Re Hicks; Ex Parte Russell [1980] FCA 6; (1980) 39 FLR 374 (11 February 1980)

FEDERAL COURT OF AUSTRALIA

Re HICKS; Ex Parte RUSSELL [1980] FCA 6; (1980) 39 FLR 374
Bankruptcy

COURT

FEDERAL COURT OF AUSTRALIA
GENERAL DIVISION
Lockhart J.(1)

CATCHWORDS

Bankruptcy-Deed of assignment-Mortgages-Mortgages executed during period of insolvency-Preferences-Extent of preferences-Bankruptcy Act 1966 (Cth.) ss. 122, 231. In May 1976 Mr and Mrs Hicks ("the debtors") acquired an interest as conditional purchasers in certain land ("the land"). In September 1977 the debtors executed a mortgage in favour of H. to secure a loan of $10,000. In January 1978 the debtors executed a further mortgage in favour of D. Pty. Ltd. to secure an advance of $6,865.10. On 27th April, 1978, the debtors executed mortgage documents in favour of the Commercial Savings Bank of Australia ("the savings bank") to secure an advance of $25,000 to be made by the savings bank. On the same day the savings bank paid the sum of $16,000 to the debtors of which sum $10,746.50 was paid to discharge the mortgage in favour of H. On 3rd May, 1978, the savings bank registered its mortgage over the land and the Commercial Bank of Australia ("the bank") also registered a mortgage over the land to secure the sum of $3,000, the extent of the debtors trading account overdraft. Also on the same day the savings bank advanced a further $7,000 to discharge a commitment to the Lands Department in relation to the land. On 12th May, 1978, the debtors executed a mortgage in favour of a Mr Howard (the brother of the female debtor) which purported to secure an advance of $25,100. On 20th June, 1978, the debtors signed s. 188 authorities. On 28th June, 1978, the savings bank advanced the final sum of $2,000 to pay for the construction of a carport on the land. On 3rd July, 1978, as required by a special resolution of creditors, the debtors executed a deed of assignment. In an application by the trustee of the deed for declarations that the mortgages in favour of the savings bank, the bank and Mr Howard were void as against him as preferences under s. 122 of the Bankruptcy Act 1966 (Cth.).

Held: (1) The mortgage executed in favour of Mr Howard was void in th at: (a) the debtors executed the same when they were insolvent to provide security to Mr Howard for past indebtedness; (b) the effect of the mortgage was to give Mr Howard a preference, priority or advantage over other creditors; (c) the mortgage was executed within six months of 3rd July, 1978.

(2) The mortgage in favour of the savings bank was not void. The moneys advanced by the savings bank, namely $25,000 in total, were advanced at all times on the basis of the security of the land.

(3) The mortgage in favour of the bank was not void. The transactions whereby a payment was made from the savings bank into the current account of the debtors at the bank and from which account the mortgage of H. was discharged, the commitment to the Lands Department was met, the construction of the carport was financed, and the reduction of the overdraft balance in that account was achieved, had to be viewed as a whole when the alleged preferential effect of any payment was being considered.

Richardson v. Commercial Banking Co. of Sydney Ltd. [1952] HCA 8; (1952), 85 CLR 110; Queensland Bacon Pty. Ltd. v. Rees [1966] HCA 21; (1966), 115 CLR 266; Calzaturificio Zenith Pty. Ltd. (in Liquidation) v. N.S.W. Leather & Trading Co. Pty. Ltd., (1970) VR 605, followed.

The principles to be applied in determining the extent of a preference when a series of transactions take place each of which increases or reduces an overdraft indebtedness in an account, discussed.

F. Douglas, for the applicant trustee.

D. M. J. Bennett Q.C. and Susan Crennan, for the second and fifth-named respondents.

W. M. C. Gummow, for the fourth-named respondent.

HEARING

Sydney, 1979, November 16, 19; 1980, February 11. 11:2:1980
APPLICATIONS.

The facts appear in the judgment.
Cur. adv. vult.

Solicitors for the applicant trustee: Abbott, Tout, Creer & Wilkinson.

Solicitors for the second and fifth-named respondents: Sly & Russell.

Solicitors for the fourth-named respondent: Dudley, Westgarth & Co.
D. LEVIN

DECISION

February 11.

LOCKHART J. delivered the following judgment.
The trustee of a deed of assignment ("the deed") under Pt X of the

Bankruptcy Act 1966 ("the Act") seeks declaration that three mortgages are void against him as preferences under s. 122 of the Act.

2. The deed was executed on 3rd July, 1978, by William Clive Hicks and Gayner Blanche Hicks ("the debtors"), who are husband and wife. It was on that date also that the special resolution requiring the execution of the deed was passed by the creditors.

3. Before the execution of the deed the debtors were self-employed builders carrying on business in the Albury district. The female debtor played little, if any, role in the business. She looked after her husband and family.

4. The debtors acquired an interest as conditional purchasers in a property, 885 Stelling Street, Albury, ("the property") on 1st May, 1976.

5. On 2nd September, 1977, the debtors executed a mortgage over the property to Mary Frances Grace Hughes to secure an advance of $10,000 made by her to them.

6. On 19th January, 1978, the debtors executed a mortgage over the property to Dallas Acceptance Pty. Ltd. ("Dallas") to secure an advance of $6,865.10. This mortgage was registered in the General Registry of Deeds on 28th June, 1978.

7. On 3rd May, 1978, the debtors executed a discharge of the mortgage to Mrs Hughes which was lodged with the Under-Secretary of Lands on 12th July, 1978.

8. The debtors executed a mortgage dated 3rd May, 1978, over the property and a form of transfer by way of mortgage to the Commercial Savings Bank of Australia Ltd. ("the savings bank") to secure an advance of $25,000. The mortgage was lodged with the Under-Secretary of Lands on 12th July, 1978.

9. The debtors executed a mortgage dated 3rd May, 1978, over the property to the Commercial Bank of Australia Ltd. ("the bank").

10. On 12th May, 1978, the debtors executed a mortgage over the property to Graham Rex Howard which purported to secure an advance of $25,100. The mortgage was registered in the General Registry of Deeds on 14th June, 1978.

11. On 20th June, 1978, the debtors signed an authority under s. 188 authorizing the trustee to call a meeting of creditors and to take control of their property. The trustee convened a meeting of creditors for 3rd July, 1978. The meeting was held and the special resolution passed requiring the debtors to sign the deed of assignment.

12. With the exception of the property, the assets of the debtors have realized $1,240. The property is the major asset and is the subject of conflicting claims by mortgagees.

13. Creditors who claim to be unsecured creditors are owed $27,290 by the debtors. Creditors claiming to be secured creditors claim a total of $61,284. Thus the total of the claims of creditors is $88,574.

14. The trustee arranged for the property, together with curtains and carpets, to be submitted to auction on 31st January, 1979, but the property was passed in. Subsequently, a contract was entered into by the trustee for the sale of the property for $40,500 which included an agreed figure of $1,000 for curtains and carpets.

15. It is common ground that if the mortgage to Mr Howard is void as a preference, the property will realize sufficient moneys to discharge in full the mortgages of Dallas, the savings bank and the bank.

16. Although the application filed on behalf of the trustee seeks directions as to whether various mortgages, including the mortgage granted to Dallas, are void as preferences, counsel for the trustee made no challenge to that mortgage. He confined his attack to the other mortgages.

17. I turn first to the mortgage to Mr Howard.

18. Mr Howard was represented by a solicitor on more than one occasion when the proceeding was mentioned before me. On 17th September, 1979, Mr Bathurst, solicitor, appeared for Mr Howard and asked for leave to withdraw as his client did not wish to take any further part in the proceeding. I granted that leave. I proceeded to hear the application in Mr Howard's absence. At no stage did Mr Howard or his solicitor submit to the court's order or indicate that he did not oppose the relief sought. It was necessary for the trustee to prove his case against Mr Howard.

19. The male debtor gave evidence that Mr Howard, who is his brother-in-law, lent the debtors about $21,000 some eighteen months before 3rd July, 1978 (i.e. approximately early January 1977); that at no time did he press for payment of the debt; and that at the time the loan was made there was a discussion between himself and his brother-in-law to the effect that the loan would bear interest at the rate of eight per cent per annum. The male debtor also said by affidavit that he did not believe that the loan "effected (sic) the land".

20. The deed of mortgage from the debtors to Mr Howard dated 12th May, 1978, states: "AND WHEREAS the mortgagee has at the request of the mortgagors agreed to lend the sum of $25,100 upon having the repayment thereof with interest theron at the rate hereinafter mentioned secured in manner hereinafter appearing NOW THIS DEED WITNESSETH that in pursuance of the said agreement and in consideration of the sum of $25,100 (hereinafter called the "principal sum" on the execution hereof lent and advanced by the mortgagee to the mortgagors the receipt whereof is hereby acknowledged, the mortgagors as beneficial owner do hereby convey unto the mortgagee..."

21. Clause 1 of the mortgage provides: "That the mortgagors will pay to the mortgagee free of exchange at Oxley the said principal sum of $25,100 made up as follows: Advance of $20,000 made on 15th June, 1976. Interest due on 15th December, 1977, of $1,300. Interest due on 15th June, 1978, of $1,300 and advance of $2,500 on 10th April, 1978, which interest is to accrue from that date. The said principal sum shall be repaid on 11th December, 1978."

22. The male debtor said in evidence that he had no knowledge of any advance of $2,500 made by his brother-in-law to the debtors on 10th April, 1978.

23. No evidence was adduced by Mr Howard.

24. I am satisfied that there was no advance of $25,100 upon the execution of the mortgage, notwithstanding the provision to the contrary in the mortgage itself. It is clear from the evidence of the male debtor that there was no agreement between the debtors and Mr Howard to repay the sum of $25,100 or any other sum on 11th December, 1978. If there was a loan at all, it was made about eighteen months before the execution of the deed of mortgage and in the sum of about $21,000.

25. I say nothing about whether there was an agreement for the payment of interest because the only evidence about this was the oral evidence of the male debtor which was general and vague. It is not necessary for me to decide that question.

26. Certainly there was no advance of $2,500 or any other sum on or about 10th April, 1978, or indeed at any other time in 1978. What happened is clear enough. The debtors executed the mortgage in favour of the brother of the female debtor when it was clear that their financial position was precarious for the purpose of giving him security for past indebtedness which had arisen over twelve months earlier.

27. I am satisfied that, at the time the mortgage was granted by the debtors to Mr Howard, they were insolvent; that it had the effect of giving Mr Howard a preference, priority or advantage over other creditors; that it was made within six months before the date on which the special resolution requiring the execution of the deed was passed by the creditors of the debtors (see s. 122 (1) (a), and s. 231 (2) (a)); and that it is void as against the trustee. There could be no question of Mr Howard being an encumbrancer in good faith and for valuable consideration and in the ordinary course of business: s. 122 (2).

28. I turn to the mortgages in favour of the savings bank and the bank.

29. On 1st December, 1976, the male debtor approached Mr Bruce, the manager of the Albury branch of the bank, and sought a loan of $25,100 to finance the construction of a dwelling on the property. He completed an application for loan, together with a statement of his assets and liabilities. The application was refused by the bank.

30. On 1st March, 1978, the male debtor completed a further application for loan and Mr Bruce obtained a further statement of assets and liabilities. On this occasion, the male debtor said to Mr Bruce: "Construction of the dwelling has commenced. The loan is required to complete the construction."

31. The debtors attended the bank to sign documents on 27th April, 1978. One of the documents was the Crown land transfer by way of mortgage which was not then available, so Mr Bruce asked them to come in several days later.

32. During April 1978, Mr Bruce prepared a mortgage to the bank to secure an overdraft limit of $3,000 in the trading account of the debtors.

33. A first progress payment of $16,000 was made by the savings bank on 27th April, 1978, and of this, $10,746.50 was paid to the solicitors for Mrs Hughes to safisfy her mortgage. The balance was used to reduce the overdraft of the debtors with the bank. The next progress payment of $7,000 was made on 3rd May, 1978, and the final advance of $2,000 on 28th June, 1978. The sum of $7,000 was used to pay the Lands Department to discharge a commitment relating to the property. The final advance of $2,000 was made to enable the carport to the house to be completed.

34. The advance of $25,000 was from the savings bank and was paid into the account of the debtors with the bank.

35. On 29th June, 1978, Mr Bruce received a notice from the trustee together with a form of proof of debt, the notice being of the meeting of creditors to be held on 3rd July, 1978. Mr Bruce was absent from Albury during the weekend 24th and 25th June; and the Border Morning Mail newspaper of Saturday 24th June, which was delivered to his house, was damaged by weather. As a result, he did not read the notice appearing in that newspaper which mentioned the meeting of creditors to be held on 3rd July. Mr Bruce says that prior to 29th June he had no knowledge of any intended meeting of creditors and that prior to that date, he had no suspicion that the debtors were unable to pay their debts as they fell due.

36. The male debtor said that when he made the second application for a housing loan (which Mr Bruce says was in March 1978) he did not mention to the bank that he was indebted to Mr Howard as "I did not believe this loan effected (sic) the land". He said he thought he made the application for loan before he applied for the loan from Dallas. He denied that he said that the loan was required to complete the construction of the property to be mortgaged. He said that at that time, only about $3,000 was required to complete the building of the dwelling on the property and that Mr Bruce suggested that he take the housing loan when they were having discussions about the overdraft. He said that Mr Bruce suggested he take the housing loan to relieve the overdrafts. The male debtor said that he did not know why the final advance of $2,000 was made on 28th June, 1978.

37. The male debtor gave evidence that in January 1978, when he obtained the loan of $6,500 from Dallas, he was working that day at Wodonga and he went to the Wodonga branch of the bank, although he usually banked at the Albury branch. He spoke to the manager of the Wodonga branch and then spoke to Mr Bruce over the telephone. He said that he told Mr Bruce he had the cheque from Dallas and that Mr Bruce asked him to pay $3,000 into the bank account in Albury after the remaining $3,000 had been used to discharge the debts of trade creditors.

38. The male debtor said that in February 1978 the banking account at the bank in the name of himself and his wife was stopped, and that he then had a discussion with Mr Bruce to the effect that the male debtor had to find moneys from external sources before "I could operate to keep going".

39. The male debtor said that it was always clear in relation to the housing loan that the debtors would have to execute a mortgage over the property to secure that advance and that there was never any suggestion that he would be obtaining $25,000 or any part of it without executing a mortgage.

40. The male debtor admitted under cross-examination that on two separate occasions, the first in 1976 and the second in 1978, when he gave the bank a list of his assets and liabilities, he did not disclose the loan from Mr Howard or the loan from Dallas and did not disclose any of his trade creditors.

41. Mr Bruce said that the first time he became aware that the debtors owed moneys to Mr Howard was after the appointment of the trustee when he visited him in his Albury office in June 1978.

42. Mr Bruce denied that he had any conversation with the male debtor about depositing $3,000 from the advance of Dallas into the banking account of the debtors in January 1978.

43. Mr Bruce said that it was his belief, when he was filling out the second statement of assets and liabilities of the male debtor, that he had no trade creditors and that the property then under construction was free of debt, apart from the sum of $7,000 owing to the Lands Department.

44. Mr Bruce said that he advanced the debtors about $6,000 in January 1978 against promised receipts from various work they were completing. That exceeded his authority and the bank reprimanded him. He said that he had little option but to stop the trading account with the bank; but that that did not mean he necessarily regarded the debtors as being in a precarious financial position. He said: "I mean, he had assets but he did not have the ready cash."

45. Mr Bruce agreed under cross-examination that when he sent the application for a savings bank loan to the head office of the bank, he knew the debtors had been having trouble in meeting overdraft limits for the previous six months. He agreed that, at the time he stopped the banking account in February, he knew that the debtors were having difficulty meeting their obligations as they fell due, although he thought it was temporary. He denied that the purpose of the application for the housing loan was to obtain security for the unsecured advance which had been made previously to the debtors. Mr Bruce did not deny that the bank's head office had suggested to him in late February that the unsecured advance should be put on a secured basis, especially in view of the history of the debtors' account. He said that the reason for the application for the housing finance was so that the debtors could obtain moneys to build or complete the home.

46. Mr Bruce agreed that a memorandum of 29th February from the credit and lending department of the bank indicated that in late February the head office was concerned about the fact that he had made a $6,000 unsecured advance to the debtors, and that they could see no justification for this and asked him to justify it. He said that the debtors had been trying to get a housing loan for twelve months and that it had been refused earlier because funds were short. He said that the security documents for the housing loan were executed on 27th April and dated 1st May 1978. As to the payment of $16,000 into the trading account of the debtors wwith the bank of which $10,746.50 was paid to Mrs Hughes and the balance to reduce the existing overdraft with the bank, he said: "Might I just explaine, the debtors had constructed a house to a fairly forward stage of construction and I was of the opinion to do that, and only incur a debt with the bank of $6,000 was a pretty good effort on their part. But the fact that they had got so far and not got returns in, left me with no choice but to stop their account at that time. . . .

47. "At the time I took the application (i.e. the second application) from Mr Hicks, I was not aware of the money owing to McKenzie and McHarg, but I was aware of the money owing to the Lands Department and I was under the impression the money we were lending was to enable him to finish the home. At the time we came to do the settling up, he told me he had borrowed $10,000 from McKenzie and McHarg to put into the home, and it seemed to me it was six of one and half a dozen of the other. . . .

48. "In January it was my general view that it would probably be difficult to say that the dollars we lent him went to doing other jobs on his home, probably a bit of both or all went into the home or all went into the business, but we did not ask if he had drained his business to $6,000 to put that into his home. I did not see it was a problem for the money to be applied in that way."

49. As to the last advance of $2,000, Mr Bruce said he held it back because at the time he inspected the house, he found that there were various small things to be done. The major part of the $2,000 was used to complete the carport.

50. Mr Bruce and the male debtor varied in their account of some material matters including the purpose of the advance by the savings bank and the deposit of $3,000 from the advance of Dallas into the banking account of the debtors in January 1978.

51. In my opinion, the evidence of Mr Bruce is to be preferred to that of the male debtor where the two conflict.

52. The female debtor swore an affidavit in the proceedings, which was read, but she gave no oral evidence.

53. In my opinion Mr Bruce intended that the loan from the savings bank would be paid into the debtors' account with the bank and then disbursed as to $10,746.50 to discharge the mortgage of Mrs Hughes, as to $7,000 by payment to the Lands Department for moneys due in respect of the property to the Crown, as to $2,000 to enable the house and carport to be completed and as to the balance, to enable the bank to be recouped for, in effect, subsidizing the building of the home.

54. The trustee attacked as preferences the mortgage by the debtors to the savings bank, the mortgage by the debtors to the bank, the payment of $16,000 by the savings bank into the account of the debtors with the bank to the extent that it went to reduce the unsecured overdraft with the bank, i.e. after paying out the mortgage to Mrs Hughes and the moneys to the Lands Department and the $2,000 to complete the house and carport, leaving a figure of $5,253.50.

55. Counsel for the trustee told me that the trustee did not challenge the payment of $3,000 from the moneys advanced by Dallas that were paid into the banking account of the debtors with the bank in January 1978.

56. Turning first to the mortgage to the savings bank.

57. Counsel for the trustee submitted that the mortgage was a preference. He relied upon the fact that the mortgage was dated 3rd May, 1978, yet the first advance of $16,000 was made by the savings bank to the debtors by payment into their account with the bank on 27th April, 1978. He submitted that the mortgage was intended to operate from the date of its execution, by which time it was already an unsecured creditor of the debtors having advanced the sum of $16,000 some days earlier.

58. The argument fails. The debtors executed the mortgage to the savings bank on 27th April, 1978, the same date as the advance of $16,000 was made. Mr Bruce inserted the date "3rd May, 1978" on that day as it was then that he sent the mortgage and other documents to the bank for registration.

59. I have no doubt that the debtors always understood that the advance of $25,000 was to be secured by first mortgage over the property in favour of the savings bank. There never was any suggestion that it would be an unsecured loan. The male debtor said so in evidence. The female debtor gave no evidence on this point.

60. There is no substance in the contention that the mortgage was intended to operate from 3rd May, 1978, and not to cover the first advance of $16,000. Even if the debtors had executed the mortgage on 3rd May, 1978, it would have been a preference: see Burns v. Stapleton [1959] HCA 34; (1959) 102 CLR 97. and Re Weiss; Ex parte White v. John Vicars & Co. Ltd. per Gibbs J. (1970) ALR 654, at pp 662-663. .

61. As to the mortgage executed by the debtors in favour of the bank, also dated 3rd May, 1978, this was intended to secure an overdraft limit of $3,000 in the debtors' trading account. Although the application filed by the trustee seeks to avoid this mortgage as a preference under s. 122, no submissions were made about it by the trustee. Hence, I will not trouble with this aspect of the case.

62. Counsel for the debtor sumbitted that, if the trustee's challenge to the mortgage granted to the savings bank failed and the advance of $16,000 by the savings bank to the debtors was secured (no challenge being made to the subsequent payments of $7,000 and $2,000), the bank received a preference to the extent that the payment of the $16,000 into the banking account of the debtors reduced the indebtedness of the debtors to the bank. Counsel submitted that the amount of the preference was $5,253.50 arrived at by deducting from the sum of $16,000 the moneys paid to discharge the mortgage to Mrs Hughes, namely, $10,746.50.

63. Counsel for the bank sought to answer the case for the trustee by five submissions.

64. First, counsel submitted that it had not been established that the debtors were insolvent in April 1978. I shall not deal with this submission in detail because I am satisfied for reasons which I shall mention later that there is no preference. I am satisfied that at all relevant times, including April 1978, the debtors were insolvent.

65. Secondly, counsel for the bank submitted that it is necessary to look at all the circumstances of a transaction and the surrounding circumstances, to consider whether or not a payment is a preference. He submitted that the payment of $16,000 into the account of the debtors was part of a wider transaction involving the advance of $25,000 by the savings bank and the provision of appropriate security over the property; the payment of the moneys necessary to discharge the mortgage of Mrs Hughes and the moneys due to the Lands Department; the payment of sufficient moneys to enable the house and carport to be completed; and the balance to be retained by the bank to recoup it for having subsidized the cost of the dwelling. In these circumstances it was submitted there was no preference.

66. In Richardson v. Commercial Banking Co. of Sydney Ltd. Dixon, Williams and Fullagar JJ. said: "In considering what is the effect of the transaction impeached under s. 95, in this case a deposit, or each of a succession of deposits, to the credit of an overdrawn current account or an overdrawn trust account at a bank, there are two things that it is important to have clearly in mind. One of them is the kind of 'effect' which the provision treats as decisive. It must be 'the effect of giving the creditor a preference, a priority or advantage over the other creditors': it is then void in bankruptcy if the sequestration is within six months. Section 95 supposes a bankruptcy, and it is in relation to that bankruptcy that the question arises whether, over the other creditors, a preference priority or advantage has been given to the particular creditor. Section 52 (c), on the other hand, propounds the hypothetical question whether in the event of bankruptcy such an effect would be produced. The bankruptcy or the petition must of course be within six months: s. 55 (1) (c).

67. "The second thing is that the effect is a consequence of the payment and that where the payment forms an integral, an inseparable, part of the entire transaction its effect as a preference involves a consideration of the whole transaction" [1952] HCA 8; (1952) 85 CLR 110, at p 129.

68. This passage was cited with approval by Barwick C.J. in Queensland Bacon Pty Ltd. v. Rees [1966] HCA 21; (1966) 115 CLR 266, at p 283. and by Menhennitt J. in Calzaturificio Zenith Pty. Ltd. (in Liquidation) v. N.S.W. Leather & Trading Co. Pty. Ltd. (1970) VR 605, at pp 611-612.

69. In my opinion these passages are apposite to the present case. The very moneys under attack were provided by the savings bank, a member of the same family as the bank. The arrangement could have been structured differently so that the savings bank retained entire control over the disposition of the $25,000 without any suggestion of a preference, and yet have achieved the same commercial result. It is impermissible to sever the whole transaction by looking at the benefit to the bank of the payment of $5,253.50 in isolation from the rest of the transaction.

70. It is not as though the sum of $16,000 was paid to the debtors by some creditor having no connexion with the bank, and deposited to the credit of the debtors' account with the bank thereby reducing the debtors' indebtedness to the bank. The $16,000 was part of a larger advance of $25,000 made available by the savings bank to the debtors as a housing loan. This was no sham or pretence. The first draw down of $16,000 went to discharge a mortgage over the property as to $10,746.60. The second draw down of $7,000 went to the Lands Department, thus clearing the way for the savings bank to have a first mortgage over the property. The final payment of $2,000 was applied to complete the house and carport. True it is that the bank received the benefit of the balance of the first payment after discharging the mortgage to Mrs Hughes; but this was a fundamental part of the overall arrangement between the two banks and the debtors. Without it there would have been no advance by the savings bank at all.

71. In my opinion, when the transaction is looked at as a whole, the payment to the bank of the $16,000 did not have the effect of giving the bank a preference, priority or advantage over the other creditors as to $5,253.50.

72. The consequence of the payment to the bank was not a preference.

73. Thirdly, it was submitted by counsel for the bank that the whole of the $16,000 was paid by the savings bank to the account of the debtors with the bank for the exclusive purpose of paying the moneys necessary to discharge the mortgage of Mrs Hughes, the money due to the Lands Department, completing the building of the house and carport and reducing the overdraft of the bank, so that the bank could recoup moneys it had earlier paid to enable the building to be constructed. It was submitted that in those circumstances there is no diminution of the debtors' assets available for payment of the creditors of the debtors.

74. I was referred to the decision of the Supreme Court of the State of Washington in the United States of America in Chiarovano v. Buttnick (1961) 358 P 2d 305. . In that case it was said by Judge Mallory, with whom the other members of the court concurred, "For a payment to constitute an illegal preference, it must cause a diminution of the assets of the bankrupt which are available for the payment of the general creditors. . . . Thus, if an asset would never have been available for general creditors and only came into the bankrupt's hands for the special and exclusive purpose of paying a single creditor, there has been no diminution of the bankrupt's assets. This principle is applicable where money is borrowed from a third party to pay a particular creditor, the third party, in effect, merely taking the place of the creditor. Such payments do not constitute an illegal preference so long as the transaction is under the control of the third party rather than the bankrupt. . . ." (1961) 358 P 2d, at p 307. .

75. Counsel for the bank referred me to the relevant section of the Bankruptcy Act under consideration in that case, which he submitted was the same in all material respects as s. 122 of the Act.

76. I was not referred to any decision of the Australian courts on this question. Indeed, I was informed by counsel that there were none.

77. As I have already reached the conclusion that the trustee's attack on the alleged preference fails, it is not necessary for me to decide this question, so I shall not do so.

78. Fourthly, counsel for the bank submitted that if there was any preference at all received by the bank, it could not exceed the sum of $3,034.50 as this was the maximum permissible by applying the tests laid down in Richardson's case [1952] HCA 8; (1952) 85 CLR 110. and Queensland Bacon Pty. Ltd. v. Rees [1966] HCA 21; (1966) 115 CLR 266. relating to payments into and withdrawals from an overdrawn account with a bank.

79. In determing the extent of a preference, where there is a series of payments into and withdrawals from an overdrawn account, one must have in mind what was said by Barwick C.J. in Queensland Bacon Pty. Ltd. v. Rees. After referring to certain passages in the judgment of the court in Richardson's case, the Chief Justice said: "In my opinion, it is enough if, on the facts of any case, the court can feel confident that implicit in the circumstances in which the payment is made is a mutual assumption by the parties that there will be a continuance of the relationship of buyer and seller with resultant continuance of the relation of debtor and creditor in the running account, so that, to use the expression employed in Richardson's case 'It is impossible' - I interpolate, in a business sense - 'to pause at any payment into the account and treat it as having produced an immediate effect to be considered independently of what followed . . .' (1952) 85 CLR, at p 133. " (1966) 115 CLR, at p 286. .

80. In my opinion, these principles apply to the present case so that in determining the extent of any preference, one must examine the payments from the point of view of their final effect at the relevant date which, in the present case is the date of execution of the deed, namely 3rd July, 1978. At that date, the account of the debtors with the bank was in debit in the sum of $3,733.71. If one takes the highest point permissible during the preceding six months, namely 5th April, 1978, when the account was overdrawn to the extent of $6,768.21, it follows that the maximum preference that could be recovered is $3,034.50. The account was overdrawn to a higher figure at one point in January 1978; but it was common ground that this should be ignored.

81. Accordingly, if there were a voidable preference in the present case, which I do not think there was, it would be in the sum of $3,034.50.

82. The fifth submission of counsel for the bank was that the bank was a payee in good faith and for valuable consideration and in the ordinary course of business. It is not necessary for me to deal with this submission in view of the conclusion I have reached.

83. In my opinion, the trustee's case against the savings bank and the bank fails.

ORDER

Declaration and orders accordingly.