Stair Lock International P/L v Matthews in His Capacity as Liquidator of Scarce Builders & Developers P/L (in Liq) - [2017] SADC 59

DISTRICT COURT OF SOUTH AUSTRALIA
(Civil: Minor Civil Review)
STAIR LOCK INTERNATIONAL P/L v MATTHEWS IN HIS CAPACITY AS LIQUIDATOR OF SCARCE BUILDERS & DEVELOPERS P/L (IN LIQ)
[2017] SADC 59
Reasons for Decision of His Honour Auxiliary Judge Clayton
9 June 2017
MAGISTRATES - APPEAL AND REVIEW
Review of decision of magistrate who held two payments to the appellant were unfair preferences and the appellant had not established the matters required to establish the defence set out in s 588FG(2) of the Corporations Act 2001 (Cwth).
Held that the appellant had established it had no grounds for suspecting the company was insolvent and a reasonable person in the circumstances would have no grounds for so suspecting.
Judgment of magistrate rescinded. Judgment for the appellant (defendant) dismissing the liquidator's claim.
Corporations Act 2001 (Cth) s 588FA, 588FC, 588 FE, 588FG, referred to.
Queensland Bacon P/L v Rees (1996) 115 CLR 266; Sydney Appliances P/L (in liq) v Eurolinx P/L [2001] NSWSC 230; Dean-Willcocks v The Commissioner of Taxation [2008] NSWSC 1113; Chicago Boot Co P/L v Davies & Anor (2011) 282 ALR 378; Sparad No 100 Ltd v JB Harkness unreported Full Court of the Supreme Court of NSW 14 February 1997; Melcalf Crane Services P/L v Rathner [2011] VSC 195; Re Ermayne P/L; Sims v Tech Holdings P/L (t/a Westline Furniture) (1919) 30 ACSR 330; Sandell v Porter (1966) 115 CLR 666, considered.

BANKRUPTCY - ADMINISTRATION OF PROPERTY - EFFECT OF BANKRUPTCY ON ANTECEDENT TRANSACTIONS - UNDUE PREFERENCES

STAIR LOCK INTERNATIONAL P/L v MATTHEWS IN HIS CAPACITY AS LIQUIDATOR OF SCARCE BUILDERS & DEVELOPERS P/L (IN LIQ)
[2017] SADC 59

This is the review of a decision of a magistrate in a minor civil claim.
The respondent is the liquidator of Scarce Builders and Developers Pty Ltd (In Liquidation) (“Scarce”). He sued to recover sums totalling $11,132 which are alleged to be unfair preferences pursuant to s 588FA of the Corporations Act 2001 (Cth).
The appellant, which conducts the business of manufacturing stairs and balustrades for houses, had supplied goods to Scarce which made a payment of $9,102.50 on 13 June 2012 and a payment of $2,029.50 on or about 15 June 2012.
Joint administrators of Scarce were appointed on 7 October 2012 and on 9 November 2012 the plaintiff was appointed liquidator. The relation back period for the purposes of s 588FE(2) of the Act commenced on 8 April 2012 and the payments to which I have referred were therefore received by the appellant within that period.
Before the magistrate the appellant disputed that the payments constituted unfair preferences and argued that they were received from Scarce in good faith, for valuable consideration and at a time when the appellant believed the company was solvent.
The trial was heard on 24 November 2016. The plaintiff appeared and gave evidence and Mr Green, the Chief Financial Officer of the appellant, appeared on its behalf and gave evidence. Those two persons also represented their respective interests on the review and Mr Green provided further evidence.
It is common ground that Scarce was insolvent at the time when the payments were made to the appellant.
The learned magistrate correctly found that the two payments were unfair preferences within the meaning of s 588FA of the Act, insolvent transactions within the meaning of s 588FC of the Act and voidable transactions within the meaning of s 588FE of the Act.
The issue before the magistrate and on this review is whether the appellant has made out the defence provided in s 588FG(2) of the Act which provides:
(2) A court is not to make under section 588FF an order materially prejudicing a right or interest of a person if the transaction is not an unfair loan to the company, or an unreasonable director related transaction of the company, and it is proved that:
(a) the person became a party to the transaction good-faith; and
(b) at the time when the person became such a party:
(i)the person had no reasonable grounds for suspecting that the company was insolvent at the time or would become insolvent as mentioned in paragraph 588 FC (b); and
(ii) a reasonable person in the person circumstances would have 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 of the transaction.
The onus of establishing the matters set out in s 588FG(2) rests with the appellant. The appellant is required to establish four matters:
1It received the payments from Scarce in good faith.
2At the time it received each payment the appellant had no reasonable grounds for suspecting that Scarce was insolvent.
3At the time it received each payment, a reasonable person in its circumstances would have had no reasonable grounds for suspecting that the company was insolvent.
4It provided valuable consideration for the payments.
There was no dispute that the appellant had provided valuable consideration for each of the payments.
The learned magistrate correctly found that the appellant has to prove that it had no reasonable grounds for suspecting that the company was insolvent at the time it received the payments and that a reasonable person in its circumstances would have had no reasonable grounds for suspecting that the company was insolvent.
The learned magistrate referred to Queensland Bacon Pty Ltd v Rees[1] where Kitto J said at 303:
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 … a reason to suspect that a fact exists is more than a reason to consider or look into the possibility of its existence.
[1] (1996) 115 CLR 266.
Her Honour correctly found that the existence or otherwise of reasonable grounds to suspect insolvency is to be assessed by reference to the circumstances at the time of the payments and not with the benefit of hindsight. She referred to the reasons of Santow J in Sydney Appliances Pty Ltd (in liquidation) v Eurolinx Pty Ltd[2] where his Honour stated at [43]:
The case law illustrates that there is no single factor whose presence invariably establishes that there was, or should have been, the requisite suspicion. Rather it is a question of looking not in hindsight but through the contemporary eyes of the parties, at the commercial circumstances then prevailing between them. This is to identify in that context those factors pointing towards insolvency of the debtor. This in turn is in order to ascertain which of those factors were apparent to the payee, and then the cumulative impact that knowledge of them should have had, or did have, upon the payee. There will also be potentially countervailing factors and circumstances to be weighed in the balance which could have tended to dispel suspicion at the time. In Re Ermayne provides an illustration of this appraisal and balancing process. This Wicks J noted (at 334):
“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 … In my view "cash flow problems" are a factor and nothing more.”
[2] [2001] NSWSC 230.
Her Honour noted the payments were made outside of trading terms but she acknowledged that the overall trading relationship between Scarce and the appellant showed that Scarce had a history of making late payments which dated back to 2009.
Her Honour was influenced by the fact that an application for an increased credit limit was presented to the appellant on 23 March 2012 and that the appellant did not trade with Scarce for the next 2 months until the outstanding payments were received in June 2012. Her Honour was also influenced by the fact that on 16 May 2012 the appellant was told that Scarce was having cash flow problems.
I digress is to make the observation that "cash flow problems" and insolvency are different concepts. The observation of Wicks J which is referred to in the reasons of Santow J that "cash flow problems" are a factor and nothing more are of particular significance in the present case.
It is also important to acknowledge that the issue is not whether Scarce was insolvent at the relevant time. That fact has been admitted. The issue is whether the appellant has made out the defence provided in s 588FG(2) of the Act.
Her Honour found that the evidence of Mr Green was not sufficient to establish on the balance of probabilities that the appellant had no reasonable grounds to suspect that the company was insolvent at the time the payments were made. She also found that a reasonable person in the appellant's position would have had reasonable grounds to suspect that the company was insolvent at the time each of the payments was made. She therefore found that the appellant had failed to establish on the balance of probabilities all the matters required by s 588FG(2)(B) of the Act. That is she found that the appellant failed to establish the good-faith defence and concluded that the plaintiff was entitled to an order under s 588FF that the appellant repay the sum of $11,132 to the plaintiff.
This review is concerned with that finding.
On the review the respondent argued that the facts indicated that at the time the appellant received the payments it, or at least a reasonable person in its position, would have had reasonable grounds to suspect that the company was insolvent. The respondent in his written submissions set out a list of 12 factors which he argued were well-established as putting a supplier on notice of a company's insolvency.[3] Those factors were:
[3] Submissions [10].
1       Payments were made outside of normal trading terms.
2       Whilst the company was unable to pay its debts as and when due, it did not have adequate explanations for why this was so.
3       The payments were made after all supply on credit was stopped on 12 April 2012.
4       After supply on credit stopped the appellant did not trade at all with Scarce for 3 months until all outstanding payments were made. Thereafter the appellant placed Scarce on cash on delivery terms or payments upfront. The appellant did not place the company on temporary stop supply only.
5       Payments were not made as part of a continuing business relationship to induce further supply of goods.
6       The appellant was told by a representative of Scarce on 10 February 2012 that Scarce was waiting for money to come in to pay the defendant.
7       On 29 February 2012 the appellant obtained a "new Veda report" which showed that in the last 12 months 12 credit enquiries in the amount of $1,951,000 had been made with regards to Scarce.
8       On 29th February 2012 the appellant's credit limit changed from $10,000-$5000 "as per GRL plus new Veda report".
9       From 6 March 2012 the appellant started getting deposits upfront for its orders and reversing deposits paid.
10    An application for an increased credit limit was signed by director of the company on 23 March 2012. The personal guarantee and indemnity clause was crossed out.
11    All supply on credit was stopped on 12 April 2012.
12    The appellant chased payment.
Mr Matthews argued that those matters support the proposition that the appellant had reasonable grounds to suspect that the company was solvent.[4]
[4] Written case [11].
I have read the oral evidence and submissions of both Mr Matthews and Mr Green before the magistrate. Mr Matthews referred to the fact that after the two payments which are asserted to be unfair preferences had been made the appellants ceased to supply credit and he argued that as at the date of the payments the appellant’s state of mind or the ordinary person would have sufficient cause to be suspicious of the company's ability to make payments as and when they fell due.[5]
[5] T 11 Lines 2-8.
Mr Green gave evidence that Scarce was a very small customer of the appellant which would not have been provided much focus in the day-to-day operations. He said the building industry is rife with slow paying customers and that the use of temporary stops applied on overdue accounts is normal practice in the building industry.[6] He said that customers use the appellant as a source of funding instead of going to a bank or organising their own finances.[7] He said that placing a customer on cash on delivery causes the customer to realise that they are serious and if you want credit you need to pay by the due date. He said:
now that doesn't suggest, as Mr Matthews has suggested, that these guys are insolvent, it's just that they are slow payers and they use other people to finance their operations.[8]
[6]    T 16 Lines 32-38.
[7]    T 17 Line 13.
[8]    T 17 Line 23.
He said that the appellant did not have any internal or external correspondence indicating a concern with insolvency.[9] He said they had not issued any statutory demands, legal letters or legal proceedings, and the only thing they had done was to remind the customer that there were a few overdue invoices. He said there were no dishonoured cheques, post‑dated cheques, payments in round numbers and that there was no repayment schedule[10] and the classic process that you would expect when somebody believes somebody is insolvent or approaching it did not exist in this case.[11]
[9] T 21 Line 31.
[10] T 22.
[11] T 22 Line 15.
He said that while the appellant put Scarce on a temporary stop supply that was normal practice not only in the building industry but elsewhere.[12]
[12] T 22 Line 17
He said that Scarce had a very variable payment history but there were really no major concerns.[13]
[13] T 22 Line 29.
After referring to the performance of Scarce Mr Green said:
If I just relied on this I would say yeah, these guys are shocking payers but they do pay; it goes up and down, as a couple of reasons for it,... So I conclude that there is nothing in that that would suggest to me that we have an insolvent company on our hands.[14]
[14] T 23.
Mr Green also said:
So I guess what I'm trying to show here is that from all the documentation and evidence that Stairlock had within the particular industry and at the particular time, did we have enough information to suggest that the company was insolvent or should have known it was insolvent. Based on the information we have, there are a lot of things missing that would suggest it's insolvent. There are some typical things of the industry that are available which would apply to many of our existing customers as well but there is no overall factor suggesting-and even if you bundle all these together, suggesting that we believed or should have known that the company was insolvent.[15]
[15] T 26.
On the review Mr Green was asked whether from the enquiries he had made he was aware of any grounds that the appellant may have had to suspect that Scarce was insolvent at the time when the payments were made. His response was:
No, not at the time the payments were made. I believe there is insufficient acts there or activities that would support Stairlock having that belief... The other things I just wanted you to look at were the company had a history of paying late and I think you can see that through looking at the annexure A and also I can provide your honour with a list or a history of the payment history and the transactions on their account so you can actually see the days that it's taken for this client to pay the invoices over a period of time.[16]
[16] Appeal transcript 14 Line 6.
He referred to a schedule which demonstrated a history of slow paying and made the point that Scarce was not a company that dealt with Stairlock every day of the week. He said Stairlock did not stop dealing with Scarce and the absence of trading was just because Scarce had no requirement to purchase stairs or balusters. The appellant did not stop supply "it's just that there was no business to be had in various months."[17]
[17] Appeal transcript 15.
Mr Green dealt with each of the 12 matters set out in paragraph 10 of the respondents’ written case[18] which I have set out above. I do not propose to deal with his response to each of the 12 matters separately. It is significant that none of the 12 matters establishes knowledge of insolvency.
As to paragraph 10.1 - Mr Green submitted there was nothing unusual about Scarce’s payment cycles and that nothing really changed because they were always late.
As to paragraph 10.3 - he said that supply was only stopped because Scarce had exceeded its credit limits.
As to paragraph 10.4 - the appellant did not trade with Scarce because they had no business. There were many gaps in the trading history where the appellant had no dealings with Scarce
As to 10.6 - it was accepted that Scarce was waiting for money to come in. Mr Green said they saw this quite regularly- “it happens all the time and a lot of clients say this.”
As to the Veda report - Mr Green said that did not indicate a financial problem.
As to 10.9 - Mr Green said payments were required and they started getting deposits up front because the account was over their $5000 credit limit.
As to 10.11 - Mr Matthews suggestion that supply and credit was stopped on 12 April, Mr Green said that the reason for that was that the credit limit had been exceeded. He said "it's not stopped because we've got financial worries about this client, it's because it exceeded the credit limit that we provided this customer.
As to 10.12 - the suggestion that there were formal arrangements- Mr Green denied that. He said "there are no formal arrangements. We didn't enter into a repayment program, we didn't enter into legal proceedings or anything. There is no legal proceedings undertaken by Stair Lock whatsoever in regards to this issue.
[18] Appeal transcript page 16 and following.
Mr Green said that if they had been concerned they would not have continued to provide the $5000 credit limit.[19] He argued that it was more a question of exceeding a credit limit than concerns about the financial viability of Scarce.[20]
[19] Appeal transcript page 21.
[20] Appeal transcript 22.
Mr Green repeated that they put Scarce on credit hold because they exceeded the credit limits.[21]
[21] Appeal transcript 32 Line 30.
In his written submission on the review Mr Green referred to a number of authorities which distinguish between slow paying and knowledge of insolvency.
Mr Green referred to the reasons of Barrett J in Dean-Willcocks v The Commissioner of Taxation[22] where His Honour said:
It is important to emphasise that the relevant suspicion is one of actual and existing insolvency as distinct from impending or potential insolvency.
[22] [2008] NSWSC 1113.
He referred to Chicago Boot Co Pty Ltd v Davies and Anor[23] where White J considered circumstances in which a reasonable person would have had grounds for suspecting that a company was insolvent. White J said that the circumstances had to be considered in the context of the overall trading relationship between the companies. In that case the average delay in the drawing of cheques was not so significantly different from what it had been during the course of the trading relationship
[23] (2011) 282 ALR 378.
In Sparad No 100 Ltd v JB Harkness[24] Priestly JA observed in relation to the late payment of debts "debts are not always paid on time by solvent traders."
[24] unreported Full Court of the Supreme Court of New South Wales 14 February 1997.
In Melcalf Crane Services Pty Ltd v Rathner[25] Barrett J said:
… I should not consider the evidence with the benefit of hindsight and I should consider the cumulative impact of the relevant evidence both for and against establishing absence of the relevant suspicion. I am also conscious of the fact that the mere failure to pay debts on time does not by itself constitute grounds for suspecting insolvency.
[25] [2011] VSC 195.

Mr Green submitted that in applying the test for insolvency the courts have consistently distinguished between temporary cash flow issues and an endemic shortage of working capital. I accept that submission. He referred to Wick J in Re Ermayne Pty Ltd; Sims v Tech Holdings Pty Ltd (t/a Westline Furniture)[26].
[26] (1919) 30 ACSR 330.
In Sandell v Porter[27] (dealing with the Bankruptcy Act 1996 (Cth)) Barwick CJ said:
The conclusion of insolvency ought to be clear from a consideration of the debtor's financial position in its entirety and generally speaking ought not to be drawn simply from evidence of a temporary lack of liquidity.
[27] (1966) 115 CLR 666.
Mr Green submitted that on the evidence produced at the trial the relevant conduct of Scarce was limited to:
·not paying the appellants invoices within the trading terms; and
·Scarce notifying the appellant on 16 May 2012 that it was having cash flow problems and that it would attempt to clear its debt by 22 May 2012
As to the first of those matters he submitted that the evidence proves that the company typically paid invoices late during the parties trading relationship and that the length of delay in receiving the 2 payments in June 2012 was no different from historical delays in receiving payments. He submitted that the mere failure to pay debts on time does not itself constitute grounds for suspecting insolvency. I accept that submission.
As to the second matter Mr Green submitted that short-term cash flow issues do not amount to insolvency. I accept that submission also. Mr Green pointed out that Scarce had a long history of delay in payment of accounts.
Mr Green submitted that in determining the subjective element in s 588FG(2) of whether the appellant did not, in fact, suspect that the company was insolvent at the time of the transactions regard should be had to the conduct of the appellant at or before the date of the transactions. He submitted that none of the usual matters evidencing a suspicion of insolvency was present. There is no evidence that the appellant raised in correspondence or otherwise with the Scarce that it held a concern about the company's solvency, there is no evidence of any internal communications between employees or management of the appellant raising a concern as to Scarce’s solvency and the appellant did not issue statutory demands, legal letters of demand or legal proceedings to recover the amounts due, or threatened to do so.
The learned magistrate referred to the fact that the appellant obtained a Veda report with regard to Scarce. Her Honour was influenced by the fact that while the report did not list any defaults on the credit history of Scarce it showed 12 credit enquiries in the amount of $1,951,000 in the previous 12 months. She concluded that a reasonable business person would not have been reassured of the company’s solvency by the Veda report. I accept the appellant’s contention that the learned magistrate erred in this conclusion. Many of the enquiries were by the company's bankers. I find that no adverse inference can be drawn the Veda report.
I accept the submission that the magistrate placed undue weight on the fact that the appellant placed Scarce on stop supply. I accept that doing that is commonplace in the building industry to put pressure on customers to make payments.
The learned magistrate was influenced by the fact that the fact that an increased credit limit application was completed which had the personal guarantee and indemnity clause crossed out. I accept the submission of Mr Green that any adverse inference drawn from the fact that the director did not sign the guarantee and indemnity is an error. Indeed if the appellant had suspicions as to the solvency of Scarce it is more likely to have required the guarantee and indemnity before further credit was provided
I accept the submission that the learned magistrate placed too much emphasis on the fact that the appellant did not trade with Scarce during the two months leading up to the payments being made in June 2012. I accept the submission that no adverse inference can be drawn because there were other instances where Scarce had not traded with the appellant.
Mr Green concluded[28]:
To bring matters properly into context, the company's debt to the appellant was relatively small, was not long overdue and occurred in circumstances where the company had a history of paying late and was a relatively high profile builder that had been in business since 1990 with no defaults listed on its Veda report.
[28] Written submission [3].
There is a qualification I must make with respect to the evidence (not submissions) of Mr Green. He was not employed by the company in June 2012 and he does not have personal knowledge of some events. However, I do accept the submissions which he has made based upon his current knowledge of the records of the appellant and his personal knowledge of the industry and credit management. I accept his evidence subject to that qualification.
Insolvency is a concept which has a quite definite meaning. As the authorities to which I have referred point out cash flow problems are not the same as insolvency. I would have no difficulty in finding that the appellant was aware Scarce was experiencing cash flow problems. The evidence establishes there was nothing unusual about that. However on the basis of the evidence of Mr Green I find that the appellant did not have reasonable grounds to suspect that the company was insolvent at the time that the payments were made. Additionally I find that a reasonable person in the appellant's position would not have had reasonable grounds to suspect that the company was insolvent at the time each of the payments was made.
There is no evidence that the appellant’s had actual knowledge of insolvency. In my opinion the established facts which were known to the appellant do establish slow paying but the established facts did not give rise to a suspicion of insolvency.
In my opinion the appellant has made out the four matters required to establish the defence in s 588FG(2).
In the circumstances the judgment of the learned magistrate will be rescinded. I substitute judgment for the defendant dismissing the claim.