Cook's Construction Pty Ltd v Brown & Anor

LOWER COURT District Court JURISDICTION : LOWER COURT 10625/01 FILE NUMBER(S) : LOWER COURT Ainslie-Wallace DCJ JUDICIAL OFFICER :

IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL 40955/03

HODGSON JA SANTOW JA YOUNG CJ in EQ

Monday 22 March 2004 COOK'S CONSTRUCTION PTY LTD v MARTIN RUSSELL BROWN & ANOR Judgment 1 YOUNG CJ in EQ: This is an appeal from Judge Ainslie-Wallace of the District Court in a case involving an alleged preference under s 588FF of the Corporations Act 2001. The respondents are the liquidators of DML Resources Pty Ltd to which I will refer as DML, now in liquidation, whose winding-up commenced on 24 October 1997. 2 The appellant carries on business as hiring excavation and earthmoving equipment in the mining and construction industries. In February 1977 DML hired machinery from the appellant. It would appear that its own machinery had broken down and it had not dealt with the appellant before but hired some equipment from the appellant's Gladstone Queensland office. The appellant sent DML invoices for hire dated 28 February 1997 and 31 March 1997. These were paid by DML on 30 May 1997 into the bank account of the appellant. The payment being made within six months of the commencement of the winding-up and whilst DML was insolvent, the payments would constitute a preference unless the appellant can prove that certain factors existed (see s 588FG). 3 There are a number of factors which are noted in the section. At the trial it was conceded that the only matters on which the trial judge had focussed were those set out in (b)(i) and (b)(ii) of the section, that is: "(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 para 588FC(b); and (ii) a reasonable person in the person's circumstances would have had no such grounds for so suspecting".

"Such a party" means party to the transaction. 4 The other aspects of the section, that is that the person became a party to the transaction in good faith and that there was valuable consideration etcetera were conceded. It is clear that although good faith was conceded the fight was on between the parties, if I can put it that way, on all aspects of the test under 588FG(2)(b)(i). 5 The relevant time is the time when the appellant became party to a transaction. "Transaction" is defined very widely in s 9 of the Corporations Act as including "(d) a payment made by the body", the body in that sense being the body corporate involved. It is conceded in the instant case that the "transaction" is the payment that was made on 30 May 1997 and so that is the relevant time that must be considered. 6 The case was heard in the District Court on 17 September 2003 and her Honour gave judgment on 3 October 2003. At the hearing the appellant read affidavits to her Honour, including that of its Chief Executive Officer, Mr Jon M Trende, however only Mrs Beverley Trende, the Secretary of the appellant, had any close knowledge of the transaction and she was the only witness cross-examined. 7 The evidence from the material presented by the appellant was that invoices were sent from its Gladstone office to DML and were not paid. The evidence was the appellant's Gladstone office was closed in June 2001. Up until then it would appear that one Judy Irwin was the officer of the appellant handling the account. Ms Irwin is no longer in the appellant's employ but there is no evidence that she is somewhere where she could not have been found to have been subpoenaed to give evidence at the hearing. However she did not give evidence. 8 Mrs Trende said in her affidavit, paras 6 to 8, that: "Prior to Cook's Gladstone office being closed in June 2001 all accounts in arrears were handled by the accounts department in Gladstone, except in circumstances when it became necessary to send correspondence to outstanding debtors. All contact in relation to DML was dealt with by our Gladstone office and was managed by Judy Irwin, office manager. I was informed by Ms Judy Irwin and I verily believed that frequently the people who generate the invoices could also have been responsible for contacting any outstanding debtors, therefore the Gladstone office could have been liaising with DML as well. It is Cook's standard practice to send out reminder letters on outstanding debts. On 8 May 1997 I caused a letter to be forwarded to DML requesting that they satisfy their outstanding accounts."

Her affidavit ended: "I can honestly say that at no time did I have any concern or suspicion that DML was insolvent." 9 In her oral examination in chief Mrs Trende said in respect to her role as the Company Secretary that it was her task - "of pursuing debts over Cook's normal trading terms of thirty days from the date on any Cook's invoice, I don't pursue all debts over thirty days, I pursue some debts over thirty days."

And in respect of para 6 of her affidavit, her oral evidence was that where it says: " … all, relating to prior Cook's Gladstone office being closed in June 2001, all accounts in arrears were handled by the accounts department in Gladstone. Accounts were handled by the regional office. In this particular case the regional office was Gladstone but it didn't handle all accounts for the whole company." 10 Mrs Trende was based in the appellant's head office in Dandenong, Victoria. DML's head office was in Mascot, New South Wales. 11 As I have mentioned, on 8 May 1997 Mrs Trende sent to DML what appears from the evidence to be mainly a standard letter but it may not have appeared to be that to the recipient. 12 Of course the first two sentences in the second part of the quote were tailor-made for this particular debtor. 13 So far as is relevant the text of that letter is: "It is with deep regret that we have reason to write to you concerning the state of your account with our organisation. We have three No. outstanding invoices which require your immediate attention."

Mrs Trende then gives some details of the invoices and continues: "All works were undertaken in good faith, and at the time of commencement we were assured of prompt payment, in return for assisting your organisation to mitigate its loss in a breakdown situation. Despite numerous verbal requests and promises for the February and March amounts to be paid on 30 April, no payments have been forthcoming. Accordingly we ask that payment be made immediately, in good faith, as the debt is now quite aged. To this end we enclose our bank account details to enable a direct deposit. Should no funds be paid immediately, we will have no alternative but to view the non-payment as a breach of the original good faith of the deal and pursue all other remedies for the recovery of the amounts outstanding as the law allows." 14 It would appear that whilst this correspondence was going on there were still some minor dealings being carried on between the two parties on the ground. 15 Her Honour said in her judgment that the respondents asked the Court to infer from the terms of the letter of 8 May that, unlike other clients of the appellant, so far as DML was concerned the invoice was to be paid promptly. She then said: "There was no explanation given as to why no-one from the Gladstone office was called and, consistent with the authority of Jones v Dunkel (1959) 101 CLR 298, when a person who is presumably able to put the true complexion on the facts relied on to ground an inference has not been called as a witness and there is no sufficient explanation for his absence, that inference can more comfortably be drawn. Having considered the letter of 8 May 1997 and the other letters written to defaulting clients, I am satisfied that the terms of payment applicable to DML were less than the thirty days required of other clients. Even if that be incorrect, the time for payment on both invoices had elapsed by 8th May and unsuccessful efforts had been made to secure payment from DML before Ms Trende wrote her letter of 8th May. It is a reasonable assumption that the person in the Gladstone office who had spoken to DML about the unpaid accounts would have received some explanation for the non-payment, if for no other reason than to shore up any promise to pay in the future. Ms Trende did not agree. She said that it was unusual for people who were contacted about payment to give a reason why the invoice was unpaid. Whether that experience is correct or not, the people who would have been in a position to give that evidence were not called." 16 She then sets out in para 37 an alleged concession of Mrs Trende, to which I will return, and concluded in para 38 of her judgment that the appellant had failed to establish the subjective test necessary, that is the test under 588FG(2)(b)(i). 17 Her Honour then dealt with the other part of the test, the objective test, and also found against the appellant and accordingly ordered that the amounts of the payments of 30 May 1997 plus interest be paid to the liquidators. 18 The appellant appeals against those findings. On the appeal Mr J Langmead SC and Mr K Baker appeared for the appellant and Mr C R C Newlinds SC and Ms A Seward appeared for the respondents. The grounds of the appeal were slightly amended at the commencement of the hearing but they were as expanded in Mr Langmead's opening in summary as follows:

(1) the weight of the evidence supported the appellant's defence;

(2) the judge wrongly formulated the objective test;

(3) the judge failed to give sufficient weight to key facts; and

(4) the judge wrongly applied the rule in Jones v Dunkel (1959) 101 CLR 298. 19 There is no doubt that the onus is on the defendant in the proceedings to satisfy the Court that (1) it had no reasonable grounds for suspecting DML was insolvent, the so-called subjective test; and (2) that a reasonable person in the appellant's circumstances would have had no such grounds, the so-called objective test. It is always difficult to ascertain what is the intention or purpose of a corporation in various aspects of the law and this has been noted time and time again, perhaps most significantly in Re The Mayor, etc, of the City of Hawthorn; Ex parte The Co-operative Brick Company Ltd [1909] VLR 27, 51 and Arthur Yates and Co Pty Ltd v The Vegetable Seeds Committee (1945) 72 CLR 37, 69. 20 The question is always one of fact. Often it is necessary to look at the acts and words of a number of directors of the corporation; see eg Municipal Council of Sydney v Campbell [1925] AC 338 (PC). In other cases one can look at the controlling mind of the corporation or its appointed spokesperson, see for instance Johns v Australian Securities Commission (1992) 8 ACSR 156, 182. 21 In the present context M McLelland J said in Spedley Securities Ltd v Western United Ltd (1992) 27 NSWLR 111 at 118-119: "In the case of an organisational payee such as a corporation, the person or persons whose state of mind is relevant for the question of 'good faith' for the purposes of subs (ii)(a) are those officers, employees or agents of the organisation who were concerned in an executive capacity in the transaction whereby the payment was received."

The same applies when one is looking at the test under consideration in the present case. 22 Mr Langmead relied heavily on the decision of Merkel J in D'Aloia v Federal Commissioner of Taxation (2003) 203 ALR 609 where his Honour focussed on the knowledge of a Ms Beverley Francis, an Australian Taxation Office collections officer to whom the file had been given as if her mind were the mind of the Commissioner. However, at least two things can be said about that case: (1) the case merely shows how his Honour approached his duty of finding the question of fact in that case; and (2) that as his Honour found that Ms Francis' evidence did not satisfy him it was not necessary to go further. 23 In cases such as the present the problem is worse than the traditional problem because the appellant has to prove a negative, that is that it had no reasonable grounds for suspecting insolvency. However, no matter how difficult the task is, the approach of the courts as exemplified in what Moffitt P said in the Parramatta Stadium case, Parramatta City Council v Hale (1982) 47 LGRA 319, 345, "Proof of a state of mind whether of a person or collegiate body may be a matter of difficulty, but the person ... must discharge that onus however difficult that may be and he must do so in accordance with proper legal requirements and by inference not suspicion." 24 The matter is a question of fact. Mr Langmead says that the Court needs to look predominantly as to what Mrs Trende said. The learned trial judge said at para 37: "Ms Trende, as Company Secretary, conceded that she had no recollection of what her belief or suspicion was at the time she wrote the letter of 8th May. Other people employed by the defendant who could have been in a position to say what they knew or suspected about DML's solvency were not called. In my view there were reasonable grounds for the defendant to suspect that DML was insolvent, even taking into account the nature of the industry as described in the evidence and accepting the industry practice of late payment of invoices." 25 Mr Langmead said that this was an overstatement of Mrs Trende's evidence and she never actually made the concession, that her Honour considered that she did make. However, if one looks at the appropriate part of the cross-examination, the summary by the learned judge gets mightily close to what Mrs Trende said. She said that she really did not have a memory as to what her feelings were at the time that she wrote the letter of 8 May and one can well accept that a company secretary of a heavy machine operating company may well have no intimate knowledge of each letter of demand she writes. 26 However, basically, she said that she has no recollection and the vital point made by her Honour in para 38 is to direct attention that there are others who could have been called but were not called who might have put further light on the matter. With respect, Mr Langmead's insistence that one must focus entirely on Mrs Trende's evidence is not in accordance with the approach that courts generally have, over the last century at least, dealt with the situation of how to evaluate corporate knowledge or non-knowledge. The Court is entitled to have put before it evidence by the person who bears the onus to establish what the corporate mind or non-mind was by evidence and not just suspicion. 27 Mr Langmead then refers to what Justice Santow, as he then was, said in Sydney Appliances Pty Ltd v Eurolinx Pty Ltd (2001) 19 ACLC 633 and what I said in Wily v Lo Presti (No 2) (1998) 16 ACLC 85 about looking at the facts in the sort of problem now before the Court in a commercial context and looking realistically at the way in which a particular industry deals with late payments of debts and cheques that are dishonoured etcetera. 28 These are of course relevant matters but they are certainly not the only matters that one has to take into account when working out these problems. 29 As has been pointed out on many occasions, the adjustments to the law made when the onus was placed on the payee of an alleged preference to prove facts may often act unfairly in the sense of commercial morality because it is a hard test for the payee to meet and it may have to meet it many years after the transaction. This however is the choice that the legislature has made as to where losses should fall in corporate insolvencies and the Court and the appellant must just apply the test which the legislature has laid down. 30 In the present case, as doubtless in many others, the financial controller of the payee will honestly say that he or she has no recollection of the transaction at all and may even honestly say that on the facts as he or she remembers them there was nothing unusual about the transaction. However, the way in which the courts have approached this task over the last ten years shows that one cannot stop there. 31 Thus, for instance, in Harkness v Commonwealth Bank of Australia (1993) 32 NSWLR 543 seven bank officers needed to be called, each to give evidence in an endeavour to make out the defences. As I have said, McLelland J in the Western United case pointed out that it is necessary to get to the mind of the organisation, the persons who were concerned in an executive capacity in the transaction. That was not just Mrs Beverley Trende. It at least included Ms Judy Irwin and there may have been others in the Gladstone office of the appellant as well but Mr Langmead says that her Honour overemphasised the non-calling of the Gladstone witnesses and indeed misapplied the rule in Jones v Dunkel. 32 As to this point it must be borne in mind that Jones v Dunkel is actually just one aspect of a wider principle. That wider principle is that in judging evidence the Court has regard to the material available to a party. If the person that the Court is considering is a person who does not bear the onus of proof and that person fails to call a witness, the inference may be drawn that the witness is not likely to assist the person's case. That is Jones v Dunkel itself. 33 If on the other hand the person bears the onus and has a witness which he or she does not call then the Court takes that into account when assessing the evidence as a whole. As good an illustration as any of that point is the judgment of Hodgson JA in Ho v Powell (2001) 51 NSWLR 572 at 576-7. It is that second aspect of the rule that is really relevant in the present case and it is with respect inaccurate to tag it as a Jones v Dunkel point. However, the tag "Jones v Dunkel" does not detract from the point her Honour was making that she can take into account when a witness is not called by a person who bears the onus when she is evaluating whether the onus of proof has been established. 34 Of course if it is shown that there is good reason why the witness is not called the principle does not apply. This may be that the witness is dead or cannot be found or material is shown that the witness is of little worth such as Fabre v Arenales (1992) 27 NSWLR 437. Indeed, not only does counsel say that her Honour did not properly apply Jones v Dunkel, he says that she should have applied it in the appellant's favour. He said as the respondents did not give any evidence other than the formal evidence to show the insolvency, the payments and the state of the company accounts, and the respondents did not call any witnesses from DML or from the Gladstone office of the appellant, the judge should have drawn the appropriate inference in the appellant's favour. This submission overlooks, with respect, the fact that the onus was on the appellant to prove and there was no obligation on the respondents at all to go into evidence to boost the appellant's case in any way whatsoever. There was no foundation for what I might call the reverse Jones v Dunkel submission. 35 It seems to me that there is little point in spending time discussing whether her Honour made inferences from the material before her which she was not entitled to make on the subjective test, nor does it matter very much whether the terms of payment were forthwith, thirty days or sixty to ninety days. There was virtually no evidence on this point and, with great respect, most of Mr Langmead's submissions here were based on mere speculation. The forensic reality was that the onus was on the appellant to establish the matters in para (b) of s 588FG(2). 36 The appellant did not call evidence from the Gladstone office about which there was nothing to show that it was not available to be called. This was the primary reason why the judge was not satisfied that the onus had been discharged. In my view, it was quite open for her Honour to reach that conclusion. As to the objective test, in view of what I have already said, it matters not what conclusion is reached as the appellant must satisfy both those tests. Focussing briefly on the objective test, Mr Langmead says that her Honour posed the wrong test. She did; but the test that she applied was easier for the appellant to satisfy than the one she should have applied. Notwithstanding, I do feel some discomfort about her Honour's assumptions on this part of the case. 37 There does not appear to be much to show that there was anything about the hiring transaction or the delay in payment which would make it one about which a reasonable person in the appellant's circumstances would have no reasonable grounds for suspecting insolvency. The matter was one of fact and I think despite her errors, her Honour's conclusion may well have been within her ability to fairly reach. 38 As I have said, in view of my conclusions on the subjective test, it really does not matter whether the objective test was satisfied or not. Thus the appeal must be dismissed with costs. 39 HODGSON JA: I agree. In order to succeed in its defence, the appellant had to satisfy the Court that it had, at the relevant time, no reasonable grounds for suspecting that the company was insolvent; and inter alia it had to prove that it did not, through persons at the Gladstone office, have any such reasonable grounds. 40 Our attention was drawn to a letter of 8 May 1997 written by the appellant to DML, under the hand of Mrs Trende, in which it is said "Despite numerous verbal requests and promises for the February and March amounts to be paid on 30 April no payments have been forthcoming". It is plain that that sentence is referring to numerous verbal requests made by some person or persons at the Gladstone office, and promises for payment made to some person or persons at the Gladstone office. 41 It was submitted by Mr Langmead that it can be inferred that that person or those persons had no reasonable grounds for suspecting that the company was insolvent, firstly because any such suspicion would have been passed on to Mrs Trende, and secondly because failure to pay accounts for sixty to ninety days was normal. I accept that those matters give some basis for an inference that those persons had no reasonable grounds. However, prima facie there was evidence that the appellant could have called that would have directly dealt with the question of what grounds if any those persons had, namely the evidence of the person or persons who made the numerous verbal requests and who received the promises. 42 Mr Langmead submitted that that was not a matter that should have been, or should now be, taken into account so as to refuse or decline to draw the inference that the person or persons had no reasonable grounds because, he submitted, there was no basis for inferring that the appellant feared to call those witnesses; and he referred to Fabre v Arenalis (1992) 27 NSWLR 437 at 448-50. However, in my opinion, where a party has to prove something and prima facie has available evidence that would directly deal with the question, a court will be very hesitant in drawing an inference in that party's favour from indirect and second-hand evidence, when the party doesn't call the direct evidence that prima facie it could have called, at least unless some explanation is given, or the circumstances themselves provide an explanation, as was the case in Fabre. 43 In my opinion, in those circumstances the primary judge was correct in not drawing in the appellant's favour the inference that at the relevant time it had no reasonable grounds for suspecting that the company was insolvent. 44 SANTOW JA: I agree with the observations of Justice Hodgson and Justice Young. I simply want to deal with two additional matters. 45 The first relates to what appears to have been a concession that there was no issue that the defendant became a party to the transaction, in the sense of receiving the relevant payments, "in good faith". This is to dispel any confusion between the notion of "acting in good faith" and what has been described as the "subjective test". The latter is the first of the two hurdles to satisfy the defence under s588FG. Confusion derives from the reference to "subjective" in relation to the first hurdle, where it is contrasted with the "objective" second hurdle. The "subjective" test in truth has something of a hybrid character. Thus the person referred to in s588FG(2)(b)(i) has to have "no reasonable grounds" for suspecting insolvency at the relevant time. The requirement of "no reasonable grounds" is clearly objective. 46 That is why it is possible to envisage a circumstance in which a person may receive payment honestly and in that sense in good faith. Yet on an objective consideration, that person may have had reasonable grounds for suspecting insolvency. Despite good faith, the defence fails. But the requirement of good faith and the subjective test coalesce where the person has both acted in good faith in ignorance of insolvency and had no reasonable grounds for suspecting it. 47 The other matter relates to the fourth ground of appeal. In particular it relates to the significance or otherwise of the evidence concerning an industry practice of time for payment being extended to sixty to ninety days. The evidence as to this is to be found in the affidavit of Mr Trende at para 7 (Blue, 333). I quote that paragraph below : "7. It is cook's usual trading terms to expect payment within 30 days from the date of the invoice. However in my experience it is not uncommon in the construction industry to expect to receive payment in excess of 60 to 90 days, 32% of Cooks customers pay in excess of 60 to 90 days. Now produced and shown to me marked "JMT5" is a true copy of Cooks Debtor Ledger History." 48 It will be observed that the practice there referred to arises in relation to Cook's usual trading terms of expecting payment within thirty days from the date of the invoice. It was submitted that this expectation accommodated payment in sixty to ninety days. 49 There are real difficulties in the way of that fourth ground of appeal. These include the fact that the invoices in the present case are entirely silent as to the date of payment. In particular they do not provide for payment within thirty days, suggesting that payment is required immediately. That might not be surprising given that this was a new client where there was no past trading history. The absence of evidence from those in the Gladstone office to which earlier reference has been made included lack of evidence as to what might have been the understanding behind leaving the invoice silent. But one inference that could fairly be drawn is that the intention was that the invoices would be paid on delivery or on receipt. 50 Indeed it is noteworthy that as at 8 May 1997 the appellant was demanding repayment of the invoice dated 30 April 1997 (Blue, 340). That is demonstrable of an intention that the invoice would indeed be payable immediately (see Black, 27. 41 to .51). 51 In those circumstances it is apparent that the appellant failed to establish that, in the case of invoices that were not expressed to be payable within thirty days or some longer period but immediately, the supposed industry practice applied. In particular it failed to show that it was part of the arrangement or understanding between the parties or their common expectation, or that there was some shared expectation that such an indulgence would be forthcoming. 52 For the reasons stated by Justices Hodgson and Young and for the additional reason that I have just set out I consider that the appeal should fail. 53 HODGSON JA: So the order of the Court is, appeal dismissed with costs.

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