Roufeil v Gliderol International Pty Limited

FACTS 3 The basic facts are not in dispute. 4 In December 2006 Gliderol, a supplier to Austech, ceased its trading relationship with Austech. According to Gliderol's records Austech had not paid Gliderol's invoices as due and owing from 30 September 2006. 5 Gliderol filed a statement of claim against Austech on 9 February 2007. On 23 April 2007 Gliderol obtained a judgment in its favour in the sum of $29,477.17 and issued a statutory demand for payment of that amount. Austech did not pay the amount and Gliderol commenced winding-up proceedings against Austech on 12 July 2007. 6 On 28 November 2007 the Australian Taxation Office served a garnishee notice on one of Austech's banks, Macarthur Credit Union Ltd, in respect of a tax debt due and owing in the sum of $109,652.82. 7 Pursuant to an agreed payment of $21,700 by instalments, Austech paid Gliderol $17,000 on 1 February 2008. On 4 February 2008, and as agreed, Gliderol's winding-up proceedings against Austech were dismissed. Austech paid the second instalment of $4,700 on 27 March 2008. 8 On 17 March 2008, GIO General Ltd served a statutory demand on Austech for payment of unpaid premiums for workers' compensation insurance in the sum of $2,296.64. The statutory demand was not satisfied. 9 On 6 May 2008 the Workers Compensation Nominal Insurer commenced winding-up proceedings against Austech. Austech was wound up and Mr Roufeil was appointed liquidator of Austech on 10 June 2008. 10 The presentation of accounts and statement filed by Mr Roufeil with the Australian Securities and Investment Commission on 22 December 2010 shows Austech's debts to unsecured creditors in the amount of $357,762 and the total money Austech held as $651.64. The Australian Taxation Office has also lodged a proof of debt for $129,126.59.

STATUTORY PROVISIONS 11 By s 588FE(2) of the Corporations Act 2001 (Cth) (the Corporations Act), if a company is being wound up, a transaction is a voidable transaction if it is an "insolvent transaction" of the company and it was entered into during the six months ending on the "relation-back day". 12 Under s 588FC of the Corporations Act, a transaction of a company is an insolvent transaction if it is an "unfair preference" given by the company and was entered into at a time when the company is insolvent. 13 Section 588FA(1) of the Corporations Act provides that a transaction is an "unfair preference" given by a company to a creditor of the company if the company and the creditor are parties to the transaction, and the transaction results in the creditor receiving from the company, in respect of an unsecured debt that the company owes to the creditor, more than the creditor would receive from the company in respect of the debt if the transaction were set aside and the creditor were to prove for the debt in the winding-up of the company. 14 Section 95A of the Corporations Act deals with solvency and insolvency as follows: (1) A person is solvent if, and only if, the person is able to pay all the person's debts, as and when they become due and payable. (2) A person who is not solvent is insolvent. 15 Under s 9 of the Corporations Act the "relation-back day", in relation to the winding-up of a company, is (insofar as relevant to Austech) the date on which the winding-up application was filed, being in this case 6 May 2008. Hence, the period of six months ending on the relation-back day as referred to in s 588FE(2) of the Corporations Act, for Austech, is the period between 6 November 2007 and 6 May 2008. 16 Section 588E of the Corporations Act deals with presumptions in a "recovery proceeding". A "recovery proceeding" is defined to include an application under s 588FF of the Corporations Act by a company's liquidator in respect of a voidable transaction. By s 588E(3), if a company is being wound up and the company is proved or must be presumed under s 588E(4) or (8) to be insolvent at a particular time during the 12 months ending on the relation-back day, it must be presumed that the company was insolvent throughout the period beginning at that time and ending on the relation-back day. Section 588E(4) concerns a company's failure to keep proper financial records. Section 588E(8) concerns proof of matters in another recovery proceeding relating to the company. For Austech, the period of 12 months ending on the relation-back day as referred to in s 588E(3) of the Corporations Act is the period between 6 May 2007 and 6 May 2008. 17 Section 588FF(1) of the Corporations Act identifies the orders a court may make on the application of a liquidator if satisfied that a transaction is voidable. Those orders include an order for repayment of an amount equal to the amount the company paid under the transaction (s 588FF(1)(a)). 18 Section 588FG(2) of the Corporations Act provides a defence in the following terms: (2) A court is not to make under section 588FF an order materially prejudicing a right or interest of a person if the transaction is not an unfair loan to the company, or an unreasonable director-related transaction of the company, and it is proved that: (a) the person became a party to the transaction in good faith; and (b) at the time when the person became such a party: (i) the person had no reasonable grounds for suspecting that the company was insolvent at that time or would become insolvent as mentioned in paragraph 588FC(b); and (ii) a reasonable person in the person's circumstances would have had no such grounds for so suspecting; and (c) the person has provided valuable consideration under the transaction or has changed his, her or its position in reliance on the transaction.

Insolvency 19 The evidence of insolvency on which the plaintiffs relied included: - (i) a series of dishonoured cheques drawn by Austech on its Macarthur Credit Union account between 2 and 27 July 2007 for relatively substantial sums of money, (ii) the non-payment of Gliderol's invoices as and when due since 30 September 2006, the subsequent failure to pay Gliderol's statutory demand and the consequent institution of Gliderol's winding-up proceedings, and the agreement for Austech to pay its debt to Gliderol by instalments, (iii) the Australian Taxation Office's garnishee notice of 28 November 2007 in respect of a tax debt of $109,652.82, (iv) the winding-up proceedings commenced by the Workers Compensation Nominal Insurer on 6 May 2008, (v) arrangements with other creditors for part-payment of debts in March and April 2008, and (vi) Austech's failure to keep proper financial records as required. 20 The plaintiffs relied on the summary of principles set out in the headnote to the decision of Palmer J in Southern Cross Interiors Pty Ltd (in liq) v Deputy Commissioner of Taxation [2001] NSWSC 621, as reported in (2001) 39 ACSR 305. Although varied on appeal in respect of different issues in Deputy Commissioner of Taxation v Clark (2003) 57 NSWLR 113; [2003] NSWCA 91, the principles stated in respect of insolvency in the headnote remain. They include the following (case citations excluded): (i) Whether a company is able to pay its debts as they become payable, under s 95A(1), is a question of fact to be ascertained from a consideration of the company's financial position as a whole. (ii) Whether a company's position as a whole reveals surmountable temporarily illiquidity, or insurmountable endemic illiquidity resulting in insolvency, requires the court 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 this indulgence does not always result in the company thereby having a cash or credit resource which can be taken into account in determining solvency. (iii) The commercial reality that creditors will normally allow some latitude for payment of their debts does not, in itself, warrant a conclusion that the debts are not payable at the times contractually stipulated and have become debts payable only upon demand. (iv) In assessing solvency the court acts upon the basis that a contractual debt is payable at the time stipulated for payment in the contract, unless there is evidence to the court's satisfaction that: (a) there has been an express or implied agreement between the company and the creditor for an extension of time for payment; or (b) there is a course of conduct between the company and the creditor sufficient to give rise to an estoppel preventing the creditor from relying upon the stipulated time for payment; or (c) there is a well-established and recognised course of conduct in the industry in which the company operates, or as between the company and its creditors as a body, whereby debts are payable at a time other than that stipulated in the creditors' terms of trade. (v) It is for the party asserting that a company's contract debts are not payable at the times contractually stipulated to make good that assertion by satisfactory evidence. […] 21 Gliderol did not admit that Austech was insolvent when the disputed payments were made. According to Gliderol: (1) Austech had multiple bank accounts and thus multiple sources of funds. For example, neither disputed payment was made from Austech's Macarthur Credit Union account. The payment of $17,000 was by way of bank cheque from St George Bank, and thus Austech must have had available to it sufficient funds to obtain that bank cheque on 1 February 2008. (2) Given Austech's multiple sources of funds, the existence of dishonoured cheques on one or other account did not prove Austech's insolvency. (3) The winding-up application made by Gliderol on 12 July 2007 on the basis of Austech's failure to meet the statutory demand created a presumption of insolvency only for the purpose of the winding-up application under s 459P of the Corporations Act but not otherwise. So much is clear from the words of s 459C(1) of the Corporations Act, which provides that the section has effect "for the purposes of" certain nominated provisions including s 459P. (4) The payment by instalments agreed between Gliderol and Austech did not prove Austech's insolvency. Austech paid the agreed amounts as and when required. 22 I accept Gliderol's submissions about the limited purposes for which insolvency is presumed by reason of Gliderol's winding-up application. 23 Nevertheless, considering Austech's financial position as a whole, it is apparent that Austech was in financial difficulty from at least September 2006 when it ceased paying Gliderol's invoices. By early July 2007 there is further evidence of significant financial difficulty in the form of a series of dishonoured cheques for relatively large sums of money. Although I accept Gliderol's submission that these facts do not prove insolvency given the different bank accounts to which Austech had access and the lack of information about those accounts, those facts are not to be considered in isolation. According to Mr Roufeil (para 10 of his affidavit of 29 March 2011), Austech's books and records at the time he undertook his inspection were incomplete and in such a poor state that a proper set of financial statements could not be prepared without an extensive amount of reconstruction and forensic accounting skill and effort. Leaving aside the effect of s 588E(3) and (4) of the Corporations Act (the latter of which does not apply in this case due to s 588E(7)), this lack of proper financial records may be considered in assessing the weight to be given to Austech's potential other sources of money. Further, by 28 November 2007 the Australian Taxation Office had served a garnishee notice in respect of a tax debt of $109,652.82. As Mr Roufeil said, the tax debt must have accrued well before 28 November 2007 to have resulted in the service of the garnishee notice. When these facts are considered together with the series of dishonoured cheques and the amounts involved, as well as the failure to pay Gliderol's invoices since 30 September 2006 and the failure to satisfy Gliderol's statutory demand, I am satisfied that Austech, as at 12 July 2007 (the date on which Gliderol's winding up application was made), could not pay its debts as and when they fell due and was thus insolvent. 24 By s 588E(3) of the Corporations Act Austech is thus presumed to have been insolvent throughout the period between 6 May 2007 and 6 May 2008, including when it made the two payments to Gliderol on 1 February and 27 March 2008. Those payments were an "unfair preference" as defined in s 588FA(1) of the Corporations Act as Gliderol received more than it otherwise would have received in the winding-up of Austech. The payments were therefore "insolvent transactions" within the meaning of s 588FC, as they were unfair preferences given by Austech and were entered into at a time when Austech was (presumed to be) insolvent. Finally, each of the payments is also a voidable transaction as defined in s 588FE(2) of the Corporations Act as each was an insolvent transaction of the company and was entered into during the six months ending on the relation-back day. 25 For these reasons, unless Gliderol establishes its defence, an order may be made for Gliderol to repay an amount equal to the amount Austech paid under the voidable transactions (s 588FF(1)(a) of the Corporations Act).

Gliderol's defence 26 Gliderol called evidence from Gail Watt, its current credit manager. Ms Watt reviewed Gliderol's records. Ms Watt was satisfied that those records contained a complete transaction history between Gliderol and Austech. Based on her review of the records Ms Watt concluded that at the time the payments were made ($17,000 on 1 February 2008 and $4,700 on 27 March 2008) neither she nor (so far as she is aware) anyone else at Gliderol had reasonable grounds to suspect that Austech was insolvent or would become insolvent as a result of the payments. According to Gliderol, while it accepted the onus of proving its defence, this evidence was sufficient to place an evidentiary burden on Austech to prove to the contrary. 27 I do not accept Gliderol's submissions on this issue. The question remains whether I am satisfied, on the whole of the evidence, that the defence in s 588FG(2) of the Corporations Act has been established. The problem for Gliderol is that the evidence is insufficient for me to reach this conclusion. Section 588FG(2) imposes both a subjective and an objective requirement (Cook's Construction Pty Ltd v Brown (2004) 49 ACSR 62; [2004] NSWCA 105). As to the subjective requirement, Ms Watt was not Gliderol's credit manager (nor, apparently, employed by Gliderol) at the relevant times. There is no evidence from which it may be inferred that Gliderol's former credit manager was unable to give evidence. Yet no inquires were made of the former credit manager. When this is considered together with the fact that management at Gliderol with whom Ms Watt had discussions before giving her evidence were both available to be called and had personal knowledge of the dealings at the time between Gliderol and Austech, it becomes apparent that the basis for Ms Watt's conclusions about Gliderol's lack of reasonable grounds to suspect Austech's insolvency (her review of the files) is insufficient. Moreover, and as Austech submitted, Ms Watt's evidence in this regard is nothing more than an assertion in terms of the statutory defence. As to the objective requirement, a reasonable person in Gliderol's position at the time the payments were made would have suspected Austech's insolvency. As noted above, Gliderol ceased its commercial relationship with Austech in December 2006. It may be inferred that it did so because Austech had not paid any of its invoices (even in part) since 30 September 2006. There is no suggestion that Gliderol extended the due dates for payment nor that Austech had any proper reason to avoid payment. After Gliderol obtained judgment in its favour in respect of these invoices, Austech did not satisfy Gliderol's statutory demand. Although Austech agreed to pay its debt in instalments and made the required payments (in the face of the winding-up proceedings), the history of Gliderol's dealings with Austech presented grounds which would have led a reasonable person in Gliderol's position to suspect Austech's insolvency.

Conclusions 28 The plaintiffs have established that the payments to Gliderol of $17,000 on 1 February 2008 and $4,700 on 27 March 2008 are voidable transactions. As Gliderol's defence under s 588FG(2) has not been established, the power to make orders as set out in s 588F(1) of the Corporations Act is available. Nothing in the circumstances of this case suggests that orders for payment of an equivalent sum should not be made as contemplated by s 588FF(1)(a), together with interest. Costs should follow the event. Directions will be made to the parties to confer and submit proposed orders reflecting these reasons for judgment. I certify that the preceding twenty-eight (28) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jagot.