BounceLED Pty Ltd v Clear Skies Corp Pty Ltd - [2023] NSWSC 121 - NSWSC 2022 case summary — Zoe

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BounceLED Pty Ltd v Clear Skies Corp Pty Ltd

[2023] NSWSC 121

Supreme Court of NSW|2022-05-10|Before: Richmond J

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At a glance

Source facts

Court

Supreme Court of NSW

Decision date

2022-05-10

Before

Richmond J

Catchwords

[2021] FCAFC 64 Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567 Cant v Mad Brothers Earthmoving Pty Limited (2020) 63 VR 222
[2020] VSCA 198 Chicago Boot Co Pty Ltd v Davis & Nicol as joint and several liquidators of Harris Scarfe Ltd [2011] SASCFC 92
282 ALR 378 Commissioner of Taxation v Kassem (2012) 205 FCR 156
[2012] FCAFC 124 Cussen as Liquidator of Akai Pty Ltd (in liq) v Commissioner of Taxation [2004] NSWCA 383

Source

Original judgment source is linked above.

Catchwords

[2021] FCAFC 64 Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567 Cant v Mad Brothers Earthmoving Pty Limited (2020) 63 VR 222[2020] VSCA 198 Chicago Boot Co Pty Ltd v Davis & Nicol as joint and several liquidators of Harris Scarfe Ltd [2011] SASCFC 92282 ALR 378 Commissioner of Taxation v Kassem (2012) 205 FCR 156[2012] FCAFC 124 Cussen as Liquidator of Akai Pty Ltd (in liq) v Commissioner of Taxation [2004] NSWCA 38357 ATR 499 D'Aloia v Federal Commissioner of Taxation [2003] FCA 133654 ATR 366 Davis v NSW Land and Housing Corporation [2016] NSWCA 32518 BPR 36,459 Dean-Willcocks v Commissioner of Taxation [2008] NSWSC 111373 ATR 801 Drive My Car Rentals Pty Ltd v Gabriel (2021) 104 NSWLR 697[2021] NSWCA 73 Gibson v Drumm [2016] NSWCA 206 Hosking v Extend N Build Pty Ltd [2018] NSWCA 14938 ACSR 307 Nikitins (Liquidator) v Encorefx (Australia) Pty Ltd (in liq) (No 2) [2021] FCA 27149 ACSR 533 R v PL [2009] NSWCCA 256Macks v Blacklaw & Shadforth Pty Ltd [1997] FCA 66725 ACLC 385 Souaid v Nahas [2019] NSWSC 113289 MVR 364 Sutherland (as liquidator of Sydney Appliances Pty Ltd (in liq)) v Eurolinks Pty Ltd [2001] NSWSC 230

Judgment (16 paragraphs)

[1]

Background

At all relevant times, BounceLED manufactured and supplied light-emitting diode (LED) lights and related components to the signage industry. The Company conducted a commercial sign manufacturing business and used LED lights and related components supplied by BounceLED to illuminate the signs the Company manufactured. BounceLED supplied goods to the Company by the following process: 1. the Company would submit a purchase order to BounceLED; 2. BounceLED would then provide the goods with an invoice to be paid by the Company. Each invoice generally stated that payment was due 30 days after the end of the month in which BounceLED sent the invoice; and 3. BounceLED would allocate payments received from the Company against the oldest invoice due at the time payment was received.
The Company appointed Mr Simon John Thorn (the Liquidator) as voluntary administrator pursuant to Pt 5.3A of the Corporations Act on 23 July 2019, being the applicable "relation back day" within the meaning of s 91. On 17 September 2019, Mr Thorn was appointed deed administrator at a meeting of creditors. On 15 April 2020, Mr Thorn was appointed liquidator pursuant to Pt 5.5 of the Corporations Act.
The Liquidator's claim before the Local Court concerned the following 11 payments allegedly made by the Company to BounceLED in the period of 6 months preceding 23 July 2019, which were alleged to amount to unfair preferences within the meaning of s 588FA: Description Date Amount Paid By 1st Payment 29 January 2019 $ 14,500.65 Company 2nd Payment 18 February 2019 $ 20,000.00 Company 3rd Payment 24 February 2019 $ 18,000.00 Company 4th Payment 1 April 2019 $ 8,567.13 Company 5th Payment 10 May 2019 $ 18,635.46 Comm-Klad 6th Payment 31 May 2019 $ 3,102.00 (Goods returned) 7th Payment 31 May 2019 $ 1,450.00 Ann Orren 8th Payment 6 June 2019 $ 352.00 Comm-Klad 9th Payment 14 June 2019 $ 2,378.24 Skope 10th Payment 26 June 2019 $ 1,841.50 Skope 11th Payment 2 July 2019 $ 3,367.74 Comm-Klad Total $ 92,194.72

[2]

While the Liquidator's claim was that all payments were made by the Company, it was not in dispute in the Local Court or this Court that the 5th and 7th to 11th payments were made by third parties as indicated in the 4th column of the above table.
The Liquidator sought an order pursuant to s 588FF for the sum of $66,959.70 (being the total amount of the 11 payments, subtracting supplies totalling $25,235.02 which were made by BounceLED), plus interest and costs.
The Local Court upheld the Liquidator's claim except for the sixth payment referred to above of $3,102, leaving $63,857.70 as the total amount of the unfair preferences received by BounceLED.

[3]

Statutory scheme

Where a transaction is a "voidable transaction" under one of the subsections of s 588FE, then, unless a defence is available, the Court has power to make one or more of the orders set out in s 588FF, including relevantly "an order directing a person to pay to the company an amount equal to some or all of the money that the company has paid under the transaction": s 588FF(1)(a). It was this power that the Local Court exercised in the present case on the basis that payments in the total amount of $63,875.70 to BounceLED were voidable transactions.
In the present case the Liquidator relied on s 588FE(2) which provides: The transaction is voidable if: (a) it is an insolvent transaction of the company; (b) it was entered into, or an act was done for the purpose of giving effect to it: (i) during the 6 months ending on the relation-back day; (ii) after that day but on or before the day when the winding up began.
Section 588FC defines "insolvent transaction" as follows: A transaction of a company is an insolvent transaction of the company if, and only if, it is an unfair preference given by the company, or an uncommercial transaction of the company, and: (a) any of the following happens at a time when the company is insolvent: (i) the transaction is entered into; or (ii) an act is done, or an omission is made, for the purpose of giving effect to the transaction; or (b) the company becomes insolvent because of, or because of matters including: (i) entering into the transaction; or (ii) a person doing an act, or making an omission, for the purpose of giving effect to the transaction.
The term "transaction" is defined in s 9 to mean in relation to a body corporate, "a transaction to which the body is a party", including a conveyance, transfer or other disposition by the body of its property, a payment made by the body, and an obligation incurred by the body.
While the concept of "insolvent transaction" applies both to an "unfair preference" and an "uncommercial transaction", only the former is relevant in the present case. Hence in the present case, it was necessary for the Liquidator to show that the relevant transaction (being the 11 payments identified in the table above) were an unfair preference and met the requirements of either paragraph (a) or (b) of the definition of "insolvent transaction".
Section 588FA defines when a transaction is an "unfair preference" relevantly as follows: 588FA Unfair preferences (1) A transaction is an unfair preference given by a company to a creditor 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) 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. …

[4]

Local Court Proceedings

In the Judgment, his Honour identified the issues on which the making of an order under s 588FF depended as follows: 1. whether the payments covered by the 11 transactions were made "from" the Company for the purposes of s 588FA, and whether the payments resulted in BounceLED receiving more from the Company in respect of those amounts than it would have done if the payments were set aside and BounceLED were to prove the payments in the winding up of the company; 2. whether the amounts owing to BounceLED were secured and, if so, whether the payments were made in respect of the secured debts owed to BounceLED by the Company; 3. whether, at the time of the payments, the Company was insolvent as required by s 588FC; and 4. whether BounceLED had made out a good faith defence pursuant to s 588FG(2).
Before addressing these issues, his Honour set out the following background facts: 1. The parties commercial relationship began in September 2017. 2. The relationship continued until 2 July 2019. 3. In the financial year ending 30 June 2017, [the Company] made a loss of $116,000 on sales of 5.8 million dollars. 4. In the financial year ending 30 June 2018, [the Company] made a loss of $835,000 on sales of 3.7 million dollars. 5. The relation back period commenced on 24 January 2019. 6. On 23 July 2019, Simon John Thorn was appointed voluntary administrator of [the Company]. 7. On 15 April 2020, Simon John Thorn was appointed liquidator. 8. Payments totalling $89,092.72 pleaded in paras 7(a) to (e) and (g) to (k) were made by [the Company] to BounceLED. 9. These payments were made in relation to goods that had been supplied and invoiced by BounceLED. 10. During the period 24 January 2019 to 23 July 2019, BounceLED made supplies to [the Company] totalling $25,235.02.
In relation to [8], this is a reference to pars 7(a) to (e) of the Liquidator's statement of claim which set out the 1st to 5th payments, and pars 7(g) to (k) of the statement of claim which sets out the 7th to 11th payments.
In relation to the first issue, his Honour divided the 11 payments into 3 categories: 1. the 1st to 4th payments, which were made from the bank account of the Company; 2. the 6th payment, which related to a "negative sale" where goods were returned by the Company to BounceLED on 31 May 2019; and 3. the remaining payments Ltd (being the 5th and 7th to 11th payments) which were made to BounceLED by third parties, being Comm-Klad, and Anne Orren and Scope Group Pty Ltd (Third Party Payments).

[5]

Nature of the Appeal

The appeal to this court is governed by ss 39-41 of the Local Court Act which relevantly provide: 39 Appeals as of right (1) A party to proceedings before the Court sitting in its General Division who is dissatisfied with a judgment or order of the Court may appeal to the Supreme Court, but only on a question of law. … 40 Appeals requiring leave (1) A party to proceedings before the Court sitting in its General Division who is dissatisfied with a judgment or order of the Court on a ground that involves a question of mixed law and fact may appeal to the Supreme Court but only by leave of the Supreme Court. … 41 Determination of appeals (1) The Supreme Court may determine an appeal made under s 39 (1) or 40: (a) by varying the terms of the judgment or order, or (b) by setting aside the judgment or order, or (c) by setting aside the judgment or order and remitting the matter to the Local Court for determination in accordance with the Supreme Court's directions, or (d) by dismissing the appeal. …
Under s 39(1) of the Local Court Act, an appeal may be brought as of right on a question of law. In that case, the existence of a question of law is not merely a qualifying condition to the right of appeal, but the question of law alone is the subject matter of the appeal: Davis v NSW Land and Housing Corporation [2016] NSWCA 325; 18 BPR 36,459 at [77]. Hence, in such an appeal, there can be no review of the merits of the Local Court's decision and it is only possible to challenge the legal correctness of what the Local Court has done: Davis at [77]-[78].
In contrast, s 40(1) of the Local Court Act allows, with leave, an appeal on a ground that involves a question of mixed law and fact. A grant of leave to appeal generally requires there to be an error of principle, a matter of public importance or injustice that is reasonably clear in the sense of going beyond what is merely arguable: Gibson v Drumm [2016] NSWCA 206 at [19]; Secure Parking Pty Ltd v Ralan Property Services Pty Ltd (No 1) [2018] NSWSC 660 at [10].
In an appeal under s 39 or 40 of the Local Court Act, this Court does not have power to make a finding of primary fact even if an error of law has been established or even if an error of mixed fact and law has been established: Lesley-Swan v Owners SP 32735 [2013] NSWSC 1635 at [71]-[75]; Rose v Tunstall [2018] NSWCA 241 at [25]-[33]. As a consequence, if an appeal is successful under either s 39 or s 40, but it is necessary to make any findings of primary fact, the proceedings will need to be remitted to the Local Court for further hearing.

[6]

Issue 1: whether payments were received from the Company (grounds 1-4)

Grounds 1 to 4 are: 1. The learned magistrate erred in: a. Not applying the decision of the Court of Appeal of the Supreme Court of Victoria in Cant v Mad Brothers Earthmoving Pty Ltd (2020) 63 VR 222; [2020] VSCA 198; and b. thereby concluding that amounts paid to BounceLED Pty Limited (BounceLED) on each of 29 January 2019, 18 February 2019 and 24 February 2019 (together, the Trust Payments) and on each of 10 May 2019, 31 May 2019, 6 June 2019, 14 June 2019, 26 June 2019 and 2 July 2019 (together, the Third Party Payments) were monies received from Clear Skies Corp Pty Limited (In Liquidation) (Company) for the purpose of section 588FA(1)(b) of the Corporations Act 2001 (Cth) (Act). 2. The learned magistrate ought to have concluded that the Trust Payments and / or the Third Party Payments: a. were not received from the money or assets to which the Company was entitled but instead were monies received from Comm-Klad Pty Ltd (Comm-Klad), Skope Group Pty Ltd (Skope) and Ann Orren (Orren) (together, the Third Party Payers); b. did not have the effect of diminishing the assets of the Company available to creditors; c. therefore, were not payments received from the Company for the purpose of section 588FA(1)(b) of the Act; and d. accordingly, were not an unfair preference given by the Company for the purpose of section 588FA of the Act. 3. Further or in the alternative to grounds 1 and 2, the learned magistrate erred in: a. failing to make any findings of material fact and law as to whether (or, alternatively, failing to consider and determine whether or, further alternatively, failing to provide any reasons applying the law to such findings of material fact as to whether) the monies in the bank account of the Company that were used to make the Trust Payments were beneficially owned by the Company (as opposed to being held on trust for any of BounceLED or the Third Party Payers); b. in the alternative to a., failing to conclude that the monies in the bank account of the Company that were used to make the Trust Payments were not monies beneficially owned by the Company. 4. Further or in the alternative to Grounds 1 and 2, the learned magistrate ought to have concluded that: a. the monies in the bank account of the Company that were used to make the Trust Payments were not monies beneficially owned by the Company; b. the Trust Payments did not have the effect of diminishing the assets of the Company available to creditors; c. the ultimate effect of the Trust Payments did not give BounceLED a preference, priority or advantage over other creditors of the Company; and d. accordingly, the Trust Payments were not an unfair preference given by the Company for the purpose of section 588FA of the Act.

[7]

Whether the Third Party Payments were received from the Company

His Honour determined that the Third Party Payments were unfair preferences and fell within the requirements of s 588FA, agreeing with the Liquidator's submission that s 588FA(1)(a) makes specific provision for such transactions. His Honour found that the payments "were treated by the creditor as payments from the company and they were applied to outstanding invoices" (see [24] above).
As set out at [23] above, His Honour noted that the parties had made submissions regarding Cant v Mad Brothers Earthmoving Pty Limited (2020) 63 VR 222; [2020] VSCA 198, In the matter of Evolvebuilt Pty Limited [2017] NSWSC 901; 35 ACLC 17-036 and Re Emanuel No 14 Pty Ltd (In Liq); Macks v Blacklaw & Shadforth Pty Ltd [1997] FCA 667; 147 ALR 281, as well as what was said by Rees J in In the matter of Western Port Holdings Pty Ltd (receivers and managers appointed) (in liq) [2021] NSWSC 232; 358 FLR 45 at [40].
However, as BounceLED submitted, the fact that BounceLED received the Third Party Payments and applied them to its outstanding invoices is not sufficient to satisfy s 588FA(1)(b). It is necessary that they be received from the Company, which requires that they be received from the Company's own money or assets to which it is entitled, so that the effect of the transaction is to diminish the assets of the Company available to creditors: Cant v Mad Brothers at [120]; Western Port Holdings Pty Ltd at [39].
In Cant v Mad Brothers, the Victorian Court of Appeal considered the meaning of the phrase "from the company" in s 588FA(1)(b), concluding at [120] that: (a) The words 'given by a company' in s 588FA(1) do not form part of the definition of an unfair preference. They are descriptive of the position when the elements of the definition in paragraphs (a) and (b) are met. (b) A company may be a party to a transaction for the purposes of s 588FA(1)(a) as a result of giving a third party a direction as to the making of a payment to a creditor, or by authorising or ratifying such a payment. However, this does not necessarily mean that the payment is received 'from the company'. (c) The words 'from the company' in s 588FA(1)(b) have the effect of retaining the requirement under the previous law that the preference be received from the company's own money, meaning money or assets to which the company is entitled. (d) It is necessary, in order for a preference to be 'from the company' that the receipt of it by the creditor has the effect of diminishing the assets of the company available to creditors. (e) On the other hand, a payment by a third party which does not have the effect of diminishing the assets of the company available to creditors is not a payment received 'from the company' and is therefore not an unfair preference.

[8]

Whether the Trust Payments were not received from the company because they were merely held on trust

BounceLED contended in the Local Court that the Trust Payments were not received from the Company because they were not monies beneficially owned by the Company, but rather were specific amounts which had been deposited to enable specific payments to be made to BounceLED and were "simply flowing through the company to BounceLED". The contention was that the amounts were held on a "Quistclose trust", being a trust according to the principle stated in Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567. Reliance was placed on the decision Colvin J in Nikitins (Liquidator) v Encorefx (Australia) Pty Ltd (in liq) (No 2) [2021] FCA 27; 149 ACSR 533.
The evidence relied on by BounceLED for this submission (as set out in its written and oral submissions in the Local Court) was (a) that it was apparent from the Company's bank statements that on the date that each of the Trust Payments was made, the same amount had been deposited into the Company's bank account from the relevant third party, and (b) that the Liquidator had accepted in cross-examination that each amount was paid by the third party to the Company by way of loan. BounceLED submitted that it could be readily inferred from this that each deposit was earmarked for a particular purpose being payment of the same amount to BounceLED.
It is necessary to outline briefly what was decided in Nitikins because this was the only decision on this issue to which his Honour was referred. That case concerned a company called EncoreFX (Australia) Pty Ltd (EFX) which was placed into voluntary administration on 30 March 2020 and went into liquidation in May 2020. Shortly before 30 March 2020, EFX had received amounts in Australian dollars from two of its clients (called Verbatim and Next) for the purposes of undertaking foreign exchange transactions to convert those funds into US dollars. The commencement of the administration intervened before the transactions were completed. The liquidators sought directions from the Court as to whether they were entitled to treat the amounts as property of the liquidation. Colvin J held that they could not because each amount was held on a statutory trust for the relevant clients under s 981H.
This conclusion made it unnecessary for Colvin J to deal with an alternative contention put by Verbatim and Next, that the amounts in dispute were held by the liquidators on a "Quistclose trust", being a trust according to the principle stated in Barclays Bank Ltd v Quistclose Investments Ltd. However, Colvin J did address that contention at length and ultimately rejected it.

[9]

Issue 2: whether BounceLED received more than it would have in the winding up (grounds 5 and 6)

Grounds 5 and 6 are: 5. The learned magistrate erred in: a. not applying the decision of the Supreme Court of New South Wales in Re Pacific Steelfixing Pty Ltd [2021] NSWSC 655; and b. concluding that BounceLED received from the Company more money than if the transactions with respect to each of the amounts paid to BounceLED during the period between 29 January 2019 and 2 July 2019 (inclusive) were set aside and BounceLED was required to prove for the debts the subject of those transactions in the winding up of the Company. 6. The learned magistrate ought to have concluded that: a. the Defendants (the Plaintiffs in the Court below) did not discharge their onus of establishing that BounceLED received from the Company more money than if the transactions with respect to each of the amounts paid to BounceLED during the period between 29 January 2019 and 2 July 2019 (inclusive) were set aside and BounceLED was required to prove for the debts the subject of those transactions in the winding up of the Company; and b. accordingly, none of the transactions with respect to each of the amounts paid to BounceLED during the period between 29 January 2019 and 2 July 2019 (inclusive) was an unfair preference given by the Company for the purpose of section 588FA of the Act.
His Honour concluded that unsecured creditors would not receive 100 cents in the dollar in the Company's liquidation and hence that BounceLED received more from the 11 payments than it would receive if it repaid the amounts and instead proved for its debts in the winding up of the Company for the purposes of s 588FA(1)(b): see [25] above.
This finding is contested by grounds 5 and 6. I accept BounceLED's submission that grounds 5 and 6 raise a question of law which is whether the conclusion reached by his Honour, that BounceLED received more from the 11 payments than it otherwise would have if it had to prove for its debts in the winding up, was reasonably open on the evidence and facts found.
The relevant part of BounceLED's submissions on this issue are as follows: 51. However, this finding was against the weight of the evidence. The Liquidator gave evidence that: (a) a notice of intention to declare a dividend had been issued; (b) proofs of debt had not been formally called (and thus had not been adjudicated); (c) the Liquidator's investigations into the company were ongoing; (d) insolvent trading claims had been issued for $2,563,344.36 and unfair preference payment claims of $398,850.57, against a total creditor pool (including secured credit0rs) of $2,563,344.36; (e) a number of recovery claims were in fact underway, including a potential insurance claim that could be "lucrative"; and (f) the Liquidator was not able to determine what the final outcome of the liquidation might be. 52. The ongoing recovery actions and investigations, once completed, may very will result in there being a surplus to the Company. The Liquidator, when pressed in re-examination if those investigations would result in a return of 100 cents in the dollar, opined that this was "very unlikely" yet simultaneously gave evidence that it was "too early to tell" what the return might be. 53. The learned Magistrate acknowledged that it was not assured that there would be insufficient funds in the liquidation so that Bounce would receive less than the Payments, including because of the various claims underway by the Liquidator, but the Reasons concluded that this limb of section 588FA(1) was satisfied because the Liquidator's evidence was "clear and unchallenged". 54. To the contrary, however, it was put to the Liquidator in cross-examination that he could not determine with certainty what the final outcome of the liquidation may be. 55. More importantly, the facts as set out in paragraph 51 above were such that the Magistrate erred in concluding that the Company had discharged its onus of proving that Bounce received more from the Payments than it would have if required to repay those amounts and prove for its debt in a winding up of the Company.

[10]

Issue 3: whether BounceLED has a good faith defence (grounds 7 and 8)

The third issue arising in this appeal is whether BounceLED established the defence in s 588FG(2) of the Act. As noted above, his Honour accepted that s 588FG(2)(a), (b)(i) and (c) were satisfied, but found that s 588FG(2)(b)(ii) was not.
Grounds 7 and 8 are: 7. The learned magistrate erred in concluding that: a. a reasonable person in the position of BounceLED would have had reasonable grounds for suspecting that the Company was insolvent on each of the occasions when amounts were paid to BounceLED during the period between 29 January 2019 and 2 July 2019 (inclusive); and b. BounceLED did not thereby establish the defence in section 588FG(2) of the Act (in circumstances where the learned magistrate was satisfied that the other elements of the defence were made out). 8. The learned magistrate ought to have concluded that: a. a reasonable person in the position of BounceLED would not have had reasonable grounds for suspecting that the Company was insolvent on each of the occasions when amounts were paid to BounceLED during the period between 29 January 2019 and 2 July 2019 (inclusive); and b. BounceLED thereby established the defence in section 588FG(2) of the Act; and c. accordingly, no order should have been made against BounceLED pursuant to section 588FF of the Act.
It was common ground between the parties that ground 7 raises a question of mixed law and fact for which leave is required. BounceLED submitted in the alternative that ground 7 raises a question of law because the finding that s 588FG(2)(b)(ii) was not satisfied was not reasonably open, having regard to the whole of the evidence.
I am satisfied that ground 7 raises a question of mixed law and fact because the question whether the test in s 588FG(2)(b)(ii) is satisfied requires the application of a legal principle (being the objective test in that provision) to the facts of the case: see R v PL [2009] NSWCCA 256; 261 ALR 365 at [26]; Souaid v Nahas [2019] NSWSC 1132; 89 MVR 364 at [3]. I will address the question of leave after considering whether ground 7 is made out.

[11]

Applicable principles

A number of cases have considered the requirements of s 588FG(2)(b) including Cussen as Liquidator of Akai Pty Ltd (in liq) v Commissioner of Taxation [2004] NSWCA 383; 57 ATR 499; In the matter of Alsafe Security Products Pty Ltd atf Alsafe Trust (in liq) [2016] NSWSC 428; Hosking v Extend N Build Pty Ltd [2018] NSWCA 149; 357 ALR 795; White v ACN 153 152 731 Pty Ltd (in liq) (2018) 53 WAR 234; [2018] WASCA 119 and Badenoch Integrated Logging Pty Ltd v Bryant (2019) 284 FCR 590; [2021] FCAFC 64. The following propositions may be drawn from those cases: 1. The application of s 588FG(2) is to be considered through the contemporary eyes of the parties in the commercial circumstances then prevailing, and without the benefit of hindsight: White at [107]. 2. The reference to suspicion of insolvency is suspicion of actual insolvency, and not merely a suspicion (or even a belief) that the debtor might be insolvent, or potentially insolvent. The word "suspect" requires more than wondering whether a matter exists or not, and involves a positive feeling of actual apprehension or mistrust that the debtor will be able to pay its debts: Hosking at [115]; White at [112]. 3. The test in s 588FG(2)(b)(i) is hybrid in character since it is directed to whether the particular creditor, with its perspicacity, the information available to it, and with any analysis of that information that it had made, had no "reasonable grounds" for suspecting insolvency at the relevant time, and the requirement for "no reasonable grounds" is objective in character: Alsafe at [33]; Hosking at [115]. 4. The test in s 588FG(2)(b)(ii) is objective in character, and is directed to whether a reasonable person in the creditor's circumstances, using the information reasonably available in those circumstances and making the analysis of that information which a reasonable person would make, would have had reasonable grounds to suspect the debtor's insolvency. The matter will be determined by reference to a person who has the knowledge and experience of an average business person: Alsafe at [34]; Hosking at [115]. 5. A failure to pay a debt, or to pay it in a timely way, may of itself not ground a suspicion of insolvency but instead indicate the mere presence of a liquidity problem or perhaps raise a possibility that the debtor is insolvent but without providing sufficient foundation for the formation of an actual suspicion that the debtor is actually insolvent. A failure to pay a debt or its late payment must be considered in the context of the history of the dealings between the parties and all the commercial circumstances: White at [113]. 6. The words "in the person's circumstances" in s 588FG(2)(b)(ii) refer to the actual circumstances as they exist at the time the creditor entered into the relevant transaction (here each of the 11 payments) and denote external objective factors or circumstances rather than factors personal to the creditor such as their personal perspicacity, financial acumen and the like: Cussen at [29]-[31], [120]; White at [123]. 7. The reference in s 588FG(2)(b)(ii) to whether a "reasonable person" in the person's circumstances "would have had" no reasonable grounds for suspecting that the debtor was insolvent is a reference to the "reasonable person's" assessment of the information actually available to the creditor into whose "circumstances" the "reasonable person" is theoretically placed. That would include knowledge of the fact that some things were not known because no request for additional information had been made but does not encompass information which is not in fact available but which a "reasonable person" would have sought and, presumably, received: Cussen at [114]; White at [123]. 8. The test under s 588FG(2)(b)(ii) is an objective test, and the standard of measurement is that of a hypothetical person who is assumed to have the knowledge and experience of the "average business person". It does not require an examination of whether the particular creditor, with their skills, training and experience, acting reasonably, would have had reasonable grounds for suspecting insolvency: Cussen at [17] and [31]; White at [123]. 9. The objective circumstances referred to in (6) may include the nature and practices of the industry in which the relevant transaction has occurred, insofar as they are established as objective matters of fact, but not merely the particular creditor's subjective views as to the operation of the industry and its practices: White at [124]. 10. If the creditor receiving the impugned payment does not in fact infer insolvency or find grounds to suspect its existence and continues to provide credit to the company, that may provide some evidence although it is not determinative, of how a reasonable person in the person's circumstances would regard the matter: White at [125]. 11. Whether a reasonable person would have suspected insolvency is to be assessed by reference to all the circumstances existing at the time of the impugned transaction, including accumulated circumstances: Alsafe at [34]. In Sutherland (as liquidator of Sydney Appliances Pty Ltd (in liq)) v Eurolinks Pty Ltd [2001] NSWSC 230; 37 ACSR 477, Santow J said at [43]: "The case law illustrates that there is no single factor whose presence invariably establishes that there was, or should have been, the requisite suspicion. Rather it is a question of looking not in hindsight but through the contemporary eyes of the parties, at the commercial circumstances then prevailing between them. This is to identify in that context those factors pointing towards insolvency of the debtor. This in turn is in order to ascertain which of those factors were apparent to the payee, and then the cumulative impact that knowledge of them should have had, or did have, upon the payee. There will also be potentially countervailing factors and circumstances to be weighed in the balance which could have tended to dispel suspicion at the time." 1. Each limb of s 588FG(2)(b) requires the negative proposition under that limb to be proved by the creditor: White at [126].

[12]

Decision below on issue 3

His Honour's reasons for concluding that s 588FG(2)(b)(ii) was not satisfied are set out at [30] above. Essentially, it involved setting out 5 matters which BounceLED "relied on" and then 3 matters which the Liquidator "pointed to" in resisting the application of the defence under s 588FG(2). These are not stated as findings of fact; rather, they are merely a summary of contentions put by each party. There follows a reference to some of the principles relevant to the application of s 588FG(2), and then the dispositive reasoning is found in the final paragraph set out at [30] above, commencing "In my view". The critical part of this reasoning is as follows (emphasis added): The evidence regarding the Company's ability or inability to pay its debt, the delay in payment, the need to withhold stock and suspend delivery, the need for post-dated invoices, payment plans and declining sales would mean that a reasonable person who has the knowledge and experience of an average business person using the information reasonably available and making an analysis of that information which a reasonable person would make, will come to no other conclusion that to suspect insolvency.
The emphasised words refer to 6 matters and repeat what was said in the Liquidator's written submissions dated 27 July 2021 at [38]. However, his Honour's reasons do not refer to particular aspects of the evidence which support the 6 matters referred to. Further, while his Honour's reasons set out the parties competing positions in relation to the evidence in the passage quoted at [30] above, his Honour does not deal with the significance of the evidence referred to or deal with the factual dispute that existed between the parties as to whether BounceLED had entered into a "payment plan" with the Company, which BounceLED denied. The only factual finding which was made by his Honour in relation to s 588FG(2)(b) was that "Mr Krecklenberg did not have grounds for suspecting that the Company was insolvent". The sparsity of his Honour's reasons on the application of s 588FG(2)(b)(ii) reflects the very limited assistance he received from the parties as to the correct principles to apply, with neither party directing his Honour to any of the relevant authorities.
Although the passage quoted at [77] above merely restates the submission made by Mr Justice, counsel for the Liquidator, in written submissions, Mr Justice did in his oral closing submissions in the Local Court refer to particular parts of the evidence which supported the submission he made. I will refer to this evidence, where appropriate, in the next paragraph.

[13]

The parties' submissions on issue 3

The plaintiff contended that his Honour's conclusion was erroneous because it mischaracterised the evidence and otherwise because it failed to take into account the matters which had been identified by BounceLED in support of the conclusion that s 588FG(2)(b) was satisfied. In relation to the matters relied upon by his Honour in support of that conclusion, BounceLED submitted that: 1. As to the Company's ability or inability to pay its debts, Mr Krecklenberg had given evidence of the absence of any communication from the Company to BounceLED as to any financial difficulties being faced by it, the ongoing payments being received by BounceLED and the national and international presence of the Company and its large and significant customer base (the first and third of which were referred to by his Honour in his reasons). 2. As to the "delay in payment", BounceLED referred to the evidence of Mr Krecklenberg that there was an industry practice in which large sign manufacturers required longer payment terms of trade, a trend in BounceLED's business of it receiving part and/or rounded payments from large customers, it not being unusual in BounceLED's business for customers to extend payment into 90+ day terms and the fact that the Company had historically been late with making payments to BounceLED. Further, the cases recognise that the delayed payment of debts and the application of pressure to secure payment of debts do not of themselves constitute reasonable grounds to suspect insolvency: Heavy Plant Leasing Pty Ltd (in liq) at [63] and [70]. 3. As to the "need to withhold stock and suspend delivery", BounceLED referred to the evidence of Mr Krecklenberg that he stopped supply once a customer went over 90 days in arrears due to its financial arrangement with Scottish Pacific which provided a commercial explanation for stopping the supply to the Company rather than a suspicion of insolvency. Also, it was pointed out that the evidence only established one instance of suspension of delivery. 4. As to the need for post-dated invoices, payment plans and declining sales, BounceLED relied upon Mr Krecklenberg's evidence that the post-dating of the invoices in the last week of the month and particularly during the Christmas shut down period was a normal practice, that there was no evidence of any "payment plan" and that Mr Krecklenberg gave evidence as to a legitimate explanation for the declining sales by BounceLED to the Company (being that the Company had excess stock and was sourcing its supplies from China).

[14]

Resolution of issue 3

There are a number of errors of principle in the way in which his Honour addressed the test under s 588FG(2)(b)(ii).
First, his Honour did not identify the evidence as to the "Company's ability or inability to pay its debts" at or leading up to the impugned payments and how such evidence is relevant to the application of the second limb. The focus of the second limb is on the information which was actually available to the creditor (see [75(7)] above). That evidence establishes that it was known to BounceLED during the period from early October 2018 to 29 January 2019 (when the 1st payment was made) the Company was able to, and did, pay part of the outstanding debt, as there were successive payments to reduce the outstanding debt in each of October, November, December and January. Consistently with his Honour's finding that s 588FG(2)(b)(i) was satisfied, the evidence does not indicate that BounceLED was aware that the Company was unable to pay the balance of the debt. The only contemporaneous documents in evidence which might lead to an inference that there was doubt as to whether the Company could pay its debts were internal emails between persons employed or associated with the Company and there is no evidence that BounceLED saw any of these emails at the relevant time. The position is the same throughout the period from the time of the 1st payment to the 11th payment.
Second, delay in payment is not itself determinative and needs to be considered in light of all the relevant circumstances. While there was delay in payment of the outstanding debt, there were regular payments in the period up to the end of January 2019. In October 2018, two payments were made ($5,429.05 and $8,091.60) and they were not round number payments. In November, three payments were made ($1,339.62, $10,688.85 and $3,000) of which only one was a round number payment. In December, two payments were made ($15,000 and $3,000) both of which were round number payments. In January, two payments were made ($4,418.55 and $14,500.65, being the 1st payment), none of which were round number payments. In total there were nine payments (including the 1st payment) over the period from 1 October 2018 to 31 January 2019 of which only three were round number payments. The position is not relevantly different in the period from 1 February to 2 July 2019, in which there were 10 payments of which only 3 were round number payments. Taken as a whole this is consistent with the Company having a cashflow problem rather than an incapacity to pay the debt.

[15]

Conclusion

As BounceLED has succeeded on grounds 1 and 7, the appeal should be allowed. The next question is the nature of the relief which should be granted. In the case of ground 1, the appropriate relief would be to remit the matter to the Local Court as further findings of primary fact are required.
In the case of ground 7, this does not require any new finding of primary fact and as it is determinative of the appeal, the appropriate course is for this Court to exercise its power under s 41(1) of the Local Court Act and dispose of the proceedings below. In particular, it is consistent with the overriding purpose in s 56(1) of the Civil Procedure Act 2005 (NSW) that the matter be finally resolved in this Court rather than being remitted back to the Local Court (there being no further finding of primary fact required).
I will hear the parties as to costs. However, I indicate that in relation to the costs below, this Court can exercise the discretionary power of the Local Court with respect to costs and as the plaintiff was successful on appeal, the appropriate order is that the defendants pay the plaintiff's costs of the proceedings in the Local Court: Drive My Car Rentals Pty Ltd v Gabriel (2021) 104 NSWLR 697; [2021] NSWCA 73 at [112]. I accept the plaintiff's submission that the costs orders should be made against the Liquidator personally, as he was the moving party in the litigation: Silvia v Brodyn Pty Ltd [2007] NSWCA 55; 25 ACLC 385 at [48]-[51].
Accordingly, I make the following orders: 1. Grant leave to the plaintiff to appeal on ground 7 only pursuant to s 40(1) of the Local Court Act 2007 (NSW). 2. Allow the appeal and set aside the judgment entered and orders made by Thomas LCM on 14 October 2021 in the Local Court. 3. Order that the Statement of Claim filed by the plaintiffs (the defendants in this Court) in the Local Court be dismissed. 4. The plaintiff to email to my Associate and serve on the defendants, submissions as to costs in this Court and the Local Court proceedings by 4:00pm on 1 March 2023. 5. The defendants to email to my Associate and serve on the plaintiff, submissions as to costs in this Court and the Local Court proceedings, including any application for a certificate under the Suitors' Fund Act by 4:00pm on 8 March 2023. 6. The plaintiff to file and serve reply submissions (if any) by 4:00pm on 10 March 2023. 7. Liberty to apply on two days' notice.

[16]

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 22 February 2023

In relation to the third category, being the Third Party Payments, his Honour found that they were unfair preferences for the following reasons: In relation to the payments from Comclad, Scope Group and Anne Orren, the plaintiff says that s 588FA(1)(a) makes specific provision for such a case and a challenge to Mr Thorn in cross-examination about the payment from Anne Orren was never put. The defendant says that at the time of making payments Scope and Concave were owed money by Clear Skies, the payments were recorded in Clear Skies' general ledger against their loan accounts and the payments did not result in any diminution of Clear Skies' assets that would otherwise be available to creditors. … In relation to the payments made by Comclad, Scope Group and Anne Orren, I am also similarly satisfied that they are unfair preferences. S 588FA(1)(a) makes specific provision for such transactions and they were treated by the creditor as payments from the company and they were applied to outstanding invoices. In that regard, I note what was said by both parties regarding the different authorities, including Cant v Mad Bros Earth Moving Pty Limited (2020) VSCA 198; Evolve Built Pty Limited NSWSC 901 and re Emanuel No 14 (1997) 147 ALR 281 and Commissioner for Taxation v Kassem (2012) 205 FLR 156. I also note the comments made by Justice Rees in Western Port Holdings Pty Limited (2021) NSWSC 232, regarding the particular authorities and, in particular, what she said at para 40, where it was noted what was relevant in examining factual scenarios in which an unsecured creditor has been found to have received payment from a company. In my view, those matters highlighted by the defendant in relation to these payments are not sufficient for the plaintiff to have failed to discharge the onus on them to prove that they are unfair preferences. Therefore, I am satisfied that the payments under consideration are unfair preferences for the purposes of s 588FA of the Corporations Act.

In relation to s 588FG(2)(b), his Honour said: In relation to those matters that the defendant relies upon, they point, in particular, to the following: 1. Mr Krecklenberg's evidence that Clear Skies had a national and international presence and its customer base included large and significant brands. 2. Late payment or payment in partial satisfaction of invoices was not unusual, either for Clear Skies Corporation Pty Limited or the industry. 3. Any downturn in orders from Clear Skies Corporation Pty Limited in 2019 was explained on the basis that an amount of excess stock had been discovered and this excess stock was being exhausted before new orders would be made and Mr Krecklenberg suspected that Clear Skies Corporation Pty Limited may have decided to start purchasing goods directly from China. 4. At no time did BounceLED issue letters of demand or commence proceedings against clear Skies Corporation. 5. BounceLED never received any correspondence suggesting the company was insolvent or unable to make payments. In resisting the defence raised, the plaintiff points to the following: 1. For the period from January 2019 to July 2019 there were missed payments, round number payments, post-dated invoices, payment plans, freezes on deliveries and declining sales. 2. These items had been ongoing since October 2018. 3. The plaintiff points to various parts of Mr Krecklenberg's evidence relating to his response to those matters raised, including generally his following up of payments and, more specifically, what he did on other occasions when payments were late or delayed, including the holding of stock. The defence includes both an objective and subject test. Subjective being the person, in this case Mr Krecklenberg or his company having non reasonable grounds for suspecting that the company was insolvent or becoming insolvent and, not or, the objective test that a reasonable person in Mr Krecklenberg's circumstances would have had no such grounds for so suspecting. In other words, both questions have to be answered in favour of the defendant for the defence to succeed. The words of Justice Kitto, in Queensland Bacon v Rees, are often quoted: "A suspicion is that something exists in more than a mere idle wondering whether it exists or not. It is a positive feeling of actual apprehension or mistrust amounting to a slight opinion but without sufficient evidence." I have no doubt the creditor became a party to the transaction or transactions in good faith, as required by subpara (a) of subs (2) of s 588FG. The success or otherwise of the defence really turns on subpara (b) in subs (2) and the objective and subjective tests I have referred to. In relation to the subjective test, that is subpara (i) of s 588FG(2)(b), it would appear to be a situation where Mr Krecklenberg, for reasons he gave in evidence, did not have grounds for suspecting that the company was insolvent. In other words, he did not have a positive feeling of actual apprehension or mistrust that amounted to a slight opinion but without sufficient evidence. But as I have pointed out, that is not the end of the matter. Subpara (ii) of s 588FG(2)(b) is the objective test and requires the defendant to prove that a reasonable person, in the person's circumstances, would have had no such ground for so suspecting. It has been said that the question in s 588FG(2)(b)(ii) is whether a reasonable person who has the "knowledge and experience of an average business person", in the creditor's circumstances, using the information reasonably available in those circumstances and making the analysis of that information which a reasonable person would make, would have had reasonable grounds to suspect the debtor's insolvency, and for the quote see Badenoch Integrated Logging Pty Limited v Bryant, In the matter of Gunns Limited (in liq) receivers and managers Appointed) [2021] FCAFC 64 at para 128 from 10 May 2021. In my view, when one applies this test to the evidence available to Mr Krecklenberg, on any objective basis it could not be said that any reasonable person would not have suspected insolvency. The evidence regarding the company's ability or inability to pay its debts, the delay in payment, the need to withhold stock and suspend delivery, the need for post-dated invoices, payment plans and declining sales, would mean that a reasonable person who has the knowledge and experience of an average business person using the information reasonably available and making an analysis of that information which a reasonable person would make, would come to no other conclusion than to suspect insolvency.

Rees J in Western Port Holdings Pty Ltd reviewed the authorities on the meaning of the expression "from the Company" in s 588FA(1)(b), and concluded as follows: [38] I am left with some disquiet by the reasoning in Cant v Mad Brothers . The language of section 588FA(1)(b) does not readily permit a construction that it is necessary to demonstrate a diminution in the assets of a company for there to be an unfair preference. As the High Court observed in International Air Transport Association v Ansett Australian Holdings Ltd (2008) 234 CLR 151; [2008] HCA 3 , "Insolvency law is statutory and primacy must be given to the relevant statutory text" as opposed to general principles developed from earlier case law or statutes: at [78] per Gummow, Hayne, Heydon, Crennan and Kiefel JJ Statutes are to be construed and applied according to their terms, not under the influence of "muffled echoes of old arguments" concerning other legislation: R v Commonwealth Conciliation and Arbitration Commission; Ex parte Association of Professional Engineers of Australia (1959) 107 CLR 208 at 276 per Windeyer J. Further, the Court in Cant v Mad Brothers, in following VR Dye and McKern, has applied reasoning developed in cases which did not concern third party payments to a case which did. [39] Nonetheless, the Court's conclusion in Cant v Mad Brothers was open in circumstances where the question had been left open in Kassem and Hosking, there is no contrary binding appellate authority and three appellate courts have considered that VR Dye is not plainly wrong: Beveridge v Whitton; McKern and Kassem. I am not entitled to depart from a considered judgment of an intermediate appellate court simply because I might prefer a different view: N & M Martin Holdings Pty Ltd v Cmr of Taxation [2020] FCA 1186 at [43] -[45] per Steward J. Ultimately, as Nettle JA observed in McKern, "If the reasoning in VR Dye is to be overturned, it is for the High Court to say so": at [27]. [40] Drawing on the factual scenarios in which an unsecured creditor has been found to have received payment "from [a] company", and where it has not, the following matters are relevant: (a) Was the benefit, which was conferred by the third party on the creditor, a benefit to which the company was otherwise entitled, for example, by reason of a contract between the company and the third party (Re Emanuel) or because the third party owed money to the company (Evolvebuilt; Cant v Mad Brothers)? (b) Was the third party a related entity to the company, by reason of common directors or shareholders, or interdependence of financial arrangements, such that payment by the third party may be regarded as effectively payment by or at the direction of the company (Burness; Kassem; Cant v Mad Brothers)? (c) Was the third party payment a loan to the company: Kassem? If it was recorded as a loan in the books of the company, this will obviously support such a finding: Cant v Mad Brothers.

Colvin J summarised the relevant principles to be applied as follows: [98] Each of Verbatim and Next claimed separately that the Court should find that the amounts in dispute were held by the liquidators on trust for them according to the principles stated in Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567, since recognised to form part of the Australian law. The principles were summarised in Australian Conference Association Ltd v Mainline Constructions Pty Ltd (in liq) (1978) 141 CLR 335 at 353 (Gibbs ACJ, Jacobs and Murphy JJ agreeing) as follows: That case is authority for the proposition that where money is advanced by A to B, with the mutual intention that it should not become part of the assets of B, but should be used exclusively for a specific purpose, there will be implied (at least in the absence of an indication of a contrary intention) a stipulation that if the purpose fails the money will be repaid, and the arrangement will give rise to a relationship of a fiduciary character, or trust. Their correctness have been widely accepted: Rambaldi (Trustee) v Commissioner of Taxation, in the matter of Alex (Bankrupt) [2017] FCAFC 217 at [27] (Allsop CJ, Dowsett and Burley JJ). [99] Given the conclusions I have reached it is not necessary to consider the merits of those claims. However, in view of the arguments advanced I will briefly consider the merits of the claims dealing with the aspect of the evidence that was said to bear upon the claim by Verbatim. [100] The question whether a Quistclose trust has been created will be answered by reference to the intention of the parties and 'the essence' of their bargain: Re Australian Elizabethan Theatre Trust; Lord v Commonwealth Bank of Australia (1991) 30 FCR 491 at 502‑503 (Gummow J). The relevant intention is to be inferred from the language used by the parties in question, having regard to the nature of the transaction and the relevant circumstances of the relationship between them: at 503. It is ascertained by reference to the objective intention of the parties: Byrnes v Kendle [2011] HCA 26; (2011) 243 CLR 253 at [53]‑[59] (Gummow and Hayne JJ). [101] A Quistclose trust does not arise simply because money is paid for a particular purpose. 'An expectation or general understanding falls short of the necessary mutual intention that funds have been provided on the express condition that they will be earmarked for use exclusively in accordance with an agreed purpose': Legal Services Commissioner v Brereton [2011] VSCA 241; (2011) 33 VR 126 at [96] (Tate JA, Nettle and Ashley JJA agreeing). The parties must intend that the money not be used at the free disposal of the recipient: George v Webb [2011] NSWSC 1608 at [211] (Ward J); and Twinsectra Ltd v Yardley [2002] 2 AC 164 at 185. [102] Payment of the money into a separate account may be indicative, but not determinative of the existence of a Quistclose trust: Walker v Corboy (1990) 19 NSWLR 382 at 397‑398 (Meagher JA). [103] The onus of proof lies on those who assert that a trust was created: Peter Cox Investments Pty Ltd (in liq) v International Air Transport Association [1999] FCA 27 at [49] (O'Loughlin J). [104] As has been noted, Verbatim relied upon evidence in support of its claim that there was a trust based upon Quistclose principles and the liquidators submitted that little weight was to be given to that evidence. The evidence was given by Mr Paul Johnson, a director and chief operating officer of Verbatim. He explained his dealings with a Mr Murphy who, in the words of Mr Johnson, encouraged him to engage EFX to conduct foreign exchange transactions. Mr Johnson deposed to communications with Mr Murphy in which he said that he needed to be convinced that the transactions would be safe in the sense that Verbatim's money would be safe and that the margin on the transactions would be less than its bank was charging. [105] Mr Johnson deposed to a conversation in which Mr Murphy said to him words to the effect that money paid to EFX would be held by EFX in a trust bank account pending completion of the transactions. He then completed an application form with EFX. He received product disclosure documents from Mr Murphy and a copy of the Master Terms. Mr Johnson also deposed to certain aspects of the product disclosure documents that he relied upon where there is reference to the establishment of trust accounts. For reasons I have already given, in my view those provisions said no more than that EFX would abide by the requirements of the Corporations Act when it came to dealing with client monies. [106] One difficulty with this evidence is that the role and responsibility of Mr Murphy is not identified in this evidence. There is no indication of any basis upon which he had authority to speak for EFX as to such matters. In any event, the correct approach is to focus upon the nature of the transaction and the objective intention as to whether the funds would be earmarked for a particular purpose and therefore could not be treated as forming part of the general funds of the recipient, in this case EFX. The objective intention is revealed by considering the terms of the PDS and the Master Terms and the form of the confirmations issued by EFX as well as the nature of the transaction as agreed.

Before addressing the 6 matters identified by his Honour in the passage quoted at [77] above, it is necessary to summarise the evidence relevant to the application of s 588FG(2)(b)(ii). In so doing, I have been assisted by a table prepared by the parties which identifies the evidence which they each rely upon. 1. In September 2017, the Company commenced purchasing goods from BounceLED. 2. On 30 October 2018, Mr Krecklenberg (a director of BounceLED and the relevant decision maker) sent an email to Ms Stambe (an employee of the Company) in which he said: "Hi … need some answers before re.payment (sic) of invoices as they will go over into 120 days". It is clear from his cross-examination that this was a request by Mr Krecklenberg for an explanation as to when the Company's invoices for July 2018 (amounting to $8,091.60 and about to become more than 90 days overdue) would be paid. Mr Krecklenberg gave evidence as to why this was significant to him. It was that BounceLED had a financing arrangement with a company called Scottish Pacific under which it would provide a loan to BounceLED of 80% of outstanding invoices, but the outstanding invoices under this arrangement could not include those which were more than 90 days overdue. This explanation was consistent with BounceLED's contention that Mr Krecklenberg was not chasing up invoices which were going from 90 days overdue to 120 days overdue because he had a suspicion of the Company's insolvency. 3. There is an email chain on 30 October 2018 between employees of the Company and/or Skope Group Pty Ltd, a related party which had previously made loans to the company. These emails discuss how the Company proposed to respond to Mr Krecklenberg's request. They include an email from Ms Kathy Donovan to Ms Ann Orren (both of Skope Group) which states: [The Company] have lots of orders on [BounceLED] Maree [Stambe] needs to advise him of payment in July or he will not release orders. They want to know if there are any moneys available to pay $8091.60 to pay July. The "him" and "he" in the first line refer to Mr Krecklenberg and indicate that he will not release (ie. meet) the Company's outstanding orders placed with BounceLED until the outstanding invoices for July have been paid. The "they" is a reference to a request from Ms Stambe to Ms Donovan in an earlier email as to whether she can advise that payment of the July invoices amounting to $8,091.60 can be made tomorrow. Ultimately, an amount of $8,091.60 was paid on the following day (Ex 1). There is no evidence that these emails were copied to BounceLED. 1. On 14 November 2018, there is an email from Ms Stambe of the Company to Ms Donovan (of the Skope Group) which states relevantly (emphasis added): Aug - 13688.86 Sept - 22418.55 Oct - 14500.00 Nov - 17668.20 Need a commitment on Aug account as a minimum and a payment plan for Sept figure as we have order going in for Nov and currently sitting at 68k. Please let me know what I can promise. The first part of the email lists the outstanding BounceLED invoices for August to November 2018 and then goes on to raise queries as to how they will be paid. There is no evidence that this email was copied to BounceLED. Mr Krecklenberg's evidence was that at no stage did he ever discuss with the Company a "payment plan" for outstanding invoices. There is no other evidence of a discussion about a payment plan and this email, as it is internal, is explicable on the basis that the Company is seeking to establish a plan with Skope Group (one of its lenders) to enable it to pay the amount of the outstanding invoices for September 2018. 1. On 4 December 2018 there is another email from Ms Stambe to Ms Donovan which contains the following statement relating to BounceLED: [BounceLED] requires 10k-15k on an account that spans Sept-Nov. Nov not all keyed 77k in total (note) [BounceLED] not supplying any more goods over 80k until commitment can be given. There is then an email chain on 5 December 2018 within the Skope Group which refers to the BounceLED account being "on hold" and discusses when a number of creditors, including BounceLED, will be paid. While none of these emails were sent or copied to BounceLED, it may be inferred that BounceLED had indicated that it would no longer supply further orders until between $10,000-$15,000 was paid and no further deliveries would be supplied over $80,000 "until a commitment can be given". The relevant "commitment" appears to be a reference to the payment of the amount of $10,000-$15,000, and the evidence establishes that the Company paid $15,000 to BounceLED on 7 December 2018 and thereafter BounceLED continued to supply goods to the Company. The balance outstanding after the payment on 7 -December 2018 was $61,934.09 and except for a short period at the end of January 2019 and again in February 2019 when the debt was slightly over $80,000, the outstanding debt of the Company to BounceLED never exceeded $80,000. 1. Mr Krecklenberg gave evidence that in December 2018 he agreed with the Company to post-date 4 invoices (totalling $7,052.65). He also gave evidence that on 12 April 2019 he agreed to post-date an invoice for an order placed on 12 April 2019 for $2,598.05 so that it would have an issue date of 1 May 2019. He gave evidence that occasionally he would be asked by a customer to post-date an invoice usually in the last week of a month such as during the Christmas shut down period. I note that the copy of the invoice for the order placed on 12 April 2019, which is in evidence, shows that it had an issue date of 12 April rather than 1 May 2019 and consequently the invoice for that order was not in fact post-dated. 2. The orders placed by the Company with BounceLED in January, February and March 2019 were lower than they had been in late 2018 (being $13,026.75 in January, $13,854.57 in February and $1,913.13 in March). 3. On 18 March 2019 Mr Krecklenberg sent an email to Ms Stambe which stated: "Can you please clear this week $8567.04 in 60+ and 90+ days?". He then followed this up by a further email on 1 April 2019 which stated: "Hi … need payment confirmed before I can ship." It appears from this email exchange and an internal email which Ms Stambe sent to colleagues within the Company that a payment of $8,567 was not made during the previous week and as a result, as at 1 April 2019, BounceLED was not supplying outstanding orders. Mr Krecklenberg then sent another email on 2 April 2019 to Mr Hiron of the Company in which he said: "Thanks for the order. Waiting on Maree to update me on payment. Once I know we will send goods out." It is apparent from these emails that the delay in paying the amount of $8,567 led to BounceLED stopping the delivery of outstanding orders. Mr Krecklenberg gave evidence that he took this approach because it seemed to him that the Company and BounceLED might not continue to have as strong a trading relationship given the decline in orders from the Company (see (10) below). A payment of $8,567.13 was made on 2 April 2019 and thereafter BounceLED received and satisfied further orders from the Company on credit terms. 4. In March 2019, Mr Krecklenberg had a conversation with Mr Cooper, an employee of the Company, in which Mr Krecklenberg offered to supply goods to the Company on consignment (an arrangement which BounceLED had with other customers). This offer was not taken up. Mr Krecklenberg explained in his evidence that this was not due to a concern about the ability of the Company to pay its debts but rather to seek to obtain more orders from the Company. 5. During April 2019 Mr Krecklenberg visited the Company's warehouse and spoke to an employee of the Company, Mr Hashmi, who had recently taken over as the operations manager of the Company and was in charge of placing orders with suppliers. Mr Krecklenberg gave evidence that (a) the reason for this visit was not because of a concern regarding the payment of outstanding invoices but rather that he wanted to introduce himself to Mr Hashmi, as the orders placed by the Company with BounceLED had been low in January and February 2019; and (b) based on his conversation with Mr Hashmi at the warehouse, he was satisfied that the reduced orders were caused by the Company clearing out stock and also purchasing stock from suppliers in China. 6. Mr Krecklenberg also gave evidence that while he was aware that BounceLED was receiving fewer orders from the Company he had no information from the Company or from other suppliers about whether the company had started to reduce its trade more generally, or that other suppliers were facing issues with receiving payment on time. 7. Over the period from 24 November 2018 to 2 July 2019 (when the 11th payment was made) the Company made 17 payments to BounceLED to reduce its outstanding debt to BounceLED to nil. In relation to the 5 payments made in that period prior to 29 January 2019, 3 were in round numbers and 2 were not in round numbers. In the period from 29 January to 2 July 2019, only 2 were in round numbers. Mr Krecklenberg gave evidence that he did not enquire who made these payments and did not know that some of them came from third parties and not the Company. 8. Mr Krecklenberg gave evidence that he did not ask, and did not know, whether the company was facing cash flow constraints or difficulties, and his approach to collecting the Company's outstanding debt reflected his general practice of following up payment of all accounts (not just those of BounceLED) which had been outstanding for more than 90 days. 9. BounceLED did not issue any letters of demand or take any enforcement action against the Company for the payment of its debt.

BounceLED Pty Ltd v Clear Skies Corp Pty Ltd

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