Hastings Deering (Queensland) Pty Ltd v Starkey as Liquidator of Allan Fitzgerald Pty Ltd (in liq)

[1994] QCA 524

IN THE COURT OF APPEAL	[1994] QCA 524
SUPREME COURT OF QUEENSLAND	Appeal No. 257 of 1993
Brisbane
Before	Fitzgerald P. Davies J.A. Pincus J.A.

[Hastings Deering v. G.L. Starkey as Liq. of Allan

Fitzgerald Pty Ltd (In Liq.)]

BETWEEN:

HASTINGS DEERING (QUEENSLAND) PTY LTD

(Applicant) Appellant

AND:

GRAHAM LINDSAY STARKEY as Liquidator of

ALLAN FITZGERALD PTY LTD (IN LIQUIDATION)

(Respondent) Respondent

REASONS FOR JUDGMENT - FITZGERALD P. AND DAVIES J.A.

Judgment delivered 02/12/1994

This is an appeal from orders made in the Trial Division on 16 November 1993. It was (i) declared that payments totalling $519,771.97 made by Allan Fitzgerald Pty. Ltd. (in liquidation) ("AF") to the appellant, Hastings Deering (Queensland) Pty. Ltd., during the period from 14 October 1986 to 13 April 1987 are void as against the respondent Starkey, the liquidator of AF, pursuant to section 451 of the Companies (Queensland) Code, and (ii) ordered that the appellant forthwith pay that sum to the respondent together with interest. The appellant contends that the correct amount is not $519,771.97 but $214,650.81, and asks that the declaration and order be varied accordingly.

It was accepted for the appellant that (i) the winding-up of AF commenced on 13 April 1987 when the application for winding up on which the order was made was filed (Companies (Queensland) Code ss.365(1)); (ii) payments totalling $519,771.97 were made by AF to the appellant in the period of six months prior to that date; (iii) when those payments were made AF was unable to pay its debts as they became due from its own money; (iv) the appellant was not a payee in good faith and for valuable consideration and in the ordinary course of business; and (v) the payments had the effect of giving the appellant a preference, priority or advantage over other creditors. The dispute between the parties is as to the extent of that preference.

At all material times, AF was a construction and earthmoving contractor and the appellant supplied earthmoving equipment and spare parts and carried out maintenance and repairs on such equipment. There was a longstanding business relationship between the appellant and AF which, as at 13 November 1986, was indebted to the appellant for a considerable sum, for a large part of which payment was overdue.

On that day, a meeting took place between representatives of the appellant and AF. According to a memorandum that day prepared by one of the appellant's employees:

"... When we approached the client for settlement, we were advised that they were not in a position to meet that amount ...

In order to keep a close watch on the situation, we have closed his current trading account and re- opened a new No.2 account to cover purchases from this date with a maximum level of $20,000 per week.

The client was quite open about their current cash flow problems and advised that their own accountants estimated that the organisation has traded at a $800,000 loss for the first quarter of this financial year. ..."

A decision to "proceed with the cash flow plan as per [the] memo of November 13th" was confirmed in another memorandum of the following day. AF was notified by letter that day.

With minor, presently irrelevant exceptions, all further equipment and parts supplied and maintenance and repairs performed by the appellant were debited to AF's No.2 account but, except for a payment of $100,000.00 received on 10 April 1987, all amounts received by the appellant from AF were credited to the "closed" original trading account. The consequences may be briefly stated. During the material period, the indebtedness of AF to the appellant on the No.2 account grew to $422,057.71 and was reduced to $322,057.71 by the payment of $100,000.00 on 10 April 1987. Over the same period, the original trading account was reduced by the following payments aggregating $419,771.97 as follows:

14.11.86	$100.000.00
11.12.86	$ 75,786.65
23. 1.87	$100,000.00
2. 3.87	$100,000.00
24. 3.87	$ 43,985.32

The declaration and order made below relate to the total of the payments credited to the two accounts during the material period.

The primary judge said:

"What [the appellant] alleges is that at all material times there was a "running account" between it and [AF] and that, applying the principle derived from Queensland Bacon Pty. Ltd. v. Rees (1966) 115 C.L.R. 266 at 284-286, the extent of any preference is to be determined by considering the net effect of the operations on the account from the first impugned payment to the date of commencement of the liquidation. Counsel for [the appellant] submitted that if that was done in this case a preference in the sum of $93,572.19 would be established; but in order to achieve that result one had to amalgamate the two accounts ... . Counsel for the [respondent] contended that the evidence did not establish that this case fell within the "running account" category; but even if it did he contended that there was no basis upon which the court could amalgamate the accounts for that purpose. ... .

... I am not satisfied that the payments were made in conducting a running account between a purchaser and a supplier where there was a mutual assumption there would be a continuance of the relationship of purchaser and supplier with resultant continuance of the relation of debtor and creditor in the running account. There was, in my opinion, no running account; one could not describe [the original trading] account ... as a running account after 14th November - it had been closed.

On the evidence I am satisfied that all of the payments particularised in Schedule B were payments in reduction of a past indebtedness and had the effect of giving Hastings Deering a preference to the full amount of the payments received.

... ."

In its submissions to this Court, the appellant accepted that the figure of $214,650.81 should now be substituted for the figure of $93,572.19 mentioned in that passage.

The principal question which arises for decision is whether the "running account" principle has scope for operation when the debtor has not one, but two accounts with the creditor, one of which is, by arrangement, effectively closed to further debit entries but credited with all, or almost all, receipts, and the other of which contains all debit entries and no, or almost no, receipts. The primary judge appears to have thought not, and the respondent, while accepting that there was a "mutual assumption there would be a continuance of the relationship of purchaser and supplier with resultant continuance of the relationship of debtor and creditor ...", seeks to uphold that conclusion, arguing that the respective entries to the two separate accounts are inconsistent with the appellant's supply of goods and services to AF and AF's payments to the appellant being considered to be part of a single overall transaction.

Alternatively, it was submitted that, even if the running account principle is applicable, each account must be considered separately and the respondent can choose the highest indebtedness on each account within the material period and claim the difference between that amount and AF's indebtedness to the appellant as at the date of commencement of the winding-up. It was said that, on this approach, the declaration and order made by the primary judge would be correct, although for different reasons from those given by his Honour.

Counsel for the respondent sought to argue, by analogy with examples which he proposed, that separate accounts are indicative of separate transactions, not a single transaction, and it might be that, in some circumstances, the running account principle will not benefit a creditor who supplies goods or services or money on one account and is paid on another. I am not called upon to imagine all the various situations which might arise and express views upon them, and I do not do so. I will, however, illustrate my opinion that the respondent's proposition is too wide and too technical by one example.

Suppose that a customer has two accounts, A and B, with a bank, each with an overdraft limit of $50,000.00, and he operates on A exclusively for a period and reaches the agreed limit. Then, by agreement or otherwise, during what proves to be the preference period, all deposits are made to account A and all drawings are made from account B until a zero balance is reached in A and the overdraft limit is reached in B. Indeed, this could be done by a single cheque for $50,000.00 drawn on account B and paid into account A.

Plainly, there is no change in position between customer and banker, which is still owed $50,000.00. Yet, on the respondent's argument, the payments to account A give the banker a "preference priority or advantage over other creditors" of $50,000.00. This result, which may properly be described as unjust and absurd, is not required by authority and is an unlikely consequence of a principle which is intended to give practical commercial content to the statutory concept of "preference, priority or advantage".

If a supplier of goods and services is substituted for the banker (the supplier of money) in the example given, it is materially indistinguishable from the facts of this case. I should, I think, prefer the solution which is sensible to that which is not.

The running account principle is not concerned with the parties' book-keeping records or arrangements as to how their accounts will be kept but is based on the premise that, where an insolvent company and one of its creditors continue with both supply and payments and supply and payments are inter-dependent, or, as it is sometimes put, "integral parts of an entire transaction" (or an overall arrangement), both, and not merely the payments, are to be taken into account in determining the extent, if any, of the creditor's "preference, priority or advantage over other creditors". The principle is a recognition that, just as the other creditors are disadvantaged by the company's payments to the particular creditor, they are advantaged by that creditor's continuing supply to the company during the material period. And just as the creditor is advantaged by the payments, it is disadvantaged by its continuing to supply the company. The extent of any benefit is the net result of setting the advantage (payments) against disadvantage (supply).

In the circumstances, it has not been necessary to consider the further argument of counsel for the appellant based on section 86 of the Bankruptcy Act, 1966, (Commonwealth), the "mutual dealings" provision, which was recently considered by the High Court in Gye v. McIntyre (1991) 171 CLR 609.

It follows from what has been said that the appeal should be allowed with costs to be taxed and the declaration and order varied by substituting the sum of $214,650.81 for the sum of $519,771.97.

IN THE COURT OF APPEAL

SUPREME COURT OF QUEENSLAND	Appeal No. 257 of 1993
Brisbane

[Hastings Deering v. G.L. Starkey as Liq. of Allan Fitgerald

P/L (In Liq.)]

BETWEEN:

HASTINGS DEERING (QUEENSLAND) PTY LTD

(Applicant) Appellant

AND:

GRAHAM LINDSAY STARKEY as Liquidator of

ALLAN FITZGERALD PTY LTD (IN LIQUIDATION)

(Respondent) Respondent

FITZGERALD P.

DAVIES J.A. PINCUS J.A.

Judgment delivered 02/12/1994

JOINT REASONS FOR JUDGMENT OF FITZGERALD P. AND DAVIES J.A., PINCUS J.A. SEPARATELY. ALL CONCURRING AS TO THE ORDERS MADE.

APPEAL ALLOWED WITH COSTS TO BE TAXED. DECLARATION AND ORDER MADE BELOW VARIED BY SUBSTITUTING THE SUM OF $214,650.81 FOR THE SUM OF $519,771.97.

CATCHWORDS: BANKRUPTCY - Preferences - running account principle - debtor appellant continued to be supplied by creditor respondent whilst insolvent - original account with creditor closed and another account opened - receipts paid into original account only - continuing debits made out to second account only - whether each account must be considered separately - whether arrangement constituted a running account.

Counsel:	P.A. Keane Q.C.with him P.E. Hack for the Appellant W. Sofronoff Q.C. with him D.K. Smith for the Respondent
Solicitors:	Stephens and Tozer for the Appellant Sly & Weigall Cannan & Petersen for the Respondent

Date/s of Hearing: 27 May 1994

IN THE COURT OF APPEAL

SUPREME COURT OF QUEENSLAND

Appeal No. 257 of 1993.

Brisbane

Before Fitzgerald P.
Davies J.A.
Pincus J.A.

[Hastings Deering v. Starkey]

BETWEEN:

HASTINGS DEERING (QUEENSLAND)

PTY LTD

Appellant

AND:

GRAHAM LINDSAY STARKEY as Liquidator of ALLAN FITZGERALD PTY LTD (in liquidation)

Respondent

REASONS FOR JUDGMENT - PINCUS J.A.

Judgment delivered 02/12/1994

I have had the advantage of reading the joint reasons of the President and

Davies J.A., and agree with their Honours' conclusions.

The issue is broadly considered similar to that dealt with in CSR Limited v.

Starkey (C.A. No. 193 of 1993, 10 May 1994). Counsel for the respondent sought to

distinguish the earlier case on the basis that here there were at relevant times two

accounts recording the transactions between the parties, rather than one. As is pointed

out in the reasons of the President and Davies J.A., from the date of institution of the

two-account system, debits were put to the new account and credits, with one important exception, were taken off the old account. It is not clear what advantage this was

thought to bring; the reason recorded in the records of the appellant was "In order to

keep a close watch on the situation...". It does not appear that the use of two accounts

had any significance other than that suggested by the expression quoted, that is, to

make it easier for the creditor to see what was developing. Despite the opening of the

two accounts, the practical or substantial position remained unaltered and is not to be

distinguished from that found to exist in CSR Limited v. Starkey. It was not argued that

the reasoning which prevailed in the Starkey case is inapplicable for any reason other

than the existence of the two accounts; in particular it was not argued that here the

general body of creditors was not advantaged by the continuing supply to the debtor, or

was advantaged only to a limited extent - for example, on the basis of an argument that

the prices charged for supply to the debtor were excessive.

It is notable that the "running account" principle has been accorded statutory

recognition in recent amendments to the Corporations Law: see s. 553C, inserted by

the Corporate Law Reform Act No. 210 of 1992.

I would add with respect to the argument based on s. 86 of the Bankruptcy Act

1966, that there is authority in support of the view that such a provision does not operate

to save payments which would otherwise be void as preferences: see Calzaturificio

Zenith Pty Ltd v. N.S.W. Leather & Trading Co. Pty Ltd. [1970] V.R 605 at 618 and the

cases there cited.

I agree with the orders proposed by the President and Davies J.A..