SUPREME COURT OF QUEENSLAND

1. McMURDO P:  The appellant plaintiff is the liquidator of Scholz Motor Group Pty Ltd, which I shall call "the company".  The liquidator sought to recover money from the respondent defendant, Peter Peters, for the benefit of the company's creditors under Ch 5, Pt 5.7B, Div 2, Corporations Act 2001 (Cth).  The liquidator applied for an order under s 588FF Corporations Act that Mr Peters repay the company an amount he received from it in what the liquidator claimed was a voidable transaction under Cl 5, Pt 5.7B, Div 2, together with interest and costs.  Mr Peters counterclaimed, seeking a declaration that a payment of $165,000 made to the company by a finance company on Mr Peters' behalf was to have been held in trust by the company for him; a declaration that he was entitled to priority over the unsecured creditors in the company's winding-up in relation to the unpaid balance of the $165,000 ($70,000) owed to him by the company; and an order that the liquidator pay him that amount of $70,000 together with interest and costs. 

2. The primary judge dismissed the liquidator's claim and adjourned Mr Peters' counterclaim. The liquidator appeals, claiming the judge should have granted her application under s 588FF Corporations Act.  In a notice of contention, Mr Peters submits the judge rightly dismissed the liquidator's claim because of the matters he raised in his counterclaim.  His transaction with the company which the liquidator impugns was not a voidable transaction under s 588FE Corporations Act.  That was because, he submits, he did not receive an unfair preference under s 588FA(1)(b) Corporations Act.  Alternatively, he contends he was entitled to the protection of s 588FG Corporations Act.

3. At all relevant times, the company conducted its business through an overdraft account with its banker and this account remained in debit. It is now common ground that the company was insolvent by 1 June 2005 but continued to trade after that time. When or if Mr Peters became aware of the company's insolvency was contentious. On 12 September 2005, Mr Peters agreed to purchase a Mercedes Benz from the company for $165,000.  He paid the company with $10,000 cash and a cheque drawn on his bank account for the balance, even though, for business reasons, he ultimately intended to finance the purchase of the car through his preferred finance company.  The company deposited this $165,000 into its overdraft account.  Mr Peters took delivery of the car.  The car was not transferred into his name.  He applied to his finance company to purchase the car through a hire purchase agreement.  The finance company representative explained that, for Mr Peters' application to be processed and approved, the application must identify the supplier of the car as the company, not Mr Peters.  Mr Peters complied.  On 19 September 2005, consistent with the finance company's arrangement with Mr Peters, the finance company paid $165,000 to the company.  This amount was again deposited into the company's overdraft account.  The result was that the company was paid two sums of $165,000 for a car which it agreed to sell to Mr Peters for $165,000.  Mr Peters and the finance company each paid the company $165,000.  To rectify this double payment, the company and Mr Peters agreed that the company would refund his original payment of $165,000.  The company drew a cheque for that amount on its overdraft account, but that cheque was dishonoured on 23 September 2005.

4. Muir JA has set out the subsequent dealings between Mr Peters and the company culminating in him obtaining, in part payment of the company's $165,000 debt to him, a bank cheque for $10,000 and two vehicles. Mr Peters subsequently sold those vehicles for $50,000 and $35,000. In the end, Mr Peters received $95,000 of the company's $165,000 debt to him, leaving an unpaid balance of $70,000.

5. I agree with Muir JA's reasons for concluding that the primary judge erred in finding that the company held either of the payments of $165,000 in its overdraft account on trust for Mr Peters. As the company's overdraft account was in debit, when the payments of $165,000 were made into that account they were subsumed into the debit account and ceased to exist as money, regardless of whether the company held any of that amount on trust for Mr Peters: In re Goldcorp Exchange Ltd;^[1] Bishopsgate Investment Ltd (in liq) v Homan;^[2] Re Global Finance Group Pty Ltd (in liq) (supervisor appointed); Ex parte Read and Herbert.^[3]

6. I also agree with Muir JA that this Court should construe s 588FA consistent with the approach taken by the majority of the Victorian Court of Appeal in Walsh v Natra Pty Ltd.^[4]  It follows that Mr Peters did receive an unfair preference under s 588FA(1)(b) from the company in the form of the $10,000 bank cheque and the two cars which he later sold for $50,000 and $35,000.  Muir JA has convincingly demonstrated why Mr Peters has failed to establish under s 588FG that his receipt of this property from the company in October 2005 was not a voidable transaction under Ch 5 Pt 5.7B, Div 2.  I agree with Fraser JA's reasons for concluding that Mr Peters' receipt of this property from the company was a transaction within the meaning of that term in s 588FA.

7. It follows that the judge erred in refusing the liquidator's claim and Mr Peters' counterclaim must be refused. The appeal must be allowed. The order made by the primary judge on 24 October 2008 should be set aside. Instead, judgment should be entered in favour of the appellant plaintiff against the respondent defendant in the sum of $95,000 together with interest under s 47 Supreme Court Act 1995 at 10 per cent from 26 January 2006 to the date of this judgment.  The respondent defendant should pay the appellant plaintiff's costs of and incidental to the trial.  The respondent defendant's counterclaim should be dismissed with costs.

8. MUIR JA:  The appellant liquidator of the Scholz Motor Group Pty Ltd appeals against orders dismissing the appellant's claim with costs made in the District Court on 24 October 2008 after the trial of the proceedings.  In the proceedings, the appellant claimed that on 11 October 2005, when the company was insolvent, the respondent received from it $10,000 in cash and motor vehicles having a value of $130,800 in reduction of the company's indebtedness to the respondent in the amount of $165,000.  It was alleged that such a transaction constituted an unfair preference within the meaning of s 588FA of the Corporations Act, an insolvent transaction within the meaning of s 588FC of the Corporations Act, a voidable transaction within the meaning of s 588FE of the Corporations Act and was voidable as against the appellant.

Relevant Facts

9. The company, at relevant times, was a motor dealer operating on the Gold Coast under a motor dealers licence issued under the Property Agents and Motor Dealers Act 2000 ("the Act").  It had four directors including Mr Seymour and Mr Leslie Scholz.  As was required by law, it had a trust account.  It also had an overdraft account with the National Australia Bank which, at relevant times, was overdrawn to the extent of about a million dollars.  The company had become insolvent by 1 June 2005 but it continued to trade.  On 12 September 2005 the respondent met with Messrs Seymour and Scholz and discussed with them the purchase by him of a Mercedes Benz E55 car owned by and registered in the name of the company for a price of $165,000.  The respondent intended obtaining finance for the purchase.  He agreed, however, to Messrs Scholz and Seymour's demand of immediate payment, paying $10,000 in cash and the balance by means of a cheque drawn on his ANZ bank account.  He was provided with a receipt for $165,000.

10. In a statement which became an exhibit in the proceedings, he said that he advised Messrs Seymour and Scholz that he would be arranging finance for the car with Grand Motors. In evidence-in-chief Mr Seymour said he was told by the respondent on 12 September 2005:

"… he would go to Grand Motors Mercedes Benz where he had previously financed his vehicles through Daimler Chrysler which is their finance company and he was going to organise to lease the car through them …"

11. In cross-examination he said:

"… we needed the car to be paid for directly and he didn't have an issue with that and he said, 'Oh, look, I'll probably want to lease it.  I'll let you know but if I lease it, it will be through Daimler Chrysler.' … but he would probably ultimately finance the car but he'd go through Daimer Chrysler because he had a relationship with them … so he said he would let me know when that would be organised."

12. The respondent was asked in cross-examination:

"So I take it that one of the reasons you wanted to go through a finance company such as Daimler Chrysler was because you wanted some sort of hire purchase agreement by which you could claim back some of the payments through your tax for your business?"

He answered, "Correct".

13. There was no discussion about what arrangements would be made in the event that the respondent did involve a financier in his acquisition and nothing was said about how the sum of $165,000 was to be held by the company. It is common ground, however, that the understanding of both parties was that the $165,000 was provided as payment of the car's purchase price and that the money could be used by the company as it saw fit. The whole of the $165,000 was deposited in the company's overdraft account, lowering but not extinguishing the debit balance. When purchasing Mercedes Benz or Daimler vehicles the respondent always obtained his finance from Grand Motors. Mr Seymour's evidence was that he did not consider it unusual that the respondent, having paid, would be obtaining finance. He said, "It does happen in the industry." In his previous dealings with Grand Motors the respondent had not previously paid for a vehicle himself before obtaining finance.

14. The respondent took delivery of the car on the day of payment but no transfer documents were then processed. On that day the respondent signed an application for finance form requesting finance of $165,275 in respect of the car by means of a hire purchase agreement. He explained to the female employee of Grand Motors who processed his application that he had already paid the purchase price. She told him that it was the policy of the finance company that the money advanced "goes back to the dealer where the invoice has been raised". The application identified the "supplier" of the car as the company. There is no suggestion in the evidence that the respondent informed representatives of the company of the content of this discussion and the respondent was not involved in any dealings between any representative of Daimler and any representative of the company.

15. The respondent was advised on or about Thursday, 15 September 2005 that his application for finance had been successful. The agreement for the hire of the car was signed by him on 16 September. At about this time he spoke to a representative of the company to inquire about whether monies from Daimler had been received and he was informed that they had not. On 19 September Daimler paid $165,000 into the company's overdraft account. The respondent was told of the payment the following day. He then visited the company's premises and was given a cheque for $165,000 drawn on the overdraft account.

16. On 22 September 2005 the respondent signed a vehicle registration transfer application form as "primary owner" for the transfer of the registration of the car from the company into his name. The respondent was advised by his bank in a letter dated 23 September 2005 that the cheque had been dishonoured. He saw Mr Scholz or Mr Seymour and was told that one of the company's directors, Maria Scholz, had had a contretemps with the bank which, as a result, was not "clearing funds until the funds were fully processed".  They said that the bank "waited for the time for the funds to be cleared.  And that would take a bit of time."  Mr Scholz gave him another cheque, dated 29 September 2005, for $165,000. 

17. The respondent's bank informed him in a letter dated 5 October 2005 that that cheque had been dishonoured. As soon as he became aware of the dishonouring the respondent spoke to Mr Scholz or Mr Seymour. He was told that the company was changing banks because of the difficulties with its bank created by Mrs Scholz and that "it takes a period of time for that procedure to go through". The respondent requested that the company give him instalments of $50,000 a week. In response, he was given a document dated 6 October 2005 which the directors of the company had drawn up. It was signed by Mr Scholz and Mr Seymour. The respondent also signed it. It provided:

"It is by this guarantee that we state as directors of the Scholz Motor Group we being, Leslie Neville Scholz, Brett Andrew Seymour and Neville Leslie Scholz that the company be in debt and owe to Mr and Mrs Wendy & Peter Peters the sum of $165,000 plus the additional costs and bank fees that have been incurred by the family as a result of this matter.

Method of Payment:

It is with best intention and good will that we clear this debt on the date of the 7^th October 2005.  Failure to comply with this intent shall see it that the company pay back the full debt by weekly instalments of no less than $50,000 per week.  It is understood that extra expenses with regards to bank fees, interest rates and commitments made by the family will incur a penalty amount, this amount shall be provided to the company by the Peters family."

18. The monies owing weren't paid on 7 October 2005 and the respondent met with Messrs Seymour and Scholz at the company's bank on 11 October. A bank cheque for $10,000 was obtained and given to the respondent. Mr Seymour's evidence was that the company was unable to pay $50,000. Mr Seymour also swore in his evidence-in-chief that the respondent "was not happy at all" and that after he and Mr Leslie Scholz discussed the matter with the company's other directors, the company also offered to give the respondent two vehicles by way of security.  It was said to him that he was to hold the vehicles for three days, by which time the company would have its finance "fully arranged" and he would be paid in full.  If the payment wasn't made by then, however, he could dispose of the vehicles.  When no further payments were forthcoming, the respondent proceeded to sell the vehicles for $50,000 and $35,000 to a car dealer.

The primary judge's findings as to the holding of monies on trust

19. As well as finding that the monies paid by Daimler were required by the Act to be held in a trust account, the primary judge concluded that the sum was to be held in trust as "it was transferred to [the company] for convenience and to meet the requirements of Daimler". His Honour referred to Walker v Corboy^[5] and implicitly held that a trust arose because the company was bound to keep the money as a separate fund for the person entitled to it.  His Honour further concluded:^[6]

"… Alternatively, it is open to find that it would not be in good conscience for the plaintiff to assert an absolute entitlement to the money as against the defendant.  In that event, a constructive trust would be recognised.  The defendant had paid [the company] for the vehicle.  It would be unconscionable for [the company] or the creditors to have the benefit of the monies which were payable to the defendant as the beneficiary of the funds.  It is common ground that [the company] was to pay the monies over upon receipt."

The appellant's contentions in relation to the existence of a trust

20. The following arguments were advanced on the appellant's behalf. Daimler caused the funds to be transferred directly to the company's bank to the credit of the overdraft account. Upon receipt by the bank, the funds reduced the company's overdraft debt to the bank. The result was that the funds were "paid into an overdrawn account and thereupon ceased to exist".^[7]  Thus the company did not hold property which could give rise to a trust.

21. An intention to create a trust is one which a person apparently holding^[8] the relevant property must sufficiently manifest so as to satisfy an objective test.^[9]  The intention of the company, objectively manifested, was to have the payment applied for its own benefit and not to keep the monies separate as trust property.  If there had been an intention to keep the monies separate they would have been placed in its trust account rather than paid directly into the overdrawn account. 

22. In cases of this kind, where a financier pays for chattels for which the customer has previously paid, not even an express promise to return monies to the customer is enough to convert a contractual obligation into a trust relationship.^[10]  In so far as the exchanges on 12 September 2005 constitute an agreement, they are one whereby, at the respondent's election:

1. the company would sell the car to Daimler, as if that were the original transaction; and

2. the original transaction with the respondent would be rescinded, and the full price repaid.

That conclusion arose from the following objective facts:

1. Both parties had experience of the requirements of Daimler.  They appreciated that Daimler would only lease vehicles which it had purchased from a dealer.  There was never any suggestion of Daimler purchasing the vehicle from the respondent.  The arrangement was made on the express basis that the respondent would let the company know if the leasing was to proceed;

2. None of the ordinary transfer documents were executed in favour of the respondent on 12 September 2005;

3. There was no discussion about any monies being placed in trust or kept separate from the general affairs of the company.  An ordinary receipt was provided to the respondent, not a trust account receipt;

4. The parties did not contemplate that the transaction would be one where the respondent would be paying double GST on the transaction.  They contemplated only one sale;

5. A licensed motor dealer is only relevantly permitted to sell motor vehicles as a principal, so any other arrangement would conflict with the presumption of regularity.^[11] 

The appellant's contentions in relation to the finding that a resulting or constructive trust existed

23. No trust of any kind can arise if no relevant property was vested in the company. A resulting trust can only arise in favour of a party making the relevant payment and it arises when the Court can discern an intention by that party to retain its interest in the sum paid.^[12]  Daimler made the relevant payment and the purpose which Daimler sought to achieve by it was fulfilled.  The particular form of constructive trust for which the respondent contended is based upon a shared, common intention.  This requires proof of a real intention by each of the parties that he or it would be owners of the relevant property, and that this intention was acted upon by the beneficiary to his detriment.^[13]  But on the evidence, not even the respondent had such an intention.  The company did not.

The appellant's contentions in relation to the application of the Property Agents and Motor Dealers Act 2000

24. The provisions of the Act do not require a dealer selling a vehicle as a principal to pay monies which it receives into a trust account. Not all monies received in respect of a transaction are to be paid into a trust account – only those amounts received "for" a transaction:  s 378(1).  "For" a transaction means in anticipation of a transaction authorised by the Act as:

1. The Act seeks to provide practical protection for monies received by persons with no beneficial entitlement to them.  This purpose does not relate to funds received on completion of a sale by a licensee as principal.

2. The definition of "amount" in s 378(2) distinguishes between a payment "for" a transaction and one which is merely "in relation to"the transaction, suggesting that the word "for" is intended to be given a narrower meaning.

3. The "provisions which regulate payments out of trust accounts contemplate they only remain in trust until the transaction is finalized; ss 384ff (sic)".  There seems to be no statutory purpose in requiring a dealer to pay its own completion monies into trust if they could be immediately paid out.

4. There is a clear statutory intent to limit monies being paid into a trust account:  s 381.

25. The trust account provisions of the Act only operate where the dealer has actually "received" an "amount" which can be directed to a trust account: s 378. The Act does not seek to regulate the position before amounts are received. As no amount was ever received by the company, the trust account provisions of the Act have no application. Section 383 does not assist the respondent as it only operates upon amounts which are in fact required by ss 378 – 379 to be paid into a trust account.

26. While the provisions of the Act require a dealer to pay certain monies into a trust account, these provisions do not "deem" a trust to exist in cases where the statutory obligation is breached. The sanctions for non-compliance are set out in s 379, and are regulated by the criminal law. So, even if s 379 were applicable, the Act does not assist in creating a trust where the parties do not intend to do so.

The appellant's contentions concerning the payment by Daimler into the overdraft account

27. Even if there were a trust, the payment of funds into an overdraft account renders them incapable of being traced. Consequently, the respondent has no proprietary claim against the company, only a personal claim for breach of trust. Such a claim has the same priority under the Corporations Act as that of any other unsecured creditor.

28. Space Investments Ltd v Canadian Imperial Bank of Commerce Trust Co (Bahamas) Ltd,^[14] on which the respondent relies, has been held inapplicable to payments made into overdraft accounts.^[15]  The dicta on the Australian authorities referred to in the primary judgment predate these authorities.

29. The bank cheque (representing further borrowings from the company's bank) and two second-hand cars (acquired before any trust could have arisen as distributions of trust funds) are to be categorised as an offer in partial satisfaction of personal obligations. The debt was fully discharged, to the extent of the benefits received.

30. The appellant's counsel submitted that the bank cheque and cars effected a full discharge of the subject debt, to the extent of the benefit received, when only a partial return would be obtained in a hypothetical liquidation.

The consequence of the payment by Daimler into the company's overdraft account

31. It is unnecessary to decide whether a trust in respect of the monies paid by Daimler came into existence in consequence of the operation of the Act or by reference to the principles relating to the constitution of trusts of whatever nature. That is because the payment of the monies by Daimler into the company's overdraft account had the consequence that, if a trust had existed, any consequent proprietary claim against the company was lost, leaving the respondent with a personal claim for breach of trust. That claim did not entitle the respondent to any priority over any other unsecured creditors in the winding up.

32. An overdraft account is a current account which the customer is permitted to have in debit up to an amount agreed with the bank. The debit balance of a current account is referred to as "an overdraft".^[16] 

33. In Bishopsgate Investment Ltd (in liq) v Homan^[17] it was held by the Court of Appeal that equitable tracing could not extend to tracing through an overdrawn bank account, as payment into the account fund ceased to exist.  In the course of his reasons, Dillon LJ, quoted the following passage from the judgment of the Privy Council in In re Goldcorp Exchange Ltd:^[18]

"Their Lordships should, however, say that they find it difficult to understand how the judgment of the Board in Space Investments Ltd. v. Canadian Imperial Bank of Commerce Trust Co. (Bahamas) Ltd. [1986] 1 WLR 1072, on which the claimants leaned heavily in argument, would enable them to overcome the difficulty that the moneys said to be impressed with the trust were paid into an overdrawn account and thereupon ceased to exist:  see, for example, In re Diplock [1948] Ch. 465.  The observations of the Board in the Space Investments case were concerned with a mixed, not a non-existent, fund."

34. Dillon LJ, after noting that the interpretation of observations of Lord Templeman in the Space Investments case^[19] had been rejected by the Privy Council said:

"… Instead the decision of the Court of Appeal in In re Diplock; Diplock v Wintle [1948] Ch. 465 is endorsed.  There it was said, at p 521:

'The equitable remedies presuppose the continued existence of the money either as a separate fund or as part of a mixed fund or as latent in property acquired by means of such a fund.  If, on the facts of any individual case, such continued existence is not established, equity is as helpless as the common law itself.' "

35. In his concurring reasons, Leggatt LJ was of the opinion that the Space Investments case was "… authority for no wider proposition than that, where a bank trustee wrongly deposits money with itself, the trustee can trace into all the bank's credit balances".  His Lordship observed after referring to In re Goldcorp Exchange Ltd, "I do not accept that it is possible to trace through an overdrawn bank account …". Henry LJ agreed with the reasons of both the other judges.

36. McLure J in Re Global Finance Group Pty Ltd (in liq)^[20] was of the opinion that, "The overwhelming balance of authority is to the effect that a proprietary claim to the traceable product will fail if trust money is paid into an overdrawn account."  Her Honour said:^[21]

"The rationale for the rule which prevents equitable tracing into an overdrawn bank account is that the property being traced must continue to exist in some form up to the time of, and through to, the traceable product.  An overdrawn bank account is a debt owing by the trustee to the bank.  The effect of a payment into an overdrawn account is to reduce or cancel the trustee's indebtedness to the bank.  Tracing is a factual process and a trust fund or part of it which is dissipated cannot be traced.  The extinguishment or reduction of the trustee's indebtedness is regarded in effect as the disappearance of the property."

37. Her Honour's conclusions and the reasons for them are consistent with the approach taken by the Full Court of the Federal Court in Baker v Official Trustee in Bankruptcy^[22] and the Full Court of the Supreme Court of South Australia in Viscariello v Bernsteen Pty Ltd (in liq).^[23]  The approach is also consistent with the conclusion in James Roscoe (Bolton) Ltd v Winder^[24] approved of in Bishopsgate Investment Management Ltd (in liq) v Homan that tracing was possible "only …to such an amount of the balance ultimately standing to the credit of the trustee as did not exceed the lowest balance of the account during the intervening period". 

38. The respondent's counsel attempted to circumvent the difficulty for the respondent posed by the loss of any trust fund by payment of the monies into the bank account by arguing that the payment of $10,000 and the transfer of the two motor vehicles was a distribution of property in part satisfaction of the trustee's obligations. The trust fund having been extinguished, it is impossible to see how the payment and transfers referred to can be regarded as a distribution of trust property. The bank cheque represented a further borrowing by the company from its bank.^[25]  The cars, acquired by the company before any trust arose, could hardly be considered to be trust property.

39. The next contention put forward by counsel for the respondent was that if the monies paid by Daimler to the company were held in trust, the respondent was thereby afforded priority over unsecured creditors even if the respondent had no proprietary remedies. He explained:

"The basic reasoning behind this principle is that a beneficiary deals with a trustee on a different basis than do unsecured creditors, who voluntarily accept the risk that the trustee might be insolvent.  Accordingly, equity affords a beneficiary priority over unsecured creditors in the event of insolvency.  This position is consonant with the essential maxim that equity regards as done that which ought to be done."

40. In support of the proposition, counsel referred to Stephenson Nominees Pty Ltd v Official Receiver^[26] Australian Securities Commission v Melbourne Asset Management Nominees Pty Ltd^[27] and Daly v Sydney Stock Exchange Ltd.^[28]  None of these cases involved the loss of a trust fund through its payment into an overdraft account.

41. In Daly v Sydney Stock Exchange Ltd, although a fiduciary relationship was found to exist, it was held that the subject monies were not held in trust.  The case would not seem to offer any support for the respondent's contentions.

42. The dissenting reasons of Gummow J in Stephenson Nominees Pty Ltd v Official Receiver^[29] contain a passage central to the reasoning of Northrop J in Australian Securities Commission v Melbourne Asset Management Nominees Pty Ltd.  It is far from clear, however, that Gummow J had in contemplation that persons who had no proprietary interest in any assets of a company could be preferred in its winding up over the general body of unsecured creditors. The question in issue related to title to monies and a mortgage over them.

43. The basis of the decision in Australian Securities Commission v Melbourne Asset Management Nominees Pty Ltd is unclear, but it does appear that although trusts were created in favour of the preferred creditors and continued to exist, tracing was a practical possibility.  Whatever that decision is authority for, it cannot overturn the provisions of ss 555 et seq of the Corporations Act which establish priorities on a winding up.

44. Consequently, I am not persuaded that this argument has substance.

The notice of contention – the proper construction of s 588 FA(1)(b)

45. The primary judge implicitly held that on the winding up of the company, approximately 70 cents in the dollar would be available for distribution to unsecured creditors. That finding was unchallenged. Applying the reasoning in Walsh v Natra Pty Ltd,^[30] the primary judge held that in determining whether the payment of the $10,000 and the transfer of the two cars amounted to a transaction or transactions resulting in an unfair preference, it was necessary to compare those benefits with what the respondent would have received had he proved in the winding up.  On his Honour's findings, the respondent would have received some 70 per cent of $95,000.  Consequently, he held the transaction or transactions constituted an unfair preference.

46. It is submitted on behalf of the respondent that the comparison which should have been made was between the benefit received by the transactions ($95,000) and the amount which would have been received had the transactions been set aside and the respondent proved for the full amount of the debt of $165,000. It is submitted that the approach in Walsh v Natra Pty Ltd leads to "the absurd consequence" that a creditor will practically always be held to have received 100 cents in the dollar where part payment is made.  Consequently, "Every receipt of value received by a creditor will be found to have a preferential effect."  Additionally, it is submitted that the assessment must be made with reference to "an unsecured debt".  There is only one such debt, namely, the sum of $165,000.  Nothing in the language of the section, it is argued, warrants the fragmentation of the "debt" into smaller constituents.

47. If the respondent's construction of s 588FA(1)(b) is correct, any creditor could, by payment of part of its unsecured debt in an amount not exceeding the sum recoverable on the debtors winding up in respect of the whole of the debt, retain the whole of the part payment and prove for the balance of the debt in the winding up. The creditor would then rank equally with other unsecured creditors in respect of the balance but would retain 100 cents in the dollar on the original payment. That this was an unlikely result was recognised in Walsh v Natra Pty Ltd. 

48. In that case the court was required to consider the application of s 588FA(1)(b) where part of an unsecured debt had been paid. Phillips JA, with whose reasons the other members of the court agreed, referred to the argument advanced on behalf of the unsecured creditor, Natra, that the comparison was "not between the amount of the payment received by the creditor by means of the impugned transaction and the amount which the creditor would have received had the transaction not occurred and the creditor proved instead for that amount in a winding up; but between the amount of the payment made to the creditor and the amount which the creditor would have received in winding up had the impugned transaction not taken place and the creditor proved in the winding up for the full amount of the unsecured debt"^[31]

49. His Honour then explained:^[32]

"[22] To take the figures that were bandied about in argument in this case: the creditor (Natra) was owed $213,000 (or thereabouts) by the company, of which $83,000 (or thereabouts) was unsecured (given that the land securing payment was worth $160,000 and the bank, having a first mortgage, was owed $30,000).  By reason of the impugned transaction on 26 November 1993, Natra received $40,000.  According to the argument put by Mr Lucas, the question posed by para (b) was whether, by virtue of the transaction which was impugned (by which the creditor was paid $40,000), the creditor received from the company (to use the language of the section) 'in respect of an unsecured debt [of $83,000] more than the creditor would receive from the company in respect of [that debt of $83,000] if the transaction [by which it received payment of $40,000] was set aside and the creditor were to prove for the debt [that is, the unsecured debt of $83,000] in a winding up of the company'.

[23]  At first glance the language of s 588FA appears to lend itself to the construction advocated by Mr Lucas, but I cannot think it correct. Requiring, as it does, a comparison of the dividend in a winding up on the whole of the unsecured debt ($83,000) with the payment of merely part of the unsecured debt ($40,000), the construction which counsel advocated does not require a comparison of like with like.  If, as submitted, the whole debt is relevant though part only has been paid in the impugned transaction, the comparison of like with like would surely require comparing the probable dividend on proof in a winding up for $83,000 with not merely the payment of $40,000, but with that payment coupled with the probable dividend in a winding up on the balance of the debt (ie, on a further $43,000, using the example given).  On that analysis the creditor will obviously have received more by reason of the impugned transaction occurring before winding up than it would receive in a winding up (even a hypothetical winding up) if, as we may assume, all the creditors are not paid in full; for $40,000 plus a dividend on $43,000 in winding up must be more than simply a dividend on $83,000.  At least part of the provable debt has been paid in full.

[24] But in my opinion the better view is that s 588FA(1) is looking to the unsecured debt or, if part only is involved in the impugned transaction, to such part of the unsecured debt as is involved.  That is in line with the position under the former legislation, and it has been said that the new Div 2 was not intended to make great change:  V R Dye & Co v Peninsula Hotels Pty Ltd at 212 per Ormiston JA.  In a case like the present, it can fairly be said that the creditor received 100 cents in the dollar in respect of an unsecured debt, being a portion only of a total unsecured debt of $83,000.  In respect of $40,000 of that debt, the creditor received $40,000: and the comparison which is sought by para (b) is between that payment of $40,000 and the probable return to the creditor in a winding up if that payment of $40,000 were set aside and the creditor were to prove for that $40,000 (being its resuscitated debt) in that winding up.  In a case like the present, the question becomes this: is 100 cents in the dollar (which was received for the relevant part of the total unsecured debt) more than the probable dividend on proof for the like sum in a winding up, supposing that the impugned transaction were first set aside?

[25] Of course it can be argued that either construction of the paragraph puts some strain on the language, but it seems to me less likely that the former was intended than the latter.  As I have said, to compare like with like requires, on the first construction, to bring to account what the creditor would receive in a winding up for the balance of its unsecured debt: and there is no reference to a winding up in the first portion of the paragraph.  On the second view, the words 'an unsecured debt that the company owes to the creditor' must be taken to refer only to such portion of the debt as is involved in the transaction.  In the case I have posited, it is a portion amounting to $40,000.  That is not to say that in every case if one looks only to the portion of the total debt which is involved in the transaction the creditor must always be receiving 100 cents in the dollar; the creditor may not be receiving so much.  Creditor and debtor may have done a deal whereby on, say, a total unsecured debt of $83,000 the creditor is willing to receive half, and then by instalments.  If the first instalment were to be $20,000, it could fairly be said that the creditor was receiving, by reason of the impugned transaction, $20,000 in respect of an unsecured debt of $40,000.  Paragraph (b) would then require that result to be compared with what the creditor would probably receive in a winding up if the transaction were set aside, the sum of $20,000 paid to the liquidator and the creditor proved for $40,000.  The question then would be whether 50 cents in the dollar was more than the likely return to the creditor in a winding up, if the impugned transaction were set aside."

50. We were not taken to any decisions which questioned either the above reasoning or the result. The case has now stood for some nine years as an authority on the construction of s 588FA(1). In my opinion the construction placed on para (b) of s 588FA(1) does no violence to the language of the provision and achieves a result which conforms with the likely Legislative intention that the provision accommodate, in a practical way, part payments of unsecured debts as well as payments in full.

51. This Court should not depart from the construction of the subject provision determined in Walsh v Natra Pty Ltd unless of opinion that the decision is clearly wrong and in my respectful opinion that is not the case.^[33]

52. There was also a ground that the "judge applied an unorthodox test by measuring the effect of the transaction against the events in the actual winding up". The point was undeveloped and it was not shown whether any alternative approach, if correct, would have assisted the respondent.

Statutory Defence under s 588FG(2) of the Corporations Act 2001 (Cth)

53. Section 588FA(1) relevantly provided:

"(1)A transaction is an unfair preference given by a company to a creditor of the company if, and only if:

(a)the company and the creditor are parties to the transaction (even if someone else is also a party); and

(b)the transaction results in the creditor receiving from the company, in respect of an unsecured debt that the company owes to the creditor, more than the creditor would receive from the company in respect of the debt if the transaction were set aside and the creditor were to prove for the debt in a winding up of the company; ..."

The primary judge held that the respondent received an unfair preference within the meaning of s 588FA(2), and that finding was not challenged successfully.  The respondent however relied on s 588FG(2).

54. Section 588FG(2) relevantly provided:

"(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, or an unreasonable director-related transaction of 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."

55. In order to establish his defence the respondent must prove that subjectively he had no reasonable grounds for suspecting that the company was insolvent and that, considered objectively, no reasonable person in the respondent's position would have suspected insolvency.^[34]

56. In Queensland Bacon Pty Ltd v Rees^[35] Kitto J described the meaning of "suspicion" in a like context in these terms:

"… the precise force of the word 'suspect' needs to be noticed.  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's 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.  The notion which 'reason to suspect' expresses in sub-s. (4) is, I think, of something which in all the circumstances would create in the mind of a reasonable person in the position of the payee an actual apprehension or fear that the situation of the payer is in actual fact that which the sub-section describes – a mistrust of the payer's ability to pay his debts as they become due and of the effect which acceptance of the payment would have as between the payee and the other creditors."

57. The test is a demanding one, as the respondent is required to prove a negative.^[36]  The matters to be established are to be determined by viewing the facts and circumstances as they unfolded at the time, without the benefit of hindsight^[37] in the commercial context of the transaction as a whole.^[38]

58. In relation to s 588 FG(2)(b)(ii), his Honour said:

"… In relation to the objective factors relevant to s 588FG(2)(ii), the following is relevant:

(a)The relevant events occurred over a period of one month.  It was not a long period of trading as is discussed in some cases;

(b)The cheques were a few days apart and an earlier one for $106,000.00 had been honoured on presentment;

(c)Explanations were given as to the short term cash flow problems;

(d)Adequate explanations were given as to why SMG did not meet the promises to pay e.g. refinancing and differences with their bank requiring a new bank;

(e)The business of SMG was still running well as far as sales were concerned.  Some 60-65 vehicles had been sold during September and October 2005; and

(f)The defendant was unaware of any other creditors of SMG."  (footnotes deleted)

59. His Honour added to these matters:

"… The fact that Mr Seymour and Leslie Scholz offered the vehicles they were driving as some type of security gave the defendant some confidence that the amount due to him would be paid.  There was also the sum of $10,000.00 paid which was a significant sum and not consistent with SMG being insolvent …"

60. The arguments advanced by counsel for the respondent concentrated on the respondent's appreciation of the sound financial standing of the company's directors, his appreciation that the company's business was ostensibly thriving, and on the lack of difficulties he had experienced in past transactions with the company. Reliance was placed on evidence that the respondent understood Mr Neville Scholz to be a successful businessman, that he understood that the Scholz family, or companies controlled by them, owned "a lot of real estate on the Gold Coast", and his knowledge that the Scholz family had a large, waterfront home in an exclusive location.

61. In relation to the respondent's acceptance of the explanation that the company's difficulties with its bank arose from Mrs Scholz's conduct and that she was impeding the resolution of those problems, reliance was placed, in part, on an observation by the respondent of Mrs Scholz being "unreasonably rude and demanding" on a particular occasion.

62. The respondent's counsel cautioned against determining the existence of a reasonable suspicion of insolvency by reference to the attitudes of lawyers and judges who may be more inclined than the average reasonable person to be questioning and, perhaps, more prone to scepticism. Reliance was placed on the following observations of Young J in Harkness v Commonwealth Bank of Australia Ltd:^[39]

"When considering the objective test, one is making an assessment 'according to the standards of an ordinary reasonable man' (per Latham CJ in Downs Distributing (at 476)) that is the standard of 'ordinary men of business' (per Barwick CJ in Queensland Bacon (at 287)) would apply to the circumstances.  As Kitto J said in the latter case (at 303): '... It is an objective question.  What the payee or anyone else inferred at the time is not to be treated as decisive, though the Court may be assisted in reaching its own conclusion by seeing how business men in fact reacted to the circumstances.'  The standard is that of the ordinary person on the Bondi bus.  That person is not necessarily a university graduate, that person is not necessarily a person who has a background in the financial world.  One does not necessarily impute to the ordinary person of business in the short-term money market or even a banker any particular intellectual standard or standard of competence.  The standard is that of the average business person.  The fact that an expert financial analyst, or a barrister or a solicitor or even a judge might add up the factors and say that on the basis of his or her experience 'of course there must be reason to suspect insolvency' is not enough."

63. The respondent has the benefit of the primary judge's findings on the question under consideration in his favour. However, in dealing with the objective, as opposed to the subjective test, this Court is in as good a position as the primary judge to consider the inferences which should be drawn from the evidence, most of which is undisputed.

64. When regard is had to the background matters identified by the respondent's counsel, it is not difficult to accept that on 24 September 2005, when the respondent was given an explanation for the dishonouring of the first cheque, he was disposed to accept it. A reasonable person in his position may well have accepted the explanation also. But, plainly, a reasonable person in the position of the respondent would have been aware at the time that he had paid $165,000 to the company on 12 September and that a further $165,000 had been transferred into the company's bank account by Daimler on 19 September.  Such a reasonable person would have wondered why there could have been difficulty in returning his $165,000 if the company was not experiencing liquidity problems.  He would have appreciated that his claims to payment were morally, if not legally, greater than those of the company's general body of creditors.

65. Such a reasonable person's doubts would have increased when, on collecting the cheque dated 29 September 2005 for $165,000, he was told not to bank it until Monday, 3 October, because the bank was still not releasing the proceeds of deposited cheques until they had been cleared. This explanation would have informed him that the company was dependent on new monies coming into the account in order to pay old debts.

66. The respondent received the letter of dishonour in relation to the second cheque on 5 October 2005. He again spoke to Messrs Scholz and Seymour and was given much the same excuse for its being dishonoured. In order to address what must have been obvious expressions of concern by the respondent, he was presented with the 6 October 2005 document. That document gave no guarantee of payment. It amounted only to a pious statement of intention to pay the money the next day, failing which the directors would procure the company to pay the debt by weekly instalments of no less than $50,000 per week. The document made plain the lack of certainty on the part of the company's directors that $165,000 of the respondent's money, wrongfully withheld, could be repaid promptly. The primary judge concluded that the "guarantee" was some comfort to the [respondent] that they would stand by their word and pay him. Even if this finding is accepted, in my view, the contents of this remarkable document, and the fact that it was thought necessary to bring it into existence, would have served only to alarm a reasonable person about the state of the company's finances.

67. A reasonable person's doubts about the insolvency of the company would have been increased by the failure to pay the $165,000 on 7 October. The primary judge considered that the respondent's position was strengthened, relevantly, by the payment of $10,000. I respectfully disagree. In my view a reasonable person would have derived no comfort from being given the bank cheque for $10,000 in lieu of payment of $165,000 or even $50,000. The inference that such a person would have drawn was that the payment of $10,000 was the best the company was able to do in the circumstances. The offer in relation to the two cars made that conclusion inescapable.

68. There is no challenge to the primary judge's acceptance of the respondent's evidence that he had had a personal experience in which he "had to change banks when cheques were wrongly dishonoured so he did not become unduly worried especially having received assurances from Mr Seymour and Mr Leslie Scholz". The appellant's counsel point out, however, that this passage contains something of a non sequitur: it was not being asserted that the cheques were being wrongly dishonoured.

69. For these reasons, I conclude that the primary judge erred in finding that a reasonable person in the respondent's circumstances would have had no reasonable grounds for suspecting that the company was insolvent. The respondent has failed to establish the application of s 588 FG(2).

Conclusion

70. I agree with what Fraser JA has written in relation to identification of the relevant transaction for the purposes of s 588FA. For the above reasons, I would order that:

• the appeal be allowed with costs;
• the order made by the primary judge on 24 October 2008 be set aside;
• judgment be entered in favour of the appellant/plaintiff against the respondent/defendant in the sum of $95,000 together with interest under s 47 Supreme Court Act 1995 at 10 per cent from 26 January 2006 to the date of this judgment;
• the respondent/defendant pay the appellant/plaintiff’s costs of and incidental to the trial; and
• the respondent/defendant’s counter-claim be dismissed with costs.

71. FRASER JA:  I have had the advantage of reading Muir JA’s reasons for judgment, with which I agree.  I gratefully adopt and will not repeat his Honour’s analysis of the evidence and the issues in the appeal.

72. During the hearing of the appeal the Court raised a question concerning the identification of the "transaction" for the purposes of s 588FA(1) of the Corporations Act.  Section 588FA provides:

"Unfair preferences

(1)A transaction is an unfair preference given by a company to a creditor of the company if, and only if:

(a)the company and the creditor are parties to the transaction (even if someone else is also a party); and

(b)the transaction results in the creditor receiving from the company, in respect of an unsecured debt that the company owes to the creditor, more than the creditor would receive from the company in respect of the debt if the transaction were set aside and the creditor were to prove for the debt in a winding up of the company;

even if the transaction is entered into, is given effect to, or is required to be given effect to, because of an order of an Australian court or a direction by an agency.

(2)For the purposes of subsection (1), a secured debt is taken to be unsecured to the extent of so much of it (if any) as is not reflected in the value of the security.

(3)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."

73. In response to the question raised by the Court, the respondent’s counsel contended that the company's payment of $10,000 together with its transfer to the respondent of the two second hand cars by way of security on 11 October 2005 should be seen as forming an inseparable part of a wider “transaction” which involved no unfair preference.  That contention was not made at the trial.  Unsurprisingly it is not dealt with in the primary judge’s reasons.  However the appellant's senior counsel frankly conceded that all of the evidence bearing upon the question was before the Court and he did not object to the Court now deciding the point.  It is expedient to resolve this new issue.

74. The respondent did not contend for any application of the "continuing business relationship" exception in s 588FA(3). Rather, the argument for the respondent was that the relevant "transaction" comprehended the respondent's purchase of the car on 12 September 2005, the loan arrangements between him and his financier (“Daimler”), the payment by Daimler of $165,000 to the company on 19 September 2005, and the subsequent payment and transfer to the respondent of the two cars on 11 October 2005.

75. On the argument advanced for the appellant, the relevant "transaction" comprehended only the company’s payment of $10,000 and transfer to the respondent of the two cars on 11 October 2005. The appellant argued that reference to the length of time that elapsed between Daimler's payment to the company on 19 September 2005 and the dealings on 11 October 2005 precluded a conclusion that Daimler's payment formed part of the relevant "transaction", particularly when regard was also had to the intervening events. 

76. As those competing arguments suggest, the identification of the “transaction” to which s 588FA(1) applies is critical. The terms of s 588FA(1) demonstrate that "nothing can amount to a preference unless the person preferred is a creditor".^[40] If the respondent’s description of the relevant transaction is correct, the respondent was not a creditor before the relevant transaction, which commenced at the latest when Daimler made its payment to the company.  Furthermore, the overall effect of the broad transaction propounded for the respondent did not result in any preference in his favour; rather, the effect was to disadvantage the respondent and to improve the net financial position of the company.

77. I think it clear, however, that the respondent’s description of the “transaction” which is relevant for the purposes of the application of s 588FA(1) cannot be accepted.

78. In the way in which the respondent’s argument characterised the legal effects of the dealings, the property in the car passed to him on 12 September 2005 when he purchased the car and property remained with him throughout. As the appellant characterised the dealings, that original purchase was rescinded (and, presumably, property in the car was transferred by the appellant to the company and then to Daimler) when Daimler paid the company for the car on 19 September 2005. There may be a third possibility, namely that property in the car remained with the company until it sold the car to Daimler, but it is not necessary for the resolution of the present issue to decide which view is correct. In my opinion, on any view the company’s payment and transfers of the two cars to the respondent on 11 October 2005 must be regarded as the only relevant “transaction” for the purpose of the application of s 588FA(1).

79. The definition of “transaction” in s 9 of the Act is expressed in such broad terms as to be capable of comprehending all of the dealings to which the respondent and the company were parties. It is arguable that they were both parties to all of the dealings, including the purchase of the car by Daimler for which the appellant contends (which may have required the respondent to transfer property in the car to the company). But as Ormiston J pointed out in a passage in VR Dye & Co v Peninsula Hotels Pty Ltd (In liq) and Anor^[41] the "transaction" to be examined is the company’s payment or other disposition of a kind contemplated by s 588FA.  The relevant “transaction” here is the payment transaction that occurred on 11 October 2005.  The appellant was by then a creditor of the company.

80. Ormiston J also observed in the passage just cited that a related agreement for the provision of goods or services or the like may be looked at in order to determine the purpose of the transaction under examination. In that respect, as Dawson, Gaudron and McHugh JJ observed in Airservices Australia v Ferrier and Anor,^[42] in relation to s 122 of the Bankruptcy Act 1966 (Cth):

"Resort must be had to the business purpose and context of the payment to determine whether it gives the creditor a preference over other creditors. 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. Thus, where the payment is a step in a wider transaction, "its actual business character must be seen and when it forms part of an entire transaction which if carried out to the intended conclusion will leave the creditor without any preference priority or advantage over other creditors the payment cannot be isolated and construed as a preference" [Richardson v Commercial Banking Co of Sydney Ltd (1952) 85 CLR 110 at 132] . . ."

81. In this case reference to the “wider transaction” confirms that the purpose of the transaction to be examined under s 588FA(1), namely the transaction on 11 October 2005, was simply to pay part of a separate, pre-existing debt. On any view, there was no change in the ownership of the car after completion of the dealing whereby Daimler paid the $165,000 to the company on 19 September 2005, thereby constituting the respondent a creditor of the company. By 11 October the respondent had been a creditor of the company for some three weeks and had been vigorously, but unsuccessfully, seeking payment of his debt. The first cheque the company gave to the respondent in payment of his debt was dishonoured on presentation, a replacement cheque was also dishonoured on presentation, a subsequent payment arrangement was not met, and the ultimate payment transaction (a small part payment and the transfer of two cars as security) radically differed from that originally contemplated (a single payment of the whole $165,000 once Daimler had paid the company).

82. Because there was no change in the ownership of the car at any time after the completion of the dealings of 19 September between Daimler and the company, the company received nothing in exchange for its payment of $10,000 and its transfer of the two cars three weeks later, other than a partial discharge of the debt. On any reasonable view, the payment and transfers to the respondent were effected in an independent transaction and for the sole purpose of paying part of the debt the company had incurred upon completion of the company’s earlier dealings with Daimler on 19 September 2005. Because the company was insolvent at the time of the payment transaction, its effect was to prefer the respondent over those other creditors whose debts remained wholly unpaid throughout the same period.

83. The argument for the respondent assimilates his position to that of a seller under the typical COD sale, in respect of which there is no preference because the seller is not a creditor before the sale. There is also usually no preferential effect in the typical COD sale because in exchange for payment the company immediately receives something of approximately equal value. For the reasons I have given there is no analogy here with a COD sale. The respondent was instead simply one of the company’s unsecured creditors for the three week period after his debt was incurred.

84. It is necessary in this connection to mention the decision in Mann v Sangria Pty Ltd,^[43] to which the appellant’s senior counsel referred the Court.  Bryson J there allowed for an extension of the exception from the application of s 588FA(1) for COD sales to a case in which his Honour concluded that although cash and delivery were not “exactly” contemporaneous they were “substantially” contemporaneous.  In that case a butcher made six deliveries of meat to a company together with the contemporaneous delivery of an invoice, in exchange for which the company handed over or sent a cheque either at or very soon after the delivery.  In five of the cases the cheque was post-dated by a couple of weeks.  The other cheque bore the date upon which it was delivered.  The cheques were paid when they were presented on those dates.  Bryson J concluded that in each of the six cases the delivery of the goods and the payment were "so closely bound together in events and in time that they should be characterised as the same transaction".^[44]

85. This case is plainly distinguishable from Mann v Sangria Pty Ltd.  The delay of some three weeks and the dealings between the company and the respondent in the period between the creation of the debt to the respondent upon completion of the 19 September transaction and the subsequent payment transaction on 11 October require the conclusion that, for the purposes of s 588FA, the latter transaction did not form part of the earlier transaction.

86. That being so, and for the reasons given by Muir JA in relation to the other issues in the appeal, the appeal must be allowed. I agree with the orders proposed by Muir JA.