Buckleys Earthmoving Pty Ltd, Re [1994] QSC 190

:;2 ~40 I ~c. 94{ I Cf 0 - at State Reporting Bureau TRANSCRIPT OF PROCEEDINGS (Copyright In this transcript Is vested In the Crown. Copies thereof must not be made or sold without the written authority of the Director, State Reporting Bureau.) SUPREME COURT OF QUEENSLAND C~viL-JURISDICTION // / WHITE J Application No 18 of 1992 IN THE MATTER OF THE CORPORATIONS LAW IN THE MATTER OF BUCKLEYS EARTHMOVING PTY LTD ACN 010 720 680 BRISBANE .. DATE 26/07/94 JUDGMENT REVISED CO?:ES ISSUED Stale RJ;ooT:ir.g Bureau Date )! ll-1 /<[-- ~-------------------------------------------------------------------------4th Floor, The Law Courts, Georf{e Street, Brisbane, Q. 4000 Televhone: (07) 227 4360. Facsimile: 1071227 5532 -- 1 of 17 -- 260794 tkb (White J) HER HONOUR: The orders of the Court in this matter are as follows: 1. Declaration that a payment of $534.95 on 7 October 1991 and payments of $630.50, $1,521.00, $2,463.00, and $6,875.85 on 14 November 1991 by Buckleys Earthmoving Pty Ltd to Clewett Corser and Drummond (a firm) are void as against the Liquidators pursuant to section 565 of the Corporations Law; 2. Order that the· respondent Clewett Corser and Drummond forthwith pay to Buckleys Earthmoving Pty Ltd the sum of $12,025.30 together with interest thereon at 10 per cent per annum from 16 May 1994. 3. I further order that the respondent pay to the applicants the costs of and incidental to the application to be taxed. I publish my reasons. 7- JUDGMENT 2 10 20 30 40 50 60 -- 2 of 17 -- ~34bl . IN THE SUPREME COURT OF QUEENSLAND Application No. 18 of 1992 Brisbane Before Justice White (Re: Buckleys Earthmoving Pty Ltd) IN THE MATTER of the Corporations Law - and - IN THE MATTER of Buckleys Earthmoving Pty Ltd A.C.N. 010 720 680 REASONS FOR JUDGMENT - WHITE J. Judgment delivered: 26/07/1994 CATCHWORDS: Preference payments - solvency of company - "ordinary course of business" - solicitor/client relationship Counsel: Mr. J. McGill for applicants liquidators Mr. A.J. Williams for respondent Solicitors: Andrew P. Abaza for applicants Macgillivrays as town agents for Clewett Corser & Drummond Hearing Date: 15 July 1994 -- 3 of 17 -- IN THE SUPREME COURT OF QUEENSLAND Application No. 18 of 1992 IN THE MATTER of the Corporations Law - and - IN THE MATTER of Buckleys Earthmoving Pty Ltd A.C.N. 010 720 680 JUDGMENT - WHITE J. Judgment delivered 26 July 1994 The applicants are the liquidators of Buckleys Earthmoving Pty Ltd ("the company") who seek a declaration that certain payments made by the company to Clewett Corser and Drummond, a firm of solicitors, ("the firm") are void as against the liquidators pursuant to s.565 of the Corporations Law. They also seek an order that the firm pay to the liquidators the sum of $12,025.30 and interest thereon. In view of the relatively modest sum involved and that it is necessary to bring such actions in the Supreme Court, Clout v. Queensland Steel and Sheet Pty. Ltd. unreported decision of Court of Appeal of 26 May 1994 (App. No. 28 of 1994 C.A. 94/177), the application was heard in Chambers on affidavit and without cross- examination of the deponents. The company was wound up by order of this court on 10 February 1992. The payments sought to be impugned are $534.95 on 7 October 1991; $630.50, $1,521 .00, $2463.00 and $6,875.85 all on 14 November 1991. Accordingly, they were made within the six months prior to the date of the presentation of the application for the winding up -- 4 of 17 -- 2 of the company. The payments were with respect to legal work done for the company by the firm. The operation of s.565 of the Corporations Law involves consideration of s.122 of the Bankruptcy Act (1966) (C/w). It is convenient to set out the relevant aspects of those provisions:- "565 ( 1) A settlement, a conveyance or transfer of property, a charge on property, 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 becoming a bankrupt, be void as against the trustee in the bankruptcy, is, in the event of the company being wound up, void as against the liquidator. (2) For the purposes of sub-section (1), the date that corresponds with the date of presentation of the petition in bankruptcy in the case of a natural person is - (a) in the case of a winding up by the Court - ( iii) the date of the filing of the application for the winding up ... (3) For the purposes of this section, the date that corresponds with the date on which a person becomes a bankrupt is the date on which the winding up of the company commences or is deemed to have commenced." Section 122 of the Bankruptcy Act provides:- "122(1) A conveyance or transfer of property, a charge on property, or a 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 this section referred to as 'the debtor'), in favour of a creditor, having the effect of giving that a creditor a preference, priority or advantage over other creditors, being a conveyance, transfer, charge, 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 a 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, -- 5 of 17 -- 3 is void as against the trustee in the 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 or proving the matters referred to in sub-section (2) lies upon the person claiming to have the benefit of the sub-section. (4) For the purpose of this section - (c) a creditor shall be deemed not to be a purchaser, payee or encumbrancer in good faith if the conveyance, transfer, charge or payment or obligation was executed, 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 became due from his own money; and (ii) that the effect of the conveyance, transfer, charge, payment or obligation would be to give him a preference, priority or advantage over other creditors." It is not disputed by the firm that the relationship of debtor and creditor existed between the company and the firm, and that the payments were made on the dates alleged. Although not admitted it seems plain from the material that the payments were for work completed by the firm and not on account of future work to be done. There is no admission that the company was insolvent at the material times. The issues then for resolution are:- (i) was the company insolvent at the relevant times; -- 6 of 17 -- 4 (ii) were the payments received in the ordinary course of business; and (iii) were they received in good faith. Solvency There were no submissions made on behalf of the firm that the company was solvent at the relevant times and it is difficult to see that any could be advanced. Mr. Taylor, one of the liquidators, concluded in his report dated 22 January 1993 that ""on the basis of the financial reports of the company together with the fact that there has been a deficit in working capital from at least June 1 989 and that the company was unable to meet its debts as they fell due, I am of the opinion that it has been trading in an insolvent state for the two and a half years prior to Liquidation." The material in Mr. Taylor' s affidavit amply supports that conclusion. As an example, twenty-four cheques dated from 30 April 1991 to 15 November 1991 were drawn in favour of the Commissioner of Taxation and the Commissioner of Payroll Tax but not presented as at 30 November 1 991, amounting to $439,901 . 29 in total. Special arrangements had been entered into with the Commissioner of Taxation seeking additional time for payment of amounts outstanding in relation to group tax, but those arrangements were not honoured in September 1991. The company had a working overdraft of $310,000. The statement of affairs prepared by the directors of the company as at 9 January 1992, recorded a deficiency of $3,896,803.00 with trade creditors being owed $2,224,030.00. The Commissioner of Taxation was then owed $636,820.00. The company had insufficient funds for the payment of wages on various dates -- 7 of 17 -- 5 from the end of August until the end of November 1991 amounting to over $300,000. Mr. Taylor swears that in the period June 1991 to 10 February 1992 there was no asset of the company which was immediately realisable to cash. The company's leasehold premises were mortgaged to the National Australia Bank to an amount greater than its value while the Queensland Industry Development Corporation held a first charge debenture over the assets of the company. The company's plant and equipment was leased from a number of finance institutions and it held no realisable bills, term deposits or stocks or shares which could be sold or realised to cash in that period. I conclude that the company was insolvent when the impugned payments were made. Ordinary Course of Business Mr. Brian Carter, a member of the firm, has sworn an affidavit on its behalf. He has general knowledge of the transactions between the company and his firm although he did not have the conduct of every file. The firm had acted for the company from its formation in 1986 until May 1990 when the company was restructured with Mr. George Williamson becoming chairman of directors and Mr. Ray Moore the managing director. It continued to act until the company went into liquidation in 1992. The firm also acted for a number of entities associated with Mr. Williamson and his brother whom Mr. Carter thought were millionaires but who were themselves slow payers of accounts. During that time there was no period when the firm did not have a number of files current for the company amongst which there were -- 8 of 17 -- 6 always some files relating to disputes with principals or sub- contractors. There seems to have been a history of slow payment of accounts throughout the period of the association of Mr. George Williamson with the company. Shortly prior to the payment of the impugned accounts Mr. Carter had several discussions with Mr. George Williamson and with Mr. Moore about the slowness with which the firm's accounts were being paid and requiring them to be paid. Mr. Williamson apparently responded that the accounts would be paid and that the company had a short term cash flow problem but that its long term position looked quite healthy. He spoke well of Mr. Moore' s work as manager of the company but complained about difficulties with sub-contractors. In November 1991 Mr. Carter took the opportunity to speak to Mr. Moore when he was consulting the firm in relation to a dispute with a sub-contractor involving a large sum of money about the various outstanding accounts. He was told by Mr. Moore that the company would become profitable within a short period once liquidity problems were overcome and mentioned a number of large jobs that the company had on its books at the time. Mr. Carter used the occasion of receiving instructions on a new file of some difficulty to insist on prompt payment of outstanding accounts and some money on account of costs in respect of the new matter. Mr. Carter has sworn that had he been concerned about receiving no payment or the possibility that the company might have gone into liquidation he would immediately have given instructions to cost the other files which were then current and have demanded payment. Mr. Carter went on leave towards the end of December and when he returned at the end of January he was informed of the -- 9 of 17 -- 7 presentation of the application to wind up the company and that the directors of the company were being represented separately by a different firm of solicitors. At that time there were still outstanding monies owing to the firm in excess of $10,000.00. Mr. Carter maintained that in his experience as a solicitor of many years' standing it is normal for earthmoving contractors to be in dispute with principals and sub-contractors during construction projects and that they are notoriously slow payers of accounts with their solicitors notwithstanding the state of liquidity of their organisation. Mr. Taylor has exhibited a number of letters from the firm relating to outstanding accounts with the company. The first dated 20 September 1991 threatened legal action for the amount owed together with interest and costs without further notice unless the account was paid by 4 October 1991. A letter dated 1 October 1991 under the hand of Mr. Moore included a cheque for $534.95, the first of the impugned cheques, for minor pieces of work done by the firm. Mr. Moore identified a number of accounts, namely, "6274 6033 6287 6998 Release of charges Transfer of Shares Second Charge Third Charge $ 630.50 6,875.85 1,521.00 2,463.00 11 and noted that they had not been paid and that he would like to have further discussions before finalising them. The firm wrote on 8 October 1991 to the company describing the cheque for $534.95 as "postdated" and disputed Mr. Moore' s bona fides in seeking to have discussions about the outstanding accounts. The following appeared: " ... I felt that it was appropriate to place on record that when I discussed the matter with you by telephone and in -- 10 of 17 -- 8 particular regarding the account in respect of the Transfer of Shares, you indicated that the account would be paid and that you had only been withholding payment because of tardiness in relation to another file. I now find that you have raised another issue consequent upon my discussions with Mr. George Williamson. I would also like to refer you to the account in relation to the Release of Charges which was a matter to which I personally attended and which has nothing whatsoever to do with the other matters. The instructions were given on that file and attended to and the account has now been outstanding for some months and we would like to see it paid. Similarly, I understand that the files in relation to the Second and Third charges are not related to the Transfer of Shares file apart from relating to the same company." Mr. Carter sought to explain this correspondence as conforming to his firm's system for the collection of book debts and that the letter of 20 September 1991 was a standard letter written with a view to applying pressure for the payment of an outstanding account. This approach, he said, usually brought results without needing to commence proceedings. He characterised the letters from the company and the further letter from the firm dated 8 October 1991 as merely "consequential correspondence" following the first letter and said that there was nothing in those letters or the circumstances which would have alerted any member of the firm to any inability on the part of the company to pay its debts or that the transactions were other than in the ordinary course of business. About three weeks prior to sending the letter of 20 September the firm had received a cheque from the company in the sum of $26,149.79 pursuant to a proposed settlement arrangement between the company and the third party. The firm had written to the third party's solicitors on 23 August 1991 as follows: "We confirm our telephone attendance on your Ms. Bretherton on 22 August 1991 and confirm our advices our -- 11 of 17 -- 9 client will make an immediate payment of $26,149.71. We advise the money will not be available until 30 August 1991 at which time we on forward it to you by way of telegraphic transfer." On 30 August 1991 the cheque was not honoured on presentation and the bank's advice to the firm was to present it again on 2 September 1991. It would appear that it was cleared then. Mr. McGill for the liquidators submitted that the events set out above taken together lend a flavour that the impugned payments were not made in the ordinary course of business. Mr. A. Williams, for the firm, pointed out that the advice from the bank on 30 August 1991 that the cheque should be presented again on 2 September 1991 represented a period from Friday to the following Monday and was thus of no great moment. He submitted that because slow payment was a normal course of dealing between the company and the firm it was in the ordinary course of business in that relationship. Opening a new file in relation to yet another sub- contractor's dispute he submitted, would tend to suggest to the firm that the company was solvent. In Robertson v. Grigg (1932) 47 C.L.R. 257 Gavan Duffy C.J. and Starke J. said at p.267 that the expression "in the ordinary course of business" should be taken to refer to "a fair transaction, and what might a man do without having any bankruptcy in view". In Downs Distributing Co. Pty. Ltd. v. Associated Blue Star Stores Pty. Ltd. (In liquidation) (1948) 76 C.L.R. 463, Rich J. at pp. 476-7 noted: "As was pointed out in Burns v. McFarlane (1940) 64 C.L.R. 108, at p. 125 the issues in sub-s. 2(b) of s. 95 of the Bankruptcy Act 1924-1933 are' (1) good faith; (2) valuable consideration; and (3) ordinary course of business.' This last expression it was said 'does not require an investigation of the course pursued in any particular trade or vocation and it does not refer to what is normal -- 12 of 17 -- 1 0 or usual in the business of the debtor or that of the creditor.' It is an additional requirement and is cumulative upon good faith and valuable consideration. it is, therefore, not so much a question of fairness and absence of symptoms of bankruptcy as of the everyday usual or normal character of the transaction. The provision does not require that the transaction shall be in the course of any particular trade, vocation or business. It speaks of the course of business in general. But it does suppose that according to the ordinary and common flow of transactions in affairs of business there is a course, an ordinary course. It means that the transaction must fall into place as part of the undistinguished common flow of business done, that it should form part of the ordinary course of business as carried on, calling for no remark and arising out of no special or particular situation." Williams J. similarly stated at p.480 that the expression "in the ordinary course of business" " ... does not require an investigation of the course pursued in any particular trade or vocation, and that it does not refer to what is normal or usual in the business of the debtor or that of the creditor. It seems to me, therefore, that the expression refers to a transaction into which it would be usual for a creditor and debtor to enter as a matter of business in the circumstances of the particular case uninfluenced by any belief on the part of the creditor that the debtor might be insolvent." In Taylor v. White (1964) 110 C.L.R. 129, Dixon C.J. said at p.136: "I do not doubt that 'in the ordinary course of business' refers to 'business' as a general conception and is not restricted to the conduct of any particular business such as the business carried on in a shop or a merchant's office or the like, but is referring to the transaction of business as a known and recognised activity pursued by anybody engaged in an attempt to win or earn or 'make' money or a living in a systematic or regular way ... The time-honoured phrase 'in the ordinary course of business' is meant to refer to transactions regularly taking place in a sustained course of activity or some usual process naturally passing without examination." Taylor J. concluded at p.152 that the authorities "do not require and examination of the character of the debtor's business". He concluded that the payments under consideration were not made in the ordinary course of business and held that it was impossible to say that they "fell into place as part of the undistinguished -- 13 of 17 -- 11 common flow of business done", or as "what a man might do without having any bankruptcy in view". As is readily seen, the first expression is the test stated by Rich J. in Downs Distributors and the latter is the test enunciated in Robertson v. Grigg by Gavan Duffy C.J. and Starke J. Menzies J. concluded at p.159: "It is not surprising, therefore, that the courts have rejected out of hand the notion that to determine what is in the ordinary course of business requires an investigation into what is normal or usual in the business of the debtor or the creditor ... It is therefore clearly established that the determination of what is meant by 'in the ordinary course of business' must take into account considerations other than the businesses carried on by the creditor and the debtor ... The authorities, it seems to me, show that the payments here in question occurred in the ordinary course of business if there were nothing about them that was unusual according to ordinary business standards." In K. & R. Fabrications (Old) Pty. Ltd. v. M. & B. Rigging Pty. Ltd. [ 1982] Qd. R. 585 the Full Court adopted with approval the observations by Connolly J. in a same named case (1980) 32 A.L.R. 183 where his Honour said at pp.184-5: "'In the ordinary course of business' refers to 'business' as a general conception and is not restricted to the conduct of any particular business such as the business carried on in a shop or merchant's office or the like. It is referring to the transaction of business as a known and recognized activity pursued by anybody engaged in an attempt to earn money or a living in a systematic or regular way: see Taylor v. White (1964) 110 C.L.R. 129 at 136, per Dixon C.J. Compare at p. 152 per Taylor J. and at p.159 per Menzies J. Again it has been said that the phrase is meant to refer to transactions regularly taking place in a sustained course of activity or some usual process naturally passing without examination: see again per Dixon C.J. (loc cit). The sequence of events in relation to this payment strongly suggests that it was prompted by the s. 222(2)(a) notice. Mr. Manning, for the creditor, suggested that in the state of the evidence this inference could not be drawn. The boot, however, is on the other foot. By s.122(3) the burden of proving that the payment was in the ordinary course of business is upon the creditor. In the circumstances of this case, unless the creditor was able -- 14 of 17 -- 1 2 to demonstrate that the payment was unrelated to the notice it would, in my judgment, not be possible to conclude that the protective provision is satisfied. The test stated by Gavan Duffy C.J. and Starke J. in Robertson v. Grigg (1932) 47 C.L.R. 257 at 267 under s.95 of the former Bankruptcy Act was whether it is 'a fair transaction, and what a man might do without having any bankruptcy in view'. A payment in response to a notice which warns of insolvency if payment not be made can scarcely be described as payment which a man might make without having insolvency in view. The emphasis has varied in the various statements to be found in the books of the test to be applied in determining whether a payment was made in the ordinary course of business. If one adopts the test propounded by Rich J. in Downs Distributing Co. Pty. Ltd. v. Associated Blue Star Stores Pty. Ltd (in lig) (1948) 76 C.L.R. 463 at 477, one comes inevitable to the same result. His Honour there said: 'It is therefore not so much a question of fairness and absence of symptoms of bankruptcy as of the everyday usual or normal character of the transaction. The provision does not require that the transaction shall be in the course of any particular trade, vocation or business. It speaks of the course of business in general. But it does suppose that according to the ordinary and common flow of transactions in affairs of business there is a course, an ordinary course. It means that the transaction must fall into place as part of the undistinguished common flow of business done, that it s·hould form part of the ordinary course of business as carried on, calling for no remark and arising out of no special or particular situation.' For my part I could not describe a payment in response to a notice under s.222 of the Companies Act as one made according to the ordinary and common flow of transactions in affairs of business or part of the undistinguished common flow of business done." In Re Cummins (T/a Nam Constructions); ex parte Harris A.R.C. Engineering Pty. Ltd. (1985) 62 A.L.R. 129 Pincus J. expressed the view that the test stated by Rich J. in Downs Distributing differed significantly from the test stated by Gavan Duffy C.J. and Starke J. in Robertson v. Grigg. His Honour concluded that it was desirable to apply the view of Rich J. He said at p.137: "But in the end it has seemed to me desirable to apply the view of Rich J. for a number of reasons. One is that to apply dicta such as those of Lord Mansfield quoted above appears strange, when the current statute makes irrelevant the existence of that very intention of -- 15 of 17 -- j j 13 which 'ordinary course of business' was supposed by Lord Mans field to be an index. Again, the view of Rich J. represents the more natural reading; particularly when one keeps in mind that intention to prefer is immaterial, and that there is a separate requirement of good faith, to construe 'ordinary course of business' as importing a necessity of fairness seems too great a departure from the actual language used. Lastly, although use of the criterion of Rich J. may well invalidate more pre- bankruptcy transactions than use of the older tests, it appears to me to conduce to greater predicabili ty of judicial decision." In Re Buckley's Earthmoving Pty. Ltd. (No.2) (1993) 11 A.C.L.C. 359 Ryan J. came to a similar conclusion and applied the test of Rich J. With respect I agree. Although the events surrounding the cheque for $26,149.79 in August/September were not part of "the transaction" which is impugned they were matters to which it is permissible to have regard when deciding if payments could be characterised as in "the ordinary course of business". If there was nothing "out of the ordinary" in the subject payments then those events might carry little, if any weight. The letter of 20 September 1991 calling for immediate payment of outstanding accounts not in dispute and threatening legal action, read together with the temporising response enclosing a post-dated cheque covering a fraction of the amount demanded and the conversations pressing hard for payment cannot in my view be said to be "in the ordinary course of business". This is particularly strengthened when the company was known to be experiencing cash flow problems and difficulties with sub-contractors. Perhaps the firm was hoping that Mr. Williamson personally would pay. As Spender J. observed in Re Cummins: Ex parte Harris and Wilde and Refrigeration Parts (Old) Pty. Ltd. (referred to by Pincus J. in Re Cummins, supra, at p.136): -- 16 of 17 -- ( 14 "The reference to 'payments made in the ordinary course of business' implies that some payments occurring in a business context are not in the ordinary course of business. Recourse is frequently made to collection agencies in an attempt to secure the payment of long outstanding debts, yet the commonness of that course in my opinion does not mean that the payment of a debt secured after recourse to such a procedure is in the ordinary course of business." More generally, the ordinariness of the course of business is not to be judged by reference to the ordinary standard of dealings with a debtor in desperate financial trouble; so to regard the matter would virtually deprive the notion of "ordinary course of business" of practical application." Katoa Pty. Ltd (In liquidation) v. Dartnall (1983) 74 F.L.R. 202 to which Mr. Williams referred does not reflect this approach and I accept that of Spender and Pincus JJ. with respect. The payments under consideration are in my view payments which were not made in the ordinary course of business. It is unnecessary to consider in detail the question of good faith in view of this conclusion. The impugned payments are void as preferences against the liquidator. The orders of the court are as follows: 1. Declaration that a payment of $534.95 on 7 October 1991 and payments of $630.50; $1,521.00; $2,463.00; and $6,875.85 on 14 November 1991 by Buckleys Earthmoving Pty. Ltd. to Clewett Corser and Drummond (a firm) are void as against the Liquidators pursuant to Section 565 of the Corporations Law; 2. Order that the respondent Clewett Corser and Drummond forthwith pay to Buckleys Earthmoving Pty. Ltd. the sum of $12,025.30 together with interest thereon. 3. Order that the respondent pay to the applicants the costs of and incidental to the application to be taxed. -- 17 of 17 --