David Olifent v Emwest Products Pty Ltd and Ors No. SCGRG 94/1951 Judgment No. 5358 Number of Pages 9 Corporations Winding up Preferences

[1995] SASC 5358

COURT IN THE SUPREME COURT OF SOUTH AUSTRALIA ANDERSON J Supreme Court Master

CWDS Corporations - winding up preferences - Plaintiff seeks declaration pursuant to s565 of the Corporations Law (pre 23 June, 1993) - plaintiff's case made out by admissions and concessions - defendant relies upon defences in s122(2) Bankruptcy Act - fails to discharge onus declaration made - judgment for plaintiff. Corporations Law s565; Bankruptcy Act s122, referred to. Downs Distributing Company Pty Ltd v Associated Blue Star Stores Pty Ltd (In Liquidation) (1948) 76 CLR 463; Sheahan v Hertz (1995) 16 ACSR 765, applied. Hamilton v BHP Steel (JGH) Ltd (1995) 13 ACLC 1548; Katoa Pty Ltd (In Liquidation) v Dartnall (1984) 2 ACLC 42, distinguished.

HRNG ADELAIDE, 16-19 October 1995 #DATE 30:11:1995 #ADD 15:1:1996

Counsel for plaintiffs:        Dr R J Baxter

Solicitors for plaintiffs:     Johnson Winter and Slattery

Counsel for defendant :        Mr M N Rice

Solicitors for defendant :     Finlaysons

Counsel for third parties:     Ms C A Mitchell

Solicitors for third parties: Cowell Clarke

ORDER
Declaration made.

JUDGE1 ANDERSON J The plaintiff claims a declaration relating to certain payments pursuant to Section 565 of the Corporations Law.

2. The case for the plaintiff is not in issue as a result of certain admissions made in the Defence and concessions made in the course of the plaintiff's opening.

3. What is so proved is:
    (1) That Ceiling and Roofing Products Pty Ltd (Receiver and
    Manager Appointed) (In Liquidation) ("CRP") was incorporated
    in this State and carried on business here.

(2) That an application for the winding up of CRP was filed
    in this Court on 4 June, 1993.

(3) That the order for winding up was made by this Court on
    6 July, 1993 and the plaintiff herein was appointed
    liquidator to that end.

(4) That at all relevant times there was a debtor/creditor
    relationship existing between CRP and the defendant (Email).

(5) That at the time certain agreed payments were made by
    the defendant to CRP that Company was insolvent in that it
    could not pay its debts as they fell due from its own money.

(6) That the affect of the payments made was to create a
    priority or a preference in the defendant over other
    creditors of CRP who were then, and at the winding up,
    unpaid.

(7) That payments were made as hereunder:
    Date   Amount
    12 January 1993        $57,000.00
    12 January 1993         57,000.00
    22 January 1993         1,072.00
    29 March 1993            8,000.00
    30 March 1993            3,187.00
    8 April 1993             5,000.00
    21 April 1993            5,000.00

4. Their total is $136,259 and it is in relation to this sum that the plaintiff seeks a declaration that they are void as against him and that they be repaid to him by the defendant. He also seeks interest. It is not in dispute that these payments were made within the relation-back period.

5. It was as a consequence of what is above set out that there was no need for the plaintiff to call evidence.

6. The defendant relies upon the provisions of s122(2) of the Bankruptcy Act, 1966 which are, in these circumstances, imported into the provisions of the Corporations Law.

7. The following parts of s122 are relevant to this defence:
    "(2) Nothing in this section affects -
    (a) the rights of a purchaser, payee or encumbrancer in
    good faith and for valuable consideration and in the
    ordinary course of business;
    (b) - (c) ...

(3) The burden of proving the matters referred to in
    sub-section (2) lies upon the person claiming to have the
    benefit of that sub-section.

(4) For the purposes of this section -
    (a) - (b) ...
    (c) a creditor shall be deemed not to be a purchaser, payee
    or encumbrancer in good faith if the conveyance, transfer,
    charge, payment or obligation was executed, made or incurred
    under such circumstances as to lead to the inference that
    the creditor knew, or had reason to suspect -
     (i) that the debtor was unable to pay his debts as they
     became due from his own money; and
     (ii) that the effect of the conveyance, transfer, charge,
     payment or obligation would be to give him a preference,
     priority or advantage over other creditors."

8. For present purposes it is conceded by the plaintiff that there was valuable consideration and so it is for the defendant to prove that its dealings with CRP were in good faith and in the ordinary course of business.

9. The defendant instituted third party proceedings but I was told at the outset by Ms Mitchell, of counsel for those parties, that those proceedings had been resolved and that I would be further advised as to what, if any, orders were necessary to conclude them. Mr Rice, of counsel for the defendant, agreed and the matter has been left to be mentioned when the final orders are made.

10. The essence of the position advanced to make out the defences relied upon pursuant to s122(2) is in good measure related to the peculiarities of the building industry. The defendant's position is that subjectivity in an assessment of its relationship with CRP is essential and that this must not be overborne by any objective view which may relate to the concession made as to insolvency at the material times.

11. Mr Rice sought support for this approach from the authorities but before turning to them it is necessary to consider the relationship between CRP and the defendant over the years.

12. CRP was a roofing contractor, one of several who were clients of Email and amongst the largest of those. Notwithstanding that the relationship had been established for some years, until August 1992 CRP had a credit limit of $10,000 and almost always its purchases from Email were within that range. Over the years, like other roofing contractors, and despite ongoing business relationships, CRP became known by Email to be a poor payer - slow and always much later than the agreed terms of trade. Those terms of trade provided for payment to be made within 30 days of the end of the month in which an invoice for goods supplied by Email was sent to CRP. Despite regular and at least monthly requests by the creditor controller of Email, Mrs Strickland, who gave evidence, payments were almost never received within 30 days and were more likely within 45-60 days. It became accepted by Email that the CRP's usual terms were payment at 60 days from month of invoice. As much is recorded in the notes made by Mrs Strickland upon the Exhibit D2 - a summarised debtors report by customer number - which shows details of CRP's indebtedness and payment method from August 1987.

13. In August 1992 CRP's credit limit increased to $160,000. This was because of a job it had won from Baulderstone-Hornibrook to do work on a new site at GMH, Elizabeth ("the NEPS job").

14. Prior to that time it was not unusual for Mrs Strickland to be told, when seeking payment of monies outstanding, that CRP was quite simply unable to pay until a time in the future. Indeed, as long ago as the February 1992 statement she has noted alongside CRP in her hand "pays 60 days". This message is repeated many times throughout the ledger pages and prior to August 1992.

15. Mr Stone, the State sales manager, gave evidence about the NEPS job. He knew about it some time before as CRP was the "preferred" supplier and so had costed the equipment specified and assisted CRP in its quote preparation. When CRP was successful it had a contract valued at approximately $206,000, much larger than any business it had previously transacted with Email. The work was intended to be done with material supplied by Email over about two months. In fact, because of production problems within Email, and wet weather on the site, it took until the end of 1992.

16. The procedures of Email were such that no equipment for this job could be ordered to be manufactured or supplied until the internal order (SOI) was approved by Mrs Strickland, the creditor supervisor. Because of the size of this contract Mr Judd, Email's national credit manager, became involved. He said in evidence that because of the slow paying history of CRP he required that its directors execute personal guarantees to support a new credit limit of $160,000. There was some minor uncertainty within the defence case as to whether this was the sole reason or whether it related to the size of the new contract, simpliciter. In any event I am able to take the view from the evidence that these guarantees were sought because of a combination of the two events - a history of slow payment coupled with a new and larger than ever before contract to be fulfilled. Whether the former, in the absence of the latter, would have, in July 1992, led to a request for such guarantees is unknown and of no consequence.

17. The personal guarantees were executed in July 1990. Confirmation of CRP's intention to contract with Email was contained in a letter of 30 April, 1992 to Mr Stone (page 27 of D3). This had led to a credit check and advice of the contract to Mr Judd on 9 June, 1992 (D9) enquiring as to guarantees in the light of failure to pay until end of June 1992 on account invoiced in March 1992. There was also, at this time, an indication that CRP will pay at 45 days.

18. After the guarantees were executed a formal request to extend the credit limit for both current trading and the NEPS job was approved by Mr Judd on 28 July, 1992 (page 11, D8). Thereafter, production on the contract went ahead and goods were supplied.

19. Invoices for all goods supplied by Email, being both for the NEPS job and other continuing work, continued to be rendered in the normal way. In August 1992 invoices were rendered for items supplied to the Velodrome job and to the NEPS project. This was the first invoice for the latter project and was treated as being payable at the end of September 1992 in the usual terms of 30 days. It was paid on 2 November, 1992 after 62 days - so much for the promise to pay on this project in 45 days.

20. From then on it took even longer for Email to be paid, both for this project and for others, as is identified in the invoices within the Exhibit D2.

21. In September 1992 invoices were sent for $164,000. Payment was due on 30 October, 1992 at 30 days. Many requests for payment were made. Further efforts enabled a payment of $50,000 to be obtained and banked on 27 November, 1992. The balance of those invoices was not paid until 12 January, 1993 and then by two sequential cheques of the same day each in the sum of $57,000. These are the first of the impugned payments. They are dated some time earlier but, on the evidence, nothing turns on that.

22. There was interesting correspondence in December 1992 and January 1993 prior to payment which Dr Baxter, of counsel for the plaintiff, suggests is sufficient to raise the suspicion referred to in s122 (4)(c)(i) and (ii) such that the defendant is unable to discharge the onus cast upon it in ss(3) thereof.

23. That correspondence is to be considered not only in the light of the historical dealings between the parties but also upon the basis upon which Email says it approved the credit limit extension in July 1992. Mr Rice also submitted that the "commercial reality" of the situation as expanded upon in the authorities to which he referred be taken into account when considering the onus upon the defendant pursuant to ss(3) and upon the plaintiff pursuant to ss(4)(c).

24. Initially, it is necessary to consider what Email knew and did after Mrs Strickland was advised on 26 November, 1992 by CRP that $50,000 was available on 27 November, 1992 and thereafter that there would be no funds until 15 December, 1992. On that day she wrote to Ray Judd (page 100 of D3) advising, having spoken to Mr Wegener, the principal of CRP, in the following terms:
    "Email Westinghouse Pty Ltd
    From: BEV STRICKLAND
    Date: 26-11-92
    Subject:
    CEILING and ROOFING - $164,000 OUTSTANDING FOR SEPTEMBER
    G.M.H. - NEPS PROJECT

To: BOB STONE
    RAY JUDD

Peter Wegener has today advised that he has an immense cash
    flow problem at the moment due to extreme weather over the
    last three months. He stipulated this is not a liguidity
    (sic) problem, just cash flow.

He is unable to pay the full amount outstanding at the
    moment. I can collect cheque for $50,000 on 27-11-92 and
    balance should be paid by 15th December but he will keep us
    posted and will advise on or about the 5th December.

Bev Strickland"

25. On 15 December, 1992 Mrs Strickland made a note of a telephone conversation with Mr Wegener wherein she noted a threat to their ongoing business relationship should she go directly to the head contractor. He advised of outstandings of $1.7m of which $400,000 had been due from a Government Department for 45 days.

26. The following day a note records a suggested approach from Email's principal in Sydney. For local reasons this was not acted upon. Further suggestions as to the basis upon which CRP should be approached were also made in an attempt to be paid in full by 17 December. At this time $114,000 of the sum due to be paid (on 30 day terms) at end of October was unpaid. It was therefore in excess of 60 days which had become, over the years, the time within which CRP as a slow payer, would satisfy its indebtedness to Email.

27. At this time there was no real suggestion of no further supply. Indeed on 31 October, 1992 equipment had been supplied for another job and the invoice dated that day.

28. However, the communication from NSW had some effect. On 16 December, 1992 the State sales manager of Email, Mr Stone, spoke to Mr Wegener. On 17 December, 1992 he wrote to his NSW principals setting out the present position and anticipating payment in January 1993. He recommended advice to CRP that should full payment not be made by 25 January, 1993 the directors' guarantees would be called in. When he wrote that letter (page 104 of D3) on 17 December the sum of $114,000 was 77 days overdue for payment (on 30 day terms).

29. Mr Stone's advice was not taken. On that day Mr Judd wrote to each director of CRP requiring payment of the total sum due of $115,072 by 1 January, 1993 threatening legal action for recovery as the alternative. In addition on 18 December, 1992 Mrs Strickland wrote to Mr Wegener indicating that future supply of equipment held by Email would be upon payment therefor being received. She also referred to the directors' liability pursuant to the guarantees (page 111 of D3). It seems from the invoices in evidence that this equipment was delivered on 23 December, 1992 despite payment not having been received. This demand for the payment of $21,887 forms a separate stage of this relationship. Payment was not received by 1 January, 1993. On 8 January, 1993 Mrs Strickland recorded on the debtor's ledger advice that the cheque would "definitely" be posted that day. A further conversation with CRP occurred on 11 January, 1993, obviously when the cheque had not arrived. The two cheques totalling $114,000 were received by courier and banked on 12 January, 1993. On 15 January, 1993 CRP advised that it was then unable to pay the balance due of $1,072 - it was subsequently paid on 22 January, 1993.

30. The balance due of $21,887 (adjusted to $21,187 by credit note in the sum of $700 on 30 March, 1993) was demanded by letter of 25 March, 1993 from Mrs Strickland to CRP (page 116 of D3). A faxed reply of 29 March, 1993 set out a proposed scheme of payment from CRP. Payments were received on 29 March, 30 March, 8 April and 21 April to discharge this debt. As the proposed scheme of payments was not met by CRP there can be no real doubt that the defence upon which the defendant relies can have no application to these payments as there is no basis upon which it is possible to say that, having regard to the then history and recent correspondence that they were received in either good faith or in the ordinary course of business. Objectively, as CRP had, at the time, admitted an inability to pay and then failed to meet its own scheme of payments both limbs of s122(4)(c) must have been raised in the mind of Mrs Strickland and, therefore, Email. No other conclusion is possible. Hence, the plaintiff is entitled to a declaration for this series of payments and to an order for payment out totalling $21,187 as sought in the statement of claim.

31. What of the other payments, those of 12 January, 1993 and 22 January, 1993? What is the "commercial reality" of the manner of those payments?

32. The defendant places significant weight upon the relationship between the parties as it existed at the relevant times. Principally it notes that, irrespective of the published and reiterated terms of trade, CRP was a slow payer with 60 days the expected norm. Mrs Strickland agreed that this was what she as credit manager expected and Mr Judd acknowledged that it was undesirable but tolerable as a matter of commercial reality.

33. The situation as it had come to exist was that CRP would not pay because it could not pay until claims it made against its principals were paid so it was in a position to then pay suppliers' accounts. If this meant a longer wait by suppliers such as Email in periods of inactivity in the building industry (e.g. the traditional Christmas lay off) - so be it. No evidence was given about when CRP made claims against its principal or when it was paid. There is ample evidence of the many occasions when Mrs Strickland had recorded that she had been told that it was then unable to pay. Does this mean that when Mrs Strickland was told on:
    (1) 2 November, 1992 that there were no funds
    (2) 27 November, 1992 as to balance - that there were no
    funds until 15 December
    (3) 15 December, 1992 will endeavour to pay before
    Christmas that she had reason to suspect that CRP was in fact insolvent? (Re Weiss
(1970) ALR 654.) Should she have inferred that in being so paid Email was obtaining a preference over other creditors of CRP?

34. The defendant must prove both that the payments of 12 January, 1993 and 22 January, 1993 were received in the ordinary course of business and in good faith.

35. As to the latter it is helpful to have regard to what King CJ said in Sheahan v Hertz (1995) 16 ACSR 765 at 770:
    "The expression 'good faith' in subs (2) is not used in its
    ordinary meaning of honesty as is apparent from a
    consideration of subs (4). The question to be answered is
    whether the creditor knew or had reason to suspect that the
    debtor was in fact insolvent: Rees v Bank of New South
Wales (1964) 111 CLR 210, and that the payment would give
    the creditor a preference over other creditors. Absent an
    actual suspicion there must be something in the
    circumstances which would create in the mind of a reasonable
    person in the position of the payee an apprehension or fear
    that the payer may be unable to pay his debts as they become
    due and that the payment would give the payee a preference:
Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266 per Kitto
J at 303; (1966) ALR 855. The question is to be answered
    objectively having regard to all the circumstances of the
    case."

36. The degree of objectivity contended for by Mr Rice when considering whether the payments were received in the ordinary course of business is to have regard to commercial reality in all of the circumstances. This test was described by Young J in Hamilton v BHP Steel (JGH) Ltd (1995) 13 ACLC 1548 at 1552 as one which must be looked at "in light of prevailing business practices". The high water mark for this test is this case where the supplier (BHP) knew that payments made to it were historically irregular and not sufficient to discharge the whole outstanding debt and which meant that it was not paying its debts to BHP as they fell due. Contrary to the liquidator's submission that the conduct of a business in a particular industry at a particular time could not be part of the objective test of the ordinary course of business the Court held that the adoption of a commercially realistic approach allowed for an account to be taken of "payment practices in the building industry in a recessionary environment" (headnote). In that case it was in issue as to whether the Company could pay its debts as they fell due from its own money. In this case the admitted insolvency of CRP means that that is not an issue.

37. That payments made may be hard to delineate in a particular case was conceded in Katoa Pty Ltd (In Liquidation) v Dartnall (1984) 2 ACLC 42. In that case where payments were made within the relevant period it was held that the defendant has discharged the onus cast upon it by s122(2) of the Bankruptcy Act. It was held that payments were in the ordinary course of business notwithstanding there were calls seeking payments and monthly statements had outstanding balances. In that case the payments were small and were consistent with the previous trading record.

38. There is no doubt on the evidence that when Mrs Strickland spoke to CRP on 26 November, 1992 seeking payment, $50,000 was to be available the following day and she was told "no funds until 15 December" (page 7, Exhibit D1). This was in respect of a debt of $164,000 then overdue. Despite many requests further payment (totalling $114,000) was not made until 12 January, 1993 when Mr Stone was advised as to the overdue balances "unable to pay till late next week" (page 5, Exhibit D1). That payment was then made as has been described.

39. Notwithstanding that CRP was recognised as a slow payer I am not persuaded that either of the payments made on the two days in January 1993 could be described falling "into place as part of the undistinguished common flow of business done ... calling for no remark and arising out of no special or particular situation": Rich J Downs Distributing Company Pty Ltd v Associated Blue Star Stores Pty Ltd (In Liquidation) (1948) 76 CLR 463 at 476-77. Objectively, the circumstances can lead to no conclusion other than a fear of inability to pay as due and that any such payment would give the payee a preference.

40. Whilst previous history was of many verbal requests for payment, the letter written by Mr Judd on 17 December, 1992 demanding payment in full by 1 January, 1993 of the then outstanding balance of $115,072, particularly as it effectively ignored Mr Stone's recommendation to him of that day, was quite different from anything which had gone before in the relationship between Email and CRP. It matters not what Mrs Strickland may have feared in November and December 1992 for the relevant time is the days on which the payments were made. However, because of what she had been told in those months, objectively her position then must have been as I have found.

41. In evidence Mr Judd carefully, and to my mind deliberately, avoided saying anything of substance about what his fears were at the time he sent that letter. I have no doubt that he suspected, because he knew from what CRP had said to Email's South Australian employees, that it could not pay its debts, that any payment received may well prefer Email to other creditors. His action in ignoring local advice and writing that letter which paid no attention to the Christmas close down in the building industry permits of no other realistic explanation. Thus, when the payments were received in January 1993 they could not have been received in good faith either on the part of Mrs Strickland or Mr Judd and therefore the defendant, nor could they be said to be in the ordinary course of business.

42. In the circumstances of this case where there was no issue as to insolvency I am unable to accept that the approach taken by Young J in Hamilton is apposite. The particular circumstances which led to the payments in no way can be brought within the long accepted and applied test laid down by Rich J in Downs case. I am far from persuaded that the building industry should receive special subjective attention when the objective test has been consistently applied for so many years. This is so even if it means that companies such as CRP are legally insolvent for much of their life. It is not to the point that they rely upon commercial goodwill to continue to exist.

43. Consequently, the defendant has failed to discharge the onus cast upon it by the provisions of s122(3). The plaintiff is entitled to the declaration it seeks in relation to all impugned payments and to judgment in the sum of $136,259 and to costs. I shall hear counsel as to interest so as to enable Minutes to be brought in.