Downs Distributing Co Pty Ltd v Associated Blue Star Stores Pty Ltd (In liq)

The case of *Downs Distributing Co Pty Ltd v Associated Blue Star Stores Pty Ltd (In liq)* concerned an appeal to the High Court of Australia from a decision of the Supreme Court of New South Wales. The plaintiff, Associated Blue Star Stores Pty Ltd (in liquidation), sought to recover a sum of money or goods transferred to the defendant, Downs Distributing Co Pty Ltd, on the grounds that these transfers constituted an unfair preference to a creditor. The dispute arose from the plaintiff's inability to pay its debts as they fell due, leading to its voluntary liquidation.

The High Court was required to determine whether the transaction, whereby the plaintiff delivered goods to the defendant in satisfaction of an outstanding debt, constituted a voidable preference under section 95 of the *Bankruptcy Act 1924-1946* (as applied to companies by section 298 of the *Companies Act 1936-1940* (N.S.W.)). Specifically, the court had to consider whether the transaction was made in the ordinary course of business, whether the defendant acted in good faith, and whether the defendant had reason to suspect the plaintiff's insolvency and that the transaction would result in a preference.

The Court held that the expression "in the ordinary course of business" does not encompass a transaction where a debtor returns goods to a creditor in settlement of a debt, with the possibility of repurchasing them. It was further reasoned that this expression refers to a transaction that a reasonable creditor and debtor would enter into, uninfluenced by any belief in the debtor's insolvency. The Court also established that a creditor is excluded from the protection afforded to those dealing in good faith if the circumstances surrounding the transaction lead to an inference that the creditor knew or had reason to suspect the debtor's inability to pay its debts as they became due, and that the transaction would confer a preference. The test for "reason to suspect" was deemed to be objective, meaning it is based on what an ordinary reasonable person would suspect in the given circumstances, rather than the subjective state of mind of the creditor.

The High Court allowed the appeal, overturning the Supreme Court's decision. The Court found that the transaction, where the plaintiff returned goods to the defendant to offset a debt, was not in the ordinary course of business. However, it also concluded that the defendant did not have reason to suspect the plaintiff's insolvency to the extent required by section 95(4) of the *Bankruptcy Act*. Consequently, the defendant was deemed to have acted in good faith and for valuable consideration in the ordinary course of business, and the transaction was not voidable as an unfair preference.