Rex Developments Pty Limited and Companies Act 1981 William James Hamilton v Harvey Brian Gartrell [1993] ACTSC 66 (12 July 1993)

SUPREME COURT OF THE ACT

REX DEVELOPMENTS PTY LIMITED AND COMPANIES ACT 1981
WILLIAM JAMES HAMILTON v. HARVEY BRIAN GARTRELL
No. SC532 of 1987
Number of pages - 6
Corporations

COURT

IN THE SUPREME COURT OF THE AUSTRALIAN CAPITAL TERRITORY
Master Hogan(1)

CATCHWORDS

Corporations - Winding up - Preference - Setting aside.

Companies Act 1981 S.451

Downs Distributing Co Pty Ltd v Associated Blue Star Stores Pty Ltd (in liquidation) [1948] HCA 14; (1948) 76 CLR 463

HEARING

CANBERRA, 31 March 1993
12:7:1993

Counsel for the Applicant: R.L. Crowe

Instructing Solicitors: Minter Ellison Morris Fletcher

Counsel for Defendant: H.B. Gartrell

Instructing Solicitors: Self

ORDER

THE COURT ORDERS THAT:
1. The respondent pay to the applicant the sum of $29,984.

2. The respondent pay the applicant's costs.Bankruptcy - Preference - Setting aside - Defence - Ordinary course of business.

DECISION

MASTER HOGAN This is an application by the liquidator of a company to set aside a preferential payment made by the company to the respondent. The application is made pursuant to S.451 of the Companies Act 1981 which in effect imports the provisions of the Bankruptcy Act 1966 relating to the setting aside of preferences, especially S.122.

2. On 25 May 1987 an Order was made in this Court that Rex Developments Pty Limited ("the Company") be wound up, and that William James Hamilton be appointed liquidator.

3. The Summons by which that Order was sought on 8 May 1987, on which date therefore the winding up commenced.

4. The respondent is a chartered accountant. At all material times he was a director of the company. A Mr Philip Carver in fact administered the affairs of the company. He had at one time been a director, but had ceased to hold that office after a short time, for reasons that are not clear on the evidence. The respondent gave evidence as follows:
"MR CROWE You were a director of Rex Developments Pty Limited from

about 1985, were you not?
MR GARTRELL Yes, I was.
MR CROWE What was Mr Carver's position with the company?
MR GARTRELL Mr Carver, who was the originator of the project, along
with another, Mr-Warner, was the controller of all operations, both the
hotel and also the refurbishment program.
MR CROWE And he reported to you, did he?
MR GARTRELL No, he was in complete charge. I was brought into the
project more to give it credence because I was a chartered accountant
and also a secretary of a publicly listed group of companies.
MR CROWE But you were the director of Rex Developments?
MR GARTRELL I was a director. Mr Carver was in complete charge of the
company.
MR CROWE He was not a director of the company?
MR GARTRELL No, he wasn't.
MASTER Was he a controlling shareholder?
MR GARTRELL Yes, he was the controlling shareholder.
MR CROWE What position did he hold at the company?
MR GARTRELL He was controller of operations or director of operations
but that - that was the complete operations of the hotel and the
refurbishment program.
MR CROWE Did he hold a formal office, with the company?
MR GARTRELL I believe he - well, definition of formal office, as far as
I am concerned, he was the controller of the company.
MR CROWE You understand what I mean by formal office, don't you, Mr
Gartrell?
MR GARTRELL Well, which office would you like me to refer to? I mean
...
MASTER Had the board appointed him as a manager? He was not a director
so he wasn't managing director?
MR GARTRELL Yes, I don't remember. He would have been the manager of
the company, yes. That's not been disputed in any matters.
MR CROWE Do you say that the board appointed him as a manager?
MR GARTRELL Well, I don't recall the actual resolution but right from
the beginning Carver was put by the board in charge of all of the
operations of the hotel.
MR CROWE So you say that he was put by the board in charge of those
operations. It necessarily follows that he was therefore responsible
to the board for those operations, does it not?
MR GARTRELL Well, that's a rather loose - to say he's actually
responsible to the board when he, in fact, is the majority shareholder
- Mr Carver did his own thing."

5. The respondent had lent $10,000 to the company on 5 February 1986. By May 1987 the interest on the loan amounted to $4,820.

6. In February 1985 the company had purchased the Canberra Rex Hotel, which it converted to strata title, and proceeded to sell in lots. In the course of that undertaking it borrowed money from NZI Capital Corporation Ltd and an associated company ("NZI") on the security of a mortgage over the hotel.

7. On 16 April 1987 the final sale of the hotel was to be completed. At that time the only substantial assets of the company were the hotel and book debts owing to the company. For the purpose of the sale it was necessary to obtain a discharge of the mortgage. The proceeds of the sale were not sufficient to discharge the whole of the mortgage debt.

8. The respondent's affidavit contained the following:

3. In connection with paragraph 15 of the Hamilton Affidavit, I
confirm that the sale of the Rex Hotel was completed on 16 April 1987.
On that day, I was in Sydney. Shortly prior to completion, I recall a
telephone conversation with Mr Phillip Kingston Carver ("Carver") to
the following effect:
Carver said:
'NZI now want to take a charge over the debtors to secure $100,000.00
and for this purpose I need you to appoint Steve Bates to sign the
documents as your attorney.'
I said:
'What is to happen with my loan repayment?'
Carver said:
'We are $100,000 short. I can't pay you out of the settlement. The
sale has to go through.'
I said:
'What's the position with the company?'
Carver said:
'The position is that we have more than $500,000 owing to us from
debtors and only a few $100,000.00 in creditors. In addition to that
we have the claim of $1,000,000.00 plus against Brian Dowling.'
(I was aware at this time that the company had a claim against Brian
Dowling (architect) for completion delays and financial loss resulting
from the refurbishment programme of the Rex Hotel.)
I said:
'I can't get down to Canberra at such short notice to sign the Power of
Attorney. I don't have any choice, do I?'
Carver said:
No, not unless you can be in Canberra in an hour's time."
I said:
'Fax me up the Power of Attorney and I will sign it in favour of Steve
Bates.'
4. In connection with paragraph 24 of the Hamilton Affidavit, I confirm
that I was paid the sum of $14,842.00 on or about 1st May 1987. The
signature appearing on annexure "M" to the Hamilton Affidavit is my
signature."

9. In his affidavit in support of this application the liquidator deposed to his belief that the company was insolvent at the date of the transaction that he sought to set aside. In support of that belief he deposed, in paragraph 32, as follows:

"Exhibited to me at the time of my swearing this affidavit and
marked 'WJH12' is a balance sheet reconstruction which shows the
balance sheet of Rex as at 31 October 1986 compiled by Stephen Bates,
chartered accountant, the balance sheet at the same date amended by me
to show a more true and fair view and the draft report as to affairs
compiled by me at 15 May 1987, which was the date of my appointment as
provisional liquidator of Rex. The balance sheet reconstruction at 31
October 1986 reveals the net assets shown by the Stephen Bates sheet to
be $7,130,574.98. My amended balance sheet shows net assets in the sum
of $505,117.80. The profit and loss appropriation statement compiled
by Stephen Bates shows that total accumulated trading losses of Rex as
at 31 October 1986 were $929,665.35. Exhibited to me at the time of my
swearing this affidavit and marked 'WJH13' is the deficiency statement
prepared by me concerning the draft report as to the affairs compiled
by me on 15 May 1987."

10. The respondent's comment on that in his affidavit was as follows:

"5. In connection with paragraph 32 of the Hamilton Affidavit, I
recall the balance sheet reconstruction by Stephen Bates. To the best
of my recollection, I did not see any other financial statement for any
period after 31st October 1986 prior to the appointment of the
liquidator of the company."

11. Other matters deposed to by the liquidator related to the service on the company of a S.364 notice in December 1986, and the non payment of group tax, prescribed payments tax and payroll tax. About those matters the respondent swore that he was not aware until after the appointment of the liquidator.

12. During cross examination the respondent insisted that he accepted Carver's assurances about the excess of assets over liabilities. The cross examination continued:

"MR CROWE Did you take any action to force a disclosure to you of
proper financial information as to where the company stood as at the
end of 1986, or indeed, beginning of 1987?
MR GARTRELL I continually requested financial statements from Carver to
find out the situation of the company.
MR CROWE And he didn't provide them to you?
MR GARTRELL And I got excuses like, 'We're putting in a new computer
system', or, 'The computer's going down' and ...
MASTER For how long had that process been going on?
MR GARTRELL A long time.
MR CROWE Well, didn't that alert you to something?
MR GARTRELL Well, it only alerted me to the fact that he was
disorganised as far as getting the accounting system up and running.
There was no flags that the company was in a solvency problem.
MR CROWE Well, there were no flags because you didn't get any
information?
MR GARTRELL Well, precisely my point - there were no flags.
MR CROWE Well, you were burying your head in the sand, weren't you, Mr
Gartrell?
MR GARTRELL Well, I was resident in Sydney. Mr Carver spent the
majority of his time in Canberra, and as the major shareholder was in
complete charge of the project.
MR CROWE You were a director of the company though, weren't you?
MR GARTRELL For the third time, yes.
MR CROWE And you knew, and you know now, that you could've insisted on
the provision of documentation, or have taken action to - financial
documentation - or have taken action to enforce that, don't you?
MR GARTRELL Yes. At the time it didn't cross my mind.

13. The other significant fact that emerged during the cross examination was that the initial method of payment to the respondent was by a cheque. That cheque was not met on presentation. Carver gave him some explanation that the company was changing bank accounts. The respondent therefore asked for a telegraphic transfer, which was the method by which he received payment.

14. The respondent did not contest that he received the payment, that the payment had the effect of giving him a preference, priority or advantage over the creditors or that it was made within the relevant 6 months period. He relied upon the defence under S.122(2)(a) of the Bankruptcy Act 1966, alleging that he was a payee in good faith and for valuable consideration and in the ordinary course of business.

15. Counsel for the liquidator submitted that the consideration for the payment was a past consideration, being a pre existing debt, and that there was not therefore any "valuable consideration" for the payment within the meaning of the paragraph.

16. I do not uphold that submission. The consideration for the payment was the contemporaneous discharge of the debt, which was valuable consideration.

17. Next, it was submitted that the payment was not in the ordinary course of business.

18. I agree with that submission. The concept of the "ordinary course of business" was described, with his customary succinct lucidity, by Rich J in Downs Distributing Co Pty Ltd v Associated Blue Star Stores Pty Ltd (in liquidation) (1948) 76-CLR 463 at 477, as follows:

"It is, therefore, not so much a question of fairness and absence
of symptoms of bankruptcy as of the everyday usual or normal character
of the transaction. The provision does not require that the
transaction shall be in the course of any particular trade, vocation or
business. It speaks of the course of business in general. But it does
suppose that according to the ordinary and common flow of transactions
in affairs of business there is a course, an ordinary course. It means
that the transaction must fall into place as part of the
undistinguished common flow of business done, that it should form part
of the ordinary course of business as carried on, calling for no remark
and arising out of no special or particular situation."

19. True it is that, once the hotel had been sold, all that remained for the company to do was to get in the debts that were owing to it, and to pay those that it owed.

20. But on 16 April 1987, when the respondent was told by Carver that the company was short of funds to effect settlement, he expressed concern about the repayment of his loan. About a fortnight later he received a cheque in payment. That cheque was not met on presentation. He insisted on, and received, payment by telegraphic transfer. That could hardly be called a payment "calling for no remark and arising out of no special or particular situation".

21. I am also persuaded that it was not a payment received in good faith.

22. The concept of good faith as used in S.122 does not have its ordinary meaning of propriety or honesty. It is given an entirely artificial meaning by paragraph 122(4)(c), which provides:

(c) A creditor shall be deemed not to be a purchaser, payee or
encumbrancer in good faith if the conveyance, transfer, charge, payment
or obligation was executed, made or incurred under such circumstances
as to lead to the inference that the creditor knew, or had reason to
suspect:
(i) that the debtor was unable to pay his debts as they became due from
his own money; and,
(ii) that the effect of the conveyance, transfer, charge, payment or
obligation would be to give him a preference, priority or advantage
over other creditors."

23. In the Downs Distributing Co case cited above, Latham CJ said, at p 475, 476:

"It was argued that the words 'the creditor had reason to suspect'
meant that the creditor had in his mind some knowledge or belief which
to him amounted to reason to suspect; in other words, that the test
was a subjective test. In my opinion there is no reason for
interpreting the words of the section in this way, and there is every
reason for interpreting them as referring to an objective test. The
sub-section refers to 'such circumstances as to lead to' one or other
of two inferences; either first, that the creditor knew certain facts;
or secondly, that the creditor had reason to suspect the existence of
certain facts. The provision as to the creditor 'knowing' adopts a
subjective criterion--applied by inference made by the court. The
other provision as to the circumstances leading to an inference that
the creditor had 'reason to suspect' relates in my opinion to what may,
by way of comparison, be described as an objective test. It is
intended to deal with circumstances such that an inference can fairly
be drawn by a court that there was reason to suspect, whether or not in
fact the mind of the creditor consciously adverted to the significance
with respect to the financial position of the debtor of the matters
mentioned in the sub-section. In my opinion a transaction falls within
sub-s.(4), so that a creditor is excluded from the category of a
creditor dealing in good faith under sub-s.(2)(b), if, whatever the
creditor may think or believe with respect to the circumstances of a
transaction, those circumstances are such as to lead to an inference by
the court that there was reason to suspect according to the standards
of an ordinary reasonable man that the debtor was unable to pay his
debts as they became due, and that the effect of the transaction would
be to give the creditor a preference over other creditors."

24. The evidence in this case may not demonstrate that in fact the respondent had actual knowledge of the financial state of the company at the time he received the payment. The circumstances that I have already referred to in connection with the ordinary course of business would at least raise a suspicion about that. But it does not matter. It is abundantly clear that on an objective test the circumstances were such as to lead to the inference that he had reason to suspect both the company's insolvency and the preferential nature of the payment to him. In addition to the circumstances of the actual payment already adverted to, there is the fact that the respondent was a director of the company, and if he was in fact as ignorant of its affairs as he claims, it was only by a sedulous abrogation of his duties as a director that he managed to remain in such ignorance. For a long time, by his own admission, he got nothing but excuses from Carver in response to his continued requests for financial information. I therefore hold also that he was not a payee in good faith when he received the payment. The payment was therefore void as against the liquidator.

25. The amount of the payment was $14,842. Interest to the date of judgment in accordance with the practice direction is $15,142.

26. I order the respondent to pay to the applicant the sum of $29,984.

27. I order the respondent to pay the applicant's costs.