In the matter of Alsafe Security Products Pty Ltd atf the Alsafe Trust (in liquidation)

[2016] NSWSC 428

Supreme Court

New South Wales

• Amendment notes

Medium Neutral Citation:	In the matter of Alsafe Security Products Pty Ltd atf the Alsafe Trust (in liquidation) [2016] NSWSC 428
Hearing dates:	18 March 2016
Decision date:	14 April 2016
Jurisdiction:	Equity - Corporations List
Before:	Black J
Decision:	Order that judgment be entered in favour of the First and Second Plaintiff in the amount of $97,628.58 and interest. Order that Defendant pay the First and Second Plaintiff’s costs of the proceedings as agreed or as assessed.
Catchwords:	CORPORATIONS — Voidable transactions — Application for orders under s 588FF of the Corporations Act 2001 (Cth) – where Defendant relied on defence under s 588FG(2) of the Corporations Act 2001 (Cth) – whether defence under s 588FG(2) of the Corporations Act 2001 (Cth) is established.
Legislation Cited:	- Corporations Act 2001 (Cth), ss 95A, 553C, 588FA, 588FC, 588FE, 588FF, 588FG - Evidence Act 1995 (Cth), s 136
Cases Cited:	- Airservices Australia v Ferrier [1996] HCA 54; (1996) 185 CLR 483 - Chicago Boot Co Pty Ltd v Davies & McIntosh as Joint & Several Liquidators of Harris Scarfe Ltd [2011] SASCFC 92; (2011) 85 ACSR 309 - Cook’s Constructions Pty Ltd v Brown [2004] NSWCA 105; 49 ACSR 62 - Cussen (as liquidator of Akai Pty Ltd (in liq)) v Cmr of Taxation [2004] NSWCA 383; (2004) 51 ACSR 530 - D’Aloia v Federal Commissioner of Taxation [2003] FCA 1336; (2003) 48 ACSR 204 - Dean-Willcocks v Cmr of Taxation [2004] NSWSC 1058; (2004) 51 ACSR 353 - Dean-Willcocks v Cmr of Taxation [2008] NSWSC 1113 - Downs Distributing Co Pty Ltd v Associated Blue Star Stores Pty Ltd (in liq) [1948] HCA 14; (1948) 76 CLR 463 - Harkness v Commonwealth Bank of Australia Ltd (1993) 12 ACSR 165 - Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298 - Kel Builders (Qld) Pty Ltd (in liq) v Brett Nash Electrics Pty Ltd [2001] QSC 178 - Kuhl v Zurich Financial Services Australia Ltd [2011] HCA 11; (2011) 243 CLR 361 - Mann v Sangria Pty Ltd [2001] NSWSC 172; (2001) 38 ACSR 307 - MSPR Pty Ltd v Advanced Braking Technology Ltd [2013] NSWCA 416 - Pegulan Floor Coverings Pty Ltd v Carter (1997) 24 ACSR 651 - Queensland Bacon Pty Ltd v Rees [1966] HCA 21; (1966) 115 CLR 266 - Sims v Celcast Pty Ltd (1998) 71 SASR 142 - Sutherland (as liquidator of Sydney Appliances Pty Ltd (in liq)) v Eurolinx Pty Ltd [2001] NSWSC 230; (2001) 37 ACSR 477 - Wily (in his capacity as liquidator of Goltep Constructions (NSW) Pty Ltd (in liq)) v Eastern - Elevators Pty Ltd [2003] NSWSC 377; (2003) 45 ACSR 261
Category:	Principal judgment
Parties:	Alsafe Security Products Pty Ltd atf The Alsafe Trust (in liquidation) (First Plaintiff) Terry Grant van der Velde as liquidator of Alsafe Security Products Pty Ltd atf The Alsafe Trust (in liquidation) (Second Plaintiff) Darley Aluminium Trading Pty Ltd (Defendant)
Representation:	Counsel: I J King (Plaintiffs) M Tovey (Defendant)   Solicitors: CLH Lawyers (Plaintiffs) M & A Lawyers (Defendant)
File Number(s):	2015/212070

Judgment

1. By Amended Originating Process filed on 3 November 2015, the Plaintiffs, Alsafe Security Products Pty Ltd (in liq) (“Company”) as trustee for the Alsafe Trust and its liquidator, Mr van der Velde, seek a declaration under ss 588FA, 588FC and 588FE of the Corporations Act 2001 (Cth) that payments totalling $97,628.58 to the Defendant, Darley Aluminium Trading Pty Ltd (“Darley”) constituted an unfair preference under s 588FA of the Corporations Act and are voidable transactions under s 588FE(2) of the Corporations Act. The Plaintiffs also seek an order under s 588FF(1)(a) of the Corporations Act for payment of that amount to the Company, together with interest and costs. I will set out the relevant statutory provisions below.

2. The Company’s principal business was the manufacture and installation of security doors and Darley supplied components for that business. Mr van der Velde, together with Mr Hathway, were appointed joint and several administrators of the Company on 24 July 2012 and were appointed joint and several liquidators of the Company on 25 October 2012. Mr Hathway resigned as liquidator on 1 October 2015, leaving Mr van der Velde as liquidator of the Company.

3. By a letter of demand dated 19 June 2015 from the liquidators to Darley (Ex A1, pp 2–9), they noted the trend of payments made outside trading terms by the Company to Darley, which recorded a deterioration in the time in which payments were made between November 2011 and January 2012, an improvement in that time, so that payments were made more promptly, in February 2012, and then a significant deterioration in that time from February 2012 until the Company was placed in administration in July 2012. That letter pointed to the fact, also established by other evidence, that the Company made payments to Darley in lump sum terms, not generally reconcilable to invoices, during the relation-back period. That letter also noted that it appeared from the Company’s records that Darley ceased supplying goods to the Company on credit terms from January 2012, when the debt owed to the Company was at its highest, and thereafter only continued trading with the Company on the basis that prepayment was made for goods prior to delivery. That letter also noted that the time in which payments were made by the Company to Darley was in excess of trading terms, ranging from 30 to 60 days between January 2012 and February 2012 and between 90 and 175 days between March and July 2012; that, as at January 2012, four invoices were outstanding dating back to October 2011; and, as at the date of the administrator’s appointment, 22 invoices were outstanding dating back to December 2012 and nine other invoices were outstanding dating back before the relation-back date. I do not understand these matters to be disputed.

The affidavit and documentary evidence

4. I should now refer to the Plaintiffs’ affidavit and other evidence, although the matters that much of that evidence sought to establish were not contested at the hearing. The Plaintiffs relied on an affidavit dated 17 July 2015 of Mr Stephen Hathway, who was previously joint and several liquidator of the Company. It appears that Mr Hathway was not available for cross-examination and that affidavit and the exhibit referred to in it were admitted with a limiting order under s 136 of the Evidence Act 1995 (Cth), as being the affidavit and exhibit referred to in Mr van der Velde’s and Mr Hudson’s affidavits, to which I refer below. Mr Hathway’s affidavit led evidence as to the payments made by the Company to Darley, the balance of the account as between the Company and Darley in the relevant period, and as to the Company’s solvency, and exhibited a report dated 19 June 2015 prepared by Mr Hathway further expanding on those matters. Mr Hathway indicated his view that the Company was insolvent on the balance sheet and cashflow tests at least during the relation-back period, a matter which is now not disputed; that the relevant payments were in the nature of preferences, a matter which is also now not disputed subject to the defence under s 588FG(2) of the Corporations Act; and identified matters on which the Plaintiffs rely to contend that Darley knew of, or had reasonable grounds to suspect, that the Company was insolvent at the time the relevant payments were made. Ms Tovey, who appeared for Darley, did not pursue specific objections to that affidavit given the limited basis on which it was read. The exhibit to Mr Hathway’s affidavit (Ex A1, 52ff) was largely directed to establishing the Company’s insolvency, a matter that is no longer in dispute.

5. The Plaintiffs also relied on an affidavit dated 11 March 2016 of Mr Terry van der Velde, who was appointed joint and several administrator of the Company and subsequently as joint and several liquidator of the Company with Mr Hathway. Mr van der Velde’s affidavit stated, relevantly, that he had read Mr Hathway’s affidavit and agreed with the statements, conclusions and contents of it and adopted those statements and conclusions as his own and that he had read Mr Hathway’s report and the documentation relied on in support of it, made inquiries of Mr Hudson, who was employed by his firm, regarding the preparation of that report and agreed with the concluding opinion that the Company was insolvent at all times from 30 June 2011 and 24 July 2012. For reasons indicated in an interlocutory judgment in the course of the hearing, I admitted that affidavit so far as it addressed the Company’s insolvency, and notwithstanding the lack of reasoning in Mr van der Velde’s (as distinct from Mr Hathway’s) evidence, under s 190 of the Evidence Act, so far as the Company’s insolvency was not genuinely in dispute in the proceedings. I admitted that affidavit, so far as it went to Darley’s defence under s 588FG(2) of the Corporations Act, with a limiting order under s 136 of the Evidence Act that it should be treated as a matter of submission only. The Plaintiffs also relied on the affidavit of Mr Matthew Hudson dated 11 March 2016. Mr Hudson had assisted in preparation of Mr Hathway’s report and supported the conclusion as to the Company’s insolvency set out in that report.

6. Darley ultimately relied only on a defence under s 588FG(2) of the Corporations Act. I now turn to the evidence led by Darley that is applicable to that defence. Darley relied on the affidavit dated 14 December 2015 of one of its directors, Mr Li. Parts of that affidavit were rejected for form, and other parts of it were admitted with limiting orders under s 136 of the Evidence Act as submissions only. Mr Li referred to Darley’s practice of applying payments made by the Company to the oldest invoices issued by Darley (Li 14.12.15 [10]). That evidence is significant, so far as an issue later arose as to the inferences to be drawn from the age of debts claimed in a proof of debt lodged by Darley in the Company’s liquidation. Mr Li’s evidence was that, between January 2010 and December 2011, the Company’s account with Darley was put “on hold” after the Company failed to make required payments by the due date and that, in that period, Darley received 92 payments from the Company, for rounded amounts from $1,000 to $30,000 and not linked to specific invoices (Li 14.12.15 [11]).

7. Mr Li also referred to other matters said to support Darley’s confidence in the Company, including evidence (admitted with a limiting order under s 136 of the Evidence Act as a submission only) that the Company had several projects running at various times including a government backed project to install products in a large number of houses in and around Orange in New South Wales; evidence (admitted as evidence of Mr Li’s understanding only) of Darley’s confidence in the Company; and evidence that the Company had a stand at the Sydney Home Show during the month of May 2012, was the sponsor of a local rugby league team and had expanded its warehouse premises to meet its customers’ demands. Mr Li’s evidence (also admitted as evidence of his understanding only) was that the Company:

“was expanding into new and exclusive products, sponsoring football teams and outwardly showed a very successful business, specifically during the period of January 2012 to July 2012.” (Li 14.12.15 [21])

8. Mr Li also referred to a decline in Darley’s sales to the Company from January 2012 and to his concern that the Company was acquiring supplies from a competitor to Darley, and to an increase in Darley’s “normal credit management process” in relation to its “high debt” with the Company, which he attributes to the fact that the Company was possibly using a competitor as a supplier. Mr Li’s evidence in cross-examination was that Darley’s trading terms were 30 days and that it was common for Darley to receive lump sum payments (T27). At a meeting of Darley’s management on 14 March 2012, the Company’s level of debt was discussed and Darley’s National Sales Manager agreed to follow up with the Company in respect of that matter (Ex P6, 3; T 35). Mr Li’s evidence in cross-examination was also that Darley would place a client on a credit hold when they are “over the term” (T36), indicating Darley’s recognition that the Company had been in an excess of its terms of payment for a substantial period.

9. Darley also relies on the affidavit dated 16 March 2016 of Mr Danny Kinny, its Sales Manager. Mr Kinny’s evidence is that, during the period from January to July 2012, there was “no difference” to the same period in previous years with respect to payments by the Company, and he refers to conversations with a principal of the Company in relation to lump sum payments. The proposition that there was no difference with respect to payments to previous years is difficult to reconcile with the apparent increase in the Company’s debt owed to Darley over that period; but, even if it were accepted, it does not assist Darley since it may indicate no more than that the Company was unable to pay its debts as and when they fell due for a longer period prior to it being placed in administration.

10. Mr Kinny also refers to other matters that, it seems to me, would have hardly have given confidence in the Company’s ability to pay its debts as and when they fell due, including that Darley reached a payment arrangement with the Company that it would pay Darley $1,000 daily towards the account (Kinny 16.3.16 [12]). Mr Kinny also refers to other matters, including that the Company had advertised in the Yellow Pages since 2007 and (in evidence admitted as evidence of his understanding only) had teams located in all parts of Sydney. These matters seem to me to be equally consistent with a company that was unable to pay its debts as and when they fell due as with a solvent company. Mr Kinny also refers to the Company moving to a bigger factory in mid-2011, a matter which he indicates suggested to him that the Company’s “business was continuing to grow and do well” (Kinny 16.3.16 [21]) and to the Company’s purchase of newer looking vans and substantial machinery, which (in evidence admitted with a limiting order under s 136 of the Evidence Act as evidence of his understanding) he considered was “a further sign that [the Company’s] business was growing and doing well” (Kinny 16.3.16 [22]). Mr Kinny’s evidence is also that the first occasion on which representatives of the Company gave him any indication of financial difficulty was when he was telephoned to advise that the Company was placed in voluntary administration in mid-2012 (Kinny 16.3.16 [28]). That evidence must be understood in the context that, if the Company’s representatives had not expressly advised Mr Kinny of that difficulty, there were nonetheless indicia of it including the long delays in payment of amounts due to Darley, the increase in the debt due to Darley over time and the fact that the Company was prepared to accede to arrangements for payment prior to delivery rather than pay the amounts due so as to have access to a credit facility with Darley.

11. Darley also relies on an affidavit of Ms Goyi (Rebecca) Li dated 16 March 2016. Ms Li was the company secretary, administration officer and office manager of Darley and the wife of one of Darley’s major shareholders. Her evidence is that she was heavily involved with accounts receivable and another employee was also part of the accounts receivable team. I note, for completeness, that Ms King submitted that the Court should draw an inference that the evidence of that other employee, who did not give evidence, would not have assisted Darley. Where a party would be expected to, but does not, call a witness who could give evidence on a relevant matter, and the failure to call that evidence is unexplained, an inference may in appropriate circumstances be drawn that the uncalled evidence would not have assisted the party’s case: Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298; Kuhl v Zurich Financial Services Australia Ltd [2011] HCA 11; (2011) 243 CLR 361 at [63]–[64] per Heydon, Crennan and Bell JJ; MSPR Pty Ltd v Advanced Braking Technology Ltd [2013] NSWCA 416 (at [53]) per Macfarlan JA (with whom Ward and Gleeson JJA agreed). It seems to me that inference is available and should be drawn.

12. Ms Li gave evidence of the “stop credit” function used by Darley’s accounting software in order to place a customer on credit hold. She gave evidence explaining the multiple references to “stop credit” in Darley’s accounting records, which were automatically generated by the process by which Darley amended the “credit hold” applied to the Company to permit the release of orders (Li 16.3.16 [11]; T43), typically when amounts were paid, usually in advance, for stock. While that evidence explains the existence of multiple references to “stop credit” in those accounting records, it otherwise does not assist Darley, since it emphasises the fact that the Company was in fact in that position throughout the relevant period, and that Darley made decisions whether to supply goods on an ongoing basis and, as noted below, generally on a cash before delivery basis. Ms Li, like Mr Kinny, led evidence (admitted with a limiting order under s 136 of the Evidence Act as to her understanding only) that the existence of Government contracts for the Company made her feel “confident about the business relationship” between Darley and the Company (Li 16.3.16 [21]). That evidence did not sit very comfortably with the fact that Darley had placed the Company on long term credit hold, notwithstanding that confidence.

13. Ms Li also referred to Mr Kinny and Mr Li having told her of the fact that the Company was developing new products, which were shown in an exhibition, presumably the Sydney Home Show, and (in evidence admitted with a limiting order under s 136 of the Evidence Act as her understanding) says that led her to believe that the Company “was growing its business” (Li 16.3.16 [22]). Ms Li also referred to conversations with a principal of Darley relating to payment arrangements of overdue accounts, including one occasion on which she requested a “payment so [Darley] can keep supplying”, following which she caused Darley to take the Company off credit hold (Li 16.3.16 [29]–[30]). I have had regard to the fact that Ms Li seeks to characterise conversations of that kind as commonplace in the relevant industry.

14. Ms Li’s evidence in cross-examination was that Darley would not extend credit to customers in an “extreme case”, that Darley’s usual terms of payment were 30 days although it typically allowed an extra 15 days for payment; and Ms Li then added that not extending credit to a customer was “very extreme and a little bit rare” (T41). That evidence emphasised the significance of the fact that Darley had placed the Company on terms that required payment prior to delivery from January 2012 until it was placed in administration. Ms Li later sought to qualify the reference to stopping credit being an “extreme circumstance” in re-examination, in somewhat confusing evidence, referring to the fact that Darley would normally allow more than 30 days for payment. I give little weight to that qualification.

15. The Plaintiffs also relied on Mr van der Velde’s further affidavit dated 16 March 2016, which annexed the supplier ledger for transactions between the Company and Darley from 1 December 2009 to 24 July 2012. That supplier ledger provides some support for the evidence led by Darley that, prior to the relation-back period, the Company had also made payments to Darley on a lump sum basis, although that does not establish the Company’s ability to pay its debts when they fell due, either in that earlier or later period. Significantly, the supplier ledger indicates that, during the relation back period, goods were typically supplied by Darley to the Company after payment of the relevant invoice, effectively on a cash before delivery basis, or, on at least one occasion, after a substantial lump sum payment had been made by the Company to reduce its indebtedness.

8. I should also refer to the other documentary evidence led in the proceedings. The Plaintiffs point out that all of the relevant documentation within Darley is not available, by reason of the migration of Darley’s email service from one provider to another in October 2013 (Ex P2). The Plaintiffs point out, and I accept, that that matter is neutral in the proceedings, and that no inference adverse to the Plaintiffs should be drawn from the absence of further documentation indicating Darley’s attitude to the Company’s solvency, where Darley could not produce that documentation.

9. The Plaintiffs relied on Darley’s proof of debt in the liquidation (Ex P8) to point to the age of outstanding debts, which dated back to December 2011. Ms Tovey responded by pointing to that proof of debt to submit that Darley cannot have been supplying on a cash on delivery basis, notwithstanding its invoices stating that it was doing so, because debts apparently referable to those invoices would not be claimed as unpaid in the proof of debt if it had done so. I do not accept that submission, since Mr Li’s evidence that amounts paid by the Company were applied to the earlier outstanding debts means that payments made on a cash on delivery basis would have been attributed to earlier debts, not to the goods supplied at a later point. A record of notes maintained in Darley’s accounting system (Ex P6) in turn contained numerous references to “stop credit”, which were explained by Ms Li’s evidence to which I have referred above; to overdue payments; to Darley’s release of particular orders from time to time; and to partial payments made by the Company. Invoices issued by Darley to the Company over the relevant period (Ex D1) recorded deliveries made to the Company with “credit terms” described as “cash before delivery”.

10. Several documents were tendered relating to Darley’s follow up of outstanding payments due by the Company. By email dated 30 April 2012 (Ex P4), Ms Li noted that the Company was not “buying lately” and had only made one payment of $5,000 on 24 April; and by email dated 30 April 2012, Ms Li wrote to Mr Kinny to the effect that:

“If [the Company] has $ to buy from [another supplier], can we make a payment plan that it can buy on COD plus extra payment towards old debt?”

Mr Kinny responded to Ms Li on the same date:

“I actually got this wrong Rebecca, sorry, I rang [the Company] he isn’t using [competitor] he is just using up existing stock, and if he does need something he pays COD from us. He said he has $330,000 outstanding, I suggested he might need to come out and see us, he said he would like to do that. [The Company] will pay the outstanding debt, I’m 100% sure.” (Ex P4)

I recognise that Mr Kinny’s evidence is consistent with his having confidence that, given time, the Company would ultimately pay down the amount due to Darley; however, it provides no support for any belief, or reasonable belief, that the Company was then able to pay its debts as and when they fell due.

19. On 1 May 2012, Ms Li followed up again, asking Mr Kinny to organise a payment plan and observing that:

“I am happy as long as we can see payments keep coming in. But now we have no idea as to when payments/how much is to be expected. For example, there were a few in March, but only one in April.

So it will be nice to keep us in the loop.” (Ex P4)

20. On 10 May 2012, Ms Li requested Mr Kinny to ask the Company “when they can make some extra payment towards old debt” and noted that no payment had been made since 20 April 2012 and, by email on the same day, Mr Kinny followed up with a principal of the Company as follows:

“[G]etting questioned by the owner of [Darley] re the outstanding money, could you reply by email so I can let her know how you [are] travelling” (Ex P3).

21. On 15 May 2012, the Company advised Mr Kinny that it had paid an additional $5,000 on Saturday and was waiting on payments coming to it; that payments from its project in Orange had “still not happened”; and that the Company did “not wish to suggest a payment plan and then not stick to it so would rather pay $1–$2K daily to keep chipping away at it” (Ex P7). Again, this advice provides no support for any belief, or reasonable belief, that the Company was able to pay its debts as and when they fell due. Mr Kinny maintained in cross-examination that none of the emails to which I have referred above encouraged him to think that the Company may be in financial difficulty (T39). It seems to me that Mr Kinny’s evidence in that respect is inconsistent with the objective probabilities and should not be accepted.

The elements of an unfair preference

22. Section 588FA of the Corporations Act provides as follows:

588FA Unfair preferences

(1)   A transaction is an unfair preference given by a company to a creditor of the company if, and only if:

(a)   the company and the creditor are parties to the transaction (even if someone else is also a party); and

(b)   the transaction results in the creditor receiving from the company, in respect of an unsecured debt that the company owes to the creditor, more than the creditor would receive from the company in respect of the debt if the transaction were set aside and the creditor were to prove for the debt in a winding up of the company;

even if the transaction is entered into, is given effect to, or is required to be given effect to, because of an order of an Australian court or a direction by an agency. …

23. Section 588FA(3) of the Corporations Act in turn deals with running accounts and provides that:

(3)   Where:

(a)   a transaction is, for commercial purposes, an integral part of a continuing business relationship (for example, a running account) between a company and a creditor of the company (including such a relationship to which other persons are parties); and

(b)   in the course of the relationship, the level of the company’s net indebtedness to the creditor is increased and reduced from time to time as the result of a series of transactions forming part of the relationship;

then:

(c)   subsection (1) applies in relation to all the transactions forming part of the relationship as if they together constituted a single transaction; and

(d)   the transaction referred to in paragraph (a) may only be taken to be an unfair preference given by the company to the creditor if, because of subsection (1) as applying because of paragraph (c) of this subsection, the single transaction referred to in the last‑mentioned paragraph is taken to be such an unfair preference.

24. It is common ground between the parties that, in the period 25 January 2012 to 24 July 2012, the Company made payments to Darley in the amount of $108,693.48 which, with the exception of one payment made on 25 May 2012, were made by electronic funds transfer. The majority of those payments were made by rounded amounts, the first in the amount of $15,000 and subsequent payments, for example, in amounts of $1,500, $2,000, $3,000 and $5,000, with some payments in specific amounts. Darley subsequently lodged a proof of debt in the Company’s liquidation of $76,203.69. The Plaintiffs plead that the relevant payments resulted in Darley receiving a greater return from the Company than it would have received if the transactions were set aside and it were to prove in the Company’s winding up. The Plaintiffs’ position is that, if the payments were set aside, Darley is not projected to receive a dividend in the Company’s liquidation, even if recoveries are made by the Plaintiffs with respect to other voidable transactions.

25. It is also now common ground between the parties that the account between the Company and Darley was a running account for the purposes of s 588FA(3) during the relation back period, in the sense that it was an active account running from day-to-day, rather than an account where further debts were not contemplated: Airservices Australia v Ferrier [1996] HCA 54; (1996) 185 CLR 483 at 504; Sutherland (as liquidator of Sydney Appliances Pty Ltd (in liq)) v Eurolinx Pty Ltd [2001] NSWSC 230; (2001) 37 ACSR 477 at [148]. It is also now common ground that, if Darley cannot succeed in establishing the defence on which it relies, to which I will return below, the amount recoverable by the Plaintiffs would be $97,628.58 together with interest.

26. The Plaintiffs plead that each of the payments constituted insolvent transactions within the meaning of s 588FC of the Corporations Act in that they were made while the Company was insolvent, or the Company became insolvent as a result of them. That section provides that:

588FC Insolvent transactions

A transaction of a company is an insolvent transaction of the company if, and only if, it is an unfair preference given by the company, or an uncommercial transaction of the company, and:

(a)   any of the following happens at a time when the company is insolvent:

(i)   the transaction is entered into; or

(ii)   an act is done, or an omission is made, for the purpose of giving effect to the transaction; or

(b)   the company becomes insolvent because of, or because of matters including:

(i)   entering into the transaction; or

(ii)   a person doing an act, or making an omission, for the purpose of giving effect to the transaction.

27. The Plaintiffs plead that, as at the date of each of the relevant payments and prior to that date, the Company was insolvent under s 95A of the Corporations Act. The Plaintiffs relied on balance sheet insolvency by reference to the Company’s balance sheet and current asset ratio analysis; defaults under payment arrangements entered with the Australian Taxation Office, the issue of garnishee notices by the Australian Taxation Office for unpaid taxation liabilities, letters of demand and ultimately a creditor’s statutory demand by the Australian Taxation Office in the relevant period; demands from Office of State Revenue in relation to outstanding payroll tax liabilities; the fact that a majority of the Company’s total trade creditors were paid outside trading terms as at 30 June 2011 and substantially all of those trade creditors were paid outside trading terms as at 24 July 2012; and contended there were insufficient cash resources to pay unsecured creditors as and when they fell due from at least 30 June 2011. Darley correctly accepted at the hearing that the Company’s insolvency had been established.

28. Section 588FE of the Corporations Act provides that a transaction is voidable if, relevantly, it is an insolvent transaction of the company and it was entered into, or an act was done for the purpose of giving effect to it during the 6 months ending on the relation‑back day. The Plaintiffs contend that each of the payments constituted a voidable transaction within the meaning of that section as each of them occurred during the relation-back period and each of the payments were insolvent transactions for the purposes of s 588FC of the Corporations Act. The concession as to the Company’s insolvency has the result that the payments were insolvent transactions. It is also now common ground that the relation-back day within the meaning of s 588FE(2) of the Corporations Act is 24 July 2012 and the payments were made within the relevant 6 month period.

29. Section 588FF of the Corporations Act in turn provides that, where, on the application of a company’s liquidator, a court is satisfied that a transaction of the company is voidable because of section 588FE, the court may, inter alia, make an order directing a person to pay to the company an amount equal to some or all of the money that the company has paid under the transaction.

Darley’s defence under s 588FG(2) of the Corporations Act

30. By paragraph 18 of its Defence, Darley pleads an affirmative defence under s 588FG(2) of the Corporations Act. I have referred to the evidence on which Darley relies in respect of that defence above. A further issue as to set-off under s 553C of the Corporations Act initially raised by Darley by way of defence was not pressed at the hearing.

31. Subsection 588FG(2) of the Corporations Act provides:

(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 588FC(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.

32. Darley bears the onus of establishing the defence under s 588FG(2) and, in order to do so, must establish that it had received each payment from the Company in good faith (subs (2)(a)); at the time of each payment it did not have reasonable grounds for suspecting that the Company was insolvent or would become insolvent by reason of making the payment (subs (2)(b)(i)); at the time of each payment a reasonable person in its circumstances would not have had reasonable grounds for such a suspicion (subs (2)(b)(ii)); and it had provided valuable consideration for the payments (subs (2)(c)): Chicago Boot Co Pty Ltd v Davies & McIntosh as Joint & Several Liquidators of Harris Scarfe Ltd [2011] SASCFC 92; (2011) 85 ACSR 309 (“Chicago Boot”) at [17]. The first of those matters was accepted by the Plaintiffs; the fourth is satisfied by the supply of goods by Darley to the Company; and the second and third were in issue.

33. The test under s 588FG(2)(b)(i) is hybrid in character, since it is directed to whether the particular creditor, with its perspicacity, the information available to it, and with any analysis of that information that it had made, had “no reasonable grounds” for suspecting insolvency at the relevant time, and the requirement for “no reasonable grounds” is objective in character: Sims v Celcast Pty Ltd (1998) 71 SASR 142 at 146; Cook’s Constructions Pty Ltd v Brown [2004] NSWCA 105; 49 ACSR 62 at [45]; Chicago Boot above at [21].

34. The test under s 588FG(2)(b)(ii) is objective in character, and is directed to whether a reasonable person in the creditor’s circumstances, using the information reasonably available in those circumstances and making the analysis of that information which a reasonable person would make, would have had reasonable grounds to suspect the debtor’s insolvency: Pegulan Floor Coverings Pty Ltd v Carter (1997) 24 ACSR 651; Dean-Willcocks v Cmr of Taxation [2004] NSWSC 1058; (2004) 51 ACSR 353; Cussen (as liquidator of Akai Pty Ltd (in liq)) v Cmr of Taxation [2004] NSWCA 383; (2004) 51 ACSR 530; Sims v Celcast Pty Ltd above at 146; Chicago Boot above at [21]–[22]. That matter will be determined by reference to a person who has the knowledge and experience of an average businessperson: Harkness v Commonwealth Bank of Australia Ltd (1993) 12 ACSR 165 at 167–169. In Sutherland (as liquidator of Sydney Appliances Pty Ltd (in liq)) v Eurolinx Pty Ltd above, Santow J observed (at [43]) that whether a reasonable person would have suspected insolvency is to be assessed by reference to all the circumstances and that:

“The case law illustrates that there is no single factor whose presence invariably establishes that there was, or should have been, the requisite suspicion. Rather it is a question of looking not in hindsight but through the contemporary eyes of the parties, at the commercial circumstances then prevailing between them. This is to identify in that context those factors pointing towards insolvency of the debtor. This in turn is in order to ascertain which of those factors were apparent to the payee, and then the cumulative impact that knowledge of them should have had, or did have, upon the payee. There will also be potentially countervailing factors and circumstances to be weighed in the balance which could have tended to dispel suspicion at the time.”

In Pegulan Floor Coverings Pty Ltdv Carter above at 658, Doyle CJ observed that the requirement to establish the negative under s 588FG(2)(b)(ii) was a fairly demanding test.

35. In D’Aloia v Federal Commissioner of Taxation [2003] FCA 1336; (2003) 48 ACSR 204, Merkel J observed (at [18]) that:

“Although differing views have been expressed as to the precise ambit of the tests in s 588FG(2)(b)(i) and (ii) it is clear that the test in subpara (b)(i) is essentially a subjective test (albeit based on objective criteria) insofar as it requires consideration of whether the person “had” any grounds for suspecting insolvency whilst the test in subpara (b)(ii) is an objective test, as it requires consideration of whether a reasonable person in the Commissioner’s circumstances had any reasonable grounds for suspecting insolvency. If the [defendant] fails to establish his defence under subpara (b)(i) it would usually follow that he must also fail under subpara (b)(ii) …”

In Dean-Willcocks v Cmr of Taxation [2008] NSWSC 1113 at [10], Barrett J endorsed a similar observation of Bryson J in Mann v Sangria Pty Ltd [2001] NSWSC 172; (2001) 38 ACSR 307 at [46] that the inquiries specified in s 588FG(2)(b)(i)–(ii) would rarely produce different results, unless a person’s actual frame of mind was affected by matters to which reasonable persons would not have had regard.

36. As Ms Tovey points out, the concept of “suspect” used in s 588FG(2)(b) requires more than wondering whether a matter exists or not, and involves a “positive feeling of actual apprehension or mistrust” that the debtor will be able to pay its debts: Queensland Bacon Pty Ltd v Rees [1966] HCA 21; (1966) 115 CLR 266 at 303; Chicago Boot above at [20]. Ms Tovey also submits that instalment payments are not, by themselves, a reason to suspect insolvency and also noted that lateness of payments were not necessarily indicia of insolvency, and refers to the relevance of common industry practice: Pegulan Floor Coverings Pty Ltd v Carter above; Kel Builders (Qld) Pty Ltd (in liq) v Brett Nash Electrics Pty Ltd [2001] QSC 178. I recognise that, in Pegulan Floor Coverings Pty Ltd v Carter above, Doyle CJ noted that instalment payments did not, in themselves, necessarily indicate insolvency where they were industry practice, although his Honour there held that such payment and other factors were together sufficient to establish a suspicion of insolvency. In Wily (in his capacity as liquidator of Goltep Constructions (NSW) Pty Ltd (in liq)) v Eastern Elevators Pty Ltd [2003] NSWSC 377; (2003) 45 ACSR 261 at [35], Dunford J also noted that the use of instalment payments would not necessarily be crucial, where they are a practice in an industry. However, that proposition depends upon evidence of such an industry practice. The evidence in this case did not establish the existence of any industry practice consistent with the accumulation of debt and lengthy delays of payment in respect of the Company to which I have referred above.

The parties’ submissions and findings

37. In her written submissions, Ms Tovey submits that:

“When [Darley] received each of the payments, it had no knowledge that a preference was being given. Between January 2010 and December 2011, [Darley] received 92 payments from the [Company]. Each [payment] was of a rounded amount and not in payment of specific invoices. The payments claimed by the plaintiffs were no different. There were lump sum payments in round figures, attributable to particular invoices. The controlling mind of [Darley] Mr Li, nor those who reported to him, believed in his or her own mind that there was any need to question each [of] the payments.”

38. Ms Tovey also submits that a suspicion of insolvency, or a reasonable basis for such a suspicion, is displaced by the fact that Darley received payments from the Company over an earlier period in “identical fashion” to those now claimed by the Plaintiffs; was not on notice of any change in the trading relationship or that that pattern of payment was indicative of insolvency or potential insolvency; common industry practice; and the Company’s explanation that it was waiting on payments due to it and representations made by the Company to Darley as to its viability and corporate health. In particular Ms Tovey refers to the Company’s successful tender for a government project at Orange, its relocation to bigger premises in late 2011 or early 2012, its purchase of new machinery, its presence at the 2012 Sydney Home Show and its sponsorship of Manly Rugby Football Club, the matters addressed in Mr Kinny’s and Ms Li’s evidence to which I referred above.

38. Ms Tovey, in her oral opening, also submitted that Darley’s case was that it operates in the building industry where “trading and credit terms are very flexible” (T6) and that the arrangement between the Company and Darley was one of ongoing supply for a period of over seven years, and during that period payments were made on an ad hoc basis and purchase orders were filled by Darley upon the Company’s request. Ms Tovey also submitted that Darley “simply never had any suspicion that the arrangement between them was one that was otherwise of normal credit terms” (T6). With all respect to these submissions, it did not seem to me that the evidence or the correspondence to which I have referred above suggested that the arrangement between the parties was continuing in its ordinary course, after Darley placed the Company on credit hold and required payment prior to delivery, and in circumstances that Darley was pressing for entry into a payment arrangement and the Company was making small payments on a daily basis. There is no evidence that the relationship between the Company and Darley was of that character over the seven year period to which Ms Tovey referred, still less that the building industry generally operates on such terms.

39. Ms Tovey also submitted in closing submissions that, if Darley was concerned as to insolvency, it simply would have stopped trading with the Company and that direction was not given (T55). I do not accept that submission, since it would be rational commercial behaviour of a party that was concerned as to insolvency of a customer to continue to supply, on the basis of payment before delivery, and take any opportunity of regular payments to reduce its debt rather than simply to sever its relationship with that customer.

40. The Plaintiffs rely, in response to Darley’s reliance on the defence under s 588FG(2) of the Corporations Act, on the fact that the Company was not paying invoices in a timely manner or in accordance with trading terms; its account had been placed “on hold” from January 2010 to December 2011; the account came off hold in January 2012 with two payments in that month; and also refer to aspects of Darley’s credit management in respect of the Company. The Plaintiffs also rely on an email dated 30 April 2012 (Ex P4) from Mr Kinny, the sales manager for Darley with contact with the Company, noting that the Company was “struggling to get money in” and to the Company’s response to a payment plan suggested by Darley on 1 May 2012 that the Company “[did] not wish to suggest a payment plan and then not stick to it” (Ex P7). Ms King also submitted, in oral closing submissions, that Mr Kinny’s subjective belief as to the financial circumstances of the Company was not relevant to the Court’s consideration of whether a reasonable person in Darley’s circumstances would have suspected insolvency, in the sense that the Company could not pay its debts as and when they fell due.

41. In summary, Darley had placed the Company on “credit hold” for approximately two years; that had arisen from the Company’s failure to make payment of a substantial amount over that period; the Company was generally paying rounded amounts not linked to specified invoices; and the Company was generally being supplied by Darley on a cash before delivery basis, rather than discharging its outstanding debt so as to have access to credit facilities. It seems to me that a reasonable person in Darley’s position would not merely have thought that it was possible that the Company was not able to pay its debts as and when they fell due, but the history of its not having done so in respect of its dealings with Darley, and the other matters referred to above, would have led a reasonable person to an actual apprehension or fear that the Company could not pay those debts when due such that it was insolvent. Even if the Company’s involvement in the Orange project, its attendance at the Sydney Home Show and its sponsorship of the Manly Rugby Football Club tended to indicate the Company’s “success” to Ms Li and Mr Kinny, it does not seem to me that those matters would have displaced a reasonable person’s suspicion that the Company could not pay its debts as and when they fell due, given its actual payment record in respect of Darley and the other matters to which I have referred. A reasonable person would have understood that the former matters were, at best, equally consistent with solvency and a continuation of the Company’s business notwithstanding its inability to pay its debts as and when they fell due.

42. In these circumstances, it is not necessary to determine whether Mr Li’s, Mr Kinny’s and Ms Li’s evidence as to the beliefs they subjectively held should be accepted. It is not necessary to determine that matter because I am satisfied that, given the matters to which I have referred, Darley had reasonable grounds for suspecting that the Company was insolvent, in the usual sense that it could not pay its debts (including to Darley) as and when they fell due for the purposes of s 588FG(2)(b)(i) of the Corporations Act, even if the evidence of Mr Li, Mr Kinny and Ms Li that they subjectively did not form that suspicion could be accepted. I am also satisfied that, given those matters, a reasonable person in Darley’s circumstances would also have had such grounds for so suspecting for the purposes of s 588FG(2)(b)(ii) of the Corporations Act. Darley has therefore not established a defence under s 588FG(2) of the Corporations Act. There should be judgment in favour of the Plaintiffs in the amount of $97,628.58 and interest. The Defendant must pay the Plaintiffs’ costs of the proceedings as agreed or as assessed.

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Amendments

02 May 2016 - Paragraph 1, line 5: Typographical error.

Paragraph 24, line 3: Typographical error.

Decision last updated: 02 May 2016