Sheahan Pty Ltd v Murdock & Gediz P/L
[2008] SADC 5
•1 February 2008
DISTRICT COURT OF SOUTH AUSTRALIA
(Civil)
SHEAHAN PTY LTD v MURDOCK & GEDIZ P/L
[2008] SADC 5
Judgment of His Honour Judge Tilmouth
1 February 2008
CORPORATIONS - WINDING UP - WINDING UP IN INSOLVENCY
INSOLVENCY - PREFERENCES - DEFENCES - WHETHER REASONABLE CAUSE TO SUSPECT - RUNNING ACCOUNT
The plaintiff as liquidator sues for the recovery of four alleged preferential payments.
Held: 1. Orders are refused on the first and second payments as insolvency is not proved at the relevant times and because the defendants have made out the defence of "good faith" under s588FG of the Corporations Act.
2. The defendants should be ordered to make the third payment as insolvency is proved as of then and they have failed to show that a reasonable person in their circumstances would have no grounds for suspecting solvency.
3. An order for the payment of the fourth sum should be refused, as the liquidator has already recovered this sum from another party, it has no proven preferential effect and in the exercise of discretion under s588FF(1).
Corporations Act 2001 (Cth) ss9, 95A, Part 5.7B, Division 2 ; Acts Interpretation Act 1901 (Cth) ss13(1), 33(2A), referred to.
Southern Cross Interiors Pty Ltd (in liq) v Deputy Commissioner of Taxation (2001) 53 NSWLR 213; Air Services Australia v Ferrier (Compass Airlines case) (1996) 185 CLR 483; Wily v Terra Cresta Business Solutions Pty Ltd [2006] NSWSC 1042; Sims v Celcast Pty Ltd (1998) 71 SASR 142; Pegulan Floor Coverings Pty Ltd v Cartier (1997) 24 ACSR 651; Julius v Bishop of Oxford (1880) 5 App Cases 214; V R Dye & Co v Peninsula Hotels Pty Ltd (in liq) and anor [1999] 3 VR 201, applied.
Sandell v Porter (1966) 155 CLR 666; Capital Finance Australia Limited v Tolcher [2007] FCAFC 185; Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355; BP Australia Ltd v Brown (2003) 58 NSWLR 322, considered.
SHEAHAN PTY LTD v MURDOCK & GEDIZ P/L
[2008] SADC 5Preliminary
Blue Apple Electronics Pty Ltd (“Blue Apple”) the second plaintiff, was the developer and manufacturer of portable power packs, produced in Strathalbyn. At first the product held high promise.[1]
[1] See Brochure Exhibit P10.
Unfortunately the company became entangled in difficulties of marketing and distribution, until cash flow became such a problem that the plaintiff Mr John Sheahan (at most times “Mr Sheahan”), was called in as an administrator and later liquidator. Gary Murdock (“Mr Murdock”) the first defendant, practised chartered accountancy from North Terrace, Adelaide since 1998. He was retained by the directors of Blue Apple to provide general accounting services and advice. The second defendant (“Gediz”) is a company trading as Gary Murdock and Associates (“GMA”), of which Mr Murdock is the sole director.
On 16 July 1999 Mr Murdock wrote a cheque to GMA on the account of Blue Apple in the sum of $2,830.00. This was for the reimbursement of wages paid on behalf of Blue Apple and a cash advance of $800.00 made to it.[2] On 19 July 1999 he drew a second cheque on the account of Blue Apple in favour of GMA, for $10,637.00. This was also a repayment of expenses incurred on its behalf.[3] On 22 July 1999 he applied a further sum of $47,000.00 to a Capital Equity Facility in his name. This, again, was by way of reimbursement for monies “directly advanced into the account of Blue Apple” by him.[4] Finally, on 29 July 1999 Blue Apple paid $40,000 to the B S Page Family Trust in complicated circumstances that will become more apparent during the course of these reasons. These are respectively the three “transactions” and the “Page transaction” claimed to be insolvent transactions as defined in s588 FE(2) of the Corporations Act 2001 (Cth) (the “Act”).
[2] Exhibit P1 Tab 28.
[3] Exhibit P1 Tab 28.
[4] Transcript 330 L 36 – 331 L1.
Mr Sheahan was appointed voluntary administrator of Blue Apple on 5 October 1999 pursuant to s436A of the Act and liquidator by resolution of creditors on 22 December 1999. In that capacity he seeks orders of the court in proceedings first issued on 15 November 2001, declaring the four transactions voidable and for the moneys to be repaid to Blue Apple under s588 FF(1)(a) of the Act.
Factual background
Before turning to the circumstances surrounding these specific transactions, there are a number of factual matters to note. What follows is not seriously in dispute between the parties. Indeed, in most respects the primary facts remain uncontested; this is very much a case of the inferences to be (or not to be) drawn from the objective facts. Blue Apple was a corporation trading in the electronics business. At relevant times during 1999 there were two active directors, Gary Fairhead and Steven Farthing. Farthing resigned on 26 May 1999, however he or his family retained an interest in the company. They engaged Mr Murdock initially as general accountant and then for the purposes of providing advice relating to the business structure, financial accounting, bookkeeping systems and the like. On 21 January 1999 the Company was lent $40,000 by Consolidated Auto Retailers and Services Pty Ltd (“CARS”) through a Director, Mr Pazman. The terms and conditions of that loan or precisely when it fell due and payable, was not made the subject of evidence before the court.
Later Mr Murdock prepared financial forecasts for Blue Apple’s trading prospects and predictions for future cash flow. These were used to support an application to the Commonwealth Bank of Australia (sometimes hereafter “CBA”) for a loan. He installed, updated and maintained a computer accounting system. These were incomplete due to the failure of the Directors to provide reliable information. He also prepared balance sheets and profit and loss statements for March and May 1999, and as will become clear, he invested heavily in the company. Those balance sheets showed net assets of just $5,506.32 as of 11 March 1999,[5] and by May of $45,384.41. The latter recorded design and patent costs of $200,000 under “intangible assets”, admittedly no better than a very broad estimate.[6] Come April 1999, he was the sole authorised signatory on the account of Blue Apple. In these several capacities he necessarily acquired an intimate knowledge of the trading position, structure and financial resources of Blue Apple.
[5] Exhibit P1 Tab 3.
[6] Exhibit D6 Tab 10.
The accounting records
The Commonwealth Bank Statements of the Blue Apple account, as well as the general ledger, record that following a deposit on 18 March 1999, it stood in credit to the extent of $33,080.18. The statements commence from 10 December 1998 when the account opened with a deposit of $50,000. They end on 17 January 2000, when Blue Apple was in debit to the extent of $32,168.93. The trading position gradually deteriorated in that time. The company fell into debit for the first time on 21 April 1999, thereafter going in and out of credit until 29 July 1999 when it fell permanently in debit.[7] This was, coincidentally, the same day as the Page transaction. It remained in debit, consistently upwards of $30,000 from then on.
[7] Exhibit P1 tabs 29 and 9 respectively.
The accounts also reveal a deteriorating income position. In an arrangement entered into quite independently of Mr Murdock, Blue Apple factored sales to Australian Print Management Pty Ltd (“APM”). The nub of the arrangement was that once stock was sold, APM became liable to account to the extent of seventy percent of sales, to Blue Apple, weekly. APM retained the balance of thirty percent on the basis that it took the risk of sustaining bad debts and covered most of the sales costs.[8] Discussions concerning APM’s accounting to Blue Apple and the accuracy of stock keeping and other records, proved to be protracted and indecisive as time went on. Over this period the two were also in negotiations for the purpose of forming a joint venture company, Power Source Team. Eventually APM stopped forwarding monies altogether. The unresolved issues with APM appear to have been a principal reason why Blue Apple ultimately failed.
[8] Exhibit D6 Tab 1.
The books of account show APM paid to Blue Apple pursuant to the factoring arrangement, a total of $145,871.99 between 18 March and 27 May 1999, received on a more or less regular basis within that period of time.[9] Another source of income came from sales of components to Charger Electronics. That company contributed $7,629.00 on 2/2/99, $6,314.11 on 12/2/99 and $14,239.63 on 5/3/99. Charger Electronics was alleged to have been owed $36.774.36 as of 28 July:[10] a proof to the extent of $59,180.60 was ultimately allowed. There were a few other inconsequential deposits on account of sales. Otherwise the bank balance was sustained by various loans or the injection of funds by investing parties, especially Mr Murdock. Apart from him, other investments were $10,000.00 on 11/3/99 and $15,000.00 on 1/4/99 from an R & N Young and by another investor Mr Moffa, of $13,000.00 on 23/4/99, $10,000.00 on 14/5/99 and $5,000.00 on 6/8/99. It can be seen that income by way of sales had all but dried up as of late May.
[9] Exhibit P7 para 7.20.
[10] Exhibit P1 Tab 13.
Voidable transactions?
In order to recover the four respective sums, Mr Sheahan bears the onus of proving the transactions were voidable as both insolvent and preferential at the time they were made, within the meaning of s588FC and s588FE of the Act. A “transaction” as defined in s9 must also be identified in each case. It is necessary therefore “to ascertain whether there is a ‘transaction’ and if so, what the ‘transaction’ is” and a debtor-creditor relationship must exist: Capital Finance Australia Limited v Tolcher .[11]
[11] [2007] FCAFC 185 at [93] and [117].
It is the contention of Mr Sheahan that Blue Apple was insolvent from no later than 18 March 1999, based on the books of account and the trading and cash position they expose. Section 95A provides insolvency occurs “if, and only if,” the person is unable to pay all debts “as and when they become due and payable”. As so defined this states a cash flow rather than a balance sheet test: Keith Smith East West Transport Pty Ltd v Australian Taxation Office.[12]
[12] (2002) 42 ACSR 501 at [33].
An unfair preference arises when a transaction takes place between a company and a creditor resulting in the creditor receiving “more than the creditor would receive … if the transaction were set aside and the creditor were to prove for the debt in a winding up of the company”: s588FA(1)(b). As the ultimate effect of the transaction on the creditors is determined objectively, it must “result in a decrease in the net value of the assets that are available to meet the competing demands of the other creditors”: Airservices Australia v Ferrier (Compass Airlines Case),[13] and V R Dye & Co v Peninsula Hotels Pty Ltd (in liq) and Anon.[14]
[13] (1996) 185 CLR 483 at 501-502.
[14] [1999] 3 VR 201.
Insolvency?
Just when a corporation becomes or remains insolvent can prove difficult and complicated to judge, particularly when the records of the company are unsatisfactory or incomplete. When that state of affairs has arrived is a question of fact for the court to determine. Consideration must be given to the potential for realization of monies from other sources and to the financial position in its entirety. Generally speaking the conclusion of insolvency ought not to be drawn simply from evidence of a temporary lack of liquidity: Sandell v Porter.[15] The Court must have regard to “commercial realities” and consider the question of insolvency as one “to be ascertained from … the company’s financial position taken as a whole”: Southern Cross Interiors Pty Ltd (in liq) v DCT,[16] Lewis Doran Constructions Pty Ltd (in liq) and Anor. v Doran & Ors.[17] The Court may consider as relevant to the exercise, the ability of the company said to be trading insolvent to borrow without security: Re RHD Power Services Pty Ltd[18] and Re Adnot Pty Ltd;[19] as well as whether the creditors voluntarily defer payment, thereby promoting solvency: Re Kerisbeck Pty Ltd .[20] The court may also have regard to resources other than cash, realisable by sale or borrowing upon security, and when such are achievable: Southern Cross Interiors Pty Ltd (in liq) v Deputy Commissioner of Taxation.[21]
[15] (1966) 115 CLR 666 at 670-671.
[16] (2001) 53 NSWLR 213, 224.
[17] (2005) 219 ALR 555 at [93].
[18] (1991) 3 ACSR 261; 9 ACLC 27.
[19] (1982) 7 ACLR 212; 1 ACLR 307 at 217 and 311 respectively.
[20] (1992) 10 ACLC 619.
[21] (2001) 53 NSWLR 213 at 224.
The applicable principles were conveniently collected by Palmer J in Southern Cross Interiors Pty Ltd (in liq) v Deputy Commissioner of Taxation:[22]
(i)whether or not a company is insolvent for the purposes of the Corporations Act (Cth), ss 95A, 459B, 588FC or 588G(1)(b), is a question of fact to be ascertained from a consideration of the company's financial position taken as a whole: Sandell v Porter, Pegulan Floor Coverings Pty Ltd v Carter (1997) 24 ACSR 651; 15ACLC 1,293 and Fryer v Powell (2001) 159 FLR 433;
(ii)in considering the company's financial position as a whole, the Court must have regard to commercial realities. Commercial realities will be relevant in considering what resources are available to the company to meet its liabilities as they fall due, whether resources other than cash are realisable by sale or borrowing upon security and when such realisations are achievable: Sandell v Porter, Taylor v Australia and New Zealand Banking (1988) 13 ACLR 780, Re Newark Pty Ltd (in liq) [1993] 1 Qd R 409 and Sheahan v Hertz (1995) 16 ACSR 765.
(iii) in assessing whether a company's position as a whole reveals surmountable temporary illiquidity or insurmountable endemic illiquidity resulting in insolvency, it is proper to have regard to the commercial reality that, in normal circumstances, creditors will not always insist on payment strictly in accordance with their terms of trade but that does not result in the company thereby having a cash or credit resource which can be taken into account in determining solvency: Bank of Australasia v Hall (1907) 4 CLR 1,514 at 1,528; Re Norfolk PlumbingSupplies Pty Ltd v Commonwealth Bank of Australia (1992) 6 ACSR 601 (at 615; 169); Taylor v Australia and New Zealand Banking (at 784; 811); Guthrie (as liq of ULT Ltd (rec apptd) (in liq)) v Radio Frequency Systems Pty Ltd (2000) 34 ACSR 572 at 575;
(iv)the commercial reality that creditors will normally allow some latitude in time for payment of their debts does not, in itself, warrant a conclusion that the debts are not payable at the times contractually stipulated and have become debts payable only upon demand: Standard Chartered Bank of Australia Pty Ltd Nos. 1 & 2 v Antico (1995) 38 NSWCR 290 (at 331); Hall v Press Plumbing (Federal Court of Australia 20 September 1994, unreported); Melbase Corporation Pty Ltd v Sequenhoe Ltd (1995) 17 ACSR 18 (at 199; 832–833); Carrier Air Conditioning Pty Ltd v Kurda (1993) 11 ACSR 247 (at 253; 777–778); Cuthbertson and Richards Sawmills Pty Ltd v Thomas (1998) 28 ACSR 310 (at 320); Lee Kong v Pilkington (Australia) Ltd (1997) 25 ACSR 103 (at 112; 1,568);
(v) in assessing solvency, the court acts upon the basis that a contract debt is payable at the time stipulated for payment in the contract unless there is evidence, proving to the court's satisfaction, that: there has been an express or implied agreement between the company and the creditor for an extension of the time stipulated for payment; or there is a course of conduct between the company and the creditor sufficient to give rise to an estoppel preventing the creditor from relying upon the stipulated time for payment; or there has been a well established and recognised course of conduct in the industry in which the company operates, or as between the company and its creditors as a body, whereby debts are payable at a time other than that stipulated in the creditors' terms of trade or are payable only on demand: Re Newark (at 414–415); Standard Chartered Bank v Antico (at 331); Melbase (1995) 28 ACSR 310; Cuthbertson v Thomas; Fryer v Powell (at 444–445);
(vi)it is for the party asserting that a company's contract debts are not payable at the times contractually stipulated to make good that assertion by satisfactory evidence: Fryer vPowell (at 444–445); Melbase; Cuthbertson v Thomas.
[22] (2001) 53 NSWLR 213 at 224-225 [54]
Was and when, was Blue Apple Insolvent?
It is claimed Blue Apple was insolvent, not merely because of the trading pattern detailed above, but also because of the existence of several indicia of insolvency. Of the usual indicia of insolvency, these were said to be present in this instance:[23]
· a history of dishonouring cheques;
· suppliers delivering goods only on a COD basis;
· making special arrangements with creditors;
· demands for the payment of trade debts.
[23] Lewis (as liquidator of Doran Constructions Pty Ltd) v Doran at [74].
Other circumstances suggestive of insolvency pointed to by the plaintiff, were:-
· a demand by CARS on 20 February 1999 for repayment of the $40,000 loan;
· Mr Murdock consequently writing to CARS seeking to advert legal proceedings on 29 March 1999;
· a debt to APM of $35,000, repaid on 5 July 1999;[24]
· the loan from the Commonwealth Bank of $130,000, approved on 16 July 1999;[25]
· outstanding debts to Mocare of $11,887.60 as of 20 May and the associated attempt to delay payment;[26]
· the inconclusive negotiations with APM;[27]
· two outstanding accounts rendered by Olympic Batteries of 15 April for $11,400;[28]
· an outstanding account from Projecta Australia of 6 June of $7,800;[29]
· an account owing to Hutchinson Electronics since 14 July of $542.57.[30]
Other much smaller debtors can be ignored as inconsequential for this exercise, or as not shown to be owing by Blue Apple.
[24] Exhibit P1 Tab 27 P13.
[25] Exhibit P1 Tab 8.
[26] Exhibit P1 Tabs 6, 11 and 16.
[27] Exhibit P1 Tabs 12 and 18.
[28] Exhibit P1 Tab 15.
[29] Exhibit P1 Tab 17.
[30] Exhibit P1 Tab 24.
More importantly there were a series of dishonored cheques as follows:
Date Amount Payee
1. 20.4.99 $4,500.00 L & M.
2. 18.5.99 $10,000.00 Mr Moffa
3. 17.6.99 $388.00 Rocca Brothers
4. 18.6.99 $2,050.00 Rocca Brothers
5. 9.7.99 $11,641.00 L & M
6. 13.7.99 $698.00 Boating Industry Association
7. 13.7.99 $500.00 Farthing
8. 13.7.99 $11,290.00 Batteries Specialties
9. 13.7.99 $10,637.00 Murdock & Associates
10. 14.7.99 $2,945.00 B.A. Tooling
11. 14.7.99 $256.00 S.A. Water
12. 14.7.99 $440.00 Mr Gale
13. 15.7.99 $2,662.00 AGC
14. 29.7.99 $60,000.00 Page
The first can be ignored because it was honoured on 22 April (cheque no.239). The second can also be ignored, as it derived from Mr Moffa who simply miscalculated his account balance, a situation rectified the following day. One of the two Rocca Brothers’ cheques appears to have been a second or double payment (see cheque no.321 for 25 May). Cheques 9 and 14 were of course closely related to two of the subject payments. The remaining cheques, drawn over a period of six days, were signed in the expectation of the approval of the bank loan first applied for around 9 June and ultimately drawn down on 21 July.[31]
[31] Exhibit D6, tab 6 – the application itself undated is Exhibit D6, tab 5
A schedule of aged creditors compiled by the liquidator estimated capital debt of Blue Apple totalling $461,131.47.[32] The single largest creditor, apart from the Commonwealth Bank, was APM in the sum of $106,494.10. Another revised schedule also prepared by the Liquidator on or before 14 March 2007, [33] details admitted proofs of $481,185.31. Liabilities incurred by Blue Apple post 18 March 1999 were calculated at $448,910.23. This latter sum yields the figure pleaded in paragraph 14 of the substituted amended Statement of Claim.
[32] Exhibit P1 Tab 10.
[33] Exhibit D3.
The case for the plaintiff in a nutshell, is that when the subject payments were made, Blue Apple was obviously unable to meet all its debts. Counsel for the plaintiff emphasized that by 21 July 1999, Mr Murdock recognised the Company required another $50,000, over and above the $130,000 provided by the Commonwealth Bank loan.[34] The defendants deny Blue Apple was insolvent at relevant times. They admit preferential effect, except for the Page transaction. They further plead to holding no reasonable grounds for suspecting Blue Apple was insolvent and assert a reasonable person in their situation would have no grounds for so suspecting.[35] These pleas engage the so-called “good faith” defence erected by s588 FG (2) of the Act.
[34] Exhibit D6, Tab 8 P 41.
[35] Para 30.1.3.3 of the Second Further Amended Defence.
Mr Jørgensen, a highly qualified Chartered Accountant, Liquidator and Auditor, was called to give evidence on behalf of the defendants. His expertise was not challenged, indeed it was conceded by the plaintiff. His report comprises exhibit D7 dated 16 March 2007. Mr Jørgensen concluded after an examination of the electronic books of account, that he was not in a position to determine whether Blue Apple was solvent or insolvent as at 18 March 1999 “without reliable financial statements, reliable creditors listings or realizable cash flow budgets”.[36] He reached the same conclusion as of the 28 April 1999,[37] 7 July 1999[38] and 29 July 1999[39] respectively. Although cross-examined for the better part of a day, no reason to question his evidence surfaced. More than once Mr Goodall commented that the plaintiff commissioned its own expert report and elected not to tender it. Nothing turns on that as it was open on the defendants’ side to produce that evidence had it chosen to.
[36] Exhibit D7 p9 section 9
[37] Section 10
[38] Section 11
[39] Section 12
It emerged during the course of Mr Jørgensen’s oral evidence, that the records of the company were seriously incomplete. In particular Mr Jørgensen noted the ledger did not contain entries related to trade debtors and creditors, patent and design costs, or as to the costs of manufacture or distribution.[40] Amongst other things he was unable to determine the level of stock-in-hand or debtors.[41] When it came to the inventory as of 28 April 1999, Mr Jørgensen was not really able to explain how this had grown from $101,234 to $194,355. A similar view was expressed with respect to the position as of 7 July 1999, when the inventory had increased to $288,941 and as of 29 July 1999, when it had unaccountably grown to $322,899.
[40] Exhibit D7 para 8.7.
[41] Paragraph 3.24
Based on his best efforts at reconstruction based on the incomplete material available to him, Mr Jørgensen estimated Blue Apple held working capital of $58,481 as of 18 March 1999, $97,180 as of 28 April 1999, $113,230 as of 7 July 1999 and $150,014 as of 29 July 1999. His evidence-in-chief as to the significance of working capital was this:[42]
QWhy is working capital a relevant matter to be considering in this context?
AWell, without access to any cashflow analysis, it’s in the same way as the other item might be, indicators of insolvency. Positive working capital might be an indicator of solvency or negative working capital might be an indication of insolvency. But working capital are currently assets which are items which, in accounting terms, would be turned into cash within a year, and current liabilities being liabilities that need to be paid within a year. And so, on the face of it, up until 30 September, there were more assets that were convertible into cash within one year than liabilities needed to be paid within one year.
[42] Transcript 588 L15 – L28.
At each of these stages, whilst acknowledging there were “a number of indicators of insolvency”,[43] Mr Jørgensen did not consider these, taken alone, as “definitive … in the absence of a reliable cash flow analysis”.[44] He considered creditors’ claims by APM ($106,494.10) and Charger Electronics ($59,180.60) were valid.[45] The accounting records suggested sales between 11 March 1999 and 31 May 1999 had remained static at $28,183, accumulated to $142,504 by 7 July 1999. They remained at that figure as of 29 July 1999.[46] Mr Jørgensen went on to observe there was insufficient information to determine a realistic cash flow budget as of 9 June 1999, that being the date upon which Mr Murdock probably forwarded the cash flow projections to Mr Sporne of the CBA in support of the loan application.[47] These projections appear somewhat optimistic. Even though Mr Murdock completed them on the advice of the Directors, they appear to have paid little regard to the fact that sales had stopped by this time, even if production had not.
[43] Paragraphs 3.30, 3.38, 3.46 and 3.51
[44] Paragraphs 3.30, 3.38, 3.46 and 3.51
[45] Paragraphs 7.46 – 7.56
[46] Paragraph 8.39.
[47] Exhibit D6 Tab 6.
Solvency – analysis to 16 July and 19 July 1999 (the first two transactions)
The Plaintiff did not purport to prove his case by the conventional “cash flow analysis”, as discussed in such cases as Keith Smith East West Transport Pty Ltd v Australian Tax Office,[48] Manpac Industries Pty Ltd v Ceccattini[49] and Gibbons v DCT.[50] This is not surprising given the state of the books and given that it was not possible to identify when invoices fell payable – hence the numerous entries on the schedule Exhibit D3, “not known”. Mr Lock who carried out the liquidation of Blue Apple on behalf of Mr Sheahan, did not contend the summary of the debtors in Exhibit D3 served the purpose of identifying when its debts became due and payable.[51] Rather, the plaintiff sought to prove insolvency from what counsel described as the “irresistible inference” arising from the accumulation of circumstances. There is no proper criticism to be levied against the plaintiff for proceeding in this way in those circumstances.
[48] (2002) ACSR 501; [2002] NSWCA 264 at [18]-[20], [22], [33]
[49] (2002) 20 ACLR 1304 at [40].
[50] [2003] NSWSC 936
[51] Transcript 87 L10.
In Wily v Terra Cresta Business Solutions Pty Ltd[52] Young CJ in Eq summarised the approach the court should take in a situation such as this:
[39]Although s 95A appears to be expressed in simple language, as Coburn says in Coburn's Insolvent Trading 2nd ed (Law Book Company, Sydney, 2003) p 63, when analysed it really fails to provide any clear guidance.
…
[42] Coburn says at p 66 of his book, having referred to all these authorities:
The courts have moved to a far wider consideration of solvency, rather than just applying a cash flow test, which is viewed as a basic starting point in the consideration of solvency. This is because the statutory emphasis is on "solvency" rather than "liquidity". The consideration will be as a question of fact: in the light of commercial reality, all things considered, could the company pay its debts as and when they became due? Such an approach includes the balance sheet test, and other commercial realities such as access to money from third parties, raising capital or credit and financial support are all relevant considerations in determining a company's ability to pay debts.
However, I emphasise that the cases are talking about commercial realities, not of the belief in a fairy godmother. … .
[52] [2006] NSWSC 1042.
The plaintiff mounted a case that Blue Apple was insolvent as and from 18 March 1999, although in order to succeed he strictly only need prove insolvency on and after 16 July 1999. Rather than consider the position of the company as of 18 March – as that might prove to be unnecessary – it will therefore suffice to examine the position as of the first payment of 16 July 1999.
After 30 June, the bank account of Blue Apple went into debit, to a maximum of $51,980 on 15 July, the day before the first subject transaction. It was relatively heavily in debit by 5 July when it repaid APM $38,128.10.[53] Immediately before the first payment was made, there was an injection of funds sourced from a home loan provided to Mr Murdock by Capital Equity Facility. Revenue from sales had all but dried up, the last of any consequence going back to late May.[54] Blue Apple had incurred debts by then of between $76,087 and $158,807 and debts of over 30 days ran between $15,695 and $84,017.[55] Although some cheques were dishonored as detailed above, they had for the most part been replaced by 15 July.
[53] Exhibit P1 Tab 29 p13, Exhibit D7 para 7.21.
[54] Transcript 637 L19 – L27 and Exhibit D7 para 14.16.
[55] Exhibit D7, paras 11.7 and 11.8.
The fact that a debt of $11,887 owing since February was rescheduled to 16 July 1999,[56] or that Blue Apple was in a few minor instances trading on COD Terms,[57] carries the matter no further. Coupled with these considerations, a bank loan of at least $130,000 from the Commonwealth Bank of Australia was in the pipeline, for which verbal approval had already been given, an approval confirmed in writing on 16 July. Although production apparently continued, no income of any significance was expected until the gridlock in the APM negotiations was overcome.
[56] Exhibit P1, tab 16.
[57] Exhibit D7, para.7.25.
In the light of the entire financial history of Blue Apple, particularly its continuing ability to secure financial support, it is not possible to find insolvency on a cash flow basis. The telling considerations if any, are the want of a regular stream of income, the perceived necessity to repay the CARS loan of $40,000 and the mounting loan accounts which served to prop up the bank balance. Nonetheless a clear picture of insolvency hardly emerges as of mid July 1999. There were periods when the account was in credit. The dishonoured cheques itemised above do not carry much weight, for reasons already advanced.
On the other hand, the company was increasingly propped up by funds provided by Mr Murdock. It appears that Gediz loaned $6,000 on 8 February and advanced a further $2,000 on 1 June. They also paid wages for Blue Apple employees as follows:[58]
[58] Compiled for Exhibit P1 Tab 9, 2nd page 7.
$2,930 on 18 June
$2,030 on 2 July
$2,030 on 9 July
$2,030 on 16 July
$2,030 on 23 July
$2,030 on 2 August
$3,030 on 6 August
$2,530 on 20 August.In one way or another the total contributions of the defendants to Blue Apple was $137,152.63. This total includes the CARS payment of $41,179 on 7 July and a home loan advance obtained through the CBA on 16 July of $33,565.55, drawn down into the account of Blue Apple.[59] Mr Murdock considered approximately $30,000 was attributable to equity or the value of his shareholding.[60]
[59] Exhibit P1 Tab 9, pages 7-8 (2nd series).
[60] Transcript 333 L2 – L153.
After May the company appeared to continue manufacturing. The accounts show ongoing payments to suppliers and the payment of wages, albeit in many instances through Mr Murdock. The last effective receipt of substance resulting from sales was on 27 May. Much smaller sums were received on 17 June ($1,696.12) and on 29 June (1,077.90).
A final, but important consideration in this context, was the unresolved dispute with APM. It is accepted that APM withheld $18,078.88 from Blue Apple, a sum due to it as of 18 March 1999. Although APM claimed to be owed far more, this was disputed by Mr Murdock, with some justification given that Mr Sheahan admitted $106,494.10 of an alleged debt of nearly twice that size. There was therefore some force in Mr Murdock’s evidence that APM’s insistence “upon complete payment of their … unjustifiable debts was made in an endeavour to increase their percentage ownership and control …”.[61] Blue Apple, through Mr Murdock, had for some time been in negotiations to form the joint venture Power Source Team Pty Ltd, as recorded earlier. These negotiations broke down much later, in September.[62] They incorporated Mr Murdock agreeing to “advise in bullet point form his thoughts on the foundations of marketing arrangements by 28.6.99” with a shareholding split of 60% to Blue Apple and 40% to APM.[63] The proposal reached the point of drafting a Sales and Agency agreement by around 18 July.[64] By 16 September APM was demanding a five year term.[65] Even if a draft agreement was available by 18 July, it was clear enough that resolution of the APM negotiations was some way off, viewed in the context of the protracted history of the dealings up until then.
[61] Transcript 364 L3 – L10.
[62] Exhibit D6 tab 8.
[63] Exhibit P1 Tab 12 and see Exhibit D6 Tab 3.
[64] Exhibit D6 Tab 8.
[65] Exhibit D6 Tab 8
Considering Mr Murdock and others continued to be willing to invest in the company, that the not insubstantial CBA loan was expected at any time and the negotiations with APM were in train whilst manufacturing continued, together with the state of the expert evidence, it is not possible to conclude on balance that Blue Apple was insolvent as of 16 July 1999, or for that matter as of 19 July. Accordingly, the claims based upon the payments of $2,830 on 16 July and $10,637 on 19 July fail, even though they were otherwise preferential.
Insolvency as of 22 and 29 July 1999
The situation changed appreciably between 19 and 22 July, from a financial point of view. Cheques totalling just over $11,000 were drawn on the 20th. The bank loan was drawn down on the 21st. Of that loan, $53,000 was credited to Blue Apple and the balance of $47,000 was “funded to [Mr Murdock’s] Capital Equity Facility” the same day.[66] As mentioned, this was by way of reimbursement to him. It will become necessary for another reason to examine this third transaction later in more detail. This loan brought the account into credit for the first time since 29 June, however on 22 July, the credit balance stood at just $19,054.65. There was a meeting of 22 July with Mr Mortimer of APM and Mr Fairhead, when there was talk of following-up sales leads and the Power Source proposal.[67]
[66] Exhibit D6, tab 7.
[67] Exhibit D6 Tab 8 P 42.
Even though the loan had come through on the 21st and the accounts consequently stood in credit, Mr Murdock made a professional judgment that the company required a further $50,000, according to his file note of that day.[68] By 30 July, he was considering adjusting the shareholding or “equity split” to increase funds, to the point that this had grown to “$50 – 60K”.[69] And rather than devoting the loan funds to ordinary trade debts, except for outgoings totalling $5,090.80 on 23 July, the overwhelming balance of the loan was allocated to reimbursing Mr Murdock and meeting the associated costs of the CBA loan.
[68] Exhibit D6, tab 8, p.40.
[69] Exhibit D6 tab 8, p45.
Another critical change in circumstances was the attempt on 23 July to discharge the Page loan by cheque no. 373 of $60,000, which was dishonoured on 26 July. Clearly then, by 21 July the company had drifted into insolvency. This situation is confirmed by the response of Mr Murdock when he approached the Nacos Credit Union and took out a loan of $20,000, so that together with the payment of $40,000 of 29 July, discharged the Page loan. This conclusion is reinforced by the dishonour of 26 July, the perceived urgent need of the $20,000 and the almost complete disbursement of the CBA funds on other than recurrent trade debts.
Of course the account was temporarily in credit on the 22nd when the third transaction took place, but that was wholly attributable to the CBA loan funds. Given that it was then proposed, as it appears, to discharge liabilities on the Page loan of $60,000 immediately, it was obvious there was inevitably going to be insufficient funds to satisfy other trade debts from that point onwards. In that trading situation, the probabilities are that Blue Apple was insolvent as of 22 July 1999. That being so, it becomes necessary to examine the third and Page transactions in a different light to that of the first and second.
The third transaction of 22 July
Although a formal application for a loan was made around 9 June, negotiations between Mr Murdock and a Mr Sporne of the CBA began sometime during March. An initial facility of $150,000 was sought, made up of a business loan of $100,000 and $50,000 by way of overdraft.[70] Eventually a facility totalling $130,000 was approved, $47,000 of which was credited to the benefit of Mr Murdock as it was applied to a Capital and Equity facility in his name. That was simply a home loan provided to him by the CBA.[71] It is conceded by the defendants that this, as well as payments 1 and 2, had the necessary preferential effect.[72] It is further conceded in the pleadings that the bank deposited this sum to his credit in that way on the instructions of Mr Murdock.[73] This was in repayment of loans made to the company by him. Accordingly subject to the defence of good faith, this transaction is clearly otherwise voidable.
[70] Exhibit D6, tab 5.
[71]Transcript 287L13 – L38.
[72]Transcript 794 L30 – L32.
[73] Paragraph 27.3.1 second further amended defence.
The Page transaction
It now becomes necessary to deal with the fourth or so-called “Page” transaction. The circumstances are not as straightforward as the other three. In truth Mr Page played no role of consequence in this. On 22 January the company received the benefit of a loan of $40,000, recorded in the books of account as coming from Mr Pazman. Pazman was a director of both Blue Apple and CARS at the time, but the loan was unquestionably advanced by CARS. Pazman was the principal of CARS. Mr Murdock admits in his defence to having on 29 March, faxed a letter to Pazman seeking to forestall legal proceedings to enforce repayment on condition that he personally repay the loan, an offer he withdrew the following day.[74] This he proposed to achieve by obtaining finance from the CBA, secured by mortgage over his home. CARS issued proceedings in its own name on 7 May 1999 and obtained a default judgment on 8 June for $40,000, plus costs.[75]
[74] Paragraphs 11.7 – 11.8 of the substituted amended Statement of Claim and second amended defence, respectively.
[75] Exhibit P1 Tab 4.
On 7 July Mr Murdock personally raised a loan of $60,000 from the Nacos Credit Union, through a Mr Brian Page. This furnishes the reason for the description of “the Page transaction” in the Statement of Claim and by the parties during the course of the trial, even though in strict legal terms there was no such thing. On that same day Mr Murdock applied $41,179 of those Nacos funds in complete discharge of the CARS judgment debt.[76] A further $880.00 was applied to legal feels incurred by Blue Apple in relation to the CARS legal proceedings. Those transactions were entered up in the books of Mr Murdock in the Blue Apple loan account. Both sums were applied on behalf of Blue Apple.
[76] Exhibit D6 Tab 9 p.47.
The final step in this composite sequence of events is the fourth alleged preferential payment by Blue Apple on 29 July 1999. On that date the general ledger of Blue Apple in the Gediz account, records a payment to B S Page as Trustee for The Page Family Trust of $40,000, applied in partial discharge of Mr Murdock’s liability for the Nacos Credit Union Loan.[77] The balance of $20,000 providing complete discharge, was raised that day by Mr Murdock from Nacos.[78] The case was argued on both sides on the basis that these payments discharged any continuing obligation of Blue Apple or the defendants on account of the Page loan.
[77] Exhibit D6, Tab 9, p8 of Gediz account and CBA bank statement p14, Exhibit P1 Tab 29.
[78] Exhibit D11.
The plaintiffs contend these transactions, although related, are separate and distinct. The liquidator regarded it as “simply a reduction of a running account balance” between Gediz and Blue Apple.[79] Whatever else it may be, it certainly was not that. A running account is one where debits and credits are recorded chronologically, and where a particular payment is intended to continue the established relationship: Ferrier and Knight v Civil Aviation Authority.[80]
[79] Exhibit D4.
[80] (1994) 55 FCR 28 at 50-51.
The defence submits the effect of the payment of 29 July, was in substance a repayment on account of Blue Apple of the CARS loan of January and in the event, completed a series of transactions having that effect. That being so, Mr Goodall submitted there was no preferential payment. Secondly he submitted an order for payment from the present defendants would amount to “double recovery”, since the plaintiff obtained full recovery against CARS with respect to the very same loan. He further contended the court should exercise a discretion reposed in it by s588FF(1), by refusing to make any order for the payment of money or otherwise. The plaintiff argues there is no such discretion.
Before dealing with this rather complex transaction, the fact of recovery from CARS should be detailed. In separate legal proceedings instigated by Mr Sheahan, CARS surrendered the $40,000 to Mr Sheahan as liquidator, shortly before 15 November 2002.[81] Those proceedings alleged the payment by Gediz trading as Gary Murdock and Associates to CARS on 7 July 1999 of $40,000, was by way of “a loan to Blue Apple” and was recorded in the books as such.[82]
[81] Exhibits D4 and D12.
[82] Exhibit D4 para 20.2.
All of the above facts relating to the so-called Page loan transactions are not in dispute. What remains in issue is the legal characterization of the entire course of events, whether the payment had the necessary preferential effect and if the court can and should refuse to make an order directing the defendants to pay to the company the sum of $40,000.
In substance the situation was this. A loan of $40,000 was made by CARS to Blue Apple of $40,000 in January 1999, a loan discharged on the payment to it by Mr Murdock of $41,179 on 7 July from funds he borrowed from the Nacos Credit Union. That made him a creditor of Blue Apple to that extent. The relevant underlying debtor/creditor relationship existed between CARS and Blue Apple for $41,179. When Mr Sheahan recovered the $41,179 from CARS in 2002, he did so in his capacity as Liquidator of Blue Apple – that is in an identical debtor/creditor relationship established by the loan of 22 January. Therefore he recovered against CARS the supposed preferential payment made on account of Blue Apple on 7 July 1999 in that amount.[83]
[83] Exhibit D4 Statement of Claim paragraph 20.1 and Transcript 711 L17-L33.
The nature of the “Page” transaction
It is settled law that the definition of “transaction” in s9 of the Act is of wide import. The court must consider the transaction in the total context of the relationship between the parties: V R Dye & Co v Peninsula Hotels Pty Ltd (in liq).[84] That may include a series of events in the course of dealings intended to extinguish a debt: Re Emanuel (No. 14) Pty Ltd (in liq): Macks & Anor v Blacklaw, Shadforth Pty Ltd.[85] The court will consider what the parties were intending to effect and how that was achieved by the “transaction” in question: Mann v Sangria Pty Ltd.[86] The complexity of modern business relations obliges the court to look objectively at the totality of the dealings between the parties when characterizing the relevant “transaction”: Capital Finance Australia Limited v Tolcher.[87]
[84] [1999] 3 VR 201 at [39].
[85] (1997) 147 ALR 281 at 288.
[86] (2001) 38 ACSR 307.
[87] [2007] FCAFC 185 at [93] and [120].
The defendants relied upon the wide definition of "transaction" in section 9 of the Act as interpreted in Re: Emanuel (No 14) Pty Ltd (in liq); Macks and Another v Blacklaw & Shadforth Pty Ltd (1997) 24 ACSR 292. In V R Dye & Co (a firm) v Peninsula Hotels Pty Ltd (in liq) & Another Ormiston J A said:[88]
[34]For the purpose of analysing these provisions, both past and present, one may start with a generality which is now reflected in the language of s588FA(1): "'One of the fundamental precepts of corporate insolvency law is that the available assets of the company are to be shared rateably among its creditors'": per Toohey, J in Airservices (at 516), citing an article by O'Donovan "Undue Preferences: Some Innocents escape not the thunderbolt" (1992) 22 University of Western Australia Law Review 322.
…
Against that broad principle, however, there has been recognised the necessity of ensuring that a company facing winding up must have some capacity to live out and possibly survive its feared fate. It is in the interests of the body of unsecured creditors that there should remain a business which can be sold as a running concern, so long as its liabilities are not increased in the mean time. So it has been accepted for many years that, as long as the company does not pay out existing creditors without obtaining an effective corresponding advantage, then it should be allowed to acquire goods and services by prepayment or on cash on delivery terms. The rationale behind the "exception" (more precisely, the non-inclusion within the general rule) is that the company gains goods and services to an equivalent value (in broad terms) to that which it pays out to obtain them, so that the existing creditors cannot in theory be prejudiced by the payment. I say "in theory" because the "rule" assumes that there is an equivalence between price and benefit obtained, which may not always occur, but to engraft some further exception upon the exception would tend to commercial impracticability.
[36]In each case the court is obliged to look at the transactions between the parties in a manner which accords with the commercial realities. It is not a matter of isolating particular individual steps in the course of a business relationship so as to give one element a different characteristic from that which the totality of that relationship would evidence.
[88] [1999] 3 VR 201; (1999) 150 FLR 307; (1999) 32 ACSR 27; (1999) 17 ACLC 954 at [34].
The principles applying here are those laid down by Dawson, Gaudron and McHugh JJ in Airservices Australia v Ferrier (Compass Airlines case)[89] a case decided on s122 of the Bankruptcy Act 1966 (Cth), then materially different to the present legislation in one respect, in as much as it had previously to be shown “the debtor was unable to pay his debts as they became due from his own to be money”. The case remains relevant nevertheless to the present inquiry:[90]
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.
As a consequence, a payment made during the six month period cannot be viewed in isolation from the general course of dealing between the creditor and the debtor before, during and after that period. Resort must be had to the business purpose and context of the payment to determine whether it gives the creditor a preference over other creditors. To have the effect of giving the creditor a preference, priority or advantage over other creditors, the payment must ultimately result in a decrease in the net value of the assets that are available to meet the competing demands of the other creditors.
Thus, where the payment is a step in a wider transaction, "its actual business character must be seen and when it forms part of an entire transaction which if carried out to the intended conclusion will leave the creditor without any preference priority or advantage over other creditors the payment cannot be isolated and construed as a preference". If the purpose of a payment is to secure an asset or assets of equal or greater value, the payee receives no advantage over other creditors. The other creditors are no worse off and, where the value of the assets has increased, they are actually better off. Thus, a debtor does not prefer a creditor to the other creditors41 if he or she pays a debt, or part of it, to induce the creditor to supply goods of equal or greater value than the amount of the payment. In that situation, it is of no relevance that the debt that is discharged happens to be a stale one. If the present value of the goods supplied is equal to or greater than the payment, the other creditors are no worse off. They are in the same position that they would have been in if the parties had so structured the transaction that the debtor paid for the new supply of goods instead of discharging the old debt. Thus, a customer does not prefer his or her banker to other creditors where, pursuant to an antecedent arrangement between the banker and its customer, the customer deposits money to meet a liability already incurred in respect of specific cheques that the banker has met on the faith of the arrangement. A court, exercising jurisdiction under s122 of the Bankruptcy Act, does not allow itself to be unsighted by the shadow of the legal form when it can see that the economic effect of the transaction does not give the creditor any preference, priority or advantage over the general body of creditors.
Commonly, however, the relationship between a debtor and creditor will involve more than a single transaction. It will often involve a number of dealings in which goods or services are supplied at regular intervals but the payments for those goods or services neither are made regularly nor, when made, are appropriated to a specific or even the most recent delivery of the goods or services. Like the case of the wider transaction, s122 does not require the court to look at the immediate effect of a particular payment if "the payment formed an integral step in a unified course" of dealings between the parties. The court looks to the business effect of the parties' dealings which almost invariably proceed on the understanding, sometimes express but more often assumed, that the creditor will continue to supply goods or services to the debtor on a credit basis as long as the debtor substantially adheres to their credit arrangements.
[89] (1996) 185 CLR 483.
[90] Above at 501-502 (footnote omitted).
The payment of 29 July was no more and no less, a reimbursement to Mr Murdock for personally bailing-out Blue Apple on its debt to CARS on 7 July. As such, Blue Apple (the debtor) and CARS (the creditor) remained the principal parties to the transaction. Section 588FA(1)(b) directs attention to the transaction resulting in the creditor securing “more than [it] would receive from Blue Apple” if required to prove in the winding up. Since CARS was required to surrender the payment of 7 July, it remains in a position to prove the loan in the winding up, so that it is in no such position. That being so, the plaintiff has failed to prove the payment of 29 July 1999 had the necessary preferential effect. That is because, although there was viewed in isolation a payment to the benefit of Mr Murdock, as he was in substance the “substitute unsecured creditor of CARS”,[91] there can only be recovery with respect to the one debt, with a one-off preferential effect. All that occurred was that the defendants were substituted as creditors in the place of CARS, providing no relevant preferential effect against the other creditors. The bottom line of the available asset pool remained the same. In the result there was no diminution in the net value of the assets available to the remaining shareholders.
[91] Transcript 710 L8.
Does s588FF(1) confer a discretion to decline to make an order?
As noted earlier, counsel for the defendant argued s588FF(1) conferred a discretion to decline to make an order at all, even when the court was prepared to find all the other elements of preferential payment under Part 5.7B Division 2 of the Act, were present. It was submitted the court might decline to make such an order, for instance when it would be oppressive, constitute an abuse of the process in cases of unreasonable or unwarranted delay by a liquidator and as in this case, such payment was tantamount to a second recovery. So far as is relevant the section provides:
Courts may make orders about voidable transactions
(1)Where, on the application of a company's liquidator, a court is satisfied that a transaction of the company is voidable because of section 588FE, the court may make one or more of the following orders:
(a) an order directing a person to pay to the company an amount equal to some or all of the money that the company has paid under the transaction;
(b) ….
Dr Baxter for the plaintiff responded by stressing the words “may make one or more of the following orders”, expressed an intent that once enlivened, the section mandated the making of at least one order – the discretion extends only to the making of multiple orders. He further submitted if it was intended that no order was an option that would be expressed in plain words, as are other means of avoiding liability for preferential payments, such as contained in s588FGA and 588FGB for example, or he might have added under s1318 of the Act.
The phraseology “may make one or more of the following orders” is one not infrequently employed in significant Commonwealth legislation these days: Workplace Relations Act 1996 (Cth) ss170CR(1), 665(1), 807, Corporations Act 2001 (Cth) s1323, Proceeds of Crime Act 1987 (Cth) s48(1), Proceeds of Crime Act 2002 (Cth) s39(1), s176(2), Bankruptcy Act 1966 (Cth), s176(2), Evidence Act 1995 (Cth), s169(1). It is in addition, one to be found in a wide range of State enactments: s114 Lands Title Act 1994 (Qld), s21A(2) Evidence Act 1977 (Qld), s181 Juvenile Justice Act 1992 (Qld), s68(1) Child Protection Act 1999 (Qld), s125(2) Penalties and Sentence Act 1999 (Qld), s84 Domestic (Feral and Nuisance) Animals Act 1994 (Vic), ss10(c), 19(1), 28AA(5) Crimes (Mental Impairment and Unfitness to be Tried) Act 1997 (Vic), s151(4) Mental Health Act 2007 (NSW), s465 Confiscation of Proceeds of Crimes Act 1989 (NSW), s17(1) Criminal Assets Recovery Act 1990 (NSW), s76C(1) Supreme Court Act 1970 (NSW), s38(1) Children’s Protection Act 1993 (SA), and s27 Criminal Assets Confiscation Act 2005 (SA).
It might be observed that had Parliament intended action was obligatory, it could have easily said so by employing “must” instead of “may”.[92] On the other hand some statutes, such as the CorporationsAct make it crystal clear no relevant order need be made, by adding a further qualification to the power, “where it is necessary or desirable to do so”.
[92] As in s34A(1)(a) of the Firearms Act 1977 (SA) - see
The issue falls to be determined as one of statutory construction. The answer lies in the language, structure and purpose of the section, considered in the statutory context. The language of the section “may make an order” is suggestive of a discretion, but that throws no light one way or the other over the subject matter to which it refers. The same applies equally to s33(2A) of the Acts Interpretation Act 1901 (Cth), to the extent that it provides “where … the word may is used, the act or thing may be done at the discretion of the person, court or body”.[93] As the High Court emphasises in Project Blue Sky Inc v Australian Broadcasting Authority,[94] “the duty of a court is to give the words of a statutory provision the meaning that the legislature is taken to have intended them to have”.
[93] Emphasis supplied by the legislation.
[94] (1998) 194 CLR 355 at 384.
The word “may” generally imports a discretion, however the particular context can be read as confering an imperative power that must be exercised if the circumstances call for it: Julius v Bishop of Oxford,[95] Ward v Williams,[96] Finances Facilities Pty Ltd v Federal Commissioner of Taxation.[97]That situation usually, but not always, occurs when the object of the power is to effectuate legal rights, as stated by Cockburn CJ in Bishop of Oxford:[98]
So long ago as the year 1693, it was decided in the case of R v Barlow,[99] that when a statute authorises the doing a thing for the sake of justice or the public good, the word ‘may’ means ‘shall’, and that such has been acted upon to the present time ….
[95] (1880) 5 App Cases 214.
[96] (1955) 92 CLR 496 at 505-506.
[97] (1971) 127 CLR 106 at 134-135.
[98] Above at 258. See also Julius v Bishop of Oxford above at 244.
[99] [1693) 2 Salk 609].
Section 588FF is found in Chapter 5 of the Act headed “External administration”. Parts 5.3A – 5.7B deal with winding up and is of a very different character to that described in Julius v Bishop of Oxford. Part 5.7B itself provides for recovery proceedings, taxation liabilities and voidable transactions. Division 2, then proceeds to deal separately with unfair preferences (s588FA), uncommercial transactions (s588FB), insolvent transactions (s588FC), unfair loans (s588FD) and unreasonable director-related transactions (s588 FDA). Sections 588FE (voidable transactions) and 588FF (orders about voidable transactions) apply to each and all of the preceeding categories or circumstances amounting to voidable transactions. Section 588FF, has to be construed in that context. Of the ten options it provides for ((a) – (i) inclusive), the first four are compensatory in nature, whereas the remainder are ameliorative.
The prospect of declining to make any order arose in Pegulan Floor Coverings Pty Ltd v Carter,[100] a question Doyle CJ did not then resolve in light of his conclusion on the facts that the avoidance of preferential benefits was “achieved by ordering repayment”,[101] an approach applied by Barrett J in Sutherland v Dexion Australia Pty Ltd.[102] Although the Court of Appeal in BP Australia Ltd v Brown[103] spoke in terms of being “in a position to control unwarranted delay by liquidators … through the discretions it exercises under s588FF(3) and 588FF(1)”, the precise point was not considered there either. There is no case to which counsel could refer the court or in the court’s own research, where the point has acutely arisen for judicial determination.
[100] (1997) 24 ACSR 651.
[101] Above at (1997) 24 ACSR at 659.
[102] (2003) 21 ACLC 341 at [61].
[103] (2003) 58 NSWLR 322 at [171].
The distinction between discretionary and mandatory requirements is “elusive”: Tasker v Fullwood.[104] Moreover, it is one that has outlived its usefulness: Project Blue Sky Inc v Australian Broadcasting Authority.[105]There is no reason to think from the words of the provision taken in total context, that Parliament intended to deprive the court of the power to decline to make an order under s588FF, if that was otherwise the correct exercise of power on the proven facts. By their very nature the options conferred under s588FF(1) are facultative rather than imperative. On the defendant’s construction the court is constrained to make an order once the preferential payment is proven, whatever the attendant circumstances might be. Such a rigid construction would serve only to constrain the court into making an order it otherwise thought inappropriate to make. That surely could not have been intended.
[104] [1978] 1 NSWLR 20 at [23-4].
[105] Above at [390 -93].
The conclusion that the section as a whole is permissive so that a discretion remains to refuse an order, is consistent with the heading “court may make orders about voidable transactions”, a heading forming part of the Act.[106] It is also one consistent with the central concept of Division 2, that is voidable transactions. If it were otherwise, the nomenclature would be expressed in terms of “void transactions”. In any case the court can direct “some or all of the money” be paid so that in otherwise appropriate cases, the court is empowered to order the payment of partial or nominal sums.
[106] Section 13 Acts Interpretation Act 1901 (Cth) and Re Minister for Immigration & Multicultural Affairs: Ex parte Miah (2001) 206 CLR 57 at [88].
It follows on this construction that the court is conferred with a discretion to decline making any order under s588FF, even though the transaction is otherwise voidable. In this case the due exercise of that discretion leads the court to refuse to make any order in relation to the Page transaction, as recovery has already been achieved by the liquidator, because the payment of 29 July 1999 had no preferential effect within the meaning of s588FA(1)(b) as the position of the company remained the same and because in the proved historical circumstances it would be unfair and unjust for the plaintiff to receive what is tantamount to double recovery from what was in substance the same underlying transaction. Alternatively, if constrained to make an order, an order requiring the defendants to pay to the company a nominal sum is all that is justified or warranted.
The defence of good faith
It is the case for the defendants in relation to all four transactions that the defence of good faith was proven by them, as it has to be, under s588FG of the Act. It is common ground between the parties that the defendants were parties to the transactions in good faith or that if they provided valuable consideration, or otherwise relevantly changed their position, so the dispute narrows to their belief as to insolvency.
It is submitted by the defendants that all four transactions were not voidable, as they fell within s588FG(2) of the Act. That section provides:-
(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, or an unreasonable director related transaction of 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 588FC(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.
Sub-section (b)(i) is essentially subjective, whereas (b)(ii) is objective in that under (b)(i) “the court will assess the conclusion which ought reasonably to have been reached” by the person, whereas under (b)(ii) “the court will be concerned with the conclusion (in terms of logic or common sense) which a reasonable person ought reasonably to have made in terms of a relevant suspicion”: Sims v Celcast Pty Ltd[107]. Moreover under (b)(i) the defendants must negate any suggestion of the actual apprehension of insolvency, based on the objective circumstances: Queensland Bacon Pty Ltd v Rees,[108] George v Rockett.[109]
[107] (1998) 71 SASR 142 at 146.
[108] (1996) 115 CLR 266 at 303-304.
[109] (1990) 170 CLR 104 at 115-116.
During the period from January right through to 30 September 1999, Mr Murdock continued to support the company, personally or through the second defendant, to the significant level of $137,152.63.[110] In addition, he provided professional services, admitted in the liquidation, totalling $98,799.50, without raising invoices until 29 October 1999. There is no suggestion those charges were unjustified or unreasonable. Further, he mortgaged his home at Hazelwood Park and another property in Whyalla, in order to support the loan application.[111] Although this issue is examined through his “contemporary eyes”, one must remain consciously aware of hindsight influencing one’s judgment: Sutherland v Eurolinx Pty Ltd.[112]
[110] Transcript 333 L2 – L7.
[111] Transcript 355 L4 – L18.
[112] (2001) 37 ACSR 477 at [43].
It is extra-ordinarily difficult to accept that with this high degree of personal commitment and exposure, he would have been prepared to extend himself so far, had he contemporaneously held reasonable grounds for suspecting Blue Apple was insolvent. With the benefit of hindsight it seems obvious that he was emerged in Blue Apple to such an extent that he lost a measure of objectivity and impartiality. In point of fact it was not until much later on 29 September that he finally determined he and Mr Moffa “will not fund BAE further”.[113] The fact remains that the extent of his personal commitment to Blue Apple and the commission of substantial personal assets to potential forfeiture, are highly inconsistent with a belief or expectation of insolvency.
[113] Exhibit D9.
It was submitted by Dr Baxter, whilst accepting Mr Murdock acted in good faith,[114] that he must have suspected insolvency because “he knew he could get himself a preferential payment”.[115] The conclusion does not necessarily flow from the premise. As a chartered accountant, Mr Murdock was only too well placed to understand the full implications of making preferential payments. No attempt was made to hide any of the subject payments - they were openly and accurately recorded in the books of account. These circumstances support his evidence that he did not suspect the company was trading insolvently.[116]
[114] Transcript 43 L6 – L7.
[115] Transcript 777 L25 – L26.
[116] Transcript 264 L23 – L34.
The more demanding question lies in whether a reasonable person in Mr Murdock’s circumstances, held no such grounds for suspecting insolvency within the meaning of ss588FG(2)(b)(ii). The onus is on him to show this state of affairs: Cook’s Construction Pty Ltd v Brown.[117] As the task is objective – with a subjective component – it is necessarily onerous to satisfy: Pegulan Floor Coverings Pty Ltd v Carter,[118] Sims v Celcast Pty Ltd[119]and Sutherland v Eurolinx Pty Ltd.[120]
[117] (2004) 49 ACSR 62.
[118] (1997) 24 ACSR 651 at 658.
[119] (1998) 71 SASR 142 at 144-146.
[120] (2001) 37 ACSR 477.
Consistent with the findings already made, a reasonable person might not have realized until 22 July 1999 that Blue Apple was insolvent. Accordingly the “defence” is made out in relation to transactions one and two. However, given the substantial draining effect of the third transaction and the repayment of the Page loan on the limited funds available to the company, a reasonable person must have held grounds for suspecting it would become insolvent by 22 July, even if that person had invested so heavily and exercised the same capacity and willingness to support the company, as Mr Murdock had. In other words, by that time Mr Murdock ought reasonably have “read the signs differently”: Sims v Celcast Pty Ltd.[121] On these findings, the defendants have failed to establish the so called “good faith” defence in relation to the third and Page transactions.
[121] Above at 146.
Conclusions
In light of the above findings, it has not proved possible to identify precisely when Blue Apple became insolvent, however the probabilities are that it was in such a state by no later than 22 July 1999. It follows that the last two of the four subject transactions were insolvent transactions under the Act. As to the first (16 July 1999 - $2,830.00) and the second ($10,637, 19 July 1999), the court holds Mr Murdock – and hence Gediz – in any event held no reasonable grounds for suspecting Blue Apple was insolvent at those times and that a reasonable person in their circumstances would have no grounds for so suspecting.
When it comes to the third transaction (22 July $47,000), irrespective of Mr Murdock’s state of belief as to insolvency, a reasonable person in his circumstances must have by then suspected the company would become insolvent, so that the defendants fail to make out a “good faith” defence with respect to that transaction and the fourth or Page transaction. As to the Page transaction (29 July $40,000), the court declines to make an order voiding the transaction, since the plaintiff has already recovered this sum, because it has not been proven to amount to a preferential payment as there was no reduction in the net value of the assets available to the creditors and if needs be, in the exercise of discretion.
Orders
The orders of the court therefore are that the applications for the payment to the plaintiff as liquidator of Blue Apple of the respective sums of $2,830, $10,637 and $40,000 are dismissed. The application for the payment to Blue Apple of $47,000 succeeds. Before entering final orders, the parties are entitled to be heard on the precise terms thereof. The parties should also be heard on issues of interest and costs. Both parties accept interest accrues from the date of demand: Capital Finance Australia Limited v Tolcher,[122] that is from 15 November 2001. They should have the opportunity to speak to the calculations on the basis of the above findings.
[122] [2007] FCAFC 185 at [144].
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