Matthews in His Capacity as Liquidator of Graphpak Australia Pty Ltd v DNP Australia Pty Ltd - [2019] SADC 36

DISTRICT COURT OF SOUTH AUSTRALIA
(Civil: Minor Civil Review)
MATTHEWS IN HIS CAPACITY AS LIQUIDATOR OF GRAPHPAK AUSTRALIA PTY LTD v DNP AUSTRALIA PTY LTD
[2019] SADC 36
Judgment of His Honour Judge O'Sullivan
26 March 2019
MAGISTRATES - APPEAL AND REVIEW - SOUTH AUSTRALIA
CORPORATIONS - WINDING UP - CONDUCT AND INCIDENTS OF WINDING UP - EFFECT OF WINDING UP ON OTHER TRANSACTIONS - PREFERENCES AND VOIDABLE TRANSACTIONS - UNFAIR PREFERENCES
Application for review of a minor civil decision of a Magistrate. The applicant brought proceedings in the Adelaide Magistrates Court alleging that the respondent received payments from Graphpak Pty Ltd during the relation back period which constituted an unfair preference within the meaning of s 588FA of the Corporations Act 2001 and were therefore insolvent transactions within the meaning of s 588FC, and are voidable pursuant to s 588FE(2) of the Act.
The Magistrate held that the payments by Graphpak Pty Ltd to the respondent were not voidable transactions as the respondent received the payments in good faith, that the respondent did not suspect Graphpak Pty Ltd of insolvency during the relation back period, and that a reasonable person in its position would not have done so. On appeal, the applicant contended that the Magistrate erred in finding that the transactions were not voidable transactions.
Held:
1. The learned Magistrate erred in finding that the requirements of s 588FG(2)(b)(i) had been satisfied;
2. The learned Magistrate erred in finding that the requirements of s 588FG(2)(b)(ii) had been satisfied;
3. The learned Magistrate erred in finding that a reasonable person in DNP’s circumstances would not have grounds for suspecting Graphpak was insolvent at the time it received the payments; and
4. Judgment rescinded. Applicant is entitled to judgment.
Magistrates Court Act 1991 s 38; Corporations Act 2001 ss 588FA, 588FC, 588FE, 588FG, 588FF, referred to.
Harradine v District Court of South Australia [2012] SASC 96; Australian Securities and Investments Commission v Plymin (No 1) [2003] VSC 123; Sellers v Offset Alpine Printing Pty Ltd; Sellers v Trigra Pty Ltd (in liq) [2003] VSCA 37; Cook’s Construction Pty Ltd v Brown [2004] NSWCA 105; Dean-Willcocks v Commissioner of Taxation [2008] NSWSC 1113; Re Ermayne Pty Ltd; Sims v Tech Holdings Pty Ltd (trading as Westline Furniture) (1999) 30 ACSR 330; Sutherland (in his capacity as liquidator of Sydney Appliances Pty Ltd (in liq) v Eurolinx Pty Ltd [2001] NSWSC 230; Clifton v CSR Building Products Pty Ltd [2011] SASC 103; Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266; Cussen as Liquidator of Akai Pty Ltd v Commissioner of Taxation (2004) 51 ACSR 530; Ex parte The Co-operative Brick Co Ltd [1909] VLR 27; Arthur Yates and Co Pty Ltd v The Vegetable Seeds Committee (1945) 72 CLR 37; Mann v Sangria Pty Ltd [2001] NSWSC 172; Sandell v Porter (1966) 115 CLR 666; Sheahan v Fabienne Pty Ltd [1999] SASC 335; (1999) 17 ACLC 1600; Jones v Dunkel (1959) 101 CLR 298, considered.

MATTHEWS IN HIS CAPACITY AS LIQUIDATOR OF GRAPHPAK AUSTRALIA PTY LTD v DNP AUSTRALIA PTY LTD
[2019] SADC 36
Introduction

This is an application by the applicant seeking a review of a minor civil decision of a Magistrate delivered on 11 April 2018 against it in action number AMCCI-17-1318 in the Adelaide Magistrates Court. The application is brought pursuant to s 38 of the Magistrates Court Act 1991.
The applicant was the plaintiff in those proceedings which involved a claim by him as the liquidator of Graphpak Pty Ltd (‘Graphpak’) alleging that the defendant, DNP Australia Pty Ltd (‘DNP’) received payments from Graphpak during the relation back period. It is alleged that those payments, totalling $12,067.35, constituted an unfair preference within the meaning of s 588FA of the Corporations Act 2001 (Cth) (‘the Act’), are therefore insolvent transactions within the meaning of s 588FC, and so are voidable pursuant to s 588FE(2) of the Act.
The applicant capped his claim at $12,000 to bring it within the minor civil jurisdiction.
DNP says it did not suspect that Graphpak was insolvent when it received the payments and, as a result, relies on the good faith defence set out in section 588FG(2) of the Act.
In dismissing the applicant’s claim, the learned Magistrate concluded[1] that:
I am satisfied that DNP did not suspect Graphpak of insolvency during the relation back period, and that a reasonable person in its position would not have done so. DNP received the transaction payments in good faith, and as such the transaction is not voidable.
[1] Reasons 11 April 2018, [49].
The nature of a minor civil action
Section 38 of the Magistrates Court Act sets out the provisions applicable to the trial of a minor civil action and any review of that action:
38—Minor civil actions
(1)     The following provisions are applicable to the trial of a minor civil action:
(a)     the trial will take the form of an inquiry by the Court into the matters in dispute between the parties rather than an adversarial contest between the parties;
(b)     the Court will itself elicit by inquiry from the parties and the witnesses, and by examination of evidentiary material produced to the Court, the issues in dispute and the facts necessary to decide those issues;
(c)     the Court may itself call and examine witnesses;
(d)     the parties are not bound by written pleadings;
(e)     the Court is not bound by the rules of evidence;
(f)     the Court must act according to equity, good conscience and the substantial merits of the case without regard to technicalities and legal forms.
(2)…
(3)…
(4)The following provisions govern representation in minor civil actions:
(a)     representation of a party by a legal practitioner will not be permitted unless—
(i)    another party to the action is a legal practitioner; or
(ii)     all parties to the action agree; or
(iii)the Court is of the opinion that the party would be unfairly disadvantaged if not represented by a legal practitioner;
(ab)   however, the Court may, in its discretion, permit representation of a party by a legal practitioner at the hearing of an interlocutory application;
(b)     if a party to the action is a body corporate, the Court must, if the party seeks to be represented by an officer or employee who is not a legal practitioner, permit such representation;
(c)     if a person is subrogated to the rights of a party, the Court will permit that person to appear in the proceedings on behalf of that party and to be represented in the same way as if that person were a party;
(d)     the Court will permit a party, or a person subrogated to the rights of a party, to be assisted by a person who is not a legal practitioner but only if that person is not acting for fee or reward.
(5)…
(6)The District Court (constituted of a single Judge) may, on the application of a party dissatisfied with a judgment given in a minor civil action, review the matter.
(7)The following provisions apply to such a review by the District Court:
(a)     subject to paragraph (ab), the right of a party to be represented by a legal practitioner at the review will be determined in accordance with subsection (4);
(ab) if, in the case of a review that relates to a minor civil action in respect of a transferred proceeding within the meaning of Part 3A of the South Australian Civil and Administrative Tribunal Act 2013, a party was represented by a legal practitioner at the proceeding, then the party may be represented by a legal practitioner at the review by the Court;
(b)     the Court may inform itself as it thinks fit and, in doing so, is not bound by the rules of evidence;
(c)     the Court may, if it thinks fit, re-hear evidence taken before the Magistrates Court;
(d)     in determining the matter, the Court may—
(i)affirm the judgment; or
(ii)rescind the judgment and substitute a judgment that the Court considers appropriate; or
(iii)if the review arises from a default judgment or summary judgment, rescind the judgment and—
(A)     substitute a judgment that the Court considers appropriate; or
(B)remit the matter to the Magistrates Court for hearing or further hearing;
(e)     in hearing and determining the review, the Court must act according to equity, good conscience and the substantial merits of the case without regard to technicalities and legal forms.
(8)A decision of the District Court on a review is final and not subject to appeal.
(9)However, the District Court may reserve a question of law arising in a review for determination by the Full Court of the Supreme Court which may determine the question and make any consequential orders or directions appropriate to the circumstances of the case.
In Harradine v District Court of South Australia[2] Blue J explained that the role of the Court in a minor civil action is one of an inquiry by the Magistrate as opposed to an adversarial contest between the parties. His Honour observed that the policy of the Magistrates Court Act is to provide an efficient and economical means by which small claims can be determined in that Court.
[2] [2012] SASC 96, [40]-[49].
Section 38(7) of the Magistrates Court Act sets out the provisions that apply to a review by the District Court of a minor civil action. It provides at s 38(7)(e) that in hearing and determining the review, the Court must act according to equity, good conscience and the substantial merits of the case without regard to technicalities and legal forms.
Corporations Act-unfair preferences
Section 588FA provides as follows:
588FA Unfair preferences
(1)A transaction is an unfair preference given by a company to a creditor of the company if, and only if:
(a)     the company and the creditor are parties to the transaction (even if someone else is also a party); and
(b)     the transaction results in the creditor receiving from the company, in respect    of an unsecured debt that the company owes to the creditor, more than the creditor would receive from the company in respect of the debt if the transaction were set aside and the creditor were to prove for the debt in a winding up of the company;
even if the transaction is entered into, is given effect to, or is required to be given effect to, because of an order of an Australian court or a direction by an agency.
(2)For the purposes of subsection (1), a secured debt is taken to be unsecured to the    extent of so much of it (if any) as is not reflected in the value of the security.
(3)     Where:
(a)     a transaction is, for commercial purposes, an integral part of a continuing business relationship (for example, a running account) between a company and a creditor of the company (including such a relationship to which other persons are parties); and
(b)     in the course of the relationship, the level of the company’s net indebtedness to the creditor is increased and reduced from time to time as the result of a series of transactions forming part of the relationship;
then:
(c)     subsection (1) applies in relation to all the transactions forming part of the relationship as if they together constituted a single transaction; and
(d)     the transaction referred to in paragraph (a) may only be taken to be an unfair preference given by the company to the creditor if, because of subsection (1) as applying because of paragraph (c) of this subsection, the single transaction referred to in the last mentioned paragraph is taken to be such an unfair preference.
Section 588FC provides:
588FC Insolvent transactions
A transaction of a company is an insolvent transaction of the company if, and only if, it is an unfair preference given by the company, or an uncommercial transaction of the company, and:
(a)     any of the following happens at a time when the company is insolvent:
(i)    the transaction is entered into; or
(ii)an act is done, or an omission is made, for the purpose of giving effect to the transaction; or
(b)     the company becomes insolvent because of, or because of matters including:
(i)    entering into the transaction; or
(ii)a person doing an act, or making an omission, for the purpose of giving effect to the transaction.
The question of voidable transactions is addressed by s 588FE:
588FE Voidable transactions
(1)     If a company is being wound up:
(a)     a transaction of the company may be voidable because of any one or more of subsections (2) to (6) if the transaction was entered into on or after 23 June 1993; and
(b)     a transaction of the company may be voidable because of subsection (6A) if the transaction was entered into on or after the commencement of the Corporations Amendment (Repayment of Directors’ Bonuses) Act 2003.
(2)     The transaction is voidable if:
(a)     it is an insolvent transaction of the company; and
(b)     it was entered into, or an act was done for the purpose of giving effect to it:
(i)    during the 6 months ending on the relation‑back day; or
(ii)     after that day but on or before the day when the winding up began.
(2A) The transaction is voidable if:
(a)     the transaction is:
(i)    an uncommercial transaction of the company; or
(ii)an unfair preference given by the company to a creditor of the company; or
(iii)    an unfair loan to the company; or
(iv)    an unreasonable director‑related transaction of the company; and
(b)     the company was under administration immediately before:
(i)the company resolved by special resolution that it be wound up voluntarily; or
(ii)     the Court ordered that the company be wound up; and
(c)     the transaction was entered into, or an act was done for the purpose of giving effect to it, during the period beginning at the start of the relation‑back day and ending:
(i)when the company made the special resolution that it be wound up voluntarily; or
(ii)     when the Court made the order that the company be wound up; and
(d)     the transaction, or the act done for the purpose of giving effect to it, was not entered into, or done, on behalf of the company by, or under the authority of, the administrator of the company.
(2B)   The transaction is voidable if:
(a)     the transaction is:
(i)    an uncommercial transaction of the company; or
(ii)an unfair preference given by the company to a creditor of the company; or
(iii)    an unfair loan to the company; or
(iv)    an unreasonable director‑related transaction of the company; and
(b)     the company was subject to a deed of company arrangement immediately before:
(i)the company resolved by special resolution that it be wound up voluntarily; or
(ii)     the Court ordered that the company be wound up; and
(c)     the transaction was entered into, or an act was done for the purpose of giving effect to it, during the period beginning at the start of the relation‑back day and ending:
(i)when the company made the special resolution that it be wound up voluntarily; or
(ii)     when the Court made the order that the company be wound up; and
(d)     the transaction, or the act done for the purpose of giving effect to it, was not entered into, or done, on behalf of the company by, or under the authority of:
(i)    the administrator of the deed; or
(ii)     the administrator of the company.
(3)     The transaction is voidable if:
(a)     it is an insolvent transaction, and also an uncommercial transaction, of the company; and
(b)     it was entered into, or an act was done for the purpose of giving effect to it, during the 2 years ending on the relation‑back day.
(4)     The transaction is voidable if:
(a)     it is an insolvent transaction of the company; and
(b)     a related entity of the company is a party to it; and
(c)     it was entered into, or an act was done for the purpose of giving effect to it, during the 4 years ending on the relation‑back day.
(5)     The transaction is voidable if:
(a)     it is an insolvent transaction of the company; and
(b)     the company became a party to the transaction for the purpose, or for purposes including the purpose, of defeating, delaying, or interfering with, the rights of any or all of its creditors on a winding up of the company; and
(c)     the transaction was entered into, or an act done was for the purpose of giving effect to the transaction, during the 10 years ending on the relation‑back day.
(6)The transaction is voidable if it is an unfair loan to the company made at any time on or before the day when the winding up began.
(6A) The transaction is voidable if:
(a)     it is an unreasonable director‑related transaction of the company; and
(b)it was entered into, or an act was done for the purposes of giving effect to it:
(i)    during the 4 years ending on the relation‑back day; or
(ii)     after that day but on or before the day when the winding up began.
(7)A reference in this section to doing an act includes a reference to making an omission.
Section 588FF sets out the orders a court may make where, on the application of a company’s liquidator, a court is satisfied that a transaction of the company is voidable because of s588FE. Section 588FG provides a defence to an application by a company’s liquidator in relation to an alleged voidable transaction. Sections 588FF and 588FG are in the following terms:
588FF Courts may make orders about voidable transactions
(1)Where, on the application of a company’s liquidator, a court is satisfied that a transaction of the company is voidable because of section 588FE, the court may make one or more of the following orders:
(a)     an order directing a person to pay to the company an amount equal to some or all of the money that the company has paid under the transaction;
(b)     an order directing a person to transfer to the company property that the company has transferred under the transaction;
(c)     an order requiring a person to pay to the company an amount that, in the court’s opinion, fairly represents some or all of the benefits that the person has received because of the transaction;
(d)     an order requiring a person to transfer to the company property that, in the court’s opinion, fairly represents the application of either or both of the following:
(i)    money that the company has paid under the transaction;
(ii)proceeds of property that the company has transferred under the transaction;
(e)     an order releasing or discharging, wholly or partly, a debt incurred, or a security or guarantee given, by the company under or in connection with the transaction;
(f)     if the transaction is an unfair loan and such a debt, security or guarantee has been assigned—an order directing a person to indemnify the company in respect of some or all of its liability to the assignee;
(g)     an order providing for the extent to which, and the terms on which, a debt that arose under, or was released or discharged to any extent by or under, the transaction may be proved in a winding up of the company;
(h)     an order declaring an agreement constituting, forming part of, or relating to, the transaction, or specified provisions of such an agreement, to have been void at and after the time when the agreement was made, or at and after a specified later time;
(i)    an order varying such an agreement as specified in the order and, if the Court thinks fit, declaring the agreement to have had effect, as so varied, at and after the time when the agreement was made, or at and after a specified later time;
(j)    an order declaring such an agreement, or specified provisions of such an agreement, to be unenforceable.
(2)     Nothing in subsection (1) limits the generality of anything else in it.
(3)     An application under subsection (1) may only be made:
(a)     during the period beginning on the relation‑back day and ending:
(i)    3 years after the relation‑back day; or
(ii)12 months after the first appointment of a liquidator in relation to the winding up of the company;
whichever is the later; or
(b)     within such longer period as the Court orders on an application under this paragraph made by the liquidator during the paragraph (a) period.
(4)If the transaction is a voidable transaction solely because it is an unreasonable director‑related transaction, the court may make orders under subsection (1) only for the purpose of recovering for the benefit of the creditors of the company the difference between:
(a)     the total value of the benefits provided by the company under the transaction; and
(b)     the value (if any) that it may be expected that a reasonable person in the company’s circumstances would have provided having regard to the matters referred to in paragraph 588FDA(1)(c).
588FG Transaction not voidable as against certain persons
(1)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 paragraph 588FC(b); and
(B)a reasonable person in the person’s circumstances would have had no such grounds for so suspecting.
(2)A court is not to make under section 588FF an order materially prejudicing a right or interest of a person if the transaction is not an unfair loan to the company, or an unreasonable director‑related transaction of the company, and it is proved that:
(a)     the person became a party to the transaction in good faith; and
(b)     at the time when the person became such a party:
(i)the person had no reasonable grounds for suspecting that the company was insolvent at that time or would become insolvent as mentioned in paragraph 588FC(b); and
(ii)a reasonable person in the person’s circumstances would have had no such grounds for so suspecting; and
(c)     the person has provided valuable consideration under the transaction or has changed his, her or its position in reliance on the transaction.
(3)For the purposes of paragraph (2)(c), if an amount has been paid or applied towards discharging to a particular extent a liability to pay tax, the discharge is valuable consideration provided:
(a)     by the person to whom the tax is payable; and
(b)     under any transaction that consists of, or involves, the payment or application.
(4)     In subsection (3):
tax means tax (however described) payable under a law of the Commonwealth or of a State or Territory, and includes, for example, a levy, a charge, and municipal or other rates.
(5)For the purposes of paragraph (2)(c), if an amount has been paid or applied towards discharging to a particular extent a liability to the Commonwealth, or to the Commissioner of Taxation, that arose under or because of an Act of which the Commissioner has the general administration, the discharge is valuable consideration provided by the Commonwealth, or by the Commissioner, as the case requires, under any transaction that consists of, or involves, the payment or application.
(6)     Subsections (3) and (5):
(a)     are to avoid doubt and are not intended to limit the cases where a person may be taken to have provided valuable consideration under a transaction; and
(b)     apply to an amount even if it was paid or applied before the commencement of this Act.

For the purposes of this matter, the relevant part of s 588FG(2) is that in s 588FG(2)(b)(i) and (ii) which provides a defence against an allegation of receiving an unfair preference if the requirements of the section are proved.
Issues before the learned Magistrate
The learned Magistrate identified two issues for determination[3] as being:
1whether DNP had reasonable grounds for suspecting that Graphpak was insolvent, or would become insolvent; and
2would a reasonable person in DNP’s circumstances have had grounds to suspect that Graphpak was insolvent.
[3] Reasons, [7].
Her Honour has referred to s 588FG(1)(b)(ii)(A) and (B). That appears to be a typographic error as that section does not apply in the circumstances of the case. The correct reference is s 588FG(2)(b)(i) and (ii). Nothing turns on that as the same principles apply to the relevant parts of both sections.
Agreed Facts
There were agreed facts between the parties that:
1Graphpak was insolvent as at 21 May 2012;
2the relation back period for the purposes of section 588FE (2) of the Act is 21 November 2011 to 21 May 2012; and
3during the relation back period Graphpak made payments to DNP in the amount of $12,067.36.
Representation
At the hearing below, the applicant, an Adelaide liquidator, represented himself whereas the defendant was represented by Mr Cameron of counsel. I assume that leave was granted in accordance with s 38(4) of the Magistrates Court Act for the defendant to be represented. At the hearing of the review before this Court, Mr Douglas of counsel appeared for the applicant, and Mr Cameron for the respondent. Both parties agreed to representation.
Further Evidence
At the commencement of the hearing the applicant applied to tender three bundles of documents described as “Book of Documents”, “Supplementary Book of Documents”, and “Applicant’s Additional Documents”, respectively.
The Book of Documents comprises the exhibits at the trial before the learned Magistrate. The Supplementary Book of Documents is a transcript of the trial, and the Applicant’s Additional Documents comprises documents that were not before the learned Magistrate but are advanced at this hearing on the basis that they go to certain matters that were raised during cross-examination before her Honour.[4]
[4] T3.5-10.
The reasons advanced by the applicant in his application to tender the Applicant’s Additional Documents were:[5]
first, the liquidator was self-represented and did not recognise the significance of the documents; and
second, the documents which comprise the Applicant’s Additional Documents, respond to answers by witnesses for DNP that emerged in cross-examination at the trial.
[5] T4.4-13.
I raised the issue with Mr Douglas that the respondent would not have a chance to comment on the Applicant’s Additional Documents.
After hearing from the respondent, I received the Book of Documents, Supplementary Book of Documents, and the Applicant’s Additional Documents in evidence as Exhibits A1, A2, and A3 respectively. In so doing, I indicated that if any of the parties wanted to call further evidence about matters arising from the exhibits then I would be prepared to allow that. As it eventuated, no party applied to call further evidence.
The Trial
Section 588FG(2)(b) has two components, both of which must be satisfied.
Section 588FG(2)(b)
The first requirement is set out in s 588FG(2)(b)(i) and is that at the time when the person received the benefit, the person had no reasonable grounds for suspecting that the company was insolvent at that time or would become insolvent as mentioned in paragraph 588FC(b).
There is no dispute between the parties that the transaction in paying DNP’s outstanding accounts during the relation back period satisfied the criteria for an insolvent transaction and therefore an unfair preference within the meaning of s 588FC.
As part of her consideration of this limb of the s 588FG(2)(b)(i) defence, the learned Magistrate dealt with the history of the trading relationship between Graphpak and DNP and in particular considered whether DNP had reasonable grounds to suspect Graphpak’s actual or impending insolvency.[6]
[6] Reasons, [9] – [39].
The Trading Relationship between Graphpak and DNP
Mr Kenneth Altschwager is the sole director, secretary and shareholder of Graphpak. Mr Altshwager’s wife, Mrs Kerry Altschwager, worked with Graphpak’s bookkeeper to draw invoices, pay bills and budget payments. Mrs Altschwager was accepted by the learned Magistrate as an honest and reliable witness. Her evidence was that she received many calls from creditors seeking payment including Ms Huyen Dinh who would routinely call asking for a payment.[7]
[7] Ibid, [14].
Ms Tanya Prime was Graphpak’s production assistant. She gave evidence and was found by the learned Magistrate to have engaged in reconstruction of some of the events. Her Honour found that Ms Prime was aware that Graphpak owed DNP and other creditors a lot of money, although she thought Graphpak was doing well.[8]
[8] Ibid, [15].
The sole director and secretary of DNP is Ms Pham Hien Huyen Dinh (‘Ms Huyen Dinh’). Ms Huyen Dinh gave evidence that she was aware that Graphpak had purchased substantial new equipment for its factory and had no knowledge of the financial difficulties experienced by Graphpak.[9] Ms Huyen Dinh’s evidence was that when she sent an invoice to Graphpak, she would receive payments of $5000 or $10,000 and she did not worry about it as long as she could meet DNP’s weekly expenses. She said she would usually telephone Ms Prime and ask for a payment to be made.[10]
[9] Ibid, [16].
[10] Ibid, [19].
Mr Altschwager’s evidence was that on occasions Ms Prime had told him that DNP was holding back an order ready for Graphpak until a payment was made. Ms Huyen Dinh denied DNP held back orders for Graphpak pending payment being made. Her Honour accepted Ms Huyen Dinh’s evidence and found that Ms Prime either suggested or implied to Mr Altschwager that DNP was holding back an order pending a payment to encourage him to make a payment to DNP.[11] Whether that is right or not, absent any action on the part of DNP to withhold orders for Graphpak pending payment, Ms Prime’s evidence that she encouraged Mr Altschwager to make a payment to DNP is of no relevance to the question of whether or not DNP and specifically, Ms Huyen Dinh, had reasonable grounds for suspecting that Graphpak was insolvent at the relevant time, or would become insolvent.
[11] Ibid, [21].
The learned Magistrate dealt with two meetings between Graphpak and DNP, one in September or October 2010 and one in August 2011.[12] These were not pre-arranged meetings. Mr Altschwager instigated both meetings with Ms Huyen Dinh to discuss Graphpak’s running account balance with DNP. Ms Huyen Dinh did not appreciate that this was the purpose of Mr Altschwager’s attendances on those dates.[13]
[12] Ibid, [22].
[13] Ibid, [22], [27], [29].
At the time of the September/October 2010 meeting, the balance due to DNP was just over $147,000. Mr Altschwager told Ms Huyen Dinh that Graphpak paid off the balance reasonably quickly, which is what occurred.
The August 2011 meeting was attended by Mr Altschwager, Ms Prime, Ms Huyen Dinh and her husband. At that time the running account balance was $94,680.95, and again, Mr Altschwager told Ms Huyen Dinh Graphpak would pay it off as quickly as it could and agreed to make weekly payments of at least $5000 per week to reduce the account.[14]
[14] Ibid, [24].
Her Honour noted that at a meeting in September or October 2011, Mr Altschwager told Ms Huyen Dinh that Graphpak was having difficulty purchasing fabric for garments and Ms Huyen Dinh agreed that in future,[15] DNP would purchase material for the garments that Graphpak needed as the running account balance was very high and Graphpak was struggling to reduce it.[16] In fact that discussion occurred at the August 2011 meeting.[17]
[15] Ibid, [24].
[16] Ibid, [30].
[17] T48.1-5 and 28-37.
The learned Magistrate found that from Graphpak’s perspective, this may have been in an effort to reduce manufacturing costs carried by Graphpak, as DNP could buy the fabric at a cheaper price than Graphpak and from Ms Huyen Dinh’s perspective, DNP could get the fabric earlier and could pass on the better price to its valued customer.[18]
[18] Reasons, [32].
Mr Altschwager said that after the meeting with Ms Huyen Dinh in August 2011, he was told that DNP was withholding orders ready for collection pending payment so he sourced an alternative sewing company, Opera Fashions, to use if DNP refused. He used Opera Fashions at times when the running account with DNP was high. Ms Huyen Dinh’s evidence was that she had not noticed any decrease in the orders placed with DNP, and the volume of orders fluctuated depending upon the time of year.[19]
[19] Ibid, [34], [37].
Her Honour found that the invoiced orders decreased substantially in the lead up to the relation back period ranging from $287,793.50 between January and June 2010 to $154,956.37 between July and December 2011.[20]
[20] Ibid, [38].
Her Honour accepted Ms Huyen Dinh’s evidence that she was unaware that another sewing company was being used but did not accept that she did not know the orders from Graphpak had decreased. However, her Honour also found that Ms Huyen Dinh did not appreciate the extent of the decrease of the orders prior to the liquidation nor did she attribute any reason for the decrease.
The learned Magistrate accepted[21] the Applicant’s submission as to the indicia set out in Australian Securities and Investments Commission v Plymin (No 1)[22] as being appropriate considerations for whether a party had reasonable grounds to suspect insolvency.
[21] Ibid, [40].
[22] [2003] VSC 123, [386].
Those considerations include: [23]
1Suppliers placing Graphpak on cash delivery terms or otherwise demanding special payments before resuming supply;
2Payments in round figures;
3Creditors unpaid outside trading terms;
4Special arrangements with select creditors.
[23] Ibid.
Her Honour concluded[24] that the indicia indicated in Australian Securities and Investments Commission v Plymin had either not been made out as within the knowledge of anyone at DNP or were practices in place over a long period of time during which DNP continued to be paid for the invoices rendered. Consequently, her Honour was satisfied DNP did not suspect Graphpak of insolvency nor that it would become insolvent as mentioned in s 588FC(b) at the time it received payment.
[24] Reasons, [49].
Section 588FG(2)(b)(ii)
The second requirement of s 588FG(2)(b) is that at the time DNP received payment, a reasonable person in DNP’s circumstances would have had no such grounds for suspecting insolvency or that Graphpak would become insolvent.
Her Honour dealt with this issue at [40]-[48] of the reasons.
The learned Magistrate held that on the oral evidence alone, DNP was at risk of a finding that it was not reasonable for it not to suspect insolvency. However by reason of the trading pattern, evidenced in Exhibit P3, DNP did not suspect Graphpak of insolvency and that a reasonable person in its position would not have done so.[25] I deal with Exhibit P3 below.
[25] Ibid, [48] – [49]; Sellers v Offset Alpine Printing Pty Ltd; Sellers v Trigra Pty Ltd (in liq) [2003] VSCA 37 at [25].
The Applicant’s grounds of review
The applicant put forward its grounds of review on three bases.
1.   The learned Magistrate:
a.misstated the reasons of Peek J in Clifton v CSR Building Products Pty Ltd [2011] SASC 103, [27] and erred in law in ruling that the applicant bears the onus of negating any defence under section 588FG of the Act;[26] and
b.thereby erred in finding that the applicant had not overcome the defence by proving a negative;
when the court ought to have ruled in accordance with the principle in Cook’s Construction Pty Ltd v Brown (2004) 49 ACSR 62 that the respondent bears the onus of establishing the defence and that the respondent had not discharged that onus.
2.   The learned Magistrate erred in law by placing reliance on an aide memoir prepared for trial to analyse payment patterns after the fact in overcoming the Court’s primary finding that “on the oral evidence alone DNP was at risk of a finding that it was not reasonable for it not to suspect insolvency”[27] when the court ought to have found in conformity with the principle in Sutherland (in his capacity as liquidator of Sydney Appliances Pty Ltd (in liquidation)) v Eurolinx Pty Ltd that the application of hindsight is impermissible when applying the objective test within the meaning of section 588FG.
3.   The learned Magistrate thereby erred in mixed fact and law in finding that a reasonable person in the respondent’s position would not suspect Graphpak Pty Ltd of insolvency during the relation back period[28] when the court ought to have found that a reasonable person in the position of the respondent would have suspected insolvency.[29]
[26] Reasons, [8].
[27] Ibid, [48].
[28] Ibid, [49].
[29] FDN 70.
The evidence was not the subject of any dispute between the parties at the review before this Court, rather it is the application of the relevant principles to that evidence.
Relevant Principles
There is no doubt that Graphpak was insolvent at all relevant times. There is also no dispute that the debt due from Graphpak to DNP is unsecured and that on a winding-up, DNP would receive no dividend in the winding-up.[30] That being the case, the payments received by DNP from Graphpak during the relation back period were unfair preferences within the meaning of s 588FA and therefore insolvent transactions within the meaning of s 588FC. The consequence of that is the unfair preferences were voidable transactions within the meaning of s 588FE so that each was, pursuant to s 588FF, subject to the making of orders having the effect of setting them aside unless DNP could establish the defence set out in s 588FG(2).
Section 588FG(2)(b)(i)
[30] Ibid, [5].
Subjective Test
The question of whether DNP had no reasonable grounds for suspecting the company was insolvent is a question to be determined subjectively.[31]
[31] Cook’s Construction Pty Ltd v Brown [2004] NSWCA 105 at [19].
In Cook’s Construction Pty Ltd v Brown[32] the New South Wales Court of Appeal observed that:[33]
There is no doubt that the onus is on the defendant in the proceedings to satisfy the Court that (1) it had no reasonable grounds for suspecting DML was insolvent, the so-called subjective test; and (2) that a reasonable person in the appellant’s circumstances would have had no such grounds, the so-called objective test. It is always difficult to ascertain what is the intention or purpose of a corporation in various aspects of the law and this has been noted time and time again, perhaps most significantly in Re The Mayor, etc, of the City of Hawthorn; Ex parte The Co-operative Brick Co Ltd [1909] VLR 27, 51 and Arthur Yates and Co Pty Ltd v The Vegetable Seeds Committee (1945) 72 CLR 37, 69.
[32] Ibid.
[33] Ibid at [19].
The Court also observed that:[34]
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. However, no matter how difficult the task is, the approach of the courts as exemplified in what Moffitt P said in the Parramatta Stadium case, Parramatta City Council v Hale (1982) 47 LGRA 319, 345, “Proof of a state of mind whether of a person or collegiate body may be a matter of difficulty, but the person … 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.
[34] Ibid at [23].
I note that in Dean-Willcocks v Commissioner of Taxation[35] Barrett J considered the s 588FG(2)(b)(ii) defence and the question of whether the test is subjective or not. His Honour noted:[36]
As Bryson J pointed out in Mann v Sangria Pty Ltd [2001] NSWSC 172; (2001) 38 ACSR 307 at [46], the first of these inquiries is concerned with the existence of reasonable grounds for the formation of the relevant suspicion by the Commissioner, while the second is concerned with the existence of reasonable grounds for the formation of the relevant suspicion by a reasonable person in the Commissioner’s circumstances. I do not think it is all that helpful to attempt to characterize one inquiry as “subjective” and the other as “objective”. One should merely approach the two inquiries according to the terms in which they have been expressed by the legislature. I would, however, respectfully endorse Bryson J’s observation (at [46] 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.”
His Honour thus accommodates the possibility that the actual frame of mind of the particular person may be affected by factors to which the mind of the hypothetical “reasonable person” would be impervious, even though each formed a judgment on “reasonable grounds”. And the “reasonable person” to whom regards is to be had is, as the Court of Appeal confirmed in Cussen as Liquidator of Akai Pty Ltd v Commissioner of Taxation [2004] NSWCA 382; (2004) 51 ACSR 530 at [31], a “reasonable business person”.
[35] [2008] NSWSC 1113.
[36] [2008] NSWSC 1113 [10] – [11].
I approach the inquiry under s 588FG(2)(b)(i) by considering whether, subjectively, DNP had no reasonable grounds for suspecting Graphpak was insolvent at the time DNP received the payments in question.
Payment Patterns and Other Indicia
In Re Ermayne Pty Ltd; Sims v Tech Holdings Pty Ltd (trading as Westline Furniture),[37] Wicks J considered the defence in s 588FG(2). In that matter, his Honour noted in that particular case that irregular payments and delays in payments did not differ from the overall trading pattern such that not a great deal of use can be made of the minor change in pattern in assessing whether a person would have grounds to suspect insolvency.[38]
[37] (1999) 30 ACSR 330.
[38] Ibid, 332.
His Honour however had regard to other material factors including:
·a dishonoured cheque which was an isolated instance; and
·evidence of pressure being applied to ensure the payment of the respondent’s accounts. His Honour held that requests for payment are consistent with nothing more than tardiness in the payment of accounts which in that particular case was nothing new, and there was correspondence that referred to a cash flow problem.[39]
[39] Ibid, 333.
His Honour also referred to correspondence[40] which indicated some concern on the part of the respondent but that did not, in his Honour’s view, demonstrate a high level of concern such that it created a suspicion of insolvency in any way.
[40] Ibid, 334.
A reference in the correspondence to having suppliers “back on side” in correspondence was a more significant factor of insolvency, suggesting creditors are becoming annoyed with the failure of the company to make payment.
As to cashflow problems, his Honour observed:[41]
Cash flow problems can be indicative of or raise a suspicion of insolvency although not necessarily so. It is important to put them in context. One may be dealing with a trader with a persistent and long history of delay in payment of accounts. The trader concerned maybe one who has a deliberate policy of keeping his creditors waiting on the basis that such credit is free and far superior to that which any bank can provide. In my view “cash flow problems” are a factor and nothing more. In this case, the company has been late in paying the respondent from the time in which the trading relationship first started. …
[41] Ibid.
Suspicion
As to the issue of suspicion, in Ermayne, Wicks J dealt with that issue in the following terms:[42]
A suspicion was described by Kitto J in Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266 at 303; [1966] ALR 855 in the following terms:
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.
In the present case, I consider that the respondent has made out a sufficient case to say that there was no positive feeling of actual apprehension or mistrust on its part amounting to a slight opinion but without sufficient evidence that the company was insolvent at the material times; nor would there have been such a feeling on the part of a reasonable person placed in the respondent’s circumstances at those times.
[42] (1999) 30 ACSR 330, 337.

In Sutherland (in his capacity as liquidator of Sydney Appliances Pty Ltd (in liq) v Eurolinx Pty Ltd[43] Santow J discussed the suspicion of insolvency. After referring to Queensland Bacon Pty Ltd v Rees[44] and the judgment of Kitto J to which I have referred above, his Honour continued:[45]
The case law illustrates that there is no single factor whose presence invariably establishes that there was, or should have been, the requisite suspicion. Rather it is a question of looking not in hindsight but through the contemporary eyes of the parties, at the commercial circumstances prevailing between them. This is to identify in that context those factors pointing towards insolvency of the debtor. This in turn is in order to ascertain which of those factors were apparent to the payee, and then the cumulative impact that knowledge of them should have had, or did have, upon the payee. There will also be potentially countervailing factors and circumstances to be weighed in the balance which could have tended to dispel suspicion at the time. In Re Ermayne provides an illustration of this appraisal and balancing process. This [sic] Wicks J noted (at 334):
“Cash flow problems can be indicative of or raise a suspicion of insolvency although not necessarily so. It is important to put them in context. One may be dealing with a trader with a persistent and long history of delay in payment of accounts … In my view “cash flow problems” are a factor and nothing more.”
Barwick J adds the warning in Sandell v Porter (1966) 115 CLR 666 at 670 that
“The conclusion of insolvency ought to be clear from a consideration of the debtor’s financial position in its entirety and generally speaking ought not to be drawn simply from evidence of a temporary lack of liquidity.”
[43] [2001] NSWSC 230.
[44] (1966) 115 CLR 266 at 303.
[45] Sutherland (in his capacity as liquidator of Sydney Appliances Pty Ltd (in liq) v Eurolinx Pty Ltd [2001] NSWSC 230, [43] – [44].
In Dean-Willcocks v Commissioner of Taxation,[46] Barrett J referred to the judgment of Kitto J in Queensland Bacon Pty Ltd v Rees before continuing in paragraphs [13]-[16]:
It is important to emphasis that the relevant suspicion is one of actual and existing insolvency, as distinct from impending or potential insolvency. That, as the Full Court of the Supreme Court of South Australia pointed out in Sheahan v Fabienne Pty Ltd [1999] SASC 335; (1999) 17 ACLC 1600, is something that was made clear in Queensland Bacon Pty Ltd v Rees (above).
The last matter to be mentioned before I turn to the specifics of this case concerns the process of ascertaining the state of suspicion (or otherwise) with which an official such as the Commissioner of Taxation must be fixed.
It was said by Young CJ in Eq in Dean-Willcocks v Commissioner of Taxation [2004] NSWSC 1058; (2004) 51 ACSR 353 that the Commissioner’s state of mind must be the sum total of his officers’ knowledge, so that, in order to discharge an onus of the kind relevant to this case, the Commissioner must call on all officers who may reasonably have a relevant opinion about solvency. Some doubt seems to be cast on this by an observation of Spigelman CJ in Cussen as Liquidator of Akai Pty Ltd (above) at [81]. The matter is, however, one that I do not need to pursue since, as will be seen, a number of officers of the Australian Taxation Office (“ATO”) have given evidence and there is no basis for thinking that knowledge of any other is relevant. In other words, the Commissioner seems to have approached the matter on the footing that he must prove his defence by reference to the state of knowledge of all officers with an exposure to the case.
It is, as I have said, necessary for the Commissioner to prove the two negative propositions in paragraph (b) of s 588FG(2). That task arises, however, in a context where the liquidators point to various factors which they say must have engendered relevant suspicion on the part of the Commissioner and the hypothetical “reasonable business person”.
Ground one – the learned Magistrate misstated the reasons of Peek J in Clifton v CSR Building Products Pty Ltd and erred in law in – reasons [8].
[46] [2008] NSWSC 1113.
At [8], the learned Magistrate found that:
Mr Matthews bears the onus of demonstrating that DNP had grounds to suspect Graphpak’s impending insolvency, or alternatively that the objective indicia would cause a reasonable person in DNP’s position to suspect that Graphpak was insolvent. DNP then bears the onus of establishing its defence pursuant s 588FG.
In support of that finding, her Honour referred to the decision of Peek J in Clifton[47] at [27]:
The plaintiffs have made submissions as to the non-calling of these witnesses both along standard Jones v Dunkel[48] lines and also to the effect that it was necessary for the defendant to call such witnesses to make out the affirmative “good faith” defence since the onus of proof was there upon the defence. However, since I consider that, on the evidence that was called, the defendants have plainly not made out the “good faith” defence, I do not consider it necessary to consider these submissions further in relation to that area of the case.
[47] [2011] SASC 103.
[48] (1959) 101 CLR 298.
In holding that the applicant bore the onus of demonstrating that DNP had grounds to suspect Graphpak’s impending insolvency or alternatively that objectively a reasonable person in DNP’s position to suspect Graphpak was insolvent, following which DNP bore the onus of establishing its defence under s 588FG, the learned Magistrate erred. With respect, her Honour has applied the requirements of establishing the requirements of s 588FE(2) which gives the basis for an application under s 588FF but then appears to have approached the matter on the basis that the onus of disproving the defence under s 588FG(2) lay on the applicant without the need for DNP to first establish the requirements in s588FG(2).
I deal with the consequence of that error later.
Ground two – the learned Magistrate erred in law by placing reliance on the aide memoir prepared for trial – reasons [48].
Her Honour found:[49]
On the oral evidence alone, DNP was at risk of a finding that it was not reasonable for it not to suspect insolvency. However, as haphazard as the process may have been when described by the witnesses, the colour-coded running account depicts systematic payments of DNP’s invoices in a logical and regular fashion over a lengthy period including the relation back period.
[49] Reasons, [48] (emphasis in original).
The aide memoir was Exhibit P3 at the trial which is a payment history for Graphpak from July 2005 to May 2012. Her Honour described Exhibit P3[50] in the following terms:
The colour-coded running account demonstrates that Graphpak consistently paid DNP invoices, individually or in a bundle, usually with one or two rounded figure payments and then a precise payment for the residual balance. Payment of invoices generally occurred within two to three months of the date of invoice. There is one invoice which was outstanding for six months in 2010, but substantial regular payments towards other invoices were being made by Graphpak during this period.
[50] Ibid, [46].
Using Exhibit P3, her Honour reached the conclusion that the respondent would not have suspected Graphpak of insolvency during the relation back period.[51]
[51] Ibid, [49].
The applicant submits that Exhibit P3, which was produced for the first time in preparation for a defence at trial, carries with it the benefit of hindsight, contrary to Sutherland (in his capacity as liquidator of Sydney Appliances Pty Ltd) (in liquidation) v Eurolinx Pty Ltd.[52] In particular, the applicant submits that there was no evidence before the Court that any such analysis had been conducted by the respondent at the relevant time and that it is the task of the court to consider what was known subjectively to the parties at the time when payments were being received.
[52] [2001] NSWSC 230, [43].
I have set out the passage to which the Applicant refers to in Sutherland above.[53]
[53] See [59].
In Sellers v Offset Alpine Printing Pty Ltd[54] the Victorian Court of Appeal observed:
…but the test is one based on the actual circumstances known to those who benefit by the “insolvent transactions” which must be examined to see whether a person in those circumstances and with that particular knowledge could have had no reasonable belief as to solvency.
[54] Sellers v Offset Alpine Printing Pty Ltd; Sellers v Trigra Pty Ltd (in liq) [2003] VSCA 37, [11].
There are at least two observations to be made about Exhibit P3.
The first is that there is a pattern of payment of either a single invoice or a bundle of invoices, in full or in part, with widely varying delays in payment throughout the entire period.
During the relation back period between 25 November 2011 and 7 May 2012, there are periods between the rendering of the invoice and the payment of that invoice between 80 days and 31 days and the entirety of the document shows a payment history of paying outstanding invoices over varying periods.
The second observation is, as Mr Douglas points out, that in the period 15 February 2012 – 8 March 2012, a total of $28,666.55 was owing but paid, in part, in five regular instalments of $5000 between 4 April 2012 and 7 May 2012. He submits that for the first time there are payments of regular amounts, which is a change to the trading pattern.
With respect to Mr Douglas, that is not correct. I note there are round figure payments made in a regular fashion, by which I mean weekly or fortnightly or thereabouts in February, March, April and May 2010, December, January, February and March 2011, in May and June 2011, and in August and September 2011. The applicant’s case is that the payments in April and May 2012 were regularised because there was an agreement struck between Ms Huyen Dinh and the applicant that it would make regular payments of $5000. That, so it is submitted, is a recognition by the respondent that it knew Graphpak was in financial trouble, and it wished to protect its position by initiating an agreement that saw it paid in a more orderly fashion.[55]
[55] T18.9-28.
In the course of his submissions, Mr Douglas referred to the Applicant’s Additional Documents.[56] He referred to a number of emails which showed Ms Huyen Dinh’s daughter, Thuy Chinh Dinh Pham (Ms Chinh Pham), chasing Graphpak for payment. Ms Chinh Pham is an accountant, however her evidence was that she was not her mother’s accountant but on occasions she would draw invoices and emails to Graphpak on behalf of DNP. On rare occasions she would ring Graphpak and ask for a payment to her mother. It was Ms Chinh Pham who prepared Exhibit P3.
[56] Exhibit A3.
A consideration of the payment history set out in Exhibit P3 reveals a payment pattern consistent with a supplier chasing its debtors for payment. There is one email dated 21 May 2012 in Exhibit A3 from Ms Chinh Pham to Graphpak which reads in part, ‘Kerry and Tanya have not paid any amount in the past two weeks (not even the minimum payment of $5000 per week) as agreed whilst they are waiting to settle the rest of our accounts.’
Ultimately, DNP worked on the basis that it would be paid eventually and if it needed money would approach Graphpak for payment of some or all of its bills. That seems to have been the pattern since January 2004. So much so is apparent from Ms Huyen Dinh’s evidence[57] and it is also consistent with Ms Prime’s evidence.[58] Further, the evidence from Mr Altschwager, was that delay in payment was an industry trait.[59]
[57] T175.30-176.8.
[58] T199.38-T200.5.
[59] See T120.1-8.
Was the learned Magistrate correct in relying on Exhibit P3?
Mr Douglas took the Court to page 232 of the transcript of the hearing before the learned Magistrate, part of the cross-examination of Ms Dinh Pham, which was consistent with My Huyen Dinh’s evidence as to her cash flow needs.[60]
[60] T232.30-31.
Mr Douglas submits that this evidence supports his submission that Exhibit P3 is a document prepared with hindsight.
The observations of Santow J in Sutherland set out above address the issue of the role of Exhibit P3 and the Applicant’s complaint that her Honour dealt with the pattern of payment by hindsight.
As a matter of principle, Exhibit P3 is, of course, a document prepared with hindsight in the sense that it is an historical record of payment, however in my view it may also be seen a document which is a convenient way of recognising the contemporaneous understanding of Ms Huyen Dinh throughout the period commencing 19 January 2004, that is, irregular payments made over varying periods of time. I reject the submission that Exhibit P3 is a document which looks only in hindsight. Rather, it is a document which provides a history of the payment relationship between Graphpak and DNP which allows the Court to consider what the position was through the contemporary eyes of the parties and as deposed to by the parties in giving their evidence orally.
In my view, it was proper for the learned Magistrate to rely on Exhibit P3.
Did DNP have no reasonable grounds to suspect insolvency?
As the authorities have made clear[61] it is not simply a question of satisfying some of the criteria and then concluding that DNP either had or did not have a reasonable suspicion.
[61] Sutherland (in his capacity as liquidator of Sydney Appliances Pty Ltd (in liq) v Eurolinx Pty Ltd [2001] NSWSC 230, [43] - [44].
In this matter, the payments in round figures commenced regularly in March 2010. Following the meeting in August 2011, Graphpak began to reduce the outstanding balance to DNP at the time, including during the relation back period, by round figure payments made on, generally, a weekly or fortnightly basis. However round figure payments were also made in February, March, April, May and December 2010 and January, February, March, August, September, October and December 2011; although I note and take into account that the relation back period commenced on 21 November 2011.
However, looking at the position, as Santow J described as through contemporary eyes of the parties, there were a number of events which occurred which I consider to be of significance and which demonstrates a departure from the norm. The first is the finding by her Honour that it was agreed between Graphpak and DNP, at the August 2011 meeting that DNP would supply fabric for Graphpak’s orders. That was explained by her Honour and found to be directed at DNP having the fabric earlier and that Ms Huyen Dinh could pass on the better price she could get to her valued client, Graphpak. Further, the reason for that arrangement was, in part, that Graphpak was having difficulty in purchasing fabric for garments. That has to be seen in the context that Graphpak owed DNP $94,680.95, was struggling to reduce that debt at that time and the meeting was held to discuss payment. In my view, an inability to pay DNP and DNP offering to pay for fabric are such as to provide reasonable grounds for suspicion as to insolvency.
Second, although her Honour found[62] that Ms Huyen Dinh was unaware that another sewing company was being used, her Honour did not accept that Ms Huyen Dinh did not know that the orders from Graphpak has decreased. Her Honour did however accept that Ms Huyen Dinh did not appreciate the extent of the decrease of orders prior to the voluntary liquidation nor did she attribute any reason for the decrease. Nonetheless, the orders decreased against a background of DNP purchasing the fabric for Graphpak and Graphpak’s difficulty in both purchasing fabric for garments and in struggling to pay the amount outstanding to DNP.
[62] Reasons, [39].
Applying the observation of Kitto J in Queensland Bacon Pty Ltd v Rees, set out above,[63] although the pattern of round figure payments by itself is not sufficient to provide reasonable grounds to suspect insolvency, that was accompanied by the other steps I have identified.
[63] See [58].
In my view notwithstanding the previous trading relationship and the basis upon which DNP worked with Graphpak as I have set out above, these changes to the trading relationship following the August 2011 meeting are such as to reveal on the part of Ms Huyen Dinh and thus DNP a positive feeling of actual apprehension or mistrust such that DNP and Graphpak made alternative arrangements concerning fabric. Further, Graphpak reduced the use of DNP’s services and a plan was proposed to reduce Graphpak’s indebtedness to DNP. Accordingly, I find that the requirements of s 588FG(2)(b)(i) have not been satisfied.
Further, support for this view is found by considering Exhibit P3 against the indicia identified in Australian Securities and Investments Commission v Plymin (No 1),[64] particularly the indicia I have set out above.[65] Accordingly, it was not open to the learned Magistrate to conclude that the indicia had not been made out and her Honour’s conclusion[66] that DNP had satisfied the requirements of the first limb of s 588FG(2)(b)(i) is in error.[67]
Ground three - the learned Magistrate thereby erred in mixed fact and law in finding that a reasonable person in the respondent’s position would not suspect Graphpak Pty Ltd of insolvency during the relation back period when the court ought to have found that a reasonable person in the position of the respondent would have suspected insolvency.[68]
[64] (2003) VSC 123, [386].
[65] See [39] – [40].
[66] Reasons, [48].
[67] Reasons, [48].
[68] Reasons, [40] – [48].
This ground concerns the requirement in s 588FG(1)(b)(ii).
In Cussen as Liquidator of Akai Pty Ltd v Commissioner of Taxation[69] the New South Wales Court of Appeal held that the “reasonable person” was a “reasonable business person”.
[69] (2004) 51 ACSR 530, [31].
In determining what is the person’s circumstances, I take into account what was known to Ms Huyen Dinh as identified by the learned Magistrate in her Honour’s reasons as I have set out above.
I have held that the use of Exhibit P3 is not such as to provide evidence of a pattern of payment sufficient to satisfy s 588FG(2)(b)(i) when considered with other factors. I am also satisfied for the same reasons that the requirements of s 588FG(2)(b)(ii) are not met.
The learned Magistrate concluded that on the oral evidence alone, DNP was at risk of a finding that it was not reasonable for it not to suspect insolvency. Her Honour has used Exhibit P3 to conclude there were systematic payments of DNP’s invoices in a logical and regular fashion over a lengthy period including during the relation back period.
Viewed from the perspective of a reasonable business person in the circumstances of DNP, specifically the special arrangement whereby DNP commenced purchasing fabric for Graphpak from August 2011 taken with the regular round figure payments made between March 2010 and 7 May 2012, and in particular the evidence that at the August 2011 meeting Graphpak was struggling to reduce the amount due to DNP, there is a departure from the historical trading relationship that existed prior to March 2010.
In my view, the fact that Graphpak was having difficulty in purchasing fabric for garments such that DNP would start purchasing it for Graphpak, the decrease in orders notwithstanding DNP purchasing fabric for Graphpak and the finding that Graphpak was struggling to reduce its indebtedness to DNP as at August 2011 is such that a reasonable business person in DNP’s circumstances would have had reasonable grounds for suspecting Graphpak was insolvent at the time it received the payments during the relation back period. Further support for this conclusion is also found in the fact that the running account balance was such that for the second time in approximately 12 months there was a need for Graphpak to propose a plan to reduce its indebtedness to DNP. In any event, even without that fact, the requirements of s 588FG(2)(b)(ii) have not been satisfied.

On that basis, the learned Magistrate erred in finding that a reasonable person in DNP’s circumstances would not have grounds for suspecting Graphpak was insolvent at the time it received the payments.
I note Graphpak had entered into arrangements involving both the Australian Taxation Office and PNW International Pty Ltd which would demonstrate that a reasonable person, knowing that fact, would have suspected insolvency. However, there is no evidence that these arrangements were ever conveyed to anyone at DNP[70] and so I do not take those matters into account in considering ss 588FG(2)(b)(i) and (ii).
[70] Reasons, [44].
Conclusion
All three grounds relied upon by the applicant are made out.
Accordingly, pursuant to s 38(7)(d)(ii) of the Magistrates Court Act, I rescind the judgment of the Magistrates Court and substitute judgment for the applicant in the sum of $12,000.
I will hear the parties as to any ancillary orders.