Re Rex Developments Pty Limited (In Liquidation) and Re the Companies Act 1981 William James Hamilton v Dorchester Private Hotels Pty Limited [1993] ACTSC 80 (20 August 1993)

SUPREME COURT OF THE ACT

IN THE MATTER OF REX DEVELOPMENTS PTY LIMITED (IN LIQUIDATION)
AND IN THE MATTER OF THE COMPANIES ACT 1981
WILLIAM JAMES HAMILTON v. DORCHESTER PRIVATE HOTELS PTY LIMITED
No. SC532 of 1987
Number of pages - 9
Companies

COURT

IN THE SUPREME COURT OF THE AUSTRALIAN CAPITAL TERRITORY
MASTER A. HOGAN

CATCHWORDS

Companies - Winding up - Preferential payments - Good faith - Valuable consideration - Ordinary course of business.

Companies Act 1981 S.451

Bankruptcy Act 1966 S.122

Robertson v Grigg [1932] HCA 29; (1932) 47 CLR 257

Spedley Securities (In liq) v Western United (1992) 7 ACSR 271 at 277, 278

Re Buckleys Earthmoving Pty Ltd (1993) 10 ACSR 129

Downs Distributing Co Pty Ltd v Associated Blue Star Stores Pty Ltd [1948] HCA 14; (1948) 76 CLR 463 at 477

Re Cummins; Ex Parte Harris (1985) 62 ALR 129

HEARING

CANBERRA
20:8:1993

Counsel for the Applicant: R. L. Crowe

Instructing Solicitors: Minter Ellison Morris Fletcher

Counsel for Defendant: M. Oakes

Instructing Solicitors: Gallens Crowley and Chamberlain

ORDER

THE COURT ORDERS THAT:
1. The respondent pay to the liquidator forthwith the sum of

$41,478.
2. The respondent pay the applicant's costs.
20 July 1993

DECISION

MASTER A. HOGAN This is a summons in a creditor's winding up whereby the liquidator seeks to recover the sum of $20,000 paid by the company to the respondent, on the ground that it was a preference, and void against the liquidator pursuant to S.451 of the Companies Act 1981.

2. Rex Developments Pty Limited ("the company") was ordered to be wound up on 27 May 1987, on the application of Pilkington ACI Operations Pty Limited filed on 8 May 1987.

3. The sum of $20,000 was paid by the company to the respondent on 2 February 1987. I have already determined that at that time the company was unable to pay its debts as they became due from its own money.

4. The payment itself is not in issue. The respondent contends, first, that it was not a preferential payment, and, secondly, that it was received in good faith, for valuable consideration and in the ordinary course of business, within S.122(2)(a) of the Bankruptcy Act 1966.

5. The company had purchased the Canberra Rex Hotel in February 1985, and embarked on a project of subdividing it into a number of Strata Title lots, refurbishing them and selling them.

6. By a Deed of Loan dated 23 January 1985 the respondent had lent the sum of $150,000 to the company.

7. The company covenanted to repay the sum lent, together with a further $150,000, (called "the agreed profit share due to Dorchester"), on the sale of one of the lots, (called "the Ansett site"), or on 31 March 1985, whichever was the earlier.

8. It also covenanted to pay interest on $300,000 from 31 January 1985 until that whole sum was repaid at the greater of 15 percent per annum or 2 percent above the Westpac indicator rate, calculated on daily rests and payable monthly in arrears.

9. The company did not meet its obligations under that agreement. On 7 May 1985 a further deed was executed, extending the date for repayment from 31 March 1985 to 15 July 1985, and providing for an "additional agreed profit share" which varied with the date of repayment, totalling $75,000 if repayment took place before 15 July 1985, and accruing at an additional $25,000 per month or part thereof if repayment took place after 15 July 1985.

10. The company did not meet its obligations under that agreement. By deed dated 6 September 1985 it was recited that the company owed $456,247.28 to the respondent at that date. It was also recited that the company "can not repay to the lender" that sum, and tendered as partial repayment the sum of $336,247.28.

11. In consideration of the receipt of that sum the respondent agreed to allow the company further time to repay the outstanding $120,000 by instalments of $8,000 a month from 20 October 1985 till 20 march 1986, and $16,000 from 20 April 1986 until final repayment. The company also covenanted to pay interest on the amount outstanding at 35 percent calculated on daily rests, to be paid as part of the monthly instalments.

12. The company paid instalments of $8,000 on 20 October 1985, 20 November 1985, 20 December 1985 and 20 January 1986. No further payment was made until 12 September 1986, when $10,000 was paid.

13. On three occasions during 1986 Mr Sellars-Jones, the secretary of the respondent, visited the site, and observed the progress of the extensive refurbishment program. He was given detailed inspections and explanations by Mr Carver, who was effectively in control of the company's operations.

14. In March 1986 he was given a report on the current trading status of the Rex Hotel and its future trading potential, prepared by Pannell Kerr Forster, chartered accountants. A copy of that report is in evidence. It is detailed, and, in broad terms, indicated that if the refurbishment was completed in time and other necessary management steps were taken the hotel would be a profitable venture.

15. In June 1986 Mr Carver indicated that he expected final settlement of the transaction to take place on 13 June 1986. That did not happen, and Mr Sellars-Jones caused his solicitors to serve a default notice, calling for payment within 7 days of $116,843 and $125.00 for costs. That notice was dated 17 June 1986.

16. Mr Sellars-Jones deposed that at that time he had no reason to believe that the company was unable to pay the debt. He was given a copy of a further report by Pannell Kerr Forster dated 22 October 1986 which addressed the topics of management and staffing, performance to date and working capital requirements over the next couple of months. It identified corrective management actions that needed to be taken. It stated that the working capital base had been eroded by trading losses and should be refinanced on a long term basis. Including October it suggested that a further $160,000 was required in working capital simply for hotel operations. It was based on the assumption that the refurbishment program would be completed in a week.

17. Shortly afterwards Mr Sellars-Jones had a conversation with Mr Carver who informed him that he was negotiating either to sell the hotel or to refinance. Mr Sellars-Jones was influenced by the consideration that non payment was resulting in additional income to the respondent at a rate of 35 percent. He decided not to press further for immediate payment.

18. Early in 1987, however, the respondent had a need for cash for its own development projects. He caused the respondent's solicitors to write a letter dated 21 January 1987 to the company, demanding payment of the amount then owing, namely $129,000, plus interest accruing at the rate of $123.74 per day from 31 December 1986.

19. On 22 January 1987 Mr Sellars-Jones and Mr Carver met at the respondent's office. Mr Carver outlined a proposal whereby the hotel was to be sold to a Mr McCauley for $15,000,000.

20. That sum would afford a profit to the company. An option fee of $1,000,000 was to be paid by monthly instalments, two of $200,000 and the last of $400,000 by 31 March 1987. He proposed to use those moneys to pay outstanding debts.

21. During the conversation Mr Carver suggested that the company would like to pay $20,000 for an option to discharge the debt for less than the total amount then owing.

22. After further discussions, Mr Sellars-Jones said words to the effect that, if the company paid $20,000 immediately for the option, the respondent would agree to release the company from all its obligations if it paid $80,000 on or before 31 March 1987. If the $80,000 were not paid by that date, or a later date if the respondent agreed, then the full amount of the debt, then $129,000, together with interest, would be payable.

23. Mr Carver agreed.

24. Mr Sellars-Jones said that he had two reasons for agreeing to the proposal. One was his own company's need for funds. A payment of $20,000 immediately, followed by $80,000 by 31 March 1987, would assist his company's cash flow. Secondly, the $30,000 that would be foregone represented a super profit, and the respondent had already made considerable profit from the transaction. He felt that Mr Carver would not have made the proposal unless he was confident that the company would be able to pay the $80,000 by the end of March.

25. On 22 January 1987 Mr Sellars-Jones rang the office of Mr McCauley, a chartered accountant. He asked to speak with the person involved with the purchase of the Canberra Rex Hotel. He was told that that person was Mr McCauley, who was not then available.

26. The $20,000 was paid on 30 January 1987. It was debited to the company's bank account on 2 February 1987. A deed of release was executed by the respondent. It is undated, but it recites the payment of the $20,000 on 30 January 1987, and is broadly to the same effect as the conversation deposed to by Mr Sellars-Jones.

27. A draft of the Deed annexed to the liquidator's affidavit of 4 March 1993 bears some handwriting at the bottom, which reads, "Original to PKC by hand 29/1. To send to Dorchester with cheque." I would infer that "PKC" refers to Mr Carver. The back sheet of the Deed, prepared by Vandenberg Reid Pappas and MacDonald, solicitors, bears a date 29/1/87. At the bottom of the copy executed by the respondent there is an initial, obviously that of Mr Sellars-Jones, and the numbers "1/2". Mr Sellars-Jones explained that the numbers did not refer to 1 February, but to the fact that the page was the first of two pages. I think that answer was disingenuous, but I do not think that much depends upon it. I would infer quite comfortably that the document was executed and delivered at about the same time as the $20,000 was paid, and that it accurately expresses the essence of the agreement that Mr Carver and Mr Sellars-Jones had reached.

28. The $80,000 was not paid on 31 March 1987, and the respondent lodged with the liquidator a proof of debt for an amount outstanding of $127,306.

29. Mr Sellars-Jones gave oral evidence and was cross examined. When he received the accountant's report in October it was obvious to him that the refurbishment program would not be completed during the following week. He said that he had good reason to think it would probably be more like a month or six weeks. But he did not regard that as material because he had no reason to think that Mr Carver would not be able to raise the extra finance.

30. There is no evidence that he in fact knew that other creditors were by then pressing for payment.

31. The amount for which the respondent lodged a proof of debt was of the order of $20,000 less than the sum claimed by its solicitors in January 1987. It was suggested to him that the explanation was that the $20,000 paid was simply a part payment of the debt, and not an option fee at all.

32. I do not think that Mr Sellars-Jones gave a very satisfactory explanation for the discrepancy. The interest calculation that he made in the witness box and which is Exhibit "1", does not enable me to reconcile the figures. But I am not persuaded that at the time he entered into it he regarded the transaction that took place in late January and early February as being any different from what was set out in the Deed of Release.

33. The first issue calling for resolution was whether the payment of the $20,000 was a preferential payment. The relevant parts of S.122(1) of the Bankruptcy Act 1966 are that it should be "... a payment made ... in favour of a creditor, having the effect of giving that creditor a preference, priority or advantage over other creditors."

34. Counsel for the respondent submitted that what took place was that for valuable consideration a right was sold to the company and the respondent did not thereby obtain any benefit or advantage in relation to the past indebtedness. He referred to the following statement of Dixon J in Robertson v Grigg [1932] HCA 29; (1932) 47 CLR 257 at 271:

"Upon the terms of sec. 95 the transfer of property or charge
thereon made must be in favour of a creditor of the person unable
to pay his debts as they became due, and it must have the effect
of giving that creditor, or a surety for his debt, a preference.
The relationship of debtor and creditor was for long the very
foundation of the provisions of the bankruptcy law affecting
preference and, although exceptions have been introduced, the old
rule otherwise remains and nothing can amount to a preference
unless the person preferred is a creditor. Sec. 95 does not
depart from this general principle. In making each separate
advance on the faith of the agreement and thereby obtaining a
charge in respect of the advance, the respondent did not obtain
any benefit or advantage in relation to the past indebtedness. He
did not deal with the debtor in his capacity as creditor. No
pre-existing debt was better secured or otherwise affected by reason
of any subsequent advance. There was, therefore, no preference to
him as a creditor."

35. In Robertson v Grigg, as each advance was made by the respondent creditor to the debtor, there was effected an equitable assignment of the debtor's right to receive payments in the future from the Main Roads Board. That further advance, secured by that assignment, had no effect at all upon the amount already owing for moneys previously lent by the creditor to the debtor.

36. As Dixon J pointed out at 270, in a passage just before the passage cited by counsel:

"In my opinion the agreements in writing of 1st September and 15th
December 1929 and the subsequent oral agreement applying the terms
of the second of those instruments to further advances constituted
valid equitable assignments. There could be no room for doubt as
to the contracts to which they referred and therefore the fund to
be resorted to was identified. The agreement to repay the
advances from progress payments as and when received appears to me
to fall within the very words of Lord Truro in Rodick v Gandell,
which have been so often cited, and to be "an agreement between a
debtor and a creditor that the debt shall be paid out of a
specific fund coming to the debtor," and therefore it creates a
valid equitable charge on such fund. Inasmuch as the agreements
were for valuable consideration, it is unimportant that the fund
was not in existence but was to arise in the future. No doubt the
assignment or charge was by way of security and would operate in
respect of each separate advance only from the date when it was in
fact made. The period of six months within which preferences must
be made to be affected by sec. 95, could not on my view be
considered to commence earlier than 9th February 1930, and L1,282
had been lent from that date. In respect of this sum the
respondent obtained a good equitable charge before the period of
six months commenced. Within the period L1,582 6s 11d. was lent
in various sums. A charge was created in favour of the respondent
in respect of each such advance as it was made, but the creation
of the charge cannot be a preference within sec. 95 because it did
not operate to prefer him in respect of any then existing debt."

37. In this case the respondent, in coming to the arrangement for the payment of $20,000, was certainly dealing with the company as a creditor, and in respect of an existing indebtedness. Even if, on the analysis contended for by the respondent, the payment of the $20,000 did not immediately reduce the indebtedness by a corresponding amount, or indeed by any amount, it was made and accepted in consideration of a covenant to pay $80,000 by a date certain, which $80,000 was less than the presently existing debt, but which would be accepted in final discharge of the whole debt.

38. The circumstances were, so far as the respondent was concerned, that there was a debt owing, the debtor had not adhered to the arrangements previously entered into by it for payment by instalments, and even if it be accepted that the respondent had no reason to suspect that it would not eventually be repaid, the time of that repayment was uncertain. The respondent had its own need of funds, and it was advantageous for it to obtain a date certain for payment of a large part of the debt, even at the cost of forgoing a part of it, which would lessen the "super profit" on the whole arrangement, but still leave the respondent with a more than adequate return on the original $150,000 invested.

39. I do not think it is necessary, therefore, to categorise the payment of the $20,000 as a fee for an option or not. The terms of the transaction were accurately expressed in the Deed. The payment of the $20,000 was in the circumstances a payment made by the company in favour of the respondent, who was a creditor, whereby the creditor became better off financially to the extent of receiving $20,000 immediately together with a covenant to pay $80,000 by 31 March 1987. The company was at that time insolvent. No other creditor, so far as the evidence discloses, was given the opportunity to receive any similar option fee in consideration of a certain payment at a fixed date of any part of the sums then owing to them. The payment of the $20,000 therefore had the effect of giving the respondent a priority, a preference or an advantage over other creditors.

40. The onus of proving the matters in para 122(2)(a) rests on the respondent.

41. It is obvious from what I have already found that I accept that there was consideration for the payment of the $20,000, namely the promise to accept a sum lesser than was owing if the $80,000 was paid on time.

42. I respectfully agree with the exposition of the law relating to the issues about "good faith" set out by McLelland J in Spedley Securities (In Liq) v Western United (1992) 7 ACSR 271 at 277, 278.

43. Under para 122(2)(a) the issue relates to the actual state of mind of the payee, in this case the relevant mind being that of the respondent's secretary, Mr Sellars-Jones.

44. I accept that in entering into the arrangement Mr Sellars-Jones was acting honestly, and, unless on the whole of the evidence it appears that para 122(4)(c) operated, the respondent was a payee in good faith.

45. Under para 122(4)(c) the issue relates to the existence of objective circumstances leading to an inference that the creditor knew the matters specified or had reason to suspect them. The onus of proving the existence of those circumstances rests on the applicant, but in this particular case it is not necessary to resort to questions of onus to resolve this particular issue.

46. It is not sufficient that the inference be drawn that the creditor knew or had reason to believe that the debtor was in financial difficulties. The matters specified in subparagraphs (i) and (ii) are quite exact. They are, expressing them succinctly, (i) that the debtor was insolvent, and (ii) that the creditor was obtaining a preference.

47. The relevant circumstances seem to me to be that the company had not adhered to its undertakings about the payment of instalments, and the refurbishment of the hotel was obviously taking longer than it should have. The reports from Pannell Kerr Forster made it clear that the delay could have serious consequences for the viability of the hotel project. Mr Carver had previously been able to refinance the project, and had a plausible story of a pending sale. That story was not probed very deeply, but so far as Mr Sellars-Jones did investigate it, there was nothing to lead him to believe that he was being misled.

48. Mr Sellars-Jones had no knowledge about the state of the company's debts generally, or of its overall financial position.

49. I am not satisfied that the circumstances were such as to lead to the inference that Mr Sellars-Jones knew, or had reason to believe, either that the company was by then insolvent or that the respondent was obtaining a preference.

50. The last issue, on which the respondent bears the onus, is whether it was a payee in the ordinary course of business.

51. There are a number of formulations of what are said to be tests of whether an act is in "the ordinary course of business". They are usefully collated in the judgment of Ryan J in Re Buckleys Earthmoving Pty Ltd (1993) 10 ACSR 129. Those formulations are helpful, and are expositions by authorities of the highest eminence. But they must always be read as aids to elucidating the meaning of the words of the statute, and not as substitutes for them.

52. Counsel for the respondent submitted that the appropriate test to apply in this case would be that formulated by Gavan Duffy CJ and Starke J in Robertson v Grigg [1932] HCA 29; (1932) 47 CLR 257, namely, not whether the act is usual or common in the business of the debtor or of the creditor, but whether it is "a fair transaction, and what a man might do without having any bankruptcy in view".

53. There are three principal difficulties that I have with applying that formulation.

54. The first is posed by asking the question, "Which man?" Let it be conceded that from the point of view of Mr Sellars-Jones the transaction was fair enough, and the sort of transaction, viewed objectively, as one might enter into without having in view any pending insolvency of the company. But the position was quite different from the viewpoint of Mr Carver, who was by then being greatly exercised in juggling the demands of various creditors while he tried to get the refurbishments finished and arrange a sale in time to avoid disaster. From his point of view the transaction was exactly the sort of thing a man might do to stave off an impending insolvency.

55. But, more importantly, if there is a difference between the test as formulated by Gavan Duffy CJ and Starke J and that of Rich J in Downs Distributing Co Pty Ltd v Associated Blue Star Stores Pty Ltd [1948] HCA 14; (1948) 76 CLR 463 at 477, I am not at liberty to prefer the former to the latter.

56. As it happens, because it concentrates on the categorising of the transaction as an objective fact, I would prefer the formulation by Rich J, even if I were uninstructed by authority. But appeals from this Court go to the Federal Court of Australia, and in that Court Pincus J has held that the view of Rich J is to be preferred. See Re Cummins; Ex Parte Harris (1985) 62 ALR 129. I respectfully adopt and apply that decision.

57. But lastly, no matter what paraphrases may be urged, it is useful to return to the actual words of the Statute, one of which is "ordinary". One of the reasons why I am happy to accept the accuracy of the recollection by Mr Sellars-Jones of his conversation about the proposal with Mr Carver is that the proposal was so extraordinary that he would obviously remember it clearly.

58. The respondent had already made considerable profit out of its course of dealing with the company. The original advance of $150,000, made in January 1985, had been repaid in September 1985, together with a further $186,247, called "an agreed profit share" and interest. A further $42,000 was received by the respondent by September 1986. It stood to make more, to the extent of $120,000 and interest. The company had defaulted for a considerable time in making payments that it had promised. The full debt had been called up twice, in June 1986 and January 1987. The debtor then proposed that it pay the sum at issue immediately, in consideration of a promise to accept another sum at a later time, which, together with the sum paid, was less than the total amount outstanding, in full discharge of the total obligation. The respondent had its own reasons for finding the proposal attractive. But by no stretch of the meaning of ordinary simple words could it be said to be a proposal that was "in the ordinary course of business".

59. I therefore find that the payment of the $20,000 was void as against the liquidator. Interest calculated in accordance with the practice direction from 30 January 1987 is $21,478.

60. I order the respondent to pay to the liquidator forthwith the sum of $41,478.

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