Re William Clive Hicks and Gayner Blanche Hicks Ex Parte: Daniel James Russell [1980] FCA 8 (11 February 1980)

FEDERAL COURT OF AUSTRALIA

Re: WILLIAM CLIVE HICKS and GAYNER BLANCHE HICKS
Ex parte: DANIEL JAMES RUSSELL
No. NSW 94 of 1978
Bankruptcy

COURT

IN THE FEDERAL COURT OF AUSTRALIA
GENERAL DIVISION
BANKRUPTCY DISTRICT OF THE STATE OF NEW SOUTH WALES AND THE AUSTRALIAN CAPITAL TERRITORY
Lockhart J.

CATCHWORDS

Bankruptcy - mortgages by debtor to creditors - mortgages executed when debtors insolvent - whether mortgages constituted a preference - determination of extent of preference.

HEARING

SYDNEY
11:2:1980

ORDER

The mortgage dated 12 May 1978 from William Clive Hicks and Gayner Blanche Hicks to Graham Rex Howard had the effect of giving to Graham Rex Howard a preference within the meaning of s. 122 of the Bankruptcy Act 1966 and that the said mortgage is void as against the applicant in so far as it constitutes a security over or charge upon any of the property of the said William Clive Hicks and Gayner Blanche Hicks. Otherwise, the application is dismissed.

THE COURT ORDERS THAT:

1. The respondent Graham Rex Howard pay one quarter of the costs of the applicant of this application.

2. The applicant pay the costs of the respondents, The Commercial Savings Bank of Australia Limited, The Commercial Bank of Australia Limited and Dallas Acceptance Pty. Limited of this application.

Otherwise no order as to costs.

DECISION

The trustee of a deed of assignment ("the deed") under Part X of the Bankruptcy Act 1966 ("the Act") seeks declarations that three mortgages are void against him as preferences under s. 122 of the Act.

The deed was executed on 3 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.

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.

The debtors acquired an interest as conditional purchasers in a property, No. 885 Stelling Street, Albury, ("the property") on 1 May 1976.

On 2 September 1977, the debtors executed a mortgage over the property to Mary Frances Grace Hughes to secure an advance of $10,000.00 made by her to them.

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

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

The debtors executed a mortgage dated 3 May 1978 over the property and a form of transfer by way of mortgage to The Commercial Savings Bank of Australia Limited ("the savings bank") to secure an advance of $25,000.00. The mortgage was lodged with the Under Secretary of Lands on 12 July 1978.

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

On 12 May 1978, the debtors executed a mortgage over the property to Graham Rex Howard which purported to secure an advance of $25,100.00. The mortgage was registered in the General Registry of Deeds on 14 June 1978.

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

With the exception of the property, the assets of the debtors have realised $1,240.00. The property is the major asset and is the subject of conflicting claims by mortgagees.

Creditors who claim to be unsecured creditors are owed $27,290.00 by the debtors. Creditors claiming to be secured creditors claim a total of $61,284.00. Thus the total of the claims of creditors is $88,574.00.

The trustee arranged for the property, together with curtains and carpets, to be submitted to auction on 31 January 1979, but the property was passed in. Subsequently, a contract was entered into by the trustee for the sale of the property for $40,500.00 which included an agreed figure of $1,000.00 for curtains and carpets.

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

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.

I turn first to the mortgage to Mr. Howard.

Mr. Howard was represented by a solicitor on more than one occasion when the proceeding was mentioned before me. On 17 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.

The male debtor gave evidence that Mr. Howard, who is his brother-in-law, lent the debtors about $21,000.00 some 18 months before 3 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 8 percentum per annum. The male debtor also said by affidavit that he did not believe that the loan "effected (sic) the land".

The deed of mortgage from the debtors to Mr. Howard dated 12 May 1978 states

"AND WHEREAS the Mortgagee has at the request of the Mortgagors agreed to lend the sum of Twenty Five Thousand One Hundred Dollars ($25,100.00) upon having the repayment thereof with interest thereon 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 Twenty Five Thousand One Hundred Dollars ($25,100.00) (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 . . ."

Clause 1 of the mortgage provides: -

"1. That the Mortgagors will pay to the Mortgagee free of exchange at Oxley the said principal sum of TWENTYFIVE THOUSAND ONE HUNDRED DOLLARS ($25,100.00) made up as follows: - Advance of TWENTY THOUSAND DOLLARS ($20,000.00) made on the 15th June 1976. Interest due on the 15th December 1977 of ONE THOUSAND THREE HUNDRED DOLLARS ($1300.00). Interest due on the 15th June 1978 of ONE THOUSAND THREE HUNDRED DOLLARS ($1300.00) and advance of TWO THOUSAND FIVE HUNDRED DOLLARS ($2500.00) on the 10th April 1978 which interest is to accrue from that date. The said principal sum shall be repaid on the 11th December 1978."

The male debtor said in evidence that he had no knowledge of any advance of $2,500.00 made by his brother-in-law to the debtors on 10 April 1978.

No evidence was adduced by Mr. Howard.

I am satisfied that there was no advance of $25,100.00 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 $25,100.00 or any other sum on 11 December 1978. If there was a loan at all, it was made about 18 months before the execution of the deed of mortgage and in the sum of about $21,000.00.

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.

Certainly there was no advance of $2,500.00 or any other sum on or about 10 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 12 months earlier.

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).

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

On 1 December 1976, the male debtor approached Mr. Bruce, the manager of the Albury branch of the bank, and sought a loan of $25,100.00 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.

On 1 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."

The debtors attended the bank to sign documents on 27 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.

During April 1978, Mr. Bruce prepared a mortgage to the bank to secure an overdraft limit of $3,000.00 in the trading account of the debtors.

A first progress payment of $16,000.00 was made by the savings bank on 27 April 1978 and of this, $10,746.50 was paid to the solicitors for Mrs. Hughes to satisfy her mortgage. The balance was used to reduce the overdraft of the debtors with the bank. The next progress payment of $7,000.00 was made on 3 May 1978 and the final advance of $2,000.00 on 28 June 1978. The sum of seven thousand dollars ($7,000.00) was used to pay the Lands Department to discharge a commitment relating to the property. The final advance of $2,000.00 was made to enable the carport to the house to be completed.

The advance of $25,000.00 was from the savings bank and was paid into the account of the debtors with the bank.

On 29 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 3 July 1978. Mr. Bruce was absent from Albury during the weekend 24 and 25 June; and the "Border Morning Mail" newspaper of Saturday 24 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 3 July. Mr. Bruce says that prior to 29 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.

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 $3,000.00 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 $2,000.00 was made on 28 June 1978.

The male debtor gave evidence that in January 1978, when he obtained the loan of $6,500.00 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 $3,000.00 into the bank account in Albury after the remaining $3,000.00 had been used to discharge the debts of trade creditors.

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."

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 $25,000.00 or any part of it without executing a mortgage.

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.

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.

Mr. Bruce denied that he had any conversation with the male debtor about depositing $3,000.00 from the advance of Dallas into the banking account of the debtors in January 1978.

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 $7,000.00 owing to the Lands Department.

Mr. Bruce said that he advanced the debtors about $6,000.00 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."

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.

Mr. Bruce agreed that a memorandum of 29 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 $6,000.00 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 27 April and dated 1 May 1978. As to the payment of $16,000.00 into the trading account of the debtors with 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 explain, 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 $6,000.00 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 . . ."

"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 $10,000.00 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 . . ."

"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 $6,000.00 to put that into his home. I did not see it was a problem for the money to be applied in that way."

As to the last advance of $2,000.00, 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 $2,000.00 was used to complete the car port.

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 $3,000.00 from the advance of Dallas into the banking account of the debtors in January 1978.

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

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

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 $7,000.00 by payment to the Lands Department for moneys due in respect of the property to the Crown, as to $2,000.00 to enable the house and car port to be completed and as to the balance, to enable the bank to be recouped for in effect, subsidising the building of the home.

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 $16,000.00 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 $2,000.00 to complete the house and car port, leaving a figure of $5,253.50.

Counsel for the trustee told me that the trustee did not challenge the payment of $3,000.00 from the moneys advanced by Dallas that were paid into the banking account of the debtors with the bank in January 1978.

Turning first to the mortgage to the savings bank.

Counsel for the trustee submitted that the mortgage was a preference. He relied upon the fact that the mortgage was dated 3 May 1978 yet the first advance of $16,000.00 was made by the savings bank to the debtors by payment into their account with the bank on 27 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 $16,000.00 some days earlier.

The argument fails. The debtors executed the mortgage to the savings bank on 27 April 1978, the same date as the advance of $16,000.00 was made. Mr. Bruce inserted the date "3 May 1978" on that day as it was then that he sent the mortgage and other documents to the bank for registration.

I have no doubt that the debtors always understood that the advance of $25,000.00 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.

There is no substance in the contention that the mortgage was intended to operate from 3 May 1978 and not to cover the first advance of $16,000.00. Even if the debtors had executed the mortgage on 3 May 1978, it would not have been a preference: see Burns v. Stapleton [1959] HCA 34; (1959) 102 C.L.R. 97; and Re Weiss; Ex parte White v. John Vicars and Co. Limited 1970 A.L.R. 654 per Gibbs J. at pp. 662 and 663.

As to the mortgage executed by the debtors in favour of the bank, also dated 3 May 1978, this was intended to secure an overdraft limit of $3,000.00 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.

Counsel for the debtor submitted that, if the trustee's challenge to the mortgage granted to the savings bank failed and the advance of $16,000.00 by the savings bank to the debtors was secured (no challenge being made to the subsequent payments of $7,000.00 and $2,000.00), the bank received a preference to the extent that the payment of the $16,000.00 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 $16,000.00 the moneys paid to discharge the mortgage to Mrs. Hughes namely, $10,746.50.

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

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.

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 $16,000.00 into the account of the debtors was part of a wider transaction involving the advance of $25,000.00 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 car port 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.

In Richardson v. Commercial Banking Co. of Sydney Limited [1952] HCA 8; (1952) 85 C.L.R. 110 Dixon, Williams and Fullagar JJ. said at p. 129: -

"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).

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."

This passage was cited with approval by Barwick in Queensland Bacon Pty.

Limited v. Rees [1966] HCA 21; (1966) 115 C.L.R. 266 at p. 283 and by Menhennitt J. in Calzaturificio Zenith Pty. Limited (In Liquidation) v. N.S.W. Leather and Trading Co. Pty. Limited 1970 V.R. 605 at pp. 611 and 612.

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 $25,000.00 without any suggestion of a preference, yet 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.

It is not as though the sum of $16,000.00 was paid to the debtors by some creditor having no connection with the bank, and deposited to the credit of the debtors' account with the bank thereby reducing the debtors' indebtedness to the bank. The $16,000.00 was part of a larger advance of $25,000.00 made available by the savings bank to the debtors as a housing loan. This was no sham or pretence. The first draw down of $16,000.00 went to discharge a mortgage over the property as to $10,746.50. The second draw down of $7,000.00 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 $2,000.00 was applied to complete the house and car port. 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.

In my opinion, when the transaction is looked at as a whole, the payment to the bank of the $16,000.00 did not have the effect of giving the bank a preference, priority or advantage over the other creditors as to $5,253.50.

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

Thirdly, it was submitted by counsel for the bank that the whole of the $16,000.00 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 moneys due to the Lands Department, completing the building of the house and car port 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.

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 358 Pacific Reporter 2nd. Series p. 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 . . ."

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.

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

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.

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 (supra) and Queensland Bacon Pty. Limited v. Rees (supra) relating to payments into and withdrawals from an overdrawn account with a bank.

In determining 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. Limited v. Rees (supra). After referring to certain passages in the judgment of the court in Richardson's Case (supra), the Chief Justice said at p. 286: -

"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 [1952] HCA 8; (1952) 85 C.L.R. 110 at p. 133 '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 . . .'".

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 3 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 proceding six months, namely 5 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.

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

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 conclusions I have reached.

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

I declare that the mortgage dated 12 May 1978 from William Clive Hicks and Gayner Blanche Hicks to Graham Rex Howard had the effect of giving to Graham Rex Howard a preference within the meaning of s. 122 of the Bankruptcy Act 1966 and that the said mortgage is void as against the applicant in so far as it constitutes a security over or charge upon any of the property of the said William Clive Hicks and Gayner Blanche Hicks. Otherwise, the application is dismissed.

I order the respondent Graham Rex Howard to pay one quarter of the costs of the applicant of this application. I order the applicant to pay the costs of the respondents, The Commercial Savings Bank of Australia Limited, The Commercial Bank of Australia Limited and Dallas Acceptance Pty. Limited of this application. Otherwise I make no order as to costs.