Rupert & Bernstein Pty Ltd in Liquidation
[1995] QSC 216
•1 September 1995
IN THE SUPREME COURT
OF QUEENSLAND
Brisbane Apn. No. 555 of 1989
Before the Hon. Justice Mackenzie
[Rupert & Bernstein Pty Ltd in liquidation]
BETWEEN:
IN THE MATTER OF THE COMPANIES (QUEENSLAND) CODE
AND:
IN THE MATTER OF RUPERT & BERNSTEIN PTY LTD (IN LIQUIDATION) A.C.N. 010 500 151
JUDGMENT - MACKENZIE J.
Judgment delivered 01/09/1995
CATCHWORDS: CORPORATIONS LAW - Liquidation - Undue preferences - s. 451 Companies (Qld) Code and s. 122 Bankruptcy Act - Defence if payment made in good faith, for valuable consideration and in ordinary course of business - Payment made after series of demands and at time when payments to creditors had largely ceased - Whether in ordinary course of business.
EVIDENCE - Admissibility - Sufficiency of proof that documents examined by liquidator were company records - Sufficiency of proof that relevant transactions took place - Whether hearsay evidence.
Counsel:P. McQuade for applicant
P. Dunning for respondent
Solicitors:James Cominos for applicant
Eric Muir for respondent
Hearing date: 18 August 1995
IN THE SUPREME COURT
OF QUEENSLAND
Brisbane Apn. No. 555 of 1989
Before the Hon. Justice Mackenzie
[Rupert & Bernstein Pty Ltd in liquidation]
BETWEEN:
IN THE MATTER OF THE COMPANIES (QUEENSLAND) CODE
AND:
IN THE MATTER OF RUPERT & BERNSTEIN PTY LTD (IN LIQUIDATION) A.C.N. 010 500 151
JUDGMENT - MACKENZIE J.
Judgment Delivered 01/09/1995
This is an application under s.451 of the Companies (Qld) Code in which it is alleged that the respondent Fast Proof Press Pty Ltd received a preference in the form of three payments of money by Rupert & Bernstein Pty Ltd ("the company"), on 4 October, 10 November and 17 November 1989. It is accepted that the applicant liquidators bear the onus of proving the primary elements establishing that the transaction is one to which s.451 applies.
Subject to the issue of admissibility of evidence to which I will refer below, there was no dispute that the payments were made to the respondent as creditor. Nor subject to the same reservation is it disputed that the relevant transactions occurred within six months prior to the winding up application being filed. Of the issues in respect of which the onus of proof lies on the liquidator, those in dispute are whether it is has been proved by properly admissible evidence that the company was unable to pay its debts as they became due from its own money at the relevant time and whether the effect of the transaction was to give the respondent a preference priority or advantage over other creditors. So far as the defence incorporated by virtue of s.122(2) of the Bankruptcy Act is concerned it was accepted that the onus of proof lay on the respondent. Relevant issues are whether the payee took the payment in good faith and for valuable consideration and in the ordinary course of business. The element of valuable consideration is not in dispute.
To put the matter in context the respondent provided printing services to Rupert and Bernstein Pty Ltd in the period January to May 1989 to the value of approximately $160,000. Approximately $90,000 was paid in respect of those services and at the end of July 1989 the company was indebted to the respondent for about $71,000. On 4 August 1989 a letter of demand was sent in respect of the indebtedness. The following day the company offered to pay approximately $30,000 prior to 8 September 1989, the further sum of about $15,000 by the end of September and the remainder, plus any amount incurred during the month of August, by the end of October. However, none of the payments proposed were made. On 14 September 1989 a statutory notice of demand was served and on 25 September 1989 the company advised that due to a series of bad debts together with a substantial decrease in monthly cash flow it was unable to pay the amount demanded. On 28 September 1989 all but about $500 of the debt was admitted, a proposal to repay the debt over a period of time was made and a cheque post-dated to 4 October 1989 was forwarded.
The first payment which the liquidator seeks to declare void ($8,504.34) was made to the respondent when a cheque in that sum was cashed on 5 October 1989. The second cheque ($6,000) was presented and honoured on 10 November 1989. A schedule setting out a plan for paying the overdue account was also provided by the company on that date. On 13 November 1989 the plan was accepted with the proviso that if the company did not perform the plan exactly the application to wind up would proceed. On 17 November 1989 a cheque for $5,000 was presented by the respondent and honoured. On 23 November 1989 a winding up application was filed. On 28 November 1989 a mortgagee appointed agents under a mortgage debenture. On 7 February 1990 a winding up order was made. On 11 March 1992 the liquidator issued a demand on the respondent to repay the sum of $19,504.34. The demand particularises the transactions in the following way:-"Cheque No Date Amount
36057504.10.89 8,504.34
53441810.11.89 6,000.00
53443217.11.89 5,000.00
$ 19,504.34"
Mr Dunning on behalf of the respondent objected to a number of matters in the affidavit of Mr Geroff. Firstly, he submitted that paragraphs 5 and 7 were inadmissible and did not prove that the documents to which he had reference were books and records of the company. He submitted that paragraph 35 then became inadmissible because it was based upon paragraphs 5 and 7. He also submitted that paragraphs 10, 11, 13, 14 , 15 and 16 were inadmissible because the factual basis for the analysis therein was not proved. He submitted that paragraph 33 which incorporates the bank statements for the company's account with Westpac Banking Corporation became inadmissible by reason of paragraph 13 being inadmissible. He also objected to paragraph 32 on the basis that it was hearsay. Paragraph 32 incorporates copies of the cheques dated 10 November 1989 and 17 November 1989, recovered from Westpac.
Paragraph 5 deposes that with the report as to affairs received from the directors of the company Mr Geroff also received "a sum of the books of records of the company". The books received on that occasion are particularised. Paragraph 7 deposes that the books and records of the company retained by the agents for the mortgagee in possession were provided to him on 20 February 1992. Once again the documents are particularised.
Mr Geroff was called for cross examination on his affidavit. The most important aspects of his oral evidence for present purposes are that he served notices on all relevant persons to get the company records. He interviewed Mr Porter, the man behind the company. The documents received by him included those which he expected to find amongst records of a company of the kind of which it was. While he did not inspect all of the documents himself he was presented with an analysis of them by his staff and worked from that, going to source documents as necessary.
Production of the books themselves was not at any time insisted on by the respondent. Nor was an opportunity offered on 7 August 1995, for the respondent to have access to the liquidator's file and the books and records of the company taken up. Nor were repeated attempts to have the respondent clarify what parts of Mr Geroff's affidavit were alleged to be inadmissible and why they were alleged to be inadmissible responded to.
In relation to his primary submission about sufficiency of proof of the records and the consequential lack of factual basis for analysis of the financial position of the company, Mr Dunning relied on Residues Treatment and Trading Co Ltd v. Southern Resources Ltd (1989) 52 SASR 54 and Tubby Trout Pty Ltd v. Sailbay Pty Ltd (1993) 42 FCR 595. Neither of those cases was a preference case. In the former the document sought to be admitted was an annual report and in the latter a letter from a supplier where there was no evidence that it had been incorporated into a records system. In each case the document was sought to be tendered as proof of the facts stated. In the present case the evidence of Mr Geroff is essentially that on the basis of information in what were given to him as the records of the company, which records contained the kind of documents he would expect to find in the records of a company of that kind, he formed the opinion that the company was insolvent in the relevant sense at the time of payment of debts.
At a secondary level the objection is that certain factual matters relating to the particular transactions are based on hearsay. The attempt to exclude certain documentary material bears then on the question of sufficiency of proof that relevant transactions took place. With respect to the question of proof of the records themselves, in Re. Action Waste Collections Pty Ltd (in Liquidation); Crawford v. O'Brien (1981) VR 691, Tadgell J. analysed arguments about admissibility of documents and records obtained by a liquidator. After referring to the role and duties of a liquidator and the absence of any suggestion that the liquidator had not carried out his duties he observed that it was no doubt true that the liquidator's sworn statements that the records were those of the company depended partially on what he was told or what he had heard when he received and examined them. He went on to say that that would not necessarily make his statements inadmissible. The initial evidentiary question was one of authentication of documents. It was necessary to consider whether a proper foundation had been laid for regarding the material on which the liquidator wished to rely as the material which he claimed it to be. He concluded by saying that one could not doubt that the records of a company in liquidation would naturally be presumed to be in the custody of its liquidator. If the liquidator were to swear that he had them and had examined them he would take him, if uncontradicted, "to be stating no more than the obvious."
In Trevor v. William Adams & Co Ltd (1987) 5 ACLC 282, 285 Wallace J. adopted Tadgell J.'s approach in Action Waste Collections. I am content to apply similar principles and find that there is sufficient proof that the documents examined were records of the company. Reference was made to s.1305 of the Corporations Law. Emphasis was placed by Mr Dunning on the word "kept" in the section. In Residues Treatment & Trading Co Ltd v. Southern Resources Ltd (1989) 52 SASR 54, Perry J. expressed the opinion in respect of a predecessor of s.1305 that the word "kept" does not simply mean that a document is retained by a corporation. He said it required that the document on record should be one in some way maintained by a corporation in a systematical periodic fashion. Section 1305 has no application in any event in this case as it is concerned with admission into evidence of a book kept by a body corporate. Once admitted it is prima facie evidence of any matter stated or recorded in the book. In this matter no attempt has been made to tender the books in evidence.
Tadgell J. in Action Waste Collections pointed out that the conclusion that there was sufficient proof that the documents were the records of the company did not remove the difficulty that the documents amounted to no more than hearsay evidence of the facts which the liquidator sought to prove by reference to them, namely the fact of the company's indebtedness, the fact that payments were made to the alleged preferred debtor and the times at which they were made.
So far as the evidence as to the existence of debts from the company to the respondent are concerned there is correspondence from the solicitors for the respondent in evidence asserting that debts in excess of the amounts shown in the cheques were owed. There is an acknowledgment by the solicitors in ex. "O" that the sum of $8,504.34 was paid by the company to the respondent no later than October 11, 1989. On the worst view from the point of view of the liquidator the correspondence establishes that it was paid between 28 September 1989 and 11 October 1989. That places it within a period of six months prior to the liquidation. Exhibits "P" and "Q" establish the payment of $6,000 on 10 November 1989.
The acceptance by the respondent through its solicitors of the document entitled "Proposed Payment Plan" is an admission of that payment. Paragraph 13 of the affidavit of Mr Whitton filed by leave verifies that correspondence "as detailed in the affidavit of Geroff" passed between the company and its solicitors and the respondent. There is therefore evidence independent of any possible operation of the hearsay rule that the first two payments relied on by the liquidator were made within a period of six months of the presentation of the application for winding up.
So far as the payment alleged to have been made on 17 November 1989 is concerned, in the same way that there was no objection taken to paragraphs 26 and 29 which refer to presentation by the respondent and honouring by the company's bank of the other two cheques, paragraph 31 is not objected to. Exhibit "V" dated 11 March 1992 is a letter to the manager Fast Proof Press Pty Ltd from Mr Geroff. It asserts that there was a payment made on 17 November 1989 by cheque no. 534432 for $5,000 to Fast Proof Press Pty Ltd prior to the company being wound up. There was no admission by the respondent of the making of that or either of the other payments at that time. However, given the context in which paragraph 31 appears, there is in my view ample evidence independent of the hearsay rule to establish the fact of that payment on the date alleged. It is an inevitable inference from the correspondence as a whole that any subsequent payment must have been made within the six month period even if there were no evidence as to the precise date.
To this point I am satisfied that there is sufficient proof that the books relied on by Mr Geroff are books of the company. I am satisfied that there is sufficient proof that the payments relied on by him were made on or about the dates alleged and within the period of six months prior to the application for winding up. I am also satisfied that the company was unable to pay its debts as they fell due from its own money. An examination of the books shows that there was a very substantial excess of current liabilities and provisions for liabilities over current assets. While the cash flow situation fluctuated, in three of the four months from July to October 1989 it was negative. By about mid November there were indications in the books that the company had, if not entirely ceased paying creditors, ceased paying them in any orderly fashion. As well as the notice of demand by the respondent, the company had received demands from a number of other creditors who were not paid. The company offered an extended payment plan to the respondent and to at least two other creditors. It is in my view clear that by the relevant times the company was unable to pay its debts as they fell due from its own monies.
It was submitted by Mr Dunning that the applicant had not proved that the payment constituted a preference. For reasons that I have given I am satisfied that there is ample evidence that by receiving the payments it received at a time when payments to others had all but ceased the respondent received a preference priority or advantage over other creditors.
Attention must now be turned to the defence imported into s.451 by reason of s.122(2)(a) of the Bankruptcy Act. Mr Dunning conceded that the hurdle that the client had to overcome was to establish that the payment was made in the ordinary course of business. He relied on the analysis of the defence by Santow J. in Spedley Securities Ltd v. Sparad (No. 100) Ltd 12 ACSR 32. The principle that it is the payment which must be in the ordinary course of business, not each particular circumstance surrounding the payment is referred to in Spedley. It was submitted that the collective circumstances provide the context and explanation for the payment and whether it is ultimately found that the payment was made in the ordinary course of business must be assessed in that context. It was submitted that ultimately whether a payment was made in the ordinary course of business was a question of fact. It was conceded that whether something was in the ordinary course of business did not depend on the individual trade or customer.
However, it was submitted that some issues concerning the relationship between the parties must come into the equation without necessarily looking at individual oddities. In my view it is unnecessary to recite again the course of events which led to the payments. It is sufficient to say that payment of the monies followed upon a series of demands and counter proposals to effect orderly repayment. Then there was the statutory notice of demand after which the payments were made. There is also evidence that by the time the last payment at least was made the overall state of the company's accounts suggested that payments to creditors had largely ceased. In my opinion, the only conclusion open was that the payments were not made in the ordinary course of business.
That being the case the respondent has failed to prove the defence. Consequently I make a declaration in terms of paragraph one of the application. The liquidator also asked for interest for the whole of the period or, failing that, from the date of the initial demand, 11 March 1992. The respondent submitted that there should be interest only from the date of commencement of proceedings, 27 July 1995. It is true that there has been a lengthy delay in taking action following the making of the demand. However the demand was made and the correspondence in ex."V" in 1992 resulted in a bare denial of liability by the respondent. Given the time frame of the matter I propose to award interest only from the date of the making of the demand by the liquidator. The formal orders are:-
I make a declaration that the following payments made on or about the dates listed by the company to Fast Proof Press Pty Ltd are void as against the liquidator pursuant to s.451 of the Corporations Law;
Cheque NoDate Amount
36057504.10.89 8,504.34
53441810.11.89 6,000.00
53443217.11.89 5,000.00
$ 19,504.34
I order that the respondent pay to the applicant the sum of $19,504.34 with interest thereon pursuant to the Common Law Practice Act 1867 from 11 March 1992;
I order the respondent to pay the costs of and incidental to the application to be taxed.
0