Lindsay Maxsted & Michael Dwyer (Joint Liquidators of Harris Scarfe Ltd) v HP Launder Holdings Australia P/L - [2006] SADC 130

DISTRICT COURT OF SOUTH AUSTRALIA
(Civil)
LINDSAY MAXSTED & MICHAEL DWYER (JOINT LIQUIDATORS OF HARRIS SCARFE LTD) & ANOR v HP LAUNDER HOLDINGS AUSTRALIA P/L
[2006] SADC 130
Judgment of His Honour Judge Lovell
6 December 2006
CORPORATIONS - WINDING UP - WINDING UP IN INSOLVENCY
INSOLVENCY - PREFERENCES - DEFENCES - WHETHER REASONABLE CAUSE TO SUSPECT - RUNNING ACCOUNT
Payments made by supplier were unfair preferences, insolvent transactions and voidable transactions – whether supplier had no reasonable grounds for suspecting Harris Scarfe was insolvent – whether a reasonable person in its circumstances would have had no such grounds for so suspecting – defence not established – cessation of mutual assumption of supply and payment on running account.
Corporations Act 2001 ss 9, 95A, 588FA, 588FA(1), 588FA(3), 588FC, 588FE, 588FF, 588FG, 588FG(2), 588FG(2)(a), 588FG(2)(b), 588FG(2)(c), referred to.
Sims v Celcast Pty Ltd (1998) 71 SASR 142; Sutherland v Eurolinx Pty Ltd (2001) 37 ACSR 477; Re Ermayne Pty Ltd; Sims v Tech Holdings Pty Ltd (1999) 30 ACSR 330; Tectron Industries Pty Ltd v Taylor [2006] SASC 175, discussed.

LINDSAY MAXSTED & MICHAEL DWYER (JOINT LIQUIDATORS OF HARRIS SCARFE LTD) & ANOR v HP LAUNDER HOLDINGS AUSTRALIA P/L
[2006] SADC 130
Overview

The Plaintiff companies (in liquidation) are both part of the Harris Scarfe group. Harris Scarfe Limited (HSL) was the retailing entity within the group. Harris Scarfe Wholesale Pty Ltd (HSW) was the entity that adopted the wholesale role supplying to Harris Scarfe Ltd.
Other than matters of formal proof (eg Ex P6) it was agreed that for the purposes of this matter nothing turned on the difference between the two entities; accordingly I will refer generally to the Plaintiffs as Harris Scarfe during the course of these reasons. The Defendant made no distinction in its evidence between the two entities.
The liquidator challenges a series of payments for goods supplied on credit. The payments were made on four separate occasions. By HSW there was one payment made on 20 October 2000, one on 27 October 2000 and two payments on 11 December 2000. By HSL there were two payments on 11 December 2000 and two payments on 29 March 2000. Thus the relevant dates of the receipt of payments were 20 October 2000 (1), 27 October 2000 (1), 11 December 2000 (4) and 29 March 2001 (2). It was conceded that all payments were preferences made by an insolvent company. The primary point in issue was whether the Defendant could make out the “good faith” defence within s 588FG (2) of the Corporations Law (The Act).
Background
Harris Scarfe was and currently is a well recognised company in South Australia (T 22). It has been operating for more than 150 years. Between 1994 and 2001 it expanded from one store to 35 stores (T 23). In late November 2000 or early December 2000 Harris Scarfe purchased the company D-Store which was an internet business. The value of the transaction was $3 million of which there was a cash component of approximately $500,000.
Harris Scarfe went into voluntary administration on 3 April 2001. It had been insolvent from 31 July 2000 (Ex P4).
HP Launder Pty Ltd had been a long established company in Melbourne. It was originally a manufacturer of fashion jewellery but more lately had been importing the product and on selling it to department stores, jewellery stores and gift stores (T 44). It had traded with Harris Scarfe for 15-20 years. Swarovski Australia Pty Ltd was, before 2000, the major shareholder of HP Launder. Swarovski is the largest manufacturer of crystal in the world as well as producing high precision binoculars and telescopic sights (T 42). In 1999 a decision was taken to merge HP Launder and Swarovski. Swarovski took up exclusive shareholding of HP Launder on 1 January 2001 (T 87). This had the effect that the management of HP Launder would then be undertaken by the management of Swarovski; the operation would be run from Sydney by the end of January 2001 rather than Melbourne. A large proportion of the staff of HP Launder were retrenched by the middle of 2000: this left the HP Launder operations in Melbourne understaffed. What was retained in Melbourne was the finance and administration of the business as well as the wholesale business of HP Launder (T 43).
Pleadings
The Plaintiffs alleged that in effect the transactions mentioned were either unfair preferences (s 588FA) and/or uncommercial transactions (s 588FB). Thus they were insolvent transactions with in the meaning of s 588FC. They became voidable transactions (s 588FE) as they were entered into, or an act was done for the purpose of giving effect to them during the six months ending on the relation back day. The 3^rd of April 2001 being the date of the appointment of the original plaintiffs as Joint and Several Administrators of the Harris Scarfe Group of companies is the relation back day within the meaning of s 9 of the Corporations Law.
Initially the Defendant admitted that it received the payments but denied that the transactions were insolvent transactions. It also asserted in the alternative that if they were “insolvent transactions” the Defendant could rely on the “good faith” defence pursuant to s 588FG of the Corporations Law. Further it asserted that it could also rely on the “running account” defence.
Non Contentious Issues
Either by admissions or through the uncontested evidence of Mr Davies most issues that were not admitted on the pleadings were conceded.
Prior to trial, by letter of 1 December 2005 from the Defendant’s solicitors to the Plaintiff’s solicitors, it was conceded by the Defendant that the “relevant Harris Scarfe entities were unable to pay their debts as and when they fell due from 31 July 2000. Accordingly, HP Launder Holdings (Aust) Pty Ltd accepts that the date of insolvency is 31 July 2000” (Ex P4).
The “relation back” day within the meaning of s 9 of the Corporations Law is 3 April 2001.
There is no issue that at the time of each payment the Defendant was an unsecured creditor of Harris Scarfe.
There is no issue that each of the payments totalling $132,940.71 was made within six months of the relation back day.
There is no issue that as a result of the payments received by the Defendant from Harris Scarfe the Defendant has been preferred, in that the Defendant has received more than it would receive from Harris Scarfe in respect of the payments if the payments were set aside and the Defendant was required to prove for the payments in the winding up of Harris Scarfe.
There is no issue that to the extent that the Defendant provided goods to Harris Scarfe, it provided valuable consideration.
There was no issue that the Defendant became a party to the transactions in “good faith” for the purposes of s 588FG(2)(a).
Thus I find that the relevant transactions are:
· Unfair preferences within the meaning of s 588FA of the Act.
· Insolvent transactions with the meaning of s 588FC of the Act in that the transactions were entered into at a time when Harris Scarfe was insolvent.
· Voidable transactions within the meaning of s 588FE of the Act.
The main issue was could the Defendant rely on the “good faith” defence. Also in issue was the question of whether a “running account” existed through the relevant period. By letter of 6 July 2006 from the Plaintiffs’ solicitors to the Defendant’s solicitors it was noted that the Defendant had pleaded that the transactions with Harris Scarfe had formed an integral part of a continuing business relationship or running account and that all the transactions form a single transaction comprising a payment of $108,666.77. For the purpose of this trial, without conceding there was a running account existing, the total of $108,666.77 as pleaded by the Defendant was admitted.
Law
As mentioned only two issues remained at trial. Had the Defendant proved the “good faith” defence and if it had not, could the Defendant avail itself of the “running account” provisions.
The onus is on the Defendant in the proceedings to satisfy the court that; (1) it had no reasonable grounds for suspecting Harris Scarfe was insolvent at that time; and (2) that a reasonable person in the Defendant’s circumstances would have had no such grounds for so suspecting. The relevant time is when the payment is received.
The two branches of the test have caused some difficulties in interpretation. However the weight of authority treats s 588FG(2)(b)(i) as setting up a subjective test with an objective element while s 588FG(2)(b)(ii) establishes an objective test.[1]^&[2]
[1] Sims v Celcast Pty Ltd (1998) 71 SASR 142
[2] Sutherland v Eurolinx Pty Ltd (2001) 37 ACSR 477
The state of mind of the Defendant’s officers and the reasons put forward for their assessment of the Plaintiffs’ financial position are relevant as to whether the requirements of subpar (b)(i) are met. The provisions of subpar (b)(ii) require the court to look at the position through the eyes of a hypothetical person. The evidence of the creditors knowledge and business qualifications may be used in a limited way for establishing “the persons circumstances” which are brought to account in applying the test contained in subpar (b)(ii), however the creditors subjective appreciation of the facts will not be relevant unless that appreciation reflects that which would be expected by the “reasonable person”.[3]
[3] Sims v Celcast Pty Ltd (1998) 71 SASR 142 at 144
It is difficult to ascertain the intention, state of knowledge or purpose of a corporation. The question is always one of fact and it may be necessary to look at the acts and words of a number of people in order to ascertain the state of mind of a corporation.
As Moffitt P said in Parramatta City Council v Hale:[4]
Proof of a state of mind whether of a person or collegiate body may be a matter of difficulty, but the person, who seeks under s 123 to bring down a decision, must discharge that onus however difficult that may be and he must do so in accordance with proper legal requirements and by inference not suspicion. … The question whether a particular inference should be drawn as to a person's or body's state of mind should be resolved by a consideration of the whole of the relevant evidence.
[4] (1982) 47 LGRA 319 at 345
As mentioned the onus here is on the Defendant. And as Young CJ stated in Cook’s Construction Pty Ltd v Brown[5] in relation to this section:
In cases such as the present the problem is worse than the traditional problem because the appellant has to prove a negative, that is that it had no reasonable grounds for suspecting insolvency.
[5] 49 ACSR 62
An insolvent company is one that is unable to pay all its debts as and when they become due and payable. A suspicion that something exists is more than a mere 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”.[6]
[6] Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266 at 303, per Kitto J
There is no single factor whose presence invariably establishes that there was, or should have been, the requisite suspicion. 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 to identify in that context those factors pointing towards insolvency. Cash flow problems can be indicative of or raise a suspicion of insolvency although not necessarily so. It is a matter of ascertaining the factors which were apparent to the payee, and then the cumulative impact that knowledge of them should have had, or did have upon the payee[7]^,[8]. It also must be borne in mind that there may be potentially countervailing factors and circumstances to be weighed in the balance which could tend to dispel suspicion at the time. The use of instalment payments or post dated cheques is not necessarily crucial by itself particularly where they are a practice in the industry.[9]
[7] Re Ermayne Pty Ltd; Sims v Tech Holdings Pty Ltd (1999) 30 ACSR 330
[8] Sutherland v Eurolinx Pty Ltd 37 ACSR 477
[9] Wily (as liquidator) v Eastern Elevators Pty Ltd [2003] NSWSC 377
Who could the Defendant have called to give evidence?
Mr Kirchler, at the time of trial, was the General Manger of Swarovski. He had been employed by Swarovski since 1999. He was the only witness called by the Defendant.
In 2000 he was General Manager Wholesale for both HP Launder and Swarovski. His role involved overseeing the relationship with the customers including sales, terms, level of stock and also the accounts and payment of the accounts (T 44). Whilst he had no personal contact with Harris Scarfe until about 25 May 2000 he was generally aware that it was a long established company: he made no differentiation between Harris Scarfe and other big department stores (T 45).
Before he took up the role of General Manager Wholesale in January 2000 Mr George Chan was in charge of that role and he had dealings with Harris Scarfe (T 89). Mr Chan had worked for HP Launder for 20 years before Mr Kirchler became involved (T 95). Mr Chan was the Director of Finance and Administration reporting to the Managing Director Mr Daddo. The Accounts Receivable Department reported to Mr Chan.
After Mr Kirchler took up his position in 2000 he took over part of the job of Mr Chan. Although it was not clearly explained, it appears that Mr Chan was relieved of some of his responsibilities but retained others (T 92). What is of importance however is the fact that Mr Chan retained that part of his position that meant the Accounts Receivable Department still reported to him. As Mr Kirchler put it the “accounts receivable was under finance and administration. However it was my responsibility at the end … “should anything get out of hand, to deal with the issue.”
If something unusual happened he would get involved (T 93 and 120). This evidence of Mr Kirchler is supported by other exhibits which clearly show that Mr Chan continued to deal with Harris Scarfe during the relevant period (in particular see Ex D4 and D12).
Although it is not entirely clear, and indeed Mr Chan was at the “same level” (T 93) in management as Mr Kirchler, I infer that it was Mr Kirchler’s role to become more involved with difficult matters handled by Mr Chan due to his previous employment with Swarovski.
After Mr Kirchler became General Manager Wholesale, there was only one person in the Accounts Receivable Department who looked after the collections – Ms Pat Heale (T 99). She was the person who had the dealings with Harris Scarfe on a daily basis until she took a redundancy package in December 2000 (T 99). Her place was taken by a lady named Veronica (surname unknown) who worked at Accounts Receivable for Swarosvki in Sydney (T 100). When asked about whether they had regular contact with Harris Scarfe Mr Kirchler stated that he did not know (T 100). He did not know whom Ms Heale may have been dealing with at Harris Scarfe (T 101). Other than Ms Scott he did not know whom Mr Chan may have been dealing with from Harris Scarfe although he was aware from other documents that he was having contact with people (Ex D12) (T 102).
Mr Kirchler did not have the day to day running of the Harris Scarfe account. There were very few documents available to the Defendant. This I was told was due to a significant problem with their computer. Mr Kirchler was left to speculate on issues which I mention later. He said he only became involved if things “got out of hand”. There were significant gaps in his evidence. I do not criticise Mr Kirchler for that; he just did not have the information. It is likely to have been in the possession of Mr Chan and Ms Heale. In my view at the very least Mr Chan should have been called. If he was not available Ms Heale should have been called.
It was argued by the Defendant that it was only necessary to call Mr Kirchler as he was in effect the “mind” of the company at the relevant times.
Given the issues to be decided I find that calling only Mr Kirchler was not sufficient. He was not in possession of the relevant information particularly as to the previous dealings with Harris Scarfe and the method of payment which was unusual. It involved writing a cheque and then putting it “in the drawer” for many months before sending it. Indeed at the time of the receipt of the first two relevant payments Mr Kirchler was not even aware of “unusual” method of payment. Mr Kirchler simply did not have information of the payment of the accounts that had occurred during the previous years. Were they monthly or quarterly? Were the payments regular but late? What was the pattern? He was not able to assist the court as to how previous payments had been applied to the outstanding amounts. I was left with no evidence for example as to whether any payments had been allocated to the January 2000 account at any time or whether it had simply remained unpaid. How the payments made in 2000 were allocated was not made clear although some monthly totals were cleared. Why those months were selected and not others was not explained. General evidence from Mr Kirchler about problems with “reconciling” the accounts was not particularly helpful (T 59 and 65). Once again I am not being critical of Mr Kirchler; he simply did not have the information.
I do not accept that Mr Kirchler was the “mind” of the Defendant at the relevant times. His evidence and assessment of matters is relevant but not conclusive as to the subjective element contained in s 588FG(2)(b)(i) of the Act and the state of knowledge of the Defendant generally.
I do not draw any inference against the Defendant for the failure to call any witness. The absence of the witnesses simply means that there may have been a failure to call sufficient evidence to establish on the balance of probabilities the necessary elements of the defence. However as there was some evidence given about the “whereabouts” of the witnesses mentioned I make the following observations.
In January 2001 the HP Launder offices closed in Melbourne (T 77). There was a problem with the computer system which meant that invoices could not be sent for one month. Mr Kirchler’s time was spent on that problem (T 77). Mr Chan remained until the end of the first quarter of 2001 tidying up loose ends which clearly included the Harris Scarfe matter (T 78). When he left his position was taken by Mr M Angst (T 105).
Mr Chan was offered a position in Sydney which he did not take up and he eventually took up a redundancy package that was offered (T 78). This apparently left him bitter according to Mr Kirchler. Attempts were made to find a method of contacting him but without success (T 78). They were rather feeble attempts given what later transpired. Mr Kirchler, when shown Ex P1, the historical extract of the Defendant company was unable to say if Mr Chan was still living at the address shown in Ex P1 (T 96). He stated that he had asked Mr Tran the current Finance and Administration Manager of the whereabouts and was told that they had no address, workplace or mobile number by which they could locate him (T 96 and 122). No one had been to check if he was still living at the address shown in Ex P1 (T 121). No one to his knowledge in the defendant company had performed an historical personal extract search at ASIC to see if there was a current address for him. The Plaintiff conducted such a search (Ex P9) during the trial and Mr Chan’s address was still the same as that recorded in Ex P1 namely 1 Monteath Place, East Doncaster, Victoria. Also tendered (Ex P10) was a Register Search Statement LTO Victoria which showed the owner of the land at 1 Monteath Place, East Doncaster was Jeannie Looi Chan. It is an almost irresistible inference that Mr Chan lives at that address. If not it seems likely that, at the very least, the address given would be a good line of inquiry to investigate. No explanation was given by Mr Kirchler why such simple procedures to locate Mr Chan were not undertaken.

No explanation was given as to why Ms Heale was not available to give evidence.
How were the payments made between the parties?
It is important to understand how Harris Scarfe dealt with the Defendant’s account. The procedure was that Harris Scarfe would draw a cheque for payment of an account and then hold the cheque for 4-6 months before sending it.
Mr Kirchler did not himself become aware of the procedure until December 2000 when he received information from Ms Heale from the Accounts Department; he made handwritten notes of the information he received (Ex D6). His notes read (in part) using a May order number as an example:
HS draws cheque end of May.
HS holds cheque for 4-6 months before sending to creditor.
The note goes onto record that this procedure had been going on for 2-3 years and that Harris Scarfe were a customer of 15-20 years standing.
Mr Kirchler explained that the May order number may have been for goods delivered and invoiced in March. It was possible for there to have been up to eight months from delivery to payment. However it is likely that it is only 4-6 months from the account being sent.
Thus it was common ground at the trial that Harris Scarfe had been writing cheques, not post dating them, but not sending to them to Harris Scarfe for anything up to 4-6 months. The cheques had all been met on presentation. They had in effect put them “in the drawer” for 4-6 months.
The use of such a method does not of itself necessarily indicate that a company is insolvent. Nevertheless it is a significant factor to be weighed with others as pointing to suspicion of insolvency or reasonable grounds for it. The length of time of the practice is indicative not of a short term cash flow problem; rather it is indicative of a long term liquidity problem. Further it could not be said that such a method of payment was standard in the industry. Whilst it is true that some of the big department stores used their commercial position to delay payment there was no evidence that any of the other debtors of the Defendant paid in this manner or delayed payment for so long.
What was the status of the accounts in 2000?
Due to problems with the Defendant’s computer very few documents were available. However some of the exhibits namely D2, D4 and D9 give an indication of what was occurring during the relevant time.
Ex D2 shows that as at 28 July 2000 the outstanding balance was $109,634.57 of which the sum of $56,309.13 had been outstanding in excess of 120 days. Further the document establishes that cheques had been sent in April, May and June 2000. I was not told how the proceeds were applied. Given what is shown in Ex D4 the proceeds did not clear the January 2000 account. This was the only documentary evidence as to past payments. It shows the payments were late but regular ie. monthly.
Ex D4 shows that as at the end of October 2000 the January 2000 account unpaid stood at $18,357.90. The February 2000 outstanding balance was $10,098.90. There was no evidence as to whether the January account meant for goods delivered in January or whether January was when the order number was generated. It is likely that the January account, to be consistent with Mr Kirchler’s understanding and explanation of the method of payment, related to goods supplied the previous month.
Ex D4 was compiled after the receipt of the two cheques in October 2000. How those monies were applied was not the subject of evidence. It does not matter as it can be seen from Ex D4 that at the very least in October 2000 the January account had a substantial balance outstanding. It had been outstanding for nine months which is outside the trading terms of the Defendant. It is also outside the latest time estimate of 6-8 months made by Mr Kirchler. It may be that the period since delivery of the goods was 10-11 months. The February 2000 account had been outstanding for eight months or possibly longer. These are both significant periods of time. The Defendant did not call evidence to say whether the balances related to order numbers or the time when goods were delivered.
What was the position of the accounts at the time of the first relevant payment?
The first of the relevant payments was 20 October 2000. By that time no payment had been received since the 30 June 2000. From Ex D4 it can be seen that even after the first two payments had been received totalling $44,205.36 the overall debt had increased to $144,135.16. The amount outstanding in excess of 120 days (January to May accounts from Ex D4) was greater than that shown in Ex D2. This was despite Mr Kirchler speaking to Harris Scarfe and telling them that although the Defendant had tolerated extended terms it was not Swarovski’s habit to extend terms for that long. Whilst the payments previously had been late they had been regular. There was no explanation for the delay of almost four months from the June payment to the first of the disputed payments. There was no explanation as to why the overall indebtedness increased despite Mr Kirchler speaking to Harris Scarfe in July and telling them that it was not his practice to extend terms for that long (T 48). There was no evidence as to what explanation, if any, had been given to the Defendant about why Harris Scarfe adopted the method of payment it did. At the time of the first payment Mr Kirchler was not even aware of the way Harris Scarfe paid.
At the time of the receipt of the first payment there was in place a method of payment that indicated that Harris Scarfe had a long term liquidity problem. If the Defendant had an explanation from Harris Scarfe for that I did not hear it. It may be of course that Harris Scarfe did not give an explanation for it’s conduct. There had not been a payment for almost four months despite regular payments in the past. If there had been such delays in the past or if there was some reason for this payment being delayed the Defendant should have called evidence about those matters. In addition the age of the accounts was in excess of those of other customers. It was not the industry norm nor the Defendants business practice to allow accounts to remain outstanding for so long. It had been happening with Harris Scarfe for “2-3 years” but that of itself is of concern and not satisfactorily explained.
I am satisfied that as at 20 October 2000 the combination of events mentioned above raised a reasonable suspicion of insolvency. Despite there being some countervailing evidence (discussed later) the Defendant has not satisfied me that it had no reasonable grounds for suspecting that Harris Scarfe was insolvent and further it has not satisfied me that a reasonable person in its circumstances would have had no such grounds for so suspecting.
The rest of the payments
The second of the relevant payments was 27 October 2000. No explanation was given as to why this payment was made only seven days later. No evidence was given as to which account (if any) it related. It is impossible for me to ascertain whether the second payment related to a specific account and if it did the age of that account.
As mentioned above the overall indebtedness had increased from earlier even after these two October payments had been made. The factors applicable to the first payment are applicable to this payment other than the obvious fact that the first payment had been received. The objective factors establish reasonable grounds for a suspicion of insolvency. It is for the Defendant to prove that it had no reasonable grounds for suspecting that Harris Scarfe was insolvent and that a reasonable person in the circumstances of the Defendant would have had no such grounds for suspecting.
As with the first payment the Defendant has not satisfied the onus of proof of either limb of the good faith defence.
The third relevant time relates to the payments made on 11 December 2000. By this time Mr Kirchler was aware of the method of payment by Harris Scarfe. He stated that when he became aware of that method of payment it did not cause him to suspect Harris Scarfe was insolvent. He stated when asked why (T 66):
Depends. They continued to pay, either monthly, two monthly or quarterly basis and they were quite substantial amounts. And no, it didn’t cause me to think that. It hadn’t changed for about two to three years.
He had not been given information about paying “monthly, two monthly or quarterly”. The only information he received indicated a monthly payment. He later elaborated on this topic in cross-examination (T 133-134). I appreciate, he in answering those questions, had the benefit of hindsight. However as I have found earlier Mr Kirchler’s state of mind is not to be equated with the “mind” of the Defendant. It is relevant but not conclusive. Given his extensive experience in business I did not find his answers surrounding the method of payment convincing. In addition there were a number of other factors that need to be considered at that time.
Ex D4 establishes the outstanding balance of the account as at 30 October 2000 namely $144,135.16. It also establishes that accounts were at least ten months in arrears. On 1 December 2000 Mr Kirchler emailed Mr Hunter of Harris Scarfe requesting payment of the outstanding amounts (Ex D5). The response was an email dated 5 December 2000 from Mr Hunter to Mr Kirchler (Ex D6). It states relevantly:
Max, the following cheques were posted today {Tuesday 5/12/00} 30/6 $19812, 31/7 $8231, 31/8 $598 and 30/9 $788. There are two more cheques dated 31/10 $39558 and 30/11 $19747 for which I am currently seeking release dates. Our accounts payable area will need to work with George to reconcile the account and bring it up to date. Regards David.
The total amount of cheques that had been posted is $29,429.00. Thus even taking that amount into account the balance after payment ($144,135.16 – $29,429.00) is $114,706.16, which is still greater than the balance owing as at 28 July 2000 (Ex D2).
It was receipt of this email which caused Mr Kirchler to make enquiries about the method of payment by Harris Scarfe. Curiously he did not seek an explanation from Harris Scarfe or Mr Chan about the method of payment (T 106 and 133). This was despite the fact that in his 27 years of business he had never known of an instance where a debtor had held onto a cheque for as long as Harris Scarfe did (T 134).
As can be seen from the dates of the cheques they cover payments for June, July, August and September. That is not of course to say that they cover the accounts for those months. They are simply the date of the cheques. Indeed none of the amounts in the email either alone or in combination match any of the monthly balances set out in Ex D4. Further it appears that despite the amount owed being in excess of $144,000 the August cheque is for $598.00 and the September cheque is for $788.00.
Whilst there is some evidence of the accounts needing to be reconciled there is no explanation in the Defendant’s case as to why, when so much is outstanding and has been for so long, that two monthly cheques can be sent for the paltry sum of $1,386.00. Again if the Defendant sought an explanation for that it was not given in evidence.
Further Mr Hunter makes it abundantly clear that for the other two cheques, which are for more significant amounts, he is seeking “release dates”. That immediately raises the question of why someone inside Harris Scarfe would need to seek a release date for a cheque. The obvious inference is that if banked immediately the cheque would not be met on presentation. That raises a suspicion of insolvency. It called for an explanation. As mentioned before if the Defendant received an explanation from Harris Scarfe to rebut such an inference it was not the subject of evidence before me.
If the monies received on 11 December were applied in an orderly fashion to the monthly balances as seen in Ex D4 it would satisfy January and February 2000. It is clear from later documents that this was not how the cheques were applied. I was not given an explanation for that. There was only Mr Kirchler’s very general evidence that suggested an account reconciliation “problem”. What the problem was and what was discussed between Harris Scarfe and HP Launder was not the subject of evidence. The documentary evidence establishes that the problem relating to reconciliation did not amount to disputes over large sums.
I have found that Mr Kirchler was, by himself, not the mind of the Defendant. Mr Chan was the person who had the majority of the dealings with Harris Scarfe at this time. The Defendant has not called evidence as to what explanation was given to them by Harris Scarfe for adopting this method of payment for so long.
The objective factors establish reasonable grounds for a suspicion of insolvency. It is for the Defendant to prove that it had no reasonable grounds for suspecting that Harris Scarfe was insolvent and that a reasonable person in the circumstances of the Defendant would have had no such grounds for suspecting. The factors pointing towards the fact that Harris Scarfe were insolvent were stronger as at 11 December 2000 than at the earlier time of the first two relevant payments.
As with the earlier payments, despite there being some countervailing evidence the Defendant has not satisfied the onus of proof of either limb of the good faith defence.
The final relevant time is 29 March 2001. On this date the two cheques referred to in Ex D6 were banked by the Defendant. There is a significant history leading to those two cheques being banked.
After the December payments were made a Customer Aged Trail Balance document was produced (Ex D9). This type of document was always produced at the end of a calendar month (T 70). Reference has been made to this document already. It shows that Harris Scarfe were the worst customer (of the larger department stores) that HP Launder had. The figures match Ex D10 which is a copy of an account sent to Harris Scarfe and dated 18 December 2000. The amount owing after the payments made in December were taken into account is $115,399.19 of which $94,872.36 is shown as being outstanding for over three months. The total amount outstanding is slightly greater than what was outstanding as at 28 July 2000 (Ex D2). Despite the discussion that Mr Kirchler had with Fiona Scott of Harris Scarfe around this time (T 48) about not extending terms for so long, the amount outstanding had by 18 December 2000 worsened slightly.
Mr Kirchler gave evidence of an account reconciliation that was undertaken around this time. Ex D11 related to the reconciliation and the final figure of $115,399.19 appears at the end of that document and that matches the figures in Ex D9 and D10. Mr Kirchler did not do the reconciliation. Not surprisingly he was unable to say what the reconciliation showed in terms of problems with the accounts. That a reconciliation needed to be done does not appear to be in dispute. What problems it may have uncovered in terms of invoicing etc was not known to Mr Kirchler. When asked why earlier amounts remained outstanding if a later amount had been paid he was only able to speculate that it was a mistake by them or Harris Scarfe (T 75). No doubt Mr Chan or Ms Heale could have shed some light on what was happening.
A further example of that problem is Ex D13 which is simply headed “Harris Scarfe Outstanding Balances by Month”. The document is not dated but it is likely to have been created after 11 December 2000. It was shown to Mr Kirchler and he was asked to compare it with Ex D4. He was unable to explain some differences (T 79). Someone else, who had knowledge of the document, should have been called rather than have Mr Kirchler speculate. At best for the Defendant it shows that there was some problem with the application of monies received from Harris Scarfe. There was no witness called to explain that issue. Mr Kirchler candidly accepted that he did not descend into the detail of the reconciliation and that he was not a party to what Ms Heale and Harris Scarfe thought the problems might be (T 136). What the exhibits D4, D10 and D11 establish is that the accounts for January and February 2000 were still outstanding by March 2001.
In January 2001 the HP Launder office closed and there was a problem with the computer system which took up a lot of Mr Kirchler’s time (T 77). Mr Chan, who was in the Melbourne office, helped him at that time with following up Harris Scarfe. As mentioned before what occurred at that time between Mr Chan and Harris Scarfe has not been the subject of evidence.
Between December 2000 and March 2001 Mr Kirchler was not aware of any challenge by Harris Scarfe to the monthly figures that had been produced (T 140).
On the 21 February 2001 Mr Kirchler rang David Clark of Harris Scarfe and left a message as follows (Ex P13):
$115,000 due - some invoices 12 months old. Legal action a distinct possibility.
Mr Kirchler admitted that he had left that message (T 159).
On 26 February 2001 Teresa Gate from the Defendant left a message for Mr Clark that (Ex P14):
Sending a letter - demanding payment within 7 days.
Mr Kirchler was not able to identify the person Teresa Gate. His only contact was with Mr Chan.
Ex P16 indicates that Mr Kirchler rang Mr Clark on 1 March 2001 but was not able to speak to him.
On 2 March 2001 Mr Kirchler received a fax from David Clark of Harris Scarfe enclosing a copy of a letter sent to Mr Chan. The letter to Mr Chan informed him that there were “payments scheduled for Friday 9^th March 2001 totalling $100,000.” (Ex D12). The arrangements for this payment had been made between Mr Chan and “somebody at Harris Scarfe” (T 140 and 148). Mr Kirchler admitted that he did not know how the figure of $100,000 calculated (T 140).
The payment was not made on 9 March. On 16 March 2001 Mr Kirchler emailed David Clark (Ex D14). He reminded Mr Clark of the outstanding amounts (which matched Ex D13 rather than the other exhibits) and requested payment of all arrears via bank transfer or legal proceedings would be commenced. It was unusual to request payment by bank transfer (T 164). The January 2000 account was now 14 months in arrears. Mr Clark replied on 17 March by email (Ex D14) stating that the payment for 9 March had been “unfortunately delayed” and that he “will consult our finance people as to your release date”.
Mr Kirchler also received an email from Mr John Fitzpatrick, General Counsel for Harris Scarfe (Ex D15). Mr Kirchler stated that he thought that this meant that “it would be taken care of”.
There is no evidence of what occurred between 17 March and the payments that were received on 29 March which totalled $59,305.25. Apparently other cheques were received after Harris Scarfe went into voluntary administration which may have been the balance of the promised $100,000.
By the time of 29 March 2001, the January and February 2000 accounts were over 12 months old. There was clear evidence that clearance had to be sought from the Finance Department of Harris Scarfe before a “release date” could be confirmed. Given how long that had been occurring it clearly indicates a long term liquidity problem. There had been no regular payments since the end of June 2000 and threats were being made about the taking of legal proceedings; it should have been clear that the liquidity problem was worsening. A deadline was missed for which no explanation was given.
As with the other disputed payments no explanation was ever given by Harris Scarfe as to why they paid in this manner.
There were reasonable grounds to suspect that Harris Scarfe was insolvent. They were or should have been obvious to those people at the Defendant who were dealing with the problem.
The Defendant has failed to satisfy me that there were no reasonable grounds to suspect that Harris Scarfe was insolvent at that time and also it has failed to satisfy me that no reasonable person in the position of the Defendant’s circumstances would have had no such grounds for so suspecting.
The countervailing evidence

The Defendant pointed to a number of matters that is suggested when taken alone or together was sufficient to dispel any suspicion of insolvency that may have arisen from the factors mentioned above. In coming to the conclusions above I have considered the points made by the Defendant. For convenience I set out below the matters I have taken into account.
1.    That whilst the invoices stipulated a trading term of 30 days that term was not adhered to by the Defendant or any of the large department stores. The bargaining position of large department stores allows them to dictate the terms of trade to suppliers such as the Defendant.
As mentioned earlier Ex D9 indicates that the larger department stores did dictate terms to some extent. No other department store had monies outstanding for more than 90 days (other than a small amount for K-Mart). Harris Scarfe had monies outstanding for up to 240 days. In addition it was not suggested that any of the other stores put the “cheque in the drawer” as Harris Scarfe did. Harris Scarfe was undoubtedly the worst customer. The evidence establishes that the method of payment by Harris Scarfe was anything but the norm for department stores in this industry.
I consider that these factors point towards a suspicion of insolvency rather than away from it.
2.    The trading history between the parties showed that late and irregular payments were routine Ex D2 and D6.
Ex D2 only establishes part of that proposition namely that payments were late not that they were irregular. Indeed Ex D2 shows that payments were made in April, May and June 2000; that is regularly although late. Mr Kirchler gave evidence that the payments were regular (T 59 and T 66). His statement that they paid monthly, two monthly or quarterly related to the disputed payments. He did not know the history of payments.
I consider that the method of payment simply points, not to a short term cash flow problem, but a long term liquidity problem. By October with no payment since 30 June 2000 the problem was not being addressed and was in fact getting worse. There was no evidence given that there had previously been a delay of over 3 and ½ months between payments.
I do not consider that the trading history supports the Defendant’s position.
3.    The Defendant was very poor at chasing overdue bills and had trouble properly reconciling its accounts.
Mr Kirchler gave evidence that many customers were slow paying. None were as slow as Harris Scarfe.
He also gave evidence that there was difficulty at various times in reconciling the accounts particularly with Harris Scarfe. It was suggested that the problem of reconciliation of the accounts was one of the reasons for Harris Scarfe was slow in paying. However he was not the person in charge of that matter. It is likely that Mr Chan had some dealings with the issue. Ms Heale was the person in charge of dealing with that issue with Harris Scarfe; Mr Kirchler did not descend to that sort of detail (T 136). He had some discussions with Ms Heale which suggested that some of the aging of accounts was incorrect. He could not provide details. The issue of what problems if any occurred with reconciliation of the accounts with Harris Scarfe was left in an unsatisfactory state.
The Plaintiff’s response to this issue was to make the point that the onus is on the Defendant to prove the elements of its defence. It should not leave matters such as this as a speculative possibility. There is much merit in that proposition. Ms Heale and perhaps Mr Chan may have been able to give evidence about the issue. They were not called. Mr Kirchler was unable to say whether it was a serious problem or just related to a few invoices.
Mr Kirchler was involved with the reconciliation that occurred in late November 2000. He was not able to give details of what passed between the Defendant and Harris Scarfe other than to say that it was a problem. The extent of the problem and how it was resolved at that time was not within his knowledge.
Without further explanation from the Defendant this submission carries very little weight.
4.    Harris Scarfe never forwarded a cheque to the Defendant, which was dishonoured.
I agree that this has some weight. However it must be borne in mind that the likely reason for putting the cheques “in the drawer” was to delay payment until the cheques could be honoured. The fact that the scheme was, for a while at least successful, is not of great weight and certainly not enough to dispel, by itself or in combination with the other matters favourable to the Defendant, the suspicion of insolvency.
5.    Harris Scarfe and the Defendant continued to trade with each other up to December 2000 when a stop buy order was put in place by Harris Scarfe.
This fact is of little weight when considering the question of whether there were no reasonable grounds to suspect insolvency. In effect this submission simply restates the earlier submission that the method of payment was in place for 2-3 years.
There was no evidence from the Defendant as to what explanation (if any) was given by Harris Scarfe to the Defendant to explain its method of payment. Mr Kirchler was unable to give an explanation. It may be that Mr Chan was given some explanation for the method of payment that meant he had some confidence in continuing to do business with Harris Scarfe. I did not hear it. Absent an explanation for the method of payment, the fact that the defendant continued to trade simply shows unwarranted optimism.
6.    The size and scale of Harris Scarfe.
It was suggested that Harris Scarfe displayed the trappings of an old, large, successful and stable business. Mr Kirchler pointed to the fact that he had received and read a letter of 3 August 2000 which referred to Harris Scarfe’s owning 37 stores nationally and that it was implementing a “cross dock” system for the central delivery of it’s goods (Ex D3). Further, in late November early December he learnt that Harris Scarfe had purchased an Internet shopping business worth $3 million. Mr Davies gave evidence that Harris Scarfe only paid cash of $500,000 and the balance was made up of the issue of shares to D-Store shareholders (T 37).
It must be remembered that as at August 2000 Mr Kirchler was not aware of the specifics of the method of payment by Harris Scarfe. He gave evidence that he did not know the rate of expansion of Harris Scarfe (T 151). He conceded in cross-examination that Harris Scarfe was their worst customer (T 151).
Mr Kirchler is not the mind of the company. Whilst he had worked with the parent company for a while he did not commence work with the Defendant until January 2000. He really only had a superficial knowledge of the relationship between Harris Scarfe and HP Launder.
Mr Kirchler had no knowledge of how the D Store business was financed. This factor has to be balanced against all the matters that were happening around December through to March 2001 which I have set out extensively above. In my view this factor is of little weight and even in combination with other factors favourable to the Defendant could not dispel the suspicion of insolvency for 11 December 2000 and 29 March 2001 transactions.
7.    Finally it was suggested that the fact of the payments themselves would have reassured the Defendant. This again has little weight when seen against the factors that had built up at the time of each payment.
These factors alone or in combination do not dispel the reasonable grounds to suspect insolvency under both limbs of the section, that I have found existed at the time of the receipt of the relevant payments.
Running Account
Section 588FA(3) moderates the operation of s 588FA(1). The codification of the “running account” defence has become definitional of what is an “unfair preference”. Thus what was once a defence is now an ingredient or element of that which the Plaintiff liquidator must prove in establishing whether it is a preference. The onus has shifted to the party attaching the payments.[10]
[10] Sutherland v Eurolinx (2001) 37 ACSR 477 at 508
The effect of the defence is that where persons trade regularly with each other on credit terms and the liability of one rises with each purchase and falls with each payment one does not, for the purpose of s 588FF, consider each payment in isolation. Whilst there was little evidence on the topic I infer that leading up to the time of the disputed payments there was in effect a running account between the Defendant and Harris Scarfe.
The basis of a running account is a continuing relationship between a debtor and creditor with an expectation that further debits and credits will be so incurred. There are two essential pre-requisites to the defence. First there must be no cessation of that mutual assumption of payment and reciprocal supply throughout the relevant period. Second, those payments must continue to have at least one operative, mutual purpose, namely inducing further supply.[11] It is possible for payment to have more than one purpose. Payments can be made for the dual purpose of discharging an existing indebtedness and to ensure further supply without denying the availability of the running account defence.[12]
[11] Sutherland v Eurolinx (2001) 37 ACSR 477 at 504
[12] Tectron Industries Pty Ltd v Taylor [2006] SASC 175
Supply continued between the Defendant and Harris Scarfe until early November 2000. At that stage a “stop buy” order was placed by Harris Scarfe. Mr Kirchler gave evidence that such an order was not unusual (T 142). Further he said that a stop buy order for three months was “very usual” (T 143). Payments after that date simply paid off indebtedness. I accept that the “stop buy” order of itself was part of the normal business arrangement between Harris Scarfe and the Defendant. The placing of the stop buy order did not mean there was a cessation of the mutual assumption of payment and reciprocal supply.
Was there a cessation of mutual assumption of payment and reciprocal supply throughout the relevant period?
This question is difficult because of the “stop supply” order placed by Harris Scarfe. It had the effect that there was indeed no supply of stock from early November through to 29 March 2000. Mr Kirchler said in cross-examination that the option of not supplying was something that he was thinking of when he sent his email of 1 December 2000 (T 149).
Mr Kirchler was asked in XXN (T 142):
QWould the defendants have continued to have supplied Harris Scarfe if that stop buy decision had not been made by Harris Scarfe.
AI would have had every intention in December because payments were forthcoming. I had - certainly in November nothing had changed. There were payments promised provided they would have been met. If they were met in December I would have continued supply. The position of the stop buy continued in the first three months in 2001. Had payments been made, yes I would have continued to supply. If, in the overall context, payments continued, large payment, I would have continued to supply.
Further Mr Kirchler was asked in XXN (T 149):
QWhat would have happened is that if Harris Scarfe had placed orders in November and December and in January and February of the next year, Launders wouldn’t have been prepared to supply because there was a very large amount outstanding for very long periods of time with broken promises to review cheques to be sent: is that not the position.
AIf there would have been no further payments and orders would have been placed in the period after January 2000, no, we would not have supplied them.
Mr Kirchler was doing his best to answer what was necessarily a hypothetical question given that Harris Scarfe had imposed the “stop buy” order. Whether or not to continue supply never arose as Harris Scarfe never placed any orders after early November. It appears from the evidence of Mr Kirchler that had orders been placed after January 2001 (he actually said 2000 but meant 2001) and there had been no further payments then it is likely that the Defendant would not have supplied any further goods. In fact after December 11 there were no further payments until 29 March 2000. The Defendant had indicated as early as 1 December 2000 that “We cannot afford to extend credit ... and continue to maintain deliveries” (Ex D5). True it is that after that email there were payments on 11 December 2000. However by February 2001 it is clear that the Defendant had run out of patience and indeed was threatening to take legal action (Ex P13). By March 10 there was a failure to pay a promised amount. Whilst it is true that the Defendant had tolerated in the past late payment of invoices and still supplied goods, by February 2001 invoices had now been outstanding for 12 months. There is no evidence before me that would suggest that this level of late payment had ever been tolerated in the past. All of the documentary evidence suggests that the Defendant by late February would not have supplied Harris Scarfe had a further order been placed. As mentioned Mr Kirchler candidly admitted that the Defendant would not have supplied. Thus I find that there was a cessation of the mutual supply and payment arrangement between Harris Scarfe and the Defendant by late February 2001. Thus the running account was terminated prior to liquidation. I do not need to consider the second “essential” element.
Conclusion.
I find that the Plaintiffs have established that the relevant payments were preference payments and are entitled to an order under s588FF. The Defendant has not succeeded in establishing the “good faith” defence. The Plaintiffs have established that, at the time of the receipt of the last two payments, the “running account” was no longer in existence as there was no longer a mutual assumption of supply and payment.
There will be judgment for the Plaintiffs for the sum of $132,940.71. I will hear the parties on the question of the final orders sought, interest and costs.