Anthony Milton Sims v ABC Tissue Products Pty Ltd

CATCHWORDS : CORPORATIONS - Insolvency - Liquidator plaintiff seeks order under s 588FF(1) of the Corporations Act 2001 (Cth) ("the Act") to recover unfair preference payment made to defendant - Defence in s 588FG(2) of the Act raised - Failure to call persons with relevant opinions to prove insolvency not suspected by defendant- No explanation proffered for failure - Requirements of statutory defence not met

Airservices Australia v Ferrier (1996) 185 CLR 483 Mann v Sangria Pty Ltd (2001) 38 ACSR 307 CASES CITED : Cook's Construction Pty Ltd v Brown (2004) 49 ACSR 62 Dean-Willcocks v Commissioner of Taxation (2004) 51 ACSR 353 Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563

Anthony Milton Sims PARTIES : Smartpak Australia Pty Ltd (in Liquidation) ACN 062 589 093 ABC Tissues Products Pty Ltd ACN 003 085 112

COUNSEL : S. Golledge (Plaintiffs) C.A. Evatt with M.K. Rollinson (Defendant)

SOLICITORS : Addisons (Plaintiffs) John Doolan Solicitors (Defendant)

• 14 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST

6011/2006 ANTHONY MILTON SIMS -V- ABC TISSUE PRODUCTS PTY LTD EX TEMPORE JUDGMENT 1 HIS HONOUR: Smartpak Australia Pty Ltd (in liquidation) (ACN 062 589 093), the second plaintiff ("the Company"), was placed under a winding up order by this Court on 20 February 2004 consequent upon an application filed on 4 December 2003.

2 The first plaintiff ("the liquidator") was appointed liquidator. 3 Luso-Affinity Pty Ltd is the sole shareholder of the Company and Luso-Affinity's shareholders included Ms Maria Isabel Pinto and Messrs Alfredo Gomes and Jose Manuel Gomes. Mr Jose Gomes was a director of the Company from 25 November 1993 to 8 June 2004. 4 At all material times the defendant, ABC Tissue Products Pty Ltd (ACN 003 085 112) ("ABC"), carried on the business of supplying paper and packaging products. It employs over 200 people. At all material times Mr Henry Kei Shing Ngai ("Mr Ngai") has been a director of ABC. Mr Chek Ming Ly became a director on 29 June 2005 and remains a director. Since 18 April 1986 Anna Lai Chang Ngai has been secretary. 5 From about 1994 until the Company's demise, ABC supplied it with paper and packaging products. The relationship was conducted by way of what is commonly referred to as a "running account".

6 During the period 4 June 2003 to 17 October 2003 the Company made payments to ABC of $2,349,352.41. Taking into account an adjustment arising from a recovery of stock by ABC pursuant to a retention of rights provision, during that period there was a net reduction in the debt owing by the Company to ABC of $290,502.86. That is, during that period the Company paid to ABC $290,502.86 more than the price of the goods supplied by ABC to it. 7 By further amended originating process dated 14 February 2008 the liquidator seeks an order under s 588FF(1) of the Corporations Act 2001 (Cth) ("the Act") that ABC pay to the Company the amount of $290,502.86 on the basis that the payments to ABC constitute a voidable transaction within the meaning of s 588FE(2) of the Act because it was an insolvent transaction within the meaning of s 588FC of the Act in that it is an unfair preference given by the Company within the meaning of s 588FA(1) of the Act. 8 It is not necessary to set out in extenso each of the above provisions given that, save to the very limited extent referred to below, no submissions were put on behalf of ABC with respect to their operation in, or application to, this case. 9 The relevant effect of those provisions is that, if at a time when the Company was insolvent, it and ABC were parties to a transaction which resulted in ABC receiving from the Company in respect of an unsecured debt owed by the Company to ABC more than ABC would receive in respect of the debt if the transaction were set aside and ABC were to prove for the debt in the winding up of the Company, the transaction is an "unfair preference" given by the Company to ABC. The Court may in that case order ABC to pay to the Company an amount equivalent to some or all of the money that the Company paid ABC under the transaction. 10 Section 588FA(3) of the Act provides that where a transaction is, for commercial purposes, an integral part of a continuing business relationship (for example, a running account) and in the course of the relationship the level of the company's net indebtedness to the creditor is increased and reduced from time to time as a result of a series of transactions forming part of the relationship, then all of those transactions are treated as one transaction and the transaction is only an unfair preference if, looked at as a whole, it satisfies the requirement of an unfair preference. 11 A running account is, as was described by the High Court in Airservices Australia v Ferrier (1996) 185 CLR 483 at 504 -505: "an active account running from day to day, as opposed to an account where further debits are not contemplated. The essential feature of a running account is that it predicates a continuing relationship of debtor and creditor with an expectation that further debits and credits will be recorded. Ordinarily, a payment, although often matching an earlier debit, is credit against the balance owing in the account. Thus, a running account is contrasted with an account where the expectation is that the next entry will be a credit entry that will close the account by recording the payment of the debt or by transferring the debt to the Bad or Doubtful Debt A/c." 12 In simple terms the approach that the enactments requires is that one looks at the cumulative effect of the transactions comprising the running account and only if as a whole the Company paid to ABC during the relevant period more than ABC would have received if the entirety of the transactions were set aside and ABC were to prove in the winding up of the Company, has there been an unfair preference. 13 The result of this is that on running account there will only be an unfair preference if during the relevant period ABC was paid more than the value of the goods it supplied during that period, that is only if there has been a net reduction in the amount of the debt during the period under consideration. This has sometimes been referred to as the "running account defence". 14 If a liquidator establishes the requisite elements for an order to be made under s 588FF(1) of the Act, then s 588FG(2), which is in the following terms, affords a defence: "A court is not to make under section 588FF an order materially prejudicing a right or interest of a person if the transaction is not an unfair loan to the company, or an unreasonable director-related transaction of the company, and it is proved that: (a) the person became a party to the transaction in good faith; and (b) at the time when the person became such a party: (i) the person had no reasonable grounds for suspecting that the company was insolvent at that time or would become insolvent as mentioned in paragraph 588FC(b); and (ii) a reasonable person in the person's circumstances would have had no such grounds for so suspecting; and (c) the person has provided valuable consideration under the transaction or has changed his, her or its position in reliance of the transaction." 15 The unchallenged evidence was (and it was not put in issue by ABC) that during the period 4 June 2003 to 17 October 2003: a the Company was at all times insolvent; b the Company and ABC operated a running account; c the Company and ABC had a continuing business relationship in the course of which the Company's net indebtedness to ABC increased and reduced from time to time as the result of a series of transactions forming part of their relationship; d the debt owed by the Company to ABC was unsecured; e the effect of their dealings on the running account (to be viewed as one transaction under s 588FA(3) of the Act) resulted in ABC receiving from the Company payment of more than it would receive if their dealings were set aside and ABC were to prove in the winding up; f the payments were made during the six months ending on the relation-back day, as defined in s 9 of the Act and referred to in s 588FE(2), being the period of six months before the date the winding up application was brought, namely 4 December 2003. The relevant period is thus from 4 June 2003 to 4 December 2003. 16 ABC put a submission that in this case: "the single transaction cannot be an unfair preference, since Smartpak's evident purpose in entering into and continuing with the running account was to induce ABC to maintain regular supply to it, and that is what ABC did. Each payment was the price of goods delivered, so Smartpak obtained the benefit equivalent to the value of each payment." 17 This submission was developed to the point where it distilled into the proposition that an arm's length contract involving purchase and sale cannot be an unfair preference because the creditor only gets what it is entitled to, namely the value of the goods sold and no more. 18 In support of this submission reliance was placed on the decision of Bryson J in Mann v Sangria Pty Ltd (2001) 38 ACSR 307. His Honour considered the meaning of the word "transaction" and came to the conclusion that s 588FA(1) was concerned only with a transaction in the course of which the person referred to becomes a creditor, and that it applied to conduct in a series of events which are separated in time and are of a kind which can be expected to recur. His Honour concluded that the section did not apply to the situation where (for example in a cash on delivery transaction) a person dealing with the company supplied value, became a creditor and received payment in a series of events so closely connected so as to be one transaction.

19 It was put that his Honour's conclusion was right but for the wrong reason. It was put that a cash on delivery transaction was a transaction for the purposes of the section because it resulted in the purchaser becoming a debtor to the seller but that his Honour's conclusion was right because there was no unfair preference in that all the seller received was the value of what he sold. This analysis, it was conceded, would not apply to a sale at an overvalue. 20 The analysis urged on the Court and the conclusion in which it results are unsustainable. 21 Mann v Sangria Pty Ltd (as appears from par [28]) did not concern a running account. 22 The notion of an unfair preference is not concerned with a party to a transaction receiving more under that transaction than he or she was entitled to receive from the other party. It is concerned with a party to a transaction receiving more under a transaction at a time when the payer was insolvent than he or she would have received if he or she had proved in the winding up. 23 If the submissions were correct no payment of any purchase price could ever be an unfair preference if it reflected the true value of the performance by the seller. This needs only to be stated to be rejected. 24 The submissions also did not take into account that over the period there was a net reduction and that the claim is restricted to that amount. 25 The transactions of purchase and sale (in this case accepted by both sides to be on running account and therefore to be treated as one) yielded, during the relevant period, payment by the Company to ABC in excess of the price of the goods sold by ABC to the Company during that same period. 26 In my view, all the elements required to enable the Court to make an order under s 588FF(1) of the Act have been satisfied. 27 ABC raises the defence afforded by s 588FG(2) of the Act. 28 That provision was the subject of judicial consideration, amongst others, by the Court of Appeal in Cook's Construction Pty Ltd v Brown (2004) 49 ACSR 62 and Dean-Willcocks v Commissioner of Taxation (2004) 51 ACSR 353. 29 The test is partially subjective and partially objective. 30 ABC bears the onus of establishing it. 31 ABC called three witnesses. Mr William Wong, its internal accountant; Ms Siv Lang Ly, its sales supervisor; and Ms Kim Bui Ly, the accounts receivable clerk. 32 Each of them gave affidavit evidence that they did not suspect that the Company was in financial difficulties or insolvent and none was effectively challenged as to their subjective state of mind at the relevant time. There is no reason not to accept that subjectively those individuals held those views. 33 For the purposes of what follows below I assume that those individuals are included in the group of individuals whose state of mind may be attributed to the Company. 34 The authorities to which I have referred above establish that in order to discharge the onus resting on ABC under s 588FG(2)(b)(i) (that is, the subjective element) ABC needs to call those persons who (in the absence of an appropriate explanation why it cannot) it is able to call and who may reasonably be thought to have a relevant opinion to prove they did not suspect insolvency: Dean-Willcocks v Commissioner of Taxation [71]. 35 Where a party has to prove something and prima facie has available evidence that would directly deal with the question, a Court will be very hesitant in drawing an inference in that party's favour from indirect and second-hand evidence without some explanation or the circumstances themselves providing an explanation: Cook's Construction Pty Ltd v Brown at [42]. 36 On 30 June 2003, Mr Ngai, the managing director of ABC, instructed ABC's solicitors, Phillips Fox to prepare documents to take security from Mr and Mrs Pinto, Mr J and Mr A Gomes and Luso-Affinity Pty Ltd for the obligations of the Company to ABC. 37 On 23 July 2003, Christina Chan, an ABC employee, provided to the solicitors the address and fax details for the Company and those individuals. 38 A mortgage was executed by Mr and Mrs Pinto in favour of ABC on 16 October 2003 over real property and they executed a guarantee in favour of ABC for the Company's obligations on 24 September 2003. 39 According to Mr Wong, Mr Ngai was the senior person to whom he reported. 40 Whilst it is of course not necessarily the case that security was taken because of a concern on the part of Mr Ngai as to the solvency of the Company, that is no doubt a possibility. There is no evidence that ABC had at any earlier time obtained security for the Company's debt. 41 Mr Ngai as the managing director of ABC is undoubtedly one of those persons who for present purposes was a person whose opinion or state of mind would be attributed to the Company: see Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563. 42 He is also, having regard to the state of the accounts between the Company and ABC and the taking of security in about the middle of 2003, a person who one would expect to have a relevant opinion on the solvency of the Company. 43 He was not called and no explanation was proffered. 44 On 5 July 2007 the liquidator sought from ABC documents including ones recording any steps to obtain security from the Company or any third party. The notice was answered by way of a letter dated 16 July 2007 signed by Mr Wong. In it he answered "to the best of our knowledge" no steps had been taken to obtain security from the Company or any third party. His evidence was that he had not been informed of the steps which ABC had taken to which I have referred above to obtain security. 45 This highlights the significance of the failure to call Mr Ngai. 46 In my view this is sufficient on its own to conclude that ABC has failed to discharge the onus upon it and the statutory defence must fail. 47 But this is not all. 48 On 24 July 2003 the Company provided to "Mingh" under cover of a facsimile its aged debtors report and aged creditors report. 49 On a date which I am satisfied to have been on or about 29 July 2003, Mr J Gomes on behalf of the Company addressed a facsimile to "Ming". 50 I am satisfied that the references to "Mingh" and "Ming" are references to Mr Chek Ming Ly. 51 In the second facsimile Mr Gomes referred to a discussion the previous day and requested ABC to process orders worth $54,000.00 on the basis ABC had $20,000.00 available and the balance of $34,000.00 would be delayed for a couple of days. Mr Gomes stated "I will pay you daily for the stock we pick up plus some towards the $34,000.00." 52 Neither the provision to ABC of the Company's debtors and creditors reports nor a request for delivery and delayed payment necessarily implies financial difficulty or insolvency on the part of the Company, (indeed counsel for ABC pointed out that the Company debtors exceeded its creditors on the reports), but the request for, and recipient of, that information may have formed a conclusion concerning the Company's financial difficulties and insolvency. 53 Mr Gomes had a discussion with Mr Chek Ming Ly the day before the fax request for delivery and delay was made and the fax providing the reports states "Reports as per your request". 54 Although the records show that Mr Chek Ming Ly was only appointed a director of ABC on 29 June 2005 he was working in the business of ABC during the relevant period. 55 As with Mr Ngai, Mr Chek Ming Ly is also a person, whom in my view, ABC needed to call if it was to discharge the onus upon it in establishing the statutory defence. 56 Further, on 10 March 2003 Mr Gomes sent a facsimile to Sona Siou, apparently a person who worked in sales at ABC. 57 Mr Gomes needed $170,000 in stock to clear a back order and requested delivery payment be made daily at a minimum of $15,000.00 a day until banking facilities were finalised. 58 On 22 August 2003 Mr Gomes provided to ABC, for the attention of "Lang", copies of bank deposit slips showing cheques deposited into the Company's account. It was not established with any clarity who Lang is or was, although it is possible that the reference could be to a previous director - Lai Chang Ngai, or to Anna Lai Chang Ngai. I make no finding with respect to that issue. 59 From 13 June 2003 to 14 August 2003 the Company dishonoured four cheques in favour of ABC for $47,000.000, $20,000.00, $41,000.00 and $38,0000.00 respectively. 60 As at 24 July 2007 the Company owed ABC over $1.9M of which over $800,000 was over 90 days old. 61 It may be that neither "Lang" nor "Sona", nor Christina Chang, are persons who held relevant views or whose minds were relevant to be attributed to the Company for the purpose of the statutory defence, but they may be. ABC led no evidence in connection with them. 62 Its failure to do so adds further impetus to the conclusion that it has not, and by a long margin, met the requirements of the statutory defence.

63 The orders of the Court will accordingly be that the defendant is to pay to the second plaintiff the sum of $290,502.86. The defendant is to pay the plaintiffs' costs of the proceedings. 64 The exhibits comprising the plaintiffs' tender bundle are to be returned. MONDAY 3RD MARCH 2008 65 HIS HONOUR: On 15 February 2008 I gave judgment in favour of the plaintiff liquidator against the defendants foreshadowing an order that the defendant pay to the second plaintiff company the sum of $290,502.86. The parties have been unable to agree on how interest should be determined and as to what the appropriate order should be as to costs. 66 Dealing firstly with interest, the defendant submits that the plaintiff originally claimed a far greater figure than that ultimately awarded and puts that there should be a modification as to interest, given that the plaintiff did not initially accept, as it should have, that the defendant's liability was to be determined on a running account basis. The defendant puts that interest should run from the time the plaintiff's conceded that the calculations were to be done on a running account basis (from when the plaintiffs claimed the final figure) namely 17 December 2007. The plaintiffs accept that interest should run from no later than the date upon which the proceedings were commenced. There is no challenge to the plaintiff's calculation of interest on that date. 67 An award of interest is intended to compensate a plaintiff, in this case the creditors of the Company, for being kept out of money which should have been paid. There is no suggestion on the part of the defendant that any amount was offered by it at any point. In my view interest is to run from the date the proceedings were commenced on the amount awarded. As at 25 February 2007 the figure including interest was $321,451.12. There shall be an order under s 588F(1) of the Corporations Act 2001 (Cth) that the defendant pay the sum of $321,451 to the second plaintiff. 68 Turning then to costs, the defendant puts that most of the evidence served by the plaintiffs was not read and that there should be an adjustment in respect of costs because the defendants were not in a position to negotiate until the plaintiffs retreated from the original untenable position that they had. 69 The defendants put that the plaintiff should only have 50 per cent of costs on the ordinary basis from 17 December 2007. The plaintiffs have been substantially successful. The defendants made no offer of compromise or any offer by way of Calderbank letter. 70 In the circumstances, the plaintiffs are entitled to their costs. The matters raised by the defendant are more properly, in my view, matters for consideration by the assessor who ultimately assesses any costs payable by the defendant to the plaintiffs.

71 In the circumstances an order will be made as I indicated aforesaid together with an order that the defendant pay the plaintiff's costs. I make the orders in the document entitled Short Minutes of Order which I have initialled, dated today's date and placed with the papers.

06/03/2008 - Incorrect ex tempore judgment date - Paragraph(s) Heading

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