Rodgers v Rumortex [1999] NSWSC 658

New South Wales Supreme Court CITATION : Rodgers v Rumortex [1999] NSWSC 658 CURRENT JURISDICTION : Equity FILE NUMBER(S) : 4463 of 1997 HEARING DATE(S) : 25 May 1999 JUDGMENT DATE : 25 May 1999

Peter Rodgers in their capacity as liquidators of Pranx Leisurewear Pty. Ltd. (In Liquidation) (First Plaintiff) PARTIES : Geoffrey McDonald in their capacity as liquidators of Pranze Leisurewear Pty. Ltd (In Liquidation) (Second Plaintiff) Rumortex Pty. Ltd. (Defendant) JUDGMENT OF : Windeyer J at 1

COUNSEL : Mr. C.N. Bowman (Plaintiffs) Mr. R.D. Marshall (Defendant) SOLICITORS : The Walker Law Group Roxburgh & Company CATCHWORDS : CORPORATIONS - winding up - insolvent transactions and unfair preferences - whether payments made when corporation was insolvent DECISION : See paragraphs 23-27

THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

WINDEYER J

TUESDAY 25 MAY 1999

004463/97 PETER RODGERS IN THEIR CAPACITY AS LIQUIDATORS OF PRANX LEISUREWEAR PTY LTD (IN LIQUIDATION) & ANOR v RUMORTEX PTY LTD

JUDGMENT

1 HIS HONOUR: In this matter the plaintiff, as liquidator of Pranx Leisurewear Pty Ltd, seeks to recover from the defendant, Rumortex Pty Ltd, the sum of $36,000 on the basis that the six payments of $6,000 which constitute that amount are insolvent transactions and unfair preferences in the winding up of Pranx. It is not suggested that they are not unfair preferences if the plaintiff is otherwise entitled to success. 2 Pranx was placed in administration on 6 February 1997 and an order for winding up was made on 5 March 1997. The relation back period is to 6 August 1996. 3 Rumortex, which is a Victorian company, supplied goods to Pranx between September 1995 and October 1995 to the value of $66,451.72. It obtained default judgment for debt in the County Court of Victoria for $71,182.32 on 14 May 1996. 4 An application was made to the Registrar of the court for an order for payment by instalments, the instalments offered being $6,000 per month. The first payment, as I understand it, was to be made on 11 or 12 August 1996. 5 Mr McCaskill, the managing director of Rumortex, opposed the making of the instalment order. He did so because he believed that Pranx could pay more. 6 The basis on which the order was sought, and presumably made, was that Pranx had insufficient liquidity and resources to satisfy the judgment in lump sum form. The application was supported by an affidavit of the solicitor, Mr Bullard, acting for Pranx, who deposed that the position of the company had improved since 30 June 1995, and the directors believed that the turnover had increased and the gross profit margin had improved, and the directors had injected funds into the company of about $150,000 to enable it to improve its balance sheet and clear debts, and that it had orders to the value of $600,000 to be delivered during July and August 1996. 7 That affidavit also evidenced a debt due to Stretch-Tex Pty Ltd which was the subject of a statutory demand in respect of which arrangements had been made for payment by instalments. 8 It must, I think, be assumed that the Registrar accepted all of this, although one would have to think he took an optimistic view in doing so. 9 It is accepted that the company was insolvent in the early part of 1996 and on 6 February 1996. 10 The result of this is that it will be presumed to be insolvent during the period during which the payments in question were made pursuant to s 588E(3) of the Corporations Law. The only result of that is that the onus shifts to Rumortex if it wishes to show that the company was not insolvent at the time any one of the payments the subject of challenge was made. There is, of course, also a defence available under s 588FG(2) if it can be established that Rumortex was a party to the payments in good faith, and that at that time, meaning at the time of each payment, had no reasonable grounds for suspecting the company was insolvent or would become insolvent, and that a reasonable person in the position of Rumortex would have no such grounds, and valuable consideration was given for the transaction impugned. 11 It is not suggested that there is a lack of good faith or that there is a lack of valuable consideration. Thus for Rumortex to make out that defence it would have to prove that it came within s 588FG(2)(b)(i) and (ii). 12 Mr Rodgers is the liquidator of the company and there can be no doubt that at the time of the winding up it was hopelessly insolvent insofar as having an excess of liabilities over assets is concerned and having had an excess of current liabilities over current assets. 13 It is also true, as Mr Rodgers has pointed out, that the position was deteriorating between 30 June 1995 and 30 June 1996 up to the date of winding up. In fact between 1995 and 1996 it seems to have been necessary to support the company by the injection of a further $150,000 into its loan funds to enable it to pay its way, those moneys having been introduced, it seems, by the directors. Thus it is perfectly clear that unless the directors continued to support the company it was hopelessly insolvent at any time after 30 June 1995. 14 There is evidence in an affidavit of Mr Rodgers sworn 4 May 1999 of a history of problems at least in the early part of 1996, but that is not a matter of any substantial importance as it is clear, in my view, that at least at 30 June 1996 the company was insolvent and, in fact, it has itself said so and relied upon that to obtain the order for payment by instalments. The evidence of Mr Rodgers as to the position after that date is not so strong. There are various occasions when petrol bills, electricity bills and telephone bills were paid a few days outside the due dates. There is, however, nothing to show that there would not have been sufficient funds to pay those particular accounts within the due dates and I do not think that anything turns on that. 15 There are, however, some other accounts, particularly one in respect of goods supplied by STU Textiles on what was, apparently, a cash on delivery basis which remained outstanding albeit that the company had continued to supply, and there are a number of other accounts with amounts overdue from 1995, yet trading continued and payments for goods delivered continued to be made. 16 The position of the company was that it received nearly all income received in the year in the period between about August and December in that year. It received a little bit in January, according to Mr Rodgers, and practically no income at all from February to June. It would seem on that basis that at some stage during the period, probably in the months before Christmas 1996, when the directors were aware of the income the company was likely to receive during that period and the expenses which would be incurred in the five months up to 30 June 1997, that it became starkly apparent that there was no possibility of the company continuing to trade. It was for that reason that the directors decided to withdraw their support and not continue to fund the company thereby ensuring its winding up. 17 The defendant, having the onus of showing that at the time some of the payments were made the company was not insolvent, really has little to rely on except the fact that during most of the period the company had funds in its bank account in credit and that is a position which is, to say the least, unusual in matters of this kind where very often bank accounts are shown to be overdrawn. 18 Had it not been for the support given by the directors after June 1996, I would find the company was insolvent and unable to pay its debts and its likely future debts as they fell due, but in view of the support which was given after that period and the fact that the company did continue to pay the bulk of its creditors I am unable to find that it was not able to pay those creditors as they fell due and, I suppose, as there is a presumption in favour of insolvency I should find the reverse and find that during that period the company was able to pay its creditors as they fell due. That could not apply to the time when the original instalment order was sought. The reason for that, in my view, is that it is admitted and has not been shown to be otherwise, that at that time the company could not pay. 19 It follows from this that the first payment which was made must be considered to be one made at a time when it has not been established to my satisfaction that the company was not insolvent but, so far as payments received after that date are concerned, I consider that the defendant has satisfied the onus it is required to bear, in that during all the time up to the last payment the evidence is that the company was trading and was paying its creditors, albeit on the last day or shortly thereafter, and at most times had surplus moneys in the bank or moneys which, at least, it considered were available to it and were not required to pay any creditor who was unduly pressing. I consider that so far as those payments are concerned that the company has not been shown to be insolvent at that time. 20 I should add that it is my view even if that were not the position, that apart from the first payment the defendant has established the defence which I mentioned under s588FG(2). The reason for that is that while the first ordered payment was received at a time when there must have been some doubt about whether or not the company would be able to maintain or to make payments, even though it had satisfied the Registrar of the Victorian County Court that it could, the other payments were all made, as I understand it, some days earlier than required under the terms of the agreement by a company with which at that time the defendant had no other business dealings. Thus the defendant on receipt of these payments could properly conclude that the company making the payments was trading at least reasonably as it said it would do in the affidavit which grounded its instalment order. 21 I do not think that it should be said that, whichever subsection one considers the matter under, but considering (ii) as being the more onerous, that a reasonable person in the position of Rumortex receiving moneys under a court order obtained on the basis that if that order was obtained the judgment debtor would be able to discharge its liabilities, should think or have grounds for suspecting that when it received those payments the company making them was insolvent or would become insolvent. 22 Thus I find that the plaintiff is entitled to succeed in respect of the $6,000 payment made on 6 August 1996 which should be declared to be an insolvent transaction and unfair preference with an order for payment of that amount to the liquidator, but otherwise the summons should be dismissed. 23 I should add that in my view a preference claim for $36,000 should not be heard in this court. I said that at the directions hearing and I say it again. That claim is within the jurisdiction of the Local Court of New South Wales and that is the court where these claims ought to be brought unless there is some special reason why they should not be so brought. There is nothing so outstandingly difficult about this claim which justifies it having been brought in this court. 24 I declare that the payment of $6,000 made to the defendant by Pranx Leisurewear Pty Ltd (In Liquidation) on 6 August 1996 was an insolvent transaction void against the plaintiffs. I order that the defendant pay the sum of $6,000 together with interest at court rates from 19 May 1997. 25 <COUNSEL ADDRESSED ON COSTS 26 I order that the defendant pay the plaintiff's costs and, in my view, their costs should be no more than the costs which would be obtained on similar proceedings in the Local Court. The defendant has stated that it would be prepared for me to make an order in an amount of $4,000 and the plaintiff has accepted that. In my view that is an amount which is reasonably generous towards the plaintiff. In those circumstances I propose to make that order. I order that the defendant pay the plaintiff's costs assessed by agreement as $4,000. Exhibits may be returned.