Sheahan v Fabienne Pty Ltd No. Scgrg-98-1775 Judgment No. S355
[1999] SASC 355
•27 August 1999
SHEAHAN v FABIENNE PTY LTD
[1999] SASC 335
Full Court: Doyle CJ, Duggan and Debelle JJ
DOYLE CJ, DUGGAN AND DEBELLE JJ The issue in this appeal is whether certain payments made to the respondent Fabienne Pty Ltd (“Fabienne”) by a company called Bosun Pty Ltd (“Bosun”) are saved from being a preference caught by s565 of the Corporations Law because they were made in the ordinary course of business and in good faith.
The appellant is liquidator of Bosun, which was wound up by order of this court on 24 October 1990 following an application lodged on 18 September 1990. Bosun had carried on business at Medindie as a motor vehicle dealer. It traded under the name “Medindie Car Sales”. Fabienne carried on the business of an automotive engineer. At the relevant times Fabienne was called “Northpark Automotive Services Pty Ltd”. It is convenient to refer to it as “Fabienne”. The directors of Fabienne were Michael Coory and his wife Maureen Coory. During the course of dealing the subject of these proceedings, the directors of Bosun were George Kotses and Con Makris.
From about 1982 or 1983 a significant proportion of Fabienne’s business was the repair and service of Bosun’s vehicles. By 1989, Bosun supplied about half of Fabienne’s business. Payments for the work were made and received on a running account. In the period 1982 to 1990 the businesses of both Fabienne and Bosun grew. By 1989 Fabienne employed about 11 employees and had up to about 40 vehicles in its workshop at any one time. Bosun was also trading extensively. It sold an average of 60 cars per week in the first half of 1990 and between 100 and 120 per week at the end of its trading.
From about June 1990 Bosun supplied less work to Fabienne. This reduction in work followed the establishment by Bosun of its own workshop on Magill Road to service and repair its vehicles. The workshop was quite large. Bosun sent two mechanics to its workshop from its premises at Medindie and employed 10 to 12 additional mechanics. There was no direct evidence as to when Bosun began sending vehicles to its own workshop. The evidence indicated that it was in about April or May 1990.
Fabienne’s terms of trading were stated to require payment of accounts within seven days. However, most of its debtors, including Bosun, did not adhere to those terms and took substantially longer to pay accounts. Bosun paid its accounts between five to seven weeks after receiving them. Expressed in other terms, Bosun was paying between 35 and 50 days after receipt of the invoice. That had been its practice since 1982-1983 when Bosun had first begun to trade with Fabienne. Fabienne accepted those terms because Bosun was such a substantial customer. This was a relatively consistent pattern for payment of accounts over the whole of the business relations between the two companies.
In 1990 the delay in Bosun’s payments to Fabienne went from five to six weeks in the latter part of January, to seven to eight weeks in February, seven to nine weeks in March, eight to nine weeks in April, nine to ten weeks in May, ten to twelve weeks in June and twelve to fourteen weeks in July. No cheques of Bosun were dishonoured until the end of July 1990 when a cheque dated 19 July 1990 was dishonoured.
The trial judge described the pattern of payments before and during 1990 in these terms:
“In a typical week, Maureen Coory would prepare a statement from invoices of work completed in the week. Ninety per cent of vehicles sent by Bosun to the defendant for service or repair would come in and go out in the same week. Towards the end of the week, Maureen or Michael Coory would personally deliver the documents to George Kotses or someone else in his absence. In return, he or she would receive a cheque. Invariably the cheque was in payment of an earlier statement. A cheque for the current statement would be written but placed in a drawer undated. Sometimes a cheque would be withheld and paid in a subsequent week with the cheque for that week. On many occasions, one or other of the Coorys would wait for a cheque at Bosun’s premises for periods of two or three hours or more. Between September 1988 and May 1989, delays in payment ranged between four and nine weeks and cheques were not paid in fourteen of the thirty three weeks. Between June and December 1989, delays ranged between five and eight weeks and cheques were not paid in five of the twenty nine weeks. Between January and July 1990, delays ranged between five and fourteen weeks and cheques were not paid in ten of the twenty seven weeks. The balance outstanding built up during the period, reached a peak of $129,040 in the fourth week of March 1990, but dropped to $87,199 in the fourth week of July 1990. Weekly statements of charges for work completed fluctuated during the period, but an upwards trend is discernible until the first week of June 1990. The amount of the statement in that week was $11,279, and amounts in preceding weeks had been running roughly at that level. In the five weeks thereafter the amounts dropped to $4,773, $6,217, $2,832, $1,934 and $2,243.”
Bosun made fourteen payments to the defendant totalling $163,822.97 during the six month relationship back period which was 19 March 1990 to 18 September 1990. The difference between Bosun’s peak indebtedness in the period and its indebtedness at the end of the period was $40,746.61. This is the agreed amount that the appellant seeks to recover from Fabienne. The relevant payments and dates are as follows:
12/ 6/90 $13,936.27
21/ 6/90 $11,369.38
3/ 7/90 $12,289.59
12/ 7/90 $10,598.85
23/ 7/90 $ 3,189.52
At the trial, there was no issue that the payments were preferences. The only issue is whether they were made in good faith and in the ordinary course of business.
Two employees of Bosun gave evidence, Mr McKeown and Ms Short. Mr McKeown had been employed by Bosun from 1985. His evidence was that Bosun had had cash flow problems from the very first day of his employment and that it was a continuing battle for creditors to be paid in any sort of timely manner. Ms Short had been employed for about three and a half years prior to August 1990. She worked in the reception area and her tasks involved preparing the accounts, secretarial work and answering the telephone. Her evidence was that in 1990 either Michael or Maureen Coory would telephone a couple of times a week for different reasons. She said that telephone calls and weekly visits seeking payment increased to every one or two days in June or July 1990. The trial judge did not place any reliance on this evidence and there is no reason to decide otherwise.
The trial judge found that, during the relevant events, Michael Coory may have had some concerns about Bosun’s cash flow but was prepared to tolerate delays in payment for the sake of maintaining what was, according to his perception, a lucrative source of income. There is no appeal against that finding.
The terms of s565 of the Corporations Law require reference to s122 of the Bankruptcy Act 1966 in order to determine whether a payment should be set aside as a preference against the liquidator. The relevant parts of s122 provide:
“(1).. A transfer of property by a person who is insolvent (the debtor) in favour of a creditor is void against the trustee in the debtor’s bankruptcy if the transfer:
(a)............. had the effect of giving the creditor a preference, priority or advantage over other creditors; and
(b)was made in the period that relates to the debtor, as indicated in the following table...
(2)... Nothing in this section affects:
(a).... the rights of a purchaser, payee or encumbrancer in the ordinary course of business who acted in good faith and who gave consideration at least as valuable as the market value of the property; or
(b) the rights of a person who is making title through or under a creditor of the debtor in good faith an who gave consideration at least as valuable as the market value of the property; or
(c)... a conveyance, transfer, charge, payment or obligation of the debtor executed, made or incurred under or in pursuance of a maintenance agreement or maintenance order; or
(d) a transfer of property under a debt agreement.
(3)... The burden of proving the matters referred to in subsection (2) lies upon the person claiming to have the benefit of that subsection.
(4)For the purposes of this section: ...
(c)... a creditor shall be deemed not to be a purchaser, payee or encumbrancer in good faith if the transfer of property was made under such circumstances as to lead to the inference that the creditor knew, or had reason to suspect:
(i).... that the debtor was unable to pay his or her debts as they became due from his or her own money; and
(ii)that the effect of the transfer would be to give him or her a preference, priority or advantage over other creditors.”
The issues at the trial were whether Fabienne received the payments in good faith and in the ordinary course of business as required by s122(2). The burden of proof was upon Fabienne: s122(3). When determining the question of good faith regard must, of course, be had to s 122(4). The trial judge answered both questions in the affirmative and held that the payments did not constitute a preference. He dismissed the liquidator’s claim. The liquidator appeals from that decision.
The Ordinary Course of Business
In determining whether the payments were made in the ordinary course of business the trial judge applied the reasons of the Court of Appeal in New South Wales in Harkness v Partnership Pacific Ltd (1997) 41 NSWLR 204. He concluded that it was proper to have regard to the context of the business dealings of the parties and held that, when the payments were considered in the context of the eight year relationship between Bosun and Fabienne, there was nothing which was special or particular about the payments or which could be realistically regarded as something other than an ordinary business payment. He said:
“The payments were on a running account and made whilst Bosun was supplying the vehicles and the defendant was still servicing and repairing them. Delays in payment, even omissions to pay at all, had always been a feature of the relationship.”
The judge held that the payments were made in the ordinary course of business. The appellant submits that the decision in Harkness is wrong and that the judge should not have relied on it, contending that regard cannot be had to the particular course of business dealings between the parties but, instead, to what might objectively be called the ordinary course of business. The appellant relies in particular on the observations of Rich J in Downs Distributing Co Pty Ltd v Associated Blue Star Stores Pty Ltd (In Liq) 1948 76 CLR 463 at 477.
The meaning of the expression “the ordinary course of business” has been considered on a number of occasions. The High Court canvassed a number of the decisions in Taylor v White (1964) 110 CLR 129, where Menzies J noted (at 160) that the observations made in the decisions of the High Court were not exactly to the same effect. More recently, the question was exhaustively canvassed by the Court of Appeal of New South Wales in Harkness v Partnership Pacific Ltd.
Some of the earlier cases might be read as suggesting that no regard should be had to the course of dealing between debtor and creditor: see, for example, Robertson v Grigg (1932) 47 CLR 257 per Gavan Duffy CJ and Starke J at 267 and Burns v McFarlane (1940) 64 CLR 108 where at 125 Rich, Dixon and McTiernan JJ said that the expression “the ordinary course of business... 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”.
But the reasons of at least Rich and Williams JJ in Downs Distributing Co Pty Ltd v Associated Blue Star Stores Pty Ltd (In Liq) (supra) suggest that, in an appropriate case, regard may be had to the course of dealing between the parties as well as to the course of business in general. The transaction in that case was unusual by any standard. Cheques which had been proffered in payment for goods were dishonoured upon presentation. The debtor had not been trading for very long. It seems to have encountered cash flow problems from an early stage. The creditor became concerned. He was not satisfied with the proposals made by the debtors. In the result, the creditor agreed to advance the debtor an amount sufficient to complete payment of the goods. That advance was secured by the debtor depositing with the creditor goods which the debtor could re-purchase as and when required for cash. The court comprised Latham CJ, Rich and Williams JJ. Latham CJ did not find it necessary to determine the precise meaning of the expression “the ordinary course of business”. He said (at 474):
“Whether that expression is understood in a very general sense or in a sense limited by reference to the particular businesses of the parties concerned, it cannot in my opinion fairly be said that the settlement of a debt between traders by a transaction involving the redelivery of goods sold together with other goods, subject to an arrangement that the debtor may purchase the goods again for cash, is a transaction in the ordinary course of business.”
It is apparent that the Chief Justice did not think that any prior decision of the court precluded reference to the particular course of business between the parties.
Rich and Williams JJ both referred to the view of the majority in Burns v McFarlane which has already been quoted. Having noted (at 476) that the expression “the ordinary course of business” was an additional requirement cumulative upon good faith and valuable consideration, Rich J continued (at 477):
“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.”
These remarks suggest that the expression “the ordinary course of business” presupposes that there is an ordinary course which can be objectively determined. It almost suggests that it is a well-established and readily identifiable fact. In many cases, one can readily determine that the transaction is one which is a relatively common occurrence. For example, the transactions in Robertson v Grigg and Burns v McFarlane were not unusual transactions for the purpose of raising capital and were held to be in the ordinary course of business. But there are other instances where one cannot readily determine whether a particular transaction or series of transactions is in the ordinary course of business. For the reasons given below, while creditors plainly wish to have debts paid promptly, it cannot be said that there is any ordinary course of business as to the time within which debts should be paid. As I understand them, the remarks of Rich J acknowledge that in some cases it is appropriate to consider the usual course of dealing between the parties. For example, when determining whether a payment has been made in “the ordinary and common flow of transactions” or is part of the “undistinguished common flow of business” it may, according to circumstance, be necessary to have regard both to general business practice as well as to the usual course of dealing between the parties.
The observations of Williams J reinforce the conclusion that, in appropriate cases, regard may be had to the usual course of dealing between the parties. His Honour said (at 479-480):
“In the later case [Burns v McFarlane (1940) 64 CLR at 125] it was said in the joint judgment of Rich J, Dixon J and McTiernan J that the expression does not require an investigation of the course pursued in any particular trade or vocation, and that it does not refer to what is normal or usual in the business of the debtor or that of the creditor. It seems to me, therefore, that the expression refers to a transaction into which it would be usual for a creditor and debtor to enter as a matter of business in the circumstances of the particular case uninfluenced by any belief on the part of the creditor that the debtor might be insolvent.”
The question of what was “usual” as between debtor and creditor in a particular case can only be determined by having regard to what are the usual terms of dealing or trading. It is possible to imagine cases where the terms of dealing between the parties depart from ordinary commercial business practices to such an extent that those terms could not be classified as being in the ordinary course of business. That is why regard must be had both to the course of dealing between the parties and to general business practice.
We do not think that this conclusion is inconsistent with any of the judgments in Taylor v White (supra). In that case (at 136) Dixon CJ said:
“I do not doubt that ‘in the ordinary course of business’ refers to ‘business’ as a general conception and is not restricted to the conduct of any particular business such as the business carried on in a shop or merchant’s office or the like, but is referring to the transaction of business as a known and recognised activity pursued by anybody engaged in an attempt to win or earn or ‘make’ money or a living in a systematic or regular way... The time-honoured phrase ‘in the ordinary course of business’ is meant to refer to transactions regularly taking place in a sustained course of activity or some usual process naturally passing without examination.”
Those remarks indicate that “the ordinary course of business” requires consideration of both general business and commercial practices as well as the conduct of a particular business. To like effect are the observations of Windeyer J at 161:
“It postulates, it seems to me, the carrying on of a business of some kind by someone, in the course of which payments are made or received. In its context in s. 95 it attracts attention, I think, both to the business of the payer, if he be in business, and to the business of the payee, if he be in business, so that one asks was the questioned payment one that would be made by the payer and received by the payee in the ordinary course of a business transaction between them. A transaction that amounts to a preference in fact is not to be seen only from one aspect when the application of s. 95 is under consideration. It must be seen in the light of all the circumstances.”
In the same case, Taylor J recognised (at 152-153) that Rich J had in Downs Distributing Co Pty Ltd v Associated Blue Star Stores Pty Ltd (In Liq) carried the matter a little further than the decision in Robertson v Grigg and Burns v McFarlane. He added that the last sentence in the passage from the reasons of Rich J which has been quoted above means “no more and no less than that the transaction will be taken to have been in the ordinary course of business if after examination of the circumstances in which it took place it is found to possess” the characteristics of the ordinary course of business. His Honour’s remarks do not rule out reference to the course of dealing between the parties. The reasons of Menzies J seem to restrict consideration to “ordinary business standards”. To that extent, His Honour appears to be in a minority.
The effect of all of these decision is that, when determining whether a payment has been made in the ordinary course of business, it may be appropriate in certain circumstances to have regard to the usual course of dealing between the parties as well as to general business practice. When dealing with payment of accounts, reference to the usual course of dealing will establish such matters as the pattern of payments. That will be particularly useful where, as here, a running account exists and one issue is whether a particular payment or a series of payments were made in the ordinary course of business.
For these reasons, we respectfully agree with Clarke JA when he said in Harkness v Partnership Pacific Ltd (at 217-218):
“Although the High Court has continually emphasised that the section is concerned with the ordinary course of business generally and not the ordinary course of the business of the parties, it does not mean that the normal procedures and practices of the parties’ businesses and the trade in which they operate, as well as the dealings between them, are irrelevant. Evidence of such matters is necessary so that the court may consider the payment in question in its factual context.
However, it does mean that the particular procedures followed in the parties’ businesses will not determine whether what occurred was in the ordinary course of business. That issue falls to be determined by whether or not the transaction by which the payment was effected arose out of a special or particular situation calling for remark or comment. A payment will fit that description when, for example, the method and timing of the payment, or the motivations which prompted its being made, indicate that it did not take place as part of the ordinary business dealings.”
It follows that we reject the appellant’s submission that the trial judge erred in applying the reasoning in Harkness v Partnership Pacific Ltd.
There is no fixed time for payment for goods or services. The terms of payment will vary not only from industry to industry but also as between different debtors and creditors in the same industry. Some will require cash on delivery for goods or on completion of a service. Others will grant credit, the terms of payment varying from, say, seven days to as much as 90 days. Where credit is allowed and an account is sent, the creditor frequently seeks payment in 30 days. But that cannot be said to be an inflexible or universal practice. A number of factors may affect the time allowed for payment. Thus, there is no single answer which has universal application to the question, what does the ordinary course of business require as to the time within which debts should be paid? All creditors seek prompt payment but common experience shows that terms of payment vary widely. For these reasons, it is necessary, when determining whether a payment is in the ordinary course of business, to have regard to the terms on which the creditor and debtor have been trading as well as to general business practice. It is possible to imagine circumstances where the terms of trading represent such a wholesale departure from normal or general business practice that they could not be said to be terms used in the ordinary course of business. That is likely to be rare. Reference to the ordinary course of business generally will provide a yardstick by which to determine whether the payment in question forms part of the everyday and usual course of dealing between debtor and creditor.
The trial judge was, therefore, entitled to have regard to the time which Bosun took to pay Fabienne’s accounts and generally to the pattern of payment and their terms of trade. The question remains whether the trial judge erred in his consideration of the facts. For the reasons which follow, we do not think he did.
One troubling feature of the dealings between these parties is that Fabienne was not only accepting payment six to seven weeks after invoicing but was allowing the total indebtedness of Bosun to increase. The total debt had increased from $27,652 at the end of September 1988 to $111,543 at the end of February 1990. However, on several occasions the payments made by Bosun exceeded the accounts rendered in a recent period so that, for a time, the total indebtedness of Bosun to Fabienne markedly decreased. For example, by the end of the second week in January 1990, the total debt had fallen to $83,759, a reduction of some $28,000. However, the overall trend was that the total indebtedness increased in that period. The increased indebtedness seems to be the result of the higher number of cars Bosun was sending to Fabienne for service and repair. It did not cause Coory to be concerned. He believed that the volume of work being provided by Bosun would ultimately result in a reduction of the debt. Furthermore, there had been no experience before July 1990 of cheques being dishonoured.
From September 1988 to early March 1990 Fabienne allowed Bosun about six to seven weeks credit. Bosun was, therefore, paying in less than 60 days. That is not an unduly long period for payment. In September to November 1988 Fabienne had allowed Bosun as much as eight to nine weeks credit. Thereafter, Bosun had resumed a pattern of paying accounts six to seven weeks in arrears and continued in that way until March and April 1990. Fabienne therefore had reason to be confident that, although in early 1990 Bosun was again taking more than six to seven weeks to pay its accounts, it would, after a short time, resume paying accounts in that time.
That background indicates that the increase in the time taken for payment of accounts from six to seven weeks (as had previously prevailed) to eight to nine weeks in March and April 1990 would not have been seen as being outside the ordinary course of business between Bosun and Fabienne. Similarly, an increase to ten and eleven weeks in May and June would not be outside the ordinary course of business. A delay of ten weeks (70 days) is at the bounds of reasonableness but is not necessarily an unduly long time. Delays in excess of ten weeks began in June. There was nothing to indicate that Bosun would not be able to return to its prior pattern of payments.
There had been eight weeks in the period from 1990 to the first week in June 1990 when no weekly payment was made. However, that too was not the first such occurrence. In the period from the end of January 1989 to the end of May 1989, there had been eight occasions when no payment had been made in a particular week. Thereafter, until the end of December 1989, payments were made in every week except four. Furthermore, in other weeks when payment was made, Bosun was paying at a substantially higher rate per week than in 1989. The payments were in the order of $13,000 to $14,000 per week and on four occasions had been in excess of $20,000. These higher weekly payments were indicative of an attempt to reduce arrears.
To summarise, Bosun was continuing to pay Fabienne in much the same way in 1990 as before. There was nothing which indicated that the pattern of payments which had been made in earlier periods was being substantially varied or that the payments were out of the ordinary course. These parties had been trading for a long time. Bosun continued to pay on the running account albeit more slowly. Although the delays were increasing in time, there was nothing to indicate that the earlier pattern would not be resumed. There is no reason to interfere with the trial judge’s conclusion that the payments were made in the ordinary course of business.
The case is perhaps borderline. But the effect of the evidence is that, in terms of what was the normal course of business as between the parties, the pattern of payment, the delays in payment, the failure to make payment, during the period in question, were not out of the ordinary course of business. In a very general sense the pattern of payments in the period in question was consistent with the general flow of business between the parties, although during the relevant period the delay in making payment was greater than it generally had been in the past. But we do not consider that, from the point of view of the course of dealings as between the parties, the method and timing of payments was particularly out of the ordinary. It is significant that the payments were made in the course of business as between two parties who had a longstanding business connection, and a connection which involved a considerable amount of business. In those circumstances it is not uncommon to find that one party allows considerable latitude to the other to maintain what is seen as a valuable business connection. There was no change in the method of payment or in the arrangements for the making of payment. All that happened is that delays in making payment tended to increase. There was nothing in particular, beyond that, that called for any comment or examination. There was nothing to suggest that the timing of the payments arose out of any special or particular situation or called for comment.
Good Faith
In holding that the payments were made in good faith the trial judge said:
“For all that the defendant knew, Bosun’s business was booming. Sales had increased dramatically, and a substantial repair and service facility had been established at Magill Road. I repeat the observations that I made in the preceding paragraph in relation to the payments. The payments were on a running account and made whilst Bosun was still supplying vehicles and the defendant was still servicing and repairing them. Delays in payment, even omissions to pay at all, had always been a feature of the relationship. I also repeat my earlier comments about Michael Coory’s state of mind at the time. Although he may have had a level of concern about Bosun’s cash flow problems, he was prepared to tolerate them for the sake of maintaining what was for him a lucrative source of income.”
He also concluded that s122(4)(c) did not require a contrary conclusion since he was satisfied that, in the circumstances in which the payments were made, there was no reason for Fabienne to expect, according to the standards of an ordinary reasonable man, that Bosun was unable to pay its debts as they became due from its own money and that the effect of the transaction would be to give Fabienne a preference over other creditors. The appellant does not submit that the judge applied a wrong test. Instead, he challenges the finding of fact, asserting that Fabienne had not discharged the burden of proving that it received the payment in good faith.
The test for determining whether a payment has been received in good faith involves both subjective and objective elements. As Barwick CJ noted in Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266 at 287:
“The existence of knowledge or suspicion of insolvency negatives good faith: and the knowledge of circumstances from which ordinary men of business would conclude that the debtor is unable to meet his liabilities is knowledge of insolvency.”
That observation identifies both the subjective and objective tests. The subjective test is whether the creditor knew or had reason to suspect that the debtor is insolvent. That is identified in the first part of the passage just quoted. The objective test is expressed in s122(4)(c) and is referred to in the second part of that passage. Thus, if facts are proved which lead to the inference that the creditor knew or had reason to suspect insolvency and that the effect of the payment would be to give the creditor a preference over other creditors, the payment would not be received in good faith. Latham CJ explained the objective test in these terms in Downs Distributing Co Pty Ltd v Associated Blue Star Stores Pty Ltd (In Liq) (supra) at 475 to 476:
“In my opinion a transaction falls within sub-s.(4), so that a creditor is excluded from the category of a creditor dealing in good faith under sub-s.(2)(b), if, whatever the creditor may think or believe with respect to the circumstances of the transaction, those circumstances are such as to lead to an inference by the court that there was reason to suspect according to the standards of an ordinary reasonable man that the debtor was unable to pay his debts as they became due, and that the effect of the transaction would be to give the creditor a preference over other creditors.”
The content of the suspicion was considered in Queensland Bacon Pty Ltd v Rees (supra) where (at 291 to 292) Barwick CJ said:
“In the first place, to satisfy s.95(4) the circumstances of the voided payment must be such as to lead to the inference that the creditor knew or had reason to suspect the fact of the debtor’s insolvency. It is not enough that the circumstances are such as to lead to the inference that the creditor had reason to suspect that the debtor might be insolvent. The words of the sub-section, to my mind, are quite clear that it is the fact of actual insolvency which must be known or suspected. To be insolvent, the debtor must be unable, as distinct from being merely unwilling, to pay his debts as they fall due. It is one thing to suspect a man’s solvency in the sense that one doubts whether he is solvent or insolvent. It is another thing to suspect that he is in fact insolvent. It is of the latter suspicion that s.95(4), in my opinion, speaks.”
In the same case Kitto J said (at 303):
“In the first place, the precise force of the word “suspect” needs to be noticed. A suspicion that something exists is more than a mere idle wondering whether it exists or not; it is a positive feeling of actual apprehension or mistrust, amounting to “a slight opinion, but without sufficient evidence”, as Chambers’s Dictionary expresses it. Consequently, a reason to suspect that a fact exists is more than a reason to consider or look into the possibility of its existence. The notion which “reason to suspect” expresses in sub-s.(4) is, I think, of something which in all the circumstances would create in the mind of a reasonable person in the position of the payee an actual apprehension or fear that the situation of the payer is in actual fact that which the sub-section describes - a mistrust of the payer’s ability to pay his debts as they become due and of the effect which acceptance of the payment would have as between the payee and the other creditors.”
Thus, the suspicion must be suspicion of actual, not merely possible, insolvency.
Section 122(4)(c) says nothing about onus of proof: S Richards & Co Pty Ltd v Lloyd (1933) 49 CLR 49 at 60; Queensland Bacon Pty Ltd v Rees (supra) at 287. It does not, therefore, extend the onus created by s122(3). The position was explained by Clark JA in Harkness v Partnership Pacific Ltd (supra) at 214 in these terms:
“In my opinion, s122(4)(c) is not concerned with the onus of proof. A creditor who seeks to bring itself within s122(2)(a) bears the onus of establishing that it was, for instance, a payee in good faith and for valuable consideration in the ordinary course of business (s122(3)). Once evidence is led on that issue a question will arise whether, in the light of the totality of the evidence, the inference of which s122(4)(c) speaks should be drawn. There are two stages to this inquiry. The first is to determine what evidence should be accepted - this is also a necessary inquiry in considering the s122(2)(a) issue. The second is to decide whether, in the light of that evidence the inference should be drawn that the creditor knew or had reason to suspect that the debtor was unable to pay its debts as they fell due from its own money and that the effect of the payment would be to give it a preference. If the court does draw the inference the stated consequences flow.”
Where the creditor is a corporation, persons whose states of mind are relevant to the question of good faith are those officers, employees or agents of the organisation who are concerned in an executive capacity in the transaction leading to the receipt of the moneys: Spedley Securities Ltd (In Liq) v Western United Ltd (In Liq) (1992) 27 NSWLR 111 at 118 to 119 applied in Harkness v Partnership Pacific Ltd (supra) at 210.
The liquidator submitted that the trial judge should have accepted the evidence of Mr McKeown that Bosun had a long term cash flow problem. That evidence, when considered with the finding that Mr Coory may have had some degree of concern about Bosun’s cash flow problems, should, it was submitted, have caused the trial judge to investigate for how long the concern had existed. The submission must be rejected since it attributes too much to the finding that Mr Coory may have had some concern about Bosun’s cash flow problems and it fails to have regard to all of the relevant facts and circumstances.
The period from April to June 1990 when Bosun was delaying payment of Fabienne’s accounts for increasing periods of time coincided with the time when Bosun opened its new workshop. Bosun had purchased the premises, fitted them out and established a new workshop employing a number of mechanics. Those steps are not indicative of a cash flow problem. The reasonable person would conclude that they suggested instead a successful and expanding business. That is what Mr Coory believed the business of Bosun to be particularly given the increasing number of vehicles he had been asked to service. In addition, the establishment of the workshop would be consistent with the fact that a financial institution had sufficient confidence in the future of Bosun to lend it the funds required to establish this new large workshop. Mr Coory said that he was not concerned that the payments had slowed because he believed that the delay in payment resulted from the fact that Bosun had no further need of Fabienne’s services once it had opened its own workshop. As he said, once Bosun had opened its own workshop “I was secondary to their cause” and their attitude was “we don’t need him any more”. That is quite an understandable reaction on his part. The fact that Bosun had opened its own workshop belied any suggestion of insolvency.
The liquidator also submitted that the trial judge had no regard to the state of mind of Mrs Coory. But the evidence showed that, in the particular circumstances of this case, Mr Coory was the directing mind of the company and that Mrs Coory had very little part to play in decisions of this kind.
The fact that the running account gradually increased from the end of September 1986 to March 1990 is not, when viewed against the overall pattern of payment, evidence of a lack of good faith. As already mentioned, it is explained by the increased volume of work in that period and by the fact that in 1990 Bosun had increased the amount of its weekly payments. It is apparent that Coory believed that the price Fabienne had to pay for the business of Bosun was to give it extended credit terms. It had done so since 1982-1983, that is to say, for up to eight years before the financial collapse of Bosun. There is nothing which shows that in that period Coory believed that Fabienne was getting any preference over other creditors. The lengthy period over which Fabienne gave that extended credit belies that conclusion. Nor is there anything which points to the inference that, in the months April to July 1990, Coory knew or suspected that Fabienne was getting a preference. Coory simply believed that Bosun was adhering to its existing practices of being late in paying Fabienne’s accounts.
Mr Coory’s state of mind about Bosun’s cash flow problems might be characterised as a suspicion of insolvency. But it is no more than that because Bosun was paying Fabienne in a very similar manner to the pattern of payments over a long time. Moreover, the payments in June were of similar amounts to the payments earlier in 1990. There is no objective reason to indicate a want of good faith or preference.
Although the indebtedness of Bosun gradually increased from $27,652.82 at the end of September 1988 to $129,040.28 at the end of March 1990, that did not necessarily mean that Fabienne would have been concerned that Bosun could not pay its accounts as they fell due. In cross-examination Mr Coory said that he was not concerned at the overall level of indebtedness because the business which Bosun had supplied had substantially increased. Bosun was, he said, sending work at the rate of about $10,000 to $15,000 per week which had caused the account to increase. That answer might explain the short term increase. It does not explain the gradual increase over a period of about two years. But, if the deeming provision in s124(4)(c) is to operate, it must be possible to infer that Fabienne knew or had reason to suspect that the payments it was receiving gave it a preference over other creditors. There is no evidence upon which such an inference could be drawn. As already mentioned, the fact that the level of work to Fabienne increased and later the establishment by Bosun of its own workshop indicated that Bosun was trading successfully and profitably.
For all of these reasons, it was open to the trial judge to conclude that Fabienne did not know or have reason to suspect that Bosun was insolvent and that, viewed objectively, the facts did not show that a reasonable person in the position of Fabienne had reason to suspect that Bosun was insolvent and the effect of the payment would give Fabienne a preference.
The appeal must, therefore, be dismissed.
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