Spectrum Joinery Pty Ltd (in liq) v Turners Building Supplies Pty Ltd [2005] ACTSC 70 (5 August 2005)

Last Updated: 11 August 2005

SPECTRUM JOINERY PTY LTD (IN LIQ) v TURNERS BUILDING SUPPLIES PTY LTD [2005] ACTSC 70 (5 AUGUST 2005)

CORPORATIONS - insolvent companies - recovery of property - payments of past accounts made in relation-back period constituting voidable transactions under Corporations Act 2001 (Cth), Pt 5.7B Div 2.

CORPORATIONS - defences - whether creditor had reasonable grounds for suspecting insolvency - Corporations Act 2001 (Cth), s 588FG - effect of accepted business practices in particular industry.

WORDS AND PHRASES - `voidable transactions' - `good faith' - `reason to suspect'.

Corporations Act 2001 (Cth), s 9, s 439C, s 513C, s 588F, Part 5.3, Part 5.7B

Re Ermayne Pty Ltd; Sims v Tech Holdings Pty Ltd (1998) 30 ACSR 330

Re: McAdam (1913) 13 SR (NSW) 206 at 208

Sutherland (as liquidator of Sydney Appliances Pty Ltd (in liq)) v Eurolinx Pty Ltd (2001) 37 ACSR 477

Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266

Pegulan Floor Coverings v Carter (1997) 15 ACLC 1,293

Sutherland v Eurolinx (2001) 37 ACSR 477

Sims v Celcast Pty Ltd (1998) 71 SASR 142, 16 ACLC 1,140

No. SC 109 of 2004

Judge: Gray J

Supreme Court of the ACT

Date: 5 August 2005

IN THE SUPREME COURT OF THE )

) No. 109 SC of 2004

AUSTRALIAN CAPITAL TERRITORY )

BETWEEN: SPECTRUM JOINERY PTY LTD (IN LIQ)

ACN 008 596 594

Plaintiff

AND: TURNERS BUILDING SUPPLIES PTY LTD

ACN 092 489 220

Defendant

ORDER

Judge: Gray J

Date: 5 August 2005

Place: Canberra

THE COURT ORDERS THAT:

1. The defendant company pay to the plaintiff company the sum of $10,500.00.

1. This is an application under s 588FF of the Corporations Act 2001 (Cth) (the Corporations Act) for an order that Turners Building Supplies Pty Limited (the defendant company) pay to Spectrum Joinery Pty Limited, a company in liquidation, (the plaintiff company) monies paid by the plaintiff company to the defendant company on four occasions during the relation-back period before the plaintiff company went into liquidation. The ground upon which this application is made is that the payments which constituted the transactions were voidable as being insolvent transactions of the company.

The facts

2. The plaintiff was a well respected company engaged in both domestic and commercial joinery work and had been in business for a considerable time. The defendant company was a significant supplier of its building needs. The plaintiff company first started trading in 1979 and the defendant was one of its first suppliers. Over the time that the plaintiff and defendant traded, the credit terms for such supplies, according to the invoices for the supplies, were in terms of payment within 30 days. However, it was clear that over that part of the extensive trading period that was the subject of evidence before me, that the practice was for a significantly longer time than 30 days to be taken to pay the accounts. Mr McNamara, who was a director of the plaintiff company and responsible for its business affairs, gave evidence that his company would purchase materials from suppliers in one month, engage in manufacturing the contracted product, and install it perhaps the month after, if the project was on time. A claim was put in to the person or company who had contracted for the product and payment was often made to his company not until 30 or 60 days later. Accordingly, he said that it was "not uncommon" in the case of 30 day credit terms with a supplier that his company would not be paid for another 60 days after the date required by the supplier for payment. Not unreasonably, the defendant, as the supplier, kept contact with the plaintiff concerning when payments might be received, but it is abundantly clear that at least since July 1995 (the earliest figures placed before me) the practice in the payment of the defendant's accounts was that payment would not be made in the worst case 364 days and the best, 17 days after the monthly account had been rendered. Mr Willis, who was a director of the defendant company and managed its business, gave evidence of his acceptance of this state of affairs. It is also plain that continuing efforts on Mr Willis' part were made to monitor this situation but it is equally plain that at least for accounts in the period January 1999 to July 2000 the efforts were directed to keeping the plaintiff company within roughly a time frame of payment within about 120 days. Mr Willis' evidence overall does not indicate a concern about the solvency of the plaintiff company over the whole of the time they traded but rather a concern that the debt not become so large that the defendant company would be left with its own cash flow problem as a result of trading in the fashion that the defendant company was prepared to permit.

3. There was a relatively short period in 1995/96 when the plaintiff company fell even further behind in paying its accounts. Schedules of Payments for two consecutive periods of invoices rendered, July 1995 to May 1999 and June 1999 to July 2000, were put in evidence before me. Those Schedules confirm that the accounts were always paid on a significantly delayed basis with the norm being accepted as perhaps roughly 150 to 190 days from the rendering of the account (although that did increase to about a year in respect of the invoices rendered in November and December 1996). The time for payments for the accounts rendered from April 1997 then varied generally between 50 and 90 days.

4. In respect of the invoiced accounts for November, December 1996, January and February 1997, a further arrangement for deferred payment was made. At that time, future accounts were to be subject to payment within 60 to 90 days and payment was also to be made off the four accounts which were said to be "frozen". Those "frozen" invoices were paid in full by about November 1997.

5. In 1999/2000 the evidence establishes that the plaintiff's business expanded and the amounts in respect of the monthly accounts increased as did the time taken to pay them. In January 2000, Mr Willis contacted the plaintiff company and requested that further payments be made in reduction of the "running account". He was informed that the plaintiff company was awaiting progress payments from Sydney before the account could be settled. This was apparently accepted by Mr Willis. It was not until July 2000 that Mr Willis contacted Mr McNamara with a view to reassessing the terms upon which, in practice, the account was operating. It was then that discussions took place concerning the implementation of a cash on delivery regime. Notwithstanding, up to the end of September 2000, the plaintiff continued to order goods on a credit basis.

6. Mr Willis' concern was that the growing indebtedness had placed him in a position whereby to continue to carry this debt he would have to work on a business overdraft. I do not infer from his evidence that he actually considered that the plaintiff company was in any financial difficulty. The situation was compounded by what Mr Willis saw as his requirement to deal with the, then, newly introduced GST. Mr Willis took the view that overdraft interest rates and his low profit margin based on high turnover made it impracticable for his company to continue to carry an increased credit liability, although he clearly considered that it was in his business interests to do so. At that time there was some discussion of an arrangement whereby there be suspension of earlier invoices and payment for the current ones on a more restricted credit payment basis as had taken place in 1996/97 but, in the end, it was determined that the plaintiff company should, in future, pay cash on delivery to stop the account from "growing". It seems to me implicit in that arrangement that there was an acceptance that the previous invoices continue to be paid under the earlier regime of delayed payment and with no alteration to the credit arrangement for those invoices which, in practice, had been roughly 90 to 120 days.

7. At the time, Mr McNamara had expressed to Mr Willis a positive view with respect to the plaintiff's prospects and growth of its business. Although Mr Mossop, who appeared as counsel for the plaintiff, was dismissive of this view as one which any creditor in trouble would put forward, I have no difficulty, having seen Mr McNamara in the witness box, in regarding such assurances as both plausible and acceptable. Payments for goods supplied on a cash on delivery basis commenced in October 2000. On 18 November 2000 the defendant company received the sum of $29,806.36 from the plaintiff company. That sum was applied by the defendant company to the June 2000 account of that same figure and could fairly be said to be expected in terms of the previous arrangements for reduction of the outstanding credit accounts. On 18 December 2000 the plaintiff company paid the sum of $21,408.77 to the defendant company. The July account stood at $42,781.40 so that could only be described as a part payment referable to that account. On 22 January 2001, a further $10,500.00 was received.

8. No further payments were received before the company was placed into voluntary administration under the provisions of Part 5.3 of the Corporations Act on 19 February 2001. On 29 March 2001, the company was wound up pursuant to s 439C of the Corporations Act. The payments to which I have referred commencing on 18 November 2000 fall within the relation-back period and, as a consequence of this, the liquidator seeks to recover those payments.

The relevant provisions of the Corporations Act 2001

9. Part 5.7B of the Corporations Act is concerned with the recovery of property or compensation for the benefit of the creditors of an insolvent company.

10. The purpose of this Part of the Corporations Act is to prevent unsecured creditors from being prejudiced by the disposition of assets or the incurring of liabilities by a company in a period shortly before the winding up which would have the effect of favouring certain creditors (see the Explanatory Memorandum to the Corporate Law Reform Bill 1992 [1035]). The Explanatory Memorandum gave examples and the examples given are only reflective of situations where a creditor is paid out in full without having to prove for a proportion of the debt, the giving away of assets or incurring of liabilities without adequate consideration and unrealistic loans or agreements that may be characterised as unfair. Accordingly, Part 5.7B Div 2 of the Corporations Act makes transactions voidable within the designated relation-back period, having regard to the factual circumstances of the company's solvency. However, the provisions in Part 5.7B of the Act, which are designed to protect those creditors who were unaware of the insolvency and who continue to deal with company, are not confined to the examples given in the Memorandum but impose a burden on any creditor who deals with an insolvent company during the relation-back period to invoke its protective provisions.

11. Accordingly, and notwithstanding that the impugned transactions in this case did not fall with the sort of transactions to which the Memorandum referred, the defendant company did not, and could not, take issue with the provisions of the Act relied upon by the plaintiff company or their application.

12. A transaction is voidable if it is an insolvent transaction of the company and was entered into during the six months ending on the relation-back day: s 588FE. An insolvent transaction of the company is one that is an unfair preference given by the company at a time when the company is insolvent and the transaction is entered into: s 588FC. An unfair preference to a creditor exists if the company and the creditor are parties to the transaction and the transaction results in the creditor of the company receiving from the company in respect of an unsecured debt that the company owes to the creditor, more than the creditor would receive from the company in respect of the debt if the transaction were set aside and the creditor were to prove for the debt in a winding up of the company: s 588FA.

13. In the present case, the affidavit of the liquidator, Mr Rangott, deposes to the plaintiff company being insolvent as at 1 July 2000 and that it continued to be so up to and including 19 February 2001, the date that the company was placed into voluntary administration. That is common ground between the parties.

14. The relation-back day referred to in s 588FE of the Corporations Act, is the day on which the winding up is taken to have begun (s 9) which, in the case of a company in administration and which, by special resolution resolves to wind itself up, is the day on which the administration began (s 513C).

15. The transactions which, in this case, are said to be the voidable transactions undertaken in the relation-back period, are the payments made by the plaintiff to the defendant on 18 November 2000, 18 December 2000 and 22 January 2001; those payments all being within the relation-back period. An example of a transaction to which a body is a party is a payment made by the body (s 9).

16. Section 588FF(i)(a) of the Corporations Act provides that where, on the application of the company's liquidator, the court is satisfied that a transaction of the company is voidable, the court may make an order directing payment of an amount equal to some or all of the money that the company has paid under the transaction.

The defence under s 588FG(2)

17. In this case, the only qualification to the court not making an order under s 588FF(1)(a) of the Act is that provided by s 588FG(2) which provides:

A court is not to make under s 588FF an order materially prejudicing a right or interest of a person if ... it is proved that:

(a) the person became a party to the transaction in good faith; and

(b) at the time when the person became such a party:

(i) the person had no reasonable grounds for suspecting that the company was insolvent at that time or would become insolvent as mentioned in paragraph 588FC(b); and

(ii) a reasonable person in the person's circumstances would have had no such grounds for so suspecting; and

(c) the person has provided valuable consideration under the transaction or has changed his, her or its position in reliance on the transaction.

18. It is apparent that the regime provided for in Part 5.7B of the Corporations Act does not directly call for a general assessment of the preference against the claims of the other unsecured creditors to which the transaction might lead, but rather sets out a statutory regime that determines the effect of the transaction without regard to that factor. It permits creditor/debtor transactions in the relation-back period (such as I am considering in this case) to be set aside unless the creditor shows that the creditor became a party in good faith and that there were no reasonable grounds, nor would a reasonable person have such grounds, for suspecting that the company debtor was insolvent or would become so as a result of the transaction.

19. The question is whether the defendant company has established the matters that s 588FG requires.

Good faith

20. A necessary precondition for the defence to be made out is that the person became a party to the transaction in good faith. "Good faith" has its natural meaning. A person acts in good faith when he or she acts with propriety or honesty (Re Ermayne Pty Ltd; Sims v Tech Holdings Pty Ltd (1998) 30 ACSR 330 at 336 per Wicks J). It may overlap with the party not being able to establish reasonable grounds for not suspecting insolvency which would have the effect of preferring the party to other creditors (Re: McAdam (1913) 13 SR (NSW) 206 at 208; Sutherland v Eurolinx Pty Ltd (2001) 37 ACSR 477 at 483 [25]).

21. I have no occasion to doubt the bona fides of the defendant's witness, Mr Willis, and having regard to his position in the defendant company, that of the defendant company. Mr Willis' evidence raises no questions as to his honesty and propriety and I am satisfied that, having regard to the past history of transactions between the plaintiff and the defendant, there were no reasonable grounds for him to suspect that his company would be preferred to the other creditors as a consequence of the plaintiff company paying the outstanding amounts owed to his company. His evidence in that respect is confirmed by Mr McNamara, who gave evidence for the plaintiff company and who agreed in cross-examination that he had never said anything to Mr Willis to indicate that the plaintiff company was in any financial difficulty. It is clear that the plaintiff company adopted a mode of trading with the defendant company designed to ensure that it did not face liquidity problems brought about by waiting for accounts to be paid in respect of ongoing projects. The defendant company acquiesced in this and was only concerned with not having to carry too great a term of credit liability.

Reason to suspect

22. This background relating to good faith has implications for my assessment as to whether the defendant company has shown that it had no reasonable grounds for suspecting the plaintiff company to be insolvent at the relevant time, and as to whether a reasonable person in the defendant's circumstances would have had no such grounds for so suspecting.

23. The suspicion for these purposes requires more than an idle wondering. In Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266 at 303 Kitto J commented:

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.

24. The qualification that the party to the transaction must have no reasonable grounds for the suspicion reinforces the notion that the suspicion is not to be treated as an ephemeral one, although the requirement that the section places on a creditor to establish a negative is a fairly demanding test (Pegulan Floor Coverings v Carter (1997) 15 ACLC 1,293 at 1,300).

25. An important factor is the commercial circumstances prevailing between the parties at the relevant time. I adopt the analysis of Santow J in Sutherland v Eurolinx (2001) 37 ACSR 477 at 483-484, [43]-[47]:

[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. Thus 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 Pty Ltd v Carter (1997) 24 ACSR 651; 15 ACLC 1293 at 1298 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 1299-1300.

[46] Priestley JA in Sparad (No 100) Ltd (as liquidator of Spedley Securities Ltd (in liq)) v J B Harkness (unreported, CA(NSW), Full Court, CA40665/93, 14 February 1997, BC9700197) 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 Cmr of Taxation (1997) 75 FCR 339; 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.

26. The approach taken by Santow J emphasises the necessity to look at the transaction as a whole in its commercial context. The fact that in this case the invoices contained stipulations of all terms being strictly 30 days net, clearly did not accord with the practice adopted by both the creditor and the debtor. The commercial reality was the acceptance by the creditor and debtor that payment on the invoices was not expected in terms of the stipulation on the invoice, but rather when the debtor received payment for the work done to which the supply of goods related.

The relevant trading history

27. The plaintiff and defendant had traded with each other for over 20 years. The pattern of trading reflected an increase in the plaintiff company's business. As I have earlier said, the terms on which the parties traded involved the plaintiff company satisfying the invoices rendered when it received payment from third parties for the work involving the supplies which had been done for the third party.

28. The schedule of payments prepared by Mr Willis for the period from June 1999 to January 2001 highlight that the payments for the past accounts for that period followed the same pattern and were for similar amounts. That schedule provided:

TRADING HISTORY FOR SPECTRUM JOINERY PTY LTD FROM JUNE 1999 TO FEBRUARY 2001

GOODS $VALUE DATES PAID DAYS TO PAY PAY PURCHASED

JUNE 1999 $11522.34 19/08/1999=$1457.16 20/09/1999=$7881.48 18/10/1999=$2183.70 111

JULY 1999 $14993.86 18/10/1999=$1810.30 29/10/1999=$7000.00 17/11/1999=$6183.56 110

AUGUST 1999 $23676.48 17/11/1999=$8816.44 01/12/1999=$13107.28 21/12/1999=$1752.76 114

SEPTEMBER 1999 $22807.45 21/12/1999=$20781.45 01/02/2000=$2026.00 125

OCTOBER 1999 $35733.73 01/02/2000=$15984.06 20/02/2000=$19749.67 94

NOVEMBER 1999 $11756.74 20/02/2000=$119.90 01/03/2000=$11636.84 125

DECEMBER 1999 $17096.77 31/03/2000=$17096.77 93

JANUARY 2000 $21797.36 01/06/2000=$21797.36 125

FEBRUARY 2000 $23560.71 05/03/2000=$63.93 CREDIT 13/06/2000=$17126.20 01/07/2000=$6370.58 125

MARCH 2000 $18569.39 01/07/2000=$18569.39 94

APRIL 2000 $19957.66 03/08/2000=$19957.66 96

MAY 2000 $25763.03 01/09/2000=$25763.03 94

JUNE 2000 $29806.36 18/11/2000=$29806.36 93

JULY 2000 $42781.40 18/12/2000=$21408.77 22/01/2001=$10500.00

The "Goods Pay Purchased" set out the month for which an invoice had been rendered for the goods supplied by the defendant company to the plaintiff company. The days to pay were Mr Willis' calculation of the time from the end of month invoice to payment. Mr Willis conceded an error in the "days to pay" for June 2000 item to 111 days. Also the time that the last payment was received was 142 days from the date that the invoice was presumed to have been rendered.

29. It seems to me that the schedule of payments supports Mr Willis' view that at least up to the receipt of the payment of $21,408.77 on 18 December 2000, the pattern of payments had been broadly consistent and there was no cause to suspect insolvency.

30. Nor do I think that the alteration to cash on delivery, which commenced to operate in September 2000 was anything more than a factor to be considered. Although Mr Willis deposes to the arrangement for cash on delivery taking place in July 2000, it was not, in fact, implemented until September 2000. As I have said, Mr Willis was concerned about his own cash flow having regard to the impact of the Goods and Services Tax and his generally low profit margin based on high turnover. He evidenced no concern about the solvency of the defendant company. I accept his explanation as entirely reasonable. The delay in the implementation of the cash on delivery arrangement supports that view.

31. Although Mr Mossop suggested that the low incidence of cash on delivery purchases in the period September 2000 to January 2001 was a further indication of financial difficulty, I accept that Mr Willis considered that it could be attributed to the plaintiff company showing that it was not necessarily dependent on the defendant company for supplies as part of a strategy to maintain the old terms. I also consider that it was reasonable for him to form that view in the circumstances.

32. Mr Mossop, counsel for the plaintiff company, obtained a concession from Mr Willis in cross-examination when he asked:

And you knew at the time of suggesting that they go onto a cash on delivery basis that the company couldn't pay the debts that it had when they were due, and you wished to limit your exposure to Spectrum if it went into liquidation? - - - Correct. As is the normal practice in business which we often exercise.

The question is not happily phrased containing, as it does, two questions, but I do not take the response to it as a concession that, at that time, Mr Willis suspected that the plaintiff company could not pay its debts in accordance with the business practice that the defendant company allowed or that if the debts were called up instanter, they would not be satisfied. I take it that the limitation to cash on delivery for future supplies was only to ensure that the defendant company was not exposed to a waiting period for the plaintiff company to receive payment for the work it did in the future. The defendant company (and any reasonable person in the defendant's position) was entitled to consider that the outstanding accounts would continue to be paid when the progress payments were received by the plaintiff company in respect of the jobs that they represented. The assent by Mr Willis to Mr Mossop's proposition was not clarified but the tenor of the whole of his evidence does not concede that the plaintiff company, if in cash flow difficulties, could not realise and pay its debts.

33. Furthermore, it is clear from the foregoing that I do not accept Mr Mossop's submission that, as there was no evidence of any agreement to vary the contractual terms, that evidences the fact that the amounts were due and payable after the 30 day term and further, that as a consequence, the plaintiff company was unable to meet its debts when they fell due. The "contractual term" relied upon by Mr Mossop was the 30 day net provision which, on all the evidence before me, had been waived by the business practices adopted by the parties. The fact that in both 1996/1997 and July 2000 Mr Willis, on behalf of the defendant company, continued to accept the arrangement for payment for the outstanding accounts to be held over in the manner that had already been established and allowing an extended time to meet the account, I regard as further support for a contrary conclusion to that of Mr Mossop's submission.

34. On the evidence before me, I regard the arrangement that had existed at least as far back as July 1995, as demonstrating the practice of not insisting on adherence to the terms of the invoices. I do not consider that this was an indulgence that was sought but rather, on the part of the defendant company, an ongoing adjustment of terms of trading brought about by, and a recognition of, the increased business that the plaintiff company was, over time, undertaking.

35. Moreover, I consider that a reasonable person in the defendant's circumstances would have viewed the matter in this way.

The position that the parties accepted

36. The situation accepted by both parties over the course of their trading is that particularised by Mr Willis when cross-examined concerning a conversation that took place with the plaintiff's credit manager:

That first sentence [in paragraph 7 of Mr Willis' affidavit as to what the credit manager said]: "We are waiting for a progress payment from Sydney, but all is okay.". You understood when she said that [to] you that she was telling you that they couldn't pay now, they couldn't make a payment off the account when you rang? - - - Correct, yes.

And you understood that she was saying that they expected a progress payment to be made at some stage in the future? - - - Yes.

And that she anticipated that that progress payment would be paid, that is the progress payment to Spectrum would be paid? - - - I'm a little bit confused there.

I'm sorry? - - - The phone calls were always along the lines of: "Yes, I'm sorry there isn't any funds available at the present time, they are doing works in Sydney which" - their claims are in Sydney.

Yes? - - - And they had expected to be paid and then when those funds are then released, I would get the proportion that was owing to me.

Yes, so you understood at all times, it wasn't a case of them simply delaying for their own benefit, it was in fact, a case of them not having the funds to pay because they hadn't been paid themselves? - - - Yes and it quite often happens in all of our accounts, unfortunately a lot of the joiners and shop fitters, they're very good tradesmen but, sometimes they're not very good businessmen. And they do the jobs they get [on] credit, they receive payment from the jobs and then release the payments.

And? - - - to the suppliers.

You also say that she said: "I have a spread sheet here, which we have prepared to allocate funds to various creditors.". And you understood that she was describing to you the fact that there were other creditors also waiting for payment and that they'd worked out some sort of scheme to allocate the funds if and when they came in, in particular amounts to particular - - - ? - - - Yes.

Including? - - - Exactly.

Including your company? - - - Including my company. (My emphasis)

37. It is also apparent from the later cross-examination that the reference to "I would get the proportion that was owing to me", was not an allocation pro rata to all creditors, but an on-forwarding of the amount received by the plaintiff company from the plaintiff's creditor for work the plaintiff company had done. That is, these amounts were to be allocated to the amount outstanding to the defendant company in respect of the supplies provided by the defendant company when the plaintiff company's trade creditors paid for the work undertaken by the plaintiff company. I do not regard this situation in the circumstances of this case as necessarily equating with an inability to pay debts as and when they fell due.

38. From these matters it is clear that Mr Willis did not deduce that the plaintiff company was insolvent or that he had grounds to suspect that circumstance.

39. In circumstances where the plaintiff company's debts were to trade creditors, all in the same position as the defendant, there was not necessarily cause for suspicion as to what turned out to be the plaintiff's underlying parlous financial state. Mr Willis was asked:

Were you aware of any outstanding debts that the company had to the tax office? - - - Well that is my whole argument. I am not aware of any debts to the tax, to the bank, to the superannuation, to the GST. That's all private information. Which unfortunately I'm not privy to.

It was knowledge or suspicion of those matters which might have founded grounds for suspicion of the plaintiff company's ability to pay its debts, but I am satisfied that neither Mr Willis nor a reasonable person in his place would have grounds to suspect the existence of those matters which appear to be the underlying cause of the plaintiff's insolvency (see Mr Rangott's affidavit of 2 March 2005 setting out the extent of the plaintiff's indebtedness to those bodies and, in particular, the Australian Taxation Office).

40. Nevertheless, Mr Mossop pressed the point that Mr Willis was taking not only a commercial risk, but one that ignored the realities of the plaintiff's position. In such a situation, he submitted that even if the creditor was acting in good faith, a reasonable person would have not accepted the position. He claimed that Mr Willis' deduction from the facts known to him was not one that a reasonable person would make. He referred to the comments of Williams J (with whom Cox and Mullighan JJ agreed) in Sims v Celcast Pty Ltd (1998) 71 SASR 142 at 146; 16 ACLC 1,140 at 1,143:

The fact that a creditor has in good faith lulled itself by its own deductive processes to a position which (with the benefit of hindsight) can afterwards be shown to be flawed will not avail that creditor by reliance on subpar (b)(i) if a reasonable person should have read the signs differently; subpar (b )(ii) will still remain as a hurdle for that creditor.

...

The respondent's officers misread the signs. The trial Judge must have read the signs only through the eyes of the respondent's officers rather than also through the eyes of the reasonable person (in the circumstances of the respondent or its responsible officers). The respondent's officers may have been overly generous in their assessment of a customer of good standing; alternatively they may have been blind to the facts which were staring at them. The hypothetical person referred to in subpar (b)(ii) would not have allowed personal perceptions to cloud a commercial judgment.

41. Those comments must be read in the light of the facts of that case. In that case, there was a long history of overdue payments in the context of promises to pay which were not kept and repayment plans that were entered into and not kept. Proceedings, at one stage, had been instituted for recovery of monies. The effect was described by Williams J in these terms (at 151; 1,147):

Based upon the above recital, it seems to me that the respondent is unable to establish that it has satisfied the test contained in subpar (b)(ii). Leal had been recognised as a delinquent debtor of Celcast by the latter part of 1994 and by February 1995 was being vigorously pursued by the respondent's debt collector. Leal's responses are unsatisfactory. The history of Leal's continuing delinquency (as pressure was applied by Celcast over some months) ought to have caused the creditor to apprehend Leal's inability to meet its debts as they fell due. In terms of subpar (b)(ii) the absence of reasonable ground to suspect insolvency has not been demonstrated.

(Celcast was the creditor/respondent and Leal the debtor.)

42. In the present case, there was no "delinquency" in the sense used in Sims v Celcast. The factual situation in Sims v Celcast was quite different and bears no relationship to what I regard as the commercial reality of the industry which regulated the trading relationship of the parties in this case.

43. Having regard to the history of the business relationship between the parties in this case and the positions accepted by them, I am satisfied that Mr Willis had no reasonable grounds for suspecting the plaintiff company to be insolvent. Save for the last payment received, I am satisfied that a reasonable person in Mr Willis' position would likewise not have had such grounds.

44. The plaintiff company seeks to have declared voidable three transactions. Section 9 of the Corporations Act defines "transaction" as including "a payment made". In Queensland Bacon (supra) at 303, Kitto J said:

The question thus posed [by s 95 of the Bankruptcy Act] is to be answered in the present cases as at the time when each of the relevant payments was about to be accepted.

In my view, the time when the question posed by a section such as s 588F of the Corporations Act is also to be answered, is the time when each of the relevant payments was about to be accepted.

45. The payments in question received in the relation-back period were:

* $29,806.36 received on 18 November 2000 for goods supplied in June 2000;

* $21,408.77 received on 18 December 2000 being part payment for goods supplied in July 2000;

* $10,500.00 received on 22 January 2001 being a further part payment for goods supplied in July 2000;

An amount of $10,872.63 remained outstanding in respect of the July account of $42,781.40.

46. It seems to me that, taken at the time that these payments were received and accepted, and having regard to the history of the business relationship, it was not until the time for acceptance of the payment on 22 January 2001 that it can be fairly said that a reasonable person in the defendant company's circumstances would have grounds for suspecting insolvency.

47. At the time of that payment, which still did not satisfy the amount rendered under the July 2000 invoice, the hypothetical reasonable person in that position would have cause to question the assumption upon which supplies were being made on a cash on delivery basis. There could be a suspicion that the low incidence of cash on delivery supplies might, indeed, be referable to difficulty in paying past accounts. A further matter of suspicion could be the fact that a payment had been received the previous month of only about half the due amount for the July 2000 invoice and the sum now being paid did not satisfy an invoice that had, by now, been outstanding for well over the 90 days that had generally been adhered to by the plaintiff company. These matters are, in my view, just sufficient to deny the defendant company from being able to satisfy the requirement in s 588FG(2) that a reasonable person in the circumstances of the defendant company would have no reasonable grounds for suspecting that the plaintiff company was insolvent at the time of accepting the payment of $10,500.00 on 22 January 2001. It follows that the transaction involving the payment of this sum is voidable.

48. Pursuant to s 588FF(1) of the Corporations Act, I order that the defendant company pay to the plaintiff company the sum of $10,500.00.

49. I will hear the parties on the questions of interest and costs.

I certify that the preceding forty-nine (49) numbered paragraphs are a true copy of the Reasons for Judgment herein of his Honour, Justice Gray.

Associate:

Date: 5 August 2005

Counsel for the plaintiff: Mr D J Mossop

Solicitor for the plaintiff: Gillespie-Jones & Co

Counsel for the defendant: Mr R F Livingston

Solicitor for the defendant: Rod J Barnett & Associates

Date of hearing: 17 March 2005

Date of judgment: 5 August 2005