Fielding and Whyte (as liquidators of GRS Contracting P/L (In Liq)) v Valley Tyres P/L [2013] QMC 8

1 MAGISTRATES COURTS OF QUEENSLAND CITATION: Fielding and Whyte (as liquidators of GRS Contracting P/L (In Liq)) v Valley Tyres P/L [2013] QMC 8 PARTIES: ANDREW PETER FIELDING AND DAVID WHYTE (AS LIQUIDATORS OF GRS CONTRACTING PTY LTD (IN LIQUIDATION) (plaintiff) v SANDBELL PTY LTD ACN 074 554 260 AS TRUSTEE FOR THE M TURNER FAMILY TRUST (first defendant) DEESON HEAVYLIFT PTY LTD ACN 090 582 513 (second defendant) TEREX MINING AUSTRALIA PTY LTD ACN 000 969 728 (third defendant) VALLEY TYRES PTY LTD ACN 065 423 494 (fourth defendant) CHARLES WALTER OGILVIE (fifth defendant) KELVIN RAYMOND OGILVIE (sixth defendant) BARRY WARREN OGILVIE (seventh defendant) FILE NO/S: M13661/11 DIVISION: Magistrates Courts PROCEEDING: Claim for Orders under s 588FF of the Corporations Act 2001 ORIGINATING COURT: Magistrates Court at Brisbane DELIVERED ON: 11 February 2013 DELIVERED AT: Brisbane HEARING DATE: 31 May 2012, 26 June 2012 MAGISTRATE: Springer BL ORDER: Claim is dismissed. CATCHWORDS: CORPORATIONS – WINDING UP – administration of -- 1 of 20 -- 2 company in liquidation - recovery of preference payments – whether the payment was cash-on-delivery - whether there was a suspicion the paying company was insolvent COUNSEL: SOLICITORS: Introduction [1] Valley Tyres Pty Ltd (VT) is a retail seller of tyres in the Hunter Valley. During 2005 and 2006 it sold tyres to GRS Pty Ltd (GRS). VT was paid for some of the tyres supplied. In September 2006 GRS was placed in liquidation. The plaintiffs in this proceeding are the liquidators of GRS who seek from VT the sum of $110,357.00 being the total of the amounts received between 22 March 2006 and 11 May 2006. The order sought is made pursuant to section 588FF of the Corporations Act 2001 (the Act). Payments by an insolvent company to a creditor within 6 months prior to its winding up are prima facie recoverable by a liquidator, pursuant to the statutory framework in Part 5.7B of Chapter 5 of the Act. For the purposes of the liquidator‟s claim, the relation back date was 13 March 2006. [2] VT opposes the orders sought and, in relation to one payment, says that the payment cannot be construed as a preference payment because of the circumstances surrounding that transaction. Rather, it says that it was a payment for a cash-on-delivery transaction which means that it does not fall within section 558FA of the Act, and is therefore not a preference. That transaction is referred to in these reasons as the „Henan COD sale”. For all payments of other sales (the general sales), Counsel for VT accepted that they were a preference and, but for the defence in section 558FG of the Act relied on, the plaintiff would succeed (T1- 7). [3] VT is the fourth defendant in the proceeding. The proceeding as it relates to other defendants is not relevant for this matter and no issues arise for determination in relation to any other defendants. [4] The trial involving VT took place over 2 days, 31 May 2012 and 26 June 2012. An agreed bundle of documents, subject to some minor exceptions, was provided to the court. That bundle became exhibit 1.1 Helpfully it is paginated. Those page numbers will be referred to throughout these reasons to identify particular documents to which I refer from time to time. [5] Written submissions were provided on behalf of the parties and supplemented by oral submissions finalised on 10 October 2012. 1 The bundle was marked Exhibit 1, subject to the identification of documents marked 15 and 16 in the index, and documents marked 22, 27 and 63 to 76 inclusive. -- 2 of 20 -- 3 [6] The only witness called by either party is Mr Blais of VT. He is the general manager of VT and also manages Atlas Tyres, a related business.2 He has been in that role for 17 years. Although he reports to the owner of the 2 businesses, he is left to operate them. It appears uncontested that VT is a profitable business and has a very small „bad debt‟ component to its business.3 Atlas Tyres supplied some of the tyres sold by VT. As a wholesaler of tyres, Atlas Tyres also sold tyres to other persons. The issues to be determined and the tests to be applied [7] The plaintiffs bear the onus of establishing that each payment was an unfair preference. Once the prima facie case is established, the issue then arises as to whether the creditor (here VT) can avail itself of the statutory defence in s 588 FG of the Act. That requires that there be: a. receipt in good faith; b. absence of subjective knowledge or suspicion about the insolvency of the debtor; and c. absence of objective knowledge about the insolvency of the debtor. [8] The defendant, VT, carries the onus in relation to those 3 matters. [9] VT acknowledges that in relation to the general sales they are an unfair preference, but contends that the statutory defence applies to those.4 In relation to the Henan COD sale (although VT contends it is not a preference), VT contends that they can rely on the defence set out in the Corporations Act. Sections 558FA and 558FG of the Corporations Act are set out in Appendix 1. The Evidence The Credit account for GRS with Valley Tyres [10] It is not in dispute that some tyres were sold to GRS on credit. At T1-37, Mr Blais describes his practice for opening a credit account for customers (commencing at line 1): If a customer seems reputable in my assessment I will just set up the account by typing in their name, data, phone number, email, as much information as I can extract from either in person or on the phone, if it‟s set up over the phone. And that becomes the account. I would make sure their mailing address is correct for the – for the 2 At the relevant time Penwil Pty Ltd (or possibly Penhill Pty Ltd) “was a company structure for the name of Atlas Tyres”: T1-87. (In exhibit 1, p 161 a pro forma invoice refers to Penwil Pty Ltd whereas p.195 of exhibit 1 a letter from Westpac Banking Corporation is addressed to Penwil Pty Limited but refers to the beneficiary of the payment as Penhill Pty Ltd. 3 VT had bad debts of $8746 in the 2006 financial year, with sales for that year of $14.8 million. See Transcript: T1- 34 L 55. 4 See T1-3, L28 and paragraph 5 of the 4th defendant‟s outline of submissions. -- 3 of 20 -- 4 mail out address and any comments, or just generally information for mailing the data out. Phone numbers and ABN number. [11] The invoices delivered for the general sales include the words: “Note: Terms are strictly nett 30 days”. [12] Exhibit 1 includes a spread sheet (see pp 232-237) entitled “Customers Aged Balance Report”. Mr Blais‟s evidence about this appears at transcript day 1, p 44 and following. The spreadsheet records customers who owed money to VT as at 1 July 2006. The amounts listed against a customer‟s name under a heading reflect different periods of time since the debt was incurred. The column headed “current” was for all transactions in the current month. The column headed “age 1” was for “anything with a previous of the month before” meaning an invoice could be only “one day old and it would show in our 30 day column which is age code one”. Similarly, age code 2 and age 3 relate to older accounts which were unpaid, the latter category being for sales 61 days and older (T1-49). I find that that spreadsheet shows the state of debtors to Valley Tyres as at 1 July 2006. [13] Mr Blais gave evidence that it was his practice in relation to contractors (which I understood to mean contractors in the mining industry) to not look for payment until accounts were placed into the “age 3” column. The spreadsheet also shows other creditors of VT who had amounts outstanding and who appear in the age 3 column. For example: Daracon Engineering $172,108.75 Gosford Quarries $11,846 Newell‟s Creek Sawmilling $12,020.60.5 [14] When VT viewed a customer as being a delinquent debtor, they would be marked in the VT accounts with “HOLD” or “CLOSED” showing against their names.6 Invoices charged to, and payments made, by GRS to Valley Tyres [15] The invoices for the general sales were dated as set out below and for the following amounts: Date Invoice Number Amount 21 November 2005 I154985 $ 1,067.00 25 November 2005 I155179 $ 660.00 15 December 2005 I155923 $12,100.00 5 See also T-1, p.56 where several other contractors working in the mining industry had amounts owing included in the „age 3‟ code. 6 See p.232 and following in exhibit 1 for the Customer Aged Balance Report and Transcript T1-44 L50 to p. 45 and T1 93 L 28. -- 4 of 20 -- 5 5 January 2006 I156577 $55,000.00 13 January 2006 I156882 $ 703.00 17 January 2006 I156986 $ 3,300.00 22 March 2006 I159266 $ 418.00. 7 [16] The Henan COD sale invoice was for an amount of $36,300 and was dated 09/05/06. [17] Payments were received as follows, although in relation to the first 2 payments there is a contest as to when the payments were received8: Date (as given by defendant) Amount 20/3/06 $35,000 10/4/06 $15,000 24/4/06 $10,000 11/5/06 $36,300 11/5/06 $14,057 How the payments came to be made [18] Mr Blais‟s evidence was that it had been drawn to his attention by a VT employee, Richard Coulson, that there was a proposed purchase by GRS or that GRS was looking for a particular Dunlop tyre. That had a sale price of $418. Mr Blais had noticed “that the account had an amount outstanding Code three. I called somebody from GRS to say how‟s this payment going?” (T1-76 L9). As a result of that conversation, 2 payments were received, one of $35,000 and about three weeks later, $15,000. Mr Blais‟s evidence was that the GRS account “was still running within my terms. There was no issues with it” (sic) (T1-76 L25). [19] There was no record of the telephone conversation made by Mr Blais to someone at GRS (T1-76 L40). He gave evidence that following the first and second payments of $35,000 and $10,000 the account was “in excellent condition. Those payments brought the account well within, like my terms” (T1-76 L55). He could give no evidence about the circumstances of the receipt of a third payment of $10,000 on 24 April 2006 (T1-76 L45). [20] Mr Blais gave evidence about his accepting payment terms well outside the 30 day period, a practice which he adopted generally in running the VT business. [21] During cross-examination, the following exchange occurred with Mr Peden for the plaintiffs asking: 7 These invoices are at pages 153-160 of exhibit 1. 8 Compare the Further Amended Statement of Claim (filed by leave 31 May 2012) at paragraph 61 and the Fourth Defendant‟s Defence filed 2 December 2011. -- 5 of 20 -- 6 “You see in fact, Mr Blais, you - you demanded payment of 35,000 before you'd make any further supply, correct?-- I don't recall demanding anything. Because in fact you required payment of 35,000 before you'd even process this further transaction for $400 odd, isn't that right?-- I don't recall that requirement. I recall asking for the - for a payment. Mmm. And in fact the $35,000 was received on the 20th of March 2006 by your company?-- By the - if that's what the bank records show, that would be - yeah, that might be right. Yeah. And the deal that you in fact, and at that time, when they said that they'd be able to pay 35,000, because that's what they told you, wasn't it?-- Yes. You knew that in fact you were owed some 73,000?-- But not due in my mind.” (T2-35) [22] The first two payments received were in rounded amounts and were not referable specifically to any of the above invoices. Valley Tyres had previously accepted rounded figure payments involving at least one other customer, for example, Turngood Pty Ltd.9 The usual practice at VT when round figure payments were received, was to treat them as “unallocated” pending clarification of the invoices to which the money was to relate. The plaintiffs seek to draw a distinction between the Turngood rounded payments and the GRS rounded payments. This will be referred to in more detail later. [23] GRS‟s response of making payment in a round figure amount on or about 20 March 2006 for $35,000 did not bring the account back into a position where only current invoices (ie those outstanding for less than 30 days) remained owing. [24] The final payment of $14,057.00 (which although shown as processed through the account on 15 May 2006 was actually received on 11 May 2006) was received following discussion or some communication between Mr Blais and someone in the GRS accounts section which occurred around the time of the Henan COD sale (discussed below). Mr Blais‟s evidence was that he asked the person at GRS if they could “fix up the balance on the remaining account” (T1-93). That evidence was confirmed during cross-examination.10 Mr Blais, when asked “at the time of receipt on the 11th of May 2006 what were the terms of the account between the companies?” he replied “Oh, good conditions”.11 The Henan COD Sale 9 See Transcript Day 1, p. 65. His evidence on that point was corroborated by page 229 in exhibit 1 dealing with other customers to whom VT sold tyres. 10 See T2-74 L35 (although the page is incorrectly numbered 1-74) 11 See T1-93 L25. -- 6 of 20 -- 7 [25] Mr Blais‟s evidence about the sale to GRS of Henan Tyres commences at T1-89. There had been an earlier sale of Henan Tyres to GRS on 5 January 2006 for $55,000. There had been no prior discussion about the terms on which tyres for the January 2006 sales were made (T1-90 L40). [26] Mr Blais gave evidence that in 2006 in approximately April or May, there was a very big demand for a particular tyre of size 2700 by 49, the latter figure being the rim size in inches. The tyre “fits a Cat 777 dump truck typically used in the contracting and mining industry for water carts and coal haulage. GRS at this time used it as a coal haulage or – tyre”. The Chinese supplier from which VT sourced its tyres (through the importing company Atlas Tyres) “kept increasing the prices because of worldwide demand, marketability and opportunist options” (T1-76). Previously payment had been required on a bill of lading, but that changed to a requirement for prepayment before production. [27] Atlas Tyres produced a pro forma invoice for COD on 8 April 2006 (T1-86 L29). At pp161 and 195 of exhibit 1, an invoice directed to another Atlas Tyres customer (Promac Rental and Sales Pty Ltd) shows “New Payment Terms as Follows;” All OTR orders are to be paid from the proforma invoice one month prior to shipping Any changes to prices/quantities are to be paid prior to release of goods.12 [28] Although this proforma invoice shows a shipping time “on or before 30th April 2006” the document which showed the payment of that invoice (p 195 of Exhibit 1) confirms receipt by Westpac on 26 April 2006 of an amount $20 less than the invoice amount. Accordingly, this was not one month prior to shipping. Despite this, the invoice does show the adoption of a process by Atlas Tyres to impose a requirement to prepay for the in-demand 2700-49 tyres. [29] Mr Blais‟s evidence about the increasing costs commenced at T1-77. The increasing cost to VT is confirmed by the “Stock Transaction Report” at p.248 of exhibit 1. The costs of sales ranged from $5900 per tyre in July 2005; $8500 in October 2005, $12,000 in February 2006, $11,000 in April 2006.13 [30] In relation to the Henan COD sale, VT pleads that it issued a tax invoice to GRS for $36,300 on 9 May 2006, that on 15 May 2006 GRS paid $36,300 and that the Henan Tyres were “supplied to GRS, contemporaneously with, and in exchange for, the Second Valley Tyres Payment in accordance with terms agreed in relation to this sale at or about the time the Henan Tyres were ordered by GRS”.14 [31] Mr Blais‟ evidence about this later sale commences at T1-91: 12 See p161 of Exhibit 1. “OTR” means “off the road” tyres – see T1-85 L 30. 13 See ex 1, p. 248 under “Sales Cost”. 14 Further Amended Defence of the Fourth Defendant -- 7 of 20 -- 8 Okay. Can you identify by reference to the customer transaction list what transaction that was?-- Yes, a transaction on the 9th of the 5th, '06 on page 205. And the invoice number?-- 160916. Can I take you to document page 162A? Now, can we firstly identify the date of this sale by reference to this document?-- 9th of the 5th, '06. And we see on there that there's a reference to 2700 49 Henan G4 E4. Again, do I take it to be the relevant tyre?-- Yes. And there's a price there a total of $36,300 for the amount?-- Yes. … MR LOONEY: And the question was do you know, can you tell us, whether or not the tyres were delivered before or after the payment was received?-- It was - it was delivered after the payment was made. Thank you. Then the final payment that we're dealing with, … The final payment there that's referred to is $14,057?-- Yes. [32] However, the evidence was that the actual payment was received on 11 May 2006 (seeT1-72 and exhibit 1 p197). The entries in the bank statement for VT for 11 May 2006 show two entries both designated “Salary GRS Contracting GRS payment” and with the amounts of $14,057.00 and $36,300. [33] Evidence was given about other customers (specifically Alan Burns Used Equipment) being required to pay COD for six 2700-49 Henan Tyres. Although the actual communication of such a requirement between VT and the customer Alan Burns Used Equipment is not before the Court, the tax invoice number 162155 of 15 June 2006 referred to in the Customer Transaction List (ex 1, p250 and T1-88) stated in relation to an invoice of 15 June 2006 for 12 Henan Tyres at a total price of $223,740 includes the words: “Above tyres will be delivered to Bowditch & Partners as directed after full payment”. [34] I infer from the evidence that the Customer Transaction Reports contain the same information as that given in an invoice to customers. [35] Mr Blais‟ evidence was that in relation to a sale to Alan Burns Used Equipment in June 2006 for six Henan Tyres for a total of $111,870, the inclusion of the bank account information on the invoice was so that the customer could “make a direct deposit into our bank account” (T1-89- L17 and p251 of exhibit 1). When -- 8 of 20 -- 9 questioned as to why that is “an indication of COD” his answer was “because it‟s a practice that we do”. [36] As to GRS‟s purchase of Henan Tyres, invoice 160916 (p.162A in exhibit 1) includes the bank account details for Valley Tyres P/L but also includes the usual wording “Note: Terms are strictly nett 30 days” (see ex 1, p.162C). For the transaction on 9 May 2006 for $36,300 Mr Blais‟s evidence was that the tyres were delivered after the payment was received (T1-92 – final line). Consideration of the evidence The terms applying to the dealings between VT and GRS [37] The evidence was that there was no credit account application form, nor were any terms discussed. [38] Although one might expect VT to have pursued GRS to comply with its obligation to pay within 30 days of the delivery of the invoice, a much more relaxed time frame seems to have been accepted. The plaintiffs raise in their submissions (para 34(d)) the point that Mr Blais was unable to explain why, if the true position had been that the terms were 90 days and only $13,827 was in the 90 day plus column, GRS would offer of its own accord to pay $50,000 by 2 instalments? [39] I did not glean from the evidence that Mr Blais had imposed a 90 day credit term, but rather that he was prepared to accept payment within those terms. Indeed, the evidence is that there was no discussion of terms. Further, regardless of what credit terms may be imposed, it is not completely unknown for debtors to pay their debts promptly. I am satisfied from the evidence that GRS was not being treated in an exclusive way in allowing terms significantly longer than 30 days. I find that there was no written application for a credit account and that no discussion of the terms on which credit was provided between VT and GRS ever occurred. [40] The plaintiffs submit that: “Therefore, the terms of credit will be those that appear from the forms that passed between the parties and were thereby accepted by them” and reliance is placed on Brogden v Metropolitan Railway Co (1877) 2 App Cas 666 (without any specific page references). [41] I have difficulty with that submission in that the appropriate inference to be drawn is that there was no acceptance by GRS of the 30 day terms; they never paid in accordance with such terms. This may be contrasted with the Brogden v Metropolitan Railway Co decision where the conduct between the parties was entirely consistent with the “approved” document signed by Brogden and filed away by the Railway Co without completion of a contract document signed by both parties (see pp 678, 680, 682, 686, 689, 693). [42] Further, in this matter, as in Spectrum Joinery Pty Ltd v Turners Building Supplies Pty Ltd [2005] ACTSC (5 August 2005), the invoices stipulate all terms being strictly 30 days nett, but that clearly did not accord with the practice adopted by both the creditor and debtor. In Spectrum Joinery, the commercial reality was “the -- 9 of 20 -- 10 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”. That is not the situation here, where on the evidence available, there was no discussion of any terms surrounding the provision of credit. I find that it was a common feature of the manner in which VT operated to accept payments outside the 30 day period referred to on the invoices issued by VT. The rounded amount payments [43] The payment of rounded amounts could suggest an inability on the part of GRS to pay its debts in full as they fell due. The plaintiffs submit at paragraph 65(d) that the rounded amounts reflected a prima facie inability to pay the entire debt then owing and that to the extent that VT relied on it being a usual practice, that assertion was not made out on the evidence, with only one customer being identified and then “it was not established that they were in fact rounded payments, as opposed to being for the precise amount of an invoice”. I accept that submission insofar as the evidence did not establish that for that other customer the invoices were not for the rounded amounts. The Henan COD sale [44] The plaintiffs bear the onus of proving that the payment for this sale was a preference; there is no onus on the defendant to disprove this. As to proof of delivery of Henan Tyres, there is no evidence about when that occurred, although I am satisfied that that occurred after the payment of the $36,300 was received on (according to the defendant) 11 May 2006. However, the plaintiffs submit that actual delivery of tyres is not relevant because (at paragraph 63 of the written submissions): Valley Tyres did not in fact achieve a COD transaction. Valley Tyres raised an invoice for $36,300 on 9 May 2006, at which time, according to Valley Tyres, the debt arose. In the mind of Mr Blais, a debt for what he described as a “COD transaction” arose at the time the invoice was raised: see XXN at T:2-70 to 71 and Ex. 10 (noting that the page is mistakenly numbered 1-70- to 1-71). The payment was several days later, being on 11 May 2006, by which time Valley Tyres was a creditor. [45] The exchange at T2-70 to 71 relates to a later June 2006 proposed transaction which never eventuated. I infer from the submission that the same attitude taken by Mr Blais in relation to the June 2006 proposed purchase of Henan Tyres should be applied to the May 2006 transaction. At T2-71 L17 in response to a question about what was included in the proof of debt completed by VT, this exchange took place: All right. Now, you did so because the books and records of Valley Tyres recorded an indebtedness from the 7th of June 2006 -- 10 of 20 -- 11 in respect of a purchase of tyres recorded in an invoice from the 7th of June?-- Not necessarily. And-----?-- No, not necessarily. I'd - I did so for the reason that - that was an unpaid COD invoice and I was hoping to recover some of the money from the liquidator for that. And the reason why you claimed the money as a debt was because an order had been requested by GRS for supply to tyres to it prior to the 7th of June, correct?-- A supply of tyres was requested in the - on the 7th of June. An indication was needed they will need some tyres and I - yeah, I sent them a COD invoice at that time. Yes. And so Valley Tyres agreed to supply the tyres and sent them an invoice on the 7th of June?-- I didn't supply - I didn't agree to supply tyres, I agreed to invoice the tyres and I would supply the tyres when they paid for the tyres. Quite. And that's exactly the point. You agreed to supply the tyres at later date, correct?-- Yes. Right. Okay-----?-- After payment, yeah. Yes. Quite, but-----?-- Yes. -----my question is as at the 7th of June-----?-- Yes. -----that's when you-----?-- Yes. -----raised the invoice because at that stage, from Valley Tyres point of view, there was an obligation to - to supply the tyres and an obligation to pay for the tyres albeit you say the supply was going to happen at a later date?-- Mmm-hmm. Right. You'd agree with that?-- Yes. [46] The plaintiffs accept that the defendant intended the Henan Tyre sale to be a COD sale (see plaintiff‟s submission, para 62). There is evidence, which I accept, about the increasing demand and a consequential increase in the acquisition cost of the large tyres. That was the basis for a change in the previously adopted terms of trade with VT‟s customers, although I note that at least one other customer was not required to pay COD for these tyres, namely Daracon Engineering (see p246 of exhibit 1 showing a payment in June 2006 for an April 2006 supply of Henan Tyres). As to why that customer was treated differently is not explained in the evidence but in any event, there is evidence that Promac Rental and Sales Pty Ltd was being subjected to a prepayment obligation in April 2006 by Atlas Tyres, the wholesale business related to VT also managed by Mr Blais. That is consistent with the pleading in paragraph 12(i) of the Further Amended Defence of the Fourth Defendant. -- 11 of 20 -- 12 [47] Mr Blais‟s agreement to the proposition put about an obligation to supply and the obligation to pay extracted above is, in my view, not definitive about whether the May 2006 COD sale was or was not achieved. I am satisfied that the evidence establishes that without the payment, there would be no delivery of the Henan Tyres; the obligation to supply was conditional on that prepayment. [48] As to Mr Blais‟s explanation for the inclusion of the account details to allow a payment directly into VT‟s bank account (that being a signifier that payment was required before supply), I am not persuaded that would be how it would necessarily be construed. It would be open to a recipient of such an invoice to place an alternative interpretation on the words, for example that they merely indicate another manner by which payment may be effected. [49] In Airservices Australia v Ferrier (1995-1996) 185 CLR 483, the majority at p502 said in considering whether a payment has the effect of giving a creditor a preference priority or advantage over other creditors: If the sole purpose of the payment is to discharge an existing debt, the effect of the payment is to give the creditor a preference over other creditors unless the debtor is able to pay all of his or her debts as they fall due. But if the purpose of the payment is to induce the creditor to provide further goods or services as well as to discharge an existing indebtedness, the payment will not be a preference unless the payment exceeds the value of the goods or services acquired. As a consequence, a payment made during the six month period cannot be viewed in isolation from the general course of dealing between the creditor and the debtor before, during and after that period. Resort must be had to the business purpose and context of the payment to determine whether it gives the creditor a preference over other creditors. To have the effect of giving the creditor a preference, priority or advantage over other creditors, the payment must ultimately result in a decrease in the net value of the assets that are available to meet the competing demands of the other creditors. … If the purpose of a payment is to secure an asset or assets of equal or greater value, the payee receives no advantage over other creditors. The other creditors are no worse off and, where the value of the assets has increased, they are actually better off. Thus a debtor does not prefer a creditor to the other creditors if he or she pays a debt, or part of it, to induce the creditor to supply goods of equal or greater value than the amount of the payments. (emphasis added). [50] The Airservices Australia v. Ferrier judgment was also considered by Bryson J in the NSW Supreme Court in Mann & Anor v Sangria Pty Ltd [2001] NSWSC 172 -- 12 of 20 -- 13 (where at paragraph [36] he adopted the approach by Ormiston J in VR Dye & Co. v Peninsula Hotel (in Liq) & Anor [1999] 3 VR 201 (commencing at paragraph 36 in VR Dye & Co v Peninsula Hotel (in Liq) & Anor): In each case the court is obliged to look at the transactions between the parties in a manner which accords with the commercial realities. It is not a matter of isolating particular individual steps in the course of a business relationship so as to give one element a different characteristic from that which the totality of that relationship would evidence. … [51] As a consequence, a payment made during a six month period cannot be viewed in isolation from the general course of dealing between the creditor and the debtor before, during and after that period. Resort must be had to the business purpose and context of the payment to determine whether it gives the creditor a preference, priority or advantage over other creditors; the payment must ultimately result in a decrease in the net value of the assets that are available to meet the competing demands of the other creditors. [52] In Sutherland & Another v Lofthouse & Another [2007] VSCA 197 the Court of Appeal dismissed the appeal and disagreed that there was an error in a finding at first instance, namely that there had been a refusal to provide further items unless those new items were pre-paid, and this amounted to evidence of a lack of belief by the appellants as to the solvency of the relevant company. However, the facts there differ significantly from those in the matter before me because there had been a history and acceptance of slow payments and broken promises to pay the debt; further there had been a change of payment terms. In this matter, there is a background to explain the requirement for pre-payment given the changed terms for supply from the Chinese supplier of the large Henan Tyres. [53] Accordingly, as the payment for the Henan Tyres in May 2006 was to induce VT to supply the tyres, and there being no decrease in the net value of the assets that were available to meet the competing demands of the other creditors, I am satisfied that the payment of $36,300 made on 11 May 2006 was and is not a preference. I find that the payment of $36,300 received by VT on 11 May 2006 was not a preference. The Statutory Defence Was there: (a) subjective knowledge; or (b) objective knowledge of an inability on the part of GRS to pay its debts? [54] The objective test to be applied in deciding about whether there was a reasonable suspicion of insolvency15 and to consider it from the position of “ordinary men of business” is: 15 Williams v Peters [2010] 1 Qd R 475 -- 13 of 20 -- 14 “the ordinary person on the Bondi bus [who is] not necessarily a university graduate … [or] a person who has a background in the financial world”. [55] In order to establish the defence under section 588FG (2) VT must prove that subjectively it had no reasonable grounds for suspecting that the company was insolvent and that, considered objectively, no reasonable person in the respondent‟s position would have suspected insolvency. In Williams v Peters [2010] 1 Qd. R 475 at 498, paragraph [56] quoted from Queensland Bacon Pty Ltd v Rees as to the meaning of suspicion: “… the precise force of the word „suspect‟ needs to be noticed. 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 of mistrust, amounting to a „slight opinion, but without sufficient evidence‟ as Chambers‟s Dictionary expresses it. Consequently, a reason to suspect that a fact exists is more than a reason to consider or look into the possibility of its existence. The notion which „reason to suspect‟ expresses in sub-s (4) is, I think, of something which in all the circumstances would create in the mind of a reasonable person in the position of the payee an actual apprehension or fear that the situation of the payer is in actual fact that which the sub-section described – a mistrust of the payer‟s ability to pay his debts as they become due and of the effect which acceptance of the payment would have as between the payee and the other creditors.” [57] The test is a demanding one, as the [party] is required to prove a negative. The matters to be established are to be determined by viewing the facts and circumstances as they unfolded at the time, without the benefit of hindsight in the commercial context of the transaction as a whole. (footnotes omitted). [56] The reason as to why the $418 proposed Dunlop tyre purchase by GRS, noting it was a small purchase compared with those previously made by GRS, would attract the attention of Mr Blais or his staff is not satisfactorily explained. There was no evidence, for example that staff were directed to routinely refer to management (ie Mr Blais) any purchase where a creditor owed a particular amount or where there have been no payments from a creditor within, for example, the previous 3 months. It seems a little surprising that such a small purchase would prompt Mr Blais to make personal contact, absent some other feature. Mr Coulson was not called as a witness, nor was any witness from GRS called by either party to give evidence as to the content or tone of the conversations between Mr Blais and GRS personnel. [57] The evidence of the first communication with GRS regarding payment of outstanding amounts was described by Mr Blais in his oral evidence; it could be -- 14 of 20 -- 15 described as a polite casual inquiry (“how‟s this payment going?”16 and “how are going for money”17), rather than a demand for payment which, if not complied with, would result in there being no future supply. That evidence is unchallenged. There was no suggestion that the whole amount then outstanding was being pursued, nor any suggestion of a negotiation of a payment plan. [58] The first GRS payment was made apparently before the supply of the $418 tyre and although only a small amount in the history of transactions up to that date, the payment left some $35,000 owing. The supply of a tyre of any amount with that amount remaining owing is inconsistent with a suspicion of insolvency. [59] In the decision in Spectrum Joinery Pty Ltd v Turners Building Supplies Pty Ltd [2005] ACTSC (5 August 2005) at paragraphs 24 - 25, Gray J said that 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 one”. He refers to an important factor being “the commercial circumstances prevailing between the parties at the relevant time” and adopted the analysis of Santow J in Sutherland v Eurolinks (2001) 37 ACSR 477 at 483-484 [43]-[47] where extracts from several cases are included. Those extracts show that courts have accepted cash flow problems can be indicative of or raise a suspicion of insolvency although not necessarily so, and they are a factor and nothing more; further debts are not always paid on time by solvent traders. [60] In Spectrum Joinery there had been a history of payments well outside the terms contained in the invoices of “strictly 30 days net” in a business relationship which spanned many years. This is not the case in this matter, in that the business relationship between VT and GRS was only relatively recent. [61] The first payment was made following a telephone call from Mr Blais. Up to the time of that telephone call there had not been previous requests for payments, nor had payments been made on a running account and the absence of any recent payments was out of the ordinary. It was not the position where there had been a history of payments being made by GRS to VT in a particular way and there was now a change to the usual manner of payment. There is no evidence of cheques that were not paid on presentation or whispers concerning GRS in the industry. GRS was not, at least as at 1 July 2006, shown with a “HOLD” on its account and had not had its account with VT closed. It is reasonable to infer that it was not so categorised at 1 March 2006. The absence of GRS being on hold at 1 July 2006 is consistent with an absence of suspicion of insolvency and would be inconsistent with a previous suspicion. [62] The plaintiffs submitted orally that during cross-examination, Mr Blais‟s responses indicate that he had made a demand. I do not accept that, nor do I conclude that his responses in cross-examination about the first communication regarding payment were in substance any different to the answers given in his examination in chief. 16 Transcript 1-76, L9 17 Transcript 2-32, L31 -- 15 of 20 -- 16 [63] The plaintiffs submit that there is subjective and objective evidence of an inability to pay all debts when due given the entry into a payment plan with GRS in March 2006 at which time the outstanding debt could not be discharged by GRS on its legal terms. (para 65(b)) [64] Once having made contact with GRS and having been promised certain payments would be made (which payments were in fact made) after the first payment it is open to view that as having cemented a belief as to the ability of GRS to pay its debts. Should other witnesses have been called? [65] As noted, Mr Blais was the only person called to give evidence. His evidence related to events some 6 years previously. The plaintiff submits (para 66 of the submissions) that two other critical witnesses could, and should have been called: Mr Richard Coulson the salesman listed on the invoice for the Henan COD sale and Mr Wilton, the sole director of Valley Tyres. [66] Mr Blais gave evidence in his capacity as general manager; he has been that role since 1995 in what seems a successful business. There is nothing to suggest that any other person in a management role knew or was likely to have the level of knowledge about the day to day operations of VT; accordingly, I do not accept that a failure to call Mr Wilton should result in an adverse inference and I make no such inference. [67] Mr Coulson, if called, may have been able to give evidence about the circumstances in which the sale for a single tyre at a price of $418 prompted him to draw that to the attention of Mr Blais; further he is the salesman shown on the invoice for the Henan COD sale (ex 1 p. 162) and would expect to have some knowledge of the circumstances surrounding the Henan COD sale. Mr Coulson continues to be employed at VT. As to Mr Coulson‟s absence, I infer his evidence would not have assisted VT – but that does not mean his evidence would have contradicted Mr Blais‟s evidence. [68] I note that he worked in the capacity of VT‟s Earthmoving Manager. In the absence of evidence about the full scope of his duties, it is uncertain whether he would be likely to have had knowledge to be able to form, on behalf of VT, a suspicion of insolvency of GRS at the relevant time (or indeed whether any suspicion that he might have held should be imputed to VT). [69] I draw no adverse inference from either party not calling any other person, that is, in the case of the plaintiffs, officers or staff of GRS who may have had a recollection of any discussion with Mr Blais when he was raising the issue of the outstanding accounts or staff of VT; in the case of the defendant Mr Coulson and Mr Wilton but conclude that those witnesses would not have assisted either party‟s case. The “Lie” -- 16 of 20 -- 17 [70] The plaintiffs rely on what they call “the Lie” in the VT letter written by Mr Blais to the liquidators dated 19 September 2007 (pp136-8 of ex 1) as a factor to be considered in whether to accept Mr Blais‟s evidence. That letter included the following: 3. With reference to your account analysis I would also like to defend your comments in point form. 1703/2006/08/04/2006 I recall a statement made by the accounts department that a payment for 35000 would be paid then about 1 week later 15000 would be paid to cover normal account trading. This was simply normal account trading and we continued to supply goods after these payment dates. At no time did Valley Tyres think that the company was insolvent. There were no special circumstances which would extract the payment other than a normal settling of account due typical 90 days. 10/05/2006 Your statement is false and incorrect. The account was still active and valid within Valley Tyres accepted trading terms. In this period there was an OTR tyre shortage for all 49” tyres and above. … Our supply factory (Henan) insisted on Payment before delivery so we simply passed these C.O.D. terms on to ALL contracting customers. … Payment before supply as a normal practice for 2700-49 Henan Supply to all contractors including GRS. Terms were agreed verbally by GRS to pay C.O.D. upon invoice. Payment was made within 1 week as they needed the tyres. 4. Note that a further invoice was done on 07-06-06 for 2700-49 for which a C.O.D. payment was required before delivery. It could be noted that this C.O.D. Payment never came. Discussions with Graham from GRS simply said we don‟t need the tyres yet but hold them for us. We will pay when we need them. I continued to leave them on account to allocate the tyres. Valley Tyres never did get payment for the tyres. Later the administrator was appointment to our surprise. (Emphasis in original) [71] The following words were handwritten interlined before the final sentence quoted: “Valley suffered a loss on these as market price was volitile “(sic). [72] The plaintiffs submit that the assertion about continued trading was false as the only tyres subsequently sold to GRS were the large Henan Tyres and, according to Mr Blais, then only on a COD basis. The letter is not specific as to the nature of the continued supply. [73] Further, as regards the statement that “all” COD customers were required to pay prior to delivery, that was not correct, as there was at least one other customer who was not being required to prepay for the larger Henan tyres, namely Daracon Engineering. The VT Defence had been amended in late 2011 (well before the trial) to delete the reference to “all” other customers. However, I do not consider this a crucial matter in determining the credibility of Mr Blais. -- 17 of 20 -- 18 [74] During cross-examination Mr Blais agreed that he had completed a proof of debt reflecting a claim that GRS owed VT the sum of $108,900. The raising of an invoice for that amount was the subject of evidence (extracted earlier in these reasons at paragraph 45). As the tyres were never supplied, it is difficult to see how that sum could be owed if the invoice raised was for an intended pre-payment or COD transaction. As he said in his evidence, the amount set out in the proof of debt was for an unpaid COD invoice and Mr Blais was hoping to recover from the liquidator some of that, because of the loss incurred in relation to that order. [75] There was no specific question put during cross examination that any of the matters raised in the letter to the liquidator were a deliberate falsehood. The plaintiffs submit that I should regard him as an unsatisfactory witness in a number of respects (para 68) and treat his evidence with caution. I see no reason why I should not generally accept Mr Blais‟s evidence, although some aspects of it lacked clarity. I find him to be a generally credible witness. Conclusion [76] Here, objectively viewed, there was nothing prior to the contact between Mr Blais and someone at GRS about a payment to suggest insolvency, other than slow payment, which should be viewed in the context of there having been no prior pursuit of unpaid accounts. I respectfully adopt the analysis of Santow J in Sutherland v Eurolink18and the extracts there from other decisions dealing with the caution which one must treat cash flow problems. In my view, the four payments set out in paragraph 17 of these reasons were received in good faith. [77] Having regard to the business relationship between VT and GRS, I am satisfied that Mr Blais (as the person with day to day responsibility for managing VT) had no subjective knowledge of insolvency of GRS or reasonable grounds for suspecting GRS to be insolvent. Further, I am satisfied that a reasonable person in Mr Blais‟s position would likewise not have had such knowledge or suspicion. [78] I am satisfied that the defendant has met the onus placed on it in proving its entitlement to reliance of the defence in section 558FG of the Act in relation to each of the payments received as set out in paragraph 17 of these reasons. [79] As previously stated, I find that the payment of $36,300 received by VT on 11 May 2006 was not a preference. [80] The plaintiffs‟ claim is dismissed. 18 (2001) 37 ACSR 477 at 483-484) and the extracts cited and followed in Spectrum Joinery (supra). -- 18 of 20 -- 19 Appendix A Sections 558FA and 558 FG of the Corporations Act state: 588FA Unfair preferences (1) A transaction is an unfair preference given by a company to a creditor of the company if, and only if: (a) the company and the creditor are parties to the transaction (even if someone else is also a party); and (b) the transaction results in the creditor 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; even if the transaction is entered into, is given effect to, or is required to be given effect to, because of an order of an Australian court or a direction by an agency. (2) For the purposes of subsection (1), a secured debt is taken to be unsecured to the extent of so much of it (if any) as is not reflected in the value of the security. (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. 588FG Transaction not voidable as against certain persons (1) A court is not to make under section 588FF an order materially prejudicing a right or interest of a person other than a party to the transaction if it is proved that: (a) the person received no benefit because of the transaction; or (b) in relation to each benefit that the person received because of the transaction: (i) the person received the benefit in good faith; and (ii) at the time when the person received the benefit: (A) 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 (B) a reasonable person in the person’s circumstances would have had no such grounds for so suspecting. (2) A court is not to make under section 588FF an order materially prejudicing a right or interest of a person if the transaction is not an unfair loan to the company, or an unreasonable director-related transaction of the company, and it is proved that: (a) the person became a party to the transaction 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. (3) For the purposes of paragraph (2)(c), if an amount has been paid or applied towards discharging to a particular extent a liability to pay tax, the discharge is valuable consideration provided: (a) by the person to whom the tax is payable; and (b) under any transaction that consists of, or involves, the payment or application. (4) In subsection (3): tax means tax (however described) payable under a law of the Commonwealth or of a State or Territory, and includes, for example, a levy, a charge, and municipal or other rates. -- 19 of 20 -- 20 (5) For the purposes of paragraph (2)(c), if an amount has been paid or applied towards discharging to a particular extent a liability to the Commonwealth, or to the Commissioner of Taxation, that arose under or because of an Act of which the Commissioner has the general administration, the discharge is valuable consideration provided by the Commonwealth, or by the Commissioner, as the case requires, under any transaction that consists of, or involves, the payment or application. (6) Subsections (3) and (5): (a) are to avoid doubt and are not intended to limit the cases where a person may be taken to have provided valuable consideration under a transaction; and (b) apply to an amount even if it was paid or applied before the commencement of this Act. -- 20 of 20 --