Beveridge v Whitton

LEGISLATION CITED : Corporations Law Airservices Australia v Ferrier (1996) 185 CLR 483 CASES CITED: Re Discovery Books Pty Ltd (1973) 20 FLR 470 V R Dye & Co v Peninsula Hotels Pty Ltd (In Liq) [1993] 3 VR 201 Akins v Abigroup Ltd (1998) 43 NSWLR 539 DECISION : See para 36

• 14 - THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL

GRAEME DAVID BEVERIDGE v ROBERT W WHITTON AS LIQUIDATOR OF HSBB PTY LTD (IN LIQUIDATION) JUDGMENT

1 MASON P: I invite Heydon JA to deliver the first judgment. 2 HEYDON JA: Background This is an appeal, by leave, from orders of Robison DCJ made on 21 May 1999 after a trial conducted in the District Court on 20 and 21 May 1999. The primary orders comprised a verdict and judgment for the plaintiff in the sum of $70,982.85, based on the plaintiff's successful claim for repayment as an unfair preference of $52,000 plus interest. The claim was made under s 588FA of the Corporations Law which at the relevant time provided: " (1) [What is unfair preference] A transaction is an unfair preference given by a company to a credit of the company if, and only if: (a) the company and the creditor are parties to the transaction (even if someone else is also a party); and (b) the transaction results in the creditor receiving from the company, in respect of an unsecured debt that the company owes to the creditor, more than the creditor would receive from the company in respect of the debt if the transaction were set aside and the creditor were to prove for the debt in a winding up of the company; even if the transaction is entered into, is given effect to, or is required to be given effect to, because of an order of an Australian court or a direction by an agency. (2) [When secured debt to be unsecured debt] For the purposes of subsection (1), a secured debt is taken to be unsecured to the extent of so much of it (if any) as is not reflected in the value of the security. (3) [Transaction part of continuing business relationship] Where: (a) a transaction is, for commercial purposes, an integral part of a continuing business relationship (for example, a running account) between a company and a creditor of the company (including such a relationship to which other persons are parties); and (b) 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 the result of a series of transactions forming part of the relationship; then (c) subsection (1) applies in relation to all the transactions forming part of the relationship as if they together constituted a single transaction; and (d) the transaction referred to in paragraph (a) may only be taken to be an unfair preference given by the company to the creditor if, because of subsection (1) as applying because of paragraph (c) of this subsection, the single transaction referred to in the last-mentioned paragraph is taken to be such an unfair preference." 3 The plaintiff was the liquidator of a company for which the defendant, an accountant, had provided services in the following circumstances. 4 In 1994 the company was controlled by Mr Miller, a bricklayer. It operated in the building industry by supplying bricklaying services. By the end of June 1994 the company was in financial difficulties. It owed the Australian Taxation Office over $200,000. It owed an insurer unpaid premiums for workers compensation insurance polices. It had a substantial overdraft with its bank. The accounts for the years ending 30 June 1992 and 30 June 1993 had not been prepared. 5 In May 1994 the bank manager with whom Mr Miller dealt invited him to a meeting with Mr Mark Fry, an officer of the Penrith branch. Mr Fry was given special responsibility for the account. Mr Fry advised Mr Miller to engage a good accountant because "the bookkeeping side of [the business] was not good". Mr Fry recommended the defendant. 6 In late June or early July 1994 Mr Miller spoke to the defendant and went to see him. He delivered substantial quantities of documents to the defendant. The defendant said they would take "quite a while to sort out" and informed Mr Miller what fees would be payable. 7 On 11 July 1994 the defendant informed Mr Miller of the terms of the engagement. The defendant said he would be responsible for the following (Blue 41N-X): "1. Provision of advice on general management matters including the preparation of periodic (monthly, quarterly and six monthly) financial statements, budgets and cash flow forecasts where necessary and as requested. 2. Preparation of financial statements (including statutory accounts and returns), and income tax returns for the business and individuals. 3. When requested, advising or instructing staff on the maintenance of the accounting and internal control systems. 4. Advising on sales tax, payroll tax, fringe benefits tax, land tax, capital gains tax, superannuation, sources of finance, investments etc. as required. 5. Undertaking special assignments such as management consulting services, purchase, installation and training in respect of computer systems, estate planing, business acquisitions and other similar matters as required. In particular I will bring all of your accounting and income tax matters up to date (1993 and 1994) as a matter of urgency so that updated accounts and budgets can be provided to the ANZ Bank. I will also liaise with the Taxation Department in respect of outstanding income and other taxes." 8 The letter offered various forms of general advice, set out hourly rates chargeable, and said memoranda of fees would be due for payment within seven days of issue. Mr and Mrs Miller agreed to these terms. 9 The trial judge found that the defendant "was in virtual sole control of the company" on the financial side (Red 22G), though there were many contacts between him and Mr Miller. 10 Payments were made to the defendant from 12 July 1994 to 20 February 1995. The company went into liquidation on 28 February 1995. The relation back period began on 22 June 1994. 11 The trial judge made several important findings. 12 The first was that at the time when the defendant was engaged, "the bookkeeping really was in a shambles and it is quite clear a great deal of work had to be done on the company's position by Mr Beveridge" (Red 25H-J). 13 The trial judge also said: "Mr Miller acknowledged in cross-examination that if the defendant had not got the books in order then the bank would have taken the matter further and acted against the business" (Red 25K-M).

That is a reference to the following evidence (Black 23Q-24J): "Q. I take it that when you had to either meet with Mr Fry or speak with him on the telephone, he wanted to know how the company was going? A. Yes. Q. And by 'going', I mean how it was trading and what its financial position was? A. Mm mm. Q. Is that a fair -- A. Yes, yes. Q. I take it that he was keen for you to get your accounts in order so that you could provide useful, accurate information on the company's financial position? A. Yes. Q. As far as you were concerned, that was one of the reasons why he said you had to get an accountant so the bank would know what position the company was in? A. That's right. Q. And could stay abreast of that from time to time as the position developed? A. .. (not transcribable) .. Q. And that's what Mr Beveridge did, wasn't it, amongst other things? He got the accounts in order? A. Yes. Yeah, he did, yeah. Q. And if he hadn't been able to do that, as far as Mr Fry was concerned, you were in a lot of trouble, weren't you? A. I was gone, yes. Q. In fact as far as the ANZ Bank was concerned, if you didn't get your accounts in order they were gong to pull the plug on the business, weren't they? A. Mm mm. Yeah. Q. So it was critical that either Mr Beveridge or someone else got the accounts in order or the company wouldn't survive? A. Correct." 14 In the course of argument, the liquidator submitted that Red 25K-M was not a finding that the ANZ would have put the company into liquidation had Mr Beveridge not been engaged. Although it is not an express finding in form, it was a favourable reference to the evidence, an acceptance of its correctness and thus an implicit finding. 15 The trial judge found that the company was insolvent by at least 13 July 1994 and that the defendant was aware of this. It was for this reason that the defendant insisted on payment within seven days of fees being rendered. (The defendant gave evidence that he would not have agreed to provide services unless those terms were accepted (Black 41D-N).) 16 The trial judge found that the defendant did a great deal of work, and that some of the work involving negotiation with pressing creditors was to some extent successful (Red 30F-K and 31X-32D). 17 The trial judge cited various passages from Airservices Australia v Ferrier (1996) 185 CLR 483. He then reached the following conclusions (Red 33E-L, 33V-34G, 34R-T and 34Z-35Q): "I pause to reflect upon the circumstances here and I ask myself, what was the purpose of the engagement of Mr Beveridge? And the purpose really is reflected in the evidence I have considered and have accepted. The company was insolvent from beginning to end. Mr Beveridge was engaged to collate the material to ascertain the true position of the company and he was engaged in accordance with these terms of engagement thereafter. But throughout all of this the company's financial position certainly did not improve. … Further, insofar as 'purpose' is concerned, it is asserted that if the purpose of a payment is to secure an asset or assets of equal or greater value the payee receives no advantage over other creditors. I ask myself here as to what was secured by the payment made to Mr Beveridge. At the end of the day the services provided by Mr Beveridge really secured nothing. It was, in my view of the evidence, an attempt to put off the inevitable. There was an attempt to extinguish bushfires, if one could use that terminology. The company was in a desperate financial position as I indicated earlier. If there was any optimism left at all there was some optimism remaining with Mr Miller but this optimism was certainly not shared by Mr Beveridge. … The ultimate effect here, on the facts before me, created no benefit whatsoever to any other creditors. Again, the factual circumstances need to be considered and appropriate weight should be given to them. … In my view it is clear that the question of intention should be considered and should not be ignored. There is a mixture of subjective and objective features in this. The insolvency was certainly known to both parties and it was a large and extensive insolvency. Frankly, on the facts before me I find it surprising, notwithstanding the claim against Concrete Constructions, that any of the parties could have entertained any reasonable hope that the financial position of the company could be saved. It would seem to me that Mr Beveridge did take a risk in his engagement as controller of the company. He knew that the company was in a difficult financial condition, hence the terms of his engagement. The overall circumstances do need to be considered and even if there is protection engaged by the operation of s 588FA(3) it is quite clear that in the particular circumstances of this case there is an unfair preference. It is quite clear that nothing was achieved other than to the detriment of the other creditors of the company."

Issues Not in Contention 18 Before turning to the contentions of the parties in the appeal, it is convenient to set aside three issues which are not contentious in the appeal. 19 The first issue related to the question of whether the case was to be decided on any basis other than what might be described as an all in or all out basis. Before the trial judge, no attempt was made to contend that some of the payments were preferences, even if others were not. The liquidator sought leave to proceed on a notice of contention before this Court which was formulated orally. That leave was refused in the course of argument for reasons given at the time and beyond that application no question of distinguishing between particular payments from this point of view arises. 20 The second issue which may be set aside is a possible argument that in view of some of the remarks of the trial judge it could be contended that the defendant was a de facto director who had permitted the company to engage in insolvent trading with himself. No case of that type was run below. If any case of that type were to be based on the insolvent trading provisions of the Corporations Law, it would need to have been pleaded and specific attention devoted to it in evidence. Allegations of that kind are serious and are not identical with those arising from the allegations relating to the unfair preference provisions. 21 The third matter which can be set on one side is this. In his written outline of argument, the defendant below contended that there were two matters in respect of which the trial judge had erred. The first matter related to the question of whether the trial judge had erred in his handling of the question of whether the defendant was or was not aware of the plaintiff's insolvency. In his written submissions, the liquidator contended that the trial judge had made no such error and in oral argument the defendant did not press the written submissions which had been made. 22 That left essentially one matter for resolution on the appeal.

The Contentions of the Parties 23 The defendant's argument on the appeal was centred on the following points.

(a) The defendant entered a contract to provide accounting services on terms that he receive speedy payment, and would not have provided them otherwise.

(b) The value of the services provided should be treated as the price charged for them.

(c) The services were necessary if the company was to continue trading, and were inherently valuable even if they did not result in a quantifiable addition to turnover or inventory. 24 The liquidator contended that the trial judge's reasoning turned on his finding that nothing was achieved other than to the detriment of the company. 25 The liquidator's written submissions continued (paras 4-9: footnotes omitted): "4. The appellant relies on a qualification placed by Ormiston J on passages from judgments of the High Court. His Honour said in V R Dye v Peninsula Hotels Pty Ltd (In Liq) and another [1999] 3 VR 201 at 214: ' .. a precise evaluation of services and goods provided can never be made satisfactorily and, unless there be some dishonest attempt to overvalue particular goods or services, they ought for practical purposes to be taken as having been received at face value, that is, at the value at which the company agreed to acquire them. This process of analysis of each transaction was later described by the majority (in Airservices ) as the 'doctrine of ultimate effect.' 5. If his Honour meant by this that any creditor who is paid for services has not received an unfair preference because, at the end of the day, those services necessarily increased the amount available to creditors by the amount paid, he was wrong. The doctrine of ultimate effect was explained by the majority in Airservices at 502: ' To have the effect of giving the creditor a preference, priority or advantage over other creditors, the payment must ultimately result in a decrease in the net value of the assets that are available to meet the competing demands of other creditors.' 6. In this passage the majority refer in a footnote to the decision of Fox J in Re Discovery Books Ltd (1973) 20 FLR 470 where his Honour said, at 475: ' one must ultimately come back to considering whether by reason of the payment, or dealing, there is less money available for the general body of creditors.' 7. The appellant implicitly accepts that the services provided by him did not result in any quantifiable addition to turnover or inventory [submissions paragraph 4(c)(ii)]. On this basis, applying the ultimate effect doctrine, there was less money for the general body of creditors and the transaction constituted an unfair preference. 8. Further, it is not accurate to say that the services rendered by the appellant were necessary to allow the company to continue trading. Although Mr Miller, a director of the Company, gave evidence in cross-examination that the company would not survive unless the appellant or someone else got the accounts in order [Black AB 24 I- J], that does not mean that the appellant's services were necessary to allow the company to continue trading. The circumstances in Airservices were quite distinct from the present circumstances. In that case, the creditor had the power to cancel the debtor's certificate of registration or seize the aircraft if the debts were not paid. Without aircraft, of course, the business of the debtor in that case could not continue. Here, although the Company's bank put pressure on Mr Miller to have the accounts prepared properly, the appellant's retainer [Blue AB 41] went well beyond the task as did the work actually performed by him and his employees [Blue AB 9-28]. 9. For these reasons the trial Judge applied the law correctly in finding that the appellant's services did not increase the assets available to creditors and so the payments to the appellant constituted unfair preferences." Conclusion 26 To my mind it is irrelevant that in fact, as matters turned out, the defendant's services "achieved nothing other than to the detriment of the other creditors of the company". Underlying this finding appears to be a conclusion that the creditors of the company at the time the defendant was engaged would have been better off if Mr Miller had never approached the defendant, or if the defendant had refused to supply any services to the company. The underlying reasoning appears to be that even if the result of the defendant not giving assistance would have been that the company entered liquidation in July 1994 rather than February 1995, the creditors would have had access to $52,000 more than was otherwise the case. 27 The fact that the defendant's intervention was, in that sense, ultimately detrimental to the creditors is not determinative, though the trial judge appeared so to treat it. This is because the "doctrine of ultimate effect" does not depend on an evaluation of whether the overall result of the impugned transaction, taken with all other circumstances affecting the company, was to improve or worsen the company's position. Rather, the doctrine looks to the "ultimate effect" of the particular transaction. If a company gives up $1,000 in cash, but gains goods which are unquestionably worth $1,000 or more, the ultimate effect has not been to decrease the net value of the assets. 28 Further, it is important not to read the word "money" as used by Fox J in Re Discovery Books Pty Ltd (1973) 20 FLR 470 at 475 too narrowly. Fox J was not referring to cash resources alone. By "money" he was referring to the company's assets as a whole. It was in that sense that the majority in Airservices Australia v Ferrier (1996) 185 CLR 483 at 502 was speaking when it referred to Fox J with approval. 29 The liquidator did not explain the basis for his submission that the Victorian Court of Appeal in V R Dye & Co v Peninsula Hotels Pty Ltd (In Liq) [1993] 3 VR 201 at 214 was wrong. It is not the case that a failure to show any quantifiable addition to turnover or inventory means that the services supplied are without value, or that a payment made for them necessarily decreases the company's net assets. There is here no evidence of, and no endeavour by the liquidator to establish, any "dishonest attempt to overvalue particular … services". Nor is there any other reason to conclude that the services were not worth what was paid for them. 30 In any event, the court ought not to refuse to follow the decision of the Victorian Court of Appeal in V R Dye & Co v Peninsula Hotels Pty Ltd (In Liq) without being convinced that it is plainly wrong: Akins v Abigroup Ltd (1998) 43 NSWLR 539 at 547. The same is true in my opinion of well-considered dicta even if, which is questionable, the statements of the Victorian Court of Appeal can be regarded as obiter dicta. I am far from being convinced that either the decision or the dicta, if that is what they are, were wrong. 31 As a fall-back position, the liquidator submitted that the Victorian Court of Appeal was not stating a hard and fast rule of law but rather that each case turned on its own facts. If one examines the facts of this particular case, they do not suggest the existence of an unfair preference. 32 The liquidator's submission that the defendant's services were not necessary to allow the company to continue trading must in my view be rejected. The distinction propounded in that submission between the powers available to the creditor in the Airservices case to cancel the certificate of registration or seize the aircraft and the powers available to the bank in this case is without substance. The bank, it seems, was owed a debt payable on demand which would not have been repaid if that demand had been made whether under s 449E of the Corporations Law or otherwise. It could have had a liquidator appointed. It dishonoured numerous cheques between July 1994 and February 1995 (Blue 59J-60Q). Its support was as essential to the trading life of the company as the certificate and the aircraft were in the Airservices case. 33 In essence, the trial judge appears to have reached the conclusion which he did on the basis of two matters. One was that the defendant knew that the company was insolvent. The other was that in due course the company went into liquidation. It seems to have been assumed that those facts alone were sufficient to support a conclusion of an unfair preference. 34 I repeat that this is a case in which there was no suggestion that the services were supplied at excessive fees, nor that the services were not needed for the immediate purposes which the defendant and Mr Miller saw as being served. In short, there was no deliberate over-servicing and no overcharging. 35 If the argument of the liquidator was sound, then no person assisting a company in financial difficulties could recover if that company goes into liquidation, so long as the person assisting was aware of the company's insolvency. In my opinion, the law does not go so far.

2. The respondent is to pay the costs of the appellant in this Court.

3. The orders of the trial judge are set aside and in lieu thereof there should be a verdict for the defendant. 4. The respondent is to pay the costs of the appellant of the proceedings below.

5, The respondent, if qualified, is to have a certificate under the Suitors Fund Act . 37 MASON P: I agree. 38 POWELL JA: I also agree. 39 MASON P: The orders of the court will be as indicated.

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