Nilant, Charles Phillipe v Borden Australia Pty Ltd

[1996] FCA 548

IN THE FEDERAL COURT OF AUSTRALIA  )
  )
WESTERN AUSTRALIA DISTRICT REGISTRY)     No WAG 3055 of 1995
  )
GENERAL DIVISION                  )

BETWEEN:CHARLES PHILIPPE LOUIS NILANT

Applicant

AND:BORDEN AUSTRALIA PTY LTD

Respondent

CORAM:    HILL J
PLACE:    PERTH
DATED:    26 JUNE 1996

REASONS FOR JUDGMENT

Mr Nilant ("the liquidator") is the liquidator of Norimed Pty Limited ("the company").  On 18 July 1994 a winding up petition was presented against the company and on 28 September 1994 the Supreme Court of Western Australia ordered that it be wound up.

On 19 April 1994, Borden Australia Pty Limited ("the respondent") received from the company payment of the sum of $8294.70, in response to a judgment obtained by it against the company in proceedings which had been commenced on 2 December 1993. An application had been made by the respondent for execution on 12 January 1994 and the payment appears to have been made to the bailiff pursuant to the writ of execution. It is this payment which the liquidator now seeks to set aside as a preference made within the six months preceding the presentation of the winding up petition. The relevant statutory provision is to be found in Division 2 of Part 5.7B of the Corporations Law headed "Voidable Transactions".  The starting point of these provisions for present purposes is s588FC.  That section defines "insolvent transactions".  It has the effect, relevant to the present case, that the liquidator must show that the payment to the company was made at a time when the company was insolvent before the transaction will fall to be considered as an insolvent transaction.  Next one turns to s588FA which defines "an unfair preference".  That section requires relevantly that the transaction (in the present case, the payment) result in the respondent receiving from the company in respect of the unsecured debt, which at that time was owed to the respondent, more than it would receive from the company in respect of the debt if the transaction was set aside and the respondent were to prove in the winding up.  Put shortly, it requires the payment to have the effect of preferring the respondent to other creditors who will receive less than 100 cents in the dollar.

Finally, one turns to s588FE which enunciates transactions which may be voidable.  Relevantly, it is provided that a 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; [inter alia]

(i)during the 6 months ending on the relation-back day ...",

that is to say, the date the petition was presented on 18 July 1994.  So, in summary, the liquidator to this point must show:

(a)the payment was made when the company was insolvent;

(b)that the result of the payment was a preference in fact to the respondent; and

(c)that the payment was made in the period 18 January 1994 to 18 July 1994.

The last of these matters is conceded, the balance is in dispute.  It is agreed that the liquidator carries the onus of proof.

The Corporations Law provides as well for a defence, under s588FG, to a person who has received a preference otherwise capable of being set aside.  For present purposes that requires the respondent to show:

(1)the respondent received the payment in good faith;

(2)at the time of the payment the respondent had no reasonable ground for suspecting that the company was insolvent; and

(3)that a reasonable person in the circumstances of the respondent would have had no such grounds for so suspecting.

The burden of showing these matters lies upon the respondent.  The respondent submits that:

(1)the liquidator has not satisfied the burden upon him of showing that the company was, at the time of payment, insolvent;

(2)alternatively, the liquidator has failed on the evidence to show that the payment resulted in a preference in fact; or

(3)alternatively, the respondent submits that it received the payment in good faith and had no reasonable grounds for suspecting the insolvency.  It says further that no reasonable person in its position would have had such grounds.

THE EVIDENCE OF INSOLVENCY
         The evidence of insolvency consisted of the following.  First, there was in evidence the accounts of the company for the year ended 30 June 1993, unaudited and unsigned by the company's accountants.  The accountants report, which was also unsigned, makes it clear that the accounts had not been audited and that the accountant expressed no opinion as to whether the accounts presented a true and fair view of the company's position as at 30 June 1993, or the results for the year then ended on that day.  The accountant's report said that the accounts had been prepared "... at the request of and exclusively for the benefit of the directors".  The accountant's report certainly does not provide a firm basis for reliance upon the accounts but, on the other hand, the directors had signed a statement to the accounts that the profit and loss statement and balance sheet did give a true and fair view of the company's results or its affairs, as the case may be, for the year.  For what it is worth, the directors stated that, at the date of the statement on 9 September 1993, there were reasonable grounds for belief that the company would be able to pay its debts as and when they fell due.

The profit and loss statement and balance sheet cast doubt on this.  The profit and loss statement revealed an operating loss for the year of $14,823.  The balance sheet (which showed a deficiency in shareholders funds of $27,959) showed current assets of $399,660 and current liabilities of $371,346.  The current assets included stock on hand of $34,928 and the value of the current assets really depended upon the value of the trade debtors shown in the accounts as $364,524.

The relevant test of solvency is not whether after realisation of its assets the company would have a surplus of assets over liabilities.  It is whether, at the relevant date, the debtor had sufficient cash in hand or would have been able to obtain by sale or pledge of its available assets command of sufficient money to satisfy all debts anticipated to fall due
and become ascertained in the reasonably immediate future (see Bank of Australasia v Hall 1907 4 CLR 1514). I adopt the language of Isaacs J in that case, referred to with approval by Taylor J in Rees v Bank of New South Wales (1964) 111 CLR 210 at 230:

"The Act requires the debtor to be able to pay his debts as they become due.  This does not mean that he is always bound to keep by him in cash a sum sufficient to meet all his outstanding indebtedness however distant the date of payment may be.  If at the time he makes the assignment, the debtor's position is such that he has property either in the form of assets in possession or of debts, which if realised would produce sufficient money to pay all his indebtedness, and if that property is in such a position as to title and otherwise that it could be realised in time to meet the indebtedness as the claims mature, with money thus belonging to the debtor, he cannot be said to be unable to pay his debts as they become due from his own money.  In other words, if the debtor can, by sale or mortgage of property which he owns at the time of the assignment, change the form of the property into cash wholly or partly but sufficient for the purpose of paying his debts as they become due, that requirement of the section is satisfied."

On the whole, all the accounts do on their own is plant a suspicion of insolvency.  But mere suspicion cannot substitute for proof; cf M. & R. Jones Shopfitting Co Pty Limited v National Bank of Australasia Limited (1983) 1 ACLC 946 at 951.

The second piece of evidence is a statement of affairs of the company signed by the directors on 10 October 1994, some six months after the transaction which is sought to be impugned.  That document lists creditors of $171,705.27 and shows assets of approximately $31,500, but one knows nothing about the debts of the creditors which are listed.  For all one knows, all of these debts could have been incurred subsequent to April 1994.  The document, neither alone nor together with the accounts, amounts to proof of solvency.

Finally, the liquidator relied upon a clause in an affidavit of Mr Barnes, the State Sales Manager for Western Australia of the respondent.  In para13 of that affidavit, Mr Barnes deposed:

"In February of the following year Friedlander told me that he had entered into an agreement with a third party who had provided funds to the Company.  He said that as a result of the sale the Company would obtain enough money to pay out all of its creditors.  I understood from Friedlander that the money paid to the respondent on 19 April 1994 came from those funds.  I also understood from him that the company would continue to trade and be managed by Friedlander as well as the third party."

This was said to provide evidence that the company had sold its assets, or at least its principal asset, to pay off its debts and thus provide evidence of insolvency at a time before the payment was made.  Paragraph 13 of the affidavit, if linked to admissible evidence of "the sale" there referred to, might have this consequence but no such evidence was forthcoming, notwithstanding that a document evidencing the sale had been rejected in evidence because it was not proved at an earlier stage in the proceedings.  It could not, one would have thought, been difficult to adduce this evidence if indeed there were a sale.

I am thus of the view that the liquidator has failed to satisfy the onus of showing on the balance of probabilities that the company was insolvent at the time of payment.

EVIDENCE OF THE EFFECT OF THE PAYMENT AT THE TIME IT WAS MADE
         It was submitted for the respondent that the liquidator had not satisfied the onus of showing by admissible evidence that the payment had the result of the respondent receiving more than it would receive if the transaction was set aside and a winding up distribution were to be made.  In my view, however, the liquidator would have satisfied that onus.  It is clear from the statement of affairs that, in the winding up the respondent would not receive 100 cents in the dollar.  The result of the payment was clearly a preference.

WHETHER THE RESPONDENTS HAVE SHOWN THAT AT THE TIME THEY MADE A PAYMENT THEY HAD NO REASONABLE GROUND FOR SUSPECTING INSOLVENCY AND THAT NO REASONABLE PERSON IN THE SITUATION OF THE RESPONDENT WOULD HAVE HAD SUCH GROUNDS.

It would only be necessary for the respondent to go into this matter if there were a finding of actual insolvency. For completeness, however, I will narrate the relevant evidence given by Mr Barnes.  Mr Barnes deposes that at various times in the second half of 1993 the company had been overdue in its payments.  In one conversation arrears were attributed to the setting up of new accounts by the company, when the company changed its bank.  On another occasion there was said to have been a temporary cash problem for which a plausible explanation was offered to Mr Barnes.

However, it was the respondent's policy to place accounts in arrears with debt collectors and on 15 November 1993 the account of the company was given to a debt collector for collection.  At the time Mr Barnes placed the company on cash on delivery terms and trading continued satisfactorily on this basis for some time.  When Mr Barnes called upon the company's premises between July 1993 and April 1994, which he did every two months or so, the company appeared to him to be actually trading.

The penultimate matter adverted to is a question of a sale to a person providing funds for the company, which sale is left up in the air.  Apart from the question of sale, I am clear that the respondent is satisfied the onus of showing that it had no grounds for suspecting insolvency at the time it made the payment and that no reasonable person in this position would have.  Had there been evidence that before the payment Mr Barnes was aware that the company had sold all (or
its main trading) assets to pay out creditors, the result might have been different.  But that evidence was not forthcoming.  (Cf Ledger (In Liquidation) v Martino Holdings Pty Limited (1993) 12 ACSR 559. The evidence of sale was left to wither on the vine. Accordingly, I would have found for the respondent on this aspect of the case.

The final matter raised was the issue of good faith.  There was nothing in the evidence to suggest that the respondent had reason to suspect that the effect of the payment was to give a preference to other creditors.  It is clear that Mr Barnes was aware from the conversation about possible sale that there were other creditors.  While it is not necessary that he be aware of specific creditors, the notion of good faith has inherent in it either direct participation in the transaction, or at least knowledge of the consequences of the transaction.  Neither have been shown in the present case.

In the result, because the liquidator has not shown that the company was insolvent at the time the payment was made, the application must be dismissed and the liquidator bear the respondent's costs of it.

I certify that this and the preceding nine (9) pages
are a true copy of the Reasons for Judgment herein of his Honour Justice Hill.

Associate:  Date: 

Counsel and Solicitors      Mr Panegyres instructed by

for Applicant:              Williams & Hughes

Counsel and Solicitors      Mr Chin instructed by

for Respondent:             Minter Ellison

Date of Hearing:            25 June 1996

Date Judgment Delivered:         26 June 1996