Preference payments - Considering the surrounding circumstances

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21 October 2011

In the case of Chicago Boot Co Pty Ltd v Davis & McIntosh as Joint & Several Liquidators of Harris Scarfe Ltd [2011] SASCFC 92, the liquidator of the Harris Scarfe Group (HS) sought to set aside a series of payments made by the company to Chicago Boot Co Pty Ltd (CB) on the basis that they were voidable preference payments pursuant to s588FA of the Corporations Act 2001 (Cth).

The main issue on appeal was whether CB had established the good faith defence under s588FG(2) of the Corporations Act 2001 (Cth), in particular, whether CB suspected HS was insolvent at the time that the payments were made.

Facts

CB was a supplier of footwear to several of the HS companies, with a trading relationship extending over 30 years.  According to CB’s trading terms, payment was to be made within 60 days of the date of delivery.  However, it was common for payments to be made outside those terms. Administrators were appointed to HS on 3 April 2001 (the relation back day).  Six payments totalling $316,801.33 had been made to CB during the relation back period.

Decision

The Full Court of the Supreme Court of South Australia confirmed that the time for assessing the existence of reasonable grounds of insolvency is the time when each payment is made.  Thus, the circumstances existing at the time of each payment must be considered. 

Taking into account the history of dealings between the parties, the Court considered that CB had established the good faith defence in relation to payments made on 4 October 2000 and 2 January 2001. 

The Court also agreed that the trial judge had erred in not considering the circumstances in a global way and not differentiating between the circumstances existing at the time of each separate payment.  Further, the trial judge had not given enough weight to “countervailing factors” which countered the effect of the communications between the parties.  These factors included the overall positive media reports of HS, the content of the HS financial statements and annual report, and the status of HS as a leading department store.

The court held that CB had failed to establish the good faith defence in relation to payments made on 19 January, 2 February and 22 February 2001, on the grounds that:

  • HS’ overall indebtedness had significantly increased during this period;
  • CB served a statutory demand on HS during this time; and
  • the communications between HS and CB, in particular emails of 25 and 30 January 2001 which clearly raised the prospect that HS was in financial trouble.

The court considered that a reasonable person in CB’s position at the time of receiving the payments would have suspected HS’ insolvency.

Comment

This case reiterates that in considering whether the good faith defence can be established, the courts assess the circumstances existing at the time that each alleged preference payment is made.

The existence or otherwise of a suspicion of insolvency is to be assessed by reference to the circumstances that existed at the time of each payment.

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