Norman Mel Ashton and Simon Read as Liquidators of Farmer Furniture Pty Ltd (Receiver and Manager Appointed) (in Liquidation) v M Simonson (Aust) Pty Ltd - [2001] WADC 39

JURISDICTION : DISTRICT COURT OF WESTERN AUSTRALIA
IN CIVIL

LOCATION: PERTH

CITATION: NORMAN MEL ASHTON AND SIMON READ AS LIQUIDATORS OF FARMER FURNITURE PTY LTD (RECEIVER & MANAGER APPOINTED) (IN LIQUIDATION) -v- M SIMONSON (AUST) PTY LTD [2001] WADC 39

CORAM: WISBEY DCJ

HEARD: 25, 26 OCTOBER 2000

DELIVERED : 26 FEBRUARY 2001

FILE NO/S: CIVO 201 of 1998

MATTER :IN THE MATTER OF SECTION 588FF OF THE CORPORATIONS LAW OF WESTERN AUSTRALIA
BETWEEN: NORMAN MEL ASHTON AND SIMON READ AS LIQUIDATORS OF FARMER FURNITURE PTY LTD (RECEIVER & MANAGER APPOINTED) (IN LIQUIDATION)
Applicants
AND
M SIMONSON (AUST) PTY LTD
Respondent

Catchwords:

Corporations - Winding up - Voidable transactions - Insolvent transaction - Unfair preference - Whether payments received for materials supplied were received at time when company unable to pay its debts - Whether respondent and/or reasonable person in circumstances of respondent would have no grounds for suspecting insolvency - Onus of proof

Legislation:

Corporations Law s9, s588FE, s588FF, s588FG

Result:

Respondent directed to pay company $42,384.30

Representation:

Counsel:

Applicants: Mr T O Coyle
Respondent: Mr T B Lyons

Solicitors:

Applicants: Phillips Fox
Respondent: Gibson Lyons

Case(s) referred to in judgment(s):

Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266
Re Ermayne Pty Ltd (1999) 30 ACSR 330
Sims v Celcast Pty Ltd (1998) 71 SASR 142

Case(s) also cited:

Jonas & Lanpac International Pty Ltd v Automation House Pty Ltd [1998] VSC 9 (30 July 1998)
Levi v Guerlini & Ors (1997) 15 ACLC 915
Re K & R Fabrications (Qld) Pty Ltd (in liq) (1980) 32 ALR 183
Smith v DCT 23 ACSR 611

WISBEY DCJ: By application filed 17 August 1998 the applicants Norman Mel Ashton and Simon Andrew Read, the liquidators of Farmer Furniture Pty Ltd (the company), seek orders against M Simonson (Aust) Pty Ltd (the respondent) as follows:
1.An order pursuant to s 588FF(1)(c) of the Corporations Law requiring the respondent to pay to the company the sum of $57,236.16.
2.Interest on the sum of $57,236.16 at the rate of 6 per cent per annum from 17 October 1997 until judgment.
3.Costs.
The amount claimed results from four transactions as follows:
Date of payment  Amount
13 February 1997  $10,399.82
27 February 1997  $10,035.75
24 April 1997  $15,666.13
5 June 1997  $21,134.46
Total          $57,236.16
Section 588FF of the Corporations Law relevantly provides that if on a liquidator's application the Court is satisfied that a transaction of the company is voidable because of the provisions of s 588FE the Court may make an order (inter alia) directing the respondent to pay to the company an amount equal to some or all of the money that the company has paid under the transaction provided always that the application has been made within three years of the relation back date.
Section 588FE provides that a transaction of the company may be voidable (inter alia) if it is an insolvent transaction of the company and was entered into or an act done for the purpose of giving effect to it during the six months ending on the relation back date.
A transaction is an insolvent transaction if it is an unfair preference and was entered into or an act done for the purpose of giving effect to the transaction at a time when the company was insolvent.
A transaction between the company and an unsecured creditor is an unfair preference if it results in the creditor obtaining more than that creditor would have received in respect of its unsecured debt if the creditor had been obliged to prove for its debt in a winding up of the company.
The term relation back day is defined in s 9 generally as the date on which the winding up is taken to have begun, and in the present case that date is relevantly declared as being the date upon which a resolution of the company's creditors was passed to wind up the company. There is no dispute that the relation back day was 23 July 1997.
Section 588FG(2) provides that the Court is not to make under s 588FF an order if the transaction is not an unfair loan to the company and it is proved that:
(a)the respondent became party to the transaction in good faith; and
(b)at the time when the respondent became such a party -
(i)it had no reasonable grounds for suspecting that the company was insolvent at that time or would become insolvent, and
(ii)a reasonable person in the respondent's circumstances would have had no such grounds for so suspecting, and
(c)the respondent has provided valuable consideration under the transaction or has changed its position in reliance on the transaction.
The respondent is required to prove on the balance of probabilities the facts necessary to bring it within the provisions of s 588FG(2): Sims v Celcast Pty Ltd (1998) 71 SASR 142.
For the respondent to prove that it acted in good faith it is required to show that it acted with honesty and propriety: Re Ermayne Pty Ltd (1999) 30 ACSR 330.
The application before the Court has properly proceeded on the basis that the four transactions previously referred to occurred within the relation back period and that prima facie each are voidable transactions requiring orders to be made in terms of the application unless the respondent discharges the burden of proof upon it pursuant to s 588FG(2). It is necessary to consider the evidence in that context.
The applicants filed two affidavits in support of the application.
In an affidavit sworn 12 August 1998 Simon Andrew Read (one of the applicants) relevantly deposed to the following facts:
(a)On 23 July 1997 the directors of the company resolved that Peter Michael Melsom and Stanley Frederick Robson be appointed administrators of the company;
(b)On 24 July 1997 it was resolved to appoint the applicants as administrators in lieu of Melsom and Robson;
(c)On 20 August 1997 a second meeting of creditors resolved that the company be wound up and that the applicants be appointed liquidators of the company;
(d)Following his joint appointment Mr Read carried out an investigation into the financial affairs of the company and concluded that the company had been unable to pay its debts as and when they fell due during the period 1 January 1996 to 23 July 1997 (the relation back date) having gone from an asset surplus position of $112,000 as at 30 June 1995 to an asset deficit position of $215,000 as at 30 June 1996 and $1,245,000 as at 23 July 1997. Excluding from the balance sheet non‑current assets such as shareholder and associated entity loans, there was a net asset deficiency of $837,000 as at 30 June 1995, $1,368,000 as at 30 June 1996 and $2,260,000 as at 23 July 1997. There was at all times a substantial deficiency in working capital from which it followed inevitably that the company had severe cashflow problems and was unable to pay its debts as and when they fell due. The company had a net operating loss of $191,000 as at 30 June 1995, $503,000 as at 30 June 1996 and $358,000 as at 23 July 1997. The financial records disclosed that 94 per cent of the company's creditors were overdue for payment as at 30 November 1994, 62 per cent of the creditors were overdue for payment as at 30 June 1996, 16 per cent of the creditors were overdue for payment, and as at 1 January 1997, and 70 per cent of the creditors were overdue for payment as at 30 June 1997.
(e)The company was only able to sustain operations by delaying payments to creditors, increasing borrowings, and reducing profit margins on stock in an endeavour to achieve cashflow.
(f)He annexed to his affidavit an internal memorandum from the financial controller of the company to a director of the company dated 3 January 1996 which is eloquent of the company's parlous fiscal integrity.
(g)That each of the four payments previously referred to were made by the company to the respondent during the relation back period (23.1.97 to 23.7.97).
(h)Excluding the recovery of payments made during the relation back period, unsecured creditors of the company would not receive a dividend in reduction of the company's liability to them.
(i)By letter dated 20 October 1997 he erroneously demanded payment of the sum of $63,694.80 from the respondent but adjusted that claim to $57,236.16 in the application.
There being no essential dispute as to the validity of the matters deposed to by Mr Read, he was not required to give oral evidence.
The other affidavit filed in support of the application was that of Kenneth James Carter sworn 1 March 2000. Mr Carter, an accountant, was employed by the company as its finance and administration manager between 4 August 1993 and 27 June 1997 and during that period was responsible for recording the financial activities of the company, reporting to directors and shareholders on the cashflow and overall position of the company, supervising receipts and payments, and providing financial assistance and supervision generally. Mr Carter deposed to the fact that:
(a)during the relation back period Mark Farmer was a director of the company and the general manager of its retail division and in that capacity dealt with the company's suppliers.
(b)he had some contact with suppliers of the company in relation to their accounts, and during the relation back period had telephone conversations with many suppliers who were asking about payment of their accounts, and would give them an indication when he thought the account would be paid. If the supplier was not satisfied with the information provided by him it would contact Mr Farmer or one of the other directors.
(c)in or about March or April 1997 a cashflow committee was established to priority schedule payments to creditors, that being necessary because the company did not have sufficient funds to meet its debts as they became due and payable. The cashflow committee met regularly to consider supplier demands, estimate how much money was available to meet those demands, and determine the order of and the extent to which demands would be met. He stated that it was obvious at every cashflow meeting that there were insufficient funds to meet all accounts that were due and owing.
(d)he believed that during the relation back period suppliers of the company ought to have known that it was having financial difficulties because of the deteriorating payment trend, closing of a store at Joondalup, and a general slump in the furniture industry.
(e)he recalled dealing with the respondent during the relation back period, and stated that it put a lot of pressure on the company for payment. In particular he dealt with Russell Newbon and Peter Kretzschmar, the respondent's sales manager, and accounts receivable manager respectively.
(f)he annexed, in particular, correspondence passing between the company and the respondent from which it can be observed that:
(i)on 13 June 1996 it was agreed that there would be a 60 day account payment period;
(ii)as at 18 February 1997 the respondent was demonstrating some concern regarding the state of its accounts;
(iii)on 16 April 1997 the respondent wrote to the company expressing concern about non‑payment of its account noting that prior undertakings had not been met and stating particularly "we cannot conduct mutual business by continually being kept in the dark, as this only conveys the wrong message, otherwise we will be forced to take other recourse to redeem payment";
(iv)the respondent forwarded to the company a document entitled "Notice before proceeding" dated 15 April 1997 seeking payment of $37,447.59 on or before 28 April 1997 and advising that legal action would be taken in the event of non‑payment.
(g)that as at 15 April 1997 there were accounts owed by the company to the respondent which were in arrears for up to 91 days, and a total sum then due and payable of $37,447.59.
Mr Carter gave viva voce evidence. He stated that most of the dealings he had with the respondent were with Mr Kretzschmar rather than Mr Newbon, and the contact was generally by telephone. He could not recall specifically mentioning the cashflow committee to Mr Kretzschmar or Mr Newbon, although it was his standard procedure to mention to creditors the existence and purpose of the cashflow committee.
In cross‑examination Mr Carter accepted that he probably did not have any discussions with Mr Newbon subsequent to the establishment of the cashflow committee. He seemed to have some vague recollection of discussions with Mr Newbon concerning payment of the respondent's account, but such discussions as they had took place prior to the establishment of the cashflow committee in about March or April 1997. He agreed with the proposition put to him that in the period February to June 1997 he might not have had more than one conversation with Mr Kretzschmar, as most of the day to day functioning of the accounts was controlled by one of the respondent's accounts clerks. When it was suggested to Mr Carter that he would not have had any discussion with Mr Kretzschmar concerning the cashflow committee, he referred to the document annexed KJC8 to his affidavit, being a letter from the respondent to the company, in which reference was made to a discussion between Mr Carter and Mr Kretzschmar on 14 April 1997 during which Mr Carter advised that a decision would be made on 17 April 1997. Mr Carter suggested that was indicative of the fact that the matters under discussion were being referred to the cashflow committee, and that Mr Kretzschmar would have been made aware of that fact.
Mr Carter agreed that in December 1996 sales orders exceeded budget and that the budget position was achieved in January 1997, although notwithstanding, there was a cashflow problem. During this period there were a number of suppliers to the company who were dealing on a cash on delivery basis. He agreed that during the period February to July 1997 the company developed some expertise in fobbing off creditors, although he was reluctant to accept that that expertise enabled it to satisfy creditors that they would be paid. He agreed that between February and June 1997 the company continued to place orders for materials with the respondent, and that position continued until 14 July 1997. In fact it appears to be the case that subsequent to 30 June 1996 the company increased its orders with the respondent. Mr Carter agreed that as a general practice the company always paid invoices late.
The respondent filed an affidavit of Peter Kretzschmar sworn 9 October 1998 in which he deposed to the fact that he was employed by the respondent as its credit manager, having held that position since 18 October 1995. He had been engaged in the credit control industry for approximately 12 years. Mr Kretzschmar stated that from 11 June 1990 the respondent operated approximately 380 active accounts in Western Australia. The respondent had been dealing with the company since 11 June 1990, initially on a 30 day credit basis, although in fact the respondent informally allowed an additional 15 days after the end of the month before it would stop credit (in other words the company actually had a 45 day credit).
Mr Kretzschmar confirmed that in or about June 1996 the company became subject to a 60 day credit account, stating that he would not have extended credit to 60 days if he thought the company was in financial difficulty, the reason for the extension being the volume of business between the company and the respondent.
Mr Kretzschmar annexed to his affidavit a summary of statements covering the period 30.6.95 to 30.6.97 showing the date of the invoice, the date due for payment, and the date of payment. The summary discloses that although a number of the payments were late, many of the payments met the trading terms.
Mr Kretzschmar stated that with 60 day accounts it was his practice to ring the debtor about a week before the due date to confirm that payment would be made, and sometimes to make arrangements to collect the cheque. He stated that he regarded this as good customer relations and credit control. He stated that when he rang the company he generally spoke to someone called Bridget in the accounts payable section and that about 30 to 40 per cent of the time in the 12 months leading up to July 1997 would be referred to Cheryl Lambkin.
Mr Kretzschmar stated that the letter from the respondent to the company dated 16 April 1997 which annexed the notice before proceeding, was computer generated, and was signed by a Mr David Simpson who had recently taken over the position of State manager, and simply desired to get the company to communicate with the respondent. Mr Simpson did not give evidence.
Mr Kretzschmar claimed that the first time he became aware that the company was in financial difficulty was when he received a letter dated 16 July 1997 advising that it was in liquidation.
In his viva voce evidence Mr Kretzschmar stated that the respondent never received a cheque from the company that was dishonoured on presentation. He confirmed that the respondent continued to supply the company with product after 18 February 1997.
Mr Kretzschmar referred to Exhibit PK2 to his affidavit which he stated was a summary of all statements for the 12 months ended 30 June 1997. It shows that having allowed the agreed payment terms together with a 15 day gratuitous credit extension there was a significant delay in paying the March, April, July, August, September, November and December 1995 invoices, the January, February and March 1996 invoices, and the January and February 1997 invoices. No payments were received from the company in the months of October and December 1995, January, February and November 1996 and March and May 1997, although his evidence indicated that there was satisfactory accounting explanation for some of those months.
Mr Kretzschmar could only recall having one telephone discussion with Mr Carter, and denied that there were any discussions concerning the cashflow committee or that he had any knowledge of such a committee. He stated that the respondent had never referred the matter of the company's outstanding accounts to a debt collection agency or solicitors.
In cross‑examination Mr Kretzschmar agreed that in some respects his summary of statements was misleading and that there had been months where some invoices due for payment were not addressed at all. Without going into the cross‑examination in great detail it is sufficient to say that the summary of statements is a very charitable reflection of the manner in which the company met its obligations towards the respondent. Clearly there were numerous occasions when a considerable period of time elapsed between the date of the rendering of the invoice and payment thereof, payment being well outside the agreed credit terms; and there was a consistent significant outstanding liability.
Mr Kretzschmar was referred to the respondent's fax to the company dated 18 February 1997 (Exhibit KJC6 to the affidavit of Mr Carter) and confirmed that the sum of $2,578.18 referred to therein was due and payable on 30 November 1996 and was still outstanding on 18 February 1997. Also that the fax referred to other invoices outstanding. The fax make it clear that the respondent's attitude was that unless by 28 February 1997 there was a substantial reduction of the outstanding indebtedness, further orders would not be met. Notwithstanding, he was adamant that he never became apprehensive about the capacity of the company to meet its financial obligations to the respondent.
Mr Kretzschmar's attention was directed to Exhibit PK4 in his affidavit being the letter dated 16 April 1997 from the respondent to the company, and he agreed that he drafted the letter, although it was signed by the manager, Mr Simpson. He agreed that the letter correctly reflected the fact that there had been numerous attempts made to obtain payment of the sum of $1,389.58 falling due for payment on 31 December 1997 and the sum of $17,461.79 falling due on 31 January 1997. It appears the attempts consisted of telephone calls, although he suggested that the calls covered the period 30 March 1997 to 16 April 1997.

Mr Kretzschmar agreed that there were a number of instances when although he left messages for the company's accounts personnel to contact him, they failed to do so. He claimed that did not raise any question in his mind about the company's ability to pay. He agreed that some of the indicia of a customer's inability to pay included beginning to pay amounts less than the full amount owing; being constantly in arrears; the amount of arrears increasing; and lack of communication; factors which sometimes lead to a suspicion that payment would not be made. He confirmed that the letter of 16 April 1997 was demonstrative of the respondents lack of confidence in the undertakings given by the company.
Russell Graham Newbon, the Tasmanian State manager of the respondent, swore an affidavit on 2 March 1999 which was filed in opposition to the application. He stated in the affidavit that he was the respondent's sales manager in Western Australia for a period of four years up to 15 July 1998, and in such position was responsible for the general supervision of the respondent's sales activities within Western Australia. As such he had close dealings with the company which was one of the respondent's major customers. Because of the company's value as a customer, Mr Newbon agreed to extend a 60 day credit facility to it, and so advised it by letter dated 17 June 1996.
Mr Newbon gave evidence viva voce stating that he had never spoken to Mr Carter. He confirmed that there were occasions during his time in Western Australia when supply was stopped to the company because of the state of the account. He emphasised in cross‑examination that he was involved purely in sales and running the sales team whilst in Western Australia, and that it was Mr Kretzschmar's job to look after creditor management. He confirmed that he had discussions with directors of the company from time to time during which he requested payment of outstanding accounts, but that he never sought a reason as to why the account was outstanding.
As already indicated the issue for determination is whether on the evidence to which I have made reference the respondent has established on the balance of probabilities those issues of fact which it is required to prove pursuant to s 588FG(2) for the Court to decline to make the orders sought in the application.
There is no suggestion on the evidence, and indeed it was never suggested by counsel for the applicants, that the respondent did not become a party to the transactions other than in good faith; nor that the respondent had not provided valuable consideration. In the result the issue for determination is whether at the time of the transactions the respondent had no reasonable grounds for suspecting that the company was insolvent, and further whether a reasonable person in its circumstances would have had no such grounds for so suspecting.
As was pointed out in Sims v Celcast Pty Ltd (supra) a consideration of the state of mind of the respondent's officers and their assessment of the company's position are relevant factors when considering whether the respondent has established that it had no reasonable grounds for suspecting that the company was insolvent or may become so, but are not relevant in determining the question of whether a reasonable person in the respondent's circumstances would have had no such grounds for so suspecting. In respect of the latter situation the Court is concerned with the conclusion (in terms of logic or commonsense) which a reasonable person ought reasonably to have reached in terms of relevant suspicion. As Williams J said at 1142:
"The provisions of subpara (b)(ii) require the Court to look at the position through the eyes of a hypothetical person. In that last mentioned situation the evidence of the creditor's knowledge and business qualifications may be used in a limited way for establishing 'the person's circumstances' which are to be brought to account in applying the tests contained in subpara (b)(ii). Otherwise, however, in applying subpara (b)(ii) the creditor's subjective appreciation of the facts will not be relevant unless that appreciation reflects that which would be expected by the reasonable person."
Section 95A of the Corporations Law provides that a person is solvent if, and only if, the person is able to pay all the person's debts, as and when they become due and payable. A person who is not solvent is insolvent.
In Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266 at 303 Kitto J relevantly stated:
"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. - The notion which 'reason to suspect' express is … of something which in all the circumstances would create in the mind of a reasonable person. … an actual apprehension or fear … a mistrust."
The evidence is eloquent of the fact that throughout 1995, 1996 and into 1997 the company was dilatory in meeting payment of the invoices rendered by the respondent. In the context of the trading relationship it cannot be said that late payment on its own account would or should have raised in the mind of the respondent and/or the hypothetical reasonable person a suspicion of insolvency. Regrettable though it may be it is a commercial reality that many debtors abuse the benevolence of creditors to their financial advantage out of selfishness rather than insolvency. On all the material put before me I am satisfied that at no time before the end of February 1997 was there reason for the respondent and/or a reasonable person to be pessimistic (that is suspicious) of the capacity of the company to honour its trading commitments. That cannot, however, be said of the position subsequent thereto.
In March or April 1997 the company established a cash flow committee and it is unrealistic to suppose that the respondent was not aware thereof.
As at the end of February 1997 an amount of $1,389.58 had been due and owing since 31 December 1997 and an amount of $17,461.79 since 31 January 1997.
The letter dated 16 April 1997 from the respondent to the company (Exhibit PK4 to the affidavit of Mr Kretzschmar) makes reference to a meeting between Mr Newbon and the company on 10 April 1997 concerning the outstanding account, and a further discussion between Mr Kretzschmar and Mr Carter on 14 April 1997 wherein Mr Carter advised Mr Kretzschmar that a decision would be made concerning payment of the account on 17 April 1997. The probability, having regard to the evidence of Mr Carter, is that certainly on 14 April 1997 Mr Kretzschmar would have been made aware of the existence of the cash flow committee and ought to have appreciated the significance thereof. The fact that Mr Carter was unable on 14 April 1997 to give a commitment concerning payment of the outstanding account should have, and indeed I have no doubt would have, caused the respondent to entertain a positive feeling of actual apprehension or mistrust about the capacity of the company to honour its financial obligations as and when they became due and payable. That is made clear in particular by the following passages in the aforesaid letter: "to date we have had no feedback from yourselves as to what is causing your inability to not be able to keep our agreed trading terms", and "we cannot conduct mutual business by continually being kept in the dark, as this only conveys the wrong message, otherwise we will be forced to take another recourse to redeem payment".
The letter was accompanied by a notice threatening legal proceedings which notice identified a sum of $1,389.58 as being outstanding in excess of 91 days, $17,461.79 as being outstanding in excess of 61 days, $10,304.26 as being outstanding in excess of 31 days, and $8,291.96 as being outstanding in excess of the maximum agreed period. The fact that the respondent was threatening legal proceedings against the company which Mr Newbon described as one of its major customers (a step which could only be regarded as incompatible with their commercial relationship) is eloquent of the fact that the respondent saw the writing on the wall, namely that the company was unable to pay its debts as and when they became due and payable.
The respondent has failed to satisfy me on balance that as at the date of the last two payments the subject of the application it had no reasonable grounds for suspecting that the company was insolvent. Indeed the evidence establishes the contrary position, namely that not only would a reasonable person in the respondent's circumstances have suspected that the company was insolvent, but the respondent had reached that conclusion.
In the result the applicants are entitled to an order that the respondent pay to the company the sum of $36,800.59 together with interest thereon from the date of the application, namely 17 August 1998 until 26 February 2001 at the sum of 6 per cent being $5,583.71. The total amount payable to the company is therefore $42,384.30.