Sydney Appliances P/L (in liq) v Eurolinx P/L

Sydney Appliances P/L (in liq) v Eurolinx P/L - [2001] NSWSC 230 - NSWSC 2001 case summary — Zoe

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OVERVIEW 1 A liquidator challenges a series of payments for goods supplied on credit. These were concededly preferences by an insolvent company. The primary point at issue is whether their recipient can make out the "good faith" defence within s588FG(2) of the Corporations Law. 2 Failing that, the recipient relies on "the running account" provisions. Under these, the amount of any preference will normally be the difference between the highest amount owed by the debtor during the six month relation back period under that account, and the amount finally owed at the date of winding up; see ss588FA to 588FG of the Corporations Law. The liquidator joins issue on these two matters. First on the good faith defence, denying it to be made out. Second, on whether, as required for a running account, there was throughout the period of those payments no interruption to the requisite mutual assumption of a continuing business relationship of which the relevant transactions were an integral part. The Liquidator contends that actual knowledge of insolvency would preclude that relationship continuing uninterrupted, or did so in the present circumstances. The Defendant replies not necessarily, and not in this case. 3 The Plaintiff company Sydney Appliances Pty Limited ("Sydney Appliances"), now in liquidation, and the Defendant supplier company Eurolinx Pty Limited ("Eurolinx") concededly had a business relationship. Eurolinx, an importer and wholesaler of European kitchen appliances, supplied kitchen appliances to Sydney Appliances, a retailer of whitegoods and other kitchen and bathroom products. 4 On 12 May 1997 the Plaintiff was appointed Administrator and on 18 June 1997 Liquidator of Sydney Appliances. Eurolinx is an unsecured creditor of Sydney Appliances. Between 12 November 1996 and 12 May 1997 Sydney Appliances paid to Eurolinx amounts totalling $565,146.80. It is that total amount which is under challenge for recovery by the liquidator. 5 I now outline first those of the facts as are agreed by the parties, and second, the agreed issues.

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AGREED FACTS 6 Between late 1994 and May 1997 the Defendant, an importer and wholesaler of European kitchen appliances, supplied stock, being kitchen appliances to Sydney Appliances Pty Limited ("Sydney Appliances" or "the Company"), a retailer of whitegoods and other kitchen and bathroom products. 7 The last supply of goods by the defendant to the Company occurred on 8 May 1997. 8 On 12 May 1997 the plaintiff, Roderick Mackay Sutherland, was appointed Voluntary Administrator of the Company pursuant to s436A of the Corporations Law. 9 Between 12 May 1997 and 18 June 1997 the Company was under administration, with Mr Sutherland acting as Administrator, within the meaning of Part 5.3A of the Corporations Law. 10 On 18 June 1997 a second meeting of creditors of the Company was convened pursuant to s439A of the Corporations Law. The creditors of the Company there resolved that the Company be wound up pursuant to s439C(c) of the Corporations Law. By virtue of s446A, Mr Sutherland became Liquidator of the Company. 11 By virtue of ss9 and 513C of the Corporations Law, and by virtue of the appointment of Mr Sutherland as voluntary administrator on 12 May 1997, the "relation back day" of the Company is 12 May 1997. 12 The Company was at all material times a retailer and wholesaler of whitegoods, kitchen and bathroom products, principally trading at Concord in NSW and Armadale in Victoria as "Sydney Appliances" and "Melbourne Appliances" respectively. 13 The Defendant Eurolinx was at all material times and remains an unsecured creditor of the Company. Eurolinx lodged a proof of debt with the Liquidator in respect of the Company dated 13 October 1997 in the amount of $109,801.25. 14 The Company is insolvent and unsecured creditors in the winding up of the Company amount to $4,614,652.08. A statement of estimated position as at 24 November 1997 is annexed and marked "A", which estimates a potential dividend to unsecured creditors of 13 cents in the dollar, as outlined in para 33 of the Liquidator's affidavit of 27 November 1998. 15 Between 12 November 1996 and 12 May 1997, the Company paid to Eurolinx amounts totalling $565,146.80 ("the Payments"). Full particulars of those Payments are comprised and recorded in schedule 1 to the Statement of Claim a copy of which is annexed and marked "B", and paras 24 to 26 of the Liquidator's affidavit of 27 November 1998 and annexures "M", "N" and "O" thereto. 16 As can be seen from annexure B, some of the Payments were made by post-dated and/or undated cheques. 17 Eurolinx has provided valuable consideration under the Payments, so that s588FG(2)(c) is satisfied. 18 In the course of the relation back period from 12 May 1997, Eurolinx supplied the Company with goods. 19 There was a continuing business relationship between the Company and Eurolinx. It is in dispute whether it was terminated at some time in the period between 12 November 1996 and 12 May 1997, or throughout. 20 Between 12 November 1996 and 12 May 1997 there was a net reduction in the amount owed by the Company to Eurolinx of $347,694.44. 21 At the time that each of the Payments were made the Company was insolvent. 22 The Plaintiff's solicitors demanded repayment of the Payments on 24 September 1997, alleging they were void "unfair preferences" pursuant to s588FA of the Corporations Law. 23 The Plaintiff commenced preference recovery proceedings against Eurolinx in respect of the Payments, plus interest and costs, by Statement of Claim filed in the District Court of NSW Sydney under plaint No. 9662 of 1997 on 28 November 1997 ("the Claim"). 24 Eurolinx filed a defence on 2 February 1998 and admits receipt of the Payments. In or about September or October 1999 Eurolinx sought to amend its defence and assert that the Plaintiff was not validly appointed Administrator of the Company. 25 In Supreme Court of NSW Equity Proceedings 3431 of 1999 ("the Validity Proceedings"), it was declared that the plaintiff had been validly appointed Administrator and Liquidator of the Company, as set out in paras 3 and 5 hereof, by judgment dated 24 February 2000 and orders and declarations made 6 March 2000. 26 In the course of the Validity Proceedings, Eurolinx:

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How were payments made between the parties? 68 Mr Sutherland, the liquidator, noted that Sydney Appliances used undated and post-dated cheques to "juggle supply of stock and temporary creditor satisfaction" (Affidavit Sutherland 27 November 1998 para 63) and constituted "a promise to pay" (T, 18.42-.46). Mr Warner stated in cross-examination that the use of such cheques was "an act of goodwill towards the creditor" (T, 75.51-.52) [emphasis added] but conceded that it gave Sydney Appliances more time to make payment (T, 75.54-.56). Indeed I would infer that latter was its principal purpose. The use of post-dated and undated cheques was a practice which had become "fairly common" from November 1996 (T, 76.6-.9). It is common ground that these cheques were usually in round amounts. 69 Whilst the use of such cheques had become "fairly common" Mr Warner also acknowledged in cross-examination that from "time to time" prior to 1996 Sydney Appliances used post-dated and undated cheques to pay creditors (T, 75.38-.46). However, there is no evidence as to whether Eurolinx were aware of this practice so far as other creditors were concerned. Absent that evidence, such practice has no special significance. 70 One contentious issue is whether there was an agreement between the parties that prior to banking such cheques sent by Sydney Appliances to Eurolinx for payment that there would be a discussion by telephone confirming that such cheques could be banked. 71 Mr Warner and Mr MacDonald testified that it was the practice of Sydney Appliances to hand deliver cheques to Eurolinx but that these cheques were not to be banked until a phone call had been received from Sydney Appliances instructing Eurolinx to do so. This is seen in the evidence of Mr Warner, director of Sydney Appliances, who testified in para 14 of his Affidavit of 18 May 2000 that "From about November 1996, the practice developed … that I used to take Eurolinx's cheques around to Eurolinx at Leichardt, hand delivering them initially to Ian Richard-Evans, and giving a schedule of payments. At the time of delivering the cheques I would usually say words to the effect: 'Here are the (November) cheques, for payment of (August ..). Banking the cheques should be OK according to their date, but I will ring you first.' The cheques were usually post dated, although some were undated, and the months being paid would differ.

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The fact that his earlier affidavit took the untenable stance it did, did not assist Mr Pesch's credibility as a witness. 75 Mr Richard-Evans (for Eurolinx) in paragraph 5.2 his affidavit of 22 June 2000 testified that he would receive cheques from Sydney Appliances and date them on the date recorded on the cheque and on "the occasion where there was no date on the cheque, there was a yellow sticker with an indication of the date on which the cheque could be banked and I would automatically bank it on that day without reference to anyone from Sydney Appliances Pty Limited." In cross-examination, however, Mr Richard-Evans stated that Mr Warner had asked him to telephone him before banking undated cheques, a request he complied with (T, 67.37-.39; T, 67.53-.58). 76 Ms Fotopoulos (who took over from Mr Richard-Evans at Eurolinx) stated in paragraphs 3-5 of her affidavit of 14 January 1999 that upon receiving an undated cheque she would ring Sydney Appliances' accounts department for permission to date the cheques before banking. She confirmed this in cross-examination (T, 60). In examination in chief Mr Warner acknowledged that Mr Fotopoulos may have rung him or he may have rung her, he was unsure as to who initiated the telephone calls (T, 72.49-.50). 77 In cross-examination Ms Fotopoulos also testified that it was Max Pesch who informed her to ring Sydney Appliances before banking cheques (T, 60.41-.48; T, 60.56-61.4). 78 I accept, as did Mr Sutherland the Liquidator in cross-examination (T, 18.58 - 19.3), that the use of post-dated and undated cheques does not in and of itself necessarily indicate that a company is insolvent; Pegulan Floor Coverings (supra). Nonetheless it is a factor of significance to be weighed with others as pointing to suspicion of insolvency or reasonable grounds for it. In ascribing weight to that factor, it is true that none of the cheques given to Eurolinx by Sydney Appliances "bounced" (Sutherland cross-examination T, 19.5-.14). Nor had Eurolinx issued a statement of claim to recover the debt (Sutherland cross-examination T, 19.16-.27). The Defendant also relied on the observation of Kitto J in Queensland Bacon at 302: "In many situations, of course, the dishonour of a cheque, unless otherwise explained, carries a strong suggestion of insolvency; but in others it may indicate, to those who are constantly dealing with the drawer and know the general course he is pursuing in his business, no more than a policy of wringing the last ounce of credit out of everyone who can be fobbed off with promises."

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112 Mr Warner, as seen above, acknowledged that, for example, from Eurolinx's accounts it appeared as if account 174 was being run within 60 days. Despite this Mr Warner, in cross-examination, was of the opinion that from November 1996 all of Sydney Appliances' creditors were at 90 days or Sydney Appliances was on "stop supply" (T, 99.50-.52). However, Mr Warner agreed that this statement was based only on his recollection of the situation (T, 100.3-.6). In support of this the Plaintiff submitted that when analysing the accounts in question one is to look at all seven accounts and not at individual accounts and in so doing the accounts as a whole were being run in excess of 60 days (Plaintiff's written submissions 16 October 2000, paras 5-7). 113 The Defendant submits that "the company has to an acceptable degree kept within its trading terms as renegotiated." (Defendant's written submissions 10 October 2000, para 27) Any invoices which were being run in excess of 60 days were explained as possibly being due to a dispute (T, 44.12-.18; T, 45.15-.27). However, I accept the Plaintiff's contention (Plaintiff's written submissions 16 October 2000, para 8) that Mr Pesch was "only guessing" that outstanding invoices were subject to dispute (T, 45.34-.37) and no evidence of any such dispute was produced to the Court in meeting the onus on the Defendant in that regard. Moreover there is nothing in the Defendant's proof of debt which concedes any invoice is in dispute. 114 I agree with the Plaintiff's contention that the best evidence of the Defendant's knowledge and the factual state of the debtor's payment exceeding 60 days was the evidence given by the two people who were dealing with the account on each side of the ledger at the relevant time. Their state of mind was clear from their evidence. Mr Warner for the Defendant and Mr Richard-Evans on behalf of Eurolinx both believed the account was out of order and in excess of 90 days. That is further borne out by the remittance advice for Sydney Appliances behind tab 14 of the Bundle showing cheques drawn in November 1996 for invoices as old as July and August 1996.

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The relevant principles 137 The Defendant relies upon a further defence under s588FA(3) of the Corporations Law, in contending for a running account. That section appears in Pt 5.7B of the Corporations Law. It codifies, in part, the law on preferences in the context of running accounts as earlier developed in three High Court decisions. The first of these was Richardson v The Commercial Banking Co of Sydney (1952) 85 CLR 110 involving an overdrawn bank account. There the total of the payments made into the account did not exceed the total paid out, so there was held to be no preference. Then followed Rees v Bank of New South Wales (1964) 111 CLR 210 again an overdrawn bank account. There payments did exceed payments out but only that excess was held to be a preference. Finally, there was Queensland Bacon Pty Ltd v Rees. There the account was in relation to suppliers of goods rather than a bank. Barwick CJ's conclusion was that this nonetheless constituted a running account. His decision and its reasoning has since been followed in subsequent cases. 138 Section 588FA(3) codifies this defence in the following terms: "(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."

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140 I would however add that in calculating the amount of any preference, I would adopt the approach in Rees v Bank of New South Wales (supra) of Kitto J at 221-2. He emphasised that whether there was any preference thereby brought about depended not upon the immediate effect but the ultimate effect on the balance of account between banker and customer or (I interpolate) supplier and supplied. In other words did there come about a permanent reduction in that balance over that period of the running account? Thus I would measure the preference, if any, by reference to the period of the relevant transactions constituting the running account, within the 6 months relation back period. I would do so by reference to the highest amount owing during the relation back period, not necessarily "at the beginning", compared to the amount owing on the last day, following Rees; see also Barlow "Voidable Preference - the High Court Re-considers" (1998) 26 ABLR 82 at 92. 141 The essence of a running account is a continuing relationship between the supplier and purchaser with value being exchanged between them. The essential features of a running account are described most recently by the High Court in the following passage from Airservices Australia v Ferrier & Anor (1996) 185 CLR 483 taken from the majority judgment of Dawson, Gaudron and McHugh JJ: "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, … 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." [ Rees v Bank of New South Wales (1964) 111 CLR 210 at 221-222] at 501-502

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147 That is, the basis of a running account is a continuing relationship between the debtor and creditor with an expectation that further debits and credits will be so incurred. 148 For that defence to be maintained, there are some essential prerequisites. First, there must be no cessation of that mutual assumption of payment and reciprocal supply throughout the relevant period. Second, those payments must continue to have as at least one operative, mutual purpose, namely inducing further supply. I would add that such purpose must not come to be subordinated to a predominant purpose of recovering past indebtedness. As the decision in Airservices Australia makes clear (see for example the majority judgment at 510), knowledge or even actual suspicion, though it be such as to negate the good faith defence, does not of itself preclude reliance upon the running account defence for a payment so received. What still requires explanation is the implication flowing from the majorities' conclusion that the last payment, and only the last, fell outside the running account defence. This was said to be because the payee in Airservices had demanded payment and received it with knowledge of insolvency. It was therefore held to be "looking backwards rather than forwards, looking to the partial payment of the old debt rather than the provision of continuing services". And this was so, notwithstanding that the supply of services did continue thereafter, probably influenced by safety considerations. 149 What was it about the last payment as compared to the earlier ones that precluded the running account defence, when the previous nine payments were held to be covered by the defence? No alternative defence of good faith, valuable consideration or ordinary course of business was ultimately relied upon in relation to the previous nine payments, though originally part of Airservices grounds of defence. So it can be taken that it was not in contest that the previous payments were all received in circumstances where that defence of good faith could not have been maintained. But one cannot infer, one way or the other whether the earlier payments were received with actual knowledge of insolvency, as distinct from imputed knowledge based on the objective test of "reason to suspect". 150 Perhaps the best explanation for this part of the decision 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 the 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. In Airservices supply did continue, it appears by then to have merely reflected the public obligation on Airservices to continue to provide civil aviation services for public safety reasons. 151 Thus the Airservices decision regarding the last payment should not be understood as negating the starting proposition. That proposition is that knowledge, even actual suspicion of insolvency, though coupled with a purpose of getting a previous account paid, does not of itself preclude the running account or continuing business relationship defence. But this is provided there still remains at least a substantive mutual purpose of continued supply which does not come to be subordinated to a predominant purpose of getting paid. It may well be so subordinated where the payer is known to be about to go under and the payee by its actions, such as demands for payment, signals that this has now become its predominant purpose. Further supply after that point is reached will not then suffice to negate that predominant purpose. This is more especially where continued supply is explicable for reasons such as public safety, though that reason by itself will not suffice to negate a running account.

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159 The Plaintiff further notes that during the relevant period, namely 12 November 1996 till 12 May 1997 Sydney Appliances was not complying with Eurolinx's terms of trade. This is said to be illustrated in Annexure A to Mr Pesch's Affidavit of 27 January 1999 which shows that payments were being made at terms between 38 days at the lowest and 88 days at its highest. It is further illustrated in Annexure D to Mr Warner's affidavit of 18 May 2000 which shows the account was running at terms of 90 days. 160 It is on the basis of this evidence that the Plaintiff submits that "it cannot be said that there was a relationship whereby goods were being supplied in consideration of Eurolinx's trading terms being complied with. … The simple fact is that by November 1996 the account was in such a derelict state that any payments made in relation to it could not sensibly be said to be linked in any way with further supplies of goods." (Plaintiff's outline of submissions, para 4-5) 161 The Plaintiff further relies on what it submits to be the clear evidence that Eurolinx was on notice of the insolvency of Sydney Appliances during the relevant period so that any continuing relationship between the parties was brought to an end by that fact, as the parties lacked the necessary mutual assumption (Plaintiff's outline of submissions, para 6). 162 The Plaintiff made a conditional concession in argument. It was to the effect that a running account was conceded but only if Eurolinx had no actual knowledge of insolvency, in particular here via Mr Pesch. Counsel said in argument: "I can shorten the submission I am about to make, [if it] is not accepted, then I will concede the running account has been made out. The submission I am about to make is based on what was said by Master Burley in the Supreme Court of South Australia in the case of Olifent (1996) 19 ACSR page 285 [at 292] … this submission only works if you accept my submission that the Defendant has not made out the first limb of the definition. In other words I need a finding that the company knew … that Sydney Appliances was insolvent so the submission doesn't work if I otherwise succeed on the objective reasonable person should have known. I need a subjective mind, namely Mr Pesch to know. (T, 137.36-.51)

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163 But that qualifying condition on the concession requires further explication. If it be put that actual knowledge of insolvency must invariably terminate the necessary business relationship then I would not accept that proposition. That would presuppose, incorrectly, that a subjective suspicion of insolvency cannot coexist with an assumption of a continuing business relationship between creditor/payee and debtor/payer. That is incorrect as an invariable proposition, on the authority of Airservices Australia. Knowledge of insolvency in that case did coexist for all the payments, including the nine not set aside. The statements of principle by the High Court clearly do admit of that coexistence of knowledge and running account; they make no distinction between subjective and objective knowledge. 164 However, the Plaintiff's qualification may legitimately be put somewhat lower. One may accept that a level of actual suspicion, if it finally reaches actual subjective knowledge of insolvency, may, but not necessarily, lead to the termination of that continuing business relationship and its associated mutual purpose of payment to induce further supply. Thus the fact of such actual knowledge may (but need not necessarily) rebut, as even one of two purposes, that purpose of inducing the creditor to maintain the relationship by providing further supply. An example of the latter case is to be found in the circumstances surrounding the last payment in Airservices Australia itself. There, as I have explained, the latter purpose was subordinated to getting the creditor's money back. 165 It is conceivable the actions of the payee/creditor could be such as to indicate that it has no continued confidence in the ability of the debtor to continue to trade, and therefore it has abandoned any assumption of a continuing business relationship. But if that were so, one would expect no further supply, unless cash on delivery. That was not the case here. 166 When it comes to the alternative basis for the Plaintiff's contention, it is true that it is the payee's purpose - inducing further supply orders to the supplier - which is primarily relevant. But this purpose is to be found in a bilateral context involving both creditor and debtor, payer and payee. Its reciprocal from the payer's viewpoint is the purpose of inducing further supply to it as the purchaser. The business relationship, with its accompanying assumption of continued supply, is both a mutual relationship and mutual assumption. That is why, when reference is made to "inducing" further supply, the focus only starts with the payer. Then the focus necessarily widens to the payee's purposes and actions in that reciprocal context. 167 Finally, the codification of the so-called running account has become definitional of what is an "unfair preference". That means that, in terms of onus, what was once merely a defence is now an ingredient or element of that which the Plaintiff liquidator must prove in establishing whether it is a preference (and its dimension). The onus in that sense has shifted to the party attaching the payments.

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