Kel Builders (Qld) P/L (in liq) v. Brett Nash Electrics P/L [2001] QSC 178 (12 June 2001)

[2] Pursuant to an application filed on 5 January 1999, this Court made an order on 5 May 1999 that KEL be wound up.

[3] Throughout the period 10 July 1998 to 22 January 1999, KEL made twelve payments, in respect of work done and materials supplied, to the respondent. Such payments totalled $118,729.44.[1]

[4] The applicant alleges that at the time each such payment was made KEL was insolvent. Therefore, the applicant submits that each transaction was an insolvent transaction as defined within s588FC(a) of the Corporations Law and that each payment conferred an unfair preference upon Brett Nash in terms of s588FA(1). Pursuant to s588FF(1), the applicant seeks to recover an amount equal to all the payments, namely $118,729.44, together with interest.

[5] The respondent, whilst not arguing to the contrary, does not admit that KEL was insolvent at the time of each payment and does not admit that each such transaction was an insolvent transaction within the meaning of s588FC(a) nor that the respondent received an unfair preference in terms of s588FA(1). The respondent relies on the defence provided by s588FG(2). This sub-section stipulates that the Court should not make an order which materially prejudices a right or interest of another party to an uncommercial transaction or unfair preference if certain conditions are proved.

[6] Before considering the application of the defence within s588FG(2), it is necessary to establish whether KEL was insolvent at all material times even though this was not put in issue by the respondent. The liquidator, Mr McVeigh, provided a comprehensive insolvency report dated 17 January 2001[2]. He was not required for cross-examination and his report is unchallenged.

"2.1 A full review of company files which include computer accounting records, correspondence files both inwards and outwards, file notes, records of litigation and source documents for accounting records.

2.2 Discussions and interviews with Directors of the Company including Mr Les Kellahan and Mr W (Bill) Kelly and extensive discussions with Drew Kellahan who was the "Commercial Manager" for the company.

2.3 As the author is the Liquidator of a number of associated companies, the conduct of the liquidation of the associated companies and investigations into the affairs of those companies has formed the basis of realisable values for intercompany loan accounts.

2.4 Detailed analysis of balance sheets of all companies."[3]

[8] Mr McVeigh found "collectable debts to be well below the levels represented by the company's own balance sheets prepared for the periods in question" and made provision for "bad and doubtful debts".[4] He also noted that, "when appropriate adjustments are made to reflect the collectability of trade debtors and inter company loan balances, the company had a deficiency at all times from at least 30 November 1997 to the date of liquidation ie its liabilities exceeded its assets".[5] Mr McVeigh also gave examples of occasions, during the relevant period, when KEL acknowledged its insolvency to, inter alia, the Queensland Building Services Authority "QBSA", the Australian Taxation Office, Rossmyer Pty Ltd and Kern Consulting.[6] The report also notes several internal memoranda and a circular letter to creditors and sub-contractors which similarly would suggest insolvency.

[9] Further in relation to the QBSA, a letter dated 13 March 1998 to KEL from the QBSA indicated that,

"the authority has become aware of significant outstanding monies owed to suppliers and is concerned that the company may not have sufficient financial resources to meet possible liabilities in relation to building work".

The QBSA in such correspondence also gave KEL notice that it intended to impose a condition on its building licence, to prevent it from contracting to carry out building work or performing building work, if it could not satisfy the QBSA that it could meet the Authority's licence financing criteria. This request was reiterated on 24 March 1998 and on 8 April 1998. A condition was imposed on KEL's licence on 5 May 1998. On 14 May 1998, KEL provided a $100,000.00 bank guarantee to the QBSA and the condition was removed. However, the QBSA, after becoming aware of further evidence of insolvency about May 1998, cancelled KEL's licence on 23 September 1998, advising them that, "the Authority still believes that the company is currently insolvent".

[10] Mr McVeigh also noted in relation to KEL's bank account that reference had to be made to the Manager of the bank in respect of numerous transactions. He noted, "companies which are solvent would normally be able to draw cheques without reference to the Manger of the bank when paying accounts". Mr McVeigh identified the references to the Manager as being consistent with insolvency.

[11] The liquidator concluded that the following evidence supported a finding of insolvency:

8.1.2 An excess of current liabilities over current assets.

8.1.4 Admissions of insolvency made to creditors and other parties.

8.1.5 Opinion of outside authorities ie Building Services Authority who had independently reviewed the capacity of the business to trade".

Mr McVeigh determined that KEL "was insolvent at or around 1 May 1998 and was insolvent from that time until the date of liquidation". He further notes, "in fact the company was insolvent at a time earlier than 1 May 1998".[7]

[12] I accept Mr McVeigh's findings based on his review of the evidence and am of the opinion that KEL was insolvent at all material times. I am therefore satisfied that the transactions, the subject of this application, are insolvent transactions pursuant to s588FC(a)(i).

[13] The parties have agreed that all transactions in paragraph 6 of the Statement of Claim are preference payments.

[14] The applicant submitted that the transactions are voidable transactions pursuant to s588FE(3) and that each payment, as pleaded in the Amended Statement of Claim, is recoverable by the applicant pursuant to s588FF(1) of the Corporations Law which relevantly provides

"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 make one or more of the following orders:

(a) 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 ...".

[15] The respondent seeks to rely upon the defence created by s588FG(2). Section 588FG(2) reads as follows:

"[Transaction not an unfair loan] A court is not to make under s588FF an order materially prejudicing a right or interest of a person if the transaction is not an unfair loan to the company and 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 or her position in reliance on the transaction.

[16] In respect of paragraph (c) above, the applicant concedes the respondent has provided valuable consideration for the payments but argues it has not satisfied the onus of proof in respect of the other matters:

[17] The respondent had a business relationship with KEL as a subcontractor during the period between June 1995 - January 1999. Throughout this time KEL never complied with the payment terms sought by the respondent. Initially the payment terms were 30 days after invoice. In some instances invoices were still unpaid even after 150 - 200 days[8].

[18] Payment often had to be forced by Mr. Nash threatening to stop work on a project or even in one instance threatening to disrupt the electricity supply. Another problem was the fact that KEL would only pay when it had been paid by its principal. For example, on the Mareeba Gardens Settlement Project undertaken between October 1996 - April 1997 the work of the respondent was 100% complete but KEL only paid 85% of that sum because it had only received that percentage of the total project. Mr. Nash, in evidence, said "They'd be on a project by project deal ... it was always basically you'd get paid on that project once they had received their payment."[9] Some 14 months after the completion of this contract the respondent was still chasing payment of retention monies. Mr. Nash said of this - "KEL were renowned. If you didn't chase your retention monies they wouldn't pay it." [10]

[19] Another example was the next contract - Project 377 Mulgrave Road - when payment to the respondent was denied or held up because a dispute with an air-conditioner installer had delayed the principal's payment to KEL.

[20] On the next project - Le Cher du Monde development - which took place between 8 December, 1997 - 9 April, 1998 an arrangement was entered into for payment each week of that week's labour costs but the other costs and charges which were invoiced were treated with the same disdain which characterised the earlier dealings.

[21] The respondent, by its continuing to contract with KEL, clearly accepted its disregard for contractual arrangements. Mr. Nash regarded this situation as normal on major construction jobs. If he could put pressure on KEL in some way he would achieve payment of his invoices in whole or in part. If he did not apply pressure it is likely his invoices would be ignored. Mr. Nash gave evidence of an ongoing laborious and, no doubt, irritating pattern of seeking payment from KEL for monies due to the respondent. His evidence is supported by the contemporaneous documents by which he sought payment. Various excuses and stalling tactics were employed by KEL but ultimately he was paid on each of these projects leading up to the Double Island project. The first of the designated payments ($6,659.00) was paid on 10 July, 1998 for outstanding invoices on these earlier jobs.

[22] Mr. Nash was not concerned about the respondent ultimately being paid. His concern was for the timeliness of the payment. He was not suspicious of the insolvency of KEL. He thought the directors had assets. They drove expensive motor vehicles. KEL had been involved in project building since the 1970's and Mr. Nash was aware that it was a contractor on a number of projects other than the ones in which he was engaged. He had unsuccessfully tendered for some of those jobs.

[23] The respondent was involved in the Double Island project between July - August 1998. The principal was Island Holdings Pty Ltd ("IH") and KEL was the contractor on a design and construct basis. The respondent subcontracted to KEL but it also did separate contract work for IH. Mr. Nash was aware that the directorships of the two companies were connected in the sense that a number of directors were on the board of each company. In his evidence Mr. Nash said he believed the companies to be separate entities.

[24] Mr. Nash obviously had a concern about IH. On 24 July 1998 he wrote to that company[11] demanding payment in full for all work by that time undertaken by the respondent and advising that all invoices for further work would be payable within 7 days. On the next day he wrote a letter to KEL stating that any further work for IH would only be undertaken as "a variation to the project and supported by a (purchase) order from KEL"[12]. On one view of the letter, this suggests some confidence on the part of the respondent that KEL was financially sound. Soon after this the second of the disputed payments ($23,750.00) was received. Invoices were in arrears but the fact of those arrears caused no concern about KEL's solvency.

[25] On 2 September 1998 a circular letter was sent to the respondent (and to all creditors of KEL) under the hand of Mr. William Kelly, Manager and Director. This letter declared the inability of KEL to pay its creditors and blamed the failure of IH to pay KEL as the reason for this. The letter sought an indulgence until 21 September, 1998 for payment of amounts outstanding. The monies were not paid on that day nor was any further comment made by KEL to creditors about its financial position. Mr. Nash's response to this circular letter was to think that this was yet another stalling tactic on the part of the Managers of KEL.[13] When asked whether he thought it strange for KEL to blame its related company IH, Mr. Nash expressed the confidence that the respondent would be paid in the end.[14]

[26] However, on 23 September, 1998 the Building Services Authority (BSA) cancelled KEL's licence on the grounds that KEL was unable to pay its debts. This fact was reported in the Cairns Post on 3 October, 1998. Mr. Nash's response to this circular letter was to think that this was yet another stalling tactic on the part of the Managers of KEL[15]. He claims not to have been aware of the cancellation of the KEL licence and not to have seen the newspaper report. In any event he was reassured by the fact that the KEL group continued its project work.

[27] But the respondent by its later actions took a different course. By 8 October 1998 the respondent instructed its solicitors to serve on KEL a Creditors Statutory Demand claiming almost $70,000.00. Mr. Nash described this as a step in his seeking a court order for that amount to be paid. He had not previously adopted such a tactic and it seems to me this was a significant shift in the relationship. I expect his solicitors would have explained the significance of his action and the outcome if paid. In this respect, the words of Connolly J in Re K & R Fabrications (8) 32 ALR 183 at p. 185 are apposite -

"A payment in response to a notice which warns of insolvency if payment not be made can scarcely be described as a payment which a man might make without having insolvency in view."

Similarly, a payment received in such circumstances would ordinarily give rise to similar view.

[28] I find that it was a consequence of being served with this demand that KEL paid to the respondent on 15 October, 1998 $40,000.00 in respect of an invoice dated 30 July 1998 for $50,000.00. By 23 October, 1998 two further cheques, each for $10,000 were handed to the respondent on the understanding that the cheques would not be presented until advised by KEL that they would be met. Mr. Nash observed that a request to delay presentation of cheques was a common enough practice in the building industry and was not therefore a matter which would put him on guard as to the insolvency of the drawer.

[29] Those cheques each for $10,000 were presented on 10 November, 1998. Thereafter in quick succession were payments for various amounts on 16, 17, 19 and 20 November, 1998 not all of which were elated to specific invoices. Two further payments were received on 8 December, 1998 and 21 January, 1999, the final being after the institution of the winding-up application.

[30] Having admitted that such payments in fact constitute a preference, the respondent had the onus of satisfying the two arms of s.588FG(2)(b) namely -

(i) That the respondent had no reasonable grounds for suspecting that the company was insolvent or had become insolvent; and

(ii) No reasonable person in the respondent's circumstances would have had no such grounds for so suspecting.

[31] The discreet nature of these separate requirements was discussed by the Court of Appeal in South Australia in Sims v Celcast Pty Ltd (9) (1998) SASC 6662 - 5 May 1998. In the reasons of Justice Williams with which the other members of the court agreed the following passage appears:-

"Therefore, under subpar(b)(ii) the Court will be concerned with the conclusion (in terms of logic or common sense) which a reasonable person ought reasonably to have made in terms of a relevant suspicion. Under (b)(i) the Court will assess the conclusion which ought reasonably to have been reached by a creditor who in fact has taken a particular step or steps formally or informally in the process of deductive reasoning. (In this way a particular subjective factor is introduced into (b)(i) which is absent from (b)(ii). In another way (b)(ii) also contains a subjective factor in having regard to "the circumstances" of the creditor. However, there is a dichotomy between the two subsections which Nathan J in the passage cited above found it unnecessary to pursue.

The other side of the coin in the above example is that the process of deduction unfortunately may have put the astute creditor "off the scent". The fact that a creditor has in good faith lulled itself by its own deductive processes to a position which (with the benefit of hindsight) can afterwards be shown to be flawed will not avail that creditor by reliance on subpar(b)(i) if a reasonable person should have read the signs differently; subpar(b)(ii) will still remain as a hurdle for that creditor.

The circumstances of the present appeal may be an example of this lastmentioned situation. The signs were there for a reasonable person to read. The respondent's officers misread the signs. The trial Judge must have read the signs only through the eyes of the respondent's officers rather than also through the eyes of the reasonable person (in the circumstances of the respondent or its responsible officers). The respondent's officers may have been overly generous in their assessment of a customer of good standing; alternatively they may have been blind to the facts which were staring at them. The hypothetical person referred to in subpar(b)(ii) would not have allowed personal perceptions to cloud a commercial judgment."

[32] In that case, as in this case, it is necessary to be clear as to the connotations of insolvency in order to assess what the available information may have suggested to a creditor (being a reasonable person). The Court of Appeal relied on passages from two decisions in the High Court which are appropriate to my consideration of the circumstances in this case. In Sandell v Porter [16] Barwick CJ (dealing with the Bankruptcy Act 1996 (Cth)) said:-

"Insolvency is expressed in s95 as an inability to pay debts as they fall due out of the debtor's own money. But the debtor's own moneys are not limited to his cash resources immediately available. They extend to moneys which he can procure by realization by sale or by mortgage or pledge of his assets within a relatively short time - relative to the nature and amount of the debts and to the circumstances, including the nature of the business, of the debtor. The conclusion of insolvency ought to be clear from a consideration of the debtor's financial position in its entirety and generally speaking ought not to be drawn simply from evidence of a temporary lack of liquidity. It is the debtor's inability, utilizing such cash resources as he has or can command through the use of his assets, to meet his debts as they fall due which indicates insolvency. Whether that state of his affairs has arrived is a question for the Court and not one as to which expert evidence may be given in terms though no doubt experts may speak as to the likelihood of any of the debtor's assets or capacities yielding ready cash in sufficient time to meet the debts as they fall due."

[33] The second High Court decision is Queensland Bacon Pty Ltd v Rees[17] where Kitto J said -

"A suspicion that something exists is more than a mere idle wondering whether it exists or not; it is a positive feeling of actual apprehension or mistrust, amounting to "a slight opinion, but without sufficient evidence" as Chamber's Dictionary expresses it. Consequently, a reason to suspect that a fact exists is more than a reason to consider or look into the possibility of its existence."

[34] I have no difficulty accepting that the respondent, trhough Mr. Nash, acted in good faith in receipt of the payments. The respondent had been involved in the building industry for a long period of time and it had witnessed the vagaries in the fortune of large contractors in that industry. Failures can be, and often are, spectacular and as a result, attract public attention. Less publicised are the resurrections and restructurings which result in contractors continuing to trade. Mr. Nash had accepted for the whole time of the respondent's relationship with KEL its disregard for the respondent's contractual rights. He did so in the belief that he would always be paid in the end.

[35] At the time of the first three payments - 10 July, 1998, 7 August, 1998 and 9 September, 1998 - the respondent was heavily involved in contract work for KEL on the Double Island project and Mr. Nash was aware of KEL being involved in other projects. The non-payment of invoices from earlier jobs was `situation normal' in the relationship. There was no circumstance which overtly suggested to the respondent that there had been any change in KEL's financial circumstances.

[36] I am satisfied that the respondent had no grounds for suspecting that KEL was insolvent up to the payment on 9 September, 1998.

[37] The test of the reasonable person for the purpose of para (b)(ii) must take into account all the circumstances. A reasonable person may not have tolerated KEL's disregard for the contractual rights of others but that is not the complete test. A reasonable person in the respondent's circumstances must also make allowances for the history of the relationship and what is common practice in the building industry. I accept that KEL, in the period up to the end of August, 1998, was involved in a range of contract work and displayed the trappings of a successful business. The Double Island undertaking was a manifestation of this. The circular letter of 2 September, 1998 does not by itself suggest any more than a temporary liquidity problem. It was subsequent events that made its terms more sinister. The fact that the subcontractor, BSB Electrics, failed would not necessarily lead to a conclusion that non-payment by KEL to that subcontractor bespoke insolvency on the part of KEL.

[38] I am satisfied that a reasonable person in the circumstances of the respondent would not have suspected, on the evidence available up to 9 September, 1998, that KEL was insolvent.

[39] During the period commencing 1 September, 1998 there was a change in circumstances. The circular letter of 2 September, 1998 was a frank admission by KEL of its inability to pay accounts at that time. It was a general communication to all creditors. It was not related to the financial capacity of an independent principal or to a dispute about contractual performance, but simply to the inability of the KEL Group to pay. The loss by KEL of its contractor's licence on 23 September, 1998 I expect would have been the topic of discussion within the industry. Even if the respondent was not aware of the detail of the BSA hearing he ought to have been aware of the rumblings. By this time the time for payment of the acknowledged debts - 21 September, 1998 - had passed and there was no communication from KEL. All of these factors combined to bring about a significant change in circumstances. The respondent was owed a substantial amount of money and its next action in serving the Statutory Demand underlines its concern at that time.

[40] The respondent has not satisfied me that from the end of September onwards he had no grounds for suspecting that KEL was, or would become, insolvent. Certainly any reasonable person in this position would have so suspected. As a consequence the respondent's defence for its receipt of the payments made between 15 October 1998 and 22 January, 1999 has not been made out. The amount of the payments so affected is $74,643.44. The application is therefore allowed in part.

[41] I order that the respondent pay to KEL Builders (Qld) Pty Ltd (in liquidation) the amount of $74,643.44 together with interest on that amount from 3 February, 2000 pursuant to the Supreme Court Act.

[1] All such payments are itemised in the Amended Application filed by leave at the hearing of this matter on 25 January 2001 and marked Exhibit 1.

[3] Insolvency Report of D. McVeigh dated 17 January 2001 at p1.

[16] (1996) 115 CLR 666 at p.670

[17] [1966] HCA 21; (1965-6) 115 CLR 266 at p.303