Kenneth John Rennie in his capacity as joint liquidator of the third Plaintiff & 2 Ors v Printbase Pty Limited

Geoffrey Ralph James in his capacity as joint liquidator of the third Plainitiff (Second Plaintiff) PARTIES : SL Electronics (NSW) Pty Limited (receivers & managers appointed) (controller acting in liquidation) A.C.N. 002 978 403 (Third Plaintiff)

Printbase Pty Limited A.C.N. 053 584 311 (Defendant) JUDGMENT OF : Acting Master Berecry

COUNSEL : Plaintiffs: Mr R Darke SC Defendant: Mr E White SOLICITORS : Plaintiffs: R Hugh & Associates Defendant: Robilliard & Robilliard CATCHWORDS : Winding up - unfair preference - insolvent transaction - defences - whether reasonable grounds to suspect company insolvent - whether transaction part of continuing business relationship - Running account - Corporations Act ss 588FA, 588FG(2) LEGISLATION CITED : Corporations Act 2001 (Cth) Sutherland v Eurolinx (2001) 37 ACSR 477 at 483 CASES CITED : Sparad (No 100) (as liquidator of Spedley Securities Ltd (in liq)) v JB Harkness (unreported CA(NSW), Full Court, CA40665/93, 14 February 1997, BC9700197 Airservices Australia v Ferrier (1996) 185 CLR 483 Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266 DECISION : The Defendant pay to the Plaintiffs the sum of $11 680.00 together with interest from the date of the letter of demand. ; The Defendant is to pay teh Plaintiffs costs of these proceedings.

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

20 February 2002 1451/01 KENNETH JOHN RENNIE IN HIS CAPACITY AS JOINT LIQUIDATOR OF THE THIRD PLAINTIFF & 3 ORS -V- PRINTBASE PTY LIMITED

JUDGMENT 1 MASTER: Between October 1991 and May 1996, the defendant supplied consulting services to the third Plaintiff ("the Company"), inter alia, to facilitate the design and manufacturer of communication systems for the Royal Australian Navy in respect of a project styled ANZAC (the project). 2 In 1993 the Company appointed the defendant's managing director as technical manager of the project. Invoices for the consultancy services were issued within one week of the end of the relevant month. The payment term on the invoices was 30 days net. The Company required the defendants timesheets to be authorised and signed by its cost code manager prior to payment of an invoice 3 Between 1992 and June 1994, the payments were made on average 62 days after the invoices were issued to the Company. During this period, the shortest period of payment was 17 days, and the longest period 115 days. Between July 1994 and July 1996 the payments were made on average 51 days after the invoices were issued. During this period, the shortest period of payment was 5 days and the longest was 120 days. 4 On or about 9 April 1996, Peter Marcus, financial accountant of the Company, advised the defendant that the Company was experiencing a cash flow problem and that the Company would be able to make payments on invoices at $5000.00 a time. At about this time, Sue Marr, accounts payable clerk for the Company, informed the defendant that the Company would : "be paying claims amounting to less than $5000.00. All claims exceeding this amount would be deferred until the next payment period" . 5 Miss Marr had a conversation with Max Harvey, managing director of the Defendant, and said words to the following effect: Miss Marr: "The Printbase account is viewed by Stanilite as wages and wished it to be paid in full. But to avoid any adverse comments, would you agree to have Printbase paid by weekly instalments? If so, the payments would be within the company policy, existing at this time." 6 At the time of the conversation the Company was under the guidance and executive control of Brian Gatfield, who had been appointed to the Board of Directors of the Company by the National Australia Bank. The bank was a substantial secured creditor of the Company. 7 On 14 April 1996, Brian Gatfield made the following announcement to staff of the company in the presence of the managing director of the Defendant. He said words to the following effect: Mr Gatfield: "The company is generally very sound. There are some short term problems but I am confident that all problems will be resolved very shortly. I am certain the Company will be trading in the black within six months." 8 The evidence of Max Harvey was that he did not know what the Company's financial position was from July 1992 to 26 May 1996 (the date when the receiver/manager was appointed). He had some idea that the Company owned realty and was aware of a large contract with the Royal Australian Navy. In his opinion, the Company had strong growth potential and a bright future. This caused him to purchase 20 000 shares in the Company on behalf of the Defendant in March 1996. His evidence is that he didn't consider the Company to be insolvent even after the appointment of a receiver/manager. 9 On 9 July 1996, an application was filed in the Federal Court by Hunter Premium Funding Ltd seeking to wind up the Company and appoint a liquidator. On 26 August 1996 the Company was wound up and the first and second Plaintiffs were appointed liquidators. 10 The Plaintiffs in the present proceedings seek an order for payment of $82,480.00 from the Defendant on the basis that certain payments made by the Company to the Defendant were unfair preferences, and that, in the circumstances, each of the payments was an insolvent and voidable transaction. The payments the Plaintiffs seek to avoid are in respect of invoices 9605 to 9609. Set out below is a schedule of the invoices /payments made during the relation back period: INVOICE DATE AMOUNT CHEQUE BANKED DAYS LATE 9605 08-Dec-95 19440 08-Feb-96 62 9606 29-Dec-95 12720 25-Mar-96 87 9607 14-Feb-96 15360 27-Mar-96 42 9608 12-Mar-96 21200 12-Apr-96, $5 000 31 9608 12-Mar-96 - 22-Apr-96, $3 000 41 9608 12-Mar-96 - 26-Apr-96, $3 000 45 9608 12-Mar-96 - 03-May-96 $3 000 52 9608 12-Mar-96 - 03-May-96 $7 200 52 9609 02-Apr-96 13760 09-May-96 37 9610 06-May-96 7760 NOT PAID - 9611 29-May-96 12720 NOT PAID -

11 The Plaintiff relies on the following sections of the Corporations Act 2001 (Cth): S 588FA (1) ["unfair preference"] 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.

S 588FC A transaction of a company is an insolvent transaction of the company if, and only if, it is an unfair preference given by the company, or an uncommercial transaction of the company, and: (a) any of the following happens at a time when the company is insolvent (i) the transaction is entered into; or (ii) an act is done, or an omission is made, for the purpose of giving effect to the transaction;

S 588FE (2) [ Insolvent transaction; time scale] The transaction is voidable if: (a) it is an insolvent transaction of the company; and; (b) it was entered into or an act was done for the purpose of giving effect to it: (i) during the 6 months ending the relation-back day; or (ii) after that day but on or before the day when the winding up began. 12 The defendant defends these proceedings relying on the following provisions of the Corporations Act: S 588FG (2) [Transaction not an unfair loan] A court is not to make under section 588FF 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 , her or it's position in reliance on the transaction. or alternatively

S 588FA (3) [Transaction part of continuing business relationship] Where: (a) a transaction is, for commercial purposes, an integral part of a continuing business relationship (for example, a running account) between a company and a creditor of the company (including such a relationship to which other persons are parties); and (b) in the course of the relationship, the level of the company's net indebtedness to the creditor is increased and reduced from time to time as the result of a series of transactions forming part of the relationship. 13 The insolvency of the Company is not in contest. Likewise, the relation-back period is not in issue. The issues to be determined are:

(1) Whether the Defendant is able to satisfy matters within s 588FG (2)(b) ; and (2) Whether any or all of the payments were an integral part of a continuing business relationship - s588FA (3) 14 It was conceded by the Plaintiff that the Defendant satisfied s 588FG(2)(a) and (c). In any event, there is nothing in any of the evidence which suggested that the Defendant acted other than with propriety or honesty (s 588FG (2)(a)) or that valuable consideration was not provided (s 588FG(2)(c)). Section 588FG(2)(b)(i) and(ii) 15 Having regard to the concessions made by the Plaintiff, for the Defendant to succeed under the above, it must establish that, firstly, subjectively it had no reasonable grounds for suspecting that the Company was insolvent at the time it received the payments, and objectively that no reasonable person in the position of the defendant would have suspected insolvency (Sutherland v Eurolinx (2001) 37 ACSR 477 at 483). The Defendant bears the onus of establishing the defence. 16 Both (i) and (ii) of s 588 (2)(b) require the Defendant to have a suspicion of insolvency. Suspicion was defined by Kitto J in Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266 at 303 in the following terms: "In the first place, the precise force of the word "suspects" needs to be noticed. 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 Chambers 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 it's existence. The notion which "a reason to suspect" expresses in sub(4) is, I think, of something which in all the circumstances would create in the mind of a reasonable person in the position of the payee an actual apprehension or fear that the situation of the payer is in actual fact that which the subsection describes - a mistrust of the payer's ability to pay his debts as they become due and of the effect which acceptance of the payment would have as between the payee and other creditors" 17 In Sutherland and Eurolinx, (supra), at 483-484 Santow J commented: "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, on the payee. There will also be potentially countervailing factors and circumstances to be weighed in the balance which could have tended to dispel the suspicion at the time" 18 In Sparad (No 100) (as liquidator of Spedley Securities Ltd (in liq)) v JB Harkness (unreported CA(NSW), Full Court, CA40665/93, 14 February 1997, BC9700197) at 20 Priestley JA, in warning against placing undue weight on dilatory payment, observed that "debts are not always paid on time by solvent traders". 19 Determining whether or not there was a suspicion of insolvency requires a consideration of the facts and circumstances at the time of the transaction and does not import hindsight. 20 It was submitted on behalf of the defendant that there was a lack of many of the indicia which would create a suspicion. The history between the parties showed a chronic late payment of invoices but nevertheless payments were always made albeit late. There is no evidence of postdated cheques or cheques not met on presentation. There was never a refusal to supply or to continue to supply services. 21 The Defendants evidence was that the ANZAC project was worth many millions of dollars to the Company. The Defendant was aware that the Company had other ongoing contracts and in March 1996 the Defendant had confidence in the financial position of the Company and this confidence was demonstrated by the purchase of a parcel of 20 000 shares in the Company. Whilst the Defendant became aware of the Company's cash flow problems during the relation-back period, it relied on statements from officers of the Company that they were only temporary. It was submitted that these matters, when considered in the light of the above authorities establish that the defendant has satisfied the onus in relation to the subjective and objective elements of subsections (i) and (ii). 22 The Plaintiffs submit that the Defendants statutory defence fails on both limbs. The Plaintiff relies on the following to establish that the Defendants have not discharged the onus: a) Making the arrangement for payment of invoice 9608 by instalments, b) The fact that this was the only occasion that any such arrangement had been made between the Company and the Defendant, c) The fact that the arrangement was made at a time when the Company was obviously facing a liquidity problem of some magnitude, d) The fact that the Company had instituted a policy whereby only creditors praying for less than $5 000.00 were to be paid, with all other creditors being deferred, e) Even if the liqidity problems were only of a temporary nature, Mr Gatfield's comments on 19 April 1996 would have made it clear that the Company had been trading at a loss and that such losses were still being incurred and may continue for a further 6 months. 23 It was not asserted by the Plaintiff that the history of late payments should have created a suspicion in the mind of the Defendant. However, that fact coupled with the variation of payment in respect of invoice 9608 together with other events in April 1996 should have raised in the Defendant's mind and would have raised in the mind of a reasonable person a suspicion concerning the Company's insolvency. It was submitted that when one takes into account the above matters that had been conveyed to the Defendant in April 1996 then the Defendant has not discharged the onus. 24 Further, the Defendant's evidence is that Mr Gatfield had been appointed to the Board of the Company by the National Bank of Australia. 25 In my opinion, when one looks at the relationship of the parties pre March1996, in which there was chronic late payment of invoices by the Company it could not be said that that history on either test would be enough to entertain a suspicion in the mind of the defendant. 26 However, matters changed in April 1996. The defendant had no knowledge of whether there had been a payment pursuant to the ANZAC project and if there had been, how the Company was going to use those funds. For example, there may have been an obligation arising out of the mortgages and charges with the National Bank of Australia to redeem it's indebtedness to the Bank, thus leaving the Company in a position where it could not pay it's unsecured creditors. 27 However, the Defendant was advised of the policy of the Company concerning the payment of accounts. It appears that an agreement was reached which changed the character of the billed amount in the invoice 9806 so as to avoid the Company's policy in relation to invoices greater than $5 000.00. Two officers of the Company at this time advised the Defendant that the Company was experiencing a cash flow problem. This may or may not have arisen previously. However, it is notable that the Company doesn't merely delay payment but has established a policy which will meet payment on invoices up to a certain amount. This is a significant change from the past. 28 Subsequently, Mr Gatfield, a nominee of the National Bank of Australia, informed the Defendant and others on 17 April 1996, that the Company although sound, has short term problems but he was certain that the Company would be trading profitably within 6 months. Would a reasonable person have a suspicion about the insolvency of the Company when told by three of it's officers that there were financial problems and that it had instituted a policy where only some of the creditors would be paid? 29 In my opinion, a reasonable person would have grounds for suspecting that the Company may have been insolvent in April 1996. The test for insolvency is found in the Corporation Act 2001 (Cth): S 95A (1) [Solvency] A person is solvent if, and only if, the person is able to pay all the person's debts, as an when they become due and payable . (2) [Insolvency] A person who is not solvent is insolvent. 30 The Company had embarked on a policy in which only certain debts would be paid notwithstanding others may have been due and payable. The Defendant was informed of the cash flow problem. The Company was not able to pay all it's debts when they became due and payable. It was preferring some creditors over others. The Defendant was one of the creditors receiving an advantage at the expense of others. 31 Therefore, in my opinion, the Defendant's defence under S 588FG(2) fails.

Running Account 32 In the alternative the Defendant relies on the defence pursuant to S 588FA (3). The essence of a running account is a continuing relationship between the supplier and the purchaser with value being exchanged between them. In Airservices Australia v Ferrier (1996) 185 CLR 483, the majority judgment of the Court at 501-2 described a "running account" thus: "If a payment is part of a wider transaction or a "running account" between the debtor and the creditor, the purpose for which the payment was made and received will usually determine whether the payment has the effect of giving the creditor a preference, priority or other advantage over other creditors. If the sole purpose of the payment is to exchange an existing debt, the effect of the payment is to give the creditor a preference over other creditors unless the debtor is able to pay all of his or her debts as they fall due. But if the purpose of the payment is to induce the creditor to provide further goods or services, as well as to discharge an existing indebtedness, the payment will not be a preference unless the payment exceeds the value of the goods or services acquired. In such a case, a Court… looks to the ultimate effect of the transaction. Whether the payment is or is not a preference has to be "decided" not by considering it's immediate effect only, but by considering what effect it ultimately produced in fact." And at 505: "It is not the label "running account" but the conclusion that payments in the account were connected with future supply of goods or services that is relevant, because it is that connection which indicates a continuing relationship of debtor and creditor. It is this conclusion which makes it necessary to consider the ultimate and not the immediate effect of individual payments." 33 In Sutherland v Eurolinx (supra), at 505 Santow J said "… the basis of a running account is a continuing relationship between a debtor and creditor with an expectation that further debits and credits will be so incurred. For that defence to be maintained, there are some essential prerequisites. First, there must be no cessation of that mutual assumption of payment and reciprocal supply throughout the relevant period. Second, those payments must continue to have at least one operative, mutual purpose, namely inducing further supply." 34 The relationship between the Company and the Defendant had existed since mid 1992. In essence that relationship had not changed, although Max Harvey gave evidence that there were three phases in the relationship. However, those phases concerned the amount of time the Defendant devoted to the Company's projects. The nature of the relationship did not change. The defendant supplied services to the Company and the Company paid for those services. Payment was made no doubt to meet an obligation to renumerate for past services and to create a goodwill to ensure a continuation of the relationship. The evidence of Mr Harvey was that he had been appointed as technical manager to the ANZAC project. It was in the interest of both parties that the relationship continue. Thus the second element was achieved as the Defendant continued to provide services until after the Receiver/Manager was appointed. The relationship existed during the relation-back period. 35 In my opinion, the relationship between the Company and the Defendant meets the description in Airservices Australia v Ferrier (supra), and the essential prerequisites enunciated by Santow J in Sutherland v Eurolinx (supra), are satisfied. 36 During the period of February to May 1996 the relationship continued. However, by April the Defendant should have had a suspicion as to the possible insolvency of the Company. As a defence under s 588FA(3), the payments during the relation-back period will only be treated as a running account if the relationship falls within the above description. In my opinion they do. The agreement to pay invoice 9608 was made when a reasonable person may have been suspicious of the insolvency of the Company. 37 The question then is whether a level of suspicion would lead to a termination of the continuing business relationship and its associated mutual purpose of payment to induce further supply? It could be that the agreement of the Defendant to receive payment by instalment indicated no confidence in the Company's ability to continue to trade and therefore abandon any assumption of a continuing business relationship. That was not the case. 38 In my view, the facts establish that rather than ending the relationship, the instalment programme ensured its continuation. Both parties wished for the relationship to continue. The business relationship with its accompanying assumption of continued supply is both a mutual relationship and a mutual assumption. The evidence is that the Defendant continued to supply services after April and the Company (and subsequently the receiver manager) made payment on the invoice. Through Ms Marr, the Company made clear its intention to the Defendant. It treated the relationship as a continuous one and wanted the Defendant to continue to supply its consulting services, in return the Company would pay in accordance with its existing policy. 39 The purpose of the parties was the continued supply of services by the Defendant and subsequent payment for those services by the Company. That purpose was not subrogated by the amount under invoice 9608. Although the payment on this invoice may be regarded as delinquent, the parties nevertheless expressed an intention to continue their business relationship and the4 transaction was integral to the continuing relationship. 40 Therefore, the payments received during the relation-back period may be avoided by the Liquidator. However, the quantum of the avoidance is not the total of the individual payments, but the difference, if any, between the greatest indebtedness during the period and the final balance. 41 The amounts and payments in respect of the invoices for the relevant period is not controversial. During the period the greatest level of indebtedness was $32160.00. At the end of the period the indebtedness had been reduced to $20480.00. Therefore, in accordance with the authorities the Plaintiff is entitled to treat as a preference the difference between the two amounts, namely $11680.00. 42 Therefore, I find as follows: - 1. There were reasonable grounds for suspecting that the Company was insolvent from April 1996 onwards. 2. In the circumstances the defence pursuant to s 588FG(2) has not been made out, 3. The principle of a running account has been made out, and 4. Judgment should be given in favour of the Plaintiffs for $11 680.00 together with interest from the date of the letter of demand.

Order 43 The Defendant pay to the Plaintiffs the sum of $11 680.00 together with interest from the date of the letter of demand. I will hear any submissions in relation to costs. oo00oo00oo00oo

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