The Production House Pty Ltd (In liq) v Frontline Graphics Pty Ltd

[1995] FCA 310

IN THE FEDERAL COURT OF AUSTRALIA  )    Limited Distribution
  )
NEW SOUTH WALES DISTRICT REGISTRY  )     No NG 3340 of 1994
  )
GENERAL DIVISION                  )

BETWEEN:THE PRODUCTION HOUSE PTY LIMITED (IN LIQUIDATION)

First Applicant

PETER RAYMOND BROOK (THE LIQUIDATOR)

Second Applicant

AND:FRONTLINE GRAPHICS PTY LIMITED

Respondent

CORAM:    HILL J
PLACE:    SYDNEY
DATED:    20 MARCH 1995

REASONS FOR JUDGMENT

The applicants, The Production House Pty Limited (In Liquidation) ("The Production House") and Peter Raymond Brook, the Liquidator of The Production House ("The Liquidator"), apply to the Court for a declaration that certain payments made by The Production House to Frontline Graphics Pty Limited ("Frontline"), the respondent, are void as against the liquidator and for an order that Frontline pay accordingly $27,423 to The Production House.

The facts are in short compass and are not in dispute.  Frontline provides a graphic film combining service for the printing industry.  The Production House had been a customer from some time in 1991.
Between March 1992 and July 1992 Frontline rendered invoices to The Production House for services rendered. These invoices totalled $27,423. Each invoice required payment within 30 days. None were in fact paid prior to September 1992. On 11 September 1992 Frontline served upon The Production House a demand, under the then s460 of the Corporations Law for the amount owing.  The demand followed an earlier request dated 23 July 1992 that the outstanding invoices be settled within five days.  Under the statutory demand, three weeks were given for payment.  The demand was not complied with.

On 8 October 1992 Mr Anderson, the accountant for The Production House, wrote to the director of Frontline as follows:

"As discussed with you by telephone yesterday I am currently renegotiating finance for The Production House.  In conjunction with Kaye Neale and Sarah Ambrose of The Production House I have prepared a cashflow which permits payments to your company on the following basis:

Week18 - 24 October    5,000

25 - 31 October    5,000

1 -7 November   2,500

8 - 14 November   2,500

15 - 21 November   2,500

22 - 28 November   5,000

In my opinion there is no doubt about the company's ability to repay your debts however it is taking longer than expected because of some bad debts which The Production House has suffered.  The Production House is fully committed to repaying your debt and would appreciate it
if you would be agreeable to the above terms. ..."

The original payment schedule as set out in the letter was subsequently changed, but by 12 February 1993 the total amount of $27,423 had been paid by eight separate cheques. Additional work was performed by Frontline for The Production House resulting in a further invoice for $10,270 being rendered on 30 September 1992. At least $6,270 of this amount was never paid. In October 1992 Frontline stopped working for The Production House. On 19 March 1993 a meeting of shareholders of The Production House resolved that the company be wound up and that Mr Brook be appointed liquidator. He subsequently demanded payment of the $27,423 from Frontline as a preference, having regard to the provisions of s565(1) of the Corporations Law.

Relevantly, s565(1) provides as follows:

"A ... payment made, or an obligation incurred, ... by a company that, if it had been made or incurred by a natural person, would, in the event of his or her becoming a bankrupt, be void as against the trustee in bankruptcy, is, in the event of the company being wound up, void as against the liquidator."

Section 565(1) thus incorporates by reference, the provisions of s122 of the Bankruptcy Act 1966, save that the references to the bankrupt will be references to the company in liquidation and reference to a person becoming a bankrupt will be read as reference to the commencement of the winding up.

Section 122 relevantly provides:

"(1) ... payment made, or an obligation incurred, by a person who is unable to pay his debts as they become due from his own money. ... in favour of a creditor, having the effect of giving that creditor a preference, priority or advantage over other creditors, being a ... payment or obligation executed, made or incurred -

(a)within 6 months before the presentation of a petition on which, or by virtue of the presentation of which, the debtor becomes the bankrupt; or

(b)on or after the day on which the petition on which, or by virtue of presentation of which, the debtor becomes a bankrupt is presented and before the day on which the debtor becomes a bankrupt;

is void as against the trustee in bankruptcy ...

(2) Nothing in this section affects -

(a)the rights of a purchaser, payee or encumbrancer in good faith and for valuable consideration and in the ordinary course of business;

...

(3) The burden of proving the matters referred to in subsection (2), lies upon the person claiming to have the benefit of that subsection.

(4)For the purposes of this section -

...

(c) a creditor shall be deemed not to be a ... payee or encumbrancer in good faith if the ... payment or obligation was ... made or incurred under such circumstances as to lead to the inference that the creditor knew, or had reason to suspect: (i) that the debtor was unable to pay his debts as they become due from his own money; ...".

In the present case the agreement for payment by instalments (if this be treated as an agreement under which the obligation to make payments by instalments was incurred) and the several payments thereafter, were incurred or made within six months of the relevant date of the commencement of the winding up, ie 19 March 1993.  The evidence satisfies me that at no relevant time was The Production House able to pay its debts as they fell due from its own money.  The accountant's letter of 8 October 1992 admits as much.  The inability of The Production House to maintain the schedule of agreed repayments, shows that that inability continued until the ultimate winding up.  No submission to the contrary was made on behalf of Frontline.

Frontline, however, submitted that it was a payee in good faith and for valuable consideration and in the ordinary course of business. It accepted that the burden of so proving lay upon it as a consequence of s122(3) of the Bankruptcy Act.  The sole question between the parties was therefore whether Frontline was a payee in good faith.

No evidence of the actual state of mind of the directors of Frontline was given in the affidavits, filed pursuant to directions given prior to the hearing.  At the hearing, counsel for Frontline sought to adduce oral evidence of that state of mind.  It was said that the source of the state of mind, presumably as to the solvency of The Production House, lay in conversations, inter alia, with the accountant for The Production House.

Counsel for the applicants objected to this course.  To have admitted the evidence would most likely have led to prejudice of the applicants who might well then have needed to interview the accountant to obtain instructions or, at the very least, to an adjournment of the case.  In any event, the evidence would hardly have assisted Frontline because counsel for the applicants did not rely upon any actual knowledge of the applicants but rather the objective question whether Frontline had reason to suspect both of the matters set out in susbsecs122(4)(c)(i) and (ii).

Counsel for Frontline relied heavily upon the accountant's letter of 8 October 1992.  He submitted that the letter asserted that there was no real problem for The Production House.  It was conceded that Frontline knew that there were some cash flow problems but at no time believed that The Production House would be unable to comply with its obligations.
         Counsel for the liquidator, however, also relied upon the same letter, as well as the following additional matters:

(1)the fact that the four initial invoices were in default of the normal thirty day trading time and had been so, in the case of the first such invoice, since March 1992;

(2)the fact that further work done by Frontline for The Production House remained unpaid;

(3)the fact that the repayment schedule initially arrived at itself needed to be re-arranged after default in it;

(4)the fact that the statutory demand when made was not complied with.

The letter, in my view, does not support Frontline's case.  It points to attempts to renegotiate finance, implying that the company without that refinancing would be or could be unable to meet its commitments.  It explains the reason for this in that bad debts were owing to The Production House.  The letter makes it clear that The Production House had cash flow problems and certainly is consistent, if not suggestive, of the inability of that company to pay from available funds its debts as they fell due.

In my view, the submissions of counsel for the liquidator should be accepted. Frontline has not discharged the onus cast upon it to show good faith in the sense used in s122. I would accordingly make the declaration and orders sought by the liquidator and order Frontline to pay the costs of the application.

The orders I would make accordingly are:

(1)Declare, pursuant to s565 of the Corporations Law, that payments made by the applicant, The Production House, to the respondent during the period from approximately 23 October 1992 to 11 February 1993 totalling $27,423 were payments that are void as against the liquidator.

(2)Order the respondent to pay to the second applicant the sum of $27,423.

(3)The respondent to pay the costs of the applicants.

(4)Interest to be payable in accordance with the Federal Court Rules from 28 April 1993 under s51A of the Federal Court Act.

I certify that this and the
preceding seven (7) pages
are a true copy of the Reasons
for Judgment herein of his Honour
Justice Hill.

Associate:

Date: 

Counsel and Solicitors      R Webb instructed by

for Applicant:              Heidtman & Co

Counsel and Solicitors      R Batlay instructed by

for Respondent:             Picone & Howes

Dates of Hearing:           20 March 1995

Date Judgment Delivered:         20 March 1995