Re Bird (As Trustee of the Estate of Arcadiou); Ex Parte Tasmanian Board Mills Ltd (Trading As Country and Western) [1979] FCA 99; (1979) 39 FLR 307 (19 December 1979)

FEDERAL COURT OF AUSTRALIA

Re BIRD (AS TRUSTEE OF THE ESTATE OF ARCADIOU); Ex parte TASMANIAN BOARD MILLS
LTD. (TRADING AS COUNTRY AND WESTERN) [1979] FCA 99; (1979) 39 FLR 307
Bankruptcy

COURT

FEDERAL COURT OF AUSTRALIA
GENERAL DIVISION
C.A. Sweeney J.(1)

CATCHWORDS

Bankruptcy - Preference - Payment in ordinary course of business - Writ issued and served on debtor - Debtor insolvent - Payment made subsequently - Void as against trustee - Bankruptcy Act 1966 (Cth.), s. 122. On 6th September, 1976, the respondent issued a Supreme Court writ against the debtor claiming $25,437.38 in respect of goods sold and delivered. On 20th September, 1976, the writ was served on the debtor; on the same day the debtor, at a meeting of his major creditors, gave notice to the respondent that he had suspended or was about to suspend payment of his debts. On 28th September, 1976, the debtor paid to the respondent the sum of $15,000; on 9th October, 1976, he paid to the respondent the sum of $5,000. On 15th March, 1977, the debtor presented his own petition. On an application by the trustee in bankruptcy that by reason of the provisions of the Bankruptcy Act 1966 (Cth.) the bankruptcy was deemed to have relation back to and to have commenced as at 20th September, 1976, and that the payments made to the respondent were void as against him, each of them having been made at a time when the debtor was unable to pay his debts as they fell due from his own money and each of which had the effect of giving to the respondent a preference, priority or advantage over other creditors.

Held: (1) On the evidence the court was satisfied that at the date of each payment the debtor was unable to pay his debts from his own moneys as they fell due.

(2) The respondent had failed to establish that the payments in question were received in the ordinary course of business.

Re Bailey; Ex parte Law v. Austin (1952), 16 ABC 80; Re Hoare; Commins v. I. & R. Spies Investments Pty. Ltd., (1972-1973) ALR 1134, followed.

Accordingly the payments were void as against the trustee.

HEARING

Melbourne, 1979, July 18; August 14; December 19. 19:12:1979
APPLICATION

Application by the trustee in bankruptcy for declarations and orders in relation to payments made by the bankrupt to the respondent and which the trustee maintained were void as against him pursuant to s. 122 of the Bankruptcy Act 1966 (Cth.).

The facts appear from the judgment.

T. Irlicht (solicitor), for the applicant.

H.H. Ednie, for the respondent.
Cur. adv. vult.

Solicitor for the applicant: T. Irlicht.

Solicitors for the respondent: Remington & Co.
D. LEVIN

DECISION

December 19.

C.A. SWEENEY J. delivered the following written judgment.
In this application, as amended by leave, the applicant seeks the following

declarations and orders: "(a) That payment made by the bankrupt to the respondent on 28th September, 1976, for $15,000 and on 9th October, 1976, for $5,000 are void as against the applicant as trustee of the property of the bankrupt as being payment having the effect of giving the respondent a preference, priority or advantage over creditors of the bankrupt, or, alternatively, by virtue of the bankruptcy of the bankrupt having been deemed to have relation back to date 20th September, 1976, on which date the bankrupt gave notice to some of his creditors, namely, Gubbatta Nominees Pty. Ltd., trading as Highett Timber Co.; Tasmanian Board Mills Ltd., trading as Country and Western; Guardian Investments Pty. Ltd.; Beneficial Finance Corporation Ltd. and Alliance Acceptance Corporation Ltd., that he has suspended or is about to suspend payment of his debts. (b) An order that the respondent pay to the applicant the sum of $20,000." (at p308)

2. The respondent based its notice of intention to oppose the application on the grounds: "(a) that the payments referred to in the application did not have the effect of giving the respondent a preference, priority or advantage over creditors of the bankrupt; (b) that the said payments are not deemed to have relation back to 20th September, 1976, as alleged in the said application or at all; (c) that at the time that the said payments were made the bankrupt was not insolvent." (at p308)

3. At the hearing, on the application of Mr. H.H. Ednie, of counsel for the respondent, leave was given to the respondent to add the following ground: "(d) that the respondent is and at all times material was a payee in good faith and for valuable consideration and in the ordinary course of business within the meaning of s. 122 (2) and (4) and accordingly lies outside the ambit of sub-s. (1) of that section." (at p308)

4. It was common ground between the parties that the bankrupt made payments to the respondent of $15,000 on 28th September and of $5,000 on 9th October, 1976, in respect of a debt of $25,000 which he owed to the respondent. (at p308)

5. The respondent by its notice of intention to oppose the application put in issue the question whether these payments had the effect of giving the respondent a preference, priority or advantage over the other creditors of the bankrupt. The evidence of the applicant, which I accept, plainly established that each of the payments had this effect. (at p308)

6. The respondent also contended that at the time of each of the payments the bankrupt was not unable to pay his debts as they became due from his own money, within the meaning of s. 122 of the Bankruptcy Act 1966. (at p308)

7. The meaning to be given to these words has been laid down in Hymix Concrete Pty. Ltd. v. Garritty (1977) 13 ALR 321 . Jacobs J. said: "The question remains, however, whether the circumstances lead to the inference that the appellant, through Mr. O'Neil, had reason to suspect that the company was unable to pay its debts as they became due out of its own money. Much depends upon the connotation of these last words. If they fall to be applied according to their literal terms then quite clearly the circumstances not only lead to but compel the inference that the appellant had reason to suspect. The company had large debts and no ready money with which to pay them. However, if the words meant that the total of liabilities exceeded the total of assets, the figures placed before Mr. O'Neil both in the Dun and Bradstreet report and in the 31 March balance sheet showed a surplus of assets. But the words 'unable to pay its debts as they become due from its own money' should not be applied in either of these ways. There is an intermediate application of them which has long been established. I shall not set out once again the passages in the judgments of the court in Bank of Australasia v. Hall per Griffith C.J. and per Isaacs J. [1907] HCA 78; (1907) 4 CLR 1514, at pp 1528, 1543 . They are set out in the judgment of Taylor J. in Rees v. Bank of New South Wales (1964) [1964] HCA 47; 111 CLR 210, at pp 229-230 . I shall set out some passages from the judgment of Barwick C.J. which I think are particularly apposite to the present case: 'The respondent's counsel submitted that, because the bank held the beliefs, which the primary judge accepted it did hold, as to the extent of the company's trading stock and of the causes of its current embarrassments, it could not be said either to know or to have reason to suspect the company's insolvency - its inability to meet its debts as they became due. But this submission springs from a basic misconception and is not borne out by the judgments of this Court to which my brother Taylor refers. It is quite true that a trader, to remain solvent, does not need to have ready cash by him to cover his commitments as they fall for payment, and that in determining whether he can pay his debts as they become due regard must be had to his realizable assets. The extent to which their existence will prevent a conclusion of insolvency will depend on a number of surrounding circumstances, one of which must be the nature of the assets and in the case of a trader, the nature of his business. Here the company's business was the sale of foodstuffs through a number of retail outlets. The asset whose value was said to negative a conclusion of insolvency, or at any rate to obviate the suspicion of it, was its trading stock of foodstuffs. In the ordinary course of the company's business this asset was not available to be realized except by means of retail sales through its various shops . . . The stock-in-trade was clearly not an asset which was available to be realized to meet current debts except in the ordinary course of the company's business, a course which had proved itself inadequate . . . . (at p310)

8. "'The bank in this case knew that the company was overtrading, that its only source of money to meet its current trading debts was the takings of its shops, that the whole of the takings were being deposited to the overdrawn account, and that the company's trading debts were not being currently met. However acceptable the motive of the bank in endeavouring to keep the company afloat, by proving its belief that the company had an excess of trading stock over those debts of which the bank was aware, it cannot escape the conclusion that, at the least, it had reason to believe that the company was insolvent. Clearly that stock, in the company's circumstances, was not within the category of realizable assets to which Isaacs J. refers in Bank of Australasia v. Hall (1907) 4 CLR, at p 1543 ' (1964) 111 CLR, at pp 218-219 . (at p310)

9. "Words used in later cases, apparently more favourable to a creditor, must be read in the light of the enunciations to which I have referred and should be taken as no more than an application of the well-established principle to particular circumstances: Queensland Bacon Pty. Ltd. v. Rees [1966] HCA 21; (1966) 115 CLR 266 ; Sandell v. Porter [1966] HCA 28; (1966) 115 CLR 666 . A temporary lack of liquidity must be distinguished from an endemic shortage of working capital whereby liquidity can only be restored by a successful outcome of business ventures in which the existing working capital has been deployed" (1977) 13 ALR, at pp 327-328 . (at p310)

10. Barwick C.J. and Gibbs J. concurred in the judgment of Jacobs J. (at p310)

11. The test so approved in the Hymix Concrete Pty. Ltd. case is expressed in the words of Griffith C.J. in Bank of Australasia v. Hall: "The question is not whether the debtor would be able, if time were given him, to pay his debts out of his assets, but whether he is presently able to do so with moneys actually available. The most favourable construction that can be put on the words 'his own moneys' is that they include any moneys of which the debtor can obtain immediate command by sale or pledge of his assets" (1907) 4 CLR, at p 1528 . (at p310)

12. The test as formulated by Isaacs J. was: "The Act requires the debtor to be able to pay his debts as they become due. This does not mean that he is always bound to keep by him in cash a sum sufficient to meet all his outstanding indebtness however distant the date of payment may be. If at the time he makes the assignment, the debtor's position is such that he has property either in the form of assets in possession or of debts, which if realized would produce sufficient money to pay all his indebtedness, and if that property is in such a position as to title and otherwise that it could be realized in time to meet the indebtedness as the claims mature, with money thus belonging to the debtor, he cannot be said to be unable to pay his debts as they become due from his own moneys. In other words, if the debtor can, by sale or mortgage of property which he owns at the time of the assignment, change the form of the property into cash wholly or partly but sufficient for the purpose of paying his debts as they become due, that requirement of the section is satisfied" (1907) 4 CLR, at p 1543 . (at p311)

13. (His Honour then set out certain evidence to the effect that the bankrupt was at all times from 15th September, 1976, to 15th March, 1977, unable to pay his debts from his own money and that during this period the excess of his liabilities over his assets was not less than $114,479.) (at p311)

14. I accept the evidence of the applicant and reject the statements made by the bankrupt in which he expressed his disagreement with certain aspects of that evidence. The managing director of the respondent, Mr. John Steel, made an affidavit in which he described the bankrupt at the relevant times as "a man of substance and, a person who, with proper management of his affairs would have been able to pay his creditors in full". His opportunity to form a reliable judgment of the bankrupt's solvency was limited and I could not accept his opinion of the bankrupt and his affairs. It is open to further doubt in the light of the attitude adopted by the respondent before and during the meeting of some of the bankrupt's creditors on 20th September, 1976, to which further reference will be made. (at p311)

15. I am satisfied that at the date of each of the payments in question the bankrupt was unable to pay his debts from his own money as they became due, within the meaning of s. 122. (at p311)

16. The other ground upon which the respondent sought to base his opposition to the orders sought under this section was the claim that it was a payee in good faith and for valuable consideration and in the ordinary course of business. It was agreed that it was a payee for valuable consideration but the other elements of this ground were contested. (at p311)

17. The evidence showed that on 6th September, 1976, the respondent issued a writ in the Supreme Court of Victoria, in which it claimed $25,437.38 for goods sold and delivered to the bankrupt between the months of February and July 1976. (at p311)

18. This writ was served upon the bankrupt on 20th September, 1976, on which day a meeting of certain of his creditors was held. The applicant described the proceedings at this meeting as follows: "18. That a meeting took place on 20th September, 1976, at my previous offices, situated at 289 Flinders Lane, Melbourne, between a Mr. John Steel, a Mr. Hitchcock, a Mr. Gary Bernard Hearst, a Mr. Timos Vertes, a Mr. Noel Tregent, Mr. Yiangos Arcadiou and myself. At that meeting I was representing the Housing Builders Association which was acting on behalf of a group of his major creditors. Messrs. Steel and Hitchcock were both representing the respondent Tasmanian Board Mills Ltd. trading as Country and Western, one of his creditors. Mr. Hearst was representing Gubbatta Nominees Pty. Ltd. trading as Highett Timber Co., one of his creditors. Mr. Vertes was a solicitor acting on the bankrupt's behalf and also on behalf of two of his secured creditors namely Beneficial Finance Corporation Ltd. and Alliance Acceptance Corporation Ltd., and Mr. Noel Tregent, who had previously been the bankrupt's solicitor, was representing Guardian Investments Pty. Ltd. one of his creditors. During that meeting Mr. Yiangos Arcadiou stated that he must find $100,000 to be able to carry on. He said he would consider a scheme of arrangement or some scheme whereby the creditors would supervise the completion of the houses. Mr. Steel stated that he was opposed to this manner of proceeding and wanted Mr. Arcadiou to be made bankrupt, as only an official receiver was capable of handling the matter. There was some discussion about realization of the assets and completion of the work in progress. Although Mr. Arcadiou did not say so in so many words he made it perfectly clear to everyone at the meeting that he had suspended payment of his debts. Also during the meeting the bankrupt was told (I believe by me) that the reason for the meeting was that the creditors were concerned about his non-payment of debts. The bankrupt made a comment to the effect that he was unable to pay the debts as the progress payments from a finance company were not being made. I do not recall the exact words he used." (at p312)

19. Mr. Tregent gave the following account of the meeting: "3. That I was present at a meeting of the major creditors of the bankrupt which took place on 20th September, 1976, at the offices of the applicant Mr. Neville Bird. At that meeting the following persons were present, namely, Mr. Yiangos Arcadiou, Mr. Alex Neville Bird, a Mr. John Steel, a Mr. Hitchcock, a Mr. Gary Bernard Hearst, a Mr. Timos Vertes, and myself. At that meeting the applicant was representing the Housing Builders Association which was acting on behalf of a group of major creditors. Messrs. Steel and Hitchcock were both representing the respondent Tasmanian Board Mills Ltd. trading as Country and Western, one of his creditors. Mr. Hearst was representing Gubbatta Nominees Pty. Ltd. trading as Highett Timber Co., one of his creditors. Mr. Vertes was a solicitor acting on the bankrupt's behalf and also on behalf of two of his secured creditors, namely, Beneficial Finance Corporation Ltd. and Alliance Acceptance Corporation Ltd., and I, who had previously been the bankrupt's solicitor, was representing Guardian Investments Pty. Ltd. also one of his creditors. During that discussion Mr. Arcadiou stated that he would consider a scheme of arrangement or some scheme whereby the creditors would supervise the completion of the houses. Mr. Steel stated that he was opposed to this manner of proceeding and wanted Mr. Arcadiou to be made bankrupt, as only an official receiver was capable of handling the matter. There was some discussion about the realization of the assets and completion of the work in progress. The said Mr. Bird said to the said Mr. Arcadiou during that meeting that there were a lot of complaints to the Housing Builders Association about him not paying his debts. The said Mr. Arcadiou replied 'how can I, the properties have reached the stage when I am due for progress payments from finance companies but they are not making the progress payments'." (at p313)

20. I accept the account of the meeting given by the applicant and Mr. Tregent from which it is seen that the payments made to the respondent were made as a result of the statement made by Mr. Steel that he wanted Mr. Arcadiou to be made bankrupt, as only an official receiver was capable of handling the matter, and as a result of the issue and service of the writ. In my opinion, the respondent has failed to show that either payment was made in the ordinary course of business (see Re Bailey; Ex parte Law v. Austin (1952) 16 ABC 80 and Re Hoare; Commins v. I. & R. Spies Investments Pty. Ltd. (1972-1973) ALR 1134 ). Indeed, I am satisfied that neither payment was made in the ordinary course of business. (at p313)

21. In Re Bailey; Ex parte Law v. Austin Clyne J. had to consider a case in which the respondent obtained two payments from a debtor, one as a result of the efforts of her solicitors and the other after the seizure by a sheriff of property of the debtor under writ of execution. Clyne J. held that "payments received by a creditor as a result of his solicitor's demands or in consequence of some process of execution cannot be regarded as payments received by the creditor 'in the ordinary course of business'" (1952) 16 ABC, at p 85 . (at p313)

22. In Re Hoare; Commins v. I. & R. Spies Investments Pty. Ltd. an overdue payment of rent was received after judgment had been obtained in respect of it and a writ of fieri facias has been issued. The writ had been withdrawn by the solicitors for the creditor to enable a sale to be made of property, from the proceeds of which payment was received by those solicitors on behalf of the creditor. It was held that this payment had not been made in the ordinary course of business. (at p313)

23. The applicant having established that each of the payments fell within s. 122 and the respondent having failed to discharge the burden laid upon it by sub-s. (3) of proving that it was a payee in the ordinary course of business, the applicant is, in my opinion, entitled to the declarations and orders sought. It is unnecessary to consider the question whether the respondent was a payee in good faith within the meaning of s. 122, or the claim of the applicant based upon s. 123. (at p314)

24. The court declares that the payment of $15,000 made by the bankrupt to the respondent on 28th September, 1976, and the payment of $5,000 made by the bankrupt to the respondent on 9th October, 1976, are void as against the applicant as trustee of the property of the bankrupt and orders that the respondent pay to the applicant the sum of $20,000. It is further ordered that the respondent pay the applicant's costs of and incidental to the application, including reserved costs, such costs to be taxed if not agreed. Liberty is reserved to either party to apply. (at p314)

ORDER

Declaration and order accordingly.