Sutherland v Eurolinx Pty Ltd - [2001] NSWSC 230

No judgment structure available for this case.

Reported Decision:
(2001) 37 ACSR 477
(2001) 19 ACLC 633

New South Wales

Supreme Court

CITATION: Sydney Appliances P/L (in liq) v Eurolinx P/L [2001] NSWSC 230

CURRENT JURISDICTION: Equity

FILE NUMBER(S): SC 4175/99

HEARING DATE(S): 11/10/00, 12/10/00

JUDGMENT DATE:
30 March 2001

PARTIES :

RODERICK MACKAY SUTHERLAND (in his capacity as Liquidator of SYDNEY APPLIANCES PTY LIMITED (in liquidation)) (Plaintiff)
EUROLINX PTY LIMITED (ACN 001 473 347) (Defendant)

JUDGMENT OF: Santow J

COUNSEL : C R C Newlinds (Plaintiff)
J J Priestley (Defendant)

SOLICITORS: Kemp Strang (Plaintiff)
Cutler Hughes & Harris (Defendant)

CATCHWORDS: CORPORATIONS — Company making payments for goods supplied — Factors going to establishing "good faith" defence under s588FG(2)(a) of Corporations Law in relation to preferential payments of a concededly insolvent company — Relevance of post-dated cheques and arrangements to not bank them without telephone confirmation — Subjective and objective alternative tests for suspicion of insolvency — Running account defence under s588FA(3) of the Corporations Law — Relevance of lack of good faith in subjective sense to continuance of business relationship required for defence — Other factors affecting — Defence made out — How unfair preference calculated where running account.

LEGISLATION CITED: Corporations Law Pt 5.3A; Pt 5.7B; s9; s95A; s436A; s439A; s439C; s446A; s513C; s588FA; 588FC; 588FE; 588FF; s588FG

CASES CITED: Airservices Australia v Ferrier & Anor (1996) 185 CLR 483
Downey v Aira Pty Limited (1996) 15 ACLC 1068
Re Ermayne; Sims v Tech Holdings Pty Limited (1998) 30 ACSR 330
Pegulan Floor Coverings v Carter (1997) 15 ACLC 1,293
Queensland Bacon Pty Limited v Rees (1966) 115 CLR 266
Rees v Bank of New South Wales (1964) 111 CLR 210
Richardson v The Commercial Banking Co of Sydney (1952) 85 CLR 110
Sandell v Porter (1966) 115 CLR 666
Sims v Celcast Pty Limited (1998) 71 SASR 142
Smith v Deputy Commissioner of Taxation (1997) 23 ACSR 611
Sparad (No 100) v Harkness (NSWCA, 14 February 1997, unreported)
Sutherland v Liquor Administration Board (1997) 15 ACLC 875

DECISION: Plaintiff succeeds on negating good faith defence. Defendant succeeds on running account defence.

IN THE SUPREME COURT
OF NEW SOUTH WALES
IN EQUITY

SANTOW J
No. 4175/99

RODERICK MACKAY SUTHERLAND (in his capacity as Liquidator of SYDNEY APPLIANCES PTY LIMITED (in liquidation))
Plaintiff

EUROLINX PTY LIMITED ( ACN 001 473 347 )
Defendant

JUDGMENT

Table of Contents

Page

OVERVIEW
AGREED FACTS
AGREED ISSUES
OVERALL ISSUES FOR DETERMINATION
Section 588FG(2) Defence
Running Account
Section 588FG(2) Defence
Good Faith
Suspicion of Insolvency
SPECIFIC FACTUAL ISSUES
What were the terms of the agreement as to payment between the parties?
Was there documentation of the indulgence (Plaintiff’s case) or change of terms (Defendant’s case) and did either occur?
Findings
Implications of indulgence
How were payments made between the parties?
What was the age of the debtors?
Account 174
Defendant’s response re Account 174
Account 269
Defendant’s response re Account 269
Other Accounts
Defendant’s response to remaining accounts
Other Documents later discovered
PX 11
PX12
PX13
Summing up
Conclusion

Was Eurolinx aware of any rumours concerning Sydney Appliances and/or Sydney Appliances’ position with its creditors?

Conclusion

Was Mr Pesch, the Australasian Marketing Manager for Eurolinx shown a copy of Sydney Appliances’ June 1996 financial accounts?

Conclusion

Is there any countervailing evidence suggesting solvency which should dispel suspicion?
Summing up
Overall Conclusion

What is a running account?
The relevant principles
Was this a running account?
Summing up

OVERALL CONCLUSIONS

OVERVIEW

1 A liquidator challenges a series of payments for goods supplied on credit. These were concededly preferences by an insolvent company. The primary point at issue is whether their recipient can make out the “good faith” defence within s588FG(2) of the Corporations Law.

2 Failing that, the recipient relies on “the running account” provisions. Under these, the amount of any preference will normally be the difference between the highest amount owed by the debtor during the six month relation back period under that account, and the amount finally owed at the date of winding up; see ss588FA to 588FG of the Corporations Law. The liquidator joins issue on these two matters. First on the good faith defence, denying it to be made out. Second, on whether, as required for a running account, there was throughout the period of those payments no interruption to the requisite mutual assumption of a continuing business relationship of which the relevant transactions were an integral part. The Liquidator contends that actual knowledge of insolvency would preclude that relationship continuing uninterrupted, or did so in the present circumstances. The Defendant replies not necessarily, and not in this case.

3 The Plaintiff company Sydney Appliances Pty Limited ("Sydney Appliances"), now in liquidation, and the Defendant supplier company Eurolinx Pty Limited ("Eurolinx") concededly had a business relationship. Eurolinx, an importer and wholesaler of European kitchen appliances, supplied kitchen appliances to Sydney Appliances, a retailer of whitegoods and other kitchen and bathroom products.

4 On 12 May 1997 the Plaintiff was appointed Administrator and on 18 June 1997 Liquidator of Sydney Appliances. Eurolinx is an unsecured creditor of Sydney Appliances. Between 12 November 1996 and 12 May 1997 Sydney Appliances paid to Eurolinx amounts totalling $565,146.80. It is that total amount which is under challenge for recovery by the liquidator.

5 I now outline first those of the facts as are agreed by the parties, and second, the agreed issues.

AGREED FACTS

6 Between late 1994 and May 1997 the Defendant, an importer and wholesaler of European kitchen appliances, supplied stock, being kitchen appliances to Sydney Appliances Pty Limited (“Sydney Appliances” or “the Company”), a retailer of whitegoods and other kitchen and bathroom products.

7 The last supply of goods by the defendant to the Company occurred on 8 May 1997.

8 On 12 May 1997 the plaintiff, Roderick Mackay Sutherland, was appointed Voluntary Administrator of the Company pursuant to s436A of the Corporations Law.

9 Between 12 May 1997 and 18 June 1997 the Company was under administration, with Mr Sutherland acting as Administrator, within the meaning of Part 5.3A of the Corporations Law.

10 On 18 June 1997 a second meeting of creditors of the Company was convened pursuant to s439A of the Corporations Law. The creditors of the Company there resolved that the Company be wound up pursuant to s439C(c) of the Corporations Law. By virtue of s446A, Mr Sutherland became Liquidator of the Company.

11 By virtue of ss9 and 513C of the Corporations Law, and by virtue of the appointment of Mr Sutherland as voluntary administrator on 12 May 1997, the "relation back day" of the Company is 12 May 1997.

12 The Company was at all material times a retailer and wholesaler of whitegoods, kitchen and bathroom products, principally trading at Concord in NSW and Armadale in Victoria as "Sydney Appliances" and "Melbourne Appliances" respectively.

13 The Defendant Eurolinx was at all material times and remains an unsecured creditor of the Company. Eurolinx lodged a proof of debt with the Liquidator in respect of the Company dated 13 October 1997 in the amount of $109,801.25.

14 The Company is insolvent and unsecured creditors in the winding up of the Company amount to $4,614,652.08. A statement of estimated position as at 24 November 1997 is annexed and marked "A", which estimates a potential dividend to unsecured creditors of 13 cents in the dollar, as outlined in para 33 of the Liquidator’s affidavit of 27 November 1998.

15 Between 12 November 1996 and 12 May 1997, the Company paid to Eurolinx amounts totalling $565,146.80 ("the Payments"). Full particulars of those Payments are comprised and recorded in schedule 1 to the Statement of Claim a copy of which is annexed and marked "B", and paras 24 to 26 of the Liquidator’s affidavit of 27 November 1998 and annexures "M", "N" and "O" thereto.

16 As can be seen from annexure B, some of the Payments were made by post-dated and/or undated cheques.

17 Eurolinx has provided valuable consideration under the Payments, so that s588FG(2)(c) is satisfied.

18 In the course of the relation back period from 12 May 1997, Eurolinx supplied the Company with goods.

19 There was a continuing business relationship between the Company and Eurolinx. It is in dispute whether it was terminated at some time in the period between 12 November 1996 and 12 May 1997, or throughout.

20 Between 12 November 1996 and 12 May 1997 there was a net reduction in the amount owed by the Company to Eurolinx of $347,694.44.

21 At the time that each of the Payments were made the Company was insolvent.

22 The Plaintiff’s solicitors demanded repayment of the Payments on 24 September 1997, alleging they were void “unfair preferences” pursuant to s588FA of the Corporations Law.

23 The Plaintiff commenced preference recovery proceedings against Eurolinx in respect of the Payments, plus interest and costs, by Statement of Claim filed in the District Court of NSW Sydney under plaint No. 9662 of 1997 on 28 November 1997 ("the Claim").

24 Eurolinx filed a defence on 2 February 1998 and admits receipt of the Payments. In or about September or October 1999 Eurolinx sought to amend its defence and assert that the Plaintiff was not validly appointed Administrator of the Company.

25 In Supreme Court of NSW Equity Proceedings 3431 of 1999 ("the Validity Proceedings"), it was declared that the plaintiff had been validly appointed Administrator and Liquidator of the Company, as set out in paras 3 and 5 hereof, by judgment dated 24 February 2000 and orders and declarations made 6 March 2000.

26 In the course of the Validity Proceedings, Eurolinx:

(a) consented to the transfer of the Claim to the Supreme Court of NSW Equity Division, which proceedings are now comprised in Proceedings 4175 of 1999; and

Corporations Law

27 The Payments are “transactions”, for the purposes of s9 and Part 5.7B of the Corporations Law. “Transaction” is defined in s9 of the Corporations Law to include "a payment".

28 Eurolinx has been preferred, within the meaning of s588FA of the Corporations Law, in that Eurolinx has received, by the Payments, more than Eurolinx would receive from the winding up of the Company, if it repaid the Payments and proved for the amount of the Payments in the winding up of the Company.

29 In or about January and February 1997, by an arrangement (the details of which are in dispute) some of the display stock supplied by Eurolinx to the Company were converted to "Consignment Stock".

AGREED ISSUES

30 There is no issue that the Company was insolvent within the meaning of s95A of the Corporations Law at the time of the transactions ("Payments").

31 There is no issue that at the time of each of the Payments Eurolinx was an unsecured creditor of the Company.

32 There is no issue that each of the Payments, totalling $565,146.80, was made within 6 months of the relation back day.

33 There is no issue that the result of the Payments that Eurolinx received from the Company is that Eurolinx has been preferred, in that Eurolinx has received more than Eurolinx would receive from the Company in respect of the Payments than if the Payments were set aside and Eurolinx was required to prove for the Payments in the

34 There is no issue that to the extent Eurolinx provided cooking appliances to the Company, it provided valuable consideration.

OVERALL ISSUES FOR DETERMINATION

Section 588FG(2) Defence

35 Whether Eurolinx can and has made out its defence based upon s588FG(2) of the Corporations Law, namely:

(1) Whether Eurolinx became a party to the transactions in good faith; and

(a) Eurolinx had no reasonable grounds for suspecting that the Company was insolvent at that time or would become insolvent; and

(b) Whether a reasonable person in the circumstances of Eurolinx would have had no such grounds for so suspecting?

Running Account

36 Whether the Payments were part of a "running account" such that s588FA(3) of the Corporations Law has effect?

37 I will deal with these issues in turn, starting with the relevant principles applicable to establishing the defences relied upon.

Section 588FG(2) Defence

38 In order for a defence to be made out under s588FG(2) of the Corporations Law it is necessary for Eurolinx to establish two essential elements. First that the payments were made in good faith. Second that Eurolinx subjectively had no reasonable grounds for suspecting that Sydney Appliances was insolvent at the time it received the payments and, objectively, that no reasonable person in the position of Eurolinx would have suspected insolvency. The defendant bears the onus in establishing this defence. (Sims v Celcast Pty Limited (1998) 71 SASR 142) These elements partially overlap. A payee who had actual suspicion on reasonable grounds that the payee was insolvent could hardly be said to be acting in good faith in receiving the payment.

Good Faith

39 The term "good faith" is to be given its natural meaning, namely to act with propriety or honesty. The requirement of good faith under s588FG(2)(a) is a subjective test. (Re Ermayne; Sims v Tech Holdings Pty Limited (1998) 30 ACSR 330 at 336; Downey v Aira Pty Limited (1996) 15 ACLC 1068 at 1075).

40 It may be accepted that there is no evidence that there was collusion with the debtor nor that this was a relationship which was conducted at anything but arms length. (Defendant's written submissions 6 October 2000 para 5).

Suspicion of Insolvency

41 I have described how suspicion of insolvency in s588FG represents both a subjective and objective hurdle for the Defendant to pass.

42 In Queensland Bacon Pty Limited v Rees (1966) 115 CLR 266 at 303 Kitto J defined “a suspicion” in these 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’ 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.”

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.”

44 Barwick J adds the warning in Sandell v Porter (1966) 115 CLR 666 at 670 that

“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."

45 Pegulan Floor Coverings v Carter (1997) 15 ACLC 1,293 (at 1,298) is a reminder that in approaching the question of suspicion of a company’s state of solvency it is necessary to apply commercial reality derived from the particular industry to the facts. It was ultimately found that insolvency should have been suspected. However, what was crucial was not, by itself, the use of instalment payments and post dated cheques. They were the practice in that industry and did not necessarily indicate insolvency. But when combined with other factors, in that case dishonoured cheques, their cumulative effect was to establish suspicion of insolvency. (at 1,299-1,300)

46 Priestley JA in Sparad (No 100) v Harkness (NSWCA, 14 February 1997, unreported) at 20 in warning against placing undue weight on dilatory payment, observed that "debts are not always paid on time by solvent traders."

47 Finally Smith v Deputy Commissioner of Taxation (1997) 23 ACSR 611 emphasises that “such a judgment must be made without the wisdom of hindsight and in all the circumstances which existed at the time”. (per Mansfeld J at 622)

48 I will outline what are put as the circumstances which constituted the "commercial reality" in the present case at the relevant times. Where material facts are disputed, I will determine these where I can, taking into account the overall onus on the Defendant to establish its defence.

specific factual ISSUES

What were the terms of the agreement as to payment between the parties?

49 Mr Maximillian Pesch was the marketing manager of Eurolinx and gave evidence on behalf of the Defendant company. This included evidence as to the agreed payment terms and as to whether it was agreed that 30 day’s payment was extended to 60 days. His evidence needs to be compared with that of Mr Michael McDonald on behalf of the Plaintiff liquidator. Mr McDonald was a director of Sydney Appliances at the time. Mr Pesch noted in his Affidavit of 27 January 1999 that at the commencement of the relationship between the Eurolinx and Sydney Appliances the trading terms were "payment within 30 days of invoice" that is, the statements "were all due for payment 30 days after the date of the statement." (paras 7 and 8). Between May 1996 and November 1996 the business relationship between the two continued to expand, such that Sydney Appliances’ orders increased from $60,000 worth of orders per month to approximately $120,000 (Pesch affidavit, para 17). Did these trading terms change and with what implications for establishing suspicion?

50 It is agreed that there was, at the least, an understanding between the parties that the terms would be extended to 60 days. (T, 127.48-.50 as articulated by Counsel for the liquidator). Mr Pesch would go further and say that understanding went so far as to constitute an agreed change to the contractual relationship substituting 60 days.

51 Prior to early November 1996 Mr Pesch states he had a telephone conversation with Mr Macdonald in words to the following effect (Pesch affidavit 27 January 1999 para 18):

“Mr Pesch: "Michael, the account needs to be brought into line."

Michael Macdonald said: "I’ll look at the position and get back to you."

52 Mr Macdonald stated that during November 1996 he had a number of conversations with Mr Pesch in one of which, in early November 1996, the following exchange occurred: (Macdonald affidavit 19 May 2000, para 17).

“Macdonald: Here are the June 1996 results. You can have a copy, but they are not good and I am meeting with all creditors, particularly our major suppliers, and asking them for support in extending trading terms. We need that support from everybody, and I need at least 60 day terms. We have existing debt through Elite (referring to the purchase of Elite Appliances by the Company in Melbourne) and a lot of Rossier stock (being a particular line of the defendant). In fact we have a lot of stock, and you should convert that stock to consignment stock and adjust the accounts accordingly.

Pesch: "Michael I will do what I can, you can probably pay for new purchases on 60 days. I don’t want to make life hard and I don’t need to keep a copy of these accounts.

Macdonald: "We’ll try and do what we can."

53 A "short time later" Mr Pesch had another conversation with Mr Macdonald in words to the following effect (Pesch Affidavit 21 January 1999, para 19):

“Michael Macdonald: What I can do to help bring the account within trading terms is to provide you with four or five cheques each month to be paid off against the oldest invoices on the account. This will allow me to get the account down in line with my cashflow. I know how much I’m getting in each week and I can write cheques which will work in with my cashflow."

Mr Pesch said: "Alright, as long as the account is brought into line with the agreed terms, that system should be okay. We’ve come to this sort of arrangement with other customers and it should work well."

54 Mr Macdonald stated in his affidavit that he could not recall these words attributed to Mr Pesch adding

"I say I certainly would have remembered being told by Eurolinx that the system of payment by post and undated cheques of substantial accounts was normal. It struck me as far from normal practice, indeed I was uncomfortable and embarrassed and it was definitely not my normal practice." (Affidavit Macdonald para 21)

55 Mr Pesch further testifies to a conversation on 19 November 1996 (Affidavit Pesch 27 January 1999 para 21) in which he observes that payment of the account had “blown out to 90 days. He reiterates the need to get payment terms down. Significantly, there is no suggestion that payment terms beyond 60 days were either agreed or understood as acceptable:

"We are happy the way business is going. If we keep growing the business we should have a long and successful business relationship with you. We do need to address payment of account however, They’ve blown out to 90 days. Whilst we’re happy with the figures achieved, we do need to get our payment terms down. As you are now one of our bigger accounts we feel we can extend the same terms as we do to other large accounts and can offer 60 days term."

Michael Macdonald said: "A 60 day term would be acceptable. We’ll keep providing you with cheques on a regular basis to ensure the account continues to be brought into those terms."

56 Mr Macdonald denied the terms of this conversation and states "I would not have used glowing words to assess or describe the trading or financial position of the Company. Formal written terms of 60 days were not offered to the best of my recollection. All invoices continued to state terms of 30 days." (Affidavit of Macdonald para 23) The lack of any documentation extending the terms to 60 days was also acknowledged by Mr Pesch during cross-examination (T, 31.15-.27)

Was there documentation of the indulgence (Plaintiff’s case) or change of terms (Defendant’s case) and did either occur?

57 No documentation has been produced nor I conclude was any ever created recording the contended November 1996 change from 30 days to 60 days or any change in the relationship between the parties (T, 31.24-.28). This is highlighted in the following exchange during the cross-examination of Mr Pesch:

“Q. Have a look at every single account on that document, they are all monthly, aren’t they?
A. That’s correct. All of our invoices and all of our statements state 30 days.

58 No such note was recorded on the debtor’s ledger. The Plaintiff noted the failure of Eurolinx to produce any file which records any arrangement other than 30 days in relation to this matter; this despite the usual practice to record such a note on the debtor’s ledger and even though Mr Richard-Evans (former credit manager of Eurolinx) conceded that he would have kept a note of such a change in his computer note-pad (T, 64.17-.24 Plaintiff's written submissions 16 October 2000 para 13).

59 The Plaintiff also noted that it was Mr Pesch’s usual practice to tell Mr Richard-Evans of changes in arrangements between parties. Mr Pesch acknowledged the importance of Mr Richard-Evans knowing such alterations to arrangements (T, 28.49-.55; T, 30.17-.20). Despite this usual practice it appears that Mr Richard-Evans was not informed of the re-negotiated terms from 30 to 60 days and that Mr Richard-Evans assumed the account remained on 30 days as he testified during cross-examination (T, 63.29-.30; 68.13-.16).

60 In cross-examination Mr Warner, financial controller of Sydney Appliances and a former director, testified that it was quite common for Sydney Appliances to delay its creditors beyond their agreed 30 day terms (T, 82.11-.16). Nonetheless, it appears that the terms were altered in this situation at this time due to financial difficulties of Sydney Appliances. During cross-examination of Mr Pesch the following exchange occurred:

61 I infer that Mr Pesch agreed to the extension of the terms by way of indulgence as he was aware that Sydney Appliances was in need of the support of its major creditors to survive and that Sydney Appliances was unable to pay its accounts when they fell due upon terms of 30 days.

Findings

62 (i) The contractual term stayed throughout at 30 days;

(ii) Some time prior to early November 1996 Eurolinx (via Mr Pesch) required that the account be brought into line, that is brought back to 30 days;

(iii) However, there was then an oral understanding reached in early November 1996, but only by informal indulgence, that an extension of the terms to 60 days would be tolerated;

(iv) There was no such tolerance agreed for longer than 60 days; indeed the indulgence and agreed method of payment was for four or five cheques each month to be applied to the oldest debts.

These conclusions are based on my assessment of the earlier noted evidence and reinforced by cross-examination of Mr Pesch T, 41 and Mr MacDonald, T, 118.14-.21.

Implications of indulgence

63 Insolvency is the inability to pay debts as and when due. In asking whether the necessary suspicion of insolvency existed at the relevant time to preclude the defence of good faith, is that determined by reference only to strict contractual terms of payment? In particular, does suspicion or active knowledge that those terms cannot be met suffice to negate that defence, notwithstanding that further latitude was informally allowed up to 60 days?

64 It is acknowledged that the contractual term was 30 days. But I have earlier concluded that this term had been extended to 60 days, but only by way of indulgence or informal arrangement.

65 The Plaintiff submits that:

“the notion of a debt ‘becoming due’ is a legal one. A debt is not rendered ‘Not Yet Due’ by reason only that the creditor has forborne (whether expressly or by a course of conduct) from actively seeking to enforce its right to be paid" relying upon Melbase Corp Pty Ltd v Segenhoe Ltd (1995) 17 ACSR 187 at 199; Cuthbertson & Richards Sawmills Pty Ltd v Thomas (1998) 28 ACSR 310 but see contra re New World Alliance; Sychotex v Baseler (1994) 51 FCR 425 at 434 (Plaintiff’s written submissions 16/10/2000 par 13).”

“any arrangement that may have existed between the parties in this case was not as a result of common usage but was a result of a request by Mr MacDonald based on the Company’s inability to pay the invoices at an earlier time. Thus it is a true ‘boot straps’ argument. It cannot be that an arrangement entered into because an earlier arrangement could not be maintained can somehow be converted into evidence of solvency! To the contrary, it is clear evidence of insolvency. The circumstances under which the ‘arrangement’ itself was entered into by necessity must, at the very least, enliven a suspicion of insolvency in any reasonable person.” (Plaintiff’s written submissions 16/10 par 15)

66 I consider that where a payee offers or allows an informal indulgence, solvency is to be tested by reference not just to the contractual due date, but also by reference to the effect of the indulgence. In addition the fact that an indulgence has been sought, while not by itself conclusive, may be weighed with any other factors telling against the perceived solvency of the Defendant company.

67 Thus where, as here, there is an arranged indulgence, intended to be relied upon, that is ordinarily sufficient to ensure the good faith defence is tested by reference to the extended period which reflects that indulgence.

How were payments made between the parties?

68 Mr Sutherland, the liquidator, noted that Sydney Appliances used undated and post-dated cheques to "juggle supply of stock and temporary creditor satisfaction" (Affidavit Sutherland 27 November 1998 para 63) and constituted "a promise to pay" (T, 18.42-.46). Mr Warner stated in cross-examination that the use of such cheques was "an act of goodwill towards the creditor" (T, 75.51-.52) [emphasis added] but conceded that it gave Sydney Appliances more time to make payment (T, 75.54-.56). Indeed I would infer that latter was its principal purpose. The use of post-dated and undated cheques was a practice which had become "fairly common" from November 1996 (T, 76.6-.9). It is common ground that these cheques were usually in round amounts.

69 Whilst the use of such cheques had become "fairly common" Mr Warner also acknowledged in cross-examination that from "time to time" prior to 1996 Sydney Appliances used post-dated and undated cheques to pay creditors (T, 75.38-.46). However, there is no evidence as to whether Eurolinx were aware of this practice so far as other creditors were concerned. Absent that evidence, such practice has no special significance.

70 One contentious issue is whether there was an agreement between the parties that prior to banking such cheques sent by Sydney Appliances to Eurolinx for payment that there would be a discussion by telephone confirming that such cheques could be banked.

71 Mr Warner and Mr MacDonald testified that it was the practice of Sydney Appliances to hand deliver cheques to Eurolinx but that these cheques were not to be banked until a phone call had been received from Sydney Appliances instructing Eurolinx to do so. This is seen in the evidence of Mr Warner, director of Sydney Appliances, who testified in para 14 of his Affidavit of 18 May 2000 that

“From about November 1996, the practice developed … that I used to take Eurolinx’s cheques around to Eurolinx at Leichardt, hand delivering them initially to Ian Richard-Evans, and giving a schedule of payments. At the time of delivering the cheques I would usually say words to the effect:

‘Here are the (November) cheques, for payment of (August ..). Banking the cheques should be OK according to their date, but I will ring you first.’

The cheques were usually post dated, although some were undated, and the months being paid would differ.

That is, payment was in fact in excess of 90 days

and depending upon what I determined the cashflow could handle

72 This practice was confirmed in examination in chief (T, 71.41-.53) and in cross-examination (T, 88.52-.55).

73 This process of providing post-dated and undated cheques at about 55 days was with instructions that they were not to be banked until Eurolinx received a telephone call from usually Mr Warner; it was also testified to by Mr MacDonald. (Affidavit 19 May 2000 para 22; T, 119.13-.20).

74 The Defendant disputes that there was a requirement for Sydney Appliances to wait for a telephone call from Eurolinx before banking cheques. (Pesch Affidavit 16 June 2000 paras 7 - 8). In cross-examination, however, Mr Pesch was shown a copy of a "With Compliments" slip (Tab 16 of the Agreed Bundle), which accompanied four post dated cheques, addressed to Mr Pesch from Andrew Warner and containing the words "We will confirm dates with you progressively, regards Andrew". Mr Pesch agreed, as indicated on the "With Compliments" slip, that Mr Warner would confirm dates before the cheques could be banked (T, 26.33-.59). This concession by Mr Pesch was highlighted in the following exchange during cross-examination:

“Q. Well if there was no arrangement between you and Mr Warner that involved either of you contacting the other, there would be no need for Mr Warner to write you a note when he gave you the cheques, saying that he would confirm the dates with you progressively?

75 Mr Richard-Evans (for Eurolinx) in paragraph 5.2 his affidavit of 22 June 2000 testified that he would receive cheques from Sydney Appliances and date them on the date recorded on the cheque and on "the occasion where there was no date on the cheque, there was a yellow sticker with an indication of the date on which the cheque could be banked and I would automatically bank it on that day without reference to anyone from Sydney Appliances Pty Limited." In cross-examination, however, Mr Richard-Evans stated that Mr Warner had asked him to telephone him before banking undated cheques, a request he complied with (T, 67.37-.39; T, 67.53-.58).

76 Ms Fotopoulos (who took over from Mr Richard-Evans at Eurolinx) stated in paragraphs 3-5 of her affidavit of 14 January 1999 that upon receiving an undated cheque she would ring Sydney Appliances’ accounts department for permission to date the cheques before banking. She confirmed this in cross-examination (T, 60). In examination in chief Mr Warner acknowledged that Mr Fotopoulos may have rung him or he may have rung her, he was unsure as to who initiated the telephone calls (T, 72.49-.50).

77 In cross-examination Ms Fotopoulos also testified that it was Max Pesch who informed her to ring Sydney Appliances before banking cheques (T, 60.41-.48; T, 60.56-61.4).

78 I accept, as did Mr Sutherland the Liquidator in cross-examination (T, 18.58 - 19.3), that the use of post-dated and undated cheques does not in and of itself necessarily indicate that a company is insolvent; Pegulan Floor Coverings (supra). Nonetheless it is a factor of significance to be weighed with others as pointing to suspicion of insolvency or reasonable grounds for it. In ascribing weight to that factor, it is true that none of the cheques given to Eurolinx by Sydney Appliances "bounced" (Sutherland cross-examination T, 19.5-.14). Nor had Eurolinx issued a statement of claim to recover the debt (Sutherland cross-examination T, 19.16-.27). The Defendant also relied on the observation of Kitto J in Queensland Bacon at 302:

“In many situations, of course, the dishonour of a cheque, unless otherwise explained, carries a strong suggestion of insolvency; but in others it may indicate, to those who are constantly dealing with the drawer and know the general course he is pursuing in his business, no more than a policy of wringing the last ounce of credit out of everyone who can be fobbed off with promises.”

79 The Defendant contended that Sydney Appliances’ use of post-dated and undated cheques were indeed part of a policy of "wringing the last ounce of credit out of" Eurolinx. As against that, this practice increased significantly in the period corresponding with the company’s increased financial difficulty. Indeed it became fairly common practice from November 1996.

80 Further, whilst there is some contradictory evidence as to the exact procedure to be used, it is clear that Sydney Appliances often used post-dated and undated cheques to pay Eurolinx. Certainly on more than one occasion from November 1996 there was the need for telephone contact either initiated by Sydney Appliances or by Eurolinx before such cheques could be banked.

81 Finally, appraisal of this factor in its overall commercial context requires consideration of other factors. I turn next to the age of the debtors, to test the Plaintiff’s contention that the evidence demonstrates a systematic failure to maintain even a 60 day payment regime from November 1996.

What was the age of the debtors?

82 Tab 17 (PX7) of the Agreed Bundle of Documents contains both a summary and the actual statements of the seven accounts operating between the parties from October 1996. It records all the payments and purchases made during the period. (T, 9.20-.36). As the Defendant notes, Mr Pesch was cross-examined on pages (T, 85, 105 and 151) "to the effect that even after the agreement of November, the account was in excess of 60 days." (Defendant’s written submissions para 25). For example, the following exchange occurred during cross-examination:

“Q. So as at 19 November you did believe that the account was beyond 90 days?
A. Correct.

Q. And then you say I offered to Mr MacDonald terms of 60 days?
A. He had to bring the account back into line which I believe was done.

Q. And thereafter he would have 60 days terms?
A. That’s correct.

83 Mr Pesch was of the belief that between October 1996 till March 1997 the account was brought into line with 60 day terms. However, he also had to acknowledge that the average of 57 days did not take into account overdue invoices in all accounts, such as the Rossier account which had not been paid since July 1996; T, 42.13 - 44).

84 It was the belief of Mr Richard-Evans, Eurolinx’s accounts department that not only was it his understanding that the Sydney Appliances’ account by its terms still required payment of invoices within 30 days of the end of the month but also as of the middle of January 1997 that the account was at about 90 days or in excess of 90 days (T, 68.13-.20). That tells heavily against the Defendant’s contention to the contrary.

85 I will now deal with account 174 and account 269 which were the subject of cross-examination.

Account 174

86 The Statement for Account number 174 till 30 October 1996 appears at page 57 of the Bundle. That statement contains an invoice dated 11 June 1996, one dated 18 July 1996 and the balance of the statement contains invoices from 1 August 1996.

87 The Statement for Account number 174 till 28 November 1996 appears at page 76 of the Bundle. This statement also contains the invoice for 11 June 1996 and the invoice for 18 July 1996. The balance of the invoices are dated from 1 September 1996.

88 Page 85 of the Bundle shows the first page of a six page Statement for Account 174 to 20 December 1996 sent by Eurolinx to Sydney Appliance. The closing balance of the Statement shows items to the value of $108,841.80. This amount is made up of amounts dating from 2 September 1996. It appears that the account was being run at greater than 60 days.

89 In cross-examination Mr Pesch acknowledged that this account had not been brought into line by December 1996 in that it was running in excess of 60 days. (T, 43.33 - 47) He also acknowledged that as of May 1997 the account was at 90 days (T, 46.17).

Defendant’s response re Account 174

90 Whilst acknowledging that the account appears to be being run in excess of 60 days the Defendant submits that in October 1996 this account is actually at 30 days, in November it is at 60 days and although the December statement looks to be at 90 days this is not the case. (Defendant’s written submissions 10 October 2000 para 25(a)) This is submitted on the basis that:

"Page 85 (December Statement) shows a credit for $46161.61. Yet that credit, unlike the treatment on the previous statements, is not applied against the invoices set out on the statement. In other words the statement at page 85 does not accurately show, which invoices have been paid. This error is repeated in the following statements for this account. With respect this undercuts any effect of the cross-examination in this regard. On close consideration it can be seen that the accounts in question are approximately in keeping with the 60 day terms. The analysis of these statements supports the evidence of Mr Pesch that the account was within 60 days." (para 25(a) Defendant’s written submissions 10 October 2000)

91 It is then further submitted, as was suggested to Mr Warner (financial controller of Sydney Appliances in giving evidence for the Plaintiff) during cross-examination, that as the balance of the account was being run within terms, the outstanding invoices could have been due to delivery problems or a dispute. Mr Warner acknowledged that this was a possibility (T, 92.3-.12). Mr Warner also acknowledged that on Eurolinx’s records the account appeared to be being run on 60 days (T, 98.36-.40).

92 The Defendant also relies on Mr Warner’s evidence that 30 days means the end of the month plus 30 days (T, 90.10) such that at 30 October 1996, account 174 was at 30 days (T, 91.10).

Account 269

93 Page 105 of the Bundle is the first page of a four page statement for account number 269 to 31 January 1997 sent by Eurolinx to Sydney Appliances (Victoria). The Closing Balance of the statement is $117,283.31. This consists of amounts dated from 1 October 1996. This account also appears to be running at greater than 60 days.

94 Another statement for Account number 269 appears on page 151 of the Bundle. This statement is until 30 May 1997 and consists of an amount outstanding from 25 October 1996, an amount from 29 October 1996, an amount from 4 December 1996 and then amounts from the beginning of February 1997.

95 It should be noted that no “proof of debt” documentation has been tendered by the Plaintiff.

96 Mr Pesch in cross-examination acknowledged that this account had not been brought into line by January 1997 and that as of May 1997 there were still invoices in excess of 60 days (T, 44.4-.19). Mr Pesch, however, tried to explain this by saying

“they could very easily have been under investigation as far as whether goods delivered that could have had POD on them. Then you jump to February, you have a whole thing for February. In this case I would have to say it is possible there were enquiries on those particular invoices.” (T, 44.13 - 18)

97 Nonetheless Mr Pesch frankly acknowledged that as of 30 May 1997 the account was in excess of 90 days (T, 45.1-.13).

Defendant’s response re Account 269

98 The Defendant however submits that this account was largely running within 60 days as evidenced by the fact that the statement at page 105 of the Bundle shows that a payment was made on 6 January 1997 paying all but approximately $8,000 of the October invoices totalling in excess of $50,000. (Defendant’s written submissions 10 October para 25(c))

Other Accounts

99 I turn now to accounts 36, 36A, 174A, 269A and Rosieres account found in Tab 17.

Defendant’s response to remaining accounts

100 The Defendant deals with accounts 174 and 269 as the larger accounts and concentrates on those. The Defendant’s written submissions of 19 October 2000 para 11(a) and (b) are as follows:

“(a) That accounts 174 and 269 are within 60 days in the period November through to 30 April, 1997.

(b) That the evidence concentrated on accounts 174 and 269 for the simple reason that they are obviously the larger accounts. That this is so is demonstrated by taking the closing balances of those two accounts as at 30 April (as shown on page 142 in respect of account 174 and on page 138 of account 269) being figures of $38,413.00 and $65,796.96 respectively, giving a total of $104,209.96. The proof of debt lodged by the Defendant is in the sum of $109,801.29 (paragraph 22 of Mr Sutherland’s affidavit at tab 3). The difference between those two figures is $5,591.33. That figure is the total indebtedness for the other accounts. Those accounts are of no significance in these proceedings.”

101 However, the fact remains that, as the plaintiff contends and I accept, in relation to the accounts in Tab 17 (p 47-8) described as 36 (balance October 1996 $22,773.20), 36A (balance October 1996 $2,764.64) 174A (balance October 1996 $13,545.22), 269A (balance October 1996 $3,819.45) and Rosieres (balance October 1996 $63,050), those accounts were at the time significant. Indeed in the case of Rosieres its account was very substantial. Those accounts exceeded 60 days, during the period October 1996 to May 1997. The Defendant’s cross-examination of Mr Warner did not refute that conclusion.

Other Documents later discovered

102 I now turn to the effect of documents marked PX 11, PX 12 and PX 13. I note that these documents were not "discovered" by the Defendant until 3:30 pm on the second and final day of the hearing. That belated discovery meant that no cross-examination could have occurred in relation to that material at the time the witnesses for the Defendant gave their evidence. There was no further evidence in chief sought to be adduced by the Defendant concerning that material, or further cross-examination sought by the Plaintiff. But it must be remembered the Defendant retains the onus in establishing its defence.

103 Taking that material (PX 11, PX 12 and PX 13) overall, it clearly does not assist the Defendant’s case. Rather constituting Eurolinx’ own records, as it does, it is effectively an admission, entirely consistent with earlier concessions elicited from the Defendant’s witnesses, that:

(i) substantial portions of indebtedness were still being paid in excess of 60 days, and furthermore

(ii) a significant proportion of indebtedness was still being paid at around, or in excess of, 90 days, measured from the date of the invoice amount (as distinct from the end of the month as applied to the 30 days) or by reference to the description “age 3” (see PX 11). The latter meant, inferentially, the debt was still owing in the third month.

PX 11

104 Exhibit PX 11 is a Debtors Ledger for Eurolinx Pty Limited providing the Customer Balance List as at May 1997 and printed on 14 May 1997. Pages one and two of this document are for account number 174. This document records amounts outstanding dating from 2 September 1996. From this it appears that a substantial number of invoices were still outstanding after 60 days and indeed outstanding after 90 days. Indeed every account listed in this document appears to have been run at greater than a 60 day indulgence.

105 The Plaintiff submits that "significantly no note of any dispute is to be found. Such a note would usually find its way onto such a document." (Plaintiff’s written submissions, p.4)

106 The Defendant, however, submits that simply because invoices exceeding 90 days appears on this document does not result in evidence that the account was being run at greater than 90 days. This is submitted on the following bases:

(a) There had been an unallocated credit of approximately $46,000.00 which exceeds the amount of the September invoices which remain on the ledger.

“Q: There are still invoices outstanding from October 1996?

But the Plaintiff’s answer to that is irrefutable. It is not for the Defendant to leave, as a speculative possibility, that the goods might have had some problem justifying delay in their payment. Mr Pesch attempted to give general evidence about disputes (see for example T, 44.15, 45.30). But as Mr Pesch admitted (T, 45.34) he was doing no more than “guessing” and made no attempt to identify any particular “dispute”. That did not assist his credibility either. No documents were tendered by the Defendant recording any dispute. The onus remains upon the Defendant in establishing its defence, and it is simply not credible to seek to refute an aged debtor’s ledger showing “Age 3” against the majority of debts by such a speculative assertion.

(c) The same can be said for the November 1996 and January 1997 invoices; their “Age 3” description cannot be simply explained away in that manner.

(d) The entry for December is a credit and thus says the Defendant, correctly, there were no outstanding invoices for December.

(e) There are only three invoices for January 1997 — but that does not alter the fact that they are “Age 3” debtors so described in the Defendant’s own records.

(f) There are a number of invoices for February 1997. As at 30 April 1997 these invoices are described as “Age 3”, being all beyond 60 days. The Defendant acknowledges that, as the Plaintiff notes, the document is described as printed on 14 May 1997 and thus the invoices would be beyond 60 days. The Defendant submits, however, that as the date of the Debtor’s Ledger is two days after the Administrator was appointed little guidance can be placed on the date of the document. The accounts were in order at 30 April 1997 assuming 60 days is measured from the end of the February 1997 month. This is said to be significant for by that time, all the payments had been made that have sought to be impugned. The time at which the court needs to determine whether a suspicion of insolvency is held has by this time passed (Defendant’s written submissions 10 October 2000, para 13(e)). That submission of the Defendant can be accepted. But it does not deal with the earlier indebtedness, and is consistent with a systematic failure to pay within 60 days.

PX12

107 PX12 is a Remittance Advice of Sydney Appliances sent to Eurolinx and dated 3 February 1997. Whilst being a Sydney Appliance document this was produced by Eurolinx.

108 As the Plaintiff notes this document records (in handwriting at the end) that as at 3 February 1997 invoices dated from 1 October 1996 were being paid. (Plaintiff’s written submissions 16 October 2000, para 9) The Defendant on the other hand submits that this document is of no assistance to the Plaintiff as it "simply shows the way in which the insolvent company thought that its payments were being dealt with". (Defendant’s written submissions 10 October 2000, par 18) But the answer is that how the insolvent company thought the payments were being dealt with is crucial, when it be the case that insolvency itself is not in dispute. Clearly enough the Defendant did think it was receiving payment outside the 60 days as PX13 further demonstrates. That should have excited its suspicion of insolvency.

PX13

109 PX13 is a handwritten document produced by Eurolinx detailing a number of invoice dates and amounts as well as the amount and date of payments. The Defendant submits it is not clear to whom this document belongs, nor who is the author of the document, when it was created nor the purpose of its creation. But given the Defendant’s onus, both as to its defence overall and faced with a document discovered from its own file, it is for the Defendant to refute that the document is not an authentic business record of the Defendant. Its late discovery reinforces that onus.

110 It appears from this document that invoices to which it refers, were being paid at 90 day terms, and certainly in excess of 60 days. Though the actual invoices are not identified by account number, they can be assumed in the absence of evidence from the Defendant to the contrary, to be part of the relevant indebtedness, more especially when there is express reference to Rosieres.

Summing up

111 Despite the changed method of payment, namely the increased use of post dated and undated cheques from December 1996, the account was not brought into line within 60 days as para 73 of Mr Sutherland’s affidavit of 27 November 1998 attests, his evidence not being challenged. Mr Pesch concedes this in cross-examination:

“Q So you believed him (Mr MacDonald) and his company was doing the best they could to pay the bills as fast as they could and notwithstanding their best intentions they were not able to bring the account into line?
A I think the account was brought down at that stage [by January 1997].

112 Mr Warner, as seen above, acknowledged that, for example, from Eurolinx’s accounts it appeared as if account 174 was being run within 60 days. Despite this Mr Warner, in cross-examination, was of the opinion that from November 1996 all of Sydney Appliances’ creditors were at 90 days or Sydney Appliances was on "stop supply" (T, 99.50-.52). However, Mr Warner agreed that this statement was based only on his recollection of the situation (T, 100.3-.6). In support of this the Plaintiff submitted that when analysing the accounts in question one is to look at all seven accounts and not at individual accounts and in so doing the accounts as a whole were being run in excess of 60 days (Plaintiff’s written submissions 16 October 2000, paras 5-7).

113 The Defendant submits that "the company has to an acceptable degree kept within its trading terms as renegotiated." (Defendant’s written submissions 10 October 2000, para 27) Any invoices which were being run in excess of 60 days were explained as possibly being due to a dispute (T, 44.12-.18; T, 45.15-.27). However, I accept the Plaintiff’s contention (Plaintiff’s written submissions 16 October 2000, para 8) that Mr Pesch was "only guessing" that outstanding invoices were subject to dispute (T, 45.34-.37) and no evidence of any such dispute was produced to the Court in meeting the onus on the Defendant in that regard. Moreover there is nothing in the Defendant’s proof of debt which concedes any invoice is in dispute.

114 I agree with the Plaintiff’s contention that the best evidence of the Defendant’s knowledge and the factual state of the debtor’s payment exceeding 60 days was the evidence given by the two people who were dealing with the account on each side of the ledger at the relevant time. Their state of mind was clear from their evidence. Mr Warner for the Defendant and Mr Richard-Evans on behalf of Eurolinx both believed the account was out of order and in excess of 90 days. That is further borne out by the remittance advice for Sydney Appliances behind tab 14 of the Bundle showing cheques drawn in November 1996 for invoices as old as July and August 1996.

Conclusion

115 Hence whilst it could be said that the company was attempting to keep within its trading terms I conclude that the Company’s accounts from November 1996 to May 1997 were being run sufficiently in excess of 60 days that, with the other factors of post-dated and undated cheques attending the altered method of payment, Eurolinx either did have, or should have had, suspicion of the Defendant’s insolvency from October 1996. That conclusion is potentially capable of reinforcement by the evidence, dealt with below (para 120 and following), concerning the disputed provision of financial information about the Defendant as at June 1996. But even without that reinforcement I consider it suffices to negate “good faith”.

Was Eurolinx aware of any rumours concerning Sydney Appliances and/or Sydney Appliances’ position with its creditors?

116 In his Affidavit of 19 May 2000 Mr MacDonald, Managing Director of Sydney Appliances testified at paragraph 12:

“Winnings Appliances was one of the Company’s major competitors. Industry rumours were often well based, and Ian Richard-Evans, Eurolinx’s credit manager until about late November 1996, also dealt with Winnings on a regular basis. I recall on occasions Ian Richard-Evans saying to me words to the effect:

‘We wont approve further deliveries because Winnings say you are not travelling well.’"

117 In cross-examination Mr MacDonald reaffirmed the content of this conversation (T, 112-114) noting that he remembered it because Mr Richard-Evans "wasn’t making it easy for us to get deliveries. He was holding back stock because our account was overdue" (T, 112.32-36).

118 In his affidavit of 22 June 2000 Mr Richard-Evans denies these words attributed to him and stated "I deny that I ever had a conversation with anyone from Winnings where the credit worthiness of Sydney Appliances Pty Limited was discussed." (para 4.2) This denial was confirmed in cross-examination. (T, 66.25-.44)

Conclusion

119 Whilst it is possible that there may have been some "gossip" or "rumours" within the industry as to Sydney Appliances’ financial position I am not satisfied they reached the Defendant in such a form as to expect them to have been heeded.

Was Mr Pesch, the Australasian Marketing Manager for Eurolinx shown a copy of Sydney Appliances’ June 1996 financial accounts?

120 Sydney Appliances’ June 1996 financial accounts constitute Annexure A to Mr Warner’s Affidavit of 18 May 2000 as well as Annexure A to Mr MacDonald’s affidavit of 19 May 2000. These accounts indicate that Sydney Appliances was undergoing financial difficulty. In particular this document demonstrated, as noted by the Plaintiff (Plaintiff’s written submissions 6 October 2000 para 13):

(i) a deficiency in current assets over current liabilities of $1.767 million;

(ii) a comparative increased deficiency in 1996 working capital over 1995 working capital of $1.233 million;

(iii) an increased overdraft in 1996 over 1995 of $257,000;

121 It is disputed whether or not Mr Pesch was shown a copy of Sydney Appliances’ 1996 financial results by Mr MacDonald in November 1996. If he were, it would be decisive in concluding that the Defendant had failed to satisfy its onus in dispelling suspicion of insolvency.

122 In his affidavit of 19 May 2000 Mr MacDonald at para 17 stated that he met with Mr Pesch in November 1996 and said to him:

"Here are the June 1996 results. You can have a copy, but they are not good and I am meeting with all creditors, particularly our major suppliers, and asking them for support in extending trade terms. We need that support from everybody, and I need at least 60 day terms. We have existing debt through Elite (referring to the purchase of Elite Appliances by the Company in Melbourne) and a lot of Rossier stock (being a particular line of the defendant). In fact we have a lot of stock, and you should convert that stock to consignment stock and adjust the accounts accordingly."

Pesch: ‘Michael I will do what I can, you can probably pay for new purchases on 60 days. I don’t want to make life hard and I don’t need to keep a copy of these accounts."

123 In cross-examination Mr MacDonald reaffirmed that he showed Mr Pesch the June 1996 accounts (T, 115.49-.52). He also acknowledged, however, that during this conversation it was possible that he would have been describing the prospects of the company in favourable terms by reference to the projected growth figures and the expectations he had of a prosperous future (T, 116.8-.14).

124 In contrast Mr Pesch stated in his Affidavit of 16 June 2000, referring to the above conversation that Mr MacDonald did not use the words "We have the June 1996 results which are poor" but rather he said words to the effect "We have the June 1996 results which are not up to our expectations." (para 2). However, not much hangs on that; neither presages an optimistic picture. Further Mr Pesch testified in paragraph 3:

"I recall that briefly during this conversation, Michael Alan MacDonald pointed to the computer screen and said words to the following effect: "These are our figures for the month of June 1996." This was no more than a brief reference during our conversation and as it had no particular relevance for me, I did not make any comment with respect to the June 1996 results which were apparently on the computer screen.’

125 In cross-examination Mr Pesch maintained that he believed he was being shown only the June sales figures for one of their products (T, 33.17-.22). The Plaintiff submits that:

“as a matter of common sense it cannot be that in November 1996 Mr MacDonald would have had any interest in showing Mr Pesch what had happened re. sales of Eurolinx’s products in June 1996. No explanation is given for why such information would be given in the absence of any information, for example, about July, August, September or October.” (Plaintiff’s written submissions 16 October 2000, para 17)

126 I could not conclude, one way or the other, whether Mr Pesch was shown the June 1996 management accounts in their entirety, being the actual document referred to as Annexure A in Mr Warner’s and Mr Macdonald’s affidavits. However, I do conclude that at some stage in November 1996 Mr Pesch was shown by Mr MacDonald some figures for June 1996. Further, it is clear that Mr Pesch was aware that at the very least these figures were not up to the "expectation" of Sydney Appliances, presaging a less than optimistic picture. Mr Pesch must have been in any event by November 1996 aware that Sydney Appliances was experiencing some financial difficulty. This is borne out by the cross-examination, during which this exchange occurred:

“Q But you don’t dispute, do you, that at that meeting, whatever results were being discussed, Mr MacDonald said to you something like "I am meeting with all creditors, particularly major suppliers, and asking them for support in extending trading terms". He said something like that, didn’t he?
A There could have been something along that line, yes.

Q "And we need that support from everybody and I need at least 60 day terms". He said something like that, didn’t he?
A Well the 60 day, the 60 day terms I’m not sure. 60 day terms were discussed with him at a later date when we actually confirmed him with the 60 days.

Q But the starting point is that he did tell you that he needed support from all his major suppliers?
A That could be correct, yes.

Q And you, of course, believed him when he told you that?
A Yes.

Q You didn’t think he was stringing you along and just telling you stories so he could pay you as late as he could get away with, did you?
A No.

Conclusion

127 I am satisfied that in November 1996, Mr Pesch was shown some figures for June 1996 but cannot conclude one way or the other as to these being the actual June 1996 accounts, though it should be borne in mind that the overall onus to establish the defence remains with the Defendant. I am also satisfied that the figures in fact shown were accompanied by

(a) the statement that (at least) they were not up to expectation, and

(b) by the stated need for general creditor support and 60 day trading terms.

That combination of connected events, in the context of the other circumstances concerning the Plaintiff known to the Defendant, would have reinforced a suspicion of insolvency, and certainly should have done.

Is there any countervailing evidence suggesting solvency which should dispel suspicion?

128 The Defendant relies on the following factors in particular to indicate lack of suspicion or basis for suspicion of insolvency (Defendant’s written submissions 10 October, para 44):

However, I do not consider that factor is a sufficiently countervailing consideration. This is especially when it is appreciated that the terms of payment, even with the indulgence to 60 days, were still not adhered to.

Again I do not consider that is a sufficiently countervailing consideration. The three expansions predate the November 1996 difficulties, the first two comfortably. Moreover as Mr Sutherland points out in his report to creditors of 29 May 1997 (Tab 3, p 39) there were problems attending that expansion. Thus for example, and most relevantly as the latest of the three, the purchase of Elite doubled in cost, and was coupled with management and logistical problems. Even if the Defendant, as a supplier to Elite, was not aware of those (and the Defendant on whom the onus vests gave no evidence to that effect) the mere fact of such an expansion would not dispel suspicion of insolvency associated with the other factors.

That of itself carries no special significance as regards solvency.

“It is the Defendant’s policy, with respect to retail customers’ accounts, that if there is any view taken by the Defendant or its management that the retail customer may be in financial difficulty, to immediately cease extending any credit terms to such customers and to place customers on strict cash on delivery ("COD") terms if supply is to continue. It is also the policy of the Defendant in such circumstances to negotiate a repayment schedule foe any outstanding amounts, not subject to COD.”

subjective

However, when the report recommending the short term assistance was put to the Bank (CBA) by Mr Summers, described as “Relationship Manager” Maroubra, his report of 13 December 1996 is at odds with the recommendation. In particular a number of significant points of concern are identified (for example substantial overspending on the Croydon fit-out and a business’ operating environment of “high risk”). These may well have contributed to the delay in any action by the Bank and then the refusal (and other foreshadowed action) set out in the Bank’s letter of 4 March 2997. They do not support the Defendant’s case but if anything the Plaintiff’s.

(vi) Sydney Appliances had used post dated and undated cheques previously with other creditors. (T, 75.38-.46) I note, however, that there is no evidence that Eurolinx was aware of this.

But I would respond by pointing out the problems had emerged earlier than this, certainly by November 1996.

My response is that optimism was not consistently exhibited and was too slender a reed to override the factors pointing to suspicion of insolvency.

(ix) Finally, there are the remaining factors such as Mr Warner’s evidence of juggling of creditors (T, 74.43-.47), or the fact that in some circumstances extending terms was in the usual course of business (T, 75.5-.24 and 76.50) or “standard practice” though concededly only by “minimal amounts” (T, 82.30-.51). I do not consider that represents a countervailing factor. Indeed a practice of juggling creditors points if anything the other way towards suspicion. It is not in the usual course of business in any objective sense. I would make the same comment about converting stock to consignment stock (T, 16.43-.58, T, 17 and Sutherland affidavit of 27 November 1998, para 68). I would agree with Mr Sutherland that it is an indicator of insolvency, though not of itself sufficient to establish it.

Summing up

129 Mr Pesch testified:

"I had no knowledge of any possibility that Sydney Appliances may be trading insolvently or may, due to payments made to the Defendant, become insolvent." [Pesch Affidavit 27 January, para 26]

130 Whereas, Mr MacDonald stated:

"At no time did I hide from any creditor, including Eurolinx, the true financial state of the Company" [MacDonald Affidavit 19 May 2000, para 26]

131 Mr MacDonald was cross-examined about this statement in the following terms:

“Q Just to confirm my understanding of your evidence, what you were telling the creditors was in line with what we’ve discussed today in terms which included your hopes for the future, the continued expansion and the projected growth?

132 There is evidence, that Mr Pesch was aware that Sydney Appliances was having trouble financially (T, 49.16-.21; T, 50.19-.41). And there are the other factors pointing to insolvency already identified and reiterated below.

133 I would conclude that Eurolinx has not discharged its onus to establish that it did not suspect that Sydney Appliances was insolvent. Indeed I would go further, and make a positive finding that Eurolinx, in the subjective sense, did know that Sydney Appliances was insolvent. That finding is then potentially relevant when I consider the Defendant’s later running account contentions.

134 There is, in any event, the further hurdle for Eurolinx to pass. It has the onus of showing that, in objective terms, a reasonable person in the position of Eurolinx would not have suspected insolvency.

135 Such a question must be answered with regard to the commercial reality of the situation. Individual factors, such as the use of post dated or undated cheques, do not in themselves indicate a lack of solvency. But it is the cumulative weight of these factors, together with those listed below that must be judged. Those factors are as follows.

(a) The oral re-negotiation of the terms from 30 days to 60 days with such re-negotiation occurring due to the need to bring accounts into line because of the known non-payment or delayed payment by Sydney Appliances and because of Sydney Appliances’ financial difficulties which to the knowledge of Eurolinx required "support from all creditors".

(b) the significantly increased and regular use of post-dated and undated cheques in round amounts with the requirement that at least on some occasions cheques could not be banked until there was telephone contact between the parties, regardless of who initiated such contact;

(c) the age of debtors with accounts being run in excess of 60 days. Indeed in some cases, they were aged in excess of 90 days though that latter calculation at least in part depends on whether the first 30 days only starts to run from the end of the month in which the debt was (earlier) incurred, or from the time the debt was actually incurred; see Warner T, 90.10 who said the former. But even the more favourable calculation does not save there being breaches of the 60 day terms, though the frequency depends on that calculation. Whilst some accounts may have been run to term and whilst explanations may be given for some accounts and some invoices, there were to the knowledge of Eurolinx sufficient accounts being run in excess of 60 days which, when combined with the reason why terms were extended to 60 days should have led to suspicion;

(d) Mr Pesch having seen some document which indicate figures for June 1996 realised, at the very least, that Sydney Appliances were not operating up to their expectations. If Mr Pesch had conducted any analysis of the figures shown to him he would have realised that Sydney Appliances was in financial difficulty;

(e) Mr Pesch’s acknowledgment that the company was having trouble financially, that Sydney Appliances was unable to pay Eurolinx’s accounts when they fell due (T, 36.6-.10); that Sydney Appliances was having more than a short term cash flow problem in that it would take at least 6 to 12 months to rectify the problem (T, 39.37 — 40.18) and that the company needed the support of all of its major suppliers to survive.

Overall Conclusion

136 When combined, these factors would have resulted in a reasonable person suspecting that Sydney Appliances was insolvent by no later than the time the impugned payments commenced on 12 November 1996. Hence the defence afforded by s588FG(2) is not made out.

What is a running account?

The relevant principles

137 The Defendant relies upon a further defence under s588FA(3) of the Corporations Law, in contending for a running account. That section appears in Pt 5.7B of the Corporations Law. It codifies, in part, the law on preferences in the context of running accounts as earlier developed in three High Court decisions. The first of these was Richardson v The Commercial Banking Co of Sydney (1952) 85 CLR 110 involving an overdrawn bank account. There the total of the payments made into the account did not exceed the total paid out, so there was held to be no preference. Then followed Rees v Bank of New South Wales (1964) 111 CLR 210 again an overdrawn bank account. There payments did exceed payments out but only that excess was held to be a preference. Finally, there was Queensland Bacon Pty Ltd v Rees. There the account was in relation to suppliers of goods rather than a bank. Barwick CJ’s conclusion was that this nonetheless constituted a running account. His decision and its reasoning has since been followed in subsequent cases.

138 Section 588FA(3) codifies this defence in the following terms:

“(3) Where:

(a) a transaction is, for commercial purposes, an integral part of a continuing business relationship (for example, a running account) between a company and a creditor of the company (including such a relationship to which other persons are parties); and

(b) in the course of the relationship, the level of the company's net indebtedness to the creditor is increased and reduced from time to time as the result of a series of transactions forming part of the relationship;

then:

(c) subsection (1) applies in relation to all the transactions forming part of the relationship as if they together constituted a single transaction; and

(d) the transaction referred to in paragraph (a) may only be taken to be an unfair preference given by the company to the creditor if, because of subsection (1) as applying because of paragraph (c) of this subsection, the single transaction referred to in the last-mentioned paragraph is taken to be such an unfair preference.”

139 Young J in Sutherland v Liquor Administration Board (1997) 15 ACLC 875 paraphrased the section in terms, which I would respectfully adopt save as I indicate below. Young J said:

“Although this is a very verbose section and the concatenation of words is sometimes difficult to comprehend, in a simple case it means that if a supplier and consumer are constantly trading, one constantly supplying goods and the other constantly making payments, then one does not look at transactions in isolation but looks at the overall effect at the beginning and the end of the relevant period. That is an inadequate summary but it is perhaps generally more meaningful than the words of the subsection itself.”

140 I would however add that in calculating the amount of any preference, I would adopt the approach in Rees v Bank of New South Wales (supra) of Kitto J at 221-2. He emphasised that whether there was any preference thereby brought about depended not upon the immediate effect but the ultimate effect on the balance of account between banker and customer or (I interpolate) supplier and supplied. In other words did there come about a permanent reduction in that balance over that period of the running account? Thus I would measure the preference, if any, by reference to the period of the relevant transactions constituting the running account, within the 6 months relation back period. I would do so by reference to the highest amount owing during the relation back period, not necessarily “at the beginning”, compared to the amount owing on the last day, following Rees; see also Barlow “Voidable Preference — the High Court Re-considers” (1998) 26 ABLR 82 at 92.

141 The essence of a running account is a continuing relationship between the supplier and purchaser with value being exchanged between them. The essential features of a running account are described most recently by the High Court in the following passage from Airservices Australia v Ferrier & Anor (1996) 185 CLR 483 taken from the majority judgment of Dawson, Gaudron and McHugh JJ:

Rees v Bank of New South Wales

142 It is thus apparent that a dual purpose of inducing the creditor to provide further goods and to discharge an existing debt does not render the payments a preference. This is unless those payments exceed the value of the goods so supplied in the relevant period.

143 Further,

"A running account between traders is merely another name for an active account running day to day, as opposed to an account where further debits are not contemplated. The essential feature of a running account is that it predicates a continuing relationship of debtor and creditor with an expectation that further debits and credits will be recorded. Ordinarily, a payment, although often matching an earlier debit, is credited against the balance owing in the account. Thus, a running account is contrasted with an account where the expectation is that the next entry will be a credit entry that will close the account by recording the payment of the debt or by transferring the debt to the Bad or Doubtful Debt A/c." (504-505)

144 Both the majority judgment as well as Brennan CJ in dissent (at 497-8) are in agreement on one matter of principle. It is that applying payments to the oldest invoices first is not of itself incompatible with a running account. Thus as Brennan CJ put it, “[T]he effect of payment in such a case would be twofold: the intended discharge of debt and the earning of further credit.”

145 The majority (at 505) stated again that it is the ultimate not immediate effect of such a series of payments on running accounts that measures any preference:

Queensland Bacon Pty Limited v Rees

Richardson’s

146 The majority in Airservices Australia also noted:

"a debtor does not prefer a creditor merely because it makes irregular payments under an express or tacit arrangement with the creditor that, while the debtor makes payments, the creditor will continue to supply goods. In such a situation, the court does not regard the individual payments as preferences even though they were unrelated to any specific delivery of goods or services and may ultimately have had the effect of reducing the amount of indebtedness of the debtor at the beginning of the six month period. If the effect of the payments is to reduce the initial indebtedness, only the amount of the reduction will be regarded as a preferential payment." (at 503-504)

147 That is, the basis of a running account is a continuing relationship between the debtor and creditor with an expectation that further debits and credits will be so incurred.

148 For that defence to be maintained, there are some essential prerequisites. First, there must be no cessation of that mutual assumption of payment and reciprocal supply throughout the relevant period. Second, those payments must continue to have as at least one operative, mutual purpose, namely inducing further supply. I would add that such purpose must not come to be subordinated to a predominant purpose of recovering past indebtedness. As the decision in Airservices Australia makes clear (see for example the majority judgment at 510), knowledge or even actual suspicion, though it be such as to negate the good faith defence, does not of itself preclude reliance upon the running account defence for a payment so received. What still requires explanation is the implication flowing from the majorities’ conclusion that the last payment, and only the last, fell outside the running account defence. This was said to be because the payee in Airservices had demanded payment and received it with knowledge of insolvency. It was therefore held to be “looking backwards rather than forwards, looking to the partial payment of the old debt rather than the provision of continuing services”. And this was so, notwithstanding that the supply of services did continue thereafter, probably influenced by safety considerations.

149 What was it about the last payment as compared to the earlier ones that precluded the running account defence, when the previous nine payments were held to be covered by the defence? No alternative defence of good faith, valuable consideration or ordinary course of business was ultimately relied upon in relation to the previous nine payments, though originally part of Airservices grounds of defence. So it can be taken that it was not in contest that the previous payments were all received in circumstances where that defence of good faith could not have been maintained. But one cannot infer, one way or the other whether the earlier payments were received with actual knowledge of insolvency, as distinct from imputed knowledge based on the objective test of “reason to suspect”.

150 Perhaps the best explanation for this part of the decision is this. The circumstances of the demand for payment was made by the payee when it clearly knew at that time of the payer’s parlous circumstances. That demand in those circumstances must have led the Court to conclude that the payee’s predominant concern was no longer continued supply but to get the previous accounts paid. By then continued supply, though it did not cease, appears to have receded in significance as a mutual purpose to the point where it was no longer to be treated as governing the parties’ relationship or at any rate was subordinated to getting paid. In Airservices supply did continue, it appears by then to have merely reflected the public obligation on Airservices to continue to provide civil aviation services for public safety reasons.

151 Thus the Airservices decision regarding the last payment should not be understood as negating the starting proposition. That proposition is that knowledge, even actual suspicion of insolvency, though coupled with a purpose of getting a previous account paid, does not of itself preclude the running account or continuing business relationship defence. But this is provided there still remains at least a substantive mutual purpose of continued supply which does not come to be subordinated to a predominant purpose of getting paid. It may well be so subordinated where the payer is known to be about to go under and the payee by its actions, such as demands for payment, signals that this has now become its predominant purpose. Further supply after that point is reached will not then suffice to negate that predominant purpose. This is more especially where continued supply is explicable for reasons such as public safety, though that reason by itself will not suffice to negate a running account.

Was this a running account?

152 Was there a continuing relationship between the parties with value being exchanged between them, that is payments accepted for reciprocal supply of goods?

153 The Defendant submits that the payments in question were received to maintain the supply of goods in the course of continuing the business. Further that it is the overall effect of payments under the running account up to the relation back day that fall to be considered as an undue preference. (Defendant’s written submissions 6 October 2000, paras 19-20)

154 In support of this the Defendant relies upon annexures MP6 and MP7 to the affidavit of Mr Pesch sworn 9 October 2000. In this regard they submit

"Those documents are the debtor ledgers for the main two accounts, the Sydney and Melbourne accounts which are numbered 174 and 269 respectively. The fact that there are invoices appearing on those debtor ledgers on an almost daily basis strongly supports the notion of a running account. It is to be noted that in the period 1 May to 8 May invoices total some $17,000 approximately. Not only does this demonstrate the continuing nature of the account but it also demonstrates a lack of suspicion of insolvency. The winding up of course commenced on 12 May." (Defendant’s written submissions, para 15)

155 The Defendant also submits that the same result is reached on the evidence of the Plaintiff, namely from an analysis of the documents contained in Tab 17 of the Bundle of Documents provided to the Court which demonstrate continued trading.

156 The Plaintiff submits, referring to Olifant v Australian Wine Pty Ltd (1996) 19 ACSR 285 at 293 that to make out this defence the Defendant must show the requisite mutual assumption as to the continuing operation of the account.

157 Whilst acknowledging that the relationship between the parties had the indicia of a running account as from November 1996, the payments were not made in the ordinary course of business to the knowledge of Mr Pesch. Rather they were made under continuing actual suspicion of insolvency. Given the level of that suspicion, the Plaintiff contends that this was sufficient to destroy any mutual assumption as to the continuing operation of the account, with the result that the defence of running account in s588FA of the Corporations Law is not available; Plaintiff’s written submissions 16 October 2000, para 26-27. The Defendant disputes this.

158 The Plaintiff submits that the nature of the relationship between the parties is found in the description of Mr Pesch in paragraph 8 of his affidavit of 27 January 1999 which states

"Sydney Appliances would place orders for stock, stock would be delivered to Sydney Appliances on various days and statements/invoices would be issued to Sydney Appliances on various dates. These statements were all due for payment 30 days after the date of the statement. The system of orders and issue of statements and payment continued and payments were received from Sydney Appliances and applied by the Defendant in payment of the oldest accounts first."

159 The Plaintiff further notes that during the relevant period, namely 12 November 1996 till 12 May 1997 Sydney Appliances was not complying with Eurolinx’s terms of trade. This is said to be illustrated in Annexure A to Mr Pesch’s Affidavit of 27 January 1999 which shows that payments were being made at terms between 38 days at the lowest and 88 days at its highest. It is further illustrated in Annexure D to Mr Warner’s affidavit of 18 May 2000 which shows the account was running at terms of 90 days.

160 It is on the basis of this evidence that the Plaintiff submits that "it cannot be said that there was a relationship whereby goods were being supplied in consideration of Eurolinx’s trading terms being complied with. … The simple fact is that by November 1996 the account was in such a derelict state that any payments made in relation to it could not sensibly be said to be linked in any way with further supplies of goods." (Plaintiff’s outline of submissions, para 4-5)

161 The Plaintiff further relies on what it submits to be the clear evidence that Eurolinx was on notice of the insolvency of Sydney Appliances during the relevant period so that any continuing relationship between the parties was brought to an end by that fact, as the parties lacked the necessary mutual assumption (Plaintiff’s outline of submissions, para 6).

162 The Plaintiff made a conditional concession in argument. It was to the effect that a running account was conceded but only if Eurolinx had no actual knowledge of insolvency, in particular here via Mr Pesch. Counsel said in argument:

Olifent

In other words I need a finding that the company knew … that Sydney Appliances was insolvent so the submission doesn’t work if I otherwise succeed on the objective reasonable person should have known. I need a subjective mind, namely Mr Pesch to know. (T, 137.36-.51)

163 But that qualifying condition on the concession requires further explication. If it be put that actual knowledge of insolvency must invariably terminate the necessary business relationship then I would not accept that proposition. That would presuppose, incorrectly, that a subjective suspicion of insolvency cannot coexist with an assumption of a continuing business relationship between creditor/payee and debtor/payer. That is incorrect as an invariable proposition, on the authority of Airservices Australia. Knowledge of insolvency in that case did coexist for all the payments, including the nine not set aside. The statements of principle by the High Court clearly do admit of that coexistence of knowledge and running account; they make no distinction between subjective and objective knowledge.

164 However, the Plaintiff’s qualification may legitimately be put somewhat lower. One may accept that a level of actual suspicion, if it finally reaches actual subjective knowledge of insolvency, may, but not necessarily, lead to the termination of that continuing business relationship and its associated mutual purpose of payment to induce further supply. Thus the fact of such actual knowledge may (but need not necessarily) rebut, as even one of two purposes, that purpose of inducing the creditor to maintain the relationship by providing further supply. An example of the latter case is to be found in the circumstances surrounding the last payment in Airservices Australia itself. There, as I have explained, the latter purpose was subordinated to getting the creditor’s money back.

165 It is conceivable the actions of the payee/creditor could be such as to indicate that it has no continued confidence in the ability of the debtor to continue to trade, and therefore it has abandoned any assumption of a continuing business relationship. But if that were so, one would expect no further supply, unless cash on delivery. That was not the case here.

166 When it comes to the alternative basis for the Plaintiff’s contention, it is true that it is the payee’s purpose — inducing further supply orders to the supplier — which is primarily relevant. But this purpose is to be found in a bilateral context involving both creditor and debtor, payer and payee. Its reciprocal from the payer’s viewpoint is the purpose of inducing further supply to it as the purchaser. The business relationship, with its accompanying assumption of continued supply, is both a mutual relationship and mutual assumption. That is why, when reference is made to “inducing” further supply, the focus only starts with the payer. Then the focus necessarily widens to the payee’s purposes and actions in that reciprocal context.

167 Finally, the codification of the so-called running account has become definitional of what is an “unfair preference”. That means that, in terms of onus, what was once merely a defence is now an ingredient or element of that which the Plaintiff liquidator must prove in establishing whether it is a preference (and its dimension). The onus in that sense has shifted to the party attaching the payments.

Summing up

168 That leads me to sum up the present case. I am satisfied that, however the onus is placed, there was here a continuing business relationship. Further that it subsisted throughout the relevant period uninterrupted, despite actual suspicion of insolvency. And finally that the relevant transactions of payment for goods supplied were rendered “an integral part” of that relationship within s588FA(3). That is, the parties’ had as a purpose not subordinated to recovery of the past debt, inducing continued supply of the relevant goods. I so conclude, notwithstanding the degree of actual suspicion entertained by the payee as to the payer’s insolvency and notwithstanding departures from the permitted scope of any indulgence. I am satisfied to do so, because the business relationship defence, if such it be, or definitional element for a preference as I incline to prefer, was in either case sufficiently made out. That result is evinced by the parties’ continued course of dealing, delinquent though it was in payment terms. It is further evinced by the absence of any specific circumstances negating the necessary purpose of inducing supply, as at least a purpose, or otherwise causing the transaction to cease to be integral to the relationship or terminating the relationship itself.

169 That means that the quantum of the preference is to be calculated by reference to the highest amount owing during the six months relation back period (which coincides with the sequence of payments) compared to the amount owing on the last day (12 May 1997).

OVERALL CONCLUSIONS

170 The Plaintiff succeeds in negating the “good faith” defence under s588FG(2) of the Corporations Law. The Defendant succeeds in its contention that there was a continuing business relationship of which the relevant transactions were an integral part, within s588FA(3) of the Corporations Law.

171 I direct the parties to submit orders within fourteen days giving effect to this judgment at which, if not agreed, they may address me on costs.

**********

Last Modified: 04/03/2001

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Citations

Sutherland v Eurolinx Pty Ltd [2001] NSWSC 230

Most Recent Citation

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Cases Cited

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Statutory Material Cited

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Sandell v Porter [1966] HCA 28

Cited Sections

CITATION:	Sydney Appliances P/L (in liq) v Eurolinx P/L [2001] NSWSC 230
CURRENT JURISDICTION:	Equity
FILE NUMBER(S):	SC 4175/99
HEARING DATE(S):	11/10/00, 12/10/00
JUDGMENT DATE:	30 March 2001
PARTIES :	RODERICK MACKAY SUTHERLAND (in his capacity as Liquidator of SYDNEY APPLIANCES PTY LIMITED (in liquidation)) (Plaintiff) EUROLINX PTY LIMITED (ACN 001 473 347) (Defendant)
JUDGMENT OF:	Santow J

COUNSEL :	C R C Newlinds (Plaintiff) J J Priestley (Defendant)
SOLICITORS:	Kemp Strang (Plaintiff) Cutler Hughes & Harris (Defendant)
CATCHWORDS:	CORPORATIONS — Company making payments for goods supplied — Factors going to establishing "good faith" defence under s588FG(2)(a) of Corporations Law in relation to preferential payments of a concededly insolvent company — Relevance of post-dated cheques and arrangements to not bank them without telephone confirmation — Subjective and objective alternative tests for suspicion of insolvency — Running account defence under s588FA(3) of the Corporations Law — Relevance of lack of good faith in subjective sense to continuance of business relationship required for defence — Other factors affecting — Defence made out — How unfair preference calculated where running account.
LEGISLATION CITED:	Corporations Law Pt 5.3A; Pt 5.7B; s9; s95A; s436A; s439A; s439C; s446A; s513C; s588FA; 588FC; 588FE; 588FF; s588FG
CASES CITED:	Airservices Australia v Ferrier & Anor (1996) 185 CLR 483 Downey v Aira Pty Limited (1996) 15 ACLC 1068 Re Ermayne; Sims v Tech Holdings Pty Limited (1998) 30 ACSR 330 Pegulan Floor Coverings v Carter (1997) 15 ACLC 1,293 Queensland Bacon Pty Limited v Rees (1966) 115 CLR 266 Rees v Bank of New South Wales (1964) 111 CLR 210 Richardson v The Commercial Banking Co of Sydney (1952) 85 CLR 110 Sandell v Porter (1966) 115 CLR 666 Sims v Celcast Pty Limited (1998) 71 SASR 142 Smith v Deputy Commissioner of Taxation (1997) 23 ACSR 611 Sparad (No 100) v Harkness (NSWCA, 14 February 1997, unreported) Sutherland v Liquor Administration Board (1997) 15 ACLC 875
DECISION:	Plaintiff succeeds on negating good faith defence. Defendant succeeds on running account defence.