Morton & Anor v Rexel Electrical Supplies Pty Ltd [2015] QDC 49

In brief: A District Court of Queensland decision addressing defences to an unfair preference action, inclusive of: good faith; set-off; and running account.  The Liquidator’s opinion that the company was insolvent in reliance upon records that failed to comply with s 286 of the Act is also considered.

Case summary by Scott D. Taylor.

For a copy of the full judgment, please click here.

Implications

Implications for Liquidators and Defendants to unfair preference actions:

•  On Solvency - Liquidators reliance upon books and records available to him/her: The failure of a company to keep correct written records (to satisfy s 286 of the Act) does not, of itself, destroy the basis of permitted reliance on those documents which are available in deciding issues such as insolvency and indebtedness at a particular point in time, or their efficacy.

• On Set-Off – Set offs under s 553C are available where unfair preferences apply: This is the first time an Australian Court has determined that s 553C can apply to unfair preferences.  The decision of Buzzle Operations Pty Ltd (in liq) v Apple Computers Australia (involving the set-off of an uncommercial transaction rather than an unfair preference) was followed.

•  On Running Account - Continued provision of goods/services may be isolated extensions of credit: Continuing to do business with a company may not constitute a series of transactions within a continuing business relationship, but rather, isolated extensions of credit ancillary to the primary objective of being paid.

•  On ‘Good Faith’ – Defence not made out notwithstanding some payments made pursuant to an agreed plan.

Facts

South East Queensland Machinery Manufacturing and Distribution (Mining) Number 1 Pty Ltd (In Liquidation), previously named Aran Management Pty Ltd (‘Aran Management’), was one of eight within a group of companies that manufactured and supplied complex mining fill plants.

Rexel Electrical Supplies Pty Ltd trading as Inaco Automation Controls (‘Inaco’) supplied electrical components to Aran Management that were used in the manufacture of the mining fill plants.

Aran Management sought to recover $197,469.16 as unfair preferences under s 588FA of the Corporations Act 2001 (the ‘Act’).

Inaco relies on three defences to resist the claim:

(a)    Good faith under s 588FG;

(b)   Running account so as to trigger the operation of 588FA(3); and

(c)    Set off pursuant to s 553C.

Further, Inaco did not admit that:

•  Aran Management was insolvent at the time of the payments; and

•  It received, by way of unfair preference payments, more than it would have received in the event those payments were set aside and it provided in the winding up.

At trial, Inaco objected to the admission of various documents of Aran Management on the basis:

•  ‘Certainly he (Mr Morton) can give evidence of what’s happened after his appointment (as Liquidator) and what is the consequence of his investigation, but those things are not proof of the truth of those particular matters having happened.  So, for example, when the investigation, or the relationship between Aran International, for example, and Aran Management, that’s purely hearsay.  It’s a – it’s not evidence of the truth of those facts.’

Inaco disputed the accuracy and authenticity of the documents, and the Liquidator’s conclusions drawn from the documents based on the Liquidator’s conclusion that Aran Management had failed to keep financial records in accordance with s 286 of the Act.

Decision

Solvency – Liquidators Opinion

His Honour accepted the Liquidators opinion that Aran Management was balance sheet insolvent from 14 February 2012 and cash flow insolvent from at least 1 March 2012 up until the appointment of the Liquidator on 14 August 2012.

The Liquidator’s conclusions based upon the books and records made available to him that the company was insolvent were accepted, notwithstanding that the books and records necessarily represent records sufficient to satisfy s 286 of the Act.  

His Honour stated further that:

•  ‘…a failure to comply with s 286 does not, of itself, destroy the basis of permitted reliance on those documents which are available in deciding issues such as insolvency and indebtedness at a particular point in time, or their efficacy.’

Running Account – 588FA(3)

In determining no running account defence existed, His Honour accepted that Aran Management had satisfied the onus of establishing that the payments were not an integral part of a continuing business relationship, but rather, a series of payments designed to reduce the pre-existing indebtedness.

His Honour held that Inaco’s focus was on reducing Aran Managements indebtedness to it: 

•  ‘…even if that meant doing some further business with it while payments were being made.  The further business did not as I see it, constitute a series of transactions within a continuing business relationship. Rather, I see those transactions as isolated extensions of credit, ancillary to Inaco’s primary objective of being paid the main debt and to assist [Aran] Management to make payment.’

Good Faith – s 588FG

His Honour held that Inaco failed to make out its defence of ‘good faith’ and referenced the following sequence of events:

1.  Aran Management verbally informed Inaco that it ‘did not have the money straight away to pay for [Inaco’s  $215,421.80 invoice]’, two weeks after its issue (in mid-February 2012).
2.  Aran Management represented that a payment of $16,224.07 would be paid by 23 March 2012.  This payment was made on time.
3.  On 28 March 2012, Inaco informed Aran Management that there were still two outstanding January invoices totalling $244,558.15. 
4.  On 28 March 2012, Aran Management responded stating:
   
   ‘As discussed with Ashok, we will have to set up the payment plan to clear these.  I can give you some indication of our plan at the beginning of next week.'
   
   
5. Also on 28 March 2012, Inaco threatened to put a stop on Aran Management’s account unless the outstanding invoices were paid.
6.  A payment plan was proposed by Aran Management on 3 April 2012 which was subsequently accepted.
7.  Aran Management failed to make Payment number 1 on time (albeit two days late).
8.  Payment number 2 was paid five days late (paid 18 April 2012).
9.  Payments numbered 3 and 4 were paid on time (paid 4 May 2012 and 11 May 2012 respectively).
10.  Payments numbered 6 and 7 were never paid (due 18 May 2012 and 2 May 2012 respectively).
11.  On 22 June 2012, Inaco served a statutory demand upon Aran Management.

Set-off – s 553C

His Honour accepted Inaco’s submissions in part, insofar as $64,658.15 of the $92,323.28 claimed was a set-off.  

The plain language of s 553C was followed.

Section 553C can apply to unfair preference actions.

The decision of the NSW Court of Appeal in Buzzle Operations Pty Ltd (in liq) v Apple Computers Australia(involving the set-off of an uncommercial transaction rather than an unfair preference) was followed, as was the reasoning adopted by Mansfield J in Re Parker.

For the same reasons rejecting Inaco’s ‘good faith’ argument, His Honour found that in relation to all but the 31 January invoice, Inaco had actual notice of acts that would have indicated to a reasonable person in Inaco’s position the fact that Aran Management was unable to pay.

Costs

Taylor David successfully recovered legal costs of the entire action on an indemnity basis on behalf of the Mr Morton as liquidator. See: Morton & Anor v Rexel Electrical Supplies Pty Ltd (No 2) [2016] QDC 6.