Hunter Wholesale Confectioners Pty Limited (In Liquidation) v Sweeties Confectionery Pty Limited

CATCHWORDS : CORPORATIONS - confectionery owned by defendant held at plaintiff's warehouse on terms returnable on demand but if sold by plaintiff replacement stock or money value would be provided. Stocks of parties mixed and not identifiable - demand for return made and not met but $100,000 paid on day before administrators appointed - whether payment an unfair preference - whether defendant knew plaintiff likely to be insolvent - whether objective test met. - BAILMENT - terms of bailment requiring goods to be identifiable and available for return - goods mixed and not returned - goods not mixed by accident - claim in conversion by owner. - TORTS - conversion - mixture of goods - measure of damages when share in mixed stock not ascertainable.

CASES CITED : Reglon Pty Limited v Hill & Ors [2006] NSWSC 1360 Sandeman & Sons v Tyzack & Branfoot Steamship Co Ltd [1913] AC 680

Hunter Wholesale Confectioners Pty Limited (In Liquidation) (First Plaintiff) PARTIES : Michael John Morris Smith and Peter Hillig in their capacity as liquidators of Hunter Wholesale Confectioners Pty Ltd (In Liquidation) (Second Plaintiff/Cross-Defendant) Sweeties Confectionery Pty Limited (Defendant/Cross-Claimant)

COUNSEL : J Baird (Plaintiffs/Cross-Defendants) J O'Sullivan (Defendant/Cross-Claimant)

SOLICITORS : Kemp Strang Lawyers (Plaintiffs/Cross-Defendants) Etienne Lawyers (Defendant/Cross-Claimant)

• 16 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

09/290865 HUNTER WHOLESALE CONFECTIONERS PTY LIMITED (In Liquidation) & ANOR V SWEETIES CONFECTIONERY PTY LIMITED JUDGMENT 1 This is an unfair preference claim involving a sum of $100,000 paid by the first plaintiff, Hunter Wholesale Confectioners Pty Limited (in liquidation) (Hunter), to the defendant, Sweeties Confectionery Pty Limited (Sweeties) on Friday 22 February 2008. Administrators were appointed to Hunter on Monday 25 February 2008. There is a cross-claim by Sweeties against the liquidators for conversion of goods of Sweeties. Facts 2 Both Hunter and Sweeties are wholesalers of confectionery. Both purchased chocolate and other confectionery items from Cadbury Schweppes Pty Limited. Mr Neville Plumb (Plumb) and his wife are directors of Hunter. Mr Leigh Stokes (Stokes) is the sole director of Sweeties. Both Plumb and Stokes were, in 2007, directors of National Confectionery Wholesalers Limited (NCWL) an industry group of confectionery wholesalers. 3 Hunter conducted its operations through warehouses in Mayfield, Lismore and Tamworth but it is the Mayfield branch which is relevant to this action. Sweeties conducted its operations at Emu Plains. 4 The second plaintiffs Mr Smith and Mr Hillig were appointed administrators of Hunter on 25 February 2008 and liquidators of Hunter by resolution of a creditors' meeting on 7 April 2008. 5 Plumb and Stokes had become friendly as a result of their association through NCWL. There was a meeting of that company in Melbourne at the end of November 2007. Messrs Plumb and Stokes attended. One evening after dinner and a few drinks they had a conversation. The version of Plumb is set out in his affidavit of 8 June 2010 as follows: Leigh: Sweeties has purchased chocolate and confectionery stock from Cadbury within its promotional period but needs to order further chocolate and confectionery stock to the value of approximately $200,000.00 in order to qualify for the promotional incentive income and receive the overseas trip being offered. Is Hunter going to achieve its Cadbury incentive target?

I: Hunter has no hope of achieving the incentive target as we are no where near the required volume of orders.

Leigh: Sweeties can still make it but doesn't need the additional stock at this time with the traditional low period in January and February coming up and with the negotiations for the sale of the business to Metcash Limited going on. Sweeties won't need the additional stock or the cash equivalent until about May 2008. I am thinking about starting a new confectionery business on the New South Wales north coast.

Leigh: I wonder if Hunter could help out by accepting delivery and storing the Confectionery Stock? Hunter could use the Confectionery Stock in its operations and then in May 2008, or earlier if I telephone you and give notice, Hunter would return the unsold portion and either, deliver to Sweeties equivalent replacement stock for any Confectionery Stock sold by Hunter, or pay to Sweeties the value of Confectionery Stock sold by Hunter. Is that something that Hunter would agree to?

Leigh: Great. Thanks 6 Stokes in his affidavit said that the conversation was as follows: I: Cadbury has a promotion running requiring the purchase of a certain quantity of chocolate and confectionery stock during the December period in order to qualify for an overseas trip. We have purchased chocolate and confectionery stock from Cadbury within the promotional period but we need to order further stock to the value of approximately $200,000.00 in order to qualify for an overseas trip being offered. I don't have any physical room in my warehouse for such a large amount of stock. Is Hunter going to achieve its Cadbury incentive target?

Neville: Hunter has no hope of achieving the incentive target as we are nowhere near the required volume of orders.

I: Sweeties can still make it but doesn't need the additional stock at this time with the traditional low period in January and February coming up and with negotiations to sell part of the Sweeties business to Metcash going on. Sweeties won't need the additional stock until March 2008. I am thinking of starting a new confectionery business on the New South Wales North Coast.

I: I wonder if Hunter could help out by taking delivery and storing the Cadbury Confectionery stock in its own warehouse until about March 2008.

I: Great. Thanks. 7 Plumb said that he had conversations with Stokes prior to 11 December 2008 which was the date of delivery of confectionery stock into Hunter's warehouse at Mayfield. His oral evidence was to the effect that Stokes asked whether he was "OK to take delivery of the stock" and he said that he was. The value was $210,215.57. He then went on to say that the conversation was along the following lines: That we were right to take the stock and that to the best of, - that the stock was to come into our warehouse and be stored and sold as I understand it and I don't know what more you want. 8 He was asked about selling the stock and he said: During the conversations in my mind we clearly mentioned the sale of the stock because the stock was dated and the stock was also in mainly chocolate being delivered to my warehouse in the middle of summer so one of the things I would have clarified and I do recall clarifying it was the stock wasn't just going to sit on my floor. 9 He said that the stock was on the floor to sell and that the arrangement was that he could sell the stock and replace it at a later date. The date of expected return was about May or earlier if required. 10 The order for the goods was in fact placed by Plumb but on behalf of Sweeties and the goods were delivered by Cadbury direct to Hunter's warehouse at Mayfield. The Cadbury invoices for $210,215.57 were made out to Sweeties. Stokes said he was happy about Hunter placing the order as he was expecting to sell his business to Metcash Limited and if the sale went through Metcash was to purchase all Sweeties' stock of whatever kind. The Cadbury invoice was made out to Sweeties. There is some doubt about the volume of confectionery delivered by it appears that somewhere between 22 and 30 pallets were delivered. 11 The expected sale of the Sweeties business to Metcash did not go ahead. On 1 February 2008 Stokes rang Plumb, told him of this and asked for the stock back as soon as possible to which Plumb said that he would get back to him shortly. Nothing seems to have happened until 22 February when Stokes rang Plumb again and left a message and Plumb returned the call at 12.51 pm. In his affidavit, Plumb did not say anything about the call on 1 February. He said that the following conversation took place in the telephone call on 22 February: Leigh: The sale to Metcash has fallen through. We need the stock back or cash as soon as possible so we can get the business back up again.

I: Things are very very difficult at the moment Leigh. Hunter is on hold with Cadbury. Hunter just doesn't have the cash to pay Sweeties the full amount. The only thing we can probably do is pay you $100,000.00.

Leigh: If you can get me some money today that would be fantastic. 12 He said that following this conversation he drew a cheque for $100,000 in favour of Sweeties and deposited it into Sweeties' account on 22 February 2008. The reason why he could not return stock was that Hunter was "on hold with Cadbury" which meant that Cadbury would not provide stock until Hunter's account was put into order. Plumb said that he paid the money into the bank account of Sweeties by depositing the cheque late in the afternoon when he went to the bank to deposit cheques which Hunter had received. The bank records of Sweeties show that the payment was recorded on 25 February but state that it was effective as at 22 February. 13 Again there is disagreement about the conversation on 22 February. The evidence of Stokes in his affidavit at paragraph 20 is as follows: 20. On or about 22 February 2008 I received a phone call from Neville Plumb who said words to the following effect: Neville: Leigh, I can't return the stock to you.

Neville: I've had to appoint some administrators. The business should still be OK. I have just paid you $100,000.00 for the Cadbury stock we sold.

I: I don't want your money. I just want my stock back as per our agreement. 14 He said that he did not know that Hunter was going to pay $100,000 to Sweeties until the conversation had taken place and he said that he never requested payment. Receipt of the money is admitted. Plumb said that he had obtained details of the account into which the moneys were to be deposited, he thought from Stokes' wife. He had not known the details prior to the date of payment and must have obtained from Stokes or his wife or somebody in the office. 15 Mr Michael Smith is one of the liquidators. Stokes contacted him on 28 February stating that he had stock in storage with Hunter at Mayfield and he had been advised of the appointment of administrators. Mr Smith asked him to send an email, which he did, saying that the stock had been delivered to Hunter with the intention that it be stored there and that he would redraw the stock when he had space available at Emu Plains. He sought to recover his stock. There was some correspondence about identifying it but I am satisfied from the evidence of Plumb that this would have been impossible. He said that on delivery the Sweeties stock purchased from Cadbury was just placed with all other Cadbury stock and there was no way that it could be identified. 16 It is necessary to decide two matters of conflict. The first is as to the terms of the agreement. I conclude that the version of Plumb is correct. The stock belonged to Sweeties to be returned when requested. Thus it had to be kept separate or identifiable. In the meantime Hunter could sell it and if it did then on demand for its return to the extent it had been sold, Hunter could provide replacement stock or pay the value of the goods sold. There are two facts which go to support that conclusion. The first is that Hunter would not have been concerned to place the order on behalf of Sweeties if there had not been interest in the type of confectionery purchased. The only reason it would have for that interest would be that it was entitled to sell some of that stock, probably because at that stage it was on hold with Cadbury and could not obtain the stock itself. The second reason to support that conclusion is that although the two men were friends there was no other reason for Hunter to agree to accept over 20 pallets into its warehouse without reward and without the ability to dispose of the stock on those pallets. I should add that even if that were not the agreement so that the sale of part of the stock amounted to a conversion the result would be that Sweeties would have a claim in the liquidation for the value of the stock converted. That on any basis seems to have been at least $100,000. When told the payment of $100,000 was to be or had been made Stokes did not object nor say that he would send the money back. In coming to this conclusion I have considered whether an email exchange between Plumb and Matthew Plohl, an employee of the liquidators, bears on the matter. It does but it does not change the conclusion reached other than to confirm the stock on delivery belonged to Sweeties. 17 The next important question to decide is whether payment of $100,000 was made before or after the conversation which took place at 12.51 pm on 22 February. Here again there was a clear conflict, Stokes saying that he was told the stock could not be returned but that $100,000 had been paid to the Sweeties' bank account, whereas the evidence of Plumb was that Stokes did not ask him to pay the $100,000 and that it was his idea and that he said he could not return the stock and would pay $100,000 into his bank account. On this aspect I found Plumb to be more convincing. The following answers were given by Stokes in cross-examination (T 75.24):

Q. He told you that he'd already sold the stock, didn't he? A. He just said he couldn't return the stock and that he was paying me an amount of money on that day. 18 And at (T 76.10): Q. And I am putting to you that he told you why he couldn't return the stock, namely he said he had sold it? A. He just told me that he had - he couldn't return the stock to me, he had some problems and that he was paying me an amount of money - had paid me an amount of money.

Q. …You wouldn't have simply accepted Plumb saying, "I can't give the stock back to you." You would have wanted to know why he couldn't return the stock, right? A. No. I just - as discussed, he said, "I can't return the stock. I just paid you some money. I'm calling some administrators in. It should be okay."

This gave me the impression that Stokes realised the problems with his earlier answer and was attempting to remedy the situation. There is, however, the important evidence from the banking records showing the deposit of $100,000 was shown to be credited on 25 February but effective from 22 February which I think indicates that it was made late in the banking day on 22 February. Plumb said it was his habit to do his banking late in the day, depositing cheques into his bank and making payments to creditors' bank accounts and I accept that evidence. Preference claim 19 It is admitted that the requirements of ss 588FA, 588FC and 588FE are made out. Insofar as it is necessary to prove insolvency on 22 February that is clearly established by the report of the liquidators of 2 June 2010. The administrators were appointed on 25 February. That is the date for the relation back period. Their report establishes the company was insolvent on 22 February 2008 and well before. As I have said that is not contested. 20 I turn to s 588FG. For this to apply in this case it is necessary for Sweeties to establish (a) that it received the $100,000 in good faith; and (b) at the time it received the benefit: A, it had no reasonable grounds for suspecting that Hunter was insolvent; and B, a reasonable person in the person's circumstances would have had no grounds for so suspecting. 21 I consider that good faith was established. The payment was, according to Plumb, made voluntarily and I accept that. Stokes did not ask for it and in fact he wanted stock. Good faith is subjective and in circumstances such as those in question here where payment is made by cheque which is not demanded it is sometimes more easily established than it is in the case of other dispositions falling within the definition of transaction under s 9 of the Corporations Act 2001. 22 Plumb said he told Stokes on 22 February that he could not get stock from Cadbury as he was on hold and denied that he made any reference to administrators. This is contrary to the evidence of Stokes who had a clear recollection that Plumb told him that he was to meet with administrators but thought things would be OK. I accept Stokes on this. The evidence was contrary to his interests. Stokes said while he did not know Hunter was "on hold" with Cadbury when he was told on 22 February that the stock could not be returned he may have had an inkling. In any event the inability to replace stock would, I think, indicate financial problems. But more importantly Stokes said that Plumb told him that he was calling administrators in and it should be OK. 23 I think that Stokes, when told this, may on a subjective test, have had no reasonable grounds to suspect Hunter was insolvent. However, I consider that a reasonable person in the circumstances of Stokes representing Sweeties would have had grounds for suspecting insolvency. I so find. The s 588FG defence is not made out. It follows that an order should be made directing Sweeties to pay Hunter the sum of $100,000 plus interest from 31 July 2008 which was the date of demand. Cross-Claim 24 This is a claim against the liquidators for conversion. It relies on the law of co-mixture although I do not think that was the basis on which the claim was originally put. The cross-claim seeks orders for delivery up of the stock placed by Sweeties into the Hunter's warehouse and in the alternative $110,215.00 for conversion. The figure claimed should be $110,385 and is the value of the original Sweeties' stock less $100,000 paid on 22 February 2008. It is admitted on the pleadings that demand was made on the liquidator for return of the Sweeties' stock and it is clear that demand was made on Hunter for return of the stock. The liquidators say they had no obligation to return the stock; that they were unable to identify unsold Sweeties' stock; and that Stokes was invited to identify it but was unable or unwilling to do so. There is an additional defence claiming that as Sweeties has lodged a proof of debt of $110,538.00 which has been admitted it has elected to rely on its rights as creditor and is bound by the election. 25 I will deal with election first. Sweeties did not have inconsistent rights. If it had no claim on the property and thus no claim in conversion it had a right to prove in the liquidation. The claim might amount to some admission but that is all. The common law doctrine of election is not engaged. Co-mixture 26 Apart from the evidence of Plumb that the stock had not been kept separate and could not be identified which is of course the basis of a finding of co-mixture, the only relevant evidence comes from the affidavit of Mr Smith, one of the liquidators sworn on 2 June 2010. Paragraph 8 of that affidavit is as follows:- 8. Based on the books and records of Hunter, the Liquidators have been able to determine that the value (exclusive of GST) of all Cadbury confectionery stock (included that supplied by Sweeties) held at Hunter's premises between the date the Sweeties stock was delivered and the date that Hunter ceased to trade was as follows:

Cadbury confection stock on hand as at10 December 2007 $128,082

Add; Receipt of Cadbury confectionery Stock (invoiced to Sweeties on 11 December 2007 $ 191,294

Add: Cadbury confectionery purchases between 11 December 2007 and 25 February 2008 $678,998

Less: Cadbury confectionery sales (at cost value) between 11 December 2007 and 24 February 2008 $883,310

Cadbury confection stock on hand at 25 February 2008 (per HWC records) $115,064

Cadbury confectionery stock on hand at 13 March 2008 (per HWC records and net of Administrators' stock purchases which were returned for credit as deposed to in paragraph 10 below $ 79,063

These figures are exclusive of GST and the $191,294 figure does not appear to be that on the invoices which total $191,105.16. 27 In Reglon Pty Limited v Hill & Ors [2006] NSWSC 1360 I set out my understanding of the law on intermixture at paragraphs 22 and 23 as follows: 22 It is not necessary to embark on a discussion of this subject from Roman law to the present day. Despite the strongly pressed arguments of Mr Coles QC, I think it clear that it is not essential that goods or products such as oil, sugar or cotton be mixed together in one vessel or container so as to merge in one substance for the general principles of co-mixture law to be brought into play. It is true Bramwell B is reported to have said in Smith v Torr [1862] 3 F&F 505 that the doctrine of confusion of property did not apply to distinct chattels like chairs and tables but to commodities "such as corn, wine, oil and the like of which there can be commingling of substance". Generally speaking in 1862 people could identify their furniture, but the doctrine has been applied in Canada to logs of wood: McDonald v Lane (1882) 7 SCR 462. I can see no reason to require a commingling of substances as distinct from a mixing of many types of identical items, when the ownership of a particular one of such items is impossible to tell from other items of the same type. The evidence is that apart from painting colours on items of scaffolding, such as those in issue in these proceedings, they cannot be distinguished one from another. I hold that commingling occurred. 23 The law in such a case can I think be stated as follows: Where there is wrongful intermingling of a substance or substances by one party, the whole belongs to the other party; where the intermingling is not wrongful, the whole is shared in common ownership in the proportions each has contributed; and perhaps in a case where there has been no intermingling of a substance, yet the mingling is wrongful, the innocent party should share in the whole, to the extent of his property introduced to the whole in a case where the contributions of the wrongdoer cannot be established or the case where both contributions cannot be satisfied. Sandeman & Sons v Tyzack & Branfoot Steamship Co Ltd [1913] AC 680 at 694. The subject is discussed in various texts including Vaines: Personal Property 4th Edition 1967 at 387 and Helmore Commercial Law and Personal Property in New South Wales 10th Edition 1992 page 40. In the present case the mixing was not shown to be authorised yet there is no mixing of substance. In those circumstances as between the owners entitled to claim and Action, I would hold that Reglon was entitled to recover from the articles painted red, equipment to the amount claimed in the summons. However, the matter is not as simple as that. 28 That case went on appeal to the Court of Appeal where in paragraphs 86 to 95 this summary of the law was confirmed as correct. 29 In the present case it is important to consider the full passage of Lord Moulton in Sandeman & Sons v Tyzack & Branfoot Steamship Co Ltd [1913] AC 680 at 694 which I paraphrased in Reglon. It commences at page 694 and is as follows: My Lords, if we proceed upon the principles of English law, I do not think it a matter of difficulty to define the legal consequences of the goods of "A." becoming indistinguishably and inseparably mixed with the goods of "B." If the mixing has arisen from the fault of "B.," "A." can claim the goods. He is guilty of no wrongful act, and therefore the possession by him of his own goods cannot be interfered with, and if by the wrongful act of "B." that possession necessarily implies the possession of the intruding goods of "B.," he is entitled to it (2 Kent's Commentaries, 10th ed., 465). But if the mixing has taken place by accident or other cause, for which neither of the owners is responsible, a different state of things arises. Neither owner has done anything to forfeit his right to the possession of his own property, and if neither party is willing to abandon that right the only equitable solution of the difficulty, and the one accepted by the law, is that "A." and "B." become owners in common of the mixed property.

Farther than this I do not think that it is safe to go. That the whole matter is far from being within the domain of settled law is shewn by the divergence of opinions as to the relative shares of the participating parties in the case of an accidental commixtio. Blackburn J. in Buckley v. Gross (following Kent's Commentaries) considers that they would be tenants in common in equal shares. In Spence v. Union Marine Insurance Co . they were judged to possess the mixed mass in proportion to the probable amounts of their contributions to it. The fact is that the conclusions of the Courts in such cases, though influenced by certain fundamental principles, have been little more than instances of cutting the Gordian knot - reasonable adjustments of the rights of parties in cases where complete justice was impracticable of attainment. I doubt whether even the fundamental principles enunciated above would be strictly adhered to in extreme cases where they would lead to substantial injustice. For instance, if a small portion of the goods of "B." became mixed with the goods of "A." by a negligent act for which "A." alone was liable, I think it quite possible that the law would prefer to view it as a conversion by "A." of this small amount of "B.'s" goods rather than do the substantial injustice of treating "B." as the owner of the whole of the mixed mass. 30 When looking at the stock on 11 December 2007 as set out in the affidavit of Mr Smith, although the mixing was brought about by wrongful act of Hunter, it would not be reasonable to hold that at 11 December the whole of the Cadbury stock belonged to Sweeties. Rather it would be proper to hold that stock to the value of the amount claimed in the cross-claim out of the total Cadbury stock then on hand belonged to Sweeties and that Sweeties had first claim on the mixed stock of confectionery up to that value. 31 The position becomes more difficult when the purchase and sale of the Cadbury stock between 11 December 2007 and 24 February 2008 are taken into account. It is more difficult, first because the cross-claim gives credit for the $100,000 payment and this acknowledges that Sweeties stock up to that value had been sold and second because stock to a value of more than $100,000 could have been sold prior to the appointment of the administrators. Plumb did not cover this in his evidence other than to say that $100,000 was all he could pay on 22 February 2008. As I have found that the agreement required the Sweeties stock to be kept separate or at least identifiable from that of Hunter, and that Hunter had the right to sell the stock and replace it upon request for return it follows that the onus is on Hunter and the liquidators to establish that stock in excess of $100,000 had been sold prior to 25 February 2008. 32 Plumb's evidence was that the turnover of Cadbury confectionery amounted to somewhere between $100,000 and $150,000 per week and that he reordered when necessary. There is some evidence about a 90 day guarantee from Cadbury, but against this was evidence of different use by dates for various items and that the use by dates were usually at least six months out from delivery from Cadbury. In any event the delivery on 11 December 2007 would have carried with it a 90 day guarantee period so that at the date of the appointment of the administrators the 11 December delivery was still within the 90 day period. There has been no attempt by the liquidators nor by counsel to identify sales of Cadbury stock corresponding in type with the Sweeties order and I accept it is not possible to establish by records what amount of Sweeties stock was held as at 25 February 2008. All that can be found is that on expected turnover a considerable amount of the stock must have been sold but whether this was more or less in value than the $100,000 is not clearly established. I consider, however, that it could not have been less in value. When sales and purchases are taken into account it seems on the balance of probabilities it is more likely than not that more of the Sweeties stock had been sold prior to 25 February than stock to the value of $100,000. Some items have longer shelf life and are slower moving than others. Having said that it would not in my opinion be reasonable to hold that approximately $110,000 worth of the stock of $126,570 including GST on hand on 25 February 2008 was Sweeties stock. On the turnover figures it is more likely than not that no more than $55,000 worth of stock was Sweeties stock and as the liquidators cannot establish otherwise I am prepared to hold that stock to the value of $55,000 belonged to Sweeties as at the date of administration. I accept this cannot be accurate and is an attempt at reasonable adjustment as complete justice cannot be attained - Sandeman page 695. 33 The liquidators had no greater claim to the stock than Hunter. Demand was made on both Hunter and the liquidator for return so that Sweeties had the right to possession. Acting contrary to that right amounted to conversion. By the sale as owners of the whole of the products by 24 April 2008 the liquidators have acted contrary to that right. They are liable on the cross-claim for $55,000 plus interest from 24 April 2008. 34 The orders are as follows:

Order the defendant pay to the plaintiff the sum of $100,000 plus interest from 31 July 2008.

Order the defendant pay the costs of the plaintiff on the originating process

Order the cross-defendants pay to the cross-claimant the sum of $55,000 plus interest from 24 April 2008.

Order the cross-defendants pay the cross-claimant's costs on the cross-claim.

The exhibits may be returned. **********

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