Sims v Tech HLDGS P/L (T/A Westline Furniture) No. Scgrg-97-1214 Judgment No. S3
[1999] SASC 3
•14 January 1999
SIMS v TECHNICAL HOLDINGS PTY LTD (Trading as WESTLINE FURNITURE)
[1998] SASC 3
Magistrates Appeal
1 WICKS J This is an appeal from the decision of the Magistrates Court in civil proceedings.
2 The appellant, Mr Sims, is liquidator of Ermayne Pty Ltd (In liquidation) which was formerly called Leal Boss Computer & Office Supplies Pty Ltd (‘the Company").
3 The Company was placed under administration on 7 July 1995. Pursuant to an order of the Federal Court of Australia dated 17 August 1995 it was placed into provisional liquidation and the plaintiff appointed provisional liquidator. By an order of the Federal Court of Australia dated 22 August 1995, it was ordered to be wound up and the plaintiff was appointed its liquidator. By the joint operation of s513A and s513C of the Corporations Law, the winding up of the Company is taken to have commenced on the day on which the administration began, namely 7 July 1995.
4 Under s588FA of the Corporations Law a transaction is an unfair preference given by a company to a creditor if the company and the creditor are parties to the transaction and it results in the creditor receiving from the Company in respect of an unsecured debt owing to the creditor more than the creditor would receive from the Company in respect of the debt if the transaction were set aside and the creditor were to prove for the debt in the winding up.
5 Under s588FC of the Corporations Law, a transaction of a company is an insolvent transaction if it is an unfair preference given by the company and the transaction is entered into when the company is insolvent. For the purposes of the Corporations Law "transaction" is defined to include a payment made.
6 Under s588FE of the Corporations Law, a transaction is voidable if it is an insolvent transaction and is entered into during six month ending on the relation back day. The relation back day is the day upon which the winding up is taken to have begun and in this instance, by the operations of s513A and s513C, to which I have already referred, the relation back day is 7 July 1995.
7 In early 1995 a number of cheques were paid by the Company to the respondent, Technical Holdings Pty Ltd trading as Westline Furniture. Details of the cheques paid are as follows:
Date Cheque Cheque No Date Presented Amount
Drawn
10.2.95 407757 10.2.95 $7526.35
3.3.95 407893 3.3.95 $3500.00
13.3.95 407926 13.3.95 $3500.00
8 For the purposes of this appeal, the three payments made are unfair preferences, they are insolvent transactions, they are voidable transactions and the amount thereof would be recoverable under s588FF of the Corporations Law but for any defence maintained under subs588FG(2). The only issue on this appeal is whether the respondent can make out a defence under that sub-section.
9 Subs588FG(2) of the Corporations Law, so far as is material, provides that a court is not to make under s588FF an order materially prejudicing a right or interest of a person if it is proved:
(a) that the person became a party to the transaction in good faith; and
(b) that the time when the person became such a party
the person had no reasonable grounds for suspecting that the Company was insolvent; and
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.
10 The question in this appeal is whether the respondent is entitled to maintain a defence to the appellant’s claim by virtue of s588FG of the Corporations Law. The onus of making out such a defence lies on the respondent: Sims v Celcast Pty Ltd (1998) 197 LSJS 86 at 87,90. The test is a demanding one. The defendant must establish both bone fides and absence of any reasons to suspect insolvency in terms of par(b) to which I have referred above: Pegulan Floor Coverings v Carter (1997) 193 LSJS 243 at 250 per Doyle CJ and Sims v Celcast Pty Ltd (supra).
11 The Company was owned and managed by Mr Declan Ryan and Mr Simon Winter. The Company was a dealer in stationery, office furniture and other office supplies.
12 The respondent traded as Westline Furniture. Its core business was the importation assembly and distribution of office furniture, a major part of its business being the distribution and sale of office chairs. It was a family company of which Mr Douglas Wauchope and his wife were shareholders and directors.
13 In August 1992 the Company applied for a credit account with the respondent in an amount of $2,000. The application was responded to by Mr Wauchope on Westline Furniture letterhead in which he said:
"CREDIT APPLICATION
-------------------------------
We confirm receipt of your application for credit with WESTLINE FURNITURE and approval of your 21 day credit account.
-------
TERMS OF TRADE
-------------------------
Our credit terms are STRICTLY NETT 21 days on statement, and subject to a credit limit of $2,000."
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14 Purchases of office furniture and equipment from the respondent commenced in September 1992 and continued until October of 1994. Annexed to these reasons is a summary of trading between the Company and the respondent. By 1994 the outstandings in respect of the Company’s account with the respondent became more significant. The amounts rendered in April and May of that year were not paid until August and then only with a cheque that was dishonoured. I will say more about the cheque later. The June and July accounts were not paid until December of that year and the accounts for August, September and October were not paid until the following February and March, within six months of the relation back date. Clearly, Mr Wauchope was very tolerant in the enforcement of his Company’s trading terms.
15 The trading pattern from the beginning shows that, even in the first year of trading, payments for the supply of goods were made irregularly and in some instances, payment was delayed for as much as 90 or 120 days. In the circumstances, I do not think that the trading pattern in 1994 differed so much from that in the earlier year that much can be made of it in assessing whether a person would have grounds to suspect insolvency. However, the trading pattern should not be considered on its own, but regard should be had to other material factors in coming to a conclusion.
16 In mid-August 1994, a cheque for $6088.99, being in respect of the April and May accounts was dishonoured. A fresh cheque was issued which was paid. This does not seem to have caused any serious concern on the part of the respondent. This can be deduced from the absence of any memorandum in evidence mentioning the topic.
17 The circumstances of the dishonour of the cheque were not altogether clear from the evidence, although the learned Magistrate, in his reasons for judgment, found that it was reasonable to infer that the cheque in question had been dishonoured. He also found that it was clear from the banking records and cheque stubs that a substitute cheque had been drawn on 18 August 1994 and presented to the bank and cleared on 6 September 1994.
18 There was only one cheque dishonoured and the dishonour occurred some six months before the preferential payments were made. If the dishonoured cheque was really to raise a suspicion of insolvency, one would have expected the subsequent cheques to have suffered the same fate. In fact the dishonoured cheque was an isolated instance. There was no pattern of dishonoured cheques.
19 Mr Wauchope in evidence said that he was not aware that the first cheque was marked "present again" or dishonoured. On this matter, the learned Magistrate thought Mr Wauchope was genuine in not realising that the cheque in question had not been met on presentation. I see no reason to disturb that finding.
20 By September 1994 there is evidence of pressure being applied to ensure the payment of the respondent’s accounts. On 30 September 1994, the respondent sent a statement to the Company showing a balance due of $14,150.28 of which $10,364.32 was said to be "overdue". The statement contained a notation in Mr Doug Wauchope’s handwriting which read as follows:
"- Att Deckland -
Cheque please
Account is now long overdue again."
21 No payment was made in October and a further statement was rendered by the respondent to the Company on 31 October 1994 for an amount of $18,787.19 of which $14,150.28 was declared to be "overdue". The statement was endorsed with a notation in Mr Wauchope’s handwriting as follows:
"Cheque please!!"
22 The notes on the statements, of themselves, are consistent with nothing more than tardiness in the payment of accounts. Tardiness is nothing new in this case as it would appear that the Company has, from the outset, taken many months to pay its accounts.
23 As neither statement had produced any result, Mr Wauchope wrote to the Company on 25 November 1994 in the following terms:
"LEALBOSS
ATTENTION PETER HINZ
FINANCIAL CONTROLLER
PETER FOLLOWING IS THE OUTSTANDINGS TO WESTLINE FURNITURE.
PURCHASES AUGUST AND BEFORE,
LONG OVERDUE $10,364.00
SEPTEMBER..OVERDUE 3,785.96
OCTOBER ..DUE WEND 30/11/94 4,636.91
=======
TOTAL OUTSTANDINGS .............. $18,787.19
=======
PETER YOU INDICATED YOU WOULD D/D TO OUR ACCOUNT, YOU MAY DO SO BUT PLEASE FAX TO US A COPY OF THE BANK DEPOSIT SLIP/RECEIPT SO AS WE CAN TAKE THIS UP IN OUR COMPUTER.
OUR BANKING DETAILS ARE AS FOLLOWS WESTLINE ACCOUNT NATIONAL AUSTRALIA BANK MOSMAN PARK BRANCH ... A/C No. 086-345 04 526-0420.
OTHER FINANCE
------------------------
I HAVE SENT YOU A FILE I HAPPENED TO HAVE ON FACTORING THAT HAPPENED TO BE ON MY DESK.
I SUGGEST THAT YOU HAVE A LOOK AT IT AND REFER IT TO YOUR DIRECTORS AS IT COULD BE THE ANSWER TO YOUR CASH FLOW PROBLEM ...
I KNOW THAT IN THE CASE OF OUR PRODUCT THE FEE CHARGED TO FACTOR OUR PRODUCT ON YOUR DEBTORS LEDGER YOU COULD MAKE ADDITIONAL PROFIT OUT OF THE INCREASED TURNOVER CONSIDERING THE MARGINS YOU MAKE ON OUR PRODUCT ... NOT TO MENTION THE ADDED BENEFIT OF HAVING YOUR SUPPLIERS BACK ON SIDE....
KIND REGARDS
DOUG WAUCHOPE"
24 This letter indicates some concern on the part of the respondent that a significant amount has been outstanding for a long time. The letter does not demonstrate a high level of concern as it is only addressed to the Financial Controller Mr Peter Hindes (incorrectly referred to as Peter Hinz). I see no particularly significance in the fact that direct debit facilities were offered. It does not seem to me that this would create a suspicion of insolvency in any way.
25 It was Mr Wauchope’s evidence that he received material on factoring from time to time from a number of sources. In the letter of 25 November 1994 referred to he said that he "happened to have" a file on factoring that "happened to be on my desk". In fact, there is some evidence that suggests that the material on factoring did not happen to be on Mr Wauchope’s desk but was sent to him following an enquiry by him for the material. He had no intention of entering into factoring.
26 The 25 November letter also makes reference to "cash flow problems" and refers to the "added benefit of having your suppliers back on side". Cash flow problems can be indicative of or raise a suspicion of insolvency although not necessarily so. It is important to put them in context. One may be dealing with a trader with a persistent and long history of delay in payment of accounts. The trader concerned may be one who has a deliberate policy of keeping his creditors waiting on the basis that such credit is free and far superior to that which any bank can provide. In my view "cash flow problems" are a factor and nothing more. In this case, the Company has been late in paying the respondent from the time in which the trading relationship first started. The very first amount of $880 which became due in September 1992 was not paid until February 1993.
27 The reference to having suppliers back on side is a more significant indicator of insolvency. It suggests that creditors generally are becoming annoyed with the failure of the Company to make payment.
28 It appears that on 25 November 1994 Mr Wauchope also sent a facsimile to Mr Hindes which read:
"Hello Peter
We ask if you had 80% of your debtors ledger. Could you pay our account.
With the margin you make on our product you could afford the fees out of the increase in turnover?
Regards Douglas"
29 The documents in relation to factoring would appear to indicate that Mr Wauchope thought the Company to have a cash flow problem and that this might well be alleviated if a factoring arrangement were entered into.
30 I do not think that the suggestion that the Company should take advantage of available factoring facilities is an indicator of insolvency. It would be highly unlikely indeed if any factoring company were to enter into an arrangement with a company found to be insolvent. Before entering into the arrangement, one would generally expect a factoring company to undertake a number of searches and enquiries into the solvency or otherwise of the client to whom the facilities are being offered. In my view, the facsimile and other material in relation to factoring facilities indicate concern on the part of Mr Wauchope that he is not being paid promptly for goods supplied and that he is anxious to remedy the situation as soon as possible. I do not think, however, that the memo and other material in relation to factoring would be indicative of insolvency.
31 Evidence was given by Mr Winter, a director of the Company, of the fact that the Company in 1994 entered into factoring arrangements with AGC. There was no evidence that Mr Wauchope was told of such a proposal. The respondent carried on its business in Western Australia and would be unlikely to be privy to gossip or rumour in South Australia - at least unless there were strong indications of insolvency emanating from the Company. Clearly, from the letter and facsimile of 25 November 1994, the respondent was not aware of the fact that the Company was already factoring its debts.
32 The memorandum dated 25 November 1994 was followed up on 2 December 1994 with a facsimile indicating that a direct debit to the respondent’s account had been made of $4,260.54. But for a few cents, this reflected the payment of the June and July accounts.
33 On 23 January 1995, the Company put out a circular to its suppliers signed by its directors, Messrs Ryan and Winter, the terms of which are as follows:
"Dear Supplier,
Leal Boss are proud to announce that they have sold their business to Pedersen Contact effective from 5th 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 8th 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 4 years and trust that you will provide the same care and attention to the new owners."
34 The circular speaks of the sale of the business which would include stock, plant and goodwill. It is made clear in the circular, however, that trade creditors will continue to look to the Company for payment and that the process of payment should be completed by the end of March "as the debtors of Leal Boss are collected". I see nothing in the circular which is indicative of or creates a suspicion of insolvency. In my view, one would need a strong context in which to place such a letter before it could be regarded as indicative of insolvency or capable of raising a suspicion of insolvency. In the present case, indicators or grounds for suspicion of insolvency are not sufficiently significant. Mr Wauchope knew nothing of the terms of sale. For all he knew, the terms might have been quite lucrative so far as the Company was concerned. In view of the Company’s trading history, to ask the creditors to wait until the end of March so that they could be paid out of moneys collected from debtors in the meantime, was neither here nor there.
35 In February the respondent received a cheque for $7526.35 dated 10 February in payment of approximately half the outstanding account and this cheque was met on presentation. It was represented to creditors that payment would be made "as debtors of Leal Boss are collected". The payment made is consistent with payment being made as debtors are collected.
36 The respondents sent a further statement to the Company dated 28 February 1995. The statement showed an opening balance of $14,526.35 with a payment on 23 February 1995 of $7,526.35 leaving $7,000 outstanding. Mr Wauchope endorsed the statement with a note in the following terms:
"Att Simon Winter
Simon we need to have this A/c finalised by Friday 24th. My co-directors have requested we take legal action for recovery after this date.
Frankly I can see no reason not to agree with them.
Please advise your position on this debt as previously requested!!
Regards Douglas."
37 The reference in the statement to Friday 24th must have been to Friday 24 March as the statement itself is dated 28 February.
38 The amount shown as owing is $7000 and this was stated to be overdue. The statement bears a note in the right-hand column:
"&3500.00
3/3/95"
39 At this stage, Mr Wauchope was aware that the Company was collecting its book debts from its own debtors and that this process should be complete by the end of March. In those circumstances, it was not unreasonable for the respondent to receive part payments on account of the total amount owing as this was within the arrangement and had been represented to the creditors in the circular. The final payments appear to have been uneventful and appear to have been made without further pressure from Mr Wauchope. An amount of $3,500 was paid on 3 March 1995 and the final payment of $3,500 was made on 13 March.
40 There had not at any time been a refusal of supply on behalf of the respondent.
41 No further goods were ordered by the Company after 18 October 1994. This appears not to have been due to any refusal on the part of the respondent to accept an order from a company placed after that date.
42 While Mr Wauchope was an important witness, the case was decided both here and in the court below on the documentary evidence as well. The matter does not turn on the evidence of witnesses alone.
43 The learned Magistrate found that the Company was insolvent as at 3 February 1995. There is no appeal against that finding.
44 I turn to the question of whether a defence to the liquidator’s claim can be made out under subs588FG(2) of the Corporations Law. In dealing with that defence, the first question is, whether in making the payments referred to earlier in these reasons, the respondent acted in good faith. The expression "good faith" is not defined and must therefore be given its natural meaning. A person acts in good faith when he or she acts with propriety or honesty: Butterworths Australian Legal Dictionary (1977). The requirement of good faith under par588FG(2)(a) of the Corporations Law is a subjective test free from any objective element: Downey v Aira Pty Ltd (1996) 14 ACLC 1068 per Ashley J at p1075.
45 In Re MacAdam (1913) 13 SR (NSW) 206 at p208 Street J said:
"I think that if a creditor enters into a transaction, knowing that his debtor is in insolvent circumstances, and knowing, or at all events, having very strong reason for suspecting, that the transaction will have the effect of preferring him to other existing creditors, he cannot be said to be acting in good faith."
46 In his judgment the learned Magistrate made an express finding that there was no dishonesty on the party of Mr Wauchope and that he and his Company did not lack good faith. I agree that the defence of good faith has been made out.
47 I turn to the requirements of s588FG(2)(b) of the Corporations Law. I have come to the conclusion that neither the respondent, nor a reasonable person in the respondent’s circumstances, would have had reasonable grounds for suspecting that the Company was insolvent at the times of the making of the payments in question. I consider that the defence in par(b) has been made out. In coming to that conclusion, I have considered the matters referred to earlier in these reasons. I have taken them into account both singly and collectively.
48 A suspicion was described by Kitto J in Queensland Bacon Pty Ltd v Rees (1965-6) 115 CLR 266 at p303 in the following terms:
"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."
49 In the present case, I consider that the respondent has made out a sufficient case to say that there was no positive feeling of actual apprehension or mistrust on its part amounting to a slight opinion but without sufficient evidence that the Company was insolvent at the material times; nor would there have been such a feeling on the part of a reasonable person placed in the respondent’s circumstances at those times.
50 In coming to a conclusion I have taken into account the various findings made by the learned Magistrate in relation to the credibility of Mr Wauchope. I have read the whole of the evidence for myself but, of course, have not had the advantage of observing Mr Wauchope’s demeanour whilst giving evidence. There is no reason why, making due allowance for the possibility of exaggeration, his evidence should not be accepted as the learned Magistrate appears to have done. That is particularly so where the documentary evidence supports his position. In coming to his decision the learned Magistrate appears to have dwelt at some length on matters relating to the credibility of Mr Wauchope.
51 I find that the defence under s588FG(2) of the Corporations Law has been made out and that the learned Magistrate was justified in coming to the conclusion he did. Accordingly, I would dismiss the appeal.
ANNEXURE
LEAL BOSS PURCHASES AND PAYMENTS TO WESTLINE FURNITURE FROM SEPTEMBER 1992 TO MARCH 1995
MONTH MONTH PAYMENT PAYMENT
TOTAL DATE AMOUNT
SEPT 92 $880.00
JAN 93 $1,100.00
FEB 93 $1,100.00 1/02/93 $880.00
MARCH 93 $2,197.09
APRIL 93 $6,204.60 29/04/93 $1,100.00
MAY 93 $14,640.93
JUNE 93 $2,687.69
JULY 93 $6,404.04 1/07/92[sic] $2,197.09
15/07/93 $1,100.00
26/07/93 $6,204.60
26/07/93 $13,522.57
$1,118.36
AUG 93 $2,206.50
SEPT 93 $2,725.27
OCT 93 $889.22
NOV 93 $3,117.15
DEC 93 $953.88 21/12/92[sic] $15,142.70
JAN 94 $6,253.46
MARCH 94 2/03/94 $4,006.37
$4,684.58 31/03/94 $953.88
APRIL 94 $3,190.99
MAY 94 $2,898.00 30/05/94 $6,253.46
JUNE 94 $1,030.70 28/06/94 $4,684.58
JULY 94 $3,230.84
AUG 94 $6,102.78 26/08/94 $6,088.99
SEPT 94 $3,785.96
OCT 94 $4,636.91
DEC 94 2/12/94 $4,260.84
FEB 95 14/02/95 $7,526.35
MARCH 95 3/03/95 $3,500.00
14/03/95 $3,500.00
TOTAL PURCHASE $82,039.79 TOTAL PAYMENT $82,039.79
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