Appellant v First Respondent [2019] VSC 546 | Case summary

Corporations Act 2001Appellant v First Respondent [2019] VSC 546 | Case summary | Zoe

[35]

The respondents produced the general ledger of Eliana which showed that as at 16 September 2016, Eliana was indebted to Rock Development in the sum of $195,908.81. Mr Cant acknowledged the ledger showed that Rock Development was a creditor of Eliana but said that, based on his investigations, he considered that the ledger was incomplete; sums owed by Rock Development to Eliana had failed to be included in the ledger and that Rock Development was in fact a debtor of Eliana.
Mr Cant deposed that Rock Development was indebted to Eliana for $1,255,233.30 pursuant to a building contract dated 10 April 2014. He said that this debt was not included in the ledger. Mr Cant produced two documents being copies of Eliana's record of the calculation of the outstanding debt of $1,255,233.30 and the building contract dated 10 April 2014 referred to in the associate justice's findings above. The building contract was between Sentosa and Rock Development as the owners and Eliana as the builder. The contract expressly contemplated progress claims being made by Eliana. Two progress claims could be submitted each month and were to set out, amongst other things, the work completed.
I infer that Eliana's calculation of the outstanding debt of $1,255,233.30 was prepared by the liquidator.[7] It identifies progress claims by number, date and amount. The document refers to progress claims as per an email from Wisewould Mahony Lawyers. Neither the email nor the progress claims were exhibited. The document lists payments to Eliana as identified by reference to Eliana's bank statements.
The liquidator made a claim on behalf of Eliana against Sentosa for outstanding progress claims under the building contract made up of unpaid claims of $1,255,233.30 and interest of $405,944.66, totalling $1,661,177.96. As indicated above, the $1,255,233.30 is the figure calculated by the liquidator.
Sentosa responded to the liquidator's claim by letter dated 18 May 2018 from its solicitors, Robert James Lawyers. The letter was not discovered prior to the trial and was only produced after the director of Eliana had given evidence.[8] The letter concedes that progress payments of $4,765,773.10 were made to Eliana but disputes that the sum of $1,255,233.30 or any further sum is owing to Eliana, by reason of offsetting claims that Sentosa purports to have against Eliana.
The letter also states:

[43]

The first issue to address is whether in each case (that is, where no debt is owed by Rock Development to Eliana and where $600,000 is owed by Rock Development to Eliana) the first limb in s 588FA(1)(a) was satisfied.
It is clear that a transaction, within the meaning of s 9 of the Corporations Act, can be made up of a series of interrelated or composite dealings.[10] Where a debtor and third party enter into an arrangement whereby the debtor's creditor is paid by the third party, that would constitute a relevant transaction for the purposes of s 588FA(1)(a).[11]
If no moneys were owed to Eliana by Rock Development, then, as the transaction between Rock Development and Eliana and between Rock Development and Mad Brothers involved Eliana incurring an obligation to Rock Development, the transaction would constitute a transaction within s 9 of the Corporations Act: see the definition of transaction paragraph (e). Similarly, if Rock Development owed Eliana $600,000, then the transaction would also constitute a transaction within s 9 of the Corporations Act: see the definition of transaction paragraph (f). The transaction would have involved a release by Eliana of a portion of the debt owed by Rock Development to Eliana. I am satisfied that in each case the first limb under s 588FA(1)(a) was satisfied.
The critical question in each case is whether the second limb was satisfied, that is, did the transaction result in Mad Brothers receiving from Eliana, in respect of the unsecured debt that Eliana owed to Mad Brothers, more from Eliana than Mad Brothers would receive from Eliana, if the transaction was set aside and Mad Brothers were to prove for the debt in a winding up of Eliana within the meaning of s 588FA(1)(b).
As mentioned in the introduction, the associate justice found that the payment was made by Eliana to Mad Brothers, as the debt of Eliana to Mad Brothers was discharged by Rock Development at the request of or with the acceptance of Eliana. In doing so, his Honour accepted the obiter dictum of Gordon J in Burness.
In Burness, Gordon J considered that it was not necessary that there be evidence of a debtor/creditor relationship between the debtor and the third party in order for a third party payment to be a preference. In that case, the defendant Supaproducts Pty Ltd ('Supaproducts') supplied building hardware to Denward Lane Pty Ltd ('Denward Lane') and Denward Lane was indebted to Supaproducts under a running account. Denward Lane was wound up as insolvent. Supaproducts received payments from Denward Lane Pre Cast Panels Pty Ltd ('Pre Cast Panels') during the relation-back period. These were challenged by the liquidator as preferences.
Gordon J dismissed the application by the liquidator, holding that Supaproducts had established the defence under s 588FG(2)(b) of the Corporations Act, that neither it or a reasonable person in its circumstances had reasonable grounds for suspecting that Denward Lane was insolvent.
Gordon J did, however, find that the payments would otherwise have satisfied s 588FA(1)(b) of the Corporations Act. Her Honour found that it was sufficient to characterise a debt as being paid by the debtor to the creditor where it was paid by a third party to the creditor, if the debtor authorised and ratified the payment by the third party. In that situation, her Honour held that the debtor would be liable to the third party who made the payment for the sum of the payment made by the third party to the creditor to satisfy the debtor's debt to the creditor. In other words, the transaction would result in the liability to the creditor being discharged and an equal liability to the third party being created.
Her Honour said:

[46]

[45] I do not accept that Re Emanuel (No 14) is authority for the proposition that before a payment by a third party can be taken to be a payment "accepted" or "made" by the debtor there must be evidence of an arrangement between the debtor and the third party whereby at the direction of the debtor, the third party made a payment to the creditor in discharge of an obligation owed by the third party to the debtor. That is not what the authorities establish: see Simpson v Egginton; Smith v Cox; Oakleigh Acquisitions Pty Ltd (in liq) v Steinochr. Where a payment made by a third party to a creditor is authorised by the debtor, nothing more is required. The debt is discharged by the third party at the request of or with the acceptance of the debtor.

[46] On the other hand, if a debt is discharged by a third party payment which is unauthorised, the debt is not necessarily discharged: see Oakleigh Acquisitions Pty Ltd (in liq) v Steinochr; Birks and Beatson; Friedmann D; R Goff and G Jones, The Law of Restitution. The debtor has a choice - to accept or not to accept the payment. If the debtor ratifies or accepts the unauthorised payment by the third party, the debtor will be liable to the third party who made the payment. In other words, the "acceptance" will give the third party a claim for money paid for and at the request of the debtor or, as it is sometimes put, impose upon the debtor a duty of restitution. If the debtor does not ratify the payment, the original debt it owed to the creditor remains outstanding: see Lumbers v W Cook Builders Pty Ltd (in liq).

[47] In the present case, the payment made by Pre Cast Panels on 10 June 2005 was a "course of dealing initiated by a debtor that [was] intended to, and [did], extinguish a creditor's debt" as contemplated by the Full Court in Re Emanuel (No 14). It was the evidence of Mr Messina that Mr Smith contacted the Defendant in June 2005 and stated to Mr Messina that "he would be continuing the same business, but had set up a new company ... [t]he new company was [Pre Cast Panels] ... [and that] when the business took over, [the defendant] should transfer the balance of the account to [Pre Cast Panels]". On any view, it was a course of conduct initiated by Denward Lane to discharge its debt to the defendant through payments made by a third party - Pre Cast Panels. Mr Smith was a director of both companies (and the sole director of Pre Cast Panels), he notified Mr Messina of the upcoming transfer of the account and Pre Cast Panels subsequently assumed the burden of that account. However, even if this payment was not a "course of dealing initiated by a debtor that is intended to, and does, extinguish a creditor's debt" (and I find that it is), then by its conduct, Denward Lane acquiesced in the payment of its debt by the third party (Pre Cast Panels) on its behalf so that the debt is taken to be discharged (see Owen v Tate and Oakleigh, possibly giving rise to a (restitutionary) right in Pre Cast Panels in the form of a claim against Denward Lane for money paid: see Lumbers.[12]

[47]

In my opinion, in the circumstances postulated by Gordon J, the liability to the third party arising from the transaction would be matched by the reduction in the liability of the debtor to the creditor. Overall, the creditors of the debtor would receive exactly the same dividend in the liquidation of the debtor, although the creditor who was paid by the third party would receive more than it would have in the liquidation. The transaction merely substituted one creditor for another; the third party would be substituted for the original creditor.
Further, if the creditor was obliged to disgorge the sum received to the debtor as an unfair preference, there would be a windfall gain to creditors of the debtor. The assets of the debtor would be increased by the sum disgorged and the liabilities of the debtor would also be increased by the sum disgorged. That is, the liabilities of the debtor would include both the liability to the original creditor who has now disgorged the payment which it received in satisfaction of its debt, and the liability to the third party who has received nothing in satisfaction of its debt. The result would be, in the normal case where the liabilities of the debtor exceeded its assets in insolvency, for the dividend to the creditors to be greater than if the payment to the creditor was not held to be an unfair preference. This follows from the fact that the overall result of the transaction was to increase liabilities by the same amount as the assets increased. The existing creditors would all receive a windfall gain.
In Re Evolvebuilt Pty Ltd ('Re Evolvebuilt'),[13] Brereton J held that Gordon's J decision on the second requirement of s 588FA(1) of the Corporations Act was in error. The relevant facts in Re Evolvebuilt were as follows. Built was the main contractor for carrying out certain interior work on a project called the ANZ project, at Pitt Street. Evolvebuilt had been subcontracted by Built to carry out the works. Evolvebuilt itself entered into secondary subcontracts for the work to be done. Unfortunately, extensive flood damage arising from a burst water pipe had the consequence that Evolvebuilt was unable to perform any work. Evolvebuilt went into liquidation. Evolvebuilt had owed money to the secondary contractors but did not pay them.
Evolvebuilt requested Built to pay the secondary subcontractors the sums owed by Evolvebuilt to them, but Built refused to do so. The CFMEU, as the union for the secondary subcontractors, also asked Built to pay the secondary subcontractors, which Built did. The liquidator of Evolvebuilt sued the secondary subcontractors, alleging the payments they received from Built were preferences in the liquidation of Evolvebuilt.
Brereton J held that the payments made by Built did not satisfy the first requirement of the preference test, that Evolvebuilt was a party to the relevant transaction pursuant to s 588FA(1)(a). Brereton J also held that the second requirement of the preference test was not satisfied as the payments received by the secondary subcontractors were not made by Evolvebuilt pursuant to s 588FA(1)(b).
In addressing the second requirement, Brereton J held that where a third party company paid the debt of a debtor company, it was not sufficient to establish that the payment was made by the debtor company for the debt to be paid to the creditor merely at the request or acquiescence of the debtor company. Brereton J held that such a test was not consistent with the decision of the Full Court of the Federal Court in Re Emanuel (No 14) Pty Ltd; Macks v Blacklaw & Shadforth Pty Ltd ('Re Emanuel').[14]
In Re Emanuel, the company Emanuel had contracted with a third party ('EFG') against whom Emanuel had a claim. In settlement of the dispute the subject of the claim, EFG and Emanuel agreed by deed that EFG would make a payment to Emanuel and, at Emanuel's direction, EFG would make a further payment to Emanuel's creditor Blacklaw.
Emanuel's liquidator sought to recover the payment made by EFG to Blacklaw as a preference. At first instance, the claim failed. The primary judge held that if the relevant transaction was the contract, then Blacklaw was not a party to it; and if the relevant transaction was the payment, then it was made by EFG and not Emanuel.
The Court on appeal reversed the decision. It held that although the payment was made by EFG to Blacklaw, Blacklaw could be said to have received the payment from Emanuel for the purposes of s 588FA(1)(b), because Blacklaw received from Emanuel the benefit of a chose in action (the promise by EFG to Emanuel to pay, contained in the deed).
In Re Evolvebuilt, Brereton J, in discussing Re Emanuel, stated:

[55]

The question here is whether the transaction resulted in Blacklaw "receiving from the company" more than it would have if the transaction were set aside and Blacklaw was to prove in the winding up of Emanuel. It is clear that what Blacklaw received from the transaction was the partial satisfaction of its debt at the rate of 100¢ in the dollar and that this was more than it would receive in satisfaction of its debt as a creditor in the winding up. But did it receive what it did from the company as the subsection requires?

There is no doubt that, if the money received by Blacklaw had been required under the Deed (i) to be paid first to Emanuel and then paid on to Blacklaw as Emanuel's money, or (ii) to be held by EFG on trust for Emanuel pending the latter's direction to pay Blacklaw, then the financial benefit accruing to Blacklaw would, relevantly, have been received from the company.

Does it make an operative difference that, rather than adopting such expedients, the Deed provided for direct payment to Blacklaw? In our view it does not and it would be surprising if it did.

What Blacklaw received from the company was the actual benefit of a valuable chose in action (ie, para 6.7 of the Deed) owned by Emanuel. Whether or not Blacklaw was a trust-beneficiary or a contract-beneficiary of that chose: as to which see Trident General Insurance Co Ltd v McNiece Bros Pty Ltd [1988] HCA 44; (1988) 165 CLR 107; 80 ALR 574 - and it is unnecessary for present purposes to determine the rights, if any, that Blacklaw had against EFG - what Emanuel provided to Blacklaw, and what Blacklaw received from Emanuel was the actual enjoyment of the benefit secured to Emanuel by its contractual provision with EFG. That actual benefit took the form of a monetary payment which partially discharged Emanuel's debt.

If it be thought that the chose was without value to Emanuel so that it could not in consequence be said that Emanuel was giving a benefit of value to Blacklaw, it is the case that if EFG failed to make the payment as directed, Emanuel could have recovered from it the sum agreed to be paid to Blacklaw: Ashdown v Ingamells (1880) 5 ExD 280. This merely illustrates why a direct payment such as occurred in this case should not be treated differently from either the trust or the payment on contingencies to which we earlier referred.

[70]

In my opinion, where the transaction involves a reduction in the debtor's assets which can be measured in money and a consequential discharge of the creditor's debt by that sum, then the transaction can be said to involve a payment by the debtor to the creditor within the meaning of s 588FA(1)(b) of the Act.
Where, however, a payment by the third party which discharges the debtor's debt to the creditor is authorised and ratified by the debtor and only involves the debtor incurring a liability in favour of the third party, and no reduction of assets of the debtor, then, in my opinion, the payment does not, on that ground, constitute a payment by the debtor to the creditor within the meaning of s 588FA(1)(b) of the Corporations Act.
Both these conclusions are consistent with the judgment of Brereton J, as discussed above.
On the facts in this case, I have found that there has been no diminution in Eliana's assets by reason of the transaction. I am not satisfied that, in those circumstances, the payment of $220,000 to Mad Brothers was from Eliana within the meaning of s 588FA(1)(b) of the Corporations Act. For the reasons discussed above, I find that the fact that Eliana authorised and ratified the payment by Rock Development is insufficient to constitute a payment by Eliana to Mad Brothers and thus is insufficient to establish that an unfair preference has been given by Eliana to Mad Brothers.
On the other hand, if I am wrong and Rock Development did owe in excess of $220,000 to Eliana, then I find that the effect of the whole transaction which was agreed upon and carried out was to prefer Mad Brothers over the other creditors of Eliana.[30] The transaction had the effect of reducing Eliana's assets by $220,000 and discharging the debt owed by Eliana to Mad Brothers. The request by Eliana to Rock Development to pay its debt would have created a liability to Rock Development that reduced the amount owed by Rock Development to Eliana. In those circumstances, I would find that the transaction did involve a payment by Eliana to Mad Brothers of $220,000 and did constitute an unfair preference given by Eliana to Mad Brothers.
It is clear from my reasoning that I see merit in Brereton J's observation that Gordon J's test could lead to a windfall gain to creditors beyond that which they would have achieved if the transaction had not been entered into. I doubt that such a windfall gain is in accordance with the object of the relevant provisions. The object is to prevent damage and disadvantage to the creditors, not to make a windfall gain for creditors.
As found above, I am not satisfied that Rock Development was indebted to Eliana. Accordingly, I find that the associate justice erred in finding the payment by Rock Development to Mad Brothers constituted an unfair preference. If it had been owed, I would have found that the associate justice was correct to find the transaction was an unfair preference.

[80]

The tests under s 588FG(2)(b)(i) and (ii) are often referred to respectively as the subjective test (though in truth it is hybrid in nature)[36] and the objective test. The associate justice does not appear to have expressly decided whether the subjective test was satisfied; Mad Brothers' witnesses gave evidence that they did not suspect Eliana's insolvency, and the associate justice agreed they were witnesses of truth.[37] His Honour, in any event, went on to consider the objective test, and concluded that as 'a reasonable business person would have no basis to believe Eliana was solvent in the circumstances',[38] Mad Brothers had failed to establish a defence.
In coming to this conclusion, the associate justice relied on Eliana's offer to pay the debt by instalments, the issuing of both a statutory demand and winding-up proceedings by Mad Brothers, and the existence of another creditor who had applied to wind up Eliana.[39]
The matters to which the associate justice had regard are accepted indicia of insolvency.[40] Mad Brothers' challenges to the associate justice's findings can be summarised as a complaint that the associate justice did not also take into account or did not give proper regard to other relevant matters which occurred after the issuing of Mad Brothers' winding-up proceedings and prior to payment being received.
For the reasons which follow, I consider that the associate justice erred in his conclusion by failing to have proper regard to the information provided to Mad Brothers and other events which occurred after the statutory demand was issued and the winding-up proceedings brought, but prior to payment being received. If the associate justice had had proper regard to the material provided to Mad Brothers and considered whether those facts and matters which subsisted when payment was received were sufficient to induce a 'positive apprehension' as to 'actual insolvency',[41] I am satisfied that he ought to have come to the conclusion that the defence under s 588FG(2) was established.

[82]

[116] In the first limb, the reference to 'the person' would ordinarily be taken to mean that particular person in that person's circumstances.

...

[120] ...[T]he first limb appears to be directed to the facts and matters actually (subjectively) appreciated by the 'person'. If the facts and matters appreciated by 'the person', from the range of information in the possession of 'the person', were sufficient to induce a suspicion of insolvency in the mind of a reasonable person, the first limb cannot be satisfied. Moreover, it is the negative which must be proved. Under the first limb, unless the relevant creditor can prove that the facts and matters appreciated by the creditor were insufficient to induce a suspicion of insolvency in the mind of a reasonable person, the first limb cannot be satisfied.

[121] ... it is insufficient for 'the person' merely to establish that, on the facts and matters which the person appreciates, the person had no actual (subjective) suspicion of insolvency...

[122] In considering, in relation to the first limb, what facts and matters 'the person' appreciated, regard would ordinarily be had to the training, skills and experience of the 'the person' in question. Thus for example, the matters appreciated by a sophisticated creditor such as a merchant bank with its accounting and economic expertise, may be different from the matters appreciated by a relatively unsophisticated sole trader.

...

[126] Accordingly, the question raised by the first limb is whether the facts and matters actually appreciated by 'the person', ie, the particular creditor, were sufficient to induce a suspicion as to insolvency in the mind of a reasonable person. The question raised by the second limb is whether the facts and matters which would have been appreciated by a hypothetical person with the knowledge and experience of the average business person in the creditor's circumstances, were sufficient to induce a suspicion as to insolvency in such a hypothetical person...[43]

[91]

In answering those questions, I consider that it is helpful to set out a short chronology.
Between late 2015 and early 2016, Mad Brothers performed earthmoving labour for Eliana. By January 2016, Eliana was indebted to Mad Brothers in the sum of $228,870.08. When Mad Brothers commenced pursuing this outstanding debt, it learned that Mr Sowiha was disputing the rates charged by Mad Brothers. A meeting was then held between representatives of Eliana and Mad Brothers, following which Mr Sowiha agreed to pay what Mad Brothers had charged after learning that an Eliana representative had apparently agreed to those rates. Mad Brothers then considered the matter resolved, and performed further work for Eliana to the value of $88,082.23. In early March 2016, Eliana paid Mad Brothers $80,000. When no further payments were received, on 23 March 2016 Mad Brothers issued a letter of demand in the sum of $236,952.31. Around 30 March 2016, Eliana offered to make payment of that sum by instalments, but subsequently claimed that the sum in the letter of demand should be reduced by the $80,000 sum which Eliana had paid in March. Mad Brothers had in fact already credited that sum.
Around April 2016, Ms Haddrell (the financial controller for Mad Brothers) sought legal advice about commencing debt recovery proceedings against Eliana, but was allegedly advised that it was more effective to issue a statutory demand. On 26 April 2016, Mad Brothers issued a statutory demand and on 8 June 2016, it filed a winding-up application against Eliana. Meanwhile, on 31 May 2016, the Victorian WorkCover Authority had filed a winding-up application against Eliana ('the WorkCover winding-up application'). On 13 July 2016, however, when Mad Brothers advertised its Notice of Application for Winding Up with ASIC, no supporting creditors made themselves known.
Meanwhile, on 6 July 2016, Mad Brothers was notified that Eliana had commenced VCAT proceedings to dispute the debt claimed by Mad Brothers. The WorkCover winding-up application was dismissed on 20 July 2016. The first return date of Mad Brothers' winding-up application was also on 20 July 2016. On that day, solicitors for Eliana sought an adjournment of the hearing, relying on an affidavit filed by Mr Sowiha to the effect that a number of properties owned by Eliana, Mr Sowiha or a related entity were incorrectly caveated and this was interfering with Eliana's ability to obtain finance. The hearing was adjourned to 17 August 2016. It is now known that in August 2016, Eliana ceased to trade and suspended its workforce, however, it appears this fact was kept both from Mad Brothers and from the court. On the second return of Mad Brothers' winding-up application on 17 August 2016, a further adjournment was granted until 24 August 2016, on the basis of an affidavit filed by Mr Sowiha to the effect that the caveats had been successfully removed and that finance arrangements which had previously been hindered were now being proceeded with. Mr Sowiha exhibited documents showing that he (or a related entity of Eliana) had entered into various arrangements to obtain finance in excess of $4.2 million, with settlement expected to occur within two to three weeks.
On 23 August 2016, prior to the third return date, Mr Sowiha filed a further affidavit. This affidavit explained that Mad Brothers' statutory demand had not been complied with or disputed as it had been sent to Eliana's internal legal department, and Eliana's in-house lawyer had taken personal leave and then resigned without returning. The affidavit further set out that Eliana was now disputing the debt in VCAT (for which an expert report had been commissioned) and requested that Eliana be able to pay the funds in dispute into court pending the outcome of the VCAT proceedings.
Also on 23 August 2016, an affidavit was filed by Mr Mokbel Gendy, the accountant for Eliana, which went to Eliana's solvency. Relevantly, Mr Gendy swore to the following:

[96]

Were the facts and matters actually appreciated by Mad Brothers (through Mr Maddalon, Mad Brothers' director, and Ms Haddrell) insufficient to induce a suspicion as to insolvency in the mind of a reasonable person?
Mr Maddalon gave evidence that, notwithstanding that he ran a successful business with 60 employees, he was a 'farm boy ... not a financial controller',[53] and that he was a 'hands-on kind of bloke, machine operator', who 'pop[s] his head into the office every now and then, but [leaves] the financial stuff up to [Ms Haddrell]'.[54]
In their evidence, Mr Maddalon and Ms Haddrell identified the following facts and matters as those which they actually appreciated in relation to Eliana's solvency or otherwise.
The debt had been the subject of ongoing disputes. While Mad Brothers understood the initial dispute to have been resolved, Mr Maddalon considered Mr Sowiha was still upset about the rates.[55] Mr Sowiha's claim that the payment of $80,000 had not been properly credited further delayed payment. Ms Haddrell and Mr Maddalon had intended to issue debt recovery proceedings in April 2016, not a statutory demand, until they received legal advice to do otherwise.[56] By July 2016, the debt was undoubtedly disputed, with Eliana having commenced VCAT proceedings.
It also appeared to Ms Haddrell and Mr Maddalon that Eliana had access to funds, as it had commissioned an expert report and briefed solicitors and counsel to appear at VCAT. Ms Haddrell and Mr Maddalon's view that Mr Sowiha and Eliana appeared to have access to funds was confirmed when caveats were successfully removed from over a significant number of properties, and documents relating to forthcoming finance were provided. Mr Maddalon considered that Eliana was going to use those funds in the VCAT proceedings to pressure Mad Brothers to accept a lower sum.[57] Ms Haddrell and Mr Maddalon considered that in order to extend finance, Eliana and Mr Sowiha's financiers would have had to be satisfied that Eliana was solvent, could provide security, and could service the loans.[58] Mr Maddalon particularly noted that Eliana had filed sworn material as to its solvency and, as it was sworn on oath, that was something he really believed in and believed had to be true.[59] Mad Brothers' legal advisors had indicated to Mad Brothers that, in light of the financial material provided, Mad Brothers should consider settling in order to avoid an adverse costs order.[60]
The respondents contend that the associate justice correctly concluded that the financial material provided by Eliana would not have been relied upon by a reasonable business person as it was not audited and was from 2015, when the payment was made in 2016.
Eliana's main contention is as follows. There was a presumption of insolvency arising from the failure to comply with the statutory demand, and because the material filed by Eliana was insufficient to dislodge that presumption for the purposes of the Court dismissing the wind-up application, then, similarly, on an objective test, a reasonable person would have grounds to suspect the company was insolvent. Eliana argues that a reasonable person would question why, if Eliana was disputing the debt and could produce audited accounts, it would pay the debt in full and not produce the accounts.
I digress to deal shortly with the point of the purpose for which the statutory demand was issued. The respondents (and the associate justice) noted that it is difficult for a defendant to make out a good faith defence in circumstances where payment follows the service of a statutory demand.[61] In Chicago Boot Co Pty Ltd v Davies & McIntosh (as joint and several liquidators of Harris Scarfe Ltd) ('Chicago Boot Co'),[62] the Full Court of the Supreme Court of South Australia considered the purpose for which a statutory demand was issued in the context of the good faith defence. White J, with whom Nyland and Anderson JJ agreed, stated:

[108]

It is clear that the material filed by Eliana in this matter and provided to Mad Brothers was not sufficient to prove solvency to a court in order to prevent a winding up. To this end, on 24 August 2016, Gardiner AsJ made orders adjourning the winding up, noting that Eliana 'wishe[d] to produce' audited accounts to support its contention of solvency. However, whether solvency has been established to the satisfaction of the court for the purposes of avoiding a wind-up application is a separate question from whether the material provided would dispel suspicion of insolvency in a reasonable business person, and care should be taken not to conflate those tests.
While I accept that the provision of older, unaudited accounts may, in some cases, be insufficient to dispel a suspicion of insolvency,[71] in the circumstances of this case, I consider it was a relevant countervailing factor to the indicators of insolvency which had preceded it. As counsel for Mad Brothers submitted, company accounts can take some time to prepare and it was not unusual for 2015-2016 financial year accounts to not be finalised by September 2016.[72] The accounts were not audited, but I do not consider that a reasonable business person (as opposed to an insolvency practitioner, financial expert or the Court) would consider this was reason enough to reject their contents. Further, this material was provided relatively contemporaneously with other material which indicated that Eliana had current access to not insignificant funds.
I consider that the appellant has established that the facts and matters which were actually appreciated by Mr Maddalon and Ms Haddrell were insufficient to induce a suspicion as to insolvency in the mind of a reasonable person. A reasonable person could conclude that Mr Sowiha was deciding not to pay, rather than that he could not pay. A reasonable person could conclude that Eliana had access to fairly significant funds, and that persons or entities providing those funds were satisfied as to Eliana's (or its director's or related entity's) ability to repay those loans. A reasonable person would tend to believe the contents of documents which have been filed in this court. A reasonable person inexperienced in questions of solvency and insolvency would rely on legal advice from their advisors as to the adequacy of material filed by the other party.
Were there any other facts or matters which a hypothetical, reasonable business person in Mad Brothers' position would have appreciated that Mad Brothers did not?
Eliana and the associate justice refer to the WorkCover winding-up application, which was also on foot against Eliana as a matter which should have induced suspicion. While the fact of this other proceeding was not subjectively appreciated by Mad Brothers (or by its individual representatives),[73] it is a matter which a hypothetical, reasonable person would have appreciated.
The respondents submit that knowledge of the WorkCover winding-up application should have put a reasonable business person on a chain of enquiry about the application, which would have led them to discover that there were a number of supporting creditors in that application. The authorities indicate, however, that it is not appropriate to take into account information which a reasonable person may have hypothetically obtained had certain enquiries been made,[74] so a reasonable business person would have only appreciated the fact that there was a concurrent winding-up application. It could not be known by a reasonable person, however, whether that winding-up application was brought due to WorkCover's suspicion as to Eliana's actual insolvency, or whether it was brought as a means of obtaining payment of a debt.[75] The WorkCover winding-up application, in any event, was dismissed on 20 July 2016. There is no evidence that the reason for the dismissal was known; it may have been because the debt had been paid out in full by Eliana. In my view, the fact of the WorkCover winding-up application, when considered together with its dismissal some two months prior to Mad Brothers receiving payment, is not a matter sufficient to induce a suspicion as to insolvency in a reasonable person.
I conclude that Mad Brothers has established that the facts and matters which subsisted at the time it received payment from Eliana fell short of being capable of establishing a positive apprehension of actual insolvency in the mind of a reasonable person. The associate justice should therefore have found that Mad Brothers made out a defence under s 588FG(2). By operation of that section, the Court could not make any order materially prejudicing Mad Brothers' rights or interests.

Appellant v First Respondent

At a glance

Court

Decision date

Before

Source

Judgment (172 paragraphs)

Parties

Cases Cited (9)