Wily v Eastern Elevators Pty Limited [2003] NSWSC 377 | Case summary

8 The alleged preferential payments are those in respect of the 4th and 5th progress payments paid on 3 July ($20,000) and 13 August 1997 ($19,000), a total of $39,000. 9 Significant work was carried out by the defendant on the lift installation between 25 June and 12 September 1997, including delivery on-site, installation of the electrical work, guarding system and the landing doors, wiring of the installation, testing and running of the lift, arranging Workcover inspection thereof and after the lift had been used as a builder's hoist, re-testing it and re-attending for a further Workcover inspection, handing the lift over for public use and downloading the electronic coding to enable the building owner to operate the lift. 10 Although progress payments 4 and 5 (the ones in dispute) were physically received from Oceanview Apartments Pty Limited they were Goltep cheques and Mr Watts, the managing director of the defendant, assumed that the cheques were being held by Oceanview for release on completion. He said that he never received any information that suggested financial difficulties on the part of Goltep and progress payments 6, 7 and 8 were apparently paid direct by Oceanview Apartments. 11 In his affidavit Mr Watts said that had Goltep not made the progress payments, including the payments the subject of this litigation, the defendant would have seized work and the lift would not have been installed, and unless the final payment was made the electronic coding would not have been entered into the control panel. If that happened the lift would have remained unserviceable and the appropriate certificate would not have issued in respect of the building in accordance with s 317A of the Local Government Act (sic). 12 He said he never had any information that suggested financial difficulties on the part of Goltep. Goltep invited his company to tender for another project involving the installation of four lifts with a contract price of $840,000 at Empress Gardens, Hurstville and it did so on 6 May 1997. He said in evidence that late payment of progress payments was common in the industry and, although telephone calls were made from time to time requesting payment of overdue amounts, this was not uncommon and did not indicate to him that Goltep was insolvent. 13 The learned Magistrate (P O'Shane LCM) was not satisfied that the payments constituted an unfair preference within s 588FA, and further held that the statutory defence had been established. Accordingly she found for the defendant. 14 The issues in dispute on the appeal were whether at the time the relevant payments were made they were made as part of a "running account" or "continuing business relationship" between the parties, and if so, the effect thereof; and secondly, whether the statutory defence had been established. 15 Sections 588FA-588FG are based on, and seek to put into statutory form, the principles which formerly applied under the Bankruptcy Act 1966, s 122 made applicable to company liquidations by the relevant legislation in force from time to time e.g. Corporations Law, s 565. 16 In Airservices Australia v Ferrier (1996) 185 CLR 483 the court considered the effect of a series of payments over a period of time and discussed the nature and effect of a "running account". At 501-2, the majority (Dawson, Gaudron and McHugh JJ) said: "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". … To have the effect of giving the creditor a preference, priority or advantage over other creditors, the payment must ultimately result in a decrease in the net value of the assets that are available to meet the competing demands of the other creditors. … If the purpose of a payment is to secure an asset or assets of equal or greater value, the payee receives no advantage over other creditors. The other creditors are no worse off and, where the value of the assets has increased, they are actually better off."

17 Their Honours then looked to the ultimate effect of such a series of dealings (at 503-4), noting that, if over the relevant period the creditor has supplied goods to a greater value than the payments made to it during that period, the general body of creditors are no worse, and may even be better, off so that the supplying creditor has received no preference. On the other hand, if the effect of the payments is to reduce the initial indebtedness, only the amount of the reduction will be regarded as a preferential payment, citing Rees v Bank of New South Wales (1964) 111 CLR 210 and Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266. 18 They then discussed the nature of a "running account" such as when goods or services are supplied at regular intervals but the payments are neither made regularly nor, when made, are appropriated to a specific, or even to the most recent, delivery of the goods or services (at 503). As they said at 504-5: "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. Ordinarily, a payment, although often matching an earlier debit, is credited against the balance owing in the account." 19 That case concerned the demise of Compass Airlines. The liquidator of Compass sought to recover $10.35 m which the company had paid to the Civil Aviation Authority by nine payments during the six-month relation back period. During this period the company's indebtedness to the Authority had increased by $8.18m but the company and the Authority both understood that provision of further services depended on the company's making arrangements to reduce its growing debt. 20 The High Court (by majority) held that there was in effect a "running account" between the company and the Authority showing regular debits and credits, indicating a continuing relationship and the making of payments that were intended to continue and not determine the relationship; and that having regard to the "ultimate effect" of the series of payments, and not the immediate effect of each payment (an overall increase in the company's indebtedness), none of the payments except the last constituted a preference; but that the last payment made the day before Compass ceased operations, was a preference because it was partial payment of an existing debt and was not made to secure the continued provision of services. 21 Re Thompson Land Ltd; Walsh as Liquidator of Thompson Land Ltd v Salzer Constructions Pty Ltd [2000] VSCA 228, (2001) 3 VR 305, also decided under the "old law", was an analogous case to the present in that it concerned progress payments under a building contract, although there were a number of other companies there involved in project management, construction, management performance guarantees, and provision of finance for the project. The liquidator claimed a number of progress payments as preferences. 22 At first instance ([1998] VSC 111), Byrne J dismissed the liquidator's claim on the basis that, although the company was a debtor of Salzer, it did not make the relevant payments in that capacity, but rather in its capacity as treasurer of the corporate group of which the subsidiary was a member, and that none of the payments constituted a "settlement of property". In the course of his judgment he rejected a defence by Salzer that the impugned progress payments were made as part of a "running account", saying, at [60]: "The work for which payments were made was work performed by Salzer under a building contract. The price for the work was a fixed lump sum payable by instalments. The cash flowed to the builder in the same way as the work continued for the proprietor. The payments were not, therefore, for a series of transactions as in the classic running account case. It was not open to TPM to withhold payment for work done without putting the whole contract at risk and exposing itself to the consequences set out in [the default clause], including damages. It is to distort this nature of the contract between TPM and Salzer to say that the payment of a progress claim is made to induce Salzer to keep working. In one sense only is this correct." 23 The liquidator's appeal was unanimously dismissed by the Court of Appeal (Winneke P, Tadgell and Chernov JJA) on the ground that in the events which had happened the company was not actually or contingently liable to the builder for any of the impugned payments and the payments were not settlements of property; but Winneke P also dealt with a notice of contention challenging the trial judge's rejection of its "running account" argument. 24 At [17] he said that he would reject the contention for the reasons given by the trial judge, and after quoting the passage from Airservices Australia v Ferrier at 501-2 cited above, his Honour went on: "In my view, this description of a running account does not fit the concept of a building contract where progress claims are made separately and in isolation from each other and following analysis and confirmation of the claim. In such a case no "balance of account" is maintained, nor is the account a "continuing one" in the sense in which that term was described by Barwick CJ in Queensland Bacon Pty Ltd v Rees. In a building contract which predicates progress payments from time to time for work done, one cannot say that the payment of a progress claim is relevantly connected with the future supply of services so as to indicate that there is a mutual assumption by the parties to the contract that there will be a continuance of the relationship of debtor and creditor. Unless that can be established it is not to the point that the payment is made, in a general sense, partly for the purpose of inducing further work." 25 In Sutherland (as liquidator of Sydney Appliances Pty Ltd (in liq.)) v Eurolinx Pty Ltd [2001] NSWSC 230, 37 ACSR 477, which related to the supply of imported kitchen appliances by Eurolinx to Sydney Appliances which subsequently went into liquidation, Eurolinx claimed that there had been a "running account" within the terms of s 588FA(3). Following a discussion of Airservices Australia v Ferrier, Santow J said at [147] that the basis of a running account is a continuing relationship between the debtor and creditor with an expectation that further debts and credits will be so incurred, and went on at [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." 26 His Honour held that there was a continuing business relationship, that the parties had as a purpose, not subordinated to recovery of the past debt, inducing continued supply of the relevant goods and consequently there was a "running account" and so the quantum of the preference was to be calculated by reference to the highest amount owing during the six-month relation back period compared to the amount owing on the last day [168-169]. 27 In Sands & McDougall Wholesale Pty Ltd (in liq.) v Commissioner of Taxation (Cth) [1998] VSCA 76, [1999] 1 VR 489 it was held that payments of sales tax to the Commissioner could not form part of a continuing business relationship or a running account for a number of reasons including that there was no contractual basis between the parties, the Commissioner was providing no services to the wholesaler and a running account contemplates a fluctuating balance as a result of entries on both sides of the ledger. Charles JA concluded by saying at [49]: "The fact that the company on two occasions earmarked payments of sales tax to the debt owing for a particular month, and that the commissioner accepted this appropriation is, I think, a further significant factor quite inconsistent with the nature of a running account." 28 Similarly in Olifent v Workcover Corporation of South Australia (1996) 135 FLR 423 at 433 in holding payment of levies to the Corporation were not part of a running account, Debelle J at 433 said: "Although there was a continuing relationship … the levy payable for each month constituted a separate transaction." 29 In the light of these authorities I am satisfied that the making of the progress payments by Eastern Elevators in the present case cannot be regarded as payments made in the course of a "running account" or a "continuing business relationship" (and it is not necessary to consider in the present case whether a "continuing business relationship" is intended to cover anything wider than what is known as a "running account", or merely intended to give it a more formal description). My reasons for coming to this conclusion are as follows: 1. Although it was claimed that the payments were made to secure the provision of future services, those future services were not of greater value than the amount of the impugned payments. The latter amounted to $39,000 but the value of the future services was only $31,798 (progress payments nos. 6, 7 and 8). 2. The transactions between the parties did not result in a fluctuating balance with payments made from time to time against services provided and to be provided, i.e. to the general balance of the account, but each payment was specifically related to a specific invoice representing a particular "progress payment" for past work. 3. Progress payments under a building contract have specifically been held in Victoria not to be consistent with the concept of a running account: Walsh v Salzer Constructions Pty Ltd, and that decision should be followed. 4. If the relationship between the parties was to be regarded as a running account, the quantum of the preference would be the difference between the highest amount owing during the six-month relation back period compared with the amount owing on the last day. Here, the highest amount owing during the relation back period was $80,140 as at 24 April 1997 and the amount owing on 8 August 1997, the date of the appointment of the administrator: s 513C, was $18,000 (a difference of $62,140), yet the liquidator only claims $39,000. 30 Accordingly I am satisfied that her Worship erred in regarding the relationship between the parties as constituting a running account. 31 So far as the "statutory defence" (s 588FG(2)) is concerned, there was no dispute that the defendant became a party to the transaction (i.e. received the payments) in good faith and had provided valuable consideration under the transaction so that paras (a) and (c) were satisfied, but the live issues were those arising under para (b) of the subsection, namely whether at the time of the payments in dispute: (i) Eastern Elevators subjectively had no reasonable grounds for suspecting that Goltep was insolvent or would become insolvent, AND (ii) Objectively, a reasonable person in Eastern Elevators' circumstances would have had no such grounds for so suspecting. 32 The defendant bears the onus of establishing this defence: Sutherland v Eurolinx Pty Ltd, supra at [38] see also Sims v Celcast Pty Ltd (1998) 71 SASR 142. 33 The generally accepted definition of "a suspicion" in this context is that of Kitto J in Queensland Bacon Pty Ltd v Rees at 303, namely "a suspicion that something exists is more than a mere idle wondering whether it exists or not; it is a positive feeling of actual apprehension or mistrust amounting to "a slight opinion, but without sufficient evidence" … consequently, a reason to suspect that a fact exists is more than a reason to consider or look at the possibility of its existence". See also Sands & McDougall v Commissioner of Taxation supra at [56]. 34 In Sutherland v Eurolinx Santow J at [43]-[48] drew attention to a number of features in the process of determining whether there was or should have been the requisite suspicion, pointing out that it is a question of looking, not in hindsight but through the contemporary eyes of the parties, at the commercial circumstances then prevailing between them. This involves ascertaining which of the factors were apparent to the payee and the cumulative impact that knowledge of them should have had, or did have, upon the payee, and bearing in mind that there may be potentially countervailing factors and circumstances to be weighed in the balance which could tend to dispel suspicion at the time. 35 His Honour noted the warning from Barwick J in Sandell v Porter (1966) 115 CLR 666 at 670 that the conclusion of insolvency ought to be clear from a consideration of the debtor's financial position in its entirety, and generally speaking ought not to be drawn simply from evidence of a temporary lack of liquidity and he also noted that it is necessary to apply commercial reality derived from the particular industry to the facts. The use of instalment payments and post dated cheques is not necessarily crucial by itself where they are a practice in the industry and do not indicate insolvency, and he referred to the warning given by Priestley J against placing undue weight on late payment noting that "debts are not always paid on time by solvent debtors." 36 In the course of her judgment, when dealing with whether the payments constituted unfair preferences or constituted a running account, her Worship said: "In the present case, the evidence in respect of the second plaintiff's (sic) meeting its periodic payments as they fell due, is that right from the time the contract was entered into, payments were made late. Further, the payment of $20,000 was several weeks overdue, and by the time it was paid the next payment of $19,000 had already occurred … However in respect of that, the principal of the defendant company stated that the second plaintiff acted in a manner not uncommon in the construction industry. The defendant has been involved in that industry for approximately 30 years, and the Court is satisfied that he is able to give evidence of that nature; but in any event his contention on that point was not traversed either in evidence in reply nor in cross-examination." 37 Having found that she was not satisfied the payments were insolvent transactions and therefore voidable under the provisions of s 588FE, her Worship noted that it was not necessary to consider whether the defendant had made out the (statutory) defences available to it under the legislation, but went on: "But even if the Court were satisfied that one or other of the payments was voidable as an insolvent transaction, the Court would decline to make orders in accordance with s 588FG, as it is not satisfied that the defendant "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 (B) a reasonable person in the person's circumstances would have had no such grounds for so suspecting. For the reasons canvassed above in respect of industry practice. No other evidence on that point was adduced either by the first plaintiff or by the defendant; nor is it a matter on which the fact of insolvency is sufficient to establish knowledge on the part of one or other of the parties." 38 The "reasons canvassed above" in respect of industry practice, referred to what her Worship had previously said, namely that in failing to make its periodic (sic) payments as they fell due Goltep was acting in a manner not uncommon in the construction industry. This finding was based on the uncontradicted evidence of Warren Watt, the managing director of Eastern Elevators, who swore an affidavit and was cross-examined. 39 Mr Watts also said that he was at all material times of the view that Goltep was able to pay its accounts as and when they fell due (para 25), and that with respect to the general circumstances concerning payment of the Eastern account, he did not at any time believe Goltep to be insolvent as the repayment arrangements entered into with Goltep were similar to those entered into with many other companies by Eastern Elevators in the building industry (para 37), that he was never informed by any officer of Goltep or by anyone else of the financial difficulties which ultimately befell Goltep, and never suspected that it was insolvent or unable to pay its debts as they fell due (paras 40-41). 40 Her Worship accepted Mr Watt's evidence that he did not believe or suspect that Goltep was insolvent and in particular that having regard to what he described as "common practice" in the industry, the lateness of the progress payments did not indicate insolvency or give rise to any suspicion thereof. A matter not adverted to in her Worship's judgment, but which could be construed as further pointing away from any suspicion of this insolvency or impending insolvency, was the tendering for the Hurstville project. A company, one might expect, would hardly waste time and effort tendering for another job if it believed or suspected the tenderee was unlikely to continue in business. 41 It was submitted that her Worship failed to have regard to two factors, namely the refusal to deliver the lift on site until the third progress payment was made and the reference to the dispute resolution process. Mr Watt was cross-examined on both these matters and his explanations were apparently accepted by her Worship. 42 In relation to the objective test under s 588FG (2)(b)(ii) it was submitted that her Worship did not address this issue, and in particular failed to have regard to the fact that because Eastern Elevators had what was described as "leverage" in that unless it encoded the lifts they could not be used and Eastern was not prepared to encode the lifts unless paid, it may have been "put off the scent" and not suspected insolvency when a "reasonable person" would have. However, the "reasonable person" whose position is to be considered is the "reasonable person" in the person's (creditor's) circumstances and so the creditor to be considered is a creditor with the same "leverage" as Eastern had. 43 In Sims v Celcast Pty Ltd (1998) 71 SASR 142 at 145-6, the Court drew attention to the difference between paras (b)(i) and (b)(ii) of s 588FG(2) and how a creditor would not meet the test under (b)(ii) if it did not carefully examine the information available to it. "The fact that a creditor has in good faith lulled itself by its own deductive processes to a position which (with the benefit of hindsight) can afterwards be shown to be flawed will not avail that creditor by reliance on subpara (b)(i) if a reasonable person should have read the signs differently; subpara (b)(ii) will still remain as a hurdle for that creditor." 44 But this case did not concern an examination of balance sheets or other financial material, but depended on what if any conclusions should be drawn from the facts of late payment and the other matters referred to in the evidence. Mr Watt said that did not lead him to suspect insolvency etc and there was no evidence from anyone else in the building industry to say that those signs would, or should, give rise to such a suspicion. 45 The plaintiffs adduced no evidence to the effect that a reasonable person in the position of the defendant should have suspected the company's insolvency and a Notice to Produce calling for any information which should have caused Eastern Elevators to suspect that Goltep was insolvent had been served and when called on, produced the reply "nothing produced". The evidence was all one way, and there was therefore no material on which a finding could be made that para (b)(ii) had not been satisfied. 46 There could be cases where the signs are so obvious that a reasonable person cannot ignore them, but this was not such an extreme case. 47 Unlike an appeal from the Equity Division or the District Court to the Court of Appeal, which is by way of re-hearing: Supreme Court Act 1970, s 75A(5), an appeal to this Division from the Local Court is limited to errors in point of law: Local Court (Civil Claims) Act 1970, s 69(2) and it is not open to this Court to review the Magistrate's findings of fact. 48 For the reasons given I am satisfied that the Magistrate correctly identified the issues to be determined, took into account, so far as she was able to on the limited evidence, both sub paras of s 588FG(2), that her findings of fact were open on the evidence and there was no error of law. 49 Accordingly, notwithstanding her error in her finding that there was a running account, this was not a case where it was open to her to make an order under s 588FF for the repayment of the two impugned progress payments and her judgment in favour of the defendant in the Local Court should be affirmed. 50 The appeal is dismissed with costs. **********

Wily v Eastern Elevators Pty Limited

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Judgment (10 paragraphs)

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