Harris Scarfe, Chicago Boot

Dwyer and others v Chicago Boot Co Pty Ltd.,1 March 2011, Sulan J [2011]SASC 27

It seems appropriate to kick off our new Blog close to home, with a judgment from Adelaide.

In  the long-running Harris Scarfe liquidation, the liquidators challenged payment to a supplier. The supplier argued that (a) the company could not be shown to have been insolvent at the relevant time, (b) the supplier  had a defence that it did not know or had no reason to suspect insolvency and (c) it had a retention of title clause and therefore this was not a payment to an unsecured creditor of HS which would have the effect of giving the supplier a better position than it would have got on liquidation.

Leaving aside the liquidator’s proof of insolvency (see below) , when the [Chicago] boot was on the other foot and the supplier had to prove lack of knowledge of insolvency, their case was not helped by the fact that Chicago Boot eventually served a statutory demand. The judge rejected their argument that this was a case of ‘won’t pay, not can’t pay’. Whilst of course the statutory demand process is not necessarily inconsistent with lack of knowledge or suspicion, Sulan J commented :

“For a publicly listed company to find itself in a position in which a statutory demand is issued does not support the contention that it was in a position to pay its debts as they fell due and chose not to do so”.

In relation to retention of title, it would have made an interesting argument that the payments were not giving any advantage to the creditor, had they been able to make out the ROT clause. Unfortunately, cross-examination revealed that (i) the original terms of trade relied upon as incorporated into the contractual relations had been lost and (ii) practice between the supplier and Harris Scarfe, for example the period of credit, and the fact that no proceeds of sale had been kept by Harris Scarfe in a separate account as fiduciary, was totally inconsistent with the alleged (and lost) terms of trade.

One noteworthy side-issue was the fact that the liquidator relied on his own ‘expert report’ to assert his position that the company had been insolvent. At first blush, it seems odd that the plaintiff can claim ‘expert’ status for his  opinion, especially as to a central element which he has to prove. But the Court did not seem that troubled  by the idea .  (The judge said that it was not disputed that the liquidator could not be ‘independent’, though later stated that he was accepting the expert evidence on the basis of the liquidator’s ‘independence as official liquidator’. ) Sulan J said that it went to weight of evidence, rather than admissibility. Precedent supports this approach. Furthermore, since the liquidator was an ‘officer of the court’ , this seemed to give some comfort .

It is hard to see what labelling the liquidator’s report as ‘expert’ added, given that the liquidator has to prove insolvency . It may have added some persuasive weight to the liquidator’s case , where the defendants disputed the liquidator’s analysis of the accounts.
It is understandable that it would be expensive, and re-inventing the wheel, to get an outside expert  to testify as to insolvency. Nevertheless, it is noted that the Accounting Standards Board  APES 300 guidelines on Insolvency Engagements suggest that experts should disclose any relationship they have with the parties to the litigation!  The IPA Code of Professional Practice (second edition), at p123, seems consistent with the approach in Harris Scarfe, though it does point out that whilst appointees need to remain objective, they should also disclose that they are likely to benefit in terms of remuneration (maybe directly in terms of time spent preparing any report, but also possibly through recoveries of any preference). If an appointee is an expert, court rules on expert witnesses should apply. One suspects that the courts have taken a relaxed approach given the professional role of liquidators, but the APES standard certainly does treat this as a conflict, and the IPA obviously feels it is worthy of guidance to its members.

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