G M Moloney and P.I.F. Geroff v Dunmore Sand and Soil Pty Ltd

[2001] QDC 327

DISTRICT COURT OF QUEENSLAND

CITATION:

G M Moloney and P.I.F. Geroff  v. Dunmore Sand and Soil Pty Ltd [2001] QDC 327

PARTIES:

GREGORY MICHAEL MOLONEY and PETER IVAN FELIX GEROFF as liquidators of Fondside Australia Pty Ltd (In Liquidation)  Applicant
and
DUNMORE SAND AND SOIL PTY LTD
  Respondent

FILE NO:

D987/01

PROCEEDING:

Application

DELIVERED ON:

14 December 2001

DELIVERED AT:

Brisbane

HEARING DATE:

15 October 2001

JUDGE:

Judge Brabazon Q.C.

ORDER:

Preference of $59,000 to be repaid.

CATCHWORDS:

CORPORATIONS LAW – insolvency – liquidation - unfair preferences – defence pursuant to s.588FG(2) Corporations Law – whether director had reasonable grounds to suspect company insolvent – whether reasonable person in circumstances of director would have no reasonable grounds to suspect company insolvent.

Sims v. Tech Holdings Pty Ltd (1998) 30 ACSR 330 at 336; Downey v. Aira Pty Ltd (1996) 50 ACLC 1068 – 1075;
Queensland Bacon Pty Ltd v. Rees (1966) 115 CLR 266 at 303;
Sydney Appliances Pty Ltd v. Eurolinx Pty Ltd (2001) NSWSC 230 – 30 March 2001;

COUNSEL:

Mr Stunden for the applicant
Mr Zillman for the respondent

SOLICITORS:

McCullough Robertson for the applicant  Dibbs Barker Gosling for the respondent

1. Mr Moloney is the liquidator of Fondside Australia Pty Ltd.  He seeks to recover a preferential payment of $59,000 made to Dunmore Sand and Soil Pty Ltd on 30 June 2000. 

1. Dunmore Sand and Soil says that it has a good defence, in that the payment was received for valuable consideration, in good faith, and because it did not suspect that Fondside was insolvent. 

1. Some facts are not in dispute:

a.        Mr Moloney and Mr Geroff were appointed administrators of Fondside on 9 August 2000

b.        They were appointed liquidators of the company on 5 September 2000.  The “relation back” date is deemed to be 9 August 2000.  The six-month period will therefore relate back to 9 February 2000. 

c.        At all times since 28 February 2000, Dunmore Sand and Soil was a creditor of Fondside.

d.        On 30 June 2000, Fondside paid $59,000 in part payment of its debt to Dunmore Sand and Soil.

e.        Fondside was insolvent, being unable to pay its debts as and when they fell due on and from 30 June 2000.

f.         The assets of Fondside are insufficient to satisfy the creditors of the company.  At present, it appears that a dividend of less than .1¢ in the dollar will be paid by the liquidators to the creditors. 

g.        Therefore, it is admitted that the $59,000 was a preferential payment – if it were recovered, it would make a difference to the payments made to the other creditors of the company.

1. Mr Moloney’s affidavit is largely unchallenged.  It says that Fondside was insolvent for the greater part of the six month period leading up to 30 June 2000. 

1. The real issues relate to the ability of Dunmore Sand and Soil to establish a defence under s.588FG(2) of the Corporations Law.  The preference will not be voidable if it can prove that:

a.            The $59,000 was a transaction made in good faith;

b.            It had no reasonable grounds for suspecting that Fondside was insolvent at that time, or would become insolvent; and

c.            A reasonable person in the circumstances of Dunmore Sand and Soil would have had no such grounds for so suspecting.

1. The term “good faith” is to be given its ordinary meaning – to act with proprietary or honesty.  The requirement of good faith under this provision is a subjective test - Sims v. Tech Holdings Pty Ltd (1998) 30 ACSR 330 at 336, Downey v. Aira Pty Ltd (1996) 50 ACLC 1068 – 1075.

1. The idea of a “suspicion” is that described in Queensland Bacon Pty Ltd v. Rees (1966) 115 CLR 266 at 303, by Kitto J.:-

“A suspicion that something exists is more than an idle wondering whether it exists or not; it is a positive feeling of actual apprehension or mistrust, amounting to “a slight opinion but without sufficient evidence” as Chambers 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.”

1. The enquiry must focus on the knowledge of the officers of Dunmore Sand and Soil.  To establish its defence, it must prove that subjectively, it had no reasonable grounds for suspecting that Fondside was insolvent on 30 June 2000, and, objectively, that no reasonable person in its position would have suspected insolvency.  Those elements partially overlap.  They are explained in the leading decision of Sims v. Celcest Pty Ltd (1998) 71 SASR 142. As the two concepts may be somewhat difficult to disentangle, it is worthwhile quoting the reasons of Justice Williams in that case (with whom the other members of the court agreed):-

“Therefore, under subpara(b)(ii) the Court will be concerned with the conclusion (in terms of logic or common sense) which a reasonable person ought reasonable to have made in terms of a relevant suspicion.  Under (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 (b)(i) which is absent from (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 subpara(b)(i) if a reasonable person should have read the signs differently; subpara(b)(ii) will still remain as a hurdle for that creditor.

The circumstances of the present appeal may be an example of this lastmentioned situation.  The signs were there for a reasonable person to read.  The respondent’s officers misread the signs.  The trial Judge must have read the signs only through the eyes of the respondent’s officers rather than also through the eyes of the reasonable person (in the circumstances of the respondent or its responsible officers).  The respondent’s officers may have been overly generous in their assessment a customer of good standing; alternatively they may have been blind to the facts which were staring at them.  The hypothetical person referred to in subpara(b)(ii) would not have allowed personal perceptions to cloud a commercial judgment.”

1. It is necessary to look at the commercial reality of the situation which faced Dunmore Sand and Soil.  There is no single factor that might be conclusive.  It is also necessary to avoid the wisdom of hindsight.  It is necessary to look at the situation through the eyes of those dealing with the situation at the time.

1. Some of the usual considerations are mentioned in Sydney Appliances Pty Ltd v. Eurolinx Pty Ltd (2001) NSWSC 230 – 30 March 2001. That is, cash flow problems can be a sign, or raise a suspicion of insolvency, but they may not be conclusive. Usually it is a consideration of the debtor’s financial position overall that counts, and a temporary lack of liquidity may not be conclusive. For example, the use of instalment payments and post-dated cheques may not be enough to show insolvency. They may be a practice in a particular industry, or the practice of a particular debtor. Some solvent traders do not pay their debts on time, as a matter of habit.

1. It is now necessary to turn to the facts of this case.

1. Mr Kerry Steggles is a director of Dunmore Sand and Soil.  He was the director responsible for this matter in 2000.  He has been involved in the supply of sand and soil for more than 40 years.

1. By 2000, Fondside had been in business for four years.  It experienced significant growth in the areas of oil and pipeline construction and the construction of infrastructure, such as sewers and water mains.  It became, by early 2000, the largest specialist pipeline construction company based in Queensland and New South Wales.

1. It needed supplies of sand because it entered into a substantial contract to build 86 kilometres of the Eastern Gas Pipeline.  Fondside was responsible for the Camden to Point Kembla section, as a sub-contractor to the Transfield Wilbros McMahon Joint Venture (TWM).  TWM had been engaged by Duke Energy Australia to build the entire pipeline.  Fondside commence work in late November 1999. 

1. In January 2000 Mr Steggles and his fellow director, Mr Cornish, found out that large quantities of sand would be required for the pipeline project.  They made enquiries of a business associate about Fondside.  Mr Steggles spoke to the associate on 27 January 2000, and was given reassuring details about the company and its directors, Messrs Moody and Kerr.  He considered that the company and its directors were capable and financially sound.

1. On 27 January, Mr Steggles spoke with Mr Kerr about an account for Fondside.  The next day he sent an Application for Credit and Guarantee form to Fondside’s office.  The form was completed and returned a few days later.  It said that accounts were due and payable, “within thirty days of the end of the month of invoice”.  The completed form gave details of three trade references.  Where the amount of monthly credit required should have been completed, it was left blank.  Having in mind his conversation with Mr Kerr, Mr Steggles noted a credit limit of $40,000, after his office manager checked out the credit references and got satisfactory responses.

1. When Fondside’s office manager telephoned on 21 February to say that supplies should start that week, Mr Steggles told her that the monthly account had been approved, and had a credit limit of $40,000.

1. Monthly accounts were sent for February, March, April, May and June.  The February account was for a relatively small amount of $10,180.  It was not paid during March.  The March account was for $53,239, so that the total debt was $63,419.  According to Mr Maloney’s reconciliation, those accounts were paid by cheques on 7 and 28 April. After the second payment was received, there was no current balance owing on the account.  However, as appears below, the cheques must have been paid later – there is no reason to doubt Mr Steggles’ calculations about amounts outstanding, from time to time.

1. After that, the quantity of sand supplied greatly exceeded that which Mr Steggles had expected.  In April, the monthly account came to $154,987.  Then, in May, the account totalled $167,099.  They were large amounts for Dunmore Sand and Soil.  Fondside was contacted on 20 April – Mr Bourke, the office manager, spoke to Mr Moody.  Mr Moody emphasised the financial strength of Fondside, but said that it would be difficult to pay earlier than the normal 30 days as the size of the project meant that Fondside had first to be paid by the Transfield consortium. 

1. Mr Steggles was then responsible for the first written expression of concern.  See the fax of 2 May, pointing out that the account stood at more than $210,000, and that there was a need to reduce is to a maximum of $50,000 as soon as possible. 

1. After 15 May, Mr Steggles made contact with the TMW group.  At first he thought that he might be paid directly by them.  That was not possible.  The financial controller of the group, Mr Amato, invited further contact if Mr Steggles was still concerned.  Mr Amato said that the rate of work and the need for sand should increase.

1. On 16 May Mr Steggles sent a fax to Mr Moody, expressing concern that the account had blown out to more than $250,000.  He asked for “an additional secured feature to this credit provision in the form of a letter of instruction from you to your client, TWM, advising them to pay us direct for materials at the end of each month and to deduct such sum from payment due to you”.  An irrevocable letter of credit from the bank was said to be an alternative.  Mr Steggles expressed his concern about “a matter of extreme urgency” and threatened to stop supplying sand at mid-day on 17 May.

1. Mr Steggles’ intention, by denying supply, was to also put pressure on Transfield.  He said as much to Mr Amato during a telephone conversation on 24 May.  The day before he had faxed his conditions to Fondside and to Mr Moody, if supply was to be continued.  The aim was to reach the $50,000 credit limit.  Payments had to be made early within the 30 day period.  He emphasised that payment of some $260,000 was needed. 

1. The result was a payment of $47,604 on 24 May.  Fondside told Mr Steggles that a progress payment of $2 million promised by TWM had not been paid.  Mr Steggles rang Mr Amato, and that was confirmed.  Mr Steggles agreed to continue supply.

1. On 30 May Mr Steggles made another round of telephone calls.  Fondside told him they had still not been paid.  He rang Mr Amato, who told him that they had paid money to Fondside.  He stopped sales on the account on 1 June.  It then appeared that TWM had in fact not paid the $2 million to Fondside.  Mr Steggles expressed his displeasure to Mr Amato, and said that there would be no more supplies of sand until the problem was sorted out. 

1. On 30 May, Mr Steggles spoke with the general manager of Fondside, Mr Promnitz.  In effect, he demanded a cheque for about $50,000 before supplies could be recommenced. 

1. The cheque did not arrive on 31 May.  Mr Steggles spoke again to Mr Promnitz.  He was told that the $2 million had still not been received, but that the cheque for $50,000 was about to arrive, and that the payment from Transfield was expected by the end of that week, in which case the account would be reduced to the $50,000 limit.

1. In fact, a cheque for $48,203 did arrive.   That was the last payment from Fondside, before the payment of $59,000, in dispute here. 

1. In early June the balance of the account increased again.  It was about $220,000.  The fax of 6 June, sent by Mr Steggles to Mr Promnitz, reflects his understanding of the agreement made between them on 30 May.  He noted that the amount outstanding as at 31 May was $226,280, even after the cheque for $48,203 had been paid.  Once again, the emphasis was on the expected cheque from Transfield. 

1. On the same day, Mr Steggles also sent a fax to Mr Amato, expressing his concern about not being paid for the sand.  He pointed out that the extent of credit was then standing at $229,000, and that:-

“We had over $100,000 of unpaid bedding sand wrapped around another Transfield Consortium pipeline project in 1994/95.  We will not allow a similar outcome with this project – the sand remains our property until it is paid for or we implement recovery.  You must ensure that we receive payment for this material.”

1. On the days before 6 June, Mr Steggles unsuccessfully tried to telephone both Mr Promnitz and Mr Moody.  He made more than five calls to Mr Moody’s office without success.  His concern was such that he contacted his solicitor, Mr Marsden, on 7 June.  He asked Mr Marsden to put pressure on Fondside and its directors, Messrs Moody and Kerr.  The result was a letter dated 13 June, from Marsdens to Fondside.  After mentioning the outstanding debt of $229,079, it asserted that telephone calls had not been returned, and that arrangements had to be made straight away for the repayment of the debt, otherwise “our client shall have no option but to commence proceedings for the winding up of the company”.  The letter also went on to say that action would be taken against the directors, as guarantors, for the recovery of any outstanding sum.

1. In the meantime, Mr Steggles recalls there was a telephone conversation with Mr Kerr on about 10 June.  Mr Kerr told him that Transfield still had not paid them. That had caused temporary cash flow problems.  Fondside could not pay faster than their normal 30 day terms.  He said that the company wanted about another $50,000 worth of sand to finish the job.

1. Mr Steggles then said that sand would be supplied, but on a cash only basis until the account was reduced to less than $50,000.  He also mentioned the letter which could be expected from Marsdens. 

1. Marsdens’ letter was in fact received by Mr Moody.  He rang Mr Steggles on 14 June.  Mr Steggles says in his affidavit that he was apologetic towards Mr Moody, as he didn’t know that the letter was going to be “that strong”.  The two men agreed that there would be a further meeting on the following week, to discuss the payment of the money. 

1. As events turned out, that meeting was held on 21 or 22 June.  It was at the offices of Fondside. 

1. The agreement is reflected in Marsdens’ letter of 25 July.  (It was suggested that the letter was actually sent on 25 June, but the correct date, as Mr Steggles explained, was that on the letter).  That is, there were total debts for April, May and June owing of about $220,000.  $59,180 would be paid by 28 June.  That would clear the April debt.  Then, the May and June debts would be paid by monthly instalments being paid in July and August.  There would be forbearance, in the event, that Fondside gave a written undertaking to do that.  It did not do that.

1. Mr Steggles recalls his conversation with Mr Kerr.  Once again, Mr Kerr emphasised that the problem related to Transfield adopting tactics to defer payments to Fondside for progress claims in accordance with their contract.  He went on to say that Duke Energy was putting pressure on Transfield to settle the claims, because Duke needed the work completed because of its own obligations.  In return, Mr Steggles agreed to continue supply on a cash basis, in addition to the arrangements set out above.

1. The matter was still unresolved when Mr Steggles read a local newspaper on 4 August 2000, to discover that Fondside had gone into receivership, with debts of more than $14 million.  His company is still owed some $170,000.  He concludes his affidavit by saying this:-

“In this matter I saw Transfield and Duke Energy as causing payment delays and Fondside’s inability to reduce out account credit depended on when they were paid.  It was to Fondside’s credit that they paid their account better than anyone else in terms of normal 30 account trading and this only changed when no payment was received during July.  I considered very carefully during April, May and June the question of whether Fondside was insolvent and decided that that was not the case.”

1. The reference to “normal 30 day trading” appears to be a reference to his earlier statement in his affidavit, that his customers usually paid their monthly account late:-

“in the month after the month following the month of supply. …. Although it is not a desired situation, we have on numerous occasions when customers have requested, given an extension of time to pay their monthly accounts due to delays in their receipt of payment for work to which they have applied our materials.. ..  It has been my experience that only a small percentage of account sales are paid within 30 days of the month of supply.  I cannot recall a customer paying consistently within 30 days of the month of supply.  It has been my experience that payment after 60 days occurs often…”

1. Marsdens’ letter of 25 July shows that at the time of the 22 June meeting, substantial debts were outstanding for April and May.  The April account was over the 30 day limit.  That was the position when the $59,500 was paid.

1. So, in summary Mr Steggles’ concerns up to 30 June had extended over a ten week period, from mid-April to 30 June.

1. It is necessary to mention some things which Mr Steggles did not know.  There is no evidence that any information critical of Fondside had been given to him from any other of its trade creditors (Boral and Readymix “had no concerns” – it is uncertain when that was said).  Fondside had given him no dishonoured or post-dated cheques.  He had seen none of Fondside’s financial records.  At all times Fondside’s work on the pipeline continued, past 30 June and into July 2000.  The work appeared to be satisfactory.

1. On behalf of the liquidators, it was submitted that, they subjectively and objectively, Mr Steggles had reasonable suspicions about insolvency by 30 June.  He had carefully considered the possibility of insolvency during April, May and June.  He had already had experience of a bad debt associated with a Transfield pipeline job.  While he insisted that the growing level of the account was his concern, his real state of mind, and concerns (it was submitted) can be seen in his communications of 2 May, 16 May and 6 June.  The first expressed concern about the surprisingly high amount of the account.  The second asks for the additional security, as mentioned above.  It records the inability to pay because of the slow payments from the Transfield consortium.  It mentions the impact of some strike activity, and also the “extreme bad debt situation” of a few years ago.  There were threats to stop supply.  Then, on 6 June, there were complaints about payment arrangements not being met.  Once again, the emphasis was on the expected payments from Transfield.

1. (The fax of the same day to the Transfield consortium should be kept in mind – the whole purpose of it was to have Transfield ensure that Dunmore Sand and Soil received payment for its material.)

1. In addition, it is submitted, it was notable that contact could not be made in the days leading up to instructions being given to Marsdens.  The approach to the solicitors indicated great concern with Fondside’s credit worthiness during June.  Mr Steggles explanation for Marsdens’ “very strong letter” should be accepted – but the fact remains that the apparent instructions to Marsdens show reasons for concern on Mr Steggles’ part.

1. On behalf of Dunmore Sand and Soil, it was submitted that the slowness in payment was not unusual, and the role played by the Transfield consortium should be seen as the dominant reason for non-payment.  Otherwise, there are no external reasons for suspecting insolvency – such as gossip, or rumours in the trade, or information from other trade creditors, or company financial records, or payment with dishonoured or post-dated cheques.  On the contrary, the job was nearing an end and there were good reasons for thinking that both the Transfield consortium and Duke Energy wanted it finished as soon as possible.  There was no evidence of bad workmanship, on anybody’s part.

1. As Mr Steggles put it, “… with jobs like this the ability of a subcontractor to pay us for the materials they obtain is essentially only as good as the money flow that comes from the prime contractor, and accordingly we have many times tried to ensure that the money flows through so that we can be paid for the goods – but all the investigations I made about the company, the way they performed, Fondside made me feel that they were a company of substance, and that they would indeed pay their debts” (T.28 and 34).

1. It is important to appreciate that the concept of insolvency is defined in the Corporation in s.95A of the Corporations Law:

“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.

A person who is not solvent is insolvent.”

1. On 30 June, the April account was over the 30 day limit.  It was also clear that the May account would not be paid on time.  There had been discussions about that on 25 June, though they seem to have already fallen through, in that the written undertaking was not given.  Those discussions included a proposal that the May account be paid in equal instalments in July and August.

1. At the same time, it will be recalled that Mr Steggles had no other particular information about the financial standing of Fondside, such as any knowledge of its balance sheet.  What he knew was that which he emphasised more than once, and is illustrated by the passage quoted above – its ability to pay depended on its cash flow from the TMW group.  Mr Steggles knew that, at least in the case of his company, it could not pay all its debts as and when they fell due.  It was not as if there was some other explanation, such as a deliberate tactic of not paying Fondside.  The plain fact is, because the difficulty with TMW, they were not in a position to do so.

1. The surrounding facts have also to be considered.  The account was well over the agreed limit, and that limit was not abandoned by Mr Steggles.  He tried to insist that it be observed.  In the days up to 30 June, deliveries were on a COD basis.  He was conscious of a previous bad debt, arising out of a Transfield pipeline job.  There were difficulties in contacting the Fondside people.

1. It may be accepted that Mr Steggles acted in good faith.  However, he had reasonable grounds for suspecting that Fondside was insolvent at that time, or would become insolvent.  Indeed, because of the strict definition of insolvency, he actually knew that.

1. Even if that is not the right conclusion, then the reaction of a reasonable person in the same position has to be considered.  Dunmore Sand and Soil is not able to demonstrate that a reasonable person in its position would have had no such grounds for suspecting insolvency.

1. It follows that the company has been unable to make out the defence provided under s.588FG(2) of the Corporations Law.  It has participated in an insolvent transaction.  As there has been a preference, the money must be repaid to the liquidators, for the benefit of the creditors as a whole.

1. There will be judgment for the applicants against the respondent for the repayment of the amount of $59,000.

1. The parties should make any further submissions they wish about interest and costs.