Chicago Boot Co Pty Ltd v Davies & McIntosh as Joint & Several Liquidators... [2017] NSWSC 901 | Case summary

Unfair preferences

Corporations Act, s 588FA(1), provides as follows: (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. ...
Thus an unfair preference involves: (1) a transaction to which the company and the creditor are both parties (s 588FA(1)(a)); whereby (2) the creditor receives from the company more than it would receive if the transaction were set aside and the creditor proved for the debt in the winding up (s 588FA(1)(b)).
As it appears that the likely return to unsecured creditors in the liquidation of Evolvebuilt is nil, it follows that each of the defendants have received more than they would receive if the payments to them were set aside and they instead proved in the liquidation. However, the critical question is whether they received the impugned payments from the company (that is to say, Evolvebuilt).
That the section is concerned with payments made by and received from the company is plain from those words, but is confirmed by the terms of s 588FF(1)(a), which provides that, where, on the application of a company's liquidator, a court is satisfied that a transaction of the company is voidable because of section 588FE, the court may, inter alia, make 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. It is also supported by the policy and purpose of provision for the recovery of unfair preferences, which is to ensure that unsecured creditors are not prejudiced by the disposition of assets in a period shortly before the commencement of a winding up which would have the effect of favouring certain creditors. A payment made by a third party which does not come out of the company's assets does not offend that policy.
The liquidators submit that, although the payments were actually made by Built, via its solicitors Gadens, to the defendants, Evolvebuilt was also a party to the transaction, and the payments were made on behalf of Evolvebuilt such that the payments were (for the purposes of s 588FA(1)(b)) received from, and (for the purposes of s 588FF(1)(a)) made by, Evolvebuilt. They submit that Built made the relevant payments on behalf of Evolvebuilt, and that that is all that is required. In aid of that submission they invoke decisions of a Full Court of the Federal Court of Australia in Re Emanuel (No 14) Pty Ltd; Macks v Blacklaw & Shadforth Pty Ltd; [1] of Gordon J in Burness, In the matter of Denward Lane Pty Ltd; [2] and of another Full Federal Court in Commissioner of Taxation v Kassem and Secatore. [3]
In Re Emanuel, the company (Emanuel) had contracted with a third party (EFG), with which it was in dispute, that in full settlement of the matters between them, EFG would make a payment to the company and another payment, at the company's direction, to its creditor Blacklaw. Emanuel's liquidator sought to recover the payment made to Blacklaw as a preference. At first instance the claim failed, the primary judge holding that if the relevant transaction was the contract, then Blacklaw was not a party to it; and if it was the payment, then it was made by EFG and not by Emanuel. This was reversed on appeal, the Full Court (O'Loughlin, Branson and Finn JJ) holding that: 1. for the purposes of s 588FA, a transaction could be comprised of multiple dealings and it was not necessary that the company be a party to every one of them; 2. where a debtor initiates a course of dealing for the purpose and having the effect of extinguishing a debt, the relevant transaction is the totality of the dealings through which the debtor procures that result, regardless of whether one or more of the dealings in the sequence does not require or involve the participation of the debtor; 3. both Emanuel and Blacklaw were parties to a transaction, although neither was a party to every component element; and 4. although the payment was made by EFG to Blacklaw, Blacklaw could be said to have received the payment from the company Emanuel for the purposes of s 588FA(1)(b), because it received from Emanuel the benefit of a chose in action (the promise to pay contained in the deed) owned by Emanuel.
Holdings (1), (2) and (3) as described above were referable to the question whether the company was a party to the relevant transaction, while holding (4) was referable to the question whether the payment was received from the company.
In reaching those conclusions, the Court first considered and overruled Nilant v Plexipack Packaging Services Pty Ltd, [4] which the trial judge had followed. In so doing, the court said (emphasis added): [5] It equally was held, more questionably in our view, that for the purposes of the definition of "transaction" in s 9 of the Corporations Law, the payment to C was not "a payment made by [A]". In reaching that conclusion, R D Nicholson J followed the decision of the Full Court of the Supreme Court of Victoria in Ramsay v National Australia Bank Ltd [1989] VR 59; 13 ACLR 732. In that case, in construing the words "a payment made … by" in s 451(1) of the Companies (Victoria) Code, the Full Court (at 63) rejected the proposition that: … a payment out of his own moneys by B to C, pursuant to a contractual obligation to discharge A's debt to C, an obligation imposed upon B by a contract between A and B, can be said to be a payment made by A to C. The words of s 451 must be given their ordinary, natural meaning. We have, with respect, some difficulty with this conclusion. Before a payment made by B to C can be effective to discharge A's debt to C, ordinarily it must be made with A's authorisation or ratification: see Mason and Carter, Restitution Law in Australia, para 846, (Butterworths, Sydney, 1995); Goff and Jones, The Law of Restitution, p 17, (4th ed, Sweet and Maxwell, London, 1993); and see generally on payment of another's debt, Beatson, The Use and Abuse of Unjust Enrichment, ch 7, (Clarendon Press, Oxford, 1991). Where a payment is so made it can properly be said that it is A's act that makes B's payment efficacious at law to discharge the debt to C. This, of itself, does not provide reason for saying that the payment itself is made by A. Nonetheless where that payment constitutes part of the consideration B furnished and A required in the A-B contract and where (inter alia) that consideration is in the final settlement of the obligations inter se of A and B, then we see no compelling reason for not concluding that A has made the payment to C albeit by using B as its instrument for the purpose. It is, though, unnecessary to consider either his matter or Ramsay's case further for reasons we give below.
In that passage, the Court distinguishes between the two questions: (1) whether the debtor A is a party to the transaction, and (2) whether the payment can be said to have been made by the debtor. The sentence which I have emphasised makes clear that they are independent, and that the circumstance that the debtor A authorises or ratifies the third party B's payment to C does not of itself provide reason for saying that A made the payment. Pertinent to the facts of Re Emanuel, the Court then expressed the view, without deciding, that where that payment constituted part of the consideration B furnished and A required in the contract between them, and where that consideration was in final settlement of the obligations between A and B, then it seemed open to conclude that A had made the payment to C, albeit by using B as its instrument for that purpose. This is further considered when the court comes to what I have identified as the second question.
The court then stated its disagreement with the view expressed in Nilant that it was impermissible to have a composite "transaction", to not all aspects of which the company was a party: [6] We cannot agree with his Honour's reasoning for two reasons, one specific, one general. The specific reason is this. Insofar as it is suggested that A was not party to the extinguishment of C's debt brought about by B's payment, we note again that A's authorisation of B's payment is necessary to discharge the debt, save in exceptional cases of no present relevance: see generally Beatson, above, ch 7; Goff and Jones, above, p 17 and especially footnote 2. In this way A is a party to the extinguishment even if it be said A is not a party to the payment itself.
The Court continued: [7] We confine our observations for present purposes simply to a course of dealing initiated by a debtor for the purpose of, and having the effect of, extinguishing a debt. It is not apparent to us why it should not be said that, where a debtor so acts and extinguishes a debt, the relevant "transaction" is the totality of the dealings through which the debtor procures the intended outcome, irrespective of whether one or more of the dealings in the sequence in question does not involve or require the participation of the debtor but does require that of a third party. The transaction, in other words, is the totality of the dealings initiated by the debtor so as to achieve the intended purpose of extinguishing the debt. … We conclude, then, that a course of dealing initiated by a debtor that is intended to, and does, extinguish a creditor's debt can in its totality be a transaction for the purposes of Pt 5.7B of the Corporations Law notwithstanding that the achievement of that end can only be realised through the participation of a third party in a particular dealing (or dealings) within the overall transaction, being a particular dealing (or dealings) to which the debtor is not or may not be a party. To this extent we consider the reasoning in Nilant's case to be incorrect and, correspondingly, so is the reasoning of the trial judge to the extent that he followed Nilant's case. The conclusion that such a composite of dealings can be a s 9 "transaction" does not of itself lead to the result that an unfair preference was given in this case. The particular transaction must fall, nonetheless, within para (a) of s 588FA(1) and must have the consequence identified in para (b). To these matters we now turn.
It is important to observe that those observations were made in the course of holding that for the purposes of s 588FA(1)(a), there could be a compound transaction, to not all parts of which the company had to be party.
Addressing the first question, which arises under s 588FA(1)(a), the Court then said: [8] Consistent with what we have said concerning Nilant's case, though, it is unnecessary for the appellant to rely upon agency to establish a transaction falling within s 588FA(1)(a). On the facts as found by the trial judge, Emanuel sought to and did procure the partial extinguishment of Blacklaw's debt through action it took, both in entering into, and under, the Deed. Its entry into the Deed; its direction under para 6.7 for a payment to be made to Blacklaw; and the payment so made with Emanuel's authorisation (with the result it produced when Blacklaw accepted the payment as partial satisfaction of the debt) constituted the relevant transaction. Clearly both Emanuel and Blacklaw were parties to that transaction even though neither was a party to all of its component elements.
That was a conclusion that Emanuel's role in authorising the transaction was sufficient to make it, for relevant purposes, a party to it. It was not a conclusion that Emanuel made the payment - the second question, to which the Court next turned: [9] Section 588FA(1)(b) The question here is whether the transaction resulted in Blacklaw "receiving from the company" more than it would have if the transaction were set aside and Blacklaw was to prove in the winding up of Emanuel. It is clear that what Blacklaw received from the transaction was the partial satisfaction of its debt at the rate of 100¢ in the dollar and that this was more than it would receive in satisfaction of its debt as a creditor in the winding up. But did it receive what it did from the company as the subsection requires? There is no doubt that, if the money received by Blacklaw had been required under the Deed (i) to be paid first to Emanuel and then paid on to Blacklaw as Emanuel's money, or (ii) to be held by EFG on trust for Emanuel pending the latter's direction to pay Blacklaw, then the financial benefit accruing to Blacklaw would, relevantly, have been received from the company. Does it make an operative difference that, rather than adopting such expedients, the Deed provided for direct payment to Blacklaw? In our view it does not and it would be surprising if it did. What Blacklaw received from the company was the actual benefit of a valuable chose in action (ie, para 6.7 of the Deed) owned by Emanuel. Whether or not Blacklaw was a trust-beneficiary or a contract-beneficiary of that chose: as to which see Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107; 80 ALR 574 - and it is unnecessary for present purposes to determine the rights, if any, that Blacklaw had against EFG - what Emanuel provided to Blacklaw, and what Blacklaw received from Emanuel was the actual enjoyment of the benefit secured to Emanuel by its contractual provision with EFG. That actual benefit took the form of a monetary payment which partially discharged Emanuel's debt. If it be thought that the chose was without value to Emanuel so that it could not in consequence be said that Emanuel was giving a benefit of value to Blacklaw, it is the case that if EFG failed to make the payment as directed, Emanuel could have recovered from it the sum agreed to be paid to Blacklaw: Ashdown v Ingamells (1880) 5 ExD 280. This merely illustrates why a direct payment such as occurred in this case should not be treated differently from either the trust or the payment on contingencies to which we earlier referred.
Thus - consistent with what had been said in the context of the discussion of Nilant - it was recognised that the circumstance that Blacklaw received a benefit from the transaction did not necessarily mean that that benefit was received "from the company". The conclusion that the payment was received "from the company" depended on the circumstance that the creditor received the actual benefit of an asset of the company, namely the chose in action owned by Emanuel under the settlement deed, in circumstances where: (1) the payment was part of the consideration furnished by EFG to Emanuel under the deed of settlement between them; (2) that consideration was in final settlement of all obligations between EFG and Emanuel; and (3) the payment was made at the direction of Emanuel, and but for that direction, Emanuel would have been entitled to the benefit of the payment; moreover, (4) had EFG failed to make the payment, Emanuel could have recovered from it the sum agreed to be paid.
The significance of the payment being by direction of the debtor, out of an asset to the benefit of which the debtor is otherwise entitled, is illustrated by two cases in which Re Emanuel was distinguished.
The first is the decision of Barrett J, as he then was, in Woodgate v Network Associates International BV. [10] Mr Woodgate, the liquidator of two related companies Marketing and Quadtel, sought to recover from the defendant, as preferences, eight payments made to it, of which Marketing had made six payments, and Quadtel two. His Honour found that while Marketing was indebted to the defendant, Quadtel was not, so there was no creditor-debtor relationship between the defendant and Quadtel to which s 588FA could apply. Invoking Re Emanuel, the liquidator submitted that, in circumstances where the companies were related and payments were sometimes made from the account of one in discharge of the other's debts, the payments made by Quadtel should be regarded as payments made by Marketing. That submission was rejected (emphasis added): 19 It is not possible to draw any inference that, on this or any other basis, money paid by Quadtel to the defendant in truth represented payment by MR to the defendant. The evidence shows that MR was indebted to the defendant and that an agreed payment plan envisaged payments by MR corresponding with those actually made by Quadtel. But there is no way of concluding what the consideration was, as between MR and Quadtel, and therefore no basis for reaching conclusions of the kind to which the Full Federal Court referred.
This illustrates that the consideration between the debtor company and the third party for making the payment to the creditor is important to determining whether the payment can be said to have been made by the company. That is because, if the third party's undertaking to make the payment is part of the consideration, then the company may have a legal right to require the payment to be made, and the payment is, as in Re Emanuel, the conferral on the creditor of the benefit of an asset of the company, namely the consideration received by the debtor company under its contract with the third party.
The second is the decision of Fryberg J in Re Imobridge Pty Ltd (in liq), [11] which was an application by a liquidator for the Court's approval under Corporations Act, s 477(2B), to enter into a litigation funding agreement. One of the relevant considerations was the company's prospects of success in the proposed action, which was a preference claim to recover from Westpac a payment made to it by a former director, Mrs Ellis. His Honour said (emphasis added; footnotes omitted): [12] 33 In support of the submission that the company was a party to the transaction, the applicant relied upon the decision of the Full Court of the Federal Court in Re Emanuel (No. 14) Pty Ltd. In that case, it was held that a payment made to a creditor of the insolvent company by a third party was part of a transaction to which the company was a party. The court referred to the wide definition of "transaction" in s. 9 of the Corporations Law, saying, "Common to the examples is the characteristic that the conduct or dealing engaged in by the debtor company has the consequence of effecting a change in the rights, liabilities or property of the company itself." 34 The present case differs from that case in two important respects. First, in that case, the payment to the creditor was made by the third party at the direction of the company. The direction was given pursuant to a deed between the third party and the company conferring the right to give such directions upon the company. The court expressly said: "We confine our observations for present purposes simply to a course of dealing initiated by a debtor for the purpose of, and having the effect of, extinguishing a debt. It is not apparent to us why it should not be said that, where a debtor so acts and extinguishes a debt, the relevant 'transaction' is the totality of the dealings through which the debtor procures the intended outcome, irrespective of whether one or more of the dealings in the sequence in question does not involve or require the participation of the debtor but does require that of a third party." In the present case, the evidence discloses no corresponding act of the company. 35 The second ground of distinction is that in Emanuel, the third party was under a legal obligation to pay the money either to the company or at its direction. In other words, the company was legally entitled to the benefit of the amount of the payment. For valuable consideration, the third party had covenanted to pay the money to the company or at its direction. It was therefore money to the benefit of which the unsecured creditors were legally entitled. In the present case, the respondent was under no legal obligation to the company to discharge its overdraft or to make any payment to the company except the $45,000 owing in respect of the Plainlands land. Apart from that, the creditors were in no worse position after the transaction than before it. In my judgment, the decision in Re Emanuel (No. 14) Pty Ltd does not advance the applicant's prospects of success against Westpac.
This reinforces two features of Re Emanuel: first, that the payment was made by direction of the debtor company, pursuant to a deed which conferred the right to give such a direction on the company; and secondly, that Emanuel was legally entitled to the benefit of the payment, so that the payment came out of an asset to the benefit of which the company was entitled. The third party EFG having, for valuable consideration, agreed to pay the money to the company or at its direction, it was money to the benefit of which the company (or the general body of its unsecured creditors) was legally entitled. The direction to pay Blacklaw had the effect that one unsecured creditor was preferred. Had the direction not been given, Emanuel would have been entitled to recover the same sum from EFG, in which case it would have been for the benefit of all its unsecured creditors.
In Burness, In the Matter of Denward Lane Pty Ltd, [13] the defendant had received a payment, in reduction of its running account with Denward Lane, from a related company Pre Cast Panels. Gordon J held that the payment was an unfair preference given by Denward Lane, but upheld a defence under s 588FG and so dismissed the liquidator's claim for its recovery.
Her Honour posed the question, whether the payment made by Pre Cast Panels (and not by the debtor company Denward Lane) fell within s 588FA(1), [14] and referred to passages in Re Emanuel which are included in those set out above at [24]-[28], and to a submission made by the defendant, founded on Woodgate, that Emanuel did not avail the liquidator because there was no evidence of any arrangement between Denward Lane and Pre Cast Panels whereby at the direction of Denward Lane, Pre Cast Panels made a payment to the defendant in discharge of an obligation owed by Pre Cast Panels to Denward Lane - to which the liquidator's response was that the third party would have a "restitutionary" claim which would operate in the "space" otherwise occupied by restitution.
Her Honour then considered the consequences of payment of a debt by a third party, and explained that where a third party paid a debt with the authority of the debtor, then it fell within Re Emanuel as a "course of dealing initiated by a debtor that is intended to … extinguish a creditor's debt". That may be, but that part of Emanuel was concerned with identifying a relevant transaction, and not with identifying from whom a payment was received.
Her Honour did not accept that Re Emanuel was authority for the proposition that, before a payment by a third party can be taken to be a payment "accepted" or "made" by the debtor, there must be evidence of an arrangement between the debtor and the third party whereby at the direction of the debtor the third party made a payment to the creditor in discharge of an obligation owed by the third party to the debtor; and said that, where a payment made by a third party to a creditor is authorised by the debtor, nothing more is required - the debt is discharged by the third party at the request of or with the acceptance of the debtor. With respect, that accurately states what is required for a third party payment to discharge a debt, but elides what is required for a third party payment to discharge a debt with whether it can be said that the payment is made by the debtor - a distinction explicitly recognised in Re Emanuel, stating that the circumstance that a third party payment is sufficiently authorised or acknowledged by a debtor to result in discharge of the debt does not of itself mean that it can be said that the debtor company, as distinct from the third party, has paid the debt.
Her Honour added that where a debt is paid by a third party which is unauthorised by the debtor, the debt is not necessarily discharged; if the debtor accepts or ratifies the unauthorised payment the debtor will be liable on a restitutionary cause of action to the third party, but if the debtor does not ratify the payment, the original debt remains outstanding. Her Honour then concluded: [15] 47 In the present case, the payment made by Pre Cast Panels on 10 June 2005 was a "course of dealing initiated by a debtor that [was] intended to, and [did], extinguish a creditor's debt" as contemplated by the Full Court in Re Emanuel. It was the evidence of Mr Messina that Mr Smith contacted the Defendant in June 2005 and stated to Mr Messina that "he would be continuing the same business, but had set up a new company … [t]he new company was [Pre Cast Panels] … [and that] when the business took over, [the Defendant] should transfer the balance of the account to [Pre Cast Panels]". On any view, it was a course of conduct initiated by Denward Lane to discharge its debt to the Defendant through payments made by a third party - Pre Cast Panels. Mr Smith was a director of both companies (and the sole director of Pre Cast Panels), he notified Mr Messina of the upcoming transfer of the account and Pre Cast Panels subsequently assumed the burden of that account. However, even if this payment was not a "course of dealing initiated by a debtor that is intended to, and does, extinguish a creditor's debt" (and I find that it is), then by its conduct, Denward Lane acquiesced in the payment of its debt by the third party (Pre Cast Panels) on its behalf so that the debt is taken to be discharged (see Owen v Tate [1974] 1 QB 402 at 411-412 and Oakleigh Acquisitions Pty Ltd (in liq) v Steinochr [2005] WASCA 247 at [82]), possibly giving rise to a (restitutionary) right in Pre Cast Panels in the form of a claim against Denward Lane for money paid: see Lumbers (2008) 232 CLR 635 at [43], [47]-[54] and [77]-[80].
However, that does not answer the question whether the payment was received by the creditors from the company - a question which was distinctly posed and answered by the Full Court in Re Emanuel, but not by Gordon J in Denward Lane. In that respect, however, the decision can nonetheless be explained on the facts in a manner consistent with Emanuel: her Honour found that Denward Lane transferred its business to Pre Cast Panels, and that the debts of Denward Lane were somehow taken over by Pre Cast Panels. It can be inferred that the consideration for the transfer by Denward Lane to Pre Cast Panels of its business included an undertaking by Pre Cast Panels to pay Denward Lane's business debts. On that analysis, Pre Cast Panels had, for valuable consideration, covenanted to discharge Denward Lane's debts, and the payments to the creditor were of money to the benefit of which Denward Lane was legally entitled, so that the creditor could be said to have received it from Denward Lane.
Because, ultimately, a defence under s 588FG succeeded, the liquidator's claim failed. Accordingly, what her Honour said on the question of third party payments was strictly obiter. However, it was referred to by a Full Court (Jacobson, Siopis and Murphy JJ) in Commissioner of Taxation v Kassem & Secatore. [16] In that case, the liquidators of Mortlake successfully brought proceedings for the recovery from the Commissioner of two payments made in reduction of Mortlake's tax debt by a related company Antqip, as unfair preferences, and the Commissioner (unsuccessfully) appealed. The Full Court adopted the findings of the primary judge that the payments were loans advanced by Antqip to Mortlake, paid to the Commissioner at Mortlake's direction: [17] 40 It is clear, as the primary judge found, that the originating source of the payments to the Commissioner was, on each occasion, the bank account of Mortlake's related entity, Antqip. But, as the primary judge found, this was a clear example of a lender paying moneys advanced to a creditor of the borrower in accordance with the borrower's directions. 41 The position as between Mortlake and Antquip was no different from a drawing by Mortlake on an overdraft from its bank with a direction to the bank to pay the creditor directly. Such a payment constitutes a loan by the bank to its customer: see eg Andrews v ANZ Banking Group Ltd [2011] FCA 1376; (2011) 86 ACSR 292 at [82] per Gordon J. 42 Moreover, even if it is not correct to describe the transaction between Mortlake and Antqip as a loan, what is important is the finding that the payment by Antqip to the Commissioner was a payment that was made by or on behalf of Mortlake. So much is plain from the evidence to which we were taken. 43 The transaction which s 588FA of the Act then looks at is the transaction between Mortlake and the Commissioner, that is to say, the payments totalling $70,000 made in March and April 2007. That was the approach taken by Gordon J in Burness v Supaproducts Pty Ltd [2009] FCA 893; (2009) 259 ALR 339 where payments were made to a creditor by a related company of the insolvent debtor. We see no reason why a different approach is required in the present case. 44 Once it is accepted that the relevant transaction is the payment made by Mortlake to the Commissioner, the transaction is one which falls squarely within the language of s 588FA(1). The transaction constituted an unfair preference because it fell within the conditions required by the prefatory wording that characterises a transaction "if and only if" the two specified conditions are satisfied.
Later, the Full Court found it unnecessary to determine whether it was necessary, for there to be an unfair preference, that there be a diminution of the debtor's assets: [18] 60 It is not necessary here to determine whether there must be a diminution in the value of the debtor's assets. The short answer is that there was a decrease in the value of Mortlake's net assets available to meet the demands of other creditors. 61 This is because the payments of $70,000 were made out of Mortlake's assets, thereby reducing the net value of its assets available to other creditors. 62 If unfairness is an element of the statutory definition in s 588FA(1), it is plain that, consistently with the authorities to which we have referred, the payments to the Commissioner gave him preference over other creditors because he obtained full payment of the debt whereas other unsecured creditors were left to prove in the winding up. Unsurprisingly, this result is in conformity with the definition in s 588FA(1) because both paragraphs (a) and (b) of that subsection are satisfied. 63 In summary, as we have already said, the position in the present case is no different from that which would apply if Mortlake were to have borrowed the funds on overdraft from its bank and paid the creditor with those funds. Where an insolvent company makes such a payment to fully discharge an existing creditor during the relation back period the creditor cannot be heard to argue that the payment was not an unfair preference.
Thus the relevant essential features of that case were that the payment was one by direction of the debtor, of funds which it borrowed from the third party and to the benefit of which it was therefore legally entitled. Reliance on the notion that the payment was "on behalf of" the debtor company was an unnecessary additional basis for the decision, and there does not appear to have been close consideration of Gordon J's reasoning; it was merely said that there was no apparent reason for taking a different approach in the instant case. [19] In any event, the words "on behalf of" cannot replace the statutory requirement that the receipt be "from the company". While the debtor company's authority or acquiescence may suffice to have the effect that the third party's payment will discharge the debt, it does not follow that the payment was made by or received from the debtor company. They are two different questions.
If, in the present case, Evolvebuilt had directed Built to pay its creditors out of moneys otherwise payable by Built to Evolvebuilt, the position would be indistinguishable from Re Emanuel, and the payments would on that analysis for relevant purposes have been received by the relevant defendants "from the company". But that is not what happened in this case.
It is true, as the liquidators emphasise, that prior to the impugned payments being made, Evolvebuilt made a formal request, under cl 38.2 of the contract, that Built pay the secondary subcontractors. Although at first I doubted that the evidence established that the request covered the impugned payments - as distinct from other earlier payments - that was when the only evidence was a letter from Gadens to the liquidators which left open an inference that an earlier tranche of payments had been the subject of such a request, but the later tranche had not. Now, with the benefit of the annexure referred to in that letter, and the direct evidence of the request made by Evolvebuilt, it is clear that the request was general in its terms. It is also true that the letter from Built to CFMEU, set out above, stated "Built NSW will make direct payment for labour to those subcontractors engaged by Evolvebuilt on the ANZ Project on behalf of Evolvebuilt where that payment has not been made by Evolvebuilt".
However, although the request was made, Built did not act pursuant to that request, but acted pursuant to the agreement it made with CFMEU, to which Evolvebuilt was not a party, in response to the industrial pressure applied by CFMEU, in order to retain the labour force on the project. To that end, rather than acting pursuant to its contract with Evolvebuilt, it terminated that contract and indicated that the secondary subcontractors would henceforth be engaged through a new subcontractor. Evolvebuilt's request, though made, was in fact irrelevant to what transpired. And although Built's letter to CFMEU contained a reference to the payment being "on behalf of Evolvebuilt", excessive significance should not be given to a phrase used in a letter written by a layperson, setting out an agreement to which Evolvebuilt was not a party; in my view it meant no more than that the payment was made in respect of the debt owed by Evolvebuilt, and perhaps to reserve Built's consequential rights against Evolvebuilt, such as they might be. Similarly, the receipt issued by J Sekulic, while it uses the phrase "on behalf of Evolvebuilt", does so in qualification of "work performed" rather than "payment made"; in any event, it cannot determine the true quality of the payment. On the other hand, the letter from Gadens to the recipients of the payments dated 28 March 2013, accompanying the impugned payments, described the payments as made "on behalf of Built".
The decisive considerations are not the terminology adopted by the parties in their correspondence, but the substance of the transaction. Relevantly: 1. while under cl 38.2 Evolvebuilt could request Built to pay secondary subcontractors, it had no legal right to require Built to do so - Built's compliance was discretionary; 2. there is no evidence that there were any moneys owing by Built to Evolvebuilt out of which such a payment could have been directed; to the contrary, the evidence is that Evolvebuilt's payment claim was assessed at nil; and 3. there was no property or right to the benefit of which Evolvebuilt was entitled, out of which the impugned payments were made. The liquidators submitted that the payments had the effect of diminishing Evolvebuilt's claim against Built in respect of Evolvebuilt's liabilities to its secondary subcontractors, on the theory that by discharging those subcontractors' claims against Evolvebuilt, that somehow reduced Evolvebuilt's claim which was said to be founded on them. But Evolvebuilt's rights under its contract with Built depended upon assessment of the progress of the works, not on the claims made on Evolvebuilt by the secondary subcontractors.
In those circumstances, although it may well be that the payments by Built had the effect of discharging Evolvebuilt's indebtedness - either because Evolvebuilt assented to them, or because the liquidators subsequently did so - it does not follow that they were made by or received from Evolvebuilt. The payments were made out of Built's assets, and not out of any asset to the benefit of which Evolvebuilt was otherwise entitled. Thus they were made by, and received by the defendants from, Built and not Evolvebuilt. This is so, even if making the payment gave Built some right to restitution against Evolvebuilt. If it were otherwise, then the satisfaction of a creditor's debt by the debtor's guarantor would constitute a payment on behalf of the debtor and be liable to be avoided as a preference.
Such a result is entirely consistent with the policy and purpose of the preference provisions. The effect on Evolvebuilt's position - and that of the general body of its unsecured creditors - is at worst neutral. While it is known that Built has lodged a proof in the liquidation, the evidence does not reveal whether it includes the amounts paid to the defendants. At the highest, Built may have acquired a restitutionary claim against Evolvebuilt for the amount it paid to discharge Evolvebuilt's debts, but that claim would not exceed the debts which it discharged. If Built did not acquire a restitutionary claim, then the result is positive.
To set aside the impugned payments and order their "repayment" to the company, which had never been entitled to them, would confer on the company and the general body of unsecured creditors a windfall which they would not have received had Built not chosen - unconstrained by any legal obligation to do so - to make them. This feature is not present in any of the cases on which the liquidators rely.
In my view, therefore, it cannot be said in any sensible way that the impugned payments to the defendants (other than the eighth defendant) were received from, or made by, Evolvebuilt. They therefore do not fall within s 588FA(1), or s 588FF(1)(a).
The position of the eighth defendant, however, is different. The impugned payments to Kennico were made directly by, and received directly from, Evolvebuilt. As, if those payments were set aside and the eighth defendant proved in the liquidation, it would receive nothing, they are unfair preferences within s 588FA. As they were made at a time when Evolvebuilt was insolvent, they are insolvent transactions. And as they were made during the six-month relation back period, they are voidable. Subject to the affirmative defence raised under s 588FG, the liquidators are entitled to an order against Kennico under s 588FF(1)(a) for their repayment.

The 588FG(2) defences

All the remaining defendants other than the fourth defendant invoke the defence afforded by s 588FG(2), which relevantly provides: (2) A court is not to make under section 588FF an order materially prejudicing a right or interest of a person if … it is proved that: (a) the person became a party to the transaction in good faith; and (b) at the time when the person became such a party: (i) the person had no reasonable grounds for suspecting that the company was insolvent at that time or would become insolvent as mentioned in paragraph 588FC(b); and (ii) a reasonable person in the person's circumstances would have had no such grounds for so suspecting; and (c) the person has provided valuable consideration under the transaction or has changed his, her or its position in reliance on the transaction.
The defendants bear the onus in relation to each of the elements of the defence. [20] However, the liquidators accept that the defendants became party to the relevant transactions in good faith, and gave valuable consideration, but submit that they had reasonable grounds to suspect insolvency, or that a reasonable person in their position would have done so.
Black J described the relevant tests in Re Alsafe Security Products Pty Ltd atf the Alsafe Trust (in liq): [21] 33 The test under 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: Sims v Celcast Pty Ltd [1998] SASC 7140; (1998) 71 SASR 142 at 146; Cook's Constructions Pty Ltd v Brown [2004] NSWCA 105; 49 ACSR 62 at [45]; Chicago Boot above at [21]. 34 The test under 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: Pegulan Floor Coverings Pty Ltd v Carter (1997) 24 ACSR 651; Dean-Willcocks v Cmr of Taxation [2004] NSWSC 1058; (2004) 51 ACSR 353; Cussen (as liquidator of Akai Pty Ltd (in liq)) v Cmr of Taxation [2004] NSWCA 383; (2004) 51 ACSR 530; Sims v Celcast Pty Ltd above at 146; Chicago Boot above at [21]-[22]. That matter will be determined by reference to a person who has the knowledge and experience of an average businessperson: Harkness v Commonwealth Bank of Australia Ltd (1993) 12 ACSR 165 at 167-169. In Sutherland (as liquidator of Sydney Appliances Pty Ltd (in liq)) v Eurolinx Pty Ltd above, Santow J observed (at [43]) that whether a reasonable person would have suspected insolvency is to be assessed by reference to all the circumstances and that: "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." In Pegulan Floor Coverings Pty Ltd v Carter above at 658, Doyle CJ observed that the requirement to establish the negative under s 588FG(2)(b)(ii) was a fairly demanding test. 35 In D'Aloia v Federal Commissioner of Taxation [2003] FCA 1336; (2003) 48 ACSR 204, Merkel J observed (at [18]) that: "Although differing views have been expressed as to the precise ambit of the tests in s 588FG(2)(b)(i) and (ii) it is clear that the test in subpara (b)(i) is essentially a subjective test (albeit based on objective criteria) insofar as it requires consideration of whether the person "had" any grounds for suspecting insolvency whilst the test in subpara (b)(ii) is an objective test, as it requires consideration of whether a reasonable person in the Commissioner's circumstances had any reasonable grounds for suspecting insolvency. If the [defendant] fails to establish his defence under subpara (b)(i) it would usually follow that he must also fail under subpara (b)(ii) ..." In Dean-Willcocks v Cmr of Taxation [2008] NSWSC 1113 at [10], Barrett J endorsed a similar observation of Bryson J in Mann v Sangria Pty Ltd [2001] NSWSC 172; (2001) 38 ACSR 307 at [46] that the inquiries specified in s 588FG(2)(b)(i)-(ii) would rarely produce different results, unless a person's actual frame of mind was affected by matters to which reasonable persons would not have had regard.
In respect of the first, second, third and fifth defendants, this issue strictly does not need to be decided, although it would provide an alternative basis for dismissing the claims against them. However, in the case of the eighth defendant, it is dispositive.
Dealing first with the first, second, third and fifth defendants, by 28 March 2013 it was known to each of them that: 1. Evolvebuilt was not paying their invoices as and when they fell due, and had not done so for some time (typically, since January). It was for that reason that on 12 March they had ceased work. 2. The CFMEU became involved because employees and subcontractors were not being paid by Evolvebuilt. 3. They ceased work on 12 March 2013 because they (and others) were and remained unpaid. 4. CFMEU negotiated directly with Built to procure payment, and Built had terminated the sub-contract with Evolvebuilt on 14 March 2013 and then paid the defendants directly.
The situation that crystallised on 14 March 2013 was self-evidently caused by Evolvebuilt's failure to make timely payments, including to the relevant defendants, for a protracted period - a failure which a reasonable person in the position of the defendants would at least suspect was attributable to an inability to do so. That suspicion would have been reinforced by the circumstance that the payments were made by Built, as a result of negotiations by CFMEU - the obvious inference being because Evolvebuilt could not itself pay. There were, therefore, reasonable grounds for a person in the position of the defendants to suspect that Evolvebuilt was unable to pay its debts as and when they fell due. If the relevant defendants did not subjectively entertain such a suspicion, a reasonable person in their position would have done so. Accordingly, the defences raised under s 588FG by the first, second, third, and fifth defendants would have failed.
As to the eighth defendant Kennico, it was only marginally involved in the ANZ Project, and had provided labour mainly to other sites. Its director Mr Chang was not aware of the events concerning the ANZ Project. Kennico received the impugned payments directly from Evolvebuilt, not from Built. There is nothing to indicate that it remained unpaid for any significant period of time; Mr Chang deposes that it received payments "in due course". Mr Chang says that he would not have provided labour if he had known that Evolvebuilt was in financial difficulty; however, it is his state of mind when the payments were received, not when the labour was provided, that is relevant.
The liquidators sent letters of demand to Kennico on 17 March and 1 April 2016, in response to which Mr Chang contacted Mr Hosking and told him that he did not know that Evolvebuilt was insolvent; that Mr L'Estrange (the director of Evolvebuilt) had sought his help, as he was waiting on payment from Built and had no money to pay sub-contractors; and that he had informed Mr L'Estrange that if Kennico was not paid, he would go to the union.
Thus the relevant circumstances known to Kennico included only that Evolvebuilt's director wanted his help because the company had no money to pay subcontractors as it was waiting on payment from Built. The suggestion that a payment from Built was awaited would convey that this was a short term cashflow issue, rather than insolvency. There is no evidence that payments to Kennico were significantly in arrears. I do not think that what was known to Kennico was sufficient to found in a reasonable person an actual apprehension or fear that Evolvebuilt was unable to pay its debts as and when they fell due, [22] as distinct from a short term cash flow problem; and as Mr Chang told Mr Hosking when asked, he did not subjectively know that Evolvebuilt was insolvent. The eighth defendant's defence under s 588FG therefore succeeds.

Chicago Boot Co Pty Ltd v Davies & McIntosh as Joint & Several Liquidators of Harris Scarfe Ltd

At a glance

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Judgment (8 paragraphs)

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Cases Cited (23)

Cited By (5)