Reported Decision : 43 ACSR 436 New South Wales Supreme Court CITATION : Whitton v Konemann Australia [2002] NSWSC 1137 CURRENT JURISDICTION: Common Law FILE NUMBER(S) : SC 10584/02 HEARING DATE(S) : 5 August 2002 JUDGMENT DATE : 28 November 2002 PARTIES : Robert Whitton as liquidator of Chittagong Pty Ltd (in liquidation) (A) Konemann Australia Pty Ltd (R) JUDGMENT OF : Austin J COUNSEL : Mr J T Johnson (A) No appearance for Respondent SOLICITORS : Access Business Lawyers, Wollongong (A) CATCHWORDS : CORPORATIONS - winding up - unfair preferences - subjective and objective ingredients of defence in s 588FG(2) - ingredients of running account under s 588FA(3) Corporations Act 2001 (Cth) ss 588FA, 588FE, 588FF, 588FG LEGISLATION CITED : Justices Act 1902 (NSW) ss 101-115 Local Courts (Civil Claims) Act 1970 (NSW) s 69 Australian Broadcasting Tribunal v Bond (1990) 170 CLR 321 Australian Gaslight Company v Valuer-General (1940) 40 SR(NSW) 126 Carr v Neill [1999] NSWSC 1263 Mahony v Industrial Registrar of New South Wales (1986) 8 NSWLR 1 CASES CITED : Poricanin v Australian Consolidated Industries Ltd (1979) 2 NSWLR 417 Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266 Re Ermayne Pty Ltd; Sims v Tech Holdings Pty Ltd (1999) 30 ACSR 330 Sims v Calcast Pty Ltd (1998) 71 SASR 142 Sutherland v Eurolinx Pty Ltd (2001) 37 ACSR 477 DECISION : See under heading "Conclusion" IN THE SUPREME COURT OF NEW SOUTH WALES COMMON LAW DIVISION AUSTIN J THURSDAY 28 NOVEMBER 2002 10584/02 ROBERT WHITTON AS LIQUIDATOR OF CHITTAGONG PTY LTD V KONEMANN AUSTRALIA PTY LTD JUDGMENT 1 HIS HONOUR: This is an appeal from a decision made on 4 February 2002 by Mr P Gould, a Magistrate at the Local Court in the Downing Centre, to dismiss the appellant's claim to recover $36,811.20 plus interest and costs under the unfair preference and uncommercial transaction provisions of the Corporations Act 2001 (Cth). 2 The appellant before me, plaintiff in the Local Court, is Robert Whitton, as liquidator of Chittagong Pty Ltd (in liq) ("Chittagong"). The respondent, the defendant in the Local Court proceeding, is a company with which Chittagong dealt, called Konemann Australia Pty Ltd ("Konemann"). 3 There was no appearance on behalf of the respondent at the hearing of the appeal, but I am satisfied by the evidence before me that proper notice of the appeal was given to the respondent. The evidence suggests that the respondent is a subsidiary of a German company, which is in liquidation or external administration, and the local representative who was formerly a director of the respondent was unable to obtain instructions from the German parent. 4 The appeal from Mr Gould's decision is brought under s 69 of the Local Courts (Civil Claims) Act 1970 (NSW). That section provides, relevantly: "69 (1) Subject to subsection (2), all judgments and orders of a court exercising jurisdiction under this Act shall be final and conclusive. (2) A party to proceedings under this Act who is dissatisfied with the judgment or order of the court as being erroneous in point of law, may appeal to the Supreme Court therefrom." 5 Subsection 69 (3) of that Act states that the provisions of ss 101 to 115 of the Justices Act 1902 (NSW) (that is, Part 5 of the Justices Act) apply, to the extent to which they are applicable, to appeals under subsection (2) in the same way as they apply to appeals to the Supreme Court under those provisions. 6 Section 102 (3) of the Justices Act states that Part 5 applies to an order of a magistrate made under another Act against which an appeal is provided for under the other Act to the Supreme Court, "to the extent to which [Part 5] not inconsistent with any other Act". Section 104 (1) of the Justices Act permits an appeal to be brought to the Supreme Court from certain convictions in summary proceedings, on a ground involving a question of law or a question of mixed fact and law, or on the ground that the conviction cannot be supported having regard to the evidence. 7 It has been held that, in a civil case where an appeal lies under s 69 (2), s 104 (1) of the Justices Act does not operate to extend the jurisdiction of the Supreme Court to entertain an appeal, beyond an appeal for error of law: Carr v Neill [1999] NSWSC 1263. In that case Sully J said (at paragraph 11) that it would be entirely inconsistent with the plain provisions of s 69 (2) to treat an appeal brought to this Court under that very limited and particular provision, as having been extensively expanded by the provisions of s 104 (1) of the Justices Act. Therefore the appellant must show that Mr Gould's decision was "erroneous in point of law". 8 There is a useful discussion of the concept of error of law in the judgment of Sully J in Carr v Neill. To summarise the principles relevant to this case: (a) the question whether there is any evidence of a particular fact is a question of law, as is the question whether particular inferences can be drawn from facts that have been found: Australian Broadcasting Tribunal v Bond (1990) 170 CLR 321, 355 per Mason CJ; (b) therefore the making of findings and the drawing of inferences in the absence of evidence is an error of law: ibid ; (c) and likewise, a finding based upon inferences from facts can be disturbed if the facts inferred and supported by evidence are incapable of justifying the finding based upon those inferences: Australian Gaslight Company v Valuer-General (1940) 40 SR(NSW) 126, at 138 per Jordan CJ; (d) as an application of the last principle, where the magistrate is required to make a decision of fact in relation to the application of a statutory description (such as in s 588FG (2)), there may be an error of law if the decision on the facts is one that could not have been reasonably entertained or supported if the magistrate had properly understood the true construction of the legislation: Mahony v Industrial Registrar of New South Wales (1986) 8 NSWLR 1, at 2 per Hope JA, and 5 per Samuels JA; (e) on the other hand, a finding based upon inferences from facts cannot be disturbed if the facts inferred by the magistrate, upon which his finding is based, are capable of supporting the finding, and there is evidence capable of supporting the inferences: Australian Gaslight Company v Valuer-General at 138; (f) and further, an alleged error in the evaluation of the evidence, even if it extends to the point of perversity, is no more than an error of fact: Poricanin v Australian Consolidated Industries Ltd (1979) 2 NSWLR 417. Facts 9 The Company carried on a book selling business, apparently trading as "The Book Sale" amongst other names, from premises at 575 George Street Sydney. The sole directors and shareholders of the company were Adrian Savvas and Marion Mueller. 10 Chittagong opened an account with Konemann on about 6 November 1996 in the name of "Boosal", in circumstances that I shall describe in more detail. It appears from the credit application form for that account that the terms of credit supply were 30 days credit with a limit of $5000. Another company with which Mr Savvas was associated, called Suchoy Pty Ltd, opened a credit account with the defendant in July 1997. 11 During the period from 4 March 1998 to 19 August 1998 Konemann received eight payments by cheques drawn on the account of Chittagong. Each except one of the payments was for $5000, and the cheques were all met on presentation for payment, although there was some evidence that cheques presented for payment at other times had not been met. The payment dates for the seven cheques for $5000 each were 6 March, 25 March, 17 April, a day after 29 April, 1 June, 9 June and 19 August 1998. The eighth cheque was for $1811.20, which was met on presentation for payment on 10 July 1998. Mr Whitton seeks to recover the total amount of $36,811.20 which was paid by Chittagong to Konemann by these cheques, together with interest and costs. 12 On about 13 October 1997 a company called Richmich Holdings Pty Ltd, claiming to be a creditor of Chittagong, served a statutory demand on Chittagong for $100,000. On 28 November 1997 Richmich filed an application in the Federal Court of Australia seeking an order that Chittagong be wound up in insolvency, consequent upon its failure to comply with the statutory demand. The Federal Court made an order for the winding up of Chittagong on 27 August 1998, and appointed Mr Whitton liquidator of the company. 13 It was not disputed before the learned magistrate that: · the relation-back day for the purposes of s 9 and Part 5.7B of the Corporations Act was 28 November 1997, the date of filing of the application for winding up; · Chittagong was insolvent during the whole of the period beginning six months before the relation-back day and ending when the winding up order was made on 27 August 1998, and was therefore insolvent when each of the cheques was drawn and paid; · at all relevant times Konemann was a creditor of Chittagong; · the cheques were referable to transactions for the purposes of s 588FA between Chittagong and Konemann; · each of those transactions, if considered separately, resulted in Konemann receiving from Chittagong, in respect of an unsecured debt that Chittagong owed to Konemann, more than Konemann would receive from Chittagong in respect of the debt if the transaction was set aside and Konemann were to prove for the debt in the winding up of Chittagong; · consequently each transaction was an unfair preference given by Chittagong to Konemann for the purposes of s 588FA(1), and was an insolvent transaction of Chittagong for the purposes of s 588FC, and was a voidable transaction for the purposes of s 588FE. 14 The evidence before the learned magistrate also may have established that the transactions were uncommercial transactions for the purposes of s 588FB, although it is unnecessary to make any determination on that question in this appeal and I shall not do so. 15 The only questions at issue before the learned magistrate and on this appeal relate to the availability of the statutory defence to a recovery action based on a voidable transaction under s 588FG(2), and the application of the "running account" provisions of s 588FA(3). The appeal 16 The appeal was brought by summons filed in the Common Law Division of the Court, but the hearing was referred to me, by a judge of that Division, as the Corporations List judge. The grounds of appeal set out in the summons are as follows: "1. The plaintiff appeals from part of His Worship's decision being: a) That the Defendant was entitled to the benefit of the statutory defence under s 588FG of the Corporations Act; and b) That there was a 'running account' between the Defendant and Chittagong Pty Ltd. 2. His Worship erred by failing to properly consider the onus of the Defendant to prove no reasonable grounds for suspicion of insolvency under s 588FG of the Corporations Act. 3. His Worship erred in finding that the Defendant did not have a subjective suspicion of insolvency. 4. His Worship erred in finding that a reasonable person in the circumstances of the defendant would have had no reasonable grounds for suspecting that Chittagong Pty Ltd was insolvent at the time of the impugned payments by Chittagong Pty Ltd. 5. His Worship erred in failing to take into account the Defendant's own evidence concerning suspicion of insolvency. 6. His Worship erred in failing to take into account the whole of the circumstances surrounding the impugned payments. 7. His Worship erred in not applying the 'commercial reality' test to the impugned payments and the surrounding circumstances. 8. The Judgment cannot be supported having regard to the evidence." 17 These various grounds of appeal are available only to the extent that they establish that the learned magistrate's decision was "erroneous in point of law", having regard to the principles summarised above. The s 588FG(2) defence 18 Section 588FG(2) states: "(2) A Court is not to make under section 588FF an order materially prejudicing a right or interest of a person if the transaction is not an unfair loan to the company and it is proved that: (a) the person became a party to the transaction in good faith; and (b) at the time when the person became such a party: (i) the person 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 (ii) a reasonable person in the person's circumstances would have had no such grounds for so suspecting; and (c) the person has provided valuable consideration under the transaction or has changed his, her or its position in reliance on the transaction." 19 This provision confers a statutory defence on a party to a voidable transaction, who would otherwise be liable to be affected by an order under s 588FF, such as an order invalidating the transaction. The onus of making out the ingredients of the defence lies with the defendant: Re Ermayne Pty Ltd; Sims v Tech Holdings Pty Ltd (1999) 30 ACSR 330; Sims v Calcast Pty Ltd (1998) 71 SASR 142. 20 There are four ingredients of the defence, all of which must be established by the defendant: (a) good faith; (b)(i) no reasonable grounds for suspecting insolvency; (b)(ii) a reasonable person would have had no grounds for suspecting; (c) valuable consideration. 21 Here there is no issue regarding ingredient (c). It is commonly said that the other ingredients of the defence involve a subjective test (ingredients (a) and (b)(i)) and an objective test (ingredient (b)(ii)). The appellant contends that the learned magistrate made errors of law in finding that the subjective and the objective tests were satisfied on the facts of this case. 22 The plaintiff and the defendant prepared detailed written submissions before the conclusion of the hearing, and the plaintiff also prepared summary submissions in reply. To understand the findings of the learned magistrate, it is necessary to have regard to the written submissions, which were obviously in the forefront of his mind when he delivered his ex tempore reasons for judgment. The subjective test 23 In Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266, Kitto J defined a "suspicion" in these terms (at 303): "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', as Chambers' Dictionary expresses it. Consequently, a reason to suspect that a fact exists is more than a reason to consider or look into the possibility of its existence." 24 In Sutherland v Eurolinx Pty Ltd (2001) 37 ACSR 477, 483 Santow J applied these observations to s 588FG(2), observing that there is no single factor whose presence invariably establishes that there was, or should have been, the requisite suspicion, and instead it is a question of looking through the contemporary eyes of the parties at the commercial circumstances then prevailing between them. 25 The evidence in this case was within a limited compass. Apart from documents, the learned magistrate had before him statements by Mr Whitton and by Mr Eisenbeis, who was a director of the defendant, with Mr Konemann, at the relevant time. Both Mr Whitton and Mr Eisenbeis were cross-examined. 26 The submissions of the parties drew attention to the following matters of detail that emerged from the evidence (with emphasis on the evidence of Mr Eisenbeis): 1. According to Mr Eisenbeis, there was only one account for "Boosal", although there were two credit applications made to the defendant, one for Chittagong and the other for Suchoy Pty Ltd. 2. The credit application for Chittagong was accepted in November 1996, about two months after commencement of the Boosal account. 3. The credit limit was originally $5000, and the terms of payment were 30 days. 4. Mr Eisenbeis gave evidence that at some later stage the limit was increased to $20,000, but the plaintiff invited the Court to reject that evidence. 5. During the period from November 1996 to mid-1997, the account balance climbed to around $35,000, and remained above $20,000 for most of the period. 6. Mr Eisenbeis gave evidence that it was not unusual in the book industry for retailers not to pay their debts to suppliers for some months over Christmas, although he agreed that non-payment for eight months would cause some concern, and he conceded there were no payments on the Boosal account from 11 April 1997 to 1 December 1997, a period of approximately 7.5 months. 7. In June 1997 a credit application was submitted on behalf of Suchoy Pty Ltd, a company related to Mr Savvas. The credit application was accepted in respect of the same account styling. At that time the Boosal account debt was in excess of $30,000, the last payment having been made on 11 April 1997. 8. There was in evidence a letter to Mr Eisenbeis dated 30 November 1997 from Adrian Savvas Publishing, an entity which Mr Eisenbeis associated with Chittagong, enclosing a cheque for $5000 and saying that 50% of the outstanding debt would be paid by 15 December, with the balance by 31 December. The later payments were not made as promised. 9. Two payments were made in January 1998. A bank deposit statement for 25 February 1998, which shows the dishonouring of a cheque on 12 February 1998, has the notation "cheque dishonoured!!". 10. In the period from March to August 1998 payments totalling $36,811.20 (the payments which are the subject of this proceeding) were made. 11. Until 21 August 1998, the invoices on the account showed the debtor to be "The Book Sale", but from 2 September 1998 onwards, the invoices for the Boosal account showed the debtor as being "Suchoy Pty Ltd". 27 In his written submissions in chief and submissions in reply, the plaintiff laid emphasis on various matters which, he submitted, established that the Court should not accept the evidence of Mr Eisenbeis that he did not suspect, and had no grounds to suspect, that Chittagong was insolvent. Those matters were: (a) The letter of 30 November 1997 enclosing a cheque for $5000 and promising two further payments. The plaintiff pointed out that this letter was written two days after the application to wind up Chittagong was filed in the Federal Court. He submitted that Mr Eisenbeis's evidence, to the effect that Chittagong simply commenced payments without any prompting or pursuit, was implausible, given that 7.5 months had elapsed without payment, and the amount owing was $30,000. (b) The fact that the promised payments were not made. This should have given rise to a suspicion on the part of Mr Eisenbeis, although his evidence was that the non-payment caused him no concern. (c) The fact that, after a year in which the total payments made were less than $10,000, Chittagong in 1998 made payments totalling over $36,000 by regular lump sum instalments set approximately two to three weeks apart. It was implausible for Mr Eisenbeis to say that this happened without prompting, correspondence or consensus between the parties. (d) The fact that, shortly after a winding up order was made in respect of Chittagong, the defendant altered the identity of the debtor on its invoices from "The Book Sale" to "Suchoy Pty Ltd". The proper inference, according to the plaintiff, was that the defendant was aware of the insolvency of Chittagong and was seeking to avoid the consequences of it. Mr Eisenbeis gave evidence in his first statement that invoices were not raised in the name of Suchoy Pty Ltd until January 2000, but it is clear from the documentary evidence that this was not correct. (e) A discrepancy between Mr Eisenbeis's first statement and original defence, on the one hand, and his oral evidence. Mr Eisenbeis said in his first statement that he did not know that Chittagong had been dealing with the defendant, and in the original defence it was stated that the defendant did not deal with Chittagong. However, in cross-examination Mr Eisenbeis conceded that he had been aware of Chittagong's credit application and, indeed, that he had witnessed it. He said that he had "made a mistake". (f) The notation "cheque dishonoured!!". The plaintiff submitted that this showed suspicion of insolvency on the part of the defendant. He also referred to some evidence about a dishonoured cheque to Edition Habit Press, a company that had some connections with Mr Eisenbeis. (g) The credit application by Suchoy Pty Ltd in June 1997. The plaintiff submitted that although Mr Eisenbeis gave evidence that this credit application was not to replace the Chittagong application, he also gave evidence that there were concerns about the brother of Mr Savvas and it was intended to have the business pass through another company. In their conversation in July 1997, Mr Eisenbeis said to Mr Savvas, "is your company going bad, will I get my money?", and in cross-examination he agreed that this was a clear indication of concern. He also conceded that his question, "how will this affect the business?" was a reference to Chittagong rather than to the defendant. 28 In the circumstances, the plaintiff submitted that the defendant did not act in good faith and there were reasonable grounds for it to suspect that Chittagong was insolvent during the whole period from March to August 1998. Further, the plaintiff submitted that the payments were not made "within the ordinary course of business", as they did not take place as part of the undistinguished flow of business, a requirement (he said) that was reinforced by the decision of the Full Court of the Supreme Court of South Australia in Emwest Products Pty Ltd v Olifent (1996) 22 ACSR 202. 29 The defendant's submissions contended that Mr Eisenbeis did not suspect insolvency at any relevant time. The submissions sought to rebut the plaintiff's claim that the evidence by Mr Eisenbeis that he had a "concern" at the time of the credit application by Suchoy Pty Ltd was evidence of actual suspicion or even knowledge of insolvency. Mr Eisenbeis denied that he had any suspicion of insolvency at the time, although he agreed that non-payment for a period of nearly eight months would be unusual. 30 The defendant's submissions referred to the conversation between Mr Savvas and Mr Eisenbeis at the time of the credit application for Suchoy Pty Ltd. Mr Eisenbeis said that when he asked Mr Savvas whether his company was going bad and whether he would get his money, he was expressing concern for the defendant's business rather than for the insolvency of Chittagong. 31 As to the letter of 30 November 1997, the defendant referred to Mr Eisenbeis's evidence that the letter was unsolicited and that no demands had been made by the defendant, and that he personally was not aware of the existence of the letter until it was discovered, much later, in the wrong file. In any event, submitted the defendant, the letter was as consistent with a cash flow problem as with likely or actual insolvency. Although the letter was written two days after the filing of the winding up application, Mr Eisenbeis gave evidence that he did not know anything about problems of insolvency in Chittagong until he was told, much later, that a winding up order had been made. 32 The defendant contended that the amendment of the name of the account to Suchoy shortly after the making of the winding up order was irrelevant because it occurred outside the period in which the impugned payments were made and could not bear on what the defendant knew or suspected at that earlier time. 33 As to the dishonouring of cheques, the defendant submitted that only two cheques were dishonoured, in February and July 1998, and that two days after dishonouring the second cheque, a further cheque for $5000 was paid. In the defendant's submission, the dishonouring of these cheques was nothing more than indicative of a cash flow problem from time to time. 34 The defendant contended that the Court should accept Mr Eisenbeis as a witness of truth, whose evidence could be relied on to establish that subjectively, he did not in fact have a suspicion of insolvency or likely insolvency as regards Chittagong during the relevant period. The objective test 35 The question raised by s 588FG(2)(b)(ii) is whether a reasonable person in the defendant's circumstances would have had no reasonable grounds for suspecting that the company was insolvent. 36 The plaintiff submitted that an analysis of the history of the debtors ledger that was in evidence shows that the account had exceeded its original limit of $5000 by 8 November 1996 and rose to $16,789 before any payment was made. Even if the limit had been increased to $20,000, as Mr Eisenbeis asserted, that increased limit was exceeded by 2 January 1997, and further payments were not made until 11 April 1997. Then no further payments were made for a period of 7.5 months, apart from a few credit notes. 37 The plaintiff submitted that on any objective view of these facts, Chittagong was not paying its debts as and when they fell due, and a suspicion of insolvency would have been raised in the mind of a reasonable person. 38 The defendant pointed out that the period focused upon by the plaintiff was before the time when the eight payments were made which are the subject of these proceedings. Further, Suchoy Pty Ltd made its credit application in June 1997, after the time addressed by the plaintiff, and at that stage Mr Eisenbeis was told there were no problems with the company although the brother of Mr Savvas might become a problem at some stage. Additionally, Mr Eisenbeis gave evidence that one of the shops at which Mr Savvas conducted his business had closed down for a period of about four months, and counsel for the defendant submitted that this might have led to a cash flow problem that might have explained the lack of payments during that period. 39 The defendant also submitted that the fact that Chittagong traded outside its terms of payment was of little, if any, significance. The plaintiff himself conceded in cross-examination that such a situation occurs in all types of industries. In fact Chittagong paid substantial sums of money over the period from February to August 1998, as part of its normal business relationship with the defendant. While the defendant conceded that the question had to be addressed having regard to "the commercial reality of the particular industry" and the debtor's financial position as a whole (Sutherland v Eurolinx Pty Ltd (2001) 37 ACSR 477 at 484), the defendant contended that these considerations did not provide grounds for a reasonable person to suspect insolvency. The magistrate's decision 40 The full text of the learned magistrate's judgment is not available, because of a failure in the transcription equipment. Fortunately, however, the available tape of his ex tempore judgment begins just as he turned to the "real issues". He identified these as whether the statutory defence in s 588FG(2) had been made out, and whether a running account had been established should the statutory defence not be made out. 41 He addressed the defendant's submission that on the evidence the facts required to be proved under subparagraphs 588FG(2)(b)(i) and (ii) had been established. He accepted that the onus of making out the defence lay with the defendant. Then he turned to the evidence of Mr Eisenbeis, referring to two aspects of that evidence. 42 First, he referred to Mr Eisenbeis's account of his conversation with Mr Savvas in July 1997. He referred to the denial by Mr Eisenbeis that he was concerned that Chittagong might not be able to pay, and the explanation given by Mr Eisenbeis when he said: "No, I know he was in the partnership with his brother and I know if your brother takes out the money that he may not have enough money left to continue his business." He referred also to Mr Eisenbeis's assertion that after 7.5 months of non-payment Mr Savvas simply sent a cheque for $5000 with his letter of 30 November 1997, without any demanding or prompting on the part of Mr Eisenbeis. 43 The learned magistrate said he was satisfied that Mr Eisenbeis was telling the truth. He described the evidence of Mr Eisenbeis as plausible, and said Mr Eisenbeis presented as being frank. He noted that credit limits in the book trade were flexible and that Mr Savvas was well-known over a long period in the trade. He referred to the evidence of Mr Eisenbeis that Mr Savvas always paid in lump sums, and noted that financial records were consistent with this evidence. He said: "The timing of the conversation in July 1997 and of the letter of 30 November 1997 would not have given rise to any suspicion or any grounds for suspicion on the part of the defendant unless I were not satisfied that the defendant had no inkling of the statutory demands or application for winding up. Mr Eisenbeis says that he had no such inkling." 44 The magistrate concluded his reasoning with respect to s 588FG(2) with the following paragraph: "I am satisfied that Mr Eisenbeis is telling the truth when he says that he had at no time suspected that the company was insolvent or would become insolvent, and that he accepted Mr Savvas' explanations for the changes of styling of the account, that he knew nothing of the winding up application until after the making of the winding up order, that the book trade did operate as alleged by Mr Eisenbeis, that a reasonable person in the defendant's circumstances would have been aware of how the book trade operated. I am satisfied that no other officer or employee of the defendant had relevant information on the issue of insolvency of the company beyond that possessed by Mr Eisenbeis nor suspected that the company was insolvent or would have become insolvent. I find that at the time the defendant became a party to the transactions the defendant had no reasonable grounds for suspecting and that a reasonable person in the defendant's circumstances would have had no such grounds for so suspecting." Decision on appeal as to the s 588FG(2) defence 45 Counsel for the appellant adopted the plaintiff's submissions before the magistrate, for the purposes of the appeal. He submitted that the magistrate had run together the objective and subjective tests for the establishment of the defence. I disagree with this submission. Although the reasoning is briefly expressed, I am not persuaded that the learned magistrate made any error of law in the nature of failing to distinguish between the objective and subjective tests. In the passage quoted above, he quite clearly makes findings in respect of both tests. 46 I am persuaded, however, that the learned magistrate made an error of law in the application of the objective test to the evidence. I agree with the submission by counsel for the appellant, that on the evidence before the magistrate, the inescapable conclusion ought to have been that a reasonable person in the defendant's circumstances would have suspected the insolvency of Chittagong throughout the period from March to August 1998 when the impugned payments were made. 47 The plaintiff's analysis of the debtors' ledger during the period from November 1996 to April 1997 is far from conclusive, because it relates to a period well before the time of the impugned payments, but the credit performance of Chittagong, disclosed by the ledger entries, is relevant as setting the scene for what was to come. The credit application by Suchoy Pty Ltd may not, of itself, have given a reasonable person in the defendant's circumstances a ground for suspecting the insolvency of Chittagong, but the credit application and the surrounding conversations could not be said to have removed any reasonable grounds for suspecting insolvency that had arisen by that time, whatever their precise effect may have been on the thinking of Mr Eisenbeis. 48 In my opinion the evidence concerning the two dishonoured cheques, in February and July 1998, is of particular significance, when viewed in light of the history of the credit relationship between Chittagong and the defendant and the state of the account between them. Counsel for the appellant also referred to evidence of a dishonoured cheque drawn in favour of Edition Habit Press (a company with which Mr Eisenbeis was associated, as a director with a shareholding, until December 2001). When that evidence is assessed together, there is in my opinion no room for inferring that the dishonouring of the cheques was referable to a cash flow problem rather than an inability to pay debts as and when they fell due. 49 I have reached the conclusion that the learned magistrate's error in the application of the objective test to the facts was not simply an error in the evaluation of the evidence, perverse or otherwise. He reached a conclusion which the facts are incapable of justifying. To this extent, therefore, the appeal should be allowed. 50 My conclusion that the objective test was not satisfied means that the s 588FG(2) defence is not available to the defendant in this case. It is unnecessary for me to decide whether the learned magistrate made any error of law in his decision with respect to the subjective test. However, since counsel for the appellant strongly contended that there had been an error of law with respect to the subjective test as well, I shall make some brief remarks on the matter. 51 In my opinion the conclusion of the learned magistrate was contrary to the weight of the evidence before him. I draw particular attention to the factual matters enumerated 1 to 11 above, and the plaintiff's submissions based on those facts listed at (a) to (g) above. The reasons for judgment do not indicate that the magistrate gave sufficient attention to the cumulative effect of these matters. The evidence of Mr Eisenbeis with respect to the practice in the book trade was not, in my view, sufficient to overcome the cumulative effect of those matters, and it appears to me that his evidence concerning the lack of any reasonable grounds for suspicion of insolvency was too implausible to be accepted. However, my disagreement with the magistrate's findings on the subjective test is in essence a disagreement with his evaluation of the evidence. I cannot say that the evidence before the Court at the hearing was incapable of justifying the findings made by the magistrate with respect to the subjective test. Therefore, were it not for my conclusion concerning the objective test, I would have dismissed the appeal. Running account 52 Having concluded that the defendant had made out the s 588FG(2) defence and accordingly was entitled to a verdict in its favour, the magistrate found it unnecessary to make a determination as to whether a running account was established, but he said: "I am satisfied that one was". He gave no reasons. Since I have reached the conclusion in this appeal that the defence was not available, it becomes necessary to deal with the running account question. 53 Section 588FA(3) provides as follows: "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." 54 The defendant did not raise the running account question in its grounds of defence, but the learned magistrate allowed argument on the point, correctly in my opinion. In its written submissions before the hearing, the defendant submitted that it did not bear the onus of establishing that s 588FG(3) applied, citing the following passage from Sutherland v Eurolinx Pty Ltd (37 ACSR at 508): "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." 55 Counsel for the appellant invited me to disagree with these observations, or at any rate to find that it was incumbent on the defendant to raise the question whether there was a continuing business relationship. In the view that I take of the matter, it is unnecessary to decide where the onus lay at the hearing. I simply observe that I see no reason to disagree with the opinions carefully and thoughtfully expressed by Santow J, whose learning and experience, especially in corporations matters, are well known. 56 In their written submissions, the parties contested the question whether there was any ongoing relationship between Chittagong and the defendant, with an expectation that the relationship would continue. The plaintiff's submission was that any continuity was severed when a credit application was made by Suchoy Pty Ltd in 1997. Once that application was accepted, the defendant no longer intended to continue its relationship with Chittagong, according to the plaintiff's submission. There was no mutual assumption of payment and reciprocal supply continuing uninterrupted thereafter (citing Sutherland v Eurolinx Pty Ltd). This was corroborated, in the plaintiff's submission, by the fact that the account was subsequently styled Suchoy Pty Ltd as from the time of the winding up order. Additionally, the payments made during the period from March to August 1998 were, with one exception, payments of $5000 each, suggesting a debt reduction program rather than a continuing business relationship. 57 The defendant submitted that acceptance of the credit application by Suchoy did not mean that the defendant ceased to supply goods to Chittagong. The evidence showed, in the defendant's submission, that the defendant supplied goods under arrangements which allowed Mr Savvas to allocate supplies as between Suchoy and Chittagong. Under these arrangements there was, according to the defendant, a continuing mutual assumption of future supply. 58 In my opinion, there is no adequate ground for me to disagree with the magistrate's conclusion that there was a running account between the defendant and Chittagong. There was a running account between them from November 1996 to July 1997. The fact that Suchoy was introduced into the trading relationship in July 1997 did not mean that s 588FA(3) could not apply. The subsection expressly contemplates a business relationship to which persons other than the company and the creditor are parties. There was evidence available to support the conclusion that there was a continuing mutual assumption of payment and reciprocal supply, as between the defendant and Chittagong, throughout the relevant period, even though there was also a trading relationship between the defendant and Suchoy. The fact that Mr Eisenbeis could not, according to his evidence, identify any particular transactions made by Chittagong after July 1997 does not preclude the conclusion that the requisite mutual assumption remained in place. 59 The parties agreed, in their written submissions, that the effect of the application of subsection (3) is that the Court should take the highest sum with respect to the indebtedness during the period of the running account, and compare it with the sum owing at the end of the relevant period, the difference between these two sums being the amount of the unfair preference. The plaintiff said that the highest balance in the account was $37,889.10 on 11 September 1997, and the defendant did not challenge that figure. In his further statement, paragraph 8, Mr Eisenbeis said that the closing balance of the account at 21 August 1998 was $11,878.90. The net difference is $26,010.20. The appellant says that if subsection (3) applies, that net difference is the amount of the preference. 60 The defendant contended in its written submissions before the hearing that Mr Eisenbeis made a mistake when he designated the closing balance as $11,878.90. The debtors ledger shows that on 21 August 1998 the sum owing was $24,726.65. According to the defendant, the discrepancy can be explained by examining an invoice dated 21 August 1998 which is attached to the plaintiff's statement. The invoice indicates that the sum of $11,878.90 only relates to accounts in excess of 90 days. 61 The problem with the defendant's submission is that the debtors ledger as at August 1998 and the invoice of 21 August 1998 do not reflect transactions solely between Chittagong and the defendant, because by that time they were intermingled with transactions involving Suchoy. Mr Eisenbeis's evidence was given in his further statement, and there is no ground for inferring that he prepared that statement otherwise than carefully. In my opinion the best evidence of the state of the account between Chittagong and the defendant is the evidence given by Mr Eisenbeis. Conclusion 62 The appellant has established that the learned magistrate's judgment was "erroneous in point of law" for the purposes of s 69 (2) of the Local Courts (Civil Claims) Act 1970 (NSW), to the extent that he found that the defence in s 588FG(2) had been made out. His judgment should be set aside and in its place, an order should be made under s 588FF(1) directing the defendant to pay the plaintiff an amount equal to the amount of the unfair preference given by Chittagong to the defendant. That amount, according to the evidence, is $26,010.20. 63 The appellant should be entitled to the costs of the appeal and the costs of the hearing, as well as interest on the amount of the unfair preference at the prescribed rates under the Supreme Court Act 1970 (NSW). Judgment should be entered accordingly. 64 I shall direct the appellant to prepare short minutes of orders to give effect to my decision. ********** Last Modified: 12/05/2002 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.