BETWEEN : NOEL GUTHRIE as the liquidator of ULT LIMITED (Receiver Appointed) (In Liq) (ACN 009 185 406)

Winding-up - Preference - Whether company able to pay its debts as they fell due from its own money - Romalpa clause - Back-dated - Whether a company charge - Whether void for want of registration - Whether payments disadvantaged mortgagee or the unsecured creditors - Whether payments made in good faith and in the ordinary course of business

Bankruptcy Act 1966, s 122

Corporations Law, s 565, s 262(1), s 263(1) s 266

Evidence Act, s 79C

Sale of Goods Act 1895, s 18

Application succeeds except in relation to last payment received by the respondent

Codelfa Construction Pty Ltd v State Rail Authority of NSW [1982] HCA 24; (1982) 149 CLR 337

Compaq Computer Ltd v Abercorn Group Ltd [1993] BCLC 602

Downs Distributing Co Pty Ltd v Associated Blue Star Stores Pty Ltd [1948] HCA 14; (1948) 76 CLR 463

Hendy Lennox Ltd (Industrial Engines) v Grahame Puttick Ltd [1984] 2 All ER 152

Johnson v Diprose [1893] 1 QB 512

KDS Construction Services Pty Ltd v National Australia Bank Ltd (1987) 5 ACLC 168

Life Insurance Co of Australia Ltd v Phillips [1925] HCA 18; (1925) 36 CLR 60

Lyford & Anor v The Commonwealth [1995] FCA 1261; (1995) 13 ACLC 900

Norfolk Plumbing Supplies Pty Ltd v Commonwealth Bank of Australia (1992) 10 ACLC 158

Re Bond Worth Ltd [1980] Ch 228

Re K&R Fabrications (Qld) Pty Ltd (1980) 32 ALR 183

Re Linney (H) & Co Ltd [1925] NZLR 907

Re MacAdam (1913) 13 SR (NSW) 206

Re Mike Electric (Aust) Pty Ltd (In Liq) (1983) 1 ACLC 758

Re Southern Cross Commodities Pty Ltd (In Liq) (1985) 3 ACLC 28

Spedley Securities Ltd (In Liq) v Western United Ltd (In Liq) (1992) 10 ACLC 357

Upper Hunter District Council v Australian Chilling & Freezing Co Ltd [1968] HCA 8; (1968) 118 CLR 429

1 COMMISSIONER PRINGLE QC: The applicant is the liquidator of ULT Limited ("ULT") which went into liquidation in 1992. The petition for an order winding up ULT was presented on 3 April 1992, and it is not in dispute that that was the date of commencement of the winding up for present purposes. ULT was a "high tech" company which was involved in the supply of equipment for the establishment of mobile telephone networks. The respondent was a supplier on an increasingly large scale during 1991, to ULT of components and equipment needed by ULT to perform its contracts in Australia and overseas, particularly in Poland, for the supply of "high tech" equipment. During 1991 large sums were owed by ULT to the respondent.

2 The applicant contends that five payments made by ULT to the respondent, of $46,148 on 4 October 1991, $80,159.22 on 10 October 1991, $40,000 on 7 November 1991, $40,000 on 15 November 1991 and $1,259 on 17 December 1991, were preferences void under s 565 of the Corporations Law read with s 122 of the Bankruptcy Act 1966. (The new regime under the Corporations Law relating to corporate insolvency came into effect in June 1993).

3 It may be remarked that ULT was a public company with an expanding business and a substantial share capital. However, expansion often implies a need for more working capital, and I have borne in mind that circumstance in considering the facts and the law in this case.

4 ULT's bank at all material times was BankWest (then known as the R&I Bank), to which I will refer as "the bank". A senior manager of the bank, Mr Thomas, was the deponent to an affidavit, sworn 22 July 1998, exhibit 7. He also gave oral evidence on behalf of the applicant.

5 Annexed to exhibit 7 are copies of two debentures dated respectively 27 October 1986 and 26 June 1990, granted by ULT to the bank and duly registered, whereby all the assets of ULT were made subject to fixed and floating charges in favour of the bank to secure repayment inter alia of all moneys advanced to ULT by the bank and all sums which the bank would become liable to pay under performance bonds or like instruments entered into on behalf of ULT. There was no suggestion at trial that there was any flaw in the bank's securities.

6 Paragraph 11 of exhibit 7 sets out the facts that in January 1991 ULT had credit limits on a number of accounts totalling $3.686 million. The balance owing to the bank was $5.242 million, significantly above approved limits, on accounts described as the overdraft, a documentary letter of credit, performance guarantees, a term loan, a lease of equipment and a standby letter of credit. Liabilities under performance bonds or a standby letter of credit were contingent.

7 From around January 1991, Mr Thomas required ULT to provide financial information on at least a monthly basis to the bank. At times information as to ULT's financial position was required by the bank on a daily basis. Mr Thomas was concerned that the bank's exposure might exceed what could be recovered if ULT's assets had to be sold so that its liabilities to the bank could be satisfied. Following negotiations orally and in writing from early February 1991 between Mr Thomas and Mr John Walters, ULT's financial controller, increased facilities were established evidenced by Mr Thomas' letter to Mr Walters dated 18 March 1991 (annexure "WT14"). For much of 1991 Mr Thomas had difficulty in keeping ULT's accounts within their approved limits, and at times there were constraints upon the funds the bank allowed ULT to pay to its creditors. I will notice more important details presently, including what the limits were on overdraft and other facilities and what funds were available to pay ULT's creditors at material times.

8 The respondent accepted that the payments were made within six months of the commencement of the winding up of ULT.

9 The liquidator bears the onus of proving that at the time each of the five payments referred to above was made, ULT was unable to pay its debts as they fell due from its own money, and that each of those payments had the effect of giving the respondent a preference, priority or advantage over other creditors.

10 (In relation to the question whether the respondent was preferred, the respondent relies on a Romalpa clause agreed to by ULT in August 1991 and also a contention that the payments did not provide any preference as against unsecured creditors, the detriment having been suffered by the bank with its consent). If the liquidator discharges the onus upon him, the burden would then be upon the respondent to prove that the payments were received by it in good faith and in the ordinary course of business. (It is not in dispute that existing debts owing to the respondent constituted valuable consideration for present purposes).

11 Whether a debtor was able to pay its debts as they fell due from its own money is not to be tested from the point of view of a balance sheet of assets and liabilities. Rather the term includes money and assets which can be converted into money by sale or pledge in time to meet the debtor's indebtedness as it becomes due; see Bank of Australasia v Hall [1907] HCA 78; (1907) 4 CLR 1514, 1528, 1543 and Sandell v Porter [1966] HCA 28; (1966) 115 CLR 666, at 670 where, after referring to the need for funds to be raised in a relatively short time if insolvency was to be avoided, Barwick CJ said:

"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, utilising 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 ... "

12 With a "temporary lack of liquidity" should be contrasted "an endemic shortage of working capital", as to which see Hymix Concrete Pty Ltd v Garritty (1977) 2 ACLR 559, 566.

13 If a company obtains from some creditors extended terms for payment, that is a relevant consideration, and so may be the anticipated early payment on sale of an asset or recovery of a debt; the question of solvency or insolvency must be decided in the light of commercial realities; see Taylor v ANZ Banking Group Ltd (1988) 13 ACLR 780, 784; Taylor v Carroll (1991) 6 ACSR 255, 259 - 261 and Leslie v Howship Holdings Pty Ltd (1997) 15 ACLC 459, 466.

14 Moneys obtainable from unsecured borrowings will almost always not be treated as a debtor's own money: Kyra Nominees Pty Ltd (In Liq) v National Australia Bank Ltd (1986) 4 ACLC 400, 405; Re RHD Power Services Pty Ltd (In Liq) (1990) 3 ACSR 261, 264. It was not argued that borrowing without security by ULT could be taken into account as part of ULT's ability to pay its debts from its own money in this case. On the other hand, the facilities provided by the bank, in reliance on the security of the debentures over ULT's assets clearly were relevant, and the contrary was not argued.

15 In the present case ULT's receipts from its debtors were banked in its current account, which during 1991 was always in overdraft, and it made payments to its creditors by cheques, by transfers and under authorities for periodical payments. There were also some other debits to its current account.

16 ULT's overdraft with the bank fluctuated. Often there were 20 or more debits to the account on one day. In noting balances of accounts I shall choose what seem to be appropriately representative figures; for example $1.56 million at 1 July 1991. For the rest of July the debit balance fluctuated between about $1.1 million and $1.4 million. By 5 August the balance had reached $2 million, by 15 August, $2.5 million and by 31 August, $2.67 million. On 10 September the balance was reduced from $2.87 million to $2.5 million returning to about $2.87 million on 17 September. On 20 September it went above $3 million and by 27 September reached $3.4 million. On that day a deposit of $2,638,464 (by Telecom) reduced the overdraft to $769,348.39. About 75 cheques were paid between 27 September and 3 October 1991. There were also quite a few debits by way of transfers and otherwise. On 4 October 22 cheques were paid by the bank including the first impugned payment of $46,148 to the respondent. The balance at the end of 4 October 1991 was about $1.67 million. The second challenged payment of $80,159.22 was made on 10 October 1991 at which stage the overdraft exceeded $2 million and was over $2.25 million at the end of that day. The overdraft increased steadily until it stood at $3.6 million at the end of October and at $4.1 million on 7 November when the third payment attacked of $40,000 was made. At the end of 7 November the balance was just under $4.4 million. The steady increase in the overdraft continued. The debit balance when the fourth impugned payment of $40,000 was made on 15 November was $4.6 million. From 28 November to 17 December (when the last challenged payment of $1,259 was made) the overdraft was over $5 million. By 2 January 1992 the balance was over $7 million.

17 Deposits were made to ULT's current account after Telecom's deposit on 27 September 1991 referred to above of a further $27,761 on 27 September, of a total of about $197,000 in October, of about $385,000 in November and of about $460,000 in December. These deposits are taken into account in the balances noted above.

18 Before dealing more fully with Mr Thomas' evidence, I record that I have given careful consideration to the purposes for which it may be used. Mr Thomas was called as a witness, and thus documents prepared by him in relation to discussions with ULT's representatives and as to the state of ULT's accounts with the bank at the time he recorded information about it are admissible under s 79C of the Evidence Act. Facts stated in his affidavit and in his oral evidence about those discussions and the state of ULT's accounts is also admissible. However, hearsay (oral or written) cannot be used to prove the truth of its contents. On the other hand, what accommodation ULT sought from time to time, what accommodation the bank granted, and the amounts owing to the bank under the various accounts are facts relevant to facts in issue, and Mr Thomas' evidence is admissible to prove those facts.

19 Mr Thomas' affidavit and documentation annexed to it embodies a considerable amount of information. I do not propose to record or summarise all of it. As to the period February to June (inclusive) of 1991, it is convenient to start with Mr Thomas' report (annexure "WT5") of 5 February 1991, which referred to a new agreed limit of $4.5 million and the raising of equity capital to reduce the bank's exposure. Some of the documentation is incomplete or not included in the agreed bundle. In a letter to ULT dated 25 February 1991 Mr Thomas said that the date by which the current level of exposure of $5.2 million was to be reduced to $4.5 million was extended to 31 May 1991, and that the current level was not to be exceeded. On 11 March 1991 ULT's indebtedness to the bank was $5.33 million, including $2.12 on overdraft. In addition to the credit limit referred to by Mr Thomas of $2.845 million on 5 February (p.251) his letter dated 18 March (p.285) refers to a new limit of $4.545 million which included a temporary overdraft of $1.7 million which was to be reduced to $700,000 by 31 March and cleared by 30 June 1991. The figures seem to include at times and omit at other times a facility granted by the bank to DNZ Electrical Contractors Sdu Bhd ("DNZ") which was controlled by ULT. Mr Thomas' report dated 22 March 1991 refers to an approved limit of $6.2 million, which had been exceeded. On 3 April 1991 (p.302) Mr Thomas told Mr Watson, a director of ULT, that unless the bank's exposure would be reduced to $5.2 million by 12 April the bank would issue a demand for repayment. A letter to the same effect followed (p.303). The bank was told in April that raising of capital was in train and that the money was being received. Mr Thomas was keen to get the bank's exposure down to $4.5 million.

20 On or about 7 May 1991 the bank declined a request to raise its credit limit from $6.1 million to $7.6 million. At that stage the bank's exposure was $5.81 million including $2.85 million on overdraft. However, the limit was increased to $6.67 million on 15 May 1991, to avoid any prejudice to ULT's fund raising efforts and on condition that further security by way of guarantees and indemnities from associated companies be provided.

21 On 6 June 1991 Mr Thomas informed ULT that it should seek a new banker. On 20 June Mr Watson told him that ULT would endeavour to do so. On 21 June Mr Thomas was informed that allotment of shares by ULT (with consequent release of payment for them) was imminent. On 28 June he was told that ULT's rights issue had been taken up to the extent of 95 per cent.

22 Despite talk of successful raising of capital, ULT continued to ask for financial assistance above $4.5 million. By letter dated 6 August 1991, Mr Thomas set out variations to the facilities recorded in his letter dated 23 May 1991 totalling $5.06 million. The credit limit was to be $4.9 million with a reduction of $2 million by 31 August. The reduction was not achieved. As at 5 September the bank's exposure was $6.97 million including $2.78 million on overdraft and a further $1.5 million in respect of DNZ. During September the bank monitored daily the cheques drawn by ULT. Numerous discussions occurred in this period. At 24 September the bank's exposure was $7.47 million including $3.12 million on overdraft. Telecom paid $2,638,464 to ULT on 27 September which amount was used to reduce ULT's overdraft.

23 On 4 October 1991, Mr Thomas telephoned Mr Watson to inquire what progress ULT had made about refinancing its facilities with the bank. On 14 October 1991 Mr Thomas wrote to Mr Mellor, a director of ULT, stating that the bank gave ULT a deadline of 30 November 1991 for refinancing its facilities with the bank. By letter dated 18 October 1991, Mr Thomas informed Mr Mellor that until anticipated income of the order of $1.8 million was received that ULT's overdraft was not to be increased except for payment of wages. On 22 October 1991, Mr Thomas and Mr Weir (another bank official) informed Mr Watson and Mr Mellor that no significant increase in ULT's debt could be permitted, that the bank's support after 30 November might cease and that the bank might appoint a receiver to ULT.

24 At a meeting on 25 October 1991 at the bank's offices, Mr Thomas was told by Mr Watson that ULT required a facility of $2 million. At a further meeting on 28 October 1991 equity fund raising was discussed. (I shall deal separately with Mr Watson's undated letter to the bank of about 28 October 1991). At that date the bank's exposure was $7.27 million.

25 On 29 October 1991, the bank wrote to ULT setting out terms on which it was prepared to increase the credit facility by a further $2 million, for a temporary overdraft (thereby increasing the credit limit to $7.57 million) the whole of which was to be repaid in full by 6 December 1991. Additional security was to be provided by two associated companies by way of joint and several guarantees and indemnities for $2 million.

26 One of the conditions in the offer was that capital raising of $6 million had to be successfully completed by 30 November 1991. In November there were discussions about capital raising. (In the event it appears that nothing effective was done in that regard). It seems from par 106 of Mr Thomas' affidavit that the overdraft component was $5 million, and that on 15 November the overdraft stood at $4.61 million. In November the bank was still monitoring ULT's account on a daily basis. By 2 December 1991 the bank's exposure had increased to $9.4 million including $5.09 million on overdraft.

27 By letter dated 6 December 1991, Mr Thomas wrote to ULT again amending the bank's offer dated 23 May 1991. The new credit limit was to be $8.12 million, the temporary overdraft being increased from $2 million to $2.55 million. Additional security by way of joint and several guarantees from the same associated companies for $550,000 was required. The facilities were to be reduced by at least $1.55 million by 20 December 1991 and repaid in full by 15 February 1992, from further capital raising of $6 million. In December 1991 the bank allowed ULT to pay its employees.

28 Annexure A hereto embodies figures extracted by Mr O'Hara from ULT's creditors' ledger, exhibit 6 which was identified by the liquidator during his evidence. I have checked the figures (except those for 4 February 1992 which I have not found) and carried the investigation of the creditors' ledger further, by following through entries as to debts owed to individual creditors.

29 As at 30 September 1990 there were about 41 creditors with claims aged 120 days and over. By 31 October about 25 of those claims had been paid. I then checked the remaining 16 creditors back to 2 August and forward to 31 October, 27 November and 31 December 1991 and against the list of unsecured creditors' claims as at 16 January 1992 in schedule H of the report as to affairs lodged by Mr Totterdell the receiver and manager appointed to ULT by the bank on 16 January 1992. . Annexure B hereto sets out categories of creditors' claims described in sub-headings. Annexure B does not include the claims of the respondent although they are recorded in the creditors' ledger of ULT. They will be dealt with separately. The report as to affairs was signed by Mr Totterdell. The schedules therein were signed by two of ULT's directors. The report as to affairs was lodged with the Australian Securities Commission. All that was done in compliance with s 429(2) of the Corporations Law. In my view the report as to affairs is admissible as a public document, for the reasons and authorities cited by Mullighan J in Duke Group Ltd (in liquidation) v Pilmer (1994) 15 ACSR 255, 273 - 4. In any event, Mr Totterdell swore an affidavit from which it may be gleaned that he checked how much each creditor was owed and made adjustments to the figures in schedule H referred to above in preparing his own schedule H in his report as to affairs dated 7 October 1992 which was lodged by the liquidator on 8 October 1992.

30 I have checked the figures relating to the creditors in schedule B (including the figures in my additional remarks about it below) against Mr Totterdell's schedule H. Apart from absence from that schedule of a reference to RF International a reduction to $18,454.60 of the debt owed to Professional Technology, (and except for the debts of creditors whose names start with "K" which I was unable to check due to illegible entries and apparently a missing page) the details in Mr Totterdell's schedule H correspond with the details in the schedule H signed by ULT's directors.

31 Mr Totterdell also deposed to the facts that he did his best to realise ULT's assets, that the amount of money realised was insufficient to pay secured claims that nothing was paid in respect of the claims of unsecured creditors of ULT as at 16 February 1992 which amounted (as corrected by Mr Totterdell) to $4,816,241. I accept that evidence.

32 In my opinion the creditors' ledger is admissible under s 1305 and s 1306 of the Corporations Law; cf R v Connell & Ors (1996) 14 ACLC 32. It is also probably admissible as evidence of facts stated therein under s 79C of the Evidence Act.

33 I add further remarks about annexure B, the ledgers and schedule H in the report as to ULT's affairs. In most instances the amount owing at 120 days shown in annexure B was also the amount owing to the creditor as at 16 February 1992. I will discuss cases where the figures changed. In the case of Deltech, a further debt of $845 appears in the ledger. There is an unexplained increase in the debt as at 16 February 1992 to $16,812.40. A further amount of $2,860 became owing to New Concept Technology in October 1991 and ULT's indebtedness as at 16 February 1992 was $4,360. Indebtedness to Forward Telecommunications increased to $6,158.65 in October 1991 and that was the amount owing as at 16 February 1992. There is an unexplained increase of the debt due to KRP Power Source from $1,697.67 on 3 December 1991 to $1,946.31 as at 16 February 1992. As at 31 December 1991 a total of $28,373.77 had been owing to KVG for more than 120 days; the total owing at that date and as at 16 February 1992 was $44,287.57. There is an unexplained increase of the amount owing to Kyodo Communications at 31 December 1991 of $65,743.30 to $86,712.41 as at 16 February 1992. Pica Software's claim increased by a further $159.50 in September 1991 and the claim as at 16 February 1992 was for $319. Additional amounts owing to Professional Technology in August, September and October 1991 increased the total due in December 1991 and as at 16 February 1992 to $25,855.20. There is an unexplained increase in RF International's claim of $1,175.33 as at 31 December 1991 to $2,035.84. It appears that none of the creditors' claims in annexure B was reduced by a payment.

34 I have omitted from annexure B a debt of $9,333.70 overdue to Smith & Associates for at least 120 days in September 1991, shown as still owing at 31 December 1991 but not appearing in schedule H. Also omitted are the claims of Key Radio Systems. It had a claim in October 1991 for $29,081.63 overdue for 120 days, ULT's total indebtedness being $207,119.32 as at 31 October. In December 1991, the indebtedness had been reduced to $135,043.81 (all overdue for 120 days). As at 16 February 1992 the indebtedness had been reduced to $68,471.61.

35 It is convenient to notice at this juncture that entries in the ledger which dealt with individual invoices distinguished between the date of the invoice and the "due date", which was the last day of the following month. Most lines, however, set out in successive columns the total owing, the total of invoices for the current month, next the total owing for the previous month (30 days), next the total owing for the month before that (60 days), next the total owing for the month before that (90 days) and then the column for the month before that and any earlier months (120 days +). When at the end of a month the ledger was printed, the unpaid debts in a previous month's column moved a step to the right as it were, eg, the unpaid debts outstanding for 60 days in August moved into the column for 90 days in September if still unpaid. I shall set out in schedule C what the ledger shows in respect of the respondent's claims as at the dates in schedule C. There is no print-out as at the end of August 1991.

36 The respondent and Key Radio Systems were major creditors of ULT at the end of September 1991. So was Chori Co Ltd, owed $110,483.84 for 30 days and $106,131.02 for 60 days at that stage. The total increased to $306,483.39 by 27 November. No payments had been made by ULT in the meantime. The total at 5 January 1992 was the same, but in both schedules H in 1992 the total stood at $604,270, which suggests that in this instance the ledger was incomplete. (Chori may have become a creditor for the first time in July 1991 and may never have received any payment from ULT).

37 Quiptec, on the other hand, was owed $86,195 on 30 September 1991 but did receive payments so that in 1992 it was owed $34,637.50.

38 One of the print-outs as at 30 September 1991 includes a debt due to Ambulance Service Victoria of $772,159 most of which had been outstanding for 120 days or more. It seems to have been dealt with separately from the overdraft account with the bank.

39 The creditors' ledger reveals in the print-out dated 30 September 1991 that the creditor Nokia Communications had a claim for $615 outstanding for over 120 days and a claim for $479,830 outstanding for over 90 days. The claims were paid before 31 October 1991. Mr Thomas said in par 96 of his affidavit that on 25 October 1991, he was told that ULT had been served with a statutory demand for $480,445 by Nokia and that there was a request for support which he initially declined. ULT's bank statement (p 187) reveals that a cheque for $480,445 was paid on 30 October 1991.

40 I do not think that service of the statutory demand has been proved by admissible evidence. However, there is admissible evidence that Nokia was paid on 30 October 1991 in full after the bank received Mr Watson's undated letter sent around 28 October 1991 (which is at least admissible to prove an application for a further temporary overdraft) and that an increase in the overdraft was granted in writing on 29 October 1991 in an amount of $2 million. Of significance is the guarantee required from companies associated with Mr Watson, namely Darowa Corporation Ltd ("Darowa") and the Small Business Investment Co Ltd ("SBIC") to cover the further advance of $2 million. I consider that on the admissible evidence a finding that a crisis for ULT was averted at the end of October by the use of the additional overdraft of $2 million is open and I make that finding.

41 Darowa also guaranteed payment to the bank of the wages paid to ULT's employees around 5 December 1991.

42 Volume 4 of the exhibits to the liquidator's affidavit contains, at 772 - 793, ULT's audited accounts for the six months which ended on 31 December 1991. At transcript 31 - 33 counsel for the respondent admitted on its behalf firstly, that ULT did indeed suffer a loss of $10,637,753 in those six months, and secondly that as at 31 December 1991 there was an excess of current liabilities over current assets of $3.3 million ($13,894,914 as against $10,519,215). The current liabilities included moneys owing to the bank. So it was unnecessary for the auditor to be called as a witness.

43 I will deal more fully with the account between ULT and the respondent and with correspondence and discussions between officers of ULT and the respondent when I consider the issues as to good faith and ordinary course of business. Here I focus on the implications of the evidence as to the actual ability of ULT to pay its debts, and not on the respondent's perception of its ability or otherwise to do so.

44 The conduct of ULT's account with the respondent is particularly relevant, as the evidence reveals that the respondent's trading terms were that a customer had 14 days' credit from the date of an invoice. Mr Matthews, the respondent's secretary and financial controller at the material time, said in evidence that normally its customers were actually allowed 30 days' credit. The state of the account from time to time is revealed by the ledger. (See annexure C hereto). The correspondence in July 1991 and exhibit 5 reveal that against an amount owing of $462,267 (of which over $53,000 had been outstanding for over 60 days and over $169,000 for over 30 days) payments of $30,022.65 and $22,984.80 were made by ULT by the end of July, that the respondent was expressing dissatisfaction and that in his letter dated 29 July 1991 Mr Walters (ULT's financial controller) stated that payment of the balance was currently scheduled as to $169,067.44, $134,512.34 and $105,681.23 for the months of May, June and July respectively in the cheque runs at the end of July, August and September respectively. In August 1991 the respondent agreed to allow an additional 30 days for payment of each of those amounts, and stated that otherwise its trading terms with ULT were to be 30 days' credit.

45 By the end of September over $300,000 should have been paid. The total paid was $170,000 up to 4 October 1991 (including the first challenged payment).

46 Cheque number 2423 drawn by ULT on 31 October 1991 in favour of ULT for $130,174.34 was cancelled. The next payment after $80,159.22 was paid on 10 October was made on 7 November in the sum of $40,000.

47 The final payments of $40,000 on 15 November and $1,259 on 17 December followed.

48 The respondent ceased supplying goods to ULT from 12 September 1991, except for a few small parcels of urgently needed requirements. The fact that the balance was not paid by ULT so that supply could be resumed is material.

49 In my view it is quite clear that in December 1991 ULT was unable to pay its debts as they fell due from its own money. I will thus consider further evidence about prior months only.

50 Minutes of directors' meetings seem to me to be admissible to establish matters such as authorising acceptance of offers of financial accommodation by the bank and steps taken towards raising further equity capital. However, a statement by a director as to ULT's financial position recorded in minutes is inadmissible to prove, as against the respondent, the truth of what was said. The same seems to me to apply to managerial reports to ULT's board and to management accounts correspondence and reports generally. (These documents are not books required to be kept by ULT by reason of the provisions of the Corporations Law). Those views are subject to the possible applicability of s 79C of the Evidence Act to a particular document.

51 The written demands addressed to ULT and the record of demands made orally, found by the liquidator among ULT's records, seem to me to be admissible at least to prove that the demands were made and that ULT's management knew about them. Counsel agreed on behalf of the parties that documents in evidence were what they purported to be, unless notice of challenge to particular documents was given. I have not relied upon the written demands or records of oral demands as evidence of the truth of facts stated. It seems to me that the written demands are original evidence of the making of the demands and that the persons who kept the records of oral demands were qualified persons within the meaning of s 79C(2)(f) and/or (g) of the Evidence Act.

52 There were many demands; see volume 4 of the annexures to the liquidator's affidavit.

53 Also in that volume 4 are documents which may be considered together with the evidence of Mr Thomas about the bank monitoring ULT's overdraft. The fact that there was a curb on ULT's ability to pay creditors freely was proved by the evidence of Mr Thomas. ULT's records show that within the constraints imposed by the bank, ULT decided which creditors should be paid.

54 There are other features of the case. I have mentioned the fact that ULT's business was expanding in 1991. It does not appear to be disputed that a corporate vehicle for a joint venture between ULT and Telecom won a contract in about May 1991 worth about $30 million to $40 million to establish a telephone service in Poland. I have mentioned the fact that on 27 September 1991 Telecom paid $2,638,464 to ULT. In the event, whatever ULT's expectations may have been, no further really substantial payments were received after that.

55 ULT raised funds in June 1991 by way of a rights issue. The contemplated further raising of equity capital did not eventuate.

56 Mr Coyle submitted that the question of ULT's ability or otherwise to pay its debts from its own money had to be considered separately in relation to each of the challenged payments. I accept that consideration must be given to each payment separately, subject to the riders that that may be done against the background of the evidence in the case bearing on the problem, and that it may be possible to consider in one exercise, two or more payments made within a short time-frame.

57 It is apparent that the funds raised by way of a rights issue in June 1991 were insufficient to solve ULT's problem of working capital needs; see annexure A hereto and the respondent's correspondence with ULT in July 1991.

58 The implications from the large payment by Telecom on 27 September 1991 deserve close attention.

59 The position concerning ULT's overdraft (and other facilities) immediately before the large payment by Telecom on 27 September 1991 may be discerned from the bank's letters to ULT dated 23 May 1991 and 6 August 1991 (in relation to limits of the facilities) and from Mr Thomas' call report dated 24 September 1991 as to the bank's actual exposure on that date.

60 Did the payment by Telecom of $2,638,464 enable ULT to pay all its debts as they fell due from its own money? ULT certainly used those funds to make payments to creditors, including the respondent. The overdraft increased from around $750,000 on 27 September to around $2.6 million on 18 October 1991, when the bank would allow only payment of wages to increase it.

61 Annexure A hereto shows that while ULT's total indebtedness was reduced by $400,000 between 30 September and 31 October 1991, claims of creditors outstanding over 120 days rose from $183,645.23 to $351,541.97. ULT should have paid the respondent $303,579.78 as arranged in August by the end of September (see annexure JM11 in exhibit 8). The payments made by 10 October 1991 (including the impugned payments of $46,148.00 and $80,159.22) totalled only $169,067.22. Having regard to the fact that the respondent had ceased deliveries in September, the failure of ULT to make payment in accordance with the arrangement gives rise to the inference that it was unable to do so because of other pressing claims. Moreover, no payment was made in October or later to the creditors in the first two groups in annexure B hereto. I will not repeat background information adverted to above. The reasons for ULT's inability to pay seem to have been that while its business was expanding, its cash flow was not as great as it should have been and it was sustaining large losses.

62 I find that when ULT made the payments on 4 and 10 October 1991 to the respondent, ULT was unable to pay all its debts as they fell due from its own money and that it was commercially insolvent.

63 I have referred to the crisis averted by ULT in late October 1991 with the assistance of the bank and Darowa and SBIC. The temporary overdraft of $2 million referred to in the bank's letter to ULT dated 29 October 1991 would not have been allowed without guarantees from Darowa and SBIC. While the amount of $2 million was secured against ULT's assets, it was also secured by guarantees of third parties. In my view, it cannot be said that the $2 million facility constituted ULT's own money raised only by mortgage of its own assets.

64 Before the new facility of $2 million was drawn upon, ULT's overdraft was about $3 million. When ULT paid $40,000 to the respondent on 7 November 1991 the overdraft was over $4.1 million. When the payment to the respondent of a further $40,000 was made on 15 November 1991, the overdraft exceeded $4.6 million, and at the end of the day, was over $4.8 million. I have said that ULT should have paid about $170,000 to the respondent by the end of September and failed to do so. A further amount of about $106,000 was arranged to be payable at the end of October. The two payments of $40,000 each were insufficient to satisfy the balance payable at the end of September and made no reduction in the amount of $106,000. Again, the inference is that ULT was unable to pay in full what it had arranged to pay to the respondent. No payments were made in respect of any of the claims in annexure B hereto. ULT's debts outstanding for more than 120 days had increased to $662,009.63 as at 27 November 1991 and there were also very significant totals of debts outstanding for 30, 60 and 90 days. I shall not repeat background evidence dealt with above.

65 I find that when the two amounts of $40,000 each were paid to the respondent on 7 and 15 November 1991, ULT was unable to pay all its debts from its own money and was commercially insolvent.

66 I record that I have not overlooked the question whether ULT could have solved its problem of insufficient working capital, by sale of assets, otherwise than in the ordinary course of business. That course does not appear even to have been considered, and there is no evidence that it was a realistic possibility. Moreover, all its assets were charged to the bank.

67 I am left with the impression that while ULT may have been unlucky, this is a case of a company with an endemic shortage of working capital which large infusions of money in June and September 1991 were unable to remedy.

Preference, priority or advantage over other creditors

68 Claims of unsecured creditors exceeding $4 million have been unpaid in the winding up of ULT. Some of those claims existed before any of the impugned payments to the respondent were made. Consequently the respondent needs to succeed on its argument concerning the Romalpa clause or the point that the payments in question prejudiced the bank, not the unsecured creditors.

69 In exhibit 10 the parties agreed the following facts:

"1. On or shortly after 16 August 1991, John Walters, then financial controller of ULT Limited, signed the credit application which is annexure 'CJ1' to the affidavit of Chris Jaeger sworn 26 April 1999 and at the same time he wrote in the date '1 May 1991'.

2. The applicant first made demand on the respondent for payment of the amounts sought in this action by his letter dated 30 May 1994.

3. The respondent did not register the credit application executed on 1 May 1991 as a charge".

70 As appears from Mr Matthews' affidavits and exhibits to them, he first broached the subject of "a retention of title" document in his facsimile to Mr Walters of 7 August 1991. The credit account application included a kind of Romalpa clause.

71 The credit application was filled in by Mr Raymond at Mr Walters' direction at the meeting on 15 August 1991 and then signed by Mr Walters. By signing the credit application ULT agreed to the following terms in relation to products supplied by the respondent:

"(a) Ownership and property is to remain with the Supplier until the Customer or the Guarantor has paid to the Supplier all moneys owing by the Customer to the Supplier at any time.

(b) Risk shall pass to the Customer whether the products are at the premises of the Supplier or the Customer.

(c) They shall be stored by the Customer in its capacity as a bailee and as a fiduciary of the Supplier and in such a way that they are clearly the property of the Supplier.

(d) They may be sold by the Customer to third parties in the ordinary course of the Customer's business.

(e) In the event any moneys owed by the Customer and the Guarantor to the Supplier are overdue for payment or the Customer has defaulted in any of the other terms of the arrangement between the Supplier and the Customer, the Supplier (or its agent) may enter the Customers' premises and take possession of the products.

(f) The Supplier, may once it has repossessed the products, resell the products to third parties.

(g) The Supplier shall have a right to any claims the Customer may have against third parties emanating from the sale of the products or new goods or objects to which the products have been incorporated.

(h) In the event of a sale by the Customer of the products or new goods or objects into which the products have been incorporated; the Supplier shall have the right to trade the proceeds".

72 The word "trade" in sub-cl (h) should obviously be read as "trace".

73 In his first affidavit Mr Matthews said that the credit application had been signed on 1 May 1991, but in his second affidavit said that other documents had refreshed his memory as to the signing of the application in mid August 1991, and that Mr Walters had agreed to the application being dated 1 May 1991, so that it would apply to goods supplied and described in invoices dated May 1991 or later (being the unpaid invoices at that time).

74 There was no real challenge to the evidence of Mr Matthews, read with facsimile dated 17 August 1991, to the effect that ULT agreed to the Romalpa terms in consideration of more time to pay overdue amounts (cf t/s 118, 162, 172 - 3). Not only was there forbearance, in that regard, but also continued supply in the second half of August and during early September as ULT's ledger shows. I find that there was consideration for the Romalpa clause.

75 Mr Totterdell was cross-examined by Mr Coyle about the respondent's contention that it retained title to goods supplied by it and still in the possession of ULT after the bank had appointed Mr Totterdell as receiver and manager to ULT on 16 January 1992. The documents prepared by Mr Totterdell's staff based on work by another witness called on behalf of the respondent, Mr Beegan, in early February 1992, embodied lists of stock supplied by the respondent and still on hand and the prices of such stock, totalling $28,988.00, identifiable items supplied by the respondent incorporated in equipment being made by ULT and still in its possession and the prices thereof totalling $218,012.00 (and further items under the heading "Cellswitch" totalling $8,673.00 which had been dealt with separately: see t/s 214). Copies of those documents were attached to Mr Totterdell's letter to the respondent dated 25 March 1992, which is in exhibit 2. Having taken legal advice about retention of title claims, Mr Totterdell agreed to pay the respondent for the items totalling about $247,000 after delivery to ULT's customers. He carried on ULT's business from January to September 1992 during which period he paid about $132,000 to the respondent. He sold ULT's business as a going concern and it seems that the purchaser paid the respondent for the balance of the items not delivered to ULT's customers by Mr Totterdell.

76 It was part of the respondent's case that at the time each of the challenged payments was made, ULT was in possession of nearly $111,270 worth of equipment supplied by the respondent between 7 May 1991 and 20 December 1991. I say "nearly", because Mr Cooke (to whose affidavit exhibit 14 was exhibited a spread sheet incorporating details from the invoices exhibited to his affidavit exhibit 15) said that of the $111,270 worth of equipment which his exercise showed had been delivered after 1 May 1991, it was possible that some items of particular description delivered after 1 May 1991 had been used before others of the same description on hand on 1 May 1991, for example, if the additions had been put in front of those on hand, on shelves, on some occasions. I find that it is probable that most of the $111,270 worth of equipment (part of the $247,000 worth referred to above) on hand in February 1992 had been supplied by the respondent to ULT after 1 May 1991. I also accept Mr Cooke's evidence that the parts supplied by the respondent and incorporated in equipment manufactured by ULT could have been removed by unscrewing or unbolting them.

77 The respondent relied on the decision of the House of Lords in an appeal from the Second Division of the Court of Session in Scotland, Armour v Thyssen Edelstahlwerke AG [1991] 2 AC 339, where it was held that a clause for retention of title over goods supplied is valid not only in relation to the very goods under the contract of sale, but also in relation to debts due to the seller under other contracts of sale, if the clause covers payment for those other goods also. The decision was followed by Moynihan J in Puma Australia Pty Ltd v Sportsman's Australia Ltd [1994] 2 Qd R 149, 157. Also see Puma Australia Pty Ltd v Sportsman's Australia Ltd (No.2) [1994] 2 Qd R 159, a decision of the Full Court in an appeal from proceedings other than those before Moynihan J.

78 While some parts of the Romalpa clause in this case may well be caught by s 262(1), s 263(1) and s 266(1) of the Corporations Law, and thus be void as against the liquidator as having created unregistered charges - see Associated Alloys Pty Ltd v Metropolitan Engineering & Fabrication Pty Ltd (1998) 16 ACLC 1633 and Professor Everett's article in 68 ALJ 404 - in the present case the respondent relies only on retention of title to goods supplied. On the authorities discussed in Puma and Associated Alloys, the crucial points in the present case are that the items used in manufacture of equipment by ULT had not been altered, they had not lost their identity and that (leaving aside for the moment the application of the Romalpa clause to goods delivered between 1 May and 16 August 1991) ownership had not passed from the respondent to ULT's customers on delivery of equipment incorporating items supplied by the respondent, since the equipment still on hand in February 1992 had not been delivered to the customers and there is nothing before me to suggest that the equipment ("work in progress") was in a deliverable state and had been unconditionally appropriated by ULT and its customers to contracts for the purchase thereof; see s 18 of the Sale of Goods Act 1895. Indeed, the appropriate time for passing of property to ULT's customers (from the respondent) would have been on delivery. (I would add that I construe sub cl (g) and (h) of the Romalpa clause in this case as taking effect upon delivery to a customer).

79 It is obvious that by 16 August 1991, property in the goods sold and delivered by the respondent to ULT between 1 May and 16 August 1991 had passed to ULT at latest on delivery to ULT. That was not disputed by counsel for the respondent. He argued that re-transfer of the property in the goods to the respondent amounted to neither a charge nor a mortgage (cf the definition of "charge" in s 9 of the Corporations Law) and that ULT did not have any equity of redemption in the goods delivered to ULT between 1 May 1991 and 16 August 1991, after 16 August 1991.

80 Mr Coyle submitted that whether a document which on its face is an absolute transfer of goods is in fact a mortgage or charge depends on the real intention of the parties to the transaction, and he referred to Manchester Sheffield & Lincolnshire Railway Co v North Central Wagon Company (1888) 13 AC 554, 568. He also submitted that the question was one of substance rather than form and was to be decided with reference to common sense, fair construction of the documents and surrounding circumstances, and referred to Westfield Holdings Ltd v Australian Capital Television Pty Ltd (1992) 32 NSWLR 194, 199 and Alderson v White (1858) 2 De G&J 98, 105; [1858] EngR 189; 44 ER 924, 928. I accept those submissions and add a reference to Rowe v Oades [1905] HCA 42; (1906) 3 CLR 73, 77, where Griffith CJ cited Alderson v White with approval and also quoted an observation of Lord Cottenham LC in Williams v Owen [1840] EngR 999; (1840) 41 ER 386, 388 that if a transaction is a mortgage, there must be a debt.

81 These cases concerned sales subject to rights of repurchase. I accept Mr Coyle's argument that in such cases there is no right of redemption.

82 Mr Coyle also referred to, and sought to distinguish, North Sydney - Apollo Printing Ltd v Rowley [1976] ACLC 40 - 249. In that case Holland J (at 28511) found that the purported sale was not genuine, that the documents were intended to provide security and that a right of redemption could have been enforced had the defendant seized the goods whilst there was no default or claimed title to the goods after the loan had been repaid.

83 Par 13, par 14 and par 15 of the respondent's supplementary outline of submissions encapsulate the core of its argument, and read as follows:

"13. In this case, the evidence does not suggest that the parties intended the ULT to obtain an interest in the nature of an equity of redemption, capable itself of being mortgaged or assigned, for the following reasons:

(a) The ROT clause itself gives RFS the right to retake possession of the goods in the event that ULT defaults on payment, but nowhere does it in terms give ULT a right to redeem the goods after they have been repossessed. The factual matrix (which includes the unwritten parts of this contract) gives no right to redeem.

(b) It is clear that the parties intended all goods coming under the clause to be treated in the same way - they did not intend that goods delivered between 1 May 1991 and 15 August 1991 be treated any differently to those delivered after 15 August 1991.

(c) Nothing in the contract taken as a whole suggests that ULT has any right to deal with an equitable interest in the goods. Indeed, the only rights it is given are the right to possession and the right to sell the goods in the ordinary course of its business. It is arguable that the explicit mention of a right to sell 'in the ordinary course of the Customer's business' excluded any dealings with an equitable interest in the goods, such as a mortgage of an equity of redemption, as such dealing would not be in the ordinary course of ULT's business.

14. Further, the parties clearly did not contemplate mutual rights to insist upon reconveyance of the estate and repayment of the consideration. There is no evidence that the parties contemplated repayment of the consideration for the transfer in question. Indeed, the consideration (forbearance from insisting on repayment of amounts outstanding, and agreeing to supply goods on credit) are not capable of repayment.

15. The transaction contemplated by the parties does not equate to a sale with a right to repurchase. Nor does it equate to a security between borrower and lender. Rather, the parties contemplated a variation in the arrangements already on foot between them regarding the supply of goods on credit, in circumstances where the original contract of sale had not been brought to a conclusion by payment of the purchase price".

84 It may be observed that an equity of redemption is implied if a mortgage does not provide for redemption expressly. It is a fundamental right of a mortgagor; see Noakes & Co Ltd v Rice [1901] UKHL 3; [1902] AC 24.

85 Parol evidence is admissible on the question whether a transaction in writing is a sale or a mortgage; see Gurfinkel v Bentley Pty Ltd [1966] HCA 75; (1966) 116 CLR 98, 110, 112, 114 (another case, on the view of the majority of the High Court, of a sale with a right to repurchase).

86 In the present case, parol evidence is important. The revelation that the application for credit was signed on 15 August 1991 requires an explanation as to what the respondent and ULT endeavoured to achieve. The document cannot be construed as if signed on 1 May 1991.

87 The crucial point seems to me to be the fact that the property in all goods sold and delivered by the respondent to ULT before 15 August 1991 had passed to ULT. So rulings in cases like Armour, that the Romalpa clause does not embody a charge, because the goods were never owned by the purchaser, are inapplicable. The respondent's argument really boils down to contentions that the parties to the document intended to treat the goods previously sold and delivered as if the property in them had never passed, and that effect should be given to that intention. But that view does not fit the facts. What the respondent wanted was security, and the section cannot be evaded by the form of a transaction at odds with commercial reality; cf Re Kent & Sussex Sawmills Ltd [1946] 2 All ER 638, 641 - 642. Moreover, that there were debts owing in respect of the goods in question, and rights of ULT to be in possession of the goods and to sell them in the ordinary course of business and of the respondent to seize them in case of default were consistent with a chattel mortgage having been created. And ULT having been the owner of the goods, it would have been odd indeed if, immediately after seizure of the goods, they could not have been redeemed if ULT had been able to raise the wind.

88 Then there is the evidence of Mr Matthews. In par 6.6 of his affidavit, exhibit 9, he deposed to saying at the meeting in August 1991 "we wanted some security". He also referred to security in the event that ULT faltered or collapsed; t/s 160 - 1.

89 I find that in the circumstances of the present case sub-cl (a) in the Romalpa clause embodied a registrable charge. It was unregistered, and is thus void as against the liquidator.

90 For completeness I mention that I have considered whether the respondent might succeed partially if the retention of the title clause were to be treated as a Romalpa clause for the future as from 15 August 1991. After all, it is a charge not the document which is void, and the reasons why the charge was void do not apply to deliveries after 15 August 1991. However, it seems that Mr Totterdell was misled (not dishonestly) by the respondent into accepting that all of the goods supplied by the respondent and in ULT's possession at the time of his appointment were owned by the respondent. He or the purchaser of the balance of the goods from him paid for them. Deliveries by the respondent after 15 August 1991 were relatively limited. It is impossible to quantify a defence based on the Romalpa clause, and understandable why this aspect was not argued. I would add that at the end of the day the respondent did rather better then most of ULT's other creditors.

91 Mr Coyle relied on Sheahan v Carrier Air Conditioning Pty Ltd & Anor (1996 - 1997) 189 CLR 407 in support of an argument that it was the bank and not the unsecured creditors which suffered prejudice as a result of the impugned payments so that the respondent did not receive a preference, priority or advantage over other creditors. In that case the payments were made by a receiver and the majority of the High Court decided the appeal on grounds which do not touch the issues in this case. However, the construction placed on s 122(1) of the Bankruptcy Act by Brennan CJ at 424 - 5 is helpful to the respondent on the law. (His Honour concurred in the allowing of the appeal). Kirby J dissented, and in doing so placed a wide construction unfavourable to the respondent on the subsection (459 - 461).

92 True it is that the bank consented to the impugned payments being made by ULT against its overdraft, by honouring the cheques. Whether at the end of the day the bank would have suffered a smaller loss if it had refused to allow those payments to be made is problematical, having regard to the fact that it continued to provide accommodation until January 1992. However, the true issue is whether the unsecured creditors were disadvantaged. In relation to that issue, this case seems to me to be distinguishable from Sheahan's and in particular the scenario examined by Brennan CJ, where it is clear that there was no practical difference between the effect of the payments on the other unsecured creditors immediately they were made on the one hand and at the date of liquidation on the other (all relevant events having occurred in May 1991 - see 415 of the report). In the present case in October and November 1991 ULT itself was carrying on business. Pressing creditors were paid (eg, Nokia and the respondent). Others were not. (See, for example, the instances in annexure "B hereto). Had all creditors been paid pro rata, from time to time, no disadvantage would have been suffered by any creditor and no creditor would have been preferred.

93 In my view, the other unsecured creditors were disadvantaged and the respondent did receive preferences by the impugned payments made in October and November 1991. That view is supported by the reasoning of Kirby J. I doubt that Brennan CJ had circumstances like the present in mind in formulating his reasons at pages 424 - 5. His Honour relied on James v Commonwealth Bank of Australia (1995) 13 ACLC 1604, 1607 - 8, where Young J's reasons seem to me to be consistent with the view that relevant prejudice to other creditors can be suffered at the time preferential payments are made (which may be saved by the running account principle, which has no relevance to the present case). The point has been authoritatively decided; see Airservices Australia v Ferrier & Anor (1996) 185 CLR 483, 501 (note 51) and G&M Aldridge Pty Ltd v Martin [1999] VSCA 179; (2000) 18 ACLC 199, 203 - 205.

94 As to the last payment of $1,259, made on 17 December 1991, the last invoice for the same amount annexed to Mr Cooke's affidavit exhibit 15 is dated 20 December 1991. I am not satisfied that there was a preference, as there is a reasonable inference that the payment was a payment in advance for the goods, the subject of that invoice.

95 Mr O'Hara provided two helpful chronologies one of which addressed dealings and communications between ULT and the respondent from 10 July 1991, the date of the respondent's letter to ULT about overdue debts of $53,007.45 for 60 days and $169,069.44 for 30 days.

96 I propose to set out what the documentation in the case reveals before addressing the evidence and explanations of the respondent's witnesses in their affidavits and oral evidence.

97 An internal memorandum dated 23 July 1991 reveals that the respondent had been told by ULT that it had raised $2 million from a rights issue which was to be used to pay creditors and that the $450,000 due for payment by ULT at the end of July would be paid to the respondent. There was reference to obtaining the agreement of ULT to retention of title by the respondent in goods supplied, to other possible securities and to "catastrophe credit insurance". A visit to ULT was also mentioned.

98 A facsimile from Mr Matthews to ULT dated 26 July 1991 provided particulars of debts totalling $462,267 and asked when payment could be expected. It was also said that the respondent's standing terms with ULT were 14 days and that ULT's liability extended back to March 1991 which was most unsatisfactory. ULT's response dated 29 July 1991 confirmed the amount owing and referred to a cheque for $30,022.65 which had been dispatched and a pending payment of $22,984.80 and the scheduling of further payments. Mr Matthews responded sharply in a facsimile dated 7 August 1991.

99 Mr Simmonds, a director of the respondent, prepared a file note dated 14 August 1991, noting positive points and the importance of maintaining a good commercial relationship with ULT as a large potential customer for the next three to five years. The file note also reviewed possible security which might be obtained.

100 I have discussed above the credit application signed in mid-August 1991. A facsimile from Mr Matthews to ULT dated 17 August 1991 recorded the results of the recent meeting in Perth, including recording amounts in which and dates by which ULT was to make payments (mentioned above). Mr Matthews also reported on the meeting to Mr Simmons by facsimile dated 27 August 1991.

101 On 12 September 1991 the respondent (by Mr Jaeger) sent a facsimile to ULT recording ULT's failure to raise funds and advising (and explaining) the respondent's decision to hold all further orders until ULT paid its debts.

102 On 9 October 1991 Mr Matthews sent a facsimile to the managing director of ULT, Mr Robinson, inter alia thanking him for recent remittances totalling $170,000, saying that outstandings were now for June to September and that as Mr Robinson was aware the respondent was holding deliveries pending settlement in full of ULT's account with the respondent and recording that on August 16 Mr Walters had said the account would be paid in full as soon as ULT was paid by its Polish partner.

103 The respondent received a copy of ULT's annual report as at 30 June 1991. The directors' report therein was dated 30 October 1991. The balance sheet stated that ULT had net assets of $8,896,233 and the profit and loss account showed an operating profit after tax of $1,830,467. (The annual report contained unreliable figures. There is no evidence that the respondent was told that was the case).

104 A facsimile dated 7 November 1991 from Mr Cooke of the respondent to ULT advised what the respondent was doing about manufacturing to meet ULT's needs, and stated that all outstanding accounts for June, July and August would have to be paid before "volume shipments" recommenced. Mr Cooke also complained about inability to obtain information from ULT's top management about its account.

105 In his affidavit exhibit 8 Mr Matthews said that at no stage was litigation against ULT threatened or considered. That may well be true, but that may be explained to an extent by an ambivalent attitude towards ULT: taking steps to protect the respondent's interests and to limit its possible losses while keeping alive the prospect of valuable business in the future. Mr Matthews also said that he first thought ULT might be in financial difficulty in December 1991, and that his discussions with Mr Walters in mid-August 1991 and ULT's annual report for 1990/1991 encouraged him to think ULT was financially sound.

106 In his affidavit exhibit 9 Mr Matthews set out his revised recollection of the visit in August 1991. In par 6.6 he said that he believed that he had said to Mr Walters that as the respondent was agreeing to accept late payment it wanted some security and wanted ULT to sign the credit application and date it 1 May 1991 so that all of the outstanding invoices would be covered by the retention of title clause. At t/s 115 and t/s 160 - 161 he emphasised the importance of the clause should a customer fail to pay. At t/s 117 Mr Matthews explained that he was seeking to achieve a fixed schedule for payment by instalments. At t/s 121 - 122 he referred to what must have been draft accounts for ULT as at 30 June 1991. He accepted (t/s 123) that on 10 July 1991 he was concerned about ULT's account. At t/s 130 - 131 he explained "catastrophe credit insurance", and at t/s 135 a "cheque run". He conceded that in mid August 1991 ULT's debt ratio was considered to be very high (t/s 141 and see t/s 146). It seems (t/s 145) that the respondent obtained a quotation for insurance in relation to ULT's indebtedness. Mr Walters told Mr Matthews in mid-August that ULT could not pay its debt but would pay according to agreed dates noted in the facsimile dated 17 August 1991 (t/s 147). Mr Matthews made the inquiries proposed by Mr Simmons (t/s 148 - 150).

107 Mr Matthews said at t/s 165 that delay in ULT receiving the 10 per cent deposit in relation to the Polish venture was due to ULT's failure to set it up well. He also said at t/s 165 - 166 that his perception of the risk in dealing with ULT was lower after the meeting in mid-August, and that the meeting had been a success. At t/s 167 he said that after the end of August Mr Jaeger took over responsibility for dealing with ULT, because his (Mr Matthews') contact, Mr Walters, was away.

108 Mr Cooke, the current general manager of the respondent who in 1991 was its national sales and marketing manager, swore four affidavits and was called to give evidence. Exhibited to his affidavit exhibit 12 were two facsimiles in July 1991 which I have not mentioned and need not explain. He was the author of the letter to ULT dated 10 July 1991 to which I have referred. In par 18 he said that after the meeting in mid-August 1991 he was satisfied that ULT was a profitable and growing company and had the ability to pay the respondent's outstanding accounts and that he had no concerns about ULT's ability to pay its creditors.

109 Mr Cooke was a party to the decision in September 1991 to put on hold further deliveries to ULT. He said that only delivery, not production, ceased, and that production would have ceased if the respondent had believed ULT was in financial difficulty.

110 Some time after 30 October 1991 he read and was satisfied with ULT's annual report. He confirmed the correctness of the information in his facsimile to ULT dated 7 November 1991 and said production would not have proceeded if ULT had been considered to be in financial difficulties. I shall not refer to correspondence after 15 November 1991. Mr Cooke said he believed that he first learned that ULT was in financial difficulty in December 1991.

111 Under cross-examination Mr Cooke said (t/s 190) that he did not have responsibility for credit control but was an interested party at the meeting. At t/s 192 he said he could not recall whether ULT gave any commitment about payment. He said he did not have a clear recollection of the discussions. At t/s 198 he said Mr Jaeger was responsible for ULT's account from early September and at t/s 200 that the decision to halt supply was ultimately Mr Jaeger's. He also said ULT was a very important customer of the respondent in the second half of 1991, a company the respondent "wanted to stick with" in relation to expanding business.

112 Mr Jaeger swore an affidavit, exhibit 16. He has been the managing director of the respondent since 1989. He as well as Mr Matthews had responsibility in 1991 for monitoring ULT's account. Around mid-1991 he became aware of ULT's contracts with Telecom locally and in relation to the Polish venture. He expected ULT to become one of the respondent's largest customers. At a directors' meeting a proposition that the respondent should obtain insurance cover in relation to ULT's debt was debated and rejected as uncommercial. He also deposed to retaining shares in ULT until it collapsed.

113 Under cross-examination Mr Jaeger accepted (at t/s 205) that when the schedule of payments agreed in Perth in mid 1991 was not adhered to by ULT he became involved in attempting to obtain payment from ULT. He recalled that the respondent was having trouble in obtaining payment. Mr Jaeger was unable to remember the details of his conversation which led to his noting in the first paragraph of his facsimile to Mr Mellor dated 12 September 1991 that ULT had been "unsuccessful in sourcing funds", (followed by an intimation that the respondent was "holding all orders"). Towards the end of the letter Mr Jaeger said:

"I can understand your hesitancy in approaching Telecom International P/L for a letter of comfort for RFS but my Board of Directors insists this be given as no security has been forthcoming. We are therefore holding all orders until we receive same or some other security or payment".

114 In the same letter ULT's proposal to pay $40,000 a week from 20 September 1991 was said not to "alleviate this situation greatly".

115 Mr Jaeger said he could not remember the meeting of directors referred to in the letter. Although he could not recall the details, Mr Jaeger said he did recall continued contact between ULT and the respondent about payment and ULT's need for further equipment. He described withholding supply, as it were, as being the technique used by the respondent to bring pressure to bear on ULT to pay.

116 Mr Jaeger was unable to recall when he received a copy of ULT's financial statements for 1990/1991.

117 The test for "good faith" for the purposes of s 122(2)(a) and (4)(c) of the Bankruptcy Act is that formulated in Queensland Bacon Pty Ltd v Rees [1966] HCA 21; (1966) 115 CLR 266, 303 - 4 by Kitto J as follows:

"In the first place, the precise force of the word 'suspect' 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'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. The notion which 'reason to suspect' expresses in sub-s. (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 sub-section 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 the other creditors.

The question thus posed by the sub-section is to be answered in the present case as at the time when each of the relevant payments was about to be accepted. It is an objective question. What the payee or anyone else inferred at the time is not to be treated as decisive, though the Court may be assisted in reaching its own conclusion by seeing how business men in fact reacted to the circumstances. The character of the circumstances is what has to be decided: were they such as to lead to the specified inference? The inference is that the payee had cause to suspect the existence of two states of fact. As to the first, the word 'unable' must be given its full force. The second goes further: it is that the payer's affairs are in such a state that acceptance of the payment (assuming that it would be allowed to stand) would put the payee in a better position vis-a-vis the other creditors than he would be in if the payer were bankrupt or, in the case of a company, were in liquidation. If the proper inference from the circumstances is that there was a sufficient reason for the payee to form an actual suspicion - a real apprehension though with insufficient warrant for a positive conclusion - that the situation had both these features, he is debarred by sub-s. (4) from being deemed a payee in good faith. Otherwise he is not".

118 Also see Levi v Guerlini & Ors (1997) 15 ACLC 913, 927. The test was stated in a compressed form by Young J in Wily v Lo Presti (No.2) (1998) 16 ACLC 85, 92:

"Would a reasonable person, who had knowledge of all the facts that the creditor knew, have a reasonable suspicion that the debtor was unable to pay his debts as they became due?".

119 His Honour also drew attention to various possible indicia of insolvency which could have innocent explanations and observed that sections like s 122 are to be given a liberal interpretation towards the creditor if there is any real doubt.

120 In Sims v Celcast Pty Ltd [1998] NSWSC 596; (1998) 16 ACLC 1 140 Williams J pointed out that it is the collective effect of the information a creditor has received which must be met; the trial Court had erred in allowing the creditor to explain away each piece of information separately. (The disposal of one fact at a time has been described as "piece-meal processes of reasoning").

121 I shall bear in mind that s 122(4)(c) is not concerned with the burden of proof; see Sheahan v Fabienne Pty Ltd [1999] SASC 335; (1999) 17 ACLC 1600, 1609 - 1610.

122 Following our Full Court in Levi v Guerlini (supra) at 928 (and noting a similar conclusion by Young J in Wily v Lo Presti (supra) - see 89 - 91 for a review of the authorities) I shall adopt as the test for ordinary course of business, whether each payment was a fair transaction, and what a person might do without having any bankruptcy in view (and not whether the transaction was usual or common in the business of ULT or of the respondent).

123 After seeing Mr Matthews, Mr Jaeger and Mr Cooke give evidence and reading their statements and the transcript, I have concluded that none has a clear recollection of what was said and done in 1991, and that much of their evidence has been reconstructed with a noticeable, but not dishonest, bias in favour of the respondent. In Mr Matthews' first statement he said that the credit application had been signed in May 1991. He also said (t/s 180) that if ULT "had paid us 200,000 we would have released another 200,000 worth of goods". I reject that evidence. It is inconsistent with the correspondence, including annexure CJ14 to Mr Jaeger's affidavit exhibit 16 discussed in par 21 therein, and is not supported by Mr Jaeger who had the carriage of the collection of the debts owed by ULT at the material time. In par 17 of Mr Cooke's affidavit, exhibit 12, he referred to a meeting with Mr Walters and Mr Raymond, in mid-August 1991, said that he could not recall the exact conversation with Mr Walters in mid-August 1991, set out statements helpful to the respondent made by Mr Walters, but made no reference at all to the discussion concerning retention of title or to the preparation and signing of the application for credit. Mr Jaeger was unable to recall what he was told by Mr Mellor during what seems to have been the most significant discussion he had had with any officer of ULT or the meeting of directors referred to in his subsequent facsimile to Mr Mellor dated 12 September 1991 part of which is quoted above.

124 Under these circumstances I consider that there is no reason why what the respondent's officers wrote or said in 1991 should be read down or treated as significantly qualified by their evidence in the case as to their impressions or opinions in 1991 of ULT's ability to pay its debts as they fell due. I shall, however, make allowance for an element of indiscriminate application of pressure on debtors who did not pay within the respondent's terms of trade, in considering the actions of the respondent's officers.

125 I have not overlooked the favourable information in Mr Matthews' facsimile to Mr Simmons dated 27 August 1991 or in ULT's financial statements for 1990/1991 received by the respondent's officers at some uncertain date after 30 October 1991. However, that information dealt with the position as at 30 June 1991, and annual figures do not in themselves reveal whether towards the end of a financial year a company's financial position is improving or deteriorating. Of greater weight is what happened after 30 June 1991.

126 I have mentioned above that payments of $30,022.65 and $22,984.80 were made by ULT in July 1991, against a debt of $462,267 of which $53,000 had been outstanding for over 60 days, and $169,000 for over 30 days, and the respondent's dissatisfaction with that position. In mid-August Mr Matthews travelled to Perth and obtained a credit agreement containing a Romalpa clause intended to provide security over all deliveries since 1 May 1991, as I have explained. Also in August, dates for payment of the sums of $169,067.44, $134,512.34 and $105,681.23 arranged in July were rescheduled to be made 30 days later in each case (ie, at the end of the months of August, September and October). ULT made no payments in August and September. Mr Jaeger had a discussion with Mr Mellor of ULT and with his (Mr Jaeger's) co-directors before sending the facsimile dated 12 September 1991 to Mr Matthews. I have dealt with its contents above. Cessation of delivery of further goods pending receipt of security for payment or payment in full from a debtor in manifest default which had declared that it had been unable to raise money was a significant event. That strategy did not result in payment being made either promptly or in full. The next payment made was $46,148 on 4 October followed by payment of $80,159.22 on 10 October 1991, together less than one-third of the total long outstanding.

127 I infer that a reasonable person reviewing those matters within the knowledge of the respondent would have had an actual and reasonable suspicion that ULT was unable to pay all its debts as they fell due from its own money, and that each of those payments in October would prefer the respondent above ULT's other creditors. I take into account (cf Queensland Bacon at 303) Mr Matthews' evidence about obtaining some security against the event that ULT faltered or collapsed (t/s 160 - 1) and Mr Jaeger's evidence that the respondent's directors discussed taking out credit insurance in relation to ULT's debts (exhibit 16 par 9).

128 Those payments did not result in resumption of deliveries by the respondent, and in Mr Cooke's facsimile to Mr Fuller dated 7 November 1991 it was said that payment for all outstanding debts was required before "volume shipments" would be recommenced. The two payments of $40,000 each in November were instalments which Mr Jaeger had stated in his facsimile dated 12 September 1991 did not alleviate the situation (of default) greatly. I draw the same inference as that in the last paragraph above in relation to the two payments in November 1991.

129 I also find that the payments by ULT to the respondent in October and November 1991 were not made in the ordinary course of business. They were made, in irregular instalments, of relatively small proportions of the overdue debts to a creditor with whom business had largely ceased; cf Katoa Pty Ltd v Premier Auto Spares Pty Ltd (1984) 2 ACLC 352. I think the features of the case which would have caused a reasonable person to apprehend that the payments were unfair was that considerable pressure to make payment had been brought to bear on ULT, and that notwithstanding ULT's need for further equipment, it was apparently unable to pay in full, and might well not have been paying creditors who were unable to put the same pressure on ULT.

130 In my opinion, therefore, the applicant should succeed in his claims relating to the payments made by ULT to the respondent in October and November 1991, but the claim in respect of the payment in December 1991 should be dismissed.