Re Broissand, P.J.M & Anor Ex parte Trevor, G.J. & Ors v Seven Seas Sales P/L

Re: PATRICE JEAN-MARC BROISSAND and BRENT STEPHEN RUDLER
Ex Parte: GARRY JOHN TREVOR AND ALDEN JON HALSE as trustees of the property of
Patrice Jean-Marc Broissand and Brent Stephen Rudler and SEVEN SEAS SALES PTY.
LTD.
No. WX126 of 1989
FED No. 911/93
Number of pages - 7
Insolvency

COURT

IN THE FEDERAL COURT OF AUSTRALIA

BANKRUPTCY DISTRICT OF THE STATE OF WESTERN AUSTRALIA
GENERAL DIVISION
LEE J

CATCHWORDS

Insolvency - preference - payee in good faith and for valuable consideration and in the ordinary course of business.

Bankruptcy Act 1966 Pt.X; s.122; sub-ss.122(4), 231(2); para.122(2)(a)

Bankruptcy Rules rr.100A-100F

Re Cummins (t/a) Nam Constructions); Ex parte Harris v. ARC Engineering Pty. Ltd. (1985) 62 ALR 129

Downs Distributing Company Proprietary Limited v. Associated Blue Star Stores Proprietary Limited (In Liquidation) (1948) 76 CLR 463

Hymix Concrete Pty. Ltd. v. Garritty (1977) 13 ALR 321

Queensland Bacon Proprietary Limited v. Rees (1966) 115 CLR 266

Spedley Securities Ltd. (In Liquidation) v. Partnership Pacific Ltd. (1993) 11 ACSR 631

Spedley Securities Ltd. v. Sparad (No. 100) Ltd. (1993) 12 ACSR 32

Spedley Securities Ltd. (In Liquidation) v. Western United Limited (In Liquidation) (1992) 7 ACSR 271

Starkey v. Allan Fitzgerald Pty. Ltd. (1993) 12 ACSR 15

Re Weiss; Ex parte White v. John Vicars and Co. Ltd. (1970) ALR 654

HEARING

PERTH, 15 October 1993

#DATE 8:12:1993

Counsel for the Applicants: R.G.S. Harrison

Solicitors for the Applicants: Sly and Weigall

Counsel for the Respondent: I.K. Campbell

Solicitors for the Respondent: Dwyer Durack

ORDER

The Court orders that:

The application be dismissed with costs.

Note: Settlement and entry of orders is dealt with in Order 124 of the Bankruptcy Rules.

JUDGE1

LEE J The applicants ("the trustees") were appointed as trustees under deeds of assignment executed on 29 December 1989 by Broissand and Rudler ("the debtors") as directed by resolutions passed at a meeting of creditors held on that day and convened at the request of the debtors pursuant to Pt.X of the Bankruptcy Act 1966 ("the Act"). Until convening the meeting of creditors the debtors had carried on business in partnership as wholesalers of fresh and frozen seafoods under the business name Dugong Seafoods.

At the time the meeting was held rr.100A-100F of the Bankruptcy Rules were still in force. It is assumed that the meeting was conducted in accordance with the requirements of those rules in respect of separation of the interests of personal and partnership creditors of the debtors.
Pursuant to sub-s.231(2) of the Act, s.122 of the Act applies to a deed of assignment as if the assigning debtor is a bankrupt and the trustees appointed by the deed are trustees of a bankrupt estate. In this application the trustees seek a declaration pursuant to s.122 of the Act that two payments made to the respondent ("Seven Seas") by Dugong Seafoods on 22 September 1989 and 12 October 1989 respectively are void as against the trustees being payments which had the effect of giving Seven Seas a preference, priority or advantage over other creditors, the payments being made within six months of the execution by the debtors of the deeds of assignment.
The debtors commenced trading as Dugong Seafoods in about July 1986 and supplied wholesalers and retailers throughout the State of Western Australia but principally in the Perth metropolitan area.
In July 1988 Seven Seas, a seafood supplier which carried on business at Salmon Street, Port Melbourne, was requested by Dugong Seafoods to supply goods on credit. Seven Seas made enquiries about the trading status of Dugong Seafoods and being satisfied thereby agreed to supply goods on terms which required payment to be made within thirty days of the delivery of a statement of account.
Between August 1988 and August 1989 Seven Seas supplied goods to the order of Dugong Seafoods. The cost of the goods supplied each month was about $20,000. In August 1989 there was a variation in the pattern of trading when the cost of goods ordered exceeded $172,000.
Shortly after the trading account commenced, Dugong Seafoods failed to adhere to the terms of trade and from March 1989 accounts were paid as a matter of course sixty days after delivery of the statement. Seven Seas appeared to acquiese in this manner of conduct of the account.
Dugong Seafoods produced a small net profit for the year ended 30 June 1988 but incurred a net trading loss for the year ended 30 June 1989. Between July 1989 and November 1989 the business continued to trade at a loss.
In November 1989 the debtors sought advice from an accountant and on 27 November 1989 each signed an authority authorizing one of the trustees to convene a meeting of creditors and take control of their property.
Seven Seas does not dispute that the payments made to it on 22 September 1989 and 12 October 1989 were payments made within six months of the resolution by a meeting of creditors that the debtors execute deeds of assignment and does not dispute that the payments to Seven Seas were made in favour of a creditor of the debtors. Seven Seas does not concede that at the time the payments were made the debtors were unable to pay their debts as they became due from their own money nor that the payments had the effect of giving Seven Seas a preference, priority or advantage over other creditors.
The onus was on the trustees to prove each of those matters in dispute. Counsel for Seven Seas contended that the trustees had provided no evidence to identify the creditors of the debtors as at the dates of payment and as at 29 December 1989 and, therefore, it was submitted, it was not possible to determine whether any creditor, unpaid as at either date of payment, remained unpaid at the date of execution of the deeds of assignment. Counsel further submitted that the trustees had not put into the evidence the books of account nor identified the material relied upon for hearsay statements contained in the affidavits of the trustees filed in support of the application. Counsel submitted that there was no evidence as to the accuracy of the books and records to which the trustees had referred nor any evidence that the trustees were satisfied they had been provided with all relevant records of the business of the debtors.
Counsel for the trustees submitted that the material adduced in evidence showed that a number of trade creditors had received no payments in reduction of outstanding accounts after 1 September 1989 and it followed that Seven Seas had been preferred to those creditors by the payments made on 22 September 1989 and 12 October 1989.
Although the evidence adduced by the trustees was less than comprehensive, it was sufficient to allow an inference to be drawn that the trustees had satisfied themselves they had been presented with the totality of the accounting records of the business and that at the time the payments were made to Seven Seas the payments constituted a preference over several identified creditors whose accounts continued to remain unpaid after 1 September 1989 and until the execution of the deeds of assignment. Accordingly, I would draw the inference that Seven Seas received a preference over those creditors. (See: Spedley Securities Limited (In Liquidation) v. Western United Limited (In Liquidation) (1992) 7 ACSR 271.)
Although less compelling, there was evidence that the debtors were unable to meet the debts of the partnership falling due at the time the payments were made to Seven Seas on 22 September 1989 and 12 October 1989. On the evidence an inference is available that the lack of funds available to the debtors to meet their debts as and when they fell due was not a temporary lack of liquidity caused by debtors to the partnership failing to make due payment of amounts owing. (See: Hymix Concrete Pty. Ltd. v. Garritty (1977) 13 ALR 321.) Although between 11-13 October 1989 the cash flow of the business was adversely affected when cheques in the sum of approximately $30,000 paid to Dugong Seafoods by trade debtors were dishonoured upon presentation that was not the root cause of the lack of solvency of each of the debtors.
However, Seven Seas contended that pursuant to para.122(2)(a) of the Act s.122 had no application to the payments made to it by Dugong Seafoods in that, upon receipt of those payments Seven Seas obtained the rights of a payee in good faith and for valuable consideration and in the ordinary course of business. It was not disputed that Seven Seas provided valuable consideration for the payments received but the onus remained on Seven Seas to show that it was a payee in good faith and in the ordinary course of business.
To determine first whether Seven Seas was a payee in the ordinary course of business it is necessary to assess whether the transactions occurred in a manner that may be expected in the common flow of business. It has been accepted that the following explication of the expression "the ordinary course of business" set out by Rich J in Downs Distributing Company Proprietary Limited v. Associated Blue Star Stores Proprietary Limited (In Liquidation) (1948) 76 CLR 463 at pp 476-477 provides an appropriate guide:

"This last expression it was said 'does not require an investigation of the course pursued in any particular trade or vocation and it does not refer to what is normal or usual in the business of the debtor or that of the creditor.' It is an additional requirement and is cumulative upon good faith and valuable consideration. It is, therefore, not so much a question of fairness and absence of symptoms of bankruptcy as of the everyday usual or normal character of the transaction. The provision does not require that the transaction shall be in the course of any particular trade, vocation or business. It speaks of the course of business in general. But it does suppose that according to the ordinary and common flow of transactions in affairs of business there is a course, an ordinary course. It means that the transaction must fall into place as part of the undistinguished common flow of business done, that it should form part of the ordinary course of business as carried on, calling for no remark and arising out of no special or particular situation."

It was submitted by the trustees that the transaction of which the payments were part was not in the ordinary course of business in that it was an arrangement outside the usual pattern of trade and not within usual trading terms. (See: Starkey v. Allan Fitzgerald Pty. Ltd. (1993) 12 ACSR 15; Re Cummins (t/a Nam Constructions); Ex parte Harris v. ARC Engineering Pty. Ltd. (1985) 62 ALR 129 per Pincus J. at pp 134-137.)
As stated earlier Dugong Seafoods habitually paid the Seven Seas account more than thirty days after delivery of a statement of the account. However, although the payments were late they were made regularly and the running account had been maintained for more than twelve months to the satisfaction of both parties.
In August 1989 a particular market opportunity arose which Dugong Seafoods wished to exploit. At that time scallops were in short supply on the Western Australian market and Dugong Seafoods considered that it could dispose of a substantial quantity of that seafood in short time. Dugong Seafoods negotiated with Seven Seas for the delivery of a large consignment of scallops. At the time of the order Dugong Seafoods had already arranged to resell half the scallops to one retailer and anticipated rapid resale of the balance. Because of the size of the order Seven Seas required Dugong Seafoods to make payment for the order within seven days of delivery of the goods. Dugong Seafoods placed orders with Seven Seas for the delivery of other seafoods on the usual terms in August 1989. Some of those orders were placed before the scallops order and one order was placed subsequently.
A director of Seven Seas had visited the business premises of Dugong Seafoods in August 1989 and had been satisfied that the business did not carry excess stock, was trading actively, and had a substantial amount owed to it by trade debtors.
Dugong Seafoods did not pay for the scallops order as agreed, namely, within seven days of delivery of the statement of account in early September. At 21 September 1989 $60,000 remained outstanding on the amount payable for the scallops, $133,742. The cost of other goods delivered in August 1989 was approximately $39,000. At the end of August payment was due for goods ordered on 30 June 1989 ($9,504) and on 31 July 1989 ($12,975). The June invoice was paid in part ($9,184) on 7 September 1989 and, apparently, a credit claimed for the balance. On 21 September 1989, by memorandum, Seven Seas advised Dugong Seafoods that the account for the scallops was more than one week overdue and asked Dugong Seafoods if it would advise what part of that stock was still on hand and what amounts were still outstanding from customers.
Dugong Seafoods responded by a memorandum which advised Seven Seas that the scallops stock had been sold to restaurants rather than wholesalers and that the restaurants were tardy in making payment for the goods received. In the memorandum it was stated that if monies were available it was intended that Seven Seas be paid $15,000 per week "to clear the debt". In more general terms the memorandum stated that some customers owed accounts that had been due since July 1989. Seven Seas was informed that to meet the problem of inadequate cash flow Dugong Seafoods had reduced costs by reducing staff.
On 22 September 1989 Dugong Seafoods forwarded to Seven Seas a cheque for $10,000 to reduce the amount owing for the scallops. On 12 October 1989 Dugong Seafoods paid $5,000 by cheque to further reduce that account.
It was a prudent business step on the part of Seven Seas to require Dugong Seafoods to make prompt payment of a scallops order which represented a commitment by Dugong Seafoods well in excess of its ordinary purchases. The transaction was negotiated on the understanding that the goods were able to be disposed of by immediate resale. In that context the requirement that Dugong Seafoods make an accelerated payment in respect of that order was not unusual and the follow-up of late payment for that order did not suggest that Seven Seas was acting outside the ordinary course of business. On its face the terms of the transaction were not untoward nor only able to be explained by the influence of a belief that Dugong Seafoods might be insolvent. (See: Downs Distributing per Williams J at p 480.) With regard to the payments in question there was no statement made by Seven Seas that no further goods would be supplied unless the payments were made and no other application of pressure by Seven Seas upon Dugong Seafoods designed to advance the interests of Seven Seas as a creditor of Dugong Seafoods being conduct that would not be expected to fall within the activities which constitute the ordinary flow of business.
The payments made on 22 September 1989 and 12 October 1989 did not meet the particular terms for payment that had been stipulated by Seven Seas for that order but the payments when made were made without unusual incident. (See: Spedley Securities Ltd. (In Liquidation) v. Partnership Pacific Ltd. (1993) 11 ACSR 631.)
I am satisfied that on the facts as set out above Seven Seas was a payee in the ordinary course of business.
The remaining question is whether Seven Seas satisfied the onus under para.122(2)(a) which required it to show that it received the payments in good faith.
Paragraph 122(2)(a) is to be read with para.122(4)(c) which states that a creditor shall be deemed not to be a payee in good faith if the payment is made under circumstances that lead to the inference that the creditor knew, or had reason to suspect, that the debtor was unable to pay his debts as they became due from his own money. Although sub-s.122(4) does not extend the onus of proof placed on a payee by para.122(2)(a) so as to require the payee to negative the existence of circumstances referred to in sub-s.122(4), (see: Queensland Bacon Proprietary Limited v. Rees (1966) 115 CLR 266 per Barwick CJ at pp 286-287) if the totality of the material before the Court supplies an inference that the payee knew, or that an ordinary and reasonable person engaged in business would have had reason to suspect, that the payer was unable to pay its debts as they became due and that the effect of that payment would be to give the payee a preference over other creditors, the Court may conclude that the payee had not satisfied the onus cast on it by para.122(2)(a). (See: Downs Distributing.)
To have reason to suspect insolvency is not to harbour suspicion of insolvency by speculating upon or doubting solvency. It is the apprehension of actual insolvency reasoned from known facts. Matters which may cause a doubt to arise as to the solvency of a customer to whom credit has been extended, do not, without more, provide reason to suspect actual insolvency. (See: Re Weiss; Ex parte White v. John Vicars and Co. Ltd. (1970) ALR 654 per Gibbs J at p 665; Queensland Bacon Proprietary Limited v. Rees (1966) 115 CLR 266 per Kitto J at p 303.)
The business of Seven Seas was domiciled in Melbourne. Dugong Seafoods was a minor customer carrying on business in Perth. Between the commencement of the trading account in August 1988 and payment of the sum of $5,000 on 12 October 1989 Seven Seas had no occasion to observe, or learn, that anything untoward was occurring in the operation of the business conducted by Dugong Seafoods. (cf. Spedley Securities Ltd. v. Sparad (No. 100) Ltd. (1993) 12 ACSR 32) Although Dugong Seafoods relied upon extended terms for payment and repeated indulgences from Seven Seas in that regard, it placed regular orders and made regular payments for the goods ordered. Not until after the payment made on 12 October 1989 had been received was a cheque in payment of the Dugong Seafoods account dishonoured on presentation by Seven Seas. Dugong Seafoods was a business carried on by a partnership and Seven Seas held no information which suggested that the partners were unable to meet the debts of the partnership from their personal property if required to do so.
The memorandum received from Dugong Seafoods on 21 September 1989 may have given warning to Seven Seas that it would be prudent to watch the conduct of the Dugong Seafoods account but it fell well short of presenting Seven Seas with reason to form a real apprehension that Dugong Seafoods was then insolvent and was delivering a preference to Seven Seas. The facts known to Seven Seas were quite limited and one must be careful not to add to them the hindsight gained from the disclosure of additional material after the occurrence of the events in question. A responsible trader carrying on business and privy to the matters known to Seven Seas would not have had reason to suspect, either on 22 September 1989 or on 12 October 1989, that the debtors were insolvent.
I am satisfied that when it received the payments on a running account in September 1989 and October 1989 Seven Seas did so in good faith being unaware of any insolvency or of the receipt of a preference and I am also satisfied that the evidence does not establish that Seven Seas had reason to suspect that at the time the payments were made Dugong Seafoods was insolvent and was preferring Seven Seas to other creditors.
The application must be dismissed with costs.

[1993] FCA 911

08 DECEMBER 1993