Allan Fitzgerald Pty Ltd (in liq), Re [1993] QSC 77
TRANSCRIPT OF PROCEEDINC;S
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SUPREME
COURT
OF
QUEENSLAND
CIVIL
JURISDICTION
LEE J
No
147
of
1987
IN
THE MATTER
OF THE
COMPANIES
CODE
(QUEENSLAND)
IN
THE MATTER
OF
ALLAN
FITZGERALD PTY
LTD
(IN
LIQUIDATION)
BRISBANE
..
DATE
30/03/9
3
JUDGMENT
1
4th Floor, The Law Courts, George Street, Brisbane, Q. 4000 Telephone: (07) 227 4360. Facsimile: (07) 227 5532
-- 1 of 98 --
300393
tgc
(Lee
J)
HIS
HONOUR:
There
are
two
applications.
The
first
is
by
the
liquidator
seeking
an
order
that certain
payments
amount
to
preferences
and
also
for
an
order
that certain
payments
after
the
commencement
of
liquidation
be
declared void
and
be
paid to
the
liquidator.
So
far
as
the claim
for preferences
is
based,
I
find
that
the
respondent
APA
acted
in
good
faith
with
respect to
both
cheques under
attack;
namely,
the
two
cheques
delivered
on
28
November
1986.
On
the question of ordinary
course of
business,
I
find
that
the
first
cheque
for
$80,000
was
paid
in
the
ordinary
course
of business but
that
the
second
cheque
was
not
a
cheque
paid
in
the ordinary course of business.
On
the question of the
running account,
I
conclude
that
the
running account
terminates
at
the
commencement
of
winding
up
on
13
April
1987.
10
20
30
Insofar
as
APA's
application for validation
is
concerned,
I 40
order
that
both
payments
made
to
APA
after
the
commencement
of
the
winding
up
be
validated.
I
will
now
hear submissions as
to costs.
50
JUDGMENT 60
2
-- 2 of 98 --
300393 kpc (Lee J)
HIS HONOUR: These are the orders I make: on the application
filed 13 March 1988 by the liquidator there is a declaration
that by reason of payments made by the company to APA during
the period between 17 November 1986 a.nd 13 April 1987 there
was a preference in the sum of $38,837.59 and this sum is void
as against the applicant liquidator. iO
I order that APA forth\"lith pay the .liquida.t.or the sum of
$38,837.59 plus interest in the sum of $J.3,982 totalling
$52,819.12 forthwith. The application is otherwise dismissed.
Having regard to all of the issues ~tlhich were litigated
before me, I order that the respondent, APA, pay the
liquidator's costs of and i.ncidental to that applicati.on to be
taxed.
3C
On the application filed by APA on 13 April 1988, I declare
that payments by the company to APA of $12,124 on 13 April
1987 and $29,478.13 on 21 May 1987 totalling $41,602.13, be
validated.
40
I order that the liquidator pay APA's costs of and incidental
to tha.t application to be taxed.
I publish my reasons.
50
JUDGI'1ENT 60
3
-- 3 of 98 --
5c9~o77
IN THE SUPREME COURT
OF QUEENSLAND
APPLICATION No. 147 of 1987
Brisbane
Before the Hon. Mr. Justice Lee
[Re: Allan Fitzgerald Pty. Ltd. (In Liquidation)]
IN THE MATTER of the
COMPANIES (QUEENSLAND) CODE
and
IN THE MATTER of
ALLAN FITZGERALD PTY. LTD. (IN LIQUIDATION)
REASONS FOR JUDGMENT - W.C. LEE
Judgment delivered the Thirtieth day of March 1993
CATCHWORDS
Company law - preference - ordinary course of business - business
in general and not actual business between company and creditor -
good faith- objective test under s. 122(4)(c) of Bankruptcy Act
- running account - in calculating preference whether running
account terminates on commencement of winding-up or when trading
between company and creditor later ceases - validation - good
faith - subjective test - whether creditor seeking validation
must establish actual improvement in company's financial affairs
between commencement of winding-up and winding-up order
payments for pre-liquidation debts - whether actual or potential
benefit to company and creditors at time of payments to creditor.
Counsel: R.I.M. Lilley for Applicant/Cross Respondent.
D.O.J. North for Respondent/Cross Applicant.
Solicitors: Sly and Wiegall Cannan and Peterson for
Applicant/Cross Respondent.
J.P. Kelly & Co for Respondent/Cross Applicant.
Hearing dates: 30th November 1992,
1st December 1992,
2nd December 1992,
3rd December 1992 and
4th December 1992.
-- 4 of 98 --
IN
THE SUPREME COURT
OF QUEENSLAND
APPLICATION NO.
147
OF
1987
IN
THE
MATTER
of
the
Companies
{Queensland)
Code
and
IN
THE
MATTER
of
ALLAN
FITZGERALD PTY. LTD.
REASONS FOR
JUDGMENT
- W.C. LEE
J.
Judgment
delivered
Thirtieth
day
of
March 1993
There
are
two
applications before the court.
The
first,
filed
13th
March
1988,
is
by
Graham
Lindsay
Starkey,
liquidator
of
Allan
Fitzgerald
Pty. Ltd. {in
liquidation)
{"the
company").
He
seeks
a
declaration that
payments
made
by
the
company
to
the
respondent,
A.
P.A.
Transport Pty.
Ltd.,
("A.
P.A.")
on
15th
April
1987
of
$12,124.00
and on
21st
May
1987
of
$29,478.13
{totalling
$41,602.13)
are
void pursuant
to s.
368
of the
Companies
(Queensland)
Code
{
"th~
Code"), and
further that
pursuant
to
s.
451
of the
Code,
certain
payments
made
by
the
company
to
A.P.A.
viz.
$71,369.93
on 23rd October
1986, $80,000.00
on
28th
November
1986, $65,847.35
on
28th
November
1986, $74,498.55
on
31st
October 1986, and
$31,604.08
on
11th
March 1987
in the
total
sum
of
$323,519.91
{sic
$323,319.91)
are preferences
and
void as
against the liquidator.
Notwithstanding
that the claim as
above
with respect to
preferences
was
supported
by
the affidavit of the applicant filed
30th
March 1988,
it
was made
clear during the hearing that the
claim in this respect
was
not for $323,519.91, but
was
in the
sum
-- 5 of 98 --
2
of
$108,984.79, being
the
difference
between
the
sum
of
$233,834.82
(the figure
at
which
the
balance
owing by
the
company
on
a
running account
kept
between
the
company
and A.P.A. peaked
at
30th
November
1986),
and
the
sum
of
$124,850.03
(the
balance
owing by
the
company
on
the
account
as
at
the
deemed
commencement
of the
winding-up
of
the
company
on
13th
April
1987).
The
only
payments
attacked
by
the
liquidator
were
the
sum
of
$80,000
and
$65,
84
7.
35
on
28th
November
1986,
but
further debits to
the
running account
for
work
done
after
that
date,
reduced
the
claim
for
a
preference
to
$108,984.79.
At
the
end
of the case,
counsel
for the applicant
sought
and
was
granted leave
to
add
a
claim
for
interest
pursuant
to
the
Common Law
Practice
Act.
The
second
application
was
filed
by
A.P.A. on
13th April
1988
in
which
it
seeks
validation
pursuant
to
s.
368(1)
of
the
Code,
of the
payments
by
the
company
to
A.P.A.
of
$12,124.00
on
15th
April
1987
and
of
$29,478.13
on
21st
May
1987,
totalling
$41,602.13.
By
consent,
it
was
ordered
that
both
applications
be
heard
together
and
that
the
evidence
in
one be
taken as
evidence
in
the other.
The company was wound
up by
order of
this
court
on 23rd June
1987 when
the applicant
was
appointed
liquidator.
On
16th June
1987, he
was
appointed provisional liquidator.
The
application
on which
the
winding-up
order
was made was
filed
on
13th April
1987 by Kenneth William
Haywood
and Donald
Charles
Haywood
trading as
"Ken and
Don Haywood",
Chartered Accountants, based
upon non-compliance with
a
statutory
demand
pursuant to s.
364(2)
of the
Code,
for the
payment
of
a
debt for accountancy services
alleged to be in the
sum
of $49,000.00. The debt was disputed
-- 6 of 98 --
3
by
the
company
and
it
appears
that
a
compromise
was
reached
between
the
company
and
those accountants
for
a
significantly
lesser
sum
in
the order of
$10,000.00
which
was
apparently
paid
by
the
company. However,
on
29th
May
1987,
this
court
ordered
that
Kimela
Pty.
Ltd.
be
substituted
as
applicant.
On
the
winding-up
order
made
on
23rd June
1987,
the
winding-up
was
deemed
to
have
commenced
on
13th April
1987,
being
the date of
filing
of the
original
application (s.
365(2)
of the
Code).
The
applications
were
closely
contested over
five
days.
There were
numerous
objections to
the
admissibility of
evidence
both
oral
and
documentary.
The
applicant's application
was
supported
by
the
affidavit
of the applicant
filed
30th
March
1988, by
oral
evidence given
by
the applicant,
by
Brian
Hawkes,
Chartered
Accountant formerly
employed by
Ken
and
Don Haywood,
by
Desmond
William Knight,
official
liquidator,
by
Anne
Maree
Walker,
clerk
formerly
employed by
the
company, by
Gail
Colb,
former
secretary
and
personal
assistant
to
Mr.
Allan
Fitzgerald,
Managing
Director of the
company,
and
by
Bradley Vincent Hellen,
Chartered Accountant
and Manager
of the Insolvency Section of the
applicant's
firm
Duesburys. Evidence
for
A.P.A.
was
given
by
George Edward
O'Donnell,
Managing
Director of
A.P.A.,
who
also
swore an
affidavit filed
13th April
1988
(ex.
3).
In addition,
large
volumes
of accounting records, schedules
and
other
documents were
tendered
on
behalf of
each
party.
Written
submissions were handed up by
each
party.
Counsel
for the
liquidator also
appended
a
submitted chronology. These
submissions were supplemented by
lengthy oral
submissions.
Numerous
authorities
were
cited
by each party.
-- 7 of 98 --
4
After
a
considerable
body
of
evidence
was
led
through
Mr.
Hawkes
and
a
large
volume
of
documents,
journals,
registers
and books
of
account
were
tendered,
counsel
for
A.P.A.
admitted
that
the
company was
insolvent
from on
or
about
17th
November
1986.
By
virtue
of
s.
451
of the
Code
and
s.
122
of the
Bankruptcy Act,
the relevant
period
during
which
preferences
may
be
attacked
as void as
against the
liquidator
commences
six
months
prior
to
the
deemed commencement
of the
winding-up
on
13th
April
1987.
Viz. 13th October
1986.
However, by
virtue
of the
admission
of
insolvency
from
17th
November
1986,
it
was
common
ground
that
the period
for consideration of
preferential
payments
runs
from
17th
November
1986
and
not
from
13th October
1986.
With
respect to
the
applicant's
claim based
on
alleged
preferences, the figures are
agreed
and
are
set
out
in
ex.
19
tendered
on
behalf of the applicant
and
ex.
27
tendered
on
behalf
of
A.P.A. These
show
the daily
balances of the
running account
from
13th
October
1986
to
13th April
1987
(ex. 19),
and
from
13th October
1986
to
17th June
1987
(ex. 27).
Counsel
for
A.P.A.
submitted
that
should
the applicant
succeed with
respect to the claim based
on
preferences, the
sum
involved
was
not the difference
between
the
peak
figure of
$233, 834.82
on
30th
November 1986 and
the
sum
of
$124, 850.
03
owing
at
the
deemed commencement
of the
winding-up
(i.e.
13th April 1987),
but rather the difference
between
the
sum
of $233,834.82 and
the
sum
of $169,544.93 (being the balance of
the outstanding account as
at
17th June 1987, being the
day
after
the appointment of the provisional liquidator). This produced
the
sum
of $64,289.89. A.P.A. had continued to supply goods and
-- 8 of 98 --
5
services to
the
company
after
the
deemed commencement
of
the
winding-up
and
right
up
to
the
time
the
provisional
liquidator
was
appointed.
It
was
submitted
that
the
whole
period of
the
running account should
be
taken
into
account because
it
in fact
continued
past
the
deemed commencement
of the
winding-up
and
right
up
to
the
time
the
provisional
liquidator
was
appointed.
Counsel
for
A.P.A.
further
submitted
that
the figure of
$64, 289.
89
will
vary
if
A.
P.A.
failed
in
having
validated
pursuant
to
s.
368(1)
of the
Code,
the
void
payments
totalling
$41,602.13
made
after
the
deemed commencement
of the
winding-up.
This
would
mean,
he
submitted,
that
the
running account balance
of
$169,544.93
at
the date of
appointment
of the provisional
liquidator
(16th
June
1987)
should then
be
adjusted
upwards
so
as
to
reverse the
subsequent
credits
to the
account
of
$41,602.13,
giving
a
figure of
$211,147.06,
which
in turn
was
the
figure to
be
deducted
from
the
peak
balance
of
$233,834.82,
giving
a
net
sum
of
only $22,687.76
which
could then
be
attacked
as
involving
a
preference
on
the adjusted
running account.
The
net
effect
of
this
submission
was
that
the
maximum
which
the
liquidator
could recover
if
he succeeded under
all
heads,
was
the
sum
of
$64, 289.89
made
up
of
$22, 687.76
as
a
preference
and
$41,602.13
pursuant to s.
368(1)
of the
Code. However,
if
A.P.A.
succeeded
in
having
validated pursuant
s.
368(1)
of the
Code,
the
payments
totalling
$41,602.13,
it
was
submitted
that
no
adjustment to the running account
was
necessary so
that
the
sum
then subject to attack as
a
preference
amounted
to the
same sum
totalling
$64,289.89.
i
-- 9 of 98 --
6
Counsel
for
the
applicant
opposed
this
approach
as
a
matter
of
law,
although
he
did not
dispute
that
as
a
matter
fact,
the
running account
continued
past
the date
of
the
deemed
commencement
of the
winding-up
on
13th
April
1987 up
to
and
including the date of
appointment
of the provisional liquidator
on
16th
June 1987. Both
counsel
informed
the court
that
they
could
locate
no
authority
which
decided
that
when
considering
a
claim
for
a
preference
based
upon
the operation of
a
running
account,
the
running account cannot extend
beyond
the
date of the
deemed commencement
of the
winding-up.
All
authorities
located
dealt
only with
a
running account
which
extended
up
to or
just
before the
commencement
of
winding-up.
It
follows
that
if
the
applicant
does
not
make
out
a
case
based
on
a
preference or
alternatively
if
A.
P.A.
discharges the
burden
of
proof
in
establishing the matters contained
ins.
122(2)
of the
Bankruptcy
Act,
it
will
not
be
necessary
to
decide
the question of
whether
or not
a
running account
must be
taken
to
have concluded
at
the
date of
commencement
of the
winding-up.
The Code
provisions dealing with preferences are
as follows:
"451 (
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.
451 ( 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
-
-- 10 of 98 --
7
iii)
in
any
other
case
-
the date
of
the
filing
of the
applicationfor
the
winding-up.
451(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."
The
Bankruptcy
Act
provides as follows:
"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
creditor
a
preference,
priority
or
advantage over
other
creditors,
being
a
conveyance,
transfer,
charge,
payment
or obligation
executed,
made
or
incurred
-
a)
within
six
months
before the presentationof
a
petition
on
which,
or
by
virtue
of the
presentation of
which,
the debtor
becomes
a
bankrupt;
is
void as
against
the
trustee in the
bankruptcy.
122(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;
122(3).
The
burden
of
proving
the matters referred
to in sub-section
(2)
lies
on
the person claiming
to
have
the benefit of
that
sub-section.
122(4). For the
purposes
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,
payment
or obligation
was
executed,
made
orincurred 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 theconveyance,
transfer, charge,
-- 11 of 98 --
8
payment
or obligation
would
be
to
give
him
a
preference,
priority
or
advantage over
other
creditors."
The
legislation
dealing
with
validation
is
contained
in
the
Code
as follows:
"368(1)
Any
disposition
of
property
of the
company,
other
than
an
exempt
disposition,
and any
transfer
of
shares
or
alteration
in
the
status
of the
members
of
the
company
made
after
the
commencement
of
the
winding-up
by
the
Court
is,
unless the
Court
otherwise
orders,
void.
368(2)
Notwithstanding
sub-section (1), the
Court
may,
where an
application for
winding-up
has
been
filed
but
a
winding-up
order
has
not
been
made, by
order
-
a)
validate
the
making,
after
the
filing
of
the application, of
a
disposition of
property of the
company;
on
such terms as
it
thinks
fit.
The company was
for
some
years
a
very
large
earthmoving
contractor.
It
built
dams,
roads, bridges, overpasses,
and
was
involved
in airport, electricity
and
railway
developments
and
other
very
large projects, particularly for
government and
semi-governmental
authorities
both
Queensland and
Commonwealth.
A.P.A.
supplied
tip
trucks to the
civil
engineering construction
industry generally
and
in particular
commenced
doing so
to the
company
from
1981/2.
On
certain
jobs,
A.
P.A.
also supplied
material
such as earth
fill.
A.P.A.
also
worked
for other
very
large
civil
engineering contractors
such as Leightons,
Clough
Engineering, Jennings, Q-Byrt, John Hollands, Thiess Transport,
and
others.
All of the trucks
A.P.A. supplied were owned and operated
by
subcontractors to
A.P.A. A.P.A. paid the truck operators
from
a
schedule of rates previously agreed upon. A common
truck hire
-- 12 of 98 --
9
rate
was
$33.50
per
hour charged
out
by
A.P.A.
to
the
company
although
there
were
other
rates
for
specific
jobs.
That
figure
returned the truck operator
approximately
$30.00
per
hour
with
a
balance
of
about
10
per cent
on
average
or
$3.50
per
hour
being
retained
by
A.P.A.
to
cover
its
overhead
and
profits.
After
payments
of
its
expenses,
A.P.A.
showed
a
net
profit
of
about
1 . 5
per cent of
gross
sales.
The
contractual
arrangements
therefore existed
between A.P.A. and
the
company
and
not
between
A.P.A.
's
subcontractors
and
the
company.
A.P.A.
was
separately
committed
to
pay
its
subcontractors,
whether
or
not
it
received
payment from
the
company.
In
1985-1986,
the
company was
engaged
in
extensive
work
on
the Brisbane
Domestic
Airport for
a
department
of the
Commonwealth
government. That job
substantially
drew
to
a
close
in the
latter
part
of
1986. A.P.A.
supplied trucks to
the
company
for
that project.
A.P.A.
also supplied trucks for the
Toombul
Overpass
project
on which
the
company was
engaged.
The
constructing authority for the
latter
project
was
the
Queensland
Main
Roads
Department. Other
work by
A.P.A.
for the
company
included the
Fairfield
Road
project for the
Queensland Railways,
electrification
work
for the
Queensland Railways
at
Kallangur,
the
Underwood Road
project
at
Rochedale
for the
Logan
City
Council,
and
other projects,
some
of
which were more
remote
from
Brisbane. Projects
on which A.P.A. were engaged
for the
company
from
13th October
1986
to 17th June
1987
appear
from ex. 27.
In
1987, A.P.A.
supplied trucks to the
company
for
a
large project
at Callide
on which
the
company was engaged by
the
Queensland
Electricity
Commission by
contract for
a sum
in the order of
-- 13 of 98 --
10
$13.
5
million.
Mr.
0 1
Donnell
was
aware
of the
value
to
the
company
of
this
and
other contracts
at
all
material
times.
A.P.A.
also
quoted
the
company
for other large projects
over
the period
1985-1987,
including the
Lake Dyer
Dam
Irrigation
Project
near
Gatton
for
the
Queensland
water
Resources
Commission.
In
1986, A.P.A.
also
quoted
the
company
for
the
Burketown Development
Road,
and
a
large project
at
Gladstone
on
which
the
company
had been engaged
by
the
Queensland
Government
Railways,
the
contract
being
in
the order of
$9.5
million,
a
fact
known
to
Mr.
0 1
Donnell.
A.
P.A.
was
not
successful in
its
quotations
to the
company
for these
particular projects.
Mr. 0 1
Donnell
said in
evidence
that
the
company was
always
engaged
in substantial
construction projects
worth
many
millions
of
dollars for
government and semi-government
instrumentalities
and
always
paid
its
accounts
in
due
course,
in
accordance with
the
practice in the industry
whereby
subcontractors to
the
company
were
paid
by
the
company
usually, but not necessarily,
after
the
company
had
obtained progress
payments
from
the
constructing authority.
At
times,
some
delays
in
progress
payments were
involved
which were
considered
normal
in
the
particular industry.
Mr. 0 1
Donnell
said that
because
of the
nature of the
work
in
which
the
company was
engaged, he
was
always
certain of being paid.
It
clearly
emerges from
evidence which
I
accept
that
it
was
often the case
that
a
subcontractor to the
company,
such as
A.
P.A.
,
would be paid
by
the
company
out of progress
payments
the
company
received
from a
particular job which included payment
to
the
company
for
work done on
that project
by the sub-contractor.
-- 14 of 98 --
1 1
However,
as
Mr.
O'Donnell
pointed
out,
this
was
not
necessarily
the case.
I
accept
that
the
source
of the
funds
received
by
the
company
out
of
which
it
made
payments
to
A.
P.A.,
was
of
no
particular
concern
to
A.P.A.
I
also
accept
the
submission
that
no
trust
existed
whereby
the
company was
obliged
to
pay
its
subcontractors out of
sums
the
company
received
for
work on
projects
on which
a
particular
subcontractor including
A.P.A.
worked. Payments
by
the
company
to
A.P.A.
(or
to
any
other
sub-contractor to
the
company
for
that
matter) could
be
made
by
the
company
out of
funds
it
derived
from
whatever source,
and
this
was
clearly
a
matter of
its
own
business
arrangements.
Whilst
commonly
payments were
made
to
A.P.A. by
the
company
out
of
funds
it
derived
from
projects
on which A.P.A. had
worked
for
the
company,
A.P.A.
was
merely
interested in
being paid
from
whatever source
the
company
derived those
funds, whether
or
not
from
progress
payments from
jobs
on which A.P.A. had
worked,
or
from
bank
overdraft or loans
or
otherwise.
A.
P.A. had
no
particular
knowledge
of other creditors
of the
company
other
than
what
Mr.
O'Donnell
may
have
cursorily
gleaned
from
the
White
Mercantile Gazette
to
which A.P.A.
subscribed.
Plaints
and
writs
were
issued
from
time
to
time
against the
company from
about 31st
May
1986, none
of
which
resulted in
any
judgment
recorded
in that
Gazette.
Mr.
O'Donnell
investigated
many
of these
and
discovered
that
they
were bona
fide disputed.
He
attached
no
particular significance to
them
but said that
judgments were more
significant.
In his
view,
the existence of
plaints
and
writs
simply showed
that disputes existed
between the
company and some
persons because
Mr.
Fi tzgerald
was
very
a
-- 15 of 98 --
12
disputive
person.
The
first
judgement
did not
appear
in
that
Gazette
until
11th
April
1987
for
$1
0,
886.
The
reason
for
non-payment
does
not
appear.
It
is
clear that
Mr.
O'Donnell
had
no knowledge
of the
fate
of the
proceedings
which were
issued or
of the
judgment.
The
evidence
indicates
that
Mr.
Fitzgerald
probably
insisted
on
precise
performance
by
his
sub-contractors
and
it
is
not
uncommon
in
an
industry
such
as
this
when
the
company was
simultaneously
engaged
in
many
substantial projects
in
various
parts
of the
State,
probably involving the
employment
of
many
sub-contractors,
that
disputes
would
arise
from
time
to
time.
Such
disputes
were
likely
to
arise
in the ordinary
course
of the
company's
business
and
provides
no
basis for suggesting
that
the
company was
unable
to
pay
its
debts as they
fell
due
at
any
particular
time, as
opposed
to
being
merely
unwilling
to
pay
them
for
whatever
reason,
even
if
they
were
genuine
debts, the
details
of
which
are not before the court.
Even
a
judgment does
not of
itself
indicate
an
inability
to
pay
debts as they
fall
due.
Mr.
0
'Donnell'
s
awareness
of the issue of
proceedings
against the
company
or against
any
of his other
customers
for
that
matter, confirms
the
evidence
generally
that
he
was a
careful
manager
of his
company's
affairs
and
as with other
persons
in the industry, attempted to
keep
his finger
on
the
pulse as far
as he was
able.
A.P.A. was
not concerned
at
any
time
material to the proceedings with regard to
arrangements
between the
company and any
of
its
other creditors,
and
did not
know
of
any such arrangements.
-- 16 of 98 --
13
The company
had
a
staff
of
about
100-150.
It
owned
substantial
machinery,
a
fleet
of trucks,
and
three large
scrapers
which
it
purchased
or
leased
in early
1986
at
a
cost of
$999,000
each
for
the Callide
project.
Mr.
O'Donnell
said
that
there
were
substantial
and
visible
signs of
a
very
successful
company,
backed
by
government
contracts
so
that
payment
of
accounts
A.P.A.
rendered
to
the
company
were
assured.
From
the
foregoing,
it
is
reasonable
to
infer that
it
was
generally
regarded
by
the industry
that
the
company was
a
major
and
successful
contractor
of considerable substance.
Mr.
O'Donnell
had
this
view
at
all
material
times
and
was
entitled
to
hold
it.
There
is
no
reason not
to
accept
his
evidence
in
this
regard
which
I
do.
It
is
also clear
from
the
evidence
which
I
accept
that
the
supply
of trucks
by
A.P.A.
to the
company was
an
essential
element
in
the successful
performance
by
the
company
of
its
contractual obligations
under
its
various
projects.
Whilst
I
accept
that
at
no
time
was
it
ever contemplated
by
Mr.
O'Donnell
that,
because
of the size
and
standing of the
company
and
because
of
what he
regarded as the long
and
successful course of dealings
between them, A.P.A. would
withdraw
the
supply
of trucks to the
company,
I
accept the
submission
that
had A.P.A.,
a
leader in the
industry of truck
supply
to the
heavy
construction industry, in
fact
withdrawn
its
supply of trucks to the
company,
particularly
in
1987,
the
consequences
to the
company
thereafter
would
probably have been
disastrous.
On
the evidence,
word
of
such
matters travels fast
throughout the industry.
It
would have been
highly unlikely in that event that another supplier of trucks
-- 17 of 98 --
14
would
have
stepped
into
the
breach,
the
result
being
that
the
company
would
have been
unable
to
perform
or to
continue
to
perform
many
of
its
major
contracts.
The
likely
consequence
in
that
event
would
have been
that
the
company was
in
breach
of
contracts
(and
liable
to
be
wound-up
at
a
much
earlier
stage),
resulting in
the
earlier
withholding
of
payments
to
the
company
by
the various
principals
pending
completion
of
the
projects
by
other
and
usually
more
expensive
means,
and
substantial
claims
for
damages
against the
company.
Mr.
Starkey's
evidence
of the
situation
which
in fact
rapidly
occurred
after
the
appointment
of provisional
liquidator
makes
this clear.
So
also
does
the
endorsement
at
the foot of
ex.
26
and
the
evidence
of
Mr.
Hellen.
Substantial
amounts
of
progress claims
were
lost
and
virtually
nothing
came
in
after
liquidation.
See
ex.
25.
Also
the
company was
a
substantial
customer
of
A.P.A.
at
all
material
times.
The
result
in fact
of the
continued supply
of
trucks
and
work
done by A.P.A.
for the
company
after
13th April
1987 was
that
the
company was
able to continue
in the
performance
of
its
various
contracts.
In
consequence
thereof,
it
appears
from
ex.
5
that
the
company
after
the
deemed commencement
of the
winding-up,
received
about $4,846,468.83
in
progress
payments,
all
or
a
substantial part of
which
probably
would
otherwise not
have been
received
had A.P.A.
not continued to
supply
trucks.
This included considerable
sums from
the
Queensland
Electricity
Commission on
a
project at
Callide
on which A.P.A.
did extensive
work
for the
company,
particularly
from
18th
March 1987
right
up
to 17th June 1987, as ex.
27
demonstrates. A.P.A.
also
worked
-- 18 of 98 --
15
on
other projects for
the
company
during
this
period
in respect
of
which
the
company
received progress
payments.
Mr.
O'Donnell
said
that
in
1986-1987,
invoices
were
produced
twice
a
month
and
sent out
to
A.P.A.
customers,
including the
company.
Statements
were
produced
after
the
end
of
each
month
and
forwarded
to
the
company
(as well as
to other
debtors of
A.
P.A.
) .
The
account with
the
company was
in
fact
three separate
accounts
numbered
30,700, 30,701, 30,702, because
the
computer
program
did not
allow
for
an
account
to
record over
$100,000.
This has
made
more
difficult
and
at
times confusing,
an
examination
of the
company's
accounts with
A.
P.A. These were
the
usual
30
day
credit
accounts
viz
if
the
customer
paid the
account
by
the
end
of the
next
month
after
the close of
the
month
of
invoicing
and
rendering of
a
statement (or, whilst
the
open
item
system
operated
up
to July
1986,
before the statement
was
prepared), the
account
would
not
be
regarded as overdue.
Reference
is
made
to
the
open
i tern
system
later.
I
accept
Mr.
O'Donnell's
evidence
that
payments
by
the
principal to
the
company
and
other contractors
under
the
local
domestic
airport
project
which
came
to
a
close in
1986, were always very
prompt
and more
expeditious than
payments
by
other principals to the
company
on
other
and
particularly later
projects
undertaken
by
the
company, some
of
which were
located
at
considerable distance
from
Brisbane
and
involved delays in their
administration
and
certification
of progress claims.
Mr.
0'
Donnell
said that
he alone
dealt with
Mr.
Allan
Fitzgerald,
Managing
Director of the
company on
operational
matters such as the supply of trucks, as well as on matters
-- 19 of 98 --
16
relating
to
payment
of
A.
P.A.
1 s
accounts.
Mr.
0 1
Donnell
was
Managing
Director of
A.P.A.
since
1969
and had
the
day
to
day
control of
A.P.A.
He
was
also
Credit Officer
responsible
for
follow-up
and
collection
of
A.
P.A.
1 s
accounts.
He
said
that
payment
within
30
days
after
the
end
of the
month
of
invoicing
was
not usual
in
the industry.
Payments were
often
made
up
to
45
days
from
the
month
of invoice,
i.e.
up
to
15
days overdue
after
rendering of the
monthly
statement.
Some
payments were
at
times
made
even
later.
Some
estimates
given
were
for
times taken
for
payment
running
from
the
month
of invoicing
rather
than
from
the
end
of
30
days
after
the
end
of
that
month,
and
required care
in
considering
them.
There
is
nothing
sacrosanct
about
a 30
day
account.
If
a
creditor
chooses
either
by
agreement
or
by
a
course
of
conduct
to
allow
a
debtor
extended
credit
beyond
the
30
day
limit, .that
is
his
business
and does
not of
itself
indicate
an
inability
in the debtor
to
pay
debts as they
fall
due,
or
that
a
payment
of
such an
account,
when made,
is
not
capable
of
being
made
in the ordinary course of business, or that
such
a
payment
is
not capable
of
being received in
good
faith.
Mr. 0 1
Donnell
was
cross-examined
at
length
about
his diaries
from 1986
to
1987
(ex.
29)
to
which
reference will later
be
made.
It
is sufficient to
now
mention
that these
were
not detailed
diaries,
as
Mr. 0 1
Donnell explained,
and were
usually only
shorthand notes of various matters
which
occurred or
which he had
to attend to in the future.
They were
not
a
full
record of
any
particular matter.
Nor were they
a
contemporaneous record of
events as they occurred. Entries were often
made ahead as
a
-- 20 of 98 --
17
reminder
of
something
to
be done
in
the
future.
Nor
does
it
always
appear
who
instigated
any
particular
contact
recorded
in
the
diaries.
Also,
merely
because
some
entries
contained
a
mark
which
indicated
that
Mr.
O'Donnell
had
attended
to
the matter,
this
did not
necessarily indicate
that
he had
initiated
the
particular
matter
under
consideration.
In
1984-1985,
A.P.A.
introduced
a
system
whereby
at
between
the
tenth
to
the
fifteenth
of
each
month,
after
the
month
when
payment
was
due
according
to
the
normal
30
day
credit,
its
senior
computer
operator
generated
reminder
notices
to
customers
whose
accounts
were
not paid
in
that
45
day
period,
i.e.
when
they
became
overdue
by
15
days.
An
example
of
such
notice
is
ex.
30.
At
15
days overdue,
the
computer
operator also
produced
a
trial
balance
of
aged
debtors,
and
Mr.
O'Donnell
thereafter
telephoned
each
debtor
whose
account
was
unpaid
for
more
than
45
days
after
the rendering of the statement
i.e.
more
than
15
days overdue
for
payment.
Mr.
O'Donnell
said that
he phoned
Mr.
Fitzgerald
under
this
system.
Mr.
Fitzgerald
never
said to
Mr.
O'Donnell
that
the
company
could not afford to
pay
A.
P.A.
or
any
of
its
other
creditors.
Often
Mr.
Fi
tzgerald
would
say
"Come down
next
Thursday and
pick
up
a
cheque", which
Mr.
0'
Donnell
said
was
fairly
standard practice in his industry. This
was
usually
so
for
a
number
of reasons.
The
customer
often preferred to talk
in person to
Mr.
O'Donnell about the service provided
and about
problems
the previous
month. This
was a
useful
customer
relations exercise.
A
principal reason
was
that the
company
(as
well as other customers of A.P.A.) were engaged on
projects
-- 21 of 98 --
18
whereby
they
received progress
payments
from
time
to
time
and
were
waiting
for
such
payments
out of
which
accounts
would
be
paid.
This
was
very
common
in
the
earthmoving
and
construction
industry.
Progress
payments depended
upon
a
number
of variables.
Certification
was
required usually
by
an
engineer
engaged
by
the
principal.
One
month
could
be poor
in
terms
of
volume
of
work.
Wet
weather
was
also
a
problem
at
times.
There
were
other
variables.
It
follows
that
delays
in
certification
often
occurred,
particularly
with
respect to projects
more
remote
from
Brisbane. In
such
cases,
Mr.
Fitzgerald said to
Mr.
O'Donnell
that
he
was
expecting
a
progress
payment
on
some
certain
date
and
said
"either
give
me a
call
before
you
come down
or
come down
on
that
day and
I
will
have
a
cheque
for
you".
This
was
also the
reason given
by
Mr.
Fitzgerald to
Mr.
O'Donnell
why
an
account
was
at
times
settled
by two
cheques,
one
immediately,
and one
when
a
progress
payment
was
received
by
the
company. Examples
of
payments
by
the
company
to
A.P.A.
by two
cheques
are in
March
and
May
1985, August 1986, September 1986, and
again
on
28th
November 1986
(the
payments under
attack).
Mr.
0'
Donnell
said that
Mr.
Fi
tzgerald
was
always very
reliable
with
respect to
making payments
in
accordance with
any
such
discussions with
him.
No
cheque
of the
company was
ever
dishonoured.
Mr.
Fitzgerald at
times did give
Mr.
O'Donnell
a
cheque and ask
him
not to present
it
for
a few
days because he
was
expecting progress payments.
Mr.
Fitzgerald often travelled
to the
site
of projects remote from Brisbane and was
at
times
difficult to readily contact.
It is reasonable to infer that at
-- 22 of 98 --
19
times,
he
probably
handed
over
a
cheque
on
this
understanding
prior to his
departure
from
Brisbane.
A.P.A. had
solicitors
who
regularly
instituted
debt
recovery
proceedings
against
slow
payers
and
in
some
cases,
statutory
demands
were
made
on
debtors pursuant
to
s.
364(2)(a)
of the
Companies Code.
At no
time
did
A.P.A.
make
any
such
demand
either
through
its
solicitors
or
otherwise
on
the
company
or
institute
any
proceedings
against the
company
or issue
any
statutory
demand. The
only
notices
which were
sent
out
to
the
company
(along with
other
debtors)
were
the
polite
computer
generated
reminders
of
which
ex.
30
is
an example.
As
indicated,
Mr.
O'Donnell
was
a
regular contributor to the
White
Mercantile
Gazette
and none
of the
proceedings
which were
commenced
against
the
company
caused
him
any
concern.
It
should
be
noted
that
Mr.
0'
Donnell
was
a
certified
practising
accountant
and
well
versed
in
matters appertaining to
bankruptcy,
the
winding-up
of
companies, and
the
effect
of
preferential
payments
to creditors.
Mr.
O'Donnell
said
that at
no
time
until
the
very end,
did
he
know
or suspect or
have
reason
to suspect
that
the
company was
insolvent or
that
it
was
unable
to
pay
its
debts as they
fell
due
from
its
own
moneys.
He
also said
that at
no
time
did
he
consider
that
any payments he
received
had
the
effect
of giving
him
a
preference,
priority or
advantage over other creditors of
the
company.
As
indicated, there
is
no
evidence
that
Mr.
O'Donnell had any
particular
knowledge
of other creditors of
the
company
or of the
state of the company's accounts with
them,
or of
any arrangements the
company may
have had with
them.
He
also said that
had he
at
any time suspected that the
company was
-- 23 of 98 --
20
unable
to
pay
its
debts,
he
would
not
have
continued
to
supply
services
on
credit
as
he
did.
I
was
impressed
by
Mr.
O'Donnell's evidence.
He
appeared
to
be open and
frank
and
was
quick
to
admit
matters
which were
apparently
against his
interests.
I
found
him
to
be
truthful
and
reliable.
I
generally
accept
his
evidence
as
to his
state
of
knowledge.
This conclusion
is
consistent
with
the
concession
made
on
behalf
of
the
applicant
that
A.P.A.
through
Mr.
O'Donnell
was
a
payee
in
(actual)
good
faith
within the
meaning
of
s.
122(2).
The
above
conclusion
is
also consistent
with the
volume and
value
of
work
continued
to
be performed
by A.P.A.
for the
company
right
up
to the date of
appointment
of provisional
liquidator
on
17th June
1987.
This
is
conveniently
set
out
in
ex.
27
and
is
ascertained
by
adding back
the
credits
for
payment
received
to
the figure
at
the
end
of
each
month
and
deducting therefrom the
opening
balance. Similar figures
from
1st
November
1 9 8 6 - 1
7th
June
1 9 8 7 may
be
ascertained
from
ex.
31 .
These
figures
show
the following:-
13th October
1986
-
31st
October
1986
1st
November 1986
-
30th
November 1986
1st
December 1986
-
31st
December 1986
1st
January
1987
-
31st January
1987
1st
February
1987
-
28th February
1987
1st
March 1987
-
31st
March 1987
1st April
1987
-
30th April
1987
1st
May 1987 -
31st
May 1987
1st June 1987 -
17th June 1987
$36,380.44
$13,467.64
$18,136.44
$12,124.00
$29,478.33
$62,365.34
$42,843.75
$46,609.26
$17,705.30
-- 24 of 98 --
21
With
respect to
the period
after
the
deemed
commencement
of
the
winding-up
on
13th
April
1987
and up
to
the
appointment
of
a
provisional
liquidator
on
16th
June
1987,
A.
P.A.
performed
work
for
the
company
to
the
value
of
$86,297.03,
whereas
during
that
period
A.P.A.
received
payments
only
of
$12,124
on
15th
April
1987
and
$29,478.13
on
21st
May
1987
(totalling
$41,602.13)
in
respect of
part
of the debts incurred
prior
to
13th
April
1987.
A.P.A.
's
total
pre-liquidation
debt
was
$124,850.03.
Also,
of
the
work
to
the
value
of
$86, 297.
03
performed
after
deemed
commencement
of the
winding-up,
work
to
the value
of
$36,273.94
was
performed
by
A.P.A.
for the
company
between
the
last
payment
to
it
of
$29,478.13
on
21st
May
1987
and up
to
16th
June
1987
at
which
time
A.P.A.
was
still
owed
$169,544.93.
thus increased
after
13th
April
1987 by
16th June
1987.
A.
P.A.'s
net
debt
$44,694.90
up
to
Because
a
considerable
amount
of cross-examination occurred
as
to
the
state
of the
company
' s
account with
A.
P.A. from
1st
January
1985
to
30th June
1986,
some
reference
is
necessary.
A
close
examination
of
all
of the
evidence (documentary
and
oral)
shows
that
a
degree
of confusion
existed in
the attempt
to
demonstrate the
state
of the
company's
account with
A.P.A.
in
this
and
subsequent
periods.
It
was
repeatedly
contended
that
there
were no
overdue balances in the
company's account before
July
1986
apart
from
in three
small
respects.
Mr.
0'
Donnell
appeared
at first
glance to
have agreed with
some
of these
propositions.
However,
this is
not so notwithstanding the suggestions put
to
him. This confusion has arisen for various reasons. Firstly,
it
was
not always readily understood that the account
was
not
-- 25 of 98 --
22
overdue
until
the lapse of
a
further
thirty
days
after
the
end
of the
month
of
invoice
and
after
a
monthly
statement
had
issued
for
the
past
month.
This
is
a
normal
30
day
account
and
is
well
understood. Reference
was
at
times
wrongly
made
to
the
account
as being
up
to sixty
days
overdue
when
it
was
in fact less
than
30
days
overdue.
The
figures of
40-45
"Days
Delay
Payment"
in
the
chronology
is
incorrect.
On
this
basis the
submission should
have
been
that
the
accounts
were
up
to
15
days overdue.
There
is
evidence
however,
that
the
account
was
at
times
overdue
to
a
greater extent
than
this
in
that
period.
Secondly,
Mr.
O'Donnell
did not
always have
in
front of
him
when
questioned, the
accounts
and
statements
for
the period
in
question.
Nor
were
these
documents
tendered
in
evidence.
Thirdly, the
company
had
three separate
accounts with
A.P.A. due
to
an
upper
limit
in
its
computer
capacity
which
made
a
clear
reconciliation of
payments
in
monthly
accounts
somewhat
difficult.
Fourthly,
A.P.A. had one
system
in
operation
up
to
June
1986
when
it
changed from an open
item system
into
a
carry
forward
balance
system,
the difference not being properly
understood
despite
Mr.
O'Donnell's explanation of
this
aspect
on
several occasions throughout
his
evidence.
Mr.
O'Donnell
said
on more
than
one
occasion
that there
were
in fact
overdue
balances
in the period 1st
January
1985
to
30th June
1986 which
did not
show up on
the statements as such because
of the previous
open
balance system whereby payments, even though received
after
the
end
of the thirty
day
period,
were
credited off the previous
monthly statements which were not at that
time prepared for the
previous month, as
if
the payments had been made
before the end
of that month. Fifthly,
some of the figures referred to in
-- 26 of 98 --
23
questions put
to
Mr.
O'Donnell
are
not
always
reconcilable
from
a
close
examination
of the
documentary
evidence,
and
particularly
ex.
31
.
Notwithstanding
the
foregoing,
it
is
reasonable
to
conclude
that
the
company,
at least
up
to
30th
June
1986,
was
a
reasonably
regular
payer
largely
because
the
company was
engaged
on
the
local
Brisbane
domestic
airport
project in
respect of
which
the
Commonwealth
department
involved
paid
its
contractors regularly
and
promptly.
Nevertheless, the
company's
account with
A.P.A.
was
overdue
at
times during
the period
January
1985
to
June
1986,
in addition to the three
occasions
referred to
by
counsel
for
the
liquidator
which
involved
relatively
small
amounts and
this
was
often
due
to
the fact that
it
was
awaiting progress
payments
from
its
principals.
Also
the
company,
in
the period
1st
January
1985
to
30th June
1986
at
times
paid A.P.A.'s
monthly
account
by two
cheques,
rather
than
one,
the object
being
that
one
could
be
banked
immediately
and
the
second
held
for
a
time
whilst the
company was
awaiting
a
progress
payment.
This
might have
indicated
a
temporary
shortage of
funds and
a
temporary
liquidity
problem,
or
it
might have
indicated that
the
company was
simply
adhering
to
its
practice
with
which
Mr.
0'
Donnell agreed
of
making payments
out of progress
payments
received,
i.e.
that
is
out of liquid
funds
rather
than out of
funds which might
otherwise
have been
raised
by bank
overdraft or
a
charge
on
assets or otherwise.
Examples
occurred in the
months
of
March
and
May
1985. Also
since 1st July
1986,
the
company
paid
A.P.A.
's
account with
more
than one cheque on
several occasions
for the
same reasons, which were well
known
to
Mr. O'Donnell and
-- 27 of 98 --
24
accepted
by him
as
normal
in
the
particular
industry
in
which
he
was
engaged,
viz.
August 1986,
September 1986, and
28th
November
1986.
This
practice in
my
view
in
no
way
supports
any
inference
that
had
the
second
cheque
been
banked
at
the
time
it
was
handed
over
(contrary
to
the friendly
arrangements
between
Mr.
0'
Donnell
and
Mr.
Fitzgerald),
it
would
not
have been
met
by
the
bank.
There
is
no
evidence
to
show
what
the
company's bank
would
have
done
with
any
such
cheque
if
banked. There
is
no
proof
that
if
banked,
it
would
not
have been met.
No
one from
the
bank gave
evidence.
Nor
does
this
arrangement
of
payment
of
a
monthly
account
by two
cheques
instead of
one,
indicate
that
the
company
was
not otherwise able to
pay
its
debts as
they
fell
due. There
is
nothing unusual about
the
company
trading in overdraft,
as
many
businesses
do.
It
is
also
necessary
to
refer
to the
company's
account with
A.P.A.
for the period
from
1st
July
1986.
It
was
put
to
Mr.
O'Donnell
that
there
was
an overdue
balance
of
$82,904
shown
in the July
1986
statement
and
that
it
related to the
May
work
which
should have been
paid
by
30th June
1986.
It
was
put to
him
that
July
1986 was
the
first
month
in
which A.P.A.
did not
receive
a
cheque from
the
company, and
that there
would have been
computer
print outs sent out to the
company from
July
onwards.
Mr.
O'Donnell
said "If
it
is
in July statement, yes." This
suggestion
is clearly incorrect.
It
emerges from
ex.
31
that the
value of
work
invoiced for the
month
of
May
1986 was
only
$54,593.85. After the change
in
A.P.A.
's
accounting system from
about 1st July 1986, whereby outstanding balances were carried
forward, no such sum appears as outstanding at 30th June 1986 for
-- 28 of 98 --
25
May
1986,
by
which
time
it
should
have been
paid.
Mr.
O'Donnell
said in
evidence,
which
I
accept,
that
this
sum
was
paid
to
A.P.A. on
3rd
July
1986
(three
days overdue)
and
that,
under
the
previous
open
balance
system
then
in
operation,
that
payment
was
treated
as
if
it
had
been
paid
by
30th June
1986,
merely because
the
June
statement
had
not then
been
prepared.
Those
statements
were
in
the ordinary
course prepared during
July
and payments
(even
if
overdue)
made
in
the early
part
of July
were
merely
offset
against
May
invoices,
which were
then,
on
the
statement,
not
shown
as overdue.
Exhibit
31
confirms
this.
It
should
be
said
that
merely because
the
company
may
have
drawn
a
cheque
as
at
the
end
of
a
particular
month,
this
does
not
mean
that
the
cheque
was
received
by
A.P.A. on
that
date.
It
is
therefore incorrect to
suggest
that
no payments were
made
in
July
1986.
A
payment
was made
on
3rd
July
1986
as
Mr.
O'Donnell
said in
evidence. This accounts
for the
fact that
during
July, there
was
no
reminder
notice
and no phone
calls
to
the
company
for
overdue
amounts
simply because
the
May
account
had been
paid
in fact,
although
three
days
late (i.e.
33
days
after
the
end
of the
month
of
May).
Thereafter, the
value
of
work done monthly
from
June
1986 up
to
June 1987,
the date of
cheques
by
the
company
as per the
company's
cash
payments
journal
(ex.
6), periods overdue, and
date of
banking
by A.P.A. appear
from
the following
table.
Apart
from
the
two
consecutive
cheques
dated 28th
November 1986 which were
apparently
handed over
at
the
one time on
that date, the evidence does not clearly establish
whether the
two cheques
in
August 1986 and September 1986 were
handed over
at the one time or delivered separately, or the
precise dates
when
they were handed over, or the dates of the
-- 29 of 98 --
26
second
cheques,
notwithstanding
that
the
August payments were
by
consecutive
cheques
and
the
September payments were
not.
The
cheques
were
not
tendered
in
evidence,
but
nothing
would
appear
to turn
on
this.
The
dates of
banking
by
A.P.A.
of the
cheques
from
3rd
July
1986
to
24th October
1986
may
not
be
exact but are
inferred
from
the date
of
clearance
in
the
company's bank
statements
(ex.
9).
MONTH
WORK
DONE
VALUE OF DATE OF
WORK
DONE
CHEQUE
OVERDUE
BASED
ON
30
DAY
CREDIT
DATE OF
BANKING
BY
A.P.A.
AMOUNT
MAY
86
JUNE
86
JULY
86
AUG.
86
SEPT.
86
OCT.
86
NOV.
86
DEC.
86
JAN. 87
FEB. 87
MAR.
87
APR. 87
MAY
87
TO
17 JUNE 87
54,593.85
110,078.75
74,910.47
71,569.93
145,868.63
(145,847.35)
74,498.55
13,467.64
18,136.44
12,124.00
29,478.13
62,365.34
42,843.75
46,609.26
17,705.30
(NOT
NECESSARILY
DATE
RECEIVED)
(AS PER
CASHPAYMENTS
JOURNAL)
(UNCLEAR)
21.8.8625.08.86
22.09.86
23.09.86
23.10.86
28.11.86
11
31.12.86
)
)
)
11.03.87
15.04.87
21.05.87
UNPAID
11
11
11
3
DAYS
21
DAYS
25
DAYS
22
DAYS
23
DAYS
23
DAYS
28
DAYS
(CONCEDED)
28
DAYS
(42
DAYS
WHEN
BANKED)
31
DAYS
70
DAYS
39
DAYS
46
DAYS
51
DAYS
OR
CLEARANCE
ON
COMPANY'S
BANK
ACCOUNT
3.07.86
21.08/86
26.08.86
23.09.86
26.09.86
24.10.86
1.12.86
12.12.86
5.01.87
11.03.87
15.04.87
21.05.87
50,000.00
60,078.75
50,000.00
24,910.47
71,569.93
80,000.00
65,847
74,498
"'~
31,604.08
12,124.00
29,478.13
-- 30 of 98 --
27
This
table
makes
it
clear
the
extent
to
which
the
company's
account with
A.P.A.
was
overdue
at
the date
of
each
payment
according
to
normal
30
day
credit
which
was
extended
by A.P.A
..
It
also
shows
that
the
"Days
Delay
in
Payment"
in the
chronology
are
misleading,
because
in
general,
a
further
month
was
added
to
the
true
number
of
days
overdue.
However,
over the period
leading
up
to
the
handing
over
of the
two
impugned
cheques
apparently
late
on
Friday,
28th
November
1986, and
their
subsequent banking,
the
delay
in
payments
probably extended
slightly
from
the
average
periods
overdue
to
30th
June
1986
(which
is
not
entirely clear
in
the evidence),
to
a maximum
of
28
days overdue
with
respect to
the
cheque
on
28th
November 1986
of
$80,000 (banked
first
available
banking
day
Monday,
1st
December
1986) and
42
days
with
respect to
the
cheque
for
$65,847.35
by
the
time
it
was
banked. Payments
during
August
1986
for
the
June account
(two
cheques), during
September
for the
July
account
(two
cheques),
and
in
October
were
a
little
over
20
days overdue so
that
the
pattern
which
occurred
up
to
28th
November 1986 was
fairly
consistent apart
from
the delay of
42
days
before
which
the
cheque
for
$65,847.35 handed
over
on
28th
November 1986 was
actually
banked.
What
occurred subsequently
is
not
directly relevant to the
question of
whether
there
were
preferences constituted
by
the
payments
of
$80,000 and $65,847.35 except
to the extent that the
state
of the running account
thereafter
may
indicate the
state
of
mind
of
Mr.
O'Donnell
at
the time
of the
impugned payments.
Indeed, as Barwick
C.J.
and
Kitto J. said in
Queensland Bacon
-- 31 of 98 --
28
Pty. Ltd. v.
Rees
(1965-6)
115
C.L.R.
266
at
300,
306
respectively,
the
later
conduct
is
of considerable
confirmatory
value
and
cannot
be
ignored.
I now
turn
to
the
particular
claims.
THE
PREFERENCE CLAIM
By
virtue
of
s.
122
of the
Bankruptcy Act,
the applicant
must
prove
various matters
all
of
which,
for relevant
purposes,
are
cumulative.
These
are:
a)
Payments were
made
during the
six
months'
period
prior
to
the
filing
of the
application to
wind up;
b)
By a
company
unable
to
pay
its
debts
as they
become
due
from
its
own
money;
c)
In
favour
of
a
creditor;
and
d) Having
the
effect
of giving the
creditor
a
preference,
priority
or
advantage over
other
creditors.
It
was
agreed
that
the period ran
from
17th
November
1986,
the date
from
which
it
was
admitted
that
the
company was
unable
to
pay
its
debts as they
become
due from
its
own
moneys.
It
was
also
agreed
that
subject to the question of
when
the
running
account ends
for the purposes
of the preference claim, the
relevant
payments were
made
within the
six
months'
period
by
the
company
to
A.P.A.
as appears
from
exs.
19, 27,
the
affidavit
of
Mr.
0'
Donnell
(para. 8),
by
the cash payments
journal of the
company,
(ex. 6),
and
the
company's bank
statements (ex.
9). All
payments
during
that period, including the only payments
attacked
by
counsel for the liquidator of
$80,000 and $65,847.35, are as
follows:
-- 32 of 98 --
MONTH
WORK
DONE
VALUE OF
WORK
DONE
29
DATE
OF
CHQ
DATE OF
BANKING
BY
COMPANY BY
RESPONDENT
AMOUNT
Sept.
86
$145,847.00 28th
Nov.
1986
1st
Dec.
1986
$80,000.00
28th
Nov.
1986
12th
Dec. 1986
$65,847.35
Oct.
86
$74,498.55
31st
Dec.
1986
5th Jan.
1987
$74,498.55
Nov.
86
$13,467.64)
)
Dec.
86
$18,136.44) 11th
Mar.
87
11th
Mar.
87
$31,604.08
TOTAL
$251,949.98
It
was
agreed
that
providing
there
was
a
preference,
this
figure
is
to
be
reduced
to arrive
at
the
difference
between
the
peak
indebtedness
of
$233,834.82
on
30th
November
1986
(i.e.
the
balance
of the
account immediately
before the
payment
of
$80,000
banked on
1st
December 1986
see exs.
19,
27),
and
either
the
sum
owing
at
the
commencement
of the
winding-up
on
13th April
1987,
$124,850.03,
or the
sum
owing
at
the
end
of the
running account
in
fact
on
16th
June
1987,
$169,044.93
as
above
pointed
out,
according
to
the decision of the court
as
to
the appropriate
date.
The
reason
why
only
the
payments
of
$80,000 and $65,847.35
were
attacked
was
that at
no
time
after
such
payments were
made
was
there
any peak
indebtedness
which exceeded
the
balance
of
$124,850.03
owing
to
A.P.A. on
13th April
1987
or the balance
of
$169,044.93
owing
as
of 16th June 1987.
It
was
agreed
that there
could be no
preference, apart
from
the
effect
of
one
or both of
those
two
payments, and
that
if
only the
second payment
of
$65,84 7.
35 was a
preference, then the
peak indebtedness
just
before that
payment was
only $163,687.62 (ex. 19, 27), so
that
the claim for
a
preference
would
in that event be only $38,837.59
(i.e. $163,687.62- $124,850.03)
if
the
sum owing as at the
-- 33 of 98 --
30
deemed
commencement
of the
winding-up
was
the
relevant
sum,
or
nil
if
the
sum
owing
as
at
the
appointment
of the provisional
liquidator
on
16th
June
1987 was
the relevant
sum
(i.e.
$169,044.93).
Whilst
it
was
not expressly
conceded
by
counsel
for
A.P.A.,
it
was
not
seriously
disputed
that
the
above
two
payments had
the
effect
of giving the
respondent
a
preference,
priority
or
advantage over
other
creditors.
It
was
conceded
that this
did
not
mean
over
all
other
creditors.
The
evidence
now
adduced
by
the applicant
and
of
which
Mr.
O'Donnell
at
all
material
times
had no knowledge,
has
established
this
requirement
by
a
sample
of other
creditors
so
affected,
and by
evidence
that
other
creditors
fell
into
this
category.
See
the statement of
affairs
exhibited to
Mr.
Starkey's
affidavit, principally
schedules
"F"
and
"H", and
exs.
20, 21,
23
and 24.
The
test is
whether,
by
the
payments
referred to,
the
rights
of
A.P.A.
vis-a-vis
the
other
creditors
has changed
so
that
the share of the other creditors
will
be
less.
The
above payments
now
show
that
A.P.A.
was
paid
in
full
for
work
done
during the
months
referred to
whereas
other
creditors
had
not
been
paid
at all
or to
the
same
extent
and
indeed, the unsecured
creditors
would
probably
receive less
than
100
cents in the
dollar.
See
Mr.
Starkey's affidavit
para.
8 (
iii),
and
the oral
evidence of Gail
Colb and
Mr.
Hell en.
This requirement
is clearly established.
The
applicant having proven
the matters required
by
s.
122(1)
of the Bankruptcy Act, A.P.A., by
virtue of s.
122(3)
of that
Act, has the burden of proving the matters contained in
s. 122(2).
By
that sub-section, A.P.A. must
establish that
it
-- 34 of 98 --
31
was
a
payee
in
good
faith,
and
for
valuable
consideration,
and
in
the ordinary
course
of business.
Each
of these
requirements
is
cumulative.
Counsel
for
the
applicant
made
it
clear
at
the
outset
that
the
only
matter
in issue
which
the
respondent
had
to
prove
pursuant
to
s.
122(2)
was
that
the
payments were
made
in
the
ordinary
course
of business.
He
conceded
that
all
payments were
made
for
valuable
consideration,
and
this
is
clearly
so with
respect
not
only
to
the
above
four
payments,
but
also
with
respect
to
the
two
payments
made
by
the
company
to
A.P.A.
after
the
commencement
of the
winding-up
and which
are the subject of
A.P.A.'s
claim
for
validation.
Also
he
did not claim
that
there
was
no good
faith
and
conceded
that
A.P.A.
did not
have
to
establish actual
good
faith.
He
relied
however,
on
the
deeming
provisions of
s.
122(4)(c)
of
the
Bankruptcy
Act and
submitted
that
the
events surrounding the
two
payments
of
$80,000 and
$65,847.35
in
November/December 1986
triggered
those provisions
by which
a
payee
is
deemed
not
to
be
a
payee
in
good
faith.
It
was
submitted
that
the
payments
in
November/December 1986
were
made
under such
circumstances as
to
lead to the inference
that
A.P.A.
knew,
or
had
reason
to suspect
that the
company was
unable
to
pay
its
debts as they
became due
from
its
own money
and
that
the
effect of the
payments
was
to
give
it
a
preference,
priority or
advantage over
other creditors.
The
result
it
was
submitted,
is that the Court
was
precluded
from
finding that
A.P.A. was a
payee
in
good
faith:
Re
Weiss [1970]
A.L.R. 654
at
665
per
Gibbs
J., citing
Queensland Bacon
Pty. Ltd.
v. Rees (1965-6) C.L.R. 266
per Barwick C.J. at
287.
-- 35 of 98 --
32
It
was
agreed
that
where
the
applicant
relied
on
the
deeming
provisions,
the
applicant
had
the
onus
of establishing
the
various matters contained
in
the sub-section
from which
the
necessary
inferences
were
capable
of
being
drawn.
All
of
these
matters are also
cumulative.
No
onus
was
cast
on
A.P.A.:
Queensland
Bacon
Pty.
Ltd. v.
Rees
(supra)
at
287;
Re
Weiss
(supra)
at
665;
Re
Cooke;
ex
parte Official
Trustee
and
Bankruptcy v.
Miller
Bros.
Melbourne Tankworks
Pty.
Ltd.
(1985)
4
F.C.R.
398
at
411;
Castellucci;
ex
parte
Pipkin
(1983)
68
F.L.R.
162
at
166.
However,
counsel
for
A.P.A.
submitted
that
the
evidence
led
by
A.P.A.,
when
considered
in
the
light
of
all
of the
evidence
in the case,
clearly
negatived the matters
contained
in
s.
122(4)(c) so
that
no
such
inferences
could
be
drawn
as
would
displace the
conceded
actual
good
faith
by
A.P.A.
with
respect
to
all
four
payments
referred to
above.
He
further
submitted
that
A.P.A. had
discharged the
onus on
it
under
s.
122(2),(3),
in establishing that
the
payments were
made
in the ordinary
course of business.
Therefore
for the applicant to
succeed with respect to
a
claim based
upon
preferences (subject to
a.determination of the
quantum
thereof),
it
must be
shown
either that
A.P.A. has not
discharged the
onus upon
it
of establishing
on
the balance of
probabilities that the
payments
in
November/December 1986 were
made
in the ordinary course of business, or alternatively (or in
addition thereto),
and notwithstanding
that actual
good
faith
has
been conceded,
that the applicant has discharged the onus
in
establishing the facts
and circumstances referred to in
-- 36 of 98 --
33
s.
122(4)(c),
from which
the inferences
referred to therein
may
be
drawn
so
that
A.P.A.
in
that
event
is
deemed
not
to
be
a
payee
in
good
faith.
In
these
circumstances,
there
can be
some
overlapping
of
the
two
concepts: see
K. & R.
Fabrications
(Old)
Pty.
Ltd. v.
M.
&
B.
Rigging
Pty. Ltd.
[1982]
Qd.R.
585
at
587.
However,
a
payment
can be
made
in
good
faith,
whilst
at
the
same
time being
a
payment
not
made
in
the ordinary course
of business:
Taylor
&
Anor.
v.
White
&
Anor. (1964)
110
C.L.R.
129
per
Taylor
J. at
153;
Re Cummins
(t/a
NAM
Constructions)
ex
parte
Harris
&
Anor
v.
ARC
Engineering Pty. Ltd.
(1985)
62
A.L.R.
129
(Pincus
J.
as
His
Honour
then
was).
The
liquidator in
this
case
has
to
a
large
extent
relied
upon
similar
circumstances
to
support both the
submission
that
these
payments were
not
made
in
the ordinary
course
of business as well as
the
submission
that
the
circumstances surrounding
these
payments
indicated
that
the
inferences
should
be
drawn
under
s.
122(4)(c) of the
Bankruptcy
Act which
deems
A.P.A.
not
to
be
a
payee
in
good
faith.
It
is
convenient
first
to deal with the submissions
in relation
to
s.
122(4)(c) of the
Bankruptcy Act.
SECTION
122(4)(c)
OF THE BANKRUPTCY ACT
The
case for the
liquidator,
as
emerged from
the course of
proceedings
and
submissions,
to justify
the
drawing
of the
necessary inferences as
at
the date of the
handing over of the
two
cheques on
Friday, 28th
November
1986, and
leading
up
to the
banking of the second cheque on
12th
December 1986
is
as follows:
-- 37 of 98 --
34
1.
The
relatively
current
state
of the
company's
account with
A.P.A.
from
January
1985
to
June
1986
and
the
absence
of
reminder
notices or
phone
calls
in
that
period.
2.
The
progressively longer periods
in
which payments were
made
between
July
1986
and
28th
November
1986
(and
12th
December
1986)
with various telephone
calls
to
Mr.
Fitzgerald in
connection with
some
payments,
as well as
the
ordinary
reminder
notices.
3.
The
issue of several court
proceedings
against
the
company
on
31st
May
1986,
21st
June
1986,
12th
July
1986,
20th
September 1986,
11th
October
1986.
4.
The
fact that
some
payments were
made
by two
cheques
(i.e.
August, September and
finally
28th
November
1986.
5.
The
fact that
the
two
payments
by
cheques handed
over
on
28th
November 1986
were from
progress
payments
received
by
the
company
from
projects
on which A.P.A. had
not
worked
at
the relevant
time
and
that
there
was no
evidence
to
show
that
Mr.
O'connell
knew
the
company's
profit
component
out
of
those progress
payments
out of
which payments
could
legitimately
have been
made
to
A.P.A.
6.
The company when
it
handed
over the
cheque
for
$65,847.35
on 28th
November 1986
did not
know when
it
could
be banked
and
when
there
would be funds
to
meet
it,
with
no
evidence
of
temporary
liquidity
problems which would have given
an
innocent explanation to the circumstances surrounding the
handing over and
the banking of the
two
cheques.
7. Most
importantly,
by
the circumstances surrounding the
handing over of the
two cheques in question on
-- 38 of 98 --
35
28th
November
1986
and
leading
up
to
the deposit
of the
second cheque
on
Friday,
12th
December
1986,
as
allegedly
contained
by
reference
to
Mr.
O'Donnell's
diaries
and
his
oral
evidence.
The
case
for
A.P.A.
as
emerged from
the
course
of the
proceedings
and
submissions,
is
as follows:
1.
The
onus
was
on
the
liquidator to
clearly
prove
the
facts
from which
the
necessary
inferences
would
objectively
be
drawn by
a
reasonable
businessman
in
the position of
Mr.
O'Donnell
and
with
his
knowledge
of the
background and
circumstances
prevailing.
It
was
submitted
that this
onus
had
not
been
discharged.
If
a
doubt
existed,
it
must
be
resolved
in
favour
of
A.P.A.
2.
The
period
1985-1986,
whilst
remotely
relevant to the
question of
good
faith,
was
not capable
of
supporting
any
of the necessary
inferences.
Ltd. v.
Rees
(supra).
See
Queensland
Bacon
Pty.
3.
As
there
was no
actual
insolvency
until
17th
November
1986,
there
could
be
no
inference
that
A.P.A.
knew
or
had
reason
to suspect
that
the
company was
unable
to
pay
its
debts as
they
became due from
its
own money
prior to that
time:
Queensland
Bacon
Pty. Ltd. v.
Rees
(supra) per
Barwick
C.J.
at
292.
4.
It
was
customary
for
A.P.A.
to bring
up
the question of
payment
after
an account
was more
than
15
days overdue
by
a
friendly
computer reminder notice to the debtor followed
by a
telephone
call. It
was common
commercial experience
that
even the best of customers are reluctant to part with
-- 39 of 98 --
36
money
and
that
the
only
efficient
way
of
running
a
business
is
to
have
a
system
which
continually brings
to
the
customer's
attention,
the
fact that
the
seller
would
like
to
be
paid:
Re
Tell
sa Furniture
Pty. Ltd.
(
1985)
9
A.C.L.R.
869
per
Young
J.
at
876-7.
5. There
was
nothing unusual about
payments
of
a
monthly
account being
made
at
times
by two
cheques, having
regard
to
Mr.
O'Donnell's
evidence
that
the
cheque
held
was
always
to
await
receipt
by
the
company
of
a
progress
payment.
This
had
occurred
in
March
and
May
1985, August 1986,
September 1986, and
again
on
28th
November
1986: See
Re
Tellsa Furniture
Pty. Ltd. (supra) per
Young
J. at
876
where
His
Honour
referred to
this
as being
"more
of
a
friendly
commercial
arrangement
than the
way
the
liquidator
seemed
to
view
it,
namely,
that of
a
creditor
continually
pressing
it
for
payment".
6.
Mr.
O'Donnell's
knowledge
of
plaints or writs
issued
against the
company
were
irrelevant
and
at
best
showed
that
Mr.
0'
Donnell
was a
competent businessman keeping
his
finger
on
the pulse.
Also,
his investigations
showed
that
many
of these
items
were
genuinely disputed debts
and
in
no
way
indicated that
the
company was
insolvent rather
than
being unwilling to
pay
those debts (for
whatever reason).
7.
Even though
the
method by which
the
company
paid A.P.A.'s
accounts
was a
result of
a
friendly
and on-going business
relationship
between them,
with
no evidence
that
Mr.
O'Donnell
knew
or had reason to suspect that the
company was unable to
pay
its
debts as they
fell
due, there
-- 40 of 98 --
37
was
evidence,
if
evidence
be
needed,
of
a
temporary
liquidity
problem
endured
by
the
company.
Mr.
O'Donnell's
evidence
was
unchallenged
(250, 254,
255).
At
254
1.
40
Mr.
O'Donnell
said:
"Did
anything
concern
you
about
that
arrangement?--
No.
I
remember
Mr.
Fitzgerald
telling
me
that
it
was
on
a
particular
contract
and
I
think
was
Callide
that
he
was
waiting
for
a
cheque on
because
I
remember
him
saying
he
was
waiting
for
a
cheque
for
ouraccount
....
"
See
also
p.
255
"Do
you
recall
being
told that
Mr.
Fi
tzgerald
was
expecting
further
funds?--
Yes
I
do
recall that.
See
also
p.
301
in
cross-examination.
"Yes, he
asked
me
to
hold
it
until
he
received
a
progress
payment."
8. There
was
no
evidence
that
Mr.
O'Donnell
at
any
time
acted
from
fear or
apprehension.
9.
The
undisputed evidence
was
that
the
company from
all
outward appearances
was
a
substantial
and
successful
company
with
major
contracts
funded by
Commonwealth
and
State
Governments and
statutory authorities.
10.
No
demands
had
ever
been
made
by
A.P.A. on
the
company
and
no
cheques had
ever
been dishonoured.
Mr.
Fi tzgerald
always
paid
his debts as promised.
11. There
was
no
evidence
of
arrangements
that the
company may
have had
with other creditors.
12.
The
undisputed evidence
was
that
Mr.
O'Donnell
at
no
time
either
knew
or suspected or
had
reason to suspect that the
company was
actually insolvent or that
it
was
unable to
pay
its
debts as they
fell
due from
its
own money. Nor
did he
at
any time consider that
any payments he received had the
-- 41 of 98 --
38
effect
of giving
him
a
preference,
priority
or
advantage
over
other
creditors.
13.
A.P.A.'s
conduct
in
continuing
to
supply
substantial credit
to
the
company
right
up
to
June
1987,
whilst
not
being
the
test
required
by
the sub-section, nevertheless
had
considerable
confirmatory value
which
could
not
be
ignored:
Queensland
Bacon
Pty. Ltd.
v.
Rees
(supra)
per
Barwick
C.J.
at
300,
per Kitto
J. at
306.
Mr.
O'Donnell
said
that
had
he
suspected insolvency,
he would
not
have
continued
to
supply
credit
and would
have withdrawn
the
supply
of trucks
to
the
company.
14.
No
objective
businessman,
possessed
of the
knowledge
possessed
by
Mr.
O'Donnell
at
all
material
times, could
properly
draw
either
of the inferences
referred to in
s.
122(4)(c),
either
from
the
background
circumstances
relied
upon by
counsel
for the
liquidator, or
from
the
facts
and
circumstances surrounding the delivery of the
two
cheques
on
28th
November 1986
and
the ultimate
banking
of
the
second cheque on
12th
December
1986.
As
the diary
entries
(ex.
9) and
oral
evidence
in relation
to
them loomed
large in the case
on
the question of
good
faith
as well as
on
the question of the ordinary course of business,
some
reference
must be
made
to that material.
The
relevant
entries
and evidence surrounding
them
appear as follows:
1 . Monday,
24th
November 1986
-
"Jobs:
(
1)
Fi tzgerald re
money"
with
a mark
indicating that
Mr.
0'
Donnell had
attended to this matter. Whilst he could not specifically
recall the telephone call,
he said that this
was
not
a
-- 42 of 98 --
39
promise
that
A.
P.A.
would
receive
a
cheque
on
Friday,
28th
November
1986.
At
24th
November
1986,
the
September
account
of
$145,847.35
was
24
days
overdue
and
this
telephone
call
accords with
Mr.
O'Donnell's usual practice
of
telephoning
customers
whose
accounts
were
more
than
15
days
overdue,
the
usual
computer
generated
reminder
also
having
gone
out
in
the ordinary course.
Mr.
O'Donnell
said
that
it
could
have
meant
"call
on
Friday about
a
cheque"
and
that
it
was
standard
practice to ring
Mr.
Fitzgerald
before
a
visit
because
he
may
not
have
been
there
at
the
time.
I
accept
Mr.
O'Donnell's evidence as
to
the
effect
of
this
entry.
2.
Friday,
28th
November 1986
-
"Fi
tzgerald re
money "
and
"C.M.P.S.
money
for
Ted
$80,000".
Mr.
O'Donnell
said
that
this
entry
could
have been
put
there
on
Monday,
24th
November
1986
in
accordance with
his practice
to
make
entries
ahead
as
reminders
of matters
to
be
attended to in
the future.
Mr.
O'Donnell
said
he probably rang
Mr.
Fitzgerald
regarding
a
payment, and
that
the reference
to
C.M.P.S.
was
probably
an
indication
from
Mr.
Fitzgerald
that
he
was
getting
a
cheque from
C.M.P.S. and
that
he
allocated
$80,000
out of
it
to
A.P.A.
He
said that
C.M.P.S.
was
not
a
job
on which A.P.A. had worked
at that
time.
Mr.
O'Donnell
was
handed two
cheque, one
for
$80,000
and one $65,847.35, and
with respect to the
second cheque
said that
Mr.
Fitzgerald
"asked
me
to hold
it
until
he
received
a
progress payment".
He
added
"I'm almost certain
he
said the progress payment from
Callide and, again,
we
-- 43 of 98 --
3.
40
weren't
working
at
Callide
at
the time."
In re-examination
he
said
that
it
was
"very
possible"
that
on
or
about
this
date
(28th
November
1986)
he
made
an
entry
ahead
on
Wednesday,
10th
December 1986
which
is
referred to
below.
This
was
his practice.
Of
significance
was
his
evidence
that
Mr.
Fitzgerald
at
times
gave
him
a
cheque and
asked
him
not
to present
it
for
a
few
days
because
"he
was
expecting
payments
from
a
particular
contractor".
When
Mr.
O'Donnell
presented the
cheques
they
always
cleared.
And
further,
after
referring to
the
fact
that
one cheque
for
$80,000
given
on
that
date
was
presented
and
paid,
he
said
that
he
received the
cheque
for
$65,847.35
with
the
request
that
he
hold
it.
He
was
not
concerned about
this
arrangement
as submitted
by
his
counsel
-
see
above.
Thursday,
4th
December 1986
"Alan
hold
for
Wednesday"
-
Mr.
O'Donnell agreed
that this
was
a
reference
to the
cheque
($65,847.35),
but there
is
no
evidence as
to
whether
this
was
a
reference to
a
telephone
call
and
if
so
who
initiated
it.
Nor
does
it
appear
when
this
entry
was
inserted
on
that
page
bearing
that
date.
Mr.
O'Donnell
said that
a
call
was
received
from John Goes, an
operations
man
in the
employment
of the
company
about
prices for
a
job.
Mr.
O'Donnell probably had
advice
that
day,
regardless of
who
initiated
the contact, to
hold the
cheque
until
Wednesday,
10th
December 1986, having regard to the
fact that
on 28th
November 1986, Mr.
O'Donnell
was
asked
to
hold the cheque
for an unspecified period or perhaps for
a
"few days" in accordance with
Mr.
Fitzgerald's practice.
-- 44 of 98 --
41
4.
Wednesday, 1Oth December 1986
-
"Hold
cheque
until
Wed.
Fi
tzgerald".
Mr.
0'
Donnell
did
not
remember
any
conversation
that
day
or
its
connotation.
I
accept
his
evidence
that
the hand-writing
was
a
reference
to
"until
Wed"
and
not
to
"until
told"
as
put
to
him
by
counsel
for
the
liquidator.
This
independently appears
by
a
close
examination
of
the hand-writing with
other writing
in
the
diaries
made
by
Mr
O'Donnell.
In cross-examination,
Mr.
O'Donnell agreed
with
the suggestion put
to
him
that
he
rang
to
see
if
it
was
all
right to
bank
the
second cheque.
He
said
"Yes, which
is
the
tenth of
the
month".
said
"Yes"
to
the proposition
that
he
was
told
He
also
"No,
can't.
You
have
got
to
hold
it
another
seven
days".
you
This
evidence
is
not
entirely clear,
having
regard
to
Mr.
O'Donnell's statement
that
he
could not
remember
the
conversation or
its
connotation
in
respect of
which
the
diary entry
does
not help.
Also
in
re-examination,
he
said
that
it
was
"very
possible" the entry
on
10th
December 1986
was made
by him on
or
about 28th
November 1986
as
a
consequence
of
what
was
said to
him on
28th
November 1986
when
he
received the
cheque.
He
said that
if
this
was
so,
it
would
explain
why
on
the
Thursday (11th
December 1986)
there
was a
job
to
do which
says
" (
8)
Fi tzgerald re
cheque".
It
seems more
likely that
if
this
entry
was made
ahead
in
accordance with
Mr.
O'Donnell's practice,
it
was
entered
on
4th
December 1986 when
receiving
an
indication
"Alan hold for
Wednesday" and would more
appropriately
fit
in with his telephone
call
on Thursday, 11th
December 1986.
-- 45 of 98 --
42
If
this
is
correct,
then
Mr.
O'Donnell
was
probably
not
told
on
Wednesday,
10th
December 1986
to
hold
the
cheque
for
a
further
seven days
although
he
probably
had
a
telephone
call
about
it
on
that
date.
Counsel
for the
liquidator
conceded
that
the diary entry
on
10th
December
1986
was
in
dispute.
5. Thursday,
11th
December 1986
-
"(8)
Fitzgerald re
cheque"
with
a
mark
beside
it
which
Mr.
O'Donnell
said
was
a
job
for
him
to
do.
He
said
that
it
"would
indicate
that
I
have
spoken
to
someone
on
that".
In cross-examination
he
said
"Yes
I
rang Alan".
He
did
not agree with
the proposition
that
he
rang
Mr.
Fitzgerald
on
11th
December 1986
notwithstanding
that
on
the previous
day
he
was
told to
hold the
cheque
until
the following
Wednesday,
17th
December
1986.
He
said
that
he
did not
remember any
conversation with
anyone
there or
what had happened
at
all,
and
that
he
was
not
aware
of the connotations
from
the
entry
on
10th
December
1986.
On
the
evidence
it
is
more
likely that
on
10th
December 1986, even though
there
was
probably
a
telephone contact,
Mr.
O'Donnell
was
not
told to
hold the
cheque
another seven days
i.e.
to
Wednesday,
17th
December
1986 and
that
the entry
on
10th
December 1986 was
probably
put
ahead
there
on
4th
December 1986
in
accordance with
Mr.
O'Donnell's usual practice.
This
is
somewhat confirmed
by
the fact that there
was no
entry
ahead
in the diary
on
Wednesday,
17th
December 1986
in accordance with his usual
practice
(which I
accept) to remind him
of something to
-- 46 of 98 --
43
check
up on
that
date,
given
that his
company was
at
that
time
owed
a
substantial
sum
of
money.
It
also
fits
in
with
the
telephone
call
on
Thursday,
11th
December 1986
which
would
have been
pointless
had he
in fact
been
told
on
Wednesday, 1Oth
December 1986
to
hold
the
cheque
for
another
seven days
i.e.
to
Wednesday,
17th
December
1986.
6.
Friday, 12th
December 1986
-
Cheque
banked.
No
entry
in
the
diary but
Mr.
O'Donnell
said
in
evidence-in-chief
that
"obvious
I
have been rung
on
the
12th
and
told that
it
was
okay
to present the
cheque
at
that
time".
7.
Wednesday,
17th
December 1986
- No
relevant
entry
in
the
diary.
It
appears
that
there
were
probably
three
telephone
calls
regarding the
second cheque
after
it
was
handed
over
on
28th
November
1986
i.e.
on
4th
December
1986, 1Oth
December
1986,
and
again
on
11th
December 1986 on which
date
Mr.
O'Donnell
said
he
rang
Mr.
Fi
tzgerald.
It
also
appears
that
there
was
a
telephone
call
on
Friday, 12th
December
1986.
It
was
further
submitted
that
by
receiving the
cheque
for
$65,847.35 with
instructions
not
to
bank
it
and
with
no
specified
date given
on which
to
bank
it,
it
was
the
same
as
an
instruction
"Don't
bank
this" or "I don't
have
the
money"
or
"Not
only
do
I
not
have
the
money,
but
I
don't
know when
I
going
to get
it".
It
was
further said that there
was no
need
for
Mr.
O'Donnell
to
ring the
company on Wednesday,
10th
December 1986 (which
entry
counsel conceded
was
the subject of
a
dispute).
He
submitted
that the effect of
what occurred
was
that the
cheque
for
$65,847.35 was
the
same
as
a
bounced cheque which meant
that the
-- 47 of 98 --
44
transaction
was
not
in
the undistinguished
common
flow
of
business.
It
was
also
submitted
that
there
was
no
difference
between
this
arrangement
and
an arrangement
for
a
post-dated
cheque,
because
a
post-dated
cheque
was
handed
over
with
a
representation
that
in
some
days
there
would
be
money
to
meet
it
and
that
the
handing
over
in
these
circumstances
was
the
same
as
handing
over
of
a
post-dated
cheque,
dishonoured
on
first
presentation,
and
met
when
presented the
second
time.
From
the
foregoing,
it
was
submitted
that
not only
was
the
handing
over
of
one
or
both
of the
two
cheques
on
28th
November
1986
and
the
circumstances
leading
up
to
the
banking
of the
second cheque on
12th
December
1986,
transactions
which
were
not
entered
into in
the ordinary course
of business, but also
that
an
objective
by-stander possessed
of the
background
and
information
which
Mr.
O'Donnell
possessed
at
the material
times,
would
necessarily infer that
A.P.A.
knew
or
had
reason
to
suspect
that
the
company was
unable
to
pay
its
debts as they
became
due
from
its
own money
and
that
the
effect
of
one
or
both of those
payments would
be
to
give
A.
P.A.
a
preference,
priority
or
advantage over
other creditors.
It
was
conceded
that there
is
no onus on A.P.A.
to
negative
the existence of circumstances
from which
the described
inferences could be drawn by
the court.
That onus
is
on
the
liquidator,
and
if
there
is
a
doubt as
to
whether
the inferences
should be drawn,
the preference should not be voided.
Barwick
C.J. in
Queensland Bacon
Pty. Ltd. v. Rees
(supra)
at
287
made
this clear.
He
said:
"The
condition
it
raises is
positively satisfied that the that the courtcircumstances of isthe
-- 48 of 98 --
45
payment
justify
the
inference
by
it
that
the
creditor
knew
or
had
reason
to
suspect the
insolvency
and
the
preference.
To
treat this
as
imposing an onus
on
the
creditor to
negative
the existence of
any
such
circumstances
is,
in
my
respectful
opinion,
to
misread
the subsection.
If
the
court,
otherwise
satisfied
of
good
faith,
has
no
material or
insufficient
material
from
which
it
can
draw
the inference
mentioned
in
s.
95(4), the
creditors'
exculpation
under
s.
95(2),
if
otherwise
made
out,
will
be
complete;
or
if,
in
such
circumstances,
the court
is
in
doubt
as
to
whether
or
not
the inference
should
be
drawn,
the preference
should
not
be
avoided."
In
Australia,
the
test
to
be
applied
under
this
sub-section
is
an
objective
one.
See
per
Latham
C.J. in
Downs
Distributing
Co.
Pty. Ltd. v. Associated
Blues
tar
Stores Pty.
Ltd.
(In
Liquidation)
(1948)
76
C.L.R.
463
at
475-6. Also,
the
sub-section requires
that
it
is
the
fact
of
actual
insolvency
which must
be
known
or
suspected.
Barwick
C.J.
in
Queensland
Bacon
Pty. Ltd. v.
Rees
(supra)
at
291-2
said:
"In the
first
place,
to satisfy s.
95(4)
thecircumstances
of the
voided
payment must
be such as
tolead
to
the inference
that
the
creditor
knew
or
had
reason
to
suspect the
fact
of the
debtor's
insolvency.
It
is
not
enough
that
the circumstances
are
such as
tolead
to
the inference
that
the
creditor
had
reason
tosuspect
that
the debtor
might be
insolvent.
The words
of the sub-section, to
my
mind,
are quite clear that
it
is
the
fact of actual
insolvency
which must be
known
or
suspected.
To
be
insolvent, the debtor
must
be
unable, as
distinct
from
merely
unwilling, to
pay
his debts as they
fall
due.
It
is
one
thing tosuspect the
man's solvency
in the sense
that
one
doubts whether he
is
solvent or insolvent.
It
is
another thing to suspect
that
he
is
in fact insolvent.
It
is
of the
latter
suspicion
that s.
95(4), in
my
opinion, speaks."
Kitto
J. in the
same
case
at
303
said:
"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 sufficientevidence' as Chambers's Dictionary expresses
it.
Consequently,
a
reason to suspect that
a
fact exists
-- 49 of 98 --
46
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
a
payee an
actual
apprehension
or fear
that
the
situation
of the
payer
is
in
actual
fact that
which
the sub-section describes
- 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
creditor.
The
question thus
posed
by
the sub-section
is
to
be
answered
in
the
present cases
as
at
the
time
when
each
of the relevant
payments
was
about
to
be
accepted.
It
is
an
objective question.
What
the
payee
or
anyone
else
inferred
at
the
time
is
not
to
be
treated
as
decisive,
though
the
Court
may
be
assisted in
reaching
its
own
conclusion
by
seeing
how
business
men
in fact
reacted to
the circumstances."
These
principles
are succinctly
encapsulated
in
the
judgment
of
White
A.C.J.
in Freer
v. Dot'n
Line
(Australia)
Pty.
Ltd.
(1992)
10
A.C.L.C.
1304
at
1309:
"The High
Court
authorities
insist
that
the court
itself
draws
those inferences
which
a
reasonable
and
impartial
businessman
would draw from
the
circumstances.
The
issue
is
not determined
by
considering
what
the
creditor
himself believes or
suspects.
There
is
good
reason
for
this.
The
creditor
has
a
strong
self-interest
in disclaiming
any
suspicion in order
that
he might
more
easily
make
out
a
defence
and
retain
the
preferential
payment."
In
Queensland
Bacon
Pty. Ltd. v.
Rees
(supra),
Barwick
C.J.
at
300
said:
"That business
men
do
not
infer
insolvency
or find
ground
to suspect
its
existence
does not of course
mean
that
the court cannot find
that the circumstances
were such
that the creditors
had
reason to
know
or to
suspect that
insolvency.
But
their
optimism, backed
up
as
it
was
in this
case,
by
their action in
continuing to give
credit to the
company
cannot,
in
my
opinion, be ignored
when
deciding whether the
recipient of
a
preferential
payment ought
to
have
known
or suspected the insolvency of his debtor."
See
also per Kitto J. (ibid.) at
306. Also Barwick C.J. at
292
said:
-- 50 of 98 --
47
"It is
the
circumstances
under
which
the
voided
payment
was
made
which must
support
the inferences
which
the sub-section describes,
though
of
course
those circumstances
would
include the
creditor's
knowledge
of
anterior
events."
From
the
way
in
which
the
case
was
fought
by
both
parties,
it
is
clear that
the
parties
regarded
the
payment
of
the
last
cheque
as
not
having
been
made
until
12th
December
1986.
This
would
appear
to
be
so,
having
regard
to
the decision of
the
Full
Court
in
K. D.
S.
Construction Services Pty. Ltd. v. National
Australia
Bank
(1987)
5
A.C.L.C.
168
and
in
particular
in the
judgment
of
Ryan
J.
(with
whom
Andrews
C.J.
and
Thomas
J.
agreed)
at
171, where
His
Honour
referred to
Tilley
v.
Official
Receiver
in
Bankruptcy
(1960)
103
C.L.R.
529
at
535
where
Kitto
J.
said:
"There can be
no
doubt
that
the
acceptance of
a
payment
by
cheque
implies,
if
there
be
nothing
to
the
contrary,
an agreement
that
it
shall
be
considered as
payment,
subject to the condition
subsequent
that
if
the
cheque be dishonoured
it
shall
no
longer
be
so
considered."
See
also
on
appeal
to
the
High
Court
(1987)
163
C.L.R.
668
and
in particular at
676
where
it
was
held
that
generally
speaking,
when
a
cheque
is
given
in
payment
of
a
debt,
it
operates as
a
conditional
payment
subject to
a
condition that
the
cheque be
paid
on
presentation.
If
it
is
dishonoured the debt
revives but
if
it
is
duly
met,
the
payment
is
complete
at
the
time
when
the
cheque
is
accepted
by
the
creditor.
In
this
case, to
use the
words
Kitto
J.
(supra), there
is
something
to the contrary.
It
cannot be
said that at
the time
the cheque
for
$65,847.35
was
handed
over,
it
was
then
and
there
accepted as payment. A.P.A. merely held that
cheque by
arrangement with the
company and
subject to confirmation
by
the
company
as to
when
it
should be presented for actual
payment.
-- 51 of 98 --
48
As
indicated
earlier
in
these reasons,
I
place
no
particular
significance
on
the
fact that
the
company
at
times
paid
A.P.A.
's
account
by two
cheques
instead
of
one,
nor
on
the
fact that
the
two
payments
in
question
were
out
of
proceeds
received
by
the
company
from
jobs
on which A.P.A.
did not
work
at
the material
time.
Nor
do
I
regard the
issue of
plaints
and
writs or
the
sending
out of
computer
reminder
notices
and
telephone
calls
of
any
particular
significance.
Nor
in
my
opinion
is
it
of
any
significance
that
the
company's
account
with
A.P.A.
was
strictly
overdue
in
the
sense
that
it
was
not paid within the
normal
30
day
period.
See
per
Kitto
J.,
Queensland
Bacon
Pty. Ltd. v.
Rees
(supra)
at
301.8,
or
that
the
company's
account
may
have
been
overdue
in
November
1986
to
a
slightly
greater
extent than
in
the
18
months up
to
30th June
1986.
I
do
not accept the
submissions
liquidator that
the
handing over
of
of
the
counsel
for
two
cheques
the
with
instructions
not
to
bank one on
a
specified date
was
the
same
as
an
instruction
"Don't
bank
this" or "I don't
have
the
money",
or
"Not
only
do
I
not
have
the
money,
but
I
don't
know when
I'
m
going
to get
it".
Nor do
I
accept the
submission
that
the
effect
of the
second cheque
was
that
it
was
a
post-dated
cheque and
that
the consequences
of
a
deferral of the presentation of
it
for
payment amounted
to the dishonouring of the
cheque.
Even
if
this
were
so, care
must be taken against too ready an assumption
that
dishonour of
a
cheque must
in
all
circumstances inevitably create
in the
mind
of
a
reasonably worldly-wise creditor
a
suspicion of
insolvency.
The
total picture
must be considered: per Kitto J,
Queensland Bacon Pty. Ltd. v. Rees (supra) at
302.
-- 52 of 98 --
49
So
also
with
a
post dated
cheque
if
that
was
the
true
effect
of
the
second cheque. There
may
be an
innocent
explanation
for
the
issue
of
a
post dated
cheque,
e.g.
a
debtor
who
will
be
absent
when
a
debt
will
become
due
might
issue
and
deliver
a
cheque and
date
it
ahead on
the
date the debt
is
due,
to
be
presented
on
that
date.
Or,
if
there
is
a
temporary
liquidity
problem
a
debtor
might
issue
a
post
dated
cheque
at
a
time
when
that
problem
will
be
cured.
On
the
other
hand,
a
cheque
post
dated
when
a
debt
is
truly
overdue,
and
not
merely
subject to
extended
credit
by
express
or
implied
agreement
(cf.
"the
friendly
commercial
agreement"
per
Young
J. in
Re
Tellsa
Furniture
Pty.
Ltd.
(supra),
may
in
the circumstances
of
a
particular
case
be
capable
of supporting
an
inference,
particularly
where
there
is
a
history
of
difficulty
in
obtaining
payment and
other
circumstances
which
might
fairly
be
said to
give
rise
to
suspicion.
However,
as
indicated,
I
do
not accept
the
submissions as
to the
effect
of the
second cheque.
Applying
the
above
principles,
and
fully
taking
into
account
the content of the
diaries
and
evidence
in
relation
thereto,
I
am
not
satisfied that
the
applicant/liquidator
has
established
facts
on which
the court should
draw
the
two
inferences pursuant
to s.
122(4)(c).
Care must be taken not
to
be wise
after
the
event. Facts
at
the time must be
considered chronologically
without "wariness of hindsight": per
Ki
tto J.
in
Queensland
Bacon
Pty. Ltd. v.
Rees
(supra)
at
313.
A
reasonably competent
businessman with
all
of the
background knowledge
possessed
by
Mr.
O'Donnell as
at
28th
November 1986 and up
to 12th
December
1986 would not draw the inference that
A.P.A. knew
or
had reason
-- 53 of 98 --
50
to suspect that at the time of either of those two payments, the
company was in fact insolvent and that the effect of either
payment was to give A.P.A. a preference, priority or advantage
over other creditors.
Mr. O'Donnell was merely holding one cheque in accordance
with the arrangement, until advised that the company had received
a progress payment. This conclusion is supported by the conduct
of A.P.A. subsequently in continuing to supply large credit to
the company. At worst for the company, the delay in presentation
of the second cheque to 12th December 1986 merely showed a
temporary shortage of liquid funds although it was equally open
to an inference that the company preferred to pay accounts out
of liquid funds rather than from other sources.
I accordingly accept the submissions of counsel for A.P.A.
This means that the conceded actual good faith on which the onus
rests upon A.P.A., pursuant s. 122(2) of the Bankruptcy Act,
remains undisturbed.
This leaves the question of whether one or both of the
impugned payments were made in the ordinary course of business.
ORDINARY COURSE OF BUSINESS
Counsel for the liquidator, in support of the submission
that the two payments were not made in the ordinary course of
business, also relied in his written submissions on the entire
history of events commencing with the trading history pre-July
1986 up to the date of the actual payments. However, during
argument he abandoned the history as largely irrelevant and
relied only on the circumstances immediately leading up to and
surrounding the actual payments themselves as disclosed by the
-- 54 of 98 --
51
diary
entries
and
evidence
by
Mr.
O'Donnell
which
has
already
been
set
out
above.
It
will
not
now
be
repeated.
He
also
relied
upon
the statement
of
Rich
J.
in
Downs
Distributing
Co.
Pty.
Ltd
v.
Associated
Bluestar Stores
Pty. Ltd.
(In Liquidation)
(supra)
at
476-7,
and on
Freer
v. Dot'n
Line
(Australia)
Pty.
Ltd.
(supra)
at
1309
col.
2
following
the
reference
to
Taylor
v.
White
(1963-4)
110
C.L.R.
129.
The
passage
in
the
last
case
however,
as counsel
for
A.P.A.
pointed
out,
was
relevant
only
to
the question of
good
faith.
Reliance
was
also
placed
on
Re Cummins
(t/a
NAM
Constructions)
ex
parte
Harris
&
Anor.
v.
A.R.C.
Engineering Pty. Ltd.
(1985)
62
A.L.R.
129
and
in particular at
135
where
Pincus
J.
(as
His
Honour
then
was)
said:
"I
can
see
nothing
unfair
about
the
circumstances
attending the
first
payment,
in
this
case,
and
the
payment
was
one which
might have been
made
'without
having
any
bankruptcy
in
view'.
On
the
other
hand,
it
seems
to
me
impossible
to
say
that
payment
under
a
cheque which
is
not only
post-dated, but
dishonoured
when
first
presented,
falls 'into
place as
part
of
the
undistinguished
common
flow
of business'
.
It
is
unusual,
I
think, to issue
a
post-dated
cheque
fordebt
which
is
immediately due and
unusual
for
a
cheque
to
be dishonoured;
the
combination
of
circumstances
is
doubly
unusual."
It
was
said that
the
handing over of
two
cheques
dated
28th
November
1986, one
to
be
paid
immediately and
the other to
be
held pending advice,
and
the circumstances leading
up
to the
banking and payment
of the second cheque on
12th
December 1986
called for
comment
and
did not
fall
into place in the
undistinguished
common
flow
of business.
Counsel
for
A.P.A.
submitted
that for
a
payment not to
be
in the ordinary course of business,
it
must be
of
an "unusual
kind": per
Latharn
J.
in
Downs
Distributing
Co.
Pty. Ltd. v.
-- 55 of 98 --
52
Associated Bluestar Stores Pty. Ltd. (In Liquidation) (supra) at
475; a payment was made in the ordinary course of business if it
was a transaction which would be usual for a creditor and debtor
to enter into as a matter of business in circumstances of the
particular case, uninfluenced by any belief on the part of the
creditor that the debtor might be insolvent: per Williams J.
(ibid.) pp. 479-80; or a transaction in the ordinary and common
flow in the affairs of business, or falling into place as part
of the undistinguished common flow of business forming part of
the ordinary course of business as carried on, calling for no
remark and arising out of no special or particular situation: per
Rich J. (ibid.) 476-7.
It was submitted that the ringing of creditors asking for
cheques when payments were overdue was a normal and efficient way
of running a business, by continually bringing to the customer's
attention the fact that the seller would like to be paid: See
per Young J. in Re Tellsa Furniture Pty. Ltd. (supra) at 876.
Therefore no significance should be given to the fact that there
were several contacts about the cheque for $65,847.35 before it
was banked and paid on 12th December 1986, or that the payments
were not out of progress payments received by the company from
projects on which A.P.A. may not have done work at the particular
time. It was said that it was a common commercial experience
that even the best customer is reluctant to part with money. It
was quite usual to suppose a company would be interested in
holding on to its cash as long as possible. The fact that a
number of companies habitually pay late, was also said to be of
significance. See also Kitto J. in Queensland Bacon Pty. Ltd.
-- 56 of 98 --
53
V.
Rees
(supra)
at
301-2
(when
dealing
with
good
faith).
It
was
further
submitted
that
Mr.
O'Donnell
never
threatened
legal
proceedings.
No
cheques
had
ever
been
dishonoured.
Arrangements
for
payment were
always
met and
that
payments were
being
made
without
A.P.A.
having
to
take
any
unusual
measure
to
effect
payment.
No
pressure
was
brought
to
bear
on
Mr.
O'Donnell
to
secure
these
two
payments.
In the
result,
it
was
said that
the
handing
over
of the
two
cheques,
one
to
be
paid
immediately
and
the
other
some
little
time
later,
was
not
a
transaction
of
"an
unusual kind"
or
that
it
fell
into
place as
part
of the
undistinguished
common
flow
of business
forming
part
of the
ordinary course
of business
carried
on.
It
was
submitted
that
this clearly
applied with regard
to the
first
cheque
for
$80,000
but
that
in
the circumstances
it
also
was
applicable to
the
ultimate
banking
and payment
of the
second
cheque on
12th
December
1986.
Counsel
referred to several
authorities.
In
K. & R.
Fabrications
(Old)
Pty. Ltd. v.
M.
& B.
Rigging
Pty. Ltd.
[1982]
Qd.R.
585,
the Full
Court held
that
a
payment
pursuant
to
a
promise
made
by
the
promisor
in
response
to
a
threat
inherent in
a
statutory notice of
demand
under
the
Companies Act
could not
be
regarded as
a
payment
made
according
to the ordinary
and
common
flow
of transactions in the
affairs
of business.
There
was
an
additional factor in that
case
viz. the
total
debt
was
$9,724. After service of the statutory
demand,
a
conference
was
held
at
the request of the debtor
at
which
the debtor
promised
to
pay $2,000
in reduction of the debt.
It
was
in fact paid
a
-- 57 of 98 --
54
month after the date promised. It was that payment which was
held not to be a payment in the ordinary course of business.
In Katoa Pty. Ltd. (In lig.) v. Dartnall & Anor. (1984) 2
A.C.L.C. 42, payments made after receipt by the company of a
monthly statement of account and carrying an adhesive label
bearing the words "Final Notice" and "Payment within 7 days or
legal action will be taken" were held to be payments in the
ordinary course of business.
In Re Lambert Homes Pty. Ltd. (In liq) (1984) 2 A.C.L.C.
688, credit was extended to a company beyond the trading limit.
Several payments were made to reduce the amount outstanding. A
cheque received by the creditor was banked and returned by the
bank with advice slip "Present again funds expected". On
re-presentation it was paid. Thereafter, large purchases were
transacted. It was held that the payment was made in good faith
and in the ordinary course of business.
Counsel also submitted that the decision in Re Cummins (t/a
NAM Constructions) ex parte Harris & Anor. v. ARC Engineering
Pty. Ltd. (supra) was of no assistance as the facts of that case
were quite different to the present.
The authorities dealing with particular transactions do not
provide much assistance in the resolution of the current problem
which depends on its own facts. The authorities make it clear
that the court does not look at the particular business or course
of dealings between the parties, but the general flow of the
ordinary course of business: Freer v. Dot'n Line (Australia) Pty.
Ltd. (supra) at 1309. 7; Downs Distributing Co. Pty. Ltd. v.
Associates Bluestar Stores Pty. Ltd. (In Liquidation) (supra) per
-- 58 of 98 --
55
Rich J. at 476-7, and per Williams J. at 480 where His Honour
said:
"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."
The "circumstances of the particular case" do not include
the state of mind of the payer: Taylor v. White (supra) per
Dixon C.J. at 136-7, per Kitto J. at 140-2, per Taylor J. at
151-2. Sub-section 122(2), as Kitto J. pointed out, refers to
the rights of a "payee ... in the ordinary course of business".
Thus the sub-section requires that the payments must have
presented itself to A.P.A. as fair payments to accept. What is
required is the quality of ordinariness from a business point of
view in the acceptance of the payments. Thus the payee must take
money not only in good faith but also without there being in his
receiving the payment, anything unusual or remarkable to make it
other than an ordinary business transaction.
In this context I therefore place no significance on the
general history of the dealings between the parties or on matters
closer to the time of the impugned transactions, such as the
regularly sending out of polite computer generated reminder
notices once an account was more than 15 days overdue, or the
fact that a telephone call was usually made thereafter if the
account remained unpaid. Nor do I regard as significant the fact
that the two payments in question were said to come out of
progress payments received by the company from a project on which
A.P.A. had not worked at the particular material time. The
source was of no concern to Mr. O'Donnell. Nor do I attach any
-- 59 of 98 --
56
significance to
the
fact
that
the
company's
account with
A.P.A.
was
overdue
for
payment
in
accordance
with the
normal
terms,
or
that
two
cheques,
as
such,
were handed
over
on
28th
November
1986.
The
payment
or
part
payment
of
an overdue account can
clearly
be
a
payment
in
the ordinary course
of business.
But
quite apart
from
the matters
last
referred to,
and
looking only
at
the
particular
circumstances
immediately
preceding
28th
November
1986
and
up
to
12th
December
1986,
I
conclude
that
the
handing
over
by
the
company
to
A.
P.A. on
28th
November 1986
of
two
cheques
bearing
that
date,
one
for
$80,000
to
be banked
immediately,
and
the other
with
the request
to
hold
it
pending
receipt
by
the
company
of
a
progress
payment,
was
a
transaction
entered
into in the ordinary
course
of
business,
at least
with
respect to
the
cheque
for
$80,000.
It
was
simply
an immediate
part
payment
of the
account.
It
cannot
be
said
that
a
cheque
given iri
part
payment
was
other
than
a
payment
in the ordinary course
of business.
I
do
not see
how
the
simultaneous handing
over
of the
second cheque
with
a
request not
to
bank
it
until
a
progress
payment
was
received, in
any
way
affects or
colours the character of the
first
payment.
It
was
in
my
opinion
a
transaction into
which
it
would
be
usual for
a
creditor
and
a
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"
or
one which might have been
made
"without having any bankruptcy
in view".
The payment
of
$80,000 on
presentation
on
1st
December
1986 was
therefore
a
payment made
in the ordinary course of
-- 60 of 98 --
57
business.
A.P.A.
has
discharged the
onus on
it
of
establishing
this fact.
This
leaves the
question of the
second cheque
for
$65,847.35
which
was
not
banked
and
paid
until
12th
December
1986.
It
was
to
be
held
pending
receipt
by
the
company
of
a
progress
payment.
Whether
the
payment
of
it
on
12th
December 1986
was
a
preference
must
be judged
by
events
at
that
time, having
regard
to
what
occurred
since
28th
November
1986.
The
details
of
those events
have
already
been
set
out.
Whilst
the
diary
entries
are not
entirely
clear,
Mr.
O'Donnell,
when
he
was
initially
handed
that
cheque,
was
requested
to
hold
it
until
a
progress
payment
was
received.
On
Thursday,
4th
December
1986, he
was
then requested
to
hold
the
cheque
for
Wednesday
which must
have
meant
Wednesday,
10th
December
1986.
The
diary entry
and
the
evidence
of
what
occurred
on
10th
December 1986
is
imprecise, but
on
the
balance
of
probabilities,
Mr.
O'Donnell
made
that
entry
ahead
on
4th
December 1986.
He
probably
also
spoke
to
Mr.
Fi
tzgerald
about
the
cheque
that
day.
He
then rang
the
company
on Thursday,
11th
December 1986
to inquire
about the
cheque.
The
time
of
that
telephone
call
does
not appear.
He
was
also
probably
told
on
12th
December 1986
that
the
cheque could then
be banked.
The
onus
of proving
that this
payment was
a
payment
made
in
the ordinary course of business
is
on A.P.A. The cheque
was
handed over
on
Friday, 28th
November 1986 and
bore
that
date but
it
could not then be banked
(or
on
the next business
day on
Monday,
1st
December 1986
as with the cheque
for $80,000).
It
was
not post-dated. There was a
request to hold
it
until
a
-- 61 of 98 --
58
progress
payment
was
received
which,
according
to
Mr.
0 1
Donnell
1 s
general
evidence,
meant
a
"few
days".
Apart
from
the
particular
practice
which
existed
between A.P.A. and
the
company,
it
might
generally
be
thought
to
be
somewhat
unusual
that
a
debtor
would
hand
over
a
cheque
currently
dated
into
the care
of
a
creditor,
rather
than
hand
over
a
post-dated
cheque
or
simply
not
hand
over
a
cheque
at
all
unless the debtor
was
going
to
be
absent for
some
time
after
that
date, of
which
there
is
no
evidence.
There
were
further contacts
about
the
cheque on Thursday,
4th
December 1986
when Mr.
0 1
Donnell
was
asked
to
hold
the
cheque
till
Wednesday,
10th
December
1986, on
Wednesday,
10th
December
1986, on
Thursday, 11th
December 1986
and
probably again
on
12th
December
1986.
Notwithstanding
that
Mr.
0 1
Donnell
was
"uninfluenced
by any
belief that
the debtor
might be
insolvent",
I am
unable
to
conclude
on
the balance
of
probabilities that
A.P.A.
has
discharged the
onus
of
showing
that
on
12th
December 1986,
it
was
a
payee
in the ordinary
course
of
business
in respect of the
sum
of
$65,847.35.
The
combination
of circumstances
meant
that
the
handing over of the dated
cheque
and
the ultimate
payment
of
it
twelve
or fourteen
days
later
called for
comment
and
did not
fall
into
place as
part
of the
undistinguished
common
flow
of business.
The
particular
course
of dealing
between
these
two
parties,
and
Mr. 0 1
Donnell
1 s
belief
is
of
no
assistance to
him on
this
aspect of the case.
The
result is that this
payment amounted
to
a
preference.
The
precise
sum
is to
be determined
by
reference to the running
account.
The
indebtedness immediately before that
payment was
$163,687.62 (exs. 19, 27), so that the claim for
a
preference is
-- 62 of 98 --
59
$38,837.59 if the sum owing as at 13th April 1987 is to be
deducted ($124,850.03), or nil if the relevant sum is the balance
owing when the running account was finally closed on 16th July
1987 (i.e. $169,044.93). The relevance of the running account
must now be considered -
RUNNING ACCOUNT
It was not disputed that A.P.A. operated a running account
with the company and that the liquidator was entitled to chose
the peak indebtedness during the six months' period prior to the
deemed commencement of the winding-up, from which to ascertain
whether in the running account there was a preferential payment
thereafter: Rees v. Bank of New South Wales (1964) 111 C.L.R. 210
per Barwick C.J. at 221. The dispute related to whether the
running account should, for the purposes of this exercise, end
at the commencement of the winding-up on 13th April 1987 or
whether the relevant time was 16th June 1987 when actual trading
between A. P.A. and the company ceased. No authorities were drawn
to my attention which have expressly decided this issue. All
authorities dealt with the situation where the running account
in fact came to an end at or before the deemed commencement of
winding-up.
Counsel for A.P.A. submitted that the authorities
established that the "entire transaction" comprising the running
account has to be considered as a whole, and that no payment can
be considered in isolation from another. It is the net effect
from the "peak indebtedness" within the relevant period to the
end of trading on the account that is to be considered when
ascertaining the amount of the preference. Merely because
-- 63 of 98 --
60
legislation
"deemed"
a
liquidation to
commence
on
a
certain
date,
the
law
does
not
deem
trading to
stop, or
to
alter
the
legal
basis of the
trading
relationship
between
the
parties:
National
Acceptance
Corporation v.
Benson (1988)
12
N.S.W.L.R.
213
at
221.
The
parties
can
lawfully
continue
to trade
after
the
deemed
commencement
of the
winding-up.
There
was
no
warrant
for
arbitrarily
closing the
account
at
the date
liquidation
was
deemed
to
have
commenced.
The
above
conclusion
was
said to
be
derived
from
Richardson
v.
Commercial Banking
Company
of
Sydney
Limited
(1951)
85
C.L.R.
110
at
129
in
the
joint
judgment
of the
Court:
"
...
there are
two
things
that
it
is
important
to
have
clearly in
mind.
One
of
them
is
the
kind
of
'effect'
which
the provision
treats
as
decisive.
It
must be
'the effect
of giving the
creditor
a
preference,
a
priority
or
advantage over
other
creditors'
:
it
is
then void
in
bankruptcy
if
the sequestration
is
within
six
months
The
second
thing
is
that
the
effect
is
the
consequence
of the
payment and
that
where
the
payment forms an
integral,
an
inseparable,
part
of
an
entiretransaction
its
effect
as
a
preference involves
a
considerable of the
whole
transaction."
Also
from Rees
v.
Bank
of
New
South
Wales
(supra) per
Barwick
C.J.
at
220:
"In
this
case the challenge
is
not to individual
payments
...
But
at
the
time
of the
receipt of
each
deposit during the relevant period, the
bank
was
able
to retain at least
some
portion of
it
in
permanent
reduction of
its
account.
What
part
it
did
retain
can
be determined
by
taking the
total
intake into
theaccount during the period
arid
deducting the outgo.
Itis
unnecessary
to
endeavour
to assign
this
remainder
to particular deposits, for the position as to the
bank's
.knowledge
in relation to the
company's
insolvency
and
in relation to the effect of
any
permanent reduction in the
company's indebtedness to
the bank was
the
same
throughout the period.
Nor
is
there
any need
to analyse the course of the overdrawn
acco].lnt during the period to determine whether
a
preference which had been obtained at
one point of
-- 64 of 98 --
61
time
was
foregone
by
the
making
of
further
advances
which
for the
time being
may
have
exceeded
the extent
of the
preference.
It
is
sufficient
in
thecircumstances
of
this
case
to
take
the overall effect
of
the
deposits
and
the
withdrawals
in
the period."
And
per
Kitto
J.
(ibid.)
at
222:
"Richardson'
s
Case
having decided
that
the
effectreferred to in
subs.
(1)
is
the
ultimate
effect
in
a
case
where
the
payment formed
an
integral
step in
a
unified
course
of
payments and
counter-payments,
...
"
See
also
Queensland
Bacon
Pty. Ltd. v.
Rees
(supra)
at
285-6
and
Re
Weiss; ex
parte
White
and
John
Vicars
and
Co.
Ltd. (supra)
per
Gibbs
J. particularly
at
657-600.
His
Honour
said
at
657:
"It is
clear that
for
the
purpose
of deciding
whether
a
payment
is
void
within
s.
95(1)
of the
BankruptcyAct
it
is
effect
in fact
of the
making
of the
payment
that
is
decisive.
It
is
also
clear that
in
some
cases,
where
the
payment forms
part
of
a
wider
transaction, or
where
it
is sufficiently
connected
with
other
items
in
a
running account,
it
is
the
effect
on
the
whole
transaction, of
all
the
connected
items,
that
has
to
be
regarded."
It
was
submitted
that
"the
whole
transaction",
or
"entire
transaction"
meant
the
entire
course
of dealings
between
the
parties
whenever
it
in fact
came
to
an
end.
It
was
said
that
this
followed
notwithstanding
that s.
368
rendered
all
payments
by
the
company
after
the
deemed commencement
of the
winding-up
void
(i.e.
not voidable)
.
It
was
also
submitted
that
the
remarks
of the
Court
of
Appeal
of
New
South Wales
in Tellsa Furniture
Pty. Ltd. (In Liquidation) v.
Glendave Nominees
Pty. Ltd.
(1987)
9
N.S.W.L.R.
254
which
indicated that
under
s.
368,
s.
451
principles did not apply,
is
not
authority for the converse
i.e. that
when
looking
at
the effect of
a
preference,
one must
look
at
the "entire" transaction or the
"whole"
transaction of
a
running account even
if it
does not
come
to
an end
until after
the
commencement
of the winding-up.
-- 65 of 98 --
62
Counsel
for
the
liquidator
submitted
that
the
proper
comparison
for
preferences
is
the
balance
at
the date of
commencement
of the
winding-up
with
peak
indebtedness.
He
relied
upon
Rees
v.
Bank
of
New
South
Wales
(supra)
per
Barwick
C.J.
at
220-1
as follows:
"It
was
also said
in
argument
for
the
bank
that
it
was
not permissible for the
liquidator to
choose
a
date
within the period of
six
months and
to
make
a
comparison
of the
state
of the
overdrawn
account
atthat
date
and
its
state at
the date of the
commencement
of the
winding-up.
It
was
submitted
that
the
proper
comparison
was
between
the debit in
the
account
at
the
commencement
of the
statutory
period of
six
months and
the
debit
at
the
commencement
of the
liquidation
- a
comparison
which
in
this
case
would
result
in
a
materially
lesser
figure
than
that
reached
by
taking the
liquidator's
comparison.
In
my
opinion,
the
liquidator
can choose
any
point
during the
statutory
period
in his
endeavour
to
show
that
from
that
point
on
there
was
a
preferential
payment and
I
see
no
reason
why
he
should not
choose,
as
he
did
here, the point of the
peak
indebtedness
of
theaccount during
the
six
months
period."
It
was
further
submitted
that
what happens
after
commencement
of the
winding-up
is
the
particular
province
of
s.
368
which
declares
that
all
payments
made
thereafter
are
void
unless those
payments
are validated in the
discretion
of the
court in
circumstances
where
the provision of
goods
or services
by
a
creditor
produces
a
benefit to the
company.
It
was
said
that
it
would work an
absurd
result
where
a
running account
was
paid
off
by payments
after
the
commencement
of the
winding-up and
the
creditor
was
successful in
having those
payments
validated
under
s.
368
as
a
matter of discretion
because
a
liquidator
could
then seek back
all
the validated
payments
in
a
preference action
pursuant to s.
451 by comparing the
nil
balance
at the close of
business with peak indebtedness before the
commencement
of the
winding-up. In
a
preference claim the court does not have a
-- 66 of 98 --
63
discretion not to declare a preference if the necessary facts are
established, as exists under s. 368(1). This would be so even
if validation occurred as it can before the winding-up order is
made (s. 368(2)).
It was further said that a creditor can succeed with
validation and fail in a preference action. Notwithstanding a
creditor's knowledge prior to the winding-up, which might
indicate a lack of good faith and a preference, goods and
services rendered after the commencement of the winding-up may
have improved the company's position so that the payments made
after the commencement of the winding-up may well be validated.
It followed according to the submission that s. 451 and s. 368
should operate independently of one another because to validate
only those payments which were not s. 451 preferences would
unduly restrict the discretion to be exercised under s. 368. He
relied on Tellsa Furniture Pty. Ltd. v. Glendave Nominees Pty.
Ltd. (supra) per Priestly J.A. at 260, 261-263, and Re Allan
Fitzgerald Pty. Ltd. (In lig) [1989] 2 Qd.R. 495 and in
particular on the remarks of Matthews J. at 501.
See also Re Rampton Holdings Pty. Ltd. (In Liquidation)
(1991) 9 A.C.L.C 220; Sheahan & Anor v. Piber Contractors Pty.
Ltd. (1991) 9 A.C.L.C. 17; Re Transconsult Australia Pty. Ltd.
(In Lig.) (1991) 9 A.C.L.C. 1052; and National Acceptance
Corporation Pty. Ltd. v. Bens on & Ors (supra) where
Priestly J.A., with whom Kirby P. and Clarke J.A. agreed,
confirmed the views expressed in Tellsa Furniture Pty. Ltd. v.
Glendave Nominees Pty. Ltd. (supra) that since s. 451 of the Code
came into operation, it is only the period of six months prior
-- 67 of 98 --
64
to
the
presentation
of
winding-up
process
to
which
the preference
provisions
apply
and
that thereafter
only
s.
368
is
to
apply.
The
matter
is
not without
difficulty.
It
is
clear that
there
can
only
be
a
preference
with
respect to
a
payment
within
the
six
months'
period
prior
to
the
deemed commencement
of the
winding-up.
All of the
authorities
and
statements
made
were
in
the context of
a
running account
which
in fact
had
come
to
an end
at
or
prior
to
the
commencement
of the
winding-up.
It
is
difficult
to ascertain
from
the various
judgments,
any
positive
indication
that
the
"entire
transaction" or
"whole
transaction"
included
trading
which
continued
after
the
deemed
commencement
of the
winding-up. Indeed,
if
anything,
there are indications
to the contrary.
In
Queensland
Bacon
Pty. Ltd.
v.
Rees
(supra),
the
approach
by Barwick
C.J.
to
the question
of
running accounts
generally,
appears
to
be
prefaced
by
his
remarks
at
282
where
His
Honour
posed
the question as
to
whether
the
immediate
effect
of
a
payment
to
one
creditor
and
not
to others
was
taken as
the
relevant
effect
or
whether
those
payments
should
be
regarded as
"part of the overall series
of not unrelated transactions
recorded
in the
running account so
that
the net effect
of the
operations
from
the date of the
first
impugned payment
to the
date of liquidation
becomes
the determinate both of the fact
and
of the extent of preference"
(my
emphasis).
And
further,
he
said:
"But
there will
be occasions
when
there will
be such
facts or events intervening
between
the
first
payment
which
is
impugned and
th~
commencement
of the
liquidation as will require the limiting dates to
be
different, the terminal date for consideration of the
state of the running accourit being for that reason
earlier than the date of the
commencement
of
liquidation."
-- 68 of 98 --
65
Whilst
that
passage
is
not conclusive,
it
seems
to
me
to
be
consistent
with
the
submissions
of
counsel
for
the
liquidator.
In
my
view,
s.
451
and
s.
368
operate
quite
independently
of
each
other.
Preferences during the
six
months
prior
to
the
commencement
of the
winding-up can be
attacked
only
under
s.
451.
A
creditor
who
supplies
credit
to
a
debtor
after
commencement
of
the
winding-up
does
so
at
his
own
risk
as
to
payment
therefor,
whether
the
supply
is
on
a
running account
or
by
way
of
isolated
transactions.
Payments
after
commencement
of
the
winding-up,
whether
in respect of
pre-liquidation or post-liquidation
debts,
are
void unless
validated.
There
seems
to
be
no good
reason
to
distinguish
a
creditor
who
supplies
credit
after
commencement
of
liquidation
on
a
running account,
and
a
creditor
who
supplies
credit
by
way
of
isolated transactions, or in
a
way
other
than
by
way
of
a
running account.
If
the
running account
were
to
continue
on
past
the date of
the
deemed commencement
of the
winding-up,
for the
purpose
of
calculation
of preference,
it
could
lead
to
consequences
of the
kind
referred to
by
counsel
for the
liquidator.
Having
regard,
to the
scheme
of the
Act
envisaged
by
s.
451
on
the
one hand and
s.
368 on
the other,
it
seems
to
me
that
the
submissions
of
counsel for the
liquidator
ought
to
be
accepted.
In the
result,
I
conclude
that the running account, for the
purposes of calculation of
any
preferences during the six
months'
period leading
up
to the
deemed commencement
of liquidation,
may
continue
up
to the date of
commencement
of the liquidation only.
This
means
that there
is
a
preference in the
sum
of $38,837.59
being the difference between the peak indebtedness of $163,687.62
-- 69 of 98 --
66
immediately
before the
payment
of
$65,847.35
on
12th
December
1986
and
the
sum
of
$124,850.03
owing
as
at
the date of the
deemed
commencement
of
winding-up
on
13th
April
1987.
The
liquidator
is
entitled
to
a
declaration
with
respect to
this
sum,
subject to
the question
of
interest
to
be
considered
subsequently.
This
leaves the question of
whether
or
not
any
or
both
of
the
two
payments
made
by
the
company
to
A.P.A.
after
13th
April
1987
should
be
validated.
VALIDATION
The sums
in
question
were
for
pre-liquidation
debts.
$12,124
was
paid
on
15th
April
1987
and
was
for
work
done
in
January
1987. $29,478.13
was
paid
on
21st
May
1987
and
was
for
work
done
in
February
1987. See
exs.
27,
31.
The
total
of
$41,602.13
represents
approximately
one
third
of the
total
pre-liquidation
debt of
$124,850 owing
at
12th
April
1987
(ex. 27). Since 13th April
1987, work
performed
by
A.P.A.
for the
company was
valued
at
$86,297.03.
Of
that
sum,
work
to
the value of
$36,273.94
was
performed
by
A.P.A.
for the
company
after
the
last
payment
to
A.P.A. on
21st
May
1987
and up
to
16th June 1987. (Ex.
27).
By
that
date the
company's
debt
increased
$44,694.90
from
13th April
1987,
to
$169,544.93.
The
particular
jobs
on which A.P.A. worked
for the
company
appear
from
ex. 27.
The
great bulk of post-liquidation
work was
performed by A.P.A.
for the
company
after
13th April
1987
at
Callide
on
a
project for the Queensland
Electricity
Commission
which during this period
made
significant progress
payments
to
the company. Exhibit
27
also
shows
that
A.P.A. did
work
for the
-- 70 of 98 --
67
company
on
other
projects in
respect
of
which
the
company
also
received progress
payments.
Counsel
for
A.P.A.
relied
principally
upon
the
submission
that
there
was
considerable
benefit to
the
creditors
and
to
the
company
generally,
flowing
from
those
payments
to
A.P.A. which
meant
that
the
company was
able
to
continue with
its
projects
and
earn
$4,678,590.30 as
progress
payments which
would
otherwise
have been
lost
to
the
company had.
A.P.A.
withdrawn
its
services
at
an
earlier
stage;
upon
lack of
knowledge by
Mr.
O'Donnell
of
the existence of the
winding-up
application
until
the
end
of
April
1987;
upon
his
reasonable
belief after
proper inquiry
that
the
application
was
not
to
be proceeded
with
and
that
the debt
had
in fact
been
compromised and
paid
by
the
company;
that
Mr.
O'Donnell
had
no
knowledge
of
the
substituted creditor until
early
June
1987;
that
Mr.
O'Donnell
did not
have knowledge
of the
financial position
of the
company
until
well
into
June
1987
and
at
all
times
had
acted
in
good
faith;
and A.P.A. would
suffer
hardship
if
the
payments were
not
validated.
Counsel
for the
liquidator
submitted
that
there
was
insufficient
evidence
to find
that
a
benefit to the
creditors
as
a
whole had been proved;
the
mere
receipt of
payments
to the
company was
insufficient
because the contract or contracts to
which
the
payments
related
may
have been
unprofitable.
There had
been no
proof
by A.P.A. on
whom
the
onus
lay
that
the
company
had
earned an accounting
profit
as
a
result of the progress
payments
received
by
the
company
and
Mr.
Knight
said that "at the
day
of
the winding-up there
was a
further deterioration".
A.P.A. had
not
shown
that the payments received after
13th April
1987
-- 71 of 98 --
68
reversed this trend. The payments received merely allowed the
company to make extensive void payments to other creditors of the
company (see ex. 6- cash payments journal). It was also said
that A.P.A. had not in the circumstances acted in good faith.
He further submitted that there was no sufficient evidence
of hardship and that in any event, it should be ignored as
irrelevant having regard to the New South Wales of Court of Appel
decision in Tellsa Furniture Pty. Ltd. v. Glendave Nominees Pty.
Ltd. (supra). This latter submission is not substantially
different to that of counsel for A.P.A. who agreed that if
hardship was relevant, it attracted very little weight.
Some dispute occurred over the question of good faith,
because of the concession by counsel for the liquidator that
A.P.A. had actual good faith with respect to all payments it
received prior to the commencement of liquidation on 13th April
1987. It was submitted by counsel for A. P.A. that it was
difficult to see, in the light of this concession, which
presumably existed up to 13th April 1987, how there could be a
sudden lack of good faith on 15th April 1987, when the first
payment was made after liquidation. It was conceded by counsel
for the liquidator that Mr. O'Donnell had no knowledge then of
the application to wind-up. Whilst I was concerned as to the
effect of this concession, I have proceeded on the basis that
counsel for the liquidator did not intend to abandon the question
of good faith post-liquidation.
He relied on the entire chronology of events to negative
good faith i.e. on events commencing from the period prior to
30th June 1986 and further submitted that Mr. 0' Donnell' s
-- 72 of 98 --
69
explanation
for
ignoring the
application for
winding-up
when
it
first
came
to his
knowledge
prior to
the
last
payment on
22nd
May
1987 was
insufficient; that
A.P.A.
knew
of
a
judgment
in
the
Gazette
on
11th
April
1987;
that
there
was
an
admitted
indebtedness
to
the
Haywoods
as
initial
applicants in
the
winding-up even though
the
amount
was
disputed;
that
Mr.
Fitzgerald indicated
on
1st
May
1987
the
need
to re-finance his
equipment;
that
A.P.A.
knew
since
26th
March 1987
that
the
company
owed a
Biloela hotel
account
for
about $6,000;
and
that
A.P.A.
did not bring the
application for validation
until
the
liquidator
commenced
proceedings
and
should
have
applied
immediately
and
certainly
when demand was made
on A.P.A.
by
the
liquidator
on
2nd
February
1988
(ex.
GSAP
A3
to
Mr.
Starkey's
affidavit)
.
The
foregoing
and
other matters
relied
upon
to
negative
good
faith
were
said to
arise
from
further entries
in
the
diaries
and
the evidence
of
Mr.
O'Donnell as follows.
Each
is
dealt
with
seriatim.
The two
payments
are included.
1. 29th January
1987. "John Armstrong
re Fitzgerald
is
he
in
trouble".
It
was
suggested
to
Mr.
O'Donnell
that
he
rang
Mr.
Armstrong
with
this
inquiry.
I
have
no
hesitation in
accepting
Mr.
O'Donnell's explanation
that
Mr.
Armstrong
rang
him
to
ask whether
the
company was
paying
its
accounts.
He was
merely seeking
a
credit
reference
which-
Mr.
O'Donnell gave him by
indicating that
A.P.A.
was
having
no
trouble in
its
dealings with
Mr.
Fi tzgerald. This
telephone
call
did not cause
Mr.
O'Donnell any concern or
in
any way
cause him
to re-appraise his
view of the
-- 73 of 98 --
70
company's financial capacity. I also accept as relevant to
his belief, Mr. O'Donnell's explanation that Mr. Armstrong
was a competitor of Mr. Fitzgerald and may have been hoping
that Mr. Fi tzgerald "would not be around when the next
Queensland Railway account came up". He said that this was
common practice in the construction industry where people
rang other operators for various reasons quite unrelated to
financial difficulty.
2. 19th February 1987. "Fitzgerald payment November". "Gail
3.
4.
said Monday 9 March". This was simply one of
Mr. O'Donnell's normal telephone calls.
27th February 1987. "Alan Fitzgerald". "Cash" was
inserted separately by pencil. "Had a good month". I
accept Mr. O'Donnell's evidence that Mr. Fitzgerald rang
him at night from Gladstone and was speaking operationally
rather than on matters relating to his finances. This fits
in with the previous telephone call to or from Gail Colb on
19th February 1987. The pencil entry "Cash" does not on
its face, necessarily refer to Mr. Fitzgerald, and
Mr. 0' Donnell said that he could recall no conversation
about money at all on this occasion and had no idea what
the notation "Cash" referred to.
9th March 1987.
December". This
"Fitzgerald payment November and
entry could have been made on
19th February 1987 or on 9th March 1987. It was put to
Mr. 0' Donnell that the reference to Ken and Don Haywood
related to their politics. I accept Mr. 0' Donnell' s
evidence that he had no idea of the political standing of
-- 74 of 98 --
71
Mr.
Fitzgerald.
It
is difficult
to
see the
relevance
of
this
suggestion put
to
Mr.
O'Donnell.
He
said
that
there
were
no rumours
whatsoever
of the
company's
viability.
5.
18th
March
1987.
"Never
paid subbies.
Not
paid
since
Xmas.
Believe $32,000".
"3
trucks
B/0
caught
up
to
Gladstone. All
the
D6's
repossessed
$300,000".
I
accept
Mr.
O'Donnell's
evidence
that this
was
not
a
reference
to
the
company's moratorium
as
put
to
him.
I
also
accept
that
Mr.
0'
Donnell
did not
learn
of
any
moratorium
of the
company
until
well
after
the
winding-up
order,
and
that
this
diary
note
and
the separate notation
"Some
finance
coys
are
backing
off
and
all
finance
coys
are
starting
to
screw",
referred to
a
company, M.J
.M.
which went
into
liquidation
in
June
1987
and
owed money
to
A.P.A. which
Mr.
O'Donnell
had
been
attempting
to
collect.
See
ex.
31.
6.
19th
March
1987.
"Meeting
with
Fitzgerald".
This
was
in
pencil writing
and
was
obviously
inserted
at
a
different
time
to
the entry following
in
ink
which
said
"Neil
Rosenlund-
Brisbane".
Mr.
O'Donnell denied
that this
was
a
meeting
between
himself,
Mr.
Fitzgerald
and
Mr.
Rosenlund
who was a
customer
of
A.P.A. There
is
no
reason not
to
accept
Mr.
O'Donnell's evidence.
7. 26th
March 1987.
"Biloela
Hotel A/c
to paid
on
receipt".
"Fitz
=owes $6,000".
Mr.
O'Donnell denied
that this
meant
that
the Biloela hotel
account
was
unpaid
by
Mr.
Fitzgerald. Rather
it
was a
contact
by one
of
A.P.A.
's
subcontractors to say
that they had moved from
the caravan
park into the Biloela hotel. After the statement of
-- 75 of 98 --
72
affairs of the company (prepared after liquidation - dated
10th August 1987) was shown to Mr. O'Donnell indicating a
debt by the company to the Biloela hotel in the sum of
$6,159, Mr. O'Donnell agreed that the reference to $6,000
was probably a reference to the fact that the company owed
$6,000 to that hotel. As pointed out by counsel for
A.P.A., at best this indicated that there was a sum of
$6,000 owed by the company to the Biloela hotel and not
that the company was not paying its accounts.
Something was made of the further notation that day
"what an absolute shit of a day". I regard this reference
as irrelevant.
8. 10th April 1987. "Fitzgerald's cheque" and "Gail, A.P.A.
tippers - Fitzgerald - re". Mr. O'Donnell said that this
could have been a telephone call either way. There is no
evidence of the details.
9. 14th April 1987. "Alan Fitzgerald chq". Again this
represented a telephone call either way and accords with
Mr. O'Donnell's usual practice.
10. 15th April 1987. A cheque for $12,124 received by A.P.A.
from the company.
11. 29th April 1987. "See Allan Friday". "CPA "
Mr. O'Donnell said that this was a reference to "certified
practising accountant". Possibly this entry referred to a
meeting with Mr. Fitzgerald on Friday, 1st May 1987.
12. 1st May 1987. This entry is in pencil "Fi tzgerald"
"finance - Re-finance the whole outfit"
-- 76 of 98 --
73
"Ken
and
Don Haywood
accountants
filed
sect
222
notice
-
payments
$50
for
six
months
work
Alan
claims
it
should
be
about $8". (This
means
$50,000
and
$8,000
respectively.)
"3578322
Haywood-
no
judgment- threatened to issue
...
?"
I
accept
that
Mr.
0'
Donnell
did
not
learn of the
application to
wind-up
until
the
end
of April or
1st
May
1987,
that
he
enquired
of the accountants
who
confirmed
that
there
was
no
judgment and
that
he
contacted
Mr.
Fitzgerald
who
told
him
the matter
was
contested.
I
accept
that
Mr.
O'Donnell
had
learned
that
the
company
had
compromised
the dispute
and
believed
that
the
company
had
paid the
accountants
$10,000
in settlement.
He
did not
assent to the proposition
that
the
s.
222
notice indicated
that
the
company was
in financial trouble.
As
to
the reference to
"Re
financing the
whole
outfit",
on which
reliance
was
placed
by
counsel
for the
liquidator to indicate
lack of
good
faith
with
respect to
the
second
payment on 22nd
May
1987,
Mr.
O'Donnell
said
that
he
was
told
by
Mr.
Fitzgerald that
the
company
intended
to terminate small
leases over various items
of
equipment
with
some
of the smaller finance
companies and
to
get
one
of the larger
companies
to consolidate the leases.
It
was
not
a
conversation as
to
Mr.
Fitzgerald's financial
position.
Mr.
O'Donnell did not
know
whether the
$6,000
owing
to the Biloela hotel
had been paid.
There
is
no
reason not to accept
Mr.
O'Donnell's explanation as to
what
-- 77 of 98 --
74
occurred
on
that
date,
and
that
it
gave
him
no
cause
for
concern.
13.
15th
May
1987. "Alan
Fitzgerald
chq".
Mr.
O'Donnell rang
for
a
cheque
in
accordance
with
his
normal
procedure.
"No
fuel
Pulled out operations
no
fuel
Fitzgerald fuel".
Mr.
O'Donnell
said
that this
meant
that
A.P.A.'s subcontractors
at
Biloela
were
using
Mr.
Fi
tzgerald'
s
fuel
because
by
the
time
they
finished
work
it
was
too
late
to
go
to
the
fuel
depot
at
Biloela.
A.P.A.
did not
supply
fuel to
its
subcontractors.
That
was
their
business
expense
and
not
A.P.A.
's.
Mr.
O'Donnell
said
that
the reference
probably
meant
that
the
subcontractors
had
made
their
own
arrangements with
Mr.
Fitzgerald
and
paid
him
themselves
as they
were
obliged
to
do. There
is
no
reason not accept
this
explanation.
14.
22nd
May
1987. Second payment
of
$29,478.13
paid.
15.
30th
May
1987.
The
date
is
struck out
and
June
13th
inserted.
The
significance of the
altered
date
is
not
readily
apparent. In evidence-in-chief,
Mr.
O'Donnell
said
that
he
learned of the
substitution of
Kimela
Pty. Ltd. as
applicant/creditor
"around about" 6th June 1987,
that
he
contacted
Mr.
Fitzgerald
concerning
this
and
was
told
by
Mr.
Fitzgerald that there
was
no
money owed
to
Kimela
Pty.
Ltd. but
that
it
belonged
to
Mr.
Alec Tenkate. There
are
no
diary entries
on 2nd
June 1987,
4th June 1987,
5th June
1987 up
to 8th June 1987. The
entry
on 30th
May 1987
(altered to
June 13th), indicated that the
money was
not
owed
to Frank Tenkate (Kimela Pty. Ltd.) but
was owed
to
-- 78 of 98 --
75
Alec
Tenkate
for
a
job
on
the
gateway
and
that
a
subcontractor's
charge
was
entered, the
money
being held
by
CMP,
being
an
organisation for
which
the
company
had
done
work.
This
indicates
that
not
earlier
than 30th
May
1987,
Mr.
0'
Donnell
learned
of
the
substituted creditor
and
discussed the matter with
Mr.
Fitzgerald.
He
was
told
that
there
was
no
debt
owing
to
the
substituted creditor
but
that
the
money
in question
was
held
by
CMP
(apparently
as
employer
pursuant
to
the
Sub-Contractors
Charges
Act)
for
the
person
who
was
entitled
to
it. It
does
not matter
whether
Mr.
O'Donnell
learnt
of the
substituted creditor
on
30th
May
1987
or
at
some
later
time.
From
the
chronology,
counsel
for
the
liquidator
appears
to
have
accepted
that
it
was
6th
June
1987
(shown
as 6th
May
1987
in error).
It
occurred well
after
the
last
payment
in
question of
$29,478.13
on
21st
May
1987.
Mr.
O'Donnell
was
entitled
to
regard as reasonable, the explanation given
to
him by
Mr.
Fitzgerald.
He
continued
to
provide trucks regularly
for the
company
after that
date
up
to
17th
June
1987
and
later
diary entries indicate that
he
continued with the
practice of contacting
Mr.
Fitzgerald over
payments.
The
entry
on
9th June
1987
indicates that
he
was
still
expecting
payments from
the
company.
He was
given
a
further
cheque about 6th June
1987 which
was
unpaid
when
the provisional liquidator
was
appointed.
The
pencil notation at the front of the
1987
diary
was
largely left
unexplained.
Mr.
O'Donnell said in
-- 79 of 98 --
76
evidence-in-chief that he could not recall having written the
notation although it was in his hand-writing. He said it may
have involved an informal meeting with some of his
subcontractors. The notation is as follows:
"Strategic Plan in event of Fitzgerald Collapse June
1987 formulated 28th May 1987.
Debt Approximately $180,000"
Then appears four options. There was no cross-examination
as to this entry or evidence as to when it was in fact inserted
in that diary.
Exhibit 2 7 shows that the debt to A. P.A. never reached
$180,000 at any time after 1st December 1986. On 28th May 1987
the debt was only $148,151.13. During the period from 13th April
1987, it progressively increased by $44,694.90, even allowing for
the two payments of $41,602.13, to a total of $169,544.93 as at
16th June 1987. This gives some support for the suggestion that
the entry was inserted later, but even if it indicates that there
was a suggestion on 28th May 1987 that the company might be
facing financial difficulties, this still occurred well after the
last payment on 21st May 1987 and is not inconsistent with
Mr. O'Donnell's evidence that he did not know of the financial
difficulties of the company until very close to the time when the
provisional liquidator was appointed. He continued to supply
trucks on credit after 28th May 1987. After that date, the
company's debt increased by $21,393.80 to 16th June 1987.
I have already referred to the history of events up to
12th December 1986. I have indicated that I place little if any
significance on the fact that Mr. O'Donnell had notice of the
issue of various plaints and writs and indeed of one judgment
-- 80 of 98 --
77
against
the
company
on
or
about 11th
April
1987.
Nor
do
I
regard
as
significant
the
fact
that
computer
reminder
notices
were
sent
out
automatically
when
all
accounts
became more
than
15
days
overdue,
or
that
overdue
accounts
were
followed
up by
a
telephone
call.
This system
occurred
month by
month.
It
was
proper
business
practice.
Nor
do
I
regard
it
as
of
any
particular
significance
that
Mr.
O'Donnell
was
prepared
to
give
extended
credit
to
the
company
beyond
the period
of
the
30
day
credit
account.
Of
significance
is
the
fact
that
A.P.A.
continued
to
supply
credit
to
a
substantial
extent
right
up
to
the date of
appointment
of the provisional
liquidator
during
which
period the
amount
of the
company's
debt
to
A.P.A.
increased.
It
was
conceded and
I
find
that
Mr.
0'
Donnell
had no
knowledge
of the
application for
winding-up
when
the
first
payment
was made
on
15th
April
1987.
In
my
opinion,
that
payment
was made
in
good
faith
and
in
the ordinary course of business,
and
for
valuable consideration.
I
place
no
significance
on
the
fact that
Mr.
0'
Donnell had
allowed
the account
to
become
overdue
to the extent
it
was
at that
time.
As
to the
second payment,
Mr.
O'Donnell
carefully
looked
into the question of the
application for
winding-up
when
it
first
came
to his
knowledge
at
the
end
of April
1987
and
not unreasonably
came
to the
view
that
it
would
not proceed.
He knew
that
the debt
had been
compromised and
paid. This
was
his belief at
the
time
the
second
payment was made on 22nd
May
1987. In
my
opinion, that
payment
was
also
made
in
good
faith
and
in the ordinary course of
business
and
for valuable consideration.
-- 81 of 98 --
78
It was not submitted on behalf of the liquidator that the
test of good faith to be applied in a validation proceeding
post-liquidation was the same as that which applied pursuant to
s. 122(4)(c) of the Bankruptcy Act viz. not what the particular
creditor knew or believed but what a reasonable man, possessed
of all the knowledge and circumstances possessed by the creditor,
would reasonably have believed or suspected in the circumstances.
In Re All an Fi tzgerald Pty. Ltd. (In . Lig) (Full Court)
(supra), a case very different to the present, there had been a
long history of difficulty experienced by a creditor (A.G.C.) in
obtaining payments for lease rentals from the company. In
January 1987 the company fell into arrears. Various meetings
occurred between the company and A.G.C. when it became obvious
that the company had grave difficulties in meeting its financial
obligations. Between 13th April and 20th June 1987 A.G.C.
threatened to repossess the equipment if lease payments were not
received. Matthews J. at 501 on the facts of the case said that
the payments were outside the ordinary course of business but
importantly it could not be said that A.G.C. had acted with good
faith as that term was understood in insolvency proceedings.
This appears to have been the view of Vasta J. on a close reading
of His Honour's remarks at 508. It would appear that the court
there looked at the question of good faith on the basis of what
A.G.C. in fact knew. The test is a subjective one. But even if
the test is objective, I would have no hesitation in concluding
that on the facts of the case as known to Mr. O'Donnell at the
time of each of the two payments, no reasonable and worldly-wise
businessman would have concluded that A.P.A. knew or had reason
-- 82 of 98 --
79
to
suspect
that
the
company was
unable
to
pay
its
debts
as
they
fell
due
and
that
the
effect
of
either
payment would
be
to
give
A.P.A.
a
preference,
priority
or
advantage
over
other
creditors.
The
question
then
is
whether
or
not
one
or
both
of
the
payments
should
be
validated
pursuant
to
s.
368(1).
The
principles relevant to
this
case
appear
from
the
various
authorities
as follows:
1 .
The
onus
of
proof
is
on
the
applicant for validation:
Re
Atlas
Truck
Services Pty. Ltd.
(1974)
24
F.L.R.
220
at
225;
Re
Allan
Fitzgerald
Pty. Ltd.
(In
Lig)
(supra) per
Kelly A.C.J.
at
500.
2.
The
court
has
a
wide and
unfettered discretion
whether
or
not to validate
such
payments:
Re
Steane's
(Bournemouth)
Ltd.
[1950]
1
All
E.R.
21
at
25
per
Vaisey
J.,
as applied
by Sach
L.J. in
Re
Clifton
Place
Garage
Ltd.
[1970]
1
Ch.
477
at
492, and
by Fox
J.
in
Re
Atlas
Truck
Services Pty.
Ltd. (supra)
at
221-2.
See
also Jardio
Holdings
Pty. Ltd.
v.
Dorcon
Constructions Pty. Ltd.
[1984]
3
F.C.R.
311
at
316;
Tellsa Furniture Pty. Ltd. (In
Lig) v.
Glendave
Nominees
Pty. Ltd. (supra)
at
2 55
per
Mahoney
J.
A. ; Re
Allan
Fitzgerald
Pty. Ltd. (In Lig) (supra) per
Vasta
J. at
508.
3.
The
discretion
is
not limited
by
classification
of
acceptable dispositions.
It
must depend upon
the facts of
each case: Tellsa Furniture Pty. Ltd. (In Lig) v. Glendave
Nominees
Pty. Ltd. (supra) per
Mahoney
J.A.
at
255;
-- 83 of 98 --
. I
80
Re Atlas Truck Services Pty. Ltd. (supra) per Fox J. at
221.
4. The basic consideration is that the purpose of the
liquidation is to divide the assets, consisting of a fund
which crystallises at the commencement of liquidation,
rateably amongst the creditors. Whilst this factor is of
importance, it is not decisive. To depart from the
principle there must be reasons which warrant that
departure: Tellsa Furniture Pty. Ltd. (In Lig) v. Glendave
Nominees Pty. Ltd. (supra) per Mahoney J.A. at 255; per
Priestly J.A. with whom Hope J.A. agreed at 261; Re Tellsa
Furniture Pty. Ltd. per Young J. at 874; Re Allan
Fitzgerald Pty. Ltd. (In Lig) (supra) (Full Court); Jardio
Holdings Pty. Ltd. v. Dorcon Constructions Pty. Ltd.
(supra) at 316-7.
5. The court should look at the application not only through
the eyes of the applicant, but also through the eyes of the
company and the creditors generally: Re Clifton Place
Garage Ltd. [1970] 1 Ch. 477 at 492; Re Tellsa Furniture
Pty. Ltd. (supra) per Young J. at 871.
6. The fact of insolvency of the company or that the company
incurred considerable losses as a result of the ultimate
liquidation or that other creditors were not paid during
the period, are not decisive factors: Jardio Holdings Pty.
Ltd. v. Dorcon Constructions Pty. Ltd. (supra) at 319-320.
7. Knowledge at the time of the transaction of the
presentation of a petition, and that a winding-up order may
be made, is not fatal to the success of an application for
-- 84 of 98 --
81
validation:
Re
Atlas
Truck
Services Pty.
Ltd. (supra)
at
222-3;
Re
Park
Ward &
Co.
Ltd.
[1926]
1
Ch.
828.
8.
Good
faith
in
the
payee
is
an
important
if
not
decisive
factor:
Re
Tellsa Furniture
Pty. Ltd. (supra)
per
Young
J.
at
874;
Mahoney
J.A.
at
256,
Priestly
J.A.
at
263;
Re
Atlas
Truck
Services
Pty.
Ltd. (supra)
per
Fox
J. at
221;
Re
Allan
Fitzgerald
Pty. Ltd. (supra)
per
Matthews
J. at
501.
Accordingly,
a
disposition carried
out
in
good
faith
at
a
time
when
the
payee
was
unaware
that
a
petition
has
been
presented
will
normally
be
validated.
9.
However,
payments
made
in
good
faith
and
in
the ordinary
course
of
business
and
for valuable consideration are
relevant factors
but
a
counter-veiling benefit to
the
company
must
usually
be
demonstrated:
Sheahan
&
Anor
v.
Piber Contractors Pty. Ltd.
(supra);
Re
Tellsa Furniture
Pty. Ltd. (supra)
per
Young
J. at
874;
Mahoney
J.A.
at
256.
10.
The
fact that post-liquidated
payments
discharge
pre-liquidation
debts
is
not
decisive against validation.
The
court in appropriate circumstances
may
validate in
full
a
pre-liquidation
debt
which
constitutes
the necessary
part
of
a
transaction
which
as
a
whole
is
beneficial to the
general
body
of creditors
and
the
company:
Re
Atlas
Truck
Services Pty. Ltd. (supra) per
Fox
J.
224-5;
Re
Tellsa
Furniture Pty. Ltd. (supra) per
Young
J. at
874;
per
Priestly
J.A.
at
263.
Benefit to the
company
so as to
enable the
company
to
be
sold as
a
going concern
is
not
a
relevant consideration:
Re
Tellsa Furniture Pty. Ltd.
(supra) per
Young
J. at
873; per Priestly J.A.
at
261.
-- 85 of 98 --
82
11.
The
essential
question
is
whether
the
transaction
could,
at
the
time
of
its
occurrence,
and
without
the
benefit
of
hindsight,
reasonably
be
perceived
as
offering
some
advantage
or
potential
advantage
to
the
company
and
its
general
body
of
creditors.
It
is
necessary
to
weigh
the
benefits to
the
respondent
against the
detriment
to
the
general
body
of
creditors:
Jardio
Holdings
Pty. Ltd. v.
Dorcon
Constructions Pty.
Ltd.
(supra).
The
inquiry
under
s.
368
( 1 )
is
essentially
a
commercial
or
economic
one,
calling
for
a
balancing of the
anticipated net
gains
or
losses
from
the
transaction for
which
approval
is
sought:
Jardio
Holdings
Pty. Ltd. v.
Dorcon
Constructions Pty.
Ltd.
(supra)
at
317.
12.
The
advantage
or
potential
advantage
to
the
company
and
to
its
general
body
of
creditors
may
be
demonstrated
where
the
payments were
related to
any
need
to
continue business,
and
earn
income
or
save
loss
during
dependency
of the
petition:
Re
Atlas
Truck
Services Pty. Ltd. (supra) per
Fox
J.
225.
"In the exercise of
this
power,
the court
will
take
into
account whether
the
payment, and
the transaction
of
which
it
is
part,
was
or
was
apt to
be
for the
benefit of the
creditors in question.
It
will, ingeneral, see the continuation of the
company's
business as, in the proper case, for
their benefit.":per
Mahoney
J.,
Tellsa Furniture Pty. Ltd. (In
Lig) v.
Glendave Nominees
Pty. Ltd. (supra)
at
257.
13. Hardship
to the creditor
if
validation
is
not ordered
is
irrelevant: Tellsa Furniture Pty. Ltd. (In Lig) v. Glendave
Nominees
Pty. Ltd. per Priestly
J.A.
Mr.
0' Donnell said in evidence which
I
accept that there
was
a
mutual assumption between the
company and A.P.A. of
continuation of the relationship which existed between them. That
-- 86 of 98 --
83
relationship
presupposed
that
providing
payments were
made
from
time
to
time,
A.P.A.
would
continue
to
supply
trucks
on
credit
to the
company.
An
analogy
was
drawn
with
the
remarks
of
Barwick
C.J.
in
Queensland
Bacon
Pty.
Ltd. v.
Rees
(supra)
at
285-6
when
in
dealing
with
the nature of
a
running account, the
Chief
Justice
said
that
the
basis of
payments
did not
have
to
depend
on
some
express
arrangement
between
the
parties
which
made
the
ensuring
of service
and
supplies
an
express
purpose
of
the
payments. His
Honour
said
at
286:
11
it
is
enough
if,
on
the
facts
of
any
case, the
court
can
feel
confident
that implicit in
thecircumstances
in
which
the
payment
is
made
is
a
mutual
assumption
by
the
parties that
there
will
be
a
continuance
of the
relationship
of
buyer
and
seller
with
resultant
continuance
of the
relation
of
debtor
and
creditor in
the
running account
11
Such
analogy
was
sought
to
be
drawn
in
Re
Allan
Fitzgerald
Pty. Ltd. (In
Lig)
(supra)
where Queensland
Bacon
Pty. Ltd. v.
Rees
(supra)
was
distinguished
by
Mat
thews
J. at
501
on
the
facts.
Absence
of
good
faith
was
of significance.
His
Honour
did not
say
that
the
analogy
would
not
be
applicable in
an
appropriate case.
Kelly A.C.J.
(who
dissented),
thought the
analogy
was
appropriate
and
said that
the
payments were
of the
nature of
"genuine
payments
made
to
reduce
a
general debit
as
it
stood
from day
to
day, and
in order to maintain
a
genuine
business relationship that
gave promise
of
advantage
to
both
debtor
and
creditor":
Re
Baronga Nominees
Pty. Ltd. (In
Lig)
{1983)
8
A.C.L.R.
265
at
273.
I
have
indicated that the continuance of the provision of
trucks
by A.P.A.
to the
company was an
essential
component
in the
ability of the
company
to continue with
its
extensive projects.
-- 87 of 98 --
84
I have already indicated that I accept Mr. O'Donnell's evidence
that A.P.A. was a leader in the industry and that if it ceased
working for the company word would have quickly spread and it
would have been very hard if not impossible for the company to
get trucks. The consequences if such had occurred, have already
been referred to.
In my opinion, sufficient has been demonstrated to warrant
a departure from the principle that the purpose of the
liquidation is to divide the assets rateably amongst the
creditors. The payments in question could at the time they were
made, and without the benefit of hindsight, reasonably be
perceived as offering some advantage or potential advantage to
the company and its general body of creditors. The payments were
related "to the need to continue business, and to earn income or
save loss during dependency of the petition" . As Mahoney J.
pointed out in Tellsa Furniture Pty. Ltd. (In Lig) v. Glendave
Nominees Pty. Ltd. (supra) at 257, "it will, in general, see the
continuation of the company's business as, in the proper case,
for their benefit."
I do not regard the submission that the progress payments
received by the company during this period enabled the company
to make extensive void payments as being persuasive. The company
was proceeding to carry on its business during this period. Many
creditors of the company received payments. If all or any of the
payments referred to are void payments, they can of course be
pursued by the liquidator and ordered to be repaid into the fund
unless the payees in question succeed in an application for their
-- 88 of 98 --
85
validation.
If
validated,
the
creditors
involved received the
benefit
of the
payments.
As
to
the
submission
that
there
was
no
demonstrated
benefit
to the
company
because
it
was
not
shown
that
the
company's
position
had
actually
improved
financially
during the period
since
13th
April
1987,
reliance
was
placed
upon
the
evidence
by
Mr.
Knight
who
had
not
been
requested
to
do
a
detailed
analysis
of the
financial position of the
company
after
March
1987, and
who
had
never
been
asked
to
express
an
opinion
until
he gave
evidence
in court.
Of
significance
is
his
evidence
at
127
of
the
transcript
as follows:
"Having
regard
to
all
the
work you
did
and
the figures
that
you
prepared,
are
you
able
to
form
an
opinionabout whether
or
not the
company
benefited
from
trading
between
13
April
1987
and
23
June 1987?--There
is
no
evidence
that
I
have
seen,
or that
I
have
tried
to calculate, or that
I
have
sought
that
would
say
it
has
benefited.
On
the
other
hand,
I
also
have
to
say
that
the
state
of
affairs
or the reports to
the
affairs
were
prepared
on
a
basis of the
company
being
in default,
being
in liquidation,
having ceased
to
trade.
So
it
is
a
difficult
comparison
to
make.
I
haven't
seen
any
evidence
one
way
or the other.
You
might
say
that
the position
has
deteriorated,
but the
reports to
affairs is
prepared
on
a
different basis,
although,
I
think
you
can
make
the conclusion
that
because
it
has gone from
-
sorry,
because
the
deficit
has
gone from
$3,215,017
at
the
end
of
March
to
$7,785,941
.
At
the
day
of
winding
up
there
was
a
further deterioration.
Accepting
that
the
company was
insolvent in
November
was
there
any
prospect of the figures
you have seenimproving
its
position?--
Well,
the only figures that
we
have
calculated in detail
are to the
end
of
March
and
we
were
using the reports to
affairs to
give
us
a
look
at
the position
beyond
that
time.
It is
possible
that there
may
have been
a
marginal improvement
in
one
month,
but
I
can't
say
that for certain that
it
is
or
that
it
has not been
the case."
Mr.
Knight's
main
difficulty
was
that the statement of
affairs
by
the directors
was
prepared on
the basis of the
company
-- 89 of 98 --
86
being
in default,
being
in liquidation,
and
having ceased
to
trade.
Mr.
Knight
relied
upon
this
statement of
affairs
insofar
as
it
gave
some
picture
as
at
the date of
the
winding-up. This
made
the
comparison
difficult
if
not impossible.
Also
it
appears
that
the
statement
of
affairs
may
not
have been based
upon
accounting
records of the
company.
But
apart
from
that
possibility,
the
endorsement
at
the
bottom
of
ex.
26
highlights
the
difficulty
in
comparing
the
position
over
this
period.
On
liquidation,
a
substantial
lease
liability
was
crystallised
and
current projects
were
determined.
Mr.
Knight
was
previously
asked about
what
the
position
would
have been
on
23rd June
1987,
if
the
assets of the
company
had
included the
work
in
progress
at
the valuation of
$2,432,000
referred to in
ex.
25
rather
than
at
the estimated
realisable
value
of
$25,000
(ex.
25,
26) shown
as
retentions.
This reduced
the deficiency
at
23rd June
1987
from
$10,192,941
to
$7,785,941,
hence
his
statement as
to the
further deterioration
from
the
figure of
$3,215,017
at
31st
March
1987.
This statement
was
not
expressed with confidence.
·
However,
of significance
is
the further fact that
he
was
not
asked
to also explain the
effect of the
immediate
crystallising
of
all
future lease charges,
which
was
caused
by
the
winding-up
and which
resulted in
an immediate and
substantial lease
liability,
as the annotation to his
document, ex.
26,
demonstrates. Probably the
immediate debt
which
then
crystallised is in the
sum
of $4,897,756 (ex. 26).
If this is
so, and
apart
from
the winding-up, the deficiency at
23rd June
1987 should probably be further reduced from $7, 785, 941
to
-- 90 of 98 --
87
$2,
888, 185.
This
deficiency
is
less
than
the deficiency of
$3,215,017
as
at
31st
March 1987
and,
on
the
basis
contended
for
on
behalf of
the
liquidator,
involves
an
improvement
in fact,
or
at least
some
arrest
in
the decline
which
counsel
for
the
liquidator
submitted as
having
to
be
established
by
A.P.A.
in
order
to
succeed
in obtaining
a
validation order.
Mr.
Starkey's
general
statement
in
para.
8(ii)
of
his
affidavit filed
13th
March
1988,
that
the
financial position of the
company
did
not
improve between
April
1987
and
the date
of the
winding-up
order,
does
not,
in
the
light
of
his reliance
on
the statement
of
affairs
(para.
8(i) of his
affidavit),
take the matter
much
further.
He
delegated the
work
to
a Mr.
Christy
who
did not give
evidence
and
to
Mr.
Hellen, although
he
was
not
cross-examined
on
that
statement
in his affidavit.
Mr.
Starkey did not
say
that
the
financial position declined.
Care must be
taken
also
not
to
overlook the
fact that assets
disposed
of
after
the
winding-up
order
were
disposed
of
on
a
liquidation basis.
But even
if
the evidence
by
Mr.
Knight
indicated
that
there
was
subsequently
shown
to
be
a
further overall financial
deterioration in
the
affairs
of the
company
between
13th April
1987
and 23rd June 1987,
(or
perhaps
to
put
it
correctly that
A.P.A. had
not discharged the
onus
of
showing an improvement),
I
do
not see
how a
decline
is
determinative of the question of
whether
or not there
was,
at
the
time each
of the
payments were
made,
a
potential
and
counter-veiling benefit to the
company and
to the creditors
by
the
company
continuing to carry
on
its
business during that period
and
receiving large
sums by way
of
progress payments which otherwise
would
not have been received.
-- 91 of 98 --
88
I
find
that
there
was
a
counter-veiling benefit to
the
company
and
to
the general
body
of
creditors
by
the continuation
of the
company's
business
and
by
the
receipt
of
substantial
progress
payments
made
possible largely
as
a
result
of
continued
provision of trucks
by
A.P.A.
Even
if
it
had been
later
shown
that
the overall financial position
of the
company
deteriorated
in the relevant period, the
rate
of
decline
must have
been
substantially
diminished
by
the
injection of
this
large
amount
of
funds.
The company
clearly
earned
income
during the relevant
period
and
in
my
view
reduced
ultimate
losses to
a
considerable
extent.
This
clearly
is
a
benefit to
the
company
and
to the
general
body
of
creditors.
The
total
sum
of
$41,602.13
paid
to
A.P.A.
during
this
period represents
from
a
commercial
point of
view,
a
relatively insignificant benefit to
A.P.A.
whilst
at
the
same
time producing
a
potentially substantial benefit to
the
company
and
to the
creditors
generally.
I
should
add
that
even
if
the question of
whether
the
company's
ultimate financial position or asset position actually
improved
or declined over the relevant period
is
the correct
test
on
the question of benefit or potential benefit to
the
company
and
the creditors
flowing
from
the
two
payments
to
A.P.A.,
any
such change cannot be gauged simply by
balancing
total
cash
receipts
during the period against
total
cash payouts during
that
period.
During evidence
by Mr.
Hell en, counsel for the
liquidator
appeared
to raise this
as
a
factor, but thereafter did
not appear to press this aspect. Vasta
J
in
Re
Allan Fitzgerald
Pty. Ltd. (In Lig) (supra)
at
506, when
dealing with the question
of whether the assets of the
company were
substantially increased
-- 92 of 98 --
89
during
the
relevant
period,
said
that
the contrary
was
indicated
because
sums
which were
paid out
exceeded
receipts.
However,
His
Honour
was
simply
dealing
with
the
submission
that
the
trial
Judge had
exercised
his discretion
upon
conclusions
which
had
not
been
supported
by
the
evidence.
Matthews
J.
in
this
respect
agreed with
the
reasons given
by
Kelly
A.
C.
J.
(50
1 ) .
All
members
of the court
then
proceeded
to exercise the
discretion
de novo,
with
Matthews
J. at
501
and
Vasta
J. at
508
in
effect
holding
that
what
was
of
critical
importance
was
the
fact that
the
payments were
made
outside
the ordinary course
of
business
and
that
the
respondent could not
be
said to
have
acted
with
good
faith.
An
ultimate
change
in
the
financial position of
a
company
or
a
change
in
its
assets,
must
depend on numerous
factors
such
as
the
source
and
disposition
of the
funds,
and
the
movement
of
all
assets
and
liabilities
in general.
It
cannot
be
determined
simply
by
a
comparison
of
cash
receipts
versus
cash
payments.
Mr.
Knight
in his
ex.
26,
did not purport
to
simply
compare
cash
receipts
with cash payments.
Even
though
the
second page
of
that
documents
refers to
"cash
deficiency",
it
is
clear
from
that
page
and
also the
first
page
of
ex.
26
that
Mr.
Knight
was
attempting
to
determine the actual deficiency of
total
assets
when
compared
with
total liabilities
for the period
up
to 31st
March
1987.
For
the period
up
to
23rd June
1987, he
relied
on
the statement of
affairs.
The
foregoing in
no
way
detracts
from
the finding above,
that the
payments
to
A.P.A.
directly
enabled
a
continuation of
the company's business
and
the injection of
a
considerable
amount
of funds which would otherwise have been
lost, thus providing an
-- 93 of 98 --
90
actual or potential benefit to the company and to the creditors.
Ultimate losses were reduced and creditors might have the
prospect of receiving some dividend or perhaps a greater dividend
than would otherwise have been the case.
Some of the authorities refer to the presence or absence of
a belief in the creditor that at the time of the payments under
attack, receipt by the debtor of progress payments or the
continuation of its business was likely to enable the debtor to
pay its outstanding debts. Some reference has also been made to
the question of whether or not the creditor was motivated by the
consideration that it was in the interests of the creditors for
the company to continue working. Such considerations can be of
considerable importance in a particular case. See for example
Re Allan Fitzgerald Pty. Ltd. (In Lig) (supra) (Full Court), and
particularly in the judgment of Vasta J. Such considerations
would doubtless have been important as going to the question of
good faith in a case where the creditor knew of the financial
predicament of the debtor over a long period and was pressing for
payment of long outstanding debts under various threats.
There is no direct evidence in this case that A.P.A. had any
such belief or was motivated by the consideration referred to.
However, any such belief or motivation is not relevant on the
facts of this case. This is so simply because Mr. O'Donnell at
no time prior to about the time of appointment of the provisional
liquidator, knew or had any reason to suspect that the company
was unable to pay its debts as they fell due, or that any
payments to A.P.A. would be preferential. Unlike the situation
confronting the Full Court in Re Allan Fitzgerald Pty. Ltd. (In
-- 94 of 98 --
91
ligl
(supra)
,
Mr.
0 1
Donnell
had
no knowledge
of the
actual
financial
affairs
of the
company
or
of
its
relationship
with
other
creditors.
A.P.A.
merely
continued
to
supply
trucks
over
the period
in
question
right
to
the
very
end
in return for
payments
from
time
to
time,
as
it
had
done
throughout
its
previous
dealings
with
the
company.
I
have
not
overlooked
the
evidence
of hardship. In
my
opinion,
A.P.A.
has
not
established relevant
hardship. In
any
event, as
indicated
above,
this
is
not
a
relevant consideration.
For
all
of the
above
reasons,
I am
clearly
of the
view
that
there
should
be an
order
on
A.
P.A.
1 s
application
filed
13th
April
1988
that
each
of these
two
payments
should
be
validated.
INTEREST
The
question
is
whether
interest
should
be
awarded and
if
so
at
what
rate
and
for
what
period
with
respect to the
preference of
$38,837.59.
The
application
was
filed
on
13th
March 1988 by
the
liquidator
which
is
now
five
years
ago.
Counsel
for
the
liquidator
submitted
that
a
rate
of
12
per
cent per
annum was
appropriate
and
that
because
A.P.A.
has
had
use
of the
money
since
late
1986,
interest
should
be awarded from
the date of the
demand
on
2nd
February
1988.
It
was
submitted
by
counsel for
A.P.A.
that
by
reason of the long delay
in the
prosecution of the claim,
interest
should not
be awarded
at all.
He
conceded
that
it
was a
matter for the discretion of the
court~
There has been very lengthy delay in the prosecution of this
particular application.
Mr.
Starkey said that there
were
many
applications involving the
company and
that
they had decided to
proceed on some
only.
One
matter involved an appeal to the Full
-- 95 of 98 --
92
Court (16th December 1988) and the refusal of special leave to
the High Court on 12th May 1989. This accounts for only part of
the delay.
Whilst the discretion is at large, some of the matters which
it is appropriate to take into account are referred to in the
judgment of Thomas J. (with whom Kneipp J. and Derrington J.
agreed) in Serisier Investments Pty. Ltd. v. English [1989] 1
Qd.R. 678. His Honour said at 679:
"There are sometimes circumstances in which it would
be unfair to order a defendant to pay interest over
the whole period. This includes the situation where
the defendant is unaware of the existence of any claim
or liability and would have ordered his affairs
differently had he been advised of it, or where a
defendant may have offered amends at an earlier date
had the claim been made. A far more common case in
which interest is not allowed from the date of the
loss is where the plaintiff has been guilty of
unreasonable delay in prosecuting the claim. The
public policy of having claims brought and determined
promptly seems to underlie this approach. Goff J.
thought that 'this may be to encourage plaintiffs to
prosecute their claims with diligence, and also
because such conduct may lull a defendant into a false
sense of security, leading him to think that the claim
will not be pursued against him' (B. P. Exploration
(Libya) Co. Ltd. v. Hunt (No. 2) at 847). These
examples are however exceptions to the normal position
that in order to remove the advantage that the
wrongdoer has had from money that ought to have been
in the pocket of the plaintiff interest is awarded
from the date of loss."
The date of the "loss" as determined by subsequent events,
appears to be the date of commencement of the winding-up on
13th April 1987: Re Mike Electric (Aust) Pty. Ltd. (In Lig)
[1984] 71 F.L.R. 117, as applied by Ryan J. in Re Toowong Trading
Pty. Ltd. (in Lig) [1989] 1 Qd.R. 207, and again in Re Allan
Fitzgerald Pty. Ltd. (In Lig) and National Westminster Finance
Australia Limited on 29th September 1992. In Spedley Securities
Ltd. (In Lig) v. Western United Ltd. (In Lig) (1991-2) 7
-- 96 of 98 --
93
A.C.S.R.
721,
interest
was
awarded from
the date of
the
demand
which
is
the date
sought
to
be
adopted
by
counsel
for
the
liquidator in
the present
application.
McLelland
J.
said
that
there
could
be
no
cause
of action
until
a
liquidator
was
appointed.
Some
general explanation
was
given
to
explain
the delay but
none
of
those matters are
in
any
way
the
fault
of
A.P.A.
On
the
other
hand, A.P.A. had
notice of the claim
since
2nd
February
1988.
There
is
no
evidence
of
what
might have
occurred
if
anything
between A.P.A. and
the
liquidators
since
that
date.
There
is
also the question of A.P.A.'s application
filed
13th
April
1988
(i.e.
one
month
after
the
liquidator's
application).
It
was
not
proceeded
with
and
no
explanations
were advanced
as
to
why
it
did not
proceed
earlier.
From
the findings
in
this
case,
it
cannot
be
said that
the
claim
by
the
liquidator
and
the
claim
by
A.P.A.
were
readily
capable
of resolution.
I
was
informed
throughout the hearing
that
some
attempts
had been
made
to
settle
the matter without
success.
There
is
no
evidence as
to delays
in
the progress of
the
liquidation since the
winding-up
order
was made.
It
seems
to
me
that in the circumstances
of the case,
it
would be
fair
to
both
parties
if
interest
was
awarded
for
a
period of three years
at
12
per cent. This gives
a
figure of
$13,982 which
should be included in the order.
ORDERS
1.
On
the application filed
13th
March 1988 by
the liquidator,
there is
a
declaration that
by
reason of
payments
made by
the
company
to
A. P.A. during the period between
-- 97 of 98 --
94
17th
November
1986
and
13th
April
1987,
there
is
a
preference
in
the
sum
of
$38,837.59
and
this
sum
is
void as
against
the
applicant/liquidator.
I
order
that
A.P.A.
forthwith
pay
to
the
liquidator,
the
sum
of
$38,837.59
plus
interest
in
the
sum
of
$13,982,
totalling
$52,819.12.
The
application
is
otherwise dismissed.
2.
On
the
application
filed
by
A.P.A. on
13th
April
1988,
I
order
that
payments by
the
company
to
A.P.A.
of
$12,124 on
15th
April
1987
and
of
$29,478.13
on
21st
May
1987
totalling
$41,602.13 be
validated.
I
will
now
hear
submissions
as
to costs.
-- 98 of 98 --
Official source: https://www.sclqld.org.au/caselaw/QSC/1993/077