Mann v Sangria Pty Ltd

[2001] NSWSC 172

Reported Decision: (2001) 38 ACSR 307
(2001) 19 ACLC 696

New South Wales

Supreme Court

CITATION:	MANN & ANOR v. SANGRIA P/L [2001] NSWSC 172 revised - 2/05/2001
CURRENT JURISDICTION:	Equity
FILE NUMBER(S):	SC 4062/99
HEARING DATE(S):	08/03/2001
JUDGMENT DATE:	21 March 2001
PARTIES :	JOHN MANN (2nd Pltf) G.A. COONEY HOLDINGS PTY LTD (IN LIQ) (3rd Pltf) SANGRIA P/L (Defendant)
JUDGMENT OF:	Bryson J at 1

COUNSEL :	R.D. Marshall - Pltf; K. Andronos - Dft
SOLICITORS:	Gordon & Johnstone - Pltf Mallesons Stephen Jaques - Dft
CATCHWORDS:	CORPORATIONS - external administration - voidable transactions - preferential payments - Abattoir sold meat to wholesale Butcher August 1996 to March 1997 then sued to recover $186,000 unpaid account - action settled on terms that debt paid off at $7000 per month - six instalments paid in period January to June 1998 - in May and June 1998 Abattoir sold and delivered six consignments of meat which were each paid for by a cheque specifically for the price of one consignment - cheques postdated 2 or 3 weeks and handed over at or forwarded soon after delivery total $27811.58 - voluntary administration on 22 June followed by winding-up - company insolvent throughout 6 months preceding VA - on claim under subs.588FA(1) to recover payments, instalments off old debt $42,000 were held to be preferences - payments $27,811.58 for deliveries in May and June were held not to fall within subs.588FA(1) as the transactions were not preferential - consideration of categorisation of facts and events as transaction within the meaning of subs.588FA(1) - defence under s.588FG(2) failed because of grounds for suspicion of insolvency - consideration of Dye v. Peninsula Hotels (Ormiston JA)
CASES CITED:	VR Dye & Co. v. Peninsula Hotel (in Liq) & Anor [1999] 3 VR 201; [1999] 32 ACSR 27 Richardson v. Commercial Banking Co. of Sydney Ltd (1952) 85 CLR 110 Airservices Australia v. Ferrier (1996) 185 CLR 483 Nilant v. Borden Australia Pty Ltd (FCA 26/6/96 Hill J) Queensland Bacon Proprietary Limited v. Rees (1966) 115 CLR 266
DECISION:	Judgment for the plaintiff for $42,000 plus interest.

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

BRYSON J.

WEDNESDAY 21 MARCH 2001

4062/99 MANN & G.A. COONEY HOLDINGS PTY LTD (IN LIQ) v. SANGRIA P/L

JUDGMENT

1 HIS HONOUR: The plaintiffs claim orders for the recovery of a number of payments made to the defendant by the company. The claim is based on Ch.5 Pt.5.7B Div.2 of the Corporations Law which relates to voidable transactions. The plaintiffs must show that each payment occurred in a transaction which was an unfair preference given by the company to a creditor within subs.588FA(1), that the transaction was an insolvent transaction within s.588FC, and that it was a voidable transaction within subs.588FE(2) which establishes a relation back period of six months; if those things are shown the Court has power to make an order in effect directing repayment under subs.588FF(1) para.(a). At the time of the payments the defendant Sangria Pty Ltd carried on business at Coonamble under the name Castlereagh Regional Abattoir. Its business was direct wholesale suppliers of beef and pork, quality butchers and smallgoods manufacturers. The principals of the company were Mr John Scott and his two brothers.

2   The third plaintiff G.A. Cooney Holdings Pty Ltd (In Liq) carried on business as a wholesale butcher and meat supplier at Ultimo. The first two plaintiffs Mr David Young and Mr John Mann were appointed voluntary administrators of Cooney Holdings on 22 June 1998. Cooney Holdings remained in administration until 17 July 1998 when it was placed in liquidation by a resolution of creditors. Mr Young and Mr Mann became liquidators and commenced these proceedings. Mr Young resigned as liquidator on 12 July 2000 and ceased to be a plaintiff when the Amended Statement of Claim was filed on 17 August 2000. However he continued to take part in the day to day conduct of the liquidation. For the purposes of s.588FE the relation back day was 22 June 1998 and the relation back period was the period of six months ending on that day.

3   Calculations made by the liquidator showed, in the liquidator’s estimate, that the company had a working capital deficiency of $802,920 at 30 June 1997. The balance sheet as of 30 June 1997 prepared by the liquidator showed that the company had net assets of $12,039, and had trade creditors of $1,127,093. The liquidator does not expect that unsecured creditors would receive any dividend.

4   The payments which are alleged to be unfair preferences total $69,811.57 and fall into two groups. The first group were instalments paid under an arrangement to pay off debts accumulated in trading:

5 January 1998 $7,000
2 February 1998 $7,000
2 March 1998 $7,000
6 April 1998 $7,000
5 May 1998 $7,000
8 June 1998 $7,000
Total: $42,000

5   The second group were payments by Cooney Holdings to Sangria for 6 sales and deliveries of meat in May and June 1998. Particulars of the sales and payments are:

Invoice date Invoice No. Amount Cheque No. Cheque date
6/5/98 19185 $ 4,863.50 1608 21/5/98
11/5/98 19199 $ 2,600.87 1619 26/5/98
18/5/98 19283 $ 4,143.15 1646 8/6/98
18/5/98 19283A $ 715.05 1649 19/5/98
25/5/98 19295 $ 6,072.61 1680 9/6/98
1/6/98 19361 $ 9,416.40 1681 16/6/98
Total: $27,811.58

Invoice No. 19295 was for a sale price totalling $6182.61 but the amount actually paid by a company was $6072.61.

6   There were pleadings and many of the basic facts relating to the claim were admitted. At the hearing it was admitted that as and from 5 January 1998 Cooney Holdings was insolvent and unable to pay its debts as and when they fell due. The substantial issues are:

1) The plaintiffs claim that each payment is a transaction which was an unfair preference within subs.558FA(1).
2) The defendant claims that Sangria is entitled to rely on a defence under subs.588FG(2).

7   In 1996 and 1997 supply took place under an arrangement in which Cooney Holdings placed an order, Sangria supplied meat requested in the order and issued an invoice. The invoices were on Sangria’s standard form and there were printed notes at the foot of each invoice as follows:

NB - Please make payment to Castlereagh Regional Abattoir
PLEASE TREAT THIS INVOICE AS A STATEMENT OF ACCOUNT
No claim recognised unless lodged on day of delivery
Terms: NET 7 DAYS E. & O.E.

8   The terms for payment net seven days were not complied with. Sangria’s experience in the meat supply business was that they seldom were, that Sangria could usually expect invoices rendered in one week to be paid by the end of the following week and there were many exceptions. The invoices for the meat sales in 1998 bear references to “A/C No. 2”. This distinguishes them from the earlier transactions. There was no running account for the later sales; each invoice and statement was dealt with and paid separately.

9   Sangria supplied Cooney Holdings with meat between August 1996 and March 1997, and as trading continued a large unpaid balance built up. Mr John Scott telephoned Mr George Cooney, the principal of Cooney Holdings, late in 1996 or early 1997 to discuss the debt and Mr Cooney said to him to this effect:

“John, you need not be worried. My development project is using up more of my ready cash than I had thought.”

After a while Mr Scott telephoned Mr Cooney again and was told:

“Yes, I know you are concerned, but there is no need to worry, you’ll be paid.”’

10   Mr Scott said “George, I need action, not words.” Mr Scott got in touch again after a while and was told “I’m sorry, money has been held up through a legal hitch. I will send you a lump sum next week.” The impasse continued; there were 5 sales in January and 6 in February but in March there was only one; Cooney Holdings ceased ordering meat. Mr Cooney told Mr Scott “I am now getting meat from a cheaper supplier.” In or soon after March 1997 when Mr Scott was in Sydney he called on George Cooney at Cooney Holdings’ shop at Ultimo. He was received in a friendly way and shown around the boning room, which appeared to be extremely busy; the business appeared to be functioning very well. George Cooney said to him “I am buying my carcass beef at cheaper rates now and this is giving me a much better margin of profit. I will soon be able to repay you in full”. On a later occasion Mr Scott visited the shop at Ultimo again; George Cooney said “I know why you are here, so let’s go and have a drink” and took him to a hotel at Kings Cross. In their conversations George Cooney told him “John you have no need to worry, tell your brothers that I’m using you short term to solve a cash flow problem and as soon as it is over, I will repay you every cent I owe, with interest added. I appreciate what you’ve done for me and as soon as this real estate is sold, everything will be fine and back to normal.” He also said “The only problem I’m having with my business is a short term cash flow problem due to the real estate development. But this will soon pass if you let me have time to pay you. The business is actually running very profitably because we have won some excellent tenders, so we’re in good shape to get everything squared up.”

11   George Cooney presented to Mr Scott a picture of a continually operating business and an atmosphere of confidence; he drove a Mercedes, entertained him at a hotel in Kings Cross and spoke confidently about his real estate business. However the unpaid account had reached $186,074.58, and Sangria sued Cooney Holdings in the District Court for that amount by a Summons issued on 17 April 1997. The proceedings were conducted with vigour and Sangria made an early application for summary judgment. This led to negotiations. In correspondence before action Mr Van Cooney, solicitor representing Cooney Holdings, proposed to Sangria’s solicitors on 20 March 1997 a scale of repayment at $2,000 per month with a payment of $40,000 on 30 June 1997. This proposal was introduced by saying “My client is unable to immediately pay the amount due in full.” There was further correspondence on the subject of arrangements for monthly payments. Negotiations proceeded.

12   A letter from Mr Van Cooney of 26 June 1997 to Sangria’s solicitor forwarded “… a copy of both my clients’ assets and liabilities …” and said “I am again instructed to advise that my client is not attempting to avoid payment of any money due to your client but is merely asking for time to pay.” The letter went on to submit proposed arrangements for payment being an immediate payment of $15,000, and a schedule of weekly and monthly payments. Throughout the negotiations it was clear that the company was not in a position to meet its debt forthwith or in any way except by a long series of monthly payments. An agreement for payment by instalments was made at some time in August 1997; there is not a complete copy of the agreement in evidence but it is clear that the agreement was entered into, executed by Cooney Holdings and also by George Cooney, and was followed by discontinuance of the District Court proceedings and a series of payments the last six of which were within the relation back period.

13   Under the agreement Cooney Holdings was to give Sangria security by 26 September 1997, being a registered second charge over its equitable interest in a property in Mary Anne Street Ultimo, including rights to receive proceeds of development of the property. The security provided for in the agreement was never in fact given. $27,000 was to be paid as at the date of the agreement and then instalments were to be made under a schedule which provided for monthly payments of $7,000. Cooney Holdings was also to pay the costs of the proceedings. George Cooney acknowledged that he was jointly and severally liable to Sangria for the debt and interest and he joined in the promises to make payments. Payments were to include interest as if there had been a District Court judgment. The agreement contained some stringent provisions. In cl.3.3 it closely limited the manner in which the company was to pay instalments which had to be by bank cheque, electronic funds transfer or otherwise as agreed in writing. By cl.4.2, on an event of default Sangria was to be entitled to judgment by consent for the whole debt.

14   Payments of $7,000 per month began in September 1997. Sometimes instalments were not paid on the due date, and when this happened Mr John Scott would telephone Mr Cooney to remind him and he would receive a cheque a few days later. He saw nothing unusual about this as Cooney Holdings had never been a prompt payer and Mr Scott had encountered many operators who could pay what they owed but chose not to do so; sometimes this was because they were very busy, sometimes they simply chose not to pay until they were chased up. He had become used to this behaviour in 40 years in the wholesale meat business. It was his evidence that he did not suspect that the late payments were because Cooney Holdings could not pay.

15   There is some evidence dealing with the possibility that a payment for December was missed; whether or not it was missed is unclear but one copy of the agreement in evidence has a schedule from which payments for December 1997 and January 1998 have been deleted; it is not clear exactly what was in the schedule of the document which was executed. (There is an obvious typographical error because one date put in and then struck out was typed as 1 December 1998). The payments sued for in these proceedings were made more or less regularly each month from January to June 1998; they were not significantly late.

16   Sales and supply resumed in May 1998. In May 1998, when these transactions began, Mr Scott was aware that Mr Cooney and the company had a short supply situation and that one or perhaps more of its suppliers had ceased to supply him. Mr John Scott said in evidence “A few weeks after I first supplied Cooney Holdings with carcasses again, we received a cheque for the full amount of the invoice. Throughout May and June 1998, Sangria continued to supply Cooney Holdings with carcasses and received payment within a few weeks.” Mr John Scott did not have any actual detailed knowledge of how the payments were handled, as he did not himself effect deliveries or closely supervise opening the mail and receiving the cheques. By reference to Sangria’s invoices and Cooney Holdings’ records something more can be seen of the pattern of events. Mr Scott’s evidence shows that the practice was that the delivery would be effected by a contract driver, who would take the invoice with him and hand it over at the time of delivering the meat. The invoice took the place of a delivery docket. The invoice was also a statement; it was a claim for payment within 7 days. It was not part of a system in which charges and invoices were collected into statements at the end of an accounting period.

17   There was a curious crossing of forensic objectives. If the deliveries of meat had taken place under arrangements or in circumstances in which a cheque for the cost of the meat delivered was to be handed over to the driver on delivery, the fact that the defendant required such an arrangement would be forensically injurious to the defence under subs.588FG(2) because it would tend to indicate a suspicion about the company’s credit-worthiness. On the other hand it could have served the defendant’s interest if each sale had been a Cash-On-Delivery transaction in which no debt ever arose; if that were shown it would seem to assist the defendant’s position under subs.588FA(1) relating to an unfair preference. However that position would be a difficult one for the defendant because the cheques were post-dated, which opened up consideration of whether payment by a post-dated cheque, conditional on the cheque later being met, should correctly be regarded as a Cash-On-Delivery transaction and outside subs.588FA(1) for that reason. The plaintiffs’ counsel sought to establish that the cheques were handed to the driver on delivery, and there was no clear evidence whether or not this happened or whether or not there was an arrangement for this to happen. It may have happened in some or all of the sales, or the cheques may have been sent to the defendant very soon after the delivery; it is not possible to make a more exact finding.

18   The payment of $4,863.50 made for invoice 19185 dated 6 May 1998 was made by cheque 1608; its position in the cheque book immediately following cheque 1607 written on 8 May 1998 suggests strongly that the cheque was post-dated, written about 8 May but given the date 21 May. Invoice 19199 dated 11 May 1998 was paid for by cheque 1619 dated 26 May 1998 which is immediately before cheque 1620 dated 11 May 1998 in the cheque book, establishing clearly that cheque 1619 was post-dated when issued; it was probably issued on 11 May 1998, which was the date of the invoice and probable date of delivery. Invoice 19283 dated 18 May 1998 was paid for by cheque 1646 which appears in the cheque book immediately after cheque 1645 written on 14 May 1998; the cheque butt shows that cheque 1646 was first written out on 15 May 1998 and then altered to 8 June 1998. Curiously 15 May 1998 is earlier than the date of invoice and presumably of delivery. There are two versions of invoice 19283, and the other one referred to as 19283A for $715.05 was paid for by a cheque dated 19 May 1998, the day after the date of the invoice. Invoice 19295 dated 25 May 1998 was paid for in part by cheque 1680 dated 9 June 1998. The cheque butt is marked “Exchange cheque” and is obviously post-dated because it is earlier in the number sequence than cheque 1682 dated 1 June 1998. Invoice 19361 dated 1 June 1998 was paid for by cheque 1681 which bears date 16 June 1998 but was also obviously written before cheque 1682 dated 1 June 1998, so it must have been post-dated.

19   The pattern shown by these cheques is that the small sale for $715.05 was paid for by a cheque dated about the time of delivery, but the others were paid by cheques which were post-dated about a fortnight or even three weeks ahead and probably issued at about the time of delivery; they may have been returned with the delivery driver. Each cheque was specifically for the amount which Cooney Holdings was to pay for the goods in one invoice.

20   Mr John Scott said in evidence about these sales that he received payment within a few weeks and “I was not aware, and did not suspect, at any stage during the period July 1997 to June 1998 that Cooney Holdings was not able to pay its debts as they fell due”. He said that he only dealt with Mr Cooney occasionally to remind him to pay the monthly instalments, and he did not notice that any instalments were missed. He also said “Once Sangria started dealing with Cooney Holdings again in May 1998, it met its debts.” He also said that he first knew of the insolvency when notified of it by the Administrators.

21   The balance sheets forwarded by Mr Van Cooney, solicitor in June 1997 would not give much confidence to anyone who read them carefully. The Statement of Assets and Liabilities for Mr George Cooney personally gave his surplus of assets over liabilities as $1,165,000 but contained a note saying that his real estate was under first mortgage to a bank to secure lines of credit totalling $2,050,000. The balance sheet for Cooney Holdings relates to 23 June 1997 and showed that the company had (at least) two lines of business as there are references to a property development business. Current assets include: “Property sale instalment due 31/5/97 (Note 2 $850,000).” The non current assets include “final property settlements September 1998 $2,550,000 (see Note 2)” and the contingent liabilities include “Power House Museum Trust & Legals (Note (1) $350,000).”

The Notes are:
Note 1 - involves possible pay-out and legal costs relating to a primary application claim.
Note 2 - instalment due 31/5/97 - delayed because of claim by Power House Museum Trust on part land sold.
Final settlement due 9/98 ($2,550,000) may be delayed beyond 9/98 but date not determinable at this date.

22   The current position was severely negative other than for the property sale instalment due on 31 May (and overdue at the time of the statement). If everything else in the current position was attributed to the meat business, there was a severe current deficit position in the meat business. For non current liabilities, fixed assets and non current assets the company’s position depended completely on achieving the final property settlement in September 1998; Note 2 stated that that settlement may be delayed and the date was not determinable.

23   Mr Scott maintained in evidence that he was not a skilled person in a position to analyse the balance sheet. This may well have been correct, but to a reasonable reader there were sources of disquiet in the document.

24   Subs.588FA(1) is in these terms:

(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.

25   I note with emphasis

- The subsection establishes what is an unfair preference .
- The subsection relates to establishing whether a transaction is an unfair preference.
- The subsection relates to a preference given to a creditor of the company.
- The company and the creditor must be parties to the transaction .

- A transaction must result in the creditor receiving more than the creditor would receive if the transaction were set aside and the creditor were to prove for the debt.

26   “Transaction” is given a definition in s.9; the definition is circular and not exhaustive but includes some specified examples. It is in the following terms:

“transaction”, in Part 5.7B, in relation to a body corporate or Part 5.7 body, means a transaction to which the body is a party, for example (but without limitation):
(a) a conveyance, transfer or other disposition by the body of property of the body; and
(b) a charge created by the body on property of the body; and
(c) a guarantee given by the body; and
(d) a payment made by the body; and
(e) an obligation incurred by the body; and
(f) a release or waiver by the body; and
(g) a loan to the body;
and includes such a transaction that has been completed or given effect to, or that has terminated;

27   Unfair preference is also defined in s.9:

“unfair preference” has the meaning given by section 588FA;

28   The provisions of subs.588FA(3), which relates to a transaction which is part of a continuing business relationship, for example a running account do not in my opinion have any application. It was not contended that they do. The series of payments of instalments in respect of past transactions could not in my opinion be seen as “an integral part of continuing business relationship (for example, a running account)”. The sales in May and June 1998 were a series of discrete transactions, and although each invoice had handwritten on it “No. 2 Account” which distinguished it from the earlier sales and the instalment arrangements, each sale was the subject of a separate invoice/statement and a clearly identifiable payment related only to that sale, so there was no element of a running account called No. 2 A/c.

29   Subsection 588FG(1) is in these terms:

A court is not to make under section 588FF an order materially prejudicing a right or interest of a person other than a party to the transaction if it is proved that:
(a) the person received no benefit because of the transaction; or
(b) in relation to each benefit that the person received because of the transaction;
(i) the person received the benefit in good faith; and
(ii) at the time when the person received the benefit:
(A) the person had no reasonable grounds for suspecting
that the company was insolvent at that time or
would become insolvent as mentioned in paragraphs
588FC(b); and
(B) a reasonable person in the person’s circumstances
would have had no such grounds for so suspecting.

30   The onus of proof of the defence is on the defendant. I particularly note that the person relying on the subsection:

- must show good faith .
- must show that the person had no reasonable ground for suspecting that the company was insolvent.
- must also show that a reasonable person in that person’s circumstances would have had no such grounds.
- must show valuable consideration .
The reference to s.588FC(b) relates to insolvency brought about by the very transaction.

31   In the ordinary and natural meaning of “transaction” a series of events occurring at different points of time could be a transaction, as could be events which were strictly simultaneous with each other. The grammatical structure of subs.588FA(1) does not indicate in a clear way that the transaction must consist of simultaneous events, and appears to admit of a series of temporally separated events, as is appropriate within the ordinary and natural meaning of “transaction”. In dealing with the event the subsection speaks in the present tense - “a transaction is an unfair preference ... the company and the creditor are parties to the transaction (even if someone else is also a party … the transaction results in the creditor receiving … in respect of an unsecured debt that the company owes to the creditor … even if the transaction is entered into, is given effect to, or is required to be given effect …”. I believe this structure is known to grammarians as the Historic Present, and it is an appropriate means of referring to conduct in a series of events which are separated in time and are of a kind which can be expected to recur. The words used in the grammatical structure do not clearly indicate whether it is necessary for the operation of the subsection that the creditor referred to be a creditor at the opening of the events and the commencement of the transaction, or whether the transaction with which the subsection deals may be one in the course of which the person referred to as the creditor becomes a creditor.

32   The context and subject matter of an unfair preference and related provisions for transactions to be avoided appear to me to support the reading in which the creditor who receives something in respect of the debt is to be a creditor at the commencement of the transaction and the unsecured debt receipt in respect of which is brought into comparison is a debt owed at the commencement of the transaction. Persons who are to come under consideration for whether payments to them are preferences and are unfair must be brought into comparison with other persons who in some way are in like case with which it is appropriate to make a comparison. The characteristic bringing all of them into comparison is that they are all creditors, and the nature of the comparison seems to require that they be creditors when the events under consideration open. The concern of the subsection is payment or other receipt of advantage in respect of a debt which existed at the opening of the transaction. I do not see how the purposes of the subsection and related provisions would be served if it applied to a transaction in the course of which a person dealing with the company supplied value, became a creditor and received payment in a series of events so closely connected as to be one transaction. Why would the legislature provide for such a transaction to be avoided, or speak of it as an unfair preference?

33   I note incidentally that, as happened in this case, a person dealing with the company may already be a creditor in respect of some other transactions and debts which existed before the transaction, were unaffected by it and continued to exist after the debt arising in the transaction had been discharged. I am unable to see any legislative purpose which would be served by an application of the subsection which arose out of the person dealing with the company having already been a creditor in some other transaction.

34   The operation of subs.588FA(1) and the extent to which it altered the law as to preferences were considered extensively in VR Dye & Co. v. Peninsula Hotel (in Liq) & Anor [1999] 3 VR 201; [1999] 32 ACSR 27 by Ormiston JA particularly at paras[27] and following.

35   Dye & Co. v. Peninsula Hotels related to a pre-payment to an accountant for professional work which was yet to be carried out, followed by issue of an invoice after performance of the work and deduction of the amount invoiced from the amount of the pre-payment held in a trust account. Ormiston JA considered the terms of subs.558FA(1) and addressed the extent to which, under earlier legislation and under the common law before any legislation dealt with the matter, payments which were not regarded as conferring an unfair preference, priority or advantage were excepted from the law which avoided preferential payments to creditors by insolvents. His Honour reviewed the authorities in which and the basis on which it was accepted that some classes of payments including Cash-On-Delivery sales and payments in the course of a running account were not voidable. Ormiston JA referred to recognition of these exceptions in authority including decisions of the High Court of Australia: Richardson v. Commercial Banking Co. of Sydney Ltd (1952) 85 CLR 110 and Airservices Australia v. Ferrier (1996) 185 CLR 483. There is little in the language of s.588FA itself which could be thought to continue earlier exceptions; of this Ormiston JA said at para.[31] “However, though the bare language of s.588FA and following might seem to deny the purposive element read into s.122 [of the earlier Bankruptcy Act], these sections are but manifestations of a more general policy of the law as to insolvency … [32] the qualification applying to running account payments must be considered as being accepted by Parliament in as much as subs.(3) of s.588FA explicitly recognises it. I would therefore conclude also that the other, formerly existing, apparent exceptions were intended still to apply and, to that extent, the legislative definition must be treated as purposive. In other words the section is still directed against unfair preferences. If that be so, then I would conclude that the new provision should be construed in the same way as the former provision, except to the extent that the language of s.588FA clearly points to a contrary conclusion.”

36   Ormiston JA went on to address case law specifically relating to s.588FA and the policy served by provisions of this kind, and said [36]:

In each case the court is obliged to look at the transactions between the parties in a manner which accords with the commercial realities. It is not a matter of isolating particular individual steps in the course of a business relationship so as to give one element a different characteristic from that which the totality of that relationship would evidence. That is but one aspect, but a principal aspect, of the running account cases which have realistically faced the way in which companies and other parties carry on business when close to insolvency. The general principle may be stated in the terms expressed by the High Court in Richardson at 132 per Dixon, Williams and Fullagar JJ:
In considering whether the real effect of a payment was to work a preference its actual business character must be seen and when it forms part of an entire transaction which if carried out to its intended conclusion will leave the creditor without any preference priority or advantage over other creditors the payment cannot be isolated and construed as a preference.
See also at 129, as to the need to look to the “entire” or “whole” transaction, cited with approval by Barwick CJ in Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266 at 283; [1966] ALR 855. The passage at 132 was recently cited with approval by the majority in Airservices (Dawson, Gaudron and McHugh JJ) at CLR 502, where they introduced it with these words:
As a consequence, a payment made during a six month period cannot be viewed in isolation from the general course of dealing between the creditor and the debtor before, during and after that period. Resort must be had to the business purpose and context of the payment to determine whether it gives the creditor a preference over other creditors. To have the effect of giving the creditor a preference, priority or advantage over other creditors, the payment must ultimately result in a decrease in the net value of the assets that are available to meet the competing demands of the other creditors.
After quoting the cited passage from Richardson, they continued:
If the purpose of a payment is to secure an asset or assets of equal or greater value, the payee receives no advantage over other creditors. The other creditors are no worse off and, where the value of the assets has increased, they are actually better off.
(See also per Brennan CJ at CLR 491 and per Toohey J at CLR 516-18.) The only qualification I would seek to place on these passages, which is doubtless implicit, is that a precise evaluation of services and goods provided can never be made satisfactorily and, unless there be some dishonest attempt to overvalue particular goods or services, they ought for practical purposes to be taken as having been received at face value, that is, at the value at which the company agreed to acquire them. This process of analysis of each transaction was later described by the majority as the “doctrine of ultimate effect” (at 509).

37   Winneke P. and Tadgell JA concurred in this judgment. With respect I find Ormiston JA’s judgment highly persuasive. Although a decision of the Court of Appeal of Victoria is not strictly binding upon me, a decision of an appellate court on uniform companies legislation is an authority which I ordinarily should follow. I find the words of s.588FA very bare of indications of the purpose which the provision was intended to serve. If it was intended simply to avoid all the insolvent company’s payments to creditors during the relation back period unless they were exactly equal to the liquidation dividend that result could have been produced directly without introducing the word “unfair” or any connotation of an unfair preference. If the subsection is read in the most strictly literal way the word “unfair” appears to be introduced to no purpose, except to lend a pejorative epithet to a highly general avoidance of transactions. Unless the purposive approach taken by Ormiston JA is correct I am unable to see what unfairness would be corrected and what advantage there might be in laying hands on all dealings with an insolvent company and retrospectively invalidating all payments of money for money’s worth; that would make an insolvent company an economic pariah and ensure its failure. Considerations related to the purpose of the provision appear to me to support indications in the text of subs.588FA(1) which seem to pick up a transaction which already has at its opening a creditor, a company and a debt and applies its comparison to a receipt which is a result of the transaction.

38   Some transaction of kinds which in the past have been regarded as exceptions or instances of non-application of provisions avoiding unfair preferences might escape the sweep of s.588FA(1) for technical reasons; for example a pre-payment against expected future services on some terms in which the cost of the services was discharged against the amount held on the pre-payment without a debt ever arising would seem to be outside subs.588FA(1) because the provider was never a creditor; and a Cash-On-Delivery sale of goods where delivery and payment were exactly contemporaneous would, it would seem, not give rise to any debt.

39   A particular difficulty of attempting a literal approach to the application of subs.588FA(1), which is resolved by some observations of Ormiston JA is the identification of the transaction referred to in any particular attempt to apply the subsection. When an attempt is made to apply literally the circular and inclusive definition of “transaction” to the sales of meat and payments which took place in May and June 1998 several different characterisations of the relevant transaction are literally available and could conceivably produce different results. If, as the definition when read literally seems to authorise, the transaction is characterised as the payment alone and all other aspects of the events which led to the payment are not regarded as part of the transaction, the conclusion that the transaction is an unfair preference is inescapable, and is preordained by the characterisation; after delivering the meat, and both before and after receiving a post-dated cheque Sangria was a creditor in respect of an unsecured debt, the tender of a cheque and of course of a post-dated cheque was no more than conditional payment and the debt was not discharged but continued to exist until the cheque was met (as each cheque was). Paring down the characterisation of the relevant transaction to such a narrow sliver involves ignoring the facts which make the payment comprehensible and which can be taken together with the payment to constitute a transaction, defensibly a transaction within the ordinary meaning of that word and within the defined meaning.

40   Ormiston JA dealt with these considerations at paras. 39 and 40:

[39] There still remains the question of how one should properly approach a transaction other than a COD or running account transaction, the latter being dealt with in subs(3) in terms which need not here be examined. In my opinion it is still necessary, in order properly to characterise any transaction, to look at the totality of the business relationship between the parties so as to see whether there is a true preferring of a creditor by the insolvent company. The passages to which I have referred earlier from cases such as Robertson v Grigg, Richardson and Airservices still entitle a court to look at what the parties are intending to effectuate and how that was effectuated, in part or in whole, by the impugned transaction. As was said in the unreported judgment of the Full Court by Young CJ, Lush and Fullagar JJ in Re A & J Lazzarotto Pty Ltd (unreported, 16 December 1977), cases such as Richardson are relevant “because it shows that the whole transaction which in fact is agreed upon and carried out must be regarded for the purpose of determining what the effect of one component part of it is” (at 7). (Cited with approval by the Full Federal Court in Ferrier v Civil Aviation Authority at FCR 59, which was reversed by the High Court in Airservices v Ferrier largely on the question of the application of the particular facts to accepted principles.)
[40] Consistently with this view the majority in Airservices said (at CLR 502) that “The purpose for which the payment was made and received will usually determine whether a payment has the effect of giving the creditor a preference, priority or advantage over other creditors”. Conceding, as was made explicit at 501, that the subjective intention of the parties is irrelevant, nevertheless that case clearly recognises that the objective purpose, in a business sense, of the whole transaction must be considered by the court in order that it can “look to the ultimate effect of the transaction” (at 502).

41   In the application of subs.588FA(1) I am required to take the step, applying the subsection to the facts, of deciding what is to be recognised as a transaction, or what are to be recognised as transactions. This point of characterisation, which is a turning point for disposing of the claim of unfair preferences, does not seem to me to be a point where the grounds of decision can be completely certain or fully articulated. In my view the transaction to which s.588FA(1) is to be applied if the purpose of the subsection is to be regarded and the connotation of the words “unfair preference” is to have an appropriate influence on its application is the whole series of events including, in each of the six cases, the order for supply of meat, its delivery, the contemporaneous delivery of the invoice, handing over a cheque or sending it on either at or soon after delivery, in five of the six cases a post-dated cheque for exactly the price, and when the post-date arrived, payment of the cheque. In my judgment, in each of the six cases there was a discrete transaction for the purposes of the subsection, and the transaction consisted of the whole series of events, as they were sufficiently directly connected together, and sufficiently discrete from any other events, to constitute one transaction within the meaning and purpose of the subsection. In each case the transaction so defined cannot, in my view, be treated as or found to be an unfair preference; there was no unfair or preferential element in it as Cooney Holdings received goods and paid for them; it made arrangements to pay for them; it made arrangements for the payment to take place not exactly but substantially contemporaneously with receipt of value, in one series of events which formed one transaction. The delivery of the goods and the payments are so closely bound together in events and in time that they should be characterised as the same transaction.

42   A different characterisation may have been given if the events in any of the series had not been as closely related together as they were. In particular, the use of post-dated cheques is usually a sign that something untoward may be taking place, and if the periods of postdating had been longer, or if presentation of a cheque had been deferred after its post-date, or if a cheque had not been met when first presented, the series of events would not have had the integration which they appear to me to have and a different characterisation may have been appropriate. So too, if each payment had not been tied so exactly to one particular delivery. A different characterisation would have to be given to events in which a series of sales took place, then a claim was made for payment of the total, and then one or more payments were made against the claim. There is room to regard a creditor who received payment in circumstances like that as a subject for consideration of unfair preference in relation to other creditors in like case, but a supplier who delivers goods and receives payment for that delivery substantially contemporaneously with the delivery is not brought under consideration in any context of unfair preference. I see nothing in these six transactions which was unfair, or preferential, or for which any legislative purpose might be supposed which could be served by discouraging such transactions, or by making them hazardous.

43   With respect of the instalments paid from January to June 1998 under the agreement made in August 1997 for payment by instalments of an old debt incurred over a period ending in March 1997 the position is altogether different and the application of subs.588FA(1) is clear in my opinion.

44 Sangria’s claim to rely on the defence in subs.588FG(2) directs attention first to the requirement in para.(a) that Sangria became a party to each transaction in good faith. Sangria through Mr Scott made a claim of good faith and there is no element in the facts which would disturb the view that Sangria acted in good faith; there is no element of contrivance, collusion with Cooney Holdings or its principals or any other wrong behaviour which might be thought of as evidencing lack of good faith. In particular there is no sign of any behaviour which could be supposed to have been intended to evade provisions of the Corporations Law relating to insolvency and its consequences.

45   In my opinion good faith is to be tested subjectively. Sangria’s counsel observed that Hill J had treated the issue of good faith as objective in Nilant v. Borden Australia Pty Ltd - Federal Court of Australia unreported 26 June 1996. In my respectful view his Honour’s observations are not to be read in that way.

46   Reliance on para.(b) directs attention to the existence of reasonable grounds for suspecting that Cooney Holdings was insolvent or would become insolvent as a result of the transaction. The idea that there were grounds for suspecting that any of the transactions would cause the company to become insolvent has no basis and can be dismissed. Paragraph (i) appears to direct attention to the existence of reasonable grounds for formation of a suspicion by Sangria itself, and subpara.(ii) directs attention to the existence of reasonable grounds for the formation of such a suspicion by a reasonable person in Sangria’s circumstances. I would think that it would be seldom that the two tests would produce different results, although it is conceivable that a person might be afflicted by some personal difficulty in forming a suspicion; the defence is available only if both are satisfied.

47   Kitto J gave the following exposition of a suspicion in Queensland Bacon Proprietary Limited v. Rees (1966) 115 CLR 266 at 303:

In the first place, the precise force of the word “suspect” needs to be noticed. 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:”, as Chambers’s Dictionary expresses it. Consequently, a reason to suspect that a fact exists is more than a reason to consider or look into the possibility of its existence. The notion which “reason to suspect” expression sub-s. (4) is, I think, of something which in all the circumstances would create in the mind of a reasonable person in the position of the payee an actual apprehension or fear that the situation of the payer is of the payer’s ability to pay his debts as they become due and of the effect which acceptance of the payment would have as between the payee and the other creditors.

48   The simple history of a series of sales beginning in August 1996 which were not paid for, amounting to $186,047.58 in March 1997 would cause suspicion, indeed alarm in the mind of any reasonable person. The history given by Mr Scott of his communications with Mr Cooney, which Mr Scott put forward as explaining his not feeling concerned, would, in my finding, do nothing but amplify concern in the mind of a reasonable person; Mr Cooney gave Mr Scott a series of fobbing and altogether inadequate explanations for not paying from time to time for meat which in the nature of things would be immediately processed and onsold and would generate revenue. Giving explanations by reference to involvement in a completely unrelated development business can have done nothing but increase alarm; as an explanation for not paying for meat supply the explanations were quite irrelevant. It cannot be a concern of an abattoir in Coonamble to contribute to credit for its customer to carry out some development project in Sydney. Sangria felt sufficient concern to commence litigation in April 1997. Mr Van Cooney’s letter of 26 June 1997 saying “… my client is not attempting to avoid payment of any money due to your client but is merely asking for time to pay …” in relation to the amount involved and the times it had been outstanding must have caused further alarm.

49   There could be no comfort in the balance sheet which, in the circumstances which I referred to earlier, should have given the reasonable reader strong reason to doubt the ability of Cooney Holdings to meet its current liabilities, and must also have made doubtful its capacity to carry on its butchery business, as that seemed altogether dependent on the outcome of the development business. The circumstances and terms of negotiation of the agreement to pay by instalments were practically a demonstration of incapacity to pay the whole sum; it would take almost two years to pay off the instalments, to which interest was to be added. Further, joining George Cooney as in effect a guarantor and making provision for security to be obtained were indications of actual lack of confidence in Cooney Holding’s own ability to meet its debts, which must have been greatly emphasised when the promised security was not forthcoming. These have to be taken with the history of dealings with Sangria and its continuing involvement in the development project which according to the prediction in Note 2 in the balance sheet was not going to reach final settlement until November 1998 or later at a date not determinable. The agreement for instalments no doubt had a significant effect on solvency in that the instalment arrangement deferred payability of the debt, but in my judgment no reasonable person could have resisted suspicion about Cooney Holding’s solvency.

50   The manner in which supply and payment were regulated when sales resumed in May 1998 indicates that Sangria regarded dealing with Cooney Holdings as a matter in which caution and close control were required.

51   Counsel for the defendant in his submissions described the company’s problem arising out of its funds being applied to a real estate investment as “a temporary liquidity problem”. In my view the postponement of receipt of the proceeds of the development indicated by Note 2 could not be thought of as a temporary liquidity problem, while the size of the unpaid first instalment, already in arrears by 23 June 1997, and the influence of the instalment on the company’s current position were far too large to be dismissed as a temporary liquidity problem, particularly as the balance sheet showed that there were other complexities relating to the Power House Trust claim in the path of realisations from the development. The difficulties were long lasting. A company which can pay its way in the development business does not finance itself by running up huge debts over many months in the meat business.

52   When supply ceased in 1997 Mr Cooney told Mr Scott that the company was getting supply from a cheaper supplier. In my finding this cannot have been the whole reason why supply by Sangria ceased; a large amount was due, it had accumulated over many months, there had been no payments and a series of fobbing explanations, and there must have been doubts about the company’s ability to pay. Under cross-examination Mr Scott explained commencing the District Court proceedings by saying: “He told me he had a short-term cash flow problem.” I do not accept that this is a whole explanation of how the position appeared to Mr Scott at the time. By January 1998, after what Sangria had been through in attempts to collect its money, the District Court proceedings, the negotiations, the agreement for instalments, and the unfulfilled promise of security, any reasonable person would in my finding have had suspicions about the company’s solvency, even though the instalments came in more or less regularly. A short term lack of liquidity is not to be equated with insolvency. However when failure to pay continues for many months and under the pressure of being sued, inability to pay becomes the obviously correct interpretation. Notwithstanding Mr Scott’s evidence, the circumstances establish, in my finding, that Sangria itself actually had suspicions about the company’s solvency. The absence of any transactions over a long period, over a year, and the arrangements for payments and acceptance of post-dated cheques when transactions resumed support this finding. The use of post-dated cheques as a practice shows that the company’s business was being conducted in an atmosphere of irregularity and that payment on due dates was a continuing difficulty. The probabilities are that Mr Scott did not have the belief alleged, and it is quite certain that a reasonable person in his position would have strongly suspected insolvency from April 1997 onwards, if not earlier.

53   In my finding there were reasonable, indeed strong grounds for suspecting that Cooney Holdings was insolvent from January 1998 onwards when the payments in question were made and Sangria has not established the facts referred to in subpara.(b).

54   All the transactions took place for valuable consideration and the defendant has proved the facts referred to in subpara.(c).

55   In the circumstances the defence has not been made out in respect of any of the payments. However only the six payments of instalments totalling $42,000 are in my judgment preferential payments.

56   I will give judgment for the plaintiff for $42,000. I have not yet considered any question of costs.

57   The plaintiffs claimed interest at the rate usually allowed on judgment debts from 12 March 1999, the date of a letter of demand before action. In my view I should allow this claim. Interest on $42,000.00 from 12 March 1999 to 21 March 2001 amounts to $8,100.25.

58   Order: Give judgment for the plaintiffs for $50,100.25.

Last Modified: 05/03/2001