Rexel Electrical Supplies Pty Ltd v Morton

SUPREME COURT OF QUEENSLAND

CITATION: Rexel Electrical Supplies Pty Ltd v Morton (as liquidator of South East Queensland Machinery Manufacturing and Distribution (Mining No. 1) (in liq)) [2015] QCA 235

PARTIES: REXEL ELECTRICAL SUPPLIES PTY LTD ACN 000 437 758 (applicant) v GAVIN MORTON (as liquidator of SOUTH EAST QUEENSLAND MACHINERY MANFUACTURING AND DISTRIBUTION (MINING NO. 1) (in liquidation)) ACN 050 414 483 (respondent)

FILE NO/S: Appeal No 3372 of 2015 / DC No 4660 of 2012

DIVISION: Court of Appeal

PROCEEDING: General Civil Appeal

ORIGINATING COURT: District Court at Brisbane – [2015] QDC 49

DELIVERED ON: 20 November 2015

DELIVERED AT: Brisbane

HEARING DATE: 18 August 2015

JUDGES: Fraser and Philippides JJA and Ann Lyons J / Separate reasons for judgment of each member of the Court, each concurring as to the orders made

ORDERS: **Grant the application for leave to amend the notice of appeal in the form which is annexure “A” to the application filed on 13 August 2015.****Refuse the application for leave to appeal.**Order that the applicant pay the respondent’s costs of the application for leave to appeal, including the costs of responding to the notice of appeal filed on 2 March 2015.

CATCHWORDS: CORPORATIONS – WINDING UP – CONDUCT AND INCIDENTS OF WINDING UP – EFFECT OF WINDING UP ON OTHER TRANSACTIONS – PREFERENCES AND VOIDABLE TRANSACTIONS – UNFAIR PREFERENCES – where the trial judge found the applicant to be insolvent – where the applicant engaged in transactions with a related entity during the ‘relation-back’ period – where the trial judge concluded that these transactions were an unfair preference – where the applicant contends the trial judge erred in concluding that the relevant transactions were an unfair preference – where the applicant needed leave to appeal because the amount of the judgment in the District Court was less than the monetary limit of the Magistrates Court – where the applicant did not make submissions on this point – whether leave to appeal the trial judge’s factual finding ought be granted / CORPORATIONS – WINDING UP – WINDING UP IN INSOLVENCY – WHAT CONSTITUTES INSOLVENCY – GENERALLY – where the applicant alleged the trial judge had erred in finding the applicant insolvent – where the liquidator gave evidence to the effect that the applicant was insolvent – where there was no evidence contradicting the liquidator – where the balance sheets and profit and loss statements of the applicant did not comply with s 286 of the Corporations Act 2001 (Cth) – where the liquidator did not rely upon unreliable information in those statements – whether the evidence supported a finding of insolvency / Corporations Act 2001 (Cth), s 95A, s 588C, s 588E, s 588FA, s 588FC, s 588FE, s 588FG / District Court of Queensland Act 1967 (Qld), s 118 / Magistrates Courts Act 1921 (Qld), s 4 / Airservices Australia v Ferrier (1996) 185 CLR 483; [1996] HCA 52, cited / Australian Securities and Investments Commission v Plymin (No 1) (2003) 175 FLR 124; [2003] VSC 123, considered / Crema (Vic) Pty Ltd v Land Mark Property Developments (Vic) Pty Ltd [2006] VSC 338, cited / Federal Commissioner of Taxation v SNF (Australia) Pty Ltd (2011) 193 FCR 149; [2011] FCAFC 74, cited / Morton & Anor v Rexel Electrical Supplies Pty Ltd [2015] QDC 49, related / Smith v Bone (2015) 104 ACSR 528; [2015] FCA 319, considered / Smith v Western Australia (2014) 250 CLR 473; [2014] HCA 3, cited / Walker v Walker (1937) 57 CLR 630; [1937] HCA 44, cited / Williams (as liquidator of Scholz Motor Group Pty Ltd (in liq)) v Scholz & Anor [2008] QCA 94, cited

COUNSEL: R Perry QC for the applicant / V G Brennan with B McGlade for the respondent

SOLICITORS: Polcyznski Lawyers for the applicant / Taylor David Lawyers for the respondent

1. FRASER JA: After a one day trial in the District Court the primary judge ordered that the applicant pay the respondent $132,811.01 representing unfair preference transactions which were voidable pursuant to s 588FE of the Corporations Act 2001 (Cth), with interest. The applicant has applied for leave to appeal against that order under s 118(3) of the District Court of Queensland Act 1967 (Qld). In accordance with the Court’s usual practice, argument at the hearing of the application proceeded on the footing that if leave to appeal were given the Court would also determine the appeal.

2. The applicant previously carried on business under the name Inaco Automation Controls (“Inaco”) and the company, of which the respondent is the liquidator, was previously named Aran Management Pty Ltd (“Management”). In what follows I will adopt that terminology.

The trial

3. At the trial both the liquidator and Management’s internal accountant, Ms Spicer, gave evidence. Otherwise the liquidator’s case was based upon documentary evidence, including reports to creditors and Management’s financial records. Inaco did not adduce any evidence.

4. Management’s winding up commenced on 14 August 2012. The liquidator’s claim concerned a series of payments, in total $197,469.16, which Management paid to Inaco between 26 March and 6 June 2012. The evidence established that Inaco supplied electrical components to Management. There was evidence that before March 2012 the payment terms were mainly 30 or 60 days. Management was one of a group of related companies controlled by Mr Dunstan (the “Group”). The Group included Aran International Services Pty Ltd (“International”). Management was the entity in the Group that incurred debts and paid creditors. International was the income producing company in the Group – it entered into contracts with clients and received payment under those contracts. There was no agreement between Management and International about the distribution of those funds, rather International supplied Management with funds as required.

5. An effect of s 588FE of the Corporations Act 2001 (Cth) (“the Act”) is that, where a company is being wound up, an “insolvent transaction of the company” entered into on or after 23 June 1993 during the six months ending on the “relation back day” may be voidable. In this case that “relation back period” was 14 February to 14 August 2012. Section 588FC defines “insolvent transaction of a company” as comprehending “an unfair preference given by the company” if the transaction is entered into when the company is insolvent. A transaction between a company and an unsecured creditor is an unfair preference if it “results in the creditor receiving from the company … more than the creditor would receive … if the transaction were set aside and the creditor were to prove for the debt in a winding up of the company…”.¹ Under s 588E, if the company is being wound up and it is proved that the company was insolvent at a particular time during the 12 months ending on the “relation back day”, then “it must be presumed that the company was insolvent throughout the period beginning at that time and ending on that day.”

6. Inaco admitted that the payments were transactions made during the relation back period, Management and Inaco were parties to the transactions, and Inaco was an unsecured creditor of Management at all relevant times. Inaco did not admit that Management was insolvent at the time of any payment or that any payment was an unfair preference. The primary judge resolved those issues in Management’s favour. The primary judge also rejected Inaco’s “good faith” defence under s 588FG(1)(b) of the Act and its contention that each transaction was not an “unfair preference” because it formed part of a running account under s 588FA(3). After allowing a set off of $64,658.15 in favour of Inaco under s 533C of the Act (which is not now in issue), the primary judge found that the liquidator was entitled to recover $132,811.01.

Insolvency

8. A person is insolvent if the person is not able to pay all of the person’s debts as and when they become due and payable.² The primary judge cited authority for the proposition that of the two common approaches to the assessment of solvency – a cash flow analysis and a balance sheet review of assets and liabilities – s 95A of the Act adopts the former approach:

“Section 95A of the Act enshrines the cash flow test of insolvency which, in contrast to a balance sheet test, focuses on liquidity and the viability of the business. While an excess of assets over liabilities will satisfy a balance sheet test, if the assets are not readily realisable so as to permit the payment of all debts as they fall due, the company will not be solvent. Conversely, it may be able to pay its debts as they fall due, despite a deficiency of assets.”³

9. The primary judge acknowledged that the question whether or not a company is insolvent is not merely an arithmetical exercise made with reference to the balance sheet, the profit and loss account, or both; that inquiries might extend to matters such as whether or not the company had access to funds from directors, related companies or others.⁴ Inaco accepted that the following observation by the primary judge was correct:

“It is a question of fact to be determined by the court as to whether or not a company is insolvent at a particular time. That involves a proper consideration of its financial position based on commercial reality. The concept of commercial reality, was explained by Chesterman J in Emanuel Management Pty Ltd v Fosters' Brewing Group where his Honour said the determination of the insolvency of a company as a matter of 'commercial reality' was:

‘... designed to prevent over-hasty adjudications of insolvency in the case of companies suffering a temporary shortage of cash. It was not meant, in my view, to allow companies in a chronic state of illiquidity who evade, by one means or another, determined action by a creditor to wind them up, by that evasion, to be deemed solvent.’”⁵ (citations omitted)

10. The primary judge’s approach is consistent with that taken by Gleeson J in Smith v Bone:⁶

“Under s 95A of the Act, a company is solvent if, and only if, it is able to pay all its debts, as and when they become due and payable. By s 95A(2), a company that is not solvent is insolvent. Section 95A adopts a ‘cash flow’ test of insolvency which is directed to income sources that are available to the company and expenditure obligations it has to meet, rather than a balance sheet test which focuses on the value of the company’s assets and liabilities reflected in the company’s books, although a balance sheet test can provide context for the application of the cash flow test: Campbell Street Theatre Pty Ltd (recs and mgrs apptd) (in liq) v Commercial Mortgage Trade Pty Ltd [2012] NSWSC 669 at [23], citing Southern Cross Interiors Pty Ltd (in liq) v Deputy Commissioner of Taxation (2001) 53 NSWLR 213 ; 188 ALR 114 ; 39 ACSR 305; [2001] NSWSC 621 (Southern Cross); Plymin (No 1); Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) (2008) 39 WAR 1; 70 ACSR 1; [2008] WASC 239. The focus of the cash flow test of insolvency is the liquidity and viability of the company’s business: Crema Pty Ltd v Land Mark Property Developments Pty Ltd (2006) 58 ACSR 631; [2006] VSC 338 at [141].

Whether or not a company is insolvent at a particular point in time is a question of fact to be ascertained from a consideration of the company’s position taken as a whole, including the nature of its assets and business, having regard to ‘commercial realities’ and common sense: Bluestone Property Services Pty Ltd (in liq) v First Equilibrium Pty Ltd [2013] FCA 876 at [42]; Southern Cross. The court’s task is to decide whether the company is suffering from an ‘endemic shortage of working capital’: Hymix Concrete Pty Ltd v Garritty (1977) 13 ALR 321 at 328.

Thus, a temporary lack of liquidity does not constitute insolvency: Sandell v Porter (1966) 115 CLR 666 at 670; [1966] HCA 28 per Barwick CJ. ‘In assessing whether a company’s position as a whole reveals surmountable temporary illiquidity or insurmountable endemic illiquidity resulting in insolvency, it is proper to have regard to the commercial reality that, in normal circumstances, creditors will not always insist on payment strictly in accordance with their terms of trade but that does not result in the company thereby having a cash or credit resource which can be taken into account in determining solvency’: Southern Cross at [54].

In considering a company’s ability to pay debts “as they become due”, it is appropriate to consider the immediate future, precisely how far into the future being a matter that depends on circumstances including the nature of the company’s business and, if known, the future liabilities: Lewis v Doran (2005) 219 ALR 555; 54 ACSR 410; [2005] NSWCA 243 at [103] (Lewis) per Giles JA; Melbase v Segenhoe (1995) 17 ACSR 187 at 198. So, for example, ‘if it appears that the debtor will not be able to pay a debt which will certainly become due in, say, a month … by reason of an obligation already existing, and which may before that day exhaust all his available resources, how can it be said that he is able to pay his debts ‘as they become due,’ out of his own moneys?’: Bank of Australasia v Hall (1907) 4 CLR 1514 at 1528; 14 ALR 51 at 54–5; [1907] HCA 78 per Griffith CJ.

…

If the court is satisfied that, as a matter of commercial reality, the company has a resource available to pay all its debts as they become payable then it will not matter that the resource is an unsecured borrowing or a voluntary extension of credit by another party: Lewis v Doran (2004) 208 ALR 385; 50 ACSR 175; [2004] NSWSC 608 at [116] (Doran); Lewis at [109] and [110] per Giles JA; Scott v Duncan [2007] FCAFC 30 at [38]. The likelihood that directors will continue to support by a company by lending it money is relevant to the assessment of solvency: see Mulherin v Bank of Western Australia Ltd [2006] QCA 175 at [113]–[115]”

11. In the liquidator’s reports to creditors, the liquidator reported statements made by Mr Dunstan to the liquidator. The Group initially supplied certain plant and materials for road and dam construction and later supplied certain plant for mines. During the latter part of 2010, International entered into substantial contracts which involved difficulties that stretched the resources of the group and resulted in heavy losses. A potentially profitable project was won in November 2011 but could not be completed because of the drain on the group’s available funds. Anticipated projects in the first half of 2012 were not secured. An unexpected income shortfall arose from a dispute in May 2012. Employees could not be paid and, because of prevailing employment rules, the employees could not be retrenched. As a result there was a downturn in revenue and a decline in profit margins. The liquidator made statements to the same effect in evidence in chief and in cross-examination.

12. That downturn in the Group’s business was reflected in the evidence of Inaco’s dealings with Management. In about mid-February 2012, Management admitted to Inaco that it was unable to pay an outstanding invoice. Thereafter, Management was consistently late in paying, and paid only parts of Inaco’s outstanding invoices. The relevant dealings were summarised in the following passage of his Honour’s reasons:

“[26]On 31 January 2012, Inaco rendered invoice 70884199 for $215,421.80 to Management, for a bypass switch, software, automatic power factor unit, and amp.

[27]Two weeks later, in or about mid-February 2012, Mr Rae, Inaco's Credit Manager contacted Ms Spicer, asking when payment of the January invoice would be received. She told him Management did not have the money straight away so he would have to wait for a while until Management was able to pay it. No explanation consistent, for instance, with a temporary cash shortage able to be overcome, was given so as to found any belief in Inaco that the inability to pay may not be consistent with insolvency as defined in s 95A. Ms Spicer did not seek to reassure Mr Rae that funds would be available from International to pay the invoice.

[28]Some four or five weeks later, on Wednesday 21 March 2012 at 1.25pm, Mr Rae again emailed Ms Spicer asking her to call him to discuss the account. She replied by email the same day at 2.l4pm, advising $16,224.07 would be paid on the Friday of that week, 23 March. Within 17 minutes Mr Rae emailed her again advising that Inaco's records showed the January figure for Management's account was $254,186.55 and seeking Ms Spicer's agreement to that figure.

[29]Presumably having heard nothing from Ms Spicer for five days, Mr Rae again emailed her at 9.24am on 28 March 2012, thanking her for the payment of $16,224.07 on Friday 23 March⁷ and reminding her there were still two outstanding January invoices totalling $244,558.15. He sought to know when those invoices would be paid.

[30]Ms Spicer replied at 10.34am that same day, 28 March 2012 seeking copies of the two January invoices, explaining that in the process of getting them approved, the original paper copies had been mislaid, although details were on the computer system. Ms Spicer went on to say:

“As discussed with Ashok, we will have to set up the payment plan to clear these. I can give you some indication of our plan at the beginning of next week.”

Mr Ashok Parmar was, according to Ms Spicer, a sales representative for Inaco. As at 3 August 2011, he was Inaco's account manager. As to how long he remained in that position the evidence does not relate.

[31]At 10.40am the same day, 28 March 2012, Mr Rae replied, saying he was unaware of anything about a payment arrangement; it had not been discussed with him. As to that payment arrangement, Ms Spicer gave evidence that, before the commencement of the above emails, she had spoken to Mr Parmar. She told him Management was having difficulty paying invoices. Mr Parmar's response was to threaten to put a stop on Management's account unless the outstanding invoices were paid. It was then Ms Spicer and Mr Parmar decided on a payment plan.

[32]On 3 April 2012 at 11.l5am, six days after the above 28 March exchange of emails, Mr Rae sent Ms Spicer an email asking her to call him urgently regarding the balance of the January account. In response, at 3.36pm that day Ms Spicer emailed Mr Rae the following payment proposal to pay $242,782.86, then showing in Management's records as owing to lnaco:

Instalment Proposed Date of Payment Payment Amount

First 03/04/2012 $20,000.00

Second 13/04/2012 $30,000.00

Third 28/04/2012 $50,000.00

Fourth 04/05/2012 $30,000.00

Fifth 11/05/2012 $50,000.00

Sixth 18/05/2012 $50,000.00

Seventh 25/05/2012 $12,982.86

$242,982.86

By email of 4 April 2012, Mr Rae indicated agreement to the proposal subject to conditions he imposed. Strictly that constituted a counter offer accepted by Management when it paid its first instalment (due 3 April) on 5 April.

…

[33]Payment No. 1 ($20,000) due on 3 April was not paid. On 5 April Mr Rae emailed Ms Spicer chasing it. It was made later that day. Payment No. 2 ($30,000) was due on 13 April 2012 was not paid. It was chased up by Inaco on 17 April 2012, and paid five days late on 18 April 2012. Payments No. 4 ($30,000 due 4 May 2012), and No. 5 ($50,000 due 11 May 2012) were paid on time. Payments No. 6 ($50,000 due 18 May 2012) and No. 7 ($12,982.86 due 25 May 2012) were never paid. The fourth and fifth instalments, both paid on time, were paid after reminder emails prior to the due date and the late payments of the first, second and third instalments were paid after emails from Mr Rae chasing them up.

…

[35]Despite the agreed subject payments of $197,469.16 having been made to Inaco between 26 March 2012 and 6 June 2014, there was still an amount of $93,568.97 said by Inaco to be owing to it by Management. On 22 June 2012, Inaco served Management with a Creditor's Statutory Demand pursuant to s 459E(2)(e), demanding payment of that sum within 21 days. The amount demanded was described as due and payable for goods sold and delivered by Inaco to Management in the period 31 January 2012 to 24 April 2012, the particulars being noted in annexure "A" of the affidavit of Colin James Rae sworn on the 20th of June 2012:

“A”

21-Jan-12 70884199 $215,421.80 $64,658.15 Invoice

20-Feb-12 70928730 $2,036.98 $2,036.98 Invoice

28-Feb-12 70946623 $566.50 $566.50 Invoice

29-Mar-12 44852 -$1,623.60 -$1,623.60 Credit Memo

29-Mar-12 44853 -$766.70 -$766.70 Credit Memo

12-Apr-12 71038015 $645.15 $645.15 Invoice

24-Apr-12 71062594 $27,193.30 $27,193.30 Invoice

24-Apr-12 71062589 $859.19 $859.19 Invoice

$93, 568.97

It can be seen that the last invoice Inaco relied upon was rendered on 24 April 2012. That figure of $93,568.97 differs by $1,245.09 from the agreed set-off figure of $92,323.88 claimed by Inaco (see later). I proceed on the basis of that agreed figure.”

13. The downturn in the group’s business was also reflected in Management’s financial records. They showed a net decline in income between 30 June 2011 and 30 June 2012 from ($425,863.06) to ($988,678.22). For the same period the balance sheet showed a deterioration of its negative net asset position of ($1,213,034.52) to ($2,201,312.54). On 1 March 2012, Management’s net asset position was ($12,740,406.33). Its “Ageing Summary As of March 1, 2012” recorded current liabilities to creditors of $1,579,997.13, of which three per cent exceeded 60 days and eight per cent exceeded 90 days. Ms Spicer gave evidence that this was accurate, that only one of the creditors (Krohne – whose debt of $60,407.70 had been outstanding for more than 90 days) was a 60 day supplier, and that despite the terms of supplier’s invoices varying between 15, 30 and 60 days, they were only paid when money was available. At 30 June 2012, by which time related entity loans were recorded as having been reduced to $1,407,593.97 (from $11,906,711.77 at 1 March 2012), Management had current liabilities of $1,701,600.26 against a total asset base of $948,598.58 (a shortfall of $753,002.00).

14. Ms Spicer gave evidence that creditors were pressing for payment at or around 1 March 2012. There were creditors who had not been paid for between 61 and 90 days and some who had not been paid for more than 90 days. There were phone calls from such creditors “every day, most of the day”. Payments were made to Inaco because Management needed goods from Inaco to enable it to complete works and generate income to clear other debts. (Nevertheless from well before the first payment in issue, on 26 March 2012, Management was late in paying, and paid only part of Inaco’s outstanding invoices: [12] of these reasons.) Ms Spicer gave evidence that most of the suppliers knew that Management usually paid outside the creditors’ terms of payment. Despite that knowledge, from on or about 1 March 2012 the creditors made the phone calls “because it got beyond the acceptable limit, really”. It was not put to Ms Spicer in cross-examination that any of this evidence was inaccurate.

15. In a report to creditors of 24 July 2013, the liquidator reported that Management was “balance sheet insolvent for at least six months prior to the [liquidator’s] appointment (14 August 2012)”, it was “cashflow insolvent from at least 1 March 2012”, it “had a liquidity ratio 0.03 as at the appointment date and 0 as at 1 March 2012”, it had been paying creditors outside trading terms from at least 1 March 2012, it had incurred trading losses from July 2011, and there was no evidence that it would have been able to secure funding from any other sources during the period.⁸

16. In the absence of any evidence contradicting the evidence adduced by the liquidator, it could reasonably be inferred that, by 1 March 2012 at the latest, as a result of the difficulties and downturn in the Group’s business Management’s sources of funds to pay its creditors had dried up. It faced not merely temporary illiquidity but an endemic shortage of working capital.

Appeal Ground (a)

17. Ground (a) of Inaco’s draft notice of appeal contends for an error by the primary judge “in admitting into evidence all of the annexures to the Exhibit 3 in circumstances where the plaintiff, in his submissions, conceded that annexures 1, 2, 6, 7, 23, 24, 25, 28 and 32 were not admissible.” Exhibit 3 is a “bundle of documents containing Management documents and various emails between the parties and other documents disclosed by both parties.”⁹ Contrary to that ground of appeal, the transcript reveals that the liquidator did not concede that the specified annexures were not admissible. Rather, the liquidator explained in his final submissions that he “only relies upon documents to which the witnesses were expressly taken or those which were disclosed by the defendant and are now sought to be relied upon by the Liquidator”.¹⁰ The documents upon which the liquidator relied at the trial to establish insolvency are not amongst the annexures which this ground of appeal contends were conceded to be inadmissible.

18. Inaco argued that statements by Mr Dunstan which the liquidator reported, and upon which the primary judge relied as support for the conclusion that Management was insolvent, were inadmissible hearsay. However the liquidator’s reports were part of Exhibit 3, which was admitted without objection. Exhibit 3 was admitted upon the basis that the primary judge would subsequently rule upon any objections taken to it.¹¹ During the liquidator’s evidence-in-chief, he was asked a question about the accounting software used by Management. Counsel for Inaco interjected and made statements to the effect that the liquidator’s evidence upon such topics must be hearsay.¹² After some discussion between the primary judge and counsel about the admissibility of such evidence and the practical difficulties which would flow from a requirement for direct evidence, the primary judge invited counsel to address the topic in their final submissions. Thereafter counsel for Inaco did not object to the admission of Mr Dunstan’s statements in the liquidator’s reports and his oral evidence. The liquidator relied upon some of that evidence in final submissions at the trial.¹³ Inaco’s final submissions did not contend that this evidence was inadmissible. Instead, Inaco’s counsel stated that Inaco “does not press its objection to Exhibit 3.”¹⁴ Furthermore, in Inaco’s submissions in reply to the liquidator’s submissions it did not object to the documentary and oral evidence of Mr Dunstan’s statements. Indeed, Inaco itself sought to rely upon one of the documentary exhibits and argued that “[Inaco] does not have to prove the document – it was proved by the tender of [E]xhibit 3.”

Appeal ground (b)

20. Ground (b) of Inaco’s draft notice of appeal contends that the primary judge “erred in that, having found … that insolvency was a question of fact to be determined by the Court, he in fact found … that the determination of the liquidator as to insolvency was ‘well founded on the evidence before him’, rather than determining the issue on the evidence and submissions before the Court.”

21. The primary judge expressed his conclusion about insolvency in the following terms:

“I am satisfied on the evidence that the plaintiff’s conclusion that Management was insolvent, on the balance sheet test from 14 February 2012 and on the cash flow test from at least as early as 1 March 2012, up to the appointment of the Liquidator on 14 August 2012 is well-founded on the evidence before him.”¹⁷

22. Inaco’s argument focussed upon the words “on the evidence before him”. In preceding paragraphs of the reasons the primary judge stated that it was “a question of fact to be determined by the court as to whether or not a company is insolvent at a particular time”¹⁸ and summarised and analysed in detail the evidence of insolvency adduced at the trial.¹⁹ Also, bearing in mind that the primary judge expressed the quoted conclusion in the present tense and referred in the first line to the evidence adduced at the trial, the concluding words “before him” should not be understood as qualifying the primary judge’s finding of insolvency upon the evidence. As the primary judge appreciated, the question was not whether insolvency was established on the evidence before the liquidator at some time before the trial, but whether or not the evidence adduced at the trial proved that Management was insolvent. A fair reading of the reasons as a whole conveys that the primary judge addressed the correct question and answered it in the affirmative.

23. In any event, if the evidence before the liquidator established insolvency the same conclusion must follow upon the evidence at the trial. Ms Spicer’s evidence supported the liquidator’s case, the liquidator adhered to his evidence in cross-examination, and Inaco did not adduce any evidence to contradict the evidence upon which the liquidator had relied in concluding that Management was insolvent.

Appeal grounds (c) and (f)

24. Ground (c) of the draft notice of appeal contends that the primary judge erred because he did not consider the matters raised by Inaco in its submissions about insolvency. There is a related contention in ground (f) that the primary judge’s finding of insolvency “was, having failed to take into account any of the matters contained in the Appellant’s submissions, against the evidence”.

25. Inaco’s written submissions at the trial about insolvency occupied some 63 paragraphs over 17 pages. A paragraph of those submissions summarised Inaco’s lengthy arguments in the following terms, upon which Inaco relied in this application:

“a.The Liquidator has failed to conduct any investigations, or adduce any evidence, as to the financial position of the Group. Without that evidence, it is simply impossible to determine [Management’s] solvency as a matter of ‘commercial reality’ at the time of the Payments;

b. The centrepieces of the Liquidator's evidence as to solvency, being [Management’s] balance sheets and profit and loss statements, are unreliable on their face, and in any event do not provide a full picture of the financial resources available to [Management]; and

c.When one looks at the totality of the indicia of insolvency identified by the Liquidator (which reflect those recognised in ASIC v Plymin (No 1), the majority have simply not been proven at all, with the balance only being the subject of limited proof and by no means sufficient to lead to a conclusion of insolvency.”²⁰

26. As to topic (a), the proposition in the first sentence overlooks the liquidator’s evidence of the statements by Mr Dunstan (perhaps on the premise, which I have rejected, that those statements should not have been admitted in evidence). The primary judge set out that evidence in terms which were not submitted to be inaccurate,²¹ and pointed out that there was no evidence to contradict the liquidator’s conclusions that Mr Dunstan was not in a position to inject any further funds into Management and “it was highly unlikely Management would be able to source funds from any other party.”²² The absence of other investigations about the financial position of the Group could not negate the inference of insolvency which arose from the evidence adduced at the trial.

27. As to topic (b), Inaco’s submissions at trial contended that Management’s financial records were conceded by the liquidator to be “not sufficient and/or accurate”²³ and its balance sheets were inaccurate by the omission of its largest asset (an entitlement to reimbursement from International) and because of conceded inaccuracies in Management’s liabilities to related entities.²⁴ That overstates the effect of the concessions. The liquidator’s report of 24 July 2013 noted that Management originally used “QB” software for its financial records but after 31 January 2012 changed to different software (“the System”). The liquidator referred to difficulties with the System, noting in particular that some data recorded in the System had not been provided to him because of a problem with Management’s server. In that context, the liquidator observed that “the books and records of the Company in my possession are not sufficient and/or accurate”. The liquidator noted that Management’s accountant “was engaged to restore a QB file and transfer some financial records for the period 1 February 2012 to 30 June 2012 from the System”, he attached to his report balance sheets generated from the QB records as at 30 June 2012, and he prepared a summary of Management’s financial position compiled from its records and from the liquidator’s own investigations.²⁵

28. With reference to the liquidator’s statement that Management’s books and records were “not sufficient and/or accurate”, Inaco’s counsel put to the liquidator in cross-examination that the books and records were “not sufficient and/or accurate … to form a view about insolvency”. The liquidator denied that proposition. He observed that the books and records did not comply with s 286 of the Act, but explained that he had attempted to reconstruct the financial position of Management with reference to information available at the time of his appointment and reliable financial information, such as the financial accounts of 30 June 2012 which had been prepared by Management’s accountant. The liquidator acknowledged that Management’s balance sheet as at 30 June 2012 contained unreliable information about loan accounts with related entities, but the liquidator explained that he had not relied upon those accounts. The liquidator did rely upon the balance sheet as at 1 March 2012, and there was no challenge to its accuracy; indeed, the cross-examination of the liquidator upon that balance sheet assumed that it was accurate. Nor did Inaco’s counsel challenge any of the other accounting records upon which the liquidator relied as evidence of insolvency.

Appeal ground (d)

33. Appeal ground (d) contends that the primary judge “erred in that, having found that … the [a]ppellant, being the entity that incurred debt and paid creditors, was provided with funds for that purpose by a related entity as and when required and requested, His Honour thereafter found, at [r]easons paragraph 41, that the [a]ppellant was insolvent as the consequence of a high level of debt and lack of real assets …”.

34. The primary judge found that the liquidator’s inability to find any evidence of an agreement between Management and International about the provision of funds which Management required to pay its creditors was “consistent with moneys being provided as and when required and requested”. Appeal ground (d) suggests an inconsistency between that finding and the primary judge’s conclusion that the applicant was insolvent. That assumes that International was willing and able to supply to Management in a timely way the money which Management required to pay its debts as they fell due. That assumption was not verified by evidence. It is true, as was submitted for Inaco, that International did make some payments to Management which allowed Management to make some payments to Inaco, but the evidence suggested that the amounts of the payments were insufficient to enable Management to comply with the repayment plan it made with Inaco, much less to enable Management to pay the debts of all of its creditors as they fell due. So much is eloquently demonstrated by Ms Spicer’s evidence that, although Management’s suppliers appreciated that it had become usual for it to “pay outside of the terms” suppliers were making phone calls every day for most of the day “because it got beyond the acceptable limit, really”.³²

Appeal ground (e)

35. In ground (e) of the draft notice of appeal, Inaco contends that the primary judge erred “in concluding that the matters contained in the liquidator’s report (Ex 3) were of sufficient probative force to justify the conclusion that the [a]ppellant was, at the time of making the payments the subject of the proceedings, unlikely to be able to source funds to meet its debts and was thereby insolvent”. That ground of appeal refers to the liquidator’s evidence that “[g]iven the lack of real assets and the high level of debts, it appears highly unlikely that the Company would have been able to source funds from any other party”. That evidence was given without objection. It is consistent with Management’s accounting records and Ms Spicer’s evidence. The primary judge did not err in the way suggested in this ground of appeal.

Insolvency: conclusion

36. I have concluded that the reasons were not inadequate and that the applicant has not made out its contentions that the primary judge erred in finding that Management was insolvent. Leave to appeal upon the grounds of appeal relating to the insolvency point should be refused.

Running Account

37. Section 588 FA(3) of the Act provides:

“(3)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;

then:

(c)subsection (1) applies in relation to all the transactions forming part of the relationship as if they together constituted a single transaction; and

(d)the transaction referred to in paragraph (a) may only be taken to be an unfair preference given by the company to the creditor if, because of subsection (1) as applying because of paragraph (c) of this subsection, the single transaction referred to in the last‑mentioned paragraph is taken to be such an unfair preference.

38. Between 20 February and 24 April 2012 Inaco supplied goods on credit to Management in the total value of $31,301.12. At the trial the applicant argued that the amount of any unfair preference should be reduced by that amount by application of the “running account” principle embodied in s 588FA(3) of the Act.³³

39. The primary judge accepted the liquidator’s argument that, upon the evidence, at the relevant times Management’s account with Inaco was not one involving continuing supply and payment but rather one involving the payment of existing debts. The inference was that the first preferential payment ($16,224.07 on 26 March 2012) was made when Management’s account was on hold, and the balance of the payments were part of a payment plan agreed at a time when Management’s account was on hold and Inaco had expressed its intention to cease trading with Management. The primary judge found that the limited future supply was “subordinated to a predominant purpose of recovering past indebtedness”³⁴ and concluded that the liquidator had satisfied his onus of proving that the preferential payments were made to reduce a pre-existing indebtedness rather than as part of a continuing business relationship between Management and Inaco; “the relationship from mid-February 2012 when Mr Rae first chased up Inaco’s January invoice of $215,412.80 appears to be characterised by Inaco’s focus on reducing Management’s indebtedness to it … even if that meant doing some further business with it while payments were being made. … The focus was on the past and not the future. There was no running account.”³⁵

40. The primary judge characterised the further supplies on credit to the value of $31,301.12 as “isolated extensions of credit, ancillary to Inaco’s primary objective of being paid the main debt and to assist Management to make payment” rather than being transactions which evidenced a continuing business relationship,³⁶ referred to s 588FA(3) and Airservices Australia v Ferrier,³⁷ and held that the relationship between Inaco and Management did not involve a running account.

Appeal ground (h)

41. Ground (h) of the draft notice of appeal contends that the primary judge “failed to address or consider the substance of the matters raised by the appellant in its submissions”. Contrary to that ground of the proposed appeal, the primary judge fairly summarised both parties’ submissions,³⁸ explained the principles embodied in s 588A(3) by reference to relevant passages in Airservices Australia v Ferrier,³⁹ and explained why his Honour found the liquidator’s arguments persuasive.⁴⁰

Appeal ground (g)

42. The remaining ground in the draft notice of appeal, ground (g), challenges the primary judge’s findings of fact. Leave to appeal upon this ground should be refused for the following reasons. The applicant requires leave to appeal because the amount of the judgment in the District Court is less than the monetary limit ($150,000⁴¹) of the Magistrates Court’s jurisdiction.⁴² The maximum amount at stake in an appeal upon ground (g) would be $31,301.12 (plus interest). The applicant did not argue that it was appropriate to grant leave to appeal on this ground; its argument for leave focussed upon a suggested procedural unfairness – inadequacy of reasons – in relation to the insolvency point.⁴³ Ground (g) does not involve a contention that the applicant was denied procedural fairness. As the liquidator submitted, the applicant seeks merely to reargue the merits of a reasoned decision.

Disposition and proposed order

43. The applicant initially filed a notice of appeal on 2 March 2015. That notice of appeal was incompetent because of the absence of an application for and grant of leave to appeal. On 13 August 2015 the applicant filed an application for leave to appeal and to file an amended notice of appeal, which added a paragraph concerning leave to appeal. Costs should follow the event, including the costs relating to the incompetent notice of appeal.

44. The following orders are appropriate:

Grant the application for leave to amend the notice of appeal in the form which is annexure “A” to the application filed on 13 August 2015.

Refuse the application for leave to appeal.

Order that the applicant pay the respondent’s costs of the application for leave to appeal, including the costs of responding to the notice of appeal filed on 2 March 2015.

45. PHILIPPIDES JA: I agree with the orders proposed by Fraser JA for the reasons stated by his Honour.

46. ANN LYONS J: I agree with the reasons of Fraser JA and the orders he proposes.

Footnotes

1. Corporations Act 2001 (Cth), s 588FA(1)(b) ↩

2. See Corporations Act 2001 (Cth), s 95A ↩

3. Crema (Vic) Pty Ltd v Land Mark Property Developments (Vic) Pty Ltd (Dodds-Streeton J) [2006] VSC 338*.* ↩

4. Williams (as liquidator of Scholz Motor Group Pty Ltd (in liq)) v Scholz & Anor [2008] QCA 94 at [109] – [110]. ↩

5. Morton & Anor v Rexel Electrical Supplies Pty Ltd [2015] QDC 49 at [37]. (Citations omitted.) ↩

6. (2015) 104 ACSR 528; [2015] FCA 319 at [24] – [27], [30]. ↩

7. This was the first payment in issue. The primary judge found that it was paid on 26 March 2012. ↩

8. [2015] QDC 49 at [25]. ↩

9. [2015] QDC 49 at [9]. ↩

10. Plaintiff’s Final Submissions, [11]; AB 419. ↩

11. Transcript, 1-16; AB 16. ↩

12. Transcript, 1-19 – 1-20; AB 19-20. ↩