Modern Master Pty Ltd (In Liq) v Canon Australia Pty Ltd

[2007] NSWDC 245

Reported Decision: 6 DCLR (NSW) 82

District Court

CITATION:	Modern Master Pty Ltd (In Liq) v Canon Australia Pty Ltd [2007] NSWDC 245
HEARING DATE(S):	2 November 2007
JUDGMENT DATE:	28 November 2007
JURISDICTION:	Civil
JUDGMENT OF:	Hungerford ADCJ
DECISION:	(1) Defendant directed to pay to Modern Master Pty Limited (Receivers and Managers Appointed) (In Liquidation) ACN 106 230 700 the sum of $93,182.57 plus interest of $18,079.97, a total of $111,262.54; (2) Defendant to pay the plaintiff's costs of the proceedings
CATCHWORDS:	CORPORATIONS - Payments by company for products and services supplied - Whether payments constituted voidable transactions to support recovery from the unsecured creditor by the company's liquidator under s 588FF(1)(a) of the Corporations Act 2001 (Cth) - Insolvent company - Transactions an unfair preference - Whether transactions an integral part of a continuing business relationship as a "running account" to constitute a defence to recovery under s 588FA(3) of the Corporations Act - "Good faith" defence to recovery under s 588FG(2) of the Corporations Act - Subjective and objective tests for suspicion of insolvency of company at time transactions made - Neither defence made out - Order made for recovery of payments
LEGISLATION CITED:	Corporations Act 2001 (Cth), ss 436A(1), 439C(c), 475(1), 588E(1), 588FA(1) and (3), 588FC, 588FE(1) and (2), 588FF(1)(a), 588FG(2), 1337E(1) and Div 2 of Pt 5.7B Civil Procedure Act 2005 (NSW), s 100(1) Uniform Civil Procedure Rules 2005 (NSW), Sch 5
CASES CITED:	Airservices Australia v Ferrier & Anor (1996) 185 CLR 483 Downey v Aira Pty Ltd (1996) 15 ACLC 1068 Ermayne; Sims v Tech Holdings Pty Ltd (1998) 30 ACSR 330 Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266 Rees v Bank of New South Wales (1964) 111 CLR 210 Sims v Celcast Pty Ltd (1998) 71 SASR 142 Smith v Deputy Commissioner of Taxation (1997) 23 ACSR 611 Sutherland v Liquor Administration Board (1997) 15 ACLC 875 Sydney Appliances Pty Ltd (In Liq) v Eurolinx Pty Ltd [2001] NSWSC 230
PARTIES:	Gregory Jay Parker (in his capacity as liquidator of Modern Master Pty Limited (Receivers and Managers Appointed) (In Liquidation) t/as Rochester Systems and Rochester Creative Systems) - Plaintiff Canon Australia Pty Limited - Defendant
FILE NUMBER(S):	Matter No 5665 of 2006
COUNSEL:	Mr M W Hadley (Plaintiff) Mr C Mobellan (Defendant)
SOLICITORS:	Dora A Jabbour (Plaintiff) Simons Ravden Lawyers (Defendant)

JUDGMENT

1 Given the general policy in a business context of permitting a technically insolvent company to continue trading, even though unable to pay all its debts as and when they become due and payable, the law recognises the opportunity for the company to manage payment of some of those debts and to endeavour to trade its way into a solvent situation. However, where the company fails and reaches the point of being wound up the law intervenes to protect the interests of creditors, including employees of the company, so as to ensure a fair distribution of the available funds.

2 The Corporations Act 2001 (Cth) in Pt 5.7B has the object of giving effect to such intervention by providing for the recovery of property or compensation for the benefit of creditors of an insolvent company and Div 2 (ss 588FA-588FJ) thereof concerns recovery proceedings by the company’s liquidator in respect of voidable transactions by the company as being an unfair preference given to a creditor. A liquidator’s application to recover under s 588FF(1), such as payments made by the company to a creditor for goods supplied on credit during the 6 months period ending on the relation-back day, may be successfully resisted by the creditor making out the defence in s 588FG(2) that it so received the benefit of the payments from the company because the transaction was made in “good faith”. A further defence may be relied upon by the creditor as recipient of the payments under s 588FA(3), namely, that the payments concerned formed an integral part of a continuing business relationship between the company and the creditor as a “running account”. Those defences formed the subject-matter of the present action by the liquidator of the company in seeking recovery of payments made by it to the defendant creditor as the supplier of goods.

The issues

3 The sole issues in the proceedings, as agreed between the parties, were:

The defendant concedes that the impugned payments are an unfair preference within the meaning of s 588FA(1) of the Corporations Act 2001 (Cth) (the Act), subject to whether the defendant can make out a defence based on either:
(a) the payments being received as part of a running account under s 588FA(3) of the Act; or
(b) the payments being received in good faith under s 588FG(2) of the Act and absence of reasonable suspicion by the defendant and absence of suspicion by a reasonable person in the defendant’s circumstances that the company was insolvent or would become insolvent as a result of the payments.

Background facts

4 The factual development of this matter was not really in dispute between the parties, rather the determination of the issues between them depended upon the inferences, which should properly be found as affected by an application of the relevant provisions of the Corporations Act.

5 Modern Master Pty Limited (the Company) was incorporated on 8 September 2003 and later that month it purchased from Casromont Pty Limited trading as Rochester Systems a business, established originally in 1974, of trade typesetting and typographic communications. In latter years the Company, trading as Rochester Systems and Rochester Creative Systems, operated as a graphic arts equipment supplier, particularly in respect of Apple Macintosh computer based systems, and supplied equipment to graphic designers, advertising agencies and publishers and provided technical advice and support. As part of its business functions, the Company had a trading relationship with the defendant, Canon Australia Pty Limited, from whom it purchased graphic arts equipment for on-sale to its customers, such as products for use in the process of making photocopies like toners and ink, and photocopying services.

6 Not insignificantly, the purchase by the Company of the business from Casromont was in part dependent on vendor finance and Casromont remains as a creditor of the Company in respect of that vendor finance. Additionally, the Company on 1 October 2003 executed a charge in favour of Apple Computer Australia Pty Limited which thus became a secured creditor of the Company.

7 During 2004, it seems that the defendant offered its clients a facility whereby it extended finance regarding the sale of its products. The usual practice required the client to make application for credit which, once approval was given and an account opened, was monitored for payments by an accounts services officer for the defendant. In relation to the supply of products, the defendant’s system involved consideration of a client’s order by an accounts services officer who would either approve or reject it after reviewing the client’s payment details and history kept on a computer system called “Captain Order Entry System”. If approved, the defendant would despatch the product ordered to the client together with an invoice. The computer system maintained by the defendant recorded the client’s account number, invoices sent to clients including their ageing, payments made by clients on the invoices, any notes made by accounts services officers regarding communications with clients as to unpaid invoices and the maximum amount of finance allowable for the account concerned.

8 Importantly for present purposes, prior to 24 December 2004 credit accounts with the defendant were opened within the Captain System but on 3 January 2005 all existing accounts under that system were migrated or transferred to a newly acquired computer software system called “Oracle V2”. That new system recorded details for clients as did the Captain System. However, apparently due to an operating malfunction within the Oracle System, more than one account number for every account and account number previously generated by the Captain System was generated by the new Oracle System. In the result, an order for product placed by a client was recorded in one of perhaps numerous accounts for the same client and accounts services officers experienced difficulties in monitoring accounts using the Oracle System to determine what amount was outstanding in relation to each client. For instance, in an article dated 2 May 2005 entitled “Canon billing problems cause reseller angst” on an internet website called “Computerworld”, the credit manager of a reseller group was reported as expressing “grave concerns with Canon’s internal billing systems, claiming persistent issues are fuelling credit management problems”. The article continued:

While stock and supplies were being delivered, customer invoices had been infrequent, he said. Because of this, many of those members in the Leading Edge Group (LEG) were chalking up rising bills with the vendor that were not being paid.

“There are transactions going through, but not all – it’s not a normal working system,” Cook said. “We have been experiencing problems with invoicing for months.”

The biggest concern was how resellers would fare when the bills arrived, he said.

“That’s the big issue: what will they do when the bills all come through,” Cook said.

LEG had not been given any indication from the vendor on when the issues would be resolved, he said.

Canon spent $40 million transitioning to a new billing system on December 31. The platform is based on Oracle’s 11i software and includes about 150 modules including CRM, HR and payroll.

Since the move, the vendor has experienced ongoing problems with its billing procedures. In February, it was forced to send out written apologies to customers over due date errors made in its accounts receivable system. At the time, a spokesperson for Canon Australia claimed the glitches were the result of fine-tuning and configuring the new system to suit its business model.

A company spokesperson said the majority of software problems had now been fixed.

…

However, computer dealers at last week’s LEG conference in Auckland claimed they were still receiving minimal paperwork from the vendor.

…communications between the two parties continued to be plagued by problems. Sales made by LEG and Canon had actually dropped by nine per cent over the past year…

…

…there was a great deal of member dissatisfaction about dealings with the vendor.

9 As a commercial response to the problems with the new Oracle System, the defendant’s general manager, Mr George Lagos, was reported as instructing accounts services officers at a meeting in January 2005:

Given the problems being associated with the change to the Oracle System, Canon will continue to release stock even if you can’t be sure how much the customer owes.

10 In oral evidence, an accounts services officer of the defendant, Mr Adrian Hawes, said the instruction from Mr Lagos was not elaborated upon or qualified in any way and neither had it ever been revoked; accounts services officers followed it, including for the Company. He said that before the instruction accounts services officers in making a decision to release stock on credit to a customer, like the Company, would consider how much was then owed, the pattern of payments (“track record”), apparent willingness to pay for what product was ordered and any unresolved disputes.

11 As to the Company, perhaps surprisingly, Mr Hawes deposed that a review of the defendant’s files did not disclose any document being an application for a finance facility for the supply of products. Nevertheless, the computerised diary notes kept by accounts services officers showed that on 22 January 2004 the defendant opened a credit account for the Company for the supply of products with a limit of $50,000 to trade at that limit for a minimum of three months; any increase would require audited financial details. Of course, that account was entered into the Captain System with a further account for the Company for photocopying services also being opened. On 24 December 2004, when the accounts were transferred to the Oracle System, Mr Hawes said a new account was opened for the supply of products but two new accounts, a duplication, were opened for photocopying services so that the Company had three accounts on the Oracle System to replace the two on the Captain System – even so, from the diary notes, complaints from the Company of having four accounts which it could not reconcile were recorded.

12 The Company proceeded to obtain products and photocopying services from the defendant. In his affidavit, Mr Hawes outlined the sequence of events from 7 June 2005 by reference to the diary notes. The main events may be summarised as follows –

7 June 2005: Mr Ross King from the Company advised he was irate at the time it took to reconcile the defendant’s accounts; the Company had four accounts it wanted to be merged into a single account with a spread sheet of the position. The Company had made an electronic funds transfer of $35,000 to the defendant.

14 June 2005: Defendant sent to the Company a spreadsheet and all outstanding invoices on three accounts with an indication accounts would be merged.

Defendant received email from the Company (Mr King), which included following comments:

…as previously discussed there is a myriad of transactions on four separate accounts with credits on different accounts and some credits missing and only brought forward balances shown…

I need all accounts consolidated with an open item reconciliation so we can try and work out what is what.

To add to the mess I have also just received a reminder letter from your James Rogers, where 2 of the 3 invoices claimed as outstanding were paid on our EFT 31.5.05, remittance advice faxed with confirmation.

I know it is a new system, but it needs to be fixed pronto.

The Company (Mr King) indicated still unhappy about “present status” of accounts and they would not be paid until “accounts fixed”. Noted that accounts would have to be stopped until paid but account merger would take some time to achieve. The total sum then due from the Company for payment on the three accounts was $90,000.

Ms Cheryl Garden, an accounts services officer of the defendant, sent the following email to Mr King of the Company:

The above account is past due for payment, and I request your assistance to rectify this by end of month.

To clarify the current account debt, I have exported same with displays attached a spreadsheet.

Please advise what assistance I can give you to ensure this debt is cleared promptly, as my records show the last payment received was dated June 05.

Look forward to hearing from you.

Mr Andy Molnar, a director of the Company, sent an email to the accountant, Mr King, and to the company secretary, Mr David Fittler, stating as to the overdue account with the defendant:

Can we talk about this one.

I’m still confused about the whole account and who owes whom what:

1. Normal purchases from Rochester for equipment.

2. Credits owed by Canon to Rochester (ArtRes, 2 x 6200s).

3. Credits owed for service (warranty work & spares).

4. $28 K worth of invoice to Canon owed to Rochester.

28 September 2005:

Ms Garden sent an email to Mr King stating that the defendant was “holding a Rochester order” as the account had not received a payment since 2004. (Mr Hawes gave evidence that that was not correct because of the payment on 7 June 2005).

28 September 2005: Ms Garden generated a diary note to the effect she would check the history of five accounts of the Company which Mr King was disputing.

28 September 2005: Defendant received a remittance advice from the Company for an EFT payment of $20,000 with an enclosed reconciliation of the amounts owing on three of the Company’s accounts apparently procured from the defendant’s records.

Mr Hawes and Mr King had the following telephone conversation:

King – I don’t know what the balances are on the company’s accounts with Canon. The company has four accounts with Canon. I would like Canon to reconcile the accounts for me. Only when the accounts are reconciled, I will pay Canon what is outstanding.

Hawes – I will download all of the Company’s accounts and forward them to you.

A diary note by Mr Hawes the same day showed he completed the download and forwarded the accounts to the Company.

28 October 2005: Mr Hawes spoke by telephone to Mr Fittler of the Company in a follow-up to the telephone conversation with Mr King on 14 October 2005.

1 November 2005: Defendant received a remittance advice from the Company and an enclosed cheque for $73,182.57 with a reconciliation of the amounts owing, apparently procured from the defendant’s records.

8 November 2005: Mr Hawes spoke by telephone to Mr king who advised “I’ve posted Canon a cheque today for $73,182.57”. Mr Hawes recorded this in the diary notes.

18 November 2005: Someone within the defendant generated a diary note that the Company had ceased trading on 3 November 2005 and that a receiver had been appointed. Mr Hawes said in evidence he “was surprised to learn from reading the diary note of 18 November 2005 that the (Company) had gone into receivership… I thought the sole reason for the (Company) not making payment of its accounts related to the queries the (Company) had raised regarding a reconciliation of its accounts”.

13 An aged analysis from the trade creditors ledger of the Company as at 10 November 2005 of its accounts with the defendant from November 2004 showed, as including the two payments of $20,000 and $73,182.57 and six credit notes totalling $7,620.56 as the only payments by it to the defendant on the accounts – a total of $100,803.13, the final position as being –

Current month $2,558.73 (credit)
30 days $28,888.54
60 days $3,551.01
90 days+ _
Balance $29,880.82
Year-to-date purchases $64,069.00

14 On 9 November 2005 at 6.00 pm a meeting of the directors of the Company resolved that, in their opinion, the Company was insolvent or likely to become so at some future time and, therefore, Mr Gregory Jay Parker, a registered liquidator, was appointed as Administrator of the Company under s 436A(1) of the Corporations Act as from 10 November 2005. On 14 November 2005, Apple Computer as the secured creditor of the Company appointed Mr Scott Bradley Kershaw and Mr Murray Campbell Smith as Receivers and Managers pursuant to the registered charge dated 1 October 2003. At a meeting of creditors of the Company on 6 December 2005, Mr Parker was appointed Liquidator of the Company by resolution of the creditors to wind up the Company pursuant to s 439C(c) of the Corporations Act.

15 It was agreed between the parties that the Company was insolvent by 10 May 2005. For the purposes of the legislation, the relation-back period of 6 months was, therefore, from 10 May 2005 to 10 November 2005.

16 Although precise details were not in evidence, it emerged during the evidence of Mr Hawes that he was aware a guarantee had been given by Mr Fittler as a director of the Company to the defendant to secure the payment of monies owed by it to the defendant. Production of such guarantee was sought from the defendant but it was not produced and no explanation was given. It was suggested that the guarantee probably arose at the time the Company was granted a credit facility of $50,000 by the defendant on 22 January 2004. However, beyond the probable existence of such a guarantee there was no evidence as to when, by whom and on what terms it was given.

17 Finally, reference should be made to the report as to the Company’s financial affairs, in the form prescribed by the Australian Securities and Investments Commission, submitted to the liquidator pursuant to s 475(1) of the Corporations Act. Completed on 24 November 2005, the report showed the estimated realisable value of total assets was $388,840 compared to contingent liabilities of $486,656; an admitted amount owing to unsecured creditors, including the defendant, totalled $513,420. It was those facts which were said to have alerted the liquidator to the likelihood of preference payments by the Company and, following further enquiries, which led to the present action, for recovery from the defendant. The ultimate question on the facts was posed as being whether the defendant retains the amount of $93,182.57 from the two payments on 28 September 2005 and 1 November 2005 or returns it to the Company for inclusion in the available pool of assets for distribution to creditors, as to which the defendant may seek to recoup a portion as an unsecured creditor.

Financial condition of the Company

18 The plaintiff, Mr Parker as the liquidator of the Company, prepared a report dated 28 May 2007 as to the solvency of the Company which was exhibited to an affidavit sworn by him the same day for the purposes of these proceedings. Mr Parker was not required for cross-examination on his evidence and it was not otherwise challenged. I accept it. Based on his report, after a review of the books and records of the Company, Mr Parker concluded that the Company was insolvent as early as May 2005 and possibly even as early as November 2004. In view of the parties’ agreement in this respect it is unnecessary to deal with the details. Suffice it to say that the plaintiff examined the factors of trading losses, current liabilities, cash flow and working capital and current ratio of assets to liabilities.

19 The review by the plaintiff of the Company’s financial statements and information led to his opinion that “there is no basis upon which the Directors/ Managers could have had reasonable grounds to expect that the Company was solvent at 30 June 2005 or would remain solvent if the Company continued to trade”. He summarised his conclusions as follows:

The evidence available clearly establishes that the Company was insolvent as at 10 May 2005, with the situation becoming progressively worse after that time. The following points can be noted:

• Operating losses have been by the Company for the financial years ended 30 June 2004 through to the date of the appointment of the Voluntary Administrator being 10 November 2005.
  
• Total liabilities have exceeded total assets as at 30 November 2004 and 10 November 2005.
  
• Current ratio dropped progressively from 0.90 in November 2004 to 0.75 in November 2005. The Company had liquidity problems before the relation-back period being 10 May 2005 to 10 November 2005.
  
• The Company’s working capital was deficient as at 30 November 2004 and continued to deteriorate by in excess of $80,000 to the date of the appointment of the Voluntary Administrator being 10 November 2005.

The Company became insolvent some time prior to the relation-back period and remained insolvent to the date of the appointment of the Administrator. The Company was insolvent as at 10 May 2005, if not some period prior. I have examined trading (review of general ledger transactions) from 1 April 2005 to the date of the appointment, being 10 November 2005, and state that at no time did the position of the Company become solvent.

Based on the evidence detailed above and given the continuing losses of the business it is my opinion that the Company was insolvent during the period 10 May 2005 to 10 November 2005 and that the Directors of the Company had reasonable grounds for suspecting that the Company was insolvent.

20 It is relevant to note the plaintiff’s view that the directors/ managers of the Company could have had no reasonable grounds to expect that the Company was solvent as at June 2005, particularly having in mind the defendant’s diary note entry of 8 July 2005 that the Company owed it $90,000 when the credit limit was only $50,000. Even so, the defendant continued to supply products to the Company.

Payments by the Company to the defendant

21 In his review of the books of the Company, the plaintiff found that two payments were made by it to the defendant, namely, $20,000 on 28 September 2005 by electronic funds transfer and $73,182.57 on 1 November 2005 by cheque which was cleared on 9 November 2005. Those payments were clearly made when the Company was insolvent.

22 As a preferred creditor of the Company, the plaintiff stated his conclusion from the review of the records that the defendant received from the transactions a net value of $93,183.57 whereas if it had proved in the winding up of the Company prior to the recovery of this preference action it would have received nothing. The plaintiff advised there were presently no funds available for distribution to unsecured creditors, such as the defendant. Interestingly, the plaintiff said his investigations revealed that the defendant did not hold any form of security over the Company’s assets “other than personal guarantees from the Company’s directors”.

The claim and the defence

23 The plaintiff sought, by statement of claim filed on 24 November 2006, an order pursuant to s 588FF(1) of the Corporations Act directing the defendant to pay to the Company as voidable transactions being an unfair preference the total sum of $93,183.57 plus interest from 9 November 2005 to the date of judgment under s 100(1) of the Civil Procedure Act 2005 according to the rates prescribed in Sch 5 to the Uniform Civil Procedure Rules 2005.

24 The claim was resisted in whole by the defendant. It was conceded that the transactions concerned as constituting the two payments totalling $93,183.57 occurred when the Company was insolvent and that they were an unfair preference within the meaning of s 588FA of the Corporations Act. However, as the agreed issues stated, the defendant as a complete answer to the claim relied upon the payments being part of a running account under s 588FA of the Corporations Act or being received by it in good faith under s 588FG of the Corporations Act. The defendant sought a verdict against the plaintiff plus costs.

Statutory scheme

25 The applicable provisions of the Corporations Act, as stated earlier, are contained in Div 2 – Voidable transactions of Pt 5.7B – Recovering Property or Compensation for the Benefit of Creditors of Insolvent Company. The presently relevant aspects may be relatively shortly stated.

26 An application under s 588FF is a recovery proceeding: s 588E(1). Where, on the application of a company’s liquidator, a court is satisfied that a transaction of the company is voidable because of s 588FE, the court may make an order directing a person (the defendant) to pay to the company some or all of the money that the company had paid under the transaction: s 588FF(1)(a). This Court has jurisdiction to make such an order: s 1337E(1). If a company is being wound up, a transaction of the company may be voidable if it is an insolvent transaction of the company and was entered into during the 6 months ending on the relation-back day (here, 10 November 2005 by reason of s 9): s 588FE(1) and (2). A transaction of a company is an insolvent transaction if, and only if, it is an unfair preference given by the company and entered into when the company was insolvent: s 588FC(a)(i). A transaction is an unfair preference given by a company to a creditor if, and only if, the company and the creditor are parties to the transaction and the transaction results in the creditor receiving, in respect of an unsecured debt the company owes the creditor, more than the creditor would receive from the company if it were to prove for the debt in a winding up of the company: s 588FA(1).

27 It is to be observed in the circumstances of this case and on the evidence that the stated ingredients for the making of an order under s 588FF(1) exist – the Company was being wound up, the transaction between the Company and the defendant was an unfair preference in that it resulted in the defendant receiving more than it would have received as an unsecured creditor from the Company than it would in a winding up and the transaction was an insolvent transaction as being entered into when the Company was insolvent. It is necessary, then, to attend to the available statutory defences to the application as here relied upon.

28 The so-called “running account” defence is prescribed in s 588FA(3) in the following terms:

(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.

29 The “good faith” defence as relied upon is contained in s 588FG(2) 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 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 588 FC(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.

30 Styled, as they are, as “defences” to an action for recovery of a preference leads to the view that the onus falls on the defendant creditor to establish them. Indeed, on the face of the statutory provisions it would be reasonably open to thus approach a consideration of this case. Certainly is that so in relation to the good faith defence under s 588FG(2) and that was common ground, which I accept as correct, between the parties here: see Sims v Celcast Pty Ltd (1998) 71 SASR 142 and Sydney Appliances Pty Ltd (In Liq) v Eurolinx Pty Ltd [2001] NSWSC 230 in para [38]. However, as to the s 588FA(3) running account point the defendant submitted the onus lay with the plaintiff to either disprove its existence or to concede a running account but adduce evidence to show the dimension or quantum of any preference amount – neither aspect, so it was put, had been satisfied by the plaintiff so that the running account point was a complete defence to the proceedings. In this respect, the defendant’s counsel relied on what Santow J said in Sydney Appliances (in para [167] to this effect:

Finally, the codification of the so-called running account has become definitional of what is an “unfair preference”. That means that, in terms of onus, what was once merely a defence is now an ingredient or element of that which the plaintiff liquidator must prove in establishing whether it is a preference (and its dimension). The onus in that sense has shifted to the party attaching the payments.

31 Counsel for the plaintiff resisted his Honour’s approach to onus and maintained it rested with the defendant. I disagree.

32 In terms, I think it plain from s 588FA(3)(d) that a transaction may only be taken to be an unfair preference if certain conditions are satisfied. It is, it seems to me, in that sense Santow J held the codification of a running account to be definitional of what is an unfair preference. To succeed, the plaintiff must show the transaction to be an unfair preference so that, in my view, it necessarily follows that the plaintiff has the onus to establish it. Even so, in the present case, where there was no real dispute as to the facts but rather what should be drawn from them in the context of the statutory provisions, I think little turns on this onus point.

Relationship and dealings between the Company and the defendant

33 A business relationship commenced between the Company and the defendant, as a consequence of the Company’s purchase of the business of Casromont following its incorporation in September 2003, whereby the Company purchased graphic arts equipment and photocopying services. It seems that the initial purchases were paid for by cash but in January 2004 the defendant opened a credit account for the Company with a limit of $50,000 for a minimum period of three months; any increase of that limit required audited approval from financial details of the transactions made.

34 From invoices, it was apparent that the Company was a regular and sizeable purchaser of products and services from the defendant during the period of the trading relationship until the Company ceased trading on 3 November 2005 just days prior to going into voluntary administration on 10 November 2005 . During the 22-month period of the operation of the credit account from January 2004 to November 2005, however, the Company’s general ledger of transactions showed only four payments by it to the defendant on the account of $34,160.41 on 31 May 2005 by electronic funds transfer, $20,164.32 on 21 July 2005 by electronic funds transfer, $20,000 on 28 September 2005 by electronic funds transfer and $73,182.57 on 1 November 2005 by cheque; the aged analysis by the plaintiff as at 30 November 2005 showed only the two payments in September and November 2005 totalling $93,182.57, being those the subject of this recovery proceeding.

35 Significantly, the diary notes kept accounts services officers of the defendant disclosed as at July 2005 a debit balance owed by the Company of about $90,000. There was no evidence of any financial audit by the defendant of the Company’s account being in excess of the $50,000 credit limit or, other than the $90,000 amount, any evidence of the maximum debit amount during the trading period. The aged analysis showed the ultimate amount due by the Company to the defendant at 10 November 2005 was $29,880.82.

36 The facility of finance for the defendant’s customers, such as the Company, was the subject of an approval and monitoring process during its operation by accounts services officers. Those officers had the function to approve the release of stock to customers on credit according to what may colloquially be called the “track record”, that is, how much owed, pattern of payments, apparent willingness to pay for what ordered and any outstanding disputes. However, the operation of this process in the instant case was affected by the defendant’s change to a new computer system in December 2004/ January 2005, from the Captain System to the Oracle System as detailed above, which generated disputes with customers as to amounts owing because of the creation of multiple accounts. Insofar as the Company was concerned, the disagreement it had with the defendant was manifest from about June 2005 and, it would seem, was never resolved before the Company went into liquidation.

37 The defendant’s approach to the computer system problems was that as early as January 2005 its general manager directed the accounts services officers to release stock to a customer on credit even if it was unsure how much the customer was then in debt. That direction was followed and, no doubt, the Company benefited by continuing to receive products and services but with an ever increasing debt. There was no evidence the defendant had in place any alternative system to monitor accounts pending resolution of the computer problems.

38 Following his review of the financial details, the plaintiff concluded that the Company was insolvent as far back as May 2005 and possibly even as early as November 2004. He identified that two subject payments in September 2005 and November 2005 totalling $93,182.57 as having been made by the Company to the defendant, even though, in his opinion, the directors/managers of the Company could have had no reasonable grounds to expect as at 30 June 2005 it was solvent or would remain solvent if trading were continued.

39 A somewhat disquieting aspect was the likely existence of personal guarantees given by the directors of the Company to the defendant in relation to the accrued but unpaid debt. Both Mr Hawes, who gave evidence for the defendant, and the plaintiff referred to those guarantees, although the guarantees themselves were not in evidence, and it is more likely than not that such guarantees existed. It may be, but this is perhaps speculation, that the guarantees sufficiently satisfied the defendant not to examine too closely the financial position of the Company during the trading period as its debt increased.

40 However one may review the facts, I think it to be plain that the Company had an increasing level of debt with the defendant but continued to receive products and services on credit but absent any regular or continuing pattern of payments. For the defendant's part, due no doubt to the problems with the transfer of accounts to the Oracle System, the lack of monitoring of the Company’s “track record” in the utilisation of its credit account exacerbated the position but, importantly, where there was no alternative system in place to manage monitoring until the Oracle System could be put in order. It is true that the defendant on 14 June 2005 wrote to the Company seeking its account be brought up to date within seven days and a further notice was sent on 13 July 2005; and on 23 September 2005 and 28 September 2005 an accounts officer, Ms Garden, emailed the Company’s accountant, Mr King, to obtain clearance of the debt. Even so, at no stage did the defendant cease the supply of products or take any further action to enquire into what was clearly an ever increasing burden of debt with the Company.

41 Then, as it transpired nearly five months after the Company became insolvent on 10 May 2005 (at the latest), the defendant accepted the $20,000 payment from the defendant and after another month it accepted payment of $73,182.57. Even then, the Company still owed $29,880.82. Within days, the Company was under voluntary administration and in liquidation about three weeks later.

42 It is to be observed in this series of events, which I think showed a quite unsatisfactory operation of its credit account with the defendant, that the Company seemed to be relying for non-payment on the alleged confusion with the accounts generated by the Oracle System. Indeed, the Computerworld article supported similar confusion with other customers of the defendant. But, the defendant permitted for a period of many months the Company’s account to be seriously in arrears, at least $40,000 in excess of the $50,000 credit limit as at July 2005, continued to supply products and services regardless of the amount owing and failed to have in place an alternative system to monitor the account. Also, in my view, the defendant must have realised, or ought reasonably to have done so, that the Company itself during this trading period would have known the true amounts of accruing debt from the invoices it received from the defendant yet persistently refused to make any payments until resolution of the dispute. Further, the defendant was sufficiently concerned about the financial viability of the Company by obtaining director’s guarantees as part of its decision to approve a credit facility. It is passing strange in this context that the Company then made two payments totalling $93,182.57 a matter of weeks before it ceased trading and went into voluntary administration; its directors, as the plaintiff said, had no basis to reasonably expect the Company was solvent as at 30 June 2005.

Findings

43 On the facts I make the following findings –

(1) I accept the plaintiff’s evidence, including his conclusion that the Company was insolvent as at 10 May 2005, if not from November 2004; his opinion that the Company’s directors/managers had no basis to have reasonable grounds to expect it was solvent at 30 June 2005 or would remain solvent if it continued to trade; two payments were made by the Company to the defendant totalling $93,182.57, being $20,000 on 28 September 2005 and $73,182.57 on 1 November 2005; such payments were made when the Company was insolvent; and the defendant as an unsecured creditor had thereby received from those transactions $93,182.57 more than it would have received in the winding up of the Company, namely, nil.

(2) I accept Mr Hawe’s evidence including his statement that the defendant’s general manager in January 2005 directed accounts service officers in view of the problems with the Oracle System to continue releasing stock to customers, including the Company, regardless of how much the customer then owed on its account.

(3) The defendant on 22 January 2004 opened a credit account for the Company with a limit of $50,000 to trade at that limit for a minimum of three months with any increase in the limit to require audited financial details.

(4) The Company during the subsequent trading period with the defendant considerably exceeded the said credit limit, at least by $40,000 by July 2005, but without any audit by the defendant.

(5) The defendant was sufficiently concerned about the financial viability of the Company at the time in January 2004 it granted credit to it to obtain guarantees from the directors to secure any unpaid debt.

(6) Although an issue arose following transfer of the Company’s account to the Oracle System in December 2004/ January 2005, the defendant ought reasonably to have known that the Company itself would have been aware from invoices of the true amount it owed but the defendant continued to supply products and services in the context of an ever increasing debt.

(7) The defendant failed during the trading period with the Company to enquire into its solvency, notwithstanding the increasing debt level and lack of regular and continuing payments.

Running account

44 Counsel for the defendant submitted that there was prima facie evidence of a running account as constituting a continuing business relationship between the Company and the defendant of which the two subject transactions totalling the payment of $93,182.57 were an integral part. The evidence relied upon was the general ledger of the Company, the aged analysis prepared by the plaintiff and the invoices forwarded by the defendant to the Company. As such, so counsel submitted, the plaintiff had neither disproved the running account nor identified the dimension or quantum of what the preference may be so that s 588FA(3) of the Corporations Act operated to prevent the transactions being taken to be an unfair preference. In the result, the transactions were not insolvent transactions under s 588FC so that they were not voidable transactions under s 588FE so as to support the plaintiff’s present application for recovery under s 588FF.

45 Counsel for the plaintiff, on the other hand, and not conceding the alleged onus on him to establish that the subject transactions did not constitute a running account, submitted that the two transactions could not be so categorised because when made they were not part of a continuing business relationship to encourage the further supply of product but merely payment of a high amount of indebtedness. Effectively, said counsel, the payments were made at the end of the relationship when the Company had been insolvent for some months .

46 Both counsel relied in the decision of Santow J in Sydney Appliances, and the cases cited therein, to support their respective positions.

47 In Sutherland v Liquor Administration Board (1997) 15 ACLC 875, as adopted by Santow J in Sydney Appliances (in para [139]), Young J defined s 588FA(3) in this way:

Although this is a very verbose section and the concatenation of words is sometimes difficult to comprehend, in simple case it means that if a supplier and consumer are constantly trading, one constantly supplying goods and the other constantly making payments, then one does not look at transactions in isolation but looks at the overall effect at the beginning and the end of the relevant period. That is an adequate summary but it is perhaps generally more meaningful that the words of the subsection itself.

48 Even though his Honour may have thought his summary to be inadequate, I would adopt it as a cogent answer to the defendant’s submissions and as only supporting what was put for the plaintiff. In light of the findings I have made on the facts here, and even accepting the continuing supply or products and services by the defendant to the Company during the period they traded, it could not be said the Company was constantly making payments as part of a running account. Indeed, the reverse was the case where the level of indebtedness simply grew over time with the two transactions concerned being made at the end of the relationship as partial discharge of the accrued debt. As Santow J observed in Sydney Appliances (in para [147]), “the basis of a running account is a continuing relationship between the debtor and creditor with an expectation that further debits and credits will be so incurred”.

49 The view so expressed receives support from what Santow J added in Sydney Appliances (in para [141]) as follows:

The essence of a running account is a continuing relationship between the supplier and the purchaser with value being exchanged between them. The essential features of a running account are described most recently in the High Court in the following passage from Airsevices Australia v Ferrier & Anor (1996) 185 CLR 483 at 501-502 taken from the majority judgment of Dawson, Gaudron and Mc Hugh JJ:

“If a payment is part of a wider transaction or a ‘running account’ between the debtor and the creditor, the purpose for which the payment was made and received will usually determine whether the payment has the effect of giving the creditor a preference, priority or advantage over other creditors. If the sole purpose of the payment is to discharge an existing debt, the effect of the payment is to give the creditor a preference over other creditors unless the debtor is able to pay all of his or her debts as they fall due. But if the purpose of the payment is to induce the creditor to provide further goods or services as well as to discharge an existing indebtedness, the payment will not be a preference unless the payment exceeds the value of the goods or services acquired. In such a case a court,…looks to the ultimate effect of the transaction. Whether the payment is or is not a preference has to be ‘decided not by considering its immediate effect only but by considering what effect it ultimately produced in fact’. [Rees v Bank of New South Wales (1964) 111 CLR 210 at 221-222]”.

50 Given the insolvent position of the Company at the time the two subject payments were made, and the decision of its directors to cease trading shortly thereafter, I am of the view that the sole purpose of the two subject transactions was to partially discharge the existing debt with the defendant, thus giving it a preference over other creditors, and where at the time the Company was insolvent and unable to pay all of its debts as they fell due.

51 I therefore conclude that the plaintiff has established the relevant transactions were not made as part of a running account within the meaning of s 588FA(3). They were unfair preferences given by the Company to the defendant.

Good faith defence

52 In order for the defendant to make out this defence under s 588FG(2) of the Corporations Act, it must show –

(a) the defendant became party to the transactions concerned in good faith; and

(b) at the time when the defendant became such a party:

(i) the defendant had no reasonable grounds for suspecting the Company was insolvent at that time or would become insolvent by entering into the transaction; and

(ii) a reasonable person in the defendant’s circumstances would have no such grounds for so suspecting; and

(c) the defendant has provided valuable consideration under the transaction or has changed its position in reliance on the transaction.

53 The defendant’s counsel accepted the onus of making out this defence: see Sydney Appliances in para [38]. In that process, counsel submitted that central to his case was the proposition that one had to look to the whole of the relationship between the Company and the defendant rather than at any particular point in time. At the base of that relationship was the dispute which existed about the multiple accounts and the resultant confusion in the amount of debt owed by the Company following the introduction of the Oracle System. Given that the requisite “good faith” was to be that of the defendant and not anything the Company might think or do, the real issue was what did the defendant know and do during the relationship – it was relevant in considering those aspects to ask what the defendant could have done in the circumstances other than to continue supplying products and services to the Company which was a customer with a significant level of trade. In the result, counsel submitted this defence was made out once it be found, as it should be, that the Company had raised a dispute about the extent and ageing of its debt on the basis the defendant had not properly credited amounts to its account, that the defendant’s invoices needed to be reconciled and that the defendant needed to merge the Company’s accounts. Such findings were said by counsel to fall well short of the defendant forming a positive feeling of actual apprehension or mistrust that the Company was insolvent or would become so from a consideration of circumstances known to the defendant.

54 For the plaintiff, his counsel emphasised that the overall picture was of the Company trading with the defendant and getting deeper and deeper into debt. Here, as counsel put, and acknowledging a court’s reluctance to find payments were received in bad faith, the circumstances showed the defendant continued to trade with the Company and accepted the payments concerned in wilful blindness of the financial position of the Company and of the continuing history of its default in meeting the debts due from time-to-time. At the least, the defendant should have had “alarm bells” ringing as to the solvency of the Company where there was good reason to believe it was acting as if it were insolvent. The two transactions made just before insolvency was declared with a prior record of non-payment of accounts made the point. In that respect, the decision to supply product with the problems in the Oracle System, but without considering the level of then debt and without any other steps in place to enquire into the Company’s ability to pay its debts as they fell due, was to disregard, as it ought not have done, relevant matters going to insolvency. It was the position, so counsel emphasised, that the Company as a debtor was taking advantage of the dispute about the Oracle System not to pay its debts when the defendant ought to have realised that the Company had its own records as to the amount and value of product purchased but failed to make payment until just before insolvency was declared – the defendant could, and reasonably should, have been suspicious of the Company’s insolvent position.

55 The defendant answered the plaintiff’s case based on the ageing debts and closeness in time of the two transactions to the Company’s administration as being flawed. Firstly, it was put by counsel that the ageing ignored the commercial reality of trading as between the defendant and the Company and the fact the Oracle System dispute was still unresolved at the time of the payments. Secondly, undue weight should not be put on delay in payments because debts are not always paid on time even by solvent traders. And, thirdly and finally, the closeness in time of the payments to the date of appointment of the administrator was irrelevant to the question of whether the defendant or a reasonable person in its position was suspicious of the Company’s insolvency, particularly in the absence of any other indicia of insolvency.

56 Santow J in Sydney Appliances (in para [38]) said that for a defence to be made out under s 588FG(2) it was “necessary for (the defendant) to establish two essential elements. First that the payments were made in good faith. Second that (the defendant) subjectively had no reasonable grounds for suspecting that (the company) was insolvent at the time it received the payment and, objectively, that no reasonable person in the position of (the defendant) would have suspected insolvency”. His Honour added (in para [39]) that “the term ‘good faith’ is to be given its natural meaning, namely to act with propriety or honesty. The requirement of good faith under s588FG(2)(a) is a subjective test. (Re Ermayne; Sims v Tech Holdings Pty Ltd (1998) 30 ACSR 330 at 336; Downey v Aira Pty Ltd (1996) 15 ACLC 1068 at 1075)”.

57 The “suspicion” of insolvency referred to in s 588FG(2)(b) represents both a subjective and an objective test for the defendant to establish. In Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266 at 303, Kitto J defined a suspicion as :

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.

58 With reference to various cases, Santow J in Sydney Appliances (in para [43]) summarised the approach at to “suspicion” in this way:

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

59 One may add to this process the words of Mansfield J in Smith v Deputy Commissioner of Taxation (1997) 23 ACSR 611 that “such a judgment must be made without the wisdom of hindsight and in all the circumstances which existed at the time”.

60 Mr Hawes, as one of the defendant’s accounts services officers, reviewed the diary notes maintained by the Oracle System and had direct contact with the Company’s accountant, Mr King, in the latter stages of trading from around mid-October 2005. On 14 October 2005 he contacted Mr King regarding the outstanding debt and was informed that “only when the accounts are reconciled, I will pay Canon what is outstanding”. Mr Hawes then forwarded to the Company a reconciliation and said it was on or around 1 November 2005 that the defendant received a remittance advice and cheque for $73,182.57. Mr Hawes deposed he “was surprised to learn…that the (Company) had gone into receivership”. Although it seems Mr Hawes was successful in obtaining relatively prompt payment of part of the debt due, and which no doubt prompted his feeling of surprise, that is to be seen in the context of other diary notes over a period of many months where, clearly, accounts services officers had been endeavouring to obtain payment by the Company. As far back as June 2005 the defendant sent the Company a spreadsheet and all outstanding invoices. It is true that at the base of the complaint by the Company was the need for the various accounts on the Oracle System to be merged, but, it seems to me, that could not reasonably explain the lack of payments over a period of months when the Company continued to receive product. Also, of course, the Company itself had received invoices and reasonably may be taken, to the knowledge of the defendant, to have a good idea as to how much was owed and for what product. Nevertheless, the level of debt simply had grown over time.

61 For instance, the defendant was very well aware, as the diary note of 8 July 2005 indicated, that the Company was seriously in default as its account was then $90,000 in debit. And yet its approved credit limit was only $50,000. In my view, that is a powerful indicia of insolvency and which should reasonably have given the defendant such a suspicion. However, it continued to provide product without regard for the amount owing and without any process in place to monitor the Company’s account.

62 The reliance by the defendant on the problems with the Oracle System, in my view, was misplaced. Those problems were obviously widespread with customers and persisting over a lengthy period. Even so, it simply permitted the Company to trade with ever increasing debt and without any process to monitor the position. As counsel for the plaintiff properly submitted, that was to turn a blind eye to the possibility of insolvency. In my view, in an objective sense, it would have been reasonable for the defendant in its state of knowledge to have suspected the Company was in financial difficulties and to give rise, as Kitto J said in Queensland Bacon, to “a positive feeling of actual apprehension or mistrust” that the Company was solvent.

63 I am satisfied that the defendant in becoming a party to the two transactions in September 2005 and November 2005 when the Company made payments totalling $93,182.57 did not do so in good faith. Its decision to permit the Company to continue trading with it, at a time when the debt level had grown to well in excess of the credit limit of $50,000 and without any alternative monitoring system in place, was simply to ignore the financial viability of the Company to meet its debts as and when they fell due. Although the defendant may not have then known the Company was in fact insolvent, it may be accepted, in my view, that a reasonable person in the position of the defendant would have suspected insolvency. It follows that the defendant has not made out the defence of “good faith”.

Conclusion and orders

64 For the foregoing reasons, I conclude that the two transactions made on 28 September 2005 and 1 November 2005, whereby the defendant received from the Company a total payment of $93,182.57, were voidable transactions within the meaning of s 588FE(2) of the Corporations Act and, as such, support the plaintiff’s application under s 588FF(1)(a) to recover such amount from the defendant. The transactions were an unfair preference pursuant to s 588FA(1) as resulting in the defendant in respect of the Company’s unsecured debt to it receiving more than it would receive from the Company in a winding up which was nil. Such unfair preference involved the transactions concerned as insolvent transactions under s 588FC(a)(i), being entered into at a time when the Company was insolvent, and thus became the voidable transactions to support the present action.

65 The plaintiff has established that the subject transactions were not made as an integral part of a continuing business relationship between the defendant and the Company, namely a running account, within the scope of s 588FA(3). This defence against there being an unfair preference therefore fails.

66 The defendant has not made out the defence of “good faith” in s 588FG(2) so that the orders sought by the plaintiff may be made.

67 The plaintiff is entitled to the relief sought. It is appropriate to add interest, at the rates prescribed by Sch 5 to the Uniform Civil Procedure Rules being 9 per cent per annum and 10 per cent per annum from 1 January 2007, to the principal amount of $93,182.57 as from 9 November 2005 to the date of judgment. This interest component is calculated at $18,079.97.

68 I make the following orders pursuant to s 588FF(1)(a) of the Corporations Act 2001 (Cth) –

(1) The defendant is directed to pay to Modern Master Pty Limited (Receivers and Managers Appointed) (In Liquidation) ACN 106 230 700 the sum of $93,182.57 plus interest of $18,079.97, a total of $111,262.54.

(2) The defendant is to pay the plaintiff’s costs of the proceedings.

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