Re Peter Kevin Aitken (Bankrupt) and Anthony Christopher Matthews (Applicant) v Tomasetti Paper Pty Limited [1987] FCA 359 (16 October 1987)

FEDERAL COURT OF AUSTRALIA

Re: PETER KEVIN AITKEN (Bankrupt) and ANTHONY CHRISTOPHER MATTHEWS
(Applicant)
And: TOMASETTI PAPER PTY LIMITED
No. 733 of 1985
Bankruptcy

COURT

IN THE FEDERAL COURT OF AUSTRALIA
SOUTH AUSTRALIA DISTRICT REGISTRY
GENERAL DIVISION
BANKRUPTCY DISTRICT OF THE STATE OF SOUTH AUSTRALIA
Forster J.(1)

CATCHWORDS

Bankruptcy - Application by trustee pursuant to s.122 - payments by bankrupt to creditor within six months before the presentation of a petition - preference priority or advantage over other creditors - payments received by creditor in good faith for valuable consideration and in the ordinary course of business.

Bankruptcy Act 1966

Queensland Bacon Pty Ltd v. Rees [1966] HCA 21; (1966) 115 CLR 266

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

HEARING

PERTH
16:10:1987

Counsel for the applicant: Mr J. Taylor

Solicitors for the applicant: Randle & Co.

Counsel for the respondent: Mr M. Hoile

Solicitors for the respondent: Thomson Simmons & Co.

ORDER

The application be dismissed with costs.
Note: Settlement and entry of order is dealt with in Bankruptcy Rule 124.

DECISION

This is an application under s.122 of the Bankruptcy Act 1966 by the trustee of the bankrupt estate of Peter Kevin Aitken to recover certain payments made by the bankrupt to Tomasetti Paper Pty Ltd ("Tomasetti") within six months before the presentation by the bankrupt of his own petition in bankruptcy. Very sensibly the advisers of the parties have agreed most of the facts so that the only issues remaining are the real basis of contention between them.

2. It is agreed that the bankrupt presented a debtor's petition on 17 December 1985. It is agreed also that the bankrupt made payments to Tomasetti as follows:

On 23 September 1985 $2,500-00
On 30 September 1985 $4,500-00
On 21 October 1985 $5,658-64

3. It is agreed that Tomasetti was a creditor of the bankrupt. It is agreed that the bankrupt was carrying on business under the name of Adelaide Business Machines. Finally it is now agreed that at the time the three payments mentioned above were made the bankrupt was clearly unable to pay his debts as they fell due and was in fact hopelessly insolvent. Tomasetti makes this last admission now but says that it was quite unaware of this at the time the payments were made which it says were received by it in good faith for valuable consideration and in the ordinary course of business (see s.122(2)(a) of the Bankruptcy Act).

4. Sections 122(1) and 122(2)(a) of the Bankruptcy Act are as follows:

"122(1) A conveyance or transfer of property, a
charge on property, or a payment made, or an
obligation incurred, by a person who is unable to
pay his debts as they become due from his own
money (in this section referred to as 'the
debtor'), in favour of a creditor, having the
effect of giving that creditor a preference,
priority or advantage over other creditors, being
a conveyance, transfer, charge, payment or
obligation executed, made or incurred -

(a) within 6 months before the presentation of a
petition on which, or by virtue of the
presentation of which, the debtor becomes a
bankrupt; or

(b) on or after the day on which the petition on
which, or by virtue of presentation of which,
the debtor becomes a bankrupt is presented and
before the day on which the debtor becomes a
bankrupt,

is void as against the trustee in the bankruptcy."

"122(2) Nothing in this section affects

(a) the rights of a purchaser, payee or
encumbrancer in good faith and for valuable
consideration and in the ordinary course of
business;"

5. The two questions which remain to be answered are whether the payments had "the effect of giving Tomasetti a preference, priority or advantage over other creditors" and whether the payments were received by Tomasetti in good faith for valuable consideration and in the ordinary course of business.

6. The first matter was proved without difficulty by the trustee and is not now disputed by Tomasetti. The questions of good faith for valuable consideration and in the ordinary course of business remain. In his final address counsel for the applicant trustee conceded that no question of valuable consideration really arose so that the only live issues are those of good faith and the ordinary course of business. It is conceded that the onus is upon the respondent to establish that the impugned payments were made in good faith and in the ordinary course of business. I should set out here s.122(4)(c):

"122(4)(c) a creditor shall be deemed not to be a
purchaser, payee or encumbrancer in good faith if
the conveyance, transfer, charge, payment or
obligation was executed, made or incurred under
such circumstances as to lead to the inference
that the creditor knew, or had reason to suspect -

(i) that the debtor was unable to pay his debts
as they became due from his own money; and

(ii) that the effect of the conveyance, transfer,
charge, payment or obligation would be to
give him a preference, priority or advantage
over other creditors."

7. I come now to the facts. The bankrupt as I have said was the proprietor of a business called Adelaide Business Machines ("ABM") which was a retailer of business machines such as typewriters, adding machines and the like and also of paper. This case concerns copy paper which the bankrupt purchased from the respondent Tomasetti a wholesaler of paper including copy paper. The bankrupt was one of the bigger customers of Tomasetti in Adelaide for copy paper and each month purchased between $5,000 and $7,000 worth of it. The ordinary terms of trade between ABM and Tomasetti were payment within approximately 80 days. This was on occasion permitted to go out to nearly 90 days.

8. The form of monthly statements rendered by Tomasetti to ABM contained five boxes at the foot of which were marked "90 days", "60 days", "30 days", "current", "balance due". Each month usually on about the 20th to the 23rd ABM paid the amount said on the previous month's statement to be 60 days overdue. On occasions Stone, Tomasetti's salesman who dealt with ABM, would ask for the cheque which was due and on other occasions the cheque would be paid without being asked for. Trading had continued between Tomasetti and ABM for some years prior to the bankrupt's bankruptcy. Stone had the general oversight of the ABM account and I found his evidence convincing as to the general run of business between ABM and Tomasetti.

9. Two things happened in September 1985. Pursuant to the ordinary terms of trade $6,992-54, being the 60 day amount appearing on the August statement, was due to be paid on or about the 20th to 23rd September. In the past the exact amount due had been paid. On this occasion on 23 September $2,500 was paid and on 30 September a further $4,500 making a total payment of $7-46 more than was due in September. This was unusual in that there was a "split payment" and in that the precise sum due was not paid.

10. The other thing that happened in September concerned insurance cover which Tomasetti had against bad debts. Pursuant to its arrangements with its insurer Tomasetti had to pay the first $15,000 of any bad debt with respect to ABM and the insurer paid the next $15,000 up to a limit of $30,000. On 16 August 1985 the insurer Trade Indemnity Australia Limited notified Tomasetti head office in Melbourne that it no longer accepted any liability with respect to the bankrupt's indebtedness to Tomasetti. It is not known when news of this step was conveyed to Tomasetti in Adelaide but based on past experience it may have taken as much as a month.

11. Hutchin, a director of Tomasetti and branch manager for South Australia, was concerned to review the altered insurance arrangements and Stone was concerned about the unusual split payment, part of which was quite late. They discussed the matter at the end of September or early in October and Hutchin at his corporate level discussed the matter with the credit controller at head office. Eventually it was decided that ABM's credit limit should be reduced from $30,000 to $15,000. The amount outstanding at the end of September was $17,328-86 and it was decided that until such time as this amount outstanding was reduced to $15,000 trading with ABM should be on a cash basis. There were six transactions in October with respect to which Tomasetti's driver was instructed to and did at the time of delviery pick up a cheque in payment for the goods delivered. On 21 October 1985 ABM made a payment of $5,658-64, the precise 60 day amount recorded in the September statement. This payment, the third of the impugned payments, was the proper amount due according to the terms of trade and paid at the proper time.

12. The fact is that the bankrupt was hopelessly insolvent at the time the three payments were made but did Tomasetti know or have reasons to suspect that the bankrupt was insolvent at the time? There is no evidence upon which one could conclude that Tomasetti knew that the bankrupt was unable to pay his debts as they fell due but did it have reason to suspect? In Queensland Bacon Pty Ltd v. Rees [1966] HCA 21; (1966) 115 CLR 266 at 291-292 Barwick C.J. says:

"In the first place, to satisfy s.95(4) the
circumstances of the voided payment must be such
as to lead to the inference that the creditor knew
or had reason to suspect the fact of the debtor's
insolvency. It is not enough that the
circumstances are such as to lead to the inference
that the creditor had reason to suspect that the
debtor might be insolvent. The words of the
sub-section, to my mind, are quite clear that it
is the fact of actual insolvency which must be
known or suspected. To be insolvent, the debtor
must be unable, as distinct from being merely
unwilling, to pay his debts as they fall due. It
is one thing to suspect a man's solvency in the
sense that one doubts whether he is solvent or
insolvent. It is another thing to suspect that
he is in fact insolvent. It is of the latter
suspicion that s.95(4), in my opinion, speaks."

13. ABM was a good customer of Tomasetti and apart from what Stone described as the minor hiccup of the split payment the terms of trade have been adhered to. In August it was known by Tomasetti that the bankrupt was expanding his business and opening a branch in Melbourne and was also refurbishing and refurnishing his office in Adelaide. It was thought that these two matters may well have led to a temporary financial embarrassment. So far as the notification from the insurers is concerned Hutchin said, and I believed him, that this did not necessarily convey to him that the bankrupt was a doubtful financial prospect. He said that it was very difficult if not impossible to pursuade the insurer to reveal why it had altered its arrangements and that sometimes it was simply because too many clients wanted cover with respect to one trader and the insurer thus felt "over-exposed". Finally on this aspect it is pointed out that the insurer simply declined further to indemnify Tomasetti with respect to bad debts beyond the first $15,000 up to a limit of $30,000. The decision made by Tomasetti left it in exactly the same position as it had been when the insurance was in force that is to say liable for the first $15,000 of any loss.

14. The other evidence on this issue is that of Mrs Linder. She had been employed by ABM at relevant times. Her job was in her words "to generate and take down telephone sales orders for copy paper and consumables and also involved in assisting Peter (the bankrupt) to file accounts and that sort of thing". She also used to order copy paper from Tomasetti as it was required. There was no evidence that her work was any more important to ABM than that. She gave evidence that towards the end Stone called frequently and saw her, tried to pump her about the financial affairs of ABM, and told her that there were rumours in the trade that ABM was in financial difficulty and that he Stone had serious doubts on this topic. If this were true then perhaps Tomasetti could be said to have reason to suspect that the bankrupt was insolvent. Stone denied that any conversations of the sort took place. Having observed both Mrs Linder and Stone giving evidence and considering other circumstances I have come to the conclusion that I prefer the evidence of Stone to that of Mrs Linder.

15. In the first place it seems to me unlikely that Stone would talk to Mrs Linder in the way she described. She was after all in a relatively minor position in the employ of one of his best customers. In the second place after the business of ABM ceased Mrs Linder went to work for Tomasetti in Adelaide from which employment she was later dismissed for reasons which she thought inadequate. She initiated two sets of proceedings against Tomasetti one of which resulted in the payment to her of a week's salary in lieu of notice and the other of which a suit for approximately $100 for holiday pay is not yet resolved. Notwithstanding that she had been told that she would receive a fortnight's salary in lieu of notice and notwithstanding that she saw fit to go to the trouble of complaining to the Department of Industry about a relatively small amount of holiday pay and notwithstanding that she plainly thought she had been wrongly dismissed by Tomasetti she said in evidence that she was neither hostile nor bitter towards Tomasetti. I do not believe her on this issue. As I have said I generally prefer Stone's evidence to hers and find no basis in her evidence to find that Tomasetti had reason to suspect that the bankrupt could not pay his debts as they became due.

16. In the result I am quite unable to find that Tomasetti knew or had reasonable cause to suspect the bankrupt's insolvency at the time the payments were made. Had I found the reverse according to the sub-section I would have been precluded from finding good faith by Tomasetti. Can I find positively that Tomasetti acted in good faith in accepting the payments? I think that I can and should because either with or without the aid of the sub-section I am unable to find any evidence to establish bad faith.

17. Were the payments made and accepted in the ordinary course of business? Evatt J. in Robertson v. Grigg [1932] HCA 29; (1932) 47 CLR 257 at 273 says:

"The 'ordinary course of business' is not, I think,
to be related to any special business carried on
by either debtor or creditor but is concerned with
the character of the impeached transaction
itself."

18. The fact in the present case is that apart from the question of the split payment the impugned payments followed almost exactly the ordinary course of business between ABM and Tomasetti. The fact that some payments had to be asked for by Stone and some were late does not necessarily mean that the transactions were outside the ordinary course of business if they appeared to the payee to be fair payments to accept (see Katoa Pty Ltd (In Liquidation) v. Dartnall (1983) 74 FLR 202).

19. In Robertson v. Grigg (supra) Gavan Duffy C.J. and Starke J. say at p 267:

"But was he a purchaser 'in the ordinary course of
business'? These words may be traced a long way
back in bankruptcy law. Thus in Alderson v.
Temple [1768] EngR 55; (1768) 4 Burr. 2235, at p 2240; [1768] EngR 55; 98 ER
165, at p 168 and Rust v. Cooper (1777) Cowp 629,
at p 634; [1777] EngR 47; 98 ER 1277, at p 1280, we find Lord
Mansfield denying that acts in the ordinary course
of business amount to fraudulent preferences.
'If a bankrupt, in course of payment pays a
creditor; this is a fair advantage, in the
course of trade: or, if a creditor threatens
legal diligence, and there is no collusion; or
begins to sue a debtor; and he makes an
assignment of part of his goods; it is a fair
transaction, and what a man might do without
having any bankruptcy in view.' 'If, in a fair
course of business, a man pays a creditor who
comes to be paid, notwithstanding the debtor's
knowledge of his own affairs, or his intention to
break; yet, being a fair transaction in the
course of business, the payment is good; for the
preference is there got consequentially, not by
design.' Again, Lord Blackburn, in Tomkins v.
Saffery (1877) 3 App Cas 213, at p 235 says:
'Now I think you must say that it is not with a
view to give an undue preference, if a man makes a
payment to a creditor in the ordinary course of
business.' And he instances the case of a man
struggling on and making payments to keep his
business going. See also Nunes v. Carter (1866)
LR 1 PC, at p 348. Therefore, the test
under sec.95 of the ordinary course of business is
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.'"

20. The present transactions should, in my view, be regarded as "fair transactions and what a man might do without having any bankruptcy in view" since they follow the pattern which had existed for years.

21. I conclude that Tomasetti received the impugned payments "in good faith for valuable consideration and in the ordinary course of business". The trustee's application therefore fails and is dismissed with costs.