Sims v Celcast P/L No. DCCIV-97-87 Judgment No. D3665

[1997] SADC 3665

Court

DISTRICT COURT OF SOUTH AUSTRALIA

Judgment of His Honour Judge Kitchen

Hearing

07/07/97 to 09/07/97.

Catchwords

Plaintiff, the liquidator of a company, sought declaration, under the Corporations Law, that a payment by the company to the defendant was an unfair preference, an insolvent transaction and a voidable transaction pursuant to the Corporations Law and an order that the defendant pay that sum to the plaintiff. The defendant admitted payment to it by the company within the period of six months preceding the commencement of the winding up, that at the time of the payment the company was insolvent and the payment resulted in the defendant receiving more of an unsecured debt than it would have received if the transaction were set aside and the defendant were to prove the debt in a winding up. Finding that the payment was an insolvent transaction, it was a voidable transaction and the plaintiff entitled to the order sought unless the defendant can obtain the benefit of section 588FG(2) of the Act. HELD that the defendant had proved the matters in section 588FG(2) - plaintiff's application dismissed.

Materials Considered

• Corporations Lawsections 95A, 588FA, 588FC, 588FE(2) 588FF, 588FG(2);
• Bankruptcy Act section 122(2)(a), referred to.
• Downey v Aira Pty Ltd (1966) 14 ACLC 1068;
• Spedley Securities Ltd v Western United Ltd (1992) 27 NSWLR 111;
• Olifent v Australian Wine Industries Pty Ltd (1996) ACSR 185;
• Pegulan Floor Coverings Pty Ltd v Carter (Supreme Court of South Australia, judgment S6299, 13 August 1997, unreported);
• Queensland Bacon Pty Ltd v Rees (1965-6) 115 CLR 266;
• Laws v Australian Broadcasting Tribunal (1990) 170 CLR 70, applied.

Representation

Plaintiff ANTHONY MILTON SIMS:
Counsel: MR P SLATTERY - Solicitors: FINLAYSONS

Defendant CELCAST PTY LTD:
Counsel: MR D KENNELLY - Solicitors: KNOX &; HARGRAVE

DCCIV-97-87

Judgment No. D3665

25 August 1997

In The Matter of ERMAYNE PTY LTD (IN LIQUIDATION)

(Civil)

SIMS v CELCAST PTY LTD

Civil

Judge Kitchen

The plaintiff is the liquidator of Ermayne Pty Ltd which was ordered to be wound up on 22 August 1995.

Ermayne Pty Ltd was formerly named Leal Boss Computer and Office Supplies Pty Ltd.I will refer to it as "Leal".

In this action the plaintiff seeks a declaration under the Corporations Law ("the Law") that a payment of $54,000 by Leal to the defendant on 31 March 1995 was an unfair preference, an insolvent transaction and a voidable transaction pursuant to the Law and it seeks an order, pursuant to section 588FF of the Law, that the defendant pay that sum to Leal.

The defendant, in its defence, admitted the payment to it of $54,000 by Leal on 31 March 1995 and that that payment was made within the period of six months preceding the date, 2 August 1995, of the commencement of the winding up of Leal.

At the trial the defendant, by its counsel, further admitted that at the time of the payment Leal was insolvent (section 95A of the Law) and the payment resulted in the defendant receiving from Leal in respect of an unsecured debt more than the defendant would have received from Leal if the transaction were set aside and the defendant were to prove the debt in a winding up (section 588FA(1)(b)).I find those matters have been established.It follows that the payment was an insolvent transaction within section 588FC, it was therefore a voidable transaction within section 588FE(2) and the plaintiff is entitled to the order he seeks unless the defendant can bring itself within section 588FG(2).That is the defence pleaded by the defendant to the plaintiff's claim.

To obtain the benefit of section 588FG(2) a creditor must prove:

"(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 ground 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."

The plaintiff conceded that the defendant provided valuable consideration "under the transaction", that is for the payment to the defendant.

Counsel for both parties referred to Downey v Aira Pty Ltd (1996) 14 ACLC
1068, a judgment of Ashley J in the Supreme Court of Victoria in which His Honour considered and interpreted section 588FG(2), he noting that there appeared to be no prior authority as to the meaning of its provisions.

Ashley J reviewed the authorities concerning the protection given by section 122(2)(a) of the Bankruptcy Act to the rights of a payee "in good faith and for valuable consideration and in the ordinary course of business" and the provisions of section 122(4)(c) of that Act enlarging upon the concept of good faith observing that the concept in that statutory setting had been held to entail both subjective and objective considerations.He concluded that in section 588F9(2) (pp1075-1076):

". 'good faith' now contains no objective element;what was previously the objective element of 'good faith' is expressed in sub-s(2)(b);

. the former objective element of good faith is now unambiguously limited to suspicion - as contrasted with knowledge - of insolvency;

. 'insolvency' - a term defined in s95A - stands in place of the two matters previously referred to in s122(4)(c)(i) and (ii).The definition of insolvency largely replicates the old s122(4)(c)(i).There appears to be no replication of the old s122(4)(c)(ii);

. sub-section (2)(b)(i) refers both to suspicion of insolvency at the time when the creditor became a party to the transaction, and to suspicion that the debtor might become insolvent by reason of the transaction itself;

. it is now clear that the creditor must prove both the subjective and objective elements of what were the old s122(2) and (4).That is evident not only from the opening words of s588FG(2), but also from the formulation of sub-paragraphs (b)(i) and (ii);

. the requirement in s122(2) that a payee show that payment was made 'in the ordinary course of business' has not been replicated.

...

... Two other matters require comment.First, counsel for the applicants submitted that, by requiring the creditor to prove a negative, a heavier burden was imposed upon the creditor by sub-s(2)(b) than was imposed upon a creditor under s122(4)(c) (assuming that the creditor carried a burden of proof under the former provision).That conclusion, he submitted, was reinforced by the presence of both sub-paragraphs (b)(i) and (ii).Second, an issue arises as to the distinction - if any - between the matters which a creditor must prove under sub-paragraphs (i) and (ii).

I doubt, though I find it unnecessary to resolve the matter in this case, that the effect of sub-s(2)(b) is as the applicants' counsel contended.The ambit given the words 'reason to suspect' in s122(4)(c) by Kitto J in Queensland Bacon was broad.

As to the second of the matters, it is no doubt right to say that all the words of a statute should be given a meaning, if that is possible.I find it difficult, however, to see how a different result could obtain from the operation of sub-paragraphs (b)(i) and (ii).The question - has the creditor proved that he had no reasonable grounds for suspecting insolvency? - requires an objective consideration of the circumstances.Once that is done, the answer to the question would seem to be 'no' if, objectively, there were no reasonable grounds - regardless whether the creditor was a reasonable or a quite unreasonable person.If that be so, then sub-paragraph (b)(ii), though expressed conjunctively, would seem to be otiose.What can at least be said is that sub-paragraph (b)(ii) makes it abundantly clear that proof of a negative - upon an objective consideration of the circumstances removed from the creditor (but not the creditor's circumstances) - is required before the creditor can make out a sub-section (2) defence."

The plaintiff handed up a book of documents (exhibit P2).The defendant accepted that they were relevant and admissible.They comprise, inter alia, correspondence between Leal and the defendant, or the solicitors of one or other of them, statements of account, bank statements, proceedings in New South Wales between the defendant and Leal and the directors of Leal and sundry other documents, to some of which it will be necessary to refer.

Stuart McNair was recruited by the defendant as its General Manager in April 1994.David John Press had been the defendant's Commercial Manager for four years before he was appointed in May 1994 to the position of Secretary and Financial Controller of the defendant.Both gentlemen gave evidence in the defendant's case.They were the only witnesses called by either party.

The defendant is based in New South Wales.Its business is in what was described as "presentation material" comprising document binders, transparencies, laminates and other stationery items most of which it imports in a semi-processed form, repackages and sells to wholesale or retail stationers in Australia.Until the month of February 1995, Leal was a wholesale/retail stationer based in South Australia to which, for several years, the defendant had sold its products.Leal, whose purchases from the defendant had increased over the years, accounted for in the order of 30-35% of the defendant's sales in South Australia, the value of its purchases being eight or nine times greater than those of the defendant's next largest customer in South Australia.

On joining the defendant Mr McNair travelled to each State to meet some of the defendant's customers.The defendant's Manager in South Australia was Bruce Heffernan.Mr Heffernan introduced Mr McNair to Declan Ryan the, or a, Managing Director of Leal.Mr McNair said, and I accept, that he was told by Mr Ryan Leal's sales were some $11 million or $12 million per annum and it was the largest supplier in South Australia.Mr McNair said that he judged from what he was told and was shown that Leal was "going ahead".

At the end of August 1994, Mr Heffernan resigned from the defendant and opened in South Australia a branch of Meter Office Products.Meter Office Products was a strong competitor of the defendant in the eastern States selling the same kind of products.Meter had been established by a former Director of the defendant.Mr McNair foresaw that Meter in South Australia would compete for the business of the defendant's customers including Leal.

Mr McNair described that beginning in late 1993 there had been an industry-wide move by the larger wholesale stationers to increase the size of their businesses by the acquisition of State based retail stationers and thereby expand from being suppliers in the market of only one State or region to compete in other States.

Mr McNair described debtors to fall into one or other of two categories.The first are those to whom the creditor sells a significant part of the debtor's supplies.The collection of their debts, Mr McNair said, is relatively easy because the debtor needs the creditor's products.The other group comprise those to whom the creditor's sales are but a small part of the debtor's supplies and "they're virtually dictating to you what they will buy, when they are buying and when they will pay it.There is virtually no leverage on them to get them to pay, particularly in the instance where there is a number of alternative suppliers of the same product."

By the end of August 1994 Leal's debt to the defendant totalled $106,670 for purchases including those made in that month.Because of what Mr McNair described as the volume of business the defendant did with Leal, over time Leal's trading terms were payment of the defendant's account in 90 days, compared with 30 days for other smaller customers of the defendant.As I understand the evidence of Mr Press, Leal had been progressively extending the time of payment for purchases from the defendant so that some of its debts to the defendant were 120 days old which Mr Press saw as Leal using the defendant's credit as a source of funds for Leal's operations.It is apparently a common device utilized by some debtors.Mr Press identified one of the defendant's customers, with whom it continues to trade, that is notorious for using this technique.

In September 1994 Mr McNair called on Mr Ryan in Adelaide.Mr McNair said he was concerned that Leal may source its supplies from Meter, recently established in Adelaide by Mr Heffernan with whom Ryan had had a good relationship when Heffernan managed the defendant in Adelaide.Mr Ryan told Mr McNair that Leal had no reason to do that.Mr McNair's evidence is that his concerns about losing business to Meter were not assuaged - understandably so, as it transpired, for Leal's purchases in September 1994 were some $9,000 compared with purchases of between $20-30,000 in each of the months May to August.In November Leal purchased goods to the value of a few thousand dollars and thereafter nothing more from the defendant.

Mr Press related that the defendant's Manager in Melbourne had been "poached" by a competitor in 1993 and the defendant lost to that competitor a customer whose purchases from the defendant had amounted to $1m per annum.

In the same meeting, in September 1994, Mr McNair took up with Mr Ryan the state of Leal's account with the defendant.Leal's cheque for $31,399.32 (the sum of the May 1994 purchases) was dishonoured when presented for payment on 6 September 1994.Mr McNair said that Mr Ryan described that Leal was acquiring premises and for that purpose re-arranging its finances.Mr McNair said he accepted that and to accommodate Leal and to do what he (McNair) could to preserve Leal as a customer but also to bring back Leal's account to 90 days he told Mr Ryan he wanted a scheduled arrangement of payments to achieve a return to 90 days trading.

On 27 September 1994 Leal wrote to the defendant proposing an arrangement to pay the debt for purchases in May and June by four payments, the first on 30 September 1994 and the last on 28 October 1994.The letter is cast in terms that post-dated cheques for the payments would be forwarded if the proposal was accepted by the defendant.It was not accepted.The defendant responded on the same day setting out the "aging" of Leal's debt to the defendant, proposing four payments on the dates that had been nominated by Leal but of different amounts aggregating more than Leal had offered "as a sign of your good faith and commitment to reduce the debt to a more manageable level".The letter continued:

"In addition we will impose a limit on purchases of $10,000 for the month of October 1994 once we have received the instalments 30 September and 7 October. Any purchases in excess of this limit will be on a cash sales basis.

By 31 October 1994 we will also have received from you an undertaking of further payments to bring the balance of the account into our normal trading terms which is payment within 30 days of the month of invoicing.

Should you default on any of the above instalments we then would consider you to be in default of the arrangement and the total debt becomes due and payable within seven days of the date of the default.After that time it would be our intention to take legal action to recover the debt.

Please acknowledge your acceptance of these terms and conditions by close of business 28 September 1994."

The letter was signed by Mr Press.Mr Press said he was told by Mr Hinde, Leal's accountant, that the payment by instalments was to protect Leal's cashflow.Mr Press explained in his evidence that the threat of legal action was to spur Leal, he believing that Leal was simply delaying.

Leal replied on 28 September 1994 with a proposed five payments in the same time-frame:it was:

"We are aware that you are keen to reduce the debt as soon as possible in reference to your counter-offer of $42,264 to be repaid in 2 weeks.We are also very mindful of the fact that we do not want to over commit and be in default of an agreed payment plan.We submit the following:-

$10,00030 September 1994

$10,0007 October 1994

$11,399.32 14 October 1994

$11,704.07 21 October 1994

$12,00028 October 1994

There are also two issues which we need to address at the moment.Firstly the purchase rebates for last year have not been taken into account in this proposal.We are aware that you intend to reduce our current debt by the rebate, of which we would like to discuss when the amount is finalised.

Secondly the amount outstanding of $865.51 in your 150 days + is currently being itemised.A fax will be forthcoming in regard to what is required to clear this amount."

On 29 September 1994 the defendant accepted Leal's proposal, required the provision of Leal's financial statements to 30 June 1994, rejected the claimed entitlement to a rebate and reiterated that in the event of any default in making the agreed payments the defendant would "proceed with legal action to recover all the moneys due".

Leal's cheque for the scheduled payment due on 30 September 1994 was dishonoured on 4 October 1994.It was paid when re-presented.Leal wrote, on 7 October 1994, to explain that the dishonoured cheque was a consequence of incorrect transfers between its bank accounts, and on the same day Leal paid the instalment due on that date.The third payment, due on 14 October 1994, was paid on time.The fourth payment was paid four days late after a reminder from the defendant.The fifth payment was made on 4 November 1994.I accept the evidence of Mr McNair and Mr Press that the lateness of some payments did not overly concern them.

In a statement of account in the month of October 1994 which was sent to Leal the total amount outstanding is shown at $85,386.49.

On 4 November 1994 Leal proposed payment of the July 1994 outstanding account ($27,778.13) by three instalments on 18, 28 and 29 November 1994.The first instalment was not paid on 18 November 1994, but on 28 November 1994 Leal paid $15,000 explaining in a facsimile dated 29 November 1994 "the shortfall of $5,000 and today's promise of $7,778.13 will unfortunately not be paid today. At this stage it will be Tuesday 6 December".The total amount outstanding was $61,862.49.On 5 December 1994 the defendant wrote to Leal (the letter was signed by Mr McNair) dealing with and again rejecting Leal's claim to a rebate for the period to 30 June 1994 but offering a rebate for 94/95 provided accounts were paid within 60 days, the rebate to be paid by the defendant when Leal paid its accounts, and also offering a special incentive payment of $6,500 for advertising jointly agreed upon with Leal.The letter set out the aging of the outstanding debts of $61,862.49 and continued:

"This is after applying the $15,000 payment made on 28 November 1994.There appears to be a continual problem of getting paid based on Leal Boss' promises and commitment.The inability to make payments to us based on your own payment schedule causes us great concern.

Previously I have requested that your financial controller communicate regularly so that we can see evidence of your intention to pay our account.

I believe that adequate time has been given to bring your account up to a current state.Consequently I require the following amount:

June$1,171.56

July $12,788.11

August $22,597.42

September $9,232.75

TOTAL $45,789.84

to be paid by close of business 14 December 1994 otherwise we will commence proceedings under the Corporations Law without further notice to collect the debt."

In my view the offer of rebates and an incentive payment is entirely consistent with the evidence of Messrs McNair and Press that they did not suspect and had no reason to suspect Leal was insolvent.Mr McNair said the reference in his letter to the Corporations Law was prompted by a form of statutory demand he had seen;it is exhibit P2 No 22.Mr McNair said he understood that that document had come from a Director of the defendant, a Mr Berry.Mr McNair agreed that exhibit P2 No 22 is a precursor to proceedings to wind up a company.The exhibit has written on it, in Mr Press' handwriting, the name Warren Wells and Associates.That is the firm Mr McNair said he went to consult when Leal did not respond to the letter dated 5 December 1994 requiring payment of $45,789.84 by 14 December 1994.

Warren Wells and Associates is a firm of solicitors in Sydney, which Mr McNair said he understood to specialise in debt collecting.Its principal is Mr Warren Wells.

Mr McNair said:

"We had come to the conclusion, as I said earlier, that the relationship was over and that no amount of inducement or negotiation on our part was going to change that, so it was very simply a matter of asking Mr Wells to issue whatever the appropriate paperwork was in order to collect the debt, and I was aware that there was a period of time between the issuing of the claim by which the other side is required to respond." (p139)

He was asked about his familiarity with legal proceedings:

"Q. You were familiar generally with the process of issuing proceedings and serving them and then defences being filed, if there are defences.

A. I was aware in a general sense that there was a claim made, a period by which the other party had to respond.I was aware that in certain circumstances parties will put in a defence so that the wind up position will put in a defence so that the wind up position is not successful, and I was also aware that in some circumstances by the issue of such a claim the debt is paid, because the other party is simply taking advantage of you and trying to spin out payments for as long as possible and that the only way that you can really get a serious result is by, I suppose, the ultimate threat of a wind up.

Q. This was all directed to winding up, wasn't it.As I understand your answer what you are saying is that you needed to issue these proceedings preparatory to a winding up if that became necessary.

A. No.

Q. Because you were prepared to go that far.

A. If it came to that point we would obviously continue to go through the process."

He said he gave instructions to Mr Wells to collect the debt, providing him with "a statement of the account that was owing and the details associated with that".He was unsure whether he gave Mr Wells the letters and documents that had passed between the defendant and Leal.

On 19 December 1994 Mr Wells issued proceedings on behalf of the defendant against Leal and its Directors, Mr Ryan and Mr Simon Winter.Against Leal the action was in the common form of an action in debt claiming $60,985.08.The claim against Messrs Ryan and Winter alleged misleading or deceptive conduct on their part, particulars of which included that when Leal entered into the agreement with the defendant for "goods and/services provided by the" defendant, Messrs Ryan and Winter held out that Leal would be able to pay for those goods and services and at the time of that holding out they "well knew that [Leal] was and would be unable to meet its debts".It further alleges that they were negligent, particularised to include that "having a suspicion that [Leal] was insolvent did not cease the trading of [Leal]" and "having a suspicion that [Leal] was insolvent did not undertake a course of refusing to commit [Leal] to any further contract that would require [Leal] to make payment of moneys".

A reader of that statement of claim might infer that the relevant officers of the defendant had evidence, or if not evidence at least some reliable information, upon which they suspected Leal was insolvent.Another view is that it is the extravagant claim of the draftsman.The plaintiff asserts, and the cross-examination of Messrs McNair and Press was directed to trying to establish, that it was the former, or at least the apparent state of mind of the draftsman, the defendant's solicitor, should be inferred to be the state of mind of the defendant.In my opinion that latter proposition cannot be entertained.In Spedley Securities Ltd v Western United Ltd (1992) 27 NSWLR
111 McLelland J discussed the "good faith" requirements in section 122(2)(a) of the Bankruptcy Act as enlarged upon in subsection (4)(c).He wrote (at p118):

"In the case of an organisational payee such as a corporation the persons whose state of mind is relevant to the question of 'good faith' for the purposes of subs(2)(a) is those officers, employees or agents of the organisation who were concerned in an executive capacity in the transaction whereby the payment was received."(my emphasis)

Mr Wells was not, as I find, an agent of the defendant in any executive capacity.

Mr McNair said, and I accept, that he did not see the statement of claim until the plaintiff commenced these proceedings against Celcast, but Mr Wells did send to him a copy of the defence.He said he (Mr McNair) dealt with Mr Wells until about mid-February 1995 then Mr Press "handled some of the discussion with Warren Wells and I handled others".

Mr Press was aware that proceedings had been issued against Leal and its Directors:"The solicitor who was handling the matter for us, was trying to join as many people as possible".He said the Managing Director of the defendant had "the ultimate responsibility to make these decisions and would do so".

On 12 January 1995 Leal and Messrs Ryan and Winter filed a defence in the action against them.It was obviously not drawn by a solicitor.It denied the claim on the "grounds" that the rebate Leal asserted it was entitled to had not been "accounted for", that there had been a mis-allocation of payments made by Leal with the result a portion of the debt claimed was not due and that "valid credit requests" by Leal had been denied by Celcast.

On 24 January 1995 the defendant received by facsimile from Leal a letter dated 23 January 1995 signed by Messrs Ryan and Winter.It reads:

"Dear Supplier,

Leal Boss are proud to announce that they have sold their business to Pedersen Contact effective from 6 February 1995.

Leal Boss have enjoyed a dominant market share in this State and it is anticipated that this will only be enhanced by the strong national and local business enjoyed by Pedersen Contact.In addition, the sale will enable significant economies of scale enabling South Australia to be one of the major contributors to the Pedersen Group.

All sundry and trade creditors of Leal Boss in existence at the 6th February will be paid in full.It is anticipated that this process should be complete by the end of March as the debtors of Leal Boss are collected.

Leal Boss wish to thank all the suppliers of both services and products, for their support over the past four years and trust that you will provide the same care and attention to the new owners."

Mr McNair said he thinks that when he returned from leave in late January 1995 he spoke over the telephone with Mr Wells about that letter, but he does not recall what he said although he accepts that a letter Mr Wells wrote to the Directors of Leal on 2 February 1995 was not likely to have been written without his instructions.Mr McNair said he did not see the letter before it was sent, and does not remember whether he saw it later.

Mr Press said he noted the words in the letter from Leal to the effect that all creditors would be paid in full:"It was an immediate signal to me that they had had the cash all along, the ability to pay all along, for purposes to suit their own ends, decided not to".

The letter from Mr Wells dated 2 February 1995 stated that a certificate of judgment would be applied for "tomorrow", and referred to the facsimile commenting "Leal Boss is about to divest itself of its only real assets (its business) to Pedersen Contact".It went on to inform the addressees that the writer had been instructed to request the information identified in the letter (it included what moneys or remuneration in kind was to be received and by whom from the sale, which bank account moneys were to be paid into, who was to control the account, whether payments from Leal's debtors were to be dealt with in that way and what other assets were to be disposed of) and requiring an undertaking from Leal and the Directors in the form of that attached to the letter, failing receipt of which by 4.00 pm on 2 February 1995 an injunction would be sought restraining Leal from dealing with any of its assets.The thrust of the requested undertaking is the opening of a bank account into which all moneys derived from the sale of any of Leal's assets are to be paid, that funds from the accounts may be withdrawn only against the signatures of a Leal representative and a representative of all Leal's creditors and that any funds withdrawn are to be applied to pay creditors, in effect pari passu.

There is an identical letter in exhibit P2 (Item 31) dated 1 February 1995.I assume it was the latter which was sent, by facsimile, in view of the time specified for the demanded response and that Mr Winter replied by facsimile dated 2 February 1995 on two occasions, the second to the effect that the defendant's claim was disputed "that Leal was selling its business and the funds raised will be more than adequate to meet all outstanding creditors including those in dispute", that the application for an injunction would be "vigorously" defended and that if, after considering the defence, the defendant wished to have an "intelligent settlement discussion .... I am sure that an amicable resolution can be achieved".

On 6 February 1995 Leal's solicitors (Messrs Johnson Winter & Slattery ("Johnsons")) entered the arena and on 8 February 1995, the day after Pedersen paid for the purchase of Leal's business (it is agreed that that occurred on 7 February 1995), Johnsons wrote to Mr Wells maintaining that Leal was entitled "to receive a 3 per cent rebate on the gross value of purchases" from the defendant and offering payment of $54,000 by bank cheque by no later than 10 February 1995 in full and final settlement.With that letter was a copy of a note dated 16 December 1994, signed by Mr Heffernan, confirming he had told Mr Ryan that the defendant would participate in the rebate programme proposed to him by Mr Ryan about eighteeen months earlier, and that he (Mr Heffernan) had been "at fault for not following it up".

Mr Wells responded the same day disparaging the reliance on Mr Heffernan for the asserted rebate and stating "we are now faced with a proposition of your client converting its assets into cash and making no attempt to meet its debts ... your client has now sold the only asset of the company";he required confirmation by 9 February that a bank cheque for $64,034.01 would be delivered to Mr Wells' office on 10 February 1995.There was no response.On 14 February 1995 Mr Wells wrote to inform Johnsons of his intention to sign judgment and to serve "a section 459E notice" on the defendant unless Johnsons would accept service.

It appears the solicitors discussed the matter on 15 February 1995 following which Mr Wells wrote to Johnsons to the effect that it appeared to him "there was no conflict between the parties as to the core debt ... of say AUD$54,000 ... [which] my client will not accept ... in full settlement ... unless and until the question of Heffernan's involvement in the rebate is resolved ... (as to) the issue of the rebate, the onus or burden of proof of proving its existence is with your client".Mr Wells proposed a means to try to resolve the rebate issue and went on "There is no doubt that the core debt is owed. There is no doubt that your client has money to meet it.My client's expectations are that that portion of the debt be paid immediately.Please provide me with an open letter advising whether or not it is your client's intention the core debt and when [sic].Unless we receive such an open letter before close of business today, our client will have to address the issue of injunctive relief to contain the assets of Leal Boss for payment to creditors".

The question of Leal's entitlement to a rebate apparently continued to occupy the attention of the parties and their solicitors.Mr Heffernan, to whom Mr Press spoke on 8 February 1995 (Mr Ryan also probably spoke to Mr Heffernan at about the same time), wrote again to Mr Ryan on 15 February 1995 setting out his recollection concerning the rebate.At least in the minds of the Directors of Leal the question of the rebate was still a live issue.

Mr Wells received no response to messages he apparently left with Johnsons and on 27 February 1995 he prepared and despatched to Leal a "creditor's statutory demand for payment of debt" under the Corporations Law claiming $60,985.08, a demand which was verified by a brief affidavit sworn by Mr McNair.

On 8 March 1995 Mr Wells wrote to Johnsons.His letter set out to refute at some length Leal's claimed entitlement to a rebate, deprecating the credibility of Messrs Heffernan and Ryan, asserting that the repeated claim to be entitled to a rebate was an attempt by Mr Ryan "to steal" the alleged sum of it from the defendant and stating that the defendant "has an intractable attitude and requires every cent to be paid and paid forthwith ... I have issued bankruptcy notices.The section 459E notice is shortly to expire ... unless we receive a cheque forthwith we will proceed with both of these enterprises mercilessly. It is impossible for my client company directors to understand why your clients have adopted a most fraudulent position".Mr Wells' way of expressing himself, in this letter in particular, well justifies Mr Press' observation that Mr Wells is "a very flowery type of person when it comes to use of language".

On 27 March 1995 Johnsons sent to Mr Wells Leal's cheque dated 24 March 1995 for $54,000 "in full and final settlement".Johnsons acknowledged, on 30 March 1995, that the condition of tender of the cheque was an error on their part, it should have been tendered unconditionally.On that basis the defendant obtained payment of the cheque.Mr McNair said that the defendant took no further action against Leal concerning the difference between what the defendant claimed and the sum of $54,000 it had received from Leal, until it filed with Leal's liquidator a proof of debt for the difference.

It seems from Mr McNair's evidence that he was content to leave with Mr Wells the pursuit of Leal for payment of what the defendant claimed.He said that he did not see the correspondence exchanged between Mr Wells and Leal's Directors or solicitors:he said he was generally aware of events but he relied on Mr Wells to keep him informed and Mr Wells would sometimes propose two or three options as to the next step.I accept his evidence.

Mr McNair's evidence is that on learning of the sale to Pedersen Contact he recalled in his own mind the acquisition of a company by the defendant in August 1994 and the "due diligence" investigation made of the acquired company before purchase, a process that took some months:

"... so one of the [re]actions that I had, on seeing the Leal Boss notice, in terms of the purchase by Pedersen Contact, was to recall the issues that I had gone through in buying this other business, and Pedersen Contact being the size of company that they are, I was convinced in my mind that they would have acquired the same processes and somewhere along those lines they would have probably done a due diligence in order to satisfy themselves of the financial accuracy or viability of the company, and based on that I was satisfied of reaching a conclusion that it would be unlikely that anyone would buy a business that was not in good condition.Bearing in mind, of course, that Leal Boss is the largest, or was, at that stage, the largest company in South Australia, it seemed a logical way of doing things, that you would go by the biggest company first, and with that assumption on my part that they would buy it and check all the financial issues out, and if there were any issues, adverse issues financially, then they wouldn't have bought the business." (T94-5)

He was taxed in cross examination (p144) about this belief concerning "due diligence".He explained his understanding was that such an investigation is done whether a corporation is being acquired or only portion of its business. I accept his evidence as to the state of mind evoked by learning of the Pedersen Contact purchase.

Mr McNair was asked in examination (p103) whether at any stage he suspected Leal was insolvent.He said:

"A. No, I had no reason to believe that they were insolvent.Our last real business dealings with them were in November.Our trading with them had really stopped, because they had alternative suppliers for products and, as far as I could understand, they were continuing to run their business and to trade.

Q. You've told his Honour of your experience in credit management.Have you ever experienced manoeuvrings by debtors on occasions other than with Leal Boss.

A. Yes, I've had experience of those types of situations arising before.

Q. Is the opinion that you have formed as to whether or not to suspect insolvency of Leal Boss influenced in any way by your general experience of dealings with debtors.

A. No, I mean, I have a number of experiences where customers have temporary financial pressure points.My own company has periods when cash flow is extremely tight, and I have, on a number of occasions, had discussions with the financial management of our customers, both at Celcast and in my previous companies, and those sort of temporary difficulties are overcome in a relatively short period of time, as, in fact, was the situation here.The original requirement we had from Leal Boss to pay the amounts that were owing in September, they accomplished that within a reasonable period of time.In fact, our total debt with the company had been virtually cut in half over a period of six to eight weeks."

Mr McNair presented as a frank and honest witness.His answers to the crucial questions put to him, very properly, in cross examination were to my observation responsive, uncontrived and had the ring of truth.I assessed Mr Press to also be a witness whose evidence I can accept.

Mr Press readily confessed to feelings of anger and frustration in what he perceived to be delaying tactics on the part of Leal in paying the defendant, its manoeuvring as he saw it to use the defendant's credit as working capital and his own firm view that the asserted entitlement to a rebate was specious, without foundation and a device to prolong the time for payment of its debt, the defendant having begun to purchase all its supplies from Meter.I note it is an agreed fact that on 3 February 1995 Leal owed Meter $32,380 which Leal paid except for $3,642.It supports the belief of Mr McNair and Mr Press that Leal sourced its supplies from Meter after it ceased to buy from the defendant. The quantum of the debt to Meter in February 1995 indicates that the value of Leal's purchases from Meter was approximately the same as those from the defendant.There is no evidence that Leal was known or suspected by Messrs McNair or Press to be experiencing financial difficulties other than the events concerning the payment of the defendant's debt.

Mr Press' evidence as to the section 459ECorporations Law notice and the state of his mind is:

"Q. Were you aware that such a notice was issued on behalf of Celcast on 27 February 1995.

A. I was aware that it was part of our tactic to issue such a notice.I couldn't tell you whether or not it was on any given date, but it was discussed and it was one of the tactics that we were to adopt.

Q. Explain the tactic to his Honour.

A. The tactic is a very strong threat.In my experience in the past, on receiving one of these notices from the other side of the fence, is to respond fairly quickly.It's the last opportunity you've got to do something to rectify the situation, otherwise you are risking the whole company.

Q. At the time that this demand was made - and I'll ask you to assume, for present purposes, the date of 27 February '95, even though you don't, yourself, know that date.

A. Right.

Q. Did you have any opinion as to whether Leal Boss was solvent or insolvent.

A. I had the opinion that they were solvent.I had received a notice from their own company telling me so in recent times, confirming what I believed all along."

In Olifent v Australian Wine Industries Pty Ltd (1996) ACSR 185, Master Burley concluded that good faith was not restricted to the question of whether or not insolvency was in view when the payment was made to a creditor.In his opinion good faith is to be given its ordinary meaning of propriety or honesty.In Pegulan Floor Coverings Pty Ltd v Carter (Supreme Court of South Australia, judgment S6299, 13 August 1997, unreported) Doyle CJ referred to Master Burley's interpretation of good faith and although noting that neither party in Pegulan took issue with that approach (absence of good faith had not been suggested) the learned Chief Justice said nothing to indicate he had any reservations about the interpretation given by Master Burley.

I am content to adopt Master Burley's interpretation for the reasons he gave after reviewing the authorities bearing on the matter and set out in his judgment.

I am satisfied that both Mr McNair and Mr Press, as the relevant officers of the defendant, received the payment in good faith.True it is that Mr Press in particular had a very firm view about the lack of what might be termed the commercial morality of those responsible for Leal's actions, and both Mr McNair and Mr Press were determined to bring Leal to pay the debt, but in my opinion having weighed all their evidence and drawing on my own assessment of them in the witness box, their respective minds or their actions were not propelled by any impropriety or dishonesty;and the test of good faith is subjective: Downey's case.There is nothing in the evidence to suggest that any of those with an executive responsibility for the defendant's actions, deliberately abstained from making enquiries into Leal's financial position or ignored some obvious fact either of which would be inconsistent with good faith.Lego Australia v Paraggio (1993) 122 ALR 356 at 375.I find that Messrs McNair and Press were of the view, and reasonably so, that the plaintiff was withholding payment in order to pressure the defendant to acknowledge what they believed was an unsubstantiated claim to a rebateTo the extent that Mr Wells' state of mind is, contrary to my view, relevant to this issue of good faith in my opinion the "flowery" language I have adverted to indicates an aggressive litigious approach by Mr Wells to his chosen field which permeates each of the documents or letters he generated, but that observation does not negate good faith.

Kitto J, in Queensland Bacon Pty Ltd v Rees (1965-6) 115 CLR 266, in a passage which Doyle CJ in Pegulan referred to as the well known dictum, said, at p303:

"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' ... Consequently, a reason to suspect that a fact exists is more than a reason to consider or look into the possibility of its existence."

Counsel for the plaintiff quite properly pointed to the statement of claim in the action against Leal and Messrs Ryan and Winter as, he submitted, evidence a belief that those two gentlemen suspected Leal was insolvent, and therefore it should be found that the defendant in asserting that must have also had the same suspicion it is alleged Ryan and Winter had.Counsel referred to Laws v Australian Broadcasting Tribunal (1990) 170 CLR at 70.In that case the question was whether the members of the Tribunal should be precluded on the grounds of actual or perceived bias from holding an enquiry into the alleged contravention by the appellant of standards prescribed by the Tribunal.The Tribunal had filed defences of justification and qualified privilege in an action for defamation brought against it by the appellant.The defence alleged that the appellant had conducted a series of radio programmes that were designed to lower the community's views of Aboriginal people, which it was claimed, justified three of the imputations the appellant asserted were contained in the words he complained of which were spoken by a senior employee of the Tribunal in the course of an interview.Gaudron and McHugh JJ wrote (at pp98-99):

"An assertion in a pleading does not constitute an admission by the party filing the pleading ... if it is proper to attribute to the fair-minded observer knowledge that pleadings do not amount to admission ... the fair-minded observer, not wishing to attribute a lack of bona fides or improper or unjustifiable conduct to the Tribunal, would inevitably conclude that its members believed that, on the evidence known to them, the Tribunal would be able to establish that the imputations made against the appellant in the broadcast were true.Moreover, the failure of the members of the Tribunal to give evidence in rebuttal of the inference which arises from the filing of the defences of justification and contextual justification strengthens the case for concluding that they held the belief that the evidence, known to them, would establish that the imputations against the appellant were true."

However, Mason CJ and Brennan J said (pp85-86):

"The appellant's case is that each and every present member of the Tribunal must be regarded as asserting a belief in the truth or the correctness of these defences on the footing that the Tribunal is continuing to maintain the defences in the action.This submission cannot be accepted for two reasons. First, as the defence was not verified on oath and was not required to be so verified, it does not amount to an assertion of belief in the correctness of the facts pleaded.Indeed, traditional principle is that assertions made in pleadings do not amount to admissions ... It has been suggested that the traditional principle may be too strict and that in some circumstances an assertion in a pleading should be received as an admission ...The suggestion that pleadings should be treated in the same way as any other form of admission fails, in our view, to take account of the function and object of pleading, when they are not required to be verified, in outlining the party's case and defining the issues to be tried ... We are left then with the suggestion that in the circumstances there is a reasonable apprehension of bias because the defences to the action for defamation give rise to a suspicion of pre-judgment or because the members of the Tribunal have a conflicting interest in defeating that action.Granted that the existence of apprehended bias is a question of fact, we are not persuaded that the appellant succeeds in making out such a case against members of the Tribunal other than the Chairman, Vice-Chairman and Ms Bailey who participated in the decision of 24 November and may be taken to have approved the giving of the interview by (the senior employee)".

Whatever the view of a fair-minded observer may be, the allegations in the defendant's statement of claim against Leal and its Directors cannot be treated as an assertion of a belief in those allegations.The test of suspicion in the context of section 588FG(2) is not what a fair-minded observer might think but whether a reasonable person in the creditor's circumstances would have had no grounds for suspecting insolvency.In my opinion it would be wrong to identify Mr Wells as "a reasonable person in the defendant's circumstances";he was given a task to do, to the prosecution of which as I have already said he brought a personal and particular means of expression in drawing the statement of claim the object of his approach (as Mr Press described) being to cast a net as wide as possible.At best the claims made against Leal's directors reflect Mr Wells' interpretation of events for the purpose of casting a wide net;they do not as I find imply that those who instructed him said or believed anything to the effect of those claims.

Mr Press spoke of the ultimate decision to pursue by demand or proceedings the debt due from Leal as being that of the Managing Director.The Managing Director was not called but I find from the evidence of Messrs McNair and Press that the Managing Director acted on the information given to him by, principally, Mr McNair who was called and thoroughly cross examined during which (and the cross examination of Mr Press) nothing emerged to give me cause to think that the Managing Director had knowledge or a state of mind different from that of Mr McNair or Mr Press on the matter of suspecting Leal was insolvent.

Mr Wells was not called.On reflection and for the reasons I have given concerning the part he played in events I am not prepared to draw any inference against the defendant adverse to my assessment of Messrs McNair and Press and their evidence.

I am satisfied that Messrs McNair and Press were the only persons in an executive capacity with the defendant whose knowledge of facts or circumstances is relevant to decide whether or not the defendant had reasonable grounds to suspect that Leal was insolvent.I have reviewed the information they had and the circumstances preceding and at the time of the payment, most of which I have referred to in these reasons.I accept the evidence of each of them, differently expressed, that they did not have such a suspicion.

The claim in the writ against Leal and its Directors and the statutory demand (the section 459E notice) are not in my opinion to be regarded, objectively, as reasonable grounds showing that the defendant suspected Leal was insolvent. Those facts and the various "flowery" assertions in Mr Wells' letters have to be seen in the context of the events which preceded them;they and the subsequent events to the date of payment are part of the matrix making up the circumstances at the time the payment was made.

Looked at in isolation the late or non-payment by Leal of promised instalment could raise a question whether Leal might be insolvent but the non-receipt of the instalment might equally be a manifestation of Leal conserving its cashflow using the defendant's credit as working capital, or pressing its claim for a rebate.To the defendant's knowledge Leal was a substantial enterprise which had sourced its supplies from a competitor newly established in South Australia.It halved its debt to the defendant in the space of some two months before ceasing to trade further with the defendant.

In response to the action against it, Leal reiterated its claim to a rebate which it persisted with after offering in early February 1995 through its solicitors $54,000 in full and final settlement.The defendant knew that Leal had sold its business in circumstances which the defendant interpreted, reasonably in my view, evinced that Leal was in a sound financial position. The defendant was told that all creditors would be paid.Then Leal made its offer and, when rejected, Leal busied itself in finding further support for the asserted rebate which ultimately the defendant decided to consider as a separate issue provided $54,000 was paid.

I am satisfied that the defendant received the payment in good faith and at the time of payment it had no reasonable ground for suspecting that Leal was insolvent.

Although conscious of what was said in Downey's case (supra), for completeness I also find that a reasonable person in the circumstances of the defendant, which in this case means Messrs McNair and Press, would have had no grounds for suspecting that Leal was insolvent at the time of the payment.

The defendant has brought itself within section 588FG(2).I dismiss the plaintiff's application.