E & M (Qld) Pty Ltd, Re; Re Beta Bord Distributors Pty Ltd [1991] QSC 363

IN THE SUPREME COURT OF QUEENSLAND Application No. 136 of 1989 Before Mr. Justice Ambrose AND: IN THE MATTER of the Companies (Queensland) Code IN THE MATTER E. & M. (OLD) PTY. LTD. (in liquidation) IN THE MATTER of an application by the liquida tars of E. & M. (OLD) PTY. 1 LTD. ( in liquidation)against BETA BORD DISTRIBUTORS PTY. LTD. pursuant to s. 451 of the Companies (Qld) Code. REASONS FOR JUDGMENT - B.W. AMBROSE J. Delivered the 17th day of December 1991 Counsel Solicitors Hearing date Mr. D. Smith for the Applicant Mr. J. Bond for the Respondent Messrs Halletts for the Applicant Messrs Philips Fox for the Respondent 20th November 1991 //' V -- 1 of 15 -- IN THE SUPREME COURT OF QUEENSLAND AND: Application No. 136 of 1989 IN THE MATTER of the Companies(Queensland) Code IN THE MATTER E. & M. (OLD) PTY. LTD. (in liquidation) IN THE MATTER of an application by the liquidators of E. & M. (OLD) PTY. LTD. (in liquidation) against BETA BORD DISTRIBUTORS PTY. LTD. pursuant to s. 451 of the Companies (Qld) Code. REASONS FOR JUDGMENT - B.W. AMBROSE J. Delivered the 17th day of December 1991 This is an application by liquidators of E. & M. (Qld) Pty. Ltd. (in liquidation) for a declaration that 11 payments made by the company in liquidation ( "the company") to the respondent company, were preferential payments and therefore void as against the applicant liquidators pursuant to s. 451 of the Companies (Queensland) Code applying the provisions of s. 122 of the Bankruptcy Act. The company was wound up by order made on 17th May 1989 upon an application filed on 11th April 1989. Under s. 451(1) of the Companies (Queensland) Code a payment made by the company which, if it had been made by a natural person would in the event of that person becoming bankrupt be -- 2 of 15 -- 2 void against the trustee in bankruptcy, is void against the liquidator of that company. Under s. 122(1) of the Bankruptcy Act, a payment by a person who at that time is unable to pay his debts as they become due from his own money in favour of a creditor which has the effect of giving that creditor a preference, priority or advantage over other creditors which is made within six months before the presentation of a petition upon which that person is made bankrupt is void against the trustee in bankruptcy. An exception against this general provision ins. 122(1) is to be found ins. 122(2) which provides that nothing ins. 122(1) affects the rights of a payee to money received in good faith and for valuable consideration and in the ordinary course of business. Under s. 122(3) the burden is upon the payee claiming to have the benefit of s. 122(2) to prove that he is within the exception to the general rule. Under s. 122(4)(c) it is provided that a creditor shall be deemed not to be a payee in good faith if the payment in issue was made under such circumstances as to lead to the inference that the creditor knew or had reason to suspect - (a) that the debtor was unable to pay his debts as they became due from his own money, and (b) that the effect of the payment would be to give that creditor a preference, priority or advantage over other creditors. Under s. 451 of the Companies (Queensland) Code, the provisions of s. 122 of the Bankruptcy Act are applied as if the I, -- 3 of 15 -- '' -: 3 filing of an application to wind up the company is the equivalent of the filing of a bankruptcy petition. I accept the evidence of Mr. Shaw that through the entire period from 30th September 1988 to 28th February 1989, the company was grossly insolvent and quite unable to meet its debts as and when they fell due. During this period the current assets of the company available to discharge its liabilities were only sufficient to pay 27 cents in each dollar of those liabilities. During the whole of the period in issue - that is the period of six months immediately preceding the making of the application to wind up the company, it is plain upon the whole of the evidence to my mind that the company was currently unable to meet its financial obligations to the respondent. It is equally clear in my mind in spite of the protestations to the contrary of Mr. Swane, that the director of the respondent at the material time, was clearly aware that the company could not meet its contractual obligations to pay the respondent for building supplies which were provided to the company to enable it to conduct its business of house building. It is clear that even before the commencement of the relevant period, and certainly during the first couple of months of that period, the company was months behind the terms of credit made available to it by the respondent and the respondent constantly and regularly requested the company to meet the credit terms which it enjoyed that is paying moneys owing for the supply of materi~l~within 45 days of those moneys falling due. I am satisfied then on the material that during the whole of the six month period in question, the company was quite unable -- 4 of 15 -- 4 to pay its debts as they became due from its own money. I am further satisfied on the evidence that if those payments did have the effect of giving the respondent a preference, priority or advantage over other of the company's creditors, then by virtue of s. 122(4)(c) the respondent could not be deemed to be a payee in good faith because of the circumstances of the payments. The constant efforts made to procure payment from the company seem only to have been successful to the extent necessary to procure a continued supply of building material from the respondent essential to enable the company to complete its house building contracts and presumably thereby to receive the contract prices to which it then became entitled. It must have been clear to the respondent that by the time the stage of construction of a dwelling house had been reached which involved the installation of plaster board inside it, that the building contract for that house was nearing completion. The burden of proving that the respondent received the payments in issue from the company in good faith and for valuable consideration and in the ordinary course of business, of course, is upon the respondent. It appears fairly clear from the affidavit of Mr. Fremantle who was employed by the company as its accountant from 20th December 1988 until the winding up order was made, that during nearly the whole of that time he received telephone calls from Mr. Swane demanding payment of overdue accounts. Indeed, in January 1989 Mr. Swane was seeking payment for moneys owing in respect of materials supplied in September and October 1988 in the sum of $16,39.28. At that stage, Mr. Swane informed Mr. Fremantle that the respondent would give -- 5 of 15 -- 5 no further credit to the company unless the moneys due for goods supplied in September and October 1988 were paid. In fact this sum was paid by cheque on 16th January 1989, however the respondent refused to reinstate the credit of the company until a further sum of $14,503.48 was paid in respect of goods provided or supplied in November 1988. The company in fact did pay the sum demanded on 23rd January 1989. Upon receipt of this sum towards the end of January 1989 the respondent again commenced to supply goods on credit to the company. However the company failed to make further payments and on 28th February 1989 Mr. Swane contacted Mr. Fremantle and advised that the company was again not paying for the goods supplied within the terms of credit agreed. Mr. Fremantle explained that "cash was very tight and the company would do what it could to reduce the debt by instalments". Thereupon Mr. Swane demanded that the company enter into an arrangement for the regular payment of moneys outstanding for December - $23,231 and for January - $13,263. Mr. Fremantle advised that the company could not pay that money immediately and it was then agreed between Mr. Fremantle and Mr. Swane that the company would pay $6,000 on the Friday of each week to reduce the outstanding indebtedness. Upon this undertaking Mr. Swane agreed that the respondent would reinstate the credit terms given to the company and would not take proceedings against it for recovery of moneys owing. Thereafter various sums were paid from time to time not only to cover the cost of goods supplied on current account but also to meet the obligation to pay $6,000 per week as agreed. Pursuant to this agreement reached at the end of February 1989 -- 6 of 15 -- 6 the following payments were made by the company to the respondent - On 2nd March 1989 - $5,587.15. This sum related to payment for specific invoices in the December 1988 account. On 10th March 1989 a cheque for $6,000 was paid. On 17th March 1989 a cheque for $7,859.35 was paid by the company which included the sum of $6,000 agreed to be paid on 28th February 1989. Whatever may have been the position with respect to payments made by the company in the months of October and November 1988, I am persuaded on the balance of probabilities that the payments made subsequent to Mr. Fremantle becoming the accountant for the company on 20th December 1988 as the result of discussions between him and Mr. Swane, and keeping in mind the nature of the payments actually made thereafter, the respondent from that time at least did have reason to suspect that the company was unable to pay its debts as they became due from its own money and that payments received by the respondent would give it a priority or advance over other creditors. With respect to the six payments made by the company to the respondent prior to Mr. Fremantle becoming the company's accountant, it is clear that all six payments (enumerated in para. 5 of the affidavit of Mr. Fremantle) were paid roughly within the terms of the credit available from the respondent to the company. At least that seems to be the position if the 45 day period of credit extended to the company commenced to run at the end of the month in which the materials had been supplied. Mr. Swane who at material times conducted the business of the respondent refers to the credit history of the company -- 7 of 15 -- '' .. 7 available to the respondent at least from the time he commenced to conduct business for the respondent on 7th December 1987. He gave evidence that he had been dealing with the company in the building business for about 10 years prior to his commencing to conduct business for the respondent and believed that the company was not really a credit risk and would generally attempt to pay the accounts within 45 days but that if there were any delay there was no need to worry because payment would ultimately be made. I have considered the evidence given by Mr. Fremantle in paras. 9, 10 and 11 of his affidavit and that of Mr. Swane in paras. 14, 15, 16 and 17 of his affidavit. I am persuaded that on the balance of probabilities the discussions and dealings between the respondent and the company reflected in the paragraphs of those affidavits to which I have referred, lead to the inference that the respondent did have reason to suspect the company was unable to pay the debts it owed to the respondent and to other creditors as they became due from its own money. Mr. Swane says that the company's payment pattern was "irregular". He said in para. 9 - "9. Payment was not made at 45 days however I continued to supply upon receipt of partial payments of invoices. From time to time it was necessary to stop supply pending receipt of payment for overdue accounts until receipt of some payment. 10. I continually requested payment of outstanding invoices. Further it was my style of business to keep in regular personal contact with the creditors of Beta Bord (debtors?) to press them for payment or regular periodic payment." -- 8 of 15 -- 8 Mr. Swane went to state that the "usual pattern" was that after being chased the company would pay and then a supply of further materials would be resumed. He said - "I was anxious to maintain the trading relationship with E. & M. and accordingly continued supply even though only part payment of earlier invoices was made. This ensured that E. & M. was able to finish a job, receive payment and then pay Beta Bord. Conducting trading accounts in this way was in my experience fairly usual in the building industry." The inference that I draw from this evidence is that the respondent traded with the company on the assumption that it may well not have been able to pay the debts it owed to the respondent or for that matter to other creditors as they became due from its own moneys but would often only be in a position to pay those debts if and when it received payments in respect of contracts it had either completed or was in the course of completing. In my view, if this was the basis upon which the respondent conducted its business with the company it seems clear that almost invariably the payments received by the respondent from the company were received in circumstances which led to the almost inescapable conclusion that at the time that payment was received certainly the company was unable to pay other debts which it then owed to the respondent - in respect of materials supplied for jobs that the company had not been able "to finish". Inferentially, the company would not have been able to pay other creditors who had provided materials used in the construction of dwelling houses not yet completed and therefore in respect of which the company had not been paid: such payments were necessary before that company could pay for the building supplies used in the houses in questions. ', ~ ' -- 9 of 15 -- 9 Mr. Swane says in. para. 11 of his affidavit - "Conducting trading accounts in this way was in my experience fairly usual in the building industry." If that be correct, it is my view that at least those persons with whom Mr. Swane had experience in the building industry, woulq almost invariably receive payment from persons they had supplied with materials, at a time long after the contractors became indebted to their suppliers; and the contractors would be unable to pay for goods supplied for which they were legally indebted to a supplier where those goods had been used to construct buildings for which the contractor had not yet received payment. One can only observe that if such a practice did exist in the building industry, it would very often be the case that a supplier of building materials would almost inevitably not receive payment for goods supplied until long after the time of supply and with full knowledge that the building contractor, if still in business, would then almost certainly owe money for materials supplied for other building contracts for which he was then unable to pay and for which he would be able to pay only if and when he received the payments to which he became entitled under those contracts for which such material had already been used. In this regard I adopt with respect the observations of Ryan J. in Re Toowong Trading Pty. Ltd. (in liq) [1989] 1 Qd. R. 207 at p. 211 where considering remarks by Menhennitt J. in Calzaturificio Zenith Pty. Ltd. (in liq); The N.S.W. Leather and Trading Company Pty. Ltd. [1970] V.R. 605 at pp. 608-609 His Honour remarked - -- 10 of 15 -- 10 "This seems to me with respect to go beyond anythingsaid in Sandill v. Porter 1966 115 C.L.R. 666 or in Bank of Australasia v. Hall (1907) 4 C.L.R. 1514 andnot to be warranted by the terms of s. 122(1) of the Bankruptcy Act 1966 (C'th) which makes the relevant inquiry one as to when a persons debts become due andnot one as to when they become payable under some credit arrangement." It is quite unnecessary for me in this case to consider what was "fairly usual in the building industry" with respect to receipt of payments by building suppliers from building contractors. However as far as the respondent company is concerned Mr. Swane makes it clear beyond argument that that company at least during the time he was controlling it - and that involves the whole period of time in question here - certainly received payments from the company for building materials it supplied to it long after the date of supply and was prepared to supply further goods on credit with full knowledge that the company could not make payment for those goods when payment was due but would only be able to make payment for them if and when it received moneys to which it was entitled under the building contracts in respect of which the materials supplied by the respondent had been used. In my view this arrangement to which Mr. Swane deposes leads to the almost irresistible conclusion that at the date when each of the 11 payments were received by the respondent from the company, the respondent was aware that the company then owed money to other creditors (as well as to the respondent) which it was then unable to pay and which it would only become able to pay if and when it received payments to which it was entitled from persons whose legal obligation to make I ~ I payment to the company was dependent generally upon com~~~tion ""'~~ - of the contract in which the building materials had been used. ) l -- 11 of 15 -- 1 1 That such was the basis of the trading between the company and respondent seems to be borne out by the fact that months went by between payment becoming due for materials delivered and payment being offered in respect of those materials. In the circumstances of this case, I infer that the respondent knew or at the very least had every reason to suspect at the time it received each of the payments referred to in para. 5 of the affidavit of Mr. Fremantle that the company was then unable to pay all its debts as they became due from its own money. In the light of the conclusion to which I have come as to the application of s. 122(4)(c)(i) and s. 122(2)(a), the respondent is unable to bring itself within the exception to the general rule to be found ins. 122(1) of the Bankruptcy Act. It follows in my view that the only real issue for consideration in the case is whether the payments to which I have referred or at least some of them in favour of the respondent had the effect of giving the respondent a preference, priority or advantage over other creditors. It is clear that at the time each of the payments was made to the respondent, the company was then unable to pay its debts as they became due from its own money resources. Whether in fact those payments preferred the respondent depends upon the nature of the trading relationship between the company and the respondent. There seems to be little doubt that generally speaking the payments effected, or at least some of them, were simply part of a wider trading transaction if indeed not payments made in connection with "a running account". In this respect I refer to the observations of Gibbs J. in Re Weiss -- 12 of 15 -- 12 ex parte White v. John Vicars & Co. (1970) A.L.R. 654 at pp. 659-660. Adopting what Barwick C.J. had said in Queensland Bacon Pty. Ltd. v. Rees (1966) .115 C.L.R. 266 at pp. 283 and 286 on the facts of that case that - "Each was a payment on account of a 'running' indebtedness, the payment not in any way intended or understood to end the relationship of the debtor and creditor but rather to ensure its 'continuance' and that 'implicit' in the circumstances 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 therelation of debtor and creditor in the running account." His Honour observed - "That payments were made to reduce a past indebtedness but they were made on the clear assumption that further supplies of cloth would be delivered in the future on credit in accordance with the arrangements on which the running account was operated. Of coursethere· was no express agreement that cloth would be supplied provided that payments were made and withheld if payments ceased but it is quite clear that both parties contemplated that further deliveries would be made if the payments were made and it is a proper inference that they understood that although the respondent was not insisting on prompt payment in strict accordance with the agreed terms of credit as a condition precedent to delivery, the continuance of some payments was necessary to ensure further delivery." His Honour then considered the facts of the case and said at p. 660 - "Moreover the parties must have assumed when each of these payments was made that the value of the goods to be supplied on and after the date of each payment would exceed the amount of the payment and this was in fact the case. On any view the question whether any of these payments was preferential in effect can only be determined by looking at the net effect of the series of payments and deliveries on the running account and when this is done it is clearly seen that none of these payments had the ef feet of giving a preference to the respondent." -- 13 of 15 -- 13 His Honour then considered further payments and said at p. 660 - "In other words when the three final payments each of £2,500 were made, the parties contemplated that the payments to the credit of the account would greatly exceed the deliveries and that the debit balance on the account would be substantially reduced. It is true that the parties contemplated some further deliveries on the account but these were to be insignificant in comparison with the value of the goods supplied until after an interval of a few months deliveries were again resumed." At p. 661 His Honour continued - "In my opinion these payments also cannot be considered in isolation and it is the net effect of the operations from the first impugned payment to the date of the bankruptcy that determines the fact and the extent of preference." Stated shortly on the facts of this case it is my view that to the extent that payments made by the company to the respondent between 11th October 1988 and 11th April 1989 exceed the value of the goods supplied by the respondent to the company in that period, the amount of that excess was a preferential payment by the company to the respondent and is recoverable by the applicants. Unfortunately, evidence led as to the value of the goods supplied by the respondent to the company in this period is incomplete. There is a good deal of material in the form of invoices, statements of account, etc. , which has been placed before me but unfortunately the only matters that seem to be fully extracted from it are the cheque payments actually made by the appellant to the respondent. There is something in the nature of a running account but unfortunately no total has been made of the amounts contained in the various invoices placed -- 14 of 15 -- 14 before me, and I infer contained in invoices not placed before me. Careful examination of the statements etc, placed before me fails to reveal the value of goods delivered by the respondent to the company on and subsequent to 11th October 1988. There is an entry in one of the statements (No. 0689) that the October purchases amounted to $31,191.74. However I have been unable to discover any record of the value of the purchases made between 11th October 1988 and 31st October 1988. At this stage therefore I am unable to do more than make the following declaration - Declare that the excess if any of the total of the amounts of money ref erred to in para. 5 of the affidavit of Spencer Harry Fremantle filed herein on 17th September 1991 over and above the invoice values for all materials supplied by the respondent to the company from and including 11th October 1988 to 11th April 1989 is a preferential payment by the company to the respondent and is void as against the applicant liquidators pursuant to the provisions of s. 451 of the Companies (Queensland) Code. I am prepared to postpone making any further declaration or order to enable the parties to consider what if any further evidence should be led upon the application as to the value of materials supplied by the respondent to the company in the period 11 th October 1988 to 11 th April 1989 and what if any further orders should be made. \ J -- 15 of 15 --