Sutherland & Anor v Lofthouse & Anor [2007] VSCA 197

1 This is an appeal from a judgment given in the County Court at Melbourne on 9 May 2006. The judge held that payments totalling $107,243.61 made by Colac Stockfeeds Pty Ltd ("the company") to the appellants in the period between 17 May 2002 and 4 October 2002 were unfair preferences within the meaning of s 588FA of the Corporations Act 2001, and thus voidable transactions under s 588FE of the Act. His Honour ordered that the appellants pay the respondents the sum of $107,243.61 with interest in the amount of $5,898.40 pursuant to s 588FF of the Act.

**2 At relevant times, the company carried on a business of blending and selling stock feeds. As part of its business, it purchased additives for livestock feeds from a number of suppliers including the appellants. The appellants supplied on terms of payment within 30 days but the company rarely if ever complied with that arrangement.

3 Arthur Roy Lister was the pre-mix and additives manager of the company. He gave evidence that when he first joined the company in March 2001 he adopted the practice of paying creditors in amounts exactly equal to outstanding invoices. But he said that he was later directed by company management to pay a round figure approximately equal to the balance of the outstanding account. There was not enough money to pay all suppliers' accounts on the first day of the month. He was under instructions, therefore, to allocate the available funds between suppliers with the object of "spreading out the cash flow and basically giving everybody some money". In the result, some suppliers tended to get paid half their monthly allocation in the first and third weeks of the month and others tended to get paid something in the second week and more in the next month. So, for example, if the balance on an outstanding account was approximately $10,000, Mr Lister said that he might pay $5,000 on account in the first week of the month and then later in the month pay another $5,000 when and if more money became available. Mr Lister added that there were a number of feed mills doing the same thing at various times when the dairy farmers dried off their cows and had no milk cheques coming in. At such times, he said, getting paid was "like getting blood out of a stone" and that even when the cows started milking again the dairy farmers were paying 90 days and it would taken them another six months to get back to 30 days.

4 Mr Lister recalled that while he was working for the company there was at some point a problem with the appellants' account being "old and overdue". He said that on one occasion in July 2002 he had a discussion with the first appellant, Mr Sutherland, about the account and that Mr Sutherland said that he wanted at least the value of that product about to be supplied to come off the account before the goods were supplied. Mr Lister said that he complied with that request "because we needed the product".

5 The first appellant, Mr Sutherland, who appeared unrepresented below, also gave evidence. He said that "we never formalised any trading terms with Colac Stockfeeds" and simply worked on the unspoken assumption that trading terms were the usual trading terms in the industry which were 30 days. But he said that:**

"Usually the type of payment we got was at the end of 30 days if we still had money outstanding we would ring them up and mention that money was outstanding and they would then pay within that following month. So for most of our working relationship with Colac Stockfeeds the account was roughly within 60 days."

**6 Mr Sutherland added that there was a sudden increase in the account level early in 2002 when the appellants increased their level of business with the company. He explained that it was part of the appellants' business plan to develop business in the region. From that time on, he said, the appellants started supplying Colac Stockfeeds with "roughly $20,000 worth of goods" each month and, since payment was usually received within 60 days, "we had an account with Colac Stockfeeds which was usually in the order of $40,000".

7 Mr Sutherland also deposed that there may have been one or two times:**

"[W]hen if we took our eye off the ball and we supplied more than what we received it blew out to the 90 days and that's most likely to be the time when you will see the maximum account level at $60,000. Usually upon drawing this to their attention they would have attempted to rectify that."

But Mr Sutherland could not recall the conversation with Mr Lister in July 2002. He observed that:

"Most likely, the specific sequence of transactions indicated by the plaintiffs earlier, the counsel for the plaintiff, was at that particular case we ourselves would have reached the limit of our account with the supplier and in order for us to be able to supply the goods that were required by Colac Stockfeeds we needed money to be forwarded immediately so that then we could purchase those goods required for that purpose."

Mr Sutherland added, however, that "Any conversations I ever had with Mr Sarah and with Mr Lister were always good nature[d]."

**8 On 17 October 2002 receivers were appointed to the company and on 14 November 2002 the respondents were appointed as voluntary administrators of the company. Then on 12 June 2003 it was resolved that the company be wound up under s 439A of the Act and that the respondents be appointed as liquidators pursuant to s 439C(c) of the Act. As the judge said, 14 November 2002 was thus the "s 513C day" in relation to the administration of the company and therefore, under s 513B, the day on which the winding up was taken to have commenced. Consequently, for the purposes of s 588FE(2), the six month period ending on that day was taken to have begun on 14 May 2002.

9 The second respondent, Mr Cauchi, gave evidence that he had examined the company's financial records and prepared an insolvency investigation report, an analysis of its cheque account, and profit and loss statements and balance sheets. They showed that for the year of income ended 30 June 2001, the company incurred an operating loss of $1.1 million. For the year of income ended 30 June 2002 it had returned an operating profit of approximately of $76, 520. But in the three months preceding the appointment of receivers, it had reverted to an operating loss of approximately $50,000. As at 8 May 2001 the company had a tax liability of $333,705.34 which it proposed to pay by weekly instalments of $10,000. But as it continued to incur further tax liabilities it failed to meet the Australian Tax Office terms of payments. According to Mr Cauchi's calculations, the company's liquidity ratio between 1999 and 2002 had fluctuated between 0.4 and 0.7, which was to be compared with an acceptable level of between 1.1 and 1.2, and there were 20 dishonoured cheques totalling $170,960.94 and a further 30 dishonoured cheques totalling $210,638.02 (which were indicative of the company operating outside its approved banking facilities while suffering from cash flow difficulties). In Mr Cauchi's opinion, the company was undercapitalised from the outset, and the position had been exacerbated by expansion through acquisitions, to the point where by mid 2001 the company was unable to meet its debts as they fell due. The claims of unsecured creditors in the winding up of the company totalled $10.5 million and Mr Cauchi expected an ultimate dividend of less than one cent in the dollar.

10 The details of the account between Colac Stockfeeds and the appellants are set out in Schedules 1 and 2 to these reasons. As appears from the statement of account, and was admitted, between 17 May 2002 and 4 October 2002 the appellants received payments from the company totalling $106,678.14 in respect of debts owing for goods supplied. During that period, the company's indebtedness to the appellants peaked at $60,341.23 on 27 August 2002. But by 30 October 2002 the level of indebtedness had reduced to $43,012.21.

11 The judge held, however, that three invoices, Invoices 21016 and 21017 each dated 30 October 2002 and Invoice 21015 dated 29 September 2002, should not be taken into account, because they were issued subsequent to the appointment of the receivers on 17 October 2002. If so, the closing balance of the account would be $38,857.53.**

**12 Based on the evidence summarised above, the judge found that the company was insolvent "probably from April, May 2001 and indisputably from January 2002", and that each of the payments made to the appellants between 17 May 2002 and 4 October 2002 was an unfair preference.

13 The judge further rejected the appellants' claim to be entitled to a defence under s 588FG(2) of the Act, on the basis that:**

"Within that period [scil. between 17 May 2002 and 4 October 2002[1]], with one exception, all the payments were in round figures and did not relate to any particular invoice. The exception was that on 5 July 2002 the company made a payment to the defendants of $11,678.14. The company had placed two orders for boxes of poison on 3 July 2002 and the first defendant insisted to Mr Lister on payment therefor, before the product was delivered. The sum of $11,678.14 represents payment for that product and it is reflected in invoices 20701 and 20702. The normal terms of trading between the company and the defendants were that payment for goods was to occur within 30 days of the date of invoice. The first defendant said that that rarely occurred and that mostly the company's accounts were paid in 60 days."[2]

"On 27 February 2002 the company's indebtedness to the defendants was $35,216.33. On that date the company made an arrangement with the defendants whereby it would attempt to transfer $6,000 per week in reduction of the outstanding balance. Whilst some payments of $6,000 were made, the sums paid thereafter varied with round figure sums both below and above $6,000 being paid."[3]

"...the arrangement to pay round figures of $6,000 was for the predominant purpose of discharging past indebtedness. Further, the demand for payment before delivery in July 2002 is inconsistent with, and an interruption to any mutual assumption and not for the purpose of inducing further supply."[4]

"The defendants varied the terms on which they expected to be paid by the company. Apart from the occasion in July 2002 when payment was demanded before goods were delivered, on 3 April 2002, invoice 20403, the terms were stated as 14 days: on 19 April 2002, invoice 20412, they were stated as 30 days: on 9 May 2002, invoice 20502, they were stated as due on receipt: on 25 June 2002, invoice 20621, they were stated as due on receipt and on 3 July 2002, invoice 20702, they were stated 30 days from invoice date."[5]

"...the fact that the defendants changed the terms [of payment] from 14 days to payment on receipt and then to 30 days, and in July 2002 to payment before delivery, should have created the requisite suspicion or provided reasonable grounds for that suspicion."[6]

"From the outset the defendants were aware of the company's reputation as a slow payer. There was regular contact between the first defendant and members of the company concerning payment and the company sent a number of emails concerning payment to the defendants, one of which evidenced the promise to reduce the outstanding debt by regular weekly payments of $6,000 in lieu of payment of invoice amounts. The defendants knew that promise was not kept."[7]

"In the context of the trading relationship between the parties, that breach should have created the requisite suspicion or provided reasonable grounds for that suspicion, especially when within two weeks of the promise the company's indebtedness actually increased."[8]

"I accept Mr Sutherland's evidence that the defendants may have acted naively, but while he described himself as an animal nutritionalist, he and his wife were in business selling a product for money. When the requisite money was not forthcoming from the company and the indebtedness increased, alarm bells should have sounded loudly.

Whilst I am suspicious that the defendants by reason of the combination of the matter referred to had ample reasonable grounds for suspecting the company was insolvent at least from mid 2002, I am satisfied that they cannot establish on the balance of probabilities that a reasonable person in their circumstances would have no grounds for suspecting that the company was insolvent. Accordingly, the good faith defence is not made out..."[9]

14 His Honour held as well that s 588FA(3) did not apply because his Honour considered that the arrangement to pay round figures of $6,000 was for the predominant purpose of discharging past indebtedness and because the demand for payment before delivery in July 2002 was inconsistent with, and not for the purpose of inducing further supply."[10]

Section 588FG(2)

1"> 15 Section 588 FG(2) of the Act provides that:

"(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."

**16 The effect of the section is to put the burden on the creditor of establishing both the subjective and objective legs of the defence. It follows that in this case the burden was on the appellants to establish both that they had no reasonable grounds for suspecting that the company was insolvent and that a reasonable person in their circumstances would not have had reasonable grounds for so suspecting.[11] "Suspicion" for that purpose means a mistrust of the company's ability to pay its debts as they become due and of the effect which acceptance of a payment would have as between the appellants and the company's other creditors.[12]

17 The appellants attack the judge's conclusion under s 588FG(2) on a number of grounds. To begin with, they say that it depended upon his finding that the payment of $11,678.14 made by the company to the appellants on 5 July 2002 was for two boxes of poison ordered on 3 July 2002 for which the first appellant had insisted that the appellants be paid before delivery. In the appellants' submission that finding was critical to the outcome of the case because his Honour treated it as evidence of a lack of belief by the appellants as to the solvency of the company, and also as an interruption to what would otherwise have been seen as a running account. The appellants contend that the finding and so much of his Honour's reasoning as was based on it represented an uncritical and unwarranted acceptance of submissions made by counsel for the respondent below that the payment of $11,678.14 reflected a refusal on the appellants' part to supply further product to the company without payment in advance. In the appellants' submission, the finding should be rejected.

18 I do not accept the argument. Evidently, the judge's reasoning was to some extent based on his finding that the payment of $11,678.14 on 5 July 2002 was for two boxes of poison for which the appellants insisted be paid before delivery. But in my view the finding was supported by the evidence. It appears to have rested principally on the following testimony given by Mr Lister, to some of which I have already referred, in the course of his examination in chief:**

"[Counsel]: You will - it speaks for itself but the account from the start of 2002, payments are made on each occasion, in round figures?---Yes.

[Counsel]:If you look down, $6,000, $6,000, $5,000?---Yes.

[Counsel]: Until we get to the top of schedule 2, where there's an opening balance of $30,385.03. There is an invoice - two invoices dated 3 July, which we will turn to in a moment, numbered - at least one of them, 20701, and both of them for $5,962, and then immediately below, on 5 July, is a payment of $11,678.14. If I tell you $5,962, double, equals $11,678 or thereabouts, what can you tell me; do you know anything about that payment?---Well, those payments - the majority of the product we were buying was the Schedule 4 Poisons, antibiotic, (indistinct), and those amounts equate to two and four boxes of that product.

[Counsel]: Do you know why the payment was made out of the ordinary run, by now, of round figures; why was there a payment for those boxes on the knocker?---Because we needed the product and Mr Sutherland would have said, 'Well, I want at least the value of that product that you are receiving to be paid to come off the account before you get the goods.'

[Counsel]: Can I just clarify, 'would have said', or did say?---Did say.

[Counsel]: So you are saying that he stipulated that that account, those boxes had to be paid for or what?---Or we wouldn't have got the goods."

19 It was also supported by this evidence given by the first appellant in chief:

"First of all in evidence I would like to say I don't recall any specific conversation with Mr Lister in regards to trading terms in the specific case. Most likely, the specific sequence of transactions indicated by the plaintiff's counsel earlier, the counsel for the plaintiff, was at that particular case we ourselves would have reached the limit of our account with the supplier and in order for us to be able to supply the goods that were required by Colac Stockfeeds we needed monthly to be forwarded immediately so that then would could purchase those goods required to that purpose. As I said, I don't recall any specific conversation with Mr Lister."

**20 Counsel for the appellants criticises the evidence of Mr Lister as being the result of what counsel termed a false suggestion that the sum of "$5,962, double, equals $11,678 or thereabouts"; whereas of course twice $5,962 is $11,924, and there were no two invoices in amounts which summed to $11,678. Counsel argues that, given the falsity of that suggestion, the evidence of Mr Lister should be seen as hypothetical and consequently that the first appellant's response to Mr Lister's testimony should also be treated as hypothetical. Counsel further prays in aid that the only relevant documentary evidence of the appellants seeking payment on delivery was an invoice No. 20502 of 9 May 2002[13] for $6,563.92, which bore on its face the notation: "Due on rec...", but was stamped as having been paid on 28 June 2002, and another invoice, No. 20621 of 25 June 2002[14] for $2981, which also bore on its face the notation "Due on rec..." but apparently was not paid before 28 June 2002.[15] Those two invoices totalled to $9,544.92 and the payment made on 28 June 2002[16] was for a rounded $8,000. So, in counsel's submission, in effect there was really no evidence that payment on delivery was ever insisted upon or made in practice.

21 In my view those submissions are not persuasive. As will be seen in the passage of the transcript set out above, the impugned question went no further than a suggestion that twice the amount of $5,962 was $11,678 "or thereabouts". In my view it was supported by the close temporal connection between the two invoices of $5,962 and the payment of $11,678.14. Furthermore, Mr Lister was an accountant who was responsible for the payment of the accounts in question. There is no reason to doubt that that he well understood the effect of the documents to which he was referred.

22 The appellants represented themselves in the proceeding below, and therefore I do not put much store on their failure to seek by cross-examination to contradict Mr Lister's version of events. But if Mr Sutherland really believed that the position was not as Mr Lister deposed, it is to be expected that he would have said so in his own evidence. As it was, the first appellant twice said in evidence that he did not dispute Mr Lister's recollection of the conversation, and only once that he disputed the detail of it, and his surmise that he had asked for immediate payment in order to pay his own suppliers was in essential respects corroborative of Mr Lister's version of the conversation. Indeed, on one possible view of the matter, it also provided a logical explanation of the difference between the invoice total of $11,924 and the amount of $11,678 that was paid: namely, that $11,678 was the amount which the appellants needed to pay to their suppliers in order to obtain supply of the goods to which the invoices totalling $11,924 related.

23 In any event, unless Mr Lister were mistaken in what he said, I do not see that the fact of the difference creates the sort of problem for which the appellants now contend. Given that it is only $300.00, I regard the close temporal and quantitative correspondence between the invoice total and the amount paid as strong support for Mr Lister's evidence. Taken in conjunction with that evidence and the first appellant's testimony, it appears to me to provide a sound basis for the judge's finding that there was a demand for payment before delivery in July 2002.

24 Turning then to the invoices Nos. 20502 and 20621 of May and June 2002, so far from detracting from the probability that there was a requirement for payment on delivery in July 2002, they appear to me to make more likely that Mr Lister's recollection was accurate. They show that there were other occasions on which the appellants demanded payment on delivery, and that suggests a propensity which increases the probability that the appellants made the demand for payment in advance of delivery referred to by Mr Lister. It is true, as counsel for the appellants pointed out, that the demands for payment on delivery in those two earlier invoices were not met as such. As appears on the face of the documents, the goods were delivered but payment did not follow until more than a month later, and then only in an amount less than the invoice total. But it is enough to support Mr Lister's evidence concerning the requirement for payment on delivery in July 2002 that the earlier invoices demonstrated previous demands for payment on delivery. It was not suggested that the failure to comply with the demands in May and June 2002 implied that there was also a failure to comply with the demands in July 2002.

25 The appellants next attack the judge's conclusion under s 588FG(2) as depending on his Honour's finding that the rounded-off payments of $6,000 were made for the predominant purpose of discharging past indebtedness. In counsel's submission, there was not any or sufficient material to support that finding either.

26 I do not accept that submission. As the judge observed, the company sent a number of emails to the appellants concerning payment of the appellants' outstanding account and in one of those, an email of 27 February 2002, the company gave an assurance that it would endeavour to reduce the outstanding account balance by weekly payments of $6,000, as follows:**

"A payment of $6,000.00 was made to your account today via EFT. Please allocate to the oldest invoices. We will be attempting to transfer this amount weekly to complete the current balance outstanding of $35,216,63."

That presents plainly as an undertaking to reduce past indebtedness by payments of $6,000.

**27 Counsel for the appellants criticises the judge's finding that the appellants varied the terms of payment from time to time. In counsel's submission, the finding ignores evidence that the parties disregarded the terms of payment stated on the invoices and in effect went along on a basis more or less of payment within 60 days.

28 In my view that criticism is also unwarranted. Elsewhere in the reasons for judgment his Honour took express notice of the fact that "The normal terms of trading between the company and the defendants were that payment for goods was to occur within 30 days of the date of invoice The first defendant said that that rarely occurred and that mostly the company's accounts were paid in 60 days."[17] The point about the appellants changing or purporting to change the terms of payment printed on their invoices was that it suggested suspicion on the appellants' part that the company was insolvent or that it may become insolvent.

29 Perhaps there is a degree of difficulty in the way in which the judge expressed his reasoning on the point. It will be recalled that his Honour described the fact of the appellants changing the terms of payment as something which "should have created the requisite suspicion or provided reasonable grounds for that suspicion". But plainly enough, what the judge intended to convey was that the circumstances which resulted in the change of terms of payment were grounds for a reasonable person in the position of the appellants to suspect that the company was insolvent.

30 As has been seen, the onus under s 588FG(2) was on the appellants to show both that they did not have reasonable grounds for suspecting that the company was insolvent and also that a reasonable person in the appellants' circumstances would not have had such grounds for suspecting.[18] The judge found that there was reason to suspect that the appellants were suspicious that the company was insolvent - which I take to mean that his Honour was not satisfied that the appellants were not suspicious that the company was insolvent - and that a reasonable person in the appellants' position would have had grounds for suspecting that the company was insolvent. With respect, I am not disposed to disagree with those conclusions.

31 As the judge said, the appellants knew that the company was a slow payer, even if that condition were endemic to the industry. There were repeated communications between Mr Sutherland and Mr Lister as to bringing the state of the account into line. There was also the assurance, apparently sought and given in February 2002, to bring the account into line by payments of $6,000. And to that must be added the fact that the company appears to have struggled to comply with that assurance; the fact that on at least two other occasions the appellants appear to have demanded payment on delivery; and the fact that those demands were not complied with until at least some days after delivery. I doubt there is much significance in the several changes in the terms of payment printed on the invoices. The timings bear no apparent relationship to movements in the levels of outstanding indebtedness. But whatever the appellants may have thought about the solvency of the company, I do not disagree with the judge that a reasonable person in the appellants' position would have mistrusted the company's ability to pay its debts as they became due and would have suspected the effect which acceptance of a payment would have had as between the appellants and the company's other creditors.**

Section 588FA(3)

**32 I take a different view of the judge's conclusion that the impugned payments were not made as under a running account and therefore that s 588FA(3) of the Act did not apply. In my view it did.

33 Section 588FA(3) provides that:**

(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;

(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."

34 As Ormiston JA explained in V R Dye & Co v Peninsula Hotels Pty Ltd (in liq) & Anor,[19] the section represents an application to the winding up of companies in insolvency of the implied exception as to running accounts to s 122 of the Bankruptcy Act 1966 (C'th). As such it embodies the principles reflected in Richardson v Commercial Banking Co of Sydney Ltd,[20] Queensland Bacon v Rees[21] and Airservices Australia v Ferrier.[22] That means that, in determining whether a payment constitutes a preference for the purposes of s 588FA(3), the effect of a payment on the other creditors must be ascertained objectively, such that:

"If a payment is part of a wider transaction or a 'running account' between the debtor and the creditor, the purpose for which the payment was made and received will usually determine whether the payment has the effect of giving the creditor a preference, priority or advantage over other creditors. If the sole purpose of the payment is to discharge an existing debt, the effect of the payment is to give the creditor a preference over other creditors unless the debtor is able to pay all of his or her debts as they fall due. But if the purpose of the payment is to induce the creditor to provide further goods or services as well as to discharge an existing indebtedness, the payment will not be a preference unless the payment exceeds the value of the goods or services acquired. In such a case a court, exercising jurisdiction under s 122 of the Bankruptcy Act, looks to the ultimate effect of the transaction. Whether the payment is or is not a preference has to be 'decided not by considering its immediate effect only but by considering what effect it ultimately produced in fact'".[23]

35 The essential feature of a running account is that it predicates a continuing relationship of debtor and creditor with an expectation that further debits and credits will be recorded. Consequently, as Dawson, Gaudron and McHugh JJ said in Airservices, the record of the account will usually provide a solid ground for determining whether the parties conducted their dealings on the basis that they had a continuing relationship and that goods or services would be provided and paid for on the credit terms ordinarily applicable in the creditor's business. On that basis, the court will usually be able to conclude whether the parties mutually assumed that from a business point of view each particular payment was connected with the subsequent provision of good or services in that account.[24] But it is enough if on the facts of the case however discerned:

"...the court can feel confident that implicit in the circumstances in which the payment is made is a mutual assumption by the parties that there will be a continuance of the relationship of buyer and seller with resultant continuance of the relation of debtor and creditor in the running account, so that, to use the expressions employed in Richardson's Case, 'it is impossible'... in a business sense - 'to pause at any payment into the account and treat it as having produced an

immediate effect to be considered independently of what followed...'"[25]

**36 In this case an examination of the statement of the account strongly implies that it was mutually assumed from a business point of view that each particular payment was connected with the subsequent provision of goods or services on account. And the bulk of the other evidence to which I have referred is to the same effect. In the circumstances, I see no reason to doubt that it was implicit in the circumstances in which each payment was made that there would be a continuance of the relationship of buyer and seller with the resultant continuance of the relation of debtor and creditor.

37 It is true, as the judge observed, that there was evidence of a perception of the appellants' account being "old and overdue". It is also probable that there was a discussion between Mr Lister and Mr Sutherland in July 2002 in which Mr Sutherland said that he wanted "at least the value of that product you are receiving, to be paid, to come off the account before you get the goods". There may have been, too, a couple of occasions when the account went out to 90 days and, upon Mr Sutherland drawing that to the company's attention, "they [the company] would have attempted to rectify that." I accept that those events, coupled with the significant reduction in the balance of account from $60,341.23 on 27 August 2002 to $43,341.23 on 12 September 2002, imply that one or more of the payments of $5,000 and $6,000 made between 30 August 2002 and 12 September 2002 was or were made for the dominant purpose of reducing the company's level of indebtedness. But I do not see any of that as opposed to an implicit mutual assumption that the relationship would continue.

38 As the statement of account shows, in August 2002 the appellants supplied the company with more than $20,000 worth of product, thereby lifting the level of outstanding accounts to $60,341.23. Thereafter, the only payments of any substance were the round payments of either $5,000 or $6,000. Meanwhile, supplies continued on a regular and recurring basis such that by the end of the relation back period the account balance stood once again at $43,012.21; or, in other words, at the level of approximately two months' worth of supplies (in accordance with the usual implied terms as to the conduct of the account, as Mr Sutherland deposed). To that is to be added Mr Lister's evidence that the company made the round payments of $5,000 and $6,000 "because we needed the product and Mr Sutherland would have said, 'Well, I want at least the value of that product that you are receiving to be paid to come off the account before you get the goods'." To my way of thinking, all of that bespeaks an implied understanding that each payment was tied to future supply.

39 No doubt, the few payments which were made at or about the date of delivery were made at a point sooner than terms of 60 days would ordinarily suggest. So too, in one sense, the round payments of $6,000 and $5,000 and $8,000 were not made 60 days after delivery. Broadly speaking, they were made in order to keep the level of indebtedness at or about the level of the cost of two months' worth of supplies, after allowing for fresh supplies. But the operation of the running account defence is not dependent on continuity of the same credit terms throughout the relation back period, and even less upon showing that each payment was made at or about the same length of time after the supply to which it relates. Nor is it necessarily inimical to the operation of the defence that a payment be made with the express purpose of reducing a debt earlier incurred, so long as it is also for the purpose of obtaining further goods or services. As the majority said in Airservices:**

"...where the relationship of debtor and creditor contemplates further debits and credits, it is difficult to see how the appropriation of payment to an earlier debt has any significance at all unless, as in Rees v Bank of New South Wales, the parties expressly agree that one of the purposes of the payment is to permanently reduce the level of indebtedness below the level existing at the time of the agreement. Even then, as Rees assumes, where the relationship is a continuing one, the preference will be not more than the amount that constitutes the difference between the indebtedness at the commencement of the agreement and the indebtedness at the end of the six-month period."[26]

**40 Equally, the fact that two lots of poisons may have been sold and delivered in July 2002 on express terms that the company pay on delivery either the price of those goods or the cost of those goods to the appellant, neither constituted a preference nor implied the exclusion of the running account defence. It was not a preference, because the purpose of the payment was to secure an asset or assets of equal or greater value, and so the appellants received no advantage over other creditors.[27] And it was not inimical to the application of the running account defence because, taken in the context of the totality of the dealings between the company and the appellants, there was nothing about it inconsistent with an intention by the parties to continue their relationship (upon the express or tacit understanding that the appellants would continue to supply goods to the company on a credit basis as long as the company substantially adhered to the credit arrangements of making payment within about 60 days). As may be seen from the statement of account, the effect of that transaction was to reduce the account balance to below $40,000 or about two months' purchases. But, as may also be seen from the statement, thereafter the balance increased again to more than $60,000 before settling down to around the $40,000 level at which it closed, and, speaking very generally, the level of indebtedness was so maintained by payments within about 60 days.

41 The judge excluded the running account exception because his Honour considered that, in order for there to be a running account:**

"A substantive purpose of each payment on the part of both purchaser and supplier must have been that of inducing further supply. If the purpose of inducing further supply becomes subordinated to a predominant purpose of discharging past indebtedness the payment is not part of the continuing business relationship or running account."

"In this case the arrangement to pay round figures of $6,000 was for the predominant purpose of discharging past indebtedness. Further, the demand for payment before delivery in July 2002 is inconsistent with,

and an interruption to any mutual assumption and not for the purpose of inducing further supply". [28]

But that reasoning was based upon what the judge perceived to be the effect of observations of Santow J in Sydney Appliances Pty Ltd v Eurolinx Pty Ltd[29] and, with respect, his Honour appears to have misunderstood the effect of that decision.

**42 Sydney Appliances concerned a creditor which supplied a company with goods on credit over a period of time. The terms of payment were at 30 days throughout the business relationship but, at around the time of the beginning of the relation back period, the creditor and the debtor made an oral arrangement that an extension of the terms to 60 days would be tolerated in return for the creditor paying four or five cheques each month to be applied to the oldest debts. The creditor received post-dated and undated cheques from the debtor but, despite the arrangement, the account was not brought into line within 60 days. The liquidator applied for the payments to be treated as preferences and the creditor raised the running account exception under s 588FA(3) as well as the s 588FG(2) defence. Santow J rejected the application of the s 588FG(2) defence. He found that the creditor either did have or should have had suspicion of the debtor's insolvency from the beginning of the relation back period. But, applying the principles adumbrated in Airservices, he held that the s 588FA(3) exception was established.

43 In the course of his reasoning, Santow J posed the question of why it was in Airservices that the last payment (as compared to earlier payments) on the account was held not to attract the running account defence. He suggested that :**

"Perhaps the best explanation for this part of the decision [in Airservices] is this. The circumstances of the demand for payment was made by the payee when it clearly knew at that time of the payer's parlous circumstances. That demand in those circumstances must have led the Court to conclude that the payee's predominant concern was no longer continued supply but to get previous accounts paid. By then continued supply, though it did not cease, appears to have receded in significance as a mutual purpose to the point where it was no longer to be treated as governing the parties' relationship or at any rate was subordinated to getting paid."[30]

**44 The judge in this case appears to have treated that as meaning that, if the predominant purpose of any payment made during the course of a running account is the discharge of past indebtedness, the payment cannot be treated as part of the running account and, if in the course of a running account one or more payments are made on the basis of cash on delivery, the running account thereupon terminates notwithstanding that the parties continue thereafter to supply goods and to make payments in circumstances which would otherwise imply that they intend to continue the relationship of buyer and seller and so of debtor and creditor on running account.

45 Plainly, however, that is not so. First and foremost, Santow J was directing himself only to the last payment on a running account and to the question of why it was treated differently to the other payments on the account. What his Honour suggested about the effect of predominant concerns was not said to be applicable to earlier payments.

46 Secondly, apart from last payments, the position clearly stated in the majority judgment in Airservices (and the authorities on which it is based) is that, if a payment forms part of a wider series of transactions premised upon an express or tacit understanding that the creditor will continue to supply goods or services to the debtor on a credit basis, the court looks to the total business effect of that series of transactions. It does not treat individual payments as preferences (even though they may be unrelated to any specific delivery of goods or services and may ultimately have the effect of reducing the amount of indebtedness of the debtor). Instead, it looks to the end of the series of transactions and only recognises that there is a preference if the net effect of the payments over the series of transactions has been to reduce the initial level of indebtedness.

47 Thirdly, and consequently, where a payment forms part of such a wider series of transactions, it is not to the point that one of the purposes of the payment is to reduce existing indebtedness - unless of course the parties are agreed that it should be a permanent reduction in indebtedness - and, even then, if the relationship is a continuing one, the preference will be no more than the amount that constitutes the difference between the indebtedness at the commencement of that agreement and the indebtedness at the end of the relation back period.[31]

48 Fourthly, the reason that the running account defence was held in Airservices not to apply to the last payment was not so much to do with the predominant purpose of the payment as the essential nature of the running account defence. As has been seen, the defence protects a creditor against the consequences of individual payments being treated as if they were preferences. But if the ultimate effect of payments is to reduce the initial level of indebtedness, the amount of the reduction at the end of the relationship back period is treated as a preference. As a matter of practice or convention, the amount of the preference is then taken to be comprised of the last payment on the account or, if that is less than the amount of the preference, to be comprised of so many or much of the last payments as are necessary to sum to the amount of the preference.[32] Consequently, where the ultimate effect of a running account is a reduction in indebtedness over the relation back period, the running account defence is incapable of preventing some part at least of the last payment being treated as a preference.

49 Finally, as the majority explained in Airservices, where a running account defence results in a last payment or payments being treated as a preference, one may then look to the circumstances of the payment in order to determine whether payment was received bona fide in the ordinary course of business for the purposes of s 122 (a) (or in the case of a corporation, s 588 FG(2)). It is at that point that the dominant purpose of the last payment or payments is likely to be of importance. But that is a different question to the application of s 588FA(3).**

**50 Where the balance of a continuing account fluctuates over the relation back period, a liquidator faced with the prospect of having to treat the account as a notional single transaction is entitled to pick the peak indebtedness during the relation back period as the beginning of the arrangement, in order to maximise recovery.[33] So, in this case, in my view the respondents are entitled to treat the arrangement as having begun on 27 August 2002, when the account balance stood at $60,341.23, and the preference is measured as the difference between that amount and the balance of the account at the conclusion of the account. Subject to what is said below, that was $43,012.21 and, on that basis, the amount of the preference would be $17,329. 02.

51 Earlier in these reasons I referred to the judge's finding that invoices 20915, 21026 and 21071 were issued after receivers were appointed to the company and to his Honour's view that those invoices should not be taken into account for the purposes of determining the closing balance of the account. I do not accept that view. I infer that the receivers were carrying on the company's business at the time that the invoices were issued. In the absence of contrary evidence, it is to be assumed therefore that they did so as agents of the company (as is ordinarily the case),[34] and counsel for the respondent did not suggest the contrary. The only argument put in support of the position that the invoices should not figure in the final balance was that the receivers would be personally liable for the amounts of the invoices. I reject that argument. Although s 419 of the Act makes the receivers personally liable for the amounts of the invoices, the section expressly provides that their liability is without prejudice to the appellants' rights against the company. There is no suggestion that any of the invoices has been paid. On the other hand, counsel for the respondent volunteered that the company was not entitled to treat as going in reduction of the final account balance the amount of $365.75 the subject of**

the credit memo of 7 October 2002. Accordingly, I treat the final account balance for present purposes as being $43,377.96.

52 In the result, I would allow the appeal in part and set aside the judgment below. In lieu thereof, I would declare that the reduction in the company's indebtedness to the appellants, from $60,341.23 on 27 August 2002 to $43,377.96 on 30 October 2002 - being an amount of $16,963.27 - was an unfair preference given by the company to the appellants. I would further order pursuant to s 588FF(1) of the Act that the appellants pay to the company the amount of $16,963.27 and a further amount by way of interest calculated at the bank overdraft rate for accounts of less than $100,000 computed from 30 October 2002 until judgment.

53 For the reasons given by Nettle JA, I too would allow the appeal, in part. I would dispose of the matter as his Honour proposes.

54 I have had the advantage of reading the reasons in draft of Nettle JA. For those reasons I would allow the appeal in part and would make the orders which his Honour proposes.

[1] The date of the last payment by the company in reduction of the account.

[11] Sands & McDougall Wholesale Pty Ltd (in liq) v Commissioner of Taxation (C'th) [1998] VSCA 76; [1999] 1 VR 489, 509 [51]-[56].

[12] Queensland Bacon Pty Ltd v Rees [1966] HCA 21; (1996) 115 CLR 266, 313; Sands and McDougall (in liq) v Commissioner of Taxation, ibid.

[15] According to the statement of account.

[18] Sands & McDougall Wholesale Pty Ltd (in liq) v Commissioner of Taxation (C'th) [1998] VSCA 76; [1999] 1 VR 489, 509; Sellers & Anor v Offset Alpine Printing Pty Ltd; Sellers & Anor v Trigra Pty Ltd (in liq) [2003] VSCA 37, [11].

[19] [1999] VSCA 60; [1999] 3 VR 201, 210.

[20] [1952] HCA 8; (1952) 85 CLR 110.

[21] [1966] HCA 21; (1966) 115 CLR 266.

[23] Air Services v Ferrier (1996) 185 CLR 483, 502 (Dawson, Gaudron and McHugh JJ), emphasis added.

[25] Queensland Bacon Pty Ltd v Rees [1966] HCA 21; (1966) 115 CLR 266, 286; Airservices Australia v Ferrier supra, 492.

[26] Airservices v Ferrier (1996) 185 CLR 483, 508, emphasis added.

[29] [2001] NSWSC 230; (2001) 37 ACSR 477; 19 ACLC 633.

[32] Queensland Bacon Pty Ltd v Rees [1966] HCA 21; (1966) 115 CLR 266, 293 (Barwick CJ); Airservices Australia v Ferrier (1996) 185 CLR 583, 504.

[33] Rees v Bank of New South Wales [1964] HCA 47; (1964) 111 CLR 210, 221; Austin and Ramsay, Ford's Principles of Corporations Law, 13th ed., [28.370]

[34] Ford's Principles of Corporations Law , 13th ed., [26.030].