MATTHEWS v WILLIAMS
[2018] SADC 70
•29 June 2018
DISTRICT COURT OF SOUTH AUSTRALIA
(Civil: Minor Civil Review)
MATTHEWS v WILLIAMS
[2018] SADC 70
Judgment of His Honour Judge Cuthbertson
29 June 2018
MAGISTRATES - APPEAL AND REVIEW
Application to review a judgment of a Magistrate holding that a payment by an insolvent company to the applicant was an unfair preference pursuant to s 588FE(2B) of the Corporations Act, and that the applicant did not receive the payment in good faith pursuant to s 588FG of the Corporations Act and ordering the repayment of $24,424.20 from the applicant to the liquidator of the Company.
HELD: Judgment set aside. The applicant has made out the good faith defence under s 588FG(2) of the Corporations Act.
Corporations Act (2001) (Cth) ss 588FA, 588FC, 588FE, 588FF, 588FG; Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266; Re Ermayne Pty Ltd; Sims v Tech Holdings Pty Ltd (t/a Westline Furniture) (1999) 30 ACSR 330, referred to.
MATTHEWS v WILLIAMS
[2018] SADC 70
The applicant was defendant to a small claim in which the plaintiff was liquidator of Scarce Builders & Developers Pty Ltd (in liquidation).
The applicant was a tradesman who did work for the Company. He would, from time to time, send invoices to the Company and a running account was kept.[1] The terms of the applicant’s work were for payment within 7 days. In practice the running account was generally in debit to the extent of about $20,000.
[1] See Exhibit P1 Tab 1.
The Company went into liquidation and the respondent brought action against the applicant for the return of an amount of about $24,424.20 said to have been an unfair preference payment made by the Company to the applicant pursuant to s 588FF of the Corporations Act2001 (Cth).
Section 588FF relevantly reads as follows:
(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)…
(c)…
(d)…
(e)…
(f)…
(g)…
(h)…
(i)…
(j)…
The respondent asserts that the payment by the Company to the applicant is a voidable transaction pursuant to s 588FE(2B)(a)(ii) of the Corporations Act as an unfair preference.
Section 588FE(2B) relevantly reads as follows:
The transaction is voidable if:
(a) the transaction is:
(i) …
(ii)an unfair preference given by the company to a creditor of the company; or
(iii)…
(iv)…
An unfair preference is defined in s 588FA(1) as follows:
(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 or an order of an Australian court or a direction by an agency.
There is no doubt that the applicant would receive less were he to prove for the debt in a winding up.
Because the relationship between the Company and the applicant involved a running account, s 588FA(3) of the Act applies. That section provides as follows:
(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 a 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.
The applicant relied at trial on the good faith defence. Firstly, he claims he did not know that the Company was insolvent at the relevant time and, secondly, he claims that no reasonable person in the position of the applicant could have reasonably suspected the Company to be insolvent and that the applicant had no reasonable grounds for so believing.
The “good faith” defence in s 588FG(2) of the Corporations Act reads as follows:
(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.
The Magistrate found that, at the relevant time, the applicant honestly believed that the Company was solvent but found against the applicant in holding that he failed to prove that he had no reasonable grounds for suspecting that the Company was insolvent and that a reasonable person in the applicant’s circumstances would have no such grounds.
The applicant challenges these findings of the Magistrate.
The matters advanced in favour of the reasonableness of the applicant’s belief that the Company was not insolvent and in favour of the applicant’s case are as follows:
1.The industry practice was for payments to contractors to take a long time.[2] Here, we are talking about the failure to pay for periods of 21 and 31 days respectively. There was no sudden change or deterioration in the amount and frequency of the Company’s payments of the running account so as to excite suspicion in a reasonable person.
2.There are no round sum payments divulged in the ledger of the account, often an indication of insolvency.[3]
3.The payments generally coincide with the invoices,[4] i.e. they are not unrelated as if indicating desperation by the Company and the making of payments of whatever funds are available unrelated to the invoices.
4.Payments are generally only about 21 days late.[5]
5.There is no evidence that the Company ever advised that there were any financial difficulties.[6]
6.There is no evidence of rumours or suspicion in the workforce or in the community that the Company was insolvent.
7.The applicant did further jobs for the Company,[7] including two large Whyalla jobs, indicative of a lack of concern by him about the ability of the Company to pay him and indicative of a reasonable expectation in the reasonable person that the Company was likely to have some future cash flow.
8.The applicant thought there would be a significant profit from the Freymark Project in Whyalla[8] and a reasonable person would have a similar view.
9.During the six months prior to being placed in administration, i.e. 7 April 2012 to 7 October 2012, invoices of $66,051.39 were paid.[9]
[2] Trial Transcript, T26.
[3] Ibid, T21.
[4] Ibid, T21.
[5] Ibid, T24.
[6] Ibid, T36.
[7] Ibid, T39.
[8] Ibid, T54.
[9] See plaintiff’s Outline of Argument [3].
Factors tending towards the proposition that a reasonable person in the applicant’s circumstances would have grounds to suspect insolvency are as follows:
1.The applicant stopped work for the Company in early July 2012. At that time indebtedness was $32,187.70, its highest over the period depicted.
His explanation for stopping work was a cooling of the relationship since he had refused work at Murray Bridge, not the failure to pay him, which he attributed not to insolvency but rather to annoyance with him by the Company.[10] He was accepted by the Magistrate as to the truth of his belief and there is no reason why the reasonable person would not have drawn the same conclusion.
2.The applicant made a claim under the Building and Construction Industry Security of Payment Act 2009 filed on 12 July 2012, thus demonstrating that he must have had concerns about being paid the debt that he was owed.
The applicant’s explanation is that he feared, not incapacity to pay through insolvency, but rather unwillingness to pay due to annoyance with the applicant. He has been accepted on the question of the honesty of his beliefs, there is no reason to suggest the reasonable person would have drawn a different conclusion.
3.Indebtedness had reached its highest in the relation back period.
[10] T37.
Suspicion
It is difficult to see how the applicant’s conduct affects the objective matters to be decided. The Magistrate has found favourably for the applicant on these issues and it has not been challenged by a cross-appeal. There is no reason to suggest a reasonable person would not have drawn similar conclusions to the applicant from the established facts.
Suspicion means a positive feeling that a state of affairs exists.
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 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.[11]
[11] See Kitto J in Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266 at 303.
There will also be potentially countervailing factors which could have tended to dispel suspicion at the time. Re Ermayne[12] provides an illustration of this appraisal and balancing in process. Thus 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.
[12] Re Ermayne Pty Ltd; Sims v Tech Holdings Pty Ltd (t/a Westline Furniture) (1999) 30 ACSR 330, 334.
It is important to bear in mind that in making the objective assessment, things done by the creditor in response to the lack of payment by the Company are not relevant. They are relevant to the first limb of the test whether the creditor had an honest belief that the Company was solvent.
Thus, for example, matters that weighed on the Magistrate, e.g. the fact that a claim was made by the applicant and the fact that he stopped doing any work for the Company, are factors to be weighed in the assessment of the honesty of his claim that he was not aware of any impending insolvency.
Having been resolved in his favour by her finding that his belief as to the Company’s solvency was honest, they do not assist the respondent on the issue of the objective test. They do not denote a reasonable suspicion of insolvency and cannot be used for that purpose but the facts that motivated the applicant to act as he did are, of course, relevant to the issue of whether a reasonable person would have a suspicion.
Her Honour’s reasoning on the objective test is somewhat terse. Her Honour concludes:
Having regard to all of the evidence, I am not satisfied that it is more likely than not that a reasonable person in the position of the defendant had no reasonable grounds to suspect that the Company was insolvent at the time the defendant received the payments that comprise the net preferential payment under the running account balance.[13]
[13] Trial judgment [50].
With respect, I differ with the view of the learned Magistrate.
In my view, having regard to all the relevant facts, which I have summarised, I am of the view that the facts would likely produce no more than “a mere idle wondering …”.
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. [14]
[14] See Wicks J in Re Ermayne at 324.
What are the objective facts? Payments had been somewhat late, albeit consistently over a lengthy period of time.
What else is there? The conduct of the appellant is not a relevant issue except as to his claimed “good faith” and on that he has been accepted.
The history of the payments to the running account might reasonably create suspicions that there were cash flow problems. They might provoke a “mere idle wondering” as to the solvency of the Company but they do not lead to the reasonable suspicion that the Company is insolvent in the relevant period.
I therefore hold that the defence under s 588FG(2) of the Corporations Act is made out:
(1)The transaction is not an unfair loan to the Company or an unreasonable director‑related transaction of the Company; and
(2)The applicant became a party to the transaction in good faith; and
(3)At the time when he became a party he had no reasonable grounds for suspecting that the Company was insolvent at the time or would become insolvent as mentioned in s 588FC(b) of the Corporations Act; and
(4)A reasonable person in the applicant’s circumstances would have no such ground for so suspecting; and
(5)The applicant has provided valuable consideration under the transaction.
I therefore make the following orders:
1.The order of the Magistrate declaring the payment of $24,424.20 to be an unfair preference is hereby rescinded.
2.The order that the applicant is to pay the respondent the sum of $24,424.20 is rescinded.
There will be no order as to costs.
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