BounceLED Pty Ltd v Clear Skies Corp Pty Ltd (in liq)

1. [1]

   This is appeal from a decision of the Local Court in proceedings brought by the Liquidator of an insolvent company, Clear Skies Corp Pty Ltd (in liq) (the Company) in which the Magistrate held that payments received by the plaintiff, BounceLED Pty Ltd (BounceLED) from the Company in the total amount of $63,857.70 were unfair preferences pursuant to s 588FF of the Corporations Act 2001 (Cth) (the Judgment). His Honour made orders requiring BounceLED to pay that amount to the Liquidator, plus interest and costs.

2. [2]

   BounceLED seeks orders that the judgment entered and orders made in the Local Court be set aside, and also seeks leave to appeal to the extent necessary under s 40(1) of the Local Court Act 2007 (NSW).

3. [3]

   In what follows section references are to the provisions of the Corporations Act, unless otherwise stated.

Background

1. [4]

   At all relevant times, BounceLED manufactured and supplied light-emitting diode (LED) lights and related components to the signage industry. The Company conducted a commercial sign manufacturing business and used LED lights and related components supplied by BounceLED to illuminate the signs the Company manufactured. BounceLED supplied goods to the Company by the following process:

   1. (1)

      the Company would submit a purchase order to BounceLED;

   2. (2)

      BounceLED would then provide the goods with an invoice to be paid by the Company. Each invoice generally stated that payment was due 30 days after the end of the month in which BounceLED sent the invoice; and

   3. (3)

      BounceLED would allocate payments received from the Company against the oldest invoice due at the time payment was received.

2. [5]

   The Company appointed Mr Simon John Thorn (the Liquidator) as voluntary administrator pursuant to Pt 5.3A of the Corporations Act on 23 July 2019, being the applicable “relation back day” within the meaning of s 91. On 17 September 2019, Mr Thorn was appointed deed administrator at a meeting of creditors. On 15 April 2020, Mr Thorn was appointed liquidator pursuant to Pt 5.5 of the Corporations Act.

3. [6]

   The Liquidator’s claim before the Local Court concerned the following 11 payments allegedly made by the Company to BounceLED in the period of 6 months preceding 23 July 2019, which were alleged to amount to unfair preferences within the meaning of s 588FA:

4. [7]

   While the Liquidator’s claim was that all payments were made by the Company, it was not in dispute in the Local Court or this Court that the 5th and 7th to 11th payments were made by third parties as indicated in the 4th column of the above table.

5. [8]

   The Liquidator sought an order pursuant to s 588FF for the sum of $66,959.70 (being the total amount of the 11 payments, subtracting supplies totalling $25,235.02 which were made by BounceLED), plus interest and costs.

6. [9]

   The Local Court upheld the Liquidator’s claim except for the sixth payment referred to above of $3,102, leaving $63,857.70 as the total amount of the unfair preferences received by BounceLED.

Statutory scheme

1. [10]

   Where a transaction is a “voidable transaction” under one of the subsections of s 588FE, then, unless a defence is available, the Court has power to make one or more of the orders set out in s 588FF, including relevantly “an order directing a person to pay to the company an amount equal to some or all of the money that the company has paid under the transaction”: s 588FF(1)(a). It was this power that the Local Court exercised in the present case on the basis that payments in the total amount of $63,875.70 to BounceLED were voidable transactions.

2. [11]

   In the present case the Liquidator relied on s 588FE(2) which provides:

3. [12]

   Section 588FC defines “insolvent transaction” as follows:

4. [13]

   The term “transaction” is defined in s 9 to mean in relation to a body corporate, “a transaction to which the body is a party”, including a conveyance, transfer or other disposition by the body of its property, a payment made by the body, and an obligation incurred by the body.

5. [14]

   While the concept of “insolvent transaction” applies both to an “unfair preference” and an “uncommercial transaction”, only the former is relevant in the present case. Hence in the present case, it was necessary for the Liquidator to show that the relevant transaction (being the 11 payments identified in the table above) were an unfair preference and met the requirements of either paragraph (a) or (b) of the definition of “insolvent transaction”.

6. [15]

   Section 588FA defines when a transaction is an “unfair preference” relevantly as follows:

7. [16]

   Section 588FG sets out a number of defences which can be raised against a claim by a liquidator for an order under s 588FF, including relevantly s 588FG(2) which provides:

Local Court Proceedings

1. [17]

   In the Judgment, his Honour identified the issues on which the making of an order under s 588FF depended as follows:

   1. (1)

      whether the payments covered by the 11 transactions were made “from” the Company for the purposes of s 588FA, and whether the payments resulted in BounceLED receiving more from the Company in respect of those amounts than it would have done if the payments were set aside and BounceLED were to prove the payments in the winding up of the company;

   2. (2)

      whether the amounts owing to BounceLED were secured and, if so, whether the payments were made in respect of the secured debts owed to BounceLED by the Company;

   3. (3)

      whether, at the time of the payments, the Company was insolvent as required by s 588FC; and

   4. (4)

      whether BounceLED had made out a good faith defence pursuant to s 588FG(2).

2. [18]

   Before addressing these issues, his Honour set out the following background facts:

3. [19]

   In relation to [8], this is a reference to pars 7(a) to (e) of the Liquidator’s statement of claim which set out the 1st to 5th payments, and pars 7(g) to (k) of the statement of claim which sets out the 7th to 11th payments.

4. [20]

   In relation to the first issue, his Honour divided the 11 payments into 3 categories:

5. [21]

   In relation to the second category, his Honour found this was not an unfair preference and this finding is not contested in this appeal. The only dispute on appeal related to the first and third categories.

6. [22]

   In relation to the first category, BounceLED contended that the first 3 payments (Trust Payments) were made from funds that were not beneficially held by the Company, but rather were held on trust for the purpose of making the payments to BounceLED, relying on a “Quistclose trust”: Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567. His Honour rejected this argument and found that the 1st to 4th payments were unfair preferences, for the following reasons:

7. [23]

   In relation to the third category, being the Third Party Payments, his Honour found that they were unfair preferences for the following reasons:

8. [24]

   His Honour’s finding in relation to the Trust Payments and the Third Party Payments is the subject of appeal grounds 1 to 4. I note that BounceLED did not dispute either in the Local Court or this Court that the 4th payment was received from the Company.

9. [25]

   His Honour found that BounceLED received more from the 11 payments than it would if they were set aside and BounceLED proved in the winding up, for the following reasons:

10. [26]

    This conclusion is the subject of appeal grounds 5 and 6.

11. [27]

    As to the second issue, this concerned a retention of title clause in the invoices issued by BounceLED. His Honour concluded that the evidence overwhelmingly supported the view that there was never any intention on behalf of the parties to rely on the retention of title clause and so it could not “be relied upon to defeat the operation of s 588FC of the Corporations Act”. This conclusion is not contested on appeal.

12. [28]

    As to the third issue, his Honour found that the Company was insolvent at the time of the payments as required by s 588FC. This conclusion is not contested on appeal.

13. [29]

    As to the fourth issue, his Honour found that BounceLED had discharged its onus of proof in relation to s 588FG(2)(a), (b)(i) and (c), but not s 588FG(2)(b)(ii).

14. [30]

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

15. [31]

    This conclusion is the subject of appeal grounds 7 and 8.

Nature of the Appeal

1. [32]

   The appeal to this court is governed by ss 39-41 of the Local Court Act which relevantly provide:

2. [33]

   Under s 39(1) of the Local Court Act, an appeal may be brought as of right on a question of law. In that case, the existence of a question of law is not merely a qualifying condition to the right of appeal, but the question of law alone is the subject matter of the appeal: Davis v NSW Land and Housing Corporation [2016] NSWCA 325; 18 BPR 36,459 at [77]. Hence, in such an appeal, there can be no review of the merits of the Local Court’s decision and it is only possible to challenge the legal correctness of what the Local Court has done: Davis at [77]–[78].

3. [34]

   In contrast, s 40(1) of the Local Court Act allows, with leave, an appeal on a ground that involves a question of mixed law and fact. A grant of leave to appeal generally requires there to be an error of principle, a matter of public importance or injustice that is reasonably clear in the sense of going beyond what is merely arguable: Gibson v Drumm [2016] NSWCA 206 at [19]; Secure Parking Pty Ltd v Ralan Property Services Pty Ltd (No 1) [2018] NSWSC 660 at [10].

4. [35]

   In an appeal under s 39 or 40 of the Local Court Act, this Court does not have power to make a finding of primary fact even if an error of law has been established or even if an error of mixed fact and law has been established: Lesley-Swan v Owners SP 32735 [2013] NSWSC 1635 at [71]–[75]; Rose v Tunstall [2018] NSWCA 241 at [25]–[33]. As a consequence, if an appeal is successful under either s 39 or s 40, but it is necessary to make any findings of primary fact, the proceedings will need to be remitted to the Local Court for further hearing.

5. [36]

   BounceLED raises in its Summons in this Court 8 grounds of appeal, grouped under 3 issues: (1) whether a payment received from the Company for the purposes of s 588FA(1)(b), (2) whether BounceLED received more than it would have in the winding up of the company, and (3) whether the good faith defence under s 588FG was made out by BounceLED. It is convenient to take the same approach in these reasons.

Issue 1: whether payments were received from the Company (grounds 1-4)

1. [37]

   Grounds 1 to 4 are:

2. [38]

   These grounds of appeal contest his Honour’s conclusion on the question of whether the Trust Payments and the Third Party Payments were received from the Company for the purpose of s 588FA(1)(b). Grounds 1 and 2 apply to both categories of payment and grounds 3 and 4 relate only to the Trust Payments. The parties were in agreement that grounds 1 and 2 raise a question of law in relation to the Third Party Payments, whereas the defendants contended that the grounds 1 to 4, in so far as they relate to the Trust Payments, only involve a question of mixed law and fact for which leave is required. It is convenient, as the parties did, to address the Third Party Payments first.

3. [39]

   His Honour determined that the Third Party Payments were unfair preferences and fell within the requirements of s 588FA, agreeing with the Liquidator’s submission that s 588FA(1)(a) makes specific provision for such transactions. His Honour found that the payments “were treated by the creditor as payments from the company and they were applied to outstanding invoices” (see [24] above).

4. [40]

   As set out at [23] above, His Honour noted that the parties had made submissions regarding Cant v Mad Brothers Earthmoving Pty Limited (2020) 63 VR 222; [2020] VSCA 198, In the matter of Evolvebuilt Pty Limited [2017] NSWSC 901; 35 ACLC 17-036 and Re Emanuel No 14 Pty Ltd (In Liq); Macks v Blacklaw & Shadforth Pty Ltd [1997] FCA 667; 147 ALR 281, as well as what was said by Rees J in In the matter of Western Port Holdings Pty Ltd (receivers and managers appointed) (in liq) [2021] NSWSC 232; 358 FLR 45 at [40].

5. [41]

   However, as BounceLED submitted, the fact that BounceLED received the Third Party Payments and applied them to its outstanding invoices is not sufficient to satisfy s 588FA(1)(b). It is necessary that they be received from the Company, which requires that they be received from the Company’s own money or assets to which it is entitled, so that the effect of the transaction is to diminish the assets of the Company available to creditors: Cant v Mad Brothers at [120]; Western Port Holdings Pty Ltd at [39].

6. [42]

   In Cant v Mad Brothers, the Victorian Court of Appeal considered the meaning of the phrase “from the company” in s 588FA(1)(b), concluding at [120] that:

7. [43]

   Rees J in Western Port Holdings Pty Ltd reviewed the authorities on the meaning of the expression “from the Company” in s 588FA(1)(b), and concluded as follows:

8. [44]

   While Rees J expressed some “disquiet” by the reasoning in Cant v Mad Brothers, her Honour accepted that the conclusion reached in that case not being plainly wrong, she was bound to follow it. I am also bound by the decision in Cant v Mad Brothers and would add that it can be explained on the basis that the Court of Appeal gave the expression “receiving from the Company” in s 588FA(1)(b) a purposive construction in light of the text, context (including legislative history) and purpose of s 588FA(1).

9. [45]

   In order to address properly the submission made by BounceLED that the Third Party Payments were not received from the Company, his Honour needed to (but did not) address the evidence concerning the circumstances in which those payments were made, including the matters identified by Rees J in Western Port Holdings Pty Ltd at [40]. Only by undertaking that task was it possible to determine if the payments were received from the Company’s own money or assets to which it was entitled, with the effect of diminishing the assets of the Company available to creditors. If the evidence did not allow such a finding to be made, then the Liquidator would not have discharged his onus of proof. The failure to address this issue, and to make the necessary findings of fact to determine whether the effect of each transaction was to diminish the assets of the Company available to creditors, is an error of law: Reitano v Commissioner of Police [2004] NSWCA 99 at [31]-[35]. As the determination of this issue would require the making of findings of primary fact, the appropriate relief under s 41 of the Local Court Act would be to set aside the judgment and remit the matter to the Local Court for further hearing, such that the Local Court can make the necessary findings of fact.

10. [46]

    BounceLED contended in the Local Court that the Trust Payments were not received from the Company because they were not monies beneficially owned by the Company, but rather were specific amounts which had been deposited to enable specific payments to be made to BounceLED and were “simply flowing through the company to BounceLED”. The contention was that the amounts were held on a “Quistclose trust”, being a trust according to the principle stated in Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567. Reliance was placed on the decision Colvin J in Nikitins (Liquidator) v Encorefx (Australia) Pty Ltd (in liq) (No 2) [2021] FCA 27; 149 ACSR 533.

11. [47]

    The evidence relied on by BounceLED for this submission (as set out in its written and oral submissions in the Local Court) was (a) that it was apparent from the Company’s bank statements that on the date that each of the Trust Payments was made, the same amount had been deposited into the Company’s bank account from the relevant third party, and (b) that the Liquidator had accepted in cross-examination that each amount was paid by the third party to the Company by way of loan. BounceLED submitted that it could be readily inferred from this that each deposit was earmarked for a particular purpose being payment of the same amount to BounceLED.

12. [48]

    It is necessary to outline briefly what was decided in Nitikins because this was the only decision on this issue to which his Honour was referred. That case concerned a company called EncoreFX (Australia) Pty Ltd (EFX) which was placed into voluntary administration on 30 March 2020 and went into liquidation in May 2020. Shortly before 30 March 2020, EFX had received amounts in Australian dollars from two of its clients (called Verbatim and Next) for the purposes of undertaking foreign exchange transactions to convert those funds into US dollars. The commencement of the administration intervened before the transactions were completed. The liquidators sought directions from the Court as to whether they were entitled to treat the amounts as property of the liquidation. Colvin J held that they could not because each amount was held on a statutory trust for the relevant clients under s 981H.

13. [49]

    This conclusion made it unnecessary for Colvin J to deal with an alternative contention put by Verbatim and Next, that the amounts in dispute were held by the liquidators on a “Quistclose trust”, being a trust according to the principle stated in Barclays Bank Ltd v Quistclose Investments Ltd. However, Colvin J did address that contention at length and ultimately rejected it.

14. [50]

    Colvin J summarised the relevant principles to be applied as follows:

15. [51]

    Colvin J undertook the analysis referred to at [106] and concluded that an objective intention of the kind required was not revealed by the relevant documents or the nature of the transactions, and consequently a Quistclose trust did not arise. It is apparent from Colvin J’s statement of the relevant principles and his decision, that BounceLED would not establish a Quistclose trust in respect of the Trust Payments merely from the facts identified at [47] above.

16. [52]

    On appeal to this Court, BounceLED reiterated the submission made below, and relied on the following observations of Gleeson J in Re BBY Limited (Receivers and Managers Appointed) (in liq) and BBY Holdings Pty Limited (Receivers and Managers Appointed) (in liq) [2022] NSWSC 29:

17. [53]

    In BBY Gleeson J recognised that a Quistclose trust can arise in respect of funds lent to a company which subsequently goes into liquidation, but found at [143] that on the facts of that case no such trust was established.

18. [54]

    In the Judgment in these proceedings, the reasoning of his Honour on this issue was brief. As set out at [23] above, when dealing with the 1st to 4th payments, which include the Trust Payments, his Honour merely noted BounceLED’s argument that the first three payments were funds to which the Company “would not otherwise have been entitled because the funds were passing through [Clear] Skies’ account and are similar to the other payments or were never free for the company to dispose of as it saw fit, but rather only for the particular purpose for which they were ultimately used”.

19. [55]

    BounceLED contends that there was an error of law because his Honour failed to engage with its submission that the Trust Payments were subject to a Quistclose trust and hence did not fall within s 588FA(2)(b).

20. [56]

    In my view, there was no error of law in his Honour’s treatment of the Trust Payments for two reasons. First, the reasoning of his Honour, although brief, can be seen as implicitly rejecting BounceLED’s submission because it was clear, on the evidence relied on, that the submission was obviously wrong. At its highest, the evidence established that two third parties lent money to the Company and on the same day an equivalent amount was paid by the Company to BounceLED. However, the money was deposited to the general account of the Company and not a separate account, and hence was intermingled with the Company’s other funds, and there was no evidence of the terms of the loan to the Company. Therefore, the evidence was not sufficient to justify a finding of a Quistclose trust on which issue BounceLED had the onus of proof: Nikitins at [103].

21. [57]

    Second, if his Honour failed to address the submission, there is no error of law in his failure to do so because if a submission is not worthy of consideration there is no error of law in failing to address it: Leduva Pty Ltd v NM Structural Engineering Pty Ltd [2010] NSWSC 1164 at [28]-[37].

22. [58]

    Accordingly, I reject grounds 1 and 2 in so far as they relate to the Trust Payments and grounds 3 and 4.

Issue 2: whether BounceLED received more than it would have in the winding up (grounds 5 and 6)

1. [59]

   Grounds 5 and 6 are:

2. [60]

   His Honour concluded that unsecured creditors would not receive 100 cents in the dollar in the Company’s liquidation and hence that BounceLED received more from the 11 payments than it would receive if it repaid the amounts and instead proved for its debts in the winding up of the Company for the purposes of s 588FA(1)(b): see [25] above.

3. [61]

   This finding is contested by grounds 5 and 6. I accept BounceLED’s submission that grounds 5 and 6 raise a question of law which is whether the conclusion reached by his Honour, that BounceLED received more from the 11 payments than it otherwise would have if it had to prove for its debts in the winding up, was reasonably open on the evidence and facts found.

4. [62]

   The relevant part of BounceLED’s submissions on this issue are as follows:

5. [63]

   The evidence of the Liquidator referred to in pars 51(a), (b), (d), (f) and (g) comprises the statement in par 80 of his affidavit sworn on 6 May 2021 that “Presently I do not expect that the unsecured creditors will receive any dividend in the winding up of the Company” and the following parts of his cross-examination and re-examination.

6. [64]

   In cross-examination, the Liquidator gave the following evidence:

7. [65]

   In re-examination, the Liquidator gave the following evidence:

8. [66]

   He was not cross-examined further on the evidence given in re-examination that the claims “could be lucrative” and whether that was consistent with his evidence that it was “very unlikely” that this would provide a return of 100 cents in the dollar to creditors. In my view, the two statements are not inconsistent: the Liquidator acknowledged that the recovery could provide a return to creditors, but that is not the same thing as a return of 100 cents in the dollar.

9. [67]

   The issue his Honour had to determine was whether the Liquidator had established on the balance of probabilities that the amount which BounceLED received by way of the 11 payments is more than it would receive if those transactions were set aside and BounceLED proved instead in the winding up. Put another way, s 588FA(1)(b) requires a comparison between the amount of the impugned transaction and the probable return to the creditor if the transaction was set aside and the creditor proved instead in the winding up: Walsh v Natra Pty Ltd (2000) 1 VR 523; [2000] VSCA 60 at [31]; Commissioner of Taxation v Kassem (2012) 205 FCR 156; [2012] FCAFC 124 at [82].

10. [68]

    The evidence referred to above regarding the potential for a “lucrative” claim or claims does not detract from the Liquidator’s evidence considered as a whole that a return to creditors of 100 cents in the dollar was very unlikely, as such an event is not probable. In my view, it was reasonably (in the sense of rationally) open on all the evidence for his Honour to reach the conclusion that he did; this is a case where the evidence reasonably admits of different conclusions, one of which is the conclusion sought to be impugned, and consequently there is no error of law: see Wesiak v D & R Constructions (Aust) Pty Ltd [2016] NSWCA 353 at [73]-[74].

11. [69]

    BounceLED also relied on the decision of Williams J in In the matter of Pacific Steelfixing Pty Ltd [2021] NSWSC 655 at [93]-[99], where her Honour found that s 588FA(1)(b) was not satisfied because the liquidator’s investigations concerning potential claims were incomplete and it was uncertain whether there would be a surplus in the winding up. Her Honour noted at [99] that the case turned “on its own very unusual facts”. As the defendant submitted, the facts in Re Pacific Steelfixing Pty Ltd are distinguishable from the facts in this case; and the finding of his Honour on this issue was reasonably open on all of the evidence.

12. [70]

    Accordingly, I reject grounds 5 and 6.

Issue 3: whether BounceLED has a good faith defence (grounds 7 and 8)

1. [71]

   The third issue arising in this appeal is whether BounceLED established the defence in s 588FG(2) of the Act. As noted above, his Honour accepted that s 588FG(2)(a), (b)(i) and (c) were satisfied, but found that s 588FG(2)(b)(ii) was not.

2. [72]

   Grounds 7 and 8 are:

3. [73]

   It was common ground between the parties that ground 7 raises a question of mixed law and fact for which leave is required. BounceLED submitted in the alternative that ground 7 raises a question of law because the finding that s 588FG(2)(b)(ii) was not satisfied was not reasonably open, having regard to the whole of the evidence.

4. [74]

   I am satisfied that ground 7 raises a question of mixed law and fact because the question whether the test in s 588FG(2)(b)(ii) is satisfied requires the application of a legal principle (being the objective test in that provision) to the facts of the case: see R v PL [2009] NSWCCA 256; 261 ALR 365 at [26]; Souaid v Nahas [2019] NSWSC 1132; 89 MVR 364 at [3]. I will address the question of leave after considering whether ground 7 is made out.

Applicable principles

1. [75]

   A number of cases have considered the requirements of s 588FG(2)(b) including Cussen as Liquidator of Akai Pty Ltd (in liq) v Commissioner of Taxation [2004] NSWCA 383; 57 ATR 499; In the matter of Alsafe Security Products Pty Ltd atf Alsafe Trust (in liq) [2016] NSWSC 428; Hosking v Extend N Build Pty Ltd [2018] NSWCA 149; 357 ALR 795; White v ACN 153 152 731 Pty Ltd (in liq) (2018) 53 WAR 234; [2018] WASCA 119 and Badenoch Integrated Logging Pty Ltd v Bryant (2019) 284 FCR 590; [2021] FCAFC 64. The following propositions may be drawn from those cases:

   1. (1)

      The application of s 588FG(2) is to be considered through the contemporary eyes of the parties in the commercial circumstances then prevailing, and without the benefit of hindsight: White at [107].

   2. (2)

      The reference to suspicion of insolvency is suspicion of actual insolvency, and not merely a suspicion (or even a belief) that the debtor might be insolvent, or potentially insolvent. The word “suspect” requires more than wondering whether a matter exists or not, and involves a positive feeling of actual apprehension or mistrust that the debtor will be able to pay its debts: Hosking at [115]; White at [112].

   3. (3)

      The test in s 588FG(2)(b)(i) is hybrid in character since it is directed to whether the particular creditor, with its perspicacity, the information available to it, and with any analysis of that information that it had made, had no “reasonable grounds” for suspecting insolvency at the relevant time, and the requirement for “no reasonable grounds” is objective in character: Alsafe at [33]; Hosking at [115].

   4. (4)

      The test in s 588FG(2)(b)(ii) is objective in character, and is directed to whether a reasonable person in the creditor’s circumstances, using the information reasonably available in those circumstances and making the analysis of that information which a reasonable person would make, would have had reasonable grounds to suspect the debtor’s insolvency. The matter will be determined by reference to a person who has the knowledge and experience of an average business person: Alsafe at [34]; Hosking at [115].

   5. (5)

      A failure to pay a debt, or to pay it in a timely way, may of itself not ground a suspicion of insolvency but instead indicate the mere presence of a liquidity problem or perhaps raise a possibility that the debtor is insolvent but without providing sufficient foundation for the formation of an actual suspicion that the debtor is actually insolvent. A failure to pay a debt or its late payment must be considered in the context of the history of the dealings between the parties and all the commercial circumstances: White at [113].

   6. (6)

      The words “in the person’s circumstances” in s 588FG(2)(b)(ii) refer to the actual circumstances as they exist at the time the creditor entered into the relevant transaction (here each of the 11 payments) and denote external objective factors or circumstances rather than factors personal to the creditor such as their personal perspicacity, financial acumen and the like: Cussen at [29]-[31], [120]; White at [123].

   7. (7)

      The reference in s 588FG(2)(b)(ii) to whether a “reasonable person” in the person’s circumstances “would have had” no reasonable grounds for suspecting that the debtor was insolvent is a reference to the “reasonable person’s” assessment of the information actually available to the creditor into whose “circumstances” the “reasonable person” is theoretically placed. That would include knowledge of the fact that some things were not known because no request for additional information had been made but does not encompass information which is not in fact available but which a “reasonable person” would have sought and, presumably, received: Cussen at [114]; White at [123].

   8. (8)

      The test under s 588FG(2)(b)(ii) is an objective test, and the standard of measurement is that of a hypothetical person who is assumed to have the knowledge and experience of the “average business person”. It does not require an examination of whether the particular creditor, with their skills, training and experience, acting reasonably, would have had reasonable grounds for suspecting insolvency: Cussen at [17] and [31]; White at [123].

   9. (9)

      The objective circumstances referred to in (6) may include the nature and practices of the industry in which the relevant transaction has occurred, insofar as they are established as objective matters of fact, but not merely the particular creditor’s subjective views as to the operation of the industry and its practices: White at [124].

   10. (10)

       If the creditor receiving the impugned payment does not in fact infer insolvency or find grounds to suspect its existence and continues to provide credit to the company, that may provide some evidence although it is not determinative, of how a reasonable person in the person’s circumstances would regard the matter: White at [125].

   11. (11)

       Whether a reasonable person would have suspected insolvency is to be assessed by reference to all the circumstances existing at the time of the impugned transaction, including accumulated circumstances: Alsafe at [34]. In Sutherland (as liquidator of Sydney Appliances Pty Ltd (in liq)) v Eurolinks Pty Ltd [2001] NSWSC 230; 37 ACSR 477, Santow J said at [43]:

   12. (12)

       Each limb of s 588FG(2)(b) requires the negative proposition under that limb to be proved by the creditor: White at [126].

2. [76]

   It has been observed in a number of cases that the enquiries under the two limbs of s 588FG(2)(b) will rarely produce different results: Mann v Sangria Pty Ltd [2001] NSWSC 172; 38 ACSR 307 at [46]; D’Aloia v Federal Commissioner of Taxation [2003] FCA 1336; 54 ATR 366 at [18]; Dean-Willcocks v Commissioner of Taxation [2008] NSWSC 1113; 73 ATR 801 at [10]; Alsafe at [35]; In the matter of Heavy Plant Leasing Pty Ltd (in liq) [2018] NSWSC 707 at [53]. While such a case may be rare, it would occur where the reasonable average business person in the creditor’s circumstances would have reasonable grounds for suspicion of insolvency, but the actual creditor, given its perspicacity or acumen and the analysis it undertook of the information available to it, did not (or vice versa): Chicago Boot Co Pty Ltd v Davis & Nicol as joint and several liquidators of Harris Scarfe Ltd [2011] SASCFC 92; 282 ALR 378 at [21].

Decision below on issue 3

1. [77]

   His Honour’s reasons for concluding that s 588FG(2)(b)(ii) was not satisfied are set out at [30] above. Essentially, it involved setting out 5 matters which BounceLED “relied on” and then 3 matters which the Liquidator “pointed to” in resisting the application of the defence under s 588FG(2). These are not stated as findings of fact; rather, they are merely a summary of contentions put by each party. There follows a reference to some of the principles relevant to the application of s 588FG(2), and then the dispositive reasoning is found in the final paragraph set out at [30] above, commencing “In my view”. The critical part of this reasoning is as follows (emphasis added):

2. [78]

   The emphasised words refer to 6 matters and repeat what was said in the Liquidator’s written submissions dated 27 July 2021 at [38]. However, his Honour’s reasons do not refer to particular aspects of the evidence which support the 6 matters referred to. Further, while his Honour’s reasons set out the parties competing positions in relation to the evidence in the passage quoted at [30] above, his Honour does not deal with the significance of the evidence referred to or deal with the factual dispute that existed between the parties as to whether BounceLED had entered into a “payment plan” with the Company, which BounceLED denied. The only factual finding which was made by his Honour in relation to s 588FG(2)(b) was that “Mr Krecklenberg did not have grounds for suspecting that the Company was insolvent”. The sparsity of his Honour’s reasons on the application of s 588FG(2)(b)(ii) reflects the very limited assistance he received from the parties as to the correct principles to apply, with neither party directing his Honour to any of the relevant authorities.

3. [79]

   Although the passage quoted at [77] above merely restates the submission made by Mr Justice, counsel for the Liquidator, in written submissions, Mr Justice did in his oral closing submissions in the Local Court refer to particular parts of the evidence which supported the submission he made. I will refer to this evidence, where appropriate, in the next paragraph.

4. [80]

   Before addressing the 6 matters identified by his Honour in the passage quoted at [77] above, it is necessary to summarise the evidence relevant to the application of s 588FG(2)(b)(ii). In so doing, I have been assisted by a table prepared by the parties which identifies the evidence which they each rely upon.

   1. (1)

      In September 2017, the Company commenced purchasing goods from BounceLED.

   2. (2)

      On 30 October 2018, Mr Krecklenberg (a director of BounceLED and the relevant decision maker) sent an email to Ms Stambe (an employee of the Company) in which he said: “Hi … need some answers before re.payment (sic) of invoices as they will go over into 120 days”. It is clear from his cross-examination that this was a request by Mr Krecklenberg for an explanation as to when the Company’s invoices for July 2018 (amounting to $8,091.60 and about to become more than 90 days overdue) would be paid. Mr Krecklenberg gave evidence as to why this was significant to him. It was that BounceLED had a financing arrangement with a company called Scottish Pacific under which it would provide a loan to BounceLED of 80% of outstanding invoices, but the outstanding invoices under this arrangement could not include those which were more than 90 days overdue. This explanation was consistent with BounceLED’s contention that Mr Krecklenberg was not chasing up invoices which were going from 90 days overdue to 120 days overdue because he had a suspicion of the Company’s insolvency.

   3. (3)

      There is an email chain on 30 October 2018 between employees of the Company and/or Skope Group Pty Ltd, a related party which had previously made loans to the company. These emails discuss how the Company proposed to respond to Mr Krecklenberg’s request. They include an email from Ms Kathy Donovan to Ms Ann Orren (both of Skope Group) which states:

   4. (4)

      On 14 November 2018, there is an email from Ms Stambe of the Company to Ms Donovan (of the Skope Group) which states relevantly (emphasis added):

   5. (5)

      On 4 December 2018 there is another email from Ms Stambe to Ms Donovan which contains the following statement relating to BounceLED:

   6. (6)

      Mr Krecklenberg gave evidence that in December 2018 he agreed with the Company to post-date 4 invoices (totalling $7,052.65). He also gave evidence that on 12 April 2019 he agreed to post-date an invoice for an order placed on 12 April 2019 for $2,598.05 so that it would have an issue date of 1 May 2019. He gave evidence that occasionally he would be asked by a customer to post-date an invoice usually in the last week of a month such as during the Christmas shut down period. I note that the copy of the invoice for the order placed on 12 April 2019, which is in evidence, shows that it had an issue date of 12 April rather than 1 May 2019 and consequently the invoice for that order was not in fact post-dated.

   7. (7)

      The orders placed by the Company with BounceLED in January, February and March 2019 were lower than they had been in late 2018 (being $13,026.75 in January, $13,854.57 in February and $1,913.13 in March).

   8. (8)

      On 18 March 2019 Mr Krecklenberg sent an email to Ms Stambe which stated: “Can you please clear this week $8567.04 in 60+ and 90+ days?”. He then followed this up by a further email on 1 April 2019 which stated: “Hi … need payment confirmed before I can ship.” It appears from this email exchange and an internal email which Ms Stambe sent to colleagues within the Company that a payment of $8,567 was not made during the previous week and as a result, as at 1 April 2019, BounceLED was not supplying outstanding orders. Mr Krecklenberg then sent another email on 2 April 2019 to Mr Hiron of the Company in which he said: “Thanks for the order. Waiting on Maree to update me on payment. Once I know we will send goods out.” It is apparent from these emails that the delay in paying the amount of $8,567 led to BounceLED stopping the delivery of outstanding orders. Mr Krecklenberg gave evidence that he took this approach because it seemed to him that the Company and BounceLED might not continue to have as strong a trading relationship given the decline in orders from the Company (see (10) below). A payment of $8,567.13 was made on 2 April 2019 and thereafter BounceLED received and satisfied further orders from the Company on credit terms.

   9. (9)

      In March 2019, Mr Krecklenberg had a conversation with Mr Cooper, an employee of the Company, in which Mr Krecklenberg offered to supply goods to the Company on consignment (an arrangement which BounceLED had with other customers). This offer was not taken up. Mr Krecklenberg explained in his evidence that this was not due to a concern about the ability of the Company to pay its debts but rather to seek to obtain more orders from the Company.

   10. (10)

       During April 2019 Mr Krecklenberg visited the Company’s warehouse and spoke to an employee of the Company, Mr Hashmi, who had recently taken over as the operations manager of the Company and was in charge of placing orders with suppliers. Mr Krecklenberg gave evidence that (a) the reason for this visit was not because of a concern regarding the payment of outstanding invoices but rather that he wanted to introduce himself to Mr Hashmi, as the orders placed by the Company with BounceLED had been low in January and February 2019; and (b) based on his conversation with Mr Hashmi at the warehouse, he was satisfied that the reduced orders were caused by the Company clearing out stock and also purchasing stock from suppliers in China.

   11. (11)

       Mr Krecklenberg also gave evidence that while he was aware that BounceLED was receiving fewer orders from the Company he had no information from the Company or from other suppliers about whether the company had started to reduce its trade more generally, or that other suppliers were facing issues with receiving payment on time.

   12. (12)

       Over the period from 24 November 2018 to 2 July 2019 (when the 11th payment was made) the Company made 17 payments to BounceLED to reduce its outstanding debt to BounceLED to nil. In relation to the 5 payments made in that period prior to 29 January 2019, 3 were in round numbers and 2 were not in round numbers. In the period from 29 January to 2 July 2019, only 2 were in round numbers. Mr Krecklenberg gave evidence that he did not enquire who made these payments and did not know that some of them came from third parties and not the Company.

   13. (13)

       Mr Krecklenberg gave evidence that he did not ask, and did not know, whether the company was facing cash flow constraints or difficulties, and his approach to collecting the Company’s outstanding debt reflected his general practice of following up payment of all accounts (not just those of BounceLED) which had been outstanding for more than 90 days.

   14. (14)

       BounceLED did not issue any letters of demand or take any enforcement action against the Company for the payment of its debt.

The parties’ submissions on issue 3

1. [81]

   The plaintiff contended that his Honour’s conclusion was erroneous because it mischaracterised the evidence and otherwise because it failed to take into account the matters which had been identified by BounceLED in support of the conclusion that s 588FG(2)(b) was satisfied. In relation to the matters relied upon by his Honour in support of that conclusion, BounceLED submitted that:

2. [82]

   BounceLED also submitted that his Honour failed to explain why, given that the cases recognised that it would be rare for the enquiries required by pars (i) and (ii) of s 588FG(2)(b) to produce different results, this occurred in the present case.

3. [83]

   The Liquidator submitted that BounceLED has conflated the subjective and objective test in taking into account certain matters that may have been relevant to Mr Krecklenberg’s view (such as the national and international presence of the Company) but not the average business person whose assessment is relevant to the objective test under s 588FG(2)(b)(ii). It was submitted that there was ample evidence in the form of missed payments, round number payments, post-dated invoices, payment plans, missed payments, freezes on deliveries and declining sales to have led the average business person to have an apprehension and suspicion of insolvency. I have referred to the evidence relied on by the defendant as to these matters at [80] above.

Resolution of issue 3

1. [84]

   There are a number of errors of principle in the way in which his Honour addressed the test under s 588FG(2)(b)(ii).

2. [85]

   First, his Honour did not identify the evidence as to the “Company’s ability or inability to pay its debts” at or leading up to the impugned payments and how such evidence is relevant to the application of the second limb. The focus of the second limb is on the information which was actually available to the creditor (see [75(7)] above). That evidence establishes that it was known to BounceLED during the period from early October 2018 to 29 January 2019 (when the 1st payment was made) the Company was able to, and did, pay part of the outstanding debt, as there were successive payments to reduce the outstanding debt in each of October, November, December and January. Consistently with his Honour’s finding that s 588FG(2)(b)(i) was satisfied, the evidence does not indicate that BounceLED was aware that the Company was unable to pay the balance of the debt. The only contemporaneous documents in evidence which might lead to an inference that there was doubt as to whether the Company could pay its debts were internal emails between persons employed or associated with the Company and there is no evidence that BounceLED saw any of these emails at the relevant time. The position is the same throughout the period from the time of the 1st payment to the 11th payment.

3. [86]

   Second, delay in payment is not itself determinative and needs to be considered in light of all the relevant circumstances. While there was delay in payment of the outstanding debt, there were regular payments in the period up to the end of January 2019. In October 2018, two payments were made ($5,429.05 and $8,091.60) and they were not round number payments. In November, three payments were made ($1,339.62, $10,688.85 and $3,000) of which only one was a round number payment. In December, two payments were made ($15,000 and $3,000) both of which were round number payments. In January, two payments were made ($4,418.55 and $14,500.65, being the 1st payment), none of which were round number payments. In total there were nine payments (including the 1st payment) over the period from 1 October 2018 to 31 January 2019 of which only three were round number payments. The position is not relevantly different in the period from 1 February to 2 July 2019, in which there were 10 payments of which only 3 were round number payments. Taken as a whole this is consistent with the Company having a cashflow problem rather than an incapacity to pay the debt.

4. [87]

   Third, while the withholding and/or suspension of deliveries of stock, which occurred on three occasions in the period from October 2018 to June 2019 (30 October and 5 December 2018 and 1 April 2019) is a relevant matter, it is not determinative where (as here) it is used to bring pressure on the debtor to pay all or part of the outstanding debt: see Heavy Plant Leasing Pty Ltd (in liq) at [58]–[63] and [70]. As with the delay in payment, applying pressure to a debtor to pay an outstanding debt needs to be assessed in light of all the circumstances known to the creditor at the time. In the present case, the withholding of stock is consistent with the normal bringing to bear of pressure on a solvent debtor to pay its debt.

5. [88]

   Fourth, the evidence established only two situations where a post-dating of invoices arose. The first was in the last week of December 2018 and the second was in April 2019. The first is explained as a normal business practice during the Christmas shut down period. The second is equivocal as it is clear from the evidence that while Mr Krecklenberg may have agreed to post-date the invoice, this did not in fact occur. Mr Krecklenberg’s evidence was that occasionally he would be asked by a customer to post-date an invoice and in agreeing to do so, he was giving the customer extra time to pay. He denied in cross-examination that the request to post-date the invoice on 12 April 2019 indicated that the Company was unable to pay that amount in the normal payment cycle. In my opinion, if an average business person knew that the request on 12 April 2019 had been made it would not lead that person to have a suspicion of actual insolvency, particularly as at the time of the request the outstanding indebtedness of the Company to BounceLED had been reducing (from $80,010.68 on 12 February 2019 to $41,739.99 as at 9 April 2019 just before the request to post-date the invoice was made).

6. [89]

   Fifth, insofar as his Honour relied on there being a “payment plan”, there is no evidence to support a finding that there existed a payment plan with BounceLED at any relevant time. It was denied by Mr Krecklenberg in his cross-examination and the email in evidence which refers to a payment plan is explicable on the basis that it was the Company which was seeking to establish its own plan with Skope Group to repay its outstanding debt to BounceLED. This is confirmed by the fact that nothing in evidence refers to or suggests any proposal for a payment plan, or its terms, was communicated by the Company to BounceLED or vice versa.

7. [90]

   Sixth, the evidence indicates that there were declining sales of products by BounceLED to the Company in early 2019 but the evidence of Mr Krecklenberg provides an explanation for it (see [80(10)] above). The explanation is reasonable and in my view would be accepted by the average business person as being reasonable, as there is nothing in the evidence to contradict it.

8. [91]

   Finally, his Honour’s finding that Mr Krecklenberg did not have grounds for suspecting that the Company was insolvent, and consistently with that view continued to provide goods to the Company on credit, does provide some further evidence (although it is not determinative) as to how a reasonable average business person in Mr Krecklenberg’s circumstances would have approached the matter: see [75(10)] above.

9. [92]

   In my opinion, in accordance with the principles stated at [75] above, when regard is had to all the circumstances existing at the time of the impugned transactions, including accumulated circumstances, the conclusion to be reached is that a reasonable average business person in BounceLED’s circumstances would not have suspected the insolvency of the Company. At most, that person would merely have wondered whether the Company was solvent, but that wondering would have been allayed by the regular making of payments by the Company, continued orders being placed by the Company and the explanation provided for the reduced amount of orders in April 2019. Accordingly, on the evidence before the Local Court, BounceLED discharged its onus of establishing that s 588FG(2)(b)(ii) is satisfied.

10. [93]

    His Honour did not address the evidence in accordance with the relevant principles, in particular that referred to at [75(11)] above, and this error has resulted in an injustice to BounceLED. For that reason, leave should be granted on ground 7 under s 40(1) of the Local Court Act.

Conclusion

1. [94]

   As BounceLED has succeeded on grounds 1 and 7, the appeal should be allowed. The next question is the nature of the relief which should be granted. In the case of ground 1, the appropriate relief would be to remit the matter to the Local Court as further findings of primary fact are required.

2. [95]

   In the case of ground 7, this does not require any new finding of primary fact and as it is determinative of the appeal, the appropriate course is for this Court to exercise its power under s 41(1) of the Local Court Act and dispose of the proceedings below. In particular, it is consistent with the overriding purpose in s 56(1) of the Civil Procedure Act 2005 (NSW) that the matter be finally resolved in this Court rather than being remitted back to the Local Court (there being no further finding of primary fact required).

3. [96]

   I will hear the parties as to costs. However, I indicate that in relation to the costs below, this Court can exercise the discretionary power of the Local Court with respect to costs and as the plaintiff was successful on appeal, the appropriate order is that the defendants pay the plaintiff’s costs of the proceedings in the Local Court: Drive My Car Rentals Pty Ltd v Gabriel (2021) 104 NSWLR 697; [2021] NSWCA 73 at [112]. I accept the plaintiff’s submission that the costs orders should be made against the Liquidator personally, as he was the moving party in the litigation: Silvia v Brodyn Pty Ltd [2007] NSWCA 55; 25 ACLC 385 at [48]-[51].

4. [97]

   Accordingly, I make the following orders:

   1. (1)

      Grant leave to the plaintiff to appeal on ground 7 only pursuant to s 40(1) of the Local Court Act 2007 (NSW).

   2. (2)

      Allow the appeal and set aside the judgment entered and orders made by Thomas LCM on 14 October 2021 in the Local Court.

   3. (3)

      Order that the Statement of Claim filed by the plaintiffs (the defendants in this Court) in the Local Court be dismissed.

   4. (4)

      The plaintiff to email to my Associate and serve on the defendants, submissions as to costs in this Court and the Local Court proceedings by 4:00pm on 1 March 2023.

   5. (5)

      The defendants to email to my Associate and serve on the plaintiff, submissions as to costs in this Court and the Local Court proceedings, including any application for a certificate under the Suitors’ Fund Act by 4:00pm on 8 March 2023.

   6. (6)

      The plaintiff to file and serve reply submissions (if any) by 4:00pm on 10 March 2023.

   7. (7)

      Liberty to apply on two days’ notice.