Cawthorn, David Saxby v D'Aquino Bros Pty Ltd [1997] FCA 449

IN THE FEDERAL COURT OF AUSTRALIA ) ) NEW SOUTH WALES DISTRICT REGISTRY ) No. NG 3646 of 1995 ) GENERAL DIVISION )

IN THE MATTER OF ILLAWARRA WHOLESALE LIQUOR PTY LIMITED (IN LIQUIDATION) AUSTRALIAN COMPANY NUMBER: 053 687 719 BETWEEN: DAVID SAXBY CAWTHORN in his capacity as Liquidator of Illawarra Wholesale Liquor Pty Limited (In Liquidation) ACN 053 687 719 Applicant AND: D'AQUINO BROS PTY LIMITED Respondent

CORAM: EMMETT J PLACE: SYDNEY DATED: 9 MAY 1997

EX TEMPORE REASONS FOR JUDGMENT This is an application brought under section 565 of the Corporations Law ("the Law") which provides, relevantly, that a payment made by a company that, if it had been made or incurred by a natural person, would, in the event of his or her becoming a bankrupt, be void as against the trustee in bankruptcy is, in the event of a company being wound up, void as against the liquidator. The applicant is the liquidator of Illawarra Wholesale Liquor Pty Ltd to which I shall refer as "the Company", having been appointed as such on 17 December 1992 by the Supreme Court of New South Wales. The application for the winding up of the Company was filed on 17 November 1992 and, accordingly, the relation back period for the purposes of section 565 of the Law, in so far as that section imports section 122 of the Bankruptcy Act 1966 ("the Act") commenced on 17 May 1992. The application relates to six payments said to have been made to the respondent ("D'Aquino") by the Company during that period, being: · a payment made by cheque dated 26 May 1992 in the sum of $89,880.67; · a payment in the sum of $37,243.37 made by cheque dated 17 July 1992; · three payments respectively in the sums of $20,000, $60,000 and $50,000 made by cheques dated 27 July 1992, 7 August 1992 and 18 August 1992; and · a payment in the sum of $7,930 by cheque dated 6 October 1992. I grouped the three cheques for round figures together because they appear to fall within a single category. In effect, there are four questions that arise in the proceedings. I shall deal with each of them separately. The first payment was made by a cheque in the sum of $37,243.37 following the presentation and dishonour of a cheque for that sum which had previously been delivered to D'Aquino. The Company carried on business as a seller of liquor and D'Aquino was a supplier of liquor to the Company. As at May 1992 the Company was indebted to D'Aquino in a sum in excess of $200,000. The Company drew a cheque for $69,165.27 on 12 May 1992. There is some evidence that that cheque was cancelled. It appears that it was presented and dishonoured. On 20 May 1992, a cheque for $89,880.67 was also drawn, delivered to D'Aquino, presented for payment and dishonoured. Mr Rex Nunzio D'Aquino gave evidence concerning the dishonour of the cheque for $89,880.67. Mr D'Aquino was the administration manager of D'Aquino at the time. The Company had traded with D'Aquino for approximately two years before 1992 and at that stage the Company was indebted to D'Aquino for goods which had previously been sold and delivered but not yet paid for. The evidence is not totally clear as to the level of that debt. However, Mr D'Aquino swore an affidavit of 7 May 1997 in which he said: At the time D'Aquinos put the company onto C.O.D., D'Aquinos were owed $137,007.09. At the time D'Aquinos ceased to trade with the Company the debt owed by the Company to D'Aquinos was $141,321.44. I shall refer directly to what was meant by putting the Company "onto C.O.D.". That evidence indicates that at some point the records of D'Aquino indicated that the Company was indebted to it in the sum of $137,007.09. The evidence concerning the Company being, "put... onto C.O.D.", related to the dishonour of the cheque. Mr D'Aquino says that at about that time, although he was hazy as to the precise date and indeed his evidence changed as to when the communication took place, he had a telephone conversation with an officer of the Company as follows: We will freeze your present account until you are able to make repayments. We will continue to supply you on a COD basis. You place your order, we will cost it and give you the amount required to be paid for it. Once you have paid for the order you can then come and collect it. Once you get back onto your feet you can start to pay your old accounts. The response was that that would be acceptable. Subsequently Mr D'Aquino also gave evidence of a further conversation which had preceded that to which I have just referred. Mr D'Aquino said: Your last cheque has bounced. You have now had a number of cheques that have bounced. We cannot continue to supply you on credit. The response was: The Company is going through some cash flow problems at the moment. We really need your help in continuing to supply us until we get back on our feet. You know things have been difficult with the recession but I am confident that we can trade out of our difficulties. The evidence indicated there may well have been as many as three cheques in this period which were dishonoured, the third cheque being a cheque which was presented after the cheque for $89,880.67 to which I have referred. Mr D'Aquino agreed in cross-examination that it was unusual to have bounced cheques. He formed the view that the Company was having some difficulty with cash flow and said that, having been involved in the liquor trade, he understood perfectly well the temporary cash flow difficulties caused when customers are slow in paying their accounts. He said, however, that he had visited the Company's warehouse which appeared to be well stocked which, he said, indicated to him that the business was basically sound, notwithstanding any temporary cash flow difficulties. Nevertheless he agreed that, following the dishonour of the cheques, he was worried that at the end of the day D'Aquino would not be paid. He acknowledged that the dishonour of the cheques meant that the Company had problems. He agreed that he knew there was a real risk that D'Aquino would not be paid. He knew that the Company could not pay the debt that was then outstanding and that there was a possibility that D'Aquino was exposed. He also agreed that it was unusual to put a customer on a COD basis. At that time D'Aquino was dealing with hundreds of customers and possibly all but the Company had some credit arrangements. It is in those circumstances that one must consider the payment made by the first cheque. Section 122 of the Act requires that a number of matters be established by a liquidator. First, there must be a payment. It is common ground that all of the payments to which I have referred are payments for the purpose of section 122. Second, the payments must take place within six months before the commencement of the winding up. It is common ground that that requirement is satisfied. Third, the payments must be made at a time when the Company was unable to pay its debts as they fell due. It is common ground that that requirement was satisfied. The fourth requirement and the fifth requirement are that the payment must be made in favour of a creditor and that the effect of the transaction is to confer a preference or advantage on that creditor. It is in relation to those two requirements that the issue before me arises. It is common ground that the Company's financial position upon its winding up is that there is a very substantial deficiency. Accordingly, if the payments were payments made to the respondent as a creditor, there is evidence that the effect of the payments was to confer a preference, priority or advantage over the other unsecured creditors. I understand the paragraph of Mr D'Aquino's affidavit to which I have referred above as being evidence that, upon payment of the sum of $89,880.67, the balance of the Company's account stood at $137,007.09. D'Aquino "put the company onto COD" in the way to which I have referred, after that payment had been made, as I understand the evidence, although the evidence is by no means totally clear in that regard. However, the paragraph was not challenged in substance in the sense that it was not objected to nor was there any cross-examination as to its substance. The effect of the payment was to reduce the indebtedness of the Company to D'Aquino by the amount of that payment in circumstances where Mr D'Aquino's understanding, which I must take to be the understanding of D'Aquino, was as I have indicated. Reliance was placed by D'Aquino on observations made by Kitto J in Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266 at 302 as follows: