The Court of Appeal has overturned a High Court decision, agreeing with receivers that certain sales by the debtor were not in the ordinary course of business, but rather payments to an unsecured creditor.
In this case1 when the debtor began to experience cash flow difficulties, it established another company to purchase stock, which the debtor would find buyers for. Sales were made either in the name of the new company, or the debtor would account to the new company for the sale proceeds.
When the debtor became insolvent, the directors of both companies instructed that stock owned by the new company be used to fill orders placed with the debtor, with sale proceeds paid directly to the new company.
Receivers considered these transactions to be outside the ordinary course of business of the debtor, with the result that the sale proceeds remained subject to the lender's security interest.
The High Court disagreed but the Court of Appeal decided that the debtor had purported to pass title of its stock without any compensating payment, with the effect that the lender's security was undermined. Arguably the transactions were not a sale in the ordinary course of business, but rather a payment to the new company as an unsecured creditor.