Davies & Nicol as Joint & Several Liquidators of Harris Scarfe Ltd v Chicago Boot Co Pty Ltd - [2011] SASC 27

SUPREME COURT OF SOUTH AUSTRALIA
(Civil)
DAVIES & NICOL AS JOINT & SEVERAL LIQUIDATORS OF HARRIS SCARFE LTD v CHICAGO BOOT CO PTY LTD
[2011] SASC 27
Judgment of The Honourable Justice Sulan
1 March 2011
CORPORATIONS - WINDING UP - WINDING UP IN INSOLVENCY - WHAT CONSTITUTES INSOLVENCY - EVIDENCE OF INSOLVENCY
CORPORATIONS - WINDING UP - CONDUCT AND INCIDENTS OF WINDING UP - EFFECT OF WINDING UP ON OTHER TRANSACTIONS - PREFERENCES
SALE OF GOODS - RIGHTS OF UNPAID SELLER AGAINST GOODS
The plaintiffs were the Receivers and Managers and Joint and Several Liquidators of Harris Scarfe - the plaintiffs claimed that certain payments made to the defendant by Harris Scarfe were made while Harris Scarfe was insolvent and constituted voidable transactions in the form of unfair preferences within the meaning of s 588FA of the Corporations Act 2001 (Cth) - the defendant relied on the good faith defence in s 588FG of the Corporations Act 2001 (Cth) that they did not know, or have a reasonable suspicion, that the defendant was insolvent at the time when the payments were made - defendant sought to rely on a retention of title clause to claim that title to the stock they supplied to Harris Scarfe did not pass until they received payment.
Held: The Harris Scarfe Group was insolvent at the time the payments were made - the payments were unfair preferences - the good faith defence not satisfied - the goods were not subject to retention of title - the defendant to pay the plaintiff $316,801.33 in accordance with s 588FF of the Corporations Act 2001 (Cth).
The liquidator prepared an expert report on the solvency of the Harris Scarfe Group - defendant submitted that the liquidator's report should not be treated as evidence from an independent expert - discussion of the admissibility and weight to be given to the report.
Held: The relationship of an expert to one of the parties is a matter which goes to evidentiary weight - the liquidator was an officer of the Court as a Joint and Several Liquidator of Harris Scarfe - the liquidator's evidence was sufficiently independent in the circumstances.
Corporations Act 2001 (Cth) s 9, s 95, s 459E, s 459F, s 459P, s 588FA, s 588 FF, s 588FG; Sale of Goods Act 1895 (SA) s 19, referred to.
ASIC v Plymin (2003) 175 FLR 124; Bank of Australasia v Hall (1907) 4 CLR 1514; Brooks v Heritage Hotel Adelaide (1996) 20 ACSR 61, applied.
Sandell v Porter (1996) 115 CLR 666; Rees v Bank of New South Wales (1964) 111 CLR 210; Lee Kong v Pilkington (Australia) Ltd (1997) 25 ACSR 103; Pioneer Concrete Pty Ltd v Ellston (1985) 10 ACLR 289; Southern Cross Interiors Pty Ltd (in liq) v Deputy Commissioner of Taxation (2001) 53 NSWLR 213; Standard Chartered Bank of Australia Ltd v Antico (Nos 1 & 2) (1995) 38 NSWLR 290; FGT Custodians Pty Ltd (formerly Feingold Partners Pty Ltd) v Mark Fagenblat [2003] VSCA 33; Sims v Celcast (1998) 71 SASR 142; Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266; Toveill Pty Ltd v Australian Quality Plus Pty Ltd [2010] NSWSC 1003; Aluminium Industrie Vaassen VB v Rompalpa Aluminium Ltd [1976] 1 WLR 676; Chattis Nominees Pty Ltd v Norman Ross Home Works Pty Ltd (Receivers appointed) (in liq) (1992) 28 NSWLR 338; Henry v Hammond [1913] 2 KB 515, discussed.
Re Tweed Garages Ltd [1962] Ch 406; Manpac Industries Pty Ltd v Ceccattini (2002) 20 ACLC 1304; Tru Floor Service Pty Ltd v Jenkins (No 2) [2006] FCA 632; Kulikovsky v Police [2010] SASC 58; Rothman's Exports Pty Ltd v Mistmorn Pty Ltd (In Liq) (1994) 125 ALR 442; Re K & R Fabrications (1980) 32 ALR 183; Associated Alloys Pty Ltd v ACN 001 452 106 Pty Ltd (in liq) (2000) 202 CLR 588; McEntire v Crossley Brothers Ltd [1895] AC 457; Hardy Wine Company Ltd v Tasman Liquor Traders Pty Ltd (in liq) (2006) 95 SASR 21; Walker v Corboy (1990) 19 NSWLR 382, considered.

DAVIES & NICOL AS JOINT & SEVERAL LIQUIDATORS OF HARRIS SCARFE LTD v CHICAGO BOOT CO PTY LTD
[2011] SASC 27
Civil
SULAN J
Introduction

The defendant, Chicago Boot Company Pty Ltd, is a manufacturer and supplier of footwear products. Initially, shoes were manufactured in Melbourne. In about 1999, Chicago Boot commenced to manufacture shoes in China. It supplied footwear to customers under the brand names Chicago Boot and Windsor Smith.
The business of Harris Scarfe was conducted by a group of companies, including Harris Scarfe Wholesale Ltd (“HSW”) and Harris Scarfe Limited (“HSL”). Harris Scarfe traded as a retail business selling goods to the public from Harris Scarfe Department Stores, located at various sites in South Australia and in other states. Harris Scarfe purchased stock from numerous suppliers. Chicago Boot had been supplying to Harris Scarfe from the early 1990s.
This matter concerns the insolvency of the Harris Scarfe Group and transactions of HSW and HSL, whereby they made payments to Chicago Boot which the liquidator of the Harris Scarfe Group seeks to recover.
The plaintiffs, the Joint and Several Liquidators of HSW and HSL, seek an order requiring Chicago Boot to pay the sum of $316,801.33,[1] being the total of various payments made by HSW and HSL to Chicago Boot between 2 January 2001 and 22 February 2001, which the plaintiff contends are unfair preferences.[2]
[1] Corporations Act 2001 (Cth) s 588FF.
[2] Corporations Act 2001 (Cth) s 588FA. For discussion, see R P Austin and I M Ramsay, Ford’s Principles of Corporations Law, LexisNexis Butterworths, 14^th ed, 2010) 1570 [28.330].
The first issue to be determined is whether the companies were insolvent during the relevant relation back period. Chicago Boot relies upon the good faith defence under s 588FG of the Corporations Act 2001 (Cth).[3] Chicago Boot further contends that it could not have received an unfair preference because a retention of title clause prevented HSW and HSL from acquiring a proprietary interest in Chicago Boot’s supplied stock until Harris Scarfe paid for the stock. Chicago Boot submits that its relationship with Harris Scarfe was not one of creditor and debtor, but one of bailor and bailee.
[3] Corporations Act 2001 (Cth) s 588FG(1)(b).
Background
Until around 1997, HSL acquired stock from suppliers and sold that stock to customers. During this period, HSL was both the purchasing entity and the selling entity. Counsel for the plaintiffs contend that, from around 1997, HSL no longer purchased stock from suppliers but, instead, stock was purchased by HSW, which was then distributed by HSW to the various Harris Scarfe shops for sale. After 1 July 2000, Chicago Boot provided goods direct to HSL. It was not an issue at trial as to which Harris Scarfe entity purchased the stock from Chicago Boot.
Pursuant to a contract, or contracts, for the supply of goods, Chicago Boot supplied goods to HSW in return for the promise by HSW of payment. On 31 July 2000, HSW drew a cheque payable to Chicago Boot for $43,540.10 in respect of a number of transactions in which goods had been supplied by Chicago Boot to HSW. The cheque was not sent to Chicago Boot until on or about 4 October 2000, when it was presented to Chicago Boot’s bank. Invoices for goods supplied to HSL were issued at the time of supply. Between 30 September 2000 and 15 February 2001, HSL drew five cheques totalling $273,261.23. The cheques were withheld by HSL until they were sent to and presented by Chicago Boot to its bank. The amount and date drawn and presented are set out below:

Cheque Number

Payer of the Cheque

Date Drawn

Date Presented

Amount $

458173

HSL

16/02/2001

22/02/2001

    16,064.68

454765

HSL

20/11/2000

02/02/2001

151,893.49

456086

HSL

31/12/2000

19/01/2001

100,779.13

453349

HSL

31/10/2000

02/01/2001

    3,444.92

451981

HSL

30/09/2000

02/01/2001

    1,079.01

Total

$273,261.23

On 16 January 2001, Chicago Boot issued a statutory demand in the amount of $286,152.76, in accordance with s 459E of the Act. The statutory demand stipulated that if the amount owing was not paid within 21 days, then the Chicago Boot would make an application to have the Harris Scarfe group of companies wound up, as specified in s 469F of the Act. Harris Scarfe made various payments to Chicago Boot after the statutory demand had been served. The payments did not discharge the entire amount of debt owed.
On 3 April 2001, Michael Dwyer and Lindsay Maxsted were appointed Joint and Several Administrators of HSW and HSL. On 3 January 2002, they were appointed Joint and Several Liquidators of HSW and HSL. On 11 November 2004, Lindsay Maxsted resigned as liquidator of the companies. On 21 January 2005, Michael Dwyer was later removed by order of this Court. On 21 January 2005, Samuel Davies and Colin Nicol were appointed Joint and Several Liquidators. By order of this Court on 11 November 2005, Samuel Davies and Colin Nicol were substituted as plaintiffs in this action to have effect from 6 June 2005.
The plaintiffs allege, and it is not in issue, that the date of appointment of the Joint and Several Administrators, being 3 April 2001, is the ‘relation-back day’ within the meaning of s 9 of the Corporations Act. The plaintiffs allege that payments totalling $273,261.23 to HSL between 2 January 2001 and 22 February 2001 were made when HSL was unable to pay its debts as and when they became due and payable. The plaintiffs further allege that a payment made by HSW on 14 October 2000 in the amount of $43,540.10 was made when HSW was unable to pay its debts as and when they became due and payable. I shall treat the total of $316,801.33 as the amount the subject of the claim, as there is no issue in respect of each individual company.
The plaintiffs claim that the payments were unfair preferences within the meaning of s 588FA of the Act. They seek payment to them of the total sum of $316,801.33 plus interest.
The issues which arise are, first, whether the plaintiffs have proved that the Harris Scarfe companies were insolvent at the time the payments were made. Secondly, Chicago Boot asserts it acted in good faith when it received the payments, and that it had no reasonable grounds for suspecting that either HSL or HSW was or would become insolvent. Thirdly, Chicago Boot contends that the payments did not result in the decrease in the net value of assets by reason that, from 1 July 2000, all goods supplied by Chicago Boot were subject to a retention of title clause which was printed on the rear of each invoice tendered to HSL and HSW.
Insolvency
Applicable Legal Principles
Insolvency is defined by s 9 of the Act as having the meaning given to it by s 95, which states:
(1)A person is solvent if, and only if, the person is able to pay all the person’s debts, as and when they become due and payable.
(2) A person who is not solvent is insolvent.
Mandie J in ASIC v Plymin[4]summarised the Court’s approach to determining insolvency. Mandie J observed that the meaning given to ‘insolvency’ is the recognised ‘cash flow test’ of insolvency. Mandie J referred to a passage of A R Keay in which the author states:
The cash flow test provides that a company is insolvent when it is unable to pay its debts as they fall due. It is of no consequence, under this test, that assets exceed liabilities. The important point is: can the company pay its way in carrying on its business? The court, in examining whether a company is suffering cash flow insolvency, will consider whether the company is actually paying its debtors.[5]
[4] (2003) 175 FLR 124
[5] Ibid 207, citing A R Keay “The Insolvency Factor In The Avoidance Of Antecedent Transactions In Corporate Liquidations” (1995) 21 Monash University Law Review 305, 307.
In approaching this test, one cannot simply have regard to the assets and liabilities, as identified in the balance sheet, to determine whether the debts may be paid at some time in the future out of a company’s assets. The test is whether the debtor is presently able to pay its debts with monies actually available.[6]
In Brooks v Heritage Hotel Adelaide,[7] the Court observed:
It is to be seen that, by its definition of insolvency, the Law poses what has been described in the decided cases as a ‘cash flow’ test, rather that a ‘balance sheet’ test. This aspect must firmly be borne in mind, because it seems to me that, in the course of his submissions counsel for the respondent leant fairly heavily on the latter aspect, albeit in the context of a wider submission related to the need to have a prospective perspective of what were said to be possible, if not probable, future developments.[8]
[6] Bank of Australasia v Hall (1907) 4 CLR 1514, 1528.
[7] (1996) 20 ACSR 61.
[8] Ibid 64.
A company may at the same time be insolvent and wealthy. It may have its assets locked up in investments not presently realisable but not have the assets available to it to meet its current liabilities.[9] However, this does not mean that, in order to remain solvent, a trader must have cash ready to cover their commitments as and when they fall due for payment. In Rees v Bank of New South Wales,[10] Barwick CJ said:
It is quite true that a trader, to remain solvent, does not need to have ready cash by him to cover his commitments as they fall for payment, and that in determining whether he can pay his debts as they become due regard must be had to his realizable assets. The extent to which their existence will prevent a conclusion of insolvency will depend on a number of surrounding circumstances, one of which must be the nature of the assets and in the case of a trade, the nature of his business.[11]
In Sandell v Porter,[12] Barwick CJ observed that it was important not to confuse insolvency with a temporary lack of liquidity. A debtor’s moneys are not limited to the cash resources immediately available, but extend to moneys which can be realised by sale, mortgage or pledge of assets within a relatively short time, and having regard to the amount of debts and to the circumstances, which include the nature of the business. He said:
The conclusion of insolvency ought to be clear from a consideration of the debtor’s financial position in its entirety and generally speaking ought not be drawn simply from evidence of a temporary lack of liquidity. It is the debtor’s inability, utilizing such cash resources as he has or can command through the use of his assets, to meet his debts as they fall due which indicates insolvency. Whether the state of his affairs has arrived is a question for the Court and not the one as to which expert evidence may be given in terms though no doubt experts may speak as to the likelihood of any of the debtor’s assets or capacities yielding ready cash in sufficient time to meet the debts as they fall due.[13]
[9] Re Tweed Garages Ltd [1962] Ch 406, 410.
[10] (1964) 111 CLR 210.
[11] Ibid 218.
[12] (1996) 115 CLR 666.
[13] Ibid 670-1.
There has been much discussion about the approach to be taken when considering the question of when a debt is due.[14] The preferred position is that a debt is due when it is legally repayable. The conduct of a creditor in not seeking to recover a debt, or from taking other enforcement action, does not mean the debt is not due and payable. In considering whether a debt is due, the Court will look to the legally binding agreement between the parties. Often, creditors will withhold taking action to enforce a debt. This may occur for a variety of reasons, including that a creditor may not wish to put at risk an ongoing commercial arrangement, or the creditor may be prepared to give the debtor time because the creditor believes the debtor has temporary liquidity problems. The Court will have regard to commercial reality and, in considering the question, will take into account whether there has been an express or implied agreement between the creditor and debtors to extend the time stipulated for payment, and whether there has been a course of conduct from which it can be concluded that debts are payable, other than as stipulated in the contract.[15]
[14] See Tru Floor Service Pty Ltd v Jenkins (No 2) [2006] FCA 632, [45-8]. For a discussion, see also C J Hamilton, ‘An Insolvency Riddle: When Is A Debt Which Is Due Not A Debt Which Is Due And Payable’ (1997) 5 Insolvency Law Journal 78.
[15] See Lee Kong v Pilkington (Australia) Ltd (1997) 25 ACSR 103; Pioneer Concrete Pty Ltd v Ellston (1985) 10 ACLR 289; Southern Cross Interiors Pty Ltd (in liq) v Deputy Commissioner of Taxation (2001) 53 NSWLR 213; Standard Chartered Bank of Australia Ltd v Antico (Nos 1 & 2) (1995) 38 NSWLR 290.
In Manpac Industries Pty Ltd v Ceccattini,[16] Young CJ said:
Solvency and insolvency are defined in s.95A of the Corporations Act as meaning a company which is unable to pay all its debts as and when they become due and payable. This, as Lindgren J pointed out in Melbase Corp Pt Ltd v Segenhoe Ltd (1995) 17 ACSR 187, requires a cashflow test rather than a balance sheet test. Again, as His Honour said in that case, when one is applying the cash flow test, it is relevant to take into consideration the relationships between creditor and debtor, any agreement and the course of conduct.In Hamilton [v BHP Steel (JLA) Ltd (1995) ACLC 1548] I indicated that that course of conduct may mean that despite what is written on the invoices etc as to time for payment, industry practice or dealings between the parties demonstrate that everyone accepts that debtors will often not pay creditors within normal trading terms. In business circumstances sometimes it is quite necessary in an industry which is experiencing recession because otherwise creditors may not be able to sell their product at all. Even though they would prefer people to stick to their 30 day terms it is better to have recalcitrant debtors than sell no product at all. (emphasis mine).[17]
[16] (2002) 20 ACLC 1304.
[17] Ibid 1309-10.
Was Harris Scarfe insolvent?
Counsel for Chicago Boot submits that the plaintiffs have failed to prove Harris Scarfe was insolvent during the relevant relation-back period. Chicago Boot did not lead evidence on the issue of solvency. Chicago Boot relies on the accounts of Harris Scarfe at the relevant period, and other documents in support of its case that the plaintiffs have failed to establish insolvency during the relevant period.
For the reasons which follow, I am satisfied that Harris Scarfe was insolvent in the relation-back period.
It is well established that the plaintiffs must prove insolvency. In doing so, the plaintiffs rely on a report from, and the evidence of, Harris Scarfe’s liquidator, Samuel Davies, dated 1 May 2005 (“the Davies Report”).
It is Chicago Boot’s contention that I should not rely on the Davies Report or Mr Davies’ evidence. Counsel submits that Mr Davies is not an independent expert and should not be received as such. Counsel contends that his reconstruction of inaccurate accounts should only be accepted to a limited extent and that the audited books and records and later published accounts of the listed Harris Scarfe entity are admissible and that they tend to prove solvency. Counsel is also critical of Mr Davies’ methodology in relation to the extent to which he has reconstructed the books and records or, later, the published accounts of HSW and HSL.
The Harris Scarfe Group comprised a number of separate legal entities. Mr Davies expressed his opinion as to whether the various entities were insolvent at the relevant time. He concluded that a whole of group approach to solvency was appropriate, as the companies were inexorably linked financially. Although initially there was criticism of Mr Davies’ approach, that criticism was not pursued.
Evidence at trial – background to Harris Scarfe’s operations

The business of Harris Scarfe commenced in the mid-nineteenth century. Over the years, the organisation, which was originally a partnership, grew until it was acquired in 1975 by Charles Davis Ltd. Charles Davies Ltd’s business was primarily concerned with the operation of department stores. The stores traded under the name ‘Harris Scarfe’. Between 1994 and 3 April 2001, Harris Scarfe implemented a rapid expansion program. It grew from a single store in the city of Adelaide to 35 stores operating in various states of Australia (“the department stores”). The ultimate holding company was Harris Scarfe Holdings Limited (“HSHL”). The main trading entities were HSL and HSW. On 23 June 1999, the company known as Dstore Limited (“DStore”) was incorporated. DStore operated as an online retail outlet. On 3 April 2001, Receivers and Managers were appointed to that company by the ANZ Bank, which held a fixed and floating charge over the assets of the company.
Harris Scarfe’s dealings with its suppliers
The manner in which HSW and HSL dealt with its suppliers was the subject of evidence of Michael Johnson, whose evidence was not in dispute. He commenced work with the Harris Scarfe group in 1986. In about 1995, he was transferred to the accountant’s office as an accounts clerk. In 1998, he became the assistant accountant, having qualified with a Diploma in Accounting in the early 1990s. In 1998, he worked for Mr Alan Hodgson, the Chief Financial Officer, and he was engaged in account reconciliation.
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.
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.
The independence of the joint and several liquidator
The plaintiffs rely on the evidence of Mr Davies to support the contention that, during the relevant period when the impugned payments were made to Chicago Boot, the Harris Scarfe Group, including HSW and HSL, were insolvent.
The defendant did not dispute that Mr Davies is qualified to speak to the accounts of the Harris Scarfe Group. However, it was submitted that his evidence should not be treated as that of an independent expert, as he is a party to the action.
It is not disputed that Mr Davies is not independent. There is no principle in Australia which would render Mr Davies’ evidence inadmissible, based merely on his lack of independence. That fact goes to weight.[18] In FGT Custodians Pty Ltd (formerly Feingold Partners Pty Ltd) v Mark Fagenblat,[19] one of the issues which arose was the value of a partnership upon its dissolution. The brother-in-law of one of the partners gave expert evidence of the value of the partnership. The Full Court of the Supreme Court of Victoria held that the evidence was admissible. Ultimately, the relationship of the expert to one of the parties is a matter which goes to weight. Ormiston JA, with whom Chernov and Eames JJ agreed, said:
To ask whether the expert evidence given was admissible, however, was to deflect the Court from the true enquiry. Although it may be described as a sub-branch of the rules relating to admissibility, [Wigmore on Evidence (Chadbourn Revision), (Little Brown, 1972) vol 2, 640, 649, 799] the real issue must have been the testimonial capacity or competence of Mr Borsky to give evidence on the subject. There can be no doubt that the evidence as to value which Mr Borsky sought to give was relevant, indeed relevant to the critical issue in the whole action, namely, what was the true value of the goodwill as a component of the amount which the respondent was entitled to receive upon retirement. All evidence which is probative is relevant, so that: “If evidence is of some, albeit slight, probative value, then it is admissible unless some principle of exclusion comes into play to justify withholding it from [the Court’s] consideration”: per Gleeson, C.J. in Festa v. The Queen. [(2001) 208 CLR 593, 599]. Although for obvious reasons proof of value in these circumstances must be established by suitable opinion evidence, if the witness from whom it is sought to adduce that evidence is suitably qualified, then there is no rule of exclusion to my knowledge which would deny either its relevance or its admissibility in general, nor did counsel point to any facet of that evidence which otherwise could be considered inadmissible either in whole or in party.
…
Whichever approach one may take to the question, there was, in my opinion, no basis in principle for excluding Mr Borsky’s expert evidence, whatever one might have said as to the wisdom of calling him as an expert in this action and whatever one may say as to the ultimate decision to prefer his evidence [cf R (Factortame) v UK (No 8) [2002] 3 WLR, 1104].[20]
[18] Kulikovsky v Police [2010] SASC 58, [36] – [37].
[19] [2003] VSCA 33.
[20] Ibid [4], [9].
The expertise of Mr Davies
Mr Davies is a qualified accountant, holding a degree in accountancy. He is a Fellow of the Institute of Chartered Accountants in Australia and is an official liquidator. He has extensive experience in the area of insolvency, has been involved in forensic accounting matters and has provided expert reports over a number of years. I consider him to be an expert in the area of insolvency. In considering his evidence, I have had regard to the fact that he is a party to this action. Mr Davies is an officer of the Court in that he is an official liquidator. As an officer of the Court, he has duties to the Court and is subject to supervision by the Court when carrying out his duties as a Court appointed liquidator. In considering his evidence, I am satisfied that he is an expert and that his evidence was given on the basis of his expertise and his independence as an official liquidator.
The evidence of Mr Davies and the insolvency of Harris Scarfe
Mr Davies’ analysis of the group is summarised in his Investigation Report. The report analyses the cash flow of the group, in particular HSL and HSW, prior to, and at, the relation-back day. In arriving at his opinion, Mr Davies had available to him, the books and records of HSHL, HSL, HSW and DStore. Mr Davies observed that all companies in the Harris Scarfe Group were wholly owned by HSHL, and that they had largely common management and directors. HSHL operated a bank overdraft facility, largely for the benefit of HSL and HSW. The ANZ, the group financier, held security over all the assets of the Harris Scarfe Group. Mr Davies summarised the purpose of his report. He said:
The purpose of my report is to highlight that Harris Scarfe, with the ANZ, had a very narrowly defined operating overdraft set at a limit of $4.25 million, but that it had, through the system that it had put in place by virtue of needing to manage that limit, creditors that vastly exceeded that particular limit at any one point in time from 31 July onwards, and in fact sometime prior to that.
As at December 1999, the value of cheques drawn against overdue accounts totalled $18.2 million. PriceWaterhouseCoopers (“PwC”) conducted a strategic business review of HSHL, which had been requested by HSHL. In December 1999, PwC reported that the Harris Scarfe Group’s capital base was inadequate for the size of the Harris Scarfe business, that the working capital facilities were inadequate, and that at least $13.5 million was required to bring creditors back to 45-day trading terms. Mr Davies gave the following evidence:
[The] report makes specific mention of a couple of things and, firstly, that is that December ’99 the amount or value of cheques withheld that had come out of the system as being due and payable sat at an amount of around about $18 million. The ANZ, as part of its annual facility review had asked PWC, noting that they’re also the auditor, to undertake a review of the Harris Scarfe business and that in December ’99 PricewaterhouseCoopers produced a report which identified a couple of things that caught my attention. Firstly, was that the Harris Scarfe Group was undercapitalised and secondly, that there was a $17 million gap in Harris Scarfe Group’s cash position which was required just to restore creditors to terms. I’ve taken that to mean to deal with the cheques withheld at that particular point in time. Noting that report was issued to the ANZ, in fact was procured by Harris Scarfe Holdings at the request of ANZ, noting those comments that PWC were going to make in that report, that report reads to me as though it ought come with the plan if it was going to the bank to accommodate that scale of issue, noting the overdraft facility was at 4.25 million, something like a quarter of the amount of cheques withheld at that time. That report leads to ultimately and some time down the track the issue of a convertible note to shareholders, like going to the shareholder base to raise further debt to then procure funds, as you’ll note the prospectus identifies, to pay to trade creditors from the balance sheet in that prospectus which clearly identifies that proceeds of that convertible note subject to $18 million would be wholly applied to trade creditors, so that when the convertible note is, in fact, issued and the funds are received as outlined in prospectus by 30 June, noting that it’s in the public domain, I suspected there would have been a degree of expectation from the supply base to have their debts brought back within terms consistent with the terms of prospectus and what then happens following that in July is something other. So, by the time we get to an October payment the creditors, in this case Chicago Boot, were quite agitated and very concerned about in that instance where Harris Scarfe Wholesale was placed financially.
The Harris Scarfe Group appeared to have experienced increasing financial difficulty from January to May 2000, with overdue payments totalling $29.1 million. Consequently, the Board retained advisors to prepare for a capital raising to facilitate the poor cash flow position. Harris Scarfe Group proposed to raise capital by a convertible note issue. In about April 2000, the ANZ Bank agreed to advance $10 million by way of short-term facility, to be repaid once the proceeds from the convertible note issue were received. In May 2000, HSHL issued a prospectus to raise $15 million by way of a convertible note issue. The funds were predominantly to be used for working capital to optimise trading terms with suppliers.
The existing bank facilities were fully drawn from time to time. Therefore, it was necessary to withhold cheques to keep the group within its facility. Harris Scarfe Group’s cash position continued to deteriorate from August 2000 to April 2001.
In May 2000, Harris Scarfe Group released to the public a convertible note issue, which sought to raise $14.2 million net of costs as a way of improving working capital, and as part of a strategy to eliminate the overdue payments of $29.1 million. As at June 2000, however, cheques withheld where payments to suppliers were overdue totalled $23 million. Despite efforts to fund the release of overdue cheques, sales were well below budget in June that year, and trading did not generate sufficient cash to enable overdue debts to creditors to be paid. The result was that cheques withheld increased at 31 July 2000 to $24.9 million.
By August 2000, cheques withheld had increased to $30 million. The position further deteriorated in September 2000. At 29 September 2000, cheques withheld totalled $40.1 million. Further, the Harris Scarfe Group had breached its interest covenant with the ANZ Bank. In October 2000, the cheques withheld position had further deteriorated to $45.9 million. As at 30 November 2000, Mr Davies calculated that cheques withheld totalled approximately $47.2 million. The Christmas period saw sales improve. Cheques withheld had reduced to $33.6 million by 31 December 2000. This position had not changed significantly by 31 January 2001. However, thereafter Harris Scarfe Group’s position deteriorated dramatically and, by the end of February 2001, cheques withheld totalled $50.1 million.
Receivers and Managers were appointed to HSHL by the ANZ Bank on 6 April 2001. Leading up to that, HSHL shares were suspended on the ASX on 29 March 2001. Voluntary Administrators were appointed to HSHL on 2 April 2001. On the same day, in an effort to no doubt prevent receivership, Adam Trescowthick, CEO and acting Chairman of HSHL, attempted to arrive at an agreement with the ANZ Bank for the Trescowthick Family to provide additional security to the ANZ Bank up to the sum of $20 million. This agreement was never reached.
Throughout the period of 31 July 2000 until 3 April 2001 (“the insolvency period”), Harris Scarfe Group’s overdraft facility was regularly overdrawn, occurring most often through overdue cheques being issued to creditors who were told not to bank cheques before a certain date. However, it appears that many of those creditors may have banked the cheques upon receipt.
The records indicate that the Harris Scarfe Group’s lack of liquidity was not temporary and that there was no reasonable prospect of the Group generating or sourcing funds sufficient to pay all of its debts overdue during the insolvency period. There were a number of indicators of the Harris Scarfe Group’s insolvency besides the fact that debts due for payment were not paid due to a lack of available funds. Mr Davies made reference to those indicators as follows:
·    Debts due for payment were not paid due to a lack of available funds;
·    The quantum of trade debts outstanding during the Insolvency Period was substantial and exceeded the Groups reported annual earnings before tax;
·    Immediately following the raising of $14.2 million from the CNI [Convertible Note Issue], the quantum of Cheques Withheld increased;
·    Immediately following receipt of the funds from the CNI the Group sought to obtain further working capital support through an increase to its existing overdraft facility;
·    In response (sic) the Group’s working capital, the ANZ requested a review of the Group;
·    The number of creditor complaints regarding unpaid debts increased significantly from September 2000 through to April 2001;
·    Senior Management were required to manage payment of creditors on a daily basis and strictly according to the available funds in the Group’s overdraft facility;
·    The number of days Cheques Withheld were held awaiting release increased in some cases in excess of 180 days;
·    Creditors were given cheques and instructed not to present the cheques until a certain date;
·    Creditors actions such as the cancellation of credit facilities, stop supply and legal action increased;
·    The buying department experienced increasing difficulty performing their role as a result of action by creditors.
Chicago Boot’s debt grew to $286,152.76. Trading accounts were also substantially overdue, outside the trading terms and up to 120 days. Chicago Boot was not paid 180 days after delivery or following the issue of a statutory demand by Chicago Boot. Mr Davies concluded:[21]
… the companies were “inexorably linked financially and this lead me to conclude that the solvency of each company is inexorably linked to the solvency of the other.
[21] The Davies Report, 2.
Mr Davies adopted the test as set out by Barwick CJ in Sandell v Porter.[22] Mr Davies observed:[23]
[22] (1996) 115 CLR 666, 670-1.
[23] The Davies Report, 9.
I understand that the test as to whether a Company can pay its debts as and when they fall due is dependent on:
·The ability of the Company to generate sufficient cashflows to meet payments of its debts as and when they fall due; and
·The ability of the Company to meet payment of its debts as and when they fall due from the company’s assets on hand.
He went on to describe the application of the test in the following way:
Assessing the likelihood of a Company’s assets or capacities yielding ready cash in sufficient time to meet the debts as they fall due involves consideration of the following:
·the Company’s cashflow outlook;
·the quantum of liabilities and the timing of liabilities falling due for payment; and
·the extend of and the nature of assets available to the company that may be used to yield cash to pay the Company’s debts.
Non-trading cashflows can be considered for solvency purposes provided they can reasonably be expected to generate cash in sufficient time to meet the debts of the Company as they fall due. Non-trading cashflows may include cashflows from:
·the sale of the Company’s non-core assets;
·the mortgage or pledge of the Company’s assets within; and/or
·loans secured or unsecured, given that such borrowings are a commercial reality in the circumstances and that the monies are available within a relatively short time – relative to the nature and amount of the debts and to the circumstances, including the nature of the business of the debtor.
Mr Davies observed that by 31 July 2000:
·    The Group had fully applied the CNI funds of $14.2 million;
·    The Group’s cash position had deteriorated as Cheques Withheld increased to $24.9 million from $18.2 million in December 1999;
·    No significant in roads had been achieved against improving its working capital arrangements: creditors continued to be paid well outside normal trading terms;
·    An additional $10 million of inventory/stock had come into the system but sales had only increased 2%;
·    The Group was managing its cashflow on a daily basis including identifying which suppliers could be paid on any given day;
·    The Group’s plan to address its chronic overdue payment problem to creditors had not been achieved …
There were no other apparent means to generate cash to meet the $24.9 million which was overdue for payment. Mr Davies formed the conclusion that the Harris Scarfe Group was unable to pay its debts as and when they fell due at all times during the insolvency period. He also concluded that HSL, HSW and DStore, as separate entities, were unable to pay their debts as and when they fell due during the insolvency period.
The evidence of the creditor’s director

Leanne Mance is a director of Chicago Boot. At the time of trial, she had been in charge of the finance and administration of Chicago Boot for approximately 25 years. During and before the insolvency period, she supervised Cheryl Kelly, who worked in the accounts receivable department and was directly responsible for the Harris Scarfe account. Michael Emanouel worked as the sales manager of Chicago Boot and Windsor Smith during the relevant period. His role involved shoe sales and correspondence with Mike Palmer, an employee of Harris Scarfe, who was responsible for purchasing stock.
Ms Mance gave evidence that Chicago Boot had been dealing with Harris Scarfe for approximately 30 years. She first became aware that Administrators and Receivers were appointed in early April 2001 when she was informed by her lawyer that Chicago Boot was issuing statutory demands against Harris Scarfe.
Ms Mance said that Harris Scarfe had, over the years, maintained an extremely poor track record with the payment of invoices. While Chicago Boot’s trading terms with Harris Scarfe required payment within 60 days of the products being sold to Harris Scarfe, they did not act in compliance with the trading terms. For as long as Chicago Boot had dealt with Harris Scarfe since the early 1990s, Harris Scarfe would draw cheques but not deliver them to Chicago Boot for long periods, far in excess of their trading terms. Ms Mance frequently had conversations with employees of Harris Scarfe about when cheques would be sent out. Often, she was told that the cheques would be sent whenever Harris Scarfe felt like it. It is not in dispute that Chicago Boot received significantly pre-dated cheques for at least the whole of the year 2000.
The correspondence in the latter part of the year 2000 between employees of Chicago Boot and Harris Scarfe shed some light on the cash flow difficulties Harris Scarfe was experiencing. On 3 October 2000, Michael Emanouel wrote an email to Mr David Hunter of Harris Scarfe in the following terms:
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 and Lipstick 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 … It is now our firm belief that you have no capacity to pay.
Ms Mance gave evidence that she first saw this email around 2001 when Harris Scarfe had already gone into receivership. It was put to Ms Mance that she too held the view, in October 2000, that the Harris Scarfe’s payment performance was poor, and that the language used by Mr Emanouel, that it “would only slow or cease the current momentum we are both enjoying” meant that Chicago Boot would no longer supply Harris Scarfe unless it paid its debts. Ms Mance was asked whether she agreed with the observation made that, for Chicago Boot and Windsor Smith to continue to supply their brands on 120‑plus credit basis, defied all commercial logic. Ms Mance said that she agreed with the statement made in the email, but only because it was outside the defendant’s trading terms.
A further fax, dated 4 October 2000, from Windsor Smith to HSL observed that payment was missing from the May invoices, and states “quite urgent payment is required to bring the account back into trading terms”.
In a fax from Leanne Mance to David Clark of Harris Scarfe, dated 11 January 2001, Ms Mance lists the amount outstanding as $43,794.13 for the months of September to December 2000. She states:
I have made numerous attempts to contact you and no answer is supplied. We have supported Harris Scarfe 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. We regret to do this as our only option to come to this as we valued your business and future business.
Ms Mance was asked in cross-examination whether if, in the past, she had ever written a letter in those terms in which Chicago Boot had threatened Harris Scarfe with legal action. She said that they had not sent a statutory demand to any of the Harris Scarfe Group of companies previously.
The statutory demand
A statutory demand was issued to HSL by Chicago Boot on 16 January 2001 in the amount of $286,152.76, in accordance with s 459E of the Act. The statutory demand stipulated that if the amount owing was not paid within 21 days, Chicago Boot would make an application to the Court for HSL to be wound up. Ms Mance told the Court that the late payment had never been as bad as this.
Ms Mance gave evidence that Chicago Boot had resorted to legal action as they had made numerous attempts to call HSL and had sent them letters, to which they usually did not respond. On the occasion they did respond, they would indicate that the cheques were in the drawer and that they would pay them when they could. She described them as “dictatorial” and, on the occasions they did contact Chicago Boot, they were rude.
Given the long-standing relationship between Chicago Boot and Harris Scarfe, it is reasonable to assume that the decision to issue the statutory demand was not made lightly.
Harris Scarfe presented a cheque in the amount of $100,779.13 on 19 January 2001, two or three days after HSL was served with the statutory demand.
Further correspondence
Similarly, on 25 January 2001, with regard to the amount owing to Windsor Smith by Harris Scarfe, Cheryl Kelly sent a letter to David Clark stating that the amount owing to Chicago Boot, as at 31 January 2001, was $183,316.94. Ms Kelly advised that she had tried many times to contact Harris Scarfe and seek to resolve the outstanding debt, but to no avail.
Following the payment by Harris Scarfe in response to the statutory demand, payment pressure continued to be applied for the balance of the debt sought in the statutory demand.
On 25 January 2001, Michael Palmer of Harris Scarfe emailed Mr Emanouel, with a copy to Cheryl Kelly, in which he acknowledged that Harris Scarfe were late in payment. In that correspondence he said decisions on which suppliers are paid first is made by their accounts department using their own set of criteria. He indicated that, as a result of downturn in trading conditions, coupled with continued problems with payment issues, Harris Scarfe had imposed restrictions upon their buyers and they now only had money to finance their catalogue program. Mr Palmer also made the following observation:
As a further complication it seems that your efforts to be paid have taken you to the stage where legal action will now be taken to recover moneys 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.
There are further email exchanges in late January 2001 regarding supply and, honouring previous commitments given by Chicago Boot.
An email from Mr Steven Ross to Mr Palmer of 30 January 2001 refers to honouring delivery of week 32 orders, and seeks a commitment from Harris Scarfe of orders forecasted before Christmas. The response from Mr Palmer, by email dated 31 January 2001, states that the orders for week 32 were the only ones that would go ahead. He says that ‘open to buy cutbacks’ means Harris Scarfe can no longer range shoes in their ladies’ departments. The email goes on to say that “… at this stage we only have funds to finance our catalogue program”.
On 31 January 2001, solicitors for Chicago Boot wrote to the solicitors for Harris Scarfe acknowledging receipt of the amount of $100,779.13, but indicating that, as at 31 January 2001, there were still amounts of $13,750.19 owing to Windsor Smith and $175,616.94 owing to Chicago Boot.
Chicago Boot presented a cheque in the amount of $151,893.49 on 2 February 2001. The cheque pre-dated the date of the statutory demand. It was supposed to be paid to Chicago Boot in December 2000.
On 5 February 2001, the solicitors for Chicago Boot acknowledged receipt of an amount of $193,103.45 from Harris Scarfe in respect of monies owing to Windsor Smith. Chicago Boot, indicated that, subject to clearance of funds, Chicago Boot would withdraw the statutory demand.
Following various payments, pressure was applied by Chicago Boot to recover the balance outstanding of $24,000. Legal proceedings were again threatened. Chicago Boot was informed that the deadline for the catalogue had passed and, in an email dated 8 February 2001, Mr Palmer stated that he cannot make a commitment about payment on time. Harris Scarfe was informed on 12 February 2001 that Chicago Boot intended to issue proceedings 94 the next day claiming $21,392. Chicago Boot presented the cheque for $16,064.68 on 22 February 2001.
Submissions on behalf of plaintiffs in relation to insolvency
The plaintiffs submit that HSL and HSW were insolvent during the relation back period. The plaintiffs further submit that the cash flow basis is the proper and required basis for assessing insolvency.
The plaintiffs also submit that there is no evidence to support Chicago Boot’s contention that the methodology undertaken by Mr Davies is flawed. The plaintiffs rely on the report and evidence of Mr Davies, together with the evidence of those who were involved in obtaining payment from Harris Scarfe.
Submissions on behalf of defendant in relation to insolvency
Counsel for Chicago Boot submits that the audited accounts show a substantial surplus of working capital during the relevant period and a net worth of $100 million. Counsel accepts that, in March 2001, Chicago Boot became aware that Mr Hodgson had falsified the profits of Harris Scarfe. During the period from January 1997 to March 2001, Hodgson had caused accounts of HSHL to be falsified. The false entries totalled almost $21 million.
Counsel submits that there is a lack of explanation as to why the apparent surplus of working capital and net worth was not available to generate cash when required. He contends that Harris Scarfe still had access to an overdraft during this period. On 19 January 2001, the ANZ Bank account appeared to be only overdrawn to the extent of $1.2 million, but the actual limit of the account was $3 million. The working capital position shown in the accounts is entirely consistent with a surplus of available working capital. Mr Davies considered those balance sheet items relevant to the assessment of HSL’s and HSW’s ability to pay its debts. This included assets which might be offered as security for further borrowings and current assets which could have been promptly converted into cash. The plaintiffs contend that there were no unsecured assets of HSL capable of securing further debts, and that HSL’s current assets could not be realised to satisfy the business, such as plant and equipment or, in the case of stock, could only be realised in the ordinary course of trade, which had proved to be inadequate.
In my view, the balance sheet analysis is of little weight when considered against the cash flow position and the conduct of Harris Scarfe in dealing with creditors over the relevant period. It is not in dispute that the unpaid debts over the relevant period grew alarmingly. There was constant monitoring of the cash position and cheques were withheld for increasing periods of time.
Counsel for Chicago Boot submits that indicators of insolvency, such as the slow payments of customers and the practice of keeping cheques in the drawer, which were not sent to suppliers until after the agreed trading terms, were evidence of an unwillingness to pay and not indicative of the inability to pay. It is submitted that these indicators only show a contempt for suppliers in order to make working capital easier to achieve.
I reject this submission. The correspondence from employees of Harris Scarfe, when Chicago Boot pressed for payment, is contrary to the submission that Harris Scarfe was unwilling, rather than unable, to pay its creditors. Harris Scarfe was under extreme pressure from Chicago Boot to put the account into order, yet it was not able to do so.
Counsel for Chicago Boot contends that the evidence supports a number of findings which do not prove insolvency, in particular:
7.1HSL had a practice over many years of “keeping cheques in the drawer”.
7.2Its substantial working capital surplus at any time (shown in all audited balance sheets up to and including the attachment to PwC’s letter of 15 March 2001) must be reduced by the amount of cheques withheld at that time; but such reduction still leaves a healthy surplus at all material times.
7.3According to audited accounts, HSH’s net worth was not less than $90 m at all material times. There is no analysis or evidence capable of establishing that the net worth was overstated by more than $46 m, if any overstatement of the value of non‑current assets can be deduced at all.
7.4Even after the revelation to the Board of HSH in late March 2001 that Hodgson had falsified entries in the record of the HS group, the Trescowthick Family endeavoured to persuade the ANZ Bank not to appoint receivers by promising additional security to the extent of $20 m. The response of the ANZ’s Craig Vaughan was not produced by Mr Davies.
7.5In January and February 2001, it is as likely as not that further borrowing against the very substantial net worth of the HS group could have funded a return to payment of suppliers within terms, if the management of HSH had wished to do so. Instead, the loss of supplier discounts was evidently preferred by management to the payment of bank interest.
7.6Acquisitions (especially snapping up Stores for $3 m in December 2000) were more important to HS management than releasing cheques to suppliers who were not prepared to exert payment pressure.
7.7Ability to fund the purchase of Dstore is consistent with ability (as distinct from willingness) to pay debts as and when they fell due.
The contention of counsel that the matters referred to do not support a finding of insolvency must be considered against the background of what was occurring at the time. Harris Scarfe was clearly in financial difficulty. The ANZ Bank was concerned. It required Harris Scarfe to commission a report from PwC. The practice of keeping cheques in the drawer over the years is but one consideration. The position at the relevant time was that the amount of monies withheld from creditors had grown dramatically. The cash flow position was alarming. Assets were not realised to relieve the position. Funds were raised by a convertible note issue in order to satisfy and relieve the position which, as it turned out, worsened. The fact that the Trescowthick Family was prepared to offer $20 million to prevent the Harris Scarfe Group from being placed in receivership is suggestive that there was a lack of cash to pay creditors and that there was a failure to satisfy the ANZ Bank about the Harris Scarfe Group’s financial health.
Counsel for Chicago Boot submits that the plaintiffs have failed to prove insolvency at the relevant time. The primary criticism of the plaintiffs’ case is that Mr Davies failed to undertake an investigation of the balance sheet and failed to reconstruct the balance sheet to ascertain whether there were sufficient assets available to the group which could have either been sold within a reasonable time to ensure outstanding debts were paid or, alternatively, from which funds could be raised by borrowings or other capital raising to pay all debts that were due and payable.
Mr Davies accepted that he had not reconstructed the balance sheet of HSHL at the relevant period. He agreed that, as at 31 January 2001, PwC provided information to Harris Scarfe that showed that the company was balance sheet solvent and profitable. Mr Davies stated, however, that there were factors which had not been taken into account by PwC. Further, he stated that he had focussed on the cash flow position, which was not part of the PwC’s analysis. I accept Mr Davies’ evidence. I am satisfied that PwC did not conduct a cash flow analysis which, in my view, was necessary if they were to express an opinion about whether the group was able to pay its debts when they fell due.
I reject Chicago Boot’s submission that the plaintiffs have failed to prove insolvency during the relation-back period. The correspondence leads to the conclusion that the Harris Scarfe Group was under extreme financial pressure, and that it was juggling its debts and paying those creditors which placed pressure on it. I reject the submission that Harris Scarfe only paid creditors that it chose to pay. The evidence is that the company was under a high degree of financial pressure. Chicago Boot issued a statutory demand in order to obtain payment. For a publicly listed company to find itself in a position in which a statutory demand is issued does not support the contention that it was in a position to pay its debts as they fell due, and chose not to do so.
I am satisfied that the Harris Scarfe Group was insolvent during the relevant period. I accept the findings of Mr Davies in his report of 1 May 2005. The evidence has demonstrated that Harris Scarfe was suffering from continual financial losses and, despite efforts to fund the release of overdue cheques, the Group fell further and further into debt. Accordingly, the Group was unable to pay its debts as and when they fell due during the insolvency period from 31 July 2000 until 3 April 2001.
Good faith defence
Section 588FG of the Act provides:
Transaction not voidable as against certain persons
(1)A court is not to make under section 588FF an order materially prejudicing a right or interest of a person other than a party to the transaction if it is proved that:
(a)     the person received no benefit because of the transaction; or
(b)     in relation to each benefit that the person received because of the transaction:
(i)the person received the benefit in good faith; and
(ii)at the time when the person received the benefit:
(A)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
(B)a reasonable person in the person’s circumstances would have had no such grounds for so suspecting.
(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 588(FC(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.

The onus is on Chicago Boot to establish that it has a defence under s 588FG(1).[24] It must establish that: (1) it acted in relation to the transaction and received the moneys in good faith; (2) it had no reasonable grounds for suspecting that Harris Scarfe was or would become insolvent at the relevant time; (3) objectively, a reasonable person in the position of the Chicago Boot would have had no reasonable ground for suspecting that Harris Scarfe was or would become insolvent at the time of the payment.
[24] Rothman’s Exports Pty Ltd v Mistmorn Pty Ltd (In liq) (1994) 125 ALR 442, 444, 447.
The plaintiffs do not contend that Chicago Boot or its directors acted other than in good faith in relation to the transactions. It is conceded that the evidence does not demonstrate any impropriety or dishonesty on their part in relation to the transactions.
In Sims v Celcast Pty Ltd,[25] Williams J, with whom Cox and Mullighan JJ agreed, considered the application of s 588FG(2)(b)(i) and (ii). After concluding that the test in (2)(b)(i) and (2)(b)(ii) is distinguishable, Williams J observed:
Therefore, under subpar (b)(ii) the court will be concerned with the conclusion (in terms of logic or common sense) which a reasonable person ought reasonably to have made in terms of a relevant suspicion. Under subpar (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. (In this way a particular subjective factor is introduced into subpar (b)(i) which is absent from subpar (b)(ii). In another way (b)(ii) also contains a subjective factor in having regard to “the circumstances” of the creditor. However, there is a dichotomy between the two subsections which Nathan J in the passage cited above found it unnecessary to pursue.)
The other side of the coin in the above example is that the process of deduction unfortunately may have put the astute creditor “off the scent”. The fact that a creditor has in good faith lulled itself by its own deductive processes to a position which (with the benefit of hindsight) can afterwards be shown to be flawed will not avail that creditor by reliance on subpar (b)(i) if a reasonable person should have read the signs differently; subpar (b)(ii) will still remain as a hurdle for that creditor.[26]
[25] (1998) 71 SASR 142.
[26] Ibid 146.
Subsections (2)(b)(i) and (2)(b)(ii) are in substantially the same terms as sub-ss (1)(b)(ii)(A) and (1)(b)(ii)(B).
It follows that the state of mind of the directors of Chicago Boot and their assessment of the financial position of Harris Scarfe at the time of the relevant transactions, are relevant to establishing sub‑para (1)(b)(ii)(A). Sub-paragraph (1)(b)(ii)(B) requires the Court to look at the position of the directors of Chicago Boot through the eyes of a reasonable person. Evidence of the director’s knowledge may be used in a limited way in applying the test contained within sub-para (2)(b)(ii), and is only relevant insofar as their subjective appreciation of the circumstances are those to be expected of a “reasonable person”.
The test of what amounts to a reasonable suspicion of insolvency was formulated by Kitto J in Queensland Bacon Pty Ltd v Rees:[27]
A suspicion is something that exists is more than a mere idle wondering whether it exists or no; it is a positive feeling of actual apprehension or mistrust, amounting to ‘a slight opinion, but without sufficient evidence’ as Chamber’s Dictionary expresses it. 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 subs(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 of 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 debs as they become due and of the effect which acceptance of the payment would have as between the payee and other creditors.[28]
[27] (1966) 115 CLR 266.
[28] Ibid 303.
In considering whether Chicago Boot has established that there were no reasonable grounds for suspecting Harris Scarfe was insolvent and that no reasonable person, in the circumstances of the directors, would have had no grounds for suspicion of Harris Scarfe’s insolvency, the Court must consider the position at the relevant time, having regard to the commercial circumstances which existed. In this case, there was a practice which had developed over the years whereby Chicago Boot accepted cheques which had been withheld for a period. Chicago Boot accepted that payments were more often than not made outside the trading terms. Nevertheless, there were other factors of which Ms Mance, the director in charge of accounts, was aware at the relevant time which were not the usual factors governing the parties’ commercial relationship.
Evidence at trial
Craig Mance, the managing director, and Leanne Mance, a director of Chicago Boot, gave evidence to the effect that they did not suspect that Harris Scarfe was or would become insolvent at the relevant time. 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.
I have referred to the evidence of Leanne Mance and to the evidence of the exchange of emails between officers of Chicago Boot and officers of Harris Scarfe earlier in these reasons.
Prior to the date that Ms Mance was told that Harris Scarfe was in receivership, she had thought Harris Scarfe to be in a very good financial position. In examination-in-chief, Ms Mance was shown a bundle of media clippings which related to Harris Scarfe’s financial position in the market from 12 May 1999 to 31 March 2001. The articles report, among other things, a 4.2 per cent rise in sales for the third quarter for HSHL, and a continued move away from discounting on 12 May 1999. The Australian Financial Review, on 25 June 1999, reported the “Department Store Harris Scarfe Holdings expects to have 40 stores operating across Australia by mid-2000 as it continues its expansion plans”.[29] Having viewed those articles at the relevant time, Ms Mance had a belief that Harris Scarfe was in a good financial position. She said that she had a certain curiosity in anything that would arise with respect to Chicago Boot’s customers.
[29] Simon Evans, ‘Harris Scarfe Goes Shopping’, Australian Financial Review (Sydney), 25 June 1999, 44.
Craig Mance gave evidence that he believed the Harris Scarfe business was growing rapidly. Harris Scarfe had always been slow in paying their invoices and was what he described as a ‘high maintenance customer’. Mr Mance was away at the time that Chicago Boot issued a statutory demand and said that, during January and February 2001, he did not have any suspicion that Harris Scarfe might not be able to pay its debts as and when they fell due. Rather, he believed that Harris Scarfe was using the money of suppliers to grow the business, as he had believed they had done for a number of years previously.
Both directors gave evidence that Chicago Boot’s relationship with Harris Scarfe was poor and one characterised by a lack of compliance with Chicago Boot’s 60-day trading terms, cheques drawn but never paid on time, and a general tendency for Harris Scarfe to “stuff Chicago Boot around”. However, there was no serious challenge to their evidence of their belief at the relevant time.
Submissions of Chicago Boot
Counsel for Chicago Boot points to a number of matters that he suggests were sufficient to dispel any suspicion of insolvency that may have arisen from the factors mentioned above. Counsel also submits that the evidence as a whole throws up no more than a reason to consider or look into the possibility of insolvency. In particular, counsel submits that if the board of HSHL had no reason to suspect insolvency until after the impugned payments, persons in the position of the defendant could hardly be expected to be suspicious. Further, counsel points to the fact that cheques were being kept in the drawer but never dishonoured. Failure or refusal to pay, counsel contends, was interpreted by Chicago Boot as rudeness rather than an inability to pay, because Harris Scarfe was being reported as flush with funds for acquisition and expansion.
It is Chicago Boot’s primary contention that, notwithstanding that the conduct of Harris Scarfe might have sparked a reason to consider or look into the possibility of insolvency, the strident publicity indicating financial success on the part of Harris Scarfe must reasonably be taken to have negated that need to enquire.
Counsel further submits that, just because Chicago Boot issued a statutory demand, does not necessarily mean that a suspicion of insolvency existed. What it does point to is the possibility of the existence of something that would go towards a suspicion of insolvency which, he contends, is well short of the criteria required to establish a reasonable suspicion. That is, the issuing of the statutory demand may be something that goes towards creating a suspicion without actually being capable of forming the requisite suspicion in itself.
Further, counsel submits that there must be more than the exchange of communications between the employees of both Harris Scarfe and Chicago Boot. All that those communications establish is that Chicago Boot required payment and that they were tired of continuously being dismissed by Harris Scarfe, which appeared to them to be spending its money on acquisitions such as the online DStore. Counsel submits that it is counterintuitive, on the facts of this case, that Chicago Boot would be pressing to supply goods for Harris Scarfe’s catalogue if Chicago Boot held a real belief or had a basis for suspecting that Harris Scarfe was insolvent.
These factors alone, or in combination, counsel submits, do not dispel the reasonable grounds to suspect insolvency under s 588FG.
Submissions of the plaintiffs
Counsel for the plaintiffs submits that there were a number of indicia from which I should conclude that a reasonable person in the position of Chicago Boot would have had reasonable grounds for suspecting that Harris Scarfe was insolvent, or would become insolvent. The following factors lead to this conclusion.
First, the receipt of pre-dated cheques well after they were due for payment, and the increasing delay over the period in 2000 in delivering cheques.
Secondly, the conduct of officers of Harris Scarfe in refusing to answer requests for payment resulting in Chicago Boot placing matters in the hands of solicitors, and authorising the issue of statutory demands to obtain payment.
Thirdly, the promises of Harris Scarfe to pay and the failure to meet those promises. For example, in December 2000, Mr Hunter of Harris Scarfe advised Chicago Boot that he was hopeful of releasing $152,000 that month. Instead, a total of $4,500 was paid in January 2001. Even after the issue of the statutory demand in January 2001 in the amount of $286,152.76, only part of the amount was paid. After that date, Harris Scarfe advised Chicago Boot that there had been a downturn, and there were harsh cutbacks.
Fourthly, Harris Scarfe threatened to stop dealing with suppliers who take legal action to recover debts due and payable.
I conclude that both Mr and Ms Mance avoided asking themselves the question of whether Harris Scarfe was insolvent. Harris Scarfe was a significant customer. They did not wish to create a situation in which their company’s relationship deteriorated to the point where they lost their customer. On the other hand, the amount owing to Chicago Boot and the length of delay in payment had grown significantly and was causing concern, particularly to Ms Mance. I do not accept Ms Mance’s evidence that she believed Harris Scarfe was in a good financial position. The email exchange between members of her staff, of which she must have been aware, and the fact that recovery of the outstanding amounts was placed in the hands of solicitors, suggest that there was a real concern about the financial position of Harris Scarfe and its ability to pay the outstanding amount to Chicago Boot.
The poor trading history between Harris Scarfe and Chicago Boot must be viewed with respect to the events and the exchanges which took place between employees of Harris Scarfe and Chicago Boot. The correspondence to which I have earlier referred supports the conclusions that there were reasonable grounds for suspecting Harris Scarfe’s insolvency.
I accept the evidence of Leanne Mance and Craig Mance that the receipt of pre-dated cheques was a characteristic of the relationship Chicago Boot had with Harris Scarfe for a number of years. That practice must be viewed in the background of events which were occurring at the relevant time, and the fact that the debt owing to Chicago Boot had grown to a much greater figure than ever before.
In my view, there were indications which cumulatively constitute reasonable grounds for the hypothetical defendant suspecting that Harris Scarfe was or was about to become insolvent. I refer, in particular, to the longer than usual invoice period that elapsed between Chicago Boot and Harris Scarfe. While this must be viewed against a backdrop of a poor transaction history between Chicago Boot and Harris Scarfe, it is evident, both via correspondence between employees of the two entities and the evidence given by Chicago Boot directors, Leanne and Craig Mance, that the situation had never previously been so bad. The circumstances of this relevant period were such that it led Chicago Boot to vigorously chase payment of Harris Scarfe accounts, to a point at which they issued statutory demands. That conduct, by itself, could be regarded as a reasonable ground for suspecting relevant insolvency. The exchanges of correspondence to which I have earlier referred are clear evidence from which I conclude that there were reasonable grounds for suspecting that Harris Scarfe was insolvent or was becoming insolvent.
While Mr and Ms Mance denied that the sending of a statutory demand led them to believe or suspect that Harris Scarfe was insolvent, as to the question of reasonable belief, the statement by Connolly J in Re K & R Fabrications,[30] is apposite:
A payment in response to a notice which warns of insolvency if payment not be made can scarcely be described as a payment which a man might make without having insolvency in view.[31]
[30] (1980) 32 ALR 183.
[31] Ibid 185.
I accept that all these factors should be considered in light of Mr and Ms Mance’s belief that Harris Scarfe was expanding and that it was using the money of suppliers to grow its business. The suggestion that Harris Scarfe was using its suppliers to finance the expansion of its business has a superficial attraction. However, the debt to Chicago Boot and Windsor Smith grew to over $250,000. The relevant staff at Harris Scarfe failed to explain why it was that the debt had been allowed to grow to such a large amount. Over a period when payment was sought, staff at Harris Scarfe prevaricated. They were dismissive of the staff of Chicago Boot, who were attempting to secure payment. It was only after solicitors had issued a statutory demand that there was any response from Harris Scarfe, and that was a partial response.
I conclude that a reasonable person in the position of Chicago Boot would have had reasonable grounds for suspecting that Harris Scarfe was, or would become insolvent at the time of the payments in question.
Retention of title clause
Chicago Boot contends that it did not receive an unfair preference within the meaning of s 588FA(1) of the Act, because the alleged payments did not result in a decrease of net value of the assets of Harris Scarfe available to creditors by reason that all goods supplied by the defendant were subject to a retention of title clause, which was printed on the reverse of every invoice rendered on HSW and HSL by Chicago Boot in respect of the payment.
The terms of the alleged retention of title clause are as follows:
(a)until goods supplied by the Company to the Customer are paid for in full:
(i)    ownership of the goods shall remain with the company but the risk shall pass to the Customer on delivery;
(ii)     the relationship between the parties shall be fiduciary and the Customer shall hold the goods as bailee for the Company;
(iii)    the Customer shall store the Company’s goods separately from its own;
(iv)    the Company authorises the Customer to on-sell the goods but as agent for the Company. The Customer shall however, not represent to any parties that it is in any way acting for the Company and the Company will not be bound by any contracts with the parties to which the Customer is a party;
(v)     the proceeds of any sale shall be paid into a separate account and the Customers shall account to the Company from this for the full price of the goods. Records shall be kept by the Customer of any goods owned by the company.
(b)In the event that the Customer defaults or commits an act of bankruptcy or a receiver is appointed and or it goes into liquidation then without prejudice to any other rights the Company may have, the Customer by receiving delivery of the goods authorises the Company to take repossession of any unpaid for goods and resell same without accounting to the Customer for the proceeds of sale.
Chicago Boot contends that, until it was paid in full, the goods the subject of the payment remained the property of Chicago Boot and were subject to its right to re-take possession of the goods. It further contends that the relationship between Chicago Boot and the relevant purchasing entity of Harris Scarfe (HSW or HSL) was that of bailor and bailee until property passed. It is further contended that, by receiving the payments, Chicago Boot did not recover more than it would have received if it were to prove in a winding up of Harris Scarfe and, therefore, the payments were not unfair preferences within the meaning of s 588FA of the Act, because, at the time of the winding up, Chicago Boot was entitled to re-take possession of the goods towards which payment was made.
Applicable legal principles
The common purpose of a retention of title clause is that goods are supplied to a company under a contract of sale in which, although the company is entitled to possession of the goods, the seller reserves the legal and beneficial title to the goods until the full price is paid.[32]
[32] Aluminium Industrie Vaassen BV v Romalpa Aluminium Ltd [1976] 1 WLR 676, 690. See also: Sale of Goods Act 1895 (SA) which provides:
Reservation of right of disposal
19. (1) Where there is a contract for the sale of specific goods, or where goods are subsequently appropriated to the contract, the seller may, by the terms of the contract or appropriation, reserve the right of disposal of the goods until certain conditions are fulfilled. In such case, notwithstanding the delivery of the goods to the buyer, or to a carrier or other bailee or custodier for the purpose of transmission to the buyer, the property in the goods does not pass to the buyer until the conditions imposed by the seller are fulfilled.
It is necessary to consider any retention of title clause in the context of the totality of the contractual arrangements which existed between Harris Scarfe and Chicago Boot. The question which arises is: What was the substance of the agreement between the parties?
In Toveill Pty Ltd v Australian Quality Plus Pty Ltd,[33] Toveill sought a declaration that, in its agreement with AQP it had a valid retention of title clause and that the proceeds of sale of goods, being oranges, by AQP to third parties was held by AQP in trust for Toveill. The facts were that Toveill produced oranges and sold them to AQP, which on-sold the oranges to third parties. Barrett J dismissed the application. In his judgment, Barrett J referred to the well-known passage in the judgment of Roskill LJ in Aluminium Industrie Vaassen BV v Romalpa Aluminium Ltd,[34] in which Roskill LJ said:
I see no difficulty in the contractual concept that, as between the defendants and their sub-purchasers, the defendants sold as principals, but that, as between themselves and the plaintiffs, those goods which they were selling as principals within their implied authority from the plaintiffs were the plaintiffs’ goods which they were selling as agents for the plaintiffs to whom they remained fully accountable. If an agent lawfully sells his principal’s goods, he stands in a fiduciary relationship to his principal and remains accountable to his principal for those goods and their proceeds. A bailee is in like position in relation to his bailor’s goods. What, then is there here to relieve the defendants from their obligation to account to the plaintiffs for those goods of the plaintiffs which they lawfully sell to sub-purchasers? The fact that they so sold them as principals does not, as I think, affect their relationship with the plaintiffs; nor, as at present advised, do I think – contrary to argument of counsel for the defendants – that the sub-purchasers could on this analysis have sued the plaintiffs on the sub-contracts as undisclosed principals for, say, breach of warranty of quality.[35]
[33] [2010] NSWSC 1003.
[34] [1976] 1 WLR 676.
[35] Ibid 690.

Barrett J observed that, in Romalpa, the contract of sale contained not only a retention of title clause with respect to the goods sold, but also an elaborate provision about the consequences of the mixing of those goods with other goods in a manufacturing process, the general thrust of which was that the seller of the original goods was to have ownership of the new product until payment.
The question of whether, in this case, Harris Scarfe is to be considered the agent of Chicago Boot, and whether a fiduciary relationship exists depends on the intention of the parties. Although the purported retention of title clause which appears on the back of the invoice is some evidence of the intention of the parties, the manner in which the parties conducted business does not support the claim that they intended that property in the goods was not to pass on until payment had been made by Harris Scarfe.
In Chattis Nominees Pty Ltd v Norman Ross Home Works Pty Ltd (Receivers appointed) (in liq),[36] Cohen J observed:
It has been said, in considering whether money held by an agent is in trust, that one of the tests is whether he is obliged to keep the money in a separate account: see Benjamin’s Sale of Goods, 3^rd ed (1987) at 381 and the reference to Henry v Hammond [1913] 2 KB 515. In that case it was held that where a person is not bound to keep money separate, but is entitled to mix it with his own money and deal with it as he pleases, and when called upon is to hand over an equivalent sum of money, then he is not a trustee of the money but merely a debtor: see also, Walker v Corboy (1990) 19 NSWLR 382 which also dealt with agents, and in particular Meagher JA (at 398) (with whom Priestley JA agreed (at 386)) and Clarke JA (at 389), quoting with approval Henry v Hammond.
Other cases requiring an agreement for the holding of moneys in a separate account so as to produce a trust relationship are Nanwa Gold Mines Ltd, Re Ballantyne v Nanwa Gold Mines Ltd [1955] 1 WLR 1080; [1955] 3 All ER 219 and Quistclose Investments Ltd v Rolls Razor Ltd (In Liq) [1970] AC 567, and cases which have followed the principles set out in the latter case.
In order to construe this agreement for sale, containing the Romalpa clause, one is entitled to look at the background facts which preceded it. There was throughout the dealings of the parties no apparent expectation of a separate account being kept but, on the contrary, it was a term of all previous sales that accounts would be paid in the usual way on trading terms of thirty days after invoice. Goods were going to a large number of stores throughout the State and it was clear that funds would be obtained by the defendant from various of those establishments. There would be little chance of an easy tracing of particular amounts paid and there would exist all the difficulties of separate accounting as are referred to in Benjamin (at 385).
Looking at the term with that background of facts it seems to me unlikely that the parties intended to agree that the retaining of the property in the proceeds of sale for the plaintiff did any more than, on receipt of those moneys, create a debt by the defendant to the plaintiff. The fact that they were stated to be the property of the plaintiff did not in my view indicate that they would be kept separately and accordingly held as a trustee. Much of the same result occurred in Walker v Corboy, above, where there was a receipt by a produce agent of moneys which, subject to the retention of commission, were really moneys of the supplier but, notwithstanding that, no trust was created.[37]
[36] (1992) 28 NSWLR 338, 346-7.
[37] Ibid 346-7.
In considering the intention of the parties, the court is entitled to look to the manner in which they conducted their business and what steps had been taken by Chicago Boot to ensure that its goods were identifiable and that the purchaser, Harris Scarfe, could account for goods on-sold to third parties. In determining the intention of the parties, the court will look at the transactions as a whole and, if the parties demonstrate by their conduct that property in the goods has passed, although they state that that was not their intention, the court will conclude that property has passed.[38]
[38] See Associated Alloys Pty Ltd v ACN 001 452 106 Pty Ltd (in liq) (2000) 202 CLR 588; and McEntire v Crossley Brothers Ltd [1895] AC 457, 463; and Hardy Wine Company Ltd v Tasman Liquor Traders Pty Ltd (in liq) (2006) 95 SASR 21.
It is necessary to determine whether the conduct of the parties is such so as to deprive the clause of its purported effect. Those factors will turn on factors such as whether Harris Scarfe stored Chicago’s goods separately from its own,[39] whether the proceeds of sale were paid into separate accounts from Harris Scarfe’s own goods and whether records were kept of the proceeds of sale.[40] It will also be necessary to assess whether the relationship between the parties was in fact fiduciary.
[39] Clause (ii).
[40] Clause (v).
The evidence as to the terms of trade between the defendant and HSW and HSL was less than satisfactory. An invoice dated 4 October 200 was tendered, which contained the alleged terms and conditions in respect of the provision of those goods. The terms and conditions provided, in part, that the HSW and HSL make payment to the defendant for the goods supplied within 30 days.
It is not clear that the terms and conditions, as set out on the rear of the invoice, are the terms and conditions which applied between Harris Scarfe and the defendant at the relevant time.
Mr Mance gave evidence that he and Leanne Mance were responsible for approving terms of trade with Harris Scarfe. He was asked:
QThe effect of that was that those trading terms that grew up over the trading history between Chicago Boot and Harris Scarfes as those things were discussed between people on either side.
AYes.
QSometimes they changed.
AI don’t think they changed but it’s possible to change.
HIS HONOUR
QWas a lot of your business basically done on a handshake; in other words discussions with people who you knew.
AYes.
QAnd trusted
AYep.
QAnd often wasn’t always formally documented.
AVery much.
He understood that the trading pattern between Chicago Boot and Harris Scarfe was that Harris Scarfe would place an order and Chicago Boot would meet the order and deliver the product. A delivery docket was raised, and the payment was to be made within 60 days of the date of that delivery docket. Harris Scarfe would receive the goods into its various stores. When goods were sold, the proceeds of sale would be treated by Harris Scarfe as revenue and be banked in its general account. No separate account was maintained for Chicago Boot sales.
Mr Mance agreed that Chicago Boot did not require Harris Scarfe to keep the consumer sales monies in a separate account. He was asked:
QYou didn’t expect Harris Scarfes to keep you informed about how much of your product was left on the shelves that is that hadn’t been sold yet.
AThrough the buying department we always knew – well not exactly but from the records from the buyers we always knew the sale through of our product and if it was good, if it was bad, the stock holding, down from style and colour.
Ms Mance gave the following evidence:
QIn your dealings with Harris Scarfe, did you establish terms of trade with them.
AYes, in early 1990, when we first started trading with them, and they would sign an application form and it would have terms of trade and also retention of title on it, and they would sign that.
QDo you have any documents constituting the indication of terms of trade or any acknowledgment.
ANo.
QWhat, have they been lost, have they.
ASorry? Yeah, it goes back, yeah.
QBeg your pardon?
AYes, it goes back earlier than I’d have to keep.
QYes, so you have made some search for them, I assume.
AYes.
In cross-examination, she gave the following evidence:
QI understand what you say but it doesn’t quite answer my question; what I want to know is, are you saying that in the 1990s there was a document which recorded that Harris Scarfe’s was meant to pay Chicago Boot account 60 days from the day of delivery of goods.
AYes.
QAnd that’s the document you can’t find now.
AThat’s right
QSo, it’s the 1990 document that records the trading terms between Harris Scarfe’s and Chicago Boot.
AYes
QSo, we’d need to be able to find that document for you to be able to say what the trading terms were, for you to be able to refer to a document to describe the trading terms, am I right about that.
AWell, I wouldn’t have – I don’t have to keep it going back that far; why would I keep it for that far back?
QWell, that might be right, but my question is this, am I not right that the document we would have to find, which is the document that describes the trading terms between Harris Scarfe’s and Chicago Boot, is the 1990 document.
AYes.
QAnd that’s the document we can’t find.
AThat’s right.
QSo, as an example, that’s the document you say which records the 60 days trading terms.
AYes.
QAnd those 60 days trading terms are the terms that operated in the period that we are talking about.
AI don’t understand that bit.
HIS HONOUR
QThe period we are talking about is 1 July 2000 to the end of April 2001, and the question is, were the trading terms –
AThey were never –
Q– in that period the terms –
AThey were never changed from the previous –
QThey changed.
AThey weren’t changed.
QThey were not changed.
ANo.
QSo, they’re the terms that we don’t have a copy of the document.
AYes, they weren’t changed.
XXN
QSo the document that can’t be found also records other trading terms as well as the 60 days, correct.
AYes.
QAnd in the period we’re talking about, the other terms that applied for the trading between Chicago Boot and Harris Scarfe’s, are those which are recorded in that 1990 document, correct.
ASay that again?
QYes.
AIt’s very confusing.
QI’ll break this down as much as you want: there’s a 1990 document which we can’t find.
AThat’s right.
QThat records the trading terms which were put in place at the time that that document was created, correct.
AYes.
QOne of the terms that that document records is payment 60 days after delivery.
AThat’s right.
QThat term continued to apply from the time of the document right through to the time that you stopped trading with Harris Scarfe’s when it went insolvent.
AThat’s right.
QThat document also records a range of other trading terms.
AYes.
QAnd those other terms applied when the document was created, you’re saying, correct – just call them the other terms.
AYes.
QYou are also saying I think that those other terms located on that document, which now can’t be found, continued to be the trading terms that applied in the business between Chicago Boot and Harris Scarfe’s.
AThat’s right.
QAnd those trading terms didn’t change.
ANo.
QSo, in order to know about what those trading terms are, we’ve really got to locate that document. You would agree.
AYes.
HIS HONOUR
QDid Harris Scarfe’s actually sign that document when you agreed to those trading terms.
AYes.
QSo there is a document –
AThere is a document.
Q– which now can’t be located.
AYes.
Q– where Harris Scarfe Ltd and Harris Scarfe Wholesalers signed a document setting out your trading terms.
AYes.
QAnd that document is different to the trading terms which are on the back of the invoices, is that right.
AYes.
It is clear form Ms Mance’s evidence that the trading terms with Harris Scarfe are not consistent with the trading terms which appear as terms and conditions on the invoice which was produced. For example, the terms on the invoice require payment for goods supplied within 30 days of the end of the month in which the invoice was issued. According to the evidence, that was not the position agreed with Harris Scarfe. The retention of title clause which appears on the invoice requires that the customer store the goods separately from its own, and that the proceeds of sale of goods be paid into a separate account and that, from that fund, the purchaser, in this case Harris Scarfe, is to make payment to Chicago Boot. It was a further requirement that Harris Scarfe keep a separate record of any goods owned by Chicago Boot. The evidence is that there was no separate storage, no separate account for proceeds of sale, and no record, as required, kept.
At no stage did the parties act in a manner which leads to the conclusion that they were in a fiduciary relationship, nor did they act in a manner in which it could be concluded that they were in the position of a bailor and bailee.
Ms Mance gave evidence that she did not know whether it was the case that Harris Scarfe stored Chicago Boot’s goods separately in accordance with the provision of the retention of title clause. In re-examination she agreed to the proposition that when Harris Scarfe was not paying Chicago Boot it had never demanded return of the goods for which payment had not been made. The retention of title clause was never acted upon by Chicago Boot.
It is an express clause of the contract that “the relationship between the parties shall be fiduciary and that the customer shall hold the goods as bailee for the company”.
Clause (v) provides that the proceeds of any sale are to be paid into a separate account and that records are kept by the customer of the proceeds of sale. Ms Mance gave evidence that the account contained monies that Harris Scarfe received from other suppliers as well as Chicago Boot. Further, there was no evidence about the accounting system and how the sale of Chicago Boot’s shoes were recorded.
One important element of determining the nature of the relationship is whether the customer was obliged to keep proceeds of sale in a separate account. In Henry v Hammond,[41] it was held that where a person is not bound to keep money separately, but is entitled to mix it with their own money and deal with it as they please and, when called upon, is to hand over an equivalent sum of money, then that person is not a trustee of the money but a debtor.[42] The comments of Cohen J in Chattis Nominees referred to earlier are apposite to this case.[43]
[41] Henry v Hammond [1913] 2 KB 515.
[42] Walker v Corboy (1990) 19 NSWLR 382.
[43] Chattis Nominees Pty Ltd v Norman Ross Home Works Pty Ltd (Receivers appointed) (in liq) (1992) 28 NSWLR 388, 346-7.
Chicago Boot has the evidentiary onus of establishing the existence and operation of the retention of title clause. Counsel for Chicago Boot accepts that neither party paid much regard in complying with the requirements of the retention of title clause. Counsel concedes on the basis of the evidence at trial that there was never any suggestion that Harris Scarfe should keep the funds in a separate account and that it would be largely impractical to do so. However, at least as far as the shoes were concerned, they were clearly branded as Chicago Boot’s and Windsor Smith’s product and, therefore, identifiable. Counsel submits that it was immaterial what happened to the shoes when they reached Harris Scarfe, as the shoes were clearly identifiable. He submits that if the payment had not have made, Chicago Boot would have been entitled to whatever shoes were there, because the shoes were identifiable. However, he concedes that the proceeds of sale of the shoes would not have been identifiable had the shoes been sold. Counsel contends that the terms were part of an established pattern on the back of invoices, which supports a conclusion that they constituted the terms of trade. He concedes that the term in relation to 30 day payment of invoices from the end of the month was varied to 60 days and honoured in the breach.
Conclusion
The circumstances surrounding the trading relationship between the parties was such that I conclude that they did not act in accordance with the retention of title terms. At all times, they conducted their business on the basis of a creditor and debtor relationship. At no time did Chicago Boot claim title of the goods it delivered to Harris Scarfe. Harris Scarfe did not store the goods separately, nor did they account to Chicago Boot for sales to third parties.
The parties at no time treated the goods as if they were subject to retention of title. Over many years Chicago Boot dealt with Harris Scarfe as if they were a purchaser of goods not subject to retention of title. Even when Chicago Boot was threatening to issue a statutory demand, there was never any claim that title in the goods had not passed. I conclude that the goods were not subject to retention of title.
In light of my conclusion, it is not necessary to explore the question of whether there is preferential treatment as a result of the retention of title clause.
Conclusion
For the reasons I have given, I conclude that Chicago Boot has received an unfair preference in respect of the payments, as alleged. I order that it pay to the plaintiff the sum of $316,801.33. I shall hear the parties on the question of interest and costs.

Cheque Number	Payer of the Cheque	Date Drawn	Date Presented	Amount $
458173	HSL	16/02/2001	22/02/2001	16,064.68
454765	HSL	20/11/2000	02/02/2001	151,893.49
456086	HSL	31/12/2000	19/01/2001	100,779.13
453349	HSL	31/10/2000	02/01/2001	3,444.92
451981	HSL	30/09/2000	02/01/2001	1,079.01
Total	$273,261.23