehension regarding Tops’ liquidity or insolvency. The project for Transend had not been completed by McAfee until March 2009. Westcon did not put Tops on hold until 14 August 2009, when it learned that it had been placed into administration.
44 Westcon’s distribution margins were very lean. If Mr Corcoran had had any suspicion as to Tops’ liquidity he would have stopped the March 2009 installation on which it had a margin of only $300.
45 Tops’ actions and communications were consistent with a reseller having temporary hiccups in its operations and/or staffing and managing its cash flow for project-related business.
46 Mr Corcoran agreed that he had never had a conversation with a representative of Tops, in which he was informed that the reason payment was not being made, was because Tops was waiting on payment from Transend. He assumed that to be the case. Westcon did not call evidence from a witness, who had had such a conversation or communication.
Tops Invoice History with Westcon from 2002 to 2007
47 Mr Corcoran, in his affidavit, gave a history of Tops’ payment history to Westcon showing the transactions that were outside payment terms: in 2002, forty-six of fifty-two; between December 2005 and December 2006, seven of fifteen; in 2007, nine of twenty-one; and in 2008, nine of eleven.
48 Counsel for the plaintiffs put the following, more detailed analysis of Tops’ payment history with Westcon to Mr Corcoran in cross-examination. In 2002, all but eight payments were paid within ten days of the due date. In 2003, only five of sixty five were paid outside terms and in 2004, only two out of forty. In 2005, no payments were made outside terms. In 2006, seven out of twenty-three were paid outside terms. In 2007, nine of twenty-one invoices were paid outside terms. Mr Corcoran, while not disagreeing with the statistics put to him, stated that a lot of the invoices may have been for the purchase of run rate items that attracted shorter payment periods.[12]
[12] T99-105
49 The entire amount of the June invoice of $97,909.55 was not paid for 251 days from invoice; however, payments of part of the debt were made at earlier dates.
The dealings between Tops and Westcon - September 2008 and August 2009
50 The plaintiffs relied on the following events which followed Tops’ order for goods and services in June 2008. I will also set out in respect of those events, evidence about them given by Mr Corcoran.
51 On 9 September 2008, Ms C Wilson, credit controller of Westcon, asked Tops to advise on the time for payment of the June and July invoices and notified that its account had been placed on hold until the outstanding June invoices were cleared. Mr Corcoran stated that this was an insurance requirement.
52 On 11 September 2008, Ms Wilson was informed that payment would be made on 15 September 2008.
53 On 17 September 2008, Ms Wilson left a message for Tops’ finance manager to call her back. On the same day Tops paid the June invoices totalling $56,703.16.
54 On 8 October 2008, Ms Wilson contacted Tops regarding payment of the invoice for $97,909.55, which had been due on 30 September 2008 and made a note “Payment to be processed 13/10/08”. No payment was received.
55 On 20 October 2008, Westcon again called Tops chasing payment. Mr Corcoran stated that the Finance Department would have phoned and received the explanation that the project was a rollout, i.e. part of a project which had not been installed, as an explanation of why the invoice had not been paid.
56 On 11 November 2008, Tops placed its final order with Westcon. It was met on 24 November 2008.
57 On 17 November 2008, Ms Wilson left a message with Tops regarding overdue invoices.
58 On 21 November 2008, Westcon again attempted to contact Tops.
59 On 1 December 2008, Tops paid the sum of $31,909.55 in part payment of Invoice No. 286941.
60 In January 2009, Ms C Wilson wrote to Tops in relation to the outstanding debt. Mr Corcoran stated that it was a requirement of Westcon’s insurance policy that it chase overdue debts.
61 On 12 January 2009, Ms Wilson received an email from the Chief Executive of Tops, Mr Noel Brown, which stated:
“Apologies for the delayed payment. We have experienced a cash flow crisis due to financing some large contract orders and some accounting administration irregularities. This has necessitated a large cash injection which is currently being processed by our bank. As soon as this occurs (should be within the next week), payment will be made. Again, apologies for the delay.”
62 Mr Corcoran accepted that the reference to cash flow crisis was “strong language”.[13]
[13] T 115
63 On 25 February 2009, Ms Wilson sent an email to Mr Brown stating:
“Please find attached letter of demand for the overdue balance on your
account.
This Friday is our end of financial year and we need this balance cleared by then.”
64 The overdue balance was $68,297.28, comprising $66,000 on Invoice No. 286941 and the remainder on other invoices. Mr Corcoran stated that this letter was sent because Westcon chased aged debts as was required by its insurance policy. In addition, the letter might have been sent because credit staff were seeking to meet their “manageable variable compensation targets”, which were measured at the end of quarter and affected their remuneration.[14]
[14] T116
65 On 26 February 2009, Mr P Giblin replied to Ms Wilson’s email as follows:
“Re your outstanding account.
I am a Director of Tops and this account has just been handed to me.
Noel Brown is no longer with us.
I am looking into this and will get back to you.
I should make you aware that we have experienced irregularities in our account section and this has created cash flow difficulties.
The Directors apologies for this and have taken action to rectify it.
I will advise.”
66 On 3 March 2009, Mr Giblin sent a further email to Ms Wilson which stated:
“Sorry I didn’t get back to you. I have been trying to sort things out [at]
this end. Thankfully I can send you payment tomorrow.”
67 On 4 March 2009, a further part payment of Invoice No. 286941 was made in the sum of $30,000. Ms Wilson sent an email that day stating:
“Thanks for sending through the payment confirmation.
Could you please advise when the balance will be paid. From the below
I assume that the total overdue amount was going to be paid.”
68 Mr Giblin replied the same day:
“Yes, it will be paid but I need a little time.
I will get back to you with more detail.”
69 In March 2009, Westcon changed its terms of trade for Tops from “30 days from statement” to “prepaid non terms customer”. Mr Corcoran stated that Westcon wanted the leverage to receive cash against the project before it would release further orders.
70 On 13 March 2009, Westcon issued its final invoice to Tops. It was on pre- paid terms. The place of this invoice in the dealings between the parties is discussed below.
71 On 30 March 2009, Ms Wilson sent an email to Mr Giblin stating:
“Please advise me by the close of business on payment of the balance of
the overdue invoices on Tops’ account.”
72 On 8 April 2009, Mr Giblin emailed Ms Wilson:
“Sorry for the delay in your payment.
I have arranged a progress payment of $15K with the remainder by end of May.
Of course we will try to improve on that and will make progress payments as cash flow permits.
Thank you in anticipation.”
73 On 8 April 2009, Tops paid the sum of $15,000.
74 On 23 April 2009, Ms Wilson emailed Mr Giblin asking him to advise when the overdue account balance would be cleared. Mr Giblin replied the next day, stating that he would need to come back to Ms Wilson the next week to advise her.
75 On 14 April 2009, Mr L Chell, Inside Sales Account Manager of Westcon, emailed Mr P Hedge of Tops asking him to arrange for payment of outstanding invoices totalling $33,197.28, as soon as possible. On that same day Ms Wilson emailed copies of the outstanding invoices to an employee of Tops.
76 On 21 April 2009, Ms Wilson emailed Tops, asking if there was any update on payment of the invoices.
77 On 28 April 2009, Ms Wilson emailed Mr Giblin:
“Please be advised that if payment is not made by this Friday for the below overdue balance we are going to send this to our collection agency. These invoices are far too overdue now.”
Details of the invoices, which totalled $33,197.28, were given in the email.
78 Mr Corcoran stated that this email was sent in accordance with Westcon’s communications procedures and the terms and conditions of its insurance.
79 On 29 April 2009, Mr Giblin replied to Ms Wilson’s email:
“I am aware of the amount owing.
Tops are expecting some payments in the next few days and therefore will be a position to make a payment to you this week.
They are chasing up the payments.”
80 Mr Corcoran gave evidence that this was a reference to chasing up payment in a project from an end user.
81 On 30 April 2009, Tops made another part payment in a rounded amount, of $10,000.
82 On 2 June 2009, Tops paid the sum of $11,000. The invoice for $97,909.55 had taken 251 days to be paid in full.
83 On 22 June 2009, Mr Hedge of Tops requested an urgent quote from Mr Chell of Westcon for work for the Department of Defence. Mr Chell emailed Mr Hedge:
“As discussed Tops owes approx $12,000. Before we could sell you these goods that figure would need to be cleared and payment would need to be received up front.”
84 Mr Corcoran stated that this requirement was a common practice in a channel industry environment, where there was an aged debt and was also a requirement of the insurance policy with Coface.
85 Mr Chell did not work in Mr Corcoran’s department at Westcon. Mr Corcoran stated that the email was incorrectly worded and that if the outstanding invoices had been paid, Tops would have again received 30 days payment terms.
86 Mr Corcoran stated that Westcon was willing to provide the quote because it had no reason to believe that Tops was insolvent. He gave four reasons for that position:
• Westcon had been trading with Tops since 2002 and it was not unusual for it to be late with repayments. • Tops had provided explanations as to why payments had been delayed. • The Defence Department was unlikely to trade with insolvent companies. • There had been no adverse information from Dunn and Bradstreet, NCI or feedback from within the distribution industry. 87 The quote was never accepted. No order was placed concerning work for the Defence Department. According to Mr Corcoran, this could have been due to reasons, such as the quote not being sufficiently competitive, or the end user deciding not to purchase the products and services.
88 On 25 June 2009, Mr Giblin sent an email to Ms Wilson stating:
“Sorry I missed you tonight, but as I will be out early in the morning, I
thought I should at least make contact.
I am a little removed from the business as we have now appointed [a] new Manager 2 months ago and an Accountant over the last two weeks, so we are working towards overcoming our difficulties of late last year. I believe we are slowly getting there.
They are endeavouring to settle your account as soon as possible and I will advise you further.”
89 Mr Corcoran stated that hiring new staff was not indicative of a failing business, but was a positive step.
90 On 3 July 2009, Ms Wilson sent an email to Mr Giblin asking when the final amount due of $12,197.28 would be paid.
91 On 3 July 2009, Tops made another part payment in the sum of $7,751.88.
92 Between 16 July and August 2009, Ms Wilson contacted Tops regarding the sum of $4,445.00 still owing.
93 On 17 July 2009, Ms F Giltjes of Tops sent an email to Ms Wilson stating:
“Just in case Peter [Giblin] hadn’t gotten back to you yesterday, we have
scheduled payment of $4,445.40 for Friday 7/8”.
94 On the same day, Ms Wilson replied:
“Considering how overdue this balance is and how long we have been chasing up payment for Tops invoices would it be possible to get it cleared on 31/7/09?”
95 On the same day, Ms Giltjes replied:
“Whilst I appreciate that the invoice is overdue at this stage I am unable to reschedule for any earlier than 7/8. If this situation changes and I can reschedule I will let you know.”
96 On 14 August 2009, Ms Wilson emailed Ms Giltjes stating:
“We still have not received payment for the below could you please advise when it will be processed as we have been chasing this up with Tops for months.”
97 On 14 August 2009, Westcon was informed that Tops had been placed into administration. It wrote off the remaining debt of $4,445.00, which could not be claimed under its insurance policy.
When was the IntruShield Product Installed?
98 One issue of fact in the proceeding concerned the identification of when an IntruShield product, which was part of the June purchase order, was installed. This issue was of some significance, because Mr Corcoran’s evidence was that it was installed by the manufacturer, McAfee, in March 2009. He relied on that event to support his contention that Westcon had no reason to suspect the solvency of Tops at that time.
99 Mr Cook contended that the March 2009 installation was of a different product and that the IntruShield product had not been installed in August 2008.
100 Mr Corcoran described the work as follows:
“It’s an engineer arriving on site to plug a unit in and make sure that it is
actually operational.”[15]
[15] T 68 (Mr Corcoran)
101 Mr Corcoran gave evidence that McAfee only ever invoiced after it had installed a product. Westcon relied on two emails. The first was an internal Westcon email of 16 January 2009 stating:
“Could you please advise the status of 1x MD-INTV-EXPRESSA as the end user is refusing to accept that the consulting work has been finished?
According to the reseller, a technician from McAfee did go on-site and did some work [a] few months ago, but the end user (Transcend Networks) is saying that he is waiting for some sort of documentation from McAfee and won’t accept the full delivery until this is resolved.
Could you please check with McAfee if this is finished as we need to invoice the reseller, and if not could you please me the ETA?
Reseller (Peter from TOPS ….) may require some sort of proof from McAfee/Westcon that this service has been performed and there is nothing outstanding.”
102 The second email was from McAfee to Westcon on 7 March 2009 and attached the invoice for the IntruShield product. The evidence was that it stated that “no physical shipment” had occurred, but Mr Corcoran gave evidence that that was because the service involved the engineer attending on site and that there was nothing to ship.
103 Westcon first sent an invoice for the IntruShield product on 24 February 2009 with 30-day payment terms. By 6 March 2009, Westcon Group recognised that the issuing of the invoice was an internal error. The invoice should have been on prepayment terms, which were standard terms for the installation of McAfee Express Service for IntruShield. Westcon has an agreement with McAfee that Westcon would not invoice for installation until it has been performed.
104 On 5 March 2009, Westcon received an invoice for installation services from McAfee for $9,405, which to Mr Corcoran confirmed that the service had been delivered to the end user by a McAfee engineer. Westcon reversed the invoice of 24 February 2009 and re-issued it on 13 March 2009, still bearing the date 24 February 2009, for the sum of $9,900. It contained standard prepayment terms that are used for the installation of McAfee Express Service for IntruShield.[16] Despite the prepayment terms contained on the invoice, in fact the installation of the product had been performed previously.
[16] T 45 (Mr Cook); T 90-92 (Mr Cocoran). The evidence about the reversal of the invoice was contained at T 54-55, 59-60, 66-70, 76 and 85
105 Mr Corcoran stated that when it re-invoiced Tops for the IntruShield product, it imposed prepayment terms because the project had been completed and it required payment.
106 The Tops order for the IntruShield product was dated 25 August 2008 and was for McAfee Express Services for IntruShield for the sum of $11,000, including GST. It bore the hand written annotation “paid 17/9/08”. Mr Corcoran was unable to say whether this invoice related to any installation work performed in March 2009. He stated that it appeared to be related to that work; however, he considered that it was surprising that Tops would invoice Transend, when it had not yet received the product. He suggested that another distributor could have supplied the product described in the August 2008 invoice.
107 Mr Corcoran agreed that the installation number on the Tops invoice to Transend in August 2008, i.e. MDINTV Express, was the same item number as on the McAfee invoice.
108 Mr Corcoran stated that his staff confirmed at meetings that the invoices were overdue because the end customer was waiting for installation of equipment.[17]
[17] T 89
109 Mr Cook considered that the March 2009 invoice concerned another order or product than that recorded in the August 2008 product, because otherwise as a matter of logic, the IntruShield product would have laid idle for months waiting to be commissioned. The books and records of Tops did not contain anything suggesting that after August or September 2008, it was waiting for the IntruShield product to be commissioned.
110 My conclusion on this issue is as follows. The email of January 2009, referred to above, suggests that there may have been a delay in finalising the commissioning of the IntruShield product ordered in June 2008. On balance, I do accept Mr Corcoran’s evidence on this matter and consider that the McAfee invoice of 6 March 2009 did relate to the IntruShield product ordered in August 2008. This was consistent with the billing practices of McAfee, as identified in Mr Corcoran’s evidence, to only send an invoice after the service was complete. The probability is that the completion of the installation and commissioning of the IntruShield product occurred in or about February 2009.
Had Transend paid Tops for the Westcon Products?
111 Mr Cook gave evidence that he had investigated the suggestion that Tops was waiting for payment from Transend before it paid Westcon. He concluded that by the end of September 2008, Transend had paid Tops for the products contained in the invoice of August 2008. He referred to entries in Tops’ accounts showing substantial payments by Transend to Westcon, in particular, a payment of $537,874.77 on 20 August 2008.[18]
[18] T 40-44
112 However, in cross-examination, Mr Cook conceded that he was not sure if that was the case and that he did not know that the payment was for the same project as that to which the August 2008 invoice related. His evidence ultimately went no further than that the payments related to projects that Tops was performing for Transend.
113 The evidence does enable a finding that Tops had already been paid by Transend for the products supplied by Westcon. However, that is not to say that the evidence enables a positive finding that Transend had not paid Tops. The position is simply unclear on the evidence.
Tops’ Payment of $7,751.88 on 11 July 2009
114 There was some uncertainty in the evidence as to what debt, the payment by Tops to Westcon of $7,751.88 on 11 July 2009, was directed. Mr Cook gave evidence that, at the time of his appointment, Tops considered that it owed Westcon the sum of $12,400.[19] Westcon submitted a proof of debt for the sum of $4,445.00, being the difference between the amount invoiced for the IntruShield product of $9,900 and a payment made of $5,454.60. Mr Cook’s evidence was that there were invoices from Westcon to Tops in October 2008 that added up to the amount of $7,751.[20]
[19] T 46
[20] T 47
115 As previously stated, on 3 July 2009, Ms Wilson wrote to Mr Giblin asking when the final debt of $12,197.28 would be paid. On the same day Westcon received a payment of $7,751.88.
116 Despite this uncertainty, the evidence established that Tops had paid the sum of $7,751.88 to Westcon during the relation back period. It was not suggested that it was paid for anything other than goods or services provided by Westcon.
Submissions of the Plaintiffs
117 The plaintiffs submitted that Westcon had not established that it did not have reasonable grounds for suspecting the insolvency of Tops at the time of the payments. They also submitted that Westcon had not established that a reasonable person in its circumstances, who considered the trading relationship with Tops after November 2008, would not have had reasonable grounds for suspecting that Tops was insolvent at that time.
118 The demands made by Westcon for payment in full were significant. There had been no agreement for payment by instalments. There was no evidence that Transend was not paying its debts to Tops.
119 In January 2009, Tops was depending on a “large cash injection”. Early March 2009 was a critical time in considering the trading relationship, because a promise of payment on 3 March 2009 was followed by part payment the next day, and a vague statement from Tops that the remaining debt would be paid, but that it needed a little time. By 25 June 2009, there was overwhelming evidence of the insolvency of Tops. It appeared to be chasing money to pay old debts.
120 The plaintiffs rejected the suggestion that Tops was waiting for payment from Transend until paying Westcon. That explanation had never been advanced by Tops as a reason for late payment. Rather Tops had explained non- payment by reference to cash flow problems. There were enough signs to alert a reasonable person that Tops was having significant liquidity problems.
121 There was no adequate evidence about the monthly meetings to which Mr Corcoran referred. Westcon had failed to call significant witnesses, including Ms C Wilson.
Submissions of the Defendant
122 Westcon relied on the unique nature of the IT distribution industry and its “channel practice” namely, that where a product was to be deployed and commissioned, the supplier would wait until it was in place, until it received its money. As a result, it often carried substantial sums that were overdue.
123 Its pursuit of Tops for payment was caused by the requirements of its insurance policy.
124 At the most, the evidence presented showed a temporary lack of liquidity on the part of Tops. A request for time to pay was insufficient. Late payment was not uncommon in the IT industry. There had to be proof actual or existing insolvency as distinct from impending or partial insolvency. Liquidity problems did not amount to insolvency.
125 Historically, Tops had fulfilled its payment obligations despite being late on occasions. Tops had given plausible explanations for delayed payment.
126 Mr Corcoran conducted regular meetings with staff. He concluded that Tops was waiting for payment for the project from the end user before paying Westcon. Mr Cook’s evidence did not show that the end user had paid Tops for the project. Westcon was not privy to what instalment milestones Tops had agreed with Transend. Tops was still requesting quotations from Westcon in June 2009.
127 Tops was still well within its credit limit at the time it made the relevant payments. Westcon had carried out due diligence in relation to Tops. It had given it time for payment as the debt related to a project, the final stage of which had not been completed until March 2009.
Consideration of Evidence and Submissions
128 The authorities establish that the statutory tests are to be applied to the commercial circumstances prevailing between the parties at the time of the payments and not with any exercise of hindsight.
129 They also suggest that undue weight should not be given to late payments, because debts are not always paid on time even by solvent debtors. An instalment plan for repayment is relevant. Equally, a rational and reasonable explanation, unrelated to any state of insolvency, is relevant and may assist in establishing the defence. A temporary lack of liquidity is insufficient. Liquidity and insolvency are different concepts. A request for time to pay is insufficient.
130 There has to be a positive feeling of actual apprehension of, or mistrust about, actual and existing insolvency. Suspicion is more than idle wondering. There has to be actual and existing insolvency as distinct from impending or partial insolvency.[21]
[21] The authorities cited by the parties included, in addition to those cited above: Burness, Re; Denward Lane Pty Ltd (in liq) v Supaproducts Pty Ltd (2009) 74 ACSR 1; Australian Securities and Investments Commission v Plymin (No 1) (2003) 46 ACSR 126; Williams v Peters (2009) 72 ACSR 365; Trinick v EM & RM Williams & Sons [2009] WASC 297; Wily v Eastern Elevators Pty Ltd (2003) 45 ACSR 261; Kazar; In the Matter of Frontier Architects Pty Ltd (in liq) [2010] FCA 1381; Dean-Willcocks v Commissioner of Taxation [2008] NSWSC 1113; Cussen v Commissioner of Taxation [2003] NSWSC 841 and Sparad (No 100) Ltd v J B Harkness (unreported, NSWCA 14 February 1997, BC9700197))
131 The practice of the payment of debts in particular industries is important. This has been particularly emphasised in the building and construction industry, but it can apply to other industries.
132 I accept that Mr Corcoran formed the opinion that the delayed payment may well have been attributable to the project on which Tops was involved. I also accept, as appeared to be the basis of the submissions, that his opinion is to be taken to be Westcon’s opinion, because for the purposes of this application, he was Westcon’s directing mind.[22]
[22] See Tesco Supermarkets Ltd v Nattrass [1972] AC 153 at 170-171 and Austin and Ramsay ‘Ford’s Principles of Corporation Law’ (14th ed.) pp 906ff [16.180]
133 I do accept that, through Mr Corcoran’s evidence, Westcon has established that it had no reasonable grounds for suspecting that Tops was insolvent at the time of the payments. Westcon, through Mr Corcoran, placed much weight on the project nature of the work, the explanations for non-payments, the credit limit, the absence of an adverse credit report and the fact that the IntruShield work was allowed to proceed in March 2009.
134 The authorities in respect of s.588FG(2)(b)(i) concentrate on the reasonable grounds that were apparent to the creditor, rather than the grounds that would have been apparent to a reasonable person. Approaching the matter in that manner, I consider that Westcon has established that it no reasonable grounds for the relevant suspicion. Therefore, Westcon has established the element of the defence contained in s.588FG(2)(b)(i) of the Act.
135 However, I do not consider that Westcon has established the other element of the defence that “a reasonable person in the person’s circumstances [i.e. Westcon’s] would have had no such grounds for so suspecting”, i.e. that Tops was insolvent at the time of the payments.
136 To use the words of Williams J in Sims v Celcast Pty Ltd[23] which are quoted above, the signs were there for a reasonable person to read, although Westcon misread the signs. The judgment of Nettle JA in Sutherland v Lofthouse[24] also distinguishes between what the creditor may have suspected and the statutory question of what a reasonable person in its circumstances would have suspected.
[23] supra
[24] supra
137 My reasons for concluding that Westcon has not established that a reasonable person in its circumstances would have had no grounds for suspecting that Tops was insolvent at the relevant time are as follows.
138 First, Tops never expressly informed Westcon that it was waiting for payment from Transend. Rather it advanced as an explanation cash flow problems caused by a number of specific factors and expressed the hope that it would obtain a cash injection. Tops’ email of 12 January 2009 was significant. Its reference to “some accounting irregularities” and the necessity for “a large cash injection” raised questions about its financial position. These questions raised issues extending beyond the challenge of temporary liquidity problems caused by the nature of the project.
139 The matters referred to in the previous paragraph, of course, do not, by themselves, mean that Westcon has not established its defence. Regardless of whether there was evidence that the delayed payment was due to the project nature of Tops’ work, a reasonable person would consider all evidence throwing light on why payment was not made. However, the fact remains that Westcon’s defence did place particular reliance on its belief that the delayed payment was caused by Tops waiting for payment from Transend.
140 I have previously concluded that the evidence did not disclose whether Transend had paid Tops.
141 It may be that a reasonable person would have taken the explanation given on 12 January 2009 in its reference to “financing some large contract orders” as referring, at least in part, to the Transend project. But if it is so read, it must be taken as not just referring to the Transend project, but also to other projects, the cumulative effect of which gave rise to cash flow problems. When it is so read, then the cash flow problems had greater significance than if they had arisen only in respect of one project.
142 Second, Westcon called no witness from those staff, or former staff, e.g. Ms Wilson, who had contacted Tops about the debt due to Westcon, to give evidence that they had been informed that it was waiting for payment from Transend. The onus is on Westcon to establish its defence and its failure, without explanation, to call such witnesses is significant.
143 In fact, Westcon had never previously dealt with Tops in respect of a channel project.[25] Mr Corcoran’s evidence was based on an assumption about why the payments were not being made.[26]
[25] T 105
[26] T 81 and 83
144 Third, Tops gave explanations for its non-payment which differed from an explanation that it was waiting for a project payment. The explanations it gave would, to a reasonable person in Westcon’s circumstances, have given rise to a relevant suspicion.
145 I have referred to the email of 12 January 2009. There was then the letter of demand of 25 February 2009. This was followed by a number of communications from Tops, none of which mentioned the project. Rather they mentioned a change of management with the departure of Mr Brown, who had sent the earlier email of 12 January 2009 and an explanation for non- payment, which again referred to irregularities in its account section, which had created cash flow difficulties.
146 This last explanation is not the same as one relying on cash flow difficulties because end users were not paying their invoices on time. Irregularities in the accounts section of a company might well suggest to a reasonable person, major financial problems and be a cause of suspicion of insolvency, when it was coupled with extensive delay in even part-payment. No payment occurred between December and March and thereafter a series of part payment occurred.[27]
[27] T 113
147 On 8 April 2009, Tops stated that it was trying to improve on the part payments and make progress payments as cash flow permitted.
148 These matters would have shown to a reasonable person in Westcon’s circumstances, not just a temporary cash flow problem, but a lengthy period in which Tops could not pay its debt, failures to honour promises to pay and suggestions of serious accounting, management and operational problems.
149 Upon receipt of the email of 12 January 2009, a reasonable person aware of the communications between Tops and Westcon would have expected that Tops was going to pay the outstanding debt soon. That did not occur. Even on 4 March 2009, Tops stated that a little more time would be required and that more detail of payments would be supplied. It was not. More than three weeks later, Westcon had to chase the debt and that led to the part payment of 8 April 2009.
150 At the time the first payment in issue was made, 4 March 2009, because of the terms of the communications between Tops and Westcon and Tops failure to pay the debt fully, a reasonable person in Westcon’s circumstances would have had reasonable grounds for suspecting that Tops was insolvent. The same conclusion applies to the later payments.
151 The Defence Department quotation of June 2009 does not take the matter much further, as it was not accepted.
152 Fourth, I do consider that a reasonable person would have seen Westcon’s consistent chasing of payments from Tops as more significant than Mr Corcoran’s evidence suggested and as suggesting that it had concerns that it may not be paid in full.
153 Fifth there was no evidence of Tops previously delaying payment of debts owed to Westcon for the extensive period of time that it took to the debt on this occasion.
154 Sixth, matters relied on by Westcon in support of its defence are surpassed in significance by the actual dealings in this case and the warning signals provided by the explanations given by Tops. This conclusion is applicable to Westcon’s arguments about the payment practices in channel projects, Tops’ payment history, the insurance policy and credit limit, the fact that the account was not placed on hold and the lack of adverse information about Tops’ financial health. It applies also to the fact that the IntruShield installation was permitted to occur in March 2009.
155 Each of those matters assists Westcon in establishing the element of the defence contained in s.588FG(2)(b)(i). However, they have less weight in respect of the element of the defence contained in s.588FG(2)(b)(ii). In respect of that element they are outweighed by the consideration, a reasonable person in Westcon’s circumstances would have given to the explanations that Tops gave for non-payment.
156 The cumulative effect of the matters I have set out has to be considered.
157 Westcon bears the onus of proving the matters required to establish the statutory defence.
158 In my opinion, Westcon has failed to establish within the meaning of s588FG (2)(b)(ii) of the Act that a reasonable person in its circumstances would have had no reasonable grounds for suspecting that Tops was insolvent at the time, commencing on 4 March 2009, when it made the challenged payments.
Conclusion
159 Each of the payments the subject of this proceeding is voidable pursuant to s.588FE(2) of the Act. I will make appropriate orders to give effect to this conclusion, including under s588FF of the Act.
160 I will hear the parties as to the form of orders that is appropriate.
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